WEBVTT - Office Debt Is Blowing Up; Budweiser Loses Crown 0:00:15.480 --> 0:00:18.480 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:18.640 --> 0:00:21.360 My name is James Crumbie. I'm a senior editor at Bloomberg. 0:00:22.040 --> 0:00:24.040 This week, we're very pleased to welcome to the show 0:00:24.160 --> 0:00:27.320 Scott Carpenter, who covers structured finance for Bloomberg News in 0:00:27.400 --> 0:00:30.120 New York. How are you doing, Scott, doing very well? 0:00:30.160 --> 0:00:33.280 Thanks for having me. We're also delighted to see Louise Parker, 0:00:33.720 --> 0:00:37.440 who covers consumer companies for Bloomberg Intelligence based in London. 0:00:37.440 --> 0:00:39.160 Hello Louise, Hi. 0:00:39.120 --> 0:00:40.480 James, thanks for having a long story. 0:00:41.280 --> 0:00:43.000 We'll be coming back to Louise later in the show 0:00:43.000 --> 0:00:46.400 to talk about two of my favorite things, beer and 0:00:46.520 --> 0:00:49.880 the US culture wars. So do stay with us. But first, 0:00:50.320 --> 0:00:53.760 Scott Carpenter with Bloomberg News office buildings. Why are they 0:00:53.800 --> 0:00:55.760 under such pressure now? Why is everything blowing up? 0:00:57.280 --> 0:01:03.040 Well? The short answer is from home. Now. You might 0:01:03.160 --> 0:01:09.399 remember back in February everything kind of this story exploded 0:01:09.440 --> 0:01:17.160 onto the scene when Brookfield defaulted on to La office towers. 0:01:18.680 --> 0:01:21.360 Brookfield is a very big company. It's not as though 0:01:21.400 --> 0:01:25.119 that company is facing serious distress. What it was doing 0:01:25.520 --> 0:01:29.399 was realizing whoa A lot of people are working from home? 0:01:29.480 --> 0:01:29.720 Now? 0:01:30.360 --> 0:01:33.920 These buildings aren't worth as much as they used to 0:01:33.920 --> 0:01:39.240 be their office buildings, so they chose to default, which 0:01:39.319 --> 0:01:45.640 meant that they're effectively not choosing to refinance. And then 0:01:45.959 --> 0:01:50.000 not too much long after that, another big company, Pimco, 0:01:50.800 --> 0:01:55.840 also defaulted on some office towers and for similar reasons. 0:01:56.320 --> 0:01:58.960 You've been seeing more and more of this over time, 0:02:00.600 --> 0:02:03.400 and it's become almost a staple of headlines. You see, 0:02:03.440 --> 0:02:06.880 this office building is falling behind, or this one is defaulted, 0:02:07.080 --> 0:02:13.200 and so on. And one thing that happened recently is 0:02:13.320 --> 0:02:17.040 that these defaults are piling up and they're starting to 0:02:17.240 --> 0:02:20.880 rise at a faster radar, not only defaults, but also 0:02:20.919 --> 0:02:26.000 the rate at which office loans are falling behind on 0:02:26.040 --> 0:02:26.639 their payments. 0:02:26.760 --> 0:02:28.640 So sorry, let me just tell you that. So, people 0:02:28.680 --> 0:02:31.240 aren't going back to the office because of you know, 0:02:31.280 --> 0:02:33.720 obviously we're working from home for much of the pandemic. 0:02:33.919 --> 0:02:35.760 But now people are going back to the office. Everyone's 0:02:35.760 --> 0:02:38.600 coming into work, the subway's a pact. What's going on 0:02:38.680 --> 0:02:40.679 and why I think coming to a head right now? 0:02:42.040 --> 0:02:44.519 Two reasons. First, even though people are going back to 0:02:44.560 --> 0:02:48.200 the office, there's a new regime of the three day 0:02:48.200 --> 0:02:51.720 work week. This has changed everything it means that yes, 0:02:51.880 --> 0:02:53.720 you're going back to the office, but you're not going 0:02:53.720 --> 0:02:56.280 as much. And companies know this and they're looking to 0:02:58.200 --> 0:03:03.840 downsize into smaller offices. So they're they're looking to shift 0:03:03.919 --> 0:03:06.360 from one building to a smaller building, maybe a more modern, 0:03:06.480 --> 0:03:08.760 nicer building as well. It's a good opportunity. The other 0:03:08.800 --> 0:03:10.520 thing is higher interest rates. 