1 00:00:18,120 --> 00:00:20,760 Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast. 2 00:00:20,880 --> 00:00:23,280 Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg. 3 00:00:23,640 --> 00:00:26,400 Speaker 1: This week, we're very pleased to welcome Anna Arsof, global 4 00:00:26,440 --> 00:00:29,920 Speaker 1: head of private credit at Moody's Ratings. How are you, Anna, great? 5 00:00:29,960 --> 00:00:31,560 Speaker 2: Thank you, super excited to be here. 6 00:00:31,640 --> 00:00:33,040 Speaker 1: Thank you so much for joining us today. Were very 7 00:00:33,040 --> 00:00:34,920 Speaker 1: excited to have you on the show and also delighted 8 00:00:34,960 --> 00:00:37,440 Speaker 1: to have us our guest, David Haven's with Bloomberg Intelligence. 9 00:00:37,440 --> 00:00:40,200 Speaker 3: Hello David, James, excellent to be with you as always, 10 00:00:40,200 --> 00:00:41,120 Speaker 3: and you two, Anna. 11 00:00:41,479 --> 00:00:44,160 Speaker 1: So We're here to discuss private credit, a hot topic. 12 00:00:44,280 --> 00:00:46,879 Speaker 1: Everybody's talking about it. Just to set the scene a bit. 13 00:00:47,159 --> 00:00:50,240 Speaker 1: Private debt has experienced a meteoric rise over the last 14 00:00:50,280 --> 00:00:52,800 Speaker 1: few years. It still has plenty of fans. I don't 15 00:00:52,800 --> 00:00:54,880 Speaker 1: think it's going away, but there are plenty of risks 16 00:00:54,920 --> 00:00:58,840 Speaker 1: building in this one point seven trillion dollar market. Last 17 00:00:58,880 --> 00:01:01,040 Speaker 1: week's rate cut from the They're kicked off what could 18 00:01:01,080 --> 00:01:04,080 Speaker 1: be a significant easing cycle, which would undermine the appeal 19 00:01:04,120 --> 00:01:07,440 Speaker 1: to investors in loans which are floating so they pay 20 00:01:07,600 --> 00:01:11,440 Speaker 1: less when rates go down. Regulators also have the industry 21 00:01:11,480 --> 00:01:14,000 Speaker 1: in their sites amid growing concerns about how any big 22 00:01:14,000 --> 00:01:16,559 Speaker 1: blow up in private credit would hit banks, which tend 23 00:01:16,600 --> 00:01:20,720 Speaker 1: to lend to private credit managers. Fundraising is meanwhile slowing 24 00:01:20,840 --> 00:01:23,679 Speaker 1: as falling oil prices effect flows from the Middle East 25 00:01:23,720 --> 00:01:26,319 Speaker 1: and new US measures may make it harder for insurers 26 00:01:26,360 --> 00:01:28,800 Speaker 1: to invest. And there's still a risk in the US 27 00:01:28,880 --> 00:01:32,480 Speaker 1: economy that it may tip into recession, which could mean 28 00:01:32,520 --> 00:01:36,200 Speaker 1: more distress broadly in debt markets, including private credit. We're 29 00:01:36,200 --> 00:01:39,280 Speaker 1: already seeing signs of private credit stress in the form 30 00:01:39,319 --> 00:01:43,240 Speaker 1: of amendments, extensions and increasing number of loans being repaid 31 00:01:43,240 --> 00:01:46,959 Speaker 1: with more debt and arise in defaults. Some fear a 32 00:01:47,000 --> 00:01:50,680 Speaker 1: big reckoning as too much money chases too few deals. 33 00:01:51,120 --> 00:01:54,600 Speaker 1: So let's start there, and is this still a golden 34 00:01:54,680 --> 00:01:57,480 Speaker 1: age or time now to curb all that enthusiasm about 35 00:01:57,480 --> 00:01:58,120 Speaker 1: private credit? 36 00:01:59,200 --> 00:02:03,320 Speaker 2: Well, golden in it's from a credit person. It's very 37 00:02:03,400 --> 00:02:05,160 Speaker 2: hard for me to say that. You know, if I 38 00:02:05,240 --> 00:02:07,320 Speaker 2: was an equity investor, I would have been a little 39 00:02:07,320 --> 00:02:09,079 Speaker 2: bit too excited. But as we try and tend to 40 00:02:09,120 --> 00:02:12,920 Speaker 2: say in credit, there is no upside to paying a 41 00:02:12,960 --> 00:02:15,120 Speaker 2: principle back, so I have to be a little bit 42 00:02:15,120 --> 00:02:19,280 Speaker 2: more tained in my response. So where are we look, 43 00:02:19,360 --> 00:02:23,960 Speaker 2: this market got its real i would say golden age 44 00:02:23,960 --> 00:02:26,960 Speaker 2: period between twenty twenty one and twenty twenty two, and 45 00:02:27,040 --> 00:02:30,320 Speaker 2: probably half of twenty twenty three. And why that was 46 00:02:30,360 --> 00:02:34,519 Speaker 2: the case, Well, at that time we had an extraordinary 47 00:02:34,680 --> 00:02:39,560 Speaker 2: influx of liquidity. Twenty twenty one was the biggest market 48 00:02:39,720 --> 00:02:43,640 Speaker 2: in originating leverage finance loans, both in the private and 49 00:02:43,720 --> 00:02:47,040 Speaker 2: in the public syndicated market. And then we got something 50 00:02:47,480 --> 00:02:51,000 Speaker 2: extraordinary rate hikes and we got to have a base 51 00:02:51,040 --> 00:02:52,840 Speaker 2: rate in order five percent, which we haven't had in 52 00:02:52,840 --> 00:02:55,600 Speaker 2: a long time. So what that meants is that seal 53 00:02:55,720 --> 00:03:00,840 Speaker 2: investors were the largest purchasers of really syndicated owns, got 54 00:03:00,880 --> 00:03:06,440 Speaker 2: scared basically, you know, issuance and claws got really tempered, 55 00:03:06,919 --> 00:03:10,359 Speaker 2: and the bordly syndicated law market pretty much died, if 56 00:03:10,400 --> 00:03:13,080 Speaker 2: you will, for two years. So this was the golden 57 00:03:13,120 --> 00:03:15,760 Speaker 2: moment of the folks out they're the large asset managers 58 00:03:15,760 --> 00:03:18,280 Speaker 2: and others who had BDC's already set up, who had 59 00:03:18,360 --> 00:03:22,720 Speaker 2: raised capital, permanent capital ready do we deployed? So yeah. 60 00:03:22,760 --> 00:03:24,840 Speaker 2: So that was the period that between twenty twenty one 61 00:03:24,840 --> 00:03:27,720 Speaker 2: and twenty three was the golden age, and then the 62 00:03:27,760 --> 00:03:30,800 Speaker 2: market opened this year in twenty twenty four in the 63 00:03:30,800 --> 00:03:33,639 Speaker 2: borodly syndicated lawn market, it's around three hundred billion dollars 64 00:03:33,680 --> 00:03:37,120 Speaker 2: that have been already executed, so it became quite competitive, 65 00:03:37,160 --> 00:03:38,560 Speaker 2: and I'm sure we're going to touch about that. 66 00:03:39,000 --> 00:03:40,360 Speaker 1: What do you think, David golden Age? 67 00:03:40,400 --> 00:03:43,760 Speaker 3: Still, I think I tend to side with Anna on 68 00:03:43,800 --> 00:03:46,240 Speaker 3: this one. It seems like we've probably moved through the 69 00:03:46,280 --> 00:03:49,520 Speaker 3: Golden Age, although we have seen a pretty significant uptakeing 70 00:03:49,520 --> 00:03:52,640 Speaker 3: growth over the past year in asset loan formation, at 71 00:03:52,720 --> 00:03:56,640 Speaker 3: least on the balance sheets of BDC's sort of focusing 72 00:03:56,640 --> 00:03:59,320 Speaker 3: on that. That's up about twenty percent on a year 73 00:03:59,360 --> 00:04:02,200 Speaker 3: over year base. So they did take a pause and 74 00:04:02,280 --> 00:04:05,280 Speaker 3: growth as rates began to rise and as there were 75 00:04:05,280 --> 00:04:08,280 Speaker 3: all sorts of questions about the economy. Seem to have 76 00:04:08,320 --> 00:04:11,720 Speaker 3: moved through that. So there's still a lot of dry 77 00:04:11,760 --> 00:04:15,320 Speaker 3: powder being put to work in private credit and private equity. 78 00:04:15,320 --> 00:04:18,000 Speaker 3: The two go hand in hand together. So I think 79 00:04:18,000 --> 00:04:19,600 Speaker 3: that we're going to see a lot of opportunity to 80 00:04:19,640 --> 00:04:22,240 Speaker 3: add assets. But the question is is this's the right 81 00:04:22,279 --> 00:04:26,080 Speaker 3: time to be adding these assets? You know, have spreads 82 00:04:26,200 --> 00:04:28,240 Speaker 3: spreads have come in, have they come in too much? 83 00:04:28,279 --> 00:04:32,240 Speaker 3: There's a lot of competitions on a noted and it 84 00:04:32,360 --> 00:04:36,400 Speaker 3: seems as though the possibility of accidents, which I think 85 00:04:36,400 --> 00:04:39,160 Speaker 3: we've largely missed over the past couple of years, might 86 00:04:39,160 --> 00:04:40,200 Speaker 3: be on the rise now. 87 00:04:40,960 --> 00:04:44,920 Speaker 2: If I may just to add to some numbers, our 88 00:04:45,040 --> 00:04:48,040 Speaker 2: estimates show that around one hundred billion dollars of worth 89 00:04:48,040 --> 00:04:51,040 Speaker 2: of transactions order of three hundred million dollars to executed 90 00:04:51,080 --> 00:04:53,920 Speaker 2: in the private credit market here to date, from which 91 00:04:54,160 --> 00:04:57,880 Speaker 2: seventy billion were notorder for a billion dollars. Why mentioning this 92 00:04:58,040 --> 00:05:02,040 Speaker 2: is because that was the sweet spot of the broadly 93 00:05:02,080 --> 00:05:06,360 Speaker 2: syndicated loan market and everybody thought, well, the BSL market 94 00:05:06,440 --> 00:05:10,000 Speaker 2: is going to open, so that's the debt for private credit. 95 00:05:10,040 --> 00:05:12,800 Speaker 2: The show is over. But obviously that did not happen. 96 00:05:13,400 --> 00:05:16,760 Speaker 2: There is a significant number of transactions that you know, 97 00:05:17,320 --> 00:05:19,960 Speaker 2: in two, three, four years ago would have gone to 98 00:05:20,000 --> 00:05:22,600 Speaker 2: the BSL market, particularly these ones that I mentioned a 99 00:05:22,600 --> 00:05:26,960 Speaker 2: billion dollars and above. But private credit, I guess showed 100 00:05:27,000 --> 00:05:29,479 Speaker 2: it's worth over the last few years. And what I 101 00:05:29,520 --> 00:05:32,200 Speaker 2: mean by that is, you know, they're much more flexible 102 00:05:32,200 --> 00:05:36,920 Speaker 2: in execution. Therefore the rating process that's one and then 103 00:05:36,960 --> 00:05:40,720 Speaker 2: also can can attend to much more flexible terms like picking. 104 00:05:40,800 --> 00:05:46,520 Speaker 2: For example, you know, the whole concept of default is 105 00:05:46,560 --> 00:05:50,599 Speaker 2: not the same. So a lot of that B three 106 00:05:50,640 --> 00:05:54,440 Speaker 2: credits that traditionally would have been originated and placed in 107 00:05:54,560 --> 00:05:58,360 Speaker 2: clo clos became more conservative seal information. Also, although his 108 00:05:58,480 --> 00:06:00,760 Speaker 2: pick top was you know, his slow still was very 109 00:06:00,760 --> 00:06:03,000 Speaker 2: slow in the first quarter, so they were looking for 110 00:06:03,080 --> 00:06:05,440 Speaker 2: better quality credits like B two. So anything that's a 111 00:06:05,480 --> 00:06:10,400 Speaker 2: B three or would have been basically originated in the 112 00:06:10,839 --> 00:06:15,479 Speaker 2: private credit market and more definitely more flexible around this. 113 00:06:16,040 --> 00:06:19,360 Speaker 2: So what's interesting for us is thinking about what's the 114 00:06:19,400 --> 00:06:23,120 Speaker 2: new norm. Is this an an normally or this year 115 00:06:23,200 --> 00:06:25,279 Speaker 2: still part of the anomally of twenty twenty one twenty 116 00:06:25,360 --> 00:06:29,960 Speaker 2: three cycle, or truly private credit is here to stay 117 00:06:30,000 --> 00:06:32,960 Speaker 2: and going to share the stage would be asl forever. 