WEBVTT - High-Yield Boom; Communications Focus: Credit Edge 0:00:00.040 --> 0:00:02.840 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:03.240 --> 0:00:05.800 My name is James Crombie. I'm a senior editor at Bloomberg. 0:00:06.400 --> 0:00:10.039 Today's guests are Olivia Raymonde, a credit reporter for Bloomberg 0:00:10.160 --> 0:00:12.920 News in New York, and Steve Flynn, who looks at 0:00:12.920 --> 0:00:16.920 the communications sector for Bloomberg Intelligence. It's been another very 0:00:16.960 --> 0:00:19.959 busy week, lots of excitement in global credit markets, including 0:00:19.960 --> 0:00:23.160 a ton of new issuance from junk rated borrowers. Let's 0:00:23.160 --> 0:00:25.079 get into that in a little bit, But before we do, 0:00:25.760 --> 0:00:28.760 I just wanted to ask Olivia Steve, what's up with 0:00:28.800 --> 0:00:32.960 Party City. We're clearly not buying enough giant heart shaped 0:00:33.000 --> 0:00:36.360 helium balloons. They had to file for bankruptcy. What's going on. 0:00:36.479 --> 0:00:39.520 We're not having enough fun in this country. What's your take, Olivia? 0:00:40.800 --> 0:00:44.800 I think that we are having enough fun in the country, 0:00:44.800 --> 0:00:46.280 and maybe that's why we don't need to go to 0:00:46.360 --> 0:00:49.800 Party City. I think I love a good party. My 0:00:49.840 --> 0:00:51.320 kids are a little bit older now, so we don't 0:00:51.400 --> 0:00:53.159 visit Party City as much as we used to. But 0:00:53.920 --> 0:00:55.600 what I've been there, so we have to wait for 0:00:55.680 --> 0:00:57.760 Valentine's Day to buy those big heart shaped balloons. But 0:00:58.480 --> 0:01:01.400 that company's in trouble and retail sales just fell. You 0:01:01.400 --> 0:01:04.400 know that the consumer is not doing well. But let's 0:01:04.400 --> 0:01:08.479 get back to the issue Olivia. We've seen a big 0:01:08.520 --> 0:01:12.920 increase in high yield bond issuance lately, junk rated a 0:01:12.959 --> 0:01:16.600 lot of cash after a real drought. Last year, issuance 0:01:16.680 --> 0:01:20.360 was down something like seventy twenty twenty two. What's the 0:01:20.400 --> 0:01:23.920 situation though, Why are they issuing now? It's a great 0:01:23.959 --> 0:01:26.800 question and a really interesting dynamic, James, that I think 0:01:26.880 --> 0:01:29.040 is going to play out through this entire year. When 0:01:29.040 --> 0:01:32.000 we look back at the end of last year, investors 0:01:32.000 --> 0:01:35.560 were really concerned about high yield bonds, especially ones in 0:01:35.600 --> 0:01:38.680 the lower rated tiers such as like triple C credits. 0:01:39.360 --> 0:01:42.880 Now what we're seeing is that as borrowing costs are dropping, 0:01:43.080 --> 0:01:47.600 not compared to last year's levels, but dropping in size 0:01:47.600 --> 0:01:50.680 and scope, people are now rushing to add on risk. 0:01:50.760 --> 0:01:52.960 When they were maybe a little bit more positioned defensively. 0:01:53.040 --> 0:01:54.560 So now they're trying to get ahead of it, which 0:01:54.560 --> 0:01:57.560 has kind of caused this big rally. But what are 0:01:57.600 --> 0:02:01.400 the advantages of issuing nobs? Borrowing gone up, yields gone up, 0:02:01.440 --> 0:02:04.680 everything's going up. Why do it no. I think that 0:02:04.880 --> 0:02:07.720 yields are down from their highest point of last year 0:02:07.720 --> 0:02:09.679 and that they will rise again, and I think that's 0:02:09.680 --> 0:02:12.720 what the base case of many strategists are. So therefore, 0:02:12.919 --> 0:02:16.000 if they have an opportunity to get in now, it's 0:02:16.040 --> 0:02:18.320 better than waiting until we hit maybe like an economic 0:02:18.400 --> 0:02:21.480 slowdown or a recession when yields spike even higher. And 0:02:21.520 --> 0:02:23.000 what are they using all that money for? Is it 0:02:23.000 --> 0:02:26.000 it's refinancing, is it new projects? Is it M and A? 0:02:26.280 --> 