CNBC Interview 2/2020 Quote

[nickenumbers]

WARREN BUFFETT: we’re allowing people to borrow money on much weaker terms than we were five or ten years ago. You couldn’t borrow money at all, for a period ten years ago. I mean, y-- literally-- you could-- Berkshire couldn’t borrow money. I mean, - everything stopped. And-- now we’ve-- the pendulum has swung b-- dramatically.

 

What do you guys make of this?  [i mean I understand the words, and the concept.]  Is Buffett indicating that debt is back out of control and we should be realistically concerned about a debt bubble fueling the stock market rise?  I know this concern comes up from time to time, but I wonder if he was exaggerating to make his point, or if he actually believes that we are back to fast and loose lending.  A-la 2005-2007

 

If you have any data or charts to prove your opinion, that would be appreciated.

 

 

https://www.cnbc.com/2020/02/24/full-transcript-billionaire-investor-warren-buffett-speaks-with-cnbcs-becky-quick-on-squawk-box-today.html

[thepupil]

https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/wilshire-5000-market-cap-gdp-exceeds-dot-com-peak/msg392360/#msg392360

 

 

My view on this is as follows:

 

publicly traded investment grade corporate america is in great financial shape and poses little credit risk or systemic risk. debt is primarily fixed, well termed out, and interest is covered many times. this isn't universally true, but I think if you go through the data it is tough to conclude otherwise. I have some data in the linked thread on this. worry about public valuations and sustainability of earnings (taxes, margins, etc) NOT credit risk.

 

private equity/sponsor backed companies are in worse shape and vulnerable to a decline in operations, an increase in the cost of financing, or a simple decline in valuations. they are more expensive on an EV basis and more levered than their public counterparts and the structure of the leverage is worse (leveraged loans with floating rates, leveraged loans have grown at the expense of HY market, because investors want floating rate). the worst positioned are those who are mezz lenders to these companies, as they don't really get the upside if things go well, and are  taking impairment risks.

 

all else equal, i think you see lower default rates (no covenants), but much higher loss given defaults in leveraged loans and CLO's.

 

I don't think this really proposes systemic risk in that I think those who own the risks are unlevered institutional investors rather than banks. Japanese banks love CLO AAA, but I think AAA is going to be totally fine. I think comparisons to subprime are difficult to make in that banks are in far better shape and you don't have anything truly going on with ratings wackiness that is comparable to back then.

 

I think WB is mostly talking about who he is competing with for add-ons: Private Equity.

 

things I'd avoid because of this view: 

BDC's, CLO mezz/equity (I do own TFG which has significant exposure to this), Junk bonds, mediocre private equity funds and their sponsors/GPs (I don't think a few dissapointing funds will hurt the big guys franchise), CRE CDO's and BDC's that own them, CLO issuers like Jefferies (which I also own). Most of these are very easy to avoid. again I think the bulk of the risk lays in a sliver of a pension's allocation to "direct lending and private credit" or "alternatives" allocations of me-too institutional investors who've strayed too far afield.

 

my word is not gospel and there are more negative and positive interpretations of the data, but I've put a fair amount of work into forming this view (mostly with data from LCD to which I no longer have access).

 

Data:

 

Covenants:

 

https://finance.yahoo.com/news/cov-lite-fight-leveraged-loans-110012689.html

https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/leveraged-loan-news/leveraged-loans-another-new-record-for-covenant-lite

 

Leveraged Loan/CLO Growth (lots of good data here)

https://www.financialresearch.gov/frac/files/OFR_FRAC-meeting_Leveraged_Lending_CLOs_07_09_2019.pdf

 

[nickenumbers]

thepupil.  Flipping excellent answer!  A+.  Slap my grandma for the use of data and integrated opinion.

 

I understand it is an opinion, but I appreciate and understand your narrative.

 

Thank you.

 

Relevant to WEB, I think your thought that he is talking about entities that he is competing with for deals...  That does make sense with regard to his comment on CNBC.

 

Again, thanks a bunch.  I nominate you for King of COBF on 2/26/20!  ;D

[tede02]

On the consumer side, my observation is mortgage lending is no where close to being excessive. But I've read a lot about auto lending getting shaky. The credit card issuers have also been more aggressive in recent years. I distinctly remember, post financial crisis, I got literally zero credit card offers in the mail for a number of years. Now they show up every week.

[Cigarbutt]

^In terms of the competitive environment for deals, it's been said that Mr. Buffett was approached by Tiffany for a deal in 2019 and it's been reported that the price was felt to be too high although there may have been an element of a requirement for an operational takeover which is not an ideal situation for Berkshire.

Tiffany was acquired by LVMH. It looks like the deal will be more than 60% financed by ultra low rate (and even negative rate along the duration) debt.

I would not bet against LVMH but how can you compete (financially) in that kind of environment if your return requirements remain fairly inelastic?

https://www.reuters.com/article/lvmh-bonds/update-1-lvmh-set-to-raise-10-bln-plus-from-bond-markets-for-tiffany-deal-idUSL8N2A55HA

Money for nothin' and...