Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crumby. I'm a senior editor at Bloomberg. This week, we're very pleased to welcome Bruce Richards, chairman and CEO of Marathon Asset Management, a twenty three billion dollar asset manager.
How are you, Bruce, I'm doing well.
Hello, James, Thank.
You so much for joining us today. We're really looking forward to getting your take on credit markets and real estate. Also delighted to see Bloomberg's very own Lisa Lee covering credit markets from London. How's it going, Lisa.
Going well here? Thank you so much.
James, and our banks guru, Arnold Kakuda with Bloomberg Intelligence, also here in the studio in New York. How's it going, Arnold?
Awesome, excited to be here.
So let's start with you, Bruce. It's great to have you on the Credit Edge. You're a real estate bear, particularly when it comes to offices and all the debt that's outstanding. There's almost a trillion dollars of commercial real estate loans coming due this year and banks are mostly on the hook. They hold a lot of those loans. But recently we've heard FED Chair j Powell and Treasury Secretary Janet Yellen talking about commercial real estate risks, as
well as executives at regional banks and analysts. They're all using the word manageable. It's going to be okay. What do you make of that, Bruce? Are they protesting too much? What's your take?
Well, that's a big subject, Tom, I think it is going to be okay. Christianity Jan's drawing the line in the sand, and she said she's the facto made a statement after March of last year that no deposit will lose a penny, and indeed, no deposit will lose a penny. So the big banks have never been safer than what they are today. I'm talking about the Big four and also the largest banks here in the United States. But as you know, there is more to it than that.
And so when you peel back the Onion City, well you see that the bigger banks have about ten percent exposure of commercial real estate, and the smaller banks and the regional size banks have an average about forty percent exposure to commercial real estate. That is a huge number relative to their capital base. So let me point out a few things. Number one is Bosle three endgame, or what we call in other parts of the world Basil four is going to start next summer, and they're not going to push.
Out the data. I don't believe.
And despite pal in his most recent statements having softened up a stance and opened up the door to potentially a little less capital requirement that might take you from sixteen to twenty percent capital race increases down to round ten to fifteen percent, but it's not going to push up to date and it's not going to negate the fact that you'll need more capital against risk assets.
That's number one. And with that, banks.
Will look to a do asset sales b uh DE risk by raising more CT court tier one equity capital that's both in the form of long debt as well as equity, but mostly in the form of retained earnings to build that base, and they'll probably just lend a little less and a little bit more selectively at more conservative attachment points in terms of where the lt V lending points are.
So what we're seeing as result is a lot of these SRT transactions and CRT Transactionally. Sr T is the significant risk transfer uh the credit risk transfers as well. Where banks are transferring their first loss or mezzanine trances of their portfolio of loans to buyers like Marathon. And so we've been very, very active dealing with the large savvy banks in Europe and the large banks in the United States and buying into these pools through CRT and s r T.
You know, last year alone, the European banks did two hundred billion of worth of portfolios of credit risk transfers last year alone. And you know, in the September, you know, just a few months ago, the feveral Lyster statement that you talked about the SRT merits and complying with reg Q, they basically blested here in the States, and so the
United States we've seen the banks really ramp up. And so with BOSEL three endgames that just set to start July next year, we believe that is a huge amount probably for US banks, you know, you know that did thirty five billion last year upwards of one hundred billion this year. And so I think, you know, we have all the tools in the toolbox to make the banks safe.
First of all, again, the biggest banks are perfectly safe, but it's the smaller banks than that you now want to start to focus in on So in the United States, you know, we have four thousand, two hundred banks here in the United States, four two hundred.
Just wrap your head around that for a second.
So what do you have in Germany and France and UK and Korea and Japan and Canada one hundred to three hundred banks and we have four.
Thousand, two hundred.
You know, back in the nineteen eighties, before the SNL crisis, there was over fourteen thousand banks here in the United States, fourteen thousand, and we're down to four thousand, four hundred. So you obviously need you know, kind of the top four, but beyond the top four, or you can drill down to the top thirty, which are at the top thirty banks, there's an exact number who have one hundred billion assets for more. You obviously don't need those banks to be
strong and viable. But outside of that, do you need I don't know, twenty banks per state here in the United States, which is one thousand banks.