118 00:06:33,360 --> 00:06:35,920 Speaker 3: Yeah, I mean I think that there's a a you 119 00:06:35,960 --> 00:06:38,560 Speaker 3: mentioned the word flexibility. I think that word flexibility is 120 00:06:38,600 --> 00:06:41,960 Speaker 3: something that's pretty attractive to the to that sort of 121 00:06:42,040 --> 00:06:45,760 Speaker 3: private private capital. I wouldn't just limit it to private credit, 122 00:06:45,800 --> 00:06:49,520 Speaker 3: but I think it's attractive to the private capital ecosystem 123 00:06:49,640 --> 00:06:52,680 Speaker 3: where private equity providers you know, are often you know, 124 00:06:52,760 --> 00:06:55,280 Speaker 3: kickstarting some of the transactions that are going on private 125 00:06:55,279 --> 00:06:59,479 Speaker 3: credit steps in provides funding. Uh, they do provide ease 126 00:06:59,520 --> 00:07:03,440 Speaker 3: of execute shan as opposed to the BSL market, You're 127 00:07:03,480 --> 00:07:06,599 Speaker 3: dealing with one or a small club of lenders, very 128 00:07:06,640 --> 00:07:10,000 Speaker 3: easy to sort of make changes and amendments and you know, 129 00:07:10,040 --> 00:07:14,040 Speaker 3: sort of shift gears on the fly in a debt 130 00:07:14,080 --> 00:07:17,960 Speaker 3: transaction given that limited number of lenders, as opposed to 131 00:07:18,040 --> 00:07:21,680 Speaker 3: the BSL market or structured market where you've got far 132 00:07:21,840 --> 00:07:24,440 Speaker 3: less flexibility and you're dealing with more people and have 133 00:07:24,480 --> 00:07:27,480 Speaker 3: more hurdles to cross. So that's pretty attractive to the borrowers. 134 00:07:27,840 --> 00:07:29,240 Speaker 2: Yeah, and then if I am a d I was 135 00:07:29,240 --> 00:07:33,800 Speaker 2: looking actually at FED research paper and private credit yesterday 136 00:07:33,840 --> 00:07:38,520 Speaker 2: preparing for this discussion and just to kind of mention 137 00:07:38,680 --> 00:07:42,800 Speaker 2: this whole point of typically it was a one lender market. Actually, 138 00:07:42,920 --> 00:07:46,040 Speaker 2: the FED shows that what traditionally was a one lender 139 00:07:46,120 --> 00:07:49,600 Speaker 2: typical private credit market has increased to two point eight 140 00:07:49,720 --> 00:07:52,720 Speaker 2: on medium for most of private credit deals. And we 141 00:07:52,840 --> 00:07:55,960 Speaker 2: know that this particular transactions nord of a billion or so, 142 00:07:56,440 --> 00:08:00,200 Speaker 2: they really become very much a club of six an 143 00:08:00,280 --> 00:08:05,000 Speaker 2: aid sometimes private credit lenders. So there is quite a 144 00:08:05,040 --> 00:08:10,120 Speaker 2: convergence for sure in terms of the structure convergency in pricing. 145 00:08:11,120 --> 00:08:14,480 Speaker 2: You know, the private credit loans used to you know, 146 00:08:14,640 --> 00:08:17,160 Speaker 2: generate like a six hundred and fifty bases points spread 147 00:08:17,560 --> 00:08:19,480 Speaker 2: just a year ago, and now that has shrinked. In 148 00:08:19,560 --> 00:08:22,560 Speaker 2: some latest deals, we're looking at around five point fifty, 149 00:08:22,680 --> 00:08:25,480 Speaker 2: which is pretty much within the norm of the broadly 150 00:08:25,520 --> 00:08:28,720 Speaker 2: syndicate in law market. So we step back and say, okay, 151 00:08:28,760 --> 00:08:33,360 Speaker 2: so it's very clubbish, meaning more banks are participating. So 152 00:08:33,440 --> 00:08:38,080 Speaker 2: that's similar to the broadly syndicated lawmarket. Spreads have compressed. 153 00:08:38,120 --> 00:08:41,120 Speaker 2: So what makes the secret sauce? And I think it 154 00:08:41,200 --> 00:08:46,520 Speaker 2: goes back to the terms and the flexibility that if 155 00:08:46,600 --> 00:08:51,000 Speaker 2: a loan ends up being in trouble, it doesn't have 156 00:08:51,120 --> 00:08:54,640 Speaker 2: to exit a CLO structure immediately because as the rating 157 00:08:54,720 --> 00:08:58,160 Speaker 2: agencies will claim that as a default. Even you know, 158 00:08:58,520 --> 00:09:01,520 Speaker 2: infusion by a sponsor capital, which was a norm in 159 00:09:01,520 --> 00:09:03,440 Speaker 2: private credit over the last two years, they would have 160 00:09:03,480 --> 00:09:05,920 Speaker 2: been potentially a trigger to call it a default and 161 00:09:06,000 --> 00:09:12,840 Speaker 2: downgrade to C DOUBLEA, which immediately becomes disadvantaged from asset 162 00:09:12,960 --> 00:09:15,600 Speaker 2: quality in a colo versus in the private credit market, 163 00:09:15,640 --> 00:09:19,280 Speaker 2: that's a performing loan that luckily got a sponsor in fusion. 164 00:09:19,360 --> 00:09:22,640 Speaker 2: So I'm glad you know, we're we're kind of comparing contrasting, 165 00:09:22,720 --> 00:09:25,960 Speaker 2: but I think we will also discuss how we compare 166 00:09:26,000 --> 00:09:28,120 Speaker 2: those default straight shortly as well. 167 00:09:28,360 --> 00:09:30,480 Speaker 1: What are your expectations for growth of this market? I mean, 168 00:09:30,520 --> 00:09:32,160 Speaker 1: it's sort of doubled over the last couple of years 169 00:09:32,600 --> 00:09:35,199 Speaker 1: in size, But what you were saying is it kind 170 00:09:35,200 --> 00:09:38,280 Speaker 1: of grew very quickly at the expense of broady syndicated loans, 171 00:09:38,280 --> 00:09:40,360 Speaker 1: which kind of shut down. Now that those are back, 172 00:09:40,440 --> 00:09:42,400 Speaker 1: Does that mean that the pace of growth of private 173 00:09:42,400 --> 00:09:44,320 Speaker 1: credit just slows or stops altogether. 174 00:09:45,440 --> 00:09:48,400 Speaker 2: Well, we you know, back many people out there, pundits 175 00:09:48,440 --> 00:09:52,679 Speaker 2: have estimated various numbers out there have been a two 176 00:09:52,720 --> 00:09:56,160 Speaker 2: point eight to three trillion over next three to five years. 177 00:09:56,480 --> 00:09:58,520 Speaker 2: We look at it a little bit more simple than that. 178 00:09:58,840 --> 00:10:00,880 Speaker 2: If today's one point seve and trillion, and we have 179 00:10:00,920 --> 00:10:05,400 Speaker 2: a three trillion dollars of private equity dry powder, and 180 00:10:05,440 --> 00:10:09,160 Speaker 2: we looked at statistically, depending on the rate cycle, equity 181 00:10:09,240 --> 00:10:11,400 Speaker 2: versus debt on media, and let's say it's around fifty 182 00:10:11,400 --> 00:10:14,160 Speaker 2: percent equity versus dead which means that that three trillion 183 00:10:14,240 --> 00:10:19,480 Speaker 2: dollars of private equity capital will need to be invested 184 00:10:19,480 --> 00:10:22,439 Speaker 2: with the equivalent of the three trillion dollars of debt. 185 00:10:22,720 --> 00:10:26,000 Speaker 2: So now exactly the conversation we just had is where 186 00:10:26,040 --> 00:10:28,080 Speaker 2: this new norm is private created is going to be 187 00:10:28,080 --> 00:10:34,199 Speaker 2: thirty fifty percent of all leverage trainians credit provisions. Let's assume, 188 00:10:34,640 --> 00:10:37,560 Speaker 2: you know, for sake of simplicity, fifty percent fifty split 189 00:10:37,640 --> 00:10:40,640 Speaker 2: up the market share with BSL. You end up basically 190 00:10:40,679 --> 00:10:44,520 Speaker 2: with need of roughly three or and a half of 191 00:10:44,679 --> 00:10:47,080 Speaker 2: CREAD provision over the next five to seven years to 192 00:10:47,160 --> 00:10:50,920 Speaker 2: deploy that private equity dry powder. So you know, again 193 00:10:50,960 --> 00:10:54,439 Speaker 2: it's all about timing and how long horizon you want 194 00:10:54,440 --> 00:10:57,640 Speaker 2: to have, but certainly, based on this very simplisticalcualation, you 195 00:10:57,679 --> 00:11:00,240 Speaker 2: can get to three trillion market you know, by of 196 00:11:00,240 --> 00:11:00,720 Speaker 2: the decade. 197 00:11:00,880 --> 00:11:03,520 Speaker 1: And in terms of deal size on a single deal level, 198 00:11:03,640 --> 00:11:05,320 Speaker 1: you know, we've seen some very big deals in a 199 00:11:05,360 --> 00:11:07,679 Speaker 1: five billion plus. It is going to continue to get 200 00:11:07,720 --> 00:11:09,440 Speaker 1: bigger in private credit, do you think. 201 00:11:10,120 --> 00:11:12,240 Speaker 2: Yeah, exactly, as I said, I mean, seventy of the 202 00:11:12,240 --> 00:11:14,599 Speaker 2: one hundred billion a year to DAT has been executed. 203 00:11:14,640 --> 00:11:18,720 Speaker 2: That's our estimates. Point two seventy billion has been these 204 00:11:18,760 --> 00:11:21,760 Speaker 2: transactions nord of a billion, with a few obviously exceeding 205 00:11:21,800 --> 00:11:24,080 Speaker 2: even two and a half billion kind of medium size. 206 00:11:24,640 --> 00:11:29,040 Speaker 2: So for sure it becomes what we are hearing from 207 00:11:29,040 --> 00:11:32,560 Speaker 2: the banks, from the private credit managers is pretty much 208 00:11:32,600 --> 00:11:34,959 Speaker 2: every deal nord of a billion actually now goes through 209 00:11:34,960 --> 00:11:38,680 Speaker 2: a dual process. Private credit almost like arrived and it's 210 00:11:38,720 --> 00:11:41,600 Speaker 2: not leaving. And the banks are like, you know, are 211 00:11:41,640 --> 00:11:45,040 Speaker 2: obviously not liking it. But the private equity managers and 212 00:11:45,040 --> 00:11:47,280 Speaker 2: sponsors are you know, indulging in it. 213 00:11:47,880 --> 00:11:49,920 Speaker 3: Yeah, and the you know, and a lot of those 214 00:11:49,920 --> 00:11:54,920 Speaker 3: sponsors are advising the private credit lenders, so you know, 215 00:11:55,240 --> 00:11:58,360 Speaker 3: there is that sort of ecosystem of private capital out 216 00:11:58,400 --> 00:12:02,520 Speaker 3: there that they cross over from private debt to private 217 00:12:02,520 --> 00:12:05,960 Speaker 3: equity and keeping everything you know, within the ecosystem I 218 00:12:06,000 --> 00:12:09,960 Speaker 3: think is pretty attractive to certainly to the advisors. 219 00:12:10,080 --> 00:12:12,040 Speaker 1: You mentioned the banks, though I know you cover the banks, 220 00:12:12,080 --> 00:12:15,160 Speaker 1: you have a very broad mandate moodies, which is is 221 00:12:15,200 --> 00:12:15,839 Speaker 1: interesting to me. 222 00:12:16,320 --> 00:12:16,800 Speaker 2: How are the. 223 00:12:16,760 --> 00:12:20,160 Speaker 1: Traditional banks affected by this big boom in direct lending. 224 00:12:20,160 --> 00:12:23,040 Speaker 1: On the one hand, they were competing, as you say, 225 00:12:23,080 --> 00:12:25,000 Speaker 1: you know, they lost out on business in the broadly 226 00:12:25,040 --> 00:12:28,720 Speaker 1: syndicated market, but now they seem to be lending more 227 00:12:28,800 --> 00:12:31,840 Speaker 1: to the private credit managers, you know, sort of doubling 228 00:12:31,840 --> 00:12:34,760 Speaker 1: the leverage in some cases in some of the fundraising, 229 00:12:35,480 --> 00:12:38,000 Speaker 1: how much risk is building on the bank side because 230 00:12:38,000 --> 00:12:39,520 Speaker 1: of this market growth? 