1 00:00:15,480 --> 00:00:18,480 Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast. 2 00:00:18,640 --> 00:00:21,360 Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg. 3 00:00:22,040 --> 00:00:24,040 Speaker 1: This week, we're very pleased to welcome to the show 4 00:00:24,160 --> 00:00:27,320 Speaker 1: Scott Carpenter, who covers structured finance for Bloomberg News in 5 00:00:27,400 --> 00:00:30,120 Speaker 1: New York. How are you doing, Scott, doing very well? 6 00:00:30,160 --> 00:00:33,280 Speaker 1: Thanks for having me. We're also delighted to see Louise Parker, 7 00:00:33,720 --> 00:00:37,440 Speaker 1: who covers consumer companies for Bloomberg Intelligence based in London. 8 00:00:37,440 --> 00:00:39,160 Speaker 1: Hello Louise, Hi. 9 00:00:39,120 --> 00:00:40,480 Speaker 2: James, thanks for having a long story. 10 00:00:41,280 --> 00:00:43,000 Speaker 1: We'll be coming back to Louise later in the show 11 00:00:43,000 --> 00:00:46,400 Speaker 1: to talk about two of my favorite things, beer and 12 00:00:46,520 --> 00:00:49,880 Speaker 1: the US culture wars. So do stay with us. But first, 13 00:00:50,320 --> 00:00:53,760 Speaker 1: Scott Carpenter with Bloomberg News office buildings. Why are they 14 00:00:53,800 --> 00:00:55,760 Speaker 1: under such pressure now? Why is everything blowing up? 15 00:00:57,280 --> 00:01:03,040 Speaker 3: Well? The short answer is from home. Now. You might 16 00:01:03,160 --> 00:01:09,399 Speaker 3: remember back in February everything kind of this story exploded 17 00:01:09,440 --> 00:01:17,160 Speaker 3: onto the scene when Brookfield defaulted on to La office towers. 18 00:01:18,680 --> 00:01:21,360 Speaker 3: Brookfield is a very big company. It's not as though 19 00:01:21,400 --> 00:01:25,119 Speaker 3: that company is facing serious distress. What it was doing 20 00:01:25,520 --> 00:01:29,399 Speaker 3: was realizing whoa A lot of people are working from home? 21 00:01:29,480 --> 00:01:29,720 Speaker 2: Now? 22 00:01:30,360 --> 00:01:33,920 Speaker 3: These buildings aren't worth as much as they used to 23 00:01:33,920 --> 00:01:39,240 Speaker 3: be their office buildings, so they chose to default, which 24 00:01:39,319 --> 00:01:45,640 Speaker 3: meant that they're effectively not choosing to refinance. And then 25 00:01:45,959 --> 00:01:50,000 Speaker 3: not too much long after that, another big company, Pimco, 26 00:01:50,800 --> 00:01:55,840 Speaker 3: also defaulted on some office towers and for similar reasons. 27 00:01:56,320 --> 00:01:58,960 Speaker 3: You've been seeing more and more of this over time, 28 00:02:00,600 --> 00:02:03,400 Speaker 3: and it's become almost a staple of headlines. You see, 29 00:02:03,440 --> 00:02:06,880 Speaker 3: this office building is falling behind, or this one is defaulted, 30 00:02:07,080 --> 00:02:13,200 Speaker 3: and so on. And one thing that happened recently is 31 00:02:13,320 --> 00:02:17,040 Speaker 3: that these defaults are piling up and they're starting to 32 00:02:17,240 --> 00:02:20,880 Speaker 3: rise at a faster radar, not only defaults, but also 33 00:02:20,919 --> 00:02:26,000 Speaker 3: the rate at which office loans are falling behind on 34 00:02:26,040 --> 00:02:26,639 Speaker 3: their payments. 35 00:02:26,760 --> 00:02:28,640 Speaker 1: So sorry, let me just tell you that. So, people 36 00:02:28,680 --> 00:02:31,240 Speaker 1: aren't going back to the office because of you know, 37 00:02:31,280 --> 00:02:33,720 Speaker 1: obviously we're working from home for much of the pandemic. 38 00:02:33,919 --> 00:02:35,760 Speaker 1: But now people are going back to the office. Everyone's 39 00:02:35,760 --> 00:02:38,600 Speaker 1: coming into work, the subway's a pact. What's going on 40 00:02:38,680 --> 00:02:40,679 Speaker 1: and why I think coming to a head right now? 41 00:02:42,040 --> 00:02:44,519 Speaker 3: Two reasons. First, even though people are going back to 42 00:02:44,560 --> 00:02:48,200 Speaker 3: the office, there's a new regime of the three day 43 00:02:48,200 --> 00:02:51,720 Speaker 3: work week. This has changed everything it means that yes, 44 00:02:51,880 --> 00:02:53,720 Speaker 3: you're going back to the office, but you're not going 45 00:02:53,720 --> 00:02:56,280 Speaker 3: as much. And companies know this and they're looking to 46 00:02:58,200 --> 00:03:03,840 Speaker 3: downsize into smaller offices. So they're they're looking to shift 47 00:03:03,919 --> 00:03:06,360 Speaker 3: from one building to a smaller building, maybe a more modern, 48 00:03:06,480 --> 00:03:08,760 Speaker 3: nicer building as well. It's a good opportunity. The other 49 00:03:08,800 --> 00:03:10,520 Speaker 3: thing is higher interest rates. 50 00:03:10,639 --> 00:03:13,640 Speaker 1: So people use those desks and they share them, so 51 00:03:14,040 --> 00:03:15,920 Speaker 1: they go in. People come in different days. I mean, 52 00:03:15,960 --> 00:03:17,919 Speaker 1: it seems like there's big peaks and troughs in that 53 00:03:17,960 --> 00:03:20,320 Speaker 1: whole return to work thing. Everyone's coming in on Tuesdays 54 00:03:20,320 --> 00:03:23,160 Speaker 1: to Thursday and off one Monday to Friday. Don't you 55 00:03:23,160 --> 00:03:24,840 Speaker 1: still need the same kind of office to do that. 56 00:03:25,560 --> 00:03:27,359 Speaker 3: Yeah, you do. There's always going to be office. The 57 00:03:27,360 --> 00:03:29,440 Speaker 3: offices are always going to be around. I think people, 58 00:03:29,520 --> 00:03:33,400 Speaker 3: I think companies are looking at this thinking this is 59 00:03:33,600 --> 00:03:36,360 Speaker 3: this is our moment to switch to a nicer office. 