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

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

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Speaker 1: This week, we're very pleased to welcome Bruce Richards, chairman

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Speaker 1: and CEO of Marathon Asset Management, a twenty three billion

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Speaker 1: dollar asset manager.

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Speaker 2: How are you, Bruce, I'm doing well.

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Speaker 3: Hello, James, Thank.

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Speaker 1: You so much for joining us today. We're really looking

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Speaker 1: forward to getting your take on credit markets and real estate.

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Speaker 1: Also delighted to see Bloomberg's very own Lisa Lee covering

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Speaker 1: credit markets from London. How's it going, Lisa.

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Speaker 4: Going well here? Thank you so much.

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Speaker 1: James, and our banks guru, Arnold Kakuda with Bloomberg Intelligence,

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Speaker 1: also here in the studio in New York. How's it going, Arnold?

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Speaker 5: Awesome, excited to be here.

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Speaker 1: So let's start with you, Bruce. It's great to have

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Speaker 1: you on the Credit Edge. You're a real estate bear,

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Speaker 1: particularly when it comes to offices and all the debt

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Speaker 1: that's outstanding. There's almost a trillion dollars of commercial real

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Speaker 1: estate loans coming due this year and banks are mostly

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Speaker 1: on the hook. They hold a lot of those loans.

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Speaker 1: But recently we've heard FED Chair j Powell and Treasury

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Speaker 1: Secretary Janet Yellen talking about commercial real estate risks, as

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Speaker 1: well as executives at regional banks and analysts. They're all

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Speaker 1: using the word manageable. It's going to be okay. What

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Speaker 1: do you make of that, Bruce? Are they protesting too much?

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Speaker 1: What's your take?

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Speaker 2: Well, that's a big subject, Tom, I think it is

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Speaker 2: going to be okay. Christianity Jan's drawing the line in

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Speaker 2: the sand, and she said she's the facto made a

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Speaker 2: statement after March of last year that no deposit will

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Speaker 2: lose a penny, and indeed, no deposit will lose a penny.

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Speaker 2: So the big banks have never been safer than what

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Speaker 2: they are today. I'm talking about the Big four and

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Speaker 2: also the largest banks here in the United States. But

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Speaker 2: as you know, there is more to it than that.

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Speaker 2: And so when you peel back the Onion City, well

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Speaker 2: you see that the bigger banks have about ten percent

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Speaker 2: exposure of commercial real estate, and the smaller banks and

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Speaker 2: the regional size banks have an average about forty percent

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Speaker 2: exposure to commercial real estate. That is a huge number

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Speaker 2: relative to their capital base. So let me point out

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Speaker 2: a few things. Number one is Bosle three endgame, or

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Speaker 2: what we call in other parts of the world Basil

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Speaker 2: four is going to start next summer, and they're not

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Speaker 2: going to push.

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Speaker 3: Out the data. I don't believe.

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Speaker 2: And despite pal in his most recent statements having softened

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Speaker 2: up a stance and opened up the door to potentially

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Speaker 2: a little less capital requirement that might take you from

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Speaker 2: sixteen to twenty percent capital race increases down to round

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Speaker 2: ten to fifteen percent, but it's not going to push

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Speaker 2: up to date and it's not going to negate the

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Speaker 2: fact that you'll need more capital against risk assets.

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Speaker 3: That's number one. And with that, banks.

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Speaker 2: Will look to a do asset sales b uh DE

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Speaker 2: risk by raising more CT court tier one equity capital

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Speaker 2: that's both in the form of long debt as well

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Speaker 2: as equity, but mostly in the form of retained earnings

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Speaker 2: to build that base, and they'll probably just lend a

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Speaker 2: little less and a little bit more selectively at more

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Speaker 2: conservative attachment points in terms of where the lt V

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Speaker 2: lending points are.

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Speaker 3: So what we're seeing as result is a lot of

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Speaker 3: these SRT transactions and CRT Transactionally. Sr T is the

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Speaker 3: significant risk transfer uh the credit risk transfers as well.

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Speaker 3: Where banks are transferring their first loss or mezzanine trances

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Speaker 3: of their portfolio of loans to buyers like Marathon. And

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Speaker 3: so we've been very, very active dealing with the large

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Speaker 3: savvy banks in Europe and the large banks in the

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Speaker 3: United States and buying into these pools through CRT and

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Speaker 3: s r T.

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Speaker 2: You know, last year alone, the European banks did two

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Speaker 2: hundred billion of worth of portfolios of credit risk transfers

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Speaker 2: last year alone. And you know, in the September, you know,

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Speaker 2: just a few months ago, the feveral Lyster statement that

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Speaker 2: you talked about the SRT merits and complying with reg Q,

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Speaker 2: they basically blested here in the States, and so the

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Speaker 2: United States we've seen the banks really ramp up. And

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Speaker 2: so with BOSEL three endgames that just set to start

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Speaker 2: July next year, we believe that is a huge amount

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Speaker 2: probably for US banks, you know, you know that did

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Speaker 2: thirty five billion last year upwards of one hundred billion

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Speaker 2: this year. And so I think, you know, we have

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Speaker 2: all the tools in the toolbox to make the banks safe.

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Speaker 2: First of all, again, the biggest banks are perfectly safe,

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Speaker 2: but it's the smaller banks than that you now want

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Speaker 2: to start to focus in on So in the United States,

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Speaker 2: you know, we have four thousand, two hundred banks here

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Speaker 2: in the United States, four two hundred.

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Speaker 3: Just wrap your head around that for a second.

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Speaker 2: So what do you have in Germany and France and

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Speaker 2: UK and Korea and Japan and Canada one hundred to

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Speaker 2: three hundred banks and we have four.

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Speaker 3: Thousand, two hundred.

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Speaker 2: You know, back in the nineteen eighties, before the SNL crisis,

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Speaker 2: there was over fourteen thousand banks here in the United States,

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Speaker 2: fourteen thousand, and we're down to four thousand, four hundred.

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Speaker 2: So you obviously need you know, kind of the top four,

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Speaker 2: but beyond the top four, or you can drill down

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Speaker 2: to the top thirty, which are at the top thirty banks,

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Speaker 2: there's an exact number who have one hundred billion assets

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Speaker 2: for more. You obviously don't need those banks to be

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Speaker 2: strong and viable. But outside of that, do you need

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Speaker 2: I don't know, twenty banks per state here in the

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Speaker 2: United States, which is one thousand banks.

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Speaker 1: So much information in that, and it's you know, that

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Speaker 1: opened up so many questions. But first of all, on

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Speaker 1: the banks you mentioned, there are a lot of banks,

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Speaker 1: and maybe there are too many in the US. Do

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Speaker 1: you expect bank failures as a result of this, commercial

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Speaker 1: real estates, mess, trouble, whatever you want.

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Speaker 2: To call it.

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Speaker 1: And to what level does it go? Is it just

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Speaker 1: very small regional banks, is it like savings and loans,

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Speaker 1: or does it rise to a level of a much

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Speaker 1: larger institution.

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Speaker 2: I think now that the deposits have been backstopped by

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Speaker 2: the Treasury Secretary at the ELM, which I thought was

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Speaker 2: a brilliant move.

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Speaker 3: Sorry I applaud her for that.

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Speaker 2: I think you're not going to have any run on deposits,

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Speaker 2: So that takes a lot of risk off the table

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Speaker 2: and panic off the table, and now it becomes just

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Speaker 2: a matter of are you solvent or are you not solvent?

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Speaker 2: How many banks do I think are not solvent today?

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Speaker 3: I don't know.

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Speaker 2: My best guesstimate is around three hundred based upon and

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Speaker 2: these are small regional banks. There's over four thousand of them,

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Speaker 2: and I think anywhere around two to three hundred are

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Speaker 2: not solvent today. And I think if the fault rates

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Speaker 2: and commercial rows, they go up to ten percent, and

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Speaker 2: they've currently you know, just increased from two percent where

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Speaker 2: it was two years ago, actually less than two percent

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Speaker 2: just two years ago. To over six percent today. But

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Speaker 2: if they go to ten percent, which I think it

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Speaker 2: will be what they get to, I think that number

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Speaker 2: rises to four hundred. So what happens there, it's just

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Speaker 2: simply a resolution. The bank just gets wound down. It

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Speaker 2: won't be a panic, it'll just be FDIC comes in

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Speaker 2: and you know, takes over, the bank, sells off their assets,

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Speaker 2: transfers deposits, you move on. And so there's a lot

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Speaker 2: of cleanup that the regulators have to do.

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Speaker 3: They know that.

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Speaker 2: And so in the you know, National Bureau of Economic

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Speaker 2: Research working paper series it just came out on c

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Speaker 2: e ORE and bank fragility, you know, it highlights this

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Speaker 2: exact this exact point talking about the forty percent exposure

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Speaker 2: that small and regional banks have to commercial real estate.

