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 back on the
Speaker 1: show Rashmi Bassu, our senior distress debt reporter in New York.
Speaker 1: How are you, Reshmi? Go ahead?
Speaker 2: How are you dying?
Speaker 1: Very well? Great to have you back on the show.
Speaker 1: Also on the Credit Edge, this week, we're going to
Speaker 1: be talking to Cecilia Chan at Bloomberg Intelligence in Hong
Speaker 1: Kong about the Chips war and casinos in China. So
Speaker 1: do stay with us. But first Rashmi Bassu with Bloomberg News.
Speaker 1: Great to have you back on the Credit Edge. Let's
Speaker 1: start with we work Fascinating Saga, a company that was
Speaker 1: not that long ago valued at almost fifty billion dollars,
Speaker 1: now bankrupt. It was the world's most valuable startup, with
Speaker 1: a colorful founder who started the office rentals firm with
Speaker 1: an essential amenity beer on tap. They grew very rapidly
Speaker 1: and spent extravagantly. But essentially it's a real estate business
Speaker 1: offering flexible workspaces and also on a mission to blur
Speaker 1: the boundaries between work and social life. By twenty nineteen,
Speaker 1: we Work had rebranded as we Co with a mission
Speaker 1: of quote elevating the world's consciousness. But Rashbie, why did
Speaker 1: they file for bankruptcy? What happened?
Speaker 2: I think the business model had just really come under question.
Speaker 2: I mean, the company hasn't turned a profit. It was
Speaker 2: valued at these, as you said, very frothy valuations. But
Speaker 2: the key is life changed after COVID and when you
Speaker 2: have a lot of debt on the balance sheet and
Speaker 2: people are not going into offices in these shared spaces,
Speaker 2: it really created a lot of issues for the company.
Speaker 1: But they did restructure their debt earlier this year. Why
Speaker 1: did that not work?
Speaker 2: It was still too much debt And you know, quite honestly,
Speaker 2: like you know, if you look at their two the
Speaker 2: second quarter results, you really see that so much of
Speaker 2: their expense is tied to these leases.
Speaker 1: So how much are they really a casualty of the pandemic?
Speaker 1: I mean they really did boom in twenty nineteen, right
Speaker 1: before the global economy shut down.
Speaker 2: No, I think it's a combination of a balance sheet
Speaker 2: issue and that they have way too much debt, but
Speaker 2: also an issue of these kind of venture capitalists loving
Speaker 2: a business concept versus actually understanding what the business meant.
Speaker 1: But let's talk about the business. I mean, presumably it
Speaker 1: does survive in some form. Most of us are back
Speaker 1: in the office again. Flexibility is the key. Surely it's
Speaker 1: a model that still works. I mean renting out office
Speaker 1: space to people who want it, especially when you live
Speaker 1: in a city like New York where you know most people,
Speaker 1: you know, spaces at a premium, rents a high People
Speaker 1: don't always have an extra room in their house to
Speaker 1: work out of. So you know, you throw in some
Speaker 1: free beer and everyone's happy. Why wouldn't it work? Just now,
Speaker 1: you know, the.
Speaker 2: Beer just wasn't enough. You know, during its court hearing,
Speaker 2: the CEO did say that, you know, the company needs
Speaker 2: to renegotiate these office leases with over four hundred landlords.
Speaker 2: And this process started back, you know, in twenty twenty two.
Speaker 2: So it's just we have to understand that a line
Speaker 2: share of the company's revenue in the second quarter was
Speaker 2: tied to these lease payments. I mean, basically, what I'm
Speaker 2: trying to say is that the lease payments kind of
Speaker 2: consumed a lot of these revenues.
Speaker 1: So we're talking about them taking out leases on buildings
Speaker 1: at this pretty height of the rent. You know, the
Speaker 1: costs of those leases were very, very high. Then they
Speaker 1: ran into the pandemic. They can't afford to service those leases,
Speaker 1: is that right, So they filed bankruptcy to sort of
Speaker 1: put a pin in those leases.
