Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crumby. I'm a senior editor at Bloomberg.
Speaker 1: This week, we're very pleased to welcome back to the
Speaker 1: show Emilia Pollard, who reports on distressed debt for Bloomberg
Speaker 1: News in New York. How are you, Amelia, I'm great,
Speaker 1: Thanks so much, James. We're also delighted to have Mike Campalone,
Speaker 1: who covers retail for Bloomberg Intelligence, also in New York.
Speaker 1: We'll be coming back to Mike shortly. Lots of fascinating
Speaker 1: stuff going on in the retail and consumer sect right now,
Speaker 1: so do stay with us. But first, Amelia Pollard with
Speaker 1: Bloomberg News Distressed Debt. You had a great story this
Speaker 1: week on struggling companies who are finding a lifeline new
Speaker 1: money to keep them alive a bit longer, but they're
Speaker 1: going bust anyway. Investors are essentially giving more cash to
Speaker 1: doomed companies and they're not making anything better. In fact,
Speaker 1: they seem to be making it worse. Deck Chairs on
Speaker 1: the Titanic, Amelia, what's going on? What's the situation?
Speaker 2: Yeah, that's the perfect way to describe it. James, and
Speaker 2: many people I spoke to while are broughting the story
Speaker 2: said that these deals, which are known as liability management
Speaker 2: transactions and the most jargon me buzzword out there right now,
Speaker 2: are essentially basically just rearranging Dectairs and the Titanic.
Speaker 3: And the reason why lenders have an incentive.
Speaker 2: To give new money is that these are existing lenders
Speaker 2: that are already in the capital structure, so they already
Speaker 2: have skin in the game, so to speak, and have
Speaker 2: a big incentive to try to keep the company afloat.
Speaker 2: And these deals known as liability management exercises or transactions,
Speaker 2: they're referred to both synonymously basically our last ditch efforts
Speaker 2: to buy the company time. So what we've seen in
Speaker 2: recent weeks, though, is that a lot of the deals
Speaker 2: that happened in twenty twenty and twenty twenty one, and
Speaker 2: even as recently as last year are starting to unravel.
Speaker 2: As you know, the pain of high interest rates and
Speaker 2: waning consumer spending is really not is not helping the
Speaker 2: situation for these companies, and they're not able to turn
Speaker 2: things around in the way they had hoped to.
Speaker 1: So let's just stop for a minute and look at it.
Speaker 1: Sort of in more broad terms liability management. First, that
Speaker 1: sort of sets off a load of jargon and lums
Speaker 1: in my mind. What does it mean just taking some
Speaker 1: debt and refinancing it with new debt maybe longer maturity,
Speaker 1: maybe cheaper or what is it? What is it? In
Speaker 1: basic terms?
Speaker 2: Yeah, basically it is, you know, getting new The company
Speaker 2: gets receives new money in exchange for either pushing out
Speaker 2: maturities or you know, kind of making some kind of
Speaker 2: arrangement that gives the lenders a benefit. And typically what
Speaker 2: we've seen in recent years is these these deals have
Speaker 2: been around forever, but the most recent breed of these
Speaker 2: deals are pretty contentious, and you often see a group
Speaker 2: of lenders left behind and often they're so pissed off
Speaker 2: that they will sue the company or the other lenders
Speaker 2: and becomes a very big, dramatic mess very quickly.
Speaker 3: But there are.
Speaker 2: Two specific types that have become exceptionally popular, and forgive
Speaker 2: the moment of jargon jargon, but I will.
Speaker 3: Explain about them.
Speaker 2: One is an up tearing transaction, and that's something that
Speaker 2: we saw the mattress Maker sort of Simons do in
Speaker 2: twenty twenty. And essentially all that means is that a
Speaker 2: group of lenders agrees to give new money in exchange
Speaker 2: for being bumped up in their repayment line. So given
Speaker 2: the worst case scenario, the company files for bankruptcy, they
Speaker 2: will be the first ones to get paid back. And
Speaker 2: in testimony from executives for these funds who had given
Speaker 2: new money or weren't able to.
Speaker 3: Give new money, some of them said that.
Speaker 2: Their base case scenario was that sort of would eventually
Speaker 2: file for bankruptcy, just did not.
Speaker 3: The writing was on the wall.
