From Boom to Bust: The Rapid Acceleration of Dislocation with Marc Lasry, Chairman, Chief Executive Officer & Co-Founder, Avenue Capital. Pat Dyson, Partner, GoldenTree.

Moderated by Nicholas Millikan, Managing Director, CAIS IQ, CAIS.

PRESENTED BY

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SPEAKERS

Marc Lasry

Chairman, Chief Executive Officer & Co-Founder

Avenue Capital

FULL BIO

MODERATOR

Nicholas Millikan

Managing Director, CAIS IQ

CAIS

FULL BIO

TIMESTAMPS

EPISODE TRANSCRIPT

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Nicholas Millikan: (00:08)
Day two, everybody. It's good to see everyone here. Thanks for coming back so early. So today, we're going to be discussing The Boom to Bust: The Rapid Acceleration of Dislocation Within Markets. My name is Nicholas Millikan. I'm managing director of investment strategy at CAIS, an alternative investment platform that brings alternate investment solutions to the independent wealth management channel. So if you want to hear more about what we do, we're right at the front of the door here. So today I'm joined by Pat Dyson, partner and global head of Telecom and member of the distress committee at Golden Tree. And then Marc Lasry, the Chairman, CEO, and co-founder of Avenue Capital. So, gentlemen, thanks for joining me this morning. How are things?

Pat Dyson: (00:51)
Good to be here. Lots to do in distressed.

Nicholas Millikan: (00:55)
Absolutely. So Mark, back to office plans, how are things going so far?

Marc Lasry: (01:01)
I think it's actually going pretty well, I think. We've told people they should be back. I'd say the vast majority of our firm is. Some folks still, people who have kids, but our view is you should be in the office. If you've got issues, we're happy to deal with them and help you deal with them. But to get investment ideas, to do the things we're doing, I think you got to be in the office. And so, so far so good. I think everything's been pretty good. I would say everybody in our office is vaccinated, so it hasn't really been an issue for us.

Nicholas Millikan: (01:37)
What about globally? Because you have global offices, is that the same?

Marc Lasry: (01:40)
It's harder. It's harder because, I would tell you in Asia, in Hong Kong, I can't even go there. I used to go there at least twice a year, now to go, you've got a quarantine for 14 days, so you're not going to go. So there's less travel, much more Zoom. So here, at least you're traveling within the United States, that's fine. But I would say globally, it's gotten a lot harder people are going into the office, but I think the travel between regions. Europe is different, you can do that. I would just tell you Asia as much harder.

Nicholas Millikan: (02:14)
What about you Pat, what's the deal over at Golden Tree?

Pat Dyson: (02:17)
I would say pretty similar to what Mark said. We were, if I think back to when we went fully back into the office would be around Labor Day of last year. And we've been largely back since that point in time, I guess with certain exceptions. But we certainly value the collaboration that occurs by being in the office. We also have an office down in Palm Beach where we were able to have that collaboration during the height of the COVID pandemic, which certainly helped us. And then as I think about London, London's been slower, but now we're largely fully back to office in London as well. So from our perspective, we really think that being in the office is of paramount importance to promote the collaboration and just the daily interaction. And then ultimately when you think about fostering a culture, you could probably get away with the work from home stuff for a shorter period of time. But as you think about bringing people up into the culture, it's really challenging if you're not in the office and seeing them face to face.

Nicholas Millikan: (03:32)
We were about that earlier, especially with the pace of hiring in financial services has been pretty resilient through the pandemic. So today we're going to discuss the pandemic impact on distress. It was obviously a big focus of last year and then relate that back to the global financial crisis and then look at the opportunities going forward. So if we were sitting here this time last year, people were talking about estimating the peak default rates 10% to 15%, I think it was September, they peaked at 5% in 2020. So what happened, Mark, maybe we start with you, last year, what did you see?

Marc Lasry: (04:05)
The Fed screwed us, it was horrible. They decided to come in and save the country. But it literally was the... I think for us, really what we focus on is when there's a lack of liquidity. You're providing liquidity, you're coming in and you're able to do things because there's issues, people have problems. The Fed came in and provided massive liquidity, and that massive amount of liquidity ended up being great for the country and great for companies so that you were just going to have lower default rates. And I think what it's done is, at least for firms like ours, the opportunity to buy bonds maybe a 20 cents is gone, but the opportunity to lend money between 10 and 15 or to do structure deals, that's turned out to be great. So you've got a ton of those opportunities. But I think ultimately the end day, everywhere around the world, it's just this huge amount of liquidity that's come in. So that's good. The bad part is for companies that can't access that liquidity, they've got to come to us and that's when we can come in and dictate terms.

