WEBVTT - Marathon Asset Management Chairman, CEO, Co-Managing Partner, and Co-Founder Bruce Richards

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<v Speaker 1>Bruce Richards, co founder and CEO of Marathon Asset Management,

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<v Speaker 1>and Bruce All the talk last week, of course was

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<v Speaker 1>about the FED, what they didn't do, but more importantly

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<v Speaker 1>what they're telegraphing and a market. When you look at

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<v Speaker 1>what's happening in treasuries and you look what's happening inequities

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<v Speaker 1>right now, it doesn't seem to think the Fed is

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<v Speaker 1>going to hold rates as high as they seem to

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<v Speaker 1>say they are.

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<v Speaker 2>Well, you could say that, or then you can just

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<v Speaker 2>listen to what the man had to say at the

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<v Speaker 2>pressure last week when FED Chairman Palell showed us the

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<v Speaker 2>dots and share with us that there will be only

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<v Speaker 2>one easing this year, it's a very far cry from

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<v Speaker 2>you know, six that was expected by the market coming

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<v Speaker 2>into the year. So, yes, the inflation number is getting

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<v Speaker 2>softer and trending down towards that you know two percent

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<v Speaker 2>goal that everyone wants to see, and it's really good news.

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<v Speaker 2>But here's the thing that I'm thinking about. If you're

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<v Speaker 2>FED chairman Pale, are you going to ease so quickly

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<v Speaker 2>when EPI markets are all time highs, job markets are

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<v Speaker 2>incredibly strong and rob lost and economy is strong because

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<v Speaker 2>if you were to ease, might it just inflate a

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<v Speaker 2>little bit more the economy, equity markets and cause these

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<v Speaker 2>animal spirits to come back and inflation to come back.

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<v Speaker 2>And so they're going to go I think, very very

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<v Speaker 2>slowly and very very cautiously. So you might expect one

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<v Speaker 2>ease or two eases and then a long pause to

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<v Speaker 2>see did it do anything to reinflate inflation?

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<v Speaker 1>Yeah, but it is all this ends up being academic

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<v Speaker 1>to a certain extent because we keep talking about what

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<v Speaker 1>the Fed may or may not do. And the question

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<v Speaker 1>I really I guess I really have is does it matter,

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<v Speaker 1>right at least in the hearing now for the economy

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<v Speaker 1>and the markets. I mean, twenty five basis points, even

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<v Speaker 1>fifty basis points are easing.

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<v Speaker 2>Does that have a material us? Economy is so strong,

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<v Speaker 2>And the reason why it doesn't have a material impact

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<v Speaker 2>is because the Fed really doesn't matter. That's really hard

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<v Speaker 2>to say. No, they don't want to matter, given the

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<v Speaker 2>amount of fiscal stimulus has happened, and the fiscal stimuluss

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<v Speaker 2>has been so exorbit so huge, never before seen in

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<v Speaker 2>a growth market like we've had, and yet it came

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<v Speaker 2>through in trillions and trillions and trillions. We're talking about

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<v Speaker 2>Infrastructure Act, the Chips Acted, and many other acts that

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<v Speaker 2>at trillions of stimulus at the time the FED was tightening.

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<v Speaker 2>So I would say that you're right about that. It

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<v Speaker 2>is a bit academic because here we are at higher

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<v Speaker 2>rates and economy is just fine. You have to stay

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<v Speaker 2>bullish because the economy is strong, jobs are strong, stock market.

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<v Speaker 2>We're going to see what's going to happen with second

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<v Speaker 2>half earnings, and we're going to have record earnings in

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<v Speaker 2>the third and fourth quarter. So i'd say stay bullish

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<v Speaker 2>for equities and stay bullsh for credit as well, because

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<v Speaker 2>a higher rate environment that we're seeing is really really

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<v Speaker 2>bullsh for the bomb market. So let's get to that.

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<v Speaker 3>Okay, So the higher equity market, economy is really good.

