January 16, 2025 • 42 mins
Centerbridge Scans Consumer Pain as Inflation Lingers (Podcast)Stubbornly high prices are a threat to consumers that could bleed through to credit markets, according to Centerbridge. “The rising cost of goods and interest rates will have an impact,” said Aaron Fink, the firm’s head of asset finance. “To the extent we see deterioration in jobs, and in the labor market more broadly, that’ll be problematic,” he tells Bloomberg News’ James Crombie and Carmen Arroyo, and Bloomberg Intelligence’s Himanshu Bakshi in the latest Credit Edge podcast. Despite this, Centerbridge still sees significant opportunity in consumer finance. Fink and Bakshi also discuss how a new US administration will affect private credit via trade policy and regulation, growth in fundraising from private wealth and retail, as well as investment in data centers to support artificial intelligence.
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Episode Transcript
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Speaker 1 (00:18):
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome Aaron Fink, head
of asset finance at Center Bridge. How are you, Aaron, Well, Thanks,
thanks for having me, Thanks so much joining us today.
We're very excited to get your credit market views. Also
delighted to welcome back co host Himanshu Bakshiet from Bloomberg Intelligence. Hello,
(00:38):
him Manhu, Hi James, thank you for having me back
and with the tough questions from Bloomberg News. Carmen Arroyo.
Great to see you, Carmen. How's it going good?
Speaker 2 (00:46):
Thank you for having me, James.
Speaker 1 (00:48):
So, just to set the scene at the top pier,
credit markets are hot and borrowers globally are taking advantage.
This month could set a record for debt issuance by
US companies. Most of it is for refinancing. There's a
lot of debt coming due That means more cash returning
to investors who have already received a ton of inflows
over the last year and are very keen to buy
given how high all in yields are. You can get
(01:08):
over five point five percent right now on high grade
US debt with a very low chance of default. That's
the highest in about six months. A growing demand supplied
imbalance is keeping spreads raiser thin and also pushing investors
to other parts of credit like structured finance and private
debt where returns are higher some some people fear it's
also leading to complacency and mispricing of risk throughout credit markets,
(01:31):
which is only expected to get worse in twenty twenty
five as more investors piled in. Private credit is particularly interesting.
Apollo thinks it will get to forty trillion dollars in
five years, and that asset based finance is already at
twenty trillion dollars. That's in a previous episode you can
listen to from December. So, Aaron, whilst your view are
you very bullish like everyone else saw, do you think
(01:51):
there is reason for caution at this point?
Speaker 3 (01:53):
Well, first, thanks for having me, James Simonshuw and Carmen.
We are constructive on the mark. There are a variety
of technicals at play that I think will lend a
decent amount of support. We'd expect to see banks continuing
to back up after a couple of years of balance
sheet de leveraging. There's been a lot of focus on
(02:15):
the capital coming into the private space, Insurers underinvested in
private assets and private capital growth generally, and so I
think those factors will help to underpin what is a
pretty well bid market. It's not to say that we
don't think there are some risks. Obviously, there's a lot
of potential for volatility in a new administration. Rates are
(02:37):
very high, and so I don't know that it's going
to just be a steady march tighter for the next year,
but we are constructive on where the market sits today.
Speaker 1 (02:46):
The big thing that's changed over the last few weeks
and days really is the high rates. You know, people
did come into the expecting quite a few rate cuts.
They expected to yields to come down generally, but they've
gone up. I mean, that's been a bit of relief
this week CPI, but you know, talking about much to
five percent on the tenure, talking about potential rate hikes next,
not even the cut. That surely changes everybody's view of
(03:11):
how credit markets react this year. What's changed in your
outlook based on yields?
Speaker 3 (03:16):
Well, our outlook has been higher for longer. I think,
you know, notwithstanding better CPI data today, we've had this
expectation that a lot of what is out in the world,
potential for tariffs in the new administration and the like,
are likely to keep rates reasonably high. And so I
(03:37):
think the question really comes down to what impact a
relatively high rate environment has on a couple of different constituencies.
We think about the world as the as it relates
to the impact for consumers. Consumers have faced, you know,
a good amount of inflation in their daily lives, and
it's made housing unaffordable. I think consumers generally are in
(03:59):
a pretty strong place, and we're watching the kind of
we're watching job creation, but obviously continued rate inflation and
continue inflation could get a pressure consumer pretty meaningfully. And
it's look, it's an attractive investing environment because base rates
are high, and I think one of the refrains I've
heard on this show and in other places is people
(04:20):
are willing to take tighter credit spreads because the absolute
returns of there, and I think that's true. In part,
we're focused on the potential for rate volatility, and we
want to make sure that we're setting up investments with
the right amount of downside protection. We don't have a
ton of explicit rate exposure, so that if there is
vol we feel like we're positioned to be insulated and
(04:42):
we're just taking the core risks that we're focused on taking.
Speaker 4 (04:45):
And one of center bridge strategies in private credit involves
identifying overlooked and misunderstood assets. Can you share what instruments
or assets are either overlooked or misunderstood by the markets
As of today.
Speaker 3 (05:00):
Center Bridge is set up twenty years ago to be
an opportunistic investor that is designed to pivot public to
private based on what the market gives us. That's our
core ethos, and we do it with an orientation where
we have one investment team that looks at a broad
range of opportunities organized by industry vertical. So I, for instance,
(05:21):
spend a majority of my time in financials and in
partnership with my peers on the private equity side and
on the credit side. We think about control private equity opportunities,
we think about credit opportunities in the corporate markets, and
of course asset finance opportunities. So we're always asking ourselves
this specific question in as a financed today, we've been
(05:42):
focused coming into the year on the ability to originate
consumer credit as at an overlooked and beaten up space.
If you think about what happened leading up to COVID,
there was a big run up in origination, consumer credit
boxes were widened, you had COVID really super charge borrower performance,
(06:03):
and the hangover from all that's been pretty dramatic. You
had really the worst performance on record in twenty one
twenty two for many consumer sectors. So we viewed that
as a time history has told us to step in
and be an originator. We've owned a broad range of
consumer finance businesses and owned today throughout the history of
(06:23):
the firm, and it's always post blow up that we
want to be there originating. So that's been one space
that we've identified as attractive. Stepping back, we still think
there's attractive opportunities in the private credit markets. Holistically, I
know that's not a super hot take these days, but
you have to pick your spots. So we orient ourselves
(06:43):
thematically but with an opportunistic bent. So we want to
be in places that we think offer the most absolute
and relative value at any point in the cycle. Today
that might be consumer. We think there's opportunities in the
housing market, but ultimately that's how we set up to
make investments.
Speaker 4 (06:59):
That's interesting. So private credit growth, if you look at it,
has largely been concentrated in direct lending for the last
few years, but we're seeing it branch out into new
areas like asset based financing. You mentioned consuming credit. Now
people are even calling it tailor swift of private credit
Reddit somewhere.
Speaker 3 (07:17):
I love that.
Speaker 4 (07:18):
How big is the addressable market if you look at
just asset based financing right now? How big is that
addressable market?
Speaker 3 (07:24):
We haven't put a number out. I've heard pretty gaudy numbers.
I've heard a forty trillion dollar number, and I think, look,
acid finance has been around for a very, very long time.
Acid finance is every you know, in every day, in
every part of our daily lives, buying a home, buying
(07:45):
a sweater at a super you know, buying a sweater
at a at a department store, you know, charging money
on your credit card. Asset finance is really a part
of the real economy, drives the real economy, drives the
corporate economy. So it's really always been here. It is
coming out of the shadows a bit, but Ultimately, these
are products and sectors that existed before the financial crisis,
(08:07):
in the form of GE and CIIT other corporate originators.
So it's not really new in the traditional sense. And
so you know, I think we we we see it
as something that folks are focused on because increasingly, you know,
the insurance companies in particular, have a good liability set
up to be able to buy these assets that are illiquid.
Speaker 4 (08:29):
But it's not new, it's just rediscovering the same old rediscovering.
So just to follow up on that, what kind of
assets are you most focused on when you're looking at
these ABF deals? Where do you see more opportunities and
what are you staying away from? Because you did mention
consumer credit, you're looking at more like mortgages, credit cards, abs.
What are you are you seeing more most opportunity?
Speaker 3 (08:51):
I mentioned that coming into twenty four an important theme
for US was origination newly originated consumer credit. It came
out of this exercise we do at Center Bridge where
every year all of our industry teams develop ideas that
we believe our multi year thematic opportunities off which we
can invest, and then we present those to the firm
(09:13):
and distill them down to the best and most actionable things.
Consumer credit met that criteria for US coming into the year.
We still think that's interesting. We're obviously paying close attention
to interest rates and the health of the consumer, but
we think the consumer is still well positioned. We see
a lot of opportunities in US housing in various forms.
Since twenty nineteen, there's been something like sixteen trillion of
(09:37):
home equity built up on the balance sheets of consumers.
