The Anonymous Meme Account Chronicling Credit Market Craziness

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1:23Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Allaway. And I'm Joe Weisenthal. Joe, we're about to do something we've never done before. I'm very excited about this. This is something that I've always sort of like wanted to do. Maybe even before we had a podcast, like even since I was like a little kid watching TV. What? No, like seeing like some like news show because we're going to talk to like someone disguised, right? Yes. We are going to talk to an anonymous source, an anonymous person, someone who's anonymous online, but will also be doubly anonymous on this podcast.

1:59And we're going to be disguising their voice. Yeah, I'm really excited. I've always wanted to do that because, you know, like those old, like, I don't know, like investigative shows. Where they have the shadows. The shadow. You see the silhouette. Yeah, they sound like a robot and stuff like that. And it's like, oh, it's so cool. And, you know, it's like there's no reason we can't do that. OK, yes, that is exactly what we're going to do. I'll just go ahead and say it. We're going to be speaking with High Yield Harry, who runs a couple of different accounts on social media. He's on Twitter and also on Instagram.

2:28He also has his own newsletter where he's basically chronicling some of the craziness that happens on Wall Street in various ways, but also in the credit markets specifically. And listeners know that private credit and its sort of differences to traditional public credit markets, so publicly issued junk bonds or leveraged loans, has been a topic of interest for us. But in general, credit markets are always interesting things. And we have been at a sort of interesting juncture in them where last year turned out to be a fantastic year for credit if you got in at the right time. And that is despite lots of people expecting that this would be the area where you would see the impact of higher interest rates.

3:18This was the frothiest area of the market in some respects, certainly leveraged loans. And that would be the place where you would see trouble from the rate hikes. And yet early 2024, haven't really seen that. So we talk, obviously, as you said, a lot about credit. We talk about a lot in the macro sense. Where is the investor demand coming from? What is the effect or not effect of higher interest rates? What is the effect of Dodd-Frank and shifting lending capacity from banks to other non-bank institutions, etc.? And all that's great and all that's important, but you can't really understand it just from the numbers without understanding someone who would just talk about the world of actually making the loans and making the deals.

4:01Right. The incentives that go into doing this and who are the players in this market. Yes. So without further ado, I am very pleased to say we have High Yield Harry with us. As mentioned, this isn't his real voice. I think it will be obvious when the episode comes out. But Harry, thank you so much for doing this. Yeah. Hi, Tracy. Hi, Joe. Thanks for having me. You know, glad to be the exception. And, you know, I'm interested in hearing how my voice is going to sound. You know, I might be sounding like the Riddler, you know, holding Gotham for ransom. But, you know, it'll be interesting to hear how it works out.

4:36So first question, I want to give you the space to, you know, explain who you are without giving too much away and doxing yourself. But who are you and what do you do? Yeah, so I'm a junior professional within the world of public credit. You know, I did the typical stint from the sell side to credit. And I have experience wearing different hats in terms of public credit and private credit. Right now, my focus is on public credit. You know, I like the opportunity set there. And I'm more of a market-based individual as opposed to a deal team guy. So that kind of drew me to public credit. But, you know, I've dipped my toes in both and have done plenty of investment committee memos for both types of offerings.

5:23I'm really excited about this. I want to get into, you know, the world of credit and what you've seen from the inside and all of that. But now before we do talk about like your public persona, the high yield, hairy persona on Twitter and Instagram. what prompted you to adopt this persona and what do you know what come from and why are you one of the only good ones you're you're too kind I was I was sitting around in mid 2020 COVID was going on was in my parents basement and you know there was a lot going on the credit markets back in like March and April but after that it really settled down and had a lot of time on my hands after some you know, more stressful, like 2 a.m.

6:08nights. And I decided I really wanted to make a finance meme account. Finance memes in particular on Instagram really originated back in like 2017. And, you know, I would say that was really the golden age of finance memes. And I was really, as a younger guy, enjoying all the memes coming out from all those accounts. And I noticed some of those guys were starting to post a lot less so i figured you know i should try my hand at this so i figured you know my my favorite show is succession you know i i i love that show and i figured you know i should i should probably do some memes and incorporate succession into it and look that that got a lot of uh popularity early on um and you know as as things developed in the credit markets, especially with all the M &A activity and craziness going on in like 2021 and early 22, you know, I think people took interest in the account.

7:08These are popular meme formats, but you're kind of using them to say very specific things about the credit markets at times. So what is it about the meme format that lends itself to sort of credit analysis or credit commentary? Yeah, that's a good question. I mean, it's funny how niche you can really get like you know you can you can get very complex and talk about like liquidation preferences or you know pick for like payment and kind and and all these all these different nuances from the form of a of a viral meme you know i'm not really sure what drives that psychology you know i just i just know people people love it and react to it in a very unique and niche way um and you know it's just really hard to like capture that in a bottle i I suppose.

