1 00:00:07,160 --> 00:00:10,559 Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast. 2 00:00:10,760 --> 00:00:13,560 Speaker 1: My name is Jill Shaw. I'm a credit reporter at Bloomberg. 3 00:00:14,000 --> 00:00:16,919 Speaker 1: Today's guests our David Brooke, who covers private credit at 4 00:00:16,960 --> 00:00:19,599 Speaker 1: Bloomberg News in New York, and Steve Flynn, who looks 5 00:00:19,600 --> 00:00:23,360 Speaker 1: at telecom in the media sector for Bloomberg Intelligence. Let's 6 00:00:23,400 --> 00:00:25,920 Speaker 1: get to it. We're going to dive into the opaque 7 00:00:25,920 --> 00:00:28,200 Speaker 1: world of private credit today, which is a one point 8 00:00:28,240 --> 00:00:32,320 Speaker 1: four trillion dollar market in the US. Private credit lenders 9 00:00:32,320 --> 00:00:34,800 Speaker 1: are in talks to arrange the buyout financing of a 10 00:00:34,800 --> 00:00:38,479 Speaker 1: healthcare technology firm, and this would be the largest buyout 11 00:00:38,479 --> 00:00:41,960 Speaker 1: financing ever arranged by direct lenders, as they're known. So 12 00:00:42,120 --> 00:00:45,159 Speaker 1: David tell us what this means. Oh, thank you for 13 00:00:45,200 --> 00:00:47,559 Speaker 1: having me. Yes, certainly, I mean very much. The big 14 00:00:47,600 --> 00:00:51,080 Speaker 1: trend in private credit is that the deals are getting 15 00:00:51,159 --> 00:00:54,000 Speaker 1: large and larger. So more money raised by private credit 16 00:00:54,040 --> 00:00:56,880 Speaker 1: funds has meant that they can deploy huge amounts of cash. 17 00:00:57,240 --> 00:00:59,720 Speaker 1: Now they're in direct competition with the with the broadest 18 00:00:59,720 --> 00:01:02,800 Speaker 1: in the leverage loan market, which historically their roots were 19 00:01:02,840 --> 00:01:05,520 Speaker 1: in the middle market. So underwriting a five point five 20 00:01:05,560 --> 00:01:08,480 Speaker 1: billion unitrins is a kind of extraordinary achievement if it 21 00:01:08,480 --> 00:01:11,560 Speaker 1: can be done by these private credit lenders who are 22 00:01:11,600 --> 00:01:13,920 Speaker 1: sitting on a huge amounts of cash, and it would 23 00:01:13,920 --> 00:01:17,240 Speaker 1: just continue this trend where private credit can be an 24 00:01:17,240 --> 00:01:19,400 Speaker 1: available option for a lot of sponsors who are looking 25 00:01:19,440 --> 00:01:22,119 Speaker 1: to kind of do larger and larger buyouts. So let's 26 00:01:22,120 --> 00:01:24,560 Speaker 1: talk about this. Why might a deal like this go 27 00:01:24,760 --> 00:01:27,760 Speaker 1: private instead of to the broadly syndicated market. Well, the 28 00:01:27,800 --> 00:01:30,680 Speaker 1: private credit lenders like to tell you, firstly, we bring 29 00:01:30,800 --> 00:01:33,480 Speaker 1: certainty of execution. That's their kind of market. To employ 30 00:01:33,600 --> 00:01:36,039 Speaker 1: their marketing line. It's true because if you go to 31 00:01:36,040 --> 00:01:39,720 Speaker 1: a broadly syndicated market, banks will have to sort of 32 00:01:39,720 --> 00:01:42,120 Speaker 1: originate a loan and distribute it to a bunch of investors. 33 00:01:43,040 --> 00:01:47,760 Speaker 1: Those investors, you know, maybe investor sentiment can very much change. 34 00:01:47,800 --> 00:01:51,400 Speaker 1: It could be price flex it could be changes on terms, etc. Etc. 35 00:01:52,040 --> 00:01:54,800 Speaker 1: Which doesn't provide that certainty. If you go to a 36 00:01:54,800 --> 00:01:57,600 Speaker 1: group of four or five lenders, then you can get 37 00:01:57,600 --> 00:02:00,720 Speaker 1: the thrice turns done very quickly, and for the sponsor's 38 00:02:00,800 --> 00:02:04,200 Speaker 1: speed is very very important. So private credit transaction can 39 00:02:04,200 --> 00:02:06,720 Speaker 1: be done very very quickly, and it can be done 40 00:02:08,000 --> 00:02:12,400 Speaker 1: with a small group of lenders, especially when the markets 41 00:02:12,400 --> 00:02:15,000 Speaker 1: were so volatile this year. This was a big option 42 00:02:15,080 --> 00:02:18,000 Speaker 1: for people. So what happened in twenty twenty two in 43 00:02:18,080 --> 00:02:20,440 Speaker 1: terms of the market share the private credit had against 44 00:02:20,440 --> 00:02:25,120 Speaker 1: the BSL market, well, market share it certainly increased. I mean, 45 00:02:25,200 --> 00:02:27,799 Speaker 1: if if the broadly syndicated loan market is not doing 46 00:02:27,840 --> 00:02:30,040 Speaker 1: any deals, then certainly it might be one hundred percent 47 00:02:30,080 --> 00:02:32,960 Speaker 1: of the markets or you know as certainly a larger 48 00:02:33,120 --> 00:02:36,280 Speaker 1: sort of share of the market themselves. And private credit 49 00:02:36,320 --> 00:02:39,600 Speaker 1: funds were not immune to some of the volatility. Certainly 50 00:02:39,600 --> 00:02:42,959 Speaker 1: in private markets there can be a lag in terms 51 00:02:43,000 --> 00:02:46,760 Speaker 1: of responding to macroeconomic volatility compared with the sort of 52 00:02:46,760 --> 00:02:50,080 Speaker 1: public markets. But private credit firms are still very much 53 00:02:50,440 --> 00:02:52,720 Speaker 1: they still in huge funds. The cash is sticky, so 54 00:02:52,760 --> 00:02:55,280 Speaker 1: they're ready to always deploy cash, and they always they 55 00:02:55,280 --> 00:02:58,000 Speaker 1: always say they