- 23 minutes ago
Category
🗞
NewsTranscript
00:00Joining us right now to break it all down is Bruce Richards. He's managing partner and head of CBC Marathon.
00:05Bruce, great to see you again.
00:06Good to see you, Ray.
00:06I know we've talked a lot ad nauseum about sort of the software and technology trade,
00:10but when you take a look at some of the default rates, at least the published default rates that we
00:14know,
00:14and you also take a look at the appetite that we continue to see by investors,
00:18both in public markets, private markets, equities, and debt,
00:21what does that tell you right now about the state of that technology trade?
00:25Technology trade is just fine.
00:27So there's very nuanced areas of technology.
00:31So if you look at the IG offtake and the technology of data centers and building out all that compute
00:38with IG as an offtake,
00:40you can buy some really attractive spreads.
00:42Those spreads started about 50 basis points behind where the issuer could issue,
00:46and now they're back to 150, in some cases 200 base points spread behind.
00:51And I think there's a wall of money coming in.
00:53First, the level set, with rates being higher for longer, which we are now, and based upon the Fed's latest
01:02move,
01:02you get paid really good returns for IG and non-IG, better returns, despite the spreads, better returns than you
01:10have in some time.
01:10And so we're super bullish on where rates have settled into, and we think that's very attractive.
01:16In the non-IG space, the high-yield space, it's a little bit more complicated.
01:22If you have a high-yield issuer, that spread could have widened as much as 3 or 350 back from
01:29where the comparable rating is,
01:31because there's not a completed project necessarily, where the power's in place, where you have a powered shell,
01:36and where the project potentially could be completed, and you have a non-IG company as your counterparty risk.
01:44So you have to be very specific what deals you'll do and what deals you won't do.
01:48So here's what I'd say.
01:50IG, buy it.
01:52If you have the capital to buy it, because you're going to pay the really good risk-adjusted return.
01:57Non-IG, make sure it's a completed project where you have a good counterparty credit,
02:03and it's a powered shell that's up and operational.
02:07And depending upon the credit, it could be a good investment.
02:09But unless it's up and operational, you have to take a pause,
02:13because there are a lot of things that can go wrong with a non-IG credit.
02:17I want to talk a little bit more about yields, though, in this context.
02:20Let's go back a week with the Fed meeting and the rate hike that everybody knew was coming.
02:25But maybe some folks may be a little surprised at the tone of Kevin Warsh
02:29that seemed to suggest he's open to more rate hikes if it means getting inflation down.
02:33How does that change, if at all, what you're looking at and what's attractive
02:37if we are indeed in a significantly higher for longer environment?
02:40So, number one, let's just look at the Fed.
02:43The Fed, the ECB, the Bank of Japan all raise rates.
02:46Curiously, the one that didn't was the Bank of England.
02:49And when asked why, they said because they didn't see the second-order effect
02:54hitting inflation from the higher energy prices.
02:56And we know, Remain, we know that higher energy prices,
03:00there's nothing the Fed can do to control that.
03:02The only thing that control that is geopolitics and opening this trade and having oil flow again.
03:07And so there's not much the Fed can do.
03:09So was the Fed wrong to raise rates?
03:11So the Fed was not wrong to raise rates.
03:13They were right to raise rates in this case, but there's not much they can do.
03:16And the reason why they were right is because they wanted to send a loud message to the marketplace
03:22that they're going to not let inflation get out of control like what happened in 2022,
03:26and they're putting their foot on the inflation break.
03:30Having said that, I think that inflation is being driven, and higher rates, rather,
03:35are being driven by all this huge supply.
03:37We talked about, you know, the fund, you know, data centers, the big growth that we see,
03:41the big deficits that we have here in this country, as well as this higher level of inflation.
03:47So the curious question is, is the Fed now one and done if the administration and Jerry Kushner
03:55and, you know, and the president, Wyckoff, are all having discussions, you know, behind the scenes,
04:01and we'll have to see how that all plays out.
04:05But if there's a deal to be had here and oil comes back down, are we one and done?
04:11Because the Fed never really raises rates and one and done.
04:14They did it in 1997, one time in the last 50 years, under the Volcker administration,
04:18where they're one and done.
04:19So, but to your question, higher rates is really good for us, you know, lenders,
04:26is really good for us borrowers, us investors, whether it's, you know,
04:32the institutional money that we're investing on behalf of the insurance money,
04:36the, you know, the wealth channels.
04:38It's a really good setup for us to earn a really high rate of return.
04:41For the borrowers, it depends who you are.
04:45Well, that's what I'm curious about, because there's got to be a balance, right?
04:48At some point, those rates, I mean, great if you're buying into those rates,
04:52but at what point, what's the threshold where that starts to look like a risk,
04:55meaning like economic risk or even economic risk?
04:59Well, it's a K-shaped economy, right?
05:00And so for the highly levered consumers that, you know,
05:03this is a big interest expense for them, they're hurt.
05:06But for companies, there's roughly 10% of the companies
05:09that are burning cash flow in order to service debt.
05:12And so FITS has the number right at 6.3%,
05:14and we think that's, you know, exactly where we are.
05:18Companies that have to move to a bad pick, they have to, they can't pay your interest,
05:22or companies that have to amend out their, or extend out their maturities
05:26because they can't pay your principal.
05:28And it's not technically a default as being recorded by, you know,
05:32a bankruptcy or some LME exercise,
05:35but FITS is calling that an effective default of 6.2%.
05:38We think that number's right because the cohort is 10% of the companies that are burning cash
05:44and that are in that company, which means 90% of the companies are just doing fine
05:49because earnings are going up and revenues are strong and the economy's strong.
05:53You know, GDP's growing this quarter, perhaps at 5% according to the Latin Fed.
