Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 1: This week, we're very pleased to welcome Mark Cherimutu from
Speaker 1: Hafen Capital Management, a private credit company mostly focused on Europe.
Speaker 2: How are you, Mark good?
Speaker 1: How are you doing very well? Thank you? Thanks for
Speaker 1: joining us today and I'm very keen to get your
Speaker 1: thoughts on the private debt market and from Bloomberg Intelligence.
Speaker 1: It's great to see Julie Hung, who covers consumer credit.
Speaker 1: Welcome back, Julie, thank you for having me back. Also
Speaker 1: delighted to see Lisa Lee, who covers credit markets from London.
Speaker 1: Brilliant to see you again, Lisa, thanks for having me on.
Speaker 1: So let's start with you Mark. Great to have you
Speaker 1: on the Credit Edge. The big question, and everyone keeps
Speaker 1: telling me, it's the fact olden age for private credit.
Speaker 1: Is that still the case twenty twenty four? Is it
Speaker 1: a golden age? Does it continue?
Speaker 3: It's it's hard to look past it. I mean, if
Speaker 3: you think about the fundamentals, double digit yield, first lean security,
Speaker 3: stable companies, larger companies than ever being financed by private credit.
Speaker 3: It's hard to look past that the fundamentals are stronger
Speaker 3: now than they've ever been and the technicals which are
Speaker 3: driving the growth of private credit that we see extending
Speaker 3: beyond twenty four and further.
Speaker 2: So we actually think we're very bullish on the market.
Speaker 1: So what does that actually mean for twenty twenty four?
Speaker 1: Is that bigger and bigger deals. Is it record levels
Speaker 1: of fundraising? Is it more disintermediation of Wall Street? Better returns?
Speaker 1: I mean what specifically we're talking about when we're talking about,
Speaker 1: you know, fantastic times in private debt.
Speaker 3: I think there's two two elements to the growth which
Speaker 3: sometimes get mixed. There's there's there's the white space growth
Speaker 3: for private credit in Europe, which is just larger companies,
Speaker 3: more diversified companies, and more sponsors using US as an
Speaker 3: asset class. So that's one area of growth and there's
Speaker 3: lots of reasons why that's continued to grow. You know,
Speaker 3: there's more banking assets in Europe and there's in the US,
Speaker 3: and we've got further to go in terms of that
Speaker 3: de leveraging of the European banking balance sheet. So there's
Speaker 3: and the replacement being private credit. So that's one element
Speaker 3: and then there's also the overlap but with the public markets.
Speaker 3: I mean, one of the drivers over the last two
Speaker 3: years of activity within in Europe in private credit has
Speaker 3: been that battleground over what used to be serviced by
Speaker 3: the broadly public broadly syndicated markets and what's gone what's
Speaker 3: gone to private and so and we foresee that continuing
Speaker 3: and there being a coexistence between the two asset classes,
Speaker 3: so we see growth in both directions.
Speaker 4: Talking about these big private credit funds, we're now seeing
Speaker 4: possibly a record twenty billion dollar fund. What is the
Speaker 4: fundraising environment right like right now?
Speaker 3: It's look, it's it's fundraising is tough for everyone. It's
Speaker 3: taking longer than ever before. So fundraisers which use cycles
Speaker 3: which used to be twelve months are now now eighteen months.
Speaker 3: But I think what we're seeing is there's a there's
Speaker 3: a concentration going on. So the bigger managers are the
Speaker 3: ones with a better track records, the ones with more
Speaker 3: established origination networks, They're the ones that are really succeeding,
Speaker 3: those which have the better relationships with the sponsors and
Speaker 3: so source the better deals and get the better terms.
Speaker 3: And that you're seeing that consolidation happening. From a more
Speaker 3: macro perspective, Europe is just really interesting, right because if
Speaker 3: a lot of the asset allocators are over indexed private
Speaker 3: equity relative to credit, and they're over indexed US to Europe.
Speaker 3: So from a diversification perspective, European private credit is a
Speaker 3: great place to be allocating in twenty four And so
Speaker 3: whilst there's a lot of people raising and it is
Speaker 3: taking longer, the most successful managers are the ones which
Speaker 3: are really gaining traction.
Speaker 4: And do you find some of the interested LPs from
Speaker 4: the Middle East, from the US, from Asia? I know
Speaker 4: there's broad array of interest, but if you had to
Speaker 4: pick a certain region which is most particularly interesting in
Speaker 4: European private credit, what would that be? Where you guys focused.
