WEBVTT - Bloomberg Businessweek Weekend - December 5th, 2025 0:00:00.280 --> 0:00:07.240 Bloomberg Audio Studios, Podcasts, radio News. 0:00:08.640 --> 0:00:13.000 This is Bloomberg Business Week Daily reporting from the magazine 0:00:13.000 --> 0:00:17.599 that helps global leaders stay ahead with insight on the people, companies, 0:00:17.640 --> 0:00:22.520 and trends shaping today's complex economy. Plus global business, finance 0:00:22.560 --> 0:00:26.280 and tech news as it happens. The Bloomberg Business Weekdaily 0:00:26.400 --> 0:00:31.320 Podcast with Carol Masser and Tim Steneveek on Bloomberg Radio. 0:00:32.159 --> 0:00:35.960 Harveryone. Welcome to the Bloomberg Business Week Weekend Podcast. Tim 0:00:36.080 --> 0:00:39.520 is on assignment. Now we've officially entered the final month 0:00:39.560 --> 0:00:42.280 of twenty twenty five, you know that, and all eyes 0:00:42.479 --> 0:00:46.760 are on this Wednesday's FOMC interest rate decision. That meeting 0:00:47.240 --> 0:00:50.559 with market participants. It is expected to bring another rate 0:00:50.640 --> 0:00:54.000 cut by the Fed, largely priced in, some say, despite 0:00:54.000 --> 0:00:57.920 the FOMC committee working with less economic data than usual 0:00:58.240 --> 0:01:00.880 after that government shutdown for more than a month. Now 0:01:00.880 --> 0:01:03.960 for the latest on what to expect from the Fed meeting, 0:01:04.000 --> 0:01:05.920 head on over to Bloomberg dot com or check it 0:01:05.920 --> 0:01:09.199 out on the Bloomberg terminal. Even without that data, We've 0:01:09.200 --> 0:01:12.959 got some really great reads this week into US economic health. 0:01:13.120 --> 0:01:15.360 We have the CEO of Lending Club with an outlook 0:01:15.400 --> 0:01:18.160 on consumer credit he joins us in just a moment 0:01:18.520 --> 0:01:21.200 plus a deep dive into private credit with Christina Lee 0:01:21.240 --> 0:01:23.920 of oak Tree Capital Management, who also has a take 0:01:23.920 --> 0:01:26.920 on the health of the consumer that's actually impacting the 0:01:26.920 --> 0:01:30.760 firm's investment strategy. Also why a recent downgrade in the 0:01:30.760 --> 0:01:35.720 cloud security company zscaler is not phasing its CEO, Jay Chawdry. 0:01:35.920 --> 0:01:38.160 We speak with him a little bit later on all 0:01:38.200 --> 0:01:41.280 of that to come, but first, the online lending marketplace 0:01:41.319 --> 0:01:44.959 and platform for loans, credit cards, deposit accounts, insurance, and 0:01:45.000 --> 0:01:48.120 a lot more. We're talking about lending Club. They announced 0:01:48.200 --> 0:01:50.640 recently a one hundred million dollars share buy back. It 0:01:50.680 --> 0:01:53.400 was just about one month ago, which was nearly five 0:01:53.440 --> 0:01:55.600 percent of the company's market value on the day of 0:01:55.640 --> 0:01:59.000 that announcement. Analysts have been raising their price targets on 0:01:59.040 --> 0:02:01.720 the stock this year, and even most recently since the 0:02:01.720 --> 0:02:05.559 company reported earnings late October and posted third quarter results 0:02:05.600 --> 0:02:08.359 that beat estimates and provided a guidance range for new 0:02:08.360 --> 0:02:12.639 fourth quarter originations with a midpoint above estimates. We caught 0:02:12.720 --> 0:02:15.919 up with Scott Sanborn, chief executive officer of lending Club. 0:02:15.960 --> 0:02:18.600 He's been CEO for almost a decade and he's been 0:02:18.639 --> 0:02:21.920 at lending Club for fifteen years now. Also joining our 0:02:22.000 --> 0:02:25.400 chat Herman shan He is Bloomberg Intelligence Senior analyst for 0:02:25.520 --> 0:02:30.320 US regional Banks who help bring this conversation, this roundtable altogether. 0:02:30.639 --> 0:02:32.880 Scott, I want to start with you and just give 0:02:32.919 --> 0:02:35.840 us some size and scope of the business, the consumers 0:02:35.840 --> 0:02:38.440 that you're working with, who's interacting with the platform. 