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Howard Marks: The Distressed Debt King (What Does He Think About AI and Private Credit?)
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- [00:00]
Brett Schaefer
Will The Fed raise rates 25 basis points in June 2026? IBKR prediction markets let you trade the outcome alongside your stocks and options, earn interest, get it right and earn $1 per contract at ibkr.com predictions last trading day June 17. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Shafer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is
- [00:35]
Ryan Henderson
a CCM Media Group podcast.
- [00:37]
Brett Schaefer
Anything discussed on Chitchat Stocks by Ryan, Brett or any other podcast guest is not formal advice or recommendation. Now. Please enjoy this episode. Welcome into Chit Chat Stocks, a podcast to help you find your next great investment. Today we are studying Howard Marks, a super investor that has been a leading distressed debt investor for decades, putting up great returns for the fund he founded, Oaktree. We'll go through all the history, look at some of his famous case studies. You know, we're going to look at the great financial crisis, current takes on private credit and AI and much, much more. We're going to look at his vesting style and what we and the listeners of this podcast can learn from looking at Howard Marks. This is part of our Super Investor series, looked at many many investors. We're going to look at a couple more this year. We're going to close things out in 2026 with this series. But yeah, we have I think 12 to 15 in the back catalog. Go check those out in the queue if you want. Before we get started, I guess I should say my name is Brett Schaefer. I'm joined as always by Ryan Henderson, my co host and remember to follow the show chit chat stocks, YouTube, Spotify, Apple Podcasts. Give us a five star review where you can. That is the best way to support this ad supported show and subscribe to the newsletter Emerging Moats. The link for there will be in the show notes. Connect with us wherever you can. Ryan I'm going to get into the history of Howard Marks. But first, what did you know about this investor before we started studying for this episode?
- [02:14]
Ryan Henderson
I knew a little bit. I had read I think two of his books, Mastering the Market Cycle and what's the other one? The early one? The one big thing is that I believe the name of the one of his early ones but a couple things that stood out. One, I did not realize how old he was. He looks pretty young. A lot of pictures. He looks healthy. He was born I believe in the late 40s. So he's seen a lot of cycles. He's seen a lot of different investment Environments as well. And he's got the experience to show for. And then I would also describe Howard Marks as sort of a value investing purist. Where. And it makes for really, it makes for engaging and helpful books and it's, it's very sort of different from our style. But there's still a lot to be learned here. And you can see he's one of those investors that kind of thrives on complexity.
- [03:19]
Brett Schaefer
All right, let's get right into it. Howard Marks is probably not as known as Peter lynch or Warren Buffett, but he has been, I'd say, one of the quote unquote stewards of the investing world for the last few decades. He has his freaky communications with markets, he'll go on financial media, all that good stuff. Ryan and I both read his book Mastering the Market Cycle. Although it's been many years since we have. I honestly really forgot exactly what the book is about. I think it's probably just a compilation of the memos that we read in preparation from this. And frankly, like his memos, the book can drag on a little bit, circling back and forth. But his investment style has to the test of time. Today we're going to be looking at that at 80 years old, Mark says, a part of the aging group. Investors, I would say, that have made their Mark, pun intended, in the late 60s through the 80s, Buffett, Munger, Icahn, Soros and more. It's kind of that group, group that are around 80 to 100 years old, maybe a little bit younger, that have been around for the modern evolution of financial markets in the United States. Marx has followed a pretty standard path. We can go through a brief history here. Worked as an analyst at Citigroup from 1969 through 1978. Then became a VP and portfolio manager of high yield debt from 1978 through 1985, I believe at Citigroup. And with the craziness of interest rates and the rise of LBOs at the time, leveraged buyouts, that must have been a wonderful time to get into investing. And then from 1985 through 1995, he was a leader at the TCW Group in distressed investing. Distressed investing. And 1995 he founded a firm called Oaktree, also focused on distressed debt investing. That gives him many decades in the arena investing in the debt markets. I think that counts probably 50 years at this point. Interestingly, Oaktree went public in 2012 and then in 2019, Brookfield took a 68% stake in the business Marks and others retained and the other ownership interest. And he remains co chair of the firm, making what they say on his biography now as big picture decisions. I'm sure aged 80 years old, he has delegated some of the work. But look, he's been in this market for many, many years. It's a bit different than equity investing because we don't have the same access to these type of investments and they're not as public for, you know, readers, people to look at famous investments like Buffett has made. But if you want to look at his long term track record, he's not as famous. But honestly his returns have been fantastic. But you have to look at that in context to the entire debt market. So debt markets differ from equity markets when evaluating returns. Absolute performance may be lower than equities over a 50 to 100 year period. But investors in a bond fund or a distressed debt fund are looking for one low volatility, usually maybe lower volatility than stocks and uncorrelated returns across the business cycle. This is why they're popular with people like pension funds, insurance companies, things like that. And before we dive into Oaktree's returns, maybe for to bring investors up to speed, let's talk about an example of how bond returns works. Because there are varying types of bonds. You have government debt, maybe short term Treasuries as the safest. Then you have high yield, essentially the riskier it is that you're going to get paid back your principal, the more out on the quote unquote risk curve people take and they'll have many different machinations. We don't have to get into all the details. It's kind of famous how complicated these things get made. If we look at Oaktree though, they play in the high yield distressed debt market, which focuses on debt that is trading at a discounted price among troubled companies. Meaning you have to do much more fundamental work on whether the company will have the capacity to pay you back. It's not like a high yield savings account that might just by short term Treasuries and then pay you back. You don't worry about anything. You have to do a lot of analysis on what you get if they default where you sit as an investor in the capital stack. And if we look at actually the math of these returns, a bond, they'll