00:00I do want to talk about the opportunities that part of your title. But let's first start with sort of
00:05the mood music in private credit right now.
00:08Because last quarter the sort of narrative was very much that these are liquidity concerns. These aren't necessarily fundamental concerns.
00:15And I wonder whether that logic still holds true today. Yeah it's a great question. I think the one thing
00:21in private credit that that I'll state up front that people sort of miss
00:24sometimes is private credit is not a single asset class. And so there are many ways to invest capital and
00:31express risk in private credit.
00:34And so in markets like this where there's a little bit of hair around the market things are still generally
00:39pretty well bid. We look to play offense in defensive assets.
00:43So areas where we're finding a lot to do for example off the run non correlated niche assets and examples
00:51are tax receivables dividend withholdings
00:54royalty or royalty like payments. And why we like these assets is let's say we enter into a period of
00:59volatility in broader private credit.
01:02Or we enter into that what we call the world we're worried about. So inflation, recession, some form of market
01:08turmoil.
01:09It doesn't change one cent of how much cash we get or when we get that cash in these assets.
01:14And in many of these smaller asset pools you can structure in profit participations and monetization upsides.
01:22So playing defense in a challenging market against non-cyclical assets and participating in the upside along the way.
01:28Talk to us a little bit about valuations. You know, how has the story there changed, especially as you think
01:34about the past few months?
01:36As you said, I mean, private credit, it isn't just one monolith that we're talking about necessarily.
01:42But have you seen valuation opportunities open up regardless?
01:47So I'd say in the what's bifurcate private and public credit, so tradable bonds and loans.
01:54So on tradable bonds and loans, you're seeing that have and have nots market from a pricing perspective.
01:59And the have nots are all the places you'd expect to see them, right?
02:03Software, building products, cable, et cetera.
02:06And I think those capital structures, they're going to be challenged.
02:10And you're seeing that in market prices in tradable securities.
02:13There definitely is still some catch-up to happen in private markets.
02:18And you're not seeing that liquidity function hit yet.
02:22So no one is forced to sell these assets, so they're not selling these assets.
02:26And there's a general sense in private assets broadly where folks are loathe to take realized losses on private assets.
02:33So I think where we will see private opportunities in assets will be when there comes to some forced selling
02:40mechanism.
02:41And at that point, what are you going to sell?
02:44You're going to sell your best assets.
02:46And sometimes those are assets that candidly should be worth par, and maybe they take a discount on those.
02:51So I think that's an opportunity.
02:53We're still very early stages in that process.
02:55And so we'll be looking for those examples.
02:57But I think the opportunities today in terms of actionable opportunities are much more in the tradable markets.
03:04When would you expect those opportunities to start coming for the loans that you would look to buy?
03:10Yeah.
03:10So back in the haves-have-nots question, it's is it refinanceable?
03:15And I'd say let's just take software as an example.
03:19And so software is there's a kind of a double whammy effect on software right now.
03:25The one is the loan-to-value effect.
03:27So the value in public markets of these companies have come down quite a bit.
03:31And so the gap between the amount of debt and what the cushion is from a value perspective has decreased
03:37significantly.
03:38So that's whammy one.
03:40And then whammy two is the increase in rates.
03:43And so most of these deals or a lot of these deals were done in 2020, 2021, effectively in zero
03:48interest rate environments.
03:49So let's say you issue debt rates plus 3%, 3.5%.
03:54You're paying kind of 3%, 3.5% in interest.
03:57And all of a sudden, you're paying like 7.5%, 8%.
03:59And not all of these business models were structured or have the economic flexibility to be comfortably paying that amount
04:08of interest expense.
04:09So that double whammy, it's going to come when things come due.
04:13And so are these extensions?
04:15Are these somehow refinancings?
04:17Are they bankruptcy filings?
04:18And I think that's when you're going to really see the rubber meet the road in this space.
04:21The rubber meet the road.
04:23I do want to talk a little bit about what we heard at Bloomberg's credit forum that happened yesterday.
04:28And it seems like there was a lot of warning on a shakeout coming.
04:33Maybe lines a little bit with what you're saying.
04:35And one of the sectors, the industries that was called out was sort of cable and broadband providers.
04:42I mean, how specific are you looking here when you think about sort of the sector level?
04:48So there are certain sectors that have more problems than others.
04:51I think what's probably the focus around cable broadband was really a lot of the timing of relatively high leveraged
04:59transactions in the space,
05:01which a lot of those transactions were done again in that 2020-2021 timeframe when rates were quite low.
05:07And so they're starting to come due in the next year or two.
05:11And, again, the appetite doesn't feel like it's there to regular way refinance these businesses.
05:17So I think that's where we'll see the opportunity set in that particular sector, cable and broadband.
05:25And I think, again, the same is true.
05:27There's a lot of rhyming between these sectors, which is not untraditional in credit, right?
05:32Like, kind of nothing happens until everything happens.
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