Steven Tananbaum: The Evolution of Credit Investing and AI Opportunities

So when I think of AI on the credit markets, I think of it two ways. First is economically, because it's such a driver of our economy. It's hard to see how it's going to actually accelerate from here. So the issue is if it de-accelerates, what's going to be the impact? That's probably, to me, the biggest issue. And if it de-accelerates, will people be taking down their economic growth assumptions? And then there's the trying to line up where the best opportunities are between the different markets. And it could be the investment-grade market, could be the better risk-adjusted opportunity. Welcome to Goldman Sachs Exchanges: Great Investors. I'm John Waldron. I'm about to sit down with Steve Tenenbaum. Steve is the founder and CIO of GoldenTree Asset Management, a credit manager with over $70 billion in assets under management. He also happens to be one of the sharpest and most successful debt investors in the world. Today, I'll find out what's behind his success and where he sees opportunities ahead. Steve, welcome to Great Investors at Goldman Sachs. John, it's great to be here. So your first job was at Kidder Peabody, I believe? Yes. And then McKay Shields? Yes. Which is where you and I met? Yes. How would you describe your early career and lessons learned in those first couple jobs? So when I think of Kidder Peabody, two-year investment banking training program focusing on M&A and high yield. And I went from an environment being a student where I had 25 to 30 hours of work each week to having 100 hours of work. So very overwhelmed. I'm sure that you could relate from your experience at Bayer. And I was overwhelmed. So I had to have this strategy of, "Okay, what do I want to accomplish? How am I going to curate my day?" And really be very deliberate about that. So that was probably the biggest memory of Kidder was, "How do I approach a day? What do I want to accomplish?" And be very deliberate, results oriented. In McKay, I get there and within two years, they give me the portfolio to run. So it's about a half a billion dollars. It's ranked 89 out of 91, which I didn't realize for anybody who's about to take over a portfolio, that is the best portfolio you're going to run. And it's the best portfolio you're going to run. So it's the best portfolio you're going to run. And it's the best position that you could be in. That was a gift. That was a gift. Yes. Yeah. There's only one place to go. And I was proud within three years, we took it to number one. But my approach was, "Okay, how are we going to do better?" And I had a couple of moves. The first move was, "If I think earnings are going to be better than what the market does, I bet the bonds are going to go up." So we had that earnings momentum. And the other was for some of these distressed names or stress names, which there were a lot in the early nineties, this was, around the S&L crisis, that if there was intrinsic value, if companies were trading below intrinsic value, then there would be interest in creates. So for something like an RJR Nabisco, that would be the earnings momentum and that they could grow into their balance sheet. And it seemed like with Philip Morris at nine to 10 times EBITDA, and you can create RJR Nabisco closer to four times in the mid to high teens, that there was something to do there where they could equitize part of the balance sheet. And that was the first move that I made. And I think that's the best portfolio you're going to get. And that would be good or six flags where you could create the debt at 50 cents on the dollar at three times. Another thing, kind of an early lesson. So that was a strategy, but an early lesson was trying to think of how do other portfolio managers think? And that was something that I began to, being in a mutual fund where there's inflows and outflows, began to think, how do they behave and why? Kind of a game theory approach or? It wasn't so much a game theory as coaching them behave. So in other words, a game theory is what's the logical way opposed to no, what do they do and why do they do it? So for instance, when I got outflows, I try and sell the hardest stuff first, because I noticed I couldn't sell it in a week or two, whereas they would sell the most liquid stuff first. And so moves like that. One of the moves that I ended up doing later was after the financial crisis, I couldn't sell any loans at 82 cents because you got dinged. It was very. Prohibitive to buy a loan at 82 cents. But if I sold it at 86 cents, you got much higher credit in the CLOs. So I began to lift my offerings to 86 cents because I knew that they were looking for loans at 86 cents liquidity there. Yeah. Yeah. All right. So, so you're a credit investor really at the end of the day, although you do all kinds of things. How would you describe your natural state of being as an investor? So I never pigeonholed myself as a credit investor. I always thought of myself as an investor. And when I think of in high school, traded stocks and options, got my 37 and 63 in college. When I was at McKay shields, when I took over the portfolio, I asked to be managed in the equity division. And in fact, I ran a convertible equity portfolio, which did nicely. I was proud of those returns. So I always thought of myself as an investor. And in fact, whenever we look at an opportunity, any deal, I wanna understand the capital structure and what I think's the best part of it. Even if we can't invest like on a LBO, well, would I buy the equity here? What do I think's the best part of the stack and why? So McKay