Marathon Asset Management

You Can’t Eat IRR: Albert Einstein was not an investor, he was a theoretical physicist renowned for his contributions to science, particularly the theory of relativity. While Einstein had many interests outside of physics, Einstein was a highly respected figure in science and through his mathematical lens, his brilliance was so eloquently and lucidly displayed when he stated “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.” The basic formula for interest formula is: A = P (1+r/n)^(nt) Where: A = the future value of the investment/loan, including interest P = the principal investment amount (initial deposit or loan amount) r = the annual interest rate (decimal) n = the number of times that interest is compounded per year t = the time the money is invested or borrowed for, in years The difference between simple interest and compound interest is stark, a difference that grows greater over time. Deploying capital and keeping money invested is critical, the opportunity cost of remaining underinvested is substantial. When investing in Funds, be mindful of this saying: “You can’t eat IRR, only MOIC”. The first time I heard this saying was pre-2008 when the CEO of a leading alternative investment consulting firm emphasized this point. I will never forgot this, always mindful of delivering a strong MOIC.

To Our Fellow Apes: AMC balance sheet adjustments just consummated provides a clear runway through 2029, given my assumption that AMC will be cash flow positive on a forward basis. AMC has $770M in cash on B/S today, so future volatility at the Box Office mitigates credit risk. It’s likely that the credit rating agencies will look at these developments favorably, so I expect AMC rating will be moved to positive in the coming months. The Box Office looks promising since last year’s strike is over, which means a backlog of future feature films are coming over the next 18 months. Inside Out 2 in the theatre's now, rivals Frozen 2 and Lion King as the highest grossing animated movie with $1.5B in sales.

Marathon Asset Management closely collaborated with AMC Theatres to help lead a creative financing solution

28:1 = substantial write downs for CMBS 28 to 1 is the ratio of downgrades to upgrades last week in the CMBS market, a staggering number by any measure. 5 tranches within 1 CMBS deal was upgraded, while 28 deals comprised of 139 tranches were downgraded by credit rating agencies. The saying location, location, location has less relevance today than it had in the past as financial conditions for real estate has been squeezed given higher cap rates and lower prices. 500 5th Avenue, a 727K sq. ft. Manhattan office building is >80% occupancy rate, strong tenant roster, robust debt coverage of 2.86x DSCR, according to Trepp. The $200M loan backing this building has just been assigned to special servicer; the owner recently decided not to make its interest payment despite having the ability as the sponsor is a foreign owner that decided their unable to roll the loan that is held in a CMBS deal, according to a recent report. SASB deals (single asset-single borrower) in/near default represent 8.7% of the market, a 3x increase since the Fed began raising rates. According to a bank broker-dealer there are 10 SASB AAA bonds that may take a principal loss. Banks hold the largest percentage of CRE loans – over 50% and regulators are concerned, who are now pushing banks to lend more conservatively in the future, which is causing a credit crunch. Maturing loans will often require the owner to write an equity check that reflects the lower property value and the simple fact that the bank lender will want to lend at a more conservative LTV. Private capital will help fill this valuation/LTV gap and that is a healthy development for property owners. Marathon Asset Management is “open for business.” While I believe valuations have bottomed for the overall marketplace, each asset is unique with its own characteristics, and despite the valuation lows having been established, there remains a mind-blowing number of properties that will require amendments, extensions, workout, and new money solutions in the coming years. Marathon is actively lending to strong sponsors on attractive assets. There is value in the CMBS market, but one should be vigilant given uncertainty and sheer number of loans that will move to special servicer as the year progresses impairing value for CMBS investors. CrediQ analysis of properties considered stressed/distressed that were re-appraised in 2023 is shown below in this bar chart. This bar chart captures loans defined as delinquent/with special servicer and shows that the average property in this cohort declined in value by -43%. Rates were artificially low = CRE valuations were artificially high = borrowers took on too much debt. Lending standards have been re-set, so this is a healthy correction, representing a great time to be a lender, earning an attractive risk-adjusted return; despite the pain many CRE owner-operators are experiencing. It was too easy for CRE owners during ZIRP, that was the unfortunate trap.

