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 Fabian Crowbog, chief investment officer and founder of north Wall Capital, a London based credit investment firm. How are you, Fabian, I'm great.
Thank you.
Nice to see you, James, Thank you so much for joining us today. We're very excited to get your credit market views, and we're also delighted to have back on the show Tollu Alamutu with Bloomberg Intelligence.
Hello, Tollu, Hello James. Great to be here again.
Thank you so Just to set the scene of it here, credit markets have bounced back after taking a bit of a hit earlier in August when stock Market's tanked and the Vick Spear gauge sword. Global markets are generally calmer, but there's still some lingering anxiety given the wild price swings of the last few weeks. Liquidity is thin and there's a lot of risk out there. It doesn't take too much to spook markets. That said, we've had some
good news on the economy. Inflation appears to be cooling and there's growing expectation of FED cuts coming in September, which would ease pressure on the weak companies that have been struggling with high borrowing costs for a while. Meanwhile, there's more debt issuance. Companies are taking advantage of very strong investor demand for corporate bonds and loans, with the
yields still at historically high levels. In general, there's more demand than supply of corporate bonds and loans, which is technical boost. Credit markets are supported by resilience in the economy and investors are getting their hopes up about a soft landing. But there are still things to worry about debt defaults, bankruptcies, commercial real estate stress, war, the US election, global geopolitics, recession risks haven't really gone away either, and
everyone's very overweight US assets compared to other regions. So what's your take, Fabian? Where do we go from here?
Where do we go from here? Well, look, I think that it certainly looks more stable today than it did only about, you know, a year and a half ago, when we were worried about energy security. You know, my parents anecdotally are you know, live in Germany and there was talk of turning off street lights and saving gas by restricting warm showers. You know, we're certainly not in that position anymore.
But in terms of credit markets, are we all clear now? Because you know, as rates come down, that eases the stress on on weak borrowers. That should clear everything up, right, I mean, we're all a happy happy now.
Well, I'm not. I'm not entirely sure I would quite go go that far.
Right.
We still have a very substantial amount of maturities coming up in the next two to three years with capital structures that are over leveraged, and I think a simple reduction in base rates, you know, doesn't necessarily address the problem of too much leverage in in companies that you know, potentially you know, don't have that much equity value remaining.
Fabian, you mentioned a very important point that I think a lot of people have been monitoring, which is the sort of maturity war that we have coming up over the next few years. What's your view then, on how some of this gets worked out. Do you think that we are bound to see many more restructurings and renegotiations or do you think that some of those issues will just bite the bullet and you know, issue debt wherever they can, however they can, whether in public or private market.
How do you think this works out? Well?
I think, you know, I think the concept of a maturity wall is something that you know, I you know, it doesn't necessarily immediately lead to increased systematic risks. The reason is that, you know, we are all aware of you know, this, this refinancing need that's out there, and that awareness then inevitably leads to the market trying to find a solution and to you know, trying to address address these issues. So you know, borrower sponsors will preemptively
try and think about having conversations with their lenders. You will have more dislocation funds raised. You know, private credit will will try and lean in with with some capital solutions, et cetera. But you know what such a maturity wall, you know, does lead to is a series of idiots
and creatic refinancing events. And that's exactly something that we at north Wall are particularly experienced in in helping address and resolve by offering our counter parties, you know, very creative private credit capital solutions to to help reduce leverage, to help address some of those those potential maturities and potentially refinance. You know some or all of the lenders in syndicates that that would like to get refinanced.
Yeah, so you talked a little bit about those sort of idiosyncratic cases, and I think we'll sort of dive into that a little bit later when we talk about some of the sectors that maybe that you've been looking at. But one of the broader issues with idiosyncratic solutions or with tailor made solutions is creditor preference and changes in creditor preference or priming or credit on creditor violence and so on and all of that. What's your view on how that plays out in a market where we are
dealing with this maturity wall. Even though yes, we are aware or everybody should be aware that the maturity will is coming up, some creditors may be more prepared to provide financing than others. So how do creditors manage through that situation without causing credit on creditor violence basically that people have been talking about.
