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Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.

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Speaker 1: My name is Olivia Raymonde and I'm a corporate finance

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Speaker 1: reporter here at Bloomberg News. This week, we are extremely

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Speaker 1: pleased to have Paula Selvison back on the show with us.

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Speaker 1: She covers leverage, finance and private credit for Bloomberg News

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Speaker 1: in New York. How are you doing, Paula.

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Speaker 2: I'm doing good, Glad to be here.

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Speaker 1: Glad to have you on. We're also delighted to chat

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Speaker 1: with Jody Lurie later on in the show. She looks

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Speaker 1: at the leisure sector for Bloomberg Intelligence in New York.

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Speaker 1: We'll be coming back to Jody a bit later in

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Speaker 1: the show, so please do stay with us. But first

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Speaker 1: back with Paula with Bloomberg News. Paula, August is typically

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Speaker 1: a quiet month for sales in the US corporate finance markets,

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Speaker 1: and it's common for us to look forward into September

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Speaker 1: and it looks like this is going to be a

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Speaker 1: pretty active month, specifically for mergers and acquisitions. Could you

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Speaker 1: walk us through sort of the dynamic that's playing out

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Speaker 1: there in the markets.

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Speaker 2: Yeah, absolutely so.

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Speaker 3: Right now, there is more than fifteen billion dollars of

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Speaker 3: committed debt financing for leverage buyouts.

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Speaker 2: Now, let's break down what that means.

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Speaker 3: So a lot of times when one company or private

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Speaker 3: equity firm buys another company, they fund part of that

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Speaker 3: acquisition with debt financing. Investment banks like the big ones

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Speaker 3: think JP, Morgan City, et cetera. They will provide essentially

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Speaker 3: temporary bridge financing that they commit to and then the

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Speaker 3: intention though is to sell that debt financing to outside

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Speaker 3: institutional investors in the form of junk bonds and leverage

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Speaker 3: loans before the deal closes. So right now, what we're

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Speaker 3: looking at is a you know, a small but growing

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Speaker 3: pipeline there. I mean, fifteen billion dollars wasn't big a

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Speaker 3: few years ago, but it is a recovery after some

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Speaker 3: issues when rates rose last year for the banks, where

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Speaker 3: they lost a lot of money on these types of transactions.

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Speaker 3: So yeah, so basically there's a lot that could basically

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Speaker 3: launch first thing in September, once the market comes back

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Speaker 3: to life, once some bankers come back from the Hamptons

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Speaker 3: and we're all back at our desks after Labor Day.

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Speaker 1: Awesome, And yes, you mentioned some trouble for the banks

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Speaker 1: last year for our listeners new to leverage finance. The

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Speaker 1: banks got themselves in a little bit of a conundrum

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Speaker 1: when it came to underwriting merger and acquisition deals. Could

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Speaker 1: you just give us a quick recap so our listeners

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Speaker 1: know sort of where the banks are coming from.

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Speaker 2: Yeah.

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Speaker 3: So when banks provide committed bridge financing for leverage finance transactions,

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Speaker 3: they actually also provide a maximum interest rate on that debt.

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Speaker 3: So essentially they tell let's say the private X firm,

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Speaker 3: you know, we hope to sell this at let's say

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Speaker 3: eight percent, but maximum this will cost ten percent for

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Speaker 3: the company. This is based off of current rates. And

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Speaker 3: so when the Fed rapidly increased interest rates to combat inflation,

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Speaker 3: basically banks just were on the other side of that

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Speaker 3: and got really burned. All of a sudden, the market

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Speaker 3: levels for selling that debt was well above the maximum

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Speaker 3: interest rate levels that they promised these companies. So that

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Speaker 3: meant if the banks wanted to get the debt off

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Speaker 3: their balance sheets, they had to sell it at a

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Speaker 3: discounted price so that the all in yield would be higher,

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Speaker 3: and they were on the hook for that difference, and

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Speaker 3: in some cases they lost billions of dollars as a

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Speaker 3: group on some of these transactions. In fact, some of

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Speaker 3: this debt is still stuck on their balance sheets. For

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Speaker 3: example Twitter, that's about thirteen billion dollars of debt, no

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Speaker 3: sign of them selling that anytime soon. And also for

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Speaker 3: a company called bright Speed, but they were able to

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Speaker 3: sell most of the debt that got stuck, which opened

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Speaker 3: their balance sheets back up to do more deals. And

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Speaker 3: the key thing for banks is they don't want to

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Speaker 3: hold this debt right, do this as a temporary commitment

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Speaker 3: and they make fees off of it. Then they recycle

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Speaker 3: their balance sheet into the next deal. And that process

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Speaker 3: is finally restarted in recent months, and that's why we

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Speaker 3: have this pipeline going into the fall.

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Speaker 2: Got it.

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Speaker 1: That makes a lot of sense, Thank you. And if

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Speaker 1: I'm correct, I think we have a couple of acquisitions

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Speaker 1: in the market, some familiar names. Simon and Schuster the publisher,

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Speaker 1: a handful of others. Can you, you know, walk us

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Speaker 1: through some of the big names that you're going to

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Speaker 1: be looking for next week?

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Speaker 3: Yeah, So I think one of the more notable ones

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Speaker 3: is Simon and Schuster just because it's such a household name.

