WEBVTT - Marathon’s Richards Predicts Asset-Based Lending Boom 0:00:18.360 --> 0:00:21.080 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:21.360 --> 0:00:23.840 My name is James Crumby. I'm a senior editor at Bloomberg. 0:00:24.320 --> 0:00:27.160 This week, we're very pleased to welcome Bruce Richards, chairman 0:00:27.200 --> 0:00:30.400 and CEO of Marathon Asset Management, a twenty three billion 0:00:30.440 --> 0:00:31.800 dollar asset manager. 0:00:32.440 --> 0:00:34.240 How are you, Bruce, I'm doing well. 0:00:34.640 --> 0:00:36.199 Hello, James, Thank. 0:00:36.000 --> 0:00:37.520 You so much for joining us today. We're really looking 0:00:37.520 --> 0:00:40.520 forward to getting your take on credit markets and real estate. 0:00:40.840 --> 0:00:44.000 Also delighted to see Bloomberg's very own Lisa Lee covering 0:00:44.000 --> 0:00:46.280 credit markets from London. How's it going, Lisa. 0:00:46.400 --> 0:00:47.839 Going well here? Thank you so much. 0:00:47.920 --> 0:00:52.240 James, and our banks guru, Arnold Kakuda with Bloomberg Intelligence, 0:00:52.320 --> 0:00:55.000 also here in the studio in New York. How's it going, Arnold? 0:00:55.280 --> 0:00:56.640 Awesome, excited to be here. 0:00:57.280 --> 0:00:59.080 So let's start with you, Bruce. It's great to have 0:00:59.120 --> 0:01:01.600 you on the Credit Edge. You're a real estate bear, 0:01:01.880 --> 0:01:03.880 particularly when it comes to offices and all the debt 0:01:03.920 --> 0:01:07.119 that's outstanding. There's almost a trillion dollars of commercial real 0:01:07.200 --> 0:01:10.319 estate loans coming due this year and banks are mostly 0:01:10.360 --> 0:01:12.160 on the hook. They hold a lot of those loans. 0:01:12.600 --> 0:01:15.800 But recently we've heard FED Chair j Powell and Treasury 0:01:15.840 --> 0:01:19.120 Secretary Janet Yellen talking about commercial real estate risks, as 0:01:19.160 --> 0:01:22.240 well as executives at regional banks and analysts. They're all 0:01:22.319 --> 0:01:25.520 using the word manageable. It's going to be okay. What 0:01:25.560 --> 0:01:27.880 do you make of that, Bruce? Are they protesting too much? 0:01:27.959 --> 0:01:28.600 What's your take? 0:01:29.319 --> 0:01:31.959 Well, that's a big subject, Tom, I think it is 0:01:32.000 --> 0:01:34.840 going to be okay. Christianity Jan's drawing the line in 0:01:34.880 --> 0:01:38.640 the sand, and she said she's the facto made a 0:01:38.640 --> 0:01:42.640 statement after March of last year that no deposit will 0:01:42.720 --> 0:01:45.800 lose a penny, and indeed, no deposit will lose a penny. 0:01:46.120 --> 0:01:48.200 So the big banks have never been safer than what 0:01:48.240 --> 0:01:50.960 they are today. I'm talking about the Big four and 0:01:51.080 --> 0:01:54.360 also the largest banks here in the United States. But 0:01:54.960 --> 0:01:58.040 as you know, there is more to it than that. 0:01:58.160 --> 0:02:01.920 And so when you peel back the Onion City, well 0:02:02.000 --> 0:02:04.360 you see that the bigger banks have about ten percent 0:02:04.360 --> 0:02:09.600 exposure of commercial real estate, and the smaller banks and 0:02:09.639 --> 0:02:13.440 the regional size banks have an average about forty percent 0:02:13.520 --> 0:02:17.640 exposure to commercial real estate. That is a huge number 0:02:18.000 --> 0:02:20.960 relative to their capital base. So let me point out 0:02:20.960 --> 0:02:24.760 a few things. Number one is Bosle three endgame, or 0:02:24.840 --> 0:02:26.800 what we call in other parts of the world Basil 0:02:26.919 --> 0:02:29.880 four is going to start next summer, and they're not 0:02:29.880 --> 0:02:30.520 going to push. 0:02:30.320 --> 0:02:31.359 Out the data. I don't believe. 0:02:31.440 --> 0:02:35.639 And despite pal in his most recent statements having softened 0:02:35.720 --> 0:02:40.239 up a stance and opened up the door to potentially 0:02:40.280 --> 0:02:43.679 a little less capital requirement that might take you from 0:02:43.880 --> 0:02:48.200 sixteen to twenty percent capital race increases down to round 0:02:48.560 --> 0:02:50.480 ten to fifteen percent, but it's not going to push 0:02:50.560 --> 0:02:52.320 up to date and it's not going to negate the 0:02:52.360 --> 0:02:54.840 fact that you'll need more capital against risk assets. 0:02:54.880 --> 0:02:58.760 That's number one. And with that, banks. 0:02:58.520 --> 0:03:04.079 Will look to a do asset sales b uh DE 0:03:04.280 --> 0:03:09.120 risk by raising more CT court tier one equity capital 0:03:09.600 --> 0:03:12.840 that's both in the form of long debt as well 0:03:12.840 --> 0:03:16.040 as equity, but mostly in the form of retained earnings 0:03:16.160 --> 0:03:20.120 to build that base, and they'll probably just lend a 0:03:20.160 --> 0:03:23.440 little less and a little bit more selectively at more 0:03:24.639 --> 0:03:27.239 conservative attachment points in terms of where the lt V 0:03:27.360 --> 0:03:28.200 lending points are. 0:03:28.639 --> 0:03:31.720 So what we're seeing as result is a lot of 0:03:31.760 --> 0:03:35.960 these SRT transactions and CRT Transactionally. Sr T is the 0:03:36.080 --> 0:03:39.680 significant risk transfer uh the credit risk transfers as well. 0:03:39.960 --> 0:03:43.840 Where banks are transferring their first loss or mezzanine trances 0:03:44.000 --> 0:03:47.840 of their portfolio of loans to buyers like Marathon. And 0:03:47.880 --> 0:03:50.960 so we've been very, very active dealing with the large 0:03:51.080 --> 0:03:53.880 savvy banks in Europe and the large banks in the 0:03:53.960 --> 0:03:58.960 United States and buying into these pools through CRT and 0:03:59.080 --> 0:03:59.400 s r T. 0:03:59.720 --> 0:04:03.760 You know, last year alone, the European banks did two 0:04:03.840 --> 0:04:07.360 hundred billion of worth of portfolios of credit risk transfers 0:04:07.440 --> 0:04:10.840 last year alone. And you know, in the September, you know, 0:04:10.880 --> 0:04:14.240 just a few months ago, the feveral Lyster statement that 0:04:14.640 --> 0:04:19.880 you talked about the SRT merits and complying with reg Q, 0:04:20.360 --> 0:04:22.400 they basically blested here in the States, and so the 0:04:22.480 --> 0:04:25.960 United States we've seen the banks really ramp up. And 0:04:26.000 --> 0:04:28.440 so with BOSEL three endgames that just set to start 0:04:28.520 --> 0:04:34.120 July next year, we believe that is a huge amount 0:04:35.000 --> 0:04:38.040 probably for US banks, you know, you know that did 0:04:38.080 --> 0:04:40.559 thirty five billion last year upwards of one hundred billion 0:04:40.560 --> 0:04:43.839 this year. And so I think, you know, we have 0:04:43.920 --> 0:04:47.720 all the tools in the toolbox to make the banks safe. 0:04:48.320 --> 0:04:50.920 First of all, again, the biggest banks are perfectly safe, 0:04:51.279 --> 0:04:54.200 but it's the smaller banks than that you now want 0:04:54.279 --> 0:04:57.600 to start to focus in on So in the United States, 0:04:57.680 --> 0:05:01.080 you know, we have four thousand, two hundred banks here 0:05:01.080 --> 0:05:03.640 in the United States, four two hundred. 0:05:03.880 --> 0:05:05.320 Just wrap your head around that for a second. 0:05:05.440 --> 0:05:07.159 So what do you have in Germany and France and 0:05:07.279 --> 0:05:10.719 UK and Korea and Japan and Canada one hundred to 0:05:10.760 --> 0:05:12.839 three hundred banks and we have four. 0:05:12.680 --> 0:05:13.520 Thousand, two hundred. 0:05:13.560 --> 0:05:16.120 You know, back in the nineteen eighties, before the SNL crisis, 0:05:16.279 --> 0:05:18.920 there was over fourteen thousand banks here in the United States, 0:05:19.560 --> 0:05:22.320 fourteen thousand, and we're down to four thousand, four hundred. 0:05:22.560 --> 0:05:25.840 So you obviously need you know, kind of the top four, 0:05:26.080 --> 0:05:28.400 but beyond the top four, or you can drill down 0:05:28.440 --> 0:05:31.080 to the top thirty, which are at the top thirty banks, 0:05:31.440 --> 0:05:33.720 there's an exact number who have one hundred billion assets 0:05:33.720 --> 0:05:36.480 for more. You obviously don't need those banks to be 0:05:36.520 --> 0:05:39.880 strong and viable. But outside of that, do you need 0:05:40.040 --> 0:05:42.800 I don't know, twenty banks per state here in the 0:05:42.880 --> 0:05:45.680 United States, which is one thousand banks. 