Well, I think I think this concept of creditor on creditor violence isn't something that should hugely surprise anybody. Let me explain. So, you know the reason that you know this credit on credit violence can occur is the outcome of you know, a vast volume of debtisians over the last qulle of five ten years, maybe longer, with relatively
weak creditor protections. And so that opens the door to the investors in these structures, who, let's remember, have a fiduciary obligation to maximize returns and to protect certainly the investments of their of their stakeholders. That opens the door to them trying to find solutions to you know, not only protect a position, but also capture potentially some of
the upside. So you know, I am not particularly surprised to see that, you know, we have some slightly more aggressive approaches to to these capital restructurings here and in the US, and certainly coming to Europe where we are most active, relatively relatively soon, So you know, and and interestingly, you know, there are you know, freaquent the opportunities to you know, play one side of the coin or try and take advantage of the other side of the opportunity.
You mentioned weak creditor protection. I guess it's fair to say that that was probably due to the environment, as in rates were extraordinarily low. There was a lot of money around to be invested, and so maybe people were prepared to accept weaker covenants than they ordinarily would have.
But I have a two pound question given the situation that we find ourselves now, one issue is that even though rates are obviously still high, coming down but still high, there is still a lot of money, at least in private credits flushing around. So do you think that creditor protections will be stronger this time around when refinancings come up, or does the demand to sort of put money to work mean that those protections might not be as strong
as people would like them to be. And a second related question on protection and one issue has been that even when the docs say X, the way that the issuer interprets X may not be the way that the bond holder or creditor interprets it. How should we be thinking about the togo between the issuer and the creditor when it comes to interpreting those protections, right?
I mean, look, I mean maybe it makes sense to take a step back, right. So you know, we at Northwall focus on the provision of private credit capital solutions to Western European borrowers in the in the middle market and even the lower middle market. Right, So we, you know, tend to focus on situations where we are very much by design the sole lender or at least a pivotal lender in the capital structure in the provision of the solution.
This enables us to stay away from situations where there is a tremendous amount of capital chasing any given opportunity because of the size of the transactions which tend to be a little bit smaller for north Wall, and because of the perceived complexity of European credit investing. So what that means for us is that we tend to seek out situations where, while we might not have been the company's first call, you know, we are you know, always
trying to be the first second call. But in a situation where there is a real urgency, a situational complexity, such as a refinancing, a you know, a lender that is dropped out of a process, a failed asset sale, whatever it might be, where there's a real need and a real requirement for us to get involved in and
provide a solution. The benefit of that is that, you know, we are never in situations where we are being asked to contemplate providing capital without covenance or you know, without the appropriate structural protections, which are important and particularly important in Europe. So can I tell you what we'll happen kind of in the larger transactions private credit market. Quite frankly, I don't know. There certainly feels like there's uh, you know,
more capital chasing again, fewer opportunities. But I can tell you about the transactions that that north Ball is involved, and you know we most certainly you know, will continue to insist on strong credit protections. So that's kind of answering, you know, you know, the first question. The second question
around you know, interpretation of documentation. Again. You know, I think it is companies choosing to you know, risk illegal battle rather than you know, necessarily imposing losses on equity
or imposing losses on the different transfer of creditors. And that is again a very much a tactical decision that we you know, will not be exposed to because you know, again we tend to be the sole lender, and we tend to have very strong creditor protections and we are in this market precisely for that reason.
But going into those trades, faban and tell you ensure that you're not walking into something that is unsustainable and you know, potentially doesn't perform well.
I think there are I mean, certainly, it all starts at our origination and underwriting. So we try to enter into situations where we have a very substantial amount of downsid protection number one on valuation in particular, but number two where we also have, due to the less competitive nature of these situations, access to you know, more diligence, you know, more information, better management time than we might ordinarily have if we were competing in a you know,
and a much more broadly syndicated transactions. So that's kind of where it starts now. You can never predict the future, and you know, it is not unusual, of course for companies in our portfolio to breach you know, what might
be tight covenant might be perceived as type covenants. And at that point in time, it is our internal asset management function that works with the investment team on encouraging the company towards a path to arrange for refinancing, again, you know, dependent on making sure that there's substantial equity value and downstair protection em bettered in the position.
I have a follow up question on because because what I'm hearing from you is sort of small can be beautiful in a way, and that getting the second call doesn't mean that you're not offered all the same things as whoever got the first call. On small can be beautiful, I guess one of the things that we're seeing happen
in asset management just broadly is consolidation. What is your broad picture view on that, and do you think that there is still room for medium sized players in the industry to continue to function or do you think that many asset managers just get hoovered up along the way, whether they are specialists or not. Do you think in the next few years we will see more consolidation or less of it than we've seen in the last few.
