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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 James Crumbie. I'm a senior editor at Bloomberg, and.

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Speaker 2: I'm Mike Campbelone, a senior credit analyst covering high yield

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Speaker 2: and investment grade retailers at Bloomberg Intelligence. This week, we're

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Speaker 2: very pleased to welcome Lauren Bez Maijin, Global head of

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Speaker 2: Liquid Credit at Carlisle. How are you, Lauren, great?

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Speaker 3: Thanks for having me.

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Speaker 2: Lauren is a partner in Global head of Liquid Credit

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Speaker 2: within Carlile's Global Credit Platform and CEO of CCIF, Carlile's

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Speaker 2: closedn fun focused on investing in equity and junior debt

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Speaker 2: tranches of colos. She's based in New York and sits

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Speaker 2: on the firm's liquid and private Investment committees. Carlile's Global

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Speaker 2: credit platform with about one hundred and ninety two billion AVASA.

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Speaker 2: It's under management spans across liquid credit, private credit, real assets, credit,

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Speaker 2: and other platform initiatives. Their liquid credit business has almost

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Speaker 2: fifty billion of assets under management and is responsible for

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Speaker 2: Carlisles COLO Management, COLO Investment and senior secured revolving credit

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Speaker 2: facilities of non ig issuers. James why don't I hand

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Speaker 2: it over to you to get us started.

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Speaker 1: Yeah, and I'd also note that Lauren's a bit of

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Speaker 1: a legend on the COLO scene of frequent speaker at

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Speaker 1: conferences who has been right about the proposition that collateralized

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Speaker 1: loan obligations are actually a pretty safe bet for credit investors.

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Speaker 1: So we'll get into that a bit later on in

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Speaker 1: the show, but before we do it, just a few

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Speaker 1: words on what we're seeing right now at Bloomberg News.

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Speaker 1: Markets are getting whipsored by trade wars that will probably

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Speaker 1: fuel inflation and fears about the sustainability of the US

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Speaker 1: economic growth. Both will be very bad for credit, and

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Speaker 1: prices have dropped a bit over the last week. Leverage

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Speaker 1: loans are at a three month low, but corporate debt spreads,

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Speaker 1: which we use as a proxy for risk, are still

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Speaker 1: pretty close to where they were in two thousand and seven,

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Speaker 1: just for the global financial crisis. If you only looked

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Speaker 1: at market pricing, think the world was quite a peaceful,

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Speaker 1: calm place, nothing much to worry about. But news headlines

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Speaker 1: show the opposite, from radical policy shifts in the US

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Speaker 1: to ongoing military conflict, stubborn inflation, and declining consumer confidence.

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Speaker 1: Plus a ton of uncertainty about what the Fed may

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Speaker 1: do next with rates. There's a wall of worry, but

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Speaker 1: also a ton of complacency in markets, and we continue

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Speaker 1: to see very robust investor demand for corporate bonds and loans,

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Speaker 1: especially in the US. Not a lot of net news

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Speaker 1: supply though, that more than anything else, may be keeping

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Speaker 1: valuations high. So, Lauren, what's your take. Should we focus

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Speaker 1: more on the apparent pro growth focus of the new

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Speaker 1: administration and all the businessmen in it, or do we

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Speaker 1: still need to worry about trade wars, policy overhauls, and

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Speaker 1: geopolitical headwinds, or you know, should that be more in

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Speaker 1: the price?

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Speaker 3: Sure? Yes, so we should. We should worry. We're credit people.

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Speaker 3: We have downside because most of what we buy is

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Speaker 3: near par so we have to think about how do

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Speaker 3: we protect that? And there is more uncertainty in this

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Speaker 3: environment where we're unclear where policies shake out. There's probably

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Speaker 3: more stroke with a pen risk than what we normally

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Speaker 3: operate with, so I think, especially given the really tight

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Speaker 3: spread environments pretty much across all of fixed income, not

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Speaker 3: just leverage loans and colos, you're not really getting paid

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Speaker 3: to take the incremental risk. So finding good companies that

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Speaker 3: can withstand volatility and exiting the weakest of companies that

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Speaker 3: if there is a policy change that should affect them,

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Speaker 3: they could they could really have financial difficulties. I think

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Speaker 3: is the right play right now.

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Speaker 2: And then Lauren, obviously there's been tremendous growth in private

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Speaker 2: credit markets in recent years. You know, do you see

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Speaker 2: that trend continuing and our public credit markets getting crowded

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Speaker 2: out by the availability of private credit.

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Speaker 3: I do see the trend continuing because there's a lot

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Speaker 3: of demand for private credit, and there's a lot of

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Speaker 3: demand for below investment great credit to begin with right now,

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Speaker 3: especially floating rate. And why is that? Well, you know what,

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Speaker 3: the inflationary environment's not terrible for below investment grade corporate credit.

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Speaker 3: We haven't reached the two percent inflation target. We're in

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Speaker 3: the mid threes instead. But what does that mean. One,

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Speaker 3: it means that our companies are probably growing a little

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Speaker 3: more than they would be if the environment wasn't inflationary.

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Speaker 3: So maybe you're picking up another point or two in

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Speaker 3: epit dog growth or sales growth. But at the same time,

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Speaker 3: because you have the inflation worry in the background, it's

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Speaker 3: likely that rates remain higher for longer, so you're getting

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Speaker 3: paid more on a floating rate asset class. So I

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Speaker 3: actually think the environment for total return investing in credit

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Speaker 3: looks pretty pretty attractive versus other classes. So let let's

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Speaker 3: get to your actual question of what does that mean

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Speaker 3: for private versus public. I think there's going to be

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Speaker 3: demand for both. They're both floating rate asset classes lending

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Speaker 3: to below investment grade on a first lean basis, and

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Speaker 3: I really don't view it as competition. I thought it

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Speaker 3: was very complementary to have direct lending step in when

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Speaker 3: the banks were having trouble underwriting or just weren't underwriting.

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Speaker 3: Direct lending has raised so much money that they could

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Speaker 3: do really big deal sizes today versus five or ten

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Speaker 3: years ago where they couldn't write the same type of

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Speaker 3: check that a BSL investor can. So giving lenders options

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Speaker 3: and having more availability of credit is a good thing

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Speaker 3: for all of our markets. And I think you're starting

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Speaker 3: to see more and more convergence where loans or borrowers

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Speaker 3: are moving in and out of each market depending on

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Speaker 3: what their goal.

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Speaker 1: Is, And as an investor, where's the relative value Right

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Speaker 1: now between the.

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Speaker 3: Two, we're seeing significant spread compression in both right now,

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Speaker 3: So you could probably put together a performing portfolio of

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Speaker 3: bsls in the three two any spread context where you're

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Speaker 3: looking closer to five hundred for for direct lending, so

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Speaker 3: you're still getting a meaningful pickup, though that that pickup

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Speaker 3: has has certainly declined over the last couple of years.

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Speaker 3: One thing that I think is pretty interesting and is

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Speaker 3: a market that still has room to grow is middle

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Speaker 3: market COLO equity. Uh. There actually seems to be pretty

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Speaker 3: good relative value there because even those spreads have compressed

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Speaker 3: in both the BSL asset side and the direct lending

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Speaker 3: asset side. Still of the liabilities and the arbitrage that

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Speaker 3: a middle market COLO can create based on where those

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Speaker 3: liabilities have now compressed to, I think really offers a

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Speaker 3: meaningful pickup to most most other fixed income markets.

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Speaker 1: I do want to get to clos and more detail,

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Speaker 1: but for you just sort of back up into the

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Speaker 1: private credit because that's what everyone wants to talk about

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Speaker 1: right now. And it's interesting. You're seeing this convergence and

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Speaker 1: this you know, reduction in spe of direct versus broadly

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Speaker 1: syndicated loans BSL. Does that compression continue?

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Speaker 3: Do you think?

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Speaker 1: And what's what's causing it.

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Speaker 3: I think it's gonna be hard to compress much more

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Speaker 3: from here. We are seeing new issues new issue loans

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Speaker 3: come at post financial crisis tights. It doesn't mean that's

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Speaker 3: where the market is trading, because there's still some tail

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Speaker 3: in the market if you look at the index. But

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Speaker 3: based on performing credit in the BSL market, we are

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Speaker 3: seeing B three's price at three hundred some even at

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Speaker 3: two seventy five, B two's two fifty two seventy five,

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Speaker 3: and new issues, so I don't think there's going to

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Speaker 3: be a ton more room for spread compression. That said,

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Speaker 3: most of our market is an arbitrage market, so if

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Speaker 3: we see significant tightening and co los spreads, it would

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Speaker 3: make room to tighten more on the asset side.

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Speaker 1: And also the compression between the broadly syndication and private

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Speaker 1: does that keep getting squeezed the gap between directs and syndication.

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Speaker 3: I actually think there's a little more room to go there.