Speaker 2: Yeah. I mean, you know, the reason why a company
Speaker 2: files for bankruptcy, especially we see in the retail space,
Speaker 2: is it allows you to reject leases. And what we're
Speaker 2: going to see as a rejection of leases combined with
Speaker 2: the company kind of begging landlords to give them confessions,
Speaker 2: meaning to decrease those payments.
Speaker 1: So you really do dig in very deeply to the
Speaker 1: kind of the creditor mess that ensues any bankruptcy. There
Speaker 1: is some big companies involved, soft bank, King Street Brigade.
Speaker 1: They're all fighting over the scraps here. Will they recover anything?
Speaker 2: They will, you know, Time Hotel, but we saw them
Speaker 2: kind of take the equity and the reorganized company assuming
Speaker 2: that it exits bankruptcy and Time Hotel like you know,
Speaker 2: I've spoken to people involved in the situation who said,
Speaker 2: this really is the success of rework is going to
Speaker 2: depend on its negotiations from landlords.
Speaker 1: Is there anything that we can spin sort of broader
Speaker 1: than just rework or is it very specific to we
Speaker 1: work in this case.
Speaker 2: I think we're just seeing, you know, a lot of
Speaker 2: disturbance happening to the commercial real estate market. And you know,
Speaker 2: one way to look at it is the more and
Speaker 2: more of these leaf's payments to landlords go down, they're
Speaker 2: also going to start seeing their cash flow come down.
Speaker 2: So does that mean they're going to default potentially?
Speaker 1: So there are other companies in a similar situation.
Speaker 2: Yeah, I mean, I think little landlords are really hurting
Speaker 2: and just have not been quite able to salvage themselves
Speaker 2: post COVID.
Speaker 1: But the idea of this we work specifically the restructuring,
Speaker 1: the bankruptcy all this, is that they do survive in
Speaker 1: some form. What form do we think that they will
Speaker 1: come out of this in?
Speaker 2: Yes, a much much smaller business.
Speaker 1: Okay, so the learnings here, the lessons don't expand too quickly,
Speaker 1: manage your debt, properly, run the company in a bit
Speaker 1: more of a measured and rational way.
Speaker 2: Right, don't fall in love with the business concept. You
Speaker 2: really just have to understand what you're doing. And I
Speaker 2: think you know this is also maybe a warning to
Speaker 2: lender is that maybe don't fall for these like sky
Speaker 2: high valuations.
Speaker 1: I mean, we've been looking a lot of the lower
Speaker 1: quality companies that's called them like triple C rated through
Speaker 1: this earning cycle, and they really are getting punished when
Speaker 1: they miss earnings. You know, some of these bonds are
Speaker 1: dropping ten cents on the open. There seems to be
Speaker 1: a lot of fear out there as credit distress rises,
Speaker 1: not just limited to we work, but across the board.
Speaker 1: Would you say that that's the case.
Speaker 2: Yeah, we're definitely seeing that more and more a company
Speaker 2: for having a challenging time servicing their debt given this
Speaker 2: very high interest great environment.
Speaker 1: On those you know, companies that are the riskiest in credit,
Speaker 1: the ones rated triple C we have seen yields almost
Speaker 1: double over the last let's say eighteen months, So they
Speaker 1: are having real trouble servicing that debt just as the
Speaker 1: maturities start to come due.
Speaker 2: Right right, We're seeing just so much pain in the
Speaker 2: market right now. You know, it's been great for the advisors,
Speaker 2: but maybe bad for the lenders.
Speaker 1: Good for the lawyers too.
Speaker 2: Absolutely so.
Speaker 1: Before we talks of Cecilia Chen at Bloomberg, and as
Speaker 1: I mentioned about China, what else is on your radar?
Speaker 2: Reshme.
Speaker 1: It's been a big year for bankruptcy and distress. Do
Speaker 1: we expect that to continue through year end? What sectors
Speaker 1: are under pressure? Where are you most focused right now?
