1
00:00:18,120 --> 00:00:20,600
Speaker 1: Hello, Welcome to the Credit Edge, a weekly markets podcast.

2
00:00:20,720 --> 00:00:23,880
Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.

3
00:00:23,800 --> 00:00:27,200
Speaker 2: And I'm Phil Brendle, a senior analyst at Bloomberg Intelligence,

4
00:00:27,200 --> 00:00:30,600
Speaker 2: covering distress situations. This week, we're very pleased to welcome

5
00:00:30,640 --> 00:00:34,919
Speaker 2: Trey Parker, co founder and CIO at Sycamore Tree Capital Partners.

6
00:00:35,040 --> 00:00:35,840
Speaker 2: How are you, Trey?

7
00:00:36,120 --> 00:00:38,440
Speaker 3: I'm great, Philip and James, how are you this morning?

8
00:00:39,080 --> 00:00:43,160
Speaker 2: Sycamore Tree is a Dallas based value oriented alternative credit

9
00:00:43,200 --> 00:00:46,199
Speaker 2: asset manager. Trey has more than twenty five years of

10
00:00:46,240 --> 00:00:49,199
Speaker 2: experience investing in the loan space, much of it with

11
00:00:49,360 --> 00:00:52,479
Speaker 2: Highland Capital, which I know through personal experience, could never

12
00:00:52,520 --> 00:00:54,920
Speaker 2: be described as a passive lender in the early days

13
00:00:54,920 --> 00:00:58,920
Speaker 2: of the broadly syndicated loan space. James, how about you

14
00:00:58,960 --> 00:00:59,640
Speaker 2: start us off?

15
00:01:00,800 --> 00:01:03,440
Speaker 1: Yeah, So, Trey, you're kind of in a niche trying

16
00:01:03,480 --> 00:01:06,480
Speaker 1: to find mispriced risk right, and you'll focus on loans,

17
00:01:06,600 --> 00:01:10,880
Speaker 1: clos structure, credit and credit secondaries. You have, as Phil says,

18
00:01:10,880 --> 00:01:13,640
Speaker 1: been around for quite a long time and have a

19
00:01:13,680 --> 00:01:16,160
Speaker 1: lot of experience in distressed debt, which is very interesting

20
00:01:16,200 --> 00:01:18,640
Speaker 1: to us. Now I'm interested just to just to start

21
00:01:18,640 --> 00:01:20,880
Speaker 1: the conversation. What you're making of all the drama right

22
00:01:20,880 --> 00:01:24,720
Speaker 1: now in the private credit business development companies are seeing

23
00:01:24,720 --> 00:01:27,000
Speaker 1: a lot of redemptions they put up the gates. That

24
00:01:27,080 --> 00:01:29,120
Speaker 1: scares a lot of people. At the same time, there's

25
00:01:29,160 --> 00:01:32,600
Speaker 1: fear about software companies going bust because of AI. The

26
00:01:32,640 --> 00:01:35,720
Speaker 1: loan market and private credit are quite exposed to that sector. So,

27
00:01:36,200 --> 00:01:38,640
Speaker 1: running from your perspective, how real is the stress in

28
00:01:38,760 --> 00:01:39,959
Speaker 1: credit markets right now?

29
00:01:41,840 --> 00:01:45,720
Speaker 3: So thanks for that question. You know, it's definitely We've

30
00:01:45,720 --> 00:01:48,160
Speaker 3: been in these markets a long time and we've seen

31
00:01:48,360 --> 00:01:51,120
Speaker 3: a fairly benign credit environment for much of the last

32
00:01:51,120 --> 00:01:54,880
Speaker 3: fifteen years. We've seen some blips throughout the energy cycle

33
00:01:55,000 --> 00:01:57,880
Speaker 3: and COVID, but by and large, credit has been very,

34
00:01:57,960 --> 00:02:00,720
Speaker 3: very healthy. I would still tell you to day that

35
00:02:01,080 --> 00:02:04,240
Speaker 3: we are in the early stages of any material fundamental

36
00:02:04,240 --> 00:02:08,040
Speaker 3: correction within within credit markets. There's obviously been a lot

37
00:02:08,040 --> 00:02:11,640
Speaker 3: of noise in the marketplace around some of the you know,

38
00:02:12,200 --> 00:02:16,320
Speaker 3: idiosyncratic situations back last fall with Tricolor and First Brands,

39
00:02:16,840 --> 00:02:19,720
Speaker 3: and obviously more recently with Dynamics going on with the

40
00:02:19,800 --> 00:02:24,160
Speaker 3: structural deficiencies or challenges let me put it that way.

41
00:02:24,200 --> 00:02:27,800
Speaker 3: Within within the private credit space, I would say, largely speaking,

42
00:02:28,040 --> 00:02:32,520
Speaker 3: the fundamentals below the surface are are still relatively okay

43
00:02:33,520 --> 00:02:37,720
Speaker 3: from a credit metrics perspective, but we are certainly seeing

44
00:02:37,760 --> 00:02:41,720
Speaker 3: an elevated level of perceived risk that's being expressed pretty

45
00:02:41,720 --> 00:02:44,040
Speaker 3: directly in price levels in the loan market. But you know,

46
00:02:44,120 --> 00:02:48,040
Speaker 3: still early stages in the private credit space, Trey.

47
00:02:48,120 --> 00:02:50,720
Speaker 2: One of the questions I had, you know, maybe if

48
00:02:50,760 --> 00:02:53,079
Speaker 2: we take a step backwards, like, how would you see

49
00:02:53,440 --> 00:02:57,239
Speaker 2: you're split between private credit and the broadly syndicated loan market,

50
00:02:57,520 --> 00:02:59,720
Speaker 2: And then maybe if you could just share with me,

51
00:03:00,440 --> 00:03:04,120
Speaker 2: you know, some of the key tenants or the DNA

52
00:03:04,160 --> 00:03:05,600
Speaker 2: of Sycamore Tree.

53
00:03:07,720 --> 00:03:11,280
Speaker 3: Absolutely so, our existing business is largely focused on the

54
00:03:11,320 --> 00:03:15,320
Speaker 3: traded credit markets across clos and structured credit. We recently

55
00:03:15,400 --> 00:03:17,600
Speaker 3: announced a launch of a new business in the credit

56
00:03:17,600 --> 00:03:19,560
Speaker 3: secondary space, and we're going to be looking at that

57
00:03:19,600 --> 00:03:23,840
Speaker 3: as a logical extension of providing liquidity to a market

58
00:03:23,840 --> 00:03:26,920
Speaker 3: that historically has had not had very much liquidity. But

59
00:03:27,000 --> 00:03:29,239
Speaker 3: when we launched the business five years ago and really

60
00:03:29,280 --> 00:03:32,359
Speaker 3: really built the fundamental foundations of who we are, it's

61
00:03:32,400 --> 00:03:35,040
Speaker 3: always been looking through the lens of being a credit

62
00:03:35,080 --> 00:03:38,200
Speaker 3: investor first and foremost, which means we're always focused on

63
00:03:38,600 --> 00:03:43,160
Speaker 3: you know, capital preservation, downside risk management and you know,

64
00:03:43,280 --> 00:03:48,040
Speaker 3: understanding the complexities of credit across multiple cycles. As James mentioned,

65
00:03:48,600 --> 00:03:50,880
Speaker 3: been in and around these markets, says, have my partners

66
00:03:50,920 --> 00:03:53,400
Speaker 3: for a long time, and we've navigated through you know,

67
00:03:53,480 --> 00:03:56,880
Speaker 3: past economic and credit cycles, the likes of ninety eight

68
00:03:56,920 --> 00:04:01,280
Speaker 3: through three and eight twenty ten, and those certainly created

69
00:04:01,320 --> 00:04:04,600
Speaker 3: some interesting situations and put us in a position to

70
00:04:04,680 --> 00:04:07,200
Speaker 3: have to manage through very difficult times. We're not yet

71
00:04:07,200 --> 00:04:10,920
Speaker 3: an environment, you know, and may it may not be,

72
00:04:11,120 --> 00:04:14,240
Speaker 3: but we are certainly prepared for that should we see

73
00:04:14,240 --> 00:04:16,880
Speaker 3: that sort of disruption and credit risk and the portfolios.

74
00:04:17,040 --> 00:04:19,080
Speaker 1: You mentioned the credit secondaries, and you've just launched a

75
00:04:19,080 --> 00:04:21,000
Speaker 1: new platform for that, and I'm interested in, you know,

76
00:04:21,040 --> 00:04:23,599
Speaker 1: why now, and what the opportunity isn't and in basic terms,

77
00:04:23,640 --> 00:04:24,559
Speaker 1: how does it actually work.

78
00:04:26,120 --> 00:04:29,400
Speaker 3: Absolutely, So it's a space we've been looking at and

79
00:04:29,440 --> 00:04:31,480
Speaker 3: monitoring for a while and it's just started to come

80
00:04:31,480 --> 00:04:35,800
Speaker 3: of age. So credit secondaries is really a continuation of

81
00:04:35,839 --> 00:04:38,640
Speaker 3: a broader secondary theme that we've seen evolve over the

82
00:04:38,680 --> 00:04:41,800
Speaker 3: last couple of decades, largely in private equity, where we

83
00:04:41,920 --> 00:04:45,080
Speaker 3: have a private asset class where limited partners have limited

84
00:04:45,120 --> 00:04:49,760
Speaker 3: liquidity options other than through privately negotiated sale transactions to

85
00:04:50,200 --> 00:04:55,920
Speaker 3: monetize those stakes before they naturally evolve or monetize. That

86
00:04:56,000 --> 00:04:58,400
Speaker 3: market last year did two hundred and forty billion dollars

87
00:04:58,440 --> 00:05:02,640
Speaker 3: of total volume across private equi and credit credit has

88
00:05:02,680 --> 00:05:05,960
Speaker 3: been single digit billions until just last year, where that

89
00:05:06,000 --> 00:05:09,240
Speaker 3: market has now or did twenty billion dollars of volume

90
00:05:09,320 --> 00:05:13,800
Speaker 3: in twenty twenty five. Their expectations that that could be

91
00:05:13,880 --> 00:05:16,880
Speaker 3: upwards of thirty five billion and twenty six and you know,

92
00:05:16,880 --> 00:05:19,600
Speaker 3: doubling or tripling over the next several years. You know,

93
00:05:19,640 --> 00:05:23,160
Speaker 3: we see this as a logical liquidity extension within the

94
00:05:24,279 --> 00:05:27,839
Speaker 3: market of private credit that's gone from infancy after the

95
00:05:27,880 --> 00:05:31,240
Speaker 3: GFC to now a one seven in some definitions, to

96
00:05:31,320 --> 00:05:33,880
Speaker 3: two seven trillion dollar market of the last fifteen to

97
00:05:33,920 --> 00:05:37,080
Speaker 3: sixteen years. And we see it as a real opportunity

98
00:05:37,080 --> 00:05:40,600
Speaker 3: to be a liquidity provider for both buyers and sellers.

99
00:05:40,920 --> 00:05:44,039
Speaker 3: Sellers in the need to rebalance portfolios and change asset

100
00:05:44,040 --> 00:05:46,880
Speaker 3: allocation and buyers who are looking to provide you know,

101
00:05:46,960 --> 00:05:50,279
Speaker 3: in many cases discounted options for liquidity to set sellers.

102
00:05:50,680 --> 00:05:52,280
Speaker 1: How does it work though, in basic terms, is it

103
00:05:52,320 --> 00:05:54,480
Speaker 1: a private actually firm has a loan out to a company,

104
00:05:54,640 --> 00:05:56,760
Speaker 1: is a private direct loan, and they don't want to

105
00:05:56,800 --> 00:05:58,440
Speaker 1: refinance for whatever reason, and you'll take it on.

106
00:05:59,200 --> 00:06:02,320
Speaker 3: So as you I'm sure familiar, private credit markets have

107
00:06:02,720 --> 00:06:05,320
Speaker 3: very little to no liquidity for an underlying loan in

108
00:06:05,360 --> 00:06:08,320
Speaker 3: their portfolios, so they're typically involved from the time of

109
00:06:08,400 --> 00:06:11,880
Speaker 3: underwriting through the ultimate payoff or paydown of that facility.

