WEBVTT - Private Debt Defaults Accelerate; China’s Bond Mess 0:00:13.039 --> 0:00:15.960 Hello, Welcome to The Credit Edge, a weekly markets podcast. 0:00:16.160 --> 0:00:18.880 My name is James Crumbie. I'm a senior editor at Bloomberg. 0:00:19.600 --> 0:00:21.479 This week, we're very pleased to have on the show 0:00:21.800 --> 0:00:25.200 Cat Hidalgo, who covers private credit for Bloomberg News in London. 0:00:25.480 --> 0:00:27.280 How are you, Kat, I'm well. 0:00:27.320 --> 0:00:28.960 Thanks so much for having me on, James. 0:00:29.680 --> 0:00:31.720 We're very excited to get your take on the markets. 0:00:31.720 --> 0:00:34.440 Thanks very much for joining. We're also delighted to see 0:00:34.479 --> 0:00:38.320 Andrew Chan, a credit analyst with Bloomberg Intelligence in Hong Kong. 0:00:38.800 --> 0:00:40.519 We'll be coming back to Andrew a bit later in 0:00:40.520 --> 0:00:42.919 the show to talk about the brewing mess in Chinese 0:00:42.920 --> 0:00:46.480 debt markets. So do stay with us. But first, Cat 0:00:46.520 --> 0:00:50.080 Hidalgo with bloom Bloomberg News, You've been all over the 0:00:50.120 --> 0:00:53.519 private debt story. The deals are getting bigger and bigger, 0:00:53.640 --> 0:00:56.760 breaking all records. There's a five point three billion dollar 0:00:56.840 --> 0:00:59.760 loan package in the market right now. At the same time, 0:01:00.040 --> 0:01:03.400 fundraising is ramping up. Oak Tree looking to raise eighteen 0:01:03.440 --> 0:01:05.920 billion dollars for a single private debt fund, which would 0:01:05.920 --> 0:01:08.920 make it the largest ever, and pensions are being urged 0:01:08.920 --> 0:01:11.840 to allocate more to the strategy, which is enjoying what 0:01:11.920 --> 0:01:16.320 Blackstone has called a golden moment. However, we're starting to 0:01:16.319 --> 0:01:19.319 see evidence of growing risk, similar to the signals we've 0:01:19.319 --> 0:01:22.560 been getting from the public bond and loan markets. There 0:01:22.600 --> 0:01:26.720 are risky companies obviously involved in this private credit market, 0:01:26.760 --> 0:01:29.040 and they're borrowing a lot of money where there's a 0:01:29.040 --> 0:01:33.160 lot a lot of transparency or regulation. Rates of sword 0:01:33.360 --> 0:01:37.080 earnings are slowing as recession looms. Some of those borrows 0:01:37.120 --> 0:01:40.920 just can't keep up. What's the situation, cap How bad 0:01:41.000 --> 0:01:44.280 is it out there? When we look at private credit defaults. 0:01:44.480 --> 0:01:48.440 Well, it's a really interesting situation. The problem is that 0:01:48.480 --> 0:01:52.440 we don't really know. It really is a very opaque 0:01:52.520 --> 0:01:56.960 and private market. So we can rely on some surveys 0:01:57.080 --> 0:01:59.440 and a bit of data here and there. For example, 0:02:00.200 --> 0:02:02.880 pros Goauer, which is a law firm, releases a private 0:02:02.920 --> 0:02:06.400 credit default index, and their Q two. 0:02:06.320 --> 0:02:08.280 Iteration, which came out recently. 0:02:08.000 --> 0:02:10.520 Shows that there was actually a decrease in the number 0:02:10.520 --> 0:02:13.880 of defaults, and that's amongst US companies. But that was 0:02:13.919 --> 0:02:17.919 after two consecutive quarters of an increasing rate. Right now 0:02:17.960 --> 0:02:20.320 their default rate is at one point six y four 0:02:21.000 --> 0:02:23.840 sent and so that's in the US, and that is 0:02:23.880 --> 0:02:27.520 still considered quite low. But other than that, we really 0:02:27.600 --> 0:02:30.240 just have to rely on the anecdotes and things like 0:02:30.240 --> 0:02:32.680 the general default rate, which you mentioned is kind of 0:02:32.720 --> 0:02:35.880 ticking up, and these things do indicate that there is 0:02:36.040 --> 0:02:39.720 more stress in the market, but not by an overwhelming sum. 0:02:39.880 --> 0:02:42.920 And there's also a difference between loss rates and default 0:02:43.000 --> 0:02:46.560 so