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

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

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Speaker 1: This week, we're very pleased to welcome David Rosenberg, head

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Speaker 1: of liquid performing credit at oak Tree Capital Management.

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Speaker 2: How are you, David, I'm doing great, Thanks for having me.

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Speaker 1: Thank you so much for coming on the show. We're

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Speaker 1: very excited to hear your views. Also delighted to see

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Speaker 1: co host Jehan Eve coupin from Bloomberg Intelligence. Hello, John Eve,

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Speaker 1: Good afternoon. Just to set the scene of it here,

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Speaker 1: Credit markets have rallied after the US election on hopes

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Speaker 1: of tax cuts, deregulation, and pro growth policies from the

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Speaker 1: next administration. At the same time, global bond yields have

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Speaker 1: risen on fears that inflation will rise. So on the

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Speaker 1: one hand, credit is getting a boost from the economic outlook,

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Speaker 1: but on the other there's a rag from higher for

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Speaker 1: longer interest rates, which will hurt weak borrowers With a

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Speaker 1: lot of debt coming due. There's a lot of uncertainty

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Speaker 1: about the next US government will do. Electoral campaign promises

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Speaker 1: aren't always kept, and politicians will have to adapt to

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Speaker 1: the world as it is. To get things done. Lack

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Speaker 1: of clarity could dampen business sentiment and delay investment. There

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Speaker 1: may also be a drag on economic growth because of it.

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Speaker 1: In addition, there's growing geopolitical risk. Quite a lot of

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Speaker 1: discord on display at this week's G twenty meetings that

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Speaker 1: may ramp up if the next US administration pursues very

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Speaker 1: aggressive tariff policy. Nonetheless, credit market participants still sound very bullish.

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Speaker 1: The expansion of private markets is helping to keep bond

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Speaker 1: spreads very tight. Most people don't expect there to be

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Speaker 1: a recession, so they don't fear a big surge in defaults.

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Speaker 1: Earnings are expected to be decent, underpinning company's ability to

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Speaker 1: repay all the debt that they keep raising. And there's

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Speaker 1: still the sense that the FED has your back if

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Speaker 1: you keep buying as long as you get the higher

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Speaker 1: quality stuff. So as credit spreads grind the tightest level

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Speaker 1: in decades, more people using the word complacency and bubble.

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Speaker 1: What's your view, David, This year has been kind to

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Speaker 1: credit investors, especially those who took on more risk. But

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Speaker 1: what do you expect for the next twelve months? What's

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Speaker 1: the outlook from here?

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Speaker 3: You know, when you talk about credit. I think you

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Speaker 3: hit on it earlier that a lot of this comes

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Speaker 3: down to some of these Some of the things happening

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Speaker 3: in the world are good for credits, some not so good.

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Speaker 3: But I believe the ability to pick credits is going

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Speaker 3: to matter again. I think we're heading into a credit

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Speaker 3: pickers market. I also tell people take it with a

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Speaker 3: grain of salt because I'm a credit picker, so I'm

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Speaker 3: always looking for a credit pickers market.

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Speaker 2: But in my.

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Speaker 3: Opinion, the ability to pick good credits is going to

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Speaker 3: matter a lot more now than it has over the

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Speaker 3: past five or six years because the yield with rates

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Speaker 3: being higher for longer, it means that the yield you

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Speaker 3: earn is quite attractive if.

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Speaker 2: You can earn it.

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Speaker 3: And so if companies don't default, they can tra actually

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Speaker 3: have to pay. And if you pick the companies are

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Speaker 3: going to pay, you're coming out with an income that's

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Speaker 3: far higher than it's been for a very long time.

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Speaker 2: So that makes me very excited about credit.

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Speaker 4: Well, we've said that the environment is pretty benign right now,

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Speaker 4: with you know, strong growth in economy, you know, interest

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Speaker 4: rates coming down, low defaults. How sustainable do you think

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Speaker 4: this is?

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Speaker 3: You know, so there's a few things in that, right.

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Speaker 3: I think the first one to talk about is rates

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Speaker 3: coming down, and I think that you know, as James

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Speaker 3: mentioned earlier, there are forces out there, not necessarily the

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Speaker 3: cause rates to go back up, but maybe kind of

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Speaker 3: slow down the pace of which rates will come down.

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Speaker 3: The market's starting to come around to that reality. I

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Speaker 3: think for a while the market was expecting this step

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Speaker 3: function drop in rates, and I think a smooth glide

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Speaker 3: path just always made a lot more sense because and

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Speaker 3: it's funny because all people have his history, right, that's

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Speaker 3: all we have, and so everyone will go back and say, well,

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Speaker 3: every time the FED cut, they would cut at least

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Speaker 3: three or four times in a row every time, and

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Speaker 3: I would tease that has saying always is dangerous and investing.

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Speaker 2: But I did check. It is true.

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Speaker 3: But if you if you look as to why, you

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Speaker 3: find that it was because there was a crisis. And

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Speaker 3: so whenever the FED was cutting over the last forty years,

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Speaker 3: generally because there was a crisis. And if there's a crisis,

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Speaker 3: one rate cut's not going to solve the crisis. You're

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Speaker 3: gonna have to do this multiple times.

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Speaker 2: Well, today there's no crisis.

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Speaker 3: As we were just talking about the economy is generally

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Speaker 3: doing okay. There's certainly always pockets a weakness we can

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Speaker 3: point to, but generally okay, And so cutting rates successively

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Speaker 3: and quickly doesn't really make.

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Speaker 2: A ton of sense.

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Speaker 3: So I think in that environment you have to think

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Speaker 3: about that. And if rates do stay directionally higher for longer,

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Speaker 3: that is good for the income side. You get to

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Speaker 3: earn more for longer, but that means companies have to

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Speaker 3: pay more for longer, and so if you pick a

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Speaker 3: credit that's a little bit more stretched, that's going to

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Speaker 3: be a challenge. I do think the economic situation, if

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Speaker 3: you look at earnings across most sectors, is pretty strong.

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Speaker 3: And so as we look around, i'd say that the

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Speaker 3: low end consumer is starting to show that it's getting

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Speaker 3: a little bit stretched. And so you look at the

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Speaker 3: low end consumer and you look at things like traffic

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Speaker 3: at fast food restaurants. So McDonald's traffic is down. Now,

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Speaker 3: the revenue dollars may be okay because they raise prices,

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Speaker 3: but the traffic is down. Starbucks traffic's down, Wendy's traffic

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Speaker 3: is down. My auto analyst told me the other day

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Speaker 3: that the percentage of car repossessions is above twenty nineteen

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Speaker 3: levels today, and I think about that. The last bill

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Speaker 3: you stop paying is your car because you need it

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Speaker 3: to get to work, and people are not being able

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Speaker 3: to pay that bill in the banks are taking the cars,

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Speaker 3: and so that shows you there is a cohort of

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Speaker 3: the consumer that is clearly stretched. But the middle end consumer,

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Speaker 3: high end consumer is still very strong. Travel, very strong,

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Speaker 3: leisure goods very strong, and so I don't think that

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Speaker 3: rolls over anytime soon. So I think that's an environment

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Speaker 3: that I think will go on for, you know, easily

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Speaker 3: another twelve months. You can also think about a Trump presidency. Right, So, Trump,

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Speaker 3: in pretty much every campaign speech mentioned the word terrace

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Speaker 3: terras is the definition of inflation. You have higher prices

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Speaker 3: the very next day, you're talking about lowering corporate taxes.

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Speaker 2: That creates a deficit.

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Speaker 3: Deficit requires selling debt that again puts upward pressure on rates.

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Speaker 3: And you're talking about border control that's also inflationary. So

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Speaker 3: there are forces out here that I think will potentially

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Speaker 3: slow down the path with which the market is hoping

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Speaker 3: and wanting rates to go down.

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Speaker 1: As you say, though, it does mean that some companies,

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Speaker 1: well all companies are gonna have to pay more to

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Speaker 1: service that debt, that's right, and more than they're expecting.

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Speaker 1: And a lot of them are expecting rates to come

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Speaker 1: down significantly, which was you know, the rates of dubvish

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Speaker 1: expectation became in this year beginning with you know, the

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Speaker 1: rates would just drop. How much of the market is

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Speaker 1: in trouble if rates, you know, just glide and maybe

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Speaker 1: they stay where they are right now.

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Speaker 3: Well that's a good question, right, And so the thing

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Speaker 3: about the market right now is the quality is very high.

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Speaker 3: So we had an interesting dynamic with COVID because usually

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Speaker 3: I always say that the recession is the cleansing event

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Speaker 3: of the market, but we had a cleansing event before

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Speaker 3: a potential recession with COVID. Right, So in high yield

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Speaker 3: default rates near seven percent and loans default rates or

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Speaker 3: four percent. And if you think about those companies that

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Speaker 3: defaulted during COVID would have stumbled along without COVID until

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Speaker 3: the next recession, then they would have defaulted. So whatever

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Speaker 3: recession comes, now you've pulled forward a lot of these

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Speaker 3: defaults and those week companies have left the market. The

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Speaker 3: other thing you have is you had this inflow of

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Speaker 3: money into credit and so you know, you kind of

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Speaker 3: think about twenty twenty three. You take the highield market

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Speaker 3: as an example. In January twenty twenty three, yields were

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Speaker 3: near nine percent and spreads were near six hundred, and

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Speaker 3: six hundred is an abnormally widespread and so I remember

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Speaker 3: going to a lot of people saying you should buy,

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Speaker 3: spreads are wide and never say no, I'm waiting for

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Speaker 3: one thousand, And I would joke that, you know, mathematically

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Speaker 3: you can't get to a thousand spread for the market,

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Speaker 3: and half the market's double b It doesn't make any sense.

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Speaker 3: But it was a debate, so not everybody agreed, and

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Speaker 3: that's fine. Then you fast forward to October of twenty three.

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Speaker 3: Spreads had gone down from six hundred down to four hundred,

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Speaker 3: but the yield is still nine turns out, spreads go down,

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Speaker 3: rates go up, you know, and all of a sudden,

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Speaker 3: I think there was a light bulb in the moment

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Speaker 3: for the market where they said, oh my gosh, I've

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Speaker 3: been waiting to tie my entry. Now I'm gonna buy

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Speaker 3: for the same nine percent I could have bought in January,

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Speaker 3: but I missed ten months of clipping nine percent, and

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Speaker 3: all this money came pouring into credit the fourth quarter

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Speaker 3: of twenty twenty three, first quarter twenty twenty four. Well,

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Speaker 3: that does a few things. When money comes in. I've

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Speaker 3: always learned that supply follows demand, not demand following supply.

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Speaker 3: If you show up with money, bankers will find something

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Speaker 3: to sell you.

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Speaker 2: And so as.

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Speaker 3: Money came pouring into credit, you saw all these companies refinance.

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Speaker 3: And so most people when they think about defaults and

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Speaker 3: when they think about stress in the market, they'll point

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Speaker 3: to the maturity wall. That's your hint of what could

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Speaker 3: be in trouble because the companies haven't fre financed yet.

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Speaker 3: And if you hit a weak patch in the market

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Speaker 3: and you can't refinance, you after restructure. But when all

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Speaker 3: this money came in, it pushed out the maturity wall.

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Speaker 3: So for twenty twenty five, less than five percent of

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Speaker 3: bonds and loans are maturing. It's deminimous the maturity wall,

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Speaker 3: and so that takes a lot of default risk off

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Speaker 3: the table that was in place before this money came in,

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Speaker 3: and so it kind of makes the market help there.

