WEBVTT - CLOs Stage a Comeback; Shipping’s in Dire Straits 0:00:12.560 --> 0:00:15.320 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:15.640 --> 0:00:18.440 My name is James Crumbie. I'm a senior editor at Bloomberg. 0:00:19.160 --> 0:00:20.920 This week, we're very pleased to have on the show 0:00:21.000 --> 0:00:23.880 Lisa Lee, who covers credit markets for Bloomberg News and 0:00:24.040 --> 0:00:25.919 is based in London. How are you, Lisa. 0:00:27.080 --> 0:00:27.360 Fine? 0:00:27.360 --> 0:00:29.639 Thank you, James, and thank you for so much for 0:00:29.680 --> 0:00:30.040 having me. 0:00:30.520 --> 0:00:33.600 We're also delighted to welcome Stephan Kohochef, who focuses on 0:00:33.680 --> 0:00:36.360 shipping at Bloomberg Intelligence, also in London. 0:00:37.200 --> 0:00:38.599 Hi, James, thanks for having me. 0:00:38.720 --> 0:00:40.839 We'll be coming back to Stefan to talk about how 0:00:40.880 --> 0:00:43.760 container shipping is starting to fall apart after a major 0:00:43.800 --> 0:00:45.960 boom during the pandemic when we were all cooped up 0:00:45.960 --> 0:00:48.720 at home ordering stuff online. So do stay with us. 0:00:49.479 --> 0:00:52.599 But first, Lisa Lee with Bloomberg News, there's a lot 0:00:52.640 --> 0:00:55.480 going on right now with clos. You've been all over 0:00:55.520 --> 0:00:57.440 that story and that's some you know, for those who 0:00:57.440 --> 0:01:01.520 don't know, that's collateralized loan obligations. So let's start with 0:01:01.560 --> 0:01:04.440 the elephant in the room. What is a colo and 0:01:04.520 --> 0:01:05.240 why do we care? 0:01:05.600 --> 0:01:05.720 So? 0:01:05.920 --> 0:01:09.399 Colos are vehicles that buy leverage loans, and leverage loans 0:01:09.440 --> 0:01:13.199 are debts of junk rated companies that are floating rate, 0:01:13.520 --> 0:01:16.679 and they buy them and they repackage them and sell 0:01:16.720 --> 0:01:19.600 them as bond of different ratings that range from triple A, 0:01:19.760 --> 0:01:22.080 which is the safest all the way down to what's 0:01:22.080 --> 0:01:26.800 called colo equity. And there are big buyer in the 0:01:26.880 --> 0:01:32.640 leverage loan market and fuel issues for private equity deals 0:01:32.640 --> 0:01:35.680 and also for just like names like Burger King and 0:01:36.080 --> 0:01:38.560 names that you might know Flora in the UK. 0:01:38.800 --> 0:01:43.920 So they buy loans, repackage them, sell them onto different investors. 0:01:44.080 --> 0:01:48.080 Is that yes, okay? So are they anything like the 0:01:48.120 --> 0:01:51.000 CDOs which blew up the financial system in two thousand 0:01:51.040 --> 0:01:51.320 and eight. 0:01:52.800 --> 0:01:56.600 They're similar in that the way they securitize their assets 0:01:56.680 --> 0:01:58.720 very similar to CDOs. That's why they have a very 0:01:58.760 --> 0:02:02.960 similar name. Different about a CDO and the clo iss 0:02:03.320 --> 0:02:07.400 what goes into the securitized vehicle. These are corporate debt 0:02:08.240 --> 0:02:11.200 and considered a lot more safer than some of the 0:02:11.880 --> 0:02:16.000 dicey junk mortgage backed derivatives that were that caused the 0:02:16.040 --> 0:02:20.440 financial crisis. So even though these are junk rated debt 0:02:21.080 --> 0:02:24.400 and more likely to go bankrupt than say your Apple 0:02:24.520 --> 0:02:29.040 or your Microsoft, they're still historically only about four percent defaults. 0:02:29.760 --> 0:02:33.040 Bankruptcies are fairly low and recoveries have been fairly high, 0:02:33.480 --> 0:02:36.880 so they're considered a lot safer, and very few clos 0:02:36.919 --> 0:02:39.760 have gone bussed, even during the financial crisis. 