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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.

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Speaker 2: I'm Tracy Allaway.

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Speaker 3: And I'm Joe Wisenthal.

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Speaker 2: Joe, it struck me that we might be at the

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Speaker 2: beginning of a new cycle, a new credit side.

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Speaker 3: Are you making a call? Are you making a market

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Speaker 3: timing call?

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Speaker 2: I would never, never, No, I'm trying to frame this episode,

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Speaker 2: but we have recently, by the time this episode comes out,

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Speaker 2: had a very momentous presumably decision from the Federal Reserve

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Speaker 2: where they've been cutting rates or they will have cut

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Speaker 2: rates for the first time since I think the summer

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Speaker 2: of last year. Oh, sorry, summer of twenty two, I

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Speaker 2: can't remember that.

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Speaker 3: That's yeah, it's wild. And when ever there is a

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Speaker 3: turning point in the raid cycle, people are often you know,

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Speaker 3: we've had this regime. Equity markets have done really well,

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Speaker 3: credit spreads generally have been pretty tight, and so when

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Speaker 3: you're in this sort of new phase of a cycle,

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Speaker 3: then it's a natural time to sort of revisit where

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Speaker 3: things stand, what kind of assumptions have been baked into markets,

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Speaker 3: and of course like what the risks and opportunities are.

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Speaker 2: Yeah, and I think the previous couple of years have

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Speaker 2: certainly surprised a lot of people who are in credit.

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Speaker 2: You know, people thought when rates went up there was

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Speaker 2: going to be a spike in defaults, and we haven't

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Speaker 2: really seen that. We've seen an increase, but it hasn't

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Speaker 2: been disastrous. We've seen spreads, as you mentioned, still at

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Speaker 2: kind of multi year lows, which is very surprising, and

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Speaker 2: so it kind of begs the question of whether or

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Speaker 2: not this dynamic can continue where pockets of stress might emerge.

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Speaker 3: That's right, And just to note for listeners, we are

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Speaker 3: recording this Monday subtem number sixteenth. We are out in

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Speaker 3: Huntington Beach, California. We are at the future Proof Festival

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Speaker 3: I think it's called, which is probably one of the coolest,

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Speaker 3: most distinct financial market conferences that I can fathom. It's

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Speaker 3: literally out on the beach.

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Speaker 2: It's entirely that's a nice way of saying, we're at

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Speaker 2: a beach three days.

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Speaker 3: It's very nice, it's pretty so we love get around here.

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Speaker 2: But you know, the other thing I was thinking about

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Speaker 2: recently is just the other thing that's happened over the

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Speaker 2: past couple of years has just been the explosion in

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Speaker 2: different types of credit available to companies, right, Like, if

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Speaker 2: you're a company seeking some sort of funding, you basically

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Speaker 2: have an option of everything from a syndicated bond or

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Speaker 2: loan to maybe doing a private deal. There are just

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Speaker 2: all these different types of credit that you could choose.

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Speaker 3: Now, everyone, if you're a company, people will find ways

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Speaker 3: to give you money. There's all kinds of different opportunities.

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Speaker 2: So we need to talk about the credit cycle. We

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Speaker 2: need to talk about the big growth in the options

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Speaker 2: available to investors and also corporates, and we need to

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Speaker 2: talk about what happens now, whether this is a new

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Speaker 2: leg in the cycle or the beginning of a new

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Speaker 2: cycle in itself.

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Speaker 3: Let's do it. I can't wait, all right, we.

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Speaker 2: Have the perfect guests to discuss all of this. We

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Speaker 2: are speaking with the co portfolio manager of Oak Trees,

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Speaker 2: a diversified income fund better known as odd X. Bit

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Speaker 2: of a mouthful actually.

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Speaker 1: Danielle Paully.

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Speaker 2: Danielle, thank you so much for coming on all thoughts.

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Speaker 4: Thank you so much for having me. Tracy and Joe.

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Speaker 2: Are you enjoying the beach as well?

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Speaker 5: Oh, I'm having a great time. I don't think I've

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Speaker 5: ever been to a conference quite like this on the beach,

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Speaker 5: so many people.

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Speaker 2: It's something I've said this before, but all conferences should

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Speaker 2: be like this.

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Speaker 3: On the beach. But you're base around here. This isn't

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Speaker 3: even special for you, like for us coming from New

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Speaker 3: York where the weather's starting to turn and everything's like, oh,

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Speaker 3: a few more days of amazing weather. This is just

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Speaker 3: your life, huh.

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Speaker 5: It's true, is a commute down the four h five.

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Speaker 5: Anyone that's watched Saturday Night Live and the Californians know

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Speaker 5: as though how perilous it can be fair driving on

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Speaker 5: LA freeways.

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Speaker 2: So I mentioned your CopM of the Diversified Income Fund,

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Speaker 2: but you're also a founding member of the investment committee.

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Speaker 2: Talk to us a little bit about what you do

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Speaker 2: at oak Tree.

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Speaker 5: I serve as a portfolio manager for Global Credit at

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Speaker 5: oak Tree, and that's our multi asset credit business. So

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Speaker 5: back in twenty seventeen, we tried to think about a

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Speaker 5: way to bring all of our different credit areas into

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Speaker 5: an easily accessible way for our clients. And I get

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Speaker 5: to serve as a portfolio manager, a member of our

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Speaker 5: investment committee, thinking about relative value and helping with asset

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Speaker 5: allocation in the portfolio. Because, as you know, these different

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Speaker 5: strategies can be more attractive or not based on what's

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Speaker 5: happening with interest rates or dislocation in the market. So

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Speaker 5: it's an interesting role to be in.

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Speaker 3: In my mind, I think I have some understanding of

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Speaker 3: what a portfolio manager does. What does an investment committee

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Speaker 3: do at an entity like oak Drink.

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Speaker 5: Well, different firms will have committees doing different things, and

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Speaker 5: our committee is less of a voting committee and more

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Speaker 5: of a thought leadership committee. So we convene all of

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Speaker 5: the different portfolio managers at oak Tree that cover different

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Speaker 5: asset classes like hil bonds and leverage loans, structured credit,

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Speaker 5: emerging market debt, even convertibles, and we meet every other

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Speaker 5: week as a group to talk about what's happening in credit.

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Speaker 5: So we'll talk about the fundamentals of the companies that

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Speaker 5: we're lending to. Are we seeing any cracks, is it

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Speaker 5: likely that defaults may pick up? And we talk about

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Speaker 5: technical trends, what's happening with issuance. Are there reasons why

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Speaker 5: there may be more attractive opportunities in one strategy versus

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Speaker 5: the other.

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Speaker 2: So at one of your weekly meetings, what would be

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Speaker 2: the big talking point during well, presumably during FOMC meeting

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Speaker 2: it would be the FED. But what have you been

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Speaker 2: talking about lately?

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Speaker 5: Well, we're bottom up investors, macro investors, but it's hard

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Speaker 5: to ignore the macro outlook when we're at such a

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Speaker 5: pivotal point with you know, perhaps a change in FED

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Speaker 5: policy that may signal this new expansionary period and credit.

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Speaker 5: We've had interest rates so high for so long, and

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Speaker 5: really where we're focused on is what has that impact

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Speaker 5: ben on borrowers credit worthiness. So we really are trying

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Speaker 5: to avoid risk when we're investing in fixed income. We

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Speaker 5: like to say it oak tree. If you avoid the losers,

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Speaker 5: the winners will take care of themselves. A lot of

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Speaker 5: our conversation is avoiding bad outcomes and focusing on that

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Speaker 5: lower cohort of borrowers that you may be in trouble

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Speaker 5: given these higher rates.

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Speaker 3: I love the idea, like this is sort of in

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Speaker 3: my mind. When I think of stock investing, it's like

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Speaker 3: you want to pick winners, and when I think of

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Speaker 3: credit investing, you want to avoid losers. I always sort

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Speaker 3: of think of it like cooking a steak, which is

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Speaker 3: just like you want to just nail it every time

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Speaker 3: in the perfect stake is just like, just avoid the

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Speaker 3: bad ones, just stay consistent. I don't know, maybe that's

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Speaker 3: a terrible analogy. I always think of stock credittak. Stocks's

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Speaker 3: pizza is like, you have the most extraordinary pizza in

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Speaker 3: the world. Credit is steak. You just want to not

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Speaker 3: missc mess it up, not mess it up, exactly right.

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Speaker 3: That's how I think of these things in my head.

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Speaker 3: So one of the things that's really surprised me, or

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Speaker 3: I think surprised a lot of people. We had this

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Speaker 3: really aggressive rate hiking cycle, and credit spreads have been

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Speaker 3: really narrow.

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Speaker 5: Now.

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Speaker 3: The obvious answer there, although it's a little question begging

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Speaker 3: I suppose, is like, yeah, well, because we didn't get

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Speaker 3: a recession. A lot of people expected a recession or

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Speaker 3: some sort of major downturn from the raid hikes. We

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Speaker 3: didn't get that, So that's maybe why asset valuations have

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Speaker 3: held up. Well, how would you Is there anything more

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Speaker 3: to it when you look at just how tight spreads

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Speaker 3: generally have remained over this cycle. What's your story that

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Speaker 3: you tell for that?

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Speaker 5: It's a great question. I mean spreads have been tight.

