Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 1: Today's guests are Olivia Raymonde, a credit reporter for Bloomberg
Speaker 1: News in New York, and Steve Flynn, who looks at
Speaker 1: the communications sector for Bloomberg Intelligence. It's been another very
Speaker 1: busy week, lots of excitement in global credit markets, including
Speaker 1: a ton of new issuance from junk rated borrowers. Let's
Speaker 1: get into that in a little bit, But before we do,
Speaker 1: I just wanted to ask Olivia Steve, what's up with
Speaker 1: Party City. We're clearly not buying enough giant heart shaped
Speaker 1: helium balloons. They had to file for bankruptcy. What's going on.
Speaker 1: We're not having enough fun in this country. What's your take, Olivia?
Speaker 1: I think that we are having enough fun in the country,
Speaker 1: and maybe that's why we don't need to go to
Speaker 1: Party City. I think I love a good party. My
Speaker 1: kids are a little bit older now, so we don't
Speaker 1: visit Party City as much as we used to. But
Speaker 1: what I've been there, so we have to wait for
Speaker 1: Valentine's Day to buy those big heart shaped balloons. But
Speaker 1: that company's in trouble and retail sales just fell. You
Speaker 1: know that the consumer is not doing well. But let's
Speaker 1: get back to the issue Olivia. We've seen a big
Speaker 1: increase in high yield bond issuance lately, junk rated a
Speaker 1: lot of cash after a real drought. Last year, issuance
Speaker 1: was down something like seventy twenty twenty two. What's the
Speaker 1: situation though, Why are they issuing now? It's a great
Speaker 1: question and a really interesting dynamic, James, that I think
Speaker 1: is going to play out through this entire year. When
Speaker 1: we look back at the end of last year, investors
Speaker 1: were really concerned about high yield bonds, especially ones in
Speaker 1: the lower rated tiers such as like triple C credits.
Speaker 1: Now what we're seeing is that as borrowing costs are dropping,
Speaker 1: not compared to last year's levels, but dropping in size
Speaker 1: and scope, people are now rushing to add on risk.
Speaker 1: When they were maybe a little bit more positioned defensively.
Speaker 1: So now they're trying to get ahead of it, which
Speaker 1: has kind of caused this big rally. But what are
Speaker 1: the advantages of issuing nobs? Borrowing gone up, yields gone up,
Speaker 1: everything's going up. Why do it no. I think that
Speaker 1: yields are down from their highest point of last year
Speaker 1: and that they will rise again, and I think that's
Speaker 1: what the base case of many strategists are. So therefore,
Speaker 1: if they have an opportunity to get in now, it's
Speaker 1: better than waiting until we hit maybe like an economic
Speaker 1: slowdown or a recession when yields spike even higher. And
Speaker 1: what are they using all that money for? Is it
Speaker 1: it's refinancing, is it new projects? Is it M and A?
Speaker 1: What's the trend the Yeah, it's really interesting. Last year,
Speaker 1: the main trend we saw was that pretty much companies
Speaker 1: were only coming to the market if they had like
Speaker 1: an imminent financing need, like they needed money to fund
Speaker 1: like an acquisition for example. Now we're seeing more opportunistic
Speaker 1: financings in the market. People are coming into refinance debt,
Speaker 1: they're coming into fun tender offers, and we're seeing MNA
Speaker 1: picking up slightly. Is there one particular sector that's dominating.
Speaker 1: I know we've had some energy companies which you know,
Speaker 1: they haven't been very apt to but but you know
Speaker 1: they've been enjoyed high oil prices. Are we seeing a
Speaker 1: big focus on one sectories it across the board. I
Speaker 1: think it's across the board. It's good to note the
Speaker 1: energy sector, that's a pretty strong sector and high yield
Speaker 1: right now. A lot of those names are DOUBLEB just
Speaker 1: the cusp of investment grade, so they have had they've
Speaker 1: been able to access the market more easily than other sectors,
Speaker 1: even in the past few months. But we have seen
Speaker 1: others like for example, Dish Network was in looking to
Speaker 1: add another couple billion dollars onto a series that it
Speaker 1: launched in November. Well, and it we'll get to Dishtion
Speaker 1: a bit with Steve who focuses on that sector. But
Speaker 1: what is the outlook though for that market? You know,
Speaker 1: these bonds are junk, and they're cool junk for a reason.