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Speaker 2: So let's all about commercial real estate. I mean, you know,

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Speaker 2: you know, delinquency rates are up and property values are down,

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Speaker 2: and difically, when cap rates go up, you know, one

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Speaker 2: hundred to one hundred and fifty basis points on a property,

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Speaker 2: then the value can decline twenty five to thirty percent,

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Speaker 2: and so all that extra you know, one hundred million

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Speaker 2: dollar properties, seventy million dollars loan, you decline thirty percent,

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Speaker 2: there's no equity left, and so there's a lot of

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Speaker 2: that resolution to do. Taking the pick through the python

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Speaker 2: is going to take some time in terms of working

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Speaker 2: this all out. I think commercial real estate represents a

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Speaker 2: lot of distress in the marketplace, but also one of

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Speaker 2: the greatest opportunities in the marketplace right now. So as

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Speaker 2: the banks pull back from because remember banks are fifty

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Speaker 2: percent five zero fifty percent of all commercial real estate

165
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Speaker 2: lending is five point six trillion dollars of commercial real

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Speaker 2: estate loans here in the United States, and they're fifty

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Speaker 2: percent of that book.

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Speaker 3: And so why did the debt wall.

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Speaker 2: The maturity debt wall just increase from five hundred and

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Speaker 2: forty billion this year on commercial real estate loans to

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Speaker 2: nine hundred billion Because all the loans coming due last year,

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Speaker 2: very few of them paid off, most of them got

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Speaker 2: extended into this year, and so it's extending pretend game

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Speaker 2: going on right now, and a lot of that's going

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Speaker 2: to get resolved, and as it gets resolved, losses are

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Speaker 2: going to get pushed through to the system for both

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Speaker 2: the lender as well as you know, as well as

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Speaker 2: the prior owner. And so it's an opportunity for firms

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Speaker 2: like Marathon to step up as banks exit commercial real

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Speaker 2: estate lending and exit. When I say exit, not go

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Speaker 2: from forty percent to zero, but go from forty percent

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Speaker 2: to where they should be fifteen to twenty percent. That's

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Speaker 2: where they should be. So that holds it, so that

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Speaker 2: big void, we're going to step up and make these loans.

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Speaker 2: And so the amount of the amount of capitalists needed

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Speaker 2: from private crapal capital to solve.

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Speaker 3: For this is enormous.

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Speaker 2: And so we're getting paid really nice returns and I

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Speaker 2: love it because it's at the current cap rates with

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Speaker 2: the current cash flow, not at the bubble pricing periods

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Speaker 2: that we had.

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Speaker 4: I'm sorry, Lisa, Oh, yes, you mentioned the SRT and

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Speaker 4: CRT some of these balance sheet movements that banks are

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Speaker 4: doing to raise their capital. Are all of these sort

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Speaker 4: of performing credits or is some of the distress stuff

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Speaker 4: that you just mentioned right now?

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Speaker 2: No, No, it would never at least it would never

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Speaker 2: be distressed. It all has to be performing. If it's

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Speaker 2: not performing, crystal clear clean like, none of us are

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Speaker 2: going to touch it. So we're scrubbing these portfolios. You're

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Speaker 2: talking about hundreds of loans to thousands loans that we're

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Speaker 2: scrubbing through at a low level detail to make sure

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Speaker 2: everything is performing going and you're talking about an average

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Speaker 2: of a triple B credit going in and then triple

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Speaker 2: triple B minus, so nothing is not performing.

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Speaker 4: No, And then you said two hundred billion last year

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Speaker 4: from Europe and then US banks are wrapping up. Given

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Speaker 4: the size of the US market, where do you think

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Speaker 4: the greater opportunity would be this year to continue from

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Speaker 4: the europeans or where with the new US mandate twos

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Speaker 4: to do these kind of deals.

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Speaker 2: An equal opportunity employer, We love it and we love

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Speaker 2: both markets. And so dealing with the top banks in

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Speaker 2: Europe and dealing with the top banks in US, we

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Speaker 2: have all those relationships. They're very very selective who they'll

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Speaker 2: go to in you know, these transactions. It's you know,

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Speaker 2: signing NDAs, is looking into portfolios and it's being there

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Speaker 2: to a price risk appropriately and then take size. I'm

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Speaker 2: talking about you know, one hundreds of millions per transaction.

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Speaker 3: So it's you know a huge opportunity in Europe.

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Speaker 2: Europe has been doing this for twenty plus years, the

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Speaker 2: US hasn't. But now the FED has blessed the US

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Speaker 2: banks to de risk knowing that the methodology and technology

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Speaker 2: UH through these off balance sheet types of curizations and

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Speaker 2: risk transfers has been well in trans in Europe, they've

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Speaker 2: studied the model, they see the merits in it. As

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Speaker 2: the US is just starting this out, so the US

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Speaker 2: will converge to I think where Europe is and it

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Speaker 2: being hundreds of billions on an annual basis, on a

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Speaker 2: go forward basis.

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Speaker 5: Great, thanks Bruce. Hey, this is Arnold Cokuda b I

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Speaker 5: credit analyst covering banks, and you know, I agree with

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Speaker 5: you in terms of these increased regulatory pressures moving some

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Speaker 5: of the risk out of out of banks, right and

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Speaker 5: let's call it into you know, the shadow bank system.

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Speaker 5: So you know, Bruce, you talked about the opportunity there,

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Speaker 5: but what do you think is the right amount of

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Speaker 5: of you know, this this risk moving to the shadow

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Speaker 5: banks and whatnot out of the banking system. You know,

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Speaker 5: it's an opportunity for marathon, but but how much is

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Speaker 5: too much?

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Speaker 2: I view that, Thank you, Arnold, and nice to talk

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Speaker 2: to you. I view that as a toolbox or playbook

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Speaker 2: that they have. So to Lisa's prior question, when you

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Speaker 2: have just trust situations that the banks involved in terms

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Speaker 2: of loans built that results in an asset sales, so

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Speaker 2: they'll sell those loans. So that's an outright it's not

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Speaker 2: a risk transfer per se, it's just a loan sale.

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Speaker 2: And so yes, we're involved in that, Lisa and Arnold.

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Speaker 2: Second is in terms of these partnerships, these SRT CRT transfers,

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Speaker 2: I think kind of the pace that Europe has been running,

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Speaker 2: because they're way ahead on this is probably the right

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Speaker 2: pace for the Europe to continue running and the US

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Speaker 2: to continue running. I don't think it goes up much

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Speaker 2: from there. I just think it goes up a lot

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Speaker 2: for the US from where it was. And Europe is

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Speaker 2: kind of you know, steady Eddy, because they've had such

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Speaker 2: an efficient frontier and how they've been managed this again

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Speaker 2: for years and years and years to go back, you know,

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Speaker 2: twenty years. And so I'll give you an example, so

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Speaker 2: you take it. You know, uh, you know, three hundred

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Speaker 2: corporate loans are ready to triple B minus and you

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Speaker 2: can do this of course with other types of loans.

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Speaker 2: Were taking commercial corporate loans in this case, and the

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Speaker 2: banks you know, want to keep their relationships right because

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Speaker 2: these are important relationships and so although those transfer the

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Speaker 2: first cure of risk.

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Speaker 3: You know, these relationships for the banks.

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Speaker 2: For their clients are important account management, you know, term loans,

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Speaker 2: credit facilities, cast management, FX, trade for the investment, banking services, custody,

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Speaker 2: payment solutions. There is so much the banks do and

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Speaker 2: the bank will never exit. That is the core of

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Speaker 2: what they do. But they don't want, given the capital constraints,

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Speaker 2: this extra layer of risk. And so how do we

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Speaker 2: de risk given the capital charges that the regulators are

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Speaker 2: going to impose for that extra layer of risk for

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Speaker 2: keeping some of these risk assets or you know non

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Speaker 2: government and non agency and you know lower investment greater

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Speaker 2: or non investment great risk. So how they do that is,

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Speaker 2: let's say they sell to US zero to ten percent

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Speaker 2: SRT trunch of the package of those three hundred let's

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Speaker 2: say corporate you know loans, they're both funded and unfunded,

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Speaker 2: including the revolvers and the loans. So they transferred that

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Speaker 2: to us, and you know, it reduces their risk waiting

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Speaker 2: from something like x amount to like zero point two

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Speaker 2: x amount. It'll go down by like seventy five eighty

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Speaker 2: percent reduction of capital by just selling that Tronshof and

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Speaker 2: so allows them the banks to originate to continue to

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Speaker 2: service their clients, but really arbitrage the capital requirements for

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Speaker 2: the lower tier risk as firms like US come in

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Speaker 2: to provide that capital. So it's a beautiful marriage of

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Speaker 2: you know where banks and you know private credit partner

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Speaker 2: and again there's other partnership arrangements, you know, portfolio sales,

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Speaker 2: you know them providing the bank providing the senior will

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Speaker 2: provide them as on that capital solution as their borrower

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Speaker 2: on the commercial real estate loan wants to roll, but

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Speaker 2: they want to roll at a more conservative LTV, so

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Speaker 2: plug that gap. So there's all kinds of ways that

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Speaker 2: we work together us in the banks, and and and

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Speaker 2: what you also see is banks also wanting back into

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Speaker 2: private credit and striking up partnership agreements with the investment

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Speaker 2: managers that do credit to form partnerships to run a

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Speaker 2: program together. So it's also something you're starting to see.