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Speaker 3: The other thing, you know, when you think about risk

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Speaker 3: in the market, you know, I'm.

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Speaker 2: A liquid guy.

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Speaker 3: Like to talk about liquid credits ever, and it's like, oh,

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Speaker 3: you must hate private credit, and I'm like, I love

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Speaker 3: private credit. They're buying all my risky stuff and taking

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Speaker 3: it out of the market. And so private credit has

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Speaker 3: had a bonanza, and you know, to be fair to

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Speaker 3: private credit, which I'm not always as a liquid guys,

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Speaker 3: there's some really amazing pockets of private credit and amazing

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Speaker 3: opportunities of deals to do, like rescue financing. But it's

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Speaker 3: a very big market and so there's also some places

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Speaker 3: where you know, you're seeing the discipline go down and

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Speaker 3: you're seeing risky deals that can't get done on the

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Speaker 3: liquid side get absorbed on the private side because it's

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Speaker 3: a way for them.

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Speaker 2: To deploy capital.

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Speaker 3: Well, again, that's an example of a deal that may

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Speaker 3: have defaulted but now won't because it got refinances. So

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Speaker 3: it's going to have at least five more years before

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Speaker 3: potentially defaults, and if it does, it'll be in another market.

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Speaker 3: So you've had a couple things that have made our

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Speaker 3: market healthier, you know, COVID taking defaults early, You've had

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Speaker 3: new money come in to refinance things, and you have

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Speaker 3: private debt start to absorb in that combination, in my opinion,

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Speaker 3: makes this a much more likely benign environment.

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Speaker 4: I'd like to drail a little bit on the view

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Speaker 4: that the COVID that cleans the market and the you know,

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Speaker 4: weakest companies have been taken out of the market. Moody's

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Speaker 4: publishes their list of companies in B three negative and below,

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Speaker 4: and I think it's you know, currently they're seeing about

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Speaker 4: fifteen percent of high issuers are in that category, which

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Speaker 4: is kind of you know, in line with the long

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Speaker 4: term average, so that you know, points to definitely.

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Speaker 2: Not a deterioration.

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Speaker 4: However, in the past two quarters they've seen an improvement

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Speaker 4: and an increase in this UH in this ratio of

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Speaker 4: companies in that weeker past of part of the credit market.

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Speaker 4: And what I wonder is have companies for some of

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Speaker 4: them kick the can down the road by doing some

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Speaker 4: restructuring and and that you know, sort of buying some time.

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Speaker 4: It's officially into sort of you know weak single be

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Speaker 4: treple C category that we could see you know, maybe

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Speaker 4: in a year or two come back and you know,

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Speaker 4: having to you know, refinance or having facing some some

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Speaker 4: difficulties again.

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Speaker 3: Yeah, no, I think you're referring to liability management exchanges

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Speaker 3: l E or as people like to say lender on

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Speaker 3: lender violence, and the short answer is yes. Right, So

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Speaker 3: if you look at quality of the market, what you'll

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Speaker 3: see as well, the double the weak single bee may

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Speaker 3: be growing, the triple C is lower. Right, So the

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Speaker 3: triple C is the lowest for high yield to triple

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Speaker 3: C is the lowest we've had in a decade. And uh,

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Speaker 3: and so I think overall you still have a better quality.

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Speaker 3: And the double b's the largest has been in a decade,

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Speaker 3: and so that's very strong. And on the loan side,

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Speaker 3: you were seeing the week single be grow and now

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Speaker 3: it's shrinking to some degree as it as.

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Speaker 2: It goes public to private.

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Speaker 3: But you still have some companies that are stressed. Right,

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Speaker 3: there's always some cohort of companies that are stressed. And

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Speaker 3: what you see these days is so you take a

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Speaker 3: company that got financed.

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Speaker 2: To in LBO.

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Speaker 3: Those are always the riskiest deals, right, leverage buyouts, private

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Speaker 3: equity sponsors and maximizing levers to drive an eternal rate

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Speaker 3: to return. And in twenty eighteen, twenty nineteen, when you

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Speaker 3: did an LBO, you know, and you know this will

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Speaker 3: show you my cynical nature, But I'm a bond investor.

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Speaker 3: So I like to say professional pessimist, not cynic. But still,

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Speaker 3: if you look at what happened, in my opinion, the

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Speaker 3: model was, it doesn't matter what I pay as a

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Speaker 3: private equity sponsor because I have free money to finance it.

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Speaker 3: I just need to pay enough to win the auction

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Speaker 3: against my competitors so I can deploy my capital. And

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Speaker 3: so if you look, multiples were just steadily creeping higher,

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Speaker 3: and they were doing it with floating rate debt. And

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Speaker 3: this is the part that's always fascinating to me because

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Speaker 3: I used to be a lender a couple decades ago.

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Speaker 3: When I was a lender, I was a junior lender,

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Speaker 3: and the credit deputy at the bank would not allow

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Speaker 3: me to make a loan unless the borrower hedged half

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Speaker 3: its baring costs. That was the rule of the bank

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Speaker 3: because back then, if you were a bank and you

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Speaker 3: wanted to syndicate the loan, you could not do so

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Speaker 3: unless you were willing to hold some on your balance sheet.

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Speaker 3: That was, no one would buy it from you if

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Speaker 3: you weren't going to own it yourself. And so that

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Speaker 3: was the rule because the bank's actually cared if you

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Speaker 3: could pay the loan back because they owned it. Now,

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Speaker 3: generally banks don't sit on the loans, they syndicate the

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Speaker 3: whole things. They don't care if you can pay back,

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Speaker 3: and so that requirement's gone away.

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Speaker 2: And so a couple of years ago when.

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Speaker 3: I had this epiphany, I remember going to our portfolio

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Speaker 3: manager of our loan strategy to say, okay, the loan

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Speaker 3: market's not required by the banks to hedge, but you

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Speaker 3: got private equity sponsors. They're financially savvy, record low rates,

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Speaker 3: surely a lot of them must to Hedge's not exactly

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Speaker 3: expensive or complicated to do. And so he checked and

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Speaker 3: it turned out about twenty five percent hedge.

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Speaker 2: Twenty five percent.

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Speaker 3: It's funny today you talk to people that said, no,

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Speaker 3: over half the market's hedge. I'm like, great, well, if

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Speaker 3: you hedge a five percent SOFA, I'm not really sure

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Speaker 3: what that means. But when SOFA was zero to one,

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Speaker 3: nobody was hedging, and they were all maximizing leverage with

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Speaker 3: these LBOs. And so those are the companies. Now the

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Speaker 3: barn costs is doubled, and some of them are now

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Speaker 3: going to have to struggle. Rates don't quickly go back

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Speaker 3: down to deal with paying for that interest, and so

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Speaker 3: that's where you see these lmes, which are equivalent to,

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Speaker 3: in my opinion, of an out of court structuring. You're

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Speaker 3: not going through bankruptcy, but people are memorializing a loss

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Speaker 3: and exchanging their debt into new It's effectively.

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Speaker 2: The same thing.

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Speaker 3: The big question is do you cure the problem? And

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Speaker 3: a lot of times I think the answer is no,

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Speaker 3: because the pain required to cure the problem. Nobody wants

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Speaker 3: to be the one to take the pain. They're like, yes,

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Speaker 3: pain needs to be taken, you should take it. I'll

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Speaker 3: be I'll keep my position intact. And when everyone's pointing

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Speaker 3: fingers at each other, you end up negotiating a deal

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Speaker 3: that often doesn't fix the problem. It kicks the can

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Speaker 3: to your point, which means a couple of years from now,

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Speaker 3: these companies are still.

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Speaker 2: Going to be levered. And it's a symptom.

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Speaker 3: Of you know, I remember, around the time of COVID,

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Speaker 3: before rates start going higher, I was having a conversation

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Speaker 3: with a strategist where I said, I'm starting to worry

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Speaker 3: that leverage is creeping higher, and the strategy said.

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Speaker 2: Why are you looking at leverage? Look at interest coverage.

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Speaker 3: You know you can have high leverage because it's it's

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Speaker 3: free money and you can just support it. And I'm like,

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Speaker 3: that's fine on a day to day basis, but eventually

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Speaker 3: you got to pay the money back.

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Speaker 2: How is nobody thinking about that?

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Speaker 3: And now that day is here, and so I think

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Speaker 3: that's what you're starting to see. So again, this is

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Speaker 3: why I think we're in a credit pickers market, because

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Speaker 3: the yield's already high. I tell people all the time,

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Speaker 3: we don't need to be a hero. The yield is

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Speaker 3: already high.

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Speaker 2: We just have to keep it.

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Speaker 3: And if you're better at keeping the yield than other people,

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Speaker 3: you're going to do quite well because the companies that

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Speaker 3: can pay have to pay. So, you know, everyone says, well,

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Speaker 3: the covenants.

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Speaker 2: Are really weak cross credit. Very true.

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Speaker 3: That's why we have this l ME because the covenants

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Speaker 3: allow it. And everyone's like, well, how do you know?

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Speaker 2: You know which you know?

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Speaker 3: Do you go through the covenants, which of course we

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Speaker 3: do to kind of protect yourself from l ME and

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Speaker 3: a sad Well, the truth is most companies can do

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Speaker 3: an l ME today. The covenants are what they are,

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Speaker 3: you can't change them, and they're generally weak. The reality is,

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Speaker 3: if you have a healthy credit and you try to

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Speaker 3: do an LME. The covenants may allow it, but you know,

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Speaker 3: you take high yield. Again for an example, the average

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Speaker 3: leverage in a high credits four times if you're four

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Speaker 3: times levered. And so when comest and says, hey, I

355
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Speaker 3: want to do an LME and I want you to

356
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Speaker 3: exchange in this new deal at fifty cents on the dollar,

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Speaker 3: you say, well, no, I don't want to do that.

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Speaker 3: And by the way, you have the right to just

359
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Speaker 3: sit on what you own and when it matures, they

360
00:16:12,120 --> 00:16:13,880
Speaker 3: have to pay you back. If they're solvent, and most

361
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Speaker 3: companies are four times lever it'll be solvent. If you're

362
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Speaker 3: ten times levered, then you get to go and say, hey,

363
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Speaker 3: I want you to do this exchange. If you don't,

364
00:16:20,880 --> 00:16:22,640
Speaker 3: we're going into bankruptcy. And you actually have a stick.

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Speaker 3: And so the weaker credits are the ones that can

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Speaker 3: get this down. The rest of them, the market will

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Speaker 3: just say no.

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Speaker 4: And talking about those weakest credits, he's it a part

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Speaker 4: of the market that you're interested to invest in because

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Speaker 4: when they are when it comes restructuring time, and you know,

371
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Speaker 4: sometimes misity gets capital from outside. I mean, is that

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Speaker 4: an area of the market that could be of interest

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Speaker 4: where arguably could be you know, outsize earning.

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Speaker 3: For sure, I always like to buy what people don't

375
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Speaker 3: want to buy, and so you know, I always caution

376
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Speaker 3: this with you know, my job and clients come to

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Speaker 3: me to get buy things that will pay. So I'm

378
00:16:59,280 --> 00:17:02,040
Speaker 3: not looking to take equity in companies and takeover companies

379
00:17:02,120 --> 00:17:05,119
Speaker 3: is a whole different strategy. It's distressed or people are

380
00:17:05,160 --> 00:17:06,840
Speaker 3: very good at that, but it's a different skill set.