Right, Just to pick up on your first point here, which is you know you might be offered more as a second call then the first call. Keep in mind that many times the situations that we're dealing with don't involve underlying the stress of the company, but merely a need and urgent need for funding because a more traditional
source of capital has fallen through. So the misconception being that because we'd have to close a deal in a rush, we have access to less informations and correct because actually what happens is there is a real determination by the company, the sponsor, if it may be, to get a deal over the line, and so everybody holds hands and says, look, we've got to get north Wall over the line to get this transaction closed in the next four to eight weeks,
whatever it might be. Let's get them all of the necessary information, let's get the access to management, et cetera. And so we actually, you know, very often feel that, you know, we understand these companies much better because we're part of the process rather than looking from the outside in. On your second point around consolidation. Yet, consolidation has been
a big theme in our industry. We are, you know, probably one of the few European self funded, entirely management owned private credit players out there, and we very regularly do get approached for at least a minority stake. You know, we have for now decided to stay independent, you know, and you know, some of our peers have chosen to
become parts of larger structures. You know, we've had no impact on our capa raising ability at least for now independently, and we've been able to fund the business as necessary. So you know, consolidation will continue to occur, but you know, we are we have no immediate plans to be part of that.
So this all sounds great in theory, but can you put some specifics on it in terms of you know, walking through an example. And I'm thinking of my my aunt who lives in Scotland, who doesn't really know what this stuff is all about, but would like to kind of, you know, tangibly interact with the concept. What what sort of companies, what sort of situations we're talking about.
Look, I think in the past you know, call it one to two years, we have you know, been more and more active in sponsor backed situations. I can give you an example. We helped a German industrial services business that was supported by a very large syndicate or a syndicate of many different mostly German and European banks over the years. And you know that that position that that syndicate came up to a maturity. Uh, the sponsor you know, was interested in refinancing this with a with a bond deal.
This was right around the time that Putin invaded the Ukraine and that to the bondie of falling apart. Strong relationships with the banks ensure that the banks decided to give the company some more time. But there was one bank syndicate lender that did not want to participate in this transaction. They held a portion of the senior debt and they had the portion of a of a second lean of they held the entirety of the second lean.
And we came in and we provided you know, that missing piece, right, and that missing piece consisted of you know, the missing piece of the of the of the senior, the missing piece the entirety of the of the of the second lean. Collectively, that was a you know, triple digit million euros. It was a sizeable transaction, but it required somebody to be able to piece these two pieces together and importantly do this in four to four to
eight weeks. We now have a position that's you know, roughly four times levered that you know very much meets the return targets of our funds on a blended basis.
This sounds like a very unusual situation, very rare to see, you know, once in a you know, you know, every every five years or something, is it. I mean, these are these common situations in Europe right now?
They are they are they are what we're seeing is a very much and you know, decrease in the commercial banks appetite to lend, and we certainly are able to to step into that into those situations. And again it comes up to this concept of maturity wall right. The more of these events you have, even if a very small percentage of them end up becoming problematic, you know, we are there to support. We are there to support
our counter parties in those situations. And remember, you know, the sponsor backed call it gap financing, private credit capital solutions business. You know, that's one part of what we do. You know, we also invest in, you know, asset backed situations. We also acquire portfolios, you know, and we have a a small but thriving legal assets funding business.
I have a question on returns. So I primarily cover real estate, right, and after the factor lost like a fifth or so of its value I'm talking euro ig real estate lost the fifth of its value in twenty twenty two. We were up double digits last year, but this year we're only up single digits, right, So what sort of returns are you looking at now in those private credits stroke special situations that you have been talking about, And how have those returns changed over the last couple of years.
Look, we you know, you know, can get drawn into you know, returns in this forum, but you know, suffice it to say, we're targeting throughout our kind of funds a return target that's you know, in the mid teens at least net to our investors, and so that requires
us obviously to be extremely opportunistic. So there's a time where you know, we found a lot of deal flow in the sponsor backed space, you know, within real estate specifically, you know, we have struggled to find situations where we can generate those types of returns while still having a
sufficient amount of downside protection. That being set, we recently closed a you know, led a deal you know that was fairly substantial and where we're able to meet our return objectives, albeit through a secondly in that situation.