Consumers approach to tapping the value in their home has
evolved over time. Fifty years ago, you sold your house
late in life to create cash to live out the
end of your retirement years. Today people are much more,
much more proactive about viewing that as an asset that
(09:59):
can be managed and tapped on an ongoing basis. And
with mortgage rates high and the average borrower coupon three
point nine percent or so, there's an attractive opportunity to
create borrowing options for consumers. There's an attractive opportunity for
originators and investors to allow consumers to take money to
consolidate debt, to take money to do home improvement projects
(10:23):
as they're increasingly locked into their homes. So those are
two areas that we see pretty exciting opportunities.
Speaker 2 (10:29):
I have a question for you on more like restructurings
or distressed in the space. And basically because one of
the mantras in private credit has always been like, you know,
it's much safe for the covenants are better. And over
the past six months we've seen a few restructurings in
direct lending. I'm wondering if that's a concern for center
Bridge and if workouts are in place, and also how
(10:51):
would that look if we were talking about asset based finance.
Speaker 3 (10:55):
So restructurings in distress in the asset based finance space.
When we think about our history is as an opportunistic investor,
we have, as I mentioned, pivot over time to make
distressed investments. And when we think about making asset finance investments,
one of the things we focus on. First you have
(11:15):
to source an underwrite, and that is an important piece
of the puzzle. But then you have to build systems
and infrastructure to be able to asset manage, to troubleshoot
and to see, you know, look around corners and to
spot problems. So the nature of asset finance investments, the
way they're set up, we try to you know, conceptualize
(11:36):
the potential risks beforehand. Are we building enough credit enhancement
into our structures? Do we have the right creditor rights
to protect us if there are issues? I don't expect
you'll see the same sort of you know, creditor on
credit or violence or LME style restructuring in the asset
finance space. It just doesn't lend itself to that. But
we're very focused on active risk management and active value
(11:59):
creation in the investments we make.
Speaker 4 (12:02):
So Aeron you said, overall your constructive on us consumers. Right. So,
there's been a lot of chatter about this unmeasurable risk rise,
which is a risk of delayed charge of effect, which
is basically borrowers who could have defaulted back in twenty
twenty one twenty twenty two, they either delayed or completely
(12:24):
avoided it due to fourbearance stimulus checks and all that.
Does this concern you when evaluating consumer focused ABF.
Speaker 3 (12:32):
Deals, Obviously twenty one and twenty two I mentioned, will
be the worst vintage, the worst couple of vintages for
a lot of consumer originators and a broad range of
consumer products. We're actually seeing a lot of that burnoff today.
So on the balance sheets of corporates or of banks
insurance companies that had those risks, you're largely through the
(12:54):
peak of the lost curve, and so nothing comes to mind.
For place is where you'd have a lot a big
build up of forbearons that could you know, where the
other shoe could drop. Ultimately, really now it's about are
the is the underwriting for new consumer loans, you know,
sufficiently conservative to capture the profile of the consumer today
(13:16):
and the potential for risk if rates rise or if
there is other you know us macro distress. But there's
no place I look and see a dramatic build up
of forbearance. Specifically, there are places where there could be
deteriorating performance in the coming year.
Speaker 2 (13:31):
I wanted to ask you a little bit about home
equity just because you mentioned that you're looking into it
or you're bullish on it, and I feel a lot
of people have been bullish on it over the past year,
and there's been new products and the you know, the
use of helox is up. Where do you see like
opportunities or where do you think there's space to go in.
Speaker 3 (13:50):
So we we actually see a handful of opportunities in
the housing market for US, build up in home equity
and some of the demographic trends fail seeing kind of
housing have been themes that we've discussed for years as
a part of our Themes effort. There are two that
come to mind here you can highlight. The first is
obviously that's sixteen trillion of equity creation since twenty nineteen.
(14:14):
I think the number if you go back to twenty
twelve is over twenty five trillion dollars. Increasingly, consumers are
trying to figure out ways to access that in various forms.
So you mentioned helocks and second leans, there's also you
know products called equity option products where consumers are selling
a portion of the equity of the home. And it
(14:35):
really is a function of the use of proceeds as
we think about like what's the best for the consumer
and where do we think there's the most compelling opportunities.
One of the things that's attractive about the equity option
products is in most cases they don't require any ongoing
payment from the borrowers, so they can be used to
consolidate debt, for instance, without taking an additional burden, in
contrast to helocks, where you're going to pay a ten
(14:57):
eleven twelve percent coupon and so cash but it comes
at a meaningful cost. But also we see an opportunity
to originate loans to consumers who want to make improvements
to their home. I think existing home sales are at
twenty five year lows. Most consumers are locked into their
mortgage rates to three point nine percent mortgage rate. Mortgage
(15:18):
rates are now north of seven percent, and increasingly consumers
are looking to make improvements and stay in place. Originating
loans for the purpose of doing home improvements is a
really i think attractive option for those consumers and for
originators and companies.
Speaker 2 (15:34):
So the follow up on that, like in the run
up to eight, and I'm sure, like you hate to
talk about the same topic, but helocks for kind of
like one of the concerns because a lot of people
were just tapping home equity for daily needs. Is that
a concern that's coming up now, especially with inflation still.
Speaker 3 (15:52):
Up the main the big problem product in the run
up to eight, really we're piggyback seconds. So these were
scenarios where consumers would buy a home and put a
first and a second in place at the same time,
effectively having zero percent equity and that's an enormous risk
factor when you think about the probability of default. The
(16:13):
products that we're looking at today and places where we've
looked at second leans and helocks, these are typically underwritten
to government to GSE standards. The leverage is relatively low
versus one hundred percent advance rate in the GFC today,
maybe are at seventy or even eighty percent advance rates.
And leverage is correlated to the quality of the of
(16:34):
the consumer. So it's I think that piggyback second issue
that was really problematic in the GFC. I don't see
that as being a pervasive problem in these products.
Speaker 1 (16:44):
Basic question though, Aaron, and I'm glad to be talking
about it because you used to work at Best Done,
so you remember the boom years, so you've got a
first time But why should I go to the center bridge?
I mean, if I think about, you know, helo or
equity in my house, I'm just going to go to
the same bank that I did a mortgage with, the
highest bank around the corner. I know the guy, It'll
give me a rate. Why should I cool you up? Instead?
Speaker 3 (17:05):
Increasingly these products are not being funded in the bank community.
There's a cohort of borrowers that are able to go
to their banks and get helocked products. But increasingly the
more exotic and more convenient products for consumers are getting
funded in the private credit space. Center Bridge is set up.
Our team, the asset finance team is set up as
(17:26):
an effort that exists inside of our broader financial effort,
financials effort, and so we go out and face the world.
We meet with an originator of Heelocks, for instance, and
I'll go with my partners on the private equity side,
and we're able to sit with them. As an owner
of these types of businesses, We've owned a broad range
of consumer finance and mortgage businesses, we own some today,
(17:48):
and we're able to relate to and really be a
partner with these originators so that we can help them
solve the problems that they have, really addressed their capital needs,
and be a one stop shop and fit of that
for the consumer. To go back to your original question,
is that it gets them products that are the best
tailored to their needs while satisfying what's good for our investors.
(18:11):
Many times those products don't exist in the traditional bank community.
Speaker 1 (18:15):
Doesn't mean I'm paying a lot more though, because I'm
going to a non traditional lender.
Speaker 3 (18:19):
Not necessarily, I think it means you're in many cases
originating a product or taking a product that's going to
get funded outside of a bank balance sheet. That might
mean pricing that is more correlated to broader interest rates
and credit spreads than if you took a loan from
your local bank, but it's not necessarily tighter. And in
(18:39):
markets like this, when credit spreads are coming in, it
can also be beneficial to consumers because as these markets
develop and the financing gets more efficient, the cost of
borrowing can come way down.
Speaker 1 (18:50):
Okay, this is kind of retail business we're talking about, though,
which kind of for a big shop like yourself, is
not particularly efficient to do one on one. I'm wondering,
sort of to back up a bit on the whole
asset based finance, how do you source the assets in general?
I mean, you know, there's there's such a big market,
there's so many different kinds of assets, and everybody's off
to these assets. The banks are less keen on them,
(19:11):
so they're kind of divesting. But you know, in basic
brule terms, what's your strategy forgetting these assets?
Speaker 3 (19:19):
So I mentioned our setup we have one investment team
that looks at opportunities take our financials effort from control,
private equity all the way through public and private abs.
So the our approach, which I think is you know,
a pretty differentiated approach, is we go out and are
able to build partnerships with management teams because when we
(19:40):
sit down with them, we've built and created credit boxes
to originate heelocks, for instance, we've financed those loans. We
understand the challenges of actually running especially finance company, and
so we're able to a talk to these companies about
a broad range of capital needs they have. We're able
(20:00):
to build enduring partnerships, and ultimately it comes down, particularly
in a market like this where there's a lot of
capital chasing the space, where we're not going to compete
just on a cost of funds basis. For us, it
comes down to finding originators with whom we can have
recurring and really long term relationships so that we can
get to the best outcomes for consumers. Because we can
build stable funding for those businesses, we can create the
(20:23):
best outcome for our investors because we're able to create
stable opportunities, and ultimately that gives us a real sourcing edge.
We can't do it everywhere, but in the sectors we
want to focus, we're able to bring that effort to bear.
