Bloomberg Audio Studios, Podcasts, radio News.

Bloomberg Audio Studios, Podcasts, radio News.

Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Allaway.

Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Allaway.

And I'm Joe Wisenthal.

And I'm Joe Wisenthal.

Joe, it struck me that we might be at the beginning of a new cycle, a new credit side.

Joe, it struck me that we might be at the beginning of a new cycle, a new credit side.

Are you making a call? Are you making a market timing call?

Are you making a call? Are you making a market timing call?

I would never, never, No, I'm trying to frame this episode, but we have recently, by the time this episode comes out, had a very momentous presumably decision from the Federal Reserve where they've been cutting rates or they will have cut rates for the first time since I think the summer of last year. Oh, sorry, summer of twenty two, I can't remember that.

I would never, never, No, I'm trying to frame this episode, but we have recently, by the time this episode comes out, had a very momentous presumably decision from the Federal Reserve where they've been cutting rates or they will have cut rates for the first time since I think the summer of last year. Oh, sorry, summer of twenty two, I can't remember that.

That's yeah, it's wild. And when ever there is a turning point in the raid cycle, people are often you know, we've had this regime. Equity markets have done really well, credit spreads generally have been pretty tight, and so when you're in this sort of new phase of a cycle, then it's a natural time to sort of revisit where things stand, what kind of assumptions have been baked into markets, and of course like what the risks and opportunities are.

That's yeah, it's wild. And when ever there is a turning point in the raid cycle, people are often you know, we've had this regime. Equity markets have done really well, credit spreads generally have been pretty tight, and so when you're in this sort of new phase of a cycle, then it's a natural time to sort of revisit where things stand, what kind of assumptions have been baked into markets, and of course like what the risks and opportunities are.

Yeah, and I think the previous couple of years have certainly surprised a lot of people who are in credit. You know, people thought when rates went up there was going to be a spike in defaults, and we haven't really seen that. We've seen an increase, but it hasn't been disastrous. We've seen spreads, as you mentioned, still at kind of multi year lows, which is very surprising, and so it kind of begs the question of whether or not this dynamic can continue where pockets of stress might emerge.

Yeah, and I think the previous couple of years have certainly surprised a lot of people who are in credit. You know, people thought when rates went up there was going to be a spike in defaults, and we haven't really seen that. We've seen an increase, but it hasn't been disastrous. We've seen spreads, as you mentioned, still at kind of multi year lows, which is very surprising, and so it kind of begs the question of whether or not this dynamic can continue where pockets of stress might emerge.

That's right, And just to note for listeners, we are recording this Monday subtem number sixteenth. We are out in Huntington Beach, California. We are at the future Proof Festival I think it's called, which is probably one of the coolest, most distinct financial market conferences that I can fathom. It's literally out on the beach.

That's right, And just to note for listeners, we are recording this Monday subtem number sixteenth. We are out in Huntington Beach, California. We are at the future Proof Festival I think it's called, which is probably one of the coolest, most distinct financial market conferences that I can fathom. It's literally out on the beach.

It's entirely that's a nice way of saying, we're at a beach three days.

It's entirely that's a nice way of saying, we're at a beach three days.

It's very nice, it's pretty so we love get around here.

It's very nice, it's pretty so we love get around here.

But you know, the other thing I was thinking about recently is just the other thing that's happened over the past couple of years has just been the explosion in different types of credit available to companies, right, Like, if you're a company seeking some sort of funding, you basically have an option of everything from a syndicated bond or loan to maybe doing a private deal. There are just all these different types of credit that you could choose.

But you know, the other thing I was thinking about recently is just the other thing that's happened over the past couple of years has just been the explosion in different types of credit available to companies, right, Like, if you're a company seeking some sort of funding, you basically have an option of everything from a syndicated bond or loan to maybe doing a private deal. There are just all these different types of credit that you could choose.

Now, everyone, if you're a company, people will find ways to give you money. There's all kinds of different opportunities.

Now, everyone, if you're a company, people will find ways to give you money. There's all kinds of different opportunities.

So we need to talk about the credit cycle. We need to talk about the big growth in the options available to investors and also corporates, and we need to talk about what happens now, whether this is a new leg in the cycle or the beginning of a new cycle in itself.

So we need to talk about the credit cycle. We need to talk about the big growth in the options available to investors and also corporates, and we need to talk about what happens now, whether this is a new leg in the cycle or the beginning of a new cycle in itself.

Let's do it. I can't wait, all right, we.

Let's do it. I can't wait, all right, we.

Have the perfect guests to discuss all of this. We are speaking with the co portfolio manager of Oak Trees, a diversified income fund better known as odd X. Bit of a mouthful actually.

Have the perfect guests to discuss all of this. We are speaking with the co portfolio manager of Oak Trees, a diversified income fund better known as odd X. Bit of a mouthful actually.

Danielle Paully.

Danielle Paully.

Danielle, thank you so much for coming on all thoughts.

Danielle, thank you so much for coming on all thoughts.

Thank you so much for having me. Tracy and Joe.

Thank you so much for having me. Tracy and Joe.

Are you enjoying the beach as well?

Are you enjoying the beach as well?

Oh, I'm having a great time. I don't think I've ever been to a conference quite like this on the beach, so many people.

Oh, I'm having a great time. I don't think I've ever been to a conference quite like this on the beach, so many people.

It's something I've said this before, but all conferences should be like this.

It's something I've said this before, but all conferences should be like this.

On the beach. But you're base around here. This isn't even special for you, like for us coming from New York where the weather's starting to turn and everything's like, oh, a few more days of amazing weather. This is just your life, huh.

On the beach. But you're base around here. This isn't even special for you, like for us coming from New York where the weather's starting to turn and everything's like, oh, a few more days of amazing weather. This is just your life, huh.

It's true, is a commute down the four h five. Anyone that's watched Saturday Night Live and the Californians know as though how perilous it can be fair driving on LA freeways.

It's true, is a commute down the four h five. Anyone that's watched Saturday Night Live and the Californians know as though how perilous it can be fair driving on LA freeways.

So I mentioned your CopM of the Diversified Income Fund, but you're also a founding member of the investment committee. Talk to us a little bit about what you do at oak Tree.

So I mentioned your CopM of the Diversified Income Fund, but you're also a founding member of the investment committee. Talk to us a little bit about what you do at oak Tree.

I serve as a portfolio manager for Global Credit at oak Tree, and that's our multi asset credit business. So back in twenty seventeen, we tried to think about a way to bring all of our different credit areas into an easily accessible way for our clients. And I get to serve as a portfolio manager, a member of our investment committee, thinking about relative value and helping with asset allocation in the portfolio. Because, as you know, these different strategies can be more attractive or not based on what's happening with interest rates or dislocation in the market. So it's an interesting role to be in.

I serve as a portfolio manager for Global Credit at oak Tree, and that's our multi asset credit business. So back in twenty seventeen, we tried to think about a way to bring all of our different credit areas into an easily accessible way for our clients. And I get to serve as a portfolio manager, a member of our investment committee, thinking about relative value and helping with asset allocation in the portfolio. Because, as you know, these different strategies can be more attractive or not based on what's happening with interest rates or dislocation in the market. So it's an interesting role to be in.

In my mind, I think I have some understanding of what a portfolio manager does. What does an investment committee do at an entity like oak Drink.

