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Hello and welcome to this episode of Perspectives. My name is Chris Stegman. I head up our Product Specialist group here at Double Line. And today I'm joined by Robert Cohen, who we colloquially refer to as the Doctor. So Doctor, thank you for joining us. My pleasure. By way of background, Robert Cohen is a portfolio Manager at Double Line and heads up our global developed credit team, which overseas all of our investment efforts in corporate credit, which includes investment. Grade and high yield and leveraged loans. So today's topic is private versus public credit. So Robert, you're aware, but Bloomberg has this nice little feature where you can sort by new stories by date. So this morning, just out of curiosity, I went to exactly one year ago today, so July of 2023, and searched private credit. At that time, the top news stories or the top article was titled Golden Age of Private. Credit, there was another one titled It's a Private Credit Party, and outside of that, a bunch of news releases on firms raising billions of dollars and launching all of these new private credit funds. Then today I went to Google this morning, so in real time and search private credit, a little bit different story. The first hit was actually a Bloomberg article titled Private Credit Pushes deeper into risk. Wall Street is Fleeing and #2 was an article from the IMF. Titled Fast growing $2 trillion Private credit Market warrants closer Watch. So, Robert, let's just start with the basics. What is private credit? Yeah, simply private credit is a loan made to our borrower. Provided by 1 or maybe 2 specific lenders. In a vehicle that is locked up with no ability to trade in and out of it. I would contrast that with what people call the public market, which is a loan made to a borrower but then sold to hundreds of different investors who have the ability to trade it. So there's a secondary market. Those are the two, those are the really differences between public and private credit. Maybe if you could just provide us a history lesson. I, I mentioned all these articles a year ago on, on golden age of private credit, now more than $2 trillion. Let's go back five years, just a brief history lesson in terms of what, where, why we got to where we are today. Yeah, private credit really was middle market lending historically. These were loans to companies that were too small to sell to hundreds of investors that, as I was mentioning before, they didn't have the disclosure requirements for public funds to be able to trade them. And so it was a solution for, like I said, a smaller company that wasn't borrowing as much money as the liquid markets. Usually look for people, the line sometimes varies, but in $200 million loan or smaller would historically be considered a middle market loan. Is there one particular that you like more than the other? I've heard you reference they're just simply different trades, so you can't really look at it that way. Maybe just expand on that a little bit for us. Yeah, I think to answer that question I have to kind of talk about what happened over the last few years. So the market went from. A lending source for small companies to something that grew to much larger companies during the pandemic. So in 2020, the capital markets seized up. So not only did small companies need financing, but large companies that would normally access the broadly syndicated loan market and the high yield market lacked access to those sources of financing. And private credit stepped in. And there was an opportunity there to generate substantial alpha, to generate substantial returns beyond the riskiness of these credits. Because there was a lending vacuum and in in fact Double Line participated in this, we made loans to companies that in a couple of cases companies that were previously investment grade credits that were downgraded to below investment grade had a difficult time accessing capital because the loan the markets were shut down. And that was an opportunity to get a really substantial return because of this vacuum that existed in capital markets. Uh, that existed, that lack of capital really existed from 2020 through 2023, even though the loan market and the high yield markets recovered in 2021, we had very tight spreads and the loan markets were recovering the access to weaker credits. So single B. Even triple C credits. It was much harder for them to find financing in in the both high yield and loan market and so that vacuum that I was talking about still existed. Into private credit through 2023 was able to finance these companies without much competition because the traditional markets weren't really available to them through that that period of time now in 2024. The liquid markets, the public markets are, have come roaring back for all credit quality. So B3 credit, even triple C credit, the the markets are basically wide open and the yield advantage that you can get from one versus the other has really collapsed. And so from an alpha opportunity there isn't really that type of opportunity anymore. It's really a matter of what the risk profile. So your question is what do we find more attractive now we think those opportunities to provide financing to companies that are in this sort of. Capital market vacuum have gone away, so the ability to get an alpha, an extra kind of a extra amount of yield to finance great companies, we don't really have that opportunity. More private credit really now is financing companies that have that need the flexibility of the private markets, they probably have either business. Plan issues their businesses under stress, or they've borrowed too much money and they need a more complex, complex