Speaker 1 (20:35):
When you're talking about management teams, are you talking about
a retail banks or at special lenders that are on
the high street? I mean, what sort of partners are
you looking for and working with the Already.
Speaker 3 (20:46):
We have invested in and alongside of major and banks,
regional banks. We have bank investments globally. We have long
standing relationships and experience investing in insurance companies of all type,
investing alongside of insurance and managing money for insurance investors.
And we have a history of managing building, buying and
(21:09):
managing specially financed companies. And so it's really all of
the above. It depends on what the opportunity that we're
talking about is and what the needs of that specific partner.
I would agree that the major banks we have less
to be able to do with because they have an
abundance of capital and it might not always fit. We
do seek to partner with these, you know, with banks
(21:32):
and strategics to create opportunities to be able to give
them additional leverage in their businesses, but ultimately it can
take all forms.
Speaker 4 (21:40):
Okay, private credit comes in and buys asset, which on
which banks wipe left serious questions. So you did mention
about regulation when you introduced So regulation and policies can
be huge drivers or barriers for growth in the market,
like acid based financing. How do you see potential changes
(22:02):
like watered down version of BASILFO and GAY or reversal
of student loan cancelation by Trump administration, or even the
impact of tariffs or potential taffs on auto's shaping the
ABF space. Which of these are you watching most closely?
Speaker 3 (22:19):
The market clearly believes that we are going to be
in a deregulation world, and we are trying to process
what that means for different asset classes. For instance, the CFPB,
are they going to be less aggressive about pursuing oversight? Clearly, tariffs,
if there are some versions of tariffs that could be
(22:41):
really inflationary and disruptive to certain markets, and so we're
paying really close attention to the impact tariffs could have.
I don't have a great answer today on what will
happen because I think there's there's quite a bit of
speculation on what form that ultimately takes. But you know,
the environment is going to change pretty dramatically. Another version
(23:01):
will be what happens with the GSS. There's a lot
of chatter around GSESE privatization, which isn't a direct regulatory point,
but ultimately could have a really dramatic impact on US
housing and it's something we're paying close attention to. I
think to the extent that these questions create volatility, it
(23:22):
could create opportunities and spread pressure, but we're paying attention
to all of those factors and hopefully it'll create interesting
investments for us.
Speaker 4 (23:32):
Got it, And just to follow up to that, do
you see the regulatory landscape shifting in any way that
might let banks reclaim some of the market share they've
lost to private credit?
Speaker 3 (23:44):
More broader question, just bank owing to deposit ratios have
trended lower, and our expectation in twenty five is that
banks will be in balance sheet build mode after shedding
assets for quite a few years post SVB. That'll, I
think create a lot of demand in the private markets.
(24:04):
That is definitely a place where we would expect, you know,
we would expect a good amount of activity and we do
expect the banks to be in risk on mode.
Speaker 2 (24:12):
A question on that that is kind of in the
same vein. Last year was kind of like the year
that people expected banks to use synthetic risk transfers or
tools to kind of like offload risk. But now it
seems like that whole market is slowing down. What do
you think is going to happen in twenty twenty five?
Speaker 3 (24:32):
Risk transfer is really just a transition mechanism to allow
banks to raise capital to manage exposures. So I think
it's a function of the agenda of this specific banks,
what mode they're in, if they're an asset growth mode
or not. We do think that risk transfer will continue
to be a part of the portfolio of options available
(24:54):
to banks. It's hard to put a number on what
SRT issue ins, for instance, will be in twenty five,
but I think increasing acceptance is going to drive it
to be a valuable tool for banks to use opportunistically
or programmatically to help manage their exposures.
Speaker 4 (25:11):
Just to follow upon that question, so on SRTs, the
IMF recently flat concerns about synthetic risk transfers and the
one that they could destabilize the financial system during stress periods.
How much risk do you see in these.
Speaker 3 (25:26):
SRTs depends on the asset class, So I think it's
hard to answer it on a broad basis. Again, we
see SRT as a vehicle for a bank to d
risk in auto or in sub lines or in other
specific exposures that they're looking to find protection, find capital in.
(25:49):
So I don't know that I look at the space
holistically as having systemic risk. It's really about what are
the discrete risks being taken in each of the sub sectors,
Like I just.
Speaker 2 (26:01):
On the acid class, Like I think last year we
mainly saw corporate dead SRTs in the US, and some
of those can be a little bit more risky, I guess,
especially if there's leverage loans, but we haven't really seen
that many in auto or mortgages. Is that something that
you think it's going to come this year?
Speaker 3 (26:17):
There have been some in the end of twenty four
banks buying protection on their subscription line books has been
one that has you know, been broadly discussed. Auto space
opportunistically has been a source of SRT flow. Again, it's
hard to get in the minds of the banks to
know where they're going to go. But those are asset
classes that lend themselves well to SRT. And SRT has
(26:42):
been really active in Europe for a very long time.
As you mentioned, you know often in the corporate in
their corporate loan books. I would expect they'll follow a
similar playbook in the US. Overtime.
Speaker 1 (26:54):
Another big contrary and cool we've had this year on
the show. Sorry talking about last year already in January,
but CIRI Commercial were to say, you know, I mean,
obviously it's very localized, it's very specialized. You really have
to do a lot of data digging. But is there
an opportunity there for you?
Speaker 3 (27:11):
We have a large real estate equity business. We are
active in the real estate debt space. Opportunistically, we see
attractive investments in commercial real estate. It's really about you
know where you are in the capital structure and in
what sector. But I do think that we do think
that there is going to be an opportunity in commercial
(27:33):
real estate. Not all of the chips have fallen from
some of the expected distress, and so in certain spots
we're in wait and see mode. But we're opportunistic. We're
optimistic that there'll be some opportunities in twenty five and
twenty six.
Speaker 1 (27:46):
There is it in offices, in data centers, is it
in CMBs. What's the drill down.
Speaker 3 (27:52):
On the performing side. Data center is an area that
I think has been talked about quite a bit. I
saw an interesting stat over the I think I saw
an interesting stat in the last day or two. Chod
GPT took two months to get to one hundred million
users Instagram, two and a half years, telephone seventy five years,
(28:13):
in the TV thirteen years, and the data usage for
chod gpt is ten x that of a traditional Google search.
So we know we're trying to understand the impact of
this AI revolution, and clearly it's going to drive data
center need, it's going to drive broad computing need. Data
(28:35):
centers are not a new concept. We're spending time to
try to understand the evolution. Whether it's in GPUs or
other picks and shovels. Energy consumption is going to be
very high. I do think that's going to be an
area of immense growth, and so we're spending time to
make sure we understand it.
Speaker 2 (28:52):
Just on the AI bed and everything tech, we've been
covering a few kind of like big deals in the
corporate markets, and one of them, recently done by threct
lenders was data bricks, and it just seems like there's
a lot of opportunities now in that space because it's
like high quality companies that are growing very fast and
just need capital. Is that a kind of like your
(29:12):
view for this sector?
Speaker 3 (29:14):
There is an immense capital need across everything that is
going to touch AI without a doubt, power generation, data centers, computing,
power and so I think the question is going to
be where the opportunities show up. But it's clear that
there is an enormous amount of capital that's going to
be needed to really fund the growth around everything AI.
Speaker 2 (29:36):
And isn't it getting crowded because everyone wants to get in?
Speaker 3 (29:39):
I'm not sure if it's crowded. I suspect that the
sheer quantum of dollars required still outstripped how much intelligent
capital there is able to be deployed currently. But I'm
sure there will be ups and downs in that space. Ultimately,
the data needs there and the cap X needs there
are going to be pretty great.
Speaker 1 (30:00):
It also means a lot more regulation, doesn't it. Once
you get down to retail, once it's in my four
oh one K the regulation does that make it more
commoditized and therefore less profitable? As a business potentially down
the road.
Speaker 3 (30:12):
Over time, anything that's attractive will get you know, the
returns will get eroded away. Ultimately, that for us means
that we need to stick to our knitting and continue
to find products and companies that might not be able
to access those broader markets. You need an enormous amount
of scale to be able to get into those products,
(30:33):
and we're a company that's really focused on the mintal markets,
on helping specially finance companies or banks or others who
have funding needs that we can tail our solutions for
that maybe don't quite fit at the scale that would
be required to deliver those products to retail markets, so.
Speaker 1 (30:51):
On middle market. Just so people are aware, the listeners,
what do you actually mean by that? Because it's a
term that's so broadly applied in so many different ways,
what do you mean by it?
Speaker 3 (30:59):
I mean we are trying to help companies that are
have maybe less regular access to the public capital markets,
that are in some cases more nascent or founder own.
We are helping businesses that might be at similar scale
but haven't quite yet hit sort of institutional level size
(31:20):
that would allow them to be massive public companies or
to have multi billion dollar funding needs. And so for us,
it's a it's a it's a place to play where
we can really differentiate ourselves, deliver attractive investments for our LPs,
and really solve problems for our capital partners.
Speaker 1 (31:38):
But is that a five hundred million dollar max deal
or is it bigger than that? And what's the kind
of you know, deal size?
Speaker 3 (31:44):
But it really it really runs the gamut. It can
be you know, quite small to quite large. It's so
it can it can run the continuum of of size
based on asset class, type of transaction.