underwriting kind of recessionary models as well, 56 00:02:58,320 --> 00:03:01,760 Speaker 1: so that you know they can they can always kind 57 00:03:01,760 --> 00:03:04,359 Speaker 1: of provide that capital when there's kind of sponsor needs it. 58 00:03:04,760 --> 00:03:09,720 Speaker 1: Private credit funds, though dialed back their hold sizes. Essentially, 59 00:03:10,320 --> 00:03:13,160 Speaker 1: if a two billion unit tranch had four lenders offering 60 00:03:13,200 --> 00:03:15,840 Speaker 1: five hundred million, it might then be eight lenders doing 61 00:03:15,840 --> 00:03:18,799 Speaker 1: two hundred and fifty million. So a multi billion dollar 62 00:03:18,880 --> 00:03:21,400 Speaker 1: unit tranch was still feasible, but it might require more 63 00:03:21,440 --> 00:03:24,560 Speaker 1: and more lenders. And in a one point four trillion market, 64 00:03:24,560 --> 00:03:27,000 Speaker 1: there is no shortage of lenders out there. There are 65 00:03:27,040 --> 00:03:29,720 Speaker 1: certainly a lot of appetite for the best deals going. 66 00:03:30,040 --> 00:03:34,120 Speaker 1: So yeah, they dialed back their hold sizes. But private 67 00:03:34,120 --> 00:03:36,200 Speaker 1: credit was also to be able to win better terms, 68 00:03:36,520 --> 00:03:39,000 Speaker 1: so pricing and loans went up, and already they're more 69 00:03:39,040 --> 00:03:42,640 Speaker 1: expensive than broadly syndicated markets and certainly tied to documentation 70 00:03:42,720 --> 00:03:45,120 Speaker 1: as well. And that's after many many years of sponsors 71 00:03:45,120 --> 00:03:47,240 Speaker 1: having the upper hand. So something we had a real 72 00:03:47,320 --> 00:03:50,000 Speaker 1: kind of pivoting sentiment in private credit firms being able 73 00:03:50,000 --> 00:03:53,800 Speaker 1: to kind of win more deals when they broadly syndicate. 74 00:03:53,840 --> 00:03:55,760 Speaker 1: I would have gone to the broadly syndicated market and 75 00:03:55,920 --> 00:04:00,720 Speaker 1: also kind of get that extra benefit of better terms 76 00:04:00,720 --> 00:04:04,800 Speaker 1: and better pricing. And this code have adi deal right now, 77 00:04:04,960 --> 00:04:08,280 Speaker 1: which is the which would be the biggest private credit 78 00:04:08,360 --> 00:04:12,520 Speaker 1: deal ever if it were to get done. Is this 79 00:04:12,600 --> 00:04:17,800 Speaker 1: sort of you know, private credit lenders coming into sort 80 00:04:17,839 --> 00:04:20,120 Speaker 1: of take market share while the leverage loan market is rallying, 81 00:04:20,120 --> 00:04:23,520 Speaker 1: because the leverage oland market is doing pretty well right now. Yes, well, Firstly, 82 00:04:23,560 --> 00:04:25,800 Speaker 1: I never like to use superlatives in private credit because 83 00:04:25,839 --> 00:04:28,560 Speaker 1: anything that's the biggest, it could not be the biggest. 84 00:04:28,560 --> 00:04:30,160 Speaker 1: There could be something else out there that we don't 85 00:04:30,160 --> 00:04:32,880 Speaker 1: secretly know. But no, I take it very much what 86 00:04:32,920 --> 00:04:35,360 Speaker 1: we've kind of reported on it certainly would be the biggest, 87 00:04:35,360 --> 00:04:37,960 Speaker 1: and certainly, talking to people in the market, it would 88 00:04:37,960 --> 00:04:40,920 Speaker 1: be the biggest. I think it's kind of interesting because 89 00:04:41,160 --> 00:04:43,760 Speaker 1: when the leverage loan market has been rallying or whether 90 00:04:43,800 --> 00:04:47,960 Speaker 1: it's kind of gone quiet, private credit has still grown 91 00:04:48,000 --> 00:04:50,120 Speaker 1: in this kind of structural way. I think we're seeing 92 00:04:50,120 --> 00:04:53,960 Speaker 1: a structural change in markets, in credit markets, especially where 93 00:04:54,040 --> 00:04:58,640 Speaker 1: like both the kind of models kind of complement each 94 00:04:58,640 --> 00:05:00,839 Speaker 1: other very much. And as you can see, the broadly 95 00:05:00,880 --> 00:05:04,000 Speaker 1: syndicated market kind of disappears a little bit. Those shuts 96 00:05:04,000 --> 00:05:06,719 Speaker 1: down private credits there to fill in the void, but 97 00:05:07,120 --> 00:05:09,360 Speaker 1: with the broadly syndicated mark and coming back, private credit 98 00:05:09,400 --> 00:05:11,440 Speaker 1: can still find it. There's still that kind of as 99 00:05:11,440 --> 00:05:15,040 Speaker 1: I was talking about the certainty of execution, not relying 100 00:05:15,040 --> 00:05:18,920 Speaker 1: on investor sentiments, And there's certain types of transactions now 101 00:05:18,960 --> 00:05:20,839 Speaker 1: that are very popular in private credit that just won't 102 00:05:20,839 --> 00:05:23,320 Speaker 1: really go to the bank. So there's something called annual 103 00:05:23,320 --> 00:05:25,760 Speaker 1: recurring revenue loans that are very much popular in a 104 00:05:25,800 --> 00:05:29,360 Speaker 1: software sector. Can you describe a bit what that is. 105 00:05:30,120 --> 00:05:32,680 Speaker 1: It's yes, it's it's it's really just I think you 106 00:05:32,720 --> 00:05:34,440 Speaker 1: can just kind of boil it down to is like 107 00:05:35,120 --> 00:05:39,360 Speaker 1: a quality type of venture type transaction. This is a 108 00:05:39,480 --> 00:05:41,799 Speaker 1: very These are very fast growing companies. They are often 109 00:05:41,880 --> 00:05:46,680 Speaker 1: software companies, and