WEBVTT - CrossingBridge’s Sherman on Return of Capital 0:00:15.720 --> 0:00:18.720 Welcome to Inside Active, a podcast about active managers that 0:00:18.800 --> 0:00:21.400 goes beyond sound bites and headlines and looks deeper into 0:00:21.440 --> 0:00:25.800 their processes, challenges and philosophies and security selection. I'm David 0:00:25.880 --> 0:00:28.960 Cohne i the Mutual Fund and Active Research at Bloomberg Intelligence. 0:00:29.200 --> 0:00:32.280 Today my coast is Sam Guy, a corporate credit strategist 0:00:32.320 --> 0:00:35.000 at Bloomberg Intelligence. Sam, thanks for joining me today. 0:00:35.360 --> 0:00:36.680 Yeah, thanks for having me on again. 0:00:37.479 --> 0:00:40.919 So your recent research looked at how credit rating agencies 0:00:40.920 --> 0:00:44.640 are viewing the broad it credit environment. Given that outlook 0:00:44.680 --> 0:00:46.840 and the events you know, unfolding in the Middle East 0:00:46.880 --> 0:00:49.519 over the weekend, you know, with heightened tensions with Iran, 0:00:49.680 --> 0:00:53.520 how do you think geopolitical risk is shaping rating agencies 0:00:53.600 --> 0:00:57.639 take on corporate credit risk right now? Any specific scenarios 0:00:57.680 --> 0:01:00.800 with this kind of uncertainty could shift credit outlook. 0:01:01.320 --> 0:01:03.560 Yeah, I mean to kind of kick it off. I 0:01:03.560 --> 0:01:06.880 think when you're looking at what rating agencies are going 0:01:06.959 --> 0:01:09.440 to do, I think they move a little bit slower, 0:01:09.480 --> 0:01:11.920 so it's tough to say exactly how they're going to 0:01:11.959 --> 0:01:14.920 react to what's going on right now. I think them 0:01:15.120 --> 0:01:17.880 and the market more broadly is just trying to digest 0:01:17.920 --> 0:01:21.399 you know how long is this conflict going to last. 0:01:21.480 --> 0:01:24.160 But in terms of what we track on our end 0:01:25.080 --> 0:01:27.120 on the ratings front, you know, we're looking at two things. 0:01:27.120 --> 0:01:29.679 We're looking at rating actions that have happened in the past, 0:01:29.720 --> 0:01:32.720 which you know, if you're looking across investment grade and 0:01:32.760 --> 0:01:35.760 high yield, has been broadly positive. But we also look 0:01:35.840 --> 0:01:40.160 at just broader sentiment looking forward from the rating agencies, 0:01:40.200 --> 0:01:42.840 which when you're looking at that piece, it's looking a 0:01:42.840 --> 0:01:46.080 little bit more negative, especially for high yield companies. So 0:01:46.720 --> 0:01:49.680 in terms of how the current events might impact that, 0:01:49.760 --> 0:01:51.720 I think you're just again going to wait and see, 0:01:52.440 --> 0:01:55.040 you know, how long this might potentially last, and then 0:01:55.640 --> 0:01:57.440 I think it could be a little bit more sector 0:01:57.480 --> 0:02:00.840 focused if rating agencies do decide to start being a 0:02:00.840 --> 0:02:05.080 little bit more pessimistic. Obviously energy being the big area 0:02:05.120 --> 0:02:07.680 where companies might start to see a little bit of 0:02:07.680 --> 0:02:11.320 impact just with where prices are headed and overall supply 0:02:11.440 --> 0:02:15.200 that's heading into the market there. So yeah, overall though, 0:02:15.360 --> 0:02:18.120 like I said, positive in terms of what they've been doing, 0:02:18.600 --> 0:02:22.720 negative kind of looking forward, especially on the high yield side. 0:02:23.040 --> 0:02:25.680 O great, great, well, I think our yesterday can certainly 0:02:25.720 --> 0:02:28.680 add to the credit discussion. I like to welcome David 0:02:28.680 --> 0:02:31.800 Sherman to the podcast. David is founder and chief investment 0:02:31.800 --> 0:02:35.519 officer of Crossing Bridge Advisors and a portfolio manager on 0:02:35.560 --> 0:02:38.200 a number of funds, including the River Park Strategic Income 0:02:38.240 --> 0:02:41.480 Fund ticker rs iv X. David, thank you for joining 0:02:41.560 --> 0:02:41.960 us today. 0:02:42.760 --> 0:02:43.840 Thank you, Sam and David. 