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Speaker 3: With how much dry powder there is in direct lending

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Speaker 3: today and how much demand there is, and just not

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Speaker 3: a lot of new loan formation in either market, you

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Speaker 3: probably have some more room on direct lending compression.

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Speaker 1: It's interesting what you say about them being complementary. Does

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Speaker 1: that remain the case. I mean, it seems like private

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Speaker 1: credit came in when when public markets would kind of

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Speaker 1: shut down, and you know, there were four borrowers that

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Speaker 1: didn't really have great access and they had to pay

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Speaker 1: up to get that access and for faster execution in

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Speaker 1: certain situations. But is it just a market for the

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Speaker 1: bad times or is it Why do you think it's

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Speaker 1: here to stay?

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Speaker 3: No, I think it's here to stay. I think it's

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Speaker 3: completely complimentary. For example, you would think that you're you

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Speaker 3: would be seeing one direction right now, meaning larger issuers

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Speaker 3: that had issued loans into the private credit market would

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Speaker 3: come and refinance into the BSL market and get a

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Speaker 3: nice so for plus three twenty five loan versus the

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Speaker 3: five point fifty or so they were paying. And sure,

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Speaker 3: we are seeing some of that, some of these companies

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Speaker 3: that have grown through acquisitions and their ebatahs bigger and

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Speaker 3: they could get a much cheaper rate in the BSL market.

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Speaker 3: They're doing that. But we're also seeing performing loans that

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Speaker 3: trade it par with tight spreads move into direct lending

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Speaker 3: out of BSL. And why is that? It's because the

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Speaker 3: BSL market's a rating constrained market. We go back to

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Speaker 3: the COLO thing. You get clos or the main buyers.

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Speaker 3: They have a lot of ratings constraints, but you could

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Speaker 3: probably take a bigger dividend that may have been rated

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Speaker 3: triple C if you did it in the BSL market,

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Speaker 3: and take it to an unrated market for a really

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Speaker 3: strong company that may be still producing cash flow, and

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Speaker 3: you put on extra a couple turns of leverage that

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Speaker 3: they could support but not get a triple C rating,

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Speaker 3: or the buyer is not asking for rating. And we've

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Speaker 3: seen a couple of multi billion dollar deals come out

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Speaker 3: of the BSL market year date, performing credit pay a

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Speaker 3: higher interest rate, but decide to go to direct lending

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Speaker 3: because they could issue more attractive terms for what they're

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Speaker 3: looking for.

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Speaker 1: And that doesn't worry you in terms of you know,

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Speaker 1: all this risk building up in the shadows. You know

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Speaker 1: that's potentially unregulated, and you know, we can't really see

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Speaker 1: how it's actually marketing to market if even is. I mean,

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Speaker 1: do you worry about the growth there?

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Speaker 3: I think that for a while, we would hear people

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Speaker 3: say that direct lending has zero defaults, and that just

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Speaker 3: can't be true. It's a lower rated asset class than BSL.

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Speaker 3: Of course, they have more partnerships with the sponsors than

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Speaker 3: you see in BSL, so there's more room to negotiate

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Speaker 3: and keep companies liquid and out of bankruptcy. But over

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Speaker 3: time it's a below investment great asset class, there will

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Speaker 3: be defaults and we're seeing that right. We didn't see

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Speaker 3: a ton during COVID, but you are seeing with higher

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Speaker 3: interest rates for multiple years now that depending on what

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Speaker 3: data you're looking at. You could look at a Lincoln index,

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Speaker 3: or you could look at you through your own portfolios,

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Speaker 3: you're starting to see some defaults. I think it looks

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Speaker 3: more like the BSL market, even though it's a lower

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Speaker 3: rated market. So maybe we average somewhere around two percent

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Speaker 3: constant default rates going forward. Of course peaks and troughs

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Speaker 3: within that. Why would a lower rated market or lower

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Speaker 3: quality market have a similar default experience as as a

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Speaker 3: higher rted market. And I think that really does go

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Speaker 3: to the partnership with sponsors and direct lending and the

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Speaker 3: ability for a small group of lenders to negotiate terms

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Speaker 3: and offer pick interest for example for a period of time,

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Speaker 3: or sponsors actually putting in equity capital, which you've seen

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Speaker 3: in direct lending much more than BSL and tighter documentation.

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Speaker 3: So I think some of the market technicals they compensate

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Speaker 3: for the lower quality. And my prediction at least is

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Speaker 3: that we'll see pretty similar default rates in both markets,

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Speaker 3: though not zero anymore for direct lending.

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Speaker 2: Yeah. And on a similar note, Lauren, you know liability

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Speaker 2: management exercises have been on the rise amongst stress creditors.

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Speaker 2: Is this activity a healthy thing for investors or a negative?

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Speaker 2: Given that that outcomes can vary amongst investors of the

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Speaker 2: same creditor.

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Speaker 3: Class, well, as a loan peerist, you have to think

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Speaker 3: that it's not a good thing. I think a lot

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Speaker 3: of us have trouble thinking about how debt could be

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Speaker 3: taking a haircut before equity. Equity is supposed to be

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Speaker 3: the first loss, and oftentimes you see sponsors or companies

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Speaker 3: come back to lenders and say, well, I'm not taking

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Speaker 3: a loss, but because your credit agreement is so loose,

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Speaker 3: I'm going to strip assets or drop down assets unless

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Speaker 3: you take a haircut or you extend me more money.

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Speaker 3: That's not the way our market has historically operated. And

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Speaker 3: it feels like a sea change. It's a sea change,

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Speaker 3: really that that's there were some of these that had

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Speaker 3: famous names, and there's a ton of press about you know,

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Speaker 3: five years ago or ten years ago, and now they're

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Speaker 3: commonplace over the last year and a half or two years.

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Speaker 3: So overall, it really does dilute the quality of the

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Speaker 3: BSL market. There's a higher likelihood that you will be

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Speaker 3: asked to take a discount on something, even if that

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Speaker 3: company doesn't really have to file for bankruptcy, right they

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Speaker 3: could take advantage of the documentation. The companies and sponsors

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Speaker 3: are not being punished for this behavior. So that makes

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Speaker 3: me believe we continue to see it. When loans trade

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Speaker 3: at eighty or eighty five cents in the dollar, advisors

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Speaker 3: are being really aggressive and reversing these ideas in so

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Speaker 3: even if it's not the company's idea, it's being put

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Speaker 3: in front of them as an option. So I think

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Speaker 3: it's here to stay. So the next question is what

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Speaker 3: do you do if you believe that this is the

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Speaker 3: new normal for the leverage loan market, And then I

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Speaker 3: think you have to invest behind it. Right, you need

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Speaker 3: the capabilities to make sure that your size matter, your

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Speaker 3: voice matters. You have the right people on your team

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Speaker 3: that have the capabilities to negotiate these these transactions, because

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Speaker 3: more so than ever, you will see the same exact

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Speaker 3: loan owned by let's say two different managers recover something

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Speaker 3: totally different, and I think that's going to be a

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Speaker 3: differentiation in performance for loan managers going forward.

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Speaker 2: Absolutely fair point. And then you know, how does Carlisle's

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Speaker 2: platform differentiate itself in that regard, you know, especially as

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Speaker 2: we move out of a cycle of the court bankruptcies

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Speaker 2: and into Lem's.

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Speaker 3: Yeah, so soze size matters and size helps, and we

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Speaker 3: are the largest BSL manager there so even if we

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Speaker 3: don't have a big position in one fund, the fact

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Speaker 3: that we manage close to one hundred clos adds up

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Speaker 3: to a large position in most things. So our voice matters,

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Speaker 3: and we've really invested behind this theme. We've now built

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Speaker 3: out a six person team that is solely dedicated to

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Speaker 3: working on transactions where we're looking at or restructuring or

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Speaker 3: LM in and out of court.

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Speaker 1: But how do CLOS participate, I mean, are they adding

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Speaker 1: new language to the documentation?

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Speaker 3: Yeah, I'd say we've seen a lot more flexibility in

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Speaker 3: language over the last five plus years in CLOS. Really,

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Speaker 3: as even debtholders are acknowledging that this is an important

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Speaker 3: capability to protect value within the CLO. I think there

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Speaker 3: was a there was a perception that clos are being

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Speaker 3: taken advantage of for a lot of their history. That

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Speaker 3: was more from the hedge fund community that would learn

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Speaker 3: what the documents would look at and how to structure

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Speaker 3: something around them. That also feels like a bit of

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Speaker 3: a change now as a lot of the map who

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Speaker 3: are leading these strange actions though not always but but

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Speaker 3: commonplace now is for par colo buyers or just par

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Speaker 3: loan buyers to be very active in these processes and

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Speaker 3: figuring out how they want them structured.

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Speaker 1: And to Mike's point, I mean you, as Carlile, how

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Speaker 1: do you make sure you get the better recovery if

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Speaker 1: you know there are two outcomes on the table.