shields, long career, successful, you lifted the performance. Then you decided to go out on your own. Yes. What drove that decision? I saw this huge entrepreneurial opportunity. So I'm going to finals and there's only four or five long lonely firms that I'm seeing in every final in every large final. There's just a few of us that are up for contention and many of 'em are being awarded two and three mandates. So in other words, three are gonna win, not bad odds. So coming from a multi strategy firm, McKay shields, I saw in like growth equity, there was a hundred managers who were top quartile who had decent records, which we were one of 'em at McKay shields in high yield or below investment grade credit, much shorter list. So that would be on the long lonely side. The other side was the hedge fund side that here's something where I thought it would be much tougher because the. Fees were higher and your mandate was broader, but actually I saw was almost upside down that there was such a imbalance between people who could actually invest in credit and that people wanted to give them money that I saw this huge need. In fact, our original hedge fund investor who I brought in told me if I went off on my own, he would double the size of the money over a hundred million and double the fees. So I saw this behavior and in both long only and in hedge funds, we had done really well. And the hedge fund had returns for the first three plus years, three and a half years in the twenties. So felt like we were entering a good space. So you launched your firm in 2000. Yes. Let's talk about the environment. What did you see as you were launching your firm from an environment standpoint? So this was the period where the.com era, there was a lot of uncertainty was just starting to roll over. 99 was a very strong year. And in 2000 began a little bit of the hangover. And you saw that particularly in the summer, that's where things began to get a little dicey. And whenever you have this new technology, this innovation, there is the who's being impacted. And the instinct, and you're seeing this in AI now is to be very broad. And that's what happened. There were so many different parts of TMT that were concerned about what the impact would be. And for instance, you take advertising. Newspapers clearly were impacted, but it took around four or five years to really get going totally 2005 or six, but you take something like TV programming or cable programmers more specifically, that was a terrific industry for another 15 years, but they were also impacted. So there were a lot of opportunities selling off, particularly in that summer. And then there were names like TMT, like Telesystem International. This was a hodgepodge of cellular companies, international and cellular stakes that ended up trading at 30 cents on the dollar, because there was concern whether you could get financing. We cut a deal at 70 cents on the dollar. They ended up selling for significantly more than the debt the following year. So there was definitely things to do. So early days, your returns are pretty good, I suspect, because you were taking advantage of that dislocation dispersion, however you want to frame it. Did you have any tougher moments? Was it, I mean, I assume you start your own firm. It's a little different than in the warm confines of one of these large organizations. So talk about any challenges you faced. So at Mackay Shields, the returns were mostly very strong or average and more very strong than average. The first seven years at Golden Tree, pretty much the same, either very strong or average. 2008, really poor year. It was very humbling. It was really the first time we had just a bad year. And so that would be that moment where we had to make some corrections and we knew we could do better. We knew our risk management wasn't where it needed to be. I also had this view that we weren't the only ones. And if we made course corrections, if we could get through to 2010, we would be differentiated. So that was my mindset. So in 2009, we passed our high water mark in October. Very proud that we were able to do it in a finite period of time. Now, I remember thinking at the time, if I were to look back at my career, I probably was a seller too early. And I saw that the underwriting I felt in 2008 and 9 was materially better than what it had been because of this concern in that you were likely to be tighter than what people expect. So it was going to really swing as it usually does. And I felt even more so going from very wide to very tight. So we still were risk on after October of 2009. So 2010, we ended up having a great year, 24%. And 2009 and 10 were two of the best years of my career. And that wouldn't have been possible without a very humbling and disappointing experience of 2008. That's a good lesson. Talk about your research process. I've always found you guys to be very granular, very focused on details, but there must be something about the process. And maybe it's part of what you just said in terms of changes you made in risk management. Just talk about how you construct that process. It's interesting because I think you might find it surprising that there's aspects that are granular, but very targeted granularly. So we start with providing a margin of safety, guardrails. So if we're investing in senior debt, it's two times asset coverage. So loan to value of 50%. If it's junior debt, we want to have one and a half times asset coverage. And that's basically gives us a margin of safety. From there, we're looking for what are the five or six issues that are going to drive the investment to be