110
00:06:12,800 --> 00:06:15,680
Speaker 3: There are a lot of institutional investors who've gotten exposure

111
00:06:15,720 --> 00:06:18,760
Speaker 3: to these private credit deals through you know, traditional fund

112
00:06:18,760 --> 00:06:21,719
Speaker 3: structures that are draw down and you know closed in

113
00:06:21,839 --> 00:06:26,719
Speaker 3: or finite in terms being having no liquidity. Those limited

114
00:06:26,760 --> 00:06:30,400
Speaker 3: partners or investors will look for liquidity and sell their stakes,

115
00:06:30,440 --> 00:06:35,200
Speaker 3: their LP interests through to buyers like secondaries, firms like ourselves,

116
00:06:36,240 --> 00:06:39,360
Speaker 3: you know, typically at some form of liquidity driven discount.

117
00:06:39,400 --> 00:06:41,839
Speaker 1: So it's an equity stake, not not a credit, not

118
00:06:41,920 --> 00:06:42,400
Speaker 1: a loan.

119
00:06:43,320 --> 00:06:46,240
Speaker 3: It's it's a derivative credit stake, but through an LP interest.

120
00:06:46,279 --> 00:06:47,760
Speaker 1: Correct how big is the ticket?

121
00:06:49,760 --> 00:06:51,359
Speaker 3: They can come in all sizes. Like I said, the

122
00:06:51,400 --> 00:06:55,279
Speaker 3: market did twenty billion dollars of volume last year. We

123
00:06:55,360 --> 00:06:57,960
Speaker 3: expect that to move higher over the next several years.

124
00:06:58,680 --> 00:07:00,920
Speaker 3: But stakes as small as to as much as a

125
00:07:00,960 --> 00:07:03,200
Speaker 3: billion dollars have traded in the credit secondary's market in

126
00:07:03,200 --> 00:07:03,960
Speaker 3: the last seple of years.

127
00:07:04,080 --> 00:07:07,080
Speaker 1: Is that the average ticket size for you?

128
00:07:05,440 --> 00:07:09,279
Speaker 3: You know, we're we're not talking capital formation yet in

129
00:07:09,320 --> 00:07:11,760
Speaker 3: terms of our firm as we just launched, you know,

130
00:07:11,800 --> 00:07:14,880
Speaker 3: but we we will opportunistically and with flexible capital. Look

131
00:07:14,920 --> 00:07:17,280
Speaker 3: at you know, a variety of different sizes, you know,

132
00:07:17,320 --> 00:07:18,840
Speaker 3: with and without partners in the market.

133
00:07:18,880 --> 00:07:22,040
Speaker 1: And you mentioned you're buying a discount. I'm wondering what

134
00:07:22,120 --> 00:07:23,680
Speaker 1: kind of discounts are you seeing right now in the

135
00:07:23,680 --> 00:07:25,280
Speaker 1: market and how is that changing over time?

136
00:07:26,640 --> 00:07:29,000
Speaker 3: Yeah, So our particular focus is more on the opportunistic

137
00:07:29,040 --> 00:07:31,760
Speaker 3: side of things within credit secondaries, you know, funds like

138
00:07:31,800 --> 00:07:36,000
Speaker 3: mes funds, special situations and distress funds. In those circumstances,

139
00:07:36,000 --> 00:07:39,680
Speaker 3: discounts upwards of twenty to twenty five percent to navs

140
00:07:39,840 --> 00:07:44,160
Speaker 3: can can materialize. We've seen the more traditional direct lending

141
00:07:44,160 --> 00:07:46,960
Speaker 3: part of the credit secondary's market trade closure to high

142
00:07:47,080 --> 00:07:51,000
Speaker 3: nineties to par because the capital formation and the relative

143
00:07:51,160 --> 00:07:55,320
Speaker 3: you know, information is more transparent in that part of

144
00:07:55,360 --> 00:07:58,440
Speaker 3: the market. We'll look for the deeper discount opportunities in

145
00:07:58,480 --> 00:08:00,040
Speaker 3: our in our portfolio.

146
00:07:59,600 --> 00:08:03,840
Speaker 2: Try spurs a question from me, like, when you're looking

147
00:08:03,880 --> 00:08:08,400
Speaker 2: at new credits and you know, just kind of think

148
00:08:08,440 --> 00:08:12,080
Speaker 2: about process at Sycamore Tree, you guys might have to

149
00:08:12,120 --> 00:08:14,240
Speaker 2: go from zero to one hundred in terms of like

150
00:08:14,760 --> 00:08:18,560
Speaker 2: understanding of credit and all of its modes and challenges,

151
00:08:18,680 --> 00:08:22,000
Speaker 2: And I'm curious, how do you do that on the

152
00:08:22,080 --> 00:08:25,720
Speaker 2: fly like that? I mean, are you like constantly looking

153
00:08:25,720 --> 00:08:29,560
Speaker 2: at these private credit loans that may not ever trade

154
00:08:30,000 --> 00:08:32,480
Speaker 2: because that's kind of a waste of resources if that

155
00:08:32,600 --> 00:08:38,800
Speaker 2: actually never comes about. Or are you just ramping up

156
00:08:38,920 --> 00:08:42,320
Speaker 2: very quickly for situations like this and you have the

157
00:08:42,760 --> 00:08:46,160
Speaker 2: dedicated resources and maybe you can talk about the kind

158
00:08:46,200 --> 00:08:48,360
Speaker 2: of resources at your firm as well that you know

159
00:08:48,520 --> 00:08:49,600
Speaker 2: to support that effort.

160
00:08:51,200 --> 00:08:55,040
Speaker 3: Absolutely. So part of the reason this is a symbiotic

161
00:08:55,080 --> 00:08:57,120
Speaker 3: relationship with this new line of business for us is

162
00:08:57,160 --> 00:09:00,320
Speaker 3: we have an existing credit platform and team that is

163
00:09:00,320 --> 00:09:03,599
Speaker 3: the broadly syndicated loan market. And we've got an experienced

164
00:09:03,920 --> 00:09:07,000
Speaker 3: the twenty ter experienced analyst team that covers in the

165
00:09:07,040 --> 00:09:09,400
Speaker 3: broadly syndicated loan market, which is north of a thousand

166
00:09:09,520 --> 00:09:12,400
Speaker 3: names with over three hundred active names in our portfolio.

167
00:09:12,800 --> 00:09:14,800
Speaker 3: And while those aren't the exact names, that are in

168
00:09:14,840 --> 00:09:18,160
Speaker 3: these private credit portfolios. We have the value and benefit

169
00:09:18,200 --> 00:09:21,920
Speaker 3: of understanding industries who the key players are able to

170
00:09:21,920 --> 00:09:25,559
Speaker 3: benchmark competitive sets across different sectors, so that when we're

171
00:09:25,600 --> 00:09:28,880
Speaker 3: looking at the top or the largest positions within some

172
00:09:28,920 --> 00:09:32,240
Speaker 3: of these secondary situations, we can leverage that team's knowledge,

173
00:09:32,280 --> 00:09:36,640
Speaker 3: background and expertise to do a deeper dive underwriting of

174
00:09:36,679 --> 00:09:39,319
Speaker 3: those private credit portfolios. The other thing I would say

175
00:09:39,360 --> 00:09:41,079
Speaker 3: is that we've been in and around these markets for

176
00:09:41,440 --> 00:09:44,880
Speaker 3: several decades, and most of the borrowers are they've been

177
00:09:44,920 --> 00:09:47,120
Speaker 3: around for a long time, and so it's rare that

178
00:09:47,200 --> 00:09:49,280
Speaker 3: we'll find a company or a borrower that we don't

179
00:09:49,280 --> 00:09:52,520
Speaker 3: have some level of familiarity with, given the collective experience

180
00:09:52,600 --> 00:09:55,600
Speaker 3: we bring to the bear here in this business.

181
00:09:55,760 --> 00:09:59,240
Speaker 2: I'm curious in those situations when you do ramp up

182
00:09:59,280 --> 00:10:02,480
Speaker 2: and are take can look at, you know, perhaps a

183
00:10:02,640 --> 00:10:05,760
Speaker 2: private credit name that was part of a club. Are

184
00:10:05,800 --> 00:10:09,760
Speaker 2: the price differences between where you guys would be interested

185
00:10:09,840 --> 00:10:13,640
Speaker 2: and where they're actually marking. Could they be quite stark

186
00:10:13,760 --> 00:10:18,240
Speaker 2: or especially in this environment, And you know, maybe just

187
00:10:18,760 --> 00:10:21,360
Speaker 2: if you can just describe where it was maybe a

188
00:10:21,400 --> 00:10:23,320
Speaker 2: couple of years ago versus today.

189
00:10:24,640 --> 00:10:28,880
Speaker 3: We've already seen some headlines around some differentials within marks

190
00:10:29,000 --> 00:10:31,720
Speaker 3: around club deals in the private credit space, and so

191
00:10:31,760 --> 00:10:34,319
Speaker 3: I think that that's something that you know, we'll always

192
00:10:34,360 --> 00:10:36,400
Speaker 3: have an eye for. You know, at the end of

193
00:10:36,440 --> 00:10:38,880
Speaker 3: the day, private credit is marked based on appraisal or

194
00:10:39,000 --> 00:10:42,120
Speaker 3: fair valuation by the underlying manager, and that's within their

195
00:10:42,200 --> 00:10:44,600
Speaker 3: rights to be able to make that determination. You know,

196
00:10:44,640 --> 00:10:46,720
Speaker 3: we will always be looking at this as a fundamental

197
00:10:46,800 --> 00:10:49,480
Speaker 3: underwriting where if we look at the business, we look

198
00:10:49,480 --> 00:10:52,040
Speaker 3: at the cash flow characteristics have said business, we'll look

199
00:10:52,040 --> 00:10:55,320
Speaker 3: at the loan value based on a view today of

200
00:10:55,360 --> 00:10:59,320
Speaker 3: what valuations in that sector or space look like. And

201
00:10:59,360 --> 00:11:02,360
Speaker 3: so regardless what the general partner of that particular fund

202
00:11:02,360 --> 00:11:04,760
Speaker 3: may view that credit to be marked at, you know,

203
00:11:04,800 --> 00:11:07,440
Speaker 3: we'll have our own independent view and will stress test

204
00:11:07,480 --> 00:11:09,040
Speaker 3: that like any good credit investor would.

205
00:11:09,400 --> 00:11:12,240
Speaker 1: And the opportunity you're seeing trailing more along the lines

206
00:11:12,280 --> 00:11:14,840
Speaker 1: of a company that borrowed, you know, very cheap when

207
00:11:15,000 --> 00:11:16,920
Speaker 1: rates were near zero five years ago, and now they're

208
00:11:16,960 --> 00:11:19,720
Speaker 1: hitting the wall trying to refinance and they can't refinance,

209
00:11:19,720 --> 00:11:22,680
Speaker 1: so they're coming to more opportunistic and dislike yourself, or

210
00:11:22,760 --> 00:11:24,680
Speaker 1: is it the fact that the private acity holder is

211
00:11:24,760 --> 00:11:28,120
Speaker 1: just fatigued and needs cash for something else or sees

212
00:11:28,160 --> 00:11:30,960
Speaker 1: better returns elsewhere. And what's the mix and how much

213
00:11:31,320 --> 00:11:34,000
Speaker 1: real stress are you seeing at the company level.

214
00:11:35,160 --> 00:11:39,240
Speaker 3: It's all the above. There's certainly a lot of you know,

215
00:11:39,480 --> 00:11:42,839
Speaker 3: private credit issuance and credit in general issuance activity that

216
00:11:42,880 --> 00:11:47,000
Speaker 3: happened in a zero interest rate environment. Those companies struggle

217
00:11:47,080 --> 00:11:51,200
Speaker 3: today in some cases to you know, meet the interest

218
00:11:51,440 --> 00:11:54,480
Speaker 3: burdens first and foremost, but really continue to invest in

219
00:11:54,520 --> 00:11:57,960
Speaker 3: their businesses, you know, invest for growth, invest for optimization.

