WEBVTT - Oaktree's Wayne Dahl on Credit Markets Right Now 0:00:10.280 --> 0:00:14.080 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.120 --> 0:00:15.640 I'm Joe Wisenthal and. 0:00:15.520 --> 0:00:16.520 I'm Tracy Alloway. 0:00:16.920 --> 0:00:20.720 Tracy, we just got back from California. We're at the 0:00:20.760 --> 0:00:23.480 future Proof Conference. I love going to southern California. 0:00:23.560 --> 0:00:26.439 I mean, you can't beat Huntington Beach. It was pretty sweet. 0:00:27.440 --> 0:00:29.200 It was so beautiful, it was really cool. We were 0:00:29.240 --> 0:00:30.000 out on the beach. 0:00:30.560 --> 0:00:32.559 We walked out to the pier, watch the. 0:00:33.400 --> 0:00:36.840 Perfect weather, watched the surfers, ate some really good food, 0:00:37.040 --> 0:00:40.519 and had some pretty good conversations about the state of 0:00:40.560 --> 0:00:41.320 financial markets. 0:00:41.400 --> 0:00:44.239 Yep, and we finally got to record an episode that 0:00:44.280 --> 0:00:47.479 we've been meaning to do for a while. We dived 0:00:47.640 --> 0:00:51.160 into not the ocean, but the credit market. 0:00:51.280 --> 0:00:53.440 I guess, like the credit market like comes up here 0:00:53.640 --> 0:00:57.520 or there in various aspects of our conversations. I guess 0:00:57.560 --> 0:00:59.640 typically when we talk about real estate, maybe a little 0:00:59.640 --> 0:01:02.240 bit about the FED. But the credit market is obviously 0:01:02.680 --> 0:01:06.399 so diverse and it's such a its own world that, 0:01:06.480 --> 0:01:08.600 like we really it had been too long since we 0:01:08.720 --> 0:01:10.479 talked about, Okay, what is happening in credit? 0:01:10.640 --> 0:01:10.880 Well. 0:01:10.959 --> 0:01:14.120 Also, I think there was this expectation that as interest 0:01:14.200 --> 0:01:17.400 rates went up, you were going to see lots of 0:01:17.480 --> 0:01:19.640 drama in the credit market, and even though we've seen 0:01:19.680 --> 0:01:23.200 bankruptcies rise a little bit, we haven't really seen the 0:01:23.200 --> 0:01:26.319 big fallout that a lot of people had been expecting. 0:01:26.120 --> 0:01:29.560 Right, And you know, look, the way people think about 0:01:29.600 --> 0:01:32.000 the FED is that it works by tightening credit conditions, 0:01:32.080 --> 0:01:34.320 right like in theory, like that's what like how the 0:01:34.520 --> 0:01:36.800 it's all's supposed to work, as you said, when interest 0:01:36.840 --> 0:01:39.039 rates go up. And yet we have got this rise 0:01:39.040 --> 0:01:41.120 in interest rates. For sure, we definitely see it on 0:01:41.160 --> 0:01:43.920 the mortgage side, like less housing activity, but the sort 0:01:43.959 --> 0:01:48.120 of like broader tightening of like business credit. We certainly 0:01:48.200 --> 0:01:50.440 haven't seen much of a widening in spreads at all. 0:01:50.520 --> 0:01:51.560 So it's a confusing time. 0:01:51.680 --> 0:01:54.440 Absolutely. So we really do have the perfect guest to 0:01:54.480 --> 0:01:55.080 talk about this. 0:01:55.480 --> 0:01:58.440 That's right, our guest. We spoke with Wayne Dall. He's 0:01:58.480 --> 0:02:03.040 a managing director, portfolio manager, an investment risk officer at 0:02:03.120 --> 0:02:05.880 oak Tree. We talk about all things credit. What do 0:02:05.920 --> 0:02:08.320 you see, Why did rates move so hard? Why are 0:02:08.360 --> 0:02:09.960 they still like pressed up against the ceiling. 