successful. And we want to understand kind of a, how did we get here and where are we going? And there are certain firms that want to have large investment memos that are very, very good. And we want to have a margin of safety. And we want to have a margin of very granular to be as complete as possible. That is not us. We have very senior experienced analysts. I think we have the best analyst on the street. We certainly by reputation have very experienced and accomplished analysts with 15 years experience plus, but they are fluent in the issues. But when they're talking about an investment, it's, Hey, what are the five things or six things that make it work? And then what's the mosaic to execute? We want to have confirming explanations. And so we're looking for why our thesis is going on. And by the way, if it's hard to keep track of, or to confirm, we should discuss it. And then it becomes an allocation issue if we'd like the idea. Interesting. All right. So let me talk about stress distress, where that's the catching falling knife question I want to ask you. So how do you avoid the value trap of this thing looks really cheap, but then realize it's gotten a lot cheaper because it shouldn't have gotten cheaper. Yes, I've been there and it's such a great question. It really goes to your screening process. understressed investing. And part of this is what is starting out with a very tight premise. So I'll give you an example of the directory industry. Here's an industry that clearly was shrinking, disappearing, and had a lot of chapter 22s and 33s. We made $800 million on the directory business, very high competitive, high 20s returns. How do we do that? Our entry price. One of the things I'm distressed, people talk about the prospects of the business and never talk about the entry price. I'm always surprised on that. We got in at one and a half times enterprise value. That was our average buy-in. Second was what's the strategy. We were involved with management teams that were returning capital and not trying to reinvent themselves. I remember having a conversation with management team up in Canada, where they were saying, you don't understand the business is going away. And if we, don't spend money to reinvent ourselves, we're going to have to liquidate. I go, exactly. Please don't do that. We want you to, the business is shrinking and you need to be in front of it, not necessarily try and reinvent yourself with a very uncertain success rate. And that's what was happening a lot in the industry. So aligning ourselves with managements that knew their own situation were committed to returning capital and being involved in an attractive price. So those would be some of the, variables that we pay attention to. Okay. There are a lot of good investments you've made over a long career, but are there particular situations that stand out to you? You've mentioned a few already, but just situations you look back and say, we really got that right. Sure. We really are proud of what we did there. So a lot of the investments start out with a thesis and when the thesis keeps working, we keep at it. So I'll give you an example in European banks. So we started an investment with BAWA and we were involved a little bit before the financial crisis. But added significantly after, and they needed to raise equity capital because their debt to equity was offsides as many, if not most of the banks were after the financial crisis. And when we invested, we thought that they could do around a high single digit return on equity and they could potentially get it to 12%. And if we got it to 12%, you could get out at book and it was primarily a retail bank. So books seemed like a pretty safe assumption at the time. They did much better. They ended up very quickly going to the mid teens, return on intangible equity, but how they did it, some of their tuck in acquisitions, how they were valued, what the ECB's approach was, how the ECB actually was a much better advocate and partner than maybe what the news was reporting about the ECB and what their approach to banks were. So having that inside track, we were able to extrapolate and go broader in the industry. And by the late teens, we saw that many of the European banks were having return on tangible capital around 10%. They were trading at 60% of tangible book. They also, and here's what people didn't believe that they were marked correctly. And they didn't necessarily have a basis for why they didn't believe that, but that's what they believed. And right after COVID, they saw that they weren't taking write downs. So they must've been marked correctly. Oh, and by the way, the interest rates were going up and they were going up in interest rates. If you have a stable economy going higher, actually is very good for banks. And their return on equity went from the around nine, 10% to 14, 15%. And the books are now trade well over book. And so we on that theme earned about $3 billion. So very, very proud of that. And we just kept when we saw it develop, kept going deeper into it. Another theme that we did well in was oil service during COVID. And in the spring of 2020, we saw, I remember there was a day, I think it was April where oil was negative. Remember it well. And we believed that because of the short-term dynamics caused by COVID, if you believe the economy and the world would get back to a semblance of normal, that oil and the suppliers to oil would do very well. And you were able to buy, whether it was onshore or offshore oil service companies at a 70% discount to what we felt the earnings were. And that's how we got to where we are today. And