they're having negative cash flows, so it's 110 00:05:46,760 --> 00:05:49,640 Speaker 1: very much hard to kind of use the traditional depth 111 00:05:50,200 --> 00:05:53,599 Speaker 1: leverage metrics bank. That's not something good for banks, but 112 00:05:53,680 --> 00:05:55,480 Speaker 1: it's very good for private credit funds who are a 113 00:05:55,520 --> 00:05:59,559 Speaker 1: lot more nimble with their cash and private credit funds 114 00:05:59,520 --> 00:06:01,880 Speaker 1: when then okay, we'll do the loans on a kind 115 00:06:01,880 --> 00:06:05,000 Speaker 1: of lower LTV, so twenty to thirty percent, and the 116 00:06:05,040 --> 00:06:10,280 Speaker 1: model is that, um that the sponsor has a higher 117 00:06:10,320 --> 00:06:12,719 Speaker 1: equity cushion, So in order for their debt to be hurt, 118 00:06:12,760 --> 00:06:17,000 Speaker 1: they have to have you know, an eighty percent wife 119 00:06:17,000 --> 00:06:19,359 Speaker 1: out of equity before even a debt is kind of spent. 120 00:06:20,000 --> 00:06:22,640 Speaker 1: M I think on top of that as well, um, 121 00:06:22,839 --> 00:06:27,120 Speaker 1: there's a kind of epit positive covenant included in it 122 00:06:27,200 --> 00:06:29,200 Speaker 1: as well. So whilst it's cash flow for just a 123 00:06:29,200 --> 00:06:32,359 Speaker 1: certain amount of time, companies expected to grow twenty thirty 124 00:06:32,400 --> 00:06:36,039 Speaker 1: percent or et cetera, et cetera, and then eventually flip 125 00:06:36,080 --> 00:06:38,760 Speaker 1: over to a positive cash flow and then repay that debt. 126 00:06:39,120 --> 00:06:40,720 Speaker 1: So that's the that's the kind of model of a 127 00:06:40,920 --> 00:06:44,320 Speaker 1: R loans. That's certainly a riskier structure than we've seen 128 00:06:44,560 --> 00:06:47,720 Speaker 1: in sort of the broadly syndicated market. Oh absolutely, I 129 00:06:47,800 --> 00:06:50,920 Speaker 1: mean you can certainly say riskier. These guys won't say 130 00:06:50,920 --> 00:06:54,160 Speaker 1: it's risky. It's it's it's it's it's really I mean, 131 00:06:54,240 --> 00:06:57,640 Speaker 1: the thesis says it's lower LTVs UM. So therefore you 132 00:06:57,720 --> 00:06:59,800 Speaker 1: kind of got a lot of equity deterioration before you 133 00:06:59,800 --> 00:07:02,359 Speaker 1: get it's any kind of loss of debt or loss 134 00:07:02,360 --> 00:07:06,160 Speaker 1: on your loans. So, and the companies are they'll say, 135 00:07:06,240 --> 00:07:08,080 Speaker 1: fast growing. You know, there's a lot of kind of 136 00:07:08,240 --> 00:07:10,520 Speaker 1: tech companies are building up a lot of like i 137 00:07:10,520 --> 00:07:14,440 Speaker 1: don't know, technologicalization of the way we kind of do 138 00:07:14,560 --> 00:07:18,280 Speaker 1: work nowadays. So very much there's a lot of those 139 00:07:18,280 --> 00:07:20,600 Speaker 1: growth of these companies that are kind of coming up now. 140 00:07:20,680 --> 00:07:25,000 Speaker 1: So yeah, it could certainly it could be risky in 141 00:07:25,040 --> 00:07:26,640 Speaker 1: a sense that now that if we're seeing a kind 142 00:07:26,640 --> 00:07:29,880 Speaker 1: of loom of slow down the economy, the growth models, 143 00:07:29,880 --> 00:07:31,640 Speaker 1: which you know, if you're talking about twenty thirty percent 144 00:07:31,720 --> 00:07:34,680 Speaker 1: only come down to ten or fifteen percents, or you know, 145 00:07:34,720 --> 00:07:37,640 Speaker 1: even lower than that, then certainly, yes, the LTV that 146 00:07:37,680 --> 00:07:40,680 Speaker 1: you're saying is twenty thirty percent goes up slightly, but 147 00:07:40,960 --> 00:07:42,800 Speaker 1: certainly if it's still growing, that's a kind of more 148 00:07:42,840 --> 00:07:45,560 Speaker 1: of an equity question. The debt still very much as 149 00:07:45,600 --> 00:07:50,480 Speaker 1: a senior secured debt and very much yes, still needs 150 00:07:50,520 --> 00:07:52,720 Speaker 1: repaying even if it still is repaid, even if the 151 00:07:52,760 --> 00:07:56,720 Speaker 1: growth is slowed down. So let's talk about this potentially 152 00:07:56,720 --> 00:08:00,240 Speaker 1: a period of slower economic growth that we might be undering. Um, 153 00:08:00,680 --> 00:08:05,600 Speaker 1: private credit lenders buy these loans to hold, and it's 154 00:08:05,600 --> 00:08:08,080 Speaker 1: hard to tell how these private companies are doing, but 155 00:08:08,320 --> 00:08:11,120 Speaker 1: you have a sense, how are the private companies in 156 00:08:11,160 --> 00:08:15,320 Speaker 1: the private credit market doing well. Private credit likes a 157 00:08:15,320 --> 00:08:19,960 Speaker 1: few sectors that do well. Recession proof however, recession proof 158 00:08:19,960 --> 00:08:22,720 Speaker 1: the yeah, it's it's another question. But they like they 159 00:08:22,760 --> 00:08:25,160 Speaker 1: like tech, like software, so as we kind of discussed, 160 00:08:25,560 --> 00:08:29,640 Speaker 1: they like business services, and they like healthcare. And these 161 00:08:29,680 --> 00:08:32,240 Speaker 1: are really free, strong sectors that a lot of them 162 00:08:32,240 --> 00:08:34,760 Speaker 1: will tell you have performed very well during recessions. So 163 00:08:34,800 --> 00:08:37,680 Speaker 1: even when you get a slow down the economy, the 164 00:08:37,720 --> 00:08:42,280 Speaker 1: companies that kind of backing should be in good spots. 