pay a coupon rate, which is that fixed annual interest payment. And I know, I'm trying to keep it light on the numbers, but I think this is important to illustrate why the high yield debt environment can produce some very, very good returns. If you're an astute investor you know, if you have $1,000 bond and it has a 5% interest rate, that is $50 in interest earned every year. But if that bond is trading at a discount to its principal, let's say 90 cents on the dollar, you can buy it in the open market for $900. That brings up the curls yield, yield to 5.6%. But if you have a bond that's trading at a distress level at $500 at only 50 cents on the dollar, the annual interest payment is 10% versus what you paid for on your cost basis. However, you also have your what is called yield to maturity. If the bond ever gets paid back in full, you get your initial $500 investment plus the $500. That is the gap between what the principal was and what you bought and your 10% interest payment every year. That can greatly increase returns. So for example, Instead of the 5% annual return, if that thousand dollar bond is over a five year period, you can get a 23% yield to maturity. I think for anyone confused on the numbers there, just think if a bond is trading at a discounted price, you can get a very, very, very high return compared to what you might think of the low returns strictly with bonds. And that's where, hey, that's where Oaktree and Marks have decided to play. We don't have exact data. There are multiple funds within the $200 billion oak tree universe. But estimates are that the returns have been 19% net of fees since 1995. For the core strategy with minimal drawdowns. I think that is extremely impressive. I mean it's not as high as the long term returns of Buffett or Early Days Buffett or Druckenmiller or Soros. But I mean for the market they're playing, that's fantastic. And we're going to dive into how he did it, his philosophy on the market cycle. But I have a quote that maybe we can kick things off where he here quote. In the distressed debt funds that we organized in 1990 and 2002, both times of chaos and financial markets, we earned net IRRs in the 30s and 40s. If you think about it, those IRRs have to be described as apparent. No one else, no one should be able to earn returns like those without significant leverage. And yet we did. Like all investors, we try to buy things for less than they're worth. The above results suggest we are aided in those funds by people who are willing to sell things far below their net worth. Why would they do so? Often because of the fire sale process. Described above. This is from one of his memos. There's 1600 pages worth of them on his website. You can peruse them for hours if you want. This is really the core of his philosophy. Going into the panic and using shrewd fundamental analysis to hey, buy some high yielding debt at a discounted price. Tron, anything to add there before we get into some case studies?
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Ryan Henderson
No. To sum it up, I think he I kind of think of Howard Marks as a classic. Heads I win, tails I don't lose investor or tails I don't lose much. And when we look at the Oaktree portfolio today, the bread and butter is credit. But they do have about 30% of their assets in non credit. So that includes equity, includes real estate. But usually most of those investments come from the tails. I don't lose part of their bets where they will oftentimes take collateral if the debt isn't paid off or whatever. And that's kind of how they end up with this sort of hodgepodge of different assets. But I'll talk briefly about the non credit portfolio and then we can go through some case studies on his returns. I'll just mention like 19% estimated net. That is good in and of itself. But when you think about it as a bond portfolio that's built to withstand difficult times, that is really astounding returns over a long period. And they're working with more than $200 billion in assets today. So they're doing it at great scale. And I think investors are more than happy, more than satisfied with those returns. So talking about the non credit portfolio, I mentioned it earlier, about 30% today of their 200 billion plus in assets are invested in either equities. So both private equities and some public equities. You can actually look up their portfolio online and you'll get some stocks in there. But that it's a microscopic portion of Oaktree's overall assets. So it's not that indicative of how they invest really. And then they also own a bunch of real estate. So the how they end up with private equity businesses usually seems to be this loan to own like strategy where they they offer high yield debt to a distressed borrower and that distressed borrower will, if they aren't able to pay, end up offering ownership in the business as collateral and and ultimately Oaktree ends up taking that over. Going through some of these I was digging through like company after company in the private equity portfolio there seems to be a focus on durable physical assets that typically provide like essential goods or services. There One exception here is going to be my first case study, which is Inter Milan, a soccer team that's kind of a random one. But in general they tend to own things like on the infrastructure side, so airports or airport adjacent assets. They actually own three gates. Here in Austin, Texas where I'm at, they own a lot of shipping ports, some railroads, stuff like that. That's the infrastructure side. And then they also own a lot of power related assets. So utilities, energy equipment providers, there was a high number of engineering services like contractors basically to the power industry. But really, yeah, it's basically durable physical businesses less likely to be disintermediated by anything digital. From what I saw. I saw very little online focused businesses there. And then on the real estate side, they've got 14 billion in assets there and it's a super wide mix. And I would guess a lot of these, again not all of this is public, but I would guess a lot of this is the loan to own strategy where starts as debt ends up becoming equity in some way. And it goes from residential and multifamily properties to industrial properties, to even commercial offices as well. It's kind of all over the place. It seems like whenever a sector is going through trouble, they go in and look for who needs money and then they structure it in a way that either they get paid back at a really high rate or they have significant downside protection. That seems to be the strategy for Oak Tree. And then the other part that stands out to me is I would describe them as sort of capital stack agnostic, where their bread and butter was in credit and high yield debt. But they are willing to buy whatever asset gives them the best opportunity. So they've got convertible debt, they've got, you know, standard high yield debt. They sometimes they'll just go right out and buy a company outright or buy equity outright. They're willing to go wherever they see the best potential returns. Usually that's some blend of credit with equity downside protection, but I'll stop it there. Brett, why don't we go through some of his best investments or most notable investments ever. You've got the first one here.
