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Speaker 1: Hello, Welcome to Credit Edge Weekly Markets Podcast. My name

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Speaker 1: is James Crombie. I'm a senior editor at Bloomberg and.

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Speaker 2: I'm Phil Brendall, of senior distressed Credit analyst at Bloomberg Intelligence.

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Speaker 2: This week, we're very pleased to welcome Danielle Pauley, a

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Speaker 2: portfolio manager within the Global credit strategy at oak Tree. Danielle,

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Speaker 2: how are you?

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Speaker 3: I'm doing well. Thank you so much for having me welcome.

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Speaker 2: Oak Tree's credit strategy has one hundred and fifty six

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Speaker 2: billion dollars of assets under management across a wide range

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Speaker 2: of strategies ranging from opportunists to credit to private instructored credit.

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Speaker 2: As a portfolio manager within the firm's flagship multi asset

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Speaker 2: credit offering and a founding member of its investment committee,

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Speaker 2: we're excited to hear what Danielle thinks about the current

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Speaker 2: credit landscape and where we sit in the cycle.

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Speaker 1: Thanks Phyl, Yeah, we have loads of questions for you, Danielle.

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Speaker 1: Credit markets are going through a bit of a rough patch,

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Speaker 1: and better quality debt is outperforming in general. The weaker

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Speaker 1: smaller companies with lots of bonds and loans to pay

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Speaker 1: off are running into trouble. As rates stay high and

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Speaker 1: earnings are pressured by inflation, trade wars, immigration reform, and

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Speaker 1: consumer stress. After Trump got reelected, everyone thought risk assets

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Speaker 1: would get a huge boost from deregulation and pro growth

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Speaker 1: policies plus deep rate cuts, but that didn't happen. The

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Speaker 1: April tariff shock through US all for a loop and

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Speaker 1: credit cracks are spreading from private debt defaults to triple

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Speaker 1: ACMBS blow ups. Investment grade debt is doing better than

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Speaker 1: junk in most cases, you're not getting paid to take

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Speaker 1: the risk. So, Danielle, how do you position in these markets?

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Speaker 1: Where are the alpha opportunities at this point?

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Speaker 3: Well, you highlighted that there is a lot going on

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Speaker 3: in the macro environment. There certainly is today and continues

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Speaker 3: to be. At oak Tree macro forecasters were bottom up

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Speaker 3: credit specialists. So in fact, in these types of markets,

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Speaker 3: for our active management approach, it's not such a bad

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Speaker 3: thing when there's some volatility, we can get some bargains

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Speaker 3: in the market. Credit has been providing, in my opinion,

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Speaker 3: highly attractive returns driven by yield and income for the

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Speaker 3: last few years, and this year is no exception. If

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Speaker 3: you're able to avoid the losers, let the winners take

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Speaker 3: care of themselves. You're able to access some really attractive

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Speaker 3: opportunities in the market. So where are the opportunities you

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Speaker 3: said to level set? Our multi asset portfolios are generally

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Speaker 3: invested in liquid credit as well as some in private credit,

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Speaker 3: blending the two together for diversification tractive yield. The core

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Speaker 3: of our portfolios on the liquid side bonds and loans

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Speaker 3: sub by G and then we have what we call

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Speaker 3: our alpha strategies, so this is structured credit clos, real

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Speaker 3: estate debt, merging markets, convertibles, and then on the private

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Speaker 3: credit side, it's direct lending but asset back to finance

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Speaker 3: doing non sponsors as well as you know regular way

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Speaker 3: sponsor LBOs. So we have a very wide opportunity set,

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Speaker 3: and that's one of the most important things I think

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Speaker 3: in this market, because you can be selective and you

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Speaker 3: can be disciplined. The way we construct the portfolio is

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Speaker 3: to look for the best ideas across the platform and

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Speaker 3: then benefit from diversification across all these different asset classes.

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Speaker 2: That's really interesting, Danielle, you know, especially because you interact

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Speaker 2: with the clients. You know perhaps more than a lot

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Speaker 2: of the portfolio managers at Oak drag, you know, given

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Speaker 2: their concentration and like this, you know, in distressed opportunistic

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Speaker 2: what are what are you seeing with twenty twenty five?

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Speaker 2: It has been pretty exciting. The Trump administrations started, and

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Speaker 2: you know, we saw the tariffs and there was a

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Speaker 2: sell America theme. You know, I'm curious have clients shifted

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Speaker 2: much in terms of what they want in terms of

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Speaker 2: credit product, you know, perhaps looking for more security or

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Speaker 2: or perhaps geography. I'm just kind of curious, you know,

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Speaker 2: how clients have viewed the sell America theme that you

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Speaker 2: know we saw earlier in the year given, and how

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Speaker 2: that's migrated with the run up in prices here.

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Speaker 3: I think the sell America theme led to a lot

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Speaker 3: of talk about increasing allocations to Europe in particular, but

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Speaker 3: we didn't see significant outflows, really outflows at all materialize

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Speaker 3: from US markets to be redeployed into Europe. So I think,

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Speaker 3: if anything, it was new dollars that were flowing into

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Speaker 3: some of the European strategies, but not in significant size.

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Speaker 3: Now within our portfolios, we found the opportunities that quite

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Speaker 3: attractive in Europe, not because of a loss of US

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Speaker 3: exceptionalism or macro bet that we were trying to make,

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Speaker 3: but simply because those economies had been relatively unloved for

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Speaker 3: a number of years and the yields looked attractive. We

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Speaker 3: also hedge everything in our portfolio back to US dollars,

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Speaker 3: so we're able to get a nice pickup on the carry.

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Speaker 3: And you know, the issuance has picked up in Europe

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Speaker 3: and it's been decent quality, and so we've found things

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Speaker 3: to do so on the margin. You know, we've probably

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Speaker 3: bought more in Europe this year than we have in

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Speaker 3: prior years. But given the relative sizes of the market,

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Speaker 3: the US is still, you know, the largest geography represented

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Speaker 3: in our portfolio. You know, when I speak with clients,

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Speaker 3: it's less about an expressed preference for Europe versus the US.

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Speaker 3: It's really about adding credit to their portfolios. I think

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Speaker 3: so many of our clients and investures generally have been

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Speaker 3: underweight credit for a very long time, and understandably so.

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Speaker 3: I mean, if you look back in the not so

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Speaker 3: distant past, high you old bonds, you know, we're giving

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Speaker 3: you a yield of three four percent some are issued

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Speaker 3: with two handles. That's not a lot of yield to

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Speaker 3: meet a seven eight percent return target, especially for some

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Speaker 3: of our state pension plans and endownment's foundations, forget it.

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Speaker 3: Some of them don't even have credit still today and

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Speaker 3: are adding so. With higher base rates and the ability

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Speaker 3: to get equity like returns, many are looking at credit

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Speaker 3: and taking money away from equities to fund growing credit allocations.

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Speaker 3: That's the largest trend I see speaking with clients.

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Speaker 1: Why credit right now? Given that the spreads are so tight,

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Speaker 1: You know, you could just take a T bill and chill,

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Speaker 1: as the expression went earlier this year. Why do you

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Speaker 1: have to do the extra work?

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Speaker 2: Yeah?

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Speaker 3: I like that, take a T bill and chill. I

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Speaker 3: think if you really, if you believe in the ability

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Speaker 3: to underwrite credit as we do and avoid the non payers,

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Speaker 3: you can pick up some incremental yield in the sub

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Speaker 3: investment grade credit market, and you don't need spreads to

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Speaker 3: tighten where they are today to get an attractive return.

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Speaker 3: So on average yields and high yield bonds and leverage

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Speaker 3: loans today they range, you know, from six to eight

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Speaker 3: percent on average. You go a little bit further out

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Speaker 3: the risk curve into structure credit clos, you're getting eight

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Speaker 3: to ten percent type yields and double B clos and

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Speaker 3: then higher than that when you start thinking about private credit,

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Speaker 3: you can put those into a diversified portfolio today and

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Speaker 3: get a high single digit yield, so a bit better

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Speaker 3: than treasuries, which you know roughly give you, you know,

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Speaker 3: four to five percent depending.

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Speaker 2: Danielle, one of the things that I'm fascinated by is,

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Speaker 2: you know, we know that private credit has grown to

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Speaker 2: what some would say is maybe a third the market. Now,

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Speaker 2: you know, if you split between like the broadly syndicated

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Speaker 2: loan market, private credit and high yield, and I'm curious,

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Speaker 2: what are you seeing there in terms of demand and

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Speaker 2: how it looks. You know, some of the some of

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Speaker 2: the interesting things about private credit is, you know, one

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Speaker 2: you didn't have to worry about mark so much, kind

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Speaker 2: of a lack of liquidity, so that's kind of a negative.

