YouSaid · the spoken record

Ben Santonelli

lines on the record: 66
first: 2023-11-06
most recent: 2023-11-06
sittings or episodes: 1
sources: podcast

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“They are going to see further margin compression and further margin compression will result in lower earnings, which will result in security prices going down. So I think that that's a concern for some businesses that we've seen. And again, as I said, we've seen it play out, specifically in businesses that have a high portion of their cost structure in labor. Versus goods or equipment or whatever might be. So it's something that we've seen. It's something that we're continuing to monitor. You know, we'll see where it goes again. We don't know, we don't try to make predictions on these things, but we try to. Least be cognizant of what's going on from a macro perspective, and that's definitely something that's been top of mind.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“If those numbers don't come down, it's very difficult for inflation to come down on just from an overall perspective. Inflation, you have goods and you have services. If only the good side is coming down and the services side is staying high, it's really hard for the Fed to get back to a two, two and a half percent level of inflation. If one of the ballast of that is very sticky. So it's been a concern for us in an environment now where companies really can't pass on price increases today.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“And as I said, you can see it in the UAW labor action. I mean, they got most of what they asked for. People don't go on strike when they're at a disadvantage. They go on strike when they deck is in their favor. And I think they realize that. And I think that that could be said for a lot, you know, not just the auto workers, but across the board. Know it's very difficult to hire people in businesses right now. I think whether, you know, you talk to the businesses that we own or universally just in general, it's one of the Is getting people in the right positions and getting qualified people in those positions.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“From a larger perspective in twenty one and twenty two most companies could pass inflation costs on to the consumer. People were able to take price, companies were able to raise price in order to keep up with inflation. As we've seen, inflation start to tick down, it's mostly been on the good side of things. The employment side, the wage, not only the wage numbers, but the employment numbers continue to be very strong. People don't actively take pay cuts. And if you have an employment environment where it's difficult to hire skilled employees, you have unemployment levels at 2 or 3 percent. That is an environment that favors labor.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“In an orderly fashion, yes, they will pay more in interest costs, so their cash flow will go down. But because they are high quality businesses, that people believe will be worth more in the future than they are today, and that they're generating sustainable cash, they will be able to refinance that debt in normal course. We don't try to make any sort of top-down macro predictions as a firm we actually actively avoid making those type of calls. So again, Have a very high confidence level in the cash flows of these businesses for the next two, three, four years. What happens in the outside world? Know it will have an impact, but it will have a muted impact on our portfolio versus the idiosyncratic risks that each of these individual businesses have.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so sure. So, one of the things that's important is we do have a very low duration, but we have a maturity that's in line. So with the overall index. So, yes, the duration is 1.3, but that's because a lot of it's floating rate On our portfolio. So we have a maturity that's in line. But no, to your point, what do we plan to do? I mean, obviously we want to what we're trying to do every day is find the best relative value that is available. And invest in that, whether that be in loans, bonds, private credit, public credit, it's really irrelevant to us. Hopefully, the situation that will arise is the businesses that we've invested in because they generate sustainable durable free cash flow will be able to access the markets, which”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“We really haven't hit that next maturity wall, and we really won't until really 2016, excuse me, 26, 27. So I think you will start to see that tick up as we move into next year. But we really haven't seen any sort of dramatic tick up in default activity in the marketplace so far. But I think we and most other participants expect that we will start to see that accelerate as we move into later into 2024.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“We have not seen it really flow through yet, I mean rates have been up. It's really only been a little bit over a year. I think that if we stay in this higher for longer period that a lot of people have anticipated, we will start to see the impact of that. The other issue that you're running into why we haven't seen it is most businesses coming out of COVID were in pretty good, you know, once they got out of COVID, there was a pretty good economic rebound. Rates were still incredibly low. A lot of people took advantage to push out their maturities in that time frame. So there haven't been a ton of near-term maturities that companies have had to deal with. Companies default for two reasons. One, they have a maturity and two, they run out of cash. Not a lot of them run out of cash. It does happen, but it's usually because they have debt that's come due.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“But company, you know, sure, there is no doubt that increased interest costs on a large portion of the floating rate market will really hurt cash flows of businesses. That have issued term loans As you said, rates have gone up 100%. That is why it's incredibly important to buy businesses that generate sustainable free cash flow because they can withstand the interest rate shock to their balance sheet, to their income statement. Businesses that were not generating a lot of cash before are not going to be generating cash today. And those are the businesses that will struggle and have difficulty refinancing. They have near term maturities.