WEBVTT - Mortgages, Private Debt, Banks, and Twitter 0:00:00.800 --> 0:00:04.040 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney alongside 0:00:04.040 --> 0:00:06.920 my co host Matt Miller. Every business day we bring 0:00:06.960 --> 0:00:11.520 you interviews from CEOs, market pros, and Bloomberg experts, along 0:00:11.520 --> 0:00:15.520 with essential market moving news. Find the Bloomberg Markets Podcast 0:00:15.600 --> 0:00:18.439 on Apple Podcasts or wherever you listen to podcasts, and 0:00:18.480 --> 0:00:23.280 at Bloomberg dot com slash podcast. We've got interest rate rising. 0:00:23.320 --> 0:00:26.600 We know that it's been terrible for the fixed income 0:00:26.640 --> 0:00:29.840 market across the board. Uh, and a big part of 0:00:29.840 --> 0:00:31.800 that some mortgage markets. When we want to talk, you know, 0:00:31.800 --> 0:00:34.600 what's going on in the MBS, that's mortgage backed securities. 0:00:34.920 --> 0:00:39.360 We bring in Eric Heidelberg, MBS strategists for Bloomberg Intelligence. 0:00:39.640 --> 0:00:43.960 What is the super strava biker? I don't know. I 0:00:44.040 --> 0:00:47.160 know that I probably put too much, too many miles 0:00:47.200 --> 0:00:51.320 on my bike. So Paul's a big peloton guy, But 0:00:51.400 --> 0:00:54.400 you actually move on your bicycle. Uh, this time of year, 0:00:54.440 --> 0:00:57.360 I might be on something called Swift, which is inside, 0:00:57.400 --> 0:00:59.040 but we feel like we're moving because it's like in 0:00:59.080 --> 0:01:02.560 a cartoon world with other people. So it's in the 0:01:02.560 --> 0:01:08.080 metaverse alright, Erica, So again, you know we look at 0:01:08.120 --> 0:01:10.560 I n go to give us a snapshot of all 0:01:10.600 --> 0:01:14.040 the indexes out there, and just in fixed and come world, 0:01:14.040 --> 0:01:16.360 like the equity world, just read everywhere. Talk to us 0:01:16.400 --> 0:01:23.360 about how the mortgage backed security market has been behaving. Well, um, 0:01:23.520 --> 0:01:26.959 there there probably aren't enough big words to describe it, 0:01:27.040 --> 0:01:30.160 but basically it's it's having its worst year ever by 0:01:30.480 --> 0:01:34.400 a significant margin, like at minus fourteen at some point 0:01:34.480 --> 0:01:37.080 in the middle of last month, we were approximately ten 0:01:37.120 --> 0:01:40.080 times worse than the mortgage market had ever been year 0:01:40.120 --> 0:01:43.120 to date. Um. And that's what happens when you have 0:01:43.160 --> 0:01:46.080 a bear market because a lot of that is really 0:01:46.120 --> 0:01:48.520 just driven by interest rates, which have turned around a 0:01:48.560 --> 0:01:51.800 little bit recently, but some of that is driven by 0:01:51.800 --> 0:01:56.480 spread widening too, as the FED has stopped buying, and 0:01:56.640 --> 0:01:58.880 you know, there's a lot of volatility in the market's 0:01:59.240 --> 0:02:02.200 not you know, with so much uncertainty around what's going 0:02:02.240 --> 0:02:04.640 to go on with inflation, etcetera. When was the last 0:02:04.640 --> 0:02:07.480 time we had a big bear market in mortgage backed securities? 0:02:09.360 --> 0:02:17.200 Before I was born? So how does the FEDS, I mean, 0:02:17.240 --> 0:02:20.080 how does QT play into this? How do rate rises 0:02:20.160 --> 0:02:23.320 play into this? Because um, didn't your own pali snap 0:02:23.360 --> 0:02:24.960 at somebody who asked if they were going to start 0:02:24.960 --> 0:02:28.440 selling nbs at the last press conference. Yeah, well, he 0:02:29.560 --> 0:02:31.880 they refused to take that off the table, which is 0:02:31.919 --> 0:02:36.640 probably wise, especially with some of his UH colleagues going 0:02:36.639 --> 0:02:40.280 on and saying we really shouldn't have be supporting a 0:02:40.320 --> 0:02:43.040 credit market, which I guess they consider mortgage backed securities 0:02:43.080 --> 0:02:46.120 to be. So, you know, he has some FED other 0:02:46.160 --> 0:02:49.680 other FED members job owning sales, and I think they 0:02:49.720 --> 0:02:52.639 want to leave that on the table because if mortgage 0:02:52.680 --> 