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Speaker 2: There's a concentrated set of lenders, and you know, I'm

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Speaker 2: just curious, are you seeing that trend continue where private

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Speaker 2: credit seems hot, or do you see that potentially reversing.

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Speaker 3: I think a lot of money has been raised in

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Speaker 3: private credit, and the growth has continued such that we're

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Speaker 3: seeing convergence between public and private markets. I don't think

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Speaker 3: that they should be pitted against each other as rivals.

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Speaker 3: We just put out an insights piece on this Friends

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Speaker 3: not foes. I think the two are settling more into

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Speaker 3: this symbiotic relationship, which is actually helpful for borrowers and investors,

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Speaker 3: but you'll have to think about the roles that each

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Speaker 3: of them play. I do think that if you're giving

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Speaker 3: up liquidity, you need to be paid for it. You

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Speaker 3: need to get higher yield than you could get in

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Speaker 3: the public market, and we are seeing that yield differential compress,

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Speaker 3: but it has maintained some end. Where I do see

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Speaker 3: the demand shifting for many in the private credit market

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Speaker 3: is as they've built up their direct lending portfolios, they're

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Speaker 3: looking more broadly at private credit opportunities, whether they're in

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Speaker 3: asset back to finance to diversify some of their exposure,

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Speaker 3: so thinking about more of a core satellite approach. A

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Speaker 3: lot of the clients I speak with are looking for

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Speaker 3: the satellite today ways to add on to what private

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Speaker 3: credit exposure they have, or they're thinking about being more

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Speaker 3: tactical and combining the two in more evergreen structures that

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Speaker 3: can be more opportunistics such that when spreads do compress,

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Speaker 3: those portfolios can allocate more to public markets, or importantly,

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Speaker 3: if there's a dislocation, they can buy liquid as assets

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Speaker 3: at a discount. So I think having a blend of

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Speaker 3: both is a trend that will continue to see. I

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Speaker 3: think the private credit markets are here to stay, and

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Speaker 3: they'll also continue to serve an important role with respect

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Speaker 3: to financing borrowers in times of stress. I mean private

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Speaker 3: credit has stepped in when liquid markets have frozen up,

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Speaker 3: so borrowers are going to continue to have multiple ways

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Speaker 3: to gain financing, which I think should actually improve the

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Speaker 3: overall health of the environment for borrowers going forward.

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Speaker 1: And on that gap between private and public I mean,

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Speaker 1: as a total credit geek, I look at that very

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Speaker 1: closely and have been looking at it for some time.

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Speaker 1: And we've gone from this time last year when I

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Speaker 1: think HIMCO was calling it one hundred and fifty bases

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Speaker 1: points increased spread obviously yield spread that's not return. Things

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Speaker 1: may change over the course of your investment, to let's

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Speaker 1: say earlier this year when it was much compressed than

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Speaker 1: by the middle of the year it was zero. And

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Speaker 1: then we taught to Blackstone a couple of weeks ago

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Speaker 1: and it was one hundred and fifty again to two hundred,

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Speaker 1: and then last week we heard from Double Line that

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Speaker 1: it was zero. So I'm interested in how you would

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Speaker 1: quantify that right now and also where is it going.

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Speaker 3: It does seem to be a moving target, and I

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Speaker 3: think it does depend on what part of the private

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Speaker 3: credit market you play, and it's hard to kind of

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Speaker 3: paint the private credit market with a single brushstroke today

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Speaker 3: when I think about our opportunity set, the large kind

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Speaker 3: of mega deals, so think of you know, over a

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Speaker 3: billion dollars. Those deals have been increasingly getting financed in

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Speaker 3: the broadly syndicated market versus the private credit market. We've

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Speaker 3: seen over the past year just a lot more deals

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Speaker 3: financed there, and the middle market deals have been going

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Speaker 3: towards private credit and we're seeing more issuance there. What

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Speaker 3: we're seeing that middle market pricing kind of on top

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Speaker 3: of the larger cap ricing, so spreads are contracting for

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Speaker 3: our opportunity set. On average, we're kind of looking at

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Speaker 3: that sponsor LBO market today it's sofur plus, you know,

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Speaker 3: four fifty to five hundred generally in the broadly syndicated market.

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Speaker 3: If we're kind of targeting single be but higher quality

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Speaker 3: something we're comfortable with. It's kind of sofur plus three

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Speaker 3: point fifty, so you're still picking up you know, incremental spread.

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Speaker 3: But those are just averages, right. There's various different deals

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Speaker 3: that are pricing different ways, and it's really more for

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Speaker 3: us about making sure that the underlying credit risk is limited,

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Speaker 3: that we're lending to a company that's not over levered,

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Speaker 3: that's going to pay us back those those high yields.

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Speaker 3: So and then outside of the kind of direct lending market,

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Speaker 3: the asset back to finance deals are pricing you know,

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Speaker 3: quite a bit wider. You can get you know, or

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Speaker 3: plus six hundred eight hundred or higher. And the asset

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Speaker 3: back to finance that we're focused on, because there has

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Speaker 3: a lot of different type of asset binance is the

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Speaker 3: contractual type. So we're looking for cash flowing assets, whether

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Speaker 3: the loans or leases that are you know, supporting those pools.

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Speaker 2: Danielle, you know, one of the things that I think

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Speaker 2: is really interesting is how late we are in this cycle.

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Speaker 2: You Know, one of the things that I do is

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Speaker 2: I look at what's the distressed market telling us about

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Speaker 2: the credit cycle, and in particular, you know, what caught

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Speaker 2: my eye is that we're now sixty three months where

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Speaker 2: the distress ratio and given that's a high yield bond measurement,

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Speaker 2: but it's been sixty three months since it's crossed eleven percent.

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Speaker 2: And most cycles, you know, we have more of I

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Speaker 2: guess a cleansing where you know, like everyone's selling and

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Speaker 2: you get this big supply surge and distressed debt. We

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Speaker 2: haven't had them for so long. Can you talk about

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Speaker 2: out what you're looking for, you know, and how it

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Speaker 2: affects maybe the private credit broadly, SA, what would what

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Speaker 2: do you think investors should be in at this point

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Speaker 2: in the cycle. It is pretty late, I I you know,

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Speaker 2: my inkling is that being in lesliquid paper might be

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Speaker 2: a dangerous place to be. But I'm curious what you're

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Speaker 2: hearing from clients, maybe what they're concerned with and uh

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Speaker 2: and you know how Old Tree manages to keep their

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Speaker 2: investment discipline in this, you know, in these times when

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Speaker 2: it's you know, pretty late in a credit cycle.

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Speaker 3: Yeah, it is. It is late in the credit cycle.

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Speaker 3: Or maybe we just haven't had a cycle for a while.

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Speaker 3: We're waiting for one at Oak J I'll tell you,

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Speaker 3: you know, that's really in our DNA as being opportunistic

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Speaker 3: and lending. In those periods, we are very active in

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Speaker 3: the rescue finance space as well as doing you know,

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Speaker 3: distressed opportunistic lending. And the distressed ratio, which I think

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Speaker 3: Phil you just reported on your latest podcast, is around

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Speaker 3: four percent. So there's not as much to do right

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Speaker 3: now in that space, but we are, you know, later

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Speaker 3: in the cycle. When I'm talking with clients, we tend

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Speaker 3: to focus on kind of three trends with respect to default.

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Speaker 3: The high yield market in particular is kind of below average.

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Speaker 3: It's usual for there to be you know, one to

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Speaker 3: two percent defaults in the market, higher than that of

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Speaker 3: course in periods of stress, which is why the overall

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Speaker 3: default rate is higher. Today, We're just we're not seeing it.

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Speaker 3: And it's a higher quality market because of that cleansing

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Speaker 3: event that happened in twenty twenty with some of the

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Speaker 3: worst companies kind of defaulting from the index. So it's

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Speaker 3: hard to imagine a significant spike in the high yield

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Speaker 3: bond market of defaults just given the quality of the market,

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Speaker 3: the secured issuance we've seen, the shorter duration. Now I

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Speaker 3: compare that with the broadly syndicated market where defaults actually

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Speaker 3: have been elevated for the last couple of years. They

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Speaker 3: are above kind of historical averages. It's not a new thing,

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Speaker 3: it's a trend we've been monitoring and it makes sense.

