WEBVTT - Oaktree Says Boring is Beautiful In Dicey Private Credit Market 0:00:18.200 --> 0:00:20.599 Hello, and welcome to Credit Edge, a weekly markets podcast. 0:00:20.640 --> 0:00:23.320 My name is James Crombie. I'm a senior editor at Bloomberg. 0:00:23.960 --> 0:00:26.239 This is a special edition of the show with highlights 0:00:26.280 --> 0:00:29.200 from our Global Credit Forum held in New York on 0:00:29.280 --> 0:00:33.240 June third, including a fantastic group of guests and speakers 0:00:33.400 --> 0:00:36.000 hitting the biggest themes of the day, from distressed debt 0:00:36.040 --> 0:00:39.120 and private markets to the multi trillion dollar AI boom. 0:00:39.680 --> 0:00:41.680 We will discuss a lot of that on this show. 0:00:41.720 --> 0:00:44.040 We hope you enjoy it and remember give us a 0:00:44.080 --> 0:00:51.680 review wherever you are listening to the Credit Edge. Christina Lee, 0:00:51.680 --> 0:00:54.840 managing director and co portfolio manager with oak Tree's Global 0:00:54.920 --> 0:00:56.080 private Debt Strategy. 0:00:56.120 --> 0:00:57.000 How are you doing, Christina? 0:00:57.280 --> 0:00:59.200 I am doing well. Thank you for having me on. 0:00:59.360 --> 0:01:01.360 Thank you so much for joining us. What stood out 0:01:01.360 --> 0:01:03.720 for me when you were talking today at our event 0:01:04.600 --> 0:01:07.479 was this kind of back to basics strategy in terms 0:01:07.520 --> 0:01:08.720 of you know, private credit. 0:01:09.440 --> 0:01:10.520 You like the middle market. 0:01:10.959 --> 0:01:13.480 I have also been saying for some time that is, 0:01:13.920 --> 0:01:16.200 you know, one of the most boring parts of the 0:01:16.200 --> 0:01:19.039 market for a good reason in this environment. To you, 0:01:19.480 --> 0:01:21.080 first of all, what does mid and market mean? 0:01:21.600 --> 0:01:21.800 Yeah? 0:01:21.800 --> 0:01:24.400 I think middle market for us is really driven by 0:01:24.600 --> 0:01:26.840 size range, and so we think about it as kind 0:01:26.840 --> 0:01:29.800 of EBITDA anywhere between twenty five too, we're usually one 0:01:29.880 --> 0:01:33.039 hundred million. But really what dictates the middle market for 0:01:33.120 --> 0:01:36.000 US is also does that company or does that borrow 0:01:36.120 --> 0:01:39.040 have access to the probably syndicate a loan market, because 0:01:39.080 --> 0:01:41.480 once you do have access, you probably are more more 0:01:41.480 --> 0:01:42.679 of a large cap borrower. 0:01:42.880 --> 0:01:45.839 Okay, so they don't have access, they're smaller in size, 0:01:46.000 --> 0:01:47.720 Does that naturally make them more risky? 0:01:48.520 --> 0:01:51.440 I think there's an argument that, yes, they can be riskier. 0:01:51.520 --> 0:01:54.280 Right when you think about mid market versus large cap. 0:01:55.000 --> 0:01:58.520 Mid market tends to have, for example, smaller management teams, 0:01:58.840 --> 0:02:02.600 they might not have as robust IT systems, and sometimes 0:02:02.600 --> 0:02:04.800 they do have some credit risk. Right, they can have 0:02:04.880 --> 0:02:09.160 some more concentration, whether it's by region or by customer. However, 0:02:09.280 --> 0:02:12.400 I wouldn't say for just blanketing all middle market companies 0:02:12.440 --> 0:02:14.880 as more risky than large cap. But that's why in 0:02:14.919 --> 0:02:18.520 the middle market you see structural differences when it comes 0:02:18.600 --> 0:02:22.840 to leverage levels versus large cap. Typically they're significally lower leverage, 0:02:22.880 --> 0:02:25.880 and then to the credit documentation is just tighter. We're 0:02:25.919 --> 0:02:28.440 getting maintenance covenants in mid market versus a large cap 0:02:28.440 --> 0:02:32.520 you don't. So the transaction structure accounts for some of 0:02:32.560 --> 0:02:35.680 the kind of risks that you see in middle market companies. 0:02:35.960 --> 0:02:38.040 And how big are the deals that you're seeing in 0:02:38.120 --> 0:02:39.679 middle market? What's what size of a loan are we 0:02:39.680 --> 0:02:40.280 be talking about? 0:02:40.440 --> 0:02:43.000 Yeah, on average, I would say what we're seeing is 0:02:43.040 --> 0:02:46.160 anywhere between usually one hundred and fifty million to five 0:02:46.200 --> 0:02:48.200 hundred million is usually the financing. 0:02:47.880 --> 0:02:50.840 Package, okay. And the kind of businesses you're lending to 0:02:51.160 --> 0:02:54.560 is it software? Is it technology? Is it you know, 0:02:54.800 --> 0:02:57.440 really risky stuff that you know, we don't know if 0:02:57.440 --> 0:02:58.880 it's all going to go wrong, or is it is 0:02:58.919 --> 0:02:59.480 it something else? 0:03:00.040 --> 0:03:00.359 We love? 0:03:00.400 --> 0:03:05.040 Boring? Boring is beautiful, Boring is better. Right now, when 0:03:05.040 --> 0:03:07.600 we look at middle market companies, we want to look 0:03:07.639 --> 0:03:11.920 at because they're smaller, what is your competitive moat? One 0:03:11.960 --> 0:03:14.160 of the areas that we have found to be really 0:03:14.200 --> 0:03:19.160 attractive in this market is business services tech in truck businesses. 0:03:19.160 --> 0:03:22.880 These are technicians that go around and fix things. It 0:03:22.919 --> 0:03:26.399 doesn't get displaced by software. And also it's regional, right 0:03:26.440 --> 0:03:29.080 you need density for these tech and truck businesses. So 0:03:29.240 --> 0:03:32.040 it's okay that you're smaller, right, You don't need that 0:03:32.160 --> 0:03:35.280 nationwide scale, but you do need to be the largest 0:03:35.320 --> 0:03:38.080 within a particular region. So that's why we look at 0:03:38.200 --> 0:03:41.280 niches and say, what do we find attractive in today's market. 0:03:41.520 --> 0:03:43.640 That's a really boring concept. 0:03:43.240 --> 0:03:45.880 Right, But are they kind of monopolies in their area. 0:03:45.800 --> 0:03:48.760 Or a lot of times they are, right they because 0:03:48.760 --> 0:03:52.160 they have the density and scale within that particular region, 0:03:52.200 --> 0:03:55.360 they can also be very price competitive. For example, if 0:03:55.360 --> 0:03:58.320 you only have two customers in Minnesota, one customer in California, 0:03:58.320 --> 0:04:00.280 and one in Oregon, yeah, you might be a bit 0:04:00.280 --> 0:04:03.320 more nationwide, but that doesn't necessarily mean you're more competitive. 0:04:03.920 --> 0:04:06.520 So it's really just basic stuff that we see every day. 0:04:06.760 --> 0:04:10.240 In the old world economy doesn't look like it's going 0:04:10.320 --> 0:04:12.640 to get displaced by technology or anything like that, and 0:04:13.000 --> 0:04:15.000 they need money for what working capital, that sort of thing. 0:04:15.360 --> 0:04:17.200 So a lot of times that we're looking at is 0:04:17.240 --> 0:04:21.080 either a leverage buyout or for example, we have if 0:04:21.160 --> 0:04:23.360 it's in a portfolio, looking at add ons, right, they're 0:04:23.400 --> 0:04:26.640 looking at maybe doing bulltowns in different regions to grow 0:04:27.560 --> 0:04:30.120 because it is harder for these businesses to typically scale 0:04:30.240 --> 0:04:32.520 organically because again, you want that density and. 0:04:32.520 --> 0:04:34.719 You did mention anyer business services, which a lot of 0:04:34.720 --> 0:04:36.840 people just means it's another word for software, But what 0:04:37.440 --> 0:04:38.240 exactly is that to you? 0:04:38.560 --> 0:04:41.440 Yeah, I think business services you do have to bifurcate 0:04:41.440 --> 0:04:43.560 it because I think there's business services where there could 0:04:43.600 --> 0:04:46.799 be AI displacement. For example, around some of the white 0:04:46.800 --> 0:04:51.080 collar professions. Right, you have seen accounting, legal firms have 0:04:51.240 --> 0:04:54.320 these LBOs, and the question around is they may not 0:04:54.360 --> 0:04:57.280 necessarily get displaced by AI, but what happens to their 0:04:57.360 --> 0:05:00.720 pricing model? Right, We just don't know yet, right, and 0:05:00.760 --> 0:05:03.920 what is their terminal value going forward? And then there's 0:05:03.960 --> 0:05:06.960 business services like blue collar business services like tech and 0:05:07.040 --> 0:05:10.320 truck businesses where they are actually doing something physical that 0:05:10.440 --> 0:05:13.280 can't be displaced by technology. And so we do buyvcate 0:05:13.360 --> 0:05:14.520 business services a bit. 0:05:14.640 --> 0:05:17.360 Right oak Tree, Though it's a big global platform, you 0:05:17.440 --> 0:05:19.440 have a lot of money to deploy. 0:05:19.920 --> 0:05:21.080 How scalable is this. 0:05:21.080 --> 0:05:21.679 Kind of business? 0:05:22.320 --> 0:05:26.200 Yeah, we have seen companies that are smaller, say call 0:05:26.240 --> 0:05:28.960 it twenty million dollars of ibada, really scale up to 0:05:28.960 --> 0:05:32.320 one hundred million beyond because there's a lot of add 0:05:32.320 --> 0:05:34.919 on opportunities for these businesses because there's a lot of 0:05:34.960 --> 0:05:37.640 regions that they can continue to bolt on and that 0:05:37.680 --> 0:05:39.600 provides incremental financing needs. 0:05:39.680 --> 0:05:41.480 And talk to us about the returns, because that is 0:05:41.520 --> 0:05:43.960 something that everyone is questioning in private markets. You know, 0:05:43.960 --> 0:05:47.080 why do I need to sacrifice liquidity if the returns 0:05:47.120 --> 0:05:48.720 really aren't there? And a lot of people on the 0:05:48.800 --> 0:05:50.800 liquid side is saying that, you know, they just it 0:05:50.960 --> 0:05:53.800 just isn't enough to compensate for that lack of liquidity 0:05:53.839 --> 0:05:54.640 and transparency. 0:05:55.400 --> 0:05:57.840 Yeah, I would say from there is still a premium, 0:05:57.839 --> 0:06:00.479 But are we on the kind of low end of 0:06:00.480 --> 0:06:02.920 the premium Probably in today's market, I would say we're 0:06:02.920 --> 0:06:06.600 about one hundred and fifty basis points higher than public 0:06:06.720 --> 0:06:07.640 markets on a. 0:06:07.880 --> 0:06:11.080 Broadly syndicated loan to middle market private loan basis that 0:06:11.160 --> 0:06:12.920 sort of thing. Is there anything out there that worries 0:06:13.000 --> 0:06:15.400 you right now for the let's say the second half 0:06:15.440 --> 0:06:15.880 of this year. 0:06:16.560 --> 0:06:20.080 I think what will worry me a bit is just 0:06:20.520 --> 0:06:23.479 kind of where the pipeline is and where the deal 0:06:23.520 --> 0:06:26.279 flow is. We've had, in reality kind of two to 0:06:26.360 --> 0:06:30.159 three years of a slower pipeline. And when there's a 0:06:30.200 --> 0:06:33.720 slow pipeline and this increase needed to deployer what I 0:06:33.760 --> 0:06:37.880 call sometimes fomo, that's when you see people kind of 0:06:37.920 --> 0:06:41.800 loosen their underwriting skills right, Like for example, last year, 0:06:41.880 --> 0:06:44.440 first nine months it was very slow from a deal pipeline, 0:06:44.680 --> 0:06:46.920 and so it seemed like Q four when that pipeline 0:06:46.960 --> 0:06:49.479 picked up, everyone rushed from the sidelines and you saw 0:06:49.640 --> 0:06:53.640 looser underwriting, higher larvage, lower spreads, all the things that 0:06:53.680 --> 0:06:56.000 you don't want to see. And so that's what I'm 0:06:56.000 --> 0:06:58.360 worried about. It's been pretty slow, but if there's kind 0:06:58.400 --> 0:07:00.479 of a pop in a quarter, you do you see 0:07:00.520 --> 0:07:02.760 that frothy market conditions come back space. 