WEBVTT - First Eagle Plays Safe as Credit Spreads Get Squeezed 0:00:17.920 --> 0:00:20.480 Hello, Welcome to The Credit Edge, a weekly markets podcast. 0:00:20.520 --> 0:00:23.239 My name is James Crumbie. I'm a senior editor at Bloomberg. 0:00:23.640 --> 0:00:26.120 This week, we're very pleased to welcome Jim Fellows, co 0:00:26.239 --> 0:00:29.160 president and CIO of First Eagle Alternative Credit. 0:00:29.200 --> 0:00:31.440 How are you, Jim, Good, Happy New Year. 0:00:31.880 --> 0:00:33.400 Happy new year to you. Thanks so much for joining 0:00:33.440 --> 0:00:34.919 us today. We're very excited to have you on the show, 0:00:34.960 --> 0:00:37.800 and also delighted to welcome back our co host David 0:00:37.840 --> 0:00:39.360 Havens from Bloomberg Intelligence. 0:00:39.360 --> 0:00:42.360 Hello, David, Hey, great to be with you on Go Eagles. 0:00:42.760 --> 0:00:46.400 So, just to set the scene here, credit markets are 0:00:46.479 --> 0:00:49.760 hot and borrowers globally are taking advantage. We're expecting a 0:00:49.800 --> 0:00:53.720 record amount of debt issuance from the US companies this month. 0:00:54.160 --> 0:00:56.680 Most of it is for refinancing. There's a lot of 0:00:56.720 --> 0:00:59.640 debt coming due. That means even more cash returning to 0:00:59.680 --> 0:01:02.240 invest who have already received a ton of inflows over 0:01:02.280 --> 0:01:04.920 the last year and are very keen to buy. Given 0:01:04.959 --> 0:01:07.760 how high all in yields are, you can get a 0:01:07.840 --> 0:01:09.800 yield of almost five point four percent right now on 0:01:09.880 --> 0:01:12.440 high grade debt with a very low chance of default. 0:01:12.480 --> 0:01:15.679 That's the highest in about six months the demands supply 0:01:15.760 --> 0:01:18.559 and balance, though, is keeping spreads raisor thin, and also 0:01:18.640 --> 0:01:21.600 pushing investors to other parts of credit like structured finance 0:01:21.680 --> 0:01:24.880 and private debt, where returns are even higher. Some fear 0:01:24.880 --> 0:01:28.280 it's also leading to complacency and mispricing of risk throughout 0:01:28.319 --> 0:01:31.080 credit markets, which is only expected to get worse in 0:01:31.160 --> 0:01:33.960 twenty twenty five. So, Jim, I want to bring you 0:01:34.000 --> 0:01:37.039 in here. What's your view? Are you very bullish for 0:01:37.040 --> 0:01:38.959 this year like everyone else, or do you see reasons 0:01:38.959 --> 0:01:40.080 to be cautious right now? 0:01:41.319 --> 0:01:47.080 I'm typically always cautious. That's that's a fault that I have. Yees, 0:01:47.160 --> 0:01:51.440 spreads are close to pre crisis tights across a lot 0:01:51.480 --> 0:01:56.480 of acid classes, loans, high yield, private credit, you know, 0:01:56.720 --> 0:02:00.520 areas that we focus on and you know, as you 0:02:01.360 --> 0:02:03.760 hit it on your opening statement, a lot of it 0:02:03.840 --> 0:02:07.880 is dependent on just lack of activity. We do have 0:02:08.080 --> 0:02:12.160 a fairly significant maturity wall that is being worked through, 0:02:12.600 --> 0:02:15.640 the cost of capital finally going up for some of 0:02:15.639 --> 0:02:18.200 these borrowers because of you know, a lot of the 0:02:18.280 --> 0:02:22.600 debt was put in place, you know, during crisis, during 0:02:23.000 --> 0:02:27.200 posts the Great Financial Crisis, when rates were hugging zero. 0:02:28.000 --> 0:02:31.320 So you're you're going to see an increase in the 0:02:31.360 --> 0:02:35.880 cost of capital going forward. And you know, I think 0:02:35.919 --> 0:02:40.320 everyone is expecting more net new issuance from M and 0:02:40.400 --> 0:02:43.240 A activity. I think that's a lot of that is 0:02:43.280 --> 0:02:48.360 wishful thinking. I think that there's still uncertainties globally that 0:02:49.040 --> 0:02:53.880 may subdued M and A activities, especially you know, with tariffs. 