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Speaker 3: You've had an increase in base rates, borrowers have to

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Speaker 3: pay more, so we are seeing more elevated faults in

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Speaker 3: that market. The quality is not there, the trends are

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Speaker 3: the opposite, and so we do expect to see you know,

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Speaker 3: continued defaults there. Now, we benefited oak Tree from having

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Speaker 3: the distressed expertise that I mentioned and really going after

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Speaker 3: those rescue financing, so we tend to know what to

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Speaker 3: avoid in the broadly syndicated market, there's a good synergy

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Speaker 3: for us and information sharing. And then the third area

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Speaker 3: of default that we speak about with clients is the

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Speaker 3: private credit market. So you've got low default and high yield,

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Speaker 3: elevated and broadly syndicated loans and dare I say masked

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Speaker 3: default in the private credit market. It's hard to get

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Speaker 3: a good sense there. I mean estimates range, you know,

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Speaker 3: I see two to five percent reported. I'm focused more

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Speaker 3: on you know, non accrules. You can get some of

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Speaker 3: that data in the BDCs that publicly report. There's been

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Speaker 3: some recent reports on pick and dissecting, you know, good

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Speaker 3: pick versus bad picks, So our amendments happening. I think,

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Speaker 3: you know, bad picks roughly reported around six percent today,

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Speaker 3: so maybe six percent default that it's quite significant actually

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Speaker 3: for that market, and I think it does speak to

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Speaker 3: us being a little bit later in the cycle, and

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Speaker 3: so it is very very important then to be mindful

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Speaker 3: that there are tails in these markets. There are things

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Speaker 3: that you have to avoid, and you have to understand

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Speaker 3: that the game has changed. You don't have as many

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Speaker 3: in court restructurings and bankruptcies. We've seen a certainly a

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Speaker 3: rise of lems, which you both have talked to at

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Speaker 3: length on many of your podcasts, and it's it's just

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Speaker 3: it's a state of play. But I do think that

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Speaker 3: if you have a good underwriting process, you have credit discipline,

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Speaker 3: you can avoid these things and you can collect that

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Speaker 3: really high income today. So I do think it's a

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Speaker 3: good time to be invested. And I don't think we're

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Speaker 3: at a tipping point by any means, but at.

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Speaker 1: The time when we are, I think I'm under supplied

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Speaker 1: in the market in terms of net new issuance and

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Speaker 1: there is a lot of cash looking for yield at

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Speaker 1: this point in the cycle. How easy is it to

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Speaker 1: maintain that discipline.

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Speaker 3: Yeah, a lot of the issuance has been refinancing, so

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Speaker 3: you are looking at a tighter spread environment. And also

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Speaker 3: just given the high interest, you're getting a lot of

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Speaker 3: cash by a way of interest in your portfolio. So

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Speaker 3: it is tough if you are a private credit lender

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Speaker 3: to stay fully deployed, especially with some of these evergreen

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Speaker 3: vehicles that have been popularized. And so what we urge

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Speaker 3: is that as a private lender, you stay disciplined in

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Speaker 3: this type of a market, that you're not in investing

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Speaker 3: in everything that you are okay seeing the overall yield

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Speaker 3: of your portfolio go down, that you're not stretching for

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Speaker 3: risk to keep it high. And I think it also

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Speaker 3: speaks to the benefit then of having an approach where

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Speaker 3: you can invest in both public and private. It's a

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Speaker 3: high bar for us to add private exposure to those portfolios.

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Speaker 3: We're finding good opportunities in the liquid market.

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Speaker 1: We are, but how much of the deals do you

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Speaker 1: see do you say that's crazy, I'm not doing it.

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Speaker 1: You know, in the lights of Trecolo and the lights

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Speaker 1: of First Brands. You know, these sort of things kind

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Speaker 1: of coming to light now that you know maybe the

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Speaker 1: cycle is coming towards the end.

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Speaker 3: As Spill says, we pass on more than we invest

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Speaker 3: in today, this is a time for caution. We're so

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Speaker 3: lucky to have Howard Marks guiding us on, you know,

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Speaker 3: mastering the market cycle, and it's just an environment right

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Speaker 3: now where discipline is going to be rewarded. We publicly,

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Speaker 3: you know, passed passed on on Tricoloro when it came

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Speaker 3: to us, and with First Brands, as Howard wrote about,

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Speaker 3: it was a name that we had owned in our

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Speaker 3: portfolio and sold out of it this summer with credit concerns,

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Speaker 3: So we don't get them all right, But the process,

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Speaker 3: you know, is in place and we're focused on avoiding

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Speaker 3: those situations.

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Speaker 1: You've talked to recently about there being some problems with

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Speaker 1: certain vintages of private credit deals. Can you expand a

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Speaker 1: bit on that. Which vintage you'll be talking about and

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Speaker 1: when do those deals start to become a problem for us?

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Speaker 3: Yeah, I did say that, and then Jamie Diamond said

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Speaker 3: it better with the cockroaches. But I think there's just

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Speaker 3: there's going to be issues because the best of the

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Speaker 3: worst of deals get done in the best of times, right,

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Speaker 3: That's that's what they say. And we did have kind

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Speaker 3: of a surge of issuance following COVID twenty twenty twenty

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Speaker 3: twenty one, when rates were very low and maybe lending

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Speaker 3: standards were a little bit less stringent than they are today,

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Speaker 3: so you didn't have the types of protections in place

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Speaker 3: that kind of keep open these situations, which is why

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Speaker 3: we've seen so many lemes, right, because of the holes

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Speaker 3: in these documents, and we've been working through a lot

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Speaker 3: of them, and I actually think we're getting to a

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Speaker 3: point where most of kind of the lemes. It slowed

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Speaker 3: a little bit for us as we've worked through a

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Speaker 3: lot of that, but I still think there will be,

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Speaker 3: you know, some of those vintage deals, if you will,

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Speaker 3: when rates were you know, lower, that still are going

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Speaker 3: to come to bear, especially for lower rated borrowers with

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Speaker 3: upcoming maturities that just don't look refinancible. It's the tail, really, And.

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Speaker 1: You think covenants are actually getting better because everything I

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Speaker 1: see suggest that they're getting.

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Speaker 3: Worse, probably overall, like recently, getting a bit worse, but

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Speaker 3: better compared to that time. In particular so various different covenants.

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Speaker 3: You know, you can insist on whether they're you know, financial,

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Speaker 3: operational in nature liquidity. Having some covenants in place is

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Speaker 3: a good thing just to level set with the company's

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Speaker 3: a spot signs early. It's especially important in the private markets.

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Speaker 3: So we are insisting still on covenants. One we are lending,

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Speaker 3: which is probably why we're not lending as actively and

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Speaker 3: passing on more deals today than we have been.

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Speaker 2: You mentioned lmes, and you know, I'm fascinated by it,

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Speaker 2: and also how investors you know, have ebbed them flowed

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Speaker 2: with them, you know, because first lean loans. You know,

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Speaker 2: there's not necessarily that first lean that you thought you had.

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Speaker 2: You know, you're going to find out later on that

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Speaker 2: you know, you're you're forced into a deal that your

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Speaker 2: face is now your one hundred cents on the dollars

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Speaker 2: now eighty cents on the dollar, and they kind of

387
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Speaker 2: whittle you down. And you know, we have been avoiding

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Speaker 2: bankruptcy on that account. And I'm just curious. We're seeing elms,

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Speaker 2: they're starting to talk about doing things in the UK,

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Speaker 2: you know, the part twenty six restructuring schemes of the arrangement,

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Speaker 2: and I'm you know it's getting exported. I'm just curious

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Speaker 2: that are you seeing clients kind of are they taking

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Speaker 2: a haircut down on, you know, what they expect in

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Speaker 2: terms of return on first lene loans at this point

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Speaker 2: because because of these enemies, or are they losing confidence

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Speaker 2: in the asset class or is that kind of like

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Speaker 2: so long term as a trend that it might not

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Speaker 2: impact their immediate views.

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Speaker 3: Before I answer, I will plug podcasts that you did

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Speaker 3: with Ross Ross Rosinfalt, who leads our restructuring efforts at

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Speaker 3: oak Tree and expert in this area. It was really

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Speaker 3: great to here you both dive into this. I think

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Speaker 3: you know, we did hear more chatter about it from

404
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Speaker 3: clients earlier in the year and late last year. In

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Speaker 3: some ways, it's kind of died down, and I think

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Speaker 3: it's becoming a longer term issue because you have seen

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Speaker 3: a lot of these lemies and we all know that

408
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Speaker 3: once one does occur, there's further likelihood of a default

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Speaker 3: later and a lower recovery. But for the most part,

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Speaker 3: a lot of the larger lenders who were really able

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Speaker 3: to provide fresh and priming capital, to your point, we're

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Speaker 3: probably able to put themselves in a better position for

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Speaker 3: that future bankruptcy or event down the road. So in

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Speaker 3: some ways the can has been kicked down the road.

