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Thank you everyone for joining for the global credit panel . We're going to try to cover as much as we can in about twenty five minutes and to kick it off. Let's just talk a little bit about distressed distressed credit and how since all of you are very experienced in that in that strategy and how it did it was the top performing hedge fund strategy last year of of all of them and yet still about 10 billion dollars flowed out of the strategy. And when you look at some some numbers that are provided by frequent it looks like the the U.S. distressed managers are still sitting on about 60 billion dollars of dry powder. So with that in mind just right off the bat let's discuss. When are we going to see the next distress Cycle Start. What's it going to look like where you're going to see the first cracks and what are the opportunities going to be let's meet Bruce. Yeah. About 14 and a half billion dollars and a lot of that's in distressed credit. So let's keep it off at first. What we haven't seen outflows So let's first second in terms of next year stress cycle. We don't see it happening this year and probably year year and a half El back in 2000 and a high yield lover's lane markers round to point to five trillion and there's three hundred billion that defaulted. And this time around if when we get there we're right around two point seventy two point eight trillion so the market's a bit bigger about 20 25 percent bigger than it was back then. And so we think a similar number close to three hundred billion will make when we get there for the time being right now in the next twelve months. You're right there's a lot of capital out there. We think the numbers around 50 to 75 billion of capital it's available unspent capital for distressed and the whole entirety of the distressed market. U.S. corporate trash market today is around 55 billion so there's a lot of unspent money that's looking for opportunity that doesn't have a home that know represents a lot more demand than there is supply at the current juncture. But what's the how do you maybe you can tell us a little about what what is the next distress cycle going to look like as opposed to the ones that we've seen in the past and where are we going to we're going to see those this cracks emerge when we get to know that now is the time to jump in. Yeah I mean look catch you with spreads and yields at cyclical lows aggregate leverage ratios approaching cyclical highs. This is an easy market to hate. The fact is is I'm not sure we got enough raw material of distress out there to trigger the next wave of defaults. You know we may need a gestation period as Bruce said 12 to 18 months. Well we need to see is a protracted period of increasingly poor underwriting decisions poor credit decisions and for that cohort of ill conceived debt to ripen and we start triggering some defaults that will cause the whole market to step back. Risk aversion steps in. It starts bleeding into higher quality high yield then we get a full blown distress cycle. But I think in terms of what may trigger it I think what we need is you know we're trying to predict a forest fire here. And the question is do we have enough dry tinder. I don't think so I think we need this cycle to bake you know maybe for another 12 to 18 months and it could be anyone's guess as to where that could crop up and it's auto loans or across the board and what we really need is a recession or a much much lower as opposed to improving corporate earnings so that deepen our research. I think we were we're sowing the seeds. I think that you know try Tim we're talking about there's a lot of debt that shouldn't be underwritten today that's getting underwritten the markets are very much open. And so it's building and what you need is an economic downturn. I'd also say what's different this time than last time is going to recoveries recoveries going to be substantially lower because of all the assets trip and is going on because you know the fact that covenants aren't tight and so companies have that much longer to kind of bleed the value in the companies before they have to file and all the mass debt and subordinated debt this time around. That's loaded up in the system will lead to I think a cycle with much lower recoveries than what we saw the last time around. But your catalysts question I think is a really important one and I think it's one a lot of people are wrestling with and one of the underlying culprits I think for the the behavior you're describing in terms of lax underwriting standards and some excesses in what people are doing from our credit investing perspective is born of this dichotomy of you've got a ninety five month old recovery. And so there's an instinctual perspective we all have that recovery should just die of old age at some point without any real tangible catalysts the housing market doesn't see an extended consumer feels like they're OK so what's it going to be. And one of the things we're spending time thinking about how to hedge across our broader business is for lack of a better word radical kind of leadership volatility that the thing that seems most likely in the near-term because all these traditional macro indicators actually could cause one to be fairly sanguine about the world. Is there some kind of geopolitical driver event that's a shock to the system. And I think given some of the behavior not just in the US but more broadly in terms of some of the leadership trends you're seeing globally that feels like a not improbable event. And you know while we're on it. In the meantime not you have you help oversee 40 billion dollars in credit assets. Half of that between public markets half of it's in private. Can you talk a little bit of what you're doing and what other hedge fund type structures have to. Are waiting and seeing or shorting. What is your platform allowing you to put money to work right now in this environment . Well that's a first of all. There's a word that I would use to describe general approach. It's it's circumspection. This is a market that demands caution for all the reasons that people been talking about I think all day. Just from reading the Bloomberg headlines when I was back in the office. But that doesn't mean it's devoid of opportunity and when we try to do is look across the continuum of what we do from an asset perspective and a liquidity perspective and I think the watchwords for us are illiquidity. There's value in a liquidity premium illiquidity today complexity. There's value