0:02:53.919 --> 0:02:57.440 I think a lot of companies may be less willing 0:02:57.480 --> 0:03:01.000 to commit to M and A give and the uncertainty 0:03:01.000 --> 0:03:07.000 of policy overall, so that that could constrain supply here 0:03:07.320 --> 0:03:10.799 for you know, the next three to six months. Hopefully 0:03:10.800 --> 0:03:14.640 things start to loosen up as we go, you know, 0:03:15.400 --> 0:03:17.079 you know, as we move into the second half of 0:03:17.080 --> 0:03:18.440 twenty twenty five. 0:03:19.080 --> 0:03:21.240 Does that mean even tied to credit spreads from here? 0:03:21.400 --> 0:03:26.640 Jim, It's possible. It is entirely possible. Uh. You know, 0:03:26.680 --> 0:03:31.360 we're seeing spreads tightening, tightening across the board. As I said, 0:03:31.360 --> 0:03:37.040 our three areas of focus, probably syndicated private credit and 0:03:37.440 --> 0:03:42.240 high you bonds spreads spreads have certainly tightened considerably. Yeah. 0:03:42.280 --> 0:03:44.800 I mean, Jim, we seem to be in a period, 0:03:45.040 --> 0:03:48.480 in a tale period in the markets. I mean, we've 0:03:48.480 --> 0:03:51.920 got the IG index down around seventy five eighty basis points, 0:03:51.920 --> 0:03:56.000 which that's territory that is probably occupied about one percent 0:03:56.200 --> 0:04:03.080 of its history. We actually have Invesco speak at a 0:04:03.200 --> 0:04:06.880 Bloomberg Intelligence Credit conference in December and New York, and 0:04:06.960 --> 0:04:09.880 their view is that that IG credit spreads could head 0:04:09.920 --> 0:04:13.960 towards fifty five basis points during the course of twenty 0:04:14.200 --> 0:04:18.200 twenty five. Is is that of you that you might share? 0:04:18.600 --> 0:04:21.000 You know, obviously there are reasons for caution out there 0:04:21.000 --> 0:04:23.279 that you that you explained as well, but there's so 0:04:23.320 --> 0:04:26.840 many technical factors that seem to be pushing towards towards 0:04:26.839 --> 0:04:30.800 tighter markets, you know, sort of modern GDP growth, relatively 0:04:30.839 --> 0:04:35.159 contained inflation, strong employment, and just a wall of cash 0:04:35.200 --> 0:04:35.679 out there. 0:04:36.320 --> 0:04:40.159 Yeah, I think that's entirely possible, you know, and you know, 0:04:40.200 --> 0:04:43.640 again on my our focus in the loan the non 0:04:43.680 --> 0:04:47.680 investment grade space, I think that's that's definitely going to 0:04:47.720 --> 0:04:51.799 be the case because I believe that, as I mentioned earlier, 0:04:51.920 --> 0:04:55.120 m and A activity could be subdued. I think the 0:04:55.120 --> 0:04:57.880 most M and A activity that's first going to occur 0:04:58.839 --> 0:05:03.600 will be strategy ex buying leverage finance companies and taking 0:05:03.800 --> 0:05:06.520 net supply out of the market. Going forward, so that 0:05:06.640 --> 0:05:10.640 certainly will support spreads tightening over you know, the next 0:05:10.640 --> 0:05:11.600 six to nine months. 0:05:12.760 --> 0:05:15.320 That's an interesting and interesting take on things. 0:05:15.880 --> 0:05:16.000 Uh. 0:05:16.360 --> 0:05:19.040 I haven't heard that all that much about the about 0:05:19.040 --> 0:05:21.679 the you know, sort of leverage finance companies or leverage 0:05:21.880 --> 0:05:26.120 leveraged companies being being taken out, but there's the consensus 0:05:26.160 --> 0:05:29.120 seems to be pointing towards much increased M and A 0:05:29.320 --> 0:05:33.640 just because you know, the the the the private equity 0:05:33.680 --> 0:05:35.279 firms have been sitting on a lot of cash. They 0:05:35.360 --> 0:05:37.240 need to put that money to work. They're under pressure 0:05:37.240 --> 0:05:40.920 to put that money to uh, to work. Rates still 0:05:40.960 --> 0:05:42.719 have I don't know, one or two you know, sort 0:05:42.760 --> 0:05:44.800 of cuts in them at least that's what consensus is 0:05:44.800 --> 0:05:47.719 pointing towards this year. So so what are you going 0:05:47.800 --> 0:05:51.520 to do if if these if spreads keep on moving tighter. 