Transcription
It's changed massively over the 30 years I've been in it, right? It used to be boring, you. When you went to a commercial bank, you made a loan. Geldern. That was then.
Then in the 1990s, loans started to trade, so banks, investment banks, could arrange and sell it off to non-banks. They traded them. Then in 2008, you got a huge amount of influx of capital doing private credit, saying, "Hey, you could come directly to us. A fund will lend you the money. You don't need a bank."
And then you had in 2015, liability management worldwide. The press loves credit on credit. The violence that changed the whole dynamic of the lending scene was secured. It used to be with the Three Musketeers. If Tom owns it, that you own it. I own it. Saved that same company. We're up for one one full with the same. All of a sudden, it changed. And certain investors in the same exact destiny instrument end up doing better than on the debt instruments.
So what I would say is, when I started in the business, senior secured lending was boring. I was boring. It was imperfect. And over time, it became interesting and exciting. I get my calling. You know, folks, I got to cut to the chase here. I mean, you know, "Margin Call" with Jeremy Irons sitting at the end of the table. Peter Sullivan, uh, was the character Zach Quinto doing it? The junior risk analyst in "Margin Call" from years ago. Hmm. How many people in your racket really aren't all that smart? Because your book is a tough read, and it makes them smarter. There's a lot of pretenders in credit, aren't there?
No. You know, one. I get myself in trouble if I said there's a lot of pretenders in credit. No, I think people evolved. I think historically, being in credit, you were a second-class citizen because it wasn't as sexy, and it was like, "Hey, all you have to do is, can I get paid back? Yes or no?" And it was viewed as a lesser business than, let's say, equity. As equities got more and more efficient and then started to trade as distressed debt, buying someone else's problem at significantly below par, where you can have downside protection, but all the upside of converting some of that debt potentially into equity. All of a sudden, people got a lot, lot more sophisticated.
And the reason I wrote the book is for the younger professionals. There was no book. You could go on Amazon, type "How do I invest in equities?" Thousands of books. "How do I invest in senior secured non-investment grade distressed debt?" Zero books. So I wrote it. I got a monopoly. I want to monetize that monopoly while it's still there. And I take a little offense. Tom and I love you. It's an easy read. I wrote this book. So, my goal was, you read it and say, "Holy crap, I learned a lot, but that wasn't painful." So every technical concept, like a fraudulent conveyance, I ended up with an interesting story, like Caesar's big fight over moving assets. Accusations of a fraudulent conveyance. So I tried to teach all of the technicals that you need to be a credit investor, whether it's performing well or distressed, but then use real companies to illustrate it and then tell a war story. So you say, "Holy cow, that was in that paint farm."
What's your view on private credit? If it weren't for the war in Iran, I think this market would be talking about private credit a lot more. How do you view it? Yeah, look, private credit historically has been a phenomenal asset class. Your lending senior secured, you put a 1-to-1 debt-to-equity ratio, and you're getting double-digit yields with downside protection. So it's a phenomenal asset class. Now, basically, I can tell you, if you're earning excess returns to the perceived risk, a lot of capital flows in. And that's what happened. A ton of capital flowed in. I just wrote an article on how do I... I don't know what I said, because what's going to happen is this: there's just going to be a dispersion of returns. The players that have been in it, lived through cycles, got punched in the face, and always learned from it. I'm going to stay disciplined. They're not going to get involved in race-to-the-bottom deals. And but I think the asset class is great if done well. I think some, some deals that got done, boy, bad deals. And if you did too many of them, you're going to have a problem. But I love this label, "Wall Street Worldwide, The Credit Investors Handbook." Michael, get it with us. We're going to continue. And we're then the professor's definitive here with a guy named Solomon of Goldman Sachs. Writing a foreword is... well, I want you to talk about the goodwill equity deal yesterday from Google Original, large in that. But talk about the, what the demand, the demand for the hyper-scalar bond offerings. What does it signal to you?
Well, look, a ton of capital is getting raised for data scientists. There's going to be equity and debt. As in every fundraising, it's an interest to the debt plight. The goal of the debt investor is to get equity-like returns with debt-like, uh, a downside. Now, there's a question what some of these debt deals, you're getting debt returns with equity downside, which is the polar opposite of what you want. Of what you want. But I break these into three types. This. The data centers with a long-term investment-grade lease. Lowest risk. But you got to do your work. One out there. Cancellation clauses in those lease sets. Because you might think, "Oh, I'm taking another risk." And then all of a sudden, you find out the contract could get canceled after two years if certain events happen. So you kind of go in, you're gonna make sure, or you have the right legal, right. The city. Big companies have massive legal entities. You might have big name debts, guarantee a loan that doesn't have the corporate guarantee. So you got to do a lot of work. And that's one end of the spectrum. Lower risk. It's got a contract. And then there's the ones that do or build it. And they would come. And that's a higher risk. But the everything is going to get financed with debt and equity. First Brands, tell us about First Brands and how that might have been a teaching tool for credit investors. Like I'm a professor. You see, this said I teach at Columbia Business School, the MBAs, and then for them, the undergrads. And I tell every student, learn from mistakes. That's how you learn. Best way. Learn from someone else's mistakes. First Brands, and I, you know, I wrote an article on that. It had five red flags. Now, a red flag doesn't mean I'm not going to do the deal. A red flag means I got to dig deeper. And when you went into the first one, syndicate a loan, you couldn't do deeper. And you had to make a decision. Just because everyone else is doing it, should I go? And I write about that. I'm like, "Oh, I got to get this." And I just think it's too, too important.
There's always leverage within the system. Where's the leverage now, or the implied leverage? Well, I think, and I've heard some people have said, is private is going to be the next catalyst for a downturn. I think it's very misunderstood. When you look at it, it is a private equity. Let's use some private equity as an example. They're going to buy a company. The private credit investors are usually lending about 50% loan to value. Then you have, they go to the banks. The banks lend them 50% loan to value on what their debt was. So you got a ton of question. The companies got a decrease in value by half. Private equity loses money. The are that hold the dogs in. Then it's kind of reduced by another half for the banks. And the banks are, of course, collateralized. So I look at it and say, look, from the stability of the financial markets, this is very low risk for banks that are funded.