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<v Speaker 2>What's the bankruptcy situation?

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<v Speaker 3>Like, I mean, are we going to see the kind

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<v Speaker 3>of bankruptcies that everyone was quort of anticipating or the

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<v Speaker 3>weakness that we've been anticipating. What do you think?

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<v Speaker 2>Well, first of all, I'd start with the faultrates. The

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<v Speaker 2>faultrates are trending around four percent, and today about three

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<v Speaker 2>quarters of these defaults don't come from bankruptcies. Don't come

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<v Speaker 2>from Chapter eleven's They come from these LMA, these liability

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<v Speaker 2>management exercises or what the rating agencies referred to as

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<v Speaker 2>distrusted exchanges, where the creditors are crammed down they have

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<v Speaker 2>to receive a lower interest, payment less principle or termed

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<v Speaker 2>out debt, something that's adverse to them. Private equity is

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<v Speaker 2>very smart. They're very smart to start with in buying

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<v Speaker 2>companies and very smart when it comes to financial engineering.

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<v Speaker 2>And what they figured out is it's really costly to

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<v Speaker 2>put a company in bankruptcy, the business interruption cost, all

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<v Speaker 2>the legal costs that you go through when the company's

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<v Speaker 2>in bankruptcy for a year to two years, it's much

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<v Speaker 2>better to extract a pound of flesh from the creditors.

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<v Speaker 2>And with ninety percent of the brotherly syndicating loan market

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<v Speaker 2>being covenant light, they can do that quite efficiently by

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<v Speaker 2>taking assets, moving over to an unrestricted SOB, coming up

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<v Speaker 2>with new money solutions from folks like Marathon, who will

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<v Speaker 2>give the company, the private equity company, additional dollars right

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<v Speaker 2>to make it through and at the expense of existing creditors.

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<v Speaker 2>So what I would say is this is a very

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<v Speaker 2>favorable environment for the credit markets because while ninety to

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<v Speaker 2>ninety five percent of the markets can sustain these higher

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<v Speaker 2>rates and you're getting paid the best yields in the generation,

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<v Speaker 2>those other five to ten percent there's also a lot

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<v Speaker 2>to do for us opportunities and credit managers that are

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<v Speaker 2>providing capital solutions and these solutions for these distress exchanges.

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<v Speaker 3>It's part of that going to be in commercial real

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<v Speaker 3>estate because we haven't had that disaster that we've been

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<v Speaker 3>waiting for.

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<v Speaker 2>Commercial real estate is again like the pig for the python.

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<v Speaker 2>It's a slow process that's being worked through. So the

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<v Speaker 2>commercial real estate debt markets around six trillion dollars. About

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<v Speaker 2>half of that is held within the banks, and about

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<v Speaker 2>half of that is in the private credit sector between

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<v Speaker 2>the reads and the CMBs markets and so forth. So

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<v Speaker 2>the good news for commercial real estate is, and there's

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<v Speaker 2>very good news, is valuations are stabilized. It's a big market,

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<v Speaker 2>and there's lots of really attractive deals to do. That's

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<v Speaker 2>the good news. The bad news is that there's about

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<v Speaker 2>a trillion of this debt that's upside down where there's

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<v Speaker 2>no value left and the creditors have to work through

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<v Speaker 2>this process of workout, and so there's a big, huge

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<v Speaker 2>maturity wall.

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<v Speaker 1>I see the advantage of sort of doing these kind

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<v Speaker 1>of non bankruptcies whatever we want to call them, refinancings

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<v Speaker 1>or recapitalizations, if you will. Are we just kicking the

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<v Speaker 1>can down the road? Are we actually making these companies

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<v Speaker 1>healthier and in theory more sustainable.

