WEBVTT - Corporate Distress Spreads; Energy Junk Is a Haven 0:00:18.400 --> 0:00:21.800 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:21.960 --> 0:00:24.680 My name is James Crombie. I'm a senior editor at Bloomberg. 0:00:25.280 --> 0:00:28.920 Today's guests are Eliza Ronaldshannon, who covers distressed debt and 0:00:28.960 --> 0:00:32.000 bankruptcy for Bloomberg News in Atlanta. We're delighted to have 0:00:32.040 --> 0:00:35.280 you on the show. Good to be here. We're also 0:00:35.400 --> 0:00:38.080 very pleased to welcome Spencer Cutter, who covers energy for 0:00:38.159 --> 0:00:43.280 Bloomberg Intelligence in Seattle. Thanks for having me on. Companies 0:00:43.320 --> 0:00:45.559 in the energy sector are highly exposed to the tightening 0:00:45.560 --> 0:00:48.519 in financial conditions that's happening as we speak. We'll be 0:00:48.560 --> 0:00:50.840 getting his insight a bit later on in the show, 0:00:51.920 --> 0:00:56.200 but before we do. Eliza Ronaldshannon, with Bloomberg News, you've 0:00:56.240 --> 0:00:59.120 been all over the biggest distressed debt stories for as 0:00:59.120 --> 0:01:02.360 long as I can remember. How is the global banking 0:01:02.400 --> 0:01:07.479 crisis affecting the troubled companies that you cover well so far? 0:01:07.800 --> 0:01:10.240 It's it's interesting. It's a bit of a double edged sword. 0:01:10.319 --> 0:01:14.119 On one hand, these companies have already been creeping into 0:01:14.560 --> 0:01:18.800 further tightness in terms of their ability to obtain new financing. 0:01:18.920 --> 0:01:23.080 The rise in rates has been increasing the amount of 0:01:23.120 --> 0:01:26.600 distress that that's out there really reducing their options in 0:01:26.680 --> 0:01:31.960 terms of financing themselves. So that has meant a lot 0:01:31.959 --> 0:01:37.559 of turning to you know, private debt funding, these specialized 0:01:37.640 --> 0:01:39.960 firms that will lend to them at quite high rates, 0:01:40.000 --> 0:01:44.040 which creates only a snowball effect of further burden on 0:01:44.080 --> 0:01:47.680 the companies. But the interesting side of this is that 0:01:48.560 --> 0:01:51.120 it's possible, you know, given that the backdrop is already 0:01:52.120 --> 0:01:54.720 tough and one of you know, the outlook being a 0:01:54.760 --> 0:01:58.800 lot of more distressed now that things have reached a 0:01:58.840 --> 0:02:02.240 real crescendo in one regard, a lot of a lot 0:02:02.280 --> 0:02:05.840 of market participants are hopeful that this will slow down 0:02:05.880 --> 0:02:09.920 the fed's rate hikes, in which case the struggling and 0:02:09.960 --> 0:02:13.919 the and the overindebted companies will benefit. So can I 0:02:13.919 --> 0:02:15.600 ask you about the funding cust I mean, they have 0:02:15.680 --> 0:02:17.600 increased across the board. But but if you're going to 0:02:17.720 --> 0:02:21.120 the private market, how much more are you're gonna have 0:02:21.120 --> 0:02:25.720 to pay? You're gonna have to pay? I mean, it's 0:02:25.720 --> 0:02:30.519 interesting because you're it's it's more about it's it's it's 0:02:30.560 --> 0:02:32.840 like you're gonna have to pay more. But it's more 0:02:32.880 --> 0:02:35.480 than the option being nothing at all. So I mean 0:02:35.520 --> 0:02:38.920 it'll be at three percentage points more in terms of 0:02:38.960 --> 0:02:42.960 the yield on a loan um. We're looking at some 0:02:43.000 --> 0:02:46.000 of the loans that we see recently in for instance, 0:02:46.040 --> 0:02:51.359 bankruptcy financing, which is only one step beyond um distressed financing. 