there's a lot of different things happening. What I 0:02:46.600 --> 0:02:48.400 can say is that what we're gathering from the people 0:02:48.440 --> 0:02:51.040 that we speak to, from fund managers and investors in 0:02:51.080 --> 0:02:55.079 those funds, is that there has been a noticeable increase 0:02:55.120 --> 0:02:58.440 in stress, but it's not dramatic or worse than other 0:02:58.520 --> 0:03:01.280 parts in the market. The kind of the typical thing 0:03:01.320 --> 0:03:03.000 that you'll hear from a fund manager is that they'll 0:03:03.040 --> 0:03:07.000 say they're hearing other portfolio struggling, but that their portfolio 0:03:07.120 --> 0:03:07.760 is doing great. 0:03:08.639 --> 0:03:08.799 Right. 0:03:08.960 --> 0:03:11.200 As you mentioned, we just don't know in some cases, 0:03:11.240 --> 0:03:13.320 so it's very difficult to actually measure this stuff, and 0:03:13.360 --> 0:03:16.920 that from markets is problematic. Usually, is there something you 0:03:16.960 --> 0:03:19.000 think that that's you know, we're just not able to 0:03:19.080 --> 0:03:21.160 track that that you know could be worrying. Is there 0:03:21.200 --> 0:03:23.040 something blowing up somewhere that we just can't see. 0:03:24.440 --> 0:03:27.680 I think it's again I mean, it's really difficult to 0:03:27.720 --> 0:03:30.280 say there's a there's a possibility of that, but one 0:03:30.400 --> 0:03:35.840 hopes that most of these funds are small enough and 0:03:35.960 --> 0:03:40.400 the allocations that pension funds and insurance companies have to 0:03:40.480 --> 0:03:43.680 these funds are small enough that if there was to 0:03:43.720 --> 0:03:46.680 be a major blow up, we wouldn't see too much 0:03:46.960 --> 0:03:47.880 systemic risk. 0:03:49.360 --> 0:03:51.600 But you know, we're keeping our eyes out for it. 0:03:51.640 --> 0:03:54.680 And and I don't I don't want to call out 0:03:54.680 --> 0:03:58.280 and say that I'm sure there's nothing nothing huge or 0:03:58.320 --> 0:04:02.240 wrong in the market. It's something that we're following very closely. 0:04:03.200 --> 0:04:05.360 So based on what we can see and what we 0:04:05.400 --> 0:04:07.960 can measure, what kinds of companies are struggling at the moment, 0:04:08.320 --> 0:04:09.480 and why are they struggling now. 0:04:11.240 --> 0:04:16.800 So I think one interesting area is actually that businesses 0:04:16.880 --> 0:04:19.920 that suffered in COVID are falling out of favor. Of course, 0:04:20.040 --> 0:04:22.200 they just can't handle the amount of stress that they've 0:04:22.200 --> 0:04:25.440 had over such a long period of time, but also 0:04:26.279 --> 0:04:28.880 that businesses that might have done really well in COVID, 0:04:29.520 --> 0:04:32.520 that kind of really enjoyed those tailwinds that they saw 0:04:32.600 --> 0:04:35.720 out of COVID are now no longer enjoying them and 0:04:36.240 --> 0:04:41.119 struggling as a result. I think also the other trend 0:04:41.160 --> 0:04:44.240 to watch out for is that you're also more likely 0:04:44.320 --> 0:04:47.800 to see assets that have been held onto for a 0:04:47.839 --> 0:04:52.320 long time by their private equity firm that probably should 0:04:52.320 --> 0:04:55.880 have been sold off previously and been able to refinance 0:04:55.960 --> 0:04:58.280 their debt, but because of the slowdown in M and 0:04:58.360 --> 0:05:02.320 A and refinancing, because of higher interest rates, they no 0:05:02.400 --> 0:05:06.520 longer have access to those lifelines. So it's those kind 0:05:06.560 --> 0:05:07.800 of older businesses. 