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Speaker 1: Hello, Welcome to the Credit Edge, a Wiki Marcus podcast.

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

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Speaker 2: And I'm Sam Geyer, a credit strategist with Bloomberg Intelligence.

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Speaker 2: This week, we're very pleased to welcome Mickey Batia, head

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Speaker 2: of Spread Products at City. How you doing today, Mickey

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Speaker 2: doing very well. Thank you, Glad to have you on

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Speaker 2: and really looking forward to this conversation. Some background for

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Speaker 2: our listeners. On top of heading up the Spread Products team,

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Speaker 2: Mickey is a member of the City's market Leadership team.

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Speaker 2: His Spread Products group covers secondary trading across corporate credit,

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Speaker 2: consumer credit, residential and commercial real estate, transport, and securitized

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Speaker 2: markets that includes core and emerging market bonds, asset backed

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Speaker 2: and mortgage backed securities, and collateralized loan obligations. He's been

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Speaker 2: with City a few decades and previously worked at Deutsche

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Speaker 2: Bank and JP Morgan. Mickey has a PhD in radiological

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Speaker 2: sciences from MIT and degrees in biomedical engineering and electrical engineering.

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Speaker 2: And with that, I'll turn it over to James to

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Speaker 2: kick it off.

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Speaker 1: Thank you very much, so, Micky, or shall we call

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Speaker 1: you doctor Battia? You did a PhD, as Sam said,

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Speaker 1: in radiological sciences. It's a broad field focused on the

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Speaker 1: use of radiation in medicine and science, especially for imaging, diagnosis,

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Speaker 1: and treatment of disease. So how do you get from

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Speaker 1: there to high finance, credit markets, secondary markets, and how

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Speaker 1: do you apply all of that to what you're doing today? Sure, Bill,

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Speaker 1: happy to be here first in terms of In terms

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Speaker 1: of my degree at MIT, so I you know, my

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Speaker 1: background was more electrical engineering, as you said, I studied

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Speaker 1: you know, statistics math as applied to medical imaging. After

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Speaker 1: I did my PhD. You know, while I was doing

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Speaker 1: my PhD, I was also very interested in finance. I

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Speaker 1: died a minor from Sloan School as well, and so

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Speaker 1: I think after I graduated, I was deciding whether to

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Speaker 1: be in academia and do medical research or to go

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Speaker 1: to finance, and I chose the finance route. JP Morgan

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Speaker 1: would come an interview for on campus recruiting from the

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Speaker 1: PhD program. That's when I joined finance. I started in

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Speaker 1: risk management, then moved to different roads in credit derivatives

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Speaker 1: when they're coming online, then to structure credit.

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Speaker 3: That was my path. Awesome.

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Speaker 2: Yeah, my brother just got his PhD. So I'll tell

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Speaker 2: him he has a route to finance potentially after he graduates.

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Speaker 2: But you know, Mickey, I just wanted to kick it off. Obviously,

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Speaker 2: a lot going on right now across the globe, a

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Speaker 2: lot of tension in the Middle East. I'm just wondering,

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Speaker 2: you know, starting out, what are what are your clients

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Speaker 2: really worried about, kind of higher level what's like you know,

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Speaker 2: obviously warre in Middle East AI taking over in terms

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Speaker 2: of how that's going to impact software. Is that where

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Speaker 2: you're seeing a lot of the concern coming about or

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Speaker 2: are there other parts of the market where maybe they're

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Speaker 2: seeing some concern as well.

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Speaker 3: Yeah, it is a it is a good question.

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Speaker 4: You know, it is a very strange market at the

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Speaker 4: moment because liquidity is ready obviously very high.

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Speaker 3: We see you.

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Speaker 4: Know, record issuances continuing on the primary side. We see

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Speaker 4: secondary treating volumes increasing, we see secondary bid offer declining.

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Speaker 4: The spreads are you know tight as tight of the

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Speaker 4: year as they are in the whole year. And but

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Speaker 4: we also see markets being discerning about risk right at

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Speaker 4: their discerning about risks and private credit. We have seen

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Speaker 4: BDC's you know being triple B flat minus rated traded

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Speaker 4: wider of strong double b's. We see, you know, US

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Speaker 4: banks historically trade tighter than yang Yankee banks comparable issuance,

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Speaker 4: they're trading wider. We see insurance companies in US trading

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Speaker 4: a bit wider in the IG space then comparable insurance

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Speaker 4: companies outside US. So I think our clients have been discerning.

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Speaker 4: They they are worried about the market. You know, the

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Speaker 4: private credit team I spoke about things are trading wider.

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Speaker 4: War obviously results in volatility, results in issuances going up

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Speaker 4: and down based on what the war outcomes are. But

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Speaker 4: I think generally the market feels very healthy, which is

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Speaker 4: consistent with how we view the fundamental market as being

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Speaker 4: still expansionary. We still expect defaults to be quite low.

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Speaker 4: So I think fundamentally the market is doing well and

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Speaker 4: that translates to to less of a concern in these

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Speaker 4: secondary markets.

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Speaker 2: Yeah, so, I mean definitely a lot of health that

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Speaker 2: at least I've been seeing on the fundamental side, like

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Speaker 2: you were just alluding to. Do you worry though about

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Speaker 2: like maybe second or third order effects from the conflict

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Speaker 2: in the Middle East, specifically, you know, the Strait being

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Speaker 2: closed right now. I've seen headlines. Obviously, oil prices are

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Speaker 2: kind of whipsawing in every direction. Fertilizer prices is another

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Speaker 2: area that is I think ultimately there's some spots where

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Speaker 2: you could see that impact the US. Do you see

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Speaker 2: those kind of be like not really being accounted for

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Speaker 2: in the market right now, especially in the United States?

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Speaker 4: I think so, I think that's the case. I completely

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Speaker 4: agree with you. I think the longer, the longer this

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Speaker 4: war lasts, you would see more of those headlines come

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Speaker 4: into reality. You know, you clearly, you know are seeing

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Speaker 4: what prices being higher. You are seeing certain parts of

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Speaker 4: the especially in Asia, they are struggling with different thanks

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Speaker 4: because of the lack of etiquette sources of energy. So

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Speaker 4: I think right now this is not really priced into

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Speaker 4: the fundamentals, but as when it gets does get priced,

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Speaker 4: assuming the conflict continues, that that definitely would reflect on

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Speaker 4: the prices.

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Speaker 1: Yeah, and as you said, the fundamentals look okay. The

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Speaker 1: tangles though incredibly strong. You know, there's so much demand

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Speaker 1: for not a huge amount of net new supply of credit.

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Speaker 1: You've talked about liquidity being a kind of fault line here,

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Speaker 1: you know, potentially and we know that it is quite fragile,

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Speaker 1: that it goes away very quickly in you know, in

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Speaker 1: any kind of shock. What do you think could cause

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Speaker 1: it to go away in any kind of sustained and

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Speaker 1: damaging way? For credit right now?

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Speaker 4: Well, you know, the backdrop of liquidity here has been

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Speaker 4: that the market structure in credit.

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Speaker 3: Has changed, is changing.

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Speaker 4: So if you look at the because of systematic trading,

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Speaker 4: the rise of electronic trading, the volumes are higher, and

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Speaker 4: they're for the bid offers have been declining. So if

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Speaker 4: we look at for every dollar of bond issued in

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Speaker 4: the US ten years ago, the trading volume would be

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Speaker 4: three and a half times, and that three and a

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Speaker 4: half is seven times right now, and the bid offers

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Speaker 4: have declined. If you measure from twenty nineteen to now,

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Speaker 4: even ignoring twenty twenty and twenty one, the bid offers

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Speaker 4: are probably half in these markets, the USIG and HYEN market.

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Speaker 4: So I think the market structure is resulting in liquidity

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Speaker 4: and the flow is getting more flows. The bid offers declined,

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Speaker 4: So I think the bar therefore for liquidity disappearing is

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Speaker 4: much higher than it used to be, certainly a few

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Speaker 4: years ago. So I do see that at some point

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Speaker 4: in time, maybe if the things are really really volatile,

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Speaker 4: the liquidity disappears.

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Speaker 1: But I think I think it's going to stay. Isn't

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Speaker 1: there anything that on the rise? I mean, all the

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Speaker 1: things that Sam's mentioning. You know that the geopolitics get worse,

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Speaker 1: that there's an energy shock, that inflation, you know, potentially

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Speaker 1: a fed hiker recession in the US. There are lots

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Speaker 1: of things that kind of we worry about in credit.

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Speaker 1: But even through that, you think the liquidity just keeps

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Speaker 1: coming for corporate bonds and leans.

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Speaker 4: Well, I think you you have to distinguish between as

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Speaker 4: I was saying, in terms of systematic trading. If if

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Speaker 4: you look at USIG markets, they're very electronic right now,

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Speaker 4: half of fifty percent of the flow is electronic highly

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Speaker 4: less so thirty percent of the floy is electronic. And

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Speaker 4: then you have the leverage loan market, which is not

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Speaker 4: very electronic at all. Right, So I think the liquidity

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Speaker 4: issues could definitely, as we have seen since the beginning

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Speaker 4: of the year, could happen in the leverage loan market,

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Speaker 4: right because as the AI disruption really pans out to

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Speaker 4: see which companies gets disrupted which companies not, that could

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Speaker 4: result in lack of liquidity there if you take if

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Speaker 4: you take a look at the AI disruptible companies in

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Speaker 4: the leverage loan universe, leverage loan universe has fifteen percent

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Speaker 4: exposure to tech AI. And if you take a look

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Speaker 4: at you know, our you know, our own independent researchers

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Speaker 4: did that. They looked at high, medium, low disruption risk

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Speaker 4: in these companies and if you look at the high

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Speaker 4: disruption candidates, they are down probably twelve points since the

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Speaker 4: beginning of the year. Low, down four, medium.