0:02:44.360 --> 0:02:48.000 So, how would you describe your core investment philosophy and 0:02:48.440 --> 0:02:49.920 how's it involved over your career? 0:02:51.200 --> 0:02:54.680 So, my core investment philosophy of both myself and the 0:02:54.720 --> 0:02:57.160 team here at Crossing Bridge, as well as what was 0:02:57.160 --> 0:03:00.640 taught to me during my early days at Lucidia, is 0:03:00.639 --> 0:03:03.880 that you've got to protect your capital first. So a 0:03:03.919 --> 0:03:05.720 lot of people think about what am I what's my 0:03:05.760 --> 0:03:08.000 return going to be? And I think that's not the 0:03:08.080 --> 0:03:09.840 right question to start with. I think the question to 0:03:09.840 --> 0:03:12.080 start with is am I going to get a return 0:03:12.160 --> 0:03:15.160 of my capital? How am I going to get a 0:03:15.200 --> 0:03:17.760 return on my capital? What are the risks to my 0:03:17.880 --> 0:03:24.000 return on capital? And what kind of of risk am 0:03:24.000 --> 0:03:28.120 I taking on that capital? The next question is am 0:03:28.160 --> 0:03:32.400 I being compensated? In fixed income? In particular where you 0:03:32.440 --> 0:03:37.320 have were ned upside right? You have whatever the prices 0:03:37.520 --> 0:03:39.920 versus par so if you buy the discount, you have 0:03:39.920 --> 0:03:42.880 that amortization at discount, and if you buy it at 0:03:42.880 --> 0:03:44.840 a premium, it's going to par But you're going to 0:03:45.080 --> 0:03:48.120 pars where you're going one word or the other. So 0:03:48.200 --> 0:03:51.080 the real question is if par is where I'm going 0:03:51.920 --> 0:03:53.880 most of my return, if not all of my return 0:03:53.960 --> 0:03:59.080 is from coupon or embedded coupon. So you're not playing 0:03:59.080 --> 0:04:02.200 like an equity for some big upside, you know, and 0:04:02.240 --> 0:04:04.800 if you lose money, it takes a long long time 0:04:04.800 --> 0:04:07.119 to make it up. So the first point is how 0:04:07.160 --> 0:04:09.360 do you make sure you don't lose money? And I 0:04:09.360 --> 0:04:13.520 think in River Parks Strategic Income, we've illustrated that although 0:04:13.600 --> 0:04:18.160 our upside capture versus peers is not in the top quartile, 0:04:18.720 --> 0:04:21.400 our die in side capture is dramatically in the top quartel. 0:04:21.480 --> 0:04:23.159 When you do that over a long period of time, 0:04:23.400 --> 0:04:27.039 you actually get significantly better compounder returns. 0:04:28.839 --> 0:04:31.480 So how does that work in terms of I should say, 0:04:31.480 --> 0:04:34.640 how does that show up in the portfolio construction decisions? 0:04:36.120 --> 0:04:39.279 So we're bottom up value investors, So we take the 0:04:39.320 --> 0:04:41.559 same discipline that you hear about from all these value 0:04:41.600 --> 0:04:45.920 equity folks that are disciples of Warren Buffet or or 0:04:45.920 --> 0:04:50.159 derivatives of Warren Buffet. We applied exactly the same into credit, 0:04:51.360 --> 0:04:53.960 and we start with the business model. So the question 0:04:54.120 --> 0:04:56.920 is you know a business model? So for instance, today 0:04:57.640 --> 0:04:59.919 in the Nordic bond market, they're issuing a bond on 0:05:00.120 --> 0:05:03.640 heated Teddy Bears and it's a very popular product that's 0:05:03.640 --> 0:05:07.039 been around for a long time, and the borrowers doing 0:05:07.080 --> 0:05:09.279 what they call divn and recap. He's taking money off 0:05:09.320 --> 0:05:11.839 the table to put into his pocket. And he's doing 0:05:11.880 --> 0:05:15.839 this because he's moving his citizenship to Ireland. And there's 0:05:15.880 --> 0:05:18.560 a state reasons and tax reasons and they're all perfectly 0:05:18.600 --> 0:05:21.359 fine reasons. It's not like I think, you know. The 0:05:21.560 --> 0:05:24.000 CEO who's run this business at the Entrepnore from beginning 0:05:24.120 --> 0:05:26.200 knows something that no one else knows. It's a really 0:05:26.240 --> 0:05:29.080 good business. It's been growing every year in recessions. It's grown. 