Nicholas Millikan: (05:29)
So Pat, did you see the same things?

Pat Dyson: (05:31)
Yeah. If you think about comparing '08, '09 to last year's crisis, so the widest the market got in '08, '09 was north of 2,000 on a spread to worse basis. Last year, we got just above 1,000. Then if you think about the period of time at which the market was north of 100 basis points spread to worst in '08, '09, it was around 11 or 12 weeks, last year it was three weeks. And to Mark's point, that was the Fed. And if you rewind to '08, '09, it was a bit unprecedented. You didn't know what the Fed was going to do, you didn't know what the moves they were going to make. I think this time around there was some expectation that you would see the Fed step in, and then they stepped in obviously very swiftly. And to Mark's point, that took the opportunity set or the broader opportunity set away.

Pat Dyson: (06:26)
Our takeaway from that is that you really have to be in the market because you don't know how long that dislocation is going to exist. And if you think about some of the elements of post the '08, '09 crisis is that the dislocations are shorter, whether it's in 2011 or '15, '16, or certainly last year. So trying to time the market and waiting for this big bang and distressed is super tricky. So you have to be around the market and be able to move very quickly across the opportunities when they present themselves because you don't know how fleeting it's going to be.

Nicholas Millikan: (07:05)
Well, on that point, exactly right. The financial crisis in the markets anyway it took about 12 months for them to go from top to bottom, it was 12 days during the pandemic. And he was talking about the distress cycle, have you seen that accelerate as well?

Pat Dyson: (07:18)
The distress cycle?

Nicholas Millikan: (07:19)
Yeah, with the restructurings and the activity around distress deals has that accelerated as well?

Pat Dyson: (07:24)
Meaning the actual time that a deal-

Nicholas Millikan: (07:25)
Yeah.

Pat Dyson: (07:26)
No, not really. I think that if you think about from the genesis of an investment through the process, has that process necessarily sped up? Short answer is no. you still have to go through the courts, to go through the process of that, if that is in fact what you're asking. So from a process perspective, no haven't seen it speed up necessarily. And if we think about distress for control investments, these are investments that are going to be in the one to three year type of period that matches up with the capital that we have deployed to distressed.

Marc Lasry: (08:04)
I think it's taking longer actually.

Nicholas Millikan: (08:06)
No, go ahead.

Marc Lasry: (08:06)
No, I think it's taking longer because what's happened is there's more fighting. In these processes today, you're going to court but you'd have to have Zoom court meeting everything just took a little bit longer. And that was good and bad because the good part for companies is maybe they were able to access capital, the bad part is maybe things, just because it took longer, they didn't have that capital. So it was very different. I think the biggest point is the fact that you've got to be in the market. I wish I can tell you when it started and things started going down we started buying, but we know how long it was going to last. And you get nervous. And literally you had that three week, four week period before the Fed stepped in. You didn't know the Fed was going to come in as strongly as they did. So you're trying to be careful and you're trying to invest. What we should have done was just put all our money to work in those three weeks. I wish somebody had called and told me, but I'm good.

Nicholas Millikan: (09:19)
So on that, putting money to work, we saw a lot of people come out with pretty big target fundraisers. Can you talk a little bit about the sizing opportunity of last year and maybe the frequency with which you need to access these opportunities?

Pat Dyson: (09:34)
Look, as those funds that were looking to raise capital to take advantage of the COVID dislocation probably weren't able to deploy the capital, as Mark is alluding to. From our perspective, we viewed distressed as an evergreen opportunity set. And as we think about that opportunity set, the size of the overall leverage finance market has exploded in size to over $3 trillion today. And we think that that's a very broad opportunity set to be able to deploy capital against. As we think about it, Golden Tree, the sizing of our funds, we purposely size our funds at a level that allows us to certainly play large cap names, but maybe most importantly allows us to get into the mid cap and small account names.

Pat Dyson: (10:20)
And then those names can really drive performance. So the size of the fund I think is important because, as we talked about earlier, the swiftness of these dislocations. And then also even today there continues to be disruptions within the market even though the overall health of the market is very strong. But to be able to get into some of these mid cap names and have those mid cap names really drive performance is important. So that's how we think about it from a sizing of our funds perspective.

Nicholas Millikan: (10:51)
And so what about you mark, do you think about it in a similar way?