220
00:11:58,880 --> 00:12:02,760
Speaker 3: In a easy money or low interest rate environment, you know,

221
00:12:02,880 --> 00:12:06,000
Speaker 3: sponsors or borrowers were willing and able to stretch to

222
00:12:06,559 --> 00:12:09,720
Speaker 3: finance their businesses at levels historically there would have been

223
00:12:09,960 --> 00:12:14,480
Speaker 3: unprecedented six times firstly eight times you know, total leverage.

224
00:12:15,160 --> 00:12:18,880
Speaker 3: Those levels are difficult to sustain in a market environment

225
00:12:18,920 --> 00:12:20,480
Speaker 3: or base rates are at three and a half to

226
00:12:20,520 --> 00:12:24,360
Speaker 3: four percent, and so I think that constraining of cash

227
00:12:24,360 --> 00:12:27,240
Speaker 3: flow has really impacted businesses. The other part of the

228
00:12:27,320 --> 00:12:30,839
Speaker 3: question you asked was around the sponsors. Sponsors were very,

229
00:12:30,920 --> 00:12:34,439
Speaker 3: very active in twenty twenty twenty one, twenty twenty two,

230
00:12:34,520 --> 00:12:38,360
Speaker 3: coming out of COVID. They put on those those capital

231
00:12:38,360 --> 00:12:41,000
Speaker 3: structures that were built for a different interest rate environment.

232
00:12:41,200 --> 00:12:44,880
Speaker 3: But they also put those investments on when they believe

233
00:12:44,960 --> 00:12:47,720
Speaker 3: that growth was on a certain trajectory. And you know,

234
00:12:47,760 --> 00:12:50,599
Speaker 3: there has been a slowdown in the growth trajectory of

235
00:12:50,640 --> 00:12:53,800
Speaker 3: a lot of these companies. And I think private equity

236
00:12:53,840 --> 00:12:57,440
Speaker 3: firms are being more portfolio managers than they are sort

237
00:12:57,480 --> 00:13:00,960
Speaker 3: of focused on each and every individual deal. And if

238
00:13:01,040 --> 00:13:04,280
Speaker 3: something that you bought at fifteen or eighteen times based

239
00:13:04,320 --> 00:13:07,360
Speaker 3: on public carpet multiples, there's now worth ten or twelve

240
00:13:07,679 --> 00:13:11,040
Speaker 3: and your equity checks sort of value is materially lower,

241
00:13:11,320 --> 00:13:13,800
Speaker 3: you're less likely to focus on that particular situation or

242
00:13:13,840 --> 00:13:16,480
Speaker 3: opportunity versus something else in your book for your portfolio.

243
00:13:16,640 --> 00:13:19,480
Speaker 3: So I think you've got some portfolio management dynamics going

244
00:13:19,480 --> 00:13:22,360
Speaker 3: home within the sponsored community. And you certainly have companies

245
00:13:22,360 --> 00:13:25,200
Speaker 3: that are starved for you know, leverage free cash flow

246
00:13:25,240 --> 00:13:25,800
Speaker 3: to invest in them.

247
00:13:26,040 --> 00:13:29,080
Speaker 1: The businesses themselves aren't impaired, they're not in trouble or

248
00:13:29,280 --> 00:13:32,120
Speaker 1: about to disappear. You just just got the wrong capital

249
00:13:32,120 --> 00:13:34,360
Speaker 1: structure and you're coming into sort of rework.

250
00:13:34,440 --> 00:13:38,720
Speaker 3: That's a bit in some cases, Yes, that that absolutely

251
00:13:38,800 --> 00:13:41,880
Speaker 3: has has been the case, where the businesses themselves are

252
00:13:41,880 --> 00:13:47,160
Speaker 3: not fundamentally broken. They've been maybe underinvested in, they may

253
00:13:47,200 --> 00:13:50,439
Speaker 3: be starved for capital, but they're not fundamentally broken. Now,

254
00:13:50,440 --> 00:13:52,560
Speaker 3: I would say, and then not to take the conversation

255
00:13:52,640 --> 00:13:55,640
Speaker 3: in an entirely different direction, but given the recent dynamics

256
00:13:55,640 --> 00:13:58,319
Speaker 3: around AI and the innovation that's going on within the

257
00:13:58,400 --> 00:14:02,600
Speaker 3: broader economy, the risk of obsolescence, the risk of you know,

258
00:14:02,760 --> 00:14:07,120
Speaker 3: further deterioration in businesses is evolving much work uckly. The

259
00:14:07,200 --> 00:14:11,960
Speaker 3: moats for companies is shrinking, and I think things like

260
00:14:12,200 --> 00:14:14,079
Speaker 3: AR are speeding up that process. And so I think

261
00:14:14,120 --> 00:14:17,040
Speaker 3: we have to be very careful about betting on you know,

262
00:14:17,160 --> 00:14:21,000
Speaker 3: good company bad balance sheet as being easy answer because

263
00:14:21,520 --> 00:14:23,400
Speaker 3: lore is changing a lot quickly right now.

264
00:14:23,960 --> 00:14:27,680
Speaker 2: Trey, you hit on something that I've seen. I follow

265
00:14:27,760 --> 00:14:31,360
Speaker 2: the distress markets, and you know, every month I publish something,

266
00:14:31,400 --> 00:14:33,680
Speaker 2: it's it's focused more on the high yeld bond market.

267
00:14:33,760 --> 00:14:36,520
Speaker 2: But what we saw recently is that the most distressed

268
00:14:36,560 --> 00:14:39,480
Speaker 2: sector now is technology, at least in the middle of

269
00:14:39,560 --> 00:14:44,080
Speaker 2: the month of April, versus communications, which was the most distressed.

270
00:14:44,120 --> 00:14:48,040
Speaker 2: And you know, these software companies are unique animals, and

271
00:14:48,080 --> 00:14:51,440
Speaker 2: I know, honestly, in the HIL bond market you're not

272
00:14:51,480 --> 00:14:54,440
Speaker 2: seeing too many of at least is not as much

273
00:14:54,440 --> 00:14:59,760
Speaker 2: as private credit is seeing. And my question really is

274
00:14:59,760 --> 00:15:03,160
Speaker 2: is the work when they go distressed? What are some

275
00:15:03,200 --> 00:15:07,920
Speaker 2: of the unique aspects of software companies running into trouble

276
00:15:08,240 --> 00:15:12,239
Speaker 2: That like makes it different than you know what we've traditionally.

277
00:15:12,280 --> 00:15:15,480
Speaker 2: You know, your roots are in Highland, like my roots

278
00:15:15,520 --> 00:15:19,760
Speaker 2: for merlinch investment managers. It's like, you know, you invested

279
00:15:19,800 --> 00:15:25,280
Speaker 2: against real assets. Software's definitely picked up the debt game

280
00:15:25,920 --> 00:15:29,720
Speaker 2: in spades, But you know, how much how do you

281
00:15:29,840 --> 00:15:30,680
Speaker 2: view it as different?

282
00:15:32,640 --> 00:15:36,240
Speaker 3: Sure? Well, first of all, I think software has levered

283
00:15:36,320 --> 00:15:38,360
Speaker 3: up largely because the evaluations got so high. It was

284
00:15:38,400 --> 00:15:40,400
Speaker 3: the only way that many of the sponsors could make

285
00:15:40,440 --> 00:15:43,840
Speaker 3: the math work to generate the text of returns they needed.

286
00:15:44,080 --> 00:15:46,760
Speaker 3: I would tell you that we've while Price would tell

287
00:15:46,800 --> 00:15:49,840
Speaker 3: you that there's a significant called forty billion dollars plus

288
00:15:49,640 --> 00:15:53,880
Speaker 3: of stressed or distressed software loans in the market, the

289
00:15:53,880 --> 00:15:56,280
Speaker 3: fundamentals are not yet proving that out. You still have

290
00:15:56,480 --> 00:15:58,920
Speaker 3: you know, net and gross retention rates within the software

291
00:15:58,960 --> 00:16:03,120
Speaker 3: space at real, relatively healthy levels. You know, revenue growth

292
00:16:03,160 --> 00:16:04,920
Speaker 3: in a lot of these situations is probably not as

293
00:16:04,960 --> 00:16:06,920
Speaker 3: fast as the sponsors would have hoped they would be,

294
00:16:08,160 --> 00:16:11,120
Speaker 3: but many of them are still you know, leverage free,

295
00:16:11,120 --> 00:16:15,560
Speaker 3: cash flow neutral and and still putting up decent fundamentals.

296
00:16:16,000 --> 00:16:19,200
Speaker 3: The recent drawdown in the software space has been more

297
00:16:19,240 --> 00:16:22,440
Speaker 3: on the prospective concerns that AI is going to materially

298
00:16:22,480 --> 00:16:25,760
Speaker 3: disrupt that sector. And there will be players in the

299
00:16:25,800 --> 00:16:29,520
Speaker 3: software space for that absolutely is the case, you know,

300
00:16:29,600 --> 00:16:32,000
Speaker 3: And and there will obviously be be winners that that

301
00:16:32,160 --> 00:16:34,240
Speaker 3: won't necessarily see that, and they'll see it as as

302
00:16:34,240 --> 00:16:36,800
Speaker 3: an advantage, as a way to play offense. And so

303
00:16:36,880 --> 00:16:39,680
Speaker 3: again it comes down to you know, good old fashioned

304
00:16:39,720 --> 00:16:43,920
Speaker 3: credit selection, you know, focused on on the survivors, focused

305
00:16:43,960 --> 00:16:46,680
Speaker 3: on the companies that actually have you know, real staying

306
00:16:46,720 --> 00:16:50,080
Speaker 3: power at their customers. A lot of the disruption risk

307
00:16:50,240 --> 00:16:53,240
Speaker 3: in in software will be a function of how easily

308
00:16:53,320 --> 00:16:57,960
Speaker 3: replaceable or sort of how easy particular software out of

309
00:16:58,120 --> 00:17:00,920
Speaker 3: out of a company. You focus on arger, more enterprise

310
00:17:00,960 --> 00:17:05,240
Speaker 3: focused software businesses that are vertically integrated, maybe in sectors

311
00:17:05,240 --> 00:17:07,920
Speaker 3: like financials or healthcare, where the sensitivity of the information

312
00:17:07,960 --> 00:17:11,360
Speaker 3: they're processing is far higher. We believe that there's far

313
00:17:11,440 --> 00:17:15,040
Speaker 3: less risk to ultimate disruption. You focus on pricing models

314
00:17:15,080 --> 00:17:17,639
Speaker 3: that are more usage based or SUCCEIT based where the

315
00:17:17,720 --> 00:17:21,280
Speaker 3: utilization isn't just a headcount and an employee based driven factor.

316
00:17:21,880 --> 00:17:23,600
Speaker 3: I think again you're going to have greater levels of

317
00:17:23,640 --> 00:17:29,000
Speaker 3: prosiliency software is based. When software does get distressed and

318
00:17:29,040 --> 00:17:31,639
Speaker 3: it's not just a capital structure issue, you know, I

319
00:17:31,680 --> 00:17:34,920
Speaker 3: do think customers will have greater concerns and therefore the

320
00:17:35,720 --> 00:17:39,399
Speaker 3: potential deterioration of those companies will be more more dire

321
00:17:39,440 --> 00:17:43,200
Speaker 3: and more risky per se as an investor. So we're

322
00:17:43,200 --> 00:17:46,320
Speaker 3: not there yet, short answer to your question in software distressed,

323
00:17:46,800 --> 00:17:48,119
Speaker 3: but when we do, I think a lots to be

324
00:17:48,200 --> 00:17:49,800
Speaker 3: very careful about about exposure.