0:02:10.160 --> 0:02:13.200 We went through a period so long where interest rates 0:02:13.200 --> 0:02:17.720 were very low and money was very easy, and unfortunately, 0:02:17.840 --> 0:02:19.880 during the period of COVID with some of the supply 0:02:20.040 --> 0:02:23.400 chain issues, with a lot of the stimulus that was 0:02:23.520 --> 0:02:26.080 put into the economy, both through the monetary channel and 0:02:26.120 --> 0:02:28.600 the fiscal channel, that really set up kind of the 0:02:28.600 --> 0:02:32.840 perfect storm for demand to go through the roof and 0:02:33.120 --> 0:02:36.840 supply to be diminished, and ultimately we ended up with 0:02:36.880 --> 0:02:40.000 this big inflation push, which, if you go back to 0:02:40.040 --> 0:02:42.640 the formula from the seventies and eighties, how do you 0:02:42.760 --> 0:02:46.799 cure inflation? You raise interest rates quickly, And I think 0:02:46.800 --> 0:02:50.120 that's the playbook that the central banks, not only in 0:02:50.160 --> 0:02:53.360 the US but really globally had no choice but to follow. 0:02:53.840 --> 0:02:57.480 What does risk actually mean to you an oak Tree 0:02:57.600 --> 0:03:02.280 and does it differ from maybe other financial firms definition 0:03:02.360 --> 0:03:02.800 of risk? 0:03:03.560 --> 0:03:05.880 Yeah, that is that is a great question, And anyone 0:03:05.880 --> 0:03:09.160 who's read our chairman Howard Marx's memos knows that he's 0:03:09.280 --> 0:03:11.639 very clear that risk is more than just the masure 0:03:11.639 --> 0:03:14.720 of volatility. I mean when typically at oak Tree, when 0:03:14.720 --> 0:03:18.079 we talk about risk, it is our number one investment philosophy, 0:03:18.120 --> 0:03:21.959 an investment tenant to keep risk under control. Really it's 0:03:22.000 --> 0:03:25.360 to avoid loss. And the tagline there for oak Tree 0:03:25.440 --> 0:03:27.520 is if you avoid the losers, the winners take care 0:03:27.520 --> 0:03:31.040 of themselves. So as credit investors, especially in a market 0:03:31.120 --> 0:03:34.240 like this where yields are high, you want to earn 0:03:34.280 --> 0:03:36.440 that yield and keep that yield and not give it 0:03:36.480 --> 0:03:39.720 back in the form of default. So to us, minimizing 0:03:39.840 --> 0:03:44.960 risk is largely related to kind of minimizing loss for investors. 0:03:45.000 --> 0:03:48.800 All right, let's dive deeper into credit. I mean, let's start, like, 0:03:49.200 --> 0:03:52.120 spreads are still pretty narrow, yeah, and credit is such 0:03:52.120 --> 0:03:53.360 a huge world, so I know we have to like 0:03:53.560 --> 0:03:55.440 go from like slice to slice and slides. But like 0:03:55.480 --> 0:03:59.720 big picture, people don't seem particularly concerned about like defaults. 0:04:00.720 --> 0:04:04.240 Yeah, I mean, look, I think one of the things 0:04:04.240 --> 0:04:07.160 with credit that has changed is largely related to the 0:04:07.160 --> 0:04:12.080 backdrop of interest rates. And to quote Howard again, our chairman. 0:04:12.400 --> 0:04:14.960 You know, he wrote a memo in December called a 0:04:15.000 --> 0:04:18.160 sea change, and in that memo he talked about this 0:04:18.360 --> 0:04:21.560 change in what was a low return world. 0:04:21.320 --> 0:04:22.720 To a high return world. 0:04:23.160 --> 0:04:25.880 And that has really I think shifted the dynamic and 0:04:25.920 --> 0:04:30.479 the expectations around credit. And you're right, have credit spreads 0:04:30.520 --> 0:04:34.000 moved maybe as wide as people thought, No, but the 0:04:34.120 --> 0:04:37.280 yields have become very attractive, and ultimately, I think if 0:04:37.360 --> 0:04:39.680 you look at credit this is something we did a 0:04:39.680 --> 0:04:42.920 lot last year. There's kind of three ways I would 0:04:42.960 --> 0:04:45.880 look at value in fixed income. Number one is what 0:04:45.960 --> 0:04:49.200 is the yield? Well, that was very attractive. Number two, 0:04:49.320 --> 0:04:52.040 what is the price? If I can buy fixed income 0:04:52.040 --> 0:04:54.400 at a discount, then I can you know, earn more 0:04:54.480 --> 0:04:57.679 than just the coupon. And number three what is the spread? 0:04:58.200 --> 0:05:01.080 The first two where it very attractive levels and spreads 0:05:01.240 --> 0:05:04.440 maybe kind of at median levels, but you know, two 0:05:04.520 --> 0:05:06.360 out of three makes a pretty good investment. 