0:02:51.440 --> 0:02:55.240 Some of these loans are going for fifteen percent um. 0:02:55.320 --> 0:02:58.000 I think there was one company that recently took out 0:02:58.040 --> 0:03:03.000 a small loan at twenty percent to avoid bankruptcy. So 0:03:03.639 --> 0:03:07.760 that becomes a really onerous It doesn't sound sustainable to me. 0:03:07.800 --> 0:03:10.119 I mean, these companies just running themselves like they're giving 0:03:10.160 --> 0:03:14.080 themselves short term lifelines, but they're not long term sustainable, 0:03:14.080 --> 0:03:17.200 are they right. It's a lot of short term lifelines. 0:03:17.320 --> 0:03:21.160 It's a lot of the companies hoping and praying that 0:03:21.200 --> 0:03:26.119 they will have a experience an operational turnaround in the meantime. 0:03:26.200 --> 0:03:29.320 So sometimes these will be pretty short term loans and 0:03:29.320 --> 0:03:32.240 they're thinking, our whole business model is going to be 0:03:32.800 --> 0:03:35.400 different and amazing in two years, so if we can 0:03:35.480 --> 0:03:40.560 only get through this tough time will be smooth sailing. 0:03:40.600 --> 0:03:44.200 And of course sometimes that is true. Sometimes they need 0:03:44.240 --> 0:03:46.960 to take on you know, you have to kind of 0:03:46.960 --> 0:03:49.520 dig yourself out of the hole and that means throwing 0:03:49.760 --> 0:03:52.440 good money after bad but it can work out in 0:03:52.480 --> 0:03:55.440 the end. It's hard to know in the moment which 0:03:55.760 --> 0:03:58.200 outcome you're going to have. But of course for executives 0:03:58.200 --> 0:04:00.880 that are in the positions, better to buy some time 0:04:00.880 --> 0:04:03.760 and not have to be the one who sank the ship. Yeah, 0:04:03.840 --> 0:04:06.200 absolutely right, So you talked about the double edged sword. 0:04:06.280 --> 0:04:08.880 Rates are going up, but that you know also at 0:04:08.920 --> 0:04:11.880 the same time, because the banking crisis, the FED may 0:04:11.920 --> 0:04:14.960 have to take its foot off the accelerator. But that's 0:04:15.000 --> 0:04:17.240 not good for these companies, right, If the economy is 0:04:17.279 --> 0:04:21.000 getting worse, right, that's net worse for them for you know, 0:04:21.320 --> 0:04:25.480 more distress, Right, it is, it's net worse for them, certainly. 0:04:25.600 --> 0:04:29.120 I mean, the the hope is that it will at 0:04:29.200 --> 0:04:34.040 least tame inflation. So the the real entrenched fear is 0:04:34.160 --> 0:04:40.680 for a stagflation a sustains stagflation situation where inflation is 0:04:40.760 --> 0:04:46.320 high and even a recession doesn't um tame it. So 0:04:46.720 --> 0:04:50.200 to some extent, you know, people are hopeful, I mean, 0:04:50.320 --> 0:04:53.839 the markets are, especially for high yield debt or always 0:04:54.320 --> 0:04:58.800 suspiciously hopeful about everything. But um, you know, it's it's 0:04:58.800 --> 0:05:02.360 a little bit of a this might hasten the cycle 0:05:02.440 --> 0:05:04.600 and at least let us come back out of it 0:05:04.640 --> 0:05:08.080 a little faster, but it's not good for corporate growth 0:05:08.200 --> 0:05:11.960 and it's not good for the company's actual operational outlook. 0:05:12.120 --> 0:05:14.880 There any particular sectors that are in trouble companies specifically, 0:05:16.480 --> 0:05:20.799 it's really not a sector specific at this point. The companies, 0:05:20.880 --> 0:05:22.800 it's just going to be the companies that have had 0:05:22.800 --> 0:05:26.160 to or had to or have just taken on a 0:05:26.160 --> 0:05:29.320 lot of debt in order to finance themselves, you know, 0:05:29.400 --> 0:05:32.560 in sunnier times when rates were really low. So that's 0:05:32.560 --> 0:05:34.920 going to be a lot of private equity owned companies 0:05:34.960 --> 0:05:39.520 that were acquired through leveraged buyouts. It also can be 0:05:39.560 --> 0:05:42.599 companies like Carvana, which is not private equity owned, but 0:05:42.640 --> 0:05:46.080 it took on almost five billion dollars worth of debt 0:05:46.160 --> 0:05:52.919 during the pandemic in order to fuel its massive growth goals. 