Chris Hentemann, Founder and CIO, 400 Capital Management

Chris Hentemann · 400 Capital Management

Big tech hyperscalers' unlevered balance sheets make them pristine counterparties for AI infrastructure lending.

Chris points to big technology firms that have grown earnings, scale, revenues and cash flows with little leverage. He says they look pristine from a counterparty risk standpoint. That strength is what other capital providers lend against, and it is the reason credit is flowing into the AI build-out, even though 400 Capital focuses on the tangible assets instead.

“the big technology firms, they've exploded with earnings and scale and revenues and cash flows without a lot of leverage. They look pristine from a counterparty risk basis.”at 41:22

Chris Hentemann · 400 Capital Management

Data center shells are a poor lending collateral because their alternative-use value is questionable.

400 Capital avoids financing the data center shell. The firm has studied alternative uses for these buildings and finds the case questionable, calling them a stretch in that context. Its data center exposure is therefore built around the power equipment inside the facility, which has a clearer secondary market and alternative use.

“We've taken this approach that data center financing for the shell, it's questionable whether we like the alternative use studies on that just philosophically... They're a little bit of a stretch in that context”at 42:40

Chris Hentemann · 400 Capital Management

Interlinked AI credit deals resemble pre-2008 contingent risk-taking and may hide blind spots.

Chris says the circular, intertwined credit among AI firms gives him pause. 400 Capital has tried to map how companies like NVIDIA, Google and Oracle are related. He sees banks taking contingent risks like those of the early 2000s, where one creditor covers another's tail risk for undisclosed reasons. An outside lender that does not understand these mutually supporting arrangements may be carrying a risk it cannot see, so it must map the incentives carefully before engaging.

“To me, that actually gives me some pause... A little bit of the pause we have is, it smells like things we've seen before.”at 50:05

Chris Hentemann · 400 Capital Management

Power assets are in huge demand with good price support, making them attractive collateral to lend against.

Hentemann says his firm recognizes power is in huge demand. He describes the power assets as old-school technology with depreciation schedules and secondary markets, and says they have uses beyond the data center they serve. He argues there is good bid and price support, the assets are identifiable, and they can be lent against. If a deal falls through, the asset can be transferred or repurposed, which he sees as the appeal.

“But what we do like is we recognize that power is in huge demand. ... There's good bid for it, there's good price support for the asset, we can identify the asset, we can lend against it”at 0:00

Chris Hentemann · 400 Capital Management

Power generation equipment is in strong demand and makes attractive, liquid collateral for lending.

Chris says power is in huge demand and that power equipment such as turbines is older technology with established depreciation schedules and secondary markets. It has alternative uses beyond any single data center, and there is good bid and price support for it. That makes the asset identifiable and lendable even if a particular project falls through, which is why 400 Capital likes lending against it.

“we recognize that power is in huge demand. Power's got some old school technology, not new technology that has, let's call it depreciation schedules and secondary markets and most importantly, alternative uses”at 42:56

Chris Hentemann · 400 Capital Management

COVID reset commercial real estate, creating relatively unique credit opportunities that his firm is pursuing.

Hentemann says commercial real estate is going through its cycles and that COVID turned the sector over. That repricing has produced relatively unique opportunities. He lists commercial real estate with SRT and residential housing as big areas where his firm has been very active and has earned nice returns. He notes that competition has increased since the earlier period but says pockets remain.

“Commercial real estate's going through those cycles. COVID turned commercial real estate over and there's some relatively unique opportunities in that sector.”at 23:02

Chris Hentemann · 400 Capital Management

Office property is a shaky collateral bet because its alternative-use value can collapse.

Chris points to the office cycle that is underway now, and to the retail cycle before it. Offices were once seen as the gold standard for real estate, but he cites many cases where owners cannot give space away, and where the conversion to housing or other uses is uncertain. He stresses that alternative use is the key test for any collateral, and the office case shows how badly that can fail.

