WEBVTT - The Next Stage of the Credit Cycle with Oaktree’s Poli 0:00:02.680 --> 0:00:16.600 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.720 --> 0:00:22.040 Hello and welcome to another episode of the Odd Lots podcast. 0:00:22.160 --> 0:00:23.599 I'm Tracy Allaway. 0:00:23.239 --> 0:00:24.439 And I'm Joe Wisenthal. 0:00:24.920 --> 0:00:28.880 Joe, it struck me that we might be at the 0:00:28.960 --> 0:00:31.720 beginning of a new cycle, a new credit side. 0:00:31.720 --> 0:00:34.160 Are you making a call? Are you making a market 0:00:34.200 --> 0:00:34.840 timing call? 0:00:35.080 --> 0:00:39.279 I would never, never, No, I'm trying to frame this episode, 0:00:39.320 --> 0:00:42.160 but we have recently, by the time this episode comes out, 0:00:42.560 --> 0:00:46.920 had a very momentous presumably decision from the Federal Reserve 0:00:47.640 --> 0:00:50.080 where they've been cutting rates or they will have cut 0:00:50.120 --> 0:00:52.640 rates for the first time since I think the summer 0:00:52.680 --> 0:00:56.760 of last year. Oh, sorry, summer of twenty two, I 0:00:56.800 --> 0:00:57.400 can't remember that. 0:00:57.400 --> 0:01:00.840 That's yeah, it's wild. And when ever there is a 0:01:00.880 --> 0:01:04.120 turning point in the raid cycle, people are often you know, 0:01:04.160 --> 0:01:07.720 we've had this regime. Equity markets have done really well, 0:01:08.200 --> 0:01:12.720 credit spreads generally have been pretty tight, and so when 0:01:12.720 --> 0:01:15.000 you're in this sort of new phase of a cycle, 0:01:15.520 --> 0:01:18.759 then it's a natural time to sort of revisit where 0:01:18.800 --> 0:01:22.759 things stand, what kind of assumptions have been baked into markets, 0:01:22.800 --> 0:01:25.280 and of course like what the risks and opportunities are. 0:01:25.560 --> 0:01:27.880 Yeah, and I think the previous couple of years have 0:01:28.000 --> 0:01:31.240 certainly surprised a lot of people who are in credit. 0:01:31.360 --> 0:01:33.959 You know, people thought when rates went up there was 0:01:34.000 --> 0:01:37.520 going to be a spike in defaults, and we haven't 0:01:37.640 --> 0:01:40.440 really seen that. We've seen an increase, but it hasn't 0:01:40.480 --> 0:01:44.320 been disastrous. We've seen spreads, as you mentioned, still at 0:01:44.440 --> 0:01:48.000 kind of multi year lows, which is very surprising, and 0:01:48.080 --> 0:01:50.120 so it kind of begs the question of whether or 0:01:50.240 --> 0:01:55.800 not this dynamic can continue where pockets of stress might emerge. 0:01:55.960 --> 0:01:58.120 That's right, And just to note for listeners, we are 0:01:58.200 --> 0:02:02.000 recording this Monday subtem number sixteenth. We are out in 0:02:02.120 --> 0:02:06.160 Huntington Beach, California. We are at the future Proof Festival 0:02:06.240 --> 0:02:08.960 I think it's called, which is probably one of the coolest, 0:02:09.000 --> 0:02:14.160 most distinct financial market conferences that I can fathom. It's 0:02:14.320 --> 0:02:15.800 literally out on the beach. 0:02:15.800 --> 0:02:17.640 It's entirely that's a nice way of saying, we're at 0:02:17.639 --> 0:02:18.959 a beach three days. 0:02:19.040 --> 0:02:21.320 It's very nice, it's pretty so we love get around here. 0:02:21.560 --> 0:02:23.280 But you know, the other thing I was thinking about 0:02:23.320 --> 0:02:25.880 recently is just the other thing that's happened over the 0:02:25.880 --> 0:02:28.920 past couple of years has just been the explosion in 0:02:29.080 --> 0:02:34.320 different types of credit available to companies, right, Like, if 0:02:34.360 --> 0:02:37.639 you're a company seeking some sort of funding, you basically 0:02:37.680 --> 0:02:41.760 have an option of everything from a syndicated bond or 0:02:41.880 --> 0:02:45.640 loan to maybe doing a private deal. There are just 0:02:45.840 --> 0:02:48.320 all these different types of credit that you could choose. 