Chris Stainton - Managing Director at HPS Investment Partners

Colbert Cannon: Welcome to Season 10 of the HPScast. I’m your host, Colbert Cannon.

If you’re new to the pod, HPS is a global investment firm. We manage approximately $110 billion in assets for a broad range of institutional and retail investors. That capital is invested across private credit and public credit strategies. Each week, I sit down with key relationships to, partners of, and friends of the firm to learn from their experience, ask how that experience shapes their current roles, and give insights into HPS and how we operate.

So, with that, let’s bring in our guest. Our guest this week is a Managing Director in HPS’s London office, focused on direct lending and special situations investing. After a BA and an MPhil at Oxford and Cambridge respectively, he started his career at Bain Capital in London in their Sankaty Advisors business, focused on credit investing.

After seven years there, we were able to convince him to join HPS in 2016. And since then, he’s been instrumental in leading a broad variety of HPS transactions across senior, junior, and special situations investing. I thoroughly enjoy the honor of working with this gent, and I’m happy to have him on with us today.

So, without any further ado, I’m thrilled to welcome in this week’s HPScast guest, our very own Chris Stainton. Chris, welcome to the pod.

Chris Stainton: Thanks very much.

Colbert Cannon: All right, Chris, let’s start from the start. Where’d you grow up? Where are you from originally?

Chris Stainton: I grew up in a small town in Yorkshire called Howden with four or five thousand people. Not many people know it, but actually, it has a very long history going back 1,000+ years.

Colbert Cannon: I love it. Now tell me then how we got from there to Oxford. You attended Merton College at Oxford. Tell me about that path.

Chris Stainton: So, I think at some point, when I was maybe 11 or 12, I seem to remember watching a movie and liking the idea of getting to Oxford or Cambridge. So, I’d kind of set myself on this path of, when I get to 18, I would like to go to Oxford. It was a bit of a singular focus for those years, but it was helpful as a driver. And I actually remember, when I was 17, like passing my driving test on the Friday and getting my Oxford offer on the Saturday.

Colbert Cannon: Greatest weekend of your life!

Chris Stainton: That was a pretty big weekend!

Colbert Cannon: All right. So then, what’d you study undergrad?

Chris Stainton: I did geography undergrad, which is pretty atypical for someone I think who’s in finance. I did think about studying economics or finance, but I actually came to the view that I wanted to study something that I really enjoyed and ideally do well at something I enjoyed. And the thing I particularly liked about geography was the interdisciplinary nature and also the interplay between the human world and physical world. There’s a bit of a qualitative element as well as a quantitative element.

Colbert Cannon: Yeah, I’m also happy to report, as a native son of North Carolina, that legend Michael Jordan’s undergraduate college major – true story – was geography. So, you’re in good company. You went on to then get your MPhil at Robinson College in Cambridge. What was the draw of that coursework?

Chris Stainton: So, I think by the time I’d finished undergrad, I wasn’t necessarily quite ready to leave university. So, I thought, okay, let me take the opportunity to do a one-year master’s. And in my masters, I chose to do Development Studies, which actually was a pretty healthy mix of some of the topics I picked up whilst doing my geography undergrad plus there was a more finance element to it. How do capital markets develop in emerging countries was one course that I particularly enjoyed, and that course was at Cambridge as opposed to Oxford.

At the end of that course, when my professors figured out I was going to go into finance, I think they were a bit horrified. I think they were expecting me to maybe go to the International Monetary Fund or the World Bank. They were like, hang on a second, how does this work?

Colbert Cannon: Well, now tell me about that. What, what was the draw? Why did you make the decision at that point? We’ll talk about Sankaty in a bit but just the finance, period. Why was that important to you?

Chris Stainton: During my time in undergrad in Oxford, I decided, that it was important to do an internship, do some work experience, but I actually found someone, that had been to Cambridge and that person was working at Lehman Brothers in markets.