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Brett Schaefer
Yes, the great financial crisis for a lot of investors. This is where you kind of made your mark again. I'm going to. I like using that term, but this is also his last name for whether you're an astute investor or not. It seems like a lot of people were able to see this ahead of time and either prepare like Marks did to take advantage coming out the other side or bet against IT and the GFC in 2007-2009 I think, you know, could be considered his magnum opus. He predicted the market crash generally, you know, not perfectly, not like Burry or something like that. And the credit crunch perfectly. While raising funds to deploy in the panic began with a Memo in early 2007. He talked about loosening lending standards. Here's a quote. Abby. The UK's second largest home loans provider has raised the standard amount. It'll lend home buyers to five times either their single or joint salaries, eclipsing that traditional borrowing levels of around three and a half times their salaries. What he said on this is in other words, there had been a traditional rule of thumb saying that borrowers can safely handle mortgages with a face amount equal to three plus times their salaries. But now they can have five times what input should be drawn. He says either that the rules used to be too conservative, which can happen sometimes. I mean that happens a lot of times in emerging markets. You know, New bank is an example there where credit line is extremely tight for most people just because these banks are really risk averse for poor people in that market. Or you know, people have losing standards and they just want to grow volumes. And that's what we saw in the great financial crisis. Yet another quote here. What did we see in the US mortgage market as home prices rose and interest rates declined? First low teaser rates, then higher loan to value ratios, then 100% financing, then low amortization, then no amortization, then loans requiring no documentation or employment. I mean we've talked about this many times. A lot of investors will know the whole story of the great financial crisis. But it is crazy that people were getting homes with no docum. That's how crazy the bubble got. And from his perspective is he is generally from the sidelines he wants to watch for when loosening lending standards occur in any market, not just housing. And he is just not going to bet against it. But he is waiting for the eventual bust. It's kind of just his classic mastering the market cycle of when there are loosening standards where there's a huge glut of supply of loans. When capital is flooding into an industry, almost always a bust will occur. He's not going to invest in a bubble a la Soros. He's not going to be like Burry or some other shorts out there that we've talked about that are going to bet against this stuff. But he waits with dry powder to deploy on the other side when the risk reward is favorable in the high yield Markets quote this from another memo. The same thing happens in the investing world. Bad investors drive out good. When undisciplined investors are out there with lots of money to get rid of, there's less scope for disciplined investors to insist on strong covenants. That's why the level of covenant protection is a good barometer of the market climate. So you're just saying across the housing market at the time and all the loan industry along with it, there was just loosening standards of, hey, what am I actually getting here? What protections do I have as a loan investor? And he said, all right, we're going to wait. And it's bubble does pop as it did, we're going to be prepared on the other side. By early 2008, he was writing about the GRE, how greed had toppled over in the bond market to a collapse. Quote, in times of the crisis, you sell what you can sell, not what you want to sell. Many of the entities that held CDO debt also had leveraged loans. Thus, when they couldn't get fair prices for CDO debt, they sold leverage loans, putting their prices under pressure as well. And when the creation of new collateralized loan obligations slowed to a trickle, the decline in demand from CLOs removed an important proposed from loan prices. So this is a lot of terms to say there were fire sales from the people associated in this market and Oaktree could come in and buy them at an extreme discount because they had the capital he raised. I think I had a note here, I probably, maybe didn't mention it, but he raised I think over $10 billion in 2008 in preparation for the other side. Turned out smart. They earned some fantastic returns. I think that's about it.
