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Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.

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Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.

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Speaker 1: This week, we're very pleased to welcome Alan Schreeger, senior

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Speaker 1: partner and portfolio manager at Oak Hill Advisors, a global

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Speaker 1: alternative investment firm.

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Speaker 2: How are you, Alan, I'm doing great, James, how are

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Speaker 2: you doing very well?

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Speaker 1: Thanks so much for joining us today. Really looking forward

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Speaker 1: to getting your take on the credit markets. And we're

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Speaker 1: also delighted to see Lisa Lee. He Lisa covers credit

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Speaker 1: markets from London and it's great to see you again.

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Speaker 1: Also on this show we have Arnold Kakuda, who covers

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Speaker 1: banks for Bloomberg Intelligence in New York. There's a lot

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Speaker 1: going on in that sector and Arnold always has some

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Speaker 1: great calls, so please do stay with us. But first,

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Speaker 1: Alan Schreeger Kill Advisors. Great to have you on the

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Speaker 1: Credit Edge. It's been a big year for credit, not

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Speaker 1: quite the Year of the bond that some people have

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Speaker 1: been predicting, but definitely a good run for risk assets,

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Speaker 1: at least when you look at total return. Also a

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Speaker 1: very big year for private credit, which everyone says is

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Speaker 1: going through a golden age. But before we get to that,

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Speaker 1: aland I just want to get your macro view, in

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Speaker 1: particular on rates. We've flipped around quite a bit from

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Speaker 1: fear about inflation hard landing to some pretty aggressive bets

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Speaker 1: on FED rate cuts happening fairly early next year, plus

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Speaker 1: a view that the economy can avoid a recession. What

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Speaker 1: do you make about the make of that? Alan? Are

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Speaker 1: we getting ahead of ourselves? What's your macroview?

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Speaker 2: So our review is that the market desperately, desperately wants

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Speaker 2: rates to go down, and that every opportunity they get

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Speaker 2: to grab hold of anything that gives the inclination that

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Speaker 2: the Fed is going to cut either sooner than they

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Speaker 2: think or earlier enough that it will have positive impact

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Speaker 2: on returns and the resulting benefits to the markets, everyone

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Speaker 2: grabs hold of them. And you know, we've been looking

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Speaker 2: We look at thousands of companies, We've been looking at

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Speaker 2: the inflation numbers that we see across businesses, We've been

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Speaker 2: looking at the macro. We have a strong view that

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Speaker 2: the FED clearly doesn't want to make the mistakes of

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Speaker 2: the seventies and eighties, and that they are going to

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Speaker 2: be prudent in how they do that. Now, I will

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Speaker 2: say sort of last week's commentary that sounded more dubbish

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Speaker 2: than we thought they were going to be surprised us

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Speaker 2: a little bit and led us to believe, Okay, maybe

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Speaker 2: they are already starting to think about where they're going

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Speaker 2: to cut I think people thinking, and now there's been

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Speaker 2: some pullbacks recently in terms of commentary that they're going

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Speaker 2: to start cutting as soon as the first half of

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Speaker 2: the year seems really aggressive to us and is not

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Speaker 2: our base case. Our base case was that they were

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Speaker 2: going to keep rates at this level for a while.

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Speaker 2: It's hard to see stand firm on that commentary, given

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Speaker 2: the commentary we've heard from the Fed over the last

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Speaker 2: couple of weeks. But we still think that there's an

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Speaker 2: inflation problem, and when you look at where labor is

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Speaker 2: and you look at where housing is, the fact is

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Speaker 2: it's hard to convince yourself that the Fed's going to

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Speaker 2: be able to get to where they say they're going

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Speaker 2: to need to be to be able to cut rates.

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Speaker 2: So we're still a little bit bearish on that. We

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Speaker 2: are still a little bit more hawkish, although I will

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Speaker 2: say we're also a little bit concerned of that view

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Speaker 2: given some of the commentary we've heard from the FED

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Speaker 2: over the last couple of weeks, notwithstanding some clean up

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Speaker 2: comments over the last week.

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Speaker 1: So let's talk private credit, which is the hot topic

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Speaker 1: at the moment. You have been beating some of the

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Speaker 1: large Wall Street banks out their own game, most recently

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Speaker 1: by leading a deal for Greenway Health they're refinancing alone

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Speaker 1: that was originally made by a more traditional lender Oakhill

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Speaker 1: ended up getting in on the reef. How are you

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Speaker 1: managing to do that sort of deal and what's your

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Speaker 1: edge over the Wall Street banks?

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Speaker 2: So, if you think about private credit, you know there

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Speaker 2: are so many advantages to using private credit if you're

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Speaker 2: an issuer. And this is really from the issuer standpoint,

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Speaker 2: because to your question, the fact is is that why

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Speaker 2: does an issuer choose to go private credit, especially if

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Speaker 2: there's a premium to that. And what I would say

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Speaker 2: is that you have a lot of advantages as an

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Speaker 2: issuer for private credit, the speed, the confidence level, the certainty,

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Speaker 2: the structuring of it. The fact is is that a

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Speaker 2: lot of people don't like their paper trading. They don't

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Speaker 2: like to not know who their holders are. And an

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Speaker 2: example like a Greenway where you're coming closer to maturity,

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Speaker 2: the ability to extend it with people who are maybe

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Speaker 2: people the issuer doesn't have a relationship with, making an

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Speaker 2: A and E less likely. There are so many different

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Speaker 2: reasons that people want to use private credit that it

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Speaker 2: can come down to simplistically that they choose that as

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Speaker 2: just an easier way to do it. One of the

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Speaker 2: things that I think is underappreciated is that in a

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Speaker 2: private deal a company like Greenway or a Finastra or

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Speaker 2: any of the other deals we've done or that you

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Speaker 2: might mention, over the term of this conversation, we get

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Speaker 2: a lot more diligence. We get to talk to and

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Speaker 2: look at information that gets you much more comfortable with

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Speaker 2: the business, gets you able to diligence the company both

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Speaker 2: from a downside protection, which we like. But this is

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Speaker 2: a conversation about why issuers choose it. But you're able

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Speaker 2: to actually explain to the buyers what the company is

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Speaker 2: going to do, why is it in an okay shape

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Speaker 2: versus a public markets where they get much less of

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Speaker 2: that because of disclosure rules. And the fact is we're

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Speaker 2: able to structure around a lot of those issues because

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Speaker 2: of the flexibility of private credit. So you know, My

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Speaker 2: view is that private credit has just this huge multiple

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Speaker 2: tier advantage over the syndicated markets. What the syndicated markets

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Speaker 2: do really well is priced tight, right, they get lower

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Speaker 2: cost financing, They're able to price things that are tighter.

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Speaker 2: And when you have a B one credit that's an

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Speaker 2: issue a seasoned issuer with a lower leverage profile. The

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Speaker 2: fact is is that syndicated markets are a great provider

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Speaker 2: of that capital. The same way the high yield market

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Speaker 2: has evolved over decades from what used to be an

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Speaker 2: LBO market when I started in the late eighties and

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Speaker 2: nineties to in essence a double V, you know, private

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Speaker 2: public market. And so I think that the private credit

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Speaker 2: market is just going to continue to do what it

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Speaker 2: does most efficiently, which is some of those more difficult deals.

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Speaker 3: Alan you've said that you think private credit could take

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Speaker 3: almost forty possibly of the bobby syndicated market going forward.

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Speaker 3: It seems now banks are finally starting to get a

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Speaker 3: little bit of their mojo back. The levish loan market

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Speaker 3: has gone back, the single double b's are training in

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Speaker 3: the high nineties. Now, how in terms will the competition

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Speaker 3: be in next year, and also how much do you

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Speaker 3: think next year banks will be get back the traditional

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Speaker 3: left in.

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Speaker 2: Business, people talk about it as if the banks matter,

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Speaker 2: and to a certain extent, obviously, the banks don't want

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Speaker 2: to give up fee business, and I'm sympathetic to that

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Speaker 2: and understand that. And obviously we have a large syndicated business,

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Speaker 2: and we think that the banks are incredibly important and

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Speaker 2: good partners in that. Regard on the private credit side

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Speaker 2: or the portion of the syndicated market that is unlikely

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Speaker 2: to grow or be as big on a going forward basis,

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Speaker 2: the fact is is that the banks need somebody to

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Speaker 2: sell these owns to. You know, the banks are just

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Speaker 2: a conduit. They're they're not a holder of these assets.

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Speaker 2: So what they want is a little less relevant than

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Speaker 2: what do their clients want, what do the end buyers want.

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Speaker 2: And the reason why I think there that the private

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Speaker 2: credit market is going to continue to take share from

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Speaker 2: the syndicated market is first of all, to the to

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Speaker 2: the point I made to James's question, which is it's

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Speaker 2: so much easier, it's so much faster, it's so much

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Speaker 2: more uh, it's so much more consistent through a variety

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Speaker 2: of markets. But just as a regular bank construct, to

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Speaker 2: the to the point you're making you have to have

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Speaker 2: people who are willing to buy what you're selling, and

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Speaker 2: for the most part, until the COLO market changes enough

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Speaker 2: that it's a good buyer of B three credit or

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Speaker 2: more levered business. And you think about what the syndicated

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Speaker 2: loan market has become. To my same point about high

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Speaker 2: yield moving towards a double B public company market, the

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Speaker 2: loan market and the loan and the first and second

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Speaker 2: lean market have become more of the LBO financing market.

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Speaker 2: And what I just believe and the reason why I

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Speaker 2: think that transition happens is there's just less availability of

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Speaker 2: second leans, meaning that there's less availability of an amount

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Speaker 2: of leverage that the private credit market can provide. And

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Speaker 2: two is that all of those are rated B three,

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Speaker 2: which means that the colos have to be willing to

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Speaker 2: continue to finance the B three market. Now, as COLO

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Speaker 2: market picks back up and COLO liabilities tightened and there's

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Speaker 2: more of that spread and you can see more colos done,

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Speaker 2: there's going to be a portion of them that buy

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Speaker 2: B threes and they are going to be B three's

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Speaker 2: in the syndicated market. But when you think about what

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Speaker 2: the COLO market needs to be, which is a B

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Speaker 2: two basically average rated entity or securitized asset class. When

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Speaker 2: we think about it, and we run a large colo businusiness,

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Speaker 2: it's really attractive to buy a B two B one

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Speaker 2: mix of assets, lever them attractively in the syndicate in

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Speaker 2: the CLO securitization market, create double digit returns and not

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Speaker 2: have to reach into the B three take weighted average

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Speaker 2: rating risk or downgrade risk, and just means that they

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Speaker 2: might not be the ideal buyer, which ultimately means that

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Speaker 2: the banks are going to be pitching B one and

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Speaker 2: B two credits and most likely will win some B

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Speaker 2: three deals, but less and less as time goes on.

