Introduces the debate about the credit industry's health, referencing Blue Owl defending against Jamie Dimon's criticism.
Matt
Victor Khosla
We are living in a truly K-shaped world. The top (tech, data centers) is very hot. The bottom (chemicals, auto, construction, manufacturing) is in a down cycle, with US manufacturing showing nine months of negative numbers.
Asks if we are seeing a recession in a big piece of the economy.
Matt
Victor Khosla
Parts of the economy are recessionary. Manufacturing has been recessionary for the last nine months. I'm not an alarmist; no huge crash is our base case. The problem is pre-2022 leveraged credit deals where interest rates are now higher and earnings are flat to down.
Questions whether the Trump administration's policies are helping the recessionary manufacturing sector.
Matt
Victor Khosla
They are trying, but it takes time to turn things around. The infrastructure bill is a down payment.
Asks if the private credit industry is in denial about underlying stress, given many managers tout investments in the 'new economy'.
Dani
Victor Khosla
Everybody talks their own book. After First Brands, we are tracking 15 deals with debt over $2B (some $20B) where senior debt is now trading under 70 cents. These are pre-2022 deals hurt by higher rates and sluggish businesses. They are essentially zombie companies that need capital to restructure.
Asks if First Brands is a one-off or indicative of a broader problem.
Dani
Victor Khosla
Put First Brands aside. The 15 other companies show it's not fraud, just over-leverage. To fix US manufacturing, you have to fix these zombie capital structures.
Asks about increasing regulatory focus on alternative lenders versus banks.
Dani
Victor Khosla
Banks used to compete with one arm tied behind their back. That arm is being freed, so there's more competition now. In credit, we have cycles; we will have a little cycle.
Asks where we are in the credit cycle.
Matt
Victor Khosla
Spreads are close to record tights, around 300 basis points. High-yield spreads can blow out to 600-900 in a recession. I don't think we'll have a recession. New issuance (e.g., hyperscalers borrowing for data centers) will increase supply a lot. Pressure on spreads is likely to go up, barring a recession, as capital is needed to clean up stressed deals.
Asks for his view on what the Fed should be doing, referencing Howard Marks.
Matt
Victor Khosla
Beyond my pay grade. But you're hearing me describe real caution. In a cautious market where inflation isn't quite licked, caution would suggest go easy. Don't supply more fuel to that fire.