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Speaker 5: I mean typically in high yield we see an average

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Speaker 5: spread range of three hundred to five hundred basis points.

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Speaker 5: Anything's higher than five hundred, no barrow really wants to

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Speaker 5: issue at anything lower than three hundred. You know, no

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Speaker 5: investor wants to buy it. And what I think we've

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Speaker 5: had to have conversations with our investors about is that

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Speaker 5: with yields so high, it's a different environment. You don't

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Speaker 5: need spreads to blow out and then compress to get

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Speaker 5: your total return when you can get a yield of

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Speaker 5: you know, seven percent or so. And so I think

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Speaker 5: you're starting to see a shift from being more tactical

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Speaker 5: buyer to a strategic buyer. And I think there's reasons

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Speaker 5: why that spread is lower in light of what you shared, Joe.

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Speaker 5: In the high old bond market, it's over fifty percent

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Speaker 5: double be today. It's the highest quality it's been in

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Speaker 5: ten years now. You have to contrast that with the

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Speaker 5: leverage loan market, where we have seen some degradation and quality,

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Speaker 5: and that is a market where we're focused on, you know,

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Speaker 5: the lower ten to fifteen percent of borrowers and looking

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Speaker 5: at the upcoming maturity schedule and wondering how some of

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Speaker 5: those are going to get financed. But generally, like the

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Speaker 5: market's okay, and so that lower spread feels more justified

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Speaker 5: to us.

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Speaker 2: So you mentioned the rate cuts earlier and describe them

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Speaker 2: as potentially an expansionary period in credit. I guess I'm

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Speaker 2: wondering how much pent up demand is there in terms

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Speaker 2: of new issuance, because overall it feels like people have

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Speaker 2: termed a lot of stuff out. But I guess there

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Speaker 2: is that segment of struggling borrowers who perhaps for them

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Speaker 2: rate cuts will be really important and make all the difference.

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Speaker 4: It's a really good question.

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Speaker 5: I think when rates come down there is just more

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Speaker 5: availability of credit. And as you point out, there are

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Speaker 5: those barrows that have been struggling with higher rates. This

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Speaker 5: will provide some per relief to them, especially those that

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Speaker 5: have taken out floating rate debt. And if we look

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Speaker 5: at the maturity wall I alluded to this a little

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Speaker 5: bit earlier for loans over the next year, there's something

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Speaker 5: like forty billion of maturity is coming due. It's all

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Speaker 5: in the lowest rated credits, so it's split B triple

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Speaker 5: C and even you know for twenty twenty six, twenty

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Speaker 5: twenty seven, it's almost seventy percent. So it's this cohortive

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Speaker 5: companies that haven't been able to get refinancing and maybe

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Speaker 5: you know, lower rates will provide them some relief. They'll

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Speaker 5: be a little bit more availability of capital. Some of

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Speaker 5: them may not be able to be refinanced in traditional ways,

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Speaker 5: they may need more rescue financing or capital solutions. But

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Speaker 5: I do think it'll be positive for credit borrowers when you.

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Speaker 3: Look at the types of entities that are struggling, fallen out,

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Speaker 3: or actually impacted by this rate segar are we talking?

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Speaker 3: Is it heavily in real estate? Is that the area

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Speaker 3: that would be most exposed or most feeling the pain

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Speaker 3: of higher rates? Are like, where do you see these

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Speaker 3: pockets that actually are facing some challenges in the financing environment.

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Speaker 5: No, it's a great point because we do a lot

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Speaker 5: more than just corporate higal bonds leverage. Low real estate

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Speaker 5: I think has been ground zero for some of these challenges,

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Speaker 5: and a lower interest rate environment should create I think

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Speaker 5: a little more optimism about what's ahead for real estate

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Speaker 5: valuations and force I think some sales and some liquidity

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Speaker 5: in that market. And so we are starting to see

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Speaker 5: some positive outcomes in real estate as people get more

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Speaker 5: comfortable with the rate environment.

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Speaker 2: So I'm always curious about tactical decisions when someone is

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Speaker 2: controlling like a very big fund that has a lot

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Speaker 2: of optionality embedded in it in terms of investments, Like

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Speaker 2: there are tons of different things you could invest in

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Speaker 2: as CopM of the diversified income fund. I mean, I

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Speaker 2: know it's all relative value, but say in a month

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Speaker 2: like August when there was a lot of volatility, but

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Speaker 2: despite that, credit spreads were kind of stable. They weren't

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Speaker 2: really blowing out during the big turmoil. How do you

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Speaker 2: judge the opportunities presented to you at a time of

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Speaker 2: like uncertainty.

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Speaker 5: Like then, we get so excited when there's volatility in

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Speaker 5: the markets. It usually means there's some bargains. But as

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Speaker 5: you point out, I mean, credit spreads really didn't widen much,

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Speaker 5: and I think by the end of that volatile week

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Speaker 5: it even tightened or at least made back that movement,

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Speaker 5: So there wasn't much for us to do. On the

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Speaker 5: corporate credit side, we were starting to get excited about

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Speaker 5: convertible bonds, so it's an area that we invest in,

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Speaker 5: and for those that maybe are less familiar with convertible bonds,

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Speaker 5: I think the easiest way to explain them is it's

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Speaker 5: a way to get the safety of a bond with

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Speaker 5: some form of income, but you also get to participate

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Speaker 5: in some equity upside. We're not converting into equity. We'll

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Speaker 5: sell before that event happens, but it is nice to

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Speaker 5: have some correlation to equity markets at certain times.

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Speaker 3: I don't think we've ever done an episode.

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Speaker 4: We haven't actually convertible.

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Speaker 3: Bond, so we could just talk about this, but can

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Speaker 3: you talk a little bit more about, like how big

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Speaker 3: is that market and who are the types of issuers

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Speaker 3: typically or is the typical situation in which an issuer

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Speaker 3: would go into the convert market.

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Speaker 5: Well, if you're going to do a session on that,

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Speaker 5: you have to speak with our portfolio managers that only

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Speaker 5: focus on convertible.

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Speaker 3: I'd love to set that up.

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Speaker 5: So the convertible market is small, and it tends to

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Speaker 5: be focused more in technology, healthcare, certain sectors, and it

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Speaker 5: has more of a correlation, i'd say, to small cap

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Speaker 5: stocks as compared to the SMP, even though the SMP

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Speaker 5: does have a lot of tech exposure and so it

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Speaker 5: tends to follow that more. I mean, for us, our

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Speaker 5: approach there is really to find good credit that we

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Speaker 5: can underwrite and then participate in the equity.

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Speaker 4: As I said, so just.

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Speaker 3: To clarify from the issuer perspective, if it's small or

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Speaker 3: if it's tech, and so that implies that they're probably

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Speaker 3: fast growing. The appeal for them is what exactly There's

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Speaker 3: this pool of capital that they want to borrow. But

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Speaker 3: this sort of sweetener is that the end investor can

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Speaker 3: participate potentially in some of the actual growth of the company.

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Speaker 4: Yeah, that's right.

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Speaker 5: You don't have to give up outright equity. And then

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Speaker 5: also you can issue at a much lower rate than

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Speaker 5: prevailing rates in the market. So that can be helpful

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Speaker 5: for a company depending on where you are in a cycle.

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Speaker 5: But it just ends up being a much smaller, more

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Speaker 5: niche market, and you can't avoid the correlation to equities.

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Speaker 5: And we're credit investors, so we don't want equities to

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Speaker 5: influence too much the performance of our funds.

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Speaker 4: Today, we're very.

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Speaker 5: Under allocated to converts it's probably the lowest allocation that

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Speaker 5: we've had since twenty nineteen heading into COVID, just because

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Speaker 5: of the valuations and equities and not finding as many bargains.

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Speaker 2: Oh wait, so you said you were getting interested in

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Speaker 2: convertibles going into the August selloff.

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Speaker 4: But I guess you you changed your because of the volatility.

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Speaker 5: Yeah, we felt that maybe we could go in at

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Speaker 5: a better entry point, see, because the valuations haven't made

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Speaker 5: a lot of sense for us, and we can get

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Speaker 5: better potential returns from credit than equities. It's been low,

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Speaker 5: but when you get some of these consecutive days in

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Speaker 5: the market and there's a sell off, you get excited

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Speaker 5: thinking converts are gonna be the first asset class to move.

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Speaker 5: And so we started looking though at which converts moved,

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Speaker 5: and they didn't really meet our criteria for wanting to

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Speaker 5: wander into equities, especially with this rate decision coming up,

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Speaker 5: an election coming up, a lot of risk out there.

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Speaker 3: But the idea would be in a volatility event as

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Speaker 3: credit investors. If I mean that whole volatility event, it

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Speaker 3: least about fifteen minutes, really like it was so short,

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Speaker 3: but theoretically if it had lasted longer, the first opportunities

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Speaker 3: likely would have shown up in converted I.

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Speaker 5: Think so, especially when spreads aren't moving totally.

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Speaker 3: That makes sense. Can you talk a little bit about

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Speaker 3: from a portfolio standpoint? I mean it makes sense when

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Speaker 3: you say, okay, volatility is exciting if you're an active manager,

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Speaker 3: volatility presents opportunities. How do you position the portfolio such

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Speaker 3: that you have the cash or the liquidity to take

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Speaker 3: advantage of volatility? Because I joked on the day of

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Speaker 3: the big sell off as like, oh, I should sell

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Speaker 3: some stocks so I can buy the dip here. Like

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Speaker 3: I would have loved to take advantage of that, but

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Speaker 3: you know, I don't really like keep a lot of

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Speaker 3: like extra cash around. How do you think about that

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Speaker 3: from a portfolio standpoint, being invested but also being in

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Speaker 3: a position to take advantage of opportunities.