In my mind, I think I have some understanding of what a portfolio manager does. What does an investment committee do at an entity like oak Drink.

Well, different firms will have committees doing different things, and our committee is less of a voting committee and more of a thought leadership committee. So we convene all of the different portfolio managers at oak Tree that cover different asset classes like hil bonds and leverage loans, structured credit, emerging market debt, even convertibles, and we meet every other week as a group to talk about what's happening in credit. So we'll talk about the fundamentals of the companies that we're lending to. Are we seeing any cracks, is it likely that defaults may pick up? And we talk about technical trends, what's happening with issuance. Are there reasons why there may be more attractive opportunities in one strategy versus the other.

Well, different firms will have committees doing different things, and our committee is less of a voting committee and more of a thought leadership committee. So we convene all of the different portfolio managers at oak Tree that cover different asset classes like hil bonds and leverage loans, structured credit, emerging market debt, even convertibles, and we meet every other week as a group to talk about what's happening in credit. So we'll talk about the fundamentals of the companies that we're lending to. Are we seeing any cracks, is it likely that defaults may pick up? And we talk about technical trends, what's happening with issuance. Are there reasons why there may be more attractive opportunities in one strategy versus the other.

So at one of your weekly meetings, what would be the big talking point during well, presumably during FOMC meeting it would be the FED. But what have you been talking about lately?

So at one of your weekly meetings, what would be the big talking point during well, presumably during FOMC meeting it would be the FED. But what have you been talking about lately?

Well, we're bottom up investors, macro investors, but it's hard to ignore the macro outlook when we're at such a pivotal point with you know, perhaps a change in FED policy that may signal this new expansionary period and credit. We've had interest rates so high for so long, and really where we're focused on is what has that impact ben on borrowers credit worthiness. So we really are trying to avoid risk when we're investing in fixed income. We like to say it oak tree. If you avoid the losers, the winners will take care of themselves. A lot of our conversation is avoiding bad outcomes and focusing on that lower cohort of borrowers that you may be in trouble given these higher rates.

Well, we're bottom up investors, macro investors, but it's hard to ignore the macro outlook when we're at such a pivotal point with you know, perhaps a change in FED policy that may signal this new expansionary period and credit. We've had interest rates so high for so long, and really where we're focused on is what has that impact ben on borrowers credit worthiness. So we really are trying to avoid risk when we're investing in fixed income. We like to say it oak tree. If you avoid the losers, the winners will take care of themselves. A lot of our conversation is avoiding bad outcomes and focusing on that lower cohort of borrowers that you may be in trouble given these higher rates.

I love the idea, like this is sort of in my mind. When I think of stock investing, it's like you want to pick winners, and when I think of credit investing, you want to avoid losers. I always sort of think of it like cooking a steak, which is just like you want to just nail it every time in the perfect stake is just like, just avoid the bad ones, just stay consistent. I don't know, maybe that's a terrible analogy. I always think of stock credittak. Stocks's pizza is like, you have the most extraordinary pizza in the world. Credit is steak. You just want to not missc mess it up, not mess it up, exactly right. That's how I think of these things in my head. So one of the things that's really surprised me, or I think surprised a lot of people. We had this really aggressive rate hiking cycle, and credit spreads have been really narrow.

I love the idea, like this is sort of in my mind. When I think of stock investing, it's like you want to pick winners, and when I think of credit investing, you want to avoid losers. I always sort of think of it like cooking a steak, which is just like you want to just nail it every time in the perfect stake is just like, just avoid the bad ones, just stay consistent. I don't know, maybe that's a terrible analogy. I always think of stock credittak. Stocks's pizza is like, you have the most extraordinary pizza in the world. Credit is steak. You just want to not missc mess it up, not mess it up, exactly right. That's how I think of these things in my head. So one of the things that's really surprised me, or I think surprised a lot of people. We had this really aggressive rate hiking cycle, and credit spreads have been really narrow.

Now.

Now.

The obvious answer there, although it's a little question begging I suppose, is like, yeah, well, because we didn't get a recession. A lot of people expected a recession or some sort of major downturn from the raid hikes. We didn't get that, So that's maybe why asset valuations have held up. Well, how would you Is there anything more to it when you look at just how tight spreads generally have remained over this cycle. What's your story that you tell for that?

The obvious answer there, although it's a little question begging I suppose, is like, yeah, well, because we didn't get a recession. A lot of people expected a recession or some sort of major downturn from the raid hikes. We didn't get that, So that's maybe why asset valuations have held up. Well, how would you Is there anything more to it when you look at just how tight spreads generally have remained over this cycle. What's your story that you tell for that?

It's a great question. I mean spreads have been tight. I mean typically in high yield we see an average spread range of three hundred to five hundred basis points. Anything's higher than five hundred, no barrow really wants to issue at anything lower than three hundred. You know, no investor wants to buy it. And what I think we've had to have conversations with our investors about is that with yields so high, it's a different environment. You don't need spreads to blow out and then compress to get your total return when you can get a yield of you know, seven percent or so. And so I think you're starting to see a shift from being more tactical buyer to a strategic buyer. And I think there's reasons why that spread is lower in light of what you shared, Joe. In the high old bond market, it's over fifty percent double be today. It's the highest quality it's been in ten years now. You have to contrast that with the leverage loan market, where we have seen some degradation and quality, and that is a market where we're focused on, you know, the lower ten to fifteen percent of borrowers and looking at the upcoming maturity schedule and wondering how some of those are going to get financed. But generally, like the market's okay, and so that lower spread feels more justified to us.

It's a great question. I mean spreads have been tight. I mean typically in high yield we see an average spread range of three hundred to five hundred basis points. Anything's higher than five hundred, no barrow really wants to issue at anything lower than three hundred. You know, no investor wants to buy it. And what I think we've had to have conversations with our investors about is that with yields so high, it's a different environment. You don't need spreads to blow out and then compress to get your total return when you can get a yield of you know, seven percent or so. And so I think you're starting to see a shift from being more tactical buyer to a strategic buyer. And I think there's reasons why that spread is lower in light of what you shared, Joe. In the high old bond market, it's over fifty percent double be today. It's the highest quality it's been in ten years now. You have to contrast that with the leverage loan market, where we have seen some degradation and quality, and that is a market where we're focused on, you know, the lower ten to fifteen percent of borrowers and looking at the upcoming maturity schedule and wondering how some of those are going to get financed. But generally, like the market's okay, and so that lower spread feels more justified to us.

So you mentioned the rate cuts earlier and describe them as potentially an expansionary period in credit. I guess I'm wondering how much pent up demand is there in terms of new issuance, because overall it feels like people have termed a lot of stuff out. But I guess there is that segment of struggling borrowers who perhaps for them rate cuts will be really important and make all the difference.

So you mentioned the rate cuts earlier and describe them as potentially an expansionary period in credit. I guess I'm wondering how much pent up demand is there in terms of new issuance, because overall it feels like people have termed a lot of stuff out. But I guess there is that segment of struggling borrowers who perhaps for them rate cuts will be really important and make all the difference.

It's a really good question.

It's a really good question.

