WEBVTT - Deckchairs on the Titanic; Retail Pain Spreads 0:00:13.240 --> 0:00:16.040 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:16.280 --> 0:00:18.720 My name is James Crumby. I'm a senior editor at Bloomberg. 0:00:19.480 --> 0:00:21.160 This week, we're very pleased to welcome back to the 0:00:21.200 --> 0:00:24.599 show Emilia Pollard, who reports on distressed debt for Bloomberg 0:00:24.640 --> 0:00:27.319 News in New York. How are you, Amelia, I'm great, 0:00:27.360 --> 0:00:31.160 Thanks so much, James. We're also delighted to have Mike Campalone, 0:00:31.160 --> 0:00:34.240 who covers retail for Bloomberg Intelligence, also in New York. 0:00:35.479 --> 0:00:37.839 We'll be coming back to Mike shortly. Lots of fascinating 0:00:37.840 --> 0:00:40.240 stuff going on in the retail and consumer sect right now, 0:00:40.520 --> 0:00:44.440 so do stay with us. But first, Amelia Pollard with 0:00:44.479 --> 0:00:48.199 Bloomberg News Distressed Debt. You had a great story this 0:00:48.240 --> 0:00:51.800 week on struggling companies who are finding a lifeline new 0:00:51.800 --> 0:00:53.640 money to keep them alive a bit longer, but they're 0:00:53.640 --> 0:00:57.080 going bust anyway. Investors are essentially giving more cash to 0:00:57.160 --> 0:01:00.440 doomed companies and they're not making anything better. In fact, 0:01:00.560 --> 0:01:03.280 they seem to be making it worse. Deck Chairs on 0:01:03.280 --> 0:01:05.640 the Titanic, Amelia, what's going on? What's the situation? 0:01:06.720 --> 0:01:08.920 Yeah, that's the perfect way to describe it. James, and 0:01:09.120 --> 0:01:11.520 many people I spoke to while are broughting the story 0:01:12.040 --> 0:01:15.479 said that these deals, which are known as liability management 0:01:15.800 --> 0:01:18.920 transactions and the most jargon me buzzword out there right now, 0:01:19.720 --> 0:01:22.839 are essentially basically just rearranging Dectairs and the Titanic. 0:01:22.920 --> 0:01:26.440 And the reason why lenders have an incentive. 0:01:26.000 --> 0:01:29.000 To give new money is that these are existing lenders 0:01:29.080 --> 0:01:32.120 that are already in the capital structure, so they already 0:01:32.120 --> 0:01:34.280 have skin in the game, so to speak, and have 0:01:34.480 --> 0:01:37.080 a big incentive to try to keep the company afloat. 0:01:37.160 --> 0:01:42.480 And these deals known as liability management exercises or transactions, 0:01:43.040 --> 0:01:49.200 they're referred to both synonymously basically our last ditch efforts 0:01:49.240 --> 0:01:52.360 to buy the company time. So what we've seen in 0:01:52.400 --> 0:01:54.840 recent weeks, though, is that a lot of the deals 0:01:54.840 --> 0:01:57.480 that happened in twenty twenty and twenty twenty one, and 0:01:57.880 --> 0:02:00.680 even as recently as last year are starting to unravel. 0:02:00.840 --> 0:02:03.320 As you know, the pain of high interest rates and 0:02:03.360 --> 0:02:07.960 waning consumer spending is really not is not helping the 0:02:08.000 --> 0:02:11.480 situation for these companies, and they're not able to turn 0:02:11.520 --> 0:02:12.959 things around in the way they had hoped to. 0:02:13.840 --> 0:02:15.960 So let's just stop for a minute and look at it. 0:02:16.000 --> 0:02:18.160 Sort of in more broad terms liability management. First, that 0:02:18.200 --> 0:02:20.440 sort of sets off a load of jargon and lums 0:02:20.440 --> 0:02:23.280 in my mind. What does it mean just taking some 0:02:23.360 --> 0:02:27.440 debt and refinancing it with new debt maybe longer maturity, 0:02:27.480 --> 0:02:29.560 maybe cheaper or what is it? What is it? In 0:02:29.600 --> 0:02:30.320 basic terms? 