Banks Are Still Reducing Energy Exposure: BlackGold’s Honari

of positioning around this from a credit perspective. Sharam Honari, she's he's partner of black Gold Capital Management, which overseas one point to billion dollars from Houston, Texas. But he joins us from our eleven three oh studios in New York. Sharon, thank you so much for joining us. I want to get your perspective, if from you know, a credit investor standpoint,

as you see oil prices dip lower, what's our biggest concern? Well, I think from our perspective, you know, we've actually had a viewpoint that the commodity would be range bound forty to sixty dollars. UH. You know, we invest up and down the capital structure of energy companies, and and from that perspective, the you know, the daily swings in oil prices don't really impact our credits as much as they probably did when oil went from a hundred ten uh,

you know, just twenty six dollars a barrel. As we've seen, you know, after kind of this history doric dislocation in the in the credit markets, we've obviously seen uh, you know, rebound and in crude prices about fifty nine dollars a barrel. Companies have really been focusing on their balance sheets. They've been cutting distributions, selling assets, increasing their efficiencies. Really those

are all credit positive type of actions. So from our perspective, if you look at the market today, it's obviously very challenging for energy equities in particular. Energy equities were down last year, they're down this year again. Uh. There continues to obviously be a lot of stress, uh in the energy arena, But investors at this point of really demanding you know, return on invested capital, and it's really forcing companies again to improve their balance sheets. And I think

that's really a positive for credit. What is the collateral to most of this energy credit. Well, I think it depends on obviously the the type of company. But if you're you're looking at you know e, m p S, obviously it's the the assets of PDP value and oil field services a different type of dynamic. Uh. And obviously the midstream we really like the midstream space that a lot of the infrastructure that's in the ground, we really

think that can't re replaced. So you're talking about the actual refineries and the pipelines or or or the assets you set assets in the ground. So is that the natural gas and the oil in the ground. Just trying to understand. Yeah, it depends on again what subsector. If you're looking at the midstream space, we're talking about process and gathering. If you're looking to exploration companies, that's really

the oil and gas in the ground. So sure you were saying, uh in a note of that you put out earlier, that you think that there is an opportunity and offering financing to high yield companies, specutive great companies. Uh, that's within them one hundred to three hundred million dollar range. Can you talk a little bit about that. Yeah, I think that's really a part of the dynamic that's really

changed over the last couple of years. Again, if you look at the energy space from two thousand fourteen on, obviously, you know we had two plus bankruptcies in the space. There was really a survivorship bias. Again, companies focused on their balance sheets, but a lot of banks had a tremendous amount of exposure to the energy space, and the Office of the Controller has basically forced a lot of

the banks to continue to decrease their exposure. So if, for example, you look at the e MP space right now, companies there are three times plus levered. Banks really can't lend to those type of entities. And for folks like us, there's an aspect of the market where I would say hundred to three hundred million dollar type of range. There really is a scarcity of capital for those type of companies,

and we're trying to fill that void. Then the beauty I think of of that smaller kind of subsid is you know, you go three hundred million above that's where people have access to the high yield markets or leverage loan market, but below that that's not really the case. Are you doing that with direct lending or with bespoke bond offerings or yeah, for us, I'll give you an example. I mean, we actually just did a direct lending deal

to a company called Atlas Sands and the Permian. It's actually a company that was started by a Bud Brigham who's very well known in the energy space. They put in about two hundred million dollars worth of equally, we provided them with a hundred fifty million dollar first lane and really the success there on our part was, you know, we've we're based in Houston, we've known but in his team for ten fifteen plus years. Uh, they decided to do the deal with us rather than with other folks.

