1 00:00:17,880 --> 00:00:20,599 Speaker 1: Hello, and welcome to the Credit Edge Weekly Markets podcast. 2 00:00:20,680 --> 00:00:22,759 Speaker 1: My name is James Crombie. I'm a senior editor at 3 00:00:22,800 --> 00:00:23,840 Speaker 1: Bloomberg and. 4 00:00:23,800 --> 00:00:27,120 Speaker 2: I'm Tim Rimington, a senior analyst covering basic materials at 5 00:00:27,160 --> 00:00:31,000 Speaker 2: Bloomberg Intelligence. This week, we're very pleased to welcome Rob Deforne, 6 00:00:31,560 --> 00:00:34,600 Speaker 2: chief investment officer at Polus Capital Management, which invests in 7 00:00:34,600 --> 00:00:37,240 Speaker 2: special situations leveraged and structured credit. 8 00:00:37,479 --> 00:00:39,680 Speaker 3: How are you, Rob, Oh, very well, thank you, Thanks 9 00:00:39,680 --> 00:00:40,440 Speaker 3: for having me today. 10 00:00:40,680 --> 00:00:43,880 Speaker 2: Great to have you here. So Rob, you founded baby 11 00:00:43,880 --> 00:00:48,040 Speaker 2: Brook Capital back in twenty fourteen, which, after a merger 12 00:00:48,200 --> 00:00:51,400 Speaker 2: with Karen Capital, went on to become Polus and now 13 00:00:51,440 --> 00:00:54,720 Speaker 2: manages more than twelve billion in aum. Before that, you 14 00:00:54,720 --> 00:00:57,880 Speaker 2: were a partner at Eton Park and previously at Millennium. 15 00:00:58,000 --> 00:01:00,440 Speaker 2: So I have to say, as a highield analyst, I'm 16 00:01:00,480 --> 00:01:03,920 Speaker 2: very excited to be here asking you the questions. It's 17 00:01:03,920 --> 00:01:08,080 Speaker 2: normally the other way around, so I'm very excited to 18 00:01:08,080 --> 00:01:10,759 Speaker 2: hear what you have to say and heading over to James. 19 00:01:11,000 --> 00:01:12,480 Speaker 1: Yeah, So before we get to the questions, I just 20 00:01:12,480 --> 00:01:14,360 Speaker 1: want to set the scene a bit. Markets are on 21 00:01:14,600 --> 00:01:17,360 Speaker 1: edge after the US lost its triple A credit rating, 22 00:01:17,760 --> 00:01:19,800 Speaker 1: Moody's was only really following the lead of the other 23 00:01:19,880 --> 00:01:22,800 Speaker 1: rating agencies, so the cut should not have been a surprise, 24 00:01:23,120 --> 00:01:25,400 Speaker 1: but it does come as another reminder of the fragile 25 00:01:25,440 --> 00:01:28,600 Speaker 1: state of US government finances, calling into question the concept 26 00:01:28,600 --> 00:01:32,200 Speaker 1: of risk free rate while also reigniting the Cell America trade. 27 00:01:32,640 --> 00:01:35,479 Speaker 1: Despite this, credit markets are projecting an air of calm 28 00:01:35,600 --> 00:01:38,319 Speaker 1: and optimism about the economy. All the losses from the 29 00:01:38,319 --> 00:01:41,160 Speaker 1: so called Liberation Day have been erased. Bond spreads are 30 00:01:41,200 --> 00:01:43,360 Speaker 1: back to where they were before the US announced tariffs 31 00:01:43,400 --> 00:01:47,440 Speaker 1: that were effectively embargoes, but the tide didn't lift all boats. 32 00:01:47,560 --> 00:01:50,560 Speaker 1: Spreads on the lowest quality corporate debt remain wide to 33 00:01:50,600 --> 00:01:53,840 Speaker 1: long term averages, indicating some concern about whether the weak, 34 00:01:54,080 --> 00:01:57,840 Speaker 1: highly indebted companies can survive as earnings decline and stagflation 35 00:01:58,000 --> 00:02:01,160 Speaker 1: risks rise. So what do you make of it? Credit 36 00:02:01,160 --> 00:02:03,040 Speaker 1: spreads would suggest that we're all in the clear now, 37 00:02:03,080 --> 00:02:05,120 Speaker 1: everything's going to be okay. What's your take? 38 00:02:05,640 --> 00:02:09,640 Speaker 3: Well, yes, I think the there's obviously been an amount 39 00:02:09,680 --> 00:02:12,720 Speaker 3: of technical strength and credit hasn't there as they have 40 00:02:12,840 --> 00:02:15,840 Speaker 3: been in most risk markets over the last few weeks. 41 00:02:15,919 --> 00:02:19,119 Speaker 3: But you know, I don't think we necessarily see the 42 00:02:19,160 --> 00:02:23,040 Speaker 3: fundamental picture having been the sounding of an all clear. 43 00:02:24,280 --> 00:02:26,040 Speaker 3: You know, for us, I think as you as you 44 00:02:26,120 --> 00:02:30,600 Speaker 3: alluded to, we were actually at pretty much embargo conditions 45 00:02:31,720 --> 00:02:35,800 Speaker 3: and we've now gone to you know, from embargo and 46 00:02:35,880 --> 00:02:40,520 Speaker 3: potential kind of meaningful shock, meaningful non linear moment for 47 00:02:40,560 --> 00:02:44,560 Speaker 3: the economy, and we've pivoted that to know, a rewiring 48 00:02:44,639 --> 00:02:48,679 Speaker 3: of trade, and from that kind of more acute kind 49 00:02:48,680 --> 00:02:52,120 Speaker 3: of you know, let's call it real shock, we're moving 50 00:02:52,160 --> 00:02:57,160 Speaker 3: into a more sustainable, but longer duration potentially rewiring of trade, 51 00:02:57,160 --> 00:03:00,200 Speaker 3: which will just be you know, very very costly for 52 00:03:00,240 --> 00:03:06,320 Speaker 3: the global economy and certainly for the US manufacturing goods, importers, 53 00:03:06,320 --> 00:03:09,600 Speaker 3: et cetera. So you know, we definitely see the likelihood 54 00:03:09,600 --> 00:03:15,000 Speaker 3: of a fundamental impact to be setting in and setting 55 00:03:15,040 --> 00:03:19,320 Speaker 3: in for the medium term. So you know, it's with that, 56 00:03:19,400 --> 00:03:22,600 Speaker 3: I think obviously the markets have there are those technical 57 00:03:22,639 --> 00:03:26,240 Speaker 3: forces and kind of you know, people were underweight and 58 00:03:26,280 --> 00:03:29,760 Speaker 3: they sold a lot of risk and they had cash 59 00:03:29,800 --> 00:03:33,240 Speaker 3: balances coming into this, but they've really bought into the 60 00:03:33,360 --> 00:03:37,080 Speaker 3: idea that an all clear has been sounded. From a 61 00:03:37,120 --> 00:03:40,240 Speaker 3: pricing perspective, I think that does provide a medium term 62 00:03:40,280 --> 00:03:43,080 Speaker 3: opportunity to take to take the other side. 63 00:03:42,840 --> 00:03:45,400 Speaker 2: Of it, and I think just following on from that 64 00:03:45,480 --> 00:03:48,040 Speaker 2: on the on the macro side. You know, one of 65 00:03:48,120 --> 00:03:49,880 Speaker 2: the things that I've seen in my coverage and Basic 66 00:03:49,920 --> 00:03:54,200 Speaker 2: Materials is essentially we've been in an industrial recession for 67 00:03:54,280 --> 00:03:58,680 Speaker 2: the past three years already, from around twenty twenty two, 68 00:04:00,000 --> 00:04:03,560 Speaker 2: and you know, we've heard again and again about this recovery, 69 00:04:03,640 --> 00:04:07,280 Speaker 2: you know, this H two recovery that never really materializes. 70 00:04:07,880 --> 00:04:10,480 Speaker 2: You know, do you think this shock that you know 71 00:04:10,560 --> 00:04:13,280 Speaker 2: might be materializing now is going to be the sort 72 00:04:13,280 --> 00:04:17,760 Speaker 2: of catalyst to sort of trigger another leg down. 73 00:04:18,360 --> 00:04:21,560 Speaker 3: I think it is more likely than not. Would definitely 74 00:04:21,560 --> 00:04:25,680 Speaker 3: be how we're thinking about it. So you know what 75 00:04:25,720 --> 00:04:28,800 Speaker 3: you mentioned there about the sort of we have been 76 00:04:28,839 --> 00:04:31,880 Speaker 3: in relatively tough conditions for the last three years, so 77 00:04:32,160 --> 00:04:36,720 Speaker 3: we would absolutely agree with what we see. You know 78 00:04:37,200 --> 00:04:40,240 Speaker 3: right now is obviously your market very very focused on 79 00:04:40,320 --> 00:04:43,239 Speaker 3: sort of the next piece of information, the next piece 80 00:04:43,240 --> 00:04:46,800 Speaker 3: of news, whether it's tariffs, whether it's you know, US 81 00:04:46,960 --> 00:04:49,680 Speaker 3: rateing downgrades. But what it all really is is the 82 00:04:49,800 --> 00:04:52,400 Speaker 3: end of a fifteen year cycle, and this is a 83 00:04:52,480 --> 00:04:56,560 Speaker 3: late cycle. This is a late cycle time at the 84 00:04:56,720 --> 00:04:59,800 Speaker 3: end of you know, ultimately a pretty long period in 85 00:05:00,120 --> 00:05:04,040 Speaker 3: the most drawn out cycles that's been unsustainably and in 86 00:05:04,080 --> 00:05:10,160 Speaker 3: many ways artificially sustained for a few extra years. And 87 00:05:11,320 --> 00:05:14,479 Speaker 3: you know, is with that we do see as you say, 88 00:05:14,600 --> 00:05:19,120 Speaker 3: kind of that industrial recession. Yeah, you know, they have 89 00:05:19,279 --> 00:05:22,080 Speaker 3: been there have been various sub sectors that have been 90 00:05:22,160 --> 00:05:25,400 Speaker 3: struggling for the last few years, which is what you 91 00:05:25,480 --> 00:05:28,839 Speaker 3: get at the tail end of the cycle. You know, 92 00:05:28,880 --> 00:05:31,680 Speaker 3: we've been told about the restocking that was coming in 93 00:05:31,760 --> 00:05:36,600 Speaker 3: chemicals right for quite a while. There's obviously the early 94 00:05:36,680 --> 00:05:39,359 Speaker 3: losers at the tail end of a cycle, which you know, 95 00:05:39,360 --> 00:05:43,359 Speaker 3: if you're looking at basic materials, building products, and that 96 00:05:43,480 --> 00:05:49,159 Speaker 3: exposure to the housing market which has been lackluster, you 97 00:05:49,160 --> 00:05:52,680 Speaker 3: know since twenty twenty two, and the rise in interest 98 00:05:52,760 --> 00:05:55,839 Speaker 3: rates globally. So there have been a number of sectors 99 00:05:55,920 --> 00:06:00,479 Speaker 3: which have been stuttering. And you know what is actually 100 00:06:00,640 --> 00:06:04,240 Speaker 3: the most interesting, to be honest, is over that three years, 101 00:06:04,400 --> 00:06:09,880 Speaker 3: how you know we have avoided