381
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Speaker 3: My skill set is to find companies that can pay

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Speaker 3: or structure securities within companies that are struggled where I

383
00:17:12,720 --> 00:17:14,840
Speaker 3: know I'm going to get paid back and so if

384
00:17:14,920 --> 00:17:17,640
Speaker 3: and when that area starts to heat up, yeah, we'll

385
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Speaker 3: be looking at that. I expect we'll get a lot

386
00:17:19,520 --> 00:17:22,800
Speaker 3: of competition from private debt because that's one area where

387
00:17:22,920 --> 00:17:25,720
Speaker 3: probably can more efficiently structure, and so you're going to

388
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Speaker 3: see a lot of what they call rescue financing. I

389
00:17:27,840 --> 00:17:29,600
Speaker 3: think of the private debt market. I think that's going

390
00:17:29,640 --> 00:17:31,800
Speaker 3: to be one of the greatest opportunities we've seen in

391
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Speaker 3: a decade. And it'll be for these companies that need money,

392
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Speaker 3: and so you'll have people come from both angles. But

393
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Speaker 3: it's always great to be a liquidity provider and people

394
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Speaker 3: are desperate for liquidity, you tend to be able to

395
00:17:43,000 --> 00:17:44,760
Speaker 3: get very good terms that way. It tends not to

396
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Speaker 3: last for a huge, huge amount of time, so you

397
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Speaker 3: have to be ready. But it feels like that part

398
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Speaker 3: of the cycle is coming.

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Speaker 1: But to be clear, that means that companies that are

400
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Speaker 1: struggling and they would otherwise doing that, lem me, the

401
00:17:55,800 --> 00:17:57,600
Speaker 1: private detmarkt is just going to go directly to them

402
00:17:57,600 --> 00:18:00,360
Speaker 1: and do it by natural loan to help them out.

403
00:18:00,560 --> 00:18:01,359
Speaker 2: Yeah, so think about it.

404
00:18:01,359 --> 00:18:03,560
Speaker 3: Think about the options a company has. So you're looking

405
00:18:03,600 --> 00:18:06,480
Speaker 3: at a near term maturity and you have a balance

406
00:18:06,560 --> 00:18:09,760
Speaker 3: sheet that's two levered, so you can go to existing

407
00:18:09,800 --> 00:18:13,040
Speaker 3: creditors and say, hey, I want you to exchange into

408
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Speaker 3: a new loan or new bond, and now I've extended

409
00:18:15,800 --> 00:18:17,639
Speaker 3: my maturity, so I deal with a short term maturity,

410
00:18:17,680 --> 00:18:18,880
Speaker 3: and I want you to do it at fifty cents

411
00:18:18,920 --> 00:18:20,880
Speaker 3: on the dollars so I can delever and there will

412
00:18:20,920 --> 00:18:24,280
Speaker 3: be a negotiation. Or you go to a private lender

413
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Speaker 3: and the private lender says, okay, because the covenants are

414
00:18:26,400 --> 00:18:27,800
Speaker 3: so weak, I want you to take some of these

415
00:18:27,800 --> 00:18:30,000
Speaker 3: assets away from creditors. Give it to me, I'll give

416
00:18:30,000 --> 00:18:32,960
Speaker 3: you new money, and now you take that new money

417
00:18:33,040 --> 00:18:35,119
Speaker 3: and pay off the short maturity and go in the

418
00:18:35,160 --> 00:18:37,360
Speaker 3: market and buy stuff back at a discount and try

419
00:18:37,400 --> 00:18:39,520
Speaker 3: and get your debt discount that way. And so it

420
00:18:39,560 --> 00:18:43,320
Speaker 3: becomes the negotiation between between the two parties as far

421
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Speaker 3: as which way you're going to do. Most companies lately,

422
00:18:45,880 --> 00:18:49,919
Speaker 3: I've observed prefer as to go They'll use the private

423
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Speaker 3: side as a negotiating stick, but they'll prefer to go

424
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Speaker 3: with existing lenders.

425
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Speaker 2: Is much more efficient.

426
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Speaker 3: You know, you get an exchange versus having to go

427
00:18:55,680 --> 00:18:58,480
Speaker 3: buy everything in the market, and so that generally is

428
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Speaker 3: how it goes so far, does it? I mean, that's

429
00:19:00,440 --> 00:19:02,760
Speaker 3: how it'll go going forward. But those are the two

430
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Speaker 3: types simplistically types of deals.

431
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Speaker 1: But the private lend is the way of talking to

432
00:19:06,480 --> 00:19:08,359
Speaker 1: about that kind of business. You know, they're talking about

433
00:19:08,640 --> 00:19:12,720
Speaker 1: high double digits correct twenty percent, you know, which is

434
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Speaker 1: great for the investment, but hell sustainable full of the bloo.

435
00:19:15,520 --> 00:19:18,640
Speaker 3: Well, so it depends on how much debt discount they're

436
00:19:18,640 --> 00:19:21,560
Speaker 3: capturing at the same time, and so you know the

437
00:19:21,600 --> 00:19:24,439
Speaker 3: other again back to my cynical nature. You think about

438
00:19:24,880 --> 00:19:28,400
Speaker 3: a rescue financing if a company is truly run out

439
00:19:28,440 --> 00:19:30,960
Speaker 3: of money, you know the balance sheet is stretched and

440
00:19:31,000 --> 00:19:34,399
Speaker 3: they're going into bankruptcy. You look at the private equity

441
00:19:34,440 --> 00:19:36,640
Speaker 3: sponsor who probably owns this company. You say, here's the deal.

442
00:19:37,000 --> 00:19:39,400
Speaker 3: I will give you five years a runway to try and.

443
00:19:39,359 --> 00:19:40,040
Speaker 2: Figure this out.

444
00:19:40,400 --> 00:19:42,200
Speaker 3: It's going to cost you, but what do you care.

445
00:19:42,280 --> 00:19:44,080
Speaker 3: Your option is to throw away the keys and get

446
00:19:44,080 --> 00:19:44,439
Speaker 3: wiped out.

447
00:19:44,440 --> 00:19:45,040
Speaker 2: So you're going to pay.

448
00:19:45,720 --> 00:19:47,560
Speaker 3: And I'm only going to do this if i can

449
00:19:47,640 --> 00:19:49,840
Speaker 3: layer everybody else. I'm in the very safest part of

450
00:19:49,880 --> 00:19:52,240
Speaker 3: the balance sheet. So if you work it out, then

451
00:19:52,240 --> 00:19:54,240
Speaker 3: I get a good return. But if you don't, I

452
00:19:54,400 --> 00:19:56,680
Speaker 3: still have a debt claim that's going to be protected

453
00:19:56,680 --> 00:19:58,360
Speaker 3: because everyone below me is going to take the loss.

454
00:19:58,359 --> 00:20:01,320
Speaker 3: So that's your simplistic rescue Finnis. So it's very expensive,

455
00:20:01,760 --> 00:20:05,320
Speaker 3: but it's pure optionality. And so if the cycle turns

456
00:20:05,359 --> 00:20:08,280
Speaker 3: and if rates go down, or a company or industries grow,

457
00:20:08,359 --> 00:20:11,040
Speaker 3: whatever it may be, the company grows into its balance sheet.

458
00:20:11,080 --> 00:20:14,600
Speaker 3: But that's why, to Johnny's point, before a lot of these,

459
00:20:14,960 --> 00:20:16,879
Speaker 3: you'll take on this new debt. It'll give you a

460
00:20:16,920 --> 00:20:18,640
Speaker 3: couple of years a runway, and then you'll be right

461
00:20:18,640 --> 00:20:20,919
Speaker 3: back where you started, if you haven't done something to

462
00:20:20,960 --> 00:20:23,399
Speaker 3: grow with the new money, and then you're still you're

463
00:20:23,440 --> 00:20:24,800
Speaker 3: still going to be struggling, and.

464
00:20:24,800 --> 00:20:26,640
Speaker 1: It dons the opportunity that you see. You're talking about

465
00:20:26,640 --> 00:20:28,199
Speaker 1: a big opportunity over the next ten years. I mean,

466
00:20:28,240 --> 00:20:31,399
Speaker 1: is it the sectors? Is it particular types of companies

467
00:20:31,440 --> 00:20:33,000
Speaker 1: that you're looking at in this regards?

468
00:20:33,119 --> 00:20:35,439
Speaker 3: You know, for for this type of stuff, it'll be

469
00:20:35,640 --> 00:20:39,560
Speaker 3: the sectors that were more LBO heavy, and so, you know,

470
00:20:39,640 --> 00:20:44,240
Speaker 3: you think about technology, healthcare, you know, sectors where you've

471
00:20:44,280 --> 00:20:45,720
Speaker 3: seen more LBOs.

472
00:20:45,920 --> 00:20:48,000
Speaker 2: That's where what my sense would be.

473
00:20:48,800 --> 00:20:51,000
Speaker 1: And it's an opportunity right now that you see for

474
00:20:51,160 --> 00:20:51,880
Speaker 1: oak Tree.

475
00:20:52,160 --> 00:20:53,879
Speaker 3: I think, so it won't be for all parts of

476
00:20:53,880 --> 00:20:55,679
Speaker 3: oak Tree, but I think that you know, we have

477
00:20:55,720 --> 00:20:58,399
Speaker 3: a big private debt business and distress business, and I

478
00:20:58,400 --> 00:20:59,960
Speaker 3: imagine those guys can be very act.

479
00:21:01,400 --> 00:21:05,000
Speaker 4: Moving on to maybe the impact of the recent election

480
00:21:05,160 --> 00:21:08,520
Speaker 4: could have on some of the industries that we imagine

481
00:21:08,560 --> 00:21:11,560
Speaker 4: you invest in. And going back to that statistic, which

482
00:21:11,800 --> 00:21:14,520
Speaker 4: I think is quite interesting. On this Moodys B three

483
00:21:14,560 --> 00:21:18,760
Speaker 4: negative list, the subsector that has the highest representation is

484
00:21:18,800 --> 00:21:21,399
Speaker 4: earl and gas I think of twenty one percent, and

485
00:21:21,440 --> 00:21:26,560
Speaker 4: I wonder is there an opportunity there considering potential changes

486
00:21:26,680 --> 00:21:31,440
Speaker 4: to regulatory environment to you know, invest in that part

487
00:21:31,440 --> 00:21:34,040
Speaker 4: of the market, as those companies are currently stressed but

488
00:21:34,119 --> 00:21:38,440
Speaker 4: might actually benefit from an improvement in the our parting environment. Going.

489
00:21:38,600 --> 00:21:40,960
Speaker 3: Yeah, so think of the thing about oil and gas.

490
00:21:41,000 --> 00:21:43,520
Speaker 3: You got to think about volume and price, right, and

491
00:21:43,600 --> 00:21:47,560
Speaker 3: a lot of these regulatory changes people are expecting. Is

492
00:21:47,560 --> 00:21:51,000
Speaker 3: two big things people are expecting from the Trump presidency.

493
00:21:51,000 --> 00:21:52,040
Speaker 2: In the oil business.