231 00:12:40,040 --> 00:12:43,280 Speaker 2: No, absolutely great question and yeah when we set up 232 00:12:43,280 --> 00:12:46,640 Speaker 2: the private Credit Analytical franchise, said Moodies. And why it 233 00:12:46,760 --> 00:12:50,640 Speaker 2: lended with me leading it is because I've covered it 234 00:12:50,679 --> 00:12:53,320 Speaker 2: was the quota of all being creatings globally responsible for 235 00:12:53,960 --> 00:12:56,319 Speaker 2: capital markets being seem particular the ones who are the 236 00:12:56,400 --> 00:13:00,240 Speaker 2: largest in in this space and provisioning credit to to 237 00:13:00,280 --> 00:13:05,040 Speaker 2: private credit and sponsors. And it became evident as part 238 00:13:05,080 --> 00:13:08,080 Speaker 2: of our diligence into the banks and or risk meetings 239 00:13:08,080 --> 00:13:11,880 Speaker 2: that the line that was growing the fastest in addition 240 00:13:11,920 --> 00:13:14,600 Speaker 2: to the commercial real estate for for a number of years, 241 00:13:15,080 --> 00:13:17,959 Speaker 2: was the exposure to non bank financials. And when we 242 00:13:18,120 --> 00:13:21,840 Speaker 2: tried to dig in into that particular exposure, because that 243 00:13:21,920 --> 00:13:25,320 Speaker 2: can be anything from origination of mortgage stray to be 244 00:13:25,360 --> 00:13:29,640 Speaker 2: securitized or traditional COLO or auto loans, et cetera. Really 245 00:13:29,679 --> 00:13:33,000 Speaker 2: the most significant subcomponent of that exposure to non bank 246 00:13:33,040 --> 00:13:36,839 Speaker 2: financials was indeed exposure to private credit and private AQ 247 00:13:36,880 --> 00:13:38,839 Speaker 2: with you. And as a matter of fact, there are 248 00:13:38,840 --> 00:13:43,720 Speaker 2: two particular business lines within that segment that had the 249 00:13:43,800 --> 00:13:47,680 Speaker 2: fastest growth. One was the subscription line of credit that 250 00:13:47,760 --> 00:13:50,760 Speaker 2: obviously had both to private equit but also increasingly over 251 00:13:50,800 --> 00:13:54,000 Speaker 2: the last few years, to private credit funds. And the 252 00:13:54,040 --> 00:13:57,800 Speaker 2: second line was something called asset bak finance or asset 253 00:13:57,800 --> 00:14:01,400 Speaker 2: back lending, which ultimately is what you just mentioned is 254 00:14:01,440 --> 00:14:05,440 Speaker 2: the leverage provisioning into the BDCs and other similar funds. 255 00:14:05,720 --> 00:14:08,360 Speaker 2: So how do the BDCs, maybe just let devistify this 256 00:14:08,800 --> 00:14:12,679 Speaker 2: for our audience here, The BDCs typically fund themselves in 257 00:14:13,040 --> 00:14:15,360 Speaker 2: when they start, when they're kind of a smaller entity, 258 00:14:15,360 --> 00:14:18,880 Speaker 2: into the secured market solely as they basically typically you know, 259 00:14:18,920 --> 00:14:21,640 Speaker 2: let's say cross five hundred million dollar size, they issue 260 00:14:21,680 --> 00:14:24,600 Speaker 2: private placements and anord of a billion, they actually seek 261 00:14:25,480 --> 00:14:28,200 Speaker 2: usually a public rating, and issue senior and secure dead 262 00:14:28,800 --> 00:14:31,280 Speaker 2: So in addition to the senior and secure debt, they 263 00:14:31,320 --> 00:14:35,920 Speaker 2: actually also still maintain a secure debt that's provided by 264 00:14:35,960 --> 00:14:39,480 Speaker 2: the banks. And we estimate that that size of that 265 00:14:39,560 --> 00:14:42,840 Speaker 2: exposure and banks balance is around four hundred plus billion dollars, 266 00:14:43,040 --> 00:14:45,600 Speaker 2: which is quite significant. But the change is really the 267 00:14:45,600 --> 00:14:49,120 Speaker 2: most significant, and what our data shows is that the 268 00:14:49,160 --> 00:14:51,960 Speaker 2: growth of the bank's exposure in that particular asset by 269 00:14:51,960 --> 00:14:56,640 Speaker 2: clending to private credit, has outpaced the fundraising of the 270 00:14:56,640 --> 00:15:01,040 Speaker 2: alternative acet managers private credit lenders, so they have increased 271 00:15:01,080 --> 00:15:05,720 Speaker 2: the exposure higher than what the capital raising activity it is. 272 00:15:06,000 --> 00:15:08,280 Speaker 2: So that might be simply a ketch up, but it's 273 00:15:08,280 --> 00:15:11,880 Speaker 2: a severy lucrative business, an attractive business for the banks, 274 00:15:12,000 --> 00:15:14,000 Speaker 2: and we think this is going to be this is 275 00:15:14,040 --> 00:15:16,560 Speaker 2: going to continue growing because there's always going to be 276 00:15:16,560 --> 00:15:20,200 Speaker 2: a secured component as part of the banks, as part 277 00:15:20,200 --> 00:15:23,600 Speaker 2: of the private credit funds originating these kind of loans. 278 00:15:23,920 --> 00:15:25,800 Speaker 3: Yeah, and it sort of goes back to, you know, 279 00:15:25,960 --> 00:15:28,240 Speaker 3: changes and regulations that have been going on since the 280 00:15:28,520 --> 00:15:32,160 Speaker 3: since the financial crisis, where banks had to de risk 281 00:15:32,240 --> 00:15:35,120 Speaker 3: you know, vast ways of their of their lending portfolios. 282 00:15:35,200 --> 00:15:40,040 Speaker 3: So they did draw back from from lower quality corporate 283 00:15:40,080 --> 00:15:43,560 Speaker 3: credit middle market lending. Uh. And it's easier for them 284 00:15:43,640 --> 00:15:45,920 Speaker 3: to go in from a regulatory perspective and make a 285 00:15:45,960 --> 00:15:49,080 Speaker 3: secured loan to an investment grade or near investment grade 286 00:15:49,160 --> 00:15:52,440 Speaker 3: rated entity than it is to a B three C 287 00:15:52,600 --> 00:15:56,240 Speaker 3: doa A one rated entity. And you know, you should 288 00:15:56,240 --> 00:15:59,840 Speaker 3: probably cueue the foreboding background music now because we are 289 00:16:00,040 --> 00:16:05,960 Speaker 3: talking about the specter of shadow banking. And you know, 290 00:16:05,960 --> 00:16:08,960 Speaker 3: if you look through the report, for example, that the 291 00:16:09,000 --> 00:16:12,520 Speaker 3: IMF did earlier this year, taking I think they dedicated 292 00:16:12,520 --> 00:16:16,080 Speaker 3: twenty to thirty pages on private credit in their Global 293 00:16:16,080 --> 00:16:19,360 Speaker 3: Financial Stability Report. One of their you know, sort of 294 00:16:19,400 --> 00:16:25,240 Speaker 3: key recommendations is stepping up regulation and disclosure around private credit, 295 00:16:25,280 --> 00:16:28,760 Speaker 3: particularly within the banking system. So well, I'm sure everybody's 296 00:16:28,760 --> 00:16:30,440 Speaker 3: going to love that, but we'll see how that goes. 297 00:16:31,000 --> 00:16:33,800 Speaker 2: No, absolutely, you know, we we have quite all significant 298 00:16:33,840 --> 00:16:37,840 Speaker 2: engagement with variety of regulators globally. Everybody's trying to understand 299 00:16:38,640 --> 00:16:43,240 Speaker 2: what does this disruption, if you will, will mean for 300 00:16:43,280 --> 00:16:46,560 Speaker 2: the banks, both from a of course competitive perspective, but 301 00:16:46,680 --> 00:16:50,560 Speaker 2: also from a risk perspective, and you know, you know, 302 00:16:50,600 --> 00:16:54,400 Speaker 2: there's just a few arguments on that side, on both 303 00:16:54,440 --> 00:16:56,560 Speaker 2: sides of the argument, if you will. So for example, 304 00:16:57,520 --> 00:17:00,600 Speaker 2: you know, if you think about a leveraged loan and 305 00:17:01,760 --> 00:17:04,879 Speaker 2: that has six seven times leverage, a lot of the 306 00:17:04,920 --> 00:17:08,320 Speaker 2: private asset manager, private asset managers, alternative asset managers will 307 00:17:08,320 --> 00:17:12,359 Speaker 2: originate this private credit loans would say, isn't that better 308 00:17:12,400 --> 00:17:15,040 Speaker 2: that risky loan to be funded with a permanent capital 309 00:17:16,080 --> 00:17:18,960 Speaker 2: at one to one leverage versus set a bank that 310 00:17:19,040 --> 00:17:21,600 Speaker 2: has nine to ten times leverage and funded with you 311 00:17:21,640 --> 00:17:25,040 Speaker 2: know forty you know, media for US banks and particularly 312 00:17:25,080 --> 00:17:27,399 Speaker 2: large banks, you know anywhere from thirty to sixty percent 313 00:17:27,440 --> 00:17:31,560 Speaker 2: of deposits, which have proven, particularly in the last years 314 00:17:31,640 --> 00:17:35,520 Speaker 2: regional bank crisis, to be quite flighty. So yes, there 315 00:17:35,600 --> 00:17:40,040 Speaker 2: is an argument to that. And however, you know, with 316 00:17:40,280 --> 00:17:44,640 Speaker 2: the loans moving into the private credit ecosystem and funded 317 00:17:44,720 --> 00:17:49,280 Speaker 2: only on banks balance sheets or or in the dark, 318 00:17:49,359 --> 00:17:51,639 Speaker 2: if you will, because we don't know on what terms. 319 00:17:51,640 --> 00:17:55,840 Speaker 2: Every banks has its own risk management standards that are 320 00:17:55,840 --> 00:17:59,480 Speaker 2: proprietary to a bank, and there's very little disclosures as 321 00:17:59,480 --> 00:18:01,560 Speaker 2: it is set to day about the breakout of that 322 00:18:01,640 --> 00:18:04,840 Speaker 2: particular non bank financial exposure line that has been growing. 323 00:18:05,840 --> 00:18:09,879 Speaker 2: It certainly creates concerns about on what terms are those 324 00:18:11,200 --> 00:18:14,840 Speaker 2: loans being made and what's the ultimate leverage in the system. 325 00:18:15,400 --> 00:18:19,040 Speaker 2: And so definitely we've been calling as well for better transparency, 326 00:18:19,119 --> 00:18:23,720 Speaker 2: particularly from the bank's perspective, about their exposure because you 327 00:18:23,760 --> 00:18:25,760 Speaker 2: know this in the larger scheme of things. So four 328 00:18:25,800 --> 00:18:28,120 Speaker 2: hundred billion, let's say, which is our current estimate based 329 00:18:28,160 --> 00:18:31,320 Speaker 2: on a survey that we are executing, and we'll be 330 00:18:31,320 --> 00:18:34,240 Speaker 2: writing more about it. It's it's not significant. We take 331 00:18:34,240 --> 00:18:38,439 Speaker 2: a twenty seven trillion US assets banking systems and this 332 00:18:38,560 --> 00:18:41,720 Speaker 2: was by the way global banks number so but the 333 00:18:41,800 --> 00:18:44,040 Speaker 2: pace and again the terms and is there not a 334 00:18:44,119 --> 00:18:46,400 Speaker 2: hidden leverage behind it is what concerns regulators. 335 00:18:46,800 --> 00:18:48,800 Speaker 1: But it's just basically fair of the unknown. Again with you, 336 00:18:48,960 --> 00:18:51,000 Speaker 1: David Sinister, music playing in the background. I mean, you 337 00:18:51,040 --> 00:18:54,000 Speaker 1: know what we can't see. We worry about you sumbly 338 00:18:54,240 --> 00:18:56,679 Speaker 1: can see more than a lot of other people because 339 00:18:56,760 --> 00:18:58,919 Speaker 1: you know you have the access. Is there anything that 340 00:18:58,960 --> 00:19:00,400 Speaker 1: you're worried about right now? 341 00:19:01,080 --> 00:19:05,359 Speaker 2: Not particularly today, because it gives us comfort that a 342 00:19:05,400 --> 00:19:09,600 Speaker 2: lot of that exposure is in these two particular business lines, 343 00:19:09,640 --> 00:19:14,280 Speaker 2: as I said, and the particularly asset back finance line 344 00:19:14,520 --> 00:19:19,520 Speaker 2: is a super senior protection for the banks, whereby they 345 00:19:19,520 --> 00:19:23,920 Speaker 2: have quite a lot of coverage. Typical the loan to 346 00:19:24,080 --> 00:19:27,040 Speaker 2: values around sixty percent. And these are all senior loans 347 00:19:27,080 --> 00:19:30,600 Speaker 2: that have been mostly senior loans that have been supporting 348 00:19:30,600 --> 00:19:33,959 Speaker 2: as a collateral. And therefore it has to have a 349 00:19:34,000 --> 00:19:37,240 Speaker 2: major correction first and foremost, and the value of both 350 00:19:37,280 --> 00:19:39,720 Speaker 2: the private equity kind of enterprise value of the companies 351 00:19:39,720 --> 00:19:43,040 Speaker 2: that senior loans support, and think about these are senior 352 00:19:43,080 --> 00:19:47,160 Speaker 2: loans that even if private equity is necessarily losing their value. 353 00:19:47,240 --> 00:19:49,359 Speaker 2: The senior loans should be first to pay, and again 354 00:19:49,400 --> 00:19:51,400 Speaker 2: the bank will be the first one to pay if 355 00:19:51,400 --> 00:19:53,280 Speaker 2: there is an issue with that loan. So it has 356 00:19:53,320 --> 00:19:56,280 Speaker 2: to be a major correction in the asset value of 357 00:19:56,760 --> 00:20:01,080 Speaker 2: senior loans today. If you think about history, recoveries for 358 00:20:01,840 --> 00:20:05,840 Speaker 2: senior loans of leverage finance companies have been around seventy percent. 