Marathon Asset Management

$1.5 Trillion CRE Debt Wall Favors Lenders Today The portfolio yield and IRR for a portfolio of loans along with the annual loss rate over the past 1, 3, 5, and 10 years are critical factors when capital allocators evaluate private credit managers. Given the treacherous period we’ve just come through in Commercial Real Estate, these metrics are particularly revealing. Over the past 12 months, the 10-year UST yield has declined by 21 basis points, the 2-year by 60 basis points, while the S&P 500 has rallied 18.4% and financials are up 14.3%. Despite this constructive backdrop, CRE mortgage REITs are essentially unchanged (see table below). In fact, the top 13 mortgage REITs are currently trading at an average 16% discount to book value. When REITs trade below NAV, raising new equity to fund additional loans becomes challenging; doing so would be dilutive to existing shareholders. This makes REITs far less competitive in extending mortgage credit, especially given that they’re required by law to distribute at least 90% of their income. Meanwhile, although banks are in solid financial shape, they’ve become far more conservative in their approach to CRE lending, reducing exposure and tightening loan terms with lower LTVs. Given these dynamics, private credit CRE lenders and insurance companies play an increasingly more important role to bridge the funding gap. With an estimated $1.5 trillion in CRE debt maturing by the end of 2026, that gap is both significant and urgent. Takeaway: It’s a highly attractive environment for direct CRE lending, with less competition, attractive spreads, and strong collateral coverage.

Fed Day There is little doubt that the Fed will ease by 25bps today. What is a little less certain is, whether the Fed will course-correct monetary policy by ending QT today ($40B monthly reduction in Fed Balance Sheet: $35T UST plus $5B MBS). For more than one year, when the Fed began lowering interest rates (easing monetary policy) on September 17, 2024, the Fed has been shrinking its balance sheet, tightening monetary policy via QT. Do you think it makes sense to ease through lowering rates, while at the same time, the Fed is tightening by QT policy? Of course not, these are offsetting policies, where the one helps to make the other less effective. I commend the Fed for recognizing this policy error and ending QT, which I expect them to do today. Likewise, from March of 2022 to September of 2023, when the Fed raised interest rates and tightened by an unprecedented 525bps, the Fed adopted the exact opposite policy by Quantitative Easing. Econ 101 and Milton Freidman textbooks taught us that the Fed should not print money when they are fighting inflation and raising rates (easing while tightening). I think every Fed Governor knows this despite being silent on this issue, since they are students of monetary policy with PhDs. Despite the inverted yield curve and significantly higher rates, and most economists expecting a recession, the simple truth is that financial conditions remained relatively loose during this period since the Fed was printing money by purchasing $2T in debt issued by the Treasury. Or, perhaps the Fed was brilliant by averting a recession, while raising rates to get inflation under better control... While the Fed is not adding to their balance sheet at the current juncture, the U.S. Banking system certainly is. Banks have two capital ratios they must adhere to: 1) risk-weighted capital ratio (Capital Adequacy Ratio, CAR) and 2) unweighted leverage ratio (Supplemental Leverage Ratio, SLR). Treasuries already had a 0% risk weight in CAR, but it was the SLR that was acting as a limiting factor in how much U.S. Treasuries banks could hold. On October 1, 2025, the Fed led by Fed Vice Chair for Supervision Michelle Bowman changed the requirements for SLR by allowing for an Enhanced SLR that impacts the globally systemic banks; a rule change that reduces the minimum leverage ratio for large banks from 5% to a new range from 3.5-4.25%. The rule change unlocks around $4 trillion of additional asset capacity for the biggest banks, which means that the banks can dance along with the Fed and buy more UST for its balance sheet. Very clever to allow for this at a time of record UST issuance. The Fed balance sheet is now $6.6 trillion, down from a peak of just under $9 trillion. As a percent of GDP, it’s now at 22.1%, down from a high of 36.8%. The Fed has room to now expand their Balance Sheet, if and when necessary. Rule #1: Don’t fight the Fed.

