00:00Well, it's changed massively over the 30 years I've been in it, right?
00:04It used to be boring.
00:06You went to a commercial bank, you made a loan, you held it, that was it.
00:11Then in the 1990s, loans started to trade.
00:14So banks, investment banks could arrange it, sell it off to non-banks, it traded.
00:20Then 2008, you got a huge amount of influx of capital doing private credit,
00:26saying, hey, you could come directly to us, a fund, we'll lend you the money, you don't need a bank.
00:33And then you had in 2015, liability management, or what the press loves,
00:39creditor on credit of violence, that changed the whole dynamic of lending senior security.
00:46It used to be, we're the three musketeers.
00:49If Tom owns a debt, you own it, I own it, same debt, same company,
00:54we're all for one, one for all, we're the same.
00:58All of a sudden, it changed.
01:00And certain investors in the same exact debt instrument end up doing better than other debt instruments.
01:08So what I would say is, when I started in the business, senior secure lending was boring.
01:13I was boring.
01:15It was a perfect fit.
01:16Right.
01:16And over time, it became interesting and exciting.
01:19Okay, Michael, you know, folks, I got to cut to the chase here.
01:22I mean, you know, Margin Call with Jeremy Irons sitting at the end of the table.
01:26Peter Sullivan was the character, Zach Quinto doing it, the junior risk analysis and Margin Call from years ago.
01:34How many people in your racket really aren't all that smart?
01:40Because your book is a tough read, and it makes them smarter.
01:45There's a lot of pretenders in credit, aren't there?
01:48No, you know, one, I'd get myself in trouble if I said there's a lot of pretenders in credit.
01:55No, I think people evolved.
01:56I think historically, being in credit, you were a second class citizen, because it wasn't as sexy.
02:04And it was like, hey, all you have to do is, can I get paid back?
02:08Yes or no.
02:09And it was viewed as a lesser business than, let's say, equity.
02:15As equities got more and more efficient, as debt started to trade, as distressed debt buying,
02:22someone else's problem at significantly below par, where you could have downside protection,
02:30but all the upside of converting some of that debt potentially into equity.
02:36All of a sudden, people got a lot, lot more sophisticated.
02:41And the reason I wrote the book is for the younger professionals, there was no book.
02:47You could go on Amazon, type, how do I invest in equities?
02:51Thousands of bucks.
02:53How do I invest in senior secured, non-investment grade, distressed debt, zero bucks.
03:00So I wrote it.
03:01I got a monopoly.
03:02I want to monetize that monopoly while it's still there.
03:07And I take a little offense, Tom, and I love you.
03:10It's an easy read.
03:11I wrote this book.
03:13So my goal was you read it and say, holy crap, I learned a lot, but that wasn't painful.
03:21So every technical concept, like a fraudulent conveyance, I ended with an interesting story,
03:28like Caesar's big fight over moving assets, accusations of a fraudulent conveyance.
03:36So I try to teach all of the technicals that you need to be a credit investor,
03:43whether it's performing or distressed, but then use real companies to illustrate it
03:50and then tell a war story.
03:52So you say, holy cow, that wasn't that painful.
03:55What's your view on private credit?
03:57If it weren't for the war on Iran, I think this market would be talking about private credit
04:00a lot more.
04:01How do you view it?
04:02Yeah, look, private credit historically has been a phenomenal asset class.
04:09You're lending senior secured.
04:11You put a one-to-one debt-to-equity ratio, and you're getting double-digit yields with
04:17downside protection.
04:19So it's a phenomenal asset class.
04:21Now, basic economics tell you, if you're earning excess returns to the perceived risk,
04:29a lot of capital flows in, and that's what happened.
04:32A ton of capital flowed in.
04:34I just wrote an article on how to analyze it, because what's going to happen is there's
04:40just going to be a dispersion of returns.
04:43The players that have been in it, lived through cycles, got punched in the face in 08, learned
04:50from it, are going to stay disciplined.
04:52They're not going to get involved in race-to-the-bottom deals.
04:56But I think the asset class is great if done well.
05:00I think some deals that got done were bad deals, and if you did too many of them, you're
05:07going to have a problem.
05:08But I love the asset class.
05:09For global Wall Street worldwide, the credit investor's handbook, Michael Gaeta with us.
05:13We're going to continue.
05:14We're in the professor's definitive here with a guy named Solomon of Goldman Sachs writing
05:19a forward as well.
05:21I want you to talk about the gajillion.
05:23We saw the equity deal yesterday from Google, original, large in that.
05:28But talk about the demand for the hyperscaler bond offerings.
05:34What does it signal to you?
05:36Well, look, a ton of capital is getting raised for data centers.
05:44There's going to be equity and debt, as in every fundraising.
05:48It's an interesting debt play.
05:53The goal of a debt investor is to get equity-like returns with debt-like downside.
06:00Now, there's a question whether some of these debt deals, you're getting debt returns with
06:07equity downside, which is the polar opposite of what you want.
06:13But I break these into three types.
06:16There's the data centers with a long-term investment-grade lease, lowest risk, but you've got to do
06:23your work.
06:24One, are there cancellation clauses in those leases?
06:29Because you might think, oh, I'm taking meta-risk.
06:33And then all of a sudden you find out the contract could get canceled after two years
06:38if certain events happen.
06:39So you've got to go in.
06:41You've got to make sure you have the right legal entity.
06:46Big companies have massive legal entities.
06:49You might have a name that's guaranteed a loan that doesn't have the corporate guarantee.
06:56So you've got to do a lot of work.
06:58And that's one end of the spectrum, lower risk.
07:01It's got a contract.
07:03And then there's the ones that you're building and they would come.
07:07And that's a higher risk.
07:08But everything is going to get financed with debt and equity.
07:14First brands.
07:15Tell us about first brands and how that might have been a teaching tool for credit investors.
07:20Look, I'm a professor, as you said.
07:23I teach at Columbia Business School, the MBAs, and then Fordham, the undergrads.
07:28And I tell every student, learn from mistakes.
07:32That's how you learn.
07:33Best way, learn from someone else's mistakes.
07:36First brands had five, and I wrote an article on this.
07:41It had five red flags.
07:43Now, a red flag doesn't mean I'm not going to do the deal.
07:47A red flag means I've got to dig deeper.
07:50And when you went into the first Broadly Syndicate alone, you couldn't dig deeper.
07:56And you had to make a decision.
07:58Just because everyone else is doing it, should I?
08:00And I write about that.
08:02Michael, I've got to get this in.
08:03I just think it's too, too important.
08:05There's always leverage within the system.
08:08Where's the leverage now or the implied leverage?
08:12Well, I think, and I've heard this, and people have said, is private credit going to be the next
08:19catalyst for a downturn?
08:21I think it's very misunderstood.
08:23When you look at it, let's use a private equity as an example.
08:29They're going to buy a company.
08:31The private credit investors are usually lending about 50% loan-to-value.
08:38Then you have, they go to the banks.
08:44The banks lend them 50% loan-to-value on what their debt was.
08:49So you've got a ton of question.
08:52The company's got to decrease in value by half.
08:55Private equity loses money.
08:58The debt holder doesn't.
09:01Then it's got to reduce by another half for the banks.
09:05And the banks are cross-collateralized.
09:07So I look at it and say, look, from the stability of the financial markets,
09:13this is very low risk for banks that have funded.
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