August 14, 2025 • 42 mins
More companies will fail to repay debt as funding costs stay high, according to Mudrick Capital Management. “What we’re getting is just elevated defaults every year, we think for the next five to seven years,” Jason Mudrick, the distressed debt fund’s founder and chief investment officer, tells Bloomberg News’ Irene Garcia Perez and Bloomberg Intelligence’s Mike Holland in the latest Credit Edge podcast. “The catalyst today is not an economic downturn — it’s this normalization of interest rates,” says Mudrick. They also discuss the Tropicana, Yellow Pages and Shutterfly debt restructurings, as well as flying taxi maker Vertical Aerospace.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:18):
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is Irene Garthia Perez. I'm a team leader
of a Bloomberg News.
Speaker 2 (00:25):
And I'm Mike Collins, senior healthcare credit analyst at Bloomberg Intelligence.
This week, we're very pleased to welcome Jason Mudrack, chief
investment officer and founder of Mudrich Capital Management. How are you, Jason, great?
Thanks for having me great, Happy to have you here.
We're excited to have Jason with us. A real pleasure
to have the chance to get up close with one
of the most successful distressed investors over the past twenty years.
(00:47):
After a time at University of Chicago undergrad and Harvard Law,
and then a stint at Merrill, Jason got started at
Contrarian Capital Management, managing distressed debt and post for reor
equities two.
Speaker 3 (00:57):
Thousand and nine.
Speaker 2 (00:57):
You hung your own shingle and have consistently generated some
impressive returns ever since, despite a constantly evolving debt market
environment over the past two decades. Welcome Jason.
Speaker 3 (01:07):
Thank you.
Speaker 1 (01:08):
You signed up Modric Capital Management when you were thirty four,
so you were a young founder in the midst of
the Great Recession. What made you take that decision, and
was there a formative moment And who do you consider your.
Speaker 3 (01:22):
Mentors younger, I'm still considered myself. Yeah, sorry, yes, of course. Well. Look,
I spent seven years working for what I considered at
the time one of the most brilliant distressed investors, certainly
at the time, John Bauer, who ran Contrarian. I sat
next to John for seven years. And that is where
you learn the business. You know, you don't learn that
(01:44):
in grad school, so I went to law school. I
spent some time doing investment banking, but you really learn
on the job. And my first day at Contrarian was
December third, two thousand and one, which was a meaningful
day for me because it was the day and Ron
filed for bankruptcy, which, for those that are old enough
to remind remember, was the largest bankruptcy ever at the time.
And I spent seven years book ended by that and
(02:05):
then Leman because I left Contrarion a week after Lehman filed,
which took the trophy and was then the largest and
still the largest bankruptcy ever. So got to see, you know,
an incredible amount of distressed opportunities, got to see the
industry evolve, and institutionalize. I think assets in the alternative
investment industry went from two hundred billion to two trillion
(02:26):
over the course of the time of that time, so
massive growth, institutionalization, and I got to run money. John
let me launch a fun at the end of two
thousand and two focused on debt for equity opportunities and
post bankruptcy situations, and I ran that business for six years,
which allowed me to build an audited track record. So
the catalyst for leaving was the financial crisis. You know,
I had been at Contrarian for a long time. I'd
(02:47):
built a six year audited track record, but the opportunity
set was thin but growing, or the potential opportunity set,
and it was the GFC that really catalyzed, you know,
a huge opportunity in our investment universe. So that was
the catalyst to my own shingle. I could have left earlier.
I probably would have raised more money, but returns would
have been muted because there was very little to do.
I knew in two thousand and nine we'd be able
(03:08):
to make money. We'd probably start with a smaller pool
of assets because people weren't allocating to emerging managers at
the time, but track record is the most important thing
in this business, and I think that decision proves with
hindsight to be the right one.
Speaker 1 (03:19):
In recent years, liability management exercises have become a very
common way to restructure capital structures companies that either need
more liquidity or need to amend and extend their debt.
How have lems changed the way you evaluate risk and
reward these days compared to when you started.
Speaker 3 (03:42):
So I think that's a good segue to maybe level
set and understand how the credit markets have evolved from
the time of the GFC to today, because it really
sets up why we're seeing lemmes and why I think
lemes is a great thing for our opportunity sett it's
really elongating this distress credit cycle. So if you rewind
back to when rates were cut to zero, sort of
(04:03):
what happened, right, Like, I like to think that the
fourteen years between two thousand and nine and when we
saw a normalization of the rate cycle was the golden
era of private equity. Why do I say that we
had cheap debt, which is the primary currency private equity
firms used to acquire businesses, and it remained cheap for
(04:24):
a very, very long period of time, we had a
good economy, basically had growing earnings right, and we had
expanding multiples bay So you saw the multiples that the
SMP trade as a multiple of ubidago from eight times
to sixteen times. Now that's inflated by some of the
big tech but even if you back out some of that,
it's truly gone from eight to twelve. And you saw
private market valuations LBO multiples go from about eight to twelve.
(04:47):
You saw a fifty percent increase in the way businesses
were being valued as a multiple of earnings. You put
those three things together, it's the perfect storm for private equity.
Levered equity benefits the most in that kind of environment,
and we saw private equity assets under management go from
one point six trillion in two thousand and eight to
nine point six trillion today. Think about that, one point
(05:07):
six trillion to nine point six trillion. That is the
result of the perfect environment for private equity. However, okay,
it's a five hundred percent increase. However, private equity use
debt primarily to purchase companies, and that's what we focus on,
non investment grade credit or over leverage businesses. So we
saw the non investment grade credit market go from a
(05:29):
ground two trillion at the time of the GFC to
close to five and a half trillion where it is today.
That's US and European denominated non investment grade credit. Okay,
so massive market driven by this private equity boom. Secondly,
very broad Okay, if you think about distressed opportunities, why
does a company become distressed. Either something happens at the
(05:51):
company or something happens to the company's industry, or you
have a broader economic downturn, which we have not had,
or you have something like a dramatic in interest rates,
which I'll come back to. Okay, but prior to the
rate change, we didn't have an economic downturn. We didn't
have a rate change. You were looking at individual companies
that were challenged or industries that were challenged. And as
(06:11):
a fund manager, we need to run a diversified portfolio
of risk. It's hard to do when you have these
very specific industries like energy in twenty fifteen, or retail
being impacted by the Amazon effect or the move to
an omni channel model, or media that was going through
secular change, whether it's newspapers or yellow pages. As people
moved from analog to digital. Just run a diversified portfolio
(06:32):
where you had few pockets of opportunities was very challenging.
What's so compelling about today is the catalyst today is
not an economic downturn. It's this normalization of interest rates.
All this pre twenty twenty two LBO driven leverage okay
was put in place in an environment where people didn't
think rates were going to ever be higher than zero.
(06:52):
If you look at that eighty percent of leverage, biots
didn't hedge interest rate risk. Nobody thought rates were going
to go up, and as a result, they put very
very high levels of debt as a multiple of cash flows.
And that works in a zero rate environment, it doesn't
work in a four or five percent rate environment. But
the beauty of this is it impacts all borrowers, not
one industry. So we have a very diverse opportunity set okay,
(07:14):
which is very unique to this cycle. And then this
is the good segue into your question about lmes. The
other phenomenon that we've seen today is very few covenants.
Ninety percent of deals or covenant light okay. That was
up from zero percent pre GFC okay, So very few covenants,
and we also have a good economy. We have very
high multiples in the equity markets, which is oftentimes how
(07:35):
private equity firms are valuing these businesses. And you have
about half the loan market held by structured products. Okay
that don't want to take equity back if they don't
have to, so colos right. So it's created this opportunity
where sponsors want to extend maturities, and they can extend
maturities because without covenant it's easy to do out of
core deals otherwise known as lemes. But what that's doing
(07:59):
from and we'll talk about lem specifically, but what is
doing for our opportunity set is it's elongating it. We're
not getting the spike in defaults like we had in
two thousand and eight and then a collapse with the
reflation of the economy. What we're getting is just elevated
defaults every year we think for the next five to
seven years. We used to look at defaults when you're
talking about a world where there's lemes, which is effectively
(08:22):
an out of court default, but the ownership isn't changing.
There's a restructuring of the maturity of potential injection of
liquidity tightening of the covenant package if you include lemes
and those are mostly effectuated through distressed exchanges. A default
are around two percent today, but if you add in
distressed exchanges, it's around five percent. Okay. The historical norm
(08:42):
for default is around two percent, So defaults in two
thousand and eight got up to around twelve percent and
then they collapsed, but the market was two trillion dollars. Today,
we're in a world that's around five percent if you
include defaults and distressed exchanges, which is how you effectuate
these lemis. But it's five percent of a five and
a half trillion dollar market. I think it's going to
be four or five six percent every year consistently. That
(09:04):
will spike if there's an economic downturn, it will come
back down if there's recovery, but it's just going to
be elongated. Okay. If you think about the problem with
the stressed, it's been driven by economic downturns. Historically, when
there's not an economic downturn, you have it's very few
industries that are usually challenged industries, which makes it very difficult,
and it's very short. It's episodic. We have the opotion
(09:26):
now we have a large market, very diverse, and I
believe very elongated. The cyclicality of what we do has
been reduced, which is a big positive.
Speaker 1 (09:34):
So it has reduced a cyclicality, but it has increased
the brain damage somehow in terms of how you think
about the specific situations.
Speaker 3 (09:42):
Exactly right. So the way we invest has changed. Okay.
So in the old days, when we had covenants, the
exercise was valuing the business and then layering on the
capital structure to that valuation and figuring out what debt
was covered, what debt might be what we call the folkrum. Okay,
that would get need to get equitied, and what debt
would be out of the money, it would be wiped out.
But the success or non success of your investment would
(10:06):
ultimately determine on whether you've got the valuation right. Today,
it's more complicated than that. You have to value the business,
you have to understand the capital structure today, but you
also have to understand how that capital structure may evolve.