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Speaker 4: And it's more of an art than a science.

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Speaker 5: I mean, today cash is an ass that it's not

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Speaker 5: as delutive as it used to be to hold, so

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Speaker 5: you can at least get some decent yield. And we'll

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Speaker 5: invest our cash in investment gray kind of short duration

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Speaker 5: type paper, so we're getting an even better yield. And

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Speaker 5: we do like to have some of that in the

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Speaker 5: portfolio as a buffer to use for these.

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Speaker 4: Periods of volatility.

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Speaker 5: One thing that we did a year or so ago

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Speaker 5: as we looked at the portfolio and which were our

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Speaker 5: you know, less liquid assets outside of private credit, because

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Speaker 5: you really can't sell private credit a selloff. So we said,

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Speaker 5: leverage loans, while you can trade them quickly, they take

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Speaker 5: a while to settle, and so we have other options.

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Speaker 5: Maybe we should create some liquidity by taking some money

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Speaker 5: out of leverage loans. And what we did is we

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Speaker 5: basically took every dollar we took out of leverage loans,

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Speaker 5: we put fifty cents into cash and fifty cents into colos.

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Speaker 5: So it's a barbell strategy because colos are really levered instruments.

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Speaker 5: You're getting a higher yield, but they don't take time

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Speaker 5: to settle, and then the cash, you know, that's available

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Speaker 5: to us.

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Speaker 4: So we created liquidity and we.

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Speaker 5: Didn't really change the overall yield profile of the fund.

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Speaker 2: You mentioned private credit. Just then, what has the growth

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Speaker 2: of the private credit market meant for the more syndicated stuff, so,

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Speaker 2: you know, leverage loans, publicly issued bonds, that sort of thing.

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Speaker 5: I think Tricy, you said it so eloquently earlier on

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Speaker 5: borrow is have more options, right, they have different ways

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Speaker 5: to get financing, whether it's through the syndicated market working

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Speaker 5: with a private lender. I think for us it's provided

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Speaker 5: really attractive opportunities to step in when markets have been frozen.

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Speaker 5: So I look back maybe to the end of twenty

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Speaker 5: twenty two when banks were hung with what forty billion

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Speaker 5: on their balance sheets, and that was an opportunity to

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Speaker 5: step in and dictate terms and say, well, lend and

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Speaker 5: in scale, but we want covenants, we want protections.

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Speaker 3: Well, sorry, explain that more. What were the assets that

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Speaker 3: were frozen or weren't moving, what types of assets were those,

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Speaker 3: and then what was this sort of what was your

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Speaker 3: package or what was your pitch to them?

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Speaker 5: Yeah, so it was banks that had pre agreed to

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Speaker 5: syndicate loans, and because interest rates had moved so quickly,

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Speaker 5: those banks were going to take significant losses taking those

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Speaker 5: loans to market, and so those opportunities they needed private

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Speaker 5: lenders to step in to speak for those deals. And

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Speaker 5: so what we were able to do is we were

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Speaker 5: able to command better terms in the form of pricing,

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Speaker 5: so higher spreads got it, and the negotiate covenants that

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Speaker 5: you wouldn't see in the public markets. That's been the

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Speaker 5: big issue on loans. You've had no covenants or protections

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Speaker 5: in the levered loan market, whereas with private credit when

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Speaker 5: we're directly originating loans, especially on the non sponsor side,

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Speaker 5: we can actually protect ourselves in terms of structure and

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Speaker 5: get covenants in there that are going to protect us.

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Speaker 2: This is one thing I always wondered. But in the

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Speaker 2: private market, when you're an entity like oak Tree, who

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Speaker 2: initiates the conversations. Is it the bank come to you

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Speaker 2: and say, hey, we have a hung loan we need

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Speaker 2: to get rid of it. Is it the company looking

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Speaker 2: for options? Do you approach potential borrowers? How does that work?

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Speaker 5: It depends, But we do have a sourcing and origination

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Speaker 5: team that oak Tree that speaks for the entirety of

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Speaker 5: our firm. I think it's a competitive advantage for us

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Speaker 5: because they are facing off with companies with sponsors, with

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Speaker 5: the banks. It's like having a sophisticated capital markets team

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Speaker 5: within an alternative asset manager, and it allows us to

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Speaker 5: have conversations more from the point of what do you need,

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Speaker 5: what's your problem?

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Speaker 4: What type of financing?

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Speaker 5: And then they will come back to us at oak

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Speaker 5: Tree and say, this is what we need to do.

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Speaker 5: Where does this fit across the firm? Let's create something

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Speaker 5: that really is tailored to that entity. And so that's

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Speaker 5: kind of how we see a lot of different things.

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Speaker 5: We're also a first call in terms of these types

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Speaker 5: of opportunities given our roots and distressed debt, investing, special

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Speaker 5: situations and rescue finance.

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Speaker 3: I mean, we've talked a lot on the show now

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Speaker 3: about the growth of private credit. How much has private

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Speaker 3: credit grown within oak Tree?

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Speaker 4: It's grown a lot.

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Speaker 5: When I joined the firm back in twenty fourteen, I

402
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Speaker 5: want to say, at that time, just the private credit

403
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Speaker 5: industry was maybe five hundred billion. It's grown to one

404
00:21:20,080 --> 00:21:23,760
Speaker 5: point seven trillion. I think today. The unique thing about

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Speaker 5: oak Tree is we've been doing private credit for a

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Speaker 5: long time. Back in two thousand, the firm launched a

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Speaker 5: mezzanine kind of middle market fund, and that's grown into

408
00:21:36,040 --> 00:21:41,280
Speaker 5: direct lending. It's really taken on all sorts of forms.

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Speaker 5: But I think we're still doing the same type of

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Speaker 5: lending that.

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Speaker 4: We were historically.

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Speaker 5: It's just now become much more popular and mainstream.

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Speaker 2: So on that note, how competitive is that market at

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Speaker 2: the moment, Because I think back to you were talking

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Speaker 2: about covenants earlier. One of the driving forces behind the

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Speaker 2: rise of CoV light sort of posts two thousand and

417
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Speaker 2: eight was well, there was so much money chasing yield

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Speaker 2: that it was a race to the bottom, and if

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Speaker 2: one investor wanted protections built into their investment or their

420
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Speaker 2: loan that the company didn't want, then someone else would

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Speaker 2: step in and basically offer to do it on better

422
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Speaker 2: terms in the company's perspective. Do you feel that kind

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Speaker 2: of competitive pressure now in the private market.

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Speaker 5: I think we still have some of that today and

425
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Speaker 5: we will going forward, just given how much demand there

426
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Speaker 5: is for private credit. But I do segment the market,

427
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Speaker 5: so I feel like that's most acute in the direct

428
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Speaker 5: lending LBO finance sponsor backed transactions, where you know, we

429
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Speaker 5: try and play, though it's a smaller opportunity set, it's

430
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Speaker 5: more episodic, is directly originating debt non sponsor, and there

431
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Speaker 5: you don't have the competition, and so you're able to

432
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Speaker 5: set terms and you're the sole lender or maybe one

433
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Speaker 5: of two lenders, and there's just a lot less competition

434
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Speaker 5: because when you manage a very large private credit fund,

435
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Speaker 5: you've got to put a lot of capital to work,

436
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Speaker 5: and there are just more LBO sponsor backed opportunities available.

437
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Speaker 5: So if you are able to be nimble or manage

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Speaker 5: private credit in a multi asset portfolio like I do,

439
00:23:23,119 --> 00:23:26,119
Speaker 5: where you don't have to constantly be deploying in private credit.

440
00:23:26,119 --> 00:23:28,720
Speaker 5: You have other tools in your toolkit. We can be

441
00:23:28,800 --> 00:23:32,360
Speaker 5: selective and try and overweight those non sponsor opportunities.

442
00:23:32,640 --> 00:23:35,480
Speaker 3: So I've been talking about the credit markets from the

443
00:23:35,840 --> 00:23:40,840
Speaker 3: borrower perspective. You mentioned in the beginning that in the

444
00:23:40,920 --> 00:23:44,400
Speaker 3: current rate environment, or at least the recent rate environment,

445
00:23:44,840 --> 00:23:47,639
Speaker 3: credit has also had a really big yield component as

446
00:23:47,680 --> 00:23:50,600
Speaker 3: part of the value proposition. And with raised as high

447
00:23:50,720 --> 00:23:53,080
Speaker 3: as they are, credit spreads okay, maybe a little narrower,

448
00:23:53,119 --> 00:23:56,439
Speaker 3: but all in, investors are getting a decent amount of income.

449
00:23:56,720 --> 00:24:00,199
Speaker 3: How have you seen the demands of investors evolve? What

450
00:24:00,240 --> 00:24:03,680
Speaker 3: are people looking for in terms of an income product

451
00:24:03,920 --> 00:24:07,480
Speaker 3: or a credit product? And how has that changed over

452
00:24:07,480 --> 00:24:10,040
Speaker 3: the last few years with the you know, the you know,

453
00:24:10,080 --> 00:24:12,800
Speaker 3: the worst inflation in forty years and the aggressive rate

454
00:24:12,880 --> 00:24:15,160
Speaker 3: hikes as such, what have you seen on this sort

455
00:24:15,200 --> 00:24:16,760
Speaker 3: of like the investor.

