1 00:00:18,400 --> 00:00:21,800 Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast. 2 00:00:21,960 --> 00:00:24,680 Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg. 3 00:00:25,280 --> 00:00:28,920 Speaker 1: Today's guests are Eliza Ronaldshannon, who covers distressed debt and 4 00:00:28,960 --> 00:00:32,000 Speaker 1: bankruptcy for Bloomberg News in Atlanta. We're delighted to have 5 00:00:32,040 --> 00:00:35,280 Speaker 1: you on the show. Good to be here. We're also 6 00:00:35,400 --> 00:00:38,080 Speaker 1: very pleased to welcome Spencer Cutter, who covers energy for 7 00:00:38,159 --> 00:00:43,280 Speaker 1: Bloomberg Intelligence in Seattle. Thanks for having me on. Companies 8 00:00:43,320 --> 00:00:45,559 Speaker 1: in the energy sector are highly exposed to the tightening 9 00:00:45,560 --> 00:00:48,519 Speaker 1: in financial conditions that's happening as we speak. We'll be 10 00:00:48,560 --> 00:00:50,840 Speaker 1: getting his insight a bit later on in the show, 11 00:00:51,920 --> 00:00:56,200 Speaker 1: but before we do. Eliza Ronaldshannon, with Bloomberg News, you've 12 00:00:56,240 --> 00:00:59,120 Speaker 1: been all over the biggest distressed debt stories for as 13 00:00:59,120 --> 00:01:02,360 Speaker 1: long as I can remember. How is the global banking 14 00:01:02,400 --> 00:01:07,479 Speaker 1: crisis affecting the troubled companies that you cover well so far? 15 00:01:07,800 --> 00:01:10,240 Speaker 1: It's it's interesting. It's a bit of a double edged sword. 16 00:01:10,319 --> 00:01:14,119 Speaker 1: On one hand, these companies have already been creeping into 17 00:01:14,560 --> 00:01:18,800 Speaker 1: further tightness in terms of their ability to obtain new financing. 18 00:01:18,920 --> 00:01:23,080 Speaker 1: The rise in rates has been increasing the amount of 19 00:01:23,120 --> 00:01:26,600 Speaker 1: distress that that's out there really reducing their options in 20 00:01:26,680 --> 00:01:31,960 Speaker 1: terms of financing themselves. So that has meant a lot 21 00:01:31,959 --> 00:01:37,559 Speaker 1: of turning to you know, private debt funding, these specialized 22 00:01:37,640 --> 00:01:39,960 Speaker 1: firms that will lend to them at quite high rates, 23 00:01:40,000 --> 00:01:44,040 Speaker 1: which creates only a snowball effect of further burden on 24 00:01:44,080 --> 00:01:47,680 Speaker 1: the companies. But the interesting side of this is that 25 00:01:48,560 --> 00:01:51,120 Speaker 1: it's possible, you know, given that the backdrop is already 26 00:01:52,120 --> 00:01:54,720 Speaker 1: tough and one of you know, the outlook being a 27 00:01:54,760 --> 00:01:58,800 Speaker 1: lot of more distressed now that things have reached a 28 00:01:58,840 --> 00:02:02,240 Speaker 1: real crescendo in one regard, a lot of a lot 29 00:02:02,280 --> 00:02:05,840 Speaker 1: of market participants are hopeful that this will slow down 30 00:02:05,880 --> 00:02:09,920 Speaker 1: the fed's rate hikes, in which case the struggling and 31 00:02:09,960 --> 00:02:13,919 Speaker 1: the and the overindebted companies will benefit. So can I 32 00:02:13,919 --> 00:02:15,600 Speaker 1: ask you about the funding cust I mean, they have 33 00:02:15,680 --> 00:02:17,600 Speaker 1: increased across the board. But but if you're going to 34 00:02:17,720 --> 00:02:21,120 Speaker 1: the private market, how much more are you're gonna have 35 00:02:21,120 --> 00:02:25,720 Speaker 1: to pay? You're gonna have to pay? I mean, it's 36 00:02:25,720 --> 00:02:30,519 Speaker 1: interesting because you're it's it's more about it's it's it's 37 00:02:30,560 --> 00:02:32,840 Speaker 1: like you're gonna have to pay more. But it's more 38 00:02:32,880 --> 00:02:35,480 Speaker 1: than the option being nothing at all. So I mean 39 00:02:35,520 --> 00:02:38,920 Speaker 1: it'll be at three percentage points more in terms of 40 00:02:38,960 --> 00:02:42,960 Speaker 1: the yield on a loan um. We're looking at some 41 00:02:43,000 --> 00:02:46,000 Speaker 1: of the loans that we see recently in for instance, 42 00:02:46,040 --> 00:02:51,359 Speaker 1: bankruptcy financing, which is only one step beyond um distressed financing. 43 00:02:51,440 --> 00:02:55,240 Speaker 1: Some of these loans are going for fifteen percent um. 44 00:02:55,320 --> 00:02:58,000 Speaker 1: I think there was one company that recently took out 45 00:02:58,040 --> 00:03:03,000 Speaker 1: a small loan at twenty percent to avoid bankruptcy. So 46 00:03:03,639 --> 00:03:07,760 Speaker 1: that becomes a really onerous It doesn't sound sustainable to me. 47 00:03:07,800 --> 00:03:10,119 Speaker 1: I mean, these companies just running themselves like they're giving 48 00:03:10,160 --> 00:03:14,080 Speaker 1: themselves short term lifelines, but they're not long term sustainable, 49 00:03:14,080 --> 00:03:17,200 Speaker 1: are they right. It's a lot of short term lifelines. 