So can you tell us what is the interest rate on a hundred and fifty million that you loaned that particular thing? I cannot actually share that with you. That's kind of a private transaction, but it will give us an idea then of what would be the cost to that kind of borrower and what kind of duration are we talking about? Yeah, I think for we're looking at kind of double digit type of returns. That's actually actually

a five year loan for this particular transaction. So firstly, in a piece of paper, I thought it was really interesting that you're saying that regulators are still correcting down on banks and having them reduce their exposure to energy. Uh is that continuing today or that was just throughout last year. No, it's actually continuing today. I mean our offices in Houston, we have bankers coming through all all

the time. You know, they're looking to partner with us to basically liquidate some of the assets that they just can't hold on their books. At what price level does it become a real problem to maintain these credits or to lend even more money to the industry. Well, I think you looked at one of one of the aspects I think that's really been changing in this industry overall is if you look at, for example, energy equities, they've been underperforming for a decade. I think a lot of

investors are also taking a step back. You're seeing it also, you know New York State Pension here, the suing Exxon and the like, and they're actually divesting their assets. So I think that's part of the aspect of scarcity of capital going forward. Where there's a need, there continues to be a need. Banker stepping back. Obviously, there's a lot of private equity firms folks like US that are trying to ultimately fill that void in the market place. Thanks

very much, Sharram Jnari. He's the partner of black Gold Capital Management, talking about credit and the energy markets. We are broadcasting live from the Golden Sacks ten thousand Small Business Summit at the Washington Hilton in Washington, d C. It is brought to you by Sage Business Cloud Financials, a powerful cloud accounting solution built on the Salesforce platform to empower businesses to scale without complexity. More at Sage dot com slash Financials. Uh So, I'm we're very lucky

to have Katie Coach here with us. She's Global head of Fundamental Equity Client Portfolio Management at Goldman Sachs Asset Management. And Katie, before we sort of dig into what's been going on in the markets, why are you here? Um? So, First of all, thank you so much for having me on the program. Um We are here. This is the

largest gathering ever in the US for small businesses. Um And we're here because at Goldman Sacks we think that it is incredibly important to support small businesses as a way to increase the overall economic health of the economy. It's a program that we've had for eight years, We've reached sixty d businesses. We're bringing those business owners and entrepreneurs education, um, and we're also giving them connections and

access to capital. So Katie, I guess, um, it would be good to connect this to what we're seeing in markets. We're seeing a lot more volatility. We're seeing the specter for rising interest rates, with even so much gold in success Management predicting that UH tenure treasure YELD could go up to three point five percent in the next six months. When does this bleed into consume business small business confidence?

What does this bleed into the real economy? Right? So, Um, I think we we should really separate what's happening in markets, which is about volatility. Um I would argue that actually volatility needed to normalize. No one promised that was going to be an orderly process that rarely rarely is, but it is good to get to more normal levels of volatility in markets. UM. And what I would say is that you need to separate that from what you referred to as the real economy. When we look at the markets,

they're volatile, yes, but it needs to normalize. When we look at the real economy, it actually continues to be incredibly healthy. Um. And when I'm out there talking to these small business owners, they feel incredibly optimistic about the opportunities set in front of them. And that is anecdotal

to these business owners. But actually the n f IB, the National Federation for Independent Businesses, came out with some data overnight where they're looking at a very broad population of small business owners and asking them the question, what you know, what is your level of optimism and is this a good time to expand businesses? And what what you see in that survey data is that we're at record high levels. Uh So Main Street is actually roaring

in the US. That's extremely good news for the economy. It doesn't mean it's going to translate into perfect equity markets. There's gonna be ups and downs, as we've seen. But if you actually feel pretty good about the underlying economic trajectory here over time, that should be good for risk assets as well, Katie. Earlier today I got the chance to speak with one of the attendees here. UM. The Debka sen is the owner and operator of a classic

tours collection. They're based in Redonda Beach, California, and she told me that one of the things that she has learned from these Goldman Sachs events is not just how to operate her business in her industry, but how to operate her business in her community and how she had

not necessarily understood that role. And I'm wondering if you could just maybe twin that with something that Goldman Sachs is doing with the online lender Marcus, because one of the points that she made is not everything is a sales call, and that it is sometimes difficult to remember that as a small business, the sales cycle can be long and you don't know where that next sale is going to come from, right so income when we work with these businesses, it's great that she has the learned

that from the ten thousand Small Business program, that she has to be a successful business but also has to be thoughtful about um how she interacts and works with the community. And I would say that that is on two levels. The first is, of course, many of these businesses are sourcing from the community for their talent, and