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Speaker 3: Or down eight.

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Speaker 4: But those are small numbers, right, and those are small

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Speaker 4: numbers on a grand scale of thing, because the fundamentals

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Speaker 4: have not really come through, right, So everybody's taking their

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Speaker 4: best educated guests as to what the disruption could be.

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Speaker 4: Clearly as and when these these things gets crystallized as

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Speaker 4: to which company gets disrupted more so and which is not,

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Speaker 4: then that will result in more volatily and a leverage

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Speaker 4: loan universe, and then that would result in more.

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Speaker 3: Liquidity challenges for some of those companies.

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Speaker 2: As well mentioned the systematic adoption and in corporates and loans.

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Speaker 2: I did see that City was associated with this company Octaurrah,

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Speaker 2: which is you know, primarily focused on trying to systematize

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Speaker 2: the trading of loans and colos. I was just wondering,

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Speaker 2: you know, what has the growth look like there. I

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Speaker 2: was a bit surprised to see the clos were being targeted.

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Speaker 2: I was just wondering, what what does that look like

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Speaker 2: in terms of automating the trading around clos just given

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Speaker 2: the complexity that that they bring to the table.

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Speaker 3: Very good question.

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Speaker 4: So you know, Octaura is a company with just doo

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Speaker 4: to our heart. We uh so we contributed you know,

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Speaker 4: our IP and on the CLO side, and you know

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Speaker 4: COLO is so we were a city as a city

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Speaker 4: was always very strong in clos, both in primary issuance

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Speaker 4: and secondary trading.

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Speaker 3: And this is many number of years ago.

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Speaker 4: The uh, the the frustration we all had at the

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Speaker 4: CEO market. But there are a lot of COLO, a

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Speaker 4: lot of q SIPs. Obviously every CLO portfolio is different.

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Speaker 4: And this was the place where we thought that the

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Speaker 4: adoption of of of tools, quantitative tools was probably the

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Speaker 4: best just because you know, there's so much data to

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Speaker 4: get arms around. So that's when you know, we we

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Speaker 4: worked on you know, uh bwig twol where we could

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Speaker 4: address lines, you know, inquiries automatically. We also came up

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Speaker 4: with a robotic pricer for clos and uh and that's

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Speaker 4: when you know, that's WEE, that's what we contributed to

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Speaker 4: Octurah And therefore you know, Octaura is some you know

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Speaker 4: as the company which is which is which which is

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Speaker 4: a lot of support from us because we want the

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Speaker 4: loan slash CLO universe to be, you know, to be

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Speaker 4: as quickly electronified as possible.

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Speaker 3: Right, But coming back to your question, I.

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Speaker 4: Think what we see is, you know, when when any

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Speaker 4: product has ETF market outstanding and trading, that's when it

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Speaker 4: gets electronified quicker and clos as we know as a

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Speaker 4: couple of ETFs one is particularly large, and that actually

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Speaker 4: results in the electronification or helping in the electronification of

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Speaker 4: the market. And I think that's the difference journey between

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Speaker 4: if you look at if you look at the US

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Speaker 4: corporate bond market, right, it's roughly fifteen trillion. If you

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Speaker 4: look at US securitized market, that's roughly fifteen trillion. And

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Speaker 4: clearly we know that the corporate bond market is much

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Speaker 4: more electronicified, and that's because the existence of ETFs and

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Speaker 4: clients trading ETFs and bond and dealers doing that fungibly

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Speaker 4: to some extent, and we see that in clos. We

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Speaker 4: don't see that in the rest of the securitized product.

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Speaker 4: But for us, the way we see things is that

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Speaker 4: that all the flow trading in the different products floor securitized,

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Speaker 4: they are in different part of the progress curve towards

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Speaker 4: getting traded more electronically. Side is clearly ahead of the curve.

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Speaker 4: Then it's us high heeled, and then there'll be securitized products.

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Speaker 4: But I think everyone is climbing up the curve, either

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Speaker 4: their climb naturally just because the market gets more educated

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Speaker 4: they have tools that they can develop, or their climb

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Speaker 4: also because they have products which will come online like ETFs,

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Speaker 4: which will force that to happen. So for us, that's why,

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Speaker 4: you know, we we went through an adjustment in our

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Speaker 4: in our structure as to how we look at how

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Speaker 4: we trade flow, where we put all the asset classes

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Speaker 4: together under one umbrella, just so that you know, we

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Speaker 4: can have our sight on that and aspirations to be

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Speaker 4: a little bit ahead of the curve when that happens.

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Speaker 2: Yeah, and do you see the potential to reach sort

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Speaker 2: of like a ceiling in terms of the electronification at least,

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Speaker 2: let's just say for the investment greade corporate markets you

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Speaker 2: mentioned fifty percent. I think a lot of people use,

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Speaker 2: you know, the equity markets as sort of a benchmark

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Speaker 2: of like, where's the ultimate target? Do you think we

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Speaker 2: can get to where equity markets are? Do you think

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Speaker 2: there's going to be a certain level that we hit

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Speaker 2: where certain clients maybe prefer just trading over the phone.

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Speaker 2: That's just how it works, and you just have to

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Speaker 2: deal with reaching that cap.

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Speaker 4: I think we think that the fifty percent in the

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Speaker 4: USIG space fifty percent electronic, will get to seventy percent

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Speaker 4: in a couple of years. I think beyond that, if

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Speaker 4: you take a look at the average daily volumes of

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Speaker 4: US corporate pund market, the voice volumes have been very stable.

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Speaker 4: The growth has come from electronic volumes. So if the

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Speaker 4: voice volumes stay where they are as symptotically, the increase

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Speaker 4: in the total volumes will determine what the percentage is.

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Speaker 4: I still think there will be your need always for

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Speaker 4: voice traders for different reasons. Right one is large blocks,

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Speaker 4: more complex traits where you need to use your balance sheet.

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Speaker 4: I would say also think about a situation and where

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Speaker 4: the algo is not really appropriate to price a bond right,

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Speaker 4: very large capital structure sitting on the cusp of getting

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Speaker 4: downgraded from investment grade to some investment grade you don't need,

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Speaker 4: You don't want an algo to trade that.

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Speaker 3: You want, you know, a more event.

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Speaker 4: Or situational trader taking it off the algo and trading that,

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Speaker 4: and bulk of that be voice. So I think those

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Speaker 4: situations will always will be there. Triple B is there's

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Speaker 4: a big bulge. One thought of the market in US

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Speaker 4: corporate bond market is triple B. So you could see

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Speaker 4: those situations, especially as the psycotone become more and more prevalent.

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Speaker 4: So I would say the voice trading volumes will stay.

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Speaker 4: Is just the electronic volumes which grow and will result

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Speaker 4: asymptotic percentage there.

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Speaker 2: And then what about just overall like AI adoption within

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Speaker 2: that same world, is it something that you've seen like

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Speaker 2: a lot of growth over the past you know, we'll

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Speaker 2: call it a year or so, or has it been

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Speaker 2: a little slow to kind of adopt AI and figure

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Speaker 2: out where exactly it's best utilized When you're trying to

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Speaker 2: figure out, you know, how to ultimately systematically trade these

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Speaker 2: uh these assets.

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Speaker 4: So I would say, you know, be excited about ya

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Speaker 4: because of two things being in spread products means that

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Speaker 4: AI is also becoming a really big part of the

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Speaker 4: capitalist structure that we look at we trade and that

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Speaker 4: we also finance. And then also AI is something a

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Speaker 4: technology that we can use and adapt for our own uh,

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Speaker 4: for our own benefit, I would say, I would say

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Speaker 4: on the second I'm just answering the second question in

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Speaker 4: terms of where AI. Where we use AI is to

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Speaker 4: just help us do things quicker and more efficiently, which

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Speaker 4: is not surprising if you have a large you know,

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Speaker 4: data coming from a financing business on the airline loans.

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Speaker 4: We have thousands of UH of borrowers in our portfolio

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Speaker 4: and we see services reports we can we can process

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Speaker 4: them much easily.

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Speaker 3: We can process a data much.

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Speaker 4: Easily to be able to become more intelligent and our

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Speaker 4: alleg price things for example. So we're using it for

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Speaker 4: all those reasons. But as I said, the first part

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Speaker 4: of the equation also excites me a lot because if

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Speaker 4: you look at all the financing which is going on

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Speaker 4: in the AI space, it's going through different parts of

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Speaker 4: our market, but in different parts. Right if you look

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Speaker 4: if the hy persecures are obviously that issuance is increasing.

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Speaker 4: You'ld see data center issuance coming in abs and CMBs.

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Speaker 4: You see the many of the CAPEX needs are being

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Speaker 4: met not just by public issuance but.

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Speaker 3: By private private capital as well.

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Speaker 4: So bringing all those things together, and how do we

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Speaker 4: look at things and aggregate, how do we make sense

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Speaker 4: of all that? How do we help our clients make

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Speaker 4: sense of that. That's something which.

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Speaker 3: Is very exciting and we're spending a lot of time

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Speaker 3: on that.