0:05:07.160 --> 0:05:09.479 Well, how are you thinking about default risk now? 0:05:09.480 --> 0:05:12.640 Because certainly there were a lot of people, I mean 0:05:12.839 --> 0:05:16.080 just last year in twenty twenty two, who were warning 0:05:16.160 --> 0:05:18.320 about we're going to get this big recession, there's going 0:05:18.360 --> 0:05:22.680 to be a big spike in defaults. We certainly haven't seen, 0:05:22.960 --> 0:05:25.240 you know, the bankruptcy rate has picked up a little bit, 0:05:25.320 --> 0:05:28.360 but we haven't seen this wave of failures that a 0:05:28.400 --> 0:05:29.640 lot of people were predicting. 0:05:30.360 --> 0:05:31.880 Yeah, that is definitely true. 0:05:31.960 --> 0:05:34.320 And I think for part of that, you have to 0:05:34.360 --> 0:05:36.960 think about what happened during COVID, And in a way 0:05:37.000 --> 0:05:41.160 you could almost say COVID was maybe recession part one, 0:05:41.640 --> 0:05:44.640 and we're on our way to recession part two. And 0:05:44.680 --> 0:05:47.080 the reason why I say that is because if you 0:05:47.120 --> 0:05:50.560 think back to the end of twenty nineteen, before COVID, 0:05:51.120 --> 0:05:54.760 the FED had stopped hiking rates in December twenty eighteen, 0:05:55.160 --> 0:05:57.880 and at that time actually had planned to continue to hike. 0:05:58.240 --> 0:06:03.279 Chairman Powell pivoted in early January twenty nineteen and ultimately 0:06:03.400 --> 0:06:06.320 ended the year by cutting rates three times. There were 0:06:06.320 --> 0:06:09.120 a lot of the similar signs of slow down in 0:06:10.839 --> 0:06:13.800 ism data, in industrial production data, a lot of your 0:06:13.800 --> 0:06:16.720 typical signs of a recession. So in a way, COVID 0:06:16.760 --> 0:06:20.320 potentially just accelerated us into a recession that was maybe 0:06:20.320 --> 0:06:23.440 on its way already. But what it also did is 0:06:23.480 --> 0:06:26.680 brought forth a number of defaults. You had, you know, 0:06:26.760 --> 0:06:29.080 default rates in the high yeld bond market, the broadly 0:06:29.120 --> 0:06:32.239 syndicated loan market anywhere from kind of four to six percent, 0:06:32.720 --> 0:06:34.520 And in a way that was kind of a cleansing 0:06:34.560 --> 0:06:38.840 event that prepared us for this time here in the 0:06:38.920 --> 0:06:42.880 high yield bond market. Because of that default rate, you 0:06:42.960 --> 0:06:45.760 cleared out a lot of the lowest rated companies that 0:06:45.839 --> 0:06:49.839 were under the most stress. Simultaneously, you had a number 0:06:49.839 --> 0:06:54.800 of downgrades, so triple B rated securities into double B 0:06:55.000 --> 0:06:56.320 or single b rated into. 0:06:56.240 --> 0:06:58.840 High yield, so you up the quality of. 0:06:58.760 --> 0:07:03.360 The high yeld bond market maximum triple b's, minimum triple c's, 0:07:03.680 --> 0:07:07.200 and kind of created this environment where everybody just refinanced 0:07:07.400 --> 0:07:10.640 at the lowest rates in history and they don't really 0:07:10.640 --> 0:07:13.120 have a cash flow problem or a maturity problem. 0:07:13.160 --> 0:07:17.240 So you anticipated my next question. And I appreciate that 0:07:17.280 --> 0:07:19.320 you brought the twenty nineteen experience because we don't really 0:07:19.320 --> 0:07:22.160 talk about twenty nineteen, but it's that much anymore. But 0:07:22.520 --> 0:07:25.440 of course that was an interesting year. And then so okay, 0:07:25.520 --> 0:07:28.800 so we have these defaults, then then the the pool 0:07:28.840 --> 0:07:30.880 of credit gets better, and then the big turming out 0:07:30.920 --> 0:07:33.160 of debt, so everyone refinances fixed. 