0:05:53.040 --> 0:05:56.200 And now it was one of those companies that didn't 0:05:56.240 --> 0:05:59.240 have a lot of revenue or it wasn't profitable at 0:05:59.240 --> 0:06:02.360 the time, And of course that's you know, not unheard 0:06:02.360 --> 0:06:05.880 of for a company to really focus on growth over profits. 0:06:05.960 --> 0:06:09.760 But the worst case scenario is for that that era 0:06:09.839 --> 0:06:15.360 to lead into an environment where there's no turning back 0:06:15.400 --> 0:06:18.080 and you have really put a lot of burden on 0:06:18.120 --> 0:06:20.760 the company, and the economy is not in a place 0:06:20.760 --> 0:06:23.839 where it will become profitable. So it just sounds like 0:06:23.839 --> 0:06:26.000 a really depressing outic I'm to see on the credit guy, 0:06:26.000 --> 0:06:28.080 so I'm always looking on the dark side. But in 0:06:28.160 --> 0:06:30.799 terms of like the the actual trade, somebody is making 0:06:30.839 --> 0:06:33.839 money here right now. Everyone is unhappy. So who's who's 0:06:33.920 --> 0:06:36.400 who's rolling in the in the big bus on someone 0:06:36.440 --> 0:06:40.960 else's paying here. Well, one place you're seeing funds try 0:06:41.040 --> 0:06:44.400 to make money, and it's a little bit too soon 0:06:44.600 --> 0:06:47.840 to know who's really going to cash out on some 0:06:47.880 --> 0:06:51.080 of these bets because they involve products that you know 0:06:51.880 --> 0:06:55.560 don't immediately turn over. But um, there's a lot of 0:06:55.600 --> 0:06:59.400 activity relatively speaking, in the market for credit default swaps, 0:06:59.640 --> 0:07:04.359 and that is a product that allows investors to bet 0:07:04.400 --> 0:07:10.600 against companies, and so that became a snowball issue during 0:07:10.600 --> 0:07:13.040 the financial crisis. But there's a lot more regulation involved 0:07:13.080 --> 0:07:16.800 now and the markets are smaller, But that is one 0:07:16.800 --> 0:07:21.400 place where hedge funds and particularly macro funds can kind 0:07:21.400 --> 0:07:25.040 of pile onto the negative sentiment and they can bet 0:07:25.080 --> 0:07:30.080 against companies where the market psychology seems to already be 0:07:30.320 --> 0:07:34.240 that everyone is in fear and there's a little bit 0:07:34.280 --> 0:07:37.400 of panic going on, and then once those bets are 0:07:37.680 --> 0:07:43.680 noticed and recorded, it exacerbates things often. So that's one 0:07:43.680 --> 0:07:46.440 place where there will be profits taken. You talked to 0:07:46.480 --> 0:07:48.520 one of the biggest guys that you know. He makes 0:07:48.600 --> 0:07:51.200 his money at moments like this, Bill as Weinstein. He 0:07:52.000 --> 0:07:54.640 always catches in at this point. He smells blood in 0:07:54.640 --> 0:07:59.240 the water. What's what's his view now on the bank bonds? Well, 0:07:59.320 --> 0:08:02.560 he is he saw the displacement in the market. He 0:08:02.800 --> 0:08:06.520 thought that the um and thinks still that there's a 0:08:06.520 --> 0:08:10.160 little bit too much selling and that there's been some 0:08:10.200 --> 0:08:13.240 forced selling on the part of counterparties, you know, other 0:08:13.320 --> 0:08:17.040 banks that need to just effectively manage their risk and 0:08:17.120 --> 0:08:21.520 just our buying protection in a way to hedge their 0:08:21.520 --> 0:08:27.200 exposure and just stay within some reasonable limits in terms 0:08:27.200 --> 0:08:31.360 of their the risk that's on their books. Um So, 0:08:32.160 --> 0:08:35.120 