0:05:46.240 --> 0:05:49.080 So much information in that, and it's you know, that 0:05:49.279 --> 0:05:51.520 opened up so many questions. But first of all, on 0:05:51.560 --> 0:05:54.080 the banks you mentioned, there are a lot of banks, 0:05:54.720 --> 0:05:56.960 and maybe there are too many in the US. Do 0:05:57.040 --> 0:05:59.920 you expect bank failures as a result of this, commercial 0:06:00.200 --> 0:06:04.000 real estates, mess, trouble, whatever you want. 0:06:03.839 --> 0:06:04.240 To call it. 0:06:05.160 --> 0:06:07.159 And to what level does it go? Is it just 0:06:07.240 --> 0:06:10.559 very small regional banks, is it like savings and loans, 0:06:10.600 --> 0:06:13.680 or does it rise to a level of a much 0:06:13.760 --> 0:06:14.640 larger institution. 0:06:15.680 --> 0:06:19.560 I think now that the deposits have been backstopped by 0:06:19.560 --> 0:06:21.720 the Treasury Secretary at the ELM, which I thought was 0:06:21.760 --> 0:06:22.440 a brilliant move. 0:06:22.480 --> 0:06:23.760 Sorry I applaud her for that. 0:06:24.400 --> 0:06:27.200 I think you're not going to have any run on deposits, 0:06:27.200 --> 0:06:29.599 So that takes a lot of risk off the table 0:06:29.880 --> 0:06:32.800 and panic off the table, and now it becomes just 0:06:32.839 --> 0:06:36.080 a matter of are you solvent or are you not solvent? 0:06:36.560 --> 0:06:41.080 How many banks do I think are not solvent today? 0:06:41.360 --> 0:06:41.840 I don't know. 0:06:42.040 --> 0:06:46.640 My best guesstimate is around three hundred based upon and 0:06:46.680 --> 0:06:50.800 these are small regional banks. There's over four thousand of them, 0:06:51.640 --> 0:06:55.560 and I think anywhere around two to three hundred are 0:06:55.560 --> 0:06:58.080 not solvent today. And I think if the fault rates 0:06:58.080 --> 0:07:00.279 and commercial rows, they go up to ten percent, and 0:07:00.279 --> 0:07:02.800 they've currently you know, just increased from two percent where 0:07:02.800 --> 0:07:05.080 it was two years ago, actually less than two percent 0:07:05.320 --> 0:07:08.400 just two years ago. To over six percent today. But 0:07:08.480 --> 0:07:10.120 if they go to ten percent, which I think it 0:07:10.160 --> 0:07:11.880 will be what they get to, I think that number 0:07:12.000 --> 0:07:15.400 rises to four hundred. So what happens there, it's just 0:07:15.400 --> 0:07:18.800 simply a resolution. The bank just gets wound down. It 0:07:18.800 --> 0:07:22.320 won't be a panic, it'll just be FDIC comes in 0:07:22.400 --> 0:07:25.480 and you know, takes over, the bank, sells off their assets, 0:07:25.560 --> 0:07:29.040 transfers deposits, you move on. And so there's a lot 0:07:29.120 --> 0:07:31.480 of cleanup that the regulators have to do. 0:07:32.040 --> 0:07:32.760 They know that. 0:07:33.360 --> 0:07:35.920 And so in the you know, National Bureau of Economic 0:07:36.000 --> 0:07:39.040 Research working paper series it just came out on c 0:07:39.200 --> 0:07:42.840 e ORE and bank fragility, you know, it highlights this 0:07:43.000 --> 0:07:48.400 exact this exact point talking about the forty percent exposure 0:07:49.040 --> 0:07:51.800 that small and regional banks have to commercial real estate. 0:07:51.960 --> 0:07:54.120 So let's all about commercial real estate. I mean, you know, 0:07:55.720 --> 0:07:59.200 you know, delinquency rates are up and property values are down, 0:07:59.520 --> 0:08:03.000 and difically, when cap rates go up, you know, one 0:08:03.080 --> 0:08:06.760 hundred to one hundred and fifty basis points on a property, 0:08:06.880 --> 0:08:10.680 then the value can decline twenty five to thirty percent, 0:08:10.880 --> 0:08:13.640 and so all that extra you know, one hundred million 0:08:13.680 --> 0:08:17.080 dollar properties, seventy million dollars loan, you decline thirty percent, 0:08:17.280 --> 0:08:19.680 there's no equity left, and so there's a lot of 0:08:19.720 --> 0:08:22.520 that resolution to do. Taking the pick through the python 0:08:22.640 --> 0:08:25.040 is going to take some time in terms of working 0:08:25.040 --> 0:08:29.600 this all out. I think commercial real estate represents a 0:08:29.640 --> 0:08:32.520 lot of distress in the marketplace, but also one of 0:08:32.559 --> 0:08:36.679 the greatest opportunities in the marketplace right now. So as 0:08:36.720 --> 0:08:40.400 the banks pull back from because remember banks are fifty 0:08:40.480 --> 0:08:44.640 percent five zero fifty percent of all commercial real estate 0:08:44.720 --> 0:08:47.080 lending is five point six trillion dollars of commercial real 0:08:47.160 --> 0:08:49.720 estate loans here in the United States, and they're fifty 0:08:49.760 --> 0:08:50.520 percent of that book. 0:08:51.040 --> 0:08:55.320 And so why did the debt wall. 0:08:55.240 --> 0:08:58.079 The maturity debt wall just increase from five hundred and 0:08:58.160 --> 0:09:01.319 forty billion this year on commercial real estate loans to 0:09:01.440 --> 0:09:05.120 nine hundred billion Because all the loans coming due last year, 0:09:05.400 --> 0:09:08.080 very few of them paid off, most of them got 0:09:08.120 --> 0:09:12.800 extended into this year, and so it's extending pretend game 0:09:12.880 --> 0:09:14.840 going on right now, and a lot of that's going 0:09:14.840 --> 0:09:17.920 to get resolved, and as it gets resolved, losses are 0:09:17.960 --> 0:09:21.240 going to get pushed through to the system for both 0:09:21.280 --> 0:09:24.199 the lender as well as you know, as well as 0:09:24.200 --> 0:09:28.320 the prior owner. And so it's an opportunity for firms 0:09:28.360 --> 0:09:31.400 like Marathon to step up as banks exit commercial real 0:09:31.480 --> 0:09:34.080 estate lending and exit. When I say exit, not go 0:09:34.200 --> 0:09:37.000 from forty percent to zero, but go from forty percent 0:09:37.040 --> 0:09:40.400 to where they should be fifteen to twenty percent. That's 0:09:40.400 --> 0:09:43.120 where they should be. So that holds it, so that 0:09:43.160 --> 0:09:45.679 big void, we're going to step up and make these loans. 0:09:46.160 --> 0:09:50.400 And so the amount of the amount of capitalists needed 0:09:50.400 --> 0:09:53.160 from private crapal capital to solve. 0:09:52.960 --> 0:09:54.439 For this is enormous. 0:09:54.679 --> 0:09:56.840 And so we're getting paid really nice returns and I 0:09:56.880 --> 0:09:58.960 love it because it's at the current cap rates with 0:09:59.080 --> 0:10:03.160 the current cash flow, not at the bubble pricing periods 0:10:03.160 --> 0:10:03.600 that we had. 0:10:03.920 --> 0:10:07.600 I'm sorry, Lisa, Oh, yes, you mentioned the SRT and 0:10:07.640 --> 0:10:10.400 CRT some of these balance sheet movements that banks are 0:10:10.440 --> 0:10:13.959 doing to raise their capital. Are all of these sort 0:10:14.000 --> 0:10:16.559 of performing credits or is some of the distress stuff 0:10:16.559 --> 0:10:17.960 that you just mentioned right now? 0:10:18.240 --> 0:10:20.560 No, No, it would never at least it would never 0:10:20.640 --> 0:10:22.760 be distressed. It all has to be performing. If it's 0:10:22.760 --> 0:10:26.559 not performing, crystal clear clean like, none of us are 0:10:26.559 --> 0:10:29.000 going to touch it. So we're scrubbing these portfolios. You're 0:10:29.000 --> 0:10:31.120 talking about hundreds of loans to thousands loans that we're 0:10:31.160 --> 0:10:34.440 scrubbing through at a low level detail to make sure 0:10:34.520 --> 0:10:37.080 everything is performing going and you're talking about an average 0:10:37.080 --> 0:10:39.400 of a triple B credit going in and then triple 0:10:39.600 --> 0:10:42.120 triple B minus, so nothing is not performing. 0:10:42.240 --> 0:10:45.040 No, And then you said two hundred billion last year 0:10:45.080 --> 0:10:47.880 from Europe and then US banks are wrapping up. Given 0:10:47.920 --> 0:10:50.160 the size of the US market, where do you think 0:10:50.200 --> 0:10:53.319 the greater opportunity would be this year to continue from 0:10:53.360 --> 0:10:57.559 the europeans or where with the new US mandate twos 0:10:57.840 --> 0:10:59.880 to do these kind of deals. 