494
00:21:52,119 --> 00:21:54,520
Speaker 3: You have the drill, baby drill, so a lot more

495
00:21:54,520 --> 00:21:58,560
Speaker 3: supply and as they release restrictions and allow more companies

496
00:21:58,560 --> 00:22:01,760
Speaker 3: to drill. And you have the claim that the rush

497
00:22:01,800 --> 00:22:05,719
Speaker 3: of Ukraine, you know, whole crisis will be ended very

498
00:22:05,800 --> 00:22:10,119
Speaker 3: very swiftly and shortly. Well, both of those add supply

499
00:22:10,200 --> 00:22:12,439
Speaker 3: to the market, which bring prices down. So you have

500
00:22:12,480 --> 00:22:15,200
Speaker 3: to think about that, which is, you know, oil prices

501
00:22:15,240 --> 00:22:17,520
Speaker 3: and theory should come down. Gas prices should come down

502
00:22:17,560 --> 00:22:21,159
Speaker 3: if there's more supply without and you know a you know,

503
00:22:21,480 --> 00:22:23,800
Speaker 3: increasing demand at the same time. And so I'm a

504
00:22:23,840 --> 00:22:25,760
Speaker 3: little more cautious. You know, it goes back to kind

505
00:22:25,760 --> 00:22:27,399
Speaker 3: of you know, I like to be controller and I

506
00:22:27,440 --> 00:22:29,399
Speaker 3: like to buy energy when everyone hates energy and I

507
00:22:29,440 --> 00:22:31,439
Speaker 3: like to sell energy when everyone loves energy. The thing

508
00:22:31,480 --> 00:22:34,919
Speaker 3: about energy, you know, it's an above average risk sector

509
00:22:35,240 --> 00:22:38,080
Speaker 3: because you have this unknowable which is what's the price

510
00:22:38,080 --> 00:22:39,679
Speaker 3: of the commodity going to be tomorrow, which is so

511
00:22:39,760 --> 00:22:42,040
Speaker 3: important to the profitability of every company in the sector.

512
00:22:42,680 --> 00:22:44,840
Speaker 3: And so for me, I'm okay to buy above average

513
00:22:44,920 --> 00:22:47,320
Speaker 3: risk things. So I invest in blow investment grade for

514
00:22:47,400 --> 00:22:49,679
Speaker 3: a living. But I always say, if you're going to

515
00:22:49,720 --> 00:22:51,800
Speaker 3: go into something that's above average risk, you should get

516
00:22:51,800 --> 00:22:54,320
Speaker 3: above average reward. Most people don't fight me on that,

517
00:22:54,920 --> 00:22:58,680
Speaker 3: And so to me, when you have periods like COVID

518
00:22:58,960 --> 00:23:01,040
Speaker 3: and oil goes negative for a period of time and

519
00:23:01,080 --> 00:23:04,760
Speaker 3: everyone's convinced you'll never use fossil fuels ever, again, we're

520
00:23:04,760 --> 00:23:07,879
Speaker 3: aggressively buying higher quality energy names that are a creative

521
00:23:07,880 --> 00:23:11,119
Speaker 3: to our portfolios. And you have today days like today

522
00:23:11,160 --> 00:23:14,280
Speaker 3: where oil is hovering around seventy and everyone's convinced no,

523
00:23:14,960 --> 00:23:17,840
Speaker 3: nothing will ever go wrong and energy again, and it's

524
00:23:17,880 --> 00:23:20,639
Speaker 3: dilutive to the portfolio. I'm a better seller because if

525
00:23:20,680 --> 00:23:23,760
Speaker 3: I can sell an energy name and buy anything else

526
00:23:23,960 --> 00:23:25,840
Speaker 3: that doesn't have that kind of volatility but has the

527
00:23:25,840 --> 00:23:28,760
Speaker 3: same yield, I should do that. And so that to

528
00:23:28,840 --> 00:23:31,480
Speaker 3: me is kind of how I treat the sector. And

529
00:23:31,560 --> 00:23:35,760
Speaker 3: so if I'm right and energy prices start to weaken

530
00:23:35,840 --> 00:23:38,400
Speaker 3: because of these policy changes, then we'll probably start looking

531
00:23:38,480 --> 00:23:41,280
Speaker 3: to where we can buy some higher quality stuff.

532
00:23:41,880 --> 00:23:44,720
Speaker 4: Away from energy. I mean, do you have any sectors

533
00:23:44,840 --> 00:23:47,439
Speaker 4: or subsectors industries that you like and don't like from

534
00:23:47,480 --> 00:23:49,440
Speaker 4: any investments than born right now? Yeah.

535
00:23:49,520 --> 00:23:50,000
Speaker 2: So it's funny.

536
00:23:50,040 --> 00:23:51,280
Speaker 3: I'm a credit guy, so I was like to talk

537
00:23:51,320 --> 00:23:53,399
Speaker 3: about what I don't like versus what I do like.

538
00:23:53,400 --> 00:23:55,359
Speaker 3: I mean, the reality is, in the end of the day,

539
00:23:55,800 --> 00:23:59,640
Speaker 3: you buy credit for their contractual income, and so there's

540
00:23:59,680 --> 00:24:01,359
Speaker 3: nothing is going to double and triple and value.

541
00:24:01,400 --> 00:24:03,400
Speaker 2: It's all about picking what can pay.

542
00:24:03,440 --> 00:24:07,000
Speaker 3: And so we talked about energy where I'm shying away,

543
00:24:07,280 --> 00:24:10,240
Speaker 3: you know, the other sectors where I'm really cautious these days,

544
00:24:10,320 --> 00:24:14,480
Speaker 3: or anything that's consumer discretionary spending dependent. Because we talked

545
00:24:14,480 --> 00:24:17,080
Speaker 3: about the weakening and the low end consumer and the

546
00:24:17,119 --> 00:24:19,600
Speaker 3: potential for that to spread, and the reality that rates

547
00:24:19,640 --> 00:24:22,119
Speaker 3: do stay a little higher for longer that does start

548
00:24:22,160 --> 00:24:24,920
Speaker 3: to stretch a consumer. You know, it's funny people talk

549
00:24:24,920 --> 00:24:28,280
Speaker 3: about inflation. They say, well, inflations come down, and ours

550
00:24:28,320 --> 00:24:31,400
Speaker 3: remind people. Inflation is a rate of growth. The rate

551
00:24:31,440 --> 00:24:34,000
Speaker 3: of growth has come down from nine percent to two

552
00:24:34,000 --> 00:24:36,280
Speaker 3: to three percent, but that's still growth, which means that

553
00:24:36,359 --> 00:24:38,800
Speaker 3: prices people are paying are a good twenty percent higher

554
00:24:38,800 --> 00:24:41,400
Speaker 3: than they were pre COVID, and that really stretches a consumer.

555
00:24:41,440 --> 00:24:43,760
Speaker 3: And it's not coming down, it's just going up slower.

556
00:24:44,320 --> 00:24:46,840
Speaker 3: And so in that type of environment, I start to

557
00:24:46,880 --> 00:24:50,959
Speaker 3: worry about sectors that are dependent on consumers continuing to

558
00:24:50,960 --> 00:24:54,959
Speaker 3: spend discretion on discretionary at an item. So specialty, retail, automotive,

559
00:24:55,040 --> 00:24:57,840
Speaker 3: things that people can buy but don't need to buy,

560
00:24:58,359 --> 00:25:00,159
Speaker 3: is an area that I'm very cautious on.

561
00:25:01,160 --> 00:25:02,240
Speaker 1: I just want to go back to something you said

562
00:25:02,240 --> 00:25:05,679
Speaker 1: about credits from credit of violence. Yeah, it's an interesting topic.

563
00:25:05,760 --> 00:25:08,160
Speaker 1: We've talked about it a lot on this show. We've

564
00:25:08,280 --> 00:25:10,800
Speaker 1: ranged from opinion that it's just the law of the land.

565
00:25:10,800 --> 00:25:13,879
Speaker 1: It's part of capitalism at work too. It's terrible and

566
00:25:14,080 --> 00:25:17,159
Speaker 1: you know, the only winners of the lawyers. Do you

567
00:25:17,280 --> 00:25:19,679
Speaker 1: see an opportunity there? I mean, how do you like

568
00:25:19,800 --> 00:25:22,760
Speaker 1: factor it into your investment decisions? You know, given that

569
00:25:22,840 --> 00:25:25,600
Speaker 1: you think that it also leads the company in worse shape.

570
00:25:25,760 --> 00:25:27,679
Speaker 3: It can you know, some of these will work, and

571
00:25:27,720 --> 00:25:29,560
Speaker 3: a lot of them I think won't. I think the

572
00:25:29,560 --> 00:25:32,080
Speaker 3: reality is, you know, we spend a lot of time

573
00:25:32,119 --> 00:25:36,760
Speaker 3: on covenants. Not everybody does, and so to me, it's

574
00:25:36,800 --> 00:25:39,560
Speaker 3: always you know, you should never you know, come in

575
00:25:39,800 --> 00:25:42,640
Speaker 3: you know the covenants when you when you read them,

576
00:25:42,920 --> 00:25:45,679
Speaker 3: you know generally you go into an indenture. There's generally

577
00:25:45,760 --> 00:25:48,640
Speaker 3: a standard package in the market. It changes from day

578
00:25:48,680 --> 00:25:50,159
Speaker 3: to day, but if you read enough of them, you

579
00:25:50,240 --> 00:25:53,360
Speaker 3: know what standard. And if a company strays from the standard.

580
00:25:53,400 --> 00:25:55,080
Speaker 3: They don't do it for sport. They have to pay

581
00:25:55,160 --> 00:25:56,560
Speaker 3: lawyers a lot of money to do it. They do

582
00:25:56,600 --> 00:25:59,240
Speaker 3: it for a reason, which means that there is literally

583
00:25:59,680 --> 00:26:02,399
Speaker 3: a roadmap of exactly what the company is going to

584
00:26:02,400 --> 00:26:04,080
Speaker 3: do if things go wrong, if you're willing to read it.

585
00:26:04,119 --> 00:26:05,720
Speaker 3: And the problem is a lot of people don't because

586
00:26:05,840 --> 00:26:07,480
Speaker 3: you could have a sentence, it goes a whole page

587
00:26:07,520 --> 00:26:10,399
Speaker 3: and it's boring, and so that's a bit of an

588
00:26:10,400 --> 00:26:12,679
Speaker 3: efficiency in the market in my opinion. So we spend

589
00:26:12,720 --> 00:26:15,440
Speaker 3: time on this, and I do that on purpose because

590
00:26:15,480 --> 00:26:18,359
Speaker 3: I want to know if things go wrong. You know,

591
00:26:18,800 --> 00:26:20,440
Speaker 3: a how likely is it the things are going to

592
00:26:20,480 --> 00:26:20,680
Speaker 3: go wrong?

593
00:26:20,720 --> 00:26:21,320
Speaker 2: And be if they do?

594
00:26:21,400 --> 00:26:23,159
Speaker 3: Am I okay with it because I have all the

595
00:26:23,200 --> 00:26:24,919
Speaker 3: time when something will go wrong and people be like,

596
00:26:24,960 --> 00:26:27,399
Speaker 3: I can't believe the sponsor did equiz and I'm like,

597
00:26:27,440 --> 00:26:29,399
Speaker 3: how could you not believe they told you before you

598
00:26:29,440 --> 00:26:31,359
Speaker 3: bought it that this was exactly what they're going to do,

599
00:26:31,880 --> 00:26:33,959
Speaker 3: and so you need to know. And so I do

600
00:26:34,080 --> 00:26:36,119
Speaker 3: think it creates an opportunity, but maybe not in the

601
00:26:36,160 --> 00:26:39,720
Speaker 3: way you're thinking, which is to me as a credit investor,

602
00:26:40,160 --> 00:26:42,800
Speaker 3: if I can avoid problems and everyone else has to

603
00:26:42,840 --> 00:26:45,879
Speaker 3: own them, that's generally the best way to outperform. And

604
00:26:45,920 --> 00:26:47,639
Speaker 3: so I love having things in the market that can

605
00:26:47,640 --> 00:26:49,639
Speaker 3: blow up that I can choose not to own.