major issues already, right, 102 00:06:09,960 --> 00:06:13,320 Speaker 3: I mean I think that this, you know, our characterization 103 00:06:13,480 --> 00:06:16,880 Speaker 3: of the market, well the economy in a late cycle 104 00:06:16,960 --> 00:06:20,880 Speaker 3: period really does suggest that, you know, we are to 105 00:06:20,880 --> 00:06:23,839 Speaker 3: some extent on borrow time and you're really looking for 106 00:06:23,960 --> 00:06:27,640 Speaker 3: kind of what is the catalyst that tips it over 107 00:06:27,680 --> 00:06:31,280 Speaker 3: the edge in the end. And I think those kind 108 00:06:31,320 --> 00:06:35,920 Speaker 3: of very heavy goods associated sectors that you mentioned, which 109 00:06:35,960 --> 00:06:41,120 Speaker 3: are have interest rate sensitive end consumer demand are clearly 110 00:06:41,160 --> 00:06:44,880 Speaker 3: the ones which have been the weaker since twenty two 111 00:06:45,760 --> 00:06:49,960 Speaker 3: because those are the places where you know, end demand 112 00:06:50,080 --> 00:06:53,360 Speaker 3: was more constrained by the traditional interst rate function and 113 00:06:53,400 --> 00:06:57,719 Speaker 3: how it impacts consumer spending. I think kind of so 114 00:06:57,880 --> 00:07:00,200 Speaker 3: for us, you know, we really do feel that for 115 00:07:01,279 --> 00:07:04,320 Speaker 3: whatever shot comes down the pipe, we do think most 116 00:07:04,480 --> 00:07:08,920 Speaker 3: likely tariffs, but you know, it could equally be sovereign funding, 117 00:07:08,960 --> 00:07:11,520 Speaker 3: et cetera. There are several there are several things that 118 00:07:11,560 --> 00:07:14,400 Speaker 3: are kind of available at the end of this economic 119 00:07:14,440 --> 00:07:17,640 Speaker 3: cycle to be the ultimate one that breaks this breaks 120 00:07:17,680 --> 00:07:21,720 Speaker 3: the camera's back, as it were. But you know, they 121 00:07:21,760 --> 00:07:25,960 Speaker 3: all sit within a context of, you know, credit wasn't 122 00:07:26,000 --> 00:07:29,040 Speaker 3: that credit worthy over the last couple of years. You know, 123 00:07:29,360 --> 00:07:33,720 Speaker 3: we are looking at very very high debt to cash 124 00:07:33,760 --> 00:07:38,640 Speaker 3: flow statistics. We're looking at extremely high amounts adjustments of 125 00:07:38,760 --> 00:07:42,200 Speaker 3: adjustments to earnings, and none of these things can really 126 00:07:42,240 --> 00:07:46,840 Speaker 3: pay your debt, you know. So that's why the market 127 00:07:46,920 --> 00:07:49,640 Speaker 3: is somewhat more fragile in the credit sector is somewhat 128 00:07:49,640 --> 00:07:55,160 Speaker 3: more fragile in the lower rated spectrum to these forces. 129 00:07:55,760 --> 00:07:58,360 Speaker 1: I feel like we've been talking about this scenario for 130 00:07:58,480 --> 00:07:59,800 Speaker 1: years though, in terms of, you know, the end of 131 00:07:59,800 --> 00:08:02,840 Speaker 1: the cycle and a big distressed cycle coming, and there's 132 00:08:02,840 --> 00:08:05,200 Speaker 1: all this money been raised for that strategy, and yeah, 133 00:08:05,240 --> 00:08:07,160 Speaker 1: it just never happens, you know, certainly on mass. I 134 00:08:07,160 --> 00:08:09,600 Speaker 1: mean there's there's specific situations. You see, there's companies that 135 00:08:09,600 --> 00:08:12,120 Speaker 1: you kind of see dropping into trouble and you know 136 00:08:12,160 --> 00:08:14,120 Speaker 1: that they're going to get into worse trouble. But you 137 00:08:14,120 --> 00:08:17,680 Speaker 1: know the size of that that opportunity just seems so 138 00:08:17,720 --> 00:08:19,840 Speaker 1: small relative to the whole market. So so why should 139 00:08:19,840 --> 00:08:21,760 Speaker 1: we worry? Now, what's the tipping point that we're really 140 00:08:21,760 --> 00:08:24,360 Speaker 1: focused on. What are the signs that you're seeing to 141 00:08:24,440 --> 00:08:25,200 Speaker 1: show that's coming. 142 00:08:25,800 --> 00:08:29,720 Speaker 3: Yeah, Look, it's the process, right, The creation of of 143 00:08:29,720 --> 00:08:34,080 Speaker 3: of excess misallocated credit is very much a process, and 144 00:08:34,120 --> 00:08:37,600 Speaker 3: it takes place over a sustained period of time, and 145 00:08:38,600 --> 00:08:42,439 Speaker 3: that you know, that was really the build up of 146 00:08:43,000 --> 00:08:46,600 Speaker 3: debt through that low interest rate period that we've had 147 00:08:46,640 --> 00:08:51,520 Speaker 3: since the GFC. So you know, the statistics really are 148 00:08:51,559 --> 00:08:53,720 Speaker 3: that we have seen that incredible pick up in just 149 00:08:53,760 --> 00:08:57,280 Speaker 3: the amount of the volume of sub investment. Great credit. 150 00:08:57,400 --> 00:09:00,600 Speaker 3: You know, we're not worried about credit in general. Investment 151 00:09:00,640 --> 00:09:03,320 Speaker 3: grade balance sheets are very strong, and you know, there 152 00:09:03,400 --> 00:09:07,600 Speaker 3: was a corporate windfall from effectively the pandemic and the 153 00:09:07,640 --> 00:09:11,840 Speaker 3: pandemic in era stimulus. So investment grade companies are about 154 00:09:11,840 --> 00:09:14,400 Speaker 3: as about as good as they have been. Yeah, they've 155 00:09:14,760 --> 00:09:18,080 Speaker 3: they've maybe overspent a little bit on buybacks, right, you know, 156 00:09:18,240 --> 00:09:20,960 Speaker 3: ultimately and kind of left a bit of leverage on 157 00:09:21,080 --> 00:09:24,600 Speaker 3: balance sheets. There are, of course a few exceptions which 158 00:09:24,640 --> 00:09:28,080 Speaker 3: are a little bit weak, but you know, by and 159 00:09:28,160 --> 00:09:30,800 Speaker 3: large igs okay. But high yield went from being that 160 00:09:30,880 --> 00:09:34,240 Speaker 3: niche asset class to you know, very much mainstream post 161 00:09:34,240 --> 00:09:38,240 Speaker 3: to GFC maybe five hundred billion dollars of loan and 162 00:09:38,520 --> 00:09:43,280 Speaker 3: high year bonds outstanding, which is now five trillion dollars. Right, 163 00:09:43,520 --> 00:09:46,360 Speaker 3: ten x the number of names, you've ten x the amount. 164 00:09:47,600 --> 00:09:49,880 Speaker 3: But in that period of time, actually a lot of 165 00:09:49,880 --> 00:09:52,520 Speaker 3: the sort of number of eyeballs looking at things has 166 00:09:52,559 --> 00:09:58,280 Speaker 3: been outsourced to passive you know, passive purchasing. So the 167 00:09:58,559 --> 00:10:00,599 Speaker 3: the kind of that has a lot the kind of 168 00:10:00,640 --> 00:10:02,600 Speaker 3: a man of scrutiny on a lot of the single 169 00:10:02,679 --> 00:10:06,720 Speaker 3: names to be reduced. So we definitely have kind of 170 00:10:06,720 --> 00:10:09,079 Speaker 3: through that process. You know. My point here is really 171 00:10:09,160 --> 00:10:12,040 Speaker 3: that we have been building up this misallocation as a 172 00:10:12,080 --> 00:10:15,320 Speaker 3: process and then kind of you know, credit always gets 173 00:10:15,360 --> 00:10:18,920 Speaker 3: to the same tipping point at the end of a cycle, 174 00:10:18,960 --> 00:10:22,160 Speaker 3: which is what is the point where you sort of 175 00:10:22,160 --> 00:10:26,000 Speaker 3: compare your growth rate the G, with your financing costs, 176 00:10:26,040 --> 00:10:29,480 Speaker 3: your interest rate the R, and what matters to servicing 177 00:10:29,559 --> 00:10:32,240 Speaker 3: credit is you kind of need a bigger G and 178 00:10:32,280 --> 00:10:37,120 Speaker 3: a smaller R. And obviously, through the period of low 179 00:10:37,200 --> 00:10:41,120 Speaker 3: interest rates the reason why credit was misallocated. Then you 180 00:10:41,160 --> 00:10:43,560 Speaker 3: can see that from kind of how much credit grew 181 00:10:44,000 --> 00:10:47,200 Speaker 3: relative to GDP, right, you know, so much more credit 182 00:10:47,200 --> 00:10:51,320 Speaker 3: growth than there than there was GDP growth. And you 183 00:10:51,400 --> 00:10:53,160 Speaker 3: get to the end of that process where you didn't 184 00:10:53,160 --> 00:10:55,559 Speaker 3: need much G. Right, you didn't need to be producing 185 00:10:55,640 --> 00:10:59,199 Speaker 3: much G you know, pre pandemic because because the R 186 00:10:59,320 --> 00:11:02,559 Speaker 3: was so low. Come out of kind of the pandemic era, 187 00:11:03,760 --> 00:11:06,440 Speaker 3: you know, twenty twenty two onwards, and we've seen kind 188 00:11:06,480 --> 00:11:08,880 Speaker 3: of the R, the financing costs, the risk free rate 189 00:11:08,960 --> 00:11:13,120 Speaker 3: for the economy pick up, but we haven't really seen 190 00:11:13,400 --> 00:11:18,120 Speaker 3: a ton of real growth. And then the thing that 191 00:11:18,200 --> 00:11:20,840 Speaker 3: kind of obviously everyone who was said, have said, well, look, 192 00:11:20,960 --> 00:11:23,480 Speaker 3: the moment where your our versus G mixed, your ORE 193 00:11:23,640 --> 00:11:27,360 Speaker 3: rises quickly and your G is constrained because you know, 194 00:11:27,440 --> 00:11:30,720 Speaker 3: the economy is ultimately interest rates sensitive, was when we 195 00:11:30,760 --> 00:11:33,439 Speaker 3: went into the hiking cycle of twenty two, And I 196 00:11:33,520 --> 00:11:36,920 Speaker 3: think it's pretty fair to say that would be attributed 197 00:11:36,960 --> 00:11:40,520 Speaker 3: to be a pretty good, you know, kind of starting 198 00:11:40,679 --> 00:11:44,599 Speaker 3: bell for the the the unraveling of what at the 199 00:11:44,640 --> 00:11:47,280 Speaker 3: time was a sort of twelve or thirteen year period 200 00:11:47,320 --> 00:11:50,480 Speaker 3: of pick up in debt. The reason why it didn't 201 00:11:51,559 --> 00:11:54,960 Speaker 3: is not, in my view, because the economy is no 202 00:11:55,080 --> 00:11:58,040 Speaker 3: longer