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Speaker 3: Do you think that SALO market will come back next

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Speaker 3: year because there's been a sort of a laggered Triple

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Speaker 3: A buyers have not disappeared, but they pulled back. Right.

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Speaker 3: There's just not as many triple A buyers as they

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Speaker 3: used to be. There might be more of them, but

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Speaker 3: there's not the depth that there used to be, and

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Speaker 3: the ARBs become incredibly tough, and that's something that they've

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Speaker 3: struggled with all year long, and also with interest rates

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Speaker 3: the way they are, resets and refines aren't really happening

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Speaker 3: what's your take on the COLO market going forward, because

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Speaker 3: you're right it has to return if leverage loans and

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Speaker 3: the bank arranger business is going to be turning the

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Speaker 3: way they did.

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Speaker 2: I do think it's going to come back. I do

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Speaker 2: think that you're seeing more and more triple A buyers

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Speaker 2: who are realizing than in the mid one hundreds, triple

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Speaker 2: a COLO risk, especially on a floating basis, is a

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Speaker 2: pretty attractive asset class to own. I think as the

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Speaker 2: banks actually think about that, their direct lending part of

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Speaker 2: their business will probably decline a combination of regulatory issues

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Speaker 2: as well as obviously private credit moving up and down

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Speaker 2: the spectrum of large to small. I think that the

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Speaker 2: banks are going to look for asset classes that meet

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Speaker 2: in essence, what their their needs are, and I think

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Speaker 2: you're going to see more and more triple A buyers

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Speaker 2: across the bank platform.

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Speaker 1: I want to ask you about the funding costs from

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Speaker 1: an issuer's perspective. Obviously this form of funding private credit

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Speaker 1: is faster, it's easier in many ways, it seems more efficient,

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Speaker 1: but you've noted that it's more expensive than the syndicated

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Speaker 1: markets we are hearing you know, you mentioned double digit returns.

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Speaker 1: We're hearing high teens on some of the loans that

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Speaker 1: are going through. How is that sustainable for companies that

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Speaker 1: are facing a potential downturn in the economy and slower earnings.

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Speaker 2: So obviously that's one hundred percent right, which is they

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Speaker 2: are borrowing. If you think about private credit, and this

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Speaker 2: is whether it matters whether it's syndicated or non syndicated,

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Speaker 2: because the spread differential, if it's one hundred and fifty

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Speaker 2: or two hundred basis points, doesn't free up or suddenly

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Speaker 2: make the company incredibly free cashual or positive versus not.

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Speaker 2: So I actually think this is a leverage finance question

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Speaker 2: more so than a private credit question, because if you

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Speaker 2: look at where the syndicated market is and you say

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Speaker 2: that that's a SOFA plus three fifty to four hundred market,

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Speaker 2: and you're saying that that's ten or eleven versus an

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Speaker 2: eleven to thirteen on the private credit market, all of

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Speaker 2: those at certain leverage levels clearly can mean that these

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Speaker 2: are levered capital structures that have sustainability issues. Obviously, different

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Speaker 2: companies are very different in terms of how they're going

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Speaker 2: to be able to handle this. You have businesses with

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Speaker 2: lower capital expenditures and lower fixed costs that are obviously

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Speaker 2: able to sustain interest levels at a higher level. They're

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Speaker 2: also levering a little bit more, so they're not necessarily

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Speaker 2: giving that as cushion, they are utilizing that for slightly

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Speaker 2: more leverage. You have businesses that have some some inherent

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Speaker 2: growth because of either improvements that a new owner might

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Speaker 2: make or investments that they've already made through capital expenditures.

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Speaker 2: But you're right, a big portion of the market has

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Speaker 2: free cash flow levels that are sort of break even

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Speaker 2: or slightly higher break eve, slightly above breaking even. And

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Speaker 2: one of the reasons why you're seeing a little bit

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Speaker 2: more of it of an insertion into a pick into

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Speaker 2: some of these capital structures. To allow these capital structures

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Speaker 2: to have that flexibility, they are reliant on ultimately growing

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Speaker 2: to create real free cash flows in that market. My

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Speaker 2: perspective in my argument on this is that the reason

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Speaker 2: why private credit is so attractive is exactly what you

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Speaker 2: just said. I actually don't think it's bad for private

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Speaker 2: credit when you think about that, it's able to structure

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Speaker 2: with full understanding of where rates are and where the

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Speaker 2: expectations of the business are. For the most part, it

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Speaker 2: is first dollar of debt through a certain leverage level

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Speaker 2: at fifty percent loan to value, and the equity is

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Speaker 2: who's in essence bearing the risk that there is ultimately

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Speaker 2: an increase in either valuations which they obviously rode for

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Speaker 2: ten years over the last ten years, or from in

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Speaker 2: their perspective improvement and performance and company EBATA, even in

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Speaker 2: the face of some dislocation. The reason why private credit works, though,

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Speaker 2: is because it's able to sort of work in all

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Speaker 2: of those environments. In the positive case, it obviously is

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Speaker 2: the receiver of all of this excess interest, so it

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Speaker 2: obviously is a great returning asset class on a relative

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Speaker 2: basis to almost anything that we see. On the downside,

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Speaker 2: its first dollar of debt, it's fifty percent loan to value,

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Speaker 2: which means the equity has to come up with a

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Speaker 2: way of making sure they do pay that. There's a

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Speaker 2: lot of things you can do in private credit to

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Speaker 2: make sure these capital structures work. In exchange for compensation,

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Speaker 2: you can pick in exchange for compensation, you can allow

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Speaker 2: them to raise incremental debt.

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Speaker 3: Since you mentioned pitt, I'd love to follow on that tray,

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Speaker 3: especially not so much like a medicine pick, which subordinated debt,

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Speaker 3: which I think we're used to, but we're starting to

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Speaker 3: see pick in first lean and unit chant, and there's

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Speaker 3: a deal in the market with a sponsor is asking

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Speaker 3: for one hundred percent pick right off the bat for

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Speaker 3: the unit tranch, and some people are saying this can

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Speaker 3: points to the fact that maybe there's a bubble going

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Speaker 3: on in private credit. So what is your answer to that.

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Speaker 3: Why are you guys allowing this kind of pick? Does

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Speaker 3: one hundred percent pick make sense? And what is a

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Speaker 3: bridge too far? And what is your answer to the

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Speaker 3: idea that maybe this points to a bubble.

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Speaker 2: So let's start with just the general pick question, which

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Speaker 2: is where the market is evolving, and it's evolving it

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Speaker 2: started with the evolution of private credit. In essence, when

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Speaker 2: you eliminate the banks, you had to figure out how

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Speaker 2: to replace what the banks were providing, which was revolvers

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Speaker 2: and delayed draws to a certain extent, so everyone started questioning, Okay,

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Speaker 2: well why are you doing the revolvers? And part of

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Speaker 2: that was is that if you're replacing the capital structures

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Speaker 2: that existed before, you obviously have to provide everything that

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Speaker 2: was provided before. Revolving were part of that The second transition,

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Speaker 2: which came with partial pick or small amounts of pick,

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Speaker 2: especially with rates where they are, is that the market

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Speaker 2: is evolving to a place where it's replacing not only

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Speaker 2: the syndicated first lean market or the syndicated it first

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Speaker 2: and second lean market, but it's taking a little piece

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Speaker 2: of the junior capital market and taking few different components

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Speaker 2: of each of those. And part of the component of

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Speaker 2: junior capital is that there is a pick component that

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Speaker 2: doesn't make it bad. It obviously means you have to

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Speaker 2: incorporate the right pricing and the right security. But if

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Speaker 2: you think about an efficient way to finance a business,

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Speaker 2: if you financed it with five turns of debt and

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Speaker 2: then one turn of pick preferred to get to six

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Speaker 2: turns of leverage, you have two constituencies. That five to

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Speaker 2: six turn piece is a much harder piece of paper

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Speaker 2: to structure because it has real downside risk because it

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Speaker 2: has five turns of debt in front of it. By

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Speaker 2: combining the two of them and taking a little bit

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Speaker 2: of both, which is a little bit of the cash,

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Speaker 2: a little bit of the pick, and then ultimately levering

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Speaker 2: more so you're zero to six instead of zero to five,

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Speaker 2: and then five to six, you're still talking about you're

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Speaker 2: sitting at a fifty percent loans of value. We use

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Speaker 2: fifty percent sort of broadly. Everyone sort of talks about that.

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Speaker 2: Some of it's forty or thirty, and some of it's

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Speaker 2: fifty five or even sixty. We don't see a lot

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Speaker 2: of sixties today, but you see fifties for sure, which

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Speaker 2: is why I use it. And when you think about

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Speaker 2: what you're doing, you're, in essence, providing capital at a

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Speaker 2: piece at a piece of a capital structure well within value,

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Speaker 2: and you're, hopefully, if you're doing it right, pricing it

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Speaker 2: appropriately for the amount of capital that exists. The mes

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Speaker 2: markets exists for decades, and this is just combining a

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Speaker 2: little bit of those markets and making sure you're getting

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Speaker 2: paid for it. So if I gave you a scenario

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Speaker 2: where you had to business that was worth fifteen times

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Speaker 2: and you were levering at six and a half times,

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Speaker 2: and you were picking and that pick, let's just say

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Speaker 2: that that pick is at a place where the six

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Speaker 2: and a half times becomes with no growth at the business,

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Speaker 2: the six and a half times becomes seven or seven

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Speaker 2: and a half times, you're still sitting there at a

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Speaker 2: very low loan to value where you are, assuming you're

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Speaker 2: getting properly paid, sitting at getting compensated for providing that

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Speaker 2: first dollar of debt. So I think when we think

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Speaker 2: about pick as a general matter, it doesn't scare us

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Speaker 2: as long as we're lending to a good company where

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Speaker 2: we think the coverages are great. I think the question

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Speaker 2: of why is this evolving is that as the preferred

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Speaker 2: market is less efficient and there's enough people in the

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Speaker 2: unitronch market who are willing to provide a little bit

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Speaker 2: more leverage and take some of that PICK in a

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Speaker 2: exchange for in essence doing that, I actually think it's healthy.

