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21:25Carol Massar:That again from his column. And Davies goes on to write that he's, quote, talking about junk rated loans made by private credit funds to mostly midsize companies often used to fund private equity buyouts and similar to the leveraged loans that banks underwrite and sell to investors. To be fair, there's a lot of questions that have emerged in recent weeks about private credit, and we have yet to see kind of a systemic issue or problem. At least that's what we hear from a lot of the voices we talk to. Let's bring in Christina Lee. She's Managing Director and Co-Portfolio Manager for U.S. Private Debt Strategy over at Oak Tree Capital Management, a firm that's got more than$200 billion in assets under management.

22:00Welcome. It's good to have you.

22:01Carol Massar:Well, thank you so much for having me. You must have been watching the events over the last few weeks with great interest. And I'm wondering just your view on the chatter around greater concerns when it comes to private credit. And again, I'm using the term like, you know, a monolith, but not all private credit is the same. Yeah, I think it's been called the great cockroach wars, you name it. I think one of the issues that I think people are having is there's been some high profile bankruptcies that have happened recently. And people are saying, is this systemic? Is this a pattern of what's next?

22:36I think sometimes you do have to take a step back and remember, we're doing sub investment grade credit, you are taking risks, there will be defaults, there will be restructuring. You don't get 8 % to 9 % all-in yields by not taking risk.

22:50Carol Massar:Okay. So having said that, when you guys, especially in terms of private credit, I think what really tripped a lot of investors or investments up in the private world, private credit, private equity for that matter, is that there weren't the exits that were normally there, right? We've seen them pushed off. And I think it's starting to come back. But then you had terms renegotiated. You just, like all these things started to happen. And you just wonder whether it gets a little bit fuzzier and that there is more opportunities or more touch points for things to come undone. Roll that in and how we should be thinking about that part of it.

23:24I think defaults have been very, very low in private credit. And if you were to look at various managers, their loss ratios, et cetera, default rates would probably all be relatively similar. And that's because private credit hasn't really been through a downturn yet. right? The advent of the class when it really started booming was maybe 10 years ago. I think COVID was too short. I think what you're seeing right now also is defaults will likely rise because a lot of these borrowers put in capital structures when it was a zero interest rate environment, which is now it's higher for longer.

23:57Carol Massar:And I think that's why you're seeing defaults and some cracks emerge. Does it get worse though? Because you're right. An investment in a zero rate where money costs nothing is very different from where we are today, right? It's just the business dynamics and the financial dynamics of a deal looks very different. So do we see more cracks going forward? Is Jamie Dimon right that there's never just one cockroach? I think you likely will see some cracks, but what will be dependent is the cracks have been mass. The cracks have been around for a year or two. There's a lot of liquidity in private credit.

24:30and even in private equity, they weren't necessarily deploying in new investments, but they were helping the resisting investments.

24:38Carol Massar:Forgive me for it, but when does too much liquidity, though, become a problem where you're chasing after, there's so much more folks involved in the private market world, private credit, private equity, and when there's a lot of money around, it's like people are chasing deals and maybe more likely to take on even more risks. So when does it get messy, or does it not in this world? Maybe it's something different. I think right now what you're seeing is there's still a supply-demand imbalance. As you had mentioned, there's less exits, there's less M &A, and so private credit dry powder has increased.

25:11But if we were to look at kind of the exit pace that private equity needs to do, M &A should increase starting in 2026, and that supply-demand imbalance should lessen. But right now what you're seeing is there's really an imbalance right now, and so you are seeing that competitive nature of private credit. And does that mean looser underwriting standards? A lot of time, yes. We should note Howard Marks, the co-chairman, principal, co-founder of Oak Tree Capital Management, out just last month. It was in the beginning of November with a traditionally long memo about private credit. But in bold on the second page, he writes, so, no, I don't think this is necessarily the beginning of a trend.

25:52And by the way, it's called cockroaches in the coal mine. it's not an indictment of the whole sub-investment grade debt market or the whole private credit market. Rather, it's just a reminder that the yield spreads people care about so much are there for a reason, because sub-investment grade debt entails credit risk. You agree, this is essentially just part of investing in this type of debt. Exactly. If you don't take on risk, that usually means that you're yielding something lower. It goes hand in hand. And I think because we've been in such a benign market where you haven't seen a lot of defaults, et cetera.

