“There's been a positive IRR to the equity on that junior layer, they got their capital back with some kind of return on over 98% of every CLO that's ever been issued. That's an astonishing statistic for people who don't think they're safe. They're not safe if you have to sell.”
Peter Gleysteen brings more than 40 years of bank loan experience. Before AGL he had two prior employers, JPMorgan Chase and CIFC, a loan asset manager he founded. At the bank this included lead banker on many of the largest LBO, M&A and re-structuring financings in the 1980’s and ‘90’s, running global loan syndications, responsibility for its global corporate loan portfolio, and serving as corporate chief credit officer. More recently he built CIFC Asset Management into a leading private debt manager with $13B in AUM, serving as founder and CEO from 2005-2014.
Syndicated bank loans are a non-traditional asset class in that they’re not securities, but loans, meaning they’re not sold on an exchange. Its appeal to long-term investors go up when interest rates are high and see most retail investors sell when rates drop. Because of the unstandardized nature of bank loans, each one is customized by the regional bank. “It's also one of the reasons why the returns are so high because of compared to almost anything else, there's a lot of excess return in bank loans.”
LISTEN AND SUBSCRIBE
SPEAKER
Peter Gleysteen
CEO & Chief Investment Officer
AGL Credit Management
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
John Darsie: (00:07)
Hello everyone and welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology and public policy. SALT Talks are a digital interview series that we started during this work from home period. And what we're really trying to do is replicate the experience that we provided at our global SALT conferences. And what we're trying to do at our conferences and on these SALT Talks is to provide a window in the minds of subject matter experts, which were primarily investors, entrepreneurs, and public policy thinkers.
John Darsie: (00:39)
We're also trying to provide a platform for what we think are big, important ideas that are shaping the future and bring you interesting investment opportunities as well. And we're very excited today to welcome Peter Gleysteen to SALT Talks. Peter is the founder of AGL Credit, and he brings more than 40 years of bank loan experience to SALT Talks today. Before AGL, he had two prior employers starting with J.P. Morgan Chase, and then more recently CIFC, a loan asset manager that he founded.
John Darsie: (01:07)
At the bank, this included being the lead banker on many of the largest LBO, M&A and restructuring financings in the 1980s and 1990s, running global loan syndications, responsibility for its global corporate loan portfolio and serving as the corporate chief credit officer. And more recently he built CIFC Asset Management into a leading private debt manager with 13 billion and assets under management. He served as its founder and CEO from 2005 to 2014. A reminder, if you have any questions for Peter during today's talk, you can enter them in the Q&A box at the bottom of your video screen. And hosting today's talk is SkyBridge Capital Partner, a co-chief investment officer and senior portfolio manager, Troy Gayeski. Troy, I'll turn it over to you for the interview.
Troy Gayeski: (01:53)
Yeah. Thanks so much, John. Peter, it's such an honor to have you here. John went through your very impressive, resume way to briefly because we're typing strain. As we start the SALT Talks, we always like to focus on more, the human side of the investment manager or the guests. Could you give us a little input on your past, some of the decisions you made that led you to have this rich career, and if there were any several moments that were particularly important.
Peter Gleysteen: (02:18)
Yes. And thank you for that. A very fulsome introduction. I think the most important thing that drove my life and career has been the fact that I grew up internationally. My father was a us diplomat. So through my childhood, up through college, I moved every couple of years, went to schools in different societies, in different languages, living in countries like Indonesia, the Soviet union twice, but then Soviet union, France I'm half Swedish. My mother was Swedish. The reason I say that or why that's so important to me is I learned early that the same reality can be perceived and express completely differently by different people in different cultures, different languages.
Peter Gleysteen: (03:05)
So that was an early lesson made me very interested in fact it was kind of a survival requirement for me to understand, not just what I thought of something, but what was the underlying reality. So it made me really interested to understand how things work, below the surface. So when I was looking for a job graduating from college, I was trying to find something that would be stimulating interesting. And I decided I really would go somewhere where I could learn more about how the world got stitched together. And the only conclusion that I found appealing was through finance, where you can see how social and economic interactions occur, all be it through the lens of credit in a bank.
Peter Gleysteen: (03:50)
And by going to a bank, I didn't have to pay to go to business school because I was actively paid to go to learn. And that's how I started in the banking. I'll just add that was very fortunate to have joined what was then called chemical bank, because it was the bank, as many people know that acquired most of the other banks in New York and other places and kept changing its name. But I was always on the same place. That accounts for the long career continuity I've had, both organizationally and in terms of my expertise, which is bank credit. More, most critically I'll speed up and then stop.