interst rate sensitive or as interest rates sensitive as 203 00:11:58,040 --> 00:12:01,360 Speaker 3: it was, is actually that it was a very unusual 204 00:12:01,400 --> 00:12:05,320 Speaker 3: period where that monitor tightening came with an enormous fiscal loosening, 205 00:12:06,160 --> 00:12:09,880 Speaker 3: so the monasary tightening didn't bite as much as it 206 00:12:09,960 --> 00:12:13,800 Speaker 3: otherwise would have done, not only the fiscal loosening that 207 00:12:13,840 --> 00:12:16,280 Speaker 3: we saw twenty two to twenty three, twenty four, but 208 00:12:16,360 --> 00:12:20,280 Speaker 3: also kind of the legacy unspent fiscal funds from twenty 209 00:12:20,320 --> 00:12:22,720 Speaker 3: to twenty one. So really it has to be thought 210 00:12:22,760 --> 00:12:26,200 Speaker 3: of as a stock flow impact, which is ordinarily you know, 211 00:12:26,360 --> 00:12:29,480 Speaker 3: twenty two's interest rate cycle and the aftermath of it 212 00:12:29,480 --> 00:12:33,880 Speaker 3: would have created those higher interest rates, higher financing costs, 213 00:12:34,480 --> 00:12:38,040 Speaker 3: which would have you know, really started the pinch on 214 00:12:39,559 --> 00:12:43,800 Speaker 3: corporate credit balance sheets. But the economy was just awash 215 00:12:43,880 --> 00:12:46,679 Speaker 3: with fiscal money and then got more physical money, and 216 00:12:46,720 --> 00:12:50,080 Speaker 3: that did kind of that unsustainable element did did draw 217 00:12:50,160 --> 00:12:53,800 Speaker 3: out this tail end of the cycle. But you know, 218 00:12:54,400 --> 00:12:57,120 Speaker 3: the forces of physics and the forces of finance, you know, 219 00:12:57,440 --> 00:12:59,920 Speaker 3: they don't change, right, This is just a stock flower, 220 00:13:00,800 --> 00:13:04,080 Speaker 3: and we went into the usual kind of bad flow 221 00:13:04,200 --> 00:13:09,200 Speaker 3: piece of lower growth and higher financing costs, but with 222 00:13:09,360 --> 00:13:12,880 Speaker 3: a much larger stock, much larger buffer for the economy 223 00:13:13,520 --> 00:13:15,720 Speaker 3: to take it. But you know, we call this time 224 00:13:15,840 --> 00:13:18,320 Speaker 3: under tension, right, which is also the corporate don't. They 225 00:13:18,360 --> 00:13:22,280 Speaker 3: don't roll over at the first moment of a higher 226 00:13:22,320 --> 00:13:25,200 Speaker 3: interest rate. You kind of have to leave in place 227 00:13:25,320 --> 00:13:28,520 Speaker 3: that period of higher interest rates and lower growth for 228 00:13:28,679 --> 00:13:31,640 Speaker 3: a longer period. Is the time under tension, not just 229 00:13:31,679 --> 00:13:34,960 Speaker 3: the existence attention. And that time is a little bit 230 00:13:35,000 --> 00:13:38,760 Speaker 3: drawn more drawn out this time because of because of 231 00:13:38,800 --> 00:13:42,280 Speaker 3: the support that offset the monetary tightening that we had. 232 00:13:43,360 --> 00:13:46,200 Speaker 3: But it is real, right, and you do see kind 233 00:13:46,240 --> 00:13:49,199 Speaker 3: of it's more of a niche practice, but obviously you've 234 00:13:49,200 --> 00:13:54,600 Speaker 3: been a massive pickup in liability management distressed exchanges, and 235 00:13:54,760 --> 00:14:00,119 Speaker 3: we've had a pretty meaningful sort of default rate across 236 00:14:00,600 --> 00:14:03,240 Speaker 3: leverage loans and high yield right you know, for a 237 00:14:03,360 --> 00:14:06,880 Speaker 3: robust part of the cycle, it's been non zero, which 238 00:14:06,920 --> 00:14:10,720 Speaker 3: is which is unusual and is now being followed up. 239 00:14:10,840 --> 00:14:13,120 Speaker 3: What's super interesting right now when you think about that 240 00:14:13,200 --> 00:14:17,240 Speaker 3: kind of the impact that interest rates have. You know, 241 00:14:17,360 --> 00:14:20,880 Speaker 3: we're now starting to see that pickup in delinquencies, you know, 242 00:14:20,960 --> 00:14:26,680 Speaker 3: certainly in the US across credit card, auto loan, obviously 243 00:14:26,840 --> 00:14:29,360 Speaker 3: the end of student loan for bearns, the impact that 244 00:14:29,360 --> 00:14:31,840 Speaker 3: that has an f A h A mortgages. So I 245 00:14:31,840 --> 00:14:35,200 Speaker 3: think a large part of kind of that delayed reaction 246 00:14:35,520 --> 00:14:40,120 Speaker 3: coming through from from interest rate hikes is starting to 247 00:14:40,120 --> 00:14:44,080 Speaker 3: be seen in the data in the in the US consumer. 248 00:14:44,360 --> 00:14:46,120 Speaker 3: We're going to have it in Europe as well, with 249 00:14:46,200 --> 00:14:49,840 Speaker 3: a kind of moderate upwards drifting NPL. So you know, 250 00:14:50,000 --> 00:14:52,680 Speaker 3: think about it. We think about it as kind of 251 00:14:52,960 --> 00:14:55,720 Speaker 3: you know, the foothills before the mountain, as you can 252 00:14:55,800 --> 00:14:58,880 Speaker 3: kind of go on the slower sent and then and 253 00:14:58,920 --> 00:15:01,400 Speaker 3: then it kind of picks up more broadly after that. 254 00:15:01,640 --> 00:15:05,080 Speaker 3: So you don't always need a shock. I think like 255 00:15:05,160 --> 00:15:08,960 Speaker 3: the financial markets love to look for that one shock, 256 00:15:09,400 --> 00:15:12,240 Speaker 3: and it could actually just be a set of things 257 00:15:12,280 --> 00:15:16,600 Speaker 3: building in the background. If you allow me to the 258 00:15:16,720 --> 00:15:20,000 Speaker 3: labor my R versus G thing for a little bit longer, 259 00:15:20,040 --> 00:15:22,400 Speaker 3: I would say that, Well, the reason why tariffs are 260 00:15:22,400 --> 00:15:28,080 Speaker 3: a really interesting one is because they in it as 261 00:15:28,120 --> 00:15:31,360 Speaker 3: a supply shop for the US and a demand shock 262 00:15:31,480 --> 00:15:36,600 Speaker 3: for everyone that exports to the US, so simultaneous supply 263 00:15:36,680 --> 00:15:41,200 Speaker 3: demand shop. We don't see many simultaneous supply demand shocks, 264 00:15:41,680 --> 00:15:45,760 Speaker 3: So that's you know, highly likely to be a lower G, 265 00:15:47,280 --> 00:15:49,400 Speaker 3: and for every unit of lower G, you're going to 266 00:15:49,440 --> 00:15:53,200 Speaker 3: have a slightly stickier R. As we know sort of 267 00:15:53,240 --> 00:15:57,280 Speaker 3: central banks should be it should be slightly harder for 268 00:15:57,320 --> 00:16:00,200 Speaker 3: them to react to slow down in growth because this 269 00:16:00,240 --> 00:16:03,560 Speaker 3: is something that raises prices, even if it's only on 270 00:16:03,600 --> 00:16:07,640 Speaker 3: a one time basis. I dispute that, but you know, 271 00:16:07,640 --> 00:16:12,760 Speaker 3: because it's a supply shot. But you know, the you know, 272 00:16:12,960 --> 00:16:17,560 Speaker 3: you will make the G versus our mechanic harder. So 273 00:16:17,600 --> 00:16:22,400 Speaker 3: the interesting thing about about tariffs is you stop. You know, 274 00:16:22,560 --> 00:16:26,440 Speaker 3: My view would be we are starting with a difficult 275 00:16:26,480 --> 00:16:29,840 Speaker 3: starting point for the end of a cycle. Big pickup 276 00:16:29,880 --> 00:16:34,880 Speaker 3: in debt it has been sort of artificially extended by that, 277 00:16:35,160 --> 00:16:37,560 Speaker 3: by that fiscal policy, which is effectively allowed kind of 278 00:16:37,840 --> 00:16:41,160 Speaker 3: three years of additional poor management for those corporates to 279 00:16:41,360 --> 00:16:44,240 Speaker 3: stick into place, and then you're hitting it with you know, 280 00:16:44,320 --> 00:16:46,480 Speaker 3: what should be a credit negative shock at the end. 281 00:16:46,600 --> 00:16:50,200 Speaker 3: So it's very difficult time to be a kind of 282 00:16:50,320 --> 00:16:56,040 Speaker 3: highly levered corporate because obviously it is a companies do 283 00:16:56,120 --> 00:16:58,680 Speaker 3: have the ability to react to some of these things. 284 00:16:59,120 --> 00:17:01,200 Speaker 3: But if you've got a lot of debt than your 285 00:17:01,440 --> 00:17:04,879 Speaker 3: ability aware with all an effect of deep degrees of 286 00:17:04,960 --> 00:17:09,400 Speaker 3: freedom to act are meaningfully lower. And so I think 287 00:17:09,480 --> 00:17:12,399 Speaker 3: kind of, you know, leverage is really the enemy for 288 00:17:12,440 --> 00:17:13,560 Speaker 3: a corporate at this time. 289 00:17:14,359 --> 00:17:16,720 Speaker 2: And in terms of your strategy, you know, how are 290 00:17:16,800 --> 00:17:20,200 Speaker 2: you how are you positioned to take advantage of that view? 291 00:17:20,359 --> 00:17:24,600 Speaker 2: You know, you mentioned perhaps US markets might see more 292 00:17:24,600 --> 00:17:27,480 Speaker 2: opportunities there. You know, I think that's interesting, you know, 293 00:17:27,520 --> 00:17:30,679 Speaker 2: covering chemicals, the US has actually been until recently one 294 00:17:30,720 --> 00:17:33,360 Speaker 2: of the stronger markets and Europe's been the weak one. 295 00:17:33,680 --> 00:17:36,880 Speaker 2: But perhaps with the tariff shock that's now going to reverse. 