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Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets podcast.

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Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.

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Speaker 1: This week, we're very pleased to welcome Mark Cherimutu from

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Speaker 1: Hafen Capital Management, a private credit company mostly focused on Europe.

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Speaker 2: How are you, Mark good?

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Speaker 1: How are you doing very well? Thank you? Thanks for

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Speaker 1: joining us today and I'm very keen to get your

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Speaker 1: thoughts on the private debt market and from Bloomberg Intelligence.

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Speaker 1: It's great to see Julie Hung, who covers consumer credit.

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Speaker 1: Welcome back, Julie, thank you for having me back. Also

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Speaker 1: delighted to see Lisa Lee, who covers credit markets from London.

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Speaker 1: Brilliant to see you again, Lisa, thanks for having me on.

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Speaker 1: So let's start with you Mark. Great to have you

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Speaker 1: on the Credit Edge. The big question, and everyone keeps

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Speaker 1: telling me, it's the fact olden age for private credit.

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Speaker 1: Is that still the case twenty twenty four? Is it

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Speaker 1: a golden age? Does it continue?

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Speaker 3: It's it's hard to look past it. I mean, if

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Speaker 3: you think about the fundamentals, double digit yield, first lean security,

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Speaker 3: stable companies, larger companies than ever being financed by private credit.

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Speaker 3: It's hard to look past that the fundamentals are stronger

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Speaker 3: now than they've ever been and the technicals which are

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Speaker 3: driving the growth of private credit that we see extending

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Speaker 3: beyond twenty four and further.

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Speaker 2: So we actually think we're very bullish on the market.

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Speaker 1: So what does that actually mean for twenty twenty four?

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Speaker 1: Is that bigger and bigger deals. Is it record levels

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Speaker 1: of fundraising? Is it more disintermediation of Wall Street? Better returns?

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Speaker 1: I mean what specifically we're talking about when we're talking about,

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Speaker 1: you know, fantastic times in private debt.

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Speaker 3: I think there's two two elements to the growth which

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Speaker 3: sometimes get mixed. There's there's there's the white space growth

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Speaker 3: for private credit in Europe, which is just larger companies,

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Speaker 3: more diversified companies, and more sponsors using US as an

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Speaker 3: asset class. So that's one area of growth and there's

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Speaker 3: lots of reasons why that's continued to grow. You know,

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Speaker 3: there's more banking assets in Europe and there's in the US,

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Speaker 3: and we've got further to go in terms of that

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Speaker 3: de leveraging of the European banking balance sheet. So there's

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Speaker 3: and the replacement being private credit. So that's one element

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Speaker 3: and then there's also the overlap but with the public markets.

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Speaker 3: I mean, one of the drivers over the last two

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Speaker 3: years of activity within in Europe in private credit has

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Speaker 3: been that battleground over what used to be serviced by

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Speaker 3: the broadly public broadly syndicated markets and what's gone what's

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Speaker 3: gone to private and so and we foresee that continuing

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Speaker 3: and there being a coexistence between the two asset classes,

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Speaker 3: so we see growth in both directions.

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Speaker 4: Talking about these big private credit funds, we're now seeing

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Speaker 4: possibly a record twenty billion dollar fund. What is the

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Speaker 4: fundraising environment right like right now?

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Speaker 3: It's look, it's it's fundraising is tough for everyone. It's

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Speaker 3: taking longer than ever before. So fundraisers which use cycles

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Speaker 3: which used to be twelve months are now now eighteen months.

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Speaker 3: But I think what we're seeing is there's a there's

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Speaker 3: a concentration going on. So the bigger managers are the

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Speaker 3: ones with a better track records, the ones with more

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Speaker 3: established origination networks, They're the ones that are really succeeding,

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Speaker 3: those which have the better relationships with the sponsors and

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Speaker 3: so source the better deals and get the better terms.

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Speaker 3: And that you're seeing that consolidation happening. From a more

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Speaker 3: macro perspective, Europe is just really interesting, right because if

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Speaker 3: a lot of the asset allocators are over indexed private

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Speaker 3: equity relative to credit, and they're over indexed US to Europe.

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Speaker 3: So from a diversification perspective, European private credit is a

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Speaker 3: great place to be allocating in twenty four And so

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Speaker 3: whilst there's a lot of people raising and it is

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Speaker 3: taking longer, the most successful managers are the ones which

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Speaker 3: are really gaining traction.

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Speaker 4: And do you find some of the interested LPs from

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Speaker 4: the Middle East, from the US, from Asia? I know

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Speaker 4: there's broad array of interest, but if you had to

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Speaker 4: pick a certain region which is most particularly interesting in

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Speaker 4: European private credit, what would that be? Where you guys focused.

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Speaker 3: I don't think there's any one particular region, but we've

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Speaker 3: really noticed an uptick in interest in the Middle East,

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Speaker 3: in Asia and even in the US looking to diversify

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Speaker 3: their portfolios and really attracted by the opportunity in Europe.

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Speaker 3: And so you know, there's there's there's multiple touchpoints and

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Speaker 3: multiple areas of interest in Europe.

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Speaker 1: Now, what's your first destination there on the on an airplane?

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Speaker 4: Is it?

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Speaker 1: Is it Toronto.

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Speaker 2: Is it Dubai?

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Speaker 1: I mean, what's where do you Where do you like

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Speaker 1: to go? Mostly for your fundraising.

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Speaker 3: I spend a lot of time in the US and

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Speaker 3: a lot of time in the Middle East, But it's

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Speaker 3: I don't think I'm unique in that way.

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Speaker 1: Respect Just back to the sort of golden age idea

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Speaker 1: that we're talking about. We've had some guests on here

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Speaker 1: recently raising a lot of red flags about private debt.