Peter Gleysteen: (04:31)
In the mid 80s, I was the co-founder of what became the leveraged finance and syndications business. John mentioned that part of my background. But I've been personally directly. Let me just add. And when I say co founded, that was with the great banker, the late Jimmy Lee. So I actually knew him since I started because we were both in the same training program together in 1975. But in any event... I've been part of bank credits long before it became an asset class and part of its evolution and every step of the way into now being a very mature and well-tested institutional asset class.
Troy Gayeski: (05:11)
That's quite an impressive background. Peter, I'll tell you, I haven't heard the term chemical bank for quite since. I think the last time we used to abandon at about as a four John's RC was born. So let's go way back. So, hey, obviously you have tremendous expertise and the broadly syndicated loan market, and that's a very keen focus of your firm. Could you explain to the investors and those that aren't invested in the space, why you find it attractive and what are some of the key characteristics now, particularly relative to other asset classes out there in corporate credit?
Peter Gleysteen: (05:47)
Yes, that's a great question. And I'll just start by making the-
Troy Gayeski: (05:51)
Thank you very much, Peter, thank you very much.
Peter Gleysteen: (05:53)
Big statement that broadly syndicated loans are misunderstood. It's actually a superior asset class, but it's really widely misunderstood, but let me start. It started with the fact that I started in banking. So if a bank's making a corporate loan, let's go back to old fashioned banking. You put into deposit, you expect that to be a hundred percent safe and that if you want to take the money out, you take it out. What are the banks do? They invest and try to invest in very safe assets. So the assets are bank loans are senior, they're secured. They have priority over any other capital in the capital structure. But the key point when I say misunderstood, the asset class is not a loan it's hundreds or thousands of loans. It's the combination and the power of the earnings power of the net interest income of the entire portfolio that generates the stable, very steady Eddy cashflow.
Peter Gleysteen: (06:51)
And more importantly, that diverse universe of borrowers creates the safety. But let's say you have a 200 loans and two or four of them become a real problem. Well that's two or four loans. And if the loans on average are generating before live or before the reference rate say 5%, and if the loss given default or the loss that you would realize on alone is half of 1%, those losses are usually covered just by your net interest income. So the underlying capital that's invested, whether you're a bank making alone or an investor investing in this asset class, the principal invested the capital has never really at risk. If the portfolio is competently selected and managed and there's this steady cashflow stream. So then you're going to ask why do banks get in trouble? Why do people get in trouble? Why do people do stupid things?
Peter Gleysteen: (07:48)
Well, in the case of credit you can make a couple of mistakes. You can, first of all, have high concentrated risk. Meaning instead of having 200 or 300 loans having, let's say three or 30, and worse if you put them all in the same sector. And the other is the mispriced risk. And God help you if you do both. If you've concentrated risks, that's mispriced and that's historically how banks and investors get into trouble. But if you do the reverse, which is not hard to do, which is why still do it. Why would I... I'm still doing it because it's, why would I not? For me, it's the gift that keeps giving because it's safe. And it's really interesting by the way.
Troy Gayeski: (08:30)
Yeah. So Peter, could you touch upon the term senior as well? Because even today we find people don't understand how important is to be senior in the capital structure versus second wean, or what's commonly referred to as the high yield bond market.
Peter Gleysteen: (08:44)
Certainly. So it's analogous to a home mortgage. When it gets a mortgage buys a house, God forbid, if you don't make the payment fee, the bank and take the house from you. And whether the mortgage was 10% or 50% or 70% of the value of the home, they get the whole thing. And then they can, in the case of a home mortgage sell the property and then anything left over you, the owner will get the residual. It's the same with senior secured loans, which typically are between 40 and 50% of the total capital structure of a borrower.
Peter Gleysteen: (09:24)
So if there's a dire problem, we're actually from the bank and the lender and its associated investors like us to recoup their capital. There's typically a 50% value cushion underneath. And when this broadly syndicated bank loan to lose money, that means everything underneath is wiped out from that a huge cushion. You then amplify that by investing in not one loan, but say 250 loans. Just having this... For those who are statisticians, you can see how that distribution of hundreds of borrowers and just a few problems and mistakes are easily supported by the earnings power and the safety of the whole portfolio.