so they're hiring locally. And one of when we look at the challenges that these small business owners point to, there's really three main ones and and and the first amongst those is attracting and retaining employees, which they're usually sourcing from the community. And so one of the solutions that we're putting forward in this program is to help people we train them on how to to find the

right talent locally. But then we also think the government should step in and help give, for example, tax credits for people in terms of training employees, because when we invest in employees, were ultimately investing in the economy. So that's one thing about interacting with the community locally is about hiring. The second thing, which you pointed to, is about access to credit and capital, which continues to be

a major challenge um for these small business owners. And the regulation that we've had since the financial crisis means that it's actually been more challenging for these small business owners to tap credit and capital um because they're often actually having to do that off of a personal balance sheet and that's become much more restrict credit card yes exactly.

So really when you talk to these business owners, their credit cards have been their working capital, right and so the rates are high and also we've had less access to credit coming out of the crisis, and that's been a real challenge for people in scaling their businesses and so connecting it to to what we're trying to do here. We work with a lot of local organizations, UM and helping those organizations extend and make loans to small businesses

because it is about retaining people. And then the other challenge which you brought up is also about access to credit to keep the business going and be able to scale it. So just really quickly, at what point will treasure yields rise enough that it will become restrictive for small businesses to borrow? Yeah, so, UM, listen, we're I think it's important to recognize we're coming off of incredibly low rates here, so three and a half percent, I

get it. That sounds high to us, but in the context of a long history of the US, we've had a lot of small business development at multiples of that. So I'm actually not that worried about the treasury yields being restrictive for barring too small business owners going back to capital markets when we have a backup and yields. Obviously, that could cause a sell off not just in the bond market, but also the equity markets. So that's something to watch as it relates to to capital markets. Thank

you very much for being with us. Katie Cotch is the global head of Fundamental Equity client portfolio Management for Goldman Sacks Asset Management, and I want to thank you very much for being here. As you can hear in the background, we are here with more than well, it seems like ten thousand small businesses, and one of them

joins us now is Sarah Cows. She is the founder and the chief executive of Swell that's s apostrophe uh W E l L. And she's described herself as a recovering countant, but now known for her double walled, copper coated stainless steel vessels. Sarah, thanks very much for being with us. Thanks for having me today. Tell us a little bit about how you started this business. I believe thirty thou dollars and an idea that you wanted to change the way, well, the way people consume any kind

of liquid, any kind of beverage, you know. I had the idea of myself as the customer and then the market from there. I thought that the world needed less single use plastic water bottles and something that looked better and worked better to carry our drinks in. Now I understand that this really came to you when you were hiking in Arizona with your mother. That's correct. I was drinking out of a water bottle that was single walls.

It was hot out. My water was hot instantly, and I had this aha moment that if only I could have cold water while I was hiking and something that actually looked beautiful too, I could convert people to really using my product. So, Sarah, we talked a lot about the manufacturing process, where things are made, the whole supply change.

Can you talk us through that from your business and what the challenges have been to scale up your business as you do enter more than sixty different countries exactly. I think that's one of the hardest things about scale. You know, if I was making making software or service, I might be able to have product a lot faster, um. But but honestly, our product is made in Asia. UM. The packaging has also made in Asia. It's put together there, and it's it's shipped to the US or to the

point of distribution. And as you mentioned, sixty five different countries. UM, we also have about two hundred different skews in stock at any given time. So it really comes down to having a very smart analytical planning team to understanding what colors and sizes are going to be hot in what

markets at what time. And I just want to mention that I believe you can spend anywhere from twenty five dollars to even hundred dollars for one of your vessels, one of your bottles, because if you like the Schowski crystals, you could probably get one of Marcus. I believe that is correct. That was a special edition that we did where the proceeds went back to charity where mission driven companies.