60 00:03:36,840 --> 00:03:39,680 Speaker 3: They're they're changing things up and they're just they're just 61 00:03:39,760 --> 00:03:43,920 Speaker 3: realizing that far fewer people are coming into the office. 62 00:03:44,240 --> 00:03:47,840 Speaker 3: I think that I think the standard work week is 63 00:03:47,920 --> 00:03:51,920 Speaker 3: now three days a week in the office, two at 64 00:03:51,920 --> 00:03:55,400 Speaker 3: home or the or the or the similar two days 65 00:03:55,440 --> 00:03:58,840 Speaker 3: a week in the office three days at home. Overall, 66 00:03:58,960 --> 00:04:03,600 Speaker 3: that result in all lot less demand for offices office space. 67 00:04:03,880 --> 00:04:06,160 Speaker 1: So let's talk about the other point. You raise higher 68 00:04:06,160 --> 00:04:10,120 Speaker 1: interest rates. Obviously rates have shot up much faster and 69 00:04:10,200 --> 00:04:13,480 Speaker 1: much more than most people expected. Why does that become 70 00:04:13,520 --> 00:04:15,160 Speaker 1: such a problem for office buildings. 71 00:04:15,760 --> 00:04:18,479 Speaker 3: Well, if you're an office landlord and you need to 72 00:04:18,560 --> 00:04:23,200 Speaker 3: rent out some space at a nice, fancy building, you 73 00:04:23,279 --> 00:04:25,240 Speaker 3: used to be able to do that at pretty low rates, 74 00:04:25,960 --> 00:04:29,920 Speaker 3: but then the Fed raised rates. Now either you want 75 00:04:29,960 --> 00:04:34,719 Speaker 3: to maybe you need to refinance your existing loan. Suddenly 76 00:04:34,760 --> 00:04:39,640 Speaker 3: it's a lot higher, you know, several percentage points higher, 77 00:04:39,640 --> 00:04:43,680 Speaker 3: which can really start to add up. So you combine 78 00:04:43,760 --> 00:04:46,960 Speaker 3: that with the fact that you don't need that office 79 00:04:47,040 --> 00:04:50,120 Speaker 3: quite as much as you used to, and suddenly you're 80 00:04:50,120 --> 00:04:52,560 Speaker 3: looking at alternatives. You want a smaller office, you want 81 00:04:52,600 --> 00:04:56,280 Speaker 3: to move to somewhere else. It just overall makes it 82 00:04:56,480 --> 00:05:00,359 Speaker 3: much less, much more expensive and therefore lesser active. 83 00:05:01,400 --> 00:05:03,520 Speaker 1: So you've written, you mentioned to philps, but you've written 84 00:05:03,520 --> 00:05:08,160 Speaker 1: a lot about delinquencies. What does that mean? Why delinquent 85 00:05:08,640 --> 00:05:11,080 Speaker 1: office loans out a five year high. 86 00:05:11,880 --> 00:05:16,320 Speaker 3: A delinquency is a word that means you've fallen behind 87 00:05:16,480 --> 00:05:24,400 Speaker 3: on your payments, usually an interest payment and delinquency rates 88 00:05:24,400 --> 00:05:26,200 Speaker 3: on office loans right a five year high, so they're 89 00:05:26,200 --> 00:05:29,640 Speaker 3: about there are four percent, and this is according to Trepp, 90 00:05:29,839 --> 00:05:33,120 Speaker 3: which keeps which attracts a lot of data on offices 91 00:05:33,160 --> 00:05:36,839 Speaker 3: and commercial real estate property. Four percent doesn't sound like 92 00:05:37,240 --> 00:05:39,920 Speaker 3: a whole lot, but it's the highest since twenty eighteen. 93 00:05:41,640 --> 00:05:45,359 Speaker 3: And remember back in twenty eighteen, there were still a 94 00:05:45,400 --> 00:05:49,800 Speaker 3: lot of office loans out there from the pre two 95 00:05:49,880 --> 00:05:53,960 Speaker 3: thousand and eight era when it were very easy loan terms, 96 00:05:54,000 --> 00:05:58,800 Speaker 3: and probably some office company borrowers were getting loans that 97 00:05:58,800 --> 00:06:03,520 Speaker 3: they shouldn't have been. So now now it's different. Now 98 00:06:03,640 --> 00:06:07,760 Speaker 3: what we're seeing is related to the pandemic, and it's 99 00:06:08,320 --> 00:06:12,000 Speaker 3: by all accounts, it's going higher. This is probably going 100 00:06:12,080 --> 00:06:16,560 Speaker 3: to be just the beginning of the sharp uptick in 101 00:06:16,960 --> 00:06:20,320 Speaker 3: the rate at which these office loans are falling behind. 102 00:06:20,680 --> 00:06:23,480 Speaker 3: There was a there was another there was a podcast 103 00:06:23,560 --> 00:06:26,000 Speaker 3: co host of Trapp who said it could get to 104 00:06:26,080 --> 00:06:29,120 Speaker 3: ten percent by the end of this year. So ten 105 00:06:29,200 --> 00:06:32,400 Speaker 3: percent of all office loans at least tied to a 106 00:06:32,440 --> 00:06:36,560 Speaker 3: certain part of the finance sector CMBs that will fall 107 00:06:36,600 --> 00:06:39,920 Speaker 3: behind at least thirty days behind on one of their payments. 108 00:06:40,279 --> 00:06:43,839 Speaker 1: So you mentioned CMBs, which immediately sets off jogging alarms 109 00:06:43,839 --> 00:06:46,200 Speaker 1: in my head. Explain what that is? I mean, you know, 110 00:06:46,200 --> 00:06:50,240 Speaker 1: anytime there's an acronym in finance often ends in TIS. 111 00:06:50,839 --> 00:06:52,200 Speaker 1: What's the CMBs. 112 00:06:52,839 --> 00:06:57,320 Speaker 3: CNBS stands for commercial mortgage backed securities, And you can 113 00:06:57,360 --> 00:07:01,599 Speaker 3: think of it as a pool. It's a pool of 114 00:07:02,480 --> 00:07:07,240 Speaker 3: commercial loans, a big part of which's office. So for example, 115 00:07:07,960 --> 00:07:11,840 Speaker 3: you could take an office loan and remember these are 116 00:07:11,920 --> 00:07:13,520 Speaker 3: that's going to be a big loans, that's going to 117 00:07:13,560 --> 00:07:17,320 Speaker 3: be millions, you know, tens of millions of dollars. And 118 00:07:17,360 --> 00:07:21,600 Speaker 3: then you take twenty or so other loans. Some of 119 00:07:21,600 --> 00:07:24,000 Speaker 3: those are office loans, some of their some of those 120 00:07:24,040 --> 00:07:29,640 Speaker 3: are loans on industrial properties, some of those are loans 121 00:07:29,680 --> 00:07:34,760 Speaker 3: on retail properties. And you and each of those is 122 00:07:34,760 --> 00:07:40,120 Speaker 3: is producing regular interest payments every month, maybe millions of dollars. 