0:05:08.560 --> 0:05:10.600 Are they in any particular sector and are they particularly 0:05:10.720 --> 0:05:12.880 kinds of businesses that we've we're more focused on, are 0:05:12.920 --> 0:05:14.760 they I mean the ones that did well in COVID 0:05:14.760 --> 0:05:16.839 are the ones that we were using because we were 0:05:16.839 --> 0:05:18.400 all locked in our house and we couldn't get out. 0:05:18.880 --> 0:05:21.640 But what kinds of When we talk about the kinds 0:05:21.640 --> 0:05:23.920 of company, what sectors are they and what kind of 0:05:23.920 --> 0:05:24.720 businesses are they? 0:05:25.520 --> 0:05:29.960 So there's the usual suspects. We've retail businesses, the obvious ones, 0:05:30.040 --> 0:05:34.320 things like casual dining. But what's interesting about private credit 0:05:34.360 --> 0:05:37.640 is that they really don't focus on those on those sectors. 0:05:37.720 --> 0:05:40.360 You know, we've got the odd specialized fund and the 0:05:40.400 --> 0:05:43.360 odd investment in most funds, but typically a private credit 0:05:43.360 --> 0:05:47.240 fund will focus on things like technology and healthcare, which 0:05:47.320 --> 0:05:49.760 is why I thought that this one example that we 0:05:49.880 --> 0:05:54.480 tracked down of a business being taken over by its lender. 0:05:55.240 --> 0:05:58.520 It's called Enva, it's a care home or operator in Germany. 0:05:58.640 --> 0:06:00.919 I thought this one was really interesting because people have 0:06:00.960 --> 0:06:03.479 written ad nauseum about how bets in the healthcare space 0:06:03.520 --> 0:06:06.080 could go billy up, But it would be actually really 0:06:06.120 --> 0:06:08.760 detrimental to see a whole sale shift in the credit 0:06:08.800 --> 0:06:12.359 quality of healthcare businesses on the private credit industry, just 0:06:12.400 --> 0:06:13.920 because they're so exposed. 0:06:14.720 --> 0:06:15.560 After technology. 0:06:15.560 --> 0:06:18.040 It's the biggest area of focus for private credit funds, 0:06:18.200 --> 0:06:21.039 and we know that sector is getting squeezed by labor 0:06:21.200 --> 0:06:26.120 inflation and regulation. We've just got to see what happens 0:06:26.160 --> 0:06:28.600 there and see if it becomes a wider vider trend, 0:06:28.600 --> 0:06:31.680 because we've really only seen of this one example, maybe 0:06:31.720 --> 0:06:33.800 a couple of others in the past, but it would 0:06:33.839 --> 0:06:36.520 have a very interesting impact if that became more serious. 0:06:37.400 --> 0:06:40.640 I guess the country to focus on is that we've 0:06:40.680 --> 0:06:43.960 noticed the larger concentration of depth F equity swaps in Germany, 0:06:44.760 --> 0:06:46.520 but we haven't yet been able to discern if that's 0:06:46.560 --> 0:06:50.200 because the situation is generally worse out there, or there 0:06:50.200 --> 0:06:53.960 are specific dynamics there, or if it has to do 0:06:54.000 --> 0:06:57.680 with technical factors in the market, kind of surrounding reporting 0:06:58.000 --> 0:07:00.120 that allow us to actually pick them up more more 0:07:00.120 --> 0:07:04.360 easily than we could elsewhere. Obviously, PMI came out yesterday 0:07:04.400 --> 0:07:07.680 with really bad numbers for the sector in manufacturing sector 0:07:07.680 --> 0:07:10.720 in Germany, and there was a recession recently there, So 0:07:11.160 --> 0:07:13.240 it kind of could be either factor. 0:07:15.520 --> 0:07:17.960 One thing that jumps out there when you're talking debt 0:07:18.040 --> 0:07:20.840 for equity swaps, what is that? Why are we talking 0:07:20.840 --> 0:07:21.880 about that in this context? 0:07:22.840 --> 0:07:27.200 So debt for equity stops is a kind of a 0:07:27.240 --> 0:07:31.640 method of last resort for a private credit fund. They've 0:07:31.680 --> 0:07:33.680 got all of these leaders that they can pull when 0:07:34.040 --> 0:07:37.200 a portfolio company is under stress. But the final thing 0:07:37.200 --> 0:07:39.920 that they'll do is they'll have a conversation with the 0:07:39.960 --> 0:07:41.360 private equity sponsor. 