We work with all different kinds of charities. But I have to say I was surprised at how popular those bottles were. Well, can I ask you just about how quickly trends change and how much you do have to adjust? I mean in water bottles, how how how much can things change? That's a great question. You know our original colors, so we bought some core colors, you know, our ocean blue, which was the color I started with, the teak would

bottle that looks like would. Those are our course best sellers and they really do make up the bulk of our business. But what our customers love about us is we're always innovating and Oftentimes our customers become collectors. They buy the bigger one because they hold a bottle of wine, or they buy the Lily Pulletzer collaboration because it matches

their handbag or maybe their sweater. Um. We have found that customers have multiples at home, they take them to work, the gym, to school, and because we're always coming out with something that's on trend or something that our customers really cove, it that we can have these collections that come in and out all the time, even though those

core best sellers are really driving the business forward. Now there's some estimates that you're doing at least if that more than a hundred million dollars in sales a year. Customers include Starbucks, Whole Foods, Jay Crew. But your first customer was the Harvard Business School. That's correct. I was an alumni and I really was hoping that I would able to convince them to use my bottles and go a little plastic free on campus. And they took up your offer. Yes, and even to this day they buy

a bottle for every student. Now that's all great, but there was an Oprah moment that really kind of change things. Can you tell us about that sure so UM. In the early days when I was the only employee, I was also doing PR so I marched myself to the post office with a bottle in a box and addressed it to Oprah win Free, Chicago, Illinois. It made it to her senior editor, who actually took the bottle on her family vacation to Peru. She called me and said,

I love this thing. It really works. I want to put it in a magazine. And really from there, I think that was the day we turned from a project into a business. So can you talk a little bit about how you got the capital to start with the manufacturing. Who were talking earlier about the challenges of credit for

small businesses, So how did you start with that? Well, you know, Beim mentioned that I was recovering accountants, so I really did care a lot in the early days about immunity economics, and I used my personal savings, so I was very careful, even though it's making a small salary as an accountant, to always put money away, and it was my nest egg. It was my my future retirement savings that I was able to use to start manufacturing UM. But my first run of of product was

only three thousand pieces. Um. I had a very small apartment and that's where the inventory was kept under my kitchen table um and really part of the reason, um, you know, I didn't raise money in the beginning. I was very careful about where the product was going to be sold. Part of it was for brand, and part of it was because I just didn't have very much inventory because I couldn't afford to buy more until I

sold that first batch. When you open, you opened the boutique, I believe in Palm Beach, I did what was behind that because you've gone from that single boutique now I know you just did a deal I believe with Married International and their Elements hotel chain to put the bottles in the hotel business. You know. In the early days, I wanted to get as close to the customers as I could, so having a small store, it was a bit of a pop up store for six months, just

listening to customers. What do they think about the product, what colors and finishes were they looking for. But to really scale the business, I had to start thinking about those big corporate partners and understanding are they looking for sustainability In the case of Marriott and in their elements brand or you know, are they really thinking about merchandise in the case of what we're doing with Starbucks. So it's it's great to have those small independent accounts. It's

really how we built the business. I'm still in about two thousand small stores in the U S. And they just like the small businesses here at the conference, they really are the backbone of our business. But to really scale, I wanted to go with some of those bigger brands, Sarah, real quick, which country have you found to be the most fertile ground outside of the US for your business right now? It's Canada if you believe that, UM. But some of the countries that we're starting to move into,

for example, we're just getting started in Japan. UM they're super interested in design and they love the design that UM that we have on the bottle. So if for me, it's a bit of a surprise if if a country is either looking for us for the sustainability angle, the fashion angle, or even the design angle, everybody seems to have something else that they sort of lean into UM. And luckily with well we have so many different messages. Sarah House, thank you so much for being with us.

Sarak House chief executive officer of swell s Apostrophe W E l L. Talking about how she started that business and grew it to where it is today. Talking about financials and financial markets. Right now we are seeing uh, some declines across the board in US equity markets. And to understand uh, sort of how investors ought to be thinking about this volatility and navigating it is Jack Avalin, founding partner and chief investment officer at Crescent Wealth Advisers. Jack,

thank you so much for joining us. I'd love to get your take on a on a key question today, which is the economic backdrop looks good? Pretty much everybody says that at least in the short term, Um, at what point is this just evaluation story? And how long if it is, can mis continue with stocks just overpriced where they were and uh needing to reprice a bit more before they seem fair. Yeah. Everything that I've seen so far this year, at least related to this volatility