0:02:48.360 --> 0:02:51.040 Now, everyone, if you're a company, people will find ways 0:02:51.080 --> 0:02:53.720 to give you money. There's all kinds of different opportunities. 0:02:54.080 --> 0:02:56.040 So we need to talk about the credit cycle. We 0:02:56.080 --> 0:02:58.960 need to talk about the big growth in the options 0:02:59.080 --> 0:03:03.320 available to investors and also corporates, and we need to 0:03:03.360 --> 0:03:06.560 talk about what happens now, whether this is a new 0:03:06.680 --> 0:03:08.880 leg in the cycle or the beginning of a new 0:03:08.919 --> 0:03:09.919 cycle in itself. 0:03:10.040 --> 0:03:11.520 Let's do it. I can't wait, all right, we. 0:03:11.480 --> 0:03:14.400 Have the perfect guests to discuss all of this. We 0:03:14.520 --> 0:03:18.320 are speaking with the co portfolio manager of Oak Trees, 0:03:18.400 --> 0:03:23.799 a diversified income fund better known as odd X. Bit 0:03:23.840 --> 0:03:25.440 of a mouthful actually. 0:03:25.520 --> 0:03:26.240 Danielle Paully. 0:03:26.480 --> 0:03:29.280 Danielle, thank you so much for coming on all thoughts. 0:03:29.360 --> 0:03:31.560 Thank you so much for having me. Tracy and Joe. 0:03:31.919 --> 0:03:33.480 Are you enjoying the beach as well? 0:03:33.480 --> 0:03:35.200 Oh, I'm having a great time. I don't think I've 0:03:35.240 --> 0:03:38.600 ever been to a conference quite like this on the beach, 0:03:38.880 --> 0:03:39.680 so many people. 0:03:40.320 --> 0:03:43.440 It's something I've said this before, but all conferences should 0:03:43.440 --> 0:03:44.120 be like this. 0:03:44.000 --> 0:03:45.880 On the beach. But you're base around here. This isn't 0:03:45.880 --> 0:03:48.120 even special for you, like for us coming from New 0:03:48.200 --> 0:03:51.040 York where the weather's starting to turn and everything's like, oh, 0:03:51.080 --> 0:03:53.200 a few more days of amazing weather. This is just 0:03:53.240 --> 0:03:54.040 your life, huh. 0:03:54.080 --> 0:03:57.040 It's true, is a commute down the four h five. 0:03:57.120 --> 0:04:00.680 Anyone that's watched Saturday Night Live and the Californians know 0:04:00.760 --> 0:04:03.720 as though how perilous it can be fair driving on 0:04:03.840 --> 0:04:04.560 LA freeways. 0:04:04.680 --> 0:04:07.720 So I mentioned your CopM of the Diversified Income Fund, 0:04:07.760 --> 0:04:11.720 but you're also a founding member of the investment committee. 0:04:11.720 --> 0:04:14.000 Talk to us a little bit about what you do 0:04:14.160 --> 0:04:14.920 at oak Tree. 0:04:15.040 --> 0:04:17.840 I serve as a portfolio manager for Global Credit at 0:04:17.839 --> 0:04:21.720 oak Tree, and that's our multi asset credit business. So 0:04:21.760 --> 0:04:26.159 back in twenty seventeen, we tried to think about a 0:04:26.200 --> 0:04:30.000 way to bring all of our different credit areas into 0:04:30.279 --> 0:04:33.720 an easily accessible way for our clients. And I get 0:04:33.760 --> 0:04:36.040 to serve as a portfolio manager, a member of our 0:04:36.080 --> 0:04:39.560 investment committee, thinking about relative value and helping with asset 0:04:39.600 --> 0:04:43.240 allocation in the portfolio. Because, as you know, these different 0:04:43.279 --> 0:04:46.839 strategies can be more attractive or not based on what's 0:04:46.839 --> 0:04:50.360 happening with interest rates or dislocation in the market. So 0:04:50.400 --> 0:04:52.120 it's an interesting role to be in. 0:04:52.120 --> 0:04:55.880 In my mind, I think I have some understanding of 0:04:55.920 --> 0:04:59.720 what a portfolio manager does. What does an investment committee 0:04:59.760 --> 0:05:01.640 do at an entity like oak Drink. 0:05:02.160 --> 0:05:06.160 Well, different firms will have committees doing different things, and 0:05:06.720 --> 0:05:09.320 our committee is less of a voting committee and more 0:05:09.360 --> 0:05:13.159 of a thought leadership committee. So we convene all of 0:05:13.200 --> 0:05:16.200 the different portfolio managers at oak Tree that cover different 0:05:16.279 --> 0:05:20.719 asset classes like hil bonds and leverage loans, structured credit, 0:05:20.760 --> 0:05:24.279 emerging market debt, even convertibles, and we meet every other 0:05:24.320 --> 0:05:27.320 week as a group to talk about what's happening in credit. 