0:07:33.040 --> 0:07:34.200 Rate ultra low. 0:07:34.440 --> 0:07:38.520 Talk to us about, like today in September twenty twenty three, 0:07:39.000 --> 0:07:42.280 how that turning out is playing into things now, and like, 0:07:42.320 --> 0:07:44.120 you know, people talk about the maturity wall. 0:07:43.960 --> 0:07:47.160 And no, Joe, you have to say looming maturity. 0:07:47.680 --> 0:07:50.640 That's the rule, the looming maturity wall. Talk to us 0:07:50.640 --> 0:07:53.440 about like the effects we're seeing today from that turning out. 0:07:53.800 --> 0:07:55.920 You're absolutely right, I mean, just to kind of put 0:07:55.960 --> 0:07:58.960 some numbers to that. In twenty twenty and twenty twenty one, 0:07:59.520 --> 0:08:02.400 the highy bond market in the US had gross issuance 0:08:02.440 --> 0:08:05.360 of about eight hundred billion dollars in a one point 0:08:05.400 --> 0:08:08.160 three trillion dollar market, so you had two thirds of 0:08:08.200 --> 0:08:10.000 the market refinance. 0:08:10.160 --> 0:08:10.520 Wow. 0:08:10.800 --> 0:08:15.480 Now today, you're right, we've obviously the the duration has 0:08:15.520 --> 0:08:20.960 shrunk in that market because refinancings have declined. But it 0:08:21.080 --> 0:08:25.760 does kind of become a twenty twenty six maturity, you know, 0:08:25.840 --> 0:08:28.800 kind of problem. Companies don't wait for the last minute 0:08:28.800 --> 0:08:32.000 to refinance their debt. That wouldn't be wise because what 0:08:32.040 --> 0:08:34.160 if the capital markets freeze up, So you kind of 0:08:34.240 --> 0:08:36.920 bring that forward maybe one to one and a half years. 0:08:36.960 --> 0:08:39.400 So I think as we get into twenty twenty four, 0:08:39.520 --> 0:08:42.360 you will start to see a situation where companies are 0:08:42.400 --> 0:08:44.400 going to have to come to the capital markets. 0:08:44.600 --> 0:08:46.000 Well it's not there yet. 0:08:46.280 --> 0:08:48.480 Well I was about to ask, though, because this month 0:08:48.520 --> 0:08:52.000 we have seen a pickup in new issue and so 0:08:52.200 --> 0:08:54.880 what's going on there? Like, why are companies deciding this 0:08:55.000 --> 0:08:57.240 is the moment to start selling new bonds? 0:08:57.559 --> 0:08:59.480 I mean there are certainly companies. 0:08:59.520 --> 0:09:02.160 I mean I can't remember the exact number, Maybe less 0:09:02.160 --> 0:09:04.240 than twenty percent of the market that comes due over 0:09:04.280 --> 0:09:07.920 the next eighteen months. So there is some amount of refinancing. 0:09:07.960 --> 0:09:11.280 There is some capital activity going on, and some of 0:09:11.280 --> 0:09:14.440 it I think is moving exposure from one market to 0:09:14.520 --> 0:09:18.439 another market. If you look at the broadly syndicated loan market, 0:09:18.960 --> 0:09:21.760 that market is made up of floating rate debt. I 0:09:21.800 --> 0:09:24.760 mean there is a market where people's interest cost has 0:09:25.000 --> 0:09:28.160 gone well, it's more than double in the last eighteen months, 0:09:28.200 --> 0:09:31.840 and the high yield market has seen some refinancing out 0:09:31.880 --> 0:09:34.760 of the loan market into secured bonds in the high 0:09:34.840 --> 0:09:37.680 yield market, So there has been some kind of new 0:09:37.920 --> 0:09:42.319 entrance in there as opposed to simply refinancing. 0:09:42.440 --> 0:09:47.000 Other sectors or types of borrowers who, in your view, 0:09:47.400 --> 0:09:50.040 are going to have a trickier time over the next 0:09:50.200 --> 0:09:54.160 eighteen twenty four months as some of these refinancings pick up. 0:09:54.960 --> 0:09:57.360 Well, Like I said, I mean you if you want 0:09:57.400 --> 0:09:59.679 to talk about the places in I'll say that non 0:09:59.720 --> 0:10:03.040 eventvement grade or speculative grade market that's going to have trouble. 