1 00:00:18,120 --> 00:00:20,920 Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets podcast. 2 00:00:21,079 --> 00:00:23,640 Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg. 3 00:00:24,200 --> 00:00:26,720 Speaker 1: This week, we're very pleased to welcome John Dorfman, chief 4 00:00:26,760 --> 00:00:30,160 Speaker 1: investment officer at Napier Park Global Capital. How are you, John, 5 00:00:31,000 --> 00:00:34,040 Speaker 1: I'm very well, James, Thank you so much for joining us. 6 00:00:34,040 --> 00:00:36,440 Speaker 1: We're very excited to hear your market views and outlook. 7 00:00:36,680 --> 00:00:39,040 Speaker 1: We're also delighted to welcome back Lisa Lee, who covers 8 00:00:39,080 --> 00:00:41,320 Speaker 1: credit markets for Bloomberg News in London. Great to see 9 00:00:41,320 --> 00:00:43,880 Speaker 1: you again, Lisa, great to be here again. And last 10 00:00:43,880 --> 00:00:47,320 Speaker 1: but absolutely not Lise from Bloomberg Intelligence. Excellent to see 11 00:00:47,320 --> 00:00:49,720 Speaker 1: Tollu Alamutu, also in London. Welcome back, Tolu. 12 00:00:50,080 --> 00:00:50,479 Speaker 2: Thank you. 13 00:00:50,600 --> 00:00:50,920 Speaker 3: James. 14 00:00:51,000 --> 00:00:52,199 Speaker 2: Great to be here as always. 15 00:00:52,280 --> 00:00:54,360 Speaker 1: So let's start with you John, Thanks very much again 16 00:00:54,400 --> 00:00:56,760 Speaker 1: for joining us on the Credit Edge. Before we dig 17 00:00:56,800 --> 00:00:59,279 Speaker 1: into the specifics of your portfolio and what you see 18 00:00:59,280 --> 00:01:01,960 Speaker 1: the best opportunity right now and of course the risks, 19 00:01:02,600 --> 00:01:05,480 Speaker 1: let's talk about your macro views, and in particular on 20 00:01:05,560 --> 00:01:09,440 Speaker 1: my mind is the Federal reserve rate cut. Bets are 21 00:01:09,440 --> 00:01:11,880 Speaker 1: being dialed down right now. Options traders, some of them 22 00:01:11,880 --> 00:01:14,360 Speaker 1: are even betting on hikes by the Fed this year. 23 00:01:15,360 --> 00:01:17,679 Speaker 1: Compare that to only a few months ago when we 24 00:01:17,680 --> 00:01:23,360 Speaker 1: were absolutely pricing very dubbish policy from central banks with 25 00:01:23,440 --> 00:01:25,360 Speaker 1: a lot of rate cuts coming starting as soon as 26 00:01:25,360 --> 00:01:29,040 Speaker 1: this month, you know, March. That's obviously all flipped as 27 00:01:29,080 --> 00:01:31,880 Speaker 1: inflation data continues to come in high. At the same time, 28 00:01:31,880 --> 00:01:34,640 Speaker 1: the US economy seems to be strong. Consumers are still 29 00:01:34,680 --> 00:01:38,640 Speaker 1: buying despite higher prices. Maybe the dreaded recession won't actually happen. 30 00:01:39,480 --> 00:01:42,640 Speaker 1: But where does that leave credit? John everyone comes in 31 00:01:42,880 --> 00:01:45,760 Speaker 1: on this show and is very, very bullish, even though 32 00:01:45,840 --> 00:01:48,480 Speaker 1: rates will probably stay high for longer. What's your take? 33 00:01:48,800 --> 00:01:52,280 Speaker 4: I think, to step back a moment, we went into 34 00:01:52,360 --> 00:01:56,320 Speaker 4: this year basically explaining to our clients that our central 35 00:01:56,400 --> 00:01:59,840 Speaker 4: investment view was that the magnitude of rate cuts that 36 00:02:00,160 --> 00:02:02,720 Speaker 4: priced in the interest rate market was far too many. 37 00:02:03,080 --> 00:02:05,880 Speaker 4: So we were always of the camp that the economy 38 00:02:06,120 --> 00:02:09,760 Speaker 4: wasn't weak enough to merit the rate cuts that were implied. 39 00:02:10,240 --> 00:02:13,680 Speaker 4: And I still feel that way. And so from a 40 00:02:13,720 --> 00:02:19,200 Speaker 4: credit perspective, you know, we think the real economy decent 41 00:02:20,240 --> 00:02:23,400 Speaker 4: and the real negative part of the credit market is 42 00:02:23,440 --> 00:02:27,240 Speaker 4: the bottom end, so it's the most levered industries, the 43 00:02:27,240 --> 00:02:31,840 Speaker 4: most levered consumers and businesses that rely on leverage because 44 00:02:31,840 --> 00:02:33,560 Speaker 4: the cost of leverage is so much higher. 45 00:02:35,000 --> 00:02:37,440 Speaker 1: So how do you position for that? What are you 46 00:02:37,480 --> 00:02:39,560 Speaker 1: doing too? I mean you obviously got that call right, 47 00:02:39,720 --> 00:02:44,040 Speaker 1: a lot of people didn't, But what's your strategy around that? 48 00:02:45,280 --> 00:02:49,000 Speaker 4: So what we're really looking for at this moment are 49 00:02:49,200 --> 00:02:55,440 Speaker 4: asset classes that provide a significant risk premium relative to 50 00:02:55,480 --> 00:02:58,360 Speaker 4: the amount of defaults that might happen if the economy 51 00:02:58,440 --> 00:03:04,080 Speaker 4: were to develop more recessionary cycle. So we see that 52 00:03:04,240 --> 00:03:07,480 Speaker 4: mostly in the credit intensive structure credit market. I think 53 00:03:07,520 --> 00:03:09,399 Speaker 4: when we compare it to you know, on the run 54 00:03:09,480 --> 00:03:13,079 Speaker 4: high yield for example, the spreads are very very low currently. 55 00:03:14,680 --> 00:03:16,520 Speaker 1: So when you talk about structured finance, I mean, is 56 00:03:16,520 --> 00:03:20,400 Speaker 1: that securitization? Is that repackaging of debt like consumer loans 57 00:03:20,760 --> 00:03:22,440 Speaker 1: or company debt? I mean, what does that mean? It 58 00:03:22,440 --> 00:03:25,679 Speaker 1: covers obviously a huge range of things. 59 00:03:25,360 --> 00:03:27,760 Speaker 4: It's it's all of the above. You know. From our 60 00:03:27,760 --> 00:03:31,440 Speaker 4: point of view, what we're really focused on is non 61 00:03:31,560 --> 00:03:36,720 Speaker 4: investment grade structure credit, frequently securitizations. It can also be 62 00:03:37,720 --> 00:03:42,480 Speaker 4: private structures where loans are basically bifurcated into different asset classes. 63 00:03:43,080 --> 00:03:48,000 Speaker 4: And we're looking kind of corporate mortgage, consumer auto US 64 00:03:48,000 --> 00:03:50,920 Speaker 4: in Europe, and what we found is those markets don't 65 00:03:50,960 --> 00:03:54,440 Speaker 4: move together at all, so the capital is highly fragmented. 66 00:03:54,520 --> 00:03:58,080 Speaker 1: Currently, we talk to other investors about how much flow 67 00:03:58,160 --> 00:03:59,800 Speaker 1: is coming out of banks? Is that where you're finding 68 00:03:59,800 --> 00:04:01,480 Speaker 1: these opportunities to buy? 69 00:04:02,200 --> 00:04:06,120 Speaker 4: Typically it comes from three different sources. One is banks, 70 00:04:07,440 --> 00:04:12,200 Speaker 4: the second is asset holders that have received redemptions for 71 00:04:12,960 --> 00:04:17,200 Speaker 4: really liquidity reasons from underlying clients. And the third is 72 00:04:17,279 --> 00:04:21,400 Speaker 4: originators themselves, So loan originators that have held too many 73 00:04:21,480 --> 00:04:25,960 Speaker 4: loans on their own balance sheet and really need to 74 00:04:26,000 --> 00:04:29,040 Speaker 4: sell off the loans to be able to generate more origination. 75 00:04:29,600 --> 00:04:33,200 Speaker 4: That's very common in things like auto lending. It's common 76 00:04:33,320 --> 00:04:36,520 Speaker 4: in our US residential real estate lending. 