in complexity. There are some sectors that they're experiencing a distress cycle today. Health healthcare is an example. Retail is an example retail because of things that are happening today health care. I think on an anticipatory basis as people look at potential regulatory and structural changes in the health care market coming down the road. And then there's a broader thematic of going where the banks aren't. And that's that's a notion that's gotten a lot of play I think it's been overhyped in some context. But there is our context in which we're seeing it create really phenomenal opportunities from a credit investing perspective what we call principle finance which is really asset backed finance. It could be aircraft Bruce and I were talking about that earlier. It could be financial assets like certain types of mortgage loans. We're continuing to see what we think is not only good relative value in a challenging market but good absolute value as we think about how we're being compensated over a cycle for the risks that we're taking IBEX that we're seeing the best risk award happens to be an asset based so it's aircraft leases it's real estate loans you know healthcare senior secured what we're not seeing good value in is actually kind of the middle market direct lending business where if you look back at the vintage of 2011 12 13 that three year period of time there's around 20 billion of capital that was raised in that four year period of time in the last four years there's been about 130 billion of capital raised for direct lending in the shadow banking system around you know six times the amount. And so we think the return profile will come down from around twelve for direct lending senior unsecured bank loans to middle market companies to middle market companies you know tranche hundred two hundred million dollar type deals to something run 8 ish camp. And given the liquidity you're giving up in some of these term fund funds not sure whether that's the right risk reward. Having said that in some of the senior secured asset based lending markets we're still seeing very attractive returns. Well so let's allow net in to defend yourself in because KKR has 8 billion dollars in direct lending assets and something just very keen and interested as we're seeing deregulation or this alleged deregulation that may may occur and unwinding of Dodd-Frank what does that mean and given much thought to what that could potentially mean to all the opportunities in the direct lending space which your people have really gotten involved in. Yeah. First of all let me defend myself. CAC and then I'll address your question but I'm going to defend myself unfortunately by mostly agreeing with what Bruce says. But I think the nuance is in direct lending means a lot of different things. And if you look at the quantum of capital is quite significant that's been raised for direct lending there's no doubt about that. The interesting thing is the the quantum is in which individually it's been raised are actually in these relatively narrow bands of call 750 million to global news 24 hours a day on air and @TicToc on Twitter. powered by more than 2700 journalists and analysts in more than 120 countries. this is Bloomberg billion a half dollar buying power vehicles which means across a diversified portfolio you're doing kind of 50 to 100 million dollar tranches. The average even in the borrower base that we're lending to is over 80 million dollars. And so we've seen this kind of niche in what I would call the upper middle market which for a number of reasons we find I think more interesting from a risk adjusted return perspective. You're not the least of which some of these concerns about where we are in the cycle the larger companies tend to be more resilient in a downturn. The regulatory piece of it this is a question we've gotten from a lot of our investors who've been giving us quite a bit of capital for direct lending saying there is this regulatory regime under the Trump administration really going to obviate what had been quite an interesting opportunity and I think our definitive answer to that is no it's not for a number of reasons. You know first of all the opportunity that's presented itself for direct lending is not just a regulatory driven phenomenon it's a capital driven phenomenon the banks were 30 times leveraged in the US today they're 10 times leverage that's the equivalent of taking like six Morgan Stanley's out of the market just in terms of that financial buying power. They're just a capital scarcity element to the equation. The second is some of the regulatory changes are not embedded into in Dodd-Frank. So for instance for us at this larger end of the spectrum where we've played the leverage lending guidelines which are a set of Fed rules have been a big driver of opportunity for us. That doesn't go away. Under Dodd-Frank and I think the last thing is lot of companies are spot financial sponsors and their companies have become habituated to using this kind of private capital. It tends to be more reliable to the banking than the traditional investment banks. We tend to be more rational counterparty is when things aren't going well and they were much more consistent in how we approach things. And so it's not just the cost of capital and availability of capital question it's a client service question and the value proposition that we're providing to these companies. But if it's a if it's a capital A question of capital and supply and demand and then the banks come in but there's still room for. For folks like you does that just leave you with the riskiest digest stuff. Yeah. So that's certainly a risk. But I think it comes back to the last point I made which is our our role in the market is not just one for filling a capital gap. That's part of it. I think we're providing a differentiated and better service to the companies that we're financing and the financial sponsors that own them than the traditional investment banks are today. So you'll be competing with them directly for in certain cases you know that you have sponsors who have access to a capital markets driven bank underwritten solution and will select a slightly more expensive private solution because they appreciate the other attributes of our offering. And so if you do have to be in cash right or you have to. You don't have the opportunities to put your money to work right now what are some of the opportunities that you find as that are a good cash alternative higher returning for someone like you. Given the roadmap that's