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Speaker 1: That's still on systematic in credit in terms of application,

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Speaker 1: I mean, sounds done some great work on this, but

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Speaker 1: it seems very limited and I'm wondering what would really

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Speaker 1: push it to more of a critical mass in terms

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Speaker 1: of you know, just much more usage. So I would say,

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Speaker 1: I would say sixty percent of our clients they have

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Speaker 1: the capability of and they do access the market in

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Speaker 1: an electronic fashion. And I think that adoption is the

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Speaker 1: one which which we we of course are you know,

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Speaker 1: we look after our clients and we are there to

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Speaker 1: serve our clients. I think that is what's driving more

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Speaker 1: and more because clients also wants to want to be

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Speaker 1: very low they want to also have a low cost

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Speaker 1: efficient way of accessing, you know, just a broader credit market.

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Speaker 1: So they're adopting these tool more and more so, and

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Speaker 1: some clients were ahead of the game and some clients

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Speaker 1: were not, and they are catching up now.

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Speaker 3: So that I think is bringing the whole.

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Speaker 4: Market adoption up right. And then on the other hand,

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Speaker 4: then you have dealers like us who are coming up

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Speaker 4: with tools to help help that progress in the market.

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Speaker 1: If we extrapolate, for then from where loans where they

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Speaker 1: are and look at maybe private credit.

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Speaker 3: Do you think private credit gets to a point?

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Speaker 1: I mean people have been talking about doing private credit ETF.

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Speaker 1: Does that get you to the point where you can

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Speaker 1: trade private credit electronically at some point in future?

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Speaker 4: If it's if it's a liquid ETF and it's very

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Speaker 4: it has got homogeneous underlyings, then I think you can

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Speaker 4: do that. If it's a bit heterogenous, then obviously it

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Speaker 4: doesn't tell you much. An aggregate price doesn't tell you

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Speaker 4: as to what's trading on.

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Speaker 3: The online side.

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Speaker 4: Now, what we have seen in private credit is that

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Speaker 4: private credit of courses evolved from from middle market space

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Speaker 4: to more IG large IG plus deals and those deals

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Speaker 4: are trading. Some of those deals are trading, so I

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Speaker 4: think certain parts of the market would trade as individual names.

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Speaker 4: But I think for private credit ETF to develop and

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Speaker 4: for dealers to be able to caliberit and trade private

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Speaker 4: credit electronically, I think you're further away from that because

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Speaker 4: we need homoginous.

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Speaker 3: Slow lying on the DF So it's years away potentially.

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Speaker 1: Yes, nothing staying with private credit there. For one, I'm

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Speaker 1: just interested in. You know, the whole market has been

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Speaker 1: quite anxious over the last few months related to retail

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Speaker 1: redemptions and a few other things about valuation, and then

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Speaker 1: you mentioned AI. Obviously that's that's been a pressure on

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Speaker 1: that market. But you obviously lend to private credit firms,

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Speaker 1: and I'm wondering, you know, one of the things that

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Speaker 1: that people always worry about is how levered the funds are.

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Speaker 1: From your perspective, are they massively levered? Are we running

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Speaker 1: into trouble on that side?

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Speaker 4: No, we are not concerned about the private credit space

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Speaker 4: for a variety of reasons. One is just even going

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Speaker 4: before to the levertt side, just as the liability mismatch. Right,

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Speaker 4: So so first of all, I take a step back

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Speaker 4: and say, you know, we're banks are allowed to do

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Speaker 4: lending and it's sufficient for them to do lending capital wise,

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Speaker 4: the other cheapest providers of capital where where it's not

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Speaker 4: efficient for them to lend because of asseid liability reasons,

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Speaker 4: mismatch reasons, or because of capital reasons. I think non

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Speaker 4: bank are great partners to do that on the non

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Speaker 4: bank side. Right, if you look at if you look

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Speaker 4: at the asset liability mismatch, you have, retail is around

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Speaker 4: Retail is around twenty percent off the size of the

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Speaker 4: market of the private credit market, and even then their

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Speaker 4: gates there, right, so you don't have that asset liability

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Speaker 4: mismatch is limited to twenty percent of less twenty percent,

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Speaker 4: even if everybody is able to get out the money at.

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Speaker 3: The same time.

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Speaker 4: And then compare that against banks, right if banks for

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Speaker 4: doing the lending, that is completely asset liability mismatch. And

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Speaker 4: as we have seen in stress situations like in twenty

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Speaker 4: twenty three with regional bank issues here in this country,

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Speaker 4: that that asset liability mismatch comes back to buy us.

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Speaker 4: So I would say that way.

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Speaker 3: I think.

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Speaker 4: That with the non bank market, I think has been

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Speaker 4: more stable, is more stable than banks doing the lending.

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Speaker 4: On your question about the leverage side, right, banks would

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Speaker 4: be levered ten to one or something, and the funds

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Speaker 4: that we we lend to, you know, you see leverage there.

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Speaker 4: Contractually the leverage is limited to two to one and

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Speaker 4: usually running at much lower levels than that. So so

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Speaker 4: that's why I'm not really concerned about, you know, the

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Speaker 4: rest that people talk about, especially driven by the retail

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Speaker 4: side of the business. Look, I think any market that

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Speaker 4: grows very quickly, very rapidly, has not been stress tested.

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Speaker 4: You know, we cannot just assume that things will be rosy.

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Speaker 4: I think, you know, we need to monitor the market.

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Speaker 4: We need to be very careful in how in which

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Speaker 4: we are, how we select our partners, who who originate

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Speaker 4: risk that that that's when we finance.

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Speaker 3: But I think o'reall.

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Speaker 4: You know, just a market having a big systemic issue

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Speaker 4: right now. I'm not really worried about that.

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Speaker 2: So staying on that topic, I'm just wondering when I've

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Speaker 2: had conversations with with guests in the past, you know,

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Speaker 2: they've brought up this idea of tourists in the private

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Speaker 2: credit space. You know, given all the hype around the

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Speaker 2: asset class in general, do you worry about people, you know,

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Speaker 2: trying to get a piece of the pie, trying to

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Speaker 2: take on a little bit more risk and not having

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Speaker 2: the experience that that other more established players have had,

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Speaker 2: and what might stem from that risk.

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Speaker 4: Absolutely, that's I think that's one of my biggest worry

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Speaker 4: that if the Cyclotons, then what happens in the to

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Speaker 4: the market rights As you said, right, so, they are

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Speaker 4: they're established players, they are you know, they are big

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Speaker 4: private credit players. They've established credit analyst. If the Cyclotons,

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Speaker 4: if there's a hard landing, you know, I have confidence

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Speaker 4: that they would have enough workout resources to do something

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Speaker 4: which is economical in that situation. But I think they

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Speaker 4: are tourists where they are not eediquately staffed for workouts.

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Speaker 3: My worry is that the.

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Speaker 4: Psycle turns and if these tourists then start just raut

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Speaker 4: and working out loans, just start selling them at below

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Speaker 4: the economic value, what happens to the rest of the

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Speaker 4: market as a result of that.

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Speaker 3: That's a big worry.

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Speaker 4: So even though you know, I could say that we

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Speaker 4: choose our clients where carefully we partner with, there is

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Speaker 4: a risk building up in the market away from that

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Speaker 4: where in a hard lending scenario, market has not been

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Speaker 4: stress testing what happens to the market then at a

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Speaker 4: real risk.

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Speaker 2: Yeah, and you also earlier you mentioned data centers and

439
00:24:53,480 --> 00:24:57,359
Speaker 2: financing and obviously quite a few headlines popping up seems

440
00:24:57,400 --> 00:25:00,720
Speaker 2: like almost on a daily basis. Now do you worry

441
00:25:00,800 --> 00:25:04,080
Speaker 2: there in terms of you know, moving too quickly with

442
00:25:04,280 --> 00:25:08,000
Speaker 2: data center financing? And you know, I'm just wondering about

443
00:25:08,040 --> 00:25:11,200
Speaker 2: all the additional infrastructure that goes into these data centers,

444
00:25:11,280 --> 00:25:15,679
Speaker 2: thinking about how it strains energy grids, the obviously the

445
00:25:15,680 --> 00:25:19,200
Speaker 2: infrastructure to actually build it, and having the supply there.

446
00:25:19,240 --> 00:25:21,400
Speaker 2: I'm just wondering if you see any potential issues there.

447
00:25:22,000 --> 00:25:25,439
Speaker 4: So I think the so I think the air demand

448
00:25:25,520 --> 00:25:29,199
Speaker 4: is real. But as as you said, I think, you know,

449
00:25:29,320 --> 00:25:35,680
Speaker 4: we have been very careful about what structures we finance

450
00:25:35,800 --> 00:25:39,400
Speaker 4: or we part of the financing package. I think when

451
00:25:40,400 --> 00:25:44,960
Speaker 4: when the structure both in terms of project finance construction

452
00:25:45,320 --> 00:25:49,280
Speaker 4: is alway locked down, when everything all the approvals, energy,

453
00:25:50,480 --> 00:25:53,880
Speaker 4: the off take are lockdown, we are we are comfortable

454
00:25:53,920 --> 00:25:56,000
Speaker 4: in financing, and if they are not, then we are not.

455
00:25:56,880 --> 00:26:00,560
Speaker 4: So I think clearly there's two markets building up there.