Speaker 1: So you know, why is everyone buying them. Everyone's buying
Speaker 1: them right now because everyone's sort of jumping in on
Speaker 1: this rally. It's kind of a fear of missing out.
Speaker 1: Stratagis do not think that this rally can be sustained.
Speaker 1: We have slowing economic growth, people are concerned about a recession.
Speaker 1: The Fed is not done hiking rates. So even though
Speaker 1: investors have I mean, even though borrowers have a little
Speaker 1: bit of a reprieve right now, and invest are jumping in.
Speaker 1: Stratagists don't think it will last, so spreads could easily
Speaker 1: widen from here or yields go up. I think the
Speaker 1: base case in the market is expecting spreads to widen
Speaker 1: and yields to go up from here, because in a
Speaker 1: recession typically you know, we're it spreads around four hundred
Speaker 1: on USI yield, right, but in a recession you go
Speaker 1: to eight hundreds. So that's a big move from here,
Speaker 1: or even a thousand if you're looking at the pandemic. So,
Speaker 1: I mean, I don't get it. We're going through an
Speaker 1: earning season that could be tough, We're getting a FED
Speaker 1: that's getting quite hawkish, We're going through you know, there's
Speaker 1: there's a war on in Ukraine. Still, there's all sorts
Speaker 1: of issues around why people still piling in. I don't
Speaker 1: get it. The amount of investor optimism about the outlook
Speaker 1: for the economy this year has been quite phenomenal. Actually,
Speaker 1: the market continues to bet on rate cuts, continuing to
Speaker 1: think that the FED is going to slow it's tightening,
Speaker 1: and that inflation is going to come down quicker than
Speaker 1: maybe once thought, and that's allowing everyone to sort of
Speaker 1: get ahead of themselves and start to make on what
Speaker 1: they think is going to happen further on down the
Speaker 1: line past a recession. But the reality is is that
Speaker 1: we don't know what the recession is going to look
Speaker 1: like and when it's going to come, so people still
Speaker 1: need to remain defensive. Okay, So before we all Steve
Speaker 1: about that and his take on the issuance rush, you've
Speaker 1: also looked at leverage loans. You know, there's a there's
Speaker 1: a ton of loan debt outstanding, and of course that's
Speaker 1: all floating rate and libel jumped to almost five percent recently,
Speaker 1: and that's you know, it was close to zero just
Speaker 1: a year ago, so that's a huge leap. Those borrowers
Speaker 1: a struggling. They're going to struggle to pay back that money.
Speaker 1: What's what's the situation there? Yeah, the loan market is
Speaker 1: a little bit more precarious than the bond market, James.
Speaker 1: It's not as highly rated, and the biggest issue of
Speaker 1: concern actually is borrowers who only have loans in their
Speaker 1: capital structure, so they have no high yield bonds. That
Speaker 1: means there's no subordinated debt sitting beneath the loans, So
Speaker 1: that's less investor protection should there be a bankruptcy, and
Speaker 1: if the slows down the pace of hiking, does that
Speaker 1: offer some relief to them, do they get bailed out?
Speaker 1: Effect to be the feed stops. I think at this
Speaker 1: point there's so much about the impact of what the
Speaker 1: FED has already done that has not moved through the economy,
Speaker 1: and we have not fully seen those effects that are
Speaker 1: materializing now but we just aren't aware of yet. So
Speaker 1: I think there's still a lot more room for a
Speaker 1: lot of volatility and a lot of surprises to the
Speaker 1: upside or downside and high old bonds this year, and
Speaker 1: on the loans specifically, more defaults in the loan section.
Speaker 1: We're probably going to see more defaults. That's because of
Speaker 1: those loan only issuers not having those high old bonds
Speaker 1: in their capital stacks. So they're smaller, they're riskier. They
Speaker 1: tend to not have access to the high old bond market.
Speaker 1: That's why they're not there, not always, but often, And
Speaker 1: so these are the type of issuers that are even
Speaker 1: more vulnerable in a downturn because they don't have the
Speaker 1: same market capitalization as S and P five hundred company would.
Speaker 1: And your story really dug into the downgrades, which I
Speaker 1: think is really interesting. What's the trend there? What was
Speaker 1: happening with that? Yeah, right now we're seeing issuers that
Speaker 1: only have loans in their capital structure. Those downgrades are
Speaker 1: at the highest level since the earlier days of the pandemic,
Speaker 1: and they're showing signs of accelerating. And on the other side,
Speaker 1: the banks, they got stuck with a whole lot of
Speaker 1: leverage buyout debt that they couldn't sell last year and
Speaker 1: they're still trying to sell it down. How are they
Speaker 1: reacting to this? Are they pulling back a bit? Are
Speaker 1: they getting more more defensive and lending to junk companies? Definitely,
Speaker 1: the banks have to stop and think about who they
Speaker 1: want to lend to more now that they have so
Speaker 1: much excess loans stuck on their bank balance sheets. It's
Speaker 1: definitely clogged the global m and A pipeline, and I
Speaker 1: do think that they're going to have to think more
Speaker 1: carefully going forward about who they want to lend to
Speaker 1: and how much they can commit. Okay, great story, thanks
Speaker 1: a lot. I'm going to turn now to Steve Flynn
Speaker 1: from Bloomberg Intelligence, who focuses on the communications sector and
Speaker 1: before we dig into that sector, I just wanted to
Speaker 1: ask you, Steve about high yeal bondishments specifically. It's being
Speaker 1: such an incredible start to the year, at least over
Speaker 1: the last you know, a few days or so. But
Speaker 1: should we expect that to continue? Sure, if yield stay
Speaker 1: at current levels or removed lower, Yeah, I definitely think
Speaker 1: you'll see continued a robust volume for new issuance UM.
Speaker 1: You know, I've been covering the high old bomb market
Speaker 1: for a long time. One thing that remains true is
Speaker 1: that you issue when you can right and the market
Speaker 1: is open. So companies are taking advantage of it and
Speaker 1: tapping the high old bomb market. And Dish was one
Speaker 1: of the big names in UM. You know, they doubled
Speaker 1: the size from five hundred billion. Have they resolved the
Speaker 1: liquidity needs in the short term, yes, they have so,
Speaker 1: but longer term I think they're going to need additional liquidity.
Speaker 1: So they ended the year or began the twenty twenty
Speaker 1: three or about two point four billion in cash we estimate,
Speaker 1: and they you know, they priced one point five billion
Speaker 1: dollars on Tuesday, so that brings them ut to about
Speaker 1: three point nine billion, which listen, that is a lot
Speaker 1: of cash, but the company has significant calls on its liquidity.
Speaker 1: It has a one point five billion dollars bond do
Speaker 1: on March first. The company is free cash flow negative
Speaker 1: due to its massive investment in its growing wireless business,
Speaker 1: and the company has a potential to purchase additional spectrum.
Speaker 1: The company also faces significant bomb maturities in the future.
Speaker 1: They have like three billion dollars and maturities in twenty four,
Speaker 1: two billion in two thou twenty five, and then an
Speaker 1: even larger amount doing in two thousand and twenty six.
Speaker 1: So while this was great for them near term boosts
Speaker 1: all liquidity funds them through this year, they're going to
Speaker 1: need additional cash in the future. Okay, thank you. So So,
Speaker 1: looking more broadly at the communication sector, which credit portfolios,
Speaker 1: sorry profiles, do you think likely to improve this year? Well, listen,
Speaker 1: we do like the communications sector. There's a few things
Speaker 1: to like about at number one. It has compelling attributes,
Speaker 1: including ample liquidity, little international exposure, most of those businesses
Speaker 1: are domestic and they provide you know, essential services that
Speaker 1: people need, such as fixed broadband and mobility. My colleague
Speaker 1: Shifman likes the technology sector. Technology companies have strong balance
Speaker 1: sheets with significant cash holdings. He believes that many of them,
Speaker 1: if you look at like Apple, Microsoft, Alphabet have very
Speaker 1: high credit ratings, hundreds of billion dollars of cash, and
Speaker 1: seemingly impenetrable business models. So those are two sectors that
Speaker 1: we like in high grade. So those are sectors that
Speaker 1: could withstand a slowdown or a recession potentially correct. Yes,
Speaker 1: I would say tech given the amount of liquidity it has.
Speaker 1: In communications, again, it provides essential services, right, so typically
Speaker 1: in recession, people are very resonant to cut back on cable,
Speaker 1: on their mobile phone, on data. Those are things they need.
Speaker 1: So those sectors are relatively defensive. Yeah, we'll have to
Speaker 1: watch Netflix through these tough times. So looking at the
Speaker 1: actual price of these bonds, I mean, they got really
Speaker 1: beaten up last year and that's why a lot of
Speaker 1: people seem to pile in again. But do you think
Speaker 1: that they are fairly valued based based on your assessment
Speaker 1: of fundamentals right now? Yeah, sure, I think they're fairly value.
Speaker 1: I think some probably you're going a little bit too wide.
Speaker 1: You know, we have a few that are really trying
Speaker 1: to deliver. So if you look at the names, like
Speaker 1: a teen T Verise and Warner Brothers Discovery. They're each
Speaker 1: striving to improve their leverage ry shows over the next
Speaker 1: couple of years. If we think about a tent verse
Speaker 1: and those are two of the largest names in the
Speaker 1: corporate bond market, and they should be able to chip
Speaker 1: away at their debtloads with free cash flow and access
Speaker 1: to dividend payments. If you look at a name like
Speaker 1: Warner Brothers Discovery, that company was created in April twenty
Speaker 1: twenty two with a merger of Discovery and Wardermania, which
Speaker 1: was separated from AT and T. You know that was
Speaker 1: highly leveraged. They've borrowed a lot of fun of payment
Speaker 1: to a T and T. But they you know, they
Speaker 1: expect significant free cash flow generation and epidog growth which
Speaker 1: will allow them to reduce their net leverage. Ray show.
Speaker 1: Those bonds are rated low, trip will be they trade
Speaker 1: very wide. There is a fear that listen, they have
Speaker 1: exposure to advertising its recession. Advertising pulls back in recession,
Speaker 1: but they do have a lot of levers to pull,
Speaker 1: I think to make to improve their credit ratio, particularly
Speaker 1: with realizing massive cost energies from the combination those two companies. Okay,
Speaker 1: and what types of communications borrowed. Do you think is
Speaker 1: most at risk and why? Well, I think the one
Speaker 1: names that are most our investors are most concerned about
Speaker 1: are those with heavy exposure to advertising given the potential
Speaker 1: for recession, potential for advertisers to slow their spend, right,
Speaker 1: and so that is the media company. So that is
Speaker 1: companies like Paramount, Warner Brothers, Discovery. You know, there's definitely
Speaker 1: some concern about them. There's also concern about companies that
Speaker 1: have relatively high leverage, like within investment grade. So a
Speaker 1: name like Charter Charter has high leverage they have they
Speaker 1: produce a lot of free cash flow, they have a
Speaker 1: robust business model, but they do have a high leverage.
Speaker 1: So some of those names will trade wide investment crede.