Speaker 2: Right now, I'm focused on the technology space, telecoms, et cetera,
Speaker 2: because they were kind of built to survive a low
Speaker 2: interest environment, and that's actually saying quite a bit, but
Speaker 2: now we're really seeing them getting their earnings getting punctured
Speaker 2: by this environment.
Speaker 1: Technology that's really hot space for a lot of people,
Speaker 1: but it's a particular area in distress.
Speaker 2: You know, one company that we've been kind of focused
Speaker 2: on is lumin Technologies, which announced a deal last week,
Speaker 2: and there's a lot of going back and forth on,
Speaker 2: you know, on whether or not the deal was a
Speaker 2: little bit too aggressive. And you know, we're just very
Speaker 2: focused on education tech companies as well, and obviously the telecoms,
Speaker 2: especially the service providers.
Speaker 1: To that space. I mean, these all sound like good
Speaker 1: businesses to be in, but in these cases it's just
Speaker 1: too much debt, not very well managed.
Speaker 2: Too much debt. It's kind of the story for Attech.
Speaker 2: It's just you know, when these lbls are leveraged, buy
Speaker 2: out for Dawn. They were done at like sky high multiples,
Speaker 2: and now we're kind of seeing the earnings of Toury
Speaker 2: and not really match up with those valuations.
Speaker 1: Great stuff, Reshmi Bassie with Bloomberg News in New York.
Speaker 1: Thank you so much for joining us.
Speaker 2: Hi, thank you so much. This was fun.
Speaker 1: Read all of Reshmi's great distress debt scoops on the
Speaker 1: Bloomberg terminal and of course at Bloomberg dot com. So
Speaker 1: right now, we're delighted to welcome to the Credit Edge
Speaker 1: Cecilia Chan, who covers technology, among other things, for Bloomberg
Speaker 1: Intelligence in Hong Kong. How's it going, Cecilia, Yeah, I'm fine.
Speaker 3: Thanks for inviting me.
Speaker 1: Great to have you on the show. So you're looking
Speaker 1: at the market for semiconductors or chips. They're increasingly in
Speaker 1: focus as AI becomes the hot new thing for investors.
Speaker 1: We talked to Rob Schiffman about that recently, a great conversation.
Speaker 1: You can find it on our podcast website. But Cecilia,
Speaker 1: chips have also become a huge geopolitical issue, with the
Speaker 1: Biden administration stepping up efforts to keep advanced chips and
Speaker 1: equipment out of China. We're talking about the essential components
Speaker 1: of AI here, and they are also used in the
Speaker 1: military and super computing applications. And I understand also the
Speaker 1: Japan and Netherlands have also adopted similar measures. So there
Speaker 1: seems to be kind of a tech cold war happening.
Speaker 1: I just wanted to start with us. You know, basic question, Cecilia,
Speaker 1: why is this happening now? Why don't these countries want
Speaker 1: to supply chips to China?
Speaker 3: Well, first of all, Asia actually is a very critical
Speaker 3: region to the semi conductors industry because the region actually
Speaker 3: as around like our semi five to eighty percent of
Speaker 3: the production hub as a production hub for the global
Speaker 3: chip manufacturing. And so for China it is especially like
Speaker 3: it's a major market because it is home to manufactories
Speaker 3: that make products using chips like the smartphones, cars, computers,
Speaker 3: household electronics, et cetera. And so those are like both imported,
Speaker 3: I mean exported around the world and also purchased by
Speaker 3: these consumers in China. And so for for China itself,
Speaker 3: it has been looking into boosting its own like domestic
Speaker 3: semi conducted instruct industry because it wants to like target
Speaker 3: for the self reliance and we know of it's reliance
Speaker 3: in like the foreign semi conductive firms. But then for US, well,
Speaker 3: it's more like a political reason that is trying to
Speaker 3: restrict the export of those adventures to China for use
Speaker 3: in ai military use and supercomputers and so, and also
Speaker 3: on the export of those high end semiconductive manufacturing equipment
Speaker 3: to the country. And so the purpose of that is
Speaker 3: to stop Beijing from receiving those cutting edge US technology
Speaker 3: to strengthen its military.