So, in the summer of my first year, I went and did a couple of weeks interning with him on the trading floor, which piqued my interest. And that was a mixture of equities plus equity research. And I, kind of, liked the equity research a bit more than the trading.

Anyway, the following summer I managed to get a full internship. And during that internship, I actually did a mixture of equity derivatives and commodities. But at the end, I figured out that I didn’t love the idea of staring at a screen all day long, and I wanted to go, kind of, more under the surface of companies and understand the drivers.

Colbert Cannon: it’s a different skill set, and different people are suited for different places.

Chris Stainton: Exactly. So, I then decided to go to the other extreme. So, I was fortunate enough to get an offer from Lehman Brothers. The offer actually had a start date for the day they went bankrupt in 2008. I had turned down that offer and gone to the other extreme, which was getting an offer from the Boston Consulting Group.

So, I went from the trading floor to proper bottoms-up company analysis. I think it was at that point, around that time period, I decided, okay, I want to do post-grad – do four years as opposed to three years. And in that intervening, I actually interned at Bain, so they offered a summer analyst program, and I’d felt having done the internship at Bain, that was actually a great mix of business analysis, financial analysis, and legal analysis. And so, in terms of the decision of going into finance, it was a little bit of – I wouldn’t say trial and error, because I don’t think…

Colbert Cannon: How about trial?

Chris Stainton: Yeah, a trial. Exactly.

Colbert Cannon: And it is interesting, Chris. I mean, you’re a very thoughtful investor. And I think that the interdisciplinary way you think about geography and what appealed to you of that, it’s the same thing. Like, there’s a lot of finance that can be quite narrow and focused. Our job, done well, you have to, I think, be broad in what you do. I’m not surprised that had an appeal to you, given your background.

Okay, so you end up at Bain Capital. Now, for those less familiar, Bain Capital is obviously a massive private equity firm. Tell us about their Sankaty Advisory business in particular in, sort of, 2009, like early days in credit there. What was that business?

Chris Stainton: So, I think around the time I joined, I think the business was something along the line of $25 – $30 billion in AUM. So, it was a pretty sizable chunk of the business. Back then, it was known as Sankaty Advisors. Today it’s known as Bain Capital Credit.,

And I think the juxtaposition of what I was looking at then to when I actually joined the firm in 2009 was stark. I mean, sometimes I think starting my career in 2009 was a good thing because it makes me focus a lot on downside protection – I wouldn’t say worst case scenarios, but I certainly think it gives you a good imagination in regards to the downside case, high-quality loan issuers trading at, kind of, in the 50s, 60s, 70s. And then, me being smart about one or two points, in retrospect, seems silly. But that was a great way to start my career, in my view.

Colbert Cannon: Listen, we always say this on the podcast. I am such a firm believer that you’re shaped by the economic environment that you start your career in. And any of us who spent time during these crises, you know, you’re jumping at shadows. You’re looking at contagion risk. You just, you get formed by those first jobs.

But let’s be precise. What were you actually doing? Like, what was the job at Bain, and how did you spend your time?

Chris Stainton: When I started my career at Bain, I was predominantly focused on liquid credit, and within that, the more stressed and distressed names. In the early years of my career, I saw names go down by 40 points in a day. Then, other investments we missed by one point, which ended up being two times money. So, I think those were lots of lessons learned in those first couple of years.

But actually, in my first year, rather than just buying a particular loan at 60 with a view of a restructuring coming up or a pull to par, some of the things we do was actually, kind of, revolving names in CLOs. So doing, kind of, switches. So, in that era, I felt like I had a better sense of not just absolute value but also relative value. And when I joined Bain, I knew really nothing. I didn’t really know what EBITDA was, but luckily I had a great set of people to learn from. And there’s a lot of ex-Bain consultants there, who were able to help me, kind of, get up to speed on how to take a view on businesses.

Colbert Cannon: Yeah, absolutely. Okay. So, let’s get HPS into the picture here. Tell us about the transaction where you met Scott French and first got introduced to the firm.