26:27That's why people, I think, are surprised. So then what's the what's the what are the products or what are what's the credit that investors should avoid right now? Like, how do you separate? Because because another criticism, I guess you could say, is that there's not a lot of transparency necessarily with this type of investment. So then how do investors know what they should invest in and what they should stay away from? Yeah, I think one of the things to look out for is one of the questions I think that we all talk about are valuation marks, right? Is there transparency? Is there not transparency?

27:01I always tell people to ask them, what is your valuation methodology? How often are you looking at your valuation? Because in the end, we are in a private illiquid market. There's no mark to market. There is no market. And so there is a subjectiveness and a judgment on the manager. And I think a lot of it is, do they mark their investments aggressively or are they conservative? Right. How do you know? I think you have to ask your questions of what methodology to do. Do you use discounted cash flow? How much does current deals matter?

27:31Carol Massar:What does your recovery rate look like? This is what Sheree wrote about last week. Well, yes. But this is where I think about, Christina, that a firm, whether it's Oak Tree or somebody else, if you're playing games in terms of valuations or not being so transparent or whatever for your investors, the deals aren't going to pay off, right? And investors are not going to give you any more money. So is that kind of a checks and balance in some way in terms of ensuring you guys are doing the work, like they trust a manager and that you guys are making sure you have the transparency before you go into a deal?

28:06Exactly. Because if you are way too aggressive and all your marks are overinflated, you will have a really hard time with your investors. Right. Right. That is reputation risk. And also just inherently as a creditor, you are always worried about kind of what's next, what's the next risk, because your upside is getting what's contractually due to you.

28:27Carol Massar:Right. So a lot of just inherently as a credit investor, you tend to be conservative. Because that's why some, you know, and some of the conversations we've had in trying to figure out, like, is there more are there more cockroaches out there that maybe some of what some have said is smaller players that maybe do maybe don't do as much homework or something that that's where we might see some problems. Talk to us about the market overall, where you guys are finding opportunities right now and what kind of kind of opportunities. And I'm curious if it tells you kind of what this investment environment is.

28:59Carol Massar:Is it a healthy one? Is it a stressed one? Like, I'm just curious. I would say right now it is there's supply demand imbalance. So what does that mean? It's very competitive. If you think about the first nine months of the year with with the tariffs, right, with all of the uncertainty, M &A went to a screeching halt for the most part. Now M &A has kind of come back after Labor Day. And so now you're seeing what I call a little bit of FOMO where you're seeing a lot of lenders rush to get deals done. And I think this is the time that you want to be very selective. You want to be a credit picker because the terms are getting more aggressive.

29:33Leverage is going up. Pricing is going down. And so from Oak Tree's philosophy standpoint is you really need to be selective. It's a yellow light. Proceed with caution. You're not going to stop investing, but you've got to pick and choose your spots. Do you think this type of asset class will end up in the 401ks of many Americans? I think that is, I call it the next frontier. I think from a technology standpoint, if you think about private credit, it's a relative, I'm talking about more sponsored direct lending. It's a pretty mature asset class at this point. Right. Right. And I think where you're going to see innovation is what I call technologies on reaching new investors or fund construction.

30:14And so I do think 401ks will be the next horizon, but that's also where private equity is also going into. Right. And so will that help a little bit with the supply demand balance?

30:23Carol Massar:Yes, right. Right. Whether people want it or not in their 401ks, I don't know. Well, it does, though. It creates another demand, right, for what's going on there. Just got about a minute left. Can you share with us, I don't know, an interesting deal that you recently did? I don't know how specific you can get, but just give us an idea in terms of maybe the type of deal, terms, or whatever you can share. Just not about a specific deal, but just what we're seeing in the market right now is it's counterintuitive. or intuitive, but as the interest rates go lower, you're seeing leverage creep up because borrowers can actually make their interest charges now.

30:56And so before when interest rates were say 4 % on SOFR, you didn't really see deals go over six times because otherwise a borrower couldn't pay their interest. Now it's actually going the other way where you're getting lower yields, but higher leverage. And that just notes the level of competition. So we're hoping that 2026, there will be a little bit more balance in deals, but that's what we're seeing in the moment.

31:17Carol Massar:So does this assume, too, that you think the Fed will continue to cut rates even into 2026? I think it all depends on who gets appointed.

31:29What about Kevin Hassett?