0:10:03.160 --> 0:10:05.720 It will, I think potentially be some of these issuers 0:10:05.720 --> 0:10:08.760 in the loan market. And again the reason for that 0:10:08.960 --> 0:10:12.160 is they have seen their cost of financing really go 0:10:12.320 --> 0:10:15.240 up as their index to short rates, which are now 0:10:15.280 --> 0:10:17.320 five and a half percent what type. 0:10:17.120 --> 0:10:19.240 Of borrowers in the loan market. 0:10:19.160 --> 0:10:22.480 So you certainly get you know, exposure to many industries, 0:10:22.520 --> 0:10:25.520 but the loan market today has really shifted into the 0:10:26.679 --> 0:10:30.480 financing source of leverage buyouts. That is the majority of 0:10:30.480 --> 0:10:33.200 the issuance in that market. When you talk about a 0:10:33.280 --> 0:10:36.760 pick up an issuance in the loan market, you're typically expecting, 0:10:37.240 --> 0:10:40.959 you know, a pickup in m and A activity using 0:10:41.000 --> 0:10:44.079 loans to refinance. And one of the biggest areas that's 0:10:44.080 --> 0:10:46.680 seen a lot of m and A activity from private 0:10:46.679 --> 0:10:49.480 equity sponsors over the last few years is in some 0:10:49.600 --> 0:10:53.520 software and technology related business. So that is the largest 0:10:53.559 --> 0:11:10.719 single sector in the loan market today. 0:11:12.040 --> 0:11:14.680 Do you see froth in the leverage loan market, because 0:11:14.720 --> 0:11:17.760 this was an area of concern for I mean years, 0:11:17.960 --> 0:11:20.960 even before COVID, you saw a lot of financial regulators 0:11:21.240 --> 0:11:24.120 start to crack down on you know, capital requirements for 0:11:24.200 --> 0:11:28.640 leverage loans. You saw I should tell a story about 0:11:28.880 --> 0:11:31.880 I was in a bank one time, and I won't 0:11:31.920 --> 0:11:33.560 name the bank, but I was going to see their 0:11:33.679 --> 0:11:36.880 leverage loan bankers and they had a framed T shirt 0:11:37.120 --> 0:11:40.000 in their office that said I stole this shirt off 0:11:40.040 --> 0:11:42.960 my client's back, So that. 0:11:42.880 --> 0:11:47.080 Kind of encapsula I think it would have been. 0:11:47.000 --> 0:11:50.320 Like maybe twenty fifteen, twenty sixteen, it was definitely the 0:11:50.400 --> 0:11:52.640 height of the leverage loan boom. 0:11:52.920 --> 0:11:55.240 But is there froth? 0:11:57.480 --> 0:12:01.520 Look, I mean, there's definitely been frauth in that market, 0:12:01.760 --> 0:12:04.440 and maybe to define that a little more clear, to say, 0:12:05.080 --> 0:12:09.520 there are certainly borrowers that probably you are at risk 0:12:09.880 --> 0:12:14.840 of having extended their balance sheet too much, and in 0:12:14.880 --> 0:12:18.720 the face of borrowing costs or interest rates going so high, 0:12:19.200 --> 0:12:23.120 they've kind of put themselves in a tough situation. I 0:12:23.200 --> 0:12:25.000 think one of the things to remember in the loan 0:12:25.040 --> 0:12:29.120 market that has maybe masked some of the potential volatility 0:12:29.160 --> 0:12:32.600 over the years is the majority of buyers in that market, 0:12:32.640 --> 0:12:36.440 almost seventy percent, are coming from the CLO market or 0:12:36.480 --> 0:12:42.640 clateralized loan obligations, and those buyers are not active traders, 0:12:42.640 --> 0:12:45.360 so you don't see loans traded like you do some 0:12:45.480 --> 0:12:48.120 of the other investment grade bonds, high yield bonds, and 0:12:48.360 --> 0:12:50.400 in a way that can kind of mask some of 0:12:50.440 --> 0:12:51.679 that building volatility. 0:12:52.200 --> 0:12:55.120 Again, one of the stories pre pandemic was this idea 0:12:55.240 --> 0:12:58.120 that a lot of the power in the market had 0:12:58.240 --> 0:13:02.640 shifted from lenders to so the companies who are issuing 0:13:02.679 --> 0:13:05.760 debt or taking out a loan could dictate the terms 0:13:06.160 --> 0:13:08.160 of that deal, and so we saw a lot of 0:13:08.200 --> 0:13:12.199 cove light deals, maybe some sketchy leverage loans. Is that 0:13:12.320 --> 0:13:14.679 still the case or does it feel like the pendulum 0:13:14.720 --> 0:13:17.319 has swung a little bit as interest rates have risen. 