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Armen Panossian

lines on the record: 75
first: 2023-09-22
most recent: 2023-09-22
sittings or episodes: 1
sources: podcast

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“Certainty of execution. And so private equity sponsors and other borrowers that wanted to have that certainty of execution said, you know, fine, I'll pay a little bit more in my spread and I will have a single lender or maybe a small consortium of lenders give me the capital that I need to go buy this company and I don't have to worry about going through a ratings process, doing a road show and pitching this to 50 or 100 different management or investment managers. I could talk to three or four direct lenders and get this job done. And so it resulted in a massive expansion opportunity for direct lenders and a widening of pricing for the direct lending market in addition to the floating rate going up 400 basis points, 500 basis points.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“It felt like a switch, but that switch took about three to six months to really be felt. The first quarter of 2022, things felt a little choppy. Second quarter, they felt like the floor was coming out. It was huge price declines. The investment banks were stuck with syndications that they had committed to, to place in the markets with price caps on the coupons. They then had to move out loans at meaningful discounts, resulted in big losses from the syndication of those loans, you know, historically you make fees when you syndicate. This time it was 2022 was a massive loss year for the banks. But with that volatility, as the banks experienced these losses and stopped committing to syndication to earn these fees, the direct lenders had the opportunity to step in into that void and provide capital that was secure in terms of”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“They're on both sides of shaking it up. And, you know, from a CLO investor standpoint, the CLOs have floating rate features to them. So those investors said, wow, my return just went up magically. Thank you very much, Fed. When quantitative easing turned into quantitative tightening, that's when the shift occurred. Because if you're a risk manager at a bank and all of a sudden the reserve flow is not coming your direction anymore, you're the expectation that is it will go the opposite direction. So then you turn to your investors and you say, stop investing. And that's what happened. The banks then said, I'm not a buyer of AAAs at all at any price. And at that point, the CLO formation engine just halted.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“So in 2021, there was about $175 billion of CLO issuance that year. And again, largely driven by this demand from the Fed infusing reserves at the banks and the banks deploying that capital through CLOAAs.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“Of 2022, you saw high yield bonds down 16%. You saw senior loans down 7%. Huge price movements in these securities really based on the sudden increase in the yield curve.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“All of a sudden, the equity arbitrage available to the equity investor of a CLO becomes far more attractive because the cost of borrowing becomes meaningfully lower. And so a tremendous amount of CLO issuance occurred in 2021, more active than any other year on record. And so the banks were originating debt to place into this CLO formation engine. What ended up happening, however, in 2022, I'm sure everybody recalls that the Fed said, you know, this inflation thing might not be transitory. The Fed decided that because inflation was not temporary, that it needed to move very swiftly and with a great magnitude. It needed to raise rates 500 basis points in 18 months. And that sudden increase in rates and the inflationary backdrop caused a significant pullback in the credit markets by June 30th.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“Sure. So, in a CLO, the asset side of the balance sheet are syndicated loans that are originated by Wall Street banks and really just distributed out to investment managers like Oak Tree and others who put together diversified portfolios and then lever those portfolios with rated securities, starting with AAA all the way down to Double B or Single B, and then an equity tranche at the bottom. But the biggest part of that capital structure, about 60% of it, are the AAA securities. So when you do see a sudden and dramatic increase in the buying interest or the demand for AAA securities like what you saw in 2021,”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“Exactly. And one of the areas where the banks were very active with those reserves was buying AAA securities and the widest spread AAA securities were CLOs. So CLO formation was at an all-time high in 2021 after the COVID-19 pandemic actually had already occurred”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“It's a very different market environment today than just two years ago. Following the global financial crisis, we had economic stimulus. We had monetary policy that was quite accommodating, easy access to capital, liquidity to help bridge the problems of the global financial crisis to a new day. And that lasted until 2019 until the COVID-19 pandemic. And even after the pandemic, there was obviously a considerable amount of stimulus that came in, as well as quantitative easing. And with quantitative easing, there was a continued expansion of this easy money policy in the 2021 timeframe, specifically in the form of reserves being parked at the bank balance sheets. And those reserves being pretty readily deployed into the markets.