July 3, 2025 • 49 mins
HPS Investment Partners is building out its fund finance business, including net-asset-value lending. “It’s a huge opportunity,” Purnima Puri, head of liquid credit and a founding partner at the $150 billion firm, tells Bloomberg News’ James Crombie and Bloomberg Intelligence’s Tolu Alamutu in the latest Credit Edge podcast. “Exits for private equity sponsors have been somewhat limited and it’s one way to get some capital back to their investor group, which I think is super important,” says Puri. They also discuss how HPS is positioning for stagflation, the private-debt deal pipeline, relative returns, slim recoveries and liability-management exercise “brain damage.”
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Episode Transcript
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Speaker 1 (00:18):
Hello, and welcome to Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at
Bloomberg and.
Speaker 2 (00:23):
I'm Totalu Ala Mutu, a senior analyst at Bloomberg Intelligence.
This week, we are very pleased to welcome Perima Puri,
governing partner at HPS Investment Partners. How are you, Panima,
I'm good, Thank you, Thank you for joining us. Panima
is the head of Liquid Credit at HPS. She's also
the portfolio manager for multi asset credit strategies. She joined
(00:47):
HPS in two thousand and seven as founding partner and
sits on the investment committee for the private credit businesses.
HPS Investment Partners is one hundred and fifty billion dollar
credit manager, with a majority of those funds focused on
private credit.
Speaker 1 (01:03):
We have got loads of questions for you, but before
we start with that, just wanted to set the scene.
Credit markets are looking pretty complacent at the moment, with
junk bonds trading ever tighter as demand for yield rises
and the supply of corporate debt remains thin. Robust returns
in public debt leads some to question the actual value
of private markets, which have enjoyed sellar growth over the
(01:24):
last few years, private debt is taking a bit of
a beating. Jeff Gunlack from Double Line recently compared the
mania for that market with the rush to collateralized debt
obligations CDOs in the run up to the global financial crisis.
He also doubted whether the asset class actually offers less
volatility for investors. It's not moved very much this year,
despite all the chaos of tariffs, inflation, rates, taxes, immigration,
(01:46):
and global geopolitics, but there are questions of whether the
loans are actually being marked correctly. So, Pernima, what's your take?
Is private credit risk fairly valued at the moment? Do
you think?
Speaker 3 (01:56):
I do?
Speaker 4 (01:57):
I think private credit risk FIRS. I think you have
to sort of bi far kate what private credit is.
So there's non investment grade private credit. There's the ABF market,
and there's the real estate market, infrastructure market, et cetera.
And then across the rating spectrum there's a variety of
versions and flavors of private credit. You know, I think
(02:17):
number one, the value of private credit has been historically
and continues to be an incremental spread over the liquid markets,
and that incremental spread has held up. Now that spread
has moved down on an absolute level as the liquid
markets have moved down, but the one hundred and fifty
to two hundred basis points and the sort of core
(02:38):
lending market has remained. The second thing I would say
is that private credit there's been I think there's the
last numbers I've seen sort of eleven hundred to twelve
hundred private credit vehicles. They're not all treated the same,
they're not all created equally. Of that number, there's about
ten that are over ten billion in size, so the
(03:00):
majority are much smaller in terms of scale. And what
that means is that there is a part of that
market that's significantly more competitive and as part that is
significantly less competitive. And the third thing I would say
is sort of another consideration to think about in private
credit is the dependence on origination and the sponsor market
versus the non sponsor market. And again, you know, when
(03:22):
you think about the world, you know, I think eighty
plus percent of companies with you know, revenues of over
one hundred million dollars are privately held. So there's a
huge amount of capital or capital needs, I should say
for companies that are privately.
Speaker 2 (03:38):
Held considering one of the issues that you mentioned is
the opportunity, the size of the investable opportunity. One of
the issues I guess that we've had over the last
I'd say at least couple of years is that there
may be too much money chasing too few opportunities, and
(04:01):
that's maybe had an effect on the potential returns. But
you're still talking about a differentiation there of one hundred
and twenty plus basis points between private and public. Do
you think, though, that there is still too much money
chasing too few opportunities or do you think that the
opportunity set is vast enough to take up all the
(04:22):
funds that have been raised for this part of the market.
Speaker 4 (04:26):
Yeah, So a couple things. One is, I think the
spread premium in the straight down the fairway private credit
world is sort of one hundred and fifty to two
hundred basis points, and I think that spread premium has maintained.
I think two is there's the ABF market and then
there's the corporate credit market. And within the corporate credit market,
and the idea of sort of too much money chasing,
(04:48):
I go back to sort of the number of funds
that exist and that sort of dictates the size of
companies that they're trafficking in. So said differently, I think
I mentioned before sort of ten funds over ten billion,
there's nine hundred funds that are sub.
Speaker 3 (05:03):
A billion dollars in size.
Speaker 4 (05:04):
And so when you think about portfolios and you think
about depersification, you can kind of backwards engineer the math
into what those holding sizes look like, call it anywhere
from a two to five percent position. And when you
think about that, that market is significantly more competitive.
Speaker 3 (05:19):
That market would I would.
Speaker 4 (05:21):
Argue on spread and on terms, is a much more
competitive market. I think when you're looking at some of
these larger vehicles, they tend to traffic in a different
segment of the market. And so when I look at
our business and some of our competitive businesses that are
of that size and scale. You know, for our business,
our core business has you know, eb adopt two hundred
(05:42):
million dollars plus in the course in your lending business,
and we have the ability to control and underwrite tranch
sizes that are quite large, as do many of our peers.
So I think that segment of the market is less
competitive and more disciplined. I also think what's important is
that segment of the market has been able to hang
on onto structural terms and structural protections, Whereas I think
(06:04):
you're right in that there is a lot more competition
and in the in the smaller funds and therefore smaller companies,
and the premium and the terms whether you think of
that as covenants or structure, et cetera. Uh, you know,
are are are dissipating a little bit, for sure.
Speaker 1 (06:25):
But also at that higher level that the larger scale
you're competing with the banks in traditional broadly syndicated loans,
Is that not a tough fight at the moment, given
how much potentially cheaper you'll get your funding if you
go syndicated.
Speaker 3 (06:37):
Yeah, it depends.
Speaker 4 (06:39):
I think it's interesting because there's a lot of numbers.
But basically, if you look at last year and you
look at year to date, the number of broadly syndicated
loan takeouts, meaning private credit taking out broadly syndicated loans
and the flip of that, which is public credit liquid
credit taking out the private least indicated loans, tends to
(07:01):
be pretty symbiotic. So I would say last year, I
don't have the exact numbers in my mind now, but
I want to say it was thirty to thirty five
billion dollars. That's roughly on both sides of the coin.
This year we're running it roughly the same size on
both sides of the coin as well, so we are
seeing those markets work in tandem.
Speaker 3 (07:18):
I actually think that you're right in.
Speaker 4 (07:21):
That today where we're sitting, there is so little new
supply and the vast majority of financing has been refinancing
in the liquid markets, high yield in the loan market.
But we have had a lot of bouts of volatility, right,
so that I mean we had peak volatility and I
guess Liberation Day sort of that week of April second
(07:42):
to the ninth or something like that. And I think
these moments of uncertainty and volatility are actually have have
sort of imprinted in people's minds that no market is
here to stay. And in fact, the value proposition for
private credit continues to be strong, especially when you see
(08:03):
these moments of volatility, because issuers need to know that
there is a market that they can they can access
if they need financing.
Speaker 1 (08:11):
Right, right, But then you know, on this scale, as
you say, there aren't that many players, there is this competition.
It is somewhat more commoditized at the top, right, because
these are bigger names. Are you not therefore susceptible to
much more compression in the spread and differential between public
and private in terms of your return as an investor?
Speaker 4 (08:29):
Yeah, we haven't seen that yet because again, that differential
has been able to hold, certainly because there's fewer folks
out there, they can offer billion dollar size, you know,
financings to counter parties. We have been able to maintain that.
Whether we're able to maintain that going forward, you know,
I don't know, we'll see, But thus far it's been
(08:51):
a pretty rational market in terms of where things price right.
Speaker 1 (08:55):
Okay, But then as you say that the lower end
of the spectrum, maybe that's where potential trouble is that
that people like gun Lak are talking about?
Speaker 2 (09:03):
Is it?
Speaker 1 (09:03):
I mean that is that the kind of where the
misconceptions and the problems of a building around private credit?
Speaker 4 (09:09):
Yeah, I mean, look, I hear the story, but we
haven't seen it. So again, like now, if you look
at so link it, first of all, there's not a
lot of great data on private credit. There's some data,
but there's not a lot.
Speaker 3 (09:20):
Of great data.
Speaker 4 (09:21):
But if you look at Lincoln, which is a third
party valuation firm, the tracks deals across industries, right, they
would say that ebitdog growth has been higher and default
rates have been lower for borrowers that are bigger. So
since you know more specifically, I think the numbers were.
You know, in Q one LTM e bit DOOG growth
for one hundred million dollar plus borrower was nine point
(09:43):
nine percent and defaults for bigger borrowers was sub two percent.
So you're not seeing a huge variance in terms of
the default rates in private versus liquid now, I would
say that, and this gets into sort of the state
of the world. If you look at most people's estimates,
(10:04):
the default rates are expected to increase from currently. You know,
we're running at like three and a half percent in
the loan market that includes distressed exchanges. You know, the
estimates are for that to increase. If you look across
the board, you know they're all over the place. Four
and a half to five percent or something for next year,
and high yield to increase as well. So if you
(10:25):
see the default rates increasing as a result of slowing
GDP growth and potentially tariff impacts, you will see a
resulting impact of private credit, it won't be immune to it.
It can't be immune to it. But this you know,
so far, you haven't seen a huge variance in those
in those default rates, and certainly you've seen growth that's
(10:49):
a bit higher in the private credit market, certainly from
the Lincoln data, than we've seen in the liquid markets.
Speaker 2 (10:55):
One of the issues that you've mentioned is about the
quality of data, or even maybe the quantity of data.
I guess in some instances, how do you get around
that and how do you get comfortable with these relatively
large positions if one can't get the quantity or quantity
(11:15):
of data that maybe might be available in some other markets.
Speaker 3 (11:21):
Well, so I'd say I'd say two things.
Speaker 4 (11:23):
One is that the quality of data in our in
our book and in many of our competitors' books is financials.
Speaker 3 (11:31):
That's the quality of the data.
Speaker 4 (11:33):
So the problem is not that we don't have the
data to look at how our businesses are doing, or
that our competitors don't have the data. They have the data.