50 00:03:17,320 --> 00:03:21,160 Speaker 1: It's a lot of the companies hoping and praying that 51 00:03:21,200 --> 00:03:26,119 Speaker 1: they will have a experience an operational turnaround in the meantime. 52 00:03:26,200 --> 00:03:29,320 Speaker 1: So sometimes these will be pretty short term loans and 53 00:03:29,320 --> 00:03:32,240 Speaker 1: they're thinking, our whole business model is going to be 54 00:03:32,800 --> 00:03:35,400 Speaker 1: different and amazing in two years, so if we can 55 00:03:35,480 --> 00:03:40,560 Speaker 1: only get through this tough time will be smooth sailing. 56 00:03:40,600 --> 00:03:44,200 Speaker 1: And of course sometimes that is true. Sometimes they need 57 00:03:44,240 --> 00:03:46,960 Speaker 1: to take on you know, you have to kind of 58 00:03:46,960 --> 00:03:49,520 Speaker 1: dig yourself out of the hole and that means throwing 59 00:03:49,760 --> 00:03:52,440 Speaker 1: good money after bad but it can work out in 60 00:03:52,480 --> 00:03:55,440 Speaker 1: the end. It's hard to know in the moment which 61 00:03:55,760 --> 00:03:58,200 Speaker 1: outcome you're going to have. But of course for executives 62 00:03:58,200 --> 00:04:00,880 Speaker 1: that are in the positions, better to buy some time 63 00:04:00,880 --> 00:04:03,760 Speaker 1: and not have to be the one who sank the ship. Yeah, 64 00:04:03,840 --> 00:04:06,200 Speaker 1: absolutely right, So you talked about the double edged sword. 65 00:04:06,280 --> 00:04:08,880 Speaker 1: Rates are going up, but that you know also at 66 00:04:08,920 --> 00:04:11,880 Speaker 1: the same time, because the banking crisis, the FED may 67 00:04:11,920 --> 00:04:14,960 Speaker 1: have to take its foot off the accelerator. But that's 68 00:04:15,000 --> 00:04:17,240 Speaker 1: not good for these companies, right, If the economy is 69 00:04:17,279 --> 00:04:21,000 Speaker 1: getting worse, right, that's net worse for them for you know, 70 00:04:21,320 --> 00:04:25,480 Speaker 1: more distress, Right, it is, it's net worse for them, certainly. 71 00:04:25,600 --> 00:04:29,120 Speaker 1: I mean, the the hope is that it will at 72 00:04:29,200 --> 00:04:34,040 Speaker 1: least tame inflation. So the the real entrenched fear is 73 00:04:34,160 --> 00:04:40,680 Speaker 1: for a stagflation a sustains stagflation situation where inflation is 74 00:04:40,760 --> 00:04:46,320 Speaker 1: high and even a recession doesn't um tame it. So 75 00:04:46,720 --> 00:04:50,200 Speaker 1: to some extent, you know, people are hopeful, I mean, 76 00:04:50,320 --> 00:04:53,839 Speaker 1: the markets are, especially for high yield debt or always 77 00:04:54,320 --> 00:04:58,800 Speaker 1: suspiciously hopeful about everything. But um, you know, it's it's 78 00:04:58,800 --> 00:05:02,360 Speaker 1: a little bit of a this might hasten the cycle 79 00:05:02,440 --> 00:05:04,600 Speaker 1: and at least let us come back out of it 80 00:05:04,640 --> 00:05:08,080 Speaker 1: a little faster, but it's not good for corporate growth 81 00:05:08,200 --> 00:05:11,960 Speaker 1: and it's not good for the company's actual operational outlook. 82 00:05:12,120 --> 00:05:14,880 Speaker 1: There any particular sectors that are in trouble companies specifically, 83 00:05:16,480 --> 00:05:20,799 Speaker 1: it's really not a sector specific at this point. The companies, 84 00:05:20,880 --> 00:05:22,800 Speaker 1: it's just going to be the companies that have had 85 00:05:22,800 --> 00:05:26,160 Speaker 1: to or had to or have just taken on a 86 00:05:26,160 --> 00:05:29,320 Speaker 1: lot of debt in order to finance themselves, you know, 87 00:05:29,400 --> 00:05:32,560 Speaker 1: in sunnier times when rates were really low. So that's 88 00:05:32,560 --> 00:05:34,920 Speaker 1: going to be a lot of private equity owned companies 89 00:05:34,960 --> 00:05:39,520 Speaker 1: that were acquired through leveraged buyouts. It also can be 90 00:05:39,560 --> 00:05:42,599 Speaker 1: companies like Carvana, which is not private equity owned, but 91 00:05:42,640 --> 00:05:46,080 Speaker 1: it took on almost five billion dollars worth of debt 92 00:05:46,160 --> 00:05:52,919 Speaker 1: during the pandemic in order to fuel its massive growth goals. 