0:02:56.800 rates aren't responding to their activity, then you know, they 0:02:56.840 --> 0:02:59.320 want to probably dangle that out there is to potentially 0:02:59.400 --> 0:03:02.880 keep spreads relatively wide because they are using mortgage backed 0:03:02.880 --> 0:03:06.840 securities and mortgage rates generally sorry, not really mortgage back securities, 0:03:06.840 --> 0:03:10.240 but mortgages rates as a lever to try to slow 0:03:10.280 --> 0:03:12.720 down the inflation rate by trying to slow on the 0:03:12.720 --> 0:03:16.520 housing market and ali inflationary aspects that a red hot 0:03:16.880 --> 0:03:20.320 housing market. Cause Google shows me seven point three three 0:03:20.440 --> 0:03:23.480 six percent for a thirty year fixed mortgage. I think 0:03:23.520 --> 0:03:25.560 you can shop around and do a little bit better 0:03:25.840 --> 0:03:32.000 if you need to, but yeah, the effect are great. Yeah. Sure. 0:03:32.200 --> 0:03:34.360 The effective rate that came out from the NBA this 0:03:34.400 --> 0:03:36.720 morning was some point oh six, which is the first 0:03:36.720 --> 0:03:39.680 time it's topped seven percent. Other mortgage rates have been 0:03:39.680 --> 0:03:42.640 showing it above seven um, and that is the first 0:03:42.680 --> 0:03:45.000 time we've seen that since two thousand and six, where 0:03:45.000 --> 0:03:47.680 it actually only reached that level. I was looking at 0:03:47.960 --> 0:03:50.840 a minute ago, um briefly in two thousand and six, 0:03:50.880 --> 0:03:53.240 and then before that it's really the early two thousand's 0:03:53.240 --> 0:03:56.880 before sustained there. And the big difference right now is 0:03:56.920 --> 0:04:01.800 just that so many homeowners have three percent mortgage rate, 0:04:01.880 --> 0:04:06.240 whereas at that point, Yeah, you concluded, Matt got it, 0:04:06.360 --> 0:04:08.640 But I will say that I bought at the absolute 0:04:08.680 --> 0:04:10.760 top of the market, so I got a good rate, 0:04:10.880 --> 0:04:13.160 but I paid way too much for my house. Yeah, 0:04:13.200 --> 0:04:15.960 and and maybe you're better off getting a worse rate, 0:04:16.080 --> 0:04:18.000 but you know, wait until the housing market comes down 0:04:18.040 --> 0:04:20.119 a little bit and you can refinance. If if rates 0:04:20.279 --> 0:04:22.280 ever do turn around that this is certainly a big 0:04:22.320 --> 0:04:24.920 trend in the opposite direction. Even the arms cost a 0:04:24.960 --> 0:04:27.120 lot of ten six arms seven point six four four 0:04:28.680 --> 0:04:31.120 huh Yeah, I think again, you can shop around and 0:04:31.120 --> 0:04:33.000 do a little bit better there. But I'm not a 0:04:33.120 --> 0:04:36.320 mortgage originator, so I don't know. So I mean Erica 0:04:36.360 --> 0:04:39.080 Tuto about the I didn't know anything about really the 0:04:39.120 --> 0:04:42.440 mortgage backed securities market until the Great Financial Crisis. Then 0:04:42.480 --> 0:04:45.120 I got like everybody else, I got very smart, very quickly. 0:04:45.440 --> 0:04:47.120 One of the things I learned is you have to 0:04:47.560 --> 0:04:49.840 really pay attention to the credit quality of the mortgages 0:04:49.960 --> 0:04:52.920 in your mbs. Just generally speaking, how do we feel 0:04:52.920 --> 0:04:56.160 about credit quality out there? The credit quality is by 0:04:56.200 --> 0:05:00.400 a large stellar compared to before the Great Financial isis. 0:05:01.120 --> 0:05:03.680 One of the things that triggered that was that there 0:05:03.760 --> 0:05:05.599 was a lot of subprime lending, and a lot of 0:05:05.600 --> 0:05:09.160 that subprime lending was made in the form of mortgages 0:05:09.360 --> 0:05:13.000 that reset upwards when rates went up. They were these 0:05:13.000 --> 0:05:15.880 teaser rates. They were you know, payoups and arms. And 0:05:15.920 --> 0:05:17.920 as a result, as soon as rates began to rise 0:05:17.920 --> 0:05:22.679 a little bit in the mid two thousands, those homeowners yeah, okay, 0:05:22.680 --> 0:05:24.720 good stuff. Erica started kind forge to get to an 0:05:24.720 --> 0:05:29.400 appointment with a FED president, Eric