00:00We are coming out of this moment for credit where it's felt quite a variety of disruptions,
00:05and one of them has certainly been software. At one of Bloomberg's investor conferences,
00:10someone from Barclays basically said, prepare for war, but hope for peace when it came
00:15to software in credit. And I wonder where we are. Are we in a moment of peace or are we
00:19still
00:20preparing for war? It's too early to tell. We're not seeing any bad results from software companies
00:26unless they were already broken before AI. We are seeing a deceleration of growth. So I don't know,
00:31last quarter in our software portfolio, we were probably seeing 10% growth and now we're seeing
00:368% growth and you're seeing even slower growth in EBITDA. Why? Because our companies are investing
00:41in their AI solution, right? But the winners and losers on which software companies are going to
00:46figure out AI are yet to be known, right? We are probably two to three years out from knowing that
00:52at this point. One of the changes that has seemingly taken place is for these software
00:56companies that look to tap the debt markets again. There have been these individual instances of
01:01lenders extracting more concessions than normal. But is that the new normal now for software?
01:06It is. And it's just starting. It's sort of the most exciting thing we've had in spread
01:10in the BSL market in over two years. We have been bleeding spread, right? Repricings for two and a
01:17half years. And now there's a significant amount of companies that have near-term maturities. About
01:2325% of the loan market is coming due by the end of 2029. And a decent amount of that
01:29is software that
01:30has not dealt with their maturity. So what does that playbook look like? We've only started to see
01:34that in the last two to three months. And they're adding over 150 basis points of spread. They're
01:40tightening documents. That's the first time I've seen documents tightened in like a dozen years.
01:45Sometimes you're getting a partial pay down from junior capital and you're getting discount as
01:50well. So you're seeing this trend of software companies coming back, figuring out where the
01:55market is to price for longer dated software. How much of that is completely isolated to software
02:00versus credit markets of a whole? Are you seeing spreads widen anywhere else, tighter documentation
02:05anywhere else? It's mostly software, anything AI adjacent as well. So those are all adding spread.
02:12And then the newest thing in our market is a new category, which is data centers. We've only seen
02:17about $11 billion of loan issuance there. But that category is going to come with wider spread as well.
02:23That's also been remarkable, not only to see the amount, but the pace. I was hearing a conversation
02:28from someone who essentially said, the banks, when they issued debt, it was very regular and it was
02:33known. They'd issue earnings and then they'd be tapping the debt markets. With hyperscalers,
02:37it's completely different. They're just kind of coming as it goes as those capital needs come up. How does that
02:41change the dynamic to not only have a new category, but a category that's maybe a little bit more volatile
02:47in just
02:47when and how they issue debt? I think that's such a good point. The amount of debt that needs to
02:52be raised by
02:53hyperscalers and the entire ecosystem of data centers from GPUs to actual building and construction is really like
03:00something that we haven't seen before. And so, yes, you've seen spread widening from those hyperscalers
03:05year to date, but the amount of debt that has to come on the back end is immense. And you
03:10would think that
03:10this is another trend that suggests that we should see widening and spreads. So how would you judge the
03:15market's ability as it currently stands to underwrite risks around data centers? I think it's evolving. You
03:20don't know what the ultimate business models look like. You don't know who the winners and losers are. The
03:26counterparty risk. It's it's interesting to look at. But I think you have to have a healthy level of
03:31skepticism. Of course, we're looking at it all. But with the lens of what is the right way to
03:37underwrite a new category where the business models are not fully fleshed out yet? Well, and you have to
03:43deal with things like chip obsolescence, which was their kind of appreciation rate. Like what is the
03:48right? No one really knows yet. So what does that mean when no one knows? And at the same time,
03:52there'd be so
03:53much demand because these companies can come to the market and it is absorbed. I wonder at what point
03:57do you get or if we are seeing any pockets of it of pushback because you don't know what the
04:02business
04:02model will look like. I think at times we have seen pushback. But what's interesting is that the