Troy Gayeski: (10:14)
So Peter, you're making a compelling case for the attractive risk reward of this asset class, which has been syndicated now for about 20 years, really going back to early two thousands. Could you talk about what type of investors are gravitating towards it and how they're using it to potentially replace traditional fixed income right now?
Peter Gleysteen: (10:33)
Yes. Not many. The asset class has grown. Broadly syndicated loans, it's about 2 trillion. That's roughly 1.2 trillion held by non-bank investors in the balanced, by the originating banks, usually in the form of revolving credits, but at the same borrowing framework. But the... It's because it's not a traditional asset class. In the following a couple of ways, first they're not securities they're loans. I'll come back to that. And, and they're originated by banks. So you can only access them by investing, if you're a long-term investor with a manager like us, who's investing in these loans. And they're also some managers who have retail funds. The appeal to retail historically has been because bank loans are floating rate. They have always been appealing when people were expecting interest rates to rise. And when interest rates are falling or low most retail investors actually kind of sell.
Peter Gleysteen: (11:45)
So it's not something that is an easy sales peach, for what I'll call an institutional Salesforce in the retail brokerage world, that's interacting with investors, and it's not something that you can buy on an exchange because they're not securities. Another thing about bank loans is they're highly unstandardized. Each one is different, it's customized by the regional bank originating bank, to that specific borrower and what they're using the money for. So it's highly customized. Well, it's also one of the reasons why the returns are so high because of compared to almost anything else, there's a lot of excess return in bank loans. But institutional investors like everybody, especially in this era of low interest rates and credits to traditionally viewed as a fixed income type of investment, institutional investors want safety, they want a meaningful, robust cash yield. Which increasingly you can't get in traditional fixed income products.
Peter Gleysteen: (12:56)
And people are noticing that if bank loans actually have that. And when I say they have that while rates now are near zero, including labor, which is the reference rate for medically syndicated loan, or at least syndicated bank loans. The actual cash distribution that you would get if you owned a portfolio of probably syndicated bank loans is the same or higher than it has been because credit spreads actually have widened and offset the decrease in [inaudible 00:13:25]. So here you have a product that's continuing to provide a thick robust, slightly higher cash coupon where everything else is kind of near zip. So it's affecting a lot more interest. I'll add one more thing, which is that most institutional investors have traditionally viewed, the five-ish percent that I mentioned that a bank loan portfolio throws off as not interesting enough.
Peter Gleysteen: (13:55)
But they like it when you apply leverage to it, which is why CLO's have emerged as such a large product. And there's like seven or 800 billion of CLO's outstanding holding all these syndicated bank loans. And the leverage, which can be as high as 10 times. You can have less leverage structures. And we specialize in that actually. Magnifies the great attributes of broadly syndicated bank loans, which are safety, strong cash distribution, or a coupon. And also liquidity.
Peter Gleysteen: (14:25)
I haven't mentioned that bank bonds are liquid. I'll come back to that if we have time in a second. But those three attributes, safety, cash, and liquidity can be magnified by applying leverage. The leverage that you want it to be non-market mark. You want it to be long-term leverage where that leverage that debt is repaid only by portfolio cashflow was not by price changes in the underlying assets. Just like a margin call. That's a bad thing. But CLO has had this terrific long-term structure and increasingly investors now for quite a while, have been investing in this. And I think given where interest rates are there, there's going to be a lot more interesting.
Troy Gayeski: (15:10)
So Peter, okay, along those lines, before we get into CLO's, which we will in a second. Can you lay out what the total return differential is right now versus a portfolio of syndicated bank loans like your own versus the 10 year treasury yield or [Lightboard 00:15:25] or even vanilla high yield bonds?
Peter Gleysteen: (15:29)
Sure. Without getting into the other asset classes. Because those are well-known levels starting with near zero for short-term treasuries. So at the asset class level, you just had an actively managed portfolio or the syndicated bank loans, including [Lightboard 00:15:48], which is 20, 30 basis points, as opposed to 3%. Really low. You can getting five to 6%. It depends on the manager and the portfolio strategy. It could be lower, could be higher. I call it five to 6%. If you add leverage to that, you go with CLO's level leverage. Hit the pause button, by doing that, the investor who wants the highest return is investing underneath the debt that's providing the leverage. So they're the junior capital. So there's one part junior capital and nine parts that on top of you.