456
00:26:02,320 --> 00:26:04,600
Speaker 4: The question at the end will be whether they will

457
00:26:04,640 --> 00:26:07,200
Speaker 4: be demand there or not. Will they be power supply

458
00:26:07,320 --> 00:26:10,320
Speaker 4: to get power supply or not. But clearly the two

459
00:26:10,480 --> 00:26:13,720
Speaker 4: risks are the two sides of the market are building

460
00:26:13,760 --> 00:26:16,600
Speaker 4: up separately. One side we are comfortable with the other

461
00:26:16,640 --> 00:26:19,480
Speaker 4: side we are not. So it remains to be seen

462
00:26:19,600 --> 00:26:24,600
Speaker 4: how that market develops. I think on the broader I

463
00:26:24,600 --> 00:26:29,000
Speaker 4: think in the broader market for AI data center, I

464
00:26:29,040 --> 00:26:33,080
Speaker 4: think it is also developing pretty quickly as an asset class.

465
00:26:33,080 --> 00:26:35,880
Speaker 4: So I think beyond that, I think we and our

466
00:26:35,880 --> 00:26:38,720
Speaker 4: clients would need to see we need to take different

467
00:26:38,800 --> 00:26:43,879
Speaker 4: forms of financing and then see it holistically to see,

468
00:26:44,000 --> 00:26:46,000
Speaker 4: you know, what is the relative value, how does one

469
00:26:46,040 --> 00:26:48,560
Speaker 4: trade versus the other? And what other risks in one

470
00:26:48,680 --> 00:26:51,920
Speaker 4: form of the market versus the other. Because the capex

471
00:26:52,000 --> 00:26:54,159
Speaker 4: needs are so large, this is where you know, we

472
00:26:54,480 --> 00:26:57,840
Speaker 4: see the private and public markets come together to solve

473
00:26:57,880 --> 00:27:02,359
Speaker 4: this problem. But then it's also something that needs to

474
00:27:02,359 --> 00:27:05,240
Speaker 4: be holistically look at for every issuer there.

475
00:27:06,000 --> 00:27:09,720
Speaker 1: How does city best participate? Is it through structuring arranging?

476
00:27:09,760 --> 00:27:11,520
Speaker 1: Do you actually want to commit balance sheet to this?

477
00:27:12,520 --> 00:27:14,920
Speaker 4: I think I think we do all that we do

478
00:27:15,280 --> 00:27:20,920
Speaker 4: so we we do commit balance sheet for financing construction.

479
00:27:21,640 --> 00:27:26,359
Speaker 4: We also commit balance sheet for for you know, for

480
00:27:26,600 --> 00:27:29,520
Speaker 4: more stable data centers in terms of financing them or

481
00:27:29,560 --> 00:27:34,440
Speaker 4: refinancing them. We do it through our CMBs market. We

482
00:27:34,480 --> 00:27:38,360
Speaker 4: do through our ABS market as well. And so what

483
00:27:38,359 --> 00:27:40,760
Speaker 4: what we have done is over the last two three years,

484
00:27:40,760 --> 00:27:44,320
Speaker 4: we have we have brought those markets together, or the

485
00:27:44,359 --> 00:27:46,679
Speaker 4: people who are active in those markets together, So we

486
00:27:46,720 --> 00:27:50,119
Speaker 4: see it in a combined, holistic way of things.

487
00:27:50,160 --> 00:27:52,800
Speaker 1: Yeah, so that combined with private credit, I mean, they're

488
00:27:52,840 --> 00:27:55,159
Speaker 1: both sort of big unknowns. People just don't really know.

489
00:27:55,280 --> 00:27:57,320
Speaker 1: The fair kind of feeds on itself when you have

490
00:27:57,359 --> 00:27:59,320
Speaker 1: no idea in which case you might go to your

491
00:27:59,320 --> 00:28:02,639
Speaker 1: bank and and get some insurance. So what kind of

492
00:28:03,400 --> 00:28:05,399
Speaker 1: solutions do you have for people that are worried about

493
00:28:05,400 --> 00:28:06,800
Speaker 1: these two areas blowing up?

494
00:28:08,359 --> 00:28:10,800
Speaker 4: Well, I think first it's what kind of exposure do

495
00:28:10,840 --> 00:28:13,920
Speaker 4: they want? Right, So, anything which is new and developing

496
00:28:14,000 --> 00:28:17,160
Speaker 4: newly as an asset class, you need to you need

497
00:28:17,200 --> 00:28:20,360
Speaker 4: to figure out the exposure. So I think thirty percent

498
00:28:20,600 --> 00:28:23,160
Speaker 4: if you look at USIG, thirty percent of the net

499
00:28:23,200 --> 00:28:32,000
Speaker 4: issuance was was hyperscalers. So clearly hyperscalar size in the

500
00:28:32,000 --> 00:28:35,840
Speaker 4: index is growing in USIG index, probably around ten percent

501
00:28:36,000 --> 00:28:39,040
Speaker 4: right now. So I think the exposure would go versus

502
00:28:39,040 --> 00:28:41,720
Speaker 4: the index. Right, if you want index exposure, the question

503
00:28:41,880 --> 00:28:45,200
Speaker 4: is do you want any exposure beyond that or not?

504
00:28:45,400 --> 00:28:47,520
Speaker 4: And that's when you know you see things how to

505
00:28:47,560 --> 00:28:50,560
Speaker 4: limit it. I think it's not insurance. I think how

506
00:28:50,640 --> 00:28:53,560
Speaker 4: you the first gating factor is how much exposure you

507
00:28:53,600 --> 00:28:56,760
Speaker 4: want to the asset class? Right? I don't think so

508
00:28:57,280 --> 00:29:01,280
Speaker 4: they're enough tools out there to hedge you're exposed if

509
00:29:01,320 --> 00:29:03,680
Speaker 4: you think you're outsized. But I think it's bottoms up

510
00:29:03,720 --> 00:29:06,760
Speaker 4: construction in terms of what exposure you want is probably

511
00:29:06,800 --> 00:29:09,640
Speaker 4: the first way to do it, or the best way

512
00:29:09,680 --> 00:29:10,160
Speaker 4: to do it.

513
00:29:10,240 --> 00:29:12,400
Speaker 1: So the CDs on the big hYP hypscalis that we're

514
00:29:12,400 --> 00:29:15,560
Speaker 1: seeing and being index that that's not enough to I

515
00:29:15,560 --> 00:29:18,120
Speaker 1: mean it's not liquid enough to be a good solution

516
00:29:18,200 --> 00:29:18,400
Speaker 1: for that.

517
00:29:19,040 --> 00:29:21,560
Speaker 4: I think for hyperscures it is. I think it's liquid.

518
00:29:21,680 --> 00:29:24,880
Speaker 4: I think you can hash that risk. If you think

519
00:29:24,880 --> 00:29:27,800
Speaker 4: that you need to tailor your risk to be not

520
00:29:28,280 --> 00:29:30,680
Speaker 4: at the index level, but is ten percent or less

521
00:29:30,720 --> 00:29:34,440
Speaker 4: than that, that's certainly something we can do. Yeah, hyperscular

522
00:29:34,440 --> 00:29:35,240
Speaker 4: CDs is liquid.

523
00:29:35,320 --> 00:29:35,640
Speaker 3: Yeah.

524
00:29:35,760 --> 00:29:41,600
Speaker 1: Is there a demand for more tailored, more innovative solutions

525
00:29:41,640 --> 00:29:44,000
Speaker 1: around you know, how to short the hyperscalars? Or how

526
00:29:44,040 --> 00:29:46,560
Speaker 1: to you know, take the other side of the AI bet.

527
00:29:48,280 --> 00:29:49,920
Speaker 3: I think so.

528
00:29:50,000 --> 00:29:53,240
Speaker 4: I think what we have seen is just the hyperscalar

529
00:29:53,280 --> 00:29:58,440
Speaker 4: CDs as being the tool and sometimes simplest is simplest.

530
00:29:58,120 --> 00:29:59,520
Speaker 3: Is the best. Yeah, Okay.

531
00:30:00,080 --> 00:30:04,240
Speaker 1: On other forms of shorts, I mean, we've we've heard

532
00:30:04,440 --> 00:30:08,760
Speaker 1: some other shops, not yours, looking at total return swaps

533
00:30:08,800 --> 00:30:13,920
Speaker 1: to bet against the leverage loan market. You've not been

534
00:30:13,920 --> 00:30:16,520
Speaker 1: doing that, but I'm wondering whether that's that's an interesting

535
00:30:16,560 --> 00:30:19,040
Speaker 1: opportunity for you, you know, if there are good economics

536
00:30:19,120 --> 00:30:21,720
Speaker 1: there for the city to offer that kind of solution,

537
00:30:22,760 --> 00:30:23,040
Speaker 1: you know.

538
00:30:23,000 --> 00:30:26,680
Speaker 4: I think we what we what we focus on is

539
00:30:26,960 --> 00:30:30,840
Speaker 4: if for clients, If for clients you know, are are

540
00:30:31,000 --> 00:30:33,640
Speaker 4: interested in a product, and they have interest in a

541
00:30:33,680 --> 00:30:35,880
Speaker 4: product like that, that's when we'll go back to the

542
00:30:35,960 --> 00:30:39,240
Speaker 4: drawing board and say, let's figure out what our clients need.

543
00:30:39,360 --> 00:30:42,760
Speaker 4: But we have not seen that demand from clients.

544
00:30:43,120 --> 00:30:45,800
Speaker 3: Uh so to to do that.