0:02:39.919 --> 0:02:43.520 So you're writing right now that resets, why are they 0:02:43.520 --> 0:02:44.200 happening right now? 0:02:44.320 --> 0:02:44.480 And what? 0:02:45.160 --> 0:02:46.000 Just tell us what they are? 0:02:47.160 --> 0:02:50.160 Okay, So resets are a type of refinancing that sort 0:02:50.160 --> 0:02:54.640 of became in vogue around twenty seventeen twenty eighteen, And 0:02:54.720 --> 0:02:56.760 what they do is they extend the life of a clo. 0:02:56.960 --> 0:02:59.800 Colo is supposed to be a finite vehicle that after 0:02:59.840 --> 0:03:02.519 a number of years, you sell the loans and you 0:03:02.639 --> 0:03:06.600 return cash to all the investors. Well, a reset, sort 0:03:06.639 --> 0:03:09.840 of like what you would consider a refinancing of a 0:03:09.919 --> 0:03:14.480 higher bond or an ig bond, extends the maturity and 0:03:14.600 --> 0:03:19.000 also sets the bond pricing at a different level. And 0:03:19.360 --> 0:03:22.160 they've been pretty much dead in the water for the 0:03:22.240 --> 0:03:25.400 last past over a year since the war in Ukraine, 0:03:25.480 --> 0:03:28.960 just because it just didn't make sense anymore. But they've 0:03:28.960 --> 0:03:33.200 started to come back, and we've saw two regular traditional 0:03:33.760 --> 0:03:36.680 clos do these resets, and it's a real indication that 0:03:37.240 --> 0:03:39.880 markets are starting to heal from f a year of 0:03:39.960 --> 0:03:43.720 really painful of returns and eels. 0:03:43.880 --> 0:03:46.920 So an investor who is you know, has owns a 0:03:46.920 --> 0:03:50.960 piece of this thing, this structure that repackages leverage loans 0:03:51.000 --> 0:03:54.320 from companies. They are essentially being told that they need 0:03:54.360 --> 0:03:57.360 to hold on to them for longer. Will they get 0:03:57.400 --> 0:03:58.280 paid more for doing that? 0:03:59.200 --> 0:04:01.800 No, they actually get paid less. So that is the 0:04:02.760 --> 0:04:06.520 issues in the COLO. They take all the interest payments 0:04:06.600 --> 0:04:08.960 that a leverage loan makes and they press them into 0:04:09.000 --> 0:04:12.720 a different investors, so triple a investor will get a 0:04:12.760 --> 0:04:17.640 lot less than say a single be investor and an 0:04:17.680 --> 0:04:21.200 equity investor. And what a reset does is they take 0:04:21.240 --> 0:04:24.200 away the yield, some of the yield that bond investor 0:04:24.240 --> 0:04:28.039 gets and increase the returns of equity investors. So why 0:04:28.080 --> 0:04:32.560 would a bond investor play along? Well, you have to 0:04:32.600 --> 0:04:35.800 look at the prevailing issuance and the yield that you 0:04:35.800 --> 0:04:39.480 can get in the market right now. What they can 0:04:39.600 --> 0:04:44.039 either say yes, will take a lower interest payment, or 0:04:44.320 --> 0:04:46.159 you can get out and you can try to find 0:04:46.360 --> 0:04:50.159 another deal that pays similar there and they really can't. 0:04:50.240 --> 0:04:53.040 So you have the option to roll, option to leave. 0:04:53.560 --> 0:04:55.720 Some do leave and try to put their money in 0:04:55.760 --> 0:04:59.279 different areas, but that is why they would take the 0:04:59.360 --> 0:05:01.719 lower interest rate. 0:05:02.040 --> 0:05:04.359 So rates globally have gone up quite a bit. You 0:05:04.360 --> 0:05:06.960 can get an investment grade bond for five percent yield 0:05:07.000 --> 0:05:08.880 right now, which is, you know, much more than junk 0:05:09.040 --> 0:05:11.680 was yielding even a year ago. Why do you go 0:05:11.720 --> 0:05:13.760 into clasteralize loan obligations? I mean, do you get paid 0:05:13.760 --> 0:05:16.800 significantly more or is it just a diversification or is 0:05:16.800 --> 0:05:18.040 it what's the benefit? 0:05:19.040 --> 0:05:21.920 You do get paid more than a corporate bond. So yes, 0:05:22.000 --> 0:05:24.720 everything has gone up. But so you look at a 0:05:24.720 --> 0:05:28.400 comparable triple A of a CLO and you look at 0:05:28.400 --> 0:05:31.520 a triple A IG bond, they've both gone up, but 0:05:31.600 --> 0:05:34.600 a CLO has gone up even further. They're floating rate 0:05:34.640 --> 0:05:36.920 for one so based off so for a youur bore 0:05:37.160 --> 0:05:39.640 and so far is past five percent right now. And 0:05:39.720 --> 0:05:41.719 on top of that you get a spread. Now, the 0:05:41.760 --> 0:05:44.800 reason why they pay more is because of the complexity. 