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<v Speaker 2>They're more sustainable because in that process there's going to

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<v Speaker 2>be less debt, and the cram down itself usually relates

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<v Speaker 2>to less debt in certain cases. In other cases, you're right,

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<v Speaker 2>you're just kicking the can down the road and waiting

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<v Speaker 2>for a day out in the future. But if the

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<v Speaker 2>companies can then grow into those capital structures, that's a

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<v Speaker 2>very positive thing. And so quite often with these exercises

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<v Speaker 2>they actually can and sometimes you're right, they probably can't,

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<v Speaker 2>and then the bankruptcy waits down the line a year

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<v Speaker 2>or two years, you know, out in the future. But

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<v Speaker 2>in most cases, these new money solutions have the colatteral

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<v Speaker 2>that protects them, and so they're senior, they're secured, and

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<v Speaker 2>they have the colatter with the covenants in place, and

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<v Speaker 2>so it's really a good attractive way to put out money.

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<v Speaker 2>And I look across Marathon's book of all these capital

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<v Speaker 2>solutions are done and across industries, because private equity is

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<v Speaker 2>invested across industries, and you're seeing this high debt burden

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<v Speaker 2>not impact just one or two sectors, but really all industries.

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<v Speaker 3>Bruce, how do you think about the election? How do

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<v Speaker 3>you think about election risk right now?

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<v Speaker 2>Well, look at the election risks we just saw in France, right,

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<v Speaker 2>We're Macron called for an earlier election and he's still

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<v Speaker 2>going to remain president, but you know, the parliament is

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<v Speaker 2>up for grabs and it looks like his party's going

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<v Speaker 2>to lose a bunch of votes, and votes you are

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<v Speaker 2>going to go to the far right and far left.

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<v Speaker 2>And what did the stock market vote for? Well, the

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<v Speaker 2>CAC forty, which is the French stock market, was down

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<v Speaker 2>six point two percent on that news, and French bonds,

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<v Speaker 2>which are the odes, widen out twenty eight bases points

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<v Speaker 2>relative to buns. That's the biggest gap in debt versus

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<v Speaker 2>you know, our versus debt markets and equen markets versus

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<v Speaker 2>our eque marketers is up that we've seen in like

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<v Speaker 2>fifteen twenty years. So elections do matter, and we saw

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<v Speaker 2>that right there, right, And so six of the seven

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<v Speaker 2>G seven countries are up for election this year, and

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<v Speaker 2>so it's a big year. You're right, it's a year

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<v Speaker 2>of the election. Here in the United States, we have

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<v Speaker 2>a big election and although we try to stay away

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<v Speaker 2>from politics, this is going to affect markets in a

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<v Speaker 2>very big way. So think about several things. Number one,

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<v Speaker 2>the border itself. That's probably one of the top issues.

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<v Speaker 2>And people don't want to talk about border because it

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<v Speaker 2>doesn't relate to the comm me. Well, yes it does.

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<v Speaker 2>The number one driver of employment over the last three

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<v Speaker 2>years has been immigration. You take immigration out, jobs are flat,

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<v Speaker 2>and meanwhile they've been growing by leaps and bounds, hundreds

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<v Speaker 2>of thousands a month, you know, month after month for

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<v Speaker 2>three years now. We've had this great employment growth and

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<v Speaker 2>it's because of immigration. That's one factor. The second factor

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<v Speaker 2>is regulatory and regulatory capture and everything related to you know,

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<v Speaker 2>big government versus kind of pro business right. And so

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<v Speaker 2>when you think about the former president who wanted to

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<v Speaker 2>take a hands off approach to business versus the current administration,

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<v Speaker 2>President Biden and FTC, which has been kind of anti

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<v Speaker 2>these big M and A transactions, you'll see a very

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<v Speaker 2>different outcome. The investment bankers and corporate CEOs are probably

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<v Speaker 2>in lining up if the former president were elected to

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<v Speaker 2>announce deals sometime going into next year, versus kind of

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<v Speaker 2>hands off right now with certain these companies. And finally,

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<v Speaker 2>what I'd say is taxes. It's a very different tax

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<v Speaker 2>stand that President Bible would have versus versus the former

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<v Speaker 2>president with respective corporate taxes as we all know, and

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<v Speaker 2>what implications are there for companies as well as the

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<v Speaker 2>impact to higher taxes for the wealthy. So very different

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<v Speaker 2>policies and a lot on the line.