being described for the credit cycle here where we may have another year or two of this frustrating environment I think if you can find credit situations that have very defined horizons whether it's around a refinancing event whether it's a hard catalyst in many event companies that are triggering changing control provisions asset sales that are being forced to be used to retire debt. You can identify these idiosyncratic situations where you know you're going to get your money back in 12 months or 18 months and you can clip 4 percent which doesn't sound like much but I think the name of the game here if you're having to invest in public markets in credit is to clip that 4 percent bide your time take very low duration think minimal credit risk clip your 4 percent and wait for a target rich opportunity set. To me that's the holy grail is to build that kind of a portfolio. And just talking about we mentioned earlier how did the distressed strategy perform last year. Very very well. And of course a lot of that was on the back of gains in energy and but now if you look at how energy debt high yield energy debt has performed this year it's been pretty slow tapering off it's not as great . So if a lot of the energy credit trade is already played out where do you go from here. How are you. How are you each playing energy at this point because I know you all you all dabble. I'll take a crack at that that in February 2016 yields on high yield energy bonds for 20 percent and then around 6 percent today. So the idea of a wholesale beta play in energy is gone right. The easy trade is done. And the fact is not to sound ungrateful because we made a lot of money in energy last year. The fact is that these businesses are not great businesses to lend money to for seven or 10 years that these are price takers. By definition these companies have low returns on capital depleting assets minimal free cash flow. These are not the kinds of companies that you necessarily want to lay out seven to 10 year bets today at par with a five or six percent coupon. So I think to play energy today again it goes back to finding those situations where companies had this near brush with death and are prompted to refinance bonds deleverage play these refinancing or liability management situations in the next 12 to 24 months and try to make money from these event driven opportunities rather than make a wholesale fresh bet on energy apart. It's a short term highly profitable some of the high yield debt. Exactly right. Some of the high yield that's just gotten to be too tight here. Risk reward. And so the high yield index is something like five and three quarters looks mastering and the energy complex of that index is about eighty five basis points cheap to that. And so a that spreads come rip roaring in. It's just too low for yield for a number of companies. In fact if you look at actual PE which is the ETF on like actually the ETF on that gives equal weightings to a lot of these high yield companies as it does to Exxon and Chevron and so forth. Look at that equity index or that equity ETF it's down around 25 percent year to date with the S&P being up 7 . It's down 25 percent. Meanwhile high yield is up around 2 to 3 percent high yield energy bonds. And so this is setting up for us to be much more balanced than we were last year or plateful alongside that actually allows us to pick some shorts on the energy side high Jihye Lee bonds. Can you give me a short. Of course not. Because we're in the process of having just put some on adding to those shorts actually. But there can in terms of like the size of the company or they're just not profit . They're just this is a typical single B double B credit and the energy high yield complex that have a nice nice capital short structures where you can actually take a short position so you're shorting the debt right were you doing on the equity side . That's not not much more side. OK. We we're taking a little bit of a different approach and I think this is embedded in Bruce's short thesis which is the securities prices travelled in a totally direction than the underlying earnings of these companies. So yes there's been some stabilization in oil price . But many of these companies whether they be oil producers or in oilfield services or offshore have not seen a recovery in earnings and many of them have real fundamental cash issues and I think there's volatility in the market. While the current face of high yield bonds have recovered quite a bit you haven't seen a new issue market come back a real scale for a lot of these companies and so there are private capital needs and one of the things that we think is critical in this sector is a lot of value can be destroyed or created in capital allocation decisions and one of the things we like about coming and doing private deals with some of these companies is you can negotiate controls over capital expenditure and allocation as part of that . So that's our approach generally has been much more of private markets type of approach. And if KKR can do that senior secured asset based coverage. Well you know well over assets to date a couple of times over I mean that's a great loan to make. But you know earlier comment last year debt was too cheap relative to equity. It's come rip roaring back and now it's actually swung the other way with WTI being down around 12 to 14 percent year to date. Equities is feeling that a lot more than debt and now debt's gotten to be a little bit too rich. Certainly for some of these companies it's an earnings story not really a debt story but for some of these companies it's actually debt story the ability to service that debt later on at lower dollar price of oil. And so you know that kind of optionality to five dollars lower in oil prices could cause a big decline for some of these bonds. And if I forgot to ask you Do you have a specific example that you had in mind of of how to make a quick profit on a short term loan or a short term obligation with some of these energy bonds. Can I say we're accumulating and fast . I'm going to give you one good example of what I'm talking about is it's a Canadian company of course in some pain but it's a it's a 10 billion dollar enterprise. Seven generations is a terrific energy company and they've got an 18 quarter percent bond that is due in 2020 trading around 1 0 4 right around the call price. This company could probably print a new issue at five and a half five and three quarters percent. This one should and will be called but in the interim if you own this bond You're