Speaker 1: Hello, Welcome to the Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crombie. I'm a senior editor at
Speaker 1: Bloomberg and.
Speaker 2: I'm Made and Chasin, head of the Amere credit research
Speaker 2: team at Bloomberg Intelligence. This week, we're very pleased to
Speaker 2: welcome Henrick Johns, CEO and partner of Sona Asset Management.
Speaker 3: How are you, Henrik, I'm doing great. Thank you for
Speaker 3: having me.
Speaker 2: Henrik was previously the global co head of Capital markets
Speaker 2: and co heed of European Investment banking at Deutsche Bank,
Speaker 2: and he is Sona's first CEO. Sona managers twenty billion dollars,
Speaker 2: up from about six billion in twenty twenty four. It
Speaker 2: runs a long short European focused fund, provides capital solutions
Speaker 2: to firms in need of financing, invest in SRTs, and
Speaker 2: also has a COLO business. It's flagship hedge fund again
Speaker 2: top in eight percent last year. So James, I'll hand
Speaker 2: over to you to kick us off.
Speaker 1: Thank you, Aiden, Thanks for joiningus, Henricks. Clearly a lot
Speaker 1: to discuss today. I do want to start, though, with
Speaker 1: the stress that you're seeing in credit markets. Regular listeners
Speaker 1: to this show will be aware of the prevailing optimism
Speaker 1: or complacency depending on your point of view. When we
Speaker 1: talk to investors and analysts, almost everyone is bullish right
Speaker 1: now on credit, but SONA is positioning for a tougher
Speaker 1: cycle ahead.
Speaker 3: Now.
Speaker 1: To be clear, your firm is in a position to
Speaker 1: take advantage of market dislocations, so it is in your
Speaker 1: interest to see the world in that way. But how
Speaker 1: tough could things get, Henrik, and where are the pressure points?
Speaker 1: Why is that not and also why is that not
Speaker 1: reflected in the data or the market pricing right now?
Speaker 3: Well, it's a it's a funny definition of stress that
Speaker 3: you started a stress where everyone is positive. Yeah, I'm
Speaker 3: not sure that actually is stress. I think the opportunity
Speaker 3: set that's therefore a fund like us is enormous. And
Speaker 3: you know that opportunity set is there because we're seeing
Speaker 3: so many different trends that are driving the credit markets,
Speaker 3: some of which are genuinely transformational, you know, to all
Speaker 3: of our lives, like the large amount of AI financing
Speaker 3: that needs to happen across all markets, all products together
Speaker 3: with you know, also some trends around how we consume things,
Speaker 3: European d industrialization. There's just a lot of things to
Speaker 3: get your teeth into if you're a long short credit
Speaker 3: manager like ourselves.
Speaker 1: But how tough do you think things could get?
Speaker 2: Me?
Speaker 1: Because you do talk about a tougher cycle a head,
Speaker 1: and you do talk about more defaults and low recoveries.
Speaker 1: I mean that would suggest stress to me.
Speaker 3: It depends a lot on which market segments. So if
Speaker 3: we start maybe with the the BSL market, you know,
Speaker 3: something that maybe isn't widely appreciated is at the sort
Speaker 3: of aggregate level of defaults in the BSL market is
Speaker 3: at a pretty high level, and it represents it's a
Speaker 3: you know, dispersion and and in some cases disruption you
Speaker 3: know where you know, some of the ways that people
Speaker 3: have financed themselves, you know, during the private credit boom
Speaker 3: and the private equity boom. You know, some of those
Speaker 3: things in terms of lack of credit discipline, you know,
Speaker 3: really starting to come home to roost. And so that
Speaker 3: again creates opportunity, you know, to to provide solutions, you know,
Speaker 3: to some of the stressed capital structures. And you know,
Speaker 3: that's a place again where where we do do really
Speaker 3: well because we have a lot of fundamental you know,
Speaker 3: analysis skills and also the scale you know, to make
Speaker 3: a difference. So, you know, in terms of trying to
Speaker 3: answer your question, which is which is very broad one,
Speaker 3: you know, how how bad can things get? Yeah? Things
Speaker 3: right now? You know that there's opportunities. I wouldn't say
Speaker 3: that they're bad per se. And you know, one of
Speaker 3: the things that I'm sure we'll cover, which we spend
Speaker 3: a lot of time thinking about, is, you know, the
Speaker 3: amount of AI capex that's coming and the financing needs.
Speaker 3: Is that an appropriate level of exuberance around the opportunities
Speaker 3: And you know, not to get historical round it, but
Speaker 3: if you look at prior cycles, you a lot of
Speaker 3: people talking about the railway boom for example of eighteen
Speaker 3: seventy three. You know, you have to go back a
Speaker 3: long way, but you know that there's genuine productivity improvements
Speaker 3: that are potentially coming from this, you know, which could
Speaker 3: justify you know, the valuations of the financing needs. But
Speaker 3: the sort of the flip side of that is, of course,
Speaker 3: that software which previously has been seen as an incredibly safe,
Speaker 3: you know, highly lucrative investment, both on the equity and
Speaker 3: the dead side. You know is is you know, under
Speaker 3: pressure because you know, maybe the AI spending and the
Speaker 3: tools that we can all develop, you know, is going
Speaker 3: to you know, make the markets you know that they're in,
Speaker 3: you know, much more difficult. So again that creates an
Speaker 3: opportunity which is a sort of a factor or a
Speaker 3: tangent to the AI boom.
Speaker 2: So it's about opportunity from from the shorting side. Do
Speaker 2: you think there is any kind of long opportunities available
Speaker 2: in this market as well? Or is it is the
Speaker 2: focus of the firm mainly really kind of areas of
Speaker 2: distress and emerging problems.