They actually have financials. Oftentimes they're monthly financials, you know,
sometimes they're quarterly financials. But those information rights Again, when
I and I'm bifurcating the market because I we don't
tend to traffic in the smaller, much more competitive part
(11:54):
of the market, but in the larger market, information rights exist,
so quality of data and underlying operation performance is not
the problem. And in fact, I would say we've been
surprised at how well the portfolio has held up. I
think what you're referencing is quality of the market data,
and it's getting better and better as the market gets bigger.
I mean the big the market now is. You know,
(12:15):
the numbers are all over the place, but call it
one point seven trillion dollars a private capital in the
corporate world, and cliff Water and Lincoln and there's several
providers that are starting to have better quality data. That's
that's more readily available if you compare it to the
highield market and the loan market, which by the way,
(12:35):
those markets are about the same size. Obviously, we have
that data, and that data is published by every every
brokerage house there is.
Speaker 3 (12:44):
But I would I.
Speaker 4 (12:45):
Would argue that as this market has evolved and the
market has grown so much, the data has increased, and
there are more and more places that are starting to
be able to bifurcate some of the market data. I
gave you the numbers, for example, in the default numbers.
You know, if you look at the link in data,
they've split up those default numbers for under twenty five
(13:06):
million dollar borrows, fifty million dollars borrowers.
Speaker 3 (13:08):
Et cetera. So it's coming.
Speaker 4 (13:11):
But the operating data is certainly there for people to
judge how companies are performing and are they are they
using pick? Are they do we have companies that are
in trouble or where are we defaulting?
Speaker 3 (13:22):
Et cetera. We got you know, managers have that data.
Speaker 2 (13:26):
You've raised a really interesting and topical point there, pick right.
So and also the default issue and how that's being defined.
Speaker 3 (13:36):
So when you're looking at I.
Speaker 2 (13:38):
Guess pure default data, there is always the issue of
how is that being defined and whether it includes amend
and extend type situations and so on. How comfortable are
you that the defaults correctly capture those sorts of situations
(13:59):
or do you think that if the people need to
look wider and consider picks and so on, and then
considering the picks and amend and extent situations, have you
seen rises in that as well? Some of our data
suggests that, but clearly you're looking at a slightly different
opportunity set. So have you seen increases in issuers looking
(14:20):
to pick or to amend an extent?
Speaker 4 (14:23):
Well, so a couple things. So in the liquid markets,
let me answer the first question, which is, how do
you incorporate liability management into default rates? In the liquid markets?
The published numbers JP Morgan, Goldman, et cetera. They publish
default rates and then they publish default rates that include
distressed exchanges. So you're capturing both of those, and you're
(14:45):
right in that there's a big differential. So LTM default
rates for high you bonds are forty basis points if
you include distressed exchanges one point three percent. In lever loans,
LTM default rates are one point four percent. If you
include distress exchanges, there are three points. So there's a
variance in those numbers. Certainly in the liquid markets we're
seeing it. With regard to the private markets, I can
(15:11):
tell you that we know what our companies are doing
in terms of defaulting, and I think I don't have data,
you know, on whether there's been a big increase in
pick or not. What I can tell you is that
the value proposition historically for private credit has been around
the following, which is number one. Unlike the liquid market,
(15:34):
which likes sort of a risk box to go after.
Why because north of sixty percent of the liquid market
or COLO buyers and there's a nice you know, we
sale buyers like a rating, an amount of leverage, a
diversity score, et cetera. Private credit has more flexibility with
regard to that. So what does that mean. That means
that you can offer borrowers the ability to pick for
(15:57):
two years maybe when. And we've seen a lot of
this where they're very good businesses and maybe they needed
but that flexibility was built in from the beginning for
a reason. And it was built in because you know,
and I could tell you this from being on our
investment committee, and I'm sure this is true at many
other places that when you're looking at underwriting an investment,
you know you're you're incorporating a whole bunch of cases,
one of which may be a stab plation in case.
(16:18):
And if that's the case, you might need to be
able to offer that flexibility. But those are oftentimes flexibilities
that are built in from time zero. So why what's
the value proposition? The value proposition is certainty of execution.
The value proposition is flexibility of capital to create capital
the way people need it. The value proposition is delay
draw facilities for liquidity purposes. Those could be short term
(16:39):
liquidity purposes, those could be you know, there might be
a roll up involved, and people need financing that's on
the wire and ready to go and not being constrained
by a ratings box. That's the value proposition. And when
there's volatility, that value proposition is all the more apparent
to issuers. So your question is distressed exchange is you know,
(17:01):
I'd say in the liquid markets, it's very transparent. Those
numbers are available and they are significantly higher, as much
as three times higher LTM.
Speaker 3 (17:09):
And and in.
Speaker 4 (17:10):
Terms of the private credit, we haven't seen our borrowers
increase pick dramatically. I don't know what the market is showing.
Speaker 1 (17:21):
And you'll see more good pick compared to bad pat.
Speaker 4 (17:23):
Well, I mean the stuff is baked in, right, you
know when you when you put a Trump sheet together, yeah,
you have you have a pick flexibility.
Speaker 1 (17:29):
Right Okay, Yeah, And going back to the strategy, talked
about the bigger deals. They're really on that many of
them are there there's a pipeline.
Speaker 3 (17:38):
Oh, there's a lot of big deals.
Speaker 1 (17:39):
Where does it come from.
Speaker 4 (17:40):
Yeah, it comes from Look, I mean, eighty plus percent
of the companies in America are privately owned, so they
need financing. We've done billion plus dollar deals private companies.
They come from taking share from the syndicated markets when
the syndicated markets are super volatile. And you know, the
loan market, and the syndicated market has been roughly flat
over the last number of years. But this is a
this is a there's a fin nancing opportunity available for
(18:02):
private companies that's going to the private market so many instances.
Speaker 1 (18:06):
So it continues to grow at this same pace.
Speaker 3 (18:09):
It's been growing at you know, fifteen to twenty percent
a year roughly.
Speaker 1 (18:12):
Yeah. Yeah, And you think the volume for direct lending
to leverage companies grows at that rate.
Speaker 4 (18:19):
No, if it grows at fifteen or twenty, or if
it grows at ten. But I think that companies in
general that are growing need to access financing. And this
market is i mean, in just a number of years,
it is now a third of the size of the
non investment grade levered market.
Speaker 3 (18:35):
Right, it's a big part.
Speaker 4 (18:36):
And then we haven't touched on sort of the asset
bat market. I mean that's private credit is five percent
of the asset is twenty six trillion dollar market if
you include real estate. Right, it's literally private credits five
percent of that marketightly right.
Speaker 1 (18:48):
But also, as you said, it's kind of you know,
it's a good solution when things are volatile, sort of
foul weather. Friend. If you take the view that you know,
we're going into a time which you know, maybe the
Fed cuts rates, the economy continues to grow, everything is rosy.
Funding markets of liquid everything looks great. I mean, why
do these companies, you know, not flip back to the
(19:10):
broadly syndicated market and save them you know, say, save
themselves some money. Maybe they don't get such great terms
or flexibility, but why not flip back.
Speaker 4 (19:19):
Because not every company is a single B rated company
that can be financing the liquid market.
Speaker 1 (19:23):
So it's going to be the bigger, more risky companies.
Speaker 4 (19:28):
Then, is that the I think one segment of the
market is a bigger, more risky company. I think another
segment of the market is companies that are first time
issuers that aren't known by the marketplace. So there's a
lot more of a learning curve for first time issuers.
I think a third segment of the market are companies
that are growing really quickly that could change.
Speaker 3 (19:46):
The landscape of how they look.
Speaker 4 (19:48):
So I think there's a lot of there's a lot
of different types of issuers that approach our market.
Speaker 2 (19:53):
And earlier on you mentioned the difference in returns between
public and private markets, but you also mentioned that in
both markets we are seeing returned moderate a little bit.
So what would you say would be a good return
for twenty twenty five for private credit in terms of
(20:14):
rough percentages or ranges?
Speaker 4 (20:16):
Yeah, I mean, look, it's hard to put a I
can't put a return number on the piece of paper.
What I can tell you is that you know, there's
a lot of BDCs that are tracking at sort of
ten percent. And I think one way to think about
this is if you look at the loan market and
you look at spreads. And the reason I say moderating
is because you know, spreads have contracted seventy five hundred
basis points since Liberation Day. So we can look at
(20:38):
public markets as kind of sort of sort of some
kind of proxy, I suppose, And so if you if
you think about the spread component. You've got loans and
high loans and high yield highields sort of three hundred
over and the loan markets, you know, depending on which
market you're looking at, as will roughly call it four
hundred is shover FED Funds Rader, you know, four three percent,
(21:01):
So loan market's roughly eight percent, and private credit is
a couple hundred basis points in excess to that.
Speaker 3 (21:06):
And that's what we're seeing. Now. The question becomes, you know,
as James says, we're.
Speaker 4 (21:10):
In a rosy land, I'm not sure I agree with that,
but uh, you know, if you if you do see
FED funds and see a number of cuts come in,
and those estimates are as much as five cuts over
the next call it through December twenty sixth or something
like that. So you know, if you see terminal FED
funds rate at three and a quarter, definitionally, returns in
(21:35):
a floating rate market will contract a little bit, and
that'll contract by one hundred basis points. And that's true
for the for the syndicated market, and it's true for
the for the private private debt market.
Speaker 1 (21:45):
So this pipeline you talk about funny, but a big
pipeline for big deals. Where is it coming from? Is
it infrastructure relates, is it is power? Is it real estate?
Where are we seeing the opportunity?
Speaker 4 (21:58):
Yeah, so we're seeing lots of different opportunities. You know,
on the corporate credit side, you know, add on financings,
there are still buy opps that are being done, rescue
financings in different parts of the capital structure. On the
asset back lending side, you know, they're securitizations of lease
stream equipment, lease streams, aircraft leases, data centers. We're seeing
(22:19):
financing opportunities other infrastructure buildouts. We're seeing in the private
credit space, which is sort of the corporate world of
private credit real estate. So you're kind of seeing the
need for financing in a whole bunch of different markets
at a whole bunch of different yield opportunities.
Speaker 1 (22:36):
Okay, and have you got a size for that addressable
love chuge.
Speaker 4 (22:41):
Sizes we've seen for the non well, let me say
that's the ABF market. So there's two kind of numbers
that people throw around. One is on the ABF market,
which is twenty six trillion dollars. That is about five
and a half trillion if you exclude real estate and structure,
and of that, the numbers we have seen are roughly
(23:04):
five percent. That's private credit right now, so it's pretty small.
