Many analysts blame a combination of weak global demand and surging shale production in the U.S. for the rise in oil inventories and price weakness. The facts do not support this assessment. In April 2018, OPEC states and Russia (together known as “OPEC2”) were producing 43.3 million barrels per day (“bpd”). By November 2018, OPEC2 increased production 1.4 million bpd adding approximately 175 million barrels to global oil markets over seven months. However, global inventories grew by only 25 million barrels relative to long-term averages so without the OPEC2 production increase inventories would have drawn massively by 150 million barrels even accounting for the stronger than expected production from U.S. shale basins.

The short-cycle nature of shale production and the intensity of activity in basins like the Permian, Bakken and Eagle Ford is resulting in drillers being forced into less desirable locations. Production from Tier 1 well locations (i.e., those with the best pay and optimum pressure) is starting to shift to Tier 2 wells that do not have the same rates of productivity. Production per new well in 2018 from U.S. shale grew by less than 1% even though average drilling lengths and proppant (solid materials like sand used to keep well fractures open) loads increased. Standard Chartered Bank believes producers have gone from drilling 100% Tier 1 wells in both the Eagle Ford and Bakken to 50% and 30% Tier 2 wells in each basin, respectively. If this trend continues then productivity per well will decline and U.S. shale will see production rollover sometime in 2019. In a recent earnings conference call, oilfield services giant Schlumberger alluded to disappointing results in so-called “child wells” in the Permian, “Parent” wells refer to the first well drilled on a pad in a virgin section of land, while “child” wells simply refer to the subsequent wells drilled. When child wells are experiencing performance degradation of as much as 30% compared with parent wells, then it is a sign that a field is already in the middle-phase of its development. This confirms that shales are showing signs of exhaustion. There is also anecdotal evidence that many shale producers are overstating well projections in their corporate presentations1, further highlighting the steep decline rates of shale basins.

It is clear that the largest oil exporting countries are keen to drain global inventories. A coalition (the “Oil Coalition”) of OPEC states, led by the Kingdom of Saudi Arabia (“KSA”), and non-OPEC states led by Russia, recently agreed to cut production by approximately 1.2 million bpd to reduce oil inventories and re-balance supply globally. KSA alone cut nearly 450,000 bpd of production in December 2018 and has indicated plans to drop production further by March 2019. Russia’s production quota in the Oil Coalition is 11.2 million bpd in 2019, which is 200,000 bpd less than October 2018 reference levels. While there is some disagreement among top ranking Russian officials over production cuts, to the extent that participation in the Oil Coalition satisfies Russia’s economic and geopolitical interests, primarily higher revenues and deeper ties with KSA, then Russia should continue to honour its quota.

Non-OPEC oil supply outside of the U.S. and Russia has been in secular decline. Over the past decade, conventional non-OPEC discoveries totaled just 110 billion barrels while consumption equaled 360 billion barrels. We believe most market participants are underestimating the intense deterioration of oil production in the rest of the world. The supply estimates of the International Energy Agency (“IEA”), which form the basis of most energy analysts’ models, called for non-OPEC supply ex U.S. and Russia to grow by 600,000 bpd in 2018; that figure has now been revised down to 200,000 bpd, a massive 65% reduction. The IEA expects non-OPEC production outside the U.S. and Russia will grow by 125,000 bpd in 2019, which seems too high when considering the December oil curtailments in Alberta and chronic underinvestment in the North Sea and Mexico over the past decade.

The IEA’s projections on demand have also not fared well. Over the past eight years, the IEA has underestimated oil demand seven times by an average of 1.2 million bpd on average. According to official IEA statistics, 2018 oil demand averaged 99.3 million bpd, which was an increase of 1.3 million bpd over 2017. However, the IEA also reports a “miscellaneous to balance item” account of 1 million bpd, which are essentially “missing” oil barrels that are unreported and have gone into commercial storage away from official inventory counts (for example, in ocean tankers or cargo trains owned by private trading firms). According to Reuters, these missing barrels represent underestimated non-OECD demand. These missing barrels have been accelerating in recent months and will further narrow global oil balances in 2019.

