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

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

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Speaker 2: I am Eric Aidelberg, the senior analyst and mortgage backed

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Speaker 2: securities and securitized products at Bloomberg Intelligence.

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Speaker 3: Bloomberg Intelligence is the research arm of Bloomberg LP.

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Speaker 2: And this week we are very pleased to welcome Shalony Shrewram,

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Speaker 2: the head of structured credit at Third Point.

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Speaker 3: How are you, Shelony, I'm doing great.

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Speaker 4: Thank you for having me, Erica awesome.

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Speaker 2: Shalony joins us with the broad experience in creating, investing in,

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Speaker 2: and trading mortgage backed securities and other structured products, including

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Speaker 2: investing in structured capitalists SCOGA and capital just before she

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Speaker 2: joined Third Point and before that serving as the head

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Speaker 2: of ABS CDO and RMBS trading at Morgan. Stand with that,

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Speaker 2: I'll move it back to James to ask first questions.

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Speaker 1: Thanks, Erica, great to have you on the show. So,

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Speaker 1: as we've been finding out for sometime, global markets are

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Speaker 1: getting whip swored now by conflict in the Middle East,

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Speaker 1: which has caused a spike in energy prices that raises

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Speaker 1: the risk of inflation and higher for longer rates plus

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Speaker 1: fears of a slowdown in the US economy. Stagflation would

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Speaker 1: mean more zombie borrowers as debt service costs go up

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Speaker 1: and revenue falls. But even before the US struck, Iran

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Speaker 1: credit markets were being rattled by concerns about AI disruption.

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Speaker 1: That's going to mean more defaults by software companies, and

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Speaker 1: there's also a ton of angst about private credit playing

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Speaker 1: in the background. Retail investors are having a bit of

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Speaker 1: a Roach Motel moment there. How are you dealing with

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Speaker 1: all this? What's your take?

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Speaker 4: That's a pretty dire picture that you've fainted.

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Speaker 5: But what I would say is this is probably one

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Speaker 5: of the most exciting times to be a credit investor.

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Speaker 4: So if you take sort of.

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Speaker 5: Any period of dislocation really since we've had since the

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Speaker 5: Great Financial Crisis of eight but even before that, you've

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Speaker 5: seen these periods of dislocation, whether it's macro geopolitical events,

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Speaker 5: how we think about rate policy and all of that

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Speaker 5: creates these very interesting blips to take advantage of markets.

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Speaker 4: And so when I look.

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Speaker 5: At the history of my ASSA class over the last

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Speaker 5: thirty plus years, a lot of it comes down to

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Speaker 5: our unit position to be a liquidity provider and deploy

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Speaker 5: in those moments of distress and really take a contrarian view.

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Speaker 5: So I think it's a really exciting time and that's

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Speaker 5: why I'm excited to be here, because I think there's

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Speaker 5: just so many different things to chat about in the space.

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Speaker 2: So what do you think kind of the most exciting

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Speaker 2: area is, Like, you know, I know it's very hard

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Speaker 2: to actually narrow it down because there are a lot

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Speaker 2: of exciting areas.

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Speaker 3: But at the same time, you only have so much bandwidth. So, right,

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Speaker 3: what are you finding it? Kind of hop one to

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Speaker 3: three wordless right now?

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Speaker 5: So maybe I just give you a two minute overview

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Speaker 5: of sort of what I do at Third Point to

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Speaker 5: sort of show you how we frame it. So Third

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Speaker 5: Point is a thirty plus year old edge fund. We

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Speaker 5: have a multi strategy approach where we do public equities,

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Speaker 5: corporate distress credit, and also structured credit, which we've had

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Speaker 5: for over eighteen years. Within structured credit, our view taking

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Speaker 5: the ethos of the firm is to always be opportunistic

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Speaker 5: across the different silos. Now, people think about structured credit

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Speaker 5: and asset backed as distinct, but they're actually sort of

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Speaker 5: synonyms for the same type of exposure. So the way

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Speaker 5: we divide it is into the four categories residential mortgages,

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Speaker 5: commercial mortgages, consumer asset backed securities, and then clos and

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Speaker 5: each one of those flavors touches a different part of

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Speaker 5: the economy and constitutes a fifteen trillion dollar market. So

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Speaker 5: the one thing about structure credit is you're never spoilt

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Speaker 5: for choice in what you can look at across the space.

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Speaker 5: So to your question, Erica, when I look at the

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Speaker 5: different things, the way we sort of lean is towards

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Speaker 5: a consumer finance background, and so we are applying what

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Speaker 5: we think are the macro conditions with how it's going

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Speaker 5: to affect the micro consumer side. So when the headlines

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Speaker 5: that James mentioned, I would say, before the geopolitical stress,

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Speaker 5: the biggest thing was what will happen with housing affordability?

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Speaker 5: What will the administration do with regards to easing either

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Speaker 5: rates this year or potentially creating different types of policies

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Speaker 5: or mortgage products that will help consumers, particularly with the

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Speaker 5: midterms coming up. And I think we saw a lot

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Speaker 5: of that in January that felt very constructive. I think

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Speaker 5: what's been interesting in the last ten days has been

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Speaker 5: You've had this fluctuation in oil prices, which from my perspective,

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Speaker 5: is going to impact the US consumer, which means how

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Speaker 5: do they pay their various debts. And then the second

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Speaker 5: part is what happens with rates. I think we the

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Speaker 5: treasury market up until probably three days ago, thought that

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Speaker 5: we would see two rate cuts, and that is a

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Speaker 5: big part of how we look at across consumer finance.

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Speaker 5: So for US, I would say that you know the

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Speaker 5: kind of the key trades right now that we like

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Speaker 5: have been in residential mortgages, but more on the private

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Speaker 5: label side, because we do feel like you've gone through

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Speaker 5: a period what record house price appreciation, so that's been

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Speaker 5: a very strong core part of our portfolio. And the

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Speaker 5: other is that this period of dislocation is going to

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Speaker 5: create two things. I think One, companies that are really

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Speaker 5: grappling with high rates that happened in twenty two and

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Speaker 5: twenty three are starting to get upended. So a lot

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Speaker 5: of consumer finance companies, for example in the solar space

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Speaker 5: as an example, or subprime auto are now finally correcting

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Speaker 5: or going through potentially bankruptcies, which is creating opportunities on

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Speaker 5: the security side.

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Speaker 4: So those are two.

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Speaker 5: Distinct categories and the third not to sort of add

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Speaker 5: more things that are we're sort of excited about right now.

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Speaker 5: Colos are a very compelling place right now in terms

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Speaker 5: of distress because you have a very specific secular shift

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Speaker 5: now on software and I think that's changing the way.

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Speaker 5: So this is probably the first time in a few

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Speaker 5: years where asset backed credit or structure credit is turning

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Speaker 5: into a trading market as opposed to a lending market,

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Speaker 5: where had been for the last three or four years.

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Speaker 3: A lot of interesting things to look at.

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Speaker 2: I'm just going to pick one of them, and now

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Speaker 2: I'll pass it back to James to pick another, because

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Speaker 2: I know which one he'll want.

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Speaker 4: To go towards.

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Speaker 3: So I'll go to the residential one. Yeah, no, I know,

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Speaker 3: I just came for the.

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Speaker 2: Structured Finances of Vegas conference. I don't know if you

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Speaker 2: were there as well, But you know, of course non

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Speaker 2: qualified mortgages or what everybody's talking about, that's where the

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Speaker 2: bulk of the issuance has been. Which part of the

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Speaker 2: residential non agency market are you mostly interested in? Is

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Speaker 2: non qualified really where it's at? And yeah, you know,

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Speaker 2: what do you see for issuance trends? And more importantly,

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Speaker 2: one more question not to overload, but do you think

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Speaker 2: there's going to be if if issuance.

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Speaker 4: Does pick up?

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Speaker 3: What's driving that and is there enough demand to support that?

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Speaker 4: Sure? Both great questions.

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Speaker 5: And I didn't go this time, so I probably would

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Speaker 5: have not seen you in the sea of blue suits

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Speaker 5: navy suits that we have at that conference. And that's

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Speaker 5: actually that conference is a good testament to you know,

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Speaker 5: twenty years ago you'd have maybe a couple hundred people

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Speaker 5: and now you have close to eight thousand people attending

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Speaker 5: it ten So you know the true scale of that market,

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Speaker 5: I think is just showing you there's two There's probably

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Speaker 5: a lot of people that have been it for a

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Speaker 5: long time, but there's a lot of people moving from

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Speaker 5: traditional private credit into that market as well. To your question,

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Speaker 5: I think so what we have focused on is predominantly

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Speaker 5: owner occupied firstly in mortgages, and we've done that through

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Speaker 5: two trades. We've done it on the non qualified mortgage side.

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Speaker 5: We've also done it in the reperforming space, which is

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Speaker 5: for our listeners. Mortgages that were done you know pre

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Speaker 5: two thousand and eight went through modifications either interest or

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Speaker 5: principle at the time and sort of because of a

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Speaker 5: modification are performing again, hence the term reperforming. So those

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Speaker 5: had been two key trades for US. I think the

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Speaker 5: distinction when I look at it non qualified mortgages. I think,

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Speaker 5: to your comment about scale, it's definitely increasing every year

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Speaker 5: pretty meaningfully. So so I think when we looked at

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Speaker 5: this five years ago, we thought the market would maybe

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Speaker 5: do ten billion, and now we're kind of crossing into

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Speaker 5: the fifty billion dollar.

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Speaker 4: Type of number.

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Speaker 5: I think what has happened, or what people maybe don't

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Speaker 5: fully appreciate, is non qualified mortgages are the same originators

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Speaker 5: who are there pre two thousand and eight that have

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Speaker 5: sort of reinvented themselves as a non qualified mortgage provider.

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Speaker 5: I think that the demand side from the capitol is

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Speaker 5: quite pronounced for non qualified mortgages right now because you

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Speaker 5: have so many insurance companies that can buy non qualified

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Speaker 5: mortgages for their portfolios. So that's driving those spreads tighter.

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Speaker 5: It's also driving prices higher. So my view on non

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Speaker 5: qualified is slightly different than it was perhaps a year

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Speaker 5: or two ago in that because they're creating at premium

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Speaker 5: dollar price somewhere between one oh three and one oh five.