Marc Lasry: (10:53)
No, we do. I think what has changed though, if you think back to different cycles, there was more large cap opportunities, you just had bigger companies, so you'd want to have a larger fund. I think today what you have is you have small cap, mid cap, large cap, but to take advantage of the small and mid cap size, you can't be that large because otherwise you're not going to have a small and mid cap opportunity is not really going to have an effect.

Marc Lasry: (11:27)
So I think for anybody who wants to do really well, you want to try to have a fund that's somewhere between $500 million to $2 billion because then you can take advantage of everything. I think that's where the market has changed. I think trying to do... Folks who raised a lot of money, I'd be surprised if they were able to put it to work. I think what everybody is doing now is doing much more on the private lending side. We'll find our deals and Golden Tree will find their deals, everybody will find different deals. But it's what can you charge today? And then the real opportunities to create real value are going to be in the small and mid cap.

Nicholas Millikan: (12:08)
Interesting. So when we talk to financial advisors in our business, a lot of them just say, "Well, have I missed the opportunity?" And Pat, you touched on this, that there's always distress. Can you tease that out a little bit and talk about what drives distress irrespective of what's happening in the broader markets?

Pat Dyson: (12:25)
So the theme would be that there's always things to do in the market. And going back to my earlier point about the size of the market. So it's a huge market. Today, the percentage of the market that is distressed is not that significant, but there's still things to do out there. And if you think about... First, if we live in a world, so it's $3 trillion in size, leverage has been creeping up, firstly lien leverage is at all time highs, and we don't always exist in a world of the most stellar management teams as well. So that in and of itself can breed opportunities. And then when you think about particular sectors, there's sectors that are continuing to experience ongoing disruptions, whether it's telecom, from a competitive perspective and the CAPEX intensity or media, as you think about it, how all of us digest media today and how different that is to several years ago, energy, obviously retail, amongst others.

Pat Dyson: (13:23)
So there's a number of industries that continue to be disrupted, to Mark's point and my earlier comment, being able to get to these mid cap names is important. And then even when you think about thinking about say telecom, for example, two of the top 10 largest defaults in the history of high yield happened within the last 18 months, Frontier and Intelsat, and they had nothing to do with COVID. So those types of opportunities sets can arise. And as we think about it, from a geographical perspective, we're deploying capital in North America and Europe and selectively in the EM. So we feel really good about the ability to deploy capital in benign environments. And then final point I'll make, if you just go back, and proof's in the pudding, if you go back and look at the history of our deployment of capital over the last 10, 11 years, it's been super steady. And if you think about what we did in '16, '17, '18, '19 in reasonably benign environments, we're always finding things to do. Obviously last year, it spiked up. But we're confident we're going to get our shots.

Nicholas Millikan: (14:30)
So Mark, we spoke a lot last year and you kept our clients very well-informed what was going on. We talked about Intelsat, we talked about Hertz, and Avis. Can you talk about that example where they've got similar businesses in Hertz and Avis but one survived one didn't? Can you talk about what drives that?

Marc Lasry: (14:45)
I think part of it, it's hard for a satellite company to get COVID.

Nicholas Millikan: (14:52)
Definitely difficult.

Marc Lasry: (14:53)
You never know. They'll come out and say, satellites are now COVID free. But I think when you look at this, why did a company file? The real reason companies filed is it was really how much liquidity they had. So Hertz at the time was fully drawn on their credit facility. So all of a sudden COVID comes, nobody's renting a car, you've got huge losses, and you're already borrowed as much as you can so you can't really do anything. Whereas Avis had a line that they could draw.

Marc Lasry: (15:32)
So the whole key in the beginning of this was how much liquidity did you have? So a simple industry was really, if you take a look at the shipping industry, Carnival Cruise, are people going on cruises? How many people went on a cruise last year? You can all take your time, raise your hand. So just think of that, how many people went on a cruise and yet that industry because they had all this asset value on these cruise ships was able to borrow money and could borrow. And in the beginning they were borrowing, what was the first deal? I think around like 12%. And now they're borrowing around five or six and you guys still haven't gone on a cruise. But the market is saying it's all coming back and they are the access to that liquidity. And that's really what's changed. If you have access to liquidity, you're going to survive, you're going to do well, if you didn't have access to liquidity, you're filing.

Marc Lasry: (16:42)
And that's why Hertz and a number of other companies went under. But today, I would tell you the vast majority of companies have access to liquidity and also the rates are so low. We're charging, I would say 8% to 12%, I assume you guys are doing the same. Don't tell me you're charging five then you're going to undercut and now I got to go charge the less. But if you think about it, we're all charging roughly the same. And that's because look, if you can borrow at 1%, you're not coming to us to do a deal. So the only people we're talking to are the folks where there's issues and we'll structure a deal to make sure that we're fine. It's a need for liquidity.