0:07:42.000 --> 0:07:42.840 The sponsor will. 0:07:42.760 --> 0:07:44.960 Say, we're not willing to put any more money into 0:07:45.040 --> 0:07:47.640 this business, so we're going to hand over the keys 0:07:48.160 --> 0:07:53.880 to you, and you can exchange all of the debt 0:07:54.200 --> 0:07:58.520 that you're owed into equity and now you private credit 0:07:58.560 --> 0:08:03.320 fund are the sole of this business. And we wrote 0:08:03.480 --> 0:08:07.360 my colleague and I Silas Brown wrote a piece about 0:08:08.280 --> 0:08:11.679 seeing a couple a few more examples of this happening, 0:08:11.680 --> 0:08:15.160 and it's an indicator of serious stress in the market. 0:08:15.240 --> 0:08:16.520 So that's why we're talking about this. 0:08:17.280 --> 0:08:22.520 So the debt side, that's when a private lender will 0:08:22.520 --> 0:08:26.720 give money to a private company in a bilateral sense, 0:08:26.720 --> 0:08:32.200 almost like privately negotiated deal that is alone, but because 0:08:32.200 --> 0:08:34.400 this company can't pay the money, but they end up 0:08:34.440 --> 0:08:37.000 just owning the company exactly. 0:08:37.080 --> 0:08:39.840 Yeah, it doesn't necessarily happen on a bilateral basis every time. 0:08:39.880 --> 0:08:42.320 Sometimes you've got maybe three lenders, which is what happened 0:08:42.360 --> 0:08:45.760 in a case called Unza in Germany recently. But yeah, 0:08:45.800 --> 0:08:47.760 that's pretty much the principle. 0:08:47.800 --> 0:08:51.880 That's the idea a bank or a lender, they don't 0:08:52.040 --> 0:08:53.920 generally want to own a business. They don't want to 0:08:53.920 --> 0:08:57.480 operate a healthcare company or a retail company or a 0:08:57.559 --> 0:09:00.560 fine dining establishment. What happens in this case, I mean, 0:09:00.880 --> 0:09:03.320 do they just suddenly shift their business model or what 0:09:03.360 --> 0:09:05.800 do they do with the assets? 0:09:05.800 --> 0:09:07.439 It's a really interesting area. 0:09:07.960 --> 0:09:10.199 Can I give you a bit of context on this actually, 0:09:11.240 --> 0:09:13.640 just to kind of flesh out my answer, So we 0:09:13.640 --> 0:09:15.920 could do a whole podcast just on the. 0:09:15.920 --> 0:09:17.520 Dynamics of these arrangements. 0:09:18.520 --> 0:09:21.199 But what's interesting to me is that there's this narrative 0:09:21.280 --> 0:09:24.640 emerging when we speak to direct lenders and private credit 0:09:24.640 --> 0:09:29.000 for managers that it's not necessarily bad to have a 0:09:29.600 --> 0:09:34.079 debt for equity swap. That because you know, the fund 0:09:34.160 --> 0:09:36.520 is now the equity owners of a business that has 0:09:36.600 --> 0:09:40.320 no debt because it's all been shifted into equity. There's 0:09:40.520 --> 0:09:43.960 huge potential for upside, much more so than when you 0:09:44.000 --> 0:09:47.560 were just debt holders with an expected yeald. The flip 0:09:47.600 --> 0:09:50.920 side of that, of course, is that you know, this 0:09:51.120 --> 0:09:54.080 is not what private debt funds were created for. Kind 0:09:54.080 --> 0:09:58.000 of to answer your question, many of them aren't equipped 0:09:58.120 --> 0:10:00.760 to deal with a large number of restructuring And while 0:10:00.760 --> 0:10:03.520 there is that potential for upside that's being talked about 0:10:03.559 --> 0:10:06.880 more and more, there is huge potential for downside. They 0:10:06.880 --> 0:10:10.439 could lose their entire investment, and most funds wouldn't be 0:10:10.480 --> 0:10:12.960 able to make a profit if they had even two 0:10:13.160 --> 0:10:16.120 or three situations where they couldn't recover their money. The 0:10:16.360 --> 0:10:19.559 entire fund would not make a profit if that happened. 