0:05:27.440 --> 0:05:30.600 So we'll talk about the fundamentals of the companies that 0:05:30.680 --> 0:05:33.560 we're lending to. Are we seeing any cracks, is it 0:05:33.680 --> 0:05:36.640 likely that defaults may pick up? And we talk about 0:05:37.200 --> 0:05:40.800 technical trends, what's happening with issuance. Are there reasons why 0:05:41.240 --> 0:05:45.360 there may be more attractive opportunities in one strategy versus 0:05:45.360 --> 0:05:45.719 the other. 0:05:46.320 --> 0:05:49.520 So at one of your weekly meetings, what would be 0:05:49.680 --> 0:05:54.000 the big talking point during well, presumably during FOMC meeting 0:05:54.080 --> 0:05:56.320 it would be the FED. But what have you been 0:05:56.360 --> 0:05:57.200 talking about lately? 0:05:57.360 --> 0:06:01.320 Well, we're bottom up investors, macro investors, but it's hard 0:06:01.320 --> 0:06:04.320 to ignore the macro outlook when we're at such a 0:06:04.360 --> 0:06:08.080 pivotal point with you know, perhaps a change in FED 0:06:08.120 --> 0:06:12.680 policy that may signal this new expansionary period and credit. 0:06:12.720 --> 0:06:16.719 We've had interest rates so high for so long, and 0:06:16.800 --> 0:06:19.680 really where we're focused on is what has that impact 0:06:19.760 --> 0:06:24.600 ben on borrowers credit worthiness. So we really are trying 0:06:24.720 --> 0:06:28.520 to avoid risk when we're investing in fixed income. We 0:06:28.640 --> 0:06:30.520 like to say it oak tree. If you avoid the losers, 0:06:30.560 --> 0:06:32.480 the winners will take care of themselves. A lot of 0:06:32.520 --> 0:06:36.720 our conversation is avoiding bad outcomes and focusing on that 0:06:36.839 --> 0:06:41.719 lower cohort of borrowers that you may be in trouble 0:06:41.800 --> 0:06:43.520 given these higher rates. 0:06:43.680 --> 0:06:45.800 I love the idea, like this is sort of in 0:06:45.800 --> 0:06:48.560 my mind. When I think of stock investing, it's like 0:06:48.880 --> 0:06:51.359 you want to pick winners, and when I think of 0:06:51.400 --> 0:06:54.480 credit investing, you want to avoid losers. I always sort 0:06:54.520 --> 0:06:56.440 of think of it like cooking a steak, which is 0:06:56.520 --> 0:06:58.960 just like you want to just nail it every time 0:06:59.000 --> 0:07:01.960 in the perfect stake is just like, just avoid the 0:07:01.960 --> 0:07:05.240 bad ones, just stay consistent. I don't know, maybe that's 0:07:05.279 --> 0:07:09.200 a terrible analogy. I always think of stock credittak. Stocks's 0:07:09.279 --> 0:07:11.760 pizza is like, you have the most extraordinary pizza in 0:07:11.800 --> 0:07:14.680 the world. Credit is steak. You just want to not 0:07:15.040 --> 0:07:17.720 missc mess it up, not mess it up, exactly right. 0:07:17.760 --> 0:07:20.040 That's how I think of these things in my head. 0:07:20.240 --> 0:07:22.640 So one of the things that's really surprised me, or 0:07:22.680 --> 0:07:24.320 I think surprised a lot of people. We had this 0:07:24.440 --> 0:07:28.080 really aggressive rate hiking cycle, and credit spreads have been 0:07:28.240 --> 0:07:29.160 really narrow. 0:07:29.480 --> 0:07:29.600 Now. 0:07:29.680 --> 0:07:33.120 The obvious answer there, although it's a little question begging 0:07:33.120 --> 0:07:35.080 I suppose, is like, yeah, well, because we didn't get 0:07:35.080 --> 0:07:37.640 a recession. A lot of people expected a recession or 0:07:37.680 --> 0:07:40.240 some sort of major downturn from the raid hikes. We 0:07:40.320 --> 0:07:43.560 didn't get that, So that's maybe why asset valuations have 0:07:43.640 --> 0:07:45.920 held up. Well, how would you Is there anything more 0:07:45.960 --> 0:07:48.280 to it when you look at just how tight spreads 0:07:48.320 --> 0:07:52.160 generally have remained over this cycle. What's your story that 0:07:52.200 --> 0:07:52.760 you tell for that? 0:07:53.280 --> 0:07:56.560 It's a great question. I mean spreads have been tight. 