0:05:29.120 --> 0:05:30.680 It's not it done here. It reminds me a little 0:05:30.720 --> 0:05:34.719 bit of build a bear. However, it's still a divner 0:05:34.800 --> 0:05:37.520 recap and it has very little leverage, meaning that debt 0:05:37.560 --> 0:05:40.800 divided by cash flow is is very minimal. And a 0:05:40.839 --> 0:05:43.440 friend of mine set, are you going to buy the 0:05:43.760 --> 0:05:47.279 teddy deal? And I said no, and they said why. 0:05:47.440 --> 0:05:49.880 I said, well, the way I look at it is, 0:05:50.240 --> 0:05:52.200 do we want to run a Teddy Bear company if 0:05:52.200 --> 0:05:56.040 things go bad? And what is there to salvage in 0:05:56.080 --> 0:05:58.800 the Teddy Bearer company if they go bad? So my 0:05:58.800 --> 0:06:00.280 friend said, well, do you think it's going to about it? 0:06:00.279 --> 0:06:01.760 I said no, I think it's absolutely fine. I think 0:06:01.800 --> 0:06:03.440 you're probably gonna make your money, You're gonna get your 0:06:03.440 --> 0:06:07.240 Cooper nuts are gonna work. But if it doesn't, what's planned? 0:06:07.240 --> 0:06:10.279 B There is no plan being a consumer one product 0:06:10.279 --> 0:06:13.719 that's heated Teddy Bears where the entrepreneur doesn't choose to 0:06:13.760 --> 0:06:14.240 support it. 0:06:15.160 --> 0:06:15.360 Right. 0:06:15.440 --> 0:06:18.680 So that's a great example, very simplistically of a perfectly 0:06:18.760 --> 0:06:24.560 fine loan or bond that we wouldn't do. But it's 0:06:25.160 --> 0:06:26.840 and it's not a function of where you're earning five 0:06:26.920 --> 0:06:27.839 hundred off the curve. 0:06:28.800 --> 0:06:29.280 It's just. 0:06:30.839 --> 0:06:33.479 Not a business model that you know, we can get 0:06:33.480 --> 0:06:36.560 our arms around that's generational to generational. 0:06:38.160 --> 0:06:40.320 That makes sense if we dig a little deeper into 0:06:40.360 --> 0:06:44.279 your investment process, are there I guess certain qualitative or 0:06:44.360 --> 0:06:48.240 quantitative factors that are really non negotiable when you're kind 0:06:48.240 --> 0:06:50.520 of doing your credit analysis, when you're saying you know 0:06:50.600 --> 0:06:52.200 before you're going to look to add a position. 0:06:53.279 --> 0:06:54.920 Well, the first thing again what we do is we 0:06:54.960 --> 0:06:57.000 look to the business model and better way we get 0:06:57.000 --> 0:07:00.960 it wrong. We don't always get it right, but business model, 0:07:01.000 --> 0:07:04.280 I think is paramount, and we don't all have to 0:07:04.320 --> 0:07:07.440 agree on what's a good business model, right, that's the beauty. 0:07:07.520 --> 0:07:11.840 There's an art there. But outside a business model, for sure, 0:07:11.960 --> 0:07:14.720 the most single important part is no different than a 0:07:14.760 --> 0:07:17.800 pe ratio or a cash flow ratio. What is my 0:07:17.920 --> 0:07:20.800 total debt or at least a debt where I am 0:07:20.840 --> 0:07:25.120 in the capital structure in comparison to the cash flows 0:07:25.120 --> 0:07:30.360 that one would expect over time. And you cannot ignore 0:07:30.400 --> 0:07:34.160 two sub sectors. How much debt can the company put 0:07:34.160 --> 0:07:37.880 on equal or senior to you in the future, because 0:07:37.880 --> 0:07:41.480 when they can, they will right. So how much can 0:07:41.520 --> 0:07:43.520 you have what they call prime to put on top 0:07:43.600 --> 0:07:46.520 with you? And what does that change your ratio from 0:07:46.520 --> 0:07:49.360 a cash flow standpoint? And the second substant is what 0:07:49.400 --> 0:07:53.680 does working capital look like? Because working capital is one 0:07:53.720 --> 0:07:57.840 thing I think most analysts across the board really undervalue 0:07:57.880 --> 0:08:03.280 and don't really appreciate the less working capital but by 0:08:03.320 --> 0:08:05.760 far debting currents and the multiple so it's no different 0:08:05.760 --> 0:08:07.240 than if you were a real estate investment you said, 0:08:07.280 --> 0:08:10.880 what's my cap rate? Right, it's effectively the same analysis. 