Speaker 1: Bloomberg Audio Studios, podcasts, radio news, because we've been talking
Speaker 1: about that mounting concern about how big government spending has
Speaker 1: going to create this issue here to markets, potentially upending them,
Speaker 1: making the job more challenging for central banks. Of course,
Speaker 1: as Jerome Powell, the FED Chair, has two days of
Speaker 1: testimony ahead in Congress, all in the middle of a
Speaker 1: weakening labor market here in the United States.
Speaker 2: It's the perfect storm.
Speaker 1: We are now joined by oak Tree Capital Management co
Speaker 1: founder and co chairman Howard Marks to talk all about it.
Speaker 1: We've been talking about the fiscal issues, right, We've been
Speaker 1: talking about the monetary conundrum that's been happening for now
Speaker 1: well over a year for the FED Chair. If you
Speaker 1: think about the potential for fiscal to really upend how
Speaker 1: investors think these days, how much is the government dot
Speaker 1: loads in the US and abroad really changing the calculus?
Speaker 3: Well, look, Sonali, I think it's unfortunate that the US
Speaker 3: behaves like a country that has a credit card with
Speaker 3: no credit limit, where the bill never comes. I mean,
Speaker 3: nobody can think that's a good idea. You would think
Speaker 3: that there has to be a point at which our
Speaker 3: dead or our deficits become too much reckoned as a
Speaker 3: percentage of GDP. Usually nobody will tell you that point
Speaker 3: doesn't exist. Nobody will tell you where it is. So
Speaker 3: nobody's exercising fiscal discipline in Washington these days.
Speaker 2: Last year we had.
Speaker 3: A deficit in the trillions in a period of prosperity,
Speaker 3: not supposed to happen.
Speaker 2: All very unfortunate. But A nobody can tell.
Speaker 3: You when it becomes a problem, and b nobody can
Speaker 3: tell you what to do with it. You can't eliminate
Speaker 3: the US from your portfolios. People who've said to do
Speaker 3: that in past years are now looking pretty bad.
Speaker 2: Yeah.
Speaker 4: I was going to say, if you had followed that advice,
Speaker 4: you'd be in a world hurt right now in terms
Speaker 4: of relative performance. And you said, the new one can
Speaker 4: tell you where that point is. But that's exactly what
Speaker 4: I'm going to ask you. Where do you think that
Speaker 4: point is? Is it something that we're approaching If you
Speaker 4: don't want to exactly pinpoint.
Speaker 3: It, I don't want to exactly pinpoint it. I want
Speaker 3: to say that I'm among the people who can't tell
Speaker 3: you where it is, you know, one of the many. Yeah,
Speaker 3: you know, I think every time I come on this
Speaker 3: on Bloomberg, I quote Mark Twain who said, it ain't
Speaker 3: what you don't know that gets you into trouble. It's
Speaker 3: what you know for certain that just ain't true. I
Speaker 3: certainly don't know.
Speaker 5: Well, I wonder what kind of opportunities you're finding. I'm
Speaker 5: always interested on the distress side about how sort of
Speaker 5: target rich the environment is. I think that says a
Speaker 5: lot about our economy. All the econo surprises that we
Speaker 5: see are to the downside lately and rates remain high.
Speaker 2: Does that make this interesting for you? Well, I think
Speaker 2: it is interested.
Speaker 3: I mean, we went through a really slow period from
Speaker 3: nine when the FED took the Fed funds rate to
Speaker 3: zero to stimulate the economy, to twenty one when they
Speaker 3: started to decided to lift it to fight inflation. And
Speaker 3: in that thirteen year period there was very little distress
Speaker 3: because it was a very benign environment for companies. Now,
Speaker 3: as you know, the interest rates are higher. That gives
Speaker 3: us more of an opportunity. And importantly, there were a
Speaker 3: lot of leverage transactions done in the period I described,
Speaker 3: where companies were burdened with capital structures debt structures that
Speaker 3: did not anticipate a five hundred basis point or four
Speaker 3: hundred base point increase in rates.
Speaker 2: So, you know, to put it.
Speaker 3: In short, it was it was a great time to
Speaker 3: be a borrower because rates came down and.
Speaker 2: Business was prosperous.
Speaker 3: But right now, and I think going into the future,
Speaker 3: leveraged companies will not be able to renew their leverage
Speaker 3: as easily and the cost of doing so will be higher.
Speaker 3: So that gives us better opportunities than we've been seeing.
Speaker 3: And you know, just to put it in brief for
Speaker 3: your listeners, six years ago, you had an idea, You
Speaker 3: went at the bank, you described that, they said, fine,
Speaker 3: we'll give you nine hundred million dollars at five percent.
Speaker 3: Now it's time to renew your debt. You go in,
Speaker 3: you describe it again, and they say, good, we'll give
Speaker 3: you five hundred million dollars at nine percent.
Speaker 1: Where do you think most of that pain is going
Speaker 1: to come? Because there's a private equity universe that's clearly
Speaker 1: grappling with that refinancing pain. There's a commercial real estate market,
Speaker 1: and equity investors seem to be ignoring any leverage that
Speaker 1: might be under the system.
