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You're listening to Strictly Business
Podcast with Lindsay Williams.

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I received a very interesting article
which says the following, the headline

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that is,

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Emerging market private credit stands
apart as cracks appear in US private

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credit.

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It goes on to say, strains are building in
US private debt as underwriting weakens

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and defaults rise.

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In contrast, investors in emerging markets
can access higher senior secured yields

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with stronger...

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protection.

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It's an unusual situation.

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With me now is Alper Kilic, who is head of
alternative credit at 91 in London.

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The reason I say it's unusual, Alper, is
because you normally think of stability in

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developed markets, not emerging markets.

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But in this case, it's gone 180 degrees, I
think.

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This is true.

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First of all, I think it is the
perception.

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And I guess the way that I define it is
that perception versus reality.

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Understandably, emerging markets, more
difficult markets, more risk.

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versus more stable, more established
developed markets.

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But I think what we have been seeing in
relation to specifically the private

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credits over the last few months

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is proving that actually it is wrong.

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And I guess we have been making the point
as

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91 and also personally myself for a long
time that this was bound to happen

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because I guess we've been watching the
market very closely and we were due to see

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some...

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credit defaults and losses.

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And it has happened.

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And we do expect that it will continue to
happen.

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Whereas the story in the emerging markets
is different.

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And I'm sure we'll talk about the details
of it.

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But actually, in terms of the quality of
the credit deals defaults,

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we have seen a great stability in the
emerging markets despite the challenging

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market conditions.

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So that's why we made that statement.

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There was a very well-known CEO of a very
well-known Wall Street bank that was

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quoted from a conference.

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In fact, I saw the interview, and he sort
of gave us a warning about developed

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market credits, particularly

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U.S., and he didn't say that it was going
to cause the market to crash.

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But I have seen headlines saying, is U.S.
private credit debt the next subprime?

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Surely it hasn't gone that far, has it?

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I don't think it has gone that far, and I
don't think if the You know,

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if the real question is that we expect a
systematic risk here, I really don't think

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so.

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But I think in between, there will be some
winners and losers.

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And I think it's going to get worse before
it gets better.

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I mean, you know, the well-known CEO of a
well-known bank is not liked by many in

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the private credit sector in the U.S.

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at the moment.

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I do quite like him, actually.

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You know,

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what he is referring to is a beer-prudent
lender and use common sense.

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And I think there's nothing wrong with
that.

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I think what we are seeing in the U.S.,
we've seen the results of it,

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but I guess the causes for it is that
there's so much liquidity, there's so much

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funding,

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and there is huge pressure for deployment
from the large U.S. private credit houses.

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And they have defined U.S.

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as their core market, and in particular,
they have further defined...

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a category in terms of where their lending
activities will take place.

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And they define to say that most of the
activities happening in the

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sponsor-backed,

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non-banked, mid-tier direct lending.

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That's how defining their market.

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And when you have billions and billions
and billions of dollars chasing that

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particular market,

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what has started to happen is that losing
underwriting conditions, creditors chasing

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the same deals.

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no concentration risk or you know
forgotten and in terms of the you know

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security

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dynamics in terms of the covenants we
started seeing a really loose practice and

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all of that

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combined together you

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know force the cracks to appear and and
and that's why you know with the high

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profile

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defaults whether it's tricolor or or first
brands that

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which made the headlines.

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That's caught people's attention and then
made the investors worried, and therefore

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investors started demanding their money.

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So I think the underlying is really bad
credit decisions driven by a huge amount

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of

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liquidity and dry powder chasing the same
market and same kind of

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underlying borrowers and here we are.

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Yeah, and here we have an asset class
which wasn't that well known a couple of

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years ago, private credit that is.

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It's grown into roughly a US$3 trillion
global asset class.

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It's become crowded in the United States,
as you've said.

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And from what you're suggesting, it has
prompted slack practices.

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Is that a little bit too simplistic?

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I think it is exactly what happened.

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And the way I define that is that it's
almost like I started...

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My background is I'm a banker.

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I've done basically structured debt and
credit all my life, close to 30 years.

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And a long, long time ago, when I started
banking, we had the first, if you will,

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the training, credit training.

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That was Credit 101.

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And the concept was be a prudent lender.

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Use common sense.

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Use your tools available in your toolbox,
which is your security, which is your

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governance.

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That's how you stay on top of the credit
situation.

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Choose your borrowers carefully.

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Credit 101.

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And I think, you know, that principle
hasn't changed.

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So the asset class itself as private
credit,

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it is there for a reason.

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And the reason has been that the banks
have also been

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stepping back, especially when...

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comes to term lending,

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because there is a lot of pressure and
challenges and restrictions for the bank

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to

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maintain their capital base, especially in
relation to Basel III and Basel IV

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regulations coming through.

