Looking back on 2023, we’ve seen financial markets tested by ongoing geopolitical upheaval. We sit down with 9fin’s CEO Steven Hunter to take us through the highs and lows of the year as well as our company’s growth story. Also tune in to find out how Steven unwinds in his spare time and what he thinks about pints in New York!
Hello and welcome to Cloud 9fin, a podcast on all things leveraged finance. We follow corporate debt from issuance to redemption, credits from performing to the stressed, and everything in between. I'm Bianca Boorer, and today for our last podcast for 2023, I'm sitting down with our CEO, Steven Hunter, to go over the highs and lows of the year. Thanks for coming on today, Steven.
Steven 00:00:26
Great to be here, Bianca. Thanks for having me.
Bianca 00:00:27
Well, what a year it's been. Another unprecedented year for the market. Everyone was hoping for that post-COVID recovery, but we've had global political upheaval thrown into the mix, with the ongoing war in Ukraine and the more recent conflict between Israel and Palestine. Steven, can you tell us how all of these external shocks have impacted the world we care about here at 9fin, which is leveraged finance?
Steven 00:00:50
What a great opening question, Bianca. To be honest, I think really the macro events have played a little bit of a backseat to interest rates. Interest rates have kind of really been the main thing driving markets in the last few months. And it's easy to forget that 18 months ago, we had effectively 0% interest rates in Europe. We had between 50 and 75 bp interest rates in the US and the UK. And now in Europe, we're at 4.5%. The US and UK are at 5.25%, 5.5%. And that's completely new. And the idea a few years ago of persistent high inflation or anything other than a completely zero rate interest environment is pretty alien for anyone who's been in markets in the last decade. But with that said, we've still not had a hard landing. We haven't had a big recession yet. Inflation has largely been brought under control and debt markets have basically been open and pretty resilient at pricing risk. When I was back in my banking days, in prior years, even the tiniest little bit of uncertainty would have caused markets to shut.
And no one would have been able to price a deal for months at a time. But for basically every single month this year, there's been a price at which people can do deals. You know, 10 years ago, a wobble would have meant telling issuers you got to sit out for two or three months and you'd have to wait for the window to open. But if you look back on even the last five years, we've had a lot of negative news. We've had a once in 100 year pandemic that shut the world economy, we had SVB and a regional banking crisis blow up, we had a big inflation wave, we had oil prices rocketing all over the place and yet, here we are still doing deals.
Bianca 00:02:22
Wow, yeah. Pretty incredible. So you moved out to New York to start the 9fin operations out there. How have you found the US market to be different from the European market?
Steven 00:02:34
The biggest thing is size. The US market is just so much bigger than the European space, but also the volume of deals you can do in a short period of time and the size of deals you can do as well, so bond and loan deals in the US just seem to happen so much faster. It's almost closer to the investment grade market sometimes. It's larger, it's deeper. I mean, I always find it quite amusing because Europe and the US at least historically used to be about the same size in terms of GDP, at least around in 2008 and early 2010s. But you know, the US capital markets are four to five times bigger now.
The depths of the markets are just so much more and so a large B deal or B- deal or even a triple C rated deal, in Europe, that might take a week or a week and a half to get done and you might need basically every single investor to play in the deal.
In the US, you can get that done in a couple of days, and you don't need the whole market to participate. So it's just a lot faster, a lot more liquid and just a little bit more developed than the European markets. And I think also the scale, some of the companies are just so much bigger.
You know, we looked at a business in the US called Raising Canes, which does effectively chicken fingers, and it had like a billion dollars of EBITDA, it was a massive business and so sometimes when you look at some of the European deals that are, you know, 150-200 million EBITDA, I used to think, well, that's a really decent sized deal in Europe. In the US, people just might not be as interested in that. It's just seen as a little bit smaller. So I think the US, faster, more liquid, things get hoovered up and you can do some pretty big deals in terms of size.
Bianca 00:04:00
And I guess how have you found living there on a personal level? I mean, I've heard that New York, the pints aren't as good. They're a lot more expensive.
Steven 00:04:09
Yeah, I mean, well, I think I probably never had a dodgy pint in London. And I think I had three in one night in New York, so that I had to send them back because they were flat or whatever.
Shameful.
Terrible, terrible and New York is definitely more expensive as well. I mean, it used to be expensive 10 years ago in the same way that London was expensive in the UK, but now it's just significantly more expensive in the UK.
But now it's just significantly more expensive, even than London. I think if you look at the data, it says it's around 30% more expensive, but it often feels an awful lot more than that.
So pints here are definitely more affordable. And at least when you're here, one of the big cultural differences as well is that the price you see is what you pay, whereas in the US, you have to pay for taxes and tips.
And I guess I'm just not quite fully culturally used to that yet.
Bianca 00:04:51
Gosh. Well, yeah. Given high interest rates and difficulties that companies are facing with refinancing their debt, we at the distressed debt team have been seeing a lot of activity.