So much information in that, and it's you know, that opened up so many questions. But first of all, on the banks you mentioned, there are a lot of banks, and maybe there are too many in the US. Do you expect bank failures as a result of this, commercial real estates, mess, trouble, whatever you want.
To call it.
And to what level does it go? Is it just very small regional banks, is it like savings and loans, or does it rise to a level of a much larger institution.
I think now that the deposits have been backstopped by the Treasury Secretary at the ELM, which I thought was a brilliant move.
Sorry I applaud her for that.
I think you're not going to have any run on deposits, So that takes a lot of risk off the table and panic off the table, and now it becomes just a matter of are you solvent or are you not solvent? How many banks do I think are not solvent today?
I don't know.
My best guesstimate is around three hundred based upon and these are small regional banks. There's over four thousand of them, and I think anywhere around two to three hundred are not solvent today. And I think if the fault rates and commercial rows, they go up to ten percent, and they've currently you know, just increased from two percent where it was two years ago, actually less than two percent
just two years ago. To over six percent today. But if they go to ten percent, which I think it will be what they get to, I think that number rises to four hundred. So what happens there, it's just simply a resolution. The bank just gets wound down. It won't be a panic, it'll just be FDIC comes in and you know, takes over, the bank, sells off their assets, transfers deposits, you move on. And so there's a lot of cleanup that the regulators have to do.
They know that.
And so in the you know, National Bureau of Economic Research working paper series it just came out on c e ORE and bank fragility, you know, it highlights this exact this exact point talking about the forty percent exposure that small and regional banks have to commercial real estate.
So let's all about commercial real estate. I mean, you know, you know, delinquency rates are up and property values are down, and difically, when cap rates go up, you know, one hundred to one hundred and fifty basis points on a property, then the value can decline twenty five to thirty percent, and so all that extra you know, one hundred million dollar properties, seventy million dollars loan, you decline thirty percent, there's no equity left, and so there's a lot of
that resolution to do. Taking the pick through the python is going to take some time in terms of working this all out. I think commercial real estate represents a lot of distress in the marketplace, but also one of
the greatest opportunities in the marketplace right now. So as the banks pull back from because remember banks are fifty percent five zero fifty percent of all commercial real estate lending is five point six trillion dollars of commercial real estate loans here in the United States, and they're fifty percent of that book.
And so why did the debt wall.
The maturity debt wall just increase from five hundred and forty billion this year on commercial real estate loans to nine hundred billion Because all the loans coming due last year, very few of them paid off, most of them got extended into this year, and so it's extending pretend game going on right now, and a lot of that's going to get resolved, and as it gets resolved, losses are going to get pushed through to the system for both the lender as well as you know, as well as
the prior owner. And so it's an opportunity for firms like Marathon to step up as banks exit commercial real estate lending and exit. When I say exit, not go from forty percent to zero, but go from forty percent to where they should be fifteen to twenty percent. That's where they should be. So that holds it, so that big void, we're going to step up and make these loans. And so the amount of the amount of capitalists needed from private crapal capital to solve.
For this is enormous.
And so we're getting paid really nice returns and I love it because it's at the current cap rates with the current cash flow, not at the bubble pricing periods that we had.
I'm sorry, Lisa, Oh, yes, you mentioned the SRT and CRT some of these balance sheet movements that banks are doing to raise their capital. Are all of these sort of performing credits or is some of the distress stuff that you just mentioned right now?
No, No, it would never at least it would never be distressed. It all has to be performing. If it's not performing, crystal clear clean like, none of us are going to touch it. So we're scrubbing these portfolios. You're talking about hundreds of loans to thousands loans that we're scrubbing through at a low level detail to make sure everything is performing going and you're talking about an average of a triple B credit going in and then triple triple B minus, so nothing is not performing.
No, And then you said two hundred billion last year from Europe and then US banks are wrapping up. Given the size of the US market, where do you think the greater opportunity would be this year to continue from the europeans or where with the new US mandate twos to do these kind of deals.
An equal opportunity employer, We love it and we love both markets. And so dealing with the top banks in Europe and dealing with the top banks in US, we have all those relationships. They're very very selective who they'll go to in you know, these transactions. It's you know, signing NDAs, is looking into portfolios and it's being there to a price risk appropriately and then take size. I'm talking about you know, one hundreds of millions per transaction.
