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Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets podcast.

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Speaker 1: My name is Irene Garthia Perez. I'm a team leader

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Speaker 1: of a Bloomberg News.

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Speaker 2: And I'm Mike Collins, senior healthcare credit analyst at Bloomberg Intelligence.

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Speaker 2: This week, we're very pleased to welcome Jason Mudrack, chief

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Speaker 2: investment officer and founder of Mudrich Capital Management. How are you, Jason, great?

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Speaker 2: Thanks for having me great, Happy to have you here.

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Speaker 2: We're excited to have Jason with us. A real pleasure

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Speaker 2: to have the chance to get up close with one

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Speaker 2: of the most successful distressed investors over the past twenty years.

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Speaker 2: After a time at University of Chicago undergrad and Harvard Law,

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Speaker 2: and then a stint at Merrill, Jason got started at

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Speaker 2: Contrarian Capital Management, managing distressed debt and post for reor

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Speaker 2: equities two.

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Speaker 3: Thousand and nine.

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Speaker 2: You hung your own shingle and have consistently generated some

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Speaker 2: impressive returns ever since, despite a constantly evolving debt market

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Speaker 2: environment over the past two decades. Welcome Jason.

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Speaker 3: Thank you.

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Speaker 1: You signed up Modric Capital Management when you were thirty four,

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Speaker 1: so you were a young founder in the midst of

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Speaker 1: the Great Recession. What made you take that decision, and

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Speaker 1: was there a formative moment And who do you consider your.

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Speaker 3: Mentors younger, I'm still considered myself. Yeah, sorry, yes, of course. Well. Look,

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Speaker 3: I spent seven years working for what I considered at

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Speaker 3: the time one of the most brilliant distressed investors, certainly

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Speaker 3: at the time, John Bauer, who ran Contrarian. I sat

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Speaker 3: next to John for seven years. And that is where

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Speaker 3: you learn the business. You know, you don't learn that

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Speaker 3: in grad school, so I went to law school. I

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Speaker 3: spent some time doing investment banking, but you really learn

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Speaker 3: on the job. And my first day at Contrarian was

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Speaker 3: December third, two thousand and one, which was a meaningful

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Speaker 3: day for me because it was the day and Ron

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Speaker 3: filed for bankruptcy, which, for those that are old enough

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Speaker 3: to remind remember, was the largest bankruptcy ever at the time.

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Speaker 3: And I spent seven years book ended by that and

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Speaker 3: then Leman because I left Contrarion a week after Lehman filed,

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Speaker 3: which took the trophy and was then the largest and

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Speaker 3: still the largest bankruptcy ever. So got to see, you know,

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Speaker 3: an incredible amount of distressed opportunities, got to see the

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Speaker 3: industry evolve, and institutionalize. I think assets in the alternative

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Speaker 3: investment industry went from two hundred billion to two trillion

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Speaker 3: over the course of the time of that time, so

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Speaker 3: massive growth, institutionalization, and I got to run money. John

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Speaker 3: let me launch a fun at the end of two

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Speaker 3: thousand and two focused on debt for equity opportunities and

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Speaker 3: post bankruptcy situations, and I ran that business for six years,

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Speaker 3: which allowed me to build an audited track record. So

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Speaker 3: the catalyst for leaving was the financial crisis. You know,

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Speaker 3: I had been at Contrarian for a long time. I'd

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Speaker 3: built a six year audited track record, but the opportunity

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Speaker 3: set was thin but growing, or the potential opportunity set,

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Speaker 3: and it was the GFC that really catalyzed, you know,

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Speaker 3: a huge opportunity in our investment universe. So that was

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Speaker 3: the catalyst to my own shingle. I could have left earlier.

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Speaker 3: I probably would have raised more money, but returns would

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Speaker 3: have been muted because there was very little to do.

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Speaker 3: I knew in two thousand and nine we'd be able

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Speaker 3: to make money. We'd probably start with a smaller pool

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Speaker 3: of assets because people weren't allocating to emerging managers at

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Speaker 3: the time, but track record is the most important thing

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Speaker 3: in this business, and I think that decision proves with

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Speaker 3: hindsight to be the right one.

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Speaker 1: In recent years, liability management exercises have become a very

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Speaker 1: common way to restructure capital structures companies that either need

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Speaker 1: more liquidity or need to amend and extend their debt.

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Speaker 1: How have lems changed the way you evaluate risk and

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Speaker 1: reward these days compared to when you started.

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Speaker 3: So I think that's a good segue to maybe level

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Speaker 3: set and understand how the credit markets have evolved from

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Speaker 3: the time of the GFC to today, because it really

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Speaker 3: sets up why we're seeing lemmes and why I think

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Speaker 3: lemes is a great thing for our opportunity sett it's

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Speaker 3: really elongating this distress credit cycle. So if you rewind

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Speaker 3: back to when rates were cut to zero, sort of

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Speaker 3: what happened, right, Like, I like to think that the

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Speaker 3: fourteen years between two thousand and nine and when we

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Speaker 3: saw a normalization of the rate cycle was the golden

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Speaker 3: era of private equity. Why do I say that we

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Speaker 3: had cheap debt, which is the primary currency private equity

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Speaker 3: firms used to acquire businesses, and it remained cheap for

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Speaker 3: a very, very long period of time, we had a

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Speaker 3: good economy, basically had growing earnings right, and we had

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Speaker 3: expanding multiples bay So you saw the multiples that the

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Speaker 3: SMP trade as a multiple of ubidago from eight times

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Speaker 3: to sixteen times. Now that's inflated by some of the

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Speaker 3: big tech but even if you back out some of that,

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Speaker 3: it's truly gone from eight to twelve. And you saw

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Speaker 3: private market valuations LBO multiples go from about eight to twelve.

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Speaker 3: You saw a fifty percent increase in the way businesses

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Speaker 3: were being valued as a multiple of earnings. You put

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Speaker 3: those three things together, it's the perfect storm for private equity.

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Speaker 3: Levered equity benefits the most in that kind of environment,

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Speaker 3: and we saw private equity assets under management go from

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Speaker 3: one point six trillion in two thousand and eight to

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Speaker 3: nine point six trillion today. Think about that, one point

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Speaker 3: six trillion to nine point six trillion. That is the

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Speaker 3: result of the perfect environment for private equity. However, okay,

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Speaker 3: it's a five hundred percent increase. However, private equity use

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Speaker 3: debt primarily to purchase companies, and that's what we focus on,

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Speaker 3: non investment grade credit or over leverage businesses. So we

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Speaker 3: saw the non investment grade credit market go from a

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Speaker 3: ground two trillion at the time of the GFC to

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Speaker 3: close to five and a half trillion where it is today.

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Speaker 3: That's US and European denominated non investment grade credit. Okay,

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Speaker 3: so massive market driven by this private equity boom. Secondly,

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Speaker 3: very broad Okay, if you think about distressed opportunities, why

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Speaker 3: does a company become distressed. Either something happens at the

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Speaker 3: company or something happens to the company's industry, or you

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Speaker 3: have a broader economic downturn, which we have not had,

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Speaker 3: or you have something like a dramatic in interest rates,

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Speaker 3: which I'll come back to. Okay, but prior to the

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Speaker 3: rate change, we didn't have an economic downturn. We didn't

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Speaker 3: have a rate change. You were looking at individual companies

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Speaker 3: that were challenged or industries that were challenged. And as

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Speaker 3: a fund manager, we need to run a diversified portfolio

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Speaker 3: of risk. It's hard to do when you have these

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Speaker 3: very specific industries like energy in twenty fifteen, or retail

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Speaker 3: being impacted by the Amazon effect or the move to

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Speaker 3: an omni channel model, or media that was going through

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Speaker 3: secular change, whether it's newspapers or yellow pages. As people

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Speaker 3: moved from analog to digital. Just run a diversified portfolio

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Speaker 3: where you had few pockets of opportunities was very challenging.

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Speaker 3: What's so compelling about today is the catalyst today is

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Speaker 3: not an economic downturn. It's this normalization of interest rates.

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Speaker 3: All this pre twenty twenty two LBO driven leverage okay

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Speaker 3: was put in place in an environment where people didn't

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Speaker 3: think rates were going to ever be higher than zero.

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Speaker 3: If you look at that eighty percent of leverage, biots

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Speaker 3: didn't hedge interest rate risk. Nobody thought rates were going

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Speaker 3: to go up, and as a result, they put very

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Speaker 3: very high levels of debt as a multiple of cash flows.

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Speaker 3: And that works in a zero rate environment, it doesn't

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Speaker 3: work in a four or five percent rate environment. But

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Speaker 3: the beauty of this is it impacts all borrowers, not

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Speaker 3: one industry. So we have a very diverse opportunity set okay,

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Speaker 3: which is very unique to this cycle. And then this

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Speaker 3: is the good segue into your question about lmes. The

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Speaker 3: other phenomenon that we've seen today is very few covenants.

