WEBVTT - Bill Rhodes: China Will Squeeze Shadow Banking to Avoid Crisis 0:00:04.760 --> 0:00:08.080 Welcome to the Bloomberg pim L Podcast. I'm pim Fox. 0:00:08.119 --> 0:00:11.200 Along with my co host Lisa Abramowitz. Each day we 0:00:11.280 --> 0:00:14.480 bring you the most important, noteworthy, and useful interviews for 0:00:14.520 --> 0:00:16.880 you and your money, whether at the grocery store or 0:00:16.920 --> 0:00:20.680 the trading floor. Find the Bloomberg pi L podcast on iTunes, 0:00:20.840 --> 0:00:30.560 SoundCloud and at Bloomberg dot com. Well Lisa Abramowitz. French 0:00:30.680 --> 0:00:36.519 elections now British elections. UH conflict between Russia and the 0:00:36.640 --> 0:00:42.000 United States, countries wanting to leave the European Union. Oil 0:00:42.320 --> 0:00:46.120 in the Middle East, Russia and Syria and the United 0:00:46.159 --> 0:00:48.959 States and Saudi Arabia. Let me give you the other list. 0:00:49.080 --> 0:00:51.240 Let's go all the way to Asia. Now, other things 0:00:51.280 --> 0:00:55.000 we can worry about. UH, problems on the Korean Peninsula, 0:00:55.080 --> 0:00:58.720 North and South Korea and China, as well as Japan 0:00:58.840 --> 0:01:02.080 and the Asian Trade Block. I can't make sense of it. 0:01:02.320 --> 0:01:05.640 You know why that is? Okay, that's right because we've 0:01:05.680 --> 0:01:07.559 got Bill Rhodes. He is the president and the chief 0:01:07.600 --> 0:01:10.960 executive of William R. Rhodes Global Advisors, and a Bill 0:01:11.040 --> 0:01:12.720 you know, just in giving you that list, that's like 0:01:12.760 --> 0:01:15.720 a free for all. Um, Where where do you start? 0:01:15.840 --> 0:01:19.039 Let's start with China and and the Korea, because you 0:01:19.080 --> 0:01:22.200 know that that area of the world very well. It's 0:01:22.240 --> 0:01:26.120 great to be with you guys here again. And I 0:01:26.160 --> 0:01:29.280 think as far as China goes, the most recent news 0:01:29.400 --> 0:01:31.720 of courses that their first quarter came at a six 0:01:31.760 --> 0:01:36.119 point nine percent people that expect GDP g d p uh, 0:01:36.520 --> 0:01:39.720 people that expected somewhere between six point seven and six 0:01:39.760 --> 0:01:43.559 point eight. The problem is it's driven by tremendous increases 0:01:43.600 --> 0:01:48.400 in debt. Their debt burden as we speak is somewhere 0:01:48.440 --> 0:01:51.600 between two d and fifty and two percent of g 0:01:51.720 --> 0:01:56.400 d p UH. The difference with those numbers is basically, 0:01:56.520 --> 0:01:59.680 if you count the inner bank exposures of the banks, 0:01:59.680 --> 0:02:02.040 it's too weighty, if you know, and it's to fifty. 0:02:02.200 --> 0:02:04.480 But that's like double it was a few years ago. 0:02:04.840 --> 0:02:08.280 And it continues to grow because the government is pushing 0:02:08.400 --> 0:02:12.040 as much uh, you know, liquidity into the market and 0:02:12.160 --> 0:02:15.639 allowing credit to grow significantly with the state owned banking 0:02:15.680 --> 0:02:19.200 system because they want to make sure the economy is 0:02:19.320 --> 0:02:22.240 red hot when they have the nineteenth Party Congress is 0:02:22.240 --> 0:02:26.320 full because this only happens every five years, and they 0:02:26.360 --> 0:02:29.720 want to make sure that President Shi Jin ping gets 0:02:29.760 --> 0:02:34.880 all his favorites on the Standing Committee of the Politburo, 0:02:35.639 --> 0:02:38.280 and Uh, this is all it counts at this point, 0:02:38.639 --> 0:02:42.600 is to get that done, uh, which will ensure that 0:02:42.720 --> 0:02:47.120 he's got at least another five years, and who knows, 0:02:47.720 --> 0:02:50.239 he may decide the first one since Don Joe Pain 0:02:50.360 --> 0:02:53.760 to extend it beyond that. Uh. And so that's all 0:02:53.840 --> 0:02:57.639 it counts. But the problem here is shadow banking continues 0:02:57.760 --> 0:03:02.920 to be basically regulated. It's growing very rapidly. That's helping 0:03:03.000 --> 0:03:07.240 fund this tremendous credit boom. Uh. They haven't done much 0:03:07.280 --> 0:03:12.560 to close the zombie companies