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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“Simplistic way of looking at things, but that's effectively what we're doing. And I think that's why it has been so repeatable is that we're not relying on a ratings agency or what is the absolute level, what is the leverage? What is the interest coverage ratio? What is this one data point that's going to determine the risk profile of this investment? The best way to look at what is the risk profile of this entire entity is how much is the whole thing worth and how much are we lending against it. And if we're only lending $40 to 50% against the total enterprise value of an asset, there will be people, you know, beneath us. There is a large equity cushion beneath us and there are people who want those assets. You know, a lot of times in fixed income, people will see.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“The security is collateralized against in our eyes is really irrelevant. What we're trying to do is say how much is this entire business worth? Whether it's based on the future cash flows of the business, discount it back to some present value, whether it's based on public comps and their trading values or private multiple transactions. There's 50 ways where you can value a business. If we look at all of those and come up with some total enterprise for the business, what would somebody else pay for this business? What would a strategic pay for this business? What would a private equity firm? What would an individual investor pay for this business? And if we're well in, you know, you think about it like a mortgage on your house, if your house is worth $2 million, yes, it's secured by the land and the house, but it's really what would somebody pay for your house? And as debt investors, we're looking at, okay, if the house is worth $2 million, how much money are we going to give this person for a mortgage? It's a very simple.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“But basically, if we have defaults that are in line with the index and we have a yield advantage of 200 to 400 basis points over the index, we can harvest that yield advantage over the course of a credit cycle in order to generate alpha consistently. And again, that's why it comes down to really making sure that we're investing in the highest quality best businesses in what people consider a leverage credit universe, a junk credit universe.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“It's usually we use the Bank of America or the Bloomberg high yield index just. Depending on the client, but just the market in general, the index itself is a little bit. Not irrelevant, but you can”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Sure. So historically over the 20 years and previously before that, the 26 years that we've been around, our defaults have been in line with the index. And I think what's surprising to a lot of people is that, yes, our defaults are in line with the index, but we own according to the ratings agencies, a much lower quality portfolio than the overall makeup of the index. So just from a pure ratings perspective, we own about 50% CCCs in our portfolio. The index makes up about 10 or 15 percent CCC. So if our defaults can stay in line with the index, as I said earlier, we create portfolios that usually have between a 200 and 400 basis point yield advantage over the index.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“So your new fund launched this summer, but in your previous experience at Poland, what is a level of default that you sort of accept? Oh, if the market's defaulting at two, we want to be defaulting. Your security is default at one. Yeah. And sort of speak to that”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Although people can debate whether there is a maturity wall or how I guess how high that wall is in 26, 27, 28 with rising interest costs. There could be some issues around refinancing that I think will plague the overall market. And that's why we will see defaults increase. But I think it's really important to remember that good businesses don't default. People will put capital into good businesses. And that's why it's our job to not worry so much about what's the maturity, what's the duration, what's the yield on these securities, but it's really to find good businesses because again, as I said, good businesses don't default. Good businesses don't go bankrupt. And when you're talking about investing from a fixed income perspective, when you need to be more concerned about how much money you can lose versus how much money you can make, we cannot impair capital and really that means we cannot have bankruptcies. And the best way to avoid bankruptcies is by investing in fundamentally.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Third of the portfolio, the top 25 names make up about two thirds of the portfolio. So I wouldn't say we're taking broad market risk. What we're really trying to do is take company specific risk. It's a lot easier to predict the earnings of a business for two or three years than it is to predict the direction of interest rates. It's a lot more repeatable. You know, I think in our process. So, yes, will the market face increasing defaults probably back to historic levels, maybe even a touch higher? I think that's the case But when you think about the way we view credit and the way we build portfolios, it's really going to come down to those underlying businesses. I do believe that default rates will increase. We are seeing fundamentals soften across the board.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so I think there are a couple aspects to that. So, first, one of the things that I think that we do here at Poland that's unique is we don't rely on the ratings agencies to determine the risk of default for an individual security that we're purchasing. We view everything through the lens of loan to value. How much is the entire enterprise worth? What are we lending against it? And if it's in that kind of 40 to 60 percent loan to value, those are securities that we want to buy. It doesn't matter to us if it's rated CCC, single B, double B. It's really through the lens of loan to value. Our clients have given us the flexibility where we're not beholden to the ratings agencies to determine risk. So that's one factor that I think, you know, just to give you an idea of the lens that we're looking through. Another thing that benefits our strategies is we're very concentrated about the top 10 names make up about”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“And how do you assess value when you look at the risk of not being paid back, the risk of default relative to sort of the implied default of the risk premium that you're taking by making that loan? For example, in 2021, spreads, I guess, were very, very narrow, but with benefit of hindsight, very, very few defaults. And I know defaults delinquencies have been low, but they are rising. of credit and or your specific world what are you sort of seeing there in terms of the risk of reward of the risk of default verge how much you're being paid for that risk”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Double digit returns in fixed income instruments. So from that perspective, the market, you know, I think a lot of people have come over to the fact that, you know, maybe bonds are back in favor. You can actually get paid for the risk that you're taking. And for a lot of people that, you know, 10% bogey is enough for them. So it's been a pretty unique environment where asset allocators, investors. Are now rethinking their allocations because they can actually get yield in the fixed income markets.”