Speaker 1 (31:57):
Okay, billion dollars is middle market, it can be depending
on the asset acid finance sure, all right, yeah.
Speaker 4 (32:05):
So I'm a credit guy. I'm looking at risk all day.
So we talked in length about private credit acid based financing.
What do you see as the largest risk facing private
credits stability and growth? Is it credit quality or borrows?
Cash flow, stricter regulation? What do you think is the
(32:26):
biggest risk facing private credit stability and growth?
Speaker 3 (32:30):
Facing private credit or facing the underlying assets?
Speaker 4 (32:34):
Underlying assets yep? So which will impact private credit deals?
Speaker 3 (32:38):
The consumers that we spend time focused on subprime near
prime consumers, they have to deal with the cost of
inflation every day. The cost you know, the rising cost
of goods and interest rates will have an impact and
has had an impact on those consumers. That population is
really heavily indexed to, you know, the way market, and
(33:01):
so to the extent we see deterioration in jobs and
in the labor market more broadly, that'll be problematic for
this cohort of borrowers. So I'd say rates matter, broader
macro matters. Ultimately, we view those populations of consumers as
quite healthy today, but we pay close attention to, you know,
(33:21):
those factors to make sure that there's no risks sneaking
up on us.
Speaker 1 (33:25):
How do you stay ahead of the pat you know,
we've had Goldman say last year that there's only going
to be eight potential participants in the private credit markets
globally over time, because it's just going to be a
scale business and anyone else who's not big enough just
gets pushed away. How does center Bridge maintain its edge?
Do you have to acquire, you have to expand is
there any kind of plan to significantly grow the business?
Speaker 3 (33:48):
Center Bridge is one hundred percent partner owned, and so
when we think about growth, we are really focused on
growing our business in the best ways for our investors.
We don't have any pressure to grow just for growth sake. Ultimately,
we've been able to carve out a niche in the
middle markets where we're able to deliver value to our investors.
(34:11):
We're able to grow our firm and build real recurring
opportunities with the counterparties that we deal with, and so
we're not worried today about the risk that we're not
going to be one of the eight or nine or
whatever Goldman's number is. Our focus is just on sticking
to our knitting, continue to find attractive investments, grow as
is appropriate, and deliver returns to our health piece.
Speaker 1 (34:35):
But what would your edge be if you have to describe,
you know, something you're doing potentially differently or you'll contrarian
on or what are you doing that you think sets
you upon.
Speaker 3 (34:42):
The way we're organized as one investment team is really
a point of differentiation for us. We've chosen, you know,
I don't know if it's contrarian, but we've chosen to
partner with banks and strategics to build relationships because we
feel like as opposed to trying to compete with at them,
that is how we can grow collaboratively, so building strategic
(35:05):
partnerships so that we can really leverage the best of
what we're good at and our bank partners to identify
attractive opportunities. That's been for us a really an important
point of focus.
Speaker 2 (35:18):
So one of those partnerships is with Wells. I wonder
if you could talk a little bit about that and
how it's structured, or if any deals are getting done
and how many and what type any color you have?
Speaker 3 (35:29):
Well I want to talk about the specific transaction. What
I can say is that we're really excited about the
opportunity in the non sponsor direct lending space. It's an
important part of the market that was being underserved and
we think we can really deliver attractive set of investments
and attractive sets of solutions for these businesses and so
(35:52):
it's an exciting area of growth for the firm.
Speaker 1 (35:54):
Do you have Sextess in mind when you're talking about
that space?
Speaker 3 (35:56):
You know broadly across US? You know the US SME landscape.
I think there's a broad range of opportunity sets.
Speaker 1 (36:03):
Okay, you mentioned US, are you looking globally at other
parts that? I mean, obviously everyone is loaded up on
the US and as always America first and exceptionalism going on.
But how do you diversify geographically if its aol.
Speaker 3 (36:15):
Coming into twenty four One of the themes we were
focused on was in UK housing. For instance, we have
a presence in Europe and we spend a good amount
of time on investments we own, specially finance companies and
at bank investments in Europe. UK housing and UK bridging
was an area that we identified as really compelling. One
of the things we like to do when we identify
(36:36):
attractive investments but there's still risk is try to tailor
those investments to make sure that we've created sufficient downside protection.
UK bridging is a short duration kind of residential fix
and flip style product and we've been really active there.
That's a space that we're really excited about and will
continue to be focused on in twenty five.
Speaker 2 (36:55):
Okay, I have a question on another asset class or
basically esoteric financings. We saw a lot in twenty before
twenty before the rates went up basically, and then last
year we saw a few like Hope business, We saw
the cosmetic you know, abs deal. Is there anything that
you're seeing that is going to come up this year
or anything. You know, any esoteric financings that are back
(37:18):
or you think they're going to, it's going to be
a slow burn.
Speaker 3 (37:22):
Ultimately, originators are attracted to getting to the public markets
or getting to the distributed markets because it brings down
the cost of funds and it's a valuable part of
their financing strategy. And so I think there will be
new asset classes and esoteric asset classes that come into
the public and private ABS markets in the coming years.
(37:44):
You've seen a broad range of things over the last
few years, but I think ultimately that the journey is
in part to bring down your cost of funds, and
the best way to do that is to get into
the U to the ABS markets. I mentioned potentially in
data centers for instance. Maybe we'll see GPU financing or
other financings that will try to capitalize this really kind
(38:04):
of capital needy space. And ultimately I think we'll see
that from you know, asset classes far and wide.
Speaker 4 (38:11):
And are looking ahead, I'm talking about the next ten years.
How do you see private credit landscape evolve over the
next decade. Are the any particular trends or opportunities that
excite you the most about what industry is heading.
Speaker 3 (38:24):
It's a big question. It is a big question. I'd
expect a continued productization, if you will, of these markets.
So the objective for businesses that generate financial assets is
to figure out how to finance them in the most
matched way. When we think about the opportunity set, and
(38:45):
I mentioned earlier private spreads compressing versus public spreads, originators
I think increasingly understand that what they went through post
SVB and the bank issues underscores this idea that they
need to not just be relying on the public markets,
which can have a boombust aspect to them. And so
(39:05):
I think we'll see a continued trend of originators balancing
their funding strategy by having private market exposure, having private
market capital partners, and accessing the public markets and maybe
doing that opportunistically. That'll wend to the growth in the
private markets. Ultimately, we're constructive that there's a lot of capital,
(39:27):
but the private markets will continue to grow, the real
economy will continue to grow. We talk about inflation, All
of those things drive increased borrowing needs, and so I
think the markets will grow and we'll see more products
find their way into them.
Speaker 1 (39:39):
When you talk about the spreads between the two, though,
can you quantify what they are right now? And why
do you think they're going to go?
Speaker 3 (39:45):
It depends on asset class. Yea, It depends on asset class.
So we want to always make private investments where we're
picking up a sufficient amount of spread to what we
could get done in the public markets. If we're not
able to do that, then we're going to look at
the public markets. What's sufficient depends on the asset class,
so one hundred, a few hundred basis points. It depends
on what type of risk we're taking. And there are
(40:07):
sectors today where private spreads have compressed in some respects
too much versus where you can go and execute in
the public markets. And our capital is opportunistic in its orientation.
We don't have to be invested in any sector, and
so we won't make investments in the private sector in
those places where that spread premia has compressed. We'll focus
(40:28):
in other places where we can pick up sufficient access return.
Speaker 1 (40:31):
If you have to put your finger on where that
is right now for twenty twenty five, what is it?
Speaker 3 (40:36):
Well? I mentioned consumer finance, I mentioned housing finance. I
think there's going to be good opportunities there to originate
home improvement loans. A space in housing that we've been
constructive on because of some of the affordability issues is
in manufactured housing. That's an area that we see a
lot of excess return potential. Increasingly homeowners find it hard
(40:59):
to fund home ownership. The average home price has gone
way up. In manufactured housing is a really fantastic alternative
for a lot of people to solve that affordability question.
But who want to own a home? So those are
three areas that will be focused in twenty five.
Speaker 1 (41:14):
And what are you steering clear of.
Speaker 3 (41:15):
There's a lot of sectors we're not investing in today.
We're mentioned earlier. We're conscientious of the risks from inflation
from rates in certain areas. I don't think there's anything
more explicitly not doing. It's more about what hits the
absolute and relative turn threshold for us to make investments.
So you know, that's that's really kind of what our
(41:36):
orientation is today.
Speaker 1 (41:37):
Great stuff. Aaron Fink from Center Bridge has been a
pleasure having on the Credit Edge money.
Speaker 3 (41:41):
Thanks thank you guys very much for having me. I
appreciate the.
Speaker 1 (41:43):
Time and of course so very grateful to him Anschu
Bakshi from Bloomberg Intelligence, thanks for joining us today. Thank you, James,
and to Conra Notaroya with Bloomberg News Miil gracias as always,
thank you. Check out all of Comman's great scoops on
Bloomberg dot com and the Bloomberg Terminal for more credit
market analysis and insight. Follow him in shoot Bacshee's work
on the Bloomberg Terminal as well. Bloomberg Intelligence is part
(42:03):
of our research department, with five hundred analysts and strategists
working across all markets. Coverage includes over two thousand equities
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(42:25):
your friends, or email me directly at Jcromby 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.
