In Real Time
In Real Time
Impact of Covid-19 on the Private Credit Space with BSP's President Rich Byrne
Join Rich Byrne, BSP's President as he answers questions regarding the impact of Covid-19 on the private credit space. This is a quick flash interview, only 7 minutes in length.
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Hello and thank you for joining us today May 15th, 2020 for this edition of in real time our series of short lash podcasts. My name is Chris Broadhead and I'm a managing director of benefits street partners or VSP. We understand that many of you are joining us from home today as we continue to navigate the COBIT 19 pandemic. Together we hope that you and your family and friends are safe and healthy and those that may not be familiar with BSP. Here's a brief primer established in 2008 benefit street partners is a leading New York city based alternative asset management firm with more than 230 employees and approximately$27 billion and assets under management CSP serves as the alternative investment arm of Franklin Templeton. Our guest today is rich burn. It was one of the founders of BSP and serves as the firm's president. Thanks for being with us today, rich. Thanks Chris. For purposes of this short last podcast, I'll keep this limited to just the question or two for you. Rich. Today's question is about perception of risk. What would you tell an investor who perceives private credits to be riskier than investing in something like a high yield bond mutual fund or an ETF? That's a good question, Chris, and I feel very well equipped to answer it because at benefit street we look out at fixed income investing across the credit spectrum, whether it's private credit or liquid credit, uh, which is broadly syndicated loans or high yield bonds or distressed investing or, or structured credit. Uh, we look across the credit spectrum and we have always observed there to be a lasting relative value enhancement and private credit more times than not private credit just represents the best risk reward. And why do I say that? Well, 80 or more percent of, uh, broadly syndicated loans are covenant light and covenant light is a term that's used a lot. But what it really means is that the, the loans have virtually no covenants. Um, whereas the deals we negotiate directly with, with our borrowers, uh, our documents that we write ourselves, um, and thus, you know, it provides us with many more protections in a post covert environment, boy, of those protections valuable. Also the yields we're getting on our private credit, uh, underwritings are generally higher, uh, for the same risk profile of an underlying company. What is the trade off? While the trade off is generally that it requires a lot more work to do, uh, um, on a private credit deal. Why? Because we're doing all the underwriting, we're doing all the due diligence and we're doing all the structuring and monitoring. We're well equipped to do that. We've been doing this for decades. So that is where we really think we earn our alpha. Really the only trade off is liquidity. And I think people make a bigger deal out of it than there is because there's plenty of liquidity in the broadly syndicated market. As long as markets are good. And again, in a post covert world, people are waking up and realizing that that liquidity, uh, isn't so great when, when things dislocate, uh, the price disparities between bid and offers are very wide leading to extraordinary volatility. Where in our private credit portfolio assets are really valued by independent appraisers most times based on the true underlying worth of a business. So you're just not going to see the same kind of volatility. So for those reasons, uh, we favor private credit the vast majority of the time. And I would just add Chris that occasionally, you know, we're always dipping into the broadly syndicated markets. When we, where we do see better relative value, sometimes there are dislocations and um, you know, we try to be as agnostic as we can, but as I said, private credit is usually the place we go when we're looking for best risk returns. Thanks, rich. A couple of times there. You mentioned this postcode environment. Um, how has COBIT 19 impacted sourcing and deal flow for, for BSPs credit practice and what sorts of investment opportunities are you seeing today? Well, the pandemic has really had a meaningful impact on the, on the world, on the market. Um, and for us it has really slowed down the activity of new underwriting of a lot of middle market companies. Um, but there still are plenty of companies out there that need capital, um, whether they're big, small or otherwise. And we always view, um, dislocations in the market as great opportunities. And this one's no different. Um, we're seeing where we do underwrite a loan. Now we're generally seeing a meaningful increase in the yields, uh, or you know, the interest rate that that we receive for the loans anywhere from a hundred to 200 or more incremental basis points of yield. And we're also having a better, um, uh, experience with borrowers with the documents that underline those loans. In other words, we're getting better covenant so the deals are better. Um, we've been, uh, there has been some deal flow in the private debt arena that's going to keep increasing as time goes on. Where we've seen the vast majority of our investing opportunities have been sort of dislocated companies that are a little bit bigger. Um, uh, and those are real time opportunities. So between the two, uh, in our private debt portfolio, we've been adding investments into the portfolio at some of the best risks, rewards that we've seen literally in a decade. That's a good rundown of the investment opportunities. Rich, what structures do you have in place to take advantage of these sorts of opportunities? Well, we have existing funds across our platform. We have 27 billion, as I think you referenced earlier in the recording of assets under management. Most of that is fully invested and you know, we're working with, you know, those portfolios to uh, to optimize their performance. Um, where we see the best opportunity is in the unspent capital, uh, you know, through either new fund structures or uninvested capital that we have in our current funds. Um, so any investment vehicle with dry powder right now is seeing, as I mentioned before, some just, just, uh, terrific opportunities. We've been in a market that's been as so compressed, so tight because of this credit cycle has gone on for so long, uh, that we're not used to seeing, um, uh, investments of really good companies when credit spreads wide now and when we're able to get better documents. So, um, for us, we favor without being particular, uh, specific in my answer anything where there's fresh invested capital available to pursue current market opportunities, uh, because those current market opportunities, as I've said, are some of the best we've seen in a very long time. Great. Thank you, rich for allowing me to ask you more than one question today and thank you all for joining us today. Be safe and be well and stay tuned for our next edition of in real time.