Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is Olivia Raimonde and I'm a corporate finance
Speaker 1: reporter here at Bloomberg News. This week, we're delighted to
Speaker 1: have on the show Jill Shaw, who covers leverage loans
Speaker 1: for Bloomberg News in New York. How are you doing, Jill, good,
Speaker 1: Thanks for having me. We're also delighted to chat with
Speaker 1: Daniel Fan, he covers China properties for Bloomberg Intelligence in
Speaker 1: Hong Kong. He is going to walk us through the
Speaker 1: latest news on Country Garden. We'll be coming back to
Speaker 1: Daniel a bit later in the show, so please do
Speaker 1: stay with us. But first we turned to Jill Shaw
Speaker 1: with Bloomberg News. Jill, August is typically a very slow
Speaker 1: month for credit deals, especially in the high old market,
Speaker 1: but we've seen more than expected, particularly in loans. Could
Speaker 1: you talk to us about what's driving that issuance and
Speaker 1: sort of set the scene for us for what's happening
Speaker 1: in your market right now.
Speaker 2: Absolutely.
Speaker 1: So.
Speaker 2: The leverage loan market has been in a bit of
Speaker 2: a rally in recent weeks, and you know, prices, secondary
Speaker 2: prices for loans just crossed ninety five cents on the
Speaker 2: dollar for the first time since just about a year ago.
Speaker 2: So what's driving that, you know, part of it is
Speaker 2: the macro macro conditions that all financial markets have been observing,
Speaker 2: which is that inflation data is better than expected and
Speaker 2: inflation is slowing. And also, at the same time, the
Speaker 2: economy is still performing well. There's decent economic growth. So
Speaker 2: all of that gives leverage loan investors some you know,
Speaker 2: some comfort that the economy is not going to go
Speaker 2: into a severe recession, which would really impact leverage loan
Speaker 2: borrowers and companies that are highly indebted. At the same time,
Speaker 2: investors are flush with cash and the yields in this
Speaker 2: market are hard to ignore. So you know, the year
Speaker 2: to date returns in the ASSA class are above eight percent,
Speaker 2: and investors are essentially hunting for paper. Issuance has been
Speaker 2: really lagging this year, and so most of the deals
Speaker 2: that we've seen recently are borrowers trying to sort of
Speaker 2: tap this rally, but many are refinancings or amended extent,
Speaker 2: so it's not quite new money, and that means that,
Speaker 2: you know, investors are still kind of hunting for paper
Speaker 2: that is high yielding.
Speaker 1: That makes a lot of sense. Thanks so much for
Speaker 1: walking us through that, Jill. But there was one deal, right,
Speaker 1: I believe it was Tenaco that was stuck on banks
Speaker 1: books that price recently. Could you talk to me a
Speaker 1: little bit about that and sort of how that came
Speaker 1: to the market.
Speaker 2: Now, Yeah, I mean, you know, the Teneco story is
Speaker 2: one of tapping this credit rally at the right time.
Speaker 2: So Teneco is an auto parts maker. It was a
Speaker 2: buy out by Apollo Management Global Management last year and
Speaker 2: it got stuck on banks books after banks tried to
Speaker 2: sell some of the bonds and loans financing that deal.
Speaker 2: And that was because investors were fleeing risky assets, right
Speaker 2: and in the auto industry was in much worse shape
Speaker 2: last year than it is now. And so at the
Speaker 2: time investors really shown the deal. And what we'd heard
Speaker 2: also was that the terms or the terms governing the
Speaker 2: documentation were sort of not an investor's favor. We are
Speaker 2: very you know, One thing to remember is that we
Speaker 2: are in a bit of a buyer's market right now.
Speaker 2: In that like, investors have been pushing back on documentation,
Speaker 2: which has deteriorated in the loan market over deck over
Speaker 2: years and starting to ask for more tight documentation in
Speaker 2: case companies fall into distress. So anyway, fast forward to
Speaker 2: this rally, it seems that you know, banks are really
Speaker 2: banks that were led by a city group in Bank
Speaker 2: of America, noted the sort of increase in prices in
Speaker 2: the secondary market, noted investor demand for deals, and likely
Speaker 2: saw some sort of macro improvement in the auto industry
Speaker 2: enough to bring this deal. And it got done. You know,
Speaker 2: it still got done at fairly steep discounts, but they
Speaker 2: were able to move that risk off their balance sheet.
Speaker 2: And remember, banks had about more than forty or so
Speaker 2: odd billion dollars stuck on their balance sheet last year
Speaker 2: when investors fled these markets. So Tenaco is one of
Speaker 2: a few remaining Teneco was one of a few remaining
Speaker 2: deals on banks balance sheets, and I'm sure they're quite
Speaker 2: relieved to be.