545
00:30:46,040 --> 00:30:48,600
Speaker 4: But if you see it, we would definitely be be

546
00:30:48,680 --> 00:30:51,640
Speaker 4: interested in that. I mean, I would say on the

547
00:30:51,720 --> 00:30:54,200
Speaker 4: leverage loan side, I think clients have been focused on

548
00:30:54,280 --> 00:30:56,720
Speaker 4: as I was saying, in terms of more EA disruption risk,

549
00:30:56,840 --> 00:31:00,200
Speaker 4: and it's difficult to hedge on that because it's not

550
00:31:00,280 --> 00:31:03,720
Speaker 4: out there in fundamentals yet. But we have not seen

551
00:31:03,760 --> 00:31:06,320
Speaker 4: any demand or request for total returns on loans.

552
00:31:06,400 --> 00:31:10,360
Speaker 1: Yeah, what about ways of betting against private credit? I mean,

553
00:31:10,400 --> 00:31:12,960
Speaker 1: other than shorting the stock of blue El for example.

554
00:31:12,960 --> 00:31:16,000
Speaker 1: That means there another way to kind of hedge yourself

555
00:31:16,000 --> 00:31:17,280
Speaker 1: if you think that's all gonna blow up.

556
00:31:21,040 --> 00:31:25,360
Speaker 4: I think in a hard landing scenario, if private credit

557
00:31:27,160 --> 00:31:29,479
Speaker 4: in a hard lending scenario, I think everything is. I

558
00:31:29,520 --> 00:31:31,680
Speaker 4: was saying everything is going to go down, so you

559
00:31:31,800 --> 00:31:35,000
Speaker 4: pretty much can buy your hedge on any asset is

560
00:31:35,040 --> 00:31:39,480
Speaker 4: going to work. I don't think personally that private credit

561
00:31:40,360 --> 00:31:44,160
Speaker 4: will go down. But if you're talking about private credit

562
00:31:44,240 --> 00:31:47,120
Speaker 4: going down, you're talking about, like you know, in a

563
00:31:47,120 --> 00:31:49,320
Speaker 4: hard lending scenario, I see shot of that. I don't

564
00:31:49,360 --> 00:31:51,680
Speaker 4: see anything going down hard landing scenario. I think you

565
00:31:51,720 --> 00:31:55,520
Speaker 4: can buy You can buy protection on high lindex and

566
00:31:55,640 --> 00:31:59,440
Speaker 4: that will be equally effective as anything else.

567
00:31:59,520 --> 00:32:02,320
Speaker 1: Everything is correlated at this point, absolutely So.

568
00:32:02,200 --> 00:32:06,080
Speaker 2: How about something like the maturity wall, which I would

569
00:32:06,120 --> 00:32:09,040
Speaker 2: think a maturity wall for investment grade and high yield

570
00:32:09,240 --> 00:32:12,840
Speaker 2: public debt probably not a huge issue, just given like

571
00:32:12,880 --> 00:32:16,880
Speaker 2: we talked about fundamentally, these companies are really solid right now.

572
00:32:16,920 --> 00:32:20,640
Speaker 2: But I'm wondering on the private side of things, if

573
00:32:20,640 --> 00:32:23,600
Speaker 2: that gets a little worrisome, you know, if they're able

574
00:32:23,640 --> 00:32:27,440
Speaker 2: to actually find the financing that they need given higher

575
00:32:27,520 --> 00:32:31,640
Speaker 2: rates and everything, especially for issuers you know, around when

576
00:32:31,720 --> 00:32:35,200
Speaker 2: rates got dropped down to zero. I'm wondering what you

577
00:32:35,240 --> 00:32:35,800
Speaker 2: think about that.

578
00:32:36,160 --> 00:32:40,400
Speaker 4: I think that's a real risk in the private credit

579
00:32:40,440 --> 00:32:43,760
Speaker 4: market because because as you said, you know, the the

580
00:32:44,040 --> 00:32:47,160
Speaker 4: covid era low rates are coming in that those capital

581
00:32:47,200 --> 00:32:52,960
Speaker 4: structures for refinancing. I think if the market stays as

582
00:32:53,000 --> 00:32:55,280
Speaker 4: it is right now of a private credit I think

583
00:32:56,000 --> 00:32:58,760
Speaker 4: I'm not that worried, but I think it's the second

584
00:32:58,880 --> 00:33:01,600
Speaker 4: order effects that you need to worry about. Right, what

585
00:33:01,600 --> 00:33:05,959
Speaker 4: what if the what if the institutional capital doesn't come

586
00:33:06,000 --> 00:33:08,920
Speaker 4: in for those refinancing What what if the institutional capital

587
00:33:09,000 --> 00:33:11,960
Speaker 4: gets withdrawn from the space are not there in the

588
00:33:12,000 --> 00:33:15,320
Speaker 4: extent it is, then who is going to rEFInd those

589
00:33:15,800 --> 00:33:19,960
Speaker 4: those middle market companies? Right, That's a worry, That's a

590
00:33:20,160 --> 00:33:22,200
Speaker 4: that's a big worry which I have, which is that

591
00:33:22,440 --> 00:33:26,200
Speaker 4: the second audi worry. So that's that's exactly right, that's

592
00:33:26,240 --> 00:33:27,760
Speaker 4: an issue that could be an issue and.

593
00:33:27,720 --> 00:33:30,280
Speaker 2: Then I guess taking a step back and just looking

594
00:33:30,280 --> 00:33:33,960
Speaker 2: at the bigger picture here for public and private I

595
00:33:34,000 --> 00:33:35,720
Speaker 2: think you alluded to it a little bit earlier, But

596
00:33:36,320 --> 00:33:39,680
Speaker 2: how would you classify just the relationship between those two markets.

597
00:33:39,720 --> 00:33:42,680
Speaker 2: Is it, you know, a competitive market? Are they fighting

598
00:33:42,720 --> 00:33:43,680
Speaker 2: for the same deals?

599
00:33:43,840 --> 00:33:44,120
Speaker 3: Is it?

600
00:33:44,760 --> 00:33:47,600
Speaker 2: You know, now private markets are offering just a different

601
00:33:47,600 --> 00:33:50,960
Speaker 2: solution to maybe companies that couldn't have gotten public financing

602
00:33:51,000 --> 00:33:54,680
Speaker 2: in the past. But you know, I do also feel

603
00:33:54,720 --> 00:33:57,960
Speaker 2: like we've seen some headlines of some of the bigger banks,

604
00:33:58,360 --> 00:34:01,680
Speaker 2: you know, teaming up with private credit players. So how

605
00:34:01,680 --> 00:34:02,920
Speaker 2: do you see that relationship?

606
00:34:03,800 --> 00:34:07,920
Speaker 4: So I think in the I think if you look

607
00:34:07,960 --> 00:34:10,640
Speaker 4: at the private if you look at the private credit,

608
00:34:10,760 --> 00:34:15,560
Speaker 4: and we're private versus public credit, I think it's a

609
00:34:15,680 --> 00:34:19,920
Speaker 4: healthy relationship between the two in the sense that some

610
00:34:20,520 --> 00:34:23,040
Speaker 4: you know, sometimes when the public market is not open,

611
00:34:23,160 --> 00:34:25,720
Speaker 4: that's when the private credit market comes in and steps

612
00:34:25,719 --> 00:34:28,240
Speaker 4: in and you're seeing them. When public markets are open,

613
00:34:28,880 --> 00:34:31,960
Speaker 4: the refi is done by public market, which effectively tells

614
00:34:32,000 --> 00:34:37,560
Speaker 4: you that the the the private public interaction is moving

615
00:34:37,640 --> 00:34:41,120
Speaker 4: out the liquidity in the markets, right because otherwise the

616
00:34:41,160 --> 00:34:42,600
Speaker 4: markets will be much more jumpy.

617
00:34:43,120 --> 00:34:44,200
Speaker 3: I think that's a good thing.

618
00:34:44,960 --> 00:34:48,480
Speaker 4: But then the private credit market also has evolved beyond

619
00:34:48,680 --> 00:34:51,200
Speaker 4: just the leverage loan companies. Right, as I had mentioned,

620
00:34:51,200 --> 00:34:54,040
Speaker 4: there are large ig plus situations that we are seeing

621
00:34:54,120 --> 00:34:57,640
Speaker 4: that is happening and that I think is very healthy.

622
00:34:59,239 --> 00:35:02,440
Speaker 4: Be seeing credit market and move on to asset backspace

623
00:35:02,480 --> 00:35:04,920
Speaker 4: as well. Right, So, any cash flow which is regular,

624
00:35:05,600 --> 00:35:08,560
Speaker 4: which could be you could get a handle on, maybe

625
00:35:08,640 --> 00:35:11,279
Speaker 4: get it rated. That's where the private credit has come

626
00:35:11,280 --> 00:35:14,920
Speaker 4: in as well. I think where I'm excited about is

627
00:35:14,920 --> 00:35:17,640
Speaker 4: that if I look at if I look at a

628
00:35:17,960 --> 00:35:22,680
Speaker 4: issuer or a borrower, I think it makes sense for

629
00:35:22,760 --> 00:35:25,480
Speaker 4: them to look at their businesses as a collection of

630
00:35:25,520 --> 00:35:30,120
Speaker 4: platforms and they can look at every platform and say,

631
00:35:30,200 --> 00:35:32,799
Speaker 4: what is the best way for us to solve to

632
00:35:33,000 --> 00:35:36,319
Speaker 4: have a problem solved? Could be financing, It could be

633
00:35:36,400 --> 00:35:41,080
Speaker 4: capital and where is the public capital more efficient whereas

634
00:35:41,160 --> 00:35:45,160
Speaker 4: private capital more efficient. So that's the thought process which

635
00:35:45,239 --> 00:35:47,440
Speaker 4: I think we are trying to bring in in my team,

636
00:35:48,040 --> 00:35:50,440
Speaker 4: where you just look at this as a collection of

637
00:35:50,480 --> 00:35:53,680
Speaker 4: platforms and optimize it with public and private. I mean, look,

638
00:35:53,719 --> 00:35:57,680
Speaker 4: you see banks going to private credit for SRT transactions, right,

639
00:35:57,800 --> 00:36:00,960
Speaker 4: So that's one form of optimization there.