325
00:17:49,840 --> 00:17:53,160
Speaker 2: So I guess that you really look for mode in

326
00:17:53,320 --> 00:17:56,200
Speaker 2: picking your credits. You want really big modes where it's

327
00:17:56,240 --> 00:18:00,880
Speaker 2: difficult to transition out of those software platforms. Very interesting.

328
00:18:01,240 --> 00:18:05,360
Speaker 3: And when they're using AI or technology as an asset

329
00:18:05,560 --> 00:18:08,240
Speaker 3: offensively as opposed to just playing defense and trying to

330
00:18:08,240 --> 00:18:09,639
Speaker 3: sustain their business model.

331
00:18:09,440 --> 00:18:14,200
Speaker 2: Right, very interesting. One of the questions that I had,

332
00:18:14,480 --> 00:18:17,119
Speaker 2: and it kind of is pulling on a thread from

333
00:18:17,640 --> 00:18:20,400
Speaker 2: the comment you made before, is about how the private

334
00:18:20,520 --> 00:18:23,520
Speaker 2: equity folks are looking at their investments more on a

335
00:18:23,560 --> 00:18:27,000
Speaker 2: portfolio basis as opposed to you. I think in the

336
00:18:27,040 --> 00:18:29,720
Speaker 2: past we've seen them very concentrated and very married to

337
00:18:29,760 --> 00:18:33,520
Speaker 2: their investments. Do you see that as a manifestation of

338
00:18:33,560 --> 00:18:37,719
Speaker 2: their entry into private credit and you know, becoming bigger

339
00:18:37,760 --> 00:18:41,040
Speaker 2: credit players that are they able to be the same

340
00:18:41,160 --> 00:18:44,880
Speaker 2: kind of sponsor that they were in the past. I'm

341
00:18:44,960 --> 00:18:49,440
Speaker 2: curious at how you view the migration of the traditional

342
00:18:49,440 --> 00:18:52,360
Speaker 2: pe sponsor over the past ten years.

343
00:18:53,800 --> 00:18:55,480
Speaker 3: Look, I think a large part of it is just

344
00:18:55,560 --> 00:18:59,000
Speaker 3: the growth and breadth of these platforms. They've gotten so large,

345
00:18:59,040 --> 00:19:02,640
Speaker 3: the fun sizes often you know equally as large that

346
00:19:02,800 --> 00:19:04,399
Speaker 3: you know they're not going to bat a thousand as

347
00:19:04,440 --> 00:19:07,200
Speaker 3: it relates to your portfolio companies and their portfolio, and

348
00:19:07,400 --> 00:19:10,240
Speaker 3: they've got to be rational about allocating you know, financial

349
00:19:10,280 --> 00:19:13,840
Speaker 3: and strategic resources to the companies that are working. You

350
00:19:13,880 --> 00:19:16,879
Speaker 3: know that they're not you know, migrating to a venture

351
00:19:16,920 --> 00:19:19,360
Speaker 3: model where they're just sticking to the handful that really

352
00:19:19,400 --> 00:19:23,040
Speaker 3: really work. But they're also you know, going to to

353
00:19:23,080 --> 00:19:26,160
Speaker 3: focus the resources on on portfolio companies that actually see

354
00:19:26,320 --> 00:19:28,920
Speaker 3: they see real, real value in I think the other

355
00:19:28,960 --> 00:19:31,040
Speaker 3: thing that you've seen is for the companies that are

356
00:19:31,440 --> 00:19:34,240
Speaker 3: you know, not performing well with in priv equity portfolios.

357
00:19:34,240 --> 00:19:37,800
Speaker 3: They're using creative liability management solutions and concert with their

358
00:19:37,880 --> 00:19:41,360
Speaker 3: lenders to extend runway, and that's obviously something that's having

359
00:19:41,359 --> 00:19:45,240
Speaker 3: a broader implication on the syndicated loan market. But those

360
00:19:45,280 --> 00:19:48,360
Speaker 3: are situations where you're actually not fixing the balance sheet,

361
00:19:48,440 --> 00:19:51,560
Speaker 3: you're actually not doing something to net net improve the

362
00:19:51,600 --> 00:19:54,720
Speaker 3: company is performance and sustainability of its capital structure, and

363
00:19:54,760 --> 00:19:57,080
Speaker 3: that's something that I think is sowing the seeds of

364
00:19:57,480 --> 00:20:00,760
Speaker 3: more potential stress to stress situations over the next three

365
00:20:00,760 --> 00:20:01,520
Speaker 3: to five years.

366
00:20:01,840 --> 00:20:03,639
Speaker 1: On ll ME since you mentioned it, Tray, I mean,

367
00:20:03,640 --> 00:20:07,280
Speaker 1: they seem to become becoming less frequent. Maybe the lawyers

368
00:20:07,280 --> 00:20:08,840
Speaker 1: are up to something else and we can't see it yet,

369
00:20:08,840 --> 00:20:13,280
Speaker 1: but there is a sense that they're diminishing, you know,

370
00:20:13,280 --> 00:20:15,960
Speaker 1: and that's that's going to be good for investors, But

371
00:20:16,680 --> 00:20:19,080
Speaker 1: for a smaller shop like yourself, I mean, how do

372
00:20:19,119 --> 00:20:21,600
Speaker 1: you navigate these things because it tends to be that

373
00:20:21,680 --> 00:20:24,199
Speaker 1: the bigger players win out in the end, and I'm

374
00:20:24,240 --> 00:20:26,000
Speaker 1: wondering how you're positioning around those.

375
00:20:27,800 --> 00:20:29,480
Speaker 3: You're right, we have seen a slow down in the

376
00:20:29,600 --> 00:20:33,560
Speaker 3: LM transaction activity. I think part of it is sponsors

377
00:20:33,800 --> 00:20:36,520
Speaker 3: are coming to the appreciation as our other lenders that

378
00:20:36,640 --> 00:20:39,639
Speaker 3: you know, it's a small relative world and you have

379
00:20:39,680 --> 00:20:41,840
Speaker 3: to come back to the same markets for refinancings down

380
00:20:41,880 --> 00:20:45,639
Speaker 3: the road, and you can't afford to you know, create

381
00:20:45,680 --> 00:20:47,679
Speaker 3: that many enemies in the market, and so I think

382
00:20:47,720 --> 00:20:49,840
Speaker 3: people are starting to act a bit more rationally and

383
00:20:49,880 --> 00:20:53,240
Speaker 3: deals are starting to become more product So I think

384
00:20:53,240 --> 00:20:55,720
Speaker 3: that's a good thing for the entire market from a

385
00:20:55,760 --> 00:20:59,160
Speaker 3: long term recovery rate perspective, which leads to the sustainability

386
00:20:59,200 --> 00:21:04,400
Speaker 3: of slow market and instructure markets. In leverage lending. You're

387
00:21:04,440 --> 00:21:08,080
Speaker 3: also you know, seeing an uptick in the number of

388
00:21:08,160 --> 00:21:11,919
Speaker 3: repeat defaulters folks that have been through LEM transactions that

389
00:21:11,960 --> 00:21:14,800
Speaker 3: are now coming back to the market and going through

390
00:21:15,040 --> 00:21:18,280
Speaker 3: you know, distressed and instructuring situations again, which obviously is

391
00:21:18,320 --> 00:21:20,359
Speaker 3: emblematic of the fact that they didn't fix the balance

392
00:21:20,400 --> 00:21:22,680
Speaker 3: at the first time around. They just sort of extended runway.

393
00:21:23,440 --> 00:21:26,120
Speaker 3: How are folks like us, which are on the smaller

394
00:21:26,160 --> 00:21:28,960
Speaker 3: scale of of you know, managers or investors in the

395
00:21:29,000 --> 00:21:32,800
Speaker 3: law market, you know, overcoming these LME dynamics. There are

396
00:21:32,800 --> 00:21:35,480
Speaker 3: two things I would say is really really proactive risk

397
00:21:35,520 --> 00:21:38,479
Speaker 3: management looking at a variety of factors that allow us

398
00:21:38,520 --> 00:21:42,240
Speaker 3: to you know, in those structures a boy or get

399
00:21:42,240 --> 00:21:45,080
Speaker 3: out of risky situations in advance of there being a

400
00:21:45,160 --> 00:21:47,800
Speaker 3: you know, more aggressive you know LM transaction, which could

401
00:21:47,840 --> 00:21:51,159
Speaker 3: be punitive to our positioning. Is the first and foremost

402
00:21:51,200 --> 00:21:54,679
Speaker 3: strategy you know, for slo luck structures. It really is

403
00:21:54,720 --> 00:21:59,240
Speaker 3: about avoiding losses, avoiding defaults. You know. Secondarily, it's using

404
00:21:59,240 --> 00:22:02,320
Speaker 3: the ecosystem knowledge and relationships that we built over our

405
00:22:02,359 --> 00:22:04,520
Speaker 3: decades in this business to make sure that we're well

406
00:22:04,560 --> 00:22:07,600
Speaker 3: aligned with other like minded lenders to make sure that

407
00:22:07,680 --> 00:22:10,679
Speaker 3: what we're doing is rational, not just for the company

408
00:22:10,720 --> 00:22:13,119
Speaker 3: and the capital structure, but rational for our own investors.

409
00:22:13,880 --> 00:22:15,639
Speaker 3: You know. One of the things based on our DNA,

410
00:22:15,680 --> 00:22:19,200
Speaker 3: our heritage is we've always been principled in the recovery

411
00:22:19,280 --> 00:22:23,359
Speaker 3: value for our investors. We view ourselves as fiduciaries and

412
00:22:23,400 --> 00:22:26,479
Speaker 3: stewards for the capital we're investing in in credit, and

413
00:22:26,480 --> 00:22:28,680
Speaker 3: that means we have abs so priority and we should

414
00:22:28,720 --> 00:22:31,880
Speaker 3: get paid back, you know, as as situations play out,

415
00:22:31,960 --> 00:22:34,560
Speaker 3: and you know, we're going to do our best within

416
00:22:34,600 --> 00:22:38,480
Speaker 3: the context of commercial situations to uphold that, and and

417
00:22:38,520 --> 00:22:40,879
Speaker 3: that means you know, sort of you know, aligning ourselves

418
00:22:40,920 --> 00:22:44,240
Speaker 3: with other like minded lenders to try to attain that outcome.

419
00:22:44,760 --> 00:22:48,080
Speaker 2: It's it's interesting because I just traveling and distress. We

420
00:22:48,119 --> 00:22:51,520
Speaker 2: always see all these that's like the the first play

421
00:22:51,520 --> 00:22:55,520
Speaker 2: of the playbook. And you know, even a byside guy

422
00:22:55,640 --> 00:22:58,120
Speaker 2: said to me recently, he's like LM stands for lets

423
00:22:58,160 --> 00:23:02,359
Speaker 2: meet eternally for the restructuring professionals, because it's just it

424
00:23:02,600 --> 00:23:06,919
Speaker 2: just seems like they meet once, get successfully, and so

425
00:23:07,040 --> 00:23:10,679
Speaker 2: you have increasing professional class that could be frustrating. And

426
00:23:10,760 --> 00:23:14,679
Speaker 2: I'm curious, you know, like, and we've also seen finally

427
00:23:14,760 --> 00:23:18,440
Speaker 2: the co ops seems to have been an effective defense mechanism.

428
00:23:18,480 --> 00:23:20,920
Speaker 2: Do you think that that might be behind the actual

429
00:23:21,000 --> 00:23:27,199
Speaker 2: slowdown in enemies because that's fairly new to me that

430
00:23:27,480 --> 00:23:28,399
Speaker 2: like that's the case.