7:55But, you know, as long as people are enjoying it and enjoying all these goofy memes and videos, then, you know, I'm happy to oblige and keep the party going. You know, I've heard people say things like, you know, when you're becoming fluent in a foreign language, when you have a dream in that language. And I think there's an equivalent where it's like, you know, you actually understand an industry well, when you get the jokes and the memes, and the more niche, the better and i you know it's like because there are meme pages for like literally every industry there's like you know uh trucking memes and then truck driver meme pages and then freight memes and freight meme pages it goes uh broker broker meme pages etc and it's like i get some you know i look at them because we've done a lot of freight and i like get half the joke so it's like okay i still have more work to do that's right when you use the distracted boyfriend meme it's like a proficiency certificate yeah it really is it's like can you make a meme for an industry that the industry participants themselves find funny and most people can't do it because they don't know enough.

8:57But like that is, I do think like sort of like the test of industry domain expertise. Can you meme, can you get the memes and can you make the memes that the other people find funny? Yeah, yeah, absolutely, Joe. And, you know, I think as time has gone along, it's taken me a very short amount of time to make some of these memes. And, you know, I wish I had a more useful skill, like a skill that provides more economic value. But, you know, I watch a lot of TV. I watch a lot of good TV shows. And I kind of have, like, etched in my brain some of the great quotes or some of the great scenes from them.

9:33And, you know, all of a sudden you might get a, like, no country for old men or Sicaro meme, you know, associated with finance. And, you know, that's the type of stuff that, like, people love out of nowhere. And you tie that to something niche and it'll pop off. I definitely have more questions on the social media side of things, but why don't we talk credit for a bit? You know, I'm sure you've been listening to some of the episodes that we've done where we're digging into private credit. But how would you characterize the difference between working in private credit versus working on the public side?

10:09Good question. Yeah. So, you know, there's pros and cons in each. You know, I think with private credit, I think there's higher compensation for the individuals in there. So, you know, that's one thing. But, you know, I think with private credit, you can structure things in a lot of different ways. And, you know, the opportunity set is very large. You know, you can look at something from a lower middle market lens, middle market lens, or you can even eat and share the broadly syndicated loan market. You know, I think with private credit, one thing in particular is you can get a lot more in the weeds.

10:48You know, you can get a lot more comprehensive data room and, you know, really get in front of the management teams, really make sure they're answering the questions you need. And, you know, I think the relationship with sponsors is a lot more important in the private credit world where, you know, in private credit, a lot of our deal flow came from sponsor relationships. You know, may come from a banker, but it also may come from a sponsor in terms of, you know, we want you as the lender that we're going to work with. Or, you know, here's 10 lenders. We're going to we're going to pick one or maybe we'll pick four.

11:26And you guys need to get a term sheet in our hands as soon as possible. You know, I think one of the cons with private credit, though, is I think from a fund standpoint, you're a little more concentrated on your bets. And then there's illiquidity as well. So, you know, when you really make an investment, you know, I think you need a lot higher conviction, given that it's, you know, it's not necessarily something you can trade out of. So flipping over to public credit, from a liquidity standpoint, you know, you may have 100 lenders within a broadly syndicated loan. And, you know, if it's a billion dollar loan, you can get decent liquidity there, you know, even if it's like a B minus credit.

12:04So, you know, I think having that liquidity is a big positive for public credit, because with private credit, I think it's a lot harder to change things or have a loan change hands as things go south. But, you know, the con with public credit in contrast to what I explained with diligence in the data room and, you know, getting in front of management and what have you is, you know, you get on a lot of these lender calls as a public credit guy and management will frankly just toss your question to the side or say, oh, you know, we'll follow up with you offline about that or, you know, say, oh, we're not going to disclose that for competitive reasons.

12:43And, you know, some of these questions are things you need to know as an underwriting investor. And it's unfortunate it doesn't get answered, but that's kind of how it's structured. And, you know, you'll get a data room in public credit, too. That's a lot more thin relative to private credit. And then the last component, too, is, you know, documentation where, you know, I think public credit, we've seen this massive wave of covalent loans, you know, no maintenance covenants. and looser docs in terms of what a sponsor can and cannot do. I think in private credit, you can get some stronger protection and more of a heads up as things go south.

13:24I think as the private credit loans get bigger, there's looser documentation. But for a general middle market or lower loan, I think you're getting stronger documentation.