and steal coal, shipbuilding and 0:03:12.639 --> 0:03:16.120 other areas, which they need to do because eventually this 0:03:16.200 --> 0:03:18.400 is going to catch up to them, probably next year. 0:03:18.720 --> 0:03:22.320 So the real question is what happens after the Party 0:03:22.360 --> 0:03:25.800 Congress is fall. Will they start squeezing the economy? Yeah, 0:03:25.800 --> 0:03:27.880 you know, Bill, I want to pick up on what 0:03:27.880 --> 0:03:30.400 you're saying that probably next year they're going to have 0:03:30.480 --> 0:03:33.600 to start grappling with this. You are a an international 0:03:33.639 --> 0:03:36.840 banker at City Group for five decades and you dealt 0:03:36.880 --> 0:03:41.120 with a lot of workouts, don't Well, it's it's it's 0:03:41.160 --> 0:03:43.880 important to have that kind of background because you helped 0:03:44.280 --> 0:03:47.520 negotiate workouts in a host of different countries, from Argentina, 0:03:47.520 --> 0:03:50.560 Brazils at Maco, Mexico. Uh, you know, South Korea, you 0:03:50.640 --> 0:03:52.960 name it. What are you looking for? You just got 0:03:53.000 --> 0:03:55.480 back from China. What are you looking for to understand 0:03:55.560 --> 0:03:59.640 exactly where we are with respect to when China's credit 0:03:59.680 --> 0:04:02.760 bubble will come crossing town? Well, I think they're gonna 0:04:02.800 --> 0:04:06.440 have to start squeezing starting the end of this year. 0:04:06.920 --> 0:04:09.640 And they have a first rate central bank, to People's 0:04:09.640 --> 0:04:12.720 Bank of China, uh, and some of the best economists 0:04:12.720 --> 0:04:16.440 in Asia there. The head of it, UH, Joe shah Shuan, 0:04:16.560 --> 0:04:18.720 has been kept over three years, which is a very 0:04:18.760 --> 0:04:21.360 smart move of Shi Jinping. He should have retired three 0:04:21.440 --> 0:04:25.679 years ago because he is trying to keep this thing moving. 0:04:26.360 --> 0:04:30.120 UH and UH. Also when we talk about China, the 0:04:30.160 --> 0:04:31.960 People's Bank of China, we have to talk about the 0:04:32.120 --> 0:04:36.039 n m B because, as you know, our president, the 0:04:36.120 --> 0:04:41.479 Chinese currency exactly. Our president had had talked again and 0:04:41.520 --> 0:04:45.279 again about manipulation by the Chinese of their currency and 0:04:45.320 --> 0:04:47.640 the first thing he was going to do was take 0:04:47.680 --> 0:04:52.000 action to declare them manipulator. And the truth is that 0:04:52.120 --> 0:04:54.640 the Chinese, through the People's Bank of China has spent 0:04:54.720 --> 0:04:58.200 a trillion dollars over the last year to maintain the 0:04:58.240 --> 0:05:01.479 stability of the ren MB, so they're not pushing it down, 0:05:01.800 --> 0:05:04.840 they're actually keeping it stable or pushing it up. Well, 0:05:04.880 --> 0:05:07.560 I just I want to just press you on the 0:05:07.640 --> 0:05:10.919 credit issue before we go on, because it's this is 0:05:10.920 --> 0:05:12.880 the big question that a lot of people have, which 0:05:12.920 --> 0:05:16.320 is if China's credit system blows up, that will disrupt 0:05:16.360 --> 0:05:19.919 the entire financial system of the world. Are we close 0:05:19.960 --> 0:05:23.640 to that point? Well, my own feeling is that the 0:05:23.720 --> 0:05:26.560 Chinese will be pragmatic enough that when they get through 0:05:26.600 --> 0:05:33.359 this nineteen Party Congress, they'll start basically uh squeezing the 0:05:33.400 --> 0:05:38.359 banking system, start controlling the shadow banking system, UH, working 0:05:38.400 --> 0:05:43.360 more to uh to to basically control the bubble in 0:05:43.400 --> 0:05:49.200 real estate municipalities UH, and start moving more rapidly and 0:05:49.320 --> 0:05:52.320 closing down some of these zombie companies. So I think 0:05:52.320 --> 0:05:54.840 you're going to see a major surge starting at the 0:05:54.920 --> 0:05:57.680 end of this year through next year in this area 0:05:57.720 --> 0:06:01.080 because the Chinese no they have a problem them UH 0:06:01.120 --> 0:06:03.240 and UH. I think they will work at it. The 0:06:03.320 --> 0:06:06.320 