Marathon Asset Management

U.S. Banks Step-Up, Regulators Step Back as Leveraged Lending Guidance is Relaxed The OCC & FDIC rolled back their 2013 Guidance that limited banks from extending 6x leverage on corporate loans, which has restricted their ability to provide financing for many of the LBOs as well as growth capital for tech and software companies that were scaling. Given last week’s guidance, banks are essentially granted permission to step back in and compete. Noticeably absent is the Federal Reserve, while they opined in 2013 with respect to this regulatory roll-back, they did not provide guidance. With a new Fed Chair appointed in May '26 (Kevin Hassett), deregulation and lower rates will be his priority, so the Fed will likely join the OCC and FDIC, providing a green light for banks. In the interim, I interpret this decision by the OCC and FDIC as a signal that banks can proceed with caution. Since the GFC, banks have yielded market share to nonbank lenders (Private Credit: DL Funds, BDCs), which helped fuel the growth of private credit. This development was critical for private equity and markets in general as private credit provided essential capital that enabled thousands of privately-owned companies to thrive. Private credit fueled M&A and LBOs as well as CapEx needs. Banks providing capital for a growing economy is critical; we welcome this development as bank will compete with Private credit lenders, providing an alternative source of capital for companies. In addition, bank regulators have eased the supplementary leverage ratio that dictates how much capital big banks must hold against their total assets freeing up capital to lend, driving ROE and bank asset growth. Across the Atlantic, BoE relaxed guidelines last week too, lowering the capital-to-risk-weighted asset ratio to 13% from 14%, which explicitly encourages U.K. banks to lend. Great minds think alike as this stimulates business activity, allowing capital to flow more freely. Barclays, HSBC, and Lloyds will benefit from this development as will borrowers who rely on these banks for funding. Bottom line: 2026 will likely see vibrant capital market activity, strong global growth, less regulations and huge CapEx needs, so I am delighted to see that bank capital will be more free flowing for credit-worthy borrowers. Bank lending brings additional competition for private nonbank lenders, but there is enough to go around in an ever-growing economy that relies on debt and equity financing. Private credit will keep its edge as it wins speed, certainty of execution and creativity. ABL and on Capital Solutions - a key element of private credit that goes beyond the scope for many of the bank lending programs. This development should be viewed as a win-win.

From Charge-Offs to Opportunity: How Banks and Private Credit Together Power the U.S. Economy Bank loan portfolios represent the core of traditional lending activities that help drive economic growth. It encompasses property ownership from residential to CRE, consumer credit, business loans, and more. Below is a list of that showing loan performance for the top 100 for the past 20+ years. This list of U.S. banks by assets shows the annualized net charge-off rates as a percentage of loan par balances, which serve as a key indicator of credit quality for each segment with implications for credit worthiness of the asset class and health of overall economic. Here are some observations to consider: - Total loss rates for bank B/S loans and leases have declined over the past 2 years showing a gradual improvement from the interest rate shock that occurred in 2022-2023. - The banking system annual loss rate now stands at 66 basis points, somewhat comparable to what one might observe in the private credit markets. - Residential home loans remain the star performer within a bank lending book, a super-safe asset class from a credit perspective with a loss rate of 1 basis point, per annum. - Commercial real estate loans have a relatively low loss rate, likely because banks are working with the borrowers to extend and amend their loans, with a very large maturity wall that has materialized. Banks have lowered their exposure to CRE over the past 2 years in a meaningful way as they have become more conservative lenders, creating a void of capital needed to finance CRE. - Farmland, which is a historically volatile asset class, typically makes for a safe loan, as the LTV dettachment point is ~35% which provides a big cushion for lenders, while food inflation has pushed farmland higher in recent years. - Credit Cards are significantly riskier vs. other asset classes: leading banks report a 379 bps loss rate in the most recent quarter; however, bank issued credit cards perform materially better vs. non-bank cards. Other categories of consumer unsecured loans fit in the same risk basket, with creditworthiness tied directly to net worth, FICO score and debt-to-income ratio. Marathon is massively underweight to consumer unsecured loans. - Loans to small businesses are experiencing some stresses, however, are in line with historical averages. Middle Market sponsor-led loans have superior risk-reward parameters; however, the quality of the business and its indebtedness is the key driver to performance. - The ultimate stress test is to evaluate a bank's B/S and its loan book vs. GFC credit and liquidity conditions as shown in the data below. It’s important to evaluate quality of earnings between private credit manager and banks. Marathon Asset Management's ABL strategy has delivered an annual loss rate of well less than 10 basis points historically, on par with the highest quality bank lending metrics. Private credit lenders perfectly complement banks.