77 00:04:37,320 --> 00:04:40,600 Speaker 1: So when we talk to other guests you know, about 78 00:04:40,640 --> 00:04:44,080 Speaker 1: this opportunity, I mean they are very excited obviously, but 79 00:04:44,120 --> 00:04:46,479 Speaker 1: I do again ask the question, you know, why do 80 00:04:46,520 --> 00:04:48,560 Speaker 1: you have to become you know, why do you have 81 00:04:48,600 --> 00:04:50,480 Speaker 1: to get fancy with credit given that you can get 82 00:04:50,560 --> 00:04:53,120 Speaker 1: very very high yields for playing vanilla stuff, you know, 83 00:04:53,160 --> 00:04:55,240 Speaker 1: even in investment grade. I mean, why do you have 84 00:04:55,279 --> 00:04:56,920 Speaker 1: to stretch for yield in this environment? 85 00:04:58,080 --> 00:04:59,719 Speaker 4: I think it's a great question. A lot of it 86 00:04:59,760 --> 00:05:04,960 Speaker 4: to depends on the overall acid allocation of individual investors, 87 00:05:05,960 --> 00:05:10,480 Speaker 4: family office investors, and institutional investors. I think for kind 88 00:05:10,480 --> 00:05:14,760 Speaker 4: of a I want yield that's highly highly liquid. I 89 00:05:14,800 --> 00:05:18,120 Speaker 4: think the on the run hiled investment grade give yields 90 00:05:18,160 --> 00:05:22,080 Speaker 4: that are very high relative to the last fifteen years, 91 00:05:22,400 --> 00:05:25,560 Speaker 4: but if you adjusted for inflation, it's not quite as high. 92 00:05:26,279 --> 00:05:29,760 Speaker 4: What we find is we're focused on the component of 93 00:05:29,800 --> 00:05:32,880 Speaker 4: the acid allocation that is more yield seeking, so it's 94 00:05:32,960 --> 00:05:37,120 Speaker 4: more as an equity alternative or as a risk asset 95 00:05:37,160 --> 00:05:40,719 Speaker 4: alternative credit. For the first time in fifteen years, you 96 00:05:40,760 --> 00:05:44,520 Speaker 4: can actually create portfolios to give equity like returns, and 97 00:05:44,560 --> 00:05:47,200 Speaker 4: that's something we haven't seen since before the GFC. 98 00:05:48,000 --> 00:05:52,520 Speaker 3: John my opinion colleague, wrote about banks coming back into 99 00:05:52,560 --> 00:05:56,800 Speaker 3: credit derivatives mostly as a capital relief trade, and I 100 00:05:56,839 --> 00:05:59,560 Speaker 3: know you've been here since the early days of credit derivatives, 101 00:05:59,560 --> 00:06:02,800 Speaker 3: and to hear about your thoughts on this and also 102 00:06:02,880 --> 00:06:06,000 Speaker 3: what trades Napier has done and how it's changed since 103 00:06:06,040 --> 00:06:07,080 Speaker 3: you've started. 104 00:06:07,760 --> 00:06:10,480 Speaker 4: That's a really great point, Lisa. There's been a lot 105 00:06:10,560 --> 00:06:16,040 Speaker 4: of focus on banks transferring loan portfolios through what they 106 00:06:16,080 --> 00:06:23,599 Speaker 4: call credit risk transference or CRTs and SRTs. I was 107 00:06:23,640 --> 00:06:25,960 Speaker 4: actually involved in one of the first ones ever done, 108 00:06:26,080 --> 00:06:29,080 Speaker 4: which to date myself was almost thirty years ago when 109 00:06:29,080 --> 00:06:32,240 Speaker 4: I was in Europe. So this is a very very 110 00:06:32,400 --> 00:06:37,320 Speaker 4: long standing technology and right now I think it's going 111 00:06:37,360 --> 00:06:40,280 Speaker 4: to be an area of significant growth. And the reason 112 00:06:40,360 --> 00:06:44,680 Speaker 4: I think that is what this technology is designed to 113 00:06:44,839 --> 00:06:48,920 Speaker 4: do is to free up capital for banks when banks 114 00:06:49,000 --> 00:06:53,919 Speaker 4: equity prices trade below book value. This is a much 115 00:06:54,480 --> 00:06:59,760 Speaker 4: much more efficient way to effectively create equity capital than 116 00:06:59,839 --> 00:07:02,520 Speaker 4: any other method, and so I think we're going to 117 00:07:02,640 --> 00:07:06,120 Speaker 4: see continued growth in this space. It happens in two 118 00:07:06,200 --> 00:07:09,120 Speaker 4: kind of formats. One is you could think of as 119 00:07:09,320 --> 00:07:13,960 Speaker 4: a public syndicated securitization and the other is a private 120 00:07:14,040 --> 00:07:18,280 Speaker 4: bilateral risk transfer and Napier Park's been involved in both. 121 00:07:18,720 --> 00:07:20,960 Speaker 4: And as I said, this is something that we've been 122 00:07:21,000 --> 00:07:22,400 Speaker 4: involved in for many, many. 123 00:07:22,240 --> 00:07:25,640 Speaker 3: Years, and it seems to be happening more in Europe 124 00:07:25,640 --> 00:07:27,840 Speaker 3: than in the US. Do you see this happening for 125 00:07:28,000 --> 00:07:30,640 Speaker 3: the US firms or is just the cost of capitals 126 00:07:30,640 --> 00:07:34,400 Speaker 3: to invest or will the basil end game actually change 127 00:07:34,400 --> 00:07:34,840 Speaker 3: things up? 128 00:07:36,640 --> 00:07:39,040 Speaker 4: I think you will see more in the US, but 129 00:07:40,200 --> 00:07:42,240 Speaker 4: I think one of the main reasons you see it 130 00:07:42,280 --> 00:07:45,440 Speaker 4: more in Europe is the point I made about European 131 00:07:45,520 --> 00:07:48,400 Speaker 4: banks trade at much lower levels relative to book than 132 00:07:48,520 --> 00:07:52,600 Speaker 4: US banks, so US banks have, you know, many more 133 00:07:54,000 --> 00:07:57,880 Speaker 4: options in terms of ability to effectively create equity and 134 00:07:58,000 --> 00:08:00,880 Speaker 4: tier one capital. But I do think you'll see more 135 00:08:00,880 --> 00:08:02,600 Speaker 4: in the US. Right now. What we're seeing in the 136 00:08:02,680 --> 00:08:08,840 Speaker 4: US are sales of whole loans rather than securitizations. But 137 00:08:08,880 --> 00:08:14,240 Speaker 4: there are some US banks doing the credit derivative synthetic scuritizations, 138 00:08:14,280 --> 00:08:15,920 Speaker 4: It's just not as common as Europe. 139 00:08:16,680 --> 00:08:18,640 Speaker 2: John, one of the things that you mentioned right at 140 00:08:18,680 --> 00:08:23,760 Speaker 2: the start was the vulnerability of the most indebted parts 141 00:08:23,800 --> 00:08:27,280 Speaker 2: of the economy. How do you then square that with, 142 00:08:27,960 --> 00:08:31,880 Speaker 2: as you said, going for equity like returns and for 143 00:08:32,280 --> 00:08:35,280 Speaker 2: going for high yield rather than investment grade. Are you 144 00:08:35,400 --> 00:08:40,319 Speaker 2: concerned then that those higher yields might just be reflecting 145 00:08:40,360 --> 00:08:47,000 Speaker 2: the concerns that people have about those parts of the economy. 146 00:08:47,600 --> 00:08:51,400 Speaker 4: I think in a lot of single name investment situations 147 00:08:51,440 --> 00:08:54,280 Speaker 4: that actually is the case. The yield is there because 148 00:08:54,400 --> 00:08:57,240 Speaker 4: it's not clear the company is going to survive, So 149 00:08:57,280 --> 00:09:00,120 Speaker 4: you could think of it as a lot if you 150 00:09:00,120 --> 00:09:01,840 Speaker 4: think of it a rating based It's a lot of the 151 00:09:01,880 --> 00:09:06,160 Speaker 4: triple C based companies are in that situation. Now. That's 152 00:09:06,160 --> 00:09:08,959 Speaker 4: why we're focused more on structure credit because we're buying 153 00:09:08,960 --> 00:09:13,600 Speaker 4: diversified portfolios where we can stress test it against an 154 00:09:13,840 --> 00:09:17,120 Speaker 4: elongated recession and make sure that we still don't have 155 00:09:17,160 --> 00:09:20,480 Speaker 4: any impairments. But on the single name side, it's it's 156 00:09:20,920 --> 00:09:22,000 Speaker 4: less obvious. 