Marathon Asset Management

Big shout out to Citywire RIA for hosting a great event down in Austin, TX last week. The evolution of private credit continues, with Asset-Based Lending ("ABL") firmly taking a slice of the allocation pie. Our partners at John Hancock Investment Management (Chris Salemme, CIMA® & Jennifer Kahane), joined me for 15+ engaging RIA panel discussions while Edward Cong & Team Marathon Asset Management were staying busy back at HQ. ABL is the next generation of private credit!

Labor is Strong: Today’s employment data will inform job growth, unemployment rate, participation rate, wages, hours worked, and private sector contribution, by industry sectors. The first Friday of each month is always a highlight for markets and this one is no exception as it will help determine the Fed’s path as Powell is less focused on inflation at this juncture, as employment is now center stage. Speaking of jobs, the 45,000 ILA jobs are back to work after a tense 3-day strike. The 36 port operators from the Gulf of Mexico in Texas to the Atlantic Ocean up to the coast of Maine have agreed to a 62% wage increase, equating to ~$130,000 per annum/40-hour work week. The large ship operators control the ports and will pay this labor increases by passing on the cost of shipping. President Biden was reluctant to use his power under Taft-Hartley to require workers to return to work, a condition that forced the port operators to work out a deal with labor. Today, the longshoremen are back to work, which is fantastic since a long-drawn out strike would have huge negative implications for the supply chain costing GDP up to $5B per day. Automation has the potential to replace labor, a development that is well advanced in Asia at the big Chinese and Korean port facilities. This video highlights a fully automated port - an issue that ILA has brought into focus. Meanwhile on the west coast, 33,000 Boeing machinist and aerospace workers in Seattle and Portland have walked off the job, demanding 40% more pay along with stronger pension benefits, lower than Boeing’s offer of +30% over 4 years. This strike has brought work stoppage for most of its commercial aircraft including the 737 and 787-series. There is a huge shortage of aircraft deliveries already with Airbus and Boeing taking 8 years to make good on new aircraft deliveries. Certainly, higher wages imply tighter operating margins for Boeing as labor costs increase, in in time, the ability to extract higher prices for new planes remains to be seen. In California, 75,000 Kaiser Permanente healthcare workers or 40% of the company’s employees walked off the job on September 30th, representing the largest healthcare worker strike ever in the U.S.. The workers want a 26% increase over 4 years while the company has offered 18% over this period in addition to addressing staffing shortages for nurses, and challenging working conditions. The striking workers, including lab technicians, pharmacists, social workers, and support staff, are demanding higher pay they deem necessary due to rising living costs. The workers agreed to return on Monday given the critical care needed for patients, in anticipation of a deal being reached. Elsewhere UAW’s Shawn Fain is also actively negotiating higher wages and better work conditions at Stellantis (Chrysler) while ongoing discussions are taking place with Ford and GM at select plants. Big country, strong labor, strong companies too, and the beat goes on.

Marathon Asset Management’s commercial real estate platform partners with Trinity Investments & Partners Group to provide a $210 million loan on the Ritz-Carlton Dallas, a premier newly renovated 427-key resort.

CNBC Insights - my appearance on CNBC Squawk on the Street where I discuss: - The Fed’s 50bp cut may be aggressive given economic strength, with smaller 25bp cuts likely in November and December. - GDP is strong, with 3.1% forecast for Q3 and further job gains expected (Friday employment report: +150k, 4.2% unemployment rate). - Q3 earnings are imminent; Q4 is forecast to grow over 10% y-o-y. - Default rates for BSL, HY bonds, and private credit have peaked, will decline, converging at 1.5-2% in the coming year as credit conditions and financing rates ease. - CRE valuations have bottomed, with improving cap rates and financing rates creating attractive opportunities in CRE loans and CMBS. - Telecom/Cable offers an overlooked AI-driven opportunity, with fiber assets key to the internet backbone. Marathon Asset Management ‘s holdings in Frontier, CommScope, and Lumen have surged, with significant price action since May 2024. - ILA strike shuts down ports from Texas along the Gulf of Mexico up the coastline of the Atlantic Ocean to Maine costing ~$5B per day; traffic re-routed through Panama Canal to take ~20 days (2 days is normal), pushing California ports to its limit; shipping rates up and supply chain bottlenecks, as labor fights for higher wages/no automation. Enjoy!

