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Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.

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Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg.

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Speaker 1: This week, we're very pleased to welcome TJ Durkin, head

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Speaker 1: of structured credit and Specialty Finance at TPG. Angelo Gordon,

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Speaker 1: How are you, Tj?

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Speaker 2: Very well, Thank you for having me.

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Speaker 1: Thank you so much for joining us, say, very excited

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Speaker 1: to have you on the show. Also delighted to welcome

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Speaker 1: back co host David Havens from Bloomberg Intelligence.

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Speaker 3: Hello, David, Hey, great to be with you all.

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Speaker 1: Also joining us with the questions from Bloomberg News, Carmen Arroyo.

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Speaker 1: Great to see you, Carmen. How's it going?

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Speaker 4: Thank you for having me, James.

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Speaker 1: So, just to set the scene a little bit here,

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Speaker 1: structure credit markets are booming as rates for the economy

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Speaker 1: grows and asset backed securities look relatively cheap compared to

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Speaker 1: other parts of fixed income. We've seen huge volumes of

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Speaker 1: asset back deal including clos this year, and there's more

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Speaker 1: to come in twenty twenty five. Private debt has also

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Speaker 1: experienced a meteoric rise. It's now a one point six

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Speaker 1: trillion market, but it could well be worth tens of

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Speaker 1: trillions of dollars more when you wrap in asset based finance,

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Speaker 1: very tight credit spreads, tons of issuance, and rising fund inflows.

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Speaker 1: That doesn't mean that there's no risk out there. The

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Speaker 1: FED started to cut rates, but yields remain high, and

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Speaker 1: the stated aims of the next government all sound quite inflationary,

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Speaker 1: signaling a period of higher for longer debt costs. That's

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Speaker 1: going to hurt borrowers across the board, especially the weak ones.

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Speaker 1: We're also seeing signs of private credit stress in the

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Speaker 1: form of amendments, extensions and increasing number of loans being

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Speaker 1: repaid with more debt, plus a rise into faults. In

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Speaker 1: the background, we have a lot of geopolitical risk, which

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Speaker 1: will only get worse as the Trump trade wars continue.

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Speaker 1: Plus the threat of recession hasn't gone away entirely. A

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Speaker 1: major downturn would cause more distress in credit markets. So TJ,

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Speaker 1: let's start with you. I'm interested in your views on

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Speaker 1: structured finance. To start with you, you've been doing that

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Speaker 1: for a long time. Why the boom this year?

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Speaker 5: Yeah, Well, listen, I think the main street economy, if

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Speaker 5: you will, is still doing quite well. Public market spreads

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Speaker 5: have certainly recovered from the wides of twenty twenty two,

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Speaker 5: and you know that's usually a healthy environment for issue

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Speaker 5: and so you've got a healthy economy, cooperative spreads, and

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Speaker 5: capital looking for other places to go other than corporate credit.

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Speaker 1: So record issuance volumes this year, does it continue next year?

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Speaker 1: And what sustains it?

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Speaker 5: Well, again, I think it's that same theme. So can

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Speaker 5: it be sustained? I think absolutely. I think when you

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Speaker 5: have healthy capital markets, you see the emergence of either

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Speaker 5: newer issuers or newer products that maybe haven't been funded

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Speaker 5: via the abs markets, and that's really the time to

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Speaker 5: come to market. And so, you know, provided sort of

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Speaker 5: the rest of the financial markets macroeconomic things stay in

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Speaker 5: tune with where we are, I would expect heavy issuance

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Speaker 5: to continue.

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Speaker 4: You mentioned something that was interesting, which was like newer issuers,

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Speaker 4: newer type of products. We've seen also a rice on

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Speaker 4: esoterics this year. Is that new or are we going

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Speaker 4: to continue to see that? And by that I mean

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Speaker 4: like music royalties, like art bonds, like really weird stuff.

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Speaker 5: Well, listen, I think some of the more niche products

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Speaker 5: are probably still living in the private markets, whereas some

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Speaker 5: of the more mainstream, if you will, products of today

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Speaker 5: that weren't of yesterday. At things like data centers right

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Speaker 5: or fiber to home. Those are probably more scalable assets

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Speaker 5: that it makes sense to do the work to get

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Speaker 5: public market funding because it's repeatable. And so I think

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Speaker 5: there's a bifurcation between the very esoteric versus what might

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Speaker 5: have been esoteric five years ago versus maybe becoming more

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Speaker 5: mainstream today.

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Speaker 4: And data centers are part of it, and I think

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Speaker 4: that's AI related chips, all that world.

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Speaker 5: Yeah, I mean that's clearly the probably most talked about

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Speaker 5: theme in the market.

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Speaker 4: You mentioned also like how a lot of this is

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Speaker 4: going to the private markets. Can you talk us through

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Speaker 4: a little bit of what you're seeing in private credit

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Speaker 4: where that asset class is kind of growing or where

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Speaker 4: is it going to?

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Speaker 5: Yeah, So I think most people know private credit as

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Speaker 5: direct lending right sponsoring sponsor backed private equity companies funding

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Speaker 5: those purchases. I think that's where most investors got their

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Speaker 5: toe hold in private credit. What's been happening under the

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Speaker 5: surface is really the private assetbect finance space where I live,

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Speaker 5: and that's been really slowly happening under the surface for

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Speaker 5: a decade plus, right, there's been this natural evolution of

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Speaker 5: what I'll call that the main street economy. So I

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Speaker 5: think auto loans, real estate finance that were primarily traditionally

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Speaker 5: funded by banks, depositories, the specialty finance universe has slowly

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Speaker 5: been gaining market share, right, And that's just been how

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Speaker 5: happening very organically, and that's where we have traditionally deployed

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Speaker 5: private credit in the asset based space. We're either lending

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Speaker 5: to those specially financed companies or we're buying their production.

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Speaker 5: And then you had twenty twenty three happen, right, And

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Speaker 5: I think that was the big wake up call of

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Speaker 5: investors primarily saying, like, what's happening over there? Is there

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Speaker 5: an opportunity for me to deploy capital and make good returns.

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Speaker 5: And that's what got everyone's attention, right, And so this

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Speaker 5: is something that's been happening, but certainly the events of

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Speaker 5: March twenty twenty three created a lot more interest that

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Speaker 5: we've seen, you know, going on eighteen months now, and

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Speaker 5: we think that this is structural and we're in the

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Speaker 5: early ennings of it.

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Speaker 3: So those events in March twenty twenty three were the

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Speaker 3: failure of some of the US regional banks. Credit Swiss

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Speaker 3: imploded at that time as well. So it was an

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Speaker 3: interesting time and it created a lot of opportunity. That

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Speaker 3: vacuum seemed to have been filled pretty quickly in the

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Speaker 3: in the market, just in in terms of the lack

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Speaker 3: of volatility that we're seeing this year. But I'm curious

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Speaker 3: where you're seeing the greatest opportunity right now, Like, what

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Speaker 3: is when you throw your remit out into this sort

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Speaker 3: of giant asset backed area, what's most interesting and how

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Speaker 3: is that evolving?

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Speaker 5: Well, I think what people thought was going to happen

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Speaker 5: and coming out of March twenty twenty three was there,

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Speaker 5: It's going to be a lot of asset sales, forced

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Speaker 5: asset sales out of the regional banks. And to your point,

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Speaker 5: there was some government intervention, the balance sheets were sort

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Speaker 5: of short up, if you will, pretty quickly, and the

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Speaker 5: volatility dissipated. And so if you fast forward today, we've

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Speaker 5: seen maybe less than two handfuls of what I would

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Speaker 5: call big forced asset sales coming out of the banks,

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Speaker 5: and those have been I would say, very well attended.

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Speaker 5: I think where we're seeing opportunity is lending to those

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Speaker 5: on bank originators as they're scaling their business and taking

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Speaker 5: market share. We think the risk adjusted returns there are

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Speaker 5: just much better because there's less competition than fighting over

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Speaker 5: assets coming out of the bank balance sheets.

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Speaker 3: Yeah, what why aren't the banks chasing this market?

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Speaker 5: Well, I mean I think of I buyfrecate the banks

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Speaker 5: into two groups. You've got like the top fifteen that

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Speaker 5: control pretty much the same amount of assets as the

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Speaker 5: next four thousand, Right, So you've got the g SIPs

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Speaker 5: if you will, that I think are optimizing capital, and

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Speaker 5: then you've got the regional banks that are not deploying capital.

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Speaker 5: So you know that's where there's opportunity in filling that

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Speaker 5: gap again in the main street economy. So if you

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Speaker 5: look at the regional bank balance sheets, you know eighty

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Speaker 5: percent of that balance sheet is non corporate credit. It's

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Speaker 5: these asset classes that my team and I focus on,

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Speaker 5: and so with the healthy economy, there's a need for

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Speaker 5: non bank capital to help bolster that origination.

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Speaker 1: What kind of assets we're talking about here? Is it

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Speaker 1: consumer loans? Is it car loans? Is it credit cards?

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Speaker 1: What sort of deals?

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Speaker 5: Yeah, I think it's everything from from the consumer oriented

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Speaker 5: products to real estate related products, whether it's you know,

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Speaker 5: commercial or residential, down to more hard assets like equipment finance.

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Speaker 1: And that's all in good shape. I mean, the consumer

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Speaker 1: at the lower end is not doing well. There's this

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Speaker 1: perception in you know, direct lending as you call it,

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Speaker 1: that you know, the weaker credits need to go private

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Speaker 1: because you know that they don't really have the public option.