Speaker 1: If you move over a high yield obviously your credit
Speaker 1: quality goes down, right, So there's a lot of names
Speaker 1: that trade at very low prices. You know, Dish we
Speaker 1: talked about they need liquidity. You have a name like
Speaker 1: AMC and or Team in movie Theories, which which trades wide.
Speaker 1: You have some of the wireline companies like a Frontier,
Speaker 1: Loom and Consolidated, they all trade pretty wide. You mentioned AMC,
Speaker 1: that's everyone's favorite meme stuck and has been through a
Speaker 1: real up and down, right, I'd be interested and you'll
Speaker 1: take on what the outlook is for that that company.
Speaker 1: I mean, do they survive in this environment? Sure? Well,
Speaker 1: AMC's revenue in Ibada may improve over the next couple
Speaker 1: of years as theater attendance continues to rebound. And while
Speaker 1: we asked me, the company has about six hundred million
Speaker 1: dollars of cash proforming to start the year, which is,
Speaker 1: you know, probably enough to absorb losses, invest in the business,
Speaker 1: and dress debt maturities over the next few years, like
Speaker 1: through twenty twenty five. But the main challenge for AMC
Speaker 1: is they have a massive, massive maturity wall in twenty
Speaker 1: twenty six that may just be too high of a
Speaker 1: hurdle for them to overcome. And as a result, you
Speaker 1: see that many of their secured, second lean and unsecured
Speaker 1: bonds are currently trading at distress prices. You think that
Speaker 1: they lust through them through the next two years. They
Speaker 1: I mean, based on expectations for you know, cash flow
Speaker 1: and given what maturities they have to deal with, I
Speaker 1: think they can last a couple of years. The company
Speaker 1: has been relatively proactive too. They've been issuing their APE shares.
Speaker 1: They also have an agreement to swap some debt for
Speaker 1: some APE shares, and so they're trying to do what
Speaker 1: they can and hopefully the box office will continue to rebound.
Speaker 1: Like I don't think we're anywhere near the eleven billion
Speaker 1: dollars domestic box office that we used to do on
Speaker 1: a yearly basis pre pandemic, but we're we're marching towards improvements.
Speaker 1: I think forecasts this year or for over eight billion dollars,
Speaker 1: and so you know that will help. If if it
Speaker 1: goes even higher, obviously that will help more. And they
Speaker 1: also diverse into minding, though it seems like a bit
Speaker 1: of a confused strategy from the top. Yeah, that was
Speaker 1: a small investment that you made that was probably more
Speaker 1: noise than anything. So as far as you know your
Speaker 1: credit analysis, I really don't factor that in. Okay. On
Speaker 1: the flip side, are there any good ones the junk
Speaker 1: that should be high grade? Do you think the most
Speaker 1: interesting name or what we'd call a rising star company
Speaker 1: that rises out of high yield into investment grade? And
Speaker 1: the driver there is that you need two of the
Speaker 1: three main credit rating agencies to rate you high grade
Speaker 1: to be high grade, and if we look at a
Speaker 1: company like Netflix, Netflix is high grade by SMP. They
Speaker 1: don't have a Fitch rating and Moodies is be a
Speaker 1: one with a positive outlook. And given the potential for
Speaker 1: given that Netflix has reached sustained a positive free cash flow,
Speaker 1: I think there's a good chance that they could be
Speaker 1: a rising star in twenty twenty three and could get upgraded.
Speaker 1: They need to make more shows, though they seem to
Speaker 1: kind of have the shows and then they wait too
Speaker 1: long for me anyway, they always cancel after the second season.
Speaker 1: Maybe those are shows that only you guys watch. Netflix
Speaker 1: has a massive content budgets, so there are cash outlays
Speaker 1: were content I think is around seventeen billion dollars offer
Speaker 1: twenty twenty two. We should get an update shortly about
Speaker 1: their budget for twenty twenty three. I've expected to be
Speaker 1: in that similar range. So they do spend a lot
Speaker 1: of money. So just dialing back, I mean, do you
Speaker 1: think there is more consolidation to come in the sets
Speaker 1: or overall? Do you think there's more emanates come? Yes,
Speaker 1: particularly when you brought up streaming right, So if you
Speaker 1: go back a couple of years, most investors were okay
Speaker 1: with these streaming companies producing large deficits, which Netflix did
Speaker 1: for many years until the pandemic. As long as they
Speaker 1: continue to grow subscribers, people are okay with the deficits.
Speaker 1: But now a lot of investors are looking for positive
Speaker 1: free cash flow or like, you know, when are these
Speaker 1: streaming business is going to be profitable? Right? And Netflix,
Speaker 1: after many years of lasses has reached sustained positive free
Speaker 1: cash flow, which is a big thing. The rating agencies
Speaker 1: we're looking for, and a lot of their lenders we're
Speaker 1: looking for. But now if we look across the board,
Speaker 1: you know, if you want to compete with somebody the
Speaker 1: size and Netflix or somebody the size that did which
Speaker 1: has you know, Disney, ESPN, Hulu, you need to be bigger. Right.
Speaker 1: So if we look at there's lots of streaming providers
Speaker 1: out there, a lots of them that are losing money
Speaker 1: and there could be some sort of combination when you
Speaker 1: think about you know you got well you have Warner
Speaker 1: Brothers and HBO Max um or HBO Max and Warner
Speaker 1: Brothers Discovery, the discovery platforms looking to get to merge
Speaker 1: this year as far as the platforms are concerned. You
Speaker 1: have you know, you have got Paramount, You've got obviously Amazon,
Speaker 1: You've got you know, tons of other streaming providing at UM.
Speaker 1: You know, Comcast has or Peacock service, So there's a
Speaker 1: lot out there. I think you may see some consolidations
Speaker 1: against some scale on the streaming side. I have about
Speaker 1: eight subscriptions to these things and my kids each have
Speaker 1: one and they'll watch one show each and it custs
Speaker 1: me the same as old school cables, so I don't
Speaker 1: wrap them all into one. Yeah, exactly. So I think,
Speaker 1: you know, you see, I think there's a chance you
Speaker 1: can get consolidations to try and bulk up some of
Speaker 1: these platforms. Okay, great, so appreciate it. Steve Flynn Bloomberg Intelligence,
Speaker 1: and just to wrap this up for this week, what
Speaker 1: is the outlook from both of you? You know, start
Speaker 1: with Olivia Raymond Day from Bloomberg News. You're looking at
Speaker 1: these markets all day long. The Fed hiking, there's a
Speaker 1: war on in Ukraine, sial, there's inflation, there's you know,
Speaker 1: geopolitical issues, there's all sorts of trouble on the horizon.
Speaker 1: But we bullish or bearish yere we're getting ahead of
Speaker 1: ourselves and being too excited about these markets. I think
Speaker 1: we're getting a little bit ahead of ourselves, James. There's
Speaker 1: just way too many uncertainties, many of them that you
Speaker 1: just mentioned that are still not fully baked into market prices.
Speaker 1: And I do think spreads are gonna move wider, and
Speaker 1: I do think yields will go higher in the near term.
Speaker 1: How about you, Steve Flynn. Yeah, I'm probably a little
Speaker 1: bit more constructive. I think a lot of companies realize
Speaker 1: that they have to deal with their debt. I think,
Speaker 1: you know, the lack of issuance last year really was
Speaker 1: a concern for companies that they may have to look
Speaker 1: for other ways to pay down their obligations and may
Speaker 1: be focused on improving their leverage ratios and credit profiles.
Speaker 1: So I think management teams are going to be focused
Speaker 1: on their debtloads, which is I think positive. Okay, great,
Speaker 1: Thank you very much again, Steve Flinn from Bloomberg Intelligence.
Speaker 1: Olivia ra Monday from Bloomberg News. I'm James Crumby. It's
Speaker 1: been a pleasure of having you. See you next week. Yes,
Speaker 1: thank you.