1 00:00:00,040 --> 00:00:02,840 Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast. 2 00:00:03,240 --> 00:00:05,800 Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg. 3 00:00:06,400 --> 00:00:10,039 Speaker 1: Today's guests are Olivia Raymonde, a credit reporter for Bloomberg 4 00:00:10,160 --> 00:00:12,920 Speaker 1: News in New York, and Steve Flynn, who looks at 5 00:00:12,920 --> 00:00:16,920 Speaker 1: the communications sector for Bloomberg Intelligence. It's been another very 6 00:00:16,960 --> 00:00:19,959 Speaker 1: busy week, lots of excitement in global credit markets, including 7 00:00:19,960 --> 00:00:23,160 Speaker 1: a ton of new issuance from junk rated borrowers. Let's 8 00:00:23,160 --> 00:00:25,079 Speaker 1: get into that in a little bit, But before we do, 9 00:00:25,760 --> 00:00:28,760 Speaker 1: I just wanted to ask Olivia Steve, what's up with 10 00:00:28,800 --> 00:00:32,960 Speaker 1: Party City. We're clearly not buying enough giant heart shaped 11 00:00:33,000 --> 00:00:36,360 Speaker 1: helium balloons. They had to file for bankruptcy. What's going on. 12 00:00:36,479 --> 00:00:39,520 Speaker 1: We're not having enough fun in this country. What's your take, Olivia? 13 00:00:40,800 --> 00:00:44,800 Speaker 1: I think that we are having enough fun in the country, 14 00:00:44,800 --> 00:00:46,280 Speaker 1: and maybe that's why we don't need to go to 15 00:00:46,360 --> 00:00:49,800 Speaker 1: Party City. I think I love a good party. My 16 00:00:49,840 --> 00:00:51,320 Speaker 1: kids are a little bit older now, so we don't 17 00:00:51,400 --> 00:00:53,159 Speaker 1: visit Party City as much as we used to. But 18 00:00:53,920 --> 00:00:55,600 Speaker 1: what I've been there, so we have to wait for 19 00:00:55,680 --> 00:00:57,760 Speaker 1: Valentine's Day to buy those big heart shaped balloons. But 20 00:00:58,480 --> 00:01:01,400 Speaker 1: that company's in trouble and retail sales just fell. You 21 00:01:01,400 --> 00:01:04,400 Speaker 1: know that the consumer is not doing well. But let's 22 00:01:04,400 --> 00:01:08,479 Speaker 1: get back to the issue Olivia. We've seen a big 23 00:01:08,520 --> 00:01:12,920 Speaker 1: increase in high yield bond issuance lately, junk rated a 24 00:01:12,959 --> 00:01:16,600 Speaker 1: lot of cash after a real drought. Last year, issuance 25 00:01:16,680 --> 00:01:20,360 Speaker 1: was down something like seventy twenty twenty two. What's the 26 00:01:20,400 --> 00:01:23,920 Speaker 1: situation though, Why are they issuing now? It's a great 27 00:01:23,959 --> 00:01:26,800 Speaker 1: question and a really interesting dynamic, James, that I think 28 00:01:26,880 --> 00:01:29,040 Speaker 1: is going to play out through this entire year. When 29 00:01:29,040 --> 00:01:32,000 Speaker 1: we look back at the end of last year, investors 30 00:01:32,000 --> 00:01:35,560 Speaker 1: were really concerned about high yield bonds, especially ones in 31 00:01:35,600 --> 00:01:38,680 Speaker 1: the lower rated tiers such as like triple C credits. 32 00:01:39,360 --> 00:01:42,880 Speaker 1: Now what we're seeing is that as borrowing costs are dropping, 33 00:01:43,080 --> 00:01:47,600 Speaker 1: not compared to last year's levels, but dropping in size 34 00:01:47,600 --> 00:01:50,680 Speaker 1: and scope, people are now rushing to add on risk. 35 00:01:50,760 --> 00:01:52,960 Speaker 1: When they were maybe a little bit more positioned defensively. 36 00:01:53,040 --> 00:01:54,560 Speaker 1: So now they're trying to get ahead of it, which 37 00:01:54,560 --> 00:01:57,560 Speaker 1: has kind of caused this big rally. But what are 38 00:01:57,600 --> 00:02:01,400 Speaker 1: the advantages of issuing nobs? Borrowing gone up, yields gone up, 39 00:02:01,440 --> 00:02:04,680 Speaker 1: everything's going up. Why do it no. I think that 40 00:02:04,880 --> 00:02:07,720 Speaker 1: yields are down from their highest point of last year 41 00:02:07,720 --> 00:02:09,679 Speaker 1: and that they will rise again, and I think that's 42 00:02:09,680 --> 00:02:12,720 Speaker 1: what the base case of many strategists are. So therefore, 43 00:02:12,919 --> 00:02:16,000 Speaker 1: if they have an opportunity to get in now, it's 44 00:02:16,040 --> 00:02:18,320 Speaker 1: better than waiting until we hit maybe like an economic 45 00:02:18,400 --> 00:02:21,480 Speaker 1: slowdown or a recession when yields spike even higher. And 46 00:02:21,520 --> 00:02:23,000 Speaker 1: what are they using all that money for? Is it 47 00:02:23,000 --> 00:02:26,000 Speaker 1: it's refinancing, is it new projects? Is it M and A? 48 00:02:26,280 --> 00:02:29,320 Speaker 1: What's the trend the Yeah, it's really interesting. Last year, 49 00:02:29,560 --> 00:02:31,960 Speaker 1: the main trend we saw was that pretty much companies 50 00:02:31,960 --> 00:02:34,400 Speaker 1: were only coming to the market if they had like 51 00:02:34,440 --> 00:02:37,440 Speaker 1: an imminent financing need, like they needed money to fund 52 00:02:37,520 --> 00:02:41,520 Speaker 1: like an acquisition for example. Now we're seeing more opportunistic 53 00:02:42,639 --> 00:02:45,600 Speaker 1: financings in the market. People are coming into refinance debt, 54 00:02:45,840 --> 00:02:49,120 Speaker 1: they're coming into fun tender offers, and we're seeing MNA 55 00:02:49,400 --> 00:02:52,920 Speaker 1: picking up slightly. Is there one particular sector that's dominating. 