606
00:26:49,880 --> 00:26:51,760
Speaker 2: And this is a big area of that.

607
00:26:52,000 --> 00:26:54,320
Speaker 3: Had a client ask me not too long ago, like

608
00:26:54,320 --> 00:26:56,520
Speaker 3: how do you protect yourself against all this l ME?

609
00:26:56,600 --> 00:26:57,040
Speaker 2: What do you do?

610
00:26:57,560 --> 00:27:00,200
Speaker 3: And it's an interesting question because covenants are what they are.

611
00:27:00,359 --> 00:27:03,280
Speaker 3: You cannot change them. You can't amend covenants. You know,

612
00:27:03,320 --> 00:27:05,520
Speaker 3: in the middle of the life of a security, nobody's

613
00:27:05,560 --> 00:27:08,800
Speaker 3: going to do that. And so if the covenants allow

614
00:27:08,960 --> 00:27:12,720
Speaker 3: for an lme's that's it. There's nothing you can do.

615
00:27:12,840 --> 00:27:15,080
Speaker 3: And so and you can do like people form co

616
00:27:15,119 --> 00:27:18,760
Speaker 3: ops and it's it's an effective strategy is basically what

617
00:27:18,800 --> 00:27:20,800
Speaker 3: they'll do is it's like a non aggression pack. So

618
00:27:21,280 --> 00:27:23,959
Speaker 3: in the original form of lm ME, you would have

619
00:27:24,000 --> 00:27:26,240
Speaker 3: a company that would go to the creditors say, hey,

620
00:27:26,560 --> 00:27:28,280
Speaker 3: it was kind of a prisoner's dilemma. I want you

621
00:27:28,359 --> 00:27:30,199
Speaker 3: to exchange at fifty cents on the dollar to this

622
00:27:30,280 --> 00:27:31,880
Speaker 3: new first line. If you don't do it, I'm gonna

623
00:27:31,880 --> 00:27:34,120
Speaker 3: cram you into a third Liane. And you have twenty

624
00:27:34,160 --> 00:27:35,479
Speaker 3: four hours to tell me if you're in or out,

625
00:27:35,520 --> 00:27:37,080
Speaker 3: and there's this big panic, what am I going to do?

626
00:27:37,119 --> 00:27:39,840
Speaker 3: And everyone just rush in and so to avoid that

627
00:27:40,280 --> 00:27:42,920
Speaker 3: credit what creditors or creditors are now doing, which I

628
00:27:42,920 --> 00:27:46,960
Speaker 3: think is smart, is locking arms early before an LME

629
00:27:47,160 --> 00:27:49,919
Speaker 3: is formed. They'll or announced, they'll go to the company

630
00:27:49,960 --> 00:27:52,520
Speaker 3: and say we've formed a co op. We're all voting together.

631
00:27:52,600 --> 00:27:55,320
Speaker 3: So this whole twenty four hours trying to cram that's

632
00:27:55,359 --> 00:27:58,000
Speaker 3: all over. They can still do the LME, by the way,

633
00:27:58,040 --> 00:28:00,159
Speaker 3: they just have to actually be an adult and have

634
00:28:00,240 --> 00:28:02,160
Speaker 3: a conversation about it, and then they can do it,

635
00:28:02,600 --> 00:28:06,400
Speaker 3: but it doesn't change the end outcome tremendously. And so

636
00:28:06,440 --> 00:28:09,639
Speaker 3: to me, the biggest protection of this is doing your

637
00:28:09,640 --> 00:28:11,840
Speaker 3: credit work, which is like we talked about before, if

638
00:28:11,880 --> 00:28:14,639
Speaker 3: you have a performing credit and you own it and

639
00:28:14,680 --> 00:28:16,720
Speaker 3: you know it's going to perform, they can announce whatever

640
00:28:16,880 --> 00:28:18,760
Speaker 3: LM they want. I don't care because I know that

641
00:28:18,840 --> 00:28:20,600
Speaker 3: I can sit on my security and it's going to

642
00:28:20,680 --> 00:28:23,880
Speaker 3: payback on maturity. That's really the only defense you have.

643
00:28:24,440 --> 00:28:26,359
Speaker 3: And you know, when it's funny because I talk to people,

644
00:28:26,359 --> 00:28:27,720
Speaker 3: they are like, you're right, I'm going to focus on

645
00:28:27,720 --> 00:28:28,119
Speaker 3: credit now.

646
00:28:28,160 --> 00:28:29,720
Speaker 2: I'm like, well, it's too late now, Like you have

647
00:28:29,760 --> 00:28:30,680
Speaker 2: to have done this a.

648
00:28:30,640 --> 00:28:32,080
Speaker 3: Couple of years ago to make sure you have a

649
00:28:32,080 --> 00:28:34,879
Speaker 3: portfolio that's in a good place today. Otherwise, when you

650
00:28:34,920 --> 00:28:37,040
Speaker 3: go to sell the risky name, it'll be priced in

651
00:28:37,080 --> 00:28:38,840
Speaker 3: that everyone knows the lem risk is there.

652
00:28:38,880 --> 00:28:40,000
Speaker 2: But that's the key.

653
00:28:40,080 --> 00:28:42,640
Speaker 3: If you're good at credit, you're going to have less

654
00:28:42,680 --> 00:28:44,880
Speaker 3: of these and that should show in your performance.

655
00:28:45,840 --> 00:28:48,760
Speaker 4: Peeking up on the topic of red flag such as

656
00:28:48,800 --> 00:28:53,000
Speaker 4: we Covenant package, we've seen, you know, more of the

657
00:28:53,400 --> 00:28:56,480
Speaker 4: kind of alternity financing solution being put in place recently,

658
00:28:56,680 --> 00:28:59,560
Speaker 4: such as payment in kind. Is it a red flag

659
00:28:59,600 --> 00:29:00,000
Speaker 4: for you?

660
00:29:00,080 --> 00:29:00,680
Speaker 2: I think it is.

661
00:29:01,200 --> 00:29:04,040
Speaker 3: And so you know, when you think about the whole

662
00:29:04,240 --> 00:29:06,640
Speaker 3: construct of a pick is because the company can't afford

663
00:29:06,680 --> 00:29:09,760
Speaker 3: to pay, and that should tell you something, right, And

664
00:29:09,840 --> 00:29:12,600
Speaker 3: so now there's two ways to do it. There is

665
00:29:12,680 --> 00:29:15,920
Speaker 3: the payment in kind at the onset. So, hey, this

666
00:29:16,040 --> 00:29:17,800
Speaker 3: company's a little bit too levered, I'm going to do

667
00:29:17,840 --> 00:29:20,640
Speaker 3: fifty percent cash pay, fifty percent pick or a lot

668
00:29:20,640 --> 00:29:22,640
Speaker 3: of It'll do like a pick toggle. I'm not going

669
00:29:22,680 --> 00:29:24,240
Speaker 3: to pick now, but I have the option to pick

670
00:29:24,240 --> 00:29:27,800
Speaker 3: if things get really tight. That's still to me a

671
00:29:27,800 --> 00:29:30,760
Speaker 3: flag of stress. But it's different than when you have

672
00:29:30,800 --> 00:29:33,280
Speaker 3: a company that you know, quite frankly, you look at

673
00:29:33,280 --> 00:29:36,640
Speaker 3: like the private debt market. I had this conversation with

674
00:29:36,760 --> 00:29:40,560
Speaker 3: our CIO recently where I said, you know, I'm worried that, uh,

675
00:29:41,080 --> 00:29:43,360
Speaker 3: there's a lot of stress building in the private markets

676
00:29:43,360 --> 00:29:45,280
Speaker 3: because you're seeing all these risky deals in public markets

677
00:29:45,320 --> 00:29:46,760
Speaker 3: get out. In the private markets, you're going to see

678
00:29:46,760 --> 00:29:49,480
Speaker 3: the faults. And the comment that came back I thought

679
00:29:49,560 --> 00:29:51,240
Speaker 3: was really interesting where he said, well, you never see

680
00:29:51,240 --> 00:29:53,280
Speaker 3: a default in private debt. You just pick the interest

681
00:29:53,320 --> 00:29:55,920
Speaker 3: and extend the maturity. And I'm like, well, what's the difference.

682
00:29:55,920 --> 00:29:58,400
Speaker 3: You're not getting paid and the difference is you don't.

683
00:29:58,200 --> 00:29:59,160
Speaker 2: Have to call it a default.

684
00:30:00,160 --> 00:30:03,160
Speaker 3: That's actually become pretty important. And so I tell people

685
00:30:03,200 --> 00:30:04,719
Speaker 3: all the time, if you want to look at the

686
00:30:04,720 --> 00:30:09,160
Speaker 3: health of the private market, just look at BDCs.

687
00:30:09,680 --> 00:30:11,040
Speaker 2: And you know, I believe it.

688
00:30:11,000 --> 00:30:13,120
Speaker 3: Was Barkley as It did a study of this recently

689
00:30:13,680 --> 00:30:15,920
Speaker 3: where they said, if you go back to twenty eleven,

690
00:30:16,480 --> 00:30:19,240
Speaker 3: the average across all BDCs, the average pick was about

691
00:30:19,280 --> 00:30:22,560
Speaker 3: two percent, and if you fast forward to today, the

692
00:30:22,600 --> 00:30:25,680
Speaker 3: average pick is over ten ten percent. Pick that is

693
00:30:25,920 --> 00:30:28,600
Speaker 3: ten percent in trouble. I haven't seen a level of

694
00:30:28,600 --> 00:30:31,920
Speaker 3: stress like that since the global financial crisis is shockingly high.

695
00:30:32,240 --> 00:30:33,720
Speaker 3: But the other thing he pointed out to me is

696
00:30:33,760 --> 00:30:36,040
Speaker 3: you think about what that actually means is, if you're

697
00:30:36,080 --> 00:30:38,640
Speaker 3: a BDC, you have to distribute ninety percent of your income.

698
00:30:39,120 --> 00:30:39,720
Speaker 2: How do you do that?

699
00:30:39,760 --> 00:30:43,920
Speaker 3: If you're picking in the hypothetically eleven that becomes a challenge.

700
00:30:44,040 --> 00:30:46,080
Speaker 2: And I asked a BDC expert about that. So what

701
00:30:46,520 --> 00:30:48,200
Speaker 2: do you do? And you saw it's easy.

702
00:30:48,240 --> 00:30:50,400
Speaker 3: We borrow, Oh my god, because that never goes wrong.

703
00:30:50,480 --> 00:30:52,600
Speaker 3: You just borrow to pay a distribution. And I'm like, okay,

704
00:30:52,600 --> 00:30:55,400
Speaker 3: but barring capacity is not infinite. What happens when that

705
00:30:55,480 --> 00:30:58,080
Speaker 3: runs out? They said, oh, we take our best assets

706
00:30:58,120 --> 00:31:00,000
Speaker 3: and sell them at a discount to another private life.

