WEBVTT - Debt Markets Ready for Sales Rush; Cruise Comeback 0:00:14.120 --> 0:00:19.040 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:19.560 --> 0:00:22.800 My name is Olivia Raymonde and I'm a corporate finance 0:00:22.840 --> 0:00:27.360 reporter here at Bloomberg News. This week, we are extremely 0:00:27.400 --> 0:00:30.800 pleased to have Paula Selvison back on the show with us. 0:00:31.200 --> 0:00:35.080 She covers leverage, finance and private credit for Bloomberg News 0:00:35.159 --> 0:00:37.440 in New York. How are you doing, Paula. 0:00:37.880 --> 0:00:39.559 I'm doing good, Glad to be here. 0:00:39.840 --> 0:00:43.240 Glad to have you on. We're also delighted to chat 0:00:43.280 --> 0:00:46.560 with Jody Lurie later on in the show. She looks 0:00:46.600 --> 0:00:49.840 at the leisure sector for Bloomberg Intelligence in New York. 0:00:51.080 --> 0:00:53.280 We'll be coming back to Jody a bit later in 0:00:53.320 --> 0:00:56.200 the show, so please do stay with us. But first 0:00:56.560 --> 0:01:02.000 back with Paula with Bloomberg News. Paula, August is typically 0:01:02.120 --> 0:01:07.640 a quiet month for sales in the US corporate finance markets, 0:01:07.880 --> 0:01:11.480 and it's common for us to look forward into September 0:01:11.800 --> 0:01:13.160 and it looks like this is going to be a 0:01:13.200 --> 0:01:17.880 pretty active month, specifically for mergers and acquisitions. Could you 0:01:17.959 --> 0:01:20.399 walk us through sort of the dynamic that's playing out 0:01:20.400 --> 0:01:21.480 there in the markets. 0:01:22.240 --> 0:01:23.880 Yeah, absolutely so. 0:01:24.040 --> 0:01:27.760 Right now, there is more than fifteen billion dollars of 0:01:27.959 --> 0:01:30.280 committed debt financing for leverage buyouts. 0:01:30.280 --> 0:01:31.720 Now, let's break down what that means. 0:01:32.040 --> 0:01:34.639 So a lot of times when one company or private 0:01:34.640 --> 0:01:37.920 equity firm buys another company, they fund part of that 0:01:38.000 --> 0:01:41.840 acquisition with debt financing. Investment banks like the big ones 0:01:41.880 --> 0:01:45.760 think JP, Morgan City, et cetera. They will provide essentially 0:01:45.800 --> 0:01:49.480 temporary bridge financing that they commit to and then the 0:01:49.520 --> 0:01:53.000 intention though is to sell that debt financing to outside 0:01:53.000 --> 0:01:56.200 institutional investors in the form of junk bonds and leverage 0:01:56.240 --> 0:01:59.600 loans before the deal closes. So right now, what we're 0:01:59.600 --> 0:02:02.520 looking at is a you know, a small but growing 0:02:02.600 --> 0:02:05.880 pipeline there. I mean, fifteen billion dollars wasn't big a 0:02:05.920 --> 0:02:08.960 few years ago, but it is a recovery after some 0:02:09.280 --> 0:02:11.480 issues when rates rose last year for the banks, where 0:02:11.480 --> 0:02:14.120 they lost a lot of money on these types of transactions. 0:02:14.560 --> 0:02:17.520 So yeah, so basically there's a lot that could basically 0:02:17.760 --> 0:02:21.160 launch first thing in September, once the market comes back 0:02:21.160 --> 0:02:23.720 to life, once some bankers come back from the Hamptons 0:02:24.160 --> 0:02:27.160 and we're all back at our desks after Labor Day. 0:02:28.200 --> 0:02:32.880 Awesome, And yes, you mentioned some trouble for the banks 0:02:32.960 --> 0:02:37.720 last year for our listeners new to leverage finance. The 0:02:37.760 --> 0:02:39.919 banks got themselves in a little bit of a conundrum 0:02:40.000 --> 0:02:43.919 when it came to underwriting merger and acquisition deals. Could 0:02:43.919 --> 0:02:46.399 you just give us a quick recap so our listeners 0:02:46.440 --> 0:02:48.440 know sort of where the banks are coming from. 0:02:49.320 --> 0:02:49.560 Yeah. 0:02:49.600 --> 0:02:54.000 So when banks provide committed bridge financing for leverage finance transactions, 0:02:54.400 --> 0:02:58.000 they actually also provide a maximum interest rate on that debt. 0:02:58.160 --> 