157 00:09:21,640 --> 00:09:24,320 Speaker 1: Currently, John, on the equity like returns, I'm just looking 158 00:09:24,320 --> 00:09:25,840 Speaker 1: at the S and P against some of the debt 159 00:09:26,320 --> 00:09:28,640 Speaker 1: markets that we cover. S and P over the last 160 00:09:28,679 --> 00:09:31,840 Speaker 1: twelve months up thirty percent. I yield neverage loans up 161 00:09:31,880 --> 00:09:35,559 Speaker 1: around eleven percent. Are we talking about thirty percent returns here? 162 00:09:37,200 --> 00:09:40,240 Speaker 4: I wish that were the case. I think you will 163 00:09:40,280 --> 00:09:46,400 Speaker 4: be in the low to mid teams returns, which is 164 00:09:46,559 --> 00:09:51,199 Speaker 4: more consistent with what most investors feel. The upper end 165 00:09:51,400 --> 00:09:54,480 Speaker 4: of equity returns will be on a forward basis for 166 00:09:54,520 --> 00:09:56,960 Speaker 4: the next three to five years rather than what they've 167 00:09:56,960 --> 00:09:59,160 Speaker 4: been for the last year or two, because I think 168 00:09:59,160 --> 00:10:01,520 Speaker 4: the last year or two is really been dominated by 169 00:10:02,040 --> 00:10:05,000 Speaker 4: artificial intelligence and the growth you know, in particular of 170 00:10:05,040 --> 00:10:12,000 Speaker 4: the US of the large tech companies, and back to 171 00:10:12,040 --> 00:10:16,240 Speaker 4: credit returns. You know, it's interesting last year, our credit funds, 172 00:10:16,400 --> 00:10:20,880 Speaker 4: the money in the ground always invested funds, we returned 173 00:10:20,920 --> 00:10:26,400 Speaker 4: twenty percent net to our clients, and our drawn return 174 00:10:26,559 --> 00:10:31,320 Speaker 4: vehicles returned of thirty three percent net to our clients. 175 00:10:31,360 --> 00:10:35,000 Speaker 4: So actually those were you know, definitely equity type of returns. 176 00:10:35,520 --> 00:10:39,679 Speaker 1: When you start talking about securitization and to add about derivatives, 177 00:10:40,240 --> 00:10:45,320 Speaker 1: why why is it, you know, not a hugely risky proposition. Now, 178 00:10:45,320 --> 00:10:46,679 Speaker 1: why why is this a good thing? 179 00:10:47,280 --> 00:10:51,440 Speaker 4: I think there's a lot of standardization and transparency that 180 00:10:51,520 --> 00:10:55,520 Speaker 4: has developed in the derivative and securitization markets over the 181 00:10:55,559 --> 00:10:58,880 Speaker 4: last ten or twenty years. Certainly in the early days 182 00:10:59,200 --> 00:11:02,400 Speaker 4: there were a lot of financial accidents, but that's less 183 00:11:02,440 --> 00:11:06,200 Speaker 4: the case now. I think from our point of view, 184 00:11:06,200 --> 00:11:08,840 Speaker 4: it's worth highlighting that if you look at just the 185 00:11:08,960 --> 00:11:13,400 Speaker 4: US high market, there is more credit the trades through 186 00:11:13,400 --> 00:11:17,199 Speaker 4: the index derivative than there is in every higher bond 187 00:11:17,200 --> 00:11:21,880 Speaker 4: put together. So this is a very, very common accepted 188 00:11:22,559 --> 00:11:26,320 Speaker 4: method of transferring corporate credit. I think, you know, if 189 00:11:26,360 --> 00:11:29,120 Speaker 4: you look at things like mortgage risk, there have been 190 00:11:30,120 --> 00:11:33,640 Speaker 4: many derivative blow ups over the years and a lot 191 00:11:33,679 --> 00:11:35,680 Speaker 4: more leverage, but in corporates it's much less. 192 00:11:35,720 --> 00:11:38,760 Speaker 2: So John I had a question about the returns figures 193 00:11:38,760 --> 00:11:42,760 Speaker 2: that you mentioned. I mean, obviously extraordinarily impressive, So congratulations 194 00:11:42,840 --> 00:11:46,439 Speaker 2: on those figures for twenty twenty four. Do you think 195 00:11:46,480 --> 00:11:50,800 Speaker 2: those sorts of returns will be repeatable? Could you see 196 00:11:50,800 --> 00:11:53,640 Speaker 2: that again? And given that we've been talking a little 197 00:11:53,640 --> 00:11:57,040 Speaker 2: bit about US versus Europe, where do you think those 198 00:11:57,080 --> 00:12:01,000 Speaker 2: sorts of returns could more likely come from either US 199 00:12:01,120 --> 00:12:02,000 Speaker 2: or maybe here? 200 00:12:02,800 --> 00:12:05,600 Speaker 4: I think in Europe a pretty significant part of our 201 00:12:05,640 --> 00:12:09,800 Speaker 4: businesses in Europe. Both Jim, my business partner, and I 202 00:12:09,840 --> 00:12:11,560 Speaker 4: have spent a lot of time in Europe. I was 203 00:12:11,559 --> 00:12:16,600 Speaker 4: there for about fifteen years investing in trading credit, and 204 00:12:16,960 --> 00:12:20,800 Speaker 4: I think last year Europe was I believe our second 205 00:12:21,160 --> 00:12:25,480 Speaker 4: most significant profit contributor, so it was very significant. I 206 00:12:25,520 --> 00:12:28,840 Speaker 4: think this year overall returns, as I said, will probably 207 00:12:28,840 --> 00:12:32,520 Speaker 4: be in the teens type area in our strategies, and 208 00:12:33,800 --> 00:12:36,800 Speaker 4: probably slightly higher in the US than in Europe, mostly 209 00:12:36,800 --> 00:12:40,360 Speaker 4: because Europe has caught up so much over the last 210 00:12:40,720 --> 00:12:41,640 Speaker 4: six month period. 211 00:12:42,200 --> 00:12:45,760 Speaker 3: When you talk about Europe, John, are you worried about 212 00:12:45,840 --> 00:12:49,240 Speaker 3: sort of the economic divergence? It seems like the US 213 00:12:49,720 --> 00:12:53,720 Speaker 3: might avoid a recession and actually might start to see 214 00:12:53,720 --> 00:12:57,160 Speaker 3: inflation going up again, Europe doesn't seem to be quite 215 00:12:57,240 --> 00:12:59,880 Speaker 3: as robust. So when you're as a credit person, how 216 00:13:00,000 --> 00:13:02,480 Speaker 3: do you think through investments there? A lot of the 217 00:13:02,559 --> 00:13:05,560 Speaker 3: people I talk to say is a great diversifier, But 218 00:13:05,720 --> 00:13:08,120 Speaker 3: in and of itself, how do you play Europe? 219 00:13:09,400 --> 00:13:12,439 Speaker 4: I think generally Europe has less I mean, just back 220 00:13:12,480 --> 00:13:15,600 Speaker 4: to my triple C comment, Europe has less of those 221 00:13:15,679 --> 00:13:19,200 Speaker 4: kind of borrowers that are able to access the public market, 222 00:13:19,280 --> 00:13:24,480 Speaker 4: and so the credit quality is generally, on average, slightly 223 00:13:24,559 --> 00:13:26,640 Speaker 4: higher when you're particularly when you're looking at the tail 224 00:13:26,920 --> 00:13:29,240 Speaker 4: kind of credit, the bottom ten percent or the bottom 225 00:13:29,280 --> 00:13:32,840 Speaker 4: fifteen percent. So what we're really focused on is the 226 00:13:32,920 --> 00:13:35,600 Speaker 4: same type of thing in Europe that you know I 227 00:13:35,640 --> 00:13:39,400 Speaker 4: was talking about, generally underwriting to recessions, whether or not 228 00:13:39,480 --> 00:13:42,040 Speaker 4: there is one, And I think right now Europe's particularly 229 00:13:42,040 --> 00:13:45,200 Speaker 4: interesting because Germany is really struggling, which I think is 230 00:13:45,600 --> 00:13:48,640 Speaker 4: very common knowledge. But if you strip out Germany, the 231 00:13:48,679 --> 00:13:52,960 Speaker 4: rest of the economies in Europe look relatively decent. And 232 00:13:53,040 --> 00:13:56,120 Speaker 4: so what we're trying to do is underwrite for a 233 00:13:56,120 --> 00:13:59,280 Speaker 4: situation that Europe worsens, whether or not it does. 234 00:14:00,200 --> 00:14:02,559 Speaker 1: What kind of a default rates are you expecting, John. 235 00:14:03,200 --> 00:14:08,120 Speaker 4: I think. I think the leverage loan default rate last year, 236 00:14:08,160 --> 00:14:11,080 Speaker 4: I'll touch on Europe and in the States, leverage loan 237 00:14:11,080 --> 00:14:14,480 Speaker 4: default rate last year was five point seven percent, with 238 00:14:14,559 --> 00:14:16,960 Speaker 4: the exception of a couple months during COVID, that was 239 00:14:17,000 --> 00:14:20,040 Speaker 4: the largest, the highest since the GFC, and that's for Moody's. 240 00:14:20,520 --> 00:14:24,080 Speaker 4: I think it'll continue around that rate at least for 241 00:14:24,160 --> 00:14:27,480 Speaker 4: the next six months, potentially the next twelve months, and 242 00:14:27,520 --> 00:14:31,120 Speaker 4: then taper off pretty dramatically. Europe, I think the default 243 00:14:31,200 --> 00:14:35,080 Speaker 4: rates will be about two percent lower, simply because there 244 00:14:35,120 --> 00:14:40,240 Speaker 4: just are less triple C type borrowers. And you'll see 245 00:14:40,240 --> 00:14:42,920 Speaker 4: the same thing with default rates tailing off in both 246 00:14:42,960 --> 00:14:46,480 Speaker 4: the US and Europe. We see defaults as more visible. 