0:07:03.400 --> 0:07:05.200 Christina Lee with oak Tree, thank you so much for 0:07:05.240 --> 0:07:06.360 joining us on the credit Edge. 0:07:06.720 --> 0:07:12.200 Thanks for having me. Matt Brill, head of North America 0:07:12.280 --> 0:07:15.360 investment grade credit at Investco, which manages more than two 0:07:15.400 --> 0:07:18.480 trillion dollars. Matt, how are you doing doing great? Thanks 0:07:18.520 --> 0:07:19.480 thanks coming on the show. 0:07:20.000 --> 0:07:24.080 Whenever I think of investment grade credit nowadays, I hate 0:07:24.080 --> 0:07:26.480 to use the word, but I am thinking bubble. It 0:07:26.640 --> 0:07:29.920 just gets tighter and tighter the more supply we see, 0:07:29.960 --> 0:07:31.920 the more demand there is. There just seems to be 0:07:31.920 --> 0:07:34.280 this wall of cash pushing against it. And I'm worried 0:07:34.320 --> 0:07:37.440 about downgrades. I'm worried about the macro outlook. I'm worried 0:07:37.440 --> 0:07:40.240 about liquidity. I'm worried about all sorts of you know, things, 0:07:40.280 --> 0:07:41.880 fallen angels. You know, there are so many things that 0:07:41.920 --> 0:07:44.400 worry me about that picture when everybody just wants to 0:07:44.440 --> 0:07:47.120 buy more. What's your view, where do we go from here? 0:07:47.440 --> 0:07:50.040 I think you need to relax, James. There's not that 0:07:50.120 --> 0:07:52.880 much to worry about. There's plenty of good things that 0:07:52.880 --> 0:07:55.880 are still happening in the investment grade market. So overall, yes, 0:07:55.960 --> 0:07:58.320 spreads are tight. They've been tight for a number of 0:07:58.440 --> 0:08:02.160 years now, and we think that continues because the fundamentals 0:08:02.200 --> 0:08:04.160 are really good and in fact, the fundamentals you know, 0:08:04.240 --> 0:08:05.600 possibly are. 0:08:05.480 --> 0:08:06.120 Better than ever. 0:08:06.560 --> 0:08:10.840 Downgrades are low, the higher quality names continue to do 0:08:10.960 --> 0:08:15.280 very well. Earnings beats are at essentially record pace. So overall, 0:08:15.680 --> 0:08:18.360 you know, we think that spreads are tight, but they're justified. 0:08:18.400 --> 0:08:21.560 So plenty to worry about at some point, but right 0:08:21.600 --> 0:08:22.680 now is really not the time. 0:08:22.800 --> 0:08:25.400 How much tights could they go, Well. 0:08:25.400 --> 0:08:26.880 We had a year ago we said maybe they could 0:08:26.920 --> 0:08:28.680 get to somewhe around fifty five basis points, and they 0:08:28.760 --> 0:08:31.280 keep hitting this wall in the high sixties. But they're 0:08:31.280 --> 0:08:33.640 really supported by all in yields where they are, so 0:08:33.720 --> 0:08:36.240 if all in yields stay high. With treasure yields where 0:08:36.240 --> 0:08:38.560 they are, we do think that spreads can continue to 0:08:38.600 --> 0:08:40.840 grind here. If the yields were on the ten yere 0:08:40.840 --> 0:08:42.880 Tursey were actually going materially lower, that would probably be 0:08:42.880 --> 0:08:44.800 a negative. But if ye'ld stay up here and you 0:08:44.960 --> 0:08:47.880 continue to get five percent furning ten year investment grade bonds, 0:08:48.200 --> 0:08:50.680 six percent for earning thirty year investment grade bonds, I 0:08:50.679 --> 0:08:52.400 think there's a real chance you could go another five 0:08:52.440 --> 0:08:54.559 to ten tighter and we could get into those high fifties. 0:08:54.600 --> 0:08:56.720 It's it's kind of a pain trade because nobody thinks 0:08:56.720 --> 0:08:58.760 that it can happen, and so no one's really positioned 0:08:58.800 --> 0:08:59.040 for that. 0:08:59.360 --> 0:09:01.080 And you think it right that we should just look 0:09:01.120 --> 0:09:02.800 at yield, don't care about spread. 0:09:03.120 --> 0:09:04.560 Well, I think you have to look at both because 0:09:04.559 --> 0:09:05.920 at the end of the day, you could just buy 0:09:05.920 --> 0:09:09.120 a treasury and get that that yield. But would you 0:09:09.200 --> 0:09:11.760 rather have a high quality company and get five percent 0:09:11.880 --> 0:09:14.160 or the US government getting four point four percent four 0:09:14.200 --> 0:09:17.400 point three percent? You know, there's still it still does 0:09:17.480 --> 0:09:20.400 give you that incremental yield, and maybe sixty basis points 0:09:20.440 --> 0:09:23.640 isn't a lot, but it's still important to everybody and 0:09:23.679 --> 0:09:26.080 every last dollar does count, and you have to figure 0:09:26.120 --> 0:09:27.800 out what are you sacrificing my doing it? Are you 0:09:27.800 --> 0:09:30.160 sacrificing liquidity? You know, we generally don't think so that 0:09:30.240 --> 0:09:32.400 the IG market is not quite as liquid as the 0:09:32.480 --> 0:09:34.960 US Jersey market, but it's pretty darn close. They mentioned 0:09:34.960 --> 0:09:37.000 of the portfolio trade means you can trade bonds by 0:09:37.000 --> 0:09:40.840 the billions very very easily. Are you sacrificing quality? And know, 0:09:40.880 --> 0:09:43.760 most of these companies are really really high cash flow generating, 0:09:44.000 --> 0:09:45.600 you know, so at the end of the day, don't 0:09:45.600 --> 0:09:49.040 really sacrifice liquidity and you don't really sacrifice credit. So 0:09:49.400 --> 0:09:51.839 I think that incremental more yield that you're going to 0:09:51.880 --> 0:09:55.040 get it is important. So overall, yes, we do look 0:09:55.040 --> 0:09:57.320 at yields, but I think the incremental spread that you're 0:09:57.360 --> 0:09:59.160 getting is still enough to be attractive. 0:09:59.360 --> 0:10:01.520 And maybe some of these companies are actually run better 0:10:01.559 --> 0:10:03.000 than the US government. Do you think we'll get to 0:10:03.080 --> 0:10:04.720 a negative spread on any of this debt? 0:10:05.320 --> 0:10:09.120 You know, that's always been that's been the holy grail 0:10:09.240 --> 0:10:12.040 or the thought of what could that actually occur? I 0:10:12.080 --> 0:10:14.240 think you could certainly see in two to three year 0:10:14.240 --> 0:10:16.520 bonds at certain times that it could happen very very 0:10:16.559 --> 0:10:19.640 short end, just given the technicals or certain things. But 0:10:19.679 --> 0:10:22.520 overall that generally doesn't make sense. The US government could 0:10:22.520 --> 0:10:27.400 always print more money. They do have a larger balance 0:10:27.400 --> 0:10:27.800 sheet at. 0:10:27.720 --> 0:10:29.600 The end of the day that they have at their disposal. 0:10:29.800 --> 0:10:32.199 But yeah, we do believe that you need to get 0:10:32.240 --> 0:10:34.800 paid something to own corporate credit. But how much is 0:10:35.000 --> 0:10:35.880 certainly up for debate. 0:10:36.080 --> 0:10:38.160 What about the supplies, either, there is a ton of 0:10:38.520 --> 0:10:41.280 new issuance, There's a ton of net new issues that 0:10:41.320 --> 0:10:44.760 we haven't seen in a well. Golden and Sax predicts 0:10:44.760 --> 0:10:48.040 eight hundred and fifty billion in net new IG supply 0:10:48.320 --> 0:10:50.040 for this year, which is the highest we've ever seen. 0:10:50.320 --> 0:10:52.880 We're also, you know, we're getting a lot of AI related, 0:10:52.880 --> 0:10:54.839 We're getting a lot of M and A related. Does 0:10:54.840 --> 0:10:57.439 that not push the market into a balance that therefore 0:10:57.440 --> 0:10:59.920 pushes spreads out? Is there not a point which by 0:11:00.160 --> 0:11:00.960 just say that's enough. 0:11:01.280 --> 0:11:03.920 Yeah, So the gross supply and the net supply are 0:11:03.920 --> 0:11:05.880 both large. So the gross supply is going to be 0:11:05.880 --> 0:11:08.400 probably pretty close to two trillion. The net supply, depending 0:11:08.400 --> 0:11:10.080 how you look at if it's just maturities or if 0:11:10.120 --> 0:11:13.480 it's maturities and coupons, it is going to be still elevated. 0:11:13.520 --> 0:11:15.679 It's more that it's growing. Right at the end of 0:11:15.679 --> 0:11:19.000 the day, it's definitely growing, but the cash flow is 0:11:19.000 --> 0:11:22.000 growing even faster for one. But the demand is really 0:11:22.240 --> 0:11:24.440 what we're looking at and the demand. It's a supply 0:11:24.480 --> 0:11:26.840 demand dynamic, and the supply is higher, but the demand 0:11:26.880 --> 0:11:29.720 is even greater than the supply growth. The reason for 0:11:29.800 --> 0:11:31.800 that is that all those all in yields being where 0:11:31.840 --> 0:11:34.760 they are on all in five to six percent range. 0:11:34.880 --> 0:11:37.480 So if you look at insurance companies pension plans, they're 0:11:37.520 --> 0:11:39.680 seeing that this is a tremendous opportunity to own investment 0:11:39.720 --> 0:11:43.160 grade credit. A lot of balance funds or pension plans 0:11:43.200 --> 0:11:45.280 that are overfunded, so they have if you take the 0:11:45.320 --> 0:11:48.280 present value of all their liabilities in the future, because 0:11:48.320 --> 0:11:50.920 the equity market has done so well, they actually have 0:11:51.080 --> 0:11:53.280 more money than they need for the future. So what 0:11:53.320 --> 0:11:55.080 they're doing is they're taking money off the table in 0:11:55.080 --> 0:11:57.600 the equity market and they're reallocating it to fixed income 0:11:57.880 --> 0:12:01.720 and locking in those year so locking in those present values, 0:12:02.080 --> 0:12:04.280 and we're seeing more and more of that. So that's 0:12:04.280 --> 0:12:06.400 that shift out of equities in over to fixed income. 0:12:06.480 --> 0:12:08.160 It's not at a large scale, but it's on the 0:12:08.280 --> 0:12:09.880 on the margin over and over, and that's creating a 0:12:09.920 --> 0:12:13.600 premituous amount of demand, so annuities, pension plans, insurance companies. 0:12:13.760 --> 0:12:16.240 It's a wave of demand that is more than offsetting 0:12:16.280 --> 0:12:17.360 the growth and supply. 0:12:17.360 --> 0:12:19.880 And specificly on the AI side of it, all of 0:12:19.880 --> 0:12:21.760 this news supply there is you know, a sort of 0:12:21.760 --> 0:12:23.360 a hope trade there that you know they'll get all 0:12:23.400 --> 0:12:25.520 this stuff right in terms of the data centers and 0:12:25.520 --> 0:12:26.800 the hyper scales everything else. 0:12:27.040 --> 0:12:28.720 We just don't know. It's kind of a shot in 0:12:28.760 --> 0:12:31.440 the duck. But is this risk being properly priced? 0:12:31.440 --> 0:12:32.000 Do you think so? 0:12:32.120 --> 0:12:33.240 I think the football told us. 0:12:33.320 --> 0:12:35.400 I think there's two sides of the coin. There's one 0:12:35.480 --> 0:12:38.560 is the unsecured hyperscalers, and then two is the structured 0:12:38.600 --> 0:12:41.320 vehicles that they're using. So let's start with the unsecured. 