0:03:00.480 So essentially they tell let's say the private X firm, 0:03:00.520 --> 0:03:02.799 you know, we hope to sell this at let's say 0:03:02.800 --> 0:03:06.880 eight percent, but maximum this will cost ten percent for 0:03:06.919 --> 0:03:11.240 the company. This is based off of current rates. And 0:03:11.280 --> 0:03:14.600 so when the Fed rapidly increased interest rates to combat inflation, 0:03:15.320 --> 0:03:17.240 basically banks just were on the other side of that 0:03:17.280 --> 0:03:19.520 and got really burned. All of a sudden, the market 0:03:19.600 --> 0:03:22.440 levels for selling that debt was well above the maximum 0:03:22.520 --> 0:03:25.680 interest rate levels that they promised these companies. So that 0:03:25.720 --> 0:03:27.640 meant if the banks wanted to get the debt off 0:03:27.680 --> 0:03:29.360 their balance sheets, they had to sell it at a 0:03:29.400 --> 0:03:32.079 discounted price so that the all in yield would be higher, 0:03:32.440 --> 0:03:34.120 and they were on the hook for that difference, and 0:03:34.160 --> 0:03:36.680 in some cases they lost billions of dollars as a 0:03:36.680 --> 0:03:39.000 group on some of these transactions. In fact, some of 0:03:39.000 --> 0:03:41.600 this debt is still stuck on their balance sheets. For 0:03:41.680 --> 0:03:44.960 example Twitter, that's about thirteen billion dollars of debt, no 0:03:45.080 --> 0:03:47.880 sign of them selling that anytime soon. And also for 0:03:47.960 --> 0:03:51.320 a company called bright Speed, but they were able to 0:03:51.360 --> 0:03:53.840 sell most of the debt that got stuck, which opened 0:03:53.840 --> 0:03:56.640 their balance sheets back up to do more deals. And 0:03:56.680 --> 0:03:58.600 the key thing for banks is they don't want to 0:03:58.640 --> 0:04:01.680 hold this debt right, do this as a temporary commitment 0:04:01.800 --> 0:04:04.119 and they make fees off of it. Then they recycle 0:04:04.120 --> 0:04:06.840 their balance sheet into the next deal. And that process 0:04:06.920 --> 0:04:09.560 is finally restarted in recent months, and that's why we 0:04:09.600 --> 0:04:11.280 have this pipeline going into the fall. 0:04:12.400 --> 0:04:12.800 Got it. 0:04:12.840 --> 0:04:15.520 That makes a lot of sense, Thank you. And if 0:04:15.560 --> 0:04:18.640 I'm correct, I think we have a couple of acquisitions 0:04:18.640 --> 0:04:23.360 in the market, some familiar names. Simon and Schuster the publisher, 0:04:23.520 --> 0:04:26.160 a handful of others. Can you, you know, walk us 0:04:26.160 --> 0:04:28.520 through some of the big names that you're going to 0:04:28.560 --> 0:04:29.600 be looking for next week? 0:04:30.960 --> 0:04:32.920 Yeah, So I think one of the more notable ones 0:04:33.000 --> 0:04:35.400 is Simon and Schuster just because it's such a household name. 0:04:35.480 --> 0:04:38.560 So this is the book publishing company. So they're old 0:04:38.600 --> 0:04:41.640 owner Paramount Global. So that's the home of like CBS 0:04:41.720 --> 0:04:44.360 and some of the big you know, broadcast brands. Paramount 0:04:44.360 --> 0:04:46.680 Global actually has owned Simon and Schuster and so they 0:04:46.720 --> 0:04:49.360 are now selling it to a really major a KKR, 0:04:49.960 --> 0:04:52.680 to a really major private equity firm called KKR for 0:04:52.720 --> 0:04:56.040 about one point six billion dollars. As part of the financing, 0:04:56.080 --> 0:04:58.760 KKR is doing this in the form of a leverage buyout. 