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Speaker 5: If we are in a rate easing environment. If we

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Speaker 5: are doing things that improve overall affordability of homes, then

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Speaker 5: I think you will see elevated refinancing at some point,

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Speaker 5: and these mortgages that are eight, nine, ten percent coupons

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Speaker 5: could go through some period of you know, maybe the

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Speaker 5: premium dollar prices are not completely justified. And so I

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Speaker 5: think what's interesting in those capital structures right now, and

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Speaker 5: kind of the way we play it is we can

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Speaker 5: be in the debt and we think the debt is

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Speaker 5: more interesting and maybe a higher total return at the

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Speaker 5: double B single B level versus the equity because you

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Speaker 5: have positive convexity there versus the residual. So that's the

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Speaker 5: way we're playing that trade. I do think that volumes

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Speaker 5: will continue to grow in the space. I think that

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Speaker 5: there are more originators that we see all the time

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Speaker 5: coming to non qualified mortgages, and I think with the

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Speaker 5: general expansion of private label mortgages, this is the easiest

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Speaker 5: place to expand that volume. The contrary point to that

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Speaker 5: is that what is the true size of people wanting

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Speaker 5: a mortgage that's north of seven percent and a lot

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Speaker 5: of it is self employed in those types of profiles.

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Speaker 5: So I think that non qualified is an interesting part.

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Speaker 5: I think performing has been more interesting for us because

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Speaker 5: the loan to value is quite different. So you know,

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Speaker 5: reperforming could be fifty sixty percent loan to value, so

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Speaker 5: significant home equity non qualified as seventy five eighty, and

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Speaker 5: so if we go through a housing correction, you just

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Speaker 5: don't have the same margin fair It's it's good, but

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Speaker 5: it's not as good as you would find in other products.

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Speaker 1: You've mentioned rates a couple of times, and I'm interested

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Speaker 1: in how much conviction you still have in rate cuts

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Speaker 1: this year given the inflation pressures from the war.

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Speaker 5: It's a great question. Though I did study economics, and

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Speaker 5: in the days of when Alan Greenspan was the FED

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Speaker 5: chair and sort of idolized the Federal Reserve, I don't think.

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Speaker 5: I feel like the part of my job is to

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Speaker 5: be aware of rates, but not to make decisions based

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Speaker 5: on it, if that makes sense, because which is why

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Speaker 5: we skew towards the private label side of the market.

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Speaker 5: I think that what has happened in the last ten

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Speaker 5: days is a great point where and we're seeing it

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Speaker 5: in the treasury market where seeing us sell off now

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Speaker 5: because of what's happening with oil and other concerns about

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Speaker 5: inflationary pressures. So I would say it's maybe the probability

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Speaker 5: has gone down in the last ten days, but if

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Speaker 5: we get some clear outcome on geopolitical stress, we might

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Speaker 5: see that reverse Again. I would say, before all of

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Speaker 5: this recent news, the way the FED Board of Governors

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Speaker 5: was looking, it felt like two cuts was sort of

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Speaker 5: reasonable to assume. That feels now like it's somewhat in question,

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Speaker 5: But it may be that it gets pushed out further

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Speaker 5: along the cycle. It doesn't happen by June, but we

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Speaker 5: keep a rate heage sort of to you know, sort

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Speaker 5: of isolate that risk and don't necessarily take a bet

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Speaker 5: on that, although it's something we're again fully aware of.

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Speaker 1: You mentioned the sort of opportunity now in credit. A

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Speaker 1: lot of people are somewhat anxious at the time because

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Speaker 1: there's so many unknowns, and you know, there are some

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Speaker 1: parts of the market in distress. So I'm wondering whether

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Speaker 1: you kind of wait it out now and wait to

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Speaker 1: see what next, or do you jump in right now.

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Speaker 1: Is this the opportunity to buy right now?

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Speaker 5: So I think it depends on the asset class. What

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Speaker 5: I will say is, you know clos which are sitt

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Speaker 5: in my universe that one, I would say, it's still

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Speaker 5: a wait and see. So we started to see softening

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Speaker 5: in that market in November with concerns about software that

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Speaker 5: were accelerated at the start of this year. I think

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Speaker 5: the challenge when you talk to every sort of walk

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Speaker 5: of life associated with views on artificial intelligence is even

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Speaker 5: those that are creating the artificial intelligence are still trying

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Speaker 5: to understand what the ramifications will be. So as an investor,

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Speaker 5: for me to say that this particular software company will

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Speaker 5: or will not default or will be replaced is very hard.

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Speaker 5: And that doesn't mean that they're you know, along the

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Speaker 5: way there could be very interesting trades, but you are

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Speaker 5: but perhaps a little bit of a hot potato type

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Speaker 5: of scenario there. So I would say clos in the

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Speaker 5: US have anywhere from fifteen to twenty percent and software

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Speaker 5: exposure on average, a lot of managers are less. That

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Speaker 5: means it's very difficult to say on a capital structure

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Speaker 5: with where equity is the bottom eight percent having a

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Speaker 5: real margin of safety. So that's an area I would say,

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Speaker 5: wait and see, let's see how that starts to play out.

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Speaker 5: The areas that I do like, I do like the

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Speaker 5: residential mortgage space. I do like certain things in consumer

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Speaker 5: asset act as well, where I think some of the

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Speaker 5: AI advancement will make those markets more efficient and have

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Speaker 5: been inefficient for a long time, and so I think

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Speaker 5: there are dislocated plays that are very interesting.

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Speaker 1: What does a hedge fund do with all these loans that?

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Speaker 1: Do you package them up and sell them on what's

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Speaker 1: the next phase of the life cycle?

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Speaker 5: Yeah, so we do two things, and this is sort

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Speaker 5: of the you know, the flavor. So asset back credit

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Speaker 5: as it's known today is the is the simple act

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Speaker 5: of buying a portfolio of loans, whether it's from a bank,

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Speaker 5: the GSS, a credit union, someone that needs to sell

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Speaker 5: risks for a variety of reasons. And then we package

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Speaker 5: those loans into a capital structure and work with the

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Speaker 5: rating agencies to make that as efficient as possible and

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Speaker 5: sell different portions of the risk. That is sort of

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Speaker 5: true asset backed credit of what we call asset back

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Speaker 5: finance today. What we do with third points a little

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Speaker 5: different in that we do that side of the equation,

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Speaker 5: but we also like to think of ourselves as moving

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Speaker 5: where the point of arbitrage may be. So sometimes we're

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Speaker 5: buying the loans and packaging them and selling them. Other

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Speaker 5: times we are buying different pieces of that capital structure,

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Speaker 5: either in the secondary market or a new issue if

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Speaker 5: we feel like the return is more compelling than the

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Speaker 5: originate to distribute model. So we oscillate back and forth.

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Speaker 5: This market lends itself more to the latter of sort

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Speaker 5: of buying specific tranches within a capital structure because we're

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Speaker 5: seeing this type of volatility.

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Speaker 1: So they move, as you pointed out earlier, from a

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Speaker 1: sort of issue's market to a now trading market. You

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Speaker 1: source things in secondary is that because there are more

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Speaker 1: holders in trouble.

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Speaker 5: So I don't think there are holders in trouble yet.

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Speaker 5: If you take the construct of what happened during the pandemic,

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Speaker 5: and maybe even stepping back a little bit further than that,

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Speaker 5: what we saw. I worked at an investment bank for

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Speaker 5: almost ten years and I was on a trading desk,

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Speaker 5: and the scale that we had in terms of balance

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Speaker 5: sheet was pretty substantial. Once you had Dodd Frank and

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Speaker 5: Basel three at that time, you started to see balance

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Speaker 5: sheet to principle risk at banks go down very significantly.

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Speaker 5: And what banks moved into was the regulatory capital model

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Speaker 5: where they will finance risk, but they don't want to

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Speaker 5: principle it. So what happens in periods of dislocation now

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Speaker 5: is that the bank is not able to be as

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Speaker 5: significant of a liquidity provider in those periods of distress,

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Speaker 5: which is why a hedge funded an asset class that

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Speaker 5: certainly doesn't trade as frequently as equities is. It's a

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Speaker 5: really interesting place to be because we can be that

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Speaker 5: liquidity provider, and so in periods like twenty twenty, we

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Speaker 5: were able to do that. We were able to go

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Speaker 5: into the market and when reads needed to sell risk

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Speaker 5: or mutual funds, we could be that liquidity provider because

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Speaker 5: we could take on the risk when people needed cash

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Speaker 5: in twenty four hours. I would say this market is

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Speaker 5: different because what we've learned from the pandemic is that

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Speaker 5: you need to have asset and liability matching, and so

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Speaker 5: you have a lot of more locked up capital in

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Speaker 5: the market, so you don't have the same pronounced for sellers.

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Speaker 5: But what you do have at the moment is some

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Speaker 5: questions around liquidity. Obviously in private credit, but more broadly,

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Speaker 5: you are seeing people trying to sell parts of the

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Speaker 5: portfolio that they can and you always sell what you

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Speaker 5: can first. So we are starting to see a little

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Speaker 5: bit of pockets there where you're seeing maybe some of

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Speaker 5: the cleaner paper come out. I would not say today

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Speaker 5: is a you know, we're getting an avalanche of product

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Speaker 5: quite yet, but I think the signs are starting to

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Speaker 5: emerge that there will be more potential selling opportunities.

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Speaker 1: And it's coming from banks.

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Speaker 5: It's coming from it's coming from you know, potentially funds

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Speaker 5: that need liquidity. It could come from insurance companies if

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Speaker 5: we start to see downgrades, for example in colos. So

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Speaker 5: I think a lot of the reasons when the buy

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Speaker 5: opportunity is interesting when there is almost an uneconomic reason

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Speaker 5: for someone to sell, whether that's regulatory capital or whether

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Speaker 5: that is rating agency driven in some form. And so

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Speaker 5: I think it's more that side. The banks have less

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Speaker 5: principal exposure today. What they do have is a lot

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Speaker 5: of financing exposure, and given their advance rates, I would

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Speaker 5: say they're in a good spot. So that I don't

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Speaker 5: think banks will be for sellers in.

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Speaker 1: This What would be the trigger then to get to

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Speaker 1: the point at which you see much more offer.