In the corporate credit market, you see a market of
roughly thirteen trillion dollars, and that's comprised of you know,
one and a half trillion of high yield, one and
a half trillion of loans, one and a half trillion
of non ig private credit. We've talked about that that
maybe one point seven and then roughly nine trillion dollars
(23:25):
of investment grade corporates. That investment grade corporate market is
a humongous market. So imagine that you have ten percent
share take, a twenty percent share take. That's those are
very very large numbers that could could move its way
into private corporate credit. And lots of reasons for you know,
(23:45):
is it off balance sheet? Is it on balance sheet?
You know, are there specific boat bespoke structures that all
that stuff is sort of valid there as well.
Speaker 2 (23:54):
You mentioned moving from sorts of five percent to maybe
ten or even twenty percent of certain markets in what
time frame do you think that that's sort of feasible?
And should we not be just a little bit concerned
that the market has already grown pretty fast in the
(24:16):
last few years, and so I'm putting my credit and
it's hat on here. People would normally already be concerned
because of how fast it's grown today. So is getting
to ten or twenty percent of those addressable markets really
(24:38):
something we should be striving for or do you not
think that might make people even more cautious about private credit?
Speaker 4 (24:46):
Well, I'd say I'll say two things. The FIRSTUS private
equity has grown faster than private credit in the corporate world,
So that's one. And two is I think when I
talk about a share take, what I mean by that
is that if you have nine trillion dollars of investment
grade corporate and you have a large ABF market, you
(25:10):
could imagine that portions of that market would flow towards
private lenders. And in the end, who are those private lenders?
There are LPs and their insurance companies and pension funds,
et cetera.
Speaker 1 (25:23):
You are obviously a storied firm, one of the first
movers in this We've written a lot about the history.
But I'm curious as to how you differentiate yourself in
this space that has become so you know, relatively mainstream
in such a short space of time, everybody's doing it.
So what keeps your head?
Speaker 4 (25:42):
Yeah, I think a couple of things. I think, you know,
we were early in the market, and so we've become
a pretty scaled provider of credit.
Speaker 3 (25:52):
One.
Speaker 4 (25:52):
Two is we a lot of our a lot of
our vehicles and our investments, our underlying investments are non
sponsor oriented and are not just the sponsor oriented market,
which which I think is a huge differentiator. So and
so early mover, non sponsor. And then three would be scale,
(26:15):
where we're competing in a universe that's not as competitive
as what we've seen in terms of broad the number
of players are coming into the private world.
Speaker 1 (26:26):
Do you fail the new competitors? Do you worry about
the aggressive nature of some of the newcome as I
do on.
Speaker 4 (26:32):
The smaller size of the companies that are being underwritten,
And certainly when you look at sort of some of
the sort of more club type deals in smaller businesses,
where those are being effectively syndicated to a number of
private credit folks, I think that's where, you know, if
one were to see stress in the market in general,
that would be a first place where you might see
(26:52):
stress because in those deals that are held by a
whole host of private credit folks, where there's not one
person that can control that tranch and sort of help
help to create a better outcome. I think that that
looks a lot more like a syndicated deal in the
liquid market. And so in those instances where that market
(27:15):
is very competitive and those deals are held by a
lot of people and they are not controlled by a
universal party, I think there's more risk in those. And
and by the way, you know, we've seen that in
the liquid markets a ton, right, because I've seen a
lot more on these liability management exercises now that it's
interesting because I will say on the liquid side, the
(27:35):
liability management exercise, those transactions have actually been declining somewhat
in the last In the last year, we saw so many,
you know, in terms of these liability management exercises that
were starting to take place. I would say that you
know that number is you know, it's down from what
(27:57):
was sixty eight percent of overall defaults down to forty
two percent. And I think it's down because if you
look at twenty three, twenty four and year to date
this year, they don't work, these libilary management exercises and
In fact, you know this year, ten out of the
thirty defaults year to date are repeat issuers of defaultedt
(28:20):
In twenty twenty three and twenty twenty four, it range
from sort of twenty five percent to a third will
repeat default issuers. And so what you're seeing there is
that just isn't working. So there's a lot of money
and fees going out the door, and there's a lot
of brain damage and creditors and recovery rates have been
totally demolished, and it didn't work anyway.
Speaker 2 (28:41):
How do you say then that investors would get round that?
Because usually the reason that I guess many would agree
to go through the whole enemy process is because they
want to avoid the potentially also costly process of going
through a full bankruptcy and so on. So why would
you say the happy medium is? Do you think that
(29:03):
lemis just need to be better structured or do you
think that the issuers should just be pushed through the
bankruptcy process.
Speaker 4 (29:11):
I mean, I think in a lot of these issues,
in a lot of these instances where you're seeing a
third of these default and exercises be repeated issued as
they should be pushed through from the beginning I think
it would have saved a lot of money to the
creditor group, but they weren't, so I think, you know,
what you're seeing, what these lemies have been have been
stripping apart assets into basically good assets and less goods
(29:33):
or bad assets, and moving some creditors along with some
senior secured financing into a new box and leaving others behind.
And I think it touches on a really important point here,
which is that you know, people focus a lot on
default rates. I think what's changed dramatically is recovery rates.
I mean, we used to have a market where recovery
(29:54):
rates on senior secured loans and unsecured high year bonds,
there was a huge differentiator, like the diferential was quite
large that differentially. That's that differential is not so large anymore.
In fact, it's roughly in line with one another in
terms of what you're seeing for unsecured and secured recovery rates.
You know LTM high yield recovery rates or sixty cents
(30:16):
and that includes distress ex changes and LTM for the
loan side is fifty four cents. So you know, they're
really converging. And it used to be that loans recovered
seventy to eighty cents on the dollar. That's we're not
really seeing that anymore.
Speaker 1 (30:28):
And you mentioned there were a lot of them and
now there haven't been that many. Maybe we're just in
a summer slow down. But do you think we're getting
to a point where there is some reputational risk on
the part of the advisors and the law firms that
are really pushing the most aggressive forms of these things.
Speaker 4 (30:43):
If there's reputational risk, because I think if you're a
private equity sponsor, your job is to keep a business,
you know, to keep an option alive if there's a
chance to do that. And I think that creditors, I mean,
you have creditor docs and eyes wide open. So but
what I do think is becoming more apparent is they're
not working. That's what I think is happening. Is you
haven't seen these things work well, So maybe that's what
(31:06):
Maybe that's more the issue.
Speaker 1 (31:07):
Unless you've seen that the only intention is just to
buy a bit more time.
Speaker 4 (31:11):
Yeah, and if the and by the way, that might
have worked if you saw if you saw an environment
where maybe rates had come in quicker, right, and you've
got floating raid heavy capital structures and decent businesses like
there are scenarios where that might have actually that might
have actually worked. I think there's a second thing going
on in liquid markets that that I worry about, which.
Speaker 3 (31:33):
Is these disqualified lenderless Yeah.
Speaker 4 (31:35):
So you know, you're starting to see some sponsors not want,
you know, as a manswer is to accumulate their debt
and own the process in the syndicated world, and some
of those disqualified lender lists are quite large. So I
worry about that in terms of liquidity. Now we haven't
seen that in a pervasive way, but that's weird, it's
(31:58):
yead Also.
Speaker 1 (31:59):
Yeah, is that they tend to be around you know,
a dozen maybe two dozen names max.
Speaker 4 (32:04):
We actually saw one recently that had one hundred names. Yes,
one hundred names.
Speaker 1 (32:10):
Isn't that most of the market company?
Speaker 3 (32:11):
Yeah?
Speaker 4 (32:12):
Yeah, I mean now that was one, yes, but yes,
normally they're in the ten to fifteen.
Speaker 1 (32:16):
Yes.
Speaker 2 (32:18):
I guess one issue then, and I guess it links
in to your point on disqualified lender lists and so on,
is getting different creditors that may have different risk profiles,
I guess, or risk tolerances to work together. So how
do you how can you suggest that issuers get around
(32:40):
that then, because you will have those that are more
on the opportunistic end of the scale, I guess, and
then you will have those that would have invested in
the issue at par and are hoping to get most
of that back as quickly as possible. So how do
you get round the issue? And how do you think
issuers should try to make the creditors work together?
Speaker 1 (33:01):
Should they try to do that at all?
Speaker 4 (33:04):
Well, I think you're getting you're you're referencing is the
sort of co op groups, right, these lender formation, these
lender groups that are being formed, and I think there
are issuers that are trying to block the formation of
co op groups. So so that's one. But ultimately, when
you have a capital structure and you have senior secured
lenders and unsecured lenders, you will have different motivations in
(33:26):
terms of how these companies look in a pro form
a you know, post restructuring format. So I'm not sure
you can get around it. When you have seen your
secured loans and you have unsecured bonds and maybe there's
old copaper and then you you know, the question becomes
how much value there is in the entity and how
to split that value up. So I don't know that
there's a way to get around it. You're right that
(33:49):
there are issuers that are trying to trying to block
that formation.
Speaker 3 (33:52):
Though for sure.
Speaker 1 (33:54):
What comes up a lot in the context of enemies
from the investment side is you need to have scale
to survive them. I mean, is that your edge in
these situations? Is that what you use going in?
Speaker 3 (34:04):
I think you need to. I don't.
Speaker 4 (34:06):
I don't think that it's always the biggest who can
survive them, but I think it is oftentimes investors that
have different types and pools of capital to help be
part of a solution. So you know, maybe there's a
rescue financing opportunity or a senior secured opportunity where you
(34:26):
can be part of a solution for an issuer to
continue to survive or help sort of you know, recap
the capital structure. I think that's probably the most important thing.
So that goes a little bit to your scale, but
it's it's not necessarily scale in the debt instrument that
(34:47):
that might be impacted negatively. I think it's being able
to bring scale to a solution for an issue.
Speaker 1 (34:55):
Going back to the private credit side of liquidity side
of that, because there is an the hope that these
things will start trading at some point. How's that going.
You've seen a lot of secondary market, is that a
big focus for you?
Speaker 4 (35:07):
We've seen runs, you know, we have not seen a
lot of trading. I think that, you know, I suspect
you will eventually see some of that. Again, it goes
back into these different buckets of size and where people
are trafficking and what their average hold size are. When
we look at our book, I mean we're controlling. We
(35:27):
control over eighty percent of our tranches that we've invested in,
so you know, I think for some of the larger
folks that want to be in a position to control
the tranche and potentially control outcomes, you're not going to
see that as much. But we've certainly seen some of
these lists come out. I don't think it's been a
robust trading market as yet.
Speaker 1 (35:50):
But is that the intention over time to just become
as liquid as syndicated loans for example?
Speaker 4 (35:55):
Well, I've read what you've read on that, you know,
and we've seen some of these bank partnerships and all
that in terms of sort of effectively syndicating private credit loans.
I don't have a great answer to it right now.