0:02:31.360 --> 0:02:35.480 Yeah, basically it is, you know, getting new The company 0:02:35.520 --> 0:02:38.359 gets receives new money in exchange for either pushing out 0:02:38.400 --> 0:02:41.400 maturities or you know, kind of making some kind of 0:02:41.520 --> 0:02:45.800 arrangement that gives the lenders a benefit. And typically what 0:02:45.840 --> 0:02:48.000 we've seen in recent years is these these deals have 0:02:48.040 --> 0:02:51.880 been around forever, but the most recent breed of these 0:02:51.919 --> 0:02:55.080 deals are pretty contentious, and you often see a group 0:02:55.120 --> 0:02:58.880 of lenders left behind and often they're so pissed off 0:02:58.919 --> 0:03:01.359 that they will sue the company or the other lenders 0:03:01.960 --> 0:03:04.919 and becomes a very big, dramatic mess very quickly. 0:03:05.720 --> 0:03:06.359 But there are. 0:03:06.200 --> 0:03:10.840 Two specific types that have become exceptionally popular, and forgive 0:03:10.960 --> 0:03:13.440 the moment of jargon jargon, but I will. 0:03:13.280 --> 0:03:14.079 Explain about them. 0:03:14.400 --> 0:03:17.720 One is an up tearing transaction, and that's something that 0:03:17.760 --> 0:03:20.800 we saw the mattress Maker sort of Simons do in 0:03:20.840 --> 0:03:23.560 twenty twenty. And essentially all that means is that a 0:03:23.600 --> 0:03:27.679 group of lenders agrees to give new money in exchange 0:03:27.680 --> 0:03:31.040 for being bumped up in their repayment line. So given 0:03:31.080 --> 0:03:33.960 the worst case scenario, the company files for bankruptcy, they 0:03:34.000 --> 0:03:36.320 will be the first ones to get paid back. And 0:03:36.600 --> 0:03:41.200 in testimony from executives for these funds who had given 0:03:41.240 --> 0:03:42.800 new money or weren't able to. 0:03:42.720 --> 0:03:44.800 Give new money, some of them said that. 0:03:44.760 --> 0:03:47.680 Their base case scenario was that sort of would eventually 0:03:47.680 --> 0:03:49.160 file for bankruptcy, just did not. 0:03:49.520 --> 0:03:50.480 The writing was on the wall. 0:03:50.520 --> 0:03:53.840 They had too much debt, you know, the industry itself 0:03:53.880 --> 0:03:55.960 was hurting, and so they wanted to ensure that they 0:03:55.960 --> 0:04:00.200 were in the best position when that did happen. We've 0:04:00.200 --> 0:04:03.160 seen a number of deals since in twenty twenty kind 0:04:03.160 --> 0:04:06.520 of replicating the structure of that deal. And then the 0:04:06.560 --> 0:04:09.400 other one that has become very popular has been something 0:04:09.480 --> 0:04:12.120 known as the drop down. And this is something that 0:04:12.240 --> 0:04:15.560 Ja Crue pioneered a few years ago, and it essentially 0:04:15.720 --> 0:04:19.320 strips collateral from a group of lenders and facts and 0:04:19.400 --> 0:04:23.160 new group of lenders, and it's often the most valuable collateral, 0:04:24.080 --> 0:04:27.000 you know, so whether it's a subsidiary. In some cases, 0:04:27.400 --> 0:04:31.120 we saw something like that with Envisioned healthcare, where subsidiary 0:04:31.240 --> 0:04:33.159 was kind of used as new collateral that was seen 0:04:33.200 --> 0:04:37.320 as highly valuable by lenders. And so those two types 0:04:37.400 --> 0:04:39.800 are the ones that those two types of deals are 0:04:39.800 --> 0:04:41.920 the ones we're seeing unraveling. And in some cases it's 0:04:41.920 --> 0:04:44.719 because so much litigation has emerged, as in the case 0:04:44.760 --> 0:04:47.080 of Serda, where the companies really are love with no 0:04:47.160 --> 0:04:48.360 option but to put the company. 0:04:48.360 --> 0:04:51.680 In chapter eleven, you mentioned though it's got worse over 0:04:51.680 --> 0:04:53.440 the last couple of years. I'm wondering why that's his. 0:04:53.640 --> 0:04:55.840 I mean, is it that company's getting more desperate because 0:04:55.839 --> 0:04:59.640 of the macro environment. Is it the advisor and laws 0:04:59.640 --> 0:05:03.560 are getting creative in you know, finding solutions. Is it 0:05:04.040 --> 0:05:06.400 the fact that none of these deals had any covenants 0:05:06.440 --> 0:05:09.320 in the easy times? What's the reason for coming to 0:05:09.360 --> 0:05:09.839 a head now? 0:05:10.279 --> 0:05:12.400 Yeah, well, I think you just listed the big three, 0:05:13.080 --> 0:05:15.000 but you