165 00:08:42,880 --> 00:08:45,560 Speaker 1: On top of that as well, sponsors are kind of 166 00:08:45,559 --> 00:08:48,120 Speaker 1: back in it. There's a lot of sponsored capital in that. So, 167 00:08:48,160 --> 00:08:50,760 Speaker 1: say when we had the coronavirus and a lot of 168 00:08:50,840 --> 00:08:54,079 Speaker 1: kind of you know, sectors, the economy shut down essentially 169 00:08:54,080 --> 00:08:57,280 Speaker 1: overnights the way private credit lenders and the way private 170 00:08:57,280 --> 00:08:59,120 Speaker 1: equity sponsors kind of work together, as there's a lot 171 00:08:59,200 --> 00:09:01,920 Speaker 1: of like kind of changing of loan terms and mending 172 00:09:01,960 --> 00:09:04,320 Speaker 1: of loan terms, or the sponsor would put more money in, 173 00:09:04,600 --> 00:09:06,720 Speaker 1: or in some cases the lender would put more money in. 174 00:09:06,880 --> 00:09:08,840 Speaker 1: So you already saw kind of an example of what 175 00:09:08,840 --> 00:09:12,720 Speaker 1: would happen during a recession during COVID, and maybe something 176 00:09:12,760 --> 00:09:15,760 Speaker 1: similar in the partnerships between a private equity and private 177 00:09:15,760 --> 00:09:17,760 Speaker 1: credit might happen again, because as we talked about before, 178 00:09:17,800 --> 00:09:20,280 Speaker 1: private equity is dealing with two free lenders. The lenders 179 00:09:20,360 --> 00:09:22,840 Speaker 1: might like the company and might say, oh, Joe, intercession 180 00:09:22,960 --> 00:09:26,439 Speaker 1: might be struggling a little bit, but later on, my 181 00:09:26,800 --> 00:09:29,320 Speaker 1: fundamentals of the company might be very good. I think 182 00:09:29,400 --> 00:09:32,800 Speaker 1: also default rates and private credit depends how you who 183 00:09:32,800 --> 00:09:35,480 Speaker 1: you kind of go to. But we've got ranges from 184 00:09:35,520 --> 00:09:39,000 Speaker 1: two to four percent in the private credit market, which 185 00:09:39,040 --> 00:09:43,520 Speaker 1: is still kind of quite low, so and people I 186 00:09:43,600 --> 00:09:46,439 Speaker 1: speak to don't anticipate it getting shooting up too high. 187 00:09:46,760 --> 00:09:50,040 Speaker 1: Certainly in the BDCs as well, what's called non accruel rates, 188 00:09:50,040 --> 00:09:51,800 Speaker 1: which is also just a measure of defaults and just 189 00:09:51,880 --> 00:09:57,520 Speaker 1: not too high. So what are BDCs? What are BDCs? Yes, 190 00:09:57,640 --> 00:09:59,480 Speaker 1: I think you get a lot of abcs a BDCs, 191 00:09:59,480 --> 00:10:01,480 Speaker 1: and perhaps I to do one myself as well. M 192 00:10:02,320 --> 00:10:06,840 Speaker 1: BDCs are a vehicle to lend, so it's really private. 193 00:10:07,200 --> 00:10:10,160 Speaker 1: You have your traditional private equity fund structure, raise ten 194 00:10:10,200 --> 00:10:12,800 Speaker 1: million from ten million from investors and then go and 195 00:10:12,840 --> 00:10:15,800 Speaker 1: spend it. It's the same with BBC's private credit firms 196 00:10:15,880 --> 00:10:17,959 Speaker 1: raise a bunch of money they put into a BDC vehicle. 197 00:10:18,320 --> 00:10:21,680 Speaker 1: BBC vehicle which I like as a reporter is that 198 00:10:21,720 --> 00:10:24,800 Speaker 1: they're public, right, so all their loans are public, all 199 00:10:24,840 --> 00:10:26,960 Speaker 1: the terms are loan of public, so we can kind 200 00:10:26,960 --> 00:10:31,160 Speaker 1: of poke through and see exactly what investors are exposed to. 201 00:10:31,559 --> 00:10:35,600 Speaker 1: BDCs can either be publicly listed, on which majority are orders. 202 00:10:35,640 --> 00:10:38,000 Speaker 1: As a growing trend, a lot of them are privately listed, 203 00:10:38,440 --> 00:10:40,200 Speaker 1: and it was kind of growing as much as more 204 00:10:40,520 --> 00:10:44,600 Speaker 1: and BDCs unlike kind of your closed ended funds, your 205 00:10:44,600 --> 00:10:47,800 Speaker 1: private equity style closed ended funds, they're available to your 206 00:10:47,800 --> 00:10:50,680 Speaker 1: retail investors. So me and you can go and buy 207 00:10:50,679 --> 00:10:53,640 Speaker 1: some shares in a BDC and get exposure to private credits, 208 00:10:54,640 --> 00:10:57,520 Speaker 1: or you could do it through a private BDC and 209 00:10:57,640 --> 00:11:00,520 Speaker 1: in terms of payouts in the private BDC is closely 210 00:11:00,520 --> 00:11:05,800 Speaker 1: redemptions as well well. Thank you, David. We look forward 211 00:11:05,840 --> 00:11:09,240 Speaker 1: to hearing a lot more about private credit. You can 212 00:11:09,280 --> 00:11:11,680 Speaker 1: read all of the news and analysis from David Brook 213 00:11:11,760 --> 00:11:15,800 Speaker 1: on the Bloomberg terminal or at Bloomberg dot com. Switching 214 00:11:15,840 --> 00:11:19,240 Speaker 1: gears a bit here to the world of telecommunications and media. 