the demand surging when and when a bunch of banks 0:08:35.160 --> 0:08:38.880 have to do that at the same time, gives sellers 0:08:38.880 --> 0:08:42.400 of CDs, which could be any any fund or that 0:08:42.400 --> 0:08:44.560 that decides to write up a contract they can really 0:08:44.559 --> 0:08:49.320 sell them at over Arguably inflated prices, and so then 0:08:50.240 --> 0:08:54.360 you're getting you know, you're you're selling a product that 0:08:54.520 --> 0:08:57.800 is higher than its market value might be. It does 0:08:57.880 --> 0:08:59.679 he think the route is over? Does he think that 0:08:59.679 --> 0:09:03.559 the unions has further to full or is it? Is 0:09:03.600 --> 0:09:08.240 it stabilizing that well, it's it's tough to know because 0:09:08.280 --> 0:09:12.680 the market is so a liquid that it changes every day. 0:09:12.920 --> 0:09:18.280 Um what's more interesting in the horizon for people like 0:09:18.400 --> 0:09:22.400 Weinstein and UM funds pursuing these kind of bets is 0:09:22.480 --> 0:09:28.200 that the same phenomenon of hedging exposure and that creating 0:09:28.240 --> 0:09:31.640 a lot of demand for CDs is now expanding into 0:09:31.679 --> 0:09:35.760 other industries. So first it was just banks. Now you're 0:09:35.800 --> 0:09:40.080 seeing it in the insurance companies. UH, their CDs is 0:09:40.080 --> 0:09:43.880 being traded very heavily. There's a lot of demand for it, 0:09:43.960 --> 0:09:47.360 and that's because insurance companies themselves have a lot of 0:09:47.400 --> 0:09:50.760 exposure to bank debt. They have that debt on their 0:09:50.800 --> 0:09:56.040 own balance sheets where they manage their assets. And that 0:09:56.120 --> 0:09:58.080 was because it was supposed to be quite safe debt, 0:09:58.160 --> 0:10:00.719 and so that's that's what they to invest in so 0:10:00.800 --> 0:10:04.040 that they have a decent return without a lot of risk. 0:10:04.280 --> 0:10:07.480 But now that it's suddenly become risky, people are betting 0:10:07.480 --> 0:10:11.400 against those insurance companies. Very interesting. So before we talk 0:10:11.440 --> 0:10:14.080 to Spencer Cutter at Bloomberg Intelligence about the energy setor 0:10:14.240 --> 0:10:18.520 what's the next big story to watch here, Eliza, I 0:10:18.559 --> 0:10:23.320 think it might be how the interest in CDs and 0:10:23.320 --> 0:10:28.280 how the rush to hedge or bet against the credit 0:10:28.360 --> 0:10:32.800 of various companies expands even beyond insurance. So does this 0:10:32.880 --> 0:10:37.400 trickle down to a lot of trading activity in other 0:10:37.440 --> 0:10:41.920 CDs indexes or in single name CDs. Thank you, Eliza 0:10:42.000 --> 0:10:44.959 Ronolds Hanon for Bloomberg News, Thanks so much for joining us. 0:10:45.600 --> 0:10:47.839 Thanks we look forward to reading all your scoops on 0:10:47.880 --> 0:10:51.480 the Bloomberg terminal and of course at Bloomberg dot com. So, 0:10:51.520 --> 0:10:54.560 as I said earlier, we're very fortunate to have Spencer 0:10:54.600 --> 0:10:57.360 Cutter here from Bloomberg Intelligence. Thank you very much for 0:10:57.440 --> 0:11:01.080 joining us. Spencer, thanks for having me. The companies that 0:11:01.160 --> 0:11:03.600 you look at, um, you know, I just remember a 0:11:03.600 --> 0:11:05.480 whole well of paying there as well. I mean, we've 0:11:05.480 --> 0:11:09.280 been talking for years about the problems in the energy sector. 