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Speaker 1: Is it the same in the asset based markets, that

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Speaker 1: you know, the weaker borrowers need to go to the

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Speaker 1: asset based private markets.

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Speaker 5: I don't know that to be the case. I think

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Speaker 5: I think there's there's different things to sort of unpack there.

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Speaker 5: I think, you know, the the weaker consumer demographic is

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Speaker 5: certainly feeling the pain of inflation more a large part

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Speaker 5: of that segment is actually not really even in the

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Speaker 5: financial market, so sort of live paycheck to paycheck, you're

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Speaker 5: not seeing that necessarily in terms of delinquencies and the

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Speaker 5: like that you would see in auto finance as an example,

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Speaker 5: we're definitely seeing i would say deviation in performance between

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Speaker 5: different sponsors or different origination companies, and so that's where

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Speaker 5: you really need to do the work. It's not a

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Speaker 5: sort of beta trade, if you will, of auto finance

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Speaker 5: is interesting, let's go all in. You have to really

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Speaker 5: be discerning and who you're partnering with because as the

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Speaker 5: economy starts to season more and you're seeing deviation between channels,

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Speaker 5: that's really where you need somebody that's been in the

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Speaker 5: space long enough to be able to tease that out

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Speaker 5: during the underwriting and underwriting phase.

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Speaker 4: So the growth of facet based finance is directly linked

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Speaker 4: to what banks are doing, as you were saying, and

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Speaker 4: as you mentioned, like last year we saw a lot

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Speaker 4: of like asset sales, and this year we've seen a

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Speaker 4: lot of like forward flow agreements and thanks kind of

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Speaker 4: like pursuing more like synthetic risk transfers or bonds that

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Speaker 4: help them kind of like strengthen their balance sheet. What

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Speaker 4: do you expect to see next year?

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Speaker 5: Yeah, no, I think things are are moving in concert.

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Speaker 5: And so like if you if you break those two

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Speaker 5: themes up right, there's there's CRT and SRT. I think

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Speaker 5: what's being miscategorized is that that's an asset class that's

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Speaker 5: really just a risk mechanism, no different than selling the

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Speaker 5: loans or doing a securitization, right, So it's a different

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Speaker 5: it's a different transaction mechanism, and so what we're focused

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Speaker 5: on is staying very disciplined on making sure the CRT

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Speaker 5: or SRT opportunities that we're looking at are core to

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Speaker 5: our expertise. My team, for example, is not going to

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Speaker 5: wander into looking at a CRT transaction off corporate revolvers.

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Speaker 5: That's that's not our DNA, that's not where we have

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Speaker 5: an edge. And so I think what you've seen this

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Speaker 5: year has been a lot of leverage finance type opportunities

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Speaker 5: and CRT. I think as the big banks move through

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Speaker 5: that pipeline, as we cross into twenty twenty five, we're

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Speaker 5: hopeful that we will get to our asset classes of

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Speaker 5: consumer finance or real estate related and so I think

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Speaker 5: that's more on the come. With regards to forward flows,

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Speaker 5: that's really a technology or a concept that especially finance

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Speaker 5: companies have used for a long time that now the

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Speaker 5: regional banks are starting to utilize. And if you think

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Speaker 5: about a regional bank, it's really just a consortium of

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Speaker 5: origination platforms, right.

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Speaker 2: And so the.

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Speaker 5: Sophisticated ones, the sophisticated banks are saying, we keep reading

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Speaker 5: about all this private credit capital formation, We've got the

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Speaker 5: clients we've got the plumbing. We might not have the

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Speaker 5: right type of capital anymore or the right quantum of

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Speaker 5: capital anymore, but it seems like there's a marriage to

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Speaker 5: be made. And so you're seeing it again and maybe

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Speaker 5: start maybe with corporate credit, and I think it will

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Speaker 5: continue to move into asset based I.

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Speaker 1: Mean, just in the sort of interplay between the so

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Speaker 1: called asset back securities market and the asset based finance market.

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Speaker 1: Some people think of these as you know, almost interchangeable,

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Speaker 1: that one is private and illiquid and the other is public,

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Speaker 1: you know, and traded. Is that the correct way of

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Speaker 1: looking at it? Does and does one shift to the

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Speaker 1: other as we get all this private deck growth.

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Speaker 5: Well, I think they're linked right in the sense of

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Speaker 5: there is not public ABS creation without some form of

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Speaker 5: private capital being ahead of that in terms of a

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Speaker 5: warehouse financing or other types of aggregation vehicles to get

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Speaker 5: to that critical mass where you can issue an ABS securitation.

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Speaker 5: No one does twenty million dollar ABS steals. They do

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Speaker 5: five hundred million dollar ABS steals, And so private capital

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Speaker 5: is on that sort of value chain or conveyor belt

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Speaker 5: before you get to the public ABS markets. And I

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Speaker 5: think what you're seeing too is especialty finance companies are

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Speaker 5: looking to diversify their their funding sources, and so when

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Speaker 5: you have public markets really fall out of bed like

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Speaker 5: they did in twenty twenty two, maybe solely relying on

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Speaker 5: that for one hundred percent of your financing is not

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Speaker 5: a good business strategy. And so you know, two years later,

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Speaker 5: we're seeing more openness of saying we should have thirty

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Speaker 5: percent of our origination funded privately or via forward flow,

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Speaker 5: and the other seventy can go to the public abs

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Speaker 5: markets or whatever. That right ratio is that necessarily wasn't

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Speaker 5: in the mindset of CFOs or CEOs, especially finance companies

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Speaker 5: prior to twenty twenty two.

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Speaker 1: But when we talk about the esset based finance market

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Speaker 1: coming into the tens of trillions, I mean Apoul's talking

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Speaker 1: about forty trillion, Blacksman is talking about thirty trillion. Is

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Speaker 1: that basically just taking all of the public abs market

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Speaker 1: and putting it into the private market.

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Speaker 5: Well, it's a combination of the public markets and then

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Speaker 5: how much leaves the bank balance sheets, right, So it's

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Speaker 5: a combination of those two.

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Speaker 3: Okay, but you're outbeating the bushes with these sort of

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Speaker 3: smaller well, a wide array of producers, but you're not

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Speaker 3: solely focused and some of the large producers, like the

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Speaker 3: public market is. You're looking at at sort of small producers,

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Speaker 3: finance companies, specialty finance companies, captive finance companies, that sort

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Speaker 3: of thing.

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Speaker 5: Yeah, but again, even routine repeat abs or shares need

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Speaker 5: that bridge capital, that warehouse capital in our in our

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Speaker 5: vocabulary to scale to get to those critical masses. And

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Speaker 5: so what we offer them is effectively revolver. So they'll

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Speaker 5: originate those auto loans, get to that critical mass, the

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Speaker 5: issue of the abs, they pay us down.

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Speaker 2: And they start all over again.

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Speaker 5: And so more mature scale companies may do four issuances

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Speaker 5: a year, and so we'll according up and down four times.

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Speaker 5: A less scale company may do that once a year, right,

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Speaker 5: And so we're providing that capital to get them to

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Speaker 5: what their end state desire is, which is public abs,

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Speaker 5: which should be a cheaper cost of funding.

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Speaker 3: So you're looking at a wide array of the economy,

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Speaker 3: a wide array of asset classes, you know, sort of

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Speaker 3: in that asset backed area. Commercial real estate is an

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Speaker 3: area that's been a hot button, particularly the office segment,

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Speaker 3: maybe not other areas to the same extent. So I

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Speaker 3: think a lot if you look at the public markets,

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Speaker 3: you look at where spreads are, it seems to be

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Speaker 3: all rainbows and unicorns. Are you seeing rainbows and unicorns

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Speaker 3: or are there a few black clouds out there as well?

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Speaker 2: Well?

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Speaker 5: I would say one observation that we have is that

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Speaker 5: in general, risk seems to be priced in a pretty

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Speaker 5: tight cluster. That's one thing that the team and I

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Speaker 5: are very wary of, right in terms of what we

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Speaker 5: like to say, in the public markets, their credit curve

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Speaker 5: is very flat, and you're seeing that in terms of

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Speaker 5: sort of private market pricing.

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Speaker 3: As well, spread compression, spread.

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Speaker 5: Compression, and quality isn't necessarily being rewarded, or certainly dangerous

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Speaker 5: situations aren't being priced appropriately with regards to office and SIRI.

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Speaker 5: I mean, ironically, I would tell you in the public markets,

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Speaker 5: I think CNBS is probably the most interesting asset class

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Speaker 5: because there's a lot of price disparity and discrepancy. I

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Speaker 5: think there's a lot of historic holders who are sort

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Speaker 5: of risk off at any level, just maybe based on

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Speaker 5: what else is in their portfolio and legacy asset management issues,

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Speaker 5: and so coming in with fresh capital and opportunistic lens.

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Speaker 5: I think that's the most interesting space that we're seeing

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Speaker 5: in the public market.

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Speaker 3: Yeah, I mean that CIRA space seems to be, or

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Speaker 3: the office areas is an interesting area because it really

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Speaker 3: is a situation where location, location, location matters, and you

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Speaker 3: really need to know the specifics of the asset itself,

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Speaker 3: because you know, you can have one building next to

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Speaker 3: one another, you know, across the street on Park Avenue

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Speaker 3: or something or Broadway, and one is underwater and one

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Speaker 3: is going gangbusters just because they've got the right rent

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Speaker 3: roles and the right you know, amenities, facilities and things

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Speaker 3: like that.