359 00:20:06,000 --> 00:20:08,520 Speaker 2: We think in this cycle for the broadly syndicated low 360 00:20:08,560 --> 00:20:11,639 Speaker 2: market that may go down as low as sixty And 361 00:20:11,720 --> 00:20:17,160 Speaker 2: what we really are focused on is we haven't had 362 00:20:17,160 --> 00:20:21,520 Speaker 2: a significant default cycle into the private credit loans today. 363 00:20:22,119 --> 00:20:24,160 Speaker 2: And we will talk in a second maybe why that's 364 00:20:24,160 --> 00:20:28,199 Speaker 2: the case, but we haven't. It's the argument of the 365 00:20:28,240 --> 00:20:32,080 Speaker 2: private credit managers that they will manage this asset better 366 00:20:32,560 --> 00:20:35,280 Speaker 2: than the banks or the broadly syne killaw market who 367 00:20:35,280 --> 00:20:38,480 Speaker 2: are here just to originate and distribute versus only to balance. 368 00:20:38,560 --> 00:20:40,679 Speaker 2: It is something that we are watching to see and 369 00:20:40,720 --> 00:20:45,119 Speaker 2: we see how they really perform ultimately relative to BSL market. 370 00:20:45,119 --> 00:20:47,439 Speaker 2: There is a lot of arguments why private credit managers 371 00:20:47,480 --> 00:20:49,919 Speaker 2: will do it better because they have their own They 372 00:20:49,920 --> 00:20:52,240 Speaker 2: have first of all, the benefit of time. At the 373 00:20:52,320 --> 00:20:54,840 Speaker 2: end of the day, they can because they have permanent 374 00:20:54,840 --> 00:20:58,560 Speaker 2: capital funding it that don't have overnight liquidity risks, at 375 00:20:58,640 --> 00:21:01,160 Speaker 2: least the funds that we rate, which is the bulk 376 00:21:01,160 --> 00:21:03,520 Speaker 2: of the BDCs and around ninety percent of the assets 377 00:21:03,560 --> 00:21:06,760 Speaker 2: and investment create Because of the low leverage and no 378 00:21:06,880 --> 00:21:11,040 Speaker 2: immediate funding risks, they can withstand let's at temporary shock 379 00:21:11,960 --> 00:21:15,920 Speaker 2: into the liquidity market and manage that loan for ultimate 380 00:21:15,960 --> 00:21:19,320 Speaker 2: recovery two three, four years from now. And also they've 381 00:21:19,320 --> 00:21:20,960 Speaker 2: been building a lot of the large funds have been 382 00:21:21,000 --> 00:21:26,680 Speaker 2: actually building their own resolution teams, hiring structuring teams, being 383 00:21:26,760 --> 00:21:29,360 Speaker 2: ready for such a cycle. So I think this will 384 00:21:29,400 --> 00:21:32,560 Speaker 2: be This is probably the biggest unknown is is that 385 00:21:33,280 --> 00:21:37,120 Speaker 2: fundraising premise, if you will, of the funds that they're 386 00:21:37,119 --> 00:21:38,719 Speaker 2: going to perform better will come true. 387 00:21:38,800 --> 00:21:41,320 Speaker 3: So I think that sort of gets back to the 388 00:21:41,359 --> 00:21:42,800 Speaker 3: word that I've sort of thrown out there a couple 389 00:21:42,840 --> 00:21:45,360 Speaker 3: of times, is this whole ecosystem idea that you've got 390 00:21:45,400 --> 00:21:48,359 Speaker 3: private capital, not just private debt, not just private equity, 391 00:21:48,400 --> 00:21:50,960 Speaker 3: but sort of private debt and equity working together along 392 00:21:50,960 --> 00:21:54,080 Speaker 3: with the sponsors too, who have that ability to throw 393 00:21:54,160 --> 00:21:56,760 Speaker 3: good money after good if you get to a troubled situation, 394 00:21:56,880 --> 00:21:59,920 Speaker 3: they've got the flexibility to make changes to terms and 395 00:22:00,080 --> 00:22:04,760 Speaker 3: conditions and amendments in a fairly flexible manner that may 396 00:22:04,800 --> 00:22:09,159 Speaker 3: not exist elsewhere. There are people that that view, you know, 397 00:22:09,320 --> 00:22:13,080 Speaker 3: amendments and things of that nature is sweeping problems under 398 00:22:13,080 --> 00:22:16,359 Speaker 3: the rug, which may be true. But again, if you 399 00:22:16,359 --> 00:22:18,960 Speaker 3: can throw good money after good or make an amendment 400 00:22:19,160 --> 00:22:20,600 Speaker 3: for a loan that you think will be good, it 401 00:22:20,640 --> 00:22:22,720 Speaker 3: makes sense rather than being forced to do something you 402 00:22:22,720 --> 00:22:25,480 Speaker 3: don't want to do. Just and on. One of the 403 00:22:25,560 --> 00:22:27,480 Speaker 3: things which I think is kind of interesting and I 404 00:22:27,520 --> 00:22:34,280 Speaker 3: get asset all the time, is why has private credit 405 00:22:34,440 --> 00:22:37,919 Speaker 3: been as or credit generally, I guess, but private credit 406 00:22:38,000 --> 00:22:40,399 Speaker 3: been as resilient as it's been. Like if I go 407 00:22:40,480 --> 00:22:42,320 Speaker 3: back and look at some of the research that you 408 00:22:42,359 --> 00:22:45,919 Speaker 3: guys did, I look back about a year ago, I 409 00:22:45,920 --> 00:22:48,199 Speaker 3: think that we were looking at a trailing default rate 410 00:22:48,240 --> 00:22:53,320 Speaker 3: of about three percent in BA in B three debt. 411 00:22:53,760 --> 00:22:56,520 Speaker 3: I think you and others were forecasting that that was 412 00:22:56,560 --> 00:22:59,239 Speaker 3: going to put perhaps double over the next year. That 413 00:22:59,320 --> 00:23:02,200 Speaker 3: hasn't happened. And so what what do you think is 414 00:23:02,240 --> 00:23:05,959 Speaker 3: going on? I've got my own theories, but curious. 415 00:23:05,480 --> 00:23:08,159 Speaker 2: We'd love to debate that one. Maybe maybe we agree, 416 00:23:08,680 --> 00:23:13,560 Speaker 2: So let me just kind of provide little statistics. You know, 417 00:23:13,600 --> 00:23:16,359 Speaker 2: we were actually close to five percent you know default 418 00:23:16,400 --> 00:23:18,560 Speaker 2: rate that we project is going to be down to 419 00:23:18,600 --> 00:23:21,240 Speaker 2: three point five percent this year and going into next year. 420 00:23:21,680 --> 00:23:24,760 Speaker 2: And that's on the broadly syndicated high yield you know, 421 00:23:24,840 --> 00:23:28,840 Speaker 2: senior loans. If you look at now of the private 422 00:23:28,880 --> 00:23:32,960 Speaker 2: credit loans universe that we rate in the business development 423 00:23:33,000 --> 00:23:36,720 Speaker 2: companies or BDC sector, actually none acrules went from just 424 00:23:36,800 --> 00:23:39,520 Speaker 2: fifty basis points two years ago to nord of one 425 00:23:39,560 --> 00:23:44,240 Speaker 2: percent today. So again this is like comparing apples and oranges, 426 00:23:44,280 --> 00:23:47,560 Speaker 2: which is the big issue of the market because as 427 00:23:47,560 --> 00:23:50,880 Speaker 2: I said earlier, as sponsor can infuse a capital, which 428 00:23:51,040 --> 00:23:53,280 Speaker 2: happened in you know, at least you know, thirty forty 429 00:23:53,320 --> 00:23:56,199 Speaker 2: percent of transactions over the last couple of years in 430 00:23:56,240 --> 00:23:59,160 Speaker 2: the private credit universe, and that is not a default 431 00:24:00,200 --> 00:24:03,520 Speaker 2: versus a non accrule really means that they're not paying interest. 432 00:24:04,040 --> 00:24:08,879 Speaker 2: So the couple of dynamics, there was definitely an ability 433 00:24:09,400 --> 00:24:13,280 Speaker 2: to move transactions from the broadly syndicated loan market when 434 00:24:13,320 --> 00:24:17,320 Speaker 2: they crossed that potential risk of default into the private 435 00:24:17,359 --> 00:24:22,679 Speaker 2: credit market. So in my view, it's very hard statistically 436 00:24:22,680 --> 00:24:25,600 Speaker 2: to prove this is we're trying to actually research it 437 00:24:25,960 --> 00:24:28,960 Speaker 2: at this moment, is how much of that those number 438 00:24:28,960 --> 00:24:32,080 Speaker 2: of loans that actually moved from be a sell into 439 00:24:32,080 --> 00:24:35,359 Speaker 2: private credit And if assumed that big part of that 440 00:24:35,480 --> 00:24:38,120 Speaker 2: maybe would have hit a default, would actually have increased 441 00:24:38,760 --> 00:24:42,680 Speaker 2: the measured default rate. And obviously that is very hard 442 00:24:42,680 --> 00:24:47,280 Speaker 2: to point. There was just an avenue of capital that 443 00:24:47,400 --> 00:24:50,680 Speaker 2: existed in private credit did not exist in prior cycles. 444 00:24:51,040 --> 00:24:54,240 Speaker 2: So that's a big reason of why that happened. Secondly, 445 00:24:55,240 --> 00:24:58,639 Speaker 2: we did have quite a constructive economy. Yes, inflation was 446 00:24:58,880 --> 00:25:02,760 Speaker 2: high as the rate increased, but we did have historic 447 00:25:02,880 --> 00:25:06,160 Speaker 2: very low unemployment. The economy was doing well, which means 448 00:25:06,160 --> 00:25:09,040 Speaker 2: that if you think about the US economy being driven 449 00:25:09,080 --> 00:25:11,520 Speaker 2: by the consumer, two thirds of the US GDP's driven 450 00:25:11,560 --> 00:25:15,479 Speaker 2: by consumer spending, and which means it's highly correlated to 451 00:25:15,640 --> 00:25:18,440 Speaker 2: the unemployment rate more than inflation rate or any other 452 00:25:19,040 --> 00:25:21,240 Speaker 2: or even interest rate. Has proven to be the case. 453 00:25:21,640 --> 00:25:24,760 Speaker 2: So therefore, and you know, we can debate these two 454 00:25:24,760 --> 00:25:26,960 Speaker 2: tails of the consumer and all of that, but generally 455 00:25:27,000 --> 00:25:31,320 Speaker 2: the consumer was had extra liquidity, had jobs, which means 456 00:25:31,320 --> 00:25:34,119 Speaker 2: that was supportive to the economy. So therefore you have 457 00:25:34,160 --> 00:25:37,080 Speaker 2: two factors again influx of capital for private credit that 458 00:25:37,200 --> 00:25:40,159 Speaker 2: basically a lot of firms who could have defaulted in 459 00:25:40,160 --> 00:25:42,480 Speaker 2: a public market went and refinance, so they did not 460 00:25:42,600 --> 00:25:46,600 Speaker 2: default in the official statistic. And then secondly, we had 461 00:25:46,600 --> 00:25:50,119 Speaker 2: a relatively strong economy booming despite the inflation and the 462 00:25:50,200 --> 00:25:50,720 Speaker 2: high rates. 463 00:25:50,960 --> 00:25:54,879 Speaker 3: Yeah, I tend to think that the trillions of helicopter 464 00:25:55,720 --> 00:25:59,520 Speaker 3: dollars of helicopter money that were pushed into the economy 465 00:25:59,600 --> 00:26:02,399 Speaker 3: during the pandemic are having a pretty big influence on 466 00:26:02,760 --> 00:26:05,679 Speaker 3: what we're seeing in individual you know, sort of credit 467 00:26:05,720 --> 00:26:09,760 Speaker 3: trends and in in corporate credit trends. But one area 468 00:26:09,800 --> 00:26:14,120 Speaker 3: which which I think is is drawing greater scrutiny right 469 00:26:14,119 --> 00:26:19,560 Speaker 3: now is the amount of payment and kind income PICK income, 470 00:26:19,560 --> 00:26:23,280 Speaker 3: which is flowing through at least BDC balance sheets. I 471 00:26:23,320 --> 00:26:26,600 Speaker 3: did some research that was published over the past couple 472 00:26:26,680 --> 00:26:29,360 Speaker 3: of days where we go back about five or six 473 00:26:29,440 --> 00:26:32,400 Speaker 3: years look at PICK income as a percentage of total 474 00:26:32,440 --> 00:26:34,440 Speaker 3: investment income, and I think it's gone from less than 475 00:26:34,440 --> 00:26:37,359 Speaker 3: five percent back in twenty eighteen or twenty nineteen to 476 00:26:37,880 --> 00:26:41,040 Speaker 3: just about ten percent now for BDC's And I think 477 00:26:41,040 --> 00:26:44,160 Speaker 3: that you know, a lot of people that I talked 478 00:26:44,160 --> 00:26:46,720 Speaker 3: to are wondering, well, this is it. This is showing 479 00:26:46,720 --> 00:26:49,560 Speaker 3: that there really is stress building up in these private 480 00:26:49,560 --> 00:26:52,359 Speaker 3: credit portfolios, and all it's going to take is a 481 00:26:52,359 --> 00:26:55,800 Speaker 3: little spark for that to sort of explode. I don't 482 00:26:55,840 --> 00:26:58,680 Speaker 3: think that there's going to be explosion, but I do 483 00:26:58,720 --> 00:27:01,320 Speaker 3: think that that's something too to keep an eye on. 484 00:27:01,480 --> 00:27:05,320 Speaker 3: And where where you guys. 485 00:27:05,200 --> 00:27:10,320 Speaker 2: Absolutely, as a matter of fact, we we deep dive 486 00:27:10,359 --> 00:27:13,199 Speaker 2: into this issue quite significantly. Maybe I'll just share some 487 00:27:13,240 --> 00:27:16,879 Speaker 2: of the statistics. Our median picking come as percentage of 488 00:27:16,920 --> 00:27:19,919 Speaker 2: total investment is around actually six and a half percent, 489 00:27:20,560 --> 00:27:22,880 Speaker 2: but there is a big discrepancy around that median. 