0:11:09.360 --> 0:11:11.280 They borrow a way too much money and they can't 0:11:11.280 --> 0:11:13.640 pay it back. How are they affected by what's going 0:11:13.679 --> 0:11:15.920 on in the banking set to what's what's you know, 0:11:16.040 --> 0:11:18.360 roiling them in terms of like the global termoil was 0:11:18.360 --> 0:11:21.560 seeing they are they all falling apart as well? Uh No, 0:11:21.720 --> 0:11:24.200 actually quite to the contrary, and I think some of 0:11:24.200 --> 0:11:26.800 the troubles that we've talked about over the past several 0:11:26.880 --> 0:11:30.560 years have helped put the energy sector into a much 0:11:30.640 --> 0:11:34.600 stronger position today, which could leave them in a really, 0:11:35.120 --> 0:11:38.440 relatively speaking to other sectors, a good position if we 0:11:38.520 --> 0:11:43.920 do see a sort of another financial dislocation or banking crisis. 0:11:45.360 --> 0:11:48.520 We had two waves of bankruptcies in the last five 0:11:48.640 --> 0:11:51.360 or six years, the first one in twenty sixteen when 0:11:51.400 --> 0:11:55.120 oil prices fell below thirty dollars a barrel, and then 0:11:55.120 --> 0:11:59.040 again in twenty twenty when oil basually went to zero briefly, 0:11:59.800 --> 0:12:02.760 and as a product as a result of that, you 0:12:02.880 --> 0:12:06.640 had a lot of the weaker companies wiped out take 0:12:06.760 --> 0:12:09.320 you know, go to bankruptcy, wipe out a bunch of debt, 0:12:09.400 --> 0:12:11.959 and either go away or re emerge with very little 0:12:11.960 --> 0:12:15.160 debt on their balance sheets. And the ones that survived, 0:12:15.240 --> 0:12:17.559 you know, they had a couple of near death experiences 0:12:17.640 --> 0:12:20.720 and they got religion, and they started using free cash 0:12:20.720 --> 0:12:23.559 flow and asset sale proceeds to pay down debt. So 0:12:24.520 --> 0:12:27.439 the overall health of the high yield energy sector, and 0:12:27.480 --> 0:12:31.480 I primarily cover high yield, but this applies to investment 0:12:31.480 --> 0:12:33.640 grade as well. I believe you know, the overall health 0:12:33.679 --> 0:12:35.880 of the sector from a credit standpoint is probably the 0:12:35.960 --> 0:12:39.360 strongest it's been in decades. So you'll see if you're 0:12:39.360 --> 0:12:42.040 trying to tell me that the high yield junk junk 0:12:42.160 --> 0:12:46.079 energy issues are a safe haven in all of this mess, well, 0:12:46.120 --> 0:12:48.680 if you if you want to go back to two 0:12:48.720 --> 0:12:50.719 thousand and eight, and not that we are going to 0:12:50.760 --> 0:12:52.679 have a repeat of two thousand and eight, but that's 0:12:52.720 --> 0:12:54.839 obviously sort of the benchmark that a lot of people 0:12:54.920 --> 0:12:59.320 go by. Oil prices plunged from about one hundred and 0:12:59.320 --> 0:13:01.840 forty five dollars a barrel down to around thirty four, 0:13:01.920 --> 0:13:04.840 and as a result, credit spreads in the energy sector 0:13:04.920 --> 0:13:10.520 did jump by quite a bit. That said, the sector 0:13:10.559 --> 0:13:14.120 then was the spreads were still three hundred, three hundred 0:13:14.160 --> 0:13:17.320 and fifty basis points tighter than the overall market despite 0:13:17.360 --> 0:13:21.679 that sort of dislocation. And one thing to point out 0:13:21.760 --> 0:13:25.160 is in two thousand and eight, the midstream sector was 0:13:25.160 --> 0:13:28.480 actually not part of the Bloomberg high yield Energy Index, 0:13:28.600 --> 0:13:30.920 and I'm looking at the index overall index spreads here, 0:13:31.640 --> 0:13:35.280 and the midstream sector is moved in and I think 0:13:35.280 --> 0:13:38.439 it was twenty fourteen out of utilities, and that's by 0:13:38.440 --> 0:13:43.160 far the safest sector within energy, and so that would 0:13:43.200 --> 0:13:46.200 account if we have another repeat today, I would think 0:13:46.240 --> 0:13:50.000 that would help keep overall energy spreads down. But if 0:13:50.080 --> 0:13:55.040 you look at leverage ratios today and free cash flow 0:13:55.080 --> 0:13:58.800 