Euro Credit on the Rise European economic growth has been sluggish for the past 1,5, 10 years with its equity markets lagging the U.S.. Euro credit markets on the other hand have shown relatively strong performance in step with the U.S.. Euro credit offers terrific value that I find equally dynamic v. U.S., and allocations on both sides of the Atlantic is compelling when investing in credit, particularly in high-quality fixed rate debt. The Fed, BoE, and ECB will likely cut rates in September, a small step forward to relieve financing pressure as SOFR/Euribor moves marginally lower by 25bp. U.S. net new issuance for non-IG credit over the past several years has grown primarily in private markets as direct lending gains market share growing in par balance while the HY/BSL market maintains its size. In Europe, there has been less growth in private credit since loans are primarily a bank-led marketplace, however the direct lending market is large and growing. I expect direct lending and private credit opportunities to advance in Europe in the years to come. In the first half of 2024, direct lending in Europe was strong, with LBOs leading deal flow of 34.6% of originations, followed by bolt-ons with 33.8%, and refinancing at 16.5% and CapEx/Other at 15.1%; with an average debt-ebitda ratio of 5.06x for newly originated direct loans. A healthy dynamic is playing out in European credit that is worth noting as I discuss in these bullet points and the table below: European HY growth over the past 5 years is +17% v. U.S., HY bonds which were flat, while the European BSL market tripled in size and the U.S. BSL market grew by +45% as private credit most of the growth during this time frame Euro HY bonds have a better credit skew with 71% rated BB v. 53% BB in U.S. European loans have 0.6x less leverage than U.S., also a favorable credit skew Euro HY bonds have a wider spread than U.S. (+353bp vs. +321bp) Default rates are roughly the same on both sides of the pond (~3%) European credits have seen few LME compared to U.S., but this too is changing with 4 large cap structures representing €52.3B: €25B Altice, €15.5B Thames Water, €7.5B Ardagh, and €4.3 Intrum all in need of capital solutions Caution is advised as default rates are expected to increase in Europe, as companies with large capital structures come into focus. Marathon sees this as an opportunity and have become increasingly active in Europe with the addition of senior investment professionals who have joined us from leading firms. The growth of the European public and private credit markets and compelling relative value comparisons with the need for capital solutions and LME should provide savvy global investors with an expanding and dynamic investment landscape.

Trillions of Dollars of Commercial Real Estate will need to be worked-out over the next 2-3 years. Marathon Asset Management is excited to continue to provide Sponsors and Asset Owners with reliable creative solutions and partnership capital to navigate this period of uncertainty.

Marathon Asset Management is pleased to announce the reset of Marathon CLO 2020-15. The reset reinstated the CLO's reinvestment period for another five years and upsized into a $462 Million structure. The fact that a CLO manager has the ability to lower its liability cost via refinancing, while also extending maturities through a reset is one more factor while CLO Equity is viewed as a compelling investment opportunity. Resets and refinancings have the potential to add additional cash-flow that accrues to the CLO Equity.

Marathon Asset Management is pleased to announce the reset of Marathon CLO 2020-15. The reset reinstated the CLO’s reinvestment period for another five years and upsized into a $462 Million structure. In 2024, Marathon has issued two new issue Bryant Park Funding CLOs, three CLO refinancings, and this CLO reset. Marathon has executed over $2.0 Billion of CLO capital markets transactions year to date, eclipsing our previous record of $1.8 billion set in 2023

