Hello, and welcome to the Credit Edge, a weekly markets podcast. My name is James Crumbie. I'm a senior editor at Bloomberg. This week, we're very pleased to welcome Mark Cherimutu from Hafen Capital Management, a private credit company mostly focused on Europe.
How are you, Mark good?
How are you doing very well? Thank you? Thanks for joining us today and I'm very keen to get your thoughts on the private debt market and from Bloomberg Intelligence. It's great to see Julie Hung, who covers consumer credit. Welcome back, Julie, thank you for having me back. Also delighted to see Lisa Lee, who covers credit markets from London. Brilliant to see you again, Lisa, thanks for having me on. So let's start with you Mark. Great to have you
on the Credit Edge. The big question, and everyone keeps telling me, it's the fact olden age for private credit. Is that still the case twenty twenty four? Is it a golden age? Does it continue?
It's it's hard to look past it. I mean, if you think about the fundamentals, double digit yield, first lean security, stable companies, larger companies than ever being financed by private credit. It's hard to look past that the fundamentals are stronger now than they've ever been and the technicals which are driving the growth of private credit that we see extending beyond twenty four and further.
So we actually think we're very bullish on the market.
So what does that actually mean for twenty twenty four? Is that bigger and bigger deals. Is it record levels of fundraising? Is it more disintermediation of Wall Street? Better returns? I mean what specifically we're talking about when we're talking about, you know, fantastic times in private debt.
I think there's two two elements to the growth which sometimes get mixed. There's there's there's the white space growth for private credit in Europe, which is just larger companies, more diversified companies, and more sponsors using US as an asset class. So that's one area of growth and there's lots of reasons why that's continued to grow. You know, there's more banking assets in Europe and there's in the US, and we've got further to go in terms of that
de leveraging of the European banking balance sheet. So there's and the replacement being private credit. So that's one element and then there's also the overlap but with the public markets.
I mean, one of the drivers over the last two years of activity within in Europe in private credit has been that battleground over what used to be serviced by the broadly public broadly syndicated markets and what's gone what's gone to private and so and we foresee that continuing and there being a coexistence between the two asset classes, so we see growth in both directions.
Talking about these big private credit funds, we're now seeing possibly a record twenty billion dollar fund. What is the fundraising environment right like right now?
It's look, it's it's fundraising is tough for everyone. It's taking longer than ever before. So fundraisers which use cycles which used to be twelve months are now now eighteen months. But I think what we're seeing is there's a there's
a concentration going on. So the bigger managers are the ones with a better track records, the ones with more established origination networks, They're the ones that are really succeeding, those which have the better relationships with the sponsors and so source the better deals and get the better terms.
And that you're seeing that consolidation happening. From a more macro perspective, Europe is just really interesting, right because if a lot of the asset allocators are over indexed private equity relative to credit, and they're over indexed US to Europe.
So from a diversification perspective, European private credit is a great place to be allocating in twenty four And so whilst there's a lot of people raising and it is taking longer, the most successful managers are the ones which are really gaining traction.
And do you find some of the interested LPs from the Middle East, from the US, from Asia? I know there's broad array of interest, but if you had to pick a certain region which is most particularly interesting in European private credit, what would that be? Where you guys focused.
I don't think there's any one particular region, but we've really noticed an uptick in interest in the Middle East, in Asia and even in the US looking to diversify their portfolios and really attracted by the opportunity in Europe. And so you know, there's there's there's multiple touchpoints and multiple areas of interest in Europe.
Now, what's your first destination there on the on an airplane?
Is it?
Is it Toronto.
Is it Dubai?
I mean, what's where do you Where do you like to go? Mostly for your fundraising.
I spend a lot of time in the US and a lot of time in the Middle East, But it's I don't think I'm unique in that way.