296 00:17:37,960 --> 00:17:41,159 Speaker 3: Yeah, yeah, I mean, how we're positioning for it is 297 00:17:42,440 --> 00:17:46,360 Speaker 3: we do have a more substantial book of single name 298 00:17:46,880 --> 00:17:52,440 Speaker 3: high your credit shorts. So we have increased the let's 299 00:17:52,480 --> 00:17:55,680 Speaker 3: call it the percentage exposure of the fund as well 300 00:17:55,720 --> 00:17:58,639 Speaker 3: as the number of names that we're exposed to, because 301 00:17:59,480 --> 00:18:03,440 Speaker 3: you know, as I mentioned, if you came into if 302 00:18:03,440 --> 00:18:07,879 Speaker 3: you came into this year, you know, we were certainly thinking, well, 303 00:18:09,720 --> 00:18:12,760 Speaker 3: there is that general misallocation in credit, right, and there's 304 00:18:12,760 --> 00:18:16,440 Speaker 3: obviously kind of those misallocations could be poor quality yearnings, 305 00:18:16,560 --> 00:18:20,679 Speaker 3: weaker businesses from a cyclical or secular basis, then you 306 00:18:20,800 --> 00:18:24,840 Speaker 3: impose on it. Additionally the tariff issue. You understand, there's 307 00:18:24,920 --> 00:18:29,879 Speaker 3: kind of our number of different sectors at play. Challenges 308 00:18:29,920 --> 00:18:32,960 Speaker 3: for consumer discretionary businesses as there's just less real link 309 00:18:33,040 --> 00:18:37,240 Speaker 3: and that impacts lots of different service and goods businesses. 310 00:18:37,480 --> 00:18:40,119 Speaker 3: As I mentioned earlier, the housing cycles being struggling, so 311 00:18:40,400 --> 00:18:43,560 Speaker 3: there's a lot of different sectors that are actually impacted here. 312 00:18:44,440 --> 00:18:48,800 Speaker 3: So really what we're we've been looking for is week 313 00:18:48,960 --> 00:18:55,000 Speaker 3: company with high leverage. We obviously like subordination as well 314 00:18:55,840 --> 00:18:58,199 Speaker 3: in shorts, because if someone sits ahead of you in 315 00:18:58,240 --> 00:19:04,920 Speaker 3: the queue in one of your restructurings, then the recovery 316 00:19:04,960 --> 00:19:07,679 Speaker 3: is clearly likely to be lower. Right, Because we're obviously 317 00:19:07,720 --> 00:19:11,680 Speaker 3: selecting for high loss given default, looking for those low recoveries. 318 00:19:11,920 --> 00:19:14,919 Speaker 3: We're selecting for a high probability of default. The company 319 00:19:14,920 --> 00:19:20,120 Speaker 3: has leverage. We business cyclically challenged because of the because 320 00:19:20,119 --> 00:19:22,720 Speaker 3: of the particular dynamics in the end markets that might 321 00:19:22,720 --> 00:19:28,280 Speaker 3: be unfolding. So you know, basically expanding by number the 322 00:19:28,840 --> 00:19:32,720 Speaker 3: set of situations that we have, but also increasing the 323 00:19:32,800 --> 00:19:35,399 Speaker 3: number of them that we have Paris would draw in 324 00:19:35,480 --> 00:19:41,520 Speaker 3: a larger larger set of names, clearly, But as I 325 00:19:41,640 --> 00:19:44,160 Speaker 3: mentioned earlier, you know, we are talking to several thousand 326 00:19:44,280 --> 00:19:47,320 Speaker 3: names in the high yield market. So if you were 327 00:19:47,359 --> 00:19:50,119 Speaker 3: to say we focus on the bottom ten or twenty 328 00:19:50,160 --> 00:19:53,560 Speaker 3: percent of names by quality, that's still one thousand names 329 00:19:53,640 --> 00:19:56,320 Speaker 3: that we could be looking at and pouring over to find, 330 00:19:56,400 --> 00:19:59,640 Speaker 3: let's say the weakest one hundred and fifty or two 331 00:19:59,720 --> 00:20:04,200 Speaker 3: hundre hundred. So it's really mean about kind of screening 332 00:20:04,480 --> 00:20:09,480 Speaker 3: and looking for more weaker situations, trying to understand what 333 00:20:09,480 --> 00:20:12,720 Speaker 3: would a cyclical slow down globally mean for that business, 334 00:20:13,240 --> 00:20:16,399 Speaker 3: what would the tariff cost mean for that business. I mean, 335 00:20:16,480 --> 00:20:19,639 Speaker 3: we've seen kind of a lack generally of commentary from 336 00:20:19,720 --> 00:20:23,160 Speaker 3: companies and therefore you know they have not been educating 337 00:20:23,200 --> 00:20:30,200 Speaker 3: analysts on the exact costs right of tariffs to them. 338 00:20:30,720 --> 00:20:33,280 Speaker 3: Obviously a lot of them will hide behind well, I'd 339 00:20:33,280 --> 00:20:37,440 Speaker 3: buy my things from a US based distributor, right, You're like, yes, 340 00:20:37,480 --> 00:20:41,200 Speaker 3: in the US based distributor probably purchased it from somewhere 341 00:20:41,200 --> 00:20:43,639 Speaker 3: else that wasn't in the US. Right, So you know, 342 00:20:43,720 --> 00:20:47,080 Speaker 3: the clarity of the information there isn't super clean. But 343 00:20:47,240 --> 00:20:51,360 Speaker 3: ultimately an enormous amount of intermediate products do you come 344 00:20:51,359 --> 00:20:55,600 Speaker 3: into the US from other countries, So there's a lot 345 00:20:55,640 --> 00:21:00,000 Speaker 3: of analytical work to do there. We would spread our 346 00:21:00,119 --> 00:21:03,840 Speaker 3: bets these days in terms of kind of the number 347 00:21:03,880 --> 00:21:10,119 Speaker 3: of situations we would look at quite simply because the 348 00:21:10,280 --> 00:21:13,360 Speaker 3: nature of restructurings has changed, Right. You know, we see 349 00:21:13,359 --> 00:21:17,800 Speaker 3: a lot of distress exchanges in lmes, and what those 350 00:21:17,880 --> 00:21:21,640 Speaker 3: really are is sort of, you know, in the nicest 351 00:21:21,680 --> 00:21:25,119 Speaker 3: possible way, is you know, avoiding a default that should 352 00:21:25,119 --> 00:21:29,920 Speaker 3: have happened now and almost always pushing into the future. Right. 353 00:21:29,960 --> 00:21:32,720 Speaker 3: You know, the majority of these companies do not make it. 354 00:21:32,760 --> 00:21:37,960 Speaker 3: You're buying time, but ultimately buying that time doesn't actually 355 00:21:38,359 --> 00:21:42,439 Speaker 3: generate success for the equity owner of the business. And 356 00:21:42,840 --> 00:21:46,520 Speaker 3: it's because of that kind of appetite to pursue those transactions. 357 00:21:46,520 --> 00:21:49,600 Speaker 3: You're seeing a lot of you know, the definition of 358 00:21:49,680 --> 00:21:53,399 Speaker 3: zombie has widened, right from something that's sort of looked 359 00:21:53,400 --> 00:21:55,960 Speaker 3: like it might not have been able to pay the 360 00:21:56,320 --> 00:22:00,280 Speaker 3: interest and principle on its debt to literally one where 361 00:22:00,280 --> 00:22:02,920 Speaker 3: the creditor said, you don't have to pay me anymore. 362 00:22:03,119 --> 00:22:06,639 Speaker 3: Let's just pretend that you know, we're still with you know, 363 00:22:06,840 --> 00:22:09,280 Speaker 3: this is still a performing credit. So it's because of 364 00:22:09,280 --> 00:22:11,159 Speaker 3: that kind of dynamic in the market that we like 365 00:22:11,200 --> 00:22:13,800 Speaker 3: to kind of shield ourselves maybe from what we see 366 00:22:13,840 --> 00:22:17,960 Speaker 3: as as those sort of not full restructurings. 367 00:22:18,640 --> 00:22:21,719 Speaker 2: Yeah, I'd actually like to push a bit further on 368 00:22:21,760 --> 00:22:24,119 Speaker 2: the on the ownership and kicking the can down the 369 00:22:24,200 --> 00:22:26,720 Speaker 2: road theme. But before we do that, I think it 370 00:22:26,720 --> 00:22:29,560 Speaker 2: would be quite interesting to hear a little bit more 371 00:22:29,560 --> 00:22:33,439 Speaker 2: about the mechanics of how you shot these names. Are 372 00:22:33,440 --> 00:22:37,639 Speaker 2: you looking to do it physically synthetically? Can you talk about, 373 00:22:37,680 --> 00:22:40,199 Speaker 2: you know, how you manage some of the risks, you know, 374 00:22:40,240 --> 00:22:43,840 Speaker 2: they're quite expensive short sometimes, you know, the liquidity can 375 00:22:43,880 --> 00:22:46,920 Speaker 2: be an issue. You know, perhaps even any examples you're 376 00:22:46,920 --> 00:22:47,520 Speaker 2: able to share. 377 00:22:48,400 --> 00:22:50,560 Speaker 3: Well, to be honest with you, I think the biggest 378 00:22:51,480 --> 00:22:54,320 Speaker 3: the biggest way of managing your risk there is is 379 00:22:54,359 --> 00:22:56,840 Speaker 3: to leave as few footprints as you can. Right. So 380 00:22:57,040 --> 00:23:00,359 Speaker 3: one of the reasons why we have you know, a 381 00:23:00,400 --> 00:23:05,320 Speaker 3: lot of shorts, so you know, hundreds, is so that 382 00:23:05,600 --> 00:23:09,320 Speaker 3: we're not exposed to any single name and the instability 383 00:23:09,359 --> 00:23:14,080 Speaker 3: of repo or the ability to borrow bonds in any 384 00:23:14,080 --> 00:23:16,560 Speaker 3: one of those names. We don't tend to use a 385 00:23:16,560 --> 00:23:20,119 Speaker 3: lot of synthetic, so we don't tend to use a 386 00:23:20,119 --> 00:23:22,720 Speaker 3: lot of CDs. I think both sides of the Atlantic 387 00:23:22,760 --> 00:23:25,720 Speaker 3: have obviously seen lots of high profile examples over the 388 00:23:25,840 --> 00:23:29,240 Speaker 3: years of CDs not really being a particularly efficient tool 389 00:23:29,400 --> 00:23:35,160 Speaker 3: for taking a view on on credit. You know, plenty 390 00:23:35,200 --> 00:23:39,159 Speaker 3: of high profile examples where company went bust but CDs 391 00:23:39,240 --> 00:23:44,040 Speaker 3: was uphaned or you know, engineered default or what have you. So, yeah, 392 00:23:44,119 --> 00:23:47,800 Speaker 3: we stick to the physical market, but leave no footprints. Really, 393 00:23:47,960 --> 00:23:51,200 Speaker 3: So if we if we have you know, if we 394 00:23:51,480 --> 00:23:57,000 Speaker 3: spend the effort analytical time, research, you know, research time, 395 00:23:57,119 --> 00:24:01,200 Speaker 3: research expense on finding as men of the weak names 396 00:24:01,200 --> 00:24:05,000 Speaker 3: as possible, we can have a smaller position in each one. 397 00:24:05,720 --> 00:24:08,720 Speaker 3: Therefore there isn't going to be crowded repo in them, 398 00:24:09,240 --> 00:24:15,359 Speaker 3: and and and as a result, you know, the cost 399 00:24:15,400 --> 00:24:18,600 Speaker 3: tends to be lower, the availabilities higher, the liquidity risk 400 00:24:18,720 --> 00:24:21,040 Speaker 3: is lower, so we kind of manage around that, to 401 00:24:21,359 --> 00:24:24,359 Speaker 3: be honest with you, just