You may think that you're creating the business, which is
your entry point at a billion dollars. Let's say, and
you wake up tomorrow and you find that you thought
(10:27):
you were first lean and now your second lean and
your creation value is actually a billion five because somebody
just put five hundred million senior to you because you
didn't have covenant protection prohibiting that. So it becomes this
multi dimensional analysis where now you need to understand game theory,
who is involved, what's the sponsor's motive, what do the
documents allow, which is usually everything anything? And you know
(10:48):
who's in the structure. Can you get in the group,
the in group if it's a non proride deal, or
you're going to be left in the outgroup. And you're
seeing some pretty you know, dramatic differences and outcomes in
these non proae of deals. So it is complicated analysis.
It requires being larger usually to join these steering committees
which guarantees you better economic treatment or avoids the risk
(11:09):
of non parade of treatment. You need to be one
of the top called ten holders, and in a multi
billion dollar capital structure, that can mean you need to
own you know, one hundred million or more of the debt.
That's hard for smaller players. It's very hard for tourists
to come into this space today. But you know what's
happening and will continue to happen. Over time is a
lot of these capital structures are going to go from
(11:30):
pre Lmy to post Lemy, and we're going to get
back to a world where you can do distress investing
like we all used to do it, just focusing on valuation.
So like I think there was about three and a
half billion of OUSE, I have the data here so
I'll get it right. There was about three and a
half billion of lem's and twenty one of distressed exchanges,
but those are primarily elemies. It went up to twenty
(11:51):
one billion, and twenty two, twenty seven billion, and twenty
three and last year we had forty four billion of
distressed exchanges, which is an all time high. I think
in two thousand and eight it was around thirty six billion,
so and I suspect twenty twenty five we'll exceed twenty
four or be comparable. So what you're having is all
of these situations are going from pre le me or
you have this risk of non Parada treatment to post
(12:14):
lem where it will be much more challenging to have
non Parada treatment because what we get in these lemis
as lenders is we get covenants. Okay, we give the
sponsor liquidity potentially if they need it, we give them
an extension of maturity if that's what they're looking for.
Sometimes they capture discount by doing the exchange at ninety
cents on the dollar or lower, so they capture some
(12:35):
deleveraging and what we get is covenants and potentially a
non PARADA outcome if the situations died enough.
Speaker 1 (12:43):
Before starting we we're discussing. You've been invested in Tropicana
which ended up being a very corercive deal and Session
which was a PROADA transaction. At what point do you
see a transaction is going to head one way or another?
And what are the termining factors for going ye, win
or and r.
Speaker 3 (13:03):
You know, it's tricky, which is why I think this
this this new dimension that makes it very challenging for
a lot of folks to think about distress investing until
it's a post LM structure like in Tropicana. As an example,
we initially were not on the steering committee, and there
was a dramatically different treatment between the steering committee and
the non steering committee at the end of the day.
(13:24):
But we lobby the folks that were on the committee.
They're folks that we've done lots of deals with in
the past. This is an iterative game for you know,
longtime credit investors. We knew the advisors very closely and
also size mattered. They needed to get to over fifty
percent to effectuate that transaction, and we helped get them there.
So they made a clear upfront that we needed to
(13:45):
own over one hundred million dollars of debt to be
considered to be on the steering committee. And that puts
you in a tough position because you don't know they're
not contractually agreeing to let you on the steering committee,
So you have to go in and realize that you
might own, you know, a sized up position and be
left out of the group. Fortunately, in that situation, we
did get over one hundred million and they allowed us
(14:06):
into the group, and that was very fortunate because that
was a very non Parada transaction.
Speaker 1 (14:11):
What is it that Detter reminds in like any transaction, Yeah,
this is going to head into a non Paretta transaction
or is it going to be a more consensual like
what are the circumstances that lead the conversations go one
way or another?
Speaker 3 (14:26):
You know, each situation is different. We used to think
it was really driven by sponsor. Some sponsors were more aggressive,
other sponsors were known as being more friendly. That's not
the case anymore. It's so normal to do non Parada transactions.
I think almost every sponsor out there will consider them.
For example, in Tropicana, the sponsor there was known as
(14:46):
being very friendly. We had heard early on that they
would not do a non Parada deal, and it ended
up being a non Parada deal. An ironically, Decision, which
is owned by Platinum, which has had historically a very
aggressive reputation, insisted that that deal be completely parata, and
it was. Parado's economics were offered equally to every lender.
It's not the outcome you would have predicted just looking
(15:08):
at who the financial sponsor was. And another deal we
mentioned that we talked about before we went live here
was Shutterfly, which was an Apollo deal that we did
a l and me that we did that worked out
successfully for everybody. We did a little over two years ago.
Apollo has a very aggressive reputation. They insisted from the
very beginning of that negotiation that everything they do be parata.
(15:30):
I think there was some backstop economics, but that was
economics provided for value provided but in terms of just
treating similarly situated lenders differently, they insisted that that couldn't happen.
So you can't know from the sponsor anymore. So you
have to evaluate what does the company need and how
important is discount capture because you can capture a lot
(15:51):
of discount by doing a non parade of transaction, because
you'll leave certain lenders in a much worse position and
presumably they'll be trading much lower. How important are other things?
Is like liquidity needs maturity extension. So Tropicana needed a
bunch of money. Okay, they didn't need a maturity extension.
They didn't have a maturity wall decision, didn't need a
maturity extension. They also needed new money. So there was
(16:12):
different sticks and carrots there. Tropicana could have raised that
new money. I think it was four hundred million that
they needed. They could have raised that four hundred million
away from the existing lender group. Okay, there's always that
thread of them doing a deal away, but if they
did it with us, they would get all these bells
and whistles. They don't need a maturity extension, but they
could get discount capture, which they wouldn't be able to
(16:34):
get if they did the deal away. So, but what
what US lenders wanted was the abilities for the fifty
one percent to move ahead of the forty nine percent,
and that was sort of the quid pro quo, if
you will, in the trade. We provided the four hundred million.
We gave them discount. They captured nine cents on the
steer co and they captured thirty cents on the non
steerco in terms of discount capture. They got the liquidity
(16:56):
they needed, and we got covenants. Okay, so have a
tiered capital structure with super priority debt and second out
debt and third out debt, which doesn't great for the
long term balance sheet health of the company, but we're
in the first lean and the second lean, So for
the steerco lenders, we're in a very very solid position.
That's a perfect example of a post lem structure that
(17:18):
we think is incredibly attractive now. I think for those
that don't want to deal with the risks of nonparata,
or don't want to deal with the intricacies of lmes,
or maybe aren't large enough to guarantee that they're going
to be on the right side of these trades. Focusing
on post lem capital structures is the way to do
distress today?
Speaker 1 (17:37):
For context for our listeners, it was it still is
PI Partners the sponsor in the case of Tropicana.
Speaker 3 (17:46):
Correct.
Speaker 2 (17:47):
I'm just going to ask a question maybe stepping back,
stepping back and sort of talking about process. Mudrick's been
around for a while, your company and your investment strategy hasn't.
It's evolved over the years, but you haven't really changed.
And I wonder what's been consistent and what's changed over
the last nearly two decades with your process, and how
(18:07):
has it changed with the evolving investment environment and sort
of how you look at and sorce deals and ideas
and how you may move forward with those deals.
Speaker 3 (18:17):
Well, the biggest change clearly is what we're talking about now,
right is having to understand and price the risks of
being left out of a nonparada transaction. Also lmes whether
the proada or nomparada is a new phenomena, right, Like
in the old days, there was covenants, so you couldn't
effectuate a maturity extension outside of court, okay, and once
(18:40):
you're in court, there's an equidization, so there's an ownership change.
So in many situations today, evaluating this risk of nonparada
and also understanding that you're going to be a creditor
for much longer than in the old days might have
been the case. Right, The maturity doesn't mean necessarily that
you're going to take the keys. I think post lme
it's very hard to do a second enemy because thresholds
(19:03):
for document amendments are usually increased, and all of the
ways these transactions are structured to be coursive, things like
jay crue and search of they're all closed. Loopholes are
all closed up. Not to say there won't be additional
ones created by very smart and expensive lawyers, but it's
becoming more and more challenging to do an Lemy two
point zero or a second Lemy right. So that's probably
(19:25):
the biggest change right in terms of our valuation of businesses.
I've been doing it the exact same way for twenty
five years. This is how I learned the business. I
hate the expression you can't teach you know on all
dog new tricks, but it works right, Like, we look
at businesses that we think are leaders in their industry,
that are well managed, that have sustainable businesses, predictable cash flows,
(19:46):
good margins generate a lot of unlevered free cash flow,
and that's important because you're going to own these businesses
for three to five years through a restructure, and instructurings
don't happen quickly, right. There's a year negotiation, then there's
a year post you know, reorganizing where you can't necessarily
do an exit, and then there's like usually an operational fix,
and then there's an exit, whether it's an IPO or sale,
(20:07):
and that process can take three to five years. So
if you underwrite the business to be doing two hundred
million of cash flow and by the time you go
to exit it's doing one twenty five, well guess what,
Like all of that work was for not and you
probably lost money. So you have to underwrite the businesses
today but also understand the sustainability of those cash flows.
And it's really a deep value exercise. It's a classic
(20:29):
gram Dot Warren Buffett analysis. And that hasn't changed. The
process has changed, the players have changed, the availability of
information has changed. I constantly tell my analysts, Okay, stop
reading reog research, stop reading debt Wire, stop reading Bloomberg none,
(20:50):
but we need to find information that is not readily available, Like,
get on a plane, get out there, meet companies, meat competitors,
talk to suppliers. Let's do our own surveys. Let's create
prietary information that we don't think other people have, other
people know. Create edge? How do we get edge in
a world where information has become much more efficient. What
I always liked about the distress credit markets is it
was horrifically inefficient. Right, companies stopped talking to you, they
(21:13):
stop reporting ten k's and ten queues if they're privately owned.
