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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 back on the

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Speaker 1: show Rashmi Bassu, our senior distress debt reporter in New York.

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Speaker 1: How are you, Reshmi? Go ahead?

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Speaker 2: How are you dying?

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Speaker 1: Very well? Great to have you back on the show.

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Speaker 1: Also on the Credit Edge, this week, we're going to

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Speaker 1: be talking to Cecilia Chan at Bloomberg Intelligence in Hong

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Speaker 1: Kong about the Chips war and casinos in China. So

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Speaker 1: do stay with us. But first Rashmi Bassu with Bloomberg News.

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Speaker 1: Great to have you back on the Credit Edge. Let's

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Speaker 1: start with we work Fascinating Saga, a company that was

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Speaker 1: not that long ago valued at almost fifty billion dollars,

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Speaker 1: now bankrupt. It was the world's most valuable startup, with

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Speaker 1: a colorful founder who started the office rentals firm with

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Speaker 1: an essential amenity beer on tap. They grew very rapidly

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Speaker 1: and spent extravagantly. But essentially it's a real estate business

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Speaker 1: offering flexible workspaces and also on a mission to blur

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Speaker 1: the boundaries between work and social life. By twenty nineteen,

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Speaker 1: we Work had rebranded as we Co with a mission

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Speaker 1: of quote elevating the world's consciousness. But Rashbie, why did

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Speaker 1: they file for bankruptcy? What happened?

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Speaker 2: I think the business model had just really come under question.

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Speaker 2: I mean, the company hasn't turned a profit. It was

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Speaker 2: valued at these, as you said, very frothy valuations. But

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Speaker 2: the key is life changed after COVID and when you

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Speaker 2: have a lot of debt on the balance sheet and

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Speaker 2: people are not going into offices in these shared spaces,

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Speaker 2: it really created a lot of issues for the company.

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Speaker 1: But they did restructure their debt earlier this year. Why

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Speaker 1: did that not work?

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Speaker 2: It was still too much debt And you know, quite honestly,

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Speaker 2: like you know, if you look at their two the

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Speaker 2: second quarter results, you really see that so much of

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Speaker 2: their expense is tied to these leases.

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Speaker 1: So how much are they really a casualty of the pandemic?

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Speaker 1: I mean they really did boom in twenty nineteen, right

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Speaker 1: before the global economy shut down.

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Speaker 2: No, I think it's a combination of a balance sheet

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Speaker 2: issue and that they have way too much debt, but

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Speaker 2: also an issue of these kind of venture capitalists loving

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Speaker 2: a business concept versus actually understanding what the business meant.

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Speaker 1: But let's talk about the business. I mean, presumably it

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Speaker 1: does survive in some form. Most of us are back

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Speaker 1: in the office again. Flexibility is the key. Surely it's

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Speaker 1: a model that still works. I mean renting out office

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Speaker 1: space to people who want it, especially when you live

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Speaker 1: in a city like New York where you know most people,

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Speaker 1: you know, spaces at a premium, rents a high People

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Speaker 1: don't always have an extra room in their house to

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Speaker 1: work out of. So you know, you throw in some

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Speaker 1: free beer and everyone's happy. Why wouldn't it work? Just now,

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Speaker 1: you know, the.

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Speaker 2: Beer just wasn't enough. You know, during its court hearing,

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Speaker 2: the CEO did say that, you know, the company needs

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Speaker 2: to renegotiate these office leases with over four hundred landlords.

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Speaker 2: And this process started back, you know, in twenty twenty two.

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Speaker 2: So it's just we have to understand that a line

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Speaker 2: share of the company's revenue in the second quarter was

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Speaker 2: tied to these lease payments. I mean, basically, what I'm

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Speaker 2: trying to say is that the lease payments kind of

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Speaker 2: consumed a lot of these revenues.

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Speaker 1: So we're talking about them taking out leases on buildings

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Speaker 1: at this pretty height of the rent. You know, the

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Speaker 1: costs of those leases were very, very high. Then they

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Speaker 1: ran into the pandemic. They can't afford to service those leases,

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Speaker 1: is that right, So they filed bankruptcy to sort of

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Speaker 1: put a pin in those leases.