56 00:02:52,960 --> 00:02:54,680 Speaker 1: I know we've had some energy companies which you know, 57 00:02:54,680 --> 00:02:56,079 Speaker 1: they haven't been very apt to but but you know 58 00:02:56,120 --> 00:02:58,800 Speaker 1: they've been enjoyed high oil prices. Are we seeing a 59 00:02:58,840 --> 00:03:02,000 Speaker 1: big focus on one sectories it across the board. I 60 00:03:02,040 --> 00:03:03,840 Speaker 1: think it's across the board. It's good to note the 61 00:03:03,960 --> 00:03:06,800 Speaker 1: energy sector, that's a pretty strong sector and high yield 62 00:03:06,880 --> 00:03:09,080 Speaker 1: right now. A lot of those names are DOUBLEB just 63 00:03:09,120 --> 00:03:13,800 Speaker 1: the cusp of investment grade, so they have had they've 64 00:03:13,840 --> 00:03:17,400 Speaker 1: been able to access the market more easily than other sectors, 65 00:03:17,760 --> 00:03:19,640 Speaker 1: even in the past few months. But we have seen 66 00:03:19,680 --> 00:03:22,640 Speaker 1: others like for example, Dish Network was in looking to 67 00:03:22,680 --> 00:03:27,560 Speaker 1: add another couple billion dollars onto a series that it 68 00:03:27,639 --> 00:03:29,880 Speaker 1: launched in November. Well, and it we'll get to Dishtion 69 00:03:29,919 --> 00:03:32,040 Speaker 1: a bit with Steve who focuses on that sector. But 70 00:03:33,240 --> 00:03:34,960 Speaker 1: what is the outlook though for that market? You know, 71 00:03:35,040 --> 00:03:37,680 Speaker 1: these bonds are junk, and they're cool junk for a reason. 72 00:03:37,760 --> 00:03:41,240 Speaker 1: So you know, why is everyone buying them. Everyone's buying 73 00:03:41,240 --> 00:03:43,600 Speaker 1: them right now because everyone's sort of jumping in on 74 00:03:43,640 --> 00:03:45,760 Speaker 1: this rally. It's kind of a fear of missing out. 75 00:03:46,480 --> 00:03:50,119 Speaker 1: Stratagis do not think that this rally can be sustained. 76 00:03:50,160 --> 00:03:53,320 Speaker 1: We have slowing economic growth, people are concerned about a recession. 77 00:03:53,360 --> 00:03:55,480 Speaker 1: The Fed is not done hiking rates. So even though 78 00:03:55,960 --> 00:03:58,520 Speaker 1: investors have I mean, even though borrowers have a little 79 00:03:58,520 --> 00:04:00,800 Speaker 1: bit of a reprieve right now, and invest are jumping in. 80 00:04:00,920 --> 00:04:04,440 Speaker 1: Stratagists don't think it will last, so spreads could easily 81 00:04:04,480 --> 00:04:07,720 Speaker 1: widen from here or yields go up. I think the 82 00:04:07,760 --> 00:04:10,120 Speaker 1: base case in the market is expecting spreads to widen 83 00:04:10,120 --> 00:04:11,960 Speaker 1: and yields to go up from here, because in a 84 00:04:12,080 --> 00:04:14,960 Speaker 1: recession typically you know, we're it spreads around four hundred 85 00:04:15,000 --> 00:04:17,320 Speaker 1: on USI yield, right, but in a recession you go 86 00:04:17,400 --> 00:04:19,560 Speaker 1: to eight hundreds. So that's a big move from here, 87 00:04:19,800 --> 00:04:22,360 Speaker 1: or even a thousand if you're looking at the pandemic. So, 88 00:04:22,560 --> 00:04:24,760 Speaker 1: I mean, I don't get it. We're going through an 89 00:04:24,760 --> 00:04:27,240 Speaker 1: earning season that could be tough, We're getting a FED 90 00:04:27,320 --> 00:04:30,760 Speaker 1: that's getting quite hawkish, We're going through you know, there's 91 00:04:30,839 --> 00:04:33,440 Speaker 1: there's a war on in Ukraine. Still, there's all sorts 92 00:04:33,440 --> 00:04:36,920 Speaker 1: of issues around why people still piling in. I don't 93 00:04:36,960 --> 00:04:40,839 Speaker 1: get it. The amount of investor optimism about the outlook 94 00:04:40,839 --> 00:04:44,760 Speaker 1: for the economy this year has been quite phenomenal. Actually, 95 00:04:44,800 --> 00:04:48,800 Speaker 1: the market continues to bet on rate cuts, continuing to 96 00:04:48,839 --> 00:04:51,720 Speaker 1: think that the FED is going to slow it's tightening, 