Do you think levels of distress are likely to pick up further in the year ahead?
Steven 00:05:09
Hard to tell. Get the crystal ball out. But we've kind of been waiting for the long promised big distressed wave for a long time. But ultimately, defaults seem to be remaining pretty low and what I find quite interesting is that there's a lot of capital structures which were set up for or configured for a very low interest rate environment.
You know, when base rates were zero percent and you saw some single B companies doing bond deals at like two percent, three percent. And to be honest, who can blame the companies and the CFOs?
Rates were zero for so long, and that's been the name of the game and so you set up your capital structure for that. But absolute rates are in a completely different place today. So if you look at the European High Yield Index, the Bank of America index, it's in the mid- 600s, and that's a quite heavily double B weighted index. So if you're in a single B, you're at a premium to that and you need to go back to 2012 or 2013 in order to find a period where you had such high absolute yields.
If you're a company who issued debt a few years ago and you have to refinance in the next few years, it's genuinely possible that your cost of debt could increase by one and a half times, maybe even double. And that can be quite scary, because one of the ways that some of these companies structure their debt stacks was for maximum possible leverage to still get a single B rating. So maybe looking at about two times interest cover, if your interest rate and your cost of debt is doubling, that's not re-financeable anymore and you're just about able to service your interest.
So I think it's going to be an interesting few years, especially as the maturity wall kind of kicks in at 25 and 26. But I'm surprised, there really should have been a bigger distress wave already. It's kind of been a perfect storm. You have interest rates rising, which means that your valuations get compressed and your headroom as a lender versus the enterprise value is massively reduced. Then we had a tricky time with earnings and companies having to pass through inflation rises, then the cost of capital goes up as well. But other than real estate, which has been a bit of a minefield, there's not really been any mega blow ups.
Lots of the larger cap structures in Europe, like EG Group and Altice, are a little troubled, but they're finding a way to plot the course to something that's more sustainable, whether that's equity injections or asset sales or pick debt in order to right size the capital structure. So people so far have been finding a way to avoid major, major distress.
Bianca 00:07:33
We shall see and aside from distress debt, we've seen a huge surge in private credit issuance. This year, as funds are quickly hoovering up the gap left in the market by the traditional banks, do you see this trend also continuing?
Steven 00:07:49
Absolutely. I mean, why would anyone want to be a bank lender today? It's just not cool anymore. There's tons of regulation. There's increasing capital ratios in Europe and the US. The barriers for bank lending are all increasing and just start a private credit fund instead. You don't have to deal with the regulation and the overhead.
I mean, in theory, banks should have a way lower cost of capital than a private credit fund just holding people's deposits and in most instances, not even passing through what current base rates are. But the kind of increased capital requirements in the regulation just means that banks are kind of having more and more disincentive to lend and private credit stepping into that gap so private credit is kind of the new cool thing. It's eating the world.
It's everywhere, whether it's large cap deals, real estate, infrastructure, investment grade lending, NAV lending, even dipping into your world of distress, it’s everywhere and if you can get mid single digits unlevered for secured lending and maybe 50% loan to value, that's really pretty attractive. So when people say it's the golden age of private credit, and that's kind of why it's a little bit of a generational opportunity. But you don't have many markets where you get like mid single, mid double digit returns where you don't start to see competition arrive and either drive those returns lower or make the terms looser, push through higher risk, higher leverage, weaker documentation. So it's still early days, but private credit isn't going away anytime soon.
Bianca 00:09:21
Interesting. Watch this space. I guess which deals across the LevFin universe have stood out to you the most?
Steven 00:09:28
Well, actually, I think this year has been a little bit dull across a lot of the stuff that we look at. Usually we're thinking, there's going to be a complete refinancing or a brand new LBO or there's going to be a restructuring and we're going to have to look at the details of this deal and who's going to put in new money and is there a consent that's going to go through? Are we going to do a J.Crew style transaction? But this year, a lot of stuff has just been quite boring A&E and if you're an existing CLO lender and someone comes along and say, hey, can you extend as long as you could do it through your CLO and you get a little bit of a margin pick up, it's really a little bit dull. For the banks as well, they don't make anywhere near as much money from A&E, so they'll be hoping to have some more exciting stuff. But there are a few interesting transactions that we've seen in Europe and some things from the US.
So I think in Europe, quite recently, we've seen the return of dividend recaps, which in this environment is quite interesting, especially if we're on the cusp of a recession. But if you're a sponsor at the moment and there's no way to get an M&A exit, then you want to take a little bit of cash off the table. Dividend recap could be an interesting option. But you've got a big contrast in the market between big, high quality credits like Belron and Action Retail this year that did dividend recaps of a chunky size. Then you had some smaller deals more recently with small loan add-ons to existing lenders for a dividend.