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Speaker 3: So this is the book publishing company. So they're old

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Speaker 3: owner Paramount Global. So that's the home of like CBS

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Speaker 3: and some of the big you know, broadcast brands. Paramount

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Speaker 3: Global actually has owned Simon and Schuster and so they

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Speaker 3: are now selling it to a really major a KKR,

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Speaker 3: to a really major private equity firm called KKR for

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Speaker 3: about one point six billion dollars. As part of the financing,

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Speaker 3: KKR is doing this in the form of a leverage buyout.

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Speaker 3: So there's all so roughly one billion dollars of debt

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Speaker 3: financing provided by a group of banks led by Jeffries,

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Speaker 3: and so that could come, you know, essentially whenever they

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Speaker 3: think the market is ready to handle it. In you know,

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Speaker 3: leverage finance world, one billion of debt isn't actually that big,

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Speaker 3: and so the biggest transaction we're waiting for is this

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Speaker 3: private equity firm called GTCR is buying a majority stake

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Speaker 3: in a payments firm called World Pay and that has

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Speaker 3: more than eight billion of debt in the form of

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Speaker 3: junk bonds and leverage loans. This is a pretty chunky deal.

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Speaker 3: We haven't seen deals of this size in quite a while,

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Speaker 3: so it'll be interesting to see, you know, the test

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Speaker 3: of the depths of the market to see if people

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Speaker 3: are willing to invest that much money. So far, it

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Speaker 3: looks like debt investors probably will be very receptive to

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Speaker 3: it because they're hungry for new deals because the leverage

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Speaker 3: buyout machine essentially got gummed up for about a year.

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Speaker 3: They haven't had like the new paper, the new money

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Speaker 3: for them to invest in, and so they're looking for

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Speaker 3: new deals so that they can put money to work.

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Speaker 1: And you're talking to investors all the time. A lot

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Speaker 1: of the sources that I speak to this year, they

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Speaker 1: continue to talk to me about this up and quality trade.

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Speaker 1: They want to be investing in higher quality credits, whether

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Speaker 1: that's investment grade or maybe the higher end of the

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Speaker 1: junk bond and the leverage loan space. But when we

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Speaker 1: look at leverage buyouts, they aren't always the safest bets.

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Speaker 1: So could you walk us through sort of what investors

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Speaker 1: are thinking about in terms of risk taking on these deals.

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Speaker 2: Yeah, So it's really interesting.

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Speaker 3: So while the market has reopened, it's definitely been for

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Speaker 3: safer companies in general.

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Speaker 2: Right, So you're double bees, higher rated.

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Speaker 3: Single bees, you know, lower rated single bees, and especially

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Speaker 3: triple C rated debt it's still fairly a no man's land.

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Speaker 3: Most people just don't want to touch it or deal

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Speaker 3: with it because of the risks. And so what we've

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Speaker 3: seen with some of these leverage buyouts, it's hard to

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Speaker 3: speak to specific ones, but broadly, the color we've heard

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Speaker 3: is that leverage is down right. So if maybe a

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Speaker 3: deal would have been levered around six times last year,

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Speaker 3: or it's now more around five times or four point

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Speaker 3: five times. And that also reflects the hiring borrowing costs,

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Speaker 3: because you know, the companies can only support so much

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Speaker 3: debt if the interest rates are higher. So investors, you know,

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Speaker 3: they're going to see this new crop of LBOs that

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Speaker 3: should be lower levered. Investors might be able to fight

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Speaker 3: for better covenants now since you know they can get

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Speaker 3: those investor protections again, since it's been more of a

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Speaker 3: debt buyer's market than a debt seller's market. But yeah,

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Speaker 3: in general, investors are still looking for higher quality names,

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Speaker 3: and you know, there's still afraid there could be a recession,

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Speaker 3: right so you know, even though it seems like some

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Speaker 3: of those predictions were early or you know, overblown, there

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Speaker 3: still could be a recession at some point in the

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Speaker 3: coming quarters. So investors want companies that are recession resistant,

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Speaker 3: that still do well during the bad part of cycles.

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Speaker 3: And they're also hyper aware of that borrowing costs are higher,

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Speaker 3: so they don't want to lever companies up too high

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Speaker 3: and then have to deal with the restructuring in a

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Speaker 3: few years.

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Speaker 2: Got it.

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Speaker 1: So it sounds like they are putting less debt onto

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Speaker 1: these companies compared to the equity than maybe they did

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Speaker 1: a few years ago.

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Speaker 4: Is that right?

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Speaker 3: Yes, So sponsors across the board do seem like they've

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Speaker 3: now had to come down on the leverage levels when

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Speaker 3: they do buy other companies.

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Speaker 1: Got it, And circling back to the banks and what

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Speaker 1: they went through last year, I know that. You know,

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Speaker 1: mergers and acquisitions, leverage buyouts are sort of the engine

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Speaker 1: of this market. But after losing billions of dollars, you know,

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Speaker 1: why is Wall Street coming back now? Why do they

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Speaker 1: want to do these deals now?

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Speaker 2: Because these deals make them a lot of money.

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Speaker 3: Because basically, the way investment banking works in this part

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Speaker 3: of the market is the banks want to constantly have

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Speaker 3: a turn of leverage buyout transactions because they can make

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Speaker 3: a fee of two points or three points. You know,

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Speaker 3: if you make a fee of three percent on billions

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Speaker 3: of dollars. That adds up really fast. So they took

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Speaker 3: their loss is they dealt with it. These losses were painful,

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Speaker 3: but nothing like the financial crisis.

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Speaker 2: Right.