clipping eight and a quarter. OK. And you can find a number of these situations where for whatever reason it's taking a little bit longer for companies to manage these liabilities optimally. And if you can accumulate these positions to me that's one of the easiest ways to try to make money on alongside in the energy space right now. Moving back we briefly briefly touch on regulation and what we can and what you're expecting and that you mentioned health care but just broadly have any of you made any new meaningful changes to your book as a result of the political and economic agenda of the new administration. And if so how. I'm not going to talk a little bit about health care. Health care would be the prime example for us. It's a sector we've been investing in as a firm for a long time both in private equity and independent credit and we we like a lot and we feel like we've got a pretty good understanding. And that's one where there actually haven't been any regulatory changes that have been made yet. There's the prospective changes that have been discussed in the market causing relatively violent swings in equity prices and credit prices. And we think that affords a lot of opportunity because the hospital space is a specific one and I'll give you a name because you want to names you get a new Quorum Health care as an example to health care. It's a hospital company it was a spin out of another distressed structure that we had followed for a long time. They're assets that we've known quite well over a number of different iterations and they have the high yield bonds that have fluctuated wildly in trading price for a number of reasons including the prospect of changes to the Affordable Care Act. We think those swings in either direction have been much more than they should be based on just what the real fundamental earnings power of the company will be and that's a great opportunity for us. We're a large holder of those bonds . What's the specific wager there though in terms of of potential changes in regulation. I think people are concerned that if a significant number of people who currently have health insurance under the ACA lose that health insurance hospitals are going to bear the brunt of that financially because hospitals provide care to people who come into the emergency room. The question is whether they get paid for it or not. So there is a concern that there was an earnings bump that came with the coverage extension under the ACA that would go away. But if you really do the work hospital by hospital state by state and you can do this through filings at all hospitals public or private are required to make. You can really get a sense of what that impact would be and we think that Mark it has been excessive in punishing these companies for how they might be affected. So are you taking a view there on whether or not reform will be passed or are you just saying regardless of whether or not. So we won't invest really ever based on a binary outcome associated with a regulatory outcome that we can't control or predict more than one. I remember talking to our team about Greek bonds and this contract which said I'm not going to make an investment based on who read the FTSE better this morning. That's just really tough . And so what we try to do is position ourself for optionality though to say we think our investment is covered in a case where there is change that results in an retraction of coverage for some of this population. But if there isn't then you know the earnings power will be that much greater and the investment will be that much better for us so that you've got baseline capital protection in the bad outcome and then you've got the opportunity for asymmetric upside and just for the record we did pass on those Greek bonds. They're now trading at to yield . We're very very happy because they're trading in double digits before so it's turned out to be the best sovereign investment that we've made in years. It looks like we're out of time but just real quick who thinks Banco Popular is a big deal and does somebody want to very very briefly explain what kind of opportunities have emerged for folks like you in this it's not something so big deal. We're talking about this the three of us you know back in the prep room in the green room and it came out so multi multi reasons. Number one it's the first time the ECB really stepped in and forced the bank into not liquidation not good bank bad bank but old U.S. style. JP Morgan takes over Bear Stearns. They did it for four one euro . And so no cost associated with that acquisition like out equity wiping out the eighty ones. There's a lot of eighty ones out there. Tier one debt and the Tier 2 is also taking a pretty substantial haircut and everyone worrying about every other bank or investors. Is that going to impact me potentially. And what happened the 80 billion dollars in deposits that transferred over to Santander are very happy there's no running the bank whatsoever. Those are better deposits there. And for one euro they got a chance to acquire a hundred and forty seven billion in assets and 80 billion dollars in deposits. So great deal for Santander but obviously you have to raise a little capital . Seven billion dollars in equity. So what comes out of this equity capital raised has come out of this. There's going to be NPL sales and so you know I'm sure. CAC here. I don't speak for you but please you know like marathon and other firms we're gonna have opportunities to be able because you finally have resolution. And Italy hasn't done anything. And what do you think Mario Draghi is looking at next. The Italian banking system so there's a number of Italian banks that are going to be forced to have the same or similar type measure wiping out the equity wiping out the 80 ones and freeing up NPLs for sale. So I'd like to hear your thoughts. We think it's a seminal fulcrum event in the European market. I mean there's been a line out the door for all these banks to buy distressed assets and there haven't been sales in real scale and the reason for that is the banks didn't have the capital to take the write downs if you extrapolate this ECB action across a lot of other insolvent banks in Europe which there are many many many in Germany and Italy this would imply that the equity will be created within these systems through bail ins that will allow the banks to sell NPLs and I think that's a good thing for investors. All right. So with that thank you very much panels to the audience for joining us for this thank you. Spencer .