I think when rates come down there is just more availability of credit. And as you point out, there are those barrows that have been struggling with higher rates. This will provide some per relief to them, especially those that have taken out floating rate debt. And if we look at the maturity wall I alluded to this a little bit earlier for loans over the next year, there's something like forty billion of maturity is coming due. It's all in the lowest rated credits, so it's split B triple C and even you know for twenty twenty six, twenty twenty seven, it's almost seventy percent. So it's this cohortive companies that haven't been able to get refinancing and maybe you know, lower rates will provide them some relief. They'll be a little bit more availability of capital. Some of them may not be able to be refinanced in traditional ways, they may need more rescue financing or capital solutions. But I do think it'll be positive for credit borrowers when you.

I think when rates come down there is just more availability of credit. And as you point out, there are those barrows that have been struggling with higher rates. This will provide some per relief to them, especially those that have taken out floating rate debt. And if we look at the maturity wall I alluded to this a little bit earlier for loans over the next year, there's something like forty billion of maturity is coming due. It's all in the lowest rated credits, so it's split B triple C and even you know for twenty twenty six, twenty twenty seven, it's almost seventy percent. So it's this cohortive companies that haven't been able to get refinancing and maybe you know, lower rates will provide them some relief. They'll be a little bit more availability of capital. Some of them may not be able to be refinanced in traditional ways, they may need more rescue financing or capital solutions. But I do think it'll be positive for credit borrowers when you.

Look at the types of entities that are struggling, fallen out, or actually impacted by this rate segar are we talking? Is it heavily in real estate? Is that the area that would be most exposed or most feeling the pain of higher rates? Are like, where do you see these pockets that actually are facing some challenges in the financing environment.

Look at the types of entities that are struggling, fallen out, or actually impacted by this rate segar are we talking? Is it heavily in real estate? Is that the area that would be most exposed or most feeling the pain of higher rates? Are like, where do you see these pockets that actually are facing some challenges in the financing environment.

No, it's a great point because we do a lot more than just corporate higal bonds leverage. Low real estate I think has been ground zero for some of these challenges, and a lower interest rate environment should create I think a little more optimism about what's ahead for real estate valuations and force I think some sales and some liquidity in that market. And so we are starting to see some positive outcomes in real estate as people get more comfortable with the rate environment.

No, it's a great point because we do a lot more than just corporate higal bonds leverage. Low real estate I think has been ground zero for some of these challenges, and a lower interest rate environment should create I think a little more optimism about what's ahead for real estate valuations and force I think some sales and some liquidity in that market. And so we are starting to see some positive outcomes in real estate as people get more comfortable with the rate environment.

So I'm always curious about tactical decisions when someone is controlling like a very big fund that has a lot of optionality embedded in it in terms of investments, Like there are tons of different things you could invest in as CopM of the diversified income fund. I mean, I know it's all relative value, but say in a month like August when there was a lot of volatility, but despite that, credit spreads were kind of stable. They weren't really blowing out during the big turmoil. How do you judge the opportunities presented to you at a time of like uncertainty.

So I'm always curious about tactical decisions when someone is controlling like a very big fund that has a lot of optionality embedded in it in terms of investments, Like there are tons of different things you could invest in as CopM of the diversified income fund. I mean, I know it's all relative value, but say in a month like August when there was a lot of volatility, but despite that, credit spreads were kind of stable. They weren't really blowing out during the big turmoil. How do you judge the opportunities presented to you at a time of like uncertainty.

Like then, we get so excited when there's volatility in the markets. It usually means there's some bargains. But as you point out, I mean, credit spreads really didn't widen much, and I think by the end of that volatile week it even tightened or at least made back that movement, So there wasn't much for us to do. On the corporate credit side, we were starting to get excited about convertible bonds, so it's an area that we invest in, and for those that maybe are less familiar with convertible bonds, I think the easiest way to explain them is it's a way to get the safety of a bond with some form of income, but you also get to participate in some equity upside. We're not converting into equity. We'll sell before that event happens, but it is nice to have some correlation to equity markets at certain times.

Like then, we get so excited when there's volatility in the markets. It usually means there's some bargains. But as you point out, I mean, credit spreads really didn't widen much, and I think by the end of that volatile week it even tightened or at least made back that movement, So there wasn't much for us to do. On the corporate credit side, we were starting to get excited about convertible bonds, so it's an area that we invest in, and for those that maybe are less familiar with convertible bonds, I think the easiest way to explain them is it's a way to get the safety of a bond with some form of income, but you also get to participate in some equity upside. We're not converting into equity. We'll sell before that event happens, but it is nice to have some correlation to equity markets at certain times.

I don't think we've ever done an episode.

I don't think we've ever done an episode.

We haven't actually convertible.

We haven't actually convertible.

Bond, so we could just talk about this, but can you talk a little bit more about, like how big is that market and who are the types of issuers typically or is the typical situation in which an issuer would go into the convert market.

Bond, so we could just talk about this, but can you talk a little bit more about, like how big is that market and who are the types of issuers typically or is the typical situation in which an issuer would go into the convert market.

Well, if you're going to do a session on that, you have to speak with our portfolio managers that only focus on convertible.

Well, if you're going to do a session on that, you have to speak with our portfolio managers that only focus on convertible.

I'd love to set that up.

I'd love to set that up.

So the convertible market is small, and it tends to be focused more in technology, healthcare, certain sectors, and it has more of a correlation, i'd say, to small cap stocks as compared to the SMP, even though the SMP does have a lot of tech exposure and so it tends to follow that more. I mean, for us, our approach there is really to find good credit that we can underwrite and then participate in the equity.

So the convertible market is small, and it tends to be focused more in technology, healthcare, certain sectors, and it has more of a correlation, i'd say, to small cap stocks as compared to the SMP, even though the SMP does have a lot of tech exposure and so it tends to follow that more. I mean, for us, our approach there is really to find good credit that we can underwrite and then participate in the equity.

As I said, so just.

As I said, so just.

To clarify from the issuer perspective, if it's small or if it's tech, and so that implies that they're probably fast growing. The appeal for them is what exactly There's this pool of capital that they want to borrow. But this sort of sweetener is that the end investor can participate potentially in some of the actual growth of the company.

To clarify from the issuer perspective, if it's small or if it's tech, and so that implies that they're probably fast growing. The appeal for them is what exactly There's this pool of capital that they want to borrow. But this sort of sweetener is that the end investor can participate potentially in some of the actual growth of the company.

Yeah, that's right.

Yeah, that's right.

You don't have to give up outright equity. And then also you can issue at a much lower rate than prevailing rates in the market. So that can be helpful for a company depending on where you are in a cycle. But it just ends up being a much smaller, more niche market, and you can't avoid the correlation to equities. And we're credit investors, so we don't want equities to influence too much the performance of our funds.

You don't have to give up outright equity. And then also you can issue at a much lower rate than prevailing rates in the market. So that can be helpful for a company depending on where you are in a cycle. But it just ends up being a much smaller, more niche market, and you can't avoid the correlation to equities. And we're credit investors, so we don't want equities to influence too much the performance of our funds.

Today, we're very.

Today, we're very.

Under allocated to converts it's probably the lowest allocation that we've had since twenty nineteen heading into COVID, just because of the valuations and equities and not finding as many bargains.

Under allocated to converts it's probably the lowest allocation that we've had since twenty nineteen heading into COVID, just because of the valuations and equities and not finding as many bargains.

Oh wait, so you said you were getting interested in convertibles going into the August selloff.

Oh wait, so you said you were getting interested in convertibles going into the August selloff.

But I guess you you changed your because of the volatility.

But I guess you you changed your because of the volatility.