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Speaker 2: No, we agree.

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Speaker 5: I mean that's why you know, granular analysis is necessary.

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Speaker 5: I mean, and there's a huge focus on what we

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Speaker 5: call the saasby space, a single acset, single borrower where

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Speaker 5: you can do that kind of private equity type underwrite

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Speaker 5: even though it's a debt instrument. And I think that's

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Speaker 5: where we've spent a lot of time over the last

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Speaker 5: couple of years as it's been again a fertile hunting

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Speaker 5: ground for I would say performing but discounted securities. I

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Speaker 5: think the CMBs space where we see opportunity is not

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Speaker 5: in terms of credit risk, where we can stay at

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Speaker 5: the top of the capital structure. We've been seeing. The

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Speaker 5: risk is the duration risk, meaning the loan may have

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Speaker 5: a legal maturity of three years including all its extensions,

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Speaker 5: but in reality, if the sponsor's paying that special service,

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Speaker 5: is probably going to grant another extension. And so the

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Speaker 5: market is trying to guess what's the duration of the

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Speaker 5: cash flow, not necessarily the credit worthiness of it at

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Speaker 5: the triple A level or the double A level.

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Speaker 4: So another concern in the commercial real estate market was

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Speaker 4: at least last year, was how many of these loans

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Speaker 4: are in banks balance sheets? And we haven't really seen

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Speaker 4: any stressed asset sales on CRE especially in office. When

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Speaker 4: is that going to happen? Is it going to take years?

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Speaker 5: Or I mean, if you go back to twenty twenty three, right,

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Speaker 5: you've seen, I say, a very accommodative regulatory regime when

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Speaker 5: it comes to the banks and their balance sheets and

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Speaker 5: the capital ratios.

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Speaker 2: Right.

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Speaker 5: I remember we used to come in every morning and

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Speaker 5: we get a new research reports, you know, sorted by

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Speaker 5: percent office, percent non performing percent of their Tier one capital,

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Speaker 5: and like that's obviously not been the case for late

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Speaker 5: So it feels to me like there's this long play

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Speaker 5: going on that there's an organic way for them to

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Speaker 5: sort of de risk out of it versus a rip

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Speaker 5: the band aid approach that people honestly may have been

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Speaker 5: hoping for in terms of distressed asset sales. Sitting in

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Speaker 5: our seat, maybe we can just switch gears a little bit.

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Speaker 5: As you may know, there was an election in this

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Speaker 5: country just to few weeks ago. When when you all

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Speaker 5: came in on Wednesday or later that week after the election,

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Speaker 5: what sort of conversations did you have? How does it

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Speaker 5: change your strategy?

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Speaker 4: What?

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Speaker 2: What?

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Speaker 3: How do you see the market changing, the opportunities, the

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Speaker 3: risks changing as the new administration comes in with some

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Speaker 3: of the some of the policies that they're talking about,

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Speaker 3: and some of the people coming into that might be

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Speaker 3: coming into the cabinet.

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Speaker 5: Well, I think, just from a regime perspective, I think

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Speaker 5: the FTC loosening of M and A is good for

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Speaker 5: what we're looking at, which is the banks. Right, there's

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Speaker 5: clearly too many banks in this country. You get a

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Speaker 5: more relaxed M and A environment that should help both

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Speaker 5: solve the problems of their their balance sheets and their

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Speaker 5: capital ratios. But probably more exciting for US is and

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Speaker 5: I've seen this throughout my career. As good markets are bad,

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Speaker 5: bank M and A almost always creates asset sales, and

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Speaker 5: so that to us might be the catalyst versus stressed

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Speaker 5: markets of twenty twenty three sort of you know, productive

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Speaker 5: mergers but still creating asset sales.

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Speaker 2: So that's what's exciting to us. I think.

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Speaker 5: The rest of it is not. I think a lot

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Speaker 5: of the other policies you ran on not necessarily to

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Speaker 5: affect this market, right right.

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Speaker 1: Interested in what you said earlier bills about some dangers

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Speaker 1: of potentially you know, risk isn't being priced. We're seeing

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Speaker 1: that a lot in the public markets across the bulge

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Speaker 1: and triple c's to you know, double B bonds. What

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Speaker 1: are you saying in structed markets? That stands out.

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Speaker 5: Again, I think as you get into certain spaces, the

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Speaker 5: auto space as an example, or the consumer finance space,

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Speaker 5: there's a lot of different origination platforms and that performance

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Speaker 5: tiering is becoming more and more prevalent, but the pricing

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Speaker 5: on those assets or those securities does not reflect it, right,

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Speaker 5: And we've been very surprised that they're sort of has

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Speaker 5: not been a rerating, if you will, some of the

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Speaker 5: lower tier originators versus the upper tier.

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Speaker 3: So you're talking about the maybe some of the subprime

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Speaker 3: and non prime borrowers used car markets things exactly.

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Speaker 5: And you know, even if you look at the non

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Speaker 5: prime auto space, there's some originators that are performing as

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Speaker 5: they normally have, right they've had they had good control

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Speaker 5: on their credit. Maybe some of the smaller, newer or

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Speaker 5: faster growing company has lost a little control on that.

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Speaker 5: But yet the asset pricing, if you were to look

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Speaker 5: in the public markets, the triple B bonds, they don't

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Speaker 5: really price that differently, and we don't see the rationale

401
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Speaker 5: behind that. So we're being patient, and that's not a

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Speaker 5: space where we're overly active on price compression.

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Speaker 4: It's interesting what you were saying is especially and I'm

404
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Speaker 4: going to use this example but feel free to change.

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Speaker 4: But in this as our team market, we've seen some

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Speaker 4: of those bonds kind of priced really really really tight,

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Speaker 4: and still we are seeing a lot of buyers coming

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Speaker 4: in and you know, willing to take on that risk

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Speaker 4: for maybe like not that much like you know, payment

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Speaker 4: or like you know, pricing. How tight does it have

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Speaker 4: to get for buyside to stop deploying so much?

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Speaker 5: Well, I think I think that space, the the SRT

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Speaker 5: and the CRT space is interesting because you're in the

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Speaker 5: early innings of of what I think will be a

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Speaker 5: continued wave of issuance, and it doesn't fit the natural

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Speaker 5: buyer base of credit risk. Meaning if you think about

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Speaker 5: rated abs bonds or corporate credit securities that are going

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Speaker 5: into daily liquidity bond funds or ETFs, they these instruments

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Speaker 5: are a bit more liquid, they might not have a

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Speaker 5: rating despite the fact that on an underwriting perspective it's

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Speaker 5: really good risk, right, it just doesn't It doesn't take

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Speaker 5: the box of traditional issuance.

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Speaker 2: And so.

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Speaker 5: I think that's why buyers are still interested in the

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Speaker 5: space despite it tightening from you know, twelve months ago,

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Speaker 5: because on a relative value, it's off and compelling returns.

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Speaker 5: So I think there's probably still room to run.

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Speaker 1: Actually, what about other parts of structure though, TJ. You know,

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Speaker 1: you've heard the whole year people saying structure products are great,

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Speaker 1: we have to start buying more of them because you know,

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Speaker 1: investment grade bonds just got so tight and everything's so

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Speaker 1: expensive in the other markets. Does that continue? Is there's

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Speaker 1: still that kind of gap between the two in terms

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Speaker 1: of prising and you've got all this new money piling in.

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Speaker 1: You know, there's just a ton of bid for fixing

436
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Speaker 1: come across the board. Everyone wants yield at this point.

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Speaker 1: Does that gap between the two markets get.

438
00:23:30,640 --> 00:23:37,560
Speaker 5: Squashed Historically No, Historically the asset based space always has

439
00:23:37,600 --> 00:23:40,800
Speaker 5: a little bit of a spread premium to the corporate space.

440
00:23:40,880 --> 00:23:45,320
Speaker 5: I don't see that, you know, inverting anytime soon. But

441
00:23:45,440 --> 00:23:49,520
Speaker 5: with that being said, I think there's plenty of issuance

442
00:23:49,560 --> 00:23:53,680
Speaker 5: to sort of sort through. I think again, we actually

443
00:23:53,680 --> 00:23:55,800
Speaker 5: probably think the top of the capital structure is more

444
00:23:55,840 --> 00:23:57,679
Speaker 5: compelling than the bottom, kind of going back to that

445
00:23:57,760 --> 00:24:00,760
Speaker 5: comment on the credit card being flat and so, you know,

446
00:24:00,800 --> 00:24:04,840
Speaker 5: a flexible capital we're able to kind of dial up

447
00:24:04,920 --> 00:24:08,280
Speaker 5: or down the credit risk and wait for better opportunities

448
00:24:08,280 --> 00:24:10,480
Speaker 5: maybe at the bottom of the capital structure.

449
00:24:10,920 --> 00:24:13,840
Speaker 4: I have a question on the lpiece. We've kind of

450
00:24:13,880 --> 00:24:16,879
Speaker 4: like heard all year how limited partners were asking money

451
00:24:16,880 --> 00:24:19,520
Speaker 4: managers to go a little bit more into esoterics or

452
00:24:19,800 --> 00:24:23,200
Speaker 4: into asset based finance because they were already like kind

453
00:24:23,200 --> 00:24:28,040
Speaker 4: of like very like very present or write and direct lending.