Respect Just back to the sort of golden age idea that we're talking about. We've had some guests on here recently raising a lot of red flags about private debt. They're maybe not as close to you, as close to the market as you are, but you know, they talk about the speed of the market's growth. It's already bigger than the US highe bond market and it didn't take very long to get there. There's you know, seem to be no transparency, not much liquidity, all the risks again
of companies falling behind on debt payments. As the rates, you know, they may be coming down, but they are very high in relative terms. There's going to be a refinancing wall. And at the same time, there are a lot of you know, relatively liquid and high yielding opportunities out there, you know, including government bonds, so you don't really need to stretch for the return anymore. Some you know, maybe maybe they are conflicted because they're trying to compete
against you. But and it seems to come from the cell side, but they are calling it a bubble. Do you think that's justified?
It's it's ironic that the banks are calling above all, given that they're the ones trying to get into private credits. So I find that quite a musing. Look, it's there, it's incontestable. There has been rapid growth in in the asset class in Europe in particular. We've got we're still a long way behind the US, and so there's there's
more runway. I think you'll find the sophistication of the larger managers in thinking about risk, in thinking about their regulary framework, in thinking about the lines of defense, are actually much more advanced and much more sophisticated than the outside world gives us credit for. I think credits selection, I think is much better than people give us credit for.
I think we are also going into a period where that there's going to be a bifurcation between those managers who have you picked well, they've got really good performing portfolios and more assets going in and more concentration on moost of those that smaller group, who are who the
better pickers right and the better stewards of capital? I think that you know, we've been through a ten year period of low interest rates, low defaults, relatively attractive growth, and now to the time where you're going to actually find out who's who's really good at this right, who's really a good steward of capital, because we're, as you say, we're in an environment where rates are still elevated, growth is still anemic, there's still some systemic risks to the economy.
So I think it's I understand people's concern, but as a persispent on the inside, you know, looking out, things are actually less beleep than you'd imagine.
Mark, are there specific sectors.
That you like?
Yeah, I think, I mean it's it's no it's no secret that we have we like healthcare. We have a dedicated healthcare team, both in the US and Europe. It's been a great source of deployment for us, the more stable and resilient parts of healthcare in particular.
You know, we're not you. We like software. Like a lot of other.
Private credit guys. We like picking the better businesses within the software world. We know that not all software businesses are created equally and we like sort of you know, the very market leading professional services sector where you've got a real reasons to exist consuming nony discretionary, you know, real downside protection. Those are the things. Those are the areas that we spend a lot.
Of our time on the software mark. How are these earnings holding up given those types of deals, you know, they're generally known for heavy add backs and synergy expectations.
We've just gone through our portfolio review and they're actually holding up really well. We've for exactly those reasons that you mentioned, We've been paying a lot of attention to the performance and the monthly incordantly numbers and actually top line is holding up in the names that we have really really well. So we've been pleased with performance in there.
Are there any centers that you avoid mark you just think are like kryptonite for private credit and for Haven.
I think it's I can't speak for the market as a whole, but but we we find consumer exposed businesses with no downside protection really difficult, right and and particularly in this sort of environment where you know, the rate rate rises are affecting Joe consumer that's going to flow through to mortgages, and and effect disposable income. So so that's those are parts of the market that we struggle with. Pure retail, for instance, work with no no asset backing really hard.
You know, do you have a rating standard for when when you're looking at what investments to make you want to avoid very high yield or you know, you're you're looking more at the business more than just the credit ratings.
I mean, we don't take a credit rating approach to take to the investments we look at. We are very focused on credit. You know, Credit selection for us is the most important thing that we do, and so diligence, understanding, sustainability, learnings, you know, free cash flow, real threats of the business, both competitive as well as systemic, you know, those are the those are the real core things that we focus on.
We're we sort of look at the look at credit from a from a fundamentalist perspective.
On the returns mark, I mean they are very high in relative terms, I mean high teens yields on some of these deals. That sounds great from the investors standpoint, but for an issuer, how sustainable is it to them, you know to pay that level of interest for the long run. I mean are you not putting putting all of these companies under a huge amount of pressure.
Yeah, it's look, we're we're a floating rate product, right, so that's a benefit to our investors, But obviously, as as you know, as you pointed out, it's that's the
burden of our portfolio companies. We focus very much on free casually and so we focus on even with the rates where they are and the margins where they are from a market perspective, we focus on the businesses that can can support those and actually we've seen leverage come down in the last twelve months in a direct as a direct result of where rates are, and so there's a right sizing of the balance sheet to try and address that elevated interest rate.
