1 00:00:16,000 --> 00:00:18,520 Speaker 1: Hello, Welcome to Credit Edge, a wiki Marcus podcast. My 2 00:00:18,640 --> 00:00:21,960 Speaker 1: name is James Crombie. I'm a senior editor at Bloomberg. 3 00:00:21,640 --> 00:00:24,400 Speaker 2: And I'm Mike Campalone, a senior credit analyst covering high 4 00:00:24,480 --> 00:00:28,240 Speaker 2: yield and investment grade retailers at Bloomberg Intelligence. This week, 5 00:00:28,280 --> 00:00:31,639 Speaker 2: we're very pleased to welcome Dagmara Michael Chuck co, chief 6 00:00:31,680 --> 00:00:35,080 Speaker 2: investment Officer at Tetragon Credit Partners. How are you, Dag. 7 00:00:35,280 --> 00:00:37,400 Speaker 3: I'm great. It's wonderful to be here with you. Right. 8 00:00:37,479 --> 00:00:39,880 Speaker 2: We're so happy if you can join us. Tetragon Credit 9 00:00:39,880 --> 00:00:42,720 Speaker 2: Partners is one of the largest and longest tenured COLO 10 00:00:43,040 --> 00:00:46,920 Speaker 2: equity investors globally. Dagging. The team at Tetragon Credit Partners 11 00:00:46,960 --> 00:00:50,040 Speaker 2: have deployed over two point eight billion into COLO equity 12 00:00:50,080 --> 00:00:53,519 Speaker 2: trnges across over one hundred and twenty eight colos and 13 00:00:53,560 --> 00:00:56,720 Speaker 2: thirty six managers since two thousand and five. James, why 14 00:00:56,720 --> 00:00:58,480 Speaker 2: don't I hand it over to you to kick us off. 15 00:00:58,600 --> 00:01:01,080 Speaker 1: Yeah. So, credit mark is a hot with bond spreads 16 00:01:01,080 --> 00:01:03,880 Speaker 1: at the TITUS in twenty seven years. As demand saws 17 00:01:03,960 --> 00:01:07,720 Speaker 1: and net news supply remains thin, investors are chasing returns 18 00:01:07,760 --> 00:01:10,679 Speaker 1: in everything from junk bonds to collateralize loan obligations, and 19 00:01:10,720 --> 00:01:14,639 Speaker 1: looking beyond the US, particularly Europe, for opportunity, excess cash 20 00:01:14,680 --> 00:01:17,319 Speaker 1: and not enough to buy raises the prospect of risk 21 00:01:17,400 --> 00:01:21,039 Speaker 1: being mispriced, while US rates staying hi for longer than 22 00:01:21,080 --> 00:01:24,760 Speaker 1: expected pushes more companies into default or bankruptcy. And we 23 00:01:24,800 --> 00:01:26,640 Speaker 1: are only just starting to see the impact on the 24 00:01:26,720 --> 00:01:30,800 Speaker 1: US economy of radical changes to trade and immigration policy. So, Doug, 25 00:01:30,840 --> 00:01:33,240 Speaker 1: what's your take? Because everything as rosy as credit markets 26 00:01:33,280 --> 00:01:36,160 Speaker 1: would suggest, how much should we worry about the fundamental 27 00:01:36,240 --> 00:01:39,040 Speaker 1: state of US companies and their ability to repay their debt. 28 00:01:39,160 --> 00:01:41,240 Speaker 3: I think the environment that we've been in for the 29 00:01:41,240 --> 00:01:43,880 Speaker 3: past few years is characterized by two words that, what 30 00:01:43,959 --> 00:01:46,800 Speaker 3: can say, have been abused by everyone in the markets. One, 31 00:01:46,840 --> 00:01:50,280 Speaker 3: of course, is uncertainty, which seems to have become a 32 00:01:50,880 --> 00:01:53,560 Speaker 3: feature of the landscape rather than an exception. And the other, one, 33 00:01:53,880 --> 00:01:57,120 Speaker 3: of course, is resently in So although from a macroeconomic perspective, 34 00:01:57,160 --> 00:02:00,480 Speaker 3: we've continued to see noise in data, that's suggest that 35 00:02:00,520 --> 00:02:04,240 Speaker 3: the economy clearly is decelerating, potentially having an impact on 36 00:02:04,360 --> 00:02:06,920 Speaker 3: the labor picture. At the same time, we also have 37 00:02:07,000 --> 00:02:12,240 Speaker 3: saxflation or sticky inflation, as a risk. Corporate entities in 38 00:02:12,280 --> 00:02:15,400 Speaker 3: the US in particular have shown themselves to be very resilient, 39 00:02:16,000 --> 00:02:19,519 Speaker 3: and we've continued to see positive, although slowing earning's growth, 40 00:02:19,520 --> 00:02:22,840 Speaker 3: which has resulted in fairly stable credit metrics. So certainly, 41 00:02:22,919 --> 00:02:27,440 Speaker 3: forward looking credit investors need to remain disciplined and concerned 42 00:02:27,480 --> 00:02:31,359 Speaker 3: about what the uncertainties that we've seen to date mean 43 00:02:31,440 --> 00:02:35,440 Speaker 3: for the future. However, the resilience so far is allowing 44 00:02:35,440 --> 00:02:38,359 Speaker 3: investors to price risk is as tight as it is today. 45 00:02:39,120 --> 00:02:41,600 Speaker 2: And diag on a similar line, are there any sectors 46 00:02:41,720 --> 00:02:45,520 Speaker 2: like retail, energy or chemicals that you'd like your managers 47 00:02:45,560 --> 00:02:48,880 Speaker 2: to avoid or reduced exposure to, just given that macro 48 00:02:49,600 --> 00:02:52,040 Speaker 2: that macro backdrop that you discussed. 49 00:02:51,680 --> 00:02:53,480 Speaker 3: So I would say in general, you know, we spent 50 00:02:53,560 --> 00:02:56,280 Speaker 3: a lot of time picking managers and try not to 51 00:02:56,400 --> 00:02:59,440 Speaker 3: get too much into their day to day jobs of 52 00:02:59,480 --> 00:03:01,799 Speaker 3: picking it. Of course, we spend a lot of time 53 00:03:01,919 --> 00:03:07,880 Speaker 3: understanding prudent risk taking and understanding their preference for specific industries. Uh. 54 00:03:07,960 --> 00:03:10,079 Speaker 3: And one of the things that's really important to CELO 55 00:03:10,120 --> 00:03:13,760 Speaker 3: equity success in particular is diversification. So, of course, if 56 00:03:13,760 --> 00:03:17,000 Speaker 3: a credit manager is doing a good job selecting credits, 57 00:03:17,000 --> 00:03:19,640 Speaker 3: they're thinking ahead of the curve and and trying to 58 00:03:19,639 --> 00:03:21,880 Speaker 3: minimize exposure at this point in time, for example, to 59 00:03:21,919 --> 00:03:26,400 Speaker 3: cyclical cyclical industries. However, of course we know that the 60 00:03:26,440 --> 00:03:28,960 Speaker 3: world is not monolithic. There's not a lot of you know, 61 00:03:29,080 --> 00:03:32,919 Speaker 3: identical companies, and so there is potentially opportunities even within 62 00:03:33,000 --> 00:03:35,960 Speaker 3: industries that can be viewed as cyclical, and so we 63 00:03:36,000 --> 00:03:40,000 Speaker 3: trust our managers to to pick the right the right companies, 64 00:03:40,280 --> 00:03:44,400 Speaker 3: even with within the most sensitive industries. So diversification and 65 00:03:45,280 --> 00:03:48,800 Speaker 3: prudent risk taking is is probably the overarching idea for US. 66 00:03:49,000 --> 00:03:50,720 Speaker 1: So dog with clos you know, we've had a lot 67 00:03:50,760 --> 00:03:52,520 Speaker 1: of guests on the show that you talk about them 68 00:03:52,640 --> 00:03:55,760 Speaker 1: is a really exciting opportunity, you know, high team team 69 00:03:55,840 --> 00:03:59,800 Speaker 1: returns one big investors in the structures are quote bulletproof. 70 00:04:00,480 --> 00:04:02,240 Speaker 1: But at the same time, there are a lot of concerns, 71 00:04:02,320 --> 00:04:05,480 Speaker 1: as we've talked about already about the US economy and 72 00:04:05,520 --> 00:04:08,240 Speaker 1: the ability of the highly indebted companies to keep up 73 00:04:08,240 --> 00:04:10,880 Speaker 1: with some of their debt payments, especially in leverage loans 74 00:04:10,880 --> 00:04:14,560 Speaker 1: which are floating and underlying rates are staying quite high. 75 00:04:14,920 --> 00:04:16,839 Speaker 1: How safe are these structures really? 76 00:04:18,600 --> 00:04:21,480 Speaker 3: I think they've proven themselves over the last twenty five 77 00:04:21,680 --> 00:04:24,719 Speaker 3: or so years to be quite a resilient. The financial 78 00:04:24,800 --> 00:04:27,680 Speaker 3: engineering in this instance has worked incredibly well, and I 79 00:04:27,720 --> 00:04:29,960 Speaker 3: think there are a couple of reasons for that. The 80 00:04:30,000 --> 00:04:33,880 Speaker 3: first one is that they are actively managed for most 81 00:04:33,880 --> 00:04:35,640 Speaker 3: of the market. There are static deals, but most of 82 00:04:35,640 --> 00:04:38,640 Speaker 3: the market is actively managed. The second reason is their 83 00:04:38,680 --> 00:04:42,760 Speaker 3: financing structure which is non marked to market, and lastly diversification, 84 00:04:42,800 --> 00:04:47,120 Speaker 3: which I previously mentioned. So they are very resilient. With 85 00:04:47,200 --> 00:04:50,520 Speaker 3: that being said, of course, you can make mistakes and 86 00:04:50,560 --> 00:04:53,760 Speaker 3: if you look at col equity performance, about fourteen percent 87 00:04:53,800 --> 00:04:57,159 Speaker 3: of deals that have been realized to date realized lower 88 00:04:57,160 --> 00:04:59,320 Speaker 3: than a zero percent I rr. So it's possible to 89 00:04:59,320 --> 00:05:00,440 Speaker 3: make mistakes the space. 90 00:05:01,160 --> 00:05:03,719 Speaker 1: And also you know, I mean this is not directly comparable, 91 00:05:03,720 --> 00:05:05,880 Speaker 1: but commercial real estate was seeing investors take a hit 92 00:05:06,000 --> 00:05:08,640 Speaker 1: even on trunches that were rated triple A, so you know, 93 00:05:08,680 --> 00:05:11,240 Speaker 1: you're not covered on everything, even though you are kind 94 00:05:11,279 --> 00:05:14,280 Speaker 1: of diversified in the pool. So you know, I mean, 95 00:05:14,320 --> 00:05:17,559 Speaker 1: I know it's been tested over over years. That again, 96 00:05:17,680 --> 00:05:21,000 Speaker 1: people still worry about clos, They still worry about leverage loans, 97 00:05:21,279 --> 00:05:24,640 Speaker 1: People still confuse clos and CDOs. Do you believe this 98 00:05:25,120 --> 00:05:26,440 Speaker 1: worry is unwarranted. 