456
00:24:16,480 --> 00:24:22,159
Speaker 5: End, I think investors have wanted more diversification, exposure to

457
00:24:22,680 --> 00:24:25,720
Speaker 5: a mix of fixed and floating rate so that they

458
00:24:25,720 --> 00:24:31,080
Speaker 5: aren't so susceptible to what's happening in the interest rate regime.

459
00:24:30,720 --> 00:24:31,240
Speaker 4: Of the FED.

460
00:24:31,400 --> 00:24:34,680
Speaker 5: Like fixed rate ig and high old only portfolios got

461
00:24:34,680 --> 00:24:37,560
Speaker 5: pretty beaten up as rates were rising, and you saw

462
00:24:37,640 --> 00:24:40,440
Speaker 5: a lot of interest and more floating rate leverage, loan,

463
00:24:40,560 --> 00:24:44,280
Speaker 5: private credit products that could continue to offer higher income.

464
00:24:44,359 --> 00:24:46,400
Speaker 4: But now where we are, they want.

465
00:24:46,240 --> 00:24:48,920
Speaker 5: To toggle back, right because the fixed rate is really

466
00:24:48,920 --> 00:24:52,000
Speaker 5: what's going to benefit the most from a rate cut,

467
00:24:52,040 --> 00:24:56,360
Speaker 5: and so having portfolios set up that can tactically access

468
00:24:56,440 --> 00:24:59,800
Speaker 5: both of those opportunity sets, I think that's really what we're.

469
00:24:59,640 --> 00:25:01,879
Speaker 4: Hearing a lot of demand for. Wait, so talk to

470
00:25:01,960 --> 00:25:02,920
Speaker 4: us a little bit more.

471
00:25:03,520 --> 00:25:05,879
Speaker 2: You know, earlier we were discussing credit spreads and the

472
00:25:05,880 --> 00:25:09,119
Speaker 2: fact that they've remained fairly low, but as you say,

473
00:25:09,520 --> 00:25:11,840
Speaker 2: maybe because of yield, they look a little bit more

474
00:25:11,880 --> 00:25:15,119
Speaker 2: attractive in the higher rate environment. But what does like

475
00:25:15,320 --> 00:25:20,119
Speaker 2: a good entry point into credit actually look like right now?

476
00:25:20,160 --> 00:25:22,560
Speaker 2: Like what should investors be looking for if they want

477
00:25:22,560 --> 00:25:24,639
Speaker 2: to kind of flip the switch on higher exposure.

478
00:25:24,960 --> 00:25:27,639
Speaker 5: Well, I think today in the high yield market, you

479
00:25:27,680 --> 00:25:31,280
Speaker 5: can get good income from a high quality bond. You're

480
00:25:31,280 --> 00:25:34,919
Speaker 5: looking probably around a seven percent yield, and that's attractive

481
00:25:35,000 --> 00:25:36,399
Speaker 5: for some. I mean I work with a lot of

482
00:25:36,440 --> 00:25:40,919
Speaker 5: institutions as well, pension plans, endowments. Oftentimes they're trying to

483
00:25:40,920 --> 00:25:44,600
Speaker 5: solve for seven percent, they no longer need to allocate

484
00:25:44,680 --> 00:25:47,320
Speaker 5: to equities to get that type of return. Has the

485
00:25:47,400 --> 00:25:49,840
Speaker 5: yield been higher, sure, I mean it was as high

486
00:25:49,840 --> 00:25:53,080
Speaker 5: as ten percent, you know, not so long ago, which

487
00:25:53,119 --> 00:25:55,360
Speaker 5: is more of an equity like return. If you think

488
00:25:55,359 --> 00:25:58,320
Speaker 5: about the SMP the last one hundred years, it's probably

489
00:25:58,320 --> 00:26:00,720
Speaker 5: given you around ten percent. I mean, if you're getting

490
00:26:00,760 --> 00:26:03,359
Speaker 5: ten percent, it feels somewhat like a free lunch to

491
00:26:03,400 --> 00:26:05,760
Speaker 5: go into credit, and so I'd say, like, that's an

492
00:26:05,880 --> 00:26:08,080
Speaker 5: entry point you don't want to miss. But today you're

493
00:26:08,119 --> 00:26:10,400
Speaker 5: still getting you know, seven percent, it's pretty good.

494
00:26:10,960 --> 00:26:13,760
Speaker 2: That's the old joke Joe, where like if you liked

495
00:26:13,800 --> 00:26:16,280
Speaker 2: high yield at seven percent, you love it at ten.

496
00:26:17,520 --> 00:26:20,119
Speaker 3: Except no one actually does. Yeah, okay, So it was

497
00:26:20,240 --> 00:26:24,640
Speaker 3: very logical. As rates were rising, suddenly interest in floating

498
00:26:24,680 --> 00:26:27,600
Speaker 3: rate debt goes up. Then the interest rates turned around,

499
00:26:27,680 --> 00:26:30,800
Speaker 3: and suddenly, oh, people want the fixed rate debt for

500
00:26:30,960 --> 00:26:34,720
Speaker 3: obvious reasons. You know, one thing I wander about, and

501
00:26:34,720 --> 00:26:38,280
Speaker 3: it comes up in many interviews. Does the memory though

502
00:26:38,440 --> 00:26:41,240
Speaker 3: of twenty twenty two persist? And do you see that

503
00:26:42,000 --> 00:26:45,080
Speaker 3: over the next decade, the fact that you can have

504
00:26:45,160 --> 00:26:50,000
Speaker 3: these very sudden, sharp spikes in inflation and therefore rates

505
00:26:50,240 --> 00:26:53,920
Speaker 3: do you see that leaving a fingerprint on investor profiles,

506
00:26:53,960 --> 00:26:57,960
Speaker 3: are on investor risk management for years to come, even

507
00:26:58,040 --> 00:27:01,280
Speaker 3: setting aside this cycle, that memory of that experience.

508
00:27:01,480 --> 00:27:02,639
Speaker 4: I'm a little skeptical.

509
00:27:02,840 --> 00:27:07,000
Speaker 5: I think many just have this low rate, zero interest

510
00:27:07,560 --> 00:27:10,760
Speaker 5: environment stuck in their heads and they think that we're

511
00:27:10,760 --> 00:27:12,439
Speaker 5: going back down there and we're staying there. And what

512
00:27:12,520 --> 00:27:15,840
Speaker 5: you raise is a concern of mine, like if inflation

513
00:27:16,560 --> 00:27:20,160
Speaker 5: rears its ugly head again and at the same time

514
00:27:20,200 --> 00:27:24,160
Speaker 5: the economy is slowing like stagflation, not something that many

515
00:27:24,440 --> 00:27:26,399
Speaker 5: investors for investing today have seen.

516
00:27:26,720 --> 00:27:29,760
Speaker 3: Well, then that actually brings to mind another question, which

517
00:27:29,800 --> 00:27:32,960
Speaker 3: is that one of the extraordinary aspects I would say,

518
00:27:33,000 --> 00:27:36,800
Speaker 3: you know, starting in March twenty twenty two is through policy,

519
00:27:36,880 --> 00:27:40,639
Speaker 3: through fiscal policy and aggressive FED action. You know, we

520
00:27:40,760 --> 00:27:44,199
Speaker 3: knocked out the recession in like three months, those the

521
00:27:44,200 --> 00:27:47,160
Speaker 3: shortest recession ever, and we sort of proved through policy

522
00:27:47,240 --> 00:27:50,320
Speaker 3: that we can always fight recessions, that they don't really

523
00:27:50,320 --> 00:27:52,679
Speaker 3: have to happen, but we know they'll happen again. But

524
00:27:52,840 --> 00:27:54,600
Speaker 3: it also makes me wonder, and then we didn't have

525
00:27:54,600 --> 00:27:57,000
Speaker 3: a recession in twenty twenty two or twenty twenty three

526
00:27:57,080 --> 00:28:00,199
Speaker 3: when everyone expected it. And so I'm curious from the

527
00:28:00,240 --> 00:28:04,280
Speaker 3: other side, like are people anxious about recession or is

528
00:28:04,320 --> 00:28:06,920
Speaker 3: there a view that's settled in that, like we don't

529
00:28:06,960 --> 00:28:10,040
Speaker 3: have to have recessions and they could be kind of

530
00:28:10,080 --> 00:28:10,960
Speaker 3: a thing of the past.

531
00:28:11,200 --> 00:28:13,560
Speaker 5: I mean, it feels like the latter in the market,

532
00:28:13,600 --> 00:28:16,080
Speaker 5: right the Fed just took this big bazooka and yeah,

533
00:28:16,640 --> 00:28:20,679
Speaker 5: really kind of shot the economy and got things going.

534
00:28:20,760 --> 00:28:23,760
Speaker 5: And they're also in a pretty good place right now

535
00:28:23,800 --> 00:28:26,760
Speaker 5: with rates so high to be able to aggressively cut

536
00:28:26,840 --> 00:28:28,800
Speaker 5: rates if something does happen.