What I can tell you is that for folks who's
part of their core business model is to control their investment,
(36:17):
they don't think you're going to see it in that
segment of the market because one of the biggest protective
features for private credit is for those investors that are
large enough to own or control the entire trunch.
Speaker 1 (36:30):
Right, yeah, okay, And as the whole market kind of
opens up, people use the word democratization and they talk about,
you know, new investors and all this stuff. ETFs are
more frequently coming up as a subject for private credit.
What do you make of that concept?
Speaker 4 (36:49):
I think if you can match duration to what holders
and investors need, it's a pretty good place to earn
yield for any kind of investor, as long as you
can hold onto your credit.
Speaker 3 (36:58):
Yeah yeah.
Speaker 1 (37:00):
Let me talk about other products that you might be
involved in or looking at getting involved in, for example,
fund finance, nav loans, collateralized fund obligations, that kind of thing.
Is that an opportunity for HPS.
Speaker 3 (37:12):
It's a huge opportunity.
Speaker 4 (37:13):
We've done a lot in fun financing, We've done a
lot in GPLP solutions and the fun financing, you know,
has had a nice premium in terms of against other
investment grade type assets, and we've started to build a
pretty nice business there.
Speaker 1 (37:31):
Can you kind of give us the sense of the
scale of it and what I.
Speaker 4 (37:35):
Mean, I can tell you we want to investment committee.
I guess what two or three days ago on something
that was north of it was a billion one of
a combination of fund financing and NAP lending, So that
scale can be quite big.
Speaker 1 (37:49):
And that kind of pipeline you see continuing that that's.
Speaker 3 (37:52):
Not the one up, but I don't think that's going
to be just a one off.
Speaker 1 (37:55):
I don't know, Okay, So is that the most exciting
opportunity for you looking ahead?
Speaker 4 (38:01):
I think fun financing is a huge opportunity, and NAVE lending,
by the way, and I think it's a huge opportunity
because I think we're in a moment in time where
exits for private act responsors has been somewhat limited and
it's a one way to get some capital back to
their investor group, which I think is super important, and
I think you're going to see more and more of that.
Speaker 1 (38:21):
I'm just also interested in another part of private credit
that people seem to worry about, which is software lending
a big focus for private funds, but has been impacted
by AI. Some people have said that, you know, a
lot of the software that was created is now redundant
because of AI. Are a bunch of private loans for
software at risk because of that.
Speaker 4 (38:43):
I mean, I think there's a lot of that argument
could sort of extend to any number of companies that
are going to be impacted by AI. I think that
what happened with software was that there is a lot
of folks that lent to a bunch of software businesses
where they did not generate cash flow, and I think
the slowing of the top line impacted the timeline between
(39:05):
the time of the loan and when they were going
to generate cash flow, and so you started to see
some stress in that system. And it's a very big
percentage of the non investment grade market as it is
in the SMP. It's forty technology and large as forty
percent of the SMP. So I mean, we never had
a disproportionate share of software, and we tended to focus
(39:25):
on companies that actually generate cash flow. I think that
you know, the AI comment on just software versus other businesses.
I think you can extend it across the board.
Speaker 1 (39:35):
So let's talk about the edge your specifically, all the
things we talked about, all the great opportunities. I was
talking about, what is the you know, where is the
best relative value right now? And why?
Speaker 4 (39:45):
So I think you're kind of legging into the macro
piece of the pie, which is, you know, we we
entered the year with a lot of uncertain well, we
entered the year in a really bullish way, I would say,
and then and then, and then Liberation Day came, and
there's a lot of volatility between April second and April ninth,
and that volatility is dissipated and the SMP is up
I think as a twenty four percent or something like
(40:05):
that since the bottom there. So I think the market
in general, and there's lots of ways to slice it up.
But the equity market, people justify because it's forty percent technology. Technology,
that makeup of the SMP has shifted dramatically from prior times.
That part that segment of the market is higher margins,
(40:26):
it's less capital intensive, et cetera. I think that for
us there still remains a lot of uncertainty, and I
don't know if we go into a recession or not,
but I think we're sort of assuming a stagflationary case.
We're assuming the growth slows, and we're assuming that inflation
is sticky. And what that exact number is I can't
(40:47):
give you. But under those assumptions, credit actually is not
so bad. So that doesn't mean that spreads want wide
now and you won't see volatility and all that. I
think you probably will. But when you look at the world,
I actually think when you look at the spectrum of
anything from investment grade credit which is one hundred basis
(41:08):
points over to private investment grade, which is depending on
your flavor, there's a premium to that that could be
anywhere from an incremental one hundred to two hundred basis
points to hiyal bonds and loans, which are, you know,
three hundred to four hundred over to private credit at
large direct lending and junior capital. I actually think across
(41:29):
the credit risk spectrum, that's a pretty interesting place. I
think what is not interesting is triple C liquid credit.
I think that's not interesting. Why because I think you're
super dependent on growth to de lever and I think
you're super dependent on capital markets to be open to refinance,
and I think you're you've got a big maturity wall
(41:50):
in that segment of the market, like twenty five percent
of the triple C markets maturing in a few years.
And if the capital markets don't open for that, and
if rates stay high and if growth modern rates, that's
a segment of the market that's going to be in
trouble and that, by the way, will widen out the
highild market just mathematically.
Speaker 3 (42:06):
So I don't I don't think that's a segment that's interesting.
Speaker 4 (42:08):
But I think if you can find ways to compound
yield across credit, and I think where you even give
up some yield, meaning maybe not move your portfolio into
sort of some of these lower rated credits, that's a
pretty good place to sit. So then you get into
what risk do you want and what duration do you want?
(42:30):
And do you want short duration, do you want longer duration?
How do you want that to look in terms of
a portfolio. But you know, you really across the board,
depending on your view on rates, you know, can be
anywhere from five and a half percent at the low
end to you know, ten plus percent on direct lending,
to even higher in terms of junior capital bespoke structured situations.
(42:51):
I think that makes a whole lot of sense visa
VI the equity market right now, and as lower of
all than the equity market, if you if you can
sort of under right into that kind of that kind
of band, so.
Speaker 2 (43:02):
You painted not so rosy, I guess outlook in terms
of potential stackfulation and so on. Would you see the
triple cs that you mentioned as being at the biggest risk,
I guess in that scenario or are there sectors geographies
that you think could come under a lot of pressure
(43:25):
through the rest of this year that we're not thinking
about at the moment.
Speaker 4 (43:29):
Yeah, well, I think I think number one, Yes, I
think triple c's are pretty risky because the times that
you want to move down in quality and liquid credit
markets are times when you're expecting a bottom in terms
of in terms of growth, and so I'm not sure
that we're at the bottom in terms of growth. I
think too, is that there's a ton of uncertainty in
the market still with regard to where we land on tariffs,
(43:53):
what that means in terms of inflation, and what that
means in terms of uh, you know, global global trade,
and I think that that uncertainty is very hard to
box at this moment. I think there's a view that
perhaps that otional tariffs that come into play and that
might be kicked out until September. But I think when
you're operating a land of uncertainty, that's why people want
(44:16):
to be in higher quality and be able to compound
because in that higher quality universe of companies, maybe you
give up a little bit of yield, but you have
a little bit more ability to underwrite what earning's power
look like, whether these companies, you know, have some more
leverage in terms of either raising prices to combat tariffs
(44:36):
or aligning their cost structures, and whether they have access
to liquidity. And I think those are really important variables
when you're operating in this land of uncertainty. You ask
the question with regard to two sectors that could be
more in trouble, and I think, you know, the biggest
sectors that could be in trouble are related to number
one tariffs, So what is that you know that could
(44:57):
be retail type sectors, industrial sectors, et cetera. And number
two related to the consumer. And that's where it's really
hard to underwrite in terms of where we're sitting today,
but you're seeing it in terms of travel and leisure
and discretionary spend.
Speaker 3 (45:15):
You're starting to see signs of that. Now.
Speaker 4 (45:18):
Look, are people are really starting to price in cuts
that you know, I think very few are pricing in July,
but people are moving into September and December. You know,
cuts to begin monthly starting in September and go through
twenty twenty six. And the million dollar question is always
(45:38):
is the FED cutting because we've reached an inflation hurdle
and been able to maintain employment levels, or are we
cutting as an insurance policy because there's a lot of
fear around underlying growth. And I think that's the question
that sort of remains, and people are starting today in
(45:59):
this might change in a week to be worried about
the employment picture.
Speaker 1 (46:04):
Or will be cutting because the FED isn't an independent anymore,
which is another risk on the horizon. But in terms
of the opportunity, what do you really lean into? It
sounds like you'll like, I mean.
Speaker 4 (46:14):
Listen, it's like we talk our and this sounds like
we're talking our book. But I would say, you know,
high quality credit is a good place to compound yield,
and I would be much more reticent on lower quality
triple C credit. I think that what you've seen this year,
certainly for the liquid guys, is that fifty percent of
the high yield managers have not been able to keep
(46:36):
up with the index. And by the way, treasuries are
a huge portion of what's happened this year for a
high yield. I mean, the treasury market is up five
year and ten years up four and a half percent
this year. The high old market is up four point
three percent this year. So it's been hard to keep
up for many managers because a lot of managers argued
towards higher quality, so they're not holding onto a lot
(46:58):
of triple C that's in there. And to you as
these cash, these coupons are high and you've got to reinvest,
and when you don't have enough paper to reinvest and
there's not a lot of new issue, it's hard to
keep invested against these index returns. But the answer is
what do we like? We like high quality. We like
high quality credit where we can lower the risk around underwriting,
(47:22):
and that risk would be either lowering the risk around
the cost structure i e. Tariffs, so staying away from
industries that could be hugely highly impacted, lowering the risk
around super consumer discretionary if you have a big slowdown
or at least underwriting where you have enough options in
businesses to access liquidity to weather a period of time.
Speaker 1 (47:45):
And you know, I'm going to ask about black Rock
because you are being acquired by black Crok, the biggest
asset manager, which presumably gives you massive scale. I know
the deal hasn't closed yet as a time of recording,
but what can you tell us?
Speaker 3 (47:56):
We're super excited about it.
Speaker 1 (47:58):
Great stuff, even Prower from HPS. Many thanks for joining
us on the Credit Edge.
Speaker 3 (48:02):
Thank you, and of.
Speaker 1 (48:03):
Course we're very grateful to Tolu Ali Mutu with Bloomberg Intelligence.
Thanks for joining us today. Thank you for having me
for more credit market analysis and insight. Read all of
Tolu's great work on the Bloomberg terminal. Bloomberg Intelligence is
part of our research department, with five hundred analysts and
strategists working across all markets. Coverage includes over two thousand
equities and credits, plus outlooks on more than ninety industries
(48:23):
and one hundred market industries, currencies and commodities. Please do
subscribe to the Credit Edge wherever you get your podcasts.