Cockroaches or Crickets? At night, when you hear crickets, it’s quiet and calm. Unlike the unease of cockroaches, equity markets are all-time highs, VIX back to 15, the Move Index at its 3-year low, and credit spreads back to their tights. Three key events for the week include: - Earnings season is telling us the S&P will notch another +10% year-over-year gain, with roughly half of companies reporting by week’s end. - The Fed is poised to ease another 25bps on Wednesday while announcing the end of QT; the Fed will continue to ease until stopping we reach neutral since the next Fed Chair (coming in May) will commit to that path. - The Trump-Xi meeting this Thursday should de-escalate trade tensions, helpful to U.S agricultural exports, rare earth imports, and finalizing the TikTok sale, which is positive for markets. Those are crickets; they chirp when the environment is favorable. Now, what about the cockroaches? Cockroaches show up in sloppy kitchens, where controls slip, covenants disappear, and lenders stretch too far to underwrite businesses that took on too much leverage when rates were low. Fraud like Tricolor is idiosyncratic, not systemic. Yes, there are a couple of cases of fraud, and yes there are some bad loans, but what the economy and markets are telling us is that the credit markets are healthy. At Marathon, we always prioritized protecting the downside and lending conservatively, that will never change. But when the Fed is easing and growth is strong, that is historically a strong setup for not only public, but also for private credit. - Private Equity will flip from record-low distributions (down 40% from 2021 peaks ) to record-high monetization over the next two years driven by lower rates + growth + lighter regulation = a potent mix. - As DPI increase, so will M&A activity, in lockstep. - Private Credit activity moves hand-in-hand, as half of LBO financing runs through credit markets, while capital solutions bridge the gap between senior debt and equity. - ABL will play a big role in this cycle as hard asset lending provides needed capital for the CapEx wave that is coming since much of this spend will be asset-based financed. This setup is rare. It’s exciting. And if you’re positioned well, it’s going to be a lot of fun. The opportunity set is expanding rapidly. Check out BofA's latest forecast for IG for example, as deal volume is projected to surge by the largest margin in years.

Big Markets, Big Opportunities: This table below shows the total size for major asset segments, calculated on a global basis (as of June 30, 2025). Based on historical growth rates for each of these 6 major segments, I have forecasted the size that each asset segment will grow to by 2030. Global real estate, encompassing both residential and commercial properties ranks as the largest asset class. However, when equities are evaluated more comprehensively to include both publicly traded and privately held companies, the gap between the two narrows significantly. So, when you tally all the private companies plus all the publicly traded companies, the corporate sector represents nearly all oF the real estate properties in the world? Note: 2/3 of the real estate is residential homes, only 1/3 is of the total value of real estate is CRE. Did you know that?: - There are more than 3x the number of private companies than publicly listed companies world-wide (150,000 vs. 50,000 companies with revenues that exceed $100M). - Over the past 20+ years, the number of publicly listed companies has declined by nearly 50%, while the number of private companies with revenues of $100M or more has tripled. - Privates are staying private for longer. - Private market has many advantages such as cost savings, less regulatory filing and shareholder and the development of private credit has supported this dynamic. Takeaway 1: when interest rates decline, there will be tremendous value to unlock in the PE industry, benefiting existing portfolio holdings and the ~$135 trillion aggregate valuation for privately held companies, a total value that matches the value of all listed companies. Takeaway 2: when interest rates decline, homeowners can finally unlock value through refinancings, new housing starts will accelerate as potential homeownership becomes more affordable and transactional volume will pick up for existing homes. Takeaway 3: CRE is the most interest-rate sensitive sector and will benefit greatly in a lower rate environment. Takeaway 4: Private Credit is a big winner, we will see deal flow pick up materially providing needed financing for PE, homeowners, and CRE.

CPI: Well Behaved, Fed Will Ease Next Week CPI was +3.0% year-over-year, both headline and core inflation number. The government shutdown delayed this September report, but here we are just days before the next Fed meeting and the administration pushed to get the CPI number released so that the Fed would have this important data point to be better informed when making important decisions with respect to monetary policy -> well done! Although inflation is firm at 3.0%, the Fed will find this number tolerable and will most likely ease next week. On the housing front, positive news for Owners’ Equivalent Rent (OER), which represents 26% of CPI-weighting, it rose only 13 bps last month, the slowest pace since November 2020. The biggest uptick was Energy prices which rose 1.5% for the month. The cost of energy will be a critical issue as the U.S. has entered the age of AI. Nuclear power is the cleanest, most reliable and largest potential generator for power, which is now fully recognized, however, it will take some time to build the plants that are necessary to power the next phase of the information/compute age. Markets stable. Good news for inflation is good news for credit markets.