is pretty much technical evaluation related. I took comfort in in seeing that, um, you know, credit conditions uh pretty much remained intact throughout the entire downdraft. So that suggests to me that you know, this isn't sickle, This isn't anything at least related to the business cycle yet. Uh, this is just simply a repricing as you as you described Jack, there are You've written that there are three

types of reversals. Right, there's the technical, which you just kind of alluded to, there's the cyclical, and then there's the systemic. Right yeah, okay, so when do we know which is which? Sure? So the the cyclical it relates to the business cycle. For example, one of the things I'm a little bit concerned about now is that we're

running our economy faster than our potential GDP growth. So we're essentially beating a two percent race two percent donkey into a three percent or so racehorse, and that we can do for a while until we start running out of capacity. One of the things I loved about this recovery, while it was certainly slow, it is really steady, and one that we were growing consistently at a potential GDP which is about two. When when we start ramping higher

than that, then we could see excesses. And then then what we'll see in a downturn would be things like credit conditions tighten up, maybe as lenders decide that their borrowers are less likely to repay their loans. We may see a yield curve in version. We could see some inflation as we run out of capacity for either production for labor. We're already starting to see a little of

that in trucking. UH. And so those are the clues that we would be looking for to say, you know what, this is now a circle called downturn, one that typically lasts a few years, not just a couple of days. So, Jack, one thing that a lot of people have been saying has driven the sell off and equities has been the increase in benchmark US treasury yields. UH. Goldman's Access Management came out overnight was talking about out seeing that yield go to three and a half percent within the next

six months. Do you agree, Yeah, Unfortunately, I don't know. I don't know about timing, but I do agree. I mean, if you think about stocks and bonds, they're just generally competing for capital um. If you you know you want steady income with low risk, you want typically gravitate the bogs. If you want higher return expectations with a little more risk,

then you'd go to equities. And since two thousand nine, UM bods have been tugging, you know, tugging at this tug of war against equities with one arm time behind it's back, because yields were just held artificially. ROW. One of the ways I look at that is historically the tenure treasury yield tends to track nominal GDP. Nominal GDP right now is four percent tenure treasury two point eight, So there is some more room UH for UM yields

to rise. And as a result of that, equities have been winning a tug of war and has and has have commanded a premium that they would normally not enjoy if fields were higher. Jack, you got any how much cash do you have on hand for your for your investors. UM. We have not raised cash during this UH downturn, largely because again we are looked at it as more of a technical bump than anything more serious than that. So we were pretty fully invested going into two thousand and eighteen.

PIM and like I said, didn't use this as an excuse to maybe get some sideline cash in, but not an excuse to get out of the market. So are you actually buying now? Yeah? When if we have opportunity to buy. We will. Uh. It's in other words, you don't see it having come already. No, I think that, you know, I will use these down drafts as buying opportunities because, like I said, I'm not seeing much follow

through to any other markets yet. UM. And if you now strip away UM valuations and look at them, look at the market relative to UM, the earnings and yield I'm sorry, earnings and dividends markets about five percent over valued. I mean to me that statistical noise, We're actually back to fair value, whereas we started the first couple of days of the year between fifteen and over valued. Jack, what kind of stocks would get you interested in buying? Uh,

like Apple or Facebook or what kind of stocks? Yeah? I think that. UM. You know, I'm not a stock picker, but I would say that, you know, if you're looking to trade, certainly that's where the action is on the on the downside and of course on the upside. UM. So as a long term investment, I would say, as economic growth tends to broaden out, UH, these large cap growth companies will kind of fall behind some of the more broader names like financials UH and industrials and basic

materials UM. So from a sector basis, I would say that probably plays pretty well over the next four to six quarters, but over you know, as as a trade as a hunch. Uh, These large cap growth names like the you know, Amazon, Facebook, Apple, and so forth, there are interesting plays. All Right, I'm going to leave it there, but I want to thank you very much for joining us. Jack Ablin is the founding partner and the chief investment officer at Crescent Wealth Advisors. Thanks for listening to the

Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo wits one. Before the podcast, you can always catch us worldwide on Bloomberg Radio.