know, those are all reasons why this coming 0:05:15.000 --> 0:05:17.159 to a head now. And I think we start to 0:05:17.200 --> 0:05:19.119 see we started to see some of these really crop 0:05:19.200 --> 0:05:22.599 up in twenty twenty and early twenty twenty one, the 0:05:22.640 --> 0:05:26.280 era of easy money. You know, it was easier to 0:05:26.279 --> 0:05:29.000 get new money in that at that time. But now 0:05:29.000 --> 0:05:31.000 we're still seeing it's big still popular, and it was 0:05:31.040 --> 0:05:34.560 still popular last year as the economy started to tighten 0:05:34.600 --> 0:05:38.480 a bit, and you know, credit markets were not as 0:05:39.040 --> 0:05:42.640 readily available with new money, and so companies were increasingly 0:05:42.680 --> 0:05:46.480 tapping existing lenders to get new financing. And that's what 0:05:46.520 --> 0:05:48.960 we've seen here. And then you know, I wrote this 0:05:49.000 --> 0:05:53.479 story just on the heels of two big filings that 0:05:53.560 --> 0:05:56.880 had liability to management deals under their belts in Kora, 0:05:57.800 --> 0:06:01.000 which is an aerospace supplier, and also dee Bold Nicksdorf, 0:06:01.080 --> 0:06:02.880 which is like one of the biggest ATM makers in 0:06:02.880 --> 0:06:05.919 the world. And so I think that we're starting to 0:06:06.000 --> 0:06:09.560 see these deals are essentially a bet that the companies 0:06:09.600 --> 0:06:11.640 were able to turn things around with interest rates as 0:06:11.680 --> 0:06:12.279 high as they are. 0:06:13.160 --> 0:06:14.240 They haven't been able. 0:06:14.040 --> 0:06:16.880 To do that, but it's essentially good money off to bed. 0:06:16.920 --> 0:06:19.919 I mean, that's just throwing money down the pan because 0:06:20.040 --> 0:06:22.200 they're already involved in the situation. They're hoping to get 0:06:22.520 --> 0:06:26.599 some kind of benefit in the longer terms. The what's 0:06:26.640 --> 0:06:27.080 the play. 0:06:27.880 --> 0:06:31.560 Yeah, the play is basically just bettering their position. So 0:06:32.920 --> 0:06:35.279 you know, one thing we saw with Serta for instance, 0:06:35.560 --> 0:06:38.279 the mattress company, is that the two different groups of 0:06:38.360 --> 0:06:43.080 lenders were basically giving the company competing contentious offers of 0:06:43.120 --> 0:06:46.520 how to reconfigure the debt, and once one group caught 0:06:46.560 --> 0:06:49.000 win that the other group was, you know, pitching a 0:06:49.120 --> 0:06:53.320 very contentious plan as well. They were like, okay, well, 0:06:53.320 --> 0:06:56.839 we need to you know, put together our own proposals 0:06:56.880 --> 0:06:58.720 so that we can get ahead. And so it's a 0:06:58.760 --> 0:07:00.760 little bit of a race to the box them as well, 0:07:00.800 --> 0:07:04.599 in which lenders are kind of you know, pushing each 0:07:04.600 --> 0:07:09.960 other to get you know, the best in the best 0:07:10.000 --> 0:07:13.040 position in case of a default. And I think that 0:07:13.040 --> 0:07:15.440 that's what we're seeing where lenders, if blenders have a 0:07:15.480 --> 0:07:17.360 base case of a default in place, I think they're 0:07:17.360 --> 0:07:19.640 trying to ensure that they're in the best possible position 0:07:19.840 --> 0:07:21.640 when the repayments start for creditors. 0:07:22.160 --> 0:07:23.200 Do we expect more of this? 0:07:24.840 --> 0:07:25.320 I think so. 0:07:25.520 --> 0:07:27.960 I mean, there there were a lot of liability management 0:07:28.000 --> 0:07:31.520 deals in the last couple of years, and it seems like, 0:07:32.360 --> 0:07:35.800 you know, professionals are only cooking up more breeds. I 0:07:36.080 --> 0:07:39.000 think that upteering and drop downs are you know, the 0:07:39.040 --> 0:07:42.160 only only two of the types of you know, kind 0:07:42.160 --> 0:07:44.160 of contentious deals that are merging from this era. 0:07:44.320 --> 0:07:46.400 But I'm sure there will be more. 0:07:46.480 --> 0:07:50.080 It seems like, you know, there's every