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Speaker 1: They're maybe not as close to you, as close to

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Speaker 1: the market as you are, but you know, they talk

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Speaker 1: about the speed of the market's growth. It's already bigger

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Speaker 1: than the US highe bond market and it didn't take

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Speaker 1: very long to get there. There's you know, seem to

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Speaker 1: be no transparency, not much liquidity, all the risks again

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Speaker 1: of companies falling behind on debt payments. As the rates,

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Speaker 1: you know, they may be coming down, but they are

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Speaker 1: very high in relative terms. There's going to be a

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Speaker 1: refinancing wall. And at the same time, there are a

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Speaker 1: lot of you know, relatively liquid and high yielding opportunities

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Speaker 1: out there, you know, including government bonds, so you don't

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Speaker 1: really need to stretch for the return anymore. Some you know,

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Speaker 1: maybe maybe they are conflicted because they're trying to compete

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Speaker 1: against you. But and it seems to come from the

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Speaker 1: cell side, but they are calling it a bubble. Do

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Speaker 1: you think that's justified?

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Speaker 3: It's it's ironic that the banks are calling above all,

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Speaker 3: given that they're the ones trying to get into private credits.

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Speaker 3: So I find that quite a musing. Look, it's there,

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Speaker 3: it's incontestable. There has been rapid growth in in the

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Speaker 3: asset class in Europe in particular. We've got we're still

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Speaker 3: a long way behind the US, and so there's there's

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Speaker 3: more runway. I think you'll find the sophistication of the

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Speaker 3: larger managers in thinking about risk, in thinking about their

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Speaker 3: regulary framework, in thinking about the lines of defense, are

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Speaker 3: actually much more advanced and much more sophisticated than the

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Speaker 3: outside world gives us credit for. I think credits selection,

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Speaker 3: I think is much better than people give us credit for.

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Speaker 3: I think we are also going into a period where

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Speaker 3: that there's going to be a bifurcation between those managers

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Speaker 3: who have you picked well, they've got really good performing

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Speaker 3: portfolios and more assets going in and more concentration on

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Speaker 3: moost of those that smaller group, who are who the

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Speaker 3: better pickers right and the better stewards of capital? I

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Speaker 3: think that you know, we've been through a ten year

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Speaker 3: period of low interest rates, low defaults, relatively attractive growth,

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Speaker 3: and now to the time where you're going to actually

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Speaker 3: find out who's who's really good at this right, who's

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Speaker 3: really a good steward of capital, because we're, as you say,

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Speaker 3: we're in an environment where rates are still elevated, growth

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Speaker 3: is still anemic, there's still some systemic risks to the economy.

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Speaker 3: So I think it's I understand people's concern, but as

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Speaker 3: a persispent on the inside, you know, looking out, things

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Speaker 3: are actually less beleep than you'd imagine.

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Speaker 5: Mark, are there specific sectors.

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Speaker 2: That you like?

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Speaker 3: Yeah, I think, I mean it's it's no it's no

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Speaker 3: secret that we have we like healthcare. We have a

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Speaker 3: dedicated healthcare team, both in the US and Europe. It's

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Speaker 3: been a great source of deployment for us, the more

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Speaker 3: stable and resilient parts of healthcare in particular.

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Speaker 2: You know, we're not you. We like software. Like a

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Speaker 2: lot of other.

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Speaker 3: Private credit guys. We like picking the better businesses within

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Speaker 3: the software world. We know that not all software businesses

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Speaker 3: are created equally and we like sort of you know,

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Speaker 3: the very market leading professional services sector where you've got

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Speaker 3: a real reasons to exist consuming nony discretionary, you know,

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Speaker 3: real downside protection. Those are the things. Those are the

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Speaker 3: areas that we spend a lot.

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Speaker 1: Of our time on the software mark. How are these

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Speaker 1: earnings holding up given those types of deals, you know,

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Speaker 1: they're generally known for heavy add backs and synergy expectations.

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Speaker 3: We've just gone through our portfolio review and they're actually

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Speaker 3: holding up really well. We've for exactly those reasons that

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Speaker 3: you mentioned, We've been paying a lot of attention to

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Speaker 3: the performance and the monthly incordantly numbers and actually top

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Speaker 3: line is holding up in the names that we have

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Speaker 3: really really well. So we've been pleased with performance in there.

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Speaker 4: Are there any centers that you avoid mark you just

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Speaker 4: think are like kryptonite for private credit and for Haven.

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Speaker 3: I think it's I can't speak for the market as

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Speaker 3: a whole, but but we we find consumer exposed businesses

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Speaker 3: with no downside protection really difficult, right and and particularly

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Speaker 3: in this sort of environment where you know, the rate

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Speaker 3: rate rises are affecting Joe consumer that's going to flow

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Speaker 3: through to mortgages, and and effect disposable income. So so

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Speaker 3: that's those are parts of the market that we struggle with.

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Speaker 3: Pure retail, for instance, work with no no asset backing

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Speaker 3: really hard.

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Speaker 5: You know, do you have a rating standard for when

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Speaker 5: when you're looking at what investments to make you want

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Speaker 5: to avoid very high yield or you know, you're you're

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Speaker 5: looking more at the business more than just the credit ratings.

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Speaker 3: I mean, we don't take a credit rating approach to

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Speaker 3: take to the investments we look at. We are very

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Speaker 3: focused on credit. You know, Credit selection for us is

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Speaker 3: the most important thing that we do, and so diligence, understanding, sustainability, learnings,

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Speaker 3: you know, free cash flow, real threats of the business,

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Speaker 3: both competitive as well as systemic, you know, those are

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Speaker 3: the those are the real core things that we focus on.

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Speaker 3: We're we sort of look at the look at credit

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Speaker 3: from a from a fundamentalist perspective.