“everybody thought offices were like the gold standard for real estate investments and now everybody, there's plenty of examples of people can't give it away.”at 42:20

Chris Hentemann · 400 Capital Management

Competition is normalizing financing returns in tech-linked asset lending, so returns will fall over time.

Chris says the spreads on tech-related financing normalize quickly and that there is a lot of capital chasing these deals. He expects returns to become more efficient over time. For now, 400 Capital's edge is speed and the ability to underwrite and deliver quickly, which sets it apart from slower competitors.

“the curve gets normalized really quickly. There's just a lot of competition.”at 44:44

Chris Hentemann · 400 Capital Management

Late in the cycle, 400 Capital prefers being a second mover in crowded financing niches.

Chris says that after the financial crisis, being a first mover carried less risk because there was more room for error. Today, in areas like equipment and data center financing, he would rather be a second mover. He wants to learn from others' mistakes and to find niche spots instead of chasing late-cycle trends in very competitive sub-markets.

“I'm a lot more complacent being a second mover in some of the sub market opportunities today, especially the ones that are super competitive and try to find niche spots”at 48:11

Chris Hentemann · 400 Capital Management

Markets are signaling concern that the US balance sheet is over-levered, a factor behind current high rates.

Hentemann argues the US should be careful about its balance sheet. He thinks one reason for the current high-rate environment is that markets are signaling concern about US over-leverage, comparing it to the leverage build-up he saw before the financial crisis. He frames this as a parallel to the excessive leverage in the pre-2008 system. He offers this as an interpretation of rates rather than a forecast.

“We should be careful, The US balance sheet. Right now, I think one of the reasons why we're in a high rate environment ... is I think the markets in a way are expressing that they're getting concerned that The US balance sheet is getting over levered.”at 14:43

Chris Hentemann · 400 Capital Management

Post-crisis mortgage underwriting overshot, leaving residential credit well priced and high quality.

Hentemann argues regulators overshot on conservatism after the financial crisis, with safe-harbor rules and tighter documentation standards raising the bar for mortgages. He cites average FICO scores on agency mortgages, which were in the low 700s or around 720 earlier and are now about 765, peaking near 780. He says the credit taker is paid to harvest premiums, and that the data shows the cream of the crop in asset selection. Residential housing was an area where his firm found very good opportunities because few players had dry powder and expertise, and leverage had been wrung out, producing low unlevered returns that his team could then lever up. He also says the GSE credit risk transfer structures made sense but were initially mispriced.

“So yes, they overshot. And there's objective data ... average FICO score on agency mortgages ... roughly low 700s or right around seven twenty. And today it's at about seven sixty five and it got as high about seven eighty.”at 20:29

Chris Hentemann · 400 Capital Management

Regulation pushes banks to become price-insensitive sellers of risk, which his firm can buy cheaply via SRT.

Hentemann explains that SRT lets banks keep client relationships and servicing while transferring credit risk on a defined loan pool to investors, which frees regulatory capital. The corporate SRT market in Europe has grown very large and fairly efficient, and SRT deals are a bit more competitive now. Still, when regulators push banks to change, they tend to be price-insensitive sellers. His firm can take the other side and structure a convex or near-convex profile for itself. Its SRT work with a Mid-Atlantic bank and with Santander shows the approach.

“Another theme is banks when they have regulators pushing them to make changes, they're usually price insensitive sellers of risk profiles. We like to be on the other side of that because you know, usually we have some control.”at 23:24

Chris Hentemann · 400 Capital Management

A broad market correction is much more likely as AI build-out capital needs grow.

Chris argues that the long expansion since the financial crisis cannot last forever. The AI mega-trend requires a huge amount of capital, and he thinks this makes a broadly felt correction much more likely than before. He frames this as a risk to watch rather than a forecast with a date.

“nothing lasts forever. And without a doubt, these numbers and this new mega trend that we're witnessing in technology is requiring a lot of capital, I would certainly say there's a much higher risk for some form of a correction that's going to actually be felt broadly.”at 47:10