707
00:31:00,280 --> 00:31:01,960
Speaker 3: So I'm like, okay, so now you've got a shrinking

708
00:31:02,000 --> 00:31:04,120
Speaker 3: fund with that verse election and growing leverage.

709
00:31:04,320 --> 00:31:05,080
Speaker 2: What could go wrong?

710
00:31:05,400 --> 00:31:05,600
Speaker 4: Now?

711
00:31:05,600 --> 00:31:07,280
Speaker 3: The answer is, you know, I got all excited. It

712
00:31:07,320 --> 00:31:09,320
Speaker 3: is going to be the next ground of opportunity. But

713
00:31:09,360 --> 00:31:12,960
Speaker 3: it'll take years because you know, it's all locked up

714
00:31:13,000 --> 00:31:14,760
Speaker 3: money without marked to market, so you're not going to

715
00:31:14,840 --> 00:31:16,640
Speaker 3: see it until the fund actually ends.

716
00:31:16,680 --> 00:31:17,880
Speaker 2: But again it goes back.

717
00:31:17,720 --> 00:31:20,520
Speaker 3: To not all private credits the same, not all public

718
00:31:20,520 --> 00:31:23,160
Speaker 3: credits is the same. If you're good at picking credit

719
00:31:23,560 --> 00:31:25,360
Speaker 3: in private credit, there's gonna be some great things to

720
00:31:25,400 --> 00:31:25,880
Speaker 3: do and you're.

721
00:31:25,800 --> 00:31:26,760
Speaker 2: Going to have a great return.

722
00:31:26,880 --> 00:31:29,600
Speaker 3: If you're just buying the market because of the explosion

723
00:31:29,640 --> 00:31:33,080
Speaker 3: of supply then or explosion of demand, sorry, then you

724
00:31:33,120 --> 00:31:34,560
Speaker 3: may find that you're going to have a lot more

725
00:31:34,560 --> 00:31:36,360
Speaker 3: deals that you have to turn to pick and so

726
00:31:36,400 --> 00:31:38,200
Speaker 3: you'll be able to see the good and the bad

727
00:31:38,360 --> 00:31:40,680
Speaker 3: just by looking at that statistic, in my opinion.

728
00:31:40,560 --> 00:31:41,880
Speaker 1: And you do expect that to get worked.

729
00:31:42,400 --> 00:31:44,720
Speaker 3: I do, yeah, I think that. Again, it's a credit

730
00:31:44,760 --> 00:31:47,000
Speaker 3: pickers market, not just for publics. It's very much a

731
00:31:47,000 --> 00:31:49,800
Speaker 3: credit pickers market for privates. If you're a good credit picker.

732
00:31:50,360 --> 00:31:53,120
Speaker 3: Then you get paid extra for going into the private market.

733
00:31:53,240 --> 00:31:56,239
Speaker 3: It's a great deal, but you'll see a divergence of

734
00:31:56,240 --> 00:31:58,040
Speaker 3: that market of the haves and the have nots.

735
00:31:58,440 --> 00:32:01,520
Speaker 1: Yeah, what about rates coming down? The economy booming and.

736
00:32:01,560 --> 00:32:05,680
Speaker 3: The trees grow into the sky and rainbows and everything amazing,

737
00:32:07,280 --> 00:32:10,320
Speaker 3: you know, I think it's it's not as I'm a cynic,

738
00:32:10,360 --> 00:32:11,640
Speaker 3: So I guess you got to take this with a

739
00:32:11,640 --> 00:32:14,320
Speaker 3: grain of salt. But no, I think that the economy

740
00:32:14,360 --> 00:32:16,680
Speaker 3: is already in good shape, and I think, so you've

741
00:32:16,680 --> 00:32:19,280
Speaker 3: got to have to start with that baseline. But you know,

742
00:32:19,360 --> 00:32:22,360
Speaker 3: I think the rate picture coming down is going to

743
00:32:22,440 --> 00:32:26,040
Speaker 3: be slower than the market hopes. And because it's just

744
00:32:26,080 --> 00:32:28,120
Speaker 3: the economy doesn't need it. You know, everyone's like, well

745
00:32:28,160 --> 00:32:30,560
Speaker 3: what happens if you know, if you don't stimulate the economy,

746
00:32:30,600 --> 00:32:33,440
Speaker 3: and you're like, where's where's the economy screaming for stimulus?

747
00:32:33,440 --> 00:32:36,080
Speaker 3: And so I think that's going to be slower. But

748
00:32:36,160 --> 00:32:40,080
Speaker 3: I don't think that creates a huge crisis because generally

749
00:32:40,240 --> 00:32:43,000
Speaker 3: the economy is okay and generally credit is high quality.

750
00:32:43,040 --> 00:32:46,160
Speaker 3: There'll be pockets of credit that will stress be stressed

751
00:32:46,200 --> 00:32:48,960
Speaker 3: if but they're small as a percentage. You know, the

752
00:32:49,040 --> 00:32:51,200
Speaker 3: dollars there may be large because the markets are you know,

753
00:32:51,280 --> 00:32:52,440
Speaker 3: trillion dollar markets.

754
00:32:52,880 --> 00:32:54,880
Speaker 2: But uh, but I think you're in.

755
00:32:54,920 --> 00:32:58,840
Speaker 3: A baseline of a pretty stable economy. But I don't

756
00:32:58,880 --> 00:33:01,880
Speaker 3: expect massive growth from here. I think you know, it's

757
00:33:01,920 --> 00:33:04,400
Speaker 3: gonna you know, the growth rate has to slow.

758
00:33:04,240 --> 00:33:06,600
Speaker 1: Okay, but there will be stressed in the private credit market,

759
00:33:06,600 --> 00:33:08,960
Speaker 1: which is growing and if you correct in what people

760
00:33:08,960 --> 00:33:13,760
Speaker 1: are calling, you know, the asset based finance boom, which

761
00:33:13,800 --> 00:33:17,120
Speaker 1: according to a polo takes it's forty trillion, and it's.

762
00:33:16,960 --> 00:33:18,000
Speaker 2: A very interesting area.

763
00:33:18,080 --> 00:33:20,200
Speaker 3: Honestly, you know, when whenever banks step away from an

764
00:33:20,200 --> 00:33:23,960
Speaker 3: area usually creates a huge opportunity. But you are right,

765
00:33:24,000 --> 00:33:26,840
Speaker 3: there's a lot of money. Howard Marx taught me many

766
00:33:26,920 --> 00:33:29,280
Speaker 3: years ago. When markets grow this fast, you buy what

767
00:33:29,400 --> 00:33:31,800
Speaker 3: you can, not what you want to, because deploying capital

768
00:33:31,840 --> 00:33:34,120
Speaker 3: becomes the chore, and so you do have to be

769
00:33:34,240 --> 00:33:37,400
Speaker 3: very picky. But I always caution people because I've seen

770
00:33:37,400 --> 00:33:39,120
Speaker 3: this so many times in the public markets too. It

771
00:33:39,120 --> 00:33:41,200
Speaker 3: doesn't mean the whole market is bad. It just means

772
00:33:41,240 --> 00:33:42,560
Speaker 3: there are gonna be a lot of players. If you

773
00:33:42,640 --> 00:33:44,760
Speaker 3: just hung a shingle a week ago, and said I'm

774
00:33:44,760 --> 00:33:47,040
Speaker 3: going to start a private credit fund, You're probably gonna

775
00:33:47,040 --> 00:33:48,760
Speaker 3: have a lot of trouble in your portfolio. You've been

776
00:33:48,800 --> 00:33:51,120
Speaker 3: doing this for ten or twenty years, you'd probably be okay.

777
00:33:52,480 --> 00:33:56,200
Speaker 4: Ibe moving on from from the credits that are a

778
00:33:56,200 --> 00:34:00,840
Speaker 4: little stressed into the better part of the market. The

779
00:34:00,920 --> 00:34:04,640
Speaker 4: double b's, I mean double b's, you know, currently generate

780
00:34:04,680 --> 00:34:07,520
Speaker 4: some tractive yields. Do you think it's a credit trade.

781
00:34:08,200 --> 00:34:11,960
Speaker 3: I've been underweighting double b's, and so you know, the

782
00:34:12,000 --> 00:34:15,360
Speaker 3: thing is that right now it became less of a

783
00:34:15,400 --> 00:34:17,520
Speaker 3: credit trade and more of a duration trade. Is that

784
00:34:17,600 --> 00:34:20,360
Speaker 3: the double b's tend to be longer duration, and everyone's

785
00:34:20,400 --> 00:34:22,319
Speaker 3: convince rates we're going to go down, so they're all

786
00:34:22,360 --> 00:34:24,520
Speaker 3: going heavy on double b's. But the other thing is,

787
00:34:24,920 --> 00:34:27,080
Speaker 3: you know, we've been in a massive risk on rally,

788
00:34:27,239 --> 00:34:29,160
Speaker 3: massive risk on rally, and so a lot of people

789
00:34:29,239 --> 00:34:31,120
Speaker 3: saying the only way you can hope to keep up

790
00:34:31,160 --> 00:34:33,040
Speaker 3: is to buy triple c's. You have to buy triple c's.

791
00:34:33,520 --> 00:34:35,040
Speaker 3: And I never like them when anyone tells me I

792
00:34:35,080 --> 00:34:37,239
Speaker 3: have to do anything but buying triple c's for the

793
00:34:37,280 --> 00:34:39,320
Speaker 3: sake of buying triple c's never made a ton of

794
00:34:39,400 --> 00:34:42,160
Speaker 3: sense to me, and so we looked at it and saying, well,

795
00:34:42,440 --> 00:34:44,799
Speaker 3: triple c's is a bet on growth. We've seen a

796
00:34:44,800 --> 00:34:47,920
Speaker 3: lot of growth. But if money's going to stay expensive

797
00:34:48,080 --> 00:34:51,719
Speaker 3: higher for longer, directionally, that means you're it's going to

798
00:34:51,760 --> 00:34:54,120
Speaker 3: be harder to finance growth, so you should see less growth.

799
00:34:54,160 --> 00:34:56,719
Speaker 3: I think that formula is pretty straightforward, So I'm not

800
00:34:56,880 --> 00:34:59,560
Speaker 3: really excited about making a big bet on growth from here.

801
00:34:59,600 --> 00:35:01,480
Speaker 3: I don't think the economy falls apart, but I also

802
00:35:01,520 --> 00:35:03,279
Speaker 3: don't think it's going to grow from here in a

803
00:35:03,320 --> 00:35:06,840
Speaker 3: dramatic way in this environment, and so I'm not rushing

804
00:35:06,920 --> 00:35:07,760
Speaker 3: into triple c's.

805
00:35:07,800 --> 00:35:08,440
Speaker 2: But if you think.

806
00:35:08,320 --> 00:35:11,840
Speaker 3: About designing a portfolio and you want to bring the

807
00:35:11,880 --> 00:35:14,120
Speaker 3: average yield up, there's two ways to do it. You

808
00:35:14,160 --> 00:35:16,200
Speaker 3: can chase really risky stuff or own a lot.

809
00:35:16,160 --> 00:35:17,120
Speaker 2: Less of the safe stuff.