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Speaker 1: On the returns mark, I mean they are very high

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Speaker 1: in relative terms, I mean high teens yields on some

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Speaker 1: of these deals. That sounds great from the investors standpoint,

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Speaker 1: but for an issuer, how sustainable is it to them,

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Speaker 1: you know to pay that level of interest for the

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Speaker 1: long run. I mean are you not putting putting all

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Speaker 1: of these companies under a huge amount of pressure.

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Speaker 3: Yeah, it's look, we're we're a floating rate product, right,

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Speaker 3: so that's a benefit to our investors, But obviously, as

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Speaker 3: as you know, as you pointed out, it's that's the

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Speaker 3: burden of our portfolio companies. We focus very much on

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Speaker 3: free casually and so we focus on even with the

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Speaker 3: rates where they are and the margins where they are

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Speaker 3: from a market perspective, we focus on the businesses that

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Speaker 3: can can support those and actually we've seen leverage come

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Speaker 3: down in the last twelve months in a direct as

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Speaker 3: a direct result of where rates are, and so there's

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Speaker 3: a right sizing of the balance sheet to try and

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Speaker 3: address that elevated interest rate.

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Speaker 4: Gun Do you think there's come a time when there's

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Speaker 4: gonna be a lag effect of other rate rises and

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Speaker 4: the interest rate payments, Because you're right, corporates have held

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Speaker 4: up very well for many many people. Many portfolios are

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Speaker 4: doing okay. But as we get into almost a thirty

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Speaker 4: year of rate high rights hikes and perhaps a recessionary environment,

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Speaker 4: what do you think about the future.

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Speaker 3: We're cautious on the outlook. Credit investors by nature are

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Speaker 3: more downside perspective than outside.

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Speaker 2: We are.

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Speaker 3: Cautious around how that lag effect and fully seeing the

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Speaker 3: effect of having these elevated rates. We're going to have

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Speaker 3: elevated rates in Europe for much longer than the US,

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Speaker 3: like if you just look at where where the curves are.

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Speaker 3: And so it's really about sustainability of business models. It's

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Speaker 3: really about, you know, picking the ones which we have

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Speaker 3: a reason to exist and have an ability and scale

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Speaker 3: to cope with the pressures and still manage that. But

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Speaker 3: you're right, they're going to be some companies that just can't.

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Speaker 3: And one of the things we've done in the last

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Speaker 3: twelve months is trying to avoid some of the smaller

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Speaker 3: companies which rich are the ones which are generally struggle

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Speaker 3: in the face of macroeconomic pressure. So we've very much

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Speaker 3: focused our attention on moving the medium size of companies

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Speaker 3: up in Apple project.

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Speaker 1: In terms of the competitive landscape, mark, you've seen a

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Speaker 1: ton of new entrants come into private credit. Everyone wants

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Speaker 1: to be involved. It's a big new thing. But I mean,

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Speaker 1: we've taught on the shows about the risks that that

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Speaker 1: brings perhaps less sophisticated participants coming in doing deals that

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Speaker 1: maybe shouldn't be done, and those those causing problems down

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Speaker 1: the line. But in terms of you know your business,

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Speaker 1: are you seeing fee pressure from this? Are you seeing

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Speaker 1: investors asked for lower management fees or greater oversight or

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Speaker 1: anything else to try? And you know, because because they can,

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Speaker 1: I mean, you know, they can pick and choose.

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Speaker 3: I think as a general comment that investors are very savvy.

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Speaker 3: They they realize that there's a lot of people coming

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Speaker 3: to raise funds and so focused on the economics around

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Speaker 3: around the managers they.

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Speaker 2: Do want to allocate to.

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Speaker 3: I think there is still a premium for those that

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Speaker 3: have long established track records, have real presence and subsistence

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Speaker 3: in the markets, and and and have real originating networks

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Speaker 3: which which can help in in low eminem environments as

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Speaker 3: we've seen. So I think they're you're right, there are

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Speaker 3: new entrants. You're right, that creates a dynamic that a

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Speaker 3: influence the terms on raising. But I think our experience,

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Speaker 3: and I think the experience about peers has been people flighting,

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Speaker 3: people flock to quality, and there's a price to pay

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Speaker 3: for that. So I think it's still an attractive environment

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Speaker 3: for us, for us and our peers to raise.

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Speaker 4: You say, you've gone towards more bigger companies. And last

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Speaker 4: year we saw the biggest private credit loan in Europe

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Speaker 4: and that entailed a syndication of a number of lenders.

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Speaker 4: What do you think about private credit and these sort

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Speaker 4: of almost lightly syndicated deals where you see twenty somewhat

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Speaker 4: lenders in a private credit deal. It's sort of a

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Speaker 4: little bit different from what has traditionally been what private

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Speaker 4: credit is supposed to be one lender, maybe two lenders

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Speaker 4: at most, but almost back to the way the leverage

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Speaker 4: loan market used to be saved fifteen years ago.

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Speaker 3: Yeah, look at this. Clearly there's been a shift in

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Speaker 3: the last twelve months. The prevalence of clubs in Europe

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Speaker 3: business is on the rise, and I think that's a

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Speaker 3: trend and theme that we're going to see throughout this

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Speaker 3: here and beyond. I would say that the twenty plus

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Speaker 3: lender syndicates is the outlier. I mean, we've only had

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Speaker 3: six deals in Europe above a billion. I think the

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Speaker 3: sweet spot in terms of syndic conversation that we're seeing

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Speaker 3: is more in the two.

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Speaker 2: To five range.

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Speaker 3: And there, I think you've got and that comes back

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Speaker 3: to the theme of concentration, you've got the same group

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Speaker 3: of people looking at the same assets and being clubbed together.

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Speaker 3: They're generally ones which think about credit and risk in

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Speaker 3: the same way. They generally think about documentation in the

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Speaker 3: same way.