454
00:24:28,560 --> 00:24:30,800
Speaker 4: What are the LPs asking now where do they want

455
00:24:30,840 --> 00:24:32,960
Speaker 4: to go? Like do they want to buy more infraud.

456
00:24:33,000 --> 00:24:35,040
Speaker 4: Do they what are they interested in?

457
00:24:36,480 --> 00:24:40,760
Speaker 5: Well, I think they're looking for diversification, right, They're looking

458
00:24:40,840 --> 00:24:44,919
Speaker 5: for diversification because they might feel over exposed to corporate credit.

459
00:24:45,640 --> 00:24:49,280
Speaker 5: They're looking for diversification because there's sort of tearing going

460
00:24:49,320 --> 00:24:52,600
Speaker 5: on with pick or LME and when you think about

461
00:24:52,640 --> 00:24:55,240
Speaker 5: the premise of asset base, some of that just can't happen, right,

462
00:24:55,520 --> 00:24:58,080
Speaker 5: My SPV can't be stripped of the assets, and so

463
00:24:58,440 --> 00:25:03,439
Speaker 5: I think there's appealing aspects of private abs. The duration

464
00:25:03,520 --> 00:25:07,280
Speaker 5: profiles generally are different, right, we're generally looking at two

465
00:25:07,320 --> 00:25:09,760
Speaker 5: to three year duration profiles. There's a lot of amorization,

466
00:25:09,840 --> 00:25:11,720
Speaker 5: there's a lot of cash flow, it's d risking in

467
00:25:11,800 --> 00:25:15,720
Speaker 5: nature versus five year bullet maturities. So I think you

468
00:25:15,760 --> 00:25:20,040
Speaker 5: add all that up, it's compelling. I think there's still

469
00:25:20,040 --> 00:25:23,480
Speaker 5: a huge education process going on, and so there's certainly

470
00:25:23,480 --> 00:25:25,679
Speaker 5: been some first movers, but we're spending a lot of

471
00:25:25,680 --> 00:25:29,520
Speaker 5: time with LPs are really across the globe and sort

472
00:25:29,520 --> 00:25:34,199
Speaker 5: of helping them understand how the US asset based finance

473
00:25:34,720 --> 00:25:37,520
Speaker 5: sector is emerging. And then it kind of trickles out

474
00:25:37,520 --> 00:25:38,919
Speaker 5: across the globe in different ways.

475
00:25:39,280 --> 00:25:42,560
Speaker 3: Are there various classes of buyers that are sort of emerging.

476
00:25:42,760 --> 00:25:45,679
Speaker 3: Is it family offices, is it insurance companies who've been

477
00:25:45,720 --> 00:25:48,440
Speaker 3: involved for years. You know, banks have obviously been involved,

478
00:25:49,920 --> 00:25:50,960
Speaker 3: sovereign wealth funds.

479
00:25:51,119 --> 00:25:54,760
Speaker 5: Yeah, I think everyone's got a different need, right, So

480
00:25:55,200 --> 00:25:57,480
Speaker 5: going to insurance as an example, we spend a lot

481
00:25:57,480 --> 00:26:01,840
Speaker 5: of time with large insurance companies that have a public

482
00:26:01,880 --> 00:26:05,720
Speaker 5: market presence, right, So they're interacting with the cell side

483
00:26:05,720 --> 00:26:08,359
Speaker 5: every day on ig parts of the capital structure, but

484
00:26:08,400 --> 00:26:12,680
Speaker 5: they maybe haven't built out the team in a way

485
00:26:12,720 --> 00:26:15,440
Speaker 5: that can source the private side, so source underwrite asset

486
00:26:15,480 --> 00:26:18,919
Speaker 5: matters the private side, and so those have been great

487
00:26:18,960 --> 00:26:24,520
Speaker 5: partnerships to develop. I think the you know, the sovereigns

488
00:26:24,600 --> 00:26:27,960
Speaker 5: or the pensions are looking for more absolute return and

489
00:26:28,040 --> 00:26:30,920
Speaker 5: just really kind of a brute force comparison to what

490
00:26:31,000 --> 00:26:33,080
Speaker 5: they're seeing in direct lending, just as sort of the

491
00:26:33,160 --> 00:26:36,160
Speaker 5: natural comp And then I think it's probably an even

492
00:26:36,240 --> 00:26:39,360
Speaker 5: more complicated story to explain to retail, So they're probably

493
00:26:39,400 --> 00:26:44,560
Speaker 5: last on the journey of maybe getting exposure holistically. But

494
00:26:44,640 --> 00:26:47,680
Speaker 5: I think everyone generally, after a few meetings, feels under

495
00:26:47,720 --> 00:26:50,760
Speaker 5: exposed to the asset class when you think about it

496
00:26:50,880 --> 00:26:53,720
Speaker 5: in comparison to the size of the economy, people are

497
00:26:53,720 --> 00:26:54,879
Speaker 5: generally under allocated.

498
00:26:55,240 --> 00:26:56,879
Speaker 3: So if we're talking you know, sort of top of

499
00:26:56,880 --> 00:26:59,520
Speaker 3: the stack, like a triple A security, like what sort

500
00:26:59,560 --> 00:27:02,560
Speaker 3: of a risk dreamium. You know, does the private ABS

501
00:27:02,600 --> 00:27:04,359
Speaker 3: deliver versus a public ABS?

502
00:27:04,440 --> 00:27:07,920
Speaker 5: Just generically yeah, So I mean I think the private

503
00:27:08,200 --> 00:27:11,360
Speaker 5: ABS market doesn't get tranched as much as the public

504
00:27:11,400 --> 00:27:12,840
Speaker 5: So I would think of it as sort of IG

505
00:27:13,000 --> 00:27:16,679
Speaker 5: and non IG risk. We on both sides of that

506
00:27:16,760 --> 00:27:21,400
Speaker 5: coin generally see double the spread of the public market equivalent.

507
00:27:22,000 --> 00:27:26,640
Speaker 5: And that's derived from really three things. One is the liquidity, right,

508
00:27:26,680 --> 00:27:28,439
Speaker 5: so it can't go into some of the homes that

509
00:27:28,480 --> 00:27:32,800
Speaker 5: public securities go, the ETFs, the bond funds, I would say,

510
00:27:33,359 --> 00:27:37,479
Speaker 5: the human complexity of sourcing underwriting it right, you have

511
00:27:37,520 --> 00:27:40,040
Speaker 5: to put the docks together versus by the syndicated bond,

512
00:27:40,160 --> 00:27:44,200
Speaker 5: so you've got to build that infrastructure on the sourcing side.

513
00:27:44,200 --> 00:27:47,280
Speaker 5: And then third is the operational complexity. It's very different

514
00:27:47,320 --> 00:27:51,880
Speaker 5: than direct lending and the fund and it's a horrible

515
00:27:51,920 --> 00:27:54,399
Speaker 5: at maturity in five years. Generally, what we're doing is

516
00:27:54,720 --> 00:27:58,680
Speaker 5: revolving facilities. We're funding our borrow or twice weekly, we're

517
00:27:58,760 --> 00:28:01,679
Speaker 5: checking the covenants, ability criteria, the borrowing base, and so

518
00:28:01,800 --> 00:28:04,359
Speaker 5: you need to build up that operational capability, and so

519
00:28:04,480 --> 00:28:08,199
Speaker 5: for all that put together, you get roughly double the

520
00:28:08,200 --> 00:28:10,960
Speaker 5: public market equivalent across the cycle.

521
00:28:12,080 --> 00:28:14,080
Speaker 4: So in the past couple of years, we've been talking

522
00:28:14,080 --> 00:28:16,280
Speaker 4: a lot about the rise of insurance, which is what

523
00:28:16,359 --> 00:28:19,359
Speaker 4: you were mentioning earlier, and most people kind of mentioned

524
00:28:19,359 --> 00:28:22,400
Speaker 4: always Apollo and the Theme and other like insurance tie

525
00:28:22,440 --> 00:28:25,840
Speaker 4: ups that we've been seeing with asset managers, like Blackstone

526
00:28:25,840 --> 00:28:28,399
Speaker 4: has its own, and like all the large asset managers do.

527
00:28:29,160 --> 00:28:31,840
Speaker 4: What should we expect for like the next twelve months,

528
00:28:31,840 --> 00:28:34,520
Speaker 4: Are we going to continue to see like asset managers

529
00:28:34,600 --> 00:28:36,760
Speaker 4: chase those tie ups or is that kind of like

530
00:28:36,800 --> 00:28:37,680
Speaker 4: played out already.

531
00:28:38,320 --> 00:28:38,760
Speaker 2: No, I don't.

532
00:28:38,800 --> 00:28:43,040
Speaker 5: I don't think anyone's chasing. I think insurance companies would

533
00:28:43,040 --> 00:28:46,440
Speaker 5: probably say they're overweight to corporate credit as well. I

534
00:28:46,480 --> 00:28:50,560
Speaker 5: think they see the risk adjusted returns are compelling in

535
00:28:50,560 --> 00:28:52,120
Speaker 5: the asset base base. I think they're trying to figure

536
00:28:52,120 --> 00:28:57,760
Speaker 5: out how to access it, and so I don't think

537
00:28:57,800 --> 00:28:59,920
Speaker 5: we're near the end of that journey. I think they'll

538
00:29:00,200 --> 00:29:05,240
Speaker 5: continue to be partnerships, whether they're exclusive or not be formed.