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Speaker 2: Yeah. I mean, you know, the reason why a company

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Speaker 2: files for bankruptcy, especially we see in the retail space,

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Speaker 2: is it allows you to reject leases. And what we're

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Speaker 2: going to see as a rejection of leases combined with

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Speaker 2: the company kind of begging landlords to give them confessions,

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Speaker 2: meaning to decrease those payments.

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Speaker 1: So you really do dig in very deeply to the

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Speaker 1: kind of the creditor mess that ensues any bankruptcy. There

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Speaker 1: is some big companies involved, soft bank, King Street Brigade.

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Speaker 1: They're all fighting over the scraps here. Will they recover anything?

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Speaker 2: They will, you know, Time Hotel, but we saw them

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Speaker 2: kind of take the equity and the reorganized company assuming

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Speaker 2: that it exits bankruptcy and Time Hotel like you know,

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Speaker 2: I've spoken to people involved in the situation who said,

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Speaker 2: this really is the success of rework is going to

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Speaker 2: depend on its negotiations from landlords.

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Speaker 1: Is there anything that we can spin sort of broader

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Speaker 1: than just rework or is it very specific to we

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Speaker 1: work in this case.

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Speaker 2: I think we're just seeing, you know, a lot of

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Speaker 2: disturbance happening to the commercial real estate market. And you know,

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Speaker 2: one way to look at it is the more and

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Speaker 2: more of these leaf's payments to landlords go down, they're

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Speaker 2: also going to start seeing their cash flow come down.

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Speaker 2: So does that mean they're going to default potentially?

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Speaker 1: So there are other companies in a similar situation.

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Speaker 2: Yeah, I mean, I think little landlords are really hurting

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Speaker 2: and just have not been quite able to salvage themselves

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Speaker 2: post COVID.

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Speaker 1: But the idea of this we work specifically the restructuring,

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Speaker 1: the bankruptcy all this, is that they do survive in

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Speaker 1: some form. What form do we think that they will

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Speaker 1: come out of this in?

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Speaker 2: Yes, a much much smaller business.

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Speaker 1: Okay, so the learnings here, the lessons don't expand too quickly,

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Speaker 1: manage your debt, properly, run the company in a bit

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Speaker 1: more of a measured and rational way.

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Speaker 2: Right, don't fall in love with the business concept. You

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Speaker 2: really just have to understand what you're doing. And I

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Speaker 2: think you know this is also maybe a warning to

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Speaker 2: lender is that maybe don't fall for these like sky

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Speaker 2: high valuations.

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Speaker 1: I mean, we've been looking a lot of the lower

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Speaker 1: quality companies that's called them like triple C rated through

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Speaker 1: this earning cycle, and they really are getting punished when

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Speaker 1: they miss earnings. You know, some of these bonds are

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Speaker 1: dropping ten cents on the open. There seems to be

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Speaker 1: a lot of fear out there as credit distress rises,

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Speaker 1: not just limited to we work, but across the board.

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Speaker 1: Would you say that that's the case.

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Speaker 2: Yeah, we're definitely seeing that more and more a company

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Speaker 2: for having a challenging time servicing their debt given this

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Speaker 2: very high interest great environment.

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Speaker 1: On those you know, companies that are the riskiest in credit,

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Speaker 1: the ones rated triple C we have seen yields almost

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Speaker 1: double over the last let's say eighteen months, So they

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Speaker 1: are having real trouble servicing that debt just as the

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Speaker 1: maturities start to come due.

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Speaker 2: Right right, We're seeing just so much pain in the

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Speaker 2: market right now. You know, it's been great for the advisors,

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Speaker 2: but maybe bad for the lenders.

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Speaker 1: Good for the lawyers too.

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Speaker 2: Absolutely so.

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Speaker 1: Before we talks of Cecilia Chen at Bloomberg, and as

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Speaker 1: I mentioned about China, what else is on your radar?

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Speaker 2: Reshme.

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Speaker 1: It's been a big year for bankruptcy and distress. Do

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Speaker 1: we expect that to continue through year end? What sectors

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Speaker 1: are under pressure? Where are you most focused right now?