Speaker 3: I don't think there's any one particular region, but we've
Speaker 3: really noticed an uptick in interest in the Middle East,
Speaker 3: in Asia and even in the US looking to diversify
Speaker 3: their portfolios and really attracted by the opportunity in Europe.
Speaker 3: And so you know, there's there's there's multiple touchpoints and
Speaker 3: multiple areas of interest in Europe.
Speaker 1: Now, what's your first destination there on the on an airplane?
Speaker 4: Is it?
Speaker 1: Is it Toronto.
Speaker 2: Is it Dubai?
Speaker 1: I mean, what's where do you Where do you like
Speaker 1: to go? Mostly for your fundraising.
Speaker 3: I spend a lot of time in the US and
Speaker 3: a lot of time in the Middle East, But it's
Speaker 3: I don't think I'm unique in that way.
Speaker 1: Respect Just back to the sort of golden age idea
Speaker 1: that we're talking about. We've had some guests on here
Speaker 1: recently raising a lot of red flags about private debt.
Speaker 1: They're maybe not as close to you, as close to
Speaker 1: the market as you are, but you know, they talk
Speaker 1: about the speed of the market's growth. It's already bigger
Speaker 1: than the US highe bond market and it didn't take
Speaker 1: very long to get there. There's you know, seem to
Speaker 1: be no transparency, not much liquidity, all the risks again
Speaker 1: of companies falling behind on debt payments. As the rates,
Speaker 1: you know, they may be coming down, but they are
Speaker 1: very high in relative terms. There's going to be a
Speaker 1: refinancing wall. And at the same time, there are a
Speaker 1: lot of you know, relatively liquid and high yielding opportunities
Speaker 1: out there, you know, including government bonds, so you don't
Speaker 1: really need to stretch for the return anymore. Some you know,
Speaker 1: maybe maybe they are conflicted because they're trying to compete
Speaker 1: against you. But and it seems to come from the
Speaker 1: cell side, but they are calling it a bubble. Do
Speaker 1: you think that's justified?
Speaker 3: It's it's ironic that the banks are calling above all,
Speaker 3: given that they're the ones trying to get into private credits.
Speaker 3: So I find that quite a musing. Look, it's there,
Speaker 3: it's incontestable. There has been rapid growth in in the
Speaker 3: asset class in Europe in particular. We've got we're still
Speaker 3: a long way behind the US, and so there's there's
Speaker 3: more runway. I think you'll find the sophistication of the
Speaker 3: larger managers in thinking about risk, in thinking about their
Speaker 3: regulary framework, in thinking about the lines of defense, are
Speaker 3: actually much more advanced and much more sophisticated than the
Speaker 3: outside world gives us credit for. I think credits selection,
Speaker 3: I think is much better than people give us credit for.
Speaker 3: I think we are also going into a period where
Speaker 3: that there's going to be a bifurcation between those managers
Speaker 3: who have you picked well, they've got really good performing
Speaker 3: portfolios and more assets going in and more concentration on
Speaker 3: moost of those that smaller group, who are who the
Speaker 3: better pickers right and the better stewards of capital? I
Speaker 3: think that you know, we've been through a ten year
Speaker 3: period of low interest rates, low defaults, relatively attractive growth,
Speaker 3: and now to the time where you're going to actually
Speaker 3: find out who's who's really good at this right, who's
Speaker 3: really a good steward of capital, because we're, as you say,
Speaker 3: we're in an environment where rates are still elevated, growth
Speaker 3: is still anemic, there's still some systemic risks to the economy.
Speaker 3: So I think it's I understand people's concern, but as
Speaker 3: a persispent on the inside, you know, looking out, things
Speaker 3: are actually less beleep than you'd imagine.
Speaker 5: Mark, are there specific sectors.
Speaker 2: That you like?
Speaker 3: Yeah, I think, I mean it's it's no it's no
Speaker 3: secret that we have we like healthcare. We have a
Speaker 3: dedicated healthcare team, both in the US and Europe. It's
Speaker 3: been a great source of deployment for us, the more
Speaker 3: stable and resilient parts of healthcare in particular.
Speaker 2: You know, we're not you. We like software. Like a
Speaker 2: lot of other.
Speaker 3: Private credit guys. We like picking the better businesses within
Speaker 3: the software world. We know that not all software businesses
Speaker 3: are created equally and we like sort of you know,
Speaker 3: the very market leading professional services sector where you've got
Speaker 3: a real reasons to exist consuming nony discretionary, you know,
Speaker 3: real downside protection. Those are the things. Those are the
Speaker 3: areas that we spend a lot.