123 00:07:40,360 --> 00:07:43,680 Speaker 3: So all together, if you combine all of these loans, 124 00:07:43,720 --> 00:07:48,400 Speaker 3: you've got it income streams Suddenly that's you know, that's 125 00:07:48,440 --> 00:07:52,720 Speaker 3: worth a lot of money, and investors will pay for 126 00:07:52,840 --> 00:07:56,520 Speaker 3: that income stream. That is a CMBs when you combine 127 00:07:56,560 --> 00:08:02,000 Speaker 3: the income streams from these different properties into a steady 128 00:08:02,440 --> 00:08:10,160 Speaker 3: overall stream of payments, and the problem recently is that 129 00:08:10,800 --> 00:08:13,880 Speaker 3: offices used to be a super safe part of this 130 00:08:14,240 --> 00:08:18,440 Speaker 3: income stream that's going into these cnbs, and that's starting 131 00:08:18,440 --> 00:08:22,240 Speaker 3: to change now they're no longer safe. There's there's big problems. 132 00:08:22,240 --> 00:08:24,120 Speaker 3: People don't really know how bad it's going to get, 133 00:08:24,600 --> 00:08:28,960 Speaker 3: and it's making the lenders in the CMBs, the ones 134 00:08:28,960 --> 00:08:33,400 Speaker 3: who are buying the income stream, it's making them very nervous. 135 00:08:33,880 --> 00:08:36,880 Speaker 1: Sounds a lot to me like two thousand and eight subprime. 136 00:08:37,880 --> 00:08:40,640 Speaker 1: Should we worry about all that all over again? 137 00:08:41,120 --> 00:08:43,679 Speaker 3: I don't think we should worry about that. This is 138 00:08:43,720 --> 00:08:47,040 Speaker 3: a fundamentally different space. I think if you go all 139 00:08:47,040 --> 00:08:52,600 Speaker 3: the way back to subprime mortgages, that was some seriously 140 00:08:52,960 --> 00:08:58,240 Speaker 3: risky loans for it, just to put it in perspective 141 00:08:58,280 --> 00:09:00,520 Speaker 3: that I think the default right, So the share of 142 00:09:00,559 --> 00:09:04,040 Speaker 3: those loans of prime mortgages, remember those are also much 143 00:09:04,120 --> 00:09:08,360 Speaker 3: much smaller because they were individual borrowers that defaulted was 144 00:09:08,720 --> 00:09:13,080 Speaker 3: you know, at the peak twenty thirty maybe forty percent 145 00:09:13,200 --> 00:09:16,440 Speaker 3: or so. These are not going to have nearly the 146 00:09:16,480 --> 00:09:19,640 Speaker 3: same default, right. It's going to be below I don't want, 147 00:09:20,280 --> 00:09:23,720 Speaker 3: you know, below ten, maybe five, I don't know, but 148 00:09:23,880 --> 00:09:26,560 Speaker 3: not in the same universe. These are corporate borrowers, they're 149 00:09:26,600 --> 00:09:31,960 Speaker 3: generally a little bit safer. Nevertheless, though you are seeing 150 00:09:31,960 --> 00:09:34,360 Speaker 3: a little bit of an increase, and that's at a minimum. 151 00:09:34,360 --> 00:09:35,559 Speaker 3: It's going to make people nervous. 152 00:09:35,920 --> 00:09:38,679 Speaker 1: I mean, it does sound particularly worrying when you've got 153 00:09:38,720 --> 00:09:42,920 Speaker 1: all these big office buildings just sitting out there unoccupied. 154 00:09:43,480 --> 00:09:47,520 Speaker 1: I mean, I travel around the United States and also Candada. 155 00:09:47,559 --> 00:09:50,319 Speaker 1: Look at Toronto. I mean, it's just full of high 156 00:09:50,400 --> 00:09:54,400 Speaker 1: rise buildings, a lot of them unoccupied. They're commercial and 157 00:09:54,440 --> 00:09:57,880 Speaker 1: they can't be retrofitted, they can't suddenly be changed into condos. 158 00:09:57,920 --> 00:09:59,640 Speaker 1: So what's the endgame here. 159 00:10:01,120 --> 00:10:04,880 Speaker 3: Nobody really knows. But I think one thing that everybody's 160 00:10:04,880 --> 00:10:07,680 Speaker 3: talking about is how bad is this going to get 161 00:10:07,760 --> 00:10:12,880 Speaker 3: for the banks. Banks buy a lot of commercial real estate, 162 00:10:13,040 --> 00:10:16,320 Speaker 3: especially regional banks, that they're pretty exposed to commercial real estate. 