0:11:00.120 --> 0:11:04.680 An equal opportunity employer, We love it and we love 0:11:04.800 --> 0:11:08.520 both markets. And so dealing with the top banks in 0:11:08.559 --> 0:11:12.439 Europe and dealing with the top banks in US, we 0:11:12.559 --> 0:11:16.040 have all those relationships. They're very very selective who they'll 0:11:16.080 --> 0:11:19.800 go to in you know, these transactions. It's you know, 0:11:19.920 --> 0:11:25.200 signing NDAs, is looking into portfolios and it's being there 0:11:25.480 --> 0:11:29.040 to a price risk appropriately and then take size. I'm 0:11:29.080 --> 0:11:32.120 talking about you know, one hundreds of millions per transaction. 0:11:32.320 --> 0:11:37.120 So it's you know a huge opportunity in Europe. 0:11:37.120 --> 0:11:39.720 Europe has been doing this for twenty plus years, the 0:11:39.840 --> 0:11:43.280 US hasn't. But now the FED has blessed the US 0:11:43.320 --> 0:11:48.840 banks to de risk knowing that the methodology and technology 0:11:49.320 --> 0:11:52.120 UH through these off balance sheet types of curizations and 0:11:52.240 --> 0:11:55.120 risk transfers has been well in trans in Europe, they've 0:11:55.120 --> 0:11:58.319 studied the model, they see the merits in it. As 0:11:58.360 --> 0:12:02.360 the US is just starting this out, so the US 0:12:02.400 --> 0:12:06.000 will converge to I think where Europe is and it 0:12:06.120 --> 0:12:09.120 being hundreds of billions on an annual basis, on a 0:12:09.200 --> 0:12:10.160 go forward basis. 0:12:11.200 --> 0:12:13.920 Great, thanks Bruce. Hey, this is Arnold Cokuda b I 0:12:14.000 --> 0:12:17.000 credit analyst covering banks, and you know, I agree with 0:12:17.040 --> 0:12:20.560 you in terms of these increased regulatory pressures moving some 0:12:20.640 --> 0:12:23.000 of the risk out of out of banks, right and 0:12:23.400 --> 0:12:25.880 let's call it into you know, the shadow bank system. 0:12:25.960 --> 0:12:28.959 So you know, Bruce, you talked about the opportunity there, 0:12:29.000 --> 0:12:30.880 but what do you think is the right amount of 0:12:31.080 --> 0:12:34.160 of you know, this this risk moving to the shadow 0:12:34.200 --> 0:12:36.720 banks and whatnot out of the banking system. You know, 0:12:36.760 --> 0:12:39.599 it's an opportunity for marathon, but but how much is 0:12:39.960 --> 0:12:40.440 too much? 0:12:41.600 --> 0:12:44.640 I view that, Thank you, Arnold, and nice to talk 0:12:44.640 --> 0:12:51.080 to you. I view that as a toolbox or playbook 0:12:51.120 --> 0:12:54.440 that they have. So to Lisa's prior question, when you 0:12:54.520 --> 0:12:58.560 have just trust situations that the banks involved in terms 0:12:58.600 --> 0:13:01.840 of loans built that results in an asset sales, so 0:13:01.880 --> 0:13:04.280 they'll sell those loans. So that's an outright it's not 0:13:04.320 --> 0:13:06.640 a risk transfer per se, it's just a loan sale. 0:13:06.679 --> 0:13:09.440 And so yes, we're involved in that, Lisa and Arnold. 0:13:10.040 --> 0:13:15.439 Second is in terms of these partnerships, these SRT CRT transfers, 0:13:16.720 --> 0:13:18.880 I think kind of the pace that Europe has been running, 0:13:18.920 --> 0:13:21.640 because they're way ahead on this is probably the right 0:13:21.679 --> 0:13:25.000 pace for the Europe to continue running and the US 0:13:25.080 --> 0:13:27.240 to continue running. I don't think it goes up much 0:13:27.240 --> 0:13:29.000 from there. I just think it goes up a lot 0:13:29.040 --> 0:13:31.800 for the US from where it was. And Europe is 0:13:31.880 --> 0:13:34.880 kind of you know, steady Eddy, because they've had such 0:13:34.960 --> 0:13:37.760 an efficient frontier and how they've been managed this again 0:13:38.200 --> 0:13:41.280 for years and years and years to go back, you know, 0:13:41.320 --> 0:13:44.240 twenty years. And so I'll give you an example, so 0:13:44.320 --> 0:13:46.800 you take it. You know, uh, you know, three hundred 0:13:46.920 --> 0:13:49.559 corporate loans are ready to triple B minus and you 0:13:49.600 --> 0:13:51.920 can do this of course with other types of loans. 0:13:52.000 --> 0:13:55.920 Were taking commercial corporate loans in this case, and the 0:13:55.960 --> 0:13:59.160 banks you know, want to keep their relationships right because 0:13:59.200 --> 0:14:02.560 these are important relationships and so although those transfer the 0:14:02.559 --> 0:14:03.680 first cure of risk. 0:14:04.040 --> 0:14:05.920 You know, these relationships for the banks. 0:14:05.600 --> 0:14:08.880 For their clients are important account management, you know, term loans, 0:14:09.120 --> 0:14:15.120 credit facilities, cast management, FX, trade for the investment, banking services, custody, 0:14:15.400 --> 0:14:18.080 payment solutions. There is so much the banks do and 0:14:18.120 --> 0:14:20.760 the bank will never exit. That is the core of 0:14:20.800 --> 0:14:24.239 what they do. But they don't want, given the capital constraints, 0:14:24.560 --> 0:14:27.280 this extra layer of risk. And so how do we 0:14:27.400 --> 0:14:31.880 de risk given the capital charges that the regulators are 0:14:31.920 --> 0:14:34.280 going to impose for that extra layer of risk for 0:14:34.600 --> 0:14:39.440 keeping some of these risk assets or you know non 0:14:39.480 --> 0:14:44.000 government and non agency and you know lower investment greater 0:14:44.080 --> 0:14:46.960 or non investment great risk. So how they do that is, 0:14:47.200 --> 0:14:49.720 let's say they sell to US zero to ten percent 0:14:50.560 --> 0:14:55.800 SRT trunch of the package of those three hundred let's 0:14:55.840 --> 0:15:00.000 say corporate you know loans, they're both funded and unfunded, 0:15:00.440 --> 0:15:03.000 including the revolvers and the loans. So they transferred that 0:15:03.040 --> 0:15:06.240 to us, and you know, it reduces their risk waiting 0:15:06.320 --> 0:15:10.280 from something like x amount to like zero point two 0:15:10.440 --> 0:15:12.840 x amount. It'll go down by like seventy five eighty 0:15:12.920 --> 0:15:17.680 percent reduction of capital by just selling that Tronshof and 0:15:17.760 --> 0:15:22.360 so allows them the banks to originate to continue to 0:15:22.400 --> 0:15:27.120 service their clients, but really arbitrage the capital requirements for 0:15:27.160 --> 0:15:30.880 the lower tier risk as firms like US come in 0:15:31.360 --> 0:15:35.160 to provide that capital. So it's a beautiful marriage of 0:15:35.600 --> 0:15:40.600 you know where banks and you know private credit partner 0:15:41.280 --> 0:15:45.520 and again there's other partnership arrangements, you know, portfolio sales, 0:15:46.880 --> 0:15:50.000 you know them providing the bank providing the senior will 0:15:50.040 --> 0:15:54.120 provide them as on that capital solution as their borrower 0:15:54.320 --> 0:15:57.200 on the commercial real estate loan wants to roll, but 0:15:57.360 --> 0:15:59.840 they want to roll at a more conservative LTV, so 0:16:00.120 --> 0:16:03.160 plug that gap. So there's all kinds of ways that 0:16:03.200 --> 0:16:06.120 we work together us in the banks, and and and 0:16:06.200 --> 0:16:09.520 what you also see is banks also wanting back into 0:16:09.560 --> 0:16:13.480 private credit and striking up partnership agreements with the investment 0:16:13.520 --> 0:16:17.800 managers that do credit to form partnerships to run a 0:16:17.840 --> 0:16:20.640 program together. So it's also something you're starting to see. 0:16:20.760 --> 0:16:24.120 So it's really interesting to see, you know, how the 0:16:24.160 --> 0:16:28.240 banks and private finance are now converging to a degree. 0:16:28.120 --> 0:16:31.120 So pretty interesting on that front. But to go more 0:16:31.160 --> 0:16:34.240 specifically in terms of you know, the increased opportunity in 0:16:34.440 --> 0:16:38.080 US uh, you know, synthetic risk transfers. Do you feel like, 0:16:38.480 --> 0:16:40.360 you know, we have the regional banks that need to 0:16:40.680 --> 0:16:44.760 you know, raise their capital levels right incorporating their unrealized losses, 0:16:45.080 --> 0:16:48.320 and then the potential and capital requirement increases for the 0:16:48.360 --> 0:16:50.720 biggest banks you know going forward. So where do you 0:16:50.760 --> 0:16:52.880 see the you know, bigger opportunities going forward. Is it 0:16:52.880 --> 0:16:54.680 more with the regional banks or some of these you 0:16:54.720 --> 0:16:57.920 know bigger JP Morgans in BA as well. 0:16:58.000 --> 0:17:01.160 Not to mention bank specifically by name, but I think 0:17:02.680 --> 0:17:04.399 you know here in the United States, it's four thy 0:17:04.520 --> 0:17:10.679 two hundred banks that are in existence, and there's thirty 0:17:10.720 --> 0:17:13.200 that's exact number that if you want to drill down 0:17:13.720 --> 0:17:15.960 and look at the total number of assets that they 0:17:15.960 --> 0:17:19.000 have in their balance sheet, there's thirty with one hundred 0:17:19.040 --> 0:17:22.800 billion or more. And so kind of the target list 0:17:22.960 --> 0:17:25.600 for US is really the top and we go a 0:17:25.640 --> 0:17:28.440 little bit below that the top fifty banks in this country. 