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Speaker 3: Yeah, you have to make sure you have the right

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Speaker 3: expertise and you're forcing your way into the right group

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Speaker 3: if it's a non proredd of transaction. That's my thesis

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Speaker 3: that that's what I believe is happening. We're seeing just

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Speaker 3: more and more of these as soon as the loan

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Speaker 3: price is trading again eighty five eighty. They're rumblings, and

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Speaker 3: what happens is you see more volatility in the in

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Speaker 3: the loan prices. And why is that It's there's now

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Speaker 3: this uncertainty premium that you need because before you would

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Speaker 3: be able to have a really good call on an

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Speaker 3: asset and say, well, it's trading at seventy five, but

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Speaker 3: I believe in the management team they're going to turn

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Speaker 3: the company around. It's power paper and you may be

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Speaker 3: right on that, but that doesn't mean that you don't

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Speaker 3: have process risk in between the two. And so that

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Speaker 3: process risk deserves a premium or a risk premium in

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Speaker 3: our market. You don't adjust it with the spread. There

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Speaker 3: is a spread is the spread, so that means there's

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Speaker 3: more volatility in the price.

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Speaker 1: Right. Yeah, Our last guests actually from PIMCOD described this

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Speaker 1: whole situation as a knife fight between creditors. Hopefully it

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Speaker 1: doesn't get worse, but there seems to be no punishment

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Speaker 1: for engaging in it, either on the borrow or the

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Speaker 1: advisor side, so it seems that it probably will get worse. Right,

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Speaker 1: But turning to clos which you know we talked a

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Speaker 1: bit about the beginning. There has been a record year

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Speaker 1: you know behind us for issuance and resets. A lot

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Speaker 1: of people expect another record year for primary volume this year,

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Speaker 1: do you share that view? What's your forecast?

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Speaker 3: Well, we are starting twenty twenty five pretty much where

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Speaker 3: we left off in twenty twenty four, with pretty significant

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Speaker 3: co low volume. New issue volume is down year over year.

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Speaker 3: I think that's because asset prices have been so high,

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Speaker 3: so it takes longer to create new issue by sourcing

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Speaker 3: primary loans versus more in the secondary. But resets have

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Speaker 3: really stepped in because you don't need a lot of

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Speaker 3: new assets for resets, so you've seen significant reset volume,

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Speaker 3: and I think I think new issue volume is going

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Speaker 3: to pick up as a lot of these warehouses get

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Speaker 3: to let's say, fifty percent of the target value in

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Speaker 3: primary loans. There are a lot of estimates out there

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Speaker 3: that suggest that we'll have another record year or record

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Speaker 3: breaking year. It feels like that right now, But I'll

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Speaker 3: be a little contrarian in that there's probably going to

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Speaker 3: be more volatility this year than there was last year.

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Speaker 3: The markets, the fixed income markets just feel very much

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Speaker 3: priced for perfection, and we're seeing there's just more risk.

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Speaker 3: And you opened with a number of those risks when

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Speaker 3: we started this conversation. So last year we had almost

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Speaker 3: no volatility. I would expect pockets this year. And what

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Speaker 3: do pockets of volatility do. It slows down issuance.

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Speaker 1: And that just means tight to spreads, right, tighter spreads

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Speaker 1: on the clos.

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Speaker 3: Well, we're tight. We're tight right now. Really, if you

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Speaker 3: look at where we are since the financial crisis on

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Speaker 3: a weighted average cost of debt basis, we're near all

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Speaker 3: time tights. So triple as are not at tights yet.

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Speaker 3: That said, I don't know that we close much tighter

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Speaker 3: than where we are today depending on volatility. We have

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Speaker 3: seen over the last let's say a week or so,

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Speaker 3: a little bit of widening in the way to average

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Speaker 3: cross the debt. I think that just comes with the

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Speaker 3: macro volatility. Seeing the stock market have some down days,

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Speaker 3: some of these headline risks, and people taking a little

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Speaker 3: bit of a step back, and that's just a microcosm

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Speaker 3: of what could happen throughout the year. So maybe we

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Speaker 3: end up close to where we are right now by

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Speaker 3: year end on spreads, maybe we're a little bit tighter

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Speaker 3: or wider, But I think there's just going to be more.

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Speaker 3: There will be times where we'll see more about volatility.

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Speaker 1: My colleague Charlie Williams over and bloommig News. He says

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Speaker 1: for a standard five year reinvestment and two year non call,

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Speaker 1: it's around one fifteen one twenty now over sofa And

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Speaker 1: when we had three month libel, a few deals got

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Speaker 1: under one hundred. Maybe that was you know, five years

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Speaker 1: ago or so. Do you think we'll end the year

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Speaker 1: then around one fifteen? Still?

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Speaker 3: Oh, my crystal ball is not is not that clear?

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Speaker 3: But yes, I think we probably end the year inside

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Speaker 3: of the one fifteen where we are now.

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Speaker 2: And then Lauren, you know, middle market COLO involvement has

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Speaker 2: been an area of significant growth. Is that something you

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Speaker 2: know your business of Carlisle is involved in and what

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Speaker 2: do you what do you seeing there?

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Speaker 3: Yeah, so Carlisle has a meaningful direct lending business. We

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Speaker 3: have issued middle market clos in the past. We did

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Speaker 3: a new issue middle market COLO last year in a

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Speaker 3: reset of an older one as well. So it's an

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Speaker 3: area that we're spending significant time on as I think

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Speaker 3: there's going to be more traditional COLO buyer interest in

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Speaker 3: having a pocket for some exposure to middle market clos

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Speaker 3: going forward.

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Speaker 2: Fair enough for then you know, kind of switching gears.

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Speaker 2: You know, COLO ETFs have grown considerably over the past

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Speaker 2: two years. You know, what do you attribute this growth

385
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Speaker 2: to and is it a net positive for financial markets?

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Speaker 3: Yeah, really significant growth. I think that part of it

387
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Speaker 3: is just demand for floating rate asset class, and so

388
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Speaker 3: you can invest in in the COLO Triple A fund

389
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Speaker 3: and get a spread over a nice floating rate base rate.

390
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Speaker 3: And when retail investors are looking for products that don't

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Speaker 3: have a lot of volatility that have performed, I think

392
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Speaker 3: there's and have a decent current yield. I think that's

393
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Speaker 3: created a lot of flows into the triple A product.

394
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Speaker 3: There will be more volatility on the MEZ products, the

395
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Speaker 3: ones that buy double b's and triple b's, But I

396
00:22:23,520 --> 00:22:25,760
Speaker 3: do think it's a positive for the retail investor to

397
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Speaker 3: have access to what had traditionally been institutional products. And

398
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Speaker 3: when you look at the COLO debt tranches, it could

399
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Speaker 3: be anywhere from triple as down to double b's. And

400
00:22:38,760 --> 00:22:43,320
Speaker 3: then you look at similarly rated asset classes, you see

401
00:22:43,520 --> 00:22:50,760
Speaker 3: better default histories, better sharp ratios, better current yield, better spread,

402
00:22:51,280 --> 00:22:55,800
Speaker 3: better total return. The most other comparable asset classes are

403
00:22:55,880 --> 00:22:59,399
Speaker 3: similarly rated asset classes, and yet the retail investor just

404
00:22:59,480 --> 00:23:01,760
Speaker 3: never had access. So I think I think it's a

405
00:23:01,840 --> 00:23:04,320
Speaker 3: really good I think it's a really good development for

406
00:23:04,400 --> 00:23:07,680
Speaker 3: the market. Clearly, that creates more demand and leads to

407
00:23:07,760 --> 00:23:10,760
Speaker 3: spread tightening, which is nice for CLO equity. At some

408
00:23:10,840 --> 00:23:14,520
Speaker 3: point there will be outflows though, and and I think

409
00:23:15,600 --> 00:23:17,320
Speaker 3: I think that will be an interesting thing for the market.

410
00:23:17,400 --> 00:23:20,720
Speaker 3: We haven't seen seen that happen yet, but that probably

411
00:23:20,760 --> 00:23:22,120
Speaker 3: also creates opportunity.

412
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Speaker 1: I remember when the first ETF for CLOS was discussed

413
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Speaker 1: years ago and I mentioned it to someone. They said,

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Speaker 1: You're You're crazy. There's no liquidity there. What are you

415
00:23:32,560 --> 00:23:34,560
Speaker 1: talking about? So why why does this work?

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Speaker 3: Now?

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Speaker 1: I mean you your your title liquid credit clos. How

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Speaker 1: does that fit in? Why is it liquid? And how

419
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Speaker 1: liquid is it?