What I'm interested in next year is if the M&A market still isn't there, are there going to be any more full on recaps with slightly more challenged credits where maybe you take a B1 structure and you recap it so that it becomes a B3 with the sponsor taking a lot of their money off the table? I'd probably be a little bit more reluctant to lend to those or to facilitate those types of transactions, but we may see some people trying them. Then in terms of, I guess, specific interesting deal terms, there's a few things between investment grids and between private credit markets that have been quite interesting.
So in the US, there was a deal from Melissa & Doug, and when they were originally trying to syndicate the deal, they had term loans, which had a pick coupon step up dependent on ratings because people were worried about the business being downgraded to triple-C, which I'd not seen before or I'd not seen a pick up in interest rate or a coupon pick based on what the rating agency said.
But in the end, the deal struggled and it went to the private credit market instead, as we reported on. Some other funky stuff, too, were the coupon steps in the American Airlines deal in the US. If their collateral coverage ratio dips below a certain level, that's not something I came across before. Then some of the stuff that's maybe a little closer to Bianca's world and the distress side of things.mBut again, in the US, you have people doing some quite bespoke things in the high yield market over there.mSo there's a company called High Peak Energy, listed busines, and they had a whole range of funky things in their covenants that might have been more at home in a private credit deal. So they had basically a capex restriction or covenant, they had to buy back bonds with excess cash flow and if they didn't, they had a coupon step up. So that's all been quite interesting stuff.
Bianca 00:12:27
OK, so some interesting stuff from the US then.
So looking ahead to 2024, what are your predictions for the state of the market?
Steven 00:12:35
Trying to get me to crystal ball gaze again.
Steven 00:12:37
I don't know. I don't know. Let's see. I'm hoping that we'll see a pick-up in some more LBO activity next year from a selfish perspective, just to make things a little more exciting and interesting. Or if not, maybe a pick up in distress. So either way works for me and to see a little bit more creative structuring. I think a lot of it will be driven by interest rates and then the maturity wall. So it doesn't feel like markets think we're going to have loads of extra interest rate rises.
So if things stabilize a little bit or you see some rate cuts, which I think are priced in, then you might see people come back to the market and try and address some of that maturity wall.
Bianca 00:13:11
OK, well, let's turn our attention to 9fin. It's been a big year in terms of growth. Talk us through the main changes that we've gone through.
Steven 00:13:19
We've hired a lot of people and scaled up a lot. So Bianca is a 9fin veteran now. But 18 months ago, I think we were maybe one or two people in the US and now we're more than 50. As a company, we've got more than 100 in London. So really, we've kind of scaled up our capabilities across the globe. We've also broadened the offering because some of the lines between what's a traditional LevFin deal or a private credit deal or distress deal or structured credit, they're all starting to blur a little bit and so we've managed to attract a lot of amazing talent.
We've seen a lot of our team progress really quickly as well with people being promoted or stepping up massively in terms of the content they're producing and we're kind of transitioning now from startup to scale up in the quest for world domination of all things debt.
Bianca 00:14:04
Amazing. We've also launched a lot of exciting products this year, including integrating AI across our platform. What are some of the new products that you are excited about?
Steven 00:14:15
I think the AI one is going to be very interesting, and it's going to be interesting both for the products that we have, but also for markets more generally in terms of how people apply it and some of the more typical high yield credits, things like call center businesses, things like that, might have some interesting applications for AI.
For us, I think the way that people find and retrieve information quickly, AI is going to completely change that and I think this is probably going to be a little bit more akin to the kind of step change that was the internet or mobile rather than the kind of fad or full stone that we had from Bitcoin and crypto, which has kind of fizzled out.
Bianca 00:14:55
Yeah, the death of crypto.
I guess what's on 9fin's agenda for 2024?
Steven 00:15:01
More hiring, more growth.
I think we've got some completely new offerings in private credit and in the CLO and structured credit space.
We've got a ton more data to add to the platform and also more sophisticated content and, of course, plenty of puns and fun along the way.
Bianca 00:15:19
Amazing. As we all know, 9fin is your baby. But what do you do to switch off? I know that you're a big fan of Love Island so is it mainly trash TV or are there any other guilty pleasures?
Steven 00:15:31
Well, a great question. Absolutely a bit of Love Island whenever it's on. There's multiple series now. I've been slowly introduced to the American version and there's also a TV show in the US called Below Deck, which I started to watch, which is similarly trashy TV. So that's about as far removed from debt finance markets as possible to get. So yeah, it's a fun way to switch your brain off at the end of the day. So I look forward to swapping all the goss on those series with you soon, Bianca.
Bianca 00:15:59
I mean, it's funny, I cover distressed real estate and then I go home and I watch Selling Sunset so you know, it's a good balance, I think. OK, well, that's all we've got time for this week. Thanks for joining us today, Steven.
Steven 00:16:11
Thanks for having me, Bianca.
Bianca 00:16:16
And thanks to you, our lovely listeners, for tuning in. As usual, if you have any feedback, you can reach out to us at team@9fin.com. And we hope you all have a wonderful Christmas and we will see you in the new year.