0:10:20.520 --> 0:10:22.680 But you know, it depends on the fund, and there's 0:10:22.720 --> 0:10:26.360 a huge amount of variation on this topic. Typically larger 0:10:26.400 --> 0:10:30.920 funds have a more substantial restructuring or workout department. We've 0:10:30.920 --> 0:10:34.120 definitely seen some major funds hiring more and more in 0:10:34.160 --> 0:10:38.040 this field recently. I can't speak to whether they actively 0:10:38.080 --> 0:10:40.680 want to own these funds. No one's ever said that 0:10:40.800 --> 0:10:43.280 to me. You know, I actively want to own these 0:10:43.320 --> 0:10:48.000 portfolio companies, but we sorry not funds portfolio companies. But 0:10:48.080 --> 0:10:51.760 we do know that some of these larger funds have 0:10:51.840 --> 0:10:55.439 taken over the keys to more and more businesses, and 0:10:55.840 --> 0:10:59.560 they are this idea about their being potential for upside 0:11:00.440 --> 0:11:03.880 is is kind of on their radar. Smaller funds would 0:11:03.880 --> 0:11:08.680 struggle more in the area. But I think what the 0:11:08.720 --> 0:11:10.520 final thing that I'll say on this is that at 0:11:10.559 --> 0:11:13.440 the end of the day, big or small, these funds 0:11:13.840 --> 0:11:16.640 were not made to own and operate the companies that 0:11:16.640 --> 0:11:19.079 they lend to. That's not what was pitched to investors, 0:11:19.559 --> 0:11:22.480 and it offers a completely different risk profile, much closer 0:11:22.520 --> 0:11:26.360 to something like a special situation sund But. 0:11:26.320 --> 0:11:28.160 It's interesting in that, you know, they're on the one side, 0:11:28.160 --> 0:11:30.200 they're lending this money at very high rates, they're making 0:11:30.200 --> 0:11:32.480 a good return there, and then when things go bad, 0:11:32.920 --> 0:11:35.480 they're actually you know, potentially making even more money because 0:11:35.480 --> 0:11:39.559 they're becoming equity owners. So so sort of win win situation. 0:11:40.320 --> 0:11:42.000 But at the same time, I mean I do worry 0:11:42.040 --> 0:11:43.920 because you know, we see this all the time in 0:11:43.960 --> 0:11:46.800 the public markets. There is a you know, the risk 0:11:46.840 --> 0:11:49.840 of complete wipeout in some of these firms, right, I mean, 0:11:49.880 --> 0:11:52.480 you must have to risk losing all your money. 0:11:53.000 --> 0:11:57.199 Absolutely, that's that's that's completely the case. And I think 0:11:57.760 --> 0:12:01.920 we're in private equity funds, you've got the potential for 0:12:02.040 --> 0:12:06.360 huge upside on every one of your investments, and you 0:12:06.400 --> 0:12:10.160 only need a couple of winners, of big winners to 0:12:10.240 --> 0:12:13.800 make the whole fund profit overall. But that's just not 0:12:13.880 --> 0:12:17.120 the case in private credit funds. That's not the way 0:12:17.120 --> 0:12:19.880 that the dynamics work. And so if you do, if 0:12:19.920 --> 0:12:22.560 you do not recover any of your money on a 0:12:22.559 --> 0:12:26.240 few investments, it can be really detrimental to the returns 0:12:26.240 --> 0:12:27.079 of the entire fund. 0:12:28.160 --> 0:12:31.440 So looking back to where we started this conversation, you know, 0:12:31.480 --> 0:12:34.120 there are more defaults, We are seeing more problems in 0:12:34.160 --> 0:12:37.000 private credit. What is the outlook for more of this? 0:12:37.080 --> 0:12:39.280 You know, do we expect a big default wave to happen? 0:12:40.440 --> 0:12:47.360 Right, So that we've mentioned we've mentioned that the bulk 0:12:47.400 --> 0:12:49.240 of these deals are done the laterally. I think you 0:12:49.280 --> 0:12:53.560 said that, but you know so, So a direct lending 0:12:53.600 --> 0:12:55.920 fund might be the only lender to a company. So 0:12:56.320 --> 0:12:58.240 when we talk about a big wave of defaults, we 0:12:58.280 --> 0:13:03.760 have to contextualize that in the relationship aspect of these funds, 0:13:03.800 --> 0:13:08.320 they really kind of focus on their relationship based culture. 0:13:09.160 --> 0:13:11.520 They talk about how that's very much in place, and 0:13:11.559 --> 0:13:13.920 so what this means is that they pride themselves on 0:13:13.960 --> 0:13:17.679 their ability to negotiate and provide flexibility to borrowers. So 0:13:18.600 --> 0:13:21.200 a wave of defaults will always be tempered by the 0:13:21.240 --> 0:13:24.719 funds trying to manage these situations more so. 0:13:24.760 --> 0:13:26.400 Than a bankuard, for example. 