I think that's, I think that's one of the things that we have to keep in mind. And I think that's one of the things that we have to keep in mind. And on replacement value was like an 80 to 90%. And so we became one of the largest, if probably the largest owner, if you consolidated everything to offshore rigs, had significant onshore rigs as well. And that trade, we earned about a billion and a half dollars on that trade and it worked out very nicely. Those are two good examples. So Golden Tree to me now is quite multi-asset, multi-strat. You're covering a lot of different asset classes. How did that develop? What's the strategy been and where do you think it goes from here? So we're always looking at what the best risk adjusted way to play a theme. Take for instance, cable is very much under siege. There's concerns about streaming, threatening their subscribers, broadband on threatening their subscribers. And we're looking, what's the best way if we think this is a viable business to invest? We can do it through a larger distressed cable name. We could do it through public company. So we're always thinking what's the best way to do something. You're seeing an AI right now, whatever has the most demand for product is where they're financing. Some is in structure products, some's in corporate, some's in the equity market to help fund the spend. So we wanted to have a broad playbook. And the issue for us was to try and determine what are everlasting opposed to being a situational tourist or accent. And what do we feel is going to be a business that we want to commit to? And we saw structure products as an area, real estate as an area, emerging markets, a great example. You look at something like Argentina and you can invest in the sovereign debt and it's done terrific. And if that's all you did the last two years, you're very happy. But it turns out that you can invest in the province debt, which is less liquid, but in all the restructurings has had materially better, this is broadly speaking, and they trade cheaper. So in the upside scenario, you're going to participate if not more so. And in the downside scenario, you're better protected. You wouldn't know that unless you had a dedicated EM group. Makes sense. All right. You've referenced AI multiple times, not surprisingly. Yes. Current view on AI and the impact it's going to have on the credit markets. And it's hard to see how it's going to actually accelerate from here. So that's probably, to me, the biggest issue. Then there's the impact on the markets. And what's a little peculiar is how small is a percentage of the index AI financing. So it's only about 2% in below investment grade. It's been mostly a finance and investment grade. It's already pressuring that market. You see it's out 8 to 10 basis points, even in the last week. And I think part of that is all these financings. And then there's a lot of private credit financings in AI. So my main issue is going to be the impact on the economy. And it could be the investment grade market could be the better risk adjusted opportunity. You see something like SpaceX is wider by, I think, 50, 60 basis points already. And that might be just a better, you know, some of the easier opportunities out there as a result. You think we'll see more dispersion because of the dislocation and the disruption of the technology? I would be shocked if we didn't see more dispersion. I'd give odds that yes, we would. And credit spreads seem tight. The market's pretty buoyant. How do you feel about that? So if you go back to like environments, what's like environments? You start the year, you're mid-cycle and you're tight and expect your growth is more than 2%. What happens? The average is you do not do very well in the credit markets and you do very well in the equity markets. And that's example. Exactly how it's playing out through July. Makes sense. All right. So you've been doing this a long time. We've talked a lot about your career and the success, your investment philosophy. Has it evolved and how so? Well, always want to have a margin of safety and always want to be an internal student, always learning and trying to inform on how to capture that mosaic in terms of influencing or, I guess, better understanding our premise to see how it's developing. But more specifically, looking at something like distressed, where when I started out, it was somewhat of the Arger and Abisco type of distressed, where if you change the asset mix between debt and equity, there's an arbitrage there. And for the most part, that doesn't really exist anymore. That's not to say situationally, clearly during COVID it did, during 2015, the fourth quarter it did, but that's more cyclical, not an evergreen. Then I'd call it distress 2.0, which happened pretty much, in the early 2000s, where just some of the premises just didn't work. And you're going to see that a lot on some of the LBOs that happened, where poor execution and management didn't do what they were supposed to. And with different management, you'll probably do better and you need to change the board. You need to have better accountability. And that's one strategy. And I think it's an advancement from just doing a balance sheet change and swapping debt for equity. What I think is the most interesting one, and I think there is a larger moat around it, is distress 3.0, which is where you have a platform and you're using it when there is a cyclical downturn to potentially buy companies and industries that are going through a transformation and creating a lot of value. We're doing it right now with Superior Energy, an oil service, but