0:04:59.200 --> 0:05:01.920 So there's all so roughly one billion dollars of debt 0:05:01.920 --> 0:05:04.839 financing provided by a group of banks led by Jeffries, 0:05:05.279 --> 0:05:07.920 and so that could come, you know, essentially whenever they 0:05:07.920 --> 0:05:11.000 think the market is ready to handle it. In you know, 0:05:11.120 --> 0:05:14.320 leverage finance world, one billion of debt isn't actually that big, 0:05:14.360 --> 0:05:17.720 and so the biggest transaction we're waiting for is this 0:05:18.680 --> 0:05:22.679 private equity firm called GTCR is buying a majority stake 0:05:22.720 --> 0:05:25.599 in a payments firm called World Pay and that has 0:05:25.640 --> 0:05:27.600 more than eight billion of debt in the form of 0:05:27.680 --> 0:05:30.720 junk bonds and leverage loans. This is a pretty chunky deal. 0:05:30.760 --> 0:05:33.200 We haven't seen deals of this size in quite a while, 0:05:33.440 --> 0:05:35.880 so it'll be interesting to see, you know, the test 0:05:35.920 --> 0:05:38.200 of the depths of the market to see if people 0:05:38.240 --> 0:05:40.839 are willing to invest that much money. So far, it 0:05:40.839 --> 0:05:43.919 looks like debt investors probably will be very receptive to 0:05:43.960 --> 0:05:47.400 it because they're hungry for new deals because the leverage 0:05:47.400 --> 0:05:50.480 buyout machine essentially got gummed up for about a year. 0:05:50.760 --> 0:05:52.960 They haven't had like the new paper, the new money 0:05:52.960 --> 0:05:55.520 for them to invest in, and so they're looking for 0:05:55.560 --> 0:05:57.520 new deals so that they can put money to work. 0:05:58.880 --> 0:06:02.080 And you're talking to investors all the time. A lot 0:06:02.120 --> 0:06:04.440 of the sources that I speak to this year, they 0:06:04.480 --> 0:06:07.960 continue to talk to me about this up and quality trade. 0:06:08.000 --> 0:06:10.840 They want to be investing in higher quality credits, whether 0:06:10.880 --> 0:06:14.400 that's investment grade or maybe the higher end of the 0:06:14.880 --> 0:06:17.240 junk bond and the leverage loan space. But when we 0:06:17.279 --> 0:06:21.039 look at leverage buyouts, they aren't always the safest bets. 0:06:21.080 --> 0:06:23.320 So could you walk us through sort of what investors 0:06:23.320 --> 0:06:26.160 are thinking about in terms of risk taking on these deals. 0:06:27.800 --> 0:06:29.159 Yeah, So it's really interesting. 0:06:29.240 --> 0:06:32.520 So while the market has reopened, it's definitely been for 0:06:32.680 --> 0:06:34.280 safer companies in general. 0:06:34.400 --> 0:06:37.440 Right, So you're double bees, higher rated. 0:06:37.160 --> 0:06:40.760 Single bees, you know, lower rated single bees, and especially 0:06:40.880 --> 0:06:44.080 triple C rated debt it's still fairly a no man's land. 0:06:44.160 --> 0:06:46.040 Most people just don't want to touch it or deal 0:06:46.080 --> 0:06:49.120 with it because of the risks. And so what we've 0:06:49.160 --> 0:06:51.479 seen with some of these leverage buyouts, it's hard to 0:06:51.480 --> 0:06:54.320 speak to specific ones, but broadly, the color we've heard 0:06:54.480 --> 0:06:57.320 is that leverage is down right. So if maybe a 0:06:57.360 --> 0:07:00.000 deal would have been levered around six times last year, 0:07:00.120 --> 0:07:02.679 or it's now more around five times or four point 0:07:02.760 --> 0:07:06.880 five times. And that also reflects the hiring borrowing costs, 0:07:06.960 --> 0:07:09.440 because you know, the companies can only support so much 0:07:09.520 --> 0:07:12.880 debt if the interest rates are higher. So investors, you know, 0:07:12.920 --> 0:07:14.760 they're going to see this new crop of LBOs that 0:07:14.840 --> 0:07:19.120 should be lower levered. Investors might be able to fight 0:07:19.240 --> 0:07:22.280 for better covenants now since you know they can get 0:07:22.280 --> 0:07:24.680 those investor protections again, since it's been more of a 0:07:25.200 --> 0:07:28.680 debt buyer's market than a debt seller's market. But yeah, 0:07:28.720 --> 0:07:31.960 in general, investors are still looking for higher quality names, 0:07:32.160 --> 0:07:34.800 and you know, there's still afraid there could be a recession, 0:07:34.880 --> 0:07:36.840 right so you know, even though it seems like some 0:07:36.880 --> 0:07:40.720 of those predictions were early or you know, overblown, there 0:07:40.760 --> 0:07:42.600 still could be a recession at some point in the 0:07:42.600 --> 0:07:46.480 coming quarters. So investors want companies that are recession resistant, 0:07:46.480 --> 0:07:49.200 that still do well during the bad part of cycles. 