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Ryan Henderson
Yeah. In going through all his or most of his great investments over the years. Well, I guess what I've learned is if you really need liquidity and you've got to sell something, you can expect oak tree to be sitting there waiting.
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Brett Schaefer
That's why Buffett honestly is pretty close with him because they kind of have the same mentality, I guess. Buffett retired now, but Berkshire almost the same thing in the great financial crisis. I'm sure they were chasing similar assets and saying, look, we can be that lender of last resort. It's the same mentality. We're not going to be, we're going to be the ones that just exhibit the quote, greedy when others are fearful, fearful when others are greedy.
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Ryan Henderson
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Brett Schaefer
Brett, I agree there's a lot of lessons we'll talk about at the end too that we can learn as investors that may not be buying bonds, but individual stocks as well and trying to not blow up your portfolio in a boom bust cycle that can occur in equity markets as well.
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Ryan Henderson
Okay. The first investment I'm looking at from Oaktree's history is Inter Milan.
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Brett Schaefer
This is not shocking.
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Ryan Henderson
Not that as a soccer man, not that big in the grand scheme of things for Oak Tree, but I do think it's emblematic of their loan to own strategy overall. So I guess two reasons I'm going to talk about it is one, I like soccer, so I find it interesting. But also it, it showcases kind of their stereotypical investment that they've made over the years. So in 2021 there was a company called Suning Holdings Group that owned Inter Milan, the soccer team based in. As the name implies, Milan, this was a large Chinese holding company that owned a bunch of different assets. And during COVID pretty much every soccer team was struggling revenue wise because you weren't attracting as many fans and you basically needed a cash plug during those times. However, simultaneously, Sunin was facing a massive liquidity crisis because they owned a ton of commercial real estate in China and had a big investment in Evergrande. For those that don't remember that story, there was this massive Chinese property developer who went through their own debt crisis and the government basically unwound them. So like Suning could have tried to sell their stake in Evergrande but the government probably wasn't letting them because they didn't want this fire sale on a bunch of assets. So they were just stuck holding these things for several years. So anyways, Sunin, the Inter Milan owner needed money and in 2021 Oaktree provided them a 275 million euro payment in kind loan PIK loan. And this loan structure is one where instead of making regular cash payments, the interest owed is capitalized, meaning it is added directly to the loan's outstanding principal balance. That means because the interest is added to the principal, future interest is calculated on a larger total loan amount. So this can pile up quite quickly. And from what I read, typically you'll see these types of loans in situations where a company doesn't have the consistent cash flow to pay it off right now or on a recurring basis, but could potentially have the ability to pay it in one big balloon payment. Down the road is to kick the
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Brett Schaefer
can down the road Loans. That's what I'd like to call them.
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Ryan Henderson
Yeah, it's basically what it is. And in this case, Sunin was allowed to pay it through shares of Inter Milan that was their Collateral which is what they ultimately had to do. They tried. In May of 2024, the total debt had reached almost 400 million euros. Sunin tried to organize another refinancing round with Pimco, but the deal collapsed. So the other thing you'll see with these PIK loans is, and this sounds like a problem, but companies that are are borrowing in a PIK loan will sometimes take on more debt to pay off their existing debt. But in this case, deal fell through with Pimco and Oaktree ultimately seized control of inter Milan in May 2024 following the acquisition of the club. Oaktree has been pretty hands off. They retained the same like they made no changes really to the sporting office like the anyone that's managing of the roster or anything like that. But they did bring in a club president just to manage the business side and make sure that it was run responsibly, at least on the financial side. Keep in mind though, we talked about this whole ordeal, this entire transaction, pretty much none of it had anything to do with Inter Milan. Like Inter Milan was still a fine asset during this time. The only reason this transaction happened was because Sunin needed money. So like Inter Milan, obviously they had sort of the COVID cash crunch, but they had great following, great notoriety. I mean the soccer team was still doing well so they were generating consistent revenue. So that wasn't the issue. It's not like they needed like a turnaround and that it was the asset that was causing the sell off. It was literally the buyer or the seller needed money, distressed seller. And it's almost like the underlying asset didn't matter at all. It could have been almost any asset. Ultimately this ends up being a decent one. But it reminded me of this famous Howard Marks quote where he says our goal isn't to find good assets but good buys. Thus it's not what you buy, it's what you pay for it. So today Inter Milan is valued at roughly 1.1 to $1.3 billion. Again, sports teams or sports franchise valuations are very like rough because it's ultimately transaction based and it's what whatever the next billionaire is willing to pay for it. But it's probably a decent ballpark. I would guess it's based on comps. So some people, when you go back and look at the IRR on this investment, some people say they bought it for basically $400 million roughly because that's the total value of debt that was owed to them by Sunin. But that's not really accurate because they only lent 275 million euros to Sunin. The rest was just the high interest payments that accrued over the three years. So. And obviously there would be some interest costs. But ultimately what happened here is Oaktree gave out 275 million euros. Three years later they got a 1.2 roughly billion dollar asset.