Yeah, we felt that maybe we could go in at a better entry point, see, because the valuations haven't made a lot of sense for us, and we can get better potential returns from credit than equities. It's been low, but when you get some of these consecutive days in the market and there's a sell off, you get excited thinking converts are gonna be the first asset class to move. And so we started looking though at which converts moved, and they didn't really meet our criteria for wanting to wander into equities, especially with this rate decision coming up, an election coming up, a lot of risk out there.

Yeah, we felt that maybe we could go in at a better entry point, see, because the valuations haven't made a lot of sense for us, and we can get better potential returns from credit than equities. It's been low, but when you get some of these consecutive days in the market and there's a sell off, you get excited thinking converts are gonna be the first asset class to move. And so we started looking though at which converts moved, and they didn't really meet our criteria for wanting to wander into equities, especially with this rate decision coming up, an election coming up, a lot of risk out there.

But the idea would be in a volatility event as credit investors. If I mean that whole volatility event, it least about fifteen minutes, really like it was so short, but theoretically if it had lasted longer, the first opportunities likely would have shown up in converted I.

But the idea would be in a volatility event as credit investors. If I mean that whole volatility event, it least about fifteen minutes, really like it was so short, but theoretically if it had lasted longer, the first opportunities likely would have shown up in converted I.

Think so, especially when spreads aren't moving totally.

Think so, especially when spreads aren't moving totally.

That makes sense. Can you talk a little bit about from a portfolio standpoint? I mean it makes sense when you say, okay, volatility is exciting if you're an active manager, volatility presents opportunities. How do you position the portfolio such that you have the cash or the liquidity to take advantage of volatility? Because I joked on the day of the big sell off as like, oh, I should sell some stocks so I can buy the dip here. Like I would have loved to take advantage of that, but you know, I don't really like keep a lot of like extra cash around. How do you think about that from a portfolio standpoint, being invested but also being in a position to take advantage of opportunities.

That makes sense. Can you talk a little bit about from a portfolio standpoint? I mean it makes sense when you say, okay, volatility is exciting if you're an active manager, volatility presents opportunities. How do you position the portfolio such that you have the cash or the liquidity to take advantage of volatility? Because I joked on the day of the big sell off as like, oh, I should sell some stocks so I can buy the dip here. Like I would have loved to take advantage of that, but you know, I don't really like keep a lot of like extra cash around. How do you think about that from a portfolio standpoint, being invested but also being in a position to take advantage of opportunities.

And it's more of an art than a science.

And it's more of an art than a science.

I mean, today cash is an ass that it's not as delutive as it used to be to hold, so you can at least get some decent yield. And we'll invest our cash in investment gray kind of short duration type paper, so we're getting an even better yield. And we do like to have some of that in the portfolio as a buffer to use for these.

I mean, today cash is an ass that it's not as delutive as it used to be to hold, so you can at least get some decent yield. And we'll invest our cash in investment gray kind of short duration type paper, so we're getting an even better yield. And we do like to have some of that in the portfolio as a buffer to use for these.

Periods of volatility.

Periods of volatility.

One thing that we did a year or so ago as we looked at the portfolio and which were our you know, less liquid assets outside of private credit, because you really can't sell private credit a selloff. So we said, leverage loans, while you can trade them quickly, they take a while to settle, and so we have other options. Maybe we should create some liquidity by taking some money out of leverage loans. And what we did is we basically took every dollar we took out of leverage loans, we put fifty cents into cash and fifty cents into colos. So it's a barbell strategy because colos are really levered instruments. You're getting a higher yield, but they don't take time to settle, and then the cash, you know, that's available to us.

One thing that we did a year or so ago as we looked at the portfolio and which were our you know, less liquid assets outside of private credit, because you really can't sell private credit a selloff. So we said, leverage loans, while you can trade them quickly, they take a while to settle, and so we have other options. Maybe we should create some liquidity by taking some money out of leverage loans. And what we did is we basically took every dollar we took out of leverage loans, we put fifty cents into cash and fifty cents into colos. So it's a barbell strategy because colos are really levered instruments. You're getting a higher yield, but they don't take time to settle, and then the cash, you know, that's available to us.

So we created liquidity and we.

So we created liquidity and we.

Didn't really change the overall yield profile of the fund.

Didn't really change the overall yield profile of the fund.

You mentioned private credit. Just then, what has the growth of the private credit market meant for the more syndicated stuff, so, you know, leverage loans, publicly issued bonds, that sort of thing.

You mentioned private credit. Just then, what has the growth of the private credit market meant for the more syndicated stuff, so, you know, leverage loans, publicly issued bonds, that sort of thing.

I think Tricy, you said it so eloquently earlier on borrow is have more options, right, they have different ways to get financing, whether it's through the syndicated market working with a private lender. I think for us it's provided really attractive opportunities to step in when markets have been frozen. So I look back maybe to the end of twenty twenty two when banks were hung with what forty billion on their balance sheets, and that was an opportunity to step in and dictate terms and say, well, lend and in scale, but we want covenants, we want protections.

I think Tricy, you said it so eloquently earlier on borrow is have more options, right, they have different ways to get financing, whether it's through the syndicated market working with a private lender. I think for us it's provided really attractive opportunities to step in when markets have been frozen. So I look back maybe to the end of twenty twenty two when banks were hung with what forty billion on their balance sheets, and that was an opportunity to step in and dictate terms and say, well, lend and in scale, but we want covenants, we want protections.

Well, sorry, explain that more. What were the assets that were frozen or weren't moving, what types of assets were those, and then what was this sort of what was your package or what was your pitch to them?

Well, sorry, explain that more. What were the assets that were frozen or weren't moving, what types of assets were those, and then what was this sort of what was your package or what was your pitch to them?

Yeah, so it was banks that had pre agreed to syndicate loans, and because interest rates had moved so quickly, those banks were going to take significant losses taking those loans to market, and so those opportunities they needed private lenders to step in to speak for those deals. And so what we were able to do is we were able to command better terms in the form of pricing, so higher spreads got it, and the negotiate covenants that you wouldn't see in the public markets. That's been the big issue on loans. You've had no covenants or protections in the levered loan market, whereas with private credit when we're directly originating loans, especially on the non sponsor side, we can actually protect ourselves in terms of structure and get covenants in there that are going to protect us.

Yeah, so it was banks that had pre agreed to syndicate loans, and because interest rates had moved so quickly, those banks were going to take significant losses taking those loans to market, and so those opportunities they needed private lenders to step in to speak for those deals. And so what we were able to do is we were able to command better terms in the form of pricing, so higher spreads got it, and the negotiate covenants that you wouldn't see in the public markets. That's been the big issue on loans. You've had no covenants or protections in the levered loan market, whereas with private credit when we're directly originating loans, especially on the non sponsor side, we can actually protect ourselves in terms of structure and get covenants in there that are going to protect us.

This is one thing I always wondered. But in the private market, when you're an entity like oak Tree, who initiates the conversations. Is it the bank come to you and say, hey, we have a hung loan we need to get rid of it. Is it the company looking for options? Do you approach potential borrowers? How does that work?

This is one thing I always wondered. But in the private market, when you're an entity like oak Tree, who initiates the conversations. Is it the bank come to you and say, hey, we have a hung loan we need to get rid of it. Is it the company looking for options? Do you approach potential borrowers? How does that work?

