Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crumby. I'm a senior editor at Bloomberg.
Speaker 1: This week, we're very pleased to welcome Fabian Crowbog, chief
Speaker 1: investment officer and founder of north Wall Capital, a London
Speaker 1: based credit investment firm. How are you, Fabian, I'm great.
Speaker 2: Thank you.
Speaker 1: Nice to see you, James, Thank you so much for
Speaker 1: joining us today. We're very excited to get your credit
Speaker 1: market views, and we're also delighted to have back on
Speaker 1: the show Tollu Alamutu with Bloomberg Intelligence.
Speaker 3: Hello, Tollu, Hello James. Great to be here again.
Speaker 1: Thank you so Just to set the scene of it here,
Speaker 1: credit markets have bounced back after taking a bit of
Speaker 1: a hit earlier in August when stock Market's tanked and
Speaker 1: the Vick Spear gauge sword. Global markets are generally calmer,
Speaker 1: but there's still some lingering anxiety given the wild price
Speaker 1: swings of the last few weeks. Liquidity is thin and
Speaker 1: there's a lot of risk out there. It doesn't take
Speaker 1: too much to spook markets. That said, we've had some
Speaker 1: good news on the economy. Inflation appears to be cooling
Speaker 1: and there's growing expectation of FED cuts coming in September,
Speaker 1: which would ease pressure on the weak companies that have
Speaker 1: been struggling with high borrowing costs for a while. Meanwhile,
Speaker 1: there's more debt issuance. Companies are taking advantage of very
Speaker 1: strong investor demand for corporate bonds and loans, with the
Speaker 1: yields still at historically high levels. In general, there's more
Speaker 1: demand than supply of corporate bonds and loans, which is
Speaker 1: technical boost. Credit markets are supported by resilience in the
Speaker 1: economy and investors are getting their hopes up about a
Speaker 1: soft landing. But there are still things to worry about
Speaker 1: debt defaults, bankruptcies, commercial real estate stress, war, the US election,
Speaker 1: global geopolitics, recession risks haven't really gone away either, and
Speaker 1: everyone's very overweight US assets compared to other regions. So
Speaker 1: what's your take, Fabian? Where do we go from here?
Speaker 2: Where do we go from here? Well, look, I think
Speaker 2: that it certainly looks more stable today than it did
Speaker 2: only about, you know, a year and a half ago,
Speaker 2: when we were worried about energy security. You know, my
Speaker 2: parents anecdotally are you know, live in Germany and there
Speaker 2: was talk of turning off street lights and saving gas
Speaker 2: by restricting warm showers. You know, we're certainly not in
Speaker 2: that position anymore.
Speaker 1: But in terms of credit markets, are we all clear now?
Speaker 1: Because you know, as rates come down, that eases the
Speaker 1: stress on on weak borrowers. That should clear everything up, right,
Speaker 1: I mean, we're all a happy happy now.
Speaker 2: Well, I'm not. I'm not entirely sure I would quite
Speaker 2: go go that far.
Speaker 3: Right.
Speaker 2: We still have a very substantial amount of maturities coming
Speaker 2: up in the next two to three years with capital
Speaker 2: structures that are over leveraged, and I think a simple
Speaker 2: reduction in base rates, you know, doesn't necessarily address the
Speaker 2: problem of too much leverage in in companies that you know,
Speaker 2: potentially you know, don't have that much equity value remaining.
Speaker 3: Fabian, you mentioned a very important point that I think
Speaker 3: a lot of people have been monitoring, which is the
Speaker 3: sort of maturity war that we have coming up over
Speaker 3: the next few years. What's your view then, on how
Speaker 3: some of this gets worked out. Do you think that
Speaker 3: we are bound to see many more restructurings and renegotiations
Speaker 3: or do you think that some of those issues will
Speaker 3: just bite the bullet and you know, issue debt wherever
Speaker 3: they can, however they can, whether in public or private market.
Speaker 3: How do you think this works out? Well?
Speaker 2: I think, you know, I think the concept of a
Speaker 2: maturity wall is something that you know, I you know,
Speaker 2: it doesn't necessarily immediately lead to increased systematic risks. The
Speaker 2: reason is that, you know, we are all aware of
Speaker 2: you know, this, this refinancing need that's out there, and
Speaker 2: that awareness then inevitably leads to the market trying to
Speaker 2: find a solution and to you know, trying to address
Speaker 2: address these issues. So you know, borrower sponsors will preemptively
Speaker 2: try and think about having conversations with their lenders. You
Speaker 2: will have more dislocation funds raised. You know, private credit
Speaker 2: will will try and lean in with with some capital solutions,
Speaker 2: et cetera. But you know what such a maturity wall,
Speaker 2: you know, does lead to is a series of idiots
Speaker 2: and creatic refinancing events. And that's exactly something that we
Speaker 2: at north Wall are particularly experienced in in helping address
Speaker 2: and resolve by offering our counter parties, you know, very
Speaker 2: creative private credit capital solutions to to help reduce leverage,
Speaker 2: to help address some of those those potential maturities and
Speaker 2: potentially refinance. You know some or all of the lenders
Speaker 2: in syndicates that that would like to get refinanced.
Speaker 3: Yeah, so you talked a little bit about those sort
Speaker 3: of idiosyncratic cases, and I think we'll sort of dive
Speaker 3: into that a little bit later when we talk about
Speaker 3: some of the sectors that maybe that you've been looking at.