490 00:27:22,960 --> 00:27:24,120 Speaker 3: You got to make more of this free. 491 00:27:24,160 --> 00:27:27,800 Speaker 2: So yeah, I'll definitely share that. But if you look 492 00:27:27,800 --> 00:27:31,720 Speaker 2: at some some BDCs here are really you know, nord 493 00:27:31,760 --> 00:27:34,080 Speaker 2: of twenty percent, like I'm looking for example at Prospect 494 00:27:34,160 --> 00:27:38,240 Speaker 2: Capital and you know, you know, close to twenty percent. 495 00:27:38,359 --> 00:27:41,359 Speaker 2: So and then we have some that are really well performing, 496 00:27:41,560 --> 00:27:45,080 Speaker 2: you know that you know, have you know less than 497 00:27:45,600 --> 00:27:49,760 Speaker 2: less than three percent. So how we analyze this? What 498 00:27:49,800 --> 00:27:53,240 Speaker 2: was unique feature of the prior crede market was that 499 00:27:53,520 --> 00:27:57,119 Speaker 2: loans can be originated as a peak from beginning, and 500 00:27:57,160 --> 00:27:59,560 Speaker 2: that was for a lot of these state companies who 501 00:27:59,560 --> 00:28:03,960 Speaker 2: wanted to reserve capital for investment, and therefore that simply 502 00:28:04,280 --> 00:28:06,720 Speaker 2: was not you know, both the sponsor and the lenders 503 00:28:06,720 --> 00:28:10,280 Speaker 2: had agreed from origination that it's better for the company 504 00:28:10,280 --> 00:28:12,840 Speaker 2: to invest in cash than pay interest. And there's been 505 00:28:12,880 --> 00:28:15,760 Speaker 2: priced from the beginning of the transaction. So we consider 506 00:28:15,840 --> 00:28:18,280 Speaker 2: that still, you know, not a perfect from a credit 507 00:28:18,400 --> 00:28:21,480 Speaker 2: quality perspective, but something that has been captured and hopefully 508 00:28:21,480 --> 00:28:23,720 Speaker 2: priced for what we look at when you sit in 509 00:28:23,760 --> 00:28:26,080 Speaker 2: created comedian, we evaluate the ratings for a number of 510 00:28:26,080 --> 00:28:28,400 Speaker 2: these BDCs. We actually look at the delta of how 511 00:28:28,560 --> 00:28:31,560 Speaker 2: much of the picks have actually moved from non picks 512 00:28:31,880 --> 00:28:36,800 Speaker 2: into pik loans, and that numbers has basically increased significantly 513 00:28:36,840 --> 00:28:39,360 Speaker 2: over the last year, and we think of that as 514 00:28:39,400 --> 00:28:42,520 Speaker 2: a precursor of increase of non accrules. So hence we 515 00:28:42,600 --> 00:28:45,440 Speaker 2: as we skeptically look at that one point percent non 516 00:28:45,440 --> 00:28:48,280 Speaker 2: acrul medium for the industry, and we look at more 517 00:28:48,320 --> 00:28:51,000 Speaker 2: the delta of Okay, it went from three and a 518 00:28:51,040 --> 00:28:53,640 Speaker 2: half four percent to six percent of the industry in picks, 519 00:28:53,640 --> 00:28:56,640 Speaker 2: So that means that there's a number of transactions that 520 00:28:56,680 --> 00:28:59,600 Speaker 2: potentially are tittering into becoming nonocruals. 521 00:29:00,360 --> 00:29:05,200 Speaker 3: Pick might be a leading indicator, non accruals a lagging indicator. Correct, 522 00:29:06,240 --> 00:29:09,480 Speaker 3: And then maybe one of the reasons we've probably seen 523 00:29:09,520 --> 00:29:11,360 Speaker 3: a significant increase in PICK is because we had a 524 00:29:11,360 --> 00:29:14,280 Speaker 3: five hundred and twenty five basis point increase in base rates. 525 00:29:15,160 --> 00:29:17,520 Speaker 3: Those base rates are going to start to hopefully decline 526 00:29:17,520 --> 00:29:19,760 Speaker 3: after the fifty basis point decline that we've seen or 527 00:29:19,880 --> 00:29:23,600 Speaker 3: cut that we saw on interest rates, maybe that'll mitigate 528 00:29:23,880 --> 00:29:25,760 Speaker 3: some of the increase in PICK activity. 529 00:29:26,160 --> 00:29:30,560 Speaker 2: It felt like we're all ladies in waiting here to 530 00:29:30,640 --> 00:29:34,880 Speaker 2: see that not a cruel increase and transfer that peak 531 00:29:34,920 --> 00:29:36,920 Speaker 2: into non a crules. Not that I'm wishing for the industry, 532 00:29:36,920 --> 00:29:40,680 Speaker 2: is just that we're obviously protecting the interest of creat investors, 533 00:29:40,680 --> 00:29:42,880 Speaker 2: and it just looked like a quite a dramatic change 534 00:29:42,880 --> 00:29:45,680 Speaker 2: of five hundred basis points of interest in the last 535 00:29:45,920 --> 00:29:47,320 Speaker 2: two and a half years would have had a more 536 00:29:47,360 --> 00:29:51,440 Speaker 2: meaningful credit issue for these highly levered companies. But I 537 00:29:51,440 --> 00:29:54,200 Speaker 2: think that's flexibility, as you said, of capital coming from 538 00:29:54,200 --> 00:29:58,720 Speaker 2: the sponsor's ability to peak transfer terms in the more 539 00:29:58,760 --> 00:30:03,000 Speaker 2: invisible part of the credit universe allowed for firms to 540 00:30:03,080 --> 00:30:07,760 Speaker 2: potentially buy time and now the fifty basis points, and 541 00:30:08,160 --> 00:30:10,560 Speaker 2: just to kind of give you our baseline is additional 542 00:30:10,560 --> 00:30:13,200 Speaker 2: one hundred two hundred and twenty five basis points between 543 00:30:13,240 --> 00:30:16,200 Speaker 2: now and the end of next year. So this will 544 00:30:16,200 --> 00:30:21,840 Speaker 2: alleviate interest expands quite significantly and also open the avenue 545 00:30:22,400 --> 00:30:26,360 Speaker 2: for other strategic investors into these companies. As we know, 546 00:30:26,920 --> 00:30:28,560 Speaker 2: the M and A market, the sponsor M and A 547 00:30:28,640 --> 00:30:31,120 Speaker 2: market was pretty much dead over the last two years 548 00:30:31,160 --> 00:30:35,120 Speaker 2: because sponsors simply could not agree on price of their 549 00:30:35,200 --> 00:30:38,080 Speaker 2: companies in a rate environment that is quite elevated. I 550 00:30:38,080 --> 00:30:41,520 Speaker 2: think this will definitely accelerate, particularly towards the end of 551 00:30:42,080 --> 00:30:43,920 Speaker 2: this year. Now we have an election cycle which might 552 00:30:44,240 --> 00:30:46,400 Speaker 2: put people a little bit still in a pause, but 553 00:30:46,520 --> 00:30:49,680 Speaker 2: certainly for next year, we're expecting M and A to 554 00:30:49,760 --> 00:30:54,480 Speaker 2: accelerate and therefore open various avenues of one, first, lower 555 00:30:54,480 --> 00:30:57,800 Speaker 2: interest expense costs. A second coming to an agreement of 556 00:30:57,960 --> 00:31:00,640 Speaker 2: enterprise value for these companies, which can allow firms to 557 00:31:00,680 --> 00:31:02,680 Speaker 2: potentially restructure through to REMNA. 558 00:31:03,600 --> 00:31:07,640 Speaker 1: Were also seeing things like synthetic pick. Do you see 559 00:31:07,720 --> 00:31:08,800 Speaker 1: more of that in private credit? 560 00:31:09,480 --> 00:31:12,320 Speaker 2: You know, we haven't necessarily as much. I think it 561 00:31:12,360 --> 00:31:15,400 Speaker 2: does exist. It's hard in the public domain to be 562 00:31:15,440 --> 00:31:19,440 Speaker 2: honest to distinguish that, and that those are kind of 563 00:31:19,480 --> 00:31:21,960 Speaker 2: the things that we worry about, like is there and 564 00:31:22,000 --> 00:31:25,880 Speaker 2: when we diligence the banks, particularly who provide potentially a 565 00:31:25,920 --> 00:31:30,000 Speaker 2: derivative form for this for these type of activities, how 566 00:31:30,080 --> 00:31:32,400 Speaker 2: much of their exposure is in derillity form has increased 567 00:31:32,480 --> 00:31:36,440 Speaker 2: versus like a total return swap policias or versus a 568 00:31:36,520 --> 00:31:41,360 Speaker 2: traditional you know lending. And we haven't seen significant pick 569 00:31:41,400 --> 00:31:45,160 Speaker 2: up activity with some but not it's not prevalent yet 570 00:31:45,200 --> 00:31:48,160 Speaker 2: in this cycle, like we saw of a synthetic bed 571 00:31:48,280 --> 00:31:51,000 Speaker 2: term in the two thousand and seven six precursor of 572 00:31:51,080 --> 00:31:52,480 Speaker 2: thousand eight crisis, and so. 573 00:31:52,480 --> 00:31:54,800 Speaker 3: You really need to cue that fore voting music for 574 00:31:54,920 --> 00:31:56,120 Speaker 3: terms like synthetic pick. 575 00:31:56,600 --> 00:31:59,320 Speaker 1: And maybe this is too early to see this, but 576 00:31:59,400 --> 00:32:01,440 Speaker 1: we are seeing a lot more in the broadly syndicated 577 00:32:01,480 --> 00:32:04,720 Speaker 1: and public markets more of this credit around credited violence, 578 00:32:05,320 --> 00:32:07,160 Speaker 1: and you know, there's a fear that it will spread 579 00:32:07,440 --> 00:32:13,280 Speaker 1: to private credit as lenders and borrowers clash and borrows 580 00:32:13,280 --> 00:32:15,480 Speaker 1: get more creative about how they do these deals. Are 581 00:32:15,520 --> 00:32:17,480 Speaker 1: you worried about that as a as a phenomenon in 582 00:32:17,720 --> 00:32:18,640 Speaker 1: private credit at all? 583 00:32:19,120 --> 00:32:19,160 Speaker 3: No? 584 00:32:19,280 --> 00:32:22,360 Speaker 2: Absolutely, Actually, Now, our regular diligence with the funds that 585 00:32:22,400 --> 00:32:24,880 Speaker 2: we read. We have this discussion and I will kind 586 00:32:24,880 --> 00:32:26,920 Speaker 2: of quote what one fund who said, like, look, we 587 00:32:26,960 --> 00:32:29,400 Speaker 2: are probably more careful than ever who we get into 588 00:32:29,400 --> 00:32:32,400 Speaker 2: a club with. It's almost like a marriage agreement, and 589 00:32:32,480 --> 00:32:36,640 Speaker 2: the divorce can be very expensive. So it became I 590 00:32:36,640 --> 00:32:39,560 Speaker 2: think that the awareness is a good thing. Actually, you know, 591 00:32:39,600 --> 00:32:44,640 Speaker 2: folks say, well, would never do underwrite another transaction with 592 00:32:44,680 --> 00:32:47,320 Speaker 2: somebody who would do this to us? For example, we 593 00:32:47,440 --> 00:32:51,120 Speaker 2: and we distinguish which partners are civilized in this market, 594 00:32:51,120 --> 00:32:53,120 Speaker 2: which are not. And again it goes back to this 595 00:32:54,080 --> 00:32:58,400 Speaker 2: ecosystem point David is making. A lot of these firms 596 00:32:58,440 --> 00:33:01,720 Speaker 2: are on Park Avenue or out They all worked at 597 00:33:01,880 --> 00:33:04,640 Speaker 2: at some point at credits fees or Deutsche Bank or 598 00:33:04,680 --> 00:33:09,080 Speaker 2: Goldman Sachs or originating leverage finance loans. It's a relatively 599 00:33:09,080 --> 00:33:12,040 Speaker 2: small universe. We're talking about some funds that have thirty 600 00:33:12,040 --> 00:33:14,840 Speaker 2: forty underwriters to maybe one hundred. These are not major 601 00:33:15,000 --> 00:33:18,120 Speaker 2: couple hundred thousand people investment banks. So yes, there is 602 00:33:18,160 --> 00:33:22,680 Speaker 2: this clubish element that the funds claim that folks will 603 00:33:22,680 --> 00:33:25,160 Speaker 2: be behaving in the market, but certainly people are wary 604 00:33:25,200 --> 00:33:26,200 Speaker 2: and watchful more than ever. 605 00:33:26,800 --> 00:33:28,760 Speaker 1: I mean, it is it is clubbish. But there's also 606 00:33:28,840 --> 00:33:34,560 Speaker 1: this massive increase in demand chasing not that many deals 607 00:33:35,040 --> 00:33:37,840 Speaker 1: city in the US, which kind of leads to, you know, 608 00:33:38,200 --> 00:33:40,640 Speaker 1: everyone who comes on this show who's a private credit 609 00:33:40,720 --> 00:33:43,440 Speaker 1: manager says they only do the good deals. Assumely that 610 00:33:43,480 --> 00:33:45,400 Speaker 1: means someone else is out there hanging on to the 611 00:33:45,480 --> 00:33:48,760 Speaker 1: bad deals and they may suffer for it. Is there 612 00:33:48,800 --> 00:33:51,160 Speaker 1: not a risk that you know, we'll just get, you know, 613 00:33:51,400 --> 00:33:54,440 Speaker 1: similar situation as we are in the public markets. 