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Speaker 2: So it's really interesting to see, you know, how the

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Speaker 2: banks and private finance are now converging to a degree.

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Speaker 5: So pretty interesting on that front. But to go more

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Speaker 5: specifically in terms of you know, the increased opportunity in

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Speaker 5: US uh, you know, synthetic risk transfers. Do you feel like,

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Speaker 5: you know, we have the regional banks that need to

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Speaker 5: you know, raise their capital levels right incorporating their unrealized losses,

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Speaker 5: and then the potential and capital requirement increases for the

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Speaker 5: biggest banks you know going forward. So where do you

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Speaker 5: see the you know, bigger opportunities going forward. Is it

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Speaker 5: more with the regional banks or some of these you

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Speaker 5: know bigger JP Morgans in BA as well.

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Speaker 2: Not to mention bank specifically by name, but I think

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Speaker 2: you know here in the United States, it's four thy

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Speaker 2: two hundred banks that are in existence, and there's thirty

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Speaker 2: that's exact number that if you want to drill down

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Speaker 2: and look at the total number of assets that they

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Speaker 2: have in their balance sheet, there's thirty with one hundred

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Speaker 2: billion or more. And so kind of the target list

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Speaker 2: for US is really the top and we go a

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Speaker 2: little bit below that the top fifty banks in this country.

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Speaker 2: What's really critical is credit risk. We don't want to

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Speaker 2: have counterparty credit risk with the institution itself, and so

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Speaker 2: it have to be a super safe, you know bank

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Speaker 2: that is a super regional slash megabank for US to

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Speaker 2: do an SRT transaction with if that helps answer your question,

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Speaker 2: give you clarity. So it won't be with like the

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Speaker 2: next four thousand right now there, when we deal with

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Speaker 2: that next four thousand, will buy loans from them, will

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Speaker 2: be partners with them. If you know, you know they'll

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Speaker 2: do the first out, we'll do this second. You know,

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Speaker 2: there's different things we can do together with the banks,

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Speaker 2: the partner up to help them think about the risking,

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Speaker 2: but not through a national team transaction.

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Speaker 1: So in general, Bruce, the opportunity from this commercial real

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Speaker 1: estate mess. You're saying it's the greatest opportunity in the

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Speaker 1: market right now, you're saying it needs a ton of capital.

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Speaker 1: Can you talk a bit about how much capital. We've

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Speaker 1: had other guests on this show talk about a trillion

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Speaker 1: dollar opportunity in real estate right now. Can you talk

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Speaker 1: about how you know what the magnitude of that opportunity

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Speaker 1: is and also what are the returns? What are you

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Speaker 1: buying these loans off the banks for? I mean, how

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Speaker 1: much of a discount are you getting?

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Speaker 2: Well, it's multi faster, so let me let me unpack

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Speaker 2: it for you for just a second. So how big

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Speaker 2: is the opportunity? You know, let's look at the biggest

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Speaker 2: framework for commercial real state. And I'll focus on the

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Speaker 2: United States for just now. But the biggest framework I'm

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Speaker 2: looking commercial state is commercial state has their property value

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Speaker 2: across this country, the commercial real estate side of around

355
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Speaker 2: twenty two trillion. That's the number that we have, twenty

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Speaker 2: two trillion. And of that twenty two trillion, eight trillion

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Speaker 2: has debt on it, fourteen trillion doesn't. So that fourteen

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Speaker 2: trillion is not a problem. Like you know, your Bloomberg

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Speaker 2: go across town, you know, to your Bloomberg headquarters.

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Speaker 3: Do they have a commercial real estate loan against their building?

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Speaker 2: No. JP Morgan is building their new headquarter building on

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Speaker 2: Park Avenue. Do they have commercial real estate loan against

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Speaker 2: that building? Absolutely not. You'll do that at the corporate level.

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Speaker 2: You'll have, you know, debt, maybe a corporate level. JP

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Speaker 2: Morgan have debt at the corporate level, but they're not

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Speaker 2: going to finance the property per se. A lot of

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Speaker 2: property here is simply not financed. Some of the biggest

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Speaker 2: properties just simply not finance. Is financed at the corporate

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Speaker 2: level and through whole code debt are not through a

370
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Speaker 2: real estate loan. So of the five point six trillion

371
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Speaker 2: dollars of debt that's there, you know, outstanding here in

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Speaker 2: the United States, that's probably around I don't know, eight

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Speaker 2: trillion dollars of property value. That's where the problem is

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Speaker 2: and that's where the opportunity is.

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Speaker 3: Now.

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Speaker 2: Of that five point six trillion of debt, how much

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Speaker 2: will be a problem in terms of extending and mending,

378
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Speaker 2: you know, potentially being restructured or default. The number could

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Speaker 2: be as high as a trillion. I don't think that's

380
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Speaker 2: an exaggeration. I think that's actually a healthy number. Is

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Speaker 2: a trillion where it's gonna have to be recapitalized or

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Speaker 2: you're gonna be flipping the keys.

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Speaker 3: You know, it's gonna have to get restructured somehow.

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Speaker 2: It's about a trillion unless if and it's wishful thinking

385
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Speaker 2: that a lot of commercial estate players have. Unless if

386
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Speaker 2: the FED brings rates down really really quickly and commercial

387
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Speaker 2: estate pops a lot and a lot of capital there

388
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Speaker 2: is available to But we think the numbers up to

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Speaker 2: a trillion, so.

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Speaker 3: Separate away from that. Of the five point.

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Speaker 2: Six trillion two point six trillion, the biggest lender are

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Speaker 2: the banks, and the rest of it is in different places.

393
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Speaker 2: The second place that it's in is excuisation. So there's

394
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Speaker 2: over a trillion dollars, like one point zero five trillion

395
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Speaker 2: of commercial real estate loans that are insecure taste excurization today.

396
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Speaker 2: So now your question is where do we see the opportunity.

397
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Speaker 2: Where we see the opportunity is multifests Number one as

398
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Speaker 2: one hundred million dollars. Property that has seventy million dollar

399
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Speaker 2: loan and it's only worth one hundred million. It's no

400
00:21:37,160 --> 00:21:39,080
Speaker 2: longer worth a hundred million. It's now worth seventy million.

401
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Speaker 2: The property that loan. When that rolls, you're not gonna

402
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Speaker 2: get seventy million dollar long because properly is worth seventy million.

403
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Speaker 2: You're gonna get sixty percent LTV. This time around, you're

404
00:21:48,800 --> 00:21:51,680
Speaker 2: gonna get forty two million dollars long. And so that

405
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Speaker 2: gap between seventy million on the old loan and forty

406
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Speaker 2: two million on the new LONGUS twenty eight million dollars gap.

407
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Speaker 3: Who's coming up with that money?

408
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Speaker 4: And so I had to come up with that money?

409
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Speaker 4: Where is What kind of returns are we looking at here?

410
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Speaker 4: You said, this is one of the best opportunities ever.

411
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Speaker 2: I think the returns have have got to be preferred

412
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Speaker 2: equity kind of returns, sweeping all the cash flow from

413
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Speaker 2: the property and basically extracting control while keeping you know,

414
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Speaker 2: the lender will keeping the equity owner in place.

415
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Speaker 4: And so preferred equity we're thinking maybe definitely double digits,

416
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Speaker 4: maybe even in the two handle.

417
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Speaker 2: Like fifteen to low twenties. Is kind of like that range,

418
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Speaker 2: depending upon the property, depend upon the situation. So that's

419
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Speaker 2: number one. Number two is is, you know, let's say

420
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Speaker 2: the borrower comes up with new money in the bank,

421
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Speaker 2: won't roll you know, us extending that new loan and

422
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Speaker 2: making a really nice return on that, and so being

423
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Speaker 2: the lender, not of last resort, but being the lender

424
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Speaker 2: because the banks are going to be pulling back at

425
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Speaker 2: least a huge portion of the capital go for a basis,

426
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Speaker 2: and so private capital has to step up for that.

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Speaker 2: Number Number three, there is new development going on and

428
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Speaker 2: new acquisitions and so being the you know, acquisition finance

429
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Speaker 2: as well as all these refinancings.

430
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Speaker 3: That's next.

431
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Speaker 2: And what I also add is I think CMBs is

432
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Speaker 2: one of the great opportunities because as loans go sideways

433
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Speaker 2: within a deal, you know, there's going to be losses

434
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Speaker 2: going to flow through to some of the junior classes,

435
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Speaker 2: and for us to buy what we consider be above

436
00:23:29,160 --> 00:23:33,440
Speaker 2: the fall from is an amazing opportunity. So the dislocated

437
00:23:33,560 --> 00:23:37,840
Speaker 2: CNBS opportunity, which is liquid you know, T plus two securities.