0:05:45.360 --> 0:05:48.960 You know what you're getting with an Apple bond, just 0:05:49.040 --> 0:05:52.640 the debt of Apple here, it's a pool of one hundred, 0:05:52.720 --> 0:05:55.840 two hundred, three hundred leverage loans and because of that 0:05:55.920 --> 0:05:57.920 you do get an extra spread. So if you're interested 0:05:57.960 --> 0:06:00.480 in a triple A with high yield. 0:06:00.680 --> 0:06:04.159 Then you go into a CLO complexity. That's that's always 0:06:04.160 --> 0:06:06.400 been a problem in the past. You know, the most complex, 0:06:06.600 --> 0:06:10.640 least transparent markets to where they trable usually starts. How 0:06:10.680 --> 0:06:13.760 worried should we be about this kind of structured product 0:06:13.839 --> 0:06:15.520 right now? Is there trouble brewing with all of this 0:06:15.640 --> 0:06:18.040 repackaging of risky loans, and particularly at the time when 0:06:18.360 --> 0:06:20.240 you know the economy is slowing, rates are going up, 0:06:20.279 --> 0:06:22.160 these companies are going to be struggling to pay back 0:06:22.200 --> 0:06:23.200 at some point right. 0:06:24.360 --> 0:06:26.960 It's interesting you mentioned that, James, because in the past, 0:06:27.560 --> 0:06:31.719 no less than the Treasury Secretary Janet Yellen, the Bank 0:06:31.760 --> 0:06:35.920 of England, the IMF has highlighted and flagged COLO as 0:06:36.040 --> 0:06:39.560 a possible area of systemic risk. And that not only 0:06:39.560 --> 0:06:42.880 that a problem in the leverage loan a CLO market 0:06:42.960 --> 0:06:48.520 could also transfer on and and destabilize the financial system. 0:06:48.839 --> 0:06:51.520 So it is an area of risk. So regulators are 0:06:51.600 --> 0:06:56.440 tracking it very carefully. They have so far performed well. 0:06:57.120 --> 0:07:01.039 But if defaults spike up much higher and recoveries which 0:07:01.080 --> 0:07:04.599 is what investors get when a loan goes into bankruptcy, 0:07:04.920 --> 0:07:08.159 is significantly lower, then they could be an area of worry. 0:07:08.360 --> 0:07:13.360 As of yet, there is no hint that it's problems 0:07:13.360 --> 0:07:17.480 are happening, but it might. We never know. 0:07:17.720 --> 0:07:18.240 We never know. 0:07:18.560 --> 0:07:20.280 And the flip side, of course, is that you've mentioned 0:07:20.280 --> 0:07:23.640 the regulators and they're constantly throwing stones at this market 0:07:23.680 --> 0:07:24.880 and saying, you know, it's going to blow up, it's 0:07:24.880 --> 0:07:26.320 going to get us into trouble. But it never it 0:07:26.400 --> 0:07:26.800 never has. 0:07:27.440 --> 0:07:30.160 Oh, it never has. That's the thing. So you have history, 0:07:30.480 --> 0:07:33.000 but you know history can only point to a future, 0:07:33.040 --> 0:07:36.640 and so for so much the market is constantly changing 0:07:36.680 --> 0:07:39.240 and evolving. So history is a good guy, but it 0:07:39.320 --> 0:07:40.400 is not a perfect eye. 0:07:40.640 --> 0:07:43.400 So leverage loans on the on the underlying side, you 0:07:43.480 --> 0:07:46.440 mentioned a bit about defaults. I still think that we're 0:07:46.480 --> 0:07:51.480 underestimating them, given you know, the pressures from lower earnings 0:07:51.520 --> 0:07:54.000 and much much higher rates. You know, rates just jumped 0:07:54.320 --> 0:07:57.680 faster and more than anyone was expecting. That has to 0:07:57.760 --> 0:07:59.280 lead to some problems, right, I mean we have to 0:07:59.360 --> 0:08:02.440 think about losses and leverage loans at some point. 