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Speaker 3: I don't think that we'll stop seeing these, but a

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Speaker 3: lot have happened, and so there has been, you know,

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Speaker 3: a bit of a slowdown the lender. Maybe on lender

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Speaker 3: violence has toned down. I think we're seeing friendlier kind

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Speaker 3: of cooperation and a lot of these situations With oak Tree,

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Speaker 3: you know, we have found situations to provide some of

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Speaker 3: the rescue financing and look at unencumbered assets and kind

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Speaker 3: of participate in this as an opportunity, but we also

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Speaker 3: still really view it as a risk on the broadly

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Speaker 3: syndicated market and wanting to avoid those situations. And it's

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Speaker 3: hard to do when ninety percent of the broadly syndicated

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Speaker 3: market doesn't have covenants. It's an issue so far, still

427
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Speaker 3: seeing most of it in the US, not as much

428
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Speaker 3: in Europe. Again I'm not the expert, but I do

429
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Speaker 3: hear that some of it has to do with board

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Speaker 3: director duties and the liability that they have there. Letting

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Speaker 3: a company go and doo insolvency in Europe is a

432
00:25:40,720 --> 00:25:44,360
Speaker 3: pretty big deal because the board directors can face criminal

433
00:25:44,440 --> 00:25:47,080
Speaker 3: charges in some case, and so they're very incentivized to

434
00:25:47,160 --> 00:25:50,720
Speaker 3: work things out in a restructuring. So I think until

435
00:25:50,880 --> 00:25:54,840
Speaker 3: some of that law changes, we probably won't see a

436
00:25:54,880 --> 00:25:58,560
Speaker 3: lot of these situations in Europe, but it's very possible

437
00:25:58,560 --> 00:25:59,359
Speaker 3: that we start seeing some.

438
00:26:00,440 --> 00:26:03,200
Speaker 1: We got the sense that the Europeans thought of themselves

439
00:26:03,200 --> 00:26:06,399
Speaker 1: as too genteel and kind to each other too to

440
00:26:06,440 --> 00:26:09,760
Speaker 1: engage in such American practices. But I don't believe that

441
00:26:09,800 --> 00:26:13,720
Speaker 1: for a minute. On the enemies sort of dying down

442
00:26:14,000 --> 00:26:16,520
Speaker 1: in the violence subsiding a little bit, I'm just as

443
00:26:16,760 --> 00:26:19,560
Speaker 1: interested in why that might be happening. And you know,

444
00:26:19,600 --> 00:26:21,920
Speaker 1: the lawyers we talk to say, it's just really on hiatus.

445
00:26:22,000 --> 00:26:24,479
Speaker 1: They did so much and you know they've now now

446
00:26:24,520 --> 00:26:26,560
Speaker 1: they going to get back to work. And one of

447
00:26:26,600 --> 00:26:29,520
Speaker 1: our guests I think last year described it as capitalism

448
00:26:29,520 --> 00:26:32,800
Speaker 1: at work. So you know what stops this getting more violent?

449
00:26:32,880 --> 00:26:34,400
Speaker 1: I can't see it myself.

450
00:26:34,680 --> 00:26:37,199
Speaker 3: I think you hit on something with the banks and

451
00:26:37,200 --> 00:26:38,960
Speaker 3: the lawyers and the fees. It costs a lot of

452
00:26:38,960 --> 00:26:42,040
Speaker 3: money to do these things, and so there's a desire

453
00:26:42,080 --> 00:26:43,200
Speaker 3: to limit cost.

454
00:26:43,200 --> 00:26:45,080
Speaker 1: As you're a lawyer in case you're making more money.

455
00:26:45,200 --> 00:26:49,719
Speaker 3: Yes, indeed, and I don't know that. Really, ever, it

456
00:26:49,840 --> 00:26:54,200
Speaker 3: was the creditors lenders maybe in some situations but not overall,

457
00:26:54,200 --> 00:26:56,440
Speaker 3: that we're going to the sponsors, you know, and saying

458
00:26:56,520 --> 00:26:58,800
Speaker 3: let's let's do this, let's leave out others. I think

459
00:26:58,840 --> 00:27:01,680
Speaker 3: it was the sponsors saying that the situation and approaching

460
00:27:01,720 --> 00:27:05,520
Speaker 3: the largest creditors first, right, And really what it speaks

461
00:27:05,560 --> 00:27:09,080
Speaker 3: to is just being a large creditor and having scale

462
00:27:09,119 --> 00:27:12,320
Speaker 3: and size puts you in a position to be able

463
00:27:12,320 --> 00:27:15,119
Speaker 3: to act on these opportunistically. That's really the key.

464
00:27:16,040 --> 00:27:18,639
Speaker 1: Okay, So the problems we are having right now in

465
00:27:18,720 --> 00:27:21,760
Speaker 1: the market, you know, the cockroaches, all that stuff, It

466
00:27:21,840 --> 00:27:24,840
Speaker 1: seems like it is kind of you know, being contained.

467
00:27:24,880 --> 00:27:28,199
Speaker 1: It's blowing over. People aren't worried about it spreading. But

468
00:27:28,960 --> 00:27:31,320
Speaker 1: you know, you've pointed out that a lot of people

469
00:27:31,320 --> 00:27:33,120
Speaker 1: in the market haven't been in the market that long,

470
00:27:33,160 --> 00:27:35,560
Speaker 1: and you know that these things can turn, and you

471
00:27:35,640 --> 00:27:38,159
Speaker 1: know how fast they can turn, and when liquidity disappears,

472
00:27:38,359 --> 00:27:40,119
Speaker 1: you know, we have a lot of problems in credit.

473
00:27:41,320 --> 00:27:43,000
Speaker 1: How far away do you think we are from that?

474
00:27:43,040 --> 00:27:46,320
Speaker 1: What might trigger it? What gives you pause to you know,

475
00:27:46,359 --> 00:27:48,919
Speaker 1: be a bit more rigorous about you know, the idea

476
00:27:49,000 --> 00:27:50,960
Speaker 1: that you know, maybe this isn't a one off, maybe

477
00:27:51,000 --> 00:27:52,720
Speaker 1: there are more cockroaches out there.

478
00:27:53,560 --> 00:27:56,960
Speaker 3: Well, we focused and of investment, greed, credit and just

479
00:27:57,000 --> 00:27:58,919
Speaker 3: being in credit in general. I think I have a

480
00:27:58,920 --> 00:28:02,560
Speaker 3: pretty pessimistic view of things already, and so for me,

481
00:28:03,480 --> 00:28:07,399
Speaker 3: the quality has actually been decent compared to history, and

482
00:28:07,440 --> 00:28:11,480
Speaker 3: I think there's still this opportunity to find good performing

483
00:28:11,520 --> 00:28:15,119
Speaker 3: companies on the liquid side. But what does give me

484
00:28:15,240 --> 00:28:20,480
Speaker 3: pause is the lack of experience in the market. I've

485
00:28:20,480 --> 00:28:23,240
Speaker 3: been with oak Tree, you know, over a decade, but

486
00:28:23,320 --> 00:28:26,159
Speaker 3: I benefit from you know, Howard's experience being one of

487
00:28:26,160 --> 00:28:29,040
Speaker 3: the few having invested through the seventies. I mean, I've

488
00:28:29,040 --> 00:28:32,760
Speaker 3: here to stagflation and Bruce Karsh's partner being the godfather

489
00:28:32,800 --> 00:28:36,080
Speaker 3: of distressed and a team with wealth of experience. We

490
00:28:36,119 --> 00:28:39,760
Speaker 3: started our private credit efforts back in two thousand and

491
00:28:39,760 --> 00:28:43,680
Speaker 3: one doing mezzanine financing junior capital, and now we're doing

492
00:28:43,720 --> 00:28:46,040
Speaker 3: you know, higher up in the capital structure, not kind

493
00:28:46,040 --> 00:28:48,480
Speaker 3: of the reverse. But the stat that I saw that

494
00:28:48,600 --> 00:28:52,160
Speaker 3: was staggering to me is that seventy percent of private

495
00:28:52,200 --> 00:28:56,120
Speaker 3: credit managers have less than ten years experience. That puts

496
00:28:56,160 --> 00:28:58,960
Speaker 3: COVID at the mid range and less than three and

497
00:28:59,000 --> 00:29:02,560
Speaker 3: a half have been investing through the GFC. I think

498
00:29:02,600 --> 00:29:05,640
Speaker 3: there's twenty one managers our self included, that have been

499
00:29:05,640 --> 00:29:08,760
Speaker 3: around since then. So you do have a lack of

500
00:29:09,600 --> 00:29:15,000
Speaker 3: experience working through these cycles, and then probably a view

501
00:29:15,120 --> 00:29:18,960
Speaker 3: that rates are going to fall and bail things out,

502
00:29:19,000 --> 00:29:21,200
Speaker 3: and you're used to a different environment, and so I

503
00:29:21,560 --> 00:29:24,120
Speaker 3: think that's impacting some of the psychology today and I

504
00:29:24,160 --> 00:29:27,520
Speaker 3: think we just have to realize that and be aware

505
00:29:27,600 --> 00:29:31,840
Speaker 3: of it. And again it's influencing this more conservative view

506
00:29:32,560 --> 00:29:35,720
Speaker 3: on how to stay disciplined and kind of construct portfolios

507
00:29:35,800 --> 00:29:37,800
Speaker 3: that are not going to get into trouble.