Heidelberg, NBA strategist for 0:05:29.400 --> 0:05:32.640 Bloomberg Intelligence, giving us a lowdown on the mortgage market here, 0:05:33.120 --> 0:05:35.159 like all the other fixed single markets, really has had 0:05:35.279 --> 0:05:44.400 a very tough I guess this Elon must Twitter deal 0:05:44.760 --> 0:05:49.599 is on. That's the news yesterday. Twenty cents I'll believe 0:05:49.640 --> 0:05:52.200 it when I see on for now. Yeah, the signatures 0:05:52.279 --> 0:05:55.120 on the documents. Let's do a deep dive into how 0:05:55.200 --> 0:05:57.160 this might all play out at the Low West coast 0:05:57.160 --> 0:05:59.200 corresponding for Bloomberg News, he joins us here in our 0:05:59.200 --> 0:06:02.280 Bloomberg Interact broker studio, as does men Deep seeing our 0:06:02.320 --> 0:06:05.720 senior technology annals for Bloomberg Intelligence, and let's start with you. 0:06:05.920 --> 0:06:09.040 Sure well, I guess it's back on, but it is 0:06:09.279 --> 0:06:14.120 pending a resolution or stay of these legal issues. Is 0:06:14.160 --> 0:06:15.800 that going to happen. I haven't heard anything, yes, so 0:06:16.080 --> 0:06:19.479 Must said that he reverts to his original offer fifty 0:06:19.520 --> 0:06:22.159 four dollars twenty cents to share on the exact same 0:06:22.320 --> 0:06:25.680 terms that were signed between the two parties April. In 0:06:25.800 --> 0:06:29.000 his letter to Twitter, he said that it's contingent on 0:06:29.080 --> 0:06:32.400 a stay of legal proceedings, which Twitter has not indicated 0:06:32.480 --> 0:06:34.839 either way what they're going to do. Really, all they've 0:06:34.880 --> 0:06:37.240 said is that they want to close the transaction at 0:06:37.279 --> 0:06:40.040 that fifty four dollar twenty cents price, and you know, 0:06:40.120 --> 0:06:42.760 the timing super interesting, you know. According to one source, 0:06:43.200 --> 0:06:46.000 legal must legal team looked at it, and they looked 0:06:46.040 --> 0:06:47.920 at what the judge in the case, who was due 0:06:47.960 --> 0:06:50.880 to preside had said, and they didn't fancy their chances. 0:06:51.279 --> 0:06:54.360 So that's where we're at. But I mean, so from 0:06:54.440 --> 0:06:57.800 the Twitter perspective, the best thing to do would be 0:06:58.000 --> 0:07:02.240 to go through with the lawsuit and have the courts 0:07:02.360 --> 0:07:04.839 order Musk to buy it, because otherwise, if they agree 0:07:04.880 --> 0:07:07.560 to drop the suit, then he could just back out again. Yeah. 0:07:07.680 --> 0:07:10.840 I mean, Twitter has at least been consistent. They sued 0:07:10.960 --> 0:07:15.400 Musk for specific performance of assigned contract, and they have 0:07:15.560 --> 0:07:19.120 maintained all along that their intent has always been to 0:07:19.160 --> 0:07:21.280 close the deal at fifty four dollars twenty cents. The 0:07:21.320 --> 0:07:23.640 reason I brought all that up is all they said 0:07:23.720 --> 0:07:26.640 last night was a reiteration that they want to close 0:07:26.720 --> 0:07:29.280 at fifty four dollars twenty cents. They didn't say whether 0:07:29.360 --> 0:07:32.040 they dropped legal proceedings. They didn't say whether they accept 0:07:32.440 --> 0:07:36.120 Musk's latest and reversion of the offer. And so I 0:07:36.200 --> 0:07:38.000 think that's a really key point you're waiting for, as 0:07:38.040 --> 0:07:39.920 well as what on earth these Wall Street bankers will 0:07:39.920 --> 0:07:42.440 do with the debt. All right, men, deep, let's say 0:07:42.880 --> 0:07:46.080 that Ellen does buy Twitter. I mean it needs some 0:07:46.200 --> 0:07:48.400 work here. I mean it needs some work in terms 0:07:48.440 --> 0:07:51.040 of engagement and growing the revenue and what does he 0:07:52.560 --> 0:07:56.440 dollar asset forty four billion dollars. Yeah, Well, with any 0:07:56.720 --> 0:07:58.400 large M and A, you have to have some sort 0:07:58.440 --> 0:08:00.240 of premium, right, You're not going to get it at 0:08:00.280 --> 0:08:03.560 market value or fair price. So that's a big, big, 0:08:03.680 --> 0:08:08.320 big premium, big premium. And I think what's uh