0:05:52.080 --> 0:05:56.040 Stay conservative, stay conservative. I think that's that's the mantra 0:05:56.120 --> 0:06:00.320 that we're operating under. It's uh, you know, you don't 0:06:00.360 --> 0:06:03.520 see a lot of screaming value. I think in the 0:06:03.560 --> 0:06:07.080 lower part of the direct lending space or private credit space, 0:06:07.680 --> 0:06:11.000 you're not seeing as much compression and spreads. You're seeing 0:06:11.080 --> 0:06:13.200 some of it, but not as not as dramatic as 0:06:13.200 --> 0:06:16.320 you're seeing in the more liquid parts of the market. 0:06:17.200 --> 0:06:19.600 You know that that's an area where you know, investors 0:06:19.640 --> 0:06:24.000 can find value in an environment of tightening tightening spreads. 0:06:24.600 --> 0:06:27.599 I do feel like rates the short end of the 0:06:27.640 --> 0:06:30.080 curves are not going to move down as much. Obviously 0:06:30.120 --> 0:06:32.560 the said probably is not going to tighten as much 0:06:32.560 --> 0:06:35.600 as what people are expecting going into twenty twenty four. 0:06:36.279 --> 0:06:39.960 So I think that's that's the you know, that's kind 0:06:39.960 --> 0:06:42.000 of the curse as well. It's going to keep you know, 0:06:42.360 --> 0:06:45.320 short rates relatively high. Therefore, more money is going to 0:06:45.320 --> 0:06:49.600 flow into the credit markets and keep spread stight, vicious circle. 0:06:50.560 --> 0:06:53.600 But by lower and Jim, do you mean lower quality 0:06:53.760 --> 0:06:55.480 like you know triple cy or do you mean lower 0:06:55.520 --> 0:06:57.719 as in smaller size like mid market. 0:06:58.000 --> 0:07:01.520 Lower in size of company it? So, what kind of 0:07:01.600 --> 0:07:02.480 sidement market? 0:07:02.960 --> 0:07:05.320 When when you talk about middle market, I mean it's 0:07:05.400 --> 0:07:07.640 a term that we often hear, but it seems to 0:07:07.640 --> 0:07:09.479 be applied to all sorts of different things in different ways. 0:07:09.520 --> 0:07:10.280 What does it mean to you? 0:07:11.320 --> 0:07:16.160 Yeah, companies that have ebit on average of twenty to 0:07:17.080 --> 0:07:22.080 fifty million dollars, so truly you know, true private privately 0:07:22.360 --> 0:07:28.480 created credit to companies that are undergoing an acquisition by 0:07:29.000 --> 0:07:32.080 a sponsor. That's typically Uh. When I say that, I 0:07:32.160 --> 0:07:37.040 mean and right now that market is either side of 0:07:37.080 --> 0:07:40.320 six percent. Uh, you know, it can't. In some cases, 0:07:40.320 --> 0:07:46.200 it's tighter for credits that are substantially less levered. So 0:07:46.920 --> 0:07:48.600 you know, you see a lot more dispersion in that 0:07:48.680 --> 0:07:54.440 part of the marketplace. You've just given the nuances of 0:07:54.520 --> 0:07:56.160 these type of companies. 0:07:57.280 --> 0:08:00.240 Maybe you can walk us through the process of how 0:08:00.280 --> 0:08:03.640 you go about accessing these these assets. It seems as 0:08:03.680 --> 0:08:07.320 though different different shops have different ways of approaching the 0:08:07.360 --> 0:08:10.760 market of sourcing the assets. And then who are you 0:08:10.880 --> 0:08:13.680 seeing the most competition from in that twenty five to 0:08:13.680 --> 0:08:14.920 fifty billion dollar segment. 0:08:15.680 --> 0:08:18.040 Yeah, there's there's a number. You know, I think some 0:08:18.120 --> 0:08:20.600 of the well we'll start with some of the larger 0:08:20.920 --> 0:08:24.600 alternative credit managers. Some of them may start to come 0:08:24.640 --> 0:08:29.920 down market as as Spreads Titan up market, so you know, 0:08:29.960 --> 0:08:33.319 we may start seeing competition from the likes of you know, 0:08:33.440 --> 0:08:37.840 the Apollos, Blackstones, et cetera. But you know, we typically 0:08:37.920 --> 0:08:42.679 are focusing on companies that are sponsored by middle market 0:08:42.760 --> 0:08:49.800 private equity companies that oftentimes it's a founder entrepreneurs selling 0:08:49.840 --> 0:08:54.800 their company to you know, monetize their life's work, and 0:08:54.880 --> 0:08:58.720 you know, they're looking to do sponsors to help effectuate 0:08:58.760 --> 0:09:01.600 those types of transactions. We have we have a we 0:09:01.640 --> 0:09:04.760 have a we have a number of originators that are 0:09:04.960 --> 0:09:10.360 calling on sponsors looking to transact on on on on 0:09:10.520 --> 0:09:14.640 deals and we're there to help finance these type of transactions. 