but what it requires is 402 00:24:24,400 --> 00:24:26,199 Speaker 3: to have looked at a lot of names, because if 403 00:24:26,200 --> 00:24:28,119 Speaker 3: you're going to assured one hundred and fifty names, you 404 00:24:28,119 --> 00:24:30,800 Speaker 3: have to have looked at one thousand, and you have 405 00:24:30,880 --> 00:24:34,200 Speaker 3: to have looked at them properly, you know, I would 406 00:24:34,240 --> 00:24:39,120 Speaker 3: say that kind of in this very very low volatility 407 00:24:39,200 --> 00:24:44,960 Speaker 3: period that we've been in for a while, excluding April 408 00:24:44,960 --> 00:24:49,200 Speaker 3: and May twenty five, the availability of repo for high 409 00:24:49,280 --> 00:24:53,159 Speaker 3: year bond has been very very high because it was 410 00:24:53,200 --> 00:24:58,080 Speaker 3: a good source of financing revenue for low fee, low 411 00:24:58,160 --> 00:25:02,560 Speaker 3: fee funds, and you know, there wasn't really a market 412 00:25:02,680 --> 00:25:05,919 Speaker 3: or appetite for shortening any of the debt, so you know, 413 00:25:06,040 --> 00:25:08,760 Speaker 3: it was just ultimately for the end owner of the bond, 414 00:25:08,960 --> 00:25:12,879 Speaker 3: quite good way of generating extra income. So the availability 415 00:25:13,040 --> 00:25:15,080 Speaker 3: and depth of the repay market is higher than it 416 00:25:15,119 --> 00:25:18,760 Speaker 3: ever has been. I think what we would expect as 417 00:25:18,880 --> 00:25:22,520 Speaker 3: times get slightly tougher for these credits, we'll see more, 418 00:25:24,560 --> 00:25:29,760 Speaker 3: we'll see more kind of you know, instability in that market, 419 00:25:29,880 --> 00:25:34,320 Speaker 3: and we'll probably see more regulator reinforcement action as a result, right, 420 00:25:34,359 --> 00:25:36,720 Speaker 3: you know, because sort of the easy way to generate 421 00:25:36,720 --> 00:25:39,760 Speaker 3: a bid for a weak position is to try and 422 00:25:40,359 --> 00:25:44,760 Speaker 3: engineer a repost squeeze by the end owner, and you know, 423 00:25:44,800 --> 00:25:47,679 Speaker 3: obviously you're not allowed to do that, so you know, 424 00:25:47,720 --> 00:25:50,640 Speaker 3: it is something that the regulator knows to look out 425 00:25:50,720 --> 00:25:53,960 Speaker 3: for at the end of a cycle. So a lot 426 00:25:53,960 --> 00:25:56,399 Speaker 3: of the times the instability and the risk you're managing 427 00:25:56,440 --> 00:25:59,520 Speaker 3: around is really around somebody doing something they're not supposed to. 428 00:26:00,640 --> 00:26:02,960 Speaker 3: So fortunately we have regulators for that. 429 00:26:03,720 --> 00:26:06,600 Speaker 2: So would you see opportunities in some of these more 430 00:26:06,720 --> 00:26:10,360 Speaker 2: creative lem examples we've seen over recent years. I mean, 431 00:26:11,200 --> 00:26:15,120 Speaker 2: Federick Gourney had a toggle pick that came out last year. 432 00:26:15,920 --> 00:26:18,800 Speaker 2: There's been a number of other picks or partial picks 433 00:26:19,880 --> 00:26:23,360 Speaker 2: from you know, highly levered European names over the last 434 00:26:23,440 --> 00:26:25,240 Speaker 2: year or so. You know, is that the sort of 435 00:26:25,240 --> 00:26:26,720 Speaker 2: thing that interests you as well? 436 00:26:27,880 --> 00:26:33,920 Speaker 3: In a word, no, the look, you can make money 437 00:26:33,920 --> 00:26:36,520 Speaker 3: on them here all there. But I think as a strategy, 438 00:26:38,000 --> 00:26:40,439 Speaker 3: I buy credit and the goal with credit is I 439 00:26:40,600 --> 00:26:43,280 Speaker 3: you know, when you're buying it, you want to make 440 00:26:43,320 --> 00:26:46,000 Speaker 3: a yield, right, and the yield requires that I get 441 00:26:46,040 --> 00:26:50,280 Speaker 3: paid a coupon, and I also get my money back 442 00:26:50,320 --> 00:26:53,920 Speaker 3: at the end, and that, unfortunately, is one of the 443 00:26:53,960 --> 00:26:56,800 Speaker 3: reasons why I don't think lms in distressed exchanges, et 444 00:26:56,840 --> 00:27:01,200 Speaker 3: cetera work particularly well, which is, if I'm picking and 445 00:27:01,440 --> 00:27:07,399 Speaker 3: rolling out maturities, then I'm not getting paid either the 446 00:27:07,520 --> 00:27:11,480 Speaker 3: principle or interest, and therefore I'm kind of left wondering 447 00:27:12,040 --> 00:27:15,320 Speaker 3: how if I have to be the end owner of 448 00:27:15,320 --> 00:27:18,199 Speaker 3: that credit, right, if I cannot find a way to 449 00:27:18,240 --> 00:27:23,760 Speaker 3: recycle that risk, I'm left wondering how I'm going to 450 00:27:23,800 --> 00:27:27,120 Speaker 3: make a profit, because the reality is I'm probably taking 451 00:27:27,600 --> 00:27:33,160 Speaker 3: a corporate that has been struggling recently. I'm leaving the 452 00:27:33,200 --> 00:27:38,000 Speaker 3: current management team in to continue running it in an 453 00:27:38,000 --> 00:27:41,840 Speaker 3: otherwise difficult It's obviously a difficult cyclical or secular environment 454 00:27:42,600 --> 00:27:48,280 Speaker 3: with the same amount of debt and presumably relatively constrained 455 00:27:48,480 --> 00:27:52,000 Speaker 3: cash flow. Because if they can't pay me as a creditor, 456 00:27:52,119 --> 00:27:55,960 Speaker 3: presumably they're they're under investing in R and D, CAPEX, 457 00:27:56,359 --> 00:27:59,199 Speaker 3: they might actually be underpaying staff, you know, all of 458 00:27:59,240 --> 00:28:03,639 Speaker 3: those things. That doesn't strike me as kind of a 459 00:28:03,640 --> 00:28:05,879 Speaker 3: situation where I would be saying, Okay, well, I'm going 460 00:28:05,960 --> 00:28:07,920 Speaker 3: to get my money back as the person who ends 461 00:28:08,000 --> 00:28:11,439 Speaker 3: up holding these because this company's going to recover because 462 00:28:11,600 --> 00:28:15,160 Speaker 3: it just doesn't have Like you just statistically, if you're 463 00:28:15,280 --> 00:28:17,720 Speaker 3: short on cash, you can't pay your debt. You haven't 464 00:28:17,720 --> 00:28:21,000 Speaker 3: got less debt and your cash flow constrained, and you 465 00:28:21,119 --> 00:28:22,960 Speaker 3: left the same management team in and you had a 466 00:28:22,960 --> 00:28:27,520 Speaker 3: bad starting point. I don't see how I underwrite the recovery. 467 00:28:28,680 --> 00:28:31,920 Speaker 3: So you know, ultimately, when we're looking at these situations, 468 00:28:32,080 --> 00:28:34,200 Speaker 3: we want to be the top of the stack. We 469 00:28:34,240 --> 00:28:37,960 Speaker 3: want asset based situations. I want them to be free 470 00:28:38,000 --> 00:28:41,560 Speaker 3: cash flow positive before debt service, so that I know 471 00:28:41,960 --> 00:28:44,680 Speaker 3: that the thing I'm buying actually has some cash flow 472 00:28:44,760 --> 00:28:49,880 Speaker 3: coming into that box. And and and you know a 473 00:28:49,880 --> 00:28:53,480 Speaker 3: lot of these lems the issue is they are burning cash, right, 474 00:28:53,600 --> 00:28:55,760 Speaker 3: you know that it's not they're not generating cash, and 475 00:28:55,800 --> 00:28:58,320 Speaker 3: therefore they're very, very difficult to do from a stress 476 00:28:58,320 --> 00:28:59,360 Speaker 3: and distress perspective. 477 00:29:00,080 --> 00:29:02,920 Speaker 2: Yeah, so I think I'll sort of pivot onto the 478 00:29:02,960 --> 00:29:06,120 Speaker 2: private equity side of it now. Then, you know, you 479 00:29:06,200 --> 00:29:09,200 Speaker 2: mentioned you're seeing a lot of kicking the can down 480 00:29:09,240 --> 00:29:12,000 Speaker 2: the road, you know, with these lemis. I totally agree 481 00:29:12,800 --> 00:29:16,080 Speaker 2: private equity firms huge driver of issuance in the sector, 482 00:29:17,320 --> 00:29:22,120 Speaker 2: but the exit market seems largely closed. You know, I'm thinking, 483 00:29:22,200 --> 00:29:25,520 Speaker 2: especially in the industrial sector, multiples that come down earnings 484 00:29:25,520 --> 00:29:28,640 Speaker 2: are you know, troughing. You know, so we've heard talk 485 00:29:28,680 --> 00:29:31,200 Speaker 2: in the past of sort of there being dry powder 486 00:29:31,240 --> 00:29:33,840 Speaker 2: and you know, they can sort of continue propping up 487 00:29:33,960 --> 00:29:37,800 Speaker 2: these these companies. I think, you know, anecdotally, we might 488 00:29:37,840 --> 00:29:39,920 Speaker 2: have seen a bit less of that dry powder being 489 00:29:39,920 --> 00:29:43,760 Speaker 2: deployed and a bit more of these more creative financing 490 00:29:43,760 --> 00:29:48,480 Speaker 2: opportunities or solutions rather. You know, how do you view 491 00:29:49,520 --> 00:29:52,200 Speaker 2: the ownership structure of the you know, the positions you're 492 00:29:52,240 --> 00:29:55,040 Speaker 2: taking on the on the short and the alongside. Is 493 00:29:55,080 --> 00:29:58,680 Speaker 2: there sort of specific you research you do into pe 494 00:29:58,880 --> 00:30:01,479 Speaker 2: funds that you know may have been fully deployed and 495 00:30:02,000 --> 00:30:04,120 Speaker 2: you know are limited on the on the drive powder. 