We're on Apple, Spotify, and all other good podcast providers,
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a review, tell your friends, or email me directly at
Jcromby eight at Bloomberg dot net. I'm James Cromby. It's
been a pleasure having you join us again. Next week
(48:45):
on the Credit Edge.
Hello, and welcome to Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at
Bloomberg and.
Speaker 2 (00:23):
I'm Totalu Ala Mutu, a senior analyst at Bloomberg Intelligence.
This week, we are very pleased to welcome Perima Puri,
governing partner at HPS Investment Partners. How are you, Panima,
I'm good, Thank you, Thank you for joining us. Panima
is the head of Liquid Credit at HPS. She's also
the portfolio manager for multi asset credit strategies. She joined
(00:47):
HPS in two thousand and seven as founding partner and
sits on the investment committee for the private credit businesses.
HPS Investment Partners is one hundred and fifty billion dollar
credit manager, with a majority of those funds focused on
private credit.
Speaker 1 (01:03):
We have got loads of questions for you, but before
we start with that, just wanted to set the scene.
Credit markets are looking pretty complacent at the moment, with
junk bonds trading ever tighter as demand for yield rises
and the supply of corporate debt remains thin. Robust returns
in public debt leads some to question the actual value
of private markets, which have enjoyed sellar growth over the
(01:24):
last few years, private debt is taking a bit of
a beating. Jeff Gunlack from Double Line recently compared the
mania for that market with the rush to collateralized debt
obligations CDOs in the run up to the global financial crisis.
He also doubted whether the asset class actually offers less
volatility for investors. It's not moved very much this year,
despite all the chaos of tariffs, inflation, rates, taxes, immigration,
(01:46):
and global geopolitics, but there are questions of whether the
loans are actually being marked correctly. So, Pernima, what's your take?
Is private credit risk fairly valued at the moment? Do
you think?
Speaker 3 (01:56):
I do?
Speaker 4 (01:57):
I think private credit risk FIRS. I think you have
to sort of bi far kate what private credit is.
So there's non investment grade private credit. There's the ABF market,
and there's the real estate market, infrastructure market, et cetera.
And then across the rating spectrum there's a variety of
versions and flavors of private credit. You know, I think
(02:17):
number one, the value of private credit has been historically
and continues to be an incremental spread over the liquid markets,
and that incremental spread has held up. Now that spread
has moved down on an absolute level as the liquid
markets have moved down, but the one hundred and fifty
to two hundred basis points and the sort of core
(02:38):
lending market has remained. The second thing I would say
is that private credit there's been I think there's the
last numbers I've seen sort of eleven hundred to twelve
hundred private credit vehicles. They're not all treated the same,
they're not all created equally. Of that number, there's about
ten that are over ten billion in size, so the
(03:00):
majority are much smaller in terms of scale. And what
that means is that there is a part of that
market that's significantly more competitive and as part that is
significantly less competitive. And the third thing I would say
is sort of another consideration to think about in private
credit is the dependence on origination and the sponsor market
versus the non sponsor market. And again, you know, when
(03:22):
you think about the world, you know, I think eighty
plus percent of companies with you know, revenues of over
one hundred million dollars are privately held. So there's a
huge amount of capital or capital needs, I should say
for companies that are privately.
Speaker 2 (03:38):
Held considering one of the issues that you mentioned is
the opportunity, the size of the investable opportunity. One of
the issues I guess that we've had over the last
I'd say at least couple of years is that there
may be too much money chasing too few opportunities, and
(04:01):
that's maybe had an effect on the potential returns. But
you're still talking about a differentiation there of one hundred
and twenty plus basis points between private and public. Do
you think, though, that there is still too much money
chasing too few opportunities or do you think that the
opportunity set is vast enough to take up all the
(04:22):
funds that have been raised for this part of the market.
Speaker 4 (04:26):
Yeah, So a couple things. One is, I think the
spread premium in the straight down the fairway private credit
world is sort of one hundred and fifty to two
hundred basis points, and I think that spread premium has maintained.
I think two is there's the ABF market and then
there's the corporate credit market. And within the corporate credit market,
and the idea of sort of too much money chasing,
(04:48):
I go back to sort of the number of funds
that exist and that sort of dictates the size of
companies that they're trafficking in. So said differently, I think
I mentioned before sort of ten funds over ten billion,
there's nine hundred funds that are sub.
Speaker 3 (05:03):
A billion dollars in size.
Speaker 4 (05:04):
And so when you think about portfolios and you think
about depersification, you can kind of backwards engineer the math
into what those holding sizes look like, call it anywhere
from a two to five percent position. And when you
think about that, that market is significantly more competitive.
Speaker 3 (05:19):
That market would I would.
Speaker 4 (05:21):
Argue on spread and on terms, is a much more
competitive market. I think when you're looking at some of
these larger vehicles, they tend to traffic in a different
segment of the market. And so when I look at
our business and some of our competitive businesses that are
of that size and scale. You know, for our business,
our core business has you know, eb adopt two hundred
(05:42):
million dollars plus in the course in your lending business,
and we have the ability to control and underwrite tranch
sizes that are quite large, as do many of our peers.
So I think that segment of the market is less
competitive and more disciplined. I also think what's important is
that segment of the market has been able to hang
on onto structural terms and structural protections, Whereas I think
(06:04):
you're right in that there is a lot more competition
and in the in the smaller funds and therefore smaller companies,
and the premium and the terms whether you think of
that as covenants or structure, et cetera. Uh, you know,
are are are dissipating a little bit, for sure.
Speaker 1 (06:25):
But also at that higher level that the larger scale
you're competing with the banks in traditional broadly syndicated loans,
Is that not a tough fight at the moment, given
how much potentially cheaper you'll get your funding if you
go syndicated.
Speaker 3 (06:37):
Yeah, it depends.
Speaker 4 (06:39):
I think it's interesting because there's a lot of numbers.
But basically, if you look at last year and you
look at year to date, the number of broadly syndicated
loan takeouts, meaning private credit taking out broadly syndicated loans
and the flip of that, which is public credit liquid
credit taking out the private least indicated loans, tends to
(07:01):
be pretty symbiotic. So I would say last year, I
don't have the exact numbers in my mind now, but
I want to say it was thirty to thirty five
billion dollars. That's roughly on both sides of the coin.
This year we're running it roughly the same size on
both sides of the coin as well, so we are
seeing those markets work in tandem.
Speaker 3 (07:18):
I actually think that you're right in.
Speaker 4 (07:21):
That today where we're sitting, there is so little new
supply and the vast majority of financing has been refinancing
in the liquid markets, high yield in the loan market.
But we have had a lot of bouts of volatility, right,
so that I mean we had peak volatility and I
guess Liberation Day sort of that week of April second
(07:42):
to the ninth or something like that. And I think
these moments of uncertainty and volatility are actually have have
sort of imprinted in people's minds that no market is
here to stay. And in fact, the value proposition for
private credit continues to be strong, especially when you see
(08:03):
these moments of volatility, because issuers need to know that
there is a market that they can they can access
if they need financing.
Speaker 1 (08:11):
Right, right, But then you know, on this scale, as
you say, there aren't that many players, there is this competition.
It is somewhat more commoditized at the top, right, because
these are bigger names. Are you not therefore susceptible to
much more compression in the spread and differential between public
and private in terms of your return as an investor?
Speaker 4 (08:29):
Yeah, we haven't seen that yet because again, that differential
has been able to hold, certainly because there's fewer folks
out there, they can offer billion dollar size, you know,
financings to counter parties. We have been able to maintain that.
Whether we're able to maintain that going forward, you know,
I don't know, we'll see, But thus far it's been
(08:51):
a pretty rational market in terms of where things price right.
Speaker 1 (08:55):
Okay, But then as you say that the lower end
of the spectrum, maybe that's where potential trouble is that
that people like gun Lak are talking about?
Speaker 2 (09:03):
Is it?
Speaker 1 (09:03):
I mean that is that the kind of where the
misconceptions and the problems of a building around private credit?
Speaker 4 (09:09):
Yeah, I mean, look, I hear the story, but we
haven't seen it. So again, like now, if you look
at so link it, first of all, there's not a
lot of great data on private credit. There's some data,
but there's not a lot.
Speaker 3 (09:20):
Of great data.
Speaker 4 (09:21):
But if you look at Lincoln, which is a third
party valuation firm, the tracks deals across industries, right, they
would say that ebitdog growth has been higher and default
rates have been lower for borrowers that are bigger. So
since you know more specifically, I think the numbers were.
You know, in Q one LTM e bit DOOG growth
for one hundred million dollar plus borrower was nine point
(09:43):
nine percent and defaults for bigger borrowers was sub two percent.
So you're not seeing a huge variance in terms of
the default rates in private versus liquid now, I would
say that, and this gets into sort of the state
of the world. If you look at most people's estimates,
(10:04):
the default rates are expected to increase from currently. You know,
we're running at like three and a half percent in
the loan market that includes distressed exchanges. You know, the
estimates are for that to increase. If you look across
the board, you know they're all over the place. Four
and a half to five percent or something for next year,
and high yield to increase as well. So if you
(10:25):
see the default rates increasing as a result of slowing
GDP growth and potentially tariff impacts, you will see a
resulting impact of private credit, it won't be immune to it.
It can't be immune to it. But this you know,
so far, you haven't seen a huge variance in those
in those default rates, and certainly you've seen growth that's
(10:49):
a bit higher in the private credit market, certainly from
the Lincoln data, than we've seen in the liquid markets.
Speaker 2 (10:55):
One of the issues that you've mentioned is about the
quality of data, or even maybe the quantity of data.
I guess in some instances, how do you get around
that and how do you get comfortable with these relatively
large positions if one can't get the quantity or quantity
(11:15):
of data that maybe might be available in some other markets.
Speaker 3 (11:21):
Well, so I'd say I'd say two things.
Speaker 4 (11:23):
One is that the quality of data in our in
our book and in many of our competitors' books is financials.
Speaker 3 (11:31):
That's the quality of the data.
Speaker 4 (11:33):
So the problem is not that we don't have the
data to look at how our businesses are doing, or
that our competitors don't have the data. They have the data.
They actually have financials. Oftentimes they're monthly financials, you know,
sometimes they're quarterly financials. But those information rights Again, when
I and I'm bifurcating the market because I we don't
tend to traffic in the smaller, much more competitive part
(11:54):
of the market, but in the larger market, information rights exist,
so quality of data and underlying operation performance is not
the problem. And in fact, I would say we've been
surprised at how well the portfolio has held up. I
think what you're referencing is quality of the market data,
and it's getting better and better as the market gets bigger.