05:57That's 8% nominal growth.
05:59This is a strong economy with strong earnings,
06:01but there's a certain cohort of borrowers that are struggling with these higher rates
06:06because we're in a ZERP world, now we're in a higher rate world.
06:09So for the investors like us, these higher rates,
06:12we're going to make a really attractive investment return.
06:14And for the borrowers that are too well levered,
06:18and FITS wrote about that in the report, I posted about that recently,
06:23it's going to result in, we think, higher default rates going forward.
06:26All right, well, I just want to be clear before we go any further.
06:29You're not expecting any real material economic weakness, right?
06:32No recession, nothing even close to it.
06:34Not at all.
06:35And look at the markets.
06:36The commodity markets aren't telling you that.
06:38The equity markets aren't telling you that.
06:40And rates aren't telling you that.
06:41They're telling you it's all growth.
06:42And credit right now, the spread volatility is the lowest that we've seen in really a generation.
06:48We haven't had much spread volatility.
06:50So the noise isn't really with us.
06:53All the action is with, we're in the middle.
06:55All the action is with equities, commodities, and rates.
07:00And credit actually is a very stable story.
07:02And what you're getting is a really high return based upon where the base rate is
07:07and based upon the return that you can earn.
07:09We've seen a lot of investors, particularly in your space,
07:12obviously mainly sort of staying in that lane of collateral-backed stuff.
07:16And I am curious that in that lane, what's more attractive to you?
07:21Is it collateral related to the GPUs and data centers?
07:24Is it collateral related to power?
07:25Or is it something completely unrelated to AI, like aircraft, et cetera?
07:29I mean, what's most attractive to you?
07:31The theme is HALO, hard assets that have low obsolescence.
07:34And so whether it's a GPU financing or financing the transformer or the turbine,
07:41or whether it's outside of a data center, and you're talking about financing property,
07:46plant, equipment, aircraft, maritime assets, on-ground logistics like railcar,
07:53it's all attractive to us at the right LTV attachment point, which for us is 65% to 75%
08:00LTV
08:01attachment point, and the right counterparty credit.
08:04We are in a very safe rate of return on that, and we're leaning very heavily into that.
08:08And there's billions and trillions of opportunity set for this ABL halo sector,
08:16because it's all about reindustrialization, building out all the plant and equipment,
08:21all the data centers, all the property that gets financed, everything that needs to be financed in this
08:25country and with these companies, with this growing economy that we have.
08:30You said this country.
08:30Is this just a U.S. story, or is there an ABL opportunity?
08:33It's a global story.
08:34Yeah.
08:34And we're in the global market, so we're also very active in Europe.
08:38We're very active around the globe.
08:41But, you know, the U.S. is, of course, the biggest economy in the world and is the epicenter
08:46of where AI and data centers are being built.
08:50It's the fastest growth economy that we've seen off of a big base number of a $31 trillion GDP.
08:56But I've heard some investors, they started to talk about, certainly on a relative basis,
09:00they've started to look more towards Europe and for the AI trade,
09:02because maybe that offers a little bit more growth than some of the companies here
09:05that have already kind of, you know, already delivered some big returns.
09:08You're starting to see a lot of activity in the Middle East now with building data centers as well.
09:13Do you see those as attractive areas, maybe potentially, that could actually compete on a return basis?
09:18We want an IG offtake.
09:20And so you show me the IG companies that are there.
09:23And so if an IG company here is building there or you have an IG company in Europe that's building
09:31in Europe,
09:31then absolutely the case.
09:34But if it's try to stand it up, require financing from us, we're not willing to take that risk.
09:41On the land speculation, on building the shell and deciding, determining whether you can get the power
09:47and then supplying the GPUs and all it takes to produce that compute.
09:54You know, the price of compute is going up, but the price of tokens are going down.
09:59And that's a really interesting dynamic.
10:01It used to be for a gigawatt of a data center power that you could produce it or manufacture it
10:09for $40 billion.
10:11Now the price is closer to $60 billion.
10:12It's actually gone up by about 50%.
10:14Meanwhile, the price of tokens have gone down.
10:17It's a very interesting dynamic because only the most well-capitalized companies can then spend that kind of money off
10:26of free cash flow,
10:27have the equity to do it, be able to raise the financing to build it.
10:30And meanwhile, the price of tokens and the demand for compute is going up, which is a very, very powerful
10:38dynamic.
10:39Yeah.
10:39We only have a couple minutes left, but I do just want to ask you a little bit just about
10:42your business overall.
10:43Obviously, the CVC Marathon deal closed a couple of months ago in July, I think.
10:48Give me a sense here.
10:49I mean, how's that integration going?
10:50Have you guys sort of launched any new products yet under this new umbrella?
10:55CVC is one of the great private equity firms in the world.
10:59Great credit business, great infrastructure business, great secondaries business, and first and foremost, an amazing private equity business.
11:06And Marathon is one of the great public and private credit managers in the world.
11:12And so combining forces together, the synergy that's created, one plus one, we think, is equal to something more than
11:19two, to be able to deliver to our clients great products, attractive returns, and the synergies that come with one
11:27firm and putting the resources together.
11:30So to answer the question in a nutshell, it's going swimily well.
11:36It's a fantastic merger and acquisition by a brilliant private equity firm.
11:41And we're very happy with the progress that's been made to date.
11:45All right.
11:45Well, they obviously got a brilliant man out of you.
11:47I always appreciate it.
11:48Bruce Richards, managing partner and head of CVC Marathon.
11:51Bruce Richards, managing partner and head of CVC Marathon, managing partner and head of CVC Marathon, managing partner and head
11:52of CVC Marathon.
Comments