0:07:56.640 --> 0:07:59.000 I mean typically in high yield we see an average 0:07:59.040 --> 0:08:01.920 spread range of three hundred to five hundred basis points. 0:08:02.520 --> 0:08:05.240 Anything's higher than five hundred, no barrow really wants to 0:08:05.280 --> 0:08:08.520 issue at anything lower than three hundred. You know, no 0:08:08.600 --> 0:08:12.400 investor wants to buy it. And what I think we've 0:08:12.440 --> 0:08:15.960 had to have conversations with our investors about is that 0:08:16.800 --> 0:08:20.560 with yields so high, it's a different environment. You don't 0:08:20.720 --> 0:08:23.760 need spreads to blow out and then compress to get 0:08:23.760 --> 0:08:25.640 your total return when you can get a yield of 0:08:25.840 --> 0:08:28.400 you know, seven percent or so. And so I think 0:08:28.440 --> 0:08:31.120 you're starting to see a shift from being more tactical 0:08:31.160 --> 0:08:34.520 buyer to a strategic buyer. And I think there's reasons 0:08:34.559 --> 0:08:37.760 why that spread is lower in light of what you shared, Joe. 0:08:38.160 --> 0:08:41.760 In the high old bond market, it's over fifty percent 0:08:41.840 --> 0:08:44.080 double be today. It's the highest quality it's been in 0:08:44.240 --> 0:08:46.959 ten years now. You have to contrast that with the 0:08:47.040 --> 0:08:51.360 leverage loan market, where we have seen some degradation and quality, 0:08:51.440 --> 0:08:54.360 and that is a market where we're focused on, you know, 0:08:54.400 --> 0:08:58.760 the lower ten to fifteen percent of borrowers and looking 0:08:58.800 --> 0:09:01.720 at the upcoming maturity schedule and wondering how some of 0:09:01.760 --> 0:09:03.960 those are going to get financed. But generally, like the 0:09:04.000 --> 0:09:07.120 market's okay, and so that lower spread feels more justified 0:09:07.120 --> 0:09:07.679 to us. 0:09:08.080 --> 0:09:11.520 So you mentioned the rate cuts earlier and describe them 0:09:11.559 --> 0:09:15.319 as potentially an expansionary period in credit. I guess I'm 0:09:15.360 --> 0:09:19.559 wondering how much pent up demand is there in terms 0:09:19.640 --> 0:09:23.400 of new issuance, because overall it feels like people have 0:09:23.559 --> 0:09:26.240 termed a lot of stuff out. But I guess there 0:09:26.360 --> 0:09:31.280 is that segment of struggling borrowers who perhaps for them 0:09:31.920 --> 0:09:34.440 rate cuts will be really important and make all the difference. 0:09:35.000 --> 0:09:36.600 It's a really good question. 0:09:37.400 --> 0:09:40.760 I think when rates come down there is just more 0:09:41.640 --> 0:09:44.839 availability of credit. And as you point out, there are 0:09:44.880 --> 0:09:47.679 those barrows that have been struggling with higher rates. This 0:09:47.760 --> 0:09:50.560 will provide some per relief to them, especially those that 0:09:50.559 --> 0:09:54.600 have taken out floating rate debt. And if we look 0:09:54.600 --> 0:09:56.600 at the maturity wall I alluded to this a little 0:09:56.600 --> 0:09:59.400 bit earlier for loans over the next year, there's something 0:09:59.440 --> 0:10:02.680 like forty billion of maturity is coming due. It's all 0:10:02.720 --> 0:10:06.040 in the lowest rated credits, so it's split B triple 0:10:06.080 --> 0:10:10.240 C and even you know for twenty twenty six, twenty 0:10:10.240 --> 0:10:13.880 twenty seven, it's almost seventy percent. So it's this cohortive 0:10:14.000 --> 0:10:17.959 companies that haven't been able to get refinancing and maybe 0:10:18.000 --> 0:10:20.560 you know, lower rates will provide them some relief. They'll 0:10:20.559 --> 0:10:23.720 be a little bit more availability of capital. Some of 0:10:23.760 --> 0:10:26.840 them may not be able to be refinanced in traditional ways, 0:10:26.920 --> 0:10:31.040 they may need more rescue financing or capital solutions. But 0:10:31.240 --> 0:10:35.560 I do think it'll be positive for credit borrowers when you. 0:10:35.480 --> 0:10:40.079 Look at the types of entities that are struggling, fallen out, 0:10:40.200 --> 0:10:43.559 or actually impacted by this rate segar are we talking? 