Speaker 2: They had too much debt, you know, the industry itself
Speaker 2: was hurting, and so they wanted to ensure that they
Speaker 2: were in the best position when that did happen. We've
Speaker 2: seen a number of deals since in twenty twenty kind
Speaker 2: of replicating the structure of that deal. And then the
Speaker 2: other one that has become very popular has been something
Speaker 2: known as the drop down. And this is something that
Speaker 2: Ja Crue pioneered a few years ago, and it essentially
Speaker 2: strips collateral from a group of lenders and facts and
Speaker 2: new group of lenders, and it's often the most valuable collateral,
Speaker 2: you know, so whether it's a subsidiary. In some cases,
Speaker 2: we saw something like that with Envisioned healthcare, where subsidiary
Speaker 2: was kind of used as new collateral that was seen
Speaker 2: as highly valuable by lenders. And so those two types
Speaker 2: are the ones that those two types of deals are
Speaker 2: the ones we're seeing unraveling. And in some cases it's
Speaker 2: because so much litigation has emerged, as in the case
Speaker 2: of Serda, where the companies really are love with no
Speaker 2: option but to put the company.
Speaker 1: In chapter eleven, you mentioned though it's got worse over
Speaker 1: the last couple of years. I'm wondering why that's his.
Speaker 1: I mean, is it that company's getting more desperate because
Speaker 1: of the macro environment. Is it the advisor and laws
Speaker 1: are getting creative in you know, finding solutions. Is it
Speaker 1: the fact that none of these deals had any covenants
Speaker 1: in the easy times? What's the reason for coming to
Speaker 1: a head now?
Speaker 2: Yeah, well, I think you just listed the big three,
Speaker 2: but you know, those are all reasons why this coming
Speaker 2: to a head now. And I think we start to
Speaker 2: see we started to see some of these really crop
Speaker 2: up in twenty twenty and early twenty twenty one, the
Speaker 2: era of easy money. You know, it was easier to
Speaker 2: get new money in that at that time. But now
Speaker 2: we're still seeing it's big still popular, and it was
Speaker 2: still popular last year as the economy started to tighten
Speaker 2: a bit, and you know, credit markets were not as
Speaker 2: readily available with new money, and so companies were increasingly
Speaker 2: tapping existing lenders to get new financing. And that's what
Speaker 2: we've seen here. And then you know, I wrote this
Speaker 2: story just on the heels of two big filings that
Speaker 2: had liability to management deals under their belts in Kora,
Speaker 2: which is an aerospace supplier, and also dee Bold Nicksdorf,
Speaker 2: which is like one of the biggest ATM makers in
Speaker 2: the world. And so I think that we're starting to
Speaker 2: see these deals are essentially a bet that the companies
Speaker 2: were able to turn things around with interest rates as
Speaker 2: high as they are.
Speaker 3: They haven't been able.
Speaker 1: To do that, but it's essentially good money off to bed.
Speaker 1: I mean, that's just throwing money down the pan because
Speaker 1: they're already involved in the situation. They're hoping to get
Speaker 1: some kind of benefit in the longer terms. The what's
Speaker 1: the play.
Speaker 2: Yeah, the play is basically just bettering their position. So
Speaker 2: you know, one thing we saw with Serta for instance,
Speaker 2: the mattress company, is that the two different groups of
Speaker 2: lenders were basically giving the company competing contentious offers of
Speaker 2: how to reconfigure the debt, and once one group caught
Speaker 2: win that the other group was, you know, pitching a
Speaker 2: very contentious plan as well. They were like, okay, well,
Speaker 2: we need to you know, put together our own proposals
Speaker 2: so that we can get ahead. And so it's a
Speaker 2: little bit of a race to the box them as well,
Speaker 2: in which lenders are kind of you know, pushing each
Speaker 2: other to get you know, the best in the best
Speaker 2: position in case of a default. And I think that
Speaker 2: that's what we're seeing where lenders, if blenders have a
Speaker 2: base case of a default in place, I think they're
Speaker 2: trying to ensure that they're in the best possible position
Speaker 2: when the repayments start for creditors.
Speaker 1: Do we expect more of this?
Speaker 3: I think so.