Hello, and welcome to the Credit Edge, a weekly markets podcast.
My name is James Crombie. I'm a senior editor at Bloomberg.
This week, we're very pleased to welcome Aaron Fink, head
of asset finance at Center Bridge. How are you, Aaron, Well, Thanks,
thanks for having me, Thanks so much joining us today.
We're very excited to get your credit market views. Also
delighted to welcome back co host Himanshu Bakshiet from Bloomberg Intelligence. Hello,
(00:38):
him Manhu, Hi James, thank you for having me back
and with the tough questions from Bloomberg News. Carmen Arroyo.
Great to see you, Carmen. How's it going good?
Speaker 2 (00:46):
Thank you for having me, James.
Speaker 1 (00:48):
So, just to set the scene at the top pier,
credit markets are hot and borrowers globally are taking advantage.
This month could set a record for debt issuance by
US companies. Most of it is for refinancing. There's a
lot of debt coming due That means more cash returning
to investors who have already received a ton of inflows
over the last year and are very keen to buy
given how high all in yields are. You can get
(01:08):
over five point five percent right now on high grade
US debt with a very low chance of default. That's
the highest in about six months. A growing demand supplied
imbalance is keeping spreads raiser thin and also pushing investors
to other parts of credit like structured finance and private
debt where returns are higher some some people fear it's
also leading to complacency and mispricing of risk throughout credit markets,
(01:31):
which is only expected to get worse in twenty twenty
five as more investors piled in. Private credit is particularly interesting.
Apollo thinks it will get to forty trillion dollars in
five years, and that asset based finance is already at
twenty trillion dollars. That's in a previous episode you can
listen to from December. So, Aaron, whilst your view are
you very bullish like everyone else saw, do you think
(01:51):
there is reason for caution at this point?
Speaker 3 (01:53):
Well, first, thanks for having me, James Simonshuw and Carmen.
We are constructive on the mark. There are a variety
of technicals at play that I think will lend a
decent amount of support. We'd expect to see banks continuing
to back up after a couple of years of balance
sheet de leveraging. There's been a lot of focus on
(02:15):
the capital coming into the private space, Insurers underinvested in
private assets and private capital growth generally, and so I
think those factors will help to underpin what is a
pretty well bid market. It's not to say that we
don't think there are some risks. Obviously, there's a lot
of potential for volatility in a new administration. Rates are
(02:37):
very high, and so I don't know that it's going
to just be a steady march tighter for the next year,
but we are constructive on where the market sits today.
Speaker 1 (02:46):
The big thing that's changed over the last few weeks
and days really is the high rates. You know, people
did come into the expecting quite a few rate cuts.
They expected to yields to come down generally, but they've
gone up. I mean, that's been a bit of relief
this week CPI, but you know, talking about much to
five percent on the tenure, talking about potential rate hikes next,
not even the cut. That surely changes everybody's view of
(03:11):
how credit markets react this year. What's changed in your
outlook based on yields?
Speaker 3 (03:16):
Well, our outlook has been higher for longer. I think,
you know, notwithstanding better CPI data today, we've had this
expectation that a lot of what is out in the world,
potential for tariffs in the new administration and the like,
are likely to keep rates reasonably high. And so I
(03:37):
think the question really comes down to what impact a
relatively high rate environment has on a couple of different constituencies.
We think about the world as the as it relates
to the impact for consumers. Consumers have faced, you know,
a good amount of inflation in their daily lives, and
it's made housing unaffordable. I think consumers generally are in
(03:59):
a pretty strong place, and we're watching the kind of
we're watching job creation, but obviously continued rate inflation and
continue inflation could get a pressure consumer pretty meaningfully. And
it's look, it's an attractive investing environment because base rates
are high, and I think one of the refrains I've
heard on this show and in other places is people
(04:20):
are willing to take tighter credit spreads because the absolute
returns of there, and I think that's true. In part,
we're focused on the potential for rate volatility, and we
want to make sure that we're setting up investments with
the right amount of downside protection. We don't have a
ton of explicit rate exposure, so that if there is
vol we feel like we're positioned to be insulated and
(04:42):
we're just taking the core risks that we're focused on taking.
Speaker 4 (04:45):
And one of center bridge strategies in private credit involves
identifying overlooked and misunderstood assets. Can you share what instruments
or assets are either overlooked or misunderstood by the markets
As of today.
Speaker 3 (05:00):
Center Bridge is set up twenty years ago to be
an opportunistic investor that is designed to pivot public to
private based on what the market gives us. That's our
core ethos, and we do it with an orientation where
we have one investment team that looks at a broad
range of opportunities organized by industry vertical. So I, for instance,
(05:21):
spend a majority of my time in financials and in
partnership with my peers on the private equity side and
on the credit side. We think about control private equity opportunities,
we think about credit opportunities in the corporate markets, and
of course asset finance opportunities. So we're always asking ourselves
this specific question in as a financed today, we've been
(05:42):
focused coming into the year on the ability to originate
consumer credit as at an overlooked and beaten up space.
If you think about what happened leading up to COVID,
there was a big run up in origination, consumer credit
boxes were widened, you had COVID really super charge borrower performance,
(06:03):
and the hangover from all that's been pretty dramatic. You
had really the worst performance on record in twenty one
twenty two for many consumer sectors. So we viewed that
as a time history has told us to step in
and be an originator. We've owned a broad range of
consumer finance businesses and owned today throughout the history of
(06:23):
the firm, and it's always post blow up that we
want to be there originating. So that's been one space
that we've identified as attractive. Stepping back, we still think
there's attractive opportunities in the private credit markets. Holistically, I
know that's not a super hot take these days, but
you have to pick your spots. So we orient ourselves
(06:43):
thematically but with an opportunistic bent. So we want to
be in places that we think offer the most absolute
and relative value at any point in the cycle. Today
that might be consumer. We think there's opportunities in the
housing market, but ultimately that's how we set up to
make investments.
Speaker 4 (06:59):
That's interesting. So private credit growth, if you look at it,
has largely been concentrated in direct lending for the last
few years, but we're seeing it branch out into new
areas like asset based financing. You mentioned consuming credit. Now
people are even calling it tailor swift of private credit
Reddit somewhere.
Speaker 3 (07:17):
I love that.
Speaker 4 (07:18):
How big is the addressable market if you look at
just asset based financing right now? How big is that
addressable market?
Speaker 3 (07:24):
We haven't put a number out. I've heard pretty gaudy numbers.
I've heard a forty trillion dollar number, and I think, look,
acid finance has been around for a very, very long time.
Acid finance is every you know, in every day, in
every part of our daily lives, buying a home, buying
(07:45):
a sweater at a super you know, buying a sweater
at a at a department store, you know, charging money
on your credit card. Asset finance is really a part
of the real economy, drives the real economy, drives the
corporate economy. So it's really always been here. It is
coming out of the shadows a bit, but Ultimately, these
are products and sectors that existed before the financial crisis,
(08:07):
in the form of GE and CIIT other corporate originators.
So it's not really new in the traditional sense. And
so you know, I think we we we see it
as something that folks are focused on because increasingly, you know,
the insurance companies in particular, have a good liability set
up to be able to buy these assets that are illiquid.
Speaker 4 (08:29):
But it's not new, it's just rediscovering the same old rediscovering.
So just to follow up on that, what kind of
assets are you most focused on when you're looking at
these ABF deals? Where do you see more opportunities and
what are you staying away from? Because you did mention
consumer credit, you're looking at more like mortgages, credit cards, abs.
What are you are you seeing more most opportunity?
Speaker 3 (08:51):
I mentioned that coming into twenty four an important theme
for US was origination newly originated consumer credit. It came
out of this exercise we do at Center Bridge where
every year all of our industry teams develop ideas that
we believe our multi year thematic opportunities off which we
can invest, and then we present those to the firm
(09:13):
and distill them down to the best and most actionable things.
Consumer credit met that criteria for US coming into the year.
We still think that's interesting. We're obviously paying close attention
to interest rates and the health of the consumer, but
we think the consumer is still well positioned. We see
a lot of opportunities in US housing in various forms.
Since twenty nineteen, there's been something like sixteen trillion of
(09:37):
home equity built up on the balance sheets of consumers.
Consumers approach to tapping the value in their home has
evolved over time. Fifty years ago, you sold your house
late in life to create cash to live out the
end of your retirement years. Today people are much more,
much more proactive about viewing that as an asset that
(09:59):
can be managed and tapped on an ongoing basis. And
with mortgage rates high and the average borrower coupon three
point nine percent or so, there's an attractive opportunity to
create borrowing options for consumers. There's an attractive opportunity for
originators and investors to allow consumers to take money to
consolidate debt, to take money to do home improvement projects
(10:23):
as they're increasingly locked into their homes. So those are
two areas that we see pretty exciting opportunities.