The biggest headwind to oil prices is the global economy and more specifically the world’s demand for oil. Emerging market commodity demand growth, the engine for global growth, has been slowly trending down since the beginning of 2018. BCA Research recently developed a proprietary index, the Global Industrial Activity (“GIA”) index that measures the strength of the underlying global demand for commodities (Figure 4). The GIA, according to BCA Research, is close to or in a bottoming phase and ready to turn up within the first half of 2019. The GIA captures more than 80% of the variation in the movement in oil prices The biggest headwind to oil prices is the global economy and more specifically the world’s demand for oil. Emerging market commodity demand growth, the engine for global growth, has been slowly trending down since the beginning of 2018. BCA Research recently developed a proprietary index, the Global Industrial Activity (“GIA”) index that measures the strength of the underlying global demand for commodities (Figure 4). The GIA, according to BCA Research, is close to or in a bottoming phase and ready to turn up within the first half of 2019. The GIA captures more than 80% of the variation in the movement in oil prices and lagged the synchronized global upturn of 2017 by only a couple months. The long-term energy demand story for emerging markets remains in place. According to Energy Intelligence Group, oil demand outside the OECD is at the highest levels in two decades and exceeds OECD oil demand by more than 4 million bpd.

The production discipline of OPEC2 and the Oil Coalition, slowing shale-oil output, and rising industrial commodity demand from emerging market countries have setup oil markets for another surprise – this time, to the upside.

The biggest headwind to oil prices is the global economy and more specifically the world’s demand for oil. Emerging market commodity demand growth, the engine for global growth, has been slowly trending down since the beginning of 2018. BCA Research recently developed a proprietary index, the Global Industrial Activity (“GIA”) index that measures the strength of the underlying global demand for commodities (Figure 4). The GIA, according to BCA Research, is close to or in a bottoming phase and ready to turn up within the first half of 2019. The GIA captures more than 80% of the variation in the movement in oil prices and lagged the synchronized global upturn of 2017 by only a couple months. The long-term energy demand story for emerging markets remains in place. According to Energy Intelligence Group, oil demand outside the OECD is at the highest levels in two decades and exceeds OECD oil demand by more than 4 million bpd.

The production discipline of OPEC2 and the Oil Coalition, slowing shale-oil output, and rising industrial commodity demand from emerging market countries have setup oil markets for another surprise – this time, to the upside.

Excerpted from Third Eye Capital Management Inc.’s Q4 2018 Investor Letter.

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The size of the U.S. leveraged loan market has nearly doubled since the end of 2007 to USD$1.1 Trillion. Already this year, the market has grown another USD$133 Billion through to the end of August 2018 (according to S&P LCD). There are now at least 306 unique, nonbank institutional loan groups participating in the primary loan markets; there were a similar number in 2007, according to S&P LCD, but less than half of those survived the GFC. The tsunami of capital accumulation has compressed credit spreads, pushed the boundaries of acceptable leverage, and given borrowers unprecedented bargaining power.

It has been relatively easy for borrowers, even the most distressed, riskiest borrowers, to access credit for opportunistic purposes; that is, credit not for growth and investment but rather to extend maturities, lower pricing, or enrich shareholders. For the twelve months ended September 30, 2018, loans for opportunistic purposes in the U.S. accounted for approximately 45% of new loans by dollar volume and 51% of new loans by number. According to data compiled by Bloomberg, junk-rated companies have reduced their bonds maturing in 2019 by more than 40% and most sub-investment grade issuers have successfully “kicked the can” to as far as 2025. This is a big paradox for debt markets today: the “smart money” is warning of a downturn (see our Q2-2018 letter) yet they are happy to postpone the inevitable reckoning for their most troubled borrowers. TEC does not lend money solely for opportunistic purposes. Our adage is to “lend money, to make money” and therefore we only invest to increase value in our portfolio companies.

Research from the Bank for International Settlements (“BIS”) shows that in the wake of the GFC, the prevalence of so-called “zombie companies” has significantly increased as a share of the total population of non-financial companies. Zombie companies, a term we first used at an investment conference in Toronto in October 2008, are companies unable to cover debt servicing costs from earnings and have assets with realizable values less than their debts outstanding. BIS suggests that “the ratcheting down in the level of interest rates” after the GFC reduced the pressure on zombie companies to restructure or exit. This reduced pressure does not reflect improvements in profitability; in fact, BIS results showed that zombie companies performed worse in terms of EBIT-to-asset ratios compared to nonzombie companies. Across fourteen advanced economies studied by the BIS1, the share of zombie companies rose, on average, from around 2% in the late 1980s to 12% in 2016. Canada’s outbreak might be worse.