Redefining the Efficient Frontier Through Innovation and Informed Adoption The diffusion-of-innovations framework explains how uncertainty and evolving knowledge shape market behavior, while the adoption curve describes how a new product or strategy spreads from innovators and early adopters to the broader investor base. The two are complementary: a knowledge-rich, conviction-driven manager reduces uncertainty for each successive adopter group, and the adoption curve captures the resulting pattern of uptake over time. Knowledge perspective and conviction enforced by decades of cycle-tested experience in public and private credit, deep research, and disciplined risk management allow for the same intelligence to be applied to new asset segments within the general domain expertise of the manager, which should not be confused with style drift. When leadership has conviction, it typically rests on data, pattern recognition across cycles, and the ability to underwrite complex structures, so early investors are not backing a hunch, but an informed, disciplined view of risk and return. Everett Rogers studied the shape of the adoption curve associated with innovators and early adopters who faced great uncertainty yet established a new platform that can materially shift an optimal profile by reducing informational and operational risk. A manager already overseeing significant assets, with institutional processes, diversified teams, and long-standing LP relationships, can scale a new product more quickly and credibly, that is confirmed by the ability to generate highly positive outcomes. For investors, this often translates into first mover advantage, access to complex and rewarding investment opportunities, improved governance and alignment, often with the ability to capture early-adopter economics while relying on the stability, infrastructure, and reputation of a seasoned institutional manager. In alternative asset management, the ability to combine innovation with best-in-class institutional investment discipline creates a powerful engine for generating differentiated returns. As new strategies diffuse across the market, those backed by deep teams with domain expertise, robust governance, and high conviction-driven underwriting are best positioned to capture enduring value for investors.

Private Credit + Private Equity = Balanced Portfolio A diversified portfolio of alternative assets undoubtedly consists of a healthy allocation to both Private Credit and Private Equity - it should not fall into a “versus” conversation, as both are a meaningful and complementary contribution to a well-diversified private markets portfolio. A well-managed PC portfolio has generated ~12% net returns over the past 12 months, despite spread compression and a lower base rate after the Fed’s cuts. Over time, I expect a well-managed PC portfolio to outperform public credit by +300 bps per annum. While PE has generally underperformed public equities during the past 3 years, over a longer time horizon (10+ years) PE has meaningfully outperformed the public equity market by several hundred basis points. Upper-quartile PE managers have generated a similar return to PC over the past 3 years; however, PE should generate a higher IRR, just as public equities generate a higher IRR relative to bonds. PC and PE should be thought of as opposite sides of the same coin. Private Credit delivers consistent cash flow thanks to coupons, shorter duration, and structural downside protection, which smooths volatility and generates steady income, providing protection throughout the cycle. Private Equity provides greater upside, with a higher potential IRR and MOIC as value creation supported by active management, board oversight, revenue expansion strategies, and operational improvements, delivers outcomes that credit investors don’t generally participate in (beyond getting repaid at par). This complementary dynamic should be compared with the traditional 60/40 public equity–public debt model, but within the private markets. To gain 60% equity exposure, a portfolio would be well served by maintaining a combination of public and private equity, while the 40% bond allocation should be evenly split between public bonds and private credit (with public bonds providing liquidity and private credit providing alpha and higher returns). Private and public equities deliver growth and appreciation, while private and public credit provide stability and income. The correlation coefficients between PE and PC are relatively low (~0.3). A well-managed private credit program has annual volatility of ~6%, roughly 100 bps less than the HY bond market, yet PC historically outperforms by ~300 bps; while PE has an annual volatility of ~12%, lower than the ~17% experienced in the public equity market, and likewise outperforms by ~300+ bps per annum. Takeaway: For a 60/40 model whose objective is to maximize outcomes, the PE/PC combination should outperform their public counterparts by 300+ basis points annually, which adds a meaningful long-term edge for those able to trade liquidity for better performance. With the new year fast approaching, it’s a great time to make portfolio decisions that thoughtfully integrate both private equity and private credit for stronger long-term outcomes.