I mean the big the market now is. You know,
(12:15):
the numbers are all over the place, but call it
one point seven trillion dollars a private capital in the
corporate world, and cliff Water and Lincoln and there's several
providers that are starting to have better quality data. That's
that's more readily available if you compare it to the
highield market and the loan market, which by the way,
(12:35):
those markets are about the same size. Obviously, we have
that data, and that data is published by every every
brokerage house there is.
Speaker 3 (12:44):
But I would I.
Speaker 4 (12:45):
Would argue that as this market has evolved and the
market has grown so much, the data has increased, and
there are more and more places that are starting to
be able to bifurcate some of the market data. I
gave you the numbers, for example, in the default numbers.
You know, if you look at the link in data,
they've split up those default numbers for under twenty five
(13:06):
million dollar borrows, fifty million dollars borrowers.
Speaker 3 (13:08):
Et cetera. So it's coming.
Speaker 4 (13:11):
But the operating data is certainly there for people to
judge how companies are performing and are they are they
using pick? Are they do we have companies that are
in trouble or where are we defaulting?
Speaker 3 (13:22):
Et cetera. We got you know, managers have that data.
Speaker 2 (13:26):
You've raised a really interesting and topical point there, pick right.
So and also the default issue and how that's being defined.
Speaker 3 (13:36):
So when you're looking at I.
Speaker 2 (13:38):
Guess pure default data, there is always the issue of
how is that being defined and whether it includes amend
and extend type situations and so on. How comfortable are
you that the defaults correctly capture those sorts of situations
(13:59):
or do you think that if the people need to
look wider and consider picks and so on, and then
considering the picks and amend and extent situations, have you
seen rises in that as well? Some of our data
suggests that, but clearly you're looking at a slightly different
opportunity set. So have you seen increases in issuers looking
(14:20):
to pick or to amend an extent?
Speaker 4 (14:23):
Well, so a couple things. So in the liquid markets,
let me answer the first question, which is, how do
you incorporate liability management into default rates? In the liquid markets?
The published numbers JP Morgan, Goldman, et cetera. They publish
default rates and then they publish default rates that include
distressed exchanges. So you're capturing both of those, and you're
(14:45):
right in that there's a big differential. So LTM default
rates for high you bonds are forty basis points if
you include distressed exchanges one point three percent. In lever loans,
LTM default rates are one point four percent. If you
include distress exchanges, there are three points. So there's a
variance in those numbers. Certainly in the liquid markets we're
seeing it. With regard to the private markets, I can
(15:11):
tell you that we know what our companies are doing
in terms of defaulting, and I think I don't have data,
you know, on whether there's been a big increase in
pick or not. What I can tell you is that
the value proposition historically for private credit has been around
the following, which is number one. Unlike the liquid market,
(15:34):
which likes sort of a risk box to go after.
Why because north of sixty percent of the liquid market
or COLO buyers and there's a nice you know, we
sale buyers like a rating, an amount of leverage, a
diversity score, et cetera. Private credit has more flexibility with
regard to that. So what does that mean. That means
that you can offer borrowers the ability to pick for
(15:57):
two years maybe when. And we've seen a lot of
this where they're very good businesses and maybe they needed
but that flexibility was built in from the beginning for
a reason. And it was built in because you know,
and I could tell you this from being on our
investment committee, and I'm sure this is true at many
other places that when you're looking at underwriting an investment,
you know you're you're incorporating a whole bunch of cases,
one of which may be a stab plation in case.
(16:18):
And if that's the case, you might need to be
able to offer that flexibility. But those are oftentimes flexibilities
that are built in from time zero. So why what's
the value proposition? The value proposition is certainty of execution.
The value proposition is flexibility of capital to create capital
the way people need it. The value proposition is delay
draw facilities for liquidity purposes. Those could be short term
(16:39):
liquidity purposes, those could be you know, there might be
a roll up involved, and people need financing that's on
the wire and ready to go and not being constrained
by a ratings box. That's the value proposition. And when
there's volatility, that value proposition is all the more apparent
to issuers. So your question is distressed exchange is you know,
(17:01):
I'd say in the liquid markets, it's very transparent. Those
numbers are available and they are significantly higher, as much
as three times higher LTM.
Speaker 3 (17:09):
And and in.
Speaker 4 (17:10):
Terms of the private credit, we haven't seen our borrowers
increase pick dramatically. I don't know what the market is showing.
Speaker 1 (17:21):
And you'll see more good pick compared to bad pat.
Speaker 4 (17:23):
Well, I mean the stuff is baked in, right, you
know when you when you put a Trump sheet together, yeah,
you have you have a pick flexibility.
Speaker 1 (17:29):
Right Okay, Yeah, And going back to the strategy, talked
about the bigger deals. They're really on that many of
them are there there's a pipeline.
Speaker 3 (17:38):
Oh, there's a lot of big deals.
Speaker 1 (17:39):
Where does it come from.
Speaker 4 (17:40):
Yeah, it comes from Look, I mean, eighty plus percent
of the companies in America are privately owned, so they
need financing. We've done billion plus dollar deals private companies.
They come from taking share from the syndicated markets when
the syndicated markets are super volatile. And you know, the
loan market, and the syndicated market has been roughly flat
over the last number of years. But this is a
this is a there's a fin nancing opportunity available for
(18:02):
private companies that's going to the private market so many instances.
Speaker 1 (18:06):
So it continues to grow at this same pace.
Speaker 3 (18:09):
It's been growing at you know, fifteen to twenty percent
a year roughly.
Speaker 1 (18:12):
Yeah. Yeah, And you think the volume for direct lending
to leverage companies grows at that rate.
Speaker 4 (18:19):
No, if it grows at fifteen or twenty, or if
it grows at ten. But I think that companies in
general that are growing need to access financing. And this
market is i mean, in just a number of years,
it is now a third of the size of the
non investment grade levered market.
Speaker 3 (18:35):
Right, it's a big part.
Speaker 4 (18:36):
And then we haven't touched on sort of the asset
bat market. I mean that's private credit is five percent
of the asset is twenty six trillion dollar market if
you include real estate. Right, it's literally private credits five
percent of that marketightly right.
Speaker 1 (18:48):
But also, as you said, it's kind of you know,
it's a good solution when things are volatile, sort of
foul weather. Friend. If you take the view that you know,
we're going into a time which you know, maybe the
Fed cuts rates, the economy continues to grow, everything is rosy.
Funding markets of liquid everything looks great. I mean, why
do these companies, you know, not flip back to the
(19:10):
broadly syndicated market and save them you know, say, save
themselves some money. Maybe they don't get such great terms
or flexibility, but why not flip back.
Speaker 4 (19:19):
Because not every company is a single B rated company
that can be financing the liquid market.
Speaker 1 (19:23):
So it's going to be the bigger, more risky companies.
Speaker 4 (19:28):
Then, is that the I think one segment of the
market is a bigger, more risky company. I think another
segment of the market is companies that are first time
issuers that aren't known by the marketplace. So there's a
lot more of a learning curve for first time issuers.
I think a third segment of the market are companies
that are growing really quickly that could change.
Speaker 3 (19:46):
The landscape of how they look.
Speaker 4 (19:48):
So I think there's a lot of there's a lot
of different types of issuers that approach our market.
Speaker 2 (19:53):
And earlier on you mentioned the difference in returns between
public and private markets, but you also mentioned that in
both markets we are seeing returned moderate a little bit.
So what would you say would be a good return
for twenty twenty five for private credit in terms of
(20:14):
rough percentages or ranges?
Speaker 4 (20:16):
Yeah, I mean, look, it's hard to put a I
can't put a return number on the piece of paper.
What I can tell you is that you know, there's
a lot of BDCs that are tracking at sort of
ten percent. And I think one way to think about
this is if you look at the loan market and
you look at spreads. And the reason I say moderating
is because you know, spreads have contracted seventy five hundred
basis points since Liberation Day. So we can look at
(20:38):
public markets as kind of sort of sort of some
kind of proxy, I suppose, And so if you if
you think about the spread component. You've got loans and
high loans and high yield highields sort of three hundred
over and the loan markets, you know, depending on which
market you're looking at, as will roughly call it four
hundred is shover FED Funds Rader, you know, four three percent,
(21:01):
So loan market's roughly eight percent, and private credit is
a couple hundred basis points in excess to that.
Speaker 3 (21:06):
And that's what we're seeing. Now. The question becomes, you know,
as James says, we're.
Speaker 4 (21:10):
In a rosy land, I'm not sure I agree with that,
but uh, you know, if you if you do see
FED funds and see a number of cuts come in,
and those estimates are as much as five cuts over
the next call it through December twenty sixth or something
like that. So you know, if you see terminal FED
funds rate at three and a quarter, definitionally, returns in
(21:35):
a floating rate market will contract a little bit, and
that'll contract by one hundred basis points. And that's true
for the for the syndicated market, and it's true for
the for the private private debt market.
Speaker 1 (21:45):
So this pipeline you talk about funny, but a big
pipeline for big deals. Where is it coming from? Is
it infrastructure relates, is it is power? Is it real estate?
Where are we seeing the opportunity?
Speaker 4 (21:58):
Yeah, so we're seeing lots of different opportunities. You know,
on the corporate credit side, you know, add on financings,
there are still buy opps that are being done, rescue
financings in different parts of the capital structure. On the
asset back lending side, you know, they're securitizations of lease
stream equipment, lease streams, aircraft leases, data centers. We're seeing
(22:19):
financing opportunities other infrastructure buildouts. We're seeing in the private
credit space, which is sort of the corporate world of
private credit real estate. So you're kind of seeing the
need for financing in a whole bunch of different markets
at a whole bunch of different yield opportunities.
Speaker 1 (22:36):
Okay, and have you got a size for that addressable
love chuge.
Speaker 4 (22:41):
Sizes we've seen for the non well, let me say
that's the ABF market. So there's two kind of numbers
that people throw around. One is on the ABF market,
which is twenty six trillion dollars. That is about five
and a half trillion if you exclude real estate and structure,
and of that, the numbers we have seen are roughly
(23:04):
five percent. That's private credit right now, so it's pretty small.
In the corporate credit market, you see a market of
roughly thirteen trillion dollars, and that's comprised of you know,
one and a half trillion of high yield, one and
a half trillion of loans, one and a half trillion
of non ig private credit. We've talked about that that
maybe one point seven and then roughly nine trillion dollars
(23:25):
of investment grade corporates. That investment grade corporate market is
a humongous market. So imagine that you have ten percent
share take, a twenty percent share take. That's those are
very very large numbers that could could move its way
into private corporate credit. And lots of reasons for you know,
(23:45):
is it off balance sheet? Is it on balance sheet?
You know, are there specific boat bespoke structures that all
that stuff is sort of valid there as well.