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Speaker 5: So I think, you know, I we always say it

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Speaker 5: at third point but equity sells off for a week,

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Speaker 5: corporate credit sells off a week or two later, and

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Speaker 5: then structure credit follows, and so being at a platform

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Speaker 5: that has all of these flavors of finance, I can

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Speaker 5: sort of see how the market is starting to emerge. So,

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Speaker 5: for example, we've had volatility and equities you know, knock

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Speaker 5: on wood this past week. Selling risk has been quite

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Speaker 5: easy in structured credit. If this volatility persists, we may

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Speaker 5: see the other direction. So it gives us a little

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Speaker 5: bit of time to potentially monetize some risk. So I

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Speaker 5: really think equity macro flows will dictate some of that

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Speaker 5: and people just deciding they want to pare down risk.

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Speaker 5: There's also usually softness around quarter ends, so March could

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Speaker 5: be an interesting month where we start to see more

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Speaker 5: pressure as we get to that point.

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Speaker 1: But to be clear, it is a technical it's not

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Speaker 1: a fundamental shift. Peopleancing deterioration in the assets and having

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Speaker 1: to ufload them for.

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Speaker 4: Yeah, So that's a good question.

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Speaker 5: So there's the technical component, which is why you get

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Speaker 5: selling on the fundamental side, because there's a flavor of

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Speaker 5: things that we look at. Certain asset classes do have

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Speaker 5: some fundamental deterioration particularly in the subprime consumer space, which

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Speaker 5: we've seen for some time. It's not an alarm bell,

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Speaker 5: but it is definitely you're seeing early stage delinquencies worse

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Speaker 5: now than they probably have ever been. So that's an

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Speaker 5: area where you could see fundamental decline. Colos, you could

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Speaker 5: see it because people are concerned about software exposure and

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Speaker 5: would rather get out now than sort of wait to

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Speaker 5: see what happens there. So you've seen some selling there,

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Speaker 5: and then you haven't really seen much in residential because

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Speaker 5: that has been a bit of a flight to quality

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Speaker 5: given the equity that people have in their home. So

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Speaker 5: I think it's going to be more in weaker parts

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Speaker 5: of the consumer and COLOS would probably be the two

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Speaker 5: predominant areas.

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Speaker 1: Do you worry that at some point there's all the

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Speaker 1: sort of fees on itself and there's contagion and people,

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Speaker 1: you know, there is fear in the market and that

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Speaker 1: we see much bigger repricing of credit across the board.

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Speaker 4: I mean fear As a credit investor.

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Speaker 5: I would I think it would be sort of exciting

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Speaker 5: in the sense of we've been in a period for

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Speaker 5: a long time where we've seen a march of credits,

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Speaker 5: breads tighter and tighter since really the sort of the

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Speaker 5: UK pension crisis of twenty three onwards, we've had two

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Speaker 5: plus years of pronounced credit spread tightening.

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Speaker 4: I don't think that.

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Speaker 5: Happens because we do have to Erica's earlier point about

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Speaker 5: the spaces and things like non qualified mortgages and others

395
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Speaker 5: are still not large enough. There's still more capital chasing

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Speaker 5: those assets. So I think that technical is going to

397
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Speaker 5: not allow that to happen. I think the areas where

398
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Speaker 5: you could see it and where you'll see that fundamental

399
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Speaker 5: deterioration are in some of the spaces that I mentioned,

400
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Speaker 5: and so there you could see more stress in the market.

401
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Speaker 5: But I don't think we're going to go into a

402
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Speaker 5: period of massive correction, however, unless you see unemployment significantly

403
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Speaker 5: tick up and you see kind of broader macroeconomic data

404
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Speaker 5: that suggests that the economy and the consumer is in

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Speaker 5: a weaker spot.

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Speaker 4: Outside of that, I don't think you.

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Speaker 5: See sort of a big retracing in the market or

408
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Speaker 5: a big distress cycle.

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Speaker 1: Right, but there is, so there is a bit underpinning

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Speaker 1: the market that's kind of repricing. Going on to the

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Speaker 1: Colo point you made, we have had a colo By

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Speaker 1: on the show not that long ago, who was you

413
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Speaker 1: know telling us that you know, previous months he would

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Speaker 1: see one or two calls you know with selling this stuff.

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Speaker 1: Now he's seeing five of those a day and he's

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Speaker 1: offering sixty cents and he's getting it. So are you

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Speaker 1: seeing those sort of discounts, like people really discounting heavily

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Speaker 1: to try and move this stuff or is it much smaller?

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Speaker 5: Yeah, so you are seeing you are seeing more selling

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Speaker 5: in clos in particular, and your other guests is correct

421
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Speaker 5: and that there are more phone calls per day and

422
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Speaker 5: there's also just more bidless in comp in that market.

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Speaker 5: I think what you're seeing is most of the selling

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Speaker 5: so far has been in equity and double b's where

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Speaker 5: you do have potential real credit exposure if there's a

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Speaker 5: high percentage of software names. So that the COLO market

427
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Speaker 5: is interesting because you have a bifurcation now where anything

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Speaker 5: that's not software outside of a few sectors is trading tighter,

429
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Speaker 5: so the excess spread has compressed a decent amount.

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Speaker 4: And then you.

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Speaker 5: Also have software where it's hard for people to have

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Speaker 5: a conclusive outlook or opinion on where software is going

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Speaker 5: to go. So I think you're going to have in

434
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Speaker 5: the COLO market two markets emerge, one where there is

435
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Speaker 5: software exposure and it trades off for a reason and

436
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Speaker 5: probably is not cheap enough, even if it's sixty cents

437
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Speaker 5: in the dollar.

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Speaker 4: And you'll have.

439
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Speaker 5: Another market where new deals being created now are going

440
00:22:32,880 --> 00:22:35,280
Speaker 5: to be much better because they won't have software exposure,

441
00:22:35,960 --> 00:22:38,560
Speaker 5: and I think the risk adjusted return in the new

442
00:22:38,600 --> 00:22:40,680
Speaker 5: product will be much stronger.

443
00:22:40,240 --> 00:22:41,359
Speaker 4: Than the old one.

444
00:22:41,400 --> 00:22:44,000
Speaker 5: So discount price is always tempting, but I think in

445
00:22:44,040 --> 00:22:45,960
Speaker 5: this case it's discounted for a reason.

446
00:22:46,200 --> 00:22:49,280
Speaker 1: So maybe a COLO three point zero without any software exposure, though.

447
00:22:49,160 --> 00:22:51,400
Speaker 5: That's right until we find the next sector we don't

448
00:22:51,400 --> 00:22:52,080
Speaker 5: want exposure to.

449
00:22:52,160 --> 00:22:54,920
Speaker 1: But yes, that yeah, okay. But in the COLO space,

450
00:22:54,960 --> 00:22:56,639
Speaker 1: do you expect there to be losses? I mean on

451
00:22:56,680 --> 00:22:58,600
Speaker 1: the equity channel, we have taught to a lot of

452
00:22:58,600 --> 00:23:00,320
Speaker 1: people over the course of the last eighty mon who

453
00:23:00,359 --> 00:23:04,720
Speaker 1: love clos and you know, one guest described them as bulletproof,

454
00:23:05,800 --> 00:23:08,600
Speaker 1: and others were levering up to buy the equity, which

455
00:23:08,680 --> 00:23:10,879
Speaker 1: you know, in this kind of market seems a bit risky.

456
00:23:10,880 --> 00:23:12,600
Speaker 1: But do do you think people might start losing money

457
00:23:12,640 --> 00:23:13,240
Speaker 1: on those trades?

458
00:23:13,320 --> 00:23:16,240
Speaker 5: So you know, a story on me is that I

459
00:23:16,320 --> 00:23:19,119
Speaker 5: started in structure credit sort of by accident in two

460
00:23:19,160 --> 00:23:22,280
Speaker 5: thousand and two, structuring colos and then marketing them. And

461
00:23:22,320 --> 00:23:25,439
Speaker 5: at the time there were twenty COLO managers and today

462
00:23:25,440 --> 00:23:28,200
Speaker 5: there's over one hundred and fifty in the US. And

463
00:23:28,840 --> 00:23:31,399
Speaker 5: you know, in the nascent days of that market, it

464
00:23:31,640 --> 00:23:34,879
Speaker 5: was really something where you could kind of choose your

465
00:23:34,880 --> 00:23:37,679
Speaker 5: own adventure in terms of portfolios. When I look at

466
00:23:37,680 --> 00:23:40,520
Speaker 5: the COLO market today, you know, seventy percent of a

467
00:23:40,560 --> 00:23:43,720
Speaker 5: trillion dollar levered loan market is going to COLO buyers.

468
00:23:43,880 --> 00:23:47,840
Speaker 5: So I think, depending on there's certainly ways to generate

469
00:23:47,840 --> 00:23:50,560
Speaker 5: alpha in those portfolios, but as you become larger and

470
00:23:50,680 --> 00:23:54,320
Speaker 5: larger in that space, you tend to buy the market itself.

471
00:23:55,000 --> 00:23:58,679
Speaker 5: So I have a though I've reinvented myself as a

472
00:23:58,680 --> 00:24:02,080
Speaker 5: mortgage person. My first job and my first love was

473
00:24:02,119 --> 00:24:04,800
Speaker 5: in clos and so all that to say that, I

474
00:24:04,800 --> 00:24:06,720
Speaker 5: think the stat that people always use is in two

475
00:24:06,720 --> 00:24:09,560
Speaker 5: thousand and eight, they say, well, no, Colo double b

476
00:24:09,760 --> 00:24:13,040
Speaker 5: ever took a write down, and they're correct. When I

477
00:24:13,080 --> 00:24:15,399
Speaker 5: look at two thousand and eight, really the reason that

478
00:24:15,480 --> 00:24:18,480
Speaker 5: worked is defaults elevated for a year and came back

479
00:24:18,560 --> 00:24:21,199
Speaker 5: right back down and obviously we went into the greatest

480
00:24:21,200 --> 00:24:25,280
Speaker 5: period of financial easing. Why I think this cycle could

481
00:24:25,359 --> 00:24:29,679
Speaker 5: be different is the default defaults don't need to be

482
00:24:29,720 --> 00:24:33,080
Speaker 5: eight percent, but they could be three. And I think

483
00:24:33,080 --> 00:24:35,800
Speaker 5: the big difference is the recovery rates could be worse.