614 00:33:55,360 --> 00:33:58,920 Speaker 2: Absolutely, you know, we kind of when we analyze the 615 00:33:58,920 --> 00:34:02,400 Speaker 2: balance sheets of the private lenders, we are very wary 616 00:34:02,440 --> 00:34:04,959 Speaker 2: about stressing the twenty twenty one vintage we call it, 617 00:34:04,960 --> 00:34:08,960 Speaker 2: which was the year of exuberance at zero rates or about, 618 00:34:09,640 --> 00:34:12,919 Speaker 2: and both markets were very open. Not as concerned about 619 00:34:12,960 --> 00:34:15,520 Speaker 2: twenty twenty two, and definitely the first half of twenty 620 00:34:15,560 --> 00:34:18,680 Speaker 2: twenty three. But this year we are quite concerned with 621 00:34:19,239 --> 00:34:21,399 Speaker 2: the influx of capital, as I said, three hundred billion 622 00:34:21,560 --> 00:34:25,360 Speaker 2: or so executed in the broadly syndicated one hundred plus 623 00:34:24,800 --> 00:34:30,680 Speaker 2: in the private credit market, spreads coming down, terms coming down. 624 00:34:30,719 --> 00:34:34,640 Speaker 2: We actually did analysis of covenants in both markets, and 625 00:34:34,800 --> 00:34:38,840 Speaker 2: private cred always has argued, well, we get covenants and 626 00:34:39,200 --> 00:34:42,400 Speaker 2: the BSL market doesn't hence why we have better investment. 627 00:34:42,440 --> 00:34:46,279 Speaker 2: That's been their pitch to investors, among other reasons. And 628 00:34:46,520 --> 00:34:48,680 Speaker 2: we actually did the analysis and it's absolutely true that the 629 00:34:48,719 --> 00:34:51,480 Speaker 2: private credit market for transactions that are out of three 630 00:34:51,600 --> 00:34:57,319 Speaker 2: hundred million dollars still has kept both the pricing and 631 00:34:57,440 --> 00:35:00,680 Speaker 2: also of the covenants. However, nor of you know, four hundred, 632 00:35:00,719 --> 00:35:05,400 Speaker 2: particularly the billion dollar plus transactions, those covenant kind of 633 00:35:05,480 --> 00:35:08,480 Speaker 2: light deals are quite converging, and that's what worries us, 634 00:35:08,520 --> 00:35:11,600 Speaker 2: particularly about this exuberance of twenty twenty four. 635 00:35:12,600 --> 00:35:16,520 Speaker 1: Another manager we had earlier this year talked about tourists 636 00:35:16,560 --> 00:35:21,680 Speaker 1: in private credit and also this concept of democratization of 637 00:35:21,680 --> 00:35:24,799 Speaker 1: private credit, you know, bringing more people in. One of 638 00:35:24,800 --> 00:35:29,040 Speaker 1: the ways that the markets traditionally do this is through ETFs, 639 00:35:29,160 --> 00:35:31,040 Speaker 1: and you know we are seeing ETFs, and I know 640 00:35:31,080 --> 00:35:32,319 Speaker 1: you've done some work on it, so I did want 641 00:35:32,360 --> 00:35:37,240 Speaker 1: to ask you about potential problems with that, you know, purely, 642 00:35:37,640 --> 00:35:40,640 Speaker 1: you know, really basic terms. ETFs are supposed to be liquid. 643 00:35:40,719 --> 00:35:41,800 Speaker 1: Private credit isn't. 644 00:35:42,600 --> 00:35:44,560 Speaker 2: Yeah. I mean, if you look at the most recent 645 00:35:44,640 --> 00:35:47,399 Speaker 2: announcement from a Poe, etcetera. And we kind of wrote 646 00:35:47,400 --> 00:35:50,239 Speaker 2: a piece of that, is that the inequidity piece is 647 00:35:50,239 --> 00:35:53,480 Speaker 2: actually relatively small. The bucket is I think fifteen percent, 648 00:35:53,840 --> 00:35:57,920 Speaker 2: no more than that. So yes, it increases risks to 649 00:35:58,000 --> 00:36:01,600 Speaker 2: even have greater than zero percent liquid assets in ATF. 650 00:36:01,680 --> 00:36:04,080 Speaker 2: But this is I think what was advertised out there 651 00:36:04,200 --> 00:36:06,879 Speaker 2: that this is the private creative. It's not quite. At 652 00:36:06,880 --> 00:36:08,640 Speaker 2: the end of the day, It's going to be mostly 653 00:36:08,640 --> 00:36:12,040 Speaker 2: public classes with a small bucket of private that's the beginning, 654 00:36:12,280 --> 00:36:15,399 Speaker 2: because Paul will commit to market make if you will, 655 00:36:15,400 --> 00:36:19,399 Speaker 2: and provide bids for that for those products, which means 656 00:36:19,400 --> 00:36:22,200 Speaker 2: that hopefully there will be more transparency in the market 657 00:36:22,280 --> 00:36:25,960 Speaker 2: building that. But investors need to be wary that potentially, 658 00:36:26,000 --> 00:36:28,000 Speaker 2: you know, you can have your capital locked in and 659 00:36:28,040 --> 00:36:30,120 Speaker 2: you have to stress this for what does that mean 660 00:36:31,200 --> 00:36:34,080 Speaker 2: for that particular bucket. And of course, look, I cannot 661 00:36:34,120 --> 00:36:37,240 Speaker 2: envision an ETF with much greater let's say, fifty percent 662 00:36:37,480 --> 00:36:40,640 Speaker 2: liquid assets simply that kind of asset ability mismatch. I 663 00:36:40,640 --> 00:36:44,399 Speaker 2: don't think that will work. So but broadly, stepping back, 664 00:36:44,440 --> 00:36:46,880 Speaker 2: even outside of dtfs, you know what has worried us 665 00:36:46,960 --> 00:36:52,600 Speaker 2: about democratization point is the retail focus of the BDCs, 666 00:36:52,719 --> 00:36:55,160 Speaker 2: and not only actually the BDCs, but I'm just coming 667 00:36:55,239 --> 00:36:57,440 Speaker 2: back from Europe from IPM, which is the largest private 668 00:36:57,440 --> 00:37:01,480 Speaker 2: capital conference in Europe, and there was a new regulation 669 00:37:01,600 --> 00:37:05,440 Speaker 2: now of called Elative, which will allow for retail investors 670 00:37:05,440 --> 00:37:08,920 Speaker 2: as low as ten thousand dollars to invest in private 671 00:37:08,960 --> 00:37:13,640 Speaker 2: credit there as well. So on one hand, we understand 672 00:37:13,760 --> 00:37:17,560 Speaker 2: very well the macroeconomic premise of allowing retail investors to 673 00:37:17,600 --> 00:37:19,840 Speaker 2: benefit from the growth of private markets and the returns 674 00:37:19,880 --> 00:37:23,359 Speaker 2: the historic turns that have been more favorable, not over 675 00:37:23,360 --> 00:37:25,840 Speaker 2: the last two years, but historically more favorable to the 676 00:37:25,840 --> 00:37:28,560 Speaker 2: public market. So you want to allow folks to get 677 00:37:28,600 --> 00:37:33,000 Speaker 2: access to that building of wealth. But on the other hand, 678 00:37:33,360 --> 00:37:38,240 Speaker 2: education to investors and understanding the risks of capital being locked. 679 00:37:38,600 --> 00:37:41,040 Speaker 2: This is not something that can trade overnight. The whole 680 00:37:41,080 --> 00:37:44,040 Speaker 2: point of private credit is they said, the benefit of 681 00:37:44,120 --> 00:37:48,120 Speaker 2: time and waiting on for better markets to mark your 682 00:37:48,160 --> 00:37:51,239 Speaker 2: transactions if you will. That's something that needs to be 683 00:37:51,440 --> 00:37:54,719 Speaker 2: very well absorbed. And I do worry when majority of 684 00:37:54,760 --> 00:37:57,200 Speaker 2: the BDC is actually fundraising that has happened over the 685 00:37:57,239 --> 00:37:59,800 Speaker 2: last few years has actually come from retail and retail 686 00:38:00,760 --> 00:38:04,080 Speaker 2: non non publicly traded b deses. 687 00:38:04,560 --> 00:38:06,520 Speaker 3: Yeah, I mean, if if you if you really want 688 00:38:06,560 --> 00:38:09,120 Speaker 3: to get a significant amount of regulation foisted on you 689 00:38:09,200 --> 00:38:12,160 Speaker 3: very quickly. A great way to do that is to 690 00:38:12,480 --> 00:38:15,400 Speaker 3: is to overmarket to retail investors have some sort of 691 00:38:15,480 --> 00:38:18,560 Speaker 3: unexpected situation blow up where things didn't quite work out 692 00:38:18,640 --> 00:38:20,759 Speaker 3: is as you'd hoped, and all of a sudden you're 693 00:38:20,800 --> 00:38:25,080 Speaker 3: going to have some pretty onerous regulations. So, you know, 694 00:38:25,280 --> 00:38:31,440 Speaker 3: it just seems like the funds and the marketers in particular, 695 00:38:31,600 --> 00:38:33,640 Speaker 3: I think, have to be very careful about the way 696 00:38:33,640 --> 00:38:37,879 Speaker 3: that they roll out these products to UH to retail investors. Now, 697 00:38:38,400 --> 00:38:40,120 Speaker 3: when you when you talk to a number of the 698 00:38:40,560 --> 00:38:43,720 Speaker 3: sort of large white schee advisors, you know, they're talking 699 00:38:43,719 --> 00:38:46,359 Speaker 3: about sort of a private wealth market where you're talking 700 00:38:46,400 --> 00:38:49,720 Speaker 3: about individuals with more than one million dollars of liquid 701 00:38:49,719 --> 00:38:52,880 Speaker 3: assets to invest. That scenario where you're going to have 702 00:38:52,920 --> 00:38:55,680 Speaker 3: a little bit more you know, leeway going into you know, 703 00:38:55,760 --> 00:38:57,799 Speaker 3: quote unquote retail, but when you're you know, sort of 704 00:38:57,800 --> 00:39:04,640 Speaker 3: getting into UH masters distributed ETFs, it's an area where 705 00:39:04,800 --> 00:39:06,160 Speaker 3: I think caution is warranted. 706 00:39:06,680 --> 00:39:07,040 Speaker 2: Agreed. 707 00:39:07,280 --> 00:39:08,799 Speaker 1: You've made the point Dave in the past that you know, 708 00:39:08,920 --> 00:39:11,399 Speaker 1: you made these skiing analogy that you know some some 709 00:39:11,440 --> 00:39:13,560 Speaker 1: of these slopes are just too steep for the for 710 00:39:13,600 --> 00:39:15,520 Speaker 1: the you know, the tourists, and you know it should 711 00:39:15,560 --> 00:39:18,640 Speaker 1: be only professionals getting involved. I mean, we're not all 712 00:39:18,840 --> 00:39:22,520 Speaker 1: heading into a world of trouble with with everyone piling 713 00:39:22,520 --> 00:39:23,560 Speaker 1: into private credit right. 