Speaker 2 (10:29):
I have a question for you on more like restructurings
or distressed in the space. And basically because one of
the mantras in private credit has always been like, you know,
it's much safe for the covenants are better. And over
the past six months we've seen a few restructurings in
direct lending. I'm wondering if that's a concern for center
Bridge and if workouts are in place, and also how
(10:51):
would that look if we were talking about asset based finance.
Speaker 3 (10:55):
So restructurings in distress in the asset based finance space.
When we think about our history is as an opportunistic investor,
we have, as I mentioned, pivot over time to make
distressed investments. And when we think about making asset finance investments,
one of the things we focus on. First you have
(11:15):
to source an underwrite, and that is an important piece
of the puzzle. But then you have to build systems
and infrastructure to be able to asset manage, to troubleshoot
and to see, you know, look around corners and to
spot problems. So the nature of asset finance investments, the
way they're set up, we try to you know, conceptualize
(11:36):
the potential risks beforehand. Are we building enough credit enhancement
into our structures? Do we have the right creditor rights
to protect us if there are issues? I don't expect
you'll see the same sort of you know, creditor on
credit or violence or LME style restructuring in the asset
finance space. It just doesn't lend itself to that. But
we're very focused on active risk management and active value
(11:59):
creation in the investments we make.
Speaker 4 (12:02):
So Aeron you said, overall your constructive on us consumers. Right. So,
there's been a lot of chatter about this unmeasurable risk rise,
which is a risk of delayed charge of effect, which
is basically borrowers who could have defaulted back in twenty
twenty one twenty twenty two, they either delayed or completely
(12:24):
avoided it due to fourbearance stimulus checks and all that.
Does this concern you when evaluating consumer focused ABF.
Speaker 3 (12:32):
Deals, Obviously twenty one and twenty two I mentioned, will
be the worst vintage, the worst couple of vintages for
a lot of consumer originators and a broad range of
consumer products. We're actually seeing a lot of that burnoff today.
So on the balance sheets of corporates or of banks
insurance companies that had those risks, you're largely through the
(12:54):
peak of the lost curve, and so nothing comes to mind.
For place is where you'd have a lot a big
build up of forbearons that could you know, where the
other shoe could drop. Ultimately, really now it's about are
the is the underwriting for new consumer loans, you know,
sufficiently conservative to capture the profile of the consumer today
(13:16):
and the potential for risk if rates rise or if
there is other you know us macro distress. But there's
no place I look and see a dramatic build up
of forbearance. Specifically, there are places where there could be
deteriorating performance in the coming year.
Speaker 2 (13:31):
I wanted to ask you a little bit about home
equity just because you mentioned that you're looking into it
or you're bullish on it, and I feel a lot
of people have been bullish on it over the past year,
and there's been new products and the you know, the
use of helox is up. Where do you see like
opportunities or where do you think there's space to go in.
Speaker 3 (13:50):
So we we actually see a handful of opportunities in
the housing market for US, build up in home equity
and some of the demographic trends fail seeing kind of
housing have been themes that we've discussed for years as
a part of our Themes effort. There are two that
come to mind here you can highlight. The first is
obviously that's sixteen trillion of equity creation since twenty nineteen.
(14:14):
I think the number if you go back to twenty
twelve is over twenty five trillion dollars. Increasingly, consumers are
trying to figure out ways to access that in various forms.
So you mentioned helocks and second leans, there's also you
know products called equity option products where consumers are selling
a portion of the equity of the home. And it
(14:35):
really is a function of the use of proceeds as
we think about like what's the best for the consumer
and where do we think there's the most compelling opportunities.
One of the things that's attractive about the equity option
products is in most cases they don't require any ongoing
payment from the borrowers, so they can be used to
consolidate debt, for instance, without taking an additional burden, in
contrast to helocks, where you're going to pay a ten
(14:57):
eleven twelve percent coupon and so cash but it comes
at a meaningful cost. But also we see an opportunity
to originate loans to consumers who want to make improvements
to their home. I think existing home sales are at
twenty five year lows. Most consumers are locked into their
mortgage rates to three point nine percent mortgage rate. Mortgage
(15:18):
rates are now north of seven percent, and increasingly consumers
are looking to make improvements and stay in place. Originating
loans for the purpose of doing home improvements is a
really i think attractive option for those consumers and for
originators and companies.
Speaker 2 (15:34):
So the follow up on that, like in the run
up to eight, and I'm sure, like you hate to
talk about the same topic, but helocks for kind of
like one of the concerns because a lot of people
were just tapping home equity for daily needs. Is that
a concern that's coming up now, especially with inflation still.
Speaker 3 (15:52):
Up the main the big problem product in the run
up to eight, really we're piggyback seconds. So these were
scenarios where consumers would buy a home and put a
first and a second in place at the same time,
effectively having zero percent equity and that's an enormous risk
factor when you think about the probability of default. The
(16:13):
products that we're looking at today and places where we've
looked at second leans and helocks, these are typically underwritten
to government to GSE standards. The leverage is relatively low
versus one hundred percent advance rate in the GFC today,
maybe are at seventy or even eighty percent advance rates.
And leverage is correlated to the quality of the of
(16:34):
the consumer. So it's I think that piggyback second issue
that was really problematic in the GFC. I don't see
that as being a pervasive problem in these products.
Speaker 1 (16:44):
Basic question though, Aaron, and I'm glad to be talking
about it because you used to work at Best Done,
so you remember the boom years, so you've got a
first time But why should I go to the center bridge?
I mean, if I think about, you know, helo or
equity in my house, I'm just going to go to
the same bank that I did a mortgage with, the
highest bank around the corner. I know the guy, It'll
give me a rate. Why should I cool you up? Instead?
Speaker 3 (17:05):
Increasingly these products are not being funded in the bank community.
There's a cohort of borrowers that are able to go
to their banks and get helocked products. But increasingly the
more exotic and more convenient products for consumers are getting
funded in the private credit space. Center Bridge is set up.
Our team, the asset finance team is set up as
(17:26):
an effort that exists inside of our broader financial effort,
financials effort, and so we go out and face the world.
We meet with an originator of Heelocks, for instance, and
I'll go with my partners on the private equity side,
and we're able to sit with them. As an owner
of these types of businesses, We've owned a broad range
of consumer finance and mortgage businesses, we own some today,
(17:48):
and we're able to relate to and really be a
partner with these originators so that we can help them
solve the problems that they have, really addressed their capital needs,
and be a one stop shop and fit of that
for the consumer. To go back to your original question,
is that it gets them products that are the best
tailored to their needs while satisfying what's good for our investors.
(18:11):
Many times those products don't exist in the traditional bank community.
Speaker 1 (18:15):
Doesn't mean I'm paying a lot more though, because I'm
going to a non traditional lender.
Speaker 3 (18:19):
Not necessarily, I think it means you're in many cases
originating a product or taking a product that's going to
get funded outside of a bank balance sheet. That might
mean pricing that is more correlated to broader interest rates
and credit spreads than if you took a loan from
your local bank, but it's not necessarily tighter. And in
(18:39):
markets like this, when credit spreads are coming in, it
can also be beneficial to consumers because as these markets
develop and the financing gets more efficient, the cost of
borrowing can come way down.
Speaker 1 (18:50):
Okay, this is kind of retail business we're talking about, though,
which kind of for a big shop like yourself, is
not particularly efficient to do one on one. I'm wondering,
sort of to back up a bit on the whole
asset based finance, how do you source the assets in general?
I mean, you know, there's there's such a big market,
there's so many different kinds of assets, and everybody's off
to these assets. The banks are less keen on them,
(19:11):
so they're kind of divesting. But you know, in basic
brule terms, what's your strategy forgetting these assets?
Speaker 3 (19:19):
So I mentioned our setup we have one investment team
that looks at opportunities take our financials effort from control,
private equity all the way through public and private abs.
So the our approach, which I think is you know,
a pretty differentiated approach, is we go out and are
able to build partnerships with management teams because when we
(19:40):
sit down with them, we've built and created credit boxes
to originate heelocks, for instance, we've financed those loans. We
understand the challenges of actually running especially finance company, and
so we're able to a talk to these companies about
a broad range of capital needs they have. We're able
(20:00):
to build enduring partnerships, and ultimately it comes down, particularly
in a market like this where there's a lot of
capital chasing the space, where we're not going to compete
just on a cost of funds basis. For us, it
comes down to finding originators with whom we can have
recurring and really long term relationships so that we can
get to the best outcomes for consumers. Because we can
build stable funding for those businesses, we can create the
(20:23):
best outcome for our investors because we're able to create
stable opportunities, and ultimately that gives us a real sourcing edge.
We can't do it everywhere, but in the sectors we
want to focus, we're able to bring that effort to bear.
Speaker 1 (20:35):
When you're talking about management teams, are you talking about
a retail banks or at special lenders that are on
the high street? I mean, what sort of partners are
you looking for and working with the Already.
Speaker 3 (20:46):
We have invested in and alongside of major and banks,
regional banks. We have bank investments globally. We have long
standing relationships and experience investing in insurance companies of all type,
investing alongside of insurance and managing money for insurance investors.
And we have a history of managing building, buying and
(21:09):
managing specially financed companies. And so it's really all of
the above. It depends on what the opportunity that we're
talking about is and what the needs of that specific partner.