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Speaker 2: We clearly want companies that are willing and able to

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Speaker 2: pay the interest that they have, so you want to

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Speaker 2: make sure they have the flexibility. It's one of the

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Speaker 2: things that private credit does provide. It is definitely an

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Speaker 2: indication that the market has gotten stronger than it was

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Speaker 2: a year ago when we were looking at five turns

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Speaker 2: leverage and not six or six and a half and

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Speaker 2: very little pick because you didn't need pick when you

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Speaker 2: only had five turns. But private equity and buyers we're

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Speaker 2: still paying fifteen turns and what they're in essence saying

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Speaker 2: is will you share some of the value purchase price

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Speaker 2: in terms of getting paid for that? And I do

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Speaker 2: think that that's not an irrational thing to do. Obviously,

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Speaker 2: as issuers get some of that, they look to get

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Speaker 2: more and more. And obviously you're referring to the Ctivity

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Speaker 2: deal that's out there that people are talking about, where

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Speaker 2: they're being asked to do full pick because there's a

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Speaker 2: reasonable amount of leverage, and that's a great, great company,

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Speaker 2: but there's obviously some things they need to do on

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Speaker 2: a free cashulow basis that might require them, combined with

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Speaker 2: the leverage level, to have less cash availability upfront, requiring

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Speaker 2: the lenders to provide some of that pick capacity. And

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Speaker 2: I don't think that the market strengthening and certainly being

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Speaker 2: willing to do things that didn't do six months ago

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Speaker 2: or a year ago, means that it's a bubble. I

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Speaker 2: think it means that the market continues to get efficient

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Speaker 2: and certainly a little bit more aggressive in terms of

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Speaker 2: what it's willing to do. But I do take a

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Speaker 2: little bit of offense to the bubble comment, not from you, obviously,

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Speaker 2: but as a general matter, because what I think a

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Speaker 2: bubble implies is that the market gets irrational to a

381
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Speaker 2: place for valuations. And it works much better in an

382
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Speaker 2: equity scenario where you obviously buy something for twenty times

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Speaker 2: that's only worth ten and then when the realization comes

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Speaker 2: you lose half your money. In private credit, where you're

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Speaker 2: still fifty percent loan to value covered, and let's assume

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Speaker 2: that pick means that you're getting to a little higher,

387
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Speaker 2: you get to sixty percent, you still have this cushion,

388
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Speaker 2: you still have a maturity that you're getting your money back,

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Speaker 2: and the likelihood is that as long as you're not

390
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Speaker 2: doing bad companies, you're going to get repaid. Obviously, private

391
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Speaker 2: credit has shown historically a very low default rate in

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Speaker 2: an ever lower default loss rate, And so I think

393
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Speaker 2: that the level of where does a bubble exist and

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Speaker 2: what is that constitute valuations, especially in private credit, where

395
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Speaker 2: you don't in essence, you don't have to buy and

396
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Speaker 2: sell things every day. So if you have something that's

397
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Speaker 2: mispriced by a small amount twenty five or fifty basis points,

398
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Speaker 2: which is what you're in essence talking about here, those

399
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Speaker 2: don't create valuation degradations that lead to real losses. And

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Speaker 2: so it's so far away from a bubble perspective that

401
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Speaker 2: I think it's a it's it's not the right thing.

402
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Speaker 1: Now.

403
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Speaker 2: Has the market gotten more aggressive? Yes, we were seeing

404
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Speaker 2: in twenty two and early twenty three five to six

405
00:23:20,080 --> 00:23:24,880
Speaker 2: turns of leverage at higher coupons, and obviously that has changed.

406
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Speaker 2: But the market has changed. I mean, look at the

407
00:23:27,080 --> 00:23:29,399
Speaker 2: where the equity markets are, look at you know, enterprise

408
00:23:29,480 --> 00:23:33,480
Speaker 2: values to ebata's, look at where the syndicated markets are gone,

409
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Speaker 2: and we're obviously even treasuries. You think about where that

410
00:23:37,280 --> 00:23:39,040
Speaker 2: is and what you're going to do there. The fact

411
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Speaker 2: is is private credit on a relative basis, which is

412
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Speaker 2: how the world invests, still looks because of the component

413
00:23:47,720 --> 00:23:52,280
Speaker 2: of coupon and risk free, still looks incredibly cheap relative

414
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Speaker 2: to those things, even if that attractiveness has created some

415
00:23:57,440 --> 00:24:01,359
Speaker 2: tightening of the of the coupons and some loosening of

416
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Speaker 2: the terms.

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Speaker 1: You know, and we get a lot of people on

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Speaker 1: the show talking about private credit. They all want to

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Speaker 1: do the good deals. No one's doing the bad deals.

420
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Speaker 1: No one's lending to the bad companies. But there is

421
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Speaker 1: so much competition right now, there's so much driypowd of

422
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Speaker 1: so many new entrants. Do you worry that this is

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Speaker 1: going to lead to bad outcomes. You know, the what

424
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Speaker 1: some people are calling the private debt tourists coming in.

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Speaker 2: You know, you sort of love private credit tourists who

426
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Speaker 2: potentially do bad deals because bad deals that ultimately you

427
00:24:31,840 --> 00:24:34,800
Speaker 2: don't own make you look good on a relative basis,

428
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Speaker 2: So you sort of have a mixture, right. The fact

429
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Speaker 2: is is private credit and an asset class. I don't

430
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Speaker 2: think gets permanently tinted by people individual firms because they're

431
00:24:47,280 --> 00:24:50,879
Speaker 2: either not capable of getting sourcing the good deals or

432
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Speaker 2: making good decisions on which ones are the good deals.

433
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Speaker 2: I actually think that's a good thing for those of

434
00:24:56,280 --> 00:25:00,000
Speaker 2: us who are actually more established players and obviously doing

435
00:25:00,119 --> 00:25:02,480
Speaker 2: a lot have a lot of choices. If you don't

436
00:25:02,480 --> 00:25:04,800
Speaker 2: have a lot of choices, you're a tourist in private credit.

437
00:25:04,880 --> 00:25:06,680
Speaker 2: I love that phrase, and I've used it before too,

438
00:25:06,680 --> 00:25:10,520
Speaker 2: so I appreciate the phrasing. But if you're a tourist,

439
00:25:11,160 --> 00:25:12,760
Speaker 2: you don't get to see that many deals, so you

440
00:25:12,840 --> 00:25:14,720
Speaker 2: sort of have to choose the ones that you get.

441
00:25:14,840 --> 00:25:21,680
Speaker 2: So the selection process, right, if you think about the

442
00:25:21,720 --> 00:25:26,360
Speaker 2: adverse selection problem that they have is that they might

443
00:25:26,480 --> 00:25:30,080
Speaker 2: end up with things that we or others have turned

444
00:25:30,080 --> 00:25:32,159
Speaker 2: down already and they don't have much of a choice.

445
00:25:33,080 --> 00:25:37,439
Speaker 2: That's not terrible for us, because ultimately, differentiation is happening

446
00:25:37,520 --> 00:25:40,600
Speaker 2: in the credit markets, and the more differentiation that happens

447
00:25:40,600 --> 00:25:43,639
Speaker 2: in the private credit markets is positive to the people

448
00:25:43,640 --> 00:25:47,080
Speaker 2: who obviously ultimately make good decisions, and we hope that

449
00:25:47,080 --> 00:25:49,280
Speaker 2: that's us. Obviously we work really hard to do that.

450
00:25:49,400 --> 00:25:51,440
Speaker 2: But I think would be a little egotistical to sit

451
00:25:51,480 --> 00:25:53,000
Speaker 2: there and say, hey, you know, we're really good at

452
00:25:53,000 --> 00:25:55,520
Speaker 2: this and nobody else is good. I don't think that's true,

453
00:25:56,040 --> 00:25:59,040
Speaker 2: and obviously future is going to tell you. But I

454
00:25:59,080 --> 00:26:02,920
Speaker 2: do know, having run all of our performing businesses during

455
00:26:02,920 --> 00:26:05,679
Speaker 2: the crisis, there are a lot of people who blew

456
00:26:05,720 --> 00:26:10,960
Speaker 2: out of existence in nine and ten, and it did

457
00:26:10,960 --> 00:26:13,920
Speaker 2: allow those of us who did well in eighth nine

458
00:26:15,160 --> 00:26:19,960
Speaker 2: to actually differentiate yourselves and grow, And so I'm not

459
00:26:20,040 --> 00:26:24,000
Speaker 2: as fearful of that. Candidly, I would love I love

460
00:26:24,000 --> 00:26:25,720
Speaker 2: when a deal that I think is sort of silly

461
00:26:25,960 --> 00:26:27,920
Speaker 2: that other people do it, because if it turns out

462
00:26:27,960 --> 00:26:31,960
Speaker 2: to truly be silly, that will be a differentiating factor.

463
00:26:32,200 --> 00:26:34,800
Speaker 2: But I don't think that taints private credit. I think

464
00:26:34,880 --> 00:26:38,639
Speaker 2: ultimately every asset class has whether it's investment grade all

465
00:26:38,640 --> 00:26:42,480
Speaker 2: the way through to high yield deliverage loan syndicated markets mes,

466
00:26:42,840 --> 00:26:46,359
Speaker 2: and certainly private credit generically has people who really do

467
00:26:46,480 --> 00:26:49,560
Speaker 2: this well and do it poorly. And the more people

468
00:26:49,600 --> 00:26:52,000
Speaker 2: who do it poorly means that the people who do

469
00:26:52,040 --> 00:26:53,240
Speaker 2: it well succeed.

470
00:26:53,640 --> 00:26:55,480
Speaker 1: Does it mean a high default rate next year?

471
00:26:56,080 --> 00:26:58,200
Speaker 2: There's a lot of businesses that have hit the fault,

472
00:26:58,520 --> 00:27:01,800
Speaker 2: had losses for different parts of the capital structure that

473
00:27:01,920 --> 00:27:05,199
Speaker 2: still exists today. And the syndicated markets are or in

474
00:27:05,240 --> 00:27:08,359
Speaker 2: the regular markets, and I think the private credit market

475
00:27:08,400 --> 00:27:11,439
Speaker 2: is just built so much better to sustain us. So

476
00:27:11,480 --> 00:27:16,320
Speaker 2: will defaults go up, No doubt they'll go up, partially

477
00:27:16,320 --> 00:27:19,119
Speaker 2: because there's going to be if the economic cycle goes down,

478
00:27:19,640 --> 00:27:24,159
Speaker 2: there will be companies that, you know, when the ocean

479
00:27:24,200 --> 00:27:28,480
Speaker 2: pulls back, they realize that they're not wearing any bathing suits.