So it's you know a huge opportunity in Europe.
Europe has been doing this for twenty plus years, the US hasn't. But now the FED has blessed the US banks to de risk knowing that the methodology and technology UH through these off balance sheet types of curizations and risk transfers has been well in trans in Europe, they've studied the model, they see the merits in it. As the US is just starting this out, so the US will converge to I think where Europe is and it being hundreds of billions on an annual basis, on a go forward basis.
Great, thanks Bruce. Hey, this is Arnold Cokuda b I credit analyst covering banks, and you know, I agree with you in terms of these increased regulatory pressures moving some of the risk out of out of banks, right and let's call it into you know, the shadow bank system. So you know, Bruce, you talked about the opportunity there, but what do you think is the right amount of of you know, this this risk moving to the shadow
banks and whatnot out of the banking system. You know, it's an opportunity for marathon, but but how much is too much?
I view that, Thank you, Arnold, and nice to talk to you. I view that as a toolbox or playbook that they have. So to Lisa's prior question, when you have just trust situations that the banks involved in terms of loans built that results in an asset sales, so they'll sell those loans. So that's an outright it's not a risk transfer per se, it's just a loan sale. And so yes, we're involved in that, Lisa and Arnold.
Second is in terms of these partnerships, these SRT CRT transfers, I think kind of the pace that Europe has been running, because they're way ahead on this is probably the right pace for the Europe to continue running and the US to continue running. I don't think it goes up much from there. I just think it goes up a lot
for the US from where it was. And Europe is kind of you know, steady Eddy, because they've had such an efficient frontier and how they've been managed this again for years and years and years to go back, you know, twenty years. And so I'll give you an example, so you take it. You know, uh, you know, three hundred corporate loans are ready to triple B minus and you can do this of course with other types of loans.
Were taking commercial corporate loans in this case, and the banks you know, want to keep their relationships right because these are important relationships and so although those transfer the first cure of risk.
You know, these relationships for the banks.
For their clients are important account management, you know, term loans, credit facilities, cast management, FX, trade for the investment, banking services, custody, payment solutions. There is so much the banks do and the bank will never exit. That is the core of what they do. But they don't want, given the capital constraints,
this extra layer of risk. And so how do we de risk given the capital charges that the regulators are going to impose for that extra layer of risk for keeping some of these risk assets or you know non government and non agency and you know lower investment greater or non investment great risk. So how they do that is, let's say they sell to US zero to ten percent SRT trunch of the package of those three hundred let's say corporate you know loans, they're both funded and unfunded,
including the revolvers and the loans. So they transferred that to us, and you know, it reduces their risk waiting from something like x amount to like zero point two x amount. It'll go down by like seventy five eighty percent reduction of capital by just selling that Tronshof and so allows them the banks to originate to continue to service their clients, but really arbitrage the capital requirements for the lower tier risk as firms like US come in
to provide that capital. So it's a beautiful marriage of you know where banks and you know private credit partner and again there's other partnership arrangements, you know, portfolio sales, you know them providing the bank providing the senior will provide them as on that capital solution as their borrower on the commercial real estate loan wants to roll, but they want to roll at a more conservative LTV, so
plug that gap. So there's all kinds of ways that we work together us in the banks, and and and what you also see is banks also wanting back into private credit and striking up partnership agreements with the investment managers that do credit to form partnerships to run a program together. So it's also something you're starting to see. So it's really interesting to see, you know, how the banks and private finance are now converging to a degree.
So pretty interesting on that front. But to go more specifically in terms of you know, the increased opportunity in US uh, you know, synthetic risk transfers. Do you feel like, you know, we have the regional banks that need to you know, raise their capital levels right incorporating their unrealized losses, and then the potential and capital requirement increases for the biggest banks you know going forward. So where do you
see the you know, bigger opportunities going forward. Is it more with the regional banks or some of these you know bigger JP Morgans in BA as well.