0:08:03.040 --> 0:08:07.000 Yeah. So bankruptcys have hit a more than a decade 0:08:07.080 --> 0:08:10.840 high right now, and we're seeing more companies go and 0:08:10.960 --> 0:08:13.240 all companies that like sort of what we used to 0:08:13.280 --> 0:08:15.960 call zombie companies have layered on dead and use debt 0:08:16.040 --> 0:08:20.000 to keep going. They're probably gonna go bus is their 0:08:20.120 --> 0:08:23.120 time to actually sort of flush out the system. But 0:08:23.760 --> 0:08:29.760 still defaults are way below historical norms, so it's anticipated 0:08:29.800 --> 0:08:33.680 and we'll oh very much depend on the course of 0:08:34.200 --> 0:08:36.560 trajectory of the economy. There's a lot of people who 0:08:36.600 --> 0:08:38.840 think now that the US is going to avoid a 0:08:38.880 --> 0:08:41.599 big recession. If we do that, then there's gonna be 0:08:41.679 --> 0:08:44.240 less stress. If we have a protracted recession because of 0:08:44.360 --> 0:08:47.320 raid hikes and the economy contracts, and we will have 0:08:47.320 --> 0:08:50.080 a much bigger problem. So it's very much dependent on 0:08:50.400 --> 0:08:53.960 the Federal reserve, inflation and whether we go into a 0:08:53.960 --> 0:08:56.800 recession or not, both in Europe and in the US. 0:08:56.960 --> 0:08:59.280 So just to go back to this sort of one 0:08:59.360 --> 0:09:02.959 key subject of CLO resets, as you say, it kind 0:09:03.000 --> 0:09:05.200 of shows that credit conditions are getting easier. 0:09:06.280 --> 0:09:06.439 You know. 0:09:06.480 --> 0:09:08.200 On the one hand, I'd be interested in your thoughts 0:09:08.240 --> 0:09:11.200 on whether this is a global phenomenon, I mean beyond 0:09:11.280 --> 0:09:13.719 just you know, the US, is it happening elsewhere? And 0:09:13.800 --> 0:09:17.640 then secondly, is it an all clear signal? Should we 0:09:17.679 --> 0:09:19.640 just breathe a big sigh of relief that the credit 0:09:19.640 --> 0:09:21.520 markets aren't going to blow up and everything's just going 0:09:21.559 --> 0:09:22.680 to get better from here. 0:09:24.120 --> 0:09:27.280 So the anticipation is it's happened in the US and 0:09:27.280 --> 0:09:30.360 then it probably will happen in Europe about six months time. 0:09:30.440 --> 0:09:35.000 So these CLO resets have what's called a non call 0:09:35.120 --> 0:09:38.240 to protect bond investors, So you can't do these resets 0:09:38.240 --> 0:09:40.920 for a period of time, usually a year and in 0:09:40.920 --> 0:09:43.440 Europe a year and a half. And so for the 0:09:44.080 --> 0:09:46.320 for the type of deal that makes sense to do 0:09:46.360 --> 0:09:49.760 a reset, you'll probably see them later in Europe. And 0:09:49.800 --> 0:09:54.080 that's the point that it's healed from last year. So 0:09:54.120 --> 0:09:56.400 the second half of last year things were tighter and 0:09:56.480 --> 0:10:00.400 worse and things have improved, but it's not healed from 0:10:01.280 --> 0:10:05.360 the beginning of last year or pre Ukraine attack, I 0:10:05.400 --> 0:10:08.600 mean an attack on Ukraine, or before the raid hikes 0:10:08.640 --> 0:10:13.480 and before inflation really soared. So no, there's still a 0:10:13.600 --> 0:10:15.480 ways to go, and it might be a while before 0:10:15.520 --> 0:10:18.720 we get to that period where money as easy and 0:10:18.800 --> 0:10:22.080 credit condition as easy as it works before. But perhaps 0:10:22.280 --> 0:10:24.920 you could say it maybe those conditions were too easy, 0:10:24.920 --> 0:10:26.840 in which we shouldn't go back to them. 0:10:27.120 --> 0:10:28.920 But in terms of what this signals. I mean, it's 0:10:28.920 --> 0:10:30.360 not an all clear. We're not out of the woods. 0:10:30.400 --> 0:10:34.000 Are Oh absolutely not. It's not absolutely not an all 0:10:34.080 --> 0:10:37.160 clear signal. It's just a hint that some things are improving. 0:10:37.280 --> 0:10:40.720 So too early to break out the champagne way too early. 