537
00:28:29,000 --> 00:28:30,159
Speaker 4: So I agree with you.

538
00:28:30,200 --> 00:28:32,600
Speaker 5: I think a lot of people are thinking will we

539
00:28:32,720 --> 00:28:35,639
Speaker 5: ever have recessions again? Now At oak Tree, yes, we

540
00:28:35,680 --> 00:28:37,919
Speaker 5: think we will. You know, we're very much a believer

541
00:28:38,120 --> 00:28:43,480
Speaker 5: of cycles. So maybe one you know, theory that we

542
00:28:43,600 --> 00:28:46,840
Speaker 5: have is because the recession was so talked about, this

543
00:28:47,360 --> 00:28:50,959
Speaker 5: upcoming recession that CFOs got in front of it. And

544
00:28:51,000 --> 00:28:54,520
Speaker 5: you did see that right with the wave of refinancings

545
00:28:54,600 --> 00:29:00,520
Speaker 5: that occurred, and frankly, you know, COVID, the reopening was

546
00:29:00,560 --> 00:29:04,080
Speaker 5: pretty good for companies. Like higher inflation has hurt consumers,

547
00:29:04,080 --> 00:29:06,800
Speaker 5: but it didn't hurt companies who saw their revenues increase,

548
00:29:07,080 --> 00:29:09,959
Speaker 5: so they're in a better cash position kind of coming

549
00:29:10,000 --> 00:29:11,280
Speaker 5: into this period too.

550
00:29:11,520 --> 00:29:13,360
Speaker 2: We talk a little bit more about that. I find

551
00:29:13,400 --> 00:29:16,080
Speaker 2: that interesting the idea that because everyone was talking about

552
00:29:16,080 --> 00:29:20,720
Speaker 2: potential recession, maybe a bunch of corporate treasurers decided to

553
00:29:20,840 --> 00:29:23,920
Speaker 2: term out their maturities and that's maybe why we didn't

554
00:29:23,960 --> 00:29:27,840
Speaker 2: have the big maturity wall disaster that everyone thought we would.

555
00:29:27,960 --> 00:29:31,080
Speaker 5: Yeah, maybe I'm giving them too much credit. Right, Look,

556
00:29:31,200 --> 00:29:34,800
Speaker 5: I think another thing that happened was COVID, and you

557
00:29:34,840 --> 00:29:37,880
Speaker 5: could argue that that was a recession, a mini recession,

558
00:29:37,920 --> 00:29:41,600
Speaker 5: and maybe it's just like the something, it was something, right,

559
00:29:41,640 --> 00:29:45,760
Speaker 5: I mean, we did see default spike, and what's happened

560
00:29:45,800 --> 00:29:48,520
Speaker 5: there is some of the worst companies kind of fell

561
00:29:48,560 --> 00:29:50,600
Speaker 5: out of the index and that's where you get that

562
00:29:50,640 --> 00:29:52,320
Speaker 5: better quality, right that I.

563
00:29:52,200 --> 00:29:52,880
Speaker 4: Was alluding to.

564
00:29:53,040 --> 00:29:55,640
Speaker 5: And so maybe you just had this kind of cleaning

565
00:29:55,680 --> 00:29:59,760
Speaker 5: event that happened. And because the market is of higher

566
00:29:59,800 --> 00:30:03,239
Speaker 5: cour quality, market participants see that, and so they're not

567
00:30:03,280 --> 00:30:07,640
Speaker 5: as concerned about having as big of an issue going forward.

568
00:30:22,520 --> 00:30:25,160
Speaker 3: Can you talk about this whenever I hear like my

569
00:30:25,400 --> 00:30:29,360
Speaker 3: credit colleagues and Tracy talk about like, oh, like high

570
00:30:29,400 --> 00:30:32,960
Speaker 3: yield that environment just fundamentally doesn't look like the high

571
00:30:33,000 --> 00:30:35,320
Speaker 3: yield environment of past or I hear people talk about

572
00:30:35,320 --> 00:30:37,719
Speaker 3: like fallen angels or all these different things that are

573
00:30:37,720 --> 00:30:41,000
Speaker 3: a little bit outside of my own comfort zone. What

574
00:30:41,200 --> 00:30:44,160
Speaker 3: is this sort of I guess the credit profile of

575
00:30:44,200 --> 00:30:46,520
Speaker 3: the market look like, how has it changed over the

576
00:30:46,600 --> 00:30:49,040
Speaker 3: last I don't know, five years, ten years, et cetera.

577
00:30:49,160 --> 00:30:52,840
Speaker 3: So when we talk about high old today versus highyield

578
00:30:52,880 --> 00:30:55,280
Speaker 3: five years ago or high yeld fifteen years ago, like,

579
00:30:55,320 --> 00:30:56,600
Speaker 3: how have these markets changed?

580
00:30:56,800 --> 00:31:01,040
Speaker 5: Well, credit rating agencies will issue their ratings, and you know,

581
00:31:01,080 --> 00:31:02,800
Speaker 5: if they were right all the time, we wouldn't have

582
00:31:02,840 --> 00:31:03,160
Speaker 5: a job.

583
00:31:03,200 --> 00:31:05,000
Speaker 4: We'd like to say that, but assume they are.

584
00:31:05,720 --> 00:31:09,840
Speaker 5: And what you've seen is that these markets have tended

585
00:31:09,920 --> 00:31:13,520
Speaker 5: to skew to lower ratings because they are sub investment

586
00:31:13,600 --> 00:31:17,400
Speaker 5: grade credit and there's inherently more risk than investment grade.

587
00:31:17,800 --> 00:31:21,160
Speaker 5: But it's a higher quality market today because some of

588
00:31:21,200 --> 00:31:25,800
Speaker 5: those companies prior to COVID, you know, we're in the market,

589
00:31:25,880 --> 00:31:28,760
Speaker 5: and then during COVID they defaulted on their debt, and

590
00:31:28,800 --> 00:31:31,560
Speaker 5: so it's more of a technical thing. Right, the market

591
00:31:31,560 --> 00:31:33,680
Speaker 5: looks better because you got rid of some of the

592
00:31:33,680 --> 00:31:37,480
Speaker 5: worst companies from the indices. At the same time than that,

593
00:31:37,640 --> 00:31:41,560
Speaker 5: some of the investment grade rated companies fell into the

594
00:31:41,560 --> 00:31:44,160
Speaker 5: index or the fallen angels that you mentioned. So it's

595
00:31:44,240 --> 00:31:48,400
Speaker 5: changed the composition of what's available out there. And then

596
00:31:48,400 --> 00:31:50,280
Speaker 5: in terms of just you know, what kind of companies

597
00:31:50,320 --> 00:31:53,400
Speaker 5: look like today versus the past.

598
00:31:53,440 --> 00:31:55,280
Speaker 4: Leverage has stayed like pretty steady.

599
00:31:55,320 --> 00:31:57,640
Speaker 5: It's actually come down a little bit in high yield,

600
00:31:57,640 --> 00:32:00,920
Speaker 5: which is interesting. Even in price credit, you know, you're

601
00:32:00,920 --> 00:32:04,200
Speaker 5: looking at maybe five turns of leverage. It's not excessive,

602
00:32:05,000 --> 00:32:08,440
Speaker 5: and so the fundamentals are okay, I think for credit,

603
00:32:08,480 --> 00:32:10,800
Speaker 5: and then you kind of overlay that with an economy

604
00:32:11,360 --> 00:32:14,840
Speaker 5: where you're not seeing cracks in the labor market in

605
00:32:14,840 --> 00:32:17,640
Speaker 5: any significant way. Like, sure, there are things that we

606
00:32:17,640 --> 00:32:21,160
Speaker 5: are focused on an oak tree, like student debt, picking

607
00:32:21,240 --> 00:32:26,880
Speaker 5: up delinquencies in auto payments, other indicators that you know

608
00:32:26,960 --> 00:32:29,960
Speaker 5: show some stress, but like generally things feel.

609
00:32:29,680 --> 00:32:32,160
Speaker 4: Okay, and the same for the borrowers.

610
00:32:32,680 --> 00:32:34,560
Speaker 2: It is true, Joe. I don't know if you remember,

611
00:32:34,600 --> 00:32:37,640
Speaker 2: but there was a moment pre COVID and sort of

612
00:32:37,640 --> 00:32:40,920
Speaker 2: post COVID where everyone was worried about the triple B

613
00:32:40,920 --> 00:32:44,600
Speaker 2: bubble involves. Do you remember that there's the idea that like,

614
00:32:44,720 --> 00:32:47,760
Speaker 2: so triple B is the lowest rung of investment grade,

615
00:32:47,960 --> 00:32:52,200
Speaker 2: and it was like the fastest growing cohort of the

616
00:32:52,240 --> 00:32:55,560
Speaker 2: IG market, and so everyone was like, oh god, the

617
00:32:55,640 --> 00:32:59,120
Speaker 2: quality of the overall corporate BALLB market is deteriorating. Everything's

618
00:32:59,120 --> 00:33:01,280
Speaker 2: triple B now, bublah blah blah blah, and it's going

619
00:33:01,360 --> 00:33:04,760
Speaker 2: to burst one day. And instead what we've seen over

620
00:33:04,800 --> 00:33:07,320
Speaker 2: the past year or so is the triple B bubble

621
00:33:07,480 --> 00:33:11,560
Speaker 2: kind of burst. But because everyone got upgraded. Yeah, so

622
00:33:11,760 --> 00:33:14,880
Speaker 2: like no downgrade, it's now falling down into high old status,

623
00:33:14,880 --> 00:33:18,760
Speaker 2: but everything getting upgraded to speak to the quality point. Okay,

624
00:33:19,080 --> 00:33:22,520
Speaker 2: since we have you, Danielle, one thing I've been wondering about,

625
00:33:22,560 --> 00:33:24,440
Speaker 2: and I feel kind of bad because I've used this

626
00:33:24,680 --> 00:33:28,160
Speaker 2: term in previous conversations, but we've never really flushed out

627
00:33:28,160 --> 00:33:32,200
Speaker 2: what it actually means. Creditor on credit or violence. It's

628
00:33:32,240 --> 00:33:33,960
Speaker 2: a very popular talking point.

