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Speaker 1: Pleased to say that joining us now for an exclusive

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Speaker 1: interview is Armand Panosian. He is head of Performing Credit

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Speaker 1: at oak Tree Capital Management, which is one of the

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Speaker 1: largest distret desk investors in the world, and it was

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Speaker 1: just this week it was announced that he will be

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Speaker 1: co CEO of the firm starting in the first quarter

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Speaker 1: of next year. Arman, great to have you with us.

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Speaker 1: I want to get to your views on the market,

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Speaker 1: but let's talk about the news of the week. The

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Speaker 1: co CEO label. First of all, congratulations, it's not a

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Speaker 1: label we see too often, a co CEO. How is

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Speaker 1: it going to work at oak Tree?

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Speaker 2: Thank you, Katie. I appreciate the opportunity to be on

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Speaker 2: real yield. The co CEO designation at oak Tree. Yes,

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Speaker 2: it is a new one and you often don't see it.

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Speaker 2: But myself and my partner Bob O'Leary, who have been

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Speaker 2: at the firm now sixteen years in my case and

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Speaker 2: over twenty years in Bob's case. We have worked together

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Speaker 2: directly in our Opportunities group for many many years, and

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Speaker 2: several years ago I moved over to the performing credit strategies.

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Speaker 2: Our partnership is very strong across all things oak Tree.

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Speaker 2: We work very closely with our credit areas and our

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Speaker 2: non credit areas as well as our non investment areas

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Speaker 2: of the firm, having been here for so long, so

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Speaker 2: we are not really dividing the world in terms of

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Speaker 2: the opportunity set or the responsibilities. That is truly a partnership.

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Speaker 2: But I will continue to oversee the performing credit strategies

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Speaker 2: and Bob will continue to see the opportunities group. And

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Speaker 2: I think there's a tremendous amount of opportunity collectively at

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Speaker 2: oak Tree given the current market environment and the economic backdrop.

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Speaker 2: So we're really excited to move forward and have to

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Speaker 2: really build on the thirty year history of oak Tree

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Speaker 2: built by Howard Marx, Bruce Karsh and the other co founders.

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Speaker 2: We're on really solid footing and excited and humbled by

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Speaker 2: the opportunity to lead the firm going forward.

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Speaker 1: Well, let's talk about some of the opportunities in the

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Speaker 1: market he took, because just a couple of weeks ago

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Speaker 1: over at Super Return in Berlin, you called this period

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Speaker 1: that we're in a new era of tight credit markets.

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Speaker 1: Where are you seeing that tightness right now?

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Speaker 2: Yeah, we're seeing it across multiple areas. So first and foremost,

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Speaker 2: the liquidity in the market is meaningfully lower today than

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Speaker 2: what it was pre COVID or even in twenty twenty one.

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Speaker 2: We're not seeing a lot of trading volume. We're not

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Speaker 2: seeing a lot of new issuance in high heeled bonds

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Speaker 2: or in senior loans, and part of that is because

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Speaker 2: there just aren't willing borrowers, and in the case of

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Speaker 2: M and A activity, we're not seeing willing sellers at

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Speaker 2: what are today depressed valuation multiples. It's really because at

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Speaker 2: this point we're at a massive inflection point around rates,

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Speaker 2: where we've had the inversion or the reversal of forty

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Speaker 2: years of downward movement and rates and about twelve or

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Speaker 2: thirteen years of easy money in the markets. With the

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Speaker 2: rapid inflation that we've seen in the economy, the FED,

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Speaker 2: and they've said as much even this week, the FED

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Speaker 2: is very much of the opinion that it needs to

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Speaker 2: raise rates to battle inflation, to get to the point

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Speaker 2: where we actually have real real rates, in other words,

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Speaker 2: rates in excess of the nominal inflationary picture. So that's good.

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Speaker 1: I was just going to say, of course, we've seen

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Speaker 1: extraordinary happenings on the monetary policy front. I'm really curious though,

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Speaker 1: in the time that we have with you to hear

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Speaker 1: your thoughts on what we've seen in the banking sector,

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Speaker 1: because i know you've made the point in the past

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Speaker 1: that you're expecting tougher regulation ahead for US banks. What

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Speaker 1: opportunities would you expect that to create, and are you

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Speaker 1: seeing those opportunities surface already?

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Speaker 2: Yes. Absolutely. In the case of investment banks that use

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Speaker 2: their balance sheets to commit to deals to syndicate to

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Speaker 2: investors in the broadly syndicated side, a broadly syndicated loan side,

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Speaker 2: or in the US high bond side, we are seeing

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Speaker 2: a reduction and access to those balance sheets and a

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Speaker 2: reduction in the new issuance volume seen from those banks.

