Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 1: This week, we're very pleased to have with us Erin Hudson,
Speaker 1: who covers distress debt for Bloomberg News in New York.
Speaker 1: How are you, Erin?
Speaker 2: I'm great, Thanks for having you, James.
Speaker 1: We're also delighted to see Aidan Cheslyn, who looks at
Speaker 1: telecoms and media for Bloomberg Intelligence in London. We'll be
Speaker 1: coming right back to Aiden a little bit later in
Speaker 1: the show, so do stay with us. But first, Erin
Speaker 1: Hudson with Bloomberg News, you've been looking at carvaner which
Speaker 1: rose to fame by selling cars from vending machines during
Speaker 1: the pandemic, then almost went bust. Now they seem to
Speaker 1: be on.
Speaker 2: The up again.
Speaker 1: The stock is up more than eight hundred percent so
Speaker 1: far this year, and they seem to be sorting out
Speaker 1: some of their debt issues. But what's the latest on
Speaker 1: car Erin?
Speaker 2: Yes, the big news on Carvana is that they announced
Speaker 2: a debt restructuring alongside their earnings last week, and they
Speaker 2: so they reduced their debt by about one point two billion,
Speaker 2: and they're doing a new equity raise. Garcia, the family
Speaker 2: Ernie Garcia, is participating in that, and it's it's an
Speaker 2: exciting development, I guess in the story of Carvana, because
Speaker 2: creditors and the company were going back and forth or
Speaker 2: there were different maneuvers that the company was taking and
Speaker 2: that creditors were taking in recent months to try and
Speaker 2: address the company's massive debt load. So this was you know,
Speaker 2: a big, a big announcement because they reached an agreement
Speaker 2: and they did it with creditors signing on too. They
Speaker 2: had all signed onto a cooperation agreement and that agreement
Speaker 2: held throughout this processes. So in the distress that world
Speaker 2: there was, you know, there's kind of a question of
Speaker 2: how powerful cooperation agreements can be and what is their
Speaker 2: use and this was sort of a case where it
Speaker 2: proved they can be very useful.
Speaker 1: Okay, so let me just stop you there. They wrote
Speaker 1: down about billion dollars one point two billion dollars in debt,
Speaker 1: which is great. They presumably they cut their interest expands,
Speaker 1: they turned out maturities, did they? I mean, what are
Speaker 1: the specifics of this restructuring.
Speaker 2: Yeah, those are the other points extended maturities, defered some
Speaker 2: interest payments, and tightened tightened some covenants. And so the
Speaker 2: idea is that this restructuring has sort of given the
Speaker 2: company more leeway to improve its business, improve performance and
Speaker 2: kind of turn itself around. There is still capacity to
Speaker 2: issue some new debt, I believe as well. So they
Speaker 2: the company still has a lot of options and you know,
Speaker 2: creditors are kind of on board for that ride.
Speaker 1: And when we look at the creditors, who who is it?
Speaker 1: We're talking about who the who are the key people
Speaker 1: involved here?
Speaker 2: Well, some of the key people that we know are
Speaker 2: involved are Apollo Ares and Pimco. Those are some of them,
Speaker 2: but of course they're there. There are a lot more.
Speaker 2: There's it's a huge capital structure. Those are some of
Speaker 2: the key players. And I think just the fact that
Speaker 2: those are some of the key players that we're sort
Speaker 2: of known in the market. You know, cooperation is not
Speaker 2: always historically thought of when some market systems think of
Speaker 2: those those those those firms. So again, I think there
Speaker 2: was just a question of how effective will this cooperation
Speaker 2: agreement really be? You know, is there really a track
Speaker 2: record for all of these different all these different and funds,
Speaker 2: you know, cooperating. So I think this was sort of
Speaker 2: an answer, and you know, people have described it to
Speaker 2: me as a significant development in the distress debt marketplace.
Speaker 1: So let me just stop me there, because you talk
Speaker 1: a lot about cooperation lenders. In this particular case, Cardana,
Speaker 1: they did work together in lots of ways to try
Speaker 1: and find the best outcome. But you know, in this
Speaker 1: new era of restructuring where we're seeing a lot more
Speaker 1: of what's been called creditor on creditor violence, how and
Speaker 1: why did the bond holders coordinate on this particular situation.