expectations today, even after we've seen natural gas prices fall 0:13:58.840 --> 0:14:01.959 to two dollars per thousand cubic feet from north and 0:14:02.080 --> 0:14:06.959 nine dollars just in August, you know, the overall the 0:14:07.640 --> 0:14:13.480 top ten high yield independent energy debt issuers, they're expected 0:14:13.520 --> 0:14:15.800 to have an average leverage ratio this year at the 0:14:15.880 --> 0:14:17.199 end of this year of less than one and a 0:14:17.240 --> 0:14:20.960 half times, and all but one of them is expected 0:14:21.000 --> 0:14:25.040 to still generate positive free cash flow. So not to 0:14:25.080 --> 0:14:27.520 say there won't be some dislocation, not to say the 0:14:27.600 --> 0:14:30.320 high yeld energy sector won't suffer somewhat. And I do 0:14:30.520 --> 0:14:34.360 think if if we do have another you know, big 0:14:34.520 --> 0:14:40.000 recession or another financial lending crisis similar to or in 0:14:40.040 --> 0:14:42.200 the spectrum of two thousand and eight, yeah, sure, it's 0:14:42.200 --> 0:14:45.480 gonna it's gonna impact energy, but I do feel like 0:14:46.720 --> 0:14:50.000 the sector's well positioned. And also keep in mind where 0:14:50.040 --> 0:14:54.000 we're coming from and how energy relates to the rest 0:14:54.000 --> 0:14:57.359 of the world today. When you do have a lending crisis, 0:14:57.400 --> 0:15:00.760 a credit crisis, and banks are pulling back, concreditors are 0:15:00.760 --> 0:15:04.240 pulling back, they really start to look for companies that 0:15:04.320 --> 0:15:07.720 have hard assets, that have a long track record of 0:15:08.040 --> 0:15:12.320 generating cash flow that can be monetized. And that's energy. 0:15:13.440 --> 0:15:16.600 You've got that in spades in this sector. So people 0:15:16.720 --> 0:15:18.440 they stay you know, hey, you know, get me out 0:15:18.440 --> 0:15:24.720 of this latest fintech crypto vaporware company and let me 0:15:24.760 --> 0:15:27.280 buy some good old fashioned oil and gas stocks. But 0:15:27.440 --> 0:15:29.400 two things. One thing, you know, you mentioned the drop 0:15:29.440 --> 0:15:32.880 in gas oils drop from one hundred and twenty to seventy. 0:15:33.400 --> 0:15:37.360 Surely that's going to hurt. Yeah, it hurts. And so 0:15:37.400 --> 0:15:40.040 the free cash flow expectations have come down, but for 0:15:40.120 --> 0:15:43.440 most of these companies are still positive. What's happening is 0:15:43.480 --> 0:15:47.520 these companies are not are not ramping up production to 0:15:47.560 --> 0:15:51.760 sort of grab the you know, one hundred dollars plus 0:15:51.840 --> 0:15:53.920 barrel of oil opportunity to either saying I'm I'm going 0:15:53.960 --> 0:15:56.720 to focus on free cash flow and I'm gonna just 0:15:56.880 --> 0:15:59.440 spend as much as I need to spend to maintain production. 0:16:00.200 --> 0:16:05.240 So yes, the falling oil prices will hurt UM, but 0:16:05.360 --> 0:16:08.200 there's still in a really good position where like I said, 0:16:08.200 --> 0:16:10.040 we entered the year this year, I think in the 0:16:10.080 --> 0:16:15.520 strongest position from a credit standpoint in certainly in my memory, 0:16:15.720 --> 0:16:18.560 in many decades. But the other thing, the other thing 0:16:18.560 --> 0:16:20.440 I wanted to raise with the ESP crowd. I mean, 0:16:20.520 --> 0:16:22.840 you're destroying the planet with your fossil fuels. Come on, 0:16:25.840 --> 0:16:28.960 you know, Yeah, there there's a dichotomy there. There's a tuget, 0:16:29.200 --> 0:16:34.760 a push and pull. Um. ESG is certainly something that 0:16:34.760 --> 0:16:38.120 you're hearing a lot about, not only from the broader community, 0:16:38.120 --> 0:16:41.400 but every company I follow talks about it, and they're 0:16:41.440 --> 0:16:49.440 investing heavily in carbon capture and other ESG related ventures. 