0:03:10.639 --> 0:03:13.640 So people use those desks and they share them, so 0:03:14.040 --> 0:03:15.920 they go in. People come in different days. I mean, 0:03:15.960 --> 0:03:17.919 it seems like there's big peaks and troughs in that 0:03:17.960 --> 0:03:20.320 whole return to work thing. Everyone's coming in on Tuesdays 0:03:20.320 --> 0:03:23.160 to Thursday and off one Monday to Friday. Don't you 0:03:23.160 --> 0:03:24.840 still need the same kind of office to do that. 0:03:25.560 --> 0:03:27.359 Yeah, you do. There's always going to be office. The 0:03:27.360 --> 0:03:29.440 offices are always going to be around. I think people, 0:03:29.520 --> 0:03:33.400 I think companies are looking at this thinking this is 0:03:33.600 --> 0:03:36.360 this is our moment to switch to a nicer office. 0:03:36.840 --> 0:03:39.680 They're they're changing things up and they're just they're just 0:03:39.760 --> 0:03:43.920 realizing that far fewer people are coming into the office. 0:03:44.240 --> 0:03:47.840 I think that I think the standard work week is 0:03:47.920 --> 0:03:51.920 now three days a week in the office, two at 0:03:51.920 --> 0:03:55.400 home or the or the or the similar two days 0:03:55.440 --> 0:03:58.840 a week in the office three days at home. Overall, 0:03:58.960 --> 0:04:03.600 that result in all lot less demand for offices office space. 0:04:03.880 --> 0:04:06.160 So let's talk about the other point. You raise higher 0:04:06.160 --> 0:04:10.120 interest rates. Obviously rates have shot up much faster and 0:04:10.200 --> 0:04:13.480 much more than most people expected. Why does that become 0:04:13.520 --> 0:04:15.160 such a problem for office buildings. 0:04:15.760 --> 0:04:18.479 Well, if you're an office landlord and you need to 0:04:18.560 --> 0:04:23.200 rent out some space at a nice, fancy building, you 0:04:23.279 --> 0:04:25.240 used to be able to do that at pretty low rates, 0:04:25.960 --> 0:04:29.920 but then the Fed raised rates. Now either you want 0:04:29.960 --> 0:04:34.719 to maybe you need to refinance your existing loan. Suddenly 0:04:34.760 --> 0:04:39.640 it's a lot higher, you know, several percentage points higher, 0:04:39.640 --> 0:04:43.680 which can really start to add up. So you combine 0:04:43.760 --> 0:04:46.960 that with the fact that you don't need that office 0:04:47.040 --> 0:04:50.120 quite as much as you used to, and suddenly you're 0:04:50.120 --> 0:04:52.560 looking at alternatives. You want a smaller office, you want 0:04:52.600 --> 0:04:56.280 to move to somewhere else. It just overall makes it 0:04:56.480 --> 0:05:00.359 much less, much more expensive and therefore lesser active. 0:05:01.400 --> 0:05:03.520 So you've written, you mentioned to philps, but you've written 0:05:03.520 --> 0:05:08.160 a lot about delinquencies. What does that mean? Why delinquent 0:05:08.640 --> 0:05:11.080 office loans out a five year high. 0:05:11.880 --> 0:05:16.320 A delinquency is a word that means you've fallen behind 0:05:16.480 --> 0:05:24.400 on your payments, usually an interest payment and delinquency rates 0:05:24.400 --> 0:05:26.200 on office loans right a five year high, so they're 0:05:26.200 --> 0:05:29.640 about there are four percent, and this is according to Trepp, 0:05:29.839 --> 0:05:33.120 which keeps which attracts a lot of data on offices 0:05:33.160 --> 0:05:36.839 and commercial real estate property. Four percent doesn't sound like 0:05:37.240 --> 0:05:39.920 a whole lot, but it's the highest since twenty eighteen. 0:05:41.640 --> 0:05:45.359 And remember back in twenty eighteen, there were still a 0:05:45.400 --> 0:05:49.800 lot of office loans out there from the pre two 0:05:49.880 --> 0:05:53.960 thousand and eight era when it were very easy loan terms, 0:05:54.000 --> 0:05:58.800 and probably some office company borrowers were getting loans that 0:05:58.800 --> 0:06:03.520 they shouldn't have been. So now now it's different. Now 0:06:03.640 --> 0:06:07.760 what we're seeing is related to the pandemic, and it's 0:06:08.320 --> 0:06:12.000 by all accounts, it's going higher. This is probably going 0:06:12.080 --> 0:06:16.560 to be just the beginning of the sharp uptick in 0:06:16.960 --> 0:06:20.320 the rate at which these office loans are falling behind. 