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Speaker 3: They were bad here, and now they've moved on and

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Speaker 3: they're ready to make money again off this business. And

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Speaker 3: in general, what we've heard across the board is that

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Speaker 3: because rates rose and because for a period of time

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Speaker 3: it was harder to get debt financing, banks were able

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Speaker 3: to get better terms for themselves.

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Speaker 2: Right, so their current.

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Speaker 3: Maximum interest rates are now once again based off of

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Speaker 3: the current market levels, which are much higher than they

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Speaker 3: were before the FED started this process. So you know,

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Speaker 3: overall color i've heard is also that the what are

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Speaker 3: called flex and caps, which is essentially the way they

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Speaker 3: do the maximum interest rates, that those are just higher.

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Speaker 3: They're more favorable for the banks, and so they should

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Speaker 3: be able to do this more safely for them, hopefully

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Speaker 3: for them. But that being said, this isn't in a vacuum, right,

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Speaker 3: because the banks are competing against each other for these deals,

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Speaker 3: and they're also competing against private credit lenders, and so

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Speaker 3: private credit lenders this other asset class where instead of

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Speaker 3: doing a temporary financing. They just come in and borrow

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Speaker 3: the money, sometimes with just a few firms for billions

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Speaker 3: of dollars of debt. You know, they can offer more

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Speaker 3: flexible terms to sponsors, and they can also typically they're

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Speaker 3: pricing is higher than the you know, hoped for rate

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Speaker 3: that the banks are doing, but it can be like

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Speaker 3: an X right, they're competing. They're trying to undercut each

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Speaker 3: other on price, on other terms, on protections. So if

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Speaker 3: banks stay out of the market, they're just going to

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Speaker 3: keep losing market share to private credit.

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Speaker 2: So they got to get back in.

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Speaker 1: Now that's super interesting. It seems like everything is owned

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Speaker 1: by private markets these days. I'm glad that you mentioned

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Speaker 1: private credit because it's a really important asset class in

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Speaker 1: the credit space. It's just grown extremely large in size.

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Speaker 1: But why would a company want to go to private credit,

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Speaker 1: Like why not just stick with, you know, a big

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Speaker 1: bank that has a familiar name.

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Speaker 2: That's a great question. So there's a lot of different

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Speaker 2: pros and cons.

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Speaker 3: So if you do the public markets, so hild bonds, leverage, loans,

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Speaker 3: and again we say public in a relative sense. These aren't,

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Speaker 3: you know, like equities, but they're relatively public because so

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Speaker 3: many people buy them, you know, hild bonds and leverage loans.

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Speaker 3: Typically the borrowing costs are cheaper than private credit, but

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Speaker 3: you have to do the debt commitments and then at

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Speaker 3: some point in the future, sometimes months later, you then

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Speaker 3: sell the junk bonds and leverage loans, and you know,

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Speaker 3: yields can change in that period of time, marketing conditions

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Speaker 3: can change. So why people like private credit is even

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Speaker 3: though it can be more expensive, you just kind of

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Speaker 3: get it all done at once. You know, there's a

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Speaker 3: certainty of execution, as a lot of people in the

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Speaker 3: market like to say, where you can just go to

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Speaker 3: a few lenders and they say, okay, we did the deal.

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Speaker 2: It's done right.

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Speaker 3: There's no headaches of you know, fifty sixty one hundred

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Speaker 3: investors having differing opinions on your company and you don't

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Speaker 3: have to worry about it. And then the other thing

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Speaker 3: is that private credit lenders can also provide, you know,

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Speaker 3: so different kinds of flexibility.

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Speaker 2: On the terms.

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Speaker 3: So one of the biggest ones is they can provide

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Speaker 3: what's called pick or payment in kind. So if let's

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Speaker 3: say you lever up a company with a lot of

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Speaker 3: debt and you think it's going to grow into this

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Speaker 3: debt load. But in the meantime you're a little bit

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Speaker 3: worried about liquidity or just the actual interest costs of cash.

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Speaker 3: Leaving the business to investors. Every year you can do

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Speaker 3: a pick, so that means instead of paying your interest

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Speaker 3: in cash, you pay in more debt that only comes

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Speaker 3: due at the end when it matures. So there's just

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Speaker 3: some you know, flexibility. It's more bespoke. It's just more

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Speaker 3: like contracts between some parties. So that's kind of the difference.

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Speaker 3: You know, banks, it's going to be cheaper if the

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Speaker 3: banks sell it to institutional asset managers, but it's a

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Speaker 3: more specific way it has to be done. Whereas private

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Speaker 3: credit lenders, they're more expensive, but you have the certainty

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Speaker 3: of execution and more flexibility.

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Speaker 1: Thank you for walking us through that, and we're going

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Speaker 1: to turn to Jody Lurie at Bloomberg Intelligence shortly, but

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Speaker 1: before we do, Paula, I know, private credit is an

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Speaker 1: asset class that you follow their closely. What what are

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Speaker 1: the big things?

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Speaker 4: You know?

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Speaker 1: What are you watching there? What's what's the next big

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Speaker 1: thing for investors and people curious about this space to

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Speaker 1: look out for in the fall.

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Speaker 3: Yeah, so I think a really interesting dynamic is right now.