0:12:42.000 --> 0:12:43.599 You just saw a large equity raise for one of 0:12:43.600 --> 0:12:46.319 the hyper scalers this week, one of the largest raises 0:12:46.360 --> 0:12:49.080 in history, maybe the largest public rais in history, and 0:12:49.120 --> 0:12:50.760 that was to defend their balance sheet. And this is 0:12:50.760 --> 0:12:52.440 a double A company. They're going out and basically saying 0:12:52.440 --> 0:12:54.520 we're going to solidifier balance sheet. Let's go ahead and 0:12:54.559 --> 0:12:57.280 issue more equity. Companies can always do this, So I 0:12:57.280 --> 0:12:59.040 think people a lot of people forget that this is 0:12:59.200 --> 0:13:01.360 an option for butanies who saw it previously from Boeing, 0:13:01.400 --> 0:13:03.439 who saw it from Oracle. This is on the table 0:13:03.440 --> 0:13:05.280 for all these companies at all times. They generally don't 0:13:05.360 --> 0:13:07.040 like to do this, but if they feel like it's 0:13:07.040 --> 0:13:09.719 prudent and the best use of their best use of 0:13:09.720 --> 0:13:12.200 their capital and best way to defend their balance, that's 0:13:12.200 --> 0:13:13.960 a great thing for them to do. So it's not 0:13:14.000 --> 0:13:15.560 just hoping that they're going to do all the right things, 0:13:15.559 --> 0:13:17.559 but I think that there's good signs that they could 0:13:17.559 --> 0:13:20.120 do that and have done that. On the structured side 0:13:20.120 --> 0:13:23.079 of things, we really take the approach that AI could 0:13:23.120 --> 0:13:25.600 be a complete flop and you're still going to get paid. 0:13:25.840 --> 0:13:28.480 And so we're looking at ambortization on chips. Are they 0:13:28.520 --> 0:13:31.040 going to go to zero by the time our bond's mature, 0:13:31.320 --> 0:13:33.880 meaning the amborization not the value of the chips, but 0:13:33.920 --> 0:13:36.240 the amborization goes to zero, so that if the value 0:13:36.240 --> 0:13:38.839 of the chips is more than zero, you're good if 0:13:38.840 --> 0:13:41.000 you just continue to get this payment. So we're taking 0:13:41.000 --> 0:13:43.640 a very structured, prudent approach that we're just assuming that 0:13:43.720 --> 0:13:45.720 this is completely worthless at the end of the day, 0:13:46.000 --> 0:13:48.120 but our bonds are still money good And that's the 0:13:48.120 --> 0:13:50.000 way that these are structured. And I think they realize 0:13:50.000 --> 0:13:51.800 they have to do it this way because they need 0:13:51.840 --> 0:13:54.319 so much money. And this really does alleviate our fears 0:13:54.320 --> 0:13:56.640 and all your concerns earlier can go to rest when 0:13:56.679 --> 0:13:58.600 we see these structures done in the way that they are, so. 0:13:58.600 --> 0:14:00.880 The text breaths don't then need to not much from 0:14:00.880 --> 0:14:03.520 it because every deal comes a bit cheaper, the concessions 0:14:03.520 --> 0:14:05.640 are a bit wide. You know, it seems like there's 0:14:05.640 --> 0:14:08.400 a value maybe wasting, but you don't think spreads widened 0:14:08.400 --> 0:14:09.320 out on the tech side. 0:14:09.480 --> 0:14:11.720 So for a while there it seems as if it's 0:14:11.720 --> 0:14:14.440 just going to relentlessly continue to come this equity raise 0:14:14.480 --> 0:14:16.240 from Alphabet, you know. I I do think kind of 0:14:16.240 --> 0:14:19.200 gives us some faith that that maybe there's going. 0:14:19.040 --> 0:14:20.200 To be a mixed going forward. 0:14:20.640 --> 0:14:23.240 But the companies have been very proactive of really trying 0:14:23.240 --> 0:14:25.440 to tell you we're not going to issue until this 0:14:25.560 --> 0:14:27.760 quarter or the next quarter or the next year, and they're 0:14:27.800 --> 0:14:30.240 trying to lay out their plans much greater, which does 0:14:30.280 --> 0:14:32.560 give us ability to plan better on our end too, 0:14:32.640 --> 0:14:36.600 so we can use our our our dollars at a 0:14:36.600 --> 0:14:38.600 more measured pace rather than making sure we don't run 0:14:38.640 --> 0:14:42.760 out of all our all our exposure early. Our ability 0:14:42.760 --> 0:14:44.680 to add more to these in the future, we can 0:14:44.760 --> 0:14:47.000 retain that. So overall we're kind of trying to figure out, 0:14:47.160 --> 0:14:48.360 you know, what are they going to do and then 0:14:48.360 --> 0:14:50.240 they're telling us. But the key is if they then 0:14:50.320 --> 0:14:52.520 do something on the side with a special purpose vehicle 0:14:52.520 --> 0:14:54.840 that's backed by the same credit that does sort of 0:14:54.840 --> 0:14:56.280 double dip, and that can be a little bit of 0:14:56.280 --> 0:15:00.440 a challenge. But if they continue to be rolling at 0:15:00.440 --> 0:15:02.960 the pace that they are, and we're seeing AI happening 0:15:02.960 --> 0:15:04.960 at the way that it is and the earning speeds 0:15:05.000 --> 0:15:07.040 that are happening, we continued to believe that they will 0:15:07.080 --> 0:15:08.600 be able to issue this debt and have it not 0:15:08.680 --> 0:15:09.600 go materially wider. 0:15:09.720 --> 0:15:12.440 Matt Real, head of North America investment grade Credit at Invesco, 0:15:12.480 --> 0:15:15.040 thank you so much for joining us on the credit edge. 0:15:17.720 --> 0:15:20.000 We are here with any Shah, Global head of det 0:15:20.120 --> 0:15:23.120 half of markets at Morgan Sandy responsible for investment grade, leverage, 0:15:23.120 --> 0:15:24.640 finance and securitized products. 0:15:24.640 --> 0:15:26.520 How you doing, any doing great. Thank you so much 0:15:26.560 --> 0:15:27.800 for having me, James. 0:15:27.480 --> 0:15:29.400 Thank you so much for being here. As you know, 0:15:29.600 --> 0:15:32.680 there's a massive AI funding boom going on, something we've 0:15:32.720 --> 0:15:36.160 never seen before in capital markets, in credit it's just 0:15:36.560 --> 0:15:40.400 overwhelming the size of the complexity. Where are we now 0:15:40.440 --> 0:15:42.560 and look ahead into the second half, what more can 0:15:42.600 --> 0:15:43.120 we expect? 0:15:43.600 --> 0:15:43.840 Sure? 0:15:43.880 --> 0:15:45.040 I mean, just to give you a little bit of 0:15:45.040 --> 0:15:47.960 context around it, I would estimate that there's going to 0:15:48.000 --> 0:15:52.200 be four hundred to five hundred billion dollars of new 0:15:52.280 --> 0:15:55.080 financing issue in the credit markets to finance AI and 0:15:55.120 --> 0:15:57.720 all the cappacks around it. You know, that's going to 0:15:57.720 --> 0:15:59.880 be north of ten percent of all of the issue 0:15:59.880 --> 0:16:01.720 in in the credit markets. That's just this year. 0:16:01.800 --> 0:16:04.160 That's just this year, to give you context more than 0:16:04.200 --> 0:16:06.800 the second half, as in to what we've already had. 0:16:06.640 --> 0:16:09.120 For the full year. For the full year, I'd expected 0:16:09.120 --> 0:16:10.960 to be ten to fifteen percent of all the issues 0:16:10.960 --> 0:16:12.800 of the credit markets. Yeah, and to give you context, 0:16:12.840 --> 0:16:15.320 two years ago, this wasn't a sector. So we're going 0:16:15.320 --> 0:16:17.360 from zero to ten to fifteen percent of the market. 0:16:17.560 --> 0:16:21.600 It'll most likely be the largest industry vertical if that 0:16:21.680 --> 0:16:25.920 was an industry vertical non financial in the entire credit markets. Now, 0:16:25.960 --> 0:16:30.520 the good news is there's so much product breadth across markets, 0:16:30.520 --> 0:16:33.160 whether it's investment, great, high yield leverage loans, and then 0:16:33.200 --> 0:16:36.280 across currencies, so there's more than sufficient capacity for it. 0:16:36.320 --> 0:16:37.680 But it is a big deal, right. 0:16:38.120 --> 0:16:41.280 We are talking to investors though that say that, yes, 0:16:41.560 --> 0:16:44.520 it's being spread across markets and currencies. But ultimately, you know, 0:16:44.600 --> 0:16:46.960 we're just one global shop. We're buying all this stuff 0:16:46.960 --> 0:16:48.400 in all the markets, so we internally are going to 0:16:48.480 --> 0:16:50.680 hit some limits on you know, the issue and also 0:16:50.680 --> 0:16:53.120 on the seite. So so what kind of pushback might 0:16:53.160 --> 0:16:54.960 you see from investors. 0:16:54.560 --> 0:16:56.280 Well, the one thing I would tell you is that 0:16:56.880 --> 0:17:00.320 investors were very under indexed big tech going in. 0:17:00.120 --> 0:17:00.640 To this, right. 0:17:00.760 --> 0:17:04.680 So, yes, today, of all of the investment grade issuance, 0:17:04.720 --> 0:17:06.879 about ten percent of it has come from the hyperscalets, 0:17:06.920 --> 0:17:08.959 which a big number, but it was zero percent two 0:17:09.040 --> 0:17:11.360 years ago, right, So I think investors have a lot 0:17:11.400 --> 0:17:14.040 of catching up to do to be invested appropriately in 0:17:14.080 --> 0:17:16.359 the sector. I do think it makes a difference that 0:17:16.680 --> 0:17:19.199 we've been able to broaden out into product categories. So 0:17:19.640 --> 0:17:23.679 you know, we always thought that most of this capacity 0:17:23.760 --> 0:17:25.720 was going to come in the investment grade market. The 0:17:25.720 --> 0:17:28.320 deepest most liquid pool of capital is the US dollar 0:17:28.520 --> 0:17:30.960 investment grade bond market. It's about half of all the 0:17:30.960 --> 0:17:34.000 capital markets issuance in the credit markets, and that has 0:17:34.000 --> 0:17:36.880 played out, we'll probably see two hundred billion dollars plus 0:17:36.920 --> 0:17:39.960 of IG issuance in the US market just from the hyperscalars. 0:17:40.720 --> 0:17:43.800 But there now as you know, tapping into other currencies. 0:17:44.400 --> 0:17:46.399 You know, one of the hyper scalers has issued in 0:17:46.480 --> 0:17:50.119 all six major currencies already this year. So non dollar 0:17:50.280 --> 0:17:54.520 issuance for hyperscalers has gone from ten or fifteen percent 0:17:54.520 --> 0:17:56.440 a year ago to being about a third of their 0:17:56.480 --> 0:17:59.640 issuance this year. So that's that's helping, I think manage 0:17:59.640 --> 0:18:02.840 the capacity a great deal. The other thing is other 0:18:02.920 --> 0:18:06.040 products like the terminal and B market. So the core 0:18:06.080 --> 0:18:08.320 weave three billion dollar termal and B that we syndicated 0:18:08.359 --> 0:18:11.159 for GPU financing, that's a brand new product. That's the 0:18:11.200 --> 0:18:14.880 first time that the institutional loan market has been used 0:18:14.920 --> 0:18:17.960 to finance that asset class. And of course all this 0:18:18.040 --> 0:18:20.480 high yield data center financing, which has been a bit 0:18:20.480 --> 0:18:22.520 of a game changer in financing the ecosystem. 0:18:23.000 --> 0:18:24.720 But the size though, I mean, you know, are they 0:18:24.720 --> 0:18:27.200 going to keep hitting us with you know, twenty billion, 0:18:27.320 --> 0:18:29.960 thirty billion at a shot, or are they going to 0:18:29.960 --> 0:18:32.919 start to dial down that volume in terms of single 0:18:33.720 --> 0:18:34.480 deal size. 0:18:34.520 --> 0:18:37.640 Well, based on all of the capex pronouncements that you've 0:18:37.680 --> 0:18:40.080 heard from the large tech companies, I think the supply 0:18:40.160 --> 0:18:42.840 is going to continue and investors like that the bigger 0:18:42.840 --> 0:18:43.160 the better. 0:18:43.640 --> 0:18:43.840 Yeah. 0:18:44.119 --> 0:18:47.119 I think it is reflected somewhat in credit spreads in 0:18:47.119 --> 0:18:49.640 that there is a bit of divergence between the large 0:18:49.640 --> 0:18:52.480 tech companies and some of the other highly rated industrial 0:18:52.480 --> 0:18:54.399 has just given all of the supply, and so I 0:18:54.480 --> 0:18:57.119 think investors in this raid environment you're seeing more and 0:18:57.160 --> 0:19:00.520 more cash coming in, particularly into investment grade, and find 0:19:00.560 --> 0:19:02.879 it to be a very attractive opportunity to deploy. And 0:19:02.920 --> 0:19:05.720 as I said, they've been underinvested coming into this cycle. 0:19:06.359 --> 0:19:09.280 What though, if it doesn't all go as planned? You know, 0:19:09.480 --> 0:19:12.240 there is a lot of hope in this AI trade. 0:19:12.240 --> 0:19:14.800 There is a lot of faith that you know, things 0:19:15.080 --> 0:19:18.639 can be as transformative as everyone really believes. What are 0:19:18.640 --> 0:19:23.080 the risks are not happening? Well, Look, I think investors 0:19:23.080 --> 0:19:25.920 are focused on three things. They're focused on structure, They're 0:19:25.920 --> 0:19:28.680 focused on liquidity, and they're focused on relative value. Those 0:19:28.720 --> 0:19:31.080 three things matter a ton when you're investing in this 0:19:31.119 --> 0:19:35.040 ecosystem or any other industry sector. So we think about structure, 0:19:35.160 --> 0:19:38.320 you think about downside protection and making sure that ultimately 0:19:38.400 --> 0:19:41.840 there is a high quality company that's standing behind whatever 0:19:42.480 --> 0:19:45.280 the credit that's being issued. Liquidity has been a big, 0:19:45.400 --> 0:19:47.280 big driver, and that's why you've seen most of this 0:19:47.359 --> 0:19:49.320 issuance in the one forty four A market and not 0:19:49.400 --> 0:19:51.080 in the four A two market, although that has been 0:19:51.320 --> 0:19:53.600 a viable path. I think most more and more of 0:19:53.600 --> 0:19:55.320 this issue is going to issuance is going to be 0:19:55.720 --> 0:19:59.360 in products that are more liquid and offer that flexibility 0:19:59.400 --> 0:20:02.239 to it investors. And then relative value. I think at 0:20:02.280 --> 0:20:04.000 the end of the day, if you look at how 0:20:04.440 --> 0:20:07.760 some of these financings have traded in the aftermarket, you'll 0:20:07.760 --> 0:20:10.280 see that investors feel like there is convexity and what 0:20:10.320 --> 0:20:11.960 they're investing in there is upside. 