Nicholas Millikan: (17:29)
I think a SALT 2022 should be in a cruise line. I think it's certainly an opportunity.

Marc Lasry: (17:33)
We should tell Anthony.

Nicholas Millikan: (17:34)
I'll tell him backstage after this.

Marc Lasry: (17:35)
Oh yeah.

Nicholas Millikan: (17:36)
So have we essentially just kicked the can down the road then, with the Fed coming in as aggressively as they had? Are we bowling up a massive distressed event in the next few years here?

Marc Lasry: (17:47)
I think you are. But the reason think you are is just, how much longer can you keep lending money at zero? So our deficit keeps going up, the amount of money the government is paying on rates just on interest alone is pretty low. If that starts moving up, we're going to have real issues. But again I can't print money. So when you can print money and you can keep borrowing, it's great and people still want to have treasuries. But whether the day of reckoning is five years from now or next year, five years, 20 years, I have no idea, but it will.

Marc Lasry: (18:25)
Sooner or later you just can't keep borrowing as much as we're borrowing. But for right now, I think the Fed and the government have done the right thing, which is you had to restart the economy, you had to provide that liquidity. But there is a real cost to that. I mean the amount of money that's been borrowed in the last... You've got a $3.5 trillion deal today, you've had trillions of dollars have already gone out. It is huge dollars that are being spent and hopefully the economy will be able to repay that.

Nicholas Millikan: (18:55)
Pat, you have you thoughts there?

Pat Dyson: (18:57)
Yeah. I would agree, if you just... Again, the timing is very difficult to discern, but there's stuff that's going on in the market today. And we see it at Golden Tree because we're not just focusing on distress, but we have a broader credit platform. So we're looking at all the new issuance that's coming today, both from loans and bonds, and there's some very aggressive things that are happening. And statistically, again, if you look at the market, leverage is at near all time highs in the market, first lien leverage is at all time highs, what does that mean on the back end? That means that recovery rates for loans is going to be lower, which means potential technical selling around CLOs.

Pat Dyson: (19:38)
The magnitude of low quality issuance defined as B or CCC, if you were to annualize the year to date so far, we would end up having the largest aggregated low quality issuance year ever this year. So all these things are telltale signs that, we're doing some things that you probably shouldn't be doing. And at Golden Tree, we're spending time on a lot of these new issuances, not necessarily playing them, but we're building a database of the names, when some of them inevitably do run into stress or distress.

Pat Dyson: (20:13)
And then final point, which I thought was a bit of an interesting nugget. When you think about obviously the market is talking about default rates being really low, which they are, they're going to be this year. But the lowest default rate year ever was 2007. And then you then had '08 and '09, which was the largest distress cycle ever. So the answer is yes, it's coming. The question is when, and I don't know. But that goes back to my earlier point, you got to be in the market because you don't know when it's necessarily going to happen. But it will happen certainly within the next several years, what would be our view?

Nicholas Millikan: (20:52)
So if we're looking 12 to 24 months out, if we stay in a low default rate and a high growth rate, a high growth in the economy, what happens? What is the opportunity set?

Pat Dyson: (21:03)
I'll echo. And I'll go first, Mark can follow up. And I'll echo just some of the points you're saying. Again, there's, going back and thinking about particular industries or dislocations that may occur in some of these more complex situations. We were very active in Puerto Rico, for example, which is very complex, 20 different issuers, we've been very active in a company called Digicell, which is the EM company with eight different bond issuing boxes. Complexity can breed opportunity. Having these complex situations, once you're in them, they can be a real barrier to entry from others being involved because you can't just open up a page and understand, it takes a lot of time. And the technical dislocations from a trading perspective can be very attractive. But again, when you look underneath the hood at a number of these sectors, energy, retail, telecom, media, healthcare, I would throw in there even financials to some degree, there's dislocation and disruption that is occurring that we think is going to provide opportunities, again, regardless of what happens broadly in the market.

Nicholas Millikan: (22:16)
Mark, any thoughts?