0:10:41.120 --> 0:10:44.000 So before we talked to Stefan Kobchev of Bloomberg Intelligence, 0:10:44.240 --> 0:10:47.200 what's the next big story to watch here on your beat, Lisa, 0:10:47.240 --> 0:10:49.440 I mean to expect a big revival in leverage loan 0:10:49.440 --> 0:10:52.520 issuance in September. Is there going to be some other 0:10:52.880 --> 0:10:54.120 big trend that you're looking at? 0:10:55.600 --> 0:11:00.679 So we are hearing from PE sources and from M 0:11:00.720 --> 0:11:04.240 and A bankers that a small pipeline is developing, so 0:11:04.320 --> 0:11:07.920 we might see more M and A issuance coming up. 0:11:08.240 --> 0:11:11.120 And the lever's landmark is very much driven by M 0:11:11.160 --> 0:11:14.520 and A and LBO issuance. But as of VIAT the pipeline, 0:11:14.960 --> 0:11:17.280 it's July now, and for for the pipeline to see 0:11:17.320 --> 0:11:20.200 a big issue in boost in September, it already already 0:11:20.280 --> 0:11:22.120 needs to be here. So I don't think we're going 0:11:22.160 --> 0:11:24.720 to see a big issuance burst in September, but perhaps 0:11:24.840 --> 0:11:27.840 later in the year we might see a moderate pickup 0:11:28.360 --> 0:11:28.880 great stuff. 0:11:28.920 --> 0:11:30.760 Lisa Lee from Bloomberg News, thank you so much for 0:11:30.840 --> 0:11:31.280 joining us. 0:11:31.679 --> 0:11:32.480 Thank you. 0:11:32.480 --> 0:11:34.440 You can read all of Lisa's scoops on the Bloomberg 0:11:34.520 --> 0:11:37.040 terminal and of course at Bloomberg dot com. So, as 0:11:37.080 --> 0:11:40.000 I mentioned earlier, shipping is a massive global business that's 0:11:40.040 --> 0:11:42.400 done very well over the last few years, but it's 0:11:42.480 --> 0:11:44.840 really hitting a wall right now, and to walk us 0:11:44.880 --> 0:11:48.000 through it, we're very pleased to have with us Stefan Kochef, 0:11:48.040 --> 0:11:50.840 who covers the sector for Bloomberg Intelligence based in London. 0:11:51.200 --> 0:11:52.120 How's it going, Stefan? 0:11:52.280 --> 0:11:54.400 Very well, Jane, thank you. So what's the. 0:11:54.400 --> 0:11:58.080 Latest from container shipping company, Stefan? How are they doing well? 0:11:58.280 --> 0:12:02.360 Container shipping companies have in the last three years. So 0:12:02.440 --> 0:12:06.320 during the pandemic, people shifted from spending from services to 0:12:06.400 --> 0:12:09.840 buying more goods online, So a big increase in demand 0:12:09.880 --> 0:12:13.319 for container shipping during the pandemic, which led to container 0:12:13.320 --> 0:12:16.960 shipping companies charging five to six times more for bringing 0:12:17.280 --> 0:12:20.439 a container box from China to let's say Long Beach 0:12:20.800 --> 0:12:23.920 in the US or Rotterdam here in Europe. So if 0:12:23.920 --> 0:12:26.720 you fast forward to today, if freight rates are down 0:12:27.200 --> 0:12:30.839 and are nearing pre pandemic levels, and looks like metrics 0:12:30.920 --> 0:12:33.440 in the sector are set to deteriorate very quickly in 0:12:33.440 --> 0:12:36.439 the coming quarters. So historically this has been a very 0:12:36.840 --> 0:12:41.520 hotil cyclical and competitive industry, and we believe this deteriorating 0:12:41.600 --> 0:12:44.959 outlook may not be fully reflected yet in the bond 0:12:45.040 --> 0:12:46.560 markets that we follow. 0:12:47.440 --> 0:12:50.160 So how come companies were able to charge six times 0:12:50.160 --> 0:12:53.000 the pre pandemic prices and that sounds inflationary? Can you 0:12:53.040 --> 0:12:53.880 break that down for us? 0:12:55.240 --> 0:13:00.320 Sure? Very inflation indeed, well on the supply side only 0:13:00.360 --> 0:13:02.280 it's mainly about supplying demound to be honest. And the 0:13:02.280 --> 0:13:04.920 supply side of things, there is about six thousand container 0:13:04.920 --> 0:13:08.120 ships in the world, huge ships, by the way, the 0:13:08.160 --> 0:13:11.080 size of a skyscraper like the Empire State Building in 0:13:11.120 --> 0:13:14.280 New York, and it takes two to three years to 0:13:14.280 --> 0:13:17.040 build a new ship in order to add capacity, so 0:13:17.200 --> 