0:09:14.760 --> 0:09:17.520 And you know, typically, as I said, they typically have 0:09:17.760 --> 0:09:19.960 twenty five million to fifty million dollars of viva DA 0:09:20.080 --> 0:09:20.760 on average. 0:09:21.520 --> 0:09:24.400 And is it only would you say it's mainly other 0:09:24.480 --> 0:09:26.880 direct lenders that you're coming across, or are you seeing 0:09:26.960 --> 0:09:29.120 banks beginning to get a little bit more active in 0:09:29.160 --> 0:09:34.319 that market or are they still simply discentivized by regulations 0:09:34.360 --> 0:09:37.240 from from you know, sort of lending into that single 0:09:37.280 --> 0:09:39.840 bee sort of high triple C space. 0:09:40.679 --> 0:09:45.120 Yeah, banks have been relatively quiet over the past couple 0:09:45.160 --> 0:09:49.320 of years. We are now beginning to start seeing some 0:09:49.480 --> 0:09:52.880 banks moving into that market and becoming more competitive. We 0:09:52.920 --> 0:09:57.760 had a situation just recently where we ended up winning 0:09:58.000 --> 0:10:01.679 because the private equity sponsor was worried about the banks 0:10:01.720 --> 0:10:06.080 being able to you know, the private equity sponsor's initial 0:10:06.120 --> 0:10:10.160 premise on buying that particular company was you It was 0:10:10.200 --> 0:10:13.040 a buy and build strategy, and they were a little 0:10:13.040 --> 0:10:16.840 concerned that the bank would not be as flexible or 0:10:16.880 --> 0:10:21.040 as dynamic and growing that capital structure along with their 0:10:21.080 --> 0:10:25.680 strategy of buying other other tack on acquisitions for that 0:10:25.720 --> 0:10:30.240 particular company. So you know that that that is that 0:10:30.480 --> 0:10:34.359 net positive for direct lenders still that are not banks. 0:10:34.679 --> 0:10:38.280 So but you we are starting to see banks show 0:10:38.360 --> 0:10:42.120 up more often in bidding processes and. 0:10:42.120 --> 0:10:45.200 The kind of companies you're dealing with. Jim, what size 0:10:45.400 --> 0:10:46.960 deal are we talking about here? Generally? 0:10:48.000 --> 0:10:51.480 You know, you could you know, facility size, that quantum 0:10:51.760 --> 0:10:55.640 you know, anywhere from sixty million up to two hundred million. 0:10:56.480 --> 0:10:58.959 That's typically you know what we're seeing what we're looking at. 0:10:58.960 --> 0:11:02.040 Sometimes they're smaller if if it's really you know, you 0:11:02.600 --> 0:11:05.280 have another We see a number of situations where it's 0:11:05.960 --> 0:11:10.640 could be smaller, but the sponsor has a very direct 0:11:10.760 --> 0:11:14.600 line of sight of additional acquisitions that they're looking to make. 0:11:15.240 --> 0:11:18.200 So you know that that facility, you know, maybe thirty 0:11:18.200 --> 0:11:22.040 million dollars, but it could grow very quickly. So you know, 0:11:22.360 --> 0:11:26.200 you do see that type of dynamic from time to time. 0:11:26.880 --> 0:11:29.080 And when you say six percent is that the margin 0:11:29.160 --> 0:11:29.840 or is that the all in? 0:11:30.800 --> 0:11:34.760 Yeah? That so the margin we're seeing sofur plus anywhere 0:11:34.760 --> 0:11:39.040 from sofur plus five to six percent. That's that's the 0:11:39.120 --> 0:11:43.120 range of we're seeing in the marketplace today. There's a 0:11:43.120 --> 0:11:46.880 few situations that may be slightly tighter than that. The 0:11:46.920 --> 0:11:51.040 market probably ends up going tighter to sub five, but 0:11:51.280 --> 0:11:54.560 you know, right now we're seeing solidly in the five 0:11:54.600 --> 0:11:57.040 to six percent over so range. 