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Speaker 3: Yeah? So the SALO markets are trillion dollars and you

421
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Speaker 3: have about sixty percent of that in triple A. Is

422
00:23:46,320 --> 00:23:48,800
Speaker 3: that's a pretty big asset class and a pretty liquid

423
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Speaker 3: asset class. Liquid, or at least the way we think

424
00:23:51,720 --> 00:23:54,640
Speaker 3: about it, Carlisle is tradable, something that you could buy

425
00:23:54,800 --> 00:23:57,119
Speaker 3: or sell any day that you walk into the office,

426
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Speaker 3: and COLO triple as certainly fit that bill.

427
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Speaker 1: So if I'm a you know, I don't know how

428
00:24:02,760 --> 00:24:04,399
Speaker 1: much money I have to put in as a retail investor.

429
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Speaker 1: I'm for disclosure, I'm not invested in the COLO market.

430
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Speaker 1: But if I put a thousand dollars in, can I

431
00:24:11,160 --> 00:24:12,400
Speaker 1: get it back out tomorrow if I want?

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Speaker 3: It? Settles T plus one?

433
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Speaker 1: Okay, amazing. The other thing you talked about was equity.

434
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Speaker 1: You know, not all of our listeners will be familiar

435
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Speaker 1: with CLO equity and how it works. You know, we

436
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Speaker 1: mostly have debt investors and listeners here. But how does

437
00:24:29,240 --> 00:24:31,800
Speaker 1: that work and why does it still work in this environment?

438
00:24:32,320 --> 00:24:32,800
Speaker 2: Sure so?

439
00:24:33,160 --> 00:24:36,200
Speaker 3: So COLO equity is basically an arbitrage product. What a

440
00:24:36,280 --> 00:24:40,680
Speaker 3: COLO does is it lends to a bunch of below

441
00:24:40,800 --> 00:24:46,320
Speaker 3: enverestment great corporate credits. They are highly diverse collateral pools

442
00:24:47,119 --> 00:24:51,119
Speaker 3: by issuer and by industry. So for example, you can't have,

443
00:24:51,359 --> 00:24:54,760
Speaker 3: depending on the COLO document, more than between twelve and

444
00:24:54,880 --> 00:24:57,760
Speaker 3: fifteen percent in any one industry. So even if you

445
00:24:58,040 --> 00:25:00,680
Speaker 3: love oil and gas and we went through another oil

446
00:25:00,720 --> 00:25:04,840
Speaker 3: and gas cycle, eighty five percent of your portfolio will

447
00:25:04,880 --> 00:25:09,600
Speaker 3: not be tied to that negative industry trend at that time.

448
00:25:09,880 --> 00:25:12,240
Speaker 3: And that's why colos have worked so well over twenty

449
00:25:12,320 --> 00:25:17,200
Speaker 3: five years. Is unlike CDOs or mortgage securitizations. They're not

450
00:25:17,320 --> 00:25:20,200
Speaker 3: tied to just one industry or real estate. They're tied

451
00:25:20,240 --> 00:25:23,440
Speaker 3: to the US economy as a whole, with lots of

452
00:25:23,560 --> 00:25:27,159
Speaker 3: different lots of different industries and borrowers inside. So the

453
00:25:27,200 --> 00:25:29,960
Speaker 3: typical COLO will have two hundred and fifty three hundred

454
00:25:30,000 --> 00:25:33,520
Speaker 3: different below investment grade corporate names in it, and we're

455
00:25:33,560 --> 00:25:37,000
Speaker 3: talking about average, but DI have like seven hundred million

456
00:25:37,040 --> 00:25:40,600
Speaker 3: dollars or something along those lines. So these are really large,

457
00:25:41,760 --> 00:25:46,120
Speaker 3: large companies that colos are lending to. So they lend

458
00:25:46,160 --> 00:25:48,760
Speaker 3: to the companies, they get an average spread from lending,

459
00:25:49,080 --> 00:25:52,560
Speaker 3: and then they issue liabilities at tighter spreads, so you're

460
00:25:52,920 --> 00:25:55,399
Speaker 3: borrowing money at a cheaper rate to lend it at

461
00:25:55,440 --> 00:25:59,000
Speaker 3: a more expensive rate. You're levering that structure, and all

462
00:25:59,160 --> 00:26:02,359
Speaker 3: of the resis visual cash flows from the difference between

463
00:26:02,480 --> 00:26:05,920
Speaker 3: what you're borrowing at and what you're lending at go

464
00:26:06,119 --> 00:26:09,640
Speaker 3: to the benefit of the equity investor, and that creates

465
00:26:09,800 --> 00:26:14,120
Speaker 3: really high cash on cash profiles compared to other compared

466
00:26:14,119 --> 00:26:17,920
Speaker 3: to other products. But the equity is also the first loss.

467
00:26:18,080 --> 00:26:20,680
Speaker 3: So any default you take, any trading loss you take,

468
00:26:22,400 --> 00:26:25,680
Speaker 3: will hit will hit the equity return. So oftentimes you'll

469
00:26:25,760 --> 00:26:29,479
Speaker 3: receive higher cash on cash, but you have to think

470
00:26:29,520 --> 00:26:32,200
Speaker 3: about what loss you will take at the end because

471
00:26:32,560 --> 00:26:35,840
Speaker 3: there will be defaults or losses over a period of time.

472
00:26:36,440 --> 00:26:40,840
Speaker 1: How much have they lost if they've been terrible victims

473
00:26:40,880 --> 00:26:43,600
Speaker 1: of various cycles, or have they came up Have they

474
00:26:43,640 --> 00:26:44,959
Speaker 1: come up pretty pretty strongly?

475
00:26:45,520 --> 00:26:47,639
Speaker 3: Yeah, So it depends. That depends on the vintage. I

476
00:26:47,680 --> 00:26:51,760
Speaker 3: think there's there are stronger vintages and weaker vintages. The

477
00:26:52,080 --> 00:26:54,160
Speaker 3: rule of thumb is you're supposed to assume that there's

478
00:26:54,359 --> 00:26:57,560
Speaker 3: a two percent constant default rate in a CLO and

479
00:26:57,720 --> 00:27:02,240
Speaker 3: you recover sixty cents on that. Realistically, you don't really

480
00:27:02,280 --> 00:27:04,920
Speaker 3: have a constant default rate. You have times when they're

481
00:27:04,960 --> 00:27:07,120
Speaker 3: high default rates and times when there's close to zero

482
00:27:07,200 --> 00:27:10,800
Speaker 3: default rates. What I think surprises a lot of people

483
00:27:10,800 --> 00:27:13,440
Speaker 3: when we talk about colos is some of the strongest vintages,

484
00:27:14,680 --> 00:27:17,639
Speaker 3: for example, was right before the financial crisis. How is

485
00:27:17,760 --> 00:27:21,199
Speaker 3: your strongest vantage of col IRRs the ones that are

486
00:27:21,240 --> 00:27:23,200
Speaker 3: issued in two thousand and seven, and then you went

487
00:27:23,560 --> 00:27:26,720
Speaker 3: to nine percent defaults the next year, But it was

488
00:27:26,800 --> 00:27:31,080
Speaker 3: because that locked in capital cheap cost to capital that's

489
00:27:31,200 --> 00:27:34,520
Speaker 3: non marked to market, so there's no foreselling and then

490
00:27:34,560 --> 00:27:37,640
Speaker 3: you have a reinvestment period. So even at times when

491
00:27:37,640 --> 00:27:40,960
Speaker 3: there's high defaults, when you get pre payments, then you're

492
00:27:41,160 --> 00:27:45,879
Speaker 3: reinvesting those prepayments at cheaper dollar prices, higher spreads, and

493
00:27:46,040 --> 00:27:48,160
Speaker 3: it starts to build back what you may have lost

494
00:27:48,400 --> 00:27:52,720
Speaker 3: from the defaults. So you actually will see pretty good

495
00:27:52,800 --> 00:27:57,000
Speaker 3: returns from colos when they're issued right around a time

496
00:27:57,040 --> 00:27:58,360
Speaker 3: of volatility.

497
00:27:58,280 --> 00:28:02,600
Speaker 2: And Lord buying non Carlisle managed colos is a part

498
00:28:02,680 --> 00:28:05,080
Speaker 2: of your business. You know, what's your involvement in that

499
00:28:05,240 --> 00:28:07,600
Speaker 2: aspect of the business and what is the process like

500
00:28:07,680 --> 00:28:10,080
Speaker 2: for you when you're deciding what looks interesting and what

501
00:28:10,320 --> 00:28:11,320
Speaker 2: you may pass on.