508
00:29:38,600 --> 00:29:40,560
Speaker 1: The flip side, though, is if you don't lean into

509
00:29:40,600 --> 00:29:44,680
Speaker 1: the risk, you kind of underperform. So and that's what

510
00:29:44,720 --> 00:29:46,640
Speaker 1: everyone's been saying that you know, you need to just

511
00:29:46,680 --> 00:29:49,240
Speaker 1: take advantage of it because it's just so good. It

512
00:29:49,320 --> 00:29:51,680
Speaker 1: seems too good to be true to me. But do

513
00:29:51,720 --> 00:29:54,400
Speaker 1: you also feel pressure that you've just got to keep

514
00:29:54,440 --> 00:29:55,920
Speaker 1: up with everyone else in terns of performance?

515
00:29:58,280 --> 00:30:01,520
Speaker 3: No, I don't feel pressure because I think oak Tree

516
00:30:01,640 --> 00:30:06,200
Speaker 3: we've developed our track record of strong kind of superior

517
00:30:06,320 --> 00:30:11,760
Speaker 3: risk adjusted returns through consistency with us. I really feel

518
00:30:11,760 --> 00:30:19,200
Speaker 3: like we're we're always good, we're sometimes great, we're never terrible.

519
00:30:20,080 --> 00:30:23,160
Speaker 3: So I think avoiding the losers, letting the winners take

520
00:30:23,200 --> 00:30:27,120
Speaker 3: care of themselves, staying out of credit issues, that's the

521
00:30:27,280 --> 00:30:30,920
Speaker 3: surest way to develop a long term track record and

522
00:30:31,120 --> 00:30:36,240
Speaker 3: keep clients happy over multiple market cycles. Now, the opposite

523
00:30:36,280 --> 00:30:38,840
Speaker 3: of that is what you mentioned leaning into risk. We

524
00:30:39,000 --> 00:30:41,800
Speaker 3: love to lean into risk when it makes sense, when

525
00:30:41,800 --> 00:30:44,440
Speaker 3: there's really a dislocation in the market. So we got

526
00:30:44,440 --> 00:30:46,920
Speaker 3: a little bit of one right with the tariffs earlier

527
00:30:46,960 --> 00:30:49,360
Speaker 3: this year. That was a great period to go out

528
00:30:49,400 --> 00:30:52,400
Speaker 3: and buy discounted bonds in the market. That's why we

529
00:30:52,520 --> 00:30:55,960
Speaker 3: keep some dry powder in our portfolios. We did the

530
00:30:56,000 --> 00:30:58,880
Speaker 3: same thing during COVID. I mean, these periods of buying

531
00:30:58,920 --> 00:31:02,480
Speaker 3: opportunities are really shortening, are fewer and far between, but

532
00:31:02,520 --> 00:31:05,120
Speaker 3: if you're ready for them, that's also a way that

533
00:31:05,160 --> 00:31:07,400
Speaker 3: you can really increase your total return. You don't have

534
00:31:07,440 --> 00:31:10,240
Speaker 3: to stretch for risks to kind of keep up. So,

535
00:31:10,400 --> 00:31:13,200
Speaker 3: with everything going on in the macro environment that you

536
00:31:13,240 --> 00:31:16,320
Speaker 3: brought up earlier, James, I just have to believe that

537
00:31:16,440 --> 00:31:19,440
Speaker 3: more volatility is ahead, especially in equity is I just

538
00:31:19,800 --> 00:31:22,600
Speaker 3: don't think it's going to continue to be a straight line,

539
00:31:22,640 --> 00:31:24,760
Speaker 3: and that's when we really need to lean in.

540
00:31:26,560 --> 00:31:29,160
Speaker 2: You know, it's interesting you mentioned the equities, because see,

541
00:31:29,240 --> 00:31:33,480
Speaker 2: it does seem like there's a you know, I've been

542
00:31:33,480 --> 00:31:36,200
Speaker 2: pointing it out. The video is trading it like fifty

543
00:31:36,280 --> 00:31:41,440
Speaker 2: times deep. And it's when things like that sort of

544
00:31:41,520 --> 00:31:44,680
Speaker 2: collapse that you all of a sudden get a rush

545
00:31:44,720 --> 00:31:48,840
Speaker 2: to the exit doors. And you know, to your point,

546
00:31:48,920 --> 00:31:52,320
Speaker 2: oak Tree's got the deep experience they've they've always you know,

547
00:31:52,360 --> 00:31:55,400
Speaker 2: it's a name synonymous with distress, at least in my mind.

548
00:31:55,880 --> 00:31:58,400
Speaker 2: I love the line from Logan Roy where he talks

549
00:31:58,400 --> 00:32:00,920
Speaker 2: about his children. He says, these are not serious people.

550
00:32:00,920 --> 00:32:04,240
Speaker 2: And you know, to some extent, you wonder some with

551
00:32:04,640 --> 00:32:08,120
Speaker 2: the newbies in private credit, you know, perhaps you might

552
00:32:08,160 --> 00:32:11,880
Speaker 2: have that same sort of you know, experience, especially when

553
00:32:11,880 --> 00:32:14,480
Speaker 2: it comes to restructuring, which we still haven't seen a

554
00:32:15,200 --> 00:32:18,600
Speaker 2: private credit structuring cycle. And I guess all of that is,

555
00:32:19,240 --> 00:32:23,600
Speaker 2: you know, how how do you see, you know, in

556
00:32:23,720 --> 00:32:28,360
Speaker 2: terms of taking advantage of that opportunity set when it happens,

557
00:32:28,600 --> 00:32:31,120
Speaker 2: because you do have to be that nimble. What are

558
00:32:31,120 --> 00:32:34,160
Speaker 2: some of the things that you guys, you know, do

559
00:32:34,720 --> 00:32:39,720
Speaker 2: when those opportunities are you able to shift personnel assets

560
00:32:39,880 --> 00:32:43,240
Speaker 2: like quickly across like different strategies and that sort of

561
00:32:43,240 --> 00:32:46,120
Speaker 2: thing when it when it ultimately happens, we.

562
00:32:46,080 --> 00:32:49,560
Speaker 3: Can be very flexible then opportunistic, especially in our multi

563
00:32:49,560 --> 00:32:54,560
Speaker 3: asset portfolios, where we've got liquid assets that are deployed,

564
00:32:54,720 --> 00:32:58,240
Speaker 3: that are ready to be sold and reallocated if there's

565
00:32:58,280 --> 00:33:01,080
Speaker 3: a sell off. We also, you know, meanin some liquidity

566
00:33:01,120 --> 00:33:03,400
Speaker 3: in the form of cash which we invest in short

567
00:33:03,480 --> 00:33:07,440
Speaker 3: duration investment grade gives us a little bit of yield today,

568
00:33:07,480 --> 00:33:11,760
Speaker 3: but it's there, and so we're positioned for these types

569
00:33:11,800 --> 00:33:15,240
Speaker 3: of opportunities, even in kind of on the run funds

570
00:33:15,240 --> 00:33:18,920
Speaker 3: that aren't the traditional draw down funds. The drawdown funds

571
00:33:18,960 --> 00:33:21,080
Speaker 3: are very well positioned. We're sitting on a lot of

572
00:33:21,160 --> 00:33:23,760
Speaker 3: dry powder and being very disciplined and waiting for a

573
00:33:23,800 --> 00:33:28,000
Speaker 3: bigger dislocation before we really start meaningfully deploying those But

574
00:33:28,760 --> 00:33:32,040
Speaker 3: even in kind of performing credit, we have the ability

575
00:33:32,080 --> 00:33:37,360
Speaker 3: to be very tactical. One of the ways that we

576
00:33:37,440 --> 00:33:40,400
Speaker 3: position ourselves too, is just the communication we have across

577
00:33:40,440 --> 00:33:43,239
Speaker 3: the firm. Could be remiss if I didn't highlight our

578
00:33:43,240 --> 00:33:46,640
Speaker 3: Global Credit Investment Committee. It's led by Bruce carsh It's

579
00:33:46,680 --> 00:33:50,120
Speaker 3: attended by all of our credit portfolio managers. We sit

580
00:33:50,720 --> 00:33:54,120
Speaker 3: in a conference room every other week for a couple hours,

581
00:33:54,160 --> 00:33:56,440
Speaker 3: and we go around and we talk about what's happening

582
00:33:56,480 --> 00:33:59,320
Speaker 3: in each of our areas, and we all kind of

583
00:33:59,400 --> 00:34:04,480
Speaker 3: collective own asset allocation and making relative value decisions for

584
00:34:04,520 --> 00:34:08,000
Speaker 3: a multi strategy fund. And so when you have those conversations,

585
00:34:08,040 --> 00:34:12,399
Speaker 3: you're really kind of positioned to act quickly. That's that's

586
00:34:12,520 --> 00:34:13,439
Speaker 3: very important as well.