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Speaker 2: Right now, I'm focused on the technology space, telecoms, et cetera,

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Speaker 2: because they were kind of built to survive a low

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Speaker 2: interest environment, and that's actually saying quite a bit, but

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Speaker 2: now we're really seeing them getting their earnings getting punctured

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Speaker 2: by this environment.

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Speaker 1: Technology that's really hot space for a lot of people,

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Speaker 1: but it's a particular area in distress.

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Speaker 2: You know, one company that we've been kind of focused

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Speaker 2: on is lumin Technologies, which announced a deal last week,

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Speaker 2: and there's a lot of going back and forth on,

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Speaker 2: you know, on whether or not the deal was a

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Speaker 2: little bit too aggressive. And you know, we're just very

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Speaker 2: focused on education tech companies as well, and obviously the telecoms,

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Speaker 2: especially the service providers.

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Speaker 1: To that space. I mean, these all sound like good

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Speaker 1: businesses to be in, but in these cases it's just

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Speaker 1: too much debt, not very well managed.

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Speaker 2: Too much debt. It's kind of the story for Attech.

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Speaker 2: It's just you know, when these lbls are leveraged, buy

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Speaker 2: out for Dawn. They were done at like sky high multiples,

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Speaker 2: and now we're kind of seeing the earnings of Toury

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Speaker 2: and not really match up with those valuations.

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Speaker 1: Great stuff, Reshmi Bassie with Bloomberg News in New York.

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Speaker 1: Thank you so much for joining us.

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Speaker 2: Hi, thank you so much. This was fun.

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Speaker 1: Read all of Reshmi's great distress debt scoops on the

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Speaker 1: Bloomberg terminal and of course at Bloomberg dot com. So

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Speaker 1: right now, we're delighted to welcome to the Credit Edge

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Speaker 1: Cecilia Chan, who covers technology, among other things, for Bloomberg

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Speaker 1: Intelligence in Hong Kong. How's it going, Cecilia, Yeah, I'm fine.

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Speaker 3: Thanks for inviting me.

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Speaker 1: Great to have you on the show. So you're looking

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Speaker 1: at the market for semiconductors or chips. They're increasingly in

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Speaker 1: focus as AI becomes the hot new thing for investors.

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Speaker 1: We talked to Rob Schiffman about that recently, a great conversation.

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Speaker 1: You can find it on our podcast website. But Cecilia,

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Speaker 1: chips have also become a huge geopolitical issue, with the

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Speaker 1: Biden administration stepping up efforts to keep advanced chips and

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Speaker 1: equipment out of China. We're talking about the essential components

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Speaker 1: of AI here, and they are also used in the

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Speaker 1: military and super computing applications. And I understand also the

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Speaker 1: Japan and Netherlands have also adopted similar measures. So there

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Speaker 1: seems to be kind of a tech cold war happening.

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Speaker 1: I just wanted to start with us. You know, basic question, Cecilia,

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Speaker 1: why is this happening now? Why don't these countries want

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Speaker 1: to supply chips to China?

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Speaker 3: Well, first of all, Asia actually is a very critical

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Speaker 3: region to the semi conductors industry because the region actually

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Speaker 3: as around like our semi five to eighty percent of

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Speaker 3: the production hub as a production hub for the global

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Speaker 3: chip manufacturing. And so for China it is especially like

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Speaker 3: it's a major market because it is home to manufactories

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Speaker 3: that make products using chips like the smartphones, cars, computers,

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Speaker 3: household electronics, et cetera. And so those are like both imported,

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Speaker 3: I mean exported around the world and also purchased by

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Speaker 3: these consumers in China. And so for for China itself,

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Speaker 3: it has been looking into boosting its own like domestic

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Speaker 3: semi conducted instruct industry because it wants to like target

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Speaker 3: for the self reliance and we know of it's reliance

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Speaker 3: in like the foreign semi conductive firms. But then for US, well,

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Speaker 3: it's more like a political reason that is trying to

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Speaker 3: restrict the export of those adventures to China for use

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Speaker 3: in ai military use and supercomputers and so, and also

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Speaker 3: on the export of those high end semiconductive manufacturing equipment

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Speaker 3: to the country. And so the purpose of that is

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Speaker 3: to stop Beijing from receiving those cutting edge US technology

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Speaker 3: to strengthen its military.