539
00:29:05,280 --> 00:29:06,840
Speaker 5: I mean, we I spend a lot of time personally

540
00:29:06,880 --> 00:29:10,120
Speaker 5: with insurance companies and helping them understand our platform and

541
00:29:10,160 --> 00:29:14,640
Speaker 5: how we can compliment what they're maybe doing internally, and

542
00:29:14,720 --> 00:29:17,040
Speaker 5: that's where they're looking to, I would say, expand the

543
00:29:17,040 --> 00:29:20,000
Speaker 5: balance sheet on the private side of the ABS side.

544
00:29:21,080 --> 00:29:24,120
Speaker 4: Also, like I have another question on this. Basically, it's

545
00:29:24,240 --> 00:29:27,280
Speaker 4: very We've seen a lot of asset managers when they

546
00:29:27,440 --> 00:29:29,840
Speaker 4: want to grow in acid based finance, they go out

547
00:29:29,920 --> 00:29:31,840
Speaker 4: and kind of like buy a shop instead of building

548
00:29:31,920 --> 00:29:34,800
Speaker 4: one out, and we've seen a few of this in

549
00:29:34,880 --> 00:29:40,040
Speaker 4: many transactions this year. Do you have any shops in

550
00:29:40,120 --> 00:29:41,440
Speaker 4: mind that do you think like now we're going to

551
00:29:41,480 --> 00:29:42,920
Speaker 4: have to they're going to have to go out and

552
00:29:43,000 --> 00:29:46,440
Speaker 4: buy another asset manager, or we're gonna they're going to

553
00:29:46,480 --> 00:29:49,320
Speaker 4: be hiring, or how competitive is it getting in that space?

554
00:29:50,040 --> 00:29:51,920
Speaker 5: Well, I think we were just on the other side

555
00:29:51,920 --> 00:29:54,760
Speaker 5: of a transaction, right, So you know, I'm happy to

556
00:29:55,080 --> 00:29:58,920
Speaker 5: say we're a year into the TPG transaction, and so

557
00:29:59,280 --> 00:30:02,400
Speaker 5: I recall some of their line of questioning when we

558
00:30:02,480 --> 00:30:05,520
Speaker 5: were we were going through through diligence. So it's a

559
00:30:05,600 --> 00:30:08,400
Speaker 5: space that it takes a long time to penetrate, and

560
00:30:08,480 --> 00:30:11,200
Speaker 5: so I can understand why people are buying it versus

561
00:30:11,200 --> 00:30:16,240
Speaker 5: building it. If you want access to that exposure, organic

562
00:30:16,400 --> 00:30:18,280
Speaker 5: is going to take you a while. So I see

563
00:30:18,360 --> 00:30:22,680
Speaker 5: the the rationale. I can't comment really on what other

564
00:30:22,720 --> 00:30:25,520
Speaker 5: people are thinking, but but I mean we we obviously

565
00:30:25,560 --> 00:30:28,280
Speaker 5: saw a firsthand in terms of our transaction with TPG.

566
00:30:29,200 --> 00:30:32,400
Speaker 3: Yeah, you you you invoke the the TPG transaction. It

567
00:30:32,480 --> 00:30:36,120
Speaker 3: it did happen a year ago. TPG has you know,

568
00:30:36,240 --> 00:30:39,360
Speaker 3: been a pretty significant force across the market, as as

569
00:30:39,480 --> 00:30:43,840
Speaker 3: is Angela Gordon over the years, and it definitely seems

570
00:30:43,880 --> 00:30:47,360
Speaker 3: like a complementary fit between the two. I'm sort of

571
00:30:47,440 --> 00:30:52,680
Speaker 3: interested in what uh what new tools uh TPG may

572
00:30:52,800 --> 00:30:55,320
Speaker 3: bring to your toolkit that you didn't have prior to

573
00:30:55,400 --> 00:30:56,040
Speaker 3: the transaction.

574
00:30:57,440 --> 00:30:57,640
Speaker 2: Yeah.

575
00:30:57,640 --> 00:31:01,560
Speaker 5: I mean they have subject matter expert teas in very

576
00:31:01,640 --> 00:31:04,440
Speaker 5: deeply in certain spaces, and so the one that probably

577
00:31:05,800 --> 00:31:09,320
Speaker 5: is most relevant to my business is in the climate space, right,

578
00:31:09,360 --> 00:31:14,360
Speaker 5: and so they've got a tremendous franchise and their private

579
00:31:14,360 --> 00:31:17,920
Speaker 5: equity business called Rise Climate, and so a lot of

580
00:31:18,080 --> 00:31:23,960
Speaker 5: that infrastructure or even consumer type products actually gets funded

581
00:31:24,000 --> 00:31:26,480
Speaker 5: in the debt market, and you know, tangentially with ABS. So,

582
00:31:26,520 --> 00:31:29,480
Speaker 5: I mean the easiest example is RESI Solar, right, Like

583
00:31:29,560 --> 00:31:31,320
Speaker 5: that's kind of the most generic one I can point to.

584
00:31:31,480 --> 00:31:35,479
Speaker 5: But as things continue to emerge, the fact that our

585
00:31:35,560 --> 00:31:38,920
Speaker 5: investment team on my side can now tap into that

586
00:31:39,040 --> 00:31:44,920
Speaker 5: really subject matter expertise on the technology, on the competitive landscape,

587
00:31:44,960 --> 00:31:46,560
Speaker 5: that's where that's where we've been spending time.

588
00:31:48,080 --> 00:31:48,200
Speaker 2: Now.

589
00:31:48,480 --> 00:31:51,240
Speaker 3: It's interesting bringing up residential solar because and this sort

590
00:31:51,280 --> 00:31:54,640
Speaker 3: of gets back to the change in administrations. The incoming administration,

591
00:31:54,920 --> 00:31:56,720
Speaker 3: I don't know, it just seems like it might be

592
00:31:56,760 --> 00:32:00,520
Speaker 3: a little less interested in supporting climate change and understand it.

593
00:32:00,600 --> 00:32:05,000
Speaker 3: There's a there's you know, fairly significant amount of government

594
00:32:05,120 --> 00:32:08,000
Speaker 3: financial backing that goes into that into that segment. Is

595
00:32:08,040 --> 00:32:09,840
Speaker 3: that the sort of thing where you might see change

596
00:32:09,840 --> 00:32:10,760
Speaker 3: over the next four years.

597
00:32:11,520 --> 00:32:13,680
Speaker 5: Yeah, I mean, listen, there can definitely be change with

598
00:32:13,880 --> 00:32:17,360
Speaker 5: anything that has tax credits or sort of other you know, softer,

599
00:32:17,560 --> 00:32:22,840
Speaker 5: harder regulatory aspects. I mean, I think if people still want,

600
00:32:23,120 --> 00:32:26,920
Speaker 5: you know, solar power, a lot of that is quite

601
00:32:26,960 --> 00:32:29,840
Speaker 5: honestly made in the Red States, right in terms of

602
00:32:29,840 --> 00:32:33,440
Speaker 5: where the jobs are, and so I'd be surprised if

603
00:32:33,480 --> 00:32:36,240
Speaker 5: it's as blunt force as as maybe the rhetoric is.

604
00:32:37,600 --> 00:32:40,040
Speaker 5: So I don't think we're particularly worried about that, but

605
00:32:41,040 --> 00:32:42,160
Speaker 5: we'll see how this plays out.

606
00:32:43,400 --> 00:32:45,240
Speaker 1: I think that's what you were saying TJ about talking

607
00:32:45,280 --> 00:32:47,320
Speaker 1: to the insurance companies and other new types of investors

608
00:32:47,360 --> 00:32:48,880
Speaker 1: about this asset class. How do you talk to them

609
00:32:48,880 --> 00:32:52,840
Speaker 1: about valuing the assets over time and monitoring for stress

610
00:32:52,960 --> 00:32:57,240
Speaker 1: and you know, any particular words on liquidity. I mean,

611
00:32:57,360 --> 00:32:58,560
Speaker 1: do you just tell them you can't try it, you

612
00:32:58,640 --> 00:33:00,600
Speaker 1: go to stuck with it for the next seven years

613
00:33:00,640 --> 00:33:02,400
Speaker 1: and just hold on to it and be happy.

614
00:33:04,960 --> 00:33:09,120
Speaker 5: Well, no, I think people are looking to take advantage

615
00:33:09,160 --> 00:33:12,840
Speaker 5: of the illiquidity premiums, right So. I think most investors

616
00:33:12,880 --> 00:33:17,120
Speaker 5: are going into that eyes wide open. It's not being misallocated,

617
00:33:17,160 --> 00:33:19,760
Speaker 5: if you will, into a liquid vehicle, right so, especially

618
00:33:19,800 --> 00:33:22,600
Speaker 5: the insurance companies, as you mentioned. So, I mean, the

619
00:33:22,680 --> 00:33:24,760
Speaker 5: fact of the matter is is most of these asset

620
00:33:24,800 --> 00:33:26,920
Speaker 5: classes have been around for decades and decades, and there's

621
00:33:26,920 --> 00:33:31,560
Speaker 5: a tremendous amount of performance history to effectively when you're

622
00:33:31,600 --> 00:33:34,440
Speaker 5: underwriting the initial transaction as well as sort of doing

623
00:33:34,480 --> 00:33:37,280
Speaker 5: your asset management work, understanding where.