Speaker 3: But one of the broader issues with idiosyncratic solutions or
Speaker 3: with tailor made solutions is creditor preference and changes in
Speaker 3: creditor preference or priming or credit on creditor violence and
Speaker 3: so on and all of that. What's your view on
Speaker 3: how that plays out in a market where we are
Speaker 3: dealing with this maturity wall. Even though yes, we are
Speaker 3: aware or everybody should be aware that the maturity will
Speaker 3: is coming up, some creditors may be more prepared to
Speaker 3: provide financing than others. So how do creditors manage through
Speaker 3: that situation without causing credit on creditor violence basically that
Speaker 3: people have been talking about.
Speaker 2: Well, I think I think this concept of creditor on
Speaker 2: creditor violence isn't something that should hugely surprise anybody. Let
Speaker 2: me explain. So, you know the reason that you know
Speaker 2: this credit on credit violence can occur is the outcome
Speaker 2: of you know, a vast volume of debtisians over the
Speaker 2: last qulle of five ten years, maybe longer, with relatively
Speaker 2: weak creditor protections. And so that opens the door to
Speaker 2: the investors in these structures, who, let's remember, have a
Speaker 2: fiduciary obligation to maximize returns and to protect certainly the
Speaker 2: investments of their of their stakeholders. That opens the door
Speaker 2: to them trying to find solutions to you know, not
Speaker 2: only protect a position, but also capture potentially some of
Speaker 2: the upside. So you know, I am not particularly surprised
Speaker 2: to see that, you know, we have some slightly more
Speaker 2: aggressive approaches to to these capital restructurings here and in
Speaker 2: the US, and certainly coming to Europe where we are
Speaker 2: most active, relatively relatively soon, So you know, and and interestingly,
Speaker 2: you know, there are you know, freaquent the opportunities to
Speaker 2: you know, play one side of the coin or try
Speaker 2: and take advantage of the other side of the opportunity.
Speaker 3: You mentioned weak creditor protection. I guess it's fair to
Speaker 3: say that that was probably due to the environment, as
Speaker 3: in rates were extraordinarily low. There was a lot of
Speaker 3: money around to be invested, and so maybe people were
Speaker 3: prepared to accept weaker covenants than they ordinarily would have.
Speaker 3: But I have a two pound question given the situation
Speaker 3: that we find ourselves now, one issue is that even
Speaker 3: though rates are obviously still high, coming down but still high,
Speaker 3: there is still a lot of money, at least in
Speaker 3: private credits flushing around. So do you think that creditor
Speaker 3: protections will be stronger this time around when refinancings come up,
Speaker 3: or does the demand to sort of put money to
Speaker 3: work mean that those protections might not be as strong
Speaker 3: as people would like them to be. And a second
Speaker 3: related question on protection and one issue has been that
Speaker 3: even when the docs say X, the way that the
Speaker 3: issuer interprets X may not be the way that the
Speaker 3: bond holder or creditor interprets it. How should we be
Speaker 3: thinking about the togo between the issuer and the creditor
Speaker 3: when it comes to interpreting those protections, right?
Speaker 2: I mean, look, I mean maybe it makes sense to
Speaker 2: take a step back, right. So you know, we at
Speaker 2: Northwall focus on the provision of private credit capital solutions
Speaker 2: to Western European borrowers in the in the middle market
Speaker 2: and even the lower middle market. Right, So we, you know,
Speaker 2: tend to focus on situations where we are very much
Speaker 2: by design the sole lender or at least a pivotal
Speaker 2: lender in the capital structure in the provision of the solution.
Speaker 2: This enables us to stay away from situations where there
Speaker 2: is a tremendous amount of capital chasing any given opportunity
Speaker 2: because of the size of the transactions which tend to
Speaker 2: be a little bit smaller for north Wall, and because
Speaker 2: of the perceived complexity of European credit investing. So what
Speaker 2: that means for us is that we tend to seek
Speaker 2: out situations where, while we might not have been the
Speaker 2: company's first call, you know, we are you know, always
Speaker 2: trying to be the first second call. But in a
Speaker 2: situation where there is a real urgency, a situational complexity,
Speaker 2: such as a refinancing, a you know, a lender that
Speaker 2: is dropped out of a process, a failed asset sale,
Speaker 2: whatever it might be, where there's a real need and
Speaker 2: a real requirement for us to get involved in and
Speaker 2: provide a solution. The benefit of that is that, you know,
Speaker 2: we are never in situations where we are being asked
Speaker 2: to contemplate providing capital without covenance or you know, without
Speaker 2: the appropriate structural protections, which are important and particularly important
Speaker 2: in Europe. So can I tell you what we'll happen
Speaker 2: kind of in the larger transactions private credit market. Quite frankly,
Speaker 2: I don't know. There certainly feels like there's uh, you know,
Speaker 2: more capital chasing again, fewer opportunities. But I can tell
Speaker 2: you about the transactions that that north Ball is involved,
Speaker 2: and you know we most certainly you know, will continue
Speaker 2: to insist on strong credit protections. So that's kind of answering,
Speaker 2: you know, you know, the first question. The second question
Speaker 2: around you know, interpretation of documentation. Again. You know, I
Speaker 2: think it is companies choosing to you know, risk illegal
Speaker 2: battle rather than you know, necessarily imposing losses on equity
Speaker 2: or imposing losses on the different transfer of creditors. And
Speaker 2: that is again a very much a tactical decision that
Speaker 2: we you know, will not be exposed to because you know,
Speaker 2: again we tend to be the sole lender, and we
Speaker 2: tend to have very strong creditor protections and we are
Speaker 2: in this market precisely for that reason.
Speaker 1: But going into those trades, faban and tell you ensure
Speaker 1: that you're not walking into something that is unsustainable and
Speaker 1: you know, potentially doesn't perform well.