0:16:49.920 --> 0:16:53.480 You know, pipeline companies may benefit from this quite a 0:16:53.480 --> 0:16:56.840 bit because you had a huge build out of oil 0:16:56.880 --> 0:17:01.400 and natural gas and refined product pipelines. As sale the 0:17:01.400 --> 0:17:05.040 shale boom started, you started seeing more generation production come 0:17:05.080 --> 0:17:08.080 out of West whether it's West Texas or the Marcellus 0:17:08.160 --> 0:17:11.159 up in New England, or the northeast and the backing 0:17:11.840 --> 0:17:14.359 that's been largely built out, and you've seen the backlog 0:17:14.560 --> 0:17:17.439 of projects for the midstream companies come down dramatically, But 0:17:17.520 --> 0:17:19.280 now some of them are starting to come back up 0:17:19.320 --> 0:17:21.960 because all these producers are saying, well, I'm going to 0:17:22.040 --> 0:17:25.200 capture carbon and use it and inject the CO two 0:17:25.280 --> 0:17:27.760 into my well to help stimulate production, and I need 0:17:28.240 --> 0:17:31.520 a CO two pipeline for that, So they're building CO 0:17:31.760 --> 0:17:35.480 two carbon capture pipelines. So, just to drill down into 0:17:35.560 --> 0:17:39.680 one name in particular, Occidental Petroleum, Warren Buffett is buying 0:17:40.320 --> 0:17:42.800 shares in that company. What does that mean for bondholder 0:17:42.840 --> 0:17:46.199 is that's one of the biggest borrowers in our universe 0:17:46.200 --> 0:17:49.960 in terms of US credit markets. Yeah, Occidental is sort 0:17:49.960 --> 0:17:53.680 of the poster child for high yield own gas companies. 0:17:53.720 --> 0:17:56.320 They used to be investment grade and they levered up 0:17:56.320 --> 0:18:00.600 to buy Anadarko that didn't turn out too well. They 0:18:00.680 --> 0:18:04.480 lost their investment grade ratings and oil dropped to zero, 0:18:04.560 --> 0:18:06.920 and everybody thought they might go bankrupt. They've since paid 0:18:06.960 --> 0:18:10.040 off about twenty billion dollars a debt and are on 0:18:10.080 --> 0:18:13.880 the verge of moving back into the Bloomberg high you'ld 0:18:14.040 --> 0:18:19.560 or sorry the Bloomberg Investment Grade Index, and Berkshire Warren 0:18:19.600 --> 0:18:22.000 Buffett obviously is playing a big role there. He lent 0:18:22.040 --> 0:18:25.680 them a lot of money for the Anadarko acquisition, and 0:18:25.720 --> 0:18:29.359 he started buying a dish shares and keeps on buying 0:18:29.359 --> 0:18:33.479 and buying and buying. From a credit standpoint, at some 0:18:33.600 --> 0:18:38.640 point you've got to start thinking, does Oxidental become strategically 0:18:38.680 --> 0:18:41.560 important for Berkshire Hathaway and therefore get some sort of 0:18:42.119 --> 0:18:46.680 implicit credit support. You know, as Berkshire, do they own 0:18:46.880 --> 0:18:49.480 enough stock to have they invested enough in this business 0:18:49.560 --> 0:18:53.160 that if oil prices dropped back down to thirty dollars 0:18:53.200 --> 0:18:55.640 a barrel for an extended period, Well, Berkshire, which has 0:18:55.760 --> 0:18:58.119 billions and billions of cash, say we're not going to 0:18:58.200 --> 0:18:59.800 let this go under. We're going to stand behind them, 0:19:00.000 --> 0:19:01.280 We're going to lend them some money, or we're going 0:19:01.320 --> 0:19:03.520 to inject some capital into this company to help get 0:19:03.520 --> 0:19:05.960 them through this tough point. It's really hard to say 0:19:06.000 --> 0:19:11.040 where that line is crossed. Um. They believe Berkshire owns 0:19:11.040 --> 0:19:14.160 about twenty four percent of Occidental today, They have warrants 0:19:14.160 --> 0:19:15.920 