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Brett Schaefer
So was it no actual interest payments or it was all payment in kind or did they. They might have got some interest on top of that in the three years interim or was it all P I. Whatever it is, P I K, I'm
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Ryan Henderson
not sure if some of the interest was paid off, but it went from 275 million owed to almost 400 million owed in three years. So I'm guessing that's very little was paid off in that time. So in this case they. This was the tails I don't lose and actually ultimately sort of tails I win situation. Assuming that they're able to sell Inter Milan at some point down the road for a decent chunk of change, they're going to have gotten a pretty. They found a distressed buyer, took it off his hands at a cheap deal, didn't get the interest payments, but there was plenty of downside protection because they were able to seize the asset.
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Brett Schaefer
All right, yeah, it's. It's pretty textbook. You kind of get that protection on the downsides. I'm going to go into my second case study here is the COVID 19 panic in the airline rescue where he is looking for another heads I win, tail tails I don't lose. Where if you have defaults, you have some protection here where you can either get playing collateral, you can either get gates, you can either get loyalty membership programs which are very complicated but can be quite valuable. But yeah, let's get into it. The COVID 19 panic and what he did with some airline distressed debt. What's nice about having these 1600 pages of memos, Frank, we did not read them all. We read some of them but we did not have time to read them all. He has commented though and invested on many big events of the last three decades with real time stamps of his thoughts. And COVID 19 was no exception. So back in 2020, well, Ryan and I were shocked looking at Ackman's hell is coming CNBC appearance. Do you remember this, Ryan? I'll never forget it. I think we were in the same. We were living together at the time.
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Ryan Henderson
This was must watch television.
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Brett Schaefer
Yeah, I think people still misunderstand that CNBC aberrance because they take the hell is coming quote when in reality he was Trying to say hell is coming but I'm actually going to buy the dip. But Marks though was preparing to deploy capital and made some interesting distressed loans to airlines as a lender of last year resort I think Sidebar this is an example of the difference between equity and credit investors. Airlines may be a perfect area for distressed debt but airports are where we might make a little more money as an individual stock investor. On March 19 he published a memo to clients. He said quote and this is 3-19-2020 at one of the height of the panic. Let's see he says I'll share some color from calm Justin, one of our debt traders quote after two days of a basically stalled but stressed market we are finally finding had the rubber band snap for sellers that need immediate cash flow brought the market lower to hurry we opened three to five point lower and the street was again hesitant to take risk so only transferred blah blah blah blah blah. One of the brokers said it was flat out mayhem and he was working from home. Imagine what an actual trading floor would have been like. It basically became ducking cover if you were a market maker as their risk taking abilities are being hindered by their C suite before immediate it's a bit confusing but you can kind of see the chaos at the time. Besides immediate needs, investors sold to prepare for quarter end redemptions, FX movements and to fund margin calls. Short settlements were rampant and larger blocks cleared in high quality double B credits. Most people don't even want to guess what the mark is on triple C credit risk. This ultimately ended up being the first real day of panic we have seen in a long time. Marks argued. Look, he said this is going to be a good time to invest. He said, quote we're never happy to have the events that bring on chaos and especially not the ones that are underway today. But it's sentiment like Justin describes above that fuels the emotional selling that allows us to access the greatest bargains in April of 2020. And this is how I think the communication piece and everything that goes around building a brand within your investment fund works because in April 2020 they were able to look at their investors say hey you trust us. We put up a good track record. You understand what our clearly what our strategy is. They raised $15 billion specifically to target distressed industries in the COVID lockdowns and when he looked at that airlines were a clear candidate. He was a part of the Latam and Azul airline restructurings. Those are two Latin American airlines. One might argue that he was bailed out by the government but I think that is part of the equation you need to look at as an investor. You don't really need to complain that the government is doing things you wouldn't, but just invest how the world actually is. And as a part of the airline investment, they used loyalty programs and slotting fees at the airports as collateral. This allowed them some value in a default scenario as travel was eventually going to recover. And hey, it might be a different airline, but we can get some value if we kind of lose here. They also had quote, equity triggers, kind of like a convertible bond to help with upside. And essentially when the airline industry recovered within a few years, the debt was refinanced in the corporate bond market and the equity values skyrocketed. I'm sure we don't have the details of exactly what their cost basis is, what the interest income they earned versus what they actually closed out with, but within a few years I'm sure the internal rate of return was fantastic. People look at this and say he kind of crushed it in the COVID 19 lockdown while Buffett was selling airlines. Look, airlines were a tiny part of Berkshire's portfolio, but clearly Marks kind of looked at the 2020 panic and unlike Berkshire Hathaway, but it didn't really do anything. They took well advantage and seemed to do quite well by their clients.