Speaker 2: I think there are I mean, certainly, it all starts
Speaker 2: at our origination and underwriting. So we try to enter
Speaker 2: into situations where we have a very substantial amount of
Speaker 2: downsid protection number one on valuation in particular, but number
Speaker 2: two where we also have, due to the less competitive
Speaker 2: nature of these situations, access to you know, more diligence,
Speaker 2: you know, more information, better management time than we might
Speaker 2: ordinarily have if we were competing in a you know,
Speaker 2: and a much more broadly syndicated transactions. So that's kind
Speaker 2: of where it starts now. You can never predict the future,
Speaker 2: and you know, it is not unusual, of course for
Speaker 2: companies in our portfolio to breach you know, what might
Speaker 2: be tight covenant might be perceived as type covenants. And
Speaker 2: at that point in time, it is our internal asset
Speaker 2: management function that works with the investment team on encouraging
Speaker 2: the company towards a path to arrange for refinancing, again,
Speaker 2: you know, dependent on making sure that there's substantial equity
Speaker 2: value and downstair protection em bettered in the position.
Speaker 3: I have a follow up question on because because what
Speaker 3: I'm hearing from you is sort of small can be
Speaker 3: beautiful in a way, and that getting the second call
Speaker 3: doesn't mean that you're not offered all the same things
Speaker 3: as whoever got the first call. On small can be beautiful,
Speaker 3: I guess one of the things that we're seeing happen
Speaker 3: in asset management just broadly is consolidation. What is your
Speaker 3: broad picture view on that, and do you think that
Speaker 3: there is still room for medium sized players in the
Speaker 3: industry to continue to function or do you think that
Speaker 3: many asset managers just get hoovered up along the way,
Speaker 3: whether they are specialists or not. Do you think in
Speaker 3: the next few years we will see more consolidation or
Speaker 3: less of it than we've seen in the last few.
Speaker 2: Right, Just to pick up on your first point here,
Speaker 2: which is you know you might be offered more as
Speaker 2: a second call then the first call. Keep in mind
Speaker 2: that many times the situations that we're dealing with don't
Speaker 2: involve underlying the stress of the company, but merely a
Speaker 2: need and urgent need for funding because a more traditional
Speaker 2: source of capital has fallen through. So the misconception being
Speaker 2: that because we'd have to close a deal in a rush,
Speaker 2: we have access to less informations and correct because actually
Speaker 2: what happens is there is a real determination by the company,
Speaker 2: the sponsor, if it may be, to get a deal
Speaker 2: over the line, and so everybody holds hands and says, look,
Speaker 2: we've got to get north Wall over the line to
Speaker 2: get this transaction closed in the next four to eight weeks,
Speaker 2: whatever it might be. Let's get them all of the
Speaker 2: necessary information, let's get the access to management, et cetera.
Speaker 2: And so we actually, you know, very often feel that,
Speaker 2: you know, we understand these companies much better because we're
Speaker 2: part of the process rather than looking from the outside in.
Speaker 2: On your second point around consolidation. Yet, consolidation has been
Speaker 2: a big theme in our industry. We are, you know,
Speaker 2: probably one of the few European self funded, entirely management
Speaker 2: owned private credit players out there, and we very regularly
Speaker 2: do get approached for at least a minority stake. You know,
Speaker 2: we have for now decided to stay independent, you know,
Speaker 2: and you know, some of our peers have chosen to
Speaker 2: become parts of larger structures. You know, we've had no
Speaker 2: impact on our capa raising ability at least for now independently,
Speaker 2: and we've been able to fund the business as necessary.
Speaker 2: So you know, consolidation will continue to occur, but you know,
Speaker 2: we are we have no immediate plans to be part
Speaker 2: of that.
Speaker 1: So this all sounds great in theory, but can you
Speaker 1: put some specifics on it in terms of you know,
Speaker 1: walking through an example. And I'm thinking of my my
Speaker 1: aunt who lives in Scotland, who doesn't really know what
Speaker 1: this stuff is all about, but would like to kind of,
Speaker 1: you know, tangibly interact with the concept. What what sort
Speaker 1: of companies, what sort of situations we're talking about.
Speaker 2: Look, I think in the past you know, call it
Speaker 2: one to two years, we have you know, been more
Speaker 2: and more active in sponsor backed situations. I can give
Speaker 2: you an example. We helped a German industrial services business
Speaker 2: that was supported by a very large syndicate or a
Speaker 2: syndicate of many different mostly German and European banks over
Speaker 2: the years. And you know that that position that that
Speaker 2: syndicate came up to a maturity. Uh, the sponsor you know,
Speaker 2: was interested in refinancing this with a with a bond deal.
Speaker 2: This was right around the time that Putin invaded the
Speaker 2: Ukraine and that to the bondie of falling apart. Strong
Speaker 2: relationships with the banks ensure that the banks decided to
Speaker 2: give the company some more time. But there was one
Speaker 2: bank syndicate lender that did not want to participate in
Speaker 2: this transaction. They held a portion of the senior debt
Speaker 2: and they had the portion of a of a second
Speaker 2: lean of they held the entirety of the second lean.
Speaker 2: And we came in and we provided you know, that
Speaker 2: missing piece, right, and that missing piece consisted of you know,
Speaker 2: the missing piece of the of the of the senior,
Speaker 2: the missing piece the entirety of the of the of
Speaker 2: the second lean. Collectively, that was a you know, triple
Speaker 2: digit million euros. It was a sizeable transaction, but it
Speaker 2: required somebody to be able to piece these two pieces
Speaker 2: together and importantly do this in four to four to
Speaker 2: eight weeks. We now have a position that's you know,
Speaker 2: roughly four times levered that you know very much meets
Speaker 2: the return targets of our funds on a blended basis.