Marc Lasry: (22:18)
Look, everybody always goes, "Well, how are you able to make money when everything is going so great?" It's actually really simple. There's a lot of knuckleheads out there, there are, these companies. I wish every company was great, I wish everything was always perfect, I wish things weren't so complicated, but they are. And the more complicated it is, the better it is for us. Your ease of capital means that people are borrowing money that shouldn't, and they're doing things and they're getting money for things they shouldn't. All I can tell you is there's hundreds of deals that we pass on. I'm sure there's hundreds of deals that Pat is passing on. All I do when I look at those deals that go, "Oh, great." Whether that's a year or two or three years, I know that company is going to have a problem.

Marc Lasry: (23:19)
Look, if you can borrow at 50 bips today or 1% or 2% you should. How many people have bought houses and the reason is you're able to borrow money? So that's why that market is going through what... I think people just assume when everything is great it's going to be great for a while. It's funny, when things are going well, nobody thinks it's going end, but when things are bad, nobody thinks it's ever going to turn. I had an investor who I would say, "Well, look what we try to do is buy things at 60 cents." And he goes, "Why not 50?" I was like, "Okay, that's a good idea, sure." And then if I said 50 why not 40?. It's, that's the market. It's not like I make stuff up.

Marc Lasry: (24:16)
So I think for all of us, we know there's going to be issues and there are issues today, and we're all investing in that. Now, is there a 10% default rate? No. So I would assume the same thing for Golden Tree and for Pat. It's are we working harder today? Yes. Because you're trying to find different deals, you're looking at different companies. Whereas when there's a 10% default rate, you're just overwhelmed by the amount of paper and there you're picking and choosing. So I think there are always problems, and ultimately our goal is to invest while there's those problems and wait for there to be a lot. And it will always come, it's a question of when. And whether that's a year from now or five years from now, I can't tell you. What I do have is I do have faith that there are a lot of people who are making huge mistakes.

Nicholas Millikan: (25:20)
So if we look at the current crisis of the dislocation of last year, it was really driven by a health crisis. But we look back to the global financial crisis, that was a financial crisis. So is there a difference in the type of distress that you have seen in the last 18 months compared to 10 years ago?

Pat Dyson: (25:38)
Short answer would be no. As I think about it, obviously the characteristics of this time around was there was more fleeting in a lot of ways. But if you think about the impact to the economy was more pronounced this time around as compared to '08, '09, whether it's unemployment or hit the GDP within that particular period. The market dislocation was less. Was everything sold in March last year? Yeah. Which is consistent with what happened in '08, '09. You didn't have the first lien sell off that occurred in '08, '09, you didn't have the leverage more broadly across the system that you had in '08, '09. But you did have situations where there were leveraged issues, notably in the RMBS market.

Pat Dyson: (26:35)
And then there were certainly, as Mark alluded to, more COVID impacted industries, whether it's Hertz or cruise lines, where, yeah, there was a bit more of a specific issue there. But broadly, and that's frankly where some of the opportunities arose, everything was sold. I alluded to Frontier earlier, Frontier was sold, but actually it was going to be a beneficiary because of the work from home environment and the need for broadband. All of retail was sold. And we invested in Jo-Ann Stores, which is a fabrics and crafts company that was actually going to be a net beneficiary and was allowed to remain open because they sell fabrics to make masks and there was also the desire to stay home and do crafts. So you had to winnow through all of that in a quick period of time, but there were certainly some winners and losers as there always is in these distress cycles. But I would say the biggest characteristic of it was the fleeting nature of the crisis as compared to '08, '09.

Nicholas Millikan: (27:45)
Any observations there Mark?

Marc Lasry: (27:45)
No, I feel it was the same. The big difference was I think in '08, '09 you were worried your financial institutions were going to go under. So that gave you more of a worry. So I would have told you in '08, '09 I was worried that this was the system of state around. Today, I wasn't worried about the system, I knew the system was fine. I just didn't know how long it would last. I was totally wrong, I thought COVID, after a couple of weeks when we all shut down I thought everything will be fine, I was so wrong. Thought that summer's coming, it'll be fabulous everybody will be ready. So I think for us, we got to invest in we did well. But I wasn't worried about survival, whereas in '08, '09 I was worried about, would we be around?

Nicholas Millikan: (28:43)
So there were a couple of things happening, so we just touched on the distress cycle. Have we seen a structural shift in the distress cycle? Has it become accelerated? Are we going to have more of these short bursts of distress rather than a more prolonged environment?

