Khosla Says 'We're Living Truly in a K-Shaped Economy'

Bloomberg

Watch Khosla Says 'We're Living Truly in a K-Shaped Economy' - Bloomberg on Dailymotion

Transcript

00:00This is an industry that's been in fierce defense of itself, Blue Owl being one of those ones,

00:04really vocally coming out and saying, you're wrong, Jamie Dimon, they're not cockroaches,

00:08things aren't wrong. You maybe side a little bit more with Jamie Dimon in this argument.

00:13You know, there is, we're living in a world where it's truly a K-shaped world. So tech

00:21data centers, financing them, building them, going out and where these valuations are,

00:29that is a very hot, hot market. There's a whole other piece of the industry, the bottom part of

00:36the K. So when we think about it, chemicals in just an extraordinary down cycle, anything associated

00:43with autos and construction and manufacturing, manufacturing has been eight months of negative

00:50numbers in US manufacturing for the last nine months, right? So when you look at that world,

00:57and forget even cockroaches or otherwise, right? When you look at the fact, I think the point I'd

01:04like to make more is we're living truly in a K-shaped economy. And what is happening in that

01:10lower part of the K, actually focusing on figuring out solutions around it is probably one place where

01:19there should be a lot more focus. Right. Not enough light there, because we're all looking at the

01:25spotlight on the data center build out, right? Are we seeing, do you think, a recession in a big piece

01:32of the economy? Parts of it are recessionary. You know, when you have nine months of PMI numbers,

01:40producer manufacturing numbers negative in the United States, that tells you manufacturing is

01:46recessionary today, last nine months, right? But I don't think it's so much even, you know, I happen

01:53to think, please, I'm not an alarmist. I don't think there is some crash coming, there's some huge

01:59recession coming or something. That's not our base case. But in a world where you have so much of the

02:07leveraged credit market, which is in those deals where, and these are deals done pre-2022,

02:17interest rates are so much higher. The earning numbers are flat to down in some of these businesses.

02:24I think the focus on trying to fix it, how much capital needs to go in there to kind of fix it,

02:30right? And how do you kind of solve some of these issues? I think that's where, Matt, I think you've

02:36got to put life on. But, Victor, can I just ask, because manufacturing, one of the key goals of

02:41this administration, I've talked to Scott Besant about it, and obviously Donald Trump wants to

02:46bring manufacturing back to America. That's the point of his, at least partially, the point of his

02:52tariff regime. Is the administration helping this situation if manufacturing is in a recession? I mean,

02:59they've been here for a year. Are they doing their own thing?

03:01No, they've started. They're trying. It takes, you know, it takes a while to turn around these

03:07aircraft carriers. Right. Right. It doesn't kind of happen quite like that. So with the one big

03:12beautiful bill, you think that's going to add some stimulus, some influence to this? It's a down

03:17payment. Yeah. Right? And you know these really well because this is part of what SVP does so well.

03:24You look at this stress and you find ways to put capital to work, to make it look better. But this is an

03:29industry. Matt and I have had so many private credit conversations where managers will come

03:32in here and they say, we're investing in the new economy. We're in that up part of the market.

03:36We're doing really well. Do you think that this is an industry that either hasn't fully grappled

03:40with or just isn't admitting what things really look like underneath the surface?

03:46Look, everybody loves to talk their own book. Okay. So who am I to kind of cast stones at anybody,

03:55right? But what we would tell you is, you know, after you had first brands happen two months ago,

04:04something, you know, we've always had a relatively high level of defaults in high yield. If you look

04:12at Moody's statistics, they tell you default rates are 5%, 5.5%. That's one out of 20 companies,

04:20right? That's a high level of defaults. But something else happened starting about two months

04:26ago. Two months ago, after first brands, there are 15 deals we are tracking with debt greater than

04:352 billion, some of them with 20 billion of debt in the high yield universe. And the senior debt

04:42is now trading at prices under 70 cents, right? So I think there's a, whatever you saw happening

04:52there, you know, we did as a group of investors, we all made investments pre-2022 when interest rates

05:00were zero. Interest rates are higher. Some of these underlying businesses are sluggish. And as a result

05:07of that, some of these capital structures need to truly get fixed. 70 cent, under 70 cent senior debt

05:16means the company is essentially a zombie company for right now, right? And we've got to kind of start

05:21to attack it. And that, by the way, I think, as you know, that's our focus. We provide capital. Look,