Speaker 1: Of our time on the software mark. How are these
Speaker 1: earnings holding up given those types of deals, you know,
Speaker 1: they're generally known for heavy add backs and synergy expectations.
Speaker 3: We've just gone through our portfolio review and they're actually
Speaker 3: holding up really well. We've for exactly those reasons that
Speaker 3: you mentioned, We've been paying a lot of attention to
Speaker 3: the performance and the monthly incordantly numbers and actually top
Speaker 3: line is holding up in the names that we have
Speaker 3: really really well. So we've been pleased with performance in there.
Speaker 4: Are there any centers that you avoid mark you just
Speaker 4: think are like kryptonite for private credit and for Haven.
Speaker 3: I think it's I can't speak for the market as
Speaker 3: a whole, but but we we find consumer exposed businesses
Speaker 3: with no downside protection really difficult, right and and particularly
Speaker 3: in this sort of environment where you know, the rate
Speaker 3: rate rises are affecting Joe consumer that's going to flow
Speaker 3: through to mortgages, and and effect disposable income. So so
Speaker 3: that's those are parts of the market that we struggle with.
Speaker 3: Pure retail, for instance, work with no no asset backing
Speaker 3: really hard.
Speaker 5: You know, do you have a rating standard for when
Speaker 5: when you're looking at what investments to make you want
Speaker 5: to avoid very high yield or you know, you're you're
Speaker 5: looking more at the business more than just the credit ratings.
Speaker 3: I mean, we don't take a credit rating approach to
Speaker 3: take to the investments we look at. We are very
Speaker 3: focused on credit. You know, Credit selection for us is
Speaker 3: the most important thing that we do, and so diligence, understanding, sustainability, learnings,
Speaker 3: you know, free cash flow, real threats of the business,
Speaker 3: both competitive as well as systemic, you know, those are
Speaker 3: the those are the real core things that we focus on.
Speaker 3: We're we sort of look at the look at credit
Speaker 3: from a from a fundamentalist perspective.
Speaker 1: On the returns mark, I mean they are very high
Speaker 1: in relative terms, I mean high teens yields on some
Speaker 1: of these deals. That sounds great from the investors standpoint,
Speaker 1: but for an issuer, how sustainable is it to them,
Speaker 1: you know to pay that level of interest for the
Speaker 1: long run. I mean are you not putting putting all
Speaker 1: of these companies under a huge amount of pressure.
Speaker 3: Yeah, it's look, we're we're a floating rate product, right,
Speaker 3: so that's a benefit to our investors, But obviously, as
Speaker 3: as you know, as you pointed out, it's that's the
Speaker 3: burden of our portfolio companies. We focus very much on
Speaker 3: free casually and so we focus on even with the
Speaker 3: rates where they are and the margins where they are
Speaker 3: from a market perspective, we focus on the businesses that
Speaker 3: can can support those and actually we've seen leverage come
Speaker 3: down in the last twelve months in a direct as
Speaker 3: a direct result of where rates are, and so there's
Speaker 3: a right sizing of the balance sheet to try and
Speaker 3: address that elevated interest rate.
Speaker 4: Gun Do you think there's come a time when there's
Speaker 4: gonna be a lag effect of other rate rises and
Speaker 4: the interest rate payments, Because you're right, corporates have held
Speaker 4: up very well for many many people. Many portfolios are
Speaker 4: doing okay. But as we get into almost a thirty
Speaker 4: year of rate high rights hikes and perhaps a recessionary environment,
Speaker 4: what do you think about the future.
Speaker 3: We're cautious on the outlook. Credit investors by nature are
Speaker 3: more downside perspective than outside.
Speaker 2: We are.
Speaker 3: Cautious around how that lag effect and fully seeing the
Speaker 3: effect of having these elevated rates. We're going to have
Speaker 3: elevated rates in Europe for much longer than the US,
Speaker 3: like if you just look at where where the curves are.
Speaker 3: And so it's really about sustainability of business models. It's
Speaker 3: really about, you know, picking the ones which we have
Speaker 3: a reason to exist and have an ability and scale
Speaker 3: to cope with the pressures and still manage that. But
Speaker 3: you're right, they're going to be some companies that just can't.
