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Irene Garcia Perez: Hello, and welcome to The Credit Edge, a weekly market podcast.

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Irene Garcia Perez: My name is Irene Garcia Perez. I'm a team leader at Bloomberg and.

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Negisa Balluku: I'm Negisa Ballaku, senior bankruptcy litigation analyst at Bloomberg Intelligence.

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Negisa Balluku: This week, we're very pleased to welcome Adam Sklar Co,

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Negisa Balluku: Chief Investment Officer of Monarch Alternative Capital.

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Adam Sklar: How are you, Adam good, Thank you, Thank you for

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Adam Sklar: having me.

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Negisa Balluku: Thank you for being here with us today. Adam leads

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Negisa Balluku: the investment team, portfolio strategy, and strategic direction across Monarch's corporate,

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Negisa Balluku: credit and real estate platforms. Monarch is a global investment

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Negisa Balluku: firm founded in two thousand and two with approximately sixty

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Negisa Balluku: billion dollars in assets under management. It focuses primarily on

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Negisa Balluku: opportunistic credit and real estate across various market segments and

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Negisa Balluku: instrument types. In his capacity as co head of real

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Negisa Balluku: Estate for Monarch, Adam is focused on directing Monarch's investment activities.

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Negisa Balluku: In leading the firm's real estate platform, he sits on

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Negisa Balluku: the investment committees on each Monarch strategy, in addition to

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Negisa Balluku: being a member of the firm's Partnership Committee and Operational

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Negisa Balluku: Executive Committee. Prior to joining Monarch In two thousand and seven,

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Negisa Balluku: Adam was an analyst at JP Morgan in Financial Institutions.

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Irene Garcia Perez: Group, So Adam, thank you very much for joining us.

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Irene Garcia Perez: Last week we had JP Morgan CEO Jamie Diamond talking

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Irene Garcia Perez: about cockroaches in relation to Tricolor and First Brand's blow ups,

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Irene Garcia Perez: that when you see one of those, you should expect

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Irene Garcia Perez: to see more. He also made some remarks about undergrading

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Irene Garcia Perez: standards by some that are not particularly good quote unquote,

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Irene Garcia Perez: and that internship triggered a few private credit executives, including

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Irene Garcia Perez: Blue Ovel Capital co CEO Mark Libshals, who say the

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Irene Garcia Perez: issue was in loans at bangalad as opposed to private

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Irene Garcia Perez: credit loan. Two questions that come to mind on the

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Irene Garcia Perez: back of these situations, do you expect to see indeed

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Irene Garcia Perez: more frauds emerge and the other one has a hunt

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Irene Garcia Perez: for you? And the amount of capital race in the

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Irene Garcia Perez: past few years, be it in direct lending strategies, be

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Irene Garcia Perez: it in clo strategies, move view diligence to a secondary role.

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Adam Sklar: Very good questions, very topical for this discussion. I'm given

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Adam Sklar: to your point Jamie Diamond and Mark Lipschultz's comments last

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Adam Sklar: week and all of the attention that is now coming,

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Adam Sklar: you know, to the corporate credit space. To answer your

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Adam Sklar: questions directly before I make a broader statement, I would

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Adam Sklar: say it's very hard to anticipate fraud generally, and I

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Adam Sklar: think it's very logical for people to look at, you know,

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Adam Sklar: tricolor first brands where there may be some form of

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Adam Sklar: fraudulent activity and view that as idiosyncratic. That being said,

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Adam Sklar: when I look across our portfolios and as someone participating

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Adam Sklar: in the levered loan and high yield bond markets very actively,

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Adam Sklar: what I do see as an environment where away from

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Adam Sklar: AI and AI cap X spending, there are large portions

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Adam Sklar: of the economy that are hurting, and we can talk

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Adam Sklar: about that further. But through that, what I see and

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Adam Sklar: feel every day is it feels like a moment, you know,

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Adam Sklar: picking up on a quote from Warren Buffett, you know,

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Adam Sklar: when the tide goes out, you see who's been swimming naked?

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Adam Sklar: And so we have gone through a period where there's

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Adam Sklar: been you know, both tremendous monetary and fiscal stimulus coming

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Adam Sklar: out of all the monetary stimulus we had in twenty

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Adam Sklar: twenty three and twenty twenty four, you know that began

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Adam Sklar: to put stress on levered capital structures with higher interest rates,

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Adam Sklar: and through the balance of those few years we've been

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Adam Sklar: in a period we're on a real basis, big parts

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Adam Sklar: of the US consumer base of getting squeezed. Nominal wages

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Adam Sklar: are coming down, job growth is slowing, and inflation has

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Adam Sklar: been quite persistent. And so there are big parts of

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Adam Sklar: the economy, as I referenced earlier, where we're seeing, you know,

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Adam Sklar: fundamental weaknesses and cracks emerging on a daily basis. And

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Adam Sklar: so I don't, you know, I'm not focused on frauds necessarily,

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Adam Sklar: but I do think, you know, there are issues, you know,

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Adam Sklar: in the corporate credit space, fundamental issues that are popping up,

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Adam Sklar: and so I think the markets are right to be

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Adam Sklar: focused on that. Second, on corporate credit as a potential

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Adam Sklar: risk moving forward.

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Irene Garcia Perez: We have seen also a couple other situations and a

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Irene Garcia Perez: fee in sex where without fraud being involved in those cases,

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Irene Garcia Perez: but where from the time the company should the dead

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Irene Garcia Perez: until it offered at the stress exchange, it was just

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Irene Garcia Perez: a matter of months, not even a year. Do you

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Irene Garcia Perez: think that investors, because of this handful year hunt for

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Irene Garcia Perez: yield or this need to employ capital, sometimes feel rush

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Irene Garcia Perez: to just you know, sign to those deals.

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Adam Sklar: Yeah, I feel like it's less a function of those

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Adam Sklar: elements which may have been press over the past few years.

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Adam Sklar: It's hard for me to comment, but I think it

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Adam Sklar: is notable kind of to part of your point that

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Adam Sklar: you know, twenty twenty three too through twenty twenty four

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Adam Sklar: were really a great time to be a credit investor.

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Adam Sklar: You had, you know, arise in the base rate, which

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Adam Sklar: had been incredibly low in the United States for the

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Adam Sklar: previous decade, and that afforded, on an absolute yield basis,

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Adam Sklar: a higher rate of return to credit investors. And part

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Adam Sklar: of the reason why we've seen such an explosion just

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Adam Sklar: so much growth in private credit in the US as

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Adam Sklar: a function of the fact that the base rate was

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Adam Sklar: at five percent or higher, you know, spreads coming out

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Adam Sklar: of the volatility that we saw in twenty twenty three,

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Adam Sklar: the regional banking crisis, geopolitical events, et cetera. It was

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Adam Sklar: a really special time to deploy capital into the credit space,

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Adam Sklar: and so as a as a result of all of

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Adam Sklar: that capital coming in and needing to be deployed. To

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Adam Sklar: your point, do I think there could have been in

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Adam Sklar: underwriting mistakes made, of course, but I don't think that's

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Adam Sklar: the big story today. As I said earlier, I think

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Adam Sklar: the bigger issue is just we're in a very uneven

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Adam Sklar: macroeconomic moment. It's why the FED, you know, partially part

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Adam Sklar: of the reason why. There may be other political reasons,

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Adam Sklar: but part of the reason why you see the FED

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Adam Sklar: moving to cut interest rates. And I think that is

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Adam Sklar: a more notable kind of element to the credit the

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Adam Sklar: corporate credit story right now than you know, super loose

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Adam Sklar: underwriting or fraud. And frankly, if you think about something

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Adam Sklar: like a SAX. You know, so in brick and mortar, retail,

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Adam Sklar: in the restaurant space, we're seeing it in chemicals, paper

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Adam Sklar: and packaging, certain parts of commercial construction housing. I mean,

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Adam Sklar: what I just listed is probably fifty percent of US GDP,

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Adam Sklar: and so you know they're there are We're seeing real

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Adam Sklar: issues on the revenue side there in terms of softness

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Adam Sklar: and that as you you know, if you're in a

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Adam Sklar: levered capital structure that's sensitive to revenue and EBITDAH and

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Adam Sklar: debt service coverage metrics. You know, I think that's the

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Adam Sklar: bigger issue right now facing the corporate credit space.

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Negisa Balluku: Adam, So in this back and forth between those that

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Negisa Balluku: say that private credit sector or non bank lending sector

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Negisa Balluku: are subject to these bad landing centers or untrustworthy borrowers.