0:13:21.800 very inelastic fixed capacity in the short term. And then 0:13:21.960 --> 0:13:24.160 at the same time, on the demand side of the equation, 0:13:24.280 --> 0:13:27.199 during the pandemic, suddenly all of us wanted to have 0:13:27.440 --> 0:13:30.559 a new chair for our work from home setup, or 0:13:30.600 --> 0:13:34.360 an extra monitor, maybe toys for our kids. And beyond 0:13:34.360 --> 0:13:36.960 supplying demand, there was also a degree of boord, congestion, 0:13:37.160 --> 0:13:41.960 worker shortages, COVID heartbreaks, etc. So if Ikea or Nike 0:13:42.240 --> 0:13:45.439 or anyone else wanted their goods delivered quickly from Asia 0:13:45.920 --> 0:13:48.880 to Europe or the US, they had to pay up 0:13:48.880 --> 0:13:51.559 to secure capacity on the ships. So companies in the 0:13:51.600 --> 0:13:55.760 sector transporting these containers were able to charge five six 0:13:55.840 --> 0:13:59.320 times more during the pandemic, and some of the companies 0:13:59.320 --> 0:14:03.440 we followed have had record profits, you know in terms 0:14:03.440 --> 0:14:06.520 of EHBEIT down free cash flow in the last few years. 0:14:06.559 --> 0:14:08.959 But the good news is that we are now back 0:14:09.040 --> 0:14:12.200 to pre pandemic levels. So to give you some numbers, 0:14:12.200 --> 0:14:16.120 shipping a forty food container from Asia to Europe cost 0:14:16.200 --> 0:14:19.800 about one thousand to two thousand dollars pre pandemic, and 0:14:19.880 --> 0:14:23.000 this went up to ten thousand dollars at the peak 0:14:23.040 --> 0:14:25.560 of the pandemic and is now down to about fifteen 0:14:25.640 --> 0:14:29.000 hundred dollars. But yes, companies in the sector do have 0:14:29.160 --> 0:14:32.800 very strong balance sheets after three years of record revenues. 0:14:33.000 --> 0:14:34.440 So what are they doing with all the money? I mean, 0:14:34.480 --> 0:14:36.520 we're infecting a lot of m and A or some 0:14:36.560 --> 0:14:37.160 debt reduction. 0:14:38.240 --> 0:14:40.080 There has been some m and A, but not the 0:14:40.600 --> 0:14:44.240 horizontal MNA. One could expect we have not seen major 0:14:44.360 --> 0:14:48.880 consolidation in the industry, and this can be explained by 0:14:48.880 --> 0:14:51.760 the fact that there are limited synergies in having more 0:14:51.840 --> 0:14:56.560 container ships. So basically, instead of you know, buying a competitor, 0:14:56.600 --> 0:14:59.280 you could just go and order more ships to be 0:14:59.360 --> 0:15:03.280 built for you. So instead, container shipping companies with all 0:15:03.280 --> 0:15:06.520 the cash generated, they have been diversifying their revenue streams 0:15:06.560 --> 0:15:11.720 away from containers, so by buying logistical companies for last 0:15:11.800 --> 0:15:15.240 mad deliveries, or investing in planes to offer air cargo, 0:15:15.840 --> 0:15:21.560 buying some software companies, etc. But overall small ballt on acquisitions. 0:15:22.040 --> 0:15:25.080 There has been some debt reduction and dividend distribution. But 0:15:25.160 --> 0:15:28.560 I think the key takeaways that shipping companies are well 0:15:28.600 --> 0:15:31.720 aware of the cyclicality of the industry and they want 0:15:31.760 --> 0:15:34.280 to be more prudent as the cycle is turning and 0:15:34.520 --> 0:15:37.920 outlook is already worsening quite quickly in the industry. 0:15:38.080 --> 0:15:40.240 Let's talk a bit about what changed the me. Why 0:15:40.360 --> 0:15:42.880 are you more negative on the outlook generally for the industry. 0:15:44.520 --> 0:15:48.560 Well, I think it's again going back to supply and demand. 