Speaker 3: So I mean I should probably take a step back
Speaker 3: and talk about what SONA does, you know, because we
Speaker 3: are at the moment a very broad firm in terms
Speaker 3: of what we look at. So we're active and everything
Speaker 3: from investment grade bonds you know, to obviously you know,
Speaker 3: regular way high yield and b A sels. You know,
Speaker 3: we do a bit of private credit where it makes
Speaker 3: sense for some of our strategies, you know, all the
Speaker 3: way to converts and so on. So you know, we're
Speaker 3: we're kind of in a lot of different things, and
Speaker 3: you know they all have different dynamics, so you know,
Speaker 3: on on some things we're positioned you know for growth,
Speaker 3: and you know there's obviously long positions in other sectors.
Speaker 3: You know, we we think that the trend is going
Speaker 3: to be down in terms of price, you know, either
Speaker 3: because for you know, sector reasons or idiosyncratic critic reasons.
Speaker 3: And in those cases obviously you want to try to
Speaker 3: express that either by just staying away from it or
Speaker 3: by going short if you can.
Speaker 1: Where are other problems though in terms of sex, what
Speaker 1: do you stay away from?
Speaker 3: I mean again, we don't really think of sectors as
Speaker 3: something which are you know, stay away at any price.
Speaker 3: We look at everything in terms of, you know, what
Speaker 3: would be the appropriate entry point, either on the short
Speaker 3: or the long side, you know, for what that particular
Speaker 3: name or the sector is going through. So a great
Speaker 3: example is last year the European chemical sector was one
Speaker 3: of the worst performing sectors, you know, obviously high energy
Speaker 3: prices and so on. And then when the war in
Speaker 3: Iran started and a lot of those industry dynamics you know,
Speaker 3: suddenly reversed, and you know, a sector that people had
Speaker 3: seen as as completely toxic and you can see that
Speaker 3: in the capital structures trading levels of some of the
Speaker 3: major European names you know, suddenly quickly recovered because the
Speaker 3: dynamics shifted. So I think the benefit of you know,
Speaker 3: looking at things based on kind of the enterprise what
Speaker 3: we think is going to happen. You know, that gives
Speaker 3: us opportunities to what we did in that case, which
Speaker 3: quickly reverse our thinking, you know, invest in it. You know,
Speaker 3: now with the you know, the war in Iran, hopefully
Speaker 3: you know, getting towards the end, you know, the industry
Speaker 3: dynamics start to reassert themselves in terms of the cost structure,
Speaker 3: you know, for Europe, and and maybe it's time to
Speaker 3: you know, to think about that bit more on the short.
Speaker 1: Side, if you are going to go short in this market,
Speaker 1: you know, it doesn't seem that easy when you're talking
Speaker 1: about some of the more leveraged capital structures and more
Speaker 1: the more liquid companies that you're you're dealing with. How
Speaker 1: what what the what's the mechanism by which you could
Speaker 1: take a short position right now in a credit market?
Speaker 3: Again, I mean, we have a very wide set of
Speaker 3: investment tools, so you know, some things are easier to short,
Speaker 3: some things are harder. So it's sort of just a
Speaker 3: it's very situational. In some cases, you know, you can
Speaker 3: use CDs. In some cases you can you know, borrow
Speaker 3: the bonds go short that way. It really just depends
Speaker 3: and you know, as part of every analysis, of course,
Speaker 3: you know, it's what's the cost of of that short
Speaker 3: you know, factors into the investment decision. So yeah, we
Speaker 3: we look at things on a very individual way.
Speaker 2: Who's providing that liquidity in in sort of more private
Speaker 2: or or distressed end of the market.
Speaker 3: I mean, again, I probably wouldn't want to comment on
Speaker 3: on sort of individual relationships that we have. You know,
Speaker 3: I think some markets are more liquid than others. You know,
Speaker 3: those are easier to express views in otherwise less. So again,
Speaker 3: it just really I'm glad.
Speaker 1: You mentioned AI and software. That is something we spend
Speaker 1: a lot of time talking about. But the software story,
Speaker 1: I mean, it started off as a bit of a
Speaker 1: shock to everyone, and everyone wanted to get out, and
Speaker 1: then there was a kind of counter movement where everyone
Speaker 1: kind of got back in realized that that software generally
Speaker 1: wasn't worthless. You know, these companies, a lot of them
Speaker 1: were utilities, and that they would actually survive. But it
Speaker 1: sounds like you have a more sort of bearish view
Speaker 1: on the sector, and I'm wondering, you know, in terms
Speaker 1: of you do expect more defaults, you expect less recovery.
Speaker 1: Do you expect to kind of wipe out in that
Speaker 1: sector at this at this point, hate hate to repeat.
Speaker 3: It depends on the name. I mean, I think we
Speaker 3: are definitely bearish on the sector. But that's also because
Speaker 3: of how quickly we internally are starting to utilize you know,
Speaker 3: the technological tools that you know AI is giving us,
Speaker 3: and you know, I'm sure that you know many of
Speaker 3: the listeners and and you know yourselves at Bloomberger are
Speaker 3: doing the same. And so in some cases you will
Speaker 3: have the ability for you know, software providers to to
Speaker 3: really reduce their costs because you know, their development costs
Speaker 3: you know, are going down as as they can code
Speaker 3: you know, more efficiently, and that will enhance their margins
Speaker 3: and and they will do well. Yeah, in other cases,
Speaker 3: you know, they're very vulnerable to disruption, and you know,
Speaker 3: so I think we are on the more barish end,
Speaker 3: you know, when it comes to to this sector overall.