484
00:24:36,080 --> 00:24:39,280
Speaker 5: So you know, in those days of the early two thousands,

485
00:24:39,280 --> 00:24:43,200
Speaker 5: we'd always run seventy percent loan recovery. Now people run sixty.

486
00:24:43,520 --> 00:24:48,640
Speaker 5: But the average sub eighty dollars price loan is around

487
00:24:48,720 --> 00:24:52,200
Speaker 5: somewhere around mid thirties. So I think the recovery rates

488
00:24:52,200 --> 00:24:55,200
Speaker 5: will be worse. And if we have two or three

489
00:24:55,320 --> 00:24:58,120
Speaker 5: years of three percent four percent default rates, that will

490
00:24:58,119 --> 00:25:02,040
Speaker 5: feel more painful than the current than what we've historically seen.

491
00:25:02,080 --> 00:25:05,000
Speaker 5: So I think it's just more if we get pronounced

492
00:25:05,000 --> 00:25:08,440
Speaker 5: periods of distress in that market, that will create the catalyst.

493
00:25:08,480 --> 00:25:10,760
Speaker 5: So I'm not going to say on the record, yes,

494
00:25:10,840 --> 00:25:13,000
Speaker 5: we're going to have losses in these portfolios.

495
00:25:13,040 --> 00:25:14,640
Speaker 4: It's possible we're able to navigate out.

496
00:25:14,680 --> 00:25:17,520
Speaker 5: But I do think you will probably see more anemic

497
00:25:17,600 --> 00:25:20,800
Speaker 5: returns for sure, and maybe you start to see impairment

498
00:25:21,600 --> 00:25:23,560
Speaker 5: on some double b's that are overall Kate. If you

499
00:25:23,640 --> 00:25:26,760
Speaker 5: think about the typical thing a double b has eight

500
00:25:26,800 --> 00:25:29,679
Speaker 5: percent credit support. If there's twenty percent software and you

501
00:25:29,760 --> 00:25:33,440
Speaker 5: have half of that portfolio, take some distress. There could

502
00:25:33,480 --> 00:25:36,600
Speaker 5: at least be some you know, potential impairment on those assets.

503
00:25:36,760 --> 00:25:38,199
Speaker 1: We could do a whole separate show on what it

504
00:25:38,240 --> 00:25:40,360
Speaker 1: was like to trade CEE doos back in the day,

505
00:25:40,400 --> 00:25:41,960
Speaker 1: but we won't do that here. Eric.

506
00:25:42,600 --> 00:25:44,560
Speaker 4: Yeah, I mean my other first love exactly.

507
00:25:44,760 --> 00:25:47,159
Speaker 2: One of the big differences, and I'm not a clo

508
00:25:47,240 --> 00:25:50,040
Speaker 2: or studio person per se, but one of the other

509
00:25:50,040 --> 00:25:52,880
Speaker 2: big differences of course, managers can swap loans in it out,

510
00:25:53,000 --> 00:25:55,240
Speaker 2: et cetera, whereas you can't really do that with the

511
00:25:55,240 --> 00:25:57,560
Speaker 2: type of structured products that I've been more involved with,

512
00:25:57,640 --> 00:26:00,720
Speaker 2: like you know, commercial and residential mortgage backs Curiti. Yeah,

513
00:26:00,840 --> 00:26:03,760
Speaker 2: we are beginning to see some distress, you know, obviously

514
00:26:03,800 --> 00:26:05,560
Speaker 2: it's actually been going on for a little while now

515
00:26:06,000 --> 00:26:07,440
Speaker 2: in commercial.

516
00:26:06,920 --> 00:26:08,000
Speaker 4: Mortgage backed securities.

517
00:26:08,080 --> 00:26:09,879
Speaker 2: I wondered if you thought that was an issue, if

518
00:26:09,920 --> 00:26:12,760
Speaker 2: that was if there's any risk of contagent in that sector,

519
00:26:12,800 --> 00:26:14,399
Speaker 2: any opportunities in that sector.

520
00:26:14,520 --> 00:26:18,199
Speaker 5: Yeah, So I think commercial mortgages are an interesting space

521
00:26:18,320 --> 00:26:21,760
Speaker 5: because again, going back to the two thousand and eight construct,

522
00:26:22,200 --> 00:26:25,720
Speaker 5: you didn't actually see losses or defaults.

523
00:26:25,240 --> 00:26:27,240
Speaker 4: In commercial mortgages until twenty twelve.

524
00:26:27,920 --> 00:26:31,760
Speaker 5: So I was active at a previous firm in trading CMBs,

525
00:26:32,440 --> 00:26:36,240
Speaker 5: you know, b pieces, and it was almost binary in

526
00:26:36,320 --> 00:26:40,000
Speaker 5: terms of outcomes because you didn't know a large asset.

527
00:26:40,280 --> 00:26:44,080
Speaker 5: So you take a typical CMBs transaction, the top ten

528
00:26:44,200 --> 00:26:46,800
Speaker 5: loans can make up more than fifty percent of the exposure.

529
00:26:46,800 --> 00:26:48,560
Speaker 4: If it's a condo a deal, sometimes.

530
00:26:48,280 --> 00:26:51,120
Speaker 2: Even one with Sasby single ASCID a single that exactly

531
00:26:51,200 --> 00:26:54,160
Speaker 2: and then even Sasby you better get that underwriting right,

532
00:26:54,320 --> 00:26:56,800
Speaker 2: and so the outcome can be binary.

533
00:26:56,880 --> 00:26:59,920
Speaker 5: So there were times so in twenty twelve, those CNBA

534
00:27:00,240 --> 00:27:04,240
Speaker 5: tranches dropped to twenty dollars price and some cases recovered

535
00:27:04,280 --> 00:27:08,240
Speaker 5: par and some cases went to zero. When the pandemic happened,

536
00:27:08,520 --> 00:27:11,360
Speaker 5: it felt like there was a secular shift in real

537
00:27:11,480 --> 00:27:14,159
Speaker 5: estate because we had certain things that didn't have the

538
00:27:14,200 --> 00:27:17,359
Speaker 5: same utility anymore. You know, certainly suburban office being an

539
00:27:17,359 --> 00:27:19,760
Speaker 5: area people thought about at the time, hotels that have

540
00:27:19,800 --> 00:27:23,280
Speaker 5: come roaring back but were a concern, and retail, which

541
00:27:23,320 --> 00:27:27,960
Speaker 5: was already sort of having declines before the pandemic. I

542
00:27:27,960 --> 00:27:31,640
Speaker 5: think for commercial real estate, the big thing is that

543
00:27:31,760 --> 00:27:33,760
Speaker 5: you do have a lot of capital still allocated to

544
00:27:33,800 --> 00:27:37,480
Speaker 5: the asset class. There has been a hope for that

545
00:27:37,680 --> 00:27:41,040
Speaker 5: investor base that rates will ease and cap rates will

546
00:27:41,080 --> 00:27:45,119
Speaker 5: ease in accordance and we will see recoveries there, but

547
00:27:45,240 --> 00:27:47,640
Speaker 5: that so far has not played out. And I think

548
00:27:47,680 --> 00:27:50,159
Speaker 5: you still have a utility problem because you need to

549
00:27:50,200 --> 00:27:52,920
Speaker 5: repurpose a lot of these So the areas of growth

550
00:27:52,960 --> 00:27:55,360
Speaker 5: and commercial real estate have been things like data centers,

551
00:27:55,960 --> 00:27:59,679
Speaker 5: right unless so no one's financing a shopping mall anymore.

552
00:28:00,080 --> 00:28:03,200
Speaker 5: So I think for commercial real estate we have played

553
00:28:03,200 --> 00:28:05,480
Speaker 5: it in a few different ways, more in sort of

554
00:28:05,560 --> 00:28:10,640
Speaker 5: industrial warehouse where there's a large you know, distributor tech

555
00:28:10,680 --> 00:28:15,040
Speaker 5: provider you know, that needs that type of exposure for distribution.

556
00:28:15,240 --> 00:28:18,520
Speaker 5: But we've kept it very small because we do think

557
00:28:18,560 --> 00:28:21,000
Speaker 5: there will be more problems in commercial real estate. The

558
00:28:21,040 --> 00:28:24,320
Speaker 5: problems we've had a lot of the classic extend and

559
00:28:24,359 --> 00:28:28,640
Speaker 5: pretend and like what you've seen in the leveraged loan

560
00:28:28,720 --> 00:28:31,840
Speaker 5: universe where you've had the loan maturity extensions, here you've

561
00:28:31,840 --> 00:28:34,720
Speaker 5: had a similar phenomenon. So I think that there will

562
00:28:34,760 --> 00:28:38,400
Speaker 5: be more distress in that market. But because and we

563
00:28:38,440 --> 00:28:40,280
Speaker 5: saw some of it with some of the stress around

564
00:28:40,520 --> 00:28:44,000
Speaker 5: into twenty twenty three when we had the banking crisis

565
00:28:44,000 --> 00:28:46,560
Speaker 5: in March of that year and there were downgrades in

566
00:28:46,640 --> 00:28:50,000
Speaker 5: CMPs and some insurance companies sold. But it's been a

567
00:28:50,160 --> 00:28:53,640
Speaker 5: pretty good trade up since then into this market. But

568
00:28:53,680 --> 00:28:56,760
Speaker 5: I do think there will be impairments and you're seeing

569
00:28:56,800 --> 00:28:59,760
Speaker 5: more strategic defaults from a lot of the large in

570
00:29:00,400 --> 00:29:02,920
Speaker 5: that space, so I don't think it's an area that

571
00:29:02,960 --> 00:29:05,280
Speaker 5: would be a compelling buy. Again, similar to what we're

572
00:29:05,280 --> 00:29:08,080
Speaker 5: seeing a little bit in colos where the defaults and

573
00:29:08,120 --> 00:29:11,320
Speaker 5: the credit impairment are happening for a reason, So we

574
00:29:11,360 --> 00:29:13,320
Speaker 5: don't think their way to play it is through CMBs.