502
00:28:11,960 --> 00:28:15,080
Speaker 3: Yeah, so we all sit as one team, between the

503
00:28:15,680 --> 00:28:19,680
Speaker 3: COLO tranch investing team and our analyst team, and I

504
00:28:19,720 --> 00:28:23,760
Speaker 3: think it's really valuable because we actually can understand the

505
00:28:23,920 --> 00:28:26,879
Speaker 3: risk inside those portfolios. So I will sit on the

506
00:28:26,920 --> 00:28:30,080
Speaker 3: investment committee for the tranch investing teams, and at times

507
00:28:30,119 --> 00:28:31,920
Speaker 3: I could look at a portfolio and say, I know

508
00:28:32,080 --> 00:28:34,960
Speaker 3: what the statistics are telling you, saying it's low triple

509
00:28:35,040 --> 00:28:38,920
Speaker 3: C or low wharf, which is the Moody's equivalent of

510
00:28:39,720 --> 00:28:43,600
Speaker 3: a numerical equivalent of rating. But I see what they're doing,

511
00:28:43,760 --> 00:28:46,120
Speaker 3: like this is not a low risk portfolio. So having

512
00:28:46,320 --> 00:28:50,040
Speaker 3: the insight on what the underlying collateral is and not

513
00:28:50,440 --> 00:28:55,320
Speaker 3: just the quantitative model about running what default rate and

514
00:28:55,360 --> 00:28:58,280
Speaker 3: recovery rate they'll be I think is really beneficial to

515
00:28:59,080 --> 00:28:59,880
Speaker 3: COLO investing.

516
00:29:00,720 --> 00:29:02,800
Speaker 1: A lot of people at Bloomberg News ask the credit team,

517
00:29:02,880 --> 00:29:06,440
Speaker 1: which I'm part of, why spreads just keep going lower

518
00:29:06,480 --> 00:29:09,440
Speaker 1: even though risk seems to be getting worse. You know,

519
00:29:09,560 --> 00:29:11,600
Speaker 1: fundamentally we seem to be facing a bit of a

520
00:29:11,680 --> 00:29:14,560
Speaker 1: drag in the economy and potentially earnings will suffer and

521
00:29:14,680 --> 00:29:18,800
Speaker 1: you know, consumers getting hit. You know, I often just

522
00:29:18,840 --> 00:29:22,200
Speaker 1: talk about there just being not enough supply. One area

523
00:29:22,280 --> 00:29:24,000
Speaker 1: that you know, potentially we could see it is M

524
00:29:24,040 --> 00:29:27,040
Speaker 1: and A, but that hasn't really started very strongly this year.

525
00:29:27,080 --> 00:29:28,640
Speaker 1: What's your what's your view of M and A. Do

526
00:29:28,680 --> 00:29:30,280
Speaker 1: you think we'll get a lot of that this year?

527
00:29:30,680 --> 00:29:34,240
Speaker 3: So you're right, there's a clearer technical imbalance between supply

528
00:29:34,320 --> 00:29:36,760
Speaker 3: and demand, and that is part of the reasons why

529
00:29:36,960 --> 00:29:39,880
Speaker 3: why spreads are so tight right now. There's more demand

530
00:29:40,080 --> 00:29:45,720
Speaker 3: for loans than there is true loan creation. It's sort

531
00:29:45,720 --> 00:29:47,640
Speaker 3: of an easy prediction that there should be more M

532
00:29:47,680 --> 00:29:50,000
Speaker 3: and A this year because it was so low last year,

533
00:29:50,400 --> 00:29:53,920
Speaker 3: it's not that hard to beat. When we talk internally

534
00:29:54,600 --> 00:29:57,120
Speaker 3: to to our capital markets team, they do believe they'll

535
00:29:57,240 --> 00:30:00,320
Speaker 3: they'll see more M and A this year, both from

536
00:30:00,560 --> 00:30:04,280
Speaker 3: the portfolio companies, meaning their portfolio companies may have thought

537
00:30:04,640 --> 00:30:07,960
Speaker 3: that it would be hard to acquire something or add on,

538
00:30:08,360 --> 00:30:13,520
Speaker 3: you know, another business line, and now with the new administration,

539
00:30:13,600 --> 00:30:16,520
Speaker 3: they think it could be easier. So just more portfolio

540
00:30:16,640 --> 00:30:19,360
Speaker 3: company M and A. But there also seems to be

541
00:30:19,480 --> 00:30:22,840
Speaker 3: more more processes in the background. So I don't know

542
00:30:23,040 --> 00:30:26,880
Speaker 3: what the full year looks like as far as what

543
00:30:27,080 --> 00:30:29,840
Speaker 3: the total amount of true new issue and will look

544
00:30:29,920 --> 00:30:32,640
Speaker 3: like in our market from LBOs and M and a's,

545
00:30:32,960 --> 00:30:35,000
Speaker 3: but I do think we're setting up for a busier

546
00:30:35,160 --> 00:30:37,280
Speaker 3: year than we were than we had last year.

547
00:30:38,120 --> 00:30:40,320
Speaker 1: Are you in any way sort of surveying the landscape

548
00:30:40,320 --> 00:30:43,320
Speaker 1: for potential acquisition targets and trying to ride the change

549
00:30:43,360 --> 00:30:47,000
Speaker 1: of control elements of that as a as an investor, Yeah,

550
00:30:47,040 --> 00:30:49,280
Speaker 1: we have that from the bond side at the moment

551
00:30:49,320 --> 00:30:51,200
Speaker 1: that people are looking for targets and then you know,

552
00:30:51,240 --> 00:30:53,080
Speaker 1: you get this one oh one, and how does that

553
00:30:53,200 --> 00:30:55,360
Speaker 1: work in terms of what you're investing in?

554
00:30:56,280 --> 00:30:59,240
Speaker 3: Yeah, So we have had what i'd say, you know,

555
00:30:59,400 --> 00:31:03,840
Speaker 3: some bonds that we own that announce that they're being acquired.

556
00:31:04,240 --> 00:31:08,920
Speaker 3: Those are very positive situations because you get that very

557
00:31:09,040 --> 00:31:12,680
Speaker 3: quick pulled apar from what was probably a low coupon

558
00:31:12,800 --> 00:31:15,960
Speaker 3: bond trading at a disc discount, not because of credit risk,

559
00:31:16,040 --> 00:31:20,520
Speaker 3: but because of duration risk. We have run some screens

560
00:31:20,560 --> 00:31:24,600
Speaker 3: there as well, but that's not our principal strategy.

561
00:31:24,680 --> 00:31:24,920
Speaker 2: Okay.

562
00:31:25,320 --> 00:31:29,160
Speaker 1: So, but you do expect more LBOs with debt, and

563
00:31:29,280 --> 00:31:32,640
Speaker 1: that maybe to boost the leverage loan supply, not on

564
00:31:32,720 --> 00:31:36,160
Speaker 1: the net basis, Okay, any particular sectors you think are

565
00:31:36,240 --> 00:31:37,040
Speaker 1: right for that right now?

566
00:31:38,320 --> 00:31:40,360
Speaker 3: I think it's sectors that could support a higher base

567
00:31:40,480 --> 00:31:44,440
Speaker 3: rate and so good cash flow types of companies that

568
00:31:44,520 --> 00:31:48,760
Speaker 3: you could still put six times leverage on areas where

569
00:31:48,800 --> 00:31:52,920
Speaker 3: you see growth and could support a cap structure that

570
00:31:53,080 --> 00:31:55,640
Speaker 3: assumes that rates are not going back down to zero.

571
00:31:56,280 --> 00:31:58,960
Speaker 1: And does that take us also to private credit funding

572
00:31:59,000 --> 00:31:59,480
Speaker 1: those deals?

573
00:32:00,520 --> 00:32:01,120
Speaker 3: Absolutely?

574
00:32:01,320 --> 00:32:03,920
Speaker 1: Okay, And it would for an issue. It just really

575
00:32:03,960 --> 00:32:05,840
Speaker 1: depends they have those options. It would just depend on

576
00:32:05,960 --> 00:32:09,080
Speaker 1: where the best cost of funds are right.

577
00:32:09,000 --> 00:32:10,880
Speaker 3: And what is you know, what are they looking for?

578
00:32:11,280 --> 00:32:14,160
Speaker 3: Is it the cost of funds or is it more

579
00:32:14,240 --> 00:32:18,520
Speaker 3: delay drop capabilities because they're going to do more tucking acquisitions, right,

580
00:32:18,600 --> 00:32:20,440
Speaker 3: direct lending may be easier to do. They want a

581
00:32:20,640 --> 00:32:24,080
Speaker 3: unitrant solution in the direct lending market, where if they

582
00:32:24,160 --> 00:32:27,120
Speaker 3: came to the liquid loan market, they need a first

583
00:32:27,200 --> 00:32:30,480
Speaker 3: lean and a second lean component, where the blended rate

584
00:32:30,680 --> 00:32:33,840
Speaker 3: may actually not be that different than what the unitrant

585
00:32:33,960 --> 00:32:34,280
Speaker 3: rate is.