Speaker 1: This sounds like a very unusual situation, very rare to see,
Speaker 1: you know, once in a you know, you know, every
Speaker 1: every five years or something, is it. I mean, these
Speaker 1: are these common situations in Europe right now?
Speaker 2: They are they are they are what we're seeing is
Speaker 2: a very much and you know, decrease in the commercial
Speaker 2: banks appetite to lend, and we certainly are able to
Speaker 2: to step into that into those situations. And again it
Speaker 2: comes up to this concept of maturity wall right. The
Speaker 2: more of these events you have, even if a very
Speaker 2: small percentage of them end up becoming problematic, you know,
Speaker 2: we are there to support. We are there to support
Speaker 2: our counter parties in those situations. And remember, you know,
Speaker 2: the sponsor backed call it gap financing, private credit capital
Speaker 2: solutions business. You know, that's one part of what we do.
Speaker 2: You know, we also invest in, you know, asset backed situations.
Speaker 2: We also acquire portfolios, you know, and we have a
Speaker 2: a small but thriving legal assets funding business.
Speaker 3: I have a question on returns. So I primarily cover
Speaker 3: real estate, right, and after the factor lost like a
Speaker 3: fifth or so of its value I'm talking euro ig
Speaker 3: real estate lost the fifth of its value in twenty
Speaker 3: twenty two. We were up double digits last year, but
Speaker 3: this year we're only up single digits, right, So what
Speaker 3: sort of returns are you looking at now in those
Speaker 3: private credits stroke special situations that you have been talking about,
Speaker 3: And how have those returns changed over the last couple
Speaker 3: of years.
Speaker 2: Look, we you know, you know, can get drawn into
Speaker 2: you know, returns in this forum, but you know, suffice
Speaker 2: it to say, we're targeting throughout our kind of funds
Speaker 2: a return target that's you know, in the mid teens
Speaker 2: at least net to our investors, and so that requires
Speaker 2: us obviously to be extremely opportunistic. So there's a time
Speaker 2: where you know, we found a lot of deal flow
Speaker 2: in the sponsor backed space, you know, within real estate specifically,
Speaker 2: you know, we have struggled to find situations where we
Speaker 2: can generate those types of returns while still having a
Speaker 2: sufficient amount of downside protection. That being set, we recently
Speaker 2: closed a you know, led a deal you know that
Speaker 2: was fairly substantial and where we're able to meet our
Speaker 2: return objectives, albeit through a secondly in that situation.
Speaker 3: So I was just asking, when you say the mid teens,
Speaker 3: are we talking pre or post fees? And then maybe
Speaker 3: we can go on to talk a little bit more
Speaker 3: about real estate.
Speaker 2: After so I was talking netal fees.
Speaker 3: Okay, that's good to know. So on real estate again,
Speaker 3: you know, sector very close to my heart. One of
Speaker 3: the issues has just been the amount and speed at
Speaker 3: which valuations of the portfolios have had to be written down.
Speaker 3: And one of the because this has been clearly on
Speaker 3: the office sector, not just here in Europe, but also
Speaker 3: obviously in the US as well and probably all around
Speaker 3: the world or in many places around the world within
Speaker 3: real estate, are there sub sectors that you say that
Speaker 3: you would say look better than others, or are there
Speaker 3: countries that you would rather focus on than some others,
Speaker 3: Like are you looking at Germany the Nordics? Where are
Speaker 3: you looking at at the moment?
Speaker 2: So I can tell you what we've spent some time.
Speaker 2: We've looked at a lot of deal flow in Germany
Speaker 2: and we haven't been able to get to get comfortable there.
Speaker 2: You know, what we've found, generally speaking is that, you know,
Speaker 2: a lot of the retail opportunities that we've seen, you
Speaker 2: don't offer kind of that that certainty of downside protection
Speaker 2: that we're looking for. Where we did get comfortable recently
Speaker 2: is in supporting the refinancing of a large portfolio of
Speaker 2: let's call it semi serviced offices with flexible working space
Speaker 2: in the Nordics, where there was a very large private
Speaker 2: equity sponsor who had, you know, real skin in the
Speaker 2: game was putting in a substantial incremental ticket of equity
Speaker 2: in the transaction, putting in place a long term sustainable
Speaker 2: capital structure, cash paying interest where we detached at a
Speaker 2: you know, comfortable double digit yield in a market that
Speaker 2: even pre COVID had a very large proportion of homeworking,
Speaker 2: you know, already kind of embedded within kind of societal norms.
Speaker 2: So you know, again, you know, we found one of
Speaker 2: those transactions, and we probably looked at one hundred generally
Speaker 2: speaking of the last years, but we did not get comfortable.
Speaker 3: Wait, so you're saying you looked at one hundred, so
Speaker 3: it's very generalizable.
Speaker 2: But what I can tell you is that the on
Speaker 2: a relative basis compared to some of the large liquid
Speaker 2: publicly traded structures where you are generating put potentially a
Speaker 2: lower return to be in a subordinated unsecured position and
Speaker 2: are subject to credit or on credit of violence, those
Speaker 2: types of situations you know, we think offer much worse
Speaker 2: compelling risk award.
Speaker 3: You mentioned something very interesting there. You said you had
Speaker 3: looked at one hundred deals and chosen just one. That's
Speaker 3: obviously a very i'd say low hit ratio or low's
Speaker 3: success ratio when you then consider the opportunities in real estate,
Speaker 3: would you say that the opportunities then are not really
Speaker 3: there given that it's just one in one hundred, or
Speaker 3: would you say that this is a similar thing when
Speaker 3: you're looking at other sectors as well. And also maybe
Speaker 3: you could talk a little bit about the time frames
Speaker 3: and holding periods that you have in your mind when
Speaker 3: you're considering some of these investments.