496 00:30:06,080 --> 00:30:10,840 Speaker 3: Yes, so you're definitely looking for that as one of 497 00:30:10,880 --> 00:30:14,760 Speaker 3: your pieces of due diligence. Is the likelihood of a 498 00:30:14,840 --> 00:30:19,160 Speaker 3: company to be supported by by the owner. It's worth 499 00:30:19,200 --> 00:30:21,320 Speaker 3: remembering there's an awful lot of debt is on non 500 00:30:21,360 --> 00:30:26,160 Speaker 3: sponsor businesses as well, especially in the US market. But 501 00:30:26,240 --> 00:30:27,760 Speaker 3: it is true that kind of there is a lot 502 00:30:27,760 --> 00:30:30,840 Speaker 3: of sponsor There are a lot of sponsor businesses. You know, 503 00:30:31,360 --> 00:30:36,440 Speaker 3: it's not a surprise to anybody that exits have been lower, 504 00:30:36,760 --> 00:30:40,360 Speaker 3: right in terms of frequency. There's obviously, you know, lots 505 00:30:40,360 --> 00:30:45,040 Speaker 3: of high profile news out there about the discomfort that 506 00:30:45,160 --> 00:30:49,200 Speaker 3: private equity investors have about the lack of return capital, 507 00:30:51,320 --> 00:30:56,040 Speaker 3: and it looks like it should continue, right, you know, ultimately, 508 00:30:56,920 --> 00:31:00,720 Speaker 3: which is it is hard to see what really brings 509 00:31:00,720 --> 00:31:06,160 Speaker 3: about a wave of exits, right. You know, so private 510 00:31:06,160 --> 00:31:10,520 Speaker 3: equity activity is easier to envisage in a decent economy 511 00:31:11,080 --> 00:31:15,600 Speaker 3: with low rates right and low finante costs. So you know, 512 00:31:15,800 --> 00:31:18,840 Speaker 3: we don't have the low enough rates and we don't 513 00:31:18,840 --> 00:31:21,680 Speaker 3: have a decent enough or stable enough economy right now, 514 00:31:22,120 --> 00:31:25,880 Speaker 3: so it is difficult to imagine being able to monetize 515 00:31:26,720 --> 00:31:32,920 Speaker 3: at the multiples that the would effectively get private equity 516 00:31:32,960 --> 00:31:38,760 Speaker 3: out at their now. So you know, obviously, with that, 517 00:31:38,800 --> 00:31:42,840 Speaker 3: the idea of dry powder is key. Now, there's two 518 00:31:42,840 --> 00:31:45,200 Speaker 3: types of dry powder, right. The dry powder in the 519 00:31:45,240 --> 00:31:48,000 Speaker 3: private equity firms is also dry powder in private credit. 520 00:31:49,400 --> 00:31:52,240 Speaker 3: So you have to take both of those things into 521 00:31:52,320 --> 00:31:59,360 Speaker 3: account as a potential source of capital into your lungs 522 00:31:59,360 --> 00:32:04,120 Speaker 3: and shorts. And you know, candidly, if you're long, you're saying, 523 00:32:04,440 --> 00:32:06,920 Speaker 3: I wonder how I can get some of that dry 524 00:32:07,120 --> 00:32:14,840 Speaker 3: powder into this business. And that absolutely happens. Not every 525 00:32:14,920 --> 00:32:18,880 Speaker 3: company that enters stress or distress is insolvent. Some of 526 00:32:18,880 --> 00:32:23,560 Speaker 3: them are just over levered. So effectively, we would push 527 00:32:23,920 --> 00:32:27,360 Speaker 3: the equity owner of the business, you know, or sometimes 528 00:32:27,360 --> 00:32:29,120 Speaker 3: of a sponsor, you know, if you want to keep 529 00:32:29,160 --> 00:32:32,320 Speaker 3: this asset, support it with some equity, and that goes 530 00:32:32,360 --> 00:32:34,560 Speaker 3: to pay me down and de levers me. And I 531 00:32:34,600 --> 00:32:36,640 Speaker 3: feel like I'm in a better place, and I will, 532 00:32:37,080 --> 00:32:41,480 Speaker 3: you know, make some compromises to you, maybe on kind 533 00:32:41,480 --> 00:32:44,160 Speaker 3: of the duration of I'll leave the capital with you, you know, 534 00:32:44,240 --> 00:32:46,520 Speaker 3: in return for that. So we really would ask that 535 00:32:46,800 --> 00:32:48,800 Speaker 3: if we were a long something that the private equity 536 00:32:48,800 --> 00:32:52,360 Speaker 3: company does step in with cash. What has been interesting 537 00:32:52,720 --> 00:32:56,080 Speaker 3: has been that in a lot of l and ees 538 00:32:56,680 --> 00:32:59,720 Speaker 3: that the owners of the debt have not pushed for that. 539 00:33:00,160 --> 00:33:04,320 Speaker 3: They've basically given the private equity firms a free option 540 00:33:04,640 --> 00:33:08,200 Speaker 3: on holding the business and running it into the future. 541 00:33:08,880 --> 00:33:12,640 Speaker 3: And you know, which is odd in situations where it's 542 00:33:12,720 --> 00:33:15,480 Speaker 3: not working right now, right there is stress and distress 543 00:33:15,560 --> 00:33:19,240 Speaker 3: because you know, maybe it's the governance of the business, 544 00:33:19,320 --> 00:33:22,160 Speaker 3: maybe it's the capital structure, maybe it's the business itself, 545 00:33:22,440 --> 00:33:25,960 Speaker 3: but it's not working. You do need to change something, 546 00:33:27,600 --> 00:33:30,400 Speaker 3: and you know, that does strike me as odd that 547 00:33:30,400 --> 00:33:34,120 Speaker 3: that hasn't happened. It's worth noting that the kind of 548 00:33:34,160 --> 00:33:37,120 Speaker 3: private credit dry powder. You know, sometimes they could come 549 00:33:37,160 --> 00:33:40,840 Speaker 3: in as a refinancier if they're very friendly. You know, 550 00:33:40,880 --> 00:33:43,200 Speaker 3: you've bought something as a stress debt, but they're very 551 00:33:43,200 --> 00:33:46,200 Speaker 3: friendly with a private equity sponsor and they come in 552 00:33:46,480 --> 00:33:50,800 Speaker 3: and do some refinancing, sometimes as a second lean, and 553 00:33:50,840 --> 00:33:53,320 Speaker 3: we might have been a first lean, so they've kind 554 00:33:53,360 --> 00:33:57,280 Speaker 3: of taken the role of putting that extra cash into 555 00:33:57,280 --> 00:34:03,040 Speaker 3: Deleverers as the first lean. But in general, you know, 556 00:34:03,120 --> 00:34:05,760 Speaker 3: I would say that your goal has to be well, 557 00:34:05,760 --> 00:34:08,239 Speaker 3: there is dry powder out there, so if you long something, 558 00:34:08,960 --> 00:34:11,320 Speaker 3: you should be finding a way to get that capital 559 00:34:11,320 --> 00:34:14,839 Speaker 3: into the business. And when we're short something, it is 560 00:34:15,239 --> 00:34:18,400 Speaker 3: you know, just ultimately it is a risk that that 561 00:34:18,560 --> 00:34:24,640 Speaker 3: that capital comes in, but it frequently hasn't, right, And 562 00:34:24,640 --> 00:34:27,759 Speaker 3: the reason why it hasn't is because the capital from 563 00:34:27,800 --> 00:34:30,839 Speaker 3: your investors is absolutely precious, right, you know, it is 564 00:34:31,239 --> 00:34:33,520 Speaker 3: it is you know, and it has to be used 565 00:34:33,600 --> 00:34:35,960 Speaker 3: for you know, it has to be used for the 566 00:34:36,040 --> 00:34:38,839 Speaker 3: right purpose. Your fiduci you duty to be a good 567 00:34:38,880 --> 00:34:42,080 Speaker 3: custodian of that capital. And if and if the business 568 00:34:42,160 --> 00:34:47,840 Speaker 3: isn't working and you're not achieving any deleveraging, then you know, 569 00:34:48,040 --> 00:34:51,200 Speaker 3: really you're not doing the right thing for your investors. 570 00:34:51,480 --> 00:34:54,480 Speaker 3: And if that is what ends up happening as a 571 00:34:54,520 --> 00:34:57,719 Speaker 3: private equity firm, just dropping some money into a into 572 00:34:57,800 --> 00:35:01,319 Speaker 3: a failing business that you kind of knew you were 573 00:35:01,320 --> 00:35:04,440 Speaker 3: going to burn, then it starts to taint your reputation 574 00:35:04,760 --> 00:35:09,960 Speaker 3: for future future capital raising, and that that is effectively sacrificing. 575 00:35:10,040 --> 00:35:11,480 Speaker 3: You know, that's the one thing that you would never 576 00:35:11,520 --> 00:35:14,279 Speaker 3: want to do. So I see why they've been cautious, 577 00:35:15,560 --> 00:35:17,840 Speaker 3: which is why would they put the capital into some 578 00:35:17,880 --> 00:35:20,800 Speaker 3: of these situations. Like you know, if you imagine a 579 00:35:20,840 --> 00:35:24,120 Speaker 3: business has you know, two billion dollars of debt and 580 00:35:24,160 --> 00:35:27,240 Speaker 3: it's got a sustainable debt capacity of one billion dollars, 581 00:35:27,360 --> 00:35:29,920 Speaker 3: which is probably about the right maths for a lot 582 00:35:29,960 --> 00:35:34,439 Speaker 3: of these credits. Well, you know, what can you put 583 00:35:34,480 --> 00:35:37,239 Speaker 3: in there to achieve a one billion dollar debt right off? 584 00:35:37,400 --> 00:35:39,840 Speaker 3: And it might be you know, no one's willing to 585 00:35:39,880 --> 00:35:42,440 Speaker 3: take that. They'll only do that if you hand the 586 00:35:42,480 --> 00:35:46,680 Speaker 3: business over. You can't really put in fifty million of 587 00:35:46,760 --> 00:35:48,879 Speaker 3: new equity and hope that people are going to ride 588 00:35:48,880 --> 00:35:51,839 Speaker 3: a billion off. So the kind of maths hasn't really 589 00:35:51,840 --> 00:35:57,239 Speaker 3: been working. And then kind of saying, well, we've got 590 00:35:57,239 --> 00:36:00,440 Speaker 3: a pretty high nave on this asset. You know, how 591 00:36:00,480 --> 00:36:04,480 Speaker 3: do we sell this twelve times leathered business at sixteen times? 