431
00:23:30,960 --> 00:23:34,000
Speaker 3: Okay, I think a greater level of organization and seeing

432
00:23:34,000 --> 00:23:36,439
Speaker 3: the world similarly when and we all should be of

433
00:23:36,480 --> 00:23:38,880
Speaker 3: the mindset that we want to sort of maximize recoveries

434
00:23:38,920 --> 00:23:41,760
Speaker 3: and difficult situations. And the credits were involved in I

435
00:23:41,800 --> 00:23:44,480
Speaker 3: think is certainly a component of that. You know, even

436
00:23:44,520 --> 00:23:46,840
Speaker 3: with the co ops, you're still seeing you know, advantage

437
00:23:46,880 --> 00:23:49,800
Speaker 3: economics for steercow lenders where they get some sort of

438
00:23:49,800 --> 00:23:53,400
Speaker 3: backstop fee or economic incentive to provide you know, sort

439
00:23:53,400 --> 00:23:56,520
Speaker 3: of capital commitments or other things to you know, sort

440
00:23:56,520 --> 00:24:00,320
Speaker 3: of lemy situations and transactions. I think that's at least

441
00:24:00,320 --> 00:24:05,080
Speaker 3: more commercially rational than what we were seeing previously. The

442
00:24:05,200 --> 00:24:07,760
Speaker 3: co ops are helping, but you know, it still comes

443
00:24:07,840 --> 00:24:10,679
Speaker 3: down to I think lenders acting rationally with with regards

444
00:24:10,720 --> 00:24:12,120
Speaker 3: to credit orders. Yeah.

445
00:24:12,119 --> 00:24:14,960
Speaker 2: One of the things that I always wondered if there

446
00:24:15,080 --> 00:24:17,600
Speaker 2: was going to be a tipping point where it's first

447
00:24:17,680 --> 00:24:22,200
Speaker 2: lean lenders are typically you know, I remember as a lender,

448
00:24:22,520 --> 00:24:25,119
Speaker 2: I'd always have the mindset, well, if this company has

449
00:24:25,320 --> 00:24:29,159
Speaker 2: value and I have to like take ownership, I prefer

450
00:24:29,200 --> 00:24:31,560
Speaker 2: to own the equity because at least then I'm not

451
00:24:31,640 --> 00:24:35,600
Speaker 2: capping my upside versus debt. But like we've seen that change,

452
00:24:36,200 --> 00:24:38,399
Speaker 2: you know in the lenders mindset that a lot of

453
00:24:38,440 --> 00:24:41,359
Speaker 2: these companies are coming out with more debt. We're even

454
00:24:41,400 --> 00:24:44,879
Speaker 2: seeing in some of these deals multi multicolor. I think

455
00:24:45,040 --> 00:24:49,720
Speaker 2: they're the existing lenders are letting the sponsor continue to

456
00:24:49,720 --> 00:24:53,560
Speaker 2: own the company and they're taking back preferred stock. You know,

457
00:24:53,920 --> 00:24:58,720
Speaker 2: I'm curious what's the appetite for equity in restructuring these days?

458
00:24:58,760 --> 00:25:03,800
Speaker 2: From lending vehicles are they tolerant of taking back equity

459
00:25:03,920 --> 00:25:10,119
Speaker 2: or is debt still the preferred course even in workouts.

460
00:25:10,680 --> 00:25:13,280
Speaker 3: And with much of the loan market, and we'll talk

461
00:25:13,280 --> 00:25:15,720
Speaker 3: about that for a second. That I think that's distinct

462
00:25:15,720 --> 00:25:17,640
Speaker 3: from the private credit market for much of the loan

463
00:25:17,680 --> 00:25:21,480
Speaker 3: market being focused on the COLO structures. I think take

464
00:25:21,560 --> 00:25:25,000
Speaker 3: back paper in a way of debt is makes more sense,

465
00:25:25,440 --> 00:25:29,879
Speaker 3: you know, for the structural benefits of recovery. That being said,

466
00:25:30,080 --> 00:25:32,120
Speaker 3: you know, if you take back a lot more debt

467
00:25:32,119 --> 00:25:34,520
Speaker 3: but the capital structure is not sustainable, you're delaying the

468
00:25:34,560 --> 00:25:39,320
Speaker 3: inevitable you know, re restructuring or eventual default of the situation.

469
00:25:39,560 --> 00:25:42,440
Speaker 3: So structure can only take you so far in terms

470
00:25:42,480 --> 00:25:46,920
Speaker 3: of you know, inherently preferring debt versus equity in take back.

471
00:25:47,600 --> 00:25:49,200
Speaker 3: I think in the private credit world you're going to

472
00:25:49,240 --> 00:25:52,919
Speaker 3: see I think a more rational economics split. You know,

473
00:25:53,000 --> 00:25:55,120
Speaker 3: if if something if there's a full from security that's

474
00:25:55,160 --> 00:25:57,520
Speaker 3: actually the debt. In a private debt situation, I think

475
00:25:57,520 --> 00:26:00,560
Speaker 3: you're going to see more handovers or you know, tossing

476
00:26:00,560 --> 00:26:04,439
Speaker 3: the keys from sponsor to private lender, where that you know,

477
00:26:05,359 --> 00:26:09,080
Speaker 3: leads to a more traditional waterfall type structuring situation.

478
00:26:10,200 --> 00:26:12,360
Speaker 1: So where else are you seeing opportunity train in terms

479
00:26:12,359 --> 00:26:15,520
Speaker 1: of sectors. I mean, we've all obviously become overnight experts

480
00:26:15,560 --> 00:26:19,920
Speaker 1: in AI, but we're rapidly gettingfa with Middle East and

481
00:26:20,000 --> 00:26:23,120
Speaker 1: shipping routes and all that stuff, So you know, that's

482
00:26:23,160 --> 00:26:25,560
Speaker 1: throwing everything for a loop over here. Maybe we haven't

483
00:26:25,600 --> 00:26:28,080
Speaker 1: seen the full impact yet in terms of you know,

484
00:26:28,160 --> 00:26:30,480
Speaker 1: gas prices and supply chains and all that stuff. But

485
00:26:30,760 --> 00:26:34,280
Speaker 1: I'm wondering if you're kind of preemptively seeing opportunity in

486
00:26:34,320 --> 00:26:37,200
Speaker 1: credit markets because of you know, geopolitics.

487
00:26:38,680 --> 00:26:41,320
Speaker 3: It so as we think about geopolitics, I think the

488
00:26:41,359 --> 00:26:44,399
Speaker 3: real lens that we need to look at is the

489
00:26:44,400 --> 00:26:47,720
Speaker 3: second and third derivative impulse of what the geopolitics means.

490
00:26:47,800 --> 00:26:51,320
Speaker 3: It's you know, certainly created inflation impulses. It relates to

491
00:26:51,440 --> 00:26:53,960
Speaker 3: oil prices and gas prices at the pump, whether it

492
00:26:54,080 --> 00:26:56,520
Speaker 3: have an impact on consumers or it has an impact

493
00:26:56,560 --> 00:27:00,639
Speaker 3: on the cost of peatstock and supply chains through chemicals,

494
00:27:00,840 --> 00:27:03,359
Speaker 3: paper and packaging, some of the chemical those some of

495
00:27:03,359 --> 00:27:06,200
Speaker 3: the sectors that have been directly impacted by bioil prices.

496
00:27:06,920 --> 00:27:09,600
Speaker 3: I think the other dynamic is is you know, even

497
00:27:09,680 --> 00:27:12,920
Speaker 3: even a further derivative, which is it's having an impact

498
00:27:13,080 --> 00:27:16,119
Speaker 3: on the way production in different and markets is happening

499
00:27:16,119 --> 00:27:19,040
Speaker 3: around the globe. For example, you know, if you think

500
00:27:19,080 --> 00:27:21,680
Speaker 3: about something like the chemical space, where there's a fair

501
00:27:21,720 --> 00:27:25,720
Speaker 3: amount of feedstock that feeds the ethylene supply chain in

502
00:27:25,760 --> 00:27:28,960
Speaker 3: Asia coming out of the straight up ormuz UH, it

503
00:27:29,040 --> 00:27:31,760
Speaker 3: really slows down the ability for some of those UH

504
00:27:32,440 --> 00:27:36,439
Speaker 3: based chemical companies produce, which provides an inherent advantage to

505
00:27:36,480 --> 00:27:38,639
Speaker 3: other parts of the globe, like the US market. For

506
00:27:39,600 --> 00:27:42,840
Speaker 3: US based chemical producers, that isn't a you know, a

507
00:27:42,880 --> 00:27:46,760
Speaker 3: boon forever, but it is a short term opportunity set

508
00:27:46,800 --> 00:27:49,720
Speaker 3: that's advantaging some of those some of those companies. You know,

509
00:27:49,760 --> 00:27:52,680
Speaker 3: I think if you look at our broader sector views,

510
00:27:53,280 --> 00:27:56,680
Speaker 3: you know, we certainly like what's going on in oil

511
00:27:56,720 --> 00:28:00,440
Speaker 3: and gas right now from an overall profitability and performance perspective.

512
00:28:00,920 --> 00:28:03,399
Speaker 3: We like the healthcare space a fair amount. You know,

513
00:28:03,440 --> 00:28:06,720
Speaker 3: we think that healthcare continues to be demand wise rearely defensive.

514
00:28:07,880 --> 00:28:10,199
Speaker 3: You know, AI there has been viewed as more of

515
00:28:10,240 --> 00:28:15,320
Speaker 3: an opportunity for you know, cost enhancement and productivity and

516
00:28:15,440 --> 00:28:19,760
Speaker 3: UH friction cost reduction UH in terms of forms of

517
00:28:19,800 --> 00:28:23,360
Speaker 3: the healthcare space, you know, on on the flip side,

518
00:28:23,960 --> 00:28:27,480
Speaker 3: you have areas like you know, technology, which which obviously

519
00:28:27,560 --> 00:28:29,679
Speaker 3: we've talked a fair amount in terms of the software space,

520
00:28:30,040 --> 00:28:33,480
Speaker 3: lodging and gaming. Inflation is having an adverse impact potentially

521
00:28:33,520 --> 00:28:37,080
Speaker 3: on consumer discretionary income levels, and so we're being a

522
00:28:37,160 --> 00:28:40,160
Speaker 3: bit more cautious as it relates to discretionary based you know,

523
00:28:40,680 --> 00:28:42,960
Speaker 3: and markets and products in to.

524
00:28:43,200 --> 00:28:45,200
Speaker 1: The chemicals one is interesting because there's not many people

525
00:28:45,320 --> 00:28:48,120
Speaker 1: are saying that, but I'm wondering if it's something's investible

526
00:28:48,160 --> 00:28:51,480
Speaker 1: in terms of your business, because you know, you're you're

527
00:28:51,520 --> 00:28:53,560
Speaker 1: definitely taking a longer view and this seems like it's

528
00:28:53,640 --> 00:28:55,880
Speaker 1: maybe a short term phenomenon.

529
00:28:57,160 --> 00:29:01,080
Speaker 3: Yeah, Look, the chemical disruption has really played out of

530
00:29:01,080 --> 00:29:03,480
Speaker 3: the last couple of years because of the substantial capacity

531
00:29:03,640 --> 00:29:06,960
Speaker 3: edition that came online in China where they were looking

532
00:29:07,000 --> 00:29:09,680
Speaker 3: to take market share within within the chemist space, and

533
00:29:09,720 --> 00:29:12,080
Speaker 3: I think we're willing to produce in a marginal, you know,

534
00:29:12,200 --> 00:29:14,880
Speaker 3: level of profitability, which made much of the rest of

535
00:29:14,880 --> 00:29:18,880
Speaker 3: the world less competitive. I think as you have a

536
00:29:19,040 --> 00:29:23,760
Speaker 3: deglobalization within supply Chaine in general, which has been a broad,

537
00:29:23,960 --> 00:29:27,240
Speaker 3: you know, sort of secular trend, particularly given current politics,

538
00:29:27,280 --> 00:29:30,360
Speaker 3: I think you're going to have more US and European

539
00:29:30,440 --> 00:29:35,240
Speaker 3: based chemical companies have an inherent advantage, especially post this disruption,

540
00:29:35,560 --> 00:29:38,040
Speaker 3: you know, from from what's going on here politically.

541
00:29:37,720 --> 00:29:39,920
Speaker 1: And so there is debt that you can invest in

542
00:29:40,120 --> 00:29:41,680
Speaker 1: a long as you know, to take and take a

543
00:29:41,720 --> 00:29:44,480
Speaker 1: long view with that kind of information right now.