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Speaker 2: So I think you're right there are these outliers, but.

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Speaker 3: Actually the market is from all centering on a much

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Speaker 3: lower number of participants, and that I think is going

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Speaker 3: to continue.

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Speaker 4: Okay, And do you worry about any of these syndications

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Speaker 4: about liquidity, about having almost like going after there's probably

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Speaker 4: indicator market. And now with the banks feeling a little

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Speaker 4: bit more assured, do you think they'll come back for

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Speaker 4: some of the deals that they've.

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Speaker 2: Last I think we're not naive right there.

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Speaker 3: We know that the banks are actively pitching to cut

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Speaker 3: and refinance some of the private credit deals that were

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Speaker 3: done away from them in the last two years. I

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Speaker 3: happen to think that there's a there's a natural medium

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Speaker 3: where we can where the two assets co exist, right,

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Speaker 3: And but it goes back to the point I mean

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Speaker 3: at the beginning, that's not our sole source of growth. Actually,

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Speaker 3: the more attractive source of growth is the systemic leakage

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Speaker 3: of capital out of the system and into private credit,

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Speaker 3: and so I actually think that you know, yes, we'll

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Speaker 3: see more activity than the banks. Yes there'll be a

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Speaker 3: bit more competition around those type of assets, but actually

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Speaker 3: not that's that's good for us, right, because we've got

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Speaker 3: plenty of other things to do.

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Speaker 1: When you look around at everything, you cover the big universe,

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Speaker 1: what are you most excited about for twenty twenty four?

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Speaker 1: Where's the big opportunity?

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Speaker 3: I think for Europe in private credit, the big opportunity

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Speaker 3: is going to come in refinancings, right, because there's never

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Speaker 3: to be going to be an uptick in LBO activity.

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Speaker 3: Twenty three was pretty muted from an M and A perspective.

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Speaker 3: I think if you talk to market participants, you know

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Speaker 3: we're not going to see an immediate snap back. It's

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Speaker 3: probably back ended. But I think what we what is

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Speaker 3: going to be interesting is we've seen almost no refinancing

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Speaker 3: in the last twenty four months, and there's there are

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Speaker 3: large maturity walls in twenty six and twenty seven, you've

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Speaker 3: got some in twenty five as well, and so I

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Speaker 3: think twenty four is going to be the year.

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Speaker 2: Of of of of.

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Speaker 3: The rebooting of that refinancing opportunity, and a particular interest

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Speaker 3: for us is a lot of these companies are not

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Speaker 3: They haven't de leaveed enough to be able to be

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Speaker 3: refinanunced dollar for dollar in cash pay terms. So I

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Speaker 3: think you're going to have to You're gonna have to

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Speaker 3: recut some of these balance sheets, which is going to

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Speaker 3: be provide a really interesting direct lending product at a.

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Speaker 2: Lower attachment point.

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Speaker 3: But also for for for firms like ourselves who can

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Speaker 3: be have more flexible capital to look at junior debt

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Speaker 3: in different strategies to plug that gap, because we whilst

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Speaker 3: the private actor community will probably help grease the wheels

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Speaker 3: by putting a bit of equity, we don't think that

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Speaker 3: they're going.

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Speaker 2: To solve the whole problem.

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Speaker 3: So firms that have that in their locker can and

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Speaker 3: be able to look at subordinated debt in refinancings through

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Speaker 3: different strategies.

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Speaker 2: I think it's going to that's gonna be a really

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Speaker 2: interesting opportunity.

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Speaker 1: So before we dig in on the consumer set with Julie,

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Speaker 1: I'm going to keep you here, Julie mark I did

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Speaker 1: want to ask you about consolidation in this industry. That

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Speaker 1: seems to be something that people are talking about. In

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Speaker 1: addition is hay Finn for sale.

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Speaker 3: I think, you know, it's it's well, we're flattered that

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Speaker 3: we're getting so much interest, but I think, you know,

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Speaker 3: it's hard to comment on on market speculation. What what

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Speaker 3: I think is interesting around the interest that you mentioned

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Speaker 3: is just the focus on European private credit and how

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Speaker 3: that's how people are looking at that as the next

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Speaker 3: real big growth driver and that sort of over indexation

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Speaker 3: point that I mentioned earlier around private equity and the

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Speaker 3: US really focusing on private credit. I think that's that's

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Speaker 3: super exciting. I think the consolidation point, it's we're seeing

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Speaker 3: concentration within fewer, fewer hands, right, It's the bigger managers

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Speaker 3: that are getting bigger.

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Speaker 2: It's the bigger.

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Speaker 3: Managers that are having more traction in fundraising, and it's

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Speaker 3: the bigger managers that are sourcing the better deals, and

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Speaker 3: so that I think that that trend is going to continue.

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Speaker 2: We see ourselves as part of that.

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Speaker 1: And just be clear on the europe point. I mean,

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Speaker 1: is it because it's cheap versus the US?

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Speaker 3: Is that the opportunity I think it's it's it's there's

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Speaker 3: a diversification point from where allocators have allocated in the past.

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Speaker 3: Of what they have in their portfolio. But there's also

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Speaker 3: an inefficiency in Europe, in the European markets, which is

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Speaker 3: which is attractor to to to to monetize right the

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Speaker 3: the You've got a patchwork of insolvency regimes across Europe.

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Speaker 2: You've got differences and structures between Italy and in the

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Speaker 2: UK and France.

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Speaker 3: You've got you've got difference is in terms of the

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Speaker 3: banking land statement and what state of deleveraging their about

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Speaker 3: their corporate balance sheets, all of which provides lots of

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Speaker 3: different pockets of opportunities and lots of different inefficiencies that

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Speaker 3: really play into the hands of private credit lenders.