Speaker 2: Well, I think that is sort of a question that
Speaker 2: we want to answer, more like when people choose to
Speaker 2: cooperate versus not. In this case, it seems like, I
Speaker 2: guess all the interests were aligned. It's sort of what
Speaker 2: we understand. There was no one who had sort of
Speaker 2: hugely different different a different interest, which can sometimes happen
Speaker 2: in companies where there's secured debt unsecured debt. Maybe there's
Speaker 2: some other instruments as well, there's different holdings where people
Speaker 2: might have sort of slightly different goals and motivations. In
Speaker 2: this case, it seemed, as far as we know, like
Speaker 2: everyone was aligned. So that might help explain part of it.
Speaker 2: But you know, I don't know if there's a formula
Speaker 2: at this point, but for sure, this is a big
Speaker 2: moment that people will look at and you know, sort
Speaker 2: of a show that creditors can unify and kind of
Speaker 2: all get on the same page, which I think some
Speaker 2: people in the market are viewing as a really positive,
Speaker 2: sort of optimistic sign that maybe we're turning a corner
Speaker 2: on the whole creditor on creditor violence theme and narrative
Speaker 2: that's really dominated the distress debt marketplace for the last
Speaker 2: couple of years.
Speaker 1: But so this capital structure then is, in relative turns
Speaker 1: less complex. I mean, there wasn't all this upteering and
Speaker 1: drop down and all this stuff that's been going on
Speaker 1: in other situations.
Speaker 2: Is that is that.
Speaker 1: Why the creditors were more aligned and sort of more
Speaker 1: on the same side of the table.
Speaker 2: Well, I should say that part of the reason the
Speaker 2: cooperative agreement was formed was because there was a fear
Speaker 2: that the company might try to kind of strike a
Speaker 2: deal with a major creditor and that that deal could
Speaker 2: leave everyone else behind. So I think there was a
Speaker 2: lot of fear, and you know, I should sort of
Speaker 2: correct the record there, Like some of my colleagues have
Speaker 2: done a lot of reporting on that last year, and
Speaker 2: that was sort of the driver to band together because
Speaker 2: if somebody cut a side deal with the company, then
Speaker 2: you know, there want to be a deal for everybody.
Speaker 2: So I think they decided this would be a good
Speaker 2: moment to stand together.
Speaker 1: Interesting, okay, So but the big question I guess for
Speaker 1: the company do they have a future? I mean, it
Speaker 1: seemed like definitely a good idea during the height of COVID,
Speaker 1: when no one really wanted to interact with other human
Speaker 1: beings using vending machines, using the Internet to buy and
Speaker 1: sell cars. Plus at that time, you know, used car
Speaker 1: prices were off the charts, so everyone wanted one. It
Speaker 1: was a massive demand story. What's the state of play now?
Speaker 1: Is carvan a business that we think will survive?
Speaker 2: Well? Time will tell from sources that I've talked to,
Speaker 2: you know, I think that I think that, you know,
Speaker 2: it's a it's a compelling idea and everyone wants to
Speaker 2: see if they can turn their performance around. So that's
Speaker 2: what you know, everyone will be watching. And I think
Speaker 2: that was you know why this debt restructuring was possible.
Speaker 2: Is that it's giving them more time, and yeah, we'll
Speaker 2: see what happens.
Speaker 1: Interest costs for that company they shot up there at
Speaker 1: one hundred eighty million dollars or something, you know, is
Speaker 1: that now under control just the interest expense.
Speaker 2: Some of the interest payments were deferred. So I think
Speaker 2: it does give them. I don't think that's the same
Speaker 2: pain point as it was previously. There has been some
Speaker 2: relief there, and.
Speaker 1: You mentioned that they do have potential access to raise
Speaker 1: more debt. I mean, have we resolved all the liquidity
Speaker 1: concerns around this company?
Speaker 2: You know, I don't know if anyone thinks that all
Speaker 2: of the problems are fixed permanently. From analysts I've talked to,
Speaker 2: they're sort of viewing this as it gives the company
Speaker 2: a runway of a couple of years. It is possible that,
Speaker 2: you know, they kind of end up in a similar
Speaker 2: position down the road where these like big fundamental questions
Speaker 2: will will come back. So maybe in hindsight we will
Speaker 2: look back in a few years and think of this
Speaker 2: as more of a band dad solution. But from source
Speaker 2: that I talk to now, I think the view is
Speaker 2: that this is, you know, it's sort of a second
Speaker 2: chance in a way, so I'm not sure we'll see.