544
00:29:44,360 --> 00:29:47,120
Speaker 3: You think there is so long as the company has

545
00:29:47,160 --> 00:29:51,480
Speaker 3: that quate liquidity to continue to withstand some level of volatility. Uh,

546
00:29:51,760 --> 00:29:54,120
Speaker 3: we absolutely think there is across different parts of the

547
00:29:54,160 --> 00:29:54,800
Speaker 3: chemical space.

548
00:29:56,200 --> 00:30:01,080
Speaker 2: So as we have you know, the environment is probably

549
00:30:01,080 --> 00:30:05,640
Speaker 2: going to be stickier than previously thought. There's going to

550
00:30:05,680 --> 00:30:10,040
Speaker 2: be a longer horizon of you know, we're not going

551
00:30:10,080 --> 00:30:13,760
Speaker 2: back to zero interest rates anytime soon. We can safely

552
00:30:13,800 --> 00:30:18,120
Speaker 2: say that, how does that? Are there any other sectors

553
00:30:18,240 --> 00:30:20,920
Speaker 2: with the kind of environment that we have, and you know,

554
00:30:21,000 --> 00:30:25,600
Speaker 2: we've constantly seen these companies looking to refinance what was

555
00:30:25,720 --> 00:30:29,000
Speaker 2: cheap debt and they get sticker shot at, you know,

556
00:30:29,040 --> 00:30:32,560
Speaker 2: where they have to refinance. Are there other sectors that

557
00:30:32,640 --> 00:30:37,400
Speaker 2: you see as like maybe presenting a distressed opportunity or

558
00:30:38,240 --> 00:30:41,400
Speaker 2: you know, and it also looks like North America Energy

559
00:30:41,480 --> 00:30:44,120
Speaker 2: is a pretty safe place to be in terms of

560
00:30:44,520 --> 00:30:48,320
Speaker 2: you know, going back to the high bond index that

561
00:30:48,400 --> 00:30:51,920
Speaker 2: I look at. It's like energy and financials had almost

562
00:30:52,200 --> 00:30:57,000
Speaker 2: no distressed bonds in them, which was, you know, kind

563
00:30:57,040 --> 00:31:01,840
Speaker 2: of mind blowing. It's there's a real dichotomy between you

564
00:31:01,880 --> 00:31:07,200
Speaker 2: know what, communications and technologies struggling with versus you know,

565
00:31:07,400 --> 00:31:12,920
Speaker 2: energy and financials. Any any thoughts on sectors anything else.

566
00:31:14,200 --> 00:31:16,400
Speaker 3: You know, it's interesting when you have past cycles is

567
00:31:16,440 --> 00:31:18,840
Speaker 3: to refer to some of our long standing history that

568
00:31:18,920 --> 00:31:23,440
Speaker 3: go through you know, significant de leveraging, you know cycles.

569
00:31:23,520 --> 00:31:26,880
Speaker 3: You know. Obviously eight was the GFC and it delivered

570
00:31:26,880 --> 00:31:29,360
Speaker 3: the financial simment system, and I think even the condition

571
00:31:29,440 --> 00:31:32,720
Speaker 3: of banks and financial companies in general are you know,

572
00:31:32,800 --> 00:31:35,440
Speaker 3: far healthier than they have been historically. And then in

573
00:31:35,480 --> 00:31:38,680
Speaker 3: fifteen and sixteen we went through the OPEC energy crisis.

574
00:31:38,760 --> 00:31:42,320
Speaker 3: I think it brought some rationality to the energy sector

575
00:31:42,360 --> 00:31:46,760
Speaker 3: from a level of debt and exposure perspective. Unfortunately, a

576
00:31:46,800 --> 00:31:50,320
Speaker 3: lot of the telecom and telecom services companies didn't learn

577
00:31:50,320 --> 00:31:53,680
Speaker 3: that lesson from twenty five years ago, which is, you know,

578
00:31:53,920 --> 00:31:56,520
Speaker 3: those are really high cost of capital businesses because they're

579
00:31:56,640 --> 00:32:00,000
Speaker 3: very capital intensive. And we saw a lot of stress

580
00:31:59,720 --> 00:32:03,440
Speaker 3: in the telecom telecom services space because of rising interest rates,

581
00:32:04,200 --> 00:32:07,200
Speaker 3: and so I think the memories of our markets are

582
00:32:07,240 --> 00:32:09,440
Speaker 3: too short most of the time. But they were they

583
00:32:09,720 --> 00:32:12,240
Speaker 3: didn't even arken back to to that that past cycle

584
00:32:12,320 --> 00:32:14,080
Speaker 3: that you know, they should have learned some lessons on.

585
00:32:14,160 --> 00:32:17,360
Speaker 3: So we're seeing some stress within you know, telecom and

586
00:32:17,480 --> 00:32:20,800
Speaker 3: and telecom related services businesses that I think have really

587
00:32:20,800 --> 00:32:24,000
Speaker 3: struggled because of the interest rate environment. You know, I

588
00:32:24,040 --> 00:32:27,640
Speaker 3: think in some of the industrial names, which you know,

589
00:32:28,360 --> 00:32:31,040
Speaker 3: we should be in somewhat of an industrial tailwind from

590
00:32:31,040 --> 00:32:34,920
Speaker 3: a domestic perspective, have also struggled. You know, I think

591
00:32:34,960 --> 00:32:38,400
Speaker 3: with some cyclicality and you know, start for capex and

592
00:32:38,400 --> 00:32:40,000
Speaker 3: not have enough free cash flow to be able to

593
00:32:40,040 --> 00:32:42,000
Speaker 3: invest in their businesses. And I think that's another sector

594
00:32:42,040 --> 00:32:44,520
Speaker 3: that we could see some strain and stress in, especially

595
00:32:44,520 --> 00:32:46,280
Speaker 3: at the higher levers levels that those are for the

596
00:32:46,280 --> 00:32:47,000
Speaker 3: instant right now.

597
00:32:47,080 --> 00:32:50,000
Speaker 2: So maybe maybe twenty six years is about the right

598
00:32:50,120 --> 00:32:55,719
Speaker 2: time frame before that they repeat becoming the spotlight player

599
00:32:56,040 --> 00:32:59,480
Speaker 2: for distress. So so one last question, because I you know,

600
00:32:59,520 --> 00:33:02,560
Speaker 2: I get I think it hits back to underwriting standards.

601
00:33:03,080 --> 00:33:03,320
Speaker 3: You know.

602
00:33:04,760 --> 00:33:06,840
Speaker 2: I think it was on the last episode of The

603
00:33:06,920 --> 00:33:11,680
Speaker 2: Credit Edge that I heard that adjustments have like roughly

604
00:33:11,720 --> 00:33:15,200
Speaker 2: doubled in the last I forget the period five to

605
00:33:15,280 --> 00:33:20,120
Speaker 2: ten years, and I'm curious where you see us being

606
00:33:20,160 --> 00:33:23,440
Speaker 2: on the pendulum are you know, are are we at

607
00:33:23,440 --> 00:33:27,640
Speaker 2: one end where ebitdad adjustments are a pe firms fantasy,

608
00:33:27,800 --> 00:33:30,840
Speaker 2: or are we at the other end where like the

609
00:33:30,840 --> 00:33:34,880
Speaker 2: people with the cash, lenders with the cash basically dictate

610
00:33:34,920 --> 00:33:35,440
Speaker 2: the terms.

611
00:33:36,160 --> 00:33:40,120
Speaker 3: I think increasingly the lack of follow through on on

612
00:33:40,240 --> 00:33:45,080
Speaker 3: ebadah and adjustments, you know, perspective ebadah adjustments and improvements,

613
00:33:45,480 --> 00:33:48,320
Speaker 3: I think lenders are going to, through a more a

614
00:33:48,320 --> 00:33:50,440
Speaker 3: softening of the cycle and a softening of the easy

615
00:33:50,440 --> 00:33:52,680
Speaker 3: money environment, get more power to be able to dictate

616
00:33:52,720 --> 00:33:56,800
Speaker 3: the definition of ebadah and how optimistic you know, ebada

617
00:33:56,880 --> 00:33:59,520
Speaker 3: can be defined as you know, going forward. On the

618
00:33:59,520 --> 00:34:03,080
Speaker 3: flip side, for the sponsors, I think we've you know,

619
00:34:03,160 --> 00:34:06,280
Speaker 3: we've come out of the period of multiple accretion and

620
00:34:06,640 --> 00:34:09,320
Speaker 3: you know, really really cheap financing. So unless they actually

621
00:34:09,360 --> 00:34:12,200
Speaker 3: do start producing some of that ebadad improvement through cost

622
00:34:12,200 --> 00:34:15,320
Speaker 3: savings and productivity improvement, they're not going to generate the

623
00:34:15,360 --> 00:34:17,520
Speaker 3: types of returns that they've been able to for the

624
00:34:17,600 --> 00:34:19,960
Speaker 3: last fifteen or twenty years. So I think it's a

625
00:34:19,960 --> 00:34:22,040
Speaker 3: little bit of a push pull. I think, you know,

626
00:34:22,160 --> 00:34:24,879
Speaker 3: your willingness as a lender to believe it, I think

627
00:34:25,040 --> 00:34:28,000
Speaker 3: is more you know, sort of suspect, and quite frankly,

628
00:34:28,040 --> 00:34:30,719
Speaker 3: in the public markets, we discount most of the adjustments

629
00:34:30,719 --> 00:34:34,960
Speaker 3: and add backs anyway, and on on. On the sponsor side,

630
00:34:34,960 --> 00:34:36,839
Speaker 3: I think it's their ability to produce it that's actually

631
00:34:36,880 --> 00:34:39,560
Speaker 3: going to allow them to put forth sort of private

632
00:34:39,560 --> 00:34:41,360
Speaker 3: dec we like returns on go forward basis.

633
00:34:42,360 --> 00:34:45,040
Speaker 1: So as Phil says, you know, rates aren't high, they

634
00:34:45,040 --> 00:34:47,640
Speaker 1: probably probably will stay high for quite a bit longer

635
00:34:47,680 --> 00:34:50,920
Speaker 1: than everyone was expecting, you know, unless the President has

636
00:34:50,920 --> 00:34:55,000
Speaker 1: his way and washed us something that's particularly political to

637
00:34:55,440 --> 00:34:59,160
Speaker 1: bring down rates. But let's assume they stay where they are.

638
00:35:00,040 --> 00:35:03,560
Speaker 1: But the bulk of the borrowers out there have gotten

639
00:35:03,640 --> 00:35:08,919
Speaker 1: used to this, they've managed through, and that must play

640
00:35:09,000 --> 00:35:12,359
Speaker 1: to the advantage. Therefore floating rate assets, which we are

641
00:35:12,400 --> 00:35:17,560
Speaker 1: hearing people talk about more so loans obviously clos you know,

642
00:35:18,000 --> 00:35:21,080
Speaker 1: going back the entire time I've been covering credit for decades,

643
00:35:21,320 --> 00:35:23,600
Speaker 1: people have been scared of clos and they still seem

644
00:35:23,640 --> 00:35:26,840
Speaker 1: to be. But you are, you have a clo business.

645
00:35:27,840 --> 00:35:30,240
Speaker 1: People seem to like them. They seem to be doing well,

646
00:35:31,239 --> 00:35:34,560
Speaker 1: yet there are concerns about higher default rates in leverage

647
00:35:34,600 --> 00:35:37,759
Speaker 1: loans and lower recoveries as you pointed out. So I'm

648
00:35:37,760 --> 00:35:40,840
Speaker 1: wondering from your perspective, you know, what's what's the current

649
00:35:41,000 --> 00:35:43,360
Speaker 1: take on on clos? How how do you what's the

650
00:35:43,400 --> 00:35:47,600
Speaker 1: reception from investors to those Yeah.