Speaker 1: Okay, got it. So do we expect this conflict to
Speaker 1: be resolved anytime soon? Do you expect it to get worse?
Speaker 1: I mean, we're going into a huge election year for
Speaker 1: the US. It's a massive political issue. So is there
Speaker 1: a postentially a risk this situation gets worse?
Speaker 2: Uh?
Speaker 3: Probably, I think this will stay or I cannot talk
Speaker 3: about the government on behalf of the government. But then yeah,
Speaker 3: I think that this geopolitical tension would probably remain a
Speaker 3: big headwind to the Asian chip makers our credit, even
Speaker 3: though the risk so far is still actually manageable, especially
Speaker 3: for those like Korean chip makers and the Taiwanese chip makers.
Speaker 1: Okay, so just let's talk about China quickly. The reaction.
Speaker 1: As you said, they've started producing more of their own
Speaker 1: to become self sufficient. Are the chips that they're making
Speaker 1: just as good as any other or they better? I
Speaker 1: mean pretulay, they're also a bit cheaper than the US,
Speaker 1: are they actually?
Speaker 3: Like I guess I should say that like because under
Speaker 3: the current restriction, China shouldn't be able to like produce
Speaker 3: those advent ships, like those that are like fourteen nanometers
Speaker 3: or below. But then in we saw that Huawei launched
Speaker 3: its new mobile mid sixty Pro and that actually surprised
Speaker 3: the market because it can connect to the next five
Speaker 3: G networks, even though, like despite US mansions that aim
Speaker 3: to cut Chinese type tech giants from this technology. And so,
Speaker 3: according to tech Insights, the phone is actually powered by
Speaker 3: a new advance chip that is domestically produced using an
Speaker 3: advanced seven nanometer technology, and rumor is saying that it
Speaker 3: is produced by SMIC, but it's just market speculation and so,
Speaker 3: but I guess what is surprised to the market is
Speaker 3: that people with think Chinese technology would stop at fourteen
Speaker 3: nine meters after restriction, but it seems like China has
Speaker 3: been able to stay around two to two point fine
Speaker 3: modes behind the world's best chip companies.
Speaker 1: So they're catching up. Seems like yes, interesting, interesting, So
Speaker 1: maybe the US policy is backfiring. So you mentioned the
Speaker 1: producer of the Hildwai chips. Is that a Chinese company?
Speaker 3: Oh yeah, it's uh, it's called s M I C
Speaker 3: or it's just a rumor thing that it produced, okay,
Speaker 3: and so yeah.
Speaker 1: And other the other chip makers also in different countries.
Speaker 1: You mentioned Korea, Taiwan. Are they also affected by this ban?
Speaker 3: Uh? Yeah, because from this band it actually also well uh,
Speaker 3: it actually affected the Chinese flaps uh owned by those
Speaker 3: Korean chip makers, and also the the Taiwanese chip makers
Speaker 3: like s M I see uh sorry not s M
Speaker 3: I S but like a Samsung s K Highnex and
Speaker 3: tsmc U. But the good thing is like in this October, well,
Speaker 3: since last October during the trips restriction, they have been
Speaker 3: receiving an indefinite wafair from US to import the equipment
Speaker 3: to their Chinese flaps and so, and then this year
Speaker 3: they actually also received an indefinite wafair and so it
Speaker 3: seems like the immediate risk to their Chinese flats has
Speaker 3: been easy because previously people are worried about, oh, what
Speaker 3: will happen if they don't get a waiverer then, because
Speaker 3: they have spent so much money in those Chinese facts
Speaker 3: and so it's going to definitely destroy the supply train chain.
Speaker 3: But then since they are able to receive the wafer
Speaker 3: and so I guess the market is slightly more relief.