31:30Carol Massar:So, yeah, do you think, is it a dumb thing that if it's Kevin Hassett that you can assume that there'll be lower rates? Just got about 30 seconds. I'm not going to make an assumption around it, but we all have an understanding of what the administration wants is lower rates, right? Interesting times, right? We'll see where the underlying economy also says, which hopefully will also dictate where the rates are in Nephley land. Right. That the Fed sticks to the mandate and what needs to be done. Thank you so much. Really appreciate it. Christina Lee, Managing Director and Co-Portfolio Manager for U.S.

32:00Carol Massar:Private Debt Strategy over at Oaktree Capital Management, joining us right here in our Bloomberg Interactive Broker Studio. Stay with us. More from Bloomberg Businessweek Daily coming up after this. Support for the show comes from Public. Public. Lately, it feels like there are two types of investing platforms. Some are traditional brokerages that haven't changed much in decades, and others feel less like investing and more like a game. Public is positioned differently. It's an investing platform for people who are serious about building their wealth. On Public, you can build a portfolio of stocks, options, bonds, crypto without all the bugs or the confetti.

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35:41Carol Massar:You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business App. Or watch us live on YouTube. So our Bloomberg Intelligence team writing earlier today that holiday retail sales appear to be off to a good start despite mixed store traffic. There's a bunch of metrics coming at us. You have Retail Next coming out saying visits to malls were soft, down 3.6%. MasterCard saying Black Friday's online and in-store sales rose 4.1%. Salesforce says global online spending will increase 8 % to reach$53.7 billion, while U.S.

36:21Carol Massar:spending will rise by 4 % to$13.4 billion. And then there's Adobe Analytics, Tim. They noted a sharp 9.1 % acceleration in digital sales as consumers leaned into the ease and convenience of buying online. Well, someone who knows how to read through all of these numbers, she does her own in-depth research, too. She understands the retail industry. Dana Telsey is back with us, founder, CEO, and chief research officer of Telsey Advisory Group. She's been joining us here at Bloomberg quite a bit, Carol, going back to Black Friday. She's here Wednesday, Friday, today. She's here on Cyber Monday. Thank you.

36:51She joins us here in the studio today.

36:53Carol Massar:Thank you for having me. There's a lot to talk about. I think you have a desk with your name on it somewhere here. It's easy. Thank you. And convenient on my office. We love, we love. There are so many different metrics that come at us. Is there a metric that catches your attention more than most, or is it that you rely just on kind of the work you guys do? I rely on what we do, but I also look at all the metrics to tell a story. And frankly, what you're seeing the metrics tell the story of, essentially it was solidly optimistic for this upcoming holiday season. There are good metrics. A lot of the metrics surpassed their expectations.

37:24Carol Massar:The other thing, when you look at online versus in-store, in-store is always going to be lower than online because online is a smaller part of the business. But one of the differences this year is online sales, the rate of growth slowed. It's going off a bigger base. while you're looking at in-store, the rate of in-store sales increased for some. Traffic is holding steady with what it's been year to date. And I think for whatever you want to say, the Gen Zers, the teens, they like that experience of being in stores. That's what I saw on Friday when I traveled all the stores. What do you mean by that?

37:58This is like the same people who watch Friends, ironically, because they didn't watch it the first time around, are now going to the mall?

38:06Carol Massar:The teens are going to the mall also. Yeah, that's what I mean. Everyone wants the experience. I think what everyone missed from COVID, talking to each other, saying this looks nice on you or look at this deal, that communication matters. So what's old is new again, Carol. They're going back to the mall just like we did when we were kids. Well, I know. Who doesn't love a mall? I don't love a mall anymore. Having said that, though, Dana, like my daughter, 22, there was something she was going to buy online. But we went to Bloomingdale's to try it on. And she ended up like, OK, this doesn't work and not buying it.

38:33Carol Massar:So it's like interesting kind of this mix of how we're figuring it out of how to shop. And it's always the surprise, because when you buy something you've had before, maybe you do get the same size or you know what it is when you're buying something new. And one of the things this year is there is newness to wardrobing. You're looking at shoes where people are going back to whether it's black, brown suede boots like Steve Madden is selling. Yeah. Whether it's wide leg denim jeans. It's not just the same old, same old and partially because events are taking place. So we look at retail sales as this monolith, but we know that's not the way that they're actually sliced.