Speaker 1: They certainly have the brand name, but you know, selling
Speaker 1: cars online doesn't seem like it's you know, huge barriers
Speaker 1: to entry for competition, So I mean, I guess they're
Speaker 1: gonna they're going to come up against it again. But
Speaker 1: in terms of the broader takeaways thereon for credit markets,
Speaker 1: what are the lessons we're learning from this?
Speaker 2: Obviously, just the lessons learned is that there there is
Speaker 2: quite an appetite for cooperation if the conditions are right,
Speaker 2: and it does seem I'm surprised by the number of
Speaker 2: people I talk to who sort of do really feel
Speaker 2: like this is a feel good type of moment. You
Speaker 2: know that that was surprising. So yeah, this, So we'll
Speaker 2: see what happens if this becomes something that happens a
Speaker 2: lot more more in various transactions, restruct strings or if
Speaker 2: you know, this this is really kind of an exceptional moment.
Speaker 2: I'm not sure we can we can say for sure
Speaker 2: right now.
Speaker 1: It's very rare you'd see, I mean, in distressed or
Speaker 1: anywhere in markets, a win win for everyone, and you know,
Speaker 1: there's no losers. I'm surprised that no one's complaining about
Speaker 1: this one.
Speaker 2: But yeah, I will say that is from from people
Speaker 2: I've talked to that is really the takeaway. This is
Speaker 2: a win win And.
Speaker 1: If you flip it to the issue of standpoint, I mean,
Speaker 1: this is simply a story of a company expands way
Speaker 1: too fast during the good times.
Speaker 2: Of course, they had a huge surgeon business during the pandemic.
Speaker 2: You know, everything was really aligned for them, tailwinds behind them.
Speaker 2: So there's sort of this broader narrative about companies that
Speaker 2: did great during the pandemic and you know, were they
Speaker 2: able are they able to transition to like a post
Speaker 2: post pandemic type of world where some of those hill
Speaker 2: winds are not so strong, or now they're facing new
Speaker 2: heads inflation, rising rates. So you know, I don't know
Speaker 2: if I can comment directly on Carvana, but for sure
Speaker 2: that's a that's a narrative that's out there. As you know,
Speaker 2: investors are looking at companies and their performance over time.
Speaker 1: So before we talk to Aiden Chanslin Bloomberg Intelligence, what's
Speaker 1: the next big story to watch out for?
Speaker 2: Here eron.
Speaker 1: I mean, credit markets seem very bullish right now, even
Speaker 1: though we're seeing more distress, more bankruptcy. Do we expect
Speaker 1: it all to get better from here, or you're still
Speaker 1: going to be very very busy reporting on distress debt.
Speaker 2: People tell me I'll be very very busy. So I
Speaker 2: expect there to be a lot more restructuring. Is a
Speaker 2: lot more, a lot more distress out there. This is
Speaker 2: why I'm hoping. But then again, there's there is a
Speaker 2: joke in this market that you know, every time people
Speaker 2: say that nothing happens. So so we'll see. But I
Speaker 2: do think there's a lot of there's going to be
Speaker 2: some interesting interesting cases on the horizon.
Speaker 1: Great stuff. Erin Hudson from Bloomberg News, thanks so much
Speaker 1: for joining us.
Speaker 2: Thank you so much. James read all of.
Speaker 1: Erin's scoops on the Bloomberg terminal and of course at
Speaker 1: Bloomberg dot com. So, as I mentioned earlier, we're delighted
Speaker 1: to welcome back on the credit edge. Aidan Cheslin, who
Speaker 1: covers telecoms and media for Bloomberg Intelligence based in London.
Speaker 1: How's it going, Aidan?
Speaker 2: Good?
Speaker 3: James, how are you very well? Thanks?
Speaker 1: And I know you cover a lot of different things,
Speaker 1: but I did want to focus on telecoms again. Last
Speaker 1: time we spoke, you mentioned the defensive nature of these firms.
Speaker 1: You know, the economies may be slowing, consumers maybe under
Speaker 1: attack from inflation and higher interest rates, but we always
Speaker 1: need our phones. Is that still the case or are
Speaker 1: there any cracks appearing in that narrative.
Speaker 4: I think it has generally been the case. I think
Speaker 4: where we're seeing some distress in telecoms is really more
Speaker 4: in the high yield space, where you know, the new
Speaker 4: issuance markets there have been closed for some time, has
Speaker 4: been only very sporadic companies coming and having to pay
Speaker 4: to do so. And we're starting to get closer to
Speaker 4: refinancing walls twenty twenty five onwards with some of the
Speaker 4: names like Telecommetalian LTEs the most in focus.