time that you know, 0:07:50.120 --> 0:07:53.360 a new clause or you know, sentence or two is 0:07:53.360 --> 0:07:56.840 added to these credit agreements to block you know, an 0:07:56.920 --> 0:08:00.360 upteering deal or drop down deal. You know, there's always 0:08:00.640 --> 0:08:03.840 some legal gap that lawyers will find. Is there a 0:08:03.880 --> 0:08:06.400 pattern too? It Is it related to a particular sector 0:08:06.520 --> 0:08:07.320 or kind of deal? 0:08:07.320 --> 0:08:09.200 I mean, is it all retail. We're going to talk 0:08:09.200 --> 0:08:12.720 to Mike Campblown a bit about retail, But is it 0:08:12.760 --> 0:08:13.960 is it mainly in one sector? 0:08:14.920 --> 0:08:16.960 You know, it's not. It's that's something that's interesting about 0:08:16.960 --> 0:08:18.160 these kind of deals. It's so. 0:08:19.800 --> 0:08:22.640 It's so diverse and the types of companies and that 0:08:23.240 --> 0:08:25.600 do these sorts of transactions. And I think that's really evident. 0:08:25.640 --> 0:08:27.320 And you know, just the two that we saw last 0:08:27.320 --> 0:08:30.800 week or two weeks ago now within Quora and people 0:08:30.920 --> 0:08:33.520 next Door if that, you know, any company that has 0:08:33.559 --> 0:08:35.040 a lot of debt is going to try to do 0:08:35.080 --> 0:08:36.240 one of these transactions. 0:08:36.840 --> 0:08:39.800 Is it mostly private equity backed companies? You think? 0:08:41.000 --> 0:08:41.200 Yeah? 0:08:41.240 --> 0:08:43.720 You know, I mean I think that there is a 0:08:43.760 --> 0:08:48.040 sponsor component to this. I'm not sure how much those 0:08:48.080 --> 0:08:50.720 sponsors are driving these sorts of deals, but in sort 0:08:50.760 --> 0:08:53.839 of for instance, you know, there there was some testimony 0:08:53.880 --> 0:08:59.079 from their p sponsor during the bankruptcy hearings and their 0:08:59.200 --> 0:09:04.400 role in kind of facilitating and helping to field interests 0:09:04.440 --> 0:09:06.800 from lenders that were proposing these sorts of deals. So 0:09:06.800 --> 0:09:09.839 they definitely play a role. Whether or not they're soliciting 0:09:09.960 --> 0:09:12.400 these kinds of transactions, I'm not sure. 0:09:13.040 --> 0:09:16.240 And when they end up in bankruptcy what you're saying 0:09:16.440 --> 0:09:19.319 in your stories that they're actually making them much more 0:09:19.360 --> 0:09:22.360 complex and much more messy. They're also all ending up 0:09:22.360 --> 0:09:24.440 in Texas, so I'm interested in why that's is as well. 0:09:24.800 --> 0:09:26.760 Yeah, they are. They love Texas. 0:09:27.920 --> 0:09:30.040 I think maybe all of the filings have been in 0:09:30.040 --> 0:09:32.600 Texas so far this year, of the ones that have 0:09:32.679 --> 0:09:36.080 libel management deals, or at least the vast majority. I 0:09:36.120 --> 0:09:38.840 think it started actually again with Surda, not to bring 0:09:38.960 --> 0:09:40.199 up Surda for the fifth time in this. 0:09:40.240 --> 0:09:40.640 Call, but. 0:09:42.400 --> 0:09:46.280 Sort of filed in Texas in January, and the bankruptcy 0:09:46.320 --> 0:09:50.480 judge there, David Jones has been kind of a pioneer 0:09:50.520 --> 0:09:57.160 in blessing many pieces of this highly controversial transaction, and 0:09:57.440 --> 0:09:59.880 the most recent one came only this week in which 0:09:59.880 --> 0:10:02.880 he said that the deal was made in good faith 0:10:03.000 --> 0:10:06.800 and that was one of the arguments that the spurned 0:10:06.880 --> 0:10:10.560 lenders was making was that the deal reached this implied 0:10:10.600 --> 0:10:13.080 covenant of good faith and fair dealing, which basically means 0:10:13.320 --> 0:10:17.000 that the intent of the original credit agreement, you know, 0:10:17.160 --> 0:10:21.160 was not to have this this sort of subverted transaction 0:10:21.280 --> 0:10:23.959 down the line. And so the fact that Judge Jones 0:10:24.000 --> 0:10:26.280 has been so willing to kind of step in and 0:10:26.800 --> 0:10:31.319 you know, make sweeping decisions and basically established case precedent 0:10:31.320 --> 0:10:34.480 in the process has attracted a lot of other companies 0:10:34.520 --> 0:10:35.080 to the venue. 