97 00:04:52,240 --> 00:04:54,520 Speaker 1: and that inflation is going to come down quicker than 98 00:04:55,080 --> 00:04:57,800 Speaker 1: maybe once thought, and that's allowing everyone to sort of 99 00:04:58,000 --> 00:05:00,800 Speaker 1: get ahead of themselves and start to make on what 100 00:05:00,839 --> 00:05:02,560 Speaker 1: they think is going to happen further on down the 101 00:05:02,560 --> 00:05:05,440 Speaker 1: line past a recession. But the reality is is that 102 00:05:05,560 --> 00:05:07,760 Speaker 1: we don't know what the recession is going to look 103 00:05:07,800 --> 00:05:09,840 Speaker 1: like and when it's going to come, so people still 104 00:05:09,839 --> 00:05:13,679 Speaker 1: need to remain defensive. Okay, So before we all Steve 105 00:05:13,680 --> 00:05:17,280 Speaker 1: about that and his take on the issuance rush, you've 106 00:05:17,320 --> 00:05:20,400 Speaker 1: also looked at leverage loans. You know, there's a there's 107 00:05:20,400 --> 00:05:23,080 Speaker 1: a ton of loan debt outstanding, and of course that's 108 00:05:23,120 --> 00:05:27,080 Speaker 1: all floating rate and libel jumped to almost five percent recently, 109 00:05:27,120 --> 00:05:29,080 Speaker 1: and that's you know, it was close to zero just 110 00:05:29,160 --> 00:05:32,240 Speaker 1: a year ago, so that's a huge leap. Those borrowers 111 00:05:32,240 --> 00:05:34,719 Speaker 1: a struggling. They're going to struggle to pay back that money. 112 00:05:34,760 --> 00:05:38,120 Speaker 1: What's what's the situation there? Yeah, the loan market is 113 00:05:38,120 --> 00:05:41,440 Speaker 1: a little bit more precarious than the bond market, James. 114 00:05:41,880 --> 00:05:45,159 Speaker 1: It's not as highly rated, and the biggest issue of 115 00:05:45,240 --> 00:05:49,040 Speaker 1: concern actually is borrowers who only have loans in their 116 00:05:49,080 --> 00:05:52,280 Speaker 1: capital structure, so they have no high yield bonds. That 117 00:05:52,320 --> 00:05:55,240 Speaker 1: means there's no subordinated debt sitting beneath the loans, So 118 00:05:55,360 --> 00:05:59,440 Speaker 1: that's less investor protection should there be a bankruptcy, and 119 00:05:59,520 --> 00:06:02,680 Speaker 1: if the slows down the pace of hiking, does that 120 00:06:02,720 --> 00:06:05,520 Speaker 1: offer some relief to them, do they get bailed out? 121 00:06:05,560 --> 00:06:08,440 Speaker 1: Effect to be the feed stops. I think at this 122 00:06:08,480 --> 00:06:11,599 Speaker 1: point there's so much about the impact of what the 123 00:06:11,640 --> 00:06:14,520 Speaker 1: FED has already done that has not moved through the economy, 124 00:06:14,520 --> 00:06:16,720 Speaker 1: and we have not fully seen those effects that are 125 00:06:16,800 --> 00:06:19,480 Speaker 1: materializing now but we just aren't aware of yet. So 126 00:06:19,520 --> 00:06:21,839 Speaker 1: I think there's still a lot more room for a 127 00:06:21,880 --> 00:06:24,039 Speaker 1: lot of volatility and a lot of surprises to the 128 00:06:24,080 --> 00:06:26,680 Speaker 1: upside or downside and high old bonds this year, and 129 00:06:27,120 --> 00:06:30,400 Speaker 1: on the loans specifically, more defaults in the loan section. 130 00:06:30,400 --> 00:06:32,359 Speaker 1: We're probably going to see more defaults. That's because of 131 00:06:32,360 --> 00:06:35,599 Speaker 1: those loan only issuers not having those high old bonds 132 00:06:35,600 --> 00:06:40,200 Speaker 1: in their capital stacks. So they're smaller, they're riskier. They 133 00:06:40,240 --> 00:06:42,839 Speaker 1: tend to not have access to the high old bond market. 134 00:06:42,880 --> 00:06:45,599 Speaker 1: That's why they're not there, not always, but often, And 135 00:06:45,640 --> 00:06:47,400 Speaker 1: so these are the type of issuers that are even 136 00:06:47,440 --> 00:06:50,159 Speaker 1: more vulnerable in a downturn because they don't have the 137 00:06:50,200 --> 00:06:53,880 Speaker 1: same market capitalization as S and P five hundred company would. 