Speaker 3: And one of the things we've done in the last
Speaker 3: twelve months is trying to avoid some of the smaller
Speaker 3: companies which rich are the ones which are generally struggle
Speaker 3: in the face of macroeconomic pressure. So we've very much
Speaker 3: focused our attention on moving the medium size of companies
Speaker 3: up in Apple project.
Speaker 1: In terms of the competitive landscape, mark, you've seen a
Speaker 1: ton of new entrants come into private credit. Everyone wants
Speaker 1: to be involved. It's a big new thing. But I mean,
Speaker 1: we've taught on the shows about the risks that that
Speaker 1: brings perhaps less sophisticated participants coming in doing deals that
Speaker 1: maybe shouldn't be done, and those those causing problems down
Speaker 1: the line. But in terms of you know your business,
Speaker 1: are you seeing fee pressure from this? Are you seeing
Speaker 1: investors asked for lower management fees or greater oversight or
Speaker 1: anything else to try? And you know, because because they can,
Speaker 1: I mean, you know, they can pick and choose.
Speaker 3: I think as a general comment that investors are very savvy.
Speaker 3: They they realize that there's a lot of people coming
Speaker 3: to raise funds and so focused on the economics around
Speaker 3: around the managers they.
Speaker 2: Do want to allocate to.
Speaker 3: I think there is still a premium for those that
Speaker 3: have long established track records, have real presence and subsistence
Speaker 3: in the markets, and and and have real originating networks
Speaker 3: which which can help in in low eminem environments as
Speaker 3: we've seen. So I think they're you're right, there are
Speaker 3: new entrants. You're right, that creates a dynamic that a
Speaker 3: influence the terms on raising. But I think our experience,
Speaker 3: and I think the experience about peers has been people flighting,
Speaker 3: people flock to quality, and there's a price to pay
Speaker 3: for that. So I think it's still an attractive environment
Speaker 3: for us, for us and our peers to raise.
Speaker 4: You say, you've gone towards more bigger companies. And last
Speaker 4: year we saw the biggest private credit loan in Europe
Speaker 4: and that entailed a syndication of a number of lenders.
Speaker 4: What do you think about private credit and these sort
Speaker 4: of almost lightly syndicated deals where you see twenty somewhat
Speaker 4: lenders in a private credit deal. It's sort of a
Speaker 4: little bit different from what has traditionally been what private
Speaker 4: credit is supposed to be one lender, maybe two lenders
Speaker 4: at most, but almost back to the way the leverage
Speaker 4: loan market used to be saved fifteen years ago.
Speaker 3: Yeah, look at this. Clearly there's been a shift in
Speaker 3: the last twelve months. The prevalence of clubs in Europe
Speaker 3: business is on the rise, and I think that's a
Speaker 3: trend and theme that we're going to see throughout this
Speaker 3: here and beyond. I would say that the twenty plus
Speaker 3: lender syndicates is the outlier. I mean, we've only had
Speaker 3: six deals in Europe above a billion. I think the
Speaker 3: sweet spot in terms of syndic conversation that we're seeing
Speaker 3: is more in the two.
Speaker 2: To five range.
Speaker 3: And there, I think you've got and that comes back
Speaker 3: to the theme of concentration, you've got the same group
Speaker 3: of people looking at the same assets and being clubbed together.
Speaker 3: They're generally ones which think about credit and risk in
Speaker 3: the same way. They generally think about documentation in the
Speaker 3: same way.
Speaker 2: So I think you're right there are these outliers, but.
Speaker 3: Actually the market is from all centering on a much
Speaker 3: lower number of participants, and that I think is going
Speaker 3: to continue.
Speaker 4: Okay, And do you worry about any of these syndications
Speaker 4: about liquidity, about having almost like going after there's probably
Speaker 4: indicator market. And now with the banks feeling a little
Speaker 4: bit more assured, do you think they'll come back for
Speaker 4: some of the deals that they've.
Speaker 2: Last I think we're not naive right there.
Speaker 3: We know that the banks are actively pitching to cut
Speaker 3: and refinance some of the private credit deals that were
Speaker 3: done away from them in the last two years. I
Speaker 3: happen to think that there's a there's a natural medium
Speaker 3: where we can where the two assets co exist, right,
Speaker 3: And but it goes back to the point I mean
Speaker 3: at the beginning, that's not our sole source of growth. Actually,
Speaker 3: the more attractive source of growth is the systemic leakage
Speaker 3: of capital out of the system and into private credit,
Speaker 3: and so I actually think that you know, yes, we'll
Speaker 3: see more activity than the banks. Yes there'll be a
Speaker 3: bit more competition around those type of assets, but actually
Speaker 3: not that's that's good for us, right, because we've got
Speaker 3: plenty of other things to do.