810
00:35:17,360 --> 00:35:20,759
Speaker 3: I prefer prefer to do the latter, because if I

811
00:35:20,880 --> 00:35:23,360
Speaker 3: believe we're very good at credit, and I think, you know,

812
00:35:23,480 --> 00:35:25,440
Speaker 3: oak Tree's got the best credit team in the world,

813
00:35:25,880 --> 00:35:27,719
Speaker 3: then I think we can go to that credit team

814
00:35:27,760 --> 00:35:29,960
Speaker 3: and say, hey, go from double B to single B.

815
00:35:30,400 --> 00:35:33,120
Speaker 3: You're gonna bring your yield up without increasing your default risk.

816
00:35:33,120 --> 00:35:35,160
Speaker 3: Because not every single Bee company is on the verge

817
00:35:35,160 --> 00:35:37,839
Speaker 3: of default, whereas you go to Triple c's a it's

818
00:35:37,880 --> 00:35:39,920
Speaker 3: a lot of default risk and so it's been to

819
00:35:40,000 --> 00:35:41,320
Speaker 3: me a better trade lately.

820
00:35:42,400 --> 00:35:43,560
Speaker 2: So that's kind of how I view it.

821
00:35:44,239 --> 00:35:46,680
Speaker 4: And what about investment great, I mean we're seeing credit

822
00:35:46,680 --> 00:35:49,080
Speaker 4: spread is coming tighter and tighter. Yes, I mean it's

823
00:35:49,080 --> 00:35:53,400
Speaker 4: totally a different logic there. But I mean you see Pucket,

824
00:35:53,440 --> 00:35:55,000
Speaker 4: so opportunity tis there as well.

825
00:35:55,080 --> 00:35:57,520
Speaker 3: Yeah, I mean, you know, look, the yield is attractive

826
00:35:57,680 --> 00:35:59,880
Speaker 3: right relative to the risk you're willing to take. So

827
00:36:00,000 --> 00:36:03,239
Speaker 3: I think our chairman wrote a memo recently where I

828
00:36:03,280 --> 00:36:05,839
Speaker 3: think it came to asset allocation, and it starts with

829
00:36:06,360 --> 00:36:08,960
Speaker 3: how much risk are you comfortable with? What can you tolerate?

830
00:36:09,040 --> 00:36:11,400
Speaker 3: And I think that's always the right place to start.

831
00:36:11,480 --> 00:36:13,200
Speaker 3: You start with the risk and then say, you know,

832
00:36:13,239 --> 00:36:15,279
Speaker 3: you don't force the yield, and then say this is

833
00:36:15,320 --> 00:36:16,839
Speaker 3: the yield I need, and then force the risk. That's

834
00:36:16,840 --> 00:36:18,719
Speaker 3: when you get into trouble. You start with this is

835
00:36:18,760 --> 00:36:21,040
Speaker 3: the risk I can take, this is what I can tolerate,

836
00:36:21,080 --> 00:36:22,320
Speaker 3: and know that I'm not going to sell at the

837
00:36:22,360 --> 00:36:25,120
Speaker 3: wrong time, and then what yield does that deliver? Well,

838
00:36:25,120 --> 00:36:27,960
Speaker 3: it turns out that across credit that yields a lot

839
00:36:28,000 --> 00:36:30,239
Speaker 3: higher than it was four or five years ago. And so,

840
00:36:30,440 --> 00:36:34,200
Speaker 3: you know, investment grade yielding five six percent pretty attractive

841
00:36:34,400 --> 00:36:37,759
Speaker 3: for people in some of their needs. I think, you know,

842
00:36:37,800 --> 00:36:40,120
Speaker 3: I yield at seven eight, even more attractive, but more

843
00:36:40,160 --> 00:36:42,719
Speaker 3: with more risk, you know, a multi strategy eight or nine.

844
00:36:42,800 --> 00:36:45,720
Speaker 3: But again, you know, you continue to say how comfortable

845
00:36:45,719 --> 00:36:47,680
Speaker 3: with your risk? You know, private debt you can get

846
00:36:47,680 --> 00:36:51,160
Speaker 3: double digit and so a lot of this depends on

847
00:36:51,160 --> 00:36:53,160
Speaker 3: the risk. So for people that need a bucket of

848
00:36:53,200 --> 00:36:55,879
Speaker 3: low risk capital, turns out that low risk capital can

849
00:36:55,920 --> 00:36:57,600
Speaker 3: deliver a pretty reasonable income.

850
00:36:58,239 --> 00:36:59,400
Speaker 2: I think that is attractive.

851
00:37:00,640 --> 00:37:03,080
Speaker 1: Another thing that people are very excited about from you,

852
00:37:03,200 --> 00:37:05,960
Speaker 1: attentially from the next administration in this country is merges

853
00:37:06,000 --> 00:37:06,799
Speaker 1: and acquisitions.

854
00:37:07,960 --> 00:37:09,240
Speaker 2: I love new supply thankers.

855
00:37:09,239 --> 00:37:10,719
Speaker 1: I always talk about it is if it's you know,

856
00:37:11,280 --> 00:37:14,040
Speaker 1: it hasn't really transplied, it hasn't really ploted through. But yes,

857
00:37:14,160 --> 00:37:16,600
Speaker 1: new supply on the one hand, but then risk in

858
00:37:16,600 --> 00:37:18,840
Speaker 1: the tons of LBOs on the other. True, what do

859
00:37:18,880 --> 00:37:20,719
Speaker 1: you what do you expect from the M and A lens?

860
00:37:20,840 --> 00:37:23,400
Speaker 3: I expected to pick up and you know, I've been

861
00:37:23,480 --> 00:37:26,080
Speaker 3: hearing the same thing from bankers. I think the reality

862
00:37:26,239 --> 00:37:31,240
Speaker 3: is that we had a pause in LBO activity because

863
00:37:31,280 --> 00:37:33,719
Speaker 3: of the election. A lot of companies saying, well, I

864
00:37:33,719 --> 00:37:35,200
Speaker 3: want to do deal, but I'm not doing it till

865
00:37:35,200 --> 00:37:38,120
Speaker 3: I know what regulatory environment I'm stepping into, and so.

866
00:37:38,280 --> 00:37:38,919
Speaker 2: I'm going to wait.

867
00:37:39,280 --> 00:37:41,880
Speaker 3: Well, now we know, and we know that the environment

868
00:37:41,960 --> 00:37:44,799
Speaker 3: should be less regulation, not more. That seems to be

869
00:37:44,920 --> 00:37:48,560
Speaker 3: pretty well accepted view, and so you would expect M

870
00:37:48,560 --> 00:37:51,080
Speaker 3: and A to pick up from here. But you also

871
00:37:51,080 --> 00:37:53,759
Speaker 3: have to remember there's a seasonal aspect of this. Thanksgiving

872
00:37:53,840 --> 00:37:56,400
Speaker 3: comes around, the market tends to get very quiet. Christmas

873
00:37:56,480 --> 00:37:59,640
Speaker 3: break comes around, the market comes gets very quiet. Bankers

874
00:37:59,680 --> 00:38:02,600
Speaker 3: and pretyarticular of a regulatory requirement to take a two

875
00:38:02,600 --> 00:38:04,800
Speaker 3: week holiday, and a lot of them do it during

876
00:38:04,840 --> 00:38:08,160
Speaker 3: the Christmas holiday, so that slows everything down. So we're

877
00:38:08,200 --> 00:38:11,000
Speaker 3: seeing a bit of a pickup of activity this week

878
00:38:11,360 --> 00:38:14,560
Speaker 3: because people trying to get it in before Thanksgiving. And

879
00:38:14,600 --> 00:38:16,640
Speaker 3: then you might see one more week of activity after

880
00:38:16,640 --> 00:38:19,800
Speaker 3: Thanksgiving and I think it gets dead. But January comes around,

881
00:38:19,840 --> 00:38:21,680
Speaker 3: I think you're gonna have all this pent up demand

882
00:38:22,160 --> 00:38:23,920
Speaker 3: that now is going to come to the market. So

883
00:38:23,960 --> 00:38:25,560
Speaker 3: we should see a pickup in M and A. And

884
00:38:25,600 --> 00:38:28,120
Speaker 3: the thing about M and A it does add risk

885
00:38:28,320 --> 00:38:30,439
Speaker 3: for certain deals. Not every deal is a bad deal,

886
00:38:30,480 --> 00:38:34,040
Speaker 3: but absolutely will be some. But it's net new supply.

887
00:38:34,160 --> 00:38:36,839
Speaker 3: So it's one thing to refinance. But when you're refinancing,

888
00:38:36,880 --> 00:38:39,399
Speaker 3: you're taking oftentimes you're taking a bond you already own

889
00:38:39,440 --> 00:38:41,920
Speaker 3: or a loan you already own and exchanging it for

890
00:38:41,960 --> 00:38:45,479
Speaker 3: a new one. So it's net neutral. M and A

891
00:38:45,520 --> 00:38:47,920
Speaker 3: is usually new supply, so it creates a little bit

892
00:38:47,960 --> 00:38:50,360
Speaker 3: more of a demand, it takes more cash out of

893
00:38:50,400 --> 00:38:53,239
Speaker 3: the market. That makes pricing a lot more efficient, and

894
00:38:53,280 --> 00:38:55,080
Speaker 3: so it's usually generally a healthy thing.

895
00:38:55,320 --> 00:38:59,400
Speaker 1: We are international audience. You're sitting to Europeans here, what

896
00:38:59,560 --> 00:39:01,560
Speaker 1: yea out there in the world of Pelton the US

897
00:39:01,640 --> 00:39:04,280
Speaker 1: are you're looking at in terms of investment opportunities?

898
00:39:04,680 --> 00:39:08,280
Speaker 3: Yeah, so, well you look across the globe and right

899
00:39:08,360 --> 00:39:12,560
Speaker 3: now you kind of you when you think about credit globally,

900
00:39:13,440 --> 00:39:15,960
Speaker 3: what I would say US versus Europe, it's generally from

901
00:39:16,040 --> 00:39:18,640
Speaker 3: size kind of seventy five to twenty five US Europe.

902
00:39:18,760 --> 00:39:21,480
Speaker 3: And that's true for loans and bonds, which means so

903
00:39:21,680 --> 00:39:24,359
Speaker 3: Europe is a smaller market, is a little less liquid,

904
00:39:24,640 --> 00:39:27,160
Speaker 3: and so you should get paid a premium for that.