Look the other way, just don’t blame me: Commercial Real Estate faced significant challenges over the past few years. The Federal Reserve’s recent Economic Bulletin shared their analysis as to why CRE prices had been so volatile. The Fed paper cleverly analyzed a litany of factors to determine why asset values for multi-family properties moved above its trend line, only to fall far below. The Fed’s analysis focused on key fundamental factors: supply-demand, construction costs, leasing, and asset management. This graph (below), by the Kansas City Fed shows valuations surge in 2021 immediately after the Fed lowered rates to 0, creating a bubble for the asset class. Then, the Fed increased its lending rate by +525bp causing CRE cap rates to move higher. What drove the decline was not supply-demand or huge gains in rental income which would have the opposite effect. What drove the decline for multi-family CRE was higher rates. Like a bond, when cap rates go up, the property price declines. Multi-family property prices declined by an unprecedented ~20% (average) during this 18-month period. The Major Central Banks (Fed, ECB, BOJ) put their official rate at 0; ZIRP was the primary factor that caused the CRE price bubble. As CBs raised rates, the bubble broke for CRE just as it did for SPACs, VC, and long-term bond prices (example: Austria AAA-rated 100-year government bonds fell 75% in price). But now that the Federal Reserve reduced its Fed Funds rate for the first time in 4 years, CRE lenders and owners who use the forward curve to model can look forward to terminal SOFR ~3% and take a sigh of relief with this more positive outlook. I’m confident that the bottom has been set for the CRE market. Recovery will be slow, there are still a ton of problems to work out, but prices will trend higher from here. There is a huge debt maturity wall for CRE, a bigger wall than has ever existed, so well-capitalized CRE lenders (including Marathon Asset Management) will be incredibly busy in the coming years. In recent weeks, Marathon has committed to 3 CRE loans in the range of $125M to $250M. Strong CRE owners-operators & property sponsors with well-positioned assets will pro-actively refinance as the clouds drift away. It will take time to clear the logjam and with so much to work-out, credit rating agencies have been playing catch-up, downgrading 50+ CMBS tranches last week without a single upgrade in the CMBS market. As it relates to the Fed and this chart below, I would have liked to read a report that better explains CRE valuations, but I guess that would require the authors to take some of the blame. There was too much exuberance at the peak and this wash-out will be very revealing who was able to preserve capital vs. those who were too far over their skis. Stability for the asset class is welcome by all, especially by lenders, and private capital will step up to fill the funding gap as banks commit less capital to CRE in the coming years.

Earlier this morning, Bruce Richards and Tod Trabocco, CFA from Marathon Asset Management discussed the 'tidal wave of opportunity' presented by Asset Based Finance. #DealCatalyst #GetDealsDone #AssetBasedFinance #PrivateCredit #StructuredCredit #CapitalStructure

Prosperity Reins: Household Net Worth in the U.S. has soared to record levels. This chart below (as of Q2 2024) shows The U.S. Household Balance Sheet reported by the U.S. Federal Reserve.   Assets: $185.0T Liabilities: $20.7T Net Worth: $164T+   Staggering that households have accumulated a net worth that is nearly 6x the size of GDP. 3Q concludes today, and as of today asset values are even higher, as Q3 GDP is estimated to grown by ~2.9% according to the FedNow economic forecasting models and job growth remains resilient. Q3 S&P 500 earnings are expected to increase 4.25% y-o-y; while Q4 ’24 is expected to increase ~10% y-o-y. Despite U.S. consumers carrying a healthy debt load of $20.7T, this pales in comparison to consumer asset values, thus a strong consumer who will keep spending.   GDI or Gross Domestic Income is a component of GDP and it’s even stronger than GDP. GDI includes wages, corporate profits, interest income and other forms of income. With cash flow and asset values increasing for both households and corporations alike, the private sector is alive and well. The best thing our elected officials and Washington technocrats can do is let the private sector thrive. No GFC, no COVID crisis, no recession in sight so no reason for big government to step in. Fiscal discipline please, and don’t interfere with free markets.   The Fed gave markets a gift by lowering rates 50bps when GDP, job growth, corporate earnings as so strong. The Fed will continue to ease until it reaches its terminal rates of 3% (don’t expect a straight line down as markets are pricing, the Fed will likely pause to see the impact to inflation and growth before eventually arriving at 3%). Money market rates will continue to decline falling from peak 5.25% to 3%. With a record $6.5T in money market accounts, the rotation to riskier assets is underway. Default rates will decline, credit spreads will generate extra cash flow vs. UST. It’s risk-on for public and private credit.   As you study this table below of Household New Worth, look at the liabilities (in red) and how they have barely grown over the past 15 years while asset value is a straight march higher.  