651
00:35:47,440 --> 00:35:51,120
Speaker 3: So celos have have definitely become less esoteric and more

652
00:35:51,600 --> 00:35:55,080
Speaker 3: you know, to use a different terminology, democratized in terms

653
00:35:55,080 --> 00:35:58,719
Speaker 3: of accessibility, both from an institutional investor point of view

654
00:35:58,719 --> 00:36:01,800
Speaker 3: and quite frankly also for certain liability parts of the

655
00:36:01,840 --> 00:36:05,080
Speaker 3: capital structure from a retail investor point of view. We

656
00:36:05,200 --> 00:36:08,319
Speaker 3: view them as highly resilient structures that have actually shown

657
00:36:08,360 --> 00:36:13,600
Speaker 3: an ability to withstand severe points of market stress. Clos

658
00:36:13,640 --> 00:36:16,320
Speaker 3: survive the ninety eight through or three crisis, dolos survived

659
00:36:16,600 --> 00:36:19,160
Speaker 3: eight crisis, they survive the COVID crisis, and I think

660
00:36:19,200 --> 00:36:22,440
Speaker 3: what they've evolved to, number one, the structures have gotten safer.

661
00:36:22,520 --> 00:36:26,520
Speaker 3: And number two, you've seen, you know, instead of of

662
00:36:26,680 --> 00:36:29,960
Speaker 3: markets shutting off and turning back on, you've seen parallel

663
00:36:30,000 --> 00:36:33,520
Speaker 3: shifts and spreads between assets and liabilities and still a

664
00:36:33,560 --> 00:36:37,880
Speaker 3: functioning market, which I think goes to the further resiliency

665
00:36:38,000 --> 00:36:40,960
Speaker 3: and survivability of colos. Now, the other point you hit on,

666
00:36:41,000 --> 00:36:44,360
Speaker 3: which is defaults and recovery rates, is always going to

667
00:36:44,400 --> 00:36:48,680
Speaker 3: be an important fundamental dynamic within clos. Clos are about,

668
00:36:48,840 --> 00:36:52,400
Speaker 3: you know, pricing liabilities reasonably well in line with assets spreads,

669
00:36:52,440 --> 00:36:55,839
Speaker 3: and it's about managing losses. And so as we get

670
00:36:55,960 --> 00:37:00,160
Speaker 3: rising dispersion, which I mean right now we're seeing will

671
00:37:00,320 --> 00:37:03,520
Speaker 3: excuse me, single bee to triple C dispersion two x

672
00:37:03,600 --> 00:37:05,360
Speaker 3: what it's been for the last ten years, where it

673
00:37:05,600 --> 00:37:08,920
Speaker 3: caught fourteen hundred basis points between single b's and triple c's.

674
00:37:10,280 --> 00:37:13,240
Speaker 3: That type of dispersion is going to create more winners

675
00:37:13,239 --> 00:37:16,000
Speaker 3: and losers. It's going to you know, really highlight and

676
00:37:16,040 --> 00:37:19,640
Speaker 3: identify people who are able to proactively identify and risk

677
00:37:19,680 --> 00:37:22,480
Speaker 3: and avoid loss in their portfolios. And so I think

678
00:37:22,520 --> 00:37:25,440
Speaker 3: that's a healthy thing. When a market persists in a

679
00:37:25,480 --> 00:37:28,000
Speaker 3: really easy money environment for too long, it gets crowded,

680
00:37:28,440 --> 00:37:31,200
Speaker 3: and you know, a difficult market credit cycle will actually

681
00:37:31,239 --> 00:37:34,839
Speaker 3: differentiate performance. And I think that's that's a healthy part

682
00:37:34,840 --> 00:37:36,760
Speaker 3: of what's going to happen in the SELO market.

683
00:37:37,000 --> 00:37:39,560
Speaker 1: Going back to your sort of em to find miss

684
00:37:39,560 --> 00:37:41,920
Speaker 1: priced risk this must be a great time to do it,

685
00:37:42,040 --> 00:37:44,200
Speaker 1: given the dispersion that you're talking.

686
00:37:44,040 --> 00:37:49,160
Speaker 3: About carefully, Yes, it's saloes are great because they're long

687
00:37:49,239 --> 00:37:52,240
Speaker 3: term locked up, you know, capital that aren't marked to market,

688
00:37:53,200 --> 00:37:56,600
Speaker 3: you know, in structure, which does allow you to take

689
00:37:56,640 --> 00:38:00,920
Speaker 3: advantage of periods of volatility and dislocation, but it doesn't

690
00:38:00,920 --> 00:38:05,160
Speaker 3: allow you to avoid loss or meaning like you have

691
00:38:05,200 --> 00:38:07,960
Speaker 3: to still make good credit selections and good credit decisions.

692
00:38:08,080 --> 00:38:11,680
Speaker 3: So yes, it does create opportunity, but it still means

693
00:38:11,719 --> 00:38:14,239
Speaker 3: you have to be very focused, especially given really are

694
00:38:14,239 --> 00:38:15,040
Speaker 3: in a potential cycle.

695
00:38:15,040 --> 00:38:17,680
Speaker 1: Well, the dispersion is it? Is it based on ill liquidity?

696
00:38:17,760 --> 00:38:17,960
Speaker 3: Is it?

697
00:38:18,000 --> 00:38:21,319
Speaker 1: Inefficiency? Is what's driving it? Because we've been tearing about

698
00:38:21,320 --> 00:38:22,520
Speaker 1: dispersion for a long time now.

699
00:38:23,680 --> 00:38:28,840
Speaker 3: Yeah, I think it's more pronounced because of the sector dynamics.

700
00:38:28,840 --> 00:38:32,040
Speaker 3: You've seen software, as an example, widened to two hundred

701
00:38:32,040 --> 00:38:34,960
Speaker 3: and fifty basis points over the broader loan market year

702
00:38:35,000 --> 00:38:37,680
Speaker 3: to day, largely because of the fears of AI. That

703
00:38:37,719 --> 00:38:39,759
Speaker 3: hasn't played through in the fundamentals. But that's what the

704
00:38:39,760 --> 00:38:43,480
Speaker 3: perception of risk is within the marketplace. I think you've seen,

705
00:38:43,760 --> 00:38:46,920
Speaker 3: you know, other sector dynamics that have caused you more

706
00:38:47,000 --> 00:38:49,959
Speaker 3: dislocation like that. It's a part of the service space.

707
00:38:50,040 --> 00:38:52,080
Speaker 3: Because of the fears of ai I have also played out.

708
00:38:53,200 --> 00:38:56,040
Speaker 3: You know, autos because of tariffs last year were particularly

709
00:38:56,040 --> 00:38:58,319
Speaker 3: wide relative to the rest of the market. So I

710
00:38:58,360 --> 00:39:00,480
Speaker 3: think that's a part of it. The other part I

711
00:39:00,560 --> 00:39:04,960
Speaker 3: would say is lmes have created negative technicals in the market.

712
00:39:05,640 --> 00:39:08,200
Speaker 3: When a situation gets into one of these you know,

713
00:39:08,280 --> 00:39:12,719
Speaker 3: sort of non default restructuring situations, the bid for that

714
00:39:12,760 --> 00:39:15,520
Speaker 3: paper goes away very quickly, and it causes a dramatic

715
00:39:15,600 --> 00:39:19,200
Speaker 3: widening of those acid prices and the spread levels that

716
00:39:19,239 --> 00:39:22,920
Speaker 3: can cause a perversion in you know, and a dispersion

717
00:39:23,080 --> 00:39:24,279
Speaker 3: in incredibrity. Yes.

718
00:39:24,480 --> 00:39:28,080
Speaker 1: Yeah, we've been hearing clos dropping out at ninety very

719
00:39:28,120 --> 00:39:30,040
Speaker 1: quickly because they think that it's going to get into

720
00:39:30,040 --> 00:39:32,680
Speaker 1: a situation that they cannot you know, litigate through. But

721
00:39:33,440 --> 00:39:35,800
Speaker 1: I'm interested when you talk about the early stages of

722
00:39:35,840 --> 00:39:38,200
Speaker 1: the cycle. We've heard people talk about late cycle. You've

723
00:39:38,200 --> 00:39:41,560
Speaker 1: been doing this long enough to have a bigger perspective maybe,

724
00:39:42,320 --> 00:39:44,719
Speaker 1: but we seem to have. You know, no cycle just

725
00:39:44,760 --> 00:39:46,920
Speaker 1: goes on and on. We talk all the time about

726
00:39:46,920 --> 00:39:48,160
Speaker 1: you know, when's it going to end, how's it going

727
00:39:48,200 --> 00:39:50,839
Speaker 1: to end, and it never ends. So's what's keeping us

728
00:39:51,080 --> 00:39:52,320
Speaker 1: limping along endlessly.

729
00:39:53,080 --> 00:39:57,880
Speaker 3: Look, I think the stat I mentioned earlier, which is

730
00:39:57,920 --> 00:40:01,040
Speaker 3: the number of repeat offenders that you know, tried to

731
00:40:01,040 --> 00:40:03,200
Speaker 3: fix their balance sheet once through some sort of kick

732
00:40:03,239 --> 00:40:05,799
Speaker 3: the can exercise, are coming back to the market again,

733
00:40:05,880 --> 00:40:09,520
Speaker 3: and in many cases ultimately going through a full scale restructuring,

734
00:40:10,160 --> 00:40:12,759
Speaker 3: is a sign that you know, the gig is up

735
00:40:12,800 --> 00:40:16,080
Speaker 3: and we're running out of runway to you know, pretend

736
00:40:16,239 --> 00:40:19,400
Speaker 3: our way into a sort of a quick recovery. I

737
00:40:19,400 --> 00:40:21,720
Speaker 3: think that's part of it. I think the other pieces.

738
00:40:22,040 --> 00:40:25,759
Speaker 3: You know, a lot of this sort of capital structure

739
00:40:26,200 --> 00:40:29,120
Speaker 3: you know is built in zero interest rate environments, is

740
00:40:29,160 --> 00:40:31,480
Speaker 3: really you know, plaguing you know a lot of borrowers.

741
00:40:31,840 --> 00:40:34,160
Speaker 3: I think that you know, they need to invest in

742
00:40:34,200 --> 00:40:37,239
Speaker 3: their business to stay competitive, to grow, to innovate, to

743
00:40:37,719 --> 00:40:40,240
Speaker 3: do M and A, and a lot of these companies

744
00:40:40,239 --> 00:40:42,319
Speaker 3: can't afford to do that because they're doing their best

745
00:40:42,360 --> 00:40:45,239
Speaker 3: to meet their interest coverage charges. And I think that

746
00:40:45,320 --> 00:40:48,160
Speaker 3: really will start to bear out and we're going to

747
00:40:48,239 --> 00:40:50,359
Speaker 3: have Look, I don't think this is an O eight

748
00:40:50,760 --> 00:40:54,120
Speaker 3: style crisis where you have massive spikes and defaults, but

749
00:40:54,200 --> 00:40:56,719
Speaker 3: even at three to five percent default rates, which with

750
00:40:56,719 --> 00:40:59,400
Speaker 3: what we've been experiencing on a soft and hard basis

751
00:40:59,400 --> 00:41:01,719
Speaker 3: for the last two or three years, that over the

752
00:41:01,719 --> 00:41:04,880
Speaker 3: next two or three years is going to be painful. Cumulatively,

753
00:41:04,920 --> 00:41:07,279
Speaker 3: that's a lot of bounce sheets that need to be restructured,

754
00:41:07,719 --> 00:41:09,239
Speaker 3: and I think that's what we're going to see. We're

755
00:41:09,280 --> 00:41:12,880
Speaker 3: going to see more proliferation of bounce sheets that are

756
00:41:12,920 --> 00:41:13,640
Speaker 3: redone next.