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Speaker 3: We've been talking about new deals, right, leverage biots, new transactions,

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Speaker 3: but there's a lot of leverage loans and hiled bonds

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Speaker 3: that are outstanding and need to be refinanced soon. It's

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Speaker 3: not like a cliff, A lot of it's already been

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Speaker 3: dealt with, but there is a good chunk of the

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Speaker 3: of this debt that still does need to be refinanced

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Speaker 3: in the next one to two years. And it's harder

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Speaker 3: to do that in the broadly syndicated markets, and it's

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Speaker 3: also more expensive. And so I think we're going to

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Speaker 3: keep seeing a trend of private credit lenders stepping into

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Speaker 3: refinance leverage loans and hiled bonds, especially leverage loans because

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Speaker 3: they're very similar structure. And so we've seen a couple

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Speaker 3: of really big examples of that recently. One was the

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Speaker 3: Phenostra example, which is currently the largest private credit deal

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Speaker 3: ever at more than five billion of total size. And

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Speaker 3: then we're also now seeing a group of private credit

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Speaker 3: lenders refinance the leverage loans for a company called Highland Software.

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Speaker 3: So we do expect to see more examples of refinancing happen,

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Speaker 3: which means that the leverage loan market especially could shrink some.

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Speaker 1: That's super interesting. Great stuff from Paula Selderson at Bloomberg News.

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Speaker 1: Thank you so much for joining us.

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Speaker 2: Paula, thanks for having me anytime, and.

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Speaker 1: You can read all of Paula's scoops on the Bloomberg

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Speaker 1: terminal and of course at Bloomberg dot com. Please do

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Speaker 1: check out her coverage. So, as I mentioned earlier, we

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Speaker 1: are delighted to welcome Jody Luriy on the Credit Edge

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Speaker 1: podcast this week. Jody covers the leisure sector for Bloomberg

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Speaker 1: Intelligence based here in New York. How's it going, Jody.

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Speaker 4: It's going great, Olivia.

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Speaker 1: You cover a lot of companies, but as the summer

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Speaker 1: comes to a close, I want to take a special

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Speaker 1: look at theme parks and the cruise lines. There's been

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Speaker 1: a lot of activity there and a lot to sort

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Speaker 1: of of dive into. Can you talk sort of high

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Speaker 1: level you know, where does the leisure sector go from here?

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Speaker 4: Sure? So, I think the leisure sector is definitely one

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Speaker 4: of the most interesting ones. In my opinion, I'm a

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Speaker 4: little biased this year just from the standpoint that I

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Speaker 4: think consumers have really outdone themselves in terms of participating

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Speaker 4: in the leisure space and in different areas of leisure,

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Speaker 4: different areas than we saw a year ago. You know,

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Speaker 4: people are getting a little bit more international in their reach.

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Speaker 4: They want to go and do, they don't want to

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Speaker 4: be stuck inside, and so even though there's discussion of

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Speaker 4: possibly a pullback economically, we're not yet seeing that prove

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Speaker 4: out in the leisure space in general. That said, we

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Speaker 4: are starting to see pockets of moderation normalization from these

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Speaker 4: post pandemic highs of certain parts of the leisure space.

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Speaker 1: Got it for sure, And can you talk a little

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Speaker 1: bit about some of the major forces that are driving

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Speaker 1: your outlook for the theme parks?

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Speaker 4: So I think that theme parks are a bit interesting

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Speaker 4: in and of themselves because they mostly shut down during

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Speaker 4: the pandemic but found ways to still stay relevant in

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Speaker 4: terms of food and beverage events and any area to

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Speaker 4: stay open, Which compares to the cruise lines that had

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Speaker 4: to fully stop. They are now. They were able to

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Speaker 4: transition out of the pandemic a little bit quicker as

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Speaker 4: a result, and last year had very strong years in

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Speaker 4: terms of season pass rates, in terms of just people

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Speaker 4: going and visiting the theme parks, and doing because it's

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Speaker 4: a nice, nice easy experience that you can do once,

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Speaker 4: you know, once every month or every week. Now this

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Speaker 4: year we're seeing that there's a bit of a pullback,

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Speaker 4: and part of that, interestingly, is because of things like weather,

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Speaker 4: which obviously we can't plan for weather, but it's definitely

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Speaker 4: creating a little bit of a wrinkle in their plan

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Speaker 4: and showing the sensitivity that they have as compared to

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Speaker 4: other parts of the leisure space this year as people

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Speaker 4: sort of look elsewhere to spend their time and spend

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Speaker 4: their leisure.

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Speaker 1: Interesting, so where else are you seeing that? Where is

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Speaker 1: the consumer going right now? What are you seeing as

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Speaker 1: their preference?

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Speaker 4: The biggest areas that have been really growing this year

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Speaker 4: has been international travel, which has really not returned to

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Speaker 4: pre pandemic levels yet. Business and conference travel is of

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Speaker 4: course improving as well. That's a little bit slower, and

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Speaker 4: that's not so much leisure, although there is that element

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Speaker 4: of leisure which is business and leisure blended. So you

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Speaker 4: go to a conference and you or you go on

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Speaker 4: a business trip and you extend it by a few

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Speaker 4: days for leisure travel. That said, I mean, I think

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Speaker 4: you know, cruise lines are a great example of an

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Speaker 4: alternative of where people are spending their time because they

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Speaker 4: can book they booked it in advance. They want to

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Speaker 4: go and do something that's a little bit more exotic

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Speaker 4: than going to your regional theme park. That said, something

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Speaker 4: like a SeaWorld is benefiting a little bit more than

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Speaker 4: a Six Flags and a Cedar Fair from the standpoint

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Speaker 4: that they have that southern California Florida focus, but that

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Speaker 4: doesn't completely keep them unexposed to some of the trends

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Speaker 4: in theme parks, namely weather. And you're seeing that for

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Speaker 4: all three of these major companies, is that they're really

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Speaker 4: actually being affected by the fact that the first and

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Speaker 4: second quarter we're not very kind to them in terms

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Speaker 4: of heat, in terms of monsoons. Now we have the

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Speaker 4: hurricane season coming up. And these companies with more of

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Speaker 4: a global reach, like the cruise lines can sort of

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Speaker 4: manage through some of these difficulties. And obviously a cruise ship,

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Speaker 4: if the weather is not good in one place, you

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Speaker 4: can sort of move to another. Not always, but you

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Speaker 4: can reroute it a little bit. You can't do that

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Speaker 4: when you have giant rollercoasters.

