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Andrzej Skiba

lines on the record: 81
first: 2024-02-16
most recent: 2024-02-16
sittings or episodes: 1
sources: podcast

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“There are a couple of reasons for that. The first one is that promise of no mark to market. The fact that you have no headache on a daily basis, you make your investments, you believe that you have selected good managers that will avoid the bad eggs and will do a lot of due diligence when selecting companies. Without any shadow of doubt, surely there are better and weaker managers out there. story is all this time so that gave people a lot of comfort that with the belief that with the right manager the right credits being selected within those private credit portfolios and no mark to market it's a much made in heaven and we have seen private credit attract more than 200 billion dollars per annum in recent years like those are”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“So, the risk of a lot of the deals is higher and the credit spread, the risk, the reward is a little bit lower. Tell us about this wall of money that is coming to finance private credits. Where is that wall of money coming? And is there a particular catalyst for why this is the case? For example, if we were to wind the clock back three years and you would just say, you know, interest rates are going to go up so much, I would think that would maybe actually cause money to flow out of the riskier segment and into the risk-free segment, like the treasury market or the investment grade market, not risk-free, but much lower risk. Yet maybe it seems like the opposite has happened. Do you have a theory or a reason as to why that might be?”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Lowering of extra compensation you are getting for investing within the asset class. If you're looking at the current yield that you're getting, the current return that you're being promised within the space, it's less than 200 basis points ahead of single b rated leverage loans. So that has shrunk a lot over the recent years as more and more money was competing within the space. Managers are very keen to invest the funds they raised over the recent years, but in the space, and that is leading to...”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“That is true. And at the outset of the asset class, you clearly had superior documentation afforded to lenders within the private credit space. But in the same way as in the broadly syndicated loan market with the advent of all these cove-light deals, the standards have fallen a lot. In the same way, those standards are falling within direct lending space too. It always happens when a wall of money is hitting an asset class, whether that's equities, whether that's fixed income, crypto, you name it, standards do fall as more and more money is chasing fewer and fewer opportunities. And here, what we have seen over the recent years is not only weakening of protections afforded within the direct lending documentation, but also”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Tell us about the debt covenants, basically power given to the lenders to say, oh, you can't go over this amount of debt threshold to make sure that things don't go out of control. I think a frequent criticism maybe of the leveraged loan market is that a lot of those loans were covenant light loans. And one positive thing that people in the private credit community, I think, say is we actually have much stronger covenant. We can exercise control over the companies to make sure that our capital is protected. What are your thoughts on that argument?”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Wide variety of investors who could come with a lifeline and hope to fix whatever is broken within the business. So that's the story as old as time. The less liquidity you have, the more customized agreements you have, the more return, but also risks go up alongside that.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“It's a bilateral agreement, so you're kind of stuck. If anything goes wrong, it's between the owner of the company and yourself and maybe you have another partner that participated in these loans. So in a way, what was part of the appeal of the asset class for direct lending, where you had these bilateral agreements, you could craft your own documents and make sure that you had as good a protection as possible in any negative scenario. Well, the downside associated with that is when trouble hits, you kind of on your own. And unless your private equity sponsor or whoever owns that company throws you a lifeline, you need to deal with the balance sheet of the company if it were to go through restructuring. Unlike in the public markets where you have”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Whether you're looking at a public bond space on a risk adjusted basis, would actually prefer those more liquid markets where you can reposition if you want to rather than being stuck in a security facing the uncertainty ahead.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Nowhere near as aggressively as investors are hoping, while at the same time the economy is slowing down. So almost your stagflation type environment, well, that would be very problematic for these kind of issuers because if your starting point was very limited cash flow, and then on top of that, you would get hits to your ongoing profitability. would be under pressure on multiple fronts and then the outcomes could be much less palatable. So there are clearly scenarios where this space will do fine and investors will be rewarded for the investments they made in those securities. However, a lot of things have to work out well. A lot of things have to align for that to be the case. And our view is simply that whether you're looking at broadly syndicated loan market or”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Careful and understand that this yield on offer does not come for free. There is a risk attached to that. And as you mentioned, there are economic scenarios where everything plays out fine. And there are economic scenarios where it becomes more difficult. So a more benign scenario, of course, would be federal reserve cutting rates quite aggressively, while U.S. economy still growing, not falling into a recession. Like that is what each of the private equity sponsors and each of the investors in the debt of the securities of these companies is hoping to experience that we would go through this relatively short period of low cash flows, but things would look much brighter on the other side of the horizon. But that is one scenario. Another scenario where inflation remains sticky, where Federal Reserve cannot cut rates.