0:07:49.320 --> 0:07:51.960 And they're also hyper aware of that borrowing costs are higher, 0:07:52.040 --> 0:07:54.440 so they don't want to lever companies up too high 0:07:54.680 --> 0:07:56.360 and then have to deal with the restructuring in a 0:07:56.400 --> 0:07:56.960 few years. 0:07:58.200 --> 0:07:58.520 Got it. 0:07:58.600 --> 0:08:01.760 So it sounds like they are putting less debt onto 0:08:01.800 --> 0:08:04.600 these companies compared to the equity than maybe they did 0:08:04.600 --> 0:08:05.400 a few years ago. 0:08:05.640 --> 0:08:06.120 Is that right? 0:08:07.680 --> 0:08:10.440 Yes, So sponsors across the board do seem like they've 0:08:10.480 --> 0:08:13.000 now had to come down on the leverage levels when 0:08:13.000 --> 0:08:14.200 they do buy other companies. 0:08:15.240 --> 0:08:18.920 Got it, And circling back to the banks and what 0:08:18.960 --> 0:08:22.080 they went through last year, I know that. You know, 0:08:22.160 --> 0:08:26.080 mergers and acquisitions, leverage buyouts are sort of the engine 0:08:26.120 --> 0:08:31.640 of this market. But after losing billions of dollars, you know, 0:08:32.480 --> 0:08:35.000 why is Wall Street coming back now? Why do they 0:08:35.000 --> 0:08:36.320 want to do these deals now? 0:08:37.440 --> 0:08:39.720 Because these deals make them a lot of money. 0:08:41.880 --> 0:08:45.560 Because basically, the way investment banking works in this part 0:08:45.559 --> 0:08:48.400 of the market is the banks want to constantly have 0:08:48.480 --> 0:08:51.080 a turn of leverage buyout transactions because they can make 0:08:51.080 --> 0:08:53.600 a fee of two points or three points. You know, 0:08:53.640 --> 0:08:56.240 if you make a fee of three percent on billions 0:08:56.240 --> 0:08:59.520 of dollars. That adds up really fast. So they took 0:08:59.520 --> 0:09:03.559 their loss is they dealt with it. These losses were painful, 0:09:03.679 --> 0:09:05.720 but nothing like the financial crisis. 0:09:05.800 --> 0:09:06.000 Right. 0:09:06.559 --> 0:09:08.839 They were bad here, and now they've moved on and 0:09:08.880 --> 0:09:11.440 they're ready to make money again off this business. And 0:09:11.679 --> 0:09:14.400 in general, what we've heard across the board is that 0:09:14.520 --> 0:09:17.720 because rates rose and because for a period of time 0:09:17.720 --> 0:09:20.520 it was harder to get debt financing, banks were able 0:09:20.559 --> 0:09:22.199 to get better terms for themselves. 0:09:22.240 --> 0:09:24.240 Right, so their current. 0:09:24.080 --> 0:09:27.080 Maximum interest rates are now once again based off of 0:09:27.120 --> 0:09:29.480 the current market levels, which are much higher than they 0:09:29.520 --> 0:09:33.440 were before the FED started this process. So you know, 0:09:34.000 --> 0:09:36.280 overall color i've heard is also that the what are 0:09:36.320 --> 0:09:39.199 called flex and caps, which is essentially the way they 0:09:39.320 --> 0:09:42.480 do the maximum interest rates, that those are just higher. 0:09:42.480 --> 0:09:45.800 They're more favorable for the banks, and so they should 0:09:45.880 --> 0:09:49.040 be able to do this more safely for them, hopefully 0:09:49.080 --> 0:09:52.840 for them. But that being said, this isn't in a vacuum, right, 0:09:53.040 --> 0:09:55.960 because the banks are competing against each other for these deals, 0:09:56.080 --> 0:09:59.560 and they're also competing against private credit lenders, and so 0:09:59.640 --> 0:10:03.199 private credit lenders this other asset class where instead of 0:10:03.320 --> 0:10:06.560 doing a temporary financing. They just come in and borrow 0:10:06.600 --> 0:10:09.720 the money, sometimes with just a few firms for billions 0:10:09.760 --> 0:10:12.800 of dollars of debt. You know, they can offer more 0:10:12.840 --> 0:10:17.040 flexible terms to sponsors, and they can also typically they're 0:10:17.080 --> 0:10:20.640 pricing is higher than the you know, hoped for rate 0:10:20.679 --> 0:10:23.080 that the banks are doing, but it can be like 0:10:23.120 --> 0:10:25.800 an X right, they're competing. They're trying to undercut each 0:10:25.800 --> 0:10:28.959 other on price, on other terms, on protections. So if 0:10:29.000 --> 0:10:30.680 banks stay out of the market, they're just going to 0:10:30.760 --> 0:10:32.560 keep losing market share to private credit. 