The Broken Clock & Less Effective Transmission Mechanism The Fed will win with a forceful hand to push inflation back to its 2% target. Yet the Fed will err on the side of caution, move slowly to make sure a lower Fed Funds does not reignite inflation. When it lowers rates later this year, the Fed would be wise to pause to access risk that monetary doesn’t cause inflation to reaccelerate. After initially lowering rates, the Fed will likely skip a meeting or two to measure the impact of its monetary stimulus. Markets are placing >90% probability that Fed will cut in September. Markets have incorrectly predicted Fed actions over the past 2+ years, but given the recent CPI, PCE and jobs softening, I expect the Fed to cut rates 1-2x in 2024, beginning in September, subject to conformational July/August data. The chart below should show lower Fed Funds and higher unemployment rate in the coming year as these two lines cross back. “Reassessing the Effectiveness of Monetary Policy” is the title of Jerome Powell’s keynote speech at Jackson Hole in August. This is a particularly important subject matter given the Fed’s models predicted recession and the more meaningful impact it expected from its monetary actions. Fed Chair Powell should acknowledge that the following dynamics contributed to the lack of effectiveness: 1) QE continued for 1-year after inflation fist surged and 6 months after it started raising rates 2) massive government spending stimulus offset monetary policy as this added to growth, blunting the impact of higher rates 3) wealthy homeowners with record low mortgage didn’t feel the impact from higher rates 4) soaring stock market led by tech and recently fueled by AI has enabled massive broad-based wealth creation 5) higher money market rates and coupons from floating rate debt are a windfall for savers 6) excessive consumer savings plus strong wage & job growth 7) financial conditions eased when the Fed signaled they were done tightening. Powell and the Fed will reassess, and when they reflect, they should evaluate why they took so long to tighten when everyone knew the inflation genie was out of the bottle in 2021. A broken clock is right twice a day so despite the wide miss by economists & Fed watchers over the past two years, it looks like forecaster will finally get it right this time. If the SOFR and fixed rate forward curves are also correct, we should expect higher rates for longer as R* (real rates) remain elevated. Never say ‘never’, but ZIRP is a thing of past. Markets never expected the Fed to raise rates by 525bps, never expected Fed Funds to remain so high for so long, with the Fed pausing so long. How do you forecast the Fed’s monetary policy impacts markets for UST, Fixed Income, Credit, Equity, PE, Growth, VC and Real Estate?

Strawberries and Cream: It’s Wimbledon finals this weekend, Breakfast at Wimbledon is must-see. What’s also must-see is Roger Federer’s 2024 commencement speech at Dartmouth College, rich with insights on what makes champions and lessons he shared regarding perseverance, passion, humility, continuous learning, focus, and discipline. Roger Federer, my all-time favorite player who won 20 Grand Slam Titles, including 8 Wimbledon titles talks about the endless practice, preparation, and hard work it takes to be the best version of oneself. Roger’s speech is a masterclass in life lessons, offering a blueprint for achieving excellence. Key qualities for any champion begin with the passion one brings to the sport or one’s profession, a trait that is necessary to preserve excellence a long career, says Roger. Humility and gratitude help keep you grounded, while continuous desire to learn and adapt is critical as the years go on, he states, as is mental fortitude and uncompromised discipline-- essential to navigate life’s challenges and achieving sustained success. Roger reminds us that he won only 54% of his points during his professional career, yet that enabled him to win ~80% of his matches and maintain #1 ranked player in the world for several years. When losing a point, the key is to focus on the next point, adjust to situation, solve for what it takes to win the next point, the next game. When winning a point, even a spectacular point that makes ESPN Top 10 Plays, forget about the point, its only a point, focus on winning the next point, one point at a time—advice from the best. Bring intensity, but also clarity and focus of mind every minute on the court Roger shares. People say “I play effortlessly” as Roger moves with such grace on the court, but Roger reminds us how hard he works behind the scenes to be conditioned to do so. What Roger does off the court is also so impressive, a family man, a husband, father, son, businessman, philanthropist, close friends with his competitors on the tour and kind to so many others he has met along the way, including me. @RogerFederer thank you for the memories and sharing your advice with the Dartmouth graduating class and the rest of us that can learn from your lessons, and I hope that you enjoy Strawberries and Cream like the rest of us watching Breakfast at Wimbledon.