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Speaker 2: Yeah.

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Speaker 1: Absolutely. I guess an important thing to think about is

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Speaker 1: that the theme parks are rooted in one spot that

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Speaker 1: they're not moving physically, whereas consumers can go to different

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Speaker 1: locations that have a desirable location and destination for the weather,

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Speaker 1: and the crews can take them there anytime during the year.

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Speaker 1: But you know, Jody, and I know you know this

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Speaker 1: so well before our listeners, the cruise lines had a

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Speaker 1: really tough time in twenty twenty when the pandemic shut

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Speaker 1: down all their operations and they really needed to rely

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Speaker 1: on the debt markets. For somebody who isn't as clued

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Speaker 1: in as you to this space, could you just walk

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Speaker 1: us through kind of what that sector has been going

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Speaker 1: through over the past couple of years.

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Speaker 4: So I think that's a great question, Olivia, because you

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Speaker 4: have to remember that this moratorium that they went through,

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Speaker 4: which was basically they had to completely shut down all

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Speaker 4: their operations during a good portion of the pandemic, it

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Speaker 4: really set them back, particularly compared to other parts of

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Speaker 4: the leisure space. They're about a year or so behind

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Speaker 4: from in this transition period in the post pandemic era.

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Speaker 4: They're now finally this year starting to see more normal

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Speaker 4: levels of activity, whereas if you look at other parts

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Speaker 4: of the leisure space. They got the benefit of that

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Speaker 4: a year year and a half ago as people started

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Speaker 4: going and doing that. Said, I think what's happening with

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Speaker 4: the cruise lines is they're pleasantly surprised by how quickly

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Speaker 4: people are starting to jump into cruising. We're seeing advanced

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Speaker 4: booking rates much higher, which means that cash flows are

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Speaker 4: getting better. We're seeing revenue also getting booked because people

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Speaker 4: are actually cruising, so they can actually book that advance

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Speaker 4: bookings as revenue. And you're starting to see any of

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Speaker 4: these band aids that they put on, like these future

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Speaker 4: cruise credits that they gave people during the pandemic, you're

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Speaker 4: seeing those roll off. So from a balance sheet perspective,

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Speaker 4: they're still not in great shape, but they're improving and

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Speaker 4: you're starting to see a light at the end of

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Speaker 4: the tunnel. Might be a few years out, but the

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Speaker 4: companies are talking about how they want to get back

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Speaker 4: to investment grade territory, how they want to improve their balogie,

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Speaker 4: bring down their debt loads relatively quickly or as quickly

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Speaker 4: as they can, and using cashloads to do so.

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Speaker 1: And you bring up a grade point with the downgrades.

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Speaker 1: Because some of these companies were investment grade before the

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Speaker 1: pandemic and subsequently were downgraded to junk when their operations

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Speaker 1: were shut down for such an extended period of time

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Speaker 1: due to the virus. But I think correct me if

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Speaker 1: I'm wrong, But one of the cruise lines did have

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Speaker 1: an upgrade earlier this month.

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Speaker 2: Is that correct?

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Speaker 4: That is correct? So Roal Caribbean is benefiting quicker than

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Speaker 4: its peers in terms of upgrades. What's happening. What you're

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Speaker 4: seeing is the way that the companies manage themselves through

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Speaker 4: the pandemic is you're starting to see that play out

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Speaker 4: in how quickly they're around each quarter. We've been talking

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Speaker 4: about for a few quarters now about how Royal Caribbean

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Speaker 4: has been about a quarter ahead of its peers in

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Speaker 4: terms of turnaround. Part of that is it got its

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Speaker 4: shipped in the water quicker it you know, it didn't

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Speaker 4: completely stop its CAPEX plans for its shipped modifications, just

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Speaker 4: the maintenance CAPEX the same way that Carnival did. Carnival

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Speaker 4: really pulled back a lot, and so they they have

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Speaker 4: to dedicate a little bit more cash this year to

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Speaker 4: CAPEX to sort of get all their ships in order.

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Speaker 4: They also have a larger fleet than Royal Caribbean. There's

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Speaker 4: some complicating factors to that that you know, made Royal

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Speaker 4: a little bit more nimble than Carnival as we get

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Speaker 4: into this transition period. That said, you are seeing that

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Speaker 4: the rating agencies are looking at these companies a little

440
00:22:49,560 --> 00:22:54,520
Speaker 4: bit more with a positive tone, but I think hesitantly

441
00:22:54,600 --> 00:22:56,400
Speaker 4: because they know that there's still a lot of hurdles

442
00:22:56,400 --> 00:22:58,800
Speaker 4: that all of them have to cross and they probably

443
00:22:58,840 --> 00:23:00,600
Speaker 4: will continue to do so. They don't want to they

444
00:23:00,680 --> 00:23:04,760
Speaker 4: don't want to penalize them for what these companies have

445
00:23:04,800 --> 00:23:06,400
Speaker 4: gone through. They want, but they want to make sure

446
00:23:06,400 --> 00:23:09,680
Speaker 4: that the companies are in good working order before they

447
00:23:09,720 --> 00:23:12,080
Speaker 4: start kind of moving up their ratings. And I think

448
00:23:12,119 --> 00:23:15,560
Speaker 4: that we'll probably see investors respond quicker to the companies

449
00:23:15,600 --> 00:23:17,480
Speaker 4: turnaround stories and the raiders.