Chris Stainton: Yeah. So, it’s actually around a decade ago now. Whilst I was at Bain, I guess my career there was really in two main components. The first component was more on the liquid side doing, kind of, secondary stressed and distressed. And the second part of my career there was helping to start the non-performing loan and real estate business, which was more portfolio based.

One of the later deals I did on the on the secondary stressed and distressed side was getting involved in the predecessor to Ardonagh – the feature of a few of our HPS Strategic Investment Partners. We were invested both in the, kind of, senior secured bonds of the predecessors to Ardonagh as well as the unsecured bonds.

Scot French, I guess, was looking after that position for HPS at the same time I was looking after the position for Baine. So, we met, I think, in the late summer or, Autumn of 2014 and over the next six months, Scot and I spent a long time together. It was a great way to get to know Scot but also get to know HP as a firm. And, you know, there’s quite a few twists and turns in those negotiations to get to the reorganization of Ardonagh’s predecessor to, I guess, help lay the foundations for what the company is today.

Colbert Cannon: So, tell us then – you get through that transaction, you spend time, and you’re, sort of, in the trenches together. How did things move from, “Hey, this guy Chris is talented” to “Okay, let’s talk about getting you on our side,” and talk to me also about the appeal of HPS for you?

Chris Stainton: Absolutely. So, I think spending those circa six months with Scott, I soon figured out he was a very, very hard negotiator but a great strategic thinker at the same time as being in all the details. But also he is very persistent and persuasive. So, I think the Towergate deal, as Ardonagh’s predecessor was called, was ultimately consummated by a scheme of arrangement, and that closed in early 2015. And I think the day after that scheme of arrangement closed, Scott called me and said, “It would be great, in future negotiations, if you were on our side of the table, as opposed to that side of the table.”

I had said, “Yeah, I’m not really sure that works, and Bain looks quite attractive, and I have a good runaway here. And there’s no pushback for me to leave.”

But in the subsequent year-and-a-half, Scott remained close, and then I was introduced to, Mike Patterson, Scott French, and I eventually made the move in mid to late 2016.

Colbert Cannon: Yeah. So, tell us about that. How big was the HPS London office when you joined? Do you remember?

Chris Stainton: I think, now, we are 100+ people. Back then, it was a fraction of that number. But in terms of the draws to HPS from Bain, I think there was no real push factors, per se. But as the years went by, I felt the market in Europe – not necessarily just Bain – was kind of bifurcated between regular way direct lending, kind of pure play sponsor lending, and at the other extreme you had distressed, secondary distress, non-performing loans. There was not that much going on in people’s minds in the middle, but I actually thought that’s where some of the most interesting deals were.

And in the conversations with HPS, I felt actually there was a big opportunity for someone to take that skill set from handling complex transactions in the distressed world, the non-performing world, and apply it on a private credit platform and actually go after those deals that are “in the middle” between, you know, regular way direct lending and your heavier distressed transactions.

Colbert Cannon: You lead a lot of our more bespoke, complicated financings, both in more senior and junior lending. You’ve got a broad remit within the European environment there. Talk to me about that evolution of the distressed market, generally. What do you do? Give us examples of the kind of stuff that happens in the direct lending and junior capital investing business out of London.

Chris Stainton: So, in the time period I was doing more secondary investing between 2009 to say 2013, that was your classic, old school distressed market. You know, there were a lot of bank sellers. Generally, everything had a pretty tight security package. Everything had a covenant. And the banks were selling large blocks. If you were buying, if you could potentially buy, you know, 26% or 34% straight off the bat.

I actually did a piece of work comparing how would the distressed landscape evolve in Europe from 2009 to say 2013, where it was a very loan heavy environment to would say 2015, 2016, and now where it’s a more bond heavy environment. But when I say bond heavy, I don’t just mean pure high yield. I also mean leverage levels, which are starting to look a lot like bonds in terms of no covenants and weakened security packages.