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Negisa Balluku: More bad news is about to come. On one hand,

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Negisa Balluku: and on the other hand, we have this argument that

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Negisa Balluku: most of the exposure was actually being held by banks

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Negisa Balluku: and that this is fear mongering. Are we basically in

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Negisa Balluku: a wait and see approach? Are there things you think

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Negisa Balluku: that we need to see to prove or disprove this

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Negisa Balluku: thesis that this is in fact the systemic failure of

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Negisa Balluku: the private credit sector. At what point I'm curious you

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Negisa Balluku: think that the examples could turn into data.

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Adam Sklar: That is a really challenging question. I don't just to

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Adam Sklar: reiterate what I was just saying, I don't see that

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Adam Sklar: in terms of a systemic failure. And underwriting that being said,

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Adam Sklar: I think there's two notable elements to answer your question

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Adam Sklar: in terms of what we're going to see over the

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Adam Sklar: next three, six, nine, twelve months and how that may

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Adam Sklar: inform you know, people's views. One obviously cyclicality. You know,

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Adam Sklar: I'm commenting on what I see on the ground today,

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Adam Sklar: and so I'm seeing, you know, it feels very late

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Adam Sklar: cycle to me in certain sectors, and we're seeing you know,

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Adam Sklar: certain weaknesses that you know I mentioned before, especially those

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Adam Sklar: sectors that are very levered to the US consumer. The

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Adam Sklar: second area which is getting more focus in our world,

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Adam Sklar: and you know in certain parts of the credit markets,

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Adam Sklar: is the exposure to legacy SaaS so software businesses in

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Adam Sklar: that we're that were sold at very high multiples of

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Adam Sklar: what was perceived to be recurring cash flow, thus levered

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Adam Sklar: at very high multiples as well, if AI poses a

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Adam Sklar: risk to those cash flows moving forward, you know, could

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Adam Sklar: that be an issue? And what was notable to me

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Adam Sklar: over the past year or so, you know, we've come

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Adam Sklar: to see that software credit lending to these software businesses

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Adam Sklar: makes up thirty to forty percent of the private credit space.

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Adam Sklar: And so if you look at public BDCs, which are

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Adam Sklar: you know, a good window into the private credit world

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Adam Sklar: where you get a lot of public disclosure, you know,

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Adam Sklar: you'll see software as always the top category in those

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Adam Sklar: portfolios and could be upwards of thirty to forty percent,

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Adam Sklar: And so I think that's very notable. You know, in

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Adam Sklar: the history of the credit markets, if you look at

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Adam Sklar: where people get into trouble, oftentimes it's when they have

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Adam Sklar: a certain concentration. So when private credit emerged and took

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Adam Sklar: all of this market share from from the BSL market

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Adam Sklar: and other balance sheets. You have to ask yourself, well,

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Adam Sklar: why are they winning all this business? Why? You know,

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Adam Sklar: are some of these huge firms, you know, winning all

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Adam Sklar: of these loans? Are they the best lender to a

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Adam Sklar: certain industry, to a certain type of borrower? And I

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Adam Sklar: think software really stands out, which seems like a great

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Adam Sklar: place to be until you have a potential for technological

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Adam Sklar: disintermediation and disruption in the form of AI that could

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Adam Sklar: be really significant risk to your question, I think it's

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Adam Sklar: too early right now to know, but that is, you know,

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Adam Sklar: it's a notable element that I think bears Mentioning.

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Irene Garcia Perez: You were on this point of BDC's exposure to legacy

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Irene Garcia Perez: SaaS businesses, there was another trend in that space that

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Irene Garcia Perez: some people were pointing as potentially problematic in the future,

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Irene Garcia Perez: which is the amount of peak loans that are in

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Irene Garcia Perez: those vehicles. Have you seen any opportunities emerge for monarch

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Irene Garcia Perez: or funds like Monarch that are more focused on opportunistic

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Irene Garcia Perez: credit emerge from these issues emerging in private credit.

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Adam Sklar: So, just to clarify, I think you're absolutely correct. We

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Adam Sklar: have noticed and the public markets I think have taken

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Adam Sklar: notice that the percentage of picking debt within some of

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Adam Sklar: the public BDC portfolios has gone up, and in some

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Adam Sklar: instances is fifteen twenty twenty five percent of these portfolios.

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Adam Sklar: It's hard for me to tell, based on the public

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Adam Sklar: disclosure whether or not those were originated as picking loans

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Adam Sklar: or they went through some type of amend and extend process.

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Adam Sklar: The businesses were weakened from when they were underwritten, and

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Adam Sklar: thus they needed that pick because they couldn't afford the

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Adam Sklar: cash interest, which would obviously send a very negative signal.

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Adam Sklar: So I just want to mention that. But factually, there

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Adam Sklar: is a lot of picking debt in these portfolios, and

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Adam Sklar: I do think it's a cause for some concern in

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Adam Sklar: terms of opportunity. You know, we at Monarch are really

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Adam Sklar: trying to be a first lean lender, so we want

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Adam Sklar: to stay at the top of the capital structure, and

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Adam Sklar: really what part of what's core to our strategy is,

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Adam Sklar: you know, we're looking for situations where it may be

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Adam Sklar: unclear what's going to happen to the equity of the business.

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Adam Sklar: You know, is the sponsor or owner of the business

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Adam Sklar: in the money, are they going to have a success

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Adam Sklar: for exit, or there could be some junior debt instrument

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Adam Sklar: that may have to equitize, and we seek to get

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Adam Sklar: paid a premium, you know, premium rate of interest or

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Adam Sklar: premium spread by buying debt at a discount a dollar

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Adam Sklar: price for the volatility that's below us in the capital structure.

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Adam Sklar: That leads itself to we are seeing opportunities in these

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Adam Sklar: types of situations, but oftentimes it's where we're coming in

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Adam Sklar: as a new lender, not buying their debt at a discount.

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Adam Sklar: And so the answer is yes, but it's not you know,

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Adam Sklar: we haven't seen that many instances where a BDC or

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Adam Sklar: a private credit institution is coming to sell us their

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Adam Sklar: debt on the secondary market. It's been more so that

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Adam Sklar: we're part of a new capital structure that would either

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Adam Sklar: take them out in part or in full or otherwise.

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Adam Sklar: And but yes, I mean there's as they've taken more

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Adam Sklar: and more market share from the BSL market, we're going

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Adam Sklar: to be interact with them more and more.

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Irene Garcia Perez: Right and in terms of industries and geographies, where are

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Irene Garcia Perez: you looking for opportunities?

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Adam Sklar: Is this yep? So we came through a period, as

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Adam Sklar: I said, it was just a tremendous environment to be

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Adam Sklar: a credit investor in twenty twenty three and twenty twenty

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Adam Sklar: four for our strategy for other strategies, and so with

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Adam Sklar: the end of MMT and QE forever or whatever, you know,

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Adam Sklar: everyone has their own name. For the period of extraordinary

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Adam Sklar: monetary policy we came through, you know, with interest rates

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Adam Sklar: rising at unprecedented rate. Defensives were really center stage for

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Adam Sklar: US and went through sector level cycles in things like telecom, healthcare,

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Adam Sklar: real estate, and so those were huge areas of focus

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Adam Sklar: in twenty twenty three and twenty twenty four. Coming into

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Adam Sklar: this year, spreads at the index level were fairly tight.

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Adam Sklar: But as I mentioned earlier, what we've started to see

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Adam Sklar: the sectors we're seeing increasing our opportunities are really in cyclicals,

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Adam Sklar: so autos, cams, packaging, we're seeing a significant pickup in

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Adam Sklar: the opportunity set there. And then also as I mentioned,

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Adam Sklar: in software less so in we're not seeing volatility or

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Adam Sklar: cyclicality and real time results, but the cost of capital

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Adam Sklar: to those businesses and capital formation surrounding the software sector

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Adam Sklar: has become much tighter, and that's leading to both a

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Adam Sklar: rerating in the secondary market, you know, in levered loans

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Adam Sklar: and high bonds and also, you know, companies that may

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Adam Sklar: need to refinance debt coming to us more actively because

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Adam Sklar: their prospects to find new capital are are much more

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Adam Sklar: limited today.

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Irene Garcia Perez: If we had recorded this podcast, say six months ago,

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Irene Garcia Perez: we would have spent a good amount of time talking

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Irene Garcia Perez: about tariffs. Now, the goal post has changed a fair

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Irene Garcia Perez: bit since they were first announced, but a number of

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Irene Garcia Perez: the industries that you mentioned, as you know, opportunities or

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Irene Garcia Perez: offer opportunities because of this weaker micro environment. Also in

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Irene Garcia Perez: this ven diagram of tariffs, in particular chemicals and the

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Irene Garcia Perez: auto space, have you seen any other industries or any

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Irene Garcia Perez: other opportunities emerging from these tariffs, and if not yet,

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Irene Garcia Perez: like do you expect to see them at this stage?