0:13:26.480 --> 0:13:30.520 So market participants have told us that this could be 0:13:30.559 --> 0:13:32.800 a factor and why we've seen so few defaults in 0:13:32.800 --> 0:13:35.040 the space so far. But just to give you an 0:13:35.040 --> 0:13:37.439 idea of what these funds can do there, they can 0:13:37.480 --> 0:13:40.880 wave covenants, they can extend maturity, they can negotiate with 0:13:40.920 --> 0:13:45.040 sponsors to provide more equity. As we said, they can 0:13:45.080 --> 0:13:48.559 take keys to the business without it being public or 0:13:48.600 --> 0:13:53.560 calling it a default. So the possibility for a huge 0:13:53.559 --> 0:13:58.120 wave of defaults is definitely tempered by that. What would 0:13:58.200 --> 0:14:01.520 really trigger wave would be a shift in risk appetite 0:14:01.600 --> 0:14:04.240 for these funds where they were no longer willing to 0:14:04.320 --> 0:14:07.440 kind of provide that flexibility. They were more keen to 0:14:07.480 --> 0:14:09.640 kind of crack the whip and be more stringent about 0:14:09.800 --> 0:14:13.319 terms and conditions. And then, of course these companies, we 0:14:13.360 --> 0:14:16.960 can't forget are in the real economy, and if we 0:14:17.040 --> 0:14:20.320 had an overall macroeconomic decline, that could push many of 0:14:20.360 --> 0:14:22.560 these businesses over the edge. 0:14:23.440 --> 0:14:25.000 So it's more like getting a loan from my friend 0:14:25.080 --> 0:14:27.320 rather than having to go and beg the manager of 0:14:27.320 --> 0:14:30.800 Buckley's Bank to better terms and a few more days 0:14:30.800 --> 0:14:31.360 to pay my loan. 0:14:31.400 --> 0:14:31.840 Is that right? 0:14:32.400 --> 0:14:34.720 They might not be quite as nice as your friend, 0:14:34.760 --> 0:14:38.120 but that's definitely kind of the idea that they're going for. 0:14:38.200 --> 0:14:38.920 Yeah. 0:14:39.160 --> 0:14:42.080 Interesting, Okay, So it's still fairly new market though private crediting. 0:14:42.200 --> 0:14:44.000 It's seen such a boom, as we've discussed over the 0:14:44.040 --> 0:14:45.960 last few years, but it's still fairly new. How does 0:14:46.000 --> 0:14:49.720 the current default situation compare to history in terms of 0:14:49.720 --> 0:14:51.360 the level of worry out there right now? 0:14:52.560 --> 0:14:55.280 It's interesting. Again, we do have very little data to 0:14:55.320 --> 0:14:55.680 go off. 0:14:55.680 --> 0:14:59.200 We really can only talk about what we see in 0:14:59.280 --> 0:15:05.320 surveys and anecdotes. Another prosaur report from April showed that 0:15:05.800 --> 0:15:08.440 one hundred and fourteen out of one hundred and fifty 0:15:08.440 --> 0:15:12.560 private credit executive surveyed they expected the faults to rise 0:15:12.600 --> 0:15:14.560 in their portfolios in the next year, which is the 0:15:14.640 --> 0:15:17.440 highest level in the past five years from the survey. 0:15:18.520 --> 0:15:23.440 But that's kind of what makes this phenomenon so interesting 0:15:23.560 --> 0:15:25.880 is that private credit has never been for a proper 0:15:25.920 --> 0:15:29.840 recession before. This is this is uncharted territory. We can't 0:15:29.960 --> 0:15:33.360 we can't really say. I mean, we definitely know that 0:15:33.400 --> 0:15:36.840 we're seeing more defrequity swaps than ever before, more defaults 0:15:36.840 --> 0:15:43.360 than ever before. So and certainly it feels like people 0:15:43.400 --> 0:15:46.800 are worried. This is something that most people that you 0:15:46.840 --> 0:15:50.640 speak to bring up, and it's it's something that people 0:15:50.640 --> 0:15:51.360 watching closely. 0:15:52.760 --> 0:15:55.760 So before we talk to Andrew Chann at Bloomberg Intelligence, 0:15:56.120 --> 0:15:59.000 how do we reconcile that with all the fundraising, all 0:15:59.040 --> 0:16:01.720 of the billions in dry powder being raised for the strategy, 0:16:02.040 --> 0:16:04.280 and the ever increasing scale of some of the loans 0:16:04.280 --> 0:16:05.160 that are getting done. 0:16:05.760 --> 0:16:07.520 Yeah, that's a really interesting question. 