480
00:27:28,800 --> 00:27:32,560
Speaker 2: There will definitely be some of that. There'll be capital

481
00:27:32,600 --> 00:27:34,720
Speaker 2: structures that are just non sustainable and they're going to

482
00:27:34,760 --> 00:27:37,919
Speaker 2: need to do some restructuring and maybe to deal with

483
00:27:38,040 --> 00:27:40,240
Speaker 2: preferreds or junior capital, they might have to do a

484
00:27:40,280 --> 00:27:44,600
Speaker 2: restructuring or a default. But I think the difference in

485
00:27:44,640 --> 00:27:47,240
Speaker 2: a bad market between private credit and the rest of

486
00:27:47,280 --> 00:27:50,560
Speaker 2: the markets will be very obvious, whereas there's a lot

487
00:27:50,560 --> 00:27:54,720
Speaker 2: of solutions that are actually good for private credit investors

488
00:27:55,000 --> 00:27:58,879
Speaker 2: where they get incremental economics, they get potentially pieces of

489
00:27:58,880 --> 00:28:03,640
Speaker 2: equity and a troubled situation, or ultimately they just are

490
00:28:03,680 --> 00:28:06,520
Speaker 2: able to realize that if the business goes from fifty

491
00:28:06,560 --> 00:28:08,919
Speaker 2: percent loan to value to eighty percent loan to value

492
00:28:09,400 --> 00:28:13,280
Speaker 2: and the company defaults and they in essence accelerate, they're

493
00:28:13,320 --> 00:28:15,080
Speaker 2: still going to get their money back because they still

494
00:28:15,119 --> 00:28:17,880
Speaker 2: have a twenty percent cushion on value. So I do

495
00:28:17,920 --> 00:28:20,520
Speaker 2: think defaults will go up, but I don't think it's

496
00:28:20,560 --> 00:28:22,760
Speaker 2: as scary and I don't think it's as prevalent as

497
00:28:22,760 --> 00:28:23,840
Speaker 2: it will be another market.

498
00:28:24,520 --> 00:28:26,480
Speaker 1: What do you think the biggest opportunity is for next year?

499
00:28:26,480 --> 00:28:26,680
Speaker 2: Ellen?

500
00:28:26,840 --> 00:28:29,000
Speaker 1: When you look at everything you cover in terms of

501
00:28:29,040 --> 00:28:32,800
Speaker 1: the credit opportunity, what are you most excited about?

502
00:28:33,640 --> 00:28:37,959
Speaker 2: You know, I think this, I think there's and you

503
00:28:37,960 --> 00:28:42,000
Speaker 2: guys ask this question in the context of the bubble,

504
00:28:42,040 --> 00:28:45,600
Speaker 2: which I strongly disagree with. But it's hard to argue

505
00:28:45,920 --> 00:28:50,960
Speaker 2: that the market opportunity has tightened in private credit over

506
00:28:51,000 --> 00:28:54,440
Speaker 2: the last few months, as there's been a reasonable amount

507
00:28:54,440 --> 00:28:57,560
Speaker 2: of growth and demand and supply is just starting. And

508
00:28:57,600 --> 00:29:02,840
Speaker 2: I think the story we're telling investors is that as

509
00:29:03,080 --> 00:29:07,720
Speaker 2: companies approach the maturity wall, they're going to need to refinance.

510
00:29:07,760 --> 00:29:11,400
Speaker 2: And I think that the market opportunity is twofold with

511
00:29:11,520 --> 00:29:15,200
Speaker 2: regards to that. From a credit investor, one is if

512
00:29:15,240 --> 00:29:18,479
Speaker 2: you truly believe there's a business that has equity value

513
00:29:18,920 --> 00:29:22,160
Speaker 2: that's going to get either refinance or recapitalized in some way,

514
00:29:22,520 --> 00:29:24,760
Speaker 2: and it's trading at a discount, and there's a number

515
00:29:24,760 --> 00:29:28,040
Speaker 2: of those names in the market. Buying those at discounts

516
00:29:28,080 --> 00:29:32,400
Speaker 2: and then capturing that in essence, repayment at par is

517
00:29:32,440 --> 00:29:34,480
Speaker 2: clearly a way to create some total return, and we're

518
00:29:34,520 --> 00:29:38,760
Speaker 2: doing that in sort of our opportunistic business across our platform.

519
00:29:39,000 --> 00:29:41,160
Speaker 2: And then the second is obviously being that take out,

520
00:29:41,200 --> 00:29:43,760
Speaker 2: because if you're willing to buy that risk, you probably

521
00:29:43,800 --> 00:29:46,320
Speaker 2: are willing to do that refinancing. And I do think

522
00:29:46,840 --> 00:29:51,320
Speaker 2: that all markets are about supply demand, and right now

523
00:29:51,600 --> 00:29:56,200
Speaker 2: you have growing supply in the leverage finance market with

524
00:29:56,600 --> 00:30:00,280
Speaker 2: increasing demand probably outpacing it a little bit. I think

525
00:30:00,280 --> 00:30:03,920
Speaker 2: that changes as companies realize that their maturity is at

526
00:30:03,960 --> 00:30:07,080
Speaker 2: twenty five and in twenty four, it's a year away.

527
00:30:07,560 --> 00:30:10,080
Speaker 2: And yeah, it's really nice to capture the coupons of

528
00:30:10,120 --> 00:30:13,640
Speaker 2: the historical three twenty fives or three fifties, but you're

529
00:30:13,680 --> 00:30:16,440
Speaker 2: now going to have to realize we need to recapitalize

530
00:30:16,440 --> 00:30:19,320
Speaker 2: the business and refinance the business. It's going to cost

531
00:30:19,400 --> 00:30:22,840
Speaker 2: this more, but ultimately it will extend our equity optionality.

532
00:30:23,160 --> 00:30:25,040
Speaker 2: And I think there's going to be a lot of

533
00:30:25,040 --> 00:30:29,400
Speaker 2: that in twenty four as people realize twenty five and

534
00:30:29,440 --> 00:30:32,239
Speaker 2: twenty six are very close and they're going to need

535
00:30:32,280 --> 00:30:35,800
Speaker 2: to do that. So I think that discount capture is

536
00:30:35,840 --> 00:30:38,400
Speaker 2: a really interesting it's a really interesting way to play

537
00:30:38,760 --> 00:30:41,080
Speaker 2: the refinancing market that's going to happen over the next

538
00:30:41,120 --> 00:30:44,880
Speaker 2: couple of years. I think providing that refinancing capital is

539
00:30:44,880 --> 00:30:49,560
Speaker 2: a really interesting thing to do. And then ultimately, you know,

540
00:30:49,640 --> 00:30:52,280
Speaker 2: on the distress side, you are going to have decent

541
00:30:52,320 --> 00:30:56,200
Speaker 2: businesses that are just overlevered or have hiccups in their performance.

542
00:30:56,640 --> 00:30:58,800
Speaker 2: We haven't seen a lot of that. Most of the

543
00:30:58,840 --> 00:31:04,040
Speaker 2: businesses that are in distress are bad businesses, and at

544
00:31:04,120 --> 00:31:06,400
Speaker 2: least from our perspective, or bad businesses, and we have

545
00:31:06,520 --> 00:31:09,800
Speaker 2: been very very much on the sidelines and now just

546
00:31:09,800 --> 00:31:13,080
Speaker 2: stressed business where we've been doing distress since the late

547
00:31:13,080 --> 00:31:16,240
Speaker 2: eighties early nineties and have a phenomenal track record there,

548
00:31:16,400 --> 00:31:19,200
Speaker 2: and we're doing very little right now because we think

549
00:31:19,240 --> 00:31:22,320
Speaker 2: that the businesses are not a problem of capital structures

550
00:31:22,440 --> 00:31:25,680
Speaker 2: or time. They are a problem of secular risks or

551
00:31:26,000 --> 00:31:27,920
Speaker 2: you know, you look at a telecom business or healthcare

552
00:31:27,960 --> 00:31:30,880
Speaker 2: businesses that just have issues that are very hard to solve.

553
00:31:31,280 --> 00:31:33,280
Speaker 2: I think that's going to be different if there's a

554
00:31:33,320 --> 00:31:37,280
Speaker 2: market dislocation in twenty four and so we'll be ready

555
00:31:37,320 --> 00:31:39,080
Speaker 2: for that as well. But one of the reasons why

556
00:31:39,080 --> 00:31:41,000
Speaker 2: we like private credit is because it sort of protects

557
00:31:41,040 --> 00:31:43,320
Speaker 2: you from that is that if even if the market

558
00:31:43,360 --> 00:31:46,680
Speaker 2: does struggle and go down, you are first dollar of debt,

559
00:31:46,720 --> 00:31:50,480
Speaker 2: you control your capital structure, You're able to provide for

560
00:31:50,600 --> 00:31:54,520
Speaker 2: incremental coupon, you know, pick or or liquidity.

561
00:31:55,160 --> 00:31:58,160
Speaker 1: Are there sectors that you love and or hate.

562
00:31:58,320 --> 00:32:01,120
Speaker 2: We've never been a set so so do this sector

563
00:32:01,160 --> 00:32:04,440
Speaker 2: we love. We've been doing software and technology since two

564
00:32:04,520 --> 00:32:09,240
Speaker 2: thousand and four. I actually started that practice here at

565
00:32:09,240 --> 00:32:13,440
Speaker 2: OKILL and we've invested over thirty billion dollars in technology

566
00:32:13,480 --> 00:32:16,040
Speaker 2: and software and have done very very well in that

567
00:32:16,120 --> 00:32:20,440
Speaker 2: sector and we've always been heavily weighted to software, healthcare

568
00:32:20,520 --> 00:32:22,640
Speaker 2: and services. That's where we've been.

569
00:32:23,280 --> 00:32:26,000
Speaker 1: So before we talk to Animald Caacuta over Bloomberg Intelligence,

570
00:32:26,760 --> 00:32:30,080
Speaker 1: what's your most contrarian trade right now?