640
00:36:01,719 --> 00:36:04,560
Speaker 1: You have a really great global perspective, and you know,

641
00:36:04,600 --> 00:36:07,280
Speaker 1: we we so often focus on the United States. But

642
00:36:07,280 --> 00:36:10,520
Speaker 1: but one other point of concern around private credit comes

643
00:36:10,560 --> 00:36:13,440
Speaker 1: up from the Middle East, where people talk about, you know,

644
00:36:13,480 --> 00:36:16,000
Speaker 1: the amount of Middle East and investor money that went

645
00:36:16,000 --> 00:36:18,759
Speaker 1: into private credit funds in the US, maybe that needs

646
00:36:18,760 --> 00:36:21,319
Speaker 1: to be repatriated to the region because of the volatility

647
00:36:21,360 --> 00:36:24,720
Speaker 1: and turmoil and war, et cetera going on there right now.

648
00:36:24,960 --> 00:36:27,160
Speaker 1: Do you think that that's a vulnerability for private credit?

649
00:36:29,239 --> 00:36:32,640
Speaker 4: I think I think the I think the institutional capital

650
00:36:32,760 --> 00:36:37,600
Speaker 4: being drawn is a vulnerability. It could be Mid East,

651
00:36:37,600 --> 00:36:39,520
Speaker 4: and it could be you know, it could be even

652
00:36:39,680 --> 00:36:42,960
Speaker 4: from Asia. So I could see I could see it happening,

653
00:36:43,000 --> 00:36:47,680
Speaker 4: to be honest, from any region, and and you know,

654
00:36:47,719 --> 00:36:51,560
Speaker 4: and more you see all these retail related noise come

655
00:36:51,840 --> 00:36:55,319
Speaker 4: to the forefront. I'm not seeing it yet that the

656
00:36:55,360 --> 00:36:58,239
Speaker 4: institutional capital being withdrawn, but there's a scenario that can

657
00:36:58,320 --> 00:37:02,080
Speaker 4: happen right as more and more questions being getting asked.

658
00:37:02,160 --> 00:37:04,319
Speaker 4: I think that's what that's I see, is the real

659
00:37:04,480 --> 00:37:08,640
Speaker 4: risk of this whole retail related you know, news which

660
00:37:08,680 --> 00:37:11,800
Speaker 4: is out there. Eventually the capital getting withdrawed from the space.

661
00:37:12,200 --> 00:37:13,960
Speaker 4: I think it can happen globally.

662
00:37:13,800 --> 00:37:17,319
Speaker 1: And so it comes from you know, funds international have

663
00:37:17,400 --> 00:37:21,399
Speaker 1: invested in US assets and they want to withdraw, not

664
00:37:21,480 --> 00:37:24,360
Speaker 1: just because they need they I mean in terms of Asia.

665
00:37:24,400 --> 00:37:26,160
Speaker 1: You know, Japanese rates are hight, so maybe it's more

666
00:37:26,200 --> 00:37:28,880
Speaker 1: attractive to invest at home and at least maybe it

667
00:37:28,920 --> 00:37:31,239
Speaker 1: gets repatriated because of what's going on there. But you

668
00:37:31,280 --> 00:37:35,600
Speaker 1: think that there's also another kind of pull away from

669
00:37:35,719 --> 00:37:39,240
Speaker 1: the US in terms of global asset allocation.

670
00:37:40,400 --> 00:37:42,279
Speaker 4: Well, so if you look at the if we look

671
00:37:42,320 --> 00:37:44,880
Speaker 4: at the direct the private credit space, bulk of that

672
00:37:45,040 --> 00:37:48,720
Speaker 4: is US, right, or the capital gets withdrawn US will

673
00:37:48,840 --> 00:37:50,640
Speaker 4: the US will get adversely affected.

674
00:37:50,680 --> 00:37:51,239
Speaker 3: I don't think so.

675
00:37:51,280 --> 00:37:54,240
Speaker 4: It will be a geopolitical decision that we are getting

676
00:37:54,239 --> 00:37:57,640
Speaker 4: capital out of the US. I think just naturally seventy

677
00:37:57,680 --> 00:38:00,600
Speaker 4: percent of the capital or of the opportunities in capital

678
00:38:00,760 --> 00:38:04,600
Speaker 4: goes to the US assets US will suffer disproportionately than

679
00:38:04,640 --> 00:38:05,560
Speaker 4: the rest of the market.

680
00:38:06,360 --> 00:38:09,799
Speaker 1: But that's risk. Yeah, but the trigger isn't gaibilistical. It's

681
00:38:09,840 --> 00:38:13,880
Speaker 1: more economic. It's more because because foreign investors say that

682
00:38:13,920 --> 00:38:16,680
Speaker 1: there are redemptions from retail and they just worry, is

683
00:38:16,680 --> 00:38:20,480
Speaker 1: that the transmission Yes, exactly, Okay.

684
00:38:20,320 --> 00:38:22,160
Speaker 4: It's that it could be you know, it could be

685
00:38:22,960 --> 00:38:26,200
Speaker 4: cycle turning. Yeah, and then if the cycle turned, you know,

686
00:38:26,239 --> 00:38:30,759
Speaker 4: we spoke about tourist managers, so the tourist managers will suffer, right,

687
00:38:30,920 --> 00:38:33,800
Speaker 4: will you go away? And so it could be because

688
00:38:33,800 --> 00:38:34,399
Speaker 4: of that as well.

689
00:38:34,520 --> 00:38:37,839
Speaker 2: Yeah, yeah, And then I'm wondering just in terms of

690
00:38:37,920 --> 00:38:41,560
Speaker 2: you know, again stepping back relative value just across asset

691
00:38:41,600 --> 00:38:44,680
Speaker 2: classes right now, given you know, there was a shift

692
00:38:44,719 --> 00:38:47,800
Speaker 2: in expectations around where inflation is going to be headed

693
00:38:47,840 --> 00:38:51,280
Speaker 2: and what the FED might do to combat that, were

694
00:38:51,320 --> 00:38:54,080
Speaker 2: you telling clients to be focused on in terms of

695
00:38:54,120 --> 00:38:57,200
Speaker 2: positioning across you know, the credit spectrum right now?

696
00:38:58,320 --> 00:39:02,440
Speaker 4: So we are we are, I mean, as you even know,

697
00:39:02,520 --> 00:39:05,840
Speaker 4: we are market makers. So we are we in terms

698
00:39:05,840 --> 00:39:07,800
Speaker 4: of us we are able to support the market in

699
00:39:08,640 --> 00:39:11,680
Speaker 4: which our way clients want to trade. But I think

700
00:39:11,719 --> 00:39:13,480
Speaker 4: if you take a look at if you take a

701
00:39:13,480 --> 00:39:17,640
Speaker 4: look at large asset managers as to where the allocations are,

702
00:39:17,760 --> 00:39:22,360
Speaker 4: you see that they are at the market weight or

703
00:39:22,400 --> 00:39:25,880
Speaker 4: the index weight in credit, you know, and they're over index.

704
00:39:26,000 --> 00:39:31,560
Speaker 4: There were index to secured dice markets, right, So I

705
00:39:31,560 --> 00:39:34,160
Speaker 4: would say the last numbers I saw the large asset managers,

706
00:39:34,200 --> 00:39:37,600
Speaker 4: we trade. The eighteen person overweight on securitized then they

707
00:39:37,640 --> 00:39:40,600
Speaker 4: are ad weight in credit. Now you can say that

708
00:39:40,640 --> 00:39:43,400
Speaker 4: ad weight in credit is because the market is liquid,

709
00:39:43,480 --> 00:39:47,000
Speaker 4: it's it's all very efficient, so it's very difficult to

710
00:39:47,040 --> 00:39:50,120
Speaker 4: want and aggregate as an asset class overweight credit. That

711
00:39:50,160 --> 00:39:51,920
Speaker 4: could be the reason, or it also could be the

712
00:39:51,960 --> 00:39:54,520
Speaker 4: reason that there's no bargains to be had overall in

713
00:39:54,560 --> 00:39:57,640
Speaker 4: the market. Right, But generally we see your clients being

714
00:39:57,680 --> 00:39:59,680
Speaker 4: more overweight to securitize and.

715
00:40:01,440 --> 00:40:02,240
Speaker 3: Structured space.

716
00:40:02,760 --> 00:40:05,200
Speaker 2: And then I want to get back to something we

717
00:40:05,280 --> 00:40:08,840
Speaker 2: had talked about. Obviously, the fundamental picture for companies looks

718
00:40:08,880 --> 00:40:13,400
Speaker 2: really strong. It feels like in terms of the actual consumer.