0:20:12.320 --> 0:20:14.720 Do they need to pay more terms of spread? Do 0:20:14.720 --> 0:20:17.080 they need to have wider new issue concessions to clear 0:20:17.160 --> 0:20:18.879 all of the rescumen? Because we're very early in the 0:20:18.880 --> 0:20:22.439 cycle and already we're tapping every market. So you know, 0:20:22.600 --> 0:20:26.840 when one investor points out and compares the Canadian market 0:20:26.920 --> 0:20:30.520 to reaching out under the couch Christians to get you know, change, 0:20:30.720 --> 0:20:32.920 because they're so keen they need every market. I mean, 0:20:33.320 --> 0:20:37.680 we're so early on, do we not start to saturate 0:20:37.720 --> 0:20:40.199 and you know, have some kind of issues clearing and 0:20:40.200 --> 0:20:43.560 then have to move the spread up again. 0:20:43.600 --> 0:20:47.600 I think the supply has been met more than adequately 0:20:47.680 --> 0:20:50.639 with demand. In fact, demand has outstripped the supply and 0:20:50.640 --> 0:20:52.480 you can see this in how some of these new 0:20:52.480 --> 0:20:55.960 issues have traded. And so for the foreseeable future, I 0:20:56.359 --> 0:20:58.400 continue to think that spreads are going to remain tight 0:20:58.680 --> 0:21:01.160 and that there's a lot of investor enthusiasm to play 0:21:01.160 --> 0:21:03.879 the sector. Anisha, Global head of dept Catal Markets at 0:21:03.880 --> 0:21:05.800 Morgan Sandy. Thank you so much for joining us on 0:21:05.840 --> 0:21:07.160 the credit edge. Thank you so much. 0:21:07.200 --> 0:21:14.119 James lot Fee Curry multi asset credit stretches at PIMCO, 0:21:14.240 --> 0:21:16.000 which manages more than two trillion dollars. 0:21:16.000 --> 0:21:17.919 How are you doing? Lot Fee doing great? How are 0:21:17.920 --> 0:21:18.520 you very well? 0:21:18.520 --> 0:21:20.760 Thanks so much for coming back on the show. So 0:21:20.920 --> 0:21:23.320 you're at the event here in New York. You just 0:21:23.359 --> 0:21:25.720 mentioned that the biggest risk is the unwind of the 0:21:25.760 --> 0:21:29.720 AI story. How imbalance the buildout is and it's not sustainable. 0:21:29.760 --> 0:21:31.360 I really want to unpat that. I wanted to tell 0:21:31.359 --> 0:21:32.960 me more about that. What God is going on and 0:21:32.960 --> 0:21:34.040 why is it such a big risk? 0:21:34.440 --> 0:21:36.640 Well, I guess there's two two areas that are would 0:21:36.640 --> 0:21:39.600 be focused on. One, as you said, the way the 0:21:39.640 --> 0:21:43.640 economic rent of the AI buildout cycle is currently accruing 0:21:43.840 --> 0:21:46.560 is very imbalanced. Basically, most of the value if you 0:21:46.600 --> 0:21:48.840 look at the equity market performances go to the semis. 0:21:49.119 --> 0:21:53.399 The relative performance of the hyper scalers, while certainly very 0:21:53.440 --> 0:21:57.280 dispersed in aggregate, you know, you don't see a lot 0:21:57.280 --> 0:21:59.479 of our performance actually relative to the indux and so 0:21:59.520 --> 0:22:02.639 that's not sustainable. In the world in which you know, 0:22:02.720 --> 0:22:05.480 the spenders are spending massive amounts of money and that 0:22:05.560 --> 0:22:07.919 are not able to monetize, it is a world that 0:22:07.920 --> 0:22:11.080 doesn't work right, and so that's one one issue. I 0:22:11.119 --> 0:22:13.679 guess the second risk is timing, because we have to 0:22:13.720 --> 0:22:16.760 remember that the buildout is happening at times zero. The 0:22:16.800 --> 0:22:19.520 adoption is going to happen later. What you don't want 0:22:19.520 --> 0:22:22.040 to happen is a remake of the late nineteen nineties 0:22:22.080 --> 0:22:24.879 where the adoption happens much later, and then in the 0:22:24.920 --> 0:22:27.359 meantime you're in a situation where you overbuilt and then 0:22:27.400 --> 0:22:30.159 you have like a classic sort of boom and bust 0:22:30.440 --> 0:22:31.640 type of Catholic cycles. 0:22:31.880 --> 0:22:34.359 Right, and given most of the high interest rates, I mean, 0:22:34.400 --> 0:22:35.720 does that put more pressure on them. 0:22:35.680 --> 0:22:39.280 To well, this capital has to remain accommodative. That's sort 0:22:39.280 --> 0:22:42.440 of the first order condition, you know, and that means 0:22:42.480 --> 0:22:45.240 that yills have to stay sufficiently low in order to 0:22:45.359 --> 0:22:48.399 accommodate the build out, and then spreads obviously have to 0:22:48.400 --> 0:22:50.760 stay at levels that allow it to Right. 0:22:50.880 --> 0:22:54.560 But does that seem like a likely scenario? Well, so far, 0:22:54.640 --> 0:22:55.440 so good, I think. 0:22:55.520 --> 0:22:57.119 You know, you have to remember that as far as 0:22:57.160 --> 0:23:01.120 the hyperscalers go, they're starting from a position of remarkable strength, 0:23:01.200 --> 0:23:04.160 you know, relative to the late nineteen nineties with telecom 0:23:04.200 --> 0:23:06.800 for example, And these are like buy and large undelovered 0:23:06.840 --> 0:23:09.440 balance sheets, and so there's plenty of debt capacity. Now, 0:23:09.800 --> 0:23:12.840 this conversation may look very different a year or two 0:23:12.880 --> 0:23:15.399 from now if we sort of revisit those metrics. But 0:23:15.520 --> 0:23:17.880 so far, I'm not too worried about lack of debt 0:23:17.920 --> 0:23:21.200 capacity among you know, the large debt companies. 0:23:20.920 --> 0:23:22.600 Right, But how much do the spreads have to widen 0:23:22.600 --> 0:23:25.040 out to come, say, investors for all that instead of unknown. 0:23:24.840 --> 0:23:27.159 Way they have in relative terms. You know, if you 0:23:27.160 --> 0:23:29.600 look at the back end of spread curves, for example, 0:23:29.760 --> 0:23:33.760 you know, the excess spread in thirty year bonds relative 0:23:33.760 --> 0:23:36.480 to ten year bonds has actually widened down quite dramatically. 0:23:36.520 --> 0:23:40.159 So in relative terms, every marginal dollar that you're issuing 0:23:40.200 --> 0:23:41.960 at that thirty year part of the curve is costing 0:23:42.000 --> 0:23:45.360 you more money. So investors are definitely paying attention. They're 0:23:45.400 --> 0:23:47.080 not doing the same thing for the broad and non 0:23:47.080 --> 0:23:50.240 financial universe, where actually curves have been flattening, So there's 0:23:50.240 --> 0:23:50.920 some adjustment. 0:23:51.000 --> 0:23:52.080 I mean, every time. 0:23:51.880 --> 0:23:55.119 You add more supply into the market, the clearing mechan 0:23:55.200 --> 0:23:58.320 is is generally via prices or wider spreads. 0:23:58.320 --> 0:24:00.080 In this yes, but there is just so much and 0:24:00.480 --> 0:24:02.639 every deal gets massively over subscribed. It just seems like, 0:24:02.680 --> 0:24:06.440 you know, almost indiscriminate buying this sort of fomo there, 0:24:06.560 --> 0:24:08.840 you know, missing out on this on all of these trades, 0:24:08.880 --> 0:24:10.760 even though they seem to become cheaper every time. 0:24:11.440 --> 0:24:14.840 But if you're flagging, the unwind is a big risk, 0:24:15.880 --> 0:24:18.680 and spreads just you know, remain relatively tight. They did 0:24:18.840 --> 0:24:20.720 sort of widen us a little bit, but they're still 0:24:20.960 --> 0:24:23.600 pretty tight. Are we going to get hit with a 0:24:23.680 --> 0:24:26.160 big correction at some point that's going to burn investors? 0:24:26.720 --> 0:24:29.080 Well, now, what really loads when these things come? But 0:24:29.200 --> 0:24:32.040 I tend to think that, you know, most corrections tend 0:24:32.080 --> 0:24:34.520 to kind of carry a little bit of a macro flavor, 0:24:34.760 --> 0:24:37.720 you know, into them at the moment. I would say, 0:24:37.880 --> 0:24:40.600 you know, obviously there's a lot of literature on the 0:24:40.640 --> 0:24:43.160 K shaped economy and the haves and the have nots, etcetera. 0:24:43.200 --> 0:24:45.399 But to me, the biggest risk at the moment is 0:24:45.600 --> 0:24:47.720 is still that the current sort of situation in the 0:24:47.720 --> 0:24:51.800 Middle East morse into a full blown supply shock. You know, 0:24:52.359 --> 0:24:54.760 you need resolution basically, you need you need, you need 0:24:54.800 --> 0:24:57.720 to get clarity and and and the longer we wait, 0:24:57.760 --> 0:24:59.240 I think the more problematic that becomes. 0:24:59.280 --> 0:25:01.720 Eventually, you you had mentioned software when you paint on 0:25:01.760 --> 0:25:05.679 the panel's still a problem. You know, definitely there are 0:25:05.720 --> 0:25:08.080 issues there. But I'm interested in you if you have 0:25:08.200 --> 0:25:10.040 you know, does it spill over, does it you know, 0:25:10.119 --> 0:25:12.960 take down BDCs or clos, does it rip through credit markets, 0:25:12.960 --> 0:25:14.640 more globy or is there anything else that might cause 0:25:14.680 --> 0:25:15.200 some contagion. 0:25:15.280 --> 0:25:17.000 Look, I've been so that would be sort of a 0:25:17.040 --> 0:25:19.720 remake of the Energy Playbook and high yel back in 0:25:19.800 --> 0:25:22.840 fourteen fifteen or so far. Actually, it's been a very 0:25:22.840 --> 0:25:25.520 pleasant surprise. You're not seeing any sign of the contingent 0:25:25.600 --> 0:25:27.359 to the product market. I mean, if you look at 0:25:27.359 --> 0:25:31.040 the performance of the broadly syndicated law market x software 0:25:31.119 --> 0:25:33.720 versus software market has done a pretty good job kind 0:25:33.720 --> 0:25:36.639 of isolating that. That left tail a little bit for 0:25:36.720 --> 0:25:40.679 the software sector specifically. To me, this is almost like 0:25:40.720 --> 0:25:43.920 a textbook example of the difference between uncertainty and risk. 0:25:44.400 --> 0:25:46.320 You know, risk is when you know the distribution of 0:25:46.359 --> 0:25:48.639 outcomes and can kind of make a call. You can say, Okay, 0:25:48.640 --> 0:25:51.720 I'm I think the asymmetry is positive. In this case, 0:25:52.119 --> 0:25:54.879 we don't really know how the distribution of outcomes look like, 0:25:54.960 --> 0:25:57.400 and so it's uncertainty and I think until you get 0:25:57.440 --> 0:26:00.440 to a place where you're comfortable as signing it traumal 0:26:00.480 --> 0:26:03.760 value of those businesses. Unfortunately, I think that it's very 0:26:03.880 --> 0:26:06.640 likely that the sector will remain stuck in a. 0:26:06.359 --> 0:26:08.320 Lot of the careery With Pimco, thank you so much 0:26:08.359 --> 0:26:09.520 for joining us on the credit Edge. 0:26:09.520 --> 0:26:10.320 Thanks for having me. 0:26:13.880 --> 0:26:17.960 Jody Lewis senior credit analysts covering travel, restaurants and gaming 0:26:17.960 --> 0:26:18.920 for Bloomberg Intelligence. 0:26:18.960 --> 0:26:19.720 How you doing, Jody. 0:26:19.840 --> 0:26:21.680 I'm doing great, James, excited to be here. 0:26:21.720 --> 0:26:23.520 Thank you so much for coming back on the Credit Edge. 0:26:23.600 --> 0:26:25.840 So talk to me about the consumer. I'm hearing all 0:26:25.840 --> 0:26:30.359 these mixed stories. But our latest guest on the Credit 0:26:30.440 --> 0:26:33.320 Edge tells us that now they're into negative spending. 