Not to mention bank specifically by name, but I think you know here in the United States, it's four thy two hundred banks that are in existence, and there's thirty that's exact number that if you want to drill down and look at the total number of assets that they have in their balance sheet, there's thirty with one hundred billion or more. And so kind of the target list for US is really the top and we go a little bit below that the top fifty banks in this country.
What's really critical is credit risk. We don't want to have counterparty credit risk with the institution itself, and so it have to be a super safe, you know bank that is a super regional slash megabank for US to do an SRT transaction with if that helps answer your question, give you clarity. So it won't be with like the next four thousand right now there, when we deal with that next four thousand, will buy loans from them, will be partners with them. If you know, you know they'll
do the first out, we'll do this second. You know, there's different things we can do together with the banks, the partner up to help them think about the risking, but not through a national team transaction.
So in general, Bruce, the opportunity from this commercial real estate mess. You're saying it's the greatest opportunity in the market right now, you're saying it needs a ton of capital. Can you talk a bit about how much capital. We've had other guests on this show talk about a trillion dollar opportunity in real estate right now. Can you talk about how you know what the magnitude of that opportunity is and also what are the returns? What are you
buying these loans off the banks for? I mean, how much of a discount are you getting?
Well, it's multi faster, so let me let me unpack it for you for just a second. So how big is the opportunity? You know, let's look at the biggest framework for commercial real state. And I'll focus on the United States for just now. But the biggest framework I'm looking commercial state is commercial state has their property value across this country, the commercial real estate side of around twenty two trillion. That's the number that we have, twenty
two trillion. And of that twenty two trillion, eight trillion has debt on it, fourteen trillion doesn't. So that fourteen trillion is not a problem. Like you know, your Bloomberg go across town, you know, to your Bloomberg headquarters.
Do they have a commercial real estate loan against their building?
No. JP Morgan is building their new headquarter building on Park Avenue. Do they have commercial real estate loan against that building? Absolutely not. You'll do that at the corporate level. You'll have, you know, debt, maybe a corporate level. JP Morgan have debt at the corporate level, but they're not going to finance the property per se. A lot of property here is simply not financed. Some of the biggest
properties just simply not finance. Is financed at the corporate level and through whole code debt are not through a real estate loan. So of the five point six trillion dollars of debt that's there, you know, outstanding here in the United States, that's probably around I don't know, eight trillion dollars of property value. That's where the problem is and that's where the opportunity is.
Now.
Of that five point six trillion of debt, how much will be a problem in terms of extending and mending, you know, potentially being restructured or default. The number could be as high as a trillion. I don't think that's an exaggeration. I think that's actually a healthy number. Is a trillion where it's gonna have to be recapitalized or you're gonna be flipping the keys.
You know, it's gonna have to get restructured somehow.
It's about a trillion unless if and it's wishful thinking that a lot of commercial estate players have. Unless if the FED brings rates down really really quickly and commercial estate pops a lot and a lot of capital there is available to But we think the numbers up to a trillion, so.
Separate away from that. Of the five point.
Six trillion two point six trillion, the biggest lender are the banks, and the rest of it is in different places. The second place that it's in is excuisation. So there's over a trillion dollars, like one point zero five trillion of commercial real estate loans that are insecure taste excurization today. So now your question is where do we see the opportunity. Where we see the opportunity is multifests Number one as one hundred million dollars. Property that has seventy million dollar
loan and it's only worth one hundred million. It's no longer worth a hundred million. It's now worth seventy million. The property that loan. When that rolls, you're not gonna get seventy million dollar long because properly is worth seventy million. You're gonna get sixty percent LTV. This time around, you're gonna get forty two million dollars long. And so that gap between seventy million on the old loan and forty two million on the new LONGUS twenty eight million dollars gap.
Who's coming up with that money?
And so I had to come up with that money? Where is What kind of returns are we looking at here? You said, this is one of the best opportunities ever.
I think the returns have have got to be preferred equity kind of returns, sweeping all the cash flow from the property and basically extracting control while keeping you know, the lender will keeping the equity owner in place.
And so preferred equity we're thinking maybe definitely double digits, maybe even in the two handle.
Like fifteen to low twenties. Is kind of like that range, depending upon the property, depend upon the situation. So that's
number one. Number two is is, you know, let's say the borrower comes up with new money in the bank, won't roll you know, us extending that new loan and making a really nice return on that, and so being the lender, not of last resort, but being the lender because the banks are going to be pulling back at least a huge portion of the capital go for a basis, and so private capital has to step up for that.