719
00:40:13,760 --> 00:40:15,719
Speaker 2: You know, people are getting a little anxious. Obviously in

720
00:40:15,760 --> 00:40:19,160
Speaker 2: the US gas prices going up. You could also argue

721
00:40:19,200 --> 00:40:22,480
Speaker 2: across the globe, given where oil prices are, do you

722
00:40:22,520 --> 00:40:26,200
Speaker 2: worry about kind of that bifurcation in terms of where

723
00:40:26,200 --> 00:40:27,200
Speaker 2: things are headed.

724
00:40:27,480 --> 00:40:30,680
Speaker 4: Across Yeah, that that has been That has been something

725
00:40:30,680 --> 00:40:35,640
Speaker 4: we have been monitoring for a few years now. You know,

726
00:40:35,719 --> 00:40:39,480
Speaker 4: the talk about k K shape recovery is out there,

727
00:40:40,800 --> 00:40:42,759
Speaker 4: but again when we look at the data, we don't

728
00:40:42,800 --> 00:40:45,440
Speaker 4: really see much to be worried about. Right, which is

729
00:40:45,480 --> 00:40:50,600
Speaker 4: also collaborated by the bank earnings. The consumers are doing fine,

730
00:40:50,760 --> 00:40:53,040
Speaker 4: and of course going forward they may not be fine

731
00:40:53,080 --> 00:40:56,200
Speaker 4: if the gas price is stay elevated. But now the

732
00:40:56,239 --> 00:40:59,160
Speaker 4: consumers are doing fine. And then you know, what we

733
00:40:59,239 --> 00:41:01,680
Speaker 4: also saw in some of the consumer risk we have

734
00:41:01,760 --> 00:41:04,840
Speaker 4: in our books, both mostly on the asset back side,

735
00:41:05,520 --> 00:41:09,719
Speaker 4: is that the post the post the rate increase, we

736
00:41:09,840 --> 00:41:13,360
Speaker 4: see all the originators tighten their credit box. So I

737
00:41:13,400 --> 00:41:15,960
Speaker 4: think they've become much more discipline in terms of how

738
00:41:16,000 --> 00:41:20,680
Speaker 4: they're giving credit to, especially to subprime consumers. And with that,

739
00:41:20,840 --> 00:41:24,000
Speaker 4: the little or so defaults we saw spike has actually

740
00:41:24,040 --> 00:41:28,000
Speaker 4: come down. So I think it's something that is obviously

741
00:41:28,040 --> 00:41:31,520
Speaker 4: worth monitoring, and we're watching out way careful for, carefully for,

742
00:41:31,680 --> 00:41:35,520
Speaker 4: but we're not really seeing. We're not seeing anything to

743
00:41:35,520 --> 00:41:36,480
Speaker 4: worry about right now.

744
00:41:37,080 --> 00:41:39,759
Speaker 1: Why are clients into securities? I mean, we know that

745
00:41:39,800 --> 00:41:43,280
Speaker 1: they've been looking at cheap nbs, cheap relative to corporates,

746
00:41:43,320 --> 00:41:46,680
Speaker 1: But what's the appeal of securitized markets right now?

747
00:41:47,840 --> 00:41:50,400
Speaker 4: I think it's I think it allows you to tailor

748
00:41:50,440 --> 00:41:53,799
Speaker 4: your risk returned profile, I think, and if we have

749
00:41:53,840 --> 00:41:57,960
Speaker 4: different views on the market, you know, some views are

750
00:41:58,080 --> 00:42:00,719
Speaker 4: more constructive on junior parts of the gap structure, some

751
00:42:00,760 --> 00:42:04,440
Speaker 4: more on the senior. I think that that market just

752
00:42:04,440 --> 00:42:07,759
Speaker 4: gives you more opportunities to do at On top of that,

753
00:42:07,840 --> 00:42:12,640
Speaker 4: I think there have been some you know, some some

754
00:42:12,920 --> 00:42:15,440
Speaker 4: just some trends in the market. If you look at

755
00:42:15,480 --> 00:42:18,600
Speaker 4: the if you look at the commercial realisted market, it

756
00:42:18,719 --> 00:42:22,160
Speaker 4: went through its own issues after the rate rise and

757
00:42:22,200 --> 00:42:25,240
Speaker 4: then now it has stab stabilized. But you know, for

758
00:42:25,239 --> 00:42:28,399
Speaker 4: for a period of time, office was a sector which

759
00:42:28,480 --> 00:42:31,400
Speaker 4: was really watertile, and then some clients saw value in

760
00:42:31,640 --> 00:42:35,239
Speaker 4: office as the markets were stabilizing, UH, they went into that.

761
00:42:36,239 --> 00:42:40,160
Speaker 4: You know, you see on the agency mortgage side, you saw,

762
00:42:40,280 --> 00:42:43,480
Speaker 4: you know, the Fanny Ferry commitment to buy mortgages that

763
00:42:43,640 --> 00:42:47,759
Speaker 4: resulted in more treating UH in the agency, in the

764
00:42:47,800 --> 00:42:51,680
Speaker 4: agency bonds. So I think each each of the markets

765
00:42:51,680 --> 00:42:55,640
Speaker 4: have their own story, but generally I think the overall

766
00:42:55,719 --> 00:42:58,200
Speaker 4: team is you know, you can take a year restract

767
00:42:58,239 --> 00:43:00,960
Speaker 4: on profile the way you know, to to where.

768
00:43:00,800 --> 00:43:01,319
Speaker 3: You want to be.

769
00:43:01,920 --> 00:43:04,720
Speaker 4: Colo's in is another example, right with the whole AI

770
00:43:05,560 --> 00:43:09,400
Speaker 4: related leverage loan. You know, when the disruption came in

771
00:43:09,840 --> 00:43:13,440
Speaker 4: the junior tranches widened out, some clients saw it as

772
00:43:13,440 --> 00:43:17,120
Speaker 4: an opportionality to buy. So I think it's it's it's

773
00:43:17,200 --> 00:43:19,600
Speaker 4: just these Every market is his own theme, but then

774
00:43:19,640 --> 00:43:23,040
Speaker 4: brought together by this overright on the reskrat on side,

775
00:43:23,480 --> 00:43:25,840
Speaker 4: you can tailor your profile the way you wanted to be.

776
00:43:26,200 --> 00:43:28,000
Speaker 1: Do you get concerns all that some of that risk

777
00:43:28,120 --> 00:43:30,600
Speaker 1: is not being priced appropriately. We're hearing a lot of

778
00:43:30,640 --> 00:43:32,440
Speaker 1: people in the COLO trade, We're hearing a lot of

779
00:43:32,440 --> 00:43:35,319
Speaker 1: people taking the equity trunch with leverage. You know, we're

780
00:43:35,320 --> 00:43:40,920
Speaker 1: talking about you know, more exotic circled solutions in this space.

781
00:43:40,960 --> 00:43:42,160
Speaker 1: Do you see any signs of froth?

782
00:43:42,800 --> 00:43:43,399
Speaker 3: No, we don't.

783
00:43:43,440 --> 00:43:46,879
Speaker 4: You know, we don't see We don't see any unnecessary

784
00:43:47,000 --> 00:43:51,680
Speaker 4: leverage or exotic trades in the securitized land. Obviously, you know,

785
00:43:51,800 --> 00:43:54,799
Speaker 4: Coos came through the equity tranche of cotos came through

786
00:43:54,920 --> 00:43:59,400
Speaker 4: a bad return year in twenty twenty five. But we

787
00:43:59,440 --> 00:44:03,799
Speaker 4: don't see any leverage on equity or any any irrational

788
00:44:04,960 --> 00:44:08,160
Speaker 4: clients doing irrational things there. And you know, we also

789
00:44:08,200 --> 00:44:10,799
Speaker 4: saw a rational VC irrationality because if you look at

790
00:44:10,840 --> 00:44:13,279
Speaker 4: the COLO issuance, its slowed down as a result of that.

791
00:44:14,040 --> 00:44:14,839
Speaker 3: So clearly the.

792
00:44:14,840 --> 00:44:17,759
Speaker 4: Market is being again differentiating in terms of what they

793
00:44:18,200 --> 00:44:20,279
Speaker 4: what they want to price or what they don't want

794
00:44:20,320 --> 00:44:20,680
Speaker 4: to price.

795
00:44:21,000 --> 00:44:24,640
Speaker 1: I mean I was seeing very exotic CDOs or cdeos squared,

796
00:44:24,680 --> 00:44:27,399
Speaker 1: all that stuff everyone worried about twenty years ago.

797
00:44:27,560 --> 00:44:30,000
Speaker 3: I hope not. No, we don't see it. You don't

798
00:44:30,000 --> 00:44:31,520
Speaker 3: see any of that, Okay.

799
00:44:32,480 --> 00:44:35,720
Speaker 4: So I think our you know, research folks just published

800
00:44:35,719 --> 00:44:39,320
Speaker 4: an article where if you look at the NetFlow in

801
00:44:39,520 --> 00:44:42,719
Speaker 4: USIG in January and February, around forty five percent of

802
00:44:42,719 --> 00:44:46,960
Speaker 4: that was overseas investors, and historically that has been one

803
00:44:47,040 --> 00:44:51,600
Speaker 4: third or so. So clearly you're seeing, you know, USIG

804
00:44:51,680 --> 00:44:54,759
Speaker 4: getting support from overseas investors there. We expect that to

805
00:44:54,760 --> 00:44:57,800
Speaker 4: continue to be I mean, expect that to continue, yes, yeah, okay.