0:06:20.680 --> 0:06:23.480 There was a there was another there was a podcast 0:06:23.560 --> 0:06:26.000 co host of Trapp who said it could get to 0:06:26.080 --> 0:06:29.120 ten percent by the end of this year. So ten 0:06:29.200 --> 0:06:32.400 percent of all office loans at least tied to a 0:06:32.440 --> 0:06:36.560 certain part of the finance sector CMBs that will fall 0:06:36.600 --> 0:06:39.920 behind at least thirty days behind on one of their payments. 0:06:40.279 --> 0:06:43.839 So you mentioned CMBs, which immediately sets off jogging alarms 0:06:43.839 --> 0:06:46.200 in my head. Explain what that is? I mean, you know, 0:06:46.200 --> 0:06:50.240 anytime there's an acronym in finance often ends in TIS. 0:06:50.839 --> 0:06:52.200 What's the CMBs. 0:06:52.839 --> 0:06:57.320 CNBS stands for commercial mortgage backed securities, And you can 0:06:57.360 --> 0:07:01.599 think of it as a pool. It's a pool of 0:07:02.480 --> 0:07:07.240 commercial loans, a big part of which's office. So for example, 0:07:07.960 --> 0:07:11.840 you could take an office loan and remember these are 0:07:11.920 --> 0:07:13.520 that's going to be a big loans, that's going to 0:07:13.560 --> 0:07:17.320 be millions, you know, tens of millions of dollars. And 0:07:17.360 --> 0:07:21.600 then you take twenty or so other loans. Some of 0:07:21.600 --> 0:07:24.000 those are office loans, some of their some of those 0:07:24.040 --> 0:07:29.640 are loans on industrial properties, some of those are loans 0:07:29.680 --> 0:07:34.760 on retail properties. And you and each of those is 0:07:34.760 --> 0:07:40.120 is producing regular interest payments every month, maybe millions of dollars. 0:07:40.360 --> 0:07:43.680 So all together, if you combine all of these loans, 0:07:43.720 --> 0:07:48.400 you've got it income streams Suddenly that's you know, that's 0:07:48.440 --> 0:07:52.720 worth a lot of money, and investors will pay for 0:07:52.840 --> 0:07:56.520 that income stream. That is a CMBs when you combine 0:07:56.560 --> 0:08:02.000 the income streams from these different properties into a steady 0:08:02.440 --> 0:08:10.160 overall stream of payments, and the problem recently is that 0:08:10.800 --> 0:08:13.880 offices used to be a super safe part of this 0:08:14.240 --> 0:08:18.440 income stream that's going into these cnbs, and that's starting 0:08:18.440 --> 0:08:22.240 to change now they're no longer safe. There's there's big problems. 0:08:22.240 --> 0:08:24.120 People don't really know how bad it's going to get, 0:08:24.600 --> 0:08:28.960 and it's making the lenders in the CMBs, the ones 0:08:28.960 --> 0:08:33.400 who are buying the income stream, it's making them very nervous. 0:08:33.880 --> 0:08:36.880 Sounds a lot to me like two thousand and eight subprime. 0:08:37.880 --> 0:08:40.640 Should we worry about all that all over again? 0:08:41.120 --> 0:08:43.679 I don't think we should worry about that. This is 0:08:43.720 --> 0:08:47.040 a fundamentally different space. I think if you go all 0:08:47.040 --> 0:08:52.600 the way back to subprime mortgages, that was some seriously 0:08:52.960 --> 0:08:58.240 risky loans for it, just to put it in perspective 0:08:58.280 --> 0:09:00.520 that I think the default right, So the share of 0:09:00.559 --> 0:09:04.040 those loans of prime mortgages, remember those are also much 0:09:04.120 --> 0:09:08.360 much smaller because they were individual borrowers that defaulted was 0:09:08.720 --> 0:09:13.080 you know, at the peak twenty thirty maybe forty percent 0:09:13.200 --> 0:09:16.440 or so. These are not going to have nearly the 0:09:16.480 --> 0:09:19.640 same default, right. It's going to be below I don't want, 0:09:20.280 --> 0:09:23.720 you know, below ten, maybe five, I don't know, but 0:09:23.880 --> 0:09:26.560 not in the same universe. These are corporate borrowers, they're 0:09:26.600 --> 0:09:31.960 generally a little bit safer. Nevertheless, though you are seeing 0:09:31.960 --> 0:09:34.360 a little bit of an increase, and that's at a minimum. 