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Speaker 1: Okay, got it. So do we expect this conflict to

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Speaker 1: be resolved anytime soon? Do you expect it to get worse?

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Speaker 1: I mean, we're going into a huge election year for

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Speaker 1: the US. It's a massive political issue. So is there

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Speaker 1: a postentially a risk this situation gets worse?

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Speaker 2: Uh?

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Speaker 3: Probably, I think this will stay or I cannot talk

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Speaker 3: about the government on behalf of the government. But then yeah,

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Speaker 3: I think that this geopolitical tension would probably remain a

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Speaker 3: big headwind to the Asian chip makers our credit, even

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Speaker 3: though the risk so far is still actually manageable, especially

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Speaker 3: for those like Korean chip makers and the Taiwanese chip makers.

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Speaker 1: Okay, so just let's talk about China quickly. The reaction.

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Speaker 1: As you said, they've started producing more of their own

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Speaker 1: to become self sufficient. Are the chips that they're making

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Speaker 1: just as good as any other or they better? I

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Speaker 1: mean pretulay, they're also a bit cheaper than the US,

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Speaker 1: are they actually?

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Speaker 3: Like I guess I should say that like because under

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Speaker 3: the current restriction, China shouldn't be able to like produce

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Speaker 3: those advent ships, like those that are like fourteen nanometers

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Speaker 3: or below. But then in we saw that Huawei launched

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Speaker 3: its new mobile mid sixty Pro and that actually surprised

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Speaker 3: the market because it can connect to the next five

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Speaker 3: G networks, even though, like despite US mansions that aim

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Speaker 3: to cut Chinese type tech giants from this technology. And so,

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Speaker 3: according to tech Insights, the phone is actually powered by

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Speaker 3: a new advance chip that is domestically produced using an

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Speaker 3: advanced seven nanometer technology, and rumor is saying that it

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Speaker 3: is produced by SMIC, but it's just market speculation and so,

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Speaker 3: but I guess what is surprised to the market is

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Speaker 3: that people with think Chinese technology would stop at fourteen

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Speaker 3: nine meters after restriction, but it seems like China has

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Speaker 3: been able to stay around two to two point fine

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Speaker 3: modes behind the world's best chip companies.

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Speaker 1: So they're catching up. Seems like yes, interesting, interesting, So

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Speaker 1: maybe the US policy is backfiring. So you mentioned the

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Speaker 1: producer of the Hildwai chips. Is that a Chinese company?

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Speaker 3: Oh yeah, it's uh, it's called s M I C

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Speaker 3: or it's just a rumor thing that it produced, okay,

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Speaker 3: and so yeah.

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Speaker 1: And other the other chip makers also in different countries.

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Speaker 1: You mentioned Korea, Taiwan. Are they also affected by this ban?

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Speaker 3: Uh? Yeah, because from this band it actually also well uh,

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Speaker 3: it actually affected the Chinese flaps uh owned by those

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Speaker 3: Korean chip makers, and also the the Taiwanese chip makers

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Speaker 3: like s M I see uh sorry not s M

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Speaker 3: I S but like a Samsung s K Highnex and

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Speaker 3: tsmc U. But the good thing is like in this October, well,

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Speaker 3: since last October during the trips restriction, they have been

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Speaker 3: receiving an indefinite wafair from US to import the equipment

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Speaker 3: to their Chinese flaps and so, and then this year

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Speaker 3: they actually also received an indefinite wafair and so it

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Speaker 3: seems like the immediate risk to their Chinese flats has

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Speaker 3: been easy because previously people are worried about, oh, what

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Speaker 3: will happen if they don't get a waiverer then, because

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Speaker 3: they have spent so much money in those Chinese facts

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Speaker 3: and so it's going to definitely destroy the supply train chain.

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Speaker 3: But then since they are able to receive the wafer

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Speaker 3: and so I guess the market is slightly more relief.

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Speaker 3: And also like the k PAX spending in well, previously

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Speaker 3: people are forecasting maybe they will start spending k PAX

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Speaker 3: in like moving the production back to their own country.

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Speaker 3: But then now it seems like they will be able

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Speaker 3: to eat that in the short term.

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Speaker 1: So just so listen. As a clear some Korean chip

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Speaker 1: makers have received a waiver which allows them to receive

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Speaker 1: the US semi conductors.

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Speaker 3: Is that right? Uh? Yeah, they allow them to export

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Speaker 3: the Chinese I mean the.

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Speaker 1: Tech okay, okay, so even though their plants are based

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Speaker 1: in China, they're still able to use this technology.

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Speaker 3: Mm hm that's right.

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Speaker 1: Interesting thing, okay, So let's let's talk about the credit

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Speaker 1: aspects of this cecilia. You look at that very closely,

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Speaker 1: and then that's what some of our readers are very

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Speaker 1: interested in. Is there any relative value here? Are there

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Speaker 1: are there winners? And losers. Are there companies that do

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Speaker 1: well out of this and others that don't.

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Speaker 3: Yeah, like the Korean chip makers ki Hynix, So we'd

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Speaker 3: like we think the bonds could titan versus it US

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Speaker 3: my peer called Micron, because sk Hynix actually is the

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Speaker 3: leader in high bandwidth memory ships, and because there's the

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Speaker 3: robust demand in the generator AI and also we are

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Speaker 3: expecting there will be a recovery in the DRAM demand

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Speaker 3: starting from twenty twenty four, and so we expect the

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Speaker 3: dollar ponds could tighten against it's our closest a usper

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Speaker 3: and also retrearchful of the company even though it's an

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Speaker 3: active in twenty twenty three. But the focus we are

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Speaker 3: looking at will be on twenty twenty four, which we

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Speaker 3: expect there will be a turnaround in the memory ship

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Speaker 3: demand and so that will drive the free casual positive again.

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Speaker 3: And also, as I've mentioned before, the indefinite WAIFA that

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Speaker 3: they have received from the US actually removed the urgency

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Speaker 3: to move the capacity back to Korea from China, and

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Speaker 3: so we think that could also stringthen their free cultural generation.

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Speaker 1: So there's opportunity in the Korean chip makers and less

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Speaker 1: so in the Chinese that maybe are under more pressure.

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Speaker 3: Yeah, for the Chinese one, well only one has a

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Speaker 3: dollar bond which is called s m C, but it's

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Speaker 3: currently under the sansion and so I think right now,

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Speaker 3: even though the ratings is I would say it's quite

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Speaker 3: stable because as long as the the the restriction will

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Speaker 3: not affect their mature, not production, than their their their

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Speaker 3: market position and the technology leadership domestically could support its

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Speaker 3: troop will be minus ratings. But yeah, for the Born

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Speaker 3: to Titan, I think the chance could be a bit

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Speaker 3: slim for now.

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Speaker 1: Okay, okay, but it will be very interesting to see

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Speaker 1: this sm I see rumor about the railway chips as

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Speaker 1: she is confirmed, right, that would be very interesting development.

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Speaker 3: Yeah, definitely on one thing other.

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Speaker 2: Other than that.

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Speaker 1: I know you you look at a multitude of things, Cilia,

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Speaker 1: and one thing that has been catching my attention over

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Speaker 1: here in the US covering Asian credit is the casinos.

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Speaker 1: I know you look at those. I just kind of

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Speaker 1: wanted to wrap this up by asking you about that

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Speaker 1: industry because it is quite important for a lot of

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Speaker 1: high yield companies in the US dollar market. How is

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Speaker 1: that industry doing? Is Macau completely swamped with gamblers.

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Speaker 2: Now.