0:10:32.760 --> 0:10:33.679 So they got to get back in. 0:10:33.800 --> 0:10:37.520 Now that's super interesting. It seems like everything is owned 0:10:37.520 --> 0:10:40.400 by private markets these days. I'm glad that you mentioned 0:10:40.400 --> 0:10:44.400 private credit because it's a really important asset class in 0:10:44.800 --> 0:10:50.240 the credit space. It's just grown extremely large in size. 0:10:50.000 --> 0:10:52.800 But why would a company want to go to private credit, 0:10:52.840 --> 0:10:55.160 Like why not just stick with, you know, a big 0:10:55.200 --> 0:10:57.520 bank that has a familiar name. 0:10:58.760 --> 0:11:00.680 That's a great question. So there's a lot of different 0:11:00.760 --> 0:11:01.720 pros and cons. 0:11:02.600 --> 0:11:05.600 So if you do the public markets, so hild bonds, leverage, loans, 0:11:05.600 --> 0:11:08.400 and again we say public in a relative sense. These aren't, 0:11:08.480 --> 0:11:10.960 you know, like equities, but they're relatively public because so 0:11:10.960 --> 0:11:14.319 many people buy them, you know, hild bonds and leverage loans. 0:11:14.360 --> 0:11:17.600 Typically the borrowing costs are cheaper than private credit, but 0:11:18.040 --> 0:11:21.400 you have to do the debt commitments and then at 0:11:21.440 --> 0:11:24.600 some point in the future, sometimes months later, you then 0:11:24.720 --> 0:11:27.080 sell the junk bonds and leverage loans, and you know, 0:11:27.320 --> 0:11:31.160 yields can change in that period of time, marketing conditions 0:11:31.200 --> 0:11:33.880 can change. So why people like private credit is even 0:11:33.920 --> 0:11:37.040 though it can be more expensive, you just kind of 0:11:37.080 --> 0:11:39.040 get it all done at once. You know, there's a 0:11:39.120 --> 0:11:41.360 certainty of execution, as a lot of people in the 0:11:41.360 --> 0:11:44.320 market like to say, where you can just go to 0:11:44.360 --> 0:11:47.080 a few lenders and they say, okay, we did the deal. 0:11:47.120 --> 0:11:47.960 It's done right. 0:11:48.160 --> 0:11:51.040 There's no headaches of you know, fifty sixty one hundred 0:11:51.120 --> 0:11:54.959 investors having differing opinions on your company and you don't 0:11:54.960 --> 0:11:57.040 have to worry about it. And then the other thing 0:11:57.160 --> 0:11:59.960 is that private credit lenders can also provide, you know, 0:12:00.000 --> 0:12:02.560 so different kinds of flexibility. 0:12:01.840 --> 0:12:02.520 On the terms. 0:12:02.800 --> 0:12:05.360 So one of the biggest ones is they can provide 0:12:05.400 --> 0:12:08.640 what's called pick or payment in kind. So if let's 0:12:08.640 --> 0:12:10.880 say you lever up a company with a lot of 0:12:10.920 --> 0:12:13.120 debt and you think it's going to grow into this 0:12:13.240 --> 0:12:15.560 debt load. But in the meantime you're a little bit 0:12:15.559 --> 0:12:18.720 worried about liquidity or just the actual interest costs of cash. 0:12:18.880 --> 0:12:21.920 Leaving the business to investors. Every year you can do 0:12:21.960 --> 0:12:25.000 a pick, so that means instead of paying your interest 0:12:25.080 --> 0:12:27.640 in cash, you pay in more debt that only comes 0:12:27.720 --> 0:12:30.000 due at the end when it matures. So there's just 0:12:30.080 --> 0:12:32.920 some you know, flexibility. It's more bespoke. It's just more 0:12:32.960 --> 0:12:36.120 like contracts between some parties. So that's kind of the difference. 