450
00:23:17,200 --> 00:23:22,480
Speaker 1: Might I'm glad you mentioned the investors, Jodie, because there

451
00:23:22,520 --> 00:23:27,400
Speaker 1: are a lot of opportunities not only to make investments

452
00:23:27,520 --> 00:23:31,679
Speaker 1: around these upgrades and downgrades, rising stars, falling angels, but

453
00:23:32,040 --> 00:23:36,159
Speaker 1: we've seen a lot of various outperformance in the leisure sector.

454
00:23:36,760 --> 00:23:38,720
Speaker 1: Can you talk to me about some of the areas

455
00:23:38,720 --> 00:23:40,520
Speaker 1: that have stood out to you this year in terms

456
00:23:40,560 --> 00:23:44,639
Speaker 1: of outperformance and where you're sort of seeing you know

457
00:23:44,680 --> 00:23:45,720
Speaker 1: that trend continue.

458
00:23:47,000 --> 00:23:48,800
Speaker 4: Yes, I mean I think I think the whole leisure

459
00:23:48,840 --> 00:23:53,280
Speaker 4: space in general has done has performed relatively well in

460
00:23:53,280 --> 00:23:57,040
Speaker 4: comparison on a relative basis compared to other parts of

461
00:23:57,080 --> 00:24:00,800
Speaker 4: the credit space or consumer discussionaries. I mean, you know,

462
00:24:01,240 --> 00:24:04,080
Speaker 4: I like to do things with my colleague Mike Camplone

463
00:24:04,080 --> 00:24:08,879
Speaker 4: about leisure versus retail, right, so he covers the retail space,

464
00:24:08,920 --> 00:24:11,120
Speaker 4: and that's been an interesting one in a different way

465
00:24:11,280 --> 00:24:14,400
Speaker 4: in terms of how consumers are spending or not spending there.

466
00:24:14,840 --> 00:24:18,360
Speaker 4: And I think what we're what we're seeing is up

467
00:24:18,480 --> 00:24:22,159
Speaker 4: until this year, much of the leisure space was starting

468
00:24:22,200 --> 00:24:24,840
Speaker 4: to was moving very much in tandem in that a

469
00:24:24,840 --> 00:24:28,639
Speaker 4: lot of the companies were affected negatively by the pandemic

470
00:24:28,800 --> 00:24:32,760
Speaker 4: and so their bonds were much wider than what they

471
00:24:32,760 --> 00:24:35,320
Speaker 4: were trading, much wider than a lot of other areas

472
00:24:35,359 --> 00:24:39,040
Speaker 4: of be their consumer discretionary and also other parts of

473
00:24:39,119 --> 00:24:43,280
Speaker 4: the credit space in general. Now we're starting to see tightening.

474
00:24:43,359 --> 00:24:47,720
Speaker 4: We're starting to see companies benefit from their own personal policies.

475
00:24:48,200 --> 00:24:50,520
Speaker 4: Case in point, now we're not talking about the gaming space,

476
00:24:50,560 --> 00:24:54,800
Speaker 4: but Las Vegas Sounds was downgraded TI yield. They've started,

477
00:24:54,800 --> 00:24:57,280
Speaker 4: they've finally bumped back up to investment grade as they

478
00:24:57,320 --> 00:25:00,560
Speaker 4: work towards improving their balance sheet, as they were towards

479
00:25:00,600 --> 00:25:04,000
Speaker 4: this post pandemic era of being a better company than

480
00:25:04,040 --> 00:25:06,200
Speaker 4: they were during the pandemic. And so I think that

481
00:25:06,840 --> 00:25:12,040
Speaker 4: we are seeing companies getting back into shape some quicker

482
00:25:12,080 --> 00:25:14,840
Speaker 4: than others. You know, McDonald's in a Starbucks, which is,

483
00:25:15,200 --> 00:25:18,000
Speaker 4: mind you, restaurants a little bit different of an area,

484
00:25:18,040 --> 00:25:20,720
Speaker 4: but we cover that as well. They are much quicker

485
00:25:20,720 --> 00:25:23,440
Speaker 4: to get their balance sheets in check than some of

486
00:25:23,480 --> 00:25:29,880
Speaker 4: the other areas of leisure and other related areas. And

487
00:25:30,000 --> 00:25:33,359
Speaker 4: so we are starting to see a differentiation between companies.

488
00:25:33,840 --> 00:25:37,280
Speaker 4: But we've been of the opinion that we think will

489
00:25:37,320 --> 00:25:40,240
Speaker 4: start seeing that from the standpoint of for instance, the

490
00:25:40,280 --> 00:25:45,040
Speaker 4: cruise lines are focused on improving their balance sheets, whereas

491
00:25:45,040 --> 00:25:47,560
Speaker 4: the theme parks are sort of getting past that point

492
00:25:47,600 --> 00:25:49,960
Speaker 4: and are starting to deal with the hairiness of their

493
00:25:50,000 --> 00:25:51,119
Speaker 4: own individual sector.