0:16:07.760 --> 0:16:09.880 Does feel like a paradox, doesn't it, But the two 0:16:10.160 --> 0:16:13.680 aren't actually mutually exclusive. So yes, private credit is raking 0:16:13.720 --> 0:16:17.920 in records terms of dry powder, especially in Europe. But 0:16:18.040 --> 0:16:20.920 the data shows that more money is going to fewer funds, 0:16:21.120 --> 0:16:24.720 So that kind of implies that investors are plowing money 0:16:24.760 --> 0:16:26.520 into a select few of. 0:16:26.480 --> 0:16:29.920 The largest funds. So this would show that. 0:16:30.400 --> 0:16:34.080 There is a fear among these investors, these pension funds, 0:16:34.080 --> 0:16:37.600 these insurance companies that invest in private debt, but that 0:16:37.680 --> 0:16:40.880 they are they do believe in the asset class, they're 0:16:40.920 --> 0:16:43.480 just a bit more wary of it now, so they're 0:16:43.480 --> 0:16:46.720 more wary of the smaller firms that they would suspect 0:16:46.800 --> 0:16:49.440 would be more susceptible to the fullests that had smaller 0:16:49.440 --> 0:16:53.520 restructuring teams that are less equipped to deal with stress. 0:16:54.200 --> 0:16:56.120 And I think the larger loans are a symptom of 0:16:56.160 --> 0:16:59.880 the same trend. The funds are fearful of stress and 0:17:00.320 --> 0:17:04.000 are relying on larger companies investing more in them because 0:17:04.080 --> 0:17:07.520 they see those as as safer option. So that's kind 0:17:07.560 --> 0:17:10.359 of how I see it in my head. Does that 0:17:10.440 --> 0:17:11.640 make sense, James to you? 0:17:11.760 --> 0:17:14.760 Absolutely yes, We'll look forward to reading more of your 0:17:14.800 --> 0:17:18.560 analysis and coverage. Thank you so much. Kat Hidelgo from 0:17:18.560 --> 0:17:22.480 Bloomberg News and of course to listeners read all of 0:17:22.560 --> 0:17:26.280 Kat's scoops on the Bloomberg terminal and at Bloomberg dot com. 0:17:26.920 --> 0:17:29.480 So you're going soon, Kat, Thank you, James. 0:17:29.680 --> 0:17:31.840 Moving on to another big topic. As I mentioned earlier, 0:17:31.880 --> 0:17:34.440 we're very fortunate to have with us Andrew Chan, who 0:17:34.480 --> 0:17:38.000 covers credit for Bloomberg Intelligence based in Hong Kong. How's 0:17:38.000 --> 0:17:39.360 it going over there, Andrew. 0:17:39.480 --> 0:17:42.879 Great, Well, I guess like exciting for a SOLS. 0:17:43.400 --> 0:17:46.040 So there's a ton of anxiety right now in markets 0:17:46.080 --> 0:17:49.200 about the state of China's economy, which has a significant 0:17:49.600 --> 0:17:54.240 repercussion for everyone else in the world. The eighteen trillion 0:17:54.280 --> 0:17:59.119 dollar economy is decelerating, the property crisis is deepening, consumers 0:17:59.160 --> 0:18:02.440 seem very beat, exports as struggling, and more than one 0:18:02.480 --> 0:18:05.920 in five young people are out of work. And as 0:18:05.960 --> 0:18:09.040 we talked about last week on this show, Country Garden, 0:18:09.359 --> 0:18:13.359 a company with about three thousand pending property projects up 0:18:13.400 --> 0:18:16.280 and down China, is on the cusp of default on 0:18:16.359 --> 0:18:19.919 its debt. And also at the same time, protesters gathered 0:18:19.920 --> 0:18:22.320 at one of the biggest shadow banks demanding their money 0:18:22.320 --> 0:18:26.359 back as payments were halted. So a lot of issues 0:18:26.960 --> 0:18:30.439 you know across China right now. You know great to 0:18:30.440 --> 0:18:32.560 have you on the show, as you know, as an 0:18:32.600 --> 0:18:36.719 expert based there, and we've we've we've been looking at 0:18:36.720 --> 0:18:39.600 this from different angles on this podcast. But but we 0:18:39.680 --> 0:18:42.399 want to drill down a little bit now into what 0:18:42.400 --> 0:18:46.800 we're calling local government financing vehicles, which is another part 0:18:46.840 --> 0:18:51.320 of this sprawling debt mess you know in China. Can 0:18:51.359 --> 0:18:55.320 you start, Andrew by telling us what these entities are? 0:18:55.359 --> 0:18:58.359 You know, what is what we're calling an lg FV 0:18:59.080 --> 0:18:59.880 and how do they work? 0:19:00.359 --> 0:19:03.760 Yeah? So, right now, the LGFE definition is pretty blurred 0:19:03.880 --> 0:19:06.520 because a lot of these entities they used to provide 0:19:06.560 --> 0:19:08.679 some sort of public service or build some type of 0:19:08.680 --> 0:19:12.920 infrastructure for the local government. But once that purpose was finished, 0:19:13.359 --> 0:19:17.280 I mean, its existence was in doubt, and many evolved 0:19:17.320 --> 0:19:22.479 by foraying into like other businesses, some profit orient mostly 0:19:22.600 --> 0:19:26.360 profit oriented, but they largely still remain in an extension 0:19:26.440 --> 0:19:27.520 of the local government. 0:19:27.840 --> 0:19:31.879 So just but in basic terms, they are entities that 0:19:32.160 --> 0:19:36.199 are phoned to fund infrastructure, schools, that sort of thing 0:19:36.200 --> 0:19:36.959 in China, Is that right? 0:19:37.840 --> 0:19:41.240 Yes, that's correct, not necessarily a school, but definitely like 0:19:41.280 --> 0:19:42.200 public services. 0:19:42.800 --> 0:19:44.879 Okay, so why do they have to set these vehicles up? 0:19:44.960 --> 0:19:46.840 Like don't they just borrow money directly. 0:19:47.880 --> 0:19:50.640 Ah, So say, for example, like I want to build 0:19:51.000 --> 0:19:53.320 a subway, and so they would set up like a 0:19:53.359 --> 0:19:57.960 subway LGFE, so to say, And so it's like somewhat 0:19:58.040 --> 0:20:02.200 run like more on co marcial terms rather than being 0:20:02.240 --> 0:20:04.120 built say by the local government. 0:20:05.000 --> 0:20:07.040 Okay, but who is responsible for that debt? 0:20:07.080 --> 0:20:07.159 Then? 0:20:07.200 --> 0:20:09.760 If you if you're burrowing through through a special purpose 0:20:09.840 --> 0:20:13.359 vehicle like this is, does that mean that you're you know, 0:20:13.440 --> 0:20:17.240 kind of distancing yourself from the ultimately from repaying that debt. 0:20:19.240 --> 0:20:22.800 So the debt is definitely belongs to the LGF, which 0:20:22.880 --> 0:20:25.200 again is an extension of the government, and a lot 0:20:25.200 --> 0:20:29.840 of the lenders that lend to the LGF, whether it's 0:20:29.880 --> 0:20:33.080 like say through offshore notes, on shore notes, or through 0:20:33.119 --> 0:20:37.639 bank lending, they understand that there's some sort of implicit 0:20:38.000 --> 0:20:43.200 government support to this SPV so so to say, or LGFF. 0:20:43.880 --> 0:20:47.439 Okay, And by government you're meaning you're meaning the federal government, 0:20:47.480 --> 0:20:50.199 not not the local or the state government, right, Oh no, 0:20:50.240 --> 0:20:53.760 the local government okay. Okay, So it doesn't necessarily roll 0:20:53.840 --> 0:20:54.920 up to the federal level. 0:20:55.800 --> 0:20:57.520 No, not to the central government level. 0:20:57.840 --> 0:20:58.159 Okay. 0:20:58.600 --> 0:21:01.440 So just to like put this in perspective, I mean, 0:21:01.600 --> 0:21:04.679 it's a we're hearing huge numbers. How much debt do 0:21:04.760 --> 0:21:05.320 they actually have? 0:21:05.920 --> 0:21:08.439 Okay, So using the termino, we actually use the bottom 0:21:08.560 --> 0:21:12.760 up approach to estimate this China LGF debt, which could 0:21:12.760 --> 0:21:16.359 be around like nine point eight trillion US dollars based 0:21:16.400 --> 0:21:19.040 on the latest available financial data of more than three 0:21:19.040 --> 0:21:20.119 thousand lgfs. 0:21:20.440 --> 0:21:24.440 So to put that in perspective, Andrew, how much debt 0:21:24.440 --> 0:21:25.440 are we talking about here? 0:21:27.320 --> 0:21:30.080