- [34:46]
Ryan Henderson
All right folks, before we move on, let's talk about our home for investment research, Fiscal AI. Fiscal AI is the complete stock research platform for fundamental investors. We use it as every single day here at Chit Chat Stocks. It has everything you need to research individual companies from 20 years of financial data to company specific segments and KPIs earnings call transcripts, Morningstar reports and insider ownership data and much, much more. And they just lowered the price of their Highest tier by 60%. If you want a complete enterprise grade financial data terminal, check out Fiscal AI. If you use our link Fiscal AI Chitchat, you will automatically get two weeks of Fiscal Pro for free, no card required. And if you want to upgrade, our link will get you 15% off any paid plan. Again, that's fiscal AI chitchat. The link will be in the show notes. Yeah, this actually points to probably a hidden advantage for Oak Tree, which is they've now done such a good job coming out of panics like investing in sort of chaos that I imagine they're able to to do a decent job raising funds when times are rough because they can point to here's the type of stuff we're going to invest in. You've seen us do it before. Here's a good opportunity to capitalize on a bunch of chaos. So I imagine that does become sort of a funding advantage for them relative to other asset managers. I'm going to talk about my second case study today. This is probably one of the more complicated transactions I read for Oaktree and Howard Marks, this was yet another sort of debt to equity swap that ultimately it seems created a ton of value for Oaktree. So in 2015, the global shipping industry was in a brutal drawdown and a company named Torm T O R M, which was a Danish shipping company that transported oil products, was in a liquidity crunch. They owed about $1.4 billion in debt to a consortium of different banks and they were struggling to generate cash. Keep in mind here the, the banks were pretty desperate at this point. They, they wanted to get their money back and it wasn't looking good for Torm at the time. At the time, Oaktree owned a separate smaller fleet of 25 tankers through a different fund that they managed. So Oaktree approached Torm's lenders and told them, basically, we will give Torm, the shipping company, our 25 ships for free if you wipe out all the old debt and give us a majority of the stock. And Torm's lenders, I mean that doesn't sound like a great deal really because you're getting your debt wiped out. But they were able to convert to some stock and they're willing to do it because they might not get back their 1.4 billion, but they get equity themselves and it's equity that's worth significantly more because Torm's now debt free and has an extra 25 ships. So a bit of a complicated transaction, but the result was Oaktree gave up 25 ships and got a 62% ownership stake in a now debt free Danish shipping giant. Following the acquisition, Oaktree apparently helped improve the business. So it's cleaner balance sheet. They were able to modernize the fleet, make a lot of upgrades. I think the 25 ships were an improvement in terms of like equipment quality. There were some operational improvements as well. Again, it always looks better in hindsight. I don't know what all the operational improvements really were. And then they moved the company's primary listing to the nasdaq, so they were able to get a little more, more funding as well. So on top of all that, in 2021, maybe 2022, the, the onset of the Russia Ukraine war basically forced a whole bunch of the most efficient shipping or short shipping routes had to be redirected which led to much longer shipping routes. And Torm as a shipper gets paid based on a combination of weight carried and distance traveled. So their revenue skyrocketed and the result was OSHA gave up 25 ships. Estimates say those 25 ships would have been worth around 500 million. They got 62% equity in what as of 2024 peaked at a market cap of 4 billion and they were paid out a ton of dividends along the way. So significant improvement from the assets that they traded over. And the estimates are today that they got around a 30% IRR. I find this one funny that they never paid for anything. They just transferred 25 ships and basically got great equity of equity stake in a now debt free business. But it goes to show this is again Oaktree does not shy away from complexity. I think they almost favor complexity because it gives them sort of a competitive advantage.
- [39:58]
Brett Schaefer
Yeah. And they want creative ways to make sure they can protect their downside. Whether it's the ships loyalty program, slotting fees at the airports or what we talked about with the Inter Milan able to convert into a trophy asset if things run into trouble. Right. The portfolio we don't really have much public access to but any takeaways you kind of looked at it. Anything there?
- [40:25]
Ryan Henderson
There isn't that much similarity across their various public equity stakes. Torum is their largest holding today by the way. Their largest equity holding. But they've been selling that down. But it basically seems that. And maybe some of these are one offs where they just thought the equity was interesting and they bought it in the open market. But it seems like a lot of these were debt to equity swaps that they got in through some sort of distressed form and now they've got sort of this residual equity portfolio because this was the downside protection on a bunch of other deals.