Peter Gleysteen: (16:28)
But if you're in that junior capital investor, instead of getting the five to 6% return, you can get, in my experience 18 over 20% or more of a beta kind of a thing, I would say 12 to 15%. But definitely in the teens. So for people who're saying five is too low and I want teens, CLO's are really interesting. And by the way, there's some good research that indicated that every CLO that's ever been issued since the first one, I think this is Wells Fargo research. There's been a positive IRR to the equity that junior layer, they got their capital back with some kind of return on over 98% of every CLO that's ever been issued. That's an astonishing statistic for people who don't think they're safe. They're not safe if you have to sell. Let me just make the point that whether you're investing in bank loans straight up or with some degree of leverage, those great attributes of ongoing cashflow generation, consistent safety and liquidity to fine tune the portfolio, those are things that are advantages and create steady Eddy returns and safety over time.
Peter Gleysteen: (17:40)
If you suddenly have to sell need liquidity for redemption reasons or worse, have a market value paced debt and have to sell because prices change. That's a bad thing. So this is a product that I think very strongly is really only for long-term investors. And then you get all these great advantages, which leverage only magnifies. I'll add that we know global investors by type in individually quite well and kind of the sweet spot for most investors, is a seven to 8% return. Now to get that, they do a wide spectrum of investments, call it a mosaic or a tapestry, private equity, Timberland high yield bonds. Just every asset class you can imagine, hoping that the combination of them over time, it's that seven to 8%. For the safety reasons and the consistent cashflow reasons that I was describing.
Peter Gleysteen: (18:40)
You can get that using a CLO strategy by using a little leverage, not a lot. Say two times leverage. Will generate... Pre COVID it was generated kind of an 8% plus return. All in broadly syndicated loan returns have step shifted up since. So a new investor going and now it counterintuitive. This is actually a great time to invest in this asset class because there's more return for risk. So with around two turns of leverage, the return opportunities around 9%, which is a little bit of a push into that kind of magic 7% that most people want.
Troy Gayeski: (19:18)
Yeah, it's pretty impressive. And speaking of not selling, let's go back to March. Where many structured credit assets, including CLO's and level loans suffered substantial losses. Despite the fact that the fundamental credit quality was still sound. And the question of whether you would realize your cash flows was very much settled. So do you think it makes sense for markets to be focused too much on liquidation value in times like March or April or going back to Q4 of a laid after leaving failed. Or do you think it makes sense to look longer term with the power of the cash flows compounding over time?
Peter Gleysteen: (19:54)
That's a great question. And I think you just answered it at the end, because-
Troy Gayeski: (19:59)
Is that a lean on that one Peter a little bit?
Peter Gleysteen: (20:00)
That was excellent because the strength and the value of the product, again and as I said, it's really for long-term investors. It is that forward cash earnings, power that's safe. So it's the ability to hold something long-term that every quarter is going to generate cash. And if you hold that investment, you're going to just getting that cash and incidentally for an actively managed portfolio in our experience, and certainly our expectations going forward.
Peter Gleysteen: (20:32)
There's also an opportunity to generate realized capital gains. So it's both cash plus a little upside down the road. If you're panicked or if you're forced to sell for whatever reason, especially in like March when prices almost instantly collapsed along with everything else, as the markets went through a boo bionic plague type panic that quickly fortunately abated. If you were selling, that was terrible.
Peter Gleysteen: (21:05)
It's because there was no bid. So if you're selling when there's no one buying, of course prices vomit. But back to the core question of valuation, the liquidation value of something, even if you say, let's say the liquidation value for a loan is a hundred cents. And the principle is a hundred cents. The loan is $1 or 1 million or 100 million. If you can sell it for that amount, that's certainly fair value. But if you do that, you're foregoing the opportunity for that future earning stream that I was describing. Now, if the market, because it's frightened or by the way most markets certainly, the broadly syndicated loan markets driven by three interwoven factors that sometimes are one of them dominates. Those are fundamentals what's really going on in the economy in each borrower. Market technical is the balance of supply and demand of investors buying and selling and sentiment.
Peter Gleysteen: (22:06)
So in March we had sentiment via panic. So if the price of a loan that's eventually going to repay 100 cents is selling for 80 cents. Not only you foregoing giving up that forward earnings power of that asset, that's worth a hundred cents, but you're taking a 20 cent loss. So it's a terrible way to value probably any asset. But certainly that is forward earnings power, but certainly broadly syndicated ones.
Peter Gleysteen: (22:40)
That's not to say there isn't important value to market prices because there is, you do want to know what it's worth, especially if you did have to sell. And especially if you want to optimize the portfolio and buy something to improve the risk profile or return targets, especially if loans are cheap, which they are now by the way, and you want to be a buyer and lower prices are a good thing in that context. But there's a difference between performance valuation and liquidation.
