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Speaker 1: Bloomberg Audio Studios, podcasts, radio news.

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Speaker 2: Now, let's bring in Bruce Richard, CEO of Marathon Asset Management,

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Speaker 2: who of course watches all of these markets very closely,

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Speaker 2: in and out of them every day. Bruce, when you

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Speaker 2: think about this idea that interest rates could stay higher

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Speaker 2: for longer, the reality now that even a summer rate

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Speaker 2: cut is at the flip of a coin. Really, how

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Speaker 2: do you think through that uncertainty and how it impacts

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Speaker 2: the way you're investing.

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Speaker 3: Well, First, the Fed, you know, meets next week in

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Speaker 3: this Sunday's March Madness, and so the March madness comes

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Speaker 3: next Wednesday will be real because we'll be looking too skewl.

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Speaker 3: We'll be looking to mean the median where the dots

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Speaker 3: are two or free. What the Fed does. Pal's been

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Speaker 3: talking about the bump, and the bump isn't really a bump,

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Speaker 3: because a bump means is coming back down. And right

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Speaker 3: now it looks like the last couple of months it's

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Speaker 3: just smoothed out and plateauing now moving sideways at just

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Speaker 3: three and a half percent CPI, three percent PPI.

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Speaker 1: So we'll the Fed move move come June.

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Speaker 3: And you're absolute right, Sonali I think it's fifty to fifty,

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Speaker 3: and so this higher for longer is real. I think

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Speaker 3: Brian's right. I think your implication of that question that

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Speaker 3: you asked is right because I think it will be

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Speaker 3: higher for longer and will have a major impact on

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Speaker 3: a bunch of different cohorts in the marketplace.

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Speaker 2: Let's talk about those cohorts other ones you think that

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Speaker 2: are going to be most drastically impacted. Where do you

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Speaker 2: think most of the pain will be?

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Speaker 3: Well, I think there's four cohorts, just to define them.

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Speaker 1: So number one's.

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Speaker 3: Sirie, the top, very top, that's most leveraged. Two rates,

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Speaker 3: Number two there's companies, and three there's banks, and fourth

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Speaker 3: there's a consumer. So you want to unpack each one

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Speaker 3: or do you want to say, yeah, what's raining?

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Speaker 2: Say there with one specific part? Because let's start with

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Speaker 2: companies because you look at the market today and spreads

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Speaker 2: are super tight. You look at the market and you

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Speaker 2: think from high grade to an investment grade here or

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Speaker 2: junk bonds. Rather, you are looking at people who believe

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Speaker 2: that nothing is going to go wrong in this economy.

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Speaker 2: Do you agree with that?

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Speaker 3: No?

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Speaker 1: Absolutely not.

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Speaker 3: I mean the ig market is, you know, pretty tight,

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Speaker 3: it's you know, pushing up against all time tights and

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Speaker 3: high old bond spreads are also very very tight, and

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Speaker 3: so they're just too tight for the risk I think

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Speaker 3: in the marketplace, and I think they are vulnerable. But

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Speaker 3: with these type of spreads and easing of financial conditions

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Speaker 3: might maybe not fed funds rate, but the easing of

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Speaker 3: financial conditions.

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Speaker 1: It's the year of the.

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Speaker 3: Refine, and it's going to be like huge, huge volume

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Speaker 3: all year long for ig and high old companies. So

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Speaker 3: within that there is a mix, right, So you have

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Speaker 3: the ninety percent that will do well.

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Speaker 1: First of all, big companies.

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Speaker 3: Are going to do very well in this environment because

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Speaker 3: high rates and low financing costs allow them to make

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Speaker 3: a really nice return on their cash. It's the ten

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Speaker 3: percent of the tail of two cities that's the other

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Speaker 3: side of the equation that's struggling. And so take you know,

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Speaker 3: take a look at like somebody software bio companies and

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Speaker 3: healthcare bio companies, and some are retailers.

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Speaker 1: I just came on, you know.

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Speaker 3: Just a minute ago, right before I was checking out

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Speaker 3: emails and going through an inbox, SMP just released a

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Speaker 3: report that I'm going to have my team print out

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Speaker 3: when I get back. It shows twenty nine companies this

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Speaker 3: calendar year, already the fastest pace of defaults since two

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Speaker 3: thousand and nine. This calendar year. We don't read about it.

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Speaker 3: We don't talk about it. You know, I recently posted

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Speaker 3: about and Vivo. We just filed for bankruptcy. A green company.

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Speaker 3: It's not so green that you know, Blake cash. And

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Speaker 3: so there's lots of companies that are overlevered Anthology. You know, Quest,

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Speaker 3: two big software companies in the buyout space that we're

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Speaker 3: supposed to be leveraged.

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Speaker 1: Eight to ten times positive.

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Speaker 3: Ebadah didn't grow into their models and for their forecasts

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Speaker 3: and so elevered about fifteen times debt to Ebadah.

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Speaker 2: You know, it begs the question here, we have not

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Speaker 2: really seen a real distress cycle, and do you think

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Speaker 2: that one is still coming?

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Speaker 3: So there's five trillion dollars of debt between high yield

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Speaker 3: and loans US and Europe, and we think there's around

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Speaker 3: four to five hundred billion that will be restructured.

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Speaker 1: So you can say.

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Speaker 3: There's no cycle because there hasn't been a recession. But

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Speaker 3: last year was a pretty decent year for distressed and dislocation,

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Speaker 3: with about one hundred and eighty billion dollars that went

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Speaker 3: through restructuring, and this year, we think that number going

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Speaker 3: into next year, in the next two years could be

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Speaker 3: three hundred and fifty billion or double that. So we're

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Speaker 3: calling for five hundred billion, and that'll be bigger or

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Speaker 3: just as big as what happened in two thousand and

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Speaker 3: eight and two thousand and nine. Maybe not in percentage term,

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Speaker 3: because the markets have grown since then, but in absolute

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Speaker 3: volume terms. And so we're seeing that again in software

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Speaker 3: and retail, in healthcare companies, and across industries.