solution. Contrast that with the public markets that are generally companies that are in better health. Because where we are in the economic cycle. And the composition of these two different markets, I think a double line, we prefer that up and quality public market because there's no spread advantage anymore versus private. The private credit market doesn't have spread advantage. If you look on a risk adjusted basis going forward, the public markets and the private markets will probably generate the same net of fee returns. So you're not getting any advantage. You really just have to pick your spot. Do you want to invest in the up and quality liquid? Higher quality, lower fee product or do you want to make an investment in the more opportunistic? Market for companies that need need more flexibility in a longer duration trade that's locked up at the moment. I think we tilt more towards the higher quality part of the of the market and that's why we prefer the public credit now versus private credit, which is actually a little out of consensus. I think most people look backwards and look at the returns of private credit and think, oh, I want that and they're not looking forward at what are these markets going to deliver for the next few years I would predict if you rate. Rating adjust. The returns in the public markets will be no worse, maybe even better after you account for credit losses versus private markets. And you're seeing the public markets at least since 2023, maybe it started, you would know better than me last year start to take back some of the market share from private credit. Is, is the main reason for that because for a, the actual borrower it's cheaper than for them if they can go towards the syndicated loan market versus private if you were B1 borrower. So higher quality part of the high yield market, not double B, but nearly double. In 2020, you probably had almost no access to the high yield market. And why was that? Because capital markets were shut down because of the pandemic. So the high yield index traded down, the new issue market seized up and then private credit stepped in and financed that company at a much lower rate that they than what they would have paid if they had to find a way to issue in the high yield market that. Relationship has flipped now AB1 borrower can access the high yield market from much lower rate than the private credit markets. So if you're performing credit then you don't need any flexibility, you feel like you're. Financial. Outlook is strong. Why would you pay pay more if you don't want there be no reason to unless you felt like I need that one-on-one lender relationships. I think I'm gonna need I see clouds on the horizon and I want the flexibility the B2 market so middle middle quality single B market has been getting refined into the bank loan market because the bank loan market, the public bank loan market has a lower cost of capital than private credit same relationship. That single B, That B2 borrower. In 2020, couldn't access the bank loan market. Bank loan market was shut down for the same reason that we had a pandemic. Prices drop, new issue, market froze and private lenders came in and provided a solution to that borrower. Now in 2024, why would that borrower pay more? To finance their to get their loan in the private credit market, if they can get a lower rate in the syndicated loan market, the public maybe they're not a great credit or they just need the flexibility. They either have a weak business plan, a weak business that they're working through or an over levered balance sheet or both and they need a borrower. They need the borrower needs a lender that will give them more flexibility in terms of time horizon to work out the concerns and more flexibility in terms of covenants. Structure requirement to make interest payments and personal payments, they need that flexibility. So not good or bad, but just different. So the lower quality B3, triple C credits are really migrating more to the private credit markets, but holistically if you look at new issue in general. Credits are moving back out of public as soon as we out of the private credit market into the public markets with high yielding loans. So while private credit was growing. In terms of the total new issue market up until 2023 here in 2024, it's actually starting to shrink again. It's going back to the high yield and low market for the reason I just said that if you if you if you're performing credit with a bright outlook, you don't need flexibility. Why would you pay more for your for your loan? You wouldn't, you only would do that because you want the flexibility. So that's why they're two different trades, the higher more of an up in quality bias to the public markets and more of an opportunistic. Bias to the private markets and in terms of investment opportunity, you just have to think about where are we in the cycle, how, how big is the opportunity in this? Opportunistic market versus the opportunity in the public market. And we think that there's more opportunity in the public market today. Alright, well, that's very helpful. I think a lot of folks when private credit comes up just kind of nod their head. But I think that at least provided a lens into private credit versus public credit. And to Roberts point, they're just different trades and of course, always, always know what you own, especially in the private credit markets. So Robert, I appreciate your time today if you have any questions. Listening to this episode and want to speak to a double line sales representative? You can go to our website, doubleline com and find our distribution teams website or simply e-mail info@doubleline.com. Thank you for joining us today.