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Speaker 2: So that there's there's two.

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Speaker 3: Elements to to to the to the interest in our market.

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Speaker 1: Great stuff, but Cherimoto from Hafen Capital Management, thank you

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Speaker 1: so much for joining us. Thanks a lot, do come

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Speaker 1: back soon and does know how it's all going. And

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Speaker 1: Lisa Lye with Bloomberg News in London, many thanks for joining,

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Speaker 1: Thank you for having me read all of Lisa's great

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Speaker 1: scoops on the Bloomberg terminal and of course at Bloomberg

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Speaker 1: dot com. And so Julie Hung with Bloomberg Intelligence in

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Speaker 1: New York. We're keeping you here. Thank you so much

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Speaker 1: for joining us on the show.

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Speaker 5: Thank you for having me again.

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Speaker 1: You have a few theories about ozepic, the weight loss drug,

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Speaker 1: and how it affects the companies you cover. I'm very

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Speaker 1: interested in sort of digging deeper into that, but I

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Speaker 1: wanted to kind of start by breaking it down in

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Speaker 1: really really simple terms. How does a weight loss treatment

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Speaker 1: that you know is really in the news now everyone's

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Speaker 1: talking about it, How can that affect the credit of

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Speaker 1: food and drinks companies that you cover? I mean, is

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Speaker 1: it really big enough to do that?

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Speaker 2: Yes?

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Speaker 5: So you know, if you look at Bloomberg has this

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Speaker 5: really good function ds go, Document Search Go. If you

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Speaker 5: do a search on the keywords like ozembic or Wagovi,

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Speaker 5: those are the big brand names for diet drugs over

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Speaker 5: the past few quarters, you'll see that the mentions have

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Speaker 5: increased in the quarterly earnings. So there is this increased

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Speaker 5: concern or you know, just a curiosity about how these

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Speaker 5: diet drugs are going to impact the sector in general.

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Speaker 5: The way they work is the supress appetites. Suppress you're

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Speaker 5: craving for sugar, so consumers are expected to eat less

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Speaker 5: and you know, the consumers who have been on these

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Speaker 5: diet drugs have been shown to have less cravings for snacking,

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Speaker 5: They're eating less portions, so as that impacts food and beverage,

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Speaker 5: the general ideas that sales are going to be lower

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Speaker 5: across the sector.

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Speaker 1: Is it big enough that on that sort of macro level,

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Speaker 1: because I can I can see it on a you know,

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Speaker 1: micro level, and maybe there are small groups of you know,

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Speaker 1: people that really need this kind of treatment and you know,

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Speaker 1: very keen to lose weight very quickly. But does it

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Speaker 1: you know, just on a macro across the US, could

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Speaker 1: it really affect the bottom line of a company?

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Speaker 4: Yeah?

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Speaker 5: I mean our view is that, you know, the the

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Speaker 5: short term impact is that it's pretty negligible. You know,

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Speaker 5: we have heard from big companies like Coca Cola and

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Speaker 5: PepsiCo Mandalis who have said that so far, what they've

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Speaker 5: seen is very little impact. I think it's more headline

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Speaker 5: risk right now than it is going to change the

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Speaker 5: bottom line for these companies. What you know, when when

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Speaker 5: the equity markets reacted to this back in October, and

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Speaker 5: that was triggered by a comment by you know, big

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Speaker 5: retailers saying that they're seeing their food sales are down

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Speaker 5: because of use of diet drugs. The equity markets, you know,

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Speaker 5: to twenty twenty three, if you look at the S

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Speaker 5: and P Packaged Food index, it's down about ten percent,

439
00:23:42,119 --> 00:23:46,360
Speaker 5: whereas the credit markets for food and beverage, the spreads

440
00:23:46,359 --> 00:23:50,199
Speaker 5: have tightened by about thirty bases points. So credit markets

441
00:23:50,200 --> 00:23:52,040
Speaker 5: are taking it a lot more in stride, and I

442
00:23:52,040 --> 00:23:56,320
Speaker 5: think it's more going back to headline risk. The bigger

443
00:23:56,320 --> 00:24:00,200
Speaker 5: picture is that is this going to be a game changer?

444
00:24:01,119 --> 00:24:03,080
Speaker 5: You know, we think that it could be, because there

445
00:24:03,119 --> 00:24:06,960
Speaker 5: are also benefits to you know, heart health and kidney

446
00:24:06,960 --> 00:24:10,480
Speaker 5: health and liver health. But what a lot of these

447
00:24:10,480 --> 00:24:13,760
Speaker 5: food and beverage companies have been doing for many, many

448
00:24:13,840 --> 00:24:17,919
Speaker 5: years is they they watch consumer behavior. They watch, you know,

449
00:24:17,960 --> 00:24:20,760
Speaker 5: how consumers eat and their lifestyle changes. Because this is

450
00:24:20,760 --> 00:24:23,680
Speaker 5: a big social risk for them. So they have been

451
00:24:23,800 --> 00:24:30,840
Speaker 5: tailoring their product portfolio to lower sugar, no calorie, low calorie,

452
00:24:31,040 --> 00:24:34,920
Speaker 5: smaller package sizing, which is something they've been doing for

453
00:24:35,200 --> 00:24:38,480
Speaker 5: many years. So they're adjusting. They have they already started

454
00:24:38,520 --> 00:24:41,960
Speaker 5: to adjust to this trend before the diet drugs came out.