Number Number three, there is new development going on and new acquisitions and so being the you know, acquisition finance as well as all these refinancings.
That's next.
And what I also add is I think CMBs is one of the great opportunities because as loans go sideways within a deal, you know, there's going to be losses going to flow through to some of the junior classes, and for us to buy what we consider be above the fall from is an amazing opportunity. So the dislocated CNBS opportunity, which is liquid you know, T plus two securities. We model every single property in each one of the
one thousand, five hundred and sixty different CMBs transactions. So you talk about like six tranches per securization, you're talking about like not was it nine three hundred? You know, securizations trunches that exist and just cmbas alone and figuring out what truants to buy. There's a lot of data science that goes with property analysis and cash flow analysis that we have modeled out here at Marathon. And what we do is we buy the tranche above the folk group. We don't want to have anything.
Right now above the fulcrum, which.
It could be the double B class, it could be the triple V class, would be the signal A class. It's not a generic answer to that because it's a function of the loan collateral and how the classes were cut in terms of the thickness of the securization and so, but we're we the.
Mes level, right, You're thinking in the mes level, well, would be triple A and.
Double as in places. Yes, so it's be somewhere between single a's and double b's and.
And and for that we expect to make a mid to upper teams I R R on T plus two securities over a multi year holding period. So you're talking about like really nice multiple on your money, and it's
you know, very very specific. It's you know, we have our you know, night vision goggles on and we're looking for that you know, needle in the haystack by buying those tranches off of you know, a very big securitization marketplace, knowing full well the information the property, the cash flow, the cuts on the train, on the transaction, and where the falcon is going to lie based upon how the workout is going to flow through in terms of loss rates to a securitization.
So, Bruce, a lot of this stuff is distressed for a reason, right, and it is very risky, and it really varies by geography and by type, and it's you know, all over the map, and you do travel, you do have a global view. I was just wondering, you know, how you see this breaking down? You know, what what what are the good sectors to look at in terms of really state what are the ones you absolutely have to avoid a country and sector.
You know, we we we we're avoiding office, and that's kind of top a less top of mind. But you know, if there's office in a securitization, it doesn't matter.
Just falls through.
The loss were just by you know, the right trans given that you know that factor. And more important, it's not a generic statement. It's very clean math of what loss factor you're going to have and how that flows through the excusation. In any excusation, you might have some losses and loans. It doesn't mean you're run for the for the hills. It means you figure out exactly how much flows through and what is left, and what is left we can buy that diskound of security at a
nice secretion. You know, when it pulls the par just into your cash flow, it'll be a great buy for us.
But you know, beyond real estate commercial state.
There's also the dislocation and you know distress that you see on the corporate side as well. Uh, maybe not as severe, but there's still you know, a healthy case load workload on the on the corporate side as well.
So, Bruce, you mentioned earlier that lenders are in some cases extending, extending, and amending what is you can talk a little bit about what the impact of that is zombie in real estates and also zombie in corporate because we have a similar well, as you said, less severe issue amount corporate did as well. Default rates are really really low because of this tendency to just close take
a blind eye. Can you address a little bit about your thoughts about how, why and how this is happening and what the ramifications are.
Sure, let me just step back for your listeners and kind of define the marketplace. When I think about private credit, I think are three segments of private credit. Number one, and the biggest actionable segment is direct lending, which we just to call it middle market lending, but it's also you know, lower middle market, upper middle market. Now, these are broadly syndicated private deals that are happening. They're taking
deal full from the broadly syndicated market. So that's the first big segment of you know, corporate.
Private credit.
The second biggot segment of corporate private credit, which we haven't talked about, which is huge and going to get much much bigger and I'm super excited about, is asset based lending. Now, the third component of private credit is what now you know, your question revolves around, which is the you know, opportunistic situations in.
Uh in the credit market.
And and I think there's a couple of segments when you kind of you know, unpack that that you.
Really want to focus on.
Number one is providing capital solutions and creative financing options to companies to help them preserve value and to help them grow and to help them get over.