0:12:36.160 --> 0:12:38.760 You know, banks, it's going to be cheaper if the 0:12:38.800 --> 0:12:41.200 banks sell it to institutional asset managers, but it's a 0:12:41.200 --> 0:12:44.000 more specific way it has to be done. Whereas private 0:12:44.000 --> 0:12:46.880 credit lenders, they're more expensive, but you have the certainty 0:12:46.880 --> 0:12:48.600 of execution and more flexibility. 0:12:49.240 --> 0:12:51.480 Thank you for walking us through that, and we're going 0:12:51.559 --> 0:12:55.040 to turn to Jody Lurie at Bloomberg Intelligence shortly, but 0:12:55.080 --> 0:12:58.320 before we do, Paula, I know, private credit is an 0:12:58.360 --> 0:13:01.679 asset class that you follow their closely. What what are 0:13:01.679 --> 0:13:02.480 the big things? 0:13:02.520 --> 0:13:02.680 You know? 0:13:02.760 --> 0:13:05.199 What are you watching there? What's what's the next big 0:13:05.240 --> 0:13:08.599 thing for investors and people curious about this space to 0:13:08.880 --> 0:13:10.000 look out for in the fall. 0:13:11.440 --> 0:13:14.439 Yeah, so I think a really interesting dynamic is right now. 0:13:14.480 --> 0:13:18.559 We've been talking about new deals, right, leverage biots, new transactions, 0:13:18.720 --> 0:13:21.360 but there's a lot of leverage loans and hiled bonds 0:13:21.720 --> 0:13:24.880 that are outstanding and need to be refinanced soon. It's 0:13:24.920 --> 0:13:27.200 not like a cliff, A lot of it's already been 0:13:27.240 --> 0:13:29.160 dealt with, but there is a good chunk of the 0:13:29.320 --> 0:13:32.160 of this debt that still does need to be refinanced 0:13:32.160 --> 0:13:34.680 in the next one to two years. And it's harder 0:13:34.720 --> 0:13:37.959 to do that in the broadly syndicated markets, and it's 0:13:38.000 --> 0:13:40.600 also more expensive. And so I think we're going to 0:13:40.679 --> 0:13:44.040 keep seeing a trend of private credit lenders stepping into 0:13:44.120 --> 0:13:48.240 refinance leverage loans and hiled bonds, especially leverage loans because 0:13:48.240 --> 0:13:50.560 they're very similar structure. And so we've seen a couple 0:13:50.600 --> 0:13:53.120 of really big examples of that recently. One was the 0:13:53.160 --> 0:13:56.800 Phenostra example, which is currently the largest private credit deal 0:13:56.840 --> 0:13:59.720 ever at more than five billion of total size. And 0:13:59.760 --> 0:14:01.920 then we're also now seeing a group of private credit 0:14:02.000 --> 0:14:05.800 lenders refinance the leverage loans for a company called Highland Software. 0:14:06.120 --> 0:14:10.040 So we do expect to see more examples of refinancing happen, 0:14:10.080 --> 0:14:13.120 which means that the leverage loan market especially could shrink some. 0:14:15.080 --> 0:14:19.520 That's super interesting. Great stuff from Paula Selderson at Bloomberg News. 0:14:19.560 --> 0:14:21.040 Thank you so much for joining us. 0:14:21.000 --> 0:14:23.640 Paula, thanks for having me anytime, and. 0:14:23.560 --> 0:14:25.960 You can read all of Paula's scoops on the Bloomberg 0:14:26.040 --> 0:14:29.120 terminal and of course at Bloomberg dot com. Please do 0:14:29.280 --> 0:14:33.000 check out her coverage. So, as I mentioned earlier, we 0:14:33.040 --> 0:14:37.000 are delighted to welcome Jody Luriy on the Credit Edge 0:14:37.000 --> 0:14:41.240 podcast this week. Jody covers the leisure sector for Bloomberg 0:14:41.280 --> 0:14:44.880 Intelligence based here in New York. How's it going, Jody. 0:14:44.840 --> 0:14:45.960 It's going great, Olivia. 