0:08:11.200 --> 0:08:14.280 Okay, And you know the fun we're talking about is 0:08:14.280 --> 0:08:17.200 strategic income. Are there times when you're kind of leaning 0:08:17.240 --> 0:08:22.040 into op opportunistic excuse me a situations and you know, 0:08:22.040 --> 0:08:24.840 how would you balance up while maintaining this, you know, 0:08:24.880 --> 0:08:27.040 strict discipline. 0:08:27.400 --> 0:08:31.200 Well, if you can find a fat pitch, you should 0:08:31.240 --> 0:08:35.920 take advantage of it. Unfortunately, there are few and far 0:08:36.640 --> 0:08:40.600 in between. And when you generally feel like there's fat pitches, 0:08:41.360 --> 0:08:44.240 there's lots of fat pitches. Right. The market's melted down. 0:08:44.320 --> 0:08:47.120 Think of Post oh eight. You could take a machine 0:08:47.160 --> 0:08:49.520 gun and shoot it pretty much anything and it was 0:08:49.559 --> 0:08:52.840 a fat pitch, right. So to me, a real fat 0:08:52.880 --> 0:08:56.480 pitch is in a market that's normal, where there's scarce 0:08:56.559 --> 0:09:00.920 opportunity and you find an opportunity. And in that case, 0:09:01.000 --> 0:09:04.920 I have no problem with the fund taking a four 0:09:05.000 --> 0:09:08.760 or five percent position in those situations because there's so 0:09:08.840 --> 0:09:12.120 few and farm pine with the caveat, we have to 0:09:12.120 --> 0:09:15.800 feel one hundred percent comfortable that when the bonds get 0:09:15.800 --> 0:09:18.720 paid off, they will get paid off in accordance with 0:09:18.800 --> 0:09:22.959 the amount that you've invested your full nun So buying 0:09:23.000 --> 0:09:25.920 a bond at sixty where you think you're going to 0:09:26.000 --> 0:09:30.040 get two coupons of ten percent, your actual cost is forty, right, 0:09:30.080 --> 0:09:32.920 sixty minus two coupons ten plus ten is twenty gets 0:09:32.960 --> 0:09:35.040 you forty. And then say, well, we think it's worth 0:09:35.120 --> 0:09:37.640 forty cents. Well, then you earned a zero return of 0:09:37.679 --> 0:09:39.400 your money for two years under the hope you're going 0:09:39.440 --> 0:09:42.360 to get coupons which aren't tax efficient for a piece 0:09:42.400 --> 0:09:44.520 of paper that's worth forty. That is not a fat pitch. 0:09:44.600 --> 0:09:47.480 That is not opportunistic. And by the way, part bonds 0:09:48.000 --> 0:09:52.080 can be opportunistic, you know, give you example a while back, 0:09:54.200 --> 0:09:56.360 we got involved in Viacom, and then let's go back 0:09:56.360 --> 0:10:01.600 to twenty eighteen. But what's interesting is things repeat themselves, right, 0:10:01.679 --> 0:10:04.959 think a paramount of Warner Brothers today. But in Viacom, 0:10:05.480 --> 0:10:09.880 CBS was going to acquire Viacom, and CBS that traded 0:10:09.880 --> 0:10:12.520 at a very tight spread, and Viacom traded a very 0:10:12.520 --> 0:10:16.119 widespread and the market wasn't appreciating that they were effectively 0:10:16.120 --> 0:10:18.959 the same credit. Right, And to me, even though it 0:10:19.000 --> 0:10:22.000 was investment grade, the fat pitch was the spread was 0:10:22.040 --> 0:10:25.160 so wide that you take the longest day to paper 0:10:25.200 --> 0:10:28.680 you can find to get the biggest spread. You take 0:10:28.720 --> 0:10:31.240 out the interest rate risk by shortening or hedging against 0:10:31.240 --> 0:10:33.800 long term treasuries, so you're just long the spread, but 0:10:33.840 --> 0:10:35.840 you're not a credit default swop where it's a five 0:10:35.960 --> 0:10:38.160 year with an average life of two and a half. 0:10:38.920 --> 0:10:40.760 You've got a long day to piece. And then when 0:10:40.760 --> 0:10:45.000 people realize the conversions. Assuming I got the analysis, the 0:10:45.040 --> 0:10:47.880 team got the analysis correct on CBS, you're going to 0:10:47.920 --> 0:10:49.960 get a big returner cap on It was an investment 0:10:49.960 --> 0:10:52.840 grade world. 