Deloitte LLP analyzed financial data of 2,274 companies listed on the Toronto Stock Exchange and the TSX Venture Exchange from 2015 to 2017 and found that at least 16% could be considered zombie companies. This likely understates Canada’s zombie problem because of the narrow definition used by Deloitte to define zombie companies and the consideration of only publicly-listed companies. Regardless, there is clearly massive amounts of capital locked-up in underperforming businesses that misallocate resources, drag productivity, and lower economic growth. Credit Benchmark, a financial data analytics company, points out that over the past eighteen months, U.S. companies with debt ratios of greater than 75% have seen default risks increase by nearly 40%. Zombie companies are ticking time-bombs in the current credit markets.

Since 2013, S&P LCD has been tracking the queue of at-risk credits in the leveraged loan markets – meaning those loan issuers with a corporate credit rating of single B- or lower (excluding defaults) by S&P Global Ratings and that have a negative outlook or implication. S&P LCD has termed these at-risk credits as “Weakest Links” and found that their share of the U.S. leveraged loan issuer universe has now spiked to 7.2%, the second-highest level on record. Weakest Links can be thought of as issuers infected with the “zombie virus”. The one-year default rate after becoming a Weakest Link has steadily grown in the five-year history of the analysis despite the strong credit market environment. Of the 2017 year-end Weakest Links, a whopping 14% defaulted or restructured. Contrast that to the one-year default rate for credits rated single B or higher, which is under 1% for the comparable time period. So far in 2018, the leveraged loan issuers that have defaulted had been Weakest Links for an average of 2.5 years. So while the credit bull market has bought time for weaker credits, it has not allowed them to avoid the inevitable. The combination in today’s economy of rising interest rates and higher wages (zombie companies likely must pay more to attract talent than uninfected firms) risks a major wave of defaults in the next recession.

Zombie companies need copious amounts of capital to survive and will therefore tend to swarm where capital is abundant and desperate to invest. It is certain in our minds that a lot of zombie companies are lurking inside the legion of private debt funds and other institutional loan portfolios that formed after the GFC. The market focus of the vast majority of private debt funds over the last decade has been the fabled “middle-market”2 where companies are presumed to be ignored by banks and other traditional sources of financing. Canada is a small and medium-sized enterprise market: 99.97% of businesses have less than 500 employees representing 90% of the workforce and 30% of GDP by province, according to Statistics Canada. It is where both Canadian chartered banks and alternative credit providers conduct most of their lending activity albeit on distinct risk parameters. In the U.S., middle-market companies represent just 3% of all U.S. businesses but account for a substantial one-third of GDP and employment, making the middle-market larger than the entire Canadian economy.

Not surprisingly, the middle-market in Canada, and to a lesser degree in the U.S., is where TEC has historically trafficked. Unfortunately, the middle-market has become in our opinion the ultimate graveyard for zombie companies. In the U.S., non-bank financial companies and private debt funds today hold 91% of all middle-market loans based on S&P LCD data. So many private debt funds have calibrated their size, structure, and strategy to the middle-market that it has created a positive feedback loop of more capital leading to more borrowers leading to more capital, and so on until eventually lenders are lending based on future expectations rather than current cash flow or values. This is an example of reflexivity, a theory popularized by successful speculator and failed philosopher George Soros3, in which participants’ expectations about a market and the actual state of the market create a “two-way connection” where the behaviour of the participants shapes the market. This is readily evidenced by the steady climb in total leverage multiples for middle-market lending transactions over the last few years; according to Refinitiv LPC (formerly, the Thomson Reuters Loan Pricing division), average debt-to-EBITDA was almost 6.5x in Q3-2018. Private debt funds are still raising capital on the premise of opportunities in the middle-market yet they do not realize that it is the aggressive lending actions of their peers influencing such opportunities.