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Speaker 1: They're true leverage.

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Speaker 2: It's pretty incredible here if you think about what you're

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Speaker 2: drawing out, this idea that you'll see more bankruptcies, this

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Speaker 2: idea that more companies may face through structurings, this idea

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Speaker 2: that more of corporate America is now laying off more individuals.

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Speaker 2: Do you think that the data can either get much

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Speaker 2: softer for economic data or do you think that is

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Speaker 2: masking some of the problems that we're seeing already in

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Speaker 2: the economy.

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Speaker 3: Well, the masking is coming from the big government spending

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Speaker 3: and those huge deficits that we're running, because it's coming

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Speaker 3: a lot of growth is coming from that part of

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Speaker 3: the equation and Corporate America.

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Speaker 1: It's again a tail of two cities. You have SMP,

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Speaker 1: which is up eight percent.

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Speaker 3: You have you know, IWM, which is Russell two thousand,

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Speaker 3: which is.

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Speaker 1: Flat on the year.

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Speaker 3: And you have a lot of companies that are levered

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Speaker 3: that are burning casts to service debt. And if you

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Speaker 3: look at the Moody's report and you look at the

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Speaker 3: B three rated companies, there's.

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Speaker 1: A big cohort.

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Speaker 3: So we're around thirty five to fifty percent of companies

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Speaker 3: that have to burn cash just to service their debt.

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Speaker 3: So that's the tail of two cities that exists. We

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Speaker 3: see that in CIRE as well. We see that with

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Speaker 3: the banks. The big banks are really safe and fortress

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Speaker 3: balance sheets JP Morgan, Bank of America, City Wells, and

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Speaker 3: the big trust banks like you know Northern Trust and

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Speaker 3: State Street and Bank of New York. There are fortress

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Speaker 3: balance sheets really safe. But there's four four hundred banks

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Speaker 3: in this country and about it's ninety ten rule about

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Speaker 3: ten percent of those have really high funding costs into

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Speaker 3: double digits. In addition to that, have balance sheets where

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Speaker 3: to really trouble because they have about forty to fifty

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Speaker 3: percent in real estate, and so we think they're already

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Speaker 3: insolvent or moving towards insolvency, and the industry will continue

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Speaker 3: to consolidate.

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Speaker 1: So it's happening in the banking.

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Speaker 3: Sector, it's happening in the corporate sector, it's happening in

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Speaker 3: real estate. It's also happening with consumers. We see delinquency

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Speaker 3: rates among consumers for both all those in credit cards,

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Speaker 3: having searched from less than two percent to over six

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Speaker 3: percent today in.

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Speaker 1: The last twelve months.

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Speaker 3: So you're seeing this tale of two cities play out

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Speaker 3: at these higher rates.

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Speaker 2: Now, I want to talk about real estate more because

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Speaker 2: you have very divergent views here. You have some people

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Speaker 2: saying that you don't really have a floor yet when

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Speaker 2: it comes to property values, when it comes to commercial

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Speaker 2: real estate more broadly, you have Blackstone saying real estate

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Speaker 2: prices have bottomed and it's an opportunity to buy on

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Speaker 2: that spectrum.

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Speaker 1: Where do you stand?

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Speaker 3: Well, I stand with I wouldn't argue with Jonathan Gray's

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Speaker 3: pretty brilliant guy, and Blackstone has a lot of very

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Speaker 3: good on ground data.

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Speaker 1: But let me share with you the data that we have.

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Speaker 3: So there's about twenty one to twenty two trillion of

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Speaker 3: real estate in the market, and a lot of companies

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Speaker 3: own their own real estate, and so they finance it

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Speaker 3: on balance sheet as opposed to putting debt on it.

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Speaker 3: But the eight trillion dollars of property that is financed

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Speaker 3: with five point six trillion of debt, a lot of

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Speaker 3: that is upside down. How much of that is upside down? Well,

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Speaker 3: Barry Stronglick says.

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Speaker 1: It's a trillion. We'd actually agree with Barry.

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Speaker 3: We think it's about a trillion that's upside down, where

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Speaker 3: the equity is basically depleted, where that one hundred million

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Speaker 3: dollar property seventy million dollar loan is only worth seventy million,

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Speaker 3: and so either the sponsor has to come up with

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Speaker 3: more money to roll that or they're going to have

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Speaker 3: to flip the keys or lose their property. So here's

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Speaker 3: the punchline finale. So this year it's a record and

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Speaker 3: look at that record wall. You have nine hundred billion

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Speaker 3: dollars of debt come and do this year when there's

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Speaker 3: only supposed to be five hundred and forty billion debt

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Speaker 3: come and do this year? Why because a lot of

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Speaker 3: those loans, hundreds of billions, got extended and amended or

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Speaker 3: kick the can down the road into this year because

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Speaker 3: they couldn't refinance. The markets are open, and the big

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Speaker 3: question is can they refinance. Take that one hundred million

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Speaker 3: dollar property a seventy million dollar a loan with no

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Speaker 3: EQUI left, and it's say Class B or C office building,

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Speaker 3: what's the alternative use? It's raising that building, taking it

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Speaker 3: down to the land value, which means it's only worth

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Speaker 3: probably thirty cents on a dollar.

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Speaker 2: Well, that is a note to leave it on Bruce

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Speaker 2: and we will have to have you back soon. As

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Speaker 2: we head in that direction. Wall Street has become pretty

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Speaker 2: expert here at kicking the can down the road