571
00:32:31,760 --> 00:32:35,240
Speaker 2: You know, right now, with where the world is in

572
00:32:35,480 --> 00:32:42,000
Speaker 2: what almost feels like this benign environment, our contrarian trade

573
00:32:42,120 --> 00:32:45,640
Speaker 2: is actually trying not to buy everything. You know. It's

574
00:32:45,840 --> 00:32:47,680
Speaker 2: when you look at a lot of the things that

575
00:32:47,680 --> 00:32:51,160
Speaker 2: you're done, it seems like deals right now are can

576
00:32:51,200 --> 00:32:55,400
Speaker 2: clear at pricing or at leverage levels that we say

577
00:32:55,440 --> 00:32:57,600
Speaker 2: to ourselves, we don't want to get caught up in

578
00:32:58,160 --> 00:33:01,760
Speaker 2: the momentum trade or the desperation trade of a BBC

579
00:33:01,960 --> 00:33:04,400
Speaker 2: that has to deploy their capital. We sort of have

580
00:33:04,480 --> 00:33:07,280
Speaker 2: a different structure because most of our capital is an

581
00:33:07,360 --> 00:33:10,280
Speaker 2: essence either where we can call it in private equity style,

582
00:33:10,320 --> 00:33:12,200
Speaker 2: so we have an ability to stay a little patient.

583
00:33:12,680 --> 00:33:16,520
Speaker 2: So our contrarian as being even though we do think

584
00:33:16,560 --> 00:33:19,240
Speaker 2: private credit is really cheap, we are trying to stay

585
00:33:19,760 --> 00:33:23,719
Speaker 2: high quality. We would rather say no to something that

586
00:33:23,760 --> 00:33:27,240
Speaker 2: we don't like. I don't know that there's an obvious

587
00:33:27,280 --> 00:33:31,160
Speaker 2: thing out there in a sector basis where you say, okay,

588
00:33:31,160 --> 00:33:35,640
Speaker 2: well everyone's got this wrong. You know, healthcare is not

589
00:33:35,720 --> 00:33:38,920
Speaker 2: going to have the issues in telecom. Telecom's a perfect example, right,

590
00:33:39,040 --> 00:33:42,760
Speaker 2: Telecom's going through this huge technology shift that's really really

591
00:33:42,840 --> 00:33:44,880
Speaker 2: hard to evaluate. They've all got that wrong. It's all

592
00:33:44,880 --> 00:33:46,720
Speaker 2: going to be fine. Like I don't think we have

593
00:33:46,840 --> 00:33:49,720
Speaker 2: any of that, and we don't really have a perspective

594
00:33:49,760 --> 00:33:53,240
Speaker 2: on that. I think what we're trying to do is

595
00:33:53,360 --> 00:33:58,160
Speaker 2: be more selective as the market stay strong, rather than

596
00:33:58,320 --> 00:34:00,000
Speaker 2: just deploy for the sake of deploying.

597
00:34:00,520 --> 00:34:03,200
Speaker 1: Great stuff. Adam Schreeger Held Advisors, thank you so much

598
00:34:03,240 --> 00:34:03,920
Speaker 1: for being on the show.

599
00:34:04,360 --> 00:34:06,280
Speaker 2: I really appreciate it. It was great to have both of

600
00:34:06,320 --> 00:34:06,760
Speaker 2: you today.

601
00:34:07,240 --> 00:34:08,879
Speaker 1: Also want to say a big thanks to Lisa Lee

602
00:34:08,880 --> 00:34:11,719
Speaker 1: with Bloomberg News in London. Brilliant to see you again. Cheers,

603
00:34:12,000 --> 00:34:12,959
Speaker 1: thank you so much for.

604
00:34:12,880 --> 00:34:15,040
Speaker 3: Having me, and happy holidays and.

605
00:34:14,960 --> 00:34:16,560
Speaker 1: All the best to both of you for twenty twenty four.

606
00:34:16,600 --> 00:34:19,080
Speaker 1: I hope it's a good one. So I'm delighted to

607
00:34:19,080 --> 00:34:22,120
Speaker 1: welcome back on the Credit Edge Arnold Kakuda, who covers

608
00:34:22,120 --> 00:34:25,240
Speaker 1: banks for Bloomberg Intelligence based in New York. How's it going, Arnold?

609
00:34:25,400 --> 00:34:26,200
Speaker 4: Awesome? Awesome.

610
00:34:26,920 --> 00:34:29,439
Speaker 1: So we've talked a lot about financial institutions. This year,

611
00:34:29,840 --> 00:34:32,520
Speaker 1: our March edition on the banking crisis was very popular.

612
00:34:32,560 --> 00:34:34,520
Speaker 1: Thank you very much for being there, Arnold, to explain

613
00:34:34,560 --> 00:34:36,640
Speaker 1: to us what was happening break it all down for us.

614
00:34:37,360 --> 00:34:41,480
Speaker 1: At that time, a very large global, systemically important institution,

615
00:34:41,640 --> 00:34:44,480
Speaker 1: credit SUEEE, went bust and we lost a handful of

616
00:34:44,480 --> 00:34:48,080
Speaker 1: regional banks in the US. Since then, we seem to

617
00:34:48,120 --> 00:34:51,520
Speaker 1: have bounce back. Credit markets have performed well. The eighty

618
00:34:51,600 --> 00:34:55,680
Speaker 1: one market almost fully recovered. But what's the situation now, Arnold?

619
00:34:55,719 --> 00:34:58,799
Speaker 1: How robust really is the banking sector? There are a

620
00:34:58,800 --> 00:35:02,279
Speaker 1: lot of Macro's storm on the horizon. Traditional banks are

621
00:35:02,280 --> 00:35:05,200
Speaker 1: losing out to other types of financial institutions that so

622
00:35:05,280 --> 00:35:08,400
Speaker 1: called non bank lenders in the world of direct lending.

623
00:35:08,960 --> 00:35:12,080
Speaker 1: Regulations are exerting some pressure on the belge bracket. And

624
00:35:12,120 --> 00:35:13,960
Speaker 1: the latest news I'm looking at is that banks are

625
00:35:14,040 --> 00:35:16,560
Speaker 1: cutting bonuses for traders, which is never a good sign.

626
00:35:17,040 --> 00:35:20,040
Speaker 1: So what's the outlook, Arnold? Will twenty twenty four be

627
00:35:20,040 --> 00:35:21,560
Speaker 1: a tough year for banks? What do you think?

628
00:35:21,960 --> 00:35:25,880
Speaker 4: Well? I think you know, there's definitely still concerns with banks,

629
00:35:25,880 --> 00:35:27,960
Speaker 4: and I think you can see that and how the

630
00:35:28,000 --> 00:35:31,200
Speaker 4: bonds are still trading wider right there, They're now about

631
00:35:31,239 --> 00:35:34,520
Speaker 4: like thirteen basis points. Financial bonds are about thirteen basic

632
00:35:34,560 --> 00:35:37,719
Speaker 4: points wider than the overall index. So you know, if

633
00:35:37,719 --> 00:35:41,920
Speaker 4: we rewind back to February, before any sort of you know,

634
00:35:41,960 --> 00:35:45,920
Speaker 4: crisis was on the horizon, financials and non financials traded flat.

635
00:35:46,440 --> 00:35:49,279
Speaker 4: So you know, yes, things are getting better, but you

636
00:35:49,280 --> 00:35:51,480
Speaker 4: know they're still concerned out there, and you know, the

637
00:35:51,520 --> 00:35:53,920
Speaker 4: spreads head wide into about you know, over twenty basis

638
00:35:53,920 --> 00:35:56,960
Speaker 4: points wider right the financial bonds. So things have gotten

639
00:35:57,000 --> 00:35:59,759
Speaker 4: better kind of retraced almost half of it, but still

640
00:35:59,760 --> 00:36:02,040
Speaker 4: have more to go. And then in terms of the

641
00:36:02,120 --> 00:36:04,160
Speaker 4: you know, the key concern I think is is these

642
00:36:04,280 --> 00:36:08,480
Speaker 4: unrealized losses on these bank balance sheets, and with the

643
00:36:08,680 --> 00:36:12,759
Speaker 4: recent you know, less concern on inflation, looking at FED

644
00:36:12,880 --> 00:36:15,839
Speaker 4: rate cuts, you know, the long duration you know, long

645
00:36:15,880 --> 00:36:19,439
Speaker 4: bonds rallying, you know, yields coming down, that is really

646
00:36:19,440 --> 00:36:22,520
Speaker 4: going to help that situation with these banks. So I think,

647
00:36:22,600 --> 00:36:25,600
Speaker 4: you know, the fundamentals are improving, but but you know

648
00:36:25,640 --> 00:36:26,960
Speaker 4: there's still some more to go there.

649
00:36:27,200 --> 00:36:30,080
Speaker 1: That's assuming you actually believe in this big aggressive rate

650
00:36:30,160 --> 00:36:33,000
Speaker 1: cut scenario that load of people betting on. But but

651
00:36:33,120 --> 00:36:34,359
Speaker 1: let me ask you about the spread, so that it's

652
00:36:34,360 --> 00:36:37,760
Speaker 1: interesting you point out thirteen basis points above the index.

653
00:36:38,600 --> 00:36:40,720
Speaker 1: What does that relate to in terms of like history,

654
00:36:40,760 --> 00:36:43,160
Speaker 1: how how does it generally trade flat over the last

655
00:36:43,160 --> 00:36:44,600
Speaker 1: like five five or so years.

656
00:36:44,719 --> 00:36:49,319
Speaker 4: Yeah, typically, you know the banks have traded uh, you

657
00:36:49,320 --> 00:36:52,600
Speaker 4: know about ten bases points tighter actually when when times

658
00:36:52,640 --> 00:36:55,880
Speaker 4: are good or times are normal, right, But I was

659
00:36:55,920 --> 00:36:57,680
Speaker 4: just kind of mentioning that data point of like, you know,

660
00:36:57,760 --> 00:37:00,319
Speaker 4: went back to kind of flat February when when things

661
00:37:00,360 --> 00:37:02,839
Speaker 4: seem to be okay. So I think I think, you know,

662
00:37:03,040 --> 00:37:05,360
Speaker 4: in a time of crisis, you know, spreads do widen

663
00:37:05,400 --> 00:37:07,840
Speaker 4: out a lot. You know, let's say in a traditional

664
00:37:07,880 --> 00:37:10,840
Speaker 4: recession and whatnot, that's when you see these kind of

665
00:37:11,280 --> 00:37:14,279
Speaker 4: things peak out. But but yeah, because these spreads are

666
00:37:14,280 --> 00:37:17,080
Speaker 4: still wider, and it's really the the regional banks, right,

667
00:37:17,120 --> 00:37:19,680
Speaker 4: which makes sense, right, They're the ones that faced a

668
00:37:19,680 --> 00:37:21,640
Speaker 4: lot of you know pressure, but you know, the big

669
00:37:21,680 --> 00:37:24,960
Speaker 4: six banks, they were seen as a rock, they were

670
00:37:25,000 --> 00:37:28,280
Speaker 4: seen as as a stabilizing force, and they're definitely tighter.