0:10:52.440 --> 0:10:55.240 So Sherman, I want to kind of dig into the 0:10:55.280 --> 0:10:58.600 market right now. Obviously, over the past six months, if 0:10:58.600 --> 0:11:01.400 you're looking at investment grade or how yield spreads have 0:11:01.440 --> 0:11:06.000 been relatively tight, pretty range bound, I'd say, probably with 0:11:06.120 --> 0:11:09.280 the exception of the past week or so. But for you, 0:11:09.480 --> 0:11:12.160 where are you seeing opportunities just across you know, the 0:11:12.240 --> 0:11:15.800 rating spectrum for your strategic income fund, because it looks 0:11:15.880 --> 0:11:19.040 like you can kind of play at multiple parts of 0:11:19.080 --> 0:11:21.280 the spectrum. So I'm wondering for you where you seeing 0:11:21.440 --> 0:11:24.440 value across those asset classes right now. 0:11:25.679 --> 0:11:29.760 So asset classes across the board are expensive, I don't 0:11:29.800 --> 0:11:37.240 care if it's stocks, bonds, cnbs abs, they're just expensive 0:11:37.280 --> 0:11:39.160 and it's been well documented as you know that the 0:11:39.280 --> 0:11:44.920 US securities are significantly more expensive than developed countries outside 0:11:44.960 --> 0:11:47.880 the US. So one of the areas that we find 0:11:47.920 --> 0:11:51.880 attractive is actually in the high yield space and in 0:11:51.920 --> 0:11:57.160 the investment grade space in issuers outside the United States 0:11:57.440 --> 0:12:02.000 or US issuers that have taken advance inge of the 0:12:02.040 --> 0:12:05.640 platform that the Nordic market offers. Because the Nordic market, 0:12:05.679 --> 0:12:12.800 you should think of it as not issuers that are Finland, Sweden, Norway, Iceland, Denmark. 0:12:12.880 --> 0:12:15.280 You should think of it as a platform like Nasdaq, 0:12:15.400 --> 0:12:18.520 is a platform where issuers can come whether they're European 0:12:18.600 --> 0:12:20.920 or US and access it is a form of barring 0:12:20.960 --> 0:12:23.040 money at four hundred million dollars or less, because the 0:12:23.080 --> 0:12:25.199 only other people that lend to four hundred million or less, 0:12:25.440 --> 0:12:27.800 like one hundred and fifty or one hundred or two 0:12:27.840 --> 0:12:30.400 hundred are direct lenders. So it's a direct it's a 0:12:30.400 --> 0:12:33.240 direct competitor direct lending. So that's where that's Warren area. 0:12:33.400 --> 0:12:35.280 We can go through more, and I do want to 0:12:35.280 --> 0:12:38.959 be clear your listener. Strategic income is a conservative high 0:12:39.000 --> 0:12:42.280 yield funding that it's typically I mean, ideally in a 0:12:42.360 --> 0:12:44.240 fat pitch world, it's one hundred percent high yield, but 0:12:44.640 --> 0:12:46.800 we've not really been in one hundred percent highield very 0:12:46.840 --> 0:12:50.800 long in that product since we started the product back 0:12:50.840 --> 0:12:55.760 in twenty and twelve. But like right now, it's about 0:12:55.760 --> 0:12:58.520 forty percent investment grade and cash are pretty close to it, 0:12:59.160 --> 0:13:01.160 which tells you how you feel about spreads. I mean, 0:13:01.760 --> 0:13:04.920 we've written a lot that you're you know, you're not 0:13:04.960 --> 0:13:08.839 getting paid a lot over treasuries in the market in general. 0:13:10.080 --> 0:13:13.240 So I also saw with that fun that the target 0:13:13.320 --> 0:13:16.520 duration is two and a half years to four years ideally. 0:13:17.320 --> 0:13:20.720 For me, I was wondering, do you ever see opportunities 0:13:20.760 --> 0:13:23.800 that maybe kind of stretch duration that you will be 0:13:24.320 --> 0:13:28.000 open to getting into if you can balance that out 0:13:28.040 --> 0:13:30.000 on the other side, or do you try and stick 0:13:30.040 --> 0:13:32.720 as closely as possible to that duration window. 