Speaker 2: Yeah, So, generally speaking, our hit rate, you know, in transactions,
Speaker 2: tends to be we end up closing somewhere between you know,
Speaker 2: two and four percent of the total number of deals
Speaker 2: that we that we see. And you know, obviously, when
Speaker 2: you're as opportunistic as we are, you know, you have
Speaker 2: a lot of deals across your desk that you really
Speaker 2: don't warrant your very detailed attention. So, yes, that's a
Speaker 2: low hit rate, but it's something that makes sense. Sorry totally.
Speaker 2: What was the second part of your question. So, we
Speaker 2: tend to lend in these types of situations on a
Speaker 2: you know, normal private credit basis, so it can be
Speaker 2: anywhere between four and six years. It's very rare that
Speaker 2: we have less than two years of call protection, and
Speaker 2: most of the time our counter parties do seek to
Speaker 2: refinance us somewhere around the first call date. So you know,
Speaker 2: in our funds we tend to recycle capital during the
Speaker 2: investment period because they you know, frequently can be relatively
Speaker 2: short duration by choice of the borer. You know, we
Speaker 2: often would obviously like to stay in for longer.
Speaker 1: One of the other things you mentioned, Fabian, that you're
Speaker 1: focus on is litigation finance. I'm interested in that concept.
Speaker 1: What does it mean, how does it work?
Speaker 2: Sure? I think it's probably worthwhile drawing a distinction between
Speaker 2: single case litigation funding, where you know, you provide a
Speaker 2: counter party with capital to pursue a particular litigation, and
Speaker 2: what we do, which tends to be you know, lending
Speaker 2: two law firms mostly against portfolio of a broad portfolio
Speaker 2: of legal assets. So what that means in practice. You know,
Speaker 2: one transaction that we have been involved in that has
Speaker 2: been publicly disclosed is we provided a loan to a
Speaker 2: London based law firm called Pocus good Head that was
Speaker 2: active in some of the you know, very large marquee
Speaker 2: litigations out there against car manufacturers in relation to the
Speaker 2: diesel emission scandal, for example, that is involved in funding
Speaker 2: you know that's involved in litigating on behalf of a
Speaker 2: you know, hundreds of thousands of Brazilian claimants against against
Speaker 2: mining companies who've caused some fairly substantial environmental damage, some
Speaker 2: medical device liability cases, some data breach litigation, you know,
Speaker 2: all litigation with an element of ESG predominantly in the
Speaker 2: mass towards space. And so what we do in those
Speaker 2: situations is without funding any individual case directly, you know,
Speaker 2: we can get comfortable that provided that one, two, or
Speaker 2: three out of in this instance call it twenty large
Speaker 2: legal cases ongoing, provided that one to three of these settle,
Speaker 2: you know, our capital will be protected. We can provide
Speaker 2: this law firm with a loan secured by a very
Speaker 2: broad portfolio of these legal assets. Uh. That takes advantage
Speaker 2: of a few things. It takes advantage of north walls obvious,
Speaker 2: you know, strength internal and in having a legal team
Speaker 2: internally that can help underwrite the cases, a very strong
Speaker 2: credit team that can ensure that the solvency of the
Speaker 2: law firm is you know, you know, sufficient to make
Speaker 2: it through through you know, the the lending horizon, you know,
Speaker 2: and our ability again to take decisions quickly and and
Speaker 2: be pragmatic and that's been a transaction that's worked out
Speaker 2: particularly well for us.
Speaker 1: But in simple terms, if you just break it down,
Speaker 1: I mean, there's there's a lawsuit, the claimants expect some
Speaker 1: money back, you're buying the lawsuit or the claim some
Speaker 1: some discount, and then you're waiting for a judgment.
Speaker 2: It's actually even simpler than that. It's think of it
Speaker 2: as a company that expects to generate a substantial amount
Speaker 2: of revenues from from litigations because it takes a share
Speaker 2: of the seeds of you know, the individual claimants involved
Speaker 2: in the litigations. They have no risk if the case
Speaker 2: is lost. If the case is one, they make a
Speaker 2: certain amount of money per per claimant, and we take
Speaker 2: an the law from takes a portion of those of
Speaker 2: those proceeds, and we lend, obviously on a risk adjusted
Speaker 2: basis against the expected recoveries in that situation. So there's
Speaker 2: no acquisition of anything at a discount. This is really
Speaker 2: alone to a business that has a working gap on
Speaker 2: need today and many multiples of expected revenues in the future.
Speaker 1: And what kind of returns can you make on those.
Speaker 2: Look in those types of funds, you know, we target
Speaker 2: twenty five percent plus irs, and you know we are
Speaker 2: we have historically outperformed.
Speaker 3: Then it's interesting to hear you talking about litigation, finance
Speaker 3: and all things to do with the law here. Obviously,
Speaker 3: within BI we have over five hundred analysts covering not
Speaker 3: just single names and on the equity and credit side,
Speaker 3: but we also have a litigation team, so it's great
Speaker 3: to hear others focusing on that area as well. I
Speaker 3: had a follow up actually on sectors. So you know,
Speaker 3: we talked a little bit about real estate and you've
Speaker 3: mentioned mining and you know, environmental issues. What key sectors
Speaker 3: would you say you're seeing the best opportunities or some
Speaker 3: of the best opportunities in at this point, and would
Speaker 3: those sectors be in the US, in Europe or elsewhere.