671
00:37:28,320 --> 00:37:30,759
Speaker 4: But you know, it's still these regional banks that that

672
00:37:30,880 --> 00:37:32,280
Speaker 4: still carry a lot of spread.

673
00:37:32,680 --> 00:37:34,600
Speaker 1: So we may see some more trouble that you think.

674
00:37:35,000 --> 00:37:38,359
Speaker 4: Uh so, I think you know, things will steadily improve, right,

675
00:37:38,360 --> 00:37:41,440
Speaker 4: they need time to kind of fix the hole on

676
00:37:41,480 --> 00:37:43,800
Speaker 4: their well, the the artificial hole on the balance sheets.

677
00:37:44,920 --> 00:37:47,799
Speaker 4: You know, lower yields definitely help. But then they're also

678
00:37:47,880 --> 00:37:50,800
Speaker 4: being a lot, you know, very conservative on capital returns.

679
00:37:51,320 --> 00:37:54,520
Speaker 4: Uh So, basically no little to no share buybacks right

680
00:37:54,560 --> 00:37:57,480
Speaker 4: for the next few quarters until they can build up

681
00:37:57,480 --> 00:38:00,680
Speaker 4: their adjusted capital levels back to where the market is comfortable.

682
00:38:01,160 --> 00:38:02,920
Speaker 1: We seem to be heading though, into more difficult year

683
00:38:02,920 --> 00:38:06,560
Speaker 1: in terms of the economy, and you know, the consumer

684
00:38:06,640 --> 00:38:09,200
Speaker 1: is going to be under more pressure. Do we do

685
00:38:09,239 --> 00:38:12,680
Speaker 1: we expect banks therefore to suffer to have a much

686
00:38:12,960 --> 00:38:14,640
Speaker 1: tougher just operating year next year?

687
00:38:14,880 --> 00:38:17,040
Speaker 4: Well, I think that that, you know what the banks

688
00:38:17,080 --> 00:38:19,400
Speaker 4: are better prepared for. You know, we learned what this

689
00:38:19,480 --> 00:38:21,920
Speaker 4: crisis the banks uh or some of the regional banks

690
00:38:21,960 --> 00:38:27,520
Speaker 4: weren't as well prepared for UH interest rate risk, right ironically,

691
00:38:27,800 --> 00:38:30,040
Speaker 4: But then what they've really been good at is preparing

692
00:38:30,040 --> 00:38:31,920
Speaker 4: for credit risk, right, And I think that's the more

693
00:38:31,920 --> 00:38:35,759
Speaker 4: traditional you know, asequality and you know you kind of

694
00:38:35,760 --> 00:38:39,120
Speaker 4: mentioned the private credit, but you know banks have been

695
00:38:39,239 --> 00:38:41,920
Speaker 4: kind of reducing you know, their their their risk appetite

696
00:38:42,239 --> 00:38:44,440
Speaker 4: and kind of getting out of some space where or

697
00:38:44,480 --> 00:38:47,560
Speaker 4: the private you know, lending has has stepped in, right,

698
00:38:47,560 --> 00:38:50,720
Speaker 4: So I think that'll help from that perspective. In terms

699
00:38:50,719 --> 00:38:53,879
Speaker 4: of the next crisis, you know, the regionals are more

700
00:38:54,000 --> 00:38:56,680
Speaker 4: a little bit more exposed to you know, the the

701
00:38:56,719 --> 00:39:01,200
Speaker 4: office real estate market overall. Right, Well, the bigger banks

702
00:39:01,200 --> 00:39:03,480
Speaker 4: are more exposed from a dollar perspective, but in terms

703
00:39:03,520 --> 00:39:06,160
Speaker 4: of percent of loans on the balance sheet, the region

704
00:39:06,280 --> 00:39:08,640
Speaker 4: is a little bit more exposed to office. But but

705
00:39:08,680 --> 00:39:11,359
Speaker 4: we think, you know, that that will play out over time, right,

706
00:39:11,400 --> 00:39:14,360
Speaker 4: and it's specific to certain regions and whatnot, so that

707
00:39:14,400 --> 00:39:17,120
Speaker 4: the banks will have time to combat that. But yeah,

708
00:39:17,160 --> 00:39:20,680
Speaker 4: so I think, you know, there will be some you know,

709
00:39:20,880 --> 00:39:24,520
Speaker 4: increasing concern, but I think it'll be contained for the

710
00:39:24,520 --> 00:39:24,919
Speaker 4: most part.

711
00:39:25,320 --> 00:39:27,239
Speaker 1: Another thing that came up this year after the bank

712
00:39:27,280 --> 00:39:30,719
Speaker 1: crisis is the suggestion that there are just still too

713
00:39:30,800 --> 00:39:34,560
Speaker 1: many banks in America. So will we get consolidation.

714
00:39:35,280 --> 00:39:39,160
Speaker 4: Well, I think you have a couple of you right now, right,

715
00:39:39,200 --> 00:39:42,080
Speaker 4: But in terms of consolidation, I think, you know, I

716
00:39:42,080 --> 00:39:44,960
Speaker 4: think over the mid to long term. Yes, In the

717
00:39:45,000 --> 00:39:48,759
Speaker 4: short term, as long as these unrealized losses continue to

718
00:39:48,760 --> 00:39:51,160
Speaker 4: live on, these balance sheets. I'd say that's a no,

719
00:39:52,160 --> 00:39:56,640
Speaker 4: because when you do M and A, everything needs to

720
00:39:56,680 --> 00:39:59,799
Speaker 4: be marked to market, to balot to So basically all

721
00:39:59,800 --> 00:40:03,239
Speaker 4: these unrealized losses would become real and so that'll create

722
00:40:03,239 --> 00:40:06,240
Speaker 4: another capital hole. And so you know, until this situation

723
00:40:06,360 --> 00:40:10,120
Speaker 4: gets better or there's like a creative solution, then I think.

724
00:40:10,600 --> 00:40:12,480
Speaker 4: You know, these large scale M and A I think

725
00:40:12,560 --> 00:40:15,239
Speaker 4: is on pause for a little bit. But then you know,

726
00:40:15,280 --> 00:40:18,279
Speaker 4: like I said, these banks are really being conservative with

727
00:40:18,360 --> 00:40:21,839
Speaker 4: capital turns. They're increasing their capital levels. Plus with lower

728
00:40:21,920 --> 00:40:25,880
Speaker 4: yields and a lot of these things running off, that'll

729
00:40:25,920 --> 00:40:28,440
Speaker 4: help with these unrealized losses. So you know, once that

730
00:40:28,480 --> 00:40:31,400
Speaker 4: situation gets more concerned, I think, yes, I think what

731
00:40:31,400 --> 00:40:32,279
Speaker 4: you're saying makes sense.

732
00:40:32,719 --> 00:40:34,879
Speaker 1: So I'm glad you mentioned bonds earlier. Let's talk about

733
00:40:34,880 --> 00:40:37,640
Speaker 1: the bonds. You read a great piece this week on

734
00:40:37,680 --> 00:40:41,640
Speaker 1: the Bloomberg Terminal about issuance by banks. You expect a

735
00:40:41,640 --> 00:40:46,239
Speaker 1: big January for bank bonds. Why is that? What's driving that?

736
00:40:46,880 --> 00:40:50,799
Speaker 4: Well, basically, I think it's a return more to like

737
00:40:50,840 --> 00:40:55,160
Speaker 4: the normal pattern that we had pre pandemic. Last year's

738
00:40:55,200 --> 00:40:59,800
Speaker 4: January was actually abnormally low, only about eight billion of issuance,

739
00:41:00,080 --> 00:41:02,600
Speaker 4: and you know, this year we're calling for about twenty

740
00:41:02,600 --> 00:41:06,360
Speaker 4: five billion, and that that's on like one hundred and

741
00:41:06,400 --> 00:41:09,279
Speaker 4: thirty five billion annual number. So we're kind of going

742
00:41:09,360 --> 00:41:15,000
Speaker 4: with the kind of historical seasonality where January, out of

743
00:41:15,040 --> 00:41:17,680
Speaker 4: all the months, is typically the biggest month of issuance

744
00:41:18,360 --> 00:41:21,319
Speaker 4: about eighteen percent, right, about almost twenty percent, So that

745
00:41:21,320 --> 00:41:23,640
Speaker 4: that's kind of how we derived the twenty five billion.

746
00:41:23,640 --> 00:41:26,000
Speaker 4: And last year was just we started off the year

747
00:41:26,200 --> 00:41:28,799
Speaker 4: really slowly, and that's really coming on the back of

748
00:41:29,239 --> 00:41:34,440
Speaker 4: a really at extremely active pandemic years of twenty twenty one,

749
00:41:34,600 --> 00:41:35,279
Speaker 4: twenty twenty two.

750
00:41:36,160 --> 00:41:38,040
Speaker 1: So why do they need all this cash? Why did

751
00:41:38,040 --> 00:41:39,799
Speaker 1: they need twenty five billion dollars in January? What's it

752
00:41:39,800 --> 00:41:40,080
Speaker 1: all for?

753
00:41:41,520 --> 00:41:43,640
Speaker 4: Well, I think you know the ones that we think

754
00:41:43,640 --> 00:41:47,160
Speaker 4: that will be more active, JPM Wells and maybe Goldman

755
00:41:48,080 --> 00:41:51,160
Speaker 4: JPM and Wells we think are more impacted by new

756
00:41:51,239 --> 00:41:56,160
Speaker 4: upcoming regulation called Basil Endgame, and so we think they're

757
00:41:56,200 --> 00:41:59,160
Speaker 4: they're balance sheets. We'll create a bit of a hole

758
00:41:59,200 --> 00:42:03,200
Speaker 4: in terms of how much excess bail and eligible debt

759
00:42:03,200 --> 00:42:05,640
Speaker 4: they'll have. I mean, they look totally fine now under

760
00:42:05,680 --> 00:42:09,000
Speaker 4: the current regulation, but a lot of these banks like

761
00:42:09,040 --> 00:42:12,399
Speaker 4: to or investors kind of point ahead to hey, what's

762
00:42:12,440 --> 00:42:15,200
Speaker 4: this upcoming regulation. What would it be on a perform

763
00:42:15,239 --> 00:42:18,000
Speaker 4: a basis. Oh, some banks look later than others, and

764
00:42:18,480 --> 00:42:20,920
Speaker 4: you know, you always want to quash any concerns early.