0:11:57.720 --> 0:12:00.800 And obviously, you know, spread is is you know, the 0:12:00.840 --> 0:12:02.960 cost of funding. Spread is one way that you can 0:12:03.200 --> 0:12:05.680 that you can compete. There are other ways to compete also, 0:12:05.800 --> 0:12:07.960 as you as you well know, terms and conditions and 0:12:08.000 --> 0:12:11.560 things like that. So what sort of trends are you 0:12:11.600 --> 0:12:15.679 what sort of compression or pressure you know, trends are 0:12:15.679 --> 0:12:18.680 you seeing on the terms and conditions side of the equation. 0:12:19.679 --> 0:12:22.560 Yeah, I mean there's there's you know a lot of 0:12:22.600 --> 0:12:27.320 times there's significant or an aggressive ask for a large 0:12:27.400 --> 0:12:31.559 d d t L to help fund future acquisitions. You 0:12:32.480 --> 0:12:36.880 know for some people that are TL is delayed draw 0:12:37.080 --> 0:12:40.160 term loan. So it's a term loan structured to be 0:12:40.320 --> 0:12:44.560 drawn at a later date where you have, as you know, 0:12:44.720 --> 0:12:49.199 define use of proceeds. Typically an acquisition you know, there's 0:12:49.280 --> 0:12:52.520 covenant terms tied to the ability to access that d 0:12:52.600 --> 0:12:58.880 D T L. So I mean we're we're seeing terms 0:12:58.960 --> 0:13:03.839 hold fairly, fairly solidly. Maybe they're slipping a little bit, 0:13:03.880 --> 0:13:08.600 but nothing like you're seeing further up the market, like 0:13:08.640 --> 0:13:12.439 in the probably syndicated market or even the upper end 0:13:12.440 --> 0:13:19.679 of the middle market, where there's very little structural sport 0:13:19.880 --> 0:13:23.640 in terms included in the credit agreements. 0:13:24.440 --> 0:13:26.280 Given little of this pressure we're talking about, you know, 0:13:26.679 --> 0:13:30.160 money coming in competition from the big guys moving down 0:13:30.559 --> 0:13:33.920 into the smaller deals and just this way of cash, 0:13:34.000 --> 0:13:37.480 do you expect some titus spreads in the middle market 0:13:37.720 --> 0:13:42.040 this year and also looser conditions was covenants, all of 0:13:42.120 --> 0:13:42.600 that stuff. 0:13:43.720 --> 0:13:47.680 I think that's that's a safe assumption in the environment 0:13:47.679 --> 0:13:49.000 that we're currently operating. 0:13:49.080 --> 0:13:51.720 Yes, yeah, And I guess one of the things that 0:13:52.000 --> 0:13:53.880 you know, a lot of the investors that we talked 0:13:53.880 --> 0:13:56.600 to and the folks that read our research here, I 0:13:56.600 --> 0:13:59.280 think are they're not confounded by it, But I would 0:13:59.280 --> 0:14:02.640 say that they're prized by the lack of of of 0:14:02.800 --> 0:14:05.720 credit loss, the lack of credit problems that have that 0:14:05.800 --> 0:14:10.000 have come to the forefront in private credit portfolios. I 0:14:10.040 --> 0:14:11.760 mean you had a five hundred and twenty five basis 0:14:11.760 --> 0:14:14.640 point rate increase. You know, at the FED in twenty 0:14:14.640 --> 0:14:17.800 two to twenty three you had somewhat slower economic growth 0:14:18.280 --> 0:14:25.280 and there were hardly any significant bankruptcies or credit losses. 0:14:25.840 --> 0:14:27.760 Is that the same sort of thing that you're seeing 0:14:27.880 --> 0:14:32.520 in your portfolio? And why aren't we seeing more of that? 0:14:33.560 --> 0:14:36.480 Well? I mean you can look at the broadly syndicated 0:14:36.480 --> 0:14:40.440 market as a guidepost, where you know, the fault rate 0:14:40.560 --> 0:14:44.560 in the broly syndicated market is approaching five percent if 0:14:44.600 --> 0:14:49.320 you include LM transactions and such, and you know, in 0:14:49.680 --> 0:14:53.760 good old fashioned defaults and bankruptcies, So you know that 0:14:53.760 --> 0:14:56.640 that you know that number is like five in the 0:14:56.640 --> 0:15:00.320 broadly syndicated market, you go down market, it's so pike, 0:15:00.640 --> 0:15:04.560 No one really knows, be perfectly honest. I you know, 0:15:04.600 --> 0:15:10.400 I track a couple different indices. Fitch has a couple 0:15:12.200 --> 0:15:15.480 data points that they publish on in terms of some 0:15:15.640 --> 0:15:20.080 of the companies that they rate from a private standpoint. 