Troy Gayeski: (23:15)
It's so segue back into CLO's and we were talking about this before we started the session. The broadly syndicated loans, roughly 95, 96 cents in a dollar right now, double re-CLO is roughly 83 cents in the dollar. Can you talk about why you think there's still that big price discrepancy, even though we don't know an analyst or a credit market participant now that would argue that double B's are not money good? People debated, hey, March, April, maybe you do get some bumblebees cracking. You have enough high enough chemo defaults. You have low enough recovery rates, but that was really settled by June and July. You still have this massive price disparity. What do you think drives that when it's clearly not fundamental value?
Peter Gleysteen: (23:57)
That's a really good question. I would say a couple of things and by the way-
Troy Gayeski: (24:02)
I'm on the roll Peter, I'm on a roll.
Peter Gleysteen: (24:04)
As everyone probably knows just listening to us that I'm not without opinions. So in CLO's, as I was describing before, above the junior capital so-called equity layer, there are various levels of debt, and all these layers or [tranches 00:24:22] are rated. And most of the debt is triple A, roughly two thirds of the capital structure of the CLO is triple A debt. That's really cheap, attractive debt. But there all these other slices, a single lay slice, triple B double B. And you're talking about the double B's.
Peter Gleysteen: (24:42)
The top end, the two thirds at the top, the triple A asset... By the way, so triple A, where do you get paid if... And this is a long-term debt with no market value triggers. And also with shorten on-call periods is very favorable optionality for the junior capital, the so-called equity. The triple A's mainly held by banks as long-term investors, insurance companies and some pension funds.
Peter Gleysteen: (25:07)
When you get to the triple and double B layer, so-called the mezzanine layer of CLO's. Those are mainly held by credit hedge funds. And it makes sense that if you go back to the math that I was describing, two thirds of all the debt is Triple A. There's not much debt left anymore. And if you take that and then if the bottom layer is 10%, that leaves like 23%, if you take that 23% and divided between AA, single A, triple B, double B, maybe single B, each of those tranches are really small. So of course it makes sense that credit hedge funds can invest it, because these are not big amounts. So they're traded they're held not in long-term hands.
Peter Gleysteen: (25:53)
So if a bank is investing in a triple A that has a 10 year final maturity, you're making an investment decision that could be there for 10 years. But the mezzanine investors are trading oriented and are looking for, because the capital structure is that it's needlessly complicated with 10 layers. And there's often between two and 400 loans in any given CLO, we're at the low end spectrum, by the way, closer to 220. That's a lot of complexity which changes the value, especially because people's assumptions on how to value those forward cashflow streams are changing. These are very sophisticated investors, so they use models. They're not looking at liquidation values. They're looking at that forward cashflow stream and the discount in it. So they're traded in a very thin market. So there's a lot of volatility. When you have something that's very complicated. It's trading from time to time, but very few buyers. And especially if some of them suddenly have to sell. So we know that in March, April, some people came under the gun because of the kind of financing arrangements that they had had to be sellers. But it's-
Troy Gayeski: (27:09)
Well Peter, as we sit here today, then you would generally agree with the statement that double B cash flows are money good and worth far yet they still traded 83. Plus you get a 550 to 650 coupon. So it looks like a pretty compelling investment right now, total return standpoint right now.
Peter Gleysteen: (27:24)
Totally. [crosstalk 00:27:26] I would say-
Troy Gayeski: (27:27)
[inaudible 00:27:27] you're participating in correct?
Peter Gleysteen: (27:29)
We do. There's opportunities there and we do have a secondary fund. It's a small piece of our AUM. But there's a very clear opportunity. I'll point out though. The devil's in the details. So it's who the manager is, what their strategy is. And for professional investors, the underlying portfolios are available. We can actually get it if we were considering someone else is... If someone wanted to look at one of our CLO's, you could based on our last quarterly payment date. You could see every single loan investment that we have in that fund or CLO. And incidentally, every BSL broadly syndicated loan is rated by both Moody's and S and P. There's a ton of information. There's research. There's a whole nother subject of private side information and public side investing. I won't go into that probably if we get time. But it's an area where homework really pays off and experience pays off even more.
Troy Gayeski: (28:30)
So that would be what we refer to as a classic alpha proposition. The credit research, looking at private versus public. That's one of the areas where you guys generate not only beta from the asset class, but also alpha to security selection, and perhaps having a bit more knowledge than the next manager that's not quite as experienced. Would that be an appropriate summary?