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Speaker 3: Ah, yeah, I actually went to Macau on last Saturday

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Speaker 3: with my family. And then well, I guess it depends

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Speaker 3: on which casino you are going to, like the US

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Speaker 3: based one like our sand China with Macau and also MGM,

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Speaker 3: the casino flower is actually quite attractive because I guess

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Speaker 3: many tourists actually will go to those those casinos, and

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Speaker 3: then for the local ones maybe a little bit they

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Speaker 3: well I guess they still need to catch up. But yeah,

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Speaker 3: but for the sector, we think despite you know, we

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Speaker 3: know that the China property market has been.

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Speaker 1: Yeah, a lot of pressure there, Yeah, a lot of pressure.

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Speaker 3: Well, many things happening in the Chinese property markay, I

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Speaker 3: guess I should say, yeah, And so I guess the

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Speaker 3: Macau casino sector it could be a safest spot to

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Speaker 3: look at, yeah, because we think that there's limited incremental

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Speaker 3: risk in the factor, especially like after the casinos, they

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Speaker 3: are able to renew the concession for other ten years.

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Speaker 3: And also we see that the mcau's growth gaming revenue

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Speaker 3: coming back, and so into twenty twenty four, we actually

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Speaker 3: are expecting another twenty two percent increase in the growth

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Speaker 3: gaming revenue despite there's like weakness in China economy, and

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Speaker 3: so we definitely think like for mcaucasin knows, yeah, it's

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Speaker 3: something to watch for in twenty twenty four. And then

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Speaker 3: for me in terms of like relative valuation, I think

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Speaker 3: the ones that are best as the US parent like

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Speaker 3: than China, and also MGM could be uh the bonds

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Speaker 3: could be tightening. The reason is because they for example,

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Speaker 3: for Fan China, they have I mean a positive outlook

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Speaker 3: and so there's a chance for the company to upgrade.

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Speaker 3: And then for MGM China, we see that they have

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Speaker 3: been like driving so much market share from the local

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Speaker 3: ones and the market shaking actually is also sustainable, and

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Speaker 3: so that could also tighten the dollar bonds.

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Speaker 1: And when you're walking the floor there in Macau and

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Speaker 1: the big casinos, we got to post sorry pre pandemic

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Speaker 1: levels of expending.

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Speaker 2: Uh.

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Speaker 3: I think for if you compared to twenty nineteen, probably

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Speaker 3: it's still not yet there. The reason is because first

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Speaker 3: of all, they have some stuff issue before, like there's

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Speaker 3: a shortage of stuff and so they need to fill

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Speaker 3: back in. And then also there are some casinos recorded

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Speaker 3: the statellite casinos they have been closing, and so that

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Speaker 3: also affects like it's not the supply wise, it's not

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Speaker 3: fully back to twenty nineteen. But then at the same time,

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Speaker 3: there are so many new casinos coming in twenty twenty

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Speaker 3: three and off to well we are now in the

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Speaker 3: end twenty twenty three and twenty twenty four, and so

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Speaker 3: it's definitely going to boost up the supply again. And

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Speaker 3: then also people coming in, like we can see that

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Speaker 3: tourists from China and even the Tier two city tstory

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Speaker 3: cities are tourists coming into Macau, and so that will

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Speaker 3: also boost up the visitation.

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Speaker 1: So Celia Cham with Bloomberg Intelligence in Hong Kong, thank

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Speaker 1: you so much for joining us.

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Speaker 3: Thank you James, thanks for inviting me.

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Speaker 1: We look forward to having you back on the show

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Speaker 1: very soon. And please listeners do check out Cecilia's great

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Speaker 1: analysis on the Bloomberg Terminal and we will catch up

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Speaker 1: very soon. And thanks again to Reshmi Basu with Bloomberg

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Speaker 1: News in New York. Read all of her scoops on

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Speaker 1: the Terminal and at Bloomberg dot com, and please do

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Speaker 1: subscribe wherever you get your podcasts. We're on Apple, Google

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Speaker 1: and Spotify. Give us a review, tell your friends, and

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Speaker 1: you can also email me directly at Jcromby eight at

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Speaker 1: Bloomberg dot net. That's j C R O M B

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Speaker 1: I E as in my surname and the number eight

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Speaker 1: at Bloomberg dot net. I'm James Crombie. It's been a

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Speaker 1: pleasure having you join us again next week on the

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Speaker 1: Credit Edge