0:02:38.800 --> 0:02:41.600 Yeah, so we serve a customer base we call the 0:02:41.639 --> 0:02:45.160 middle majority. They are if you think about credit, which 0:02:45.160 --> 0:02:47.040 we are a credit centric bank. 0:02:47.480 --> 0:02:49.120 If you've got a lot of money, you don't need 0:02:49.160 --> 0:02:50.120 a lot of access to credit. 0:02:50.160 --> 0:02:52.239 You pay cash for car, you save up to send 0:02:52.240 --> 0:02:54.760 your kids to college. If you're on the other end 0:02:54.800 --> 0:02:58.160 of the spectrum, you can't really access credits. So there's 0:02:58.200 --> 0:03:02.720 this middle group that are high income, heavy users of credit. 0:03:02.760 --> 0:03:05.079 So they can afford a car, they can afford to 0:03:05.080 --> 0:03:06.600 send their kids to school, but they need to use 0:03:06.600 --> 0:03:07.320 credit to do it. 0:03:07.400 --> 0:03:08.880 That's who we serve. 0:03:09.360 --> 0:03:12.040 It's a really big customer base that represents about a 0:03:12.080 --> 0:03:13.720 third of the US population, but. 0:03:13.680 --> 0:03:16.120 It's close to half of the credit wallet. 0:03:16.200 --> 0:03:18.480 So they are more likely than average to have every 0:03:18.480 --> 0:03:21.400 form of credit, and that credit is with the exception 0:03:21.480 --> 0:03:23.320 mortgages also larger than average. 0:03:23.320 --> 0:03:23.959 That's what we serve. 0:03:24.080 --> 0:03:27.000 How much do these people usually make our average? 0:03:27.040 --> 0:03:29.519 And you know, obviously misleading averages can be misleading, but 0:03:29.520 --> 0:03:31.600 average is about one hundred and twenty five thousand dollars, 0:03:31.960 --> 0:03:34.079 but you can think of it of ranging between call 0:03:34.120 --> 0:03:37.160 it eighty thousand dollars in individual income to about two 0:03:37.240 --> 0:03:40.160 hundred thousand is where we really over index. 0:03:41.240 --> 0:03:41.520 Great. 0:03:42.040 --> 0:03:45.200 One of the real highlights of your recent investor day 0:03:45.600 --> 0:03:49.320 was the panel discussion with Marketplace Investors, and we talked 0:03:49.320 --> 0:03:53.160 about this earlier before your appearance here on radio. One 0:03:53.160 --> 0:03:57.800 of the panel THATTS talked about being aligning performance expectations 0:03:57.840 --> 0:04:00.440 partnering with better operators. Are you seeing that with the 0:04:00.920 --> 0:04:02.320 private credit space. 0:04:02.560 --> 0:04:03.680 Yeah, we do so. 0:04:03.920 --> 0:04:06.800 You know, we were born as a marketplace. Initially, everything 0:04:06.800 --> 0:04:10.680 we originated we sold. When we acquired the bank in 0:04:10.720 --> 0:04:13.440 twenty one, we started to hold a portion of our 0:04:13.440 --> 0:04:14.720 loans on our balance sheet. 0:04:15.000 --> 0:04:17.160 That both gives us. 0:04:17.040 --> 0:04:20.760 A stronger and more resilient earnings profile also allows us 0:04:20.760 --> 0:04:24.760 to do other things innovate using our balance sheet. And 0:04:25.040 --> 0:04:27.919 what we found is just by aligning our interest with 0:04:28.080 --> 0:04:31.159 our loan buyers, we're the largest eater of our own cooking. 0:04:31.200 --> 0:04:33.680 We're the largest holder of lending club loans. We care 0:04:33.800 --> 0:04:37.359 very deeply about the performance of the credit and you know, 0:04:37.440 --> 0:04:41.840 credit is always evolving, it's very dynamic. Because we have 0:04:41.920 --> 0:04:43.680 a balance sheet, what we can do is when we 0:04:43.720 --> 0:04:46.080 want to test something new, we test it on our 0:04:46.120 --> 0:04:46.800 balance sheet. 0:04:47.040 --> 0:04:50.120 Let's try longer duration, let's try a larger loan size, 0:04:50.200 --> 0:04:50.880 let's try. 0:04:50.640 --> 0:04:51.680 A new marketing channel. 