Speaker 2: So, you know, we focus almost exclusively on Western Europe,
Speaker 2: right and there again we tend to focus on you know,
Speaker 2: the beer drinking countries over the wine drinking contries. But
Speaker 2: we are entirely sector agnostic. You know, we've seen some
Speaker 2: interesting deals in industrial services recently. You know, the one
Speaker 2: area where we tend to stay away from is you know,
Speaker 2: things that are very much tech enabled or that rely
Speaker 2: on kind of the underwriting of enterprise values. So we
Speaker 2: tend to focus on businesses that you know, produce cash,
Speaker 2: have strong asset base and are you know, provide us
Speaker 2: with a good amount of downsid protection.
Speaker 1: We you mentioned Western Europe. We are sitting in New
Speaker 1: York City. You are presumably not here on holiday. Are
Speaker 1: you talking? I know, are you talking to US investors?
Speaker 1: And if so, what's their response when you kind of
Speaker 1: pitch them Europe as an investment. I mean, it seems
Speaker 1: to me that there is this huge like home bias.
Speaker 1: There isn't a huge amount of like understanding of all
Speaker 1: of the different things that go on in Europe generally,
Speaker 1: and there's you know, almost like an aversion to the
Speaker 1: you know, just unknown of Europe. So how do you
Speaker 1: kind of talk to them about that?
Speaker 2: Yeah, I mean, look I totally understand. I you know,
Speaker 2: lived in the US for ten years. I am originally German,
Speaker 2: but I went to school here in New York City,
Speaker 2: and you know, I really you know, you know, I
Speaker 2: spent a lot of time here, and there is that
Speaker 2: perceived that that perception that Europe is more risky, less attractive,
Speaker 2: too small, not worth a hassle, et cetera. But what
Speaker 2: we're seeing from the LPs that we speak to. So,
Speaker 2: you know, I spend a lot of time in the US.
Speaker 2: There's a lot of LP capital here that has an
Speaker 2: interest in Europe. And generally speaking, what I've seen in
Speaker 2: the last twenty years that i've seen this, that i've
Speaker 2: been doing this is that you know, when there's a
Speaker 2: cyclical change, investors tend to pull back, these are both
Speaker 2: gps and LPs, their interest and the expertise back into
Speaker 2: the US. There's generally this perception that the deal flow
Speaker 2: is more interesting here. Rates are higher. You know, there
Speaker 2: is going to be more opportunity, it's a bigger market,
Speaker 2: it's simpler, we understand it. We're going to do more here.
Speaker 2: But because of that, what also tends to happen relatively
Speaker 2: quickly is that the US opportunity tends to be arbitraged
Speaker 2: away more quickly than the European opportunity. While at the
Speaker 2: same time in Europe, because this capital gets sucked out
Speaker 2: of Europe into the US, both this capital from the
Speaker 2: GP side but also the LP interest, the opportunity set
Speaker 2: in Europe is particularly interesting, and so what we're seeing
Speaker 2: is that investor interest tends to go US first. Europe second,
Speaker 2: and at some point look moves over to Asia. And similarly,
Speaker 2: when it comes to you know, kind of where we
Speaker 2: sit on the opportunistic end of private credit. You know,
Speaker 2: obviously LPs first start by building their core private credit allocations.
Speaker 2: Then they start to look a little bit further field
Speaker 2: specialty finance, et cetera. And then comes opportunities to credit
Speaker 2: and eventually distressed. And so the LPs where we are,
Speaker 2: you know, having the best conversations at the moment, are
Speaker 2: those with that institutional memory to know that, Okay, I
Speaker 2: can see the returns in the US decreasing, while I
Speaker 2: can see still some really interesting opportunities in Europe. We're
Speaker 2: going to start to shift some of our attention to Europe.
Speaker 2: And that's certainly something that's happening now.
Speaker 1: So it's a trend that just started. You expect it
Speaker 1: to accelerate.
Speaker 2: It's a trend that started probably in the middle of
Speaker 2: last year, and is you know, going a full steam
Speaker 2: for sure.
Speaker 3: One of the issues I guess with looking at Europe
Speaker 3: LUSUS years, and I think you alluded to that earlier,
Speaker 3: is is scale or size When these investors are looking
Speaker 3: at the Europe opportunity, do you think that the size
Speaker 3: is there for some of these investors to really get
Speaker 3: stuck in or do you think that that's something that
Speaker 3: we will only see in future.
Speaker 2: No, I think there's you know, this is a very
Speaker 2: common misconception in Europe as well, which is that it's
Speaker 2: not scalable. You know, we have found that Europe is
Speaker 2: certainly very very scalable. We are laser focused on scalability
Speaker 2: and everything that we do precisely in order to be
Speaker 2: able to address that investor demand. I think there's one
Speaker 2: misconception about Europe, and that misconception is that, you know,
Speaker 2: if you find deals there, they have to be of
Speaker 2: a minimum size to be worth your time. While what
Speaker 2: we have learned is to scale into deals in Europe
Speaker 2: you very often have to start a little bit smaller
Speaker 2: and grow with your counter party into transaction sizes over time.
Speaker 2: So it just takes a little bit longer to build
Speaker 2: those relationships. But once you you know are there, you
Speaker 2: are embedded, You get this repeat deal flow and you
Speaker 2: can take advantage of the fact that your really does
Speaker 2: favor locals or it really does favor incumbents, and it
Speaker 2: works to your advantage. We certainly have found ourselves always
Speaker 2: to be in a position where you know, we have
Speaker 2: more deal flow than opportunity, more deal flow then capital
Speaker 2: available and hopefully made continue.