Peter Gleysteen: (28:51)
Yes. Thank you. And I'll just add that. So my background, as I said earlier, I come from the banking world. So I come from the world from making loans, not taking, I'm not taking something that someone else created it's offering you as an investor. So I would call myself more like the cook, the dishwasher, Maître d', the waiter. And most investors as the people going to the restaurant ordering Alec card. So I'm more familiar with where these come from, how they come to be made, what the issues are, what kinds of information is available.
Peter Gleysteen: (29:26)
And how to put the pieces. And I'll go back to when you asked about my background, I made the comment that I learned early, that things are often not what they appear. And that motivated me early to kind of understand what was going on, as opposed to just the way things appeared on the surface. Because I noticed in different countries that it was the same reality, but people expressed it and lived it differently. And for good reason, and that was great and I feel a great beneficiary of that. And when I found a career in an asset class that had a terrific continuity with great attributes of what I just been describing, safety, steady Eddie ongoing cash flow and liquidity. So you can change things. You can change your mind at the backstage. Changed the investment profile. That's why I'm in my fifth decade of doing this.
Troy Gayeski: (30:19)
Yeah, it is a rich history. So obviously the pandemic has affected pretty much everyone on the planet. It's affected some investors negatively, others positively. But in terms of your firm, how has it impacted your ability to put capital to work, particularly for new investments where you've raised quite a bit in the past six months?
Peter Gleysteen: (30:40)
Yeah. So we were really surprised. So in March it looked like the world possibly could end. So we immediately reevaluated every investment stress test. And said "Oh my God, the recession is not a year or two from now. It's happening now. And it might you the worst ever." In that process, we concluded that some positions we should have less of, or not have any at all and made the adjustments. It's a liquid asset class. But the main conclusion was, wow, most of these borrowers are gonna make it. And some of them are actually quite strong. So it was as if every person on the planet had a complete medical test. And you could know everything. Who's going to survive, who's going to thrive and who needs intensive care. So the asset class suddenly had credit risk much more visible.
Peter Gleysteen: (31:35)
And let me just add that there's two forms of credit risk. There's financial credit risk, how much leverage, what kind of loan agreement, are there covenants? Those types of risks are visible. In fact, they're hiding in plain sight. More important risk is basic credit risk. What kind of company, what's the industry, what drives customer demand, what's their competitive position. Those things change and are frankly mostly opaque. And that's where you need to do all the work. The COVID recession made basic credit risk suddenly really evident. So you can make much more, both risk management decision on an informed basis, but also... These are clearly survivors. These are better than survivors. And they've been hugely sold off. Now prices have retraced quite a bit, but they're still discounted. So we concluded really quickly that this was a great investing opportunity.
Peter Gleysteen: (32:32)
So the surprising, I said, we were surprised in March. By the way, AGL, slow at organizing new activities was legally formed in March of 2019. So not that long ago, although the firm was fully formed before that date. All the employees, partners, capital bank and all that stuff. But in March of this year, 2020, we had about over 2 billion of assets under management for our funds. But now we have like 4.3 going on 4.4 billion. So with more than doubled since COVID. Why? Because of these incredibly compelling opportunities and our investing partners, understand that. And when they want the money to put you put the work to get the benefit of more risk or... There's slightly elevated risk across the board because of the uncertainties of social distancing from COVID and how that's changing businesses and how our economy and societies will operate, but there's way more return. So-
Troy Gayeski: (33:40)
It's truly incredible. Your assets have doubled more than doubled under management in six short months. It's a real tribute to the inefficiency and the opportunity, the assets that you traffic in. Plus obviously the skill that you and your team have historically. Now let's approach this from a different angle. We typically run across a few efficient market theorists. There aren't many left. Because anyone that's studied markets the last 20 years now, not even longer. I know there's plenty of inefficiencies all the time. And they're particularly exacerbated in times of stress.
Troy Gayeski: (34:17)
Could you better explain to people or at least attempt to why, even with rates this low in the fed, haven't expanded their balance sheet by 3 trillion ECB, not far behind money supply growth exploded, we're 20.1% more money supply now than coming into March. How you could still realize such attractive returns and such high coupons in a backdrop where you just say, [inaudible 00:34:43] zero, 10 year treasuries, 50 or 60 basis points, IGE yields, one and a half to 1.7 [inaudible 00:34:52] around 1.2. Why do you think even in an environment like this, you could still continue to get such attractive yields?