Gun Do you think there's come a time when there's gonna be a lag effect of other rate rises and the interest rate payments, Because you're right, corporates have held up very well for many many people. Many portfolios are doing okay. But as we get into almost a thirty year of rate high rights hikes and perhaps a recessionary environment, what do you think about the future.
We're cautious on the outlook. Credit investors by nature are more downside perspective than outside.
We are.
Cautious around how that lag effect and fully seeing the effect of having these elevated rates. We're going to have elevated rates in Europe for much longer than the US, like if you just look at where where the curves are. And so it's really about sustainability of business models. It's really about, you know, picking the ones which we have a reason to exist and have an ability and scale
to cope with the pressures and still manage that. But you're right, they're going to be some companies that just can't. And one of the things we've done in the last twelve months is trying to avoid some of the smaller companies which rich are the ones which are generally struggle in the face of macroeconomic pressure. So we've very much focused our attention on moving the medium size of companies up in Apple project.
In terms of the competitive landscape, mark, you've seen a ton of new entrants come into private credit. Everyone wants to be involved. It's a big new thing. But I mean, we've taught on the shows about the risks that that brings perhaps less sophisticated participants coming in doing deals that maybe shouldn't be done, and those those causing problems down the line. But in terms of you know your business,
are you seeing fee pressure from this? Are you seeing investors asked for lower management fees or greater oversight or anything else to try? And you know, because because they can, I mean, you know, they can pick and choose.
I think as a general comment that investors are very savvy. They they realize that there's a lot of people coming to raise funds and so focused on the economics around around the managers they.
Do want to allocate to.
I think there is still a premium for those that have long established track records, have real presence and subsistence in the markets, and and and have real originating networks which which can help in in low eminem environments as we've seen. So I think they're you're right, there are new entrants. You're right, that creates a dynamic that a
influence the terms on raising. But I think our experience, and I think the experience about peers has been people flighting, people flock to quality, and there's a price to pay for that. So I think it's still an attractive environment for us, for us and our peers to raise.
You say, you've gone towards more bigger companies. And last year we saw the biggest private credit loan in Europe and that entailed a syndication of a number of lenders. What do you think about private credit and these sort of almost lightly syndicated deals where you see twenty somewhat
lenders in a private credit deal. It's sort of a little bit different from what has traditionally been what private credit is supposed to be one lender, maybe two lenders at most, but almost back to the way the leverage loan market used to be saved fifteen years ago.
Yeah, look at this. Clearly there's been a shift in the last twelve months. The prevalence of clubs in Europe business is on the rise, and I think that's a trend and theme that we're going to see throughout this here and beyond. I would say that the twenty plus lender syndicates is the outlier. I mean, we've only had six deals in Europe above a billion. I think the sweet spot in terms of syndic conversation that we're seeing is more in the two.
To five range.
And there, I think you've got and that comes back to the theme of concentration, you've got the same group of people looking at the same assets and being clubbed together. They're generally ones which think about credit and risk in the same way. They generally think about documentation in the same way.
So I think you're right there are these outliers, but.
Actually the market is from all centering on a much lower number of participants, and that I think is going to continue.
Okay, And do you worry about any of these syndications about liquidity, about having almost like going after there's probably indicator market. And now with the banks feeling a little bit more assured, do you think they'll come back for some of the deals that they've.
Last I think we're not naive right there.
We know that the banks are actively pitching to cut and refinance some of the private credit deals that were done away from them in the last two years. I happen to think that there's a there's a natural medium where we can where the two assets co exist, right, And but it goes back to the point I mean
at the beginning, that's not our sole source of growth. Actually, the more attractive source of growth is the systemic leakage of capital out of the system and into private credit, and so I actually think that you know, yes, we'll see more activity than the banks. Yes there'll be a bit more competition around those type of assets, but actually not that's that's good for us, right, because we've got plenty of other things to do.