575
00:29:13,400 --> 00:29:15,640
Speaker 5: I think the better way is to do sas B

576
00:29:15,760 --> 00:29:19,720
Speaker 5: as you mentioned, or do direct loan origination where you

577
00:29:19,840 --> 00:29:23,400
Speaker 5: are forming a real direct dialogue with the borrower and

578
00:29:23,480 --> 00:29:26,520
Speaker 5: being able to have that asset for a long period

579
00:29:26,560 --> 00:29:28,080
Speaker 5: of time and really think about it as it's going

580
00:29:28,080 --> 00:29:29,720
Speaker 5: to be a ten year investment and how does it

581
00:29:29,760 --> 00:29:31,000
Speaker 5: look over a ten year horizon.

582
00:29:31,400 --> 00:29:32,840
Speaker 1: Are you doing the data center deals?

583
00:29:34,120 --> 00:29:37,920
Speaker 5: We have not done really much in the data center space.

584
00:29:38,760 --> 00:29:40,800
Speaker 5: You know. The one thing about our firm is that

585
00:29:40,840 --> 00:29:45,200
Speaker 5: we're always looking at relative value, and we find the

586
00:29:45,320 --> 00:29:49,920
Speaker 5: data center play more interesting. On the corporate credit side,

587
00:29:50,240 --> 00:29:52,360
Speaker 5: you're buying single beek credits that are sort of in

588
00:29:52,400 --> 00:29:57,000
Speaker 5: the double digits context, whereas data centers now are inside

589
00:29:57,040 --> 00:29:59,800
Speaker 5: of two hundred spread. So candidly, they don't really work

590
00:29:59,840 --> 00:30:04,000
Speaker 5: for a hedge fund model, but we follow the space.

591
00:30:04,080 --> 00:30:06,560
Speaker 5: We think it's an interesting space. I don't know if

592
00:30:06,600 --> 00:30:09,080
Speaker 5: it all ends up in the right space at the end,

593
00:30:09,480 --> 00:30:11,800
Speaker 5: but there's certainly a lot of enthusiasm for the sector.

594
00:30:12,160 --> 00:30:15,120
Speaker 1: Or is it moving to GPU financial power procurement? Is

595
00:30:15,120 --> 00:30:16,120
Speaker 1: that the next phase of that?

596
00:30:16,240 --> 00:30:18,160
Speaker 4: That's probably the next phase of this.

597
00:30:18,280 --> 00:30:21,920
Speaker 5: I think that a lot of the data center focus

598
00:30:21,920 --> 00:30:24,840
Speaker 5: has been because you have capital allocated commercial real estate

599
00:30:24,840 --> 00:30:26,520
Speaker 5: and this is a way to play it. But I

600
00:30:26,560 --> 00:30:29,920
Speaker 5: think all of the ancillary and vital parts of AI

601
00:30:29,960 --> 00:30:31,720
Speaker 5: are going to be much more useful, and so looking

602
00:30:31,760 --> 00:30:34,720
Speaker 5: at GPU energy production, I think those will be the

603
00:30:34,760 --> 00:30:37,080
Speaker 5: perhaps the more interesting areas and where you're going to

604
00:30:37,120 --> 00:30:38,560
Speaker 5: have more constraints on growth.

605
00:30:38,760 --> 00:30:41,520
Speaker 1: Right, you seem to like the consumer sector, but we

606
00:30:41,560 --> 00:30:45,800
Speaker 1: are seeing more delinquencies in subprime credit cards and also

607
00:30:46,280 --> 00:30:49,600
Speaker 1: that's pre pandemic levels. Does that not worry you? How

608
00:30:49,640 --> 00:30:50,640
Speaker 1: do you position around that?

609
00:30:50,920 --> 00:30:51,200
Speaker 4: Sure?

610
00:30:51,360 --> 00:30:54,400
Speaker 5: So I like in What I like about my asset

611
00:30:54,440 --> 00:30:58,760
Speaker 5: class generally is that we get a monthly report, which

612
00:30:58,800 --> 00:31:00,920
Speaker 5: is very different than what you see in corporate creditory

613
00:31:00,920 --> 00:31:04,880
Speaker 5: of inequities, where you are getting, you know, a ten Q,

614
00:31:05,120 --> 00:31:08,360
Speaker 5: but you don't that is interpretation with accountants.

615
00:31:08,640 --> 00:31:11,479
Speaker 4: So in our world, it's sort of like a blood report.

616
00:31:11,560 --> 00:31:14,479
Speaker 5: You know every month who paid, who didn't, and who

617
00:31:14,600 --> 00:31:16,960
Speaker 5: recovered and at what level. And to your point, you

618
00:31:17,000 --> 00:31:20,480
Speaker 5: are getting the delinquency information, So I think you can

619
00:31:20,680 --> 00:31:24,240
Speaker 5: form pretty thoughtful ideas on We're really a lot of

620
00:31:24,320 --> 00:31:27,200
Speaker 5: large numbers business, and so you can see how that

621
00:31:27,240 --> 00:31:31,240
Speaker 5: delinquency Q is forming and make decisions. So to your point,

622
00:31:31,760 --> 00:31:34,880
Speaker 5: I believe in the consumer, but I'm very skeptical about

623
00:31:34,880 --> 00:31:38,320
Speaker 5: certain segments of it. So subprime auto is an area

624
00:31:38,400 --> 00:31:42,040
Speaker 5: that we have avoided for many years. We liked it

625
00:31:42,160 --> 00:31:45,760
Speaker 5: pre pandemic, we liked it during the pandemic, and then

626
00:31:45,880 --> 00:31:49,320
Speaker 5: afterwards we stayed away from it because we felt that

627
00:31:49,840 --> 00:31:52,080
Speaker 5: car prices had gone up too much due to supply

628
00:31:52,160 --> 00:31:54,720
Speaker 5: chain issues, rates had gone up too much, and what

629
00:31:54,760 --> 00:31:58,200
Speaker 5: we're seeing now is strategic defaults. So we avoided twenty

630
00:31:58,200 --> 00:32:01,800
Speaker 5: two to twenty three twenty four vintage subprime auto. So

631
00:32:01,960 --> 00:32:05,800
Speaker 5: it's not that all subprime auto consumers are underperforming, that

632
00:32:06,160 --> 00:32:09,320
Speaker 5: vintage is underperforming. So the way we played it was

633
00:32:09,360 --> 00:32:13,880
Speaker 5: through rental car asset backed because we had the fleet

634
00:32:14,160 --> 00:32:17,640
Speaker 5: there as a backup along with contractual cash flows, and

635
00:32:17,680 --> 00:32:20,200
Speaker 5: you could get a spread pickup versus subprime auto. So

636
00:32:20,240 --> 00:32:23,479
Speaker 5: I think it's always the nuance of what segment of

637
00:32:23,520 --> 00:32:26,120
Speaker 5: the consumer and what vintage is driving a lot of

638
00:32:26,120 --> 00:32:26,800
Speaker 5: those returns.

639
00:32:26,840 --> 00:32:28,280
Speaker 1: There's a question I should have asked you right at

640
00:32:28,320 --> 00:32:30,640
Speaker 1: the beginning to set the scene, but how big is

641
00:32:30,680 --> 00:32:34,040
Speaker 1: this structured market, you know, and what's the opportunity and

642
00:32:34,240 --> 00:32:36,600
Speaker 1: really who is it for? Because we're seeing so much

643
00:32:37,360 --> 00:32:40,959
Speaker 1: anxiety about private credit, as you mentioned earlier, coming from

644
00:32:41,040 --> 00:32:43,280
Speaker 1: retail who now realizing that they can't take all their

645
00:32:43,280 --> 00:32:45,600
Speaker 1: money out whenever they want to. Some of these asset

646
00:32:45,600 --> 00:32:49,360
Speaker 1: classes are illiquid, some of them are quite complex. You know,

647
00:32:49,400 --> 00:32:51,320
Speaker 1: we talked a bit about clos and CEOs. Just the

648
00:32:51,400 --> 00:32:54,280
Speaker 1: mere three letters scares the hell out of some people.

649
00:32:54,360 --> 00:32:57,360
Speaker 1: So yeah, I'm interested in, you know, the bigger picture

650
00:32:57,400 --> 00:32:58,480
Speaker 1: of like what is this market?

651
00:32:58,520 --> 00:33:01,760
Speaker 5: And sure, so I a structure credit you know jokingly

652
00:33:01,840 --> 00:33:03,920
Speaker 5: is for everyone, but I think it's in some ways

653
00:33:03,960 --> 00:33:07,120
Speaker 5: structure credit because of we were the nexus of issues

654
00:33:07,120 --> 00:33:10,280
Speaker 5: in two thousand and eight. There's an immediate fear about

655
00:33:10,320 --> 00:33:12,520
Speaker 5: the asset class. But if you really think about it,

656
00:33:12,600 --> 00:33:16,640
Speaker 5: everything we're talking about today, maybe colos aside, are things

657
00:33:16,680 --> 00:33:18,800
Speaker 5: that we all deal with in daily life. Right We're

658
00:33:18,840 --> 00:33:21,600
Speaker 5: all thinking about mortgages and credit cards and car payments,

659
00:33:21,680 --> 00:33:24,400
Speaker 5: and so what I think is interesting is that you

660
00:33:24,440 --> 00:33:27,440
Speaker 5: are touching every part of the economy through structured credit.

661
00:33:28,200 --> 00:33:30,960
Speaker 5: The way I think about it is, the corporate bond

662
00:33:31,040 --> 00:33:34,440
Speaker 5: market is about eleven trillion in size. Structured credit is fifteen.

663
00:33:34,880 --> 00:33:38,360
Speaker 5: Now nine billion of that is agency product. But just

664
00:33:38,400 --> 00:33:40,560
Speaker 5: to give you a scale, if you look at most

665
00:33:40,600 --> 00:33:44,960
Speaker 5: investors today, they are largely under allocated in structure credit.