Private debt funds and their investors are ignoring Wayne Gretzky’s advice, “I skate to where the puck is going to be, not to where it has been.” The premium in spread that lenders in the middle-market expect to get paid has narrowed significantly. The average yield premium for middle-market loans above larger loans in the U.S. has been a paltry 1.20% between 2011-2017, according to Refinitiv LPC. We believe the puck in loan markets today is heading toward larger companies (with enterprise values more than $200 Million). Banks have increasingly shifted from being principal investors in larger loans to brokers or arrangers that prefer to make highly profitable syndication and transaction-oriented fees in distributing these loans. This works especially well when market liquidity is high; however, turnover has substantially decreased since the GFC reflecting structural changes in bank’s marketmaking and proprietary trading activities. We have noticed that larger financings ($100 Million or more) are taking longer to execute in the Canadian bank market. This means larger companies wanting to access debt may be facing greater uncertainty in timing and execution than smaller firms despite their bigger scale and generally higher credit quality. Larger companies have performed better than smaller companies during the past three default cycles according to Morgan Stanley research. Given our late-cycle view, we believe large company loans are where risk-adjusted returns are most attractive and will provide the best cover when defaults climb again. Private debt funds with large committed pools of capital, established reputations in their target markets, and long-term skills and experience in managing complex loan workouts have an advantage in this environment.

Potential Lost

According to official survey data, businesses in Canada and the U.S. appear to have finally bought into the demand recovery story and are raising expectations of future capital investment spending. Apparent strength in the economy and job growth are encouraging firms to upgrade their revenue and profit outlooks, and any tentativeness caused by trade tensions was removed after Canada, U.S., and Mexico recently reached a pending free trade agreement. With business loans easy to obtain, we would not be surprised to see capital expenditures accelerate through to the end of 2019. This will especially help manufacturers, materials companies, and energy producers which have lagged other major industrials in the post-GFC recovery. BCA Research notes that the average age of non-residential capital assets has risen to the highest level since 1962. Cautious investment sentiment in the aftermath of the GFC has created pent-up demand for fixed assets, meaning the replacement cycle for business investment may be in the early stages.

The IMF estimates that global investment in 2017 was at least 20% below the level implied by the pre-GFC trend. The IMF blames reduced bank credit availability, but the problem is more about the choice made by companies to prioritize shareholder friendly actions (like share buy-backs and dividend recaps) over business investment. In order to fulfil capital spending intentions, businesses need access to credit, and as readers of my quarterly letter know, there is a lot of credit available today. Based on data tracked by the Bank for International Settlements, non-financial corporate debt is outpacing GDP growth in the developed economies (Figure 1). Corporate debt in Canada is at record highs and is more than 40 points higher as a percent of GDP than in the U.S.

Unfortunately, the aggressive releveraging by Canadian businesses has not coincided with an increase in spending on new machinery and equipment (“M&E”), a category of spending that C.D. Howe Institute, a non-partisan economic research organization, says affects Canadian prosperity. Relative to the U.S., which accounts for approximately one-half of total OECD investment, Canadian M&E investment per worker has had a dismal record.

Today, Canada’s gap in investment is the widest it has been in thirty years, which the OECD calculates to be a record 40% less than what U.S. businesses invest per worker. This trend is worrisome for the future competitiveness of Canadian businesses. By stalling investment for a prolonged period, businesses risk permanently reducing their long-term potential. The resulting loss of output cannot be regained.

The C.D. Howe Institute estimates that post-GFC Canadian businesses have mostly chosen to use internally generated funds to increase liquidity buffers, presumably, to insure against another economic downturn. Investment intentions, however, appear to be rebounding and a majority of businesses surveyed by the Bank of Canada are planning to increase investment spending in response to anticipated strength in demand, capacity pressures, and the “need to keep up with competitors.”4 In order to achieve investment levels more in line with their counterparts in the U.S. and other OECD countries, Canadian firms will need to borrow more and increase external financing. However, there is little spare capacity for banks to finance business investment in Canada given the extended run in the current credit cycle. This further enhances the business case for experienced non-bank, alternative lenders in Canada, who can provide creative financing solutions to make companies more competitive.

Excerpted from Third Eye Capital Management Inc.’s Q3 2018 Investor Letter.

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Operating margins for companies in the S&P500 have reached twenty-five year highs, fueled largely by tax cuts. However, wage growth has lagged and lack of human, not capital, resources has become the top constraint for businesses in both Canada and the U.S.[1], suggesting labour prices have lots of room to run. BCA Research’s Margin Proxy indicator, which tracks the ratio of selling prices for the non-financial corporate sector to unit labour costs, appears to have peaked. Similarly, nominal GDP growth minus aggregate wages is trending lower reaching levels that coincided with previous recessions. The turn in corporate profit margins is worrisome in an environment when bond yields are headed higher. More reason for caution by credit managers.