0:13:33.920 --> 0:13:37.280 So we don't want to be interest rate speculators, and 0:13:37.400 --> 0:13:41.560 a long duration debt is an interest rate speculation, educated 0:13:41.640 --> 0:13:45.160 or not that rates are going to come down period 0:13:45.160 --> 0:13:48.839 indus story. And then you also now with the shorter 0:13:48.960 --> 0:13:53.400 life cycle in business, as we saw in the the 0:13:53.520 --> 0:13:58.280 sassacop apocalypse with AI, the lifespan of businesses is less 0:13:58.280 --> 0:14:01.440 certain on terminal value. So you know the idea of 0:14:01.440 --> 0:14:05.040 buying a one hundred year bond when any company, whether 0:14:05.080 --> 0:14:08.599 it's Google or Pepsi, you know, a lot happens in 0:14:08.600 --> 0:14:10.439 one hundred years. I'm not sure I want that kind 0:14:10.440 --> 0:14:16.920 of bottom up duration risk. So I kind of want 0:14:16.920 --> 0:14:17.600 to jump in again. 0:14:18.840 --> 0:14:22.160 When when there's a situation spread spreads are tight, defaults 0:14:22.160 --> 0:14:26.040 are low. How do you prepare the portfolio or you know, 0:14:26.080 --> 0:14:27.960 any of your funds for that matter. You know, for 0:14:28.000 --> 0:14:31.040 a potential deterioration in the market before the market actually 0:14:31.080 --> 0:14:32.480 sees it, you get lucky. 0:14:33.800 --> 0:14:35.720 So no, no, there's some truth that I mean, I'll 0:14:35.720 --> 0:14:37.160 answer the question, but I want to start with some 0:14:37.240 --> 0:14:40.640 basic for your audience. You know, funds that are growing 0:14:40.720 --> 0:14:44.240 or static do better in deteriorating markets than funds that 0:14:44.280 --> 0:14:49.760 are shrinking in asset flows, right because the less when 0:14:49.800 --> 0:14:52.920 there's price discovery, it's generally not the stuff that gets 0:14:52.960 --> 0:14:56.240 priced down that is quick to move off your your portfolio. 0:14:56.320 --> 0:15:00.480 We've seen this in the whole BBC Private Len World 0:15:00.560 --> 0:15:03.400 conversation that's going on as we speak with Blue Owl, 0:15:03.680 --> 0:15:07.720 not to pick on them, but literally everybody else. So 0:15:07.960 --> 0:15:10.120 one of the things I think from an outsider perspective 0:15:10.160 --> 0:15:12.680 is it is important to think about what is the 0:15:12.720 --> 0:15:16.880 stability and flows of the underlying vehicle that you're investing in, 0:15:16.920 --> 0:15:21.360 whether it's a hedge fund, a private fund, an interval fund. 0:15:22.520 --> 0:15:24.200 There was a good article I think Bloomberg did or 0:15:24.200 --> 0:15:26.000 somebody did, on the life of interval funds and when 0:15:26.000 --> 0:15:29.360 they load up and when they get redemptions. We have 0:15:29.440 --> 0:15:32.720 dairy liquidity, so by definition, we have a mismatch and 0:15:32.760 --> 0:15:36.040 assets and liabilities. Right, our borrowers are like savers at 0:15:36.040 --> 0:15:39.160 a bank, Right, they have daily liquidy. So we're fundamentally 0:15:39.160 --> 0:15:42.680 mismatched to start with. We lend long and borrow short. Right, 0:15:42.880 --> 0:15:46.920 Our customers are our liabilities. I don't mean them negatively, 0:15:46.960 --> 0:15:49.960 but that's so. I think understanding your asset liability match 0:15:50.000 --> 0:15:53.920 helps solve some of that problem, David. And then why 0:15:53.920 --> 0:15:55.960 don't you explore the question further if you want? And 0:15:56.000 --> 0:15:57.480 I can add to it. But I think that's an 0:15:57.520 --> 0:16:01.000 important top down that people have to think about, is 0:16:01.000 --> 0:16:02.560 we're your asset liability matches. 0:16:03.160 --> 0:16:06.200 No, that makes sense. So one thing I want to 0:16:06.240 --> 0:16:10.800 get back to real quick Sherman, is the distress environment. 0:16:10.880 --> 0:16:12.680 I think you were kind of alluding to a little 0:16:12.680 --> 0:16:15.320 bit lower of a supply there, just wondering, you know, 0:16:15.360 --> 0:16:18.960 looking forward, are you seeing maybe that that might start 0:16:19.000 --> 0:16:22.760 to kind of increase in terms of opportunities there, or 0:16:23.280 --> 0:16:25.680 is that something that you're just not really you know, 0:16:25.760 --> 0:16:27.880 keeping all that close an eye on in terms of 0:16:28.200 --> 0:16:31.800 maybe how the FED might impact some of these companies 0:16:31.840 --> 0:16:34.280 that are on the lower end of the spectrum. 