Speaker 1: What about the scalability of the returns you're talking about,
Speaker 1: you know, double digit on middle market private credit, twenty
Speaker 1: five percent litigation finance. Presumably that kind of return comes
Speaker 1: from being in the niche, It doesn't scale up.
Speaker 2: I mean, yes, certainly there are while you know, certainly
Speaker 2: there are elements of truth to that. Although the private
Speaker 2: credit that a deal that I mentioned to you, you know,
Speaker 2: was a sorry, the legal asseteal that I mentioned to
Speaker 2: you earlier, you know, at the very end was almost
Speaker 2: a two hundred million dollar transaction that got refinanced by
Speaker 2: a half a billion dollar deal by by a US
Speaker 2: hedge fund. Right, So that falls very much within the scale,
Speaker 2: within the scalability requirements I think of most investors, certainly
Speaker 2: gets our attention. And then you know, when it comes
Speaker 2: to these private credit solutions, I think there's there's some
Speaker 2: truth to that. You know, there's going to be only
Speaker 2: so much you can do at this very high end
Speaker 2: of our return range, you know, but I don't think
Speaker 2: anybody's really going to complain if you delivered to them
Speaker 2: kind of teens net returns, you know, at a slightly
Speaker 2: bigger scale.
Speaker 3: One of the other issues I guess that's come up
Speaker 3: this year has been unexpected and expected elections, especially in
Speaker 3: your given what's happened in France and the impact that
Speaker 3: that had on spreads and just valuations in general. What
Speaker 3: would you say then, the key risks in Europe visit
Speaker 3: the election cycle still? Is it geopolitics, is it commodity prices?
Speaker 3: What what do you think are the key risks for
Speaker 3: the geographic area that you're focusing on.
Speaker 2: Look, I think you know again, it's a It's a
Speaker 2: good question and one that gets asked by our investors
Speaker 2: a lot. You know. I'm you know, I'm you know.
Speaker 2: I've been investing in Europe now for almost twenty years,
Speaker 2: always from London, and I've seen crisis after crisis after crisis.
Speaker 2: We had a sovereign dead crisis, we had COVID, taper, tantrum,
Speaker 2: et cetera. We see all these different issues that pop up,
Speaker 2: and what I have learned is that Europe is surprisingly resilient.
Speaker 3: You know.
Speaker 2: Some of the negative factors that are certainly prevalent in
Speaker 2: the European Union it's in ersia, it's bureaucracy, et cetera.
Speaker 2: Also make it much more difficult for you know, any
Speaker 2: change in government to impact and affect radical change. So
Speaker 2: I am less concerned potentially certainly today than I was,
Speaker 2: you know, at the onset of the of the Ukraine
Speaker 2: Ukraine conflict. So you know what, we're trying to find
Speaker 2: total Louis situations where you know, regardless of what recession
Speaker 2: case we model, our investors' capital is protected independently of
Speaker 2: you know, sudden shocks in macro, independently of the next
Speaker 2: election cycle, et cetera. So what I'm worried about the most.
Speaker 2: What I'm worried about the most is you know, maintaining
Speaker 2: a strong team, as we have over the last seven
Speaker 2: years at Northwall, finding good opportunities, continuing to deliver really
Speaker 2: strong solutions to our counterparties that they can rely on,
Speaker 2: and delivering to our LPs, you know, not just returns,
Speaker 2: but also transparency, good communication, and a good relationship so
Speaker 2: that this ecosystem of team counterparties LPs is in a
Speaker 2: good place.
Speaker 3: We talked a little bit earlier about you know, investor protection,
Speaker 3: making sure that you have enough equity coverage or backing
Speaker 3: or cushion if you prefer. But is that possible when
Speaker 3: you're aiming for relatively high returns and are you necessarily
Speaker 3: looking just at the senior part of the capital structure
Speaker 3: for some of these companies or are you prepared to
Speaker 3: take more risk basically to get those return figures that
Speaker 3: you mentioned.
Speaker 2: So we are certainly very happy to drop down into
Speaker 2: a second lean position in a capital structure, provided that
Speaker 2: we subordinate ourselves to you know, what we call the
Speaker 2: benign syndicative lenders, so you know, commercial lending banks you know,
Speaker 2: and not you know, aggressive hedge funds for example point
Speaker 2: number one. Secondly, you know when we drop in a
Speaker 2: second lean, such as the situation with the German industrial
Speaker 2: services business I described earlier. When we do drop into
Speaker 2: a second lean, you know, what we want to do
Speaker 2: is make sure that you know, we are well covered
Speaker 2: and we detach at you know, where only two or
Speaker 2: three years ago probably a banking syndicate would have detached.
Speaker 2: So you know, we look to detach somewhere between four
Speaker 2: four and a half five times, not somewhere between eight
Speaker 2: and twelve times EBITDA, So that gives us, you know,
Speaker 2: a good amount of dwanced protection. You know, maybe that
Speaker 2: business is not worth eight times, maybe it's worth six times,
Speaker 2: but if we detach it four times, you know, we
Speaker 2: are We're comfortable.
Speaker 1: When you look at European middle market private credit right now,
Speaker 1: where are you saying stress? Is it in the payment
Speaker 1: in kind? You know, the pick deals? Is it covenant breaches?
Speaker 1: Are there any signs of you know, more defaults coming?
Speaker 2: You know, I think obviously the market is doing whatever
Speaker 2: it can to avoid defaults, and you know, obviously private
Speaker 2: credit firms you know, have an incentive to you know,
Speaker 2: work with their borers to try and restructure these situations.