I would agree that the major banks we have less
to be able to do with because they have an
abundance of capital and it might not always fit. We
do seek to partner with these, you know, with banks
(21:32):
and strategics to create opportunities to be able to give
them additional leverage in their businesses, but ultimately it can
take all forms.
Speaker 4 (21:40):
Okay, private credit comes in and buys asset, which on
which banks wipe left serious questions. So you did mention
about regulation when you introduced So regulation and policies can
be huge drivers or barriers for growth in the market,
like acid based financing. How do you see potential changes
(22:02):
like watered down version of BASILFO and GAY or reversal
of student loan cancelation by Trump administration, or even the
impact of tariffs or potential taffs on auto's shaping the
ABF space. Which of these are you watching most closely?
Speaker 3 (22:19):
The market clearly believes that we are going to be
in a deregulation world, and we are trying to process
what that means for different asset classes. For instance, the CFPB,
are they going to be less aggressive about pursuing oversight? Clearly, tariffs,
if there are some versions of tariffs that could be
(22:41):
really inflationary and disruptive to certain markets, and so we're
paying really close attention to the impact tariffs could have.
I don't have a great answer today on what will
happen because I think there's there's quite a bit of
speculation on what form that ultimately takes. But you know,
the environment is going to change pretty dramatically. Another version
(23:01):
will be what happens with the GSS. There's a lot
of chatter around GSESE privatization, which isn't a direct regulatory point,
but ultimately could have a really dramatic impact on US
housing and it's something we're paying close attention to. I
think to the extent that these questions create volatility, it
(23:22):
could create opportunities and spread pressure, but we're paying attention
to all of those factors and hopefully it'll create interesting
investments for us.
Speaker 4 (23:32):
Got it, And just to follow up to that, do
you see the regulatory landscape shifting in any way that
might let banks reclaim some of the market share they've
lost to private credit?
Speaker 3 (23:44):
More broader question, just bank owing to deposit ratios have
trended lower, and our expectation in twenty five is that
banks will be in balance sheet build mode after shedding
assets for quite a few years post SVB. That'll, I
think create a lot of demand in the private markets.
(24:04):
That is definitely a place where we would expect, you know,
we would expect a good amount of activity and we do
expect the banks to be in risk on mode.
Speaker 2 (24:12):
A question on that that is kind of in the
same vein. Last year was kind of like the year
that people expected banks to use synthetic risk transfers or
tools to kind of like offload risk. But now it
seems like that whole market is slowing down. What do
you think is going to happen in twenty twenty five?
Speaker 3 (24:32):
Risk transfer is really just a transition mechanism to allow
banks to raise capital to manage exposures. So I think
it's a function of the agenda of this specific banks,
what mode they're in, if they're an asset growth mode
or not. We do think that risk transfer will continue
to be a part of the portfolio of options available
(24:54):
to banks. It's hard to put a number on what
SRT issue ins, for instance, will be in twenty five,
but I think increasing acceptance is going to drive it
to be a valuable tool for banks to use opportunistically
or programmatically to help manage their exposures.
Speaker 4 (25:11):
Just to follow upon that question, so on SRTs, the
IMF recently flat concerns about synthetic risk transfers and the
one that they could destabilize the financial system during stress periods.
How much risk do you see in these.
Speaker 3 (25:26):
SRTs depends on the asset class, So I think it's
hard to answer it on a broad basis. Again, we
see SRT as a vehicle for a bank to d
risk in auto or in sub lines or in other
specific exposures that they're looking to find protection, find capital in.
(25:49):
So I don't know that I look at the space
holistically as having systemic risk. It's really about what are
the discrete risks being taken in each of the sub sectors,
Like I just.
Speaker 2 (26:01):
On the acid class, Like I think last year we
mainly saw corporate dead SRTs in the US, and some
of those can be a little bit more risky, I guess,
especially if there's leverage loans, but we haven't really seen
that many in auto or mortgages. Is that something that
you think it's going to come this year?
Speaker 3 (26:17):
There have been some in the end of twenty four
banks buying protection on their subscription line books has been
one that has you know, been broadly discussed. Auto space
opportunistically has been a source of SRT flow. Again, it's
hard to get in the minds of the banks to
know where they're going to go. But those are asset
classes that lend themselves well to SRT. And SRT has
(26:42):
been really active in Europe for a very long time.
As you mentioned, you know often in the corporate in
their corporate loan books. I would expect they'll follow a
similar playbook in the US. Overtime.
Speaker 1 (26:54):
Another big contrary and cool we've had this year on
the show. Sorry talking about last year already in January,
but CIRI Commercial were to say, you know, I mean,
obviously it's very localized, it's very specialized. You really have
to do a lot of data digging. But is there
an opportunity there for you?
Speaker 3 (27:11):
We have a large real estate equity business. We are
active in the real estate debt space. Opportunistically, we see
attractive investments in commercial real estate. It's really about you
know where you are in the capital structure and in
what sector. But I do think that we do think
that there is going to be an opportunity in commercial
(27:33):
real estate. Not all of the chips have fallen from
some of the expected distress, and so in certain spots
we're in wait and see mode. But we're opportunistic. We're
optimistic that there'll be some opportunities in twenty five and
twenty six.
Speaker 1 (27:46):
There is it in offices, in data centers, is it
in CMBs. What's the drill down.
Speaker 3 (27:52):
On the performing side. Data center is an area that
I think has been talked about quite a bit. I
saw an interesting stat over the I think I saw
an interesting stat in the last day or two. Chod
GPT took two months to get to one hundred million
users Instagram, two and a half years, telephone seventy five years,
(28:13):
in the TV thirteen years, and the data usage for
chod gpt is ten x that of a traditional Google search.
So we know we're trying to understand the impact of
this AI revolution, and clearly it's going to drive data
center need, it's going to drive broad computing need. Data
(28:35):
centers are not a new concept. We're spending time to
try to understand the evolution. Whether it's in GPUs or
other picks and shovels. Energy consumption is going to be
very high. I do think that's going to be an
area of immense growth, and so we're spending time to
make sure we understand it.
Speaker 2 (28:52):
Just on the AI bed and everything tech, we've been
covering a few kind of like big deals in the
corporate markets, and one of them, recently done by threct
lenders was data bricks, and it just seems like there's
a lot of opportunities now in that space because it's
like high quality companies that are growing very fast and
just need capital. Is that a kind of like your
(29:12):
view for this sector?
Speaker 3 (29:14):
There is an immense capital need across everything that is
going to touch AI without a doubt, power generation, data centers, computing,
power and so I think the question is going to
be where the opportunities show up. But it's clear that
there is an enormous amount of capital that's going to
be needed to really fund the growth around everything AI.
Speaker 2 (29:36):
And isn't it getting crowded because everyone wants to get in?
Speaker 3 (29:39):
I'm not sure if it's crowded. I suspect that the
sheer quantum of dollars required still outstripped how much intelligent
capital there is able to be deployed currently. But I'm
sure there will be ups and downs in that space. Ultimately,
the data needs there and the cap X needs there
are going to be pretty great.
Speaker 1 (30:00):
It also means a lot more regulation, doesn't it. Once
you get down to retail, once it's in my four
oh one K the regulation does that make it more
commoditized and therefore less profitable? As a business potentially down
the road.
Speaker 3 (30:12):
Over time, anything that's attractive will get you know, the
returns will get eroded away. Ultimately, that for us means
that we need to stick to our knitting and continue
to find products and companies that might not be able
to access those broader markets. You need an enormous amount
of scale to be able to get into those products,
(30:33):
and we're a company that's really focused on the mintal markets,
on helping specially finance companies or banks or others who
have funding needs that we can tail our solutions for
that maybe don't quite fit at the scale that would
be required to deliver those products to retail markets, so.
Speaker 1 (30:51):
On middle market. Just so people are aware, the listeners,
what do you actually mean by that? Because it's a
term that's so broadly applied in so many different ways,
what do you mean by it?
Speaker 3 (30:59):
I mean we are trying to help companies that are
have maybe less regular access to the public capital markets,
that are in some cases more nascent or founder own.
We are helping businesses that might be at similar scale
but haven't quite yet hit sort of institutional level size
(31:20):
that would allow them to be massive public companies or
to have multi billion dollar funding needs. And so for us,
it's a it's a it's a place to play where
we can really differentiate ourselves, deliver attractive investments for our LPs,
and really solve problems for our capital partners.
Speaker 1 (31:38):
But is that a five hundred million dollar max deal
or is it bigger than that? And what's the kind
of you know, deal size?
Speaker 3 (31:44):
But it really it really runs the gamut. It can
be you know, quite small to quite large. It's so
it can it can run the continuum of of size
based on asset class, type of transaction.
Speaker 1 (31:57):
Okay, billion dollars is middle market, it can be depending
on the asset acid finance sure, all right, yeah.
Speaker 4 (32:05):
So I'm a credit guy. I'm looking at risk all day.
So we talked in length about private credit acid based financing.
What do you see as the largest risk facing private
credits stability and growth? Is it credit quality or borrows?
Cash flow, stricter regulation? What do you think is the
(32:26):
biggest risk facing private credit stability and growth?