0:15:48.680 --> 0:15:51.240 So the big driver for me is the demand side 0:15:51.240 --> 0:15:55.560 of the equation. High inflation rates macroeconomic volatility, I mean 0:15:55.600 --> 0:15:59.120 lower disposable incomes. These are worries for all of us 0:15:59.240 --> 0:16:03.960 these days. Equally, as economies have reopened, people want to 0:16:04.000 --> 0:16:07.520 travel again and go visit family members in other countries, 0:16:07.560 --> 0:16:10.560 maybe as opposed to buying yet another piece of furniture 0:16:10.600 --> 0:16:14.600 for their living room. So weaker demand for finished goods 0:16:14.800 --> 0:16:17.600 is key, But the supply side of the equation is 0:16:17.640 --> 0:16:22.040 also normalizing. So what container shipping companies have done with 0:16:22.120 --> 0:16:24.560 some of the record profits from the pandemic is to 0:16:24.640 --> 0:16:30.200 go and order new ships, thus increasing the actual available capacity. 0:16:31.160 --> 0:16:34.400 And usually newer ships are bigger and are more cost efficient, 0:16:34.440 --> 0:16:38.040 so everybody needs those ships in a very competitive environment. 0:16:38.120 --> 0:16:42.080 So overall, weaker demand for shipping services and increased supply 0:16:42.160 --> 0:16:45.400 of ships, and we already see a bit of a 0:16:45.440 --> 0:16:47.600 price war in the industry going on at the moment. 0:16:47.680 --> 0:16:51.120 So good news for us and consumers, and bad news 0:16:51.160 --> 0:16:52.840 for the companies in the sector. 0:16:52.840 --> 0:16:54.960 We believe, okay, probably the big guys will be okay, 0:16:54.960 --> 0:16:57.160 but there must be some smaller companies that maybe weren't 0:16:57.160 --> 0:16:59.680 so ready for the downturn, and you know, our risk 0:16:59.840 --> 0:17:02.640 of distress or you know, even default in the worst 0:17:02.640 --> 0:17:05.840 case when do you expect that in this industry? 0:17:06.880 --> 0:17:11.600 Yeah, James, you're right. The industry is extremely fragmented. So 0:17:11.720 --> 0:17:15.439 maybe the top three players have about fifteen percent market 0:17:15.480 --> 0:17:21.480 share each and then there's a huge tale of around 0:17:21.600 --> 0:17:25.600 fifty percent or half of the companies operating an industry 0:17:25.680 --> 0:17:29.400 have under one percent market share. So indeed, the smaller 0:17:29.440 --> 0:17:35.560 companies may be most at risk, so those ones may 0:17:35.600 --> 0:17:39.719 feel the pain first. But that being said, even if 0:17:39.760 --> 0:17:43.600 the bigger players that you know investors are more familiar with, 0:17:43.920 --> 0:17:48.000 such as mrsk or Hapagloyd, maybe they're okay in the 0:17:48.040 --> 0:17:51.320 short term, but this doesn't mean that there won't be 0:17:51.359 --> 0:17:54.840 any volatility in terms of especially the bonds that we 0:17:54.960 --> 0:17:59.040 follow here on the credit side of our research analysis. 0:17:59.040 --> 0:18:01.040 Are there any names particularly do you worry about any 0:18:01.040 --> 0:18:03.360 companies that are struggling techne hard. 0:18:05.160 --> 0:18:08.399 Well, I think it's maybe it's important to mention the 0:18:09.040 --> 0:18:14.640 actual volatility of the industry. So one of the companies 0:18:14.640 --> 0:18:19.640 we we cover CMA CGM, a French container shipping company. 0:18:20.520 --> 0:18:23.920 They've had their rating credit ratings at S and T 0:18:24.119 --> 0:18:27.639 go from triple C plus to double B plus, so 0:18:27.680 --> 0:18:30.640 a six notch upgrade in the last ten years. Cycle 0:18:31.920 --> 0:18:34.600 so it looks like, you know, we are past the 0:18:34.600 --> 0:18:38.080 peak of the cycle and coming quickly in the opposite direction. 0:18:38.520 --> 0:18:43.120 So we haven't seen any downgrades yet, but we've already 0:18:43.160 --> 0:18:47.040 seen earlier this week ZIM, which is a number number 0:18:47.080 --> 0:18:50.320 ten player in the industry, had you know, to lower 0:18:50.359 --> 0:18:54.359 its guidance for twenty twenty three, So you know, a 0:18:54.400 --> 0:18:58.200 few cracks appearing already, and even the bigger players won't 0:18:58.240 --> 0:19:04.639 be immune to to potential downgrades in outlook or maybe 0:19:04.840 --> 0:19:08.720 credit ratings. So yeah, more of a cautious stance on 0:19:08.760 --> 0:19:09.560 the whole industry. 