0:09:34.360 --> 0:09:35.559 It's going to make people nervous. 0:09:35.920 --> 0:09:38.679 I mean, it does sound particularly worrying when you've got 0:09:38.720 --> 0:09:42.920 all these big office buildings just sitting out there unoccupied. 0:09:43.480 --> 0:09:47.520 I mean, I travel around the United States and also Candada. 0:09:47.559 --> 0:09:50.319 Look at Toronto. I mean, it's just full of high 0:09:50.400 --> 0:09:54.400 rise buildings, a lot of them unoccupied. They're commercial and 0:09:54.440 --> 0:09:57.880 they can't be retrofitted, they can't suddenly be changed into condos. 0:09:57.920 --> 0:09:59.640 So what's the endgame here. 0:10:01.120 --> 0:10:04.880 Nobody really knows. But I think one thing that everybody's 0:10:04.880 --> 0:10:07.680 talking about is how bad is this going to get 0:10:07.760 --> 0:10:12.880 for the banks. Banks buy a lot of commercial real estate, 0:10:13.040 --> 0:10:16.320 especially regional banks, that they're pretty exposed to commercial real estate. 0:10:16.960 --> 0:10:20.640 I'm not sure how exposed they are to this particular slice, 0:10:20.679 --> 0:10:25.160 which is CMBs, but there's definitely going to be some 0:10:25.280 --> 0:10:29.680 pain that. I think the top sort of national banks 0:10:30.120 --> 0:10:32.760 tend to be some of the biggest lenders of cnbs. 0:10:33.440 --> 0:10:35.600 They're fine, They're obviously going to be fine, but they're 0:10:35.640 --> 0:10:38.319 still gonna you know, they're still going to be experiencing 0:10:38.360 --> 0:10:43.120 some pain over this. Then, so there's that the investors, 0:10:43.160 --> 0:10:45.920 the banks that are buying the cnbs or the lending 0:10:45.920 --> 0:10:49.720 into them, that are going to take a hit. And 0:10:49.760 --> 0:10:53.439 then it's going to be a lot harder for anybody 0:10:53.440 --> 0:10:57.320 who wants to refinance to refinance because rates are so 0:10:57.400 --> 0:11:00.880 much higher. Let's say you need to refinance an office loan, 0:11:01.400 --> 0:11:05.400 Suddenly you might not be able to afford it, and 0:11:05.880 --> 0:11:10.319 that could be that could lead to some problems as well. Ultimately, 0:11:10.600 --> 0:11:12.600 I'm not really sure what's going to happen. I don't 0:11:12.600 --> 0:11:16.000 think anybody is really sure, aside from the fact that 0:11:17.520 --> 0:11:21.040 we do have this one big seismic trend rippling through 0:11:21.080 --> 0:11:24.000 the whole sector, which is people are not working in 0:11:24.040 --> 0:11:25.439 the office as often as they used to. 0:11:25.840 --> 0:11:27.720 Are there any particular parts of the United States that 0:11:27.720 --> 0:11:28.800 are particularly exposed. 0:11:29.960 --> 0:11:32.840 Yeah, you hear about some markets that are worse than others. 0:11:33.840 --> 0:11:37.280 Los Angeles is downtown LA. We had a great story 0:11:37.320 --> 0:11:41.720 by John Gidtelson a week or a couple of weeks 0:11:41.720 --> 0:11:45.400 ago about how Los Angeles office towers are really struggling. 0:11:45.840 --> 0:11:51.480 It's not viewed as a very attractive space, and that's 0:11:51.600 --> 0:11:55.200 where there's been a lot of defaults on office buildings. 0:11:55.440 --> 0:11:57.880 That was where that was where Brookfield defaulted on those 0:11:57.920 --> 0:12:01.760 two LA office towers. That that catapulted this trend into 0:12:01.760 --> 0:12:04.640 the into the headlines, and then I think there have 0:12:04.679 --> 0:12:07.679 been a couple since then. Yeah, so I'd say LA 0:12:07.800 --> 0:12:13.080 is a is an area to watch and that that, 0:12:13.240 --> 0:12:15.040 in my mind stands out. There are a couple of others. 