93 00:05:53,040 --> 00:05:56,200 Speaker 1: And now it was one of those companies that didn't 94 00:05:56,240 --> 00:05:59,240 Speaker 1: have a lot of revenue or it wasn't profitable at 95 00:05:59,240 --> 00:06:02,360 Speaker 1: the time, And of course that's you know, not unheard 96 00:06:02,360 --> 00:06:05,880 Speaker 1: of for a company to really focus on growth over profits. 97 00:06:05,960 --> 00:06:09,760 Speaker 1: But the worst case scenario is for that that era 98 00:06:09,839 --> 00:06:15,360 Speaker 1: to lead into an environment where there's no turning back 99 00:06:15,400 --> 00:06:18,080 Speaker 1: and you have really put a lot of burden on 100 00:06:18,120 --> 00:06:20,760 Speaker 1: the company, and the economy is not in a place 101 00:06:20,760 --> 00:06:23,839 Speaker 1: where it will become profitable. So it just sounds like 102 00:06:23,839 --> 00:06:26,000 Speaker 1: a really depressing outic I'm to see on the credit guy, 103 00:06:26,000 --> 00:06:28,080 Speaker 1: so I'm always looking on the dark side. But in 104 00:06:28,160 --> 00:06:30,799 Speaker 1: terms of like the the actual trade, somebody is making 105 00:06:30,839 --> 00:06:33,839 Speaker 1: money here right now. Everyone is unhappy. So who's who's 106 00:06:33,920 --> 00:06:36,400 Speaker 1: who's rolling in the in the big bus on someone 107 00:06:36,440 --> 00:06:40,960 Speaker 1: else's paying here. Well, one place you're seeing funds try 108 00:06:41,040 --> 00:06:44,400 Speaker 1: to make money, and it's a little bit too soon 109 00:06:44,600 --> 00:06:47,840 Speaker 1: to know who's really going to cash out on some 110 00:06:47,880 --> 00:06:51,080 Speaker 1: of these bets because they involve products that you know 111 00:06:51,880 --> 00:06:55,560 Speaker 1: don't immediately turn over. But um, there's a lot of 112 00:06:55,600 --> 00:06:59,400 Speaker 1: activity relatively speaking, in the market for credit default swaps, 113 00:06:59,640 --> 00:07:04,359 Speaker 1: and that is a product that allows investors to bet 114 00:07:04,400 --> 00:07:10,600 Speaker 1: against companies, and so that became a snowball issue during 115 00:07:10,600 --> 00:07:13,040 Speaker 1: the financial crisis. But there's a lot more regulation involved 116 00:07:13,080 --> 00:07:16,800 Speaker 1: now and the markets are smaller, But that is one 117 00:07:16,800 --> 00:07:21,400 Speaker 1: place where hedge funds and particularly macro funds can kind 118 00:07:21,400 --> 00:07:25,040 Speaker 1: of pile onto the negative sentiment and they can bet 119 00:07:25,080 --> 00:07:30,080 Speaker 1: against companies where the market psychology seems to already be 120 00:07:30,320 --> 00:07:34,240 Speaker 1: that everyone is in fear and there's a little bit 121 00:07:34,280 --> 00:07:37,400 Speaker 1: of panic going on, and then once those bets are 122 00:07:37,680 --> 00:07:43,680 Speaker 1: noticed and recorded, it exacerbates things often. So that's one 123 00:07:43,680 --> 00:07:46,440 Speaker 1: place where there will be profits taken. You talked to 124 00:07:46,480 --> 00:07:48,520 Speaker 1: one of the biggest guys that you know. He makes 125 00:07:48,600 --> 00:07:51,200 Speaker 1: his money at moments like this, Bill as Weinstein. He 126 00:07:52,000 --> 00:07:54,640 Speaker 1: always catches in at this point. He smells blood in 127 00:07:54,640 --> 00:07:59,240 Speaker 1: the water. What's what's his view now on the bank bonds? Well, 128 00:07:59,320 --> 00:08:02,560 Speaker 1: he is he saw the displacement in the market. He 129 00:08:02,800 --> 00:08:06,520 Speaker 1: thought that the um and thinks still that there's a 130 00:08:06,520 --> 00:08:10,160 Speaker 1: little bit too much selling and that there's been some 131 00:08:10,200 --> 00:08:13,240 Speaker 1: forced selling on the part of counterparties, you know, other 132 00:08:13,320 --> 00:08:17,040 Speaker 1: banks that need to just effectively manage their risk and 133 00:08:17,120 --> 00:08:21,520 Speaker 1: just our buying protection in a way to hedge their 134 00:08:21,520 --> 00:08:27,200 Speaker 1: exposure and just stay within some reasonable limits in terms 135 00:08:27,200 --> 00:08:31,360 Speaker 1: of their the risk that's on their books. Um So, 136 00:08:32,160 --> 00:08:35,120 Speaker 1: the demand surging when and when a bunch of banks 137 00:08:35,160 --> 00:08:38,880 Speaker 1: have to do that at the same time, gives sellers 138 00:08:38,880 --> 00:08:42,400 Speaker 1: of CDs, which could be any any fund or that 139 00:08:42,400 --> 00:08:44,560 Speaker 1: that decides to write up a contract they can really 140 00:08:44,559 --> 00:08:49,320 Speaker 1: sell them at over Arguably inflated