Fed Survey of Credit Conditions Remains Healthy The U.S. economy and credit conditions remain resilient with a Goldilocks-like profile according to bank survey data reported to the Federal Reserve. Recent insights from Senior Credit Officer Opinion Survey conducted by the Federal Reserve Bank of New York indicate underscores a cautious, but steady risk appetite, orderly credit conditions, and a disciplined lending environment, factors that generally favor high-quality private credit strategies. At the current juncture, the U.S. economy looks favorable as we look forward to next year, with my expectations that the economy will deliver +2.5% GDP growth for 2026, marking a year of above-trend expansion supported by fiscal stimulus from OBBA, monetary stimulus from the Fed (the Fed to lower rates rate next week, then hold rates steady until the next Fed chair is installed, today is the end of QT, next Fed Chair takes over in May will lean towards easing the Funds rate to 3% by year-end '26), plus meaningful CapEx from re-industrialization plans by global companies, in addition to continued AI-driven capital investment. Inflation is likely to remain somewhat sticky, with core CPI/PCE hovering around 3%, although I expect it to gradually decline by 20-30 basis points year-end 2026. Meanwhile, payroll growth will hold employment rate steadily around 4.5%, supported by underlying economic growth. In this environment, private credit continues to stand out as a defensive way to keep risk contained while maintaining attractive return potential. While yield premiums remain attractive for public credit, absolute yields have declined, which should push more capital in the direction of the private credit markets. A balanced portfolio of direct lending, asset-based lending and opportunistic credit (capital solutions) should again prove highly rewarding for capital allocators who appreciate the alpha, absolute returns and meaningful downside protection though structural protection and diversification that well managed private credit portfolios offer. As we navigate policy uncertainty, rich public market multiples, a Fed in transition; the ability to earn durable yield with relatively low volatility and strong structural protections becomes an increasingly valuable shock absorber for portfolios that have the flexibility to hold alternative investments. For many investors, private credit offers a practical way to stay invested, stay defensive, and capture alpha. Surveys says:

Thankful for You On Thanksgiving, we should take the time to reflect, appreciate everything and everyone we are truly grateful for. Blessed with health, happiness, our friends, colleagues, community and loved ones. In a world of diverse traditions, may we all embrace gratitude and kindness to each other. I’m deeply grateful for everything we have accomplished at Marathon Asset Management, the commitment by our extraordinary team, our shared success, and the meaningful impact we make together. Most of all, thank you to our clients for your unwavering trust and partnership, you inspire us every day. Wishing everyone a warm, joyful holiday filled with peace and prosperity. 🦃🧡 #Thanksgiving #Gratitude