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Adam Sklar: It's a great question. Through my lens, I think the

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Adam Sklar: issue that tariffs have created and are creating really goes

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Adam Sklar: to the point on you know, real spending power being constrained.

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Adam Sklar: And so if you looked at a chart of wage growth,

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Adam Sklar: nominal or real wage growth, it peaked in twenty twenty one,

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Adam Sklar: early twenty twenty two, and it's just been dropping since.

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Adam Sklar: When you change trade policy and increased tariffs, you know,

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Adam Sklar: there's been both through the general inflation environment, we've been

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Adam Sklar: in in the US, combined now with this change in

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Adam Sklar: trade policy, there's this huge impetus amongst consumer facing businesses

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Adam Sklar: to take price and so I think the tariff story

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Adam Sklar: really dovetails into the fact that, you know, the consumers

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Adam Sklar: getting squeezed. Nominal wage growth is decelerating. We're really not

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Adam Sklar: adding net jobs on a monthly basis, which is in

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Adam Sklar: disha of a labor market that's gone from being incredibly

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Adam Sklar: tight to now softening. And you know, when you look

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Adam Sklar: through CPI, which has been sticky at the headline level,

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Adam Sklar: you know, I think partially due to the tariff point

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Adam Sklar: partially due to other factors, it's worse, you know, than

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Adam Sklar: the headline data would indicate. I was looking at you know,

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Adam Sklar: healthcare costs. Healthcare costs and CPI are up three point

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Adam Sklar: four percent year of year. But I was reading a

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Adam Sklar: report the PwC put out stating that on a commercial basis,

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Adam Sklar: for commercial payers, healthcare costs are up eight percent year

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Adam Sklar: of year. Healthcare is one of the biggest you know,

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Adam Sklar: inputs into you know, the consumer space ending basket. Then

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Adam Sklar: you look at food, well, in home, you know, grocery

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Adam Sklar: store food prices have been you know, that has been

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Adam Sklar: decelerating and that's growing at around three percent. But if

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Adam Sklar: you look at out of home food, so when people

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Adam Sklar: go and eat in restaurants, you know that's closer to

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Adam Sklar: four and a half to five percent up year of year.

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Adam Sklar: And so when you really start looking at what the

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Adam Sklar: consumer is exposed to, you know there there's a lot

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Adam Sklar: of real spending power pressure, and you know, tariffs are

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Adam Sklar: a part of that story. It's hard for me to disaggregate,

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Adam Sklar: you know, where and when they're most impactful. You know,

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Adam Sklar: one sector where I know they are very impactful is

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Adam Sklar: in brick and mortar retail, but there because of everything

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Adam Sklar: that's gone on in that space over the past ten years,

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Adam Sklar: it's really not a big part of our market anymore

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Adam Sklar: and not a sector that we focus on.

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Negisa Balluku: Adam, I wanted to move on to a pretty big

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Negisa Balluku: topic for the past five years or so, there's no

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Negisa Balluku: secret that obviously because of costs, primarily perhaps bankruptcies have

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Negisa Balluku: gotten more and more truncated. And this is sort of

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Negisa Balluku: the past ten fifteen years. And then because of those

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Negisa Balluku: loose documents of again past ten fifteen years, we've arrived

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Negisa Balluku: in the past five your series of this explosion of

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Negisa Balluku: the lemes. I guess first I want to I want

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Negisa Balluku: to ask as to how custom investors are at this

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Negisa Balluku: out of court fix now, because it almost seems like

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Negisa Balluku: it's an expected stepping stone to a Chapter eleven filing.

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Negisa Balluku: And then on that I want to also ask as

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Negisa Balluku: to how this shift from in court solution to in

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Negisa Balluku: boardroom solutions so to speak, has, as far as restructuring goes,

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Negisa Balluku: has impacted your investment decisions.

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Adam Sklar: So you are absolutely correct. LME has become, you know,

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Adam Sklar: a huge part of what it means to be an

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Adam Sklar: opportunistic credit investor and has been a tool that sponsors

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Adam Sklar: and businesses have used to deal with their capital structures.

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Adam Sklar: You know, just to frame it a little bit, I

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Adam Sklar: would say, it's a very logical step in the evolution

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Adam Sklar: of a business that, as I mentioned earlier, may have

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Adam Sklar: you know, some is experiencing some type of issue that

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Adam Sklar: was unforeseen at underwrite. You know, sponsor's equity is not

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Adam Sklar: accreting at twenty percent a year and we're moving towards

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Adam Sklar: a sale. Something else has happened and maybe the sponsor

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Adam Sklar: needs more time where the business needs more liquidity, And

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Adam Sklar: so you know, in the broadest strokes, what's what's what's

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Adam Sklar: happening is the sponsor is taking very open restricted payments

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Adam Sklar: and investment capacity, which is you know, in the documents

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Adam Sklar: you referenced, and is trading that for term in some

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Adam Sklar: instances liquidity and in some instances discount capture to delever

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Adam Sklar: a bit. And so that is a very very notable

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Adam Sklar: part of being an opportunistic player in in the levered

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Adam Sklar: loan market in terms of you know, how that's impacted us,

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Adam Sklar: I think in our process. I think from our perspective,

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Adam Sklar: it's incredibly important to be a student of all of

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Adam Sklar: the precedent transactions to understand, you know, how sponsors will

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Adam Sklar: look to handle, you know, whether it's a pending maturity

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Adam Sklar: or the need for some of the elements I mentioned,

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Adam Sklar: and to try to look at a potential investment in

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Adam Sklar: the secondary market and some of these in some of

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Adam Sklar: these capital structures through the appropriate lens, baking in the

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Adam Sklar: fact that there may be an extension of the maturity.

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Adam Sklar: So maybe the yield to maturity isn't what you thought

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Adam Sklar: because the debt will be extended. Discount capture is obvious,

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Adam Sklar: we need to bake that in, you know, to have

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Adam Sklar: a margin of safety and the price we're willing to

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Adam Sklar: pay for something. If creditors are going to agree to

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Adam Sklar: take a haircut to the face amount of their debt

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Adam Sklar: and liquidity, frankly, can be a huge opportunity for us.

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Adam Sklar: We can deploy incremental capital at a very low LTV

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Adam Sklar: generally at really attractive spreads. So there's a number of

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Adam Sklar: things to consider, but it's been it's been a positive

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Adam Sklar: for us in two ways. One, I think the price

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Adam Sklar: of a loan in deals in businesses that are going

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Adam Sklar: through some type of you know, transitory issue, the loan

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Adam Sklar: not only has to reflect the fundamental value the market's

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Adam Sklar: willing to ascribe to the business, but also the prospect

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Adam Sklar: for the lme. And what that does is that generally

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Adam Sklar: creates another ten twenty points of trading price discount to

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Adam Sklar: account for the fact that the future of the capital

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Adam Sklar: structure is somewhat uncertain. And you know, for us, you know,

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Adam Sklar: who are constantly playing in that market, you know, we

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Adam Sklar: think there's we think there's alpha there and capturing some

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Adam Sklar: of that discount.

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Negisa Balluku: How do you define all this curious as is, how

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Negisa Balluku: do you define success in that space? Because it could

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Negisa Balluku: mean different things to all the parties involved in that

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Negisa Balluku: big ecosystem. Obviously, one simple way to view it is

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Negisa Balluku: whether the company ends up by in a year, two years,

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Negisa Balluku: three years, and we see that that happens all the time, right,

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Negisa Balluku: But also you're also often times are looking with an

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Negisa Balluku: I who was positioning yourself better or while for that

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Negisa Balluku: eventual bankruptcy. How do you view success in that space

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Negisa Balluku: when you're evaluating your choices.

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Adam Sklar: Yeah, Look, it goes to a point. I mean, we

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Adam Sklar: need to be for investors in the credit markets, we

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Adam Sklar: need to be experts. We need to be great at

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Adam Sklar: process and understanding obviously the credit documents that we're investing in,

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Adam Sklar: but we also have to be good investors, you know,

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Adam Sklar: and pick businesses that you know perform to our underwriting

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Adam Sklar: and so, you know, we generally view ourselves as transitional capital.