438
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Speaker 2: We model every single property in each one of the

439
00:23:41,480 --> 00:23:45,960
Speaker 2: one thousand, five hundred and sixty different CMBs transactions. So

440
00:23:45,960 --> 00:23:50,440
Speaker 2: you talk about like six tranches per securization, you're talking

441
00:23:50,440 --> 00:23:53,480
Speaker 2: about like not was it nine three hundred? You know,

442
00:23:53,560 --> 00:23:58,160
Speaker 2: securizations trunches that exist and just cmbas alone and figuring

443
00:23:58,200 --> 00:24:01,879
Speaker 2: out what truants to buy. There's a lot of data

444
00:24:01,920 --> 00:24:05,520
Speaker 2: science that goes with property analysis and cash flow analysis

445
00:24:05,680 --> 00:24:08,359
Speaker 2: that we have modeled out here at Marathon. And what

446
00:24:08,440 --> 00:24:12,880
Speaker 2: we do is we buy the tranche above the folk group.

447
00:24:13,160 --> 00:24:14,440
Speaker 2: We don't want to have anything.

448
00:24:14,640 --> 00:24:16,640
Speaker 4: Right now above the fulcrum, which.

449
00:24:17,040 --> 00:24:18,359
Speaker 2: It could be the double B class, it could be

450
00:24:18,400 --> 00:24:20,080
Speaker 2: the triple V class, would be the signal A class.

451
00:24:20,560 --> 00:24:23,840
Speaker 2: It's not a generic answer to that because it's a

452
00:24:23,880 --> 00:24:27,120
Speaker 2: function of the loan collateral and how the classes were

453
00:24:27,160 --> 00:24:31,760
Speaker 2: cut in terms of the thickness of the securization and so,

454
00:24:32,000 --> 00:24:33,520
Speaker 2: but we're we the.

455
00:24:33,480 --> 00:24:35,879
Speaker 4: Mes level, right, You're thinking in the mes level, well,

456
00:24:35,880 --> 00:24:36,800
Speaker 4: would be triple A and.

457
00:24:36,800 --> 00:24:39,560
Speaker 3: Double as in places. Yes, so it's be somewhere between

458
00:24:39,600 --> 00:24:41,399
Speaker 3: single a's and double b's and.

459
00:24:41,840 --> 00:24:45,200
Speaker 2: And and for that we expect to make a mid

460
00:24:45,240 --> 00:24:48,239
Speaker 2: to upper teams I R R on T plus two

461
00:24:48,320 --> 00:24:51,640
Speaker 2: securities over a multi year holding period. So you're talking

462
00:24:51,640 --> 00:24:56,399
Speaker 2: about like really nice multiple on your money, and it's

463
00:24:56,480 --> 00:24:59,480
Speaker 2: you know, very very specific. It's you know, we have

464
00:24:59,560 --> 00:25:02,600
Speaker 2: our you know, night vision goggles on and we're looking

465
00:25:02,640 --> 00:25:05,040
Speaker 2: for that you know, needle in the haystack by buying

466
00:25:05,040 --> 00:25:09,080
Speaker 2: those tranches off of you know, a very big securitization marketplace,

467
00:25:09,440 --> 00:25:13,960
Speaker 2: knowing full well the information the property, the cash flow,

468
00:25:14,880 --> 00:25:17,760
Speaker 2: the cuts on the train, on the transaction, and where

469
00:25:17,800 --> 00:25:20,320
Speaker 2: the falcon is going to lie based upon how the

470
00:25:20,359 --> 00:25:22,680
Speaker 2: workout is going to flow through in terms of loss

471
00:25:22,720 --> 00:25:23,760
Speaker 2: rates to a securitization.

472
00:25:24,160 --> 00:25:26,040
Speaker 1: So, Bruce, a lot of this stuff is distressed for

473
00:25:26,119 --> 00:25:28,280
Speaker 1: a reason, right, and it is very risky, and it

474
00:25:28,320 --> 00:25:30,879
Speaker 1: really varies by geography and by type, and it's you know,

475
00:25:30,920 --> 00:25:33,359
Speaker 1: all over the map, and you do travel, you do

476
00:25:33,440 --> 00:25:34,960
Speaker 1: have a global view. I was just wondering, you know,

477
00:25:35,000 --> 00:25:37,359
Speaker 1: how you see this breaking down? You know, what what

478
00:25:37,359 --> 00:25:39,280
Speaker 1: what are the good sectors to look at in terms

479
00:25:39,280 --> 00:25:41,000
Speaker 1: of really state what are the ones you absolutely have

480
00:25:41,040 --> 00:25:43,000
Speaker 1: to avoid a country and sector.

481
00:25:44,200 --> 00:25:48,120
Speaker 2: You know, we we we we're avoiding office, and that's

482
00:25:48,240 --> 00:25:51,360
Speaker 2: kind of top a less top of mind. But you know,

483
00:25:51,600 --> 00:25:54,000
Speaker 2: if there's office in a securitization, it doesn't matter.

484
00:25:54,119 --> 00:25:54,600
Speaker 3: Just falls through.

485
00:25:54,600 --> 00:25:56,800
Speaker 2: The loss were just by you know, the right trans

486
00:25:56,840 --> 00:26:00,480
Speaker 2: given that you know that factor. And more important, it's

487
00:26:00,520 --> 00:26:04,919
Speaker 2: not a generic statement. It's very clean math of what

488
00:26:05,040 --> 00:26:06,840
Speaker 2: loss factor you're going to have and how that flows

489
00:26:06,840 --> 00:26:09,199
Speaker 2: through the excusation. In any excusation, you might have some

490
00:26:09,320 --> 00:26:11,480
Speaker 2: losses and loans. It doesn't mean you're run for the

491
00:26:11,560 --> 00:26:14,719
Speaker 2: for the hills. It means you figure out exactly how

492
00:26:14,800 --> 00:26:18,000
Speaker 2: much flows through and what is left, and what is

493
00:26:18,119 --> 00:26:22,200
Speaker 2: left we can buy that diskound of security at a

494
00:26:22,280 --> 00:26:26,159
Speaker 2: nice secretion. You know, when it pulls the par just

495
00:26:26,240 --> 00:26:28,640
Speaker 2: into your cash flow, it'll be a great buy for us.

496
00:26:28,960 --> 00:26:31,200
Speaker 3: But you know, beyond real estate commercial state.

497
00:26:31,000 --> 00:26:34,359
Speaker 2: There's also the dislocation and you know distress that you

498
00:26:34,440 --> 00:26:37,520
Speaker 2: see on the corporate side as well. Uh, maybe not

499
00:26:37,840 --> 00:26:42,800
Speaker 2: as severe, but there's still you know, a healthy case

500
00:26:42,880 --> 00:26:45,880
Speaker 2: load workload on the on the corporate side as well.

501
00:26:47,359 --> 00:26:50,560
Speaker 4: So, Bruce, you mentioned earlier that lenders are in some

502
00:26:50,680 --> 00:26:56,600
Speaker 4: cases extending, extending, and amending what is you can talk

503
00:26:56,640 --> 00:26:58,879
Speaker 4: a little bit about what the impact of that is

504
00:26:59,000 --> 00:27:03,920
Speaker 4: zombie in real estates and also zombie in corporate because

505
00:27:03,920 --> 00:27:06,960
Speaker 4: we have a similar well, as you said, less severe

506
00:27:07,040 --> 00:27:10,560
Speaker 4: issue amount corporate did as well. Default rates are really

507
00:27:10,640 --> 00:27:14,120
Speaker 4: really low because of this tendency to just close take

508
00:27:14,119 --> 00:27:16,359
Speaker 4: a blind eye. Can you address a little bit about

509
00:27:16,400 --> 00:27:19,359
Speaker 4: your thoughts about how, why and how this is happening

510
00:27:19,400 --> 00:27:20,840
Speaker 4: and what the ramifications are.

511
00:27:21,600 --> 00:27:24,840
Speaker 2: Sure, let me just step back for your listeners and

512
00:27:25,320 --> 00:27:29,080
Speaker 2: kind of define the marketplace. When I think about private credit,

513
00:27:29,440 --> 00:27:32,480
Speaker 2: I think are three segments of private credit. Number one,

514
00:27:33,119 --> 00:27:38,439
Speaker 2: and the biggest actionable segment is direct lending, which we

515
00:27:38,760 --> 00:27:40,639
Speaker 2: just to call it middle market lending, but it's also

516
00:27:41,119 --> 00:27:43,920
Speaker 2: you know, lower middle market, upper middle market. Now, these

517
00:27:44,080 --> 00:27:47,960
Speaker 2: are broadly syndicated private deals that are happening. They're taking

518
00:27:48,160 --> 00:27:52,240
Speaker 2: deal full from the broadly syndicated market. So that's the

519
00:27:52,280 --> 00:27:56,239
Speaker 2: first big segment of you know, corporate.

