Odd Lots Podcast Summary: Inside the Blood Sport of Creditor-on-Creditor Violence Bloomberg Hosts Joe Weisenthal and Tracy Alloway | Release Date: November 25, 2024

Introduction to Creditor-on-Creditor Violence

In this engaging episode of Bloomberg's Odd Lots podcast, hosts Tracy Alloway and Joe Weisenthal delve into the complex and often tumultuous world of creditor-on-creditor violence. This phenomenon refers to the aggressive and sometimes contentious interactions among creditors when a company faces financial distress. The discussion is enriched by insights from Sujit Indap, Wall Street editor at the Financial Times and author of Caesars Palace Coup, who provides a deep dive into the mechanics and implications of these financial battles.

Understanding Creditor-on-Creditor Violence

Tracy Alloway initiates the conversation by reflecting on her experience covering the leveraged loan market during the mid-2010s, noting a significant shift towards covenant light (cov light) loans. These loans have weaker covenants, granting companies greater flexibility to restructure but often at the expense of lenders.

Joe Weisenthal adds his perspective, emphasizing the hierarchical nature of lenders' positions. He explains, “lenders to a firm have different statuses and some are higher up in the rank than others," highlighting the inherent inequalities within the credit structure (02:00).

Matt Levine, a Bloomberg journalist, further elucidates the concept:

"The creditor on creditor violence phenomena, though, is a little bit more nuanced and novel... you, because you choose to and the sponsor wants to, doesn't really care. The sponsor will just go to you. It's easier to deal and cut since there's two of you, not three of us to negotiate with." (07:56)

This illustrates how larger creditors can leverage their significant positions to influence outcomes unfavorably for smaller lenders, despite all being governed by the same contractual agreements.

Evolution and Impact on the Credit Market

The conversation progresses to discuss the broader implications of cov light loans and creditor-on-creditor violence on the credit market. Matt Levine explains the technical evolution of these credit agreements:

“You have to actually ask yourself, do you want to be in this business... the market has become much riskier than it used to be for the technical reasons and the social reasons.” (34:06)

He highlights how the explosion of leveraged loans over the past decade has diluted the safety traditionally associated with senior loans, making the market inherently more volatile and contentious.

Private Credit Market Dynamics and Case Studies

When addressing whether creditor-on-creditor violence is present in the private credit market, Matt Levine acknowledges its nascency but provides relevant examples:

“There was one of these aggressive kind of refinancing transactions that happened using kind of a loose document... the creditor and credit violence situation was extremely mild.” (14:20)

He cites the Pluralsight case, where a mild form of creditor-on-creditor violence was observed, emphasizing that such instances are still relatively rare in the private credit sphere. However, the potential for increased conflicts remains as the market evolves.

Legal Expertise vs. Valuation in Mitigating Conflicts

A significant portion of the discussion centers on whether legal expertise or valuation skills are more crucial for distressed investors. Matt Levine posits that while legal creativity is pivotal in crafting defensive strategies, the true value lies in entrepreneurial skills and business acumen:

“If you're going to make a lot of money, it's going to be less on a technical factor... it's about how you think the business is going to turn around.” (34:11)

This underscores the importance of not just understanding the legal frameworks but also possessing the ability to drive business success post-restructuring.

Court Responses and Judicial Influence

Tracy Alloway raises concerns about the role of courts and judges in these financial disputes, referencing the book Default: The Landmark Court Battle Over Argentina's $100 Billion Debt Restruct:

“What happened is people ultimately settle out before you get final rulings.” (25:58)

Matt Levine responds by detailing how court jurisdictions, whether state or federal, impact the resolution of creditor disputes. He uses the example of the Simmons case to illustrate how bankruptcy courts can swiftly validate restructuring transactions, often favoring the winning creditor group (23:48).

Impact on Distressed Investing and Legal Costs

The episode highlights the escalating legal costs associated with creditor-on-creditor violence, which directly affect the returns for distressed investors. Matt Levine notes:

“How much lawyers cost... how much bankers cost... it's affecting the returns of these funds.” (33:13)

These high expenditures on legal and financial services reduce the profitability of distressed investments, making the landscape increasingly challenging for smaller investors and passive funds.

Role of Major Players: Apollo as a Case Study

Matt Levine discusses the rise of major private credit firms like Apollo, which have expanded their influence by leveraging their expertise in both equity and credit markets:

“Apollo is the clearest example... credit markets are much deeper, much wider, and there's just much more opportunity to build a massive firm.” (39:29)

Apollo's strategic maneuvers exemplify how traditional private equity firms are evolving into dominant credit market players, driving both innovation and competition within the industry.

Concluding Thoughts: Benefits and Drawbacks of Cov Light Loans

The hosts and guest wrap up by contemplating whether cov light loans and the resultant creditor-on-creditor violence ultimately benefit or harm companies. Matt Levine argues that while companies gain flexibility and can avoid bankruptcy, the increased costs and complexities in capital structures pose significant risks:

“You're picking up pennies in front of the steamroller and that is bad.” (39:07)

Joe Weisenthal echoes concerns about the resource allocation towards legal disputes, which diminishes the overall efficiency and attractiveness of capital markets.

Final Reflections

Tracy Alloway and Joe Weisenthal conclude by acknowledging the multifaceted nature of creditor-on-creditor violence, emphasizing the need for balanced approaches that consider both legal frameworks and business fundamentals. They ponder the potential for collaborative strategies among investors to mitigate conflicts, hinting at future shifts in market dynamics.

Notable Quotes:

• Matt Levine (07:56): “You, because you choose to and the sponsor wants to, doesn't really care... it's easier to deal and cut since there's two of you, not three of us to negotiate with.”

• Matt Levine (34:06): “The market has become much riskier than it used to be for the technical reasons and the social reasons.”

• Matt Levine (33:13): “How much lawyers cost... it's affecting the returns of these funds.”

• Tracy Alloway (42:13): “There's a ton of human hours devoted towards the definition of and/or things that we all thought we knew the definition of.”

Resources Mentioned:

• Sujit Indap, Co-author of Caesars Palace Coup
• Default: The Landmark Court Battle Over Argentina's $100 Billion Debt Restruct
• Pluralsight Case Study
• Simmons Case Study

Further Engagement:

Listeners are encouraged to check out Sujit Indap’s book for deeper insights into distressed debt battles and follow Odd Lots for more in-depth discussions on finance, markets, and economics. Additional content and resources are available on Bloomberg’s website and Discord channel.

This summary captures the essence of the Odd Lots episode, providing a comprehensive overview for those who seek to understand the intricate dynamics of creditor-on-creditor violence and its broader impact on the financial landscape.