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14:34Can I ask a definitional question? is a data room a literally a room where you walk into a sealed room and look at information and can't take it out or is it is that is it virtual like what is a data room yeah well it's funny you know a data room gets gets a lot of jokes like that where people uh meme about it being a physical place but it's actually more of a virtual place you know it could be on a website like sim track or it could be on something as simplistic as Dropbox, where a lot of data is inputted into an online database. So that can be financials, can be a confidential information memorandum, a SIM, you know, lender presentation, legal documents, KPIs, and just a lot of various information that helps an investor assess an investment opportunity.

15:29Can I ask your take? This is a question that comes up in every credit conversation, and I'm not always satisfied with the answers. But what is the attraction for investors to go into private credit? Because people say, oh, it's uncorrelated, but it's like, yeah, of course it's correlated. And it's like, oh, the returns are higher, but as you say, it's a liquid, no mark to market. How would you characterize the appetite from investors to lend via the private credit channel? Yeah, you know, I think as like SOFR and base rates have increased, you're getting a very attractive return. And then I think also from the Covenant standpoint as well, you know, that provides a little more structure relative to leveraged loans or high yield bonds potentially.

16:16And then look, I think private equity has shifted a lot of deal flow to private credit. So naturally, if you're looking to invest in credit, you're looking to include some private credit into that mix as well. I'm still bullish on private credit. I think there's a lot of smart and sophisticated investors in the space. But I think there's also a lot of deals that get done on a relationship basis. But ultimately, you know, you get pretty, pretty decent double digit returns. And, you know, you have a first lien position as opposed to an equity position. So, you know, on an LTV basis, I think you're fine with with a lot of these names.

17:00Talk to us more about how a private credit deal actually comes into being versus, say, a syndicated loan or something like that. Because I think like the actual process by which an issuer chooses to go the public or the private route is still something I'm kind of like wrapping my head around. Like what is the I guess the catalyst for going one way or another? Who's like calling the shots or who is influential in this process? Yeah. So, you know, I think a big thing I saw in private credit was people or sponsors would favor private credit in situations where banks or someone else is moving too slow.

17:41And, you know, like private equity would want to partner that moves fast and moves quickly with them. So, you know, I think that's an instance where private credit can come in and, you know, help provide a level of execution and certainty, which, you know, I think is massive. You know, I do think the public credit market makes a lot of sense for a lot of these bigger issuers. But in terms of like, you know, on the smaller side, I think private credit comparably makes a lot of sense. So in terms of how these how these deals end up getting done, you know, like I mentioned earlier, a lot of this is from relationships, you know, might be a banker who gives it out, but it's predominantly going to be a sponsor who's who's seeking out term sheets from from lenders.

18:32in terms of assessing this, it's all about myself as a junior person and then other people on the totem pole from VP to Director of MD, assessing the data room, getting in front of the sponsor to make sure we're getting what we need answered before we can take this to an investment committee, confirming internally whether senior individuals in the firm have have interest in continuing with the process. Uh, and, and, you know, a lot of these, a lot of these deals end up, end up following a timeline where it's like, Oh, you know, we already have. Term sheets or indicated interest from a lot of other lenders.

19:10We need you to move fast. And part of it too, is like a sponsor testing you of like, you know, you, you need to move fast because we want to work with the partner who will move fast with us. So, you know, we, we work pretty hard, modeling a deal out, you know, building out like an internal memorandum, which, you know, is our story for the investment, you know, detailing the transaction, the sponsor, the company, you know, getting nuts and bolts on how the company works, you know, any key risks and mitigants from like a vendor, contract, cost structure, industry standpoint. And then, you know, thinking internally how we want to go about the pricing we offer and, you know, any other components there.

19:55And in Look, too, I also, you know, spent some time, you know, doing a little bit of equity as well. And, you know, whether we provide a lending solution that's first lien in conjunction with some other lenders or whether we want to provide something from a one-stop shop situation where you're also contributing equity to help, you know, really carry the deal is a key component when modeling it out, when doing research and kind of measuring returns. And look, from there, you go to your investment committee, you figure out what needs to be addressed, whether the risks have been mitigated. And if it has been, you're able to go and get an indicative term sheet out to a sponsor.

20:39If they select you or you and another group of lenders, You know, you might find yourself in the Midwest, like on the floor of a widget manufacturing company and, you know, working hand in hand with legal sponsor to really assess the deal and make sure it closes and, you know, you feel very comfortable and have a strong conviction in your deal. Were you ever involved in a deal where you had to take back the keys, as they say, and you end up running the widget manufacturer accidentally? No, I haven't. And I think that's a function of the current credit environment where things are still OK. If we've had a massive rise in interest rates, I think it takes a while for that to filter out.