666
00:33:45,000 --> 00:33:48,040
Speaker 5: There is a lot more of an investor base across

667
00:33:48,080 --> 00:33:51,480
Speaker 5: every type of institutional investor and individual in corporate credit

668
00:33:51,560 --> 00:33:55,240
Speaker 5: versus structured The big thing about structure credit to me

669
00:33:55,560 --> 00:33:59,560
Speaker 5: is you're getting this monthly information. We are an amortizing

670
00:33:59,600 --> 00:34:02,840
Speaker 5: product for the most part, and so when we go

671
00:34:02,880 --> 00:34:05,280
Speaker 5: through periods of distress, if you take a corporate credit

672
00:34:05,400 --> 00:34:08,080
Speaker 5: bond or loan, you have the coupon and then you

673
00:34:08,120 --> 00:34:10,719
Speaker 5: have terminal recovery. At that point, so you are very

674
00:34:10,719 --> 00:34:13,080
Speaker 5: beholden to mark to market fluctuations.

675
00:34:13,120 --> 00:34:13,359
Speaker 2: There.

676
00:34:13,960 --> 00:34:16,640
Speaker 5: In contrast, we're getting payments and a lot of these

677
00:34:16,640 --> 00:34:20,160
Speaker 5: asset classes every month, so the duration of the asset

678
00:34:20,239 --> 00:34:23,520
Speaker 5: is shrinking over time and so the vulnerability to mark

679
00:34:23,560 --> 00:34:27,279
Speaker 5: to market goes down. So when individuals are looking at

680
00:34:27,280 --> 00:34:30,920
Speaker 5: this for a portfolio, I think that structured credit offers

681
00:34:31,360 --> 00:34:35,080
Speaker 5: a predictable cash flow nature that's very different. So the

682
00:34:35,120 --> 00:34:37,440
Speaker 5: issues that are going on in private credit today are

683
00:34:37,440 --> 00:34:39,720
Speaker 5: really driven by the fact that there is that bullet

684
00:34:39,719 --> 00:34:43,160
Speaker 5: maturity concept and people want their money now, whereas I

685
00:34:43,160 --> 00:34:45,320
Speaker 5: think in structured credit you're seeing a lot of product

686
00:34:45,400 --> 00:34:49,359
Speaker 5: now that has quarterly distribution or something else associated with it.

687
00:34:49,480 --> 00:34:52,960
Speaker 5: The other point I would make is because two thousand

688
00:34:53,000 --> 00:34:55,680
Speaker 5: and eight was the nexus. We were the nexus of problems,

689
00:34:55,680 --> 00:35:00,759
Speaker 5: and that was really driven by a combination of weak underwriting,

690
00:35:00,840 --> 00:35:04,000
Speaker 5: but also i'd say documentation being poor and people really

691
00:35:04,000 --> 00:35:06,799
Speaker 5: not reading, which sounds funny, but people that took out

692
00:35:06,800 --> 00:35:09,040
Speaker 5: the mortgage didn't read, people that were doing the work

693
00:35:09,120 --> 00:35:12,719
Speaker 5: didn't necessarily look at those documents. We have gone through

694
00:35:12,760 --> 00:35:17,080
Speaker 5: a massive overhaul as a sector, and the regulatory environment

695
00:35:17,239 --> 00:35:20,840
Speaker 5: is very strong, so all of these packaging of deals

696
00:35:20,880 --> 00:35:24,320
Speaker 5: that we're talking about cannot be done without risk retention

697
00:35:24,480 --> 00:35:26,600
Speaker 5: from the bank. So the banks have skin in the game.

698
00:35:27,239 --> 00:35:29,360
Speaker 5: We certainly have skin in the game, and so the

699
00:35:30,040 --> 00:35:33,480
Speaker 5: profile is very different than before. When we buy a

700
00:35:33,480 --> 00:35:36,840
Speaker 5: mortgage portfolio, now it's six to eight weeks of diligence

701
00:35:36,880 --> 00:35:40,080
Speaker 5: where we are checking if the house is there, We're

702
00:35:40,080 --> 00:35:44,719
Speaker 5: doing an appraisal, we're checking title. It's a very robust process.

703
00:35:44,840 --> 00:35:47,839
Speaker 5: And so I think comfort that investors can have is

704
00:35:48,320 --> 00:35:50,759
Speaker 5: the level of diligence and detail that are done now,

705
00:35:50,800 --> 00:35:54,160
Speaker 5: that are required by the regulatory bodies and that we

706
00:35:54,200 --> 00:35:58,560
Speaker 5: do as investors makes it a much more compelling asset

707
00:35:58,640 --> 00:36:00,840
Speaker 5: class than it was before. And I think a reason

708
00:36:00,880 --> 00:36:04,080
Speaker 5: why people should sort of there is the fear, but

709
00:36:04,239 --> 00:36:07,120
Speaker 5: actually all of those problems have created a lot of

710
00:36:07,280 --> 00:36:08,759
Speaker 5: very interesting profiles at risk.

711
00:36:09,800 --> 00:36:12,759
Speaker 3: How do you know the right price either when you're

712
00:36:12,800 --> 00:36:14,799
Speaker 3: buying it or when you're marking it to market? You

713
00:36:14,840 --> 00:36:15,920
Speaker 3: mentioned marketing at market?

714
00:36:16,200 --> 00:36:18,200
Speaker 2: You know, this isn't stuff that you can see a

715
00:36:18,239 --> 00:36:20,719
Speaker 2: ticker tape, you know, on your TV.

716
00:36:20,560 --> 00:36:23,880
Speaker 3: Station, So you know, how are you how how do

717
00:36:23,920 --> 00:36:24,600
Speaker 3: you get the right.

718
00:36:24,440 --> 00:36:27,200
Speaker 2: Price for these sore in both say when you buy

719
00:36:27,239 --> 00:36:29,200
Speaker 2: it and then make sure you're value.

720
00:36:29,080 --> 00:36:32,520
Speaker 5: Still you know, not to plug Bloomberg, but obviously Bloomberg

721
00:36:32,600 --> 00:36:35,040
Speaker 5: is a great help in the sense that every.

722
00:36:34,800 --> 00:36:36,920
Speaker 4: Security that we trade is on Bloomberg.

723
00:36:37,000 --> 00:36:39,759
Speaker 5: I think the other thing is that which people may

724
00:36:39,800 --> 00:36:42,680
Speaker 5: not know, is that in structure credit we have trace

725
00:36:43,080 --> 00:36:45,920
Speaker 5: which shows you trading volumes. Now it's not for every

726
00:36:46,080 --> 00:36:48,920
Speaker 5: asset class, but you get transparency for example in consumer

727
00:36:48,960 --> 00:36:52,200
Speaker 5: abs where I can pull up any trade that's happened

728
00:36:52,360 --> 00:36:55,120
Speaker 5: in the last six months and see every price in

729
00:36:55,160 --> 00:36:57,920
Speaker 5: every buy and sell. So there is more transparency to

730
00:36:57,960 --> 00:37:02,000
Speaker 5: this asset class than people would endnticipate. We use a lot.

731
00:37:02,080 --> 00:37:05,480
Speaker 5: There's a combination of things. There are in house models

732
00:37:05,480 --> 00:37:08,200
Speaker 5: that we build that we look and really it's our

733
00:37:08,239 --> 00:37:11,840
Speaker 5: analysis is statistical analysis, right, We're looking at a pool.

734
00:37:11,920 --> 00:37:18,000
Speaker 5: It's a thousand mortgages that have similar characteristics FICO scores, balances, coupons,

735
00:37:18,000 --> 00:37:20,760
Speaker 5: but also things like geography. Is it in a state

736
00:37:20,800 --> 00:37:23,759
Speaker 5: where there's foreclosure that's judicial or not? What does that

737
00:37:23,920 --> 00:37:27,839
Speaker 5: mean for the recovery of those mortgages. But I think

738
00:37:27,960 --> 00:37:30,759
Speaker 5: one of the things that makes it, you know, we

739
00:37:30,840 --> 00:37:33,440
Speaker 5: all use a similar software called intex so that's something

740
00:37:33,480 --> 00:37:36,960
Speaker 5: that pretty much every structured credit investor has, and we

741
00:37:37,040 --> 00:37:39,879
Speaker 5: are looking at inputs. So the other big difference, I guess,

742
00:37:39,960 --> 00:37:42,319
Speaker 5: which I forgot to mention to James, is that in

743
00:37:42,400 --> 00:37:45,799
Speaker 5: corporate credit you assume terminal recovery is par. When you

744
00:37:45,840 --> 00:37:51,040
Speaker 5: look at structured credit assets, you are applying prepayments to faults, recovery,

745
00:37:51,160 --> 00:37:55,120
Speaker 5: delinquency cues, how much is being advanced from the servicer

746
00:37:55,320 --> 00:37:59,160
Speaker 5: on delinquencies, and so all of that goes into the

747
00:37:59,239 --> 00:38:02,600
Speaker 5: analysis to say, this is my view on a scenario

748
00:38:02,719 --> 00:38:05,440
Speaker 5: for this bond, and this is what I project the

749
00:38:05,560 --> 00:38:09,360
Speaker 5: losses to be on this portfolio, and then what do

750
00:38:09,440 --> 00:38:12,279
Speaker 5: I need to get compensated above treasury rates in order

751
00:38:12,320 --> 00:38:15,960
Speaker 5: to make this risk interesting for me? And so we

752
00:38:16,200 --> 00:38:19,040
Speaker 5: rarely buy anything where the recovery rate is assumed to

753
00:38:19,040 --> 00:38:22,319
Speaker 5: be par. That would be a huge upside scenario. So

754
00:38:23,280 --> 00:38:26,600
Speaker 5: I think it's a combination of that. And then also

755
00:38:26,960 --> 00:38:29,480
Speaker 5: because we actively trade in the markets, and it's one

756
00:38:29,520 --> 00:38:31,000
Speaker 5: of the things that we enjoy being at a hedge

757
00:38:31,040 --> 00:38:33,800
Speaker 5: fund is sometimes we will send out two way markets,

758
00:38:33,840 --> 00:38:36,879
Speaker 5: which used to be what banks would do, but now

759
00:38:36,920 --> 00:38:38,719
Speaker 5: we send out two way markets and really kind of

760
00:38:38,760 --> 00:38:40,839
Speaker 5: figure out where the market might be. So I think

761
00:38:40,840 --> 00:38:43,840
Speaker 5: it's a combination of when do I think this bond

762
00:38:43,880 --> 00:38:45,960
Speaker 5: is going to pay me back? And what do I

763
00:38:46,000 --> 00:38:48,200
Speaker 5: think I should get paid for to own that bond

764
00:38:48,280 --> 00:38:50,560
Speaker 5: until it does, And of course there will be periods

765
00:38:50,600 --> 00:38:53,560
Speaker 5: of trades. Now. One other thing I would add is

766
00:38:53,560 --> 00:38:58,000
Speaker 5: that because we've had all these periods of dislocation, sometimes

767
00:38:58,000 --> 00:38:59,880
Speaker 5: it used to be a few months some nowadays it

768
00:39:00,040 --> 00:39:02,200
Speaker 5: could be two weeks right where you really see a

769
00:39:02,239 --> 00:39:04,640
Speaker 5: period where things sell off and there's something to do.