And when I was working, doing this piece of work, it really dawned on me that it’s a very, very different distressed environment because, if you’re buying a high yield bond or you’re buying a covenant-light, security-loose term loan, if something goes wrong, there’s no early trigger events. You know, if the trigger will be a maturity or liquidity need – i. e., dollar prices are probably going to go pretty low – there’s ways for people to drop collateral out of your package and put incremental debt in the system or take out dividends or otherwise known as RPs.

Also, in a more bond format, it’s harder to get information. You know, if you were buying into a bank syndicate, you could go immediately meet the management. You know, there were sometimes monthly meetings that banks had actually negotiated before you even got involved in something that was stressed.

So, you put it all together in terms of fragmented holder bases, poor information, no covenants, loose collateral package, I figured out in the 2015 – 2016 time period actually the game has changed quite a lot. There’s not going to be the same secondary distress cycle and buying opportunity there was before. And that’s when I guess my mind was turning to, kind of, those “deals in the middle,” between the regular way direct lending sphere and the distress sphere – i. e. is there a way, to some extent, use the looseness in the loan and bond documentation to actually put new capital into those situations?

Colbert Cannon: We say this all the time – it’s unequivocally a worse environment if you’re a public markets only investor today. It’s never been harder to understand, sort of, how you can be disadvantaged given weak documentation, but there is an inverse to that. The corollary is it’s never been better as a borrower.

If you need capital, you can raise it in a downside protected manner to the new lender in a way that was unimaginable 10, 15 years ago. And the confluence in, as you correctly say, what was distressed and private credit, which were actually quite separate 15 – 20 years ago, there’s a massive convergence there now in the middle.

Tell us about an example of that kind of stuff that you’ve been doing.

Chris Stainton: I guess the first kernel of the idea when I joined was like, okay, well, all these high yield bonds and to some extent, leverage loans, have these super senior baskets. So, you know, if a company needs liquidity, is there a way for us to fill that super senior basket, which is super priority, or, in essence, ahead of the first lien, to plug a liquidity gap, being the primary use of proceeds? And we did that a couple of times pre-COVID. During the COVID years, we were able to do some of those otherwise known as “basket fill investments.”

But I think there’s a few more derivations of just the pure, super senior basket fill. In some cases, you have the ability to, kind of, add more Pari debt. I’ve not done much of the Pari raises – it’s harder to get a bespoke security package.

Our usual way of doing business is we want to speak for the majority of the tranche, or we want to speak for all of the tranche. We want to drive the documentation.

If you’re doing a Pari piece, it’s much harder to do that. So, if one iteration is a super senior basket fill, that’s attractive. The Pari-passu with an existing tranche is harder. But then the further derivations are, can you drop down assets into an unrestricted subsidiary and finance that?

In all these situations, HPS is coming, in general, as a third-party capital provider. We want to be a problem-solver, and we want to be a friend to the situation. So, it may be the case that, from a borrower’s perspective, they’re having a hard time dealing with their creditors, and they can’t raise the money they need quick enough. We’re able to obviously help them get the liquidity they need by filling whatever basket that may be available. And that is actually one of the most enjoyable parts of the job – figuring out what is an issue that a company has, and what is a creative way that we can fix it.

Colbert Cannon: It’s a, it’s a job where you get to be a solutions provider that can provide a win-win solution and providing a solution to a company is super interesting.

Chris Stainton: And also, the opportunity set. From when I first joined, the kernel of the idea was new money into an existing capital structure, super senior or structurally senior or in a, kind of, unrestricted sub drop-down. I think that evolved over time, and actually, some of the other interesting transactions we’ve looked at are just larger and with complexity or perceived complexity.

A super senior basket fill will be small because, yes, these bond and loan documents are loose, but they’re not crazy loose to allow multi-hundred million of super senior to come in, typically. Maybe it’s 100 million, 150 million, 75 million. After one or two years, the idea evolved to – are there some more stressed, senior refinancings we can do where you’re taking out the whole capital structure?