There's very little information on the interlink sites. Right, it
was whatever was contractionally agreed in the credit agreement. So
the kind of disclosure that you get with a public
company and the liquidity you get with the public company,
you don't have. Like liquidity drives up, information drives up.
It's this very specialized skill set, but it's gotten much
more efficient. How do you use AI? We don't at all, No,
(21:36):
not even for the research. I mean, we read all
the despite what I just said, we all all We
read all the Bloomberg, we read all the real research,
and you guys are using a lot of AI, but
we don't. We haven't deployed any AI technology, right or wrong?
I'm a big believer that we do our own work,
Like that's how the light bulb goes off. It's spending
a lot of time reading through the documents, spending time
(21:57):
with management, talking to folks that are smarter than us
about the industry. And that's where you it's the work,
it's the process that creates the genius having chat GBq
or some sort of AI product, you know, tell us
about a company, like anybody can get access to that information.
It's not going to create a differentiated viewpoint and being
(22:19):
a contrarian, Like the idea is that you develop a
thesis that the security price is not reflecting, and then
you develop conviction in that thesis and you get it right,
and that's how you make money. That's how you generate
alpha and not data. In this market, Are.
Speaker 1 (22:34):
You seeing many opportunities arising from the disruption that AI
is causing across industries we have?
Speaker 3 (22:41):
I mean AI is impacting businesses all over the place,
like data centers as an example. Call centers is a
great example. It's a very distressed industry that we've been evaluating.
We have made an investment in it, but it's being
impacted by the uncertain by AI today, but also the
uncertainty is like this is this a business a value
proposition that will exist in two years or five years
(23:01):
or ten years. And it's constantly stuff that we talk
about how will AI impact these businesses? But that goes
back to the valuation exercise and the sustainability and predictability
of cash flows. But in terms of using AI to
help us analyze, we don't do that yet.
Speaker 1 (23:16):
One of your recent investments, I mean, I think it's
been a couple of years now since you first invested
in it, that is a bit atypical to put it
that way, was vertical aerospace the British can we call.
Speaker 3 (23:29):
It flying taxis EVI toalls, Okay, much more sophisticated than
flying taxis, but it was more of.
Speaker 1 (23:37):
A at first, it was more of a dead venture investment.
What made you invest in it in the first place.
Speaker 3 (23:45):
Now, this goes back to my comment about diversified opportunities.
Rates were low for so long. We saw industries that
would have never considered borrowing tap the debt markets. Okay,
this was a pre revenue and obvious no cash flow business,
and they borrowed money. Very few industries resisted the temptation
(24:05):
to borrow. So that's created the opportunity for us to
selectively make investments that, as you say, may be viewed
as a typical But at the end of the day,
if we can create equity upside through credit, that's what
we try and do. And the interesting thing about disruptive technology.
You would have never seen distressed opportunities in disruptive technology
because they wouldn't have borrowed, you know, in a more
(24:27):
normal interest rate environment. But we've seen a ton of
opportunities in disruptive technologies and that can create incredible upside.
Right when you buy a very mature business at call
it four times cash flow through the debt and you
think it's worth six times, okay, that can be you
have meaningful downside protection because you're creating a business at
(24:48):
four times to the top of the structure, and you
get that equity upside by exiting it at six times
in three years. Okay. But when you can buy a
business for a couple hundred million dollars, which is what
we did with Vertical through initial a senior security convertible loan,
and then we then converted it to equity to take
control of the business, we think Vertical could be worth
north of ten billion dollars in five years. That kind
(25:10):
of upside you'll never get investing in a mature business.
So yes, it is a typical. However, we're entering creating
the equity upside through debt, which is what we do.
It was a structured transaction. It was a senior secured
convert that I think created the opportunity should the company
not be able to refinance, us to own the business,
which is what happened. So we're using all of our
(25:31):
trade craft, if you will, to create the upside. Now
we have to get the upside right, So it's going
to create a different kind of risk reward like this
doesn't work, it's potentially a zero, but if it works,
it could bee hundred x and you're not going to
get that kind of upside downside and traditional distress investing.
So we only do a few of these, right. The
rest of our portfolio is the tropicanas and decisions and
the more what you would think is typical distress investing.
(25:55):
But we've had a very good track record in the
past with these kind of opportunities, So we pick our
spots and I think it's I think vertical actually is
one of the most interesting things in our portfolio today.
Speaker 2 (26:05):
What are some other interesting names in your portfolio that
you or maybe some of your favorite investments you've made.
Maybe they weren't the best money maker, but you just
got it right. Was there a trade that you ever
made that you just felt good you made the call.
It wasn't maybe the most econometry, but you felt it
was kind of like your you know, not your white whale,
(26:26):
but you know it's something that worked out well for
you that you know.
Speaker 3 (26:29):
I mean, it's it's a polar opposite from something like
a vertical aerospace. But I think one of the trades
that we did that were most known for is we
rolled up the Yellow Pages in the United States and
that was an investment that at cocktail conversation, I got
a lot of eye rolling. You own what I've never
seen a Yellow Page before. But you know, some of
(26:51):
these investments that are sort of left for the dead
by most of Wall Street. You know, it's all about price.
If you can create them cheap enough, it's just classic
like cigar butt trade. But what we did with this
particular investment, I mean, it was a roll up, so
it had various different names. It ended up publicly traded
today it's called Thrive. But when we bought it was
a roll up of id ARC and then our externally
(27:14):
and dex Media et cetera, et cetera. Eventually bought all
of Yellow Pages I means are soul sorry, all of
AT and t's assets from servers. We were buying these
businesses for around two times cash flow, okay, and they
were declining, but we were taking costs out faster than
the revenue is declining. And if you do that math,
what it means is you can take your basis out.
(27:35):
It was initially a dead investment and then it converted
to equity. So initially as a dead investment, we were
taking it out through coupon and contractual amorizations, and once
it was equity, it was through other avenues. But we
were able to take our basis out every two two
and a half years. And when you can make an
investment and get your money back and still create a
tale of cash flows, that risk reward is incredibly attractive
(27:55):
because you can't lose money at that point, okay, when
you can protect your downside like that, and that's what
you can do in these controlled liquidations. But what we
were able to do with Thrive thanks to the management
team there as one of the best management teams we've
ever worked with. Is we were able to evolve the business.
So we were able to reduce our downside through just
effectively I don't want to say liquidating, but effectively monetizing
(28:17):
the tail of cash lows from the legacy business. And
then we were able to take one of our assets,
which was a nationwide sales force, and build a SaaS
product okay for business automation focused on small and medium
sized businesses that tended to be relatively unsophisticated with regards
to how they were running their businesses, their CRM tools,
their texts and email marketing tools. We were able to
(28:39):
wrap some of the best Silicon Valley product into our brand,
which we renamed Thrive, and then use our three thousand
person nationwide salesforce to distribute it to the roofers and
plumbers and the small businesses of the world that used
to advertise on the Yellow Pages maybe still do, maybe
still don't, but didn't know how to automate, and that
business now have seen multiple exp man and in trades
(29:00):
for something like six turns on Nasdaq. So that's that's
an investment that it actually worked out successful, but it
was somewhat controversial all the time. Like when I told
clients that we were investing in yellow Pages, they looked
at me like I was crazy. But I think we
made six times or money over about twelve years.
Speaker 1 (29:16):
Where else do you see value?
Speaker 3 (29:19):
These days?
Speaker 1 (29:19):
You were mentioning some thes eropic technologies. I don't know
if there are like other examples that you can give
in that space. You were mentioning post lme dead. Where
else did you see value disease?
Speaker 3 (29:32):
I think the post me opportunity is particularly compelling, and
it will get more and more compelling. And the reason
I say that is because you're going to have more
and more post lem structures. There was very few of
them before two years ago, and there was more a
year ago, and there's more now and they'll be more
next year because all these all these structures are either
going to Falter leemy, right, I mean their maturity wall
(29:54):
is what it is. It peaks in twenty twenty eight.
Between now in twenty twenty eight, there's about a trillion
and a half dollars non investment great credit maturing. Okay,
those are either go de fault or they're going to
get extended, and they're likely going to get extended through
some sort of l me. Some will get refined, but
a lot of them aren't because the leverage multiples on
these businesses are too high for today's environment. You could
(30:14):
put six turns of debt on a business pre interest
rate normalization. Today you can only put four. Okay, So
unless you've deleveraged through earnings growth or debt pay down
or equitization or something, you have a non refinanciable capital structure,
and a lot of the market is going to extend,
so you're going to have more and more of these leemies.
So decisions. A great example decision was we talked about
it as a parada le me. Put aside the risk
(30:36):
of non parada versus parada. Let's just talk about the
investment opportunity today. This is PR Newswire, okay, and a
host of other three other businesses that are related to PR,
so PR evaluation, monitoring, Social media monitoring, and evaluation, and
it's really pitched. The value proposition is that it's a
one stop shop for a corporation. But news distribute, which
(31:00):
is what business wire and PR newswire DO is basically
a duopoly business. Wires owned by Berkshire pr Newswires owned
by Decision. This is a good, solid business. It's about
a nine hundred million dollar revenue business with close to
sixty percent gross margins and thirty percent of ebadah margins.
That's fairly capital light, all right. So it does about
two hundred and fifty million of real ebadah, not adjusted ebadah,
(31:22):
and spends about fiftieth capbeck. So it's a two hundred
million dollars pre tax, unleveraged, free cash flow business. Such
steady business. Look at the financials for the last five
years of very consistent and steady. So why why is
this interesting? There is post LME, so very covenant strong,
not covenant light. Covenant strong debt trading in the mid fifties.