247 00:14:46,720 --> 00:14:48,960 Speaker 4: It's more clear to us which companies are going to 248 00:14:49,040 --> 00:14:51,360 Speaker 4: default than it would have been a year ago. 249 00:14:51,640 --> 00:14:54,360 Speaker 1: But do you think that's priced into the current credit markets, 250 00:14:54,360 --> 00:14:55,680 Speaker 1: given how tight spreads have become. 251 00:14:56,720 --> 00:14:57,160 Speaker 4: I don't. 252 00:14:57,720 --> 00:14:59,640 Speaker 1: And then what happens next is does it have to 253 00:14:59,680 --> 00:15:02,520 Speaker 1: repres I mean nos is looking at how much dubbish 254 00:15:02,600 --> 00:15:04,400 Speaker 1: policy was priced in at the end of last year 255 00:15:04,400 --> 00:15:07,120 Speaker 1: that hasn't unwhelmed yet. On top of that, you've got 256 00:15:07,120 --> 00:15:09,280 Speaker 1: the default risk you're talking about. It should there be 257 00:15:09,280 --> 00:15:12,080 Speaker 1: a shakeout in the junk bond market. 258 00:15:12,840 --> 00:15:16,440 Speaker 4: I think there'll be a repricing. The reason it's so 259 00:15:16,560 --> 00:15:20,000 Speaker 4: expensive is most investors buy on yield, they don't buy 260 00:15:20,000 --> 00:15:22,840 Speaker 4: on spread. So they say to themselves, Okay, if I 261 00:15:22,840 --> 00:15:25,320 Speaker 4: could buy at six percent or eight percent or ten percent, 262 00:15:25,360 --> 00:15:27,960 Speaker 4: obviously depending on the type of risk you're looking at, 263 00:15:28,400 --> 00:15:33,320 Speaker 4: I'm happy. And they're not really looking at what's the spread. 264 00:15:33,800 --> 00:15:37,200 Speaker 4: The other thing that really concerns us is the index 265 00:15:37,320 --> 00:15:42,040 Speaker 4: credit quality has deteriorated in the high old market because 266 00:15:42,080 --> 00:15:46,040 Speaker 4: there's and strangely enough, in a really unusual manner, it's 267 00:15:46,080 --> 00:15:49,000 Speaker 4: because so many companies have been upgraded to investment grade, 268 00:15:49,560 --> 00:15:53,640 Speaker 4: not because the companies are doing poorly. It's just if 269 00:15:53,680 --> 00:15:57,640 Speaker 4: you take really large borrowers and upgrade them, they fall 270 00:15:57,680 --> 00:16:01,480 Speaker 4: out of the index, and the residual index is meaningfully weaker. 271 00:16:01,800 --> 00:16:04,040 Speaker 4: So we do think there'll be a correction in HYO. 272 00:16:04,560 --> 00:16:07,000 Speaker 4: I think the magnitude of it is really going depend 273 00:16:07,080 --> 00:16:09,680 Speaker 4: on what happens with interest rates because of this gross 274 00:16:09,760 --> 00:16:11,400 Speaker 4: yield based buying behavior. 275 00:16:12,280 --> 00:16:15,120 Speaker 3: John, you have a sizeable COLO shop in both the 276 00:16:15,240 --> 00:16:18,800 Speaker 3: US and Europe, so you can talk tip to that market. 277 00:16:18,840 --> 00:16:20,920 Speaker 3: The leverage loan market as seen as there's been a 278 00:16:21,000 --> 00:16:24,600 Speaker 3: huge repricing and colos are now almost at the record 279 00:16:24,640 --> 00:16:27,360 Speaker 3: pace to start a year. Do you think that could continue? 280 00:16:27,360 --> 00:16:29,960 Speaker 3: And is there any worries about that market, any kind 281 00:16:30,000 --> 00:16:32,640 Speaker 3: of repricing stalling? There? Are we giving a little bit 282 00:16:32,680 --> 00:16:33,680 Speaker 3: ahead of ourselves. 283 00:16:34,040 --> 00:16:36,480 Speaker 4: I don't think the market is ahead of itself, because 284 00:16:36,520 --> 00:16:40,520 Speaker 4: there was very little COLO activity for the last couple 285 00:16:40,560 --> 00:16:43,800 Speaker 4: of years relative to some of the stronger years. And 286 00:16:44,200 --> 00:16:47,320 Speaker 4: I think because the economy in both the US and 287 00:16:47,360 --> 00:16:50,880 Speaker 4: Europe has weathered both the geopolitical risks and the interest 288 00:16:50,960 --> 00:16:54,840 Speaker 4: rate changes, I actually think this is pretty sustainable, the 289 00:16:54,920 --> 00:16:57,840 Speaker 4: growth in the COLO market, because keep in mind, newer 290 00:16:57,960 --> 00:17:03,360 Speaker 4: vintage loans frankly speaking, are much stronger credit wise than 291 00:17:03,400 --> 00:17:07,440 Speaker 4: those of you know, three, five, seven years ago, because 292 00:17:07,440 --> 00:17:10,480 Speaker 4: it's been difficult to finounce over the last few years 293 00:17:10,560 --> 00:17:11,560 Speaker 4: until very recently. 294 00:17:11,960 --> 00:17:14,000 Speaker 2: Thank you for that, John. I had a sort of 295 00:17:14,040 --> 00:17:16,879 Speaker 2: follow up question on something you mentioned. You know, you 296 00:17:16,920 --> 00:17:20,480 Speaker 2: said Germany is sort of seen as the sick man 297 00:17:20,520 --> 00:17:25,080 Speaker 2: of Europe, if you like. But one of the areas 298 00:17:25,119 --> 00:17:27,399 Speaker 2: where I guess there is also concern looking say at 299 00:17:27,400 --> 00:17:29,760 Speaker 2: the real estate sector is in the Nordics and to 300 00:17:29,760 --> 00:17:33,440 Speaker 2: a lesser extent in the UK. So when you're looking 301 00:17:33,440 --> 00:17:36,719 Speaker 2: across Europe, is real estate one of the sectors that 302 00:17:36,800 --> 00:17:41,200 Speaker 2: you're thinking is looking worth investing in or are there 303 00:17:41,240 --> 00:17:44,720 Speaker 2: other areas that maybe you think are looking much better 304 00:17:44,800 --> 00:17:46,280 Speaker 2: than the real estate sector? 305 00:17:47,280 --> 00:17:50,720 Speaker 4: Generally, real estate sector is an area that we have 306 00:17:50,920 --> 00:17:57,399 Speaker 4: not been that positive on and remain concerned about. And 307 00:17:57,440 --> 00:18:02,240 Speaker 4: I think the reason is the real state investor market 308 00:18:02,880 --> 00:18:05,159 Speaker 4: is prone to using a lot of leverage and a 309 00:18:05,200 --> 00:18:07,760 Speaker 4: lot of short term leverage. And I think, you know, 310 00:18:07,840 --> 00:18:09,920 Speaker 4: looking at the situation in Europe, I think a lot 311 00:18:09,960 --> 00:18:14,480 Speaker 4: of assets are going to come out of some of 312 00:18:14,480 --> 00:18:18,159 Speaker 4: the real estate firms, and I think it will be 313 00:18:18,160 --> 00:18:21,679 Speaker 4: probably more of a real by real estate is a 314 00:18:21,720 --> 00:18:24,440 Speaker 4: real asset opportunity than a credit opportunity. 315 00:18:25,640 --> 00:18:28,760 Speaker 2: Yeah, And just would you say that that same comment 316 00:18:28,880 --> 00:18:33,560 Speaker 2: applies then in the US because obviously we are seeing 317 00:18:33,640 --> 00:18:37,119 Speaker 2: some banks come under pressure because of their real estate exposure. 