Used Prices Up, New Prices Down Over the past three years, new home prices are down ~10% while existing home prices are up ~11%. Despite homebuilders cutting prices, offering concessions, and even buying down (subsidizing) mortgage rates, buyers aren’t biting. Inventory tells the story: - New homes: 9 months of supply, double the historical average and the highest (outside the GFC). - Existing homes: just 4.5 months of supply, right at the 30-year average (Bloomberg chart below) Why the gap? Used homes are easier to sell. They often come with furniture, more established neighborhoods, and sometimes even an assumable mortgage (government loans are!). Homebuilders are doing their best to cut costs by building smaller homes with fewer amenities, trying to meet an affordability challenge that’s worse than ever. Affordability is now at record lows, a concern in Washington regardless of political affiliation. Higher input costs (labor and materials) haven’t stopped new home prices from dropping, but demand remains weak. I expect the Administration, and the Fed will focus on lowering mortgage rates in the coming year: - Rate cuts at the front end of the yield curve are an absolute certain. - A new Fed Chair might potentially use QE to bring down long-term rates which would lower federal funding costs, ease mortgage affordability (lower rates, narrow the 10Y UST vs. 30Y MBS spread), and support CapEx expansion (data centers, re-industrialization). Yes, the American Dream is still alive, just less affordable. From an investment perspective, mortgage credit remains a strong complement within a diversified ABL program; Marathon is as active as ever investing in first lien and second lien residential mortgages. Question of the day: Are homebuilders a buy? The Homebuilder ETF (XHB) is down 10% over the past year, while the S&P 500 is up 15% in the same period.

The next Fed Chair……survey says? Scott Bessent has narrowed the number of Fed candidates down to 5. The Treasury Secretary intends to narrow this list further to just 3 candidates for recommendation to the President for his consideration. The candidates that make the short list: 1. Michelle Bowman, Fed Vice Chair for Supervision 2. Christopher Waller, Fed Governor 3. Kevin Hassett, National Economic Council Director 4. Kevin Warsh, Former Fed Governor 5. Rick Rieder, BlackRock’s head of Fixed Income Polymarket has Kevin Hassett in the lead, followed Kevin Warsh, Chris Waller and Rick Reider (shown below). Whoever is chosen will likely lower rates since this: 1. reduces government debt service costs 2. stimulates the housing market 3. promotes development of infrastructure projects, which is core to the economic plan of the current administration: building energy plants, AI data centers, reindustrialization of America that incentives companies to bring back manufacturing to the U.S. The next Fed Chair will be dovish, accept a higher inflation rate, while reducing the Fed Funds rate. As for longer term rates, although it is not my base case assumption, I would not be surprised to see the next Fed Chair offer to use its balance sheet to buy long-term UST to bring down long-term rates if the rates market does not cooperate (QE). Despite an economy that is likely to surprise to the upside in 2026, and despite inflation stubbornly stuck ~3%, I expect the Fed to normalize its Fund Rate, bringing it to 3% by September of 2026. Note: When Jay Powell raised interest rates by 525bps in 2022-23, at the same time he was tightening, he was also easing financial conditions by conducting quantitate easing (buying treasuries to lower long-term rates, which intuitively does not make sense to do when you are raising interest rates!). Likewise, over the past year as Jay Powell began lowering rates 125bps from its peak rate, the Fed was conducting a passive form of quantitative tightening (by letting UST roll off its balance sheet), again a counterproductive move. I view both actions as sub-optimal from a monetary policy standpoint, since the one action is offset by the other. As for the next Fed Chair, I would expect he will coordinate his policy actions to achieve the desired outcome (e.g. signal QE to bring longer term lower, when lowering rates at the front end). Equity markets may be fully priced with respect to valuation metrics, but with a growing economy and strong earnings outlook the market will likely move higher once it has consolidated and shaken out leveraged players. Credit markets should also perform very well in the coming year, however, some of the levered credit investors who have made poor investment decisions will bring questions. As the economy grows in 2026 and the Fed continues to ease financial conditions in 2026, the outlook has turned promising for private equity and commercial real estate.