0:02:29.320 What's the trend the Yeah, it's really interesting. Last year, 0:02:29.560 --> 0:02:31.960 the main trend we saw was that pretty much companies 0:02:31.960 --> 0:02:34.400 were only coming to the market if they had like 0:02:34.440 --> 0:02:37.440 an imminent financing need, like they needed money to fund 0:02:37.520 --> 0:02:41.520 like an acquisition for example. Now we're seeing more opportunistic 0:02:42.639 --> 0:02:45.600 financings in the market. People are coming into refinance debt, 0:02:45.840 --> 0:02:49.120 they're coming into fun tender offers, and we're seeing MNA 0:02:49.400 --> 0:02:52.920 picking up slightly. Is there one particular sector that's dominating. 0:02:52.960 --> 0:02:54.680 I know we've had some energy companies which you know, 0:02:54.680 --> 0:02:56.079 they haven't been very apt to but but you know 0:02:56.120 --> 0:02:58.800 they've been enjoyed high oil prices. Are we seeing a 0:02:58.840 --> 0:03:02.000 big focus on one sectories it across the board. I 0:03:02.040 --> 0:03:03.840 think it's across the board. It's good to note the 0:03:03.960 --> 0:03:06.800 energy sector, that's a pretty strong sector and high yield 0:03:06.880 --> 0:03:09.080 right now. A lot of those names are DOUBLEB just 0:03:09.120 --> 0:03:13.800 the cusp of investment grade, so they have had they've 0:03:13.840 --> 0:03:17.400 been able to access the market more easily than other sectors, 0:03:17.760 --> 0:03:19.640 even in the past few months. But we have seen 0:03:19.680 --> 0:03:22.640 others like for example, Dish Network was in looking to 0:03:22.680 --> 0:03:27.560 add another couple billion dollars onto a series that it 0:03:27.639 --> 0:03:29.880 launched in November. Well, and it we'll get to Dishtion 0:03:29.919 --> 0:03:32.040 a bit with Steve who focuses on that sector. But 0:03:33.240 --> 0:03:34.960 what is the outlook though for that market? You know, 0:03:35.040 --> 0:03:37.680 these bonds are junk, and they're cool junk for a reason. 0:03:37.760 --> 0:03:41.240 So you know, why is everyone buying them. Everyone's buying 0:03:41.240 --> 0:03:43.600 them right now because everyone's sort of jumping in on 0:03:43.640 --> 0:03:45.760 this rally. It's kind of a fear of missing out. 0:03:46.480 --> 0:03:50.119 Stratagis do not think that this rally can be sustained. 0:03:50.160 --> 0:03:53.320 We have slowing economic growth, people are concerned about a recession. 0:03:53.360 --> 0:03:55.480 The Fed is not done hiking rates. So even though 0:03:55.960 --> 0:03:58.520 investors have I mean, even though borrowers have a little 0:03:58.520 --> 0:04:00.800 bit of a reprieve right now, and invest are jumping in. 0:04:00.920 --> 0:04:04.440 Stratagists don't think it will last, so spreads could easily 0:04:04.480 --> 0:04:07.720 widen from here or yields go up. I think the 0:04:07.760 --> 0:04:10.120 base case in the market is expecting spreads to widen 0:04:10.120 --> 0:04:11.960 and yields to go up from here, because in a 0:04:12.080 --> 0:04:14.960 recession typically you know, we're it spreads around four hundred 0:04:15.000 --> 0:04:17.320 on USI yield, right, but in a recession you go 0:04:17.400 --> 0:04:19.560 to eight hundreds. So that's a big move from here, 0:04:19.800 --> 0:04:22.360 or even a thousand if you're looking at the pandemic. So, 0:04:22.560 --> 0:04:24.760 I mean, I don't get it. We're going through an 0:04:24.760 --> 0:04:27.240 earning season that could be tough, We're getting a FED 0:04:27.320 --> 0:04:30.760 that's getting quite hawkish, We're going through you know, there's 0:04:30.839 --> 0:04:33.440 there's a war on in Ukraine. Still, there's all sorts 0:04:33.440 --> 0:04:36.920 of issues around why people still piling in. I don't 0:04:36.960 --> 0:04:40.839 get it. The amount of investor optimism about the outlook 0:04:40.839 --> 0:04:44.760 for the economy this year has been quite phenomenal. Actually, 0:04:44.800 --> 0:04:48.800 the market continues to