215 00:11:19,400 --> 00:11:21,480 Speaker 1: As I mentioned earlier, we are very lucky to have 216 00:11:21,520 --> 00:11:25,440 Speaker 1: Steve Flynn from Bloomberg Intelligence, So Steve one of the 217 00:11:25,480 --> 00:11:28,000 Speaker 1: deals on your radar right now. The Rogers Shaw deal 218 00:11:28,600 --> 00:11:30,760 Speaker 1: give us a sense of who these companies are and 219 00:11:30,800 --> 00:11:33,960 Speaker 1: what the deal is sure, So Rogers and Shaw to 220 00:11:34,080 --> 00:11:38,920 Speaker 1: the largest communications companies in Canada and also includes a Quebecore, 221 00:11:39,640 --> 00:11:43,400 Speaker 1: which is also a large media company or communications company 222 00:11:43,400 --> 00:11:46,840 Speaker 1: in Canada. So Rogers Shaw and Quebecore recently extended the 223 00:11:46,880 --> 00:11:50,280 Speaker 1: outside date for their proposed transactions until March thirty first, 224 00:11:50,800 --> 00:11:54,120 Speaker 1: So just to interrupt you there, what's the outside date. 225 00:11:54,280 --> 00:11:56,600 Speaker 1: The outside date is kind of like your merger termination date, 226 00:11:56,640 --> 00:11:58,720 Speaker 1: and they've extended a couple of times. Is you know, 227 00:11:58,760 --> 00:12:01,160 Speaker 1: this deal has announced almost two years ago in March 228 00:12:01,240 --> 00:12:03,520 Speaker 1: twenty twenty one, so it'll take about two years to 229 00:12:03,600 --> 00:12:06,880 Speaker 1: get this deal done, which is you know, communications deals 230 00:12:06,920 --> 00:12:09,079 Speaker 1: take a long time because there's a lot of regulatory 231 00:12:09,120 --> 00:12:11,839 Speaker 1: reviews to get them done. But this is going to 232 00:12:11,880 --> 00:12:14,840 Speaker 1: be a long deal at two years. So what we're 233 00:12:14,840 --> 00:12:17,880 Speaker 1: hoping is that they'll soon receive the final regulatory approval 234 00:12:17,960 --> 00:12:22,480 Speaker 1: from Canada Industry Minister Champagne, and once he's approved, they 235 00:12:22,480 --> 00:12:25,719 Speaker 1: can close the deals and Rodgers will purchase Shaw for 236 00:12:25,760 --> 00:12:28,719 Speaker 1: about twenty six billion, which includes about twenty billion This 237 00:12:28,840 --> 00:12:32,079 Speaker 1: is Canadian dollars, twenty billion Canadian for Shaw shares and 238 00:12:32,120 --> 00:12:35,440 Speaker 1: the assumption of about six billion dollars Canadian of Shot debt. 239 00:12:36,280 --> 00:12:40,560 Speaker 1: The companies are going to turn around and sell Shaw's 240 00:12:40,720 --> 00:12:44,200 Speaker 1: Freedom mobile business to Quebecore for two point eight five 241 00:12:44,200 --> 00:12:47,319 Speaker 1: billion Canadian So the proceeds will help you reduce the 242 00:12:47,360 --> 00:12:50,080 Speaker 1: debt load. But you know, the proformer company proformer Rodgers 243 00:12:50,080 --> 00:12:52,319 Speaker 1: once this deal is done, is going to be really 244 00:12:52,400 --> 00:12:55,120 Speaker 1: large and highly leveraged. It's going to have about fifty 245 00:12:55,120 --> 00:12:57,800 Speaker 1: billion Canadian in debt and a leverage ratio of about 246 00:12:57,840 --> 00:13:01,439 Speaker 1: five times. And as it's all, Rodgers now is rated 247 00:13:01,760 --> 00:13:04,880 Speaker 1: high triple B. It's BAA one for Moodies and triple 248 00:13:04,920 --> 00:13:08,600 Speaker 1: B plus from both SMP and Fitch, and those ratings 249 00:13:08,640 --> 00:13:10,680 Speaker 1: are going to be downgraded by one to two notches 250 00:13:11,120 --> 00:13:15,000 Speaker 1: based on radar commentary. So do these companies have a 251 00:13:15,080 --> 00:13:18,960 Speaker 1: plan to sort of improve those credit metrics after this merger? Correct? 252 00:13:19,000 --> 00:13:21,360 Speaker 1: They're targeting lower leverage and they're going to get through 253 00:13:21,440 --> 00:13:24,000 Speaker 1: through a combination of higher ebadas. Some of that driven 254 00:13:24,120 --> 00:13:27,400 Speaker 1: from cost synergies. They've outlined a significant number of cost 255 00:13:27,520 --> 00:13:30,880 Speaker 1: energies to take out as a result of combining the 256 00:13:30,920 --> 00:13:33,400 Speaker 1: two companies. And then also I expect them to use 257 00:13:33,520 --> 00:13:36,839 Speaker 1: access free cash flow to reduce debt. So they're going 258 00:13:36,880 --> 00:13:39,160 Speaker 1: to deleverage over the next couple of years. And it's interesting. 259 00:13:39,400 --> 00:13:41,960 Speaker 1: So if you compare where the Rogers US dollar bonds 260 00:13:42,000 --> 00:13:45,400 Speaker 1: trade now, they prade. They trade at G spreads that 261 00:13:45,480 --> 00:13:47,080 Speaker 1: are kind of right in the middle of the pack 262 00:13:47,200 --> 00:13:51,640 Speaker 1: of triple B rated communications companies. You know, they're they're 263 00:13:51,679 --> 00:13:54,200 Speaker 1: wider than some of the highest quality names like Att, 264 00:13:54,440 --> 00:13:57,360 Speaker 1: Disney and Verizon, and they're also tighter than some of 265 00:13:57,400 --> 00:14:01,360 Speaker 1: the more speculative names like a Charter secured Powamount or 266 00:14:01,440 --> 00:14:03,680 Speaker 1: Warner Brothers Discovery. So they're kind of like right in 267 00:14:03,679 --> 00:14:06,080 Speaker 1: the middle of the pack, and that's probably where they're 268 00:14:06,080 --> 00:14:07,880 Speaker 1: going to be rated, you know, sort of mid to 269 00:14:07,920 --> 00:14:10,880 Speaker 1: low triple bait. So they're going to maintain their status 270 00:14:10,920 --> 00:14:12,560 Speaker 1: in the middle of the pack, not sort of start 271 00:14:12,559 --> 00:14:16,559 Speaker 1: trading lower because of this this erosion of credit metrics, 272 00:14:16,600 --> 00:14:18,280 Speaker 1: it's expected to the deal to close, So I think 273 00:14:18,280 --> 00:14:20,320 Speaker 1: it's pretty much