Peter Gleysteen: (35:00)
That is a great question. And I don't have a complete answer but I can make a couple of points. The first and at the most simplistic level, the asset class has always been in capital markets. Usually if you go to the capital markets, you get the lower of whatever the execution is. It's whatever investors are willing to buy whatever you're offering the cheapest in terms of cost to the issuer. The broadly syndicated loan market is the opposite. While the new issue prices for loans change over time are driven by, as I was saying. Fundamentals, technicals and sentiment. It's the higher of what the banks who originated need require. And by the way, their cost structures keep going up for a whole bunch of reasons and what investors require. Now, when we talk about investors who invest in us, I said that that group's about 1.2 trillion.
Peter Gleysteen: (35:54)
It's like eight different kinds of investors. It's CLO's, it's retail funds, it's credit hedge funds, not only buy CLO's securities, they also buy loans directly. It's insurance companies, it's informed foreign banks. All these different investors have completely different motives, different time horizons, different ways of valuing things. Almost all of them are public side. And as I said before, each loan is different. They're rated. Most investors are first influenced well, okay. What, your most investors work in large organizations and have to explain things to the higher ups. So the higher ups are reading whatever they're reading or whatever terminal and it's saying, "Broadly syndicated loans are risky. Their private equity, CLO's are highly leveraged." They have a really negative... They should have a halo and instead have a stigma in terms of how they're portrayed.
Peter Gleysteen: (36:51)
So at a high level investors have to explain to the higher up, why they're doing this despite this kind of negative perception. When you have a recession, nevermind one, that's unprecedented because of these behavioral changes that are best made in some industries and we're just hitting the pause button. Since a year ago, triple C rated assets. I mentioned, all of these ones are rated. The triple C contingent, is more than double triple C is kind of a danger zone. We don't intentionally, we don't invest in anything that's triple C. We could have something that becomes triple C. We have very hard lineage that, but the point is, that's more than double. Why? Because we have a recession, there's a lot of risks. There's a lot of uncertainty. So in that environment, when I said that spreads step shifted up, ignoring interest rates, whatever the regular way spread levels were, investors require more returns.
Peter Gleysteen: (37:49)
So spreads have lifted because risk actually is higher. If you actually get into the innards of portfolios, you can either create new portfolios or discover an existing ones. That they're really safe, that they're managed in the way that the risk profile is actually improved. They're actually safer than they were, but actually have higher returns. One thing I didn't mention is... That's really helpful. There's over a thousand borrowers in the broadly syndicated loan market. And these are mostly private companies. It's the backbone. These are the mid to large companies that are the backbone of the U.S economy. These are not the multinational companies that you can buy a public equity in or an investment grade bond. These are private companies, they're not investment grade. Most of them are very healthy. So it's a terrifically inefficient space.
Peter Gleysteen: (38:50)
And I could talk probably for days about it, including how syndicated lending came about the transition from banks, to just making loans to the same borrowers, to becoming a capital markets activity. And then it became a capital markets activity that included investors in not just banks. And that was mainly because there weren't enough banks from risk management standpoint that to finance the growth of private companies that wanted to be financed. So it's actually quite inefficient. That has a very interesting total bank based history. And of course these are originated by banks structuring.
Troy Gayeski: (39:28)
That is a tremendous excavation. If I could sum it up before we turn it over to John to close things out. It's basically because the banks and the investors are always demanding a higher yield than they think the risks they're taking A and B, even though your view is that there isn't demonstrably more risks, given the increase let's call it a V-shape recovery in certain industries. Investors are demanding even more return now because of the uncertainties in the world. Would that be a fair summary of those two points?
Peter Gleysteen: (40:00)
Very, good summary. I'll add one more piece to that. And we should record this. At the long [crosstalk 00:40:09]
Troy Gayeski: (40:09)
I think we are I think John [inaudible 00:40:11]
John Darsie: (40:11)
Oh, we're recording in it.
Peter Gleysteen: (40:13)
At a lower level, I mentioned that the asset class is not a syndicated loan. It's all of them. That's what [inaudible 00:40:20] the safety.
Peter Gleysteen: (40:22)
Yes, if you take a loan and we're in a riskier environment, people are demanding that loan should have more return. So they all do. If you take... Then if you take a big, if you create a big portfolio of them, they are generating more cashflow that funds out any possible losses, you're actually getting more return, which is creating more safety. So counterintuitively, there's an increase there's a perception of increased risk or reality of increased risk. That's pushing spreads up. But there's much more pushup, as you said, in spreads and there is risk and you have to have that push in banks and investors have to be paid more from what they think the risk is.