0:14:46.400 --> 0:14:49.760 You cover a lot of companies, but as the summer 0:14:49.960 --> 0:14:53.440 comes to a close, I want to take a special 0:14:53.520 --> 0:14:57.640 look at theme parks and the cruise lines. There's been 0:14:57.680 --> 0:14:59.880 a lot of activity there and a lot to sort 0:14:59.880 --> 0:15:02.840 of of dive into. Can you talk sort of high 0:15:02.960 --> 0:15:05.440 level you know, where does the leisure sector go from here? 0:15:07.760 --> 0:15:11.240 Sure? So, I think the leisure sector is definitely one 0:15:11.240 --> 0:15:13.800 of the most interesting ones. In my opinion, I'm a 0:15:13.840 --> 0:15:17.640 little biased this year just from the standpoint that I 0:15:17.640 --> 0:15:25.119 think consumers have really outdone themselves in terms of participating 0:15:25.160 --> 0:15:27.400 in the leisure space and in different areas of leisure, 0:15:28.160 --> 0:15:29.880 different areas than we saw a year ago. You know, 0:15:29.920 --> 0:15:32.240 people are getting a little bit more international in their reach. 0:15:33.240 --> 0:15:35.040 They want to go and do, they don't want to 0:15:35.080 --> 0:15:38.000 be stuck inside, and so even though there's discussion of 0:15:38.240 --> 0:15:42.520 possibly a pullback economically, we're not yet seeing that prove 0:15:42.680 --> 0:15:45.840 out in the leisure space in general. That said, we 0:15:45.920 --> 0:15:49.560 are starting to see pockets of moderation normalization from these 0:15:50.600 --> 0:15:53.800 post pandemic highs of certain parts of the leisure space. 0:15:54.200 --> 0:15:56.880 Got it for sure, And can you talk a little 0:15:56.920 --> 0:16:00.160 bit about some of the major forces that are driving 0:16:00.160 --> 0:16:02.080 your outlook for the theme parks? 0:16:02.800 --> 0:16:06.080 So I think that theme parks are a bit interesting 0:16:06.160 --> 0:16:10.920 in and of themselves because they mostly shut down during 0:16:10.920 --> 0:16:16.120 the pandemic but found ways to still stay relevant in 0:16:16.240 --> 0:16:19.880 terms of food and beverage events and any area to 0:16:19.920 --> 0:16:23.160 stay open, Which compares to the cruise lines that had 0:16:23.200 --> 0:16:28.480 to fully stop. They are now. They were able to 0:16:28.520 --> 0:16:30.760 transition out of the pandemic a little bit quicker as 0:16:30.800 --> 0:16:33.560 a result, and last year had very strong years in 0:16:33.640 --> 0:16:39.960 terms of season pass rates, in terms of just people 0:16:40.000 --> 0:16:43.160 going and visiting the theme parks, and doing because it's 0:16:43.160 --> 0:16:45.480 a nice, nice easy experience that you can do once, 0:16:45.680 --> 0:16:50.400 you know, once every month or every week. Now this 0:16:50.520 --> 0:16:52.400 year we're seeing that there's a bit of a pullback, 0:16:52.480 --> 0:16:55.600 and part of that, interestingly, is because of things like weather, 0:16:55.720 --> 0:17:00.880 which obviously we can't plan for weather, but it's definitely 0:17:00.880 --> 0:17:02.720 creating a little bit of a wrinkle in their plan 0:17:02.800 --> 0:17:06.119 and showing the sensitivity that they have as compared to 0:17:06.200 --> 0:17:09.520 other parts of the leisure space this year as people 0:17:09.640 --> 0:17:12.480 sort of look elsewhere to spend their time and spend 0:17:12.520 --> 0:17:13.119 their leisure. 0:17:14.359 --> 0:17:17.960 Interesting, so where else are you seeing that? Where is 0:17:18.000 --> 0:17:20.960 the consumer going right now? What are you seeing as 0:17:20.960 --> 0:17:21.720 their preference? 0:17:24.480 --> 0:17:28.600 The biggest areas that have been really growing this year 0:17:28.800 --> 0:17:34.600 has been international travel, which has really not returned to 0:17:34.640 --> 0:17:38.320 pre pandemic levels yet. Business and conference travel is of 0:17:38.359 --> 0:17:41.199 course improving as well. That's a little bit slower, and 0:17:41.240 --> 0:17:43.959 that's not so much leisure, although there is that element 0:17:44.000 --> 0:17:46.919 of leisure which is business and leisure blended. So you 0:17:46.960 --> 0:17:48.919 go to a conference and you or you go on 0:17:48.960 --> 0:17:50.680 a business trip and you extend it by a few 0:17:50.760 --> 0:17:55.040 days for leisure travel. That said, I mean, I think 0:17:55.240 --> 0:17:58.239 you know, cruise lines are a great example of an 0:17:58.240 --> 0:18:02.560 alternative of where people are spending their time because they 0:18:02.640 --> 0:18:05.000 can book they booked it in advance. They want to 0:18:05.040 --> 0:18:07.639 go and do something that's a little bit more exotic 0:18:08.119 --> 0:18:11.480 than going to your regional theme park. That said, something 0:18:11.600 --> 0:18:15.240 like a SeaWorld is benefiting a little bit more than 0:18:15.240 --> 0:18:18.840 a Six Flags and a Cedar Fair from the standpoint 0:18:18.840 --> 0:18:25.119 that they have that southern California Florida focus, but that 0:18:25.160 --> 0:18:30.320 doesn't completely keep them unexposed to some of the trends 0:18:31.080 --> 0:18:34.280 in theme parks, namely weather. And you're seeing that for 0:18:34.359 --> 0:18:37.719 all three of these major companies, is that they're really 0:18:38.119 --> 0:18:40.280 actually being affected by the fact that the first and 0:18:40.320 --> 0:18:42.960 second quarter we're not very kind to them in terms 0:18:43.000 --> 0:18:45.359 of heat, in terms of monsoons. Now we have the 0:18:45.440 --> 0:18:49.040 hurricane season coming up. And these companies with more of 0:18:49.080 --> 0:18:51.439 a global reach, like the cruise lines can sort of 0:18:52.119 --> 0:18:55.840 manage through some of these difficulties. And obviously a cruise ship, 0:18:55.880 --> 0:18:57.760 if the weather is not good in one place, you 0:18:57.800 --> 0:19:00.639 can sort of move to another. Not always, but you 0:19:01.119 --> 0:19:02.919 can reroute it a little bit. You can't do that 0:19:02.960 --> 0:19:04.320 when you have giant rollercoasters. 0:19:05.440 --> 0:19:05.720 Yeah. 0:19:05.760 --> 0:19:09.119 Absolutely. I guess an important thing to think about is 0:19:09.160 --> 0:19:12.920 that the theme parks are rooted in one spot that 0:19:12.920 --> 0:19:17.119 they're not moving physically, whereas consumers can go to different 0:19:17.160 --> 0:19:22.040 locations that have a desirable location and destination for the weather, 0:19:22.119 --> 0:19:25.520 and the crews can take them there anytime during the year. 0:19:25.800 --> 0:19:28.120 But you know, Jody, and I know you know this 0:19:28.160 --> 0:19:31.439 so well before our listeners, the cruise lines had a 0:19:31.480 --> 0:19:34.760 really tough time in twenty twenty when the pandemic shut 0:19:34.800 --> 0:19:37.520 down all their operations and they really needed to rely 0:19:37.680 --> 0:19:41.960 on the debt markets. For somebody who isn't as clued 0:19:42.000 --> 0:19:44.000 in as you to this space, could you just walk 0:19:44.080 --> 0:19:46.760 us through kind of what that sector has been going 0:19:46.800 --> 0:19:48.400 through over the past couple of years. 0:19:48.720 --> 0:19:51.600 So I think that's a great question, Olivia, because you 0:19:51.640 --> 0:19:53.880 have to remember that this moratorium that they went through, 0:19:53.920 --> 0:19:56.320 which was basically they had to completely shut down all 0:19:56.400 --> 0:20:01.159 their operations during a good portion of the pandemic, it 0:20:01.320 --> 0:20:04.159 really set them back, particularly compared to other parts of 0:20:04.160 --> 0:20:06.440 the leisure space. They're about a year or so behind 0:20:06.560 --> 0:20:10.280 from in this transition period in the post pandemic era. 0:20:10.520 --> 0:20:13.159 They're now finally this year starting to see more normal 0:20:13.320 --> 0:20:16.280 levels of activity, whereas if you look at other parts 0:20:16.320 --> 0:20:18.639 of the leisure space. They got the benefit of that 0:20:18.720 --> 0:20:21.040 a year year and a half ago as people started 0:20:21.080 --> 0:20:25.199 going and doing that. Said, I think what's happening with 0:20:25.320 --> 0:20:28.280 the cruise lines is they're pleasantly surprised by how quickly 0:20:28.600 --> 0:20:33.719 people are starting to jump into cruising. We're seeing advanced 0:20:33.720 --> 0:20:36.520 booking rates much higher, which means that cash flows are 0:20:36.520 --> 0:20:40.680 getting better. We're seeing revenue also getting booked because people 0:20:40.680 --> 0:20:43.119