586
00:32:34,640 --> 00:32:38,640
Speaker 1: Okay. Your titles also has the word global in it,

587
00:32:38,760 --> 00:32:41,960
Speaker 1: which I'm always very interested in, giving that everyone is

588
00:32:42,040 --> 00:32:44,480
Speaker 1: just so loaded up on the US at the moment,

589
00:32:45,480 --> 00:32:47,520
Speaker 1: but there seems to be, you know, lots of other

590
00:32:47,600 --> 00:32:50,960
Speaker 1: markets out there. Maybe geographical diversification is a good thing

591
00:32:51,040 --> 00:32:52,880
Speaker 1: over the long haul. What are you saying outside of

592
00:32:52,920 --> 00:32:53,200
Speaker 1: the US.

593
00:32:53,800 --> 00:32:58,400
Speaker 3: Yeah, So we have a European business as well. It's

594
00:32:58,400 --> 00:33:02,680
Speaker 3: about nine billion dollars a UM invested in liquid loans,

595
00:33:02,840 --> 00:33:07,200
Speaker 3: mostly through colos. What I'd say is that we're actually

596
00:33:07,200 --> 00:33:10,120
Speaker 3: seeing pretty good performance there. It doesn't look that different

597
00:33:10,680 --> 00:33:13,960
Speaker 3: from what we're seeing in our US companies. So in

598
00:33:14,040 --> 00:33:18,000
Speaker 3: our US companies for the third quarter, we saw about

599
00:33:18,400 --> 00:33:23,480
Speaker 3: seventy percent of our companies grow sales and EBITDA it

600
00:33:23,600 --> 00:33:26,240
Speaker 3: was very high sixties in Europe, right, just a couple

601
00:33:26,360 --> 00:33:31,680
Speaker 3: percentage points different, which which I think surprises people when

602
00:33:31,680 --> 00:33:33,680
Speaker 3: they think about Europe. But when we look at the

603
00:33:33,760 --> 00:33:38,400
Speaker 3: performance of loans and companies in Europe, I think Germany

604
00:33:38,480 --> 00:33:41,640
Speaker 3: has very specific issues, but Germany is not all all

605
00:33:41,760 --> 00:33:45,320
Speaker 3: of Europe. So we're seeing pretty We're seeing pretty strong

606
00:33:45,400 --> 00:33:49,200
Speaker 3: performance in the portfolios on both sides, and they don't

607
00:33:49,840 --> 00:33:52,920
Speaker 3: look that different from the performance metrics right now.

608
00:33:53,680 --> 00:33:55,760
Speaker 1: But the idea is that the US is going to

609
00:33:55,800 --> 00:33:57,320
Speaker 1: grow a lot more in the in the you know,

610
00:33:57,360 --> 00:33:59,959
Speaker 1: European countries are going to face you know, much more

611
00:34:00,200 --> 00:34:02,920
Speaker 1: challenging times ahead, and that will filter down to the

612
00:34:03,000 --> 00:34:06,000
Speaker 1: boroughs at the corporate level, although they seem to be

613
00:34:06,080 --> 00:34:09,520
Speaker 1: priced much cheaper, is there a relative value opportunity US

614
00:34:10,320 --> 00:34:12,439
Speaker 1: Europe and in favor of Europe at the moment.

615
00:34:12,800 --> 00:34:16,640
Speaker 3: Yeah. And by the way, since Ukraine, everyone's been predicting

616
00:34:16,719 --> 00:34:18,880
Speaker 3: some of the downfall of the European economy and that

617
00:34:18,960 --> 00:34:22,080
Speaker 3: the credits were going to deteriorate very meaningfully, and that

618
00:34:22,280 --> 00:34:26,160
Speaker 3: hasn't really happened, right, And yes, you could pick up

619
00:34:26,320 --> 00:34:29,479
Speaker 3: meaningful spread by investing in European loans. We would see

620
00:34:29,719 --> 00:34:33,200
Speaker 3: average portfolio spreads in Europe in the high three seventies

621
00:34:33,360 --> 00:34:37,319
Speaker 3: versus the low three twenties in the USA. Now your

622
00:34:37,360 --> 00:34:40,279
Speaker 3: base rate is lower, so the yield in the US

623
00:34:40,440 --> 00:34:43,080
Speaker 3: is still higher, So you think about how you're hedging

624
00:34:43,360 --> 00:34:46,560
Speaker 3: and where your capital is coming from. But it also

625
00:34:46,719 --> 00:34:52,799
Speaker 3: note that Europe doesn't have this liability management distress exchange phenomenon.

626
00:34:52,920 --> 00:34:55,719
Speaker 3: There are some, but it's not as prevalent as what

627
00:34:55,800 --> 00:34:56,799
Speaker 3: you're seeing in the US.

628
00:34:57,080 --> 00:34:59,040
Speaker 1: And you don't think it's going to spread in that direction.

629
00:34:59,160 --> 00:35:01,800
Speaker 1: I mean, these things tend to move, you know, around

630
00:35:01,840 --> 00:35:02,120
Speaker 1: the world.

631
00:35:03,280 --> 00:35:03,759
Speaker 2: I do.

632
00:35:04,040 --> 00:35:05,920
Speaker 3: I think I think that there will be more of

633
00:35:05,960 --> 00:35:09,160
Speaker 3: them in Europe over time, but I don't think we're

634
00:35:09,239 --> 00:35:11,759
Speaker 3: catching up to where we are in the US anytime soon.

635
00:35:12,080 --> 00:35:16,080
Speaker 1: Okay, but so, but you're naturally presumably weighted towards the

636
00:35:16,160 --> 00:35:18,200
Speaker 1: US just because of the scale relative scale of the

637
00:35:18,239 --> 00:35:18,880
Speaker 1: two markets.

638
00:35:20,320 --> 00:35:21,040
Speaker 3: Do you do you do?

639
00:35:21,080 --> 00:35:22,359
Speaker 1: You do you spend much time in Asia?

640
00:35:23,520 --> 00:35:27,200
Speaker 3: Yes, we we have a lot of investors in Asia,

641
00:35:27,280 --> 00:35:29,040
Speaker 3: so we we try to visit frequently.

642
00:35:29,840 --> 00:35:32,399
Speaker 1: And when you're talking to investors that aren't from the US,

643
00:35:33,320 --> 00:35:34,719
Speaker 1: what are they what are they asking you right now?

644
00:35:34,719 --> 00:35:36,560
Speaker 1: I mean that from you know, the questions I get

645
00:35:36,600 --> 00:35:39,360
Speaker 1: from the UK, for example, along the lines of what

646
00:35:39,520 --> 00:35:43,000
Speaker 1: on earth is going on because of the politics more

647
00:35:43,040 --> 00:35:45,239
Speaker 1: than anything. But but what sort of questions do do

648
00:35:45,360 --> 00:35:48,800
Speaker 1: potential investors ask you about, you know, generally investing in

649
00:35:48,960 --> 00:35:49,680
Speaker 1: credit right now?

650
00:35:50,480 --> 00:35:53,920
Speaker 3: Yes, I'd say when we uh talk to to investors

651
00:35:53,960 --> 00:35:57,440
Speaker 3: in Europe, I'd say there's a little there's more pessimism

652
00:35:57,520 --> 00:36:01,160
Speaker 3: there than there is in the US today. Certainly, questions

653
00:36:01,200 --> 00:36:06,520
Speaker 3: around policy tariffs, what the administration means, what the interconnectivity

654
00:36:06,560 --> 00:36:10,799
Speaker 3: of the supply chain looks like, and you know, where

655
00:36:11,200 --> 00:36:13,440
Speaker 3: where the US decides to partner going forward. So I

656
00:36:13,480 --> 00:36:16,840
Speaker 3: think it's just top of mind, both in Europe and

657
00:36:16,960 --> 00:36:21,160
Speaker 3: Asia and even in the US to ask questions like that, and.

658
00:36:21,280 --> 00:36:23,799
Speaker 1: In terms of you know, the answers that we get

659
00:36:23,880 --> 00:36:26,800
Speaker 1: from investors at the moment is look through the noise,

660
00:36:27,360 --> 00:36:29,759
Speaker 1: focus on the pro growth, focus on the on the

661
00:36:29,800 --> 00:36:32,759
Speaker 1: business credentials of of the you know, the leaders, and

662
00:36:32,880 --> 00:36:35,040
Speaker 1: don't get don't get tied up in the you know,

663
00:36:35,400 --> 00:36:37,600
Speaker 1: the day to day noise. Is that is that a

664
00:36:37,719 --> 00:36:41,799
Speaker 1: fair assumption for for you know, a portfolio manager right now,

665
00:36:41,960 --> 00:36:42,960
Speaker 1: should should they just do that?