So I was just asking, when you say the mid teens, are we talking pre or post fees? And then maybe we can go on to talk a little bit more about real estate.
After so I was talking netal fees.
Okay, that's good to know. So on real estate again, you know, sector very close to my heart. One of the issues has just been the amount and speed at which valuations of the portfolios have had to be written down.
And one of the because this has been clearly on the office sector, not just here in Europe, but also obviously in the US as well and probably all around the world or in many places around the world within real estate, are there sub sectors that you say that you would say look better than others, or are there countries that you would rather focus on than some others, Like are you looking at Germany the Nordics? Where are you looking at at the moment?
So I can tell you what we've spent some time. We've looked at a lot of deal flow in Germany and we haven't been able to get to get comfortable there. You know, what we've found, generally speaking is that, you know, a lot of the retail opportunities that we've seen, you don't offer kind of that that certainty of downside protection
that we're looking for. Where we did get comfortable recently is in supporting the refinancing of a large portfolio of let's call it semi serviced offices with flexible working space in the Nordics, where there was a very large private equity sponsor who had, you know, real skin in the game was putting in a substantial incremental ticket of equity in the transaction, putting in place a long term sustainable capital structure, cash paying interest where we detached at a
you know, comfortable double digit yield in a market that even pre COVID had a very large proportion of homeworking, you know, already kind of embedded within kind of societal norms. So you know, again, you know, we found one of those transactions, and we probably looked at one hundred generally speaking of the last years, but we did not get comfortable.
Wait, so you're saying you looked at one hundred, so it's very generalizable.
But what I can tell you is that the on a relative basis compared to some of the large liquid publicly traded structures where you are generating put potentially a lower return to be in a subordinated unsecured position and are subject to credit or on credit of violence, those types of situations you know, we think offer much worse compelling risk award.
You mentioned something very interesting there. You said you had looked at one hundred deals and chosen just one. That's obviously a very i'd say low hit ratio or low's success ratio when you then consider the opportunities in real estate, would you say that the opportunities then are not really there given that it's just one in one hundred, or would you say that this is a similar thing when
you're looking at other sectors as well. And also maybe you could talk a little bit about the time frames and holding periods that you have in your mind when you're considering some of these investments.
Yeah, So, generally speaking, our hit rate, you know, in transactions, tends to be we end up closing somewhere between you know, two and four percent of the total number of deals that we that we see. And you know, obviously, when you're as opportunistic as we are, you know, you have a lot of deals across your desk that you really don't warrant your very detailed attention. So, yes, that's a low hit rate, but it's something that makes sense. Sorry totally.
What was the second part of your question. So, we tend to lend in these types of situations on a you know, normal private credit basis, so it can be anywhere between four and six years. It's very rare that we have less than two years of call protection, and most of the time our counter parties do seek to refinance us somewhere around the first call date. So you know, in our funds we tend to recycle capital during the investment period because they you know, frequently can be relatively
short duration by choice of the borer. You know, we often would obviously like to stay in for longer.
One of the other things you mentioned, Fabian, that you're focus on is litigation finance. I'm interested in that concept. What does it mean, how does it work?
Sure? I think it's probably worthwhile drawing a distinction between single case litigation funding, where you know, you provide a counter party with capital to pursue a particular litigation, and what we do, which tends to be you know, lending two law firms mostly against portfolio of a broad portfolio
of legal assets. So what that means in practice. You know, one transaction that we have been involved in that has been publicly disclosed is we provided a loan to a London based law firm called Pocus good Head that was active in some of the you know, very large marquee litigations out there against car manufacturers in relation to the diesel emission scandal, for example, that is involved in funding you know that's involved in litigating on behalf of a
you know, hundreds of thousands of Brazilian claimants against against mining companies who've caused some fairly substantial environmental damage, some medical device liability cases, some data breach litigation, you know, all litigation with an element of ESG predominantly in the
mass towards space. And so what we do in those situations is without funding any individual case directly, you know, we can get comfortable that provided that one, two, or three out of in this instance call it twenty large legal cases ongoing, provided that one to three of these settle, you know, our capital will be protected. We can provide this law firm with a loan secured by a very broad portfolio of these legal assets. Uh. That takes advantage
of a few things. It takes advantage of north walls obvious, you know, strength internal and in having a legal team internally that can help underwrite the cases, a very strong credit team that can ensure that the solvency of the law firm is you know, you know, sufficient to make it through through you know, the the lending horizon, you know, and our ability again to take decisions quickly and and be pragmatic and that's been a transaction that's worked out particularly well for us.