99 00:05:26,600 --> 00:05:29,840 Speaker 3: I think the comparison, certainly to other securitized products is 100 00:05:30,400 --> 00:05:34,520 Speaker 3: not correct. Of course, investors need to understand their was 101 00:05:34,600 --> 00:05:38,719 Speaker 3: bord and be appropriately positioned in the capital structure. But 102 00:05:38,920 --> 00:05:42,359 Speaker 3: to a large extent, based on the history that we've seen, 103 00:05:42,920 --> 00:05:45,920 Speaker 3: and remember, we've gone through very very different environments higher 104 00:05:45,920 --> 00:05:49,640 Speaker 3: interest rates, lower interest rates, the financial crisis, the pandemic, 105 00:05:49,760 --> 00:05:53,479 Speaker 3: the ASA class survived. It's one of the only parts 106 00:05:53,520 --> 00:05:56,640 Speaker 3: of the securitized products universe that did incredibly well. And 107 00:05:56,680 --> 00:06:01,200 Speaker 3: so I do think that the structure is very, very resilient. 108 00:06:01,960 --> 00:06:04,320 Speaker 3: Of course, there's the element of valuation and risk pricing, 109 00:06:04,720 --> 00:06:07,520 Speaker 3: but I would not be kind of concerned about the 110 00:06:07,520 --> 00:06:10,560 Speaker 3: existential value of clos as an asset class. 111 00:06:12,040 --> 00:06:15,440 Speaker 2: And deg loan spreads have continued to grind tighter all 112 00:06:15,480 --> 00:06:18,960 Speaker 2: summer long, making the COLO arbitrage word challenging. What have 113 00:06:19,040 --> 00:06:21,040 Speaker 2: you been able to do to alleviate some of that 114 00:06:21,320 --> 00:06:22,159 Speaker 2: spread compression. 115 00:06:24,000 --> 00:06:27,479 Speaker 3: So one of the things that a controlling equity investor 116 00:06:27,520 --> 00:06:32,000 Speaker 3: can do is adjust the capital structure that is financing themselves. 117 00:06:32,160 --> 00:06:34,600 Speaker 3: And so we've spent a lot of time this summer 118 00:06:35,000 --> 00:06:38,800 Speaker 3: actively refinancing and reducing our funding costs. But even on 119 00:06:38,839 --> 00:06:42,560 Speaker 3: a new investment decision. Of course, we are not concurrently 120 00:06:42,600 --> 00:06:45,960 Speaker 3: necessarily buying assets and financing ourselves with liabilities, and so 121 00:06:46,279 --> 00:06:50,039 Speaker 3: there's a lot of art and tactics to deciding when 122 00:06:50,080 --> 00:06:52,479 Speaker 3: to put a trade on. And one of the things 123 00:06:52,480 --> 00:06:54,520 Speaker 3: that you can do, for example, is take advantage of 124 00:06:54,520 --> 00:06:56,919 Speaker 3: the fact that often asset prices move a lot faster 125 00:06:57,040 --> 00:07:00,120 Speaker 3: than facts and the reality, and so one can and 126 00:07:00,160 --> 00:07:04,760 Speaker 3: potentially source assets during a dislocation and then finance yourself 127 00:07:05,080 --> 00:07:07,920 Speaker 3: once the dislocation has past, which this year has shown 128 00:07:08,000 --> 00:07:09,600 Speaker 3: us can be a matter of a couple of weeks. 129 00:07:10,000 --> 00:07:13,120 Speaker 3: So a lot of value can be generated in the 130 00:07:13,160 --> 00:07:15,360 Speaker 3: asset class by being opportunistic and tactical. 131 00:07:16,360 --> 00:07:18,520 Speaker 2: And then are there certain types of loans that you 132 00:07:18,640 --> 00:07:22,160 Speaker 2: look for your managers to avoid or minimize, like second 133 00:07:22,240 --> 00:07:23,960 Speaker 2: lean loans or given in loans. 134 00:07:25,720 --> 00:07:28,800 Speaker 3: Yes, so we have a very specific view of what 135 00:07:28,960 --> 00:07:33,000 Speaker 3: is appropriate for leverage within the COLO structure and tend 136 00:07:33,080 --> 00:07:37,000 Speaker 3: to have a fairly conservative bias. So we really value 137 00:07:37,080 --> 00:07:41,240 Speaker 3: highly diversified, high credit quality portfolios that are also liquid, 138 00:07:41,680 --> 00:07:45,200 Speaker 3: So we certainly would not be comfortable investing in portfolios 139 00:07:45,200 --> 00:07:50,720 Speaker 3: that are very heavily allocated to second leans on secured bonds, 140 00:07:51,240 --> 00:07:54,160 Speaker 3: but also smaller companies. So we really value the power 141 00:07:54,200 --> 00:07:57,360 Speaker 3: of liquidity as a risk mitigation tool and also as 142 00:07:57,400 --> 00:07:59,840 Speaker 3: a way to take advantage of volatility that happens more 143 00:07:59,880 --> 00:08:00,720 Speaker 3: and more in the market. 144 00:08:02,040 --> 00:08:03,360 Speaker 1: Just a follow up on my spend though, I mean, 145 00:08:03,840 --> 00:08:06,720 Speaker 1: the average margin on leverage loans is just getting squeezed 146 00:08:06,760 --> 00:08:08,800 Speaker 1: and squeezed by the repricings, and some some are getting 147 00:08:08,840 --> 00:08:11,760 Speaker 1: done as low as one seventy five over sofa, you 148 00:08:11,800 --> 00:08:14,360 Speaker 1: know for a leverage loan, which is very very tight. 149 00:08:14,480 --> 00:08:17,880 Speaker 1: I mean everything site across the boarding credit. But how 150 00:08:17,880 --> 00:08:20,920 Speaker 1: do you make that arbitrage work? And you know, how 151 00:08:20,920 --> 00:08:23,280 Speaker 1: do you maintain profitability at a time when the people 152 00:08:23,280 --> 00:08:27,560 Speaker 1: are really looking at clos the equity to deliver very 153 00:08:27,640 --> 00:08:28,320 Speaker 1: high returns. 154 00:08:28,520 --> 00:08:30,960 Speaker 3: Yeah, so there's there's really two components of that. One 155 00:08:31,080 --> 00:08:34,440 Speaker 3: is that, of course, for the foreseable future, when you 156 00:08:34,480 --> 00:08:37,199 Speaker 3: first make a decision to invest in cl equity, need 157 00:08:37,240 --> 00:08:39,720 Speaker 3: to make sure that there is sufficient access, interest generation 158 00:08:40,559 --> 00:08:43,240 Speaker 3: and the portfolios to evolve over time, so to the 159 00:08:43,280 --> 00:08:46,480 Speaker 3: extent you can control your liability strike if you will. 160 00:08:47,120 --> 00:08:50,400 Speaker 3: It's always ideal to have the cheapest possible financing structure, 161 00:08:50,440 --> 00:08:53,640 Speaker 3: the most efficient financing structure. The other reality is that 162 00:08:53,720 --> 00:08:56,840 Speaker 3: spread compression is not a permanent state of the world. 163 00:08:56,880 --> 00:09:00,000 Speaker 3: And of course these are long lived investments. They typically 164 00:09:00,040 --> 00:09:02,440 Speaker 3: have reinvestment periods of anywhere from three to five years. 165 00:09:02,679 --> 00:09:05,200 Speaker 3: There's some reinvestment permitted even after the end of the 166 00:09:05,200 --> 00:09:08,120 Speaker 3: reinvestment period, and so in reality, you can have these 167 00:09:08,120 --> 00:09:11,560 Speaker 3: transactions lift for a very long time. And so part 168 00:09:11,559 --> 00:09:16,760 Speaker 3: of the decision making that you are considering is what 169 00:09:16,880 --> 00:09:19,520 Speaker 3: is your outlook on unfolatility and spread evolution. From there, 170 00:09:19,559 --> 00:09:22,520 Speaker 3: we know that these spreads don't last forever, but you 171 00:09:22,600 --> 00:09:25,720 Speaker 3: do have an ability to lock in these liabilities at 172 00:09:25,720 --> 00:09:28,480 Speaker 3: a very attractive spread, and so that is part of 173 00:09:28,520 --> 00:09:30,840 Speaker 3: the value of the current environment that's very attractive. 174 00:09:31,679 --> 00:09:34,000 Speaker 1: And in terms of the returns that you're talking about 175 00:09:34,040 --> 00:09:38,120 Speaker 1: to your end users, I mean we hear high teens 176 00:09:38,160 --> 00:09:41,439 Speaker 1: as a kind of level generally. Is that what you're seeing. 177 00:09:42,880 --> 00:09:45,600 Speaker 3: Yeah, So it really depends on again on your level 178 00:09:45,600 --> 00:09:47,440 Speaker 3: of risk taking, the amount of leverage that you want 179 00:09:47,480 --> 00:09:50,320 Speaker 3: to apply through the CLO structure. That can range from 180 00:09:50,400 --> 00:09:54,760 Speaker 3: ten x to seventeen X. But broadly speaking, the asset 181 00:09:54,760 --> 00:09:58,800 Speaker 3: class has delivered about twelve percent realized returns. Skilled participants 182 00:09:58,800 --> 00:10:03,520 Speaker 3: in the market can generate fifteen percent plus returns. Of course, 183 00:10:03,760 --> 00:10:06,200 Speaker 3: as I said initially, if you take more rescue should 184 00:10:06,200 --> 00:10:09,960 Speaker 3: be able to generate higher returns. And investors, you know, 185 00:10:10,160 --> 00:10:14,199 Speaker 3: clearly have a very wide range of managers, durations, markets 186 00:10:14,240 --> 00:10:16,520 Speaker 3: to choose from in order to decide where they want 187 00:10:16,520 --> 00:10:17,280 Speaker 3: to play in the space. 188 00:10:17,880 --> 00:10:19,920 Speaker 1: And is that re term getting eroded by all of 189 00:10:19,960 --> 00:10:22,200 Speaker 1: the demand for limited supply of assets. 