prices, and so then 141 00:08:50,240 --> 00:08:54,360 Speaker 1: you're getting you know, you're you're selling a product that 142 00:08:54,520 --> 00:08:57,800 Speaker 1: is higher than its market value might be. It does 143 00:08:57,880 --> 00:08:59,679 Speaker 1: he think the route is over? Does he think that 144 00:08:59,679 --> 00:09:03,559 Speaker 1: the unions has further to full or is it? Is 145 00:09:03,600 --> 00:09:08,240 Speaker 1: it stabilizing that well, it's it's tough to know because 146 00:09:08,280 --> 00:09:12,680 Speaker 1: the market is so a liquid that it changes every day. 147 00:09:12,920 --> 00:09:18,280 Speaker 1: Um what's more interesting in the horizon for people like 148 00:09:18,400 --> 00:09:22,400 Speaker 1: Weinstein and UM funds pursuing these kind of bets is 149 00:09:22,480 --> 00:09:28,200 Speaker 1: that the same phenomenon of hedging exposure and that creating 150 00:09:28,240 --> 00:09:31,640 Speaker 1: a lot of demand for CDs is now expanding into 151 00:09:31,679 --> 00:09:35,760 Speaker 1: other industries. So first it was just banks. Now you're 152 00:09:35,800 --> 00:09:40,080 Speaker 1: seeing it in the insurance companies. UH, their CDs is 153 00:09:40,080 --> 00:09:43,880 Speaker 1: being traded very heavily. There's a lot of demand for it, 154 00:09:43,960 --> 00:09:47,360 Speaker 1: and that's because insurance companies themselves have a lot of 155 00:09:47,400 --> 00:09:50,760 Speaker 1: exposure to bank debt. They have that debt on their 156 00:09:50,800 --> 00:09:56,040 Speaker 1: own balance sheets where they manage their assets. And that 157 00:09:56,120 --> 00:09:58,080 Speaker 1: was because it was supposed to be quite safe debt, 158 00:09:58,160 --> 00:10:00,719 Speaker 1: and so that's that's what they to invest in so 159 00:10:00,800 --> 00:10:04,040 Speaker 1: that they have a decent return without a lot of risk. 160 00:10:04,280 --> 00:10:07,480 Speaker 1: But now that it's suddenly become risky, people are betting 161 00:10:07,480 --> 00:10:11,400 Speaker 1: against those insurance companies. Very interesting. So before we talk 162 00:10:11,440 --> 00:10:14,080 Speaker 1: to Spencer Cutter at Bloomberg Intelligence about the energy setor 163 00:10:14,240 --> 00:10:18,520 Speaker 1: what's the next big story to watch here, Eliza, I 164 00:10:18,559 --> 00:10:23,320 Speaker 1: think it might be how the interest in CDs and 165 00:10:23,320 --> 00:10:28,280 Speaker 1: how the rush to hedge or bet against the credit 166 00:10:28,360 --> 00:10:32,800 Speaker 1: of various companies expands even beyond insurance. So does this 167 00:10:32,880 --> 00:10:37,400 Speaker 1: trickle down to a lot of trading activity in other 168 00:10:37,440 --> 00:10:41,920 Speaker 1: CDs indexes or in single name CDs. Thank you, Eliza 169 00:10:42,000 --> 00:10:44,959 Speaker 1: Ronolds Hanon for Bloomberg News, Thanks so much for joining us. 170 00:10:45,600 --> 00:10:47,839 Speaker 1: Thanks we look forward to reading all your scoops on 171 00:10:47,880 --> 00:10:51,480 Speaker 1: the Bloomberg terminal and of course at Bloomberg dot com. So, 172 00:10:51,520 --> 00:10:54,560 Speaker 1: as I said earlier, we're very fortunate to have Spencer 173 00:10:54,600 --> 00:10:57,360 Speaker 1: Cutter here from Bloomberg Intelligence. Thank you very much for 174 00:10:57,440 --> 00:11:01,080 Speaker 1: joining us. Spencer, thanks for having me. The companies that 175 00:11:01,160 --> 00:11:03,600 Speaker 1: you look at, um, you know, I just remember a 176 00:11:03,600 --> 00:11:05,480 Speaker 1: whole well of paying there as well. I mean, we've 177 00:11:05,480 --> 00:11:09,280 Speaker 1: been talking for years about the problems in the energy sector. 178 00:11:09,360 --> 00:11:11,280 Speaker 1: They borrow a way too much money and they can't 179 00:11:11,280 --> 00:11:13,640 Speaker 1: pay it back. How are they affected by what's going 180 00:11:13,679 --> 00:11:15,920 Speaker 1: on in the banking set to what's what's you know, 181 00:11:16,040 --> 00:11:18,360 Speaker 1: roiling them in terms of like the global termoil was 182 00:11:18,360 --> 00:11:21,560 Speaker 1: seeing they are they all falling apart as well? Uh No, 183 00:11:21,720 --> 00:11:24,200 Speaker 1: actually quite to the contrary, and I think some of 184 00:11:24,200 --> 00:11:26,800 Speaker 1: the troubles that we've talked about over the past several 185 00:11:26,880 --> 00:11:30,560 Speaker 1: years have helped put the energy sector into a much 186 00:11:30,640 --> 00:11:34,600 Speaker 1: stronger position today, which could leave them in a really, 187 00:11:35,120 --> 00:11:38,440 Speaker 1: relatively speaking to other sectors, a good position if we 188 00:11:38,520 --> 00:11:43,920 Speaker 1: do see a sort of another financial dislocation or banking crisis. 189 00:11:45,360 --> 00:11:48,520 Speaker 1: We had two waves of bankruptcies in the last five 190 00:11:48,640 --> 00:11:51,360 Speaker 1: or six years, the first one in twenty sixteen when 191 00:11:51,400 --> 00:11:55,120 Speaker 1: oil prices fell below thirty dollars a barrel, and then 192 00:11:55,120 --> 00:11:59,040 Speaker 1: again in twenty twenty when oil basually went to zero briefly, 193 00:11:59,800 --> 00:12:02,760 Speaker 1: and as a product as a result of that, you 194 00:12:02,880 --> 00:12:06,640 Speaker 1: had a lot of the weaker companies wiped out take 195 00:12:06,760 --> 00:12:09,320 Speaker 1: you know, go to bankruptcy, wipe out a bunch of debt, 196 00:12:09,400 --> 00:12:11,959 Speaker 1: and either go away or re emerge with very little 197 00:12:11,960 --> 00:12:15,160 Speaker 1: debt on their balance sheets. And the ones that survived, 198 00:12:15,240 --> 00:12:17,559 Speaker 1: you know, they had a couple of near death experiences 199 00:12:17,640 --> 00:12:20,720 Speaker 1: and they got religion, and they started using free cash 200 00:12:20,720 --> 00:12:23,559 Speaker 1: flow and asset sale proceeds to pay down debt. So 201 00:12:24,520 --> 00:12:27,439 Speaker 1: the overall health of the high yield energy sector, and 202 00:12:27,480 --> 00:12:31,480 Speaker 1: I primarily cover high yield, but this applies to investment 203 00:12:31,480 --> 00:12:33,640 Speaker 1: grade as well. I believe you know, the overall health 204 00:12:33,679 --> 00:12:35,880 Speaker 1: of the sector from a credit standpoint is probably the 205 00:12:35,960 --> 00:12:39,360 Speaker 1: strongest it's been in decades. So you'll see if you're 206 00:12:39,360 --> 00:12:42,040 Speaker 1: trying to tell me that the high yield junk junk 207 00:12:42,160 --> 00:12:46,079 Speaker 1: energy issues are a safe haven in all of this mess, well, 208 00:12:46,120 --> 00:12:48,680 Speaker 1: if you if you want to go back to two 209 00:12:48,720 --> 00:12:50,719 Speaker 1: thousand and eight, and not that we are going to 210 00:12:50,760 --> 00:12:52,679 Speaker 1: have a repeat of two thousand and eight, but that's 211 00:12:52,720 --> 00:12:54,839 Speaker 1: obviously sort of the benchmark that a lot of people 212 00:12:54,920 --> 00:12:59,320 Speaker 1: go by. Oil prices plunged from about one hundred and 213 00:12:59,320 --> 00:13:01,840 Speaker 1: forty five dollars a barrel down to around thirty four, 214 00:13:01,920 --> 00:13:04,840 Speaker 1: and as a result, credit spreads in the energy sector 215 00:13:04,920 --> 00:13:10,520 Speaker 1: did jump by quite a bit. That said, the sector 216 00:13:10,559 --> 00:13:14,120 Speaker 1: then was the spreads were still three hundred, three hundred 217 00:13:14,160 --> 00:13:17,320 Speaker 1: and fifty basis points tighter than the overall market despite 218 00:13:17,360 --> 00:13:21,679 Speaker 1: that sort of dislocation. And one thing to point out 219 00:13:21,760 --> 00:13:25,160 Speaker 1: is in two thousand and eight, the midstream sector was 220 00:13:25,160 --> 00:13:28,480 Speaker 1: actually not part of the Bloomberg high yield Energy Index, 221 00:13:28,600 --> 00:13:30,920 Speaker 1: and I'm looking at the index overall index spreads here, 222 00:13:31,640 --> 00:13:35,280 Speaker 1: and the midstream sector is moved in and I think 223 00:13:35,280 --> 00:13:38,439 Speaker 1: it was twenty fourteen out of utilities, and that's by 224 00:13:38,440 --> 00:13:43,160 Speaker 1: far the safest sector within energy, and so that would 225 00:13:43,200 --> 00:13:46,200 Speaker 1: account if we have another repeat today, I would think 226 00:13:46,240 --> 00:13:50,000 Speaker 1: that would help keep overall energy spreads down. But if 227 00:13:50,080 --> 00:13:55,040 Speaker 1: you look at leverage ratios today and free cash flow 228 00:13:55,080 --> 00:13:58,800 Speaker 1: expectations today, even after we've seen natural gas prices fall 229 00:13:58,840 --> 00:14:01,959 Speaker 1: to two dollars per thousand cubic feet from north and 230 00:14:02,080 --> 00:14:06,959 Speaker 1: nine dollars just in August, you know, the overall the 231 00:14:07,640 --> 00:14:13,480 Speaker 1: top ten high yield independent energy debt issuers, they're expected 232 00:14:13,520 --> 00:14:15,800 Speaker 1: to have an average leverage ratio this year at the 233 00:14:15,880 --> 00:14:17,199 Speaker 1: end of this year of less than