318 00:18:38,240 --> 00:18:39,960 Speaker 2: Do you say that, would you say that that's different 319 00:18:39,960 --> 00:18:41,560 Speaker 2: from Europe or the same. 320 00:18:42,600 --> 00:18:47,680 Speaker 4: It's similar the US. It's mostly real estate that's held 321 00:18:47,720 --> 00:18:50,480 Speaker 4: by regional banks. There really are very few issues with 322 00:18:50,560 --> 00:18:53,520 Speaker 4: the large money center banks. But you know, the US 323 00:18:53,560 --> 00:18:56,120 Speaker 4: needs a regional bank system and a local bank system. 324 00:18:56,280 --> 00:18:59,800 Speaker 4: So I think I think you will see assets come 325 00:18:59,840 --> 00:19:03,120 Speaker 4: out out of the regional banks that are real estate related. 326 00:19:03,720 --> 00:19:07,880 Speaker 2: If I could just ask one more within that US 327 00:19:08,000 --> 00:19:13,479 Speaker 2: real estate landscape, do you think that there are areas 328 00:19:13,480 --> 00:19:16,679 Speaker 2: of opportunity. One of the things that some people have 329 00:19:16,720 --> 00:19:21,880 Speaker 2: been talking about is, uh, you know, sunset belt versus 330 00:19:22,080 --> 00:19:25,000 Speaker 2: coastal and so on or so of sector within real 331 00:19:25,080 --> 00:19:27,920 Speaker 2: estate that might begin to start looking to look interesting. 332 00:19:28,000 --> 00:19:31,040 Speaker 2: Do you see any kind of differentiation happening or do 333 00:19:31,119 --> 00:19:33,960 Speaker 2: you think that it's just best to be cautious on 334 00:19:34,000 --> 00:19:34,840 Speaker 2: the entire sector. 335 00:19:36,000 --> 00:19:39,640 Speaker 4: No, Actually, we see some areas of you know, very 336 00:19:39,680 --> 00:19:43,600 Speaker 4: significant opportunity. Kirk currently, because I think all real estate 337 00:19:43,640 --> 00:19:46,840 Speaker 4: has sort of been tarred with a negative brush, we 338 00:19:46,960 --> 00:19:52,960 Speaker 4: have originated about five billion dollars of residential real estate 339 00:19:53,119 --> 00:19:59,080 Speaker 4: whole loans in the last five years, generally in transitional 340 00:19:59,160 --> 00:20:04,560 Speaker 4: lending or either public market public homebuilders who are doing 341 00:20:04,640 --> 00:20:09,440 Speaker 4: specific developments in the residential space, so that's single family homes, 342 00:20:09,920 --> 00:20:13,000 Speaker 4: and we also do it with professional developers that have 343 00:20:13,080 --> 00:20:15,840 Speaker 4: groups of say five to ten homes that they're renovating 344 00:20:16,280 --> 00:20:19,720 Speaker 4: and then selling. So there is an interesting opportunity in 345 00:20:19,720 --> 00:20:23,679 Speaker 4: the US because there's a fairly significant housing shortage in 346 00:20:23,720 --> 00:20:27,440 Speaker 4: certain places, and the yields that you get to lend 347 00:20:27,560 --> 00:20:31,240 Speaker 4: are meaningfully higher because there's less liquidity in the system. 348 00:20:31,359 --> 00:20:34,840 Speaker 4: So we do think there's some pretty interesting opportunities, and 349 00:20:34,880 --> 00:20:38,480 Speaker 4: it's more in the form of direct origination than anything else. 350 00:20:39,320 --> 00:20:41,240 Speaker 1: But what about the risk, John? On the consumer side, 351 00:20:41,240 --> 00:20:43,439 Speaker 1: I mean, the consumer is coming under more pressure obviously 352 00:20:43,480 --> 00:20:47,200 Speaker 1: with inflation and housing costs are very very high. There's 353 00:20:47,280 --> 00:20:50,760 Speaker 1: lots of signs now that maybe the buying, the post 354 00:20:50,760 --> 00:20:54,400 Speaker 1: COVID buying revenge spending is drying up. Do you think 355 00:20:54,440 --> 00:20:57,640 Speaker 1: that we're exposed now to more consumer defaults? 356 00:20:58,760 --> 00:21:03,480 Speaker 4: I think that you'll likely see rising consumer delinquencies and 357 00:21:03,520 --> 00:21:09,760 Speaker 4: defaults in the bottom quintile of the income distribution and 358 00:21:09,920 --> 00:21:14,159 Speaker 4: potentially the second quintile. Most of it will depend on 359 00:21:14,200 --> 00:21:17,760 Speaker 4: whether wages are higher than inflation or lower than inflation. 360 00:21:19,000 --> 00:21:22,080 Speaker 4: They have been lower than inflation until the last twelve months, 361 00:21:22,119 --> 00:21:26,120 Speaker 4: and now wage increases have been higher than inflation. Usually 362 00:21:26,280 --> 00:21:31,439 Speaker 4: that improves consumer spending, but it's not equally distributed. 363 00:21:32,440 --> 00:21:34,360 Speaker 3: So that does seem like a worry to you, John, 364 00:21:34,440 --> 00:21:36,320 Speaker 3: What else are you worried about as you look through 365 00:21:36,680 --> 00:21:40,280 Speaker 3: this year and the global landscape and credit and are 366 00:21:40,320 --> 00:21:42,600 Speaker 3: you worried about your political risk about some of the 367 00:21:42,640 --> 00:21:43,680 Speaker 3: elections coming up. 368 00:21:45,119 --> 00:21:49,000 Speaker 4: You know, the thing I'm most worried about is the 369 00:21:50,560 --> 00:21:55,160 Speaker 4: I guess what I'd say is still extremely optimistic market 370 00:21:55,200 --> 00:21:58,760 Speaker 4: pricing of interest rate cuts in the short term and 371 00:21:58,840 --> 00:22:01,679 Speaker 4: the next you don't call it to twelve to eighteen months. 372 00:22:02,200 --> 00:22:05,760 Speaker 4: I think if those don't happen and the economy doesn't 373 00:22:05,920 --> 00:22:07,960 Speaker 4: grow in the US and Europe, then you're going to 374 00:22:08,000 --> 00:22:14,760 Speaker 4: see some pretty significant capital markets volatility. Geopolitics typically are 375 00:22:14,920 --> 00:22:17,920 Speaker 4: short term effects on markets unless you get a very 376 00:22:18,000 --> 00:22:22,040 Speaker 4: expansive war, so that's less of a concern. And the 377 00:22:22,080 --> 00:22:25,280 Speaker 4: election cycles are always a concern, but I think that's 378 00:22:25,320 --> 00:22:29,440 Speaker 4: more about volatility than anything fundamental for twenty twenty four. 379 00:22:30,160 --> 00:22:34,600 Speaker 2: John, I mean, given the history of your institution, I mean, 380 00:22:34,640 --> 00:22:38,600 Speaker 2: obviously you've worked within a bank before. One of the 381 00:22:38,600 --> 00:22:42,639 Speaker 2: things that's come up in a recent podcast is the 382 00:22:42,920 --> 00:22:47,360 Speaker 2: potential for institutions like yours to either partner with banks 383 00:22:47,520 --> 00:22:50,560 Speaker 2: or to get stakes in banks. Do you think that 384 00:22:50,560 --> 00:22:53,800 Speaker 2: that is something that you would consider given the history 385 00:22:54,480 --> 00:22:56,760 Speaker 2: of your institution, or is that something that you think 386 00:22:57,040 --> 00:22:58,000 Speaker 2: is firmly in the past. 387 00:22:58,040 --> 00:23:02,919 Speaker 4: Now I think for us it probably doesn't make sense 388 00:23:03,040 --> 00:23:06,520 Speaker 4: because our real interest is being able to be opportunistic 389 00:23:06,600 --> 00:23:09,840 Speaker 4: in our investing, and typically if we partner with a bank, 390 00:23:09,880 --> 00:23:13,680 Speaker 4: where that becomes more of a flow agreement where we're 391 00:23:13,800 --> 00:23:17,399 Speaker 4: locked into working with that particular bank, whereas we prefer 392 00:23:17,480 --> 00:23:20,679 Speaker 4: to have the flexibility. We've done that a lot with 393 00:23:20,800 --> 00:23:26,520 Speaker 4: non bank originators, where we have a lot more pricing 394 00:23:26,680 --> 00:23:30,080 Speaker 4: power in terms of our ability to buy and price 395 00:23:30,840 --> 00:23:33,879 Speaker 4: the assets that we're getting involved in. But with the 396 00:23:33,920 --> 00:23:36,320 Speaker 4: banks it's a little trickier just. 397 00:23:36,680 --> 00:23:40,359 Speaker 2: To follow up on that. Then, one of the issues 398 00:23:40,359 --> 00:23:44,800 Speaker 2: that's coming up is potential regulation or more oversight of 399 00:23:45,119 --> 00:23:49,800 Speaker 2: non bank lenders. Is that something that concerns you or 400 00:23:50,960 --> 00:23:53,160 Speaker 2: is that something that you don't think that the market 401 00:23:53,200 --> 00:23:54,800 Speaker 2: should be worried about. 