When you look around at everything, you cover the big universe, what are you most excited about for twenty twenty four? Where's the big opportunity?
I think for Europe in private credit, the big opportunity is going to come in refinancings, right, because there's never to be going to be an uptick in LBO activity. Twenty three was pretty muted from an M and A perspective. I think if you talk to market participants, you know we're not going to see an immediate snap back. It's
probably back ended. But I think what we what is going to be interesting is we've seen almost no refinancing in the last twenty four months, and there's there are large maturity walls in twenty six and twenty seven, you've got some in twenty five as well, and so I think twenty four is going to be the year.
Of of of of.
The rebooting of that refinancing opportunity, and a particular interest for us is a lot of these companies are not They haven't de leaveed enough to be able to be refinanunced dollar for dollar in cash pay terms. So I think you're going to have to You're gonna have to recut some of these balance sheets, which is going to be provide a really interesting direct lending product at a.
Lower attachment point.
But also for for for firms like ourselves who can be have more flexible capital to look at junior debt in different strategies to plug that gap, because we whilst the private actor community will probably help grease the wheels by putting a bit of equity, we don't think that they're going.
To solve the whole problem.
So firms that have that in their locker can and be able to look at subordinated debt in refinancings through different strategies.
I think it's going to that's gonna be a really interesting opportunity.
So before we dig in on the consumer set with Julie, I'm going to keep you here, Julie mark I did want to ask you about consolidation in this industry. That seems to be something that people are talking about. In addition is hay Finn for sale.
I think, you know, it's it's well, we're flattered that we're getting so much interest, but I think, you know, it's hard to comment on on market speculation. What what I think is interesting around the interest that you mentioned is just the focus on European private credit and how that's how people are looking at that as the next real big growth driver and that sort of over indexation point that I mentioned earlier around private equity and the
US really focusing on private credit. I think that's that's super exciting. I think the consolidation point, it's we're seeing concentration within fewer, fewer hands, right, It's the bigger managers that are getting bigger.
It's the bigger.
Managers that are having more traction in fundraising, and it's the bigger managers that are sourcing the better deals, and so that I think that that trend is going to continue.
We see ourselves as part of that.
And just be clear on the europe point. I mean, is it because it's cheap versus the US?
Is that the opportunity I think it's it's it's there's a diversification point from where allocators have allocated in the past. Of what they have in their portfolio. But there's also an inefficiency in Europe, in the European markets, which is which is attractor to to to to monetize right the the You've got a patchwork of insolvency regimes across Europe.
You've got differences and structures between Italy and in the UK and France.
You've got you've got difference is in terms of the banking land statement and what state of deleveraging their about their corporate balance sheets, all of which provides lots of different pockets of opportunities and lots of different inefficiencies that really play into the hands of private credit lenders.
So that there's there's two.
Elements to to to the to the interest in our market.
Great stuff, but Cherimoto from Hafen Capital Management, thank you so much for joining us. Thanks a lot, do come back soon and does know how it's all going. And Lisa Lye with Bloomberg News in London, many thanks for joining, Thank you for having me read all of Lisa's great scoops on the Bloomberg terminal and of course at Bloomberg dot com. And so Julie Hung with Bloomberg Intelligence in New York. We're keeping you here. Thank you so much for joining us on the show.
Thank you for having me again.
You have a few theories about ozepic, the weight loss drug, and how it affects the companies you cover. I'm very interested in sort of digging deeper into that, but I wanted to kind of start by breaking it down in really really simple terms. How does a weight loss treatment that you know is really in the news now everyone's talking about it, How can that affect the credit of food and drinks companies that you cover? I mean, is it really big enough to do that?
Yes?
So you know, if you look at Bloomberg has this really good function ds go, Document Search Go. If you do a search on the keywords like ozembic or Wagovi, those are the big brand names for diet drugs over the past few quarters, you'll see that the mentions have increased in the quarterly earnings. So there is this increased concern or you know, just a curiosity about how these diet drugs are going to impact the sector in general.