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Speaker 3: Ninety percent of deals or covenant light okay. That was

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Speaker 3: up from zero percent pre GFC okay, So very few covenants,

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Speaker 3: and we also have a good economy. We have very

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Speaker 3: high multiples in the equity markets, which is oftentimes how

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Speaker 3: private equity firms are valuing these businesses. And you have

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Speaker 3: about half the loan market held by structured products. Okay

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Speaker 3: that don't want to take equity back if they don't

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Speaker 3: have to, so colos right. So it's created this opportunity

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Speaker 3: where sponsors want to extend maturities, and they can extend

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Speaker 3: maturities because without covenant it's easy to do out of

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Speaker 3: core deals otherwise known as lemes. But what that's doing

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Speaker 3: from and we'll talk about lem specifically, but what is

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Speaker 3: doing for our opportunity set is it's elongating it. We're

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Speaker 3: not getting the spike in defaults like we had in

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Speaker 3: two thousand and eight and then a collapse with the

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Speaker 3: reflation of the economy. What we're getting is just elevated

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Speaker 3: defaults every year we think for the next five to

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Speaker 3: seven years. We used to look at defaults when you're

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Speaker 3: talking about a world where there's lemes, which is effectively

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Speaker 3: an out of court default, but the ownership isn't changing.

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Speaker 3: There's a restructuring of the maturity of potential injection of

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Speaker 3: liquidity tightening of the covenant package if you include lemes

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Speaker 3: and those are mostly effectuated through distressed exchanges. A default

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Speaker 3: are around two percent today, but if you add in

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Speaker 3: distressed exchanges, it's around five percent. Okay. The historical norm

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Speaker 3: for default is around two percent, So defaults in two

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Speaker 3: thousand and eight got up to around twelve percent and

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Speaker 3: then they collapsed, but the market was two trillion dollars. Today,

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Speaker 3: we're in a world that's around five percent if you

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Speaker 3: include defaults and distressed exchanges, which is how you effectuate

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Speaker 3: these lemis. But it's five percent of a five and

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Speaker 3: a half trillion dollar market. I think it's going to

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Speaker 3: be four or five six percent every year consistently. That

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Speaker 3: will spike if there's an economic downturn, it will come

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Speaker 3: back down if there's recovery, but it's just going to

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Speaker 3: be elongated. Okay. If you think about the problem with

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Speaker 3: the stressed, it's been driven by economic downturns. Historically, when

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Speaker 3: there's not an economic downturn, you have it's very few

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Speaker 3: industries that are usually challenged industries, which makes it very difficult,

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Speaker 3: and it's very short. It's episodic. We have the opotion

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Speaker 3: now we have a large market, very diverse, and I

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Speaker 3: believe very elongated. The cyclicality of what we do has

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Speaker 3: been reduced, which is a big positive.

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Speaker 1: So it has reduced a cyclicality, but it has increased

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Speaker 1: the brain damage somehow in terms of how you think

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Speaker 1: about the specific situations.

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Speaker 3: Exactly right. So the way we invest has changed. Okay.

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Speaker 3: So in the old days, when we had covenants, the

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Speaker 3: exercise was valuing the business and then layering on the

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Speaker 3: capital structure to that valuation and figuring out what debt

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Speaker 3: was covered, what debt might be what we call the folkrum. Okay,

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Speaker 3: that would get need to get equitied, and what debt

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Speaker 3: would be out of the money, it would be wiped out.

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Speaker 3: But the success or non success of your investment would

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Speaker 3: ultimately determine on whether you've got the valuation right. Today,

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Speaker 3: it's more complicated than that. You have to value the business,

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Speaker 3: you have to understand the capital structure today, but you

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Speaker 3: also have to understand how that capital structure may evolve.

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Speaker 3: You may think that you're creating the business, which is

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Speaker 3: your entry point at a billion dollars. Let's say, and

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Speaker 3: you wake up tomorrow and you find that you thought

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Speaker 3: you were first lean and now your second lean and

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Speaker 3: your creation value is actually a billion five because somebody

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Speaker 3: just put five hundred million senior to you because you

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Speaker 3: didn't have covenant protection prohibiting that. So it becomes this

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Speaker 3: multi dimensional analysis where now you need to understand game theory,

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Speaker 3: who is involved, what's the sponsor's motive, what do the

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Speaker 3: documents allow, which is usually everything anything? And you know

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Speaker 3: who's in the structure. Can you get in the group,

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Speaker 3: the in group if it's a non proride deal, or

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Speaker 3: you're going to be left in the outgroup. And you're

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Speaker 3: seeing some pretty you know, dramatic differences and outcomes in

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Speaker 3: these non proae of deals. So it is complicated analysis.

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Speaker 3: It requires being larger usually to join these steering committees

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Speaker 3: which guarantees you better economic treatment or avoids the risk

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Speaker 3: of non parade of treatment. You need to be one

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Speaker 3: of the top called ten holders, and in a multi

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Speaker 3: billion dollar capital structure, that can mean you need to

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Speaker 3: own you know, one hundred million or more of the debt.

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Speaker 3: That's hard for smaller players. It's very hard for tourists

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Speaker 3: to come into this space today. But you know what's

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Speaker 3: happening and will continue to happen. Over time is a

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Speaker 3: lot of these capital structures are going to go from

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Speaker 3: pre Lmy to post Lemy, and we're going to get

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Speaker 3: back to a world where you can do distress investing

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Speaker 3: like we all used to do it, just focusing on valuation.

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Speaker 3: So like I think there was about three and a

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Speaker 3: half billion of OUSE, I have the data here so

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Speaker 3: I'll get it right. There was about three and a

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Speaker 3: half billion of lem's and twenty one of distressed exchanges,

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Speaker 3: but those are primarily elemies. It went up to twenty

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Speaker 3: one billion, and twenty two, twenty seven billion, and twenty

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Speaker 3: three and last year we had forty four billion of

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Speaker 3: distressed exchanges, which is an all time high. I think

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Speaker 3: in two thousand and eight it was around thirty six billion,

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Speaker 3: so and I suspect twenty twenty five we'll exceed twenty

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Speaker 3: four or be comparable. So what you're having is all

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Speaker 3: of these situations are going from pre le me or

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Speaker 3: you have this risk of non Parada treatment to post

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Speaker 3: lem where it will be much more challenging to have

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Speaker 3: non Parada treatment because what we get in these lemis

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Speaker 3: as lenders is we get covenants. Okay, we give the

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Speaker 3: sponsor liquidity potentially if they need it, we give them

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Speaker 3: an extension of maturity if that's what they're looking for.

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Speaker 3: Sometimes they capture discount by doing the exchange at ninety

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Speaker 3: cents on the dollar or lower, so they capture some

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Speaker 3: deleveraging and what we get is covenants and potentially a

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Speaker 3: non PARADA outcome if the situations died enough.

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Speaker 1: Before starting we we're discussing. You've been invested in Tropicana

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Speaker 1: which ended up being a very corercive deal and Session

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Speaker 1: which was a PROADA transaction. At what point do you

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Speaker 1: see a transaction is going to head one way or another?

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Speaker 1: And what are the termining factors for going ye, win

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Speaker 1: or and r.

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Speaker 3: You know, it's tricky, which is why I think this

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Speaker 3: this this new dimension that makes it very challenging for

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Speaker 3: a lot of folks to think about distress investing until

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Speaker 3: it's a post LM structure like in Tropicana. As an example,

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Speaker 3: we initially were not on the steering committee, and there

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Speaker 3: was a dramatically different treatment between the steering committee and

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Speaker 3: the non steering committee at the end of the day.

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Speaker 3: But we lobby the folks that were on the committee.

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Speaker 3: They're folks that we've done lots of deals with in

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Speaker 3: the past. This is an iterative game for you know,

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Speaker 3: longtime credit investors. We knew the advisors very closely and

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Speaker 3: also size mattered. They needed to get to over fifty

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Speaker 3: percent to effectuate that transaction, and we helped get them there.

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Speaker 3: So they made a clear upfront that we needed to

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Speaker 3: own over one hundred million dollars of debt to be

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Speaker 3: considered to be on the steering committee. And that puts

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Speaker 3: you in a tough position because you don't know they're

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Speaker 3: not contractually agreeing to let you on the steering committee,

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Speaker 3: So you have to go in and realize that you

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Speaker 3: might own, you know, a sized up position and be

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Speaker 3: left out of the group. Fortunately, in that situation, we

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Speaker 3: did get over one hundred million and they allowed us

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Speaker 3: into the group, and that was very fortunate because that

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Speaker 3: was a very non Parada transaction.

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Speaker 1: What is it that Detter reminds in like any transaction, Yeah,

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Speaker 1: this is going to head into a non Paretta transaction

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Speaker 1: or is it going to be a more consensual like

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Speaker 1: what are the circumstances that lead the conversations go one

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Speaker 1: way or another?

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Speaker 3: You know, each situation is different. We used to think

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Speaker 3: it was really driven by sponsor. Some sponsors were more aggressive,

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Speaker 3: other sponsors were known as being more friendly. That's not

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Speaker 3: the case anymore. It's so normal to do non Parada transactions.

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Speaker 3: I think almost every sponsor out there will consider them.