one and a 234 00:14:17,240 --> 00:14:20,960 Speaker 1: half times, and all but one of them is expected 235 00:14:21,000 --> 00:14:25,040 Speaker 1: to still generate positive free cash flow. So not to 236 00:14:25,080 --> 00:14:27,520 Speaker 1: say there won't be some dislocation, not to say the 237 00:14:27,600 --> 00:14:30,320 Speaker 1: high yeld energy sector won't suffer somewhat. And I do 238 00:14:30,520 --> 00:14:34,360 Speaker 1: think if if we do have another you know, big 239 00:14:34,520 --> 00:14:40,000 Speaker 1: recession or another financial lending crisis similar to or in 240 00:14:40,040 --> 00:14:42,200 Speaker 1: the spectrum of two thousand and eight, yeah, sure, it's 241 00:14:42,200 --> 00:14:45,480 Speaker 1: gonna it's gonna impact energy, but I do feel like 242 00:14:46,720 --> 00:14:50,000 Speaker 1: the sector's well positioned. And also keep in mind where 243 00:14:50,040 --> 00:14:54,000 Speaker 1: we're coming from and how energy relates to the rest 244 00:14:54,000 --> 00:14:57,359 Speaker 1: of the world today. When you do have a lending crisis, 245 00:14:57,400 --> 00:15:00,760 Speaker 1: a credit crisis, and banks are pulling back, concreditors are 246 00:15:00,760 --> 00:15:04,240 Speaker 1: pulling back, they really start to look for companies that 247 00:15:04,320 --> 00:15:07,720 Speaker 1: have hard assets, that have a long track record of 248 00:15:08,040 --> 00:15:12,320 Speaker 1: generating cash flow that can be monetized. And that's energy. 249 00:15:13,440 --> 00:15:16,600 Speaker 1: You've got that in spades in this sector. So people 250 00:15:16,720 --> 00:15:18,440 Speaker 1: they stay you know, hey, you know, get me out 251 00:15:18,440 --> 00:15:24,720 Speaker 1: of this latest fintech crypto vaporware company and let me 252 00:15:24,760 --> 00:15:27,280 Speaker 1: buy some good old fashioned oil and gas stocks. But 253 00:15:27,440 --> 00:15:29,400 Speaker 1: two things. One thing, you know, you mentioned the drop 254 00:15:29,440 --> 00:15:32,880 Speaker 1: in gas oils drop from one hundred and twenty to seventy. 255 00:15:33,400 --> 00:15:37,360 Speaker 1: Surely that's going to hurt. Yeah, it hurts. And so 256 00:15:37,400 --> 00:15:40,040 Speaker 1: the free cash flow expectations have come down, but for 257 00:15:40,120 --> 00:15:43,440 Speaker 1: most of these companies are still positive. What's happening is 258 00:15:43,480 --> 00:15:47,520 Speaker 1: these companies are not are not ramping up production to 259 00:15:47,560 --> 00:15:51,760 Speaker 1: sort of grab the you know, one hundred dollars plus 260 00:15:51,840 --> 00:15:53,920 Speaker 1: barrel of oil opportunity to either saying I'm I'm going 261 00:15:53,960 --> 00:15:56,720 Speaker 1: to focus on free cash flow and I'm gonna just 262 00:15:56,880 --> 00:15:59,440 Speaker 1: spend as much as I need to spend to maintain production. 263 00:16:00,200 --> 00:16:05,240 Speaker 1: So yes, the falling oil prices will hurt UM, but 264 00:16:05,360 --> 00:16:08,200 Speaker 1: there's still in a really good position where like I said, 265 00:16:08,200 --> 00:16:10,040 Speaker 1: we entered the year this year, I think in the 266 00:16:10,080 --> 00:16:15,520 Speaker 1: strongest position from a credit standpoint in certainly in my memory, 267 00:16:15,720 --> 00:16:18,560 Speaker 1: in many decades. But the other thing, the other thing 268 00:16:18,560 --> 00:16:20,440 Speaker 1: I wanted to raise with the ESP crowd. I mean, 269 00:16:20,520 --> 00:16:22,840 Speaker 1: you're destroying the planet with your fossil fuels. Come on, 270 00:16:25,840 --> 00:16:28,960 Speaker 1: you know, Yeah, there there's a dichotomy there. There's a tuget, 271 00:16:29,200 --> 00:16:34,760 Speaker 1: a push and pull. Um. ESG is certainly something that 272 00:16:34,760 --> 00:16:38,120 Speaker 1: you're hearing a lot about, not only from the broader community, 273 00:16:38,120 --> 00:16:41,400 Speaker 1: but every company I follow talks about it, and they're 274 00:16:41,440 --> 00:16:49,440 Speaker 1: investing heavily in carbon capture and other ESG related ventures. 