The way they work is the supress appetites. Suppress you're craving for sugar, so consumers are expected to eat less and you know, the consumers who have been on these diet drugs have been shown to have less cravings for snacking, They're eating less portions, so as that impacts food and beverage, the general ideas that sales are going to be lower across the sector.
Is it big enough that on that sort of macro level, because I can I can see it on a you know, micro level, and maybe there are small groups of you know, people that really need this kind of treatment and you know, very keen to lose weight very quickly. But does it you know, just on a macro across the US, could it really affect the bottom line of a company?
Yeah?
I mean our view is that, you know, the the short term impact is that it's pretty negligible. You know, we have heard from big companies like Coca Cola and PepsiCo Mandalis who have said that so far, what they've seen is very little impact. I think it's more headline risk right now than it is going to change the
bottom line for these companies. What you know, when when the equity markets reacted to this back in October, and that was triggered by a comment by you know, big retailers saying that they're seeing their food sales are down because of use of diet drugs. The equity markets, you know, to twenty twenty three, if you look at the S and P Packaged Food index, it's down about ten percent, whereas the credit markets for food and beverage, the spreads
have tightened by about thirty bases points. So credit markets are taking it a lot more in stride, and I think it's more going back to headline risk. The bigger picture is that is this going to be a game changer? You know, we think that it could be, because there are also benefits to you know, heart health and kidney health and liver health. But what a lot of these food and beverage companies have been doing for many, many years is they they watch consumer behavior. They watch, you know,
how consumers eat and their lifestyle changes. Because this is a big social risk for them. So they have been tailoring their product portfolio to lower sugar, no calorie, low calorie, smaller package sizing, which is something they've been doing for many years. So they're adjusting. They have they already started to adjust to this trend before the diet drugs came out.
So is it going to impact their bottom line. Longer term, you know, I don't really think so, because they are doing everything they're supposed to be doing right now to
prepare for wider use in the future. And James, you brought up a really good point that you know, there's a small segment of the population using these drugs right now, so again, in the short term, there's a lot of obstacles to using these drugs, which again, like we just think that the short term, you know, equity impact was overdone. It's very expensive if you look at the studies. I think wogovi is about seventeen five hundred dollars annually, and
that's before rebates and discounts. It's an injection which is very cumbersome for a lot of users, and you know they're competing against true diabetics who need the drugs, so supply is limited. So right now there is not that widespread use. So I think, you know, in the short to even the medium term, like you're not going to see an impact to the bottom line.
But what about leverage trends. I mean, that seems to be the story of the moment, is that a lot of companies are just getting hit because they took on too much debt when when it was cheap, now it's much more expensive and they're hitting a refine. Well, are there any companies in your set to you know, even though this may be sort of marginal more of a headline impact, are there any that just have too much leverage now and it could sort of start to affect them in some way.
Yeah, So, you know, the consumer sector. You know our if you look at our outlook and even our message. Since twenty twenty three, they have been focusing on net leverage trends. They have net leverage targets that they're working towards, and they have been more aware of how much debt they have on their balance sheets. I think, you know, when COVID happened in twenty twenty, they were taken by surprise and a lot of companies were over levered at the time. They don't want to be caught in a
situation like that anymore. So they're focusing a lot on just very balanced capital allocation policies. If they're doing anything that shareholder friendly, or if they're doing M and A that's debt funded, they're doing it within the confines of a conservative financial policy or within the confines of their leverage targets. So what we're seeing as we're entering twenty twenty four is generally a very healthy balance sheet, very good liquidity levels for the consumer food and beverage sector.
On the consumer side, though, I mean, we do know that the consumer is under a bit of pressure. There's been inflation, COVID savings have wound down, the rates are very high to borrow. So is there any impact there or is this just you know, stuff that consumers will buy whatever.