163 00:10:16,960 --> 00:10:20,640 Speaker 3: I'm not sure how exposed they are to this particular slice, 164 00:10:20,679 --> 00:10:25,160 Speaker 3: which is CMBs, but there's definitely going to be some 165 00:10:25,280 --> 00:10:29,680 Speaker 3: pain that. I think the top sort of national banks 166 00:10:30,120 --> 00:10:32,760 Speaker 3: tend to be some of the biggest lenders of cnbs. 167 00:10:33,440 --> 00:10:35,600 Speaker 3: They're fine, They're obviously going to be fine, but they're 168 00:10:35,640 --> 00:10:38,319 Speaker 3: still gonna you know, they're still going to be experiencing 169 00:10:38,360 --> 00:10:43,120 Speaker 3: some pain over this. Then, so there's that the investors, 170 00:10:43,160 --> 00:10:45,920 Speaker 3: the banks that are buying the cnbs or the lending 171 00:10:45,920 --> 00:10:49,720 Speaker 3: into them, that are going to take a hit. And 172 00:10:49,760 --> 00:10:53,439 Speaker 3: then it's going to be a lot harder for anybody 173 00:10:53,440 --> 00:10:57,320 Speaker 3: who wants to refinance to refinance because rates are so 174 00:10:57,400 --> 00:11:00,880 Speaker 3: much higher. Let's say you need to refinance an office loan, 175 00:11:01,400 --> 00:11:05,400 Speaker 3: Suddenly you might not be able to afford it, and 176 00:11:05,880 --> 00:11:10,319 Speaker 3: that could be that could lead to some problems as well. Ultimately, 177 00:11:10,600 --> 00:11:12,600 Speaker 3: I'm not really sure what's going to happen. I don't 178 00:11:12,600 --> 00:11:16,000 Speaker 3: think anybody is really sure, aside from the fact that 179 00:11:17,520 --> 00:11:21,040 Speaker 3: we do have this one big seismic trend rippling through 180 00:11:21,080 --> 00:11:24,000 Speaker 3: the whole sector, which is people are not working in 181 00:11:24,040 --> 00:11:25,439 Speaker 3: the office as often as they used to. 182 00:11:25,840 --> 00:11:27,720 Speaker 1: Are there any particular parts of the United States that 183 00:11:27,720 --> 00:11:28,800 Speaker 1: are particularly exposed. 184 00:11:29,960 --> 00:11:32,840 Speaker 3: Yeah, you hear about some markets that are worse than others. 185 00:11:33,840 --> 00:11:37,280 Speaker 3: Los Angeles is downtown LA. We had a great story 186 00:11:37,320 --> 00:11:41,720 Speaker 3: by John Gidtelson a week or a couple of weeks 187 00:11:41,720 --> 00:11:45,400 Speaker 3: ago about how Los Angeles office towers are really struggling. 188 00:11:45,840 --> 00:11:51,480 Speaker 3: It's not viewed as a very attractive space, and that's 189 00:11:51,600 --> 00:11:55,200 Speaker 3: where there's been a lot of defaults on office buildings. 190 00:11:55,440 --> 00:11:57,880 Speaker 3: That was where that was where Brookfield defaulted on those 191 00:11:57,920 --> 00:12:01,760 Speaker 3: two LA office towers. That that catapulted this trend into 192 00:12:01,760 --> 00:12:04,640 Speaker 3: the into the headlines, and then I think there have 193 00:12:04,679 --> 00:12:07,679 Speaker 3: been a couple since then. Yeah, so I'd say LA 194 00:12:07,800 --> 00:12:13,080 Speaker 3: is a is an area to watch and that that, 195 00:12:13,240 --> 00:12:15,040 Speaker 3: in my mind stands out. There are a couple of others. 196 00:12:15,360 --> 00:12:17,400 Speaker 1: To be clear, when you're talking about investors like Brookfield, 197 00:12:17,440 --> 00:12:19,680 Speaker 1: you know, these are big, deep pocketed investors. They're not 198 00:12:19,720 --> 00:12:22,360 Speaker 1: struggling for cash, but they are effectually be walking away 199 00:12:22,360 --> 00:12:25,040 Speaker 1: from some of these real estate assets that they own. 200 00:12:25,679 --> 00:12:28,640 Speaker 3: Yep, that's right there. It's it's you could call it 201 00:12:28,679 --> 00:12:31,839 Speaker 3: a strategic default. It's not. It's not a default driven 202 00:12:31,880 --> 00:12:35,520 Speaker 3: by they would really like to refinance. They just they can't. 203 00:12:35,559 --> 00:12:37,959 Speaker 3: They don't have any money, so they have to. It's 204 00:12:37,960 --> 00:12:40,839 Speaker 3: a default where they're saying it's just not worth it 205 00:12:41,480 --> 00:12:45,040 Speaker 3: to keep paying into this thing. So yeah, back in February, 206 00:12:45,080 --> 00:12:49,240 Speaker 3: Brookfield was coming up against this big maturity date and 207 00:12:49,280 --> 00:12:52,280 Speaker 3: it thought and it's and it decided, you know what, 208 00:12:53,280 --> 00:12:56,720 Speaker 3: rather than refinance this thing and pay higher rates, we're 209 00:12:56,880 --> 00:12:59,000 Speaker 3: just going to walk away. That made the most sense 210 00:12:59,040 --> 00:12:59,480 Speaker 3: for them. 211 00:13:00,400 --> 00:13:02,840 Speaker 1: So before we talk to Louise Parker at Boomberg Contlligence, 212 00:13:02,880 --> 00:13:05,680 Speaker 1: what's the next big story to watch here? Do you think, Scott? 213 00:13:07,840 --> 00:13:10,439 Speaker 3: Does it have to be related to to office US 214 00:13:10,520 --> 00:13:13,319 Speaker 3: anything instructured finance, which tends to scare a lot of 215 00:13:13,320 --> 00:13:18,000 Speaker 3: people generally, Well, everybody's looking at subprime auto loans. I'm 216 00:13:18,040 --> 00:13:22,000 Speaker 3: working on subprime auto loans these days, for subprime model loans. 217 00:13:22,559 --> 00:13:24,800 Speaker 3: The reason it's interesting to me is because they get 218 00:13:24,840 --> 00:13:29,400 Speaker 3: packaged into bonds, just like these office loans do. And 219 00:13:30,800 --> 00:13:33,559 Speaker 3: what is going to the big question is what will 220 00:13:33,640 --> 00:13:37,839 Speaker 3: happen with interest rates now being a lot higher and 221 00:13:38,040 --> 00:13:43,720 Speaker 3: more and more subprime borrowers are falling behind on their payments. 222 00:13:44,400 --> 00:13:48,559 Speaker 3: There's gonna be some pain for some bondholders who are 223 00:13:48,600 --> 00:13:52,520 Speaker 3: exposed to people falling behind. It's going to be pretty limited, 224 00:13:52,559 --> 00:13:57,480 Speaker 3: though there's a couple of deep subprime companies that are 225 00:13:57,520 --> 00:14:00,880 Speaker 3: that are more exposed than others. Overall, well, I think 226 00:14:01,120 --> 00:14:04,240 Speaker 3: people are not fundamentally too worried, but yeah, there could be. 227 00:14:04,280 --> 00:14:07,280 Speaker 3: There could be a little bit of pain for some 228 00:14:07,400 --> 00:14:12,040 Speaker 3: of the more deep some prime borrowers. And if those 229 00:14:12,120 --> 00:14:16,640 Speaker 3: loans get packaged into bonds, those bonds could be facing 230 00:14:16,640 --> 00:14:17,560 Speaker 3: a bit of stress. 