402 00:23:55,880 --> 00:23:59,640 Speaker 4: Well, we would welcome more supervision of non bank lenders 403 00:23:59,680 --> 00:24:03,520 Speaker 4: because one of our biggest concerns is the growth of 404 00:24:03,600 --> 00:24:08,040 Speaker 4: private credit as a non marked market asset and the 405 00:24:08,320 --> 00:24:14,040 Speaker 4: extraordinary differences in holding prices of the same asset across 406 00:24:14,080 --> 00:24:18,920 Speaker 4: different managers. That's really concerning to us. I think that 407 00:24:19,560 --> 00:24:23,840 Speaker 4: you need to have consistent valuation across all asset classes, 408 00:24:24,200 --> 00:24:26,920 Speaker 4: And I think because that's a reasonably new asset class, 409 00:24:27,400 --> 00:24:30,080 Speaker 4: it's really become an asset class that is heavily driven 410 00:24:30,119 --> 00:24:33,800 Speaker 4: by what we would call volatility washing, and that's a 411 00:24:33,840 --> 00:24:35,919 Speaker 4: concern as it gets bigger and bigger and bigger. 412 00:24:36,680 --> 00:24:38,879 Speaker 3: So how do you think when you think through private 413 00:24:38,920 --> 00:24:41,600 Speaker 3: credit and this marked to market issue, because you're right, 414 00:24:41,640 --> 00:24:45,240 Speaker 3: there is wide disparity. How do you think do you 415 00:24:45,280 --> 00:24:47,320 Speaker 3: have any ideas on how we can get from where 416 00:24:47,320 --> 00:24:50,800 Speaker 3: we are now to that point or do you think 417 00:24:50,800 --> 00:24:52,359 Speaker 3: that really requires regulation? 418 00:24:53,720 --> 00:24:56,160 Speaker 4: It would only happen through a regulatory response. 419 00:24:57,080 --> 00:24:58,639 Speaker 1: So if you look at all of the stuff you 420 00:24:58,960 --> 00:25:02,760 Speaker 1: get to see every day on which sounds fascinating, and 421 00:25:02,800 --> 00:25:05,000 Speaker 1: you're talking about equity, you like returns in some parts 422 00:25:05,040 --> 00:25:08,280 Speaker 1: of it, but we're also considering, you know, significant risks. 423 00:25:08,840 --> 00:25:11,040 Speaker 1: Where is the best relative value right now for you? 424 00:25:12,640 --> 00:25:14,800 Speaker 4: I think for us, the two areas that we feel 425 00:25:14,840 --> 00:25:19,120 Speaker 4: have the most relative value are opportunities in the credit 426 00:25:19,200 --> 00:25:23,760 Speaker 4: derivative markets, and that's really a large corporate risk in 427 00:25:23,800 --> 00:25:26,680 Speaker 4: the US and Europe that's non investment grade. And then 428 00:25:26,760 --> 00:25:32,920 Speaker 4: completely unrelated is the area I was discussing previously, residential 429 00:25:33,000 --> 00:25:36,040 Speaker 4: lending in the United States in single family homes. 430 00:25:36,800 --> 00:25:38,760 Speaker 1: So the second one makes a lot of sense to 431 00:25:38,800 --> 00:25:41,880 Speaker 1: me in terms of understanding it. But trunched credit derivatives. 432 00:25:41,920 --> 00:25:43,520 Speaker 1: Can you explain that to my grandmother? Please? 433 00:25:44,520 --> 00:25:49,520 Speaker 4: Sure? The basic idea is taking pools of credit derivatives, 434 00:25:50,640 --> 00:25:54,600 Speaker 4: so you take like one hundred different credits and it's 435 00:25:54,720 --> 00:25:58,120 Speaker 4: trunched into a first loss, a mezzanine, and a senior, 436 00:25:58,240 --> 00:26:02,040 Speaker 4: just like a clo. So it's basically like creating clos 437 00:26:02,080 --> 00:26:03,800 Speaker 4: but with credit derivatives instead. 438 00:26:03,480 --> 00:26:06,639 Speaker 1: Of loans and clos. For those out there who don't understand, 439 00:26:06,680 --> 00:26:11,480 Speaker 1: it's repackaging of company debt, typically the riskier debt, the 440 00:26:11,560 --> 00:26:14,800 Speaker 1: leverage loans. But it hasn't defaulted. It's done quite well, 441 00:26:14,800 --> 00:26:15,639 Speaker 1: hasn't it over history? 442 00:26:16,359 --> 00:26:19,760 Speaker 4: That's right. They sound complicated and they sound very scary, 443 00:26:20,880 --> 00:26:23,640 Speaker 4: but in actual fact, the default rates for the same 444 00:26:23,760 --> 00:26:28,240 Speaker 4: rating are much much lower than they are for single name. 445 00:26:28,160 --> 00:26:30,639 Speaker 1: Credits, and the returns are high. 446 00:26:31,000 --> 00:26:34,840 Speaker 4: The returns are higher. Yeah, okay, the faults lower, returns higher. 447 00:26:35,119 --> 00:26:38,320 Speaker 1: And that's a sustainable, long term business. It's not just 448 00:26:39,000 --> 00:26:40,160 Speaker 1: a hot money trade. 449 00:26:40,680 --> 00:26:40,760 Speaker 3: No. 450 00:26:40,920 --> 00:26:43,280 Speaker 4: In fact, there's less and less hot money and more 451 00:26:43,280 --> 00:26:45,920 Speaker 4: and more kind of what I call real money investing. 452 00:26:46,480 --> 00:26:53,040 Speaker 4: We've also seen the development of ETFs buying clos so 453 00:26:53,080 --> 00:26:56,480 Speaker 4: that's a new development. The reason the risk premium is 454 00:26:56,480 --> 00:26:59,160 Speaker 4: so high is it's a very fragmented market and it's 455 00:26:59,240 --> 00:27:03,240 Speaker 4: very institutional. But I think as you see etups develop, 456 00:27:04,359 --> 00:27:08,880 Speaker 4: it will create a much broader distribution for the asset class. 457 00:27:09,480 --> 00:27:12,600 Speaker 1: And presume the increased liquiditys was that the next step, 458 00:27:12,640 --> 00:27:14,359 Speaker 1: because I mean they're not very liquid right now and 459 00:27:14,400 --> 00:27:18,680 Speaker 1: ets need liquidity. That's right, yes, yeah, okay, so you've 460 00:27:18,720 --> 00:27:20,680 Speaker 1: got the rates call right at the beginning of the year, 461 00:27:21,320 --> 00:27:23,320 Speaker 1: A lot of people didn't. Where else do you think 462 00:27:23,320 --> 00:27:25,560 Speaker 1: you're very contrarian? Where do you think that you'll write? 463 00:27:25,560 --> 00:27:27,360 Speaker 1: And other people may may not be right? 464 00:27:28,320 --> 00:27:31,080 Speaker 4: Well, I think the main contrarian view we've had is 465 00:27:31,119 --> 00:27:34,600 Speaker 4: for almost eighteen months, we've had the view that neither 466 00:27:34,680 --> 00:27:37,720 Speaker 4: the US nor Europe will go into a recession that 467 00:27:37,840 --> 00:27:43,639 Speaker 4: is significant enough to affect market valuations negatively. You know, 468 00:27:43,720 --> 00:27:48,080 Speaker 4: at the time, that was hugely contrarian, and that allowed 469 00:27:48,160 --> 00:27:50,600 Speaker 4: us to invest a lot of capital about a year 470 00:27:50,640 --> 00:27:54,040 Speaker 4: and a quarter ago and through the course of last year, 471 00:27:54,600 --> 00:27:58,200 Speaker 4: when very few investors were willing to because they basically 472 00:27:58,200 --> 00:28:00,800 Speaker 4: had the view that the economy would go into a 473 00:28:00,840 --> 00:28:04,080 Speaker 4: pretty severe recession and therefore they wanted to wait rather 474 00:28:04,119 --> 00:28:04,800 Speaker 4: than invest. 