kind 0:08:08.360 --> 0:08:11.880 of not clear yet is how he plans to monetize it. 0:08:12.040 --> 0:08:15.080 Clearly he has his ideas around you know, coming up 0:08:15.120 --> 0:08:18.960 with a subscription model or just kind of leveraging the 0:08:19.080 --> 0:08:22.680 franchise as you know, a super app, which is what 0:08:22.880 --> 0:08:28.080 he tweeted about yesterday. X So, look, I think with Musk, 0:08:28.240 --> 0:08:31.000 because he's the face of Tesla, and Tesla as a 0:08:31.120 --> 0:08:34.000 company has had a very good ear in terms of 0:08:34.120 --> 0:08:37.720 attracting talent and what they're doing around you know, supercomputer 0:08:38.440 --> 0:08:42.240 and robots and just evis in general. I think what 0:08:42.480 --> 0:08:45.440 he's looking for is not to go through the trial 0:08:45.640 --> 0:08:48.800 because there will be bad PR and it's gonna hurt 0:08:48.840 --> 0:08:53.840 Tesla and then so really it's really care about bad PR. 0:08:53.880 --> 0:08:56.040 I mean, if there's one billionaire out there that's gotten 0:08:56.120 --> 0:08:59.160 bad PR, it is Elon Musk. He's the king of 0:08:59.280 --> 0:09:03.160 bad PR. Well, they had an AI day on Friday, 0:09:03.400 --> 0:09:08.360 where it was really aimed at getting more talent, attracting 0:09:08.440 --> 0:09:11.160 talent around AI and machine learning to help him with 0:09:11.280 --> 0:09:13.920 his supercomputer and you know all the things that tell 0:09:13.920 --> 0:09:16.880 SLA is doing. So they really care about talent right now. 0:09:17.040 --> 0:09:19.600 And I think if he goes through this trial, it's 0:09:19.640 --> 0:09:22.720 going to bring in a lot of negative publicity talking 0:09:22.720 --> 0:09:25.000 about twelve or thirteen billion dollars a debt. I'm looking 0:09:25.040 --> 0:09:28.280 at the f A function on the bloomber terminal consensus 0:09:28.400 --> 0:09:31.680 IBATA is like a billion a billion three. They can't 0:09:31.679 --> 0:09:34.920 have that kind of leverage. What are they thinking? Well, so, 0:09:35.360 --> 0:09:37.839 I mean his plans is to get Twitter to one 0:09:37.880 --> 0:09:41.000 billion in daily active users, which is five times where 0:09:41.080 --> 0:09:43.360 they are now. And uh right, and he wants to 0:09:43.400 --> 0:09:46.079 bring out the cyber truck by last year. That's not 0:09:46.160 --> 0:09:49.880 gonna happen, all right, timing, What's when do we think 0:09:49.920 --> 0:09:52.560 this thing is gonna close? Actually? Is there anybody's venturing? 0:09:52.720 --> 0:09:55.160 I guess this is what's so fascinating. He wants to 0:09:55.240 --> 0:09:57.160 do the deal at the original terms of April. If 0:09:57.160 --> 0:09:59.840 you look at section two point to the closing se 0:10:00.000 --> 0:10:02.520 and I love that and the articles of closing that 0:10:02.640 --> 0:10:05.439 we're in there. They've all been fulfilled. The Twitter shareholders 0:10:05.520 --> 0:10:08.720 voted for it, the regulatory waiting periods of past. That's 0:10:08.720 --> 0:10:11.160 why I say focus on Twitter and what Twitter does, 0:10:11.520 --> 0:10:13.440 because they seem to be in control here if they 0:10:13.480 --> 0:10:16.679 do stay legal proceedings. I think there's a big portion 0:10:16.679 --> 0:10:18.640 of the market that says it's reasonable to think this 0:10:18.760 --> 0:10:22.320 deal could close in the days rather than weeks. Could 0:10:22.360 --> 0:10:25.800 happen very quickly. But as I said, maybe we still 0:10:25.880 --> 0:10:27.839 do go to some somewhat form of trial. Maybe the 0:10:27.880 --> 0:10:32.240 court has jurisdiction over the closing dynamic and a little 0:10:32.280 --> 0:10:34.959 bit out of Musks control, it seems. I mean, doesn't 0:10:35.040 --> 0:10:37.280 that make sense for them to ask the judge to 0:10:37.440 --> 0:10:40.800 just guarantee the closing because they can say, look, okay, 0:10:40.880 --> 0:10:43.440 he's agreed again. But last time he agreed, he signed 0:10:43.440 --> 0:10:46.360 all the documents, he committed himself legally, he made it 0:10:47.200 --> 0:10:50.360 a binding commitment, and then he backed out. So you 0:10:50.440 --> 0:10:52.400 know what's thet from. You know, there are many voices 0:10:52.440 --> 0:10:54.560 in the market that thinks the judge will keep an 0:10:54.559 --> 0:10:56.880 eye on this. Remember this is a chance recurt case. 0:10:57.559 --> 0:10:59.400 To Paul's point though that I think any of us 0:10:59.440 --> 0:11:01.559 knew what chance three court was before this week. What 0:11:01.920 --> 0:11:04.880 is the It's just corporate m and a court. You know, 0:11:05.040 --> 0:11:06.800 she has the final say. It would have taken her 0:11:06.840 --> 0:11:09.199 months to reach the decision. But the debt, you know, 0:11:09.440 --> 0:11:11.719 the Wall Street bankers that musk Haide have to go 0:11:11.840 --> 0:11:13.880 to the asset managers and sell twelve and a half 0:11:13.960 --> 0:11:17.880 billion dollars of leverage buyout debt. That is much less 0:11:17.880 --> 0:11:20.040 attractive than it was in April when this whole thing 0:11:20.200 --> 0:11:22.760 was hatched. I don't I mean, are you hearing anything 0:11:22.920 --> 0:11:27.600 from Wall Street the men deep about this capital structure here? 0:11:27.800 --> 0:11:29.120 I kind of feel like he's got to go to 0:11:29.240 --> 0:11:31.199 get some more private equity here. Well, the good thing 0:11:31.400 --> 0:11:33.760 is it's still you know, when you compared to the 0:11:33.880 --> 0:11:38.040 deck to equity ratio thirty three billion in equity and 0:11:38.160 --> 0:11:40.719 the remainder twelve point five billion in debt, which is 0:11:40.760 --> 0:11:44.920 still relatively low, typical buyouts like the Citrix buyout, that 0:11:45.080 --> 0:11:48.040 component is much higher. So did anybody want a piece 0:11:48.080 --> 0:11:50.160 of the Citrics buyout? People wouldn't want to touch it 0:11:50.200 --> 0:11:53.320 with a ten foot pole. Are banks lost six hundred 0:11:53.360 --> 0:11:56.800 million dollars on the Citrix But that's gonna be dropping 0:11:56.840 --> 0:11:59.120 a bucket compared to this, I think us can still 0:11:59.240 --> 0:12:01.839 raise the money by selling his stock. He has hundred 0:12:01.880 --> 0:12:04.760 and seventy billion in Tesla stocks, so he can, didn't 0:12:04.800 --> 0:12:07.120 he see from the tweets are from the text messages, 0:12:07.160 --> 0:12:08.800 I should say that there are a lot of very 0:12:08.880 --> 0:12:11.160 rich people that want to help him out with cash. Yeah, 0:12:11.320 --> 0:12:14.400 but again, what does this all come down to? You know? Trust? 0:12:14.559 --> 0:12:16.480 This has been a bit of a roller coaster and 0:12:16.960 --> 0:12:19.480 what we don't know from the court filings and disclosures 0:12:19.480 --> 0:12:21.760 as part of the discoveries, what do all those rich 0:12:21.840 --> 0:12:25.800 people think today? October five, Levan, a Eastern Are they 0:12:25.880 --> 0:12:28.680 willing to get on board? Who knows? Alright, guys, great stuff. 0:12:28.679 --> 0:12:31.400 Appreciate you coming in here. Ed Ludlow, West Coast correspondent 0:12:31.640 --> 0:12:33.599 for Bloomberg News. He's been trolling around New York for 0:12:33.640 --> 0:12:35.360 the past few weeks. We have no idea what's going on, 0:12:36.160 --> 0:12:40.760 but we got Mandeep Sing. He's a Bloomberg in bloom 0:12:40.800 --> 0:12:43.640 b I industry. Uh. He covers all things technology and 0:12:43.679 --> 0:12:45.560 he's in the office quite off. Yeah, he's in your 0:12:45.559 --> 0:12:47.360 office quite often. He's one of these proud of him 0:12:47.440 --> 0:12:49.640 we are, so we always appreciate getting that round table. 0:12:49.720 --> 0:12:52.240 So looks. We'll keep our eyes on this Twitter. Will 0:12:52.280 --> 0:12:58.400 they close? Boy? Talk about it in public markets? Two 0:12:58.600 --> 0:13:04.000 just Marketer on everywhere and deals. You don't see I 0:13:04.160 --> 0:13:06.800 p O s. You see E t F launches, But 0:13:06.840 --> 0:13:10.240 that's pretty much it. I mean, so if here's you 0:13:10.280 --> 0:13:13.280 should have a television show about that on Monday Steam. 