0:12:15.360 --> 0:12:17.400 To be clear, when you're talking about investors like Brookfield, 0:12:17.440 --> 0:12:19.680 you know, these are big, deep pocketed investors. They're not 0:12:19.720 --> 0:12:22.360 struggling for cash, but they are effectually be walking away 0:12:22.360 --> 0:12:25.040 from some of these real estate assets that they own. 0:12:25.679 --> 0:12:28.640 Yep, that's right there. It's it's you could call it 0:12:28.679 --> 0:12:31.839 a strategic default. It's not. It's not a default driven 0:12:31.880 --> 0:12:35.520 by they would really like to refinance. They just they can't. 0:12:35.559 --> 0:12:37.959 They don't have any money, so they have to. It's 0:12:37.960 --> 0:12:40.839 a default where they're saying it's just not worth it 0:12:41.480 --> 0:12:45.040 to keep paying into this thing. So yeah, back in February, 0:12:45.080 --> 0:12:49.240 Brookfield was coming up against this big maturity date and 0:12:49.280 --> 0:12:52.280 it thought and it's and it decided, you know what, 0:12:53.280 --> 0:12:56.720 rather than refinance this thing and pay higher rates, we're 0:12:56.880 --> 0:12:59.000 just going to walk away. That made the most sense 0:12:59.040 --> 0:12:59.480 for them. 0:13:00.400 --> 0:13:02.840 So before we talk to Louise Parker at Boomberg Contlligence, 0:13:02.880 --> 0:13:05.680 what's the next big story to watch here? Do you think, Scott? 0:13:07.840 --> 0:13:10.439 Does it have to be related to to office US 0:13:10.520 --> 0:13:13.319 anything instructured finance, which tends to scare a lot of 0:13:13.320 --> 0:13:18.000 people generally, Well, everybody's looking at subprime auto loans. I'm 0:13:18.040 --> 0:13:22.000 working on subprime auto loans these days, for subprime model loans. 0:13:22.559 --> 0:13:24.800 The reason it's interesting to me is because they get 0:13:24.840 --> 0:13:29.400 packaged into bonds, just like these office loans do. And 0:13:30.800 --> 0:13:33.559 what is going to the big question is what will 0:13:33.640 --> 0:13:37.839 happen with interest rates now being a lot higher and 0:13:38.040 --> 0:13:43.720 more and more subprime borrowers are falling behind on their payments. 0:13:44.400 --> 0:13:48.559 There's gonna be some pain for some bondholders who are 0:13:48.600 --> 0:13:52.520 exposed to people falling behind. It's going to be pretty limited, 0:13:52.559 --> 0:13:57.480 though there's a couple of deep subprime companies that are 0:13:57.520 --> 0:14:00.880 that are more exposed than others. Overall, well, I think 0:14:01.120 --> 0:14:04.240 people are not fundamentally too worried, but yeah, there could be. 0:14:04.280 --> 0:14:07.280 There could be a little bit of pain for some 0:14:07.400 --> 0:14:12.040 of the more deep some prime borrowers. And if those 0:14:12.120 --> 0:14:16.640 loans get packaged into bonds, those bonds could be facing 0:14:16.640 --> 0:14:17.560 a bit of stress. 0:14:17.880 --> 0:14:19.840 Very excited to see what you come up with on 0:14:19.880 --> 0:14:22.800 that great stuff. Scott the Carpenter from Bloomberg News, thanks 0:14:22.840 --> 0:14:23.680 so much for joining us. 0:14:23.720 --> 0:14:25.400 Thanks very much. I read all of. 0:14:25.440 --> 0:14:28.000 Scott's scoops on the Bloomberg terminal and of course at 0:14:28.000 --> 0:14:31.360 Bloomberg dot com. So, as I mentioned earlier, we're very 0:14:31.360 --> 0:14:33.480 pleased to have with us Louise Parker, who looks at 0:14:33.520 --> 0:14:37.160 consumer companies for Bloomberg Intelligence, and we're here to talk 0:14:37.200 --> 0:14:40.280 about the King of beers. What's the situation, Louise. 0:14:40.640 --> 0:14:44.040 Well, h James or is it the king of beers? 0:14:44.680 --> 0:14:48.720 Certainly in the US in recent weeks, bud Light has 0:14:48.800 --> 0:14:51.200 lost its crown. It has been the number one beer 0:14:51.440 --> 0:14:55.800 in the US market for over twenty years and going 0:14:55.840 --> 0:15:01.520 back to early April in so a Twitter or not, 0:15:01.600 --> 0:15:04.720 Actually I think it was Instagram and Twitter post by 0:15:04.760 --> 0:15:10.200 a transgender I guess someone who had a marketing alliance 0:15:10.360 --> 0:15:14.480 with the company. She was celebrating her one year since 0:15:14.680 --> 0:15:19.920 transition and had one can of bud Light with her 0:15:20.040 --> 0:15:23.640 image on it, and the market for bud Light just 0:15:23.840 --> 0:15:27.080 fell through the floor. In the world of social media, 0:15:27.760 --> 0:15:31.239 there was a boycott for bud Lights, and anytime customers 0:15:31.880 --> 0:15:35.840 are alienated by your advertising and the company says to 0:15:35.960 --> 0:15:40.520 their customers, this was not a marketing campaign. Okay, anytime 0:15:40.640 --> 0:15:43.120 you are in social media and you're paying someone to 0:15:43.160 --> 0:15:46.360 push your brand, that is marketing. That is a campaign. 