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Adam Sklar: We're coming to a situation because there's some type of complexity,

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Adam Sklar: and we attempt to find great businesses or great assets

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Adam Sklar: and underwrite through that. In terms of success in an

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Adam Sklar: LME setting, I do think there's an element of trying

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Adam Sklar: to find a win win, you know, where it's a

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Adam Sklar: success for us as stakeholders and the credit part of

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Adam Sklar: the capital structure, but it also should be a success

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Adam Sklar: for the sponsor. And so I define that as creating,

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Adam Sklar: to your point earlier, an efficient process where the alternative

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Adam Sklar: of going through a formal restructuring the feebur and would

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Adam Sklar: be materially higher. So you're saving what can be hundreds

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Adam Sklar: of millions of dollars in fees and expenses that otherwise

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Adam Sklar: could go into the business, and you know, providing a

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Adam Sklar: capital structure that's more sustainable and has more runway for

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Adam Sklar: the business to turn around or continue to perform. And

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Adam Sklar: you know, and that's how we define success. It's not

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Adam Sklar: you know, we don't know what's going to happen two, three,

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Adam Sklar: four years forward, and so I think it's unfair at

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Adam Sklar: the time of the LME to you know, fully burden

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Adam Sklar: yourself with what may occur three years down the road. Now,

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Adam Sklar: if there's things that are apparent to you at the time,

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Adam Sklar: you know, some impending issue, you know, that would be

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Adam Sklar: a bit silly to go through an LME process to

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Adam Sklar: then only end up in bankruptcy six months later. I

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Adam Sklar: can't think of one instance we've been involved in where that,

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Adam Sklar: you know, that was our perspective at the time.

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Negisa Balluku: Yeah, I mean I always wonder because how you incorporate

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Negisa Balluku: restructuring costs long term because you could potentially have this

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Negisa Balluku: multiple rounds of restructuring that also layer costs when you

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Negisa Balluku: have LME, but then you could have a bridge loan

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Negisa Balluku: and then you have the dip and then the exit loans,

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Negisa Balluku: so that that kind of ends up over time when

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Negisa Balluku: the company eventually fails. But one quick question that you

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Negisa Balluku: mentioned earlier that you are typically on the top or

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Negisa Balluku: try to be, in the tablo cavalty structure. And we're

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Negisa Balluku: the point when we hear so much about this new

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Negisa Balluku: environment we're on and this new weather you call it

421
00:24:39,080 --> 00:24:41,760
Negisa Balluku: two point h or three point zero. Where is this

422
00:24:41,840 --> 00:24:45,000
Negisa Balluku: idea that lenders are going towards the sponsor sort of

423
00:24:45,040 --> 00:24:48,119
Negisa Balluku: joining arms and then there's power in numbers, and that

424
00:24:48,520 --> 00:24:50,919
Negisa Balluku: co ops are kind of the main topic and we

425
00:24:50,960 --> 00:24:54,560
Negisa Balluku: hear about so much. But I also wonder, being on

426
00:24:54,680 --> 00:24:57,920
Negisa Balluku: the oftentime, being on the tabolo cavialty structure, how you

427
00:24:57,960 --> 00:25:02,240
Negisa Balluku: think of flexibility. Is there are always best to insert

428
00:25:02,280 --> 00:25:04,600
Negisa Balluku: yourself on the early in the process. Are there times

429
00:25:04,600 --> 00:25:07,000
Negisa Balluku: when signing a co op may not make sense? How

430
00:25:07,040 --> 00:25:09,640
Negisa Balluku: proactive you are, and when it makes sense to engage

431
00:25:09,680 --> 00:25:12,040
Negisa Balluku: with a sponsor whatnot? How do you think of that

432
00:25:12,080 --> 00:25:15,119
Negisa Balluku: in those at least in those early stages when anelemie

433
00:25:15,160 --> 00:25:16,879
Negisa Balluku: is potentially being considered.

434
00:25:17,240 --> 00:25:20,920
Adam Sklar: Great question, very tough to answer generically. I mean, co

435
00:25:21,000 --> 00:25:24,440
Adam Sklar: ops really shouldn't be a one size fits all exercise.

436
00:25:24,880 --> 00:25:28,720
Adam Sklar: They're appropriate in certain instances where there may be certain

437
00:25:28,800 --> 00:25:31,560
Adam Sklar: dynamics at play. One thing that comes to mind is

438
00:25:32,240 --> 00:25:35,120
Adam Sklar: sometimes we you know, we're buying debt of a business

439
00:25:35,440 --> 00:25:38,520
Adam Sklar: in the secondary market, We you know, show up to

440
00:25:38,560 --> 00:25:40,840
Adam Sklar: an ad hoc group that's already been formed, and maybe

441
00:25:40,880 --> 00:25:43,440
Adam Sklar: there are two groups, and so rather than going down

442
00:25:43,480 --> 00:25:46,760
Adam Sklar: a path of having two groups quote unquote bidding against

443
00:25:46,800 --> 00:25:51,359
Adam Sklar: themselves to come together, you know, and sign a co op,

444
00:25:51,680 --> 00:25:54,120
Adam Sklar: you know, maybe logical, they're also you know, we haven't

445
00:25:54,119 --> 00:25:56,840
Adam Sklar: spoken about this yet, but oftentimes we get involved in

446
00:25:56,880 --> 00:25:59,640
Adam Sklar: capital structures where there may be multiple tranches of debt.

447
00:26:00,200 --> 00:26:03,320
Adam Sklar: So there could be think about a capital structure where

448
00:26:03,320 --> 00:26:07,720
Adam Sklar: there's a senior secured loan, unsecured bonds, and then equity.

449
00:26:08,160 --> 00:26:10,760
Adam Sklar: You know, maybe some of the creditors own the unsecured bonds,

450
00:26:10,800 --> 00:26:14,159
Adam Sklar: others don't. That could be another impetus for having a

451
00:26:14,200 --> 00:26:16,080
Adam Sklar: co op where you know, it could be viewed as

452
00:26:16,119 --> 00:26:20,359
Adam Sklar: mutually beneficial, but it's really hard to speak about them generally. Also,

453
00:26:20,400 --> 00:26:23,360
Adam Sklar: the terms of co ops can be very different, so

454
00:26:23,480 --> 00:26:25,240
Adam Sklar: it's hard for me to speak at a high level.

455
00:26:25,680 --> 00:26:28,680
Adam Sklar: But it really goes to say, it's another example of,

456
00:26:28,920 --> 00:26:31,159
Adam Sklar: you know, an element of why it's very hard to

457
00:26:31,160 --> 00:26:33,960
Adam Sklar: be a tourist in this space. This is part of

458
00:26:34,040 --> 00:26:37,200
Adam Sklar: our core business. It's what we do every day, and

459
00:26:37,240 --> 00:26:39,840
Adam Sklar: so it's it's it's become harder and harder, I think

460
00:26:40,200 --> 00:26:43,440
Adam Sklar: to step into some of these, you know, more opportunistic

461
00:26:44,640 --> 00:26:47,240
Adam Sklar: loans or bonds to trade in the secondary market without

462
00:26:47,320 --> 00:26:49,400
Adam Sklar: understanding these dynamics.

463
00:26:49,640 --> 00:26:52,840
Irene Garcia Perez: Are you seeing an increased staff or by the sponsors

464
00:26:53,000 --> 00:26:57,400
Irene Garcia Perez: and or their advisors to try to blog early on

465
00:26:57,720 --> 00:27:02,360
Irene Garcia Perez: this type of arrangements or again say from predators. Mostly

466
00:27:02,520 --> 00:27:06,000
Irene Garcia Perez: I'm asking if you're seeing more deals because I would

467
00:27:06,040 --> 00:27:09,240
Irene Garcia Perez: imagine typically that happens more in primary issue that you

468
00:27:09,320 --> 00:27:12,480
Irene Garcia Perez: have to like just included in the new language early on.

469
00:27:12,840 --> 00:27:16,199
Irene Garcia Perez: But I was wondering maybe in some amends and extent,

470
00:27:16,359 --> 00:27:18,840
Irene Garcia Perez: since you're there, you can also like take the language

471
00:27:18,840 --> 00:27:21,960
Irene Garcia Perez: and include something just in case in the future.

472
00:27:22,320 --> 00:27:26,639
Adam Sklar: Yeah, I will say, never underestimate the creativity of the

473
00:27:26,680 --> 00:27:32,160
Adam Sklar: bankruptcy bar and the sponsor community. So without getting into specifics,

474
00:27:32,960 --> 00:27:37,240
Adam Sklar: things like DQ lists or even NDAs you know that

475
00:27:37,640 --> 00:27:41,920
Adam Sklar: can certainly, you know there's an attempt to weaponize those

476
00:27:41,920 --> 00:27:46,479
Adam Sklar: things at times, but overall, I wouldn't say there's been

477
00:27:46,520 --> 00:27:50,520
Adam Sklar: a material change from what we've experienced over the past five, ten,

478
00:27:50,600 --> 00:27:51,880
Adam Sklar: fifteen years.