In many cases in Europe, you have a multi hundred million cap stack, which is maybe owned by a non-sponsor, so a family, entrepreneur, or public company. Maybe it’s in a sector which has had some difficulty in the past. Maybe it’s a post-restructured business. It doesn’t need to be new money into a distressed situation. Actually, it could be a situation that’s just large with complexity or perceived complexity, which doesn’t fit into one of those two buckets we discussed earlier – your regular way sponsor LBO, or your hard-core distressed.

Colbert Cannon: Well, Chris, what we’ve seen in the last 18 months, post the rate move, for the first time since literally the beginning of your career, you know, rates are something other than zero, right? Base rates at 5 – 5.5% obviously has profound impacts on what’s happened in the markets.

You’ve always been thoughtful about trends and what’s coming. What gets you excited about the future in the European market? What do you look at right now and say, here’s what I’m excited about over the next three-to-five years?

Chris Stainton: Clearly, private credit has developed a lot in the European market like it has in the U. S. market. It’s grown a lot but also become more nuanced. I still think the European private credit market has one sphere which is, frankly, pretty competitive: mid-market, LBO sponsor lending, 150 million to 250 million tranche sizes where people are happy to do small club syndicates. I think, in that particular area, you have a good chance of being underpriced and under-structured. You don’t want to be “gridded” as we call it – I put in an Excel grid against everyone else to the n^th degree.

However, in Europe, I think outside of that sphere, there’s two axes where we try to differentiate ourselves. One is scale. So, if you’re taking 500 million, a billion, 1.5 billion hold sizes, there are very few players who can tackle that size, HPS being one.

Then the other axis is complexity, and we’ve touched on some of these themes already. So, within Europe, that non-LBO and particularly non-mid-market space – I think you’re still finding a lot of interesting things to do.

And if we look at what’s going on in the public markets – and there’s always a bit of an intersection between the public and private worlds. Often, we run screens of loans and bonds actually to generate ideas for our private credit business.

I think the maturity wall was pretty heavily discussed a year ago, and I was discussing the maturity wall in 2010 when I was back at Bain. I think now the maturity wall has a bit more of a math issue in terms of rates being higher, so some capital stacks are going to break. Even if confidence returns, new debt is issued where you still have higher rates.

Colbert Cannon: Let me just stop for a second for people less familiar. With the maturity wall, there’s a bunch of debt that’s coming due over the next couple years. People have warned about that since the global financial crisis, and it’s never really arisen as a problem because, if rates are zero, you can almost always find somebody who’s going to refinance that debt.

The math problem that Chris is alluding to is that, with the rates move, suddenly you’re borrowing costs, in many cases, double or triple depending on what your spread was. And so, just mathematically, you are carrying too much debt at current rates to be able to service it. And that creates opportunities because people need more complicated, bespoke financings in that world.

Chris Stainton: So, I think if you look at what’s been happening on the leverage loan side in Europe, a lot of work has been done to address the leverage loan maturity wall. If you look at the high yield side – one way to look at it is the total non-debt coming due during the near-term – I think less work has been done towards that in terms of tackling the nearer-term maturities. But actually, when you double click and look at some of the specific issuers, we are currently looking at multiple high yield issuers in Europe who are looking to tackle problems, and that might be taking out near-term maturities.

On some bond structures, you have multiple staggered maturities. So maybe they need to take out short-term maturities with a private term loan, most likely filling a super senior or other basket that’s available. Alternatively, on some of those high yield structures, there’s just purely a liquidity problem.

Colbert Cannon: If you’re a sponsor and you want to raise a couple hundred million dollar direct loan into a new LBO, there are quite literally dozens of firms who can give it to you. And if you need a scaled transaction where there’s some complexity to it that maybe is non-sponsor, there’s less than a handful. One of the things that I think we pride ourselves on, as an institution, is just trying to be where the competitive set is much less. If we can minimize that competition, I think that can lead to more interesting situations. And that, I think that’s where you sit, obviously, Chris, in what you do.

Maybe let me pivot to one last question about the European environment. We have colleagues on the ground in the continent in Europe, but our biggest office in Europe is obviously in London. How do you think philosophically about lending into various countries across Europe?