It depends, But we do have a sourcing and origination team that oak Tree that speaks for the entirety of our firm. I think it's a competitive advantage for us because they are facing off with companies with sponsors, with the banks. It's like having a sophisticated capital markets team within an alternative asset manager, and it allows us to have conversations more from the point of what do you need, what's your problem?

It depends, But we do have a sourcing and origination team that oak Tree that speaks for the entirety of our firm. I think it's a competitive advantage for us because they are facing off with companies with sponsors, with the banks. It's like having a sophisticated capital markets team within an alternative asset manager, and it allows us to have conversations more from the point of what do you need, what's your problem?

What type of financing?

What type of financing?

And then they will come back to us at oak Tree and say, this is what we need to do. Where does this fit across the firm? Let's create something that really is tailored to that entity. And so that's kind of how we see a lot of different things. We're also a first call in terms of these types of opportunities given our roots and distressed debt, investing, special situations and rescue finance.

And then they will come back to us at oak Tree and say, this is what we need to do. Where does this fit across the firm? Let's create something that really is tailored to that entity. And so that's kind of how we see a lot of different things. We're also a first call in terms of these types of opportunities given our roots and distressed debt, investing, special situations and rescue finance.

I mean, we've talked a lot on the show now about the growth of private credit. How much has private credit grown within oak Tree?

I mean, we've talked a lot on the show now about the growth of private credit. How much has private credit grown within oak Tree?

It's grown a lot.

It's grown a lot.

When I joined the firm back in twenty fourteen, I want to say, at that time, just the private credit industry was maybe five hundred billion. It's grown to one point seven trillion. I think today. The unique thing about oak Tree is we've been doing private credit for a long time. Back in two thousand, the firm launched a mezzanine kind of middle market fund, and that's grown into direct lending. It's really taken on all sorts of forms. But I think we're still doing the same type of lending that.

When I joined the firm back in twenty fourteen, I want to say, at that time, just the private credit industry was maybe five hundred billion. It's grown to one point seven trillion. I think today. The unique thing about oak Tree is we've been doing private credit for a long time. Back in two thousand, the firm launched a mezzanine kind of middle market fund, and that's grown into direct lending. It's really taken on all sorts of forms. But I think we're still doing the same type of lending that.

We were historically.

We were historically.

It's just now become much more popular and mainstream.

It's just now become much more popular and mainstream.

So on that note, how competitive is that market at the moment, Because I think back to you were talking about covenants earlier. One of the driving forces behind the rise of CoV light sort of posts two thousand and eight was well, there was so much money chasing yield that it was a race to the bottom, and if one investor wanted protections built into their investment or their loan that the company didn't want, then someone else would step in and basically offer to do it on better terms in the company's perspective. Do you feel that kind of competitive pressure now in the private market.

So on that note, how competitive is that market at the moment, Because I think back to you were talking about covenants earlier. One of the driving forces behind the rise of CoV light sort of posts two thousand and eight was well, there was so much money chasing yield that it was a race to the bottom, and if one investor wanted protections built into their investment or their loan that the company didn't want, then someone else would step in and basically offer to do it on better terms in the company's perspective. Do you feel that kind of competitive pressure now in the private market.

I think we still have some of that today and we will going forward, just given how much demand there is for private credit. But I do segment the market, so I feel like that's most acute in the direct lending LBO finance sponsor backed transactions, where you know, we try and play, though it's a smaller opportunity set, it's more episodic, is directly originating debt non sponsor, and there you don't have the competition, and so you're able to set terms and you're the sole lender or maybe one of two lenders, and there's just a lot less competition because when you manage a very large private credit fund, you've got to put a lot of capital to work, and there are just more LBO sponsor backed opportunities available. So if you are able to be nimble or manage private credit in a multi asset portfolio like I do, where you don't have to constantly be deploying in private credit. You have other tools in your toolkit. We can be selective and try and overweight those non sponsor opportunities.

I think we still have some of that today and we will going forward, just given how much demand there is for private credit. But I do segment the market, so I feel like that's most acute in the direct lending LBO finance sponsor backed transactions, where you know, we try and play, though it's a smaller opportunity set, it's more episodic, is directly originating debt non sponsor, and there you don't have the competition, and so you're able to set terms and you're the sole lender or maybe one of two lenders, and there's just a lot less competition because when you manage a very large private credit fund, you've got to put a lot of capital to work, and there are just more LBO sponsor backed opportunities available. So if you are able to be nimble or manage private credit in a multi asset portfolio like I do, where you don't have to constantly be deploying in private credit. You have other tools in your toolkit. We can be selective and try and overweight those non sponsor opportunities.

So I've been talking about the credit markets from the borrower perspective. You mentioned in the beginning that in the current rate environment, or at least the recent rate environment, credit has also had a really big yield component as part of the value proposition. And with raised as high as they are, credit spreads okay, maybe a little narrower, but all in, investors are getting a decent amount of income. How have you seen the demands of investors evolve? What are people looking for in terms of an income product or a credit product? And how has that changed over the last few years with the you know, the you know, the worst inflation in forty years and the aggressive rate hikes as such, what have you seen on this sort of like the investor.

So I've been talking about the credit markets from the borrower perspective. You mentioned in the beginning that in the current rate environment, or at least the recent rate environment, credit has also had a really big yield component as part of the value proposition. And with raised as high as they are, credit spreads okay, maybe a little narrower, but all in, investors are getting a decent amount of income. How have you seen the demands of investors evolve? What are people looking for in terms of an income product or a credit product? And how has that changed over the last few years with the you know, the you know, the worst inflation in forty years and the aggressive rate hikes as such, what have you seen on this sort of like the investor.

End, I think investors have wanted more diversification, exposure to a mix of fixed and floating rate so that they aren't so susceptible to what's happening in the interest rate regime.

End, I think investors have wanted more diversification, exposure to a mix of fixed and floating rate so that they aren't so susceptible to what's happening in the interest rate regime.

Of the FED.

Of the FED.

Like fixed rate ig and high old only portfolios got pretty beaten up as rates were rising, and you saw a lot of interest and more floating rate leverage, loan, private credit products that could continue to offer higher income.

Like fixed rate ig and high old only portfolios got pretty beaten up as rates were rising, and you saw a lot of interest and more floating rate leverage, loan, private credit products that could continue to offer higher income.

But now where we are, they want.

But now where we are, they want.

To toggle back, right because the fixed rate is really what's going to benefit the most from a rate cut, and so having portfolios set up that can tactically access both of those opportunity sets, I think that's really what we're.

To toggle back, right because the fixed rate is really what's going to benefit the most from a rate cut, and so having portfolios set up that can tactically access both of those opportunity sets, I think that's really what we're.

Hearing a lot of demand for. Wait, so talk to us a little bit more.

Hearing a lot of demand for. Wait, so talk to us a little bit more.

You know, earlier we were discussing credit spreads and the fact that they've remained fairly low, but as you say, maybe because of yield, they look a little bit more attractive in the higher rate environment. But what does like a good entry point into credit actually look like right now? Like what should investors be looking for if they want to kind of flip the switch on higher exposure.

You know, earlier we were discussing credit spreads and the fact that they've remained fairly low, but as you say, maybe because of yield, they look a little bit more attractive in the higher rate environment. But what does like a good entry point into credit actually look like right now? Like what should investors be looking for if they want to kind of flip the switch on higher exposure.