475 00:28:05,640 --> 00:28:07,320 Speaker 1: So if you don't think of recession, then presumingly that 476 00:28:07,400 --> 00:28:11,080 Speaker 1: means very few or no rate cuts from the Fed. 477 00:28:12,400 --> 00:28:14,000 Speaker 4: I think that's distinctly possible. 478 00:28:14,080 --> 00:28:15,640 Speaker 1: Yes, zero rate cuts. 479 00:28:16,520 --> 00:28:19,920 Speaker 4: Zero is hard to say. My instinct is that there'll 480 00:28:19,960 --> 00:28:22,960 Speaker 4: be some, but I don't think. I don't think it'll 481 00:28:23,000 --> 00:28:25,440 Speaker 4: be as much as you know, three to five, which 482 00:28:25,440 --> 00:28:27,480 Speaker 4: is what's been spoken about. 483 00:28:28,160 --> 00:28:31,360 Speaker 1: Great stuff. John Dorfmann, chief investment Officer at Napier Park 484 00:28:31,400 --> 00:28:33,359 Speaker 1: Global Capsule, thank you so much for joining us on 485 00:28:33,400 --> 00:28:34,119 Speaker 1: the Credit Edge. 486 00:28:34,640 --> 00:28:35,600 Speaker 4: Thank you very much. 487 00:28:36,160 --> 00:28:38,120 Speaker 1: And Lisa Lei with Bloomberg News in London, brilliant to 488 00:28:38,120 --> 00:28:38,600 Speaker 1: see you again. 489 00:28:38,720 --> 00:28:41,440 Speaker 3: Cheers, cheers. Thanks for having me and. 490 00:28:41,360 --> 00:28:44,360 Speaker 1: Tolo Ali Mutu at Bloomberg Intelligence. Stay where you are. 491 00:28:44,360 --> 00:28:46,880 Speaker 1: We're going to ask you more questions, So just a 492 00:28:46,960 --> 00:28:49,920 Speaker 1: quick update. You look at real estate, which we could 493 00:28:49,960 --> 00:28:52,360 Speaker 1: definitely discuss all day long and certainly on every episode 494 00:28:52,360 --> 00:28:55,040 Speaker 1: of The Credit Edge. I wanted to ask about rates though. 495 00:28:55,120 --> 00:28:58,880 Speaker 1: First the whole no cuts narrative has suddenly gained traction. 496 00:28:59,040 --> 00:29:02,120 Speaker 1: That's not good for borrow especially those sitting on underwater 497 00:29:02,200 --> 00:29:04,800 Speaker 1: office loans that they're trying to refinance. There seemed to 498 00:29:04,800 --> 00:29:05,800 Speaker 1: be a bit of a light at the end of 499 00:29:05,800 --> 00:29:08,000 Speaker 1: the tunnel coming into this year, but that's gone away. 500 00:29:08,040 --> 00:29:09,280 Speaker 1: What's the situation right now? 501 00:29:10,200 --> 00:29:15,240 Speaker 2: Yeah, So thanks again, James. The thing is, as you said, 502 00:29:15,320 --> 00:29:18,120 Speaker 2: we can talk about real estate for twenty four hours, 503 00:29:18,160 --> 00:29:21,000 Speaker 2: seven days a week, and you know I can definitely. 504 00:29:21,080 --> 00:29:25,360 Speaker 2: But anyway, just considering what's happening in funding markets and 505 00:29:25,760 --> 00:29:28,719 Speaker 2: to real estate issuers, I think some of them have 506 00:29:28,920 --> 00:29:32,000 Speaker 2: adjusted to the fact that or the likely fact that 507 00:29:32,400 --> 00:29:36,480 Speaker 2: rates may stay elevated for longer. And I think one 508 00:29:36,480 --> 00:29:39,280 Speaker 2: of the ways that that is being reflected is that 509 00:29:40,560 --> 00:29:43,920 Speaker 2: we're seeing many more issuers come to the public bond market. 510 00:29:44,080 --> 00:29:46,600 Speaker 2: So even though some of them would have paid near 511 00:29:47,120 --> 00:29:53,360 Speaker 2: zero or close to zero yeah rates for their bonds 512 00:29:53,880 --> 00:29:57,360 Speaker 2: prior to twenty twenty two, they're coming in and issuing 513 00:29:57,440 --> 00:30:01,920 Speaker 2: at much higher coupon levels. This week, we have seen 514 00:30:02,280 --> 00:30:05,440 Speaker 2: the likes of City con come to the market, but 515 00:30:05,520 --> 00:30:07,680 Speaker 2: you know, through this year, we've had quite a few 516 00:30:07,720 --> 00:30:10,840 Speaker 2: issuers that have come to the market and pay those 517 00:30:10,880 --> 00:30:13,720 Speaker 2: higher rates to get funding done. So I think that 518 00:30:13,880 --> 00:30:17,080 Speaker 2: is a small positive, especially given what you said about 519 00:30:18,080 --> 00:30:22,480 Speaker 2: banks potentially potentially tightening the belt a little bit when 520 00:30:22,520 --> 00:30:26,080 Speaker 2: it comes to lending to the sector or taking a 521 00:30:26,080 --> 00:30:28,520 Speaker 2: different view on what their current exposures are. 522 00:30:29,280 --> 00:30:31,440 Speaker 1: So great news that they are getting the access to capsule, 523 00:30:31,480 --> 00:30:33,920 Speaker 1: but you say that they're paying higher rates. Are these sustainable? 524 00:30:34,120 --> 00:30:35,600 Speaker 1: Sustainable rates for the borrow? 525 00:30:36,880 --> 00:30:42,320 Speaker 2: I think what you will see is that potentially interest 526 00:30:42,400 --> 00:30:46,840 Speaker 2: cover ratios and other metrics will come under some more 527 00:30:46,880 --> 00:30:53,920 Speaker 2: pressure as they replace maturing sometimes cheaper funding with more 528 00:30:53,960 --> 00:31:00,400 Speaker 2: expensive debt. But in many cases not all the the 529 00:31:00,440 --> 00:31:04,960 Speaker 2: gap between the current interest cover ratios and the threshold 530 00:31:05,040 --> 00:31:08,160 Speaker 2: that they have in the bond documentation or loan documentation 531 00:31:08,360 --> 00:31:11,880 Speaker 2: is okay enough or adequate enough for them to take 532 00:31:11,920 --> 00:31:14,520 Speaker 2: on more expensive debt. 533 00:31:15,160 --> 00:31:15,280 Speaker 3: Uh. 534 00:31:15,440 --> 00:31:17,480 Speaker 2: The other thing that I think you will see, or 535 00:31:17,520 --> 00:31:23,960 Speaker 2: we're already seeing, is issuers doing disposals and also trying 536 00:31:24,000 --> 00:31:27,760 Speaker 2: to raise equity capital as a way of offsetting the 537 00:31:27,800 --> 00:31:33,360 Speaker 2: impact of higher funding costs. So we're seeing small size 538 00:31:33,400 --> 00:31:37,960 Speaker 2: and also some significant disposals. And then on the capital 539 00:31:38,040 --> 00:31:43,320 Speaker 2: raising side we have seen is issue place equity specifically 540 00:31:44,320 --> 00:31:51,040 Speaker 2: to offset the rising leverage that they're seeing on their books. 541 00:31:51,920 --> 00:31:55,040 Speaker 1: And in terms of actual companies, are there any anyone 542 00:31:55,200 --> 00:31:57,680 Speaker 1: under more pressure or anyone doing better than mighty last book. 543 00:31:57,680 --> 00:31:59,080 Speaker 1: It was only a few weeks ago, but but how 544 00:31:59,480 --> 00:32:00,160 Speaker 1: things change. 