0:04:51.920 --> 0:04:55.080 We hold that first, we own it, we own it, we. 0:04:54.960 --> 0:04:57.120 Make sure it performs the way we expect, and then 0:04:57.200 --> 0:04:59.599 we release that to the marketplace. If you don't have 0:04:59.600 --> 0:05:02.880 a balance you can't really do that. And so that's 0:05:03.000 --> 0:05:07.200 visible in our results across every aspect of underwriting. So 0:05:08.360 --> 0:05:11.160 lower delinquencies than the rest of the industry thirty or 0:05:11.200 --> 0:05:12.000 forty percent. 0:05:11.720 --> 0:05:16.000 Below, lower roll rates, higher recovery rates, lower. 0:05:15.760 --> 0:05:19.600 Prepayments, lower fraud, literally every aspect that you can measure 0:05:19.920 --> 0:05:21.599 of credit, we're out performing on. 0:05:21.920 --> 0:05:25.839 Has that remained consistent this year, in recent months, in 0:05:25.880 --> 0:05:27.839 recent weeks, like you have a great real time view 0:05:28.360 --> 0:05:30.480 of the consumer in the form of how well they 0:05:30.520 --> 0:05:33.760 are doing in terms of paying back their loans. That's right, 0:05:33.839 --> 0:05:34.640 still looking good. 0:05:34.800 --> 0:05:37.680 Yeah, So that's been consistent for you know, we release 0:05:37.800 --> 0:05:39.880 four years of data we put out there, and so 0:05:39.920 --> 0:05:43.640 it's remained consistent. But you know it's not it's kind 0:05:43.640 --> 0:05:45.800 of like a duck on a pond. It's remained consistent 0:05:45.839 --> 0:05:46.679 because we're doing. 0:05:46.480 --> 0:05:47.920 A lot of work underneath the cover. 0:05:48.120 --> 0:05:51.080 So you know, something that we shared an investor Day 0:05:51.120 --> 0:05:53.640 is at any given time, we have more than two 0:05:53.760 --> 0:05:58.200 hundred tests in the market where we're evaluating price points, 0:05:58.279 --> 0:06:02.280 changes to the credit. So we're constantstantly adjusting to reflect 0:06:02.360 --> 0:06:06.320 what's happening with the consumer, and that's what's giving us 0:06:06.320 --> 0:06:07.440 the consistent results. 0:06:07.480 --> 0:06:10.120 Well, so that to me says you're very picky about 0:06:10.120 --> 0:06:12.680 who you lend to. That's true, we are so in 0:06:12.760 --> 0:06:14.880 terms of your test, So tell me what it is 0:06:15.000 --> 0:06:18.800 I mean, and how many of people who apply or 0:06:18.800 --> 0:06:21.200 want to access your platform. You're like, I'm out. 0:06:21.560 --> 0:06:24.880 Yeah, So we're pretty good at selecting who we want 0:06:25.279 --> 0:06:28.000 to have in our portfolio and reaching out to those 0:06:28.040 --> 0:06:32.520 people and then both delivering the price and product experience, 0:06:32.560 --> 0:06:35.280 but also let's call it the user experience that gets 0:06:35.320 --> 0:06:39.679 them all the way through. So we look for areas where, 0:06:39.880 --> 0:06:43.760 for example, we can control the use of the fund proceeds. 0:06:43.800 --> 0:06:45.920 If you come to me and say i want twenty 0:06:46.000 --> 0:06:51.479 thousand dollars because I'm going to do whatever my kid 0:06:51.520 --> 0:06:55.839 needs braces or I'm moving cross country. Great, but unless 0:06:55.839 --> 0:06:58.400 I'm paying the orthodontist, I don't actually know that that's 0:06:58.440 --> 0:07:01.160 what you're using it for. Yeah, So we try to, 0:07:01.600 --> 0:07:05.280 you know, set ourselves up so that we are in 0:07:05.320 --> 0:07:07.719 some ways controlling the use of proceeds and then making 0:07:07.720 --> 0:07:09.920 the experience such that it makes it really easy. So 0:07:10.000 --> 0:07:13.480 or largest use cases for people who already have debt, 0:07:13.560 --> 0:07:16.640 credit card debt, most notably, which at this point more 0:07:16.680 --> 0:07:19.520 than half of all Americans are carrying. They're carrying it 0:07:19.560 --> 0:07:21.920 at really high rates twenty three percent interest rate. It's 0:07:22.040 --> 0:07:25.800 highest they've ever been in history. And we say, great, 0:07:25.840 --> 0:07:28.680 you should do this instead. It takes less than five minutes. 