Well, I think today in the high yield market, you can get good income from a high quality bond. You're looking probably around a seven percent yield, and that's attractive for some. I mean I work with a lot of institutions as well, pension plans, endowments. Oftentimes they're trying to solve for seven percent, they no longer need to allocate to equities to get that type of return. Has the yield been higher, sure, I mean it was as high as ten percent, you know, not so long ago, which is more of an equity like return. If you think about the SMP the last one hundred years, it's probably given you around ten percent. I mean, if you're getting ten percent, it feels somewhat like a free lunch to go into credit, and so I'd say, like, that's an entry point you don't want to miss. But today you're still getting you know, seven percent, it's pretty good.

Well, I think today in the high yield market, you can get good income from a high quality bond. You're looking probably around a seven percent yield, and that's attractive for some. I mean I work with a lot of institutions as well, pension plans, endowments. Oftentimes they're trying to solve for seven percent, they no longer need to allocate to equities to get that type of return. Has the yield been higher, sure, I mean it was as high as ten percent, you know, not so long ago, which is more of an equity like return. If you think about the SMP the last one hundred years, it's probably given you around ten percent. I mean, if you're getting ten percent, it feels somewhat like a free lunch to go into credit, and so I'd say, like, that's an entry point you don't want to miss. But today you're still getting you know, seven percent, it's pretty good.

That's the old joke Joe, where like if you liked high yield at seven percent, you love it at ten.

That's the old joke Joe, where like if you liked high yield at seven percent, you love it at ten.

Except no one actually does. Yeah, okay, So it was very logical. As rates were rising, suddenly interest in floating rate debt goes up. Then the interest rates turned around, and suddenly, oh, people want the fixed rate debt for obvious reasons. You know, one thing I wander about, and it comes up in many interviews. Does the memory though of twenty twenty two persist? And do you see that over the next decade, the fact that you can have these very sudden, sharp spikes in inflation and therefore rates do you see that leaving a fingerprint on investor profiles, are on investor risk management for years to come, even setting aside this cycle, that memory of that experience.

Except no one actually does. Yeah, okay, So it was very logical. As rates were rising, suddenly interest in floating rate debt goes up. Then the interest rates turned around, and suddenly, oh, people want the fixed rate debt for obvious reasons. You know, one thing I wander about, and it comes up in many interviews. Does the memory though of twenty twenty two persist? And do you see that over the next decade, the fact that you can have these very sudden, sharp spikes in inflation and therefore rates do you see that leaving a fingerprint on investor profiles, are on investor risk management for years to come, even setting aside this cycle, that memory of that experience.

I'm a little skeptical.

I'm a little skeptical.

I think many just have this low rate, zero interest environment stuck in their heads and they think that we're going back down there and we're staying there. And what you raise is a concern of mine, like if inflation rears its ugly head again and at the same time the economy is slowing like stagflation, not something that many investors for investing today have seen.

I think many just have this low rate, zero interest environment stuck in their heads and they think that we're going back down there and we're staying there. And what you raise is a concern of mine, like if inflation rears its ugly head again and at the same time the economy is slowing like stagflation, not something that many investors for investing today have seen.

Well, then that actually brings to mind another question, which is that one of the extraordinary aspects I would say, you know, starting in March twenty twenty two is through policy, through fiscal policy and aggressive FED action. You know, we knocked out the recession in like three months, those the shortest recession ever, and we sort of proved through policy that we can always fight recessions, that they don't really have to happen, but we know they'll happen again. But it also makes me wonder, and then we didn't have a recession in twenty twenty two or twenty twenty three when everyone expected it. And so I'm curious from the other side, like are people anxious about recession or is there a view that's settled in that, like we don't have to have recessions and they could be kind of a thing of the past.

Well, then that actually brings to mind another question, which is that one of the extraordinary aspects I would say, you know, starting in March twenty twenty two is through policy, through fiscal policy and aggressive FED action. You know, we knocked out the recession in like three months, those the shortest recession ever, and we sort of proved through policy that we can always fight recessions, that they don't really have to happen, but we know they'll happen again. But it also makes me wonder, and then we didn't have a recession in twenty twenty two or twenty twenty three when everyone expected it. And so I'm curious from the other side, like are people anxious about recession or is there a view that's settled in that, like we don't have to have recessions and they could be kind of a thing of the past.

I mean, it feels like the latter in the market, right the Fed just took this big bazooka and yeah, really kind of shot the economy and got things going. And they're also in a pretty good place right now with rates so high to be able to aggressively cut rates if something does happen.

I mean, it feels like the latter in the market, right the Fed just took this big bazooka and yeah, really kind of shot the economy and got things going. And they're also in a pretty good place right now with rates so high to be able to aggressively cut rates if something does happen.

So I agree with you.

So I agree with you.

I think a lot of people are thinking will we ever have recessions again? Now At oak Tree, yes, we think we will. You know, we're very much a believer of cycles. So maybe one you know, theory that we have is because the recession was so talked about, this upcoming recession that CFOs got in front of it. And you did see that right with the wave of refinancings that occurred, and frankly, you know, COVID, the reopening was pretty good for companies. Like higher inflation has hurt consumers, but it didn't hurt companies who saw their revenues increase, so they're in a better cash position kind of coming into this period too.

I think a lot of people are thinking will we ever have recessions again? Now At oak Tree, yes, we think we will. You know, we're very much a believer of cycles. So maybe one you know, theory that we have is because the recession was so talked about, this upcoming recession that CFOs got in front of it. And you did see that right with the wave of refinancings that occurred, and frankly, you know, COVID, the reopening was pretty good for companies. Like higher inflation has hurt consumers, but it didn't hurt companies who saw their revenues increase, so they're in a better cash position kind of coming into this period too.

We talk a little bit more about that. I find that interesting the idea that because everyone was talking about potential recession, maybe a bunch of corporate treasurers decided to term out their maturities and that's maybe why we didn't have the big maturity wall disaster that everyone thought we would.

We talk a little bit more about that. I find that interesting the idea that because everyone was talking about potential recession, maybe a bunch of corporate treasurers decided to term out their maturities and that's maybe why we didn't have the big maturity wall disaster that everyone thought we would.

Yeah, maybe I'm giving them too much credit. Right, Look, I think another thing that happened was COVID, and you could argue that that was a recession, a mini recession, and maybe it's just like the something, it was something, right, I mean, we did see default spike, and what's happened there is some of the worst companies kind of fell out of the index and that's where you get that better quality, right that I.

Yeah, maybe I'm giving them too much credit. Right, Look, I think another thing that happened was COVID, and you could argue that that was a recession, a mini recession, and maybe it's just like the something, it was something, right, I mean, we did see default spike, and what's happened there is some of the worst companies kind of fell out of the index and that's where you get that better quality, right that I.

Was alluding to.

Was alluding to.

And so maybe you just had this kind of cleaning event that happened. And because the market is of higher cour quality, market participants see that, and so they're not as concerned about having as big of an issue going forward.

And so maybe you just had this kind of cleaning event that happened. And because the market is of higher cour quality, market participants see that, and so they're not as concerned about having as big of an issue going forward.

Can you talk about this whenever I hear like my credit colleagues and Tracy talk about like, oh, like high yield that environment just fundamentally doesn't look like the high yield environment of past or I hear people talk about like fallen angels or all these different things that are a little bit outside of my own comfort zone. What is this sort of I guess the credit profile of the market look like, how has it changed over the last I don't know, five years, ten years, et cetera. So when we talk about high old today versus highyield five years ago or high yeld fifteen years ago, like, how have these markets changed?