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“That's right. And you don't need to kind of bend and change your stripes and invest in cyclical businesses to get that additional return. You can invest in good companies that are, you know, have very low cyclicality, could be very stable from a cash flow generation perspective through a cycle.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“For a private equity owned company or a private equity sponsor, LBO, what we're seeing typically is 50 to 70 percent equity checks. We're seeing leverage between four and a half and as much as six times debt T EBITDA, which is a little on the high side. But the multiples that the private equity firms are paying for some of the larger businesses are still quite high. It's still in the double digits. But the good news, though, is that with so much of the risks known, the economic risks, the high cost of borrowing, the private equity firms as well as lenders are underwriting to a stress case scenario under which the company will continue to cash flow even if things deteriorate from here. So it's probably the most well-telegraphed recession in history if the recession does occur next year. I think nobody will be surprised if one does occur. And so everyone is underwriting as if that is a certainty. So credit quality as a result is quite high. The returns are quite high. And the loan to values are quite low as evidenced by”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“But that's hundreds of billions of dollars that is completely floating. And LIBOR has gone from 25 basis points to now converted to SOFR at over 5%. So you have almost a doubling of the interest coupon paid by some of these businesses against the backdrop of COVID-19, inflation, and some of the economic pressures that come with those factors.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, the private equity owned businesses and private equity sponsors prefer floating rate debt. The reason they prefer it is, generally speaking, floating rate debt does not have call protection. And so as the markets over the last 10 years just continued to tighten every year or every other year, having non-call debt was problematic. I mean, if you had call perfection, then your cost of refinancing that debt would be onerous. So private equity firms were taking advantage of the tightening market conditions by taking on floating rate debt. And they decided not to hedge with enough frequency. About a third of the debt, based on our estimation, about a third of the debt that's floating rate out there has been hedged in some form or fashion affixed.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, there's a lot of dislocation today, which has been created by a rapid increase in rates, as well as some cracks in the economy, especially around borrowers that put together capital structures when money was easier to be had when rates were lower, when liquidity was high, when valuation multiples were stable to rising, it was easy to make money and easy to deploy capital. And I think a lot of investors and lenders and really lost their way and agreed to terms and conditions that under today's market environment would not be acceptable. Levels of leverage that would not work. And as a result, there is a condition where there's risks and opportunities in the current market. And if you've done a good job of avoiding the risks, the opportunities are plentiful. What are those risks? The risks are older vintage transactions that put”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, there were times in certain companies that it really did feel like we were alone in a room. And the benefit of hindsight, it was a great time to invest. It was a great time to learn. I learned a lot about what it meant to have conviction when others didn't and also how to navigate or how to orchestrate your organization to withstand that type of pressure. I think Howard and Bruce especially did a great job in navigating oak tree to not lose itself and to not lose its stripes when it was easy to do so. It was easy to become nervous and unhinged.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“We fielded a lot of phone calls. I think the most nervous we became was when the bank started failing and when we were concerned or we became concerned that client capital held in those banks, prime brokerages and such, we were just worried that at some point that that could become a general unsecured claim in the bankruptcies of a cascading set of banks. And that was probably the peak of when we became most nervous. But again, if that were to happen, if that had happened, we would have probably been the least of the worries of politicians, diplomats, investors. But even that, you got...”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“And so they were happy that we had the, we provided the countercyclical exposure that they needed at that time. So we really didn't have any clients that were fleeing. We certainly had clients that were nervous. And we're calling us and saying, look, I mean, what's going to happen with my private equity book? I mean, if you're mine, you name it, company at 20 cents to 60 cents, and they're owned by marquee private equity firms, what's going to happen with that.