587
00:34:13,960 --> 00:34:15,919
Speaker 1: And when you had the last one, you talked earlier

588
00:34:15,960 --> 00:34:18,879
Speaker 1: about best ideas, what were the best ideas that came up?

589
00:34:20,120 --> 00:34:23,759
Speaker 3: Well, you know, maybe going back to to equities, right,

590
00:34:24,440 --> 00:34:27,160
Speaker 3: valuations are stretched. I think there's going to be more

591
00:34:27,239 --> 00:34:30,720
Speaker 3: volatility in the equity markets. We have a convertible bond

592
00:34:30,760 --> 00:34:35,319
Speaker 3: strategy that's actually done very well this year, not by

593
00:34:35,520 --> 00:34:38,839
Speaker 3: taking excess, you know, equity risk. It's a relatively low

594
00:34:38,880 --> 00:34:41,360
Speaker 3: delta strategy. We tend to focus more on balanced and

595
00:34:41,440 --> 00:34:45,920
Speaker 3: even busted converts. That strategy has done very well this year,

596
00:34:45,960 --> 00:34:48,360
Speaker 3: but I think some of its best opportunities are ahead.

597
00:34:48,480 --> 00:34:52,200
Speaker 3: We could meaningfully grow that in an equity dislocation. So

598
00:34:52,280 --> 00:34:54,680
Speaker 3: I think that that's an interesting area that we could

599
00:34:54,760 --> 00:34:55,560
Speaker 3: lean into.

600
00:34:55,480 --> 00:34:57,920
Speaker 1: And if they contect to them, and they can both well.

601
00:34:57,960 --> 00:35:00,879
Speaker 3: It tends to be dominated by tech, healthcare. Those are

602
00:35:00,920 --> 00:35:03,640
Speaker 3: just the largest parts of the market. The convert market's

603
00:35:03,640 --> 00:35:09,480
Speaker 3: been growing though. It's over five hundred billion of market

604
00:35:09,560 --> 00:35:12,560
Speaker 3: value today from you know, three hundred maybe just a

605
00:35:12,560 --> 00:35:14,720
Speaker 3: couple of years ago. So the issuance is there.

606
00:35:15,520 --> 00:35:17,440
Speaker 1: I'm sorry for our listeners who don't know what busted

607
00:35:17,480 --> 00:35:20,800
Speaker 1: converts out. Do you want to tell us in basic terms?

608
00:35:21,520 --> 00:35:25,080
Speaker 3: Yeah, the very very basic level. You know, we kind

609
00:35:25,080 --> 00:35:28,920
Speaker 3: of we invest in convertible bonds more so as a

610
00:35:29,000 --> 00:35:31,319
Speaker 3: debt investor, so you get kind of the safety of

611
00:35:31,400 --> 00:35:34,800
Speaker 3: debt and credit, but you also get the ability to

612
00:35:34,880 --> 00:35:38,799
Speaker 3: kind of participate in equity. Upside, We're not converting them,

613
00:35:38,840 --> 00:35:42,600
Speaker 3: as the name might imply, but definitely the prices go

614
00:35:42,800 --> 00:35:45,200
Speaker 3: up with the underlying equity when it goes up. The

615
00:35:45,239 --> 00:35:50,640
Speaker 3: busted converts have really, you know, lost their convertibility, their optionality.

616
00:35:51,640 --> 00:35:54,960
Speaker 3: They're not trading like equities anymore. They're much more like

617
00:35:55,040 --> 00:35:57,720
Speaker 3: fixed income instruments. So they give you a yield today,

618
00:35:57,960 --> 00:36:01,360
Speaker 3: you know, four ish percent, whereas as a more equity

619
00:36:01,440 --> 00:36:05,120
Speaker 3: sensitive convertible would have you know, a negative yield. So

620
00:36:05,239 --> 00:36:08,520
Speaker 3: think of them as more fixed income instruments, they're just

621
00:36:08,640 --> 00:36:12,160
Speaker 3: out of the money. The optionality's gone, but there is

622
00:36:12,239 --> 00:36:16,040
Speaker 3: a little bit there if things really do work out.

623
00:36:16,360 --> 00:36:20,040
Speaker 1: And the other stuff you like is structured clos. You

624
00:36:20,080 --> 00:36:23,399
Speaker 1: mentioned one of our guests in earlier this year called

625
00:36:23,400 --> 00:36:25,800
Speaker 1: them bulletproof. Do you are you that much for a

626
00:36:25,880 --> 00:36:28,279
Speaker 1: believer in clos that you think they're indestructible.

627
00:36:28,719 --> 00:36:31,719
Speaker 3: Well, we can't forget the underlying assets, and colos are

628
00:36:31,719 --> 00:36:36,960
Speaker 3: broadly syndicated loans, and so you need to underwrite those

629
00:36:37,000 --> 00:36:39,880
Speaker 3: portfolios and the loans in those portfolios. You need to

630
00:36:39,960 --> 00:36:43,040
Speaker 3: underwrite the managers that are managing them. Not colos are

631
00:36:43,040 --> 00:36:48,360
Speaker 3: created equal. We're prioritizing, you know, newer vintage clos as well,

632
00:36:49,239 --> 00:36:52,400
Speaker 3: and you need to look exactly when they were issued

633
00:36:52,680 --> 00:36:55,120
Speaker 3: and what's in there. Was the manager trying to stretch

634
00:36:55,120 --> 00:36:58,160
Speaker 3: for risk, to create an arbitrage, et cetera. So I

635
00:36:58,239 --> 00:37:03,160
Speaker 3: never like to use bulletproof for anything, and history would

636
00:37:03,360 --> 00:37:07,320
Speaker 3: suggest not. But I will say, you know, the default

637
00:37:07,320 --> 00:37:13,120
Speaker 3: and loss races rates for clos much less than bonds

638
00:37:13,120 --> 00:37:15,640
Speaker 3: and loans through the cycle, and they do get a

639
00:37:15,680 --> 00:37:19,400
Speaker 3: bad rap and confused with you know, CDOs of the crisis.

640
00:37:19,440 --> 00:37:21,440
Speaker 3: This is this is not that. I think they're much

641
00:37:21,440 --> 00:37:24,280
Speaker 3: more well understood today, even just in the last few years.

642
00:37:24,760 --> 00:37:27,840
Speaker 3: And you do need such a meaningful part of the

643
00:37:27,840 --> 00:37:30,719
Speaker 3: collateral pool to default before you take, you know, a

644
00:37:30,760 --> 00:37:33,640
Speaker 3: first loss, even in a double B tranch, that I

645
00:37:33,719 --> 00:37:37,400
Speaker 3: do think it presents a compelling opportunity. One of the

646
00:37:37,440 --> 00:37:41,280
Speaker 3: reasons I like double B clos in particular is because

647
00:37:41,320 --> 00:37:45,880
Speaker 3: their spreads are still slightly wide of historical averages. You

648
00:37:45,920 --> 00:37:50,040
Speaker 3: cannot say that for many other asset classes. So on average,

649
00:37:50,080 --> 00:37:52,919
Speaker 3: for a double B CLO, you're still getting almost five

650
00:37:53,000 --> 00:37:55,640
Speaker 3: hundred basis point pickup compared to a double B bond.

651
00:37:56,680 --> 00:37:59,520
Speaker 3: And I think that that exists for a couple reasons,

652
00:37:59,560 --> 00:38:02,399
Speaker 3: and one is because banks and insurers have been big

653
00:38:02,440 --> 00:38:05,160
Speaker 3: buyers of colos, but they've focused more on the investment

654
00:38:05,200 --> 00:38:08,279
Speaker 3: grade tranches. The sub investment grade tranches usually go to

655
00:38:08,320 --> 00:38:09,959
Speaker 3: alternative managers like US.

656
00:38:10,160 --> 00:38:12,160
Speaker 1: Can you do that in size at the moment.

657
00:38:11,920 --> 00:38:14,960
Speaker 3: It's a much smaller market, So definitely, the triple A

658
00:38:15,000 --> 00:38:17,000
Speaker 3: is the largest part of the capital structure. It gets

659
00:38:17,000 --> 00:38:23,040
Speaker 3: placed first. The double B is small, but there's ample opportunity.