we've done it with a couple of other examples. And I think that's, to me, the most exciting part of distressed is when you can have a platform and just build it up and also be directed to what's going to make this a desirable exit, what will make this company a desirable exit or desirable to a potential acquirer. And often when you're just doing a balance sheet change and then putting in better management and responsible directors, that's not getting you there. Shifting gears a little bit. You're a prominent art collector, also an investment asset class. Yeah. So, though, I thought, I think that more, more as a passion and as a hobby. Right. So question for you, for people out there that are maybe just getting started or just getting kind of interested in art, observations, words of wisdom, how to think about it. Sure. We've gone to the more established artist, whether it's a Andy Warhol or William de Kooning. Now, if you're starting out, that might not be where you're going to start. And you can get prints, you can get, so you don't always have to go with paintings, which tend to be the most expensive, whereas prints are less expensive. And they're, they both have terrific prints, particularly Andy Warhol has exceptional prints. Then on the primary market, we've gone with artists who we feel have had 10 years of what we think of making differentiated good art. I remember Julie Mehretu, who's downstairs. When we first were looking at her, she had 10 years of making really good art. And I remember buying a drawing of, of Julie's and, you know, we have since collected more. Julie's on the lobby of Goldman Sachs for those who may not know, but she already had a record of making very good art. I found it's stood the test of time the best. Makes sense. All right. We'd like to end these conversations with a lightning round. Okay. So, so here we go. What is your greatest strength as an investor? Having a process and sticking with it. So being on, on discipline, being reflective. You have to make iterations and trying to understand if something's really trying to be honest, why do we do this? And is it happening or not happening? Okay. Best piece of advice you've ever received? You don't always have to be doing something and to be disciplined. How do you spend your time out of the office? We played some tennis together. I like tennis, art. I think it's really important to have passions, you know, and my dad very much instilled in my brother and I that, and he loved opera, that having hobbies and passions is really important. So art would be one. My second day with my wife was at the Metropolitan Museum. And so that's a fun thing. And then with family and friends. That's great. Which founders do you admire the most? Paul Singer is a founder, and these are people who've been able to create lasting institutions and being able to change with the times. All right. Finally, as we look ahead, where do you expect to see the most dispersion and opportunities across markets? So I'm going to give a couple public opportunities. First, I think tips. I think 30 year tips are close to 3%. I think the upside downside and the probability of it working is really, there is much better upside downside in terms of tightening 50 basis points to 250, opposed to 325. It might put it as probability adjusted as much better than 50%. So I think it's like minus 4% plus 18%. And I think that it's just good, absolute value. I think it's somewhat of a gift here. If you look at historically where tips have been, this is a great entry price. And if you look at the relationship, it's usually been in the low 50. And if you look at the relationship, it's usually been in the low twos since 2000. If you look at relative to 2000 on equities, where you have inflation adjusted, I think in the mid force, the fact that you're a pretty high percentage of getting a risk-free return inflation adjusted from equities, that's really, I think, very special when you look at the relative value. When you look at software and particularly companies with high retention, growing revenue and maturity is 28 and 29. You're going to have to look at the relative value. You can get companies that were bought for a dollar and create them for 30 cents with those stats. It seems very provocative. I mentioned in cable, I think that there's clearly the industry has challenges, but we believe particularly when looking at Comcast and looking at the relationship with charter between the debt and equity seems, and this is not a trade that's not people in the marketplace aren't doing, but I think it's just a real interesting relationship. So those are three public opportunities that we think are important. And I think that's what we're looking for in the future. And I think that's opportunities that we think are provocative. Steve, thank you very much. John, thank you. This episode of Goldman Sachs Exchange's Great Investors was recorded on Thursday, July 23rd, 2026. I'm John Waldron. If you enjoyed this show, we hope you'll follow us on Apple Podcasts, Spotify, YouTube, or wherever you listen to your podcasts and leave us a rating and a comment. The opinions and views expressed herein are as of the date of this program. If you have any questions or other problems, please post them in the comments. And if you have any questions or other problems, please post them in the comments. Thank you for listening to this episode of Goldman Sachs Exchange's Great Investors. I'm John Waldron. And I think that's what we're losing. Goldman Sachs does not endorse any candidate or any political party. Copyright 2025 Goldman Sachs. All rights reserved.