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And they have been focusing more on the
short-term lending space, more working

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capital, trade financing.

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It's not that they don't do term
financing.

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They do, but their capital requirements
are much higher.

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So therefore, the banks have kind of...

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pullback and you have institutional
investors such as your insurance companies

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such as your pension

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companies and basically they they they
have from their own clients

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uh term long-term uh financing and
liquidity capabilities so essentially it's

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all about the long-term

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assets matching the long-term liabilities
and so the private credit players

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are basically using that capability to
work with their institutional investors,

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and therefore,

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they match their assets and liabilities,
and they raise those liabilities through

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their clients,

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and they place them into the term assets.

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There is nothing wrong with it, and I
think it works.

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It's a working model.

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And I don't think in that space, if
everyone plays their roles carefully, I

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don't think there will be losers.

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the big because the borrowers are
benefiting from it.

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They need long-term financing because
whether it may be CapEx, new investments,

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acquisitions and whatnot,

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and the creditors are matching their
assets and liabilities, and they're also

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supporting a viable,

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sustainable business model.

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Cracks start to happen when people move
away from what they're doing, what they're

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supposed to be doing.

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And that's why, I guess, we are facing
this issue right now.

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And also the US market, the participants
chase software as a service and business

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services,

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where in emerging markets, you've got, as
you put it,

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an opportunity set dominated by
asset-heavy,

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cash flow generative borrowers with
limited exposure to sectors most

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vulnerable to AI disruption.

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So in other words,

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solid institutions that generate cash flow
with far less risk than the US business

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model, I would say.

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That's exactly true.

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I think I can understand the headlines
again, because there is not a day that

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goes by, you know,

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with us not talking about AI, AI growth,
technology, absolutely.

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But when it comes to credit, when it comes
to lending to those entities,

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we look for established business models,
we look for stable revenues, we look,

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we try to understand from our borrowing
clients who their clients are, do they

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have contracts?

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how sustainable those cash flows are.

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And as we all know, cash is king.

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We do pay attention to cash flows and
revenue.

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So on the contrary, when you look at the
story in the U.S.

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vis-a-vis the growth of AIs, yes, there is
a lot of growth potential.

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There is a lot of growth, I guess,
expectations.

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We all understand it.

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We all get it.

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But then it is also very volatile.

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The dynamics change a lot.

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technology change a lot clients move
around a lot so if you are entering into a

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credit relationship

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with a name software name like that
without establishing the fact that their

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revenue and cash flow

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generation model is stable before

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you know it actually market dynamics may
change and you find your borrower not

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being able to repay your debt

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In emerging markets, the approaches we are
taking is asset-backed,

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stable revenues.

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Also, a significant majority of what we do
is secured lending.

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So we put charge on those fixed assets.

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We put charge on the assignment of the
receivables from our clients.

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We work with them.

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We agree with the covenants with them.

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But the concept of covenant light, To be
honest with you, it doesn't exist in EM.

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We've never done it.

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You do negotiate your covenants, of
course, but there is always covenants.

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There's always security.

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There's always plan A and plan B.

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There's always concentration risks.

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So the underwriting standards in EM, and
that's pretty much across the board,

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and has been pretty stable.

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And as a result of that, while of course
we do see three credit issues,

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it will be naive to say that there's no
credit issues.

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It is far more manageable compared to what
we are seeing in the US in particular.

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So what do you see happening?

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Do you see the US now sort of stabilising
because no new participants will come into

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the market because it's a crowded market
and

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because the pickings are rather slim?

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And on the other hand, do you see the
emerging market being targeted by the same

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sort of players that

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might play in the US and therefore the
situation comes full circle?

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What would you say?

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rotation.

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But the dynamics are very different.

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I guess rather than the players coming
into emerging markets and changing the

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market dynamics,

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in emerging markets, the credit standards
and credit behavior has been pretty

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established.

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Second of all, and there's an important
differentiation here, in the asset class

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that I highlighted to you at the moment in
the US,

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a lot of that is non-bank.

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Therefore, private credit players are not
working with the banks.

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They are basically working outside of the
banks and going directly to those

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borrowers.

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Now, it's a business model.

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It may work for some.

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But in emerging markets, and we refer to
emerging markets, of course, it's huge.

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I mean, if you look at it, depending on
how you define it, right, it may go from

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anywhere from, you know,

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120, 30 to 200-odd markets.

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The way that we define it, and when I look
at it, I define it as where the big flows

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are,

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where the big infrastructure needs are,
where the big...

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established economists are, probably we've
identified for 91's purposes about 15

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markets,

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that is Asia, Latin America, and it's
SEMIA, that's basically Middle East,

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Central, New East, Europe, and Turkey.