660
00:38:22,400 --> 00:38:23,440
Speaker 1: There and the equity as well.

661
00:38:23,480 --> 00:38:26,400
Speaker 3: Would you buy that, I would you know, the strategy

662
00:38:26,480 --> 00:38:28,480
Speaker 3: manages more of a credit products. We want to be

663
00:38:28,560 --> 00:38:31,239
Speaker 3: mindful of that. But I think COLO equity is attractive,

664
00:38:31,239 --> 00:38:33,839
Speaker 3: and we have other products that invest in that exclusively.

665
00:38:34,120 --> 00:38:37,960
Speaker 1: So a clobb right now is providing potentially equity like returns.

666
00:38:38,000 --> 00:38:38,399
Speaker 2: Is that right?

667
00:38:38,480 --> 00:38:41,000
Speaker 1: That's right, It's pretty pretty interesting. And the other stuff

668
00:38:41,040 --> 00:38:44,200
Speaker 1: you mentioned before we got in the studio was CMBs.

669
00:38:45,239 --> 00:38:46,840
Speaker 1: That's something that people have kind of blown hot and

670
00:38:46,880 --> 00:38:49,239
Speaker 1: cold them Why is it hot now?

671
00:38:49,880 --> 00:38:53,879
Speaker 3: Well, it's hot now because of financing, data centers and

672
00:38:54,440 --> 00:38:55,560
Speaker 3: digital infrastructure.

673
00:38:55,800 --> 00:38:57,560
Speaker 1: Is that a bubble? Because we've heard a lot about

674
00:38:57,560 --> 00:39:00,600
Speaker 1: the AI bubble? Now, is it a Is it a

675
00:39:00,640 --> 00:39:02,600
Speaker 1: fear that that all that stuff is just pie in

676
00:39:02,640 --> 00:39:02,959
Speaker 1: the sky.

677
00:39:03,560 --> 00:39:05,319
Speaker 3: Yeah, you know, the part of the market that I

678
00:39:05,360 --> 00:39:07,880
Speaker 3: prefer right now in real estate is more on the

679
00:39:07,960 --> 00:39:11,120
Speaker 3: R and BAS side. We do both, but I just

680
00:39:11,160 --> 00:39:14,840
Speaker 3: think the opportunity and data centers, the financing, the spreads,

681
00:39:14,600 --> 00:39:18,280
Speaker 3: it's tight, and so where we can find more interesting

682
00:39:18,320 --> 00:39:24,319
Speaker 3: opportunity today is and residential. And we're focused on non

683
00:39:24,480 --> 00:39:27,560
Speaker 3: qualified mortgages non QM real estate. So these aren't your

684
00:39:28,160 --> 00:39:32,560
Speaker 3: Franny Fetti government backed mortgages, but it doesn't mean it's

685
00:39:33,120 --> 00:39:37,440
Speaker 3: legacy subprime mortgage exposure. Either. It means that if you're

686
00:39:37,480 --> 00:39:40,480
Speaker 3: self employed, you have a small business like my husband does,

687
00:39:40,840 --> 00:39:43,399
Speaker 3: you're taking out a private loan. You're not going through

688
00:39:43,400 --> 00:39:47,200
Speaker 3: the government, so your credit scores are actually decent, your

689
00:39:47,239 --> 00:39:51,200
Speaker 3: loan to values reasonable. I can actually buy these at

690
00:39:51,239 --> 00:39:53,799
Speaker 3: a discount. In the market today, you can't buy much

691
00:39:53,800 --> 00:39:56,680
Speaker 3: at a discount. And really the bet there is that

692
00:39:58,320 --> 00:40:01,960
Speaker 3: rates fall, prepayments pickback up. These pulled apar you're out

693
00:40:02,040 --> 00:40:05,880
Speaker 3: yielding high yield, you're doing so with diversification in the portfolio.

694
00:40:06,239 --> 00:40:09,240
Speaker 1: These all sound like interesting ideas. When we had oatry

695
00:40:09,320 --> 00:40:10,680
Speaker 1: loss on the show that was about a year ago,

696
00:40:10,760 --> 00:40:13,880
Speaker 1: David Rosenberg, your colleague, said that rescue financing was quote

697
00:40:14,040 --> 00:40:16,440
Speaker 1: one of the greatest opportunities we've seen in a decade.

698
00:40:16,480 --> 00:40:18,520
Speaker 1: So I'm interested in, you know, the twelve months off

699
00:40:18,520 --> 00:40:20,040
Speaker 1: to how did that trade pan out for you.

700
00:40:21,600 --> 00:40:25,480
Speaker 3: Well, we found pockets of opportunity to do rescue financing,

701
00:40:25,960 --> 00:40:29,000
Speaker 3: and given oak Trees scale, I mean, we see a

702
00:40:29,000 --> 00:40:33,720
Speaker 3: lot of opportunities, but given how wide open capital markets

703
00:40:33,719 --> 00:40:37,160
Speaker 3: have been, how much money there is, the opportunity and

704
00:40:37,200 --> 00:40:40,160
Speaker 3: rescue financing has probably been lighter than we would have expected.

705
00:40:40,200 --> 00:40:43,120
Speaker 3: I was right there along with David, really rooting for it.

706
00:40:43,760 --> 00:40:47,040
Speaker 3: But I think the better opportunities are still ahead.

707
00:40:47,200 --> 00:40:52,400
Speaker 2: Okay, I'm curious, So, since we're going across asset classes

708
00:40:52,400 --> 00:40:55,799
Speaker 2: commercial real estate, is that something that is also on

709
00:40:55,840 --> 00:40:56,640
Speaker 2: the radar?

710
00:40:57,440 --> 00:41:00,560
Speaker 3: It is, you know, James and I were just focused

711
00:41:00,600 --> 00:41:03,799
Speaker 3: on the residential, which I find more attractive, But it

712
00:41:03,840 --> 00:41:06,160
Speaker 3: doesn't mean that we're not in the commercial space. You've

713
00:41:06,200 --> 00:41:09,800
Speaker 3: actually seen some issuance come back in office and single asset,

714
00:41:09,840 --> 00:41:13,400
Speaker 3: single borrower. Finally, it feels like office is hit a

715
00:41:13,480 --> 00:41:16,960
Speaker 3: bottom and that's coming back. And we do industrial, we

716
00:41:17,000 --> 00:41:21,640
Speaker 3: do last mile logistics. We're really wherever relative value is,

717
00:41:21,760 --> 00:41:22,280
Speaker 3: we're there.

718
00:41:23,280 --> 00:41:24,880
Speaker 1: So where is the best rounds of value?

719
00:41:25,120 --> 00:41:27,440
Speaker 3: I do think it's in the residential.

720
00:41:27,120 --> 00:41:29,600
Speaker 1: And the potential mortgage backed security.

721
00:41:29,719 --> 00:41:33,640
Speaker 3: Yeah, residential mortgage backed securities at least an hour opportunity set.

722
00:41:33,120 --> 00:41:36,800
Speaker 3: And I say that because I think we're under built

723
00:41:36,880 --> 00:41:39,480
Speaker 3: in the US. You know, we don't have oversupply. You

724
00:41:39,600 --> 00:41:44,560
Speaker 3: haven't seen a loosening of lending standards in that space.

725
00:41:45,040 --> 00:41:47,760
Speaker 3: And we have an interesting dynamic right now where most

726
00:41:47,800 --> 00:41:50,879
Speaker 3: Americans who own homes have mortgage rates that are less

727
00:41:50,880 --> 00:41:54,160
Speaker 3: than five percent the average is three percent. So because

728
00:41:54,200 --> 00:41:56,920
Speaker 3: of the prevailing six seven percent mortgage rates that have

729
00:41:56,960 --> 00:41:59,960
Speaker 3: been out there, you haven't seen a lot of activity,

730
00:42:00,320 --> 00:42:03,360
Speaker 3: you know, a lot of home sales, certainly not refinancings.

731
00:42:04,120 --> 00:42:05,600
Speaker 3: And so I do think that that's a part of

732
00:42:05,600 --> 00:42:07,920
Speaker 3: the market where rates fall, you're going to see some

733
00:42:08,040 --> 00:42:10,920
Speaker 3: activity there and it's going to lead to, you know,

734
00:42:10,960 --> 00:42:13,799
Speaker 3: some nice opportunities for that segment of the market. Now,

735
00:42:13,840 --> 00:42:16,360
Speaker 3: generally we feel like rates are saying higher for longer,

736
00:42:16,400 --> 00:42:18,719
Speaker 3: and we've been in that camp. But it is nice

737
00:42:18,719 --> 00:42:20,520
Speaker 3: to have some things in the portfolio that are a

738
00:42:20,600 --> 00:42:21,520
Speaker 3: hedge to that view.