The flattening U.S. yield curve is also troubling. The spread between the 2-year and 10-year yield is at just 25 basis points, close to its lowest since 2007. With increasing odds of at least two more rate hikes by the Fed, an inverted yield curve looks to be imminent and could curtail lending by banks affected by the consequent compression in net interest margins. As Grant’s Interest Rate Observer recently reminded its readers, an inverted yield has historically had ominous implications for economic growth. A flattening and then inversion of the yield curve in the U.S. has preceded every global recession since the 1970s. It would not be surprising to see the “smart money” begin to reduce risk exposure in anticipation of an inversion and hasten a downturn.in the economy.

Judging by the change in spreads, the implications from trade uncertainty have not yet been fully discounted by corporate bond markets. On March 1, 2018, U.S. President Donald Trump announced tariffs on steel and aluminum, and followed up in the same month with tariffs on US$50 Billion worth of Chinese goods including components used by aeronautics, technology, and materials companies. China retaliated with new tariffs on various U.S. food products and automobiles and their components. Since then, based on specific industry high-yield bond indices published by ICE, the industries that investors believe will be most negatively directly affected by a trade war were automotive, services, building materials, and food and beverage. Surprisingly, spreads on junk bonds in the aerospace and technology sectors actually narrowed. It seems that investors are willing to shrug-off the contractionary impact of a trade war as just as another buying opportunity. This is a mistake.

Today’s supply chains are much more tightly integrated and global than they were in the past. According to the Global Value Chain Participation Rate published by the OECD, nearly every multinational company in the S&P500 is exposed to extensive supply chain networks. This means even industries that are not directly affected by rising tariffs will be impacted by the higher costs for imported goods passed along the supply chain. If a trade war becomes protracted, which is very possible given Trump’s nationalist and authoritarian tendencies and unconstrained government powers on trade, global GDP would decline, business confidence would fall along with capital spending, and prices for consumer and capital goods would rise. All of this combined with tighter monetary policy from the U.S. Federal Reserve means a recession or economic downturn would be virtually assured.

The ongoing importance of security selection over index exposure cannot be overstated. The threat posed to credit investors from a trade war is significant, particularly given already elevated bond prices, low spreads, and high leverage. TEC’s portfolio has relatively low direct exposure to global trade. Our largest loans are in the energy and software sectors, where production costs and sales are domestic in the case of the former, and business activity is independent of trade flows or global supply chain networks.

There is a growing number of risks, both internal and external, affecting private debt investors today. It is going to be sudden death for many of the uninitiated and unprepared lenders currently active in the market. “Smart money” institutional investors are increasingly focusing on private debt managers that have expertise in managing distressed and special situations, a quality difficult to find given the relative inexperience of most participants. The ability to successfully resolve problem loans must be a mandatory core competency for lenders; unfortunately, this only becomes apparent when the cycle turns, and losses suddenly occur.

[1] BLS June 2018 Labor Turnover; CFIB June 2018 Help Wanted

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Similar to the end of the 1990s expansion, investors today are juxtaposing a strong global economy with a nearly 10-year-old bull market in risk assets that refuses to quit. The S&P500 is currently trading at 14X EBITDA, which surpasses the previous peak in this multiple in 1999. Back then, occasional bouts of volatility and widening of credit spreads could not stop the animal spirits from creating excessive appreciation in equity and credit markets. Tech stock prices nearly tripled in 1999 and five-year earnings growth estimates from analysts averaged an incredible 18% per year. The unemployment rate fell from 4.3% to 4% by the end of the year. The U.S. Federal Reserve (the “Fed”) declared the U.S. economy to have reached full potential but only gradually rose rates from 4.75% in June 1999 to 6.5% in May 2000. When financial conditions finally tightened, the economy contracted, the U.S. fell into recession, and the adjustment to equity and credit markets was more rapid than expected.

When central bankers cut rates to extremes, market speculation and excessive borrowings are inevitable. So is the pain that comes from the reversal. Today the Fed is unable to ignore wage pressures from an economy that has reached full employment and is (again) reluctantly raising rates until the business cycle turns down. Rising interest rates are the only cure to the current debt hangover, which will eventually encourage another painful deleveraging period. The fact that the riskiest rated junk bonds are outperforming investment grade this year clearly signals that investors are more worried about rate risks than default risks.