question is do they start early enough and what will 0:06:06.360 --> 0:06:09.800 be the impact if their growth rate goes from near 0:06:09.880 --> 0:06:14.440 seven percent where it is today and drops down to five. Uh, 0:06:14.480 --> 0:06:16.080 you know the effect in the world. As a world 0:06:16.160 --> 0:06:20.200 second largest economy, the largest importer of commodities in the world, 0:06:20.640 --> 0:06:23.120 so they have the largest banking system in the in 0:06:23.160 --> 0:06:25.640 the world. Now they passed Europe. So you've got to 0:06:25.640 --> 0:06:28.280 take a look at all of these and watch very carefully. 0:06:28.800 --> 0:06:31.839 Once you have that party Congress what they do with 0:06:31.880 --> 0:06:36.120 the economy. Can you do Brexit and the new the 0:06:36.160 --> 0:06:38.200 snap election that's just been called, can you do that 0:06:38.240 --> 0:06:43.000 in fifteen seconds. I'm not surprised that Prime Minister May 0:06:43.000 --> 0:06:45.400 has done it because she needs the strongest hand she 0:06:45.440 --> 0:06:49.080 can get in this negotiation, because this negotiation is going 0:06:49.120 --> 0:06:52.120 to be tough, and uh, you know she was counting 0:06:52.160 --> 0:06:55.440 on some good feelings from Chancellor Merkel and others. But 0:06:55.440 --> 0:06:58.320 remember Chancellor Merkel has to go into an election. God 0:06:58.360 --> 0:07:01.239 only knows what's going to happen in France because everyone 0:07:01.360 --> 0:07:03.840 thought two weeks ago or three weeks ago there was 0:07:03.839 --> 0:07:05.920 going to be a runoff in the second round between 0:07:06.000 --> 0:07:09.400 Makron and the le Pen, But now you have the 0:07:09.480 --> 0:07:12.640 Left surging and it's really not clear what's gonna happen 0:07:12.760 --> 0:07:16.400 in the first round, so I think that all bets 0:07:16.400 --> 0:07:19.480 are off. With regards to the French election, I think 0:07:19.520 --> 0:07:22.640 with Merkele she will win, but it may be a 0:07:22.640 --> 0:07:25.480 tougher election than people think. Exactly. Well, I will keep 0:07:25.720 --> 0:07:28.240 will keep getting in touch with you because you have 0:07:28.280 --> 0:07:31.600 a lot of fantastic insights. Bill Rhodes is the author 0:07:31.680 --> 0:07:34.640 of Banker to the World, and he has been for 0:07:34.840 --> 0:07:38.920 decades as a former banker at City Group. Bill Rhodes 0:07:38.960 --> 0:07:41.680 is the president, chief executive officer of William R. Rhodes 0:07:41.680 --> 0:07:56.160 Global Advisors. My grandfather used to say to me, just 0:07:56.240 --> 0:07:59.280 because your paranoid doesn't mean they're not out to get you. 0:07:59.400 --> 0:08:03.000 And somebody who might ascribe to that theory of the 0:08:03.040 --> 0:08:06.480 world is Michael sal Loov. He's head of products, particularly 0:08:06.520 --> 0:08:10.640 with mobile security focus for Checkpoints Software Technologies. He's former 0:08:10.680 --> 0:08:13.400 CEO and co founder of Lacoon Mobile Security, which was 0:08:13.400 --> 0:08:18.560 acquired by Checkpoints Software. The company is based in San Carlos, California, 0:08:18.600 --> 0:08:20.560 as well as Tel Aviv. Michael sat, thank you so 0:08:20.640 --> 0:08:23.680 much for joining us. I want to start with talking 0:08:23.800 --> 0:08:27.400 about what companies that you work with are doing to 0:08:27.560 --> 0:08:31.600 make sure that their mobile devices and all of those 0:08:31.680 --> 0:08:34.520 used by the employees are secure and our company is 0:08:34.520 --> 0:08:39.120 doing enough. Good morning, Lisa Um. So indeed, you know, 0:08:39.160 --> 0:08:43.560 we've seen quite am impressive adoption of mobile devices in 0:08:43.600 --> 0:08:46.040 the in the corporate environment. I think all of us 0:08:46.040 --> 0:08:51.080 are using those the smartphones, Android ius um as our 0:08:51.160 --> 0:08:55.200 primary sort of computing platform for for doing mobile and 0:08:55.320 --> 0:08:59.360 most of the companies today basically they actually invested heavily 0:08:59.360 --> 0:09:02.480 in the manage those devices, but very few of them 0:09:02.840 --> 0:09:07.319 