0:13:17.600 --> 0:13:20.880 I think in the broadly syndicated loan market that's probably 0:13:20.920 --> 0:13:23.160 still largely the case. There is a lot of demand, 0:13:23.240 --> 0:13:27.079 and obviously over the last call it eighteen months, supply 0:13:27.400 --> 0:13:30.760 has been diminished. So you have people who want to 0:13:30.760 --> 0:13:34.560 buy loans. As institutions, you're competing against CLO's buying loans, 0:13:34.600 --> 0:13:37.840 so that demand has kept up. I think one of 0:13:37.840 --> 0:13:39.880 the places where maybe you have seen a little bit 0:13:39.920 --> 0:13:42.560 more of a shift there is in the private credit 0:13:42.640 --> 0:13:45.839 market that's issuing loans, where interesting you've seen kind of 0:13:45.880 --> 0:13:49.040 a pullback from some of the buyers that were very, 0:13:49.160 --> 0:13:52.240 very active in twenty twenty one, and the either the 0:13:52.280 --> 0:13:55.000 new buyers or continuing buyers have been able to be 0:13:55.080 --> 0:13:59.360 a little bit more strict with their demands for terms. 0:13:59.720 --> 0:14:02.080 Cove things like that, and those deals. 0:14:03.000 --> 0:14:05.280 When a private credit comes up all the time, and 0:14:05.280 --> 0:14:07.840 we probably should even do more on this, But it 0:14:07.880 --> 0:14:10.840 always seems like, for whatever reason, and I don't really 0:14:10.920 --> 0:14:12.680 understand it. I don't know much about the market. For 0:14:12.720 --> 0:14:15.240 whatever reason, it seems like it doesn't matter where the 0:14:15.280 --> 0:14:18.160 cycle is. It just seems like it just grows and 0:14:18.240 --> 0:14:21.160 grows private credit. What's the how does that happen? 0:14:21.920 --> 0:14:22.160 Well? 0:14:22.200 --> 0:14:24.080 I mean, who wouldn't want to put an asset in 0:14:24.120 --> 0:14:27.040 their portfolio that has no volatility and the price doesn't 0:14:27.280 --> 0:14:27.480 Is that. 0:14:27.520 --> 0:14:29.000 Really isn't really that simple? Is it? 0:14:29.080 --> 0:14:29.160 Like? 0:14:29.440 --> 0:14:31.800 Because people say that, I'm like, Oh, can't really be 0:14:31.920 --> 0:14:33.800 like that. They can't really be the story? But is 0:14:33.840 --> 0:14:34.400 that the story? 0:14:34.640 --> 0:14:37.720 I mean, Joe, to date, I think that largely has 0:14:37.760 --> 0:14:40.160 been the story. I mean, you're right, there has been 0:14:40.200 --> 0:14:42.720 a story can to the well, the time will come 0:14:42.840 --> 0:14:44.560 for the day of reckoning of you know, all this 0:14:44.800 --> 0:14:47.240 all this borrowing in this private credit market, all these 0:14:47.280 --> 0:14:49.600 marks that are staying at par are gonna are gonna 0:14:49.600 --> 0:14:52.640 come down, and you know, perhaps we are getting closer 0:14:52.640 --> 0:14:55.360 to that date, but you're right, that really still has 0:14:55.440 --> 0:14:58.440 not been tested, although I think people are preparing a 0:14:58.440 --> 0:15:01.200 little more, you know, for that day to come. 0:15:01.400 --> 0:15:04.960 Every time I hear about like pe or VC or 0:15:05.000 --> 0:15:07.480 private credit, and people are like, well, the biggest nice 0:15:07.520 --> 0:15:09.440 thing is like it doesn't move, and so I'm like, 0:15:09.480 --> 0:15:10.320 that can't be it. 0:15:10.320 --> 0:15:10.960 It can't be that. 0:15:11.080 --> 0:15:12.920 And yet maybe that is a big thing. 0:15:13.080 --> 0:15:15.560 I mean, it has kind of been that easy to date. 0:15:15.640 --> 0:15:17.280 But like I said, I think people are getting a 0:15:17.280 --> 0:15:19.920 little more concerned where you see. You know, I think 0:15:19.920 --> 0:15:23.400 some private credit managers deciding do I want to deploy 0:15:23.440 --> 0:15:26.080 this incremental capital that I can draw down or do 0:15:26.160 --> 0:15:29.080 I need to preserve this to potentially, you know, rescue 0:15:29.120 --> 0:15:31.360 some of the deals that are already in my portfolio. 0:15:31.680 --> 0:15:34.040 I think investors are getting a little more picky as 0:15:34.040 --> 0:15:37.680 well when looking at some of these legacy portfolios, going, hey, 0:15:37.720 --> 0:15:40.720 I like private credit and I like where it's priced today, 0:15:40.800 --> 0:15:43.120 But do I want to buy the portfolio that was 0:15:43.160 --> 0:15:46.720 built in twenty twenty one when money was free? 0:15:47.560 --> 0:15:51.440 Does the rise of private credit affect oat Tree at all? 0:15:51.480 --> 0:15:53.920 And what I mean by that is like, maybe there 0:15:53.920 --> 0:15:58.360 are certain opportunities that end up getting taken by private 0:15:58.440 --> 0:16:02.440 lenders versus publicly traded. You know, a company will decide 0:16:02.440 --> 0:16:04.200 I'm going to do a private deal. There's a lot 0:16:04.240 --> 0:16:06.720 of appetite, a lot of demand, rather than go down 0:16:06.760 --> 0:16:08.080 the publicly traded route. 0:16:08.880 --> 0:16:11.800 Maybe the caveat is it depends which group you talk to. Yeah, 0:16:11.840 --> 0:16:14.960 but no, I think the growth in private credit, especially 0:16:15.040 --> 0:16:18.360 over the last few months, has has been positive for 0:16:18.400 --> 0:16:21.360 oak Tree and has potential to be to be positive. 0:16:20.960 --> 0:16:21.880 For more areas. 0:16:22.360 --> 0:16:25.080 I mean, we are certainly active in these private credit 0:16:25.120 --> 0:16:28.600 markets seeking to you know, find value and really fill 0:16:28.600 --> 0:16:31.160 a gap that I think has grown over the last 0:16:31.200 --> 0:16:34.840 eighteen months where some of the larger players have you know, 0:16:34.880 --> 0:16:37.520 maybe step back and including some of the banks. 0:16:37.600 --> 0:16:38.200 Yeah. 0:16:38.280 --> 0:16:40.120 I think on the other hand, you know, oak Tree 0:16:40.160 --> 0:16:43.640 obviously we're known for our distressed as distressed debt business, 0:16:43.960 --> 0:16:47.120 which now is our global opportunities business. You know, here's 0:16:47.120 --> 0:16:50.080 an here's an opportunity for you know, a group like 0:16:50.120 --> 0:16:52.920 that to maybe you know, step in and support some 0:16:53.040 --> 0:16:55.760 of these deals if if things go south. So I 0:16:55.760 --> 0:16:58.280 think there's multiple ways where where we can see a 0:16:58.320 --> 0:17:00.280 benefit from from this growth. 0:17:00.360 --> 0:17:02.800 You mentioned, you know, maybe like some of these private 0:17:02.840 --> 0:17:05.600 credit managers and maybe they don't want to like to 0:17:06.000 --> 0:17:09.720 deploy that additional marginal capital for that risk. It made 0:17:09.760 --> 0:17:11.240 me wonder, just going back to the sort of the 0:17:11.280 --> 0:17:14.080 beginning of the conversation, like you can get a real 0:17:14.160 --> 0:17:16.440 return risk free these days, which you haven't been able 0:17:16.440 --> 0:17:18.800 to get in a long time, and you don't even 0:17:18.840 --> 0:17:20.600 have to take any like duration risk. You can like 0:17:20.880 --> 0:17:24.320 there's positive rates at the short end. Does that change 0:17:24.480 --> 0:17:26.440 risk ampetite or you see people was like, yeah, look 0:17:26.480 --> 0:17:27.920 I could make money and I don't have to take 0:17:27.920 --> 0:17:30.719 any risk. Does that change like how money gets deployed 0:17:30.760 --> 0:17:31.200 in your view? 0:17:32.080 --> 0:17:35.560 Yes, I definitely think it does. And really from our standpoint, 0:17:35.880 --> 0:17:38.919 it kind of shifts even where we take risk on 0:17:39.040 --> 0:17:41.920 the you know, on on the maybe the risk spectrum 0:17:41.960 --> 0:17:44.879 or the duration spectrum. I mean, it's rare that you 0:17:45.000 --> 0:17:47.760 have short rates being the highest part of the curve. 0:17:47.920 --> 0:17:49.920 So what's what's kind of. 0:17:49.880 --> 0:17:53.760 Resulted in that is securities that pay interest index to 0:17:53.800 --> 0:17:54.879 those short rates. 0:17:55.040 --> 0:17:57.240 Have become even more and more attractive. 0:17:57.320 --> 0:18:00.199 So just to again kind of put some numbers that 0:18:00.200 --> 0:18:02.200 if you look at the high yield market, a fixed 0:18:02.240 --> 0:18:05.480 rate market, sure their yields have gone up, but their 0:18:05.520 --> 0:18:08.600 income they generate has stayed, you know, right around low 0:18:08.680 --> 0:18:11.600 sixes despite the call it nine percent yields. Can you 0:18:11.680 --> 0:18:13.280 just explain that a little for what I mean is 0:18:13.440 --> 0:18:17.359 the coupon on a high yield bond is under six percent, 0:18:17.760 --> 0:18:20.320 their price is currently below par. So you take that 0:18:20.400 --> 0:18:23.480 coupon divided by the price, that's your current yield. 0:18:23.480 --> 0:18:25.040 That's going to be in the low sixes. 0:18:25.480 --> 0:18:28.680 Whereas, if I can buy a high quality floating rate 0:18:28.720 --> 0:18:31.560 security that might be a structured asset, that might be 0:18:31.600 --> 0:18:35.679 a broadly syndicated loan, I'm earning that near five and 0:18:35.720 --> 0:18:38.600 a half percent solfar rate plus a spread of call 0:18:38.680 --> 0:18:41.320 it four hundred basis points, now I'm earning nine and 0:18:41.320 --> 0:18:45.399 a half percent. So, yes, risk free is a you know, 0:18:45.480 --> 0:18:48.480 certainly a viable investment, but you know, so are a 0:18:48.480 --> 0:18:51.080 lot of other investments that are you know, reasonably safe, 0:18:51.080 --> 0:18:53.639 that have you know, an appropriate kind of spread for 0:18:53.720 --> 0:18:54.200 their risk. 0:18:54.840 --> 0:18:58.600 So we're talking about yields sort of enticing buyers at 0:18:58.640 --> 0:19:01.440 this moment in time. But there's something else that has 0:19:01.520 --> 0:19:05.480 happened since the pandemic, which is the Federal Reserve announced 0:19:05.520 --> 0:19:10.000 this massive corporate bond buying program that, in theory is 0:19:10.040 --> 0:19:13.240 now a permanent backstop for the market. Do you think 0:19:13.359 --> 0:19:15.600 that's affected investing behavior. 0:19:16.520 --> 0:19:19.920 There's no doubt that had a significant impact on investing 0:19:19.960 --> 0:19:24.600 behavior in twenty twenty. Just knowing that that backstop was there, 0:19:25.560 --> 0:19:27.879 I'm not sure how much today. I mean, I think 0:19:28.320 --> 0:19:30.479 in the case of say the hi Yo bond market, 0:19:31.200 --> 0:19:34.000 you have seen that market kind of shrink over the 0:19:34.080 --> 0:19:37.919 last eighteen months, shrink because deals of come do that 0:19:38.000 --> 0:19:42.760 haven't been refinanced. You've had actually more upgrades than downgrades 0:19:42.760 --> 0:19:45.639 in that market, which may be surprising given the you know, 0:19:45.680 --> 0:19:47.960 all the talk of recession and the need for spreads 0:19:47.960 --> 0:19:50.919 to be wider. So you know, you do kind of 0:19:50.920 --> 0:19:55.040 have this almost supply demand mismatch on the side of 0:19:55.760 --> 0:19:58.959 you know, maybe demand kind of pushing those those spreads tighter. 0:19:59.560 --> 0:20:02.399 But I think it's in the back of people's minds somewhere. 0:20:03.440 --> 0:20:06.240 How do you think about the Fed here Tracy mentioned 0:20:06.359 --> 0:20:08.560 the backstop, but in terms of like the sort of 0:20:08.560 --> 0:20:11.240 good old fashion where they are on the rate side. 0:20:12.480 --> 0:20:15.600 Obviously there's hope that maybe they could cut rates even 0:20:15.600 --> 0:20:17.679 in the absence of a recession. 0:20:17.720 --> 0:20:19.840 But is the FED like, are we clear? 0:20:19.960 --> 0:20:22.920