Speaker 1: Rid of it. That makes a lot of sense. Yes,
Speaker 1: last year, there was tens of billions of dollars of
Speaker 1: these loans, as you said, stuck on bank's books when
Speaker 1: the market massively repriced. But there are still some deals lingering, Jill,
Speaker 1: Is that right? Can we expect to see those anytime soon? Yeah?
Speaker 2: I mean, what's left on banks balance sheets is really
Speaker 2: led by a few deals. So Twitter, which is of
Speaker 2: course Elon Musk's buy out of the social media platform
Speaker 2: that's now called x That's a significant chunk of debt
Speaker 2: sitting on banks balance sheets, and then bright Speed, which
Speaker 2: is Apollos buyout of some broadband holdings from Lumen. So
Speaker 2: you know, I think that those deals are probably further out.
Speaker 2: Twitter is quite volatile in terms of the changes that
Speaker 2: Elon Musk is making right now, and what the performance
Speaker 2: of that company looks like under this new sort of
Speaker 2: ownership is something I think people are watching closely, but
Speaker 2: would need a lot more data before banks could credibly
Speaker 2: bring that deal to market. And Bright Speed has some
Speaker 2: ongoing litigation, which just means that it's sort of impossible
Speaker 2: right now as well. So Teneco is probably one of
Speaker 2: the last hung deals that we will see come to market.
Speaker 2: But from my conversations with bankers, that risk is now
Speaker 2: you know, much of that risk has been marked down
Speaker 2: in prior quarters for banks, and historically speaking, that amount
Speaker 2: is low, and so that's not really getting in the
Speaker 2: way of new underwriting for.
Speaker 1: Banks looking for new underwriting, and banks for sure after
Speaker 1: last year's levels, So can you talk to me a
Speaker 1: little bit though, So we're getting all this supply, now,
Speaker 1: what does that mean for like the post Labor Day
Speaker 1: deal pipeline, which is when we typically see a lot
Speaker 1: of these deals come to market.
Speaker 2: Yeah, So you know, the supply that we're getting right
Speaker 2: now is a lot of refise, a lot of amend
Speaker 2: and extend deals, which is when companies try to push
Speaker 2: out their maturities. So a lot of the issuers that
Speaker 2: can deal with their maturities are coming now and taking
Speaker 2: advantage of this rally right and the tightening of prices.
Speaker 2: We've also seen some dividend deals and an occasional acquisition
Speaker 2: smaller acquisition deal post Labor Day. What I think we're
Speaker 2: expecting is a lot of the big financings that banks
Speaker 2: have signed up for mergers and acquisitions. So you know,
Speaker 2: Sineos is one World Pay is a massive cross border
Speaker 2: deal which banks have underwritten. There was also a one
Speaker 2: billion dollar loan for the buyout of Simon and Schuster.
Speaker 2: So there's quite a few deals in the pipeline for September.
Speaker 2: Beyond that, I think the pipeline is a little quiet,
Speaker 2: But what we're hearing is that their process is underway
Speaker 2: and banks may be able to bring more more debt
Speaker 2: into the syndicated markets.
Speaker 1: Well, we'll be certainly looking out for those deals. I
Speaker 1: want to circle back to Tenaco real quick, if you
Speaker 1: allow me. So, you mentioned the discount, could you give
Speaker 1: us some color. I know it was eighty five cents
Speaker 1: on the dollar for the bond. Would you be able
Speaker 1: to talk to us a little bit about the color
Speaker 1: you were getting from investors, you know, when the talks
Speaker 1: and the discussions around the ultimate pricing were happening.
Speaker 3: Yeah.
Speaker 2: I mean I think that you know, Teneco is a
Speaker 2: cyclical company, and so investors that are wary of auto
Speaker 2: in general are not likely to play in the deal.
Speaker 2: But I what I imagine that investors who did play
Speaker 2: in the deal saw was like a significant discount there
Speaker 2: that looked pretty attractive. And I think that, you know,
Speaker 2: this year is a much better year two for an
Speaker 2: auto parts supplier than last year, and so I think
Speaker 2: all of those things combined kind of and then you know,
Speaker 2: let's not forget that the documentation on that deal became
Speaker 2: more investor friendly. It did when they first brought it
Speaker 2: out like a week or so ago, and then it
Speaker 2: did again before pricing, so investors were certainly, it seems,
Speaker 2: jockeying for that. So yes, the price got it done,
Speaker 2: but also I think, you know, some concessions from the
Speaker 2: sponsor on the on the deal terms was probably the
Speaker 2: thing that pushed it over the finish line.