have adopted solutions to to secure the device itself from 0:09:07.320 --> 0:09:10.559 from hackers. Well, tell us a little bit about some 0:09:10.640 --> 0:09:13.560 of the things that could happen if you don't spend 0:09:13.640 --> 0:09:18.560 time and money securing your network. Right, So, you know, 0:09:18.559 --> 0:09:24.160 cybercriminals and they recognize the trend and they see the 0:09:24.200 --> 0:09:28.360 mobile devices probably the weakest link in all of the 0:09:28.400 --> 0:09:33.280 i T infrastructure, mainly because I T professionals or security professionals, 0:09:33.280 --> 0:09:36.920 they don't have good visibility into what's going on on 0:09:36.960 --> 0:09:39.760 those devices. And you can add to that the fact 0:09:39.800 --> 0:09:43.320 that most of those devices are actually they have dual use, right, 0:09:43.400 --> 0:09:46.760 they are used by the the owners both for corporate 0:09:47.520 --> 0:09:51.000 communication but also for personal use. So you know, once 0:09:51.080 --> 0:09:53.960 cyber criminals hack into that device, they can actually do 0:09:54.000 --> 0:09:59.000 almost everything, starting from like is dropping on all of 0:09:59.000 --> 0:10:04.280 your about communication passwords that you would type, you know, 0:10:04.600 --> 0:10:08.360 get access to your calendar, contact lists, and probably some 0:10:08.400 --> 0:10:10.320 of the scarier things is the fact that they can 0:10:10.440 --> 0:10:13.640 use the Microsoft the microphone and the and the camera 0:10:14.520 --> 0:10:17.920 to drop on you even you know, when when the 0:10:17.920 --> 0:10:20.959 follows in your pocket, when the screen is closed. Wait wait, wait, 0:10:21.000 --> 0:10:23.000 back up, back up. Okay. So we've heard a lot 0:10:23.040 --> 0:10:25.080 about these sort of worst case scenarios, you know, the 0:10:25.160 --> 0:10:27.320 dolls that are spying on your children and telling them 0:10:27.360 --> 0:10:29.320 what to do with microphones and stuff like that. She 0:10:29.440 --> 0:10:32.560 never believes me that. Well, no, no, I believe. I believe. 0:10:32.679 --> 0:10:35.240 I'm trying to figure out how common is this. I mean, 0:10:35.600 --> 0:10:37.440 is this just you know, a one in a you 0:10:37.480 --> 0:10:39.880 know billion chance that somebody's going to do this, or 0:10:40.000 --> 0:10:42.760 are there growing teams of people actively trying to hack 0:10:42.800 --> 0:10:45.520 in activate the microphone and steal everything that you have 0:10:45.559 --> 0:10:49.200 in your bank. So I think that the microphone scenario 0:10:49.360 --> 0:10:53.680 is actually very targeted scenario. But the truth to be told. 0:10:54.480 --> 0:10:57.880 First of all, in a survey that we've conducted a 0:10:57.880 --> 0:11:02.840 few few weeks ago, together with dimensional data, they they 0:11:02.880 --> 0:11:06.839 have dimensional research I'm sorry, they've actually the company is 0:11:06.880 --> 0:11:10.040 actually recognized about of the company is recognized that they 0:11:10.040 --> 0:11:13.120 already had a breach from a mobile device, and twenty 0:11:13.200 --> 0:11:16.959 five said that they actually have no clue, right that 0:11:17.000 --> 0:11:20.920 they don't have visibility from our own research, basically from 0:11:20.920 --> 0:11:24.840 customers that are using our our mobile threat prevention product, 0:11:24.880 --> 0:11:27.400 and we have more than eight hundred customers those days 0:11:27.600 --> 0:11:31.680 that are using the product. Every every company that they 0:11:31.760 --> 0:11:34.920 have more than five hundred employees, they had a mobile breach. 