190 00:10:22,240 --> 00:10:24,959 Speaker 3: It's clearly been a challenge. And the other challenge, of 191 00:10:25,040 --> 00:10:28,280 Speaker 3: course has been loss generation in the asset class. We've 192 00:10:28,320 --> 00:10:32,680 Speaker 3: seen elevated lemes and the so called dual track default 193 00:10:32,760 --> 00:10:37,480 Speaker 3: rate and recoveries being challenged across a number of sort 194 00:10:37,520 --> 00:10:42,160 Speaker 3: of repeat Chapter twenty two style restructurings. So yes, those 195 00:10:42,200 --> 00:10:46,640 Speaker 3: two concerns clearly do affect the expected returns and it's 196 00:10:46,679 --> 00:10:50,280 Speaker 3: important in that instance to pick managers who can outperform 197 00:10:50,800 --> 00:10:52,120 Speaker 3: the worst cases in the market. 198 00:10:54,000 --> 00:10:56,760 Speaker 2: And switching gears a little bit dag something on everyone's 199 00:10:56,760 --> 00:11:00,600 Speaker 2: mind and credit lemes. What's been the proach of your 200 00:11:00,640 --> 00:11:03,959 Speaker 2: managers with respect to lemis you know, do they participate 201 00:11:04,000 --> 00:11:07,960 Speaker 2: in their restructuring? Are they sellers of the risk? Any color? 202 00:11:08,000 --> 00:11:13,360 Speaker 3: There? So we invest with a diverse pool of managers 203 00:11:13,400 --> 00:11:16,840 Speaker 3: and the approaches differ. I think it's important to say 204 00:11:16,840 --> 00:11:20,000 Speaker 3: that our views as an equity investor is that lemies 205 00:11:20,080 --> 00:11:23,720 Speaker 3: are not constructive and not good for anyone in the market, 206 00:11:24,040 --> 00:11:27,880 Speaker 3: and so they should be avoided. It is probably a 207 00:11:27,960 --> 00:11:31,000 Speaker 3: fallacy to assume that if you're a large manager, you 208 00:11:31,000 --> 00:11:32,960 Speaker 3: will always end up on the right side of the trade, 209 00:11:33,600 --> 00:11:36,080 Speaker 3: because exceptions occur, and it's very difficult to do the 210 00:11:36,120 --> 00:11:40,560 Speaker 3: game theory of understanding exactly what position you'll be in. 211 00:11:41,360 --> 00:11:43,800 Speaker 3: But with that being said, we've had managers that have 212 00:11:43,880 --> 00:11:47,320 Speaker 3: been involved in priming transactions and lemies. We've also had 213 00:11:47,360 --> 00:11:51,439 Speaker 3: managers that have been negatively affected, and so it's it's 214 00:11:51,480 --> 00:11:56,880 Speaker 3: for us all about finding managers that in general are 215 00:11:56,920 --> 00:11:59,839 Speaker 3: in portfolios where they can exit the credit before the 216 00:12:00,080 --> 00:12:03,720 Speaker 3: enemy occurs, which of course is easier said than than done. 217 00:12:04,120 --> 00:12:07,440 Speaker 2: And and do you see loan documentation being modified to 218 00:12:07,520 --> 00:12:10,280 Speaker 2: limit the ability of management teams to pursue an lemy. 219 00:12:10,640 --> 00:12:13,160 Speaker 3: We have, but of course hope and wish would be 220 00:12:13,200 --> 00:12:17,600 Speaker 3: that there's a more concerted and consistent effort their cyclicality 221 00:12:17,679 --> 00:12:22,160 Speaker 3: to how how often these documents are adjusted. Typically, post 222 00:12:22,240 --> 00:12:25,200 Speaker 3: lemy documents are stronger than pre lemy documents, but of 223 00:12:25,240 --> 00:12:29,280 Speaker 3: course some flexibility can remain. So in general, again to 224 00:12:29,520 --> 00:12:32,360 Speaker 3: my earlier earlier point, we do think that it would 225 00:12:32,360 --> 00:12:36,840 Speaker 3: behove the entire industry to return discipline to the documentation. 226 00:12:36,960 --> 00:12:39,240 Speaker 3: And it's critically important for us when we're looking at 227 00:12:39,280 --> 00:12:42,520 Speaker 3: managers to ensure that they spend enough time and energy 228 00:12:42,559 --> 00:12:45,320 Speaker 3: and understanding what the documents allow and that it becomes 229 00:12:45,360 --> 00:12:47,080 Speaker 3: a part of their credit analysis. 230 00:12:47,920 --> 00:12:49,960 Speaker 1: But clearly the trend right now seems to be that 231 00:12:50,000 --> 00:12:52,640 Speaker 1: there will be more lemies and they'll be more aggressive, 232 00:12:52,679 --> 00:12:54,720 Speaker 1: and not just in US, but they're going to spread 233 00:12:54,720 --> 00:12:56,640 Speaker 1: to Europe. So you know, it's kind of become a 234 00:12:56,720 --> 00:12:59,320 Speaker 1: fact of life. And you know, one guest, you know, 235 00:12:59,400 --> 00:13:01,880 Speaker 1: several months on the show described it as a as 236 00:13:01,920 --> 00:13:05,080 Speaker 1: a you know, just part of capitalism at work. You know, 237 00:13:05,120 --> 00:13:07,679 Speaker 1: you can't avoid it. So how realistic do you think 238 00:13:07,800 --> 00:13:10,080 Speaker 1: it really is to say just avoid them, given that 239 00:13:10,160 --> 00:13:12,040 Speaker 1: you know that's just what's happening. 240 00:13:13,800 --> 00:13:15,800 Speaker 3: It is It is very difficult, and you know, there 241 00:13:15,840 --> 00:13:18,960 Speaker 3: is an argument to the reason for their existence, which 242 00:13:19,000 --> 00:13:21,199 Speaker 3: is that it is a more efficient way to refinance 243 00:13:21,760 --> 00:13:25,439 Speaker 3: recapitalize a company that's entered into some issues it's cheaper 244 00:13:25,480 --> 00:13:28,720 Speaker 3: than doing a bankruptcy process, and so it's not all bad. 245 00:13:29,480 --> 00:13:33,240 Speaker 3: I think that what we are advocating against is the 246 00:13:33,280 --> 00:13:35,800 Speaker 3: removal of the very aggressive lender on lender of violence 247 00:13:35,840 --> 00:13:39,720 Speaker 3: and non parada treatment, which is outside of the realm 248 00:13:39,760 --> 00:13:42,440 Speaker 3: of what the ATHA class should look like. But lems 249 00:13:42,480 --> 00:13:45,080 Speaker 3: in and of themselves can be an efficient way to 250 00:13:45,600 --> 00:13:49,480 Speaker 3: quickly readjust the capital structure and allow the company chance 251 00:13:49,520 --> 00:13:50,960 Speaker 3: to improve operating performance. 252 00:13:51,679 --> 00:13:54,080 Speaker 1: But it's basically another form of default, right, I mean. 253 00:13:54,880 --> 00:13:58,040 Speaker 3: It, it is absolutely another form of default. Another form 254 00:13:58,040 --> 00:14:01,920 Speaker 3: of default, of course is lost generation is selling a 255 00:14:02,000 --> 00:14:05,200 Speaker 3: name below the cost of which you acquired it. So 256 00:14:06,080 --> 00:14:09,120 Speaker 3: you know, exiting lemis at a loss could could result 257 00:14:09,120 --> 00:14:13,480 Speaker 3: in the same outcomes. So it's a very complicated process. 258 00:14:13,880 --> 00:14:16,280 Speaker 3: In general, the objective of the manager, a successful seal 259 00:14:16,320 --> 00:14:19,840 Speaker 3: of manager is to minimize losses, whether that's defaults, lemies 260 00:14:19,960 --> 00:14:20,440 Speaker 3: or trading. 261 00:14:21,320 --> 00:14:23,760 Speaker 1: And do you expect I mean, we hear a lot 262 00:14:23,800 --> 00:14:27,040 Speaker 1: about default rates. We also hear that, you know, mostly 263 00:14:27,080 --> 00:14:29,160 Speaker 1: the concern is on the leverage loan side in terms 264 00:14:29,200 --> 00:14:32,640 Speaker 1: of you know, the outlook for more default. A lot 265 00:14:32,640 --> 00:14:34,480 Speaker 1: of the defaults are happening in the form of lemis. 266 00:14:35,240 --> 00:14:37,320 Speaker 1: Do you expect. I mean, we're coming to a point 267 00:14:37,360 --> 00:14:40,320 Speaker 1: in time when you know, the economy seems to be slowing, 268 00:14:40,440 --> 00:14:43,840 Speaker 1: rates are staying high, the maturities is coming up, and 269 00:14:43,920 --> 00:14:45,360 Speaker 1: a lot of the companies just are going to hit 270 00:14:45,400 --> 00:14:47,400 Speaker 1: the wall. Do you expect defaults to accelerate from here? 271 00:14:49,040 --> 00:14:53,360 Speaker 3: That's not currently our baseline expectation. We've been of the 272 00:14:53,440 --> 00:14:56,920 Speaker 3: view that will have an extended default cycle that is 273 00:14:56,920 --> 00:15:01,040 Speaker 3: not similar to the sort of mountain acceleration of default 274 00:15:01,040 --> 00:15:04,520 Speaker 3: that we saw during prior cyclical downturns in the economy. 