Speaker 1: When you look around at everything, you cover the big universe,
Speaker 1: what are you most excited about for twenty twenty four?
Speaker 1: Where's the big opportunity?
Speaker 3: I think for Europe in private credit, the big opportunity
Speaker 3: is going to come in refinancings, right, because there's never
Speaker 3: to be going to be an uptick in LBO activity.
Speaker 3: Twenty three was pretty muted from an M and A perspective.
Speaker 3: I think if you talk to market participants, you know
Speaker 3: we're not going to see an immediate snap back. It's
Speaker 3: probably back ended. But I think what we what is
Speaker 3: going to be interesting is we've seen almost no refinancing
Speaker 3: in the last twenty four months, and there's there are
Speaker 3: large maturity walls in twenty six and twenty seven, you've
Speaker 3: got some in twenty five as well, and so I
Speaker 3: think twenty four is going to be the year.
Speaker 2: Of of of of.
Speaker 3: The rebooting of that refinancing opportunity, and a particular interest
Speaker 3: for us is a lot of these companies are not
Speaker 3: They haven't de leaveed enough to be able to be
Speaker 3: refinanunced dollar for dollar in cash pay terms. So I
Speaker 3: think you're going to have to You're gonna have to
Speaker 3: recut some of these balance sheets, which is going to
Speaker 3: be provide a really interesting direct lending product at a.
Speaker 2: Lower attachment point.
Speaker 3: But also for for for firms like ourselves who can
Speaker 3: be have more flexible capital to look at junior debt
Speaker 3: in different strategies to plug that gap, because we whilst
Speaker 3: the private actor community will probably help grease the wheels
Speaker 3: by putting a bit of equity, we don't think that
Speaker 3: they're going.
Speaker 2: To solve the whole problem.
Speaker 3: So firms that have that in their locker can and
Speaker 3: be able to look at subordinated debt in refinancings through
Speaker 3: different strategies.
Speaker 2: I think it's going to that's gonna be a really
Speaker 2: interesting opportunity.
Speaker 1: So before we dig in on the consumer set with Julie,
Speaker 1: I'm going to keep you here, Julie mark I did
Speaker 1: want to ask you about consolidation in this industry. That
Speaker 1: seems to be something that people are talking about. In
Speaker 1: addition is hay Finn for sale.
Speaker 3: I think, you know, it's it's well, we're flattered that
Speaker 3: we're getting so much interest, but I think, you know,
Speaker 3: it's hard to comment on on market speculation. What what
Speaker 3: I think is interesting around the interest that you mentioned
Speaker 3: is just the focus on European private credit and how
Speaker 3: that's how people are looking at that as the next
Speaker 3: real big growth driver and that sort of over indexation
Speaker 3: point that I mentioned earlier around private equity and the
Speaker 3: US really focusing on private credit. I think that's that's
Speaker 3: super exciting. I think the consolidation point, it's we're seeing
Speaker 3: concentration within fewer, fewer hands, right, It's the bigger managers
Speaker 3: that are getting bigger.
Speaker 2: It's the bigger.
Speaker 3: Managers that are having more traction in fundraising, and it's
Speaker 3: the bigger managers that are sourcing the better deals, and
Speaker 3: so that I think that that trend is going to continue.
Speaker 2: We see ourselves as part of that.
Speaker 1: And just be clear on the europe point. I mean,
Speaker 1: is it because it's cheap versus the US?
Speaker 3: Is that the opportunity I think it's it's it's there's
Speaker 3: a diversification point from where allocators have allocated in the past.
Speaker 3: Of what they have in their portfolio. But there's also
Speaker 3: an inefficiency in Europe, in the European markets, which is
Speaker 3: which is attractor to to to to monetize right the
Speaker 3: the You've got a patchwork of insolvency regimes across Europe.
Speaker 2: You've got differences and structures between Italy and in the
Speaker 2: UK and France.
Speaker 3: You've got you've got difference is in terms of the
Speaker 3: banking land statement and what state of deleveraging their about
Speaker 3: their corporate balance sheets, all of which provides lots of
Speaker 3: different pockets of opportunities and lots of different inefficiencies that
Speaker 3: really play into the hands of private credit lenders.
Speaker 2: So that there's there's two.