0:15:21.320 --> 0:15:25.880 Krauscour has a database where they're monitoring default rates. So 0:15:26.400 --> 0:15:29.400 and it varies considerably. I mean, I've seen a delta 0:15:29.480 --> 0:15:32.040 as high as seven and as low as two point 0:15:32.080 --> 0:15:36.920 seven or a pool of private credit assets, depending on 0:15:37.480 --> 0:15:41.800 who's providing that data, so it varies quite a bit. 0:15:43.080 --> 0:15:47.600 There there could be situations where you know, assets are 0:15:47.640 --> 0:15:51.800 picking and they're not quote unquote default because with lender 0:15:51.840 --> 0:15:54.840 agreed to waive the default in lieu of a pick. 0:15:55.320 --> 0:15:59.640 You know, my mind, that's technically a default. But there 0:15:59.720 --> 0:16:06.400 there there's definitely definitional challenges as you look deeper into 0:16:06.480 --> 0:16:09.960 the credit private credit market. Whereasn't it probably syndicated market, 0:16:09.960 --> 0:16:13.000 it's pretty straightforward. You know, you have a market that's 0:16:13.000 --> 0:16:16.840 telling you what it's worth. So it's it's a little different. 0:16:18.320 --> 0:16:20.480 Definitional challenges, I think is a pretty good way of 0:16:20.880 --> 0:16:23.920 putting it. I tracked the BDC data here at Bloomberg 0:16:24.440 --> 0:16:27.760 and that non accrule rate has remained quite low, but 0:16:27.840 --> 0:16:31.040 pick has definitely come up, and you know, below the surface, 0:16:31.120 --> 0:16:33.360 you know that there have also been a fair amount 0:16:33.360 --> 0:16:36.440 of you know, sort of extensions and amendments and things 0:16:36.520 --> 0:16:37.800 like that along the way. 0:16:38.680 --> 0:16:42.320 Yep, yep, today's picks become tomorrow's non accruals. 0:16:43.200 --> 0:16:45.040 Can you expand a bit on the sexes that you'd 0:16:45.120 --> 0:16:45.880 like and the sex as. 0:16:45.800 --> 0:16:50.520 You avoid, So you know today some of the positive. 0:16:51.120 --> 0:16:56.680 Financials have some pretty good dynamics taking place. I think 0:16:57.200 --> 0:17:01.560 deregulation with the new administration should be all very positive 0:17:01.680 --> 0:17:06.919 for financial segment. You know, and in the broadly syndicated 0:17:06.960 --> 0:17:10.080 and private credit markets, we see a lot of asset managers, 0:17:10.720 --> 0:17:13.520 see a lot of you know, servicing companies that are 0:17:13.560 --> 0:17:19.520 servicing a variety of financial institutions. We see insurance brokers, 0:17:19.960 --> 0:17:24.520 and so there's there's a breath of you know, breath 0:17:24.560 --> 0:17:27.480 of type, you know, various types of financial services companies 0:17:27.480 --> 0:17:31.480 that come to market, you know, within financial services. Right now, 0:17:31.520 --> 0:17:35.159 we're a little cautious on any financial services company that 0:17:35.280 --> 0:17:40.800 relies on float to to generate incremental ebit duh, because 0:17:40.960 --> 0:17:44.200 you know, rates are expected to come down. Maybe that's 0:17:44.240 --> 0:17:46.399 probably not as much of the challenge going forward if 0:17:46.440 --> 0:17:49.119 rates don't come down as much as people think. So 0:17:49.800 --> 0:17:56.919 financials were positive on business services. There's a lot of 0:17:57.359 --> 0:18:02.640 activity there. It tends to be countersick cool, and you know, 0:18:02.680 --> 0:18:05.320 the one thing to watch in that sub segment today 0:18:05.400 --> 0:18:10.359 is you know a lot of outsourcing and offshoring of labor, 0:18:11.040 --> 0:18:13.000 and so you have to we have to be mindful 0:18:13.040 --> 0:18:17.280 of that. And with some of the new administrative administration's 0:18:17.760 --> 0:18:21.080 policy as it relates to labor. So we're but we 0:18:21.200 --> 0:18:26.360 still are generally positive on business services utilities that that's 0:18:26.720 --> 0:18:31.360 a segment that we were very cautious on five five, 0:18:31.440 --> 0:18:37.639 seven years ago. Given the advent of renewables. Now abilities 0:18:37.640 --> 0:18:41.800 are starting to turn around. You're seeing power prices increase, 0:18:41.960 --> 0:18:47.159 you have demand for power as it relates to AI, 0:18:47.640 --> 0:18:51.520 data centers, et cetera. So the wind is at their 0:18:51.560 --> 0:18:57.120 backs from a from a sector standpoint, uh and then 0:18:57.200 --> 0:19:02.960 some of the negatives, the automoti of bly chain that's 0:19:03.080 --> 0:19:05.639 under a lot of pressure. We expect that to continue 0:19:06.520 --> 0:19:09.639 be under a lot of pressure. Retail. I feel like 0:19:09.800 --> 0:19:15.240 retail has always been a no go area for a decade. 0:19:16.000 --> 0:19:19.879 And then healthcare. Healthcare is an area that's still I 0:19:19.920 --> 0:19:23.840 think there's a lot of uncertainty as relates to healthcare, 0:19:24.000 --> 0:19:28.399 especially with some of the ACA subsidies expiring in twenty 0:19:28.480 --> 0:19:33.399 twenty five, which will increase the number of uninsured that 0:19:33.480 --> 0:19:37.960 could pressure a bad debt expense within healthcare companies. And 0:19:38.200 --> 0:19:40.720 I think the expansion of Medicaid and some of the 0:19:40.760 --> 0:19:44.400 other federal federal programs as it relates to healthcare could 0:19:44.440 --> 0:19:48.280 be under some pressure. So We're still fairly pautious on healthcare. 0:19:48.359 --> 0:19:52.520 Healthcare actually has been you know, it's dealing with a 0:19:52.560 --> 0:19:55.480 one two punch really to some extent. They had a 0:19:55.520 --> 0:19:59.080 lot of labor issues during COVID. Now now they've seemed 0:19:59.080 --> 0:20:02.640 to put that problem behind them in terms of contract 0:20:02.760 --> 0:20:06.440 pricing and labor. But now they're facing popline issues. So 0:20:07.119 --> 0:20:11.359 that's an area where we're fairly cautious. And actually the 0:20:11.440 --> 0:20:16.480 correlate corollary to utilities renewables, you know, renewables are still 0:20:17.080 --> 0:20:20.520 are now undergoing a lot of pressure because of over expansion, 0:20:20.600 --> 0:20:24.840 et cetera. So those are just a few of the 0:20:25.040 --> 0:20:28.200 sectors pros and cons that we're looking at today. 0:20:29.080 --> 0:20:31.399 So in that context, Jim, where's the best value right 0:20:31.440 --> 0:20:33.200 now for you? You know, you look at all sorts 0:20:33.200 --> 0:20:37.399 of different kinds of credit products across the globe. Where's 0:20:37.400 --> 0:20:38.680 the value? Where's the relative value? 0:20:39.560 --> 0:20:43.680 I mean, I'm a I'm a corporate credit specialist specializing 0:20:43.760 --> 0:20:48.280 in private credit, probably syndicated high yield. So don't I 0:20:48.320 --> 0:20:54.840 don't have a broad you know, fixed income acid allocation mindset. 0:20:54.960 --> 0:20:58.320 I know we have a sister organization, Napier Park. They 0:20:58.920 --> 0:21:02.399 have more of a macro broader perspective on things. But personally, 0:21:02.440 --> 0:21:05.880 I think mortgage backs are cheap relative to everything else. 0:21:06.200 --> 0:21:09.080 That's that's me in the cheap seats. Looking at it 0:21:09.160 --> 0:21:13.600 from like a personal investment perspective, you know, I do 0:21:13.800 --> 0:21:20.080 think that the within private credit, asset based lending is 0:21:20.119 --> 0:21:27.000 a very unique area, very esoteric, and it's it's an 0:21:27.080 --> 0:21:29.159 area that you don't see a lot of competition in. 0:21:29.280 --> 0:21:33.480 I see. I see some of the assets and opportunities 0:21:33.720 --> 0:21:36.160 in that segment as some of the best risks return 0:21:36.240 --> 0:21:40.840 out there because it's very short in duration, very high returns, 0:21:42.600 --> 0:21:44.880 you know, but it has to be structured very carefully, 0:21:44.960 --> 0:21:46.560 and you know, we have a team that does that. 0:21:47.800 --> 0:21:49.760 It's it's some I think it's some of the best 0:21:49.920 --> 0:21:52.720 I just said some of the best risks risk adjust 0:21:52.760 --> 0:21:55.520 to return out there in my world that I look at. 0:21:56.520 --> 0:21:58.520 When we talk about asset based lending, I think it 0:21:58.600 --> 0:22:01.359 might mean you know different things to different people. So 0:22:02.119 --> 0:22:05.200 from your perspective, when you talk about asset based lending, 0:22:05.280 --> 0:22:07.840 what are you what are you really looking at? 0:22:08.960 --> 0:22:12.960 We're looking at companies that are undergoing a need for 0:22:13.080 --> 0:22:19.600 situational capital either either on a good perspective. They're looking 0:22:19.680 --> 0:22:24.520 to expand they have assets that they incrementally can pledge 0:22:24.840 --> 0:22:29.720 to lenders or a short period of time, and or 0:22:29.880 --> 0:22:38.520 companies that are actually experiencing specific liquidity issues and they 0:22:38.600 --> 0:22:41.160 may have some incremental assets that they can get financying 0:22:41.240 --> 0:22:46.760 on to bridge them through either a bankruptcy or to 0:22:46.880 --> 0:22:52.800 a turnaround. And you know, we underwrite to a liquidation 0:22:53.480 --> 0:22:56.800 like an actual liquidation. So it's a it's a very 0:22:57.440 --> 0:23:02.080 specific type of underwriting process. Uh and you know, every 0:23:02.800 --> 0:23:04.920 you know, every situation could be different. We had a 0:23:05.280 --> 0:23:07.440 I can't really get into specifics, but you know, we 0:23:07.560 --> 0:23:13.480 had a uh an investment in that space recently that 0:23:13.800 --> 0:23:18.960 it was a brand that was tied into an entity 0:23:19.080 --> 0:23:23.560 that was in bankruptcy. We helped person who was behind 0:23:23.640 --> 0:23:27.840 that brand finance the acquisition of that brand out of bankruptcy. 0:23:28.720 --> 0:23:32.520 We were paid very well to do that. You know. 0:23:32.720 --> 0:23:35.360 Unfortunately that you know, it was a nine month loan. 0:23:35.920 --> 0:23:38.200 I wish, I wish it would have stayed out for 0:23:38.359 --> 0:23:42.520 three years, five years, thirty years. But those are the 0:23:42.600 --> 0:23:45.560 type of situations we get involved in in it. And 0:23:45.640 --> 0:23:50.679 as I said, it's a very episodic type of opportunity 0:23:50.760 --> 0:23:53.679 set and there's not a lot of competition. That's another 0:23:54.400 --> 0:23:57.040 good thing about that part of the market that we 0:23:57.359 --> 0:24:02.320 find attractive is, you know, on on our our core 0:24:03.240 --> 0:24:08.119 middle market lower middle market direct lending strategy, you know, 0:24:08.160 --> 0:24:12.000 we're peating. We're competing with ten to twenty different lenders 0:24:12.040 --> 0:24:14.800 at any given time, depending on the situation. Here, it's 0:24:14.880 --> 0:24:17.000 like five people. So it's it's it's a it's a 0:24:17.119 --> 0:24:22.479 much different universe of h of institutions that we're competing against. 0:24:23.680 --> 0:24:25.639 It sounds like it's a very labor intensive business and 0:24:25.800 --> 0:24:27.720 quite hard to scale. But what kind of returns are 0:24:27.760 --> 0:24:28.440 you seeing, le Jim. 0:24:29.440 --> 0:24:33.880 We're seeing so fur plus six, the so for plus nine, 0:24:35.000 --> 0:24:39.159 a lot of a lot of you know, incremental fees 0:24:39.640 --> 0:24:44.959 associated with these type of transactions. And you know it's uh, 0:24:45.280 --> 0:24:49.080 you're you're well protected because of the structure and the 0:24:50.040 --> 0:24:52.600 you know, the I mean, these are these are the 0:24:52.680 --> 0:24:57.080 most they're probably the most aggressive straight jackets out there 0:24:57.240 --> 0:25:00.920 from a structural standpoint. H It's a it's a very 0:25:01.119 --> 0:25:03.280 very specific type of deal. 0:25:03.880 --> 0:25:06.760 Right Yeah. And this this whole asset based lending space 0:25:06.840 --> 0:25:09.920 seems to be you know, sort of exploding in a 0:25:09.960 --> 0:25:12.879 good way, exploding growth wise. Again, You've got you know, 0:25:12.960 --> 0:25:17.040 sort of the largest alternative managers, Apollo and Blackstone, talking 0:25:17.800 --> 0:25:22.360 about forty trillion dollar addressable markets. It includes the investment 0:25:22.400 --> 0:25:25.400 grade space. Now, are you looking at some of these, 0:25:25.560 --> 0:25:28.119