BCA Research points out that although households and the financial sector have significantly de-levered since the GFC, total debt has actually grown through a re-levering of government debt and nonfinancial corporate debt. Nearly US$4 Trillion of debt over the past decade has been used to finance dividends or buyback equity, which has unquestionably contributed to shareholder gains. Tighter monetary policy will, however, deflate the current credit bubble and remove a major tailwind to the stock market.

Source: BCA Research

S&P Global recently warned that the current credit cycle has peaked but acknowledged that default rates are not likely to accelerate until 2019. Abundant and cheap financing easily masks default levels because it prolongs the ability of weaker companies to survive and benefit from the extra time to recovery. Corporate profitability looks to have peaked and leverage has hit pre-crisis highs, both indicators of a late cycle point. There is a chorus of opposing views from credit managers, however, that believe the already long-running credit cycle has room to run.

They argue that the fundamental outlook for the economy is strong. In the U.S., real GDP growth is at 2.3% (annualized as of Q1-2018), business investment up 7.2%, real personal consumption is growth at 2.4%, and core durable goods orders rose 7.6% in March 2018, the best annual growth rate in four years. In Canada, consumer confidence is near cyclical highs and wage pressures are increasing. Based on output gap estimates of both the Bank of Canada and International Monetary Fund, there is essentially no spare capacity left in the Canadian economy[1].

Credit managers that expect several more years of expansion in the credit cycle point to commercial loan data to buttress their case. According to Credit Suisse, such data has been a reliable lead indicator for turning credit conditions, with banks historically tightening standards well before a turn in the cycle. The Fed’s latest Senior Loan Officer Opinion Survey shows banks are easing standards, a sign of improving credit conditions. Sixty percent of U.S. banks surveyed cited weaker loan demand in Q1-2018 due to aggressive competition from alternative lenders, which caused banks to loosen access to credit even further. Similarly, according to the Bank of Canada’s Spring 2018 Business Outlook Survey, most Canadian businesses consider credit as easy or relatively easy to obtain.

There seems to be no shortage of demand for credit, judging by the massive US$180 Billion raised for the private debt asset class last year. We see this as a contrarian signal and are not moved by biased credit managers eager to accumulate assets under management for the hottest alternative investment strategy in the world.[2]

The leveraged loan market in the U.S. has topped $1 Trillion according to S&P Global, that’s a doubling in the last 18 months. In predictable fashion, risk premiums have fallen to lowest levels since 2014.

According to S&P Global, a total of 62% of leveraged buyout loans in Q1-2018 had total leverage above 6X EBITDA, and an average of 6.4X for the total leveraged lending market .This can be explained in part by the relaxation of U.S. leveraged lending guidelines, which were introduced by the Fed, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation in 2013, and intended to prohibit banks from making loans when total leverage is above 4X. Borrower-friendly markets created by record levels of investor cash have not just caused leverage to rise (up from 5.9X in 2016) but investor protections to continue to weaken. When we last highlighted the low frequency of covenants in middle-market loans a year ago, we thought lender documentation could not worsen. We were wrong. Covenant quality has declined every month for the last twelve months and is at its weakest levels ever![3]

Bankers and private debt investors are justifying weaker documentation because of the factors described above, all of which are temporarily suppressing default rates. The latest survey of credit managers by S&P Global shows no expectations of rising defaults until at least 2020, a year longer than S&P Global’s own estimates. This benign outlook will encourage more risk-taking by lenders.

Credit managers have returned to the halcyon days when capital was ample, and risk was thought to be scarce. Members of our team, like Dev Bhangui, who was active in financing telecommunications companies in the 1990s, remember the influx of “concept companies” with no cash flows or assets that successfully raised billions in debt. These companies failed in huge numbers around the turn of the century. Similar companies are getting financed today, like WeWork, an office-sharing company described by the Financial Times as an “unprofitable company that does not own hard assets or offer a clear outlook for free cash flow”. On April 25, 2018, WeWork sold a 3X oversubscribed issue of $700 Million senior, unsecured bonds to investors at 7.875%. Alternative investors like Apollo might be partying, but we’re planning…for the coming wave of defaults.

[1] BCA Research

[2] Private Debt Investor, Q1-2018 fundraising data

[3] Moody’s Covenant Quality Indicator March 2018

Excerpted from Third Eye Capital Management Inc.’s Q1 2018 Investor Letter.

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