138 00:06:54,400 --> 00:06:56,440 Speaker 1: And your story really dug into the downgrades, which I 139 00:06:56,480 --> 00:06:58,680 Speaker 1: think is really interesting. What's the trend there? What was 140 00:06:58,720 --> 00:07:03,599 Speaker 1: happening with that? Yeah, right now we're seeing issuers that 141 00:07:03,640 --> 00:07:06,320 Speaker 1: only have loans in their capital structure. Those downgrades are 142 00:07:06,360 --> 00:07:09,080 Speaker 1: at the highest level since the earlier days of the pandemic, 143 00:07:09,120 --> 00:07:12,880 Speaker 1: and they're showing signs of accelerating. And on the other side, 144 00:07:12,880 --> 00:07:14,560 Speaker 1: the banks, they got stuck with a whole lot of 145 00:07:15,000 --> 00:07:17,680 Speaker 1: leverage buyout debt that they couldn't sell last year and 146 00:07:17,680 --> 00:07:19,800 Speaker 1: they're still trying to sell it down. How are they 147 00:07:19,840 --> 00:07:21,840 Speaker 1: reacting to this? Are they pulling back a bit? Are 148 00:07:21,840 --> 00:07:27,320 Speaker 1: they getting more more defensive and lending to junk companies? Definitely, 149 00:07:27,560 --> 00:07:29,840 Speaker 1: the banks have to stop and think about who they 150 00:07:29,880 --> 00:07:32,600 Speaker 1: want to lend to more now that they have so 151 00:07:32,720 --> 00:07:35,440 Speaker 1: much excess loans stuck on their bank balance sheets. It's 152 00:07:35,480 --> 00:07:38,800 Speaker 1: definitely clogged the global m and A pipeline, and I 153 00:07:38,840 --> 00:07:40,400 Speaker 1: do think that they're going to have to think more 154 00:07:40,440 --> 00:07:42,680 Speaker 1: carefully going forward about who they want to lend to 155 00:07:43,040 --> 00:07:46,160 Speaker 1: and how much they can commit. Okay, great story, thanks 156 00:07:46,200 --> 00:07:48,280 Speaker 1: a lot. I'm going to turn now to Steve Flynn 157 00:07:48,320 --> 00:07:51,840 Speaker 1: from Bloomberg Intelligence, who focuses on the communications sector and 158 00:07:52,200 --> 00:07:54,080 Speaker 1: before we dig into that sector, I just wanted to 159 00:07:54,440 --> 00:07:58,760 Speaker 1: ask you, Steve about high yeal bondishments specifically. It's being 160 00:07:58,840 --> 00:08:01,360 Speaker 1: such an incredible start to the year, at least over 161 00:08:01,400 --> 00:08:04,600 Speaker 1: the last you know, a few days or so. But 162 00:08:05,760 --> 00:08:09,400 Speaker 1: should we expect that to continue? Sure, if yield stay 163 00:08:09,480 --> 00:08:12,440 Speaker 1: at current levels or removed lower, Yeah, I definitely think 164 00:08:12,440 --> 00:08:16,080 Speaker 1: you'll see continued a robust volume for new issuance UM. 165 00:08:16,280 --> 00:08:17,880 Speaker 1: You know, I've been covering the high old bomb market 166 00:08:17,920 --> 00:08:19,680 Speaker 1: for a long time. One thing that remains true is 167 00:08:19,720 --> 00:08:22,680 Speaker 1: that you issue when you can right and the market 168 00:08:22,760 --> 00:08:24,920 Speaker 1: is open. So companies are taking advantage of it and 169 00:08:24,920 --> 00:08:27,680 Speaker 1: tapping the high old bomb market. And Dish was one 170 00:08:27,720 --> 00:08:30,120 Speaker 1: of the big names in UM. You know, they doubled 171 00:08:30,160 --> 00:08:34,559 Speaker 1: the size from five hundred billion. Have they resolved the 172 00:08:34,679 --> 00:08:37,800 Speaker 1: liquidity needs in the short term, yes, they have so, 173 00:08:38,200 --> 00:08:40,840 Speaker 1: but longer term I think they're going to need additional liquidity. 174 00:08:41,640 --> 00:08:45,200 Speaker 1: So they ended the year or began the twenty twenty 175 00:08:45,200 --> 00:08:47,640 Speaker 1: three or about two point four billion in cash we estimate, 176 00:08:47,960 --> 00:08:49,920 Speaker 1: and they you know, they priced one point five billion 177 00:08:49,920 --> 00:08:52,240 Speaker 1: dollars on Tuesday, so that brings them ut to about 178 00:08:52,280 --> 00:08:54,520 Speaker 1: three point nine billion, which listen, that is a lot 179 00:08:54,559 --> 00:08:58,280 Speaker 1: of cash, but the company has significant calls on its liquidity. 180 00:08:58,320 --> 00:09:00,439 Speaker 1: It has a one point five billion dollars bond do 181 00:09:00,600 --> 00:09:03,880 Speaker 1: on March first. The company is free cash flow negative 182 00:09:03,920 --> 00:09:07,400 Speaker 1: due to its massive investment in its growing wireless business, 183 00:09:07,760 --> 00:09:11,040 Speaker 1: and the company has a potential to purchase additional spectrum. 184 00:09:12,000 --> 00:09:15,280 Speaker 1: The company also faces significant bomb maturities in the future. 185 00:09:15,280 --> 00:09:17,640 Speaker 1: They have like three billion dollars and maturities in twenty four, 186 00:09:18,120 --> 00:09:20,160 Speaker 1: two billion in two thou twenty five, and then an 187 00:09:20,160 --> 00:09:22,480 Speaker 1: even larger amount doing in two thousand and twenty six. 188 00:09:22,920 --> 00:09:26,080 Speaker 1: So while this was great for them near term boosts 189 00:09:26,080 --> 00:09:29,120 Speaker 1: all liquidity funds them through this year, they're going to 190 00:09:29,200 --> 00:09:31,959 Speaker 1: need additional cash in the future. Okay, thank you. So So, 191 00:09:32,120 --> 00:09:36,680 Speaker 1: looking more broadly at the communication sector, which credit portfolios, 192 00:09:36,760 --> 00:09:40,880 Speaker 1: sorry profiles, do you think likely to improve this year? Well, listen, 193 00:09:41,160 --> 00:09:45,000 Speaker 1: we do like the communications sector. There's a few things 194 00:09:45,000 --> 00:09:47,880 Speaker 1: to like about at number one. It has compelling attributes, 195 00:09:47,920 --> 00:09:52,600 Speaker 1: including ample liquidity, little international exposure, most of those businesses 196 00:09:52,640 --> 00:09:55,800 Speaker 1: are domestic and they provide you know, essential services that 197 00:09:56,080 --> 00:09:59,840 Speaker 1: people need, such as fixed broadband and mobility. My colleague 198 00:10:00,120 --> 00:10:03,760 Speaker 1: Shifman likes the technology sector. Technology companies have strong balance 199 00:10:03,800 --> 00:10:07,880 Speaker 1: sheets with significant cash holdings. He believes that many of them, 200 00:10:07,920 --> 00:10:11,000 Speaker 1: if you look at like Apple, Microsoft, Alphabet have very 201 00:10:11,080 --> 00:10:13,959 Speaker 1: high credit ratings, hundreds of billion dollars of cash, and 202 00:10:14,400 --> 00:10:19,160 Speaker 1: seemingly impenetrable business models. So those are two sectors that 203 00:10:19,480 --> 00:10:22,160 Speaker 1: we like in high grade. So those are sectors that 204 00:10:22,280 --> 00:10:26,559 Speaker 1: could withstand a slowdown or a recession potentially correct. Yes, 205 00:10:26,800 --> 00:10:29,080 Speaker 1: I would say tech given the amount of liquidity it has. 206 00:10:29,080 --> 00:10:33,560 Speaker 1: In communications, again, it provides essential services, right, so typically 207 00:10:33,559 --> 00:10:38,400 Speaker 1: in recession, people are very resonant to cut back on cable, 208 00:10:38,679 --> 00:10:42,320 Speaker 1: on their mobile phone, on data. Those are things they need. 209 00:10:42,360 --> 00:10:45,120 Speaker 1: So those sectors are relatively defensive. Yeah, we'll have to 210 00:10:45,120 --> 00:10:49,520 Speaker 1: watch Netflix through these tough times. So looking at the 211 00:10:50,000 --> 00:10:52,080 Speaker 1: actual price of these bonds, I mean, they got really 212 00:10:52,080 --> 00:10:53,959 Speaker 1: beaten up last year and that's why a lot of 213 00:10:53,960 --> 00:10:56,920 Speaker 1: people seem to pile in again. But do you think 214 00:10:56,960 --> 00:10:59,720 Speaker 1: that they are fairly valued based based on your assessment 215 00:10:59,720 --> 00:11:02,760 Speaker 1: of fundamentals right now? Yeah, sure, I think they're fairly value. 216 00:11:02,760 --> 00:11:04,720 Speaker 1: I think some probably you're going a little bit too wide. 217 00:11:05,640 --> 00:11:07,800 Speaker 1: You know, we have a few that are really trying 218 00:11:07,800 --> 00:11:09,440 Speaker 1: to deliver. So if you look at the names, like 219 00:11:09,840 --> 00:11:13,080 Speaker 1: a teen T Verise and Warner Brothers Discovery. They're each 220 00:11:13,120 --> 00:11:15,319 Speaker 1: striving to improve their leverage ry shows over the next 221 00:11:15,360 --> 00:11:18,000 Speaker 1: couple of years. If we think about a tent verse 222 00:11:18,080 --> 00:11:19,480 Speaker 1: and those are two of the largest names in the 223 00:11:19,520 --> 00:11:21,680 Speaker 1: corporate bond market, and they should be able to chip 224 00:11:21,679 --> 00:11:24,240 Speaker 1: away at their debtloads with free cash flow and access 225 00:11:24,240 --> 00:11:26,400 Speaker 1: to dividend payments. If you look at a name like 226 00:11:26,400 --> 00:11:30,400 Speaker 1: Warner Brothers Discovery, that company was created in April twenty 227 00:11:30,600 --> 00:11:33,719 Speaker 1: twenty two with a merger of Discovery and Wardermania, which 228 00:11:33,800 --> 00:11:37,079 Speaker 1: was separated from AT and T. You know that was 229 00:11:37,160 --> 00:11:39,520 Speaker 1: highly leveraged. They've borrowed a lot of fun of payment 230 00:11:39,559 --> 00:11:41,800 Speaker 1: to a T and T. But they you know, they 231 00:11:41,840 --> 00:11:46,520 Speaker 1: expect significant free cash flow generation and epidog growth which 232 00:11:46,520 --> 00:11:49,600 Speaker 1: will allow them to reduce their net leverage. Ray show. 233 00:11:50,240 --> 00:11:52,720 Speaker 1: Those bonds are rated low, trip will be they trade 234 00:11:53,280 --> 00:11:55,719 Speaker 1: very wide. There is a fear that listen, they have 235 00:11:55,760 --> 00:11:58,920 Speaker 1: exposure to advertising its recession. Advertising pulls back in recession, 236 00:11:59,200 --> 00:12:01,200 Speaker 1: but they do have a lot of levers to pull, 237 00:12:01,240 --> 00:12:04,240 Speaker 1: I think to make to improve their credit ratio, particularly 238 00:12:04,240 --> 00:12:08,360 Speaker 1: with realizing massive cost energies from the combination those two companies. Okay, 239 00:12:08,360 --> 00:12:10,720 Speaker 1: and what types of communications borrowed. Do you think is 240 00:12:10,720 --> 00:12:13,320 Speaker 1: most at risk and why? Well, I think the one 241 00:12:13,440 --> 00:12:16,480 Speaker 1: names that are most our investors are most concerned about 242 00:12:16,480 --> 00:12:21,160 Speaker 1: are those with heavy exposure to advertising given the potential 243 00:12:21,160 --> 00:12:25,199 Speaker 1: for recession, potential for advertisers to slow their spend, right, 244 00:12:25,520 --> 00:12:27,560 Speaker 1: and so that is the media company. So that is 245 00:12:27,559 --> 00:12:32,040 Speaker 1: companies like Paramount, Warner Brothers, Discovery. You know, there's definitely 246 00:12:32,040 --> 00:12:34,640 Speaker 1: some concern about them. There's also concern about companies that 247 00:12:34,720 --> 00:12:37,719 Speaker 1: have relatively high leverage, like within investment grade. So a 248 00:12:37,840 --> 00:12:42,000 Speaker 1: name like Charter Charter has high leverage they have they 249 00:12:42,000 --> 00:12:43,719 Speaker 1: produce a lot of free cash flow, they have a 250 00:12:43,840 --> 00:12:46,560 Speaker 1: robust business model, but they do have a high leverage. 251 00:12:46,600 --> 00:12:49,240 Speaker 1: So some of those names will trade wide investment crede. 252 00:12:49,280 --> 00:12:51,160 Speaker 1: If you move over a high yield obviously your credit 253 00:12:51,240 --> 00:12:53,319 Speaker 1: quality goes down, right, So there's a lot of names 254 00:12:53,320 --> 00:12:55,920 Speaker 1: that trade at very low prices. You know, Dish we 255 00:12:56,000 --> 00:12:59,000 Speaker 1: talked about they need liquidity. You have a name like 256 00:12:59,360 --> 00:13:03,559 Speaker 1: AMC and or Team in movie Theories, which which trades wide. 257 00:13:04,120 --> 00:13:06,520 Speaker 1: You have some of the wireline companies like a Frontier, 258 00:13:06,679 --> 00:13:10,480 Speaker 1: Loom and Consolidated, they all trade pretty wide. You mentioned AMC, 259 00:13:10,600 --> 00:13:14,040 Speaker 1: that's everyone's favorite meme stuck and has been through a 260 00:13:14,040 --> 00:13:18,320 Speaker 1: real up and down, right, I'd be interested and you'll 261 00:13:18,320 --> 00:13:21,319 Speaker 1: take on what the outlook is for that that company. 262 00:13:21,320 --> 00:13:23,640 Speaker 1: I mean, do they survive in this environment? Sure? Well, 263 00:13:23,679 --> 00:13:26,720 Speaker 1: AMC's revenue in Ibada may improve over the next couple 264 00:13:26,720 --> 00:13:30,360 Speaker 1: of years as theater attendance continues to rebound. And while 265 00:13:30,400 --> 00:13:32,440 Speaker 1: we asked me, the company has about six hundred million 266 00:13:32,440 --> 00:13:34,960 Speaker 1: dollars of cash proforming to start the year, which is, 267 00:13:35,360 --> 00:13:39,040 Speaker 1: you know, probably enough to absorb losses, invest in the business, 268 00:13:39,120 --> 00:13:41,600 Speaker 1: and dress debt maturities over the next few years, like 269 00:13:41,640 --> 00:13:45,080 Speaker 1: through twenty twenty five. But the main challenge for AMC 270 00:13:45,240 --> 00:13:47,840 Speaker 1: is they have a massive, massive maturity wall in twenty 271 00:13:48,080 --> 00:13:50,839 Speaker 1: twenty six that may just be too high of a 272 00:13:50,920 --> 00:13:53,680 Speaker 1: hurdle for them to overcome. And as a result, you 273 00:13:53,760 --> 00:13:56,640 Speaker 1: see that many of their secured, second lean and unsecured 274 00:13:56,679 --> 00:13:59,720 Speaker 1: bonds are currently trading at distress prices. You think that 275 00:13:59,760 --> 00:14:02,319 Speaker 1: they lust through them through the next two years. They 276 00:14:02,600 --> 00:14:06,920 Speaker 1: I mean, based on expectations for you know, cash flow 277 00:14:07,000 --> 00:14:09,920 Speaker 1: and given what maturities they have to deal with, I 278 00:14:09,960 --> 00:14:12,560 Speaker 1: think they can last a couple of years. The company 279 00:14:12,600 --> 00:14:17,880 Speaker 1: has been relatively proactive too. They've been issuing their APE shares. 280 00:14:18,520 --> 00:14:20,760 Speaker 1: They also have an agreement to swap some debt for 281 00:14:20,840 --> 00:14:24,160 Speaker 1: some APE shares, and so they're trying to do what 282 00:14:24,200 --> 00:14:29,120 Speaker 1: they can and hopefully the box office will continue to rebound. 283 00:14:29,160 --> 00:14:32,160 Speaker 1: Like I don't think we're anywhere near the eleven billion 284 00:14:32,160 --> 00:14:34,680 Speaker 1: dollars domestic box office that we used to do on 285 00:14:34,720 --> 00:14:39,160 Speaker 1: a yearly basis pre pandemic, but we're we're marching towards improvements. 286 00:14:39,160 --> 00:14:41,680 Speaker 1: I think forecasts this year or for over eight billion dollars, 287 00:14:42,080 --> 00:14:44,240 Speaker 1: and so you know that will help. If if it 288 00:14:44,280 --> 00:14:46,640 Speaker 1: goes even higher, obviously that will help more. And they 289 00:14:46,680 --> 00:14:48,640 Speaker 1: also diverse into minding, though it seems like a bit 290 00:14:48,640 --> 00:14:51,960 Speaker 1: of a confused strategy from the top. Yeah, that was 291 00:14:52,000 --> 00:14:54,440 Speaker 1: a small investment that you made that was probably more 292 00:14:54,560 --> 00:14:56,960 Speaker 1: noise than anything. So as far as you know your 293 00:14:57,000 --> 00:15:00,040 Speaker 1: credit analysis, I really don't factor that in. Okay. On 294 00:15:00,080 --> 00:15:02,040 Speaker 1: the flip side, are there any good ones the junk 295 00:15:02,120 --> 00:15:04,560 Speaker 1: that should be high grade? Do you think the most 296 00:15:04,560 --> 00:15:07,440 Speaker 1: interesting name or what we'd call a rising star company 297 00:15:07,480 --> 00:15:10,400 Speaker 1: that rises out of high yield into investment grade? And 298 00:15:11,200 --> 00:15:13,320 Speaker 1: the driver there is that you need two of the 299 00:15:13,440 --> 00:15:18,320 Speaker 1: three main credit rating agencies to rate you high grade 300 00:15:18,320 --> 00:15:20,320 Speaker 1: to be high grade, and if we look at a 301 00:15:20,360 --> 00:15:25,160 Speaker 1: company like Netflix, Netflix is high grade by SMP. They 302 00:15:25,200 --> 00:15:27,400 Speaker 1: don't have a Fitch rating and Moodies is be a 303 00:15:27,560 --> 00:15:31,360 Speaker 1: one with a positive outlook. And given the potential for 304 00:15:31,720 --> 00:15:35,480 Speaker 1: given that Netflix has reached sustained a positive free cash flow, 305 00:15:35,800 --> 00:15:37,560 Speaker 1: I think there's a good chance that they could be 306 00:15:37,600 --> 00:15:40,400 Speaker 1: a rising star in twenty twenty three and could get upgraded. 307 00:15:40,720 --> 00:15:42,360 Speaker 1: They need to make more shows, though they seem to 308 00:15:42,440 --> 00:15:45,120 Speaker 1: kind of have the shows and then they wait too 309 00:15:45,160 --> 00:15:48,760 Speaker 1: long for me anyway, they always cancel after the second season. 310 00:15:49,720 --> 00:15:53,880 Speaker 1: Maybe those are shows that only you guys watch. Netflix 311 00:15:53,920 --> 00:15:58,800 Speaker 1: has a massive content budgets, so there are cash outlays 312 00:15:58,800 --> 00:16:02,600 Speaker 1: were content I think is around seventeen billion dollars offer 313 00:16:02,720 --> 00:16:05,880 Speaker 1: twenty twenty two. We should get an update shortly about 314 00:16:05,920 --> 00:16:09,680 Speaker 1: their budget for twenty twenty three. I've expected to be 315 00:16:09,720 --> 00:16:12,480 Speaker 1: in that similar range. So they do spend a lot 316 00:16:12,520 --> 00:16:15,640 Speaker 1: of money. So just dialing back, I mean, do you 317 00:16:15,640 --> 00:16:18,120 Speaker 1: think there is more consolidation to come in the sets 318 00:16:18,200 --> 00:16:21,000 Speaker 1: or overall? Do you think there's more emanates come? Yes, 319 00:16:21,080 --> 00:16:23,120 Speaker 1: particularly when you brought up streaming right, So if you 320 00:16:23,160 --> 00:16:26,320 Speaker 1: go back a couple of years, most investors were okay 321 00:16:26,400 --> 00:16:30,760 Speaker 1: with these streaming companies producing large deficits, which Netflix did 322 00:16:30,840 --> 00:16:34,680 Speaker 1: for many years until the pandemic. As long as they 323 00:16:34,720 --> 00:16:37,320 Speaker 1: continue to grow subscribers, people are okay with the deficits. 324 00:16:37,360 --> 00:16:40,400 Speaker 1: But now a lot of investors are looking for positive 325 00:16:40,400 --> 00:16:42,440 Speaker 1: free cash flow or like, you know, when are these 326 00:16:43,360 --> 00:16:46,480 Speaker 1: streaming business is going to be profitable? Right? And Netflix, 327 00:16:46,600 --> 00:16:50,040 Speaker 1: after many years of lasses has reached sustained positive free 328 00:16:50,040 --> 00:16:52,480 Speaker 1: cash flow, which is a big thing. The rating agencies 329 00:16:52,480 --> 00:16:54,000 Speaker 1: we're looking for, and a lot of their lenders we're 330 00:16:54,040 --> 00:16:56,200 Speaker 1: looking for. But now if we look across the board, 331 00:16:56,280 --> 00:16:57,760 Speaker 1: you know, if you want to compete with somebody the 332 00:16:57,800 --> 00:17:00,400 Speaker 1: size and Netflix or somebody the size that did which 333 00:17:00,440 --> 00:17:05,199 Speaker 1: has you know, Disney, ESPN, Hulu, you need to be bigger. Right. 334 00:17:05,200 --> 00:17:08,000 Speaker 1: So if we look at there's lots of streaming providers 335 00:17:08,000 --> 00:17:10,160 Speaker 1: out there, a lots of them that are losing money 336 00:17:10,560 --> 00:17:13,240 Speaker 1: and there could be some sort of combination when you 337 00:17:13,240 --> 00:17:16,000 Speaker 1: think about you know you got well you have Warner 338 00:17:16,000 --> 00:17:19,280 Speaker 1: Brothers and HBO Max um or HBO Max and Warner 339 00:17:19,280 --> 00:17:23,639 Speaker 1: Brothers Discovery, the discovery platforms looking to get to merge 340 00:17:23,840 --> 00:17:27,159 Speaker 1: this year as far as the platforms are concerned. You 341 00:17:27,240 --> 00:17:30,560 Speaker 1: have you know, you have got Paramount, You've got obviously Amazon, 342 00:17:30,680 --> 00:17:34,320 Speaker 1: You've got you know, tons of other streaming providing at UM. 343 00:17:34,400 --> 00:17:37,000 Speaker 1: You know, Comcast has or Peacock service, So there's a 344 00:17:37,040 --> 00:17:39,600 Speaker 1: lot out there. I think you may see some consolidations 345 00:17:39,600 --> 00:17:42,200 Speaker 1: against some scale on the streaming side. I have about 346 00:17:42,240 --> 00:17:44,639 Speaker 1: eight subscriptions to these things and my kids each have 347 00:17:44,840 --> 00:17:48,080 Speaker 1: one and they'll watch one show each and it custs 348 00:17:48,200 --> 00:17:50,920 Speaker 1: me the same as old school cables, so I don't 349 00:17:50,920 --> 00:17:53,960 Speaker 1: wrap them all into one. Yeah, exactly. So I think, 350 00:17:54,560 --> 00:17:56,879 Speaker 1: you know, you see, I think there's a chance you 351 00:17:56,920 --> 00:17:58,760 Speaker 1: can get consolidations to try and bulk up some of 352 00:17:58,760 --> 00:18:04,600 Speaker 1: these platforms. Okay, great, so appreciate it. Steve Flynn Bloomberg Intelligence, 353 00:18:04,720 --> 00:18:08,400 Speaker 1: and just to wrap this up for this week, what 354 00:18:09,119 --> 00:18:12,320 Speaker 1: is the outlook from both of you? You know, start 355 00:18:12,359 --> 00:18:16,439 Speaker 1: with Olivia Raymond Day from Bloomberg News. You're looking at 356 00:18:16,480 --> 00:18:19,320 Speaker 1: these markets all day long. The Fed hiking, there's a 357 00:18:19,359 --> 00:18:23,320 Speaker 1: war on in Ukraine, sial, there's inflation, there's you know, 358 00:18:23,400 --> 00:18:26,520 Speaker 1: geopolitical issues, there's all sorts of trouble on the horizon. 359 00:18:26,560 --> 00:18:29,200 Speaker 1: But we bullish or bearish yere we're getting ahead of 360 00:18:29,240 --> 00:18:32,720 Speaker 1: ourselves and being too excited about these markets. I think 361 00:18:32,720 --> 00:18:34,840 Speaker 1: we're getting a little bit ahead of ourselves, James. There's 362 00:18:34,920 --> 00:18:38,200 Speaker 1: just way too many uncertainties, many of them that you 363 00:18:38,280 --> 00:18:43,600 Speaker 1: just mentioned that are still not fully baked into market prices. 364 00:18:43,600 --> 00:18:46,159 Speaker 1: And I do think spreads are gonna move wider, and 365 00:18:46,200 --> 00:18:48,880 Speaker 1: I do think yields will go higher in the near term. 366 00:18:49,600 --> 00:18:51,840 Speaker 1: How about you, Steve Flynn. Yeah, I'm probably a little 367 00:18:51,840 --> 00:18:54,840 Speaker 1: bit more constructive. I think a lot of companies realize 368 00:18:54,840 --> 00:18:56,880 Speaker 1: that they have to deal with their debt. I think, 369 00:18:57,000 --> 00:19:00,600 Speaker 1: you know, the lack of issuance last year really was 370 00:19:00,640 --> 00:19:02,600 Speaker 1: a concern for companies that they may have to look 371 00:19:02,600 --> 00:19:05,159 Speaker 1: for other ways to pay down their obligations and may 372 00:19:05,200 --> 00:19:08,240 Speaker 1: be focused on improving their leverage ratios and credit profiles. 373 00:19:08,280 --> 00:19:10,720 Speaker 1: So I think management teams are going to be focused 374 00:19:10,760 --> 00:19:14,639 Speaker 1: on their debtloads, which is I think positive. Okay, great, 375 00:19:14,760 --> 00:19:17,360 Speaker 1: Thank you very much again, Steve Flinn from Bloomberg Intelligence. 376 00:19:17,400 --> 00:19:20,880 Speaker 1: Olivia ra Monday from Bloomberg News. I'm James Crumby. It's 377 00:19:20,920 --> 00:19:22,920 Speaker 1: been a pleasure of having you. See you next week. Yes, 378 00:19:23,320 --> 00:19:23,639 Speaker 1: thank you.