39:10What would you say characterizes the companies that are doing a good job at actually bringing consumers through the door versus the ones that are not?

39:18Carol Massar:Newness. I think the newness in product innovation really matter. Something that they don't have in their closets. You think about the newness even in consumer electronics, whether it's Nintendo, whether it's Aura rings, there's new things out there. Same old, same old. You're going to watch for the deals and what the value you're getting. But today, when you have, whether it's Coach adding new items to their Tabby collection, whether it's Macy's, who now has 40 % newness, 20 new cosmetics brands in their stores, whether it happens to be Steve Madden, which I mentioned, the brown suede boots, the closed-toed shoes at Birkenstock, or you look at Levi's, which frankly has new collaborations that's driving demand.

40:00Carol Massar:So what are you showing me this year that you didn't show me last year? What about promotions? Because I have to say leading up to it, I saw some big promotions, 50, 60, and they built through kind of the weekend. So we do a tracker, 85 retailers that we track every holiday. We've been doing it for over 10 years. We did see promotions build, particularly in some of the specialty apparel retailers, but not everyone. We saw some promotional increases, whether it's the Bath and Body Works we saw it in, and you've seen a wider range of promotions instead of maybe last year, 40 to 50, maybe it's 40 to 60%.

40:33Carol Massar:You're going to watch that. At the same time, you know who had fewer promotions or less promotion? Ralph Lauren, 30 % off instead of 40 % off last year. So what's the picture that all of this paints of the consumer? I think it paints a consumer who's a bifurcated consumer, higher income continuing to spend, And lower income basically being very discerning in what they're spending, particularly on essentials. But it's also showing consumers want to celebrate the holiday season. And they'll think about January and January and they'll spend for holiday. How much, though, I think about this a lot.

41:08Carol Massar:I mean, how are they buying? We saw some information about the buy now, pay later, continuing to be an important payment option for consumers. Adobe forecasting$20.2 billion will be spent through the payment method this holiday, 11 % growth over 2024. I think on the buy now, pay later, look who it's going after. It's going after those consumers who have more limited spending power, and it's picking up interest. You are seeing companies who have had buy now, pay later for a long time. It's still important. It's everywhere now. It is everywhere. So it's not as differentiated as it had been in the past.

41:44It's not a sign of anything in your view?

41:45Carol Massar:No, I'm watching credit card delinquencies a lot. We're looking to see what that looks like. We're watching certainly what consumer spending looks like. And if anything, you're still seeing some pretty solid results. Take a look at the retailers' earnings the past few weeks. While they've been mixed, some of the outliers, I mean, who would have thought Kohl's? Kohl's basically showed some improvement. And we've seen some good results. More to come this week because this week, everyone from Macy's, Victoria's Secret, Alta, Signet are all reporting, and we'll get some more color on discretionary.

42:15Carol Massar:It feels pretty good. It feels okay. Tariff-driven price increases. I mean, the demand elasticity is something to be watching carefully. So that's definitely there. Does it feel like a season where folks were like, holidays are important, and so I'm budgeting so that I can spend here, and maybe I won't do something else? I think there's some of that, but I think they're also spending saying, I'll pay it back later. I think they want to celebrate, given it's been a tough year with a lot going at consumers all at the same time. so you said that nintendo had has done a good job this year of bringing consumers through the door companies including steve madden levi's ralph lauren ralph lauren what are the hot products as we look to you have to say labubu oh labubu is the hot product oh yes it is i don't even know what a labubu it's like a little it's a collectible thing on a backpackable yep it could be on handbags backpacks guys and girls wear labubu or have labubus and it is the hot do you have a labubu No, I don't.

43:13Carol Massar:Do you? Just a second. No, I don't. No. But it's just kind of wild. Well, now I know what I'm getting each of you for the holidays. Thank you. Is there like an it thing? That is the it thing. The little boo-boo is the it thing. I mean, there's other things out there that are certainly trending. Legos are always trending and are very popular. So who can't take that away? Yeah. When it's gotten colder out, so you're definitely seeing sweaters and outerwear take center stage. Ah, love it. Dana Telsey, founder, CEO, and chief research officer of Telsey Advisory Group. This is the Bloomberg Business Week Daily Podcast, available on Apple, Spotify, and anywhere else you get your podcasts.

43:50Listen live weekday afternoons from 2 to 5 p.m. Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

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