(31:45):
It's a billion seven I believe of debt trading in
the mid fifties creates the business for about a billion
plus the super senior debt that was put in place
as part of the LME. You're buying the business for
about a billion two and it does two fifty of
ebada or two hundred of on leverag free camps. Post
cap backs to buy a business like pr Newswire for
less than five times Ubida is very attractive. I don't
(32:06):
see anything in the public equity land that looks anything
quite like that. It's probably creating it at about half
of what it's worth, and you have covenants, so you
know you're not going to end up on the wrong
side of a non Parada transaction, which wouldn't have been
the case a year ago.
Speaker 1 (32:20):
One common topic also in the Lemy discussion is that
lemies actually like don't tackle the business issue. They tackle
the they fix and oftentimes just temporarily the capital structure issues,
but oftentimes they don't even cut leverage on those. So
how often do you see the business is actually like
(32:40):
managing to turn around the situation and like doing changes
in the actual business as opposed to just like, well,
you know, extending Let's think about this problem in a
couple of years and then we'll see if like just
the micro environment has improved or rates have gone down.
Speaker 3 (32:58):
It's going to be a situations. A lot of these
companies have a tremendous amount of cost out opportunities if
the economy is held up. A lot of this isn't
dependent on what the economy does but write you know,
at least in recent years we've had a good economy,
a lot of these businesses were required, and there wasn't
a large focus on cost out on an optimization because
(33:19):
you had an environment where things were good and multiples
were expanding. So as a sponsor, you didn't really need
to roll up your sleeves and get your hands dirty
doing some of the hard stuff to increase cashlows through
margin expansion because revenues were growing and multiples were expanding.
That's not the case anymore. So. Of the examples that
I've rattled off post LME is like Shutterfly has done
(33:40):
a great job. Apollo has done a great job with
that asset of increasing cash flows primarily through cost optimization.
It has not been revenue driven. Now, revenues have hung
in there, they haven't gone south, but they've taken a
lot of cost out of the business and increased cash
flows fairly materially. I think they were around two fifty
when they did the LME and they're approaching for one
hundred now. So that's one that I think will work.
(34:02):
It's hard to know what probability or what percentage of
these things are going to work because not a lot
of them have hit their new maturity well yet. My
suspicion is your comments are right. Most of them aren't
fixing the capital structure. It's going to be very hard
in this economic environment to grow top line and continue
to expand margin, and most of them will ultimately default.
Whether that number is going to be sixty percent, seventy percent,
(34:23):
eighty percent, or thirty forty fifty percent will somewhat depend
on the economy and it will be very situational. But
my suspicion is that much of this is kicking the
can down the road and they'll ultimately default, which is
why I think that ratio of two percent default three
percent exchange will slowly be three percent to fall two
percent exchange, four percent to fault one percent exchange, and
(34:45):
maybe it will stay a five. But the mix of
how many are actually equitizations in court versus extensions of
maturity and liquidity injections out of court, that's going to
change as you get into a post LM world, which
will be at over the next couple of years.
Speaker 2 (35:01):
I think it's interesting we didn't not doubt this morning,
basically saying that distress bonds apply in April was about
one hundred billion cycled down to about fifty sixty sixty
four billion today. So the numbers come down. The total
number of distress sponds in the index has come down,
and it doesn't really square with a rise. You know,
we're looking at in that sort of combined percentage that
(35:21):
you're talking about. How do you square price action, you know,
with actual risk and fundamental risk maybe rising or maybe
they're you're thinking they're they're dropping with the l ME.
But the way the market is today in terms of price,
but offset by the rising rate, default rate and exchange rate,
how do you square those two?
Speaker 3 (35:41):
Well, the numbers that I'm talking about are defaults and exchanges. Okay,
The distressed exchange ratio is really a measure of trading prices,
right right, So you could not default, you could not
do an LME. You're not going to go into my
five percent number, okay, but you'd be in your numbers. Look,
we've had you know, just the distressed rate is gonna
move up and down with sentiment. And you know, in
(36:03):
a post tariff world. In January and February March like
the markets were down a lot. There was a lot
of companies that did not defaults or weren't going to
default eminantly and weren't going to do an lemy imminently
that we're training at distress prices. In those bonds of
rallied up, you're also going to get a big difference
in and it's harder to calculate because they're private issuers.
But loan land versus bond land, we've seen a dramatic
(36:23):
difference in l amizing. Most private equity sponsors didn't utilize
the public bond market that utilized either the direct lending
market in recent years or the broadly syndicated loan market.
Because there was a private it's cheaper for them. It's
easier to issue less disclosure. So you're going to see
different numbers there, but you're going to see those numbers
move up and down with sentiment. And we're in a
risk on world now, and we were in a risk
(36:46):
off mode back in April.
Speaker 1 (36:47):
We were unfortunately running out of time. Mike, I don't
know if you have any other burning question.
Speaker 2 (36:53):
Burning desire question I would have is sort of, you know,
you've been doing this for a long time, you're kind
of you know, credit your credit guy kind of through
went through. What advice would you give to emerging analysts
and sort of people that aspire to b pms who
sort of want to blend distressed instincts sort of with
credit discipline, Like, what sort of advice would you give
to someone starting out maybe listening to this podcast.
Speaker 3 (37:15):
Well, two things I would comment. So, first of all,
I am a credit guy through and through, because our
investments always start as credit. But we're investing in credit
to create equity upside, and there's a couple of ways
you can do that. You can either get refinanced out,
in which case we just remain a creditor, or you
can convert that to equity and then you're an equity holder.
A very large portion of our portfolio today is equity
(37:38):
private public equity. Where we sit on the board, we're
very involved. We're known as a distress for influence or
distress for control funds. The vertical airspace we control, the
poor we control. We have a control equity position there.
So we're sort of an in between, like almost in
between a credit investor and a private equity investor public
equity investor. Advice I would give, I would just circle
(37:58):
back to what I said earlier. You need to develop
a contrariant thesis to make money in investing. It's very
hard to do that if you're focusing on sources that
everybody else has access to. So you need to understand
what a business does and read the ten K and
read the ten Q and do all that work. But like,
get out there, meet with management teams, don't sit behind
your desk. That's where the light bulb goes off and
(38:20):
you develop a really differentiated view. It's some of our
best investment opportunities Historically. I've always come from field work,
just getting in there, getting knee deep, knowing the business
better than anybody else could know because you've just spent
hundreds and hundreds of hours with management teams, former management teams, competitors, suppliers, customers, etc. Etc.
That's where you develop a thesis that's contrarian to what
(38:41):
the security price is trading, and I think there's too
many analysts today that are just inundated with easy access
to information and they spit out lots of reports, but
you're just regurgitating information that everybody already knows, and that's
not how you become a good investor. So that would
be my advice. That's great, appreciate it.
Speaker 1 (38:59):
Well, that's a personal take, but I was My last
question would be more around private credit. We've seen that
asset class raise a lot of money in the past
few years. How has it impacted distress investing in your view?
And also do you see actually any opportunities arising from
private credit providers struggling?
Speaker 3 (39:21):
Good question when I get a lot. I think the
short answer is it doesn't impact what we do directly.
There's always the threat of we can do a deal away.
We don't need your capital because we can prime you
with money from X, Y and Z private credit fund
and I think that is that threat is real. It's
(39:41):
rare that we see it acted upon, but I do
think it's real. Although I would say that most private
credit funds don't want to get involved in highly levered,
distressed situations, So there are very few firms out there,
maybe your HPSS and Angela Gordon's that will be willing
to step in and understand how to analyze that risk
and our comfortable making a private loan to a company
(40:01):
that might you know it's likely to go bankrupt. You know.
Private credit, I would say, is very crowded, and I
think that makes it very hard to evaluate the performance
because you haven't had a downturn yet, but you have
a lot of players chasing a lot of deals. So
we've definitely seen spreads compress. In terms of opportunities. Private
(40:22):
credit doesn't trade, okay, so a lot of people say,
is this is gonna be a big opportunity for you.
The problem is when you have one holder of a
dead instrument and it's not actively traded and syndicated, that
holder can work with the issue or on an extension
of maturity very easily. You don't need to do an
LME and create JKRW in course of NIS to get
everybody to participate. It's it's just a one It's a
(40:43):
bilateral conversation between borrower and lender, and they can also
pick it. Okay, if you're cash flow negative, right, rather
than borrowing money from somebody else, you can just pay
it in kind. So what we're seeing is what I
tell our clients that say, how do you think we
should evaluate private credit? I say, ask the manager what
percentage of this portfolio is paying in kind versus cash
(41:03):
pay And what we're seeing is twenty to thirty percent
of these private credit portfolios are now paying in kind.
That's a big, big red flag. So I think it's
a big risk. Is going to create an opportunity for
us to buy these loans? I don't think so, because
I don't think they're going to trade where they had
it marked and where we would buy it. There's probably
very different numbers. They probably have it marked par and
we would be bidding sixty or seventy cents when they
(41:24):
can just get an extension and not have it impact
their track record while they're raising their next fund. Why
would they sell to us? The only way they lose
thirty points that week is if they sell to us,
And that's the beauty of or risk, depending on the
side of it you're on, but of private market valuations.
Speaker 1 (41:39):
Json Modrick, founder and CIO of Mudrik Capital Management, many
thanks for joining us on the credit edge, and of
course we're very grateful to Mike holl On from Bloomberg Intelligence.
We appreciate you joining us today for more credit market
analysis and insight. Read all of Mike's great work on
the Bloomberg terminal. Bloomberg Intelligence is part of our research department,
(42:00):
with five hundred analysts and strategies working across all markets.
Coverage includes over two thousand equities and credits and outlooks
on more than ninety industries and one hundred market indices,
currencies and commodities. Please do subscribe to The Credit Edge
wherever you get your podcasts. We're on Apple, Spotify, and
all of other good podcast providers, including the Bloomberg Terminal
(42:21):
at b pop Go. Give us a review, tell your friends,
help spread the word. Amirna Garthia Perez, it's been a
pleasure having you join us again next week on the
Credit Edge
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is Irene Garthia Perez. I'm a team leader
of a Bloomberg News.