0:07:28.920 --> 0:07:31.200 We're going to save you seven hundred basis points. And 0:07:31.320 --> 0:07:33.560 by the way, check all the credit cards that you 0:07:33.640 --> 0:07:35.200 have that you want us to pay off, like we 0:07:35.240 --> 0:07:38.240 see you have Chase or a cap One. Great, check 0:07:38.280 --> 0:07:40.680 those and we're going to pay them directly, so we 0:07:40.760 --> 0:07:42.840 know you are paying off your credit card debt. You're 0:07:42.880 --> 0:07:45.080 not just saying you're going to pay off your credit 0:07:45.080 --> 0:07:47.280 card debt and taking out more money we are paying 0:07:47.280 --> 0:07:49.640 it off for you. Benefit for you is you know 0:07:49.680 --> 0:07:51.520 you've consolidated everything into one bill. 0:07:51.640 --> 0:07:52.560 Other benefit is. 0:07:52.520 --> 0:07:55.280 Your FICO score usually goes up by thirty thirty five 0:07:55.320 --> 0:07:58.640 points because you've lowered, you know, your utilization. 0:07:59.120 --> 0:08:01.440 How much can you low? Like I'm going to tell you, 0:08:01.600 --> 0:08:04.240 credit card rates just blow my mind about how high 0:08:04.280 --> 0:08:06.120 they are. And I'm just curious, why are they so high? 0:08:06.160 --> 0:08:09.200 Are people so bad? Is it to cover? No, I'm curious. 0:08:09.320 --> 0:08:09.520 Yeah. 0:08:09.520 --> 0:08:10.760 No, it's a great question, and it just. 0:08:10.680 --> 0:08:13.400 Seems like it's out of control, and I think it 0:08:13.480 --> 0:08:18.400 prevents people from becoming financially solvent or creating, you know, 0:08:18.640 --> 0:08:20.480 kind of getting ahead of the game if you will. 0:08:20.600 --> 0:08:22.160 Yeah, there's a lot to unpack in that. 0:08:22.760 --> 0:08:23.040 It is. 0:08:23.160 --> 0:08:26.320 No, No, it's a great question, and you know there's 0:08:26.520 --> 0:08:29.040 a number of questions underneath. But I'd say the biggest 0:08:29.080 --> 0:08:33.520 thing is if you think about how people choose credit cards, 0:08:33.559 --> 0:08:36.040 it is not based on the interest rate. Yeah right, 0:08:36.320 --> 0:08:41.240 it's my Skymiles card or whatever, my retail store card. 0:08:41.240 --> 0:08:43.240 I'm going to get rewards for this. I don't even 0:08:43.280 --> 0:08:45.080 know what the interest rate is, or it's a promotional 0:08:45.160 --> 0:08:47.720 rate that resets, So that's one, they don't choose based 0:08:47.760 --> 0:08:50.880 on that. Half of the people don't revolve on the card. 0:08:50.920 --> 0:08:54.280 They're collecting these rewards. Yeah, but they're not carrying a balance. Well, 0:08:54.840 --> 0:08:57.400 guess who's paying for that. All the people that are 0:08:57.440 --> 0:09:02.080 carrying a balance. Those people don't know what their rates are. 0:09:02.200 --> 0:09:04.960 The research we've done is half of all customers don't 0:09:05.200 --> 0:09:07.600 say they don't know the interest rate on their credit cards, 0:09:07.800 --> 0:09:10.000 and the half that say they do, more than half 0:09:10.080 --> 0:09:13.040 of them are wrong. They think they know their rate, 0:09:13.120 --> 0:09:16.520 but they don't, right. And so cards have been able 0:09:16.559 --> 0:09:19.720 and one of the big resets with the cards was 0:09:19.720 --> 0:09:22.520 was driven by the Card Act, which limited how much 0:09:22.640 --> 0:09:26.200 cards could increase rates, so they factored in higher rates. 0:09:26.480 --> 0:09:28.040 I just want to jump in real quick. We are 0:09:28.120 --> 0:09:31.240 speaking with Scott Sanborn, CEO of a lending club. He's 0:09:31.240 --> 0:09:33.400 been CEO for close to a decade. We also have 0:09:33.520 --> 0:09:36.800 here with us Hermann Chan. He's Bloomberg Intelligence senior analyst 0:09:36.920 --> 0:09:38.240 for US regional banks. 0:09:38.679 --> 0:09:38.959 Thanks. 