231 00:14:17,880 --> 00:14:19,840 Speaker 1: Very excited to see what you come up with on 232 00:14:19,880 --> 00:14:22,800 Speaker 1: that great stuff. Scott the Carpenter from Bloomberg News, thanks 233 00:14:22,840 --> 00:14:23,680 Speaker 1: so much for joining us. 234 00:14:23,720 --> 00:14:25,400 Speaker 3: Thanks very much. I read all of. 235 00:14:25,440 --> 00:14:28,000 Speaker 1: Scott's scoops on the Bloomberg terminal and of course at 236 00:14:28,000 --> 00:14:31,360 Speaker 1: Bloomberg dot com. So, as I mentioned earlier, we're very 237 00:14:31,360 --> 00:14:33,480 Speaker 1: pleased to have with us Louise Parker, who looks at 238 00:14:33,520 --> 00:14:37,160 Speaker 1: consumer companies for Bloomberg Intelligence, and we're here to talk 239 00:14:37,200 --> 00:14:40,280 Speaker 1: about the King of beers. What's the situation, Louise. 240 00:14:40,640 --> 00:14:44,040 Speaker 2: Well, h James or is it the king of beers? 241 00:14:44,680 --> 00:14:48,720 Speaker 2: Certainly in the US in recent weeks, bud Light has 242 00:14:48,800 --> 00:14:51,200 Speaker 2: lost its crown. It has been the number one beer 243 00:14:51,440 --> 00:14:55,800 Speaker 2: in the US market for over twenty years and going 244 00:14:55,840 --> 00:15:01,520 Speaker 2: back to early April in so a Twitter or not, 245 00:15:01,600 --> 00:15:04,720 Speaker 2: Actually I think it was Instagram and Twitter post by 246 00:15:04,760 --> 00:15:10,200 Speaker 2: a transgender I guess someone who had a marketing alliance 247 00:15:10,360 --> 00:15:14,480 Speaker 2: with the company. She was celebrating her one year since 248 00:15:14,680 --> 00:15:19,920 Speaker 2: transition and had one can of bud Light with her 249 00:15:20,040 --> 00:15:23,640 Speaker 2: image on it, and the market for bud Light just 250 00:15:23,840 --> 00:15:27,080 Speaker 2: fell through the floor. In the world of social media, 251 00:15:27,760 --> 00:15:31,239 Speaker 2: there was a boycott for bud Lights, and anytime customers 252 00:15:31,880 --> 00:15:35,840 Speaker 2: are alienated by your advertising and the company says to 253 00:15:35,960 --> 00:15:40,520 Speaker 2: their customers, this was not a marketing campaign. Okay, anytime 254 00:15:40,640 --> 00:15:43,120 Speaker 2: you are in social media and you're paying someone to 255 00:15:43,160 --> 00:15:46,360 Speaker 2: push your brand, that is marketing. That is a campaign. 256 00:15:47,560 --> 00:15:52,600 Speaker 2: The senior management behind the marketing alliance have been pushed aside, 257 00:15:52,680 --> 00:15:55,760 Speaker 2: let's say, not necessarily sacked, but no longer in their positions, 258 00:15:56,480 --> 00:16:00,840 Speaker 2: and senior management at AB InBev, who owns brand bud Light, 259 00:16:01,560 --> 00:16:04,360 Speaker 2: having come out to say, we messed up. We made 260 00:16:04,400 --> 00:16:08,720 Speaker 2: a mistake of just carrying on like nothing's changed. But 261 00:16:08,880 --> 00:16:12,000 Speaker 2: now we're seeing in the numbers coming through from May 262 00:16:12,320 --> 00:16:15,320 Speaker 2: that bud Light has actually lost its crown to be 263 00:16:15,440 --> 00:16:18,560 Speaker 2: the number one beer in the US market to modelo 264 00:16:18,800 --> 00:16:22,920 Speaker 2: especial and interesting thing there is. But the ABI used 265 00:16:22,960 --> 00:16:24,760 Speaker 2: to own that brand in America, but they had to 266 00:16:24,760 --> 00:16:28,120 Speaker 2: sell it for concentration reasons when they bought sab Miller 267 00:16:28,160 --> 00:16:31,680 Speaker 2: about six years ago, so they owned the brand Modello 268 00:16:31,760 --> 00:16:34,760 Speaker 2: outside of America. But now it has the number one 269 00:16:35,040 --> 00:16:38,800 Speaker 2: position in America. And as you and I were chudding recently, James, 270 00:16:39,040 --> 00:16:41,560 Speaker 2: this is a cultural war. Now I don't reside in 271 00:16:41,560 --> 00:16:43,280 Speaker 2: the US so maybe you can tell me what you're 272 00:16:43,320 --> 00:16:47,400 Speaker 2: seeing on the airwaves about what's happening to bud Light. 273 00:16:47,960 --> 00:16:50,320 Speaker 1: Well, I live in the bubble of New York City 274 00:16:50,400 --> 00:16:52,680 Speaker 1: and in particular Brooklyn, so everyone's drinking bud Light all 275 00:16:52,720 --> 00:16:59,560 Speaker 1: the time. I prefer other types of alcoholic beverage, but 276 00:17:00,200 --> 00:17:03,680 Speaker 1: other beers are available too. But why, I mean, this 277 00:17:03,720 --> 00:17:05,720 Speaker 1: is fascinating exactly these say culture wars. But why are 278 00:17:05,760 --> 00:17:07,560 Speaker 1: we talking about this on a credit show? Why does 279 00:17:07,560 --> 00:17:10,080 Speaker 1: it affect the company so badly in terms of its revenue? 