275 00:15:05,120 --> 00:15:08,040 Speaker 3: I would say the exception to that view, of course, 276 00:15:08,240 --> 00:15:11,520 Speaker 3: is that we are not expecting a recession in the 277 00:15:11,600 --> 00:15:15,080 Speaker 3: US at the moment. If if that occurs, we should 278 00:15:15,960 --> 00:15:18,600 Speaker 3: and may see an acceleration and default. But our current 279 00:15:18,880 --> 00:15:21,400 Speaker 3: expectation is that we'll see this four to five percent 280 00:15:21,440 --> 00:15:24,560 Speaker 3: perandum default rate for an extended period of time because 281 00:15:24,560 --> 00:15:28,920 Speaker 3: there's just idiosyncratic reasons for overlevered companies with elevated rates 282 00:15:29,320 --> 00:15:33,000 Speaker 3: to run into trouble. So hopefully, hopefully that is the case. 283 00:15:33,880 --> 00:15:35,720 Speaker 3: And again our view is that it's best to be 284 00:15:35,760 --> 00:15:38,880 Speaker 3: diversified and prudent in taking risk at the moment because 285 00:15:38,920 --> 00:15:43,360 Speaker 3: we're not getting compensated for potentially higher credit risk. 286 00:15:44,160 --> 00:15:46,320 Speaker 1: And then so in basic terms, I mean, for for 287 00:15:46,360 --> 00:15:49,280 Speaker 1: our listeners who are not quite you know, up on 288 00:15:49,600 --> 00:15:52,840 Speaker 1: how CLO equity works. I mean it seems like if 289 00:15:52,920 --> 00:15:55,560 Speaker 1: if you expect more defaults in leverage loans and you're 290 00:15:55,800 --> 00:15:59,640 Speaker 1: on the riskiest rounde of the CLO, you're going to 291 00:15:59,640 --> 00:16:01,640 Speaker 1: take a big hit. But how do you avoid that? 292 00:16:01,760 --> 00:16:05,280 Speaker 3: Yeah, so there is a natural hedge against that, which 293 00:16:05,320 --> 00:16:07,320 Speaker 3: is part of the power of COLO equity, which is 294 00:16:07,360 --> 00:16:10,360 Speaker 3: that you have financed yourself at a point in time 295 00:16:10,760 --> 00:16:14,360 Speaker 3: and locked in liabilities. And typically when you have a 296 00:16:14,400 --> 00:16:19,840 Speaker 3: default cycle really accelerate above the average historical number, you 297 00:16:19,920 --> 00:16:22,320 Speaker 3: also have a repricing of credit risk. And so there 298 00:16:22,400 --> 00:16:26,240 Speaker 3: is a natural increase in your interest income generation because 299 00:16:26,280 --> 00:16:30,520 Speaker 3: your portfolio is repricing wider, whether that's lower lower prices 300 00:16:30,880 --> 00:16:33,840 Speaker 3: or wider spreads, and that naturally offs that some of 301 00:16:33,920 --> 00:16:36,600 Speaker 3: the lost generation that also increases at that point in time. 302 00:16:36,920 --> 00:16:39,800 Speaker 3: And of course the challenge is making sure that your 303 00:16:39,840 --> 00:16:43,120 Speaker 3: lost generation does not completely eat away at the spread widening. 304 00:16:43,120 --> 00:16:46,640 Speaker 3: And that is the value of an actively managed portfolio. 305 00:16:47,520 --> 00:16:50,440 Speaker 1: And is it also down to picking more experience manages. 306 00:16:50,440 --> 00:16:52,320 Speaker 1: Theres a ton of new managers coming in. It is 307 00:16:52,320 --> 00:16:54,920 Speaker 1: it very much like how do you choose your manager? 308 00:16:56,840 --> 00:16:59,480 Speaker 3: Absolutely so for us, you know, picking the managers the 309 00:16:59,480 --> 00:17:02,440 Speaker 3: most credit decision, regardless of whether that is a short 310 00:17:02,520 --> 00:17:04,960 Speaker 3: term or long term investment, and we tend to be 311 00:17:05,000 --> 00:17:08,320 Speaker 3: long term investors. There are over one hundred and thirty 312 00:17:08,359 --> 00:17:10,680 Speaker 3: managers in the US alone, so it's a very very 313 00:17:11,720 --> 00:17:16,560 Speaker 3: crowded market, But the number of experienced managers that we 314 00:17:16,560 --> 00:17:20,000 Speaker 3: would be comfortable with is actually quite small relative to 315 00:17:20,000 --> 00:17:24,080 Speaker 3: that total market size. So we spend a lot of time, 316 00:17:24,080 --> 00:17:29,200 Speaker 3: of course, understanding their their experience, and would advise against 317 00:17:29,760 --> 00:17:33,080 Speaker 3: investing with folks that are new to either loans or 318 00:17:33,119 --> 00:17:36,000 Speaker 3: to COLO management. It's not enough to be a good 319 00:17:36,040 --> 00:17:39,840 Speaker 3: loan manager because the COLO structure is complicated and can 320 00:17:39,880 --> 00:17:42,919 Speaker 3: be harnessed to be very powerful for investors if the 321 00:17:42,960 --> 00:17:45,600 Speaker 3: manager understands all of the tricks of the trade. 322 00:17:46,800 --> 00:17:50,560 Speaker 2: And deg you know, a relatively new investor in COLO, 323 00:17:50,640 --> 00:17:54,320 Speaker 2: liabilities have been COLO ETFs and we've seen continued growth 324 00:17:54,800 --> 00:17:58,119 Speaker 2: this year. I'd assume that growth has clearly helped push 325 00:17:58,240 --> 00:18:01,280 Speaker 2: liability spreads lower. But do you view this investor base 326 00:18:01,320 --> 00:18:04,200 Speaker 2: as committed to the product on a longer term basis. 327 00:18:06,240 --> 00:18:09,840 Speaker 3: Yes, I think so. I would see this as part 328 00:18:09,920 --> 00:18:16,520 Speaker 3: of a general migration of alternative assa classes into more 329 00:18:16,920 --> 00:18:20,600 Speaker 3: retail focused investor bases. And of course the speed at 330 00:18:20,600 --> 00:18:22,359 Speaker 3: which it happens may not be as fast as the 331 00:18:22,359 --> 00:18:25,639 Speaker 3: initial launch of the products, but we would expect retail 332 00:18:25,640 --> 00:18:27,919 Speaker 3: participation to be a fairly constant part of the market. 333 00:18:28,040 --> 00:18:31,920 Speaker 1: Yeah, the big thing with hitting on constantly is private credit. 334 00:18:32,080 --> 00:18:34,440 Speaker 1: And you know there's been talked about private credit clos 335 00:18:34,880 --> 00:18:37,359 Speaker 1: but I'm just interested in generally in your view of 336 00:18:37,400 --> 00:18:40,600 Speaker 1: how private credit is altering the landscape, how you work, 337 00:18:40,640 --> 00:18:41,479 Speaker 1: and what you invest in. 338 00:18:41,720 --> 00:18:43,680 Speaker 3: So I would say so far it's been more of 339 00:18:43,720 --> 00:18:47,160 Speaker 3: a friend than a foe. And of course the phone 340 00:18:47,240 --> 00:18:50,160 Speaker 3: nature comes from potentially lack of discipline and too much 341 00:18:50,160 --> 00:18:54,560 Speaker 3: competition and a rational pricing of risk. The reason that 342 00:18:55,680 --> 00:18:58,200 Speaker 3: my assessment is that it's generally been a positive development 343 00:18:58,280 --> 00:19:01,359 Speaker 3: so far is that we've seen about twenty five billion 344 00:19:01,400 --> 00:19:05,119 Speaker 3: of triple C rated broadly syndicated loans refinanced into the 345 00:19:05,119 --> 00:19:07,800 Speaker 3: private credit market at par. One of the names that 346 00:19:07,880 --> 00:19:11,840 Speaker 3: is topical recently is Finastro, which obviously originally went into 347 00:19:12,280 --> 00:19:14,639 Speaker 3: the direct loan private credit space is a triple S 348 00:19:14,760 --> 00:19:17,160 Speaker 3: rated name and recently has come back to the broadly 349 00:19:17,200 --> 00:19:21,000 Speaker 3: syndicated loan market. It's a B minus company. So that's 350 00:19:21,040 --> 00:19:25,360 Speaker 3: just one example of that market providing an additional, more 351 00:19:25,400 --> 00:19:29,719 Speaker 3: patient form of capital that has more flexibility to remove 352 00:19:29,760 --> 00:19:32,280 Speaker 3: credit resk from our market. And I think a big 353 00:19:32,280 --> 00:19:35,240 Speaker 3: part of the thesis from participants in the BSL space 354 00:19:35,320 --> 00:19:38,040 Speaker 3: has been that private credit will serve as a sort 355 00:19:38,080 --> 00:19:43,520 Speaker 3: of speed bump at a buffer from really potentially accelerated 356 00:19:43,520 --> 00:19:45,800 Speaker 3: default that would be higher without the capital based there. 357 00:19:46,000 --> 00:19:48,080 Speaker 3: So it's good to have another pool of capital providing 358 00:19:48,119 --> 00:19:52,080 Speaker 3: liquidity to companies that has more patients, flexibility, tools in 359 00:19:52,119 --> 00:19:54,280 Speaker 3: the toolbox than the BSL market does, which of course 360 00:19:54,359 --> 00:19:57,119 Speaker 3: is so heavily dependent on ratings because it is a 361 00:19:57,160 --> 00:19:58,000 Speaker 3: COLO product. 362 00:19:58,240 --> 00:20:00,480 Speaker 1: Does it ultimately take away the supply that you would 363 00:20:00,520 --> 00:20:01,880 Speaker 1: need to build a CLO. 364 00:20:02,240 --> 00:20:05,480 Speaker 3: Some segments of the market to some extent, Yes, But 365 00:20:05,520 --> 00:20:09,040 Speaker 3: I would say in overall, given given the other value 366 00:20:09,080 --> 00:20:13,280 Speaker 3: they provide to the ecosystem, I would say the provision 367 00:20:13,280 --> 00:20:15,800 Speaker 3: of capital period during periods of distress is probably more 368 00:20:15,880 --> 00:20:20,080 Speaker 3: valuable than the competition for a few names when conditions 369 00:20:20,080 --> 00:20:22,240 Speaker 3: are good and in general, as we've seen so far 370 00:20:22,280 --> 00:20:25,520 Speaker 3: this year, the syndicated market has actually won out more 371 00:20:25,640 --> 00:20:29,000 Speaker 3: names than private credit has gained from BSL given the 372 00:20:29,480 --> 00:20:32,119 Speaker 3: spread compression that we've seen in the public market. 373 00:20:32,480 --> 00:20:34,360 Speaker 1: And so over time, you don't think that the entire 374 00:20:34,440 --> 00:20:36,280 Speaker 1: leverage loan market goes private. 