Speaker 1: So on Telecommetalia, I mean that's a good name. They
Speaker 1: are burning through a lot of cash, the ratings are
Speaker 1: under pressure. What's the plan to turn that company around?
Speaker 4: Well, they're trying to sell the network. So the fixed
Speaker 4: line network in particular is of interest to KKR. Has
Speaker 4: been selected as the exclusive bidder at this stage, and
Speaker 4: by the end of September we're supposed to hear more
Speaker 4: about whether that's going ahead and what that might end.
Speaker 3: Up looking like.
Speaker 4: There's still a degree of uncertainty here, which is that
Speaker 4: the less preferred bidder that's been pushed to the side
Speaker 4: for now included CDP, one of the government's own investment vehicles.
Speaker 4: So there's a little bit of uncertainty is whether the
Speaker 4: government would allow Italy to lose control of this asset,
Speaker 4: and so there is some political risk to this deal
Speaker 4: completing still, So.
Speaker 1: Just so we know the importance of this one aiden
Speaker 1: what's the scale? How important is this company in the
Speaker 1: European telecoms contexts?
Speaker 4: The Italian incumbent, so the number one player in fixed
Speaker 4: line in particular in Italy. They have their problem has
Speaker 4: been for a long period of time now an elevated
Speaker 4: debt position, so net debt at the end of twenty
Speaker 4: twenty three was in the order of twenty five to
Speaker 4: thirty billion euros. This grid sale couldnet them around somewhere
Speaker 4: around two thirds of that figure, so it would make
Speaker 4: a serious, serious inroad into the debt. The only problem
Speaker 4: is operating off the network obviously leaves you with just
Speaker 4: the service company, which would be a lot more susceptible
Speaker 4: to competition and to volatile learnings.
Speaker 1: Can they still access the bond market and how expensive
Speaker 1: would it be.
Speaker 3: They've done so twice this year.
Speaker 4: The problem was that the costs keeps you racking up
Speaker 4: every time they do it. So they access the market
Speaker 4: in January with a six handle on the coupon, and
Speaker 4: then they came again much more recently with another bond,
Speaker 4: and the coupon on that one was almost eight percent.
Speaker 4: So the problem is the longer they go on burning
Speaker 4: cash increasing leverage, the longer this deal takes to materialize,
Speaker 4: the interest costs are just going.
Speaker 2: Up and up and up.
Speaker 1: They are also doing some liability management that they're buying
Speaker 1: back some bonds with tender offers and turning up maturities.
Speaker 1: How's that going for them?
Speaker 4: Yeah, that was the focus of these recent new issues,
Speaker 4: so I think that's just them trying to extend these
Speaker 4: maturities as best they can.
Speaker 3: They've still got a bit of a wall.
Speaker 4: Twenty twenty five, they haven't really cured that problem, so
Speaker 4: there's still more to do.
Speaker 1: So what's the next big thing to watch out for here, Aidan?
Speaker 1: Is there a date by which that sale needs to
Speaker 1: go through? Is there some kind of calendar of events
Speaker 1: that we're looking out for.
Speaker 4: They've given exclusivity to KKR until the end of September,
Speaker 4: so that's kind of the deadline, although these deadlines have
Speaker 4: been rolled over before, but that's the deadline we have
Speaker 4: at the moment for a deal actually coming about. I
Speaker 4: think what bondholders are really looking for is a bit
Speaker 4: more clarity on the future capital structure.
Speaker 3: At the moment.
Speaker 4: They were unable to answer on the last analyst call
Speaker 4: whether debt would be separated with the network into the
Speaker 4: new KKI unit, or whether they'd have to retain the
Speaker 4: debt and use the cash proceeds to to start tendering
Speaker 4: for some of that debt. And if they did that, well,
Speaker 4: we still don't know exactly which ones would be tended
Speaker 4: and which ones wouldn't, So there's a huge amount of
Speaker 4: uncertainty for bondholders even if the deal does go through.