0:10:43.679 --> 0:10:45.840 Is it heavily in real estate? Is that the area 0:10:45.920 --> 0:10:49.079 that would be most exposed or most feeling the pain 0:10:49.120 --> 0:10:50.760 of higher rates? Are like, where do you see these 0:10:50.800 --> 0:10:55.600 pockets that actually are facing some challenges in the financing environment. 0:10:55.600 --> 0:10:57.080 No, it's a great point because we do a lot 0:10:57.120 --> 0:11:00.800 more than just corporate higal bonds leverage. Low real estate 0:11:00.840 --> 0:11:03.720 I think has been ground zero for some of these challenges, 0:11:04.280 --> 0:11:07.439 and a lower interest rate environment should create I think 0:11:07.480 --> 0:11:11.439 a little more optimism about what's ahead for real estate 0:11:11.520 --> 0:11:15.840 valuations and force I think some sales and some liquidity 0:11:15.840 --> 0:11:18.320 in that market. And so we are starting to see 0:11:18.320 --> 0:11:21.320 some positive outcomes in real estate as people get more 0:11:21.360 --> 0:11:22.840 comfortable with the rate environment. 0:11:23.840 --> 0:11:28.440 So I'm always curious about tactical decisions when someone is 0:11:28.920 --> 0:11:32.120 controlling like a very big fund that has a lot 0:11:32.160 --> 0:11:35.360 of optionality embedded in it in terms of investments, Like 0:11:35.400 --> 0:11:38.400 there are tons of different things you could invest in 0:11:38.600 --> 0:11:42.560 as CopM of the diversified income fund. I mean, I 0:11:42.600 --> 0:11:45.480 know it's all relative value, but say in a month 0:11:45.679 --> 0:11:49.120 like August when there was a lot of volatility, but 0:11:49.240 --> 0:11:52.520 despite that, credit spreads were kind of stable. They weren't 0:11:52.559 --> 0:11:55.640 really blowing out during the big turmoil. How do you 0:11:55.760 --> 0:11:59.480 judge the opportunities presented to you at a time of 0:11:59.559 --> 0:12:01.680 like uncertainty. 0:12:01.160 --> 0:12:04.040 Like then, we get so excited when there's volatility in 0:12:04.080 --> 0:12:07.640 the markets. It usually means there's some bargains. But as 0:12:07.679 --> 0:12:10.720 you point out, I mean, credit spreads really didn't widen much, 0:12:10.720 --> 0:12:12.480 and I think by the end of that volatile week 0:12:12.480 --> 0:12:15.160 it even tightened or at least made back that movement, 0:12:15.600 --> 0:12:17.960 So there wasn't much for us to do. On the 0:12:17.960 --> 0:12:21.280 corporate credit side, we were starting to get excited about 0:12:21.320 --> 0:12:24.160 convertible bonds, so it's an area that we invest in, 0:12:24.240 --> 0:12:28.439 and for those that maybe are less familiar with convertible bonds, 0:12:28.480 --> 0:12:30.600 I think the easiest way to explain them is it's 0:12:30.600 --> 0:12:33.760 a way to get the safety of a bond with 0:12:33.880 --> 0:12:36.640 some form of income, but you also get to participate 0:12:36.679 --> 0:12:40.560 in some equity upside. We're not converting into equity. We'll 0:12:40.559 --> 0:12:43.880 sell before that event happens, but it is nice to 0:12:43.920 --> 0:12:47.000 have some correlation to equity markets at certain times. 0:12:47.280 --> 0:12:49.200 I don't think we've ever done an episode. 0:12:49.240 --> 0:12:51.600 We haven't actually convertible. 0:12:51.160 --> 0:12:54.000 Bond, so we could just talk about this, but can 0:12:54.040 --> 0:12:55.880 you talk a little bit more about, like how big 0:12:55.960 --> 0:12:58.760 is that market and who are the types of issuers 0:12:58.800 --> 0:13:02.800 typically or is the typical situation in which an issuer 0:13:03.120 --> 0:13:04.680 would go into the convert market. 