0:11:35.200 --> 0:11:39.480 So that's definitely quite common. Is that? Is that? Okay, 0:11:39.480 --> 0:11:42.560 we're just sinking in with that any company that has 0:11:42.600 --> 0:11:46.440 more than five people, it's not okay, Well that the 0:11:46.480 --> 0:11:48.959 truth is out right, Okay, so we got so this 0:11:49.080 --> 0:11:51.560 is now you're trying to combat this. So you're trying 0:11:51.559 --> 0:11:55.360 to offer up some solutions, right for for companies to 0:11:55.480 --> 0:11:59.719 prevent this from becoming a total mess. Yeah that's not 0:11:59.760 --> 0:12:03.840 true it yeah, yeah, okay, So give us some idea, 0:12:03.960 --> 0:12:06.679 like how much would something like that cost? I mean, 0:12:06.760 --> 0:12:10.120 is is that is that expensive? Is that on a 0:12:10.200 --> 0:12:13.600 perform basis? How does that work? So it's actually it's 0:12:13.640 --> 0:12:18.080 not that expensive, you know, for you know, from if 0:12:18.120 --> 0:12:21.920 we're talking about list price. It's basically it's basically four 0:12:21.960 --> 0:12:28.640 dollars per month per per device. Now, you know tech, 0:12:28.880 --> 0:12:32.800 you know, an average company with with let's say, like 0:12:32.800 --> 0:12:36.160 you know, five thousand or three thousand employees, it's not 0:12:36.240 --> 0:12:39.480 that expensive. And also of course you know those things, 0:12:40.600 --> 0:12:43.000 those type of software, they have discounts, you know, based 0:12:43.000 --> 0:12:45.640 on volumes. Yeah, Michael, how do you have a sense 0:12:45.720 --> 0:12:50.000 of where a lot of these hackers come from? Um, 0:12:50.040 --> 0:12:52.120 you know, it's it's usually sort of like you know, 0:12:52.200 --> 0:12:57.640 the the usual suspects. So a lot of those groups 0:12:58.120 --> 0:13:02.520 are emerging from China, you know, for example, last that's 0:13:02.559 --> 0:13:06.960 the same last November, we've uncovered a group which preached 0:13:07.000 --> 0:13:11.160 about one point three million devices. They were Chinese. Some 0:13:11.320 --> 0:13:14.720 of those groups are actually emerging from from Russia, so 0:13:14.800 --> 0:13:18.720 we've seen traces that the same guys that hacked DNC 0:13:19.040 --> 0:13:22.160 they also have capabilities in the in the mobile in 0:13:22.160 --> 0:13:26.640 the smartphone space. No, it's it's pretty much equivalent to 0:13:26.679 --> 0:13:29.760 what we're seeing, you know, everywhere else in in the cyberspace. 0:13:30.520 --> 0:13:33.400 Thank you very much for joining us. Michael shall Love 0:13:33.880 --> 0:13:37.240 is the head of Products Mobile Security for a checkpoint 0:13:37.480 --> 0:13:41.000 software and I guess that you know offers a little 0:13:41.000 --> 0:13:43.839 bit of a window into what you should at least 0:13:43.840 --> 0:13:47.600 be aware could happen to your phone. Just because your 0:13:47.600 --> 0:13:50.240 paranoid doesn't mean they're not advocate. Just that's all I'm 0:13:50.240 --> 0:14:06.920 gonna say. Okay, Well, the rental car companies Hurts Global 0:14:06.960 --> 0:14:11.439 Holdings and Avis Budget Group, they have bonds which trade, 0:14:11.480 --> 0:14:15.000 and boy, they are not trading like hotcakes. They are 0:14:15.400 --> 0:14:17.960 sort of like lemons, at least according to Molly Smith, 0:14:18.000 --> 0:14:21.560 our Bloomberg corporate finance reporter who joins US now and 0:14:21.600 --> 0:14:26.440 you can follow Molly on Twitter at Molly Smith News. 0:14:26.960 --> 0:14:30.400 Molly Smith tell us the tale of Hurts Global and 0:14:30.560 --> 0:14:34.880 Avis Budget and I just want to note that you 0:14:35.600 --> 0:14:40.400 are in the enviable position of actually being charged more 0:14:40.480 --> 0:14:42.880 if you were ever to rent a car from either 0:14:42.960 --> 0:14:45.960 of these organizations because they have that twenty five year 0:14:46.000 --> 0:14:50.960 old and below penalty. That's true. I am charged with 0:14:50.960 --> 0:14:55.000 that penalty being I think or something like that security 0:14:55.040 --> 0:15:00.960 deposit charge for us under the age of UM. But 0:15:01.040 --> 0:15:03.880 that's true. Yeah, the bonds are really getting hit lately. Um. 0:15:03.920 --> 0:15:06.360 You could see it starting from a bit earlier this month, 0:15:06.640 --> 0:15:09.520 and it's really coming in line with the decline in 0:15:09.880 --> 0:15:13.280 used car prices, which is really the assets essentially that 0:15:13.400 --> 0:15:17.200 back these bonds and loans that are issued by these companies. 