479
00:27:52,240 --> 00:27:56,200
Negisa Balluku: Any thoughts to get specific maybe on the anti boycotting

480
00:27:56,280 --> 00:27:58,520
Negisa Balluku: language in order of brothers and whether that could be

481
00:27:59,359 --> 00:28:01,720
Negisa Balluku: viewed as a way of precursors to the anti co

482
00:28:01,800 --> 00:28:04,400
Negisa Balluku: op language that we keep hearing about that, I don't

483
00:28:04,440 --> 00:28:07,399
Negisa Balluku: think it's actually made it into any of the documents,

484
00:28:07,440 --> 00:28:11,280
Negisa Balluku: any kind of any thoughts there. It's really mainly prohibiting

485
00:28:12,320 --> 00:28:15,480
Negisa Balluku: the ability of current lenders to prohibit third party financing.

486
00:28:15,520 --> 00:28:18,679
Negisa Balluku: But there's some thoughts that could be potentially a precursor

487
00:28:18,720 --> 00:28:21,680
Negisa Balluku: to anti co op language that it hasn't It hasn't

488
00:28:21,680 --> 00:28:22,720
Negisa Balluku: gotten to that point yet.

489
00:28:22,960 --> 00:28:25,600
Adam Sklar: Yeah, I've heard, we've we've seen a few instances of

490
00:28:26,160 --> 00:28:29,440
Adam Sklar: anti co op language or things that I would say,

491
00:28:29,520 --> 00:28:33,679
Adam Sklar: or maybe a cousin to what you're describing, where you

492
00:28:33,720 --> 00:28:39,240
Adam Sklar: know someone in the advisor group or sponsor group or

493
00:28:39,240 --> 00:28:42,520
Adam Sklar: the owner of the business wants to kind of pre

494
00:28:42,600 --> 00:28:47,600
Adam Sklar: wire or restrict what may occur in the future. Those

495
00:28:47,640 --> 00:28:50,600
Adam Sklar: things that my experience are tough and frankly it may

496
00:28:50,600 --> 00:28:54,120
Adam Sklar: be diletarious. They may think that is a positive for

497
00:28:54,160 --> 00:28:57,080
Adam Sklar: them for their interests, but these things can be so

498
00:28:57,160 --> 00:29:01,640
Adam Sklar: unpredictable the way they go that for closing, optionality you know,

499
00:29:01,680 --> 00:29:04,280
Adam Sklar: may actually be a negative. So it's not something that

500
00:29:04,320 --> 00:29:07,920
Adam Sklar: I've seen become like a major market theme.

501
00:29:08,520 --> 00:29:11,680
Negisa Balluku: Well, I think for closing, optionality goes both ways sometimes, right.

502
00:29:11,720 --> 00:29:14,400
Negisa Balluku: I think that's probably the reason from the lenders perspective,

503
00:29:14,720 --> 00:29:17,960
Negisa Balluku: what we haven't seen omni blockers being deployed. They haven't

504
00:29:17,960 --> 00:29:21,120
Negisa Balluku: gotten much traction with some one in spirit and that's

505
00:29:21,360 --> 00:29:23,720
Negisa Balluku: kind of made sense there. We know that now, but

506
00:29:24,080 --> 00:29:26,680
Negisa Balluku: typically speaking, we're not seeing the much of an effort

507
00:29:26,760 --> 00:29:30,200
Negisa Balluku: to insert those in even Postell and me, maybe.

508
00:29:30,800 --> 00:29:33,800
Irene Garcia Perez: I wanted to go back to AI for a moment

509
00:29:34,040 --> 00:29:38,840
Irene Garcia Perez: you were mentioning earlier in the case of legacy SaaS

510
00:29:38,880 --> 00:29:43,160
Irene Garcia Perez: businesses that you look into, if AI poses a risk

511
00:29:43,200 --> 00:29:47,840
Irene Garcia Perez: to those cash flows, how does your team approach the

512
00:29:48,080 --> 00:29:51,480
Irene Garcia Perez: AI impact? Because in some even in some distress situations,

513
00:29:51,520 --> 00:29:55,360
Irene Garcia Perez: I can imagine businesses where AI could be a positive

514
00:29:55,400 --> 00:29:59,600
Irene Garcia Perez: and in others where it's actually a threat to the business.

515
00:29:59,760 --> 00:30:03,280
Irene Garcia Perez: But even with the its. In some cases is technology

516
00:30:03,280 --> 00:30:06,480
Irene Garcia Perez: that is already there or it's being developed. In other

517
00:30:06,560 --> 00:30:08,560
Irene Garcia Perez: cases is like what you think it, Yeah, you may

518
00:30:08,600 --> 00:30:10,920
Irene Garcia Perez: be able to do in five to seven years. So

519
00:30:11,120 --> 00:30:13,720
Irene Garcia Perez: how does your team approach this element?

520
00:30:14,280 --> 00:30:16,960
Adam Sklar: It is a huge area of focus for us internally,

521
00:30:18,040 --> 00:30:22,320
Adam Sklar: to the point where it's pretty abnormal for us to do.

522
00:30:22,880 --> 00:30:25,360
Adam Sklar: You know, we'll have a credit review and then have

523
00:30:25,440 --> 00:30:28,640
Adam Sklar: four or five internal meetings subsequently just to dig into

524
00:30:28,680 --> 00:30:32,920
Adam Sklar: the topic, almost like a special research project of how

525
00:30:33,080 --> 00:30:38,720
Adam Sklar: AI could or may or is impacting some of these credits.

526
00:30:39,680 --> 00:30:42,640
Adam Sklar: It's hard to talk about it monolithically because within software

527
00:30:42,680 --> 00:30:47,440
Adam Sklar: there's so many sub segments of that market, and but

528
00:30:48,080 --> 00:30:50,480
Adam Sklar: the pace at which we're looking at new opportunities is

529
00:30:50,520 --> 00:30:55,840
Adam Sklar: so robust that we're effectively going through whether it's cyber workflows,

530
00:30:55,960 --> 00:30:58,719
Adam Sklar: data management, you know, we're going through each sub segment

531
00:30:59,280 --> 00:31:03,120
Adam Sklar: and doing our best to come up with views, you know,

532
00:31:03,240 --> 00:31:06,720
Adam Sklar: as you'd expect. It's it's almost like a quadrant analysis

533
00:31:07,240 --> 00:31:11,160
Adam Sklar: where we're looking at you know, we're making certain assessments

534
00:31:11,640 --> 00:31:19,280
Adam Sklar: about disintermediation risk based on the customer type. You know,

535
00:31:19,440 --> 00:31:23,880
Adam Sklar: is it on prem or off prem? Is who does

536
00:31:23,920 --> 00:31:27,600
Adam Sklar: the business compete with you know, are they what is

537
00:31:27,640 --> 00:31:31,000
Adam Sklar: their ability to utilize AI? What is the customer's ability

538
00:31:31,080 --> 00:31:33,880
Adam Sklar: or willingness or desire to utilize AI? And we're making

539
00:31:33,880 --> 00:31:39,200
Adam Sklar: assessments based on you know, a huge checklist of considerations.

540
00:31:39,600 --> 00:31:43,520
Adam Sklar: Is that going to be perfect, No, but it's starting

541
00:31:43,560 --> 00:31:46,760
Adam Sklar: to give us a framework, you know, as to where

542
00:31:46,800 --> 00:31:49,800
Adam Sklar: we you know, where we see more susceptibility than not.