0:17:28.880 --> 0:17:32.280 What's really critical is credit risk. We don't want to 0:17:32.280 --> 0:17:35.640 have counterparty credit risk with the institution itself, and so 0:17:35.960 --> 0:17:38.840 it have to be a super safe, you know bank 0:17:39.320 --> 0:17:47.000 that is a super regional slash megabank for US to 0:17:47.040 --> 0:17:50.360 do an SRT transaction with if that helps answer your question, 0:17:50.480 --> 0:17:53.720 give you clarity. So it won't be with like the 0:17:53.760 --> 0:17:58.119 next four thousand right now there, when we deal with 0:17:58.160 --> 0:18:00.600 that next four thousand, will buy loans from them, will 0:18:00.640 --> 0:18:03.200 be partners with them. If you know, you know they'll 0:18:03.200 --> 0:18:05.520 do the first out, we'll do this second. You know, 0:18:05.920 --> 0:18:08.480 there's different things we can do together with the banks, 0:18:08.680 --> 0:18:11.240 the partner up to help them think about the risking, 0:18:11.280 --> 0:18:12.880 but not through a national team transaction. 0:18:13.520 --> 0:18:17.360 So in general, Bruce, the opportunity from this commercial real 0:18:17.480 --> 0:18:20.359 estate mess. You're saying it's the greatest opportunity in the 0:18:20.359 --> 0:18:23.160 market right now, you're saying it needs a ton of capital. 0:18:23.720 --> 0:18:26.120 Can you talk a bit about how much capital. We've 0:18:26.119 --> 0:18:27.840 had other guests on this show talk about a trillion 0:18:27.880 --> 0:18:31.240 dollar opportunity in real estate right now. Can you talk 0:18:31.240 --> 0:18:33.760 about how you know what the magnitude of that opportunity 0:18:33.760 --> 0:18:35.800 is and also what are the returns? What are you 0:18:35.840 --> 0:18:37.760 buying these loans off the banks for? I mean, how 0:18:37.840 --> 0:18:38.960 much of a discount are you getting? 0:18:39.520 --> 0:18:42.119 Well, it's multi faster, so let me let me unpack 0:18:42.160 --> 0:18:45.280 it for you for just a second. So how big 0:18:45.320 --> 0:18:48.600 is the opportunity? You know, let's look at the biggest 0:18:48.640 --> 0:18:51.200 framework for commercial real state. And I'll focus on the 0:18:51.280 --> 0:18:54.159 United States for just now. But the biggest framework I'm 0:18:54.200 --> 0:18:57.600 looking commercial state is commercial state has their property value 0:18:58.119 --> 0:19:02.560 across this country, the commercial real estate side of around 0:19:02.600 --> 0:19:05.320 twenty two trillion. That's the number that we have, twenty 0:19:05.320 --> 0:19:09.600 two trillion. And of that twenty two trillion, eight trillion 0:19:10.240 --> 0:19:15.639 has debt on it, fourteen trillion doesn't. So that fourteen 0:19:15.640 --> 0:19:17.600 trillion is not a problem. Like you know, your Bloomberg 0:19:17.880 --> 0:19:21.120 go across town, you know, to your Bloomberg headquarters. 0:19:21.160 --> 0:19:23.479 Do they have a commercial real estate loan against their building? 0:19:23.960 --> 0:19:27.320 No. JP Morgan is building their new headquarter building on 0:19:27.320 --> 0:19:29.480 Park Avenue. Do they have commercial real estate loan against 0:19:29.480 --> 0:19:32.720 that building? Absolutely not. You'll do that at the corporate level. 0:19:32.920 --> 0:19:35.160 You'll have, you know, debt, maybe a corporate level. JP 0:19:35.240 --> 0:19:37.159 Morgan have debt at the corporate level, but they're not 0:19:37.200 --> 0:19:39.879 going to finance the property per se. A lot of 0:19:39.960 --> 0:19:44.000 property here is simply not financed. Some of the biggest 0:19:44.000 --> 0:19:46.760 properties just simply not finance. Is financed at the corporate 0:19:46.840 --> 0:19:51.040 level and through whole code debt are not through a 0:19:51.080 --> 0:19:55.400 real estate loan. So of the five point six trillion 0:19:55.520 --> 0:20:00.159 dollars of debt that's there, you know, outstanding here in 0:20:00.160 --> 0:20:03.440 the United States, that's probably around I don't know, eight 0:20:03.480 --> 0:20:07.040 trillion dollars of property value. That's where the problem is 0:20:07.359 --> 0:20:09.080 and that's where the opportunity is. 0:20:09.400 --> 0:20:09.640 Now. 0:20:09.760 --> 0:20:13.920 Of that five point six trillion of debt, how much 0:20:13.960 --> 0:20:17.320 will be a problem in terms of extending and mending, 0:20:17.720 --> 0:20:22.760 you know, potentially being restructured or default. The number could 0:20:22.760 --> 0:20:24.879 be as high as a trillion. I don't think that's 0:20:24.920 --> 0:20:28.560 an exaggeration. I think that's actually a healthy number. Is 0:20:28.600 --> 0:20:32.560 a trillion where it's gonna have to be recapitalized or 0:20:32.880 --> 0:20:34.199 you're gonna be flipping the keys. 0:20:35.720 --> 0:20:37.960 You know, it's gonna have to get restructured somehow. 0:20:38.440 --> 0:20:42.160 It's about a trillion unless if and it's wishful thinking 0:20:42.160 --> 0:20:44.480 that a lot of commercial estate players have. Unless if 0:20:44.680 --> 0:20:47.680 the FED brings rates down really really quickly and commercial 0:20:47.880 --> 0:20:50.360 estate pops a lot and a lot of capital there 0:20:50.440 --> 0:20:53.280 is available to But we think the numbers up to 0:20:53.320 --> 0:20:55.000 a trillion, so. 0:20:55.960 --> 0:20:58.280 Separate away from that. Of the five point. 0:20:58.000 --> 0:21:02.679 Six trillion two point six trillion, the biggest lender are 0:21:02.720 --> 0:21:07.200 the banks, and the rest of it is in different places. 0:21:07.520 --> 0:21:12.560 The second place that it's in is excuisation. So there's 0:21:12.680 --> 0:21:16.360 over a trillion dollars, like one point zero five trillion 0:21:17.200 --> 0:21:21.159 of commercial real estate loans that are insecure taste excurization today. 0:21:21.480 --> 0:21:25.440 So now your question is where do we see the opportunity. 0:21:25.600 --> 0:21:30.040 Where we see the opportunity is multifests Number one as 0:21:30.320 --> 0:21:34.280 one hundred million dollars. Property that has seventy million dollar 0:21:34.400 --> 0:21:36.879 loan and it's only worth one hundred million. It's no 0:21:37.160 --> 0:21:39.080 longer worth a hundred million. It's now worth seventy million. 0:21:39.080 --> 0:21:43.800 The property that loan. When that rolls, you're not gonna 0:21:43.800 --> 0:21:46.200 get seventy million dollar long because properly is worth seventy million. 0:21:46.240 --> 0:21:48.800 You're gonna get sixty percent LTV. This time around, you're 0:21:48.800 --> 0:21:51.680 gonna get forty two million dollars long. And so that 0:21:51.760 --> 0:21:54.440 gap between seventy million on the old loan and forty 0:21:54.440 --> 0:21:56.680 two million on the new LONGUS twenty eight million dollars gap. 0:21:56.680 --> 0:21:57.840 Who's coming up with that money? 0:21:58.560 --> 0:21:59.960 And so I had to come up with that money? 0:22:00.280 --> 0:22:02.400 Where is What kind of returns are we looking at here? 0:22:02.440 --> 0:22:04.800 You said, this is one of the best opportunities ever. 0:22:05.480 --> 0:22:08.240 I think the returns have have got to be preferred 0:22:08.240 --> 0:22:11.000 equity kind of returns, sweeping all the cash flow from 0:22:11.000 --> 0:22:15.959 the property and basically extracting control while keeping you know, 0:22:16.040 --> 0:22:20.240 the lender will keeping the equity owner in place. 0:22:20.359 --> 0:22:24.199 And so preferred equity we're thinking maybe definitely double digits, 0:22:24.280 --> 0:22:26.040 maybe even in the two handle. 