624
00:33:37,480 --> 00:33:39,320
Speaker 2: The trajectory of the performance is going.

625
00:33:41,000 --> 00:33:43,400
Speaker 5: It's not a surprise if you will like where things

626
00:33:43,440 --> 00:33:46,280
Speaker 5: are today, whether you think they're trending twelve months from now.

627
00:33:47,400 --> 00:33:48,000
Speaker 2: We shouldn't be.

628
00:33:48,040 --> 00:33:49,640
Speaker 5: That far off based on all the tools we have

629
00:33:49,720 --> 00:33:52,640
Speaker 5: available to us. And that's really where sort of the infrastructure,

630
00:33:52,720 --> 00:33:55,320
Speaker 5: the asset management, the analytics come in. And that goes

631
00:33:55,400 --> 00:33:57,640
Speaker 5: back to why we have not seen a tremendous amount

632
00:33:57,640 --> 00:34:00,160
Speaker 5: of competition because you need to build us and it

633
00:34:00,720 --> 00:34:02,240
Speaker 5: costs a lot of money, it takes a lot of time,

634
00:34:02,840 --> 00:34:05,360
Speaker 5: and there's a little bit of an incumbency bias to

635
00:34:05,560 --> 00:34:08,480
Speaker 5: this business versus maybe some other products that are more

636
00:34:08,560 --> 00:34:09,839
Speaker 5: easily accessible.

637
00:34:10,520 --> 00:34:13,160
Speaker 1: So is it safer than in relative terms than direct lending?

638
00:34:14,040 --> 00:34:15,960
Speaker 5: I think the risks are different, right, I think the

639
00:34:16,080 --> 00:34:18,160
Speaker 5: risks are different. We talked about duration, we talked about

640
00:34:19,280 --> 00:34:22,840
Speaker 5: the cash flow profile, we talked about having the assets secured.

641
00:34:24,400 --> 00:34:26,560
Speaker 5: The downside, maybe there's probably more direct lenders than there

642
00:34:26,560 --> 00:34:29,560
Speaker 5: are sypacks finance providers, So in terms of thinking about

643
00:34:29,560 --> 00:34:34,400
Speaker 5: their refinancing risk, you might say that it's better opportunity

644
00:34:34,400 --> 00:34:37,399
Speaker 5: in the direct lending space. But from our seat, when

645
00:34:37,480 --> 00:34:41,120
Speaker 5: we look at our borrowers or counterparts, we have a

646
00:34:41,280 --> 00:34:44,319
Speaker 5: very high recapture rate on those financings. Right, there's less

647
00:34:44,360 --> 00:34:47,120
Speaker 5: competition if both sides are happy there's a high switching

648
00:34:47,200 --> 00:34:50,320
Speaker 5: costs versus direct lending. Meaning we've got the SPV setup,

649
00:34:50,360 --> 00:34:52,640
Speaker 5: we've got the trustees in place, we've got the borrowing base,

650
00:34:52,680 --> 00:34:56,680
Speaker 5: we've got the legal docs. If it's working for both counterparties,

651
00:34:56,719 --> 00:34:58,439
Speaker 5: we generally see pretty hybrid nual rates.

652
00:34:58,840 --> 00:35:00,840
Speaker 3: We should also be able to cut stamize things for

653
00:35:01,239 --> 00:35:03,920
Speaker 3: the buyers as well, right, more so than you know,

654
00:35:04,000 --> 00:35:05,880
Speaker 3: sort of just direct lending would.

655
00:35:06,160 --> 00:35:08,759
Speaker 5: Yeah, correct, I mean it's it's still highly covenanted, right,

656
00:35:08,880 --> 00:35:10,680
Speaker 5: Like it's different than direct lending, where I think it's

657
00:35:10,719 --> 00:35:14,480
Speaker 5: a multiple and a and a spread function largely driving.

658
00:35:14,520 --> 00:35:17,400
Speaker 5: And I think it's about eligibility criteria, it's about flexibility.

659
00:35:17,800 --> 00:35:19,960
Speaker 5: Those are things that are important to these specialty finance

660
00:35:20,000 --> 00:35:22,760
Speaker 5: companies much more so than just what's the raw spread?

661
00:35:23,160 --> 00:35:26,040
Speaker 1: Right? How big is the investable opportunity?

662
00:35:27,000 --> 00:35:29,839
Speaker 5: Yeah, the million dollar question. Listen, I think we can

663
00:35:30,080 --> 00:35:32,320
Speaker 5: we can easily kind of get to a seven potentially

664
00:35:32,320 --> 00:35:34,680
Speaker 5: in a dollar market. I know there's numbers flying around

665
00:35:35,480 --> 00:35:39,520
Speaker 5: multiples of that. Yeah, regardless, it's a giant, gigantic opportunity.

666
00:35:39,640 --> 00:35:43,480
Speaker 5: And you know, we're very busy, right to say the least.

667
00:35:43,800 --> 00:35:46,960
Speaker 4: Because the forty trillion number that other estimates just throughout

668
00:35:46,960 --> 00:35:51,040
Speaker 4: what also including infrastructure, energy like other asse of classes.

669
00:35:51,120 --> 00:35:53,160
Speaker 5: Right, Yeah, I mean we always say private credit is

670
00:35:53,239 --> 00:35:55,799
Speaker 5: very loosely defined, So I mean you can you can

671
00:35:55,840 --> 00:35:57,719
Speaker 5: add a whole bunch of ingredients and get to a

672
00:35:57,760 --> 00:35:58,319
Speaker 5: bigger number.

673
00:35:59,200 --> 00:36:02,920
Speaker 1: You've told about more beage finance and also equipment finance offline.

674
00:36:03,400 --> 00:36:06,719
Speaker 1: Can you talk about a bit more about the opportunity then, Well.

675
00:36:06,600 --> 00:36:08,960
Speaker 5: I mean, equipment finance is a space that's kind of

676
00:36:09,040 --> 00:36:11,360
Speaker 5: core to again, kind of the main street economy.

677
00:36:11,520 --> 00:36:11,640
Speaker 2: Right.

678
00:36:11,800 --> 00:36:14,400
Speaker 5: It's been a space that has been dominated by the

679
00:36:14,440 --> 00:36:18,440
Speaker 5: regional banks, and so even an interested investor from the

680
00:36:18,480 --> 00:36:21,160
Speaker 5: private credit side has had a very hard time accessing it.

681
00:36:21,560 --> 00:36:24,239
Speaker 5: That changed in twenty twenty three, and so we've spent

682
00:36:24,360 --> 00:36:28,520
Speaker 5: the last twelve months or so really you know, interviewing counterparties,

683
00:36:28,520 --> 00:36:31,600
Speaker 5: whether they be banks or non bank originators, and figuring

684
00:36:31,640 --> 00:36:34,520
Speaker 5: out how to plug that gap where that borrow or

685
00:36:34,640 --> 00:36:37,400
Speaker 5: that finance, that that financing need was traditionally going to

686
00:36:37,440 --> 00:36:40,280
Speaker 5: regional bank one two three, They can't fulfill that anymore.

687
00:36:41,239 --> 00:36:43,400
Speaker 5: The business is still good, the equipment is still the equipment,

688
00:36:43,840 --> 00:36:46,440
Speaker 5: and so that's a space that we think is in

689
00:36:46,520 --> 00:36:48,920
Speaker 5: the very kind of early intings of transitioning into more

690
00:36:49,000 --> 00:36:54,719
Speaker 5: of a stable private credit subsector. On mortgage finance, that

691
00:36:54,960 --> 00:36:57,560
Speaker 5: is a space where the interest rate move has had

692
00:36:57,600 --> 00:37:02,520
Speaker 5: a profound effect on volumes and how the consumer or

693
00:37:02,600 --> 00:37:05,680
Speaker 5: the borrower utilizes it. And so you know, you sit

694
00:37:05,760 --> 00:37:07,880
Speaker 5: here today and the US is unique and with this

695
00:37:08,000 --> 00:37:13,279
Speaker 5: thirty year fixed rate mortgage product where borrowers have effectively

696
00:37:13,320 --> 00:37:15,680
Speaker 5: locked in their lowest the lowest rate they can get

697
00:37:15,719 --> 00:37:18,239
Speaker 5: on their largest obligation. And that's a good thing, right,

698
00:37:19,960 --> 00:37:23,080
Speaker 5: But now you see someone that's been in their house

699
00:37:23,160 --> 00:37:24,920
Speaker 5: for seven eight years with a three and a half

700
00:37:24,920 --> 00:37:27,800
Speaker 5: percent mortgage saying, you know, I've got hundreds of thousand

701
00:37:27,800 --> 00:37:28,800
Speaker 5: dollars of home equity.

702
00:37:28,840 --> 00:37:30,279
Speaker 2: How do I access that?

703
00:37:30,520 --> 00:37:33,359
Speaker 5: Traditionally you would refinance your firstly and take some cash out.