714 00:39:23,440 --> 00:39:25,840 Speaker 3: Now, right right, yeah. I mean the way sort of 715 00:39:25,880 --> 00:39:28,960 Speaker 3: that that ski ski analogy is at the I mean there, 716 00:39:29,040 --> 00:39:30,719 Speaker 3: you know, there's a risk everywhere on the on the 717 00:39:30,760 --> 00:39:34,080 Speaker 3: ski slopes, even on on on the the green circles 718 00:39:34,120 --> 00:39:37,839 Speaker 3: where I've dislocated my left shoulder with a with a 719 00:39:37,880 --> 00:39:42,719 Speaker 3: caught edge. But you know that if you come prepared, 720 00:39:42,800 --> 00:39:44,560 Speaker 3: if you've got the right equipment, if you know your 721 00:39:44,600 --> 00:39:47,000 Speaker 3: way around the mountain, if you you know know the slope, 722 00:39:47,040 --> 00:39:48,360 Speaker 3: you know where the rocks are, where the trees are, 723 00:39:48,360 --> 00:39:51,680 Speaker 3: where the cliffs are, then you know you've taken adequate 724 00:39:51,680 --> 00:39:54,360 Speaker 3: precautions and you know, game on, go have some fun. 725 00:39:55,320 --> 00:39:57,840 Speaker 3: If you don't have all of that in your in 726 00:39:57,920 --> 00:40:00,720 Speaker 3: your in your backpack, then you might want all look elsewhere. 727 00:40:01,560 --> 00:40:06,000 Speaker 1: You talked and recently about how pick just go back 728 00:40:06,000 --> 00:40:08,480 Speaker 1: to that point is a kind of a bridge for 729 00:40:08,600 --> 00:40:12,440 Speaker 1: some of these struggling borrowers to you know, get to 730 00:40:12,480 --> 00:40:15,320 Speaker 1: a point where we have lower rates. You talked about 731 00:40:15,480 --> 00:40:17,640 Speaker 1: your outlook for rates to come down and Obviously, the 732 00:40:17,640 --> 00:40:21,000 Speaker 1: FED is embarking on quite an aggressive easing campaign right now, 733 00:40:21,000 --> 00:40:25,920 Speaker 1: but is it enough do you think to avoid further distress? 734 00:40:25,960 --> 00:40:29,040 Speaker 1: I mean there still must be some unsustainable capital stretches out. 735 00:40:28,880 --> 00:40:32,640 Speaker 2: There, right absolutely. I mean when we actually stressed as 736 00:40:33,680 --> 00:40:37,480 Speaker 2: for a rating purpose our BDCs to qualify for the 737 00:40:37,480 --> 00:40:40,960 Speaker 2: investment Great status, we actually use the two thousand and 738 00:40:41,000 --> 00:40:44,399 Speaker 2: seven two thousand and eighty fault cycle, so which means 739 00:40:44,400 --> 00:40:47,480 Speaker 2: that we assume that we're going to get into at 740 00:40:47,600 --> 00:40:52,800 Speaker 2: least you know, you know, eighty percent kind of price 741 00:40:52,840 --> 00:40:57,239 Speaker 2: of the broadly syndicated the leveraginal market defaults increasing to 742 00:40:57,760 --> 00:41:00,120 Speaker 2: at least five and a half percent kind of on 743 00:41:00,160 --> 00:41:03,480 Speaker 2: the crules. And that's how we test the capital cushion 744 00:41:04,000 --> 00:41:09,080 Speaker 2: for the disease. We you know, nobody can really uh 745 00:41:09,680 --> 00:41:12,719 Speaker 2: uh predict where the market can go. What what we 746 00:41:12,760 --> 00:41:17,560 Speaker 2: are doing in our analysis is ensuring that our ratings 747 00:41:17,600 --> 00:41:20,640 Speaker 2: can withstand the test of time and test of what 748 00:41:20,760 --> 00:41:22,640 Speaker 2: the history has shown of where our kind of worst 749 00:41:22,680 --> 00:41:25,960 Speaker 2: case scenarios have been in leverage loans. And I'm talking 750 00:41:26,000 --> 00:41:28,239 Speaker 2: about a market back in two thousand and eight. We 751 00:41:28,320 --> 00:41:30,200 Speaker 2: use a scenario when there was a three hundred billion 752 00:41:30,239 --> 00:41:32,520 Speaker 2: dollars of Hong transactions for a year and a half 753 00:41:32,560 --> 00:41:37,239 Speaker 2: on banks balance sheets. So I think that it's a 754 00:41:37,280 --> 00:41:41,640 Speaker 2: solid test. Of course, things can always get worse geopolitics, 755 00:41:41,840 --> 00:41:44,520 Speaker 2: things that we cannot predict. Think about the COVID market, 756 00:41:44,520 --> 00:41:46,919 Speaker 2: et cetera. How much extra liquidity it can really come 757 00:41:47,320 --> 00:41:51,080 Speaker 2: from FED balance sheet. That's quite leverage we know today. 758 00:41:51,640 --> 00:41:56,600 Speaker 2: But we do believe that what we're seeing today is 759 00:41:58,640 --> 00:42:02,800 Speaker 2: is probably not the worst case scenario. We do believe 760 00:42:02,840 --> 00:42:07,680 Speaker 2: that our base case is avoiding orthorization scenario. However, the 761 00:42:07,800 --> 00:42:12,160 Speaker 2: downside case, when some of this downside risks materialize, make 762 00:42:12,239 --> 00:42:16,160 Speaker 2: the default rate in the leverage finance cycle jumps significantly 763 00:42:16,200 --> 00:42:18,880 Speaker 2: from LESSI three and a half too close to seven 764 00:42:18,960 --> 00:42:23,400 Speaker 2: eight percent. So again, every investor should always do a 765 00:42:23,400 --> 00:42:27,160 Speaker 2: scenario analysis and test their risk appetite based on that, 766 00:42:27,280 --> 00:42:29,720 Speaker 2: and we're trying to do that for benefit or ratings 767 00:42:29,760 --> 00:42:30,360 Speaker 2: and investors. 768 00:42:30,600 --> 00:42:34,560 Speaker 3: So maybe switch gears a little bit. Yesterday you did 769 00:42:34,640 --> 00:42:38,400 Speaker 3: the not you, Moody's did the unthinkable. You upgraded a 770 00:42:38,440 --> 00:42:41,879 Speaker 3: couple of BDCs. You also have done a nice job, 771 00:42:41,920 --> 00:42:44,200 Speaker 3: I think, and I think investors agree, have done a 772 00:42:44,280 --> 00:42:47,880 Speaker 3: nice job of differentiating amongst BDCs You've got some that 773 00:42:47,920 --> 00:42:50,719 Speaker 3: had positive outlooks and some that had negative outlooks, and 774 00:42:50,760 --> 00:42:55,560 Speaker 3: that I think is quite helpful for people to see. What, 775 00:42:56,640 --> 00:43:00,800 Speaker 3: in your view is the ceiling of where a BDC 776 00:43:01,000 --> 00:43:04,440 Speaker 3: rating can go, and how do you think about the 777 00:43:04,440 --> 00:43:07,719 Speaker 3: interplay between Let's use Blackstone as an example because they 778 00:43:07,719 --> 00:43:10,800 Speaker 3: were upgraded yesterday. There are two funds, Blackstone Private Credit 779 00:43:10,840 --> 00:43:15,439 Speaker 3: and Blackstone Secured Lending, one notch to BAA two they're 780 00:43:15,440 --> 00:43:18,799 Speaker 3: associated with. I don't think Moody's rates Blackstone, but it 781 00:43:18,840 --> 00:43:22,360 Speaker 3: is rated A by some of your friendly competitors. Obviously 782 00:43:22,640 --> 00:43:27,680 Speaker 3: A plus a well rated company. Ceiling for BDCs, where 783 00:43:27,680 --> 00:43:30,440 Speaker 3: could it go as kind of monoliine type entities that 784 00:43:30,480 --> 00:43:33,480 Speaker 3: are wholesale funded, And how do you think about the 785 00:43:33,480 --> 00:43:36,880 Speaker 3: interplay between these large white chew advisors and those that 786 00:43:36,960 --> 00:43:37,760 Speaker 3: don't have them. 787 00:43:38,120 --> 00:43:40,680 Speaker 2: Great question. Yes, So we read around the nord of 788 00:43:40,719 --> 00:43:46,280 Speaker 2: thirty BDCs in the public domain, from which we placed 789 00:43:46,760 --> 00:43:49,279 Speaker 2: six on positive outlook while ago and we have three 790 00:43:49,280 --> 00:43:51,759 Speaker 2: your negative outlook and we took an action on three, 791 00:43:51,800 --> 00:43:55,280 Speaker 2: as you noted, two Blackstone entities and one Eras Capital. 792 00:43:56,600 --> 00:44:01,400 Speaker 2: So first a question on ceiling. Look, we have a 793 00:44:01,400 --> 00:44:04,319 Speaker 2: full rating spectrum C A two three ple a. So 794 00:44:05,000 --> 00:44:08,160 Speaker 2: celink in theory does not exist. But maybe I'll try 795 00:44:08,200 --> 00:44:11,200 Speaker 2: to answer that question through the median bank creating today. 796 00:44:12,320 --> 00:44:15,080 Speaker 2: The medium bank creating or what we called baseline create 797 00:44:15,120 --> 00:44:18,440 Speaker 2: assessment without additional support in the US is B double 798 00:44:18,480 --> 00:44:20,960 Speaker 2: A one. So, and we talk about kind of a 799 00:44:21,040 --> 00:44:25,359 Speaker 2: normal regional cohor without significant concentration in commercial real estate, 800 00:44:26,440 --> 00:44:31,480 Speaker 2: A highly in a more concentrated regional bank we have 801 00:44:31,640 --> 00:44:33,840 Speaker 2: with a commercial real estate book would be BA A 802 00:44:33,880 --> 00:44:36,880 Speaker 2: two B doua A three equivalent, if you will. So 803 00:44:37,960 --> 00:44:39,880 Speaker 2: what you can see is a convergence. But there are 804 00:44:39,880 --> 00:44:42,400 Speaker 2: two different factors. One is the low leverage. We just 805 00:44:42,440 --> 00:44:45,040 Speaker 2: talked about the banks on average being levered nine times. 806 00:44:45,080 --> 00:44:48,080 Speaker 2: We're talking here medium leverage on one point one times 807 00:44:48,120 --> 00:44:51,120 Speaker 2: today for the BBCs we just mentioned so significantly. What 808 00:44:51,200 --> 00:44:54,480 Speaker 2: the difference is. It's low leverage, Yes, it's a monoligne. 809 00:44:54,480 --> 00:44:57,640 Speaker 2: But the diverse we're looking at difversification of portfolio across sectors. 810 00:44:58,000 --> 00:45:01,520 Speaker 2: And then key differentiation and with the banks relative to 811 00:45:01,680 --> 00:45:06,080 Speaker 2: the BDCs is the funding aspect. There's no overnight funding. 812 00:45:07,280 --> 00:45:11,439 Speaker 2: The only like two parts of risky if you will, 813 00:45:11,520 --> 00:45:15,520 Speaker 2: funding more risky funding is the secure funding from the banks, 814 00:45:15,520 --> 00:45:18,200 Speaker 2: which is subject to quarterly evaluation. But I know that 815 00:45:18,200 --> 00:45:21,640 Speaker 2: that those margining loans really in order to be effectively 816 00:45:21,719 --> 00:45:24,800 Speaker 2: margined for additional collateral, we have to have a major 817 00:45:24,840 --> 00:45:29,520 Speaker 2: correction talking on average values of sixty percent loan to value, 818 00:45:29,520 --> 00:45:31,040 Speaker 2: which means that a lot of these loans have to 819 00:45:31,080 --> 00:45:34,320 Speaker 2: lose forty percent of their value. So again that's quite 820 00:45:34,400 --> 00:45:38,560 Speaker 2: a tail scenario for a significant margin risk on the 821 00:45:38,560 --> 00:45:42,239 Speaker 2: secured book unsecured credles which is a dominant funding for 822 00:45:42,280 --> 00:45:47,200 Speaker 2: this investment. Greate BDCs a domain basically cannot really withdraw 823 00:45:47,200 --> 00:45:49,840 Speaker 2: their money if you will, and then you have pervonent equity. 824 00:45:50,280 --> 00:45:54,360 Speaker 2: So the funding risk, one can argue is pretty is 825 00:45:54,400 --> 00:45:58,240 Speaker 2: pretty muted. Where the funding risk comes true is indeed 826 00:45:58,440 --> 00:46:01,719 Speaker 2: the in the retail on the BDCs liking BI cred 827 00:46:02,120 --> 00:46:04,640 Speaker 2: But for us, where we spend a lot of time 828 00:46:04,680 --> 00:46:08,680 Speaker 2: with entity like b credit to be to be eligible 829 00:46:09,040 --> 00:46:14,160 Speaker 2: for upgrade was actually differensification of funding on their secured basis. 830 00:46:14,200 --> 00:46:18,000 Speaker 2: So and also how the provision for that maximum withdrawal 831 00:46:18,040 --> 00:46:21,640 Speaker 2: of liquidity of like twenty percent a year from the 832 00:46:21,680 --> 00:46:25,120 Speaker 2: retail book, and it's about what availability of lines of 833 00:46:25,000 --> 00:46:28,560 Speaker 2: credit for example from number of banks. If an entity 834 00:46:28,640 --> 00:46:32,280 Speaker 2: like this had high leverage or one or two banks 835 00:46:32,320 --> 00:46:35,640 Speaker 2: only providing that liquidity support, that definitely would not have 836 00:46:35,719 --> 00:46:38,279 Speaker 2: been a reason for upgrade up or even investment grade rating. 