Some type of you know, choppy water. And so it's the bridge to the other side.
And we do a lot of these capital solutions, and that's you know, a fantastic opportunity to help companies that are you know, maybe a little over leverage or stress or.
If the two distress you help of the capital solution, it'll just go down that path.
And so you know, in the US and Europe, you know, we have hundreds of billions of dollars of debt that's existing today whose debt trades below like an eighty dollars price.
You know, on my radar list today, I have one hundred and thirty five companies that we're tracking, tolling around three hundred and fifty billion that looks like that on top of the one hundred and eighty two billion of companies debt, which is one hundred and five companies that defaulted the last calendar year in twenty twenty three.
And so so what's causing this.
Well, in two thousand and eight, two thousand and eight, during a DFC high, you bonds, leverage, loans, you know, direct lending on the private side, there was one point seven trillion dollar credit market one point seven trillion. Today that market size is zie point one trillion, so it's
growing three times where it was then. And through all the exhiberance and the zerp world that we lived in when companies borrowed maybe too much and money was too free flowing and a lot of people folks chose to you know borrow floating rate and you know, realizing that you know, FED funds is up five hundred twenty five based punts, so the base boring rate, which is now sofur is up five hundred twenty five basis points. The funny costs have become too high and there's a lot
of leverage. So the company may have cut you know, you know, fifty LTV loan, but given the purchase price multiple may been six times that even a finance when it was originally issued, but that includes ad backs and adjustments. You take out those adbacks and adjustments and your at least eternal leverage higher than that. So you can look at the software company that came in at like seven turns of debt leverage, that really looks closer to ten times.
Or healthcare company that came in at five and a half turns of debt that's really more close than eight turns of debt data up today. And so when you talk about like ibada is before debt service and now debt service has doubled, right, so you know, livebar plus a spread has become sofur plus that same spread.
But the sofa rates.
Of five hundred and twenty five basbooks, so the financial cost that the company occurs is two x what it was. And so a lot of these companies are burning cash, actual cash flow, burning cash just to service their debt, just the service their death. And what segment of the marketplace, Well, if you look at the leverage loan marketplace and you read what movies have to say, it's over fifty percent of the companies are B three rated are now in that category.
Current sofa barn rates.
And so you know, there is an easy financial conditions that have occurred over those last many months, and it's fantastic and it's helped companies through finance out and so you don't have the same debt maturity wall in corporate finance that you do in real estate finance, but you
still have a lot of cash burner going on. And you know, the default rate won't get to ten or twelve percent like it was in LA, but it is going to get to four percent in this current marketplace, and four percent of five point one trillion, the current size is over two hundred billion dollars of the faults and select of the faults, we're ten percent of one
point seven trillion. Back in two thousand and eight, you know, you know, it took you to about one hundred and eighty to two hundred billion, So you'll end up at the same place in terms of the sizeable opportunity for distress dislocation. And most importantly, what we're doing is capital to help these good companies with overlovered balancies make it through.
What I am more excited about was what you said about abs lending, because you seem excited and we haven't touched on it, So a lot of people are now looking at that as the next frontier private credit. To you, Bruce, what does that ABS lending mean to you?
And where Well, let's talk about WID's coming and then let me answer your question, because it's really important to understand, like whites come in to kind of put a ribbon on it and to kind of, you know, complete the circle. So let's go back to the banks for a second.
The banks have been the biggest ABL lenders and when they exited doing a lot of the corporate lending back in eight because of the basel free regulations that came in that put cop requirements on those type of risk loans in place, they then doubled down an ABL lending and that's when some of the ABL loans like really took off in the balance as a it's a balance
sheet for these banks. Now fast forward to twenty twenty four or twenty twenty five, one buzzle free endgame comes into place, and the banks now have to have more capital against those types of loans and so to de risk, the bank's going to make less of those loans and we're seeing it across the system. And so now let's talk about ABL. What is ABL as opposed to making a loan based upon a company's cash flow, We're making
a loan based upon the collateral. So it's an senior secured asset based loan where we have a perfected interest in that underlying collateral at a certain LTV, a tasking point, and a certain debt service coverage ratio. A slightly different way of thinking about it, but it's opposed to lending against op cooho co of company, we're lending against hart assets.