704
00:37:33,960 --> 00:37:36,000
Speaker 5: That math doesn't make any sense today, and so we're

705
00:37:36,040 --> 00:37:41,160
Speaker 5: seeing the evolution of home equity products. Again, we think

706
00:37:41,239 --> 00:37:44,400
Speaker 5: the credit is pristine at this point. So that's a

707
00:37:44,440 --> 00:37:48,800
Speaker 5: space where we're looking to get deployed quickly. We know

708
00:37:48,920 --> 00:37:52,440
Speaker 5: credit standers can loosen over time as more people, you know,

709
00:37:53,080 --> 00:37:55,040
Speaker 5: look for that opportunity, and so that's a space that

710
00:37:56,719 --> 00:37:58,920
Speaker 5: you know, we expect there could be one hundred and

711
00:37:58,960 --> 00:38:01,759
Speaker 5: fifty to twohentred million of origination per year with a

712
00:38:02,360 --> 00:38:05,239
Speaker 5: call it two trillion dollar really a dressable market there

713
00:38:05,320 --> 00:38:09,080
Speaker 5: on the he looks helocks or secondly as yeah, yeah, okay, So.

714
00:38:09,440 --> 00:38:11,520
Speaker 3: Rates go up, rates go down. I look at the

715
00:38:11,680 --> 00:38:14,640
Speaker 3: the BDCs also on the credit side, and it seems

716
00:38:14,640 --> 00:38:17,200
Speaker 3: to be a double edged sword, at least for business

717
00:38:17,239 --> 00:38:20,640
Speaker 3: development companies. If rates go up, it puts a little

718
00:38:20,640 --> 00:38:23,600
Speaker 3: bit more stress on the borrowers, but it also creates

719
00:38:23,840 --> 00:38:25,720
Speaker 3: you know, more of a I guess of a spread

720
00:38:25,719 --> 00:38:28,239
Speaker 3: opportunity for the for the lender. Rates go down, less

721
00:38:28,239 --> 00:38:30,960
Speaker 3: stress on the borrow but maybe maybe you know, sort

722
00:38:30,960 --> 00:38:34,160
Speaker 3: of less less margin to be had there. How does

723
00:38:34,200 --> 00:38:36,359
Speaker 3: that operate in your business? So I think we're looking

724
00:38:36,400 --> 00:38:41,000
Speaker 3: at probably the consensus points towards about three rate cuts

725
00:38:41,040 --> 00:38:43,640
Speaker 3: over the next twelve months. It's been as high as

726
00:38:43,680 --> 00:38:45,520
Speaker 3: six or seven, you know if you look back a

727
00:38:45,560 --> 00:38:49,560
Speaker 3: few months. So rates go down, three rate cuts next

728
00:38:49,560 --> 00:38:51,520
Speaker 3: twelve months. How does that work in your business?

729
00:38:53,480 --> 00:38:57,000
Speaker 5: I think it's it's less impactful than it is on

730
00:38:57,040 --> 00:38:57,680
Speaker 5: the corporate side.

731
00:38:57,680 --> 00:38:58,600
Speaker 2: I think I think.

732
00:39:00,200 --> 00:39:03,439
Speaker 5: The duration of the product therefore leads to I would

733
00:39:03,440 --> 00:39:06,279
Speaker 5: say more natural resetting. There aren't these big cliff or

734
00:39:06,320 --> 00:39:08,480
Speaker 5: wall events where you're gonna have a whole bunch of

735
00:39:08,680 --> 00:39:13,560
Speaker 5: low cost ig credit from twenty twenty one rollover, Right,

736
00:39:13,760 --> 00:39:16,239
Speaker 5: So most of what we're doing is lending on a

737
00:39:16,280 --> 00:39:19,360
Speaker 5: floating rate basis to these specially financed companies. They're adjusting

738
00:39:20,480 --> 00:39:24,280
Speaker 5: their return on assets, right, So they're what they're charging

739
00:39:24,320 --> 00:39:26,960
Speaker 5: to their consumer moves kind of in tandem, and it's

740
00:39:27,000 --> 00:39:28,400
Speaker 5: resetting really on a daily basis.

741
00:39:28,480 --> 00:39:28,600
Speaker 2: Right.

742
00:39:28,640 --> 00:39:32,080
Speaker 5: So if you're an auto finance company and the FED

743
00:39:32,200 --> 00:39:34,320
Speaker 5: cuts or it doesn't cut, you can kind of naturally

744
00:39:34,360 --> 00:39:37,719
Speaker 5: think of twenty five basis points and rate being passed on.

745
00:39:38,040 --> 00:39:40,600
Speaker 5: So there's not as much of this kind of built

746
00:39:40,719 --> 00:39:46,040
Speaker 5: up a mismatch, if you will. I think I don't

747
00:39:46,080 --> 00:39:49,760
Speaker 5: foresee rates causing a lot of stress in this market.

748
00:39:49,840 --> 00:39:52,719
Speaker 5: I think that really occurred in twenty twenty two and

749
00:39:52,800 --> 00:39:55,200
Speaker 5: there was a giant reset of both rates and spread,

750
00:39:55,920 --> 00:39:59,080
Speaker 5: and I think companies were stress tested then.

751
00:39:59,160 --> 00:40:00,920
Speaker 2: I think things are more on balance today.

752
00:40:01,840 --> 00:40:04,240
Speaker 3: Yeah, they certainly were. Five hundred and twenty five basis

753
00:40:04,280 --> 00:40:07,840
Speaker 3: point increase in base rates and then increase risk premiums

754
00:40:07,840 --> 00:40:10,720
Speaker 3: on top of that was some discombobulation of the banking

755
00:40:11,600 --> 00:40:14,640
Speaker 3: market made for an interesting environment. I think it's actually

756
00:40:14,680 --> 00:40:21,640
Speaker 3: pretty remarkable how well credit managed through all of those changes.

757
00:40:23,400 --> 00:40:26,319
Speaker 5: I mean, listen, it didn't feel great in the second

758
00:40:26,400 --> 00:40:29,520
Speaker 5: or third quarter of twenty two, but you know, most

759
00:40:29,520 --> 00:40:31,439
Speaker 5: people got to the other side. Whether you know, again,

760
00:40:31,480 --> 00:40:33,000
Speaker 5: it was more of a it was more of the

761
00:40:33,120 --> 00:40:36,840
Speaker 5: issuers problem than it was so much the investors problem.

762
00:40:36,920 --> 00:40:39,160
Speaker 5: The investors could kind of patiently wait and see how

763
00:40:39,200 --> 00:40:42,200
Speaker 5: this shakes out. The issuers were the ones that had

764
00:40:42,360 --> 00:40:46,800
Speaker 5: liquidity needs. They were kind of the four sellers of

765
00:40:46,840 --> 00:40:49,280
Speaker 5: twenty twenty two. It wasn't the owners of the bonds.

766
00:40:49,360 --> 00:40:51,839
Speaker 5: It was actually the owners of the loans that needed

767
00:40:51,880 --> 00:40:55,920
Speaker 5: to turn over their facilities, and so you know, it

768
00:40:56,080 --> 00:40:59,400
Speaker 5: wasn't a productive P and L environment for them. But

769
00:40:59,440 --> 00:41:00,960
Speaker 5: to your point, made it to the other side. And

770
00:41:01,360 --> 00:41:04,840
Speaker 5: now I think those companies have sort of reset and

771
00:41:04,880 --> 00:41:06,880
Speaker 5: they've Again that goes back to why there's more demand

772
00:41:07,000 --> 00:41:10,000
Speaker 5: for private credit, because if some of those companies had

773
00:41:10,600 --> 00:41:15,440
Speaker 5: fifty percent of their production already determined to go to counterparty,

774
00:41:15,480 --> 00:41:18,560
Speaker 5: why regardless of where triple A spreads were, they would

775
00:41:18,560 --> 00:41:20,359
Speaker 5: have an easier process getting through twenty twenty two than

776
00:41:20,360 --> 00:41:21,000
Speaker 5: they otherwise did.

777
00:41:21,200 --> 00:41:21,719
Speaker 3: Yeah, yep.

778
00:41:22,320 --> 00:41:24,839
Speaker 1: One thing we've seen on the public side in terms

779
00:41:24,840 --> 00:41:28,000
Speaker 1: of credit spreads, you know, they're incredibly tight, you know,

780
00:41:28,280 --> 00:41:31,840
Speaker 1: decades long loads in terms of you know, IG and

781
00:41:31,880 --> 00:41:35,600
Speaker 1: high yield, and parts of that has been due to

782
00:41:35,640 --> 00:41:37,560
Speaker 1: the fact that supply has been taken out by the

783
00:41:37,600 --> 00:41:40,960
Speaker 1: private markets. To what extent does that happen in asset

784
00:41:41,320 --> 00:41:43,960
Speaker 1: backed markets and how will that affect pricing?

785
00:41:45,520 --> 00:41:46,640
Speaker 2: That's a good question. I think.