But in simple terms, if you just break it down, I mean, there's there's a lawsuit, the claimants expect some money back, you're buying the lawsuit or the claim some some discount, and then you're waiting for a judgment.
It's actually even simpler than that. It's think of it as a company that expects to generate a substantial amount of revenues from from litigations because it takes a share of the seeds of you know, the individual claimants involved in the litigations. They have no risk if the case is lost. If the case is one, they make a certain amount of money per per claimant, and we take an the law from takes a portion of those of those proceeds, and we lend, obviously on a risk adjusted
basis against the expected recoveries in that situation. So there's no acquisition of anything at a discount. This is really alone to a business that has a working gap on need today and many multiples of expected revenues in the future.
And what kind of returns can you make on those.
Look in those types of funds, you know, we target twenty five percent plus irs, and you know we are we have historically outperformed.
Then it's interesting to hear you talking about litigation, finance and all things to do with the law here. Obviously, within BI we have over five hundred analysts covering not just single names and on the equity and credit side, but we also have a litigation team, so it's great to hear others focusing on that area as well. I had a follow up actually on sectors. So you know, we talked a little bit about real estate and you've
mentioned mining and you know, environmental issues. What key sectors would you say you're seeing the best opportunities or some of the best opportunities in at this point, and would those sectors be in the US, in Europe or elsewhere.
So, you know, we focus almost exclusively on Western Europe, right and there again we tend to focus on you know, the beer drinking countries over the wine drinking contries. But we are entirely sector agnostic. You know, we've seen some interesting deals in industrial services recently. You know, the one area where we tend to stay away from is you know, things that are very much tech enabled or that rely
on kind of the underwriting of enterprise values. So we tend to focus on businesses that you know, produce cash, have strong asset base and are you know, provide us with a good amount of downsid protection.
We you mentioned Western Europe. We are sitting in New York City. You are presumably not here on holiday. Are you talking? I know, are you talking to US investors? And if so, what's their response when you kind of pitch them Europe as an investment. I mean, it seems to me that there is this huge like home bias. There isn't a huge amount of like understanding of all of the different things that go on in Europe generally, and there's you know, almost like an aversion to the
you know, just unknown of Europe. So how do you kind of talk to them about that?
Yeah, I mean, look I totally understand. I you know, lived in the US for ten years. I am originally German, but I went to school here in New York City, and you know, I really you know, you know, I spent a lot of time here, and there is that perceived that that perception that Europe is more risky, less attractive, too small, not worth a hassle, et cetera. But what we're seeing from the LPs that we speak to. So, you know, I spend a lot of time in the US.
There's a lot of LP capital here that has an interest in Europe. And generally speaking, what I've seen in the last twenty years that i've seen this, that i've been doing this is that you know, when there's a cyclical change, investors tend to pull back, these are both gps and LPs, their interest and the expertise back into the US. There's generally this perception that the deal flow
is more interesting here. Rates are higher. You know, there is going to be more opportunity, it's a bigger market, it's simpler, we understand it. We're going to do more here. But because of that, what also tends to happen relatively quickly is that the US opportunity tends to be arbitraged
away more quickly than the European opportunity. While at the same time in Europe, because this capital gets sucked out of Europe into the US, both this capital from the GP side but also the LP interest, the opportunity set in Europe is particularly interesting, and so what we're seeing is that investor interest tends to go US first. Europe second, and at some point look moves over to Asia. And similarly, when it comes to you know, kind of where we
sit on the opportunistic end of private credit. You know, obviously LPs first start by building their core private credit allocations. Then they start to look a little bit further field specialty finance, et cetera. And then comes opportunities to credit and eventually distressed. And so the LPs where we are, you know, having the best conversations at the moment, are those with that institutional memory to know that, Okay, I can see the returns in the US decreasing, while I
can see still some really interesting opportunities in Europe. We're going to start to shift some of our attention to Europe. And that's certainly something that's happening now.
So it's a trend that just started. You expect it to accelerate.
It's a trend that started probably in the middle of last year, and is you know, going a full steam for sure.