05:27some of these will end up as restructurings, sure. But at the same time, so many of these great

05:33businesses, some of these are really great businesses, just over levered. They need capital

05:39to be, they need preferred capital, junior capital to go out and kind of restructure that balance

05:45sheet, right? So to our way of thinking, there's just a whole bunch more opportunities. I would say

05:50first brands isn't a one-off, is also what you're saying. It is. You know, when you, to talk about

05:55fraud, to talk about something, all the different. Because that's what most people say, it's fraud,

06:00it's idiosyncratic, there's no other cases. But also that it's a great business, right? Bruce

06:04Richards was sitting right where you are, and he said, it's a great business. And I buy first

06:07brands products for my cars, you know? Can I tell you, I'm not going to debate first brands,

06:12great business or bad business. The balance sheet, obviously, was a little exaggerated,

06:17if I'm just being polite, right? And the super senior debt is trading at, what, 60 cents?

06:21I think 50 now. Yeah. But you're on top of it as I am.

06:26So you're involved in first brands, if I'm not mistaken.

06:29We are now, and I have to just be very careful about it for that reason. But I think, put first

06:36brands on the side. The 15 companies whose debt has fallen between $2 billion and even $20 billion

06:44in the last two months, we don't think there's fraud here. They're just over-levered. Just way

06:51over-levered. And these deals done pre-2022. And I think that's the part we've got to kind of work

06:57through and fix. For manufacturing to really get better in the U.S., you've got to fix these zombie

07:03capital structures, the ones which we've created.

07:06And for you, it's an opportunity, right? As we've discussed, when you see good companies that just

07:10need more finance in there, regulators might look at it differently. And there's been a lot of

07:15attention in Washington, D.C. Elizabeth Warren and another Democratic representative have been

07:19talking that credit needs to be stress-tested like the banks. FDIC changing rules on leveraged loans that

07:25make things more friendly to the banks. Do you think the tide is really changing where regulation is

07:30now focusing on alternative lenders versus the banks? The alternative lenders have had a free

07:36ride, right? The banks they used to compete with had one arm tied behind their back. And the private

07:43credit guys were able to kind of compete. You know, to me, from a distance, we are not in the direct

07:49lending business, OK? So I'm a little distant from it. But you can see now the banks which had one of

07:56their arms tied behind their back. That arm's being freed up, right? So there's a little bit more

08:02competition than there was. But when there's more competition, often that leads to standards that get a

08:08little bit looser, trying to win over that. That sounds like maybe not the healthiest thing, actually, to have

08:12that competition back. Yeah, you know, we, in credit, we have cycles, Danny. We are, we're going to have a little

08:19cycle. Where are we? Where are we right now in the cycle? Spreads are close to record tights. When

08:26you look back over 20 years, they've been right around kind of 300 odd basis points, give and take,

08:33right? Give or take. Those are really, really tight spreads, just in terms of where we are. So look,

08:39we're poised. You just look at high yield over time. You know, spreads can blow out to 600, 800,

08:46900 over. And that's sort of what happens when in a recession. I don't think we're in a recession in the

08:52next year or two. Don't get the wrong idea. But please, I think our view would be you're lending

08:57today with really tight spreads. The amount of new issuance which is coming into the high yield

09:04market, all this data center stuff you're hearing about, well, guess what? The hyperscalers are coming

09:10to borrow in the high yield. The amount of supply is just going to increase a lot. I think, to our point

09:18of view, the pressure on spreads is likely to go up, even barring a recession. The pressure on spreads

09:26to clean up all the stuff I was describing, all that just requires capital. And those spreads will,

09:33they will have to kind of widen to accommodate it.

09:36Victor, can I just ask, you're, I mean, not in the direct lending business, but you're a pioneer in

09:39the distress credit business. And Howard Marks is another who was just on surveillance. He said he

09:45thinks that these are healthy markets, healthier than they were in 2000, but that the Fed shouldn't

09:50be necessarily moving rates much more at this point. What's your view on what the Fed should

09:54be doing? Yeah. You know, beyond my pay grade.

09:58It is not. If anyone gets paid enough to talk about this, it's you.

10:03You know, look, you're hearing me describe some real caution. Yeah. Right. So in kind of a cautious

10:11market like this, where inflation isn't quite licked, I think caution would suggest just go easy.

10:20Don't supply more fuel to that fire. Right. But I'm a little bit of an old fashioned. I'm a little more cautious.

Category

Transcript

Be the first to comment

Recommended