Speaker 2 (00:25):
And I'm Mike Collins, senior healthcare credit analyst at Bloomberg Intelligence.
This week, we're very pleased to welcome Jason Mudrack, chief
investment officer and founder of Mudrich Capital Management. How are you, Jason, great?
Thanks for having me great, Happy to have you here.
We're excited to have Jason with us. A real pleasure
to have the chance to get up close with one
of the most successful distressed investors over the past twenty years.
(00:47):
After a time at University of Chicago undergrad and Harvard Law,
and then a stint at Merrill, Jason got started at
Contrarian Capital Management, managing distressed debt and post for reor
equities two.
Speaker 3 (00:57):
Thousand and nine.
Speaker 2 (00:57):
You hung your own shingle and have consistently generated some
impressive returns ever since, despite a constantly evolving debt market
environment over the past two decades. Welcome Jason.
Speaker 3 (01:07):
Thank you.
Speaker 1 (01:08):
You signed up Modric Capital Management when you were thirty four,
so you were a young founder in the midst of
the Great Recession. What made you take that decision, and
was there a formative moment And who do you consider your.
Speaker 3 (01:22):
Mentors younger, I'm still considered myself. Yeah, sorry, yes, of course. Well. Look,
I spent seven years working for what I considered at
the time one of the most brilliant distressed investors, certainly
at the time, John Bauer, who ran Contrarian. I sat
next to John for seven years. And that is where
you learn the business. You know, you don't learn that
(01:44):
in grad school, so I went to law school. I
spent some time doing investment banking, but you really learn
on the job. And my first day at Contrarian was
December third, two thousand and one, which was a meaningful
day for me because it was the day and Ron
filed for bankruptcy, which, for those that are old enough
to remind remember, was the largest bankruptcy ever at the time.
And I spent seven years book ended by that and
(02:05):
then Leman because I left Contrarion a week after Lehman filed,
which took the trophy and was then the largest and
still the largest bankruptcy ever. So got to see, you know,
an incredible amount of distressed opportunities, got to see the
industry evolve, and institutionalize. I think assets in the alternative
investment industry went from two hundred billion to two trillion
(02:26):
over the course of the time of that time, so
massive growth, institutionalization, and I got to run money. John
let me launch a fun at the end of two
thousand and two focused on debt for equity opportunities and
post bankruptcy situations, and I ran that business for six years,
which allowed me to build an audited track record. So
the catalyst for leaving was the financial crisis. You know,
I had been at Contrarian for a long time. I'd
(02:47):
built a six year audited track record, but the opportunity
set was thin but growing, or the potential opportunity set,
and it was the GFC that really catalyzed, you know,
a huge opportunity in our investment universe. So that was
the catalyst to my own shingle. I could have left earlier.
I probably would have raised more money, but returns would
have been muted because there was very little to do.
I knew in two thousand and nine we'd be able
(03:08):
to make money. We'd probably start with a smaller pool
of assets because people weren't allocating to emerging managers at
the time, but track record is the most important thing
in this business, and I think that decision proves with
hindsight to be the right one.
Speaker 1 (03:19):
In recent years, liability management exercises have become a very
common way to restructure capital structures companies that either need
more liquidity or need to amend and extend their debt.
How have lems changed the way you evaluate risk and
reward these days compared to when you started.
Speaker 3 (03:42):
So I think that's a good segue to maybe level
set and understand how the credit markets have evolved from
the time of the GFC to today, because it really
sets up why we're seeing lemmes and why I think
lemes is a great thing for our opportunity sett it's
really elongating this distress credit cycle. So if you rewind
back to when rates were cut to zero, sort of
(04:03):
what happened, right, Like, I like to think that the
fourteen years between two thousand and nine and when we
saw a normalization of the rate cycle was the golden
era of private equity. Why do I say that we
had cheap debt, which is the primary currency private equity
firms used to acquire businesses, and it remained cheap for
(04:24):
a very, very long period of time, we had a
good economy, basically had growing earnings right, and we had
expanding multiples bay So you saw the multiples that the
SMP trade as a multiple of ubidago from eight times
to sixteen times. Now that's inflated by some of the
big tech but even if you back out some of that,
it's truly gone from eight to twelve. And you saw
private market valuations LBO multiples go from about eight to twelve.
(04:47):
You saw a fifty percent increase in the way businesses
were being valued as a multiple of earnings. You put
those three things together, it's the perfect storm for private equity.
Levered equity benefits the most in that kind of environment,
and we saw private equity assets under management go from
one point six trillion in two thousand and eight to
nine point six trillion today. Think about that, one point
(05:07):
six trillion to nine point six trillion. That is the
result of the perfect environment for private equity. However, okay,
it's a five hundred percent increase. However, private equity use
debt primarily to purchase companies, and that's what we focus on,
non investment grade credit or over leverage businesses. So we
saw the non investment grade credit market go from a
(05:29):
ground two trillion at the time of the GFC to
close to five and a half trillion where it is today.
That's US and European denominated non investment grade credit. Okay,
so massive market driven by this private equity boom. Secondly,
very broad Okay, if you think about distressed opportunities, why
does a company become distressed. Either something happens at the
(05:51):
company or something happens to the company's industry, or you
have a broader economic downturn, which we have not had,
or you have something like a dramatic in interest rates,
which I'll come back to. Okay, but prior to the
rate change, we didn't have an economic downturn. We didn't
have a rate change. You were looking at individual companies
that were challenged or industries that were challenged. And as
(06:11):
a fund manager, we need to run a diversified portfolio
of risk. It's hard to do when you have these
very specific industries like energy in twenty fifteen, or retail
being impacted by the Amazon effect or the move to
an omni channel model, or media that was going through
secular change, whether it's newspapers or yellow pages. As people
moved from analog to digital. Just run a diversified portfolio
(06:32):
where you had few pockets of opportunities was very challenging.
What's so compelling about today is the catalyst today is
not an economic downturn. It's this normalization of interest rates.
All this pre twenty twenty two LBO driven leverage okay
was put in place in an environment where people didn't
think rates were going to ever be higher than zero.
(06:52):
If you look at that eighty percent of leverage, biots
didn't hedge interest rate risk. Nobody thought rates were going
to go up, and as a result, they put very
very high levels of debt as a multiple of cash flows.
And that works in a zero rate environment, it doesn't
work in a four or five percent rate environment. But
the beauty of this is it impacts all borrowers, not
one industry. So we have a very diverse opportunity set okay,
(07:14):
which is very unique to this cycle. And then this
is the good segue into your question about lmes. The
other phenomenon that we've seen today is very few covenants.
Ninety percent of deals or covenant light okay. That was
up from zero percent pre GFC okay, So very few covenants,
and we also have a good economy. We have very
high multiples in the equity markets, which is oftentimes how
(07:35):
private equity firms are valuing these businesses. And you have
about half the loan market held by structured products. Okay
that don't want to take equity back if they don't
have to, so colos right. So it's created this opportunity
where sponsors want to extend maturities, and they can extend
maturities because without covenant it's easy to do out of
core deals otherwise known as lemes. But what that's doing
(07:59):
from and we'll talk about lem specifically, but what is
doing for our opportunity set is it's elongating it. We're
not getting the spike in defaults like we had in
two thousand and eight and then a collapse with the
reflation of the economy. What we're getting is just elevated
defaults every year we think for the next five to
seven years. We used to look at defaults when you're
talking about a world where there's lemes, which is effectively
(08:22):
an out of court default, but the ownership isn't changing.
There's a restructuring of the maturity of potential injection of
liquidity tightening of the covenant package if you include lemes
and those are mostly effectuated through distressed exchanges. A default
are around two percent today, but if you add in
distressed exchanges, it's around five percent. Okay. The historical norm
(08:42):
for default is around two percent, So defaults in two
thousand and eight got up to around twelve percent and
then they collapsed, but the market was two trillion dollars. Today,
we're in a world that's around five percent if you
include defaults and distressed exchanges, which is how you effectuate
these lemis. But it's five percent of a five and
a half trillion dollar market. I think it's going to
be four or five six percent every year consistently. That
(09:04):
will spike if there's an economic downturn, it will come
back down if there's recovery, but it's just going to
be elongated. Okay. If you think about the problem with
the stressed, it's been driven by economic downturns. Historically, when
there's not an economic downturn, you have it's very few
industries that are usually challenged industries, which makes it very difficult,
and it's very short. It's episodic. We have the opotion
(09:26):
now we have a large market, very diverse, and I
believe very elongated. The cyclicality of what we do has
been reduced, which is a big positive.
Speaker 1 (09:34):
So it has reduced a cyclicality, but it has increased
the brain damage somehow in terms of how you think
about the specific situations.
Speaker 3 (09:42):
Exactly right. So the way we invest has changed. Okay.
So in the old days, when we had covenants, the
exercise was valuing the business and then layering on the
capital structure to that valuation and figuring out what debt
was covered, what debt might be what we call the folkrum. Okay,
that would get need to get equitied, and what debt
would be out of the money, it would be wiped out.
But the success or non success of your investment would
(10:06):
ultimately determine on whether you've got the valuation right. Today,
it's more complicated than that. You have to value the business,
you have to understand the capital structure today, but you
also have to understand how that capital structure may evolve.
You may think that you're creating the business, which is
your entry point at a billion dollars. Let's say, and
you wake up tomorrow and you find that you thought
(10:27):
you were first lean and now your second lean and
your creation value is actually a billion five because somebody
just put five hundred million senior to you because you
didn't have covenant protection prohibiting that. So it becomes this
multi dimensional analysis where now you need to understand game theory,
who is involved, what's the sponsor's motive, what do the
documents allow, which is usually everything anything? And you know
(10:48):
who's in the structure. Can you get in the group,
the in group if it's a non proride deal, or
you're going to be left in the outgroup. And you're
seeing some pretty you know, dramatic differences and outcomes in
these non proae of deals. So it is complicated analysis.