Speaker 2: Still, what should they be one reaching out for?
Speaker 3: Well, clearly now it'll be in highly levered situations, and
Speaker 3: you name two of them, private equity and real estate leverage.
Speaker 3: The use of debt to amplify your returns. It has
Speaker 3: been the lifeblood of these two asset classes and they've
Speaker 3: done extremely well as a result. It was very, very
Speaker 3: salutary for them. But that's where the pain will come
Speaker 3: in the future. And you know, you can't increase a
Speaker 3: company's debt service costs markedly without affecting his returns. And
Speaker 3: in certain sectors of the real estate world, mainly retail
Speaker 3: and office, there are fundamental questions. So you put that together,
Speaker 3: we think you'll see some disruption which will give us
Speaker 3: and people like us opportunity. You know, this has been
Speaker 3: a really tough period for lenders, which is what we are,
Speaker 3: and a really tough period for bargain hunters.
Speaker 4: Right well, I want to talk a bit more about
Speaker 4: the business of lending and what's going on in the
Speaker 4: private credit industry. Of course, a month or two ago
Speaker 4: we saw Plural Site back by Vista basically transfer its
Speaker 4: assets into a different subsidiary to obtain more financing from
Speaker 4: its sponsor. Let's become a little bit of a battle cry,
Speaker 4: you see lenders basically asking for plural site protection. Right now,
Speaker 4: I won't ask you specifically about what happened with that episode,
Speaker 4: but how do you see this evolving in the industry.
Speaker 4: Do you think that we're going to see more creditor
Speaker 4: on creditor violence as some have been calling it.
Speaker 3: Well, you know, people tend to do what they can
Speaker 3: to enhance their position financially. Most people will stick to
Speaker 3: what they can do legally. Some people will stick to
Speaker 3: what they can do ethically. I don't know, there's some
Speaker 3: question about what that means, but you know, people, if
Speaker 3: there's an opening, people will take it. For the most part,
Speaker 3: there is an opening for what you call credit or
Speaker 3: credit of violence. That is proactive, proactive efforts to enhance
Speaker 3: your situation financially at the expense of somebody else.
Speaker 2: And so.
Speaker 3: The important point is that it's up to lenders to
Speaker 3: study the documentation well enough to prevent it.
Speaker 2: That's it.
Speaker 5: Are you getting Are you active in office space right now?
Speaker 5: Because it seems like the perfect storm for anybody who
Speaker 5: has the financing. We talked to Ego Namdar, a real
Speaker 5: state investor a couple of days ago, who is getting
Speaker 5: like seventy percent off really big important office buildings in
Speaker 5: New York, the capital of the world, Like, how can
Speaker 5: that not come back?
Speaker 3: Well, the question, Matt is very simple. You're getting let's
Speaker 3: say you're getting seventy off.
Speaker 2: Is that enough?
Speaker 3: And you know, the mere fact that the price of
Speaker 3: something is down doesn't make it a bye. It has
Speaker 3: to be that the price is down more than it
Speaker 3: should be given the fundamentals.
Speaker 2: And you know, I think it's going to be up to.
Speaker 3: The experts, people who've made their life in that world
Speaker 3: and with success, to make that assessment.
Speaker 2: You know, I think that.
Speaker 3: If there is a bunch of real estate funds formed
Speaker 3: this year, somebody who puts all their money into office
Speaker 3: and somebody who puts none of their money into office,
Speaker 3: one of them will be the best performer.
Speaker 2: I just don't know which one.
Speaker 1: You know, if you have these struggles that are still
Speaker 1: under the surface, we are just about, you know, five
Speaker 1: days away really from bank earnings, and the question is
Speaker 1: is we enter this era where they're about to meet
Speaker 1: new capital rules as well? Are there still just tremendous
Speaker 1: stresses under the system that people are not noticing.
Speaker 3: Well, it's the it's the small to mid size banks,
Speaker 3: the community and regional banks that are that are heavily
Speaker 3: weighted toward real estate loans. The biggest banks over two
Speaker 3: hundred and fifty billion in assets don't have much of
Speaker 3: a concentration.
Speaker 2: They're not at risk.
Speaker 3: But some of the smaller banks, you know, I think
Speaker 3: on average, the banks under two hundred and fifty billion
Speaker 3: in assets, loans on real estate make up one hundred
Speaker 3: and sixty percent of their regulatory capital. So some of
Speaker 3: them will find pain, especially the ones who lent above
Speaker 3: average and concentrated in regions that are troubled and so forth.
Speaker 3: So you know, I don't think it's a systemic risk
Speaker 3: that's going to put us in the sink, but I
Speaker 3: do think that you'll see some companies in trouble, and
Speaker 3: you know, one by one the authorities may have to
Speaker 3: bail them out, and may well.
Speaker 4: Do so, all right, Howard, Unfortunately we have to leave
Speaker 4: it there. Great to have you, of course on our
Speaker 4: launch day are big banks, of course, to Howard. Marxie
Speaker 4: is the co founder and co chairman of oak Tree Capital.