837 00:46:38,560 --> 00:46:42,440 Speaker 2: But somebody like Blackstone, who has absolutely one of the 838 00:46:42,520 --> 00:46:46,440 Speaker 2: leading relationships with the global banks, we're talking about numerous 839 00:46:46,480 --> 00:46:49,719 Speaker 2: bank clients existing out there to support that liquidity and 840 00:46:49,800 --> 00:46:54,200 Speaker 2: also significant liquid acid bucket to provision for that, and 841 00:46:54,920 --> 00:46:58,920 Speaker 2: in peril with the lowest non a cruel statistic in 842 00:46:58,960 --> 00:47:03,799 Speaker 2: the BDC cocor we read tipped us over that additional 843 00:47:03,840 --> 00:47:06,560 Speaker 2: line of investment grade. 844 00:47:06,600 --> 00:47:08,959 Speaker 1: Just to go back to where we started, and we're 845 00:47:09,080 --> 00:47:12,880 Speaker 1: almost had a time unfortunately, but a lot of people 846 00:47:13,040 --> 00:47:15,680 Speaker 1: still worry about private credit. Our last guest said it 847 00:47:15,719 --> 00:47:18,480 Speaker 1: was the one thing that concerned him. There was an 848 00:47:18,480 --> 00:47:22,400 Speaker 1: insurance company from Asia this week saying that there was 849 00:47:22,400 --> 00:47:24,719 Speaker 1: going to be a reckoning. It's not the first time 850 00:47:24,719 --> 00:47:28,120 Speaker 1: we've heard that from the market, and we're hearing it 851 00:47:28,120 --> 00:47:30,960 Speaker 1: from regulators, We're hearing it from from multilaterals and all 852 00:47:31,000 --> 00:47:35,799 Speaker 1: sorts of people are they is this concern misplaced? They 853 00:47:35,840 --> 00:47:39,239 Speaker 1: just don't understand what it is that we're talking about here, 854 00:47:39,560 --> 00:47:42,640 Speaker 1: or are there really some concerns that we should we 855 00:47:42,680 --> 00:47:43,720 Speaker 1: should be talking about. 856 00:47:44,680 --> 00:47:47,640 Speaker 2: Again, it goes back to the pace of growth and 857 00:47:47,719 --> 00:47:50,799 Speaker 2: where the funding comes from. It's it's going to be 858 00:47:50,880 --> 00:47:53,680 Speaker 2: very important to get more transparency from the banks about 859 00:47:53,880 --> 00:47:56,520 Speaker 2: is there some kind of, as you said, synthetic leverage, 860 00:47:56,560 --> 00:47:59,480 Speaker 2: additional leverage coming to this market and it's not visible 861 00:47:59,520 --> 00:48:03,600 Speaker 2: to us. We're talking about trillion point seven market from 862 00:48:03,680 --> 00:48:07,160 Speaker 2: which you know we moved is very roughly three hundred 863 00:48:07,239 --> 00:48:11,280 Speaker 2: billion of assets through the BDC cohort in the US, 864 00:48:11,840 --> 00:48:14,760 Speaker 2: So there's still lots and the dark and I definitely 865 00:48:14,800 --> 00:48:17,560 Speaker 2: welcome and all of us who are in the industry 866 00:48:17,560 --> 00:48:22,160 Speaker 2: analyzing it, welcome more transparency about what's the leverage outside 867 00:48:22,160 --> 00:48:24,839 Speaker 2: of the BDC coord out there. How much of these 868 00:48:24,840 --> 00:48:29,000 Speaker 2: funds indeed use a leverage that's secured that's potentially more 869 00:48:29,080 --> 00:48:32,480 Speaker 2: margin driven. So in order to answer that question, we 870 00:48:32,600 --> 00:48:35,480 Speaker 2: really need more transparency, particularly from the banks who are 871 00:48:35,480 --> 00:48:36,400 Speaker 2: funding this market. 872 00:48:36,880 --> 00:48:40,640 Speaker 3: Yeah, but I don't think that you've got people are 873 00:48:40,640 --> 00:48:42,319 Speaker 3: going to go back and think about what happened during 874 00:48:42,320 --> 00:48:46,640 Speaker 3: the Financial crisis, where you essentially had unlimited leverage built 875 00:48:46,640 --> 00:48:50,600 Speaker 3: into the system through through CDOs, derivatives and derivatives that 876 00:48:51,080 --> 00:48:53,200 Speaker 3: aren't used in the at least in the same way 877 00:48:53,320 --> 00:48:55,840 Speaker 3: or the same degree in this area part of the world. 878 00:48:56,320 --> 00:48:58,480 Speaker 3: So I think that makes a big difference. It doesn't 879 00:48:58,520 --> 00:49:01,560 Speaker 3: strike me, and I lived through the financial crisis as 880 00:49:02,239 --> 00:49:07,480 Speaker 3: a desk analyst at a large Swiss bank. It just 881 00:49:07,560 --> 00:49:12,920 Speaker 3: doesn't seem like the risk transmission mechanism is nearly as 882 00:49:13,000 --> 00:49:17,360 Speaker 3: potent in the way that private credit is structured today 883 00:49:17,480 --> 00:49:19,920 Speaker 3: as it has been in maybe some other areas that 884 00:49:19,960 --> 00:49:21,640 Speaker 3: have caused systemic problems in the past. 885 00:49:22,000 --> 00:49:25,160 Speaker 2: I tend to agree with that, and as I noted, 886 00:49:25,160 --> 00:49:28,200 Speaker 2: a lot of this is permanent capital by pension funds 887 00:49:28,480 --> 00:49:32,560 Speaker 2: originally who are the largest first investors, insurance companies, sovereign 888 00:49:32,600 --> 00:49:38,880 Speaker 2: wealth funds, and only most recently this more flight confident 889 00:49:38,920 --> 00:49:42,200 Speaker 2: of fuel investors came into the space like the retail investors. 890 00:49:42,560 --> 00:49:45,360 Speaker 2: So hence why we are really looking for those pokts 891 00:49:45,360 --> 00:49:47,759 Speaker 2: and we want to ensure from a systemic stability that 892 00:49:48,120 --> 00:49:52,600 Speaker 2: there is indeed attention about disclosures and particularly for those 893 00:49:52,640 --> 00:49:55,560 Speaker 2: type of investors. But for you know, I would agree 894 00:49:55,719 --> 00:49:58,680 Speaker 2: David that we haven't seen those that kind of exuberance 895 00:49:58,719 --> 00:50:01,880 Speaker 2: of innovative structures that probably exists, but not to that 896 00:50:02,040 --> 00:50:04,640 Speaker 2: level or you know, as I said, overnight risk derivatives, 897 00:50:04,719 --> 00:50:09,240 Speaker 2: leverage and leverage synthetic structures that compare to two thousand 898 00:50:09,239 --> 00:50:12,000 Speaker 2: and seven thousand and eight, Which doesn't mean that will 899 00:50:12,040 --> 00:50:15,600 Speaker 2: not happen, but that's something that we number of eyes 900 00:50:15,960 --> 00:50:18,640 Speaker 2: are still watching and continue to watch, and we will 901 00:50:18,680 --> 00:50:19,600 Speaker 2: be part of that as well. 902 00:50:19,719 --> 00:50:23,359 Speaker 3: Yeah, that whole issue of demand liability seems much more 903 00:50:23,360 --> 00:50:27,320 Speaker 3: contained here, which is a great's that's generally what causes 904 00:50:27,360 --> 00:50:30,759 Speaker 3: a financial institution or sector to get into trouble. You know, 905 00:50:30,800 --> 00:50:33,120 Speaker 3: you saw it with Silicon Valley Bank a year and 906 00:50:33,160 --> 00:50:37,000 Speaker 3: a half ago. It's it's that demand liability issue seems 907 00:50:37,000 --> 00:50:38,359 Speaker 3: to be pretty well stitched up here. 908 00:50:38,920 --> 00:50:41,319 Speaker 1: That's probably what worries me. I've been doing this way 909 00:50:41,360 --> 00:50:43,480 Speaker 1: too long, and I worry about complacency and things that 910 00:50:43,480 --> 00:50:44,880 Speaker 1: we can't see. But if you have to pick one thing, 911 00:50:44,880 --> 00:50:46,640 Speaker 1: and what's the one thing that worries the most about 912 00:50:46,640 --> 00:50:47,520 Speaker 1: private credit right now? 913 00:50:48,880 --> 00:50:52,800 Speaker 2: You know what worries me is that everybody wants to 914 00:50:52,840 --> 00:50:56,799 Speaker 2: be a poll and I'll explain that. You know, in 915 00:50:56,840 --> 00:50:59,480 Speaker 2: the back in the financial crisis also where I worked 916 00:50:59,520 --> 00:51:03,560 Speaker 2: for one of the investment banks, and there was a 917 00:51:03,640 --> 00:51:07,680 Speaker 2: Chase to become Goldman Sachs because Goldman had a premier 918 00:51:07,880 --> 00:51:11,040 Speaker 2: let's say structured credit franchise or deriality franchise, et cetera. 919 00:51:11,120 --> 00:51:13,160 Speaker 2: And then we know that the banks who were trying 920 00:51:13,160 --> 00:51:17,520 Speaker 2: to be Goldman always do not exist these days. And 921 00:51:17,560 --> 00:51:21,480 Speaker 2: there were international n US banks and these days a 922 00:51:21,560 --> 00:51:23,440 Speaker 2: Poll and some of the other in a large asset 923 00:51:23,480 --> 00:51:25,759 Speaker 2: manager just like Blackstone, are leading the way they have. 924 00:51:26,120 --> 00:51:29,120 Speaker 2: They're quite institutionalized, with a lot of capital and a 925 00:51:29,160 --> 00:51:32,480 Speaker 2: lot of great talent. And it only requires, as you say, 926 00:51:32,520 --> 00:51:36,360 Speaker 2: the tourists and and here I'm not referring to the 927 00:51:36,400 --> 00:51:39,920 Speaker 2: retail investors, but you know, everybody wants to raise capital 928 00:51:39,960 --> 00:51:41,799 Speaker 2: to be part of the six y you know, new 929 00:51:41,840 --> 00:51:45,759 Speaker 2: acid class of private credit, and does it in a 930 00:51:46,040 --> 00:51:49,480 Speaker 2: wrong way, and then it vines a shock to the 931 00:51:49,520 --> 00:51:53,040 Speaker 2: system just because it was done in a very inappropriate way, 932 00:51:53,440 --> 00:51:56,480 Speaker 2: either from a leverage or or type of investment, and 933 00:51:56,520 --> 00:51:59,640 Speaker 2: then can create an issue of either overreaction from a 934 00:51:59,680 --> 00:52:04,279 Speaker 2: regular or reaction from retail investors. So that's something to 935 00:52:04,280 --> 00:52:06,799 Speaker 2: watch where the capital is coming from, formation of new 936 00:52:06,840 --> 00:52:11,239 Speaker 2: funds talent. That's how there's limited talent, I would say 937 00:52:11,320 --> 00:52:14,440 Speaker 2: more than limited capital these days, so for sure the 938 00:52:14,440 --> 00:52:16,400 Speaker 2: investors should be watching where it plays their money. 939 00:52:16,640 --> 00:52:18,960 Speaker 1: Great stuff and ours off global head of Private Credit 940 00:52:19,000 --> 00:52:20,680 Speaker 1: at Moody's Ratings. It has been a pleasure having you 941 00:52:20,760 --> 00:52:23,800 Speaker 1: on the Credit Edge and David Havens with Bloomberg Intelligence, 942 00:52:23,800 --> 00:52:25,240 Speaker 1: thank you for so much for joining us today. 943 00:52:25,400 --> 00:52:27,000 Speaker 3: Let's do it again for. 944 00:52:27,000 --> 00:52:29,040 Speaker 1: Even more analysis. Read all of David's great work on 945 00:52:29,040 --> 00:52:32,480 Speaker 1: the Bloomberg Terminal. Bloomberg Intelligence is part of our research department, 946 00:52:32,520 --> 00:52:35,520 Speaker 1: with five hundred analysts and strategists working across all markets. 947 00:52:35,760 --> 00:52:38,680 Speaker 1: Coverage includes over two thousand equities and credits and outlooks 948 00:52:38,680 --> 00:52:41,360 Speaker 1: on more than ninety industries and one hundred market indices, 949 00:52:41,600 --> 00:52:44,960 Speaker 1: currencies and commodities. And please do subscribe to the Credit 950 00:52:45,040 --> 00:52:48,120 Speaker 1: Edge wherever you get your podcasts. We're on Apple, Spotify 951 00:52:48,200 --> 00:52:51,719 Speaker 1: and all other good podcast providers including b Podgo on 952 00:52:51,719 --> 00:52:54,640 Speaker 1: the Bloomberg Terminal, give us a review, tell your friends, 953 00:52:54,680 --> 00:52:58,479 Speaker 1: or email me directly at Jcrumby eight at Bloomberg dot net. 954 00:52:59,160 --> 00:53:01,319 Speaker 1: I'm James Crumby's been a pleasure having you join us 955 00:53:01,360 --> 00:53:03,279 Speaker 1: again next week on the Credit Edge.