739
00:42:21,680 --> 00:42:23,960
Speaker 1: Okay, and what sort of returns are you guessing on

740
00:42:24,000 --> 00:42:24,399
Speaker 1: the R and.

741
00:42:24,320 --> 00:42:28,439
Speaker 3: BS a little bit more than high yield right now?

742
00:42:28,800 --> 00:42:29,160
Speaker 1: Okay?

743
00:42:29,280 --> 00:42:32,520
Speaker 3: Yeah, so you know, call it seven seven and a

744
00:42:32,520 --> 00:42:33,120
Speaker 3: half percent?

745
00:42:33,239 --> 00:42:37,080
Speaker 1: Okay, very interesting. So all it all sounds pretty rosy.

746
00:42:37,400 --> 00:42:39,719
Speaker 1: But you know, we've been doing this for a while, Phil,

747
00:42:39,760 --> 00:42:43,880
Speaker 1: and I worry is what really worries you about the

748
00:42:43,920 --> 00:42:46,799
Speaker 1: setup in terms of global credit markets right now?

749
00:42:48,840 --> 00:42:51,440
Speaker 3: I think the lack of discipline that we talked about,

750
00:42:52,520 --> 00:42:56,080
Speaker 3: just how much money is chasing you know, deals, I

751
00:42:56,080 --> 00:42:58,120
Speaker 3: think you need to be mindful of that. And then

752
00:42:58,200 --> 00:43:01,560
Speaker 3: also we hit on a little bit, but AI, you

753
00:43:01,600 --> 00:43:07,400
Speaker 3: can't not be skeptical. I know it's real and I

754
00:43:07,440 --> 00:43:10,200
Speaker 3: see the impact, but we all have to admit we

755
00:43:10,239 --> 00:43:13,040
Speaker 3: don't know. It's not going to be a linear development.

756
00:43:13,280 --> 00:43:17,600
Speaker 3: And a lot of the AI is let as not

757
00:43:17,719 --> 00:43:21,680
Speaker 3: yet commercialized revenue. So a lot of these companies are

758
00:43:21,719 --> 00:43:24,279
Speaker 3: spending a lot of their cash flows and development for

759
00:43:24,360 --> 00:43:28,840
Speaker 3: the promise of kind of future investment gains. And I

760
00:43:28,880 --> 00:43:32,839
Speaker 3: think if the market feels that that's not materializing, you

761
00:43:32,880 --> 00:43:35,880
Speaker 3: could see outflows from that space, and that's going to

762
00:43:35,920 --> 00:43:38,319
Speaker 3: have a big impact on the market, given just how

763
00:43:38,400 --> 00:43:41,280
Speaker 3: much AI spending has kind of kept the economy going

764
00:43:41,920 --> 00:43:42,680
Speaker 3: in this cycle.

765
00:43:43,200 --> 00:43:45,319
Speaker 1: On the lack of discipline, I'm interested in how that

766
00:43:45,360 --> 00:43:47,440
Speaker 1: manifests itself. Is it deals getting done that you just

767
00:43:47,480 --> 00:43:49,399
Speaker 1: shake your head and say, how did that deal get done?

768
00:43:49,440 --> 00:43:51,320
Speaker 1: Or how did that company get money? Or you know,

769
00:43:51,360 --> 00:43:53,800
Speaker 1: I can't believe they're doing that nowadays. And what stands

770
00:43:53,800 --> 00:43:56,120
Speaker 1: out for you in terms of lack of discipline.

771
00:43:55,840 --> 00:43:58,319
Speaker 3: What stands out is that anything with AI is just

772
00:43:58,360 --> 00:44:02,640
Speaker 3: getting done right. You have that the title, and your

773
00:44:02,719 --> 00:44:06,040
Speaker 3: chances of getting it done are pretty good. And so

774
00:44:06,280 --> 00:44:08,480
Speaker 3: I think a lot of the excess we're seeing is

775
00:44:08,520 --> 00:44:09,759
Speaker 3: in that space right now.

776
00:44:10,600 --> 00:44:13,280
Speaker 1: When you go fundraising, you are you have been talking

777
00:44:13,280 --> 00:44:16,200
Speaker 1: to investors? What do they ask you about credit at

778
00:44:16,200 --> 00:44:18,880
Speaker 1: the moment, because there is seemingly much more interest in

779
00:44:18,920 --> 00:44:21,799
Speaker 1: the asset class. You know, we are getting a lot

780
00:44:21,800 --> 00:44:24,399
Speaker 1: more listeners, a lot more readers, a lot.

781
00:44:24,320 --> 00:44:25,279
Speaker 2: More like what is that?

782
00:44:25,400 --> 00:44:27,719
Speaker 1: How does that work? People who maybe only look at

783
00:44:27,760 --> 00:44:30,040
Speaker 1: equities now they're looking at credit. So what what? What

784
00:44:30,080 --> 00:44:32,480
Speaker 1: sort of questions you get from your end users?

785
00:44:32,480 --> 00:44:35,799
Speaker 3: Mostly oh, very similar questions you know, to to you.

786
00:44:36,280 --> 00:44:39,960
Speaker 3: They want to understand the underlying risks and really the

787
00:44:40,080 --> 00:44:43,280
Speaker 3: certainty of that yield. How much of that yield potentially

788
00:44:43,280 --> 00:44:45,600
Speaker 3: are you going to give back, you know, to to defaults?

789
00:44:45,760 --> 00:44:48,520
Speaker 3: What is kind of lurking out there? So we spend

790
00:44:48,520 --> 00:44:50,960
Speaker 3: a lot of time talking about the quality of the

791
00:44:51,000 --> 00:44:54,920
Speaker 3: underlying market and where we started the conversation that high

792
00:44:55,000 --> 00:44:58,839
Speaker 3: yield looks pretty good in terms of quality loans. You know,

793
00:44:58,880 --> 00:45:00,880
Speaker 3: you need to be a little bit more picky and

794
00:45:01,000 --> 00:45:05,400
Speaker 3: private credit. There's been you know, some excess, and we

795
00:45:05,520 --> 00:45:08,359
Speaker 3: talk a lot about too, what are their objectives? You know,

796
00:45:08,400 --> 00:45:10,960
Speaker 3: what type of liquidity do they need? What makes most

797
00:45:10,960 --> 00:45:14,440
Speaker 3: sense for them? And kind of constructing solutions that accomplish that.

798
00:45:14,760 --> 00:45:17,759
Speaker 3: You have a lot of options in today's market, and

799
00:45:17,800 --> 00:45:21,920
Speaker 3: so it does depend too where an investor's coming from.

800
00:45:22,440 --> 00:45:25,279
Speaker 3: You know, endowment foundation clients that I speak with that

801
00:45:25,400 --> 00:45:28,160
Speaker 3: don't have much credit are kind of happy to take

802
00:45:28,200 --> 00:45:31,080
Speaker 3: some chips off the table and equities to fund credit,

803
00:45:32,160 --> 00:45:34,839
Speaker 3: and then maybe others that already have credit are kind

804
00:45:34,840 --> 00:45:37,399
Speaker 3: of thinking about how do I diversify what I have

805
00:45:37,520 --> 00:45:39,320
Speaker 3: and how do I make sure what I have is

806
00:45:39,880 --> 00:45:40,680
Speaker 3: what I think it is?

807
00:45:41,280 --> 00:45:43,799
Speaker 1: Great stuff, Daniel Polly from Oakrey has been a real

808
00:45:43,800 --> 00:45:46,840
Speaker 1: pleasure having you on the Credit Edge. Many thanks, many thanks.

809
00:45:47,480 --> 00:45:50,400
Speaker 1: And Phil Brandle with Bloomberg Intelligence, thank you so much

810
00:45:50,440 --> 00:45:54,600
Speaker 1: for joining us today. Thank you, and for even more analysis.

811
00:45:54,680 --> 00:45:56,879
Speaker 1: Read all of Fill's great work on the Bloomberg terminal.

812
00:45:56,960 --> 00:45:59,560
Speaker 1: It's great stuff. I've been reading it for years. Bloomberg

813
00:45:59,560 --> 00:46:01,840
Speaker 1: Intelligence is part of our research department, with five hundred

814
00:46:01,840 --> 00:46:05,120
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815
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Speaker 1: two thousand equities and credits and outlooks on more than

816
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817
00:46:12,160 --> 00:46:14,640
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821
00:46:23,920 --> 00:46:28,319
Speaker 1: at jcrombieight at Bloomberg dot net. I'm James Crombie. It's

822
00:46:28,320 --> 00:46:30,520
Speaker 1: been a pleasure having you join us again. Next week

823
00:46:30,600 --> 00:46:45,520
Speaker 1: on the Credit Edge