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Well, we don't really have much evidence regarding that because vast majority of the growth within the space happened after the global financial crisis. And even when we went through pretty testy times during the COVID pandemic, that disruption was relatively quick. And also rate cuts that ensued lowered the cost of funding dramatically for issuers. So it made a lot of sense why many of the companies that would hit a speed bump would get a helping hand from the owners to get through that period of turbulence. So it's really not been tested in terms of a broad longer slowdown, maybe even a recession. And that's what needs to be taken into account. From our perspective, we don't have any dogmatic issues with the space. All we're saying is that investors who are allocating capital to that part of the fixed income markets need to be”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Andre, where do you think we are in the credit cycle? I want to know your thoughts on that, but also whether if we have a benign cycle, maybe private credit continues to do well, but if the defaults start to pick up, how do you sort of see this playing out? Is there, by the way, a backtest? Like, what did what was the private credit industry like in 2006, 7, and 2008? And how did that fare?”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Of that business makes sense for like comparison. But a lot of those addbacks are much more aggressive and they're hoping for outcomes that may or may not materialize.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Rosy profit projections is also much more limited. I mentioned earlier that we're looking at the leverage within this space excluding addbacks. Well, what are addbacks? AdBACs are all the items that haven't happened yet. All the items that are not really cash items that owners add to the profitability of these businesses when they're marketing these transactions. So it could be a contract you have in one yet. It could be a synergy from M&A transaction that hasn't been realized yet. It could be a lot of goodies that look good on paper but are not real hard cash yet. So while there are legitimate ad bags that you want to consider, well, if you close the transaction media to acquire business, you know, looking at performer numbers that include full year.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Yes, that's correct, Jack. So at the end of the day, a company that is run in a particularly conservative fashion doesn't have the need to run with six, seven times leverage. So that has been achieved for the purpose of improving equity returns of equity owners. And that's why when we're looking at the destination of travel for vast majority of floating debt in recent years, whether that's leveraged loan space or whether that's private credit space, that's been LBO deals where private equity was choosing these markets to finance obligation in either leverage loan or private credit space rather than coming to public high yield markets, where generally issuers are more conservative, where the willingness of investors to accept”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“That they would throw some money at the problem, help them to kick the can down the road and improve their financial stability for as long as rates remain high, give them a bit of a lifeline. But if you're looking across your whole portfolio and vast majority of your companies is paying these exorbitant costs of debt and is not generating much cash flow, well, then the problem becomes more acute because if this situation continues, do you really have the willingness and the ability to help everyone out? And that's when problems start.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Pretty widespread because when you're looking at the average margin, the average spread they're paying over the floating rate, whether that's again LIBOR or sofa, whatever is used these days, that is a standard across the industry. Actually, you can argue that some of the recent transactions where there was a lot of competition to get these deals priced are having slightly smaller margins. But even they are paying double-digit cost of funding. So this issue is pretty widespread across the whole space. And that's why our concern relates to the fact that, look, if you had one or two or three companies facing these issues, well, then you would expect that private equity sponsors, because those are the ones who are mainly the owners of companies accessing private credit and direct lending in particular.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“So people talking about a 15% yield on a private credit loan that is very juicy for the investor. But as you say, that comes with risk. And you're saying if these loans are to entities and companies, smaller companies that have, they're leveraged six to seven times, nearly all of their operating cash flow is going to pay off pay off that debt. Is that just a handful of companies or is that widespread?”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Is being strangled by this high cost of debt and is barely generating any cash flow. So especially at a time of economic uncertainty when a slowdown could well be on the cards, that creates an issue. That is a problem that makes this space particularly vulnerable compared to public markets where companies are just laughing at the fact that they manage to get cost of debt at three, four, five percent range and now don't have to access markets.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“And that is a big deal because when you think about the amount of debt that these companies have on their balance sheets, excluding addbacks, industry data is suggesting six to seven times annual profits in terms of the amount of debt that they're carrying on their balance sheets. Well, when you're paying low teens in your cost of funding and you multiply that by this kind of leverage, you end up in a situation where three quarters of your cash flow could go out of the door straight away just to pay your debt. And that is a problem because that means you have very little money left to pay for your capex, for capital expenditure to deal with your working capital needs, to maybe pay some taxes if you need to. So a vast majority of private debt companies right at this moment”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“These days, that's almost treasury yields. So companies have been super proactive in refinancing their debt. And what it meant is that when rates did increase, when Fed hiked rates aggressively over the recent years, they weren't that bothered. They weren't bothered because they already termed out their debt. They didn't have to come to the market and lock in these higher costs of funding. If you are leveraged loan or private credit company, well, then situation is very different because with every rate hike, your cost of funding has increased. So right now, when we're looking at an average that these companies are paying in terms of their debt costs, well, we're talking about low teens in percent terms.