0:15:47.560 --> 0:15:52.600 The senior management behind the marketing alliance have been pushed aside, 0:15:52.680 --> 0:15:55.760 let's say, not necessarily sacked, but no longer in their positions, 0:15:56.480 --> 0:16:00.840 and senior management at AB InBev, who owns brand bud Light, 0:16:01.560 --> 0:16:04.360 having come out to say, we messed up. We made 0:16:04.400 --> 0:16:08.720 a mistake of just carrying on like nothing's changed. But 0:16:08.880 --> 0:16:12.000 now we're seeing in the numbers coming through from May 0:16:12.320 --> 0:16:15.320 that bud Light has actually lost its crown to be 0:16:15.440 --> 0:16:18.560 the number one beer in the US market to modelo 0:16:18.800 --> 0:16:22.920 especial and interesting thing there is. But the ABI used 0:16:22.960 --> 0:16:24.760 to own that brand in America, but they had to 0:16:24.760 --> 0:16:28.120 sell it for concentration reasons when they bought sab Miller 0:16:28.160 --> 0:16:31.680 about six years ago, so they owned the brand Modello 0:16:31.760 --> 0:16:34.760 outside of America. But now it has the number one 0:16:35.040 --> 0:16:38.800 position in America. And as you and I were chudding recently, James, 0:16:39.040 --> 0:16:41.560 this is a cultural war. Now I don't reside in 0:16:41.560 --> 0:16:43.280 the US so maybe you can tell me what you're 0:16:43.320 --> 0:16:47.400 seeing on the airwaves about what's happening to bud Light. 0:16:47.960 --> 0:16:50.320 Well, I live in the bubble of New York City 0:16:50.400 --> 0:16:52.680 and in particular Brooklyn, so everyone's drinking bud Light all 0:16:52.720 --> 0:16:59.560 the time. I prefer other types of alcoholic beverage, but 0:17:00.200 --> 0:17:03.680 other beers are available too. But why, I mean, this 0:17:03.720 --> 0:17:05.720 is fascinating exactly these say culture wars. But why are 0:17:05.760 --> 0:17:07.560 we talking about this on a credit show? Why does 0:17:07.560 --> 0:17:10.080 it affect the company so badly in terms of its revenue? 0:17:11.000 --> 0:17:13.800 Well, it does because bud Light is such an important beer. 0:17:13.960 --> 0:17:18.240 Only they only generate seventeen percent of their total beer 0:17:18.320 --> 0:17:22.160 volume in the North American market, so that's US, Canada, 0:17:22.240 --> 0:17:27.840 and Mexico. But they generate that's volume, sales volume seventeen percent, 0:17:28.160 --> 0:17:30.880 but it's almost thirty percent, twenty eight point seven percent 0:17:31.160 --> 0:17:34.280 of sales revenue. And when you get to Ibida, that's 0:17:34.320 --> 0:17:37.720 where they're not some Bolts earnings, it's over thirty percent, 0:17:37.760 --> 0:17:41.520 thirty point five percent. I'm not going to try and 0:17:41.880 --> 0:17:44.760 do a presentation here, but those numbers are coming down. 0:17:44.840 --> 0:17:49.320 So this is consensus are saying that volumes across North America, 0:17:49.359 --> 0:17:51.720 across all of their brands. Now they have a lot 0:17:51.720 --> 0:17:54.359 of brands which have also lost here. So they have 0:17:54.560 --> 0:17:59.920 not just bud Light, they have Michelo Vulture. They own Budweiser, 0:18:00.320 --> 0:18:02.720 bush Light, and Natural Light, and they had to also 0:18:02.760 --> 0:18:06.520 sell Corona, And so the brands that are gaining share 0:18:06.520 --> 0:18:08.080 are the ones that they used to own. So any 0:18:08.200 --> 0:18:11.000 any brand that is not owned by ABI is actually 0:18:11.080 --> 0:18:16.280 gaining share. Add to the detriment of Bidlight and all 0:18:16.320 --> 0:18:21.320 of its sister brands under ABI umbrella. And what the 0:18:21.400 --> 0:18:24.080 analyst is saying this year is that North American volumes 0:18:24.080 --> 0:18:28.080 will be down five percent. That's in revenue, that's only 0:18:28.119 --> 0:18:30.920 one percent, But they're seeing North America ebit yards down 0:18:31.000 --> 0:18:34.240 eight percent. Now that's why I care as a credit analyst. 