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I mean, look, if they did hedge, which many of them have, they're reaping the benefits of that today. But, you know, that's a constant argument or debate internally that those businesses are having. Should we turn this out in the high-yield bond market? Should we go into the leverage loan market? Where can we get the best matrix of covenants versus rate versus execution? From our perspective, we're relatively agnostic to whether we buy a bond or a loan. Again, where it moves in the interim, what the mark to markets are not, you know, what's driving our underlying investment thesis. It's what is the yield on the security and what is the loan to value. And what we're trying to do is find the highest yield with the lowest loan to value and where those cross, those are the names that we want to have conviction and buy.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“And how are your companies which are often quite levered? How do you think of them managing that interest rate expense where if Amazon borrows 40-year fixed rate, it's the bondholders who have a problem, not Amazon? But in your world, very short duration at floating rate instruments, your holders of those loans are getting paid more as the Federal Reserve raised over 500 basis points, but interest expense is going up 100%. How often do your companies or companies in that universe think about, hmm, maybe I'm going to term out that debt? Maybe I'm going to put on a little bit of a hedge.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“We take a different view of that. We say, look, yes, it's levered, but this is a really high quality business. It's generating a lot of cash. Yes, it might be six times levered, but it's fifteen times business and your sub 50% loan to value. That's a great security to own.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“The large institutional buyers are not buying those deals in mass. So what does that do? It creates an inefficiency where people who are willing to take the time to understand that entire business and why it can be leveraged six times and why it can be successful. And it's really 50, 60% loan to value, which is an incredibly attractive security, why they can buy that even though it's rated CCCC. We don't have any of those restrictions placed on us from our clients. So, you know, we are, like I said earlier, we're ratings agnostic. It really has no impact on what we're buying. So therein lies the opportunity. Most people won't look at it, won't buy it, or they just automatically deem it too risky because the ratings agencies said it's a triple C security.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“I won't call them benchmark huggers, but they are very aware of the benchmark. They have a lot of restrictions on what they can own. They can't be, you know, they have to stay within certain bandwidths. And one of those relates to lower tier, triple C and single B rated securities.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, sure. So I think one thing that's important when you think about the names that we're investing in and when you think about, call it the 80 names in our portfolio, I would say that about 80% of those names are private equity owned businesses. So they're not publicly traded businesses. What is private equity looking for? They're looking for high quality businesses that are growing that generate cash and that are valuable enterprises. So because they are valuable enterprises that generate cash, what can they do? They can add the L in the LBO. They can put leverage on it. So they lever those businesses six or seven times out of the gates. When you lever something six or seven times, you are automatically going to get a triple C rating, regardless of the quality of the business. Most fixed income investors are”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Where we have such a huge yield advantage over the index OK is fine. We have the coupon that allows us to be patient. And That's a very powerful tool when you're trying to manage a portfolio. We don't do a lot of trading in our portfolios. We are longer term buy and hold investors. And when you have a 10, 10.5% coupon, Provides you a lot of patience to be selective. And being selective in an environment like this. You know, is really what's going to differentiate managers that outperform or underperform.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“I was referencing rather the fact that we own about 80 businesses in our portfolios. If I had a, generically speaking, I'd say two-thirds of them have revenues down mid single digits. Their costs are up, you know, low to mid single digits. So you're seeing some margin compression. Again, these are off pretty strong numbers in 21 and 22. So things are slowing down for those businesses, but it is not at a level where we're saying, wow, these guys really need to start cutting costs and battening down the hatches because the sky's about to fall in. It's just softer. And I know that that doesn't raise the fear monitor in a lot of people because it's just kind of a plain vanilla message that things aren't that bad. Things aren't that good either. It's just kind of okay. And again, for us,”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“In an environment where we have interest base rates at 5% and companies that are struggling can't raise capital unless it's in the 12, 13, 14 percent range, well, a lot of those businesses don't generate the type of cash in order to support paying interest costs at $13, $14. Those are the businesses that will struggle and will default at a higher rate. Again, it's incumbent upon us as analysts to analyze these businesses and understand how much disposable cash they have, what type of interest costs increase could this business take and still generate cash.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Will it tick higher because their interest costs are materially higher than they were five years ago and they don't generate enough cash in order to support the debt load that they have for sure. Where that goes, we've generally taken the view that it will probably revert back to that three to four percent historic average. We've been well under that for a number of years. The last 15 years debt has been incredibly cheap and money has been readily available to even some of the lowest quality issuers.