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I mean, I think oak tree benefits from having really great clients and long history. And, you know, Howard started investing in high yield bonds in the 70s. Howard and Bruce and Sheldonstone and their other partners began working together in 1985 and in 1988 in distressed debt. We had already delivered on promises that we had made to clients around the type of investing we would do and the responsibility that we would take in investing their capital. So they knew that of all the things, of all the problems that they may have in their book, we were probably the least of their problems.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“We are paid to catch falling knives. That's our job. We need to do our work and make sure that we've done a very good amount of analysis to be comfortable with owning a business through a cycle at the creation value that we're investing at. And if we do our jobs right, that this will all turn out okay. And it did. I mean, I think we did deliver strong performance during that period of time. We returned a lot of capital. I think most importantly, our clients appreciated the return of capital. And we were on a footing that if we wanted to, we could have raised another $14 billion right afterwards if we wanted to. But, you know, we decided not to. We decided that the opportunity set was less attractive coming out of the global financial crisis. And we raised a fund that was less than half the size of the prior fund because we thought that just because we could raise capital doesn't mean that we should raise capital.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“And so when I started, we were investing the A fund. You know, the cracks were there, but they weren't wide. And then very soon after, you know, Bear Stearns fails, Lehman Brothers fails, the cracks were massive, and there was so much for selling from the trading desks at the banks. There was so much for selling from something called SIVs, the special investment vehicles that had mismatched assets to liabilities. Obviously, the hedge funds had redemptions. It often felt like we were one of very few or maybe the only one buying in the market, which took a lot of fortitude. And I remember Howard especially said, you know, because everyone was scared that our clients' capital was at risk and our jobs were at risk and the future of the world as we know it was at risk. But Howard said, you know,”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“You know, it was interesting because the way we structured that particular fund, it was a smaller A fund. And then we had a very, very large B fund that wasn't necessarily the case that it would be drawn. It will be drawn if the opportunity presents itself. So the A fund, if I recall correctly, was about $3.5 billion. The B fund was over $10 billion.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“In 2007, not terribly busy in 2007, to be honest, but in 2008, 2009, 10, it was by far the busiest time in my career in investing. I'm sure Howard mentioned this to you, but after the collapse of Lehman for many months, we were buying hundreds of millions of dollars of publicly traded debt globally. And frankly, it took a lot of conviction to do so because everything we bought was down.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“I remember when I bought my first house in 2006. All I was asked was if I intended to repay the debt. And I didn't have to show any materials about my income or my credit capacity. It was purely if I intended to repay, which if I knew how to short it back then, I would have immediately because I'm pretty sure I was not a good credit at that point in time. But fast forward to June of 2007, Oak Tree in the distressed debt landscape is really second to none. Howard Marks and Bruce Karsh saw these cracks that I think they were early to see in the corporate credit markets, they decided to go raise a big fund and they had a lot of conviction to do that and stepped up with the clients to raise it. And I was fortunate to find a seat in that group and invested very steadily.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, he had a very strong team around him. On the equity side, they were based in Connecticut and doing, I would say, investing that was separate and apart from the distress side, we were really focused on the distress side in small and medium-sized businesses, buying their debt, looking to restructure them, taking over control, making some swift decisions around acquisitions or divestitures and then selling those businesses. So we were kind of kept in a little bit of a bubble on the distress side. And I think we were always kind of the negative group within an organization that was quite equity focused and always looking for the upside opportunity. So it's kind of an interesting dichotomy to be a distressed investor in the context of an equity manager that was always looking for the glass half full rather than the glass half empty.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, thanks, Barry. So when I was in graduate school, I thought about all the different types of investing or advisory work I could do. And I, you know, really triangulated on distressed debt being the most interesting part of the markets where I could participate. And Pequot Capital had a group based in Los Angeles that had a long and experienced team that was investing in distress debt and really kept separate and apart from what the rest of the hedge fund at Pequot was doing. But I did meet Art Sandberg really, I would say, a great person to work for. But I really learned a lot from the team doing the distressed debt investing. Rob Webster and Paul Mellinger in Los Angeles that really did a lot in the small and medium-sized distress for control space.”
2023-09-22 · Masters in Business · Armen Panossian on Credit in a Time of Rising Rates · IDENTIFIED FROM THE TRANSCRIPT · source