Speaker 3: And you know, just to address your question about you know,
Speaker 3: the quick sell off and then the recovery, I think
Speaker 3: it's it's definitely worth sort of mentioning that, you know,
Speaker 3: the software business, especially if it's based on subscription. It's
Speaker 3: not like it goes away in the space of one quarter.
Speaker 3: I mean, that's that's the nature of the business. And
Speaker 3: you know, we're very early in the software or is
Speaker 3: there in the AI sort of utilization boom, and people
Speaker 3: need to think about how many tokens you know, they're
Speaker 3: they're buying and spending money on. But you know, over time,
Speaker 3: you know, particularly if you take software, you know, in
Speaker 3: the sort of leverage finance space, you know, these are
Speaker 3: often a bit smaller. You know, they're higher leveraged companies,
Speaker 3: slightly more vulnerable in terms of disruption. And if you
Speaker 3: have a big maturity that's coming up in a couple
Speaker 3: of years time, I'm sure you've you've seen, you know,
Speaker 3: there's about a twenty percent maturity cliff in twenty twenty eight,
Speaker 3: and that's a very self selecting group of companies that
Speaker 3: are are subject to that. You know that refinancing is
Speaker 3: going to be harder, and you know, if you just
Speaker 3: look at these names on the basis of are they
Speaker 3: paying their current income, what is you know, this quarter's earnings,
Speaker 3: you know then obviously you know big price falls is unjustified.
Speaker 3: But if you're thinking ahead and thinking about the terminal value.
Speaker 3: Then it's different. And you know, I think a great
Speaker 3: way to illustrate that is you think about, you know,
Speaker 3: where secondary buyout funds are pricing, or even just what's
Speaker 3: happening in the equity markets. It sort of tells you
Speaker 3: that all is not well, you know, in that sector
Speaker 3: in general, and a.
Speaker 2: Nasset like sector of course, which is something that you
Speaker 2: guys have brought up about one of the kind of
Speaker 2: structural problems with the portfolios in private credit right now.
Speaker 3: Yeah, and look, I think you know, private credit, you know,
Speaker 3: as sort of a tangent, you know, was a phenomenally
Speaker 3: successful business for a long time, I mean last ten
Speaker 3: years really, but you know, in a way it was
Speaker 3: a victim of its own success. You know, they've seen
Speaker 3: a lot of inflows and so it became very deployment focused,
Speaker 3: and the easiest way to deploy was in large software deals,
Speaker 3: you know, particularly in the sort of twenty one twenty
Speaker 3: two boom. So if you've ended up with a lot
Speaker 3: of that in your portfolio, then you know you're going
Speaker 3: to be scratching your head a little bit now and
Speaker 3: thinking like how do I get out of this? And
Speaker 3: of course, you know, it's very much in your interest
Speaker 3: to believe that these credits are all performing and there's
Speaker 3: nothing wrong. You know, time will tell.
Speaker 1: And do you expect much lower recovery rates than what
Speaker 1: people are currently assuming.
Speaker 3: Well, I think one thing that hopefully market pisipits are
Speaker 3: very aware of is that the there's been a big
Speaker 3: divergence over the last you know, five years in terms
Speaker 3: of the credit quality on loans and bonds and you
Speaker 3: know loans, both BSL loans and private credit loans, although
Speaker 3: obviously there's less information available in private credit, you know,
Speaker 3: where the bond market, you know, because of the discipline
Speaker 3: of ratings and you know mark to markets and and
Speaker 3: daily liquidity has trended to becoming higher quality in terms
Speaker 3: of ratings, and the BSL market has tended to become
Speaker 3: lower quality, you know, because you've just been able to
Speaker 3: do you know, more sort of qute unquote creative things
Speaker 3: there and so, uh, you know, we do think that
Speaker 3: there's going to be you know, more stress in the
Speaker 3: loan market, but again, you know that that creates opportunity
Speaker 3: because you know, there's a right price to enter a
Speaker 3: credit that's under stress, you know where you know it
Speaker 3: may not have asset value, but maybe it persists longer
Speaker 3: than you think, or you have a great match mean
Speaker 3: team that's able to turn around, or you know, and
Speaker 3: there's some very super I mean very smart you know
Speaker 3: equity sponsors who are good at building businesses and restructuring.
Speaker 3: So yeah, again it's very situational in terms of you
Speaker 3: know how to invest in them.
Speaker 2: Yeah, and that brings me on to the question we
Speaker 2: have about the kind of refinancing. Well, you touched on
Speaker 2: it earlier. John Eyrewood, obviously founder of Sona said last
Speaker 2: year at about one hundred billion dollars of European leverage
Speaker 2: credit issued by Pe firms or struggle to refinance before
Speaker 2: it matures in twenty twenty eight, do you have a
Speaker 2: kind of update on that view, and then maybe just
Speaker 2: talk us through what's Sona's approach to kind of evaluating
Speaker 2: that risk or all of those issues coming to market,
Speaker 2: and what's your edge compared to maybe your peers in
Speaker 2: how you would look at that.