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Speaker 2: Because the hung loans that were placed on the balance

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Speaker 2: sheets in twenty twenty two and were placed at massive

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Speaker 2: discounts into the market in late twenty twenty two in

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Speaker 2: early twenty twenty three really created a big hole in

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Speaker 2: the bank balance sheets in the billions of dollars, and

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Speaker 2: therefore the risk desks and regulators are watching this very closely.

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Speaker 2: In the case of the commercial banks or regional banks

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Speaker 2: in the US, they have tremendous amounts of real estate

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Speaker 2: loans and other corporate loans, as well as a FED

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Speaker 2: that has articulated a higher level of equity capital needed

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Speaker 2: to manage those banks. And as a result, what we

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Speaker 2: were seeing how that played through in the markets is

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Speaker 2: a reduction in lending activity by commercial banks across the

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Speaker 2: board in real estate as well as corporate lending, which

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Speaker 2: allows for private lending, non regulated entities like investment managers

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Speaker 2: such as oak Tree to step in into that void

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Speaker 2: and partner with banks in some cases as well as

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Speaker 2: just lend directly to borrowers or real estate as well

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Speaker 2: as corporate lending that no longer have that incumbent lender

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Speaker 2: available to them.

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Speaker 1: And I want to get to fundraising, but just quickly

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Speaker 1: on that point, have you started to see banks start

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Speaker 1: to offload some of that loans. There's a great story

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Speaker 1: on the terminal to that effect that basically you're seeing

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Speaker 1: that already happen. Is that something that oak Tree is

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Speaker 1: trying to take advantage of.

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Speaker 2: Yes, we have seen it begin but it's only the beginning.

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Speaker 2: I think the depth of that opportunity is yet to come.

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Speaker 2: There have been some transactions, there have been many conversations

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Speaker 2: as well as discussions about partnership between the private lending

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Speaker 2: universe asset manager universe with banks. But there are transactions

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Speaker 2: of portfolios in both real estate and corporate lending that

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Speaker 2: have already occurred, and based on the conversations, I think

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Speaker 2: we'll continue to occur at a more rapid clip over

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Speaker 2: the course of the next few quarters.

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Speaker 1: We'll hope to have you back to talk about those conversations.

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Speaker 1: But let's talk about some other news from oak Tree.

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Speaker 1: In the past couple of days, you also announced the

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Speaker 1: close of oak Trees Life Science Lending Fund for two

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Speaker 1: point three billion dollars. Tell us a little bit about

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Speaker 1: that sept and what are you looking at there.

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Speaker 2: Life sciences is an attractive industry from a lending perspective

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Speaker 2: for multiple reasons. First of all, it requires specialized knowledge,

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Speaker 2: and therefore it's a less efficient marketplace for competitors to

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Speaker 2: lend in. We're able to get more attractive legal terms,

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Speaker 2: better pricing, lower loan to values than you would typically

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Speaker 2: see in other asset classes in the lending universe. As

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Speaker 2: a result of that, second, life sciences companies are not

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Speaker 2: GDP correlated. If a company is good at curing cancer,

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Speaker 2: saving lives, changing lives doesn't really matter if we're in

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Speaker 2: a recession or having some sort of broad market dislocation.

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Speaker 2: From a credit perspective, the company's performance makes it such

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Speaker 2: that our loans to these businesses are well covered. So

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Speaker 2: we really like that. From a diversification standpoint, in a

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Speaker 2: broader credit portfolio, uncorrelated assets that will not kind of

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Speaker 2: have the same outcome as an industrial or consumer business might.

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Speaker 2: So that those are the two main reasons why we

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Speaker 2: really like it. And the third I would say is,

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Speaker 2: you know, there has been a meaningful reduction in the

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Speaker 2: valuation multiples for these businesses since the pandemic. During the pandemic,

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Speaker 2: they rallied very hard, and since then they are off

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Speaker 2: you know, fifty sixty seventy percent, which means that the

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Speaker 2: cost of incurring or the cost of raising capital in

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Speaker 2: the equity markets is prohibitively expensive for these companies at

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Speaker 2: this point, too diluted and therefore finding alternative solutions like

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Speaker 2: the ones that we offer at oak Tree in our

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Speaker 2: life sciences business are very attractive at the time, and

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Speaker 2: we're seeing a meaningful increase in our in our deal pipeline.

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Speaker 1: Arman, it's great to get some time with you hope

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Speaker 1: to have you back soon. That is armand Panosian. Thank

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Speaker 1: you so much,