770
00:39:05,520 --> 00:39:08,440
Speaker 5: Those are the moments where part of it becomes we're

771
00:39:08,480 --> 00:39:11,240
Speaker 5: seeing the yields go from eight to fifteen. That feels

772
00:39:11,239 --> 00:39:13,319
Speaker 5: like a buy. But the one interesting part of our

773
00:39:13,320 --> 00:39:16,359
Speaker 5: asset class is that scenarios are always shifting, and it's

774
00:39:16,360 --> 00:39:19,600
Speaker 5: always evolving based on delinquency keys views of the economy.

775
00:39:20,040 --> 00:39:22,760
Speaker 5: And there is still an art to our business where

776
00:39:22,840 --> 00:39:24,880
Speaker 5: two people can look at the same risk and have

777
00:39:24,960 --> 00:39:27,719
Speaker 5: different views on what losses will be. And that's what

778
00:39:27,800 --> 00:39:31,000
Speaker 5: creates a true market, which is different than I think

779
00:39:31,040 --> 00:39:32,520
Speaker 5: a lot of other sectors right now.

780
00:39:33,160 --> 00:39:35,759
Speaker 1: And yet you probably still find people that are much

781
00:39:35,840 --> 00:39:39,000
Speaker 1: more comfortable with just corporate credit because you can get

782
00:39:39,040 --> 00:39:41,680
Speaker 1: five percent in ig fitting absolutely nothing. You've got a

783
00:39:41,719 --> 00:39:43,800
Speaker 1: trump put behind your fed puot whatever you want to

784
00:39:43,800 --> 00:39:46,879
Speaker 1: call it. What is the discussion like when you're telling

785
00:39:46,920 --> 00:39:48,560
Speaker 1: them all these other things, all these other bells and

786
00:39:48,560 --> 00:39:50,960
Speaker 1: whistles and complexities, And I mean, are you finding that

787
00:39:50,960 --> 00:39:53,520
Speaker 1: people are engaging with that? I mean, obviously they can

788
00:39:53,600 --> 00:39:55,839
Speaker 1: make a better return there, but yeah, and maybe there's

789
00:39:55,920 --> 00:39:59,520
Speaker 1: less risk. But how hard is it for investors, you know,

790
00:39:59,600 --> 00:40:01,400
Speaker 1: broadly to grasp those concepts.

791
00:40:01,520 --> 00:40:01,719
Speaker 4: Yeah.

792
00:40:01,880 --> 00:40:03,560
Speaker 5: I think one of the things I would say is

793
00:40:03,600 --> 00:40:07,640
Speaker 5: that at Third Point, our founder Dan Loebe was really

794
00:40:07,760 --> 00:40:11,680
Speaker 5: early to putting structured credit in a multi strategy fund right,

795
00:40:12,600 --> 00:40:16,480
Speaker 5: And he is a credit investor by background, even though

796
00:40:16,480 --> 00:40:20,359
Speaker 5: people know him as a prolific activist equity investor, And

797
00:40:20,719 --> 00:40:22,920
Speaker 5: the way that he looks at structure credit is it

798
00:40:22,960 --> 00:40:26,879
Speaker 5: adds ballast to his portfolio. There will be periods of dislocation,

799
00:40:27,040 --> 00:40:30,560
Speaker 5: and when those dislocation moments occur, I'm going to take

800
00:40:30,960 --> 00:40:33,640
Speaker 5: some leaps in structure credit and maybe in corporate credit.

801
00:40:33,719 --> 00:40:37,320
Speaker 5: So typically it happens in tandem. And I think because

802
00:40:37,320 --> 00:40:39,279
Speaker 5: we were early to the space, because we've done it

803
00:40:39,320 --> 00:40:42,760
Speaker 5: now for eighteen years, we do have a known track

804
00:40:42,760 --> 00:40:45,400
Speaker 5: record in this space, and I would say we have

805
00:40:45,440 --> 00:40:48,759
Speaker 5: a great relationship across all of our counterparts on the

806
00:40:48,800 --> 00:40:52,000
Speaker 5: street where when there are opportunities, part of it is

807
00:40:52,040 --> 00:40:54,040
Speaker 5: getting the phone call. Sourcing is a big part of

808
00:40:54,080 --> 00:40:57,160
Speaker 5: our business and then responding quickly. And I think the

809
00:40:57,200 --> 00:40:59,719
Speaker 5: way that we run our firm and the way Dan

810
00:40:59,800 --> 00:41:03,440
Speaker 5: run firm is it can be a very thoughtful and

811
00:41:03,520 --> 00:41:06,719
Speaker 5: quick conversation about do we like this opportunity, and then

812
00:41:06,800 --> 00:41:09,160
Speaker 5: let's go and make it happen. So we do think

813
00:41:09,200 --> 00:41:12,400
Speaker 5: of ourselves as nimble in those markets. So to your question,

814
00:41:12,520 --> 00:41:15,239
Speaker 5: I think from investors because they have seen it be

815
00:41:15,280 --> 00:41:17,560
Speaker 5: a part of our main fund for many years, and

816
00:41:17,600 --> 00:41:20,480
Speaker 5: we do have now a standalone structure credit fund that

817
00:41:20,480 --> 00:41:24,520
Speaker 5: we've had for six years. I think investors understand the

818
00:41:24,560 --> 00:41:27,600
Speaker 5: product more because of the education we have done both

819
00:41:27,640 --> 00:41:31,480
Speaker 5: in house and externally. And I think that people are

820
00:41:31,520 --> 00:41:34,680
Speaker 5: actually looking for an alternative because to your point, corporate

821
00:41:34,680 --> 00:41:37,960
Speaker 5: credit feels safe, but it also feels a little crowded

822
00:41:38,000 --> 00:41:41,279
Speaker 5: at times, and so this feels like an interesting alternative.

823
00:41:41,800 --> 00:41:45,239
Speaker 5: And we even joke internally the risk adjusted return we

824
00:41:45,320 --> 00:41:48,080
Speaker 5: can get in our space versus corporate credit, we're always

825
00:41:48,160 --> 00:41:51,279
Speaker 5: higher because there is still a barrier to entry in

826
00:41:51,320 --> 00:41:54,920
Speaker 5: our market from the investment side, So I think it

827
00:41:54,960 --> 00:41:58,520
Speaker 5: creates a great opportunity. So I think our investor base

828
00:41:58,640 --> 00:42:01,360
Speaker 5: looks at every sleeve that we have of different offerings

829
00:42:01,360 --> 00:42:05,040
Speaker 5: here and things, the structure credit as a diversification versus

830
00:42:05,040 --> 00:42:06,600
Speaker 5: some of the other products that they have in the fund.

831
00:42:06,680 --> 00:42:07,440
Speaker 4: So it has been good.

832
00:42:07,480 --> 00:42:10,000
Speaker 5: But I do think product education and I think the

833
00:42:10,000 --> 00:42:13,520
Speaker 5: work you're doing with podcasts like this really getting people

834
00:42:13,560 --> 00:42:17,200
Speaker 5: to understand that all of the headlines and all of

835
00:42:17,239 --> 00:42:19,719
Speaker 5: the bad news they've heard for years and years out there,

836
00:42:20,440 --> 00:42:22,520
Speaker 5: you know, dispelling some of those rumors, I think is

837
00:42:22,560 --> 00:42:24,719
Speaker 5: really important, and because I do think it's a good

838
00:42:24,800 --> 00:42:26,239
Speaker 5: part to have in your portfolio.

839
00:42:26,640 --> 00:42:30,920
Speaker 1: And the credit market dips occasionally. You know, we've thrown

840
00:42:31,000 --> 00:42:33,680
Speaker 1: so many bad headlines at it and they keep coming.

841
00:42:34,040 --> 00:42:36,239
Speaker 1: But credit market dips for about ten minutes, and that

842
00:42:36,320 --> 00:42:38,719
Speaker 1: everyone piles in and is it the same instructure that

843
00:42:38,800 --> 00:42:42,399
Speaker 1: you just have a very very fleeting window to buy

844
00:42:42,480 --> 00:42:44,960
Speaker 1: stuff on the cheap or is there much longer.

845
00:42:45,560 --> 00:42:46,319
Speaker 4: It's a good question.

846
00:42:46,320 --> 00:42:49,200
Speaker 5: It depends when the blip happens. So you know, we

847
00:42:49,239 --> 00:42:53,600
Speaker 5: can think about, you know, the software conversation that we

848
00:42:53,719 --> 00:42:57,160
Speaker 5: have today in clos is a different variation of what

849
00:42:57,160 --> 00:43:00,600
Speaker 5: we had in twenty sixteen when we had energy prices reset.

850
00:43:01,520 --> 00:43:04,840
Speaker 5: And as one of our head of credit says, fracking

851
00:43:04,960 --> 00:43:08,560
Speaker 5: is to oil as to energy as AI is to software.

852
00:43:08,600 --> 00:43:11,240
Speaker 5: But I think the big difference now is in oil

853
00:43:11,360 --> 00:43:13,400
Speaker 5: you can say, Okay, it's going to be one fifty

854
00:43:13,520 --> 00:43:15,960
Speaker 5: or it's going to be seventy five. In software you

855
00:43:15,960 --> 00:43:18,360
Speaker 5: don't have the same sort of outlook on that side.

856
00:43:18,640 --> 00:43:21,719
Speaker 5: So I think there is a delineation that's happening in

857
00:43:21,719 --> 00:43:25,839
Speaker 5: that space that's quite pronounced. But overall, I think when

858
00:43:25,840 --> 00:43:28,160
Speaker 5: I look at market blips, is it technical or is

859
00:43:28,200 --> 00:43:31,640
Speaker 5: it fundamental. If it's fundamental, it should persist for longer.