Speaker 3: So I think Sona's edge and I speak as a
Speaker 3: relatively recent arrival who's not making investments, So you know,
Speaker 3: please take this, you know, with a with a grain
Speaker 3: of salt, but I think the reason for the firm's
Speaker 3: success is that it essentially thinks of itself and is
Speaker 3: perceived by a lot of its sort of counterparties as
Speaker 3: as a solution provider. And you know, that solution can
Speaker 3: be anything from anchoring a new issue, you know, to
Speaker 3: d risk a bank underwrite, you know, to supporting a
Speaker 3: sponsor in a amend and extent they want to do
Speaker 3: for for a b SL and and sort of anything
Speaker 3: in between, or de risking a bank by investing in
Speaker 3: an SRT, you know, to help them recycle capital for
Speaker 3: something that they want to do. So you know, we
Speaker 3: we sort of do all of those things. And you know,
Speaker 3: to maintain that, you know that view by our counterparties,
Speaker 3: you need to have scale, so you know, they need
Speaker 3: to be able to come to us and feel like,
Speaker 3: you know, even if we're not doing the whole solution,
Speaker 3: we're a significant part of it. So it's not a
Speaker 3: waste of time to to sort of get us on board.
Speaker 3: It requires obviously, you know, fundamental analysis, you know, to
Speaker 3: understand what you're getting yourself into. And it also requires,
Speaker 3: and this is really the thing that we think is
Speaker 3: most critical, you know, a broad view across public and
Speaker 3: private markets, so we can think about how to price
Speaker 3: risk appropriately, you know, kind of everywhere that that touches
Speaker 3: this credit, you know, whether that's you know, in the
Speaker 3: BSL market, you know what's going on in private credit,
Speaker 3: and also in the public markets, and so you know,
Speaker 3: the combination of those three things means that often we
Speaker 3: are in a position where, certainly in Europe and increasingly
Speaker 3: in the US, you know, we are coming up with
Speaker 3: solutions in partnership, you know, with our relationships as opposed
Speaker 3: to you know, being the fund that someone calls up,
Speaker 3: you know and says, this is what's happening, and you know,
Speaker 3: again that requires being very you know, fast in responses.
Speaker 3: I remember when I was on the cell side. You know,
Speaker 3: the thing I probably hated the most was getting strung
Speaker 3: along for a few weeks by fund and then getting
Speaker 3: told no. You know, I'd much rather have a fast
Speaker 3: no and then move on or know that I'm wrong.
Speaker 3: You know, fast know, in many cases is as good
Speaker 3: or almost as good as a yes. And then you know,
Speaker 3: again like being there not based on whether the market
Speaker 3: has moved five basis points that day, but having done
Speaker 3: a fundamental credit analysis that you stick with your view
Speaker 3: because it's a high conviction view.
Speaker 1: But is the edge more that you kind of get
Speaker 1: involved in the smaller situations as well, because you know,
Speaker 1: what you're describing is pretty much what you know, all
Speaker 1: the banks would say, including JP Morgan, that they offer
Speaker 1: across the board service, but you must be doing a
Speaker 1: different scale of business right in the middle market.
Speaker 3: Well, I think what I mean by that is that
Speaker 3: while many banks have obviously a very broad business model,
Speaker 3: even though not all of them are particularly well joined
Speaker 3: up between the different types of things that they do,
Speaker 3: there's not that many people on the by side, and yes,
Speaker 3: certainly in Europe that have the broad, unconstrained mandate that
Speaker 3: we do. And you know, again we touched on AI.
Speaker 3: You know, we're we're very active in you know, all
Speaker 3: sorts of types of AI investments, you know, many in
Speaker 3: the US, increasingly in Europe. We're also you know, very
Speaker 3: active in the new issue market. You know, we're a
Speaker 3: big trader in the secondary market. So it's really just
Speaker 3: that we're constantly ingesting information and getting signals you know,
Speaker 3: from the kind of investments that we're doing or or
Speaker 3: frankly investments that we choose not to do. And you know,
Speaker 3: that's what gives us that that sort of fundamental conviction.
Speaker 3: And you know, we're also relatively focused on you know,
Speaker 3: liquidity and you know, making sure that you know, something
Speaker 3: is you know, whatever it is that we're doing is
Speaker 3: appropriate in terms of liquidity for the strategy that we
Speaker 3: invest in. Yeah, and obviously we have a number of
Speaker 3: different buckets that we can use as investing vehicles.
Speaker 1: But the scale of these deals and you mentioned AI,
Speaker 1: I mean I've talked to an underwriter recently who said
Speaker 1: that quote, some of these issues wouldn't get out of
Speaker 1: bed for less than twenty five billion, which is a huge,
Speaker 1: you know evolution even compared to last year. And so
Speaker 1: like we're talking about massive, massive, you know, a multi
Speaker 1: trillion dollar investment cycle. How does a you know, relatively
Speaker 1: niche shop like Sonar participate in that.
Speaker 3: Well, I'm glad you asked that question, James, because I
Speaker 3: think we're everything other than niche in the world that
Speaker 3: we're in, you know, the and maybe touching a little
Speaker 3: bit on the on the kind of the AI CAPEX needs.
Speaker 3: So I think you know, people are banding around different numbers,
Speaker 3: you know, whether it's you know, eight hundred or nine
Speaker 3: hundred billion that needs to get financed in CAPEX next year.
Speaker 3: Now what that means is that the largest bar wars
Speaker 3: you know, in the investment grade bond market you know,
Speaker 3: are going to become you know, potentially the hyperscalers in
Speaker 3: uh you know, the course of you know, three to
Speaker 3: four years. But the investment grade bond market, you know,
Speaker 3: I unsecured that issue directly by the hyperscalers to finance
Speaker 3: the CAPEX is only a small part of the story.
Speaker 3: You know. It's everything from construction lending to GPU financing,
Speaker 3: to you know, HILD bonds, to various you know, securitization vehicles.