629
00:33:34,120 --> 00:33:35,479
Speaker 3: But what do we mean exciting?

630
00:33:35,640 --> 00:33:39,200
Speaker 2: Yeah, it does, right, it sounds active at least, what

631
00:33:39,240 --> 00:33:40,840
Speaker 2: do we mean when we're talking about that?

632
00:33:41,280 --> 00:33:43,959
Speaker 5: You know, it's it's funny, it's nothing new, It's happened

633
00:33:44,000 --> 00:33:46,120
Speaker 5: for a long time. But I think the dollars at

634
00:33:46,120 --> 00:33:48,960
Speaker 5: play are a lot bigger given the growth of these markets.

635
00:33:49,640 --> 00:33:53,160
Speaker 5: And it's what we talked about earlier that a lot

636
00:33:53,200 --> 00:33:56,680
Speaker 5: of the deals that got done over the last few

637
00:33:56,760 --> 00:34:00,280
Speaker 5: years have no covenants in the leverage loan market. And

638
00:34:00,320 --> 00:34:02,600
Speaker 5: so what that does is it just there's holes in

639
00:34:02,640 --> 00:34:06,840
Speaker 5: these deals and it allows for sometimes nefarious activities.

640
00:34:07,280 --> 00:34:11,320
Speaker 3: Explain that further covenance and holes for someone like myself

641
00:34:11,320 --> 00:34:14,080
Speaker 3: who is not doesn't have a concrete idea of what

642
00:34:14,080 --> 00:34:16,279
Speaker 3: this means, like, is what talk to us a little

643
00:34:16,280 --> 00:34:17,200
Speaker 3: bit about how that plays.

644
00:34:17,280 --> 00:34:17,480
Speaker 4: Yeah.

645
00:34:17,520 --> 00:34:20,920
Speaker 5: Sure, so ideally when we're structuring alone with a company,

646
00:34:21,120 --> 00:34:25,400
Speaker 5: we want to find ways to protect ourselves, especially if

647
00:34:25,560 --> 00:34:28,560
Speaker 5: they are going to miss an interest payment or default

648
00:34:28,600 --> 00:34:31,400
Speaker 5: on the entirety of their loan. We want to ensure

649
00:34:31,440 --> 00:34:34,319
Speaker 5: things like we're first lean and the capital structure, meaning

650
00:34:34,320 --> 00:34:37,080
Speaker 5: that we're going to get paid back first in a bankruptcy.

651
00:34:37,800 --> 00:34:41,520
Speaker 5: We may want to tie our loan to certain assets

652
00:34:41,600 --> 00:34:44,920
Speaker 5: that the company has so that those assets can be

653
00:34:45,040 --> 00:34:48,000
Speaker 5: used to pay the proceeds of the bankruptcy. And so

654
00:34:48,080 --> 00:34:52,040
Speaker 5: you put these covenants or terms into the bond indenture,

655
00:34:52,440 --> 00:34:56,279
Speaker 5: the loan document so that you're protecting yourselves. But because

656
00:34:56,360 --> 00:35:01,040
Speaker 5: there's been such competition to invest in these deals, and

657
00:35:01,080 --> 00:35:03,279
Speaker 5: there's been this low interest rate environment and just a

658
00:35:03,320 --> 00:35:07,160
Speaker 5: lot of capital, it's been harder to get these types

659
00:35:07,239 --> 00:35:09,960
Speaker 5: of protections into the documents.

660
00:35:10,320 --> 00:35:12,560
Speaker 3: It sort of sounds like when everyone was buying homes

661
00:35:12,560 --> 00:35:14,160
Speaker 3: a few years ago and no one did the inspect

662
00:35:14,239 --> 00:35:16,719
Speaker 3: They like awave the inspections just because you just like

663
00:35:16,880 --> 00:35:18,200
Speaker 3: and that was like one of it. It's like, no,

664
00:35:18,239 --> 00:35:19,880
Speaker 3: if you want an inspection, someone's going to buy it

665
00:35:19,880 --> 00:35:21,600
Speaker 3: before you. It's like the same basic principle.

666
00:35:21,680 --> 00:35:24,759
Speaker 5: Yeah. And so when it comes to lender on lender violence, then,

667
00:35:24,960 --> 00:35:28,759
Speaker 5: as you were saying, Tracy, these companies are struggling from

668
00:35:28,840 --> 00:35:31,319
Speaker 5: higher rates, right, they may not be able to make

669
00:35:31,360 --> 00:35:34,759
Speaker 5: their interest payments. And so what's happening is you have

670
00:35:34,880 --> 00:35:38,200
Speaker 5: certain creditors and sponsors looking at, well, how are we

671
00:35:38,280 --> 00:35:41,400
Speaker 5: going to remedy this situation. We need fresh capital for

672
00:35:41,480 --> 00:35:43,879
Speaker 5: this company to kick the can down the road, if

673
00:35:43,880 --> 00:35:47,959
Speaker 5: you will. And so what you're seeing is different techniques

674
00:35:48,520 --> 00:35:52,319
Speaker 5: applied taking advantage of there being no covenants. So a

675
00:35:52,360 --> 00:35:57,640
Speaker 5: classic example of this is stripping assets from a collateral package,

676
00:35:57,800 --> 00:35:58,719
Speaker 5: dropping them out.

677
00:35:58,719 --> 00:36:00,160
Speaker 4: It's called a drop down.

678
00:36:00,480 --> 00:36:02,600
Speaker 5: So you might see that they might go to a

679
00:36:02,719 --> 00:36:06,920
Speaker 5: new entity and unrestricted entity that can then take out debt.

680
00:36:07,520 --> 00:36:11,480
Speaker 5: That will just lessen the amount of assets that investors

681
00:36:11,600 --> 00:36:15,000
Speaker 5: can have to pay back their claims. You also have

682
00:36:15,120 --> 00:36:19,640
Speaker 5: the ability to have new capital come in so effectively

683
00:36:19,800 --> 00:36:22,680
Speaker 5: priming first lean investors. You go to bed thinking your

684
00:36:22,719 --> 00:36:24,239
Speaker 5: first lean, and then you wake up the next day

685
00:36:24,640 --> 00:36:31,240
Speaker 5: second lean surprise. That's challenging and oftentimes really the company

686
00:36:31,280 --> 00:36:33,759
Speaker 5: can work with the majority of creditors to do this

687
00:36:33,840 --> 00:36:37,520
Speaker 5: really quickly, and not all creditors may be involved, and

688
00:36:37,600 --> 00:36:40,879
Speaker 5: it can be really violent, I guess if you will,

689
00:36:41,000 --> 00:36:42,760
Speaker 5: which is why the term is used.

690
00:36:43,480 --> 00:36:45,880
Speaker 2: So one of the things I've been thinking about recently.

691
00:36:46,200 --> 00:36:49,719
Speaker 2: We started this conversation talking about the credit cycle and

692
00:36:49,760 --> 00:36:51,400
Speaker 2: the idea of well, maybe we're at the start of

693
00:36:51,440 --> 00:36:54,040
Speaker 2: a new credit cycle or a new stage of the

694
00:36:54,080 --> 00:36:57,400
Speaker 2: current credit cycle. It does feel like the cycles have

695
00:36:57,680 --> 00:37:01,400
Speaker 2: kind of become a little bit muddled, right, I guess

696
00:37:01,560 --> 00:37:04,439
Speaker 2: as we were discussing, there are all these new options

697
00:37:04,520 --> 00:37:08,120
Speaker 2: for borrowers. So if they can't get a loan in

698
00:37:08,160 --> 00:37:11,920
Speaker 2: the syndicated market, maybe they talk to someone in the

699
00:37:11,960 --> 00:37:15,760
Speaker 2: private market, and so there's I guess additional pressure valves.

700
00:37:16,120 --> 00:37:18,520
Speaker 2: Does it feel to you like maybe the credit cycle

701
00:37:18,640 --> 00:37:22,560
Speaker 2: has changed in some either fundamental or permanent way.

702
00:37:22,600 --> 00:37:25,920
Speaker 5: Here. Now, what you raise I think is important because

703
00:37:25,920 --> 00:37:28,800
Speaker 5: in some ways it may have extended the credit cycle

704
00:37:28,920 --> 00:37:32,560
Speaker 5: because there are different avenues for companies to access capital.

705
00:37:33,160 --> 00:37:36,640
Speaker 5: You know, well, I think it creates a lasting impact.