275 00:16:49,920 --> 00:16:53,480 Speaker 1: You know, pipeline companies may benefit from this quite a 276 00:16:53,480 --> 00:16:56,840 Speaker 1: bit because you had a huge build out of oil 277 00:16:56,880 --> 00:17:01,400 Speaker 1: and natural gas and refined product pipelines. As sale the 278 00:17:01,400 --> 00:17:05,040 Speaker 1: shale boom started, you started seeing more generation production come 279 00:17:05,080 --> 00:17:08,080 Speaker 1: out of West whether it's West Texas or the Marcellus 280 00:17:08,160 --> 00:17:11,159 Speaker 1: up in New England, or the northeast and the backing 281 00:17:11,840 --> 00:17:14,359 Speaker 1: that's been largely built out, and you've seen the backlog 282 00:17:14,560 --> 00:17:17,439 Speaker 1: of projects for the midstream companies come down dramatically, But 283 00:17:17,520 --> 00:17:19,280 Speaker 1: now some of them are starting to come back up 284 00:17:19,320 --> 00:17:21,960 Speaker 1: because all these producers are saying, well, I'm going to 285 00:17:22,040 --> 00:17:25,200 Speaker 1: capture carbon and use it and inject the CO two 286 00:17:25,280 --> 00:17:27,760 Speaker 1: into my well to help stimulate production, and I need 287 00:17:28,240 --> 00:17:31,520 Speaker 1: a CO two pipeline for that, So they're building CO 288 00:17:31,760 --> 00:17:35,480 Speaker 1: two carbon capture pipelines. So, just to drill down into 289 00:17:35,560 --> 00:17:39,680 Speaker 1: one name in particular, Occidental Petroleum, Warren Buffett is buying 290 00:17:40,320 --> 00:17:42,800 Speaker 1: shares in that company. What does that mean for bondholder 291 00:17:42,840 --> 00:17:46,199 Speaker 1: is that's one of the biggest borrowers in our universe 292 00:17:46,200 --> 00:17:49,960 Speaker 1: in terms of US credit markets. Yeah, Occidental is sort 293 00:17:49,960 --> 00:17:53,680 Speaker 1: of the poster child for high yield own gas companies. 294 00:17:53,720 --> 00:17:56,320 Speaker 1: They used to be investment grade and they levered up 295 00:17:56,320 --> 00:18:00,600 Speaker 1: to buy Anadarko that didn't turn out too well. They 296 00:18:00,680 --> 00:18:04,480 Speaker 1: lost their investment grade ratings and oil dropped to zero, 297 00:18:04,560 --> 00:18:06,920 Speaker 1: and everybody thought they might go bankrupt. They've since paid 298 00:18:06,960 --> 00:18:10,040 Speaker 1: off about twenty billion dollars a debt and are on 299 00:18:10,080 --> 00:18:13,880 Speaker 1: the verge of moving back into the Bloomberg high you'ld 300 00:18:14,040 --> 00:18:19,560 Speaker 1: or sorry the Bloomberg Investment Grade Index, and Berkshire Warren 301 00:18:19,600 --> 00:18:22,000 Speaker 1: Buffett obviously is playing a big role there. He lent 302 00:18:22,040 --> 00:18:25,680 Speaker 1: them a lot of money for the Anadarko acquisition, and 303 00:18:25,720 --> 00:18:29,359 Speaker 1: he started buying a dish shares and keeps on buying 304 00:18:29,359 --> 00:18:33,479 Speaker 1: and buying and buying. From a credit standpoint, at some 305 00:18:33,600 --> 00:18:38,640 Speaker 1: point you've got to start thinking, does Oxidental become strategically 306 00:18:38,680 --> 00:18:41,560 Speaker 1: important for Berkshire Hathaway and therefore get some sort of 307 00:18:42,119 --> 00:18:46,680 Speaker 1: implicit credit support. You know, as Berkshire, do they own 308 00:18:46,880 --> 00:18:49,480 Speaker 1: enough stock to have they invested enough in this business 309 00:18:49,560 --> 00:18:53,160 Speaker 1: that if oil prices dropped back down to thirty dollars 310 00:18:53,200 --> 00:18:55,640 Speaker 1: a barrel for an extended period, Well, Berkshire, which has 311 00:18:55,760 --> 00:18:58,119 Speaker 1: billions and billions of cash, say we're not going to 312 00:18:58,200 --> 00:18:59,800 Speaker 1: let this go under. We're going to stand behind them, 313 00:19:00,000 --> 00:19:01,280 Speaker 1: We're going to lend them some money, or we're going 314 00:19:01,320 --> 00:19:03,520 Speaker 1: to inject some capital into this company to help get 315 00:19:03,520 --> 00:19:05,960 Speaker 1: them through this tough point. It's really hard to say 316 00:19:06,000 --> 00:19:11,040 Speaker 1: where that line is crossed. Um. They believe Berkshire owns 317 00:19:11,040 --> 00:19:14,160 Speaker 1: about twenty four percent of Occidental today, They have warrants 318 00:19:14,160 --> 00:19:15,920 Speaker 1: to buy a lot more, and I think they have 319 00:19:15,960 --> 00:19:19,439 Speaker 1: approval to get up to like fifty percent. So you know, 320 00:19:19,520 --> 00:19:22,840 Speaker 1: fifty percent certainly seems like a line in the sand, 321 00:19:22,880 --> 00:19:25,840 Speaker 1: but it may it's a fuzzy area. But that's something 322 00:19:25,840 --> 00:19:29,760 Speaker 1: to consider, is when do you think that this becomes 323 00:19:29,760 --> 00:19:33,000 Speaker 1: a strategically important investment for Berkshire and that they are 324 00:19:33,080 --> 00:19:36,400 Speaker 1: going to back it up and help support Occidental if 325 00:19:36,400 --> 00:19:39,520 Speaker 1: they should run into any sort of credit or financial trouble. 