One of the issues I guess with looking at Europe LUSUS years, and I think you alluded to that earlier, is is scale or size When these investors are looking at the Europe opportunity, do you think that the size is there for some of these investors to really get stuck in or do you think that that's something that we will only see in future.
No, I think there's you know, this is a very common misconception in Europe as well, which is that it's not scalable. You know, we have found that Europe is certainly very very scalable. We are laser focused on scalability and everything that we do precisely in order to be able to address that investor demand. I think there's one misconception about Europe, and that misconception is that, you know, if you find deals there, they have to be of
a minimum size to be worth your time. While what we have learned is to scale into deals in Europe you very often have to start a little bit smaller and grow with your counter party into transaction sizes over time. So it just takes a little bit longer to build those relationships. But once you you know are there, you are embedded, You get this repeat deal flow and you can take advantage of the fact that your really does favor locals or it really does favor incumbents, and it
works to your advantage. We certainly have found ourselves always to be in a position where you know, we have more deal flow than opportunity, more deal flow then capital available and hopefully made continue.
What about the scalability of the returns you're talking about, you know, double digit on middle market private credit, twenty five percent litigation finance. Presumably that kind of return comes from being in the niche, It doesn't scale up.
I mean, yes, certainly there are while you know, certainly there are elements of truth to that. Although the private credit that a deal that I mentioned to you, you know, was a sorry, the legal asseteal that I mentioned to you earlier, you know, at the very end was almost a two hundred million dollar transaction that got refinanced by a half a billion dollar deal by by a US
hedge fund. Right, So that falls very much within the scale, within the scalability requirements I think of most investors, certainly gets our attention. And then you know, when it comes to these private credit solutions, I think there's there's some
truth to that. You know, there's going to be only so much you can do at this very high end of our return range, you know, but I don't think anybody's really going to complain if you delivered to them kind of teens net returns, you know, at a slightly bigger scale.
One of the other issues I guess that's come up this year has been unexpected and expected elections, especially in your given what's happened in France and the impact that that had on spreads and just valuations in general. What would you say then, the key risks in Europe visit the election cycle still? Is it geopolitics, is it commodity prices? What what do you think are the key risks for the geographic area that you're focusing on.
Look, I think you know again, it's a It's a good question and one that gets asked by our investors a lot. You know. I'm you know, I'm you know. I've been investing in Europe now for almost twenty years, always from London, and I've seen crisis after crisis after crisis. We had a sovereign dead crisis, we had COVID, taper, tantrum, et cetera. We see all these different issues that pop up, and what I have learned is that Europe is surprisingly resilient.
You know.
Some of the negative factors that are certainly prevalent in the European Union it's in ersia, it's bureaucracy, et cetera. Also make it much more difficult for you know, any change in government to impact and affect radical change. So I am less concerned potentially certainly today than I was, you know, at the onset of the of the Ukraine
Ukraine conflict. So you know what, we're trying to find total Louis situations where you know, regardless of what recession case we model, our investors' capital is protected independently of you know, sudden shocks in macro, independently of the next election cycle, et cetera. So what I'm worried about the most.
What I'm worried about the most is you know, maintaining a strong team, as we have over the last seven years at Northwall, finding good opportunities, continuing to deliver really strong solutions to our counterparties that they can rely on, and delivering to our LPs, you know, not just returns, but also transparency, good communication, and a good relationship so that this ecosystem of team counterparties LPs is in a good place.
We talked a little bit earlier about you know, investor protection, making sure that you have enough equity coverage or backing or cushion if you prefer. But is that possible when you're aiming for relatively high returns and are you necessarily looking just at the senior part of the capital structure for some of these companies or are you prepared to take more risk basically to get those return figures that you mentioned.
So we are certainly very happy to drop down into a second lean position in a capital structure, provided that we subordinate ourselves to you know, what we call the benign syndicative lenders, so you know, commercial lending banks you know, and not you know, aggressive hedge funds for example point number one. Secondly, you know when we drop in a second lean, such as the situation with the German industrial
services business I described earlier. When we do drop into a second lean, you know, what we want to do is make sure that you know, we are well covered and we detach at you know, where only two or three years ago probably a banking syndicate would have detached. So you know, we look to detach somewhere between four four and a half five times, not somewhere between eight and twelve times EBITDA, So that gives us, you know,
a good amount of dwanced protection. You know, maybe that business is not worth eight times, maybe it's worth six times, but if we detach it four times, you know, we are We're comfortable.