Peter Gleysteen: (41:05)
And when you apply that X increment on every single loan at the portfolio level, it creates a higher return per unit of risk. So if you had the amount of risks that you were, that you wanted or were willing to take was X, and you stay at X, you rebalance portfolios to the risk. The risk is the same. You're getting paid much more for that same level of risk, which why [crosstalk 00:41:28] asset level.
Troy Gayeski: (41:29)
Peter. So we're going to end it there on my end. It's been a real pleasure to speak with you and learn about your background and hear you articulate the compelling case for the leverage loan CLO and broadly syndicated bank debt market. I'm going to turn it over to my partner, the managing director of SALT, to close things out with some questions from the audience. Go ahead, John.
John Darsie: (41:48)
Thank you, Troy. It's been a fantastic conversation. We have a couple of great questions from the audience. So I'm going to take two questions. I'm going to put them into one. So we don't take too much of people's time and Peter's time, and you've been very gracious to join us Peter, thank you very much. Given your experience in building these bank loans, have you seen any shift in the underwriting language of these loans, pre COVID versus now, has standards shifted from higher Cub light, has issuances ramped up? And also the returns we've discussed are historical when we had higher loan covenant standards. Do you have concerns on a go-forward basis that recoveries with respect to the current loan market environment, specifically the degradation of loan covenants and lender protections, especially in issuances from 2018 to 2019?
Peter Gleysteen: (42:38)
Those are great questions. So first of all, since COVID, credits... Like I said before, with credit risks, there's two kinds, there's financial risk and basic risk. With credit quality and underwriting standards. There there's two kinds, there's the quality of the documents and whether there's covenants or not, and separately, how rigorous and how high are the standards in terms of which borrowers, what companies get financing. So on the former, which is covenants or what people would call loose documentation, loose terms. There hasn't really been much change. It's the same. And the main reason for that is people who invest in this know that these loans are well structured. The borrowers are credit worthy, and the math of more return for risks that I was describing is present. So there hasn't been pressure from investors.
Peter Gleysteen: (43:40)
The investors would like to have better documentation, but that hasn't happened. That hasn't happened. I don't expect that to happen. And I think this time I couldn't say why. More importantly though. I think credit standards, real credit standards, like who gets the money have improved. And I'll make two comments. One is post COVID the average new issue or in the broadly syndicated loan market. That means a borrower comes to the market with a new loan banks, underwritten and presenting a new loan. The average borrower is a larger company with less leverage with better ratings and is paying more. So it's a higher quality borrower. Back to the first point, the documents have not improved, but a stronger borrower. The other comment that I'll make is if you look at this over a 10, 20, 30 year timeframe, the average borrowers over time have been improving.
Peter Gleysteen: (44:39)
If you were to look at the typical leveraged buyout of the 1980s, which is when I cut my teeth and really big leveraged finance, you'd be horrified with the capital structures. On how much leverage and some of those on some of those buyouts. If you were to compare the current cohort of borrowers with the ones in the O six O seven pre financial crisis year. What you would find is, borrowers today are air quality. So that trend over time has actually been through higher quality, not lower quality, even though the terms of the documents are clearly loose.
Peter Gleysteen: (45:21)
And I'll just add that, that's mainly a phenomenon. Most the growth of the broadly syndicated loan investor base has been driven by the determines that crossed over, the move of traditional high yield investors that continue investing high yield, but also to invest in loans. Because typically the borrower has the downstairs high yield bond and the upstairs, or the broadly syndicated loan. Now high yield doesn't have covenants, never seen private side information, so they never demanded it and don't need it. So that's one of the... It's a structural reason why, covenant has effectively gone away. And from that standpoint, loans and bonds have converged. One is still the security and one is still alone.
John Darsie: (46:08)
Peter, thanks so much again for taking the time to join us. And Troy, thanks so much for taking the time to moderate today's discussion. I think it was fascinating, Peter, as you mentioned, this was recorded. So anybody who joined late or wants to clarify some of what you said, they can always go to the SALT website within two or three days, we'll typically post these episodes on demand. But thanks everybody for tuning in, it was a real pleasure to have you on Peter.
Peter Gleysteen: (46:33)
Thank you for having me and thank you audience for listening and hopefully you're interested. Thank you.