Pass the Prosciutto, Please A decade ago, “PIIGS” was a acronym for 5 fiscally challenged European countries: Portugal, Ireland, Italy, Greece, and Spain. The press and financial analysts referred to these proud countries with a negative tone, at the same time that Marathon Asset Management's European Credit team invested capital in these countries, identifying incredibly attractive investments during this time period. Amazing people, proud heritage, yet difficult times for these great countries. Today, they are recognized as rising stars of Europe with some of the fastest growing economies in the EMU. This transformation stands as a testament to economic resilience that was overcome from the 2010-2012 eurozone sovereign crisis. These 5 great nations confronted their respective funding crisis to make adjustments with sovereign debt-to-GDP exceeding 100% in most cases while unemployment soared, and a banking system required several hundred billion Euro bailout packages. The troika's intervention (European Commission, ECB, and IMF) in Greece, Portugal and Ireland led to pension reform, tax increases, labor market liberalization, and a structural rework that created the backdrop for today's success, even more impressive given the popular protests and political upheaval that took place. The turnaround has been nothing short of remarkable. Ireland became a tech and pharma hub with 5% GDP growth. Portugal grew from not only tourism, but also a thriving start-up community and development of clean energy; Spain's unemployment fell from a staggering 27% to single digits. Greece achieved primary budget surpluses and regained investment-grade status leveraging its agriculture and shipping advantage, while Italy with so many natural advantages is most noted for its fiscal discipline. The market recognize the progress, growth and value of these countries and investors are being well rewarded. 2025 Equity Market Performance (y-t-d): Greece +56% Spain +52% Portugal +42% Ireland +39% Italy +38% Europe’s remarkable recovery is one of the most dynamic and resilient investment opportunities globally, delivering highly attractive risk-adjusted returns from strong European companies at valuations that still look compelling versus the U.S. As a credit investor, I’m more excited than ever to invest capital here, a vibrant continent, a perfect complement to the U.S. and diversifier for a global portfolio.

The Scorpion and the Frog A scorpion arrives at the edge of a wide river and asks a frog, “Will you carry me across on your back?” The frog hesitates. “You’re a scorpion. You’ll sting me halfway and we’ll both drown.” The scorpion replies calmly, “That would be irrational. If I sting you, I drown too. Trust me.” The frog, persuaded by the logic, agrees. Halfway across, the scorpion stings him. As paralysis sets in and they both begin to sink, the frog gasps, “Why? Now we both die!” The scorpion shrugs: “I couldn’t help it. It’s my nature.” In Private Credit, the scorpion is the manager who knows that deep down certain credits are structurally flawed, with substantial business or operation risk, too highly leveraged, weak covenant protection, or run by management or a sponsor with a history of value destruction; yet the credit lender makes the loan anyway. “It’s priced for the risk," “The will grow their way out," “We’re senior and secured,” “We’ll be fine,” where the lender believes this time will be different, that the scorpion has somehow changed its nature, climb on board, let's start swimming across the river, yet a 5-7 year loan can take one through the full credit life cycle. Remember, anyone can make a loan. Generating alpha in Private Credit takes a strong origination platform, rigorous diligence/underwriting with specialized expertise, tight legal and structuring, and proactive asset management, and, of course, uncompromising discipline. True alpha is getting paid back par on every time. Getting across the pond safely, cycle after cycle, without ever discovering halfway through that your credit investments sting you is paramount. Moral of the Story: as a lender play it safely, make sure you make it to the other side. At Marathon Asset Management, our entire culture is built around one question: “Will we get paid back in the worst case, not the base case?” Stay disciplined out there, credit is highly attractive for those who manage and structure risk well, with an objective to keep annual loss rates to zero. #CreditMarkets #RiskManagement #PrivateCredit

Higher for a Bit Longer It’s a close call, but based on the data at hand, I’m sticking with my view: after delivering two rate cuts in its last two meetings, the Fed is likely to pause in December. Inflation remains more than 100 bps above the Fed's 2% target given the recent firming in CPI that has kept inflation hovering around 3%. Looking forward, in 2026, I expect a slow drift lower given many dynamics currently at play. With today’s solid jobs report, the Fed has little urgency to ease further. Employment isn’t softening as much as earlier data suggested, giving policymakers more confidence to hold steady. This morning’s delayed September BLS report surprised the upside: +119k jobs versus expectations of +51k, pushing the 3-month average up to +62k from +18k. Gains were broad-based across goods and services, with strength in lower-wage sectors such as Education & Health and Leisure & Hospitality, as well as an uptick in Construction. Meanwhile, federal employment continues to decline. The October jobs report has been eliminated given the government shutdown, while the November report won’t be released until after the December 10 FOMC meeting. That leaves September as the last official employment datapoint the Fed can rely on, though they will, of course, incorporate market surveys like ADP. With no new inflation prints (CPI, PPI, PCE) arriving before the meeting, the Fed will be operating with a thinner data set that helps guide their decisions.