0:26:33.960 --> 0:26:34.679 What do you make of that? 0:26:34.840 --> 0:26:38.320 And is that real negative spending? Is definitely a bold statement. 0:26:38.800 --> 0:26:41.680 I would say that the issue we're seeing right now 0:26:41.760 --> 0:26:44.080 is that the lower income consumer is definitely trying to 0:26:44.119 --> 0:26:46.720 keep up with the joneses. The higher income consumer is 0:26:46.760 --> 0:26:48.800 still very much spending. We're seeing that in our travel 0:26:48.800 --> 0:26:51.160 survey data which came out just a few weeks ago, 0:26:51.480 --> 0:26:54.320 that they are in fact spending and they are very 0:26:54.400 --> 0:26:58.439 much increasing their spend to match the inflation increase. But 0:26:58.600 --> 0:27:01.480 the lower income consumer definitely a little bit more concerned 0:27:01.520 --> 0:27:04.720 and they're reacting such. They're trading down, they're looking at 0:27:04.760 --> 0:27:09.480 ways to still go and do, but maybe not as 0:27:10.359 --> 0:27:12.800 well as they've done in the past because they are 0:27:12.840 --> 0:27:13.760 filling the pull. 0:27:14.400 --> 0:27:17.399 So it's just the lower income consumer that's suffering, right, 0:27:17.400 --> 0:27:18.879 And that's what we're talking about here. Or is there 0:27:19.119 --> 0:27:21.440 a deeper because you know, I talk to people that 0:27:21.520 --> 0:27:24.880 are not in my classic bucket for low income, who 0:27:24.920 --> 0:27:29.200 are suffering through inflation and through you know, higher fuel costs, 0:27:29.240 --> 0:27:31.480 through everything just being more expensive, they're going to spend 0:27:31.520 --> 0:27:34.919 less on discretionary items. So how much how broad is 0:27:34.960 --> 0:27:36.360 this kind of consumer pressure? 0:27:36.720 --> 0:27:39.000 So I think, James, the key is the amount of 0:27:39.040 --> 0:27:41.800 time that we're in this state. If we're paying over 0:27:41.880 --> 0:27:44.520 four dollars a pump into the end of this year, 0:27:44.640 --> 0:27:47.639 people will be adjusting the way that they're spending. People 0:27:47.680 --> 0:27:50.600 are already adjusting the way that they're buying basic goods, 0:27:51.040 --> 0:27:54.439 but we're not necessarily seeing them holistically pull back on 0:27:54.520 --> 0:27:58.920 experiences because they still do amazingly. Remember the pandemic, They 0:27:58.960 --> 0:28:01.679 see war, they see all these sort of components that 0:28:01.760 --> 0:28:04.439 remind them that they could be dead tomorrow. And so 0:28:04.640 --> 0:28:08.320 thinking of abola, thinking of hantavirus as the most recent 0:28:08.400 --> 0:28:12.240 scares that we're still dealing with, somewhat people are saying, Okay, 0:28:12.680 --> 0:28:15.439 I know that this could all end, and so at 0:28:15.520 --> 0:28:17.720 least for twenty twenty six, as long as I'm able 0:28:17.720 --> 0:28:20.760 to afford it, I will. But something that we added 0:28:20.760 --> 0:28:23.200 in our travel survey this year, which we were excited 0:28:23.240 --> 0:28:26.760 about is asking people how they're paying for their spending 0:28:26.840 --> 0:28:30.639 on travel, and we have a combination. If it's fifty 0:28:30.760 --> 0:28:34.120 three percent of people are paying with credit cards and 0:28:34.160 --> 0:28:37.840 another ten percent is paying with my now pay later, 0:28:38.320 --> 0:28:41.040 So you talk about a credit perspective, that's what's going 0:28:41.080 --> 0:28:43.320 on people's balance sheets. Never mind the fact that twenty 0:28:43.360 --> 0:28:46.440 five percent are dipping into loyalty points, ten percent are 0:28:46.520 --> 0:28:50.000 using tax credits, and then you have, of course personal 0:28:50.040 --> 0:28:53.760 savings that's about forty percent. So people are using all 0:28:53.840 --> 0:28:55.440 parts of their balance sheet to pay for this. 0:28:55.680 --> 0:28:58.000 It's a pretty grim statement. They do it now. 0:28:58.040 --> 0:28:59.440 Otherwise you know you won't be able to do it 0:28:59.440 --> 0:29:01.880 because you'll be dead. But what kind of experience they 0:29:01.960 --> 0:29:03.760 are they are they paying for? I mean, you know, 0:29:03.880 --> 0:29:06.320 travel on an aeroplane to another country has become a 0:29:06.320 --> 0:29:09.120 lot more expensive. But are they just staying at home? 0:29:09.160 --> 0:29:10.120 Are they going to theme parks? 0:29:10.120 --> 0:29:10.680 What are they doing? 0:29:11.240 --> 0:29:15.080 Theme parks are not necessarily catching the wave of the 0:29:15.120 --> 0:29:18.600 consumer spending unfortunately at the moment, well we are seeing 0:29:18.640 --> 0:29:21.240 those people are looking. They want to do beach vacations, 0:29:21.280 --> 0:29:24.000 they want to do national parks. I think that's marrying 0:29:24.120 --> 0:29:27.400 with USA two fifty as well as the FIFA World Cup. 0:29:28.280 --> 0:29:30.960 US consumers however, are looking to say a little bit 0:29:30.960 --> 0:29:34.040 more domestic, so they have paired back their international travel, 0:29:34.240 --> 0:29:35.640 and I think that's a function of the fact that 0:29:35.800 --> 0:29:39.240 airline travel is not as convenient and it's more expensive. 0:29:39.520 --> 0:29:42.239 We already had a few discount airlines drop out of 0:29:42.440 --> 0:29:45.880 the ecosystem. We have a few more where there's merger talks, 0:29:45.920 --> 0:29:49.760 and I think that this discussion then just feeds into 0:29:49.840 --> 0:29:53.440 this fear around air travel and promotes the idea of 0:29:53.480 --> 0:29:57.280 people should just travel locally to the Jersey shore. 0:29:57.320 --> 0:29:59.240 As I like to joke, well, go on a cruise, 0:29:59.280 --> 0:30:00.840 you love cruises, Tell me about cruises. 0:30:00.840 --> 0:30:02.120 How the cruise line's doing in all this. 0:30:02.200 --> 0:30:04.960 Yes, amazingly. For as much as we're seeing people pull 0:30:05.040 --> 0:30:09.240 back on Caribbean, on Mexico, on all the sort of 0:30:09.320 --> 0:30:13.680 key areas Italy that we see usually that dictate cruise travel, 0:30:14.000 --> 0:30:16.520 at the same time we're seeing that people are still 0:30:16.560 --> 0:30:19.600 very much bending on cruises. That the cruise companies are 0:30:19.640 --> 0:30:23.080 talking about advanced booking rates being their highest levels that 0:30:23.120 --> 0:30:26.160 they've ever been, that they're already seeing bookings into next year. 0:30:26.280 --> 0:30:28.840 Very much so, we have Royal Caribbean rolling out on 0:30:28.960 --> 0:30:33.640 their river cruise, and that's something that you sort of 0:30:33.680 --> 0:30:36.280 wonder how they're going to do. And from my understanding, 0:30:36.640 --> 0:30:39.120 the Celebrity River Cruise is doing very well from a 0:30:39.120 --> 0:30:42.680 bookings perspective, and they haven't even really gone to shore yet. 0:30:42.840 --> 0:30:46.040 So I think the key here is that for as 0:30:46.160 --> 0:30:48.360 much as you kind of look for these warning signs, 0:30:48.360 --> 0:30:50.800 as much as you're kind of worried, at the same time, 0:30:51.080 --> 0:30:53.720 the data is indicating that for now we're okay, and 0:30:53.760 --> 0:30:56.200 I think that that will continue through the remainder of 0:30:56.280 --> 0:30:59.360 twenty six because so many people, especially for cruises, pay 0:30:59.360 --> 0:31:00.920 in advance, don't want to back out. 0:31:01.320 --> 0:31:03.200 They do have a little debt as well. Is that 0:31:03.240 --> 0:31:05.840 an opportunity for credit investors who are really hungry for 0:31:05.920 --> 0:31:08.320 yield right now they're looking for opportunities, but is there 0:31:08.640 --> 0:31:11.200 an opportunity to buy into some of that stuff? 0:31:11.800 --> 0:31:13.600 Yes, and no, James, because we so have a few 0:31:13.680 --> 0:31:16.560 names that are what you would call rising stars. So 0:31:16.680 --> 0:31:19.200 Royal Caribbean already got upgraded to investment grade, so that 0:31:19.200 --> 0:31:21.520 price appreciation that you would get from a credit perspective 0:31:21.600 --> 0:31:24.080 is not there so much. Right They're solidly investment grade. 0:31:24.360 --> 0:31:27.520 Carnival just got upgraded again by Moodies, and they aren't 0:31:27.720 --> 0:31:31.040 yet fully investment grade, so there is a component of 0:31:31.080 --> 0:31:33.400 that where if and when they got upgraded by either 0:31:33.440 --> 0:31:36.840 Moodies or SMP so that they're index eligible to investment grade, 0:31:36.920 --> 0:31:39.240 you'll see an uplift just by the fact that there 0:31:39.240 --> 0:31:42.640 are investors who normally can't buy their bonds that all 0:31:42.680 --> 0:31:44.880 of a sudden can And so I think we are 0:31:44.920 --> 0:31:47.880 going to see that. Whether it's this year or next year, 0:31:47.920 --> 0:31:51.600 I think is dependent on the overall economy and dependent 0:31:51.640 --> 0:31:54.400 on how well they do with managing the additional costs 0:31:54.440 --> 0:31:59.200 related to energy, because that will of course affect their margins, 0:31:59.320 --> 0:32:02.400 which will then and delay deleveraging a little bit. 0:32:03.280 --> 0:32:05.320 Jody Lewie with Blueberg Intelligence, thank you so much for 0:32:05.400 --> 0:32:06.360 Johnny's on the credit. 0:32:06.200 --> 0:32:12.160 Edge now Way Global head of the leveraged Finance team 0:32:12.160 --> 0:32:13.040 at bark Is, how you're doing. 0:32:13.160 --> 0:32:13.920 Yes, it's very good. 0:32:14.040 --> 0:32:15.560 Thank you, James, so good to see you. It's such 0:32:15.560 --> 0:32:16.680 an exciting time for credit. 0:32:17.280 --> 0:32:19.320 We have heard all sorts of things today at the 0:32:19.320 --> 0:32:22.800 event about the risky end of credit, the leverage side 0:32:22.840 --> 0:32:23.240 of credit. 0:32:23.680 --> 0:32:25.840 You know, there is a lot of worry about distress. 0:32:25.920 --> 0:32:27.320 There's a lot of worry about default. 0:32:27.400 --> 0:32:29.200 There's a lot of worry about just all the risks 0:32:29.200 --> 0:32:33.760 that's building up, and I'm just wondering, you know, how 0:32:33.760 --> 0:32:35.840 do you see it? Are we heading into a tougher 0:32:35.880 --> 0:32:39.200 second half because we're getting more supply and maybe people 0:32:39.280 --> 0:32:42.200 on the demand side. It's sort of thinking again about 0:32:42.200 --> 0:32:44.160 some of the triple c ras, some of the really 0:32:44.240 --> 0:32:46.080 you know, very challenged credits out there. 0:32:46.080 --> 0:32:47.680 But how are you seeing it? What's the what's the 0:32:47.720 --> 0:32:48.800 trend for the second half? 0:32:50.120 --> 0:32:52.880 I think second half will be busy. From a primary 0:32:52.880 --> 0:32:57.960 supply perspective. We are seeing M and A pipelines building up, 0:32:58.560 --> 0:33:02.280 so we are excited because the first half have been slow. 0:33:02.440 --> 0:33:04.480 And then you heard some of the panelists talking about 0:33:05.000 --> 0:33:09.760 deployment being slow, maybe deliberately so because the bar for 0:33:09.880 --> 0:33:13.520 deployment has been high, But ultimately on the BSL side, 0:33:13.720 --> 0:33:17.480 the technicals are strong. So our investors want to see 0:33:17.800 --> 0:33:23.040 new paper supplies, new investment opportunities, or anything LBOs take 0:33:23.120 --> 0:33:26.840 private carve out I think will be well received and 0:33:27.320 --> 0:33:30.000 look from our perspective as a bank, when they come 0:33:30.080 --> 0:33:32.440 to on the right right, So you're question around how 0:33:32.480 --> 0:33:35.560 do we feel about the market. I guess two aspect. 