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Is not close to the truth the fact that in this higher interest rate environment, in a world where rates are high, particularly companies that are paying debt that is linked to floating debt, i.e. your coupon is not fixed, so you take whether it was LIBOR or sofa rate plus a margin, a spread, those companies were most under pressure in recent times. So if, for example, we compare the case of the US high yield bond market, well, vast majority of companies was super proactive in 2020 and 2021 issuing debt. You even had some triple C rated companies, which is as low as it gets within high yield before a default, issuing debt with a coupon that started with a number five.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Stand economic pressures. There's a reason why many of these companies did not have access to public funding. Like arguably, it's cheaper to issue debt in public markets. So if you had none of that access, well, then there's something about you that is riskier than public investors can accept. So from our perspective, when you're looking into a slowdown scenario, it's really misguided to expect that these less diversified smaller companies that have fewer avenues to deal with an economic slowdown would be somehow doing better than their counterparts in the public market. The other reason why we felt that”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Well, if you think about what asset class we're talking about, it's leverage finance. It's higher risk debt investment. So by definition, we're not talking about government bond securities or investment-grade rated credit. So from the get-go, the level of risk is higher than otherwise would be the case. But also, the other thing that we need to remember is how this asset class started. So with banks no longer being able to lend to smaller, less diversified companies, well, those were embraced by investors within private dead space and direct lending in particular. So when you're looking at those businesses, you tend to look at smaller, weaker companies compared to those in the public markets that tend to be larger, more able to witness.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“And that's why we had bizarre situations where, for example, I would go to speak at an investor conference across the US and you would have a panel of investors from across the fixed income industry speaking about their outlook for the markets. And you would have comments like, well, the economic growth is uncertain. I would prefer to stay away from public high yield markets, but I think that private credit is a safe space to hide, which in our opinion was borderline insane, but that lack of mark-to-market was giving people this false sense of security that since the price is not changing at all, then there's nothing wrong happening with my investment.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Makes sense. So, if there's a little bit of a credit event and credit spreads, why did significantly as they did close to a year ago in March when Silicon Valley Bank fell if you hold a high yield bond or something publicly traded that will decline in value? That has to be reflected on your portfolio. But for private credit, you can just say, oh, I bought this for $100. It's at $100. It's a $100 bond. That's what it is.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Seemed quite attractive. The other appeal of the asset class was to do with lack of mark-to-market accounting. So when as an investor in a public bond securities, I look at my portfolio, at the end of the day, I need to price those securities and provide my investors with an update of how the portfolio is doing. You have price transparency. So you can see whether the market has gone up or down in a relatively short space of time. Well, here you have no mark to market. You are shielded from market price fluctuations. And the only times you need to make any adjustments to your valuation is either when the security is repaid or if you have to write down the value of that security. But so far as economic growth has been pretty robust, that has not happened.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Well, the main attraction of the space is double digit returns. So the asset class has done well in recent years. And bearing in mind that we've only really started growing, particularly in the context of direct lending in the last five, ten years, it's a pretty new asset class. So initially you were getting quite a lot of really good assets at really attractive valuations for debt investors generating those double digit returns. That clearly is the appeal that the returns of this asset class were definitely greater than what you could obtain in public markets. If you think about it a few years ago when rates were much lower, it was very difficult to get any kind of return within fixed income to garn a double digit type returns still being within fixed income.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“With a lot of debt on their books. In the markets, always you have innovation. So into that void step in investors who started providing direct lending to these institutions. So today when we're talking about private debt, that space includes a whole variety of investment styles. There are investors looking at infrastructure assets. You have distressed investors, but also one of the spaces that has been growing probably the fastest in recent years has been direct lending. So that is the space that garners a lot of attention right now where investors are drawn to potentially juicy returns. But in our opinion, that does not come without risks.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Yes, that's been the fastest growing part of fixed income markets over the recent years. So private credit essentially is provision of debt, is lending to companies outside of the public markets. So we're not talking about corporate bonds. We're not talking about broadly syndicated loans. We're talking about a situation where a company makes an agreement with one or two lenders to borrow money. And this space has grown tremendously. The origins of the private credit space take quite a few years from where we are now. And a lot of the beginnings were driven by regulators essentially forcing banks to offload exposures to smaller, less diversified companies.”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT
“Hello, Jack. Thank you for having me. Well, I'm surviving a snowstorm here in Connecticut, so it's quite an eventful day, but managed to make my way to the office to have a conversation with you”
2024-02-16 · Forward Guidance · The Rising Risks In The Private Credit Lending Bonanza | Andrzej Skiba · IDENTIFIED FROM THE TRANSCRIPT