It requires being larger usually to join these steering committees
which guarantees you better economic treatment or avoids the risk
(11:09):
of non parade of treatment. You need to be one
of the top called ten holders, and in a multi
billion dollar capital structure, that can mean you need to
own you know, one hundred million or more of the debt.
That's hard for smaller players. It's very hard for tourists
to come into this space today. But you know what's
happening and will continue to happen. Over time is a
lot of these capital structures are going to go from
(11:30):
pre Lmy to post Lemy, and we're going to get
back to a world where you can do distress investing
like we all used to do it, just focusing on valuation.
So like I think there was about three and a
half billion of OUSE, I have the data here so
I'll get it right. There was about three and a
half billion of lem's and twenty one of distressed exchanges,
but those are primarily elemies. It went up to twenty
(11:51):
one billion, and twenty two, twenty seven billion, and twenty
three and last year we had forty four billion of
distressed exchanges, which is an all time high. I think
in two thousand and eight it was around thirty six billion,
so and I suspect twenty twenty five we'll exceed twenty
four or be comparable. So what you're having is all
of these situations are going from pre le me or
you have this risk of non Parada treatment to post
(12:14):
lem where it will be much more challenging to have
non Parada treatment because what we get in these lemis
as lenders is we get covenants. Okay, we give the
sponsor liquidity potentially if they need it, we give them
an extension of maturity if that's what they're looking for.
Sometimes they capture discount by doing the exchange at ninety
cents on the dollar or lower, so they capture some
(12:35):
deleveraging and what we get is covenants and potentially a
non PARADA outcome if the situations died enough.
Speaker 1 (12:43):
Before starting we we're discussing. You've been invested in Tropicana
which ended up being a very corercive deal and Session
which was a PROADA transaction. At what point do you
see a transaction is going to head one way or another?
And what are the termining factors for going ye, win
or and r.
Speaker 3 (13:03):
You know, it's tricky, which is why I think this
this this new dimension that makes it very challenging for
a lot of folks to think about distress investing until
it's a post LM structure like in Tropicana. As an example,
we initially were not on the steering committee, and there
was a dramatically different treatment between the steering committee and
the non steering committee at the end of the day.
(13:24):
But we lobby the folks that were on the committee.
They're folks that we've done lots of deals with in
the past. This is an iterative game for you know,
longtime credit investors. We knew the advisors very closely and
also size mattered. They needed to get to over fifty
percent to effectuate that transaction, and we helped get them there.
So they made a clear upfront that we needed to
(13:45):
own over one hundred million dollars of debt to be
considered to be on the steering committee. And that puts
you in a tough position because you don't know they're
not contractually agreeing to let you on the steering committee,
So you have to go in and realize that you
might own, you know, a sized up position and be
left out of the group. Fortunately, in that situation, we
did get over one hundred million and they allowed us
(14:06):
into the group, and that was very fortunate because that
was a very non Parada transaction.
Speaker 1 (14:11):
What is it that Detter reminds in like any transaction, Yeah,
this is going to head into a non Paretta transaction
or is it going to be a more consensual like
what are the circumstances that lead the conversations go one
way or another?
Speaker 3 (14:26):
You know, each situation is different. We used to think
it was really driven by sponsor. Some sponsors were more aggressive,
other sponsors were known as being more friendly. That's not
the case anymore. It's so normal to do non Parada transactions.
I think almost every sponsor out there will consider them.
For example, in Tropicana, the sponsor there was known as
(14:46):
being very friendly. We had heard early on that they
would not do a non Parada deal, and it ended
up being a non Parada deal. An ironically, Decision, which
is owned by Platinum, which has had historically a very
aggressive reputation, insisted that that deal be completely parata, and
it was. Parado's economics were offered equally to every lender.
It's not the outcome you would have predicted just looking
(15:08):
at who the financial sponsor was. And another deal we
mentioned that we talked about before we went live here
was Shutterfly, which was an Apollo deal that we did
a l and me that we did that worked out
successfully for everybody. We did a little over two years ago.
Apollo has a very aggressive reputation. They insisted from the
very beginning of that negotiation that everything they do be parata.
(15:30):
I think there was some backstop economics, but that was
economics provided for value provided but in terms of just
treating similarly situated lenders differently, they insisted that that couldn't happen.
So you can't know from the sponsor anymore. So you
have to evaluate what does the company need and how
important is discount capture because you can capture a lot
(15:51):
of discount by doing a non parade of transaction, because
you'll leave certain lenders in a much worse position and
presumably they'll be trading much lower. How important are other things?
Is like liquidity needs maturity extension. So Tropicana needed a
bunch of money. Okay, they didn't need a maturity extension.
They didn't have a maturity wall decision, didn't need a
maturity extension. They also needed new money. So there was
(16:12):
different sticks and carrots there. Tropicana could have raised that
new money. I think it was four hundred million that
they needed. They could have raised that four hundred million
away from the existing lender group. Okay, there's always that
thread of them doing a deal away, but if they
did it with us, they would get all these bells
and whistles. They don't need a maturity extension, but they
could get discount capture, which they wouldn't be able to
(16:34):
get if they did the deal away. So, but what
what US lenders wanted was the abilities for the fifty
one percent to move ahead of the forty nine percent,
and that was sort of the quid pro quo, if
you will, in the trade. We provided the four hundred million.
We gave them discount. They captured nine cents on the
steer co and they captured thirty cents on the non
steerco in terms of discount capture. They got the liquidity
(16:56):
they needed, and we got covenants. Okay, so have a
tiered capital structure with super priority debt and second out
debt and third out debt, which doesn't great for the
long term balance sheet health of the company, but we're
in the first lean and the second lean, So for
the steerco lenders, we're in a very very solid position.
That's a perfect example of a post lem structure that
(17:18):
we think is incredibly attractive now. I think for those
that don't want to deal with the risks of nonparata,
or don't want to deal with the intricacies of lmes,
or maybe aren't large enough to guarantee that they're going
to be on the right side of these trades. Focusing
on post lem capital structures is the way to do
distress today?
Speaker 1 (17:37):
For context for our listeners, it was it still is
PI Partners the sponsor in the case of Tropicana.
Speaker 3 (17:46):
Correct.
Speaker 2 (17:47):
I'm just going to ask a question maybe stepping back,
stepping back and sort of talking about process. Mudrick's been
around for a while, your company and your investment strategy hasn't.
It's evolved over the years, but you haven't really changed.
And I wonder what's been consistent and what's changed over
the last nearly two decades with your process, and how
(18:07):
has it changed with the evolving investment environment and sort
of how you look at and sorce deals and ideas
and how you may move forward with those deals.
Speaker 3 (18:17):
Well, the biggest change clearly is what we're talking about now,
right is having to understand and price the risks of
being left out of a nonparada transaction. Also lmes whether
the proada or nomparada is a new phenomena, right, Like
in the old days, there was covenants, so you couldn't
effectuate a maturity extension outside of court, okay, and once
(18:40):
you're in court, there's an equidization, so there's an ownership change.
So in many situations today, evaluating this risk of nonparada
and also understanding that you're going to be a creditor
for much longer than in the old days might have
been the case. Right, The maturity doesn't mean necessarily that
you're going to take the keys. I think post lme
it's very hard to do a second enemy because thresholds
(19:03):
for document amendments are usually increased, and all of the
ways these transactions are structured to be coursive, things like
jay crue and search of they're all closed. Loopholes are
all closed up. Not to say there won't be additional
ones created by very smart and expensive lawyers, but it's
becoming more and more challenging to do an Lemy two
point zero or a second Lemy right. So that's probably
(19:25):
the biggest change right in terms of our valuation of businesses.
I've been doing it the exact same way for twenty
five years. This is how I learned the business. I
hate the expression you can't teach you know on all
dog new tricks, but it works right, Like, we look
at businesses that we think are leaders in their industry,
that are well managed, that have sustainable businesses, predictable cash flows,
(19:46):
good margins generate a lot of unlevered free cash flow,
and that's important because you're going to own these businesses
for three to five years through a restructure, and instructurings
don't happen quickly, right. There's a year negotiation, then there's
a year post you know, reorganizing where you can't necessarily
do an exit, and then there's like usually an operational fix,
and then there's an exit, whether it's an IPO or sale,
(20:07):
and that process can take three to five years. So
if you underwrite the business to be doing two hundred
million of cash flow and by the time you go
to exit it's doing one twenty five, well guess what,
Like all of that work was for not and you
probably lost money. So you have to underwrite the businesses
today but also understand the sustainability of those cash flows.
And it's really a deep value exercise. It's a classic
(20:29):
gram Dot Warren Buffett analysis. And that hasn't changed. The
process has changed, the players have changed, the availability of
information has changed. I constantly tell my analysts, Okay, stop
reading reog research, stop reading debt Wire, stop reading Bloomberg none,
(20:50):
but we need to find information that is not readily available, Like,
get on a plane, get out there, meet companies, meat competitors,
talk to suppliers. Let's do our own surveys. Let's create
prietary information that we don't think other people have, other
people know. Create edge? How do we get edge in
a world where information has become much more efficient. What
I always liked about the distress credit markets is it
was horrifically inefficient. Right, companies stopped talking to you, they
(21:13):
stop reporting ten k's and ten queues if they're privately owned.
There's very little information on the interlink sites. Right, it
was whatever was contractionally agreed in the credit agreement. So
the kind of disclosure that you get with a public
company and the liquidity you get with the public company,
you don't have. Like liquidity drives up, information drives up.
It's this very specialized skill set, but it's gotten much
more efficient. How do you use AI? We don't at all, No,
(21:36):
not even for the research. I mean, we read all
the despite what I just said, we all all We
read all the Bloomberg, we read all the real research,
and you guys are using a lot of AI, but
we don't. We haven't deployed any AI technology, right or wrong?