0:13:05.040 --> 0:13:06.560 Well, if you're going to do a session on that, 0:13:06.600 --> 0:13:09.120 you have to speak with our portfolio managers that only 0:13:09.160 --> 0:13:10.479 focus on convertible. 0:13:10.160 --> 0:13:11.120 I'd love to set that up. 0:13:11.840 --> 0:13:17.000 So the convertible market is small, and it tends to 0:13:17.040 --> 0:13:23.719 be focused more in technology, healthcare, certain sectors, and it 0:13:23.840 --> 0:13:27.840 has more of a correlation, i'd say, to small cap 0:13:27.840 --> 0:13:31.040 stocks as compared to the SMP, even though the SMP 0:13:31.120 --> 0:13:33.720 does have a lot of tech exposure and so it 0:13:33.760 --> 0:13:36.320 tends to follow that more. I mean, for us, our 0:13:36.360 --> 0:13:39.640 approach there is really to find good credit that we 0:13:39.679 --> 0:13:42.199 can underwrite and then participate in the equity. 0:13:42.240 --> 0:13:43.600 As I said, so just. 0:13:43.520 --> 0:13:49.800 To clarify from the issuer perspective, if it's small or 0:13:49.840 --> 0:13:52.679 if it's tech, and so that implies that they're probably 0:13:52.840 --> 0:13:58.280 fast growing. The appeal for them is what exactly There's 0:13:58.360 --> 0:14:01.760 this pool of capital that they want to borrow. But 0:14:01.880 --> 0:14:04.520 this sort of sweetener is that the end investor can 0:14:04.600 --> 0:14:07.800 participate potentially in some of the actual growth of the company. 0:14:07.920 --> 0:14:09.040 Yeah, that's right. 0:14:09.280 --> 0:14:12.720 You don't have to give up outright equity. And then 0:14:13.000 --> 0:14:17.079 also you can issue at a much lower rate than 0:14:17.200 --> 0:14:20.880 prevailing rates in the market. So that can be helpful 0:14:20.960 --> 0:14:24.120 for a company depending on where you are in a cycle. 0:14:24.600 --> 0:14:26.560 But it just ends up being a much smaller, more 0:14:26.600 --> 0:14:30.480 niche market, and you can't avoid the correlation to equities. 0:14:30.480 --> 0:14:33.720 And we're credit investors, so we don't want equities to 0:14:34.640 --> 0:14:37.120 influence too much the performance of our funds. 0:14:38.320 --> 0:14:39.880 Today, we're very. 0:14:39.760 --> 0:14:43.200 Under allocated to converts it's probably the lowest allocation that 0:14:43.240 --> 0:14:47.720 we've had since twenty nineteen heading into COVID, just because 0:14:47.720 --> 0:14:52.280 of the valuations and equities and not finding as many bargains. 0:14:52.440 --> 0:14:55.080 Oh wait, so you said you were getting interested in 0:14:56.040 --> 0:14:59.120 convertibles going into the August selloff. 0:14:59.160 --> 0:15:02.920 But I guess you you changed your because of the volatility. 0:15:03.040 --> 0:15:05.600 Yeah, we felt that maybe we could go in at 0:15:05.640 --> 0:15:09.480 a better entry point, see, because the valuations haven't made 0:15:09.520 --> 0:15:11.680 a lot of sense for us, and we can get 0:15:11.880 --> 0:15:16.040 better potential returns from credit than equities. It's been low, 0:15:16.040 --> 0:15:18.400 but when you get some of these consecutive days in 0:15:18.440 --> 0:15:21.840 the market and there's a sell off, you get excited 0:15:21.920 --> 0:15:24.680 thinking converts are gonna be the first asset class to move. 0:15:25.320 --> 0:15:28.200 And so we started looking though at which converts moved, 0:15:28.760 --> 0:15:31.280 and they didn't really meet our criteria for wanting to 0:15:31.360 --> 0:15:34.640 wander into equities, especially with this rate decision coming up, 0:15:34.680 --> 0:15:37.200 an election coming up, a lot of risk out there. 