543
00:31:50,280 --> 00:31:52,440
Adam Sklar: And again, because we're generally playing at the top of

544
00:31:52,480 --> 00:31:55,400
Adam Sklar: the capital structure, we believe that we're going into these

545
00:31:55,400 --> 00:31:58,640
Adam Sklar: situations if we decide to invest with a very significant

546
00:31:58,680 --> 00:32:01,920
Adam Sklar: margin of safety beneath us. And so we're trying to

547
00:32:01,920 --> 00:32:03,720
Adam Sklar: set up a framework where we want to feel as

548
00:32:03,800 --> 00:32:07,880
Adam Sklar: comfortable making those investment decisions on the future of these

549
00:32:07,920 --> 00:32:11,240
Adam Sklar: businesses in the same way we would a chemicals company,

550
00:32:11,560 --> 00:32:14,680
Adam Sklar: a packaging business, et cetera. That the issue is is

551
00:32:14,720 --> 00:32:18,600
Adam Sklar: that we've been investing in keems or packaging or housing,

552
00:32:18,680 --> 00:32:21,640
Adam Sklar: et cetera for decades. You know, software has just not

553
00:32:21,640 --> 00:32:24,600
Adam Sklar: been an area where we have as much you know, experience,

554
00:32:24,680 --> 00:32:28,280
Adam Sklar: and so we're we're dedicating a huge amount of resources

555
00:32:28,720 --> 00:32:30,920
Adam Sklar: to try to get up the curve. And again, as

556
00:32:30,960 --> 00:32:33,520
Adam Sklar: I mentioned earlier, we have to get the capital structure

557
00:32:33,520 --> 00:32:36,320
Adam Sklar: and the process right. But we also, to your point,

558
00:32:36,640 --> 00:32:39,880
Adam Sklar: have to you know, there's a risk and there's capital

559
00:32:39,880 --> 00:32:42,160
Adam Sklar: flight from the sector for a reason, and we have

560
00:32:42,200 --> 00:32:45,840
Adam Sklar: to get that right. And it's certainly it's certainly not easy.

561
00:32:46,160 --> 00:32:48,680
Adam Sklar: So it's a huge topic. It kind of goes to

562
00:32:48,720 --> 00:32:52,280
Adam Sklar: a broader point which you know, we haven't talked about yet.

563
00:32:52,280 --> 00:32:55,800
Adam Sklar: But it's pretty remarkable that, you know, high yield spreads

564
00:32:55,800 --> 00:32:58,520
Adam Sklar: are at their ninety fifth percentile. And I think a

565
00:32:58,520 --> 00:33:01,280
Adam Sklar: lot of people would listen to this and say smps

566
00:33:01,360 --> 00:33:04,120
Adam Sklar: at or near all time highs every day. You know,

567
00:33:04,240 --> 00:33:06,880
Adam Sklar: credit spreads are so tight. What is this guy talking about?

568
00:33:07,640 --> 00:33:10,760
Adam Sklar: But there's a lot beneath the surface to look at

569
00:33:10,760 --> 00:33:13,080
Adam Sklar: and talk about, and there's a huge amount of dispersion

570
00:33:13,560 --> 00:33:16,640
Adam Sklar: within the credit markets, and so I just wanted I

571
00:33:16,640 --> 00:33:19,840
Adam Sklar: didn't really mention that upfront, but I think it's a

572
00:33:19,880 --> 00:33:23,800
Adam Sklar: really notable element to this discussion. And yes, software is

573
00:33:23,840 --> 00:33:26,160
Adam Sklar: a huge part of the market. Frankly, even as someone

574
00:33:26,200 --> 00:33:28,640
Adam Sklar: who has grown up in credit, you know, I've lived

575
00:33:28,640 --> 00:33:31,480
Adam Sklar: in these markets for the last nineteen years. If you

576
00:33:31,520 --> 00:33:35,000
Adam Sklar: had asked me two years ago what percentage of private

577
00:33:35,000 --> 00:33:38,000
Adam Sklar: credit was lending to software, I just would have had

578
00:33:38,040 --> 00:33:41,080
Adam Sklar: no idea it's as large as it is, and so

579
00:33:41,160 --> 00:33:45,520
Adam Sklar: these are really big spaces, and you know, the impact

580
00:33:45,600 --> 00:33:47,560
Adam Sklar: that AI is going to have not only on software,

581
00:33:47,600 --> 00:33:50,280
Adam Sklar: by the way, on other businesses were involved in as well,

582
00:33:50,840 --> 00:33:54,720
Adam Sklar: whether it be positive or negative to your point, is nascent,

583
00:33:54,760 --> 00:33:57,360
Adam Sklar: but the rate of change is really fast, and so

584
00:33:57,520 --> 00:34:00,200
Adam Sklar: in something that in previous cycles may have taken five

585
00:34:00,320 --> 00:34:03,760
Adam Sklar: years for us to fully know what the impact, my

586
00:34:03,840 --> 00:34:06,640
Adam Sklar: concern is now you know, maybe six months or twelve

587
00:34:06,680 --> 00:34:10,320
Adam Sklar: months or eighteen months, and so the duration of those

588
00:34:10,760 --> 00:34:14,480
Adam Sklar: revenues or that cash flow that we're banking on, you know,

589
00:34:14,560 --> 00:34:17,560
Adam Sklar: maybe more volatile than even we perceive. And it's something

590
00:34:17,800 --> 00:34:19,359
Adam Sklar: you know that we're pressure testing every day.

591
00:34:20,600 --> 00:34:22,239
Irene Garcia Perez: Right. Does that mean that you will have at some

592
00:34:22,320 --> 00:34:26,319
Irene Garcia Perez: point maybe to ask the companies to send you financials

593
00:34:26,360 --> 00:34:28,759
Irene Garcia Perez: monthly as opposed to qually to check for that.

594
00:34:29,200 --> 00:34:32,319
Adam Sklar: I don't think we're quite at that point, but yet,

595
00:34:32,400 --> 00:34:36,120
Adam Sklar: I mean we're we're certainly monitoring these things incredibly closely

596
00:34:36,160 --> 00:34:39,279
Adam Sklar: and again in a regular way kind of if you

597
00:34:39,320 --> 00:34:43,080
Adam Sklar: think about the Russell versus the mag seven, you know,

598
00:34:43,120 --> 00:34:46,879
Adam Sklar: we're often investing in value businesses, companies that would be

599
00:34:47,200 --> 00:34:49,960
Adam Sklar: if they were public in the Russell and there again

600
00:34:50,239 --> 00:34:54,240
Adam Sklar: based on our own experience and those sectors and generally

601
00:34:54,239 --> 00:34:58,280
Adam Sklar: how those sectors perform. You know, we don't to your point,

602
00:34:58,360 --> 00:35:02,520
Adam Sklar: have to be monitoring things monthly, you know, generally, but

603
00:35:02,600 --> 00:35:05,319
Adam Sklar: with this, you know, we are acutely focused on the

604
00:35:05,360 --> 00:35:08,560
Adam Sklar: topic and we're trying to leverage our resources to get

605
00:35:08,560 --> 00:35:10,360
Adam Sklar: as smart as possible, as quickly as possible.

606
00:35:11,760 --> 00:35:15,400
Irene Garcia Perez: You were mentioning earlier in real estate, commercial real estate,

607
00:35:15,560 --> 00:35:18,239
Irene Garcia Perez: which has gone through a lot in the past five

608
00:35:18,360 --> 00:35:21,640
Irene Garcia Perez: to ten years, is not that appealing these days. Brick

609
00:35:21,719 --> 00:35:24,680
Irene Garcia Perez: and mortar in particular, Where do you see in real estate?

610
00:35:24,680 --> 00:35:27,759
Irene Garcia Perez: Where do you see attractive pockets these days?

611
00:35:27,920 --> 00:35:30,160
Adam Sklar: Yeah? Sorry, just to clarify, I was talking about brick

612
00:35:30,200 --> 00:35:34,319
Adam Sklar: and mortar retail. So the retailers is just not most

613
00:35:34,360 --> 00:35:37,040
Adam Sklar: of them have no debt because of the retail apocalypse

614
00:35:37,080 --> 00:35:40,120
Adam Sklar: in twenty seventeen, and what's happened to that sector since

615
00:35:40,600 --> 00:35:43,520
Adam Sklar: there's not a lot of actionable opportunities for us in

616
00:35:43,560 --> 00:35:46,960
Adam Sklar: that space. In real estate to your point, you know,

617
00:35:47,000 --> 00:35:52,360
Adam Sklar: real estate went through a very very violent adjustment in

618
00:35:52,440 --> 00:35:55,120
Adam Sklar: twenty twenty three and twenty twenty four as a function

619
00:35:55,160 --> 00:35:58,920
Adam Sklar: of interest rates moving up and thus cap rates moving wider,

620
00:35:59,320 --> 00:36:03,680
Adam Sklar: so valueuation multiples coming down. And then within certain pockets

621
00:36:03,680 --> 00:36:06,280
Adam Sklar: of the commercial real estate space, you know, there's been

622
00:36:06,520 --> 00:36:11,080
Adam Sklar: there's been some some idiot more idiosyncratic issues fundamentally, and

623
00:36:11,160 --> 00:36:14,759
Adam Sklar: so that sector really re rated over the past two

624
00:36:14,840 --> 00:36:17,719
Adam Sklar: year A few years now, you know, I'm seeing much

625
00:36:17,760 --> 00:36:21,520
Adam Sklar: more volatility in the corporate credit space, and real estate

626
00:36:21,600 --> 00:36:24,760
Adam Sklar: I think should be on stronger footing. One really positive

627
00:36:24,760 --> 00:36:26,719
Adam Sklar: thing for commercial real estate in the US is where

628
00:36:26,719 --> 00:36:29,279
Adam Sklar: we are in the capital cycle. So what happened, you know,

629
00:36:29,400 --> 00:36:32,880
Adam Sklar: interest rates rose, obviously, as I mentioned, you know, valuation

630
00:36:33,000 --> 00:36:36,720
Adam Sklar: multiples came down, a lot of capital destruction in that space.