375 00:20:36,359 --> 00:20:39,720 Speaker 3: I think that's unlikely. Clearly. There are some companies where 376 00:20:39,920 --> 00:20:41,639 Speaker 3: it does make a lot of sense, but that market 377 00:20:41,720 --> 00:20:44,679 Speaker 3: is more expensive, and so it's not a decision that 378 00:20:44,760 --> 00:20:48,000 Speaker 3: makes sense for all companies at all times. So it's 379 00:20:48,240 --> 00:20:50,800 Speaker 3: going to be, in our view, a market that is 380 00:20:51,160 --> 00:20:54,200 Speaker 3: much more closely linked together than it was in the past, 381 00:20:54,680 --> 00:20:58,320 Speaker 3: where liquidity lines are blurred and investors are looking at 382 00:20:58,560 --> 00:21:00,800 Speaker 3: and companies are looking at a number of options across 383 00:21:00,840 --> 00:21:04,600 Speaker 3: all those possibilities how yield BSL private credit? But I 384 00:21:04,640 --> 00:21:07,000 Speaker 3: don't see it as an existential threat to the syndicated 385 00:21:07,040 --> 00:21:07,800 Speaker 3: market and deck. 386 00:21:07,920 --> 00:21:10,080 Speaker 2: So is it possible for your managers to invest in 387 00:21:10,119 --> 00:21:12,200 Speaker 2: private credit assets to. 388 00:21:12,359 --> 00:21:15,640 Speaker 3: Some extent theoretically yes, but of course it would need 389 00:21:15,680 --> 00:21:18,639 Speaker 3: to be very very large companies, and it is constrained, 390 00:21:18,960 --> 00:21:22,520 Speaker 3: so there are small baskets for smaller companies. In general, 391 00:21:22,520 --> 00:21:26,639 Speaker 3: it's not something that we think is very sensible to 392 00:21:26,680 --> 00:21:29,080 Speaker 3: do in a lot of size, and I think it's 393 00:21:29,119 --> 00:21:32,800 Speaker 3: tricky to combine private credit and syndicated assets within a 394 00:21:32,840 --> 00:21:36,479 Speaker 3: CLO structure because it's hard to get the right pricing 395 00:21:36,480 --> 00:21:38,600 Speaker 3: on the liability side and the right structure. You have 396 00:21:38,640 --> 00:21:41,960 Speaker 3: to account for some flexibilities that may cost you in 397 00:21:42,160 --> 00:21:44,560 Speaker 3: structural efficiency, and so I think that you know, some 398 00:21:44,760 --> 00:21:49,080 Speaker 3: mixing is potentially sensible for the right managers that have 399 00:21:49,119 --> 00:21:51,840 Speaker 3: the right expertise, but it should be it should be 400 00:21:51,840 --> 00:21:52,880 Speaker 3: well well constrained. 401 00:21:53,960 --> 00:21:56,520 Speaker 1: Could we catch a point that it's some sometime soon 402 00:21:56,560 --> 00:21:59,919 Speaker 1: where you're getting a private credit entirely private credit, not 403 00:22:00,040 --> 00:22:03,280 Speaker 1: middle market, but you know, big private credit loan clo. 404 00:22:03,600 --> 00:22:05,560 Speaker 3: I think so. And of course, over the last few 405 00:22:05,600 --> 00:22:09,440 Speaker 3: years we've seen private credit issueans really accelerate and become 406 00:22:09,440 --> 00:22:12,800 Speaker 3: a more meaningful share of the COLO market. Most of 407 00:22:12,840 --> 00:22:17,639 Speaker 3: that activity is financing driven versus arbitrage driven issuance and 408 00:22:17,680 --> 00:22:21,159 Speaker 3: the syndicated market. I think it's a natural evolution of 409 00:22:21,160 --> 00:22:23,960 Speaker 3: the space, given the attractiveness of COLO financing relative to 410 00:22:24,040 --> 00:22:25,560 Speaker 3: other financing options that are available. 411 00:22:26,160 --> 00:22:28,120 Speaker 1: So what's the timeframe then, Is it going to happen 412 00:22:28,200 --> 00:22:28,520 Speaker 1: this year? 413 00:22:29,160 --> 00:22:31,440 Speaker 3: I think that it will require a little bit more time, 414 00:22:31,760 --> 00:22:36,200 Speaker 3: and it really depends on the appetite from external capital 415 00:22:36,480 --> 00:22:39,360 Speaker 3: or colo equity in those transactions, and I think that's 416 00:22:39,480 --> 00:22:42,320 Speaker 3: that's a much more difficult exercise than the public, more 417 00:22:42,359 --> 00:22:46,439 Speaker 3: transparent markets. It's a much higher level of understanding the 418 00:22:46,480 --> 00:22:48,800 Speaker 3: manager than the more transparent public markets. 419 00:22:48,880 --> 00:22:50,560 Speaker 1: So when you look at private credit, then you know 420 00:22:50,600 --> 00:22:53,320 Speaker 1: you've been covering leverage loans and cls for a long time. 421 00:22:53,560 --> 00:22:55,600 Speaker 1: I'm just wondering, you know, what your view is a 422 00:22:55,720 --> 00:22:58,399 Speaker 1: valuation of private loans, because that seems to be a 423 00:22:58,400 --> 00:23:00,600 Speaker 1: big concern. Everyone's kind of worried about how they're being 424 00:23:00,600 --> 00:23:03,040 Speaker 1: marked and if they're being marked accurately in that's the 425 00:23:03,080 --> 00:23:06,720 Speaker 1: potential area of risk that we could see cutting across 426 00:23:06,760 --> 00:23:08,440 Speaker 1: all markets. Do you worry about that's a tool? 427 00:23:08,760 --> 00:23:12,119 Speaker 3: I do. I do think that the amount of capital 428 00:23:12,119 --> 00:23:14,840 Speaker 3: that's been raised in that space and the need to 429 00:23:14,880 --> 00:23:18,280 Speaker 3: deploy it may create some erosion of discipline, if you will, 430 00:23:18,359 --> 00:23:21,240 Speaker 3: from the market participants. And I also worry that that 431 00:23:21,320 --> 00:23:25,679 Speaker 3: erosion of discipline spills over to the public markets. The 432 00:23:25,760 --> 00:23:29,040 Speaker 3: liquidity and the transparency of price discovery is really important, 433 00:23:29,080 --> 00:23:32,159 Speaker 3: and I think that translates into more than just you know, 434 00:23:32,200 --> 00:23:35,480 Speaker 3: concerns about market dynamics, but also potentially the wrong asset 435 00:23:35,480 --> 00:23:40,000 Speaker 3: allocation decisions being made given the illusion of stability that 436 00:23:40,040 --> 00:23:42,760 Speaker 3: one might have and in the private space, given the 437 00:23:43,080 --> 00:23:44,920 Speaker 3: lag in price discovery. 438 00:23:45,680 --> 00:23:48,120 Speaker 1: So does that give the broadly syndicated market an edge 439 00:23:48,480 --> 00:23:49,760 Speaker 1: in relative terms? 440 00:23:50,480 --> 00:23:53,359 Speaker 3: I do think that it maintains its value. Of course, 441 00:23:53,720 --> 00:23:57,080 Speaker 3: the critical decision, the critical fact pattern is does the 442 00:23:57,080 --> 00:24:00,600 Speaker 3: spread premium and private credit compensate investors enough for the 443 00:24:00,600 --> 00:24:03,480 Speaker 3: ill liquidity and the credit risk that exists within that market. 444 00:24:03,960 --> 00:24:06,520 Speaker 3: And the other feature that's often missed is that in 445 00:24:06,560 --> 00:24:10,600 Speaker 3: private credit it's very difficult to monetize volatility once it happens. 446 00:24:10,640 --> 00:24:13,680 Speaker 3: Once you're in a loan, you're stuck in that loan. 447 00:24:13,680 --> 00:24:15,359 Speaker 3: You may have an ability to mend an extent, but 448 00:24:15,359 --> 00:24:18,640 Speaker 3: it's difficult to rotate capital away from a specific name. 449 00:24:19,480 --> 00:24:22,600 Speaker 3: The volatility that you can monetize in the syndicated market 450 00:24:22,720 --> 00:24:25,120 Speaker 3: is a big advantage, and I think the higher data 451 00:24:25,160 --> 00:24:27,320 Speaker 3: of loans over time with other markets makes it a 452 00:24:27,400 --> 00:24:32,080 Speaker 3: very attractive asset class to invest in from an equity perspective, in. 453 00:24:32,080 --> 00:24:34,600 Speaker 1: Terms of issuance of clos I mean, what's your view, 454 00:24:34,640 --> 00:24:38,399 Speaker 1: is it overdone? Do you continue the same trend you know, 455 00:24:38,440 --> 00:24:41,359 Speaker 1: what kind of risks do you potentially get from such 456 00:24:41,400 --> 00:24:43,040 Speaker 1: a big volume of issuance. 457 00:24:43,280 --> 00:24:46,040 Speaker 3: So of course, the theoretical risk is that we've missed 458 00:24:46,080 --> 00:24:48,880 Speaker 3: priced risk and then there is going to be an 459 00:24:48,960 --> 00:24:54,359 Speaker 3: issue with losses and ultimately performance for those vintages, which 460 00:24:54,359 --> 00:24:56,199 Speaker 3: is why I think it's really important for investors to 461 00:24:56,200 --> 00:24:59,560 Speaker 3: be very thoughtful around vintage selection and sourcing the right opportunities. 462 00:25:00,600 --> 00:25:03,000 Speaker 3: You know, this year is looking like a very strong year. 463 00:25:03,080 --> 00:25:05,800 Speaker 3: Last year, of course, was a record year for the market, 464 00:25:07,119 --> 00:25:10,680 Speaker 3: and it's not necessarily all bad. The challenge for our 465 00:25:10,920 --> 00:25:13,400 Speaker 3: market has been the fact that the syndicated market has 466 00:25:13,440 --> 00:25:17,320 Speaker 3: not produced as many new entrants as as one would 467 00:25:17,359 --> 00:25:20,760 Speaker 3: expect to see given given the volume of CILO issues. 468 00:25:21,160 --> 00:25:23,320 Speaker 3: But there are other dynamics in the market, for example 469 00:25:23,359 --> 00:25:27,600 Speaker 3: redemptions and refinancings and the extension of reinvestment runway that 470 00:25:27,720 --> 00:25:31,760 Speaker 3: is allowing for recycling of existing secondary supply. So I 471 00:25:31,760 --> 00:25:34,119 Speaker 3: don't think we're at a at a at a danger 472 00:25:34,200 --> 00:25:36,720 Speaker 3: point at this stage. But on the margin, you know, 473 00:25:36,800 --> 00:25:39,879 Speaker 3: not all transactions will be successful because it does require 474 00:25:39,880 --> 00:25:42,560 Speaker 3: a lot of discipline to to have the right mix 475 00:25:42,600 --> 00:25:45,040 Speaker 3: of components to get the right return. Profile for the risk. 476 00:25:45,640 --> 00:25:47,760 Speaker 1: But do you think the issuance just keeps expanding and 477 00:25:47,840 --> 00:25:49,919 Speaker 1: hitting new records each year? From here, we. 478 00:25:49,960 --> 00:25:52,520 Speaker 3: Probably have not seen seen the record volumes yet. If 479 00:25:52,520 --> 00:25:54,359 Speaker 3: we know our market, our market always surprises us to 480 00:25:54,400 --> 00:25:58,840 Speaker 3: the upside. I don't think that's a near term development though, 481 00:25:59,160 --> 00:26:00,879 Speaker 3: given all the all the risks that we have building 482 00:26:00,880 --> 00:26:03,679 Speaker 3: on the horizon. So I think we hover around these 483 00:26:03,720 --> 00:26:08,480 Speaker 3: record levels uh and wait for another stabilization in the 484 00:26:08,520 --> 00:26:10,560 Speaker 3: world for for real acceleration. 