And let me break it down the four categories for you, Uh, Lisa, So a b L I think is a nine trillion dollar marketplace, nine trillion and it's a small fraction of that now, and what's been put in security form securitizations is four trillion, so I think in private form it's a five trillion dollar marketplace.
And what is it?
Number one, in no particular order. Number one, it's corporate ABL. So you're talking about lending its plant, equipment, inventory, uh, intellectual property, receivables, trade, it's whatever's in corporate a BL. But again, you have a perfected interest against those assets, and so if anything has happened, you have a lean on it that they're yours. The second category, i'd say
is what I call, you know, consumers. Last specialty finance, and there you have everything from like all those consumers you know to you know, s rts and c rts that put that there, certain type of you know, royalties you can put like music royalties in there, or healthcare you know royalties in there, and so specialty finances Category two.
Category three you mentioned it, so I'll emphasize it. It's transportation and under transportations aviation, and we've done not only you know, the Airbus and Airbus three twenties and Bowing seven thirty sevens and all the series, and we have you know four coming through committee you know this week, and we've done.
Over one hundred and fifty aircraft with the big.
Airlines, you know, the big airlines that everyone travels, and we on the we on the metal, we lease it to them. We get paid the structure cash flow. We also do this with engines, because an airplane has about thirty year useful life, and engine you know, last year around seven years, and so we've done engine leasing as well.
You know, when you're buying.
New, brand new Airbus three twenty neo, you might pay sixty five million for it, you know from Airbus. And the engines are two engines that you know on each wing, one in each one that costs like thirty five million, that costs like more than half the plane. And so engine leasing is also a segment of what we do. We do a lot in maritime. This week, we just did it joins that deal, you know, tug and barge.
We've done international shipping. There's there's rail and road. We've done trucking deals, transportation equipment, infrastructure type loans that support
all this. And then the fourth category is property. And I think we had over fifty thousand residential loans, the whole loans out of side of the scarization that we own to hear at Marathon, Second lean, first lane loans, commercial real estate property, everything from parking lots to infrastructure we've done here at Marathon and it all fits into the rainbow, this beautiful mosaic of ASCID based lending. And we have a teams of teams approach because each team
is dedicated this year. Team's different from the RESI team, it's different from the aviation team, different from the maritime team, different from those that are doing you know against plant equipment, whether it's a crane in the sky or farm equipment or forklifts, or whether it's all the loans are all different teams rolling up into ABL program here at Marathon. So I love ABL and mark my words, it's a forecast. So who knows that the one.
Hundred billion dollar.
Middle market lending and private credit lending business in OA, which grew to one point seven trillion dollars where it is today seventeen fold increase, you'll see the same thing happening in ABL in this next decade.
Wow, it's pretty amazing. I think one thing, you know, we're in New York. One thing we didn't talk about is uh multifamily and you know an NYCB has been pretty volatile over the past couple of weeks, so though we've had a little mini bailout, what are your thoughts on that sector? Bruce, multifamily and and and maybe rent regulated? Do you see risk in there or is it just kind of one off specific for NYCB.
You know, I don't want to talk politics. I host it as far away as politics possible, But you know, rent controlled and got bust people that you know, you know reside in all these properties but rent controls a problem for you know, investor. When the city comes and any city, New York City particularly when any city comes and says you can't raise rates rents, then what do you think that's sponsor's going to do. They're gonna put any money in the property to improve it, They're going
to try to maintain it. And their model, their financial model is based upon raising rates, and they have a lot of extra costs to maintain it, including financing costs. So it puts them upside down. So it's a real problem for you know, banks that have leaned into and lenders that leaned into rent control, rents stabilized, and I wouldn't touch that sector as a result, wouldn't touch it as a lender because I think it's a very difficult loan to make. And you know, in terms of multi family, no,
you got to love multifamily. You know, it's a it's a beautiful thing. Talk about home, you know, homes themselves.
You know.
The simple factor matter is home prices over the last three years have increased twenty five percent nationally.
It's a huge run up.