I'm a big believer that we do our own work,
Like that's how the light bulb goes off. It's spending
a lot of time reading through the documents, spending time
(21:57):
with management, talking to folks that are smarter than us
about the industry. And that's where you it's the work,
it's the process that creates the genius having chat GBq
or some sort of AI product, you know, tell us
about a company, like anybody can get access to that information.
It's not going to create a differentiated viewpoint and being
(22:19):
a contrarian, Like the idea is that you develop a
thesis that the security price is not reflecting, and then
you develop conviction in that thesis and you get it right,
and that's how you make money. That's how you generate
alpha and not data. In this market, Are.
Speaker 1 (22:34):
You seeing many opportunities arising from the disruption that AI
is causing across industries we have?
Speaker 3 (22:41):
I mean AI is impacting businesses all over the place,
like data centers as an example. Call centers is a
great example. It's a very distressed industry that we've been evaluating.
We have made an investment in it, but it's being
impacted by the uncertain by AI today, but also the
uncertainty is like this is this a business a value
proposition that will exist in two years or five years
(23:01):
or ten years. And it's constantly stuff that we talk
about how will AI impact these businesses? But that goes
back to the valuation exercise and the sustainability and predictability
of cash flows. But in terms of using AI to
help us analyze, we don't do that yet.
Speaker 1 (23:16):
One of your recent investments, I mean, I think it's
been a couple of years now since you first invested
in it, that is a bit atypical to put it
that way, was vertical aerospace the British can we call.
Speaker 3 (23:29):
It flying taxis EVI toalls, Okay, much more sophisticated than
flying taxis, but it was more of.
Speaker 1 (23:37):
A at first, it was more of a dead venture investment.
What made you invest in it in the first place.
Speaker 3 (23:45):
Now, this goes back to my comment about diversified opportunities.
Rates were low for so long. We saw industries that
would have never considered borrowing tap the debt markets. Okay,
this was a pre revenue and obvious no cash flow business,
and they borrowed money. Very few industries resisted the temptation
(24:05):
to borrow. So that's created the opportunity for us to
selectively make investments that, as you say, may be viewed
as a typical But at the end of the day,
if we can create equity upside through credit, that's what
we try and do. And the interesting thing about disruptive technology.
You would have never seen distressed opportunities in disruptive technology
because they wouldn't have borrowed, you know, in a more
(24:27):
normal interest rate environment. But we've seen a ton of
opportunities in disruptive technologies and that can create incredible upside.
Right when you buy a very mature business at call
it four times cash flow through the debt and you
think it's worth six times, okay, that can be you
have meaningful downside protection because you're creating a business at
(24:48):
four times to the top of the structure, and you
get that equity upside by exiting it at six times
in three years. Okay. But when you can buy a
business for a couple hundred million dollars, which is what
we did with Vertical through initial a senior security convertible loan,
and then we then converted it to equity to take
control of the business, we think Vertical could be worth
north of ten billion dollars in five years. That kind
(25:10):
of upside you'll never get investing in a mature business.
So yes, it is a typical. However, we're entering creating
the equity upside through debt, which is what we do.
It was a structured transaction. It was a senior secured
convert that I think created the opportunity should the company
not be able to refinance, us to own the business,
which is what happened. So we're using all of our
(25:31):
trade craft, if you will, to create the upside. Now
we have to get the upside right, So it's going
to create a different kind of risk reward like this
doesn't work, it's potentially a zero, but if it works,
it could bee hundred x and you're not going to
get that kind of upside downside and traditional distress investing.
So we only do a few of these, right. The
rest of our portfolio is the tropicanas and decisions and
the more what you would think is typical distress investing.
(25:55):
But we've had a very good track record in the
past with these kind of opportunities, So we pick our
spots and I think it's I think vertical actually is
one of the most interesting things in our portfolio today.
Speaker 2 (26:05):
What are some other interesting names in your portfolio that
you or maybe some of your favorite investments you've made.
Maybe they weren't the best money maker, but you just
got it right. Was there a trade that you ever
made that you just felt good you made the call.
It wasn't maybe the most econometry, but you felt it
was kind of like your you know, not your white whale,
(26:26):
but you know it's something that worked out well for
you that you know.
Speaker 3 (26:29):
I mean, it's it's a polar opposite from something like
a vertical aerospace. But I think one of the trades
that we did that were most known for is we
rolled up the Yellow Pages in the United States and
that was an investment that at cocktail conversation, I got
a lot of eye rolling. You own what I've never
seen a Yellow Page before. But you know, some of
(26:51):
these investments that are sort of left for the dead
by most of Wall Street. You know, it's all about price.
If you can create them cheap enough, it's just classic
like cigar butt trade. But what we did with this
particular investment, I mean, it was a roll up, so
it had various different names. It ended up publicly traded
today it's called Thrive. But when we bought it was
a roll up of id ARC and then our externally
(27:14):
and dex Media et cetera, et cetera. Eventually bought all
of Yellow Pages I means are soul sorry, all of
AT and t's assets from servers. We were buying these
businesses for around two times cash flow, okay, and they
were declining, but we were taking costs out faster than
the revenue is declining. And if you do that math,
what it means is you can take your basis out.
(27:35):
It was initially a dead investment and then it converted
to equity. So initially as a dead investment, we were
taking it out through coupon and contractual amorizations, and once
it was equity, it was through other avenues. But we
were able to take our basis out every two two
and a half years. And when you can make an
investment and get your money back and still create a
tale of cash flows, that risk reward is incredibly attractive
(27:55):
because you can't lose money at that point, okay, when
you can protect your downside like that, and that's what
you can do in these controlled liquidations. But what we
were able to do with Thrive thanks to the management
team there as one of the best management teams we've
ever worked with. Is we were able to evolve the business.
So we were able to reduce our downside through just
effectively I don't want to say liquidating, but effectively monetizing
(28:17):
the tail of cash lows from the legacy business. And
then we were able to take one of our assets,
which was a nationwide sales force, and build a SaaS
product okay for business automation focused on small and medium
sized businesses that tended to be relatively unsophisticated with regards
to how they were running their businesses, their CRM tools,
their texts and email marketing tools. We were able to
(28:39):
wrap some of the best Silicon Valley product into our brand,
which we renamed Thrive, and then use our three thousand
person nationwide salesforce to distribute it to the roofers and
plumbers and the small businesses of the world that used
to advertise on the Yellow Pages maybe still do, maybe
still don't, but didn't know how to automate, and that
business now have seen multiple exp man and in trades
(29:00):
for something like six turns on Nasdaq. So that's that's
an investment that it actually worked out successful, but it
was somewhat controversial all the time. Like when I told
clients that we were investing in yellow Pages, they looked
at me like I was crazy. But I think we
made six times or money over about twelve years.
Speaker 1 (29:16):
Where else do you see value?
Speaker 3 (29:19):
These days?
Speaker 1 (29:19):
You were mentioning some thes eropic technologies. I don't know
if there are like other examples that you can give
in that space. You were mentioning post lme dead. Where
else did you see value disease?
Speaker 3 (29:32):
I think the post me opportunity is particularly compelling, and
it will get more and more compelling. And the reason
I say that is because you're going to have more
and more post lem structures. There was very few of
them before two years ago, and there was more a
year ago, and there's more now and they'll be more
next year because all these all these structures are either
going to Falter leemy, right, I mean their maturity wall
(29:54):
is what it is. It peaks in twenty twenty eight.
Between now in twenty twenty eight, there's about a trillion
and a half dollars non investment great credit maturing. Okay,
those are either go de fault or they're going to
get extended, and they're likely going to get extended through
some sort of l me. Some will get refined, but
a lot of them aren't because the leverage multiples on
these businesses are too high for today's environment. You could
(30:14):
put six turns of debt on a business pre interest
rate normalization. Today you can only put four. Okay, So
unless you've deleveraged through earnings growth or debt pay down
or equitization or something, you have a non refinanciable capital structure,
and a lot of the market is going to extend,
so you're going to have more and more of these leemies.
So decisions. A great example decision was we talked about
it as a parada le me. Put aside the risk
(30:36):
of non parada versus parada. Let's just talk about the
investment opportunity today. This is PR Newswire, okay, and a
host of other three other businesses that are related to PR,
so PR evaluation, monitoring, Social media monitoring, and evaluation, and
it's really pitched. The value proposition is that it's a
one stop shop for a corporation. But news distribute, which
(31:00):
is what business wire and PR newswire DO is basically
a duopoly business. Wires owned by Berkshire pr Newswires owned
by Decision. This is a good, solid business. It's about
a nine hundred million dollar revenue business with close to
sixty percent gross margins and thirty percent of ebadah margins.
That's fairly capital light, all right. So it does about
two hundred and fifty million of real ebadah, not adjusted ebadah,
(31:22):
and spends about fiftieth capbeck. So it's a two hundred
million dollars pre tax, unleveraged, free cash flow business. Such
steady business. Look at the financials for the last five
years of very consistent and steady. So why why is
this interesting? There is post LME, so very covenant strong,
not covenant light. Covenant strong debt trading in the mid fifties.
(31:45):
It's a billion seven I believe of debt trading in
the mid fifties creates the business for about a billion
plus the super senior debt that was put in place
as part of the LME. You're buying the business for
about a billion two and it does two fifty of
ebada or two hundred of on leverag free camps. Post
cap backs to buy a business like pr Newswire for
less than five times Ubida is very attractive. I don't
(32:06):
see anything in the public equity land that looks anything
quite like that. It's probably creating it at about half
of what it's worth, and you have covenants, so you
know you're not going to end up on the wrong
side of a non Parada transaction, which wouldn't have been
the case a year ago.
Speaker 1 (32:20):
One common topic also in the Lemy discussion is that
lemies actually like don't tackle the business issue. They tackle
the they fix and oftentimes just temporarily the capital structure issues,
but oftentimes they don't even cut leverage on those. So
how often do you see the business is actually like
(32:40):
managing to turn around the situation and like doing changes
in the actual business as opposed to just like, well,
you know, extending Let's think about this problem in a
couple of years and then we'll see if like just
the micro environment has improved or rates have gone down.
