00:00So I want to start with just how much needs to actually get finance because the scope of the
00:04needs and the asks is pretty unbelievable, staggering. What's your sense for the next
00:09five years of what's necessary? So the numbers are massive. You're absolutely right. And this
00:12is a big question that every buy side analyst investor is trying to get their grips around.
00:17There's a couple of numbers out there. Five trillion is the total hyperscaler capex over
00:21the next five years. If you think through what's happened in investment grade so far,
00:24we've had 100 billion, 150 billion, sorry, already this year. That same time last year
00:29was 20 billion. High yield, 40 billion this year. Same time last year, zero. So it really has become
00:35exponential in terms of the volume we're seeing. I spend most of my time with the investor side
00:40asking, okay, what is going to come this week? What is going to come next week? What's the expected
00:45deal flow in the next three, four or five months? Everyone is working out where they're going to put
00:49that cash and how much cash do they have to hold for these deals. The good news is all of
00:54the deals
00:54so far have gone very, very well. We're seeing oversubscription rates of two, three, four, five
00:58times in some cases, especially in the high yield space. And the market has actually phenomenally
01:03returned 10% year to date in the HPC sector, the high performance compute sector. The high yield
01:09index has only returned 2%. So you really cannot ignore this asset class when it's outperforming
01:14by 800 basis points. So the amount of capital coming into the asset class and investors who have
01:19been left out is still coming back in. So numbers are massive. The market is trying to get it in
01:24bite
01:25size. They're working out which asset class needs to take which. The good news is you've got investment
01:29grade, you have high yield, you have private credit, you have convertibles, you have equity.
01:34Private equity, as of yesterday, is putting a big amount into the space. So every asset class is
01:38getting ready to see how much they can put in and they want to, and is obviously an attractive asset
01:43class to continue to be in. Where's the money going? Is this all just going to data centers?
01:47The big use case right now, especially in high yield, is in data centers. So we've seen about 15 deals
01:52so far
01:53aren't just in pure data centers. But we saw about four weeks ago, the first GPU deal. So pure just
01:59GPU rollout, obviously, for NVIDIA chips. And we're seeing a lot more of those projects come through.
02:03So hold on a second. So the GPUs have like a three year cycle, and then they depreciate pretty
02:08significantly, potentially. Five to six. Five to six? All right. But either way, I mean,
02:11there's a sense that there is a sort of end date on some of these investments. Did investors get a
02:16little queasy about that? The amazing thing on Bloomberg, if you actually pull up the H100 index,
02:20you can see the smile curve on the actual secondary market on H100 chips. So yes,
02:26about six months ago, everyone was wondering through that depreciation cycle, the use case.
02:30I think the narrative's actually turned. The narrative is now, okay, even in five, six years,
02:35there is demand for these chips. And that is obviously enabling people to lend into the GPU asset
02:40class. What about concern about regulation? There was a big story that was getting a lot of attention
02:43this morning. The CEO of Standard Chartered was talking about lower value human capital that he was
02:49getting rid of in favor of AI. A lot of people are very nervous about this. Will the regulatory regime
02:54potentially crimp some of these investments? Look, so right now, the regulation side is obviously a
03:01little bit lax in regards to allowing a lot of data centers to go and get built very quickly.
03:06And permitting rules are pretty attractive where data centers are getting built. There is a bit of a
03:11race to get data centers built. You're seeing capital requests coming in thick and fast.
03:15Right now, if you think through what is the data center itself, if that is already built
03:19and additional regulation comes up, does that make that data center already built more attractive
03:24versus a potential oversupply risk? I think that's actually helpful. So right now,
03:29with regulation where it is and getting these deals done, it actually works in the inverse case
03:33where these deals are more attractive if they're built and they're up and running.
03:36One conundrum this year has been the absolute record pace of issuance in a whole host of ways.
03:40And yet benchmark interest rates keep rising. And people wonder, when is that going to sort of
03:44squeeze people out of the market? Have you seen any kind of pullback as a result of,
03:48say, 30-year yields going to the highest level since 2007?
03:51Yeah, it's probably the biggest topic in the last couple of weeks. Where are rates going? What is
03:55coming from inflation, especially secondary impacts from the Middle East, from supply chains?
04:00Where are rates going to go? There's an interesting dynamic in the AI space where these,
04:05depending on the leverage you put into the data centers, you can choose between
04:08being investment grade or high yield. So in the high yield space, we have five-year debt,
04:13non-call two, so you can call the debt after two years. So even if rates go up 100 basis
04:18points,
04:19150 basis points, is that going to prevent you from going and having an attractive return
04:24from your equity side on the data center? The answer is no. So yes, there is sensitivity,
04:30but the rate sensitivity in the high yield asset class is just a lot lower versus investment grade.
04:34investment grade, locking in debt for 16 years, that is a very different proposition when you're
04:40locking it in at 100 basis points higher. So yes, I think it's going to be a key driver of
04:44the markets
04:44the next six, seven months, just in regards to rates. But right now, the high yield market is
04:49absorbing it.
04:50Do you think that right now, even some investment grade companies could potentially
04:53choose to issue in the high yield market because of the shorter duration and the call structure?
04:57Correct. You can actually toggle up your leverage. So for example, we had an issuer who decided to go
05:02investment grade, they could have done higher leverage. So they could have gone high yield,
05:06but they wanted to go lower in leverage and go into the investment grade space.
05:09That same issuer potentially is now thinking about going, okay, I'm going to have a higher leverage
05:13proposition going forward. I'm going to go into the high yield space because I don't like the rate
05:17backdrop, and I can call that debt in two years.
05:20Just real quick here, a lot of people have been worried about software debt and the scale of
05:24potential refinancings coming down the pike. What's your concern level? What are investors'
05:28concern level about potential losses there?
05:30Well, actually, just quickly on that dynamic, that software dynamic, that is why there is so
05:34much cash going into the AI space. Typically, on the software side, software makes up about 15%
05:40of loans, about 5% of high yield. All of that cash, they don't want to lend into software typically
05:45right now. So all of that cash is going into AI. Now, there is a big maturity problem coming in
05:51software. If you think through private credit and leverage loans, there's about 100 billion in 28 and
05:562029. That needs to get addressed. It slowly is getting addressed. We led a deal last week for
06:01four and a half billion to start to address that problem. There's more deals that have launched
06:05today to start to address that. But some of these companies are more levered, potentially at higher
06:10risk of AI disintermediation. So what's the question there? Do they have access to the market? I'd say
06:16right now, with the health of the markets, they do have access, but it is no time like the never.
06:20They
06:20need to get going on this because the closer you get to that maturity, the easier it is for the
06:25buy side
06:25to push back and demand tighter terms, higher pricing. And that really is going to impact that whole asset class.
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