That run up is bigger than the run up leading into the housing crisis in a way the price appreciation that we've seen among homeowners, and so with that, financing rates have gone up. And because financing rates have gone up, the price to own a home now with your rent and that price increase is now eighty percent higher than it was three years ago. That is remarkable, and it's
the highest point to own relative to rent. So I love as much as OER as much as that's keeping a firm based under CPI, as much of rent roles have increased. For a multifamily, it is the cheapest it's been that I've ever seen it in tracking. It decades, the price to rent versus the price to own.
I just wanted to follow up on where we started the conversation. Banks are going to take losses, and you know some are going to disappear potentially, given that you think there are too many, what impact does that have more broadly on financial markets and the economy. I'm surely it's not going to just be contained.
I think the banks are safe. I think the banks are safe.
I think that the biggest opportunity will be in commercial real estate, followed by filling in any void that the banks are going to dial back during Basel three endgame, which is to be a lender in abl and also to play the SRT and asset acquisition game, and that's a big part of our playbook. I think there's a
big opportunity in credit, in liquid credit markets. We run a program called MATS, which is a multi asset credit strategies and it's across you know, the structured credit world em but high yield and leverage loans and its multi strategy approach to what is eleven trillion dollar market credit. The private credit markets are big, and they're going to get bigger and bigger and bigger because the bank's pulling back.
And although ninety five percent of the corporate credits are fine in terms of credit, there's the other five percent that needs capital solutions that results in distressed and dislocation. But the end of the day, the banking system is solid, both in Europe and the US. Not so much in China, but in the US and Europe, and so I'm not
concerned at all about banking. And the most impressive thing about this cycle is to fed to raise rates five hundred and twenty five piece points, keep it there for an extended period of time, and the cracks are actually rather minuscule. It tells you how robust the financial system is.
It's not only because of the strength of the bank thanks to Buzzle three and all the regulations and what's coming next for Buzzle three endgame, but it's also due to the robustness of capital among the private credit lending community and the financial markets.
It's really impressive to see.
And the last question, Bruce, I know out of time, but you've been doing this a long time. As you say, when have you last seen such a great opportunity? You sound so bullish.
Well, it's the Goalden there of credit. Right rates are five hundred and twenty five basis points. We haven't seen this in a generation. So you have to go back to earlier in my career when you saw rates as high as they are.
Number one.
Number two, you've never seen the credit markets as large as they are now. Equity market globally it's over one hundred trillion of fixed income and credit market globally of over one hundred trillion, and we have eleven trillion dollars here at Marathon of credit of the credit market that we invest in, and so it's a big market at the highest rates that you know we've seen.
In a generation. And meanwhile, the comm is going well.
Earners have popped back up, and so the earnings recessions over equi markets are trading all time highs.
But when you talk about.
Our clients, the LPs, we invest money for the pension plans, the ariski plans, the sid wealth funds and downments foundations, insurance companies, the consultants that advise them, these wealth platforms, and the bank private banks and so forth. Look, they can invest in the credit markets and along the credit curve and liquid credit and get an eight to nine percent yield that's magnificent. And in private credit add three
hundred basis points to that double digit returns. And so when you have liability management, you're managing against and your actoral return requirements like a six percent return. And if you do this in credit, a lot of folks that come to conclusion, why do we need the equity risk and so well, let me better balance. Finally, because the financial repression is over, the zup environment, it is over, and rachel returns are rather healthy in credit. Let me
now better balance my portfolio. And that's what we're doing with our clients. That's why We're so jazzed, you know, and when you have an error like this the golden era of credit, it's just our sweet spot for what we do for our clients.
Great stuff. Bruce Richards, Chairman and CEO of Marathon Asset Management. Great to have you on the Credit Edge. Please come back again soon.
Thank you, James, thank you Arnold, and thank you Lisa.
Also want to say big thanks to Lisa leaving Bloomberg News in London. Brilliant to see you again, cheers. And to Arnold Kakuda with Bloomberg Intelligence, thank you so much for being here. Read all of Ronold's brilliant analysis on the Bloomberg Terminal. It's really great. Check it out. Please do subscribe wherever you get your podcasts. We're on Apple, Spotify and all good podcast providers, including the Bloomberg Terminal. Give us a review, tell your friends, or email me
directly at Jcrumby eight at Bloomberg dot net. I'm James Cromby. It's been a pleasure having you join us again next week on the Credit Edge.