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Speaker 3: For example, in Tropicana, the sponsor there was known as

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Speaker 3: being very friendly. We had heard early on that they

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Speaker 3: would not do a non Parada deal, and it ended

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Speaker 3: up being a non Parada deal. An ironically, Decision, which

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Speaker 3: is owned by Platinum, which has had historically a very

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Speaker 3: aggressive reputation, insisted that that deal be completely parata, and

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Speaker 3: it was. Parado's economics were offered equally to every lender.

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Speaker 3: It's not the outcome you would have predicted just looking

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Speaker 3: at who the financial sponsor was. And another deal we

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Speaker 3: mentioned that we talked about before we went live here

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Speaker 3: was Shutterfly, which was an Apollo deal that we did

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Speaker 3: a l and me that we did that worked out

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Speaker 3: successfully for everybody. We did a little over two years ago.

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Speaker 3: Apollo has a very aggressive reputation. They insisted from the

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Speaker 3: very beginning of that negotiation that everything they do be parata.

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Speaker 3: I think there was some backstop economics, but that was

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Speaker 3: economics provided for value provided but in terms of just

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Speaker 3: treating similarly situated lenders differently, they insisted that that couldn't happen.

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Speaker 3: So you can't know from the sponsor anymore. So you

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Speaker 3: have to evaluate what does the company need and how

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Speaker 3: important is discount capture because you can capture a lot

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Speaker 3: of discount by doing a non parade of transaction, because

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Speaker 3: you'll leave certain lenders in a much worse position and

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Speaker 3: presumably they'll be trading much lower. How important are other things?

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Speaker 3: Is like liquidity needs maturity extension. So Tropicana needed a

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Speaker 3: bunch of money. Okay, they didn't need a maturity extension.

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Speaker 3: They didn't have a maturity wall decision, didn't need a

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Speaker 3: maturity extension. They also needed new money. So there was

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Speaker 3: different sticks and carrots there. Tropicana could have raised that

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Speaker 3: new money. I think it was four hundred million that

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Speaker 3: they needed. They could have raised that four hundred million

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Speaker 3: away from the existing lender group. Okay, there's always that

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Speaker 3: thread of them doing a deal away, but if they

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Speaker 3: did it with us, they would get all these bells

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Speaker 3: and whistles. They don't need a maturity extension, but they

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Speaker 3: could get discount capture, which they wouldn't be able to

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Speaker 3: get if they did the deal away. So, but what

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Speaker 3: what US lenders wanted was the abilities for the fifty

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Speaker 3: one percent to move ahead of the forty nine percent,

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Speaker 3: and that was sort of the quid pro quo, if

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Speaker 3: you will, in the trade. We provided the four hundred million.

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Speaker 3: We gave them discount. They captured nine cents on the

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Speaker 3: steer co and they captured thirty cents on the non

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Speaker 3: steerco in terms of discount capture. They got the liquidity

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Speaker 3: they needed, and we got covenants. Okay, so have a

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Speaker 3: tiered capital structure with super priority debt and second out

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Speaker 3: debt and third out debt, which doesn't great for the

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Speaker 3: long term balance sheet health of the company, but we're

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Speaker 3: in the first lean and the second lean, So for

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Speaker 3: the steerco lenders, we're in a very very solid position.

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Speaker 3: That's a perfect example of a post lem structure that

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Speaker 3: we think is incredibly attractive now. I think for those

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Speaker 3: that don't want to deal with the risks of nonparata,

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Speaker 3: or don't want to deal with the intricacies of lmes,

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Speaker 3: or maybe aren't large enough to guarantee that they're going

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Speaker 3: to be on the right side of these trades. Focusing

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Speaker 3: on post lem capital structures is the way to do

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Speaker 3: distress today?

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Speaker 1: For context for our listeners, it was it still is

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Speaker 1: PI Partners the sponsor in the case of Tropicana.

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Speaker 3: Correct.

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Speaker 2: I'm just going to ask a question maybe stepping back,

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Speaker 2: stepping back and sort of talking about process. Mudrick's been

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Speaker 2: around for a while, your company and your investment strategy hasn't.

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Speaker 2: It's evolved over the years, but you haven't really changed.

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Speaker 2: And I wonder what's been consistent and what's changed over

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Speaker 2: the last nearly two decades with your process, and how

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Speaker 2: has it changed with the evolving investment environment and sort

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Speaker 2: of how you look at and sorce deals and ideas

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Speaker 2: and how you may move forward with those deals.

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Speaker 3: Well, the biggest change clearly is what we're talking about now,

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Speaker 3: right is having to understand and price the risks of

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Speaker 3: being left out of a nonparada transaction. Also lmes whether

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Speaker 3: the proada or nomparada is a new phenomena, right, Like

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Speaker 3: in the old days, there was covenants, so you couldn't

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Speaker 3: effectuate a maturity extension outside of court, okay, and once

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Speaker 3: you're in court, there's an equidization, so there's an ownership change.

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Speaker 3: So in many situations today, evaluating this risk of nonparada

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Speaker 3: and also understanding that you're going to be a creditor

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Speaker 3: for much longer than in the old days might have

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Speaker 3: been the case. Right, The maturity doesn't mean necessarily that

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Speaker 3: you're going to take the keys. I think post lme

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Speaker 3: it's very hard to do a second enemy because thresholds

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Speaker 3: for document amendments are usually increased, and all of the

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Speaker 3: ways these transactions are structured to be coursive, things like

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Speaker 3: jay crue and search of they're all closed. Loopholes are

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Speaker 3: all closed up. Not to say there won't be additional

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Speaker 3: ones created by very smart and expensive lawyers, but it's

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Speaker 3: becoming more and more challenging to do an Lemy two

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Speaker 3: point zero or a second Lemy right. So that's probably

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Speaker 3: the biggest change right in terms of our valuation of businesses.

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Speaker 3: I've been doing it the exact same way for twenty

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Speaker 3: five years. This is how I learned the business. I

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Speaker 3: hate the expression you can't teach you know on all

383
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Speaker 3: dog new tricks, but it works right, Like, we look

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Speaker 3: at businesses that we think are leaders in their industry,

385
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Speaker 3: that are well managed, that have sustainable businesses, predictable cash flows,

386
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Speaker 3: good margins generate a lot of unlevered free cash flow,

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Speaker 3: and that's important because you're going to own these businesses

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Speaker 3: for three to five years through a restructure, and instructurings

389
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Speaker 3: don't happen quickly, right. There's a year negotiation, then there's

390
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Speaker 3: a year post you know, reorganizing where you can't necessarily

391
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Speaker 3: do an exit, and then there's like usually an operational fix,

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Speaker 3: and then there's an exit, whether it's an IPO or sale,

393
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Speaker 3: and that process can take three to five years. So

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Speaker 3: if you underwrite the business to be doing two hundred

395
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Speaker 3: million of cash flow and by the time you go

396
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Speaker 3: to exit it's doing one twenty five, well guess what,

397
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Speaker 3: Like all of that work was for not and you

398
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Speaker 3: probably lost money. So you have to underwrite the businesses

399
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Speaker 3: today but also understand the sustainability of those cash flows.

400
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Speaker 3: And it's really a deep value exercise. It's a classic

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Speaker 3: gram Dot Warren Buffett analysis. And that hasn't changed. The

402
00:20:33,200 --> 00:20:37,960
Speaker 3: process has changed, the players have changed, the availability of

403
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Speaker 3: information has changed. I constantly tell my analysts, Okay, stop

404
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Speaker 3: reading reog research, stop reading debt Wire, stop reading Bloomberg none,

405
00:20:50,400 --> 00:20:53,520
Speaker 3: but we need to find information that is not readily available, Like,

406
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Speaker 3: get on a plane, get out there, meet companies, meat competitors,

407
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Speaker 3: talk to suppliers. Let's do our own surveys. Let's create

408
00:21:00,080 --> 00:21:02,880
Speaker 3: prietary information that we don't think other people have, other

409
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Speaker 3: people know. Create edge? How do we get edge in

410
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Speaker 3: a world where information has become much more efficient. What

411
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Speaker 3: I always liked about the distress credit markets is it

412
00:21:10,200 --> 00:21:13,399
Speaker 3: was horrifically inefficient. Right, companies stopped talking to you, they

413
00:21:13,440 --> 00:21:17,320
Speaker 3: stop reporting ten k's and ten queues if they're privately owned.

414
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Speaker 3: There's very little information on the interlink sites. Right, it

415
00:21:19,760 --> 00:21:22,399
Speaker 3: was whatever was contractionally agreed in the credit agreement. So

416
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Speaker 3: the kind of disclosure that you get with a public

417
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Speaker 3: company and the liquidity you get with the public company,

418
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Speaker 3: you don't have. Like liquidity drives up, information drives up.

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Speaker 3: It's this very specialized skill set, but it's gotten much

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Speaker 3: more efficient. How do you use AI? We don't at all, No,

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Speaker 3: not even for the research. I mean, we read all

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Speaker 3: the despite what I just said, we all all We

423
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Speaker 3: read all the Bloomberg, we read all the real research,

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Speaker 3: and you guys are using a lot of AI, but

425
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Speaker 3: we don't. We haven't deployed any AI technology, right or wrong?

426
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Speaker 3: I'm a big believer that we do our own work,

427
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Speaker 3: Like that's how the light bulb goes off. It's spending

428
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Speaker 3: a lot of time reading through the documents, spending time

429
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Speaker 3: with management, talking to folks that are smarter than us

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Speaker 3: about the industry. And that's where you it's the work,

431
00:22:06,119 --> 00:22:10,760
Speaker 3: it's the process that creates the genius having chat GBq

432
00:22:11,040 --> 00:22:13,719
Speaker 3: or some sort of AI product, you know, tell us

433
00:22:13,720 --> 00:22:16,160
Speaker 3: about a company, like anybody can get access to that information.

434
00:22:16,200 --> 00:22:19,320
Speaker 3: It's not going to create a differentiated viewpoint and being

435
00:22:19,359 --> 00:22:22,480
Speaker 3: a contrarian, Like the idea is that you develop a

436
00:22:22,520 --> 00:22:26,440
Speaker 3: thesis that the security price is not reflecting, and then

437
00:22:26,480 --> 00:22:29,040
Speaker 3: you develop conviction in that thesis and you get it right,

438
00:22:29,320 --> 00:22:31,919
Speaker 3: and that's how you make money. That's how you generate

439
00:22:31,960 --> 00:22:34,800
Speaker 3: alpha and not data. In this market, Are.

440
00:22:34,680 --> 00:22:38,399
Speaker 1: You seeing many opportunities arising from the disruption that AI

441
00:22:38,520 --> 00:22:41,000
Speaker 1: is causing across industries we have?

442
00:22:41,080 --> 00:22:43,440
Speaker 3: I mean AI is impacting businesses all over the place,

443
00:22:43,480 --> 00:22:46,919
Speaker 3: like data centers as an example. Call centers is a

444
00:22:46,920 --> 00:22:50,720
Speaker 3: great example. It's a very distressed industry that we've been evaluating.

445
00:22:50,920 --> 00:22:53,000
Speaker 3: We have made an investment in it, but it's being

446
00:22:53,040 --> 00:22:55,600
Speaker 3: impacted by the uncertain by AI today, but also the

447
00:22:55,680 --> 00:22:58,720
Speaker 3: uncertainty is like this is this a business a value

448
00:22:58,720 --> 00:23:01,640
Speaker 3: proposition that will exist in two years or five years

449
00:23:01,720 --> 00:23:04,440
Speaker 3: or ten years. And it's constantly stuff that we talk

450
00:23:04,520 --> 00:23:07,480
Speaker 3: about how will AI impact these businesses? But that goes

451
00:23:07,520 --> 00:23:10,480
Speaker 3: back to the valuation exercise and the sustainability and predictability

452
00:23:10,480 --> 00:23:13,119
Speaker 3: of cash flows. But in terms of using AI to

453
00:23:13,160 --> 00:23:15,760
Speaker 3: help us analyze, we don't do that yet.

454
00:23:16,000 --> 00:23:19,280
Speaker 1: One of your recent investments, I mean, I think it's

455
00:23:19,280 --> 00:23:21,560
Speaker 1: been a couple of years now since you first invested

456
00:23:21,560 --> 00:23:24,919
Speaker 1: in it, that is a bit atypical to put it

457
00:23:24,960 --> 00:23:29,200
Speaker 1: that way, was vertical aerospace the British can we call.

458
00:23:29,080 --> 00:23:33,679
Speaker 3: It flying taxis EVI toalls, Okay, much more sophisticated than

459
00:23:33,720 --> 00:23:37,160
Speaker 3: flying taxis, but it was more of.

460
00:23:37,119 --> 00:23:41,560
Speaker 1: A at first, it was more of a dead venture investment.

461
00:23:41,760 --> 00:23:45,240
Speaker 1: What made you invest in it in the first place.

462
00:23:45,280 --> 00:23:49,800
Speaker 3: Now, this goes back to my comment about diversified opportunities.

463
00:23:50,080 --> 00:23:53,320
Speaker 3: Rates were low for so long. We saw industries that

464
00:23:53,320 --> 00:23:57,200
Speaker 3: would have never considered borrowing tap the debt markets. Okay,

465
00:23:57,200 --> 00:24:01,720
Speaker 3: this was a pre revenue and obvious no cash flow business,

466
00:24:01,760 --> 00:24:05,680
Speaker 3: and they borrowed money. Very few industries resisted the temptation

467
00:24:05,760 --> 00:24:08,480
Speaker 3: to borrow. So that's created the opportunity for us to

468
00:24:09,200 --> 00:24:12,920
Speaker 3: selectively make investments that, as you say, may be viewed

469
00:24:12,920 --> 00:24:14,679
Speaker 3: as a typical But at the end of the day,

470
00:24:14,720 --> 00:24:17,439
Speaker 3: if we can create equity upside through credit, that's what

471
00:24:17,480 --> 00:24:21,840
Speaker 3: we try and do. And the interesting thing about disruptive technology.

472
00:24:22,320 --> 00:24:25,720
Speaker 3: You would have never seen distressed opportunities in disruptive technology

473
00:24:25,760 --> 00:24:27,520
Speaker 3: because they wouldn't have borrowed, you know, in a more

474
00:24:27,520 --> 00:24:30,879
Speaker 3: normal interest rate environment. But we've seen a ton of

475
00:24:30,880 --> 00:24:36,080
Speaker 3: opportunities in disruptive technologies and that can create incredible upside.

476
00:24:36,200 --> 00:24:40,080
Speaker 3: Right when you buy a very mature business at call

477
00:24:40,119 --> 00:24:42,679
Speaker 3: it four times cash flow through the debt and you

478
00:24:42,720 --> 00:24:45,240
Speaker 3: think it's worth six times, okay, that can be you

479
00:24:45,240 --> 00:24:48,159
Speaker 3: have meaningful downside protection because you're creating a business at

480
00:24:48,200 --> 00:24:50,240
Speaker 3: four times to the top of the structure, and you

481
00:24:50,320 --> 00:24:52,640
Speaker 3: get that equity upside by exiting it at six times

482
00:24:52,680 --> 00:24:54,960
Speaker 3: in three years. Okay. But when you can buy a

483
00:24:55,000 --> 00:24:58,199
Speaker 3: business for a couple hundred million dollars, which is what

484
00:24:58,240 --> 00:25:01,640
Speaker 3: we did with Vertical through initial a senior security convertible loan,

485
00:25:02,240 --> 00:25:03,920
Speaker 3: and then we then converted it to equity to take

486
00:25:03,920 --> 00:25:06,920
Speaker 3: control of the business, we think Vertical could be worth

487
00:25:08,000 --> 00:25:10,719
Speaker 3: north of ten billion dollars in five years. That kind

488
00:25:10,760 --> 00:25:13,560
Speaker 3: of upside you'll never get investing in a mature business.

489
00:25:13,600 --> 00:25:17,840
Speaker 3: So yes, it is a typical. However, we're entering creating

490
00:25:17,880 --> 00:25:19,960
Speaker 3: the equity upside through debt, which is what we do.

491
00:25:20,480 --> 00:25:23,280
Speaker 3: It was a structured transaction. It was a senior secured

492
00:25:23,320 --> 00:25:26,320
Speaker 3: convert that I think created the opportunity should the company

493
00:25:26,320 --> 00:25:29,320
Speaker 3: not be able to refinance, us to own the business,

494
00:25:29,359 --> 00:25:31,640
Speaker 3: which is what happened. So we're using all of our

495
00:25:31,920 --> 00:25:34,400
Speaker 3: trade craft, if you will, to create the upside. Now

496
00:25:34,400 --> 00:25:36,119
Speaker 3: we have to get the upside right, So it's going

497
00:25:36,160 --> 00:25:38,480
Speaker 3: to create a different kind of risk reward like this

498
00:25:38,560 --> 00:25:41,000
Speaker 3: doesn't work, it's potentially a zero, but if it works,

499
00:25:41,000 --> 00:25:42,480
Speaker 3: it could bee hundred x and you're not going to

500
00:25:42,480 --> 00:25:45,960
Speaker 3: get that kind of upside downside and traditional distress investing.

501
00:25:46,040 --> 00:25:48,639
Speaker 3: So we only do a few of these, right. The

502
00:25:48,680 --> 00:25:51,879
Speaker 3: rest of our portfolio is the tropicanas and decisions and

503
00:25:51,920 --> 00:25:55,080
Speaker 3: the more what you would think is typical distress investing.

504
00:25:55,119 --> 00:25:57,359
Speaker 3: But we've had a very good track record in the

505
00:25:57,359 --> 00:26:00,600
Speaker 3: past with these kind of opportunities, So we pick our

506
00:26:00,600 --> 00:26:02,720
Speaker 3: spots and I think it's I think vertical actually is

507
00:26:02,720 --> 00:26:04,600
Speaker 3: one of the most interesting things in our portfolio today.

508
00:26:05,000 --> 00:26:08,240
Speaker 2: What are some other interesting names in your portfolio that

509
00:26:08,280 --> 00:26:11,480
Speaker 2: you or maybe some of your favorite investments you've made.

510
00:26:11,480 --> 00:26:13,919
Speaker 2: Maybe they weren't the best money maker, but you just

511
00:26:13,920 --> 00:26:16,320
Speaker 2: got it right. Was there a trade that you ever

512
00:26:16,359 --> 00:26:19,440
Speaker 2: made that you just felt good you made the call.

513
00:26:19,560 --> 00:26:23,119
Speaker 2: It wasn't maybe the most econometry, but you felt it

514
00:26:23,160 --> 00:26:25,960
Speaker 2: was kind of like your you know, not your white whale,

515
00:26:26,000 --> 00:26:28,040
Speaker 2: but you know it's something that worked out well for

516
00:26:28,160 --> 00:26:29,080
Speaker 2: you that you know.

517
00:26:29,200 --> 00:26:31,800
Speaker 3: I mean, it's it's a polar opposite from something like

518
00:26:31,840 --> 00:26:34,440
Speaker 3: a vertical aerospace. But I think one of the trades

519
00:26:34,440 --> 00:26:37,080
Speaker 3: that we did that were most known for is we

520
00:26:37,160 --> 00:26:40,280
Speaker 3: rolled up the Yellow Pages in the United States and

521
00:26:40,320 --> 00:26:44,800
Speaker 3: that was an investment that at cocktail conversation, I got

522
00:26:44,840 --> 00:26:48,080
Speaker 3: a lot of eye rolling. You own what I've never

523
00:26:48,119 --> 00:26:51,639
Speaker 3: seen a Yellow Page before. But you know, some of

524
00:26:51,680 --> 00:26:54,680
Speaker 3: these investments that are sort of left for the dead

525
00:26:54,760 --> 00:26:57,840
Speaker 3: by most of Wall Street. You know, it's all about price.

526
00:26:57,960 --> 00:27:00,960
Speaker 3: If you can create them cheap enough, it's just classic

527
00:27:01,080 --> 00:27:03,760
Speaker 3: like cigar butt trade. But what we did with this

528
00:27:03,800 --> 00:27:05,679
Speaker 3: particular investment, I mean, it was a roll up, so

529
00:27:05,800 --> 00:27:08,240
Speaker 3: it had various different names. It ended up publicly traded

530
00:27:08,280 --> 00:27:10,800
Speaker 3: today it's called Thrive. But when we bought it was

531
00:27:11,240 --> 00:27:14,080
Speaker 3: a roll up of id ARC and then our externally

532
00:27:14,200 --> 00:27:17,959
Speaker 3: and dex Media et cetera, et cetera. Eventually bought all

533
00:27:17,960 --> 00:27:20,159
Speaker 3: of Yellow Pages I means are soul sorry, all of

534
00:27:20,560 --> 00:27:22,760
Speaker 3: AT and t's assets from servers. We were buying these

535
00:27:22,800 --> 00:27:25,280
Speaker 3: businesses for around two times cash flow, okay, and they

536
00:27:25,320 --> 00:27:29,239
Speaker 3: were declining, but we were taking costs out faster than

537
00:27:29,280 --> 00:27:31,960
Speaker 3: the revenue is declining. And if you do that math,

538
00:27:32,040 --> 00:27:33,960
Speaker 3: what it means is you can take your basis out.

539
00:27:35,160 --> 00:27:37,040
Speaker 3: It was initially a dead investment and then it converted

540
00:27:37,080 --> 00:27:39,080
Speaker 3: to equity. So initially as a dead investment, we were

541
00:27:39,080 --> 00:27:42,080
Speaker 3: taking it out through coupon and contractual amorizations, and once

542
00:27:42,119 --> 00:27:44,959
Speaker 3: it was equity, it was through other avenues. But we

543
00:27:44,960 --> 00:27:46,800
Speaker 3: were able to take our basis out every two two

544
00:27:46,840 --> 00:27:49,040
Speaker 3: and a half years. And when you can make an

545
00:27:49,080 --> 00:27:51,439
Speaker 3: investment and get your money back and still create a

546
00:27:51,480 --> 00:27:55,720
Speaker 3: tale of cash flows, that risk reward is incredibly attractive

547
00:27:55,720 --> 00:27:58,480
Speaker 3: because you can't lose money at that point, okay, when

548
00:27:58,480 --> 00:28:00,399
Speaker 3: you can protect your downside like that, and that's what

549
00:28:00,440 --> 00:28:04,159
Speaker 3: you can do in these controlled liquidations. But what we

550
00:28:04,160 --> 00:28:06,160
Speaker 3: were able to do with Thrive thanks to the management

551
00:28:06,160 --> 00:28:08,080
Speaker 3: team there as one of the best management teams we've

552
00:28:08,119 --> 00:28:10,960
Speaker 3: ever worked with. Is we were able to evolve the business.

553
00:28:11,359 --> 00:28:13,480
Speaker 3: So we were able to reduce our downside through just

554
00:28:14,080 --> 00:28:17,800
Speaker 3: effectively I don't want to say liquidating, but effectively monetizing

555
00:28:17,880 --> 00:28:20,919
Speaker 3: the tail of cash lows from the legacy business. And

556
00:28:20,960 --> 00:28:23,000
Speaker 3: then we were able to take one of our assets,

557
00:28:23,000 --> 00:28:26,240
Speaker 3: which was a nationwide sales force, and build a SaaS

558
00:28:26,240 --> 00:28:29,720
Speaker 3: product okay for business automation focused on small and medium

559
00:28:29,720 --> 00:28:33,600
Speaker 3: sized businesses that tended to be relatively unsophisticated with regards

560
00:28:33,640 --> 00:28:36,479
Speaker 3: to how they were running their businesses, their CRM tools,

561
00:28:36,760 --> 00:28:39,440
Speaker 3: their texts and email marketing tools. We were able to

562
00:28:39,440 --> 00:28:43,840
Speaker 3: wrap some of the best Silicon Valley product into our brand,

563
00:28:43,960 --> 00:28:47,080
Speaker 3: which we renamed Thrive, and then use our three thousand

564
00:28:47,080 --> 00:28:50,760
Speaker 3: person nationwide salesforce to distribute it to the roofers and

565
00:28:50,800 --> 00:28:53,000
Speaker 3: plumbers and the small businesses of the world that used

566
00:28:53,000 --> 00:28:55,440
Speaker 3: to advertise on the Yellow Pages maybe still do, maybe

567
00:28:55,480 --> 00:28:58,200
Speaker 3: still don't, but didn't know how to automate, and that

568
00:28:58,520 --> 00:29:00,880
Speaker 3: business now have seen multiple exp man and in trades

569
00:29:00,920 --> 00:29:03,959
Speaker 3: for something like six turns on Nasdaq. So that's that's

570
00:29:04,000 --> 00:29:06,400
Speaker 3: an investment that it actually worked out successful, but it

571
00:29:06,520 --> 00:29:09,240
Speaker 3: was somewhat controversial all the time. Like when I told

572
00:29:09,240 --> 00:29:11,120
Speaker 3: clients that we were investing in yellow Pages, they looked

573
00:29:11,120 --> 00:29:12,720
Speaker 3: at me like I was crazy. But I think we

574
00:29:12,800 --> 00:29:16,160
Speaker 3: made six times or money over about twelve years.

575
00:29:16,760 --> 00:29:19,080
Speaker 1: Where else do you see value?

576
00:29:19,120 --> 00:29:19,560
Speaker 3: These days?

577
00:29:19,560 --> 00:29:22,720
Speaker 1: You were mentioning some thes eropic technologies. I don't know

578
00:29:22,720 --> 00:29:24,960
Speaker 1: if there are like other examples that you can give

579
00:29:25,040 --> 00:29:30,160
Speaker 1: in that space. You were mentioning post lme dead. Where

580
00:29:30,200 --> 00:29:32,600
Speaker 1: else did you see value disease?

581
00:29:32,600 --> 00:29:36,480
Speaker 3: I think the post me opportunity is particularly compelling, and

582
00:29:36,520 --> 00:29:38,440
Speaker 3: it will get more and more compelling. And the reason

583
00:29:38,440 --> 00:29:41,360
Speaker 3: I say that is because you're going to have more

584
00:29:41,360 --> 00:29:44,080
Speaker 3: and more post lem structures. There was very few of

585
00:29:44,080 --> 00:29:46,920
Speaker 3: them before two years ago, and there was more a

586
00:29:47,000 --> 00:29:48,920
Speaker 3: year ago, and there's more now and they'll be more

587
00:29:48,960 --> 00:29:51,520
Speaker 3: next year because all these all these structures are either

588
00:29:51,520 --> 00:29:53,920
Speaker 3: going to Falter leemy, right, I mean their maturity wall

589
00:29:54,040 --> 00:29:56,280
Speaker 3: is what it is. It peaks in twenty twenty eight.

590
00:29:56,960 --> 00:29:59,120
Speaker 3: Between now in twenty twenty eight, there's about a trillion

591
00:29:59,160 --> 00:30:01,920
Speaker 3: and a half dollars non investment great credit maturing. Okay,

592
00:30:01,920 --> 00:30:03,360
Speaker 3: those are either go de fault or they're going to

593
00:30:03,400 --> 00:30:05,360
Speaker 3: get extended, and they're likely going to get extended through

594
00:30:05,400 --> 00:30:08,239
Speaker 3: some sort of l me. Some will get refined, but

595
00:30:08,280 --> 00:30:10,160
Speaker 3: a lot of them aren't because the leverage multiples on

596
00:30:10,240 --> 00:30:14,600
Speaker 3: these businesses are too high for today's environment. You could

597
00:30:14,600 --> 00:30:17,720
Speaker 3: put six turns of debt on a business pre interest

598
00:30:17,760 --> 00:30:20,520
Speaker 3: rate normalization. Today you can only put four. Okay, So

599
00:30:20,600 --> 00:30:23,680
Speaker 3: unless you've deleveraged through earnings growth or debt pay down

600
00:30:23,760 --> 00:30:27,760
Speaker 3: or equitization or something, you have a non refinanciable capital structure,

601
00:30:27,800 --> 00:30:29,680
Speaker 3: and a lot of the market is going to extend,

602
00:30:29,720 --> 00:30:31,520
Speaker 3: so you're going to have more and more of these leemies.

603
00:30:31,520 --> 00:30:34,080
Speaker 3: So decisions. A great example decision was we talked about

604
00:30:34,120 --> 00:30:36,840
Speaker 3: it as a parada le me. Put aside the risk

605
00:30:36,880 --> 00:30:39,480
Speaker 3: of non parada versus parada. Let's just talk about the

606
00:30:39,520 --> 00:30:43,840
Speaker 3: investment opportunity today. This is PR Newswire, okay, and a

607
00:30:43,880 --> 00:30:47,800
Speaker 3: host of other three other businesses that are related to PR,

608
00:30:48,000 --> 00:30:54,120
Speaker 3: so PR evaluation, monitoring, Social media monitoring, and evaluation, and

609
00:30:54,200 --> 00:30:56,440
Speaker 3: it's really pitched. The value proposition is that it's a

610
00:30:56,440 --> 00:31:00,800
Speaker 3: one stop shop for a corporation. But news distribute, which

611
00:31:00,800 --> 00:31:03,080
Speaker 3: is what business wire and PR newswire DO is basically

612
00:31:03,160 --> 00:31:06,520
Speaker 3: a duopoly business. Wires owned by Berkshire pr Newswires owned

613
00:31:06,520 --> 00:31:10,080
Speaker 3: by Decision. This is a good, solid business. It's about

614
00:31:10,080 --> 00:31:12,600
Speaker 3: a nine hundred million dollar revenue business with close to

615
00:31:12,640 --> 00:31:15,600
Speaker 3: sixty percent gross margins and thirty percent of ebadah margins.

616
00:31:15,880 --> 00:31:18,160
Speaker 3: That's fairly capital light, all right. So it does about

617
00:31:18,160 --> 00:31:22,280
Speaker 3: two hundred and fifty million of real ebadah, not adjusted ebadah,

618
00:31:22,680 --> 00:31:24,960
Speaker 3: and spends about fiftieth capbeck. So it's a two hundred

619
00:31:24,960 --> 00:31:29,200
Speaker 3: million dollars pre tax, unleveraged, free cash flow business. Such

620
00:31:29,280 --> 00:31:31,440
Speaker 3: steady business. Look at the financials for the last five

621
00:31:31,520 --> 00:31:35,080
Speaker 3: years of very consistent and steady. So why why is

622
00:31:35,120 --> 00:31:40,120
Speaker 3: this interesting? There is post LME, so very covenant strong,

623
00:31:40,400 --> 00:31:44,200
Speaker 3: not covenant light. Covenant strong debt trading in the mid fifties.

624
00:31:45,000 --> 00:31:48,600
Speaker 3: It's a billion seven I believe of debt trading in

625
00:31:48,600 --> 00:31:51,600
Speaker 3: the mid fifties creates the business for about a billion

626
00:31:51,640 --> 00:31:53,640
Speaker 3: plus the super senior debt that was put in place

627
00:31:53,640 --> 00:31:55,800
Speaker 3: as part of the LME. You're buying the business for

628
00:31:55,840 --> 00:31:58,320
Speaker 3: about a billion two and it does two fifty of

629
00:31:58,360 --> 00:32:00,600
Speaker 3: ebada or two hundred of on leverag free camps. Post

630
00:32:00,600 --> 00:32:03,600
Speaker 3: cap backs to buy a business like pr Newswire for

631
00:32:03,680 --> 00:32:06,280
Speaker 3: less than five times Ubida is very attractive. I don't

632
00:32:06,280 --> 00:32:09,320
Speaker 3: see anything in the public equity land that looks anything

633
00:32:09,720 --> 00:32:13,040
Speaker 3: quite like that. It's probably creating it at about half

634
00:32:13,040 --> 00:32:15,600
Speaker 3: of what it's worth, and you have covenants, so you

635
00:32:15,640 --> 00:32:16,920
Speaker 3: know you're not going to end up on the wrong

636
00:32:16,960 --> 00:32:19,600
Speaker 3: side of a non Parada transaction, which wouldn't have been

637
00:32:19,600 --> 00:32:20,400
Speaker 3: the case a year ago.

638
00:32:20,640 --> 00:32:24,520
Speaker 1: One common topic also in the Lemy discussion is that

639
00:32:24,880 --> 00:32:28,360
Speaker 1: lemies actually like don't tackle the business issue. They tackle

640
00:32:28,400 --> 00:32:33,560
Speaker 1: the they fix and oftentimes just temporarily the capital structure issues,

641
00:32:33,880 --> 00:32:36,840
Speaker 1: but oftentimes they don't even cut leverage on those. So

642
00:32:37,200 --> 00:32:40,760
Speaker 1: how often do you see the business is actually like

643
00:32:40,920 --> 00:32:44,240
Speaker 1: managing to turn around the situation and like doing changes

644
00:32:44,280 --> 00:32:46,920
Speaker 1: in the actual business as opposed to just like, well,

645
00:32:47,280 --> 00:32:51,640
Speaker 1: you know, extending Let's think about this problem in a

646
00:32:51,640 --> 00:32:54,160
Speaker 1: couple of years and then we'll see if like just

647
00:32:54,400 --> 00:32:58,680
Speaker 1: the micro environment has improved or rates have gone down.

648
00:32:58,960 --> 00:33:00,920
Speaker 3: It's going to be a situations. A lot of these

649
00:33:00,960 --> 00:33:05,160
Speaker 3: companies have a tremendous amount of cost out opportunities if

650
00:33:05,200 --> 00:33:06,720
Speaker 3: the economy is held up. A lot of this isn't

651
00:33:06,720 --> 00:33:08,760
Speaker 3: dependent on what the economy does but write you know,

652
00:33:08,800 --> 00:33:12,480
Speaker 3: at least in recent years we've had a good economy,

653
00:33:12,760 --> 00:33:14,880
Speaker 3: a lot of these businesses were required, and there wasn't

654
00:33:14,880 --> 00:33:19,240
Speaker 3: a large focus on cost out on an optimization because

655
00:33:19,520 --> 00:33:22,160
Speaker 3: you had an environment where things were good and multiples

656
00:33:22,160 --> 00:33:24,640
Speaker 3: were expanding. So as a sponsor, you didn't really need

657
00:33:24,680 --> 00:33:27,120
Speaker 3: to roll up your sleeves and get your hands dirty

658
00:33:27,560 --> 00:33:30,720
Speaker 3: doing some of the hard stuff to increase cashlows through

659
00:33:30,720 --> 00:33:34,240
Speaker 3: margin expansion because revenues were growing and multiples were expanding.

660
00:33:34,880 --> 00:33:37,680
Speaker 3: That's not the case anymore. So. Of the examples that

661
00:33:37,720 --> 00:33:40,480
Speaker 3: I've rattled off post LME is like Shutterfly has done

662
00:33:40,480 --> 00:33:42,520
Speaker 3: a great job. Apollo has done a great job with

663
00:33:42,560 --> 00:33:46,400
Speaker 3: that asset of increasing cash flows primarily through cost optimization.

664
00:33:46,480 --> 00:33:49,880
Speaker 3: It has not been revenue driven. Now, revenues have hung

665
00:33:49,920 --> 00:33:52,560
Speaker 3: in there, they haven't gone south, but they've taken a

666
00:33:52,560 --> 00:33:55,080
Speaker 3: lot of cost out of the business and increased cash

667
00:33:55,080 --> 00:33:57,840
Speaker 3: flows fairly materially. I think they were around two fifty

668
00:33:57,880 --> 00:34:00,120
Speaker 3: when they did the LME and they're approaching for one

669
00:34:00,160 --> 00:34:02,640
Speaker 3: hundred now. So that's one that I think will work.

670
00:34:02,840 --> 00:34:05,440
Speaker 3: It's hard to know what probability or what percentage of

671
00:34:05,440 --> 00:34:07,080
Speaker 3: these things are going to work because not a lot

672
00:34:07,120 --> 00:34:09,719
Speaker 3: of them have hit their new maturity well yet. My

673
00:34:09,840 --> 00:34:13,200
Speaker 3: suspicion is your comments are right. Most of them aren't

674
00:34:13,200 --> 00:34:15,719
Speaker 3: fixing the capital structure. It's going to be very hard

675
00:34:15,719 --> 00:34:18,240
Speaker 3: in this economic environment to grow top line and continue

676
00:34:18,280 --> 00:34:21,120
Speaker 3: to expand margin, and most of them will ultimately default.

677
00:34:21,440 --> 00:34:23,600
Speaker 3: Whether that number is going to be sixty percent, seventy percent,

678
00:34:23,800 --> 00:34:27,720
Speaker 3: eighty percent, or thirty forty fifty percent will somewhat depend

679
00:34:27,840 --> 00:34:30,560
Speaker 3: on the economy and it will be very situational. But

680
00:34:31,200 --> 00:34:34,640
Speaker 3: my suspicion is that much of this is kicking the

681
00:34:34,640 --> 00:34:37,400
Speaker 3: can down the road and they'll ultimately default, which is

682
00:34:37,440 --> 00:34:40,080
Speaker 3: why I think that ratio of two percent default three

683
00:34:40,120 --> 00:34:43,239
Speaker 3: percent exchange will slowly be three percent to fall two

684
00:34:43,239 --> 00:34:45,919
Speaker 3: percent exchange, four percent to fault one percent exchange, and

685
00:34:45,960 --> 00:34:48,680
Speaker 3: maybe it will stay a five. But the mix of

686
00:34:48,760 --> 00:34:52,360
Speaker 3: how many are actually equitizations in court versus extensions of

687
00:34:52,400 --> 00:34:55,480
Speaker 3: maturity and liquidity injections out of court, that's going to

688
00:34:55,600 --> 00:34:59,000
Speaker 3: change as you get into a post LM world, which

689
00:34:59,320 --> 00:35:01,000
Speaker 3: will be at over the next couple of years.

690
00:35:01,120 --> 00:35:03,000
Speaker 2: I think it's interesting we didn't not doubt this morning,

691
00:35:03,120 --> 00:35:06,160
Speaker 2: basically saying that distress bonds apply in April was about

692
00:35:06,160 --> 00:35:09,720
Speaker 2: one hundred billion cycled down to about fifty sixty sixty

693
00:35:09,719 --> 00:35:12,000
Speaker 2: four billion today. So the numbers come down. The total

694
00:35:12,080 --> 00:35:14,879
Speaker 2: number of distress sponds in the index has come down,

695
00:35:15,360 --> 00:35:18,200
Speaker 2: and it doesn't really square with a rise. You know,

696
00:35:18,360 --> 00:35:21,719
Speaker 2: we're looking at in that sort of combined percentage that

697
00:35:21,719 --> 00:35:25,319
Speaker 2: you're talking about. How do you square price action, you know,

698
00:35:25,640 --> 00:35:29,439
Speaker 2: with actual risk and fundamental risk maybe rising or maybe

699
00:35:29,560 --> 00:35:31,640
Speaker 2: they're you're thinking they're they're dropping with the l ME.

700
00:35:32,120 --> 00:35:34,400
Speaker 2: But the way the market is today in terms of price,

701
00:35:34,560 --> 00:35:40,359
Speaker 2: but offset by the rising rate, default rate and exchange rate,

702
00:35:40,680 --> 00:35:41,600
Speaker 2: how do you square those two?

703
00:35:41,680 --> 00:35:45,960
Speaker 3: Well, the numbers that I'm talking about are defaults and exchanges. Okay,

704
00:35:46,000 --> 00:35:50,080
Speaker 3: The distressed exchange ratio is really a measure of trading prices,

705
00:35:50,400 --> 00:35:52,680
Speaker 3: right right, So you could not default, you could not

706
00:35:52,719 --> 00:35:55,120
Speaker 3: do an LME. You're not going to go into my

707
00:35:55,160 --> 00:35:58,200
Speaker 3: five percent number, okay, but you'd be in your numbers. Look,

708
00:35:58,239 --> 00:36:00,920
Speaker 3: we've had you know, just the distressed rate is gonna

709
00:36:01,080 --> 00:36:03,440
Speaker 3: move up and down with sentiment. And you know, in

710
00:36:03,480 --> 00:36:06,799
Speaker 3: a post tariff world. In January and February March like

711
00:36:06,800 --> 00:36:08,560
Speaker 3: the markets were down a lot. There was a lot

712
00:36:08,600 --> 00:36:11,040
Speaker 3: of companies that did not defaults or weren't going to

713
00:36:11,080 --> 00:36:13,600
Speaker 3: default eminantly and weren't going to do an lemy imminently

714
00:36:13,840 --> 00:36:15,840
Speaker 3: that we're training at distress prices. In those bonds of

715
00:36:15,920 --> 00:36:17,920
Speaker 3: rallied up, you're also going to get a big difference

716
00:36:17,920 --> 00:36:20,960
Speaker 3: in and it's harder to calculate because they're private issuers.

717
00:36:20,960 --> 00:36:23,880
Speaker 3: But loan land versus bond land, we've seen a dramatic

718
00:36:23,880 --> 00:36:28,400
Speaker 3: difference in l amizing. Most private equity sponsors didn't utilize

719
00:36:28,400 --> 00:36:31,120
Speaker 3: the public bond market that utilized either the direct lending

720
00:36:31,160 --> 00:36:34,440
Speaker 3: market in recent years or the broadly syndicated loan market.

721
00:36:34,640 --> 00:36:36,759
Speaker 3: Because there was a private it's cheaper for them. It's

722
00:36:36,800 --> 00:36:40,239
Speaker 3: easier to issue less disclosure. So you're going to see

723
00:36:40,239 --> 00:36:41,960
Speaker 3: different numbers there, but you're going to see those numbers

724
00:36:41,960 --> 00:36:43,680
Speaker 3: move up and down with sentiment. And we're in a

725
00:36:43,800 --> 00:36:46,200
Speaker 3: risk on world now, and we were in a risk

726
00:36:46,200 --> 00:36:47,560
Speaker 3: off mode back in April.

727
00:36:47,719 --> 00:36:50,200
Speaker 1: We were unfortunately running out of time. Mike, I don't

728
00:36:50,200 --> 00:36:53,240
Speaker 1: know if you have any other burning question.

729
00:36:53,920 --> 00:36:56,160
Speaker 2: Burning desire question I would have is sort of, you know,

730
00:36:56,160 --> 00:36:57,680
Speaker 2: you've been doing this for a long time, you're kind

731
00:36:57,680 --> 00:36:59,960
Speaker 2: of you know, credit your credit guy kind of through

732
00:37:00,080 --> 00:37:03,799
Speaker 2: went through. What advice would you give to emerging analysts

733
00:37:03,800 --> 00:37:06,160
Speaker 2: and sort of people that aspire to b pms who

734
00:37:06,400 --> 00:37:09,440
Speaker 2: sort of want to blend distressed instincts sort of with

735
00:37:09,520 --> 00:37:12,480
Speaker 2: credit discipline, Like, what sort of advice would you give

736
00:37:12,520 --> 00:37:15,360
Speaker 2: to someone starting out maybe listening to this podcast.

737
00:37:15,560 --> 00:37:17,759
Speaker 3: Well, two things I would comment. So, first of all,

738
00:37:17,800 --> 00:37:19,879
Speaker 3: I am a credit guy through and through, because our

739
00:37:19,880 --> 00:37:23,440
Speaker 3: investments always start as credit. But we're investing in credit

740
00:37:23,480 --> 00:37:26,080
Speaker 3: to create equity upside, and there's a couple of ways

741
00:37:26,120 --> 00:37:27,919
Speaker 3: you can do that. You can either get refinanced out,

742
00:37:27,960 --> 00:37:31,480
Speaker 3: in which case we just remain a creditor, or you

743
00:37:31,520 --> 00:37:34,160
Speaker 3: can convert that to equity and then you're an equity holder.

744
00:37:34,400 --> 00:37:38,040
Speaker 3: A very large portion of our portfolio today is equity

745
00:37:38,520 --> 00:37:40,960
Speaker 3: private public equity. Where we sit on the board, we're

746
00:37:41,080 --> 00:37:43,480
Speaker 3: very involved. We're known as a distress for influence or

747
00:37:43,520 --> 00:37:46,080
Speaker 3: distress for control funds. The vertical airspace we control, the

748
00:37:46,080 --> 00:37:48,840
Speaker 3: poor we control. We have a control equity position there.