Speaker 2 (23:54):
You mentioned moving from sorts of five percent to maybe
ten or even twenty percent of certain markets in what
time frame do you think that that's sort of feasible?
And should we not be just a little bit concerned
that the market has already grown pretty fast in the
(24:16):
last few years, and so I'm putting my credit and
it's hat on here. People would normally already be concerned
because of how fast it's grown today. So is getting
to ten or twenty percent of those addressable markets really
(24:38):
something we should be striving for or do you not
think that might make people even more cautious about private credit?
Speaker 4 (24:46):
Well, I'd say I'll say two things. The FIRSTUS private
equity has grown faster than private credit in the corporate world,
So that's one. And two is I think when I
talk about a share take, what I mean by that
is that if you have nine trillion dollars of investment
grade corporate and you have a large ABF market, you
(25:10):
could imagine that portions of that market would flow towards
private lenders. And in the end, who are those private lenders?
There are LPs and their insurance companies and pension funds,
et cetera.
Speaker 1 (25:23):
You are obviously a storied firm, one of the first
movers in this We've written a lot about the history.
But I'm curious as to how you differentiate yourself in
this space that has become so you know, relatively mainstream
in such a short space of time, everybody's doing it.
So what keeps your head?
Speaker 4 (25:42):
Yeah, I think a couple of things. I think, you know,
we were early in the market, and so we've become
a pretty scaled provider of credit.
Speaker 3 (25:52):
One.
Speaker 4 (25:52):
Two is we a lot of our a lot of
our vehicles and our investments, our underlying investments are non
sponsor oriented and are not just the sponsor oriented market,
which which I think is a huge differentiator. So and
so early mover, non sponsor. And then three would be scale,
(26:15):
where we're competing in a universe that's not as competitive
as what we've seen in terms of broad the number
of players are coming into the private world.
Speaker 1 (26:26):
Do you fail the new competitors? Do you worry about
the aggressive nature of some of the newcome as I
do on.
Speaker 4 (26:32):
The smaller size of the companies that are being underwritten,
And certainly when you look at sort of some of
the sort of more club type deals in smaller businesses,
where those are being effectively syndicated to a number of
private credit folks, I think that's where, you know, if
one were to see stress in the market in general,
that would be a first place where you might see
(26:52):
stress because in those deals that are held by a
whole host of private credit folks, where there's not one
person that can control that tranch and sort of help
help to create a better outcome. I think that that
looks a lot more like a syndicated deal in the
liquid market. And so in those instances where that market
(27:15):
is very competitive and those deals are held by a
lot of people and they are not controlled by a
universal party, I think there's more risk in those. And
and by the way, you know, we've seen that in
the liquid markets a ton, right, because I've seen a
lot more on these liability management exercises now that it's
interesting because I will say on the liquid side, the
(27:35):
liability management exercise, those transactions have actually been declining somewhat
in the last In the last year, we saw so many,
you know, in terms of these liability management exercises that
were starting to take place. I would say that you
know that number is you know, it's down from what
(27:57):
was sixty eight percent of overall defaults down to forty
two percent. And I think it's down because if you
look at twenty three, twenty four and year to date
this year, they don't work, these libilary management exercises and
In fact, you know this year, ten out of the
thirty defaults year to date are repeat issuers of defaultedt
(28:20):
In twenty twenty three and twenty twenty four, it range
from sort of twenty five percent to a third will
repeat default issuers. And so what you're seeing there is
that just isn't working. So there's a lot of money
and fees going out the door, and there's a lot
of brain damage and creditors and recovery rates have been
totally demolished, and it didn't work anyway.
Speaker 2 (28:41):
How do you say then that investors would get round that?
Because usually the reason that I guess many would agree
to go through the whole enemy process is because they
want to avoid the potentially also costly process of going
through a full bankruptcy and so on. So why would
you say the happy medium is? Do you think that
(29:03):
lemis just need to be better structured or do you
think that the issuers should just be pushed through the
bankruptcy process.
Speaker 4 (29:11):
I mean, I think in a lot of these issues,
in a lot of these instances where you're seeing a
third of these default and exercises be repeated issued as
they should be pushed through from the beginning I think
it would have saved a lot of money to the
creditor group, but they weren't, so I think, you know,
what you're seeing, what these lemies have been have been
stripping apart assets into basically good assets and less goods
(29:33):
or bad assets, and moving some creditors along with some
senior secured financing into a new box and leaving others behind.
And I think it touches on a really important point here,
which is that you know, people focus a lot on
default rates. I think what's changed dramatically is recovery rates.
I mean, we used to have a market where recovery
(29:54):
rates on senior secured loans and unsecured high year bonds,
there was a huge differentiator, like the diferential was quite
large that differentially. That's that differential is not so large anymore.
In fact, it's roughly in line with one another in
terms of what you're seeing for unsecured and secured recovery rates.
You know LTM high yield recovery rates or sixty cents
(30:16):
and that includes distress ex changes and LTM for the
loan side is fifty four cents. So you know, they're
really converging. And it used to be that loans recovered
seventy to eighty cents on the dollar. That's we're not
really seeing that anymore.
Speaker 1 (30:28):
And you mentioned there were a lot of them and
now there haven't been that many. Maybe we're just in
a summer slow down. But do you think we're getting
to a point where there is some reputational risk on
the part of the advisors and the law firms that
are really pushing the most aggressive forms of these things.
Speaker 4 (30:43):
If there's reputational risk, because I think if you're a
private equity sponsor, your job is to keep a business,
you know, to keep an option alive if there's a
chance to do that. And I think that creditors, I mean,
you have creditor docs and eyes wide open. So but
what I do think is becoming more apparent is they're
not working. That's what I think is happening. Is you
haven't seen these things work well, So maybe that's what
(31:06):
Maybe that's more the issue.
Speaker 1 (31:07):
Unless you've seen that the only intention is just to
buy a bit more time.
Speaker 4 (31:11):
Yeah, and if the and by the way, that might
have worked if you saw if you saw an environment
where maybe rates had come in quicker, right, and you've
got floating raid heavy capital structures and decent businesses like
there are scenarios where that might have actually that might
have actually worked. I think there's a second thing going
on in liquid markets that that I worry about, which.
Speaker 3 (31:33):
Is these disqualified lenderless Yeah.
Speaker 4 (31:35):
So you know, you're starting to see some sponsors not want,
you know, as a manswer is to accumulate their debt
and own the process in the syndicated world, and some
of those disqualified lender lists are quite large. So I
worry about that in terms of liquidity. Now we haven't
seen that in a pervasive way, but that's weird, it's
(31:58):
yead Also.
Speaker 1 (31:59):
Yeah, is that they tend to be around you know,
a dozen maybe two dozen names max.
Speaker 4 (32:04):
We actually saw one recently that had one hundred names. Yes,
one hundred names.
Speaker 1 (32:10):
Isn't that most of the market company?
Speaker 3 (32:11):
Yeah?
Speaker 4 (32:12):
Yeah, I mean now that was one, yes, but yes,
normally they're in the ten to fifteen.
Speaker 1 (32:16):
Yes.
Speaker 2 (32:18):
I guess one issue then, and I guess it links
in to your point on disqualified lender lists and so on,
is getting different creditors that may have different risk profiles,
I guess, or risk tolerances to work together. So how
do you how can you suggest that issuers get around
(32:40):
that then, because you will have those that are more
on the opportunistic end of the scale, I guess, and
then you will have those that would have invested in
the issue at par and are hoping to get most
of that back as quickly as possible. So how do
you get round the issue? And how do you think
issuers should try to make the creditors work together?
Speaker 1 (33:01):
Should they try to do that at all?
Speaker 4 (33:04):
Well, I think you're getting you're you're referencing is the
sort of co op groups, right, these lender formation, these
lender groups that are being formed, and I think there
are issuers that are trying to block the formation of
co op groups. So so that's one. But ultimately, when
you have a capital structure and you have senior secured
lenders and unsecured lenders, you will have different motivations in
(33:26):
terms of how these companies look in a pro form
a you know, post restructuring format. So I'm not sure
you can get around it. When you have seen your
secured loans and you have unsecured bonds and maybe there's
old copaper and then you you know, the question becomes
how much value there is in the entity and how
to split that value up. So I don't know that
there's a way to get around it. You're right that
(33:49):
there are issuers that are trying to trying to block
that formation.
Speaker 3 (33:52):
Though for sure.
Speaker 1 (33:54):
What comes up a lot in the context of enemies
from the investment side is you need to have scale
to survive them. I mean, is that your edge in
these situations? Is that what you use going in?
Speaker 3 (34:04):
I think you need to. I don't.
Speaker 4 (34:06):
I don't think that it's always the biggest who can
survive them, but I think it is oftentimes investors that
have different types and pools of capital to help be
part of a solution. So you know, maybe there's a
rescue financing opportunity or a senior secured opportunity where you
(34:26):
can be part of a solution for an issuer to
continue to survive or help sort of you know, recap
the capital structure. I think that's probably the most important thing.
So that goes a little bit to your scale, but
it's it's not necessarily scale in the debt instrument that
(34:47):
that might be impacted negatively. I think it's being able
to bring scale to a solution for an issue.
Speaker 1 (34:55):
Going back to the private credit side of liquidity side
of that, because there is an the hope that these
things will start trading at some point. How's that going.
You've seen a lot of secondary market, is that a
big focus for you?
Speaker 4 (35:07):
We've seen runs, you know, we have not seen a
lot of trading. I think that, you know, I suspect
you will eventually see some of that. Again, it goes
back into these different buckets of size and where people
are trafficking and what their average hold size are. When
we look at our book, I mean we're controlling. We
(35:27):
control over eighty percent of our tranches that we've invested in,
so you know, I think for some of the larger
folks that want to be in a position to control
the tranche and potentially control outcomes, you're not going to
see that as much. But we've certainly seen some of
these lists come out. I don't think it's been a
robust trading market as yet.
Speaker 1 (35:50):
But is that the intention over time to just become
as liquid as syndicated loans for example?
Speaker 4 (35:55):
Well, I've read what you've read on that, you know,
and we've seen some of these bank partnerships and all
that in terms of sort of effectively syndicating private credit loans.
I don't have a great answer to it right now.
What I can tell you is that for folks who's
part of their core business model is to control their investment,
(36:17):
they don't think you're going to see it in that
segment of the market because one of the biggest protective
features for private credit is for those investors that are
large enough to own or control the entire trunch.
Speaker 1 (36:30):
Right, yeah, okay, And as the whole market kind of
opens up, people use the word democratization and they talk about,
you know, new investors and all this stuff. ETFs are
more frequently coming up as a subject for private credit.
What do you make of that concept?
