00:00The loved part of this market, which for a large point had been AI-related equities,
00:04has been incredibly volatile. Goldman was on earlier basically saying it's the most volatile
00:08it's been outside of a recession. Credit, though, has been remarkably well-behaved. Why do you
00:13think there's such a difference between the two asset classes right now?
00:16Credit is pricing and resiliency, but selectivity matters. What that means is the income that
00:23investors can earn from credit remains high and stable, kind of counterbalancing that
00:29volatility that we're seeing in equities right now. But the key is selectivity, because we are
00:34starting to see this dispersion with borrowers, and you have a lot of cross-currents going on,
00:40tariffs, geopolitics. There's no shortage of things that are rocking equity markets, and they do have
00:44their impact in credit, but on the most vulnerable borrowers in the space.
00:48So you mentioned selectivity, and in your notes you said it's a picker's market. So what separates
00:53the winners and the losers in the credit markets right now?
00:55We love this credit picker's market at Oaktree because it plays to our strengths, bottom-up,
00:59fundamental analysis, and being very disciplined in our underwriting. So we have elevated rates,
01:06and that has increased the interest debt burden for a number of borrowers, and so we have to be
01:11mindful of the tail. My colleagues on our opportunistic, distressed side of the business shared with me
01:17that there's about $200 billion of capital right now of borrowers that have yields over 15% are
01:24trading below 90 cents across around 250 borrowers. So that's really the next kind of opportunistic
01:30wave of opportunities that we'll see. But there's still, you know, solid, stable companies in the
01:36high-yield bond market that you can invest in and get, you know, a decent yield when you're putting
01:41together a portfolio today.
01:42I do wonder, though, with some of the AI names, again, not as dramatic as equities, but if we are
01:46starting to see some pushback, I was just looking, I did this on Aspie on the terminal or little AI,
01:51basically saying, look at all the hyperscalers and how their debt is trading. And among 32
01:55that have issued debt this year, all of them are trading below par. It's worse if you have,
02:00you know, a hundred-year debt, for example, or if you're priced in sterling, which Alphabet is.
02:04But I wonder if there is obviously some idiosyncratic things going on in the UK, but if there is
02:08starting to be some pushback against these hyperscalers and the amount of capex and the
02:12spending and the amount that they're tapping bond markets to do so.
02:15Yes. I mean, I think that the hyperscalers have issued so much debt and they are going to have
02:21to face higher financing costs. You're also starting to see some political pushback about
02:27where data centers are getting built. And you also still have to commercialize and show that
02:33you're turning in that capex spend into profit. And so I think you're right to point out that the
02:38market is starting to differentiate or a little bit, be a little bit more mindful of investing in
02:44the trend. You also talk about some building in the distress debt world. What will get us away from
02:49building to the real distress debt cycle? Yeah, the back the truck up moment isn't here yet. I think
02:56you need to continue to see elevated rates. I think increasing rates, if we do have worse really
03:03focused on inflation and rates go higher, that is going to put pressure on some borrowers. And we
03:08also have a maturity wall that's coming 2027, 2028. These were deals that got done kind of between
03:152020 to 2022 with around six year maturities. A number of these borrowers have done liability
03:21management exchanges that have kind of pushed the can down the road. But these are hard maturities
03:26coming up. And so I think that could create that distressed moment that we've been waiting for.
03:32Is it then alarming that energy prices are starting to rise again, considering that the war in the
03:36Middle East is yet again in a kinetic phase? Yes, I think just energy and commodity prices rising is
03:41generally challenging for a number of companies that are seeing their input costs increase. And the
03:47question will be, can they pass through those costs to their consumers? I really think that the lower
03:52end consumer is continuing to be punished by higher oil prices, higher cost of goods. They are already
03:58in a recession right now, while top earners are continuing to spend. If we do see equity market
04:04weakness, could they pull back on spending? That's a concern of ours as well, as we think about the
04:09overall health of the economy right now. Does the rebound and the tech change attractiveness of the credit
04:15at all? Or do you think that yields still make the case? I'd like to see, you know, a little
04:20bit more
04:21volatility and better pricing on some of these AI deals, at least before I get more interested on the credit
04:27side. I think it's great to participate in AI from an equity perspective. But in credit, we're capped on our
04:34upside. So for us, it's all about avoiding the losers, letting the winners take care of themselves, ensuring that
04:39we're very low, you know, on our default risk. By the way, you said dispersion is really starting to take
04:44hold in
04:44these credit markets. Do you see the same for things like AI infrastructure deals and the things that
04:48have been really hot in this market? We haven't seen it yet. But I think when you do have such
04:52significant growth in any market, you have a loosening of lending standards. Forget a little
04:58bit of the discipline involved and you'll get that dispersion later. So we're starting to see it now in
05:03private credit where there's been significant growth and you have, you know, a tail. So we're seeing it
05:08there now, but not yet. But by the way, when all the like first brands and tricolor things were
05:12happening, people were like, OK, you can put to side the fact that these were obvious frauds,
05:16but maybe it does signify that underwriting standards were getting loose. Do we not learn
05:21from that moment that there needs to be more due diligence and there needs to be tighter
05:24underwriting standards? Did we kind of put that to the wayside and just because competition has
05:29become so robust? Yeah, I think we did put it to the wayside, especially for something shiny and new
05:34that can continue to deliver those types of returns that individuals are looking for
05:38in their portfolios that maybe they had looked to private credit to deliver. And I think it's just
05:43systematic of the market. We go through cycles. We see kind of euphoria and then we see the
05:49consequences of that later down the road.
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