0:16:34.720 --> 0:16:36.560 So there's a lot to unpacked there, So I'm going 0:16:36.640 --> 0:16:38.720 to do a little bit. Look, I started in the 0:16:38.760 --> 0:16:44.440 business in nineteen eighty five, is an Internet Drexel in LA. 0:16:45.400 --> 0:16:47.800 I went full time in eighty seven. I started in 0:16:47.840 --> 0:16:51.080 the distressed investing market. That market is not the market 0:16:51.120 --> 0:16:55.840 we have today. The market is different because valuations are different, 0:16:57.680 --> 0:17:03.960 bankruptcy law has matured. You have different constituencies buying distrept 0:17:04.000 --> 0:17:07.159 papers such as clos which make a different alignment of 0:17:07.160 --> 0:17:10.440 interest is very different, let's say, than an opportunistic investor. 0:17:10.840 --> 0:17:12.480 Right their goal is to kick the can down the 0:17:12.520 --> 0:17:16.960 road and maybe not cleanse the balance sheet. Particularly, and 0:17:17.080 --> 0:17:19.840 you have this lovely credit or on credit of warfare 0:17:19.840 --> 0:17:23.120 in the United States where literally the song from Hamilton 0:17:23.119 --> 0:17:24.560 you want to be in the room where it happens 0:17:24.640 --> 0:17:27.800 is takes a whole new meaning. So I find the 0:17:27.800 --> 0:17:33.520 distress market here, particularly of the larger opportunities, less interesting 0:17:34.320 --> 0:17:37.520 or have inherently more risk than what I'm traditionally used to. 0:17:38.560 --> 0:17:43.160 So as a rule, we look at distress always where 0:17:43.200 --> 0:17:46.240 how can we SOLVEREI our own problem with our own capital. 0:17:46.280 --> 0:17:48.639 So by definition, if you're a four billion dollar farm 0:17:48.960 --> 0:17:51.560 and a big positions five percent, like, that's a huge position, 0:17:51.640 --> 0:17:54.320 So that's two hundred million. If we can't solve our 0:17:54.320 --> 0:17:57.960 own problem with two hundred million, then who's coming to 0:17:58.000 --> 0:18:01.840 the rescue for us? So it does limit too. I 0:18:01.840 --> 0:18:05.840 think you're seeing less true distressed because of liability management 0:18:05.960 --> 0:18:10.439 exercises lemies, and that's a functional alignment of interest in 0:18:10.440 --> 0:18:13.119 how things are done. And these costs are out of 0:18:13.160 --> 0:18:15.520 this world. The people are making all the money are 0:18:15.560 --> 0:18:18.480 the financial advisors. I mean, somebody just go buy a 0:18:18.520 --> 0:18:22.440 whole bunch of stocks and financial advisors. It's very different 0:18:22.720 --> 0:18:26.520 in the Nordics, and I'm not their problems with the Nordics, 0:18:27.320 --> 0:18:30.520 but there it's very different. So in the stress world, 0:18:30.800 --> 0:18:36.680 where we see typically opportunity today is post lemy post 0:18:36.760 --> 0:18:40.120 liability manager exercises where we can look at the securities 0:18:40.480 --> 0:18:43.400 that are top of the capital structure with good covenants 0:18:44.240 --> 0:18:50.080 and issue to make money for the original holder. We're 0:18:50.080 --> 0:18:52.440 now that holder, call it a hedge fund. An opportunistic 0:18:52.480 --> 0:18:55.880 holder is looking to move on and recycle their money, 0:18:55.880 --> 0:18:58.200 and they're willing to give up a ten to twelve 0:18:58.480 --> 0:19:00.879 thirteen percent piece of paper top the capital structure, make 0:19:00.960 --> 0:19:03.760 more equity type return, and we like to be a 0:19:03.800 --> 0:19:07.600 provider of liquidity, be a natural transition, and as it seasons, 0:19:07.880 --> 0:19:10.520 the market then picks it up or gets refinanced. Whereas 0:19:10.560 --> 0:19:12.679 in the ORCS it's more of what I'm familiar with 0:19:12.720 --> 0:19:14.760 from the I describe it as what the lever's loan 0:19:14.800 --> 0:19:17.959 market was in the early nineties. There's more opportunity as 0:19:18.000 --> 0:19:18.840 a distress lender. 