485 00:26:11,600 --> 00:26:13,800 Speaker 1: We're also at a point in time when you know 486 00:26:13,960 --> 00:26:16,240 Speaker 1: there's there's a lot of pressure on the FED to ease, 487 00:26:17,200 --> 00:26:19,919 Speaker 1: you know, certainly from the from the government in the US. 488 00:26:20,840 --> 00:26:23,200 Speaker 1: So rates you know, at some point should should come down. 489 00:26:23,240 --> 00:26:25,720 Speaker 1: I mean, depending on your view of inflation and and 490 00:26:25,720 --> 00:26:29,399 Speaker 1: and how things pan out. But for a floating rate product, 491 00:26:29,640 --> 00:26:32,639 Speaker 1: does that end up hitting its appeal? I mean, how 492 00:26:32,640 --> 00:26:34,520 Speaker 1: do you how do you get around that with investors 493 00:26:34,520 --> 00:26:36,600 Speaker 1: who maybe want to lock in fix rate at this 494 00:26:36,640 --> 00:26:38,320 Speaker 1: point and avoid floating. 495 00:26:38,600 --> 00:26:40,960 Speaker 3: So I think it depends on whether you're a dead 496 00:26:40,960 --> 00:26:44,719 Speaker 3: investor and a quid investor. UH. And of course there 497 00:26:44,720 --> 00:26:48,160 Speaker 3: are both positive and negative impact of lower rates. Our 498 00:26:48,240 --> 00:26:51,680 Speaker 3: view happens to be that declining rates but not going 499 00:26:51,720 --> 00:26:54,439 Speaker 3: back to the serup policies or interest rate policies is 500 00:26:54,440 --> 00:26:56,680 Speaker 3: a net net positive for the for the syndicated and 501 00:26:56,960 --> 00:27:00,440 Speaker 3: high bond markets, and it's sort of a a very 502 00:27:00,480 --> 00:27:04,520 Speaker 3: good environment for companies. While of course rates declining from 503 00:27:04,600 --> 00:27:05,800 Speaker 3: four and a half to three and a half or 504 00:27:05,800 --> 00:27:09,359 Speaker 3: three percent wherever we end up does reduce your yield, 505 00:27:09,960 --> 00:27:12,320 Speaker 3: it is not positive from a credit perspective, so we 506 00:27:12,320 --> 00:27:15,359 Speaker 3: should see improvement and credit fundamentals, and so it's all 507 00:27:15,359 --> 00:27:19,439 Speaker 3: about that the interplay between those those two forces. And 508 00:27:19,480 --> 00:27:21,960 Speaker 3: as I said, our view is that it's not going 509 00:27:22,000 --> 00:27:25,359 Speaker 3: to be incredibly problematic from from a demand perspective. Of 510 00:27:25,359 --> 00:27:27,680 Speaker 3: course we will see rotation as we always do, particularly 511 00:27:27,720 --> 00:27:30,760 Speaker 3: from retail buyers, and that could be an opportunity for 512 00:27:30,880 --> 00:27:31,719 Speaker 3: the CLO market. 513 00:27:32,200 --> 00:27:34,760 Speaker 1: As we mentioned at the beginning, there is sort of 514 00:27:34,800 --> 00:27:39,720 Speaker 1: a sense of maybe diversification geographically building you know, this 515 00:27:39,760 --> 00:27:42,720 Speaker 1: whole idea of American exceptionalism being tested, and you have 516 00:27:42,760 --> 00:27:45,200 Speaker 1: offices in London, you look at, you know, the market globally. 517 00:27:45,240 --> 00:27:48,320 Speaker 1: I'm wondering where you see the relative value between Europe 518 00:27:48,520 --> 00:27:49,480 Speaker 1: and the US right now. 519 00:27:51,040 --> 00:27:53,760 Speaker 3: So for many many years we've looked at the European 520 00:27:53,800 --> 00:27:57,719 Speaker 3: market and have very firmly decided that the best opportunity 521 00:27:57,760 --> 00:28:00,480 Speaker 3: was in the US for a lot of reasons, better liquidity, 522 00:28:00,520 --> 00:28:05,439 Speaker 3: more volatility, more diversity, UH and a better ability to 523 00:28:05,680 --> 00:28:10,160 Speaker 3: manage risk. But given the recent development compression of earnings 524 00:28:10,600 --> 00:28:13,040 Speaker 3: growth and GDP growth between the two markets, Europe is 525 00:28:13,320 --> 00:28:15,399 Speaker 3: for the first time in many years more firmly on 526 00:28:15,440 --> 00:28:19,000 Speaker 3: our on our radar. We have not made any new 527 00:28:19,000 --> 00:28:21,520 Speaker 3: European investments to date, but we're looking at that market 528 00:28:21,600 --> 00:28:23,840 Speaker 3: much more closely than we have been in many, many years. 529 00:28:24,400 --> 00:28:25,879 Speaker 1: But it's an issue of scale as it I mean, 530 00:28:26,000 --> 00:28:27,160 Speaker 1: just not big enough. 531 00:28:28,119 --> 00:28:30,720 Speaker 3: It's an issue of scale, diversity, complexity. Of course, it's 532 00:28:30,760 --> 00:28:33,840 Speaker 3: not one market many bankruptcy jurisdictions. It's it's a It's 533 00:28:33,880 --> 00:28:36,399 Speaker 3: a more challenging market to maneuver in many ways. But 534 00:28:36,440 --> 00:28:38,280 Speaker 3: of course the trade off is that it's potentially more 535 00:28:38,320 --> 00:28:42,200 Speaker 3: stable and that could be a nice dallas to h 536 00:28:42,320 --> 00:28:43,840 Speaker 3: to the volatility in the US. 537 00:28:44,360 --> 00:28:46,400 Speaker 1: And is there a better return in Europe right now 538 00:28:46,480 --> 00:28:48,440 Speaker 1: in even the smaller scale. 539 00:28:48,120 --> 00:28:51,240 Speaker 3: Not yet in our assessment, but again, differential is getting smaller, 540 00:28:51,360 --> 00:28:53,800 Speaker 3: and of course there's other dynamics from an equity perspective, 541 00:28:54,640 --> 00:28:57,760 Speaker 3: including the availability of capital across the two markets, where 542 00:28:58,520 --> 00:29:01,920 Speaker 3: those differences may you know, lead us to invest in Europe. 543 00:29:02,760 --> 00:29:05,560 Speaker 1: And in terms of investors coming in to the market, 544 00:29:05,680 --> 00:29:08,040 Speaker 1: I mean, what's the app site right now of foreign 545 00:29:08,080 --> 00:29:09,800 Speaker 1: investors in U S CLOS? 546 00:29:09,800 --> 00:29:15,320 Speaker 3: Would you say, I would say that it's remained relatively stable. 547 00:29:15,800 --> 00:29:19,400 Speaker 3: We see pockets of new investors learning about the assa class, 548 00:29:19,480 --> 00:29:22,800 Speaker 3: particularly as assa classes like private equity face a lot 549 00:29:22,800 --> 00:29:26,560 Speaker 3: of headwinds, where col equity hits similar return targets, doesn't 550 00:29:26,560 --> 00:29:29,000 Speaker 3: have the J curve, has higher cash flows and is 551 00:29:29,440 --> 00:29:32,600 Speaker 3: potentially more resilient. These are marginal changes. We haven't seen 552 00:29:32,920 --> 00:29:36,120 Speaker 3: kind of whole sale lack of interest or you know, 553 00:29:36,240 --> 00:29:38,880 Speaker 3: doubling or tripling of interest. So these are marginal changes 554 00:29:39,560 --> 00:29:42,800 Speaker 3: that I guess every asset manager's experiences in slightly different ways. 555 00:29:43,640 --> 00:29:46,000 Speaker 1: The new investors that you're seeing, what kind of questions 556 00:29:46,000 --> 00:29:48,160 Speaker 1: are they asking about CLOS because there still seems to 557 00:29:48,160 --> 00:29:51,280 Speaker 1: be you know, lack of understanding really about the product. 558 00:29:51,320 --> 00:29:52,760 Speaker 1: I mean, even though you know it's been going for 559 00:29:52,760 --> 00:29:55,200 Speaker 1: a long time and it has done well even through downturns, 560 00:29:55,240 --> 00:29:57,240 Speaker 1: as you mentioned, even through two thousand and eight, you 561 00:29:57,320 --> 00:30:00,000 Speaker 1: know what sort of questions are they putting to you. 562 00:30:00,720 --> 00:30:03,800 Speaker 3: I think that we always lead with explaining to them 563 00:30:03,800 --> 00:30:05,960 Speaker 3: that it's worth to understand the asset class because that 564 00:30:06,000 --> 00:30:08,920 Speaker 3: complexity premium, once you get through it can be monetized 565 00:30:08,960 --> 00:30:11,320 Speaker 3: for a very long time. But the biggest I would 566 00:30:11,360 --> 00:30:14,800 Speaker 3: say source of misunderstanding or source of questions is understanding 567 00:30:14,840 --> 00:30:20,520 Speaker 3: the idea of leveraging leverage loans and explaining the power 568 00:30:20,560 --> 00:30:23,400 Speaker 3: and the value of the very unique financing structure of CLOS. 569 00:30:24,040 --> 00:30:27,240 Speaker 3: Ten X leverage can be a very high number objectively 570 00:30:27,320 --> 00:30:29,440 Speaker 3: if you don't understand that it's not mark to market, 571 00:30:29,680 --> 00:30:32,440 Speaker 3: that it's locked in, that it's match funded, all those 572 00:30:32,560 --> 00:30:36,000 Speaker 3: features that are very very important to giving CLOS and 573 00:30:36,040 --> 00:30:37,640 Speaker 3: COL equity the resilience that it's. 574 00:30:37,480 --> 00:30:40,840 Speaker 2: Had, and deg what's the composition of your investor pool 575 00:30:40,880 --> 00:30:45,200 Speaker 2: and what makes COLO equity attractive to a non US investor. 