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“You hope that you haven't lost so much value that there's no recovery for the debt holders and there's nothing left. That would be a chapter seven. That's not great. Chapter 11 can be totally fine for a business if it's just reorganizing with a different balance sheet. If there's been so much deterioration in the business that it's going to liquidate, that's not a good outcome for anybody. So again, that's why it goes down to making sure you're picking good businesses to invest in. But we have a maturity. And on that maturity date, the company either needs to pay you back or they're going to file for bankruptcy. Will those rates tick higher because of”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Again, I think it's going to come down to the individual businesses in that space. There's always some sectors that are doing well, some sectors that are doing poorly. So it's going to be, you know, what is causing? Is it a consumer-led? Recession? Is it a manufacturing recession? What is driving the underlying weakness? I think we'll go into that. But the thing about fixed income that is great is when you buy a stock or you buy an equity security, you can say, well, I think there's a catalyst out there in the future. Maybe it's earnings. Maybe it's this where we think once that happens, the stock will go up or down. We have the greatest catalysts known to mankind and that's a maturity. The company either needs to pay you back on that date or hopefully you will own the business if you've done your underwriting correctly.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Americans love to spend money. If people have jobs, they will spend money. And yes, will things slow? Could we have a mild recession? Could the Fed force us into a recession? Sure. But a recession doesn't equate to the great financial crisis of 2008. It just means it's a normal cyclical slowdown of the economy. And I think that's probably our in-house view is that things are weakening. Yes, it might slow down. We may go into a recession. We might not, but we don't think the severity of that or the duration of that will be particularly painful as long as those employment numbers remain as strong as they do.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“It's wage inflation coming down very difficult to manage in an orderly fashion. So one of the things that we've been very cognizant of in looking at businesses that we're putting in the portfolios is what percentage of their costs are fixed and variable when it comes to labor. If we see a business and there's been some on the healthcare side, on the staffing side, where they have a huge component of their business is variable labor costs or even fixed labor costs for that matter. Those companies will struggle because wage inflation is not coming down. The employment numbers are still incredibly strong. And that, so that is, you know, that is specific to businesses that have that type of cost structure. But I think it leads back to our overall outlook in that it's really hard to go into a recession when people have jobs. And”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“But one of the things that we talk about a lot here is how wage inflation and how goods inflation is impacting a lot of the businesses that we're investing in. And I think everybody can see for the most part that goods are coming down, whether it be supply chain, whether it be certain monetary policies. inflation on the good side is getting a little bit easier. The wage picture is still pretty tough. You know, you can see it in the recent UAW strike. I mean, labor doesn't strike when they're at a position of weakness. And when you think about how strong the employment environment is today,”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“You can earn equity like returns in fixed income investments. It's just a pretty unique situation. Now, to your point earlier about, oh, what is our outlook? I do think we do believe, as I said earlier, we do believe that defaults will increase. fundamentals are weakening.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I mean, look, spreads by historical standards are still relatively tight. I remind people here all the time, though, that we call it high yield. We don't call it high spread. So, you know, it's really, you can choose your poison. You can say for five years, oh, well, we weren't getting enough yield, but spreads were okay. Well, today we're getting a lot of yield, but spreads are still relatively tight. You can come up with the reason why not to invest. And I think look, a lot of people do, and they have very, you know, good reasons for it. But from our perspective, like I said earlier, yes, we've been the beneficiary for the last year and a half of a higher rate environment. And there aren't that many opportunities that I can think of where you have an economic picture that, yes, it might be muddled, but it's by no means a sky is falling type scenario.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“And how would you assess your outlook just on the bank loan leverage loan for publicly traded, not the private credit space? I suppose there's times where things are, it's blood in the streets and the yields are very high and you are much more sanguine about the future than most people in the market. That's obviously a time where you want to be buying handover fist. If you have the cash, are you in that stage? Are you on the other side of the spectrum where you think it's time to be fearful because everyone else is greedy? Because it is, you know, you say its yields are so high, but is it accurate to say that a lot of that is just interest rates going up? So the resetting of rates of sofa, what it's tied to, not the spread widen.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“And you want to put that money to work, you need to compete. There are a lot of people who have raised funds and they want deals. And when you have more people looking at fewer deals, they're going to be more competitive. And the person who wins the deal, generically speaking, provided the lowest rate to the company. So you won and now you have the loan, but you also were willing to do it at a lower cost of capital or a looser document or You know, whatever it may be, then your competitors. So it's just a fact of life in all asset classes. I don't think it's unique to private credit, but it's just something that we've seen over the last few years as you've seen the explosion in capital raised in that space.