Speaker 4: In our view, it's very unlikely that whether you end
Speaker 4: up in a network business with KKR, which would probably
Speaker 4: have a high degree of leverage, or whether you end
Speaker 4: up in a service company with a comparatively low amount
Speaker 4: of leverage. We don't see either of those eventualities leading
Speaker 4: to an investment grade rating. You may have some improvement
Speaker 4: over the current position, but not much, and the real
Speaker 4: tail risk here is that if a deal doesn't occur,
Speaker 4: then the company is in big trouble. It has a
Speaker 4: huge amount of debt, rapidly rising interest costs, a big
Speaker 4: funding need in a very competitive market. And our thesis
Speaker 4: has been that if you don't get this this deal,
Speaker 4: you could end up with credit spreads trading more in
Speaker 4: line with something like an LTS whether the marketer has
Speaker 4: started to price in and more just stress valuation in
Speaker 4: anticipation of those maturities in twenty twenty five.
Speaker 1: Okay, so we'll be watching your research very closely on
Speaker 1: that one. Before we go that, we did want to
Speaker 1: also ask you about sell Next, which is a Spanish
Speaker 1: tower operator. Why is that one on your radarid?
Speaker 3: Yeah, a bit more of a positive story on this one.
Speaker 4: Last year, they massively changed their corporate strategy, which for
Speaker 4: the last few years has been an absolute acquisition on
Speaker 4: but they've rained that in. They want to get the
Speaker 4: S and P rating up from plus to trip will
Speaker 4: be minus. They actually reported results this week which seemed
Speaker 4: to fit or still seem to be trending in the
Speaker 4: right direction for an upgrade. We think sometime next year.
Speaker 4: The one thing that could bring that forward would be
Speaker 4: if they were to sell or partner on some of
Speaker 4: their assets and bring an external investment and get leverage
Speaker 4: down a little bit quicker. But they're on track to
Speaker 4: a free cash flow break even in twenty twenty four.
Speaker 4: The capex starts to tail away in twenty twenty five,
Speaker 4: and I think that's probably the trigger for SMP to
Speaker 4: raise them to triple B minus the credit spreads for them.
Speaker 4: They still trade wide of their investment grade piers, so
Speaker 4: the closest comparison is American Tower, which trades tighter than
Speaker 4: them in Euros, when normally we would expect European companies
Speaker 4: tend to trade tighter than the Yankee issuer is in Euros.
Speaker 4: So it seems like there's a reasonable amount of room
Speaker 4: for Cell and X spreads potentially upperformers and when that
Speaker 4: upgrade comes through.
Speaker 1: How much are we talking about here?
Speaker 4: So celln X has a pretty significant eurocurve. Their leverage
Speaker 4: has been coming down from around seven times fully adjusted
Speaker 4: the way the rating agencies do it, and I think
Speaker 4: that's going to come down to around five to five
Speaker 4: and a half times in the medium to so it's
Speaker 4: a fairly fairly significant reduction in leverage, and the rating
Speaker 4: agencies as well. It's worth remembering have become a lot
Speaker 4: more tolerant of leverage at tower companies. Recently, there was
Speaker 4: an S ANDP report that basically said all of the
Speaker 4: tower companies have been given an extra half a turn
Speaker 4: of leverage tolerance within their credit ratings. I think as
Speaker 4: the business model has kind of shown itself to be
Speaker 4: quite resilient through the various recent shocks.
Speaker 1: So are there any particular parts of a curve for
Speaker 1: sell Next you particularly like or you're interested in, you know,
Speaker 1: that you think might move more than others.
Speaker 4: Yeah, I think when you look at that comparison that
Speaker 4: I was talking about to American Tower, it becomes more pronounced.
Speaker 3: At the longer end.
Speaker 4: Cell Next, as a high old issue, has a bit
Speaker 4: of a steeper curve. So around the sort of seven
Speaker 4: to nine year kind of maturity points in Euros looks
Speaker 4: to be where there's most relative value against the US comparative.
Speaker 1: Interesting, So cell Next going up potentially and Telecom Italia
Speaker 1: going down.
Speaker 3: That's it.
Speaker 1: Thanks very much, Aidan Cheslin of Bloomberg Intelligence. You can
Speaker 1: read all of his great analysis on the Bloomberg terminal.
Speaker 1: Do check it out, and I hope to see you
Speaker 1: back on the show soon.
Speaker 2: Aiden.
Speaker 3: Thanks James, and thanks.
Speaker 1: Again to Erin Hudson from Bloomberg News. Read all of
Speaker 1: her great credit scoops on the Terminal and at Bloomberg
Speaker 1: dot Com. I'm James Crombie. It's been a pleasure having
Speaker 1: you join us again next week on the Credit Edge.