0:15:17.280 --> 0:15:19.840 So when those prices are coming down on the cars, 0:15:20.200 --> 0:15:24.600 you know, so are these um securitizations from the companies, 0:15:24.640 --> 0:15:27.240 And you're seeing that now reflected in the bond prices. 0:15:27.280 --> 0:15:30.160 Previously was an equity issue, you know, you saw a 0:15:30.200 --> 0:15:32.760 bit more of the stock sell off earlier, but the 0:15:32.760 --> 0:15:35.440 creditors now starting to get weary as well well. And 0:15:35.480 --> 0:15:38.360 just to be clear, this isn't just the investors in 0:15:38.440 --> 0:15:42.640 the securitized bonds, but also in the straight corporate debt 0:15:42.680 --> 0:15:45.680 that Hurts and Avis have issued. Which is interesting because 0:15:45.680 --> 0:15:48.520 these companies have levered up on several fronts. Right they've 0:15:49.000 --> 0:15:52.360 sold off the residuals, there are the income that they 0:15:52.360 --> 0:15:55.960 get from rentals to go to the securitized bond holders, 0:15:56.000 --> 0:15:58.680 as well as sold corporate debt to raise money for 0:15:58.840 --> 0:16:03.560 their operations. Have these companies addressed the ongoing and growing 0:16:03.640 --> 0:16:06.400 concern that the resale market for autos is falling out 0:16:06.400 --> 0:16:08.680 of bed and it's going to profoundly challenge their whole 0:16:08.680 --> 0:16:11.800 business model. Well, I think that's exactly the challenge that 0:16:11.840 --> 0:16:15.440 they're facing now and possibly having to re evaluate their 0:16:15.480 --> 0:16:19.280 residual value assumptions and what they had previously made. Both 0:16:19.320 --> 0:16:21.960 Hurts and Avis were forecasting no more than a two 0:16:21.960 --> 0:16:25.040 to three percent decline and used car prices. You're now 0:16:25.080 --> 0:16:29.080 already seeing um GMS forecasting those prices to fall seven 0:16:29.080 --> 0:16:32.800 percent this year. Ally Financial UM, which is an auto 0:16:32.880 --> 0:16:37.200 financing lender UM their prices already fell seven percent in 0:16:37.240 --> 0:16:41.640 the first quarter, So um the decline is definitely steeper 0:16:41.680 --> 0:16:45.560 and faster than these companies had anticipated. Not just looking 0:16:45.640 --> 0:16:49.160 four point eight billion dollars worth of debt. Let's just 0:16:49.240 --> 0:16:52.440 take Hurts Global for h for a moment, But this 0:16:52.520 --> 0:16:57.320 INCURDS includes I beg your pardon, um, revolving revolvers that 0:16:57.360 --> 0:17:00.280 are available, term loans that out that our outstanding, as 0:17:00.320 --> 0:17:03.000 well as a bond principle. So well, although you should 0:17:03.000 --> 0:17:05.240 note that it's up right, I mean it was that 0:17:05.240 --> 0:17:07.359 that if you look at just for example of Hurts, 0:17:07.359 --> 0:17:09.720 they're short and long term debt has increased from eleven 0:17:09.720 --> 0:17:11.840 point three billion dollars in two thousand and eleven to 0:17:11.920 --> 0:17:14.320 thirteen point five billion dollars, so they've been actually increasing 0:17:14.320 --> 0:17:16.800 their debts, so it actually matters quite a bit anyway, 0:17:16.840 --> 0:17:22.639 carry on, okay, Okay. I anyway, I was looking at 0:17:22.680 --> 0:17:28.240 four point eight billion right on the Bloomberg and is 0:17:28.280 --> 0:17:31.439 that considered a lot for for these kinds of companies. 0:17:31.480 --> 0:17:34.560 I mean, these are assets and you may you may, 0:17:34.680 --> 0:17:36.360 you may find that people are going to buy them, 0:17:36.440 --> 0:17:40.320 and it may be good paper. You don't know, right well, 0:17:40.320 --> 0:17:44.200 I mean, I think really what's more concerning to the 0:17:44.240 --> 0:17:46.600 creditors right now and the analysts that look at it's 0:17:46.600 --> 0:17:48.600 not so much the absolute amount of debt, but when 0:17:48.600 --> 0:17:51.320 you're looking at it on a net leverage ratio basis. 0:17:51.359 --> 0:17:53.760 So Hurts is really trying to keep that within a 0:17:53.800 --> 0:17:56.320 two and a half to three and a half times range, 0:17:56.359 --> 0:17:58.680 and they're as of year end it was at five 0:17:58.720 --> 0:18:02.160 points six times. They're um net debt to adjusted earnings. 