0:22:25.840 --> 0:22:31.200 Like fifteen to low twenties. Is kind of like that range, 0:22:31.240 --> 0:22:34.080 depending upon the property, depend upon the situation. So that's 0:22:34.160 --> 0:22:39.560 number one. Number two is is, you know, let's say 0:22:39.600 --> 0:22:41.200 the borrower comes up with new money in the bank, 0:22:41.240 --> 0:22:45.479 won't roll you know, us extending that new loan and 0:22:45.520 --> 0:22:48.280 making a really nice return on that, and so being 0:22:48.280 --> 0:22:51.359 the lender, not of last resort, but being the lender 0:22:51.400 --> 0:22:53.040 because the banks are going to be pulling back at 0:22:53.119 --> 0:22:55.800 least a huge portion of the capital go for a basis, 0:22:56.000 --> 0:22:58.160 and so private capital has to step up for that. 0:22:59.560 --> 0:23:03.320 Number Number three, there is new development going on and 0:23:03.840 --> 0:23:07.240 new acquisitions and so being the you know, acquisition finance 0:23:08.119 --> 0:23:09.760 as well as all these refinancings. 0:23:10.440 --> 0:23:11.080 That's next. 0:23:12.320 --> 0:23:14.680 And what I also add is I think CMBs is 0:23:14.720 --> 0:23:19.280 one of the great opportunities because as loans go sideways 0:23:19.280 --> 0:23:23.880 within a deal, you know, there's going to be losses 0:23:23.960 --> 0:23:26.159 going to flow through to some of the junior classes, 0:23:26.560 --> 0:23:29.119 and for us to buy what we consider be above 0:23:29.160 --> 0:23:33.440 the fall from is an amazing opportunity. So the dislocated 0:23:33.560 --> 0:23:37.840 CNBS opportunity, which is liquid you know, T plus two securities. 0:23:38.200 --> 0:23:41.439 We model every single property in each one of the 0:23:41.480 --> 0:23:45.960 one thousand, five hundred and sixty different CMBs transactions. So 0:23:45.960 --> 0:23:50.440 you talk about like six tranches per securization, you're talking 0:23:50.440 --> 0:23:53.480 about like not was it nine three hundred? You know, 0:23:53.560 --> 0:23:58.160 securizations trunches that exist and just cmbas alone and figuring 0:23:58.200 --> 0:24:01.879 out what truants to buy. There's a lot of data 0:24:01.920 --> 0:24:05.520 science that goes with property analysis and cash flow analysis 0:24:05.680 --> 0:24:08.359 that we have modeled out here at Marathon. And what 0:24:08.440 --> 0:24:12.880 we do is we buy the tranche above the folk group. 0:24:13.160 --> 0:24:14.440 We don't want to have anything. 0:24:14.640 --> 0:24:16.640 Right now above the fulcrum, which. 0:24:17.040 --> 0:24:18.359 It could be the double B class, it could be 0:24:18.400 --> 0:24:20.080 the triple V class, would be the signal A class. 0:24:20.560 --> 0:24:23.840 It's not a generic answer to that because it's a 0:24:23.880 --> 0:24:27.120 function of the loan collateral and how the classes were 0:24:27.160 --> 0:24:31.760 cut in terms of the thickness of the securization and so, 0:24:32.000 --> 0:24:33.520 but we're we the. 0:24:33.480 --> 0:24:35.879 Mes level, right, You're thinking in the mes level, well, 0:24:35.880 --> 0:24:36.800 would be triple A and. 0:24:36.800 --> 0:24:39.560 Double as in places. Yes, so it's be somewhere between 0:24:39.600 --> 0:24:41.399 single a's and double b's and. 0:24:41.840 --> 0:24:45.200 And and for that we expect to make a mid 0:24:45.240 --> 0:24:48.239 to upper teams I R R on T plus two 0:24:48.320 --> 0:24:51.640 securities over a multi year holding period. So you're talking 0:24:51.640 --> 0:24:56.399 about like really nice multiple on your money, and it's 0:24:56.480 --> 0:24:59.480 you know, very very specific. It's you know, we have 0:24:59.560 --> 0:25:02.600 our you know, night vision goggles on and we're looking 0:25:02.640 --> 0:25:05.040 for that you know, needle in the haystack by buying 0:25:05.040 --> 0:25:09.080 those tranches off of you know, a very big securitization marketplace, 0:25:09.440 --> 0:25:13.960 knowing full well the information the property, the cash flow, 0:25:14.880 --> 0:25:17.760 the cuts on the train, on the transaction, and where 0:25:17.800 --> 0:25:20.320 the falcon is going to lie based upon how the 0:25:20.359 --> 0:25:22.680 workout is going to flow through in terms of loss 0:25:22.720 --> 0:25:23.760 rates to a securitization. 0:25:24.160 --> 0:25:26.040 So, Bruce, a lot of this stuff is distressed for 0:25:26.119 --> 0:25:28.280 a reason, right, and it is very risky, and it 0:25:28.320 --> 0:25:30.879 really varies by geography and by type, and it's you know, 0:25:30.920 --> 0:25:33.359 all over the map, and you do travel, you do 0:25:33.440 --> 0:25:34.960 have a global view. I was just wondering, you know, 0:25:35.000 --> 0:25:37.359 how you see this breaking down? You know, what what 0:25:37.359 --> 0:25:39.280 what are the good sectors to look at in terms 0:25:39.280 --> 0:25:41.000 of really state what are the ones you absolutely have 0:25:41.040 --> 0:25:43.000 to avoid a country and sector. 0:25:44.200 --> 0:25:48.120 You know, we we we we're avoiding office, and that's 0:25:48.240 --> 0:25:51.360 kind of top a less top of mind. But you know, 0:25:51.600 --> 0:25:54.000 if there's office in a securitization, it doesn't matter. 0:25:54.119 --> 0:25:54.600 Just falls through. 0:25:54.600 --> 0:25:56.800 The loss were just by you know, the right trans 0:25:56.840 --> 0:26:00.480 given that you know that factor. And more important, it's 0:26:00.520 --> 0:26:04.919 not a generic statement. It's very clean math of what 0:26:05.040 --> 0:26:06.840 loss factor you're going to have and how that flows 0:26:06.840 --> 0:26:09.199 through the excusation. In any excusation, you might have some 0:26:09.320 --> 0:26:11.480 losses and loans. It doesn't mean you're run for the 0:26:11.560 --> 0:26:14.719 for the hills. It means you figure out exactly how 0:26:14.800 --> 0:26:18.000 much flows through and what is left, and what is 0:26:18.119 --> 0:26:22.200 left we can buy that diskound of security at a 0:26:22.280 --> 0:26:26.159 nice secretion. You know, when it pulls the par just 0:26:26.240 --> 0:26:28.640 into your cash flow, it'll be a great buy for us. 0:26:28.960 --> 0:26:31.200 But you know, beyond real estate commercial state. 0:26:31.000 --> 0:26:34.359 There's also the dislocation and you know distress that you 0:26:34.440 --> 0:26:37.520 see on the corporate side as well. Uh, maybe not 0:26:37.840 --> 0:26:42.800 as severe, but there's still you know, a healthy case 0:26:42.880 --> 0:26:45.880 load workload on the on the corporate side as well. 0:26:47.359 --> 0:26:50.560 So, Bruce, you mentioned earlier that lenders are in some 0:26:50.680 --> 0:26:56.600 cases extending, extending, and amending what is you can talk 0:26:56.640 --> 0:26:58.879 a little bit about what the impact of that is 0:26:59.000 --> 0:27:03.920 zombie in real estates and also zombie in corporate because 0:27:03.920 --> 0:27:06.960 we have a similar well, as you said, less severe 0:27:07.040 --> 0:27:10.560 issue amount corporate did as well. Default rates are really 0:27:10.640 --> 0:27:14.120 really low because of this tendency to just close take 0:27:14.119 --> 0:27:16.359 a blind eye. Can you address a little bit about 0:27:16.400 --> 0:27:19.359 your thoughts about how, why and how this is happening 0:27:19.400 --> 0:27:20.840 and what the ramifications are. 0:27:21.600 --> 0:27:24.840 Sure, let me just step back for your listeners and 0:27:25.320 --> 0:27:29.080 kind of define the marketplace. When I think about private credit, 0:27:29.440 --> 0:27:32.480 I think are three segments of private credit. Number one, 0:27:33.119 --> 0:27:38.439 and the biggest actionable segment is direct lending, which we 0:27:38.760 --> 0:27:40.639 just to call it middle market lending, but it's also 0:27:41.119 --> 0:27:43.920 you know, lower middle market, upper middle market. Now, these 0:27:44.080 --> 0:27:47.960 are broadly syndicated private deals that are happening. They're taking 0:27:48.160 --> 0:27:52.240 deal full from the broadly syndicated market. So that's the 0:27:52.280 --> 0:27:56.239 first big segment of you know, corporate. 0:27:57.480 --> 0:27:58.200 Private credit. 0:27:58.440 --> 0:28:01.879 The second biggot segment of corporate private credit, which we 0:28:01.920 --> 0:28:04.960 haven't talked about, which is huge and going to get 0:28:05.080 --> 0:28:08.280 much much bigger and I'm super excited about, is asset 0:28:08.280 --> 0:28:13.840 based lending. Now, the third component of private credit is 0:28:14.480 --> 0:28:17.959 what now you know, your question revolves around, which is 0:28:18.480 --> 0:28:23.040 the you know, opportunistic situations in. 0:28:23.600 --> 0:28:24.840 Uh in the credit market. 