Beware of the Cockroach: This comment was in respect to JP Morgan’s $170M hit on Tricolor when Jamie said, “it’s not our finest moment." Jamie, always the perfectionist and CEO extraordinaire who transformed JP Morgan into a global powerhouse/most profitable bank the world has ever known is on pace to book in excess of $60B in profits in 2025 despite this loss to the sub-prime auto loan company. Jamie’s comment that “when you see one cockroach, there are probably more” is a reminder to everyone managing risk in the $3T private credit market, as he notes further risks that may be lurking, especially if economy were to falter. The number of bad PIK loans, amendments with debt extensions, loans classified as non-accrual loans collectively represents the “at-risk” category that capital allocators should focus on when evaluating private credit investment managers and an allocation to private credit funds. When businesses are too highly levered (6x or more Debt-to-EBITDA or LTV in excess of 50%), the loan is too risky for bank lending standards, and the high standard set by a conservative private credit manager. A seasoned private credit portfolio with attributes of low leverage and tight covenants to profitable non-cyclical businesses is what banks, loan officers and conservative credit managers should strive to achieve, which is complete contrast to the cockroach comparison. Significant alpha is generated when a Direct Lending investment manager can achieve an outcome of zero losses. Credit managers in the Private Credit market with experienced and disciplined investment processes to source, underwrite, structure and asset manage a diverse portfolio of loans should perform well throughout the business cycle, especially when positioned with robust businesses with strong PE sponsorship, tight covenants, low leverage with ability to pay down debt. We appreciate the concern Jamie has expressed, particularly with respect to the $1T+ of private credit loans some of which were aggressively underwritten in an era of near-zero rates as many of these companies have inadequate equity cushion as they contend with debt payments that are 2x vs. the initial model. JP Morgan’s fortress balance sheet is similar to the large money center banks. The new concern that the Fed and markets is focused on is NBFI, the non-bank lenders as banks have large exposure to these counterparts. This came to light more clearly last week when a couple select regional banks also reported counterparty losses; the KBW Regional Bank Index fell 6% in a single day. It is noteworthy to observe NDFI as shown in this chart below.

Buy the Dip Lou Hanover, Marathon’s brilliant CIO, loves to “buy the dip.” When others are feeling pain as panic spreads through the market, Lou stays calm, carefully evaluating opportunities, aware that many are selling at the lows, and patiently waiting for the deleveraging process to unfold. That’s what buying the dip is all about. There’s another kind of dip that Lou loves to buy! Lou loves to “Buy the DIP” or Debtor-in-Possession loans to finance a “good company with a bad balance sheet” that must undergo Chapter 11 bankruptcy restructuring. The DIP loan provides liquidity to a company for it to sustain operations during the restructuring process. Despite the apparent risk of lending to a distressed entity, DIP loans to ongoing business with concerns provide investment managers like Marathon with a strong investment opportunity. DIP loans carry a “super-priority” status whereby when the company is operating under the U.S. Bankruptcy Code, the DIP lender ranks ahead of all pre-existing debts, equity claims, and even administrative expenses in repayment. This ensures lenders are paid first when the company emerges from BK; or in the downside scenario if a company liquidates or forced to sells assets, the DIP lender is repaid first. DIP loans carry interest rates usually several hundred basis points higher than typical private credit loans with additional economics associated with upfront fees, call protection and exit fees; in total, DIP loans can deliver 15-25% IRRs. Marathon Asset Management has provided DIP loans to ~50 companies over the years and has never incurred a loss given the discerning way in, which we evaluate a company and the low leverage of this super-senior BK loan. Lou’s preference is to be the lead DIP lender. Over the past couple of years, Marathon has led 8 such DIP loans for companies (listed below), all of which have (or will) emerge from BK with strong operating businesses and assets. The intent is always to invest when our capital can help the company emerge from bankruptcy in a strong position to create a win-win. 1. First Brands 2. Marelli Automotive 3. Hearthside Foods 4. Mallinckrodt 5. Talen Energy 6. Cineworld 7. LATAM Airlines 8. Avianca Airlines Takeaway: Buy the dip when the market is finding its bottom and buy the DIP when a strong company stumbles. In both cases, conviction comes from careful analysis and the confidence to act from a position of strength; it’s when uncertainty creates opportunity.