Speaker 3: You know, all of this is coming at us and
Speaker 3: that is what's creating you know, this incredible opportunity to
Speaker 3: invest money. And you know, for fund like us, I
Speaker 3: suppose we're niche in the sense that we are not
Speaker 3: managing a trillion, But you know what that also means
Speaker 3: is that for the opportunities that we pick to invest in,
Speaker 3: we can be very meaningful. And so you know, the
Speaker 3: reason we're so excited about what's going on in the
Speaker 3: world again, particularly in that space, is because the amount
Speaker 3: of opportunities that you get shown because banks, I mean
Speaker 3: a fundamental difference between bank and you know, debt financing
Speaker 3: equity financing generally is that banks and credit funds typically
Speaker 3: don't allow the kind of concentration that equity markets allow.
Speaker 3: So you have to have diversifications. So there's no institution
Speaker 3: on earth that could absorb, you know, all of the
Speaker 3: amount of debt requirements that that's coming. And so by
Speaker 3: having very strong sourcing relationships and you know, some of
Speaker 3: that edge that I mentioned, we're able to pick and
Speaker 3: choose the things that we really like, and you know,
Speaker 3: if there's something that we don't like, then you can
Speaker 3: just move on because you can be confident that next
Speaker 3: week someone else is going to show you a different
Speaker 3: deal which you may like. And so that just creates
Speaker 3: a great dynamic, you know, for us in terms of
Speaker 3: deploying capital, is.
Speaker 1: It though ABF type deals? Is it? I mean? I mean,
Speaker 1: how does Sony participate in a an AI financing? There's
Speaker 1: so many different kinds.
Speaker 3: Everything, you know, everything from you know, equity to HILED
Speaker 3: bonds to investment grade bonds to a b F. You know,
Speaker 3: we we have a very As I said, yes, some
Speaker 3: people still think of us as a European left in
Speaker 3: player and you know, we we are a lot more
Speaker 3: than that at this point. You know, we've got five
Speaker 3: global offices. We've just announced that we're opening one in Tokyo.
Speaker 3: You know, we have a significant investment team in New
Speaker 3: York and I've had for you know, really since the inception,
Speaker 3: So we're involved. You know, wherever we see you know
Speaker 3: alpha And you know, again it comes back to that
Speaker 3: investing age that I talked about, but you know that
Speaker 3: is applicable across all of these markets.
Speaker 1: So where do you see alpha right now? Because I
Speaker 1: mean if you've bought SpaceX bonds, that wouldn't have been
Speaker 1: partletuarly good that right last week? But what what is
Speaker 1: the opportunity in AI debt right now?
Speaker 3: Some trades are great and they pay you appropriately. Others
Speaker 3: are more more difficult. And you know what's fascinating about
Speaker 3: it is that on one hand, you can say all
Speaker 3: of this is speculative, right, you know, will people actually
Speaker 3: adopt AI? And you know, is all of this debt
Speaker 3: and you know all of this equity value you know
Speaker 3: going to work out well? And you know in a
Speaker 3: way if you look at you know, particularly the equity markets,
Speaker 3: you know you have you've see earnings assumptions that have
Speaker 3: gone up and up and up, and that is really
Speaker 3: what's justifying the valuations as opposed to you know, just
Speaker 3: multiple expansions and that earning. You know, there's many different
Speaker 3: ways of playing AI. You know, some of them is
Speaker 3: in memory, you know, others are in powershells, Others are
Speaker 3: in GPU financings. Others are you know, buying and trading
Speaker 3: high old bonds. I know some of your previous guests
Speaker 3: have talked about the the pressure that the sheer amount
Speaker 3: of financing will have on the IG market, and and
Speaker 3: we certainly think that the case. I mean, it's sort
Speaker 3: of inevitable that you know, with the amount of financing
Speaker 3: that has to go, that spreads you know, eventually go wider.
Speaker 3: I mean, it's just a supplied demand in bads. At
Speaker 3: the same time, you know, with yields where they are,
Speaker 3: if we're talking about you know, IG bonds for a second,
Speaker 3: you know, there is still a ton of demand you know,
Speaker 3: from yield buyers, insurance companies and others, and you know
Speaker 3: that's what's keeping spreads as tight as they are. So
Speaker 3: we're not necessarily seeing that, you know, there's a massive
Speaker 3: widening happening in the short term. But I mean those
Speaker 3: of us that have been in the market for a
Speaker 3: long time know that you know, comes and fits and starts,
Speaker 3: and you know there'll be you know, some rumor that
Speaker 3: a hyperscaler is is slowing down its cap e spending
Speaker 3: and everyone will panic and sell everything, and then in
Speaker 3: two weeks time, you know, they'll buy everything again and again.
Speaker 3: If you think about, you know what what a fund
Speaker 3: like ours does, you know, we really live off of,
Speaker 3: you know, the rate of changed seeing things go up
Speaker 3: and down. That's what creates opportunities for us. Rather than saying, okay,
Speaker 3: you know AI is the thing We're going to put
Speaker 3: all our money and go along this, you know, we
Speaker 3: we obviously try to find ways to create convexity in
Speaker 3: our investment.
Speaker 2: Given your background as an originator, given be touching on
Speaker 2: this subject, have to ask you a lot's been made
Speaker 2: about pe firms kind of eating debt, syndicate of bank
Speaker 2: investment banks lunch in times of the origination market, even
Speaker 2: spreading into investment grade in a big way. What's your
Speaker 2: kind of take on that and how you see the
Speaker 2: outlook for that kind of disintermediated origination going forward.
