T.R.I. - Global Economic Environment Implications

foreign [Music] good afternoon your excellencies ladies and gentlemen distinguished guests my name is Dan Chapman I'm the founder and CEO of argentum Creek Partners a great pleasure to be here with you today argentum is an em hedge fund focused on investments in restructuring special situations and distressed we started our business in 2015 a result of a spin out from Cargill but our roots go way back we've been investing in emerging markets for 30 plus years first on the sell side with JP Morgan and then on the buy side with black Black River Cargill unit and ACP um tonight we are today we have a impressive lineup of speakers um here for you today covering buy side and sell side as well as Legal Financial and uh advisory firms uh that investigative front in advisory firms um so investing in um special situations restructuring opportunities it's a multi-disciplinary approach um and I expect the benefit of listening to these advisors and professionals that we have here today we'll leave you with a great deal of knowledge about the opportunities and how to navigate these uh these these opportunities in current environment uh before I uh begin uh I'd like to friend thank our friends at adtm for organizing this uh event and uh bringing these thought leaders across these disciplines and sectors the regions uh to address the broad spectrum of issues that are creating this opportunity and awareness around restructurings and turnarounds I'd also like to thank our partners at Abu Dhabi investment office um grateful for their support and guidance it's been an integral part of accelerating argentum's expansion into the region where we just opened an office here in adtm now let's turn to why we're here today em restructuring is what lies ahead I think we can all agree that the world today is a different place than where we were a year ago but going back a dozen years or so as a financial investor the world of risk has changed a lot since the global financial crisis recent Trends are quickly unwinding and some of those changes are having a profound effect on markets today historically speaking the Global Financial Marketplace is inherently volatile unstable basically a two-way bet but with recent interventionist policy across various different governments the marketplace is operated with more of a sense of stability a buy that dip mentality which has been the case for quite some time but now the tides are changing and I think we all need to pay attention to what's going on uh the transition to the new Financial environment of higher costs inflation interest rates combined with increasing geopolitical conflicts requires careful navigating generally speaking the 0809 GFC has been considered a benchmark period for major and distressed opportunities in EM over the past few decades in our view we may be seeing today an opportunity that rivals or exceeds the GFC which was a time that generated great returns for distressed investors post GFC we've seen Trends in the markets driven by government policy so stimulus historically low interest rates set by central banks low inflation and this is resulted in a unprecedented increase in the level of debt corporate debt issuance and outstandings um let's see if I can get this so uh a chart can say a lot more than words so I'll pull up okay so the chart you see here is a simple chart about em corporate external bonds outstanding and how that's grown since 2004. uh the chart shows hard currency bonds only while this is a subset of the overall amount of debt in Emerging Markets corporate debt Emerging Markets we view this as a reliable data set that shows Bond specifics but indicates overall em debt trends of all types so the space is much larger than you see here but this this data is is very indicative of what's happened overall so when I started my career uh my em career in in sort of prehistoric times 1989. um there were almost no em bonds uh we were trading Sovereign loans most of them were defaulted at that time um but in 2004 when I started my career on the buy side which is where this chart starts um you know the corporate Market um was about a quarter of a trillion um uh face value of outstandings uh leading up to the GFC we had uh impressive growth um so Market size doubled between 04 and um and uh 09. uh and then the stimulus fueled explosion uh of debt happened post GFC we're now from the GFC 09 to to today at 2.6 trillion of outstandings Justin hard currency bonds five times the outstandings prior the outstandings prior to um to the GFC it's a big number I think you should take a moment and let that sink in um so it it's also important to note while that number is large um 40 percent of the debt that outstanding the the of these outstandings uh those mature in the next three to four years uh that is a significant challenge I think to many of these corporates in Emerging Markets uh it's our expectation that while defaults have been elevated we are going to see we're going to see more defaults um overall levels of em distress already exceed uh what we saw in the GFC in terms of quantum but with the debt stock as big as it is today we believe that is far from over successfully navigating these periods of transition and turmoil can be extremely attractive opportunities for investors so while this sounds challenging it's not all bad news um there are a range of positive things to note for example overall net leverage metrics are actually down materially from the coveted Peak for Em High Yield issuers the amount of net leverage in a in an Em High Yield issuers about half that of U.

S issuers and about one-third of that of European high yield issuers so um this we think May indicate a future access to credit problem um rather than a solvency problem that's a classic baby with the bath water type of trade that's usually a good trade to do in Emerging Markets secondly on the legal and Regulatory front uh we feel like regimes have generally improved in many jurisdictions um since the GFC that means tools for Recovery are stronger and therefore restructuring processes restructuring prospects rather are better lastly some places are actually doing well in this environment the GCC is a good example as we've seen here this week Abu Dhabi specifically is is thriving proactive and dynamic strategy and we feel like in a position to benefit so there are winners and losers there are also a lot of challenges in my experience a healthy dose of skepticism is a way to survive in Emerging Markets over the Long Haul and as we transition to to the panels I think a questioning mindset is important and here are some of the questions I keep in mind I'm sure there will be many more that I hope you all ask of the panel and they'll have for us but firstly you know how will Rising interest rates and inflation with the Specter of a recession impact Em are we in for an epic default cycle uh secondly is the strong USD a major problem for emerging markets will higher risk-free rates crowd out Emerging Markets borrowers and create a home country bias if you can invest in a U.S treasury at four percent do you really need to go to em um uh geopolitical risks food security energy security uh the impact on Emerging Markets how do you navigate this and is globalization reversing the jury is out on that um finally expanded use of sanctions um the sanctions as a weapon frankly how does this impact em Borrowers and how do investors navigate this um tough question uh active management and this environment can index and passive investing work in emerging markets do we need more specialization to navigate these complex situations that we face these are just a few questions to get us started I look forward to hearing from the panel on these and others this afternoon we hope to address these questions but also benefit from Lessons Learned by this highly experienced panel um many of these folks I'm very interested to hear what they have to say we've worked with many of them Key to Our Success is having a great team our team is argentum and a lot of the folks you'll see here today so uh I look forward to to hearing the panels and um hope you're uh uh excited as I am to get on with the day um enjoy the rest of the conference thank you [Applause]