494
00:25:52,359 --> 00:25:55,360
Speaker 1: Hairiness of their own individual sector. That makes a lot

495
00:25:55,359 --> 00:25:59,200
Speaker 1: of sense. One company that I've seen you write about

496
00:25:59,240 --> 00:26:01,159
Speaker 1: that I think a lot of our listeners will be

497
00:26:01,200 --> 00:26:04,120
Speaker 1: familiar with is six Flags. Can you talk to us,

498
00:26:04,200 --> 00:26:05,840
Speaker 1: talk to me a little bit about what's going on

499
00:26:05,920 --> 00:26:08,520
Speaker 1: with that company?

500
00:26:08,880 --> 00:26:12,560
Speaker 4: Sure, and I hope you don't envision hairiness on the

501
00:26:12,640 --> 00:26:16,000
Speaker 4: roller coasters or you envision somebody's too pick laying off

502
00:26:16,040 --> 00:26:19,960
Speaker 4: as they ride it. But I mean, I think, I

503
00:26:19,960 --> 00:26:22,000
Speaker 4: think for a company like six Flags, it's a little

504
00:26:22,000 --> 00:26:26,120
Speaker 4: complicated because management really wants to get their leverage down.

505
00:26:26,520 --> 00:26:29,760
Speaker 4: They have they have similar net leverage targets to their

506
00:26:29,800 --> 00:26:33,560
Speaker 4: peer of three to four times. SeaWorld was the crikets

507
00:26:33,640 --> 00:26:35,840
Speaker 4: to get it down to three times and actually below

508
00:26:35,880 --> 00:26:39,040
Speaker 4: three times. Cedar Fair is nearing that level and six

509
00:26:39,040 --> 00:26:41,520
Speaker 4: Flags is a little bit above and they you know,

510
00:26:41,720 --> 00:26:43,760
Speaker 4: six Flags it's a complicated company because they have a

511
00:26:43,800 --> 00:26:48,760
Speaker 4: long history of some challenges from a credit perspective, but

512
00:26:48,800 --> 00:26:51,720
Speaker 4: obviously a very different company now than they were. They're

513
00:26:51,760 --> 00:26:55,879
Speaker 4: just much larger than their peers like SeaWorld, so there

514
00:26:55,880 --> 00:26:58,840
Speaker 4: are some comparisons between the two. They've had some management

515
00:26:58,920 --> 00:27:02,160
Speaker 4: changes over recent years, and I think that what they're

516
00:27:02,200 --> 00:27:04,560
Speaker 4: trying to do is be good stewards of their balance

517
00:27:04,600 --> 00:27:07,879
Speaker 4: sheet as much as they can within the constraints.

518
00:27:07,400 --> 00:27:08,000
Speaker 2: That they have.

519
00:27:08,480 --> 00:27:11,080
Speaker 4: So they're trying to reinvent how they do things, pushing

520
00:27:11,119 --> 00:27:14,760
Speaker 4: season passes similar to Cedar Fair and Sea World to

521
00:27:14,920 --> 00:27:18,400
Speaker 4: have that reoccurring revenue. But what they're finding is by

522
00:27:18,440 --> 00:27:23,280
Speaker 4: pushing season passes, they're losing out on additional dollars per

523
00:27:23,440 --> 00:27:27,359
Speaker 4: customer necessarily because you're not charging for the single pass.

524
00:27:27,680 --> 00:27:30,280
Speaker 4: The benefit you get is you have more deferred revenue,

525
00:27:30,320 --> 00:27:32,560
Speaker 4: you have more of an idea of what your cash

526
00:27:32,560 --> 00:27:35,680
Speaker 4: flows could be, your consistent cash flows, and so it's

527
00:27:35,720 --> 00:27:37,840
Speaker 4: sort of a mixed bag. And they've been playing around

528
00:27:37,880 --> 00:27:39,960
Speaker 4: with their food options, and they've been playing around with

529
00:27:40,000 --> 00:27:42,320
Speaker 4: a bunch of different things that have affected their cash

530
00:27:42,320 --> 00:27:44,240
Speaker 4: flow kind of negatively. So they're still very much in

531
00:27:44,280 --> 00:27:47,000
Speaker 4: a transition period. They've been active in the credit markets

532
00:27:47,000 --> 00:27:49,280
Speaker 4: this year as much as they can be to sort

533
00:27:49,320 --> 00:27:51,439
Speaker 4: of address their neo mature and debt and anything that

534
00:27:51,480 --> 00:27:54,560
Speaker 4: seems attractive. But the interest rate environment doesn't make it

535
00:27:54,600 --> 00:27:58,360
Speaker 4: as easy for them to refinance that as I think

536
00:27:58,359 --> 00:27:58,840
Speaker 4: they would like.

537
00:28:00,240 --> 00:28:00,800
Speaker 2: Certainly not.

538
00:28:01,040 --> 00:28:07,600
Speaker 1: Yes, interest costs are higher for almost everyone except maybe

539
00:28:07,640 --> 00:28:10,480
Speaker 1: if you're thinking about some of the double digit coupons

540
00:28:10,520 --> 00:28:13,240
Speaker 1: that the cruise lines had to pay at the start

541
00:28:13,280 --> 00:28:14,040
Speaker 1: of the pandemic.

542
00:28:14,280 --> 00:28:18,040
Speaker 4: Absolutely, although we did see a return of the double

543
00:28:18,640 --> 00:28:20,880
Speaker 4: cruise line debt unfortunately.