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“It's really all of the above. People will lend higher on a loan-to-value perspective. The quality of the underlying cash flows might be weaker. There could be More loopholes, so to speak, in the credit documents themselves that are more borrower friendly. It's really in all of the above situation wherever somebody gives somebody else is going to take. So it's just more of a generic, you know. Generic take that when you see that amount of capital flowing into a relatively niche kind of asset class.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Interesting, and when you say that underwriting standards may not be as rigorous as they were in the past because so much money has flooded into the space, I'm paraphrasing, what are the new, where can you see that lack of stringency? Is it the loan to values or a higher loan to values, higher interest ratio coverage? just not looking at the fundamentals of the business, all the above.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“I do think that there's been a deterioration in underwriting standards, and that will play itself out when we do have a default cycle and that I do think that recovery rates will be lower. I don't think that's a unique opinion by any stretch. I think that that's been pretty widely speculated. But it seems to make sense. When a lot of money goes into any particular asset class, something has to give and I think what we'll see give here is the fact that recovery rates on loans will be lower in the next default cycle than they had been in previous default cycles.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Because we are involved in this market. The thing that would concern me more than the mark to market would just be the basic underwriting standards. And I think When you look at the market as a whole and you think about how much money has been raised in the marketplace in such a short period of time, mostly in the form of dedicated funds that need to put money to work.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“That absolutely could be the case. I mean, private lending in general, you do not need to mark to market. These are not daily priced loans. So whereas in the vast majority of our portfolio, which is daily price and mark to market, we see the daily gyrations of the market resulted in the portfolio and people see that in private credit, much like a private equity firm. You don't need to mark your portfolio every day based on whether the Dow was up or whether treasuries were up or down on a daily basis. So yes, that doesn't mean the businesses are necessarily stable. It just means you're not marking them on a daily basis. So can you have situations where companies are performing incredibly well or very poorly? And there's a lag in the pricing of those securities. For sure. I think from our perspective,”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“And tell us about how it appears to be. I think with a normal loan or a bond, there's a rating agency. It pays quarterly semi-annually. If it doesn't pay, there's a default. Is there an issue with private credit where maybe it's a little bit less opaque? It's hard to tell. And there could be loans that are marked at $100 that are not worth that and could have severe credit issues.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“And it is a real asset class. There's no doubt about it. It is here to stay. I think, though, from our perspective right now, given the underlying rates that you can get paid in the public markets, we're not seeing the liquidity premium that would drive us to want to allocate more into private credit today. You know, that can definitely change. But historically, we've targeted around a $400 to $500 basis point premium for illiquidity to go into a private transaction to sacrifice that liquidity. And today, it's probably closer to 50 to 150 basis points. So for us, that's not reaching our kind of threshold, but it is definitely been a major player in our market. In taking share from the banks and a lot of people like the fact that it appears on the outside to be relatively stable asset class.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“In a deal. Again, it's not broadly syndicated, but 15 is not insignificant. And that can count as private credit. You could buy an on the run high yield bond that's been hung on a bank balance sheet and you buy it at a discount 15, 20 point discount off the bank, that is now considered private credit. So there are a lot of definitions I think that people have of private credit.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“In some markets, you are getting paid the liquidity premium to be in private credit. In other markets you are not. If we can have the flexibility to toggle between both markets, that should give our investors the best possible return. So we've never had a dedicated fund directly towards all public or directly towards all private. It's that flexibility to find the best relative value at any given moment that really has helped us generate alpha over a long period of time. Today, there's been a massive amount of dollars raised in the private credit space. There's still a massive amount of dry powder that needs to be put to work. And you're seeing the definition of private credit kind of morph. Ten years ago, it was direct originated loans, you know, me to you and there was nobody else involved. Today, there can be 15 people.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so sure. So, you know, I think it's important because private equity. So first, basically, we determine whether it's private credit versus public credit based on the liquidity profile. Was it broadly syndicated through a large brokerage house like a JPMorgan? Or was it uniquely originated or sourced by somebody at Poland or one of our partners? So it really has to do with the liquidity profile of the debt instrument, whether we classify it as public or private credit. That being said, the definition of what private credit is has really changed over the last 15 or so years. We've been doing private credit at Poland since I got here and before, so it's not a new asset class to us, although it has gained in popularity over the last few years dramatically. You know, we've always taken... The approach that”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Securities to invest in. So these portfolios are generating income on a monthly quarterly basis that needs to be reinvested back in that marketplace. And especially as rates were going up, people were putting money flows into the levered loan space was pretty dramatic because people wanted to take advantage of those higher yields. So a lot of money flowing in, a lot of demand for the asset class, not a lot of supply. And that's why you've seen one of the reasons why you've seen some really strong numbers out of the levered loan asset class.