Speaker 3: Elements to to to the to the interest in our market.
Speaker 1: Great stuff, but Cherimoto from Hafen Capital Management, thank you
Speaker 1: so much for joining us. Thanks a lot, do come
Speaker 1: back soon and does know how it's all going. And
Speaker 1: Lisa Lye with Bloomberg News in London, many thanks for joining,
Speaker 1: Thank you for having me read all of Lisa's great
Speaker 1: scoops on the Bloomberg terminal and of course at Bloomberg
Speaker 1: dot com. And so Julie Hung with Bloomberg Intelligence in
Speaker 1: New York. We're keeping you here. Thank you so much
Speaker 1: for joining us on the show.
Speaker 5: Thank you for having me again.
Speaker 1: You have a few theories about ozepic, the weight loss drug,
Speaker 1: and how it affects the companies you cover. I'm very
Speaker 1: interested in sort of digging deeper into that, but I
Speaker 1: wanted to kind of start by breaking it down in
Speaker 1: really really simple terms. How does a weight loss treatment
Speaker 1: that you know is really in the news now everyone's
Speaker 1: talking about it, How can that affect the credit of
Speaker 1: food and drinks companies that you cover? I mean, is
Speaker 1: it really big enough to do that?
Speaker 2: Yes?
Speaker 5: So you know, if you look at Bloomberg has this
Speaker 5: really good function ds go, Document Search Go. If you
Speaker 5: do a search on the keywords like ozembic or Wagovi,
Speaker 5: those are the big brand names for diet drugs over
Speaker 5: the past few quarters, you'll see that the mentions have
Speaker 5: increased in the quarterly earnings. So there is this increased
Speaker 5: concern or you know, just a curiosity about how these
Speaker 5: diet drugs are going to impact the sector in general.
Speaker 5: The way they work is the supress appetites. Suppress you're
Speaker 5: craving for sugar, so consumers are expected to eat less
Speaker 5: and you know, the consumers who have been on these
Speaker 5: diet drugs have been shown to have less cravings for snacking,
Speaker 5: They're eating less portions, so as that impacts food and beverage,
Speaker 5: the general ideas that sales are going to be lower
Speaker 5: across the sector.
Speaker 1: Is it big enough that on that sort of macro level,
Speaker 1: because I can I can see it on a you know,
Speaker 1: micro level, and maybe there are small groups of you know,
Speaker 1: people that really need this kind of treatment and you know,
Speaker 1: very keen to lose weight very quickly. But does it
Speaker 1: you know, just on a macro across the US, could
Speaker 1: it really affect the bottom line of a company?
Speaker 4: Yeah?
Speaker 5: I mean our view is that, you know, the the
Speaker 5: short term impact is that it's pretty negligible. You know,
Speaker 5: we have heard from big companies like Coca Cola and
Speaker 5: PepsiCo Mandalis who have said that so far, what they've
Speaker 5: seen is very little impact. I think it's more headline
Speaker 5: risk right now than it is going to change the
Speaker 5: bottom line for these companies. What you know, when when
Speaker 5: the equity markets reacted to this back in October, and
Speaker 5: that was triggered by a comment by you know, big
Speaker 5: retailers saying that they're seeing their food sales are down
Speaker 5: because of use of diet drugs. The equity markets, you know,
Speaker 5: to twenty twenty three, if you look at the S
Speaker 5: and P Packaged Food index, it's down about ten percent,
Speaker 5: whereas the credit markets for food and beverage, the spreads
Speaker 5: have tightened by about thirty bases points. So credit markets
Speaker 5: are taking it a lot more in stride, and I
Speaker 5: think it's more going back to headline risk. The bigger
Speaker 5: picture is that is this going to be a game changer?
Speaker 5: You know, we think that it could be, because there
Speaker 5: are also benefits to you know, heart health and kidney
Speaker 5: health and liver health. But what a lot of these
Speaker 5: food and beverage companies have been doing for many, many
Speaker 5: years is they they watch consumer behavior. They watch, you know,
Speaker 5: how consumers eat and their lifestyle changes. Because this is
Speaker 5: a big social risk for them. So they have been
Speaker 5: tailoring their product portfolio to lower sugar, no calorie, low calorie,
Speaker 5: smaller package sizing, which is something they've been doing for
Speaker 5: many years. So they're adjusting. They have they already started
Speaker 5: to adjust to this trend before the diet drugs came out.