0:09:39.120 --> 0:09:41.920 I wanted to follow up with you, Scott on some 0:09:41.960 --> 0:09:44.800 of the medium term expectations you laid out an Investor Day. 0:09:44.880 --> 0:09:48.360 You talked about doubling loan originations. We're talking about eighteen 0:09:48.400 --> 0:09:52.120 to twenty billion dollars a year. What are some of 0:09:52.120 --> 0:09:54.520 the levers to get you to that level? You mentioned 0:09:54.679 --> 0:09:59.040 use cases? Maybe talk about home improvement as a use case, 0:09:59.200 --> 0:10:01.360 and how do you maintain solid credit quality as you 0:10:01.440 --> 0:10:01.760 ramp up? 0:10:01.920 --> 0:10:03.920 And an improvement is something you're getting into, right. 0:10:03.800 --> 0:10:04.520 That's right, yep. 0:10:05.040 --> 0:10:08.680 So first and foremost is as I mentioned, you know, 0:10:08.760 --> 0:10:11.480 credit card refining people out of their credit card debt 0:10:11.520 --> 0:10:13.360 into a fixed rate, lower rate. 0:10:13.240 --> 0:10:15.240 Loan is number one use case. 0:10:15.320 --> 0:10:18.240 It's it's about eighty eighty percent of what we do. 0:10:19.200 --> 0:10:21.240 That market is the largest it's ever been. There's one 0:10:21.240 --> 0:10:21.880 point three. 0:10:21.720 --> 0:10:23.400 Trillion eighty percent of what you do. 0:10:23.480 --> 0:10:23.760 Is that? 0:10:23.840 --> 0:10:24.080 Wow? 0:10:24.200 --> 0:10:24.600 Go ahead? 0:10:24.679 --> 0:10:29.480 Sorry, So that is you know, one point three trillion 0:10:29.480 --> 0:10:32.920 in balance is priced at really really high rates. We 0:10:33.320 --> 0:10:36.199 you know, when the rate environment shifted and the inflationary 0:10:36.360 --> 0:10:38.880 pressure shifted, we pulled back on a lot of our marketing. 0:10:38.960 --> 0:10:41.839 So we're currently running today at sort of below our 0:10:42.000 --> 0:10:46.280 historical volumes. So we're just going back into that market, 0:10:47.080 --> 0:10:49.640 turning back on marketing channels that we had turned off. 0:10:50.000 --> 0:10:52.800 And then the other areas. You know, personals can be 0:10:52.880 --> 0:10:56.920 used literally for anything, right, and before credit cards came 0:10:56.960 --> 0:10:59.280 around and came to be, they were the dominant way 0:10:59.320 --> 0:11:01.000 consumers at access you know. 0:11:01.000 --> 0:11:02.200 Credit for everyday need. 0:11:02.360 --> 0:11:06.360 So we have a major purchase finance business that's growing today, 0:11:06.840 --> 0:11:10.560 call it fifty plus percent year on year. That's allowing 0:11:10.640 --> 0:11:16.520 things like elective medical procedures, you know, lay six races 0:11:16.520 --> 0:11:20.319 for your kid, you know, all kinds of procedure of 0:11:20.400 --> 0:11:24.240 fertility treatments, teeth implants, so things that insurance doesn't pay 0:11:24.280 --> 0:11:26.120 for but you want. 0:11:25.960 --> 0:11:27.440 To do and you want to do right away. 0:11:28.600 --> 0:11:32.040 Private school education it's another one. So home improvement is 0:11:32.080 --> 0:11:35.679 sort of a next adjacency. People right now are staying 0:11:35.679 --> 0:11:38.120 in their homes longer. You know, seventy five percent of Americans, 0:11:38.120 --> 0:11:41.480 their mortgage rate is under five percent. They're not going anywhere, 0:11:42.280 --> 0:11:44.960 and the homes are getting older. So the homes need 0:11:45.000 --> 0:11:47.520 to be invested in, they need to be improved. So 0:11:48.000 --> 0:11:54.000 effectively enabling home improvement through an unsecured loan, where again 0:11:54.520 --> 0:11:56.600 we are controlling the use of proceeds. We can pay 0:11:56.640 --> 0:11:59.840 the supplier, we can pay the contractor. We've got the 0:11:59.840 --> 0:12:04.200 capability through an acquisition we announced to you know, disperse 0:12:04.280 --> 0:12:06.480 this in phases to multiple parties. 0:12:07.240 --> 0:12:10.400 So we're really excited to kick that off. 0:12:10.760 --> 0:12:14.800 Consumer doing okay, I'd say the consumer we serve is 0:12:15.240 --> 0:12:18.280 demonstrating themselves to be remarkably resilient. 0:12:19.760 --> 0:12:20.160 That a lot. 0:12:20.280 --> 0:12:25.160 It's a drinking game, but we'll acknowledge the sentiment isn't great. 0:12:25.480 --> 0:12:28.559 Are thanks to Scott Sanborn, chief executive officer of Lending Club, 0:12:28.640 --> 0:12:31.640 alongside our own Herman Chan. He is Bloomberg Intelligence Senior 0:12:31.679 --> 0:12:35.120 Analyst for US regional banks. Coming up the split mood 0:12:35.320 --> 0:12:40.400 around private credit soaring, inflows rising risks, lots of questions. 0:12:40.600 --> 0:12:42.600 One of the things to look out for is one 0:12:42.640 --> 0:12:44.640 of the questions. I think that we all talk about 0:12:44.640 --> 0:12:45.800 our valuation marks. 0:12:46.400 --> 0:12:46.559 Right. 0:12:46.800 --> 0:12:51.160 Is there transparency? Is there not transparency? I always tell 0:12:51.200 --> 0:12:53.960 people to ask them what is your valuation methodology? 0:12:54.120 --> 0:12:56.959 Christina Lee of oak Tree Capital Management joins us. Next, 0:12:57.240 --> 0:13:09.400 you're listening to Bloomberg Business Week. This is bloom. 0:13:04.800 --> 0:13:08.600 You are listening to the Bloomberg Business Weekdaily Podcast. Catch 0:13:08.679 --> 0:13:11.840 us live weekday afternoons from two to five pm Eastern 0:13:12.040 --> 0:13:15.119 Listen on Apple CarPlay and Android Auto with the Bloomberg 0:13:15.160 --> 0:13:18.040 Business app, or watch us live on YouTube. 0:13:18.800 --> 0:13:22.160 In a recent opinion piece for Bloomberg, Apollo Global Management 0:13:22.280 --> 0:13:25.160 CEO Mark Rowan argued that much of the fear around 0:13:25.200 --> 0:13:28.960 private credit is based on myths that the core of 0:13:29.000 --> 0:13:33.560 this market remains high quality and relatively safe. Even so, 0:13:33.880 --> 0:13:37.640 not everyone is so confident. Bloomberg Opinion columnist Paul Davies 0:13:37.840 --> 0:13:40.520 argues that the lack of transparency in private credit is 0:13:40.559 --> 0:13:43.760 one reason that investors could be more fearful. He goes 0:13:43.800 --> 0:13:46.079 on to say that the outlook for repayment problems in 0:13:46.160 --> 0:13:50.000 bankruptcies isn't great and that in fact, it's getting worse. 0:13:50.360 --> 0:13:52.400 Needless to say, a lot of questions have emerged in 0:13:52.440 --> 0:13:55.240 recent weeks about private credit. It all really goes back 0:13:55.280 --> 0:13:58.600 to that JP Morgan earnings call back in October, when 0:13:58.640 --> 0:14:01.760 the head of JP Morgan, Jamie Diamond, made that comment 0:14:01.800 --> 0:14:04.960 about more cockroaches being out there, kind of tapping into 0:14:05.000 --> 0:14:07.800 some of the concerns about the private lending world, the 0:14:07.800 --> 0:14:10.600 private credit world, the financial landscape, that there could be 0:14:10.600 --> 0:14:11.640 more problems. 0:14:11.240 --> 0:14:13.480 Out there, like you should assume that every something has 0:14:13.480 --> 0:14:19.119 we scour all process, all procedures, all underrunning all everything, 0:14:19.880 --> 0:14:22.320 and you know, we think we're okay and other stuff. 0:14:23.280 --> 0:14:26.360 My antenna goes up with leaves like that happened, and 0:14:26.800 --> 0:14:28.720 I should I shouldn't say this, but when you see 0:14:28.720 --> 0:14:32.200 one cockroach, they're probably more, you know, and so we 0:14:32.200 --> 0:14:35.040 we should everyone should be four more than this one. 0:14:35.200 --> 0:14:38.360 This past week, we leaned on Christina Lee, managing director 0:14:38.400 --> 0:14:41.240 and co portfolio manager for oak Tree Capital Management's US 0:14:41.320 --> 0:14:43.600 private debt strategy, for some insight. 0:14:44.120 --> 0:14:46.800 I think it's been called the Great cockroa chores, you 0:14:46.880 --> 0:14:49.960 name it. I think one of the issues that I 0:14:50.000 --> 0:14:53.280 think people are having is there's been some high profile 0:14:53.320 --> 0:14:56.360 bankruptcies that I've happed recently, and people are saying, is 0:14:56.400 --> 0:15:00.240 this systemic? Is this a pattern of what's next? I 0:15:00.280 --> 0:15:02.120 think sometimes you do have to take a step back 0:15:02.120 --> 0:15:05.760 and remember we're doing sub investment grade credit. You are 0:15:05.920 --> 0:15:09.120 taking risk. There will be defaults, there will be restructurings. 0:15:09.200 --> 0:15:12.280 You don't get eight to nine percent all in yields 0:15:12.520 --> 0:15:13.640 by not taking risk. 0:15:14.640 --> 0:15:19.320 Okay. So having said that, when you guys, especially you know, 0:15:19.720 --> 0:15:22.720 in terms of private credit, I think what really tripped 0:15:22.840 --> 0:15:25.480 a lot of investors or investments up in the private world, 0:15:25.600 --> 0:15:28.000 private credit, private equity for that matter, is that there 0:15:28.000 --> 0:15:30.480 weren't the exits that were normally there. Right, We've seen 0:15:30.520 --> 0:15:32.920 them pushed off, and I think it's starting to come back, 0:15:33.200 --> 0:15:36.200 but then you had terms renegotiated. You just like all 0:15:36.240 --> 0:15:38.360 these things started to happen, and you just wonder whether 0:15:38.360 --> 0:15:40.840 it gets a little bit fuzzier and that there is 0:15:40.880 --> 0:15:43.560 more opportunities or more touch points for things to come 0:15:43.640 --> 0:15:46.640 undone roll that in and how we should be thinking 0:15:46.640 --> 0:15:47.680 about that part of it. 0:15:48.240 --> 0:15:51.080 I think defaults have been very, very low in private credit, 0:15:51.480 --> 0:15:54.680 and if you were to look at various managers, their 0:15:54.760 --> 0:15:58.080 loss ratios, et ceter, default rates would probably all be 0:15:58.280 --> 0:16:03.000 relatively similar. And that's because private credit hasn't really been 0:16:03.080 --> 0:16:04.320 through a downturn yet. 0:16:04.400 --> 0:16:04.560 Right. 0:16:04.680 --> 0:16:06.960 The advent of the class when it really started booming 0:16:07.080 --> 0:16:09.920 was maybe ten years ago. I think COVID was too short. 0:16:10.280 --> 0:16:12.920 I think what you're seeing right now also is defaults 0:16:12.920 --> 0:16:15.800 will likely rise because a lot of these bars put 0:16:15.800 --> 0:16:19.040 in capital structures when it was a zero interest rate environment, 0:16:19.120 --> 0:16:21.280 which is you know, now it's higher for longer, and 0:16:21.320 --> 0:16:25.440 I think that's why you're seeing defaults and some cracks emerge. 0:16:25.520 --> 0:16:28.000 Does it get worse though, because you're right, an investment 0:16:28.080 --> 0:16:30.840 in a zero rate where money costs nothing is very 0:16:30.840 --> 0:16:33.960 different from where we are today, right. It's just the 0:16:34.000 --> 0:16:36.760 business dynamics and the financial dynamics of a deal looks 0:16:36.880 --> 0:16:41.160 very different. So do we see more cracks going forward? 0:16:41.240 --> 0:16:44.440 Is Jamie diamond Wright that there's never just one cockroach. 0:16:45.080 --> 0:16:47.400 I think you likely will see some cracks, but what 0:16:47.480 --> 0:16:49.800 will be dependent is the cracks have been massed, the 0:16:49.840 --> 0:16:52.160 cracks have been around for a year or two. Is 0:16:52.240 --> 0:16:55.640 there's a lot of liquidity in private credit and even 0:16:55.680 --> 0:16:59.440 in private equity. They weren't necessarily deploying in new investments, 0:16:59.440 --> 0:17:01.560 but they were helping the resisting investments. 0:17:02.480 --> 0:17:04.840 Forgive me for about when does too much liquidity, though, 0:17:04.920 --> 0:17:08.560 become a problem where you're chasing after there's so much 0:17:08.600 --> 0:17:13.000 more folks involved in the private market world, private credit, 0:17:13.040 --> 0:17:16.240 private equity, and when there's a lot of money around, 0:17:16.320 --> 0:17:18.440 it's like people are chasing deals and maybe more likely 0:17:18.480 --> 0:17:20.560 to take on even more risks. So when does it 0:17:20.600 --> 0:17:22.920 get messy or does it not? In this world, maybe 0:17:22.960 --> 0:17:23.679 it's something different. 