Marc Lasry: (28:57)
If you tell me what the Fed's going to do, I'll give you an answer. That's really it. I think part of it is I think the Fed is more willing today to act and really what it's about is liquidity. So if the Fed's willing to provide liquidity, it's only willing to provide liquidity when they're worried about systemic risk, and I think that's what it was. I don't think the Fed's going to get involved if you start seeing a slow down because that's fine, that's not a systemic risk to the system. So I think the one thing we really haven't had is a recession. If you think about it, a recession is two negative quarters. So a real recession, I don't think the Fed's going to come in that hard. It's not like they can lower rates much lower. So I think you need shocks to the system where people can't access capital, then the Fed will come in

Nicholas Millikan: (29:54)
At any thoughts there?

Pat Dyson: (29:56)
No, I would agree on the Fed comment. I think if you think about, again, the characteristics of the crises that have happened post '08, '09, they've been more fleeting. And I think that is because the Fed was in there where you knew you had this access to liquidity. And so if you think about the Eurozone crisis, well, that was... Ultimately, it ended with some move by the ECB. When you think about '15, '16, which was the energy led crisis that became contagion in the broader market, that was when spreads got north of 1,000 and the market stepped in. And then last year certainly was quick with the Fed also stepping in very, very rapidly.

Pat Dyson: (30:41)
So I agree with Mark, it's going to be if the Fed is not there, then you're going to see a more prolonged distress cycle, whether it's '08, '09 or '02, '03. I think that that's, also to Mark's point, what else can the Fed do is the issue. If you think about what's going on in the market, whether it's inflation, rates, taxes, more regulatory driven environment, there's some issues that... Particular when you think about, what's growth going to look like in '23? I don't know, maybe not so great. So it can certainly lead to a broader opportunity set.

Nicholas Millikan: (31:20)
So talk a little about the Fed the Fed's involvement coming in to save the day or ruin the opportunity for you Mark. So is it their role to keep stepping in? After the financial crisis, remember there was $800 billion bailout back then and now we're talking in the trillions. How much further can the Fed intervene without completely breaking the system? Is it their mandate now to provide liquidity?

Marc Lasry: (31:39)
I think it's becoming their mandate, I think is becoming a societal issue. You don't want people out of work, you don't want companies falling for... If you're a government or if you're president of the United States or if you're the head of the Fed, do you want people going into bankruptcy? Do you want people being hurt? I think the answer is no. And I think what's changed is originally the Fed was there to worry about inflation, to worry about rates getting too high. I think now the Fed is making sure that the system keeps working and that people have access to liquidity and that you keep unemployment where it is. I think it has changed, I think it's very much different than it was when I started in the business. I think the Fed now has a much bigger mandate.

Nicholas Millikan: (32:38)
Pat, any thoughts on...

Pat Dyson: (32:39)
I think it's the willingness of our society today to allow for this extended pain to occur is I think much more limited than it has been in the past. I think it's just because what the Fed has done over the last 11, 12 years, if things get to better, it was like, "Okay, you guys got to go do something." Whereas that necessarily wasn't the case before because they were in a bit more of a narrower lane. So if the size of the government and all of those things we've certainly shifted from a societal perspective. And I think that impacts how they react to the market.

Nicholas Millikan: (33:14)
It's interesting. The role has certainly changed for sure and you can see that. So if we look at, we've touched a little bit on sectors, what about geography? There's uneven.... And economic recovery is going on around the world, we've got resurgence. I'm Australian, my family has been locked down for 250 days. So what are opportunities there geographically?

Marc Lasry: (33:33)
They need to get out more.

Nicholas Millikan: (33:35)
They do need to get out more.

Marc Lasry: (33:35)
Your family.

Nicholas Millikan: (33:35)
They can't get out.

Pat Dyson: (33:41)
I'll go first. From our perspective, we're a bit agnostic to the jurisdiction. We focus on North America and Europe and then selectively in certain emerging market countries. As they think about the opportunity set, I would envision it being probably not too dissimilar from what we've seen over the last several years, where we're going to be more overweight North America, which is not surprising, it's a larger market. But even in proportion, if we think back to what we were doing in '10, '11, '12, where we had more than typical exposure to Europe because the opportunity set was there. If I was to think about moving forward, I think the opportunity is going to be broader in North America, size of the market. And I don't think that there's going to be massive dislocations between North America and Europe as it relates to the credit opportunity.

Pat Dyson: (34:42)
And then finally, emerging markets is going to be very opportunistic for us. We have an in-house emerging markets team that focus focuses on sovereigns and then we overlay them to help out from a corporate credit perspective as well. And we've selectively found opportunities in various jurisdictions. But we also know what we don't know in certain of these jurisdictions. So we're going to tread somewhat cautiously given the different bankruptcy regimes that may exist. So when we think about our overall exposure from emerging markets, it's always going to be in that 10% to 15% and max out there as we think about it.