Speaker 2: I mean, there there were a lot of liability management
Speaker 2: deals in the last couple of years, and it seems like,
Speaker 2: you know, professionals are only cooking up more breeds. I
Speaker 2: think that upteering and drop downs are you know, the
Speaker 2: only only two of the types of you know, kind
Speaker 2: of contentious deals that are merging from this era.
Speaker 3: But I'm sure there will be more.
Speaker 2: It seems like, you know, there's every time that you know,
Speaker 2: a new clause or you know, sentence or two is
Speaker 2: added to these credit agreements to block you know, an
Speaker 2: upteering deal or drop down deal. You know, there's always
Speaker 2: some legal gap that lawyers will find. Is there a
Speaker 2: pattern too? It Is it related to a particular sector
Speaker 2: or kind of deal?
Speaker 1: I mean, is it all retail. We're going to talk
Speaker 1: to Mike Campblown a bit about retail, But is it
Speaker 1: is it mainly in one sector?
Speaker 3: You know, it's not. It's that's something that's interesting about
Speaker 3: these kind of deals. It's so.
Speaker 2: It's so diverse and the types of companies and that
Speaker 2: do these sorts of transactions. And I think that's really evident.
Speaker 2: And you know, just the two that we saw last
Speaker 2: week or two weeks ago now within Quora and people
Speaker 2: next Door if that, you know, any company that has
Speaker 2: a lot of debt is going to try to do
Speaker 2: one of these transactions.
Speaker 1: Is it mostly private equity backed companies? You think?
Speaker 3: Yeah?
Speaker 2: You know, I mean I think that there is a
Speaker 2: sponsor component to this. I'm not sure how much those
Speaker 2: sponsors are driving these sorts of deals, but in sort
Speaker 2: of for instance, you know, there there was some testimony
Speaker 2: from their p sponsor during the bankruptcy hearings and their
Speaker 2: role in kind of facilitating and helping to field interests
Speaker 2: from lenders that were proposing these sorts of deals. So
Speaker 2: they definitely play a role. Whether or not they're soliciting
Speaker 2: these kinds of transactions, I'm not sure.
Speaker 1: And when they end up in bankruptcy what you're saying
Speaker 1: in your stories that they're actually making them much more
Speaker 1: complex and much more messy. They're also all ending up
Speaker 1: in Texas, so I'm interested in why that's is as well.
Speaker 3: Yeah, they are. They love Texas.
Speaker 2: I think maybe all of the filings have been in
Speaker 2: Texas so far this year, of the ones that have
Speaker 2: libel management deals, or at least the vast majority. I
Speaker 2: think it started actually again with Surda, not to bring
Speaker 2: up Surda for the fifth time in this.
Speaker 3: Call, but.
Speaker 2: Sort of filed in Texas in January, and the bankruptcy
Speaker 2: judge there, David Jones has been kind of a pioneer
Speaker 2: in blessing many pieces of this highly controversial transaction, and
Speaker 2: the most recent one came only this week in which
Speaker 2: he said that the deal was made in good faith
Speaker 2: and that was one of the arguments that the spurned
Speaker 2: lenders was making was that the deal reached this implied
Speaker 2: covenant of good faith and fair dealing, which basically means
Speaker 2: that the intent of the original credit agreement, you know,
Speaker 2: was not to have this this sort of subverted transaction
Speaker 2: down the line. And so the fact that Judge Jones
Speaker 2: has been so willing to kind of step in and
Speaker 2: you know, make sweeping decisions and basically established case precedent
Speaker 2: in the process has attracted a lot of other companies
Speaker 2: to the venue.
Speaker 1: So he's being easier on these companies only from the
Speaker 1: investor standpoint, well.
Speaker 3: Some would say, some would say he's being easier in
Speaker 3: the company.
Speaker 2: I mean, I think that you know, any bankruptcy court
Speaker 2: and judge's main prerogative is for the company to survive,
Speaker 2: you know, And so I think that that's that's really
Speaker 2: the goal here, and I think that they he presumably
Speaker 2: saw the litigation as a you know, a barrier to
Speaker 2: the company survival, and he cited the fact that the
Speaker 2: other group of lenders had proposed an equally contentious type
Speaker 2: of deal, so you know, they were they were very
Speaker 2: ready to do their own type of transaction and only
Speaker 2: because they were left and behind.
Speaker 1: Were they so pissed off? Okay, but this doesn't always
Speaker 1: end badly. You mentioned J Crew earlier. They're still in business.
Speaker 1: How can this come to a happy ending here? There
Speaker 1: are some success stories. One that we saw was with
Speaker 1: board Writers, which is a surfwhere retailer. They did a
Speaker 1: contentious deal in recent months and they were ultimately bought
Speaker 1: by Authentic Brands, which is I think they agreed to
Speaker 1: buy them in March. So that you know that a
Speaker 1: sale out of court is would be seen as a
Speaker 1: success by many. And I think that whenever these deals
Speaker 1: are proposed or lenders are interested in doing this sort
Speaker 1: of transaction, they'll point to success stories like this. So
Speaker 1: you know, I think that we cited a study from
Speaker 1: Fitch that's out of thirty types of these kinds of deals,
Speaker 1: twenty four amounted to a default or a bankruptcy down
Speaker 1: the line. So but you know there are there are
Speaker 1: six that didn't, and lenders and companies will keep on
Speaker 1: pointing to those is as reasons why it might be
Speaker 1: worth it in the end. But mostly bad, so far,
Speaker 1: so far, mostly bad. That's you're a lawyer.
Speaker 2: Yeah, I mean, I'm for sure unless you're a lawyer
Speaker 2: or any professional retained for these kinds of deals.
Speaker 1: So before we talked to Mike Campbell and Bloomberg Intelligence,
Speaker 1: what's the next big story to watch on your beat, Amelia.
Speaker 2: I think the next big one is the fact that
Speaker 2: a lot of the companies that we've seen in file
Speaker 2: for bankruptcy this year have been ones that have been
Speaker 2: you know, highly very telegraphed in. They've been names that
Speaker 2: have been on our radar for months, if not years,
Speaker 2: and you know, I have had a huge amount of
Speaker 2: debt for a long time. I think something that will
Speaker 2: be interesting in the broader market and economy as if
Speaker 2: we start to see pretty healthy companies pivot quickly into
Speaker 2: a distress situation, and I think that will be evidence
Speaker 2: that interest rates are you know, really starting to bite
Speaker 2: in a way that is causing severe repercussions. And the
Speaker 2: other thing that we're looking at is just how commercial
Speaker 2: real estate is being impacted right now by interest rates.
Speaker 2: That's one of the biggest you know, industries or sectors
Speaker 2: to have distress debt right now, and I think that
Speaker 2: will be a story that'll play out for the rest
Speaker 2: of the year.
Speaker 1: Great stuff familiar pull out from Bloomberg News. Thanks so
Speaker 1: much for joining us. Read all of Amelia's scoops on
Speaker 1: the Bloomberg terminal and of course at Bloomberg dot com.
Speaker 3: Thanks so much having me James, So.
Speaker 1: As I mentioned earlier, we're glad to have with us
Speaker 1: Mike Campalone, who looks at retail companies for Bloomberg Intelligence.
Speaker 4: How's it going, Mike, Hey, James, thanks for having me on.
Speaker 1: So in retail, what's the outlook? How strained are consumers
Speaker 1: right now given such high inflation, rising rates and a
Speaker 1: recession coming?
Speaker 4: Yeah? Absolutely so. You know, we've been looking at recent
Speaker 4: credit card transaction data and it showing consumers continue to
Speaker 4: pull back on retail spending, and while their preference for
Speaker 4: or experience related categories continued, that pace has actually started
Speaker 4: to slow. So furniture supporting goods and clothing accessory stores
Speaker 4: all within retail experience the greatest demand driven contraction that
Speaker 4: we've seen in that data.
Speaker 1: You know.
Speaker 4: More generally, retailers across sub sectors have warned up an
Speaker 4: increasingly more pressured consumer, but we certainly see more red
Speaker 4: flags from auto part home improvement, and select apparel retailers
Speaker 4: as well, especially those catering to a lower income earning consumer.
Speaker 4: Retailers have given us a fairly consistent outlook for twenty
Speaker 4: twenty three, which includes pressure both on the top and
Speaker 4: bottom line in the first half of the year, with
Speaker 4: some of that pressure easing in the second half. You know,
Speaker 4: easing freight costs seem to be the largest contributor to
Speaker 4: retailers improved tone in the backup of the year, and
Speaker 4: we expect to see that as well.
Speaker 1: So you said consumers are kind of pulling back across
Speaker 1: the board. Is it away from discretion? Are you away
Speaker 1: from sort of nice to have and more to what
Speaker 1: people need to have right now?
Speaker 4: Yeah, that's absolutely true. And you know, after one Q earnings,
Speaker 4: some of those themes that retailers have expressed to us
Speaker 4: at the beginning of the year have really held consistent
Speaker 4: with our expectations. You know. Some of those themes include
Speaker 4: inventories realigning, so as supply chains and product costs decline.
Speaker 4: In twenty twenty two, we saw inventories were extremely bloated,
Speaker 4: as you may remember, and as demand and timing we're
Speaker 4: significantly out of sync. So we're seeing that rebalancing start
Speaker 4: to happen. The second theme, freight costs are easing. Like
Speaker 4: I said earlier, that's going to benefit retailers who import
Speaker 4: from Asia the most. So we've seen spot rates pushed lower,
Speaker 4: which has enabled some retailers to renegotiate annual shipping container
Speaker 4: contracts that they typically hold in the spring, and that's
Speaker 4: why we're going to see that benefit, that freight benefit
Speaker 4: in the second half of the year for most names.
Speaker 4: And then lastly, the weakest sub sectors last year within
Speaker 4: retail are going to see the greatest improvement this year.
Speaker 4: So department stores, apparel and footwear, and value sectors will
Speaker 4: benefit from this more conservative inventory planning after substantial markdowns
Speaker 4: last year to clear that access inventory.
Speaker 1: It's interesting that bricks and mortar scenes becoming back people
Speaker 1: as you want to go out to shop now.
Speaker 4: So yeah, so you know, I think how retailers are
Speaker 4: differentiating themselves, and you know, what they've learned from the
Speaker 4: pandemic is the physical store remains extremely important, and that's
Speaker 4: both from an in store shopping experience and also leveraging
Speaker 4: physical footprints that retailers have to bolster their logistics and
Speaker 4: distribution network. So stores are still important, and it's more
Speaker 4: about store footprint optimization than getting rid of stores completely.
Speaker 1: And as part of that, I mean, you're going out
Speaker 1: to shops because you couldn't for so long. Is it
Speaker 1: sort of revenge spending as we've been calling it.
Speaker 4: Yeah, you know, there was definitely that theme of revenge
Speaker 4: spending and people wanting to just spend money that was
Speaker 4: built up during the pandemic, whether through uh, you know,
Speaker 4: stimulus fueled money that people were receiving, or just a
Speaker 4: desire to do things and shop again. So we've seen
Speaker 4: that revenge spending on goods definitely pulled back, and it's
Speaker 4: still lingering around in the travel and experience sector. But
Speaker 4: like I said earlier, we're starting to see those trends fade.
Speaker 1: So it has to come to an end. I mean,
Speaker 1: obviously it's some that the pandemic has been you know,
Speaker 1: there's it's supposed to be over now, although everyone's wearing
Speaker 1: masks skin because of the air quality. But the the
Speaker 1: idea that you know, there was this boom eventually fades.
Speaker 1: Is it Is it gonna just go to zero? I mean,
Speaker 1: are we going to just see a big, big drop
Speaker 1: off in consumption? You think?
Speaker 4: You know, I think it's unique to the sub sectors
Speaker 4: within retail. You know, one one space, uh, you know,
Speaker 4: particularly where there's been a lot of shift in spending
Speaker 4: and also in credit profiles is the the department stores.
Speaker 4: So you know, it's the department stores are an absolutely
Speaker 4: interesting space within retail for us from a credit perspective,
Speaker 4: and we've seen drastic changes in some of these companies'
Speaker 4: profiles for the names we cover, so Macy's, Coal's, and
Speaker 4: Nordstrom just over the past three years. So Macy's has
Speaker 4: done an exceptional job delevering its balance sheet. It's reduced
Speaker 4: funded debt by over two billion dollars over the past
Speaker 4: three years. It's pushed out near term debt maturities with
Speaker 4: no significant bomb maturities over the next five years, and
Speaker 4: it has a capital structure that's mainly unsecured. The company's
Speaker 4: Polaris initiative has also started to benefit the company's margins
Speaker 4: that have historically lacked peers a pre pandemic, and we
Speaker 4: expect that trend to persist for Macy's this year. You know,
Speaker 4: Nordstrom continues to face operating challenges, especially with its rack business.
Speaker 4: We think that these issues will continue to extend pressure
Speaker 4: on its credit profile over the near term, and the
Speaker 4: company has two hundred and fifty million of bombs charities
Speaker 4: in twenty twenty four that also need to be addressed,
Speaker 4: you know. And then lastly, moving on to Coles, I
Speaker 4: think that name has seen the most drastic negative shift
Speaker 4: in its credit profile over the past three years, at
Speaker 4: a time where probably execution risk is likely at its
Speaker 4: highest with new management in place. So Cole's had a
Speaker 4: financial policy last year that prioritized shareholder returns via buybacks,
Speaker 4: which a person was seven hundred million dollars for the year,
Speaker 4: and that's despite the company generating negative free cash flow
Speaker 4: during that time period. So you know, definitely a shift
Speaker 4: in spending across different subsectors of retail, department stores being
Speaker 4: a very unique space within there as well, both from
Speaker 4: a consumer spending shift and from you know, indiosyncratic credit
Speaker 4: risk that exists within some of these names. So a
Speaker 4: lot going on there.
Speaker 1: So regardless of the quality of the product and the
Speaker 1: experience and all that stuff, and you know, whether you
Speaker 1: love the store or not, it really does seem to
Speaker 1: be more about how how the companies have managed their
Speaker 1: balance shees right, in terms of like you know, with
Speaker 1: suddenly in this much much higher rate, and.
Speaker 4: Absolutely absolutely, we could not agree more with that. We
Speaker 4: are prefer names that have prioritized cleaning up the balance
Speaker 4: sheet last year, and that's just putting them in a
Speaker 4: better position this year from a capital allocation standpoint and
Speaker 4: being able to deploy capital, even if it's more limited,
Speaker 4: deploy capital in the right places, like investing in stores
Speaker 4: and cafecs.
Speaker 1: And so how they differentiating themselves in the context of
Speaker 1: credit quality.
Speaker 4: Yeah, so you know that definitely names are differentiating selves
Speaker 4: by you know, investing in the physical store like we
Speaker 4: were staying like we were saying earlier, and leveraging that
Speaker 4: store for their distribution network. And then you know, second
Speaker 4: from the type of business that the that this retailer
Speaker 4: operates in, Like we were saying, there's so many different
Speaker 4: subsectors within retail. So how how are retailer is differentiating
Speaker 4: itself via its product offering and it's its store experience
Speaker 4: is really making a difference. So something like an off
Speaker 4: price retailer like TJX is really benefited benefiting from last
Speaker 4: year's inventory blood and they're able to secure a larger
Speaker 4: surplus of branded products at a lower cost, so both
Speaker 4: improving the company's margin profile, offering consumers a lower price
Speaker 4: point option at a time where wallets are already being strapped.
Speaker 4: So both a combination of a capital allocation historically prioritizing
Speaker 4: the balance sheet and continuing to invest into the company's
Speaker 4: business and store footprint, and then also this differentiating the
Speaker 4: product and service that the retailer offers.
Speaker 1: Let's talk about the risk of I mean, since we've
Speaker 1: credit guys, Emilia Apollo from Bloomberg News was talking about
Speaker 1: the stress generally, and we've seen a lot of bankruptcy,
Speaker 1: a lot of defaults, and a lot of them have
Speaker 1: been in retail. A lot of them been happening over
Speaker 1: the last few years. Is there more of that to come? Yeah?
Speaker 4: So I was actually reading a recent SMP report that
Speaker 4: was similar to Amelia's story, and it was pointing out
Speaker 4: that consumer discretionary actually has topped the list of sexor
Speaker 4: sectors with the most bankruptcies this year in the US.
Speaker 4: So yeah, we've definitely seen some notable retail bankruptcies this year,
Speaker 4: including Party City and bed Bath and Beyond, who both
Speaker 4: followed for Chapter eleven earlier this year. And that was
Speaker 4: a combination of weakening consumer demand, higher costs, and then
Speaker 4: really unsustainable debtloads.
Speaker 1: Has it been cleared out now or is there more
Speaker 1: of that to come? You think?
Speaker 4: Yeah, we think that there's still risks for obviously highly levered,
Speaker 4: sponsored owned retailers and who operate in segments of retail
Speaker 4: that are super content concentrated in UH product offerings that
Speaker 4: are fading away. So whether it's you know, home improvement,
Speaker 4: auto parts, and even some apparel retailers. So that kind
Speaker 4: of combination of very specific business segment that the retailer
Speaker 4: operates in and sells products out of, and just high
Speaker 4: debt loads that are unsustainable, you know, could could continue
Speaker 4: that trend of retail bankruptcies.
Speaker 1: So again you mentioned household names like Party City. I
Speaker 1: mean those those would seem to be good businesses. Everyone
Speaker 1: wants a party, but just purely because they didn't manage
Speaker 1: that debt properly, they're blowing up.
Speaker 4: Yeah, yeah, yeah, blowing up. And I don't know if
Speaker 4: you met a pun intended there. The helium shortage actually
Speaker 4: was a big driver of the bankruptcy UH for Party
Speaker 4: City as well. So yeah, a combination of just business
Speaker 4: risks and unsustainable debt loads.
Speaker 1: So what do you see the value right now? Mike,
Speaker 1: I mean in terms of, you know, what would you
Speaker 1: say is a good credit pick or what's a pan?
Speaker 4: Yeah? Absolutely, yeah, And a little shameless plug for our
Speaker 4: BI Credit Picks and Pans reports that we put out
Speaker 4: on multiple times throughout the year, So absolutely check is
Speaker 4: out to all our listeners if you haven't. But from
Speaker 4: a relative value perspective, at the beginning of the year,
Speaker 4: within our vi I Credit Picks and Pans report UH,
Speaker 4: and specifically for retail, in our picks, we included Macy's,
Speaker 4: t j X, and Target At. Some of the names
Speaker 4: that could outperform in Some of the names that were
Speaker 4: on our pans list were VF Corp UH and under Armor,
Speaker 4: and we kind of stand by those, uh, those views
Speaker 4: that we outlined at the beginning of the year.
Speaker 1: What's PF.
Speaker 4: VF Corp. Is the owner of brands like Timberlane, Dickey's.
Speaker 4: It's a really a conglomerate of our portfolio of brands
Speaker 4: that has had a historical emphasis on buying and selling
Speaker 4: brands and managing its portfolio consistently. So we you know,
Speaker 4: we've kind of pointed to some of the risk associated
Speaker 4: with that name just in how it does business in
Speaker 4: that sense, but then also a growing debtload. It has
Speaker 4: to fund an unfavorable tax decision related to its twenty
Speaker 4: eleven acquisition of Timberland that it had a fund with
Speaker 4: all debt. So just higher debt loads and already aggressive
Speaker 4: business just is increasing risk for.
Speaker 1: That name and on you and under Ahma, that's an
Speaker 1: interesting one. I just see people wearing that everywhere I go,
Speaker 1: So why is that not doing so well?
Speaker 4: Yeah? So under Armour has had challenges that it's faced
Speaker 4: even pre pandemic, and it's really struggled with just turning
Speaker 4: around that business since then. You know, the prior CEO
Speaker 4: abruptly left I want to say last year, so we
Speaker 4: have new management in place, and that's just even pushing
Speaker 4: event risk higher for the name. So challenges there that
Speaker 4: were pre pandemic are now even under more of a
Speaker 4: microscope with new management management in place. So absolutely a
Speaker 4: show me story.
Speaker 1: Now, Thanks very much Mike campellone of Bloomberg Intelligence. You
Speaker 1: can read all of his great analysis on the Bloomberg terminal.
Speaker 1: Do check it out, and we hope to see you
Speaker 1: back on the show soon. Mike.
Speaker 4: Thank you so much, Jeeves, and.
Speaker 1: Thank us again to Emlia Pollard from Bloomberg News. Read
Speaker 1: all of her great distress debt scoops on the Terminal
Speaker 1: and at Bloomberg dot Com. I'm James Crombie. It's been
Speaker 1: a pleasure having you join us again. Next week on
Speaker 1: the Credit Edge