631
00:36:37,160 --> 00:36:39,799
Adam Sklar: But partially what that's led to is very little new

632
00:36:39,840 --> 00:36:43,680
Adam Sklar: supply in most sub sectors of the commercial real estate space.

633
00:36:43,719 --> 00:36:48,000
Adam Sklar: And traditionally, outside of these extreme movements and monetary policy,

634
00:36:48,320 --> 00:36:51,640
Adam Sklar: the biggest driver of winners and losers in commercial real

635
00:36:51,719 --> 00:36:54,719
Adam Sklar: estate is new supply. And so we're not going to

636
00:36:54,800 --> 00:36:58,360
Adam Sklar: have a significant amount of supply twenty twenty six, twenty

637
00:36:58,400 --> 00:37:01,239
Adam Sklar: twenty seven, even into twenty twenty eight, I think in

638
00:37:01,320 --> 00:37:04,040
Adam Sklar: most real estate categories, supply is going to be well

639
00:37:04,080 --> 00:37:08,360
Adam Sklar: below new supply, be well below historical levels, which sets

640
00:37:08,400 --> 00:37:12,880
Adam Sklar: up quite nicely for fundamentals, putting the economic cycle aside

641
00:37:12,880 --> 00:37:16,160
Adam Sklar: for a second, and so real estate has been in

642
00:37:16,160 --> 00:37:19,160
Adam Sklar: the eye of the storm, so to say, values you know,

643
00:37:19,200 --> 00:37:21,520
Adam Sklar: based on the cap rate expansion I was mentioning or

644
00:37:21,560 --> 00:37:24,560
Adam Sklar: down anywhere between twenty and forty percent, you know when

645
00:37:24,600 --> 00:37:28,319
Adam Sklar: you look, when you look nationally, and so you know,

646
00:37:28,400 --> 00:37:31,680
Adam Sklar: I'm I think it's a more stable area to actually

647
00:37:31,920 --> 00:37:36,279
Adam Sklar: investigainst now moving forward prospectively, especially if you believe that

648
00:37:36,360 --> 00:37:39,879
Adam Sklar: the FED is going to continue cutting and so we're

649
00:37:39,880 --> 00:37:44,440
Adam Sklar: still seeing significant opportunities there to lend, you know, originate

650
00:37:44,560 --> 00:37:49,359
Adam Sklar: loans by loans, invest in CMBs, and it's a little

651
00:37:49,360 --> 00:37:53,080
Adam Sklar: bit I think the analysis prospectively is a little bit

652
00:37:53,120 --> 00:37:56,719
Adam Sklar: more straightforward than cyclicals or something like software that we've

653
00:37:56,719 --> 00:37:58,480
Adam Sklar: been we've been talking about how.

654
00:37:58,400 --> 00:38:02,520
Negisa Balluku: Do if you the supply finishes and consumer weakness generally

655
00:38:02,920 --> 00:38:05,560
Negisa Balluku: as far as the impact that they have in a

656
00:38:05,680 --> 00:38:08,840
Negisa Balluku: wider scope of industries than what with typicul sye and

657
00:38:08,920 --> 00:38:13,200
Negisa Balluku: kind of discrete these stress cycles, whether you we expect

658
00:38:13,239 --> 00:38:15,640
Negisa Balluku: to see more Chapter twenty twos, for example, we've seen

659
00:38:15,640 --> 00:38:16,680
Negisa Balluku: those a little bit lately.

660
00:38:17,440 --> 00:38:20,839
Adam Sklar: Yeah, look it goes to the I hate to you know,

661
00:38:21,120 --> 00:38:24,480
Adam Sklar: quoting Buffett as an investor. It's a little bit cliche,

662
00:38:24,600 --> 00:38:27,160
Adam Sklar: but I do think we're in one of these moments

663
00:38:27,200 --> 00:38:31,120
Adam Sklar: where you know, the tide is going out, and it's

664
00:38:31,200 --> 00:38:33,560
Adam Sklar: it's hard to always predict, you know, where we're going

665
00:38:33,640 --> 00:38:37,960
Adam Sklar: to see issues, but it's there is some circularity to

666
00:38:38,040 --> 00:38:41,000
Adam Sklar: the argument in the sense that now right now, over

667
00:38:41,080 --> 00:38:45,320
Adam Sklar: the past two weeks, really there is a big spotlight

668
00:38:45,400 --> 00:38:48,279
Adam Sklar: on corporate credit. I think you know, where the BDC's

669
00:38:48,760 --> 00:38:50,759
Adam Sklar: and some of the relevant gps are trading in the

670
00:38:50,760 --> 00:38:54,000
Adam Sklar: public market is certainly you know, getting a lot of attention,

671
00:38:54,520 --> 00:38:58,640
Adam Sklar: and then you know, having large kind of these you know,

672
00:38:59,000 --> 00:39:02,920
Adam Sklar: large losses in situations like First Brand and Tricolor have

673
00:39:03,080 --> 00:39:07,040
Adam Sklar: brought now a huge amount of focus and scrutiny to

674
00:39:07,120 --> 00:39:09,520
Adam Sklar: situations that you and I may be talking about in

675
00:39:09,520 --> 00:39:13,560
Adam Sklar: the next thirty sixty ninety days, whereas at other moments

676
00:39:13,560 --> 00:39:15,960
Adam Sklar: of time, you know, it just may not be as notable,

677
00:39:16,440 --> 00:39:18,239
Adam Sklar: and so it's hard. I mean, we've talked about a

678
00:39:18,320 --> 00:39:22,879
Adam Sklar: number of cyclical sectors that you know are really significant

679
00:39:23,000 --> 00:39:25,960
Adam Sklar: in the lever loan and highal bond markets and in

680
00:39:26,000 --> 00:39:29,480
Adam Sklar: the private credit space as well. There's nothing else that

681
00:39:29,560 --> 00:39:33,080
Adam Sklar: comes to mind that may be lesser talked about, but

682
00:39:33,200 --> 00:39:36,040
Adam Sklar: I do think now you know, whether it's a credit

683
00:39:36,040 --> 00:39:40,840
Adam Sklar: committee at banks, the regulatory complex that oversees the banking sector,

684
00:39:41,120 --> 00:39:45,000
Adam Sklar: credit committees at large private credit institutions. You're just going

685
00:39:45,080 --> 00:39:49,960
Adam Sklar: to have an acute focus on potential issues and tbd

686
00:39:50,080 --> 00:39:52,000
Adam Sklar: will have to see how those are dealt with.

687
00:39:52,719 --> 00:39:56,480
Negisa Balluku: One of the responses has been from the ones most effected,

688
00:39:56,560 --> 00:39:58,880
Negisa Balluku: say first Brand, for example, that there is an ability

689
00:39:58,920 --> 00:40:02,120
Negisa Balluku: to absorb the loss. How much the thing that matters

690
00:40:02,160 --> 00:40:04,640
Negisa Balluku: I mean, does size matter in this environment or is

691
00:40:04,680 --> 00:40:07,399
Negisa Balluku: I mean could matter more in the short term or

692
00:40:07,480 --> 00:40:09,239
Negisa Balluku: rather more in the long term. What do you think

693
00:40:09,280 --> 00:40:10,640
Negisa Balluku: of that as a response.

694
00:40:10,480 --> 00:40:13,200
Adam Sklar: I'm glad you brought that up. There's one other notable

695
00:40:13,239 --> 00:40:15,760
Adam Sklar: element that's happening right now that we haven't talked about,

696
00:40:16,040 --> 00:40:19,279
Adam Sklar: being with FED funds at five and a quarter, and

697
00:40:19,960 --> 00:40:23,000
Adam Sklar: let's say spreads were one hundred wider in twenty twenty four.