786
00:41:47,080 --> 00:41:50,759
Speaker 5: I think the preferred method of funding will still be

787
00:41:50,840 --> 00:41:53,160
Speaker 5: the public markets, just from a cost perspective. I think

788
00:41:53,239 --> 00:41:56,480
Speaker 5: of the private markets as either the means to the end,

789
00:41:56,880 --> 00:42:00,680
Speaker 5: meaning so we're giving that bridging or where house capacity

790
00:42:00,760 --> 00:42:02,319
Speaker 5: to get to that public markets, and so that will

791
00:42:02,360 --> 00:42:05,960
Speaker 5: always be necessary capital. But I don't see many specially

792
00:42:06,000 --> 00:42:09,560
Speaker 5: finance companies completely going to private funding based on where

793
00:42:09,800 --> 00:42:12,640
Speaker 5: the opportunity or where they're funding opportunities are today. So

794
00:42:13,200 --> 00:42:16,000
Speaker 5: it's much more balanced. I think, you know, where we

795
00:42:16,239 --> 00:42:19,840
Speaker 5: set is we're really playing across public and private markets,

796
00:42:21,600 --> 00:42:25,360
Speaker 5: and so that also provides some of our counterparties, we

797
00:42:25,480 --> 00:42:27,480
Speaker 5: provide them more utility than if we were just in

798
00:42:27,560 --> 00:42:30,160
Speaker 5: the public markets or just in the private markets. And

799
00:42:30,600 --> 00:42:32,920
Speaker 5: that's also sort of a sourcing advantage when we think

800
00:42:32,960 --> 00:42:33,600
Speaker 5: about our business.

801
00:42:34,000 --> 00:42:37,360
Speaker 1: Okay, there's probably some listeners out there thinking, you know,

802
00:42:37,520 --> 00:42:42,360
Speaker 1: securitization at the highest levels since the global financial crisis

803
00:42:42,920 --> 00:42:45,200
Speaker 1: and then all of it being bundled up and into

804
00:42:45,280 --> 00:42:48,680
Speaker 1: private hands where you can't see what's going on, sets

805
00:42:48,680 --> 00:42:50,759
Speaker 1: off a few alarm bells, particularly if you're old like

806
00:42:50,920 --> 00:42:54,800
Speaker 1: me and remember the last market catastrophes. What are we

807
00:42:54,880 --> 00:42:56,840
Speaker 1: doing differently this time? Why are we're not going to

808
00:42:56,880 --> 00:42:58,840
Speaker 1: get into the same kind of trouble as we did

809
00:42:58,960 --> 00:42:59,319
Speaker 1: last time?

810
00:43:00,440 --> 00:43:02,799
Speaker 5: Well, I mean, listen, I think the fact that it's

811
00:43:02,840 --> 00:43:06,960
Speaker 5: going to I would tell you private transactions are generally

812
00:43:07,680 --> 00:43:14,240
Speaker 5: pretty discerning in terms of the eligibility criteria, the traps

813
00:43:14,239 --> 00:43:16,360
Speaker 5: if you will, to cut things off if they are

814
00:43:16,440 --> 00:43:18,640
Speaker 5: going bad, and more so than what would be a

815
00:43:19,000 --> 00:43:23,000
Speaker 5: traditional static pool securitization. So the more capital that goes

816
00:43:23,040 --> 00:43:26,000
Speaker 5: into private markets actually probably means there's more control and risk.

817
00:43:26,680 --> 00:43:27,440
Speaker 2: Listen. I think.

818
00:43:28,840 --> 00:43:31,879
Speaker 5: Whether it's the rating agencies or whether it's the sophistication

819
00:43:32,120 --> 00:43:35,400
Speaker 5: of the actual bond buyers versus two thousand and eight,

820
00:43:35,480 --> 00:43:38,840
Speaker 5: I think the whole game has changed and evolved. But

821
00:43:39,760 --> 00:43:41,640
Speaker 5: at the end of the day, I don't think there's

822
00:43:42,000 --> 00:43:45,279
Speaker 5: new credit being created, it's the geography of where that

823
00:43:45,360 --> 00:43:48,239
Speaker 5: credit is. So again, we've talked a lot about the

824
00:43:48,320 --> 00:43:50,640
Speaker 5: auto loans used to live on the regional bank balance sheet.

825
00:43:51,640 --> 00:43:54,520
Speaker 5: That person still needs the auto loan, the car still

826
00:43:54,560 --> 00:43:57,520
Speaker 5: exists as the collateral. It's not being created in thin air.

827
00:43:57,640 --> 00:44:00,400
Speaker 5: So now that it's being funded in the securitization market

828
00:44:00,560 --> 00:44:04,520
Speaker 5: versus the regional bank, that doesn't mean there's sort of access.

829
00:44:04,600 --> 00:44:07,279
Speaker 5: It's just the geography of the funding that's the theme

830
00:44:07,360 --> 00:44:08,640
Speaker 5: of I think twenty twenty three.

831
00:44:08,920 --> 00:44:11,279
Speaker 3: Seems to be a lot less leverage in the system too,

832
00:44:11,440 --> 00:44:16,160
Speaker 3: and less financial weapons of mass destruction in the form

833
00:44:16,200 --> 00:44:16,920
Speaker 3: of CDs.

834
00:44:17,040 --> 00:44:19,560
Speaker 5: Yeah, I was gonna say exactly, like CDs and CDOs

835
00:44:19,560 --> 00:44:22,160
Speaker 5: are no longer a tool.

836
00:44:22,000 --> 00:44:23,640
Speaker 2: To put leverage on leverage, right.

837
00:44:24,800 --> 00:44:27,640
Speaker 5: A lot of that was, you know, manufactured triple a

838
00:44:27,800 --> 00:44:32,239
Speaker 5: risk that I just I don't think whatever fly knowing

839
00:44:32,320 --> 00:44:33,400
Speaker 5: what we know today, but.

840
00:44:33,440 --> 00:44:36,560
Speaker 1: We all still see some signs of synthetic leverage coming up, right,

841
00:44:36,600 --> 00:44:38,840
Speaker 1: I mean, there are some signs out there that you know,

842
00:44:39,160 --> 00:44:41,560
Speaker 1: there is a bit more froth in the muket.

843
00:44:41,920 --> 00:44:44,480
Speaker 5: Well, I mean, if you're talking about the SRT space,

844
00:44:44,520 --> 00:44:47,160
Speaker 5: I mean that's actually the inverse of what happened in

845
00:44:47,200 --> 00:44:51,120
Speaker 5: the GFC. The GFC, the goal was created as much

846
00:44:51,200 --> 00:44:55,960
Speaker 5: triple A cheap financing as possible and export that. I

847
00:44:56,040 --> 00:44:58,879
Speaker 5: think you see now the big banks sort of get

848
00:44:58,960 --> 00:45:02,439
Speaker 5: capital relief throughout, but they still own the assets, they're

849
00:45:02,440 --> 00:45:05,919
Speaker 5: still funding it. It's not necessarily being exported the way.

850
00:45:05,800 --> 00:45:06,279
Speaker 2: It used to be.

851
00:45:07,040 --> 00:45:08,799
Speaker 1: And if you think about everything, you're doing everything, you're

852
00:45:08,800 --> 00:45:11,000
Speaker 1: looking at what's the best relative value, where's the best

853
00:45:11,040 --> 00:45:12,319
Speaker 1: opportunity right now? In credit?

854
00:45:13,200 --> 00:45:17,120
Speaker 5: Well, again, from a deployment perspective, we think lending is

855
00:45:17,239 --> 00:45:20,359
Speaker 5: much better than owning, generally speaking, because there's less people

856
00:45:20,400 --> 00:45:23,640
Speaker 5: that are built to do it. From an asset perspective,

857
00:45:23,680 --> 00:45:26,680
Speaker 5: I think we're focused on housing, we're focused on residential

858
00:45:26,760 --> 00:45:31,840
Speaker 5: real estate. We're generally undersupplied, and so these kind of

859
00:45:31,880 --> 00:45:35,960
Speaker 5: emerging home equity products, if you will, seem very compelling

860
00:45:36,040 --> 00:45:38,240
Speaker 5: right now because if you think about what you just asked,

861
00:45:38,400 --> 00:45:41,160
Speaker 5: the amount of regulation that went into residential mortgages Posts

862
00:45:41,200 --> 00:45:44,560
Speaker 5: two thousand and eight has led to really pristine credit

863
00:45:44,680 --> 00:45:49,040
Speaker 5: quality even fifteen years later, and so I think that

864
00:45:49,280 --> 00:45:52,640
Speaker 5: is the place, if you will, to look for high

865
00:45:52,680 --> 00:45:55,319
Speaker 5: quality assets, even if the spreads are not what they

866
00:45:55,360 --> 00:45:57,120
Speaker 5: once were, you know Twelvey eighteen months ago.

867
00:45:57,640 --> 00:46:00,080
Speaker 1: Great stuff. TJ. Duck and Head of Structured Credit and

868
00:46:00,160 --> 00:46:03,080
Speaker 1: Specialty Finance at TPG, Angelo Gordon, It's been a pleasure

869
00:46:03,120 --> 00:46:05,800
Speaker 1: having you on the Credit Edge, Thanks guys, and of

870
00:46:05,840 --> 00:46:08,320
Speaker 1: course we're very grateful to David Havenes from Bloomberg Intelligence.

871
00:46:08,320 --> 00:46:09,600
Speaker 1: Thanks for much for joining us today.

872
00:46:09,640 --> 00:46:09,799
Speaker 2: Yep.

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Speaker 3: Great being with you all.

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Speaker 1: And to Carmen Arroyo with Bloomberg News milgratias.

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Speaker 4: Thank you.

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Speaker 1: Please do follow Carmen on Bloomberg dot com and the

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Speaker 1: Bloomberg Terminal, and for more credit market analysis and insight

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Speaker 1: read all of David Havens's great work on the terminal.

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Speaker 1: us a review, tell your friends, or email me directly

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Speaker 1: at Jcromby eight at Bloomberg dot net. I'm James Cromby.

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Speaker 1: It's been a pleasure having you join us again next

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Speaker 1: week on the Credit Edge.