765
00:42:21,520 --> 00:42:24,040
Speaker 4: So so I think that's why JPM and Wells they're

766
00:42:24,080 --> 00:42:26,720
Speaker 4: a bit more affected by this new regulation. Bottle endgame,

767
00:42:27,800 --> 00:42:29,080
Speaker 4: you know, they want to get ahead of that. And

768
00:42:29,120 --> 00:42:31,759
Speaker 4: then for Goldman, it's more they were, you know, very light.

769
00:42:31,800 --> 00:42:34,480
Speaker 4: They along with City were very late this year, and

770
00:42:34,520 --> 00:42:36,360
Speaker 4: so we think it's more of a return to normal

771
00:42:36,400 --> 00:42:36,919
Speaker 4: for those two.

772
00:42:37,400 --> 00:42:40,680
Speaker 1: That's a endgame that sets off my jargon alarm. I

773
00:42:40,680 --> 00:42:42,279
Speaker 1: should get a gong for that whenever you mentioned it.

774
00:42:42,320 --> 00:42:43,319
Speaker 1: But what do you what do you mean by that?

775
00:42:43,360 --> 00:42:43,839
Speaker 1: Break it down?

776
00:42:43,840 --> 00:42:47,560
Speaker 4: For us, it's basle endgame. It's this is the regulation

777
00:42:47,719 --> 00:42:51,960
Speaker 4: that a lot of these bank CEOs are complaining about, saying, hey,

778
00:42:52,000 --> 00:42:54,840
Speaker 4: why why is there increased regulation? Why do why do

779
00:42:54,920 --> 00:42:57,480
Speaker 4: banks need to hold more and more capital, more equity?

780
00:42:57,840 --> 00:43:00,759
Speaker 4: Even though the biggest banks, even though they came out

781
00:43:00,800 --> 00:43:04,319
Speaker 4: of this stress in March to May like they were

782
00:43:04,320 --> 00:43:06,120
Speaker 4: the fine they were the bedrocks, right, why do they

783
00:43:06,120 --> 00:43:06,680
Speaker 4: need to do that?

784
00:43:06,719 --> 00:43:06,959
Speaker 2: Well?

785
00:43:07,480 --> 00:43:13,120
Speaker 4: It's actually the regulators playing catchup from you know, an

786
00:43:13,160 --> 00:43:18,880
Speaker 4: overall regulator. The global regulators suggestion ten years ago saying,

787
00:43:19,239 --> 00:43:25,759
Speaker 4: let's implement a standardized approach to riskuided assets. Basically right now,

788
00:43:25,960 --> 00:43:29,359
Speaker 4: what we have across the world is each region, each

789
00:43:29,400 --> 00:43:32,120
Speaker 4: country has their own risk weights for let's say a

790
00:43:32,120 --> 00:43:35,719
Speaker 4: mortgage loan. Right and but but because there's a lot

791
00:43:35,760 --> 00:43:38,719
Speaker 4: of latitude in that, the global regulators like, hey, we

792
00:43:38,960 --> 00:43:42,000
Speaker 4: need to have certain floors for that. And then when

793
00:43:42,000 --> 00:43:44,080
Speaker 4: they when they put in you know, that calculation for

794
00:43:44,120 --> 00:43:47,600
Speaker 4: the US banks, plus we call goal plating that the

795
00:43:47,680 --> 00:43:52,399
Speaker 4: US regulator put in additional stuff. That's where all these

796
00:43:52,440 --> 00:43:55,120
Speaker 4: big banks, you know, they say, would need to hold

797
00:43:55,640 --> 00:43:58,799
Speaker 4: twenty percent more risk wuided assets, which is the denominator

798
00:43:58,880 --> 00:44:01,719
Speaker 4: of equi in capital requirements. So they need to hold

799
00:44:01,719 --> 00:44:04,800
Speaker 4: more equity in capital as well, and also need to

800
00:44:04,840 --> 00:44:06,680
Speaker 4: hold more debt as well on top of that.

801
00:44:07,160 --> 00:44:09,799
Speaker 1: Also the big comeback I mean this you say it's

802
00:44:09,840 --> 00:44:11,560
Speaker 1: a return to what it was you know, a few

803
00:44:11,640 --> 00:44:14,000
Speaker 1: years ago, maybe, but it is a big increase. It

804
00:44:14,120 --> 00:44:16,080
Speaker 1: is a lot of debt that's coming. Is there a

805
00:44:16,120 --> 00:44:18,680
Speaker 1: certain amount of market timing there? I mean, you know

806
00:44:18,840 --> 00:44:22,280
Speaker 1: these guys. They advise debt capital markets, they tell issuers

807
00:44:22,280 --> 00:44:24,640
Speaker 1: when to go, they look at rates, they look ahead.

808
00:44:25,120 --> 00:44:28,759
Speaker 1: The banks. Are they the smartest issues in the room, Well,

809
00:44:28,880 --> 00:44:29,880
Speaker 1: I think they.

810
00:44:29,960 --> 00:44:32,720
Speaker 4: You know, they are always in the market. They're always

811
00:44:32,760 --> 00:44:35,880
Speaker 4: looking at the market, right, and then sometimes they just

812
00:44:36,120 --> 00:44:39,480
Speaker 4: have to do it right. And you know, the big

813
00:44:39,480 --> 00:44:44,280
Speaker 4: difference between bank and financial debt compared to non financial

814
00:44:44,480 --> 00:44:47,239
Speaker 4: is the banks typically issue shorter, right, So if you

815
00:44:47,280 --> 00:44:50,240
Speaker 4: look at the financials index, it's a lot shorter duration

816
00:44:50,520 --> 00:44:55,080
Speaker 4: than the overall And so from just that standpoint of

817
00:44:55,120 --> 00:44:58,960
Speaker 4: you're just looking at maturities, right, the banks need to

818
00:44:59,000 --> 00:45:01,840
Speaker 4: be continued, you know, big issuers from that standpoint, so

819
00:45:03,320 --> 00:45:06,120
Speaker 4: I think there's some aspect of timing, but I think

820
00:45:06,239 --> 00:45:08,280
Speaker 4: you know, you're looking ahead to some of the regulation

821
00:45:08,360 --> 00:45:11,080
Speaker 4: and whatnot. You know, these banks always need to be

822
00:45:11,120 --> 00:45:13,920
Speaker 4: the market anyway, and you know, if you if you

823
00:45:14,040 --> 00:45:16,479
Speaker 4: have let's say we're calling for most of the banks

824
00:45:16,480 --> 00:45:18,399
Speaker 4: to do twenty to twenty five billion of debt this year,

825
00:45:18,960 --> 00:45:21,160
Speaker 4: you don't want to do that whole twenty in a

826
00:45:21,200 --> 00:45:23,200
Speaker 4: one day, right, you know, you want to do it

827
00:45:23,239 --> 00:45:26,200
Speaker 4: over you know, a few quarters, you know, use all

828
00:45:26,200 --> 00:45:29,240
Speaker 4: the quarters, right, and then typically they like to come

829
00:45:30,360 --> 00:45:33,480
Speaker 4: a day or two within the week after they report earnings,

830
00:45:33,560 --> 00:45:36,640
Speaker 4: right in January, April, you know, July, and October. So

831
00:45:36,920 --> 00:45:39,320
Speaker 4: those are kind of the peak periods that typically happen,

832
00:45:39,400 --> 00:45:43,120
Speaker 4: and we think, you know, that that'll come back this year,

833
00:45:43,200 --> 00:45:45,520
Speaker 4: you know, unless, of course, you know, the things that

834
00:45:45,600 --> 00:45:47,440
Speaker 4: kind of mess that up a little bit have been

835
00:45:47,440 --> 00:45:50,000
Speaker 4: like kind of the Ukraine War or like you know,

836
00:45:50,280 --> 00:45:52,200
Speaker 4: some you know, we thought there might be an issue

837
00:45:52,239 --> 00:45:54,520
Speaker 4: with you know, haw Maas and Israel and stuff like that.

838
00:45:54,560 --> 00:45:56,560
Speaker 4: But you know, unless we see things like that on

839
00:45:56,600 --> 00:45:59,960
Speaker 4: the horizon, which is kind of hard to say, you know,

840
00:46:00,520 --> 00:46:02,920
Speaker 4: we think it'll become more of a historical pattern.

841
00:46:03,520 --> 00:46:05,640
Speaker 1: So for the investors in this stuff, where are the

842
00:46:05,680 --> 00:46:08,560
Speaker 1: best opportunities right now? Where's the relative value?

843
00:46:09,640 --> 00:46:12,040
Speaker 4: It's the things are getting tighter and tighter, but you know,

844
00:46:12,080 --> 00:46:15,239
Speaker 4: some I think there's still some spread in some of

845
00:46:15,280 --> 00:46:19,080
Speaker 4: the regionals. You know. The US Bank Corp. Is a

846
00:46:19,160 --> 00:46:22,520
Speaker 4: name that felt really hard. This was used to be

847
00:46:22,640 --> 00:46:25,120
Speaker 4: the tightest training bank, you know, of of all banks.