280 00:17:11,000 --> 00:17:13,800 Speaker 2: Well, it does because bud Light is such an important beer. 281 00:17:13,960 --> 00:17:18,240 Speaker 2: Only they only generate seventeen percent of their total beer 282 00:17:18,320 --> 00:17:22,160 Speaker 2: volume in the North American market, so that's US, Canada, 283 00:17:22,240 --> 00:17:27,840 Speaker 2: and Mexico. But they generate that's volume, sales volume seventeen percent, 284 00:17:28,160 --> 00:17:30,880 Speaker 2: but it's almost thirty percent, twenty eight point seven percent 285 00:17:31,160 --> 00:17:34,280 Speaker 2: of sales revenue. And when you get to Ibida, that's 286 00:17:34,320 --> 00:17:37,720 Speaker 2: where they're not some Bolts earnings, it's over thirty percent, 287 00:17:37,760 --> 00:17:41,520 Speaker 2: thirty point five percent. I'm not going to try and 288 00:17:41,880 --> 00:17:44,760 Speaker 2: do a presentation here, but those numbers are coming down. 289 00:17:44,840 --> 00:17:49,320 Speaker 2: So this is consensus are saying that volumes across North America, 290 00:17:49,359 --> 00:17:51,720 Speaker 2: across all of their brands. Now they have a lot 291 00:17:51,720 --> 00:17:54,359 Speaker 2: of brands which have also lost here. So they have 292 00:17:54,560 --> 00:17:59,920 Speaker 2: not just bud Light, they have Michelo Vulture. They own Budweiser, 293 00:18:00,320 --> 00:18:02,720 Speaker 2: bush Light, and Natural Light, and they had to also 294 00:18:02,760 --> 00:18:06,520 Speaker 2: sell Corona, And so the brands that are gaining share 295 00:18:06,520 --> 00:18:08,080 Speaker 2: are the ones that they used to own. So any 296 00:18:08,200 --> 00:18:11,000 Speaker 2: any brand that is not owned by ABI is actually 297 00:18:11,080 --> 00:18:16,280 Speaker 2: gaining share. Add to the detriment of Bidlight and all 298 00:18:16,320 --> 00:18:21,320 Speaker 2: of its sister brands under ABI umbrella. And what the 299 00:18:21,400 --> 00:18:24,080 Speaker 2: analyst is saying this year is that North American volumes 300 00:18:24,080 --> 00:18:28,080 Speaker 2: will be down five percent. That's in revenue, that's only 301 00:18:28,119 --> 00:18:30,920 Speaker 2: one percent, But they're seeing North America ebit yards down 302 00:18:31,000 --> 00:18:34,240 Speaker 2: eight percent. Now that's why I care as a credit analyst. 303 00:18:34,760 --> 00:18:39,560 Speaker 2: It's had a pretty dramatic impact on the share price 304 00:18:39,640 --> 00:18:42,199 Speaker 2: for ABI bod in the US as the ticker is, 305 00:18:44,000 --> 00:18:46,960 Speaker 2: but it's off its lows. It was down about seventeen percent. 306 00:18:47,240 --> 00:18:51,359 Speaker 2: It's off the lows now, but the bonds spreads haven't 307 00:18:51,400 --> 00:18:54,160 Speaker 2: really moved. So I care as a credit analyst. What's 308 00:18:54,160 --> 00:18:58,160 Speaker 2: happening on the cash bonds The company has. ABI has 309 00:18:58,320 --> 00:19:02,359 Speaker 2: bonds in sterling, euros dollars and I've looked at it 310 00:19:02,400 --> 00:19:05,840 Speaker 2: this week against some of its peers in the beverage world, 311 00:19:06,040 --> 00:19:08,320 Speaker 2: and they really haven't moved, they haven't widened, They've just 312 00:19:08,520 --> 00:19:13,520 Speaker 2: tracked the peer group for beverages. It is interesting for 313 00:19:13,600 --> 00:19:16,600 Speaker 2: this company because they levered up five six years ago. 314 00:19:16,600 --> 00:19:18,960 Speaker 2: As I said, when they bought sab Miller, they took 315 00:19:18,960 --> 00:19:21,960 Speaker 2: on over one hundred billion dollars of debt. They've managed 316 00:19:22,000 --> 00:19:25,040 Speaker 2: to reduce that down to about seventy billion and reduced 317 00:19:25,119 --> 00:19:28,240 Speaker 2: leverage from upwards five times down to three and a 318 00:19:28,280 --> 00:19:33,040 Speaker 2: half time. So they've just retained or just regained a 319 00:19:33,080 --> 00:19:36,760 Speaker 2: single A credit rating. And it's great for the company 320 00:19:36,920 --> 00:19:39,760 Speaker 2: because they're in the market buying back bonds. The way 321 00:19:39,800 --> 00:19:43,399 Speaker 2: they reduce their debt is tendering their their bonds. But 322 00:19:43,560 --> 00:19:48,879 Speaker 2: now the sort of advanced situation where with declining earnings, 323 00:19:48,960 --> 00:19:50,800 Speaker 2: they very well have to look at what the knock 324 00:19:50,840 --> 00:19:53,600 Speaker 2: on effect to cash flow is. Will the bid for 325 00:19:53,680 --> 00:19:56,760 Speaker 2: the bonds be supported by buybacks if their cash flow 326 00:19:56,840 --> 00:20:00,600 Speaker 2: is indeed reducing? So that's why could and Less care. 327 00:20:00,960 --> 00:20:03,080 Speaker 1: But the equity is down and the bonds aren't. Do 328 00:20:03,119 --> 00:20:05,040 Speaker 1: we expect the bonds to start falling in to catch 329 00:20:05,080 --> 00:20:05,439 Speaker 1: catch up? 330 00:20:05,480 --> 00:20:09,359 Speaker 2: With the equity Eventually, yeah, really good question. Possibly we 331 00:20:10,080 --> 00:20:12,080 Speaker 2: won't see the full extent of this, even though we 332 00:20:12,119 --> 00:20:15,320 Speaker 2: get volume data on a week to week basis. The 333 00:20:15,560 --> 00:20:18,439 Speaker 2: information industry informations out there and it's on the terminal 334 00:20:18,480 --> 00:20:21,359 Speaker 2: for people that want to look at it. The company 335 00:20:21,359 --> 00:20:23,760 Speaker 2: won't report their second quarter results until the first week 336 00:20:23,800 --> 00:20:26,919 Speaker 2: of August, and that's when we might see them have 337 00:20:27,080 --> 00:20:30,440 Speaker 2: to reduce their guidance. We haven't seen anything to date. 338 00:20:30,640 --> 00:20:33,280 Speaker 2: We saw when their first quarter came out, which was 339 00:20:33,320 --> 00:20:38,199 Speaker 2: three weeks after this