04:07issuers are generally price agnostic. They have to get the financing done. So they're willing to give on
04:13terms. They're willing to give on spread to get to get the financing raised. What would happen if any of
04:19the
04:19issues that are currently bubbling up? Any sort of slowing, be it from the LLM CEOs warning about the
04:25wire saying we need to slow down, maybe concerns about the return on capital. If any of that causes
04:29a slowdown in issuance, what does that do to the loan markets that are seeing just this corner be so
04:34robust when it comes to issuance? So the loan market is just starting to see the data center
04:40issuance come in. It started with IG. It's in private markets. It's in high yield. And it's coming into
04:45the loan market. I think that we are going to have to continue to see this issuance and it is
04:51going to be
04:51priced. Like we're going to find the price where it clears. How does the forward count calendar look in terms
04:56of pipeline? You know, it's the busiest that it's been all year. And it's not just it's not really data
05:00centers. Those are deals that don't really show up in the pipeline, if that makes sense. We're seeing a lot
05:06of
05:06more take privates, a lot more dividend deals, direct lending deals going into BSL markets. And so we're seeing
05:13over $100 billion forward calendar today. That last one, the dynamic, what is that of looking at more
05:19direct lending going into BSL? You know, I think a lot of companies have grown and graduated out of
05:24the direct lending space and can access cheaper capital in the BSL market. That's interesting.
05:30What about just plain old M&A, LBOs? What does issuance look like around there? It's picking up. I'd say
05:36that we're seeing less sponsor to sponsor transactions, but we're seeing take privates again and corporate
05:41transactions as well. Do you expect the sponsor backed market to pick up? It seems like there's
05:47more pickup, but we're starting at a pretty low level. So, yes, there's more announcements almost
05:52almost every day. But a lot of that is public to private. So in this environment, again, where more
05:57supply is coming up, the pipeline looks robust, spreads are relatively well behaved. Is there anything
06:02that concerns you that would cause spread widening to happen at moment again beyond software, because
06:08that's, as you pointed out, it's starting to happen. But in wider markets, what would really cause
06:11that mechanism to occur? Yeah, I think that overall our companies are doing well. We actually have the
06:17highest growth rate in our portfolio of 550 companies that we've seen in three years, both on
06:22sales and EBITDA and the highest percent of our companies producing cash. So the corporate
06:28fundamental backdrop feels good. Laurence, can I just stay on that point right now? Because I think that
06:32would surprise a lot of people when they just read headlines about like oil prices at 100, inflation is still
06:37a
06:37problem. What about it is? What about this environment creates that, that you can see such robust growth?
06:42Part of its industry dependent, like we're seeing really strong results at a certain industries like
06:48industrials, oil and gas, financials, health care. Of course, there's some weaker industries as well. And
06:54we're seeing the year over year growth sort of lapse some of those issues that they were having with
06:59inflationary pressures. So does that mean that going for the opportunity set is still pretty wide for you?
07:04Yeah, I would, I would say so. I mean, today about 40% of loans are trading under par, sorry,
07:09trading over par. But we are seeing more, more divergence in the rest of the, the rest of the
07:15loan pricing and it creates opportunity. So one thing that I would love to ask you about, there was
07:19this piece of research that was published this year, and it basically found that sponsors with
07:25aggressive reputations and distress pay, they point out a 60 basis point premium on loans. I should say,
07:30Carlisle was not named as one of the aggressive ones. But I wonder if you actively see that dynamic
07:35in markets of like a reputation of a firm will cause basically wider spreads for them.
07:40I think so. And I think it's evolving. What I'd say, the reason why you're seeing it right now is
07:45over
07:45the last three years, there's been a pickup of what's called LMEs. These are out of court
07:50restructurings. It used to be that most bankruptcies would happen in court. Now in our market, they happen out of
07:56court.
07:56And the sponsors who have been the most aggressive on those out of court restructurings seem to be paying
08:04more on their, their new loans. It pays to be a little bit friendly, maybe.
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