520
00:27:57,480 --> 00:27:58,200
Speaker 3: Private credit.

521
00:27:58,440 --> 00:28:01,879
Speaker 2: The second biggot segment of corporate private credit, which we

522
00:28:01,920 --> 00:28:04,960
Speaker 2: haven't talked about, which is huge and going to get

523
00:28:05,080 --> 00:28:08,280
Speaker 2: much much bigger and I'm super excited about, is asset

524
00:28:08,280 --> 00:28:13,840
Speaker 2: based lending. Now, the third component of private credit is

525
00:28:14,480 --> 00:28:17,959
Speaker 2: what now you know, your question revolves around, which is

526
00:28:18,480 --> 00:28:23,040
Speaker 2: the you know, opportunistic situations in.

527
00:28:23,600 --> 00:28:24,840
Speaker 3: Uh in the credit market.

528
00:28:25,240 --> 00:28:28,400
Speaker 2: And and I think there's a couple of segments when

529
00:28:28,440 --> 00:28:31,680
Speaker 2: you kind of you know, unpack that that you.

530
00:28:31,680 --> 00:28:32,560
Speaker 3: Really want to focus on.

531
00:28:32,680 --> 00:28:37,040
Speaker 2: Number one is providing capital solutions and creative financing options

532
00:28:37,280 --> 00:28:41,200
Speaker 2: to companies to help them preserve value and to help

533
00:28:41,240 --> 00:28:43,560
Speaker 2: them grow and to help them get over.

534
00:28:43,400 --> 00:28:46,520
Speaker 3: Some type of you know, choppy water. And so it's

535
00:28:46,560 --> 00:28:48,080
Speaker 3: the bridge to the other side.

536
00:28:48,440 --> 00:28:52,680
Speaker 2: And we do a lot of these capital solutions, and

537
00:28:52,760 --> 00:28:56,040
Speaker 2: that's you know, a fantastic opportunity to help companies that

538
00:28:56,200 --> 00:29:01,240
Speaker 2: are you know, maybe a little over leverage or stress or.

539
00:29:01,960 --> 00:29:04,560
Speaker 3: If the two distress you help of the capital solution,

540
00:29:05,040 --> 00:29:07,080
Speaker 3: it'll just go down that path.

541
00:29:07,560 --> 00:29:12,160
Speaker 2: And so you know, in the US and Europe, you know,

542
00:29:12,240 --> 00:29:16,480
Speaker 2: we have hundreds of billions of dollars of debt that's

543
00:29:16,800 --> 00:29:21,160
Speaker 2: existing today whose debt trades below like an eighty dollars price.

544
00:29:21,880 --> 00:29:24,440
Speaker 2: You know, on my radar list today, I have one

545
00:29:24,520 --> 00:29:27,560
Speaker 2: hundred and thirty five companies that we're tracking, tolling around

546
00:29:27,600 --> 00:29:30,000
Speaker 2: three hundred and fifty billion that looks like that on

547
00:29:30,120 --> 00:29:32,760
Speaker 2: top of the one hundred and eighty two billion of

548
00:29:32,880 --> 00:29:36,560
Speaker 2: companies debt, which is one hundred and five companies that

549
00:29:36,680 --> 00:29:39,960
Speaker 2: defaulted the last calendar year in twenty twenty three.

550
00:29:40,480 --> 00:29:43,520
Speaker 3: And so so what's causing this.

551
00:29:43,800 --> 00:29:47,160
Speaker 2: Well, in two thousand and eight, two thousand and eight,

552
00:29:47,640 --> 00:29:51,080
Speaker 2: during a DFC high, you bonds, leverage, loans, you know,

553
00:29:51,160 --> 00:29:54,200
Speaker 2: direct lending on the private side, there was one point

554
00:29:54,240 --> 00:29:58,240
Speaker 2: seven trillion dollar credit market one point seven trillion. Today

555
00:29:58,280 --> 00:30:02,400
Speaker 2: that market size is zie point one trillion, so it's

556
00:30:02,400 --> 00:30:07,200
Speaker 2: growing three times where it was then. And through all

557
00:30:07,280 --> 00:30:10,240
Speaker 2: the exhiberance and the zerp world that we lived in

558
00:30:10,480 --> 00:30:14,480
Speaker 2: when companies borrowed maybe too much and money was too

559
00:30:14,520 --> 00:30:19,600
Speaker 2: free flowing and a lot of people folks chose to

560
00:30:19,960 --> 00:30:23,240
Speaker 2: you know borrow floating rate and you know, realizing that

561
00:30:24,000 --> 00:30:25,840
Speaker 2: you know, FED funds is up five hundred twenty five

562
00:30:25,840 --> 00:30:28,040
Speaker 2: based punts, so the base boring rate, which is now

563
00:30:28,120 --> 00:30:31,080
Speaker 2: sofur is up five hundred twenty five basis points. The

564
00:30:31,160 --> 00:30:34,560
Speaker 2: funny costs have become too high and there's a lot

565
00:30:34,560 --> 00:30:36,400
Speaker 2: of leverage. So the company may have cut you know,

566
00:30:37,480 --> 00:30:43,240
Speaker 2: you know, fifty LTV loan, but given the purchase price

567
00:30:43,320 --> 00:30:47,200
Speaker 2: multiple may been six times that even a finance when

568
00:30:47,280 --> 00:30:51,920
Speaker 2: it was originally issued, but that includes ad backs and adjustments.

569
00:30:52,040 --> 00:30:54,320
Speaker 2: You take out those adbacks and adjustments and your at

570
00:30:54,360 --> 00:30:56,880
Speaker 2: least eternal leverage higher than that. So you can look

571
00:30:56,880 --> 00:31:00,840
Speaker 2: at the software company that came in at like seven

572
00:31:00,920 --> 00:31:05,120
Speaker 2: turns of debt leverage, that really looks closer to ten times.

573
00:31:05,440 --> 00:31:07,840
Speaker 2: Or healthcare company that came in at five and a

574
00:31:07,840 --> 00:31:11,160
Speaker 2: half turns of debt that's really more close than eight

575
00:31:11,200 --> 00:31:15,640
Speaker 2: turns of debt data up today. And so when you

576
00:31:15,680 --> 00:31:20,760
Speaker 2: talk about like ibada is before debt service and now

577
00:31:20,920 --> 00:31:25,440
Speaker 2: debt service has doubled, right, so you know, livebar plus

578
00:31:25,440 --> 00:31:29,080
Speaker 2: a spread has become sofur plus that same spread.

579
00:31:29,440 --> 00:31:30,920
Speaker 3: But the sofa rates.

580
00:31:30,800 --> 00:31:32,880
Speaker 2: Of five hundred and twenty five basbooks, so the financial

581
00:31:32,920 --> 00:31:35,680
Speaker 2: cost that the company occurs is two x what it was.

582
00:31:36,400 --> 00:31:39,360
Speaker 2: And so a lot of these companies are burning cash,

583
00:31:39,920 --> 00:31:43,720
Speaker 2: actual cash flow, burning cash just to service their debt,

584
00:31:44,400 --> 00:31:49,800
Speaker 2: just the service their death. And what segment of the marketplace, Well,

585
00:31:49,800 --> 00:31:52,080
Speaker 2: if you look at the leverage loan marketplace and you

586
00:31:52,200 --> 00:31:55,320
Speaker 2: read what movies have to say, it's over fifty percent

587
00:31:55,360 --> 00:31:58,840
Speaker 2: of the companies are B three rated are now in

588
00:31:58,840 --> 00:32:00,120
Speaker 2: that category.

589
00:32:00,200 --> 00:32:01,960
Speaker 3: Current sofa barn rates.

590
00:32:02,360 --> 00:32:06,840
Speaker 2: And so you know, there is an easy financial conditions

591
00:32:06,840 --> 00:32:08,920
Speaker 2: that have occurred over those last many months, and it's

592
00:32:08,960 --> 00:32:12,480
Speaker 2: fantastic and it's helped companies through finance out and so

593
00:32:12,520 --> 00:32:15,440
Speaker 2: you don't have the same debt maturity wall in corporate

594
00:32:15,880 --> 00:32:19,640
Speaker 2: finance that you do in real estate finance, but you

595
00:32:19,720 --> 00:32:22,400
Speaker 2: still have a lot of cash burner going on. And

596
00:32:23,120 --> 00:32:25,160
Speaker 2: you know, the default rate won't get to ten or

597
00:32:25,200 --> 00:32:29,280
Speaker 2: twelve percent like it was in LA, but it is

598
00:32:29,320 --> 00:32:33,120
Speaker 2: going to get to four percent in this current marketplace,

599
00:32:34,000 --> 00:32:36,640
Speaker 2: and four percent of five point one trillion, the current

600
00:32:36,680 --> 00:32:40,720
Speaker 2: size is over two hundred billion dollars of the faults

601
00:32:40,760 --> 00:32:44,040
Speaker 2: and select of the faults, we're ten percent of one

602
00:32:44,040 --> 00:32:47,640
Speaker 2: point seven trillion. Back in two thousand and eight, you know,

603
00:32:48,600 --> 00:32:50,320
Speaker 2: you know, it took you to about one hundred and

604
00:32:50,320 --> 00:32:52,560
Speaker 2: eighty to two hundred billion, So you'll end up at

605
00:32:52,560 --> 00:32:55,720
Speaker 2: the same place in terms of the sizeable opportunity for

606
00:32:56,400 --> 00:32:59,760
Speaker 2: distress dislocation. And most importantly, what we're doing is capital

607
00:33:00,600 --> 00:33:03,800
Speaker 2: to help these good companies with overlovered balancies make it through.