576 00:30:47,440 --> 00:30:53,200 Speaker 3: So our investor base is fairly diversified geographically, about fifty 577 00:30:53,200 --> 00:30:55,880 Speaker 3: to fifty mix between the US and Europe. We do 578 00:30:56,000 --> 00:30:58,640 Speaker 3: have some other geographiesy in the mechs as well, but 579 00:30:58,640 --> 00:31:02,360 Speaker 3: as a smaller percentage and a fairly wide range of investors, 580 00:31:02,600 --> 00:31:05,560 Speaker 3: you know, ranging from high net worth all the way 581 00:31:05,680 --> 00:31:09,400 Speaker 3: up to pensions and insurance companies. Typically non US investors 582 00:31:09,520 --> 00:31:14,360 Speaker 3: are looking to get US exposure, and clos and col 583 00:31:14,440 --> 00:31:18,000 Speaker 3: equity specifically allow investors outside of the US to get 584 00:31:18,000 --> 00:31:23,160 Speaker 3: access to corporate America in a very diversified, efficient fashion. 585 00:31:23,480 --> 00:31:26,360 Speaker 3: So it's it's investors looking to have exposure to credit 586 00:31:26,400 --> 00:31:29,320 Speaker 3: data in the US in a way that isolates credit 587 00:31:29,360 --> 00:31:31,840 Speaker 3: default risk without you know, exposing you to other types 588 00:31:31,840 --> 00:31:33,440 Speaker 3: of risk like interest rates, et cetera. 589 00:31:33,760 --> 00:31:37,520 Speaker 1: One other aspects of the complexity premium. As you mentioned it, 590 00:31:37,600 --> 00:31:39,640 Speaker 1: there is this kind of misunderstanding of what these things 591 00:31:39,640 --> 00:31:42,520 Speaker 1: are and then you should get paid more because they're complicated, 592 00:31:42,720 --> 00:31:45,080 Speaker 1: although you know, you could argue that they're not that complicated really, 593 00:31:45,080 --> 00:31:48,880 Speaker 1: but they are also often in the in the lens 594 00:31:48,880 --> 00:31:53,400 Speaker 1: of regulators and you know, government entities, and you know, 595 00:31:54,240 --> 00:31:56,280 Speaker 1: for this reason, and you know, people sort of worry 596 00:31:56,280 --> 00:31:58,440 Speaker 1: about what they don't really understand. But do you expect 597 00:31:58,520 --> 00:32:02,080 Speaker 1: more headwinds from regulators as this kind of you know, 598 00:32:02,240 --> 00:32:05,120 Speaker 1: product get gets pushed more broadly to investors. 599 00:32:05,200 --> 00:32:09,080 Speaker 3: I don't think so. Of course, we are seeing an expansion, 600 00:32:09,120 --> 00:32:13,040 Speaker 3: as we mentioned earlier, of the product into the retail space, 601 00:32:13,080 --> 00:32:15,880 Speaker 3: where I do think it's appropriate for regulators to ensure 602 00:32:15,920 --> 00:32:20,120 Speaker 3: that those investors understand what they are potentially getting exposed to. 603 00:32:20,920 --> 00:32:23,160 Speaker 3: But in general, the ASCA class, of course, has been 604 00:32:23,360 --> 00:32:26,760 Speaker 3: regulated and owned by a very wide variety of investors 605 00:32:26,800 --> 00:32:30,400 Speaker 3: across the world, and is generally very well understood by 606 00:32:30,520 --> 00:32:32,400 Speaker 3: by regulators and market participants. 607 00:32:32,640 --> 00:32:34,080 Speaker 1: And is it true to say I mean this has 608 00:32:34,120 --> 00:32:37,000 Speaker 1: been this has been mentioned a few times that the 609 00:32:37,040 --> 00:32:43,680 Speaker 1: equity trund or equity in clos actually performed okay through 610 00:32:43,720 --> 00:32:45,000 Speaker 1: the finished crisis. 611 00:32:45,800 --> 00:32:50,440 Speaker 3: It performed better than okay, performed outstandingly well. So that 612 00:32:50,640 --> 00:32:53,760 Speaker 3: set of vintages generated close to a nineteen twenty percent 613 00:32:53,800 --> 00:32:57,640 Speaker 3: i r R, which is one of the best vintages historically. 614 00:32:58,240 --> 00:33:02,080 Speaker 3: There were very unique reasons for them at including financing 615 00:33:02,160 --> 00:33:05,680 Speaker 3: at so for libor plus forty five basis points, which 616 00:33:05,960 --> 00:33:08,520 Speaker 3: we will not likely have again. But the power of 617 00:33:08,680 --> 00:33:12,200 Speaker 3: volatility and a locked in liability structure really shown through 618 00:33:12,240 --> 00:33:15,600 Speaker 3: in that in that environment. So if you invest appropriately, 619 00:33:15,640 --> 00:33:20,040 Speaker 3: prudently and have the right managers, going through volatility is 620 00:33:20,040 --> 00:33:24,400 Speaker 3: actually an incredibly valuable exercise for COLO equity, and it's 621 00:33:24,480 --> 00:33:27,200 Speaker 3: quite paradoxical for many For many folks looking at the 622 00:33:27,200 --> 00:33:28,680 Speaker 3: asset class for the first time. 623 00:33:29,960 --> 00:33:32,600 Speaker 1: Twenty percent. That was through what like two thousand and six, 624 00:33:32,640 --> 00:33:33,640 Speaker 1: two thousand and eight or nine. 625 00:33:33,720 --> 00:33:37,000 Speaker 3: What was the period, so pre crisis vintages, Yes, two 626 00:33:37,000 --> 00:33:39,080 Speaker 3: thousand and five to two thousand and seven roughly. 627 00:33:39,160 --> 00:33:41,080 Speaker 1: Yeah, okay, and then what about COVID. 628 00:33:42,880 --> 00:33:46,400 Speaker 3: COVID also actually had some very very good vintages, So 629 00:33:46,440 --> 00:33:49,600 Speaker 3: twenty twenty is an outstanding vintage. The reason for that 630 00:33:49,720 --> 00:33:53,280 Speaker 3: was that although liabilities were quite wide at that time, 631 00:33:54,000 --> 00:33:56,960 Speaker 3: investors were able to source assets at very cheap prices 632 00:33:57,480 --> 00:34:00,160 Speaker 3: uh and then see a very rapid price recovery. So 633 00:34:00,200 --> 00:34:05,800 Speaker 3: they monetized five to six points of discount timesten leverage, 634 00:34:05,800 --> 00:34:08,120 Speaker 3: which of course gets you a very very nice return 635 00:34:08,400 --> 00:34:09,560 Speaker 3: on an annualized basis. 636 00:34:09,640 --> 00:34:10,600 Speaker 1: What do you expect for this year? 637 00:34:11,160 --> 00:34:13,760 Speaker 3: We expect this year to be more of a vanilla 638 00:34:14,160 --> 00:34:17,960 Speaker 3: investment here in the sense that we are really putting 639 00:34:18,120 --> 00:34:20,440 Speaker 3: transactions on at the moment in the new issue market 640 00:34:20,719 --> 00:34:23,399 Speaker 3: for the value of the cheap liabilities. We are once 641 00:34:23,440 --> 00:34:27,040 Speaker 3: again close to twenty eighteen tights from an overall cost 642 00:34:27,040 --> 00:34:29,160 Speaker 3: of funding perspective, and so the value that you are 643 00:34:29,200 --> 00:34:31,319 Speaker 3: locking in as an equitin investor is the cheapness of 644 00:34:31,320 --> 00:34:36,480 Speaker 3: that financing structure, and very good opportunity, as I noted earlier, 645 00:34:36,520 --> 00:34:40,400 Speaker 3: to monetize short term periods of volatility, which seems to 646 00:34:40,400 --> 00:34:42,680 Speaker 3: have been a very common theme this year. 647 00:34:43,440 --> 00:34:46,640 Speaker 1: So, Vanilla, what does that mean? Ten percent? Fifteen? What's 648 00:34:46,680 --> 00:34:47,919 Speaker 1: the number the teen? 649 00:34:48,160 --> 00:34:51,440 Speaker 3: So anywhere from? You know, thirteen and a half fifteen percent? 650 00:34:52,320 --> 00:34:54,000 Speaker 1: Okay, still not bad. 651 00:34:54,800 --> 00:34:58,920 Speaker 3: Very very good relative to the risk and dag. 652 00:34:58,960 --> 00:35:02,440 Speaker 2: You know, AI is making its presence felt in the 653 00:35:02,480 --> 00:35:04,879 Speaker 2: financial world. You know, I can't even count how many 654 00:35:04,880 --> 00:35:07,399 Speaker 2: times we hear it. To hear that word today over 655 00:35:07,480 --> 00:35:09,600 Speaker 2: here at Bloomberg, you know, do you use it in 656 00:35:09,600 --> 00:35:12,640 Speaker 2: any of your investment processes? And have any of your 657 00:35:12,640 --> 00:35:15,280 Speaker 2: managers embraced AI in their investment process? 658 00:35:16,840 --> 00:35:20,560 Speaker 3: We certainly do, and it's been a very very important 659 00:35:21,040 --> 00:35:24,640 Speaker 3: part of the evolution of our systems and has made 660 00:35:24,719 --> 00:35:27,200 Speaker 3: us very very efficient. One of the things that we've 661 00:35:27,200 --> 00:35:32,680 Speaker 3: seen over the lifespan of our investment strategy is of course, 662 00:35:32,719 --> 00:35:35,759 Speaker 3: an expansion of data availability, which is power when you're 663 00:35:35,760 --> 00:35:39,080 Speaker 3: making investments, and for us, we focused a lot of 664 00:35:39,120 --> 00:35:42,480 Speaker 3: the systems development on ensuring that we're using data that 665 00:35:43,719 --> 00:35:47,279 Speaker 3: others may have available in a more efficient and more 666 00:35:47,360 --> 00:35:50,360 Speaker 3: unique way, and also that we're sourcing other data that 667 00:35:50,400 --> 00:35:52,400 Speaker 3: others may not be looking at in a way that 668 00:35:52,560 --> 00:35:55,440 Speaker 3: powers us to be more effective in making investment decisions. 