455
00:24:42,440 --> 00:24:46,840
Speaker 5: So is it going to impact their bottom line. Longer term,

456
00:24:47,160 --> 00:24:49,800
Speaker 5: you know, I don't really think so, because they are

457
00:24:49,880 --> 00:24:52,639
Speaker 5: doing everything they're supposed to be doing right now to

458
00:24:52,720 --> 00:24:57,679
Speaker 5: prepare for wider use in the future. And James, you

459
00:24:57,680 --> 00:25:00,640
Speaker 5: brought up a really good point that you know, there's

460
00:25:00,640 --> 00:25:03,560
Speaker 5: a small segment of the population using these drugs right now,

461
00:25:04,040 --> 00:25:06,600
Speaker 5: so again, in the short term, there's a lot of

462
00:25:06,640 --> 00:25:10,919
Speaker 5: obstacles to using these drugs, which again, like we just

463
00:25:11,200 --> 00:25:15,840
Speaker 5: think that the short term, you know, equity impact was overdone.

464
00:25:16,440 --> 00:25:20,119
Speaker 5: It's very expensive if you look at the studies. I

465
00:25:20,160 --> 00:25:25,000
Speaker 5: think wogovi is about seventeen five hundred dollars annually, and

466
00:25:25,040 --> 00:25:30,280
Speaker 5: that's before rebates and discounts. It's an injection which is

467
00:25:30,359 --> 00:25:34,720
Speaker 5: very cumbersome for a lot of users, and you know

468
00:25:34,720 --> 00:25:38,119
Speaker 5: they're competing against true diabetics who need the drugs, so

469
00:25:38,200 --> 00:25:41,520
Speaker 5: supply is limited. So right now there is not that

470
00:25:41,600 --> 00:25:44,879
Speaker 5: widespread use. So I think, you know, in the short

471
00:25:44,920 --> 00:25:46,439
Speaker 5: to even the medium term, like you're not going to

472
00:25:46,440 --> 00:25:48,000
Speaker 5: see an impact to the bottom line.

473
00:25:48,480 --> 00:25:50,439
Speaker 1: But what about leverage trends. I mean, that seems to

474
00:25:50,440 --> 00:25:52,080
Speaker 1: be the story of the moment, is that a lot

475
00:25:52,119 --> 00:25:54,959
Speaker 1: of companies are just getting hit because they took on

476
00:25:55,000 --> 00:25:57,679
Speaker 1: too much debt when when it was cheap, now it's

477
00:25:57,760 --> 00:26:00,520
Speaker 1: much more expensive and they're hitting a refine. Well, are

478
00:26:00,560 --> 00:26:02,840
Speaker 1: there any companies in your set to you know, even

479
00:26:02,880 --> 00:26:04,560
Speaker 1: though this may be sort of marginal more of a

480
00:26:04,560 --> 00:26:06,680
Speaker 1: headline impact, are there any that just have too much

481
00:26:06,760 --> 00:26:09,760
Speaker 1: leverage now and it could sort of start to affect

482
00:26:09,800 --> 00:26:10,440
Speaker 1: them in some way.

483
00:26:10,760 --> 00:26:14,560
Speaker 5: Yeah, So, you know, the consumer sector. You know our

484
00:26:14,800 --> 00:26:19,200
Speaker 5: if you look at our outlook and even our message.

485
00:26:19,400 --> 00:26:23,200
Speaker 5: Since twenty twenty three, they have been focusing on net

486
00:26:23,240 --> 00:26:26,960
Speaker 5: leverage trends. They have net leverage targets that they're working towards,

487
00:26:27,000 --> 00:26:31,000
Speaker 5: and they have been more aware of how much debt

488
00:26:31,040 --> 00:26:34,480
Speaker 5: they have on their balance sheets. I think, you know,

489
00:26:34,520 --> 00:26:37,160
Speaker 5: when COVID happened in twenty twenty, they were taken by

490
00:26:37,200 --> 00:26:41,239
Speaker 5: surprise and a lot of companies were over levered at

491
00:26:41,280 --> 00:26:44,320
Speaker 5: the time. They don't want to be caught in a

492
00:26:44,359 --> 00:26:47,680
Speaker 5: situation like that anymore. So they're focusing a lot on

493
00:26:48,200 --> 00:26:53,200
Speaker 5: just very balanced capital allocation policies. If they're doing anything

494
00:26:53,240 --> 00:26:55,600
Speaker 5: that shareholder friendly, or if they're doing M and A

495
00:26:55,680 --> 00:26:58,880
Speaker 5: that's debt funded, they're doing it within the confines of

496
00:26:58,920 --> 00:27:03,240
Speaker 5: a conservative financial policy or within the confines of their

497
00:27:03,680 --> 00:27:06,879
Speaker 5: leverage targets. So what we're seeing as we're entering twenty

498
00:27:06,920 --> 00:27:10,760
Speaker 5: twenty four is generally a very healthy balance sheet, very

499
00:27:10,760 --> 00:27:14,240
Speaker 5: good liquidity levels for the consumer food and beverage sector.

500
00:27:15,119 --> 00:27:17,480
Speaker 1: On the consumer side, though, I mean, we do know

501
00:27:17,520 --> 00:27:19,440
Speaker 1: that the consumer is under a bit of pressure. There's

502
00:27:19,440 --> 00:27:24,639
Speaker 1: been inflation, COVID savings have wound down, the rates are

503
00:27:24,680 --> 00:27:27,000
Speaker 1: very high to borrow. So is there any impact there

504
00:27:27,080 --> 00:27:29,560
Speaker 1: or is this just you know, stuff that consumers will

505
00:27:29,640 --> 00:27:30,240
Speaker 1: buy whatever.