Can you talk about this whenever I hear like my credit colleagues and Tracy talk about like, oh, like high yield that environment just fundamentally doesn't look like the high yield environment of past or I hear people talk about like fallen angels or all these different things that are a little bit outside of my own comfort zone. What is this sort of I guess the credit profile of the market look like, how has it changed over the last I don't know, five years, ten years, et cetera. So when we talk about high old today versus highyield five years ago or high yeld fifteen years ago, like, how have these markets changed?

Well, credit rating agencies will issue their ratings, and you know, if they were right all the time, we wouldn't have a job.

Well, credit rating agencies will issue their ratings, and you know, if they were right all the time, we wouldn't have a job.

We'd like to say that, but assume they are.

We'd like to say that, but assume they are.

And what you've seen is that these markets have tended to skew to lower ratings because they are sub investment grade credit and there's inherently more risk than investment grade. But it's a higher quality market today because some of those companies prior to COVID, you know, we're in the market, and then during COVID they defaulted on their debt, and so it's more of a technical thing. Right, the market looks better because you got rid of some of the worst companies from the indices. At the same time than that, some of the investment grade rated companies fell into the index or the fallen angels that you mentioned. So it's changed the composition of what's available out there. And then in terms of just you know, what kind of companies look like today versus the past.

And what you've seen is that these markets have tended to skew to lower ratings because they are sub investment grade credit and there's inherently more risk than investment grade. But it's a higher quality market today because some of those companies prior to COVID, you know, we're in the market, and then during COVID they defaulted on their debt, and so it's more of a technical thing. Right, the market looks better because you got rid of some of the worst companies from the indices. At the same time than that, some of the investment grade rated companies fell into the index or the fallen angels that you mentioned. So it's changed the composition of what's available out there. And then in terms of just you know, what kind of companies look like today versus the past.

Leverage has stayed like pretty steady.

Leverage has stayed like pretty steady.

It's actually come down a little bit in high yield, which is interesting. Even in price credit, you know, you're looking at maybe five turns of leverage. It's not excessive, and so the fundamentals are okay, I think for credit, and then you kind of overlay that with an economy where you're not seeing cracks in the labor market in any significant way. Like, sure, there are things that we are focused on an oak tree, like student debt, picking up delinquencies in auto payments, other indicators that you know show some stress, but like generally things feel.

It's actually come down a little bit in high yield, which is interesting. Even in price credit, you know, you're looking at maybe five turns of leverage. It's not excessive, and so the fundamentals are okay, I think for credit, and then you kind of overlay that with an economy where you're not seeing cracks in the labor market in any significant way. Like, sure, there are things that we are focused on an oak tree, like student debt, picking up delinquencies in auto payments, other indicators that you know show some stress, but like generally things feel.

Okay, and the same for the borrowers.

Okay, and the same for the borrowers.

It is true, Joe. I don't know if you remember, but there was a moment pre COVID and sort of post COVID where everyone was worried about the triple B bubble involves. Do you remember that there's the idea that like, so triple B is the lowest rung of investment grade, and it was like the fastest growing cohort of the IG market, and so everyone was like, oh god, the quality of the overall corporate BALLB market is deteriorating. Everything's triple B now, bublah blah blah blah, and it's going to burst one day. And instead what we've seen over the past year or so is the triple B bubble kind of burst. But because everyone got upgraded. Yeah, so like no downgrade, it's now falling down into high old status, but everything getting upgraded to speak to the quality point. Okay, since we have you, Danielle, one thing I've been wondering about, and I feel kind of bad because I've used this term in previous conversations, but we've never really flushed out what it actually means. Creditor on credit or violence. It's a very popular talking point.

It is true, Joe. I don't know if you remember, but there was a moment pre COVID and sort of post COVID where everyone was worried about the triple B bubble involves. Do you remember that there's the idea that like, so triple B is the lowest rung of investment grade, and it was like the fastest growing cohort of the IG market, and so everyone was like, oh god, the quality of the overall corporate BALLB market is deteriorating. Everything's triple B now, bublah blah blah blah, and it's going to burst one day. And instead what we've seen over the past year or so is the triple B bubble kind of burst. But because everyone got upgraded. Yeah, so like no downgrade, it's now falling down into high old status, but everything getting upgraded to speak to the quality point. Okay, since we have you, Danielle, one thing I've been wondering about, and I feel kind of bad because I've used this term in previous conversations, but we've never really flushed out what it actually means. Creditor on credit or violence. It's a very popular talking point.

But what do we mean exciting?

But what do we mean exciting?

Yeah, it does, right, it sounds active at least, what do we mean when we're talking about that?

Yeah, it does, right, it sounds active at least, what do we mean when we're talking about that?

You know, it's it's funny, it's nothing new, It's happened for a long time. But I think the dollars at play are a lot bigger given the growth of these markets. And it's what we talked about earlier that a lot of the deals that got done over the last few years have no covenants in the leverage loan market. And so what that does is it just there's holes in these deals and it allows for sometimes nefarious activities.

You know, it's it's funny, it's nothing new, It's happened for a long time. But I think the dollars at play are a lot bigger given the growth of these markets. And it's what we talked about earlier that a lot of the deals that got done over the last few years have no covenants in the leverage loan market. And so what that does is it just there's holes in these deals and it allows for sometimes nefarious activities.

Explain that further covenance and holes for someone like myself who is not doesn't have a concrete idea of what this means, like, is what talk to us a little bit about how that plays.

Explain that further covenance and holes for someone like myself who is not doesn't have a concrete idea of what this means, like, is what talk to us a little bit about how that plays.

Yeah.

Yeah.

Sure, so ideally when we're structuring alone with a company, we want to find ways to protect ourselves, especially if they are going to miss an interest payment or default on the entirety of their loan. We want to ensure things like we're first lean and the capital structure, meaning that we're going to get paid back first in a bankruptcy. We may want to tie our loan to certain assets that the company has so that those assets can be used to pay the proceeds of the bankruptcy. And so you put these covenants or terms into the bond indenture, the loan document so that you're protecting yourselves. But because there's been such competition to invest in these deals, and there's been this low interest rate environment and just a lot of capital, it's been harder to get these types of protections into the documents.

Sure, so ideally when we're structuring alone with a company, we want to find ways to protect ourselves, especially if they are going to miss an interest payment or default on the entirety of their loan. We want to ensure things like we're first lean and the capital structure, meaning that we're going to get paid back first in a bankruptcy. We may want to tie our loan to certain assets that the company has so that those assets can be used to pay the proceeds of the bankruptcy. And so you put these covenants or terms into the bond indenture, the loan document so that you're protecting yourselves. But because there's been such competition to invest in these deals, and there's been this low interest rate environment and just a lot of capital, it's been harder to get these types of protections into the documents.

It sort of sounds like when everyone was buying homes a few years ago and no one did the inspect They like awave the inspections just because you just like and that was like one of it. It's like, no, if you want an inspection, someone's going to buy it before you. It's like the same basic principle.

It sort of sounds like when everyone was buying homes a few years ago and no one did the inspect They like awave the inspections just because you just like and that was like one of it. It's like, no, if you want an inspection, someone's going to buy it before you. It's like the same basic principle.