608
00:33:04,680 --> 00:33:07,240
Speaker 4: What I am more excited about was what you said

609
00:33:07,320 --> 00:33:10,000
Speaker 4: about abs lending, because you seem excited and we haven't

610
00:33:10,040 --> 00:33:13,360
Speaker 4: touched on it, So a lot of people are now

611
00:33:13,720 --> 00:33:17,320
Speaker 4: looking at that as the next frontier private credit. To you, Bruce,

612
00:33:17,360 --> 00:33:19,640
Speaker 4: what does that ABS lending mean to you?

613
00:33:19,960 --> 00:33:24,280
Speaker 2: And where Well, let's talk about WID's coming and then

614
00:33:24,440 --> 00:33:27,120
Speaker 2: let me answer your question, because it's really important to understand,

615
00:33:27,240 --> 00:33:29,520
Speaker 2: like whites come in to kind of put a ribbon

616
00:33:29,600 --> 00:33:32,680
Speaker 2: on it and to kind of, you know, complete the circle.

617
00:33:32,920 --> 00:33:34,719
Speaker 2: So let's go back to the banks for a second.

618
00:33:34,720 --> 00:33:38,280
Speaker 2: The banks have been the biggest ABL lenders and when

619
00:33:38,280 --> 00:33:41,280
Speaker 2: they exited doing a lot of the corporate lending back

620
00:33:41,320 --> 00:33:45,160
Speaker 2: in eight because of the basel free regulations that came

621
00:33:45,240 --> 00:33:50,120
Speaker 2: in that put cop requirements on those type of risk

622
00:33:50,240 --> 00:33:54,120
Speaker 2: loans in place, they then doubled down an ABL lending

623
00:33:54,680 --> 00:33:57,880
Speaker 2: and that's when some of the ABL loans like really

624
00:33:57,920 --> 00:34:00,720
Speaker 2: took off in the balance as a it's a balance

625
00:34:00,760 --> 00:34:03,960
Speaker 2: sheet for these banks. Now fast forward to twenty twenty

626
00:34:04,000 --> 00:34:09,800
Speaker 2: four or twenty twenty five, one buzzle free endgame comes

627
00:34:09,800 --> 00:34:13,080
Speaker 2: into place, and the banks now have to have more

628
00:34:13,160 --> 00:34:18,080
Speaker 2: capital against those types of loans and so to de risk,

629
00:34:18,480 --> 00:34:21,359
Speaker 2: the bank's going to make less of those loans and

630
00:34:21,400 --> 00:34:25,399
Speaker 2: we're seeing it across the system. And so now let's

631
00:34:25,400 --> 00:34:29,480
Speaker 2: talk about ABL. What is ABL as opposed to making

632
00:34:29,520 --> 00:34:33,720
Speaker 2: a loan based upon a company's cash flow, We're making

633
00:34:33,760 --> 00:34:39,640
Speaker 2: a loan based upon the collateral. So it's an senior

634
00:34:39,760 --> 00:34:43,440
Speaker 2: secured asset based loan where we have a perfected interest

635
00:34:43,600 --> 00:34:47,040
Speaker 2: in that underlying collateral at a certain LTV, a tasking point,

636
00:34:47,640 --> 00:34:51,160
Speaker 2: and a certain debt service coverage ratio. A slightly different

637
00:34:51,280 --> 00:34:53,840
Speaker 2: way of thinking about it, but it's opposed to lending

638
00:34:53,840 --> 00:34:57,360
Speaker 2: against op cooho co of company, we're lending against hart assets.

639
00:34:57,719 --> 00:35:01,200
Speaker 2: And let me break it down the four categories for you, Uh, Lisa,

640
00:35:01,600 --> 00:35:06,080
Speaker 2: So a b L I think is a nine trillion

641
00:35:06,120 --> 00:35:11,120
Speaker 2: dollar marketplace, nine trillion and it's a small fraction of

642
00:35:11,120 --> 00:35:14,920
Speaker 2: that now, and what's been put in security form securitizations

643
00:35:15,040 --> 00:35:17,719
Speaker 2: is four trillion, so I think in private form it's

644
00:35:17,719 --> 00:35:19,560
Speaker 2: a five trillion dollar marketplace.

645
00:35:20,000 --> 00:35:20,680
Speaker 3: And what is it?

646
00:35:21,280 --> 00:35:26,120
Speaker 2: Number one, in no particular order. Number one, it's corporate ABL.

647
00:35:26,280 --> 00:35:29,520
Speaker 2: So you're talking about lending its plant, equipment, inventory, uh,

648
00:35:29,640 --> 00:35:35,240
Speaker 2: intellectual property, receivables, trade, it's whatever's in corporate a BL.

649
00:35:35,400 --> 00:35:38,760
Speaker 2: But again, you have a perfected interest against those assets,

650
00:35:39,280 --> 00:35:41,279
Speaker 2: and so if anything has happened, you have a lean

651
00:35:41,360 --> 00:35:44,920
Speaker 2: on it that they're yours. The second category, i'd say

652
00:35:45,200 --> 00:35:47,840
Speaker 2: is what I call, you know, consumers. Last specialty finance,

653
00:35:48,000 --> 00:35:50,239
Speaker 2: and there you have everything from like all those consumers

654
00:35:50,640 --> 00:35:54,000
Speaker 2: you know to you know, s rts and c rts

655
00:35:54,040 --> 00:35:56,840
Speaker 2: that put that there, certain type of you know, royalties

656
00:35:56,880 --> 00:35:59,600
Speaker 2: you can put like music royalties in there, or healthcare

657
00:35:59,719 --> 00:36:03,680
Speaker 2: you know royalties in there, and so specialty finances Category two.

658
00:36:04,280 --> 00:36:08,560
Speaker 2: Category three you mentioned it, so I'll emphasize it. It's

659
00:36:08,640 --> 00:36:12,479
Speaker 2: transportation and under transportations aviation, and we've done not only

660
00:36:12,600 --> 00:36:15,120
Speaker 2: you know, the Airbus and Airbus three twenties and Bowing

661
00:36:15,160 --> 00:36:18,239
Speaker 2: seven thirty sevens and all the series, and we have

662
00:36:18,360 --> 00:36:21,480
Speaker 2: you know four coming through committee you know this week,

663
00:36:21,560 --> 00:36:23,120
Speaker 2: and we've done.

664
00:36:23,000 --> 00:36:25,480
Speaker 3: Over one hundred and fifty aircraft with the big.

665
00:36:25,320 --> 00:36:28,359
Speaker 2: Airlines, you know, the big airlines that everyone travels, and

666
00:36:28,400 --> 00:36:30,239
Speaker 2: we on the we on the metal, we lease it

667
00:36:30,239 --> 00:36:32,319
Speaker 2: to them. We get paid the structure cash flow. We

668
00:36:32,400 --> 00:36:35,359
Speaker 2: also do this with engines, because an airplane has about

669
00:36:35,360 --> 00:36:38,120
Speaker 2: thirty year useful life, and engine you know, last year

670
00:36:38,120 --> 00:36:41,520
Speaker 2: around seven years, and so we've done engine leasing as well.

671
00:36:41,800 --> 00:36:42,719
Speaker 3: You know, when you're buying.

672
00:36:42,520 --> 00:36:46,359
Speaker 2: New, brand new Airbus three twenty neo, you might pay

673
00:36:46,400 --> 00:36:50,880
Speaker 2: sixty five million for it, you know from Airbus. And

674
00:36:51,040 --> 00:36:53,239
Speaker 2: the engines are two engines that you know on each wing,

675
00:36:53,320 --> 00:36:55,520
Speaker 2: one in each one that costs like thirty five million,

676
00:36:55,560 --> 00:36:57,400
Speaker 2: that costs like more than half the plane. And so

677
00:36:57,480 --> 00:36:59,680
Speaker 2: engine leasing is also a segment of what we do.

678
00:36:59,719 --> 00:37:01,600
Speaker 2: We do a lot in maritime. This week, we just

679
00:37:01,600 --> 00:37:04,800
Speaker 2: did it joins that deal, you know, tug and barge.