0:17:24.000 --> 0:17:27.120 I think right now, what you're seeing is there's still 0:17:27.160 --> 0:17:30.320 a supply demand imbalance. As you had mentioned, there's less exits, 0:17:30.359 --> 0:17:33.480 there's less M and A, and so private credit dry 0:17:33.520 --> 0:17:37.720 powder has increased. But if we were to look at 0:17:37.880 --> 0:17:40.560 kind of the exit piece that private equity needs to 0:17:40.600 --> 0:17:43.200 do M and A should increase starting in twenty twenty six, 0:17:43.440 --> 0:17:47.360 and that supply demand imbalance should lessen. But right now, 0:17:47.400 --> 0:17:50.439 what you're seeing is there's really an imbalance right now, 0:17:50.440 --> 0:17:52.920 and so you are seeing that competitive nature of private credit. 0:17:52.960 --> 0:17:55.840 And does that mean looser underwriting standards a lot of time? Yes, 0:17:56.119 --> 0:17:56.680 would you do it? 0:17:57.160 --> 0:18:00.639 Howard Marx, the co chairman principal co found under of 0:18:00.720 --> 0:18:04.080 oak Tree Capital Management, out just last month, that was 0:18:04.320 --> 0:18:09.920 in the beginning of November, with a traditionally long memo 0:18:10.160 --> 0:18:13.080 about private credit, but in bold on the second page 0:18:13.080 --> 0:18:15.639 he writes, so, no, I don't think this is necessarily 0:18:15.640 --> 0:18:18.000 the beginning of a trend. And by the way, it's 0:18:18.000 --> 0:18:22.240 called cockroaches in the coal mine. It's not an indictment 0:18:22.560 --> 0:18:24.680 of the whole sub investment grade debt market or the 0:18:24.720 --> 0:18:28.080 whole private credit market. Rather, it's just a reminder that 0:18:28.200 --> 0:18:31.360 the yield spreads people care about so much are there 0:18:31.400 --> 0:18:35.480 for a reason, because sub investment grade debt entails credit risk. 0:18:36.000 --> 0:18:38.800 You agree, this is essentially just part of investing in 0:18:38.840 --> 0:18:39.600 this type of debt. 0:18:39.840 --> 0:18:43.080 Exactly if you don't take on risk, that usually means 0:18:43.080 --> 0:18:46.119 that you're yielding something lower. Right, it goes hand in hand, 0:18:46.160 --> 0:18:48.600 and I think because we've been in such a benign 0:18:48.680 --> 0:18:50.800 market where that you haven't seen a lot of defaults, 0:18:50.800 --> 0:18:52.920 et cetera. That's why people, I think are surprised. 0:18:53.080 --> 0:18:55.840 So then what's the what are the products or what 0:18:56.040 --> 0:18:59.440 are what's the credit that investors should avoid right now? 0:18:59.480 --> 0:18:59.520 Like? 0:18:59.560 --> 0:19:05.560 How do you separate because of another? A criticism I 0:19:05.560 --> 0:19:07.120 guess you could say is that there's not a lot 0:19:07.160 --> 0:19:11.320 of transparency necessarily with this type of investment, So then 0:19:11.359 --> 0:19:14.080 how do investors know what they should invest in what 0:19:14.119 --> 0:19:15.160 they should stay away from? 0:19:15.560 --> 0:19:17.480 Yeah, I think one of the things to look out 0:19:17.560 --> 0:19:19.639 for is one of the questions. I think that we 0:19:19.680 --> 0:19:23.400 all talk about our valuation works, right, Is there transparency? 0:19:23.440 --> 0:19:27.240 Is there not transparency? I always as tell people to 0:19:27.280 --> 0:19:30.920 ask them what is your valuation methodology? How often are 0:19:30.920 --> 0:19:33.119 you looking at your valuation? Because in the end, we 0:19:33.160 --> 0:19:36.520 are in a private liquid market, there's no mark to market, 0:19:36.560 --> 0:19:39.400 there is no market, and so there is a subjectiveness 0:19:39.440 --> 0:19:43.159 and a judgment on the manager. And I think a 0:19:43.240 --> 0:19:45.800 lot of it is do they mark their investments aggressively 0:19:45.920 --> 0:19:46.840