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Their acquisitions and the model becomes more different, the more difficult as a private equity firm when you're paying, when your cost of capital on the debt stack is 10 or 11 percent versus the last 15 years it's been at three or four percent. So, you know, there has not been a ton of private equity activity. There has not been a ton of, as I said earlier, opportunistic refinancing. Of the things that that has created is there's a pretty strong technical from a supply demand perspective in the marketplace that is helping this asset class to have a pretty strong year. There are more buyers than there are sellers and there hasn't been a ton of new”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, absolutely. I mean, with where rates are, people are not opportunistically refinancing unless they have a maturity. You know, I would equate it to if you had a 3% 30-year mortgage on your house, you're not going to go to the bank today and say, you know what, I think I want to refinance at 8%, you're going to hold that for as long as you can. It's an asset. So we're not seeing a ton of opportunistic refinancing for sure. And the other part is that on the true origination side, there's been a lack of activity on the private equity front, which has historically been one of the largest users of the leverage loan market to help finance their.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“It and what have you seen in terms of the activity of origination of syndication of loans just looking at, I think all sorts of types of loans, total bird's eye view. I think there's a ton of lending last year and it's somewhat slowed down. Is that fair to say for your neck of the woods as well?”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“More on the bad than the good There are a lot of household names that people just don't realize they use the leverage credit markets in order to provide the business with, whether it be growth capital, M&A, share buyback capital, whatever general corporate purposes that they needed for.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“This is a deal that JP Morgan is launching, and they're going out to the marketplace to raise $500 million of capital in the form of this is actually a form of a note today. It's not a loan, but same point stands. So there are businesses that a lot of people have heard of. A lot of people know them. It's just a broadly syndicated deal that raising canes, hired JP Morgan to raise $500 million. JP Morgan goes out and goes to institutional investors and sells the debt. It's a very liquid marketplace. I mean, the loan market today, I think, on the broadly syndicated side is close to a trillion and a half dollars. The high-yield bond market in North America is close to a trillion and a half dollars. So it's a large asset class. And there are a lot. Of companies Ford. Revlon, you know, brand names that people have heard both good and bad.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Sure. So most of the loans that we're buying are broadly syndicated loans. Today there's a loan in the marketplace for raising canes. I don't know if you've heard it's a fast food chicken restaurant in the south. They're looking to expand into the northeast”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Their forecasts in one, two, three years, do they have true competitive advantages that are sustainable? Are there technological threats? Is there obsolescence threats? That's all part of the bottom-up diligence that's incumbent upon us to do As analysts, in order to build out a portfolio where we're very comfortable with the risks that we're taking.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so we don't do commercial real estate. It's really, you know, there are specialized lenders who focus on that marketplace. It's really not a A liquid marketplace, the liquid marketplace that we're transacting in on a daily basis. We can trade our portfolio every day. It's broker quoted. There's an active market for it. There's been an asks every day. So, you know, we try to, 80% or so of our portfolios are daily priced and traded. So we're looking at more of the liquid portion of the market. And again, to your point exactly, loan to value is more art than science. The value of something is in the eye of the beholder. And it's really what is incumbent upon our analyst team and the research process that we follow to look at, okay, what is a normalized level of earnings for this business? Are they overearning? Are they underearning? What are the dynamics in this particular sector that is going to change?”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Loan to value, nothing else. I understand that value is a commodity. Oh, we're lending to one type of business. We're lending against account receivable. The other type we're lending against some other form of collateral. I get that. But what about if, and I don't know, tell me if they are, but if someone was lending against a office building in San Francisco, which in 2021 was valued at a billion dollars with a loan-to-value of 40%, and then the bill, you know, similar building was instead of a billion dollars was now sold in 2023 for 200 million. Now your loan-to-value instead of 40%, it's 200%. So do you do any commercial real estate there? And if not, or whether or not can you comment on that?”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“The largest factor in how our portfolios are different than the rest of the marketplace is that it's truly based on loan-to-value and really nothing else.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“You know, a security that is seven times levered, and they'll say, geez, that's a lot of leverage that has to be incredibly risky. Well, if the business is only worth eight times, then yes, you're 90% loan to value. That's a very risky investment. But if the business is worth 20 times and it's generating cash, it has sustainable margin profile, real true competitive advantages. You're seven times on 20, you're sub 50% loan to value. That doesn't look that risky to me even though to most people they see. We can't invest in that. And, you know, that is one of the, I think when you think about risk and you think about how we differentiate ourselves from most fixed income investors, that's probably the largest determinant.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT