Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is Olivia Raymonde and I'm a corporate finance
Speaker 1: reporter here at Bloomberg News. This week, we are extremely
Speaker 1: pleased to have Paula Selvison back on the show with us.
Speaker 1: She covers leverage, finance and private credit for Bloomberg News
Speaker 1: in New York. How are you doing, Paula.
Speaker 2: I'm doing good, Glad to be here.
Speaker 1: Glad to have you on. We're also delighted to chat
Speaker 1: with Jody Lurie later on in the show. She looks
Speaker 1: at the leisure sector for Bloomberg Intelligence in New York.
Speaker 1: We'll be coming back to Jody a bit later in
Speaker 1: the show, so please do stay with us. But first
Speaker 1: back with Paula with Bloomberg News. Paula, August is typically
Speaker 1: a quiet month for sales in the US corporate finance markets,
Speaker 1: and it's common for us to look forward into September
Speaker 1: and it looks like this is going to be a
Speaker 1: pretty active month, specifically for mergers and acquisitions. Could you
Speaker 1: walk us through sort of the dynamic that's playing out
Speaker 1: there in the markets.
Speaker 2: Yeah, absolutely so.
Speaker 3: Right now, there is more than fifteen billion dollars of
Speaker 3: committed debt financing for leverage buyouts.
Speaker 2: Now, let's break down what that means.
Speaker 3: So a lot of times when one company or private
Speaker 3: equity firm buys another company, they fund part of that
Speaker 3: acquisition with debt financing. Investment banks like the big ones
Speaker 3: think JP, Morgan City, et cetera. They will provide essentially
Speaker 3: temporary bridge financing that they commit to and then the
Speaker 3: intention though is to sell that debt financing to outside
Speaker 3: institutional investors in the form of junk bonds and leverage
Speaker 3: loans before the deal closes. So right now, what we're
Speaker 3: looking at is a you know, a small but growing
Speaker 3: pipeline there. I mean, fifteen billion dollars wasn't big a
Speaker 3: few years ago, but it is a recovery after some
Speaker 3: issues when rates rose last year for the banks, where
Speaker 3: they lost a lot of money on these types of transactions.
Speaker 3: So yeah, so basically there's a lot that could basically
Speaker 3: launch first thing in September, once the market comes back
Speaker 3: to life, once some bankers come back from the Hamptons
Speaker 3: and we're all back at our desks after Labor Day.
Speaker 1: Awesome, And yes, you mentioned some trouble for the banks
Speaker 1: last year for our listeners new to leverage finance. The
Speaker 1: banks got themselves in a little bit of a conundrum
Speaker 1: when it came to underwriting merger and acquisition deals. Could
Speaker 1: you just give us a quick recap so our listeners
Speaker 1: know sort of where the banks are coming from.
Speaker 2: Yeah.
Speaker 3: So when banks provide committed bridge financing for leverage finance transactions,
Speaker 3: they actually also provide a maximum interest rate on that debt.
Speaker 3: So essentially they tell let's say the private X firm,
Speaker 3: you know, we hope to sell this at let's say
Speaker 3: eight percent, but maximum this will cost ten percent for
Speaker 3: the company. This is based off of current rates. And
Speaker 3: so when the Fed rapidly increased interest rates to combat inflation,
Speaker 3: basically banks just were on the other side of that
Speaker 3: and got really burned. All of a sudden, the market
Speaker 3: levels for selling that debt was well above the maximum
Speaker 3: interest rate levels that they promised these companies. So that
Speaker 3: meant if the banks wanted to get the debt off
Speaker 3: their balance sheets, they had to sell it at a
Speaker 3: discounted price so that the all in yield would be higher,
Speaker 3: and they were on the hook for that difference, and
Speaker 3: in some cases they lost billions of dollars as a
Speaker 3: group on some of these transactions. In fact, some of
Speaker 3: this debt is still stuck on their balance sheets. For
Speaker 3: example Twitter, that's about thirteen billion dollars of debt, no
Speaker 3: sign of them selling that anytime soon. And also for
Speaker 3: a company called bright Speed, but they were able to
Speaker 3: sell most of the debt that got stuck, which opened
Speaker 3: their balance sheets back up to do more deals. And
Speaker 3: the key thing for banks is they don't want to
Speaker 3: hold this debt right, do this as a temporary commitment
Speaker 3: and they make fees off of it. Then they recycle
Speaker 3: their balance sheet into the next deal. And that process
Speaker 3: is finally restarted in recent months, and that's why we
Speaker 3: have this pipeline going into the fall.
Speaker 2: Got it.
Speaker 1: That makes a lot of sense, Thank you. And if
Speaker 1: I'm correct, I think we have a couple of acquisitions
Speaker 1: in the market, some familiar names. Simon and Schuster the publisher,
Speaker 1: a handful of others. Can you, you know, walk us
Speaker 1: through some of the big names that you're going to
Speaker 1: be looking for next week?
Speaker 3: Yeah, So I think one of the more notable ones
Speaker 3: is Simon and Schuster just because it's such a household name.
Speaker 3: So this is the book publishing company. So they're old
Speaker 3: owner Paramount Global. So that's the home of like CBS
Speaker 3: and some of the big you know, broadcast brands. Paramount
Speaker 3: Global actually has owned Simon and Schuster and so they
Speaker 3: are now selling it to a really major a KKR,
Speaker 3: to a really major private equity firm called KKR for
Speaker 3: about one point six billion dollars. As part of the financing,
Speaker 3: KKR is doing this in the form of a leverage buyout.
Speaker 3: So there's all so roughly one billion dollars of debt
Speaker 3: financing provided by a group of banks led by Jeffries,
Speaker 3: and so that could come, you know, essentially whenever they
Speaker 3: think the market is ready to handle it. In you know,
Speaker 3: leverage finance world, one billion of debt isn't actually that big,
Speaker 3: and so the biggest transaction we're waiting for is this
Speaker 3: private equity firm called GTCR is buying a majority stake
Speaker 3: in a payments firm called World Pay and that has
Speaker 3: more than eight billion of debt in the form of
Speaker 3: junk bonds and leverage loans. This is a pretty chunky deal.
Speaker 3: We haven't seen deals of this size in quite a while,
Speaker 3: so it'll be interesting to see, you know, the test
Speaker 3: of the depths of the market to see if people
Speaker 3: are willing to invest that much money. So far, it
Speaker 3: looks like debt investors probably will be very receptive to
Speaker 3: it because they're hungry for new deals because the leverage
Speaker 3: buyout machine essentially got gummed up for about a year.
Speaker 3: They haven't had like the new paper, the new money
Speaker 3: for them to invest in, and so they're looking for
Speaker 3: new deals so that they can put money to work.
Speaker 1: And you're talking to investors all the time. A lot
Speaker 1: of the sources that I speak to this year, they
Speaker 1: continue to talk to me about this up and quality trade.
Speaker 1: They want to be investing in higher quality credits, whether
Speaker 1: that's investment grade or maybe the higher end of the
Speaker 1: junk bond and the leverage loan space. But when we
Speaker 1: look at leverage buyouts, they aren't always the safest bets.
Speaker 1: So could you walk us through sort of what investors
Speaker 1: are thinking about in terms of risk taking on these deals.
Speaker 2: Yeah, So it's really interesting.
Speaker 3: So while the market has reopened, it's definitely been for
Speaker 3: safer companies in general.
Speaker 2: Right, So you're double bees, higher rated.
Speaker 3: Single bees, you know, lower rated single bees, and especially
Speaker 3: triple C rated debt it's still fairly a no man's land.
Speaker 3: Most people just don't want to touch it or deal
Speaker 3: with it because of the risks. And so what we've
Speaker 3: seen with some of these leverage buyouts, it's hard to
Speaker 3: speak to specific ones, but broadly, the color we've heard
Speaker 3: is that leverage is down right. So if maybe a
Speaker 3: deal would have been levered around six times last year,
Speaker 3: or it's now more around five times or four point
Speaker 3: five times. And that also reflects the hiring borrowing costs,
Speaker 3: because you know, the companies can only support so much
Speaker 3: debt if the interest rates are higher. So investors, you know,
Speaker 3: they're going to see this new crop of LBOs that
Speaker 3: should be lower levered. Investors might be able to fight
Speaker 3: for better covenants now since you know they can get
Speaker 3: those investor protections again, since it's been more of a
Speaker 3: debt buyer's market than a debt seller's market. But yeah,
Speaker 3: in general, investors are still looking for higher quality names,
Speaker 3: and you know, there's still afraid there could be a recession,
Speaker 3: right so you know, even though it seems like some
Speaker 3: of those predictions were early or you know, overblown, there
Speaker 3: still could be a recession at some point in the
Speaker 3: coming quarters. So investors want companies that are recession resistant,
Speaker 3: that still do well during the bad part of cycles.
Speaker 3: And they're also hyper aware of that borrowing costs are higher,
Speaker 3: so they don't want to lever companies up too high
Speaker 3: and then have to deal with the restructuring in a
Speaker 3: few years.
Speaker 2: Got it.
Speaker 1: So it sounds like they are putting less debt onto
Speaker 1: these companies compared to the equity than maybe they did
Speaker 1: a few years ago.
Speaker 4: Is that right?
Speaker 3: Yes, So sponsors across the board do seem like they've
Speaker 3: now had to come down on the leverage levels when
Speaker 3: they do buy other companies.
Speaker 1: Got it, And circling back to the banks and what
Speaker 1: they went through last year, I know that. You know,
Speaker 1: mergers and acquisitions, leverage buyouts are sort of the engine
Speaker 1: of this market. But after losing billions of dollars, you know,
Speaker 1: why is Wall Street coming back now? Why do they
Speaker 1: want to do these deals now?
Speaker 2: Because these deals make them a lot of money.
Speaker 3: Because basically, the way investment banking works in this part
Speaker 3: of the market is the banks want to constantly have
Speaker 3: a turn of leverage buyout transactions because they can make
Speaker 3: a fee of two points or three points. You know,
Speaker 3: if you make a fee of three percent on billions
Speaker 3: of dollars. That adds up really fast. So they took
Speaker 3: their loss is they dealt with it. These losses were painful,
Speaker 3: but nothing like the financial crisis.
Speaker 2: Right.
Speaker 3: They were bad here, and now they've moved on and
Speaker 3: they're ready to make money again off this business. And
Speaker 3: in general, what we've heard across the board is that
Speaker 3: because rates rose and because for a period of time
Speaker 3: it was harder to get debt financing, banks were able
Speaker 3: to get better terms for themselves.
Speaker 2: Right, so their current.
Speaker 3: Maximum interest rates are now once again based off of
Speaker 3: the current market levels, which are much higher than they
Speaker 3: were before the FED started this process. So you know,
Speaker 3: overall color i've heard is also that the what are
Speaker 3: called flex and caps, which is essentially the way they
Speaker 3: do the maximum interest rates, that those are just higher.
Speaker 3: They're more favorable for the banks, and so they should
Speaker 3: be able to do this more safely for them, hopefully
Speaker 3: for them. But that being said, this isn't in a vacuum, right,
Speaker 3: because the banks are competing against each other for these deals,
Speaker 3: and they're also competing against private credit lenders, and so
Speaker 3: private credit lenders this other asset class where instead of
Speaker 3: doing a temporary financing. They just come in and borrow
Speaker 3: the money, sometimes with just a few firms for billions
Speaker 3: of dollars of debt. You know, they can offer more
Speaker 3: flexible terms to sponsors, and they can also typically they're
Speaker 3: pricing is higher than the you know, hoped for rate
Speaker 3: that the banks are doing, but it can be like
Speaker 3: an X right, they're competing. They're trying to undercut each
Speaker 3: other on price, on other terms, on protections. So if
Speaker 3: banks stay out of the market, they're just going to
Speaker 3: keep losing market share to private credit.
Speaker 2: So they got to get back in.
Speaker 1: Now that's super interesting. It seems like everything is owned
Speaker 1: by private markets these days. I'm glad that you mentioned
Speaker 1: private credit because it's a really important asset class in
Speaker 1: the credit space. It's just grown extremely large in size.
Speaker 1: But why would a company want to go to private credit,
Speaker 1: Like why not just stick with, you know, a big
Speaker 1: bank that has a familiar name.
Speaker 2: That's a great question. So there's a lot of different
Speaker 2: pros and cons.
Speaker 3: So if you do the public markets, so hild bonds, leverage, loans,
Speaker 3: and again we say public in a relative sense. These aren't,
Speaker 3: you know, like equities, but they're relatively public because so
Speaker 3: many people buy them, you know, hild bonds and leverage loans.
Speaker 3: Typically the borrowing costs are cheaper than private credit, but
Speaker 3: you have to do the debt commitments and then at
Speaker 3: some point in the future, sometimes months later, you then
Speaker 3: sell the junk bonds and leverage loans, and you know,
Speaker 3: yields can change in that period of time, marketing conditions
Speaker 3: can change. So why people like private credit is even
Speaker 3: though it can be more expensive, you just kind of
Speaker 3: get it all done at once. You know, there's a
Speaker 3: certainty of execution, as a lot of people in the
Speaker 3: market like to say, where you can just go to
Speaker 3: a few lenders and they say, okay, we did the deal.
Speaker 2: It's done right.
Speaker 3: There's no headaches of you know, fifty sixty one hundred
Speaker 3: investors having differing opinions on your company and you don't
Speaker 3: have to worry about it. And then the other thing
Speaker 3: is that private credit lenders can also provide, you know,
Speaker 3: so different kinds of flexibility.
Speaker 2: On the terms.
Speaker 3: So one of the biggest ones is they can provide
Speaker 3: what's called pick or payment in kind. So if let's
Speaker 3: say you lever up a company with a lot of
Speaker 3: debt and you think it's going to grow into this
Speaker 3: debt load. But in the meantime you're a little bit
Speaker 3: worried about liquidity or just the actual interest costs of cash.
Speaker 3: Leaving the business to investors. Every year you can do
Speaker 3: a pick, so that means instead of paying your interest
Speaker 3: in cash, you pay in more debt that only comes
Speaker 3: due at the end when it matures. So there's just
Speaker 3: some you know, flexibility. It's more bespoke. It's just more
Speaker 3: like contracts between some parties. So that's kind of the difference.
Speaker 3: You know, banks, it's going to be cheaper if the
Speaker 3: banks sell it to institutional asset managers, but it's a
Speaker 3: more specific way it has to be done. Whereas private
Speaker 3: credit lenders, they're more expensive, but you have the certainty
Speaker 3: of execution and more flexibility.
Speaker 1: Thank you for walking us through that, and we're going
Speaker 1: to turn to Jody Lurie at Bloomberg Intelligence shortly, but
Speaker 1: before we do, Paula, I know, private credit is an
Speaker 1: asset class that you follow their closely. What what are
Speaker 1: the big things?
Speaker 4: You know?
Speaker 1: What are you watching there? What's what's the next big
Speaker 1: thing for investors and people curious about this space to
Speaker 1: look out for in the fall.
Speaker 3: Yeah, so I think a really interesting dynamic is right now.
Speaker 3: We've been talking about new deals, right, leverage biots, new transactions,
Speaker 3: but there's a lot of leverage loans and hiled bonds
Speaker 3: that are outstanding and need to be refinanced soon. It's
Speaker 3: not like a cliff, A lot of it's already been
Speaker 3: dealt with, but there is a good chunk of the
Speaker 3: of this debt that still does need to be refinanced
Speaker 3: in the next one to two years. And it's harder
Speaker 3: to do that in the broadly syndicated markets, and it's
Speaker 3: also more expensive. And so I think we're going to
Speaker 3: keep seeing a trend of private credit lenders stepping into
Speaker 3: refinance leverage loans and hiled bonds, especially leverage loans because
Speaker 3: they're very similar structure. And so we've seen a couple
Speaker 3: of really big examples of that recently. One was the
Speaker 3: Phenostra example, which is currently the largest private credit deal
Speaker 3: ever at more than five billion of total size. And
Speaker 3: then we're also now seeing a group of private credit
Speaker 3: lenders refinance the leverage loans for a company called Highland Software.
Speaker 3: So we do expect to see more examples of refinancing happen,
Speaker 3: which means that the leverage loan market especially could shrink some.
Speaker 1: That's super interesting. Great stuff from Paula Selderson at Bloomberg News.
Speaker 1: Thank you so much for joining us.
Speaker 2: Paula, thanks for having me anytime, and.
Speaker 1: You can read all of Paula's scoops on the Bloomberg
Speaker 1: terminal and of course at Bloomberg dot com. Please do
Speaker 1: check out her coverage. So, as I mentioned earlier, we
Speaker 1: are delighted to welcome Jody Luriy on the Credit Edge
Speaker 1: podcast this week. Jody covers the leisure sector for Bloomberg
Speaker 1: Intelligence based here in New York. How's it going, Jody.
Speaker 4: It's going great, Olivia.
Speaker 1: You cover a lot of companies, but as the summer
Speaker 1: comes to a close, I want to take a special
Speaker 1: look at theme parks and the cruise lines. There's been
Speaker 1: a lot of activity there and a lot to sort
Speaker 1: of of dive into. Can you talk sort of high
Speaker 1: level you know, where does the leisure sector go from here?
Speaker 4: Sure? So, I think the leisure sector is definitely one
Speaker 4: of the most interesting ones. In my opinion, I'm a
Speaker 4: little biased this year just from the standpoint that I
Speaker 4: think consumers have really outdone themselves in terms of participating
Speaker 4: in the leisure space and in different areas of leisure,
Speaker 4: different areas than we saw a year ago. You know,
Speaker 4: people are getting a little bit more international in their reach.
Speaker 4: They want to go and do, they don't want to
Speaker 4: be stuck inside, and so even though there's discussion of
Speaker 4: possibly a pullback economically, we're not yet seeing that prove
Speaker 4: out in the leisure space in general. That said, we
Speaker 4: are starting to see pockets of moderation normalization from these
Speaker 4: post pandemic highs of certain parts of the leisure space.
Speaker 1: Got it for sure, And can you talk a little
Speaker 1: bit about some of the major forces that are driving
Speaker 1: your outlook for the theme parks?
Speaker 4: So I think that theme parks are a bit interesting
Speaker 4: in and of themselves because they mostly shut down during
Speaker 4: the pandemic but found ways to still stay relevant in
Speaker 4: terms of food and beverage events and any area to
Speaker 4: stay open, Which compares to the cruise lines that had
Speaker 4: to fully stop. They are now. They were able to
Speaker 4: transition out of the pandemic a little bit quicker as
Speaker 4: a result, and last year had very strong years in
Speaker 4: terms of season pass rates, in terms of just people
Speaker 4: going and visiting the theme parks, and doing because it's
Speaker 4: a nice, nice easy experience that you can do once,
Speaker 4: you know, once every month or every week. Now this
Speaker 4: year we're seeing that there's a bit of a pullback,
Speaker 4: and part of that, interestingly, is because of things like weather,
Speaker 4: which obviously we can't plan for weather, but it's definitely
Speaker 4: creating a little bit of a wrinkle in their plan
Speaker 4: and showing the sensitivity that they have as compared to
Speaker 4: other parts of the leisure space this year as people
Speaker 4: sort of look elsewhere to spend their time and spend
Speaker 4: their leisure.
Speaker 1: Interesting, so where else are you seeing that? Where is
Speaker 1: the consumer going right now? What are you seeing as
Speaker 1: their preference?
Speaker 4: The biggest areas that have been really growing this year
Speaker 4: has been international travel, which has really not returned to
Speaker 4: pre pandemic levels yet. Business and conference travel is of
Speaker 4: course improving as well. That's a little bit slower, and
Speaker 4: that's not so much leisure, although there is that element
Speaker 4: of leisure which is business and leisure blended. So you
Speaker 4: go to a conference and you or you go on
Speaker 4: a business trip and you extend it by a few
Speaker 4: days for leisure travel. That said, I mean, I think
Speaker 4: you know, cruise lines are a great example of an
Speaker 4: alternative of where people are spending their time because they
Speaker 4: can book they booked it in advance. They want to
Speaker 4: go and do something that's a little bit more exotic
Speaker 4: than going to your regional theme park. That said, something
Speaker 4: like a SeaWorld is benefiting a little bit more than
Speaker 4: a Six Flags and a Cedar Fair from the standpoint
Speaker 4: that they have that southern California Florida focus, but that
Speaker 4: doesn't completely keep them unexposed to some of the trends
Speaker 4: in theme parks, namely weather. And you're seeing that for
Speaker 4: all three of these major companies, is that they're really
Speaker 4: actually being affected by the fact that the first and
Speaker 4: second quarter we're not very kind to them in terms
Speaker 4: of heat, in terms of monsoons. Now we have the
Speaker 4: hurricane season coming up. And these companies with more of
Speaker 4: a global reach, like the cruise lines can sort of
Speaker 4: manage through some of these difficulties. And obviously a cruise ship,
Speaker 4: if the weather is not good in one place, you
Speaker 4: can sort of move to another. Not always, but you
Speaker 4: can reroute it a little bit. You can't do that
Speaker 4: when you have giant rollercoasters.
Speaker 2: Yeah.
Speaker 1: Absolutely. I guess an important thing to think about is
Speaker 1: that the theme parks are rooted in one spot that
Speaker 1: they're not moving physically, whereas consumers can go to different
Speaker 1: locations that have a desirable location and destination for the weather,
Speaker 1: and the crews can take them there anytime during the year.
Speaker 1: But you know, Jody, and I know you know this
Speaker 1: so well before our listeners, the cruise lines had a
Speaker 1: really tough time in twenty twenty when the pandemic shut
Speaker 1: down all their operations and they really needed to rely
Speaker 1: on the debt markets. For somebody who isn't as clued
Speaker 1: in as you to this space, could you just walk
Speaker 1: us through kind of what that sector has been going
Speaker 1: through over the past couple of years.
Speaker 4: So I think that's a great question, Olivia, because you
Speaker 4: have to remember that this moratorium that they went through,
Speaker 4: which was basically they had to completely shut down all
Speaker 4: their operations during a good portion of the pandemic, it
Speaker 4: really set them back, particularly compared to other parts of
Speaker 4: the leisure space. They're about a year or so behind
Speaker 4: from in this transition period in the post pandemic era.
Speaker 4: They're now finally this year starting to see more normal
Speaker 4: levels of activity, whereas if you look at other parts
Speaker 4: of the leisure space. They got the benefit of that
Speaker 4: a year year and a half ago as people started
Speaker 4: going and doing that. Said, I think what's happening with
Speaker 4: the cruise lines is they're pleasantly surprised by how quickly
Speaker 4: people are starting to jump into cruising. We're seeing advanced
Speaker 4: booking rates much higher, which means that cash flows are
Speaker 4: getting better. We're seeing revenue also getting booked because people
Speaker 4: are actually cruising, so they can actually book that advance
Speaker 4: bookings as revenue. And you're starting to see any of
Speaker 4: these band aids that they put on, like these future
Speaker 4: cruise credits that they gave people during the pandemic, you're
Speaker 4: seeing those roll off. So from a balance sheet perspective,
Speaker 4: they're still not in great shape, but they're improving and
Speaker 4: you're starting to see a light at the end of
Speaker 4: the tunnel. Might be a few years out, but the
Speaker 4: companies are talking about how they want to get back
Speaker 4: to investment grade territory, how they want to improve their balogie,
Speaker 4: bring down their debt loads relatively quickly or as quickly
Speaker 4: as they can, and using cashloads to do so.
Speaker 1: And you bring up a grade point with the downgrades.
Speaker 1: Because some of these companies were investment grade before the
Speaker 1: pandemic and subsequently were downgraded to junk when their operations
Speaker 1: were shut down for such an extended period of time
Speaker 1: due to the virus. But I think correct me if
Speaker 1: I'm wrong, But one of the cruise lines did have
Speaker 1: an upgrade earlier this month.
Speaker 2: Is that correct?
Speaker 4: That is correct? So Roal Caribbean is benefiting quicker than
Speaker 4: its peers in terms of upgrades. What's happening. What you're
Speaker 4: seeing is the way that the companies manage themselves through
Speaker 4: the pandemic is you're starting to see that play out
Speaker 4: in how quickly they're around each quarter. We've been talking
Speaker 4: about for a few quarters now about how Royal Caribbean
Speaker 4: has been about a quarter ahead of its peers in
Speaker 4: terms of turnaround. Part of that is it got its
Speaker 4: shipped in the water quicker it you know, it didn't
Speaker 4: completely stop its CAPEX plans for its shipped modifications, just
Speaker 4: the maintenance CAPEX the same way that Carnival did. Carnival
Speaker 4: really pulled back a lot, and so they they have
Speaker 4: to dedicate a little bit more cash this year to
Speaker 4: CAPEX to sort of get all their ships in order.
Speaker 4: They also have a larger fleet than Royal Caribbean. There's
Speaker 4: some complicating factors to that that you know, made Royal
Speaker 4: a little bit more nimble than Carnival as we get
Speaker 4: into this transition period. That said, you are seeing that
Speaker 4: the rating agencies are looking at these companies a little
Speaker 4: bit more with a positive tone, but I think hesitantly
Speaker 4: because they know that there's still a lot of hurdles
Speaker 4: that all of them have to cross and they probably
Speaker 4: will continue to do so. They don't want to they
Speaker 4: don't want to penalize them for what these companies have
Speaker 4: gone through. They want, but they want to make sure
Speaker 4: that the companies are in good working order before they
Speaker 4: start kind of moving up their ratings. And I think
Speaker 4: that we'll probably see investors respond quicker to the companies
Speaker 4: turnaround stories and the raiders.
Speaker 1: Might I'm glad you mentioned the investors, Jodie, because there
Speaker 1: are a lot of opportunities not only to make investments
Speaker 1: around these upgrades and downgrades, rising stars, falling angels, but
Speaker 1: we've seen a lot of various outperformance in the leisure sector.
Speaker 1: Can you talk to me about some of the areas
Speaker 1: that have stood out to you this year in terms
Speaker 1: of outperformance and where you're sort of seeing you know
Speaker 1: that trend continue.
Speaker 4: Yes, I mean I think I think the whole leisure
Speaker 4: space in general has done has performed relatively well in
Speaker 4: comparison on a relative basis compared to other parts of
Speaker 4: the credit space or consumer discussionaries. I mean, you know,
Speaker 4: I like to do things with my colleague Mike Camplone
Speaker 4: about leisure versus retail, right, so he covers the retail space,
Speaker 4: and that's been an interesting one in a different way
Speaker 4: in terms of how consumers are spending or not spending there.
Speaker 4: And I think what we're what we're seeing is up
Speaker 4: until this year, much of the leisure space was starting
Speaker 4: to was moving very much in tandem in that a
Speaker 4: lot of the companies were affected negatively by the pandemic
Speaker 4: and so their bonds were much wider than what they
Speaker 4: were trading, much wider than a lot of other areas
Speaker 4: of be their consumer discretionary and also other parts of
Speaker 4: the credit space in general. Now we're starting to see tightening.
Speaker 4: We're starting to see companies benefit from their own personal policies.
Speaker 4: Case in point, now we're not talking about the gaming space,
Speaker 4: but Las Vegas Sounds was downgraded TI yield. They've started,
Speaker 4: they've finally bumped back up to investment grade as they
Speaker 4: work towards improving their balance sheet, as they were towards
Speaker 4: this post pandemic era of being a better company than
Speaker 4: they were during the pandemic. And so I think that
Speaker 4: we are seeing companies getting back into shape some quicker
Speaker 4: than others. You know, McDonald's in a Starbucks, which is,
Speaker 4: mind you, restaurants a little bit different of an area,
Speaker 4: but we cover that as well. They are much quicker
Speaker 4: to get their balance sheets in check than some of
Speaker 4: the other areas of leisure and other related areas. And
Speaker 4: so we are starting to see a differentiation between companies.
Speaker 4: But we've been of the opinion that we think will
Speaker 4: start seeing that from the standpoint of for instance, the
Speaker 4: cruise lines are focused on improving their balance sheets, whereas
Speaker 4: the theme parks are sort of getting past that point
Speaker 4: and are starting to deal with the hairiness of their
Speaker 4: own individual sector.
Speaker 1: Hairiness of their own individual sector. That makes a lot
Speaker 1: of sense. One company that I've seen you write about
Speaker 1: that I think a lot of our listeners will be
Speaker 1: familiar with is six Flags. Can you talk to us,
Speaker 1: talk to me a little bit about what's going on
Speaker 1: with that company?
Speaker 4: Sure, and I hope you don't envision hairiness on the
Speaker 4: roller coasters or you envision somebody's too pick laying off
Speaker 4: as they ride it. But I mean, I think, I
Speaker 4: think for a company like six Flags, it's a little
Speaker 4: complicated because management really wants to get their leverage down.
Speaker 4: They have they have similar net leverage targets to their
Speaker 4: peer of three to four times. SeaWorld was the crikets
Speaker 4: to get it down to three times and actually below
Speaker 4: three times. Cedar Fair is nearing that level and six
Speaker 4: Flags is a little bit above and they you know,
Speaker 4: six Flags it's a complicated company because they have a
Speaker 4: long history of some challenges from a credit perspective, but
Speaker 4: obviously a very different company now than they were. They're
Speaker 4: just much larger than their peers like SeaWorld, so there
Speaker 4: are some comparisons between the two. They've had some management
Speaker 4: changes over recent years, and I think that what they're
Speaker 4: trying to do is be good stewards of their balance
Speaker 4: sheet as much as they can within the constraints.
Speaker 2: That they have.
Speaker 4: So they're trying to reinvent how they do things, pushing
Speaker 4: season passes similar to Cedar Fair and Sea World to
Speaker 4: have that reoccurring revenue. But what they're finding is by
Speaker 4: pushing season passes, they're losing out on additional dollars per
Speaker 4: customer necessarily because you're not charging for the single pass.
Speaker 4: The benefit you get is you have more deferred revenue,
Speaker 4: you have more of an idea of what your cash
Speaker 4: flows could be, your consistent cash flows, and so it's
Speaker 4: sort of a mixed bag. And they've been playing around
Speaker 4: with their food options, and they've been playing around with
Speaker 4: a bunch of different things that have affected their cash
Speaker 4: flow kind of negatively. So they're still very much in
Speaker 4: a transition period. They've been active in the credit markets
Speaker 4: this year as much as they can be to sort
Speaker 4: of address their neo mature and debt and anything that
Speaker 4: seems attractive. But the interest rate environment doesn't make it
Speaker 4: as easy for them to refinance that as I think
Speaker 4: they would like.
Speaker 2: Certainly not.
Speaker 1: Yes, interest costs are higher for almost everyone except maybe
Speaker 1: if you're thinking about some of the double digit coupons
Speaker 1: that the cruise lines had to pay at the start
Speaker 1: of the pandemic.
Speaker 4: Absolutely, although we did see a return of the double
Speaker 4: cruise line debt unfortunately.
Speaker 1: Yes, yes, I think they're going to be paying high
Speaker 1: costs for a while.
Speaker 4: You know.
Speaker 1: Speaking of you know, how these companies are doing. We're
Speaker 1: talking a lot about their outperformance this year and how
Speaker 1: they're sort of, you know, regaining their footing after you know,
Speaker 1: so much upheaval for the pandemic. But can you talk
Speaker 1: to me about what some of these companies' goals are,
Speaker 1: you know, as it relates to their business and to
Speaker 1: their credit and you know, how attainable those might be
Speaker 1: looking ahead into twenty twenty four.
Speaker 4: Sure, so, I think from a goal standpoint, the companies
Speaker 4: have made it pretty clear that obviously they want operations
Speaker 4: to be very strong, you know, they want to increase
Speaker 4: their their occupancy levels as well as their advanced bookings
Speaker 4: and all those sort of pieces that are important, you know,
Speaker 4: taking in new new vessels and having the financing for it.
Speaker 4: But part and parcel to that is the focus on
Speaker 4: cash flows and debt repayment. They're not necessarily thinking about
Speaker 4: their shareholders at the moment, which in my opinion, is
Speaker 4: very good thing that they're not, because they are way, way, way,
Speaker 4: way too early in the game to be thinking along
Speaker 4: those lines. That said, I mean, I think as you
Speaker 4: as you look up twenty twenty four. I think you
Speaker 4: could probably see a few more ratings upgrades provided they
Speaker 4: continue on this path, they don't get waylaid by some
Speaker 4: unforeseen event like a pandemic, and you might end up
Speaker 4: seeing a few ratings upgrades. However, I don't know if
Speaker 4: you would necessarily see investment grade until twenty twenty five
Speaker 4: or twenty six for some of the names, and I
Speaker 4: think that that's more attainable. That's possible, but it's definitely
Speaker 4: encouraging and one of those stories that I think a
Speaker 4: lot of investors like to hear because there's fewer and
Speaker 4: fewer of those at the moment in terms of these
Speaker 4: turnaround plays that investors are looking for.
Speaker 1: Absolutely, yes, the upgrade story and the you know, reaching
Speaker 1: for that rising star going from junk to investment grade
Speaker 1: is definitely going to be something that we're all going
Speaker 1: to be watching very closely. That was Jody Lurie everyone.
Speaker 1: Thank you very much, Jody Jody Luriy of Bloomberg Intelligence.
Speaker 1: You can read all of her great analysis on the
Speaker 1: Bloomberg Terminal. Please do check it out, and Jody, hope
Speaker 1: to see you back on the show again soon. Thank you,
Speaker 1: and thanks again to Paula Selvison from Bloomberg News. You
Speaker 1: can read all of her great scoops and her coverage
Speaker 1: on the Terminal and at Bloomberg dot Com. I'm Olivia Raymonde.
Speaker 1: It's been a pleasure having you. Please join us again
Speaker 1: next next week on the Credit Edge,