Centerbridge's Aronson Defends Private Credit: 'Take a Breath'

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00:00So let's start with garbage lending, because Gunlock sees basically markets awash in that.

00:05And I'm curious, you know, where you're sitting, what standards look like, whether you've seen

00:10any evidence that maybe due diligence is starting to slip a little bit.

00:14You know, there's always peaks and valleys of enthusiasm in any investment class,

00:21including lending. I think to call private credit and direct lending, you know, garbage lending,

00:25it's just a way overstatement. And I think people really have to step back and take a breath.

00:31It's like lending has been around forever. Direct lending, it's not that different than bank lending.

00:37It's non-bank lenders doing it rather than traditional banks. But there's nothing really

00:42new about it. And of course, people can get carried away. And of course, I think the direct lending

00:48market is a trillion or a trillion and a half, some gargantuan number. For people who say there's

00:54never going to be an issue, it's just wrong. Conversely, for people who think, oh, it's all

00:59going to come tumbling down, it's equally wrong. Right. So it's an important perspective here,

01:04and it's important to take a breath, as you say. But what do you make of the narrative that,

01:09you know, to Gunlock's point, that a lot of the problem children in the public markets,

01:14that that's been shifted to the private markets. And that's one of the reasons why you've seen junk

01:18bond indexes, for example, maybe become a little less junky. Do you think that there's anything to that?

01:23I actually don't. I think, again, it's a relatively new asset class in that it's

01:30non-banks. Firms like ours are making loans to private companies. But prior to us doing it,

01:36banks used to do it. So there's nothing new. But what always happens on Wall Street when there's a

01:41new idea, non-bank lending, people sometimes get carried away and inevitably mistakes are made. But

01:47if you see, I think it's really important to look at the data. And I would analogize this to the

01:53syndicated loan market, which is probably the best comp to the direct lending market. And if you look

01:59back at 25, 30 years of data, the highest, highest that defaults ever went is around 10%. And that was at

02:09the height of the GFC in the midst of a crunching recession. Now, people say 10%, 10% on a trillion

02:16five. That's a lot. And it is. And that actually can spell opportunity for for creative investors.

02:22Right. But no one looks at it from the flip side, even in the worst of times. Yeah. 90% of the market

02:30is just fine. What do actual recovery rates, at least based on what you know, what do they look like,

02:36particularly relative to what we saw in past cycles, potential recovery? So if you look at

02:41the historical recovery rates on syndicated loans, first lien leverage loans, it's around 60 cents in

02:48the dollar. Okay. Direct lending, predominantly they're called unit tranche loans. What does that

02:53mean? They're first lien senior secured loans. Now, who knows what the actual recovery rate will be?

03:00Maybe it's 60 cents. Maybe it's really bad. Maybe it's 40 cents. But again, just do the math. If you

03:06lend a million dollars at the height of a recession, probabilistically 10% will default. Okay. So

03:15your million dollars, you got $900,000. That is fine. And the balance, let's say your recovery rate is

03:2240 cents in the dollar, not 60. So that's $940,000 on a million dollar portfolio. So it's not to say that

03:32there aren't problems. Of course there are problems. Yeah. But it's not like the whole world is going to

03:37come tumbling down. It's not. And I agree with you with some of the extremes, I think, and some of the

03:41hyperbole we've seen in that space have gone a little bit far. But I do want to focus on some of

03:45those problems and the compounding effect that it's had on being able to raise new funds for new vehicles,

03:51to cash out on existing on existing investments as well. Do you think we're going to start to see a

03:57little bit more, for lack of a better word, liquidity in that space anytime soon?

04:03I think when people calm down and take a breath, that people will realize that the world isn't going

04:08to end. I mean, there are always liquidity concerns, but that liquidity concern really

04:13has no bearing on whether the loan is actually worth 100 cents in the dollar. Now, your loan can be

04:19worth 100 cents, but if everyone wants their money out today, it's no different than an old-fashioned

04:24bank run 50 or 100 years ago. You can't do it. So it has to come out slowly, but it has no real

04:32bearing on the value. Has your job changed by meaning the things you have to deal with on a

04:36day-to-day basis? Has it changed materially relative to a few years back because of everything

04:41that's been going on? I think the primacy of private markets continues to grow, and we don't see

04:48that stopping. If, again, you look at the direct lending market, a trillion, a trillion and a half,

04:54the vast majority of it is directed to financing buyouts. It's sponsor-led financing. But if you

05:00look at the U.S., Wall Street, we're this much compared to the U.S. GDP. And so what we're thinking

05:07about is how do you bring direct lending solutions to that huge cohort of companies that have nothing

05:13to do with Wall Street and buyouts and private equity?

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