Speaker 5: So is it going to impact their bottom line. Longer term,
Speaker 5: you know, I don't really think so, because they are
Speaker 5: doing everything they're supposed to be doing right now to
Speaker 5: prepare for wider use in the future. And James, you
Speaker 5: brought up a really good point that you know, there's
Speaker 5: a small segment of the population using these drugs right now,
Speaker 5: so again, in the short term, there's a lot of
Speaker 5: obstacles to using these drugs, which again, like we just
Speaker 5: think that the short term, you know, equity impact was overdone.
Speaker 5: It's very expensive if you look at the studies. I
Speaker 5: think wogovi is about seventeen five hundred dollars annually, and
Speaker 5: that's before rebates and discounts. It's an injection which is
Speaker 5: very cumbersome for a lot of users, and you know
Speaker 5: they're competing against true diabetics who need the drugs, so
Speaker 5: supply is limited. So right now there is not that
Speaker 5: widespread use. So I think, you know, in the short
Speaker 5: to even the medium term, like you're not going to
Speaker 5: see an impact to the bottom line.
Speaker 1: But what about leverage trends. I mean, that seems to
Speaker 1: be the story of the moment, is that a lot
Speaker 1: of companies are just getting hit because they took on
Speaker 1: too much debt when when it was cheap, now it's
Speaker 1: much more expensive and they're hitting a refine. Well, are
Speaker 1: there any companies in your set to you know, even
Speaker 1: though this may be sort of marginal more of a
Speaker 1: headline impact, are there any that just have too much
Speaker 1: leverage now and it could sort of start to affect
Speaker 1: them in some way.
Speaker 5: Yeah, So, you know, the consumer sector. You know our
Speaker 5: if you look at our outlook and even our message.
Speaker 5: Since twenty twenty three, they have been focusing on net
Speaker 5: leverage trends. They have net leverage targets that they're working towards,
Speaker 5: and they have been more aware of how much debt
Speaker 5: they have on their balance sheets. I think, you know,
Speaker 5: when COVID happened in twenty twenty, they were taken by
Speaker 5: surprise and a lot of companies were over levered at
Speaker 5: the time. They don't want to be caught in a
Speaker 5: situation like that anymore. So they're focusing a lot on
Speaker 5: just very balanced capital allocation policies. If they're doing anything
Speaker 5: that shareholder friendly, or if they're doing M and A
Speaker 5: that's debt funded, they're doing it within the confines of
Speaker 5: a conservative financial policy or within the confines of their
Speaker 5: leverage targets. So what we're seeing as we're entering twenty
Speaker 5: twenty four is generally a very healthy balance sheet, very
Speaker 5: good liquidity levels for the consumer food and beverage sector.
Speaker 1: On the consumer side, though, I mean, we do know
Speaker 1: that the consumer is under a bit of pressure. There's
Speaker 1: been inflation, COVID savings have wound down, the rates are
Speaker 1: very high to borrow. So is there any impact there
Speaker 1: or is this just you know, stuff that consumers will
Speaker 1: buy whatever.
Speaker 5: You know, Volume trends have been weak, and I think
Speaker 5: you know, when you see that consumer companies are raising prices,
Speaker 5: it has impacted consumer purchasing behavior, but it hasn't stopped
Speaker 5: them from buying food. You have to eat, and that's
Speaker 5: why it's consumer staple because compared to you know, what
Speaker 5: Mark was saying, like the retailers where non discretionary, you're
Speaker 5: always going to see purchases, whereas you know they could
Speaker 5: hold off on some of the personal care purchases, home
Speaker 5: appliance purchases. But when you're looking at food and beverage,
Speaker 5: the sales have been overall pretty stable compared to other sectors,
Speaker 5: just because of the need to have to eat, have
Speaker 5: to drink, and a lot of these companies, they've been
Speaker 5: very wary of their price increases, but you know they
Speaker 5: have been able to pass some of these costs onto consumers.
Speaker 5: You do see a volume impact, but that's getting a
Speaker 5: little better because food food inflation trends in the US
Speaker 5: have been moderating a tadbit.
Speaker 1: Are there is there any kind of going down to
Speaker 1: generic brands by cossumism And I don't see the difference
Speaker 1: between the two different types of rice crispies.
Speaker 2: But that's just me.
Speaker 1: My kids do unfortunately, But do we do we see
Speaker 1: that that happening.