698
00:40:23,600 --> 00:40:25,080
Adam Sklar: What that does when you look at if you look

699
00:40:25,080 --> 00:40:29,319
Adam Sklar: at the BDCs and private credit vehicles, the asset side

700
00:40:29,320 --> 00:40:31,880
Adam Sklar: of the balance sheet is yielding twelve or thirteen percent,

701
00:40:32,719 --> 00:40:34,800
Adam Sklar: And what that does is it gives you more buffer

702
00:40:34,880 --> 00:40:38,279
Adam Sklar: to absorb losses. If you're targeting a ten percent rate

703
00:40:38,280 --> 00:40:41,200
Adam Sklar: of return and the asset side of your book yields

704
00:40:41,239 --> 00:40:46,279
Adam Sklar: thirteen percent, you can take some quantum of loss. What's

705
00:40:46,280 --> 00:40:48,880
Adam Sklar: happening right now, and part of the reason why I

706
00:40:48,920 --> 00:40:52,240
Adam Sklar: believe the BDCs are trading where they are is because

707
00:40:52,280 --> 00:40:56,800
Adam Sklar: the FED is cutting rates. And so remember the vast

708
00:40:56,800 --> 00:41:00,680
Adam Sklar: majority of the levered loan market, for sure and private

709
00:41:00,719 --> 00:41:03,920
Adam Sklar: credit are in floating rate instruments, and so as the

710
00:41:03,960 --> 00:41:07,160
Adam Sklar: FED cuts, what's happening the yield on their book is

711
00:41:07,160 --> 00:41:11,200
Adam Sklar: actually declining. And so the confluence of having an environment

712
00:41:11,239 --> 00:41:16,040
Adam Sklar: where the yield on your portfolio's declining and you may

713
00:41:16,080 --> 00:41:21,399
Adam Sklar: have increased credit issues is obviously not ideal, and it's

714
00:41:21,400 --> 00:41:24,480
Adam Sklar: hard to disaggregate these various issues. But I think for

715
00:41:24,600 --> 00:41:27,120
Adam Sklar: sure part of the reason why the BDCs are trading

716
00:41:27,120 --> 00:41:30,279
Adam Sklar: at such a notable discount to NAV is because their

717
00:41:30,360 --> 00:41:33,200
Adam Sklar: yields are coming down and that impacts their ability to

718
00:41:33,239 --> 00:41:36,280
Adam Sklar: cover their dividend payment. And so what you may start

719
00:41:36,280 --> 00:41:39,160
Adam Sklar: seeing are BDCs that have to start cutting their dividends,

720
00:41:39,600 --> 00:41:43,680
Adam Sklar: private credit vehicles that just have less yield, and you know,

721
00:41:43,800 --> 00:41:47,360
Adam Sklar: tbd on where we go in terms of credit issues.

722
00:41:47,360 --> 00:41:50,960
Adam Sklar: Although you know, I think there's that enhanced focus on

723
00:41:52,040 --> 00:41:56,880
Adam Sklar: amending and extending debt, picking debt. I noticed in analyzing

724
00:41:56,960 --> 00:42:00,200
Adam Sklar: the BDCs about a third twenty five to per sent

725
00:42:00,239 --> 00:42:03,040
Adam Sklar: to a third of their portfolio are from our loans

726
00:42:03,200 --> 00:42:07,280
Adam Sklar: issued prior to twenty twenty three. And so these loans

727
00:42:07,280 --> 00:42:10,640
Adam Sklar: were issued in a different point in time. Cap multiples

728
00:42:10,640 --> 00:42:15,200
Adam Sklar: were higher, interest rates were far lower, and so you know,

729
00:42:15,400 --> 00:42:20,839
Adam Sklar: seeing kind of a zombification of those portfolios where there's

730
00:42:20,920 --> 00:42:24,880
Adam Sklar: huge amounts of extension, significant amounts of pick at a

731
00:42:24,920 --> 00:42:28,000
Adam Sklar: time when when on their good loans they're earning less interest,

732
00:42:28,200 --> 00:42:30,319
Adam Sklar: you know, can be tough. And so I think that

733
00:42:30,440 --> 00:42:32,680
Adam Sklar: is a part of the story that we hadn't covered yet,

734
00:42:32,840 --> 00:42:33,960
Adam Sklar: but is important to note.

735
00:42:34,160 --> 00:42:37,760
Negisa Balluku: My only final question is any particular cases called cases

736
00:42:37,760 --> 00:42:40,279
Negisa Balluku: you're keeping an eye on what's interesting to you right now?

737
00:42:40,280 --> 00:42:42,440
Negisa Balluku: We've seen a few in the I guess sort of

738
00:42:42,880 --> 00:42:46,399
Negisa Balluku: space in September. I was just curious what you're keeping

739
00:42:46,400 --> 00:42:46,799
Negisa Balluku: an eye on.

740
00:42:47,239 --> 00:42:52,080
Adam Sklar: Yeah, so Converge one is a very notable case that

741
00:42:52,560 --> 00:42:57,440
Adam Sklar: you know, may impact how deals in in court or

742
00:42:57,480 --> 00:43:03,400
Adam Sklar: out of court are offered to creditor constituencies. You know,

743
00:43:03,480 --> 00:43:06,759
Adam Sklar: they're constantly my career, there have been a number of

744
00:43:06,800 --> 00:43:09,040
Adam Sklar: landmark cases. And it kind of goes to the earlier

745
00:43:09,080 --> 00:43:11,520
Adam Sklar: point of it's tough to be a tourist in the sector.

746
00:43:11,640 --> 00:43:14,600
Adam Sklar: You know, we need to constantly be up and be

747
00:43:14,760 --> 00:43:18,640
Adam Sklar: current on legal precedent in addition to what i'll call

748
00:43:18,680 --> 00:43:21,040
Adam Sklar: market precedent. You know, what are market norms, but also

749
00:43:21,600 --> 00:43:25,120
Adam Sklar: you know what in various jurisdictions, what are the legal

750
00:43:25,120 --> 00:43:28,560
Adam Sklar: precedents permitting and how do we do deals that you

751
00:43:28,600 --> 00:43:32,880
Adam Sklar: know and find transactions that fit within you know, the

752
00:43:32,920 --> 00:43:36,440
Adam Sklar: four corners of the law, so to say, and and

753
00:43:36,440 --> 00:43:38,400
Adam Sklar: that and that landscape even over the course of the

754
00:43:38,480 --> 00:43:40,840
Adam Sklar: last ten to fifteen years has changed from time to

755
00:43:40,880 --> 00:43:45,480
Adam Sklar: time pretty notably, so we're always, you know, focused on

756
00:43:45,480 --> 00:43:48,200
Adam Sklar: on making sure we're up to date there. And to

757
00:43:48,280 --> 00:43:51,719
Adam Sklar: your earlier question, it may influence how we view certain

758
00:43:51,760 --> 00:43:56,080
Adam Sklar: situations and how capital structures can evolve, whether in court

759
00:43:56,160 --> 00:43:56,719
Adam Sklar: or out of court.

760
00:43:57,080 --> 00:43:59,879
Negisa Balluku: Yeah, and converted oneas particularly interesting to me, at least

761
00:44:00,040 --> 00:44:03,520
Negisa Balluku: because we had a court decide this majority of our

762
00:44:03,680 --> 00:44:06,600
Negisa Balluku: minority issue based on the bankruptcy Code as opposed to

763
00:44:06,600 --> 00:44:09,560
Negisa Balluku: the document language which we're most typically used to saying.

764
00:44:09,800 --> 00:44:13,000
Irene Garcia Perez: Read stuff. Adams Clark from Monarch Alternative Capital, Thanks so

765
00:44:13,080 --> 00:44:15,520
Irene Garcia Perez: much for joining us on the Credit Edge, and of

766
00:44:15,560 --> 00:44:19,719
Irene Garcia Perez: course we're grateful to Nigisavoluku from Bloomberg Intelligence. Thank you

767
00:44:19,760 --> 00:44:22,840
Irene Garcia Perez: for joining us. Thank you for more credit market analysis

768
00:44:22,840 --> 00:44:25,800
Irene Garcia Perez: and insight. Read all of Nigisa's great work on the Terminal.

769
00:44:26,160 --> 00:44:28,960
Irene Garcia Perez: Bloomberg Intelligence is part of our research department, with five

770
00:44:29,040 --> 00:44:33,440
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771
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772
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773
00:44:41,440 --> 00:44:43,920
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774
00:44:43,960 --> 00:44:47,239
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775
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776
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777
00:44:53,680 --> 00:44:56,360
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778
00:44:56,360 --> 00:45:12,400
Irene Garcia Perez: again next week on the Credit Edge