My Bloomberg Interview with Alix Steel & Romaine Bostick, CFA - All Major Credit Sectors Flash Green 1. Federal Reserve, Rates & Capital Deployment: The Fed will ultimately cut its funds rate to 3% as the easing cycle has begun with an aggressive 50bp cut signaling “risk-on" for debt and equity markets. With $6.5T money market accounts, cash returns will decline as it flows into riskier assets, particularly public and private credit, supported by strong GDP. 2. LBO surge: On the horizon loan supply will accelerate as lower rates drive LBO’s and thus credit formation to finance transactions. 3. Asset-Based Lending is already accelerating, with Marathon Asset Management building a tremendous pipeline of opportunities today. 4. Opportunistic Credit: strong corporate earnings, economic growth does not negate the fact that too much leverage was created during ZIRP, and as businesses adjust their capital and corporate structure opportunities abound for capital solutions that provides a bridge for businesses. Growth capital with equity upside through a debt structure is highly attractive. 5. Bank & Asset Manager Partnerships: Apollo and Citibank are a landmark arrangement and will facilitate large loans transactions for private IG and non-IG credit; while Marathon Asset Management and Webster Bank’s partnership is positioned in the middle-markets, a combination that is a powerful partnership utilizing the combined capabilities of Bank-Asset Manager to deliver a menu of options to private equity sponsors.

Marathon Asset Management is hiring a Director/Managing Director for our Client Solutions team focused on Capital Formation & Business Development of Institutional Investors. Marathon's position as as a leading global public and private credit manager, with an unwavering focus on exceptional performance and partnership on behalf of our clients, offers an exciting opportunity to join our best-in-class team. New York // Los Angeles // Miami // London

U.S. vs. Europe As equity markets set all-time highs in the U.S., it is worth noting this chart by Deutsche Bank research that highlights the enormous value creation in the U.S. In contrast, European value creation is considerably more limiting. Mario Draghi recently wrote a report on this exact subject matter as he highlighted European Union competitiveness where he notes the stunning statistic that no EU company with a market cap of €100B has been created in the past 50 years! Despite this there are strong and well managed companies in Europe including its banks, insurance industry, pharma, consumer brands, transportation industry, manufacturing, energy and so on, however the market caps for the largest companies are ~€100B not in the trillions. Meanwhile, the U.S has several $1 Trillion companies created since the 1990. The innovator ecosystem, higher productivity gains, optimal incentives, regulatory framework has all played a role accelerating growth in the U.S., while the brilliant Mr. Draghi who I greatly admire is at a loss to truly explain why Europe has lagged, however he is certainly asking all the right questions. It’s worth noting these differences: - Population in U.S. is 350 million residents vs. 450 million residing in the 27 EU countries (750 million live in all of Europe), both with exceptional education systems. - GDP in U.S. is $28T vs. $17T for EU ($23T for Europe), as the Fed has a dual mandate of low inflation and job stability while ECB has a single mandate focused on price stability. - Market Capitalization for Listed Equities in U.S. is $60T vs. €15T in Europe. If you are like me, you must love Europe. Its amazing people, tradition, history and heritage, art and architecture, the diversity, beautiful travel destinations, restaurants, and café galore, the natural beauty of its landscape, high-quality lifestyle, and so much more. Europe is a great place to do business, Marathon Asset Management is an active investor in Europe given our strong team on the ground in London and Luxembourg, offices we have grown over the nearly 25 years we have been domiciled there. But back to Super Mario, its stunning that the Eurozone’s Stoxx 50 Index last set its record high in April 2000, and 24 years later it has yet to make a new high. I hope that Mario’s report is a call to action, there is no reason why Europe has less of an innovation economy than the U.S. As a global asset manager focused on public and private credit, we find significant investment opportunities in Europe investing in credit markets.