Speaker 5: Is some private label trade down, but it's not as
Speaker 5: big as we had expected. So there's a company, Cannagarbarans
Speaker 5: that reported and quarter recently and what they're saying is
Speaker 5: like their sales were a little weaker, their ebide was
Speaker 5: a little weaker. But what they're saying is like it's
Speaker 5: not really a trade down to private label, but it's
Speaker 5: more the consumer is just stretching their budget more. They're
Speaker 5: going to the supermarkets less, they're working through their pantry
Speaker 5: and their freezers and they're making they're buying more multi meals,
Speaker 5: things that they can have leftovers instead of just one
Speaker 5: meal opportunity. So it's not that they're trading down, but
Speaker 5: they're just stretching their budget a little bit more so.
Speaker 1: Is there any kind of relative value argument right now?
Speaker 1: I mean from a credit investor standpoint, are they companies
Speaker 1: that are particularly attractive or companies that are, you know,
Speaker 1: looking more risky in this phase of the cycle.
Speaker 5: Yeah, I mean when you look at the overall sector,
Speaker 5: I mean, spreads have tightened throughout twenty twenty three, but
Speaker 5: if you look within the sector, there are pockets of opportunity.
Speaker 5: You know, we do see that you know, are still
Speaker 5: a little wide for craft or mulsten cores, even Cannagra
Speaker 5: like spreads. Spreads are a little wider than some of
Speaker 5: their peers. And what we like about these companies is
Speaker 5: that they are working towards a very healthy net leverage
Speaker 5: target and it's not fully priced in yet.
Speaker 1: And know, are there any other events or any kind
Speaker 1: of things on the horizon for the next twelve months
Speaker 1: that make you particularly worried for your industries or particularly
Speaker 1: excited about the opportunity.
Speaker 5: Yeah, I mean I cover tobacco, I cover consumer products,
Speaker 5: I cover food and beverage, So there's a lot of
Speaker 5: different things that are coming down the pipeline. I mean,
Speaker 5: one big thing for the tobacco sector is the menth
Speaker 5: all band in the United States. Everyone's waiting for ruling
Speaker 5: on that, which has been delayed. Some of that is political,
Speaker 5: but I think when there is you know, we think
Speaker 5: that the band is going to come into effect because
Speaker 5: menthol cigarettes are banned in Europe and Canada, so it
Speaker 5: makes sense that the United States would follow. But a
Speaker 5: lot of the tobacco companies, they have been preparing for
Speaker 5: this news. They have been focused more on their non
Speaker 5: combustible segment and you know, and their alternative alternative products
Speaker 5: like dest generation products. So in addition to that, like
Speaker 5: they also have been focusing on like healthy balance sheets.
Speaker 5: So we think they'll be able to manage through that.
Speaker 5: But also, you know, just looking at general consumer trends,
Speaker 5: anything can happen. You know, we didn't expect COVID to
Speaker 5: happen back in twenty twenty. We didn't expect us to
Speaker 5: be in a full blown pandemic. You know, we didn't
Speaker 5: expect that, you know, consumers were going to be in lockdown.
Speaker 5: So that's always on our minds and kind of going
Speaker 5: back to something that Mark said that, you know, credit
Speaker 5: investors were always kind of like, you know, the DeBie downers,
Speaker 5: and you know, we're also looking at the worst case scenario.
Speaker 5: So even though you know volume trends in food is
Speaker 5: trending better, they might still be negative, but sequentially they're
Speaker 5: looking better. It's always in the back of our minds
Speaker 5: that you know, something bad can happen. And I think
Speaker 5: a lot of these companies when you listen to them,
Speaker 5: they're also just a little more cautious, like they're not
Speaker 5: coming out and saying that everything's turned around. Even though
Speaker 5: food inflation trends are getting better, they still keep it
Speaker 5: in the back of their minds that consumers are still stretched,
Speaker 5: you know, budgets are stretched, and you know they're not
Speaker 5: calling for you know, complete turnaround just yet.
Speaker 1: I'm mostly worried about the US election, but we still
Speaker 1: need to eat and.
Speaker 5: Drink, right, Yes, yes, exactly.
Speaker 1: Julie Hung with Bloomberg Intelligence. Thank you so much for
Speaker 1: joining us.
Speaker 5: Thank you for having me James.
Speaker 1: We look forward to having you back on the show
Speaker 1: very soon. Thank you and thanks again. Tomuch Cherry Mutu
Speaker 1: from HAFN, as well as to Lisa Lee from Bloomberg news,
Speaker 1: read all of Lisa's great scoops on the terminal and
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Speaker 1: on the Credit Edge