0:33:35.680 --> 0:33:39.600 One is from our own underwriting perspective. I think we 0:33:39.720 --> 0:33:44.440 are very conscious about some of the macro uncertainties that 0:33:44.560 --> 0:33:48.800 is still very much present, and I don't think any 0:33:48.840 --> 0:33:52.000 of those things will evaporate, and it comes soon. So 0:33:52.080 --> 0:33:55.719 when it comes to underwriting the right credit, pick up 0:33:55.760 --> 0:33:59.400 the right client that we want to bank, I think 0:33:59.480 --> 0:34:02.680 our focus will be high. But on the in terms 0:34:02.720 --> 0:34:06.800 of the distribution into the market, actually acknowledging the type 0:34:06.840 --> 0:34:11.400 of product people want to see, I think the Interestingly, 0:34:11.680 --> 0:34:14.520 you know at the moment that the spread is closer 0:34:14.560 --> 0:34:18.840 to autumn tight, and if anything, both from leverage loans 0:34:18.840 --> 0:34:22.480 and the bond market US and Europe, if you look 0:34:22.480 --> 0:34:26.959 at the spread, it's pretty much at or in the 0:34:27.520 --> 0:34:30.640 in the sense of the European higher bond, actually tighter 0:34:30.760 --> 0:34:33.960 than at the start of the ye around war. So 0:34:34.160 --> 0:34:38.640 it's very clear that the market really want to move 0:34:38.760 --> 0:34:40.360 past the current conflict. 0:34:40.560 --> 0:34:42.480 It's great for the issue, though, but what about the investor, 0:34:42.480 --> 0:34:45.120 because they're not really getting much compensation for macro arias, 0:34:45.160 --> 0:34:47.440 for downgrade, for all the other stuff that you think 0:34:47.480 --> 0:34:49.040 you get more spread for in this environment. 0:34:49.600 --> 0:34:54.680 So interestingly, we had our thirtieth year Higher conference in Austin, 0:34:54.760 --> 0:34:59.960 Texas where we had a record turnout both issuers, investor 0:35:00.400 --> 0:35:03.719 and private equities. And I have to say the sentiment, 0:35:03.920 --> 0:35:08.080 if I can characterize it, probably was one of the 0:35:08.120 --> 0:35:12.480 most optimistic and the level of engagement and energy levels 0:35:12.840 --> 0:35:17.560 were very, very high. So I totally agree with you. 0:35:17.560 --> 0:35:19.720 You know, when you look at the spread and everything 0:35:19.719 --> 0:35:23.960 else from an index perspective, everything's tight. But when you 0:35:24.000 --> 0:35:26.880 look at the underlying credit a lot of the issues 0:35:26.960 --> 0:35:30.919 that we focus on there, current tradings are strong. We're 0:35:30.960 --> 0:35:35.160 not seeing any slowdowns or softness. So I do think, 0:35:36.080 --> 0:35:40.080 notwithstanding the headline news, but when you look at the 0:35:40.719 --> 0:35:44.680 micro level individual issuers, there is a reason why people 0:35:44.680 --> 0:35:45.560 feel optimistic. 0:35:46.080 --> 0:35:47.799 And on the invest side again they are they just 0:35:47.920 --> 0:35:50.120 looking at all in yield and thinking that's high. 0:35:50.120 --> 0:35:50.680 So that's great. 0:35:50.680 --> 0:35:53.200 And also, you know, giving the rates environment, are they 0:35:53.360 --> 0:35:56.160 more key on floating paper than fixed. 0:35:57.280 --> 0:35:59.680 I mean, just pick up your second part of the question. 0:36:00.520 --> 0:36:05.120 I think it depends. The bond market of the recent 0:36:05.200 --> 0:36:09.920 years have been under supplied, certainly from the LBO side, 0:36:10.360 --> 0:36:13.160 because you know, loan as a product is just far 0:36:13.200 --> 0:36:17.000 more superior when it comes to providing flexibility. So whenever 0:36:17.080 --> 0:36:20.840 there is a way to do everything loan. You know, 0:36:21.200 --> 0:36:23.680 a lot of the issuers and this is sponsor owned 0:36:24.560 --> 0:36:27.919 portfolio companies, they will do loans. So so right now, 0:36:27.960 --> 0:36:31.399 given some of the fraction since beginning of the year, 0:36:31.840 --> 0:36:34.440 you know, we've seen more supply into the bomb market. 0:36:34.480 --> 0:36:37.600 So this year the bond market actually from a volume perspective, 0:36:37.640 --> 0:36:40.799 has picked up, so more supply into the bomb market. 0:36:40.920 --> 0:36:44.320 People would like to deploy money there are just because 0:36:44.480 --> 0:36:49.000 it offers convexity, okay, and then the loan market, Look, 0:36:49.040 --> 0:36:52.560 it's slightly different type of investors. The clos. The CLO 0:36:52.640 --> 0:36:55.680 the triple A strip within the clos is still at 0:36:55.719 --> 0:36:57.920 all time time, so I think they're still making money, 0:36:57.960 --> 0:37:01.759 notwithstanding the perception of you know, our things have just 0:37:01.800 --> 0:37:02.200 been too. 0:37:02.120 --> 0:37:04.640 Tight, right. Do you see any stress doing the clos 0:37:04.760 --> 0:37:08.040 figuring the lower rated trunches given all the software concerns 0:37:08.040 --> 0:37:15.520 and other issues that are going on the macroside. 0:37:12.320 --> 0:37:14.759 Not that we're picking up. I mean, as part of 0:37:14.800 --> 0:37:20.560 the panel, we talked about are there any potential distress 0:37:21.200 --> 0:37:23.880 especially around the software as a sector around the corner. 0:37:24.880 --> 0:37:29.719 I think the panelists were in agreement in that not 0:37:30.160 --> 0:37:33.680 in the near future, especially in the BSL space. I 0:37:33.719 --> 0:37:36.239 think the issuers have done a good job when it 0:37:36.280 --> 0:37:39.760 comes to doing a andes and repricings and really pushing 0:37:39.800 --> 0:37:43.520 out maturity. So there is no almost I want to 0:37:43.560 --> 0:37:46.200 talk about. I think I want to say one or 0:37:46.239 --> 0:37:50.120 two percent of all of the software issuance that have 0:37:50.520 --> 0:37:53.920 twenty twenty seven maturity, so no near term maturity issues. 0:37:54.840 --> 0:37:58.719 Probably about just down the twenty percent twenty twenty eight. 0:37:59.360 --> 0:38:03.480 So I think it's still too early to say exactly 0:38:03.520 --> 0:38:05.399 what's going to happen and how is that actually going 0:38:05.440 --> 0:38:06.480 to impact performance? 0:38:06.480 --> 0:38:06.840 Obviously. 0:38:06.840 --> 0:38:09.960 Clos no Way, Global head of Leverage Finance team at Buck's, 0:38:09.960 --> 0:38:13.240 thank you so much for Roonis on the credit edge, 0:38:15.600 --> 0:38:18.480 Shield Hotel, head of the New York private credit practice 0:38:18.520 --> 0:38:19.080 at Mayo Brown. 0:38:19.080 --> 0:38:20.560 How are you doing, Shield, I'm doing well. 0:38:20.600 --> 0:38:21.960 Thanks for having me, James. 0:38:22.680 --> 0:38:24.880 I'm really interested in your view right now. She'll of 0:38:25.040 --> 0:38:28.680 covenants because they are very light. The situation in the 0:38:28.719 --> 0:38:30.880 market is, you know, technically there is a ton of 0:38:31.000 --> 0:38:33.759 demand for yield and there isn't a lot of net 0:38:33.840 --> 0:38:37.879 new supply. That obviously puts the ball in the borrowers court. 0:38:38.640 --> 0:38:40.920 They have been quite aggressive and then we've seen these 0:38:41.080 --> 0:38:44.160 lemies and there have been a lot of issues around that, 0:38:44.800 --> 0:38:46.960 and some of the invests I talked to actually say 0:38:47.000 --> 0:38:49.240 to me that they have so much cash to allocate 0:38:49.280 --> 0:38:51.799 that when they look at the documentation, they don't like it, 0:38:51.880 --> 0:38:54.880 but they have to buy. What kinds of issues are 0:38:54.880 --> 0:38:56.759 you seeing in documentation right now? 0:38:57.040 --> 0:38:59.840 I think you're right. The supply the demand dynamic is 0:38:59.840 --> 0:39:01.799 all a lot of black, right, so there's there's a 0:39:01.800 --> 0:39:09.400 lot of dollars chasing very few good deals. The documentation itself, 0:39:10.680 --> 0:39:15.160 it's tightened a little bit in terms of lum protections 0:39:15.239 --> 0:39:19.520 and things that you wouldn't normally get pre sas apocalypse 0:39:20.040 --> 0:39:23.400 sneaking into these documents, which is good, but not substantially. 0:39:23.840 --> 0:39:26.919 I think the biggest holes in these documents is even 0:39:26.960 --> 0:39:32.840 the definitions, uh, the sizing of some of the financial covenants. 0:39:32.840 --> 0:39:40.839 If there are financial covenants, they're they're cove wide. 0:39:38.760 --> 0:39:42.240 And it seems like a lot of. 0:39:43.560 --> 0:39:47.239 Private credit liners. A lot of what goes into their 0:39:47.280 --> 0:39:52.839 decision making process is sponsor reputation. You know what they 0:39:52.960 --> 0:40:01.040 currently have with that sponsor, industry and size of a deal, right, 0:40:01.600 --> 0:40:05.640 so if it's if it's a significantly sized deal with 0:40:05.680 --> 0:40:09.480 a sponsor that you have a ton of reps with 0:40:10.239 --> 0:40:12.799 and you're in a ton of credits with them, and 0:40:12.880 --> 0:40:16.000 you like the industry, you're going to rely less on 0:40:16.440 --> 0:40:20.200 the documentation for protection and rely on that relationship. 0:40:22.040 --> 0:40:25.840 So the stress on private credit generally the fear of 0:40:26.239 --> 0:40:30.760 you know, defaulse, non cruel's, bad recoveries, you know sas pocalypts, 0:40:30.800 --> 0:40:31.400 all that stuff. 0:40:31.560 --> 0:40:34.319 You think it's overblown in some I do. 0:40:34.800 --> 0:40:35.080 I do. 0:40:35.160 --> 0:40:38.560 We're we're looking at a mature market now, and you 0:40:38.600 --> 0:40:42.200 know stress, stress is normal, it's it's actually healthy. I 0:40:42.239 --> 0:40:48.480 don't think it's it's something that is unique to private credit. 0:40:48.520 --> 0:40:50.640 I think you're you're going to see that that level 0:40:50.680 --> 0:40:53.880 of stress in in all markets, including the syndicated market, 0:40:54.480 --> 0:40:57.360 and it's just part of the credit cycle. 0:40:57.880 --> 0:40:59.880 Still that we've got this fair, we've got big redemptions, 0:41:00.160 --> 0:41:03.520 got a lot of concern around marks, around other aspects 0:41:03.520 --> 0:41:06.360 of private credit. Where are the risks for you in 0:41:06.400 --> 0:41:06.960 this market? 0:41:08.920 --> 0:41:11.719 So I think the biggest risk coming out of all 0:41:11.760 --> 0:41:18.520 of this is regulation, right. I think that as regulators 0:41:18.560 --> 0:41:24.000 start to look at the asset class with a stronger lens, 0:41:24.480 --> 0:41:28.160 that that could take away one of the advantages of 0:41:28.360 --> 0:41:31.879 the private markets in terms of being nimble and being 0:41:31.920 --> 0:41:33.200 able to act quickly. 0:41:34.200 --> 0:41:36.000 She he'll to tell head of the New York private 0:41:36.000 --> 0:41:37.960 credit practice at Mayer Brown, thank you so much for 0:41:38.000 --> 0:41:39.120 joining us on the credit edge. 0:41:39.320 --> 0:41:40.120 Thanks James. 0:41:43.600 --> 0:41:47.120 It's Johnny, head of structured credit at Third Point. She 0:41:47.160 --> 0:41:49.840 sets on the Funds Risk Committee and overseas investments in 0:41:49.920 --> 0:41:53.880 residential and commercial mortgage backed securities as well as consumer finance. 0:41:54.160 --> 0:41:56.680 You were on the show not that long ago, back 0:41:56.719 --> 0:42:00.000 by popular demand. You told us that at that time 0:42:00.120 --> 0:42:02.800 in March that quote, this is probably one of the 0:42:02.840 --> 0:42:05.319 most exciting times to be a credit investor. So I 0:42:05.400 --> 0:42:07.600 just wanted to catch us up on the last three 0:42:07.600 --> 0:42:10.880 months in which you had those exciting times. How exciting 0:42:10.920 --> 0:42:12.200 has it been since we last spoke. 0:42:12.560 --> 0:42:13.960 Thanks for having me back, James. 