factored into the spreads where they are 274 00:14:20,360 --> 00:14:23,640 Speaker 1: now now. If they execute in the delever over the 275 00:14:23,640 --> 00:14:27,120 Speaker 1: next couple of years and bring them and successfully integrate 276 00:14:27,160 --> 00:14:29,320 Speaker 1: the two companies, I would imagine that their credit spreads 277 00:14:29,320 --> 00:14:32,280 Speaker 1: will improve along with their credit metrics. So let's talk 278 00:14:32,320 --> 00:14:35,120 Speaker 1: a bit about a company that is trading at distress levels, 279 00:14:35,120 --> 00:14:38,680 Speaker 1: and that's Lumen. That stock is down almost twenty five 280 00:14:38,680 --> 00:14:42,000 Speaker 1: percent ear to date. Is the company in trouble? Yeah, 281 00:14:42,040 --> 00:14:45,000 Speaker 1: So you know Women. Woman has been pretty hit, hit 282 00:14:45,000 --> 00:14:48,200 Speaker 1: pretty hard, both in the equity and debt markets. So 283 00:14:48,240 --> 00:14:51,360 Speaker 1: the equity market cap is now below four billion dollars. 284 00:14:51,600 --> 00:14:53,720 Speaker 1: We look about a year ago it was thirteen billions. 285 00:14:53,760 --> 00:14:56,239 Speaker 1: That's a big drop, and now many of its unsecured 286 00:14:56,240 --> 00:14:59,240 Speaker 1: bonds will will yield as much as sixteen to twenty percent, 287 00:14:59,400 --> 00:15:03,520 Speaker 1: So it's getting into pretty dicey territory there. That said, 288 00:15:03,920 --> 00:15:06,840 Speaker 1: you know, Luman does have adequate liquidity for the next 289 00:15:06,840 --> 00:15:08,800 Speaker 1: few years given a couple of things. Number one, it's 290 00:15:08,840 --> 00:15:12,200 Speaker 1: cash on hand, It has an untapped revolument credit line, 291 00:15:12,840 --> 00:15:15,880 Speaker 1: It has a deal to sell its European business, and 292 00:15:16,040 --> 00:15:19,040 Speaker 1: the company has minimal debt maturities until the twenty twenty five. 293 00:15:19,160 --> 00:15:22,240 Speaker 1: So even though you know the stock and the bonds 294 00:15:22,240 --> 00:15:24,240 Speaker 1: have been hit here, I think a near term they 295 00:15:24,280 --> 00:15:27,240 Speaker 1: look okay from a liquidity perspective. Tell me a bit 296 00:15:27,240 --> 00:15:31,840 Speaker 1: about the company and why has the outlook deteriorated and 297 00:15:32,000 --> 00:15:35,240 Speaker 1: what does it tell us broadly about companies in this sector. Sure, so, 298 00:15:35,600 --> 00:15:39,400 Speaker 1: lumin is kind of a legacy mostly wireline communications companies. 299 00:15:39,440 --> 00:15:44,680 Speaker 1: So the peers include like Frontier Communications, Windstream, Consolidate Communications, 300 00:15:45,000 --> 00:15:48,720 Speaker 1: and this whole sector has been under pressure for several 301 00:15:48,800 --> 00:15:53,440 Speaker 1: years now due to you know, high debt loads, business trends, 302 00:15:53,480 --> 00:15:56,120 Speaker 1: whereby they're losing a lot of migration of clients to 303 00:15:56,600 --> 00:16:00,760 Speaker 1: wireless competition from cable, etc. And they also all of 304 00:16:00,760 --> 00:16:03,920 Speaker 1: them had high dividend payout ratios, which they've kind of cut. 305 00:16:04,000 --> 00:16:07,120 Speaker 1: I mean, Lumen just recently eliminated its dividend, so they 306 00:16:07,200 --> 00:16:10,400 Speaker 1: have been under pressure. And plus, you know, in when 307 00:16:10,440 --> 00:16:13,160 Speaker 1: you're providing communications services, there's always a high level of 308 00:16:13,200 --> 00:16:17,720 Speaker 1: capital investment. You have to keep up with your competitors. So, 309 00:16:18,080 --> 00:16:22,040 Speaker 1: for example, like Lumin is trying to deliver higher broadband 310 00:16:22,080 --> 00:16:24,800 Speaker 1: speeds to their clients, so they're upgrading a lot of 311 00:16:24,800 --> 00:16:28,640 Speaker 1: their customers to fiber so that can remain competitive with 312 00:16:29,440 --> 00:16:34,800 Speaker 1: their wireline and cable competitors. Now, to be fair, Lumin 313 00:16:34,880 --> 00:16:37,080 Speaker 1: has taken a number of steps to better position. The 314 00:16:37,080 --> 00:16:41,440 Speaker 1: company executed two major asset sales in twenty twenty two. 315 00:16:41,720 --> 00:16:43,720 Speaker 1: I mentioned they announced a third asset sell of the 316 00:16:43,760 --> 00:16:46,960 Speaker 1: European business, which should close hopefully in late twenty twenty three. 317 00:16:47,600 --> 00:16:50,280 Speaker 1: They're embarking on a fiber upgrade plan. They eliminated the 318 00:16:50,320 --> 00:16:53,120 Speaker 1: dividends on their common shairs, and they recently install the 319 00:16:53,160 --> 00:16:56,320 Speaker 1: new management team. So they're trying to do things. But 320 00:16:56,400 --> 00:16:58,920 Speaker 1: let's remember that their credit profile is likely to weakend 321 00:16:59,600 --> 00:17:02,800 Speaker 1: this year. The company on February seventh announced that they 322 00:17:02,840 --> 00:17:06,960 Speaker 1: expect adjusted EBADA to drop thirteen to seventeen percent this year, 323 00:17:07,280 --> 00:17:10,160 Speaker 1: and that's going to push leverage likely above four times 324 00:17:10,280 --> 00:17:14,480 Speaker 1: or will probably stay through twenty twenty four. So now 325 00:17:14,520 --> 00:17:19,560 Speaker 1: the company expects revenue in IBADA to return to growth 326 