326 00:19:40,560 --> 00:19:45,920 Speaker 1: So overall credit energy sector, the big year for this 327 00:19:46,440 --> 00:19:50,119 Speaker 1: particular pasit of credit is a moment for energy bonds. 328 00:19:52,160 --> 00:19:56,720 Speaker 1: Uh well, energy bonds have they certainly did very well 329 00:19:56,840 --> 00:19:59,879 Speaker 1: the last year, year and a half. And the problem 330 00:20:00,160 --> 00:20:02,240 Speaker 1: run into is there is sort of a floor in 331 00:20:02,320 --> 00:20:05,640 Speaker 1: terms of credit spreads, and I think we hit that 332 00:20:05,680 --> 00:20:12,280 Speaker 1: floor last year. So not to say that spreads half 333 00:20:12,280 --> 00:20:15,000 Speaker 1: to widen. And you've certainly seen credit spreads hold in 334 00:20:16,080 --> 00:20:18,919 Speaker 1: even though oil and natural gas prices have fallen. I 335 00:20:18,920 --> 00:20:21,920 Speaker 1: mean you see credit spreads for natural gas producers like 336 00:20:22,040 --> 00:20:26,040 Speaker 1: Chesapeake Energy and Southwestern they're about the same place today, 337 00:20:26,080 --> 00:20:29,560 Speaker 1: even though natural gas is two dollars per thousand cubic feet. 338 00:20:29,600 --> 00:20:31,600 Speaker 1: Those credit spreads are still the same place today as 339 00:20:31,640 --> 00:20:36,600 Speaker 1: they were back when natural gas was by fifty, so 340 00:20:36,760 --> 00:20:40,280 Speaker 1: people are not hitting the panic button yet. That said, 341 00:20:40,400 --> 00:20:43,000 Speaker 1: if oil goes back to one hundred and natural gas 342 00:20:43,000 --> 00:20:47,960 Speaker 1: goes back to six seven seven dollars, it's hard to 343 00:20:48,000 --> 00:20:52,240 Speaker 1: see that there's a lot of upside just because the upside, 344 00:20:52,280 --> 00:20:55,520 Speaker 1: you know, the windfall from those higher prices, is being 345 00:20:55,560 --> 00:20:59,000 Speaker 1: steered towards shareholders. All the companies have spent the last 346 00:20:59,040 --> 00:21:02,359 Speaker 1: several years using they're free cash flow to pay down debt, 347 00:21:02,359 --> 00:21:04,159 Speaker 1: and now they said, okay, we're kind of done with that, 348 00:21:04,240 --> 00:21:05,800 Speaker 1: and maybe we'll pay down a little bit more, but 349 00:21:05,840 --> 00:21:07,920 Speaker 1: we're really going to start using any free cash flow 350 00:21:08,000 --> 00:21:11,159 Speaker 1: we generate to pay dividends or buy backstock. So for 351 00:21:11,440 --> 00:21:14,600 Speaker 1: from a credit standpoint, there's not a whole lot more 352 00:21:14,680 --> 00:21:19,320 Speaker 1: upside left, but not much downside either. Well, you know, 353 00:21:19,400 --> 00:21:21,480 Speaker 1: there's always some downside in the credit world, and that's 354 00:21:21,480 --> 00:21:25,159 Speaker 1: all we think about as credit analysts. But relative to 355 00:21:25,600 --> 00:21:28,480 Speaker 1: a lot of the other industries out there, I feel 356 00:21:28,640 --> 00:21:31,399 Speaker 1: pretty good like that the high old energy sector is 357 00:21:31,440 --> 00:21:35,040 Speaker 1: pretty well positioned. If we should hit another financial storm 358 00:21:35,040 --> 00:21:38,800 Speaker 1: in the near future, so and unlikely safe haven. Who'd 359 00:21:38,840 --> 00:21:41,399 Speaker 1: have thought we'd be running for cover in junk energy 360 00:21:41,400 --> 00:21:44,480 Speaker 1: bonds but Spencer Cutter from Bloomberg Intelligence, thank you so 361 00:21:44,560 --> 00:21:48,320 Speaker 1: much for joining us. Thank you and do read all 362 00:21:48,359 --> 00:21:51,360 Speaker 1: of Spencer's analysis on the Bloomberg Terminal and I look 363 00:21:51,400 --> 00:21:54,440 Speaker 1: forward to catching up again very soon. Thanks again also 364 00:21:54,520 --> 00:21:57,199 Speaker 1: to Eliza ronalds Hannon from Bloomberg News. Read all of 365 00:21:57,240 --> 00:21:59,600 Speaker 1: her scoops on the Terminal and at Bloomberg dot Com. 366 00:21:59,600 --> 00:22:01,880 Speaker 1: Definitely important to keep an eye on the distressed debt 367 00:22:02,080 --> 00:22:04,440 Speaker 1: story right now, no matter what part of the market 368 00:22:04,480 --> 00:22:06,720 Speaker 1: you're in, and Eliza and her team will continue to 369 00:22:06,720 --> 00:22:09,159 Speaker 1: break a lot of news in that market over the 370 00:22:09,240 --> 00:22:13,080 Speaker 1: coming months and weeks. I'm James Bromby. It's been a 371 00:22:13,119 --> 00:22:22,000 Speaker 1: pleasure having you. See you next week on Credit Edge.