806
00:44:58,080 --> 00:44:58,600
Speaker 3: Interesting.

807
00:44:58,960 --> 00:45:02,239
Speaker 2: I'm wondering, you know, taking a step back looking we've

808
00:45:02,440 --> 00:45:05,479
Speaker 2: obviously talked about some of the risks that could play

809
00:45:05,520 --> 00:45:08,680
Speaker 2: out here over the next couple of quarters. You've been

810
00:45:08,680 --> 00:45:11,480
Speaker 2: in leadership positions in eight and in twenty twenty. I'm

811
00:45:11,520 --> 00:45:14,279
Speaker 2: just wondering for you, what what were some like big

812
00:45:14,320 --> 00:45:19,120
Speaker 2: takeaways that you took from those particular instances when things

813
00:45:19,160 --> 00:45:24,200
Speaker 2: got pretty hairy and risk really you know, took a turn.

814
00:45:24,320 --> 00:45:28,120
Speaker 2: So how did you like pull some different lessons from

815
00:45:28,160 --> 00:45:29,440
Speaker 2: those those time periods.

816
00:45:30,280 --> 00:45:33,040
Speaker 4: Yeah, it's a good question, I would say. I would

817
00:45:33,080 --> 00:45:35,520
Speaker 4: say the first thing, you know, the first thing to

818
00:45:35,600 --> 00:45:39,799
Speaker 4: take away is complexity is is bad. You know, we

819
00:45:39,840 --> 00:45:43,279
Speaker 4: spoke about CDO squared. We so spoke about very thin

820
00:45:43,560 --> 00:45:47,840
Speaker 4: bespoke tranches where there was semblance of liquidity that you

821
00:45:47,880 --> 00:45:52,160
Speaker 4: can delta hedge them. But of course when when the

822
00:45:52,200 --> 00:45:55,600
Speaker 4: market became really volatile, there was no doubta hedging those stranches.

823
00:45:55,680 --> 00:45:59,480
Speaker 4: So I think keeping risks simple is is the best

824
00:45:59,480 --> 00:46:03,200
Speaker 4: thing to do. And that's why, even if clients would

825
00:46:03,239 --> 00:46:06,040
Speaker 4: come to us about some very exotic way to you know,

826
00:46:06,160 --> 00:46:08,879
Speaker 4: hedge different parts of the business, I think the bar

827
00:46:09,000 --> 00:46:10,919
Speaker 4: for us is pretty high to be able to offer

828
00:46:10,960 --> 00:46:13,560
Speaker 4: that product. We'll only offer it if you think that

829
00:46:13,600 --> 00:46:16,200
Speaker 4: in our credit markets we can hedge it in a

830
00:46:16,280 --> 00:46:19,200
Speaker 4: very effective manner. I know in equity they can because

831
00:46:19,239 --> 00:46:22,480
Speaker 4: equity is much more liquid. So I think one is

832
00:46:22,520 --> 00:46:26,920
Speaker 4: to just keep things very simple. And the other, I

833
00:46:26,960 --> 00:46:32,160
Speaker 4: would say is too is to also not assume that

834
00:46:32,239 --> 00:46:34,879
Speaker 4: the liquidity will be there when you when you need it.

835
00:46:35,000 --> 00:46:40,080
Speaker 4: So I think those are the two things that we are.

836
00:46:38,560 --> 00:46:39,840
Speaker 3: Very in tune attuned to.

837
00:46:40,040 --> 00:46:42,560
Speaker 1: And paying a lot of attention on is there one

838
00:46:42,560 --> 00:46:45,120
Speaker 1: particular area of credit right now where you see particularly

839
00:46:45,200 --> 00:46:46,480
Speaker 1: good relative value?

840
00:46:49,080 --> 00:46:51,920
Speaker 4: I would say I would say that has to be

841
00:46:52,200 --> 00:46:58,200
Speaker 4: on the on the AI ecosystem, where I think I

842
00:46:58,280 --> 00:47:00,160
Speaker 4: think if I was an investor in the space, is

843
00:47:00,200 --> 00:47:03,680
Speaker 4: I would look at all the different ways. For example,

844
00:47:04,160 --> 00:47:07,080
Speaker 4: you know, I can get exposure to hyperscaler either through

845
00:47:07,160 --> 00:47:12,719
Speaker 4: their unsecured bond or through their asset backed where you

846
00:47:12,760 --> 00:47:15,720
Speaker 4: know security or asset backed where they are the off taker,

847
00:47:16,520 --> 00:47:19,640
Speaker 4: or look at the private markets where they are you

848
00:47:19,680 --> 00:47:22,560
Speaker 4: know where they are their originating at as well. I

849
00:47:22,560 --> 00:47:24,560
Speaker 4: think that's probably the biggest area of oportunity.

850
00:47:24,760 --> 00:47:26,320
Speaker 1: So you don't sound like you're worried about the bubble,

851
00:47:26,520 --> 00:47:28,920
Speaker 1: obsolescence or all these other things that some of the

852
00:47:29,360 --> 00:47:31,880
Speaker 1: guests are concerned about right now in the context of

853
00:47:31,880 --> 00:47:34,080
Speaker 1: AI and the buildout and the trillions of dollars that

854
00:47:34,120 --> 00:47:35,120
Speaker 1: they need to invest.

855
00:47:35,600 --> 00:47:36,120
Speaker 3: Well, if you.

856
00:47:36,160 --> 00:47:39,279
Speaker 4: Look at eight eighty person of the cab AX is

857
00:47:39,360 --> 00:47:42,840
Speaker 4: coming from hyperscalar free cash flow, right so you know,

858
00:47:43,000 --> 00:47:45,560
Speaker 4: even if it's a bubble, and even if the demand

859
00:47:45,640 --> 00:47:49,680
Speaker 4: is not there, what you have is still hyperscalers which

860
00:47:49,800 --> 00:47:51,680
Speaker 4: which slightly negative.

861
00:47:51,320 --> 00:47:52,480
Speaker 3: Cash flow that's what you have.

862
00:47:53,239 --> 00:47:55,680
Speaker 1: You run a massive department. You're paid to worry. What

863
00:47:55,680 --> 00:47:58,040
Speaker 1: are you most worried about in terms of credit markets?

864
00:47:58,800 --> 00:48:01,120
Speaker 4: I think I'm most worried about which are not in news,

865
00:48:01,200 --> 00:48:04,200
Speaker 4: which is not surprising because things are in news. Everybody

866
00:48:04,200 --> 00:48:06,600
Speaker 4: has looked at them and analyzed them. I mean, so

867
00:48:06,640 --> 00:48:08,840
Speaker 4: I'm worried about. I think we spoke at the beginning

868
00:48:09,400 --> 00:48:13,880
Speaker 4: of this podcast. I'm worried about if the war lasts

869
00:48:13,920 --> 00:48:17,480
Speaker 4: longer than people think it is, maybe it takes you know,

870
00:48:17,520 --> 00:48:18,680
Speaker 4: it just lasts maybe.

871
00:48:18,480 --> 00:48:20,000
Speaker 3: The whole year, or maybe beyond that.

872
00:48:20,920 --> 00:48:24,640
Speaker 4: I'm worried about the other public debts, especially especially in

873
00:48:24,680 --> 00:48:27,200
Speaker 4: this country, not just the level, but the rate of

874
00:48:27,280 --> 00:48:30,680
Speaker 4: growth of that. What if the client starts focusing on it.

875
00:48:30,760 --> 00:48:34,160
Speaker 4: What if the rate markets just becomes more volatile? Right

876
00:48:35,280 --> 00:48:37,560
Speaker 4: That has a second order effect on our products. So

877
00:48:37,920 --> 00:48:41,080
Speaker 4: I think those are the two things which I'm more

878
00:48:41,080 --> 00:48:44,200
Speaker 4: worried about. I think AI will take time to play out.

879
00:48:44,320 --> 00:48:48,040
Speaker 4: I think private credit will take more time to play out.

880
00:48:48,120 --> 00:48:50,959
Speaker 4: So that's not an instantaneous thing in my mind right now.

881
00:48:51,560 --> 00:48:52,160
Speaker 3: Great stuff.

882
00:48:52,200 --> 00:48:54,520
Speaker 1: Mickey Platyr, head of Spread Products at City, has been

883
00:48:54,520 --> 00:48:56,400
Speaker 1: a pleasure having you on the Credit Edge money. Thanks,

884
00:48:56,600 --> 00:48:59,520
Speaker 1: thank you, thanks, and to some guy with Boomberg Intelligence,

885
00:48:59,520 --> 00:49:00,120
Speaker 1: thank you very much.

886
00:49:00,200 --> 00:49:00,960
Speaker 3: For joining us today.

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00:49:01,120 --> 00:49:02,160
Speaker 2: Yeah, thanks for having me.

888
00:49:02,320 --> 00:49:04,640
Speaker 1: Read more analysis, read all Sam's great work on the

889
00:49:04,640 --> 00:49:07,840
Speaker 1: Bloomberg Terminal. Bloomberg Intelligence is part of our research department,

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00:49:30,200 --> 00:49:33,520
Speaker 1: email me directly at Jcromby eight at Bloomberg dot net.

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00:49:34,080 --> 00:49:36,239
Speaker 1: I'm James Crombie. It's been a pleasure having you join

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00:49:36,320 --> 00:49:52,640
Speaker 1: us again next week on the Credit Edge