When you look at European middle market private credit right now, where are you saying stress? Is it in the payment in kind? You know, the pick deals? Is it covenant breaches? Are there any signs of you know, more defaults coming?
You know, I think obviously the market is doing whatever it can to avoid defaults, and you know, obviously private credit firms you know, have an incentive to you know, work with their borers to try and restructure these situations. And so we are seeing obviously in increased use of PICK, which I think in and of itself isn't necessarily a problem provided it is, you know, there as part of a new funding solution, and not to sweep a problem
under the rug. The way that we look at PICK is that it helps us get to our required return. You know, we ask companies to pay as much cash as they can. The remainder to our required return we are very happy to take in the form of PICK. And here again what we're then doing is really eating over time into the potential returns that the equity, the private equity firm or the equity holders could generate in
the transaction. So actually, what I'm more worried about is, you know, what one should be more worried about is what is happening to the returns of the private equity firms in these situations, you know, rather than what's happening to the returns you know at our level of the
private credit firm. Obviously you can pick into nowhere, right, So you've got to make sure that you have covenants that also capture this pick element, so that if leverage gets to an unsustainable level, you then can get to a point where you can have a conversation about the potential refinancing with the counterparty.
Obviously, pick notes have got their fair fair share of attention recently, and you mentioned something very crucial there, which is obviously you can't pick into nowhere. My question then would be how do you draw the line then? Because you said leverage getting to an unsustainable level, do you have in your mind a level that is sustainable sort of across the board for all sectors or is it more on a case by case basis. I know earlier you mentioned sort of high single digit net debt to
ebit not being where you want to be. Is that what you're thinking about or are there other metrics, leverage metrics that you're thinking about?
Again, it depends. I was talking about an industrial services business, right Dolu, which has you know, very different valuation to potentially you know, you know, a SaaS business. So you know, it is very much industry specific it is, and there is no right or wrong answer. Right, this is where you know, it comes down to our underwriting and our
valuation of these businesses. I think the difference that you might see to some of the more broadly syndicated you know or the larger hold Coepick notes is that you know, in many of those situations, those companies already have a first ever revolver or they have a first lean that there is secondly in a piece of paper, and you're now kind of really in replacement equity territory because these larger
companies have access to the capital markets. The companies that we look at don't necessarily have access to the capital markets. So yes, they should have a slightly law evaluation because of lower liquidity. Maybe they're smaller players within certain industries, but certainly, you know, we can take advantage of the fact that you know, other than potentially banking syndicate, there's unlikely to be another lender in the capital structure.
So what's next for north Well Fabian? Where do you go from here? Is there one big opportunity that you would pinpoint, Is there a I don't know, a new a new fundraising strategy. Is there a new York office opening on the horizon? What's next for you?
So there's a few things. So we talked a lot here today about our private credit capital solutions business. Also part of our credit opportunities funds, you know, is the provision of liquidity to counter parties that you know require capital, you know, in different formats. So we've been, for example, very active in acquiring well seasoned unsecured consumer loan portfolios from some of these European European servicers that have become asset owners, and that's certainly a trend that we expect
to continue. We see a lot of deal flow in in in that portfolio space and have a dedicated team going after that opportunity. At the moment we talked about legal assets. Legal assets is something that you know, we continue to be excited about and continue to see deal flow both in Europe and actually have a team member here in the US spending more time on trying to
find some US opportunities, you know. And then finally, in many of the situations where we do provide second in capital, we are often also presented with the opportunity to participate in a very attractively priced first glean. So you know, we are spending more and more time in looking at kind of some more more plain vanilla call it senior lending,
senior lending opportunities. When it comes to the our US presence, as I alluded to before, there is a lot of very smart, very flexible LP capital in the US, and we always try to be closer to our investors, and if that means having a presence in the US, we certainly would be very open to it.
Great stuff, Fabian Crobog, Chief investment Officer and founder of Northwall Capital. It's been a pleasure having you on the credit edge.
Thank you, nice to nice to be here, and thanks Toller.
And of course I'm very grateful to Tollu Ala Mutu from Bloomberg Intelligence. Thank you for joining us today.
Thank you. Always happy to be here for.
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