Speaker 1: Got it. Got it, Thanks so much. And so we've
Speaker 1: been talking a lot about some of these riskier deals.
Speaker 1: I want to pivot to another one of your stories
Speaker 1: that you put out this week that was fantastic. It
Speaker 1: talked about loan defaults and how they're outpacing the defaults
Speaker 1: in junk bonds. Can you walk us through that, because
Speaker 1: I always thought it was typically the other way around.
Speaker 2: Yeah, I mean, you know what it typically has been
Speaker 2: is that they kind of move in tandem. And what
Speaker 2: we're seeing for the first time and like thirty years,
Speaker 2: is this divergence right where loan defaults are up to
Speaker 2: like four percent and high held bond defaults are still
Speaker 2: closer to three or two point seven. So that margin,
Speaker 2: that difference of like one point three percentage points is
Speaker 2: the biggest in thirty years. Why is this happening. It's
Speaker 2: really a rate story, right. Leverage loans are floating rate,
Speaker 2: which means that as as rates go up, the interest
Speaker 2: that borrowers pay on that debt goes up, whereas junk
Speaker 2: bonds are affects right, and so they don't see the
Speaker 2: new sort of rates regime regime until until they come
Speaker 2: back to the market and refinance their deal. There's other
Speaker 2: reasons too, I think, generally speaking, compositionally, the leverage loan
Speaker 2: market is lower quality now than the high held market.
Speaker 2: There's a number of reasons for that. One, the leverage
Speaker 2: loan market is where you know, six almost sixty percent
Speaker 2: of borrow or private equity backed, which tends to mean
Speaker 2: more leverage on those companies they're smaller generally speaking. And
Speaker 2: then you know, because private equity likes really to borrow
Speaker 2: at that B three level, they're lower rated and falling
Speaker 2: below that means that you know, lever's loan borrowers lose
Speaker 2: access to a lot of their investors clos The high
Speaker 2: yield market, in contrast, has actually been getting in better
Speaker 2: quality in recent years. You know, the last time that
Speaker 2: the high yeld market saw many many defaults, as most
Speaker 2: listeners credit listeners will remember, is like the twenty fifteen
Speaker 2: twenty sixteen cycle of energy to faults and really many
Speaker 2: many of you know, many of those defaults have sort
Speaker 2: of moved out of the market, and now that market
Speaker 2: is a lot healthier and a lot of a lot
Speaker 2: of bars have also moved to the leverage loan market.
Speaker 2: So what we have is on one end, a higher
Speaker 2: quality market and high yield, the rates regime really catching
Speaker 2: up to that market just yet though, though that maturity
Speaker 2: wall is approaching. And on the other side, we have
Speaker 2: a market that is lower quality, favored by private equity,
Speaker 2: which means more debt, and where the rates regime has
Speaker 2: already caught up. You know, these benchmark rates where that
Speaker 2: leverse loan leverse loans are PEG two have already risen dramatically,
Speaker 2: and some companies have seen their their interest costs like
Speaker 2: essentially double over the last you know, the last eight
Speaker 2: months or whatever of rate hikes.
Speaker 1: Wow, that is that is a steep increase. And then
Speaker 1: another thing that I've thought about when looking at this
Speaker 1: topic is that another reason why historically loan defaults have
Speaker 1: been lower is because they sit higher in the capital
Speaker 1: structure and they are usually those investors are paid back
Speaker 1: before junk bond investors. Is that correct, Jill, And could
Speaker 1: you talk about that dynamic and how it's changed.
Speaker 2: Yeah, I mean loan investors tend to sit senior secured.
Speaker 2: There's a couple of things here. So one senior secured
Speaker 2: is definitely going to get paid first. If you have
Speaker 2: a loan only capital structure, though it's only it's all
Speaker 2: loans all, you know, sort of everybody has has the
Speaker 2: same priority, whereas like you know, those mixed capital structures
Speaker 2: where there are loans and bonds, Yes, the loans would
Speaker 2: get paid first. And so we do have like loan
Speaker 2: only borrowers, and they are seen to be more risky
Speaker 2: in the leverish loan market because not only do you
Speaker 2: have a capital structure that is exposed to interest rate,
Speaker 2: entire capital structure that is exposed to interest rates. Many
Speaker 2: of these companies did not hedge against inflation or against
Speaker 2: arise in rates. You know, no one really, no, broadly
Speaker 2: speaking across Wall Street, the aggressive regime of raid hikes
Speaker 2: was not expected. And so that's sort of the reason
Speaker 2: as well that like leverage lown borrowers are kind of
Speaker 2: getting hit harder earlier.