0:13:13.760 --> 0:13:15.800 So people go into the private market, we hear more 0:13:15.840 --> 0:13:18.920 and more about this private equity, private debt. We're going 0:13:18.960 --> 0:13:20.920 to dive deeper into that biz. And we can do 0:13:21.040 --> 0:13:23.000 that with Randy Schumer. He's co had of Senior Lending 0:13:23.040 --> 0:13:26.120 and senior managing director Churchill Asset Management. He joined us 0:13:26.200 --> 0:13:29.160 live here in our Bloomberg Interactive Broker studio. So, Randy, 0:13:29.520 --> 0:13:32.280 it's been tough everywhere out there for investors. Talk to 0:13:32.360 --> 0:13:35.400 us about the private capital business that you've been so 0:13:35.520 --> 0:13:38.520 involved in. How two been for you guys, Well, for 0:13:38.600 --> 0:13:40.520 somebody who's been in it for a long long time, 0:13:40.800 --> 0:13:44.040 it's interesting to actually see it coming into its own 0:13:44.080 --> 0:13:45.720 And part of the reason is because, as you guys 0:13:45.760 --> 0:13:49.560 have described, what the FED is doing with quantitative tightening 0:13:49.760 --> 0:13:52.679 and interest rate hikes is creating a vacuum in the 0:13:52.760 --> 0:13:56.160 public markets. So there's no clearing price for public bonds 0:13:56.240 --> 0:13:58.360 right now, and the loans are both loans and bond 0:13:58.400 --> 0:14:01.360 market are kind of offline because nobody knows how much 0:14:01.400 --> 0:14:03.000 if you're an issuer, how much is that going to 0:14:03.120 --> 0:14:05.400 cost me? So what they're doing is they're going to 0:14:05.480 --> 0:14:08.560 the private markets, in large part because it's long term 0:14:08.640 --> 0:14:10.959 capital that's been locked up for us to invest in 0:14:11.080 --> 0:14:14.040 companies and other peers of ours, and we can go 0:14:14.200 --> 0:14:17.000 out with those companies and say we actually can give 0:14:17.040 --> 0:14:20.120 you capital that's not volatile, that's not that is going 0:14:20.200 --> 0:14:23.680 to be positive in terms of for investors interest rates 0:14:23.760 --> 0:14:25.760 going forward because it's a floating rate asset class and 0:14:25.920 --> 0:14:29.040 for senior debt. So that's why it's getting attention. And 0:14:29.360 --> 0:14:32.200 the other thing for investors is that because you've got 0:14:32.360 --> 0:14:37.040 a somewhat risk off environment, leverages coming down, covenants are tighter, 0:14:37.440 --> 0:14:39.440 and even more important, yields are higher right now for 0:14:39.520 --> 0:14:44.200 private credit? Are they do these borrowers continue to agree 0:14:44.240 --> 0:14:46.480 to floating rates? I mean, I guess now you want it, 0:14:46.600 --> 0:14:48.520 right because as we're starting to get to what feels 0:14:48.560 --> 0:14:50.760 like the top, you want to get into a floating rate. Well, 0:14:50.800 --> 0:14:53.320 they want it because it's available capital. So they're willing 0:14:53.360 --> 0:14:57.360 to pay the price. Secondly, the unitrunch financings that were 0:14:57.560 --> 0:15:01.080 higher leverage, so six and seven times cash flows are 0:15:01.120 --> 0:15:03.520 no longer in the market, and so from an investor perspective, 0:15:03.840 --> 0:15:07.440 at five times and even less, that's very attractive. Junior 0:15:07.520 --> 0:15:11.160 capital now is being put into these capital structures to 0:15:11.320 --> 0:15:14.880 provide the issue where the little bit more flexibility. Now 0:15:15.000 --> 0:15:18.600 junior capital is a fixed rate instrument, so it's good 0:15:18.640 --> 0:15:20.960 for the issue where because they lock in their cost, 0:15:21.320 --> 0:15:22.960 and it's good for an investor because the fixed rate 0:15:23.040 --> 0:15:25.440 cost is it's higher, it's you know, ten to twelve percent. 0:15:25.880 --> 0:15:28.240 Even senior debt today is close to ten percent. So 0:15:28.320 --> 0:15:30.840 it's very attractive from an investor perspective. It's been so hot. 0:15:30.920 --> 0:15:33.360 I mean, Paul and I talked to so many UM 0:15:33.680 --> 0:15:37.760 fund managers who are starting to get into private markets 0:15:37.920 --> 0:15:41.760 and more and more we talked to private capital managers. 