0:18:34.760 --> 0:18:39.560 It's had a pretty dramatic impact on the share price 0:18:39.640 --> 0:18:42.199 for ABI bod in the US as the ticker is, 0:18:44.000 --> 0:18:46.960 but it's off its lows. It was down about seventeen percent. 0:18:47.240 --> 0:18:51.359 It's off the lows now, but the bonds spreads haven't 0:18:51.400 --> 0:18:54.160 really moved. So I care as a credit analyst. What's 0:18:54.160 --> 0:18:58.160 happening on the cash bonds The company has. ABI has 0:18:58.320 --> 0:19:02.359 bonds in sterling, euros dollars and I've looked at it 0:19:02.400 --> 0:19:05.840 this week against some of its peers in the beverage world, 0:19:06.040 --> 0:19:08.320 and they really haven't moved, they haven't widened, They've just 0:19:08.520 --> 0:19:13.520 tracked the peer group for beverages. It is interesting for 0:19:13.600 --> 0:19:16.600 this company because they levered up five six years ago. 0:19:16.600 --> 0:19:18.960 As I said, when they bought sab Miller, they took 0:19:18.960 --> 0:19:21.960 on over one hundred billion dollars of debt. They've managed 0:19:22.000 --> 0:19:25.040 to reduce that down to about seventy billion and reduced 0:19:25.119 --> 0:19:28.240 leverage from upwards five times down to three and a 0:19:28.280 --> 0:19:33.040 half time. So they've just retained or just regained a 0:19:33.080 --> 0:19:36.760 single A credit rating. And it's great for the company 0:19:36.920 --> 0:19:39.760 because they're in the market buying back bonds. The way 0:19:39.800 --> 0:19:43.399 they reduce their debt is tendering their their bonds. But 0:19:43.560 --> 0:19:48.879 now the sort of advanced situation where with declining earnings, 0:19:48.960 --> 0:19:50.800 they very well have to look at what the knock 0:19:50.840 --> 0:19:53.600 on effect to cash flow is. Will the bid for 0:19:53.680 --> 0:19:56.760 the bonds be supported by buybacks if their cash flow 0:19:56.840 --> 0:20:00.600 is indeed reducing? So that's why could and Less care. 0:20:00.960 --> 0:20:03.080 But the equity is down and the bonds aren't. Do 0:20:03.119 --> 0:20:05.040 we expect the bonds to start falling in to catch 0:20:05.080 --> 0:20:05.439 catch up? 0:20:05.480 --> 0:20:09.359 With the equity Eventually, yeah, really good question. Possibly we 0:20:10.080 --> 0:20:12.080 won't see the full extent of this, even though we 0:20:12.119 --> 0:20:15.320 get volume data on a week to week basis. The 0:20:15.560 --> 0:20:18.439 information industry informations out there and it's on the terminal 0:20:18.480 --> 0:20:21.359 for people that want to look at it. The company 0:20:21.359 --> 0:20:23.760 won't report their second quarter results until the first week 0:20:23.800 --> 0:20:26.919 of August, and that's when we might see them have 0:20:27.080 --> 0:20:30.440 to reduce their guidance. We haven't seen anything to date. 0:20:30.640 --> 0:20:33.280 We saw when their first quarter came out, which was 0:20:33.320 --> 0:20:38.199 three weeks after this transgender influencer posted on Instagram, and 0:20:38.440 --> 0:20:40.480 they were like, well, North America's only once then have 0:20:40.480 --> 0:20:43.520 had volume with bud Light, it's not important. Well, I 0:20:43.560 --> 0:20:45.840 think they missed the point and they missed the opportunity 0:20:45.920 --> 0:20:49.040 to actually say, mere Copple, we got this wrong. We're 0:20:49.080 --> 0:20:52.199 going to talk to our core customers. And they have 0:20:52.359 --> 0:20:56.280 rolled out new advertising, but the damage has been done, 0:20:56.280 --> 0:20:59.040 and some equity analysts out there are saying, will they 0:20:59.119 --> 0:21:01.600 ever get back the market share that they've lost. Certainly 0:21:01.640 --> 0:21:04.680 with bud Light, they've alienated customers and that's a real 0:21:04.720 --> 0:21:06.440 problem for a consumer company. 