0:28:25.240 --> 0:28:28.400 And and I think there's a couple of segments when 0:28:28.440 --> 0:28:31.680 you kind of you know, unpack that that you. 0:28:31.680 --> 0:28:32.560 Really want to focus on. 0:28:32.680 --> 0:28:37.040 Number one is providing capital solutions and creative financing options 0:28:37.280 --> 0:28:41.200 to companies to help them preserve value and to help 0:28:41.240 --> 0:28:43.560 them grow and to help them get over. 0:28:43.400 --> 0:28:46.520 Some type of you know, choppy water. And so it's 0:28:46.560 --> 0:28:48.080 the bridge to the other side. 0:28:48.440 --> 0:28:52.680 And we do a lot of these capital solutions, and 0:28:52.760 --> 0:28:56.040 that's you know, a fantastic opportunity to help companies that 0:28:56.200 --> 0:29:01.240 are you know, maybe a little over leverage or stress or. 0:29:01.960 --> 0:29:04.560 If the two distress you help of the capital solution, 0:29:05.040 --> 0:29:07.080 it'll just go down that path. 0:29:07.560 --> 0:29:12.160 And so you know, in the US and Europe, you know, 0:29:12.240 --> 0:29:16.480 we have hundreds of billions of dollars of debt that's 0:29:16.800 --> 0:29:21.160 existing today whose debt trades below like an eighty dollars price. 0:29:21.880 --> 0:29:24.440 You know, on my radar list today, I have one 0:29:24.520 --> 0:29:27.560 hundred and thirty five companies that we're tracking, tolling around 0:29:27.600 --> 0:29:30.000 three hundred and fifty billion that looks like that on 0:29:30.120 --> 0:29:32.760 top of the one hundred and eighty two billion of 0:29:32.880 --> 0:29:36.560 companies debt, which is one hundred and five companies that 0:29:36.680 --> 0:29:39.960 defaulted the last calendar year in twenty twenty three. 0:29:40.480 --> 0:29:43.520 And so so what's causing this. 0:29:43.800 --> 0:29:47.160 Well, in two thousand and eight, two thousand and eight, 0:29:47.640 --> 0:29:51.080 during a DFC high, you bonds, leverage, loans, you know, 0:29:51.160 --> 0:29:54.200 direct lending on the private side, there was one point 0:29:54.240 --> 0:29:58.240 seven trillion dollar credit market one point seven trillion. Today 0:29:58.280 --> 0:30:02.400 that market size is zie point one trillion, so it's 0:30:02.400 --> 0:30:07.200 growing three times where it was then. And through all 0:30:07.280 --> 0:30:10.240 the exhiberance and the zerp world that we lived in 0:30:10.480 --> 0:30:14.480 when companies borrowed maybe too much and money was too 0:30:14.520 --> 0:30:19.600 free flowing and a lot of people folks chose to 0:30:19.960 --> 0:30:23.240 you know borrow floating rate and you know, realizing that 0:30:24.000 --> 0:30:25.840 you know, FED funds is up five hundred twenty five 0:30:25.840 --> 0:30:28.040 based punts, so the base boring rate, which is now 0:30:28.120 --> 0:30:31.080 sofur is up five hundred twenty five basis points. The 0:30:31.160 --> 0:30:34.560 funny costs have become too high and there's a lot 0:30:34.560 --> 0:30:36.400 of leverage. So the company may have cut you know, 0:30:37.480 --> 0:30:43.240 you know, fifty LTV loan, but given the purchase price 0:30:43.320 --> 0:30:47.200 multiple may been six times that even a finance when 0:30:47.280 --> 0:30:51.920 it was originally issued, but that includes ad backs and adjustments. 0:30:52.040 --> 0:30:54.320 You take out those adbacks and adjustments and your at 0:30:54.360 --> 0:30:56.880 least eternal leverage higher than that. So you can look 0:30:56.880 --> 0:31:00.840 at the software company that came in at like seven 0:31:00.920 --> 0:31:05.120 turns of debt leverage, that really looks closer to ten times. 0:31:05.440 --> 0:31:07.840 Or healthcare company that came in at five and a 0:31:07.840 --> 0:31:11.160 half turns of debt that's really more close than eight 0:31:11.200 --> 0:31:15.640 turns of debt data up today. And so when you 0:31:15.680 --> 0:31:20.760 talk about like ibada is before debt service and now 0:31:20.920 --> 0:31:25.440 debt service has doubled, right, so you know, livebar plus 0:31:25.440 --> 0:31:29.080 a spread has become sofur plus that same spread. 0:31:29.440 --> 0:31:30.920 But the sofa rates. 0:31:30.800 --> 0:31:32.880 Of five hundred and twenty five basbooks, so the financial 0:31:32.920 --> 0:31:35.680 cost that the company occurs is two x what it was. 0:31:36.400 --> 0:31:39.360 And so a lot of these companies are burning cash, 0:31:39.920 --> 0:31:43.720 actual cash flow, burning cash just to service their debt, 0:31:44.400 --> 0:31:49.800 just the service their death. And what segment of the marketplace, Well, 0:31:49.800 --> 0:31:52.080 if you look at the leverage loan marketplace and you 0:31:52.200 --> 0:31:55.320 read what movies have to say, it's over fifty percent 0:31:55.360 --> 0:31:58.840 of the companies are B three rated are now in 0:31:58.840 --> 0:32:00.120 that category. 0:32:00.200 --> 0:32:01.960 Current sofa barn rates. 0:32:02.360 --> 0:32:06.840 And so you know, there is an easy financial conditions 0:32:06.840 --> 0:32:08.920 that have occurred over those last many months, and it's 0:32:08.960 --> 0:32:12.480 fantastic and it's helped companies through finance out and so 0:32:12.520 --> 0:32:15.440 you don't have the same debt maturity wall in corporate 0:32:15.880 --> 0:32:19.640 finance that you do in real estate finance, but you 0:32:19.720 --> 0:32:22.400 still have a lot of cash burner going on. And 0:32:23.120 --> 0:32:25.160 you know, the default rate won't get to ten or 0:32:25.200 --> 0:32:29.280 twelve percent like it was in LA, but it is 0:32:29.320 --> 0:32:33.120 going to get to four percent in this current marketplace, 0:32:34.000 --> 0:32:36.640 and four percent of five point one trillion, the current 0:32:36.680 --> 0:32:40.720 size is over two hundred billion dollars of the faults 0:32:40.760 --> 0:32:44.040 and select of the faults, we're ten percent of one 0:32:44.040 --> 0:32:47.640 point seven trillion. Back in two thousand and eight, you know, 0:32:48.600 --> 0:32:50.320 you know, it took you to about one hundred and 0:32:50.320 --> 0:32:52.560 eighty to two hundred billion, So you'll end up at 0:32:52.560 --> 0:32:55.720 the same place in terms of the sizeable opportunity for 0:32:56.400 --> 0:32:59.760 distress dislocation. And most importantly, what we're doing is capital 0:33:00.600 --> 0:33:03.800 to help these good companies with overlovered balancies make it through. 0:33:04.680 --> 0:33:07.240 What I am more excited about was what you said 0:33:07.320 --> 0:33:10.000 about abs lending, because you seem excited and we haven't 0:33:10.040 --> 0:33:13.360 touched on it, So a lot of people are now 0:33:13.720 --> 0:33:17.320 looking at that as the next frontier private credit. To you, Bruce, 0:33:17.360 --> 0:33:19.640 what does that ABS lending mean to you? 0:33:19.960 --> 0:33:24.280 And where Well, let's talk about WID's coming and then 0:33:24.440 --> 0:33:27.120 let me answer your question, because it's really important to understand, 0:33:27.240 --> 0:33:29.520 like whites come in to kind of put a ribbon 0:33:29.600 --> 0:33:32.680 on it and to kind of, you know, complete the circle. 0:33:32.920 --> 0:33:34.719 So let's go back to the banks for a second. 0:33:34.720 --> 0:33:38.280 The banks have been the biggest ABL lenders and when 0:33:38.280 --> 0:33:41.280 they exited doing a lot of the corporate lending back 0:33:41.320 --> 0:33:45.160 in eight because of the basel free regulations that came 0:33:45.240 --> 0:33:50.120 in that put cop requirements on those type of risk 0:33:50.240 --> 0:33:54.120 loans in place, they then doubled down an ABL lending 0:33:54.680 --> 0:33:57.880 and that's when some of the ABL loans like really 0:33:57.920 --> 0:34:00.720 took off in the balance as a it's a balance 0:34:00.760 --> 0:34:03.960 sheet for these banks. Now fast forward to twenty twenty 0:34:04.000 --> 0:34:09.800 four or twenty twenty five, one buzzle free endgame comes 0:34:09.800 --> 0:34:13.080 into place, and the banks now have to have more 0:34:13.160 --> 0:34:18.080 capital against those types of loans and so to de risk, 0:34:18.480 --> 0:34:21.359 the bank's going to make less of those loans and 0:34:21.400 --> 0:34:25.399 we're seeing it across the system. And so now let's 0:34:25.400 --> 0:34:29.480 talk about ABL. What is ABL as opposed to making 0:34:29.520 --> 0:34:33.720 a loan based upon a company's cash flow, We're making 0:34:33.760 --> 0:34:39.640 a loan based upon the collateral. So it's an senior 0:34:39.760 --> 0:34:43.440 secured asset based loan where we have a perfected interest 0:34:43.600 --> 0:34:47.040 in that underlying collateral at a certain LTV, a tasking point, 0:34:47.640 --> 0:34:51.160 and a certain debt service coverage ratio. A slightly different 0:34:51.280 --> 0:34:53.840 way of thinking about it, but it's opposed to lending 0:34:53.840 --> 0:34:57.360 against op cooho co of company, we're lending against hart assets. 