0:15:42.760 --> 0:15:44.800 What if we have a big recession? What you know, 0:15:44.960 --> 0:15:48.360 the the narrative has been short, shallow recession until recently, 0:15:48.560 --> 0:15:50.320 and now I think people are starting to worry about 0:15:50.320 --> 0:15:53.840 a longer term, deeper recession. Is that a problem, Well, 0:15:53.880 --> 0:15:56.320 it is a problem for the overall markets because we 0:15:56.440 --> 0:15:58.840 don't know how that recession is going to unfold. It's 0:15:58.880 --> 0:16:00.680 going to be like a no way do none seems 0:16:00.760 --> 0:16:04.840 unlikely because the bank capital balance sheets are pretty strong 0:16:04.960 --> 0:16:07.600 right now. It doesn't feel like it's going to be 0:16:07.680 --> 0:16:11.080 an industry focus because we've had rolling recessions like that 0:16:11.200 --> 0:16:14.920 over time in retail and so forth. Um, what probably 0:16:15.000 --> 0:16:16.400 is going to happen is it's going to be an 0:16:16.480 --> 0:16:21.800 interest expense UH coverage issue because as interest rates go up, 0:16:22.480 --> 0:16:25.320 companies that were highly leveled, too highly leveled in our view, 0:16:25.640 --> 0:16:27.280 are going to suffer because they're not gonna be able 0:16:27.320 --> 0:16:29.360 to pay their interests. Because think about it, Treasury rates 0:16:29.400 --> 0:16:32.520 were zero a year ago. There four percent today that 0:16:33.280 --> 0:16:35.240 described and that's not changing. By the way, the Fed 0:16:35.360 --> 0:16:37.840 fight against inflation is going to be continuing this year 0:16:37.880 --> 0:16:40.040 and next year, and so you're gonna see interest rates 0:16:40.080 --> 0:16:44.040 pretty high. So we think active management is critical. If 0:16:44.080 --> 0:16:46.120 you are in industries the way Churchill is that are 0:16:46.160 --> 0:16:50.960 more defensive, like healthcare and technology and software, those businesses 0:16:51.000 --> 0:16:54.320 are going to do well typically through all cycles. But 0:16:54.400 --> 0:16:59.960 if you're in chemicals, gaming, energy, housing, those businesses are 0:17:00.040 --> 0:17:01.640 going to get hurt. And that's where you're going to 0:17:01.720 --> 0:17:06.160 see in a recession um tighter interest and potentially default. 0:17:06.520 --> 0:17:09.680 We're already seeing some kickups in large cap defaults just 0:17:09.840 --> 0:17:12.359 because of that. All right, Let's just assume I'm a 0:17:12.480 --> 0:17:14.840 super wealthy person out there and I want I just 0:17:14.920 --> 0:17:17.280 bought a social media company and I need twelve or 0:17:17.320 --> 0:17:20.200 thirteen billion dollars in debt. Is there even a market 0:17:20.280 --> 0:17:24.240 out there for me? Well, I think there's there's probably 0:17:24.400 --> 0:17:27.399 a market. But the question is what's the price right now? 0:17:27.520 --> 0:17:30.040 And if you look at the public markets, and you're 0:17:30.040 --> 0:17:32.359 seeing it in spades over the last several days in 0:17:32.480 --> 0:17:34.480 the public equity markets, but we're seeing it all the 0:17:34.520 --> 0:17:37.000 time in the credit markets, what is the clearing price? 0:17:37.400 --> 0:17:39.680 And the clearing price is determined by the value. What 0:17:39.840 --> 0:17:43.280 is the value of the business and or the or 0:17:43.400 --> 0:17:46.000 the assets, And that's going to be driven a lot 0:17:46.119 --> 0:17:49.320 by what is the expectation for the cycle going forward. 0:17:49.800 --> 0:17:52.160 You tell me where we're going to be with rates 0:17:52.280 --> 0:17:55.240 next year, and and somebody who's asking me whether we're 0:17:55.240 --> 0:17:57.800 gonna have a hard landing. We're a barely a one 0:17:57.880 --> 0:18:00.399 percent growth rate right now. We had negative growth in 0:18:00.440 --> 0:18:03.359 the first and second quarters. Some folks, you know in 0:18:03.400 --> 0:18:06.280 Bloomberg including you're saying kind of a one percent It's 0:18:06.320 --> 0:18:08.440 hard to have a hard landing when you're going along 0:18:08.520 --> 0:18:11.280 at one percent growth, right, So, what I think we 0:18:11.440 --> 0:18:14.399 see as sort of a