You know, Volume trends have been weak, and I think you know, when you see that consumer companies are raising prices, it has impacted consumer purchasing behavior, but it hasn't stopped them from buying food. You have to eat, and that's why it's consumer staple because compared to you know, what Mark was saying, like the retailers where non discretionary, you're always going to see purchases, whereas you know they could hold off on some of the personal care purchases, home
appliance purchases. But when you're looking at food and beverage, the sales have been overall pretty stable compared to other sectors, just because of the need to have to eat, have to drink, and a lot of these companies, they've been very wary of their price increases, but you know they have been able to pass some of these costs onto consumers. You do see a volume impact, but that's getting a little better because food food inflation trends in the US have been moderating a tadbit.
Are there is there any kind of going down to generic brands by cossumism And I don't see the difference between the two different types of rice crispies.
But that's just me.
My kids do unfortunately, But do we do we see that that happening.
Is some private label trade down, but it's not as big as we had expected. So there's a company, Cannagarbarans that reported and quarter recently and what they're saying is like their sales were a little weaker, their ebide was a little weaker. But what they're saying is like it's not really a trade down to private label, but it's
more the consumer is just stretching their budget more. They're going to the supermarkets less, they're working through their pantry and their freezers and they're making they're buying more multi meals, things that they can have leftovers instead of just one meal opportunity. So it's not that they're trading down, but they're just stretching their budget a little bit more so.
Is there any kind of relative value argument right now? I mean from a credit investor standpoint, are they companies that are particularly attractive or companies that are, you know, looking more risky in this phase of the cycle.
Yeah, I mean when you look at the overall sector, I mean, spreads have tightened throughout twenty twenty three, but if you look within the sector, there are pockets of opportunity. You know, we do see that you know, are still a little wide for craft or mulsten cores, even Cannagra like spreads. Spreads are a little wider than some of their peers. And what we like about these companies is that they are working towards a very healthy net leverage target and it's not fully priced in yet.
And know, are there any other events or any kind of things on the horizon for the next twelve months that make you particularly worried for your industries or particularly excited about the opportunity.
Yeah, I mean I cover tobacco, I cover consumer products, I cover food and beverage, So there's a lot of different things that are coming down the pipeline. I mean, one big thing for the tobacco sector is the menth all band in the United States. Everyone's waiting for ruling on that, which has been delayed. Some of that is political, but I think when there is you know, we think that the band is going to come into effect because menthol cigarettes are banned in Europe and Canada, so it
makes sense that the United States would follow. But a lot of the tobacco companies, they have been preparing for this news. They have been focused more on their non combustible segment and you know, and their alternative alternative products like dest generation products. So in addition to that, like they also have been focusing on like healthy balance sheets. So we think they'll be able to manage through that. But also, you know, just looking at general consumer trends,
anything can happen. You know, we didn't expect COVID to happen back in twenty twenty. We didn't expect us to be in a full blown pandemic. You know, we didn't expect that, you know, consumers were going to be in lockdown. So that's always on our minds and kind of going back to something that Mark said that, you know, credit investors were always kind of like, you know, the DeBie downers, and you know, we're also looking at the worst case scenario.
So even though you know volume trends in food is trending better, they might still be negative, but sequentially they're looking better. It's always in the back of our minds that you know, something bad can happen. And I think a lot of these companies when you listen to them, they're also just a little more cautious, like they're not
coming out and saying that everything's turned around. Even though food inflation trends are getting better, they still keep it in the back of their minds that consumers are still stretched, you know, budgets are stretched, and you know they're not calling for you know, complete turnaround just yet.
I'm mostly worried about the US election, but we still need to eat and.
Drink, right, Yes, yes, exactly.
Julie Hung with Bloomberg Intelligence. Thank you so much for joining us.
Thank you for having me James.
We look forward to having you back on the show very soon. Thank you and thanks again. Tomuch Cherry Mutu from HAFN, as well as to Lisa Lee from Bloomberg news, read all of Lisa's great scoops on the terminal and at Bloomberg dot com. Please do subscribe wherever you get your podcasts. We're on Apple, Google and Spotify. Give us a review to tell your friends, or email me directly at jcrombieight at Bloomberg dot net. That's j C R M B I E as in my surname and the
number eight at Bloomberg dot net. I'm James Crombie. It's been a pleasure having you join us again next week on the Credit Edge