Speaker 3: Yeah, I think the ones that you may be talking
Speaker 3: about may have started as p firms, but you know,
Speaker 3: they're not that anymore. Look, I think that the trends
Speaker 3: in the left in market and just markets generally has
Speaker 3: been that both you know, private equity firms have gotten
Speaker 3: a lot more sophisticated. You know, they all have capital markets,
Speaker 3: you know, teams now, you know, which are in many
Speaker 3: cases directly syndicating debt, you know, and in some cases
Speaker 3: you know, obviously they've grown to become you know, completely
Speaker 3: outgrown their their private equity businesses. So for us, you know,
Speaker 3: it's again about being a solutions provider to all sides
Speaker 3: of that. I mean, I have to think that banks
Speaker 3: and you know, I've I've left banking now, but I
Speaker 3: think banks have an opportunity to gain market share, you know,
Speaker 3: for for the next couple of years, because you know,
Speaker 3: aside from the A boom, another thing that we strongly
Speaker 3: believe in is that public and private markets are converging,
Speaker 3: and public markets are probably going to be gaining market
Speaker 3: share at the expense of private markets. I mean, if
Speaker 3: you just think about what's happened, private markets benefited from
Speaker 3: the sort of the financial repression ultra low interest rates
Speaker 3: caused a lot of money to flow into that you
Speaker 3: know where that's p direct lending or other forms of financing.
Speaker 3: And you know, if you just take the US I
Speaker 3: p O market, you can see that actually there's a
Speaker 3: reequitization happening. You know, buybacks are slowing down and people
Speaker 3: are issuing more more equity. I mean, look at you
Speaker 3: know that that Google deal SpaceX. You know, we'll have
Speaker 3: more jumbo I p O s you know, coming and
Speaker 3: so you know, I think the types of firms that
Speaker 3: are involved in the public markets, you know, are going
Speaker 3: to benefit. And for banks, you know, regulation in the
Speaker 3: US certainly seems like it's it's getting a bit looser,
Speaker 3: and you know, with less money flowing into direct lending,
Speaker 3: I think that creates an opportunity for for banks and
Speaker 3: public markets because banks generally aren't in the you know,
Speaker 3: sort of warehousing business, right They're they're moving, not in storage,
Speaker 3: as they say, and you know, they need somewhere to
Speaker 3: go with it. And you know, we try to position
Speaker 3: ourselves as you know, the partner of choice you know
Speaker 3: four banks in terms of helping them distribute their risk.
Speaker 1: Does that not mean the returns suffer because you know,
Speaker 1: public investors generally went to private markets to find better
Speaker 1: returns for the illiquidity. If they're converging, then you're gonna
Speaker 1: have more more trouble finding alph.
Speaker 3: No, because I think again, the ability to trade things
Speaker 3: and express views in the public market is really what
Speaker 3: generates the alpha. You know, certainly for for us, we
Speaker 3: try to run our business as a series of smaller
Speaker 3: wins and and that's what generates the revenue rather than
Speaker 3: taking huge directional bed and again that's that's a fundamental
Speaker 3: difference between you know, a sort of deployment focused model
Speaker 3: as opposed to a trading focused model. You know, you're
Speaker 3: always thinking about liquidity, and you know, can you monetize
Speaker 3: you know, a movement up or down in our price?
Speaker 1: Can we talk about Europe, Henrick, I mean you are
Speaker 1: based there, That's that's where you know the roots are
Speaker 1: camp I know you have an international kind of expansion plan.
Speaker 1: But but sitting there and having the advantage in terms
Speaker 1: of your knowledge of the local economies and jurisdictions and
Speaker 1: all that stuff. What what is the Europe against US
Speaker 1: credit market proposition? Right now?
Speaker 3: I should start by saying we love Europe. You know,
Speaker 3: this is obviously where you know, Sona was founded. It's
Speaker 3: where I've spent my whole career. But we love it
Speaker 3: because it's complex and difficult and and a bit harder
Speaker 3: to get your head around than the US market is now.
Speaker 3: I don't want to take anything away from you know
Speaker 3: the world's largest credit market where all the exciting innovation
Speaker 3: is happening. And you know, I think for investing in equity,
Speaker 3: the US frankly, I mean the growth, both the productivity, growth,
Speaker 3: the innovation, you know, that clearly has Europe beat. But
Speaker 3: for a credit provider, you know, example we like to
Speaker 3: use is that in the US you've got you know,
Speaker 3: three cell phone companies, uh, and they're all super sophisticated,
Speaker 3: large borrowers, you know, with capital markets program. You know,
Speaker 3: in Europe each country has three, uh you know, cell
Speaker 3: phone providers, if not four, and so you know, and
Speaker 3: that's twenty seven countries times three, So you know, it
Speaker 3: just gives you so many more opportunities, you know, to
Speaker 3: to unlock value. So I think that that sort of
Speaker 3: you know, our our sort of roots in being you know,
Speaker 3: the best at investing in Europe with a large unconstrained mandates.
Speaker 3: That that is always going to be foundation of the firm.
Speaker 3: Having said that, you know, it's not so much international
Speaker 3: expansion plans. I mean we we are expanded, you know
Speaker 3: in the US. And you know, while the market there
Speaker 3: is more competitive, I should say. You know, one of
Speaker 3: the things about Europe is it is less competitive because
Speaker 3: it's more difficult, you know, while the US market is
Speaker 3: more competitive. Again some of the same edge that helps
Speaker 3: us in Europe. Good partner you know, uh, you know,
Speaker 3: fundamental analysis, commit in size, commit early, give good feedback.
Speaker 3: You know, those things work just as well in the
Speaker 3: US capital markets as they do in Europe. So you know,
Speaker 3: we certainly see on our side that are sort of
Speaker 3: mind share and certainly told by some of our partners,
Speaker 3: mind share you know in the US is is also
Speaker 3: drastically increased, you know the last couple of years.