0:42:14.040 --> 0:42:18.040 I would say probably right after we had our conversation 0:42:18.800 --> 0:42:21.000 is when the credit markets had sort of their first 0:42:21.040 --> 0:42:25.000 blip in the markets, and it wasn't force selling, but 0:42:25.040 --> 0:42:28.200 it was more of companies that needed to still issue 0:42:28.239 --> 0:42:30.920 debt in some form needing liquidity in a span of 0:42:30.960 --> 0:42:34.520 about ten days in March, so there was interesting opportunities there. 0:42:34.920 --> 0:42:37.920 I think some of the activity and credit is more brewing, 0:42:38.040 --> 0:42:39.680 and I think we'll see it probably in the back 0:42:39.719 --> 0:42:40.439 half of this year. 0:42:40.920 --> 0:42:44.759 So when we spoke, you talked about forced selling. Are 0:42:44.800 --> 0:42:45.319 you seeing that? 0:42:45.880 --> 0:42:48.680 So, I think force selling is not coming in the 0:42:48.760 --> 0:42:51.520 exact form yet. I think where you will see it 0:42:51.640 --> 0:42:54.840 is higher rates suggest that commercial real estate will have 0:42:54.920 --> 0:42:56.839 more pain because I think a lot of people were 0:42:56.880 --> 0:43:00.360 waiting for a refinancing wave. Corporate credit, you have a 0:43:00.360 --> 0:43:03.200 lot of lmes that are hitting maturity walls at the 0:43:03.280 --> 0:43:05.200 end of this year and next that will be another 0:43:05.239 --> 0:43:08.840 refinancing pressure. And I think the third is there was 0:43:08.880 --> 0:43:11.400 a lot of focus on BDC's at the beginning of 0:43:11.440 --> 0:43:14.480 the year. A lot of BDCs also have COLO exposure, 0:43:14.560 --> 0:43:16.239 and we think in the back half of the year 0:43:16.280 --> 0:43:18.839 you may see pressure to sell as it's harder to 0:43:18.840 --> 0:43:20.279 sustain dividends and. 0:43:20.239 --> 0:43:22.719 Also they're getting more redemption so they need to fund those. 0:43:23.520 --> 0:43:26.359 Is that going to be another pressure point, I. 0:43:26.280 --> 0:43:28.560 Think potentially, although I think the market has been quite 0:43:28.640 --> 0:43:32.200 resilient in private credit where there are more captive buyers 0:43:32.200 --> 0:43:34.840 out there, whether that be insurance other sorts of longer 0:43:34.920 --> 0:43:37.279 dated funds. So I think you've seen more of a 0:43:37.320 --> 0:43:40.640 rebalancing across fund portfolios out of BDC's and less for 0:43:40.880 --> 0:43:43.360 selling there. I think you can see it though potentially 0:43:43.360 --> 0:43:46.839 in Colos because they are a more liquid market, and 0:43:47.239 --> 0:43:50.120 you might see even equity start to pick in those structures, 0:43:50.160 --> 0:43:53.600 which means it doesn't have any sense in the portfolio anymore. 0:43:53.640 --> 0:43:56.960 So I think it'd probably come more from more publicly 0:43:57.000 --> 0:44:00.319 traded clos and corporate credit that's sitting in BDC as 0:44:00.320 --> 0:44:02.040 opposed to traditional private But. 0:44:02.040 --> 0:44:03.920 When you look at Colos right now, the triple A 0:44:03.920 --> 0:44:07.239 piece at least very very tight, which would suggest not 0:44:07.360 --> 0:44:09.799 a lot of stress or at least concern about it. 0:44:10.120 --> 0:44:12.120 We know about the software issue, we know that's brewing, 0:44:12.719 --> 0:44:14.800 we know that you know there are other issues potentially, 0:44:14.840 --> 0:44:18.640 but what really do you think is something. 0:44:18.400 --> 0:44:21.000 That might tip clos over? I mean, how would that 0:44:21.120 --> 0:44:21.640 actually happen? 0:44:21.880 --> 0:44:24.520 Yeah, So I think since we last spoke, software prices 0:44:24.520 --> 0:44:27.359 have actually rallied and so and you've seen two things happen. 0:44:27.440 --> 0:44:30.480 You've seen anything not software sort of tighten on a 0:44:30.520 --> 0:44:33.880 spread basis, and you've seen software rally as well. So 0:44:33.920 --> 0:44:37.680 the creation costs for a us COLO equity has become tighter, 0:44:38.120 --> 0:44:40.480 which means you're seeing less creation on that side of 0:44:40.520 --> 0:44:42.920 the market, where I think you'll see the pressure in 0:44:43.000 --> 0:44:46.640 clos is more when software starts to play out. And 0:44:46.680 --> 0:44:48.960 also you have other pressures. You have home building pressure 0:44:49.040 --> 0:44:51.080 right now because we're in a high rate and environment. 0:44:51.520 --> 0:44:53.920 You have issue on the chemical sector as well because 0:44:53.920 --> 0:44:56.759 of oil. So I think there will be other defaults 0:44:56.880 --> 0:44:59.360 within colos that cause issues. And I think the triple 0:44:59.400 --> 0:45:01.480 as are type, but they're still one of the widest 0:45:01.520 --> 0:45:04.360 triple a's out in the market. You will see it 0:45:04.480 --> 0:45:07.840 more at the double B triple B type of level 0:45:07.880 --> 0:45:10.480 potentially if there are downgrades in triple b's, because they 0:45:10.520 --> 0:45:12.719 are a big portion of insurance portfolios. So I think 0:45:12.800 --> 0:45:17.000 the force selling comes not from necessarily economic default on 0:45:17.080 --> 0:45:20.000 day one, but could be downgrades for something else that 0:45:20.040 --> 0:45:21.919 forces an uneconomic reason to sell. 0:45:22.080 --> 0:45:24.360 And at that point the cilos have to sell loans 0:45:24.400 --> 0:45:29.160 that are low quality at a steep discount, correct, at 0:45:29.160 --> 0:45:31.879 which point you might jump in on an opportunity if 0:45:31.960 --> 0:45:34.880 it makes sense. But is this a bigger issue for 0:45:34.920 --> 0:45:37.200 the market or is it? I mean the sense that 0:45:37.239 --> 0:45:40.319 we get from talking to investors on the macro level 0:45:40.360 --> 0:45:42.799 is that really all this stuff's contained, we kind of 0:45:42.800 --> 0:45:44.640 know about it. It's not going to affect us. We're 0:45:44.680 --> 0:45:47.040 just going to carry on buying as much as we 0:45:47.120 --> 0:45:50.000 can of everything else, and we'll be Okay, what do 0:45:50.040 --> 0:45:50.759 you how do you see that? 0:45:50.880 --> 0:45:52.759 So I think it's really if you're sitting at a 0:45:52.880 --> 0:45:56.440 very large alternative asset manager right now, you're hitting the 0:45:56.440 --> 0:45:59.720 buy button every day, and so most of those investors 0:45:59.760 --> 0:46:02.200 will say credit spreads are going tighter, and I think 0:46:02.239 --> 0:46:04.680 with what I said in terms of AI spending and 0:46:04.719 --> 0:46:07.440 what we've seen generally with the economy, it feels like 0:46:07.680 --> 0:46:11.080 we could see credit spreads tighter. That being said, I 0:46:11.120 --> 0:46:14.080 do think there are issues beneath the surface where there 0:46:14.120 --> 0:46:17.600 will still be for selling. And if insurance companies are 0:46:17.600 --> 0:46:20.120 buying the entire triple B stack of colos and there 0:46:20.120 --> 0:46:22.920 are a few downgrades, they can't hold that risk anymore. 0:46:23.239 --> 0:46:25.000 And it might be a parallel to what we saw 0:46:25.040 --> 0:46:27.600 in March of twenty three with the banking crisis, where 0:46:27.680 --> 0:46:31.239 CMBs got downgraded from triple B and became a force 0:46:31.280 --> 0:46:33.480 seller product. So you might see a version of that. 0:46:33.800 --> 0:46:36.800 And frankly, for a place like Third Point, we don't 0:46:36.880 --> 0:46:39.640 have to have a huge dislocation in order to make 0:46:39.680 --> 0:46:42.840 a very compelling return across our funds. If you're managing 0:46:42.880 --> 0:46:45.360 two hundred billion much harder to make that depth work, 0:46:45.560 --> 0:46:45.799 so that. 0:46:45.800 --> 0:46:49.279 Effects insurance companies and then presume me that has some 0:46:49.360 --> 0:46:51.480 kind of knock on effect. I mean, certainly in terms 0:46:51.520 --> 0:46:54.400 of sentiment. But is there a bigger full across credit 0:46:54.440 --> 0:46:55.120 markets you think? 0:46:55.640 --> 0:46:58.719 I think it's It may be still more episodic. I 0:46:58.719 --> 0:47:01.319 think the other thing that we haven't seen play out 0:47:01.360 --> 0:47:03.759 fully as what is the strain on the consumer overall? 0:47:04.120 --> 0:47:05.919 And that may cause a little bit of a risk 0:47:06.000 --> 0:47:09.040 off mode or at least a recalibration of risk assumptions. 0:47:09.320 --> 0:47:11.520 But I don't think it's a contagion type of scenario. 0:47:11.640 --> 0:47:14.480 I think you will find dislocated sectors. The COLO market 0:47:14.520 --> 0:47:16.759 also in the US is a trillion dollar so if 0:47:16.800 --> 0:47:19.719 it starts to move, it will have implications on the 0:47:19.800 --> 0:47:22.799 underlying levered loans and the liquidity availability there. 0:47:23.280 --> 0:47:25.640 And private market is also under a love of stress. 0:47:25.880 --> 0:47:29.279 You expect private credit loans to selling it discount just 0:47:29.320 --> 0:47:31.319 because people need to tie up their portfolios. 0:47:31.400 --> 0:47:35.240 Well, we've seen private credit loans traded a discount. Obviously 0:47:35.280 --> 0:47:37.600 you have public BDCs that are trading at a discount, 0:47:37.600 --> 0:47:40.760 but we've also seen private credit loans traded a discount, 0:47:40.800 --> 0:47:43.920 but I think that the again resilience for the asset 0:47:43.960 --> 0:47:46.959 class has been I think stronger than expected. Of course 0:47:47.000 --> 0:47:50.719 you're seeing headlines around redemptions broadly, but actually a lot 0:47:50.760 --> 0:47:54.600 of the paper that's transacting has been a not as 0:47:54.719 --> 0:47:57.080 much of a discount. Outside of software, where you have 0:47:57.239 --> 0:48:00.000 seen discounts that could be twenty thirty points or there. 0:48:00.600 --> 0:48:02.680 Sean Nisam with the point, Thank you so much for 0:48:02.719 --> 0:48:03.839 joining us on the credit edge. 0:48:03.840 --> 0:48:05.200 Thank you James for having me back. 0:48:09.040 --> 0:48:11.680 So I'm here with Scott Goodwin, managing partner of Diameter 0:48:11.800 --> 0:48:15.400 Capital Partners, a twenty eight billion dollar global credit alternative 0:48:15.480 --> 0:48:16.040 asset manager. 0:48:16.080 --> 0:48:18.320 How you doing, Scott, great, Thanks James for having me. 0:48:18.360 --> 0:48:19.319 It's a privilege to be here. 0:48:19.440 --> 0:48:22.560 So you invest across public and private markets, including clos, 0:48:22.800 --> 0:48:26.160 direct lending, asset based finance, and real estate credit. But 0:48:26.200 --> 0:48:28.080 you have said not that long ago that private credit 0:48:28.120 --> 0:48:31.160 portfolios are dangerously concentrated in software and other asset like 0:48:31.239 --> 0:48:34.680 businesses that may be vulnerable to AI disruption. Tell me 0:48:34.719 --> 0:48:35.359 more about that. 0:48:35.440 --> 0:48:37.680 Sure, I mean, if you look at and we're just 0:48:37.719 --> 0:48:39.759 talking here about the left in direct lending market, the 0:48:39.800 --> 0:48:42.839 one point five trillion dollar market, which is about one 0:48:42.880 --> 0:48:47.920 third SASS and if you take the publicly reported portfolios 0:48:48.239 --> 0:48:50.880 from the people who run these portfolios, they'll tell you 0:48:50.960 --> 0:48:52.080 the numbers are pretty low. 0:48:52.320 --> 0:48:55.080 There's a good chart our in our. 0:48:55.000 --> 0:48:57.640 Sown presentation on this, which is on our LinkedIn page, 0:48:58.040 --> 0:49:00.400 that shows what we think the numbers are using Claude, 0:49:00.480 --> 0:49:04.279 using GPT, using Gemini, looking through each loan, and it 0:49:04.880 --> 0:49:07.800 looks like about half the loans across the private credit 0:49:07.840 --> 0:49:12.760 space on aggregate have some sort of AI risk factor 0:49:12.800 --> 0:49:17.920 their software, their business services, their IT services, their healthcare, 0:49:17.960 --> 0:49:20.440 IT insurance broker. That's not to say these are all 0:49:20.520 --> 0:49:23.320 bad loans. This is just to say, hey, you're lending 0:49:23.320 --> 0:49:25.960 it ninety eight or ninety nine cents, you're trying to 0:49:26.000 --> 0:49:28.719 get your coupon back and par you don't have the 0:49:28.760 --> 0:49:31.200 total return of an equity. Why would you ever have 0:49:31.880 --> 0:49:35.759 half your portfolio exposed to one risk factor? Crazy portfolio 0:49:35.800 --> 0:49:38.040 management and really bad risk management. 