506
00:27:30,840 --> 00:27:33,800
Speaker 5: You know, Volume trends have been weak, and I think

507
00:27:34,359 --> 00:27:37,200
Speaker 5: you know, when you see that consumer companies are raising prices,

508
00:27:38,119 --> 00:27:42,719
Speaker 5: it has impacted consumer purchasing behavior, but it hasn't stopped

509
00:27:42,720 --> 00:27:47,280
Speaker 5: them from buying food. You have to eat, and that's

510
00:27:47,280 --> 00:27:52,479
Speaker 5: why it's consumer staple because compared to you know, what

511
00:27:52,520 --> 00:27:57,440
Speaker 5: Mark was saying, like the retailers where non discretionary, you're

512
00:27:57,480 --> 00:28:00,680
Speaker 5: always going to see purchases, whereas you know they could

513
00:28:00,720 --> 00:28:04,120
Speaker 5: hold off on some of the personal care purchases, home

514
00:28:04,160 --> 00:28:07,400
Speaker 5: appliance purchases. But when you're looking at food and beverage,

515
00:28:08,560 --> 00:28:13,560
Speaker 5: the sales have been overall pretty stable compared to other sectors,

516
00:28:14,040 --> 00:28:18,439
Speaker 5: just because of the need to have to eat, have

517
00:28:18,560 --> 00:28:22,879
Speaker 5: to drink, and a lot of these companies, they've been

518
00:28:23,119 --> 00:28:26,520
Speaker 5: very wary of their price increases, but you know they

519
00:28:26,520 --> 00:28:29,160
Speaker 5: have been able to pass some of these costs onto consumers.

520
00:28:29,359 --> 00:28:31,920
Speaker 5: You do see a volume impact, but that's getting a

521
00:28:31,920 --> 00:28:34,879
Speaker 5: little better because food food inflation trends in the US

522
00:28:35,720 --> 00:28:37,640
Speaker 5: have been moderating a tadbit.

523
00:28:38,320 --> 00:28:40,560
Speaker 1: Are there is there any kind of going down to

524
00:28:40,640 --> 00:28:43,760
Speaker 1: generic brands by cossumism And I don't see the difference

525
00:28:43,760 --> 00:28:46,000
Speaker 1: between the two different types of rice crispies.

526
00:28:46,000 --> 00:28:46,640
Speaker 2: But that's just me.

527
00:28:46,760 --> 00:28:49,320
Speaker 1: My kids do unfortunately, But do we do we see

528
00:28:49,360 --> 00:28:50,840
Speaker 1: that that happening.

529
00:28:51,080 --> 00:28:53,720
Speaker 5: Is some private label trade down, but it's not as

530
00:28:54,200 --> 00:28:58,880
Speaker 5: big as we had expected. So there's a company, Cannagarbarans

531
00:28:58,920 --> 00:29:03,840
Speaker 5: that reported and quarter recently and what they're saying is

532
00:29:03,840 --> 00:29:06,680
Speaker 5: like their sales were a little weaker, their ebide was

533
00:29:06,680 --> 00:29:08,680
Speaker 5: a little weaker. But what they're saying is like it's

534
00:29:08,680 --> 00:29:11,480
Speaker 5: not really a trade down to private label, but it's

535
00:29:11,480 --> 00:29:14,240
Speaker 5: more the consumer is just stretching their budget more. They're

536
00:29:14,280 --> 00:29:17,720
Speaker 5: going to the supermarkets less, they're working through their pantry

537
00:29:17,760 --> 00:29:23,760
Speaker 5: and their freezers and they're making they're buying more multi meals,

538
00:29:24,120 --> 00:29:28,480
Speaker 5: things that they can have leftovers instead of just one

539
00:29:28,520 --> 00:29:32,040
Speaker 5: meal opportunity. So it's not that they're trading down, but

540
00:29:32,080 --> 00:29:34,959
Speaker 5: they're just stretching their budget a little bit more so.

541
00:29:35,040 --> 00:29:37,440
Speaker 1: Is there any kind of relative value argument right now?

542
00:29:37,440 --> 00:29:40,600
Speaker 1: I mean from a credit investor standpoint, are they companies

543
00:29:40,600 --> 00:29:43,880
Speaker 1: that are particularly attractive or companies that are, you know,

544
00:29:43,920 --> 00:29:46,959
Speaker 1: looking more risky in this phase of the cycle.

545
00:29:47,920 --> 00:29:50,080
Speaker 5: Yeah, I mean when you look at the overall sector,

546
00:29:50,200 --> 00:29:54,040
Speaker 5: I mean, spreads have tightened throughout twenty twenty three, but

547
00:29:54,200 --> 00:29:57,000
Speaker 5: if you look within the sector, there are pockets of opportunity.

548
00:29:58,000 --> 00:30:00,480
Speaker 5: You know, we do see that you know, are still

549
00:30:00,480 --> 00:30:04,520
Speaker 5: a little wide for craft or mulsten cores, even Cannagra

550
00:30:04,680 --> 00:30:07,320
Speaker 5: like spreads. Spreads are a little wider than some of

551
00:30:07,360 --> 00:30:10,000
Speaker 5: their peers. And what we like about these companies is

552
00:30:10,000 --> 00:30:13,000
Speaker 5: that they are working towards a very healthy net leverage

553
00:30:13,720 --> 00:30:16,840
Speaker 5: target and it's not fully priced in yet.

554
00:30:17,480 --> 00:30:21,840
Speaker 1: And know, are there any other events or any kind

555
00:30:21,840 --> 00:30:24,440
Speaker 1: of things on the horizon for the next twelve months

556
00:30:24,440 --> 00:30:26,920
Speaker 1: that make you particularly worried for your industries or particularly

557
00:30:26,960 --> 00:30:28,320
Speaker 1: excited about the opportunity.