Speaker 4 (36:49):
I think if you can match duration to what holders
and investors need, it's a pretty good place to earn
yield for any kind of investor, as long as you
can hold onto your credit.
Speaker 3 (36:58):
Yeah yeah.
Speaker 1 (37:00):
Let me talk about other products that you might be
involved in or looking at getting involved in, for example,
fund finance, nav loans, collateralized fund obligations, that kind of thing.
Is that an opportunity for HPS.
Speaker 3 (37:12):
It's a huge opportunity.
Speaker 4 (37:13):
We've done a lot in fun financing, We've done a
lot in GPLP solutions and the fun financing, you know,
has had a nice premium in terms of against other
investment grade type assets, and we've started to build a
pretty nice business there.
Speaker 1 (37:31):
Can you kind of give us the sense of the
scale of it and what I.
Speaker 4 (37:35):
Mean, I can tell you we want to investment committee.
I guess what two or three days ago on something
that was north of it was a billion one of
a combination of fund financing and NAP lending, So that
scale can be quite big.
Speaker 1 (37:49):
And that kind of pipeline you see continuing that that's.
Speaker 3 (37:52):
Not the one up, but I don't think that's going
to be just a one off.
Speaker 1 (37:55):
I don't know, Okay, So is that the most exciting
opportunity for you looking ahead?
Speaker 4 (38:01):
I think fun financing is a huge opportunity, and NAVE lending,
by the way, and I think it's a huge opportunity
because I think we're in a moment in time where
exits for private act responsors has been somewhat limited and
it's a one way to get some capital back to
their investor group, which I think is super important, and
I think you're going to see more and more of that.
Speaker 1 (38:21):
I'm just also interested in another part of private credit
that people seem to worry about, which is software lending
a big focus for private funds, but has been impacted
by AI. Some people have said that, you know, a
lot of the software that was created is now redundant
because of AI. Are a bunch of private loans for
software at risk because of that.
Speaker 4 (38:43):
I mean, I think there's a lot of that argument
could sort of extend to any number of companies that
are going to be impacted by AI. I think that
what happened with software was that there is a lot
of folks that lent to a bunch of software businesses
where they did not generate cash flow, and I think
the slowing of the top line impacted the timeline between
(39:05):
the time of the loan and when they were going
to generate cash flow, and so you started to see
some stress in that system. And it's a very big
percentage of the non investment grade market as it is
in the SMP. It's forty technology and large as forty
percent of the SMP. So I mean, we never had
a disproportionate share of software, and we tended to focus
(39:25):
on companies that actually generate cash flow. I think that
you know, the AI comment on just software versus other businesses.
I think you can extend it across the board.
Speaker 1 (39:35):
So let's talk about the edge your specifically, all the
things we talked about, all the great opportunities. I was
talking about, what is the you know, where is the
best relative value right now? And why?
Speaker 4 (39:45):
So I think you're kind of legging into the macro
piece of the pie, which is, you know, we we
entered the year with a lot of uncertain well, we
entered the year in a really bullish way, I would say,
and then and then, and then Liberation Day came, and
there's a lot of volatility between April second and April ninth,
and that volatility is dissipated and the SMP is up
I think as a twenty four percent or something like
(40:05):
that since the bottom there. So I think the market
in general, and there's lots of ways to slice it up.
But the equity market, people justify because it's forty percent technology. Technology,
that makeup of the SMP has shifted dramatically from prior times.
That part that segment of the market is higher margins,
(40:26):
it's less capital intensive, et cetera. I think that for
us there still remains a lot of uncertainty, and I
don't know if we go into a recession or not,
but I think we're sort of assuming a stagflationary case.
We're assuming the growth slows, and we're assuming that inflation
is sticky. And what that exact number is I can't
(40:47):
give you. But under those assumptions, credit actually is not
so bad. So that doesn't mean that spreads want wide
now and you won't see volatility and all that. I
think you probably will. But when you look at the world,
I actually think when you look at the spectrum of
anything from investment grade credit which is one hundred basis
(41:08):
points over to private investment grade, which is depending on
your flavor, there's a premium to that that could be
anywhere from an incremental one hundred to two hundred basis
points to hiyal bonds and loans, which are, you know,
three hundred to four hundred over to private credit at
large direct lending and junior capital. I actually think across
(41:29):
the credit risk spectrum, that's a pretty interesting place. I
think what is not interesting is triple C liquid credit.
I think that's not interesting. Why because I think you're
super dependent on growth to de lever and I think
you're super dependent on capital markets to be open to refinance,
and I think you're you've got a big maturity wall
(41:50):
in that segment of the market, like twenty five percent
of the triple C markets maturing in a few years.
And if the capital markets don't open for that, and
if rates stay high and if growth modern rates, that's
a segment of the market that's going to be in
trouble and that, by the way, will widen out the
highild market just mathematically.
Speaker 3 (42:06):
So I don't I don't think that's a segment that's interesting.
Speaker 4 (42:08):
But I think if you can find ways to compound
yield across credit, and I think where you even give
up some yield, meaning maybe not move your portfolio into
sort of some of these lower rated credits, that's a
pretty good place to sit. So then you get into
what risk do you want and what duration do you want?
(42:30):
And do you want short duration, do you want longer duration?
How do you want that to look in terms of
a portfolio. But you know, you really across the board,
depending on your view on rates, you know, can be
anywhere from five and a half percent at the low
end to you know, ten plus percent on direct lending,
to even higher in terms of junior capital bespoke structured situations.
(42:51):
I think that makes a whole lot of sense visa
VI the equity market right now, and as lower of
all than the equity market, if you if you can
sort of under right into that kind of that kind
of band, so.
Speaker 2 (43:02):
You painted not so rosy, I guess outlook in terms
of potential stackfulation and so on. Would you see the
triple cs that you mentioned as being at the biggest risk,
I guess in that scenario or are there sectors geographies
that you think could come under a lot of pressure
(43:25):
through the rest of this year that we're not thinking
about at the moment.
Speaker 4 (43:29):
Yeah, well, I think I think number one, Yes, I
think triple c's are pretty risky because the times that
you want to move down in quality and liquid credit
markets are times when you're expecting a bottom in terms
of in terms of growth, and so I'm not sure
that we're at the bottom in terms of growth. I
think too, is that there's a ton of uncertainty in
the market still with regard to where we land on tariffs,
(43:53):
what that means in terms of inflation, and what that
means in terms of uh, you know, global global trade,
and I think that that uncertainty is very hard to
box at this moment. I think there's a view that
perhaps that otional tariffs that come into play and that
might be kicked out until September. But I think when
you're operating a land of uncertainty, that's why people want
(44:16):
to be in higher quality and be able to compound
because in that higher quality universe of companies, maybe you
give up a little bit of yield, but you have
a little bit more ability to underwrite what earning's power
look like, whether these companies, you know, have some more
leverage in terms of either raising prices to combat tariffs
(44:36):
or aligning their cost structures, and whether they have access
to liquidity. And I think those are really important variables
when you're operating in this land of uncertainty. You ask
the question with regard to two sectors that could be
more in trouble, and I think, you know, the biggest
sectors that could be in trouble are related to number
one tariffs, So what is that you know that could
(44:57):
be retail type sectors, industrial sectors, et cetera. And number
two related to the consumer. And that's where it's really
hard to underwrite in terms of where we're sitting today,
but you're seeing it in terms of travel and leisure
and discretionary spend.
Speaker 3 (45:15):
You're starting to see signs of that. Now.
Speaker 4 (45:18):
Look, are people are really starting to price in cuts
that you know, I think very few are pricing in July,
but people are moving into September and December. You know,
cuts to begin monthly starting in September and go through
twenty twenty six. And the million dollar question is always
(45:38):
is the FED cutting because we've reached an inflation hurdle
and been able to maintain employment levels, or are we
cutting as an insurance policy because there's a lot of
fear around underlying growth. And I think that's the question
that sort of remains, and people are starting today in
(45:59):
this might change in a week to be worried about
the employment picture.
Speaker 1 (46:04):
Or will be cutting because the FED isn't an independent anymore,
which is another risk on the horizon. But in terms
of the opportunity, what do you really lean into? It
sounds like you'll like, I mean.
Speaker 4 (46:14):
Listen, it's like we talk our and this sounds like
we're talking our book. But I would say, you know,
high quality credit is a good place to compound yield,
and I would be much more reticent on lower quality
triple C credit. I think that what you've seen this year,
certainly for the liquid guys, is that fifty percent of
the high yield managers have not been able to keep
(46:36):
up with the index. And by the way, treasuries are
a huge portion of what's happened this year for a
high yield. I mean, the treasury market is up five
year and ten years up four and a half percent
this year. The high old market is up four point
three percent this year. So it's been hard to keep
up for many managers because a lot of managers argued
towards higher quality, so they're not holding onto a lot
(46:58):
of triple C that's in there. And to you as
these cash, these coupons are high and you've got to reinvest,
and when you don't have enough paper to reinvest and
there's not a lot of new issue, it's hard to
keep invested against these index returns. But the answer is
what do we like? We like high quality. We like
high quality credit where we can lower the risk around underwriting,
(47:22):
and that risk would be either lowering the risk around
the cost structure i e. Tariffs, so staying away from
industries that could be hugely highly impacted, lowering the risk
around super consumer discretionary if you have a big slowdown
or at least underwriting where you have enough options in
businesses to access liquidity to weather a period of time.
Speaker 1 (47:45):
And you know, I'm going to ask about black Rock
because you are being acquired by black Crok, the biggest
asset manager, which presumably gives you massive scale. I know
the deal hasn't closed yet as a time of recording,
but what can you tell us?
Speaker 3 (47:56):
We're super excited about it.
Speaker 1 (47:58):
Great stuff, even Prower from HPS. Many thanks for joining
us on the Credit Edge.
Speaker 3 (48:02):
Thank you, and of.
Speaker 1 (48:03):
Course we're very grateful to Tolu Ali Mutu with Bloomberg Intelligence.
Thanks for joining us today. Thank you for having me
for more credit market analysis and insight. Read all of
Tolu's great work on the Bloomberg terminal. Bloomberg Intelligence is
part of our research department, with five hundred analysts and
strategists working across all markets. Coverage includes over two thousand
equities and credits, plus outlooks on more than ninety industries
(48:23):
and one hundred market industries, currencies and commodities. Please do
subscribe to the Credit Edge wherever you get your podcasts.
We're on Apple, Spotify, and all other good podcast providers,
including the Bloomberg Terminal at b pod go. Give us
a review, tell your friends, or email me directly at
Jcromby eight at Bloomberg dot net. I'm James Cromby. It's
been a pleasure having you join us again. Next week
(48:45):
on the Credit Edge.
Host
James Crombie
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