Speaker 3 (32:58):
It's going to be a situations. A lot of these
companies have a tremendous amount of cost out opportunities if
the economy is held up. A lot of this isn't
dependent on what the economy does but write you know,
at least in recent years we've had a good economy,
a lot of these businesses were required, and there wasn't
a large focus on cost out on an optimization because
(33:19):
you had an environment where things were good and multiples
were expanding. So as a sponsor, you didn't really need
to roll up your sleeves and get your hands dirty
doing some of the hard stuff to increase cashlows through
margin expansion because revenues were growing and multiples were expanding.
That's not the case anymore. So. Of the examples that
I've rattled off post LME is like Shutterfly has done
(33:40):
a great job. Apollo has done a great job with
that asset of increasing cash flows primarily through cost optimization.
It has not been revenue driven. Now, revenues have hung
in there, they haven't gone south, but they've taken a
lot of cost out of the business and increased cash
flows fairly materially. I think they were around two fifty
when they did the LME and they're approaching for one
hundred now. So that's one that I think will work.
(34:02):
It's hard to know what probability or what percentage of
these things are going to work because not a lot
of them have hit their new maturity well yet. My
suspicion is your comments are right. Most of them aren't
fixing the capital structure. It's going to be very hard
in this economic environment to grow top line and continue
to expand margin, and most of them will ultimately default.
Whether that number is going to be sixty percent, seventy percent,
(34:23):
eighty percent, or thirty forty fifty percent will somewhat depend
on the economy and it will be very situational. But
my suspicion is that much of this is kicking the
can down the road and they'll ultimately default, which is
why I think that ratio of two percent default three
percent exchange will slowly be three percent to fall two
percent exchange, four percent to fault one percent exchange, and
(34:45):
maybe it will stay a five. But the mix of
how many are actually equitizations in court versus extensions of
maturity and liquidity injections out of court, that's going to
change as you get into a post LM world, which
will be at over the next couple of years.
Speaker 2 (35:01):
I think it's interesting we didn't not doubt this morning,
basically saying that distress bonds apply in April was about
one hundred billion cycled down to about fifty sixty sixty
four billion today. So the numbers come down. The total
number of distress sponds in the index has come down,
and it doesn't really square with a rise. You know,
we're looking at in that sort of combined percentage that
(35:21):
you're talking about. How do you square price action, you know,
with actual risk and fundamental risk maybe rising or maybe
they're you're thinking they're they're dropping with the l ME.
But the way the market is today in terms of price,
but offset by the rising rate, default rate and exchange rate,
how do you square those two?
Speaker 3 (35:41):
Well, the numbers that I'm talking about are defaults and exchanges. Okay,
The distressed exchange ratio is really a measure of trading prices,
right right, So you could not default, you could not
do an LME. You're not going to go into my
five percent number, okay, but you'd be in your numbers. Look,
we've had you know, just the distressed rate is gonna
move up and down with sentiment. And you know, in
(36:03):
a post tariff world. In January and February March like
the markets were down a lot. There was a lot
of companies that did not defaults or weren't going to
default eminantly and weren't going to do an lemy imminently
that we're training at distress prices. In those bonds of
rallied up, you're also going to get a big difference
in and it's harder to calculate because they're private issuers.
But loan land versus bond land, we've seen a dramatic
(36:23):
difference in l amizing. Most private equity sponsors didn't utilize
the public bond market that utilized either the direct lending
market in recent years or the broadly syndicated loan market.
Because there was a private it's cheaper for them. It's
easier to issue less disclosure. So you're going to see
different numbers there, but you're going to see those numbers
move up and down with sentiment. And we're in a
risk on world now, and we were in a risk
(36:46):
off mode back in April.
Speaker 1 (36:47):
We were unfortunately running out of time. Mike, I don't
know if you have any other burning question.
Speaker 2 (36:53):
Burning desire question I would have is sort of, you know,
you've been doing this for a long time, you're kind
of you know, credit your credit guy kind of through
went through. What advice would you give to emerging analysts
and sort of people that aspire to b pms who
sort of want to blend distressed instincts sort of with
credit discipline, Like, what sort of advice would you give
to someone starting out maybe listening to this podcast.
Speaker 3 (37:15):
Well, two things I would comment. So, first of all,
I am a credit guy through and through, because our
investments always start as credit. But we're investing in credit
to create equity upside, and there's a couple of ways
you can do that. You can either get refinanced out,
in which case we just remain a creditor, or you
can convert that to equity and then you're an equity holder.
A very large portion of our portfolio today is equity
(37:38):
private public equity. Where we sit on the board, we're
very involved. We're known as a distress for influence or
distress for control funds. The vertical airspace we control, the
poor we control. We have a control equity position there.
So we're sort of an in between, like almost in
between a credit investor and a private equity investor public
equity investor. Advice I would give, I would just circle
(37:58):
back to what I said earlier. You need to develop
a contrariant thesis to make money in investing. It's very
hard to do that if you're focusing on sources that
everybody else has access to. So you need to understand
what a business does and read the ten K and
read the ten Q and do all that work. But like,
get out there, meet with management teams, don't sit behind
your desk. That's where the light bulb goes off and
(38:20):
you develop a really differentiated view. It's some of our
best investment opportunities Historically. I've always come from field work,
just getting in there, getting knee deep, knowing the business
better than anybody else could know because you've just spent
hundreds and hundreds of hours with management teams, former management teams, competitors, suppliers, customers, etc. Etc.
That's where you develop a thesis that's contrarian to what
(38:41):
the security price is trading, and I think there's too
many analysts today that are just inundated with easy access
to information and they spit out lots of reports, but
you're just regurgitating information that everybody already knows, and that's
not how you become a good investor. So that would
be my advice. That's great, appreciate it.
Speaker 1 (38:59):
Well, that's a personal take, but I was My last
question would be more around private credit. We've seen that
asset class raise a lot of money in the past
few years. How has it impacted distress investing in your view?
And also do you see actually any opportunities arising from
private credit providers struggling?
Speaker 3 (39:21):
Good question when I get a lot. I think the
short answer is it doesn't impact what we do directly.
There's always the threat of we can do a deal away.
We don't need your capital because we can prime you
with money from X, Y and Z private credit fund
and I think that is that threat is real. It's
(39:41):
rare that we see it acted upon, but I do
think it's real. Although I would say that most private
credit funds don't want to get involved in highly levered,
distressed situations, So there are very few firms out there,
maybe your HPSS and Angela Gordon's that will be willing
to step in and understand how to analyze that risk
and our comfortable making a private loan to a company
(40:01):
that might you know it's likely to go bankrupt. You know.
Private credit, I would say, is very crowded, and I
think that makes it very hard to evaluate the performance
because you haven't had a downturn yet, but you have
a lot of players chasing a lot of deals. So
we've definitely seen spreads compress. In terms of opportunities. Private
(40:22):
credit doesn't trade, okay, so a lot of people say,
is this is gonna be a big opportunity for you.
The problem is when you have one holder of a
dead instrument and it's not actively traded and syndicated, that
holder can work with the issue or on an extension
of maturity very easily. You don't need to do an
LME and create JKRW in course of NIS to get
everybody to participate. It's it's just a one It's a
(40:43):
bilateral conversation between borrower and lender, and they can also
pick it. Okay, if you're cash flow negative, right, rather
than borrowing money from somebody else, you can just pay
it in kind. So what we're seeing is what I
tell our clients that say, how do you think we
should evaluate private credit? I say, ask the manager what
percentage of this portfolio is paying in kind versus cash
(41:03):
pay And what we're seeing is twenty to thirty percent
of these private credit portfolios are now paying in kind.
That's a big, big red flag. So I think it's
a big risk. Is going to create an opportunity for
us to buy these loans? I don't think so, because
I don't think they're going to trade where they had
it marked and where we would buy it. There's probably
very different numbers. They probably have it marked par and
we would be bidding sixty or seventy cents when they
(41:24):
can just get an extension and not have it impact
their track record while they're raising their next fund. Why
would they sell to us? The only way they lose
thirty points that week is if they sell to us,
And that's the beauty of or risk, depending on the
side of it you're on, but of private market valuations.
Speaker 1 (41:39):
Json Modrick, founder and CIO of Mudrik Capital Management, many
thanks for joining us on the credit edge, and of
course we're very grateful to Mike holl On from Bloomberg Intelligence.
We appreciate you joining us today for more credit market
analysis and insight. Read all of Mike's great work on
the Bloomberg terminal. Bloomberg Intelligence is part of our research department,
(42:00):
with five hundred analysts and strategies working across all markets.
Coverage includes over two thousand equities and credits and outlooks
on more than ninety industries and one hundred market indices,
currencies and commodities. Please do subscribe to The Credit Edge
wherever you get your podcasts. We're on Apple, Spotify, and
all of other good podcast providers, including the Bloomberg Terminal
(42:21):
at b pop Go. Give us a review, tell your friends,
help spread the word. Amirna Garthia Perez, it's been a
pleasure having you join us again next week on the
Credit Edge
Host
James Crombie
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
New Heights with Jason & Travis Kelce
Football’s funniest family duo — Jason Kelce of the Philadelphia Eagles and Travis Kelce of the Kansas City Chiefs — team up to provide next-level access to life in the league as it unfolds. The two brothers and Super Bowl champions drop weekly insights about the weekly slate of games and share their INSIDE perspectives on trending NFL news and sports headlines. They also endlessly rag on each other as brothers do, chat the latest in pop culture and welcome some very popular and well-known friends to chat with them. Check out new episodes every Wednesday. Follow New Heights on the Wondery App, YouTube or wherever you get your podcasts. You can listen to new episodes early and ad-free, and get exclusive content on Wondery+. Join Wondery+ in the Wondery App, Apple Podcasts or Spotify. And join our new membership for a unique fan experience by going to the New Heights YouTube channel now!
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com