0:15:37.280 --> 0:15:41.000 But the idea would be in a volatility event as 0:15:41.160 --> 0:15:44.400 credit investors. If I mean that whole volatility event, it 0:15:44.520 --> 0:15:47.160 least about fifteen minutes, really like it was so short, 0:15:47.200 --> 0:15:50.680 but theoretically if it had lasted longer, the first opportunities 0:15:50.760 --> 0:15:52.640 likely would have shown up in converted I. 0:15:52.640 --> 0:15:55.320 Think so, especially when spreads aren't moving totally. 0:15:55.520 --> 0:16:12.640 That makes sense. Can you talk a little bit about 0:16:12.680 --> 0:16:15.720 from a portfolio standpoint? I mean it makes sense when 0:16:15.720 --> 0:16:18.800 you say, okay, volatility is exciting if you're an active manager, 0:16:18.920 --> 0:16:24.440 volatility presents opportunities. How do you position the portfolio such 0:16:24.480 --> 0:16:27.360 that you have the cash or the liquidity to take 0:16:27.400 --> 0:16:31.400 advantage of volatility? Because I joked on the day of 0:16:31.400 --> 0:16:32.880 the big sell off as like, oh, I should sell 0:16:32.920 --> 0:16:34.960 some stocks so I can buy the dip here. Like 0:16:35.200 --> 0:16:36.840 I would have loved to take advantage of that, but 0:16:36.920 --> 0:16:39.160 you know, I don't really like keep a lot of 0:16:39.200 --> 0:16:41.880 like extra cash around. How do you think about that 0:16:41.920 --> 0:16:44.600 from a portfolio standpoint, being invested but also being in 0:16:44.600 --> 0:16:46.520 a position to take advantage of opportunities. 0:16:46.720 --> 0:16:48.720 And it's more of an art than a science. 0:16:48.920 --> 0:16:51.680 I mean, today cash is an ass that it's not 0:16:51.720 --> 0:16:53.760 as delutive as it used to be to hold, so 0:16:53.800 --> 0:16:56.960 you can at least get some decent yield. And we'll 0:16:57.000 --> 0:17:01.480 invest our cash in investment gray kind of short duration 0:17:02.440 --> 0:17:05.919 type paper, so we're getting an even better yield. And 0:17:05.960 --> 0:17:07.560 we do like to have some of that in the 0:17:07.560 --> 0:17:09.920 portfolio as a buffer to use for these. 0:17:09.840 --> 0:17:10.879 Periods of volatility. 0:17:10.880 --> 0:17:13.320 One thing that we did a year or so ago 0:17:13.960 --> 0:17:17.080 as we looked at the portfolio and which were our 0:17:17.400 --> 0:17:21.160 you know, less liquid assets outside of private credit, because 0:17:21.200 --> 0:17:24.119 you really can't sell private credit a selloff. So we said, 0:17:24.400 --> 0:17:28.400 leverage loans, while you can trade them quickly, they take 0:17:28.440 --> 0:17:31.400 a while to settle, and so we have other options. 0:17:31.440 --> 0:17:34.000 Maybe we should create some liquidity by taking some money 0:17:34.040 --> 0:17:37.640 out of leverage loans. And what we did is we 0:17:38.000 --> 0:17:41.000 basically took every dollar we took out of leverage loans, 0:17:41.080 --> 0:17:44.360 we put fifty cents into cash and fifty cents into colos. 0:17:44.400 --> 0:17:48.359 So it's a barbell strategy because colos are really levered instruments. 0:17:48.440 --> 0:17:51.000 You're getting a higher yield, but they don't take time 0:17:51.040 --> 0:17:54.080 to settle, and then the cash, you know, that's available 0:17:54.119 --> 0:17:54.479 to us. 0:17:54.480 --> 0:17:56.480 So we created liquidity and we. 0:17:56.440 --> 0:17:59.600 Didn't really change the overall yield profile of the fund. 0:18:00.080 --> 0:18:03.800 You mentioned private credit. Just then, what has the growth 0:18:03.840 --> 0:18:08.080 of the private credit market meant for the more syndicated stuff, so, 0:18:08.240 --> 0:18:11.600 you know, leverage loans, publicly issued bonds, that sort of thing. 0:18:12.160 --> 0:18:14.720 I think Tricy, you said it so eloquently earlier on 0:18:14.800 --> 0:18:18.640 borrow is have more options, right, they have different ways 0:18:18.680 --> 0:18:22.439 to get financing, whether it's through the syndicated market working 0:18:22.440 --> 0:18:26.760 with a private lender. I think for us it's provided 0:18:26.840 --> 0:18:32.360 really attractive opportunities to step in when markets have been frozen. 