905
00:39:27,400 --> 00:39:30,040
Speaker 3: Anytime you sacrifice liquidity, you should get paid a little

906
00:39:30,520 --> 00:39:33,000
Speaker 3: And so you know, I've been doing global portfolios for

907
00:39:33,040 --> 00:39:35,400
Speaker 3: about a decade and you know, the rough rule of

908
00:39:35,440 --> 00:39:38,400
Speaker 3: thumb is you get paid fifty seventy five basis points

909
00:39:38,400 --> 00:39:41,200
Speaker 3: additional yield you go from US to Europe, and it's

910
00:39:41,239 --> 00:39:44,120
Speaker 3: it's a good trade. And so there are periods like

911
00:39:45,400 --> 00:39:47,400
Speaker 3: you know, a couple of years ago when Russia is

912
00:39:47,440 --> 00:39:49,600
Speaker 3: going to turn off natural gas to Europe and natural

913
00:39:49,640 --> 00:39:51,960
Speaker 3: gas goes into electricity, electricity goes and everything, and it

914
00:39:52,000 --> 00:39:53,799
Speaker 3: was going to be armygedin and you were getting paid

915
00:39:53,800 --> 00:39:56,160
Speaker 3: over two hundred basis points to go to US from

916
00:39:56,200 --> 00:39:58,480
Speaker 3: the US to Europe, which is last time I saw

917
00:39:58,480 --> 00:40:01,520
Speaker 3: that was gregsitt Or the global finance crisis, and that

918
00:40:01,760 --> 00:40:04,120
Speaker 3: didn't feel that bad, and that was an opportunity and

919
00:40:04,160 --> 00:40:08,239
Speaker 3: we were buying. Today the pickup is very low. It's

920
00:40:08,239 --> 00:40:10,840
Speaker 3: almost a parody because there's debates of who's going to

921
00:40:10,920 --> 00:40:14,040
Speaker 3: have rates go down faster, US or Europe. And so

922
00:40:14,120 --> 00:40:16,399
Speaker 3: I've been leaning more towards the US if I don't

923
00:40:16,440 --> 00:40:19,280
Speaker 3: get that pickup. I've found that, you know, the European

924
00:40:19,360 --> 00:40:21,239
Speaker 3: loan market seems to have a little more pickup than

925
00:40:21,280 --> 00:40:24,000
Speaker 3: the US loan market because clos are a big buyer

926
00:40:24,040 --> 00:40:25,920
Speaker 3: in the loan market. They tend to buy about seventy

927
00:40:25,960 --> 00:40:28,439
Speaker 3: percent of the market in the US. And there's more

928
00:40:28,480 --> 00:40:31,120
Speaker 3: aggressive COLO creation in the US than Europe, so that

929
00:40:31,160 --> 00:40:34,280
Speaker 3: creates more demand. And there's a bigger etf retail presence

930
00:40:34,320 --> 00:40:36,680
Speaker 3: in the US market, so that creates more demands. So

931
00:40:36,680 --> 00:40:38,720
Speaker 3: the lack of demand has a little bit better pricing,

932
00:40:38,760 --> 00:40:41,560
Speaker 3: so on the marginal like that you know we do

933
00:40:41,640 --> 00:40:44,520
Speaker 3: when we look at things like em EM, we go

934
00:40:44,640 --> 00:40:47,080
Speaker 3: back to again being credit pickers. I don't come in

935
00:40:47,360 --> 00:40:50,440
Speaker 3: saying I want exposure Russia or I want exposure to China.

936
00:40:50,920 --> 00:40:54,160
Speaker 3: We go in looking for credits that you know, frankly,

937
00:40:54,200 --> 00:40:56,400
Speaker 3: are good good houses on a bad block. Right So

938
00:40:56,440 --> 00:40:58,319
Speaker 3: it's a company that if it were in any other

939
00:40:58,360 --> 00:41:00,560
Speaker 3: country would be investment grade, but because it's in X

940
00:41:00,640 --> 00:41:03,319
Speaker 3: y Z country, it's high yield and we'll look at those.

941
00:41:03,960 --> 00:41:08,760
Speaker 3: But right now we're not aggressively pushing into em because

942
00:41:09,040 --> 00:41:11,000
Speaker 3: you can get such a good yield and develop markets

943
00:41:11,000 --> 00:41:12,680
Speaker 3: that you don't need to be a hero.

944
00:41:12,800 --> 00:41:14,640
Speaker 2: So we're being pickier right now.

945
00:41:15,000 --> 00:41:17,040
Speaker 1: And when you look at everything across the board. Where's

946
00:41:17,080 --> 00:41:19,600
Speaker 1: the best relative value, where's the best opportunity for you

947
00:41:19,680 --> 00:41:20,040
Speaker 1: right now?

948
00:41:21,040 --> 00:41:21,600
Speaker 2: Right now?

949
00:41:21,640 --> 00:41:25,000
Speaker 3: Across the board, We're really like structure credit, colo debt.

950
00:41:25,040 --> 00:41:28,400
Speaker 3: I think w B clos are very attractive, and you know,

951
00:41:28,520 --> 00:41:30,760
Speaker 3: I also kind of you know, I like say, boring

952
00:41:30,840 --> 00:41:34,319
Speaker 3: is beautiful for bonds, and so you know, we like,

953
00:41:34,520 --> 00:41:37,200
Speaker 3: you know, just regular way loans and bonds where you

954
00:41:37,239 --> 00:41:39,319
Speaker 3: can just clip a good income, right you know, that's

955
00:41:39,320 --> 00:41:41,440
Speaker 3: really the key right now is just where can I

956
00:41:41,480 --> 00:41:44,400
Speaker 3: lock in a good income? Because you know, everyone's convinced

957
00:41:44,440 --> 00:41:47,400
Speaker 3: that everything's going to go amazing, Well, it's going to

958
00:41:47,440 --> 00:41:50,200
Speaker 3: be all this growth equities until today we're on fire.

959
00:41:50,840 --> 00:41:53,239
Speaker 3: And you know, in those kind of periods that I

960
00:41:53,320 --> 00:41:55,120
Speaker 3: kind of look around, like there's lots of things that

961
00:41:55,120 --> 00:41:57,440
Speaker 3: could cause the market to hiccup, you know, whether it

962
00:41:57,480 --> 00:41:59,520
Speaker 3: be rates that we've talked a lot about, whether it

963
00:41:59,600 --> 00:42:02,600
Speaker 3: be you know, the ultimate outcome of policy from from

964
00:42:02,640 --> 00:42:04,520
Speaker 3: the new from the recent election in the US, whether

965
00:42:04,560 --> 00:42:05,440
Speaker 3: it be ge politics.

966
00:42:05,480 --> 00:42:06,840
Speaker 2: There's lots of things you can point to.

967
00:42:07,120 --> 00:42:09,200
Speaker 3: You only need one of them, but there's plenty of

968
00:42:09,239 --> 00:42:11,480
Speaker 3: things that you could point to. And so in those

969
00:42:11,560 --> 00:42:14,160
Speaker 3: environments where nobody's worried. I tend to worry, and so

970
00:42:14,280 --> 00:42:16,520
Speaker 3: I like to kind of lean towards locking in my

971
00:42:16,560 --> 00:42:18,759
Speaker 3: income and waiting for a little more volatility.

972
00:42:18,960 --> 00:42:21,719
Speaker 1: You mentioned rescue finance is a huge opportunity as well. Yeah,

973
00:42:21,800 --> 00:42:24,600
Speaker 1: you know, is that everything in rescue finance.

974
00:42:25,000 --> 00:42:26,680
Speaker 2: I think, you know again, it's gonna be.

975
00:42:26,920 --> 00:42:29,719
Speaker 3: It's gonna be like anything. There's gonna be some really

976
00:42:29,760 --> 00:42:32,480
Speaker 3: good rescue finance and really bad rescue finance, and you're

977
00:42:32,520 --> 00:42:34,680
Speaker 3: gonna have to be good at picking. And if you're

978
00:42:34,719 --> 00:42:36,759
Speaker 3: good at picking, I think there's gonna be some really

979
00:42:36,760 --> 00:42:39,240
Speaker 3: good risk adjusted opportunity. It's gonna have to be patient.

980
00:42:39,320 --> 00:42:41,719
Speaker 3: It's not gonna just come flooding in. You're gonna have

981
00:42:41,719 --> 00:42:43,680
Speaker 3: to wait because companies are gonna have to be desperate,

982
00:42:44,600 --> 00:42:47,239
Speaker 3: and it will be market dependent because if money keeps

983
00:42:47,239 --> 00:42:50,120
Speaker 3: flooding into the market and companies keep finding ways to refinance,

984
00:42:50,120 --> 00:42:53,160
Speaker 3: and they won't need rescue financing. So it's gonna, you know,

985
00:42:53,320 --> 00:42:56,040
Speaker 3: take some time to evolve. But I do think they'll

986
00:42:56,080 --> 00:42:56,759
Speaker 3: be good and bad.

987
00:42:57,760 --> 00:43:01,239
Speaker 4: Strong created skills, a bottom up of approach, and a

988
00:43:01,239 --> 00:43:04,200
Speaker 4: lot of setic tvts that seems a recp for success.

989
00:43:04,320 --> 00:43:08,880
Speaker 3: I agree, and being contraran that that is key.

990
00:43:08,920 --> 00:43:10,239
Speaker 1: But what's the one thing that worries you?

991
00:43:11,520 --> 00:43:15,440
Speaker 3: Ah, I'm a professional worrier, So what worries me the

992
00:43:15,480 --> 00:43:18,600
Speaker 3: most right now? I mean we kind of talked about before.

993
00:43:18,600 --> 00:43:21,319
Speaker 3: I worry the most that nobody's worried and that, you know,

994
00:43:21,480 --> 00:43:23,520
Speaker 3: everyone's convinced trees are going to grow to the sky

995
00:43:23,600 --> 00:43:25,279
Speaker 3: and everything's going to be perfect and we're going to

996
00:43:25,320 --> 00:43:29,000
Speaker 3: see all this growth. I am bearish on growth because

997
00:43:29,000 --> 00:43:31,520
Speaker 3: I think money's going to stay expensive a little bit longer,

998
00:43:32,040 --> 00:43:34,040
Speaker 3: and so I do think that cuts into growth. I

999
00:43:34,040 --> 00:43:36,799
Speaker 3: do think geopolitics is a little bit underplayed. We'll have

1000
00:43:36,840 --> 00:43:38,759
Speaker 3: a flare up for a day or so, and then

1001
00:43:38,760 --> 00:43:41,920
Speaker 3: everyone will convince themselves that it's it's all fine. I

1002
00:43:42,000 --> 00:43:44,000
Speaker 3: kind of say, it's like violence on TV. Everyone's getting

1003
00:43:44,040 --> 00:43:47,520
Speaker 3: desensitized the volatility in the markets, and so used to

1004
00:43:47,560 --> 00:43:49,520
Speaker 3: be if you saw a ten or twenty basis point

1005
00:43:49,520 --> 00:43:51,480
Speaker 3: move in the ten year and a day, you would panic,

1006
00:43:51,520 --> 00:43:54,799
Speaker 3: And now that's just another day. And so I do

1007
00:43:54,920 --> 00:43:57,760
Speaker 3: think that's where I focus most of my attention these days.

1008
00:43:58,440 --> 00:44:01,160
Speaker 1: Great stuff. David Rosenberg, head of liquid performing credit at

1009
00:44:01,160 --> 00:44:02,640
Speaker 1: oak Tree. It's been a pleasure having you on the

1010
00:44:02,640 --> 00:44:05,440
Speaker 1: Credit Edge money. Thanks, thank you, and of course we're

1011
00:44:05,480 --> 00:44:08,200
Speaker 1: very grateful to John eve Coupan from Bloomberg Intelligence. Thank

1012
00:44:08,200 --> 00:44:09,319
Speaker 1: you so much for joining us today.

1013
00:44:09,360 --> 00:44:11,280
Speaker 4: Thank you all for a pleasure for more.

1014
00:44:11,239 --> 00:44:13,960
Speaker 1: Credit market analysis and insight reader all of John eve

1015
00:44:14,040 --> 00:44:17,239
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00:44:17,280 --> 00:44:19,880
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1024
00:44:43,200 --> 00:44:46,239
Speaker 1: at Bloomberg dot net. I'm James Cromby. It's been a

1025
00:44:46,280 --> 00:44:48,560
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1026
00:44:48,600 --> 00:45:09,200
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