transgender influencer posted on Instagram, and 340 00:20:38,440 --> 00:20:40,480 Speaker 2: they were like, well, North America's only once then have 341 00:20:40,480 --> 00:20:43,520 Speaker 2: had volume with bud Light, it's not important. Well, I 342 00:20:43,560 --> 00:20:45,840 Speaker 2: think they missed the point and they missed the opportunity 343 00:20:45,920 --> 00:20:49,040 Speaker 2: to actually say, mere Copple, we got this wrong. We're 344 00:20:49,080 --> 00:20:52,199 Speaker 2: going to talk to our core customers. And they have 345 00:20:52,359 --> 00:20:56,280 Speaker 2: rolled out new advertising, but the damage has been done, 346 00:20:56,280 --> 00:20:59,040 Speaker 2: and some equity analysts out there are saying, will they 347 00:20:59,119 --> 00:21:01,600 Speaker 2: ever get back the market share that they've lost. Certainly 348 00:21:01,640 --> 00:21:04,680 Speaker 2: with bud Light, they've alienated customers and that's a real 349 00:21:04,720 --> 00:21:06,440 Speaker 2: problem for a consumer company. 350 00:21:06,760 --> 00:21:10,400 Speaker 1: So one tweet loses them billions of dollars. The equity 351 00:21:10,440 --> 00:21:13,320 Speaker 1: tanks the bonds could follow. Is it really as simple 352 00:21:13,320 --> 00:21:15,159 Speaker 1: as that or was there anything else going on that 353 00:21:15,200 --> 00:21:16,679 Speaker 1: you could attribute this move to. 354 00:21:18,440 --> 00:21:21,200 Speaker 2: I think it's a polarization of society in America. I mean, 355 00:21:21,320 --> 00:21:25,160 Speaker 2: I'm sitting in London and or we just see what 356 00:21:25,200 --> 00:21:27,320 Speaker 2: we see and we're obviously not on the ground there. 357 00:21:27,880 --> 00:21:30,280 Speaker 2: This has not affected their global sales. This has not 358 00:21:30,359 --> 00:21:34,040 Speaker 2: had a knock on effect to the London, Paris Frankfort. 359 00:21:34,119 --> 00:21:36,960 Speaker 2: You know, they're beers, which we don't drink a little 360 00:21:36,960 --> 00:21:39,639 Speaker 2: budde over here. I must say sorry about that. But 361 00:21:40,160 --> 00:21:43,520 Speaker 2: they own cellar Atoa, they owned bets, they own left 362 00:21:43,560 --> 00:21:46,159 Speaker 2: they you know, this is a global portfolio of beers. 363 00:21:46,680 --> 00:21:50,160 Speaker 2: It hasn't had a huge effect in South America, in Asia, Pacific, 364 00:21:50,720 --> 00:21:54,080 Speaker 2: across Europe. This is a North America problem for the 365 00:21:54,119 --> 00:21:57,040 Speaker 2: company and they have to address it. They literally have 366 00:21:57,119 --> 00:21:59,399 Speaker 2: to come out and say this is what happened, this 367 00:21:59,560 --> 00:22:03,200 Speaker 2: is how I fixing it. Sorry for the upset because 368 00:22:03,240 --> 00:22:06,800 Speaker 2: people have boycotted this through social media and it's happening 369 00:22:06,840 --> 00:22:10,639 Speaker 2: at the bars. They're having to repurchase beer that is 370 00:22:10,720 --> 00:22:14,200 Speaker 2: expired because from their distributives, because the bars aren't taking it. 371 00:22:14,280 --> 00:22:16,520 Speaker 2: They can't sell it. So people are walking into a 372 00:22:16,600 --> 00:22:19,160 Speaker 2: bar where they would have ordered a bid light, they're 373 00:22:19,160 --> 00:22:22,960 Speaker 2: going for anything but an abi beer, and that is 374 00:22:23,000 --> 00:22:23,439 Speaker 2: a problem. 375 00:22:24,000 --> 00:22:26,560 Speaker 1: It sounds like they're also a warning for other companies. 376 00:22:26,560 --> 00:22:29,359 Speaker 1: I mean, there's lots of other consumer companies that you know, 377 00:22:29,440 --> 00:22:33,320 Speaker 1: every time there's a special event or a commemoration or 378 00:22:33,400 --> 00:22:35,600 Speaker 1: you know, it's Pride month this month. I mean, companies 379 00:22:35,640 --> 00:22:38,400 Speaker 1: feel the need to make a statement on these things, 380 00:22:38,440 --> 00:22:40,760 Speaker 1: on these issues. But then you're seeing this sort of 381 00:22:40,800 --> 00:22:45,320 Speaker 1: backlash for for various reasons in the States. What's the strategy. 382 00:22:45,359 --> 00:22:47,600 Speaker 1: What do other consumer companies do they just keep quiet 383 00:22:47,680 --> 00:22:50,200 Speaker 1: or they you know, how do others learn from this? 384 00:22:50,840 --> 00:22:53,040 Speaker 2: It's really hard joined because damned if you do, damned 385 00:22:53,040 --> 00:22:55,680 Speaker 2: if you don't. I mean, my personal news feed is 386 00:22:55,840 --> 00:22:59,920 Speaker 2: full of pride celebration, as you would expect for any 387 00:23:00,160 --> 00:23:02,720 Speaker 2: whether you know, you get Mother's Day, you get fatherestay 388 00:23:03,200 --> 00:23:06,159 Speaker 2: and the consumer companies roll out their advertising around that. 389 00:23:06,640 --> 00:23:09,280 Speaker 2: And pride is huge because people celebrate, they get together 390 00:23:09,680 --> 00:23:12,520 Speaker 2: with their friendship groups and they'll have a drink and 391 00:23:12,600 --> 00:23:14,680 Speaker 2: that might be in a bud light, you know, you 392 00:23:14,800 --> 00:23:17,840 Speaker 2: never know, but they have to read the room. They 393 00:23:17,880 --> 00:23:21,359 Speaker 2: have to see when they do misstep that they've made 394 00:23:21,400 --> 00:23:24,600 Speaker 2: a mistake and they have to address it. Like they 395 00:23:24,640 --> 00:23:28,399 Speaker 2: were trying to target a very small part of the 396 00:23:28,480 --> 00:23:32,600 Speaker 2: population and alienated a large part of the population who 397 00:23:32,640 --> 00:23:35,639 Speaker 2: actually uses their product, who drinks their beer. It's a 398 00:23:35,760 --> 00:23:37,760 Speaker 2: really tricky question and. 399 00:23:37,800 --> 00:23:38,720 Speaker 1: They should have said sorry. 