666
00:36:44,440 --> 00:36:46,680
Speaker 3: I think it's hard to just do that, especially given

667
00:36:46,719 --> 00:36:50,680
Speaker 3: how tight risk premiums are. You know that said a

668
00:36:50,760 --> 00:36:52,960
Speaker 3: lot of times you have a clear picture on policy,

669
00:36:53,040 --> 00:36:54,560
Speaker 3: and then you could you could figure out what your

670
00:36:54,600 --> 00:36:59,560
Speaker 3: investment strategy is with that. And I don't think we

671
00:36:59,640 --> 00:37:02,560
Speaker 3: have a very clear view on policy right now, and

672
00:37:02,920 --> 00:37:06,879
Speaker 3: things are changing, and we could see headlines that say

673
00:37:06,960 --> 00:37:09,400
Speaker 3: one thing you know on Monday, and say a different

674
00:37:09,440 --> 00:37:13,279
Speaker 3: thing on Tuesday, so uh, you know, the antenna is up.

675
00:37:13,480 --> 00:37:15,800
Speaker 3: I think that's where it comes down to, trying to

676
00:37:15,880 --> 00:37:21,640
Speaker 3: find companies that can withstand volatility and withstand some policy changes,

677
00:37:22,200 --> 00:37:24,560
Speaker 3: even if that means that the ibadah will go down

678
00:37:24,680 --> 00:37:27,399
Speaker 3: and they still work and their capital structures still work,

679
00:37:27,800 --> 00:37:31,279
Speaker 3: and the cuspy companies that really have no margin for error,

680
00:37:31,760 --> 00:37:33,080
Speaker 3: I think we have to be careful with.

681
00:37:33,440 --> 00:37:35,960
Speaker 1: And in simple terms and that supremely large capital structures

682
00:37:36,000 --> 00:37:36,680
Speaker 1: that are higher.

683
00:37:36,520 --> 00:37:41,839
Speaker 3: Rated, higher rated or they could still be B three

684
00:37:42,400 --> 00:37:45,960
Speaker 3: companies that still produce a lot of cash flow even

685
00:37:46,040 --> 00:37:48,880
Speaker 3: if they have six times leveraged, or and they have

686
00:37:49,000 --> 00:37:52,600
Speaker 3: good business models that will eventually be able to recover.

687
00:37:53,000 --> 00:37:55,400
Speaker 1: Because you know, as we've discussed, there isn't enough supply.

688
00:37:55,520 --> 00:37:58,440
Speaker 1: There is a lot of demand that there's none of

689
00:37:58,480 --> 00:38:00,600
Speaker 1: this not enough of this good stuff to go around.

690
00:38:01,400 --> 00:38:03,600
Speaker 1: So sourcing must become a challenge for you. I mean,

691
00:38:04,000 --> 00:38:04,680
Speaker 1: how do you deal with that?

692
00:38:05,160 --> 00:38:10,279
Speaker 3: Well, what I'd say is that there has been there

693
00:38:10,320 --> 00:38:12,879
Speaker 3: is a technical in the market where about twenty five

694
00:38:12,920 --> 00:38:17,480
Speaker 3: percent of the COLO market is still post reinvestment period.

695
00:38:17,560 --> 00:38:20,440
Speaker 3: What does that mean. It means generally they can't buy loans,

696
00:38:20,640 --> 00:38:25,719
Speaker 3: and if there's a refinancing of the loan and the

697
00:38:25,800 --> 00:38:29,800
Speaker 3: maturity is being extended, oftentimes they can't participate. So for

698
00:38:30,000 --> 00:38:33,800
Speaker 3: large managers, you almost have that with all the refinancings

699
00:38:33,880 --> 00:38:36,239
Speaker 3: that have happened in twenty twenty four and we think

700
00:38:36,239 --> 00:38:38,960
Speaker 3: are going to happen in twenty twenty five, you almost

701
00:38:39,000 --> 00:38:44,239
Speaker 3: have this natural supply coming because the older funds can't

702
00:38:44,280 --> 00:38:47,520
Speaker 3: participate anymore, and you have a free option on those

703
00:38:47,600 --> 00:38:51,799
Speaker 3: loans since you own them to be as So that's

704
00:38:51,880 --> 00:38:55,400
Speaker 3: been a true source of loans for new deals or

705
00:38:55,480 --> 00:38:59,000
Speaker 3: reinvesting deals, I think for most large managers that have

706
00:38:59,280 --> 00:39:05,160
Speaker 3: a significant COLO COLO platforms. And then I think we'll

707
00:39:05,160 --> 00:39:08,880
Speaker 3: see we'll see some more some more new issue loan creation.

708
00:39:09,640 --> 00:39:12,160
Speaker 3: And lastly, we're starting to see a little bit a

709
00:39:12,320 --> 00:39:16,040
Speaker 3: little bit of pricing come down. So whereas more of

710
00:39:16,080 --> 00:39:18,480
Speaker 3: the market was trading over par a couple of weeks ago.

711
00:39:19,640 --> 00:39:22,120
Speaker 3: The secondary is easier to buy today, closer to.

712
00:39:22,160 --> 00:39:26,080
Speaker 1: Par right, okay, And do you think that that downward

713
00:39:26,160 --> 00:39:28,680
Speaker 1: trend in pricing continues, you.

714
00:39:28,719 --> 00:39:31,399
Speaker 3: Know, it's it's hard to tell. I'd say there's been.

715
00:39:32,160 --> 00:39:35,520
Speaker 3: If we continue to see retail inflows into floating rate assets,

716
00:39:35,560 --> 00:39:39,319
Speaker 3: which we probably will, then loan should move back up.

717
00:39:39,520 --> 00:39:42,000
Speaker 1: Yeah, okay, And back to the issue as item just

718
00:39:42,160 --> 00:39:45,200
Speaker 1: just very briefly. The the issue was we we are

719
00:39:45,280 --> 00:39:48,000
Speaker 1: hearing have gotten used to hire for longer and they

720
00:39:48,120 --> 00:39:50,239
Speaker 1: settled in and even if ten year rate goes to

721
00:39:50,320 --> 00:39:53,120
Speaker 1: five percent, they'll still be okay, although there will be

722
00:39:53,200 --> 00:39:57,160
Speaker 1: this you know, default rate that continues, you know, historical

723
00:39:57,200 --> 00:39:59,880
Speaker 1: averages because there are companies that just can't can't do that.

724
00:40:01,080 --> 00:40:04,160
Speaker 1: But do you get the sense that you know that

725
00:40:04,280 --> 00:40:05,560
Speaker 1: it's going to be worse than that, You know that

726
00:40:05,760 --> 00:40:07,799
Speaker 1: a five percent rate could could push a lot more

727
00:40:07,840 --> 00:40:09,520
Speaker 1: borrowers over the edge and we suddenly get a much

728
00:40:09,640 --> 00:40:11,160
Speaker 1: much more distress in the marketplace.

729
00:40:12,040 --> 00:40:15,240
Speaker 3: You know, we had the highest percentage of our companies

730
00:40:15,320 --> 00:40:19,319
Speaker 3: produce cash flow in the third quarter than we'd seen

731
00:40:21,000 --> 00:40:26,319
Speaker 3: in I think years. And that's not a counterintuitive, right,

732
00:40:26,400 --> 00:40:28,759
Speaker 3: because you would think that you'd have a very with

733
00:40:28,960 --> 00:40:32,600
Speaker 3: rates being so high, they should have produced a lot

734
00:40:32,640 --> 00:40:34,799
Speaker 3: more cashlow in twenty twenty one when rates were close

735
00:40:34,840 --> 00:40:37,760
Speaker 3: to zero. In fact, we had a very much lower

736
00:40:37,840 --> 00:40:40,799
Speaker 3: percent of our company producing cash flow then, even though

737
00:40:40,840 --> 00:40:43,359
Speaker 3: they were growing sales and EBITDA at a faster pace

738
00:40:43,640 --> 00:40:45,839
Speaker 3: and a higher percentage of our companies were growing sales

739
00:40:45,880 --> 00:40:48,000
Speaker 3: and EBITDAD. So why was it. It was because they

740
00:40:48,040 --> 00:40:50,520
Speaker 3: were investing. There were good times, there was more cap

741
00:40:50,600 --> 00:40:52,799
Speaker 3: beex they were more hiring, there was a talent war.

742
00:40:53,840 --> 00:40:56,320
Speaker 3: They were investing in their future. And I think that

743
00:40:57,080 --> 00:41:00,399
Speaker 3: with rates being up, and I think, like you said,

744
00:41:00,440 --> 00:41:03,600
Speaker 3: the market accepting that this is going to remain higher,

745
00:41:03,840 --> 00:41:08,480
Speaker 3: maybe not the highest, but higher for longer, there's much

746
00:41:08,520 --> 00:41:11,040
Speaker 3: more of a focus on cash flow and producing cash

747
00:41:11,120 --> 00:41:14,160
Speaker 3: and keeping cash. And so I think we've seen management

748
00:41:14,320 --> 00:41:17,520
Speaker 3: teams trained to think about that over the last year

749
00:41:17,600 --> 00:41:20,920
Speaker 3: or two, and especially coming back from COVID when everything's

750
00:41:21,160 --> 00:41:24,480
Speaker 3: fell apart for many companies, and I think there's a

751
00:41:24,600 --> 00:41:27,920
Speaker 3: true focus on how to operate in this higher rate

752
00:41:28,040 --> 00:41:29,880
Speaker 3: environment going forward.