Speaker 1: That makes a lot of sense, and I'm sure that
Speaker 1: that is going to be a theme and a topic
Speaker 1: that the entire fixed income market is going to be
Speaker 1: watching very closely, especially as we move into the end
Speaker 1: of the year and see how growth holds up well. Jill,
Speaker 1: thank you so much for coming on. Great stuff. That
Speaker 1: was Jill Shaw from Bloomberg News. Thank you so much
Speaker 1: for joining us. You can read all of Jill's coverage
Speaker 1: and her scoops on the Bloomberg terminal and of course
Speaker 1: at Bloomberg dot com.
Speaker 2: Thanks for having me.
Speaker 1: As I mentioned earlier, I'm delighted to welcome Daniel Fan
Speaker 1: to the Credit Edge. He covers China properties for Bloomberg
Speaker 1: Intelligence based in Hong Kong. Today we are going to
Speaker 1: focus on the distressed Chinese developer Country Garden Holdings. Daniel,
Speaker 1: can you set the scene for us what's going on here?
Speaker 3: Thank you Olivia. Yeah, the scene is actually about Country
Speaker 3: Gardens stress situation. The company used to be one of
Speaker 3: the largest, if not the largest, in the past six
Speaker 3: years in terms of sales. The developer failed to make
Speaker 3: its kep on on payment on time on August six.
Speaker 3: That create a lot of concern about the financial health
Speaker 3: of the company and also drag down the bond price
Speaker 3: of the whole center. That also creates some issue about
Speaker 3: whether the China property seer has some systematic risk.
Speaker 1: Do you think the Country Garden is going to get
Speaker 1: a bailout from the government. Is that an option on
Speaker 1: the table.
Speaker 3: I think there's a lot of expectations that the government
Speaker 3: may do something, but I think the chance, based on
Speaker 3: what we have seen, is not that high. It was
Speaker 3: once a two big to fail developer, and it's now
Speaker 3: becoming maybe a bit too big to be rescued by government,
Speaker 3: especially at the local level, given the size. It has
Speaker 3: more than three hundred projects nationwide, and it would be
Speaker 3: difficult for any local government to handle. So in short,
Speaker 3: the government the top agenda is to ensure project delivery
Speaker 3: while leaving the developer to deal with its own financial problems.
Speaker 1: Got it? Got it? And how likely is it that
Speaker 1: Country Garden will extend its offshore debt.
Speaker 3: It's getting more likely now because the options available on
Speaker 3: the table are getting less. It tried to do a
Speaker 3: share placement at the end of July, but for some
Speaker 3: reason it did not go through, and then share price
Speaker 3: dropped from one point four Hong Kong dollar around eighty
Speaker 3: cents yesterday closing. So it's a little bit difficult to
Speaker 3: attack the equity market in terms of getting financing I mean,
Speaker 3: I mean in terms of financing coming deal. It has
Speaker 3: two convertible bonds pay about in December and one come
Speaker 3: football coming deal in January. The total amount is around
Speaker 3: one point nine billion US dollars.
Speaker 1: One point nine billion US dollars. That's quite a chunk
Speaker 1: of change. So talk to me about the impact this
Speaker 1: is going to have on Asia's fixed income sector. If
Speaker 1: Country Garden needs to extend offshore.
Speaker 3: Deb uh, the impact more coming from like as a
Speaker 3: location perspective, Country Garden has around eight point four billion
Speaker 3: dollar bond outstanding in the Bloomberg Asia Higher Bond Index,
Speaker 3: the ind size is around like six six seventy six billion. Basically,
Speaker 3: fund managers need to find something else to replace Country Garden.
Speaker 3: And also another thing is Country Garden used to be
Speaker 3: a core holding of many fund managers in their portfolio.
Speaker 1: Are there like can you give us like a sense
Speaker 1: of sort of like what other options there are? Like
Speaker 1: what could they be reallocating to or what are some
Speaker 1: opportunities that you are hearing are out there for investors
Speaker 1: besides Country Garden.
Speaker 3: I think naturally you have a smaller index after Country Garden.
Speaker 3: If they don't pay, they will be out of the
Speaker 3: index preis, and then I think you have an impact
Speaker 3: on the China how you market in the sense that
Speaker 3: people kind of like feel skeptical about the market. They
Speaker 3: may look for somewhere else outside of China for investment opportunities.