Yeah. And so when it comes to lender on lender violence, then, as you were saying, Tracy, these companies are struggling from higher rates, right, they may not be able to make their interest payments. And so what's happening is you have certain creditors and sponsors looking at, well, how are we going to remedy this situation. We need fresh capital for this company to kick the can down the road, if you will. And so what you're seeing is different techniques applied taking advantage of there being no covenants. So a classic example of this is stripping assets from a collateral package, dropping them out.

Yeah. And so when it comes to lender on lender violence, then, as you were saying, Tracy, these companies are struggling from higher rates, right, they may not be able to make their interest payments. And so what's happening is you have certain creditors and sponsors looking at, well, how are we going to remedy this situation. We need fresh capital for this company to kick the can down the road, if you will. And so what you're seeing is different techniques applied taking advantage of there being no covenants. So a classic example of this is stripping assets from a collateral package, dropping them out.

It's called a drop down.

It's called a drop down.

So you might see that they might go to a new entity and unrestricted entity that can then take out debt. That will just lessen the amount of assets that investors can have to pay back their claims. You also have the ability to have new capital come in so effectively priming first lean investors. You go to bed thinking your first lean, and then you wake up the next day second lean surprise. That's challenging and oftentimes really the company can work with the majority of creditors to do this really quickly, and not all creditors may be involved, and it can be really violent, I guess if you will, which is why the term is used.

So you might see that they might go to a new entity and unrestricted entity that can then take out debt. That will just lessen the amount of assets that investors can have to pay back their claims. You also have the ability to have new capital come in so effectively priming first lean investors. You go to bed thinking your first lean, and then you wake up the next day second lean surprise. That's challenging and oftentimes really the company can work with the majority of creditors to do this really quickly, and not all creditors may be involved, and it can be really violent, I guess if you will, which is why the term is used.

So one of the things I've been thinking about recently. We started this conversation talking about the credit cycle and the idea of well, maybe we're at the start of a new credit cycle or a new stage of the current credit cycle. It does feel like the cycles have kind of become a little bit muddled, right, I guess as we were discussing, there are all these new options for borrowers. So if they can't get a loan in the syndicated market, maybe they talk to someone in the private market, and so there's I guess additional pressure valves. Does it feel to you like maybe the credit cycle has changed in some either fundamental or permanent way.

So one of the things I've been thinking about recently. We started this conversation talking about the credit cycle and the idea of well, maybe we're at the start of a new credit cycle or a new stage of the current credit cycle. It does feel like the cycles have kind of become a little bit muddled, right, I guess as we were discussing, there are all these new options for borrowers. So if they can't get a loan in the syndicated market, maybe they talk to someone in the private market, and so there's I guess additional pressure valves. Does it feel to you like maybe the credit cycle has changed in some either fundamental or permanent way.

Here. Now, what you raise I think is important because in some ways it may have extended the credit cycle because there are different avenues for companies to access capital. You know, well, I think it creates a lasting impact. I think we'll have to wait and see, but probably the answer is yes, especially as private credit grows and morphs from more of an industry that was focused on sponsor backed direct lending to areas like non sponsor directly originated loans, which I had mentioned, and then other things like asset back to finance. I think they'll just continue to be an evolution of the market over time.

Here. Now, what you raise I think is important because in some ways it may have extended the credit cycle because there are different avenues for companies to access capital. You know, well, I think it creates a lasting impact. I think we'll have to wait and see, but probably the answer is yes, especially as private credit grows and morphs from more of an industry that was focused on sponsor backed direct lending to areas like non sponsor directly originated loans, which I had mentioned, and then other things like asset back to finance. I think they'll just continue to be an evolution of the market over time.

I'm curious about industry sectors, and we've talked about it a little bit. We talked about where companies issue preferreds. We talked a little bit about the sensitivity of real estate to the interest rate cycle. One of the other big macro themes that we talk a lot about the show is like this incredible boom into certain types of capex, things like data centers, things like infrastructure, things like new energy. All the different factories and plants that have come out thanks to the Chips Act and the Inflation Reduction Act. How do some of these big economy wide trends play out in the credit space, and have there been new areas of borrowing that you see due to things like some of these secular trends in the nature of the economy.

I'm curious about industry sectors, and we've talked about it a little bit. We talked about where companies issue preferreds. We talked a little bit about the sensitivity of real estate to the interest rate cycle. One of the other big macro themes that we talk a lot about the show is like this incredible boom into certain types of capex, things like data centers, things like infrastructure, things like new energy. All the different factories and plants that have come out thanks to the Chips Act and the Inflation Reduction Act. How do some of these big economy wide trends play out in the credit space, and have there been new areas of borrowing that you see due to things like some of these secular trends in the nature of the economy.

Yeah, you know, we have seen secular trends over time. And most of the activity that was in M and A and LBOs of the last however many years, was in tech in particular.

Yeah, you know, we have seen secular trends over time. And most of the activity that was in M and A and LBOs of the last however many years, was in tech in particular.

And now tech is.

And now tech is.

Such a large part of the leverage loan market. And now today as you point out new areas of investment AI chips, I think it's growing that area. But I mean, the market has a beautiful way of adjusting itself, right, Like we loved investing in data centers last year, but then everyone else did too, and so the yields have really compressed. So there is somewhat I think of a resetting of return expectations and some of those hot sectors. And then you really have to shift to say, wow, so much of this was issued. Are these really quality loans that were made? Is this going to be ground zero for defaults? And then it becomes more of a problem, right Like what's hot then becomes the area of concern.

Such a large part of the leverage loan market. And now today as you point out new areas of investment AI chips, I think it's growing that area. But I mean, the market has a beautiful way of adjusting itself, right, Like we loved investing in data centers last year, but then everyone else did too, and so the yields have really compressed. So there is somewhat I think of a resetting of return expectations and some of those hot sectors. And then you really have to shift to say, wow, so much of this was issued. Are these really quality loans that were made? Is this going to be ground zero for defaults? And then it becomes more of a problem, right Like what's hot then becomes the area of concern.

So one thing I was wondering about an event like this future Proof. It bills itself as a wealth festival. The predominant audience member seems to be rias. So I'm curious when someone like you comes to an event like this, what are you talking about with all the people here? Are you like pitching those specific funds or like, what are those client conversations or potential client conversations actually looking like.

So one thing I was wondering about an event like this future Proof. It bills itself as a wealth festival. The predominant audience member seems to be rias. So I'm curious when someone like you comes to an event like this, what are you talking about with all the people here? Are you like pitching those specific funds or like, what are those client conversations or potential client conversations actually looking like.

I mean, if you're an RIA, you have so much to consider in terms of asset allocation outside of alternatives. But even with alternatives, you've got VC, private equity, all these different areas to consider. So I think a lot of my conversations are around why credit is a compelling investment opportunity today, getting those high yields and income. I do think credit could potentially outperform equities, and you know, having them think about it as a steady allocation in their portfolios of their clients so that their clients can do other things. I mean, why not have fixed income credit be that steady core allocation that hopefully, you know, they can then use to fund other areas. So a lot of my conversations are educational it's also about talking about the different types of private credit that's out there and the different types of vehicles that they can access to. So we've seen interval funds, BDC's, these types of funds become more mainstream and really excited to just kind of have those conversations about how individuals can access what institutions have for so long.