0:18:02.200 --> 0:18:05.160 So really, like then they've acknowledged that, you know, their 0:18:05.200 --> 0:18:07.879 CFO on conference cause they know that they are really 0:18:08.040 --> 0:18:11.560 at elevated leverage levels and something that they are working 0:18:11.600 --> 0:18:15.719 to reduce. But so far that clearly has not happened. Well. 0:18:15.760 --> 0:18:19.280 And investment and as you said in stockholders, investors in 0:18:19.280 --> 0:18:21.480 the company, owners of the investor have already kind of 0:18:21.560 --> 0:18:24.919 voted with their money and the stock is down so 0:18:24.960 --> 0:18:27.800 far this year, right and Avis also down more than 0:18:28.560 --> 0:18:31.320 this year as well. You have to wonder why Hurts 0:18:31.359 --> 0:18:34.919 and Avis still buy new cars, hold them for a 0:18:35.040 --> 0:18:38.680 year during their highest appreciation period of time, and then 0:18:38.680 --> 0:18:40.760 try to resell them. Is there any talk about changing 0:18:40.800 --> 0:18:44.439 that model. Well, the idea right now, as they're starting 0:18:44.480 --> 0:18:47.320 to buy more new cars versus used in the fleet, 0:18:47.520 --> 0:18:50.480 is really to take advantage of the heavy discounting going 0:18:50.520 --> 0:18:53.000 on at the new car level. And while I mean 0:18:53.000 --> 0:18:55.320 they are trying to drive their acquisition costs down in 0:18:55.400 --> 0:18:57.760 other ways by some of them are switching more to 0:18:57.840 --> 0:19:00.880 what's called the risk versus a program vehicle, a risk 0:19:01.000 --> 0:19:05.280 vehicle in which case the companies like Hurts an Avis 0:19:05.280 --> 0:19:08.720 own the vehicle outright, they're making the assumptions about the 0:19:08.760 --> 0:19:12.320 residual um price when you know, when it comes time 0:19:12.320 --> 0:19:15.960 to sell the car. Versus a program car, the companies 0:19:16.000 --> 0:19:19.959 get on a buyback agreement from the manufacturers, so they 0:19:20.000 --> 0:19:22.520 don't have to assume any of that price risk. So 0:19:22.680 --> 0:19:25.520 the program cars in that sense do cost a bit more. 0:19:25.840 --> 0:19:29.560 Hence why the rental car companies are somewhat shifting, shifting 0:19:29.600 --> 0:19:32.760 a little bit more towards the risk vehicles to drive 0:19:32.760 --> 0:19:35.560 down the acquisition costs a little bit more. Is that 0:19:35.680 --> 0:19:38.480 is that going to affect you know, how the business 0:19:38.560 --> 0:19:40.320 actually run, the kind of car you get when you, 0:19:40.320 --> 0:19:42.000 you know, you show up at a at a rental 0:19:42.000 --> 0:19:44.840 car company. Well, at least for Hurts right now, the 0:19:44.840 --> 0:19:47.640 fleet is like a bit lopsided. And we talked about 0:19:47.680 --> 0:19:49.800 this little bit in the story that you know, they 0:19:50.280 --> 0:19:53.240 were trying to you know, reduce the size and age 0:19:53.240 --> 0:19:57.439 of their fleet previously by buying smaller, cheaper cars, but 0:19:57.480 --> 0:19:59.840 they didn't turn out to be so popular. Americans tent 0:20:00.040 --> 0:20:02.919 prefer bigger cars, especially when they're renting, when they're on 0:20:02.920 --> 0:20:04.600 the road, you know, they have more things to carry. 0:20:04.680 --> 0:20:06.879 So I think right now that's really what they're in 0:20:06.920 --> 0:20:09.560 the middle of doing, of correcting their fleet, and that's 0:20:09.560 --> 0:20:12.040 something that analysts are looking for coming up. Thank you 0:20:12.119 --> 0:20:14.240 so much. This is a really important story to sort 0:20:14.280 --> 0:20:16.320 of highlights some of the growing distress that we've been 0:20:16.359 --> 0:20:19.359 hearing about and seeing in the auto sector. Molly Smith, 0:20:19.400 --> 0:20:21.560 we really appreciate you joining us. Molly Smith is a 0:20:21.600 --> 0:20:25.359 corporate finance reporter for Bloomberg. Talking about Avis and Hurts 0:20:25.400 --> 0:20:29.040 and their bonds tumbling to new lows as we see 0:20:29.240 --> 0:20:44.480 resale values of vehicles decline. Medical bills have been straining 0:20:44.560 --> 0:20:48.159 employers for a long time. But the