0:34:57.719 --> 0:35:01.200 And let me break it down the four categories for you, Uh, Lisa, 0:35:01.600 --> 0:35:06.080 So a b L I think is a nine trillion 0:35:06.120 --> 0:35:11.120 dollar marketplace, nine trillion and it's a small fraction of 0:35:11.120 --> 0:35:14.920 that now, and what's been put in security form securitizations 0:35:15.040 --> 0:35:17.719 is four trillion, so I think in private form it's 0:35:17.719 --> 0:35:19.560 a five trillion dollar marketplace. 0:35:20.000 --> 0:35:20.680 And what is it? 0:35:21.280 --> 0:35:26.120 Number one, in no particular order. Number one, it's corporate ABL. 0:35:26.280 --> 0:35:29.520 So you're talking about lending its plant, equipment, inventory, uh, 0:35:29.640 --> 0:35:35.240 intellectual property, receivables, trade, it's whatever's in corporate a BL. 0:35:35.400 --> 0:35:38.760 But again, you have a perfected interest against those assets, 0:35:39.280 --> 0:35:41.279 and so if anything has happened, you have a lean 0:35:41.360 --> 0:35:44.920 on it that they're yours. The second category, i'd say 0:35:45.200 --> 0:35:47.840 is what I call, you know, consumers. Last specialty finance, 0:35:48.000 --> 0:35:50.239 and there you have everything from like all those consumers 0:35:50.640 --> 0:35:54.000 you know to you know, s rts and c rts 0:35:54.040 --> 0:35:56.840 that put that there, certain type of you know, royalties 0:35:56.880 --> 0:35:59.600 you can put like music royalties in there, or healthcare 0:35:59.719 --> 0:36:03.680 you know royalties in there, and so specialty finances Category two. 0:36:04.280 --> 0:36:08.560 Category three you mentioned it, so I'll emphasize it. It's 0:36:08.640 --> 0:36:12.479 transportation and under transportations aviation, and we've done not only 0:36:12.600 --> 0:36:15.120 you know, the Airbus and Airbus three twenties and Bowing 0:36:15.160 --> 0:36:18.239 seven thirty sevens and all the series, and we have 0:36:18.360 --> 0:36:21.480 you know four coming through committee you know this week, 0:36:21.560 --> 0:36:23.120 and we've done. 0:36:23.000 --> 0:36:25.480 Over one hundred and fifty aircraft with the big. 0:36:25.320 --> 0:36:28.359 Airlines, you know, the big airlines that everyone travels, and 0:36:28.400 --> 0:36:30.239 we on the we on the metal, we lease it 0:36:30.239 --> 0:36:32.319 to them. We get paid the structure cash flow. We 0:36:32.400 --> 0:36:35.359 also do this with engines, because an airplane has about 0:36:35.360 --> 0:36:38.120 thirty year useful life, and engine you know, last year 0:36:38.120 --> 0:36:41.520 around seven years, and so we've done engine leasing as well. 0:36:41.800 --> 0:36:42.719 You know, when you're buying. 0:36:42.520 --> 0:36:46.359 New, brand new Airbus three twenty neo, you might pay 0:36:46.400 --> 0:36:50.880 sixty five million for it, you know from Airbus. And 0:36:51.040 --> 0:36:53.239 the engines are two engines that you know on each wing, 0:36:53.320 --> 0:36:55.520 one in each one that costs like thirty five million, 0:36:55.560 --> 0:36:57.400 that costs like more than half the plane. And so 0:36:57.480 --> 0:36:59.680 engine leasing is also a segment of what we do. 0:36:59.719 --> 0:37:01.600 We do a lot in maritime. This week, we just 0:37:01.600 --> 0:37:04.800 did it joins that deal, you know, tug and barge. 0:37:05.400 --> 0:37:09.040 We've done international shipping. There's there's rail and road. We've 0:37:09.040 --> 0:37:13.800 done trucking deals, transportation equipment, infrastructure type loans that support 0:37:13.880 --> 0:37:17.960 all this. And then the fourth category is property. And 0:37:18.040 --> 0:37:20.520 I think we had over fifty thousand residential loans, the 0:37:20.560 --> 0:37:22.560 whole loans out of side of the scarization that we 0:37:22.600 --> 0:37:25.520 own to hear at Marathon, Second lean, first lane loans, 0:37:26.040 --> 0:37:32.319 commercial real estate property, everything from parking lots to infrastructure 0:37:32.480 --> 0:37:35.360 we've done here at Marathon and it all fits into 0:37:35.840 --> 0:37:39.799 the rainbow, this beautiful mosaic of ASCID based lending. And 0:37:39.840 --> 0:37:43.080 we have a teams of teams approach because each team 0:37:43.160 --> 0:37:46.040 is dedicated this year. Team's different from the RESI team, 0:37:46.040 --> 0:37:49.719 it's different from the aviation team, different from the maritime team, 0:37:50.000 --> 0:37:53.320 different from those that are doing you know against plant equipment, 0:37:53.360 --> 0:37:55.760 whether it's a crane in the sky or farm equipment 0:37:55.800 --> 0:37:58.640 or forklifts, or whether it's all the loans are all 0:37:58.680 --> 0:38:02.840 different teams rolling up into ABL program here at Marathon. 0:38:02.880 --> 0:38:07.400 So I love ABL and mark my words, it's a forecast. 0:38:07.440 --> 0:38:10.240 So who knows that the one. 0:38:10.120 --> 0:38:11.480 Hundred billion dollar. 0:38:12.680 --> 0:38:16.200 Middle market lending and private credit lending business in OA, 0:38:16.520 --> 0:38:19.160 which grew to one point seven trillion dollars where it 0:38:19.239 --> 0:38:24.000 is today seventeen fold increase, you'll see the same thing 0:38:24.080 --> 0:38:26.560 happening in ABL in this next decade. 0:38:27.200 --> 0:38:30.480 Wow, it's pretty amazing. I think one thing, you know, 0:38:30.520 --> 0:38:32.320 we're in New York. One thing we didn't talk about 0:38:32.440 --> 0:38:36.000 is uh multifamily and you know an NYCB has been 0:38:36.200 --> 0:38:38.000 pretty volatile over the past couple of weeks, so though 0:38:38.040 --> 0:38:41.400 we've had a little mini bailout, what are your thoughts 0:38:41.400 --> 0:38:45.239 on that sector? Bruce, multifamily and and and maybe rent regulated? 0:38:46.160 --> 0:38:47.840 Do you see risk in there or is it just 0:38:48.360 --> 0:38:50.680 kind of one off specific for NYCB. 0:38:51.880 --> 0:38:55.120 You know, I don't want to talk politics. I host 0:38:55.160 --> 0:38:57.920 it as far away as politics possible, But you know, 0:38:58.000 --> 0:39:02.200 rent controlled and got bust people that you know, you 0:39:02.200 --> 0:39:06.840 know reside in all these properties but rent controls a 0:39:06.880 --> 0:39:10.440 problem for you know, investor. When the city comes and 0:39:11.000 --> 0:39:13.759 any city, New York City particularly when any city comes 0:39:13.840 --> 0:39:17.120 and says you can't raise rates rents, then what do 0:39:17.120 --> 0:39:19.080 you think that's sponsor's going to do. They're gonna put 0:39:19.080 --> 0:39:21.200 any money in the property to improve it, They're going 0:39:21.239 --> 0:39:24.280 to try to maintain it. And their model, their financial 0:39:24.280 --> 0:39:27.160 model is based upon raising rates, and they have a 0:39:27.160 --> 0:39:30.960 lot of extra costs to maintain it, including financing costs. 0:39:31.040 --> 0:39:33.160 So it puts them upside down. So it's a real 0:39:33.280 --> 0:39:37.000 problem for you know, banks that have leaned into and 0:39:37.080 --> 0:39:41.320 lenders that leaned into rent control, rents stabilized, and I 0:39:41.360 --> 0:39:45.080 wouldn't touch that sector as a result, wouldn't touch it 0:39:46.200 --> 0:39:49.040 as a lender because I think it's a very difficult 0:39:49.040 --> 0:39:53.719 loan to make. And you know, in terms of multi family, no, 0:39:53.760 --> 0:39:56.600 you got to love multifamily. You know, it's a it's 0:39:56.600 --> 0:39:59.759 a beautiful thing. Talk about home, you know, homes themselves. 0:40:00.040 --> 0:40:00.200 You know. 0:40:00.239 --> 0:40:03.160 The simple factor matter is home prices over the last 0:40:03.200 --> 0:40:06.600 three years have increased twenty five percent nationally. 