848
00:46:26,160 --> 00:46:28,759
Speaker 4: You know, they've been hit with some several downgrades and

849
00:46:29,080 --> 00:46:33,960
Speaker 4: they they closed an acquisition unfortunately at at at kind

850
00:46:33,960 --> 00:46:36,280
Speaker 4: of the worst time they at the marke to market. Uh,

851
00:46:36,520 --> 00:46:39,759
Speaker 4: union banks unrealized losses and so their equity levels went

852
00:46:39,800 --> 00:46:41,640
Speaker 4: down a lot, and then we hit we got hit

853
00:46:41,680 --> 00:46:45,640
Speaker 4: with the regional bank. Uh so you know SVB fall,

854
00:46:45,800 --> 00:46:48,279
Speaker 4: you know First Republic you know issue, So you know

855
00:46:48,360 --> 00:46:50,680
Speaker 4: that that was front and center when when their capital

856
00:46:50,760 --> 00:46:54,319
Speaker 4: levels were were kind of very low, right, So we

857
00:46:54,360 --> 00:46:57,239
Speaker 4: think that's coming back a lot. So you know, even

858
00:46:57,239 --> 00:47:00,680
Speaker 4: though it's not higher rated than P and C, you know,

859
00:47:00,960 --> 00:47:03,520
Speaker 4: the bond still trade trade wider, so we think kind

860
00:47:03,520 --> 00:47:07,319
Speaker 4: of there might be an opportunity there, Uh within the

861
00:47:07,320 --> 00:47:10,080
Speaker 4: Big six space. We think you know, b of A

862
00:47:10,440 --> 00:47:13,560
Speaker 4: trades wider than than JPM by about like ten fifteen

863
00:47:13,560 --> 00:47:17,160
Speaker 4: basis points. B A Bay you know, continues to be

864
00:47:17,200 --> 00:47:20,720
Speaker 4: an active issuer. You know, this week we've had Brian moynihan,

865
00:47:20,800 --> 00:47:23,280
Speaker 4: the CEO, saying will continue to invest in trading, which

866
00:47:23,920 --> 00:47:26,160
Speaker 4: kind of is a double edged sword for for bondholders

867
00:47:26,239 --> 00:47:29,960
Speaker 4: because the trading business is financed with bonds. So again,

868
00:47:30,120 --> 00:47:32,040
Speaker 4: you know, be a A will be an active issuer, but

869
00:47:32,120 --> 00:47:35,320
Speaker 4: we think JPM will be as well. And but b

870
00:47:35,440 --> 00:47:38,839
Speaker 4: of A actually they do better. You know, they're one

871
00:47:38,840 --> 00:47:40,799
Speaker 4: of the best stressed test banks in terms of their

872
00:47:40,840 --> 00:47:43,759
Speaker 4: loan losses are lower. So in a software landing or

873
00:47:43,760 --> 00:47:46,120
Speaker 4: any kind of landing, right, we think that they're fundamentally

874
00:47:46,160 --> 00:47:49,920
Speaker 4: they might you know, outperform you know, their peers.

875
00:47:50,160 --> 00:47:53,279
Speaker 1: So anyone you stay away from.

876
00:47:54,000 --> 00:47:57,160
Speaker 4: Uh, stay aways is a tough word, but we think

877
00:47:58,280 --> 00:48:00,840
Speaker 4: you know, City Group, you know, get the pairing between

878
00:48:00,880 --> 00:48:03,840
Speaker 4: City Group and Wells Fargo. Wells Fargo we think is

879
00:48:03,840 --> 00:48:05,840
Speaker 4: going to be an active issuer, but their bonds already

880
00:48:05,840 --> 00:48:09,640
Speaker 4: trade the widest and yet you know lower rated City

881
00:48:09,640 --> 00:48:12,200
Speaker 4: Group we think, you know, trades a little bit tighter.

882
00:48:12,280 --> 00:48:15,440
Speaker 4: And then we think that they'll return to the markets

883
00:48:15,440 --> 00:48:17,920
Speaker 4: this year, you know, back to a normal level. So

884
00:48:18,000 --> 00:48:20,600
Speaker 4: you have some issuance kind of negative technicals that we

885
00:48:20,640 --> 00:48:23,120
Speaker 4: think will happen this year. And plus they're more kind

886
00:48:23,160 --> 00:48:26,839
Speaker 4: of internationally exposed. They're trying to, i know, improve on that,

887
00:48:27,120 --> 00:48:29,840
Speaker 4: but but they're still they still have a more international footprint.

888
00:48:29,880 --> 00:48:33,080
Speaker 4: So if there's any more geopolitical risk that comes about, right,

889
00:48:33,120 --> 00:48:34,919
Speaker 4: like the Middle East is always something to look at,

890
00:48:34,960 --> 00:48:36,960
Speaker 4: and then you know, will that be a contangent around

891
00:48:36,960 --> 00:48:40,799
Speaker 4: other em countries so that that might you know, if

892
00:48:40,840 --> 00:48:43,759
Speaker 4: that flares up that then City is a name that

893
00:48:43,760 --> 00:48:45,719
Speaker 4: people might look at and say, hey, there might be

894
00:48:46,800 --> 00:48:48,480
Speaker 4: a little more increased risk.

895
00:48:48,960 --> 00:48:50,680
Speaker 1: So to wrap things up here on what are your

896
00:48:51,160 --> 00:48:53,080
Speaker 1: what are you most excited about when you look at

897
00:48:53,080 --> 00:48:56,200
Speaker 1: twenty twenty four and what gives you the most sleepless nights?

898
00:48:57,960 --> 00:48:59,640
Speaker 4: I don't know if there would be more sleepless nights

899
00:49:00,200 --> 00:49:03,600
Speaker 4: like they were in March, but I think what's exciting is,

900
00:49:03,840 --> 00:49:07,160
Speaker 4: you know, it's it'll, it'll you know, normal compared to

901
00:49:07,160 --> 00:49:09,960
Speaker 4: this year. I think, you know, normal typically is a

902
00:49:09,960 --> 00:49:12,640
Speaker 4: boring word. But after the year that, you know, the

903
00:49:12,840 --> 00:49:15,359
Speaker 4: rock and roll ride that we had with with with

904
00:49:15,400 --> 00:49:18,040
Speaker 4: the regional bank crisis this year, I think, you know,

905
00:49:18,120 --> 00:49:20,759
Speaker 4: for banks, not normal, I think is a nice thing.

906
00:49:22,480 --> 00:49:25,080
Speaker 4: And then what keeps me up at night? I think

907
00:49:25,200 --> 00:49:27,680
Speaker 4: you know, there's always you know, as a quality pressure.

908
00:49:27,880 --> 00:49:30,240
Speaker 4: You know, we we look at you know, the office

909
00:49:30,280 --> 00:49:33,239
Speaker 4: space is often mentioned as you know, so what's what's

910
00:49:33,239 --> 00:49:37,839
Speaker 4: the fallout? Right? And how quickly will this office uh

911
00:49:37,960 --> 00:49:42,080
Speaker 4: fallout hit hit the banks? And we continue here It's

912
00:49:42,120 --> 00:49:46,880
Speaker 4: it's going to take some time, but you know, is

913
00:49:46,920 --> 00:49:48,839
Speaker 4: that going to be you know, this year, next year,

914
00:49:48,920 --> 00:49:51,600
Speaker 4: the year after that, right? But but at least it's

915
00:49:51,600 --> 00:49:54,640
Speaker 4: it's it's kind of like typically when we see these

916
00:49:54,680 --> 00:49:57,239
Speaker 4: big things on the horizon and everybody's talking about it,

917
00:49:57,719 --> 00:49:59,839
Speaker 4: those aren't the things that usually kind of you know,

918
00:50:00,560 --> 00:50:03,080
Speaker 4: are the big issues. And so I feel like we're

919
00:50:03,080 --> 00:50:05,520
Speaker 4: already talking about it. You know, banks are preparing for it,

920
00:50:05,560 --> 00:50:08,239
Speaker 4: they're provisioning more for it in terms of potential you know,

921
00:50:08,400 --> 00:50:11,160
Speaker 4: long losses and that that'll I think, you know, definitely

922
00:50:11,200 --> 00:50:13,600
Speaker 4: pick up, but I think it might take a little

923
00:50:13,600 --> 00:50:17,560
Speaker 4: bit more time and be reasonable. So but if anything,

924
00:50:17,600 --> 00:50:20,879
Speaker 4: you know, yes, the the office space, you know, that's

925
00:50:20,880 --> 00:50:21,360
Speaker 4: a sector to.

926
00:50:21,360 --> 00:50:22,880
Speaker 1: Look out for, but as of now, you think it

927
00:50:22,920 --> 00:50:24,480
Speaker 1: affects mostly the regional banks.

928
00:50:25,040 --> 00:50:27,040
Speaker 4: There are more you know, as a percentage of loans. Yes,

929
00:50:27,040 --> 00:50:29,200
Speaker 4: they're more exposed from that standpoint.

930
00:50:29,200 --> 00:50:31,759
Speaker 1: Okay, And I like the way you characterize twenty twenty

931
00:50:31,760 --> 00:50:33,640
Speaker 1: four as a normal year, given we're heading into a

932
00:50:33,719 --> 00:50:35,200
Speaker 1: very unusual election cycle.

933
00:50:36,480 --> 00:50:37,080
Speaker 4: Yeah, that too.

934
00:50:37,160 --> 00:50:40,759
Speaker 1: Yeah, So let's hope you're right. Thanks very much, And

935
00:50:41,000 --> 00:50:43,239
Speaker 1: Kakuda of Blueberg Intelligence you can read all of his

936
00:50:43,280 --> 00:50:45,680
Speaker 1: great analysis on the Bloomberg terminal. Do check it out.

937
00:50:45,680 --> 00:50:47,880
Speaker 1: And I hope see you back on the show soon. Donald, great,

938
00:50:47,920 --> 00:50:50,640
Speaker 1: thanks for having me again, and I hope we'll not

939
00:50:50,719 --> 00:50:53,759
Speaker 1: be discussing another banking crisis at that time, and have

940
00:50:53,840 --> 00:50:56,480
Speaker 1: a great holiday in great New Ya. Thanks a lot,

941
00:50:56,520 --> 00:50:59,440
Speaker 1: you too, Cheers, Thanks a lot, and thanks again to

942
00:50:59,480 --> 00:51:02,200
Speaker 1: Alan Shred of voke Kel Advisors and Lisa Lee from

943
00:51:02,200 --> 00:51:05,440
Speaker 1: Bloomberg News. Read all of Lisa's great credit scoops on

944
00:51:05,480 --> 00:51:09,200
Speaker 1: the terminal and at Bloomberg dot com. Please do subscribe

945
00:51:09,239 --> 00:51:12,640
Speaker 1: wherever you get your podcasts. We're on Apple, Google and Spotify.

946
00:51:12,760 --> 00:51:14,600
Speaker 1: Give us a review, tell your friends, or email me

947
00:51:14,640 --> 00:51:18,600
Speaker 1: directly at Jcrombeight at Bloomberg dot net. That's J C

948
00:51:18,800 --> 00:51:21,000
Speaker 1: R O M B I E. That's in my surname

949
00:51:21,080 --> 00:51:24,239
Speaker 1: and the number eight at Bloomberg dot net. This is

950
00:51:24,280 --> 00:51:26,440
Speaker 1: the last show of the year. We're taking a short break,

951
00:51:26,440 --> 00:51:28,600
Speaker 1: but we'll be right back with you on January fourth

952
00:51:28,640 --> 00:51:31,399
Speaker 1: to ring in the new year. Don't miss it. I'm

953
00:51:31,440 --> 00:51:34,240
Speaker 1: James Crombie. It's been a pleasure having you join us again.

954
00:51:34,400 --> 00:51:36,880
Speaker 1: Next time on the Credit Edge.