860
00:43:31,680 --> 00:43:33,680
Speaker 5: And I think that we are going through a period

861
00:43:33,719 --> 00:43:37,359
Speaker 5: now where it's potentially fundamental, which means you could have

862
00:43:37,480 --> 00:43:41,680
Speaker 5: opportunities for multiple years. If we look over the last

863
00:43:42,120 --> 00:43:44,359
Speaker 5: fifteen years in the space, You're right, you know, some

864
00:43:44,440 --> 00:43:49,120
Speaker 5: of when we had volatility in Portugal, Ireland, Greece and

865
00:43:49,160 --> 00:43:52,200
Speaker 5: Spain that was driven by that was a few weeks, right,

866
00:43:52,280 --> 00:43:53,920
Speaker 5: and you had a tapeer tantrum. So I think some

867
00:43:54,000 --> 00:43:56,160
Speaker 5: of these have been smaller periods three weeks a month.

868
00:43:57,120 --> 00:44:01,560
Speaker 5: Our asset class is really driven by some of those pockets,

869
00:44:01,560 --> 00:44:03,920
Speaker 5: but I think also fundamentals and you'll see people just

870
00:44:03,960 --> 00:44:06,960
Speaker 5: move out of one asset class into another. So this

871
00:44:07,120 --> 00:44:09,799
Speaker 5: cycle I think will be more pronounced because we will

872
00:44:09,840 --> 00:44:14,359
Speaker 5: see fundamental shifts as opposed to I need liquidity in

873
00:44:14,760 --> 00:44:16,600
Speaker 5: you know two days.

874
00:44:15,960 --> 00:44:19,399
Speaker 1: Those fundamental shift you're talking about things like the unemployment

875
00:44:19,520 --> 00:44:22,760
Speaker 1: and the economy really turning into plus B A recession

876
00:44:22,800 --> 00:44:23,200
Speaker 1: is that.

877
00:44:23,040 --> 00:44:26,640
Speaker 5: The Yeah, I think recession is you know, probably very

878
00:44:26,680 --> 00:44:29,040
Speaker 5: early to say something like that, because I think we

879
00:44:29,200 --> 00:44:33,759
Speaker 5: have the confluence of real progress and artificial intelligence which

880
00:44:33,840 --> 00:44:35,799
Speaker 5: is going to prop up a large portion of our

881
00:44:35,840 --> 00:44:38,400
Speaker 5: economy and that we as a firm are very constructive on.

882
00:44:38,800 --> 00:44:41,719
Speaker 5: And at the same time, you could have AI displacing

883
00:44:42,160 --> 00:44:45,279
Speaker 5: you know, perhaps more of the stem side of the

884
00:44:45,320 --> 00:44:48,600
Speaker 5: business and professionals than we realized. But that's going to

885
00:44:48,600 --> 00:44:51,680
Speaker 5: take place. I think two three years that we'll see

886
00:44:51,719 --> 00:44:54,160
Speaker 5: some kind of a structural change in unemployment. So that's

887
00:44:54,239 --> 00:44:58,400
Speaker 5: one How long the geopolitical stress persists is going to

888
00:44:58,440 --> 00:45:02,399
Speaker 5: be important for the immediate issue. And you know where

889
00:45:02,440 --> 00:45:05,520
Speaker 5: we started where you were talking about stagflation. You know,

890
00:45:05,719 --> 00:45:07,600
Speaker 5: are we going to have rate cuts or not, are

891
00:45:07,640 --> 00:45:09,520
Speaker 5: they a good idea or not? And what does it

892
00:45:09,600 --> 00:45:12,239
Speaker 5: mean for the consumer going forward? So I think those

893
00:45:12,280 --> 00:45:16,200
Speaker 5: are things that could change the structural outlook of the economy.

894
00:45:16,600 --> 00:45:18,680
Speaker 5: So I think those are things that are very different

895
00:45:18,719 --> 00:45:19,680
Speaker 5: than we've had before.

896
00:45:20,000 --> 00:45:21,879
Speaker 1: Do you assume it happens, though, because we've been looking

897
00:45:21,880 --> 00:45:23,879
Speaker 1: for the end of the cycle. For me, I mean

898
00:45:24,200 --> 00:45:26,479
Speaker 1: asked that question every day for the last ten years.

899
00:45:26,640 --> 00:45:27,480
Speaker 1: When's it going to end?

900
00:45:27,520 --> 00:45:27,560
Speaker 2: You?

901
00:45:27,680 --> 00:45:29,360
Speaker 1: Do you think that it really will or will it

902
00:45:29,400 --> 00:45:30,600
Speaker 1: just keep getting extended.

903
00:45:30,680 --> 00:45:32,279
Speaker 5: I don't know that there's going to be an end

904
00:45:32,320 --> 00:45:35,080
Speaker 5: of a cycle, but I do think you will have

905
00:45:35,640 --> 00:45:38,520
Speaker 5: I think you will have a flight to certain assets

906
00:45:38,560 --> 00:45:41,239
Speaker 5: and a flight away from others. So you know, what

907
00:45:41,239 --> 00:45:43,920
Speaker 5: we're seeing in software is pretty pronounced right now where

908
00:45:43,920 --> 00:45:46,360
Speaker 5: people are just not touching it. At some point someone

909
00:45:46,360 --> 00:45:48,400
Speaker 5: will be the first brave one to go dip a

910
00:45:48,440 --> 00:45:51,279
Speaker 5: toow and come back into that space. So I think

911
00:45:51,280 --> 00:45:54,640
Speaker 5: it's going to be more of moving away from certain sectors,

912
00:45:55,080 --> 00:45:58,160
Speaker 5: retreating to others, and spending time there before it makes

913
00:45:58,200 --> 00:46:00,799
Speaker 5: sense to come back. I don't I don't think that

914
00:46:01,120 --> 00:46:04,880
Speaker 5: if you see a big corporate credit to fault cycle,

915
00:46:04,880 --> 00:46:07,480
Speaker 5: it will certainly blow spreads out, but I don't think

916
00:46:07,520 --> 00:46:11,239
Speaker 5: it necessarily means that mortgage assets widen precipitously.

917
00:46:11,440 --> 00:46:14,080
Speaker 1: Okay, and you've mentioned it a few times, or you've

918
00:46:14,120 --> 00:46:16,400
Speaker 1: touched on the idea of relative value, where is the

919
00:46:16,400 --> 00:46:19,000
Speaker 1: best relative value in credit markets that say we were

920
00:46:19,080 --> 00:46:21,279
Speaker 1: looking over the next year or so, just to yeah,

921
00:46:21,280 --> 00:46:23,399
Speaker 1: there's a time horizon, so not to.

922
00:46:23,360 --> 00:46:24,760
Speaker 4: Go back to plug housing.

923
00:46:24,800 --> 00:46:28,640
Speaker 5: But I do think I think residential mortgages on the

924
00:46:28,680 --> 00:46:31,759
Speaker 5: private label side will be interesting. Rates are going to

925
00:46:31,760 --> 00:46:33,879
Speaker 5: tell its own story, but I do think that there

926
00:46:33,960 --> 00:46:38,520
Speaker 5: is a very interesting You know, you have fifty sixty

927
00:46:38,560 --> 00:46:43,279
Speaker 5: percent equity people's homes, you have low housing turnover, and

928
00:46:43,360 --> 00:46:45,239
Speaker 5: even if you see a correction house prices, you have

929
00:46:45,239 --> 00:46:47,520
Speaker 5: a lot of stability in that market. I think you're

930
00:46:47,560 --> 00:46:51,319
Speaker 5: going to see a lot in public companies that have

931
00:46:51,560 --> 00:46:54,360
Speaker 5: securitized products or structure credit that they use as a

932
00:46:54,400 --> 00:46:57,319
Speaker 5: financing tool, and whether those companies do well or not,

933
00:46:57,480 --> 00:47:00,719
Speaker 5: they will want more continuous financing. So that's a place

934
00:47:00,760 --> 00:47:04,160
Speaker 5: where we play, where we're very active in corporate governance,

935
00:47:04,239 --> 00:47:07,640
Speaker 5: and I think you'll see those types of distressed opportunities

936
00:47:08,400 --> 00:47:10,319
Speaker 5: open up in those places as well. So I think

937
00:47:10,320 --> 00:47:13,120
Speaker 5: it's largely going to be in consumer residential, and I

938
00:47:13,120 --> 00:47:15,280
Speaker 5: think there will be a very interesting point for close,

939
00:47:15,560 --> 00:47:17,160
Speaker 5: but it's probably a quarter away.

940
00:47:17,800 --> 00:47:18,320
Speaker 4: Great stuff.

941
00:47:18,360 --> 00:47:20,680
Speaker 1: Shelony Sara Aram with Third Point, Thank you so much

942
00:47:20,719 --> 00:47:21,640
Speaker 1: for being on the Credit Edge.

943
00:47:21,640 --> 00:47:22,799
Speaker 4: Thank you both appreciate it.

944
00:47:23,040 --> 00:47:25,840
Speaker 1: Of course, very grateful to Erica Adelberg with Bloomberg Intelligence.

945
00:47:25,840 --> 00:47:27,160
Speaker 1: Thank you so much for joining us today.

946
00:47:27,320 --> 00:47:28,759
Speaker 3: Thank you for having me for.

947
00:47:28,760 --> 00:47:31,160
Speaker 1: More credit market analysis and insight. Read all of Erica's

948
00:47:31,200 --> 00:47:33,879
Speaker 1: great work on the Bloomberg Terminal. Bloomberg Intelligence is part

949
00:47:33,880 --> 00:47:36,560
Speaker 1: of our research department, with five hundred analysts and strategists

950
00:47:36,600 --> 00:47:39,760
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951
00:47:39,760 --> 00:47:42,480
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952
00:47:42,560 --> 00:47:46,840
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953
00:47:46,840 --> 00:47:49,359
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00:47:52,560 --> 00:47:55,880
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956
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957
00:47:59,120 --> 00:48:03,080
Speaker 1: at Bloomberg Net. I'm James Crumbie. It's been the pleasure

958
00:48:03,120 --> 00:48:05,839
Speaker 1: having you join us again next week on the Credit Edge.