544
00:28:21,680 --> 00:28:24,720
Speaker 1: Yes, yes, I think they're going to be paying high

545
00:28:24,760 --> 00:28:26,600
Speaker 1: costs for a while.

546
00:28:26,400 --> 00:28:26,600
Speaker 4: You know.

547
00:28:26,800 --> 00:28:30,680
Speaker 1: Speaking of you know, how these companies are doing. We're

548
00:28:30,680 --> 00:28:33,399
Speaker 1: talking a lot about their outperformance this year and how

549
00:28:33,440 --> 00:28:37,080
Speaker 1: they're sort of, you know, regaining their footing after you know,

550
00:28:37,200 --> 00:28:40,240
Speaker 1: so much upheaval for the pandemic. But can you talk

551
00:28:40,240 --> 00:28:43,920
Speaker 1: to me about what some of these companies' goals are,

552
00:28:44,240 --> 00:28:46,240
Speaker 1: you know, as it relates to their business and to

553
00:28:46,320 --> 00:28:49,120
Speaker 1: their credit and you know, how attainable those might be

554
00:28:49,280 --> 00:28:50,800
Speaker 1: looking ahead into twenty twenty four.

555
00:28:51,160 --> 00:28:53,440
Speaker 4: Sure, so, I think from a goal standpoint, the companies

556
00:28:53,480 --> 00:28:56,560
Speaker 4: have made it pretty clear that obviously they want operations

557
00:28:56,600 --> 00:28:59,680
Speaker 4: to be very strong, you know, they want to increase

558
00:28:59,760 --> 00:29:03,760
Speaker 4: their their occupancy levels as well as their advanced bookings

559
00:29:03,800 --> 00:29:06,160
Speaker 4: and all those sort of pieces that are important, you know,

560
00:29:06,240 --> 00:29:08,959
Speaker 4: taking in new new vessels and having the financing for it.

561
00:29:09,320 --> 00:29:12,200
Speaker 4: But part and parcel to that is the focus on

562
00:29:12,280 --> 00:29:16,320
Speaker 4: cash flows and debt repayment. They're not necessarily thinking about

563
00:29:16,360 --> 00:29:19,600
Speaker 4: their shareholders at the moment, which in my opinion, is

564
00:29:19,680 --> 00:29:23,400
Speaker 4: very good thing that they're not, because they are way, way, way,

565
00:29:23,440 --> 00:29:28,800
Speaker 4: way too early in the game to be thinking along

566
00:29:28,880 --> 00:29:32,280
Speaker 4: those lines. That said, I mean, I think as you

567
00:29:32,920 --> 00:29:34,720
Speaker 4: as you look up twenty twenty four. I think you

568
00:29:34,760 --> 00:29:38,040
Speaker 4: could probably see a few more ratings upgrades provided they

569
00:29:38,080 --> 00:29:40,680
Speaker 4: continue on this path, they don't get waylaid by some

570
00:29:41,720 --> 00:29:47,000
Speaker 4: unforeseen event like a pandemic, and you might end up

571
00:29:47,040 --> 00:29:50,680
Speaker 4: seeing a few ratings upgrades. However, I don't know if

572
00:29:50,720 --> 00:29:53,960
Speaker 4: you would necessarily see investment grade until twenty twenty five

573
00:29:54,000 --> 00:29:56,440
Speaker 4: or twenty six for some of the names, and I

574
00:29:56,480 --> 00:30:02,520
Speaker 4: think that that's more attainable. That's possible, but it's definitely

575
00:30:02,640 --> 00:30:05,800
Speaker 4: encouraging and one of those stories that I think a

576
00:30:05,800 --> 00:30:10,000
Speaker 4: lot of investors like to hear because there's fewer and

577
00:30:10,120 --> 00:30:12,200
Speaker 4: fewer of those at the moment in terms of these

578
00:30:12,240 --> 00:30:15,600
Speaker 4: turnaround plays that investors are looking for.

579
00:30:16,200 --> 00:30:21,520
Speaker 1: Absolutely, yes, the upgrade story and the you know, reaching

580
00:30:21,560 --> 00:30:25,280
Speaker 1: for that rising star going from junk to investment grade

581
00:30:25,320 --> 00:30:27,800
Speaker 1: is definitely going to be something that we're all going

582
00:30:27,840 --> 00:30:31,920
Speaker 1: to be watching very closely. That was Jody Lurie everyone.

583
00:30:32,400 --> 00:30:36,160
Speaker 1: Thank you very much, Jody Jody Luriy of Bloomberg Intelligence.

584
00:30:36,560 --> 00:30:38,840
Speaker 1: You can read all of her great analysis on the

585
00:30:38,840 --> 00:30:42,200
Speaker 1: Bloomberg Terminal. Please do check it out, and Jody, hope

586
00:30:42,240 --> 00:30:44,760
Speaker 1: to see you back on the show again soon. Thank you,

587
00:30:45,800 --> 00:30:49,240
Speaker 1: and thanks again to Paula Selvison from Bloomberg News. You

588
00:30:49,240 --> 00:30:51,640
Speaker 1: can read all of her great scoops and her coverage

589
00:30:51,640 --> 00:30:56,360
Speaker 1: on the Terminal and at Bloomberg dot Com. I'm Olivia Raymonde.

590
00:30:56,840 --> 00:30:59,800
Speaker 1: It's been a pleasure having you. Please join us again

591
00:30:59,800 --> 00:31:01,960
Speaker 1: next next week on the Credit Edge,