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So out of those 15 markets,

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the banks are active in terms of their
origination model, in terms of their

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network.

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And the differentiation I'm trying to make
here is that In emerging markets, we still

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work with the banks.

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We work with the banks because we partner
with them in origination.

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We do syndicated deals, we do club deals,
and despite that,

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we are still able to generate very
sustainable returns.

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And as a result of that and that market
dynamic,

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I think trying to displace the emerging
market credit standards

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and follow the examples of what's happened
in the U.S.

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will not be realistic any time soon.

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And then the second point is that while it
is perhaps not 200 markets, it's 15

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markets,

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it is still 15 different markets.

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So it is still the understanding of those
dynamics locally, those borrowers,

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those regulations.

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It requires a lot of effort and hard work.

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Therefore, I don't think it is.

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Easy to replicate to say that I have a
huge amount of dry powder and I'm going to

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go and change the credit standards.

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And third of all, I think it will be
almost a recipe for disaster, having seen

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what happened in the U.S.

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And if they try to replicate the same
model once again,

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I don't think how much investor support
and investor appetite those institutions

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will get.

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That's why I think it's quite limited to
see this similar deterioration in the

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emerging markets.

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I'm just looking at the 91's platform and
some of the deals that it's done.

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Very diverse indeed, Alper.

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You have done a deal with a Vietnamese
renewable company in South Africa.

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This is an interesting one.

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Infrastructure development to facilitate
the building of apartments targeting low

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to middle income homeowners.

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And also you go to Latin America, a cold
storage logistics supplier.

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Are you still seeing lots of opportunities
in emerging markets?

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We are seeing tons of opportunities.

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We are seeing tons of opportunities and
our focus is basically in two main areas.

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One is infrastructure and the way that I
define infrastructure is it is pretty much

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from energy, generation,

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transmission, distribution to
transportation.

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Roads, motorways, railways, telecoms, that
is fiber,

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that is towers, that's data centers,
healthcare, hospitals.

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So the entire universe of infrastructure
is where the demand is.

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There are different numbers, but I think
it was through

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World Bank that they've announced that the
annual infrastructure gap in emerging

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markets is

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about...

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two trillion dollars.

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Two trillion dollars, right?

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So if you look at the low and middle
income countries, China, Indonesia,

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Brazil,

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Turkey, and India,

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those five markets make 70 percent of that
infrastructure kind of a demand.

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So our focus is infrastructure because
there is a lot of need

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and the growth story of those economies.

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compared to developed markets is about 2%
more.

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So according to the World Bank's numbers,
the expectation is about, in those

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markets,

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average growth rate is about 3.4%, 3.5%,
whereas in developed markets,

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you have about 1.4%, 1.5%.

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So economies are growing.

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Infrastructure is leading this growth, and
it's wide-based, driven by energy, but

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other sectors as well.

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And we are seeing a lot of opportunities.

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And the second area where we are seeing a
lot of opportunities is well-established

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local corporates in those markets.

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And the reason for that is that
infrastructure demand is not going to be

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supplied

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miraculously, you know, on its own.

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So you need local entities, those
corporates to deliver that infrastructure

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growth,

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and perhaps even outside of the
infrastructure specifically.

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So our focus is where there's an
infrastructure.

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Related project or corporate and the
entities,

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local corporates who are champions in
their countries, in their regions,

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who will deliver that growth story.

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So when I look at that main area, we see a
lot and a lot of opportunities.

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We can almost still choose the right
opportunities we want and decline the ones

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that we don't feel comfortable.

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That could be because of structuring.

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That could be because of the...

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Track record of the companies or projects,
it could be yield driven.

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We have a pretty specific target in our
mind.

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And with that target in mind,

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we are still seeing a lot of deal flow
coming directly from our borrowing clients

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through

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our partner banks.

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We are working a lot with the advisor.

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We are working a lot with the DFI, the
likes of IFCs, AFDBs, AIBs, EBRDs.

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They're all very good partners of us.

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So, you know, deal flow is abundant and we
are able to, you know, choose and focus on

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the ones that work for our cities.

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It's such an interesting subject and it's
a subject we wouldn't have been talking

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about, as I said in my introduction a few
years ago.

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Alper, thank you very much for your
insights.

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Alper Kilic is Head of Alternative Credit
at 91 in London.

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The views and opinions expressed in these
podcasts are those of Lindsay Williams and

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various contributors and do not reflect
the policy,

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position or the views of the audience.

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or opinion of any other agency,
organization, employer,

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or company associated with
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Assumptions made on the analyses are not
reflective of the position of any other

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entity other than the speaker or the
author.

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And since we are critically thinking human
beings, these views are always subject to

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change, revision,

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and rethinking at any time.

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