- [41:02]
Brett Schaefer
That's fair. That's fair. Yeah. Not really one where you can do any 13F following. Maybe someday we'll see more publicly what the bond market looks like. It seems like an industry regardless of whether you have trade web and market access trying to help where it stuck like 40 years in the past. I don't know why you can't digitally trade bonds but that's a whole nother topic and there's really no disclosures. So hey we'll be in the dark. But I think the returns have been fantastic either way. And we've had some case studies, public stuff that Marks and other people have reported on. As we round into the final segments here we're going to Do a takeaways. And then what he said about AI and private credit, because people are clearly asking him a bunch about those two markets that are huge, huge debt markets at the moment. Those two takeaways. I guess you just went. So I'll kick things off here. One, the one takeaway I had are that risks are highest when everyone thinks they are lowest. He says this time and time again. It's helped him throughout his investing career. This means that they are not properly priced in or people are generally ignoring risks to flood the market with liquidity. It's the classic quote, when the music is playing, you have to dance. Marks, to use the analogy, is the awkward guy sitting in the corner that fits us. We don't like dancing either. So yeah, all right. Two, protect your downside in bond investing. The only thing you don't want is a permanent loss of capital and you want to make sure to minimize the risk of this occurring. Mark says that they have taken quote donuts over the years, but less than others with stock investing. As an individual, I think this is making sure you do not invest in something that has a high degree of bankruptcy risk or does not mean your shares may go down 80% in a downturn or use margin. You know, there's lessons here for the individual investors, like our listeners and ourselves that are investing in stocks. And three, the market cycle always occurs. You can say demand is infinite. You can say people are going to pay their mortgages without, you know, people pay their mortgages and then just do no underwriting. But again, we've seen what happened there. If there's no discipline, if there's an infinite flood of capital into a market, the cycle is going to happen. It's going to flood out the bad, good investors with all the bad investors just giving bad loans. And you can have a government that, you know, papers over losses, but eventually the business cycle will play out if greed comes to an excess. It's just human nature. He takes the psychology of investing and plays in, oh, I forgot to finish my notes here. It's the combination of psychology of investing and, and value investing. He's using that human nature and psychology that turns into the market cycle and is saying, I'm going to wait for the fire sales for the deep value bond plays coming out the other side.
- [43:55]
Ryan Henderson
Yeah, I think those are all good takeaways. Honestly, my first takeaway was that for an investor like me, I can't really replicate this strategy and probably shouldn't. He Marks and Oaktree Bradley fished in the areas where there were a Lot of bad assets usually, but they were able to position their investments or the terms of their investment in a way where they wouldn't lose money or they would be paid a ton of interest by the underlying company, which, if you're just the average equity holder, that might not be the most favorable outcome for you. So, yeah, I guess my first takeaway is don't copy this. Unless maybe you're running a high yield debt fund and you're listening to this podcast. Second one, and I think this is a good quote. He says bold steps taken in pursuit of great performance can just as easily be wrong as right. I think it's easy, especially times like right now, to be envious of people who are having really good returns when times are really good. And maybe they took a concentrated bet on, in this case, a memory chip company or some, some stock that's seen those 10x returns over the last couple years, but they very well could have gotten lucky and it's not that repeatable. And if they decide to replicate that strategy and try it again, eventually it's going to hurt them. So again, taking big concentrated bets. And I'm kind of saying this to myself here, you are potentially just as you could be wrong as easily as you are right. So don't get overconfident if it works out. One time is probably my tip for myself, and then the second or the last one for me is, and it's not really the type of investment I go for. But he has famously said everything is AAA at the right price. And it's a good reminder that even great businesses can be bad investments if you pay the wrong price and vice versa. So the example I have here is I own shares of Wicks. I don't love the business, but I do love the price. Hopefully I don't just jinx myself, but it, it's a good example where you can generate good returns if you see the right valuation, the right price, even if you don't really, really love the underlying business.
- [46:22]
Brett Schaefer
Yeah. All right. Listeners are probably thinking, well, what about today? And I kind of wanted to close things off. Maybe we can discuss a little bit about it. You know, there's, there's a lot of debt flowing into AI AI infrastructure, that whole complex. There's been a lot of looming stories, a lot of rumors, just so much commentary around private credit. I, I don't know what to believe yet. It's not something we're an expert in, but there's just a ton of concerns out there. And of course Marks has been asked about it a bunch and has had two memos. These are actually the two memos he has released as of early 2026. I have one quote here. Let's see. He essentially said, I don't know if this is worth reading, the whole thing, but he dove in, essentially having Claude write a memo for him. He's trying to test out whether the tools are great. I'll say this is maybe a testament of him as an 80 year old. He's not afraid to sound foolish and kind of do things that 20 and 30 year olds might make fun of him for. But Buffett, on the other hand, or some of these other investors might never explore that. But here is what he talks about. Let's see, here's a quote he had Claude come up with. Great. Okay. He's asked about whether Claude is going to replace every financial analyst and he says this is where it gets things wrong. Great investors are much more than fast, unemotional processors of data. They had to be strong. Exactly where Claude admits AI might be the weakest in dealing with novel developments where there's not enough prior experience for dependable patterns to have been compiled. They also have to make subjective decisions regarding qualitative factors and exercise, taste and discernment. For instance, choosing the right counterparties has played an important part in Oaktree's success. How will AI make judgments of that sort? And there's something else. AI doesn't have skin in the game. It doesn't feel the weight of concentrated positions or the fear of capital loss. Its willingness to take risks might not be constrained by humans normal risk aversion. The best investors sense potential risk intuitively and this contributes greatly to their success. Okay, well, what do you think, agree or disagree with his take here?