bet on rate cuts, continuing to 0:04:48.839 --> 0:04:51.720 think that the FED is going to slow it's tightening, 0:04:52.240 --> 0:04:54.520 and that inflation is going to come down quicker than 0:04:55.080 --> 0:04:57.800 maybe once thought, and that's allowing everyone to sort of 0:04:58.000 --> 0:05:00.800 get ahead of themselves and start to make on what 0:05:00.839 --> 0:05:02.560 they think is going to happen further on down the 0:05:02.560 --> 0:05:05.440 line past a recession. But the reality is is that 0:05:05.560 --> 0:05:07.760 we don't know what the recession is going to look 0:05:07.800 --> 0:05:09.840 like and when it's going to come, so people still 0:05:09.839 --> 0:05:13.679 need to remain defensive. Okay, So before we all Steve 0:05:13.680 --> 0:05:17.280 about that and his take on the issuance rush, you've 0:05:17.320 --> 0:05:20.400 also looked at leverage loans. You know, there's a there's 0:05:20.400 --> 0:05:23.080 a ton of loan debt outstanding, and of course that's 0:05:23.120 --> 0:05:27.080 all floating rate and libel jumped to almost five percent recently, 0:05:27.120 --> 0:05:29.080 and that's you know, it was close to zero just 0:05:29.160 --> 0:05:32.240 a year ago, so that's a huge leap. Those borrowers 0:05:32.240 --> 0:05:34.719 a struggling. They're going to struggle to pay back that money. 0:05:34.760 --> 0:05:38.120 What's what's the situation there? Yeah, the loan market is 0:05:38.120 --> 0:05:41.440 a little bit more precarious than the bond market, James. 0:05:41.880 --> 0:05:45.159 It's not as highly rated, and the biggest issue of 0:05:45.240 --> 0:05:49.040 concern actually is borrowers who only have loans in their 0:05:49.080 --> 0:05:52.280 capital structure, so they have no high yield bonds. That 0:05:52.320 --> 0:05:55.240 means there's no subordinated debt sitting beneath the loans, So 0:05:55.360 --> 0:05:59.440 that's less investor protection should there be a bankruptcy, and 0:05:59.520 --> 0:06:02.680 if the slows down the pace of hiking, does that 0:06:02.720 --> 0:06:05.520 offer some relief to them, do they get bailed out? 0:06:05.560 --> 0:06:08.440 Effect to be the feed stops. I think at this 0:06:08.480 --> 0:06:11.599 point there's so much about the impact of what the 0:06:11.640 --> 0:06:14.520 FED has already done that has not moved through the economy, 0:06:14.520 --> 0:06:16.720 and we have not fully seen those effects that are 0:06:16.800 --> 0:06:19.480 materializing now but we just aren't aware of yet. So 0:06:19.520 --> 0:06:21.839 I think there's still a lot more room for a 0:06:21.880 --> 0:06:24.039 lot of volatility and a lot of surprises to the 0:06:24.080 --> 0:06:26.680 upside or downside and high old bonds this year, and 0:06:27.120 --> 0:06:30.400 on the loans specifically, more defaults in the loan section. 0:06:30.400 --> 0:06:32.359 We're probably going to see more defaults. That's because of 0:06:32.360 --> 0:06:35.599 those loan only issuers not having those high old bonds 0:06:35.600 --> 0:06:40.200 in their capital stacks. So they're smaller, they're riskier. They 0:06:40.240 --> 0:06:42.839 tend to not have access to the high old bond market. 0:06:42.880 --> 0:06:45.599 That's why they're not there, not always, but often, And 0:06:45.640 --> 0:06:47.400 so these are the type of issuers that are even 0:06:47.440 --> 0:06:50.159 more vulnerable in a downturn because they don't have the 0:06:50.200 --> 0:06:53.880 same market capitalization as S and P five hundred company would. 0:06:54.400 --> 0:06:56.440 And your story really dug into the downgrades, which I 0:06:56.480 --> 0:06:58.680 think is really interesting. What's the trend there? What was 0:06:58.720 --> 0:07:03.599 happening with that? Yeah, right now we're seeing issuers that 0:07:03.640 --> 0:07:06.320 only have loans in their capital structure. Those downgrades are 0:07:06.360 --> 0:07:09.080 at the highest level since the earlier days of the pandemic, 0:07:09.120 --> 0:07:12.880 and they're showing signs of accelerating. And on the other side, 0:07:12.880 --> 0:07:14.560 the banks, they got stuck with a whole lot of 0:07:15.000 --> 0:07:17.680 leverage buyout debt that they couldn't sell last year and 0:07:17.680 --> 0:07:19.800 they're still trying to sell it down. How are they 0:07:19.840 --> 0:07:21.840 reacting to this? Are they pulling back a bit? Are 0:07:21.840 --> 0:07:27.320 they getting more more defensive and lending to junk companies? Definitely, 0:07:27.560 --> 0:07:29.840 the banks have to stop and think about who they 0:07:29.880 --> 0:07:32.600 want to lend to more now that they have so 0:07:32.720 --> 0:07:35.440 much excess loans stuck on their bank balance sheets. It's 0:07:35.480 --> 0:07:38.800 definitely clogged the global m and A pipeline, and I 0:07:38.840 --> 0:07:40.400 do think that they're going to have to think more 0:07:40.440 --> 0:07:42.680 carefully going forward about who they want to lend to 0:07:43.040 --> 0:07:46.160 and how much they can commit. Okay, great story, thanks 0:07:46.200 --> 0:07:48.280 a lot. I'm going to turn now to Steve Flynn 0:07:48.320 --> 0:07:51.840 from Bloomberg Intelligence, who focuses on the communications sector and 0:07:52.200 --> 0:07:54.080 before we dig into that sector, I just wanted to 0:07:54.440 --> 0:07:58.760 ask you, Steve about high yeal bondishments specifically. It's being 0:07:58.840 --> 0:08:01.360 such an incredible start to the year, at least over 0:08:01.400 --> 0:08:04.600 the last you know, a few days or so. But 0:08:05.760 --> 0:08:09.400 should we expect that to continue? Sure, if yield stay 0:08:09.480 --> 0:08:12.440 at current levels or removed lower, Yeah, I definitely think 0:08:12.440 --> 0:08:16.080 you'll see continued a robust volume for new issuance UM. 0:08:16.280 --> 0:08:17.880 You know, I've been covering the high old bomb market 0:08:17.920 --> 0:08:19.680 for a long time. One thing that remains true is 0:08:19.720 --> 0:08:22.680 that you issue when you can right and the market 0:08:22.760 --> 0:08:24.920 is open. So companies are taking advantage of it and 0:08:24.920 --> 0:08:27.680 tapping the high old bomb market. And Dish was one 0:08:27.720 --> 0:08:30.120 of the big names in UM. You know, they doubled 0:08:30.160 --> 0:08:34.559 the size from five hundred billion. Have they resolved the 0:08:34.679 --> 0:08:37.800 liquidity needs in the short term, yes, they have so, 0:08:38.200 --> 0:08:40.840 but longer term I think they're going to need additional liquidity. 0:08:41.640 --> 0:08:45.200 So they ended the year or began the twenty twenty 0:08:45.200 --> 0:08:47.640 three or about two point four billion in cash we estimate, 0:08:47.960 --> 0:08:49.920 and they you know, they priced one point five billion 0:08:49.920 --> 0:08:52.240 dollars on Tuesday, so that brings them ut to about 0:08:52.280 --> 0:08:54.520 three point nine billion, which listen, that is a lot 0:08:54.559 --> 0:08:58.280 of cash, but the company has significant calls on its liquidity. 0:08:58.320 --> 0:09:00.439 It has a one point five billion dollars bond do 0:09:00.600 --> 0:09:03.880 on March first. The company is free cash flow negative 0:09:03.920 --> 0:09:07.400 due to its massive investment in its growing wireless business, 0:09:07.760 --> 0:09:11.040 and the company has a potential to purchase additional spectrum. 0:09:12.000 --> 0:09:15.280 The company also faces significant bomb maturities in the future. 0:09:15.280 --> 0:09:17.640 They have like three billion dollars and maturities in twenty four, 0:09:18.120 --> 0:09:20.160 two billion in two thou twenty five, and then an 0:09:20.160 --> 0:09:22.480 even larger amount doing in two thousand and twenty six. 0:09:22.920 --> 0:09:26.080 So while this was great for them near term boosts 0:09:26.080 --> 0:09:29.120 all liquidity funds them through this year, they're going to 0:09:29.200 --> 0:09:31.959 need additional cash in the future. Okay, thank you. So So, 0:09:32.120 --> 0:09:36.680 looking more broadly at the communication sector, which credit portfolios, 0:09:36.760 --> 0:09:40.880 sorry profiles, do you think likely to improve this year? Well, listen, 0:09:41.160 --> 0:09:45.000 we do like the communications sector. There's a few things 0:09:45.000 --> 0:09:47.880 to like about at number one. It has compelling attributes, 0:09:47.920 --> 0:09:52.600 including ample liquidity, little international exposure, most of those businesses 0:09:52.640 --> 0:09:55.800 are domestic and they provide you know, essential services that 0:09:56.080 --> 0:09:59.840 people need, such as fixed broadband and mobility. My colleague 0:10:00.120 --> 0:10:03.760 Shifman likes the technology sector. Technology companies have strong balance 0:10:03.800 --> 0:10:07.880 sheets with significant cash holdings. He believes that many of them, 0:10:07.920 --> 0:10:11.000 if you look at like Apple, Microsoft, Alphabet have very 0:10:11.080 --> 0:10:13.959 high credit ratings, hundreds of billion dollars of cash, and 0:10:14.400 --> 0:10:19.160 seemingly impenetrable business models. So those are two sectors that 0:10:19.480 --> 0:10:22.160 we like in high grade. So those are sectors that 0:10:22.280 --> 0:10:26.559 could withstand a slowdown or a recession potentially correct. Yes, 0:10:26.800 --> 0:10:29.080 I would say tech given the amount of liquidity it has. 0:10:29.080 --> 0:10:33.560 In communications, again, it provides essential services, right, so typically 0:10:33.559 --> 0:10:38.400 in recession, people are very resonant to cut back on cable, 0:10:38.679 --> 0:10:42.320 on their mobile phone, on data. Those are things they need. 0:10:42.360 --> 0:10:45.120 So those sectors are relatively defensive. Yeah, we'll have to 0:10:45.120 --> 0:10:49.520 watch Netflix through these tough times. So looking at the 0:10:50.000 --> 0:10:52.080 actual price of these bonds, I mean, they got really 0:10:52.080 --> 0:10:53.959 beaten up last year and that's why a lot of 0:10:53.960 --> 0:10:56.920 people seem to pile in again. But do you think 0:10:56.960 --> 0:10:59.720 that they are fairly valued based based on your assessment 0:10:59.720 --> 0:11:02.760 of fundamentals right now? Yeah, sure, I think they're fairly value. 0:11:02.760 --> 0:11:04.720 I think some probably you're going a little bit too wide. 0:11:05.640 --> 0:11:07.800 You know, we have a few that are really trying 0:11:07.800 --> 0:11:09.440 to deliver. So if you look at the names, like 0:11:09.840 --> 0:11:13.080 a teen T Verise and Warner Brothers Discovery. They're each 0:11:13.120 --> 0:11:15.319 striving to improve their leverage ry shows over the next 0:11:15.360 --> 0:11:18.000 couple of years. If we think about a tent verse 0:11:18.080 --> 0:11:19.480 and those are two of the largest names in the 0:11:19.520 --> 0:11:21.680 corporate bond market, and they should be able to chip 0:11:21.679 --> 0:11:24.240 away at their debtloads with free cash flow and access 0:11:24.240 --> 0:11:26.400 to dividend payments. If you look at a name like 0:11:26.400 --> 0:11:30.400 Warner Brothers Discovery, that company was created in April twenty 0:11:30.600 --> 0:11:33.719 twenty two with a merger of Discovery and Wardermania, which 0:11:33.800 --> 0:11:37.079 was separated from AT and T. You know that was 0:11:37.160 --> 0:11:39.520 highly leveraged. They've borrowed a lot of fun of payment 0:11:39.559 --> 0:11:41.800 to a T and T. But they you know, they 0:11:41.840 --> 0:11:46.520 expect significant free cash flow generation and epidog growth which 0:11:46.520 --> 0:11:49.600 will allow them to reduce their net leverage. Ray show. 0:11:50.240 --> 0:11:52.720 Those bonds are rated low, trip will be they trade 0:11:53.280 --> 0:11:55.719 very wide. There is a fear that listen, they have 0:11:55.760 --> 0:11:58.920 exposure to advertising its recession. Advertising pulls back in recession, 0:11:59.200 --> 0:12:01.200 but they do have a lot of levers to pull, 0:12:01.240 --> 0:12:04.240 I think to make to improve their credit ratio, particularly 0:12:04.240 --> 0:12:08.360 with realizing massive cost energies from the combination those two companies. Okay, 0:12:08.360 --> 0:12:10.720 and what types of communications borrowed. Do you think is 0:12:10.720 --> 0:12:13.320 most at risk and why? Well, I think the one 0:12:13.440 --> 0:12:16.480 names that are most our investors are most concerned about 0:12:16.480 --> 0:12:21.160 are those with heavy exposure to advertising given the potential 0:12:21.160 --> 0:12:25.199 for recession, potential for advertisers to slow their spend, right, 0:12:25.520 --> 0:12:27.560 and so that is the media company. So that is 0:12:27.559 --> 0:12:32.040 companies like Paramount, Warner Brothers, Discovery. You know, there's definitely 0:12:32.040 --> 0:12:34.640 some concern about them. There's also concern about companies that 0:12:34.720 --> 0:12:37.719 have relatively high leverage, like within investment grade. So a 0:12:37.840 --> 0:12:42.000 name like Charter Charter has high leverage they have they 0:12:42.000 --> 0:12:43.719 produce a lot of free cash flow, they have a 0:12:43.840 --> 0:12:46.560 robust business model, but they do have a high leverage. 0:12:46.600 --> 0:12:49.240 So some of those names will trade wide investment crede. 0:12:49.280 --> 0:12:51.160 If you move over a high yield obviously your credit 0:12:51.240 --> 0:12:53.319 quality goes down, right, So there's a lot of names 0:12:53.320 --> 0:12:55.920 that trade at very low prices. You know, Dish we 0:12:56.000 --> 0:12:59.000 talked about they need liquidity. You have a name like 0:12:59.360 --> 0:13:03.559 AMC and or Team in movie Theories, which which trades wide. 0:13:04.120 --> 0:13:06.520 You have some of the wireline companies like a Frontier, 0:13:06.679 --> 0:13:10.480 Loom and Consolidated, they all trade pretty wide. You mentioned AMC, 0:13:10.600 --> 0:13:14.040 that's everyone's favorite meme stuck and has been through a 0:13:14.040 --> 0:13:18.320 real up and down, right, I'd be interested and you'll 0:13:18.320 --> 0:13:21.319 take on what the outlook is for that that company. 0:13:21.320 --> 0:13:23.640 I mean, do they survive in this environment? Sure? Well, 0:13:23.679 --> 0:13:26.720 AMC's revenue in Ibada may improve over the next couple 0:13:26.720 --> 0:13:30.360 of years as theater attendance continues to rebound. And while 0:13:30.400 --> 0:13:32.440 we asked me, the company has about six hundred million 0:13:32.440 --> 0:13:34.960 dollars of cash proforming to start the year, which is, 0:13:35.360 --> 0:13:39.040 you know, probably enough to absorb losses, invest in the business, 0:13:39.120 --> 0:13:41.600 and dress debt maturities over the next few years, like 0:13:41.640 --> 0:13:45.080 through twenty twenty five. But the main challenge for AMC 0:13:45.240 --> 0:13:47.840 is they have a massive, massive maturity wall in twenty 0:13:48.080 --> 0:13:50.839 twenty six that may just be too high of a 0:13:50.920 --> 0:13:53.680 hurdle for them to overcome. And as a result, you 0:13:53.760 --> 0:13:56.640 see that many of their secured, second lean and unsecured 0:13:56.679 --> 0:13:59.720 bonds are currently trading at distress prices. You think that 0:13:59.760 --> 0:14:02.319 they lust through them through the next two years. They 0:14:02.600 --> 0:14:06.920 I mean, based on expectations for you know, cash flow 0:14:07.000 --> 0:14:09.920 and given what maturities they have to deal with, I 0:14:09.960 --> 0:14:12.560 think they can last a couple of years. The company 0:14:12.600 --> 0:14:17.880 has been relatively proactive too. They've been issuing their APE shares. 0:14:18.520 --> 0:14:20.760 They also have an agreement to swap some debt for 0:14:20.840 --> 0:14:24.160 some APE shares, and so they're trying to do what 0:14:24.200 --> 0:14:29.120 they can and hopefully the box office will continue to rebound. 0:14:29.160 --> 0:14:32.160 Like I don't think we're anywhere near the eleven billion 0:14:32.160 --> 0:14:34.680 dollars domestic box office that we used to do on 0:14:34.720 --> 0:14:39.160 a yearly basis pre pandemic, but we're we're marching towards improvements. 0:14:39.160 --> 0:14:41.680 I think forecasts this year or for over eight billion dollars, 0:14:42.080 --> 0:14:44.240 and so you know that will help. If if it 0:14:44.280 --> 0:14:46.640 goes even higher, obviously that will help more. And they 0:14:46.680 --> 0:14:48.640 also diverse into minding, though it seems like a bit 0:14:48.640 --> 0:14:51.960 of a confused strategy from the top. Yeah, that was 0:14:52.000 --> 0:14:54.440 a small investment that you made that was probably more 0:14:54.560 --> 0:14:56.960 noise than anything. So as far as you know your 0:14:57.000 --> 0:15:00.040 credit analysis, I really don't factor that in. Okay. On 0:15:00.080 --> 0:15:02.040 the flip side, are there any good ones the junk 0:15:02.120 --> 0:15:04.560 that should be high grade? Do you think the most 0:15:04.560 --> 0:15:07.440 interesting name or what we'd call a rising star company 0:15:07.480 --> 0:15:10.400 that rises out of high yield into investment grade? And 0:15:11.200 --> 0:15:13.320 the driver there is that you need two of the 0:15:13.440 --> 0:15:18.320 three main credit rating agencies to rate you high grade 0:15:18.320 --> 0:15:20.320 to be high grade, and if we look at a 0:15:20.360 --> 0:15:25.160 company like Netflix, Netflix is high grade by SMP. They 0:15:25.200 --> 0:15:27.400 don't have a Fitch rating and Moodies is be a 0:15:27.560 --> 0:15:31.360 one with a positive outlook. And given the potential for 0:15:31.720 --> 0:15:35.480 given that Netflix has reached sustained a positive free cash flow, 0:15:35.800 --> 0:15:37.560 I think there's a good chance that they could be 0:15:37.600 --> 0:15:40.400 a rising star in twenty twenty three and could get upgraded. 0:15:40.720 --> 0:15:42.360 They need to make more shows, though they seem to 0:15:42.440 --> 0:15:45.120 kind of have the shows and then they wait too 0:15:45.160 --> 0:15:48.760 long for me anyway, they always cancel after the second season. 0:15:49.720 --> 0:15:53.880 Maybe those are shows that only you guys watch. Netflix 0:15:53.920 --> 0:15:58.800 has a massive content budgets, so there are cash outlays 0:15:58.800 --> 0:16:02.600 were content I think is around seventeen billion dollars offer 0:16:02.720 --> 0:16:05.880 twenty twenty two. We should get an update shortly about 0:16:05.920 --> 0:16:09.680 their budget for twenty twenty three. I've expected to be 0:16:09.720 --> 0:16:12.480 in that similar range. So they do spend a lot 0:16:12.520 --> 0:16:15.640 of money. So just dialing back, I mean, do you 0:16:15.640 --> 0:16:18.120 think there is more consolidation to come in the sets 0:16:18.200 --> 0:16:21.000 or overall? Do you think there's more emanates come? Yes, 0:16:21.080 --> 0:16:23.120 particularly when you brought up streaming right, So if you 0:16:23.160 --> 0:16:26.320 go back a couple of years, most investors were okay 0:16:26.400 --> 0:16:30.760 with these streaming companies producing large deficits, which Netflix did 0:16:30.840 --> 0:16:34.680 for many years until the pandemic. As long as they 0:16:34.720 --> 0:16:37.320 continue to grow subscribers, people are okay with the deficits. 0:16:37.360 --> 0:16:40.400 But now a lot of investors are looking for positive 0:16:40.400 --> 0:16:42.440 free cash flow or like, you know, when are these 0:16:43.360 --> 0:16:46.480 streaming business is going to be profitable? Right? And Netflix, 0:16:46.600 --> 0:16:50.040 after many years of lasses has reached sustained positive free 0:16:50.040 --> 0:16:52.480 cash flow, which is a big thing. The rating agencies 0:16:52.480 --> 0:16:54.000 we're looking for, and a lot of their lenders we're 0:16:54.040 --> 0:16:56.200 looking for. But now if we look across the board, 0:16:56.280 --> 0:16:57.760 you know, if you want to compete with somebody the 0:16:57.800 --> 0:17:00.400 size and Netflix or somebody the size that did which 0:17:00.440 --> 0:17:05.199 has you know, Disney, ESPN, Hulu, you need to be bigger. Right. 0:17:05.200 --> 0:17:08.000 So if we look at there's lots of streaming providers 0:17:08.000 --> 0:17:10.160 out there, a lots of them that are losing money 0:17:10.560 --> 0:17:13.240 and there could be some sort of combination when you 0:17:13.240 --> 0:17:16.000 think about you know you got well you have Warner 0:17:16.000 --> 0:17:19.280 Brothers and HBO Max um or HBO Max and Warner 0:17:19.280 --> 0:17:23.639 Brothers Discovery, the discovery platforms looking to get to merge 0:17:23.840 --> 0:17:27.159 this year as far as the platforms are concerned. You 0:17:27.240 --> 0:17:30.560 have you know, you have got Paramount, You've got obviously Amazon, 0:17:30.680 --> 0:17:34.320 You've got you know, tons of other streaming providing at UM. 0:17:34.400 --> 0:17:37.000 You know, Comcast has or Peacock service, So there's a 0:17:37.040 --> 0:17:39.600 lot out there. I think you may see some consolidations 0:17:39.600 --> 0:17:42.200 against some scale on the streaming side. I have about 0:17:42.240 --> 0:17:44.639 eight subscriptions to these things and my kids each have 0:17:44.840 --> 0:17:48.080 one and they'll watch one show each and it custs 0:17:48.200 --> 0:17:50.920 me the same as old school cables, so I don't 0:17:50.920 --> 0:17:53.960 wrap them all into one. Yeah, exactly. So I think, 0:17:54.560 --> 0:17:56.879 you know, you see, I think there's a chance you 0:17:56.920 --> 0:17:58.760 can get consolidations to try and bulk up some of 0:17:58.760 --> 0:18:04.600 these platforms. Okay, great, so appreciate it. Steve Flynn Bloomberg Intelligence, 0:18:04.720 --> 0:18:08.400 and just to wrap this up for this week, what 0:18:09.119 --> 0:18:12.320 is the outlook from both of you? You know, start 0:18:12.359 --> 0:18:16.439 with Olivia Raymond Day from Bloomberg News. You're looking at 0:18:16.480 --> 0:18:19.320 these markets all day long. The Fed hiking, there's a 0:18:19.359 --> 0:18:23.320 war on in Ukraine, sial, there's inflation, there's you know, 0:18:23.400 --> 0:18:26.520 geopolitical issues, there's all sorts of trouble on the horizon. 0:18:26.560 --> 0:18:29.200 But we bullish or bearish yere we're getting ahead of 0:18:29.240 --> 0:18:32.720 ourselves and being too excited about these markets. I think 0:18:32.720 --> 0:18:34.840 we're getting a little bit ahead of ourselves, James. There's 0:18:34.920 --> 0:18:38.200 just way too many uncertainties, many of them that you 0:18:38.280 --> 0:18:43.600 just mentioned that are still not fully baked into market prices. 0:18:43.600 --> 0:18:46.159 And I do think spreads are gonna move wider, and 0:18:46.200 --> 0:18:48.880 I do think yields will go higher in the near term. 0:18:49.600 --> 0:18:51.840 How about you, Steve Flynn. Yeah, I'm probably a little 0:18:51.840 --> 0:18:54.840 bit more constructive. I think a lot of companies realize 0:18:54.840 --> 0:18:56.880 that they have to deal with their debt. I think, 0:18:57.000 --> 0:19:00.600 you know, the lack of issuance last year really was 0:19:00.640 --> 0:19:02.600 a concern for companies that they may have to look 0:19:02.600 --> 0:19:05.159 for other ways to pay down their obligations and may 0:19:05.200 --> 0:19:08.240 be focused on improving their leverage ratios and credit profiles. 0:19:08.280 --> 0:19:10.720 So I think management teams are going to be focused 0:19:10.760 --> 0:19:14.639 on their debtloads, which is I think positive. Okay, great, 0:19:14.760 --> 0:19:17.360 Thank you very much again, Steve Flinn from Bloomberg Intelligence. 0:19:17.400 --> 0:19:20.880 Olivia ra Monday from Bloomberg News. I'm James Crumby. It's 0:19:20.920 --> 0:19:22.920 been a pleasure of having you. See you next week. Yes, 0:19:23.320 --> 0:19:23.639 thank you.