Speaker 3 (32:30):
Facing private credit or facing the underlying assets?
Speaker 4 (32:34):
Underlying assets yep? So which will impact private credit deals?
Speaker 3 (32:38):
The consumers that we spend time focused on subprime near
prime consumers, they have to deal with the cost of
inflation every day. The cost you know, the rising cost
of goods and interest rates will have an impact and
has had an impact on those consumers. That population is
really heavily indexed to, you know, the way market, and
(33:01):
so to the extent we see deterioration in jobs and
in the labor market more broadly, that'll be problematic for
this cohort of borrowers. So I'd say rates matter, broader
macro matters. Ultimately, we view those populations of consumers as
quite healthy today, but we pay close attention to, you know,
(33:21):
those factors to make sure that there's no risks sneaking
up on us.
Speaker 1 (33:25):
How do you stay ahead of the pat you know,
we've had Goldman say last year that there's only going
to be eight potential participants in the private credit markets
globally over time, because it's just going to be a
scale business and anyone else who's not big enough just
gets pushed away. How does center Bridge maintain its edge?
Do you have to acquire, you have to expand is
there any kind of plan to significantly grow the business?
Speaker 3 (33:48):
Center Bridge is one hundred percent partner owned, and so
when we think about growth, we are really focused on
growing our business in the best ways for our investors.
We don't have any pressure to grow just for growth sake. Ultimately,
we've been able to carve out a niche in the
middle markets where we're able to deliver value to our investors.
(34:11):
We're able to grow our firm and build real recurring
opportunities with the counterparties that we deal with, and so
we're not worried today about the risk that we're not
going to be one of the eight or nine or
whatever Goldman's number is. Our focus is just on sticking
to our knitting, continue to find attractive investments, grow as
is appropriate, and deliver returns to our health piece.
Speaker 1 (34:35):
But what would your edge be if you have to describe,
you know, something you're doing potentially differently or you'll contrarian
on or what are you doing that you think sets
you upon.
Speaker 3 (34:42):
The way we're organized as one investment team is really
a point of differentiation for us. We've chosen, you know,
I don't know if it's contrarian, but we've chosen to
partner with banks and strategics to build relationships because we
feel like as opposed to trying to compete with at them,
that is how we can grow collaboratively, so building strategic
(35:05):
partnerships so that we can really leverage the best of
what we're good at and our bank partners to identify
attractive opportunities. That's been for us a really an important
point of focus.
Speaker 2 (35:18):
So one of those partnerships is with Wells. I wonder
if you could talk a little bit about that and
how it's structured, or if any deals are getting done
and how many and what type any color you have?
Speaker 3 (35:29):
Well I want to talk about the specific transaction. What
I can say is that we're really excited about the
opportunity in the non sponsor direct lending space. It's an
important part of the market that was being underserved and
we think we can really deliver attractive set of investments
and attractive sets of solutions for these businesses and so
(35:52):
it's an exciting area of growth for the firm.
Speaker 1 (35:54):
Do you have Sextess in mind when you're talking about
that space?
Speaker 3 (35:56):
You know broadly across US? You know the US SME landscape.
I think there's a broad range of opportunity sets.
Speaker 1 (36:03):
Okay, you mentioned US, are you looking globally at other
parts that? I mean, obviously everyone is loaded up on
the US and as always America first and exceptionalism going on.
But how do you diversify geographically if its aol.
Speaker 3 (36:15):
Coming into twenty four One of the themes we were
focused on was in UK housing. For instance, we have
a presence in Europe and we spend a good amount
of time on investments we own, specially finance companies and
at bank investments in Europe. UK housing and UK bridging
was an area that we identified as really compelling. One
of the things we like to do when we identify
(36:36):
attractive investments but there's still risk is try to tailor
those investments to make sure that we've created sufficient downside protection.
UK bridging is a short duration kind of residential fix
and flip style product and we've been really active there.
That's a space that we're really excited about and will
continue to be focused on in twenty five.
Speaker 2 (36:55):
Okay, I have a question on another asset class or
basically esoteric financings. We saw a lot in twenty before
twenty before the rates went up basically, and then last
year we saw a few like Hope business, We saw
the cosmetic you know, abs deal. Is there anything that
you're seeing that is going to come up this year
or anything. You know, any esoteric financings that are back
(37:18):
or you think they're going to, it's going to be
a slow burn.
Speaker 3 (37:22):
Ultimately, originators are attracted to getting to the public markets
or getting to the distributed markets because it brings down
the cost of funds and it's a valuable part of
their financing strategy. And so I think there will be
new asset classes and esoteric asset classes that come into
the public and private ABS markets in the coming years.
(37:44):
You've seen a broad range of things over the last
few years, but I think ultimately that the journey is
in part to bring down your cost of funds, and
the best way to do that is to get into
the U to the ABS markets. I mentioned potentially in
data centers for instance. Maybe we'll see GPU financing or
other financings that will try to capitalize this really kind
(38:04):
of capital needy space. And ultimately I think we'll see
that from you know, asset classes far and wide.
Speaker 4 (38:11):
And are looking ahead, I'm talking about the next ten years.
How do you see private credit landscape evolve over the
next decade. Are the any particular trends or opportunities that
excite you the most about what industry is heading.
Speaker 3 (38:24):
It's a big question. It is a big question. I'd
expect a continued productization, if you will, of these markets.
So the objective for businesses that generate financial assets is
to figure out how to finance them in the most
matched way. When we think about the opportunity set, and
(38:45):
I mentioned earlier private spreads compressing versus public spreads, originators
I think increasingly understand that what they went through post
SVB and the bank issues underscores this idea that they
need to not just be relying on the public markets,
which can have a boombust aspect to them. And so
(39:05):
I think we'll see a continued trend of originators balancing
their funding strategy by having private market exposure, having private
market capital partners, and accessing the public markets and maybe
doing that opportunistically. That'll wend to the growth in the
private markets. Ultimately, we're constructive that there's a lot of capital,
(39:27):
but the private markets will continue to grow, the real
economy will continue to grow. We talk about inflation, All
of those things drive increased borrowing needs, and so I
think the markets will grow and we'll see more products
find their way into them.
Speaker 1 (39:39):
When you talk about the spreads between the two, though,
can you quantify what they are right now? And why
do you think they're going to go?
Speaker 3 (39:45):
It depends on asset class. Yea, It depends on asset class.
So we want to always make private investments where we're
picking up a sufficient amount of spread to what we
could get done in the public markets. If we're not
able to do that, then we're going to look at
the public markets. What's sufficient depends on the asset class,
so one hundred, a few hundred basis points. It depends
on what type of risk we're taking. And there are
(40:07):
sectors today where private spreads have compressed in some respects
too much versus where you can go and execute in
the public markets. And our capital is opportunistic in its orientation.
We don't have to be invested in any sector, and
so we won't make investments in the private sector in
those places where that spread premia has compressed. We'll focus
(40:28):
in other places where we can pick up sufficient access return.
Speaker 1 (40:31):
If you have to put your finger on where that
is right now for twenty twenty five, what is it?
Speaker 3 (40:36):
Well? I mentioned consumer finance, I mentioned housing finance. I
think there's going to be good opportunities there to originate
home improvement loans. A space in housing that we've been
constructive on because of some of the affordability issues is
in manufactured housing. That's an area that we see a
lot of excess return potential. Increasingly homeowners find it hard
(40:59):
to fund home ownership. The average home price has gone
way up. In manufactured housing is a really fantastic alternative
for a lot of people to solve that affordability question.
But who want to own a home? So those are
three areas that will be focused in twenty five.
Speaker 1 (41:14):
And what are you steering clear of.
Speaker 3 (41:15):
There's a lot of sectors we're not investing in today.
We're mentioned earlier. We're conscientious of the risks from inflation
from rates in certain areas. I don't think there's anything
more explicitly not doing. It's more about what hits the
absolute and relative turn threshold for us to make investments.
So you know, that's that's really kind of what our
(41:36):
orientation is today.
Speaker 1 (41:37):
Great stuff. Aaron Fink from Center Bridge has been a
pleasure having on the Credit Edge money.
Speaker 3 (41:41):
Thanks thank you guys very much for having me. I
appreciate the.
Speaker 1 (41:43):
Time and of course so very grateful to him Anschu
Bakshi from Bloomberg Intelligence, thanks for joining us today. Thank you, James,
and to Conra Notaroya with Bloomberg News Miil gracias as always,
thank you. Check out all of Comman's great scoops on
Bloomberg dot com and the Bloomberg Terminal for more credit
market analysis and insight. Follow him in shoot Bacshee's work
on the Bloomberg Terminal as well. Bloomberg Intelligence is part
(42:03):
of our research department, with five hundred analysts and strategists
working across all markets. Coverage includes over two thousand equities
and credits and outlooks on more than ninety industries and
one hundred market indices, currencies and commodities. Please do subscribe
to The Credit Edge wherever you get your podcast. We're
on Apple, Spotify and other good podcast providers, including the
Bloomberg Terminal at bpod Go. Give us a review, tell
(42:25):
your friends, or email me directly at Jcromby 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.
Host
James Crombie
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