Chris Stainton: So, I think one of the priorities when we’re looking at deals is, how do you plan for a scenario where something doesn’t go well? What does that downside case look like? And unlike many others, our deals generally have covenants. So, there will be an early trigger if something goes awry. What does that actually mean? So, where is your asset security? Where is your share pledge?

There are certain jurisdictions in Europe, particularly in the south of the continent, where it is going to be very hard to do, I guess, a non-consensual re-cap of the capital stack. In the northern part of the continent, actually, it’s more straightforward to do a non-consensual.

I think that’s one of the fundamentals of doing any credit investment, being able to catch it on the downside and also control your destiny. So, at HPS, we generally think it’s important to ideally speak for all the tranche or a majority of the tranche, write the document yourself in first principles and have the covenant and security package to be able to act if the deal goes awry.

Colbert Cannon: Got it. Super interesting. Chris, it is always a great pleasure to catch up. Exciting things happening in the European environment. Appreciate you sharing your thoughtful views today.

With that, I, I want to move to the last segment of the pod, something we like to call “Best Ideas.” We offer up something that’s added value in our lives recently. “Best Ideas” because it’s our goal, as investors, to maximize exposure to those.

Chris, you’re our guest. I’m going to ask you to go first. What is your best idea this week?

Chris Stainton: So, I’m a particular fan of spy thrillers. And within the genre, one of my favorite writers is John le Carre. There’s been a lot of adaptations of John le Carre’s work, but I think one of the less well-known adaptations is a UK miniseries called “The Night Manager,” which you can find on Netflix but was originally produced by the BBC.

I would strongly recommend it. It’s very captivating. I think it’s maybe six or seven episodes. The cast has mainly British actors, including Hugh Laurie.

Colbert Cannon: I’ll heartily co-sign that. How about that? One of my favorite series I’ve watched recently. Hugh Laurie is amazing in it. Tom Hiddleston is great. Elizabeth Debicki is great. It’s a really fantastic show. So, a great one.

All right. So, for my best idea, people know I like to be inspired by the guests of the week. As you heard earlier, Chris is a graduate of Oxford. And so, I started there and started thinking about some of my favorite stories set there. And I thought back to a book recommended to me originally by my oldest sister. who was then a grad student at Nuffield College at Oxford.

My best idea this week is a remarkable trilogy of fantasy novels by Philip Pullman called “His Dark Materials.” The first book was called “The Golden Compass.”

The books came out in the mid-1990s and have been made into both a movie and an HBO TV series, but I think, in this case, the books really stand above the adaptations. The stories, full disclosure, have magic in them, so if that’s not your thing, I get it. But the fantasy, I think, serves the story really well here.

The plot is about this young girl, Lyra, who lives at Oxford and gets swept up in this grand adventure with magic dust and polar bears and these overarching themes of the conflict between religion and science. The name, “His Dark Materials,” is actually taken from Milton’s “Paradise Lost,” and Pullman has framed the story as a, sort of, retelling and inversion of that story.

So, in honor of an alum of Oxford, my best idea this week is Philip Pullman’s “His Dark Materials” trilogy, set initially, at least, in Chris’ old stomping grounds.

With that, it’s time to wrap up for the week. Chris, thank you again for coming on. I’m grateful for a truly insightful conversation. I appreciate the time.

Chris Stainton: Thank you.

Colbert Cannon: Thanks again to our guest, Chris Stainton. Check out our “Show Notes” to learn more about Chris and his work at HPS. You can learn more about his “Best Idea” for the week, the BBC tv spy thriller, “The Night Manager,” in our “Show Notes.” There, you’ll also find a link to read my “Best Idea” for the week, the fantasy novel trilogy “His Dark Materials” by Philip Pulman.

This podcast was brought to you by AT WILL Media with HPS Investment Partners. Please be sure to rate, review and subscribe on Apple podcasts or wherever you like to listen.