0:18:32.520 --> 0:18:34.840 So I look back maybe to the end of twenty 0:18:34.880 --> 0:18:37.679 twenty two when banks were hung with what forty billion 0:18:37.760 --> 0:18:40.639 on their balance sheets, and that was an opportunity to 0:18:40.680 --> 0:18:45.159 step in and dictate terms and say, well, lend and 0:18:45.320 --> 0:18:48.480 in scale, but we want covenants, we want protections. 0:18:48.800 --> 0:18:52.439 Well, sorry, explain that more. What were the assets that 0:18:52.680 --> 0:18:56.520 were frozen or weren't moving, what types of assets were those, 0:18:56.600 --> 0:19:00.960 and then what was this sort of what was your 0:19:01.000 --> 0:19:02.720 package or what was your pitch to them? 0:19:02.840 --> 0:19:07.520 Yeah, so it was banks that had pre agreed to 0:19:07.640 --> 0:19:11.800 syndicate loans, and because interest rates had moved so quickly, 0:19:11.880 --> 0:19:15.800 those banks were going to take significant losses taking those 0:19:15.880 --> 0:19:21.240 loans to market, and so those opportunities they needed private 0:19:21.320 --> 0:19:24.560 lenders to step in to speak for those deals. And 0:19:24.640 --> 0:19:26.159 so what we were able to do is we were 0:19:26.200 --> 0:19:28.560 able to command better terms in the form of pricing, 0:19:28.640 --> 0:19:32.199 so higher spreads got it, and the negotiate covenants that 0:19:32.280 --> 0:19:34.760 you wouldn't see in the public markets. That's been the 0:19:34.800 --> 0:19:38.800 big issue on loans. You've had no covenants or protections 0:19:38.840 --> 0:19:42.360 in the levered loan market, whereas with private credit when 0:19:42.359 --> 0:19:46.000 we're directly originating loans, especially on the non sponsor side, 0:19:46.200 --> 0:19:48.840 we can actually protect ourselves in terms of structure and 0:19:48.880 --> 0:19:51.160 get covenants in there that are going to protect us. 0:19:51.880 --> 0:19:53.800 This is one thing I always wondered. But in the 0:19:53.880 --> 0:19:57.120 private market, when you're an entity like oak Tree, who 0:19:57.200 --> 0:20:00.760 initiates the conversations. Is it the bank come to you 0:20:00.880 --> 0:20:02.760 and say, hey, we have a hung loan we need 0:20:02.800 --> 0:20:05.199 to get rid of it. Is it the company looking 0:20:05.240 --> 0:20:09.280 for options? Do you approach potential borrowers? How does that work? 0:20:09.600 --> 0:20:13.200 It depends, But we do have a sourcing and origination 0:20:13.359 --> 0:20:15.800 team that oak Tree that speaks for the entirety of 0:20:15.800 --> 0:20:19.400 our firm. I think it's a competitive advantage for us 0:20:19.480 --> 0:20:23.119 because they are facing off with companies with sponsors, with 0:20:23.200 --> 0:20:26.480 the banks. It's like having a sophisticated capital markets team 0:20:26.960 --> 0:20:30.320 within an alternative asset manager, and it allows us to 0:20:30.359 --> 0:20:33.840 have conversations more from the point of what do you need, 0:20:33.920 --> 0:20:34.760 what's your problem? 0:20:34.800 --> 0:20:36.080 What type of financing? 0:20:36.240 --> 0:20:38.200 And then they will come back to us at oak 0:20:38.240 --> 0:20:40.720 Tree and say, this is what we need to do. 0:20:41.640 --> 0:20:45.479 Where does this fit across the firm? Let's create something 0:20:45.520 --> 0:20:49.400 that really is tailored to that entity. And so that's 0:20:49.480 --> 0:20:52.000 kind of how we see a lot of different things. 0:20:52.000 --> 0:20:54.320 We're also a first call in terms of these types 0:20:54.359 --> 0:20:58.320 of opportunities given our roots and distressed debt, investing, special 0:20:58.359 --> 0:21:00.840 situations and rescue finance. 0:21:01.119 --> 0:21:03.120 I mean, we've talked a lot on the show now 0:21:03.160 --> 0:21:05.960 about the growth of private credit. How much has private 0:21:06.000 --> 0:21:08.000 credit grown within oak Tree? 0:21:08.320 --> 0:21:09.359 It's grown a lot. 0:21:09.680 --> 0:21:13.800