749
00:37:48,960 --> 00:37:51,759
Speaker 3: So we're sort of an in between, like almost in

750
00:37:51,760 --> 00:37:54,359
Speaker 3: between a credit investor and a private equity investor public

751
00:37:54,400 --> 00:37:58,880
Speaker 3: equity investor. Advice I would give, I would just circle

752
00:37:58,880 --> 00:38:01,440
Speaker 3: back to what I said earlier. You need to develop

753
00:38:01,520 --> 00:38:04,880
Speaker 3: a contrariant thesis to make money in investing. It's very

754
00:38:04,960 --> 00:38:07,920
Speaker 3: hard to do that if you're focusing on sources that

755
00:38:08,000 --> 00:38:11,240
Speaker 3: everybody else has access to. So you need to understand

756
00:38:11,280 --> 00:38:12,920
Speaker 3: what a business does and read the ten K and

757
00:38:12,960 --> 00:38:15,120
Speaker 3: read the ten Q and do all that work. But like,

758
00:38:15,160 --> 00:38:18,320
Speaker 3: get out there, meet with management teams, don't sit behind

759
00:38:18,320 --> 00:38:20,759
Speaker 3: your desk. That's where the light bulb goes off and

760
00:38:20,760 --> 00:38:23,160
Speaker 3: you develop a really differentiated view. It's some of our

761
00:38:23,200 --> 00:38:27,120
Speaker 3: best investment opportunities Historically. I've always come from field work,

762
00:38:27,719 --> 00:38:31,080
Speaker 3: just getting in there, getting knee deep, knowing the business

763
00:38:31,080 --> 00:38:33,040
Speaker 3: better than anybody else could know because you've just spent

764
00:38:33,120 --> 00:38:38,600
Speaker 3: hundreds and hundreds of hours with management teams, former management teams, competitors, suppliers, customers, etc. Etc.

765
00:38:39,200 --> 00:38:41,880
Speaker 3: That's where you develop a thesis that's contrarian to what

766
00:38:41,920 --> 00:38:44,120
Speaker 3: the security price is trading, and I think there's too

767
00:38:44,120 --> 00:38:47,880
Speaker 3: many analysts today that are just inundated with easy access

768
00:38:47,920 --> 00:38:50,680
Speaker 3: to information and they spit out lots of reports, but

769
00:38:50,680 --> 00:38:54,399
Speaker 3: you're just regurgitating information that everybody already knows, and that's

770
00:38:54,440 --> 00:38:56,600
Speaker 3: not how you become a good investor. So that would

771
00:38:56,640 --> 00:38:59,000
Speaker 3: be my advice. That's great, appreciate it.

772
00:38:59,239 --> 00:39:02,520
Speaker 1: Well, that's a personal take, but I was My last

773
00:39:02,560 --> 00:39:06,160
Speaker 1: question would be more around private credit. We've seen that

774
00:39:06,400 --> 00:39:09,399
Speaker 1: asset class raise a lot of money in the past

775
00:39:09,480 --> 00:39:14,919
Speaker 1: few years. How has it impacted distress investing in your view?

776
00:39:14,960 --> 00:39:18,319
Speaker 1: And also do you see actually any opportunities arising from

777
00:39:18,560 --> 00:39:21,120
Speaker 1: private credit providers struggling?

778
00:39:21,360 --> 00:39:24,000
Speaker 3: Good question when I get a lot. I think the

779
00:39:24,920 --> 00:39:28,520
Speaker 3: short answer is it doesn't impact what we do directly.

780
00:39:28,640 --> 00:39:31,800
Speaker 3: There's always the threat of we can do a deal away.

781
00:39:32,400 --> 00:39:35,239
Speaker 3: We don't need your capital because we can prime you

782
00:39:35,320 --> 00:39:38,280
Speaker 3: with money from X, Y and Z private credit fund

783
00:39:38,800 --> 00:39:41,480
Speaker 3: and I think that is that threat is real. It's

784
00:39:41,600 --> 00:39:43,359
Speaker 3: rare that we see it acted upon, but I do

785
00:39:43,400 --> 00:39:46,000
Speaker 3: think it's real. Although I would say that most private

786
00:39:46,000 --> 00:39:49,640
Speaker 3: credit funds don't want to get involved in highly levered,

787
00:39:49,640 --> 00:39:53,479
Speaker 3: distressed situations, So there are very few firms out there,

788
00:39:53,600 --> 00:39:56,120
Speaker 3: maybe your HPSS and Angela Gordon's that will be willing

789
00:39:56,160 --> 00:39:58,880
Speaker 3: to step in and understand how to analyze that risk

790
00:39:58,960 --> 00:40:01,600
Speaker 3: and our comfortable making a private loan to a company

791
00:40:01,640 --> 00:40:05,799
Speaker 3: that might you know it's likely to go bankrupt. You know.

792
00:40:05,920 --> 00:40:09,920
Speaker 3: Private credit, I would say, is very crowded, and I

793
00:40:09,920 --> 00:40:13,200
Speaker 3: think that makes it very hard to evaluate the performance

794
00:40:13,719 --> 00:40:15,759
Speaker 3: because you haven't had a downturn yet, but you have

795
00:40:15,800 --> 00:40:17,600
Speaker 3: a lot of players chasing a lot of deals. So

796
00:40:17,600 --> 00:40:22,760
Speaker 3: we've definitely seen spreads compress. In terms of opportunities. Private

797
00:40:22,760 --> 00:40:25,080
Speaker 3: credit doesn't trade, okay, so a lot of people say,

798
00:40:25,120 --> 00:40:26,520
Speaker 3: is this is gonna be a big opportunity for you.

799
00:40:26,560 --> 00:40:29,000
Speaker 3: The problem is when you have one holder of a

800
00:40:29,040 --> 00:40:33,000
Speaker 3: dead instrument and it's not actively traded and syndicated, that

801
00:40:33,120 --> 00:40:35,320
Speaker 3: holder can work with the issue or on an extension

802
00:40:35,320 --> 00:40:37,200
Speaker 3: of maturity very easily. You don't need to do an

803
00:40:37,280 --> 00:40:40,239
Speaker 3: LME and create JKRW in course of NIS to get

804
00:40:40,239 --> 00:40:43,279
Speaker 3: everybody to participate. It's it's just a one It's a

805
00:40:43,320 --> 00:40:47,000
Speaker 3: bilateral conversation between borrower and lender, and they can also

806
00:40:47,040 --> 00:40:50,040
Speaker 3: pick it. Okay, if you're cash flow negative, right, rather

807
00:40:50,080 --> 00:40:52,480
Speaker 3: than borrowing money from somebody else, you can just pay

808
00:40:52,480 --> 00:40:55,719
Speaker 3: it in kind. So what we're seeing is what I

809
00:40:55,760 --> 00:40:57,560
Speaker 3: tell our clients that say, how do you think we

810
00:40:57,560 --> 00:41:00,319
Speaker 3: should evaluate private credit? I say, ask the manager what

811
00:41:00,360 --> 00:41:03,760
Speaker 3: percentage of this portfolio is paying in kind versus cash

812
00:41:03,760 --> 00:41:06,160
Speaker 3: pay And what we're seeing is twenty to thirty percent

813
00:41:06,160 --> 00:41:08,720
Speaker 3: of these private credit portfolios are now paying in kind.

814
00:41:09,239 --> 00:41:11,080
Speaker 3: That's a big, big red flag. So I think it's

815
00:41:11,120 --> 00:41:12,799
Speaker 3: a big risk. Is going to create an opportunity for

816
00:41:12,880 --> 00:41:14,919
Speaker 3: us to buy these loans? I don't think so, because

817
00:41:14,920 --> 00:41:17,120
Speaker 3: I don't think they're going to trade where they had

818
00:41:17,160 --> 00:41:19,400
Speaker 3: it marked and where we would buy it. There's probably

819
00:41:19,480 --> 00:41:22,200
Speaker 3: very different numbers. They probably have it marked par and

820
00:41:22,280 --> 00:41:24,960
Speaker 3: we would be bidding sixty or seventy cents when they

821
00:41:24,960 --> 00:41:27,400
Speaker 3: can just get an extension and not have it impact

822
00:41:27,440 --> 00:41:29,400
Speaker 3: their track record while they're raising their next fund. Why

823
00:41:29,440 --> 00:41:30,920
Speaker 3: would they sell to us? The only way they lose

824
00:41:30,960 --> 00:41:32,600
Speaker 3: thirty points that week is if they sell to us,

825
00:41:32,680 --> 00:41:35,920
Speaker 3: And that's the beauty of or risk, depending on the

826
00:41:35,920 --> 00:41:38,279
Speaker 3: side of it you're on, but of private market valuations.

827
00:41:39,160 --> 00:41:42,919
Speaker 1: Json Modrick, founder and CIO of Mudrik Capital Management, many

828
00:41:42,920 --> 00:41:45,839
Speaker 1: thanks for joining us on the credit edge, and of

829
00:41:45,840 --> 00:41:48,880
Speaker 1: course we're very grateful to Mike holl On from Bloomberg Intelligence.

830
00:41:48,920 --> 00:41:52,560
Speaker 1: We appreciate you joining us today for more credit market

831
00:41:52,640 --> 00:41:55,680
Speaker 1: analysis and insight. Read all of Mike's great work on

832
00:41:55,680 --> 00:41:59,960
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833
00:42:00,040 --> 00:42:03,480
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834
00:42:03,719 --> 00:42:07,280
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835
00:42:07,320 --> 00:42:10,239
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836
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837
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841
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842
00:42:31,239 --> 00:42:49,319
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