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<v Speaker 1>A lot of people would say very different policies, But

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<v Speaker 1>when you look at history, at some point it kind

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<v Speaker 1>of balance itself out, at least from an investment perspective.

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<v Speaker 1>Is there a point in time in this election cycle

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<v Speaker 1>where it is appropriate to actually act on the potential

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<v Speaker 1>for what could happen? Do you wait till after the election,

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<v Speaker 1>do you front run it, what do you do well?

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<v Speaker 2>One of the greatest trades of this last fifteen twenty

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<v Speaker 2>years is when President Obama was elected and knowing his

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<v Speaker 2>stance on healthcare and buying into healthcare companies in advance

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<v Speaker 2>of him taking office, and that had legs that took

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<v Speaker 2>us from years and years and years on and it's

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<v Speaker 2>still working to today based upon Obamacare and all the

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<v Speaker 2>policies and measures that we're put in place. So so yes,

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<v Speaker 2>I think these implications of what one administration, our current

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<v Speaker 2>administration might take versus the former administration might take is

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<v Speaker 2>very different, and we'll have implications for for sectors and

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<v Speaker 2>for companies specifically.

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<v Speaker 3>One thing that seems to stay the same in all

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<v Speaker 3>the research that I read is that the budget deficit,

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<v Speaker 3>the physcal deficit's going to grow, like no matter who's

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<v Speaker 3>in the White House, there's me more money in different

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<v Speaker 3>ways coming in.

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<v Speaker 2>Do you think that's that effect?

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<v Speaker 1>Is that true?

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<v Speaker 2>Do you look at it like that?

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<v Speaker 3>Is there a long term behind your place?

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<v Speaker 2>It didn't used to be the case, but now I

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<v Speaker 2>think it more is the case and what's baked in,

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<v Speaker 2>and so I wouldn't disagree with that at all. Now,

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<v Speaker 2>is you know, rather disappointed, you know to see how

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<v Speaker 2>much the deficit grew during the Republican administration because I'm

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<v Speaker 2>all for you know, fiscal austerity or or you know,

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<v Speaker 2>fiscal strength and how it's you know, been relatively indifferent.

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<v Speaker 2>But what I would say is I think we'd have

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<v Speaker 2>slightly bigger depths with the current administration that we would

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<v Speaker 2>with the form administration, because I think the former administrations

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<v Speaker 2>learned from that and wants to downsize government and wants

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<v Speaker 2>to downsize a lot of the benefits that so many

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<v Speaker 2>folks have enjoyed in these last four years. And I

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<v Speaker 2>think there actually might be a little greater than what

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<v Speaker 2>the commentators are stating and versus what you've seen in

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<v Speaker 2>these last few years.

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<v Speaker 1>We'll only have about thirty seconds left. But on that point, though,

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<v Speaker 1>are we focusing too much on the president himself? I mean,

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<v Speaker 1>I think about the elections that we just had overseas

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<v Speaker 1>that was less about the man at the top and

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<v Speaker 1>more about the legislatures or the parliaments, And I wonder

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<v Speaker 1>if we're going to find ourselves in the same situation

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<v Speaker 1>here in the US, where who's in the White House

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<v Speaker 1>is going to matter less than what the complexion.

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<v Speaker 2>Of conquers point. Executive order will be the order of

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<v Speaker 2>the day, more executive or more executive order than that

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<v Speaker 2>we've ever seen going forward, because that rubicon has already

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<v Speaker 2>been crossing.

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<v Speaker 1>Okay, all right, there's a great conversation. Always great to

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<v Speaker 1>have you, Richards. He's the CEO of Marathon Asset Management,