Speaker 1: Oh they're more quiet detonstructurings going on in the background. Well,
Speaker 1: I think there definitely are on the private credit side.
Speaker 1: And you know that's something which is a little bit
Speaker 1: mysteriou because you know, I mentioned before the elevated levels
Speaker 1: of defaults in the b SL market, and if you
Speaker 1: think about private credit as.
Speaker 3: A as an asset class, it has a lot of commonality,
Speaker 3: you know, in terms of who the who the sponsors are,
Speaker 3: you know, who the investors are, and the types of companies.
Speaker 3: You'd argue that they're probably a bit smaller on average
Speaker 3: than you know, companies that end up in the BSL
Speaker 3: market depent on obviously when when the deal was issued,
Speaker 3: and so you know, it seems to us, but there's
Speaker 3: obviously not a huge amount of data on this. You know,
Speaker 3: by nature of it being private that there must be
Speaker 3: a lot of quote unquote quiet restructurings, you know, pick tranches,
Speaker 3: you know, things like that, you know that are going
Speaker 3: on in that market, and you know that's probably going
Speaker 3: to be reflected in the returns people are seeing in
Speaker 3: their private credit portfolios. You know, over the next couple
Speaker 3: of years. That's you know, I don't think it's a
Speaker 3: sort of summit systemic suddenly we have a Lehman moment
Speaker 3: and the world ends. But you know, kind of just
Speaker 3: a slow grind of you know, especially as there's less
Speaker 3: liquidity coming in, you know, refinancing becomes a bit more difficult,
Speaker 3: performance suffers. You know that there's going to be you know,
Speaker 3: more more trouble in that space.
Speaker 1: Are you seeing opportunities right now to take on some
Speaker 1: of that stress in terms of you know, the BDCs
Speaker 1: over here in a lot of trouble and they seem
Speaker 1: to be eating to fund redemptions. Are they are they
Speaker 1: selling their loans at a discount that you're seeing, or
Speaker 1: even the clos that are trying to you know, reduce
Speaker 1: their software exposure or their triples the exposure.
Speaker 3: It's a very interesting topic because the short answer is no.
Speaker 3: As in there is not a lot of sales of
Speaker 3: private credit assets or even portfolios, and you know, the
Speaker 3: portfolios that are trading are trading actually at pretty high prices.
Speaker 3: That is a little bit hard to square sort of
Speaker 3: redemptions coming in quarter by quarter, you know, into you know,
Speaker 3: some of these structures that that allow it. Again, I
Speaker 3: think it it just takes a bit of time, you know,
Speaker 3: for for the you know, first, first of all, you know,
Speaker 3: inflows obviously have to be smaller than outflows in order
Speaker 3: to create stress in the system. You know, there's all
Speaker 3: sorts of bank financings and other ways of raising liquidity,
Speaker 3: you know, and and in fact, some private credit deals
Speaker 3: do trade, you know, so you can actually you know,
Speaker 3: raise you know, some cash by selling you know, the
Speaker 3: really good stuff over time. Though, you know, it's an
Speaker 3: area that we're watching carefully because it does feel like
Speaker 3: there's going to be opportunities there, but we just don't
Speaker 3: see it right now.
Speaker 1: You like those what's the opportunity?
Speaker 3: Yes, we really like SRTs and obviously we have a
Speaker 3: standalone SRT fund as well, although we also invest in
Speaker 3: in other ways. And you know, the reason why we
Speaker 3: like SRTs is because it's part of a broader trend
Speaker 3: that is, you know, working very much in our favor,
Speaker 3: and that is that European banks in particular have realized
Speaker 3: that the way that they can get the best returns
Speaker 3: for their shareholders is to develop more into an origination
Speaker 3: to originate, to distribute model. And you know, that's always
Speaker 3: been the case in leverage finance broadly, and it's one
Speaker 3: of the things that created an opportunity for direct lenders
Speaker 3: to step into you know, mid market lending that in
Speaker 3: Europe you know previously would have been done by banks,
Speaker 3: but you know regulation was was you know, making it
Speaker 3: more more punitive. Yeah, that same trend is happening across
Speaker 3: more asset classes. So it's a big part of why
Speaker 3: we think the ABF opportunity in Europe is so exciting,
Speaker 3: and you know, so what we try to do either
Speaker 3: through SRT technology, which is obviously a very structured way
Speaker 3: of providing capital relief to to a bank you know
Speaker 3: too you know more niche things, you know, things like
Speaker 3: bespoke CDs or you know, outright sales or syndications you know,
Speaker 3: to really you know, utilize the you know, the very
Speaker 3: strong relationships that banks have, you know, with their customers
Speaker 3: and that we could never replicate and don't want to replicate,
Speaker 3: but basically be a partner alongside banks, you know, to
Speaker 3: help them move risk. And again that flexible mandate that
Speaker 3: we have which allows us to look at you know,
Speaker 3: everything and anything you know on a bank balance sheet
Speaker 3: and try to price that approp brittlely. You know, that
Speaker 3: is a big advantage for us. And you know, the
Speaker 3: SRT fund and and kind of SRTs is is really
Speaker 3: just a subset of of that SAT.
Speaker 2: He's obviously growing fantastically well over the last few years.
Speaker 2: What's what's the next phase? How do you how do
Speaker 2: you drive that even further? Do you need to hire
Speaker 2: he looks like you've been doing some some geographic geographic
Speaker 2: kind of diverse ication do you need to acquire? What's
Speaker 2: what does the future hold?