Nicholas Millikan: (35:24)
Mark, you guys are very active geographic, it's one of your competitive advantages.

Marc Lasry: (35:27)
Look, we think there's... We have huge teams out in Europe and in Asia. It's a bit of an oxymoron we say we invest in Europe, we do, but really we invest in Northern Europe not Southern Europe because the legal system isn't that great. And if you think of Asia you want to invest in India, absolutely Australia, you want to do Singapore, you want to do Hong Kong. You want to do jurisdictions where the legal system works. So Asia, you've got a huge amount of different countries, but I think for us we're seeing quite a bit of opportunities out there. So I would tell you, there's a lack of private capital. So here in the US there's just there's a lot of competition, there's more competition in Asia and Europe. There's less for what we do, what Pat and I do. So I think it's gone pretty well.

Nicholas Millikan: (36:24)
What about China tightening regulation around technology, et cetera, do you see that as a risk or creating opportunities?

Marc Lasry: (36:29)
No, no, it's a risk. I think it's hard to invest in China. It is the things we've done where we've bought that. But I think right now with everything that's going on out there, it's much harder. I think there is a lack of capital because the Chinese government is clamping down. But I think from what we do, we want to have a certainty on legal side. So right now I don't know if you have that in China. So I think we'll just be a little bit more careful, whereas maybe we would have a year ago invested more. I think today will just be a little bit more careful for China specific.

Nicholas Millikan: (37:12)
So we've talked a little bit about the different types of catalysts there could be, but are there common catalysts for distress that people should be looking out for that maybe indicate something coming down the pike?

Marc Lasry: (37:22)
The bonds are trading really low.

Nicholas Millikan: (37:24)
Oh, that's a good answer.

Pat Dyson: (37:27)
[crosstalk 00:37:27] you first Mark, go ahead.

Marc Lasry: (37:29)
The bank that's really low. When you think of the travel sector, last year, that's where all the opportunities were because that was the sector that was going to take longer, the restaurant industry. So there's always sectors that have that are going through ups and downs. And I would tell you, I'm sure Golden Tree is the same thing, we start looking at a company once the bonds are trading 1,000 over treasuries. Because you got to get paid for that risk. So maybe they're doing 800 or maybe we're doing 1,000, they're doing 1,000 we're doing 800 over treasuries. Everybody's got a number and that's when you start really focusing on that company. But you've got to have the opportunity so that the price has to be down, so that's how we look at it.

Pat Dyson: (38:29)
I think it's tough to necessarily predict what's going to cause the dislocation. I don't think that we would've sat here in December of '19 or January of '20 and said, "Okay, COVID's going to cost us this massive dislocation." Now, I talked earlier about some of the fundamental pressures that are showing in the market from just a core credit metrics perspective. But as we, and I would echo what Mark said, when we think about looking at particular credits, A, we're looking at them all the time given that we're a broad credit platform.

Pat Dyson: (39:06)
And then as they go stressed or distressed, oftentimes our first purchase is not our best purchase. But we get deeper into a situation and there's nothing better than when you're deep into a situation and you've got growing conviction that your thesis is playing out. And even if it's going up, you keep buying, that's when you make the excess returns that we're all looking for. So tough again. We can all sit here and highlight things that we're focusing on and thinking about and concerned about. But what ends up causing the dislocation is always tough to discern. But again, you got to be in the market when it happens because just look back at history, things happen and you just got to be there and you got to be positioned to move quickly.

Nicholas Millikan: (39:49)
So we've talked a lot about corporate credit situations, is there any opportunities that exist in distress outside of that?

Pat Dyson: (39:58)
I alluded to it a little bit earlier, we've been active historically and structured. That can be opportunistic as well, again, going back to 2010 to 2012 or '13, there was a lot of dislocations in structure, whether it's European CLS or otherwise. And that was a decent allocation within our distress funds. From '14 to '19 or '20, not really. But then last year, there was real dislocations in certain elements of the RMBS market and we had some big allocations and were able to A, move really quickly and B, deploy a lot of capital in a situation that was a very good situation and also is something that we're able to monetize as the market returned.

Pat Dyson: (40:46)
So structured is probably even more than an accent for us, it is opportunistic. We've got a real strong structured team that does work outside of distressed. And then otherwise, I alluded to EM, we've been active historically in certain of the larger restructurings in an EM if I call Puerto Rico EM. So Puerto Rico, which has been a very strong investment for us over the last several years. And also we've been involved in Argentina. So we'll selectively go to these different jurisdictions when we see the opportunity set. And frankly, it's building on some of the stuff we've done in Puerto Rico, which has been a really strong, as I allude to, a really strong investment for us.