- [48:38]
Ryan Henderson
I agree. And there's one quote there that I really like is, for instance, choosing the right counterparties has played an important part in Oaktree's success. Again, maybe not applicable to the average investor, but would, you know, take that Inter Milan example. Would Claude have been able to know just how desperate Sunin really was for capital?
- [48:57]
Brett Schaefer
No. My client, her party is going to be optimus.
- [49:01]
Ryan Henderson
If that's the case, maybe it will now.
- [49:04]
Brett Schaefer
All right, here's one that I think is more applicable for investors regarding what he is concerned about today and generally with AI, he kind of said, too early to tell. We'll see what happens over the next few years. Just because it's only been a couple of years of this boom, he said. While I mentioned it in my December memo, I want to point out again that some AI revenue is currently circular in nature derived from AI companies buying from each other. The chain of revenue has to ultimately rest on end users paying for real economic value. And while that's increasingly the case, the question of how much revenue is circular remains an open one. That sums up the debate clearly.
- [49:39]
Ryan Henderson
Yeah, yeah, yeah, I, I agree. Any other quotes here on the private credit space?
- [49:46]
Brett Schaefer
I think, yeah, this is one where he's going to be more of an expert in. He says, quote, the massive amounts of capital that have been available for investment in direct lending created a gold rush. In the last 15 years, something like $2 trillion of direct loans have been made. The whole private credit sector was $150 billion 20 years ago. And he says, quote, in my experience, the limiting factor for the credit never borrowers appetite for capital, but lenders willingness to supply it. He quotes field of Dreams. If you provide the capital, they'll borrow it. Thus the makeup of the credit market was greatly influenced by the growth of private equity, the boom in capital available, and both parties agreement that software companies were good candidates for investment. He pretty much said there's a lot of supply here, flooding the markets and it created a lot of bad investments. He says the problem might not be actually as bad as the headlines say, but if your investors scream and panic and want their money back, it doesn't matter. He seems to think that if the tide comes out on private credit and direct lending, Oaktree, with less exposure, will be able to sift through the garbage, same as always. So it's kind of the same situation. He's waiting if the dominoes fall, or is that the right term? If there's bargains to be had, they'll be waiting if and when they do. He's not saying they will, but he's prepared to make the investments.
- [51:01]
Ryan Henderson
So what you're saying, Brett, is you think they will. Oaktree will be seizing a number of data centers in 2020.
- [51:09]
Brett Schaefer
No, this is different than this is private credit. I'd say the software company.
- [51:13]
Ryan Henderson
Software, yeah. On the AI side they will.
- [51:16]
Brett Schaefer
That's true. That's true. He, well, he, he I guess would look at the situations the same way. He'd probably look at them interchangeably and say, hey, we just want downside protection. If there are fire sales, like for example, the core weaves, the really high risk players, if they have some assets we can buy at a fire sale, if things kind of turn south here, OpenAI, Oracle, what have you, they don't care what industry it is, they just want good downside protection. And upside if they're right.
- [51:42]
Ryan Henderson
Yeah, yeah. No, I mean the underlying asset isn't the focus. It's like the opposite of every other investor in the world, it seems.
- [51:51]
Brett Schaefer
It's true. That's true.
- [51:53]
Ryan Henderson
I think that's going to do it. Any other thoughts on Howard Marks?
- [51:57]
Brett Schaefer
I don't think so. We got, yeah, 50 minutes here should be good. A roughly hour long episode. Let us know any other super investors you want us to cover, but we've covered a lot of them. Kind of winding our way through. We're going to, I think, finish with Munger and Buffett to close things out in 2026, but before that, we gotta find some other super investors that fit this criteria. As a disclosure, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan I or any podcast guests may hold securities discussed in this podcast, may have held them in the past and may buy, sell, or hold them in the future. Thank you everyone for tuning in and we'll see you next time.
- [52:51]
Ryan Henderson
I finally had a light bulb moment about a stock we've all heard about growing at 18 a year and a 15 pe. I shared this insight in a special Deep Dive report to subscribers of my research service Value Spotlight. The report is called A Generational Moment, Reigniting Human Connections through a Tangible Network of Intangible Assets. Chit chat listeners can get a discount to my research@stockwriteup.com that's stock W R I T E U P Your next chapter in health care starts at Carrington College's School of Nursing in Portland. Join us for our open house on Tuesday, January 13th from 4 to 7pm
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Brett Schaefer
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Ryan Henderson
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Brett Schaefer
Whether it's the funds fueling AI or
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Ryan Henderson
crypto's trillion dollar swings, there's a money side to every story. Get the money side of the story. Subscribe now@bloomberg.com.