0:49:38.200 --> 0:49:40.840 Right, you've actually used the words almost criminal to describe 0:49:40.880 --> 0:49:44.960 the high concentration in a single sector. But on software, 0:49:45.000 --> 0:49:47.160 I mean, we've kind of gone through this whole panic 0:49:47.239 --> 0:49:48.960 and fear and everyone dumping them to it, sort of 0:49:49.000 --> 0:49:51.080 bouncing back a little bit, and people saying, well, hang 0:49:51.120 --> 0:49:53.080 on a minute, there is some value there. Not every 0:49:53.120 --> 0:49:56.600 software firm gets displaced by AI. So what's the trade 0:49:56.600 --> 0:49:58.239 for you? How do you play AI or how do 0:49:58.280 --> 0:49:58.880 you play software? 0:49:58.960 --> 0:49:59.640 We agree with that. 0:50:00.120 --> 0:50:03.200 We don't think all software is bad, but it's going 0:50:03.239 --> 0:50:05.319 to be a very long cycle. I think it's too 0:50:05.360 --> 0:50:07.080 early in software to necessarily know. 0:50:07.000 --> 0:50:09.160 Who the early winners and who the winners and losers are. 0:50:09.640 --> 0:50:12.719 I would much rather buy a service now or a 0:50:12.719 --> 0:50:16.680 Salesforce dot com stock that's down materially, that has a 0:50:16.800 --> 0:50:20.480 real large mode around their business, a big balance sheet 0:50:20.640 --> 0:50:23.640 they can pivot their business. Then by at night, if 0:50:23.640 --> 0:50:25.680 a software loan has gone from say par to ninety 0:50:25.680 --> 0:50:28.520 five cents, I have five points of upside. I don't 0:50:28.520 --> 0:50:30.920 know what the terminal value is of that business, and 0:50:30.960 --> 0:50:33.480 they're levered and they don't generally out of cash. I'd 0:50:33.560 --> 0:50:35.680 much rather buy the public, large public companies. So I 0:50:35.680 --> 0:50:38.839 don't think the debt in that sector is priced right 0:50:38.880 --> 0:50:41.799 relatively to the public equities. Given if you get it 0:50:41.840 --> 0:50:44.799 wrong on the debt, you're going to have very low recoveries. 0:50:45.280 --> 0:50:48.080 Public BSL recoveries in the tech sector have been between 0:50:48.120 --> 0:50:50.040 ten and thirty cents the past five years. 0:50:51.000 --> 0:50:54.400 AH the fullest sellers right now in the market, BBCs, sailors, 0:50:54.480 --> 0:50:56.520 anything else that needs to get out of these things. 0:50:56.719 --> 0:50:59.879 The force selling from the BBC's is episodic. It tends 0:50:59.920 --> 0:51:03.200 to come around their redemptions. There were force sellers six 0:51:03.320 --> 0:51:06.520 eight weeks ago. You're starting to see another round of 0:51:06.520 --> 0:51:10.400 redemptions come through. We are seeing some foreselling. I think 0:51:10.440 --> 0:51:13.200 as the banks start to tighten their terms, the foreselling 0:51:13.239 --> 0:51:15.640 so far as redemption driven. It's not driven by margin 0:51:15.719 --> 0:51:18.239 calls by bank saying you can't have x amount of 0:51:18.280 --> 0:51:20.919 SaaS in your portfolio or x amount of AI factor 0:51:20.960 --> 0:51:23.480 risk in your portfolio. I think as the banks start 0:51:23.560 --> 0:51:26.319 to tighten their terms and we're beginning to see that, 0:51:26.880 --> 0:51:29.160 you will see at an incremental level for selling. As 0:51:29.160 --> 0:51:32.279 far as clos you'd be surprised there has it. If 0:51:32.320 --> 0:51:35.399 you look at the data. We've obviously taken our SaaS 0:51:35.400 --> 0:51:38.040 exposure down materially and have since twenty twenty three when 0:51:38.080 --> 0:51:39.120 we first got worried. 0:51:38.840 --> 0:51:40.279 About the air risk to SaaS. 0:51:40.360 --> 0:51:42.800 But if you look at the public data on cels, 0:51:42.840 --> 0:51:45.920 there haven't been that many COLO managers that have really 0:51:46.040 --> 0:51:48.920 changed their SaaS exposure or really changed their AI factor 0:51:48.960 --> 0:51:52.960 risk exposure. So that tells me that either they're paralyzed 0:51:53.160 --> 0:51:54.640 and they just own the index and they don't know 0:51:54.640 --> 0:51:56.520 what to do, or they don't think it's that big 0:51:56.560 --> 0:51:57.839 of a risk, but. 0:51:57.800 --> 0:52:00.759 At some point it might become a risk sound needs 0:52:00.800 --> 0:52:01.239 to be sold. 0:52:01.320 --> 0:52:04.000 You look at sector sell offs. I'll compare this to 0:52:04.120 --> 0:52:06.960 energy in twenty fourteen. The first leg of a sell off, 0:52:07.040 --> 0:52:10.360 very high correlation. Then you start to sort winners and losers. 0:52:10.480 --> 0:52:14.080 The process that's going on right now in software, both 0:52:14.080 --> 0:52:17.560 private and public loans and the equity market is starting 0:52:17.560 --> 0:52:19.799 to sort winners and losers. I think it's kind of 0:52:19.840 --> 0:52:23.560 too early just to know, so we're treading carefully. 0:52:24.400 --> 0:52:27.719 It's somewhat obvious who the early losers are. 0:52:28.200 --> 0:52:29.680 We don't want to buy the distressed out of the 0:52:29.680 --> 0:52:32.759 early losers, but we have, you know, a lot of 0:52:32.800 --> 0:52:35.480 capitals stored up ready for the opportunity. If some of 0:52:35.480 --> 0:52:38.359 the better companies that we can have real modes start 0:52:38.400 --> 0:52:40.319 to trade it at big discounts, it sounds like. 0:52:40.320 --> 0:52:42.640 A big problem, though, you know, given the extent of 0:52:42.680 --> 0:52:45.200 it that you've mentioned, and also how many people are 0:52:45.280 --> 0:52:47.640 in clos how many people think that they are you know, 0:52:48.040 --> 0:52:50.560 pretty solid in terms of you know, they will survive 0:52:50.600 --> 0:52:53.400 it more difficult macro and rates environment. But if this 0:52:53.680 --> 0:52:57.080 was one revel, is there a bigger, more contagion impact 0:52:57.080 --> 0:52:57.800 to cross credit. 0:52:57.960 --> 0:52:59.759 I don't think it's a systemic problem because it's just 0:52:59.760 --> 0:53:02.480 not a big enough market. So lefin direct lending is 0:53:03.120 --> 0:53:06.680 a you know, a trillion five BSL is a bit bigger, 0:53:06.800 --> 0:53:08.759 you know a little bit bigger than that. SaaS is 0:53:08.840 --> 0:53:11.239 thirty percent of one market, high teens percentage of the other. 0:53:11.719 --> 0:53:13.880 If you think about the AI risk factor, it's a 0:53:13.960 --> 0:53:17.000 larger number. Do I think you start to eat into 0:53:17.000 --> 0:53:20.400 triple A clos No, but certainly the double B and 0:53:20.440 --> 0:53:26.040 Triple B tranches of the clos in those managers that 0:53:26.239 --> 0:53:30.520 aren't prudent, proactive portfolio managers could really be exposed to 0:53:30.560 --> 0:53:33.200 taking losses and we haven't seen that in a long time. 0:53:33.800 --> 0:53:35.799 And then the question is who owns the double B 0:53:35.840 --> 0:53:36.760 and triple B tranches. 0:53:37.200 --> 0:53:39.040 I think a lot of people would yield chasing in 0:53:39.080 --> 0:53:41.600 exactly those places, and the equity as well, so they 0:53:41.680 --> 0:53:43.640 might get get themselves into trouble. 0:53:43.800 --> 0:53:47.200 Yeah, but that is still you think contained, it's not 0:53:47.280 --> 0:53:48.040 gonna rip through. 0:53:48.239 --> 0:53:51.719 I don't think it's a systemic problem if if at 0:53:51.760 --> 0:53:55.319 some point some insurance company has too much triple B 0:53:55.400 --> 0:53:58.400 COLO with SaaS exposure, that will create a scare in 0:53:58.400 --> 0:54:01.040 the insurance space. But I would say that the bigger 0:54:01.080 --> 0:54:03.640 risk factor for for insurance longer term is in the 0:54:03.640 --> 0:54:06.680 asset backspace, where there's a much larger exposure than there 0:54:06.760 --> 0:54:09.480 is in the COLO space. And the asset backed problems 0:54:09.480 --> 0:54:12.320 so far have been contained to basically frauds and cock roaches. 0:54:12.360 --> 0:54:14.839 You haven't seen a more systemic issue there, and and 0:54:14.840 --> 0:54:15.720 and we don't see. 0:54:15.520 --> 0:54:16.879 That in the near term on the horizon either. 0:54:17.040 --> 0:54:18.920 Is it big enough problem for BDCs to take one 0:54:18.960 --> 0:54:19.439 of them down? 0:54:19.920 --> 0:54:22.040 You mean, for a BDC to effectively default and lose 0:54:22.040 --> 0:54:24.479 their I mean they're there, they will think, I think yes, 0:54:24.600 --> 0:54:27.160 is the answer that you know there are some BDCs 0:54:27.200 --> 0:54:30.879 that are trading at you knowero point six point seven 0:54:30.920 --> 0:54:33.520 of gross asset value, the more stress or distressed ones, 0:54:33.560 --> 0:54:35.520 So yeah, I think you could see that. Is is 0:54:35.560 --> 0:54:39.160 it a broad based problem? No, And we actually think 0:54:39.360 --> 0:54:41.040 you know, we were short a lot of BDC's last 0:54:41.080 --> 0:54:43.320 year that had too much SaaS and AI risk factor exposure. 0:54:43.320 --> 0:54:46.600 Now I would say we're pretty neutrably positioned. But there's 0:54:46.680 --> 0:54:49.560 gonna be opportunities when when fear is high to buy 0:54:49.600 --> 0:54:52.680 those BDCs that actually don't have this exposure but are 0:54:52.719 --> 0:54:53.640 just being thrown out. 0:54:53.560 --> 0:54:54.680 Like the baby with the bathwater. 0:54:54.840 --> 0:54:55.000 Right. 0:54:55.120 --> 0:54:56.520 But if you look at the panic right now to 0:54:56.600 --> 0:54:58.440 some redemptions and gates and all that stuff, which you 0:54:58.480 --> 0:55:01.080 know doesn't seem that problem, methtic thun immensely if one 0:55:01.080 --> 0:55:03.239 of them goes down. You can imagine the freak out 0:55:03.280 --> 0:55:04.320 across credit markets. 0:55:04.320 --> 0:55:07.520 But let's see, that'll be an exciting day, Diameter because 0:55:07.520 --> 0:55:10.359 we'll be sitting there looking to buy the high quality 0:55:10.360 --> 0:55:11.520 wrestler it's getting thrown out. 0:55:11.920 --> 0:55:12.440 Great stuff. 0:55:12.440 --> 0:55:14.960 Scott Goodwin with Diameter Capital Partners. Thank you so much 0:55:15.000 --> 0:55:15.879 for being on the Credit Edge. 0:55:15.920 --> 0:55:19.400 Thanks so much, James. 0:55:21.320 --> 0:55:23.839 We hope you enjoy this special edition of the Credit Edge, 0:55:23.840 --> 0:55:25.879 and we hope you'll give us a review. For even 0:55:25.960 --> 0:55:29.719 more credit market analysis and insight, read all of Bloomberg 0:55:29.760 --> 0:55:34.480 Intelligence's great work on the Bloomberg terminal. Bloomberg Intelligence is 0:55:34.520 --> 0:55:37.120 past of our research department, with five hundred analysts and 0:55:37.120 --> 0:55:40.800 strategists working across all markets. Coverage includes over two thousand 0:55:40.840 --> 0:55:44.120 equities and credits plus outlooks on more than ninety industries 0:55:44.320 --> 0:55:48.640 and one hundred market indusees, currencies, and commodities. Please do 0:55:48.719 --> 0:55:51.160 subscribe to The Credit Edge wherever you get your podcasts. 0:55:51.200 --> 0:55:53.880 We're on Apple, Spotify and all other good podcast providers, 0:55:53.960 --> 0:55:57.920 including the Bloomberg Terminal at bag pod Go, Tell your friends, 0:55:58.000 --> 0:55:59.440 or email me directly at. 0:55:59.440 --> 0:56:03.320 J crom eight at Bloomberg dot net. I'm James Crombie. 0:56:03.360 --> 0:56:05.359 It's been a pleasure having you join us again next 0:56:05.400 --> 0:56:06.919 week on the Credit Edge.