Speaker 3: And also like the k PAX spending in well, previously
Speaker 3: people are forecasting maybe they will start spending k PAX
Speaker 3: in like moving the production back to their own country.
Speaker 3: But then now it seems like they will be able
Speaker 3: to eat that in the short term.
Speaker 1: So just so listen. As a clear some Korean chip
Speaker 1: makers have received a waiver which allows them to receive
Speaker 1: the US semi conductors.
Speaker 3: Is that right? Uh? Yeah, they allow them to export
Speaker 3: the Chinese I mean the.
Speaker 1: Tech okay, okay, so even though their plants are based
Speaker 1: in China, they're still able to use this technology.
Speaker 3: Mm hm that's right.
Speaker 1: Interesting thing, okay, So let's let's talk about the credit
Speaker 1: aspects of this cecilia. You look at that very closely,
Speaker 1: and then that's what some of our readers are very
Speaker 1: interested in. Is there any relative value here? Are there
Speaker 1: are there winners? And losers. Are there companies that do
Speaker 1: well out of this and others that don't.
Speaker 3: Yeah, like the Korean chip makers ki Hynix, So we'd
Speaker 3: like we think the bonds could titan versus it US
Speaker 3: my peer called Micron, because sk Hynix actually is the
Speaker 3: leader in high bandwidth memory ships, and because there's the
Speaker 3: robust demand in the generator AI and also we are
Speaker 3: expecting there will be a recovery in the DRAM demand
Speaker 3: starting from twenty twenty four, and so we expect the
Speaker 3: dollar ponds could tighten against it's our closest a usper
Speaker 3: and also retrearchful of the company even though it's an
Speaker 3: active in twenty twenty three. But the focus we are
Speaker 3: looking at will be on twenty twenty four, which we
Speaker 3: expect there will be a turnaround in the memory ship
Speaker 3: demand and so that will drive the free casual positive again.
Speaker 3: And also, as I've mentioned before, the indefinite WAIFA that
Speaker 3: they have received from the US actually removed the urgency
Speaker 3: to move the capacity back to Korea from China, and
Speaker 3: so we think that could also stringthen their free cultural generation.
Speaker 1: So there's opportunity in the Korean chip makers and less
Speaker 1: so in the Chinese that maybe are under more pressure.
Speaker 3: Yeah, for the Chinese one, well only one has a
Speaker 3: dollar bond which is called s m C, but it's
Speaker 3: currently under the sansion and so I think right now,
Speaker 3: even though the ratings is I would say it's quite
Speaker 3: stable because as long as the the the restriction will
Speaker 3: not affect their mature, not production, than their their their
Speaker 3: market position and the technology leadership domestically could support its
Speaker 3: troop will be minus ratings. But yeah, for the Born
Speaker 3: to Titan, I think the chance could be a bit
Speaker 3: slim for now.
Speaker 1: Okay, okay, but it will be very interesting to see
Speaker 1: this sm I see rumor about the railway chips as
Speaker 1: she is confirmed, right, that would be very interesting development.
Speaker 3: Yeah, definitely on one thing other.
Speaker 2: Other than that.
Speaker 1: I know you you look at a multitude of things, Cilia,
Speaker 1: and one thing that has been catching my attention over
Speaker 1: here in the US covering Asian credit is the casinos.
Speaker 1: I know you look at those. I just kind of
Speaker 1: wanted to wrap this up by asking you about that
Speaker 1: industry because it is quite important for a lot of
Speaker 1: high yield companies in the US dollar market. How is
Speaker 1: that industry doing? Is Macau completely swamped with gamblers.
Speaker 2: Now.
Speaker 3: Ah, yeah, I actually went to Macau on last Saturday
Speaker 3: with my family. And then well, I guess it depends
Speaker 3: on which casino you are going to, like the US
Speaker 3: based one like our sand China with Macau and also MGM,
Speaker 3: the casino flower is actually quite attractive because I guess
Speaker 3: many tourists actually will go to those those casinos, and
Speaker 3: then for the local ones maybe a little bit they
Speaker 3: well I guess they still need to catch up. But yeah,
Speaker 3: but for the sector, we think despite you know, we
Speaker 3: know that the China property market has been.