558
00:30:28,840 --> 00:30:32,440
Speaker 5: Yeah, I mean I cover tobacco, I cover consumer products,

559
00:30:32,480 --> 00:30:36,200
Speaker 5: I cover food and beverage, So there's a lot of

560
00:30:36,240 --> 00:30:38,160
Speaker 5: different things that are coming down the pipeline. I mean,

561
00:30:38,200 --> 00:30:40,960
Speaker 5: one big thing for the tobacco sector is the menth

562
00:30:40,960 --> 00:30:44,280
Speaker 5: all band in the United States. Everyone's waiting for ruling

563
00:30:44,280 --> 00:30:49,120
Speaker 5: on that, which has been delayed. Some of that is political,

564
00:30:49,480 --> 00:30:52,800
Speaker 5: but I think when there is you know, we think

565
00:30:52,800 --> 00:30:55,440
Speaker 5: that the band is going to come into effect because

566
00:30:56,160 --> 00:30:59,200
Speaker 5: menthol cigarettes are banned in Europe and Canada, so it

567
00:30:59,240 --> 00:31:03,560
Speaker 5: makes sense that the United States would follow. But a

568
00:31:03,600 --> 00:31:06,440
Speaker 5: lot of the tobacco companies, they have been preparing for

569
00:31:06,880 --> 00:31:09,320
Speaker 5: this news. They have been focused more on their non

570
00:31:09,320 --> 00:31:18,520
Speaker 5: combustible segment and you know, and their alternative alternative products

571
00:31:18,520 --> 00:31:22,120
Speaker 5: like dest generation products. So in addition to that, like

572
00:31:22,200 --> 00:31:25,000
Speaker 5: they also have been focusing on like healthy balance sheets.

573
00:31:25,000 --> 00:31:26,720
Speaker 5: So we think they'll be able to manage through that.

574
00:31:27,640 --> 00:31:30,680
Speaker 5: But also, you know, just looking at general consumer trends,

575
00:31:31,480 --> 00:31:34,400
Speaker 5: anything can happen. You know, we didn't expect COVID to

576
00:31:34,480 --> 00:31:37,680
Speaker 5: happen back in twenty twenty. We didn't expect us to

577
00:31:38,120 --> 00:31:41,760
Speaker 5: be in a full blown pandemic. You know, we didn't

578
00:31:41,760 --> 00:31:45,040
Speaker 5: expect that, you know, consumers were going to be in lockdown.

579
00:31:45,480 --> 00:31:48,880
Speaker 5: So that's always on our minds and kind of going

580
00:31:48,920 --> 00:31:50,880
Speaker 5: back to something that Mark said that, you know, credit

581
00:31:50,880 --> 00:31:54,200
Speaker 5: investors were always kind of like, you know, the DeBie downers,

582
00:31:54,240 --> 00:31:57,280
Speaker 5: and you know, we're also looking at the worst case scenario.

583
00:31:57,480 --> 00:32:01,200
Speaker 5: So even though you know volume trends in food is

584
00:32:01,840 --> 00:32:04,640
Speaker 5: trending better, they might still be negative, but sequentially they're

585
00:32:04,680 --> 00:32:06,840
Speaker 5: looking better. It's always in the back of our minds

586
00:32:06,840 --> 00:32:10,200
Speaker 5: that you know, something bad can happen. And I think

587
00:32:10,240 --> 00:32:12,200
Speaker 5: a lot of these companies when you listen to them,

588
00:32:12,600 --> 00:32:15,760
Speaker 5: they're also just a little more cautious, like they're not

589
00:32:15,840 --> 00:32:18,400
Speaker 5: coming out and saying that everything's turned around. Even though

590
00:32:18,640 --> 00:32:22,400
Speaker 5: food inflation trends are getting better, they still keep it

591
00:32:22,440 --> 00:32:25,680
Speaker 5: in the back of their minds that consumers are still stretched,

592
00:32:27,160 --> 00:32:29,360
Speaker 5: you know, budgets are stretched, and you know they're not

593
00:32:29,600 --> 00:32:31,960
Speaker 5: calling for you know, complete turnaround just yet.

594
00:32:32,400 --> 00:32:34,360
Speaker 1: I'm mostly worried about the US election, but we still

595
00:32:34,360 --> 00:32:34,840
Speaker 1: need to eat and.

596
00:32:34,880 --> 00:32:36,880
Speaker 5: Drink, right, Yes, yes, exactly.

597
00:32:37,320 --> 00:32:39,360
Speaker 1: Julie Hung with Bloomberg Intelligence. Thank you so much for

598
00:32:39,400 --> 00:32:39,880
Speaker 1: joining us.

599
00:32:40,160 --> 00:32:41,480
Speaker 5: Thank you for having me James.

600
00:32:41,760 --> 00:32:43,160
Speaker 1: We look forward to having you back on the show

601
00:32:43,240 --> 00:32:46,560
Speaker 1: very soon. Thank you and thanks again. Tomuch Cherry Mutu

602
00:32:46,600 --> 00:32:49,760
Speaker 1: from HAFN, as well as to Lisa Lee from Bloomberg news,

603
00:32:50,160 --> 00:32:52,600
Speaker 1: read all of Lisa's great scoops on the terminal and

604
00:32:52,680 --> 00:32:55,760
Speaker 1: at Bloomberg dot com. Please do subscribe wherever you get

605
00:32:55,760 --> 00:32:59,000
Speaker 1: your podcasts. We're on Apple, Google and Spotify. Give us

606
00:32:59,000 --> 00:33:01,600
Speaker 1: a review to tell your friends, or email me directly

607
00:33:01,640 --> 00:33:05,240
Speaker 1: at jcrombieight at Bloomberg dot net. That's j C R

608
00:33:05,440 --> 00:33:07,480
Speaker 1: M B I E as in my surname and the

609
00:33:07,560 --> 00:33:11,320
Speaker 1: number eight at Bloomberg dot net. I'm James Crombie. It's

610
00:33:11,320 --> 00:33:13,880
Speaker 1: been a pleasure having you join us again next week

611
00:33:13,960 --> 00:33:15,000
Speaker 1: on the Credit Edge