400 00:23:39,320 --> 00:23:40,240 Speaker 2: They should have said sorry. 401 00:23:40,560 --> 00:23:42,320 Speaker 1: Are there any other companies in this boat as far 402 00:23:42,359 --> 00:23:44,200 Speaker 1: as you can see, Louise in terms of consumer stuff 403 00:23:44,240 --> 00:23:45,480 Speaker 1: that you cover, well, I. 404 00:23:45,480 --> 00:23:48,040 Speaker 2: Don't cover target, but they were in a similar situation 405 00:23:48,280 --> 00:23:52,720 Speaker 2: in recent weeks with again with Pride, they had special 406 00:23:52,760 --> 00:23:58,280 Speaker 2: filmsuits for people who are transitioning, and mums yelled foul 407 00:23:58,359 --> 00:24:01,119 Speaker 2: and said, you're targeting to In fact, they were not 408 00:24:01,280 --> 00:24:04,760 Speaker 2: targeting children. Sorry to use upon the company they aimed target. 409 00:24:05,160 --> 00:24:07,919 Speaker 2: They were not aimed at children. They were adult sized, 410 00:24:08,080 --> 00:24:10,080 Speaker 2: and they moved all their stock to the back of 411 00:24:10,119 --> 00:24:13,920 Speaker 2: the store and some stores just pulled the merchandise altogether. 412 00:24:14,040 --> 00:24:16,960 Speaker 2: So it's really hard when people are on a bandwagon. 413 00:24:17,960 --> 00:24:20,000 Speaker 2: Do you swerve to your curve do you just avoid 414 00:24:20,040 --> 00:24:22,680 Speaker 2: it all together? It's a really difficult one. But when 415 00:24:22,680 --> 00:24:25,119 Speaker 2: you're in the business of selling a product, you are 416 00:24:25,240 --> 00:24:28,280 Speaker 2: producing it. You have to sell you have to have 417 00:24:28,400 --> 00:24:30,639 Speaker 2: the flow through of volumes or else you're having the 418 00:24:30,720 --> 00:24:33,800 Speaker 2: shot shot down production. This is that's how serious it 419 00:24:33,880 --> 00:24:35,760 Speaker 2: can get. If people don't take your product the end 420 00:24:35,760 --> 00:24:38,200 Speaker 2: of the day, you have to consider what to do 421 00:24:38,280 --> 00:24:42,160 Speaker 2: with that product. Do we continue to ship the manufacture 422 00:24:42,200 --> 00:24:44,200 Speaker 2: volumes and ship the volumes that we have been It's 423 00:24:44,240 --> 00:24:47,840 Speaker 2: not you don't move beer from North America to South America, 424 00:24:48,000 --> 00:24:50,200 Speaker 2: you know, you just don't. You have local brands, and 425 00:24:50,320 --> 00:24:53,600 Speaker 2: you make those brands where where the consumer will consume them, 426 00:24:53,960 --> 00:24:56,600 Speaker 2: where they'll drink them. And if they're not actually you know, 427 00:24:56,720 --> 00:24:59,879 Speaker 2: asking for ad a bud light, that's that's troublesome. 428 00:25:00,280 --> 00:25:02,760 Speaker 1: And the Budweiser maker and Heiser Bush, that's they're still 429 00:25:02,800 --> 00:25:04,200 Speaker 1: in trouble here. They're not out of the woods. 430 00:25:05,080 --> 00:25:08,199 Speaker 2: Not yeah, I mean this has been going on, as 431 00:25:08,240 --> 00:25:12,360 Speaker 2: I said, since the beginning of April, and where what's 432 00:25:12,400 --> 00:25:15,840 Speaker 2: troublesome for me is that this is the peak summer 433 00:25:15,920 --> 00:25:19,639 Speaker 2: season that we're invented, and so families get together, you 434 00:25:19,960 --> 00:25:21,639 Speaker 2: get together with your friends that we can you have 435 00:25:21,720 --> 00:25:24,920 Speaker 2: a barbecue, you go for a picnique, you have you know, 436 00:25:25,359 --> 00:25:27,679 Speaker 2: a callerbox. What if you call it ESQ on Australian 437 00:25:27,800 --> 00:25:32,040 Speaker 2: of beer, wine, whatever other things you like to consume. 438 00:25:33,480 --> 00:25:37,480 Speaker 2: And if you're avoiding one brand, that's an issue. You know, 439 00:25:37,880 --> 00:25:40,840 Speaker 2: people people might change their mind. But the social media 440 00:25:40,880 --> 00:25:43,520 Speaker 2: over this is massive. I mean, I don't look at 441 00:25:43,520 --> 00:25:45,520 Speaker 2: all this toff typically, but I did some research for 442 00:25:45,600 --> 00:25:49,800 Speaker 2: this chat and it's it's just one way. It's there's 443 00:25:49,840 --> 00:25:50,240 Speaker 2: a real. 444 00:25:50,160 --> 00:25:54,200 Speaker 1: Polarization total mindfield. Amazing, Yeah, very very interesting. 445 00:25:54,440 --> 00:25:55,080 Speaker 3: Thank you very much. 446 00:25:55,200 --> 00:25:59,560 Speaker 1: Louise Parker of Bloomberg Intelligence. Read all your great analysis 447 00:25:59,640 --> 00:26:02,560 Speaker 1: Louise on the Bloomberg Terminal. Do check it out and 448 00:26:02,680 --> 00:26:04,000 Speaker 1: we hope to see you back on the show soon. 449 00:26:04,720 --> 00:26:07,440 Speaker 1: And thanks again to Scott Carpenter from Bloomberg News. Read 450 00:26:07,480 --> 00:26:10,359 Speaker 1: all of his great distress debt scoops and strut to 451 00:26:10,400 --> 00:26:13,320 Speaker 1: finance scoops on the Terminal and at Bloomberg dot Com. 452 00:26:14,320 --> 00:26:16,520 Speaker 1: I'm James Crombie. It's been a pleasure having you join 453 00:26:16,600 --> 00:26:18,680 Speaker 1: us again next week on the Credit Edge.