Speaker 3: Like I think I'm sonas a great business. It's ten
Speaker 3: years old in September, and I can't take any credit
Speaker 3: for what's happened until now, but you know, it's it's
Speaker 3: a great place to work. The culture is amazing, and
Speaker 3: you know, our plans are manifold. I mean, the the
Speaker 3: most important thing is to deliver good returns to our investors.
Speaker 3: And yeah, that's what drives you know, everything, and that's
Speaker 3: you know, I you know, we keep investing in technology,
Speaker 3: in you know, smart people. You know, we have hired
Speaker 3: you know, quite quite a few people recently, you know,
Speaker 3: both on the investment and the non investment side. But
Speaker 3: I think we're about the right size. And one of
Speaker 3: the things that's that's most fascinating now, you know, just
Speaker 3: circling back to the beginning, is you know, what is
Speaker 3: the AI or what are the AI tools that are
Speaker 3: available to us going to mean? You know, for you know,
Speaker 3: the the investment world and and you know the amount
Speaker 3: of analysis that you can do, you know, with a
Speaker 3: given set of people, you know, both on your internal
Speaker 3: process side but also on the investment side. So you know,
Speaker 3: we're very excited about that. You know, I think in
Speaker 3: terms of you know, if there was apart from some
Speaker 3: of these mega trends that I've talked about AI CAPEX,
Speaker 3: you know, sort of we haven't really talked about, you know,
Speaker 3: what's going on the consumer side with glps and people
Speaker 3: eating and drinking like you know, d industrialization, you all
Speaker 3: really important trends. I think the thing that invites excites
Speaker 3: us the most probably is you know, the sort of
Speaker 3: the scope for growth in A B F markets, you
Speaker 3: know here in Europe because you know, just like we've
Speaker 3: been talking about private and public convergence in the same
Speaker 3: way corporate and and structured finance. You know, that is
Speaker 3: also converging, and you know it's most easily seen on
Speaker 3: the on the AI side, but European utilities, you know,
Speaker 3: same thing. They need to massively invest in transmission generation,
Speaker 3: you know, upgrading things. You know, there's going to be
Speaker 3: opportunities to you know, get investment grade returns, sorry, get
Speaker 3: above investment grade returns, you know, by being smart on structure,
Speaker 3: you know, from you know, with basically the backing of
Speaker 3: investment grade counterparties. So this isn't just a hyperscalar data
Speaker 3: center kind of trade. Yeah, there's lots of those things.
Speaker 3: And again that that's probably where we can see you know,
Speaker 3: most growth and also where SONA is incredibly well placed
Speaker 3: by virtue of our market share in Europe and our
Speaker 3: relationships you know, with with potential borrowers and issues.
Speaker 1: Well, it happens to that market though, I mean, does
Speaker 1: it have to experience regulatory changes or how does it grow?
Speaker 1: Because we have had people looking at ABF in Europe,
Speaker 1: but what what's the thing that makes makes it much bigger?
Speaker 3: I mean a lot of people talk about that, you know,
Speaker 3: there needs to be changes in securitization rules and so on,
Speaker 3: and yeah, that that is certainly all true. But you know,
Speaker 3: in a way, this isn't so much about regulation. It's
Speaker 3: about just need you know, and availability of capex. You
Speaker 3: know that, you know, the the investments have to be made.
Speaker 3: And you know the great thing for US is, you know,
Speaker 3: the banks can't absorb you know, this amount of financing.
Speaker 3: You know, banks obviously have a higher market share in
Speaker 3: Europe than in in the US, and the banks don't
Speaker 3: don't want to absorb it, you know, they want to
Speaker 3: underwrite some, keep some and sell some and you know,
Speaker 3: again that's where you know, we we play a really
Speaker 3: important role.
Speaker 1: When we talk to the A b F people in
Speaker 1: the US, they talk a lot about the scale of it,
Speaker 1: you know, into the tens of trillions of dollars of opportunity,
Speaker 1: but they also talk about the need to be very
Speaker 1: large to to take advantage to that. So, you know,
Speaker 1: again to sort of repeat, maybe rephrase aidents aidents question,
Speaker 1: I mean, why why not expand from from where you are?
Speaker 3: Now?
Speaker 1: Why why not acquire? Why not massively increase your your footprint?
Speaker 3: I mean, look, of course we we'd like to do that,
Speaker 3: but you know, we're we're not gonna do anything that
Speaker 3: that sort of just distracts from our core mission, which is,
Speaker 3: you know, deploy capital effectively and get good returns. You know.
Speaker 3: So you know, we're we're a relatively small business in
Speaker 3: number of people. You know, we don't have endless capacity.
Speaker 3: But you know, some of the things I've said probably
Speaker 3: gives you an indication of places that were interested in
Speaker 3: in expanding and offering new products, you know, and that's
Speaker 3: obviously an ongoing dialogue.
Speaker 1: You know, with r LPs, you have the US, you
Speaker 1: also have Japan. Any other countries you to get involved in.
Speaker 3: I mean, there's there's a lot of exciting things. But
Speaker 3: you know, between the US, Europe and are two. So
Speaker 3: we have an investing office in Hong Kong, I should say, uh,
Speaker 3: and then you know Abu Dhabi and and Japan. That's
Speaker 3: it's quite a lot to manage. So it's only from
Speaker 3: my side, I'm happy if we stay as we are
Speaker 3: for for a little while.
Speaker 1: Great stuff. Henrik Johnson, CEO of Sona Asset Management, thank
Speaker 1: you so much for joining us on the Credit Edge.
Speaker 3: Thank you for having me, and of.
Speaker 1: Course very grateful to Aden Chesslin with Bloomberg Intelligence. Thank
Speaker 1: you very much.
Speaker 2: Always a pleasure, James.
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