0:19:09.560 --> 0:19:12.040 I guess at this point, what are the takeaways more 0:19:12.040 --> 0:19:14.600 broadly speaking seven for the credit markets or even for 0:19:14.640 --> 0:19:17.240 the economy of what's gone well on him? It seems 0:19:17.280 --> 0:19:21.920 that there was an unusual event that really inflated pricing 0:19:22.160 --> 0:19:25.280 and gave these companies a massive windfall through the pandemic. 0:19:25.320 --> 0:19:29.159 But are we kind of normalizing now back to prayer trend? 0:19:29.520 --> 0:19:31.520 Is it just getting that to where we were, or 0:19:31.600 --> 0:19:34.520 is you know, is there some of the some of 0:19:34.600 --> 0:19:39.639 the takeaway from from the post pandemic shipping story that 0:19:39.680 --> 0:19:40.240 you're looking at. 0:19:41.920 --> 0:19:46.000 Well, I think we if one looks at the balance 0:19:46.040 --> 0:19:49.080 sheets and the financial statements of these companies today and 0:19:49.160 --> 0:19:51.560 they will be amazed at how, you know, how little 0:19:51.640 --> 0:19:53.880 debt they have and how great of a free cash 0:19:53.880 --> 0:19:57.080 flow they have generated in the last twelve months. But 0:19:57.240 --> 0:19:59.639 you know, looking at the annual report of twenty twenty 0:19:59.680 --> 0:20:02.639 two doesn't give you the forward looking chair, especially in 0:20:02.680 --> 0:20:06.000 the a cyclical industry such as the container shipping industry. 0:20:06.080 --> 0:20:09.320 So I think then the key point is that historically, 0:20:09.800 --> 0:20:13.720 shipping credits have always traded at a premium to other 0:20:13.800 --> 0:20:18.480 industrial names, which is something we don't see yet in 0:20:19.640 --> 0:20:23.440 the credit markets. So for instance, Marska I was mentioning earlier, 0:20:23.520 --> 0:20:27.560 a Danish company currently is one of the tighter names 0:20:27.560 --> 0:20:31.000 in the triple B space, and a similar story for Hapagloid, 0:20:31.080 --> 0:20:34.840 the German container shipping company, one of them tighter names 0:20:34.840 --> 0:20:39.720 in the double B euro credit space. So overall, I 0:20:39.760 --> 0:20:43.800 think credit valuations will be exposed to two weak or fundamentals, 0:20:43.880 --> 0:20:46.200 especially in the second half of this year and next 0:20:46.240 --> 0:20:50.359 year when we expect important deliveries of new ships, as 0:20:50.400 --> 0:20:53.320 it takes two to three years to actually build a 0:20:53.400 --> 0:20:57.840 new ship, so very interesting and potentially volatile times ahead 0:20:57.880 --> 0:20:58.560 for the industry. 0:20:58.800 --> 0:21:03.119 So the premium shipping gets over industrials in credit markets 0:21:03.160 --> 0:21:05.280 that you think could be eroded, it could be lost. 0:21:06.800 --> 0:21:11.000 Well, yeah, if we look back at at historical trends, 0:21:11.000 --> 0:21:14.840 I mean the shipping industry in terms of credit spreads, 0:21:14.840 --> 0:21:18.720 they have always traded at the premium, and now they're 0:21:18.720 --> 0:21:21.240 trading tighter than than the rest of the market. So 0:21:21.240 --> 0:21:24.120 it looks like, you know, it doesn't doesn't seem right, 0:21:24.560 --> 0:21:27.040 but then it is explained by the very strong balance 0:21:27.080 --> 0:21:29.480 sheet and the very strong cashboard generation in the in 0:21:29.520 --> 0:21:31.600 the last couple of years. But maybe it won't. It 0:21:31.640 --> 0:21:32.240 won't last. 0:21:33.359 --> 0:21:35.600 So maybe instead of trading tight, they're going to be 0:21:35.600 --> 0:21:40.840 trading flat or maybe even wider to the to the industrial. Okay, interesting, Okay, 0:21:40.880 --> 0:21:44.360 So one one last question stevan view on ESG, which 0:21:44.400 --> 0:21:47.560 is the big hot topic at the moment. These big ships, 0:21:47.600 --> 0:21:50.240 they burn a ton of diesel to move all these 0:21:50.240 --> 0:21:53.680