21:27I think those taking the key situations are going to be an interesting storyline over the next few years. You know, I think maybe to get ahead of myself, you know, I think PIC and Payment in Kind is a way right now for a lot of sponsors and lenders to address some of these, you know, 2021 or deals like that, that were a little weaker and, you know, give it a little bit of a longer timeline to run. So, you know, I think at the moment we're going to see less key taking situations. You know, I feel I feel a little comfortable with 24. It's just going to be interesting, you know, in 2025 and onwards, how many key taking situations we get.

22:10Yeah. What do you think also about some of the big investment banks now getting into private credit? Because this seems to be the irony, right? It's like private credit kind of became a thing because banks were retrenching from lending or it was harder for them to lend. But now they're getting into it. And also, like they're sort of competing with, I guess, their own syndicated bond and loan businesses. It just seems kind of funny. Yeah, it's a little bizarre because it's pretty much balance sheet lending. So, you know, it's it's a little interesting. You know, I have a harder time imagining, you know, banks wanting to hold on to a lot of debt.

22:53You know, I think the syndication market works really well from like a risk management standpoint. But it'll be, you know, it'll be interesting to see how it develops. And, you know, I don't even know if I want to call it private credit if it's a bank doing it, right? It's just kind of like, you know, it's kind of like bank lending. Is the idea that they're going to create pools of capital to lend that aren't their balance sheet capital, that they're going to essentially create some vehicle for outside LPs or investors, and then the bank essentially becomes the conduit for it? Yeah, yeah. I mean, there are some balance sheet lenders, but there are also a lot of banks looking at JV partners as well.

23:36You know, it'll be interesting to see how it develops. I think like one argument for it is like maybe you can graduate people from like middle, you know, middle market lending to, you know, larger lending, you know, as a company grows over time. And, you know, maybe that's a good way to have relationship management. If, you know, I guess I think like historically you've seen a lot of like middle market names graduate over time to like the broadly syndicated loan market. You mentioned that for professionals in this space, private credit is currently more lucrative than public credit. Is that basically a function of the necessity of things like relationships or the skill level to craft the right covenant structure for the deal?

24:20As you say, more importance of relationships, more importance of being able to create a bespoke covenant structure that allows the people in this space to make more money? yeah you know i feel like i've seen a lot of investment banking analysts and associates head over to private credit as opposed to them heading over to public credit so you know i think that's a function of it where you know that skill set they had in ib makes more sense in private credit because you know it is like very similar to what they were doing before in banking so So, you know, I think that's the key driver. I think fund growth is a key driver.

24:58You know, I think the returns, I think AUM growth are key drivers in the moment. Look, I think with public credit, too, you know, compensation varies widely depending on where you are. And, you know, some public credit can be a lot more sleep and night credit as opposed to private credit, which I think, you know, needs significant diligence. And given the, like, illiquidity, you know, you're really digging in there and spending a lot of hours on it. Well, I think a lot of public credit, you know, if it's more hedge fund oriented or long short oriented, you know, I think that compensates higher.

25:37But if it's a little more sleepy of a fund, then, you know, I think it'll comp lower. You actually do a compensation survey on your newsletter, I think. And I find this a really interesting aspect of some of the anonymous finance accounts now that they are, you know, either collecting or being given information from people in the industry. Primarily, I think like younger people in the industry. And this seems to be a big change on Wall Street. Like, you know, there used to be if you worked at Goldman, maybe you talk to other Goldman people a little bit about comp, but everything was like kind of secret.

26:16Like there wasn't a lot of transparency on Wall Street, but it feels like that's changing, even though it's just to be clear, it's not the banks themselves that are driving this transparency. It's like the actual workers and primarily the junior ones. Yeah, absolutely. I think that's one of the better parts of running this platform is just the compensation transparency that's been able to come out of this, especially in credit. Because I think with investment banking, you can kind of figure out structure of where analysts and associates get paid out. But, you know, once you get once you start getting like credit associate and credit VP compensation level by city, you know, you can provide a lot of transparency.

26:59And I've had a lot of people come to me and say, you know, they've used it in terms of making sure they're getting compensated appropriately when getting a new job or something along that line. So, you know, I think there's also some private equity compensation in there, too, within the survey. And, you know, I run this like every March and I think you learn a lot from it. So I'm excited to see what I find out in the next month, month and a half or so. But, you know, I think you can you can really learn a lot from it. And I think I think over time is, you know, more followers increasingly become more senior.

27:33It's going to be really interesting to provide more transparency beyond just the junior level and really dig into like, OK, you know, I'm a mid-level professional. What should I be making? You know, what type of carry interest should I be having? And, you know, I think that type of granularity is going to be good because I think especially like the mid-level, you know, there's not much transparency. Are you cool with coming on? And Tracy, should we do a lots more in March with the results of the survey? Oh, I'd love that. Yeah. Yeah. Come back. Can we have you back on in March and do a little mini episode with reveal the survey results?