669 00:35:55,760 --> 00:35:58,239 Speaker 3: So we think that it's a really important tool we do. 670 00:35:58,239 --> 00:36:00,960 Speaker 3: You know that some of our managers are also increasingly 671 00:36:01,200 --> 00:36:03,600 Speaker 3: relying on it, And even if it's something simple like 672 00:36:03,680 --> 00:36:09,239 Speaker 3: making routine operational processes more efficient, improving risk management over time, 673 00:36:09,280 --> 00:36:11,680 Speaker 3: we think that those will be very powerful additions to 674 00:36:11,960 --> 00:36:12,600 Speaker 3: the toolbox. 675 00:36:14,239 --> 00:36:16,160 Speaker 1: Our listeners will know that at this point of the show. 676 00:36:16,160 --> 00:36:18,759 Speaker 1: I always I always like to ask, what is your edge? 677 00:36:19,160 --> 00:36:21,279 Speaker 1: How do you differentiate yourself? What are you doing that's 678 00:36:21,280 --> 00:36:22,000 Speaker 1: different to the rest. 679 00:36:24,600 --> 00:36:28,360 Speaker 3: I think that our edge, of course, is our expertise 680 00:36:28,400 --> 00:36:33,279 Speaker 3: and length of understanding what this market looks like, knowing 681 00:36:33,360 --> 00:36:37,799 Speaker 3: managers and knowing market participants very well. But equally importantly, 682 00:36:38,040 --> 00:36:42,480 Speaker 3: it is our humbleness and discipline and our desire to 683 00:36:43,239 --> 00:36:47,120 Speaker 3: focus always on maximizing returns rather than any other objective. 684 00:36:47,520 --> 00:36:50,200 Speaker 3: And that is something that we think is really important, 685 00:36:50,200 --> 00:36:53,320 Speaker 3: particularly a time like we're in today, where risk premium 686 00:36:53,320 --> 00:36:56,000 Speaker 3: are compressed and investment decision making is a lot more 687 00:36:56,040 --> 00:36:57,840 Speaker 3: challenging than it is during a dislocation. 688 00:36:58,760 --> 00:37:01,279 Speaker 1: Do you need to grow in the age of like 689 00:37:01,480 --> 00:37:03,920 Speaker 1: trillion dollar multi trillion dollar managers? Do you think that 690 00:37:03,960 --> 00:37:06,160 Speaker 1: the tetrigon needs to gain more scale? 691 00:37:06,640 --> 00:37:09,320 Speaker 3: Look, a little bit more scale is always is always 692 00:37:09,320 --> 00:37:11,440 Speaker 3: desirable and helpful, But of course you don't want to 693 00:37:11,480 --> 00:37:15,680 Speaker 3: get so large that the opportunity set is not appropriate 694 00:37:15,719 --> 00:37:17,640 Speaker 3: for the capital that you have. So we really think 695 00:37:17,680 --> 00:37:20,520 Speaker 3: that being capacity constrained and having the right amount of 696 00:37:20,560 --> 00:37:24,480 Speaker 3: capital for the opportunity set is important. A lot of 697 00:37:24,520 --> 00:37:27,160 Speaker 3: capital has been raised in the space by as the 698 00:37:27,239 --> 00:37:32,440 Speaker 3: managers themselves, you're so called captive funds, and so that has, 699 00:37:32,200 --> 00:37:34,800 Speaker 3: in my view at least eroded a little bit of 700 00:37:34,840 --> 00:37:37,880 Speaker 3: the discipline that should be in place for scale of equity. 701 00:37:38,520 --> 00:37:41,080 Speaker 3: And so we think that you know, being nimble and 702 00:37:41,120 --> 00:37:44,439 Speaker 3: the right size and potentially a little bit smaller than 703 00:37:44,560 --> 00:37:47,160 Speaker 3: you would ordinarily think is not a bad is not 704 00:37:47,200 --> 00:37:48,200 Speaker 3: a bad position to be in. 705 00:37:49,360 --> 00:37:51,480 Speaker 1: Is there one big credit opportunity out there? You think 706 00:37:51,520 --> 00:37:53,880 Speaker 1: people are missing one big thing that you know, you 707 00:37:53,920 --> 00:37:55,920 Speaker 1: think is the best relative value right now? 708 00:37:56,120 --> 00:37:58,680 Speaker 3: I don't. I don't necessarily think that folks are missing 709 00:37:58,719 --> 00:38:00,880 Speaker 3: the opportunity and scale equity, but I would highlight that 710 00:38:00,920 --> 00:38:04,279 Speaker 3: as a continued opportunity. Of course, potentially a biased view 711 00:38:04,280 --> 00:38:06,880 Speaker 3: given my dedication to the asset class, but it is 712 00:38:06,920 --> 00:38:10,120 Speaker 3: an asset class that's delivered some very powerful things in 713 00:38:10,200 --> 00:38:14,440 Speaker 3: a single asset category. So again it's teams returns, high 714 00:38:14,520 --> 00:38:18,400 Speaker 3: current cash flows, and diversification because the asset class, through 715 00:38:18,400 --> 00:38:21,640 Speaker 3: its cash flow generation, actually exhibits very low correlation with 716 00:38:21,680 --> 00:38:24,080 Speaker 3: other things that you would have in a multi asset portfolio, 717 00:38:24,680 --> 00:38:28,160 Speaker 3: and I think relatively risk profile today you would need 718 00:38:28,200 --> 00:38:31,279 Speaker 3: to really take some esoteric credit risks and counter party 719 00:38:31,360 --> 00:38:34,080 Speaker 3: risks to generate those returns. And here we are in 720 00:38:34,160 --> 00:38:36,640 Speaker 3: Vanilla Corporate America just using a little bit of leverage 721 00:38:36,640 --> 00:38:40,439 Speaker 3: in financial engineering to generate those returns. So we think, 722 00:38:40,520 --> 00:38:42,920 Speaker 3: I think that it's a really compelling opportunity and it 723 00:38:42,960 --> 00:38:45,279 Speaker 3: makes sense to add to a portfolio. 724 00:38:45,880 --> 00:38:48,960 Speaker 1: It's interesting to know, also, Vanilla America, these loans are 725 00:38:49,080 --> 00:38:52,160 Speaker 1: basically to companies that people kind of know that household names, right, 726 00:38:52,160 --> 00:38:55,239 Speaker 1: they're not obscure, you know, private equity shells that are 727 00:38:55,239 --> 00:38:57,799 Speaker 1: paying dividends that they're actually you know, companies you can 728 00:38:57,800 --> 00:39:00,160 Speaker 1: see out on the high street exactly. 729 00:39:00,200 --> 00:39:04,319 Speaker 3: So it's American airlines and other businesses that you use 730 00:39:04,520 --> 00:39:08,320 Speaker 3: and know. So it's getting access to what drives growth 731 00:39:08,320 --> 00:39:11,680 Speaker 3: in the US and finances that growth, which ultimately has 732 00:39:11,680 --> 00:39:14,000 Speaker 3: been a core part of the successive of the US, 733 00:39:14,040 --> 00:39:16,160 Speaker 3: getting that efficiency of capital markets. 734 00:39:16,640 --> 00:39:19,600 Speaker 1: But as a credit veteran, you must be worried about something. 735 00:39:19,640 --> 00:39:21,040 Speaker 1: I mean, we worry about stuff all the time. What 736 00:39:21,360 --> 00:39:23,480 Speaker 1: keeps you up at night? Dog worrying about the outlook. 737 00:39:23,600 --> 00:39:25,719 Speaker 3: It's my job to worry all the time, although you 738 00:39:25,719 --> 00:39:29,040 Speaker 3: know glass half full, I guess as an equity investor 739 00:39:29,040 --> 00:39:33,120 Speaker 3: in credit, I worry about ultimately the loss performance of 740 00:39:33,160 --> 00:39:36,120 Speaker 3: the ATHA class given the amount of capital that's flashing 741 00:39:36,160 --> 00:39:38,640 Speaker 3: around in the system, and potentially the erosion of discipline. 742 00:39:39,239 --> 00:39:43,640 Speaker 3: I also worry about where the economy is heading. We've 743 00:39:43,680 --> 00:39:46,399 Speaker 3: had We've been waiting for a recesion in the US 744 00:39:46,440 --> 00:39:48,839 Speaker 3: for many years now, and it certainly will come at 745 00:39:48,880 --> 00:39:52,200 Speaker 3: some point. So spending a lot of time thinking about 746 00:39:52,239 --> 00:39:54,279 Speaker 3: how we position for that, you know, making sure that 747 00:39:54,320 --> 00:39:57,320 Speaker 3: we're building portfolios that are resilient and diversified enough to 748 00:39:57,360 --> 00:40:00,839 Speaker 3: withstand that downturn eventually, which create opportunity. 749 00:40:01,280 --> 00:40:06,080 Speaker 1: Great stuff. Dag Michael Chuck Cocio at Tetragon Credit Partners, 750 00:40:06,800 --> 00:40:08,160 Speaker 1: thank you for being on the Credit Edge. 751 00:40:08,520 --> 00:40:10,239 Speaker 3: Thank you, pleasure chatting with you, and. 752 00:40:10,160 --> 00:40:12,960 Speaker 1: Of course very grateful to Mike Campalone from Bloomberg Intelligence. 753 00:40:13,040 --> 00:40:15,200 Speaker 2: Cheers Mike, Thanks James, Thanks Dag. 754 00:40:15,320 --> 00:40:17,719 Speaker 1: For more credit market analysis and insight, read all of 755 00:40:17,760 --> 00:40:20,880 Speaker 1: Mike's great work on the Bloomberg Terminal. Bloomberg Intelligence is 756 00:40:20,920 --> 00:40:23,279 Speaker 1: part of our research department, with five hundred analysts and 757 00:40:23,320 --> 00:40:26,880 Speaker 1: strategists working across all markets. Courage includes over two thousand 758 00:40:26,920 --> 00:40:29,640 Speaker 1: equities and credits pus outlooks on more than ninety industries 759 00:40:29,680 --> 00:40:33,759 Speaker 1: and one hundred market indices, currencies and commodities. Please do 760 00:40:33,880 --> 00:40:36,520 Speaker 1: subscribe to The Credit Edge wherever you get your podcasts. 761 00:40:36,520 --> 00:40:39,720 Speaker 1: We're on Apple, Spotify and all other good podcast providers, 762 00:40:39,760 --> 00:40:42,880 Speaker 1: including the Bloomberg Terminal at b pod Go. Give us 763 00:40:42,880 --> 00:40:46,000 Speaker 1: a review, tell your friends, or email me directly at 764 00:40:46,160 --> 00:40:50,480 Speaker 1: jcrombieight at Bloomberg dot net. I'm James Crombie. It's been 765 00:40:50,520 --> 00:40:53,000 Speaker 1: a pleasure having you join us again next week on 766 00:40:53,040 --> 00:41:08,000 Speaker 1: the Credit Edge.