Speaker 2: And so we are seeing obviously in increased use of PICK,
Speaker 2: which I think in and of itself isn't necessarily a
Speaker 2: problem provided it is, you know, there as part of
Speaker 2: a new funding solution, and not to sweep a problem
Speaker 2: under the rug. The way that we look at PICK
Speaker 2: is that it helps us get to our required return.
Speaker 2: You know, we ask companies to pay as much cash
Speaker 2: as they can. The remainder to our required return we
Speaker 2: are very happy to take in the form of PICK.
Speaker 2: And here again what we're then doing is really eating
Speaker 2: over time into the potential returns that the equity, the
Speaker 2: private equity firm or the equity holders could generate in
Speaker 2: the transaction. So actually, what I'm more worried about is,
Speaker 2: you know, what one should be more worried about is
Speaker 2: what is happening to the returns of the private equity
Speaker 2: firms in these situations, you know, rather than what's happening
Speaker 2: to the returns you know at our level of the
Speaker 2: private credit firm. Obviously you can pick into nowhere, right,
Speaker 2: So you've got to make sure that you have covenants
Speaker 2: that also capture this pick element, so that if leverage
Speaker 2: gets to an unsustainable level, you then can get to
Speaker 2: a point where you can have a conversation about the
Speaker 2: potential refinancing with the counterparty.
Speaker 3: Obviously, pick notes have got their fair fair share of
Speaker 3: attention recently, and you mentioned something very crucial there, which
Speaker 3: is obviously you can't pick into nowhere. My question then
Speaker 3: would be how do you draw the line then? Because
Speaker 3: you said leverage getting to an unsustainable level, do you
Speaker 3: have in your mind a level that is sustainable sort
Speaker 3: of across the board for all sectors or is it
Speaker 3: more on a case by case basis. I know earlier
Speaker 3: you mentioned sort of high single digit net debt to
Speaker 3: ebit not being where you want to be. Is that
Speaker 3: what you're thinking about or are there other metrics, leverage
Speaker 3: metrics that you're thinking about?
Speaker 2: Again, it depends. I was talking about an industrial services business,
Speaker 2: right Dolu, which has you know, very different valuation to
Speaker 2: potentially you know, you know, a SaaS business. So you know,
Speaker 2: it is very much industry specific it is, and there
Speaker 2: is no right or wrong answer. Right, this is where
Speaker 2: you know, it comes down to our underwriting and our
Speaker 2: valuation of these businesses. I think the difference that you
Speaker 2: might see to some of the more broadly syndicated you
Speaker 2: know or the larger hold Coepick notes is that you know,
Speaker 2: in many of those situations, those companies already have a
Speaker 2: first ever revolver or they have a first lean that there
Speaker 2: is secondly in a piece of paper, and you're now
Speaker 2: kind of really in replacement equity territory because these larger
Speaker 2: companies have access to the capital markets. The companies that
Speaker 2: we look at don't necessarily have access to the capital markets.
Speaker 2: So yes, they should have a slightly law evaluation because
Speaker 2: of lower liquidity. Maybe they're smaller players within certain industries,
Speaker 2: but certainly, you know, we can take advantage of the
Speaker 2: fact that you know, other than potentially banking syndicate, there's
Speaker 2: unlikely to be another lender in the capital structure.
Speaker 1: So what's next for north Well Fabian? Where do you
Speaker 1: go from here? Is there one big opportunity that you
Speaker 1: would pinpoint, Is there a I don't know, a new
Speaker 1: a new fundraising strategy. Is there a new York office
Speaker 1: opening on the horizon? What's next for you?
Speaker 2: So there's a few things. So we talked a lot
Speaker 2: here today about our private credit capital solutions business. Also
Speaker 2: part of our credit opportunities funds, you know, is the
Speaker 2: provision of liquidity to counter parties that you know require capital,
Speaker 2: you know, in different formats. So we've been, for example,
Speaker 2: very active in acquiring well seasoned unsecured consumer loan portfolios
Speaker 2: from some of these European European servicers that have become
Speaker 2: asset owners, and that's certainly a trend that we expect
Speaker 2: to continue. We see a lot of deal flow in
Speaker 2: in in that portfolio space and have a dedicated team
Speaker 2: going after that opportunity. At the moment we talked about
Speaker 2: legal assets. Legal assets is something that you know, we
Speaker 2: continue to be excited about and continue to see deal
Speaker 2: flow both in Europe and actually have a team member
Speaker 2: here in the US spending more time on trying to
Speaker 2: find some US opportunities, you know. And then finally, in
Speaker 2: many of the situations where we do provide second in capital,
Speaker 2: we are often also presented with the opportunity to participate
Speaker 2: in a very attractively priced first glean. So you know,
Speaker 2: we are spending more and more time in looking at
Speaker 2: kind of some more more plain vanilla call it senior lending,
Speaker 2: senior lending opportunities. When it comes to the our US presence,
Speaker 2: as I alluded to before, there is a lot of
Speaker 2: very smart, very flexible LP capital in the US, and
Speaker 2: we always try to be closer to our investors, and
Speaker 2: if that means having a presence in the US, we
Speaker 2: certainly would be very open to it.
Speaker 1: Great stuff, Fabian Crobog, Chief investment Officer and founder of
Speaker 1: Northwall Capital. It's been a pleasure having you on the
Speaker 1: credit edge.
Speaker 2: Thank you, nice to nice to be here, and thanks Toller.
Speaker 1: And of course I'm very grateful to Tollu Ala Mutu
Speaker 1: from Bloomberg Intelligence. Thank you for joining us today.
Speaker 3: Thank you. Always happy to be here for.
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