Speaker 1: Yeah, a lot of pressure there, Yeah, a lot of pressure.
Speaker 3: Well, many things happening in the Chinese property markay, I
Speaker 3: guess I should say, yeah, And so I guess the
Speaker 3: Macau casino sector it could be a safest spot to
Speaker 3: look at, yeah, because we think that there's limited incremental
Speaker 3: risk in the factor, especially like after the casinos, they
Speaker 3: are able to renew the concession for other ten years.
Speaker 3: And also we see that the mcau's growth gaming revenue
Speaker 3: coming back, and so into twenty twenty four, we actually
Speaker 3: are expecting another twenty two percent increase in the growth
Speaker 3: gaming revenue despite there's like weakness in China economy, and
Speaker 3: so we definitely think like for mcaucasin knows, yeah, it's
Speaker 3: something to watch for in twenty twenty four. And then
Speaker 3: for me in terms of like relative valuation, I think
Speaker 3: the ones that are best as the US parent like
Speaker 3: than China, and also MGM could be uh the bonds
Speaker 3: could be tightening. The reason is because they for example,
Speaker 3: for Fan China, they have I mean a positive outlook
Speaker 3: and so there's a chance for the company to upgrade.
Speaker 3: And then for MGM China, we see that they have
Speaker 3: been like driving so much market share from the local
Speaker 3: ones and the market shaking actually is also sustainable, and
Speaker 3: so that could also tighten the dollar bonds.
Speaker 1: And when you're walking the floor there in Macau and
Speaker 1: the big casinos, we got to post sorry pre pandemic
Speaker 1: levels of expending.
Speaker 2: Uh.
Speaker 3: I think for if you compared to twenty nineteen, probably
Speaker 3: it's still not yet there. The reason is because first
Speaker 3: of all, they have some stuff issue before, like there's
Speaker 3: a shortage of stuff and so they need to fill
Speaker 3: back in. And then also there are some casinos recorded
Speaker 3: the statellite casinos they have been closing, and so that
Speaker 3: also affects like it's not the supply wise, it's not
Speaker 3: fully back to twenty nineteen. But then at the same time,
Speaker 3: there are so many new casinos coming in twenty twenty
Speaker 3: three and off to well we are now in the
Speaker 3: end twenty twenty three and twenty twenty four, and so
Speaker 3: it's definitely going to boost up the supply again. And
Speaker 3: then also people coming in, like we can see that
Speaker 3: tourists from China and even the Tier two city tstory
Speaker 3: cities are tourists coming into Macau, and so that will
Speaker 3: also boost up the visitation.
Speaker 1: So Celia Cham with Bloomberg Intelligence in Hong Kong, thank
Speaker 1: you so much for joining us.
Speaker 3: Thank you James, thanks for inviting me.
Speaker 1: We look forward to having you back on the show
Speaker 1: very soon. And please listeners do check out Cecilia's great
Speaker 1: analysis on the Bloomberg Terminal and we will catch up
Speaker 1: very soon. And thanks again to Reshmi Basu with Bloomberg
Speaker 1: News in New York. Read all of her scoops on
Speaker 1: the Terminal and at Bloomberg dot com, and please do
Speaker 1: subscribe wherever you get your podcasts. We're on Apple, Google
Speaker 1: and Spotify. Give us a review, tell your friends, and
Speaker 1: you can also email me directly at Jcromby eight at
Speaker 1: Bloomberg dot net. That's j C R O M B
Speaker 1: I E as in my surname and the number eight
Speaker 1: at Bloomberg dot net. I'm James Crombie. It's been a
Speaker 1: pleasure having you join us again next week on the
Speaker 1: Credit Edge