00:17:19,560 --> 00:17:21,280 Speaker 1: by the end of twenty twenty four and be higher 327 00:17:21,320 --> 00:17:23,560 Speaker 1: in twenty twenty five. But I believe most investors are 328 00:17:23,680 --> 00:17:27,920 Speaker 1: pretty skeptical that the company can return to growth. Yeah, assets, sales, 329 00:17:27,960 --> 00:17:30,880 Speaker 1: dividend cuts. I feel like this is going to become 330 00:17:31,080 --> 00:17:33,600 Speaker 1: the playbook for companies this year as they try to 331 00:17:33,640 --> 00:17:37,080 Speaker 1: deal with high debt loads and rising interest costs. Is 332 00:17:37,080 --> 00:17:40,159 Speaker 1: that kind of what you're seeing too? Correct? Now? You know, 333 00:17:40,200 --> 00:17:42,199 Speaker 1: the years start off pretty strong for debt issues, so 334 00:17:42,200 --> 00:17:44,880 Speaker 1: I think a few companies said, hey, you know, and 335 00:17:45,320 --> 00:17:48,160 Speaker 1: particularly in high yield, you tap the market when you can, 336 00:17:48,400 --> 00:17:50,399 Speaker 1: right now, when you need to, and so the market 337 00:17:50,440 --> 00:17:51,720 Speaker 1: was open there earlier this year were so a few 338 00:17:51,760 --> 00:17:54,959 Speaker 1: companies tap both the high grade and high yield markets 339 00:17:55,440 --> 00:17:57,840 Speaker 1: to get cash because you're right, if you have upcoming 340 00:17:57,880 --> 00:18:00,040 Speaker 1: maturities and you know it's going to be expense of 341 00:18:00,119 --> 00:18:02,360 Speaker 1: the bar. If it gets more expensive, the longer you wait, 342 00:18:02,400 --> 00:18:04,760 Speaker 1: the bigger trouble you could be. And so yes, I think. 343 00:18:04,840 --> 00:18:07,800 Speaker 1: And then if you can't borrow money, another way to 344 00:18:07,880 --> 00:18:10,400 Speaker 1: raise capital is obviously asset sales, which is something people 345 00:18:10,440 --> 00:18:14,199 Speaker 1: can do. And leadership changes are also sort of on 346 00:18:14,280 --> 00:18:16,520 Speaker 1: the horizon for a lot of these companies as they 347 00:18:16,560 --> 00:18:20,800 Speaker 1: deal with this changing economic environment. One big name is 348 00:18:20,840 --> 00:18:23,680 Speaker 1: that Bob Iger has come back as the Sea of Disney. 349 00:18:24,240 --> 00:18:27,160 Speaker 1: So what are you looking at in terms of major 350 00:18:27,280 --> 00:18:31,440 Speaker 1: changes for Disney's financial position their credit profile? Sure, so 351 00:18:31,880 --> 00:18:33,960 Speaker 1: I g has announced a number of steps which should 352 00:18:34,000 --> 00:18:39,880 Speaker 1: improve Disney's financial performance and credit profile. Now, their net 353 00:18:39,920 --> 00:18:42,200 Speaker 1: leverage is pretty high when you include the minority interest, 354 00:18:42,240 --> 00:18:44,560 Speaker 1: which you should. It's a little bit high at three 355 00:18:44,560 --> 00:18:47,600 Speaker 1: point seven times, but that can improve over the next year. 356 00:18:47,680 --> 00:18:49,760 Speaker 1: I think, so I got us set up a couple 357 00:18:49,760 --> 00:18:52,480 Speaker 1: of steps. Number one, he's restructuring the company to three 358 00:18:52,480 --> 00:18:56,200 Speaker 1: main segments. Number two, he's tarting five point five billion 359 00:18:56,240 --> 00:18:59,320 Speaker 1: dollars of cost savings. And number three, he's striving for 360 00:18:59,440 --> 00:19:01,959 Speaker 1: Disney US to be profitable by the end of fiscal 361 00:19:01,960 --> 00:19:04,040 Speaker 1: twenty twenty four. Now, Disney Plus like a lot of 362 00:19:04,040 --> 00:19:07,280 Speaker 1: streaming businesses are a drag on the company's operations because 363 00:19:07,320 --> 00:19:12,320 Speaker 1: there's big investment required in the beginning. So and one 364 00:19:12,320 --> 00:19:13,960 Speaker 1: other thing that we're really keeping our eye on is 365 00:19:13,960 --> 00:19:16,280 Speaker 1: a major financial catalyst that's on the horizon, which is 366 00:19:16,320 --> 00:19:20,280 Speaker 1: what happens with Hulu. So Disney owns sixty seven percent 367 00:19:20,280 --> 00:19:25,520 Speaker 1: of Hulu, yet Comcast owns thirty three percent, and what's 368 00:19:25,520 --> 00:19:28,600 Speaker 1: going on with that ownership, Like are they are they 369 00:19:28,640 --> 00:19:31,400 Speaker 1: going to try to sell off that steak in Hulu? Well, 370 00:19:31,440 --> 00:19:33,199 Speaker 1: what's interesting is this is really going to come to 371 00:19:33,200 --> 00:19:36,280 Speaker 1: a head in likely early twenty twenty four, because come 372 00:19:36,440 --> 00:19:39,600 Speaker 1: January twenty twenty four, Disney has the right to exercise 373 00:19:39,640 --> 00:19:42,760 Speaker 1: a call option on comcast thirty three percent steak, and 374 00:19:42,880 --> 00:19:45,800 Speaker 1: Comcast has a put option that it could exercise at 375 00:19:45,840 --> 00:19:48,840 Speaker 1: the same time to put its steak to Disney. So 376 00:19:49,040 --> 00:19:52,120 Speaker 1: it would seem logical that if either party exercises their option, 377 00:19:52,560 --> 00:19:56,280 Speaker 1: you know, come early twenty twenty four, that the thirty 378 00:19:56,280 --> 00:19:59,239 Speaker 1: three percent stake would go from Comcast to Disney with 379 00:19:59,280 --> 00:20:02,399 Speaker 1: a potential value then in the low nine billion dollars area. 380 00:20:02,480 --> 00:20:04,720 Speaker 