0:21:06.760 --> 0:21:10.400 So one tweet loses them billions of dollars. The equity 0:21:10.440 --> 0:21:13.320 tanks the bonds could follow. Is it really as simple 0:21:13.320 --> 0:21:15.159 as that or was there anything else going on that 0:21:15.200 --> 0:21:16.679 you could attribute this move to. 0:21:18.440 --> 0:21:21.200 I think it's a polarization of society in America. I mean, 0:21:21.320 --> 0:21:25.160 I'm sitting in London and or we just see what 0:21:25.200 --> 0:21:27.320 we see and we're obviously not on the ground there. 0:21:27.880 --> 0:21:30.280 This has not affected their global sales. This has not 0:21:30.359 --> 0:21:34.040 had a knock on effect to the London, Paris Frankfort. 0:21:34.119 --> 0:21:36.960 You know, they're beers, which we don't drink a little 0:21:36.960 --> 0:21:39.639 budde over here. I must say sorry about that. But 0:21:40.160 --> 0:21:43.520 they own cellar Atoa, they owned bets, they own left 0:21:43.560 --> 0:21:46.159 they you know, this is a global portfolio of beers. 0:21:46.680 --> 0:21:50.160 It hasn't had a huge effect in South America, in Asia, Pacific, 0:21:50.720 --> 0:21:54.080 across Europe. This is a North America problem for the 0:21:54.119 --> 0:21:57.040 company and they have to address it. They literally have 0:21:57.119 --> 0:21:59.399 to come out and say this is what happened, this 0:21:59.560 --> 0:22:03.200 is how I fixing it. Sorry for the upset because 0:22:03.240 --> 0:22:06.800 people have boycotted this through social media and it's happening 0:22:06.840 --> 0:22:10.639 at the bars. They're having to repurchase beer that is 0:22:10.720 --> 0:22:14.200 expired because from their distributives, because the bars aren't taking it. 0:22:14.280 --> 0:22:16.520 They can't sell it. So people are walking into a 0:22:16.600 --> 0:22:19.160 bar where they would have ordered a bid light, they're 0:22:19.160 --> 0:22:22.960 going for anything but an abi beer, and that is 0:22:23.000 --> 0:22:23.439 a problem. 0:22:24.000 --> 0:22:26.560 It sounds like they're also a warning for other companies. 0:22:26.560 --> 0:22:29.359 I mean, there's lots of other consumer companies that you know, 0:22:29.440 --> 0:22:33.320 every time there's a special event or a commemoration or 0:22:33.400 --> 0:22:35.600 you know, it's Pride month this month. I mean, companies 0:22:35.640 --> 0:22:38.400 feel the need to make a statement on these things, 0:22:38.440 --> 0:22:40.760 on these issues. But then you're seeing this sort of 0:22:40.800 --> 0:22:45.320 backlash for for various reasons in the States. What's the strategy. 0:22:45.359 --> 0:22:47.600 What do other consumer companies do they just keep quiet 0:22:47.680 --> 0:22:50.200 or they you know, how do others learn from this? 0:22:50.840 --> 0:22:53.040 It's really hard joined because damned if you do, damned 0:22:53.040 --> 0:22:55.680 if you don't. I mean, my personal news feed is 0:22:55.840 --> 0:22:59.920 full of pride celebration, as you would expect for any 0:23:00.160 --> 0:23:02.720 whether you know, you get Mother's Day, you get fatherestay 0:23:03.200 --> 0:23:06.159 and the consumer companies roll out their advertising around that. 0:23:06.640 --> 0:23:09.280 And pride is huge because people celebrate, they get together 0:23:09.680 --> 0:23:12.520 with their friendship groups and they'll have a drink and 0:23:12.600 --> 0:23:14.680 that might be in a bud light, you know, you 0:23:14.800 --> 0:23:17.840 never know, but they have to read the room. They 0:23:17.880 --> 0:23:21.359 have to see when they do misstep that they've made 0:23:21.400 --> 0:23:24.600 a mistake and they have to address it. Like they 0:23:24.640 --> 0:23:28.399 were trying to target a very small part of the 0:23:28.480 --> 0:23:32.600 population and alienated a large part of the population who 0:23:32.640 --> 0:23:35.639 actually uses their product, who drinks their beer. It's a 0:23:35.760 --> 0:23:37.760 really tricky question and. 0:23:37.800 --> 0:23:38.720 They should have said sorry. 0:23:39.320 --> 0:23:40.240 They should have said sorry. 0:23:40.560 --> 0:23:42.320