706
00:37:36,719 --> 00:37:39,560
Speaker 5: I think we'll have to wait and see, but probably

707
00:37:39,600 --> 00:37:44,239
Speaker 5: the answer is yes, especially as private credit grows and

708
00:37:44,760 --> 00:37:47,160
Speaker 5: morphs from more of an industry that was focused on

709
00:37:47,280 --> 00:37:51,640
Speaker 5: sponsor backed direct lending to areas like non sponsor directly

710
00:37:51,680 --> 00:37:54,400
Speaker 5: originated loans, which I had mentioned, and then other things

711
00:37:54,440 --> 00:37:58,360
Speaker 5: like asset back to finance. I think they'll just continue

712
00:37:58,400 --> 00:38:00,680
Speaker 5: to be an evolution of the market over time.

713
00:38:01,280 --> 00:38:04,359
Speaker 3: I'm curious about industry sectors, and we've talked about it

714
00:38:04,400 --> 00:38:08,080
Speaker 3: a little bit. We talked about where companies issue preferreds.

715
00:38:08,520 --> 00:38:10,440
Speaker 3: We talked a little bit about the sensitivity of real

716
00:38:10,520 --> 00:38:12,759
Speaker 3: estate to the interest rate cycle. One of the other

717
00:38:12,800 --> 00:38:15,320
Speaker 3: big macro themes that we talk a lot about the

718
00:38:15,400 --> 00:38:19,279
Speaker 3: show is like this incredible boom into certain types of capex,

719
00:38:19,680 --> 00:38:24,200
Speaker 3: things like data centers, things like infrastructure, things like new energy.

720
00:38:24,560 --> 00:38:27,279
Speaker 3: All the different factories and plants that have come out

721
00:38:27,400 --> 00:38:30,439
Speaker 3: thanks to the Chips Act and the Inflation Reduction Act.

722
00:38:30,719 --> 00:38:34,759
Speaker 3: How do some of these big economy wide trends play

723
00:38:34,800 --> 00:38:37,000
Speaker 3: out in the credit space, and have there been new

724
00:38:37,080 --> 00:38:40,759
Speaker 3: areas of borrowing that you see due to things like

725
00:38:40,800 --> 00:38:43,360
Speaker 3: some of these secular trends in the nature of the economy.

726
00:38:43,640 --> 00:38:46,320
Speaker 5: Yeah, you know, we have seen secular trends over time.

727
00:38:46,400 --> 00:38:49,560
Speaker 5: And most of the activity that was in M and

728
00:38:49,640 --> 00:38:53,319
Speaker 5: A and LBOs of the last however many years, was

729
00:38:53,360 --> 00:38:55,279
Speaker 5: in tech in particular.

730
00:38:55,320 --> 00:38:56,080
Speaker 4: And now tech is.

731
00:38:56,040 --> 00:38:59,480
Speaker 5: Such a large part of the leverage loan market. And

732
00:38:59,719 --> 00:39:03,440
Speaker 5: now today as you point out new areas of investment

733
00:39:03,600 --> 00:39:08,160
Speaker 5: AI chips, I think it's growing that area. But I mean,

734
00:39:08,200 --> 00:39:10,759
Speaker 5: the market has a beautiful way of adjusting itself, right,

735
00:39:10,800 --> 00:39:14,400
Speaker 5: Like we loved investing in data centers last year, but

736
00:39:14,440 --> 00:39:16,640
Speaker 5: then everyone else did too, and so the yields have

737
00:39:16,719 --> 00:39:20,239
Speaker 5: really compressed. So there is somewhat I think of a

738
00:39:20,280 --> 00:39:23,800
Speaker 5: resetting of return expectations and some of those hot sectors.

739
00:39:24,160 --> 00:39:26,720
Speaker 5: And then you really have to shift to say, wow,

740
00:39:26,800 --> 00:39:30,640
Speaker 5: so much of this was issued. Are these really quality

741
00:39:30,719 --> 00:39:33,080
Speaker 5: loans that were made? Is this going to be ground

742
00:39:33,200 --> 00:39:37,200
Speaker 5: zero for defaults? And then it becomes more of a problem,

743
00:39:37,320 --> 00:39:40,719
Speaker 5: right Like what's hot then becomes the area of concern.

744
00:39:41,520 --> 00:39:45,560
Speaker 2: So one thing I was wondering about an event like

745
00:39:45,680 --> 00:39:50,040
Speaker 2: this future Proof. It bills itself as a wealth festival.

746
00:39:50,480 --> 00:39:54,920
Speaker 2: The predominant audience member seems to be rias. So I'm

747
00:39:54,920 --> 00:39:57,680
Speaker 2: curious when someone like you comes to an event like this,

748
00:39:57,920 --> 00:40:01,279
Speaker 2: what are you talking about with all the people here?

749
00:40:01,280 --> 00:40:04,080
Speaker 2: Are you like pitching those specific funds or like, what

750
00:40:04,120 --> 00:40:08,160
Speaker 2: are those client conversations or potential client conversations actually looking like.

751
00:40:08,680 --> 00:40:11,799
Speaker 5: I mean, if you're an RIA, you have so much

752
00:40:11,840 --> 00:40:16,040
Speaker 5: to consider in terms of asset allocation outside of alternatives.

753
00:40:16,040 --> 00:40:19,839
Speaker 5: But even with alternatives, you've got VC, private equity, all

754
00:40:19,880 --> 00:40:21,839
Speaker 5: these different areas to consider. So I think a lot

755
00:40:21,840 --> 00:40:26,080
Speaker 5: of my conversations are around why credit is a compelling

756
00:40:26,160 --> 00:40:30,920
Speaker 5: investment opportunity today, getting those high yields and income. I

757
00:40:31,000 --> 00:40:34,879
Speaker 5: do think credit could potentially outperform equities, and you know,

758
00:40:35,040 --> 00:40:38,759
Speaker 5: having them think about it as a steady allocation in

759
00:40:38,800 --> 00:40:42,759
Speaker 5: their portfolios of their clients so that their clients can

760
00:40:42,840 --> 00:40:46,360
Speaker 5: do other things. I mean, why not have fixed income

761
00:40:46,520 --> 00:40:51,680
Speaker 5: credit be that steady core allocation that hopefully, you know,

762
00:40:51,960 --> 00:40:55,400
Speaker 5: they can then use to fund other areas. So a

763
00:40:55,440 --> 00:40:58,879
Speaker 5: lot of my conversations are educational it's also about talking

764
00:40:58,920 --> 00:41:02,120
Speaker 5: about the different types of private credit that's out there

765
00:41:02,320 --> 00:41:04,880
Speaker 5: and the different types of vehicles that they can access to.

766
00:41:05,040 --> 00:41:09,360
Speaker 5: So we've seen interval funds, BDC's, these types of funds

767
00:41:09,400 --> 00:41:13,759
Speaker 5: become more mainstream and really excited to just kind of

768
00:41:13,760 --> 00:41:17,879
Speaker 5: have those conversations about how individuals can access what institutions

769
00:41:17,920 --> 00:41:18,680
Speaker 5: have for so long.

770
00:41:19,000 --> 00:41:23,000
Speaker 2: What type of questions do arias have about private debt, Like,

771
00:41:23,080 --> 00:41:25,680
Speaker 2: I'm curious to hear their concerns and how much they

772
00:41:25,760 --> 00:41:28,360
Speaker 2: overlap with the stuff you see in the headlines about

773
00:41:28,400 --> 00:41:32,280
Speaker 2: you know, private debt bubble or a creditor on creditor

774
00:41:32,320 --> 00:41:34,200
Speaker 2: or violence, which we kind of already discussed.

775
00:41:34,520 --> 00:41:38,000
Speaker 5: So I think aria is the questions that we get

776
00:41:38,360 --> 00:41:42,440
Speaker 5: surprisingly relate more to the macro environment and less about

777
00:41:42,520 --> 00:41:46,120
Speaker 5: the fundamentals of credit. I think they're really wanting to

778
00:41:46,239 --> 00:41:51,560
Speaker 5: understand what rate cuts will do to private credit because

779
00:41:51,600 --> 00:41:54,480
Speaker 5: it will lower the yield, and the yield is really

780
00:41:54,520 --> 00:41:57,640
Speaker 5: important in private credit for them, and so we've had

781
00:41:57,640 --> 00:42:00,839
Speaker 5: some conversations around that. I think think less so the

782
00:42:00,840 --> 00:42:04,920
Speaker 5: conversation has been focused on the quality of private credit

783
00:42:05,000 --> 00:42:07,880
Speaker 5: and whether you know, a type of bubble is brewing

784
00:42:07,960 --> 00:42:11,120
Speaker 5: at this point, though, maybe the focus should kind of

785
00:42:11,200 --> 00:42:14,040
Speaker 5: turn there at some point soon. I do think that

786
00:42:14,239 --> 00:42:17,319
Speaker 5: active management in the space is so important, and you

787
00:42:17,360 --> 00:42:20,239
Speaker 5: are starting to see some products, you know now being

788
00:42:20,280 --> 00:42:24,000
Speaker 5: recently announced like ETFs that may be passive, and I

789
00:42:24,000 --> 00:42:25,839
Speaker 5: think we have to figure out, like what is that

790
00:42:25,920 --> 00:42:29,200
Speaker 5: going to mean? What does that look like? Those are

791
00:42:29,280 --> 00:42:30,960
Speaker 5: questions that our as should be asking.