753
00:41:30,400 --> 00:41:32,239
Speaker 1: So when you look around everything, you get to see

754
00:41:33,000 --> 00:41:37,000
Speaker 1: which must be a lot globally and sort of thinking

755
00:41:37,000 --> 00:41:40,160
Speaker 1: about relative value for let's say the next twelve to

756
00:41:40,239 --> 00:41:43,080
Speaker 1: eighteen months, what jumps out as an opportunity for you?

757
00:41:43,920 --> 00:41:47,920
Speaker 3: Yeah, so I like the middle market COLO equity. I

758
00:41:48,040 --> 00:41:51,320
Speaker 3: think the cash flow profiles really interesting. It is a

759
00:41:51,440 --> 00:41:56,400
Speaker 3: market that is not fully developed like the BSL COLO

760
00:41:56,520 --> 00:41:59,120
Speaker 3: market is. I think there's an opportunity there because it

761
00:41:59,239 --> 00:42:01,960
Speaker 3: is a newer market and not everyone's investing and chasing

762
00:42:02,080 --> 00:42:05,640
Speaker 3: that asset class. So I think you could get pretty

763
00:42:05,680 --> 00:42:11,160
Speaker 3: attractive IRRs and cash on cash returns in that if

764
00:42:11,200 --> 00:42:13,520
Speaker 3: you if you can source the paper again, because it's

765
00:42:13,600 --> 00:42:15,600
Speaker 3: it's a market that is much smaller.

766
00:42:16,360 --> 00:42:18,560
Speaker 1: What would you say in terms of numbers? Is that

767
00:42:18,640 --> 00:42:21,759
Speaker 1: double digits? Is it fifty percent? What kind of numbers

768
00:42:21,760 --> 00:42:23,120
Speaker 1: do you think about as attractive returns?

769
00:42:23,719 --> 00:42:26,400
Speaker 3: Yeah. When we model it, we were looking at deals

770
00:42:26,440 --> 00:42:29,760
Speaker 3: and modeling middle market co equity. Right now we're seeing

771
00:42:31,400 --> 00:42:35,080
Speaker 3: mid to high teens IRRs versus let's say twelve to

772
00:42:35,200 --> 00:42:38,040
Speaker 3: thirteen percent irs for BSL COLO equity.

773
00:42:38,320 --> 00:42:40,960
Speaker 1: Okay, and that has has it gone up recently or

774
00:42:41,080 --> 00:42:42,960
Speaker 1: is it is it generally going up or is it

775
00:42:43,719 --> 00:42:44,600
Speaker 1: capped around that level?

776
00:42:44,920 --> 00:42:49,400
Speaker 3: I'd say it's it's consistent around that level over the

777
00:42:49,520 --> 00:42:51,880
Speaker 3: last year or so, we've seen like we've seen the

778
00:42:51,960 --> 00:42:54,719
Speaker 3: assets spreads come down, but we've also seen the liabilities

779
00:42:54,760 --> 00:42:58,680
Speaker 3: spreads come down, which has really helped to stabilize the

780
00:42:58,840 --> 00:42:59,759
Speaker 3: arbitrage and cash on.

781
00:43:00,560 --> 00:43:03,840
Speaker 1: Okay, I have to ask because middle market one guests

782
00:43:03,960 --> 00:43:06,920
Speaker 1: recently described a billion dollar loan as mid market. What

783
00:43:06,920 --> 00:43:07,520
Speaker 1: does it mean to you.

784
00:43:10,280 --> 00:43:14,600
Speaker 3: That I would think of companies with EBITDA inside of

785
00:43:14,640 --> 00:43:18,560
Speaker 3: one hundred million or seventy five million as middle market

786
00:43:19,840 --> 00:43:22,080
Speaker 3: in today's in today's environment.

787
00:43:21,840 --> 00:43:24,400
Speaker 1: And a middle market clo, how big could that be?

788
00:43:25,239 --> 00:43:28,160
Speaker 3: The traditional size around four hundred million dollars, so you've

789
00:43:28,239 --> 00:43:31,200
Speaker 3: actually seen ones go up I think close to a

790
00:43:31,239 --> 00:43:35,080
Speaker 3: billion dollars. So you see a range, but I'd say

791
00:43:35,120 --> 00:43:38,200
Speaker 3: that the traditional size is around four hundred and As.

792
00:43:38,120 --> 00:43:40,440
Speaker 1: We started by talking about risk and you mentioned, you know,

793
00:43:40,640 --> 00:43:44,239
Speaker 1: we're all worried because we're credit people. What keeps you

794
00:43:44,320 --> 00:43:46,279
Speaker 1: up at night worrying about? You know, in terms of

795
00:43:46,760 --> 00:43:48,400
Speaker 1: credit markets, there just seems to be a ton of

796
00:43:48,880 --> 00:43:52,399
Speaker 1: liquidity out there, not enough to buy. But what's wrong

797
00:43:52,440 --> 00:43:54,279
Speaker 1: with that picture? Anything concerning at the moment.

798
00:43:54,840 --> 00:44:00,319
Speaker 3: Yeah, I'm really concerned about policy change that could hurt

799
00:44:01,000 --> 00:44:05,000
Speaker 3: our companies and how do we figure out which which

800
00:44:05,080 --> 00:44:10,359
Speaker 3: policies will actually be changed and who which companies are

801
00:44:10,440 --> 00:44:12,600
Speaker 3: not going to be able to handle that that risk?

802
00:44:12,840 --> 00:44:17,800
Speaker 3: And it's it's the uncertainty that I think it scares me,

803
00:44:18,040 --> 00:44:21,360
Speaker 3: or as a credit person, worries me because we don't

804
00:44:21,440 --> 00:44:24,000
Speaker 3: have a lot of insight into that. Right now, we

805
00:44:24,120 --> 00:44:27,880
Speaker 3: have this wonderful government Affairs group, given our DC heritage,

806
00:44:28,280 --> 00:44:30,319
Speaker 3: and they provide us a lot of color on what's

807
00:44:30,360 --> 00:44:33,840
Speaker 3: going on on the Hill and in Washington, so that

808
00:44:34,000 --> 00:44:37,680
Speaker 3: that's beneficial and I think is UH will hopefully help

809
00:44:37,800 --> 00:44:41,279
Speaker 3: us navigate this environment. But there's there's still a lot

810
00:44:41,320 --> 00:44:42,440
Speaker 3: that's changing every day.

811
00:44:43,160 --> 00:44:45,560
Speaker 1: Is that the edge being rooted in DC? I was

812
00:44:45,560 --> 00:44:47,120
Speaker 1: going to ask you, what's your edge? We are the

813
00:44:47,200 --> 00:44:47,719
Speaker 1: credit edge?

814
00:44:47,760 --> 00:44:48,520
Speaker 3: So is it?

815
00:44:48,680 --> 00:44:49,640
Speaker 1: Is it the DC connection?

816
00:44:50,560 --> 00:44:54,520
Speaker 3: I think our DC heritage is certainly helpful when we

817
00:44:54,640 --> 00:44:56,200
Speaker 3: have today's risks in the background.

818
00:44:56,560 --> 00:45:00,840
Speaker 1: Great stuff, Lauren Bezmejian, Global head of Credit at Carlyle.

819
00:45:01,080 --> 00:45:02,680
Speaker 1: It's been a pleasure having you on the Credit Edge.

820
00:45:02,719 --> 00:45:05,880
Speaker 1: Many thanks, thank you, and of course we're very grateful

821
00:45:05,920 --> 00:45:10,080
Speaker 1: to Michael Campillone from Bloomberg Intelligence. Thanks for joining us. Ay, Mike,

822
00:45:10,239 --> 00:45:12,719
Speaker 1: thank you very much. For more credit analysis, read all

823
00:45:12,760 --> 00:45:15,759
Speaker 1: of Mike's great work on the Bloomberg Terminal. Bloomberg Intelligence

824
00:45:15,880 --> 00:45:18,840
Speaker 1: is part of our research department, with five hundred analysts

825
00:45:18,840 --> 00:45:21,879
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826
00:45:21,880 --> 00:45:24,439
Speaker 1: thousand equities and credits and outlooks on more than ninety

827
00:45:24,520 --> 00:45:28,560
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828
00:45:28,600 --> 00:45:31,440
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829
00:45:31,760 --> 00:45:35,120
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830
00:45:35,200 --> 00:45:38,320
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831
00:45:38,440 --> 00:45:41,960
Speaker 1: or email me directly at jcromby eight at Bloomberg dot net.

832
00:45:42,640 --> 00:45:44,799
Speaker 1: I'm James Crombie. It's been a pleasure having you join

833
00:45:44,920 --> 00:45:46,919
Speaker 1: us again next week on the Credit Edge.