question really is 0:20:48.440 --> 0:20:52.119 how much does Obamacare change that? How much does the 0:20:52.200 --> 0:20:56.160 failure of the GOP's proposal UH to repeal and replace 0:20:56.280 --> 0:20:58.320 Obamacare affect all of this. I want to bring in 0:20:58.400 --> 0:21:02.240 Joe Jackson, who's chairman and executive officer of wage Works, 0:21:02.280 --> 0:21:05.000 which is based in San Mateo, California. And if everyone 0:21:05.080 --> 0:21:08.840 has ever deducted or put aside money for medical expenses, 0:21:08.840 --> 0:21:11.439 they've dealt with wage Works and filling out those forms, 0:21:11.440 --> 0:21:12.840 I know that I have, Joe, Thank you so much 0:21:12.880 --> 0:21:16.359 for joining us right now. How much are you keeping 0:21:16.440 --> 0:21:20.840 track of what happens on the national healthcare level? How 0:21:20.920 --> 0:21:25.080 much does that affect your revenues and your business? Well, 0:21:25.480 --> 0:21:28.320 thank you for having me, Lisa. I think we spend 0:21:28.400 --> 0:21:31.320 quite a bit of time kind of tracking and um 0:21:32.440 --> 0:21:36.560 UH keeping close to the the puts and takes that 0:21:36.600 --> 0:21:41.560 were put into the recent healthcare bill. UM. We continue 0:21:41.600 --> 0:21:45.080 to have folks in Washington UM monitor the meetings that 0:21:45.080 --> 0:21:49.679 are taking place UM. But I think overall, what we 0:21:49.800 --> 0:21:55.600 tell folks at wage Works is that the whether or 0:21:55.600 --> 0:21:59.080 not the bill were to pass UM are products that 0:21:59.160 --> 0:22:03.600 we provide. Working families across the countries are thriving today 0:22:03.600 --> 0:22:06.800 and will continue to thrive no matter whether there's a 0:22:06.800 --> 0:22:09.239 new healthcare bill, which I believe that there will be 0:22:09.280 --> 0:22:13.159 at some point in time, or um if if there's not. 0:22:14.080 --> 0:22:16.960 The key thing is that out of pocket healthcare expenses 0:22:17.000 --> 0:22:20.719 continue to go up each year, and working families across 0:22:20.720 --> 0:22:24.480 the country the only defense mechanism that they have UM 0:22:24.640 --> 0:22:27.600 to offset those increases and out of pocket expenses is 0:22:27.640 --> 0:22:31.600 to use health savings account put pre tax dollars into 0:22:31.640 --> 0:22:35.680 a flexible spending account UM that allows them to pay 0:22:35.720 --> 0:22:38.879 for those expenses using pre tax dollars, which is really 0:22:38.880 --> 0:22:42.520 a benefit for working families Joe Jackson. Then how come 0:22:42.600 --> 0:22:45.320 the government seems to make it so difficult and so 0:22:45.520 --> 0:22:50.159 complicated for everybody to share the same kinds of benefits 0:22:50.200 --> 0:22:53.840 that you are describing. Because you've got the flexible spending 0:22:53.880 --> 0:22:56.560 accounts the f s as, then you have the health 0:22:56.800 --> 0:22:59.880 savings accounts, the h s A S oh and yes, 0:23:00.160 --> 0:23:03.520 Health Reimbursement Arrangements the h r a S and then 0:23:03.560 --> 0:23:07.600 you've got transit programs. Why can't they just simplify this 0:23:07.720 --> 0:23:11.360 and expand these programs you you say they work, Why 0:23:11.480 --> 0:23:15.000 just not expand something that is already doing pretty well well? 0:23:15.040 --> 0:23:18.160 I think there is expansion across the board. I think 0:23:18.200 --> 0:23:21.800 in health savings accounts a lot of what was proposed 0:23:21.800 --> 0:23:24.719 in the recent healthcare bill would go a long way 0:23:24.800 --> 0:23:27.240 to expand the amount of dollars that can be contributed 0:23:27.320 --> 0:23:29.960 to a health savings account. Uh. There were some other 0:23:30.320 --> 0:23:32.679 what if they pulled off the caps for example? I 0:23:32.680 --> 0:23:35.000 mean they keep talking about tearing up the script and 0:23:35.240 --> 0:23:37.280 you know, making the government. What would you like if 0:23:37.320 --> 0:23:39.800 you could write your own bill, Let's say, what would 0:23:39.800 --> 0:23:43.560 it contain? Well? I think from from our industry standpoint, 0:23:43.920 --> 0:23:46.560