792
00:42:31,440 --> 00:42:33,920
Speaker 2: All right, daniel Paully, thank you so much for joining us.

793
00:42:34,000 --> 00:42:34,839
Speaker 2: That was really fun.

794
00:42:35,040 --> 00:42:36,480
Speaker 3: That's fantastic. Thank you so much.

795
00:42:36,560 --> 00:42:51,280
Speaker 2: Thank you so much, Joe, that was a good episode.

796
00:42:51,280 --> 00:42:55,200
Speaker 2: I felt to record after the conversation with dan Ives.

797
00:42:55,440 --> 00:42:56,520
Speaker 3: Yeah, it was great.

798
00:42:56,520 --> 00:42:59,719
Speaker 2: Dovetailed. So one of the things that is standing out

799
00:42:59,719 --> 00:43:03,719
Speaker 2: to me after all these discussions with bond market participants

800
00:43:03,760 --> 00:43:08,160
Speaker 2: on the West Coast is the yield versus spread. Yes, yeah,

801
00:43:08,200 --> 00:43:11,160
Speaker 2: so everyone's been complaint. Not everyone, but a lot of

802
00:43:11,200 --> 00:43:13,799
Speaker 2: people have been pointing out that spreads are still very,

803
00:43:13,880 --> 00:43:16,560
Speaker 2: very low and so it's difficult to find entry points

804
00:43:16,560 --> 00:43:19,399
Speaker 2: into credit. But on the other hand, as Danielle pointed out,

805
00:43:19,520 --> 00:43:22,920
Speaker 2: like at seven percent yields, that might be very attractive.

806
00:43:23,200 --> 00:43:25,960
Speaker 3: I think a seven percent yield will double your portfolio

807
00:43:26,040 --> 00:43:28,000
Speaker 3: in about ten years, so it's not bad like you

808
00:43:28,120 --> 00:43:29,759
Speaker 3: just like if you could just like lock in that

809
00:43:29,840 --> 00:43:31,160
Speaker 3: seven percent yield.

810
00:43:30,960 --> 00:43:33,520
Speaker 2: Just avoid messing up that credit sta Yeah.

811
00:43:33,440 --> 00:43:36,800
Speaker 3: Just avoid over cooking the steak. Get all your money

812
00:43:36,800 --> 00:43:38,879
Speaker 3: in a seven percent yield, and then ten years from

813
00:43:38,880 --> 00:43:40,600
Speaker 3: now you've doubled your wealth. Like that's not bad.

814
00:43:40,840 --> 00:43:41,040
Speaker 4: Yeah.

815
00:43:41,080 --> 00:43:43,120
Speaker 2: The other thing that stood out to me was, you know,

816
00:43:43,200 --> 00:43:46,560
Speaker 2: she was talking about I guess quality trends within the

817
00:43:46,600 --> 00:43:49,879
Speaker 2: index itself, and I do think it's so funny how

818
00:43:49,960 --> 00:43:52,600
Speaker 2: much hand ringing there was about the triple B yeah,

819
00:43:52,840 --> 00:43:56,680
Speaker 2: bursting eventually and like causing this big wave of like

820
00:43:56,920 --> 00:43:59,799
Speaker 2: downgrades and defaults in the credit market. But instead of

821
00:43:59,840 --> 00:44:03,680
Speaker 2: the downgrades, it basically has ended or started to reverse

822
00:44:04,160 --> 00:44:05,759
Speaker 2: with upgrades. You know.

823
00:44:05,960 --> 00:44:07,879
Speaker 3: I think one of the reasons my brain, like when

824
00:44:07,920 --> 00:44:11,160
Speaker 3: I first got interested in markets is through stocks. And

825
00:44:11,239 --> 00:44:14,080
Speaker 3: stocks are really nice because it's like there's one Microsoft,

826
00:44:14,160 --> 00:44:17,080
Speaker 3: there's one Google, you know, and then when you look

827
00:44:17,120 --> 00:44:20,319
Speaker 3: at credit and there's just like this like endless proliferation

828
00:44:20,560 --> 00:44:23,880
Speaker 3: of new terms and like interval funds. I don't know

829
00:44:23,920 --> 00:44:24,360
Speaker 3: what that is.

830
00:44:24,440 --> 00:44:24,680
Speaker 2: What's it?

831
00:44:24,719 --> 00:44:25,960
Speaker 3: Do you know what an interval fund is?

832
00:44:26,440 --> 00:44:26,680
Speaker 5: I did.

833
00:44:26,680 --> 00:44:29,240
Speaker 3: We got to learn what interval funds and business development

834
00:44:29,320 --> 00:44:32,200
Speaker 3: core just like all of these new things and preferreds

835
00:44:32,200 --> 00:44:34,759
Speaker 3: and stuff, and so you know, there's just this sort

836
00:44:34,800 --> 00:44:37,560
Speaker 3: of endless how do you mentioned in the beginning, just

837
00:44:37,600 --> 00:44:40,960
Speaker 3: like this endless buffet of credit products, and it's sort

838
00:44:40,960 --> 00:44:44,279
Speaker 3: of always interesting. And then the fact that like you

839
00:44:44,360 --> 00:44:46,680
Speaker 3: talk about like investment grade, but that does not mean

840
00:44:46,719 --> 00:44:48,919
Speaker 3: the same thing in twenty twenty two. Is it means

841
00:44:48,920 --> 00:44:51,480
Speaker 3: in twenty twenty one or twenty twenty five or twenty

842
00:44:51,560 --> 00:44:54,600
Speaker 3: nineteen or same with high yield? Just this endless buffet,

843
00:44:54,880 --> 00:44:57,239
Speaker 3: And then you understand why you sort of have these

844
00:44:57,360 --> 00:45:00,200
Speaker 3: entities like ratings agencies that can sort of segment at

845
00:45:00,280 --> 00:45:02,960
Speaker 3: risk in a sort of useful way, because it's just

846
00:45:03,000 --> 00:45:03,640
Speaker 3: so sprawling.

847
00:45:03,880 --> 00:45:07,000
Speaker 2: Yeah, this is why I always like asking the process

848
00:45:07,080 --> 00:45:11,120
Speaker 2: questions of like how do options actually get in front

849
00:45:11,160 --> 00:45:14,919
Speaker 2: of someone like Danielle or dan Ivison? And then how

850
00:45:14,960 --> 00:45:18,920
Speaker 2: do you choose from? Like there must be dozens.

851
00:45:18,480 --> 00:45:21,120
Speaker 3: If not hundreds, endless permutation.

852
00:45:20,840 --> 00:45:25,840
Speaker 2: Like investment categories within credit like not talking about single

853
00:45:26,120 --> 00:45:29,120
Speaker 2: loans or investments or direct loans that sort of thing,

854
00:45:29,160 --> 00:45:31,800
Speaker 2: but just like the actual categories must be in the dozens.

855
00:45:31,920 --> 00:45:33,680
Speaker 3: Let's do it, by the way, let's do a creditor

856
00:45:33,680 --> 00:45:36,319
Speaker 3: on creditor violence episode, like, let's just find one, like

857
00:45:36,360 --> 00:45:38,960
Speaker 3: maybe a specific incident in like dissecting, because I just

858
00:45:39,000 --> 00:45:40,880
Speaker 3: want to get that in a headline because I think

859
00:45:40,920 --> 00:45:43,239
Speaker 3: people would download it. But that also just sounds like

860
00:45:43,360 --> 00:45:45,839
Speaker 3: it's very It's like the thought that like you could

861
00:45:45,920 --> 00:45:48,239
Speaker 3: have like the first lean debt and then the next

862
00:45:48,239 --> 00:45:51,080
Speaker 3: morning somehow you don't, or that the idea that a

863
00:45:51,120 --> 00:45:54,600
Speaker 3: company could move assets that are sort of like a

864
00:45:54,640 --> 00:45:57,960
Speaker 3: collateral into some other vehicle and then the creditors can't

865
00:45:58,040 --> 00:46:01,239
Speaker 3: get access to them to liquidate them or pay the debt, Like,

866
00:46:01,640 --> 00:46:02,960
Speaker 3: let's talk about that more.

867
00:46:03,120 --> 00:46:06,040
Speaker 2: I always think an episode about creditor on creditor violence

868
00:46:06,080 --> 00:46:09,360
Speaker 2: sounds almost like a PSA, like have you been hurt

869
00:46:09,440 --> 00:46:11,200
Speaker 2: by creditor on creditor violince?

870
00:46:11,200 --> 00:46:12,239
Speaker 3: Well, let's do one, all right?

871
00:46:12,640 --> 00:46:13,319
Speaker 2: Shall we leave it there?

872
00:46:13,440 --> 00:46:14,160
Speaker 3: Let's leave it there.

873
00:46:14,320 --> 00:46:17,480
Speaker 2: This has been another episode of the Authoughts podcast. I'm

874
00:46:17,520 --> 00:46:20,520
Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway.

875
00:46:20,239 --> 00:46:22,840
Speaker 3: And I'm Jill Wisenthal. You can follow me at the Stalwart.

876
00:46:23,040 --> 00:46:26,719
Speaker 3: Follow our producers Carmen Rodriguez at, Carmen Arman, dash Ol

877
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Speaker 3: to our producer Moses. On more odd Laws content, go

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