0:19:19.520 --> 0:19:21.520 So I want to get back to one point you 0:19:21.600 --> 0:19:26.280 mentioned just in terms of the fundamental picture for companies, 0:19:26.280 --> 0:19:29.000 at least in the US. I know you've said, obviously 0:19:29.040 --> 0:19:32.720 bonds a little bit more expensive here relative to some 0:19:32.840 --> 0:19:36.960 opportunities with issuers across the pond. But how are you 0:19:37.000 --> 0:19:40.920 seeing just the overall fundamental picture for US companies. Are 0:19:40.960 --> 0:19:44.600 we getting the same amount of value for the risk 0:19:44.680 --> 0:19:47.080 that you'd be taking on or are you seeing you know, 0:19:47.359 --> 0:19:50.720 metrics like leverage or interest coverage starting to deteriorate a 0:19:50.760 --> 0:19:51.119 little bit. 0:19:52.080 --> 0:19:54.840 So it's really weird. I would say the fixed income market, 0:19:54.840 --> 0:19:59.119 whether it's asset back deals like or just general corporate credit, 0:19:59.680 --> 0:20:03.280 it's hay shape, just like our economy. And the funny 0:20:03.320 --> 0:20:06.840 thing is plain vanilla hyal bonds are some of the 0:20:06.920 --> 0:20:12.240 highest quality junk bonds out there as opposed to leverage 0:20:12.280 --> 0:20:15.440 loans and direct loans or paper that's in the BDC world, 0:20:16.840 --> 0:20:19.119 which is not what you would expect. There's actually been 0:20:19.160 --> 0:20:22.639 a scarcity of issuance of how you'll bonds relative to 0:20:22.720 --> 0:20:25.480 leverage loans and direct lending. And that's a function of 0:20:25.600 --> 0:20:30.639 where capital formation is. So that's an important point. But 0:20:30.720 --> 0:20:35.760 in the answer your question, look, there are two ways 0:20:35.800 --> 0:20:38.200 to think about distress cycles. One is like an insurance 0:20:38.240 --> 0:20:42.480 company where you create ibn R incurb but not reported, 0:20:42.600 --> 0:20:45.840 like a reserve setup right top down. We know we're 0:20:45.880 --> 0:20:48.879 insurance company, we know we're going to have losses. Let's 0:20:48.960 --> 0:20:50.840 reserve for it and let's set up incurb but not 0:20:50.880 --> 0:20:52.920 report it, and then actually see how you are in 0:20:52.960 --> 0:20:55.720 the reserve calculations. And that's one of the things I 0:20:55.720 --> 0:20:58.840 think direct lending, the BDCs and the clos haven't done 0:20:58.840 --> 0:21:02.000 a really good job of truck like an insurance company 0:21:02.000 --> 0:21:04.600 reserve concept, and I think if they did, I think 0:21:04.600 --> 0:21:10.480 that would bring a lot of sense of transparency and 0:21:11.560 --> 0:21:14.800 some level of security too underlying investors. So you wouldn't 0:21:14.800 --> 0:21:18.000 nessly have some of this heightened fear, right because people 0:21:18.000 --> 0:21:19.680 would have a concept of where they are in the 0:21:19.720 --> 0:21:24.000 reserve analysis. But the other thing on the bottom up 0:21:24.080 --> 0:21:25.960 is at the end of the day, it still goes 0:21:26.000 --> 0:21:28.400 to the business model and the amount of debt relative 0:21:28.440 --> 0:21:31.760 to cash flow and where you're creating those businesses. And 0:21:31.800 --> 0:21:34.080 you had a private equity business that had so much 0:21:34.119 --> 0:21:37.360 money put to work they allowed peeing expansion or purchased 0:21:37.400 --> 0:21:40.439 multiple expansion, which don't make sense. I mean, if you 0:21:40.480 --> 0:21:44.560 buy something at fifteen times cash flow, you're never making 0:21:44.600 --> 0:21:47.399 a good return in your capital as a portfolio unless 0:21:47.400 --> 0:21:50.400 it grows. So now you're in the growth business. You're 0:21:50.440 --> 0:21:53.880 in the private equity levered growth equity business, which gives 0:21:53.880 --> 0:21:56.040 you a very little balance sheet room to try to 0:21:56.040 --> 0:21:57.280 pull the levers for growth. 0:21:58.600 --> 0:22:01.240 So then I guess kind of changing gears here slightly 0:22:01.760 --> 0:22:04.520 in terms of risks. I know you mentioned the SaaS 0:22:04.560 --> 0:22:08.120 apocalypse or apocalypse apocalypse of however you want to refer 0:22:08.200 --> 0:22:12.119