Speaker 3: Maybe they may look into like Japan or even Australia
Speaker 3: to broader the concept of Asia. In the past, when
Speaker 3: we talk about Asia, we usually talkt about Asia excluded
Speaker 3: in Japan and also excluding Australia. Now, yeah, we may
Speaker 3: need to change the concept Asia may include Japan and Australia.
Speaker 3: And the second point is they may they may get
Speaker 3: out of the hire market and focus more in the
Speaker 3: investment grade market. That will be some of the impact
Speaker 3: in the.
Speaker 1: Very interesting Yeah, a lot of people, a lot of
Speaker 1: my sources talking to me about, you know, the up
Speaker 1: and quality trade, whether it's China property or you know,
Speaker 1: US investment grade bonds. A lot of investors in the
Speaker 1: market are looking to move up in quality and capture
Speaker 1: those yields that we haven't seen in such a long time.
Speaker 1: So I want to switch from the fixed income markets
Speaker 1: to the physical housing market. How is that impacted by
Speaker 1: everything that's going on with Country Garden.
Speaker 3: Because Country Garden is kind of like a household name
Speaker 3: alsore in the in the physical market, it will have
Speaker 3: damage in terms of home buiased confidence. They don't know
Speaker 3: which developer is trustworthy if they want to buy a
Speaker 3: piece of property. I think that is the most important
Speaker 3: impact in the physical market and also there if Country
Speaker 3: Garden is not trustworthy, then who else? And then people
Speaker 3: may think it's the whole like property center, not safe
Speaker 3: from I mean from a home buased perspective. If we
Speaker 3: look at like Evergrand, Evergrand, we can still say it's
Speaker 3: a stand alone case because I think people kind of
Speaker 3: understand its business model is using a higher leverage the
Speaker 3: Country Garden. What's a different story. It was rated investment
Speaker 3: grade just like more than slightly more than a year
Speaker 3: ago and a high quality developer when the government launched
Speaker 3: it first arrow of a rescue plan.
Speaker 1: Very interesting. So is policy stimulus going to help at
Speaker 1: this point? Can you talk about it? Talk to us
Speaker 1: about it from that angle?
Speaker 3: Yeah, I think the policy matches trying to help to
Speaker 3: adjust the demand side, like easing home purchased restriction a
Speaker 3: lower deposit RAISO. I think the more important pon their
Speaker 3: stressing is to ensure delivery. It's kind of like a
Speaker 3: double as sol because they won't try to ensure delivery,
Speaker 3: so meaning that they require developers to keep more cares
Speaker 3: at the project level to make sure they're able to
Speaker 3: complete the project and deliver to the hands of their
Speaker 3: home buyers at the same time. Decide effect is developer
Speaker 3: they are less able to use the cares available for
Speaker 3: debt surfacing, especially for offshore bondholders, so that this is
Speaker 3: one point and the other thing is in their second
Speaker 3: row to support the center the government wire the agencies
Speaker 3: provide guarantee onsore for developers to issue onsore bonds, but
Speaker 3: at the same time they require developers to post collateral
Speaker 3: against the guarantee. So because a lot of the Chinese
Speaker 3: property developers they depend very much more than ninety percent
Speaker 3: of their revenue from project development, many of them they
Speaker 3: don't have like sizable investment properties or unpledged assets to
Speaker 3: provide to the government as collateral against which they get
Speaker 3: guarantee on their bond issuance.
Speaker 1: Also got it, Got it, And then I wanted to
Speaker 1: follow up with you again on like the home buyers
Speaker 1: are people you talked about a crisis of confidence, you
Speaker 1: know in the home buyers who are who are looking
Speaker 1: to buy property, but has anyone lost their homes or
Speaker 1: is anyone's homes at risk because of this?
Speaker 3: We see some cases that like people are protesting because
Speaker 3: the unit they put money on are still not like
Speaker 3: completely yet. We see cases here and there, but not
Speaker 3: in a law scale so probably due to the policy
Speaker 3: to mature delivery by the government.
Speaker 1: Thanks very much that it was Daniel Fan Bloomberg Intelligence.
Speaker 1: You can read all of his great analysis on the
Speaker 1: Bloomberg Terminal. Do check it out. Hope to see you
Speaker 1: back on the show soon, Daniel. Thank you, and thanks
Speaker 1: again to Jill Shaw from Bloomberg News. Read all of
Speaker 1: her great stuff on the terminal and at Bloomberg dot com.
Speaker 1: And I'm Olivia Raymonde. It's been a pleasure having you
Speaker 1: join us again next week on the Credit Edge.