545 00:32:00,560 --> 00:32:03,440 Speaker 2: Yeah, I think it definitely was only a few weeks ago. 546 00:32:03,440 --> 00:32:05,040 Speaker 2: But as we said, we can talk about real estate 547 00:32:05,080 --> 00:32:09,360 Speaker 2: twenty four seven. I think one of the issuers that 548 00:32:10,280 --> 00:32:12,480 Speaker 2: has received a lot of attention this week in particular, 549 00:32:12,600 --> 00:32:19,320 Speaker 2: has been city Con. This is a Nordic based retail 550 00:32:20,080 --> 00:32:23,000 Speaker 2: real estate issuer that reported results that showed a loss 551 00:32:23,040 --> 00:32:26,960 Speaker 2: because of negative valuation adjustments. But shortly after that loss, 552 00:32:27,000 --> 00:32:30,280 Speaker 2: they issued new equity and then they tended for a 553 00:32:30,320 --> 00:32:32,680 Speaker 2: bond and they issued a new bond as well. So 554 00:32:33,120 --> 00:32:35,960 Speaker 2: it's come into focus because of all the measures that 555 00:32:36,000 --> 00:32:39,320 Speaker 2: I think management is trying to take to put the 556 00:32:39,360 --> 00:32:43,480 Speaker 2: company on a farmer in a firmer position. So that's 557 00:32:43,520 --> 00:32:47,080 Speaker 2: been one interesting one. And then on the other side, 558 00:32:47,120 --> 00:32:50,240 Speaker 2: we had this week an issue called time starten a 559 00:32:50,400 --> 00:32:53,959 Speaker 2: B which is the parent company or the majority the 560 00:32:53,960 --> 00:32:56,680 Speaker 2: main owner of an ncity called time Start, and Bosstad, 561 00:32:56,720 --> 00:33:00,280 Speaker 2: which is a residential real estate landlord, and that sure 562 00:33:00,320 --> 00:33:02,160 Speaker 2: has come out to say that they will not be 563 00:33:02,240 --> 00:33:07,239 Speaker 2: paying the interest on their deeply subordinated instruments that are 564 00:33:07,240 --> 00:33:10,680 Speaker 2: called hybrids so that led to a drop in in 565 00:33:11,080 --> 00:33:13,840 Speaker 2: the value of those securities. So and the reason that 566 00:33:13,960 --> 00:33:16,800 Speaker 2: they're not able to do that is because their subsidiaries 567 00:33:17,160 --> 00:33:20,080 Speaker 2: not paying dividends, so they don't have enough to maybe 568 00:33:20,120 --> 00:33:22,960 Speaker 2: cover the cost of those hybrids or cover the interest 569 00:33:23,040 --> 00:33:28,080 Speaker 2: on those hybrids. So you're still seeing quite different moves 570 00:33:28,160 --> 00:33:32,560 Speaker 2: by issuers within the sector. So I think differentiation will 571 00:33:33,520 --> 00:33:36,160 Speaker 2: remain a theme through the rest of this year. 572 00:33:36,840 --> 00:33:38,880 Speaker 1: What's your take on Citicon though the management say that 573 00:33:38,920 --> 00:33:41,280 Speaker 1: they're doing something to sort the company out, but are 574 00:33:41,280 --> 00:33:43,360 Speaker 1: they really are? Are you hopeful on that? 575 00:33:43,960 --> 00:33:46,480 Speaker 2: As a credit analyst, I can never sort of turn 576 00:33:46,560 --> 00:33:51,560 Speaker 2: down more equity, right, so I have to say at 577 00:33:51,640 --> 00:33:53,760 Speaker 2: least you know they're taking the right steps in terms 578 00:33:53,840 --> 00:33:58,920 Speaker 2: of equity. What I think is has been concerning for 579 00:33:59,000 --> 00:34:04,840 Speaker 2: me looking at is valuation. So they only revalued their 580 00:34:05,120 --> 00:34:10,520 Speaker 2: portfolio with external input once last year, and that was 581 00:34:10,520 --> 00:34:12,160 Speaker 2: at the end of the year, and that resulted in 582 00:34:12,400 --> 00:34:15,280 Speaker 2: the loss that I mentioned earlier. So it'll be interesting 583 00:34:15,480 --> 00:34:19,719 Speaker 2: to see how they approach valuations this year. But the 584 00:34:19,760 --> 00:34:21,640 Speaker 2: other thing that they're doing, apart from the equity and 585 00:34:21,719 --> 00:34:26,840 Speaker 2: apart and raising unsecured debt, is that they're looking to 586 00:34:26,880 --> 00:34:30,040 Speaker 2: do more disposal. So they're doing some of the right things, 587 00:34:30,600 --> 00:34:34,719 Speaker 2: but I'd say how they delivers through the rest of 588 00:34:34,760 --> 00:34:38,360 Speaker 2: this year will still be important. I can't as a 589 00:34:38,400 --> 00:34:41,400 Speaker 2: credit analyst ever say that you know an entity is 590 00:34:42,160 --> 00:34:44,680 Speaker 2: in the all clear. We're always looking forward to what 591 00:34:44,719 --> 00:34:46,000 Speaker 2: will happen in the next quarter. 592 00:34:46,080 --> 00:34:46,239 Speaker 3: You know. 593 00:34:46,280 --> 00:34:48,440 Speaker 1: The investors we've talked to recently, like Fortress, I mean, 594 00:34:48,440 --> 00:34:50,160 Speaker 1: that was a great episode, by the way, for listeners 595 00:34:50,200 --> 00:34:52,120 Speaker 1: out there, you should go back and try and find it. 596 00:34:52,120 --> 00:34:55,200 Speaker 1: It's tons of great detail from their co CEO talking 597 00:34:55,239 --> 00:34:58,799 Speaker 1: about how they're trading this what they call trillion dollar opportunity. 598 00:34:58,840 --> 00:35:01,640 Speaker 1: But other than then, than them totally, who else is 599 00:35:01,960 --> 00:35:03,439 Speaker 1: potentially benefiting from this? 600 00:35:04,000 --> 00:35:09,280 Speaker 2: A number of people are looking increasingly to real estate, 601 00:35:09,400 --> 00:35:14,400 Speaker 2: not necessarily just private credit, but even judging from the 602 00:35:14,560 --> 00:35:19,560 Speaker 2: questions I get regular long only money is looking increasingly 603 00:35:20,040 --> 00:35:22,840 Speaker 2: at whatever opportunities you might be able to get in 604 00:35:22,880 --> 00:35:27,359 Speaker 2: real estate. Also looking at the equity capital raises that 605 00:35:27,400 --> 00:35:31,200 Speaker 2: we've had recently, Given that I think the last two 606 00:35:31,239 --> 00:35:35,000 Speaker 2: we've had were oversubscribed, that tells you that your typical 607 00:35:35,000 --> 00:35:39,360 Speaker 2: equity investors have probably in some cases willing to step 608 00:35:39,400 --> 00:35:42,800 Speaker 2: in to look at some of these companies again, whereas 609 00:35:42,800 --> 00:35:45,280 Speaker 2: maybe a year ago they might have been less willing 610 00:35:45,320 --> 00:35:47,799 Speaker 2: to do so. So I think your traditional investors are 611 00:35:47,800 --> 00:35:54,200 Speaker 2: still looking. Where we are concerned more about pullback is 612 00:35:54,239 --> 00:35:59,840 Speaker 2: on the bank side, given issues around more regulatory overside 613 00:36:00,120 --> 00:36:05,080 Speaker 2: and about potential losses on existing exposures, they might be 614 00:36:05,239 --> 00:36:08,600 Speaker 2: further poor back there. But you're some of the regular 615 00:36:09,200 --> 00:36:13,080 Speaker 2: public credit public equity investors are coming back. And of 616 00:36:13,080 --> 00:36:17,520 Speaker 2: course we've talked about the alternative asset managers or private 617 00:36:17,560 --> 00:36:21,319 Speaker 2: credit increasingly interested in real estate too. 618 00:36:21,840 --> 00:36:22,120 Speaker 4: Annie. 619 00:36:22,120 --> 00:36:24,480 Speaker 1: Thanks Talo alam two with Bloomberg Intelligence in London. 620 00:36:24,960 --> 00:36:25,760 Speaker 2: Thank you James. 621 00:36:26,480 --> 00:36:29,319 Speaker 1: Check out all Tolerance research on the Bloomberg Terminal. It 622 00:36:29,400 --> 00:36:31,680 Speaker 1: really is great stuff. Or contact her directly if you 623 00:36:31,680 --> 00:36:34,440 Speaker 1: need more info and join her webinars. They can be 624 00:36:34,480 --> 00:36:38,399 Speaker 1: found on LinkedIn and the terminal. Thanks again, and thanks 625 00:36:38,440 --> 00:36:41,640 Speaker 1: again to John Dorfmann, chief investment officer at Napier Park, 626 00:36:41,880 --> 00:36:44,120 Speaker 1: and to Lisa Leeve with Bloomberg News in London. Read 627 00:36:44,160 --> 00:36:46,520 Speaker 1: all of Lisa's great scoops on the Bloomberg Terminal and 628 00:36:46,600 --> 00:36:50,120 Speaker 1: of course at Bloomberg dot com, and please do subscribe 629 00:36:50,120 --> 00:36:52,720 Speaker 1: wherever you get your podcasts. We're on Apple, Google, Spotify, 630 00:36:52,840 --> 00:36:55,160 Speaker 1: give us a review, tell your friends, or email me 631 00:36:55,239 --> 00:36:59,240 Speaker 1: directly at Jcromby eight at Bloomberg dot net. I'm James Crumby. 632 00:36:59,320 --> 00:37:01,239 Speaker 1: It's been a pleasure having you. See you next time 633 00:37:01,440 --> 00:37:03,839 Speaker 1: on the Credit Edge.