WATCH: ‘Beware leverage deep in the structure’

Increased leverage deep in the capital structure will cause problems for those firms unable to fix problems, maintains GSO's Dwight Scott in this video shot at the PDI New York Forum.

We caught up with Dwight Scott of GSO Capital Partners at the PDI New York Forum and chatted about the credit cycle, documentation, things that keep managers up at night and the potential perils of leverage.

Full transcript:

It’s a different answer than where we are in the economic cycle I think. It certainly feels like we have more room to run in the economic cycle because of the strength of the earnings of those companies. What is a little harder to put your mind around is where we are in the credit cycle with rates rising, with the Fed tightening and with most of the strategies being really toppy from a spread standpoint, it feels like we’re late in the credit cycle and we’re being very cautious about that.

I think the economic cycle can run longer and we can still have a correction in the capital markets effectively and I think there’s a risk of that today that is different than it was a year and a half ago when the Fed was still thinking about what they were going to do, and we were still early in the tightening cycle.

So much of our strategies are about not making mistakes and so what makes me stay awake at night is making sure that we continue to do what we say we’re gonna do. We do the detailed due diligence, we understand the company risk, we structure our documents appropriately and when things go bump in the night we get in there and we get involved and that’s a big pat of what we do, so for me the worry at night is to make sure our process and our team continues to be strong.

As we see leverage, particularly in new transactions, start to tick up, stepping into too much leverage too deep in the structure is the biggest mistake you can make. It’s not really the leverage quantum as much as where you sit and where you attach and where you detach. So where you make mistakes is where you attach too far down in the capital structure and you cannot fix the problem when the market corrects. And so that’s what you have to be really careful of today.