sloppy sideways where companies are 0:18:14.520 --> 0:18:17.520 are going to be continually trying to figure out, Okay, 0:18:17.640 --> 0:18:20.879 where do I maneuver through these supply chain shortages? How 0:18:20.920 --> 0:18:24.520 do I keep my costs down? In an era of inflation, 0:18:24.800 --> 0:18:28.040 food prices, energy prices continue to go up. And again, 0:18:28.080 --> 0:18:31.760 if you're if you're in an active management scenario where um, 0:18:31.920 --> 0:18:35.840 you're having a manager look very carefully at the free 0:18:35.880 --> 0:18:39.400 cash flows of these businesses. Are retail investors gonna say, Okay, 0:18:39.400 --> 0:18:42.680 I'm comfortable with this manager because they've been through a 0:18:42.760 --> 0:18:45.240 downturn before. We've been around for twenty years, We've seen 0:18:45.320 --> 0:18:48.040 these ups and downs. You're dealing with though much more 0:18:48.560 --> 0:18:51.520 institutional investors. I mean, you're dealing with big numbers, right, 0:18:51.520 --> 0:18:54.000 Do you have big assets under management? Um? Is there 0:18:54.320 --> 0:18:58.520 room for a smaller player in private capital? Is there 0:18:58.600 --> 0:19:01.360 room for retail investors really get into it? Well, there's 0:19:01.400 --> 0:19:04.680 definitely room for retail investors. And in that case, it's 0:19:04.720 --> 0:19:07.399 really a question of education. What is private credit how 0:19:07.440 --> 0:19:11.560 does it help defining it as an uncorrelated asset class, 0:19:11.600 --> 0:19:13.399 so it doesn't move with all the markets. So we 0:19:13.480 --> 0:19:16.320 don't care where the DAO is today or yesterday or tomorrow. 0:19:16.640 --> 0:19:18.040 What we care is and when we look at our 0:19:18.080 --> 0:19:20.960 portfolio companies, how are those businesses going to go through 0:19:21.000 --> 0:19:23.960 a cycle? And then explaining it to investors, here's why 0:19:24.080 --> 0:19:28.080 you should be comfortable with our track record with very 0:19:28.160 --> 0:19:31.920 few losses over the last twenty years, through multiple cycles, 0:19:32.359 --> 0:19:35.520 and with very careful screening of companies to make sure 0:19:35.560 --> 0:19:38.199 that if we do hit a downturn, that those companies 0:19:38.240 --> 0:19:40.840 are going to be safe. Real quick, thirty seconds. What's 0:19:40.840 --> 0:19:42.280 a typical deal for you? What do you look for? 0:19:42.920 --> 0:19:45.879 So we look for companies that are leaders in their field. 0:19:46.000 --> 0:19:48.520 We look for companies that are backed by the best 0:19:48.600 --> 0:19:51.399 private equity firms that we have close relationships with, who 0:19:51.480 --> 0:19:54.360 do a lot of the thought leadership about Okay, why 0:19:54.440 --> 0:19:57.000 the sector and why this business um And we look 0:19:57.040 --> 0:20:00.160 for structures that are conservative fully secured by ass that's 0:20:00.200 --> 0:20:03.760 in cash flow, low leverage pricing that is at a 0:20:03.840 --> 0:20:07.280 premium to the public markets. And second and third ways 0:20:07.320 --> 0:20:09.840 out because we all know that things happen you want 0:20:09.840 --> 0:20:13.080 to make sure their ways out if something happens that's unexpected, 0:20:13.080 --> 0:20:15.840 and then there always is all right, good stuff. Randy Schwimmer, 0:20:16.119 --> 0:20:18.520 co head of Senior Lending and Senior Managing Director Churchill 0:20:18.520 --> 0:20:21.720 Asset Management, talking about the private capital business and again 0:20:21.760 --> 0:20:24.840 as the public markets. And you've got a very popular newsletter. Yeah, 0:20:24.880 --> 0:20:28.000 well we should that because you have a big readership 0:20:28.160 --> 0:20:31.200 and for this kind of a niche industry, right, I 0:20:31.200 --> 0:20:33.159 think it's a pretty big deal. I appreciate that the 0:20:33.240 --> 0:20:35.480 lead left dot com and it's free to any friends 0:20:35.640 --> 0:20:38.480 of this group right here because we're friends of Bloomberg. 0:20:38.600 --> 0:20:40.639 Good stuff. I love to hear that. I range Schimmer 0:20:40.680 --> 0:20:43.159