0:10:35.800 --> 0:10:39.000 So he's being easier on these companies only from the 0:10:39.000 --> 0:10:40.320 investor standpoint, well. 0:10:40.200 --> 0:10:41.959 Some would say, some would say he's being easier in 0:10:42.000 --> 0:10:42.360 the company. 0:10:42.440 --> 0:10:44.880 I mean, I think that you know, any bankruptcy court 0:10:45.000 --> 0:10:48.600 and judge's main prerogative is for the company to survive, 0:10:49.880 --> 0:10:52.680 you know, And so I think that that's that's really 0:10:52.679 --> 0:10:55.520 the goal here, and I think that they he presumably 0:10:55.559 --> 0:10:59.040 saw the litigation as a you know, a barrier to 0:10:59.040 --> 0:11:02.360 the company survival, and he cited the fact that the 0:11:02.480 --> 0:11:07.079 other group of lenders had proposed an equally contentious type 0:11:07.080 --> 0:11:09.760 of deal, so you know, they were they were very 0:11:09.800 --> 0:11:12.400 ready to do their own type of transaction and only 0:11:12.600 --> 0:11:13.800 because they were left and behind. 0:11:13.800 --> 0:11:16.960 Were they so pissed off? Okay, but this doesn't always 0:11:17.040 --> 0:11:20.360 end badly. You mentioned J Crew earlier. They're still in business. 0:11:21.080 --> 0:11:24.160 How can this come to a happy ending here? There 0:11:24.160 --> 0:11:27.679 are some success stories. One that we saw was with 0:11:27.960 --> 0:11:33.480 board Writers, which is a surfwhere retailer. They did a 0:11:33.840 --> 0:11:38.040 contentious deal in recent months and they were ultimately bought 0:11:38.080 --> 0:11:41.560 by Authentic Brands, which is I think they agreed to 0:11:41.559 --> 0:11:43.280 buy them in March. So that you know that a 0:11:43.400 --> 0:11:45.800 sale out of court is would be seen as a 0:11:45.840 --> 0:11:49.560 success by many. And I think that whenever these deals 0:11:49.679 --> 0:11:52.480 are proposed or lenders are interested in doing this sort 0:11:52.480 --> 0:11:55.640 of transaction, they'll point to success stories like this. So 0:11:56.960 --> 0:11:59.040 you know, I think that we cited a study from 0:11:59.040 --> 0:12:02.319 Fitch that's out of thirty types of these kinds of deals, 0:12:03.200 --> 0:12:07.280 twenty four amounted to a default or a bankruptcy down 0:12:07.280 --> 0:12:09.679 the line. So but you know there are there are 0:12:09.720 --> 0:12:13.360 six that didn't, and lenders and companies will keep on 0:12:13.400 --> 0:12:15.640 pointing to those is as reasons why it might be 0:12:15.679 --> 0:12:19.319 worth it in the end. But mostly bad, so far, 0:12:19.720 --> 0:12:21.680 so far, mostly bad. That's you're a lawyer. 0:12:22.240 --> 0:12:24.560 Yeah, I mean, I'm for sure unless you're a lawyer 0:12:24.679 --> 0:12:27.200 or any professional retained for these kinds of deals. 0:12:27.760 --> 0:12:30.520 So before we talked to Mike Campbell and Bloomberg Intelligence, 0:12:30.520 --> 0:12:32.800 what's the next big story to watch on your beat, Amelia. 0:12:33.800 --> 0:12:36.120 I think the next big one is the fact that 0:12:36.160 --> 0:12:37.720 a lot of the companies that we've seen in file 0:12:37.800 --> 0:12:39.880 for bankruptcy this year have been ones that have been 0:12:40.160 --> 0:12:43.880 you know, highly very telegraphed in. They've been names that 0:12:43.880 --> 0:12:46.000 have been on our radar for months, if not years, 0:12:46.280 --> 0:12:48.240 and you know, I have had a huge amount of 0:12:48.280 --> 0:12:50.280 debt for a long time. I think something that will 0:12:50.320 --> 0:12:53.400 be interesting in the broader market and economy as if 0:12:53.400 --> 0:12:58.440 we start to see pretty healthy companies pivot quickly into 0:12:58.440 --> 0:13:01.319 a distress situation, and I think that will be evidence 0:13:01.360 --> 0:13:04.880 that interest rates are you know, really starting to bite 0:13:04.920 --> 0:13:08.960 in a way that is causing severe repercussions. And the 0:13:09.000 --> 0:13:11.560 other thing that we're looking at is just how commercial 0:13:11.559 --> 0:13:14.200 real estate is being impacted right now by interest rates. 0:13:14.200 --> 0:13:17.760 That's one of the biggest you know, industries or sectors 0:13:17.760 --> 0:13:20.440 to have distress debt right now, and I think that 0:13:20.520 --> 0:13:22.400 will be a story that'll play out for the rest 0:13:22.400 --> 0:13:22.760 of the year. 0:13:23.600 --> 0:13:25.679 Great stuff familiar pull out from Bloomberg News. Thanks so 0:13:25.760 --> 0:13:28.520 much for joining us. Read all of Amelia's scoops on 0:13:28.520 --> 0:13:31.280 the Bloomberg terminal and of course at Bloomberg dot com. 0:13:31.720 --> 0:13:33.600 Thanks so much having me James, So. 0:13:33.520 --> 0:13:35.319 As I mentioned earlier, we're glad to have with us 0:13:35.440 --> 0:13:38.880 Mike Campalone, who looks at retail companies for Bloomberg Intelligence. 0:13:39.080 --> 0:13:41.959 How's it going, Mike, Hey, James, thanks for having me on. 0:13:43.000 --> 0:13:45.840 So in retail, what's the outlook? How strained are consumers 0:13:45.920 --> 0:13:48.880 right now given such high inflation, rising rates and a 0:13:48.920 --> 0:13:49.640 recession coming? 0:13:50.440 --> 0:13:53.040 Yeah? Absolutely so. You know, we've been looking at recent 0:13:53.080 --> 0:13:56.440 credit card transaction data and it showing consumers continue to 0:13:56.480 --> 0:13:59.839 pull back on retail spending, and while their preference for 0:14:00.080 --> 0:14:04.200 or experience related categories continued, that pace has actually started 0:14:04.200 --> 0:14:09.160 to slow. So furniture supporting goods and clothing accessory stores 0:14:09.760 --> 0:14:13.200 all within retail experience the greatest demand driven contraction that 0:14:13.200 --> 0:14:14.280 we've seen in that data. 0:14:14.640 --> 0:14:14.800 You know. 0:14:14.880 --> 0:14:18.880 More generally, retailers across sub sectors have warned up an 0:14:18.880 --> 0:14:22.960 increasingly more pressured consumer, but we certainly see more red 0:14:23.000 --> 0:14:28.000 flags from auto part home improvement, and select apparel retailers 0:14:28.000 --> 0:14:32.320 as well, especially those catering to a lower income earning consumer. 0:14:33.400 --> 0:14:36.840 Retailers have given us a fairly consistent outlook for twenty 0:14:36.880 --> 0:14:39.960 twenty three, which includes pressure both on the top and 0:14:40.040 --> 0:14:42.440 bottom line in the first half of the year, with 0:14:42.600 --> 0:14:45.360 some of that pressure easing in the second half. You know, 0:14:45.480 --> 0:14:48.440 easing freight costs seem to be the largest contributor to 0:14:48.680 --> 0:14:51.560 retailers improved tone in the backup of the year, and 0:14:51.680 --> 0:14:53.320 we expect to see that as well. 0:14:54.240 --> 0:14:56.520 So you said consumers are kind of pulling back across 0:14:56.520 --> 0:14:59.000 the board. Is it away from discretion? Are you away 0:14:59.040 --> 0:15:02.080 from sort of nice to have and more to what 0:15:02.120 --> 0:15:03.440 people need to have right now? 0:15:03.880 --> 0:15:06.960 Yeah, that's absolutely true. And you know, after one Q earnings, 0:15:07.360 --> 0:15:10.640 some of those themes that retailers have expressed to us 0:15:10.680 --> 0:15:13.200 at the beginning of the year have really held consistent 0:15:13.240 --> 0:15:16.040 with our expectations. You know. Some of those themes include 0:15:16.360 --> 0:15:21.560 inventories realigning, so as supply chains and product costs decline. 0:15:22.440 --> 0:15:26.160 In twenty twenty two, we saw inventories were extremely bloated, 0:15:26.160 --> 0:15:29.400 as you may remember, and as demand and timing we're 0:15:29.480 --> 0:15:32.360 significantly out of sync. So we're seeing that rebalancing start 0:15:32.400 --> 0:15:35.800 to happen. The second theme, freight costs are easing. Like 0:15:35.840 --> 0:15:39.200 I said earlier, that's going to benefit retailers who import 0:15:39.240 --> 0:15:42.880 from Asia the most. So we've seen spot rates pushed lower, 0:15:43.000 --> 0:15:48.160 which has enabled some retailers to renegotiate annual shipping container 0:15:48.240 --> 0:15:51.560 contracts that they typically hold in the spring, and that's 0:15:51.560 --> 0:15:54.240 why we're going to see that benefit, that freight benefit 0:15:54.320 --> 0:15:56.400 in the second half of the year for most names. 0:15:56.560 --> 0:15:59.920 And then lastly, the weakest sub sectors last year within 0:16:00.080 --> 0:16:03.160 retail are going to see the greatest improvement this year. 0:16:03.440 --> 0:16:08.000 So department stores, apparel and footwear, and value sectors will 0:16:08.000 --> 0:16:13.400 benefit from this more conservative inventory planning after substantial markdowns 0:16:13.480 --> 0:16:15.960 last year to clear that access inventory. 0:16:16.680 --> 0:16:19.040 It's interesting that bricks and mortar scenes becoming back people 0:16:19.080 --> 0:16:20.400 as you want to go out to shop now. 0:16:21.520 --> 0:16:25.120 So yeah, so you know, I think how retailers are 0:16:25.160 --> 0:16:28.600 differentiating themselves, and you know, what they've learned from the 0:16:28.640 --> 0:16:33.000 pandemic is the physical store remains extremely important, and that's 0:16:33.040 --> 0:16:37.920 both from an in store shopping experience and also leveraging 0:16:38.000 --> 0:16:43.440 physical footprints that retailers have to bolster their logistics and 0:16:43.520 --> 0:16:46.920 distribution network. So stores are still important, and it's more 0:16:46.920 --> 0:16:51.480 about store footprint optimization than getting rid of stores completely. 0:16:52.400 --> 0:16:53.840 And as part of that, I mean, you're going out 0:16:53.840 --> 0:16:56.440 to shops because you couldn't for so long. Is it 0:16:56.480 --> 0:16:58.440 sort of revenge spending as we've been calling it. 0:16:58.960 --> 0:17:01.600 Yeah, you know, there was definitely that theme of revenge 0:17:01.600 --> 0:17:05.560 spending and people wanting to just spend money that was 0:17:05.640 --> 0:17:08.879 built up during the pandemic, whether through uh, you know, 0:17:08.960 --> 0:17:12.800 stimulus fueled money that people were receiving, or just a 0:17:13.000 --> 0:17:16.240 desire to do things and shop again. So we've seen 0:17:16.280 --> 0:17:19.520 that revenge spending on goods definitely pulled back, and it's 0:17:19.520 --> 0:17:23.800 still lingering around in the travel and experience sector. But 0:17:24.080 --> 0:17:26.520 like I said earlier, we're starting to see those trends fade. 0:17:27.480 --> 0:17:28.879 So it has to come to an end. I mean, 0:17:28.880 --> 0:17:31.439 obviously it's some that the pandemic has been you know, 0:17:31.480 --> 0:17:34.680 there's it's supposed to be over now, although everyone's wearing 0:17:34.720 --> 0:17:38.960 masks skin because of the air quality. But the the 0:17:39.280 --> 0:17:42.400 idea that you know, there was this boom eventually fades. 0:17:42.520 --> 0:17:44.960 Is it Is it gonna just go to zero? I mean, 0:17:45.000 --> 0:17:46.760 are we going to just see a big, big drop 0:17:46.760 --> 0:17:48.160 off in consumption? You think? 0:17:49.160 --> 0:17:51.720 You know, I think it's unique to the sub sectors 0:17:51.720 --> 0:17:54.840 within retail. You know, one one space, uh, you know, 0:17:54.920 --> 0:17:57.880 particularly where there's been a lot of shift in spending 0:17:58.000 --> 0:18:01.080 and also in credit profiles is the the department stores. 0:18:01.400 --> 0:18:04.919 So you know, it's the department stores are an absolutely 0:18:04.960 --> 0:18:08.359 interesting space within retail for us from a credit perspective, 0:18:08.400 --> 0:18:10.840 and we've seen drastic changes in some of these companies' 0:18:10.880 --> 0:18:14.560 profiles for the names we cover, so Macy's, Coal's, and 0:18:14.680 --> 0:18:18.640 Nordstrom just over the past three years. So Macy's has 0:18:18.680 --> 0:18:22.920 done an exceptional job delevering its balance sheet. It's reduced 0:18:22.960 --> 0:18:25.480 funded debt by over two billion dollars over the past 0:18:25.520 --> 0:18:28.560 three years. It's pushed out near term debt maturities with 0:18:28.680 --> 0:18:32.119 no significant bomb maturities over the next five years, and 0:18:32.160 --> 0:18:35.800 it has a capital structure that's mainly unsecured. The company's 0:18:35.800 --> 0:18:39.200 Polaris initiative has also started to benefit the company's margins 0:18:39.440 --> 0:18:42.760 that have historically lacked peers a pre pandemic, and we 0:18:42.840 --> 0:18:45.840 expect that trend to persist for Macy's this year. You know, 0:18:46.000 --> 0:18:50.959 Nordstrom continues to face operating challenges, especially with its rack business. 0:18:51.520 --> 0:18:55.760 We think that these issues will continue to extend pressure 0:18:55.800 --> 0:18:58.040 on its credit profile over the near term, and the 0:18:58.040 --> 0:19:00.439 company has two hundred and fifty million of bombs charities 0:19:00.480 --> 0:19:02.639 in twenty twenty four that also need to be addressed, 0:19:03.000 --> 0:19:05.600 you know. And then lastly, moving on to Coles, I 0:19:05.600 --> 0:19:08.480 think that name has seen the most drastic negative shift 0:19:08.520 --> 0:19:11.200 in its credit profile over the past three years, at 0:19:11.200 --> 0:19:14.520 a time where probably execution risk is likely at its 0:19:14.560 --> 0:19:17.679 highest with new management in place. So Cole's had a 0:19:17.680 --> 0:19:21.840 financial policy last year that prioritized shareholder returns via buybacks, 0:19:22.040 --> 0:19:24.480 which a person was seven hundred million dollars for the year, 0:19:24.720 --> 0:19:28.160 and that's despite the company generating negative free cash flow 0:19:28.240 --> 0:19:31.600 during that time period. So you know, definitely a shift 0:19:31.640 --> 0:19:35.520 in spending across different subsectors of retail, department stores being 0:19:35.520 --> 0:19:38.560 a very unique space within there as well, both from 0:19:38.800 --> 0:19:42.520 a consumer spending shift and from you know, indiosyncratic credit 0:19:42.640 --> 0:19:44.840 risk that exists within some of these names. So a 0:19:44.880 --> 0:19:45.760 lot going on there. 0:19:46.760 --> 0:19:49.080 So regardless of the quality of the product and the 0:19:49.119 --> 0:19:51.080 experience and all that stuff, and you know, whether you 0:19:51.200 --> 0:19:53.560 love the store or not, it really does seem to 0:19:53.560 --> 0:19:55.679 be more about how how the companies have managed their 0:19:55.680 --> 0:19:57.359 balance shees right, in terms of like you know, with 0:19:57.440 --> 0:20:00.560 suddenly in this much much higher rate, and. 0:20:01.240 --> 0:20:04.320 Absolutely absolutely, we could not agree more with that. We 0:20:04.840 --> 0:20:08.399 are prefer names that have prioritized cleaning up the balance 0:20:08.400 --> 0:20:10.560 sheet last year, and that's just putting them in a 0:20:10.560 --> 0:20:14.720 better position this year from a capital allocation standpoint and 0:20:14.760 --> 0:20:17.880 being able to deploy capital, even if it's more limited, 0:20:18.280 --> 0:20:21.560 deploy capital in the right places, like investing in stores 0:20:21.600 --> 0:20:22.720 and cafecs. 0:20:23.880 --> 0:20:27.760 And so how they differentiating themselves in the context of 0:20:27.800 --> 0:20:28.840 credit quality. 0:20:29.640 --> 0:20:33.720 Yeah, so you know that definitely names are differentiating selves 0:20:34.280 --> 0:20:36.840 by you know, investing in the physical store like we 0:20:36.840 --> 0:20:39.679 were staying like we were saying earlier, and leveraging that 0:20:39.800 --> 0:20:44.919 store for their distribution network. And then you know, second 0:20:45.119 --> 0:20:48.080 from the type of business that the that this retailer 0:20:48.119 --> 0:20:51.040