592 00:36:04,920 --> 00:36:07,120 Speaker 3: You know that's difficult as well. We need to deliver 593 00:36:07,200 --> 00:36:10,839 Speaker 3: it at six to six before we could, and you know, 594 00:36:10,960 --> 00:36:13,480 Speaker 3: the math doesn't really work. So they're keeping the dry 595 00:36:13,520 --> 00:36:14,160 Speaker 3: powder safe. 596 00:36:14,160 --> 00:36:17,160 Speaker 1: I me, but some of the distressed investors out there, 597 00:36:17,239 --> 00:36:19,600 Speaker 1: I mean, there's so much cash that they've raised over 598 00:36:19,640 --> 00:36:22,880 Speaker 1: the years for not a lot of opportunity in relative terms, 599 00:36:23,120 --> 00:36:25,880 Speaker 1: there seem to be under pressure to deploy, and in 600 00:36:25,920 --> 00:36:30,080 Speaker 1: some cases they're lending new money to these stressed companies 601 00:36:30,120 --> 00:36:32,040 Speaker 1: that seems to be more, you know, more of a 602 00:36:32,080 --> 00:36:37,040 Speaker 1: popular strategy. How do you see that? I, well, we don't. 603 00:36:36,760 --> 00:36:40,560 Speaker 3: Do that because I'm old fashionate enough James to think 604 00:36:40,600 --> 00:36:43,319 Speaker 3: that a company that's struggling with too much debt might 605 00:36:43,360 --> 00:36:47,719 Speaker 3: not need more of it. So look the way that 606 00:36:48,200 --> 00:36:51,400 Speaker 3: I think the way the industry is it has proceeded 607 00:36:51,480 --> 00:36:57,200 Speaker 3: to say, in the absence of interesting secondary distress purchases 608 00:36:57,280 --> 00:37:01,120 Speaker 3: right of buying somebody else's mistake. They pushed towards kind 609 00:37:01,160 --> 00:37:04,480 Speaker 3: of primary stress and to stress. So lend money into 610 00:37:04,520 --> 00:37:08,720 Speaker 3: a struggling situation. And I suppose the capital solutions industry 611 00:37:08,719 --> 00:37:12,239 Speaker 3: has evolved from doing into doing that in an effectively 612 00:37:12,280 --> 00:37:19,440 Speaker 3: subordinated format. Now I can't imagine taking a stressed company 613 00:37:19,560 --> 00:37:23,400 Speaker 3: and wanting to put subordinated capital into that, right, but 614 00:37:23,480 --> 00:37:26,600 Speaker 3: I know it happens. I think that you know that 615 00:37:27,040 --> 00:37:31,960 Speaker 3: the turnaround that would be required in that situation in 616 00:37:32,080 --> 00:37:34,360 Speaker 3: terms of the operation of the business, the quality the 617 00:37:34,360 --> 00:37:37,520 Speaker 3: business would just be enormous that you would have to 618 00:37:37,600 --> 00:37:39,840 Speaker 3: underwrite two to feel that you were definitely going to 619 00:37:39,840 --> 00:37:44,400 Speaker 3: get that money back. You know, we would obviously do 620 00:37:44,560 --> 00:37:48,040 Speaker 3: senior rescue financy, but that's not really what's been happening 621 00:37:48,040 --> 00:37:49,560 Speaker 3: out there, right, You know, a lot of it is 622 00:37:49,600 --> 00:37:53,760 Speaker 3: really sort of stressed subordinated. So you know, rule number 623 00:37:53,760 --> 00:37:58,279 Speaker 3: one never subordinate yourself and the other is never pick yourself. 624 00:37:58,560 --> 00:38:01,520 Speaker 3: So if it breaks the the cardinal rules, then I 625 00:38:01,520 --> 00:38:05,520 Speaker 3: wouldn't do it. So, yeah, we're not really into that. 626 00:38:05,560 --> 00:38:07,920 Speaker 3: I think kind of more broadly, for your investors, you 627 00:38:07,960 --> 00:38:10,799 Speaker 3: also have to think about, well, what am I really doing? Right? 628 00:38:10,960 --> 00:38:14,279 Speaker 3: The reason why we stick to only secondary purchases the 629 00:38:14,320 --> 00:38:17,640 Speaker 3: average purchase price on our distress debt. So we've done 630 00:38:17,640 --> 00:38:22,200 Speaker 3: our one hundred and thirty five transactions in nearly twelve years, 631 00:38:22,239 --> 00:38:24,640 Speaker 3: the average purchase price has been fifty five cents on 632 00:38:24,640 --> 00:38:28,719 Speaker 3: the dollar. So the thing about entering the debt via 633 00:38:28,719 --> 00:38:31,319 Speaker 3: the secondary at a discount, they have to be able 634 00:38:31,360 --> 00:38:34,319 Speaker 3: to find it right, and that's a whole new thing. 635 00:38:34,440 --> 00:38:38,640 Speaker 3: You know, we have managed to sustain a franchise for 636 00:38:38,719 --> 00:38:41,480 Speaker 3: purchasing that secondary distress debt. But if you buy the 637 00:38:41,560 --> 00:38:47,560 Speaker 3: right stuff, you have gone into a situation where you 638 00:38:47,640 --> 00:38:51,480 Speaker 3: kind of feel like the worst thing has already happened, right, 639 00:38:51,600 --> 00:38:54,879 Speaker 3: You've gone bankrupt. And therefore, kind of if you think 640 00:38:54,880 --> 00:38:58,920 Speaker 3: about the conditional probabilities of this, what's the probability wants 641 00:38:59,000 --> 00:39:02,440 Speaker 3: a really terrible thing has happened, then another really terrible 642 00:39:02,480 --> 00:39:06,279 Speaker 3: thing happens afterwards, and also it is clearly much lower. Right, 643 00:39:06,320 --> 00:39:09,440 Speaker 3: the bad thing has already happened. So, you know, we 644 00:39:09,520 --> 00:39:11,279 Speaker 3: got in there at fifty five cents on the dollar 645 00:39:11,360 --> 00:39:13,920 Speaker 3: feeling like, well, if we can get the assets or 646 00:39:14,000 --> 00:39:17,440 Speaker 3: cash flows, maybe get forty five or fifty back but 647 00:39:17,480 --> 00:39:19,880 Speaker 3: if we get it right, there's a potential equity like 648 00:39:19,960 --> 00:39:23,760 Speaker 3: return available here. The problem with giving the company fresh 649 00:39:23,880 --> 00:39:26,919 Speaker 3: new capital on a primary basis is you basically given 650 00:39:26,960 --> 00:39:29,440 Speaker 3: them one hundred. You said, well, keep paying me my 651 00:39:29,760 --> 00:39:33,319 Speaker 3: twelve of coupon that you're going to afford. But if 652 00:39:33,360 --> 00:39:36,279 Speaker 3: I get it wrong, I get zero. Right, So you know, 653 00:39:36,280 --> 00:39:38,080 Speaker 3: if you think about the skew on ours, we've paid 654 00:39:38,120 --> 00:39:40,440 Speaker 3: fifty five to try and get somewhere between fifty and 655 00:39:40,480 --> 00:39:43,799 Speaker 3: one hundred, and you know if you but if you've 656 00:39:43,800 --> 00:39:46,960 Speaker 3: done the primary example that new money capital solutions is money, 657 00:39:47,000 --> 00:39:49,080 Speaker 3: you've given them one hundred. Your best case, you get 658 00:39:49,120 --> 00:39:51,840 Speaker 3: one hundred. In your worst case you get zero. But 659 00:39:51,840 --> 00:39:54,880 Speaker 3: you subordinated yourself, so the probability of the zero is 660 00:39:54,960 --> 00:39:59,040 Speaker 3: much higher. So you have to charge a pretty substantial coupon. 661 00:39:59,440 --> 00:40:02,239 Speaker 3: But then theblem is that the company's probably struggling. If 662 00:40:02,239 --> 00:40:04,680 Speaker 3: it's struggling with debt, then it's going to be picking 663 00:40:04,719 --> 00:40:08,480 Speaker 3: your coupon presumably, So it kind of falls a little 664 00:40:08,520 --> 00:40:11,200 Speaker 3: bit down on the common sense thing, which is, you know, 665 00:40:11,239 --> 00:40:13,279 Speaker 3: if you were talking to your grandma about that, what 666 00:40:13,320 --> 00:40:16,000 Speaker 3: would she say, you know, when you'd sort of you 667 00:40:16,040 --> 00:40:19,840 Speaker 3: know her neighbor wasn't paying their mortgage, so you said, well, 668 00:40:19,960 --> 00:40:22,600 Speaker 3: i'll give you, you know, I'll give you another twenty 669 00:40:22,640 --> 00:40:25,440 Speaker 3: five percent of your house value. You don't have to 670 00:40:25,480 --> 00:40:28,520 Speaker 3: pay me a coupon, and I'll sit behind the bank. 671 00:40:29,640 --> 00:40:32,239 Speaker 3: You know. She would say, well that now, I'm not 672 00:40:32,239 --> 00:40:35,120 Speaker 3: sure that makes a ton of common sense. And I 673 00:40:35,160 --> 00:40:37,440 Speaker 3: think you know, that's why we would describe maybe that 674 00:40:37,840 --> 00:40:41,920 Speaker 3: primary Cap solutions as an innovation as we call it 675 00:40:41,960 --> 00:40:44,960 Speaker 3: in finance, which isn't a real innovation. It might just 676 00:40:45,040 --> 00:40:46,240 Speaker 3: be a fad. 677 00:40:47,360 --> 00:40:50,759 Speaker 1: So when you're pitching this rob to you investors out there, 678 00:40:50,800 --> 00:40:52,680 Speaker 1: you know, in terms of a strategy, what's the upsite 679 00:40:52,760 --> 00:40:54,520 Speaker 1: right now? What's kind of questions they asking you? In 680 00:40:54,560 --> 00:40:57,360 Speaker 1: you know the context? Also, you know they can get 681 00:40:57,760 --> 00:40:59,960 Speaker 1: five and a half percent on an investment grade by 682 00:41:00,160 --> 00:41:02,839 Speaker 1: with zero likelihood of default, So why should they stick 683 00:41:02,880 --> 00:41:05,680 Speaker 1: their necks out and really you know, jump into distress 684 00:41:05,760 --> 00:41:06,160 Speaker 1: right now? 685 00:41:06,760 --> 00:41:10,120 Speaker 3: Well you can definitely make more than that on good distress, 686 00:41:11,800 --> 00:41:16,400 Speaker 3: you know, so it really forms part of a you know, 687 00:41:16,560 --> 00:41:21,439 Speaker 3: balanced portfolio, right you know. And and what I think 688 00:41:21,480 --> 00:41:25,279 Speaker 3: you're really saying to investors is, look, that becomes a 689 00:41:25,400 --> 00:41:29,040 Speaker 3: time each cycle, right, we have these micro distress cycles 690 00:41:29,080 --> 00:41:32,360 Speaker 3: and we have a macro distress cycle. You know, ultimately 691 00:41:32,400 --> 00:41:35,560 Speaker 3: also insues and what they provide you is the opportunity 692 00:41:35,640 --> 00:41:39,600 Speaker 3: to create assets at the meaningful discount to their intrinsic 693 00:41:39,680 --> 00:41:42,000 Speaker 3: value via the debt. And so you can actually make 694 00:41:42,040 --> 00:41:46,480 Speaker 3: equity like returns from you know, being senior in a 695 00:41:46,480 --> 00:41:49,319 Speaker 3: capital structure, right, so you can actually be in the 696 00:41:49,400 --> 00:41:52,000 Speaker 3: in the lower risk part of it, and you can 697 00:41:52,040 --> 00:41:54,680 Speaker 3: make equity live returns from that top of the cap 698 00:41:54,760 --> 00:41:58,759 Speaker 3: stack position in really really great assets, right. You know, 699 00:41:58,760 --> 00:42:01,239 Speaker 3: it could have been done in realists day, or aviation 700 00:42:01,600 --> 00:42:07,480 Speaker 3: or hotels or yeah, some operating businesses, infrastructure, you name it. 701 00:42:07,520 --> 00:42:09,200 Speaker 3: So you can get these brilliant businesses and you can 702 00:42:09,200 --> 00:42:11,520 Speaker 3: actually take the kind of thin slices at the top 703 00:42:11,560 --> 00:42:14,160 Speaker 3: and generate equity like returns from that. But you only 704 00:42:14,200 --> 00:42:16,960 Speaker 3: get that every so often, and it's in these periods 705 00:42:16,960 --> 00:42:21,480 Speaker 3: where you've kind of kind of the misallocation has has 706 00:42:21,480 --> 00:42:23,600 Speaker 3: built up over the years, and you get to a 707 00:42:23,600 --> 00:42:27,680 Speaker 3: position where when we get the market clear and you 708 00:42:27,440 --> 00:42:30,239 Speaker 3: you absolutely get kind of a brilliant opportunity for that. 709 00:42:31,120 --> 00:42:34,520 Speaker 3: I think investors have been really receptive over over the 710 00:42:35,680 --> 00:42:38,799 Speaker 3: over the last couple of years. I think they they 711 00:42:39,719 --> 00:42:42,319 Speaker 3: have have a couple of perceptions. One of one of 712 00:42:42,360 --> 00:42:44,600 Speaker 3: them is we also we have kind of a real 713 00:42:44,840 --> 00:42:47,480 Speaker 3: business for doing this, right. It's not just waiting for 714 00:42:47,520 --> 00:42:50,160 Speaker 3: the things to kind of turn up and jump jump 715 00:42:50,200 --> 00:42:52,200 Speaker 3: out at you off the screen. We have had to 716 00:42:52,280 --> 00:42:57,360 Speaker 3: kind of find a way to keep sourcing the really 717 00:42:57,360 --> 00:42:59,920 Speaker 3: interesting risk that fits that top of the capital strut 718 00:43:00,120 --> 00:43:04,320 Speaker 3: a big discount against asset based situations, right, and having 719 00:43:04,440 --> 00:43:08,840 Speaker 3: built that infrastructure has been really key for investors to 720 00:43:08,920 --> 00:43:12,440 Speaker 3: understand that, well, we can find things when there isn't 721 00:43:12,520 --> 00:43:15,560 Speaker 3: a big macro cycle, then when it turns up, hopefully 722 00:43:15,600 --> 00:43:19,040 Speaker 3: will be a safe custodium for their capital when when 723 00:43:19,080 --> 00:43:21,480 Speaker 3: one does turn up. I think the other thing that 724 00:43:22,200 --> 00:43:26,520 Speaker 3: one centers from investors is they're absolutely not kind of 725 00:43:26,960 --> 00:43:31,200 Speaker 3: entirely comfortable with the current setup of of of market 726 00:43:31,280 --> 00:43:38,399 Speaker 3: prices and fundamentals because you know, I think it's one thing, 727 00:43:39,280 --> 00:43:43,640 Speaker 3: you know, investors don't have an other people's money mindset, right, 728 00:43:43,680 --> 00:43:47,239 Speaker 3: It is absolutely their money that they manage and that 729 00:43:47,440 --> 00:43:51,600 Speaker 3: you know, they have been entrusted with, certainly our end investors, 730 00:43:52,080 --> 00:43:54,279 Speaker 3: and therefore they're trying to come up with what the 731 00:43:54,360 --> 00:43:57,040 Speaker 3: right thing to do is and it's quite hard to 732 00:43:57,080 --> 00:44:00,360 Speaker 3: find kind of that fundamental justification, you know, is a 733 00:44:00,440 --> 00:44:03,000 Speaker 3: high and fundamentals a week for just sort of you know, 734 00:44:03,600 --> 00:44:07,120 Speaker 3: you know, just plow on and keep the faith and 735 00:44:07,600 --> 00:44:11,480 Speaker 3: sort of diamond hand at whatever. So you know, I 736 00:44:11,480 --> 00:44:14,480 Speaker 3: think what what you send is that trepidation that they 737 00:44:14,520 --> 00:44:17,560 Speaker 3: have and sort of meet more and more people with 738 00:44:17,560 --> 00:44:21,279 Speaker 3: with grady degrees of anxiety, you know, on behalf of 739 00:44:21,520 --> 00:44:23,239 Speaker 3: you know, if it's a pension fund, you know, the 740 00:44:23,239 --> 00:44:25,759 Speaker 3: trustees of that pension fund, or it's an endowment, it's 741 00:44:25,800 --> 00:44:29,680 Speaker 3: the maybe some of the important programs that they're doing 742 00:44:29,719 --> 00:44:33,440 Speaker 3: with the funds that are available. The sovereigns kind of 743 00:44:33,480 --> 00:44:38,640 Speaker 3: you know, the longer dated you know, a wealth of 744 00:44:39,000 --> 00:44:42,200 Speaker 3: their countries, so they don't necessarily really want to just 745 00:44:42,239 --> 00:44:46,279 Speaker 3: be yoloing it. So you know, it's with that that 746 00:44:46,400 --> 00:44:50,400 Speaker 3: they kind of you know, maybe also what can appeal 747 00:44:50,520 --> 00:44:54,040 Speaker 3: is these more balanced portfolios where you're not just running lot. 748 00:44:54,320 --> 00:44:55,600 Speaker 1: I've got to answer that because you mentioned it. If 749 00:44:55,600 --> 00:44:57,880 Speaker 1: you don't equity like returns, you know, in the US 750 00:44:58,080 --> 00:45:00,279 Speaker 1: for some people that only remember last year, that's you know, 751 00:45:00,360 --> 00:45:02,799 Speaker 1: in excess of twenty percent, So what does it mean to. 752 00:45:02,800 --> 00:45:06,880 Speaker 3: You, well, yeah, and then in twenty twenty two, I 753 00:45:06,920 --> 00:45:10,760 Speaker 3: guess it was down about that much. So you know, yes, 754 00:45:11,040 --> 00:45:13,680 Speaker 3: I think I think you have to think about it 755 00:45:13,680 --> 00:45:15,920 Speaker 3: through the cycle. But I mean, equity like returns is 756 00:45:16,200 --> 00:45:18,440 Speaker 3: you know, maybe a bit of a glib phrase, James, 757 00:45:18,440 --> 00:45:21,359 Speaker 3: but you know, credit like returns is four to ten 758 00:45:22,000 --> 00:45:24,560 Speaker 3: and equity like returns is kind of you know whatever, 759 00:45:24,640 --> 00:45:30,279 Speaker 3: twelve to twenty and and you know that that is 760 00:45:30,400 --> 00:45:33,160 Speaker 3: that is just kind of broad bucketing as much as anything. 761 00:45:34,000 --> 00:45:36,880 Speaker 1: So what's the edge then, where's the best relative value 762 00:45:37,000 --> 00:45:37,479 Speaker 1: right now? 763 00:45:38,320 --> 00:45:44,799 Speaker 3: On the long side? Is really mining for you know, 764 00:45:45,080 --> 00:45:52,040 Speaker 3: what we're looking for is European bank owned risk that 765 00:45:52,200 --> 00:45:56,040 Speaker 3: tends to have been more conservatively underwritten in the initial 766 00:45:56,239 --> 00:45:58,759 Speaker 3: you know, in the initial underwrite and actually has the 767 00:45:58,840 --> 00:46:03,040 Speaker 3: hard asset backing. But what I would say is more broadly, 768 00:46:03,080 --> 00:46:05,799 Speaker 3: you know, it's a time for caution. There's a lot 769 00:46:05,880 --> 00:46:09,160 Speaker 3: it's difficult to underwrite longs because you don't necessarily know 770 00:46:09,200 --> 00:46:12,000 Speaker 3: what's going to happen next. But I think that sort 771 00:46:12,000 --> 00:46:15,400 Speaker 3: of where we're finding the best value is is in 772 00:46:15,520 --> 00:46:19,239 Speaker 3: things that were more conservatively underwritten initially on the long side, 773 00:46:19,320 --> 00:46:22,800 Speaker 3: which therefore pushes us to buy in bank non performing loans. 774 00:46:23,800 --> 00:46:27,200 Speaker 3: But you know, I think the you know, I think 775 00:46:27,280 --> 00:46:32,040 Speaker 3: the I think the bigger miss pricing lies still in 776 00:46:32,080 --> 00:46:35,719 Speaker 3: the lower rated parts of credit and utilizing those as 777 00:46:35,719 --> 00:46:40,160 Speaker 3: are short because they do imply a pretty low probability 778 00:46:40,160 --> 00:46:43,279 Speaker 3: of default and loss given default, which in these kind 779 00:46:43,320 --> 00:46:46,840 Speaker 3: of unusual circumstances may well not transpire. 780 00:46:47,760 --> 00:46:50,760 Speaker 1: One more question from me, Rob, Bloomberg News has reported 781 00:46:50,760 --> 00:46:52,759 Speaker 1: that your firm is up for sale. What can you 782 00:46:52,760 --> 00:46:53,400 Speaker 1: tell us about that. 783 00:46:54,440 --> 00:46:57,520 Speaker 3: I'm afraid that's something I can't comment on, but thank 784 00:46:57,560 --> 00:46:58,160 Speaker 3: you for asking. 785 00:46:58,239 --> 00:47:00,560 Speaker 1: I'm sure you'll tell us first when it happens. Great stuff, 786 00:47:00,719 --> 00:47:03,680 Speaker 1: Rob Daforon, Chief investment Officer at Polist Capital Management. It's 787 00:47:03,680 --> 00:47:05,040 Speaker 1: been a pleasure having you on the credit edge. 788 00:47:05,040 --> 00:47:07,920 Speaker 3: Many thanks, Thank you much appreciate it. 789 00:47:07,960 --> 00:47:10,600 Speaker 1: And Tim Riminton with Bloomberg Intelligence, thank you very much 790 00:47:10,600 --> 00:47:11,480 Speaker 1: for joining us today. 791 00:47:11,800 --> 00:47:12,880 Speaker 2: Thanks, it's been a pleasure. 792 00:47:13,080 --> 00:47:16,279 Speaker 1: For even more analysis, read all of Tim Riminton's great 793 00:47:16,320 --> 00:47:19,440 Speaker 1: work on the Bloomberg terminal. Bloomberg Intelligence is part of 794 00:47:19,440 --> 00:47:22,520 Speaker 1: our research department, with five hundred analysts and strategists working 795 00:47:22,520 --> 00:47:25,960 Speaker 1: across all markets. Coverage includes over two thousand equities and 796 00:47:26,040 --> 00:47:29,200 Speaker 1: credits and outlooks on more than ninety industries and one 797 00:47:29,280 --> 00:47:34,480 Speaker 1: hundred market induses, currencies, and commodities. Please do subscribe to 798 00:47:34,480 --> 00:47:37,960 Speaker 1: The Credit Edge wherever you get your podcasts. We're on Apple, Spotify, 799 00:47:38,040 --> 00:47:41,280 Speaker 1: and all other good podcast providers, including the Bloomberg Terminal 800 00:47:41,320 --> 00:47:45,120 Speaker 1: at b pod Go. Give us a review, tell your friends, 801 00:47:45,239 --> 00:47:48,919 Speaker 1: or email me directly at Jcrombie eight at Bloomberg dot net. 802 00:47:49,680 --> 00:47:52,000 Speaker 1: I'm James Crombie. It's been a pleasure having you join 803 00:47:52,120 --> 00:48:11,480 Speaker 1: us again next week on the Credit Edge.