Nicholas Millikan: (41:28)
Anything to add there, Mark?

Marc Lasry: (41:30)
No, I think it's really been on the real estate or on the structured side, so it's the same thing. The thing I found I was smiling a little when Pat said our first purchase is never our best one, ours has been fabulous. But there's been a few where you bought something at 60 and you keep buying it at 50, 40, 30 and you keep looking at the analyst going, "Are you positive that we should still keep buying?" But the problem is in these markets, you've got to buy when people are selling and you've got to believe in your thesis. And Pat's absolutely right, I wish I could tell you the first purchase was the best one. It tends to be you start buying and then you keep buying. And part of what you want to do is, the only way you get people nervous is as the price keeps going down, then more and more people sell because they're like, "Whoa." So I think the hard part in what we do is you're constantly buying at lower prices until it's-

Nicholas Millikan: (42:40)
Do you have any example, Mark? Maybe one-

Marc Lasry: (42:43)
Pretty much everything we've done. [crosstalk 00:42:45] one example, I'll just give you every name. I'll give you a great example, I've told this story before. But we were involved in Ford in 2008 and we started buying Ford bank debt it was 90, 80, 70, 60, 50. And when you got to 50 cents, we literally had half a billion of it, we just kept buying. And our trader says, I'm sitting there and he goes, "Hey, I got another 100 million of Ford bank debt, do you want to buy it?" I'm like, "No, I hate the name. I can't stand it anymore." And he goes, "Well, we're locked, we got to give a bid." I'm like, "I don't want a bid" And he goes, "Well, we have to." I look at the analyst and the PM and I'm like, "What do you guys want to do?" They go, "Well, we think it's good." So I'm like, "I hate it. Let's just buy it. Let's bid 30 cents."

Marc Lasry: (43:42)
He goes, "He's never going to say yes. You can't bid down 20 points." I'm like, "That's the point. I don't want to own it." And then you hear the trader go, "Okay, thank you." I'm like "What happened?" "Because we own 100 million at 30" And I'm like, "Shit, that's not good. First of all you got to write down 520 points." So literally you buy 100 but you just lost 100 million on your mark. And I looked at the analyst and I'm like, "I'm going to kill you." Because I wanted to. And he goes, "I'll be right back." I go, "Where are you going?" He goes, "I'm sick to my stomach, there was no way they could do this." I'm like, "Hurry up, I need to fire you. This isn't enjoyable." And we got out at par. But you went through, that's why I was laughing when you said it, you literally went through hell.

Marc Lasry: (44:35)
Imagine every day writing down your portfolio and that's that's what March was during COVID. We'd buy something we were like, "Yeah, we bought it a good price." And a day later it's down five points or down 10, you just keep marking things down and everybody calls you up, you guys call up and go, "Hey, are you okay? Do you know what you're doing? Your portfolio is down." Because everybody wants daily. It not like you used to give people a yearly how we did for the year, now it's daily. And they go, "Are you guys still smart over there?" And like, "No everybody lost their intelligence." It is funny when you go through this but it happened. I would tell you it's eight out of 10, I don't know it's not like two out of 10, it's eight out of... Because that's the only way you're able to buy.

Nicholas Millikan: (45:29)
That's a great story. So we're up on time here. I just want to thank you. But I have one last question, this is just for you Mark because you're probably the only person in the room that has experienced in this. We're in New York City, right?

Marc Lasry: (45:40)
Yeah.

Nicholas Millikan: (45:41)
There's a distressed opportunity, it's a couple of blocks down the path, it's the New York Knicks, you're ready to take them over and turn around.

Marc Lasry: (45:48)
They got issues. Non you know what? It's fabulous. Winning a championship in Milwaukee it was so cool. I tried to explain to the players it was because of my leadership, but they seem to think it's because of what they were doing on the court. But we had a great time. It's going to be hard for the Knicks. You need certain players and this league has turned into a superstar league and you need a couple of those. But yeah, I'd be happy to if they wanted to try.

Nicholas Millikan: (46:23)
Excellent. As a fan, I'd love you to.

Marc Lasry: (46:26)
We'll try.

Nicholas Millikan: (46:27)
So thank you, Pat, Mark.

Marc Lasry: (46:28)
Pleasure.

Nicholas Millikan: (46:28)
It's been a pleasure talking to you.