0:40:06.920 --> 0:40:08.000 It's a huge run up. 0:40:08.120 --> 0:40:10.279 That run up is bigger than the run up leading 0:40:10.280 --> 0:40:13.719 into the housing crisis in a way the price appreciation 0:40:13.800 --> 0:40:18.880 that we've seen among homeowners, and so with that, financing 0:40:18.960 --> 0:40:21.960 rates have gone up. And because financing rates have gone up, 0:40:22.520 --> 0:40:25.239 the price to own a home now with your rent 0:40:25.400 --> 0:40:28.600 and that price increase is now eighty percent higher than 0:40:28.640 --> 0:40:32.680 it was three years ago. That is remarkable, and it's 0:40:32.719 --> 0:40:39.200 the highest point to own relative to rent. So I 0:40:39.400 --> 0:40:42.120 love as much as OER as much as that's keeping 0:40:42.400 --> 0:40:45.799 a firm based under CPI, as much of rent roles 0:40:45.840 --> 0:40:49.759 have increased. For a multifamily, it is the cheapest it's 0:40:49.880 --> 0:40:53.080 been that I've ever seen it in tracking. It decades, 0:40:53.760 --> 0:40:56.440 the price to rent versus the price to own. 0:40:56.880 --> 0:40:59.280 I just wanted to follow up on where we started 0:40:59.280 --> 0:41:03.560 the conversation. Banks are going to take losses, and you 0:41:03.600 --> 0:41:06.160 know some are going to disappear potentially, given that you 0:41:06.160 --> 0:41:09.319 think there are too many, what impact does that have 0:41:09.440 --> 0:41:12.680 more broadly on financial markets and the economy. I'm surely 0:41:12.719 --> 0:41:14.200 it's not going to just be contained. 0:41:14.560 --> 0:41:17.000 I think the banks are safe. I think the banks 0:41:17.040 --> 0:41:17.560 are safe. 0:41:17.680 --> 0:41:24.560 I think that the biggest opportunity will be in commercial 0:41:24.560 --> 0:41:29.719 real estate, followed by filling in any void that the 0:41:29.800 --> 0:41:33.800 banks are going to dial back during Basel three endgame, 0:41:34.080 --> 0:41:39.080 which is to be a lender in abl and also 0:41:40.560 --> 0:41:47.280 to play the SRT and asset acquisition game, and that's 0:41:48.000 --> 0:41:49.920 a big part of our playbook. I think there's a 0:41:49.960 --> 0:41:54.680 big opportunity in credit, in liquid credit markets. We run 0:41:54.719 --> 0:41:57.640 a program called MATS, which is a multi asset credit 0:41:57.719 --> 0:42:02.360 strategies and it's across you know, the structured credit world 0:42:02.400 --> 0:42:05.640 em but high yield and leverage loans and its multi 0:42:05.640 --> 0:42:09.600 strategy approach to what is eleven trillion dollar market credit. 0:42:10.239 --> 0:42:14.400 The private credit markets are big, and they're going to 0:42:14.440 --> 0:42:17.160 get bigger and bigger and bigger because the bank's pulling back. 0:42:17.719 --> 0:42:21.640 And although ninety five percent of the corporate credits are 0:42:21.719 --> 0:42:24.840 fine in terms of credit, there's the other five percent 0:42:25.040 --> 0:42:28.799 that needs capital solutions that results in distressed and dislocation. 0:42:29.320 --> 0:42:31.960 But the end of the day, the banking system is solid, 0:42:32.160 --> 0:42:35.600 both in Europe and the US. Not so much in China, 0:42:35.920 --> 0:42:39.560 but in the US and Europe, and so I'm not 0:42:39.640 --> 0:42:43.719 concerned at all about banking. And the most impressive thing 0:42:43.719 --> 0:42:46.680 about this cycle is to fed to raise rates five 0:42:46.800 --> 0:42:49.040 hundred and twenty five piece points, keep it there for 0:42:49.080 --> 0:42:53.240 an extended period of time, and the cracks are actually 0:42:53.400 --> 0:42:57.640 rather minuscule. It tells you how robust the financial system is. 0:42:58.120 --> 0:43:00.080 It's not only because of the strength of the bank 0:43:00.360 --> 0:43:02.879 thanks to Buzzle three and all the regulations and what's 0:43:02.920 --> 0:43:06.799 coming next for Buzzle three endgame, but it's also due 0:43:06.840 --> 0:43:10.720 to the robustness of capital among the private credit lending 0:43:10.760 --> 0:43:13.880 community and the financial markets. 0:43:13.920 --> 0:43:15.160 It's really impressive to see. 0:43:15.320 --> 0:43:17.239 And the last question, Bruce, I know out of time, 0:43:17.280 --> 0:43:19.239 but you've been doing this a long time. As you say, 0:43:19.560 --> 0:43:21.520 when have you last seen such a great opportunity? You 0:43:21.560 --> 0:43:22.920 sound so bullish. 0:43:23.000 --> 0:43:25.879 Well, it's the Goalden there of credit. Right rates are 0:43:25.920 --> 0:43:28.080 five hundred and twenty five basis points. We haven't seen 0:43:28.120 --> 0:43:30.120 this in a generation. So you have to go back 0:43:30.120 --> 0:43:32.600 to earlier in my career when you saw rates as 0:43:32.640 --> 0:43:33.359 high as they are. 0:43:33.719 --> 0:43:34.120 Number one. 0:43:34.200 --> 0:43:36.960 Number two, you've never seen the credit markets as large 0:43:36.960 --> 0:43:39.680 as they are now. Equity market globally it's over one 0:43:39.760 --> 0:43:44.000 hundred trillion of fixed income and credit market globally of 0:43:44.080 --> 0:43:47.560 over one hundred trillion, and we have eleven trillion dollars 0:43:47.760 --> 0:43:51.120 here at Marathon of credit of the credit market that 0:43:51.160 --> 0:43:53.440 we invest in, and so it's a big market at 0:43:53.480 --> 0:43:56.320 the highest rates that you know we've seen. 0:43:56.120 --> 0:43:59.760 In a generation. And meanwhile, the comm is going well. 0:44:00.040 --> 0:44:03.760 Earners have popped back up, and so the earnings recessions 0:44:03.840 --> 0:44:05.880 over equi markets are trading all time highs. 0:44:06.120 --> 0:44:07.359 But when you talk about. 0:44:07.040 --> 0:44:11.240 Our clients, the LPs, we invest money for the pension plans, 0:44:11.360 --> 0:44:15.200 the ariski plans, the sid wealth funds and downments foundations, 0:44:15.200 --> 0:44:19.520 insurance companies, the consultants that advise them, these wealth platforms, 0:44:20.000 --> 0:44:23.600 and the bank private banks and so forth. Look, they 0:44:23.600 --> 0:44:27.200 can invest in the credit markets and along the credit 0:44:27.239 --> 0:44:29.759 curve and liquid credit and get an eight to nine 0:44:29.800 --> 0:44:35.120 percent yield that's magnificent. And in private credit add three 0:44:35.160 --> 0:44:39.160 hundred basis points to that double digit returns. And so 0:44:39.200 --> 0:44:42.879 when you have liability management, you're managing against and your 0:44:42.920 --> 0:44:46.000 actoral return requirements like a six percent return. And if 0:44:46.040 --> 0:44:48.200 you do this in credit, a lot of folks that 0:44:48.280 --> 0:44:51.520 come to conclusion, why do we need the equity risk 0:44:52.160 --> 0:44:56.880 and so well, let me better balance. Finally, because the 0:44:57.000 --> 0:45:00.600 financial repression is over, the zup environment, it is over, 0:45:00.880 --> 0:45:04.040 and rachel returns are rather healthy in credit. Let me 0:45:04.080 --> 0:45:07.200 now better balance my portfolio. And that's what we're doing 0:45:07.200 --> 0:45:10.560 with our clients. That's why We're so jazzed, you know, 0:45:10.760 --> 0:45:14.400 and when you have an error like this the golden 0:45:14.400 --> 0:45:17.239 era of credit, it's just our sweet spot for what 0:45:17.239 --> 0:45:18.320 we do for our clients. 0:45:18.360 --> 0:45:21.520 Great stuff. Bruce Richards, Chairman and CEO of Marathon Asset Management. 0:45:21.520 --> 0:45:22.960 Great to have you on the Credit Edge. Please come 0:45:23.000 --> 0:45:23.680 back again soon. 0:45:24.360 --> 0:45:26.680 Thank you, James, thank you Arnold, and thank you Lisa. 0:45:27.400 --> 0:45:29.280 Also want to say big thanks to Lisa leaving Bloomberg 0:45:29.360 --> 0:45:31.719 News in London. Brilliant to see you again, cheers. And 0:45:31.880 --> 0:45:34.560 to Arnold Kakuda with Bloomberg Intelligence, thank you so much 0:45:34.560 --> 0:45:36.920 for being here. Read all of Ronold's brilliant analysis on 0:45:36.920 --> 0:45:39.800 the Bloomberg Terminal. It's really great. Check it out. Please 0:45:39.800 --> 0:45:42.080 do subscribe wherever you get your podcasts. We're on Apple, 0:45:42.160 --> 0:45:45.600 Spotify and all good podcast providers, including the Bloomberg Terminal. 0:45:45.920 --> 0:45:47.960 Give us a review, tell your friends, or email me 0:45:48.040 --> 0:45:53.080 directly at Jcrumby eight at Bloomberg dot net. I'm James Cromby. 0:45:53.120 --> 0:45:55.080 It's been a pleasure having you join us again next 0:45:55.120 --> 0:46:12.879 week on the Credit Edge.