680
00:37:05,400 --> 00:37:09,040
Speaker 2: We've done international shipping. There's there's rail and road. We've

681
00:37:09,040 --> 00:37:13,800
Speaker 2: done trucking deals, transportation equipment, infrastructure type loans that support

682
00:37:13,880 --> 00:37:17,960
Speaker 2: all this. And then the fourth category is property. And

683
00:37:18,040 --> 00:37:20,520
Speaker 2: I think we had over fifty thousand residential loans, the

684
00:37:20,560 --> 00:37:22,560
Speaker 2: whole loans out of side of the scarization that we

685
00:37:22,600 --> 00:37:25,520
Speaker 2: own to hear at Marathon, Second lean, first lane loans,

686
00:37:26,040 --> 00:37:32,319
Speaker 2: commercial real estate property, everything from parking lots to infrastructure

687
00:37:32,480 --> 00:37:35,360
Speaker 2: we've done here at Marathon and it all fits into

688
00:37:35,840 --> 00:37:39,799
Speaker 2: the rainbow, this beautiful mosaic of ASCID based lending. And

689
00:37:39,840 --> 00:37:43,080
Speaker 2: we have a teams of teams approach because each team

690
00:37:43,160 --> 00:37:46,040
Speaker 2: is dedicated this year. Team's different from the RESI team,

691
00:37:46,040 --> 00:37:49,719
Speaker 2: it's different from the aviation team, different from the maritime team,

692
00:37:50,000 --> 00:37:53,320
Speaker 2: different from those that are doing you know against plant equipment,

693
00:37:53,360 --> 00:37:55,760
Speaker 2: whether it's a crane in the sky or farm equipment

694
00:37:55,800 --> 00:37:58,640
Speaker 2: or forklifts, or whether it's all the loans are all

695
00:37:58,680 --> 00:38:02,840
Speaker 2: different teams rolling up into ABL program here at Marathon.

696
00:38:02,880 --> 00:38:07,400
Speaker 2: So I love ABL and mark my words, it's a forecast.

697
00:38:07,440 --> 00:38:10,240
Speaker 2: So who knows that the one.

698
00:38:10,120 --> 00:38:11,480
Speaker 3: Hundred billion dollar.

699
00:38:12,680 --> 00:38:16,200
Speaker 2: Middle market lending and private credit lending business in OA,

700
00:38:16,520 --> 00:38:19,160
Speaker 2: which grew to one point seven trillion dollars where it

701
00:38:19,239 --> 00:38:24,000
Speaker 2: is today seventeen fold increase, you'll see the same thing

702
00:38:24,080 --> 00:38:26,560
Speaker 2: happening in ABL in this next decade.

703
00:38:27,200 --> 00:38:30,480
Speaker 5: Wow, it's pretty amazing. I think one thing, you know,

704
00:38:30,520 --> 00:38:32,320
Speaker 5: we're in New York. One thing we didn't talk about

705
00:38:32,440 --> 00:38:36,000
Speaker 5: is uh multifamily and you know an NYCB has been

706
00:38:36,200 --> 00:38:38,000
Speaker 5: pretty volatile over the past couple of weeks, so though

707
00:38:38,040 --> 00:38:41,400
Speaker 5: we've had a little mini bailout, what are your thoughts

708
00:38:41,400 --> 00:38:45,239
Speaker 5: on that sector? Bruce, multifamily and and and maybe rent regulated?

709
00:38:46,160 --> 00:38:47,840
Speaker 5: Do you see risk in there or is it just

710
00:38:48,360 --> 00:38:50,680
Speaker 5: kind of one off specific for NYCB.

711
00:38:51,880 --> 00:38:55,120
Speaker 2: You know, I don't want to talk politics. I host

712
00:38:55,160 --> 00:38:57,920
Speaker 2: it as far away as politics possible, But you know,

713
00:38:58,000 --> 00:39:02,200
Speaker 2: rent controlled and got bust people that you know, you

714
00:39:02,200 --> 00:39:06,840
Speaker 2: know reside in all these properties but rent controls a

715
00:39:06,880 --> 00:39:10,440
Speaker 2: problem for you know, investor. When the city comes and

716
00:39:11,000 --> 00:39:13,759
Speaker 2: any city, New York City particularly when any city comes

717
00:39:13,840 --> 00:39:17,120
Speaker 2: and says you can't raise rates rents, then what do

718
00:39:17,120 --> 00:39:19,080
Speaker 2: you think that's sponsor's going to do. They're gonna put

719
00:39:19,080 --> 00:39:21,200
Speaker 2: any money in the property to improve it, They're going

720
00:39:21,239 --> 00:39:24,280
Speaker 2: to try to maintain it. And their model, their financial

721
00:39:24,280 --> 00:39:27,160
Speaker 2: model is based upon raising rates, and they have a

722
00:39:27,160 --> 00:39:30,960
Speaker 2: lot of extra costs to maintain it, including financing costs.

723
00:39:31,040 --> 00:39:33,160
Speaker 2: So it puts them upside down. So it's a real

724
00:39:33,280 --> 00:39:37,000
Speaker 2: problem for you know, banks that have leaned into and

725
00:39:37,080 --> 00:39:41,320
Speaker 2: lenders that leaned into rent control, rents stabilized, and I

726
00:39:41,360 --> 00:39:45,080
Speaker 2: wouldn't touch that sector as a result, wouldn't touch it

727
00:39:46,200 --> 00:39:49,040
Speaker 2: as a lender because I think it's a very difficult

728
00:39:49,040 --> 00:39:53,719
Speaker 2: loan to make. And you know, in terms of multi family, no,

729
00:39:53,760 --> 00:39:56,600
Speaker 2: you got to love multifamily. You know, it's a it's

730
00:39:56,600 --> 00:39:59,759
Speaker 2: a beautiful thing. Talk about home, you know, homes themselves.

731
00:40:00,040 --> 00:40:00,200
Speaker 3: You know.

732
00:40:00,239 --> 00:40:03,160
Speaker 2: The simple factor matter is home prices over the last

733
00:40:03,200 --> 00:40:06,600
Speaker 2: three years have increased twenty five percent nationally.

734
00:40:06,920 --> 00:40:08,000
Speaker 3: It's a huge run up.

735
00:40:08,120 --> 00:40:10,279
Speaker 2: That run up is bigger than the run up leading

736
00:40:10,280 --> 00:40:13,719
Speaker 2: into the housing crisis in a way the price appreciation

737
00:40:13,800 --> 00:40:18,880
Speaker 2: that we've seen among homeowners, and so with that, financing

738
00:40:18,960 --> 00:40:21,960
Speaker 2: rates have gone up. And because financing rates have gone up,

739
00:40:22,520 --> 00:40:25,239
Speaker 2: the price to own a home now with your rent

740
00:40:25,400 --> 00:40:28,600
Speaker 2: and that price increase is now eighty percent higher than

741
00:40:28,640 --> 00:40:32,680
Speaker 2: it was three years ago. That is remarkable, and it's

742
00:40:32,719 --> 00:40:39,200
Speaker 2: the highest point to own relative to rent. So I

743
00:40:39,400 --> 00:40:42,120
Speaker 2: love as much as OER as much as that's keeping

744
00:40:42,400 --> 00:40:45,799
Speaker 2: a firm based under CPI, as much of rent roles

745
00:40:45,840 --> 00:40:49,759
Speaker 2: have increased. For a multifamily, it is the cheapest it's

746
00:40:49,880 --> 00:40:53,080
Speaker 2: been that I've ever seen it in tracking. It decades,

747
00:40:53,760 --> 00:40:56,440
Speaker 2: the price to rent versus the price to own.

748
00:40:56,880 --> 00:40:59,280
Speaker 1: I just wanted to follow up on where we started

749
00:40:59,280 --> 00:41:03,560
Speaker 1: the conversation. Banks are going to take losses, and you

750
00:41:03,600 --> 00:41:06,160
Speaker 1: know some are going to disappear potentially, given that you

751
00:41:06,160 --> 00:41:09,319
Speaker 1: think there are too many, what impact does that have

752
00:41:09,440 --> 00:41:12,680
Speaker 1: more broadly on financial markets and the economy. I'm surely

753
00:41:12,719 --> 00:41:14,200
Speaker 1: it's not going to just be contained.

754
00:41:14,560 --> 00:41:17,000
Speaker 3: I think the banks are safe. I think the banks

755
00:41:17,040 --> 00:41:17,560
Speaker 3: are safe.

756
00:41:17,680 --> 00:41:24,560
Speaker 2: I think that the biggest opportunity will be in commercial

757
00:41:24,560 --> 00:41:29,719
Speaker 2: real estate, followed by filling in any void that the

758
00:41:29,800 --> 00:41:33,800
Speaker 2: banks are going to dial back during Basel three endgame,

759
00:41:34,080 --> 00:41:39,080
Speaker 2: which is to be a lender in abl and also

760
00:41:40,560 --> 00:41:47,280
Speaker 2: to play the SRT and asset acquisition game, and that's

761
00:41:48,000 --> 00:41:49,920
Speaker 2: a big part of our playbook. I think there's a

762
00:41:49,960 --> 00:41:54,680
Speaker 2: big opportunity in credit, in liquid credit markets. We run

763
00:41:54,719 --> 00:41:57,640
Speaker 2: a program called MATS, which is a multi asset credit

764
00:41:57,719 --> 00:42:02,360
Speaker 2: strategies and it's across you know, the structured credit world

765
00:42:02,400 --> 00:42:05,640
Speaker 2: em but high yield and leverage loans and its multi

766
00:42:05,640 --> 00:42:09,600
Speaker 2: strategy approach to what is eleven trillion dollar market credit.