1: So this is you know, this is a big price 381 00:20:04,800 --> 00:20:09,280 Speaker 1: tag here, and the agreement will be valued based on 382 00:20:09,320 --> 00:20:12,359 Speaker 1: fair market value of Hulu with a floor market for 383 00:20:12,480 --> 00:20:15,160 Speaker 1: overall Hulu of twenty seven billion, which says a thirty 384 00:20:15,160 --> 00:20:17,120 Speaker 1: three percent stake is you know, in the low nine 385 00:20:17,119 --> 00:20:22,040 Speaker 1: billion dollar area. So you know, that's what's could happen. Now, 386 00:20:22,280 --> 00:20:25,800 Speaker 1: there's what's interesting. On February seventh or February ninth, excuse me, 387 00:20:26,080 --> 00:20:28,440 Speaker 1: Bob Iger said in an interview that he's open minded 388 00:20:29,320 --> 00:20:32,600 Speaker 1: with regard to Hulu, and he said that Disney buying 389 00:20:32,640 --> 00:20:35,560 Speaker 1: out Comcast is not necessarily the case. So I think 390 00:20:35,600 --> 00:20:37,200 Speaker 1: there's a chance we could see kind of a flip 391 00:20:37,200 --> 00:20:40,560 Speaker 1: of the script there where instead of Disney buying a Comcast, 392 00:20:40,640 --> 00:20:42,280 Speaker 1: maybe they strike a deal for the other way that 393 00:20:42,320 --> 00:20:45,760 Speaker 1: Comcast buys out Disney's two thirds stay or they turn 394 00:20:45,800 --> 00:20:49,160 Speaker 1: around and sell Hulu. Yeah, it seems like these streaming 395 00:20:49,160 --> 00:20:51,600 Speaker 1: platforms have been really difficult for some of these legacy 396 00:20:51,640 --> 00:20:55,159 Speaker 1: media companies to catch up on. So curious what we 397 00:20:55,160 --> 00:20:58,400 Speaker 1: should be looking out for in terms of Disney, Netflix, 398 00:20:58,440 --> 00:21:01,000 Speaker 1: all of these sort of streaming But he's obviously Netflix 399 00:21:01,000 --> 00:21:03,440 Speaker 1: has a usual leg up. Yeah, and Netflix is free 400 00:21:03,440 --> 00:21:05,560 Speaker 1: cash will positive, right, So a big step from Netflix 401 00:21:05,720 --> 00:21:09,120 Speaker 1: was to turn free cash flow positive. They said they're 402 00:21:09,119 --> 00:21:11,359 Speaker 1: a sustained positive free cash flow, which is a big 403 00:21:11,440 --> 00:21:16,000 Speaker 1: step for them. Their credit profile is very good. The 404 00:21:16,080 --> 00:21:17,920 Speaker 1: big catalysts we're waiting for now is from Moody's to 405 00:21:18,000 --> 00:21:21,840 Speaker 1: upgrade that to ig so S Andp's already there. We're 406 00:21:21,880 --> 00:21:24,520 Speaker 1: waiting for Moodies the next step, which should hopefully happen soon. 407 00:21:24,640 --> 00:21:27,680 Speaker 1: And that's what's going on Netflix. Other companies, you know, 408 00:21:27,720 --> 00:21:31,359 Speaker 1: Warner Brothers, Discovery still burning a lot and streaming, Paramount 409 00:21:31,600 --> 00:21:33,240 Speaker 1: is still burning a lot and streaming, and talk about 410 00:21:33,240 --> 00:21:35,960 Speaker 1: Disney still burning a lot and streaming. So yes, it's 411 00:21:35,960 --> 00:21:38,480 Speaker 1: still a big investment for a lot of these companies, 412 00:21:38,480 --> 00:21:42,040 Speaker 1: and consolidation probably does make sense. And partly, of course, 413 00:21:42,200 --> 00:21:44,040 Speaker 1: Netflix has the leg up because a lot of the 414 00:21:44,119 --> 00:21:47,440 Speaker 1: debt they took on in order to sort of grow 415 00:21:47,480 --> 00:21:49,399 Speaker 1: as much as they did was in this low interest 416 00:21:49,480 --> 00:21:51,760 Speaker 1: rate era and now we are in an era of 417 00:21:51,800 --> 00:21:53,720 Speaker 1: higher interest rates. And so if you're still in that 418 00:21:53,800 --> 00:21:56,199 Speaker 1: growth phase in terms of your streaming platform, you have 419 00:21:56,200 --> 00:21:59,840 Speaker 1: a natural disadvantage to someone like Netflix. Correct and Netflix 420 00:22:00,040 --> 00:22:01,960 Speaker 1: his high yield and raise most of its money in 421 00:22:01,960 --> 00:22:03,640 Speaker 1: the high yeld market, but they have very low coupons 422 00:22:03,640 --> 00:22:05,400 Speaker 1: are exactly right because they did it at a time 423 00:22:05,440 --> 00:22:08,320 Speaker 1: when the junk barn market yield were much lower than 424 00:22:08,320 --> 00:22:10,600 Speaker 1: they are today. But hopefully for Netflix, you know, when 425 00:22:10,640 --> 00:22:12,919 Speaker 1: they get up to IG, it's a deeper pool capital, 426 00:22:12,960 --> 00:22:15,560 Speaker 1: it's a lower cost pool capital. If they do need 427 00:22:15,600 --> 00:22:18,399 Speaker 1: to go back to the markets to refinance the mature 428 00:22:18,440 --> 00:22:20,560 Speaker 1: in a couple of years, they should hopefully have no 429 00:22:20,600 --> 00:22:24,240 Speaker 1: problem doing it. Awesome. Thanks very much to Steve Flynn 430 00:22:24,280 --> 00:22:27,040 Speaker 1: from Bloomberg Intelligence. You can read all of his analysis 431 00:22:27,080 --> 00:22:30,080 Speaker 1: on the Bloomberg Terminal. Thanks also to David Brooke from 432 00:22:30,080 --> 00:22:32,680 Speaker 1: Bloomberg News. Read all his scoops on the private credit 433 00:22:32,760 --> 00:22:35,920 Speaker 1: market on the Terminal and Bloomberg dot Com. I'm Jill. 434 00:22:36,080 --> 00:22:38,240 Speaker 1: Thanks for joining us. See you next week on the 435 00:22:38,240 --> 00:22:39,760 Speaker 1: Credit Edge.