757
00:41:13,480 --> 00:41:15,399
Speaker 1: All right, I mean I'll last guests, as Phil said,

758
00:41:15,440 --> 00:41:18,400
Speaker 1: mentioned seven hundred and seventy billion in US loans directs

759
00:41:18,440 --> 00:41:22,000
Speaker 1: and broadly syndicated that are stress based on interest coverage

760
00:41:22,080 --> 00:41:25,040
Speaker 1: ratios below one and a half and leverage above seven times,

761
00:41:25,800 --> 00:41:28,960
Speaker 1: which seems like a big worrying number with all the

762
00:41:29,000 --> 00:41:30,640
Speaker 1: other things going on in the world, and yet every

763
00:41:30,640 --> 00:41:32,799
Speaker 1: time there's a dip, people just pile in and buy it.

764
00:41:34,520 --> 00:41:36,920
Speaker 3: There's a lot of capital on sidelines. I think equity

765
00:41:36,920 --> 00:41:39,680
Speaker 3: market participants certainly have some fomo with everything that's going

766
00:41:39,719 --> 00:41:43,920
Speaker 3: on in AI, but at some point credit investors will

767
00:41:43,920 --> 00:41:46,600
Speaker 3: have to come to market and seek some sort of refinancing.

768
00:41:47,600 --> 00:41:50,200
Speaker 3: And unless you believe in a greater fools theory, those

769
00:41:50,239 --> 00:41:52,200
Speaker 3: businesses that have some one and a half times interest

770
00:41:52,239 --> 00:41:54,440
Speaker 3: coverage north of seven times leverage are going to really

771
00:41:54,440 --> 00:41:58,200
Speaker 3: struggle to get refinanced and that will become an issue,

772
00:41:58,280 --> 00:41:58,759
Speaker 3: you know, at.

773
00:41:58,680 --> 00:42:01,720
Speaker 1: The and the fear around private credit which just seems

774
00:42:01,719 --> 00:42:04,480
Speaker 1: to be feeding on itself because no one knows a

775
00:42:04,520 --> 00:42:07,200
Speaker 1: lot of that is based on the idea that you know,

776
00:42:07,680 --> 00:42:10,200
Speaker 1: there was a lot of fund raised, funds raised, and

777
00:42:10,239 --> 00:42:13,800
Speaker 1: they needed to be deployed, and not everyone was deploying

778
00:42:13,800 --> 00:42:17,040
Speaker 1: them quote responsibly. But when we talk to people about that,

779
00:42:17,080 --> 00:42:18,919
Speaker 1: they would always say, well, it's obviously not us, it's

780
00:42:18,920 --> 00:42:21,560
Speaker 1: the tourists. You've been doing this a long time, tray

781
00:42:21,600 --> 00:42:23,759
Speaker 1: you're not a tourist, And wondering are you seeing any

782
00:42:23,840 --> 00:42:26,360
Speaker 1: kinds of you know, signs of frath or did you

783
00:42:26,400 --> 00:42:28,000
Speaker 1: see any deals that you just shook your head out

784
00:42:28,000 --> 00:42:29,960
Speaker 1: and so that that shouldn't be getting done right now?

785
00:42:31,280 --> 00:42:34,080
Speaker 3: There absolutely have been, and we've we've been very disciplined

786
00:42:34,120 --> 00:42:37,680
Speaker 3: in our credit underwriting process and remains so today. There's

787
00:42:37,680 --> 00:42:40,000
Speaker 3: always deals that you scratch your head at when you

788
00:42:40,040 --> 00:42:43,520
Speaker 3: see get done. And and I do think there's been

789
00:42:43,960 --> 00:42:48,400
Speaker 3: a massive breath widening in the participation in credit markets

790
00:42:48,440 --> 00:42:51,880
Speaker 3: in general, and private credits markets more specifically. Many of

791
00:42:51,920 --> 00:42:55,279
Speaker 3: those platforms haven't actually ever navigated a cycle, and so

792
00:42:55,680 --> 00:42:57,840
Speaker 3: it will be interesting to see how they react and

793
00:42:57,840 --> 00:43:00,960
Speaker 3: behave in the circumstances. Like just to kind of circle back,

794
00:43:01,040 --> 00:43:04,760
Speaker 3: I don't think the broader credit markets, both private and public,

795
00:43:04,840 --> 00:43:07,839
Speaker 3: are fundamentally broken. I think they just need to go

796
00:43:07,880 --> 00:43:10,640
Speaker 3: through a bit of a cathartic credit cycle process. I

797
00:43:10,640 --> 00:43:13,399
Speaker 3: think that's going to you know, separate the real week

798
00:43:13,440 --> 00:43:13,920
Speaker 3: from the shaft.

799
00:43:14,080 --> 00:43:17,640
Speaker 1: But it's more of a repricing, not a big collapse.

800
00:43:19,600 --> 00:43:24,439
Speaker 3: A repricing and a culling of of of the weaker herd.

801
00:43:24,560 --> 00:43:27,439
Speaker 3: I guess you would say credit credit markets or credit cycles,

802
00:43:27,480 --> 00:43:30,480
Speaker 3: I should say, and economic cycles are intentional in that

803
00:43:30,560 --> 00:43:35,520
Speaker 3: they tend to, you know, filter out companies, borrowers, you know,

804
00:43:35,560 --> 00:43:38,279
Speaker 3: people that really shouldn't be competitive, shouldn't have gotten the

805
00:43:38,360 --> 00:43:40,759
Speaker 3: breath of fresh air to continue to get financed or

806
00:43:40,760 --> 00:43:43,000
Speaker 3: to move forward. And we need a little that, we

807
00:43:43,000 --> 00:43:45,840
Speaker 3: need a little health on the local arsist in market.

808
00:43:45,960 --> 00:43:48,560
Speaker 1: You still trade seem to think that is pretty far off,

809
00:43:48,680 --> 00:43:53,800
Speaker 1: this this reckoning, and I'm wondering what might trigger it.

810
00:43:53,800 --> 00:43:55,480
Speaker 3: It's not so much that it's far off, that it's

811
00:43:55,560 --> 00:43:59,280
Speaker 3: early and that there's still a fair amount of credit

812
00:43:59,480 --> 00:44:02,640
Speaker 3: that needs to work through, you know, a balance sheet

813
00:44:02,680 --> 00:44:07,440
Speaker 3: right sizing or some sort of restructuring your organization, and

814
00:44:07,480 --> 00:44:09,680
Speaker 3: that could continue for multiple years. I mean, if you

815
00:44:09,880 --> 00:44:12,840
Speaker 3: just look at what historically has happened, it's typically not

816
00:44:13,040 --> 00:44:17,000
Speaker 3: until three or four years after you know, a bullish

817
00:44:17,080 --> 00:44:19,560
Speaker 3: credit issuing cycle. Do you see the stress and the

818
00:44:19,600 --> 00:44:22,319
Speaker 3: stress that comes out of that. And you know, we

819
00:44:22,320 --> 00:44:25,160
Speaker 3: were still in a very very rosy, very healthy environment

820
00:44:25,400 --> 00:44:27,919
Speaker 3: through twenty twenty four and even you know the first

821
00:44:27,920 --> 00:44:30,360
Speaker 3: part of twenty twenty five, and so you've got to

822
00:44:30,400 --> 00:44:32,640
Speaker 3: fast forward that tape two three four years down the

823
00:44:32,680 --> 00:44:36,560
Speaker 3: road to see, you know what those you know, situations

824
00:44:36,719 --> 00:44:39,960
Speaker 3: really what would become of them. And that's why I mean,

825
00:44:40,000 --> 00:44:41,520
Speaker 3: it's going to go on for a while.

826
00:44:41,360 --> 00:44:43,719
Speaker 1: So it's not going to happen over so to be clear,

827
00:44:43,719 --> 00:44:46,239
Speaker 1: then we're already in the default cycle. It's it's that

828
00:44:46,680 --> 00:44:49,560
Speaker 1: let's say, let's say five percent, and it's not going

829
00:44:49,600 --> 00:44:51,800
Speaker 1: to increase dramatically from there. It's just going to continue

830
00:44:51,800 --> 00:44:55,279
Speaker 1: at this fairly high rate. Yes, that's our view, and

831
00:44:55,320 --> 00:44:59,720
Speaker 1: that's across public and private. You think I believe so, yes,

832
00:45:00,719 --> 00:45:02,239
Speaker 1: I'm going to obviously put you on spot and say

833
00:45:02,239 --> 00:45:03,879
Speaker 1: how many years does it go on trade?

834
00:45:03,920 --> 00:45:06,880
Speaker 3: So yeah, look, I think we have at least a

835
00:45:06,920 --> 00:45:10,360
Speaker 3: couple more years of this to work through some of

836
00:45:10,400 --> 00:45:14,000
Speaker 3: the excesses. Where could we be wrong? You know, some

837
00:45:14,040 --> 00:45:18,040
Speaker 3: of this sort of fiscal stimulus bullus AI could be

838
00:45:18,160 --> 00:45:21,840
Speaker 3: a productivity boon that doesn't you know, sort of damage

839
00:45:21,840 --> 00:45:25,719
Speaker 3: employment and creates massive upside growth to the economy. And

840
00:45:25,760 --> 00:45:28,719
Speaker 3: that's somehow filters through the consumer and in that side

841
00:45:28,719 --> 00:45:32,560
Speaker 3: of circumstance, you know, could we be wrong and default rates,

842
00:45:32,640 --> 00:45:34,680
Speaker 3: you know, crash back down to one or two percent

843
00:45:34,800 --> 00:45:38,279
Speaker 3: and we're off to the races. Absolutely, But where we're

844
00:45:38,320 --> 00:45:41,200
Speaker 3: focused in the way that we're positioned for that it

845
00:45:41,560 --> 00:45:43,600
Speaker 3: may not be quite as juicy, but it's still not

846
00:45:43,840 --> 00:45:46,520
Speaker 3: a horrible thing. It certainly wouldn't be as healthy as

847
00:45:46,560 --> 00:45:48,759
Speaker 3: we're talking about. But that's I guess, how we could

848
00:45:48,800 --> 00:45:49,680
Speaker 3: be wrong with the situation.

849
00:45:50,440 --> 00:45:53,080
Speaker 1: Great stuff, Trey Parker with Sycamore Tree Capital Partners. It's

850
00:45:53,080 --> 00:45:55,000
Speaker 1: been a pleasure having you on the Credit Edge. Many thanks.

851
00:45:55,160 --> 00:45:56,799
Speaker 3: Thank you for having me. I appreciate it.

852
00:45:56,880 --> 00:45:59,000
Speaker 1: And to Phil Brendle of Bloomberg Intelligence, thank you very

853
00:45:59,080 --> 00:46:02,480
Speaker 1: much for joining us today. Thanks guys for even more analysis.

854
00:46:02,480 --> 00:46:04,759
Speaker 1: Read all of Phil's work on the Bloomberg Terminal. It's

855
00:46:04,800 --> 00:46:07,800
Speaker 1: great stuff. I've been reading it for years. Bloomberg Intelligence

856
00:46:07,840 --> 00:46:10,120
Speaker 1: is part of our research department, with five hundred analysts

857
00:46:10,120 --> 00:46:13,120
Speaker 1: and strategists working across all markets. Coverage includes over two

858
00:46:13,160 --> 00:46:15,479
Speaker 1: thousand equities and credits and outlooks on more than ninety

859
00:46:15,560 --> 00:46:20,280
Speaker 1: industries and one hundred market industries, currencies, and commodities. Please

860
00:46:20,320 --> 00:46:22,720
Speaker 1: who subscribe to the Credit Edge wherever you get your podcasts.

861
00:46:22,760 --> 00:46:25,680
Speaker 1: We're on Apple, Spotify and all other good podcast providers,

862
00:46:25,680 --> 00:46:29,280
Speaker 1: including the Bloomberg Terminal at the podco. Give us a review,

863
00:46:29,400 --> 00:46:32,359
Speaker 1: tell your friends, or email me directly at jcromb eight

864
00:46:32,480 --> 00:46:33,719
Speaker 1: at Bloomberg dot net.

865
00:46:34,560 --> 00:46:35,320
Speaker 3: I'm James Crombie.

866
00:46:35,320 --> 00:46:37,120
Speaker 1: It's been a pleasure having you join us again next

867
00:46:37,160 --> 00:46:54,560
Speaker 1: week on the Credit Edge.