767
00:42:10,239 --> 00:42:14,400
Speaker 2: The private credit markets are big, and they're going to

768
00:42:14,440 --> 00:42:17,160
Speaker 2: get bigger and bigger and bigger because the bank's pulling back.

769
00:42:17,719 --> 00:42:21,640
Speaker 2: And although ninety five percent of the corporate credits are

770
00:42:21,719 --> 00:42:24,840
Speaker 2: fine in terms of credit, there's the other five percent

771
00:42:25,040 --> 00:42:28,799
Speaker 2: that needs capital solutions that results in distressed and dislocation.

772
00:42:29,320 --> 00:42:31,960
Speaker 2: But the end of the day, the banking system is solid,

773
00:42:32,160 --> 00:42:35,600
Speaker 2: both in Europe and the US. Not so much in China,

774
00:42:35,920 --> 00:42:39,560
Speaker 2: but in the US and Europe, and so I'm not

775
00:42:39,640 --> 00:42:43,719
Speaker 2: concerned at all about banking. And the most impressive thing

776
00:42:43,719 --> 00:42:46,680
Speaker 2: about this cycle is to fed to raise rates five

777
00:42:46,800 --> 00:42:49,040
Speaker 2: hundred and twenty five piece points, keep it there for

778
00:42:49,080 --> 00:42:53,240
Speaker 2: an extended period of time, and the cracks are actually

779
00:42:53,400 --> 00:42:57,640
Speaker 2: rather minuscule. It tells you how robust the financial system is.

780
00:42:58,120 --> 00:43:00,080
Speaker 2: It's not only because of the strength of the bank

781
00:43:00,360 --> 00:43:02,879
Speaker 2: thanks to Buzzle three and all the regulations and what's

782
00:43:02,920 --> 00:43:06,799
Speaker 2: coming next for Buzzle three endgame, but it's also due

783
00:43:06,840 --> 00:43:10,720
Speaker 2: to the robustness of capital among the private credit lending

784
00:43:10,760 --> 00:43:13,880
Speaker 2: community and the financial markets.

785
00:43:13,920 --> 00:43:15,160
Speaker 3: It's really impressive to see.

786
00:43:15,320 --> 00:43:17,239
Speaker 1: And the last question, Bruce, I know out of time,

787
00:43:17,280 --> 00:43:19,239
Speaker 1: but you've been doing this a long time. As you say,

788
00:43:19,560 --> 00:43:21,520
Speaker 1: when have you last seen such a great opportunity? You

789
00:43:21,560 --> 00:43:22,920
Speaker 1: sound so bullish.

790
00:43:23,000 --> 00:43:25,879
Speaker 2: Well, it's the Goalden there of credit. Right rates are

791
00:43:25,920 --> 00:43:28,080
Speaker 2: five hundred and twenty five basis points. We haven't seen

792
00:43:28,120 --> 00:43:30,120
Speaker 2: this in a generation. So you have to go back

793
00:43:30,120 --> 00:43:32,600
Speaker 2: to earlier in my career when you saw rates as

794
00:43:32,640 --> 00:43:33,359
Speaker 2: high as they are.

795
00:43:33,719 --> 00:43:34,120
Speaker 3: Number one.

796
00:43:34,200 --> 00:43:36,960
Speaker 2: Number two, you've never seen the credit markets as large

797
00:43:36,960 --> 00:43:39,680
Speaker 2: as they are now. Equity market globally it's over one

798
00:43:39,760 --> 00:43:44,000
Speaker 2: hundred trillion of fixed income and credit market globally of

799
00:43:44,080 --> 00:43:47,560
Speaker 2: over one hundred trillion, and we have eleven trillion dollars

800
00:43:47,760 --> 00:43:51,120
Speaker 2: here at Marathon of credit of the credit market that

801
00:43:51,160 --> 00:43:53,440
Speaker 2: we invest in, and so it's a big market at

802
00:43:53,480 --> 00:43:56,320
Speaker 2: the highest rates that you know we've seen.

803
00:43:56,120 --> 00:43:59,760
Speaker 3: In a generation. And meanwhile, the comm is going well.

804
00:44:00,040 --> 00:44:03,760
Speaker 2: Earners have popped back up, and so the earnings recessions

805
00:44:03,840 --> 00:44:05,880
Speaker 2: over equi markets are trading all time highs.

806
00:44:06,120 --> 00:44:07,359
Speaker 3: But when you talk about.

807
00:44:07,040 --> 00:44:11,240
Speaker 2: Our clients, the LPs, we invest money for the pension plans,

808
00:44:11,360 --> 00:44:15,200
Speaker 2: the ariski plans, the sid wealth funds and downments foundations,

809
00:44:15,200 --> 00:44:19,520
Speaker 2: insurance companies, the consultants that advise them, these wealth platforms,

810
00:44:20,000 --> 00:44:23,600
Speaker 2: and the bank private banks and so forth. Look, they

811
00:44:23,600 --> 00:44:27,200
Speaker 2: can invest in the credit markets and along the credit

812
00:44:27,239 --> 00:44:29,759
Speaker 2: curve and liquid credit and get an eight to nine

813
00:44:29,800 --> 00:44:35,120
Speaker 2: percent yield that's magnificent. And in private credit add three

814
00:44:35,160 --> 00:44:39,160
Speaker 2: hundred basis points to that double digit returns. And so

815
00:44:39,200 --> 00:44:42,879
Speaker 2: when you have liability management, you're managing against and your

816
00:44:42,920 --> 00:44:46,000
Speaker 2: actoral return requirements like a six percent return. And if

817
00:44:46,040 --> 00:44:48,200
Speaker 2: you do this in credit, a lot of folks that

818
00:44:48,280 --> 00:44:51,520
Speaker 2: come to conclusion, why do we need the equity risk

819
00:44:52,160 --> 00:44:56,880
Speaker 2: and so well, let me better balance. Finally, because the

820
00:44:57,000 --> 00:45:00,600
Speaker 2: financial repression is over, the zup environment, it is over,

821
00:45:00,880 --> 00:45:04,040
Speaker 2: and rachel returns are rather healthy in credit. Let me

822
00:45:04,080 --> 00:45:07,200
Speaker 2: now better balance my portfolio. And that's what we're doing

823
00:45:07,200 --> 00:45:10,560
Speaker 2: with our clients. That's why We're so jazzed, you know,

824
00:45:10,760 --> 00:45:14,400
Speaker 2: and when you have an error like this the golden

825
00:45:14,400 --> 00:45:17,239
Speaker 2: era of credit, it's just our sweet spot for what

826
00:45:17,239 --> 00:45:18,320
Speaker 2: we do for our clients.

827
00:45:18,360 --> 00:45:21,520
Speaker 1: Great stuff. Bruce Richards, Chairman and CEO of Marathon Asset Management.

828
00:45:21,520 --> 00:45:22,960
Speaker 1: Great to have you on the Credit Edge. Please come

829
00:45:23,000 --> 00:45:23,680
Speaker 1: back again soon.

830
00:45:24,360 --> 00:45:26,680
Speaker 3: Thank you, James, thank you Arnold, and thank you Lisa.

831
00:45:27,400 --> 00:45:29,280
Speaker 1: Also want to say big thanks to Lisa leaving Bloomberg

832
00:45:29,360 --> 00:45:31,719
Speaker 1: News in London. Brilliant to see you again, cheers. And

833
00:45:31,880 --> 00:45:34,560
Speaker 1: to Arnold Kakuda with Bloomberg Intelligence, thank you so much

834
00:45:34,560 --> 00:45:36,920
Speaker 1: for being here. Read all of Ronold's brilliant analysis on

835
00:45:36,920 --> 00:45:39,800
Speaker 1: the Bloomberg Terminal. It's really great. Check it out. Please

836
00:45:39,800 --> 00:45:42,080
Speaker 1: do subscribe wherever you get your podcasts. We're on Apple,

837
00:45:42,160 --> 00:45:45,600
Speaker 1: Spotify and all good podcast providers, including the Bloomberg Terminal.

838
00:45:45,920 --> 00:45:47,960
Speaker 1: Give us a review, tell your friends, or email me

839
00:45:48,040 --> 00:45:53,080
Speaker 1: directly at Jcrumby eight at Bloomberg dot net. I'm James Cromby.

840
00:45:53,120 --> 00:45:55,080
Speaker 1: It's been a pleasure having you join us again next

841
00:45:55,120 --> 00:46:12,879
Speaker 1: week on the Credit Edge.