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, as I said before, I've been here for 19 years. And other than maybe the first one or two, we really haven't seen an environment like this where we're simply being the beneficiaries of a move in Fed funds that has loans that we were buying, you know, debt securities that we were buying last year, a year and a half ago at 5% today are yielding 10%. The underlying fundamentals really have not changed of those businesses. So this is an opportunity where debt investors can get equity-like returns and fixed income instruments. That's not a, you know, we've seen yields this high before, but it's usually coincided with periods of economic turmoil or massive market dislocations. Today, things are okay. They're not great. But we're still able to achieve double digit.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Would also add to that that most of our portfolios Have a pretty significant yield advantage over the index. So our average portfolio has a coupon today of about 10.5%. 25 basis point moves in Fed funds don't really have a material impact when you have a 10.5% coupon and a 12% yield on the portfolio. Yes, it can affect the overall market, the refinancing market, things like that. But we've seen over time the number one driver of performance of our accounts is going to be the underlying credit quality and performance of the businesses, not rates.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“You know, when you think about the entire leverage credit universe, most of our portfolios are made up about a third in loans, which have very low effective adjusted duration because obviously their floating rate. About a third is made up of bonds. And that third tends to be kind of lower tier middle market. So it's relatively shorter from a maturity perspective. So the duration there is lower. And then we have about a third, which are in less liquid situations. And those are a mix between bonds and loans. So we tend to have a maturity that's in line with the overall market, but our adjusted effective duration averages between one and two. So it's much more important to us that we get the underlying fundamentals right of the businesses that we're investing in than the overall direction of rates.”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, sure. So a little bit on background, I've been here for just about a little over 19 years at Poland. And again, throughout that entire timeline, we've been 100% focused on the leverage credit markets. So whether it be Heidio bonds, levered loans, private credit, it's where we spend 100% of our time. So your point about interest rates, and I think it's pretty important because most fixed income investors, you know, their outcomes are going to be determined by the direction and the severity of movement of interest rates. But I think one of the things that's unique about how we look at credit and through our bottom-up value-based approach is we're much more focused on the quality of business and the underlying fundamentals of those businesses than we are about interest rates. And it works well with our strategy because as”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT
“Is mine, Ben. So just to set the stage, what you invest in is credit. So as you know, and many of our audience members today know, when it comes to taking interest rate risk, the risk that interest rates go up, the investors in long-duration instruments have faced, I would say, close to catastrophic losses. It is quite extreme, the losses on there. That's related to the government debt and interest rate risk. Your world is my understanding, is completely at the very short end of the yield curve, so very little duration of risk, but you're really taking that credit risk. So the risk isn't that you get paid back, but interest rates go up, but that you don't get paid back. So how would you just tell us a little bit about your fund, your background, and what you invest in, and then how would you characterize the, let's say, the past year for credit?”
2023-11-06 · Forward Guidance · The Bond Market Sell-Off Was Duration, Not Credit Risk | Ben Santonelli · IDENTIFIED FROM THE TRANSCRIPT