to buy a lot more, and I think they have 0:19:15.960 --> 0:19:19.439 approval to get up to like fifty percent. So you know, 0:19:19.520 --> 0:19:22.840 fifty percent certainly seems like a line in the sand, 0:19:22.880 --> 0:19:25.840 but it may it's a fuzzy area. But that's something 0:19:25.840 --> 0:19:29.760 to consider, is when do you think that this becomes 0:19:29.760 --> 0:19:33.000 a strategically important investment for Berkshire and that they are 0:19:33.080 --> 0:19:36.400 going to back it up and help support Occidental if 0:19:36.400 --> 0:19:39.520 they should run into any sort of credit or financial trouble. 0:19:40.560 --> 0:19:45.920 So overall credit energy sector, the big year for this 0:19:46.440 --> 0:19:50.119 particular pasit of credit is a moment for energy bonds. 0:19:52.160 --> 0:19:56.720 Uh well, energy bonds have they certainly did very well 0:19:56.840 --> 0:19:59.879 the last year, year and a half. And the problem 0:20:00.160 --> 0:20:02.240 run into is there is sort of a floor in 0:20:02.320 --> 0:20:05.640 terms of credit spreads, and I think we hit that 0:20:05.680 --> 0:20:12.280 floor last year. So not to say that spreads half 0:20:12.280 --> 0:20:15.000 to widen. And you've certainly seen credit spreads hold in 0:20:16.080 --> 0:20:18.919 even though oil and natural gas prices have fallen. I 0:20:18.920 --> 0:20:21.920 mean you see credit spreads for natural gas producers like 0:20:22.040 --> 0:20:26.040 Chesapeake Energy and Southwestern they're about the same place today, 0:20:26.080 --> 0:20:29.560 even though natural gas is two dollars per thousand cubic feet. 0:20:29.600 --> 0:20:31.600 Those credit spreads are still the same place today as 0:20:31.640 --> 0:20:36.600 they were back when natural gas was by fifty, so 0:20:36.760 --> 0:20:40.280 people are not hitting the panic button yet. That said, 0:20:40.400 --> 0:20:43.000 if oil goes back to one hundred and natural gas 0:20:43.000 --> 0:20:47.960 goes back to six seven seven dollars, it's hard to 0:20:48.000 --> 0:20:52.240 see that there's a lot of upside just because the upside, 0:20:52.280 --> 0:20:55.520 you know, the windfall from those higher prices, is being 0:20:55.560 --> 0:20:59.000 steered towards shareholders. All the companies have spent the last 0:20:59.040 --> 0:21:02.359 several years using they're free cash flow to pay down debt, 0:21:02.359 --> 0:21:04.159 and now they said, okay, we're kind of done with that, 0:21:04.240 --> 0:21:05.800 and maybe we'll pay down a little bit more, but 0:21:05.840 --> 0:21:07.920 we're really going to start using any free cash flow 0:21:08.000 --> 0:21:11.159 we generate to pay dividends or buy backstock. So for 0:21:11.440 --> 0:21:14.600 from a credit standpoint, there's not a whole lot more 0:21:14.680 --> 0:21:19.320 upside left, but not much downside either. Well, you know, 0:21:19.400 --> 0:21:21.480 there's always some downside in the credit world, and that's 0:21:21.480 --> 0:21:25.159 all we think about as credit analysts. But relative to 0:21:25.600 --> 0:21:28.480 a lot of the other industries out there, I feel 0:21:28.640 --> 0:21:31.399 pretty good like that the high old energy sector is 0:21:31.440 --> 0:21:35.040 pretty well positioned. If we should hit another financial storm 0:21:35.040 --> 0:21:38.800 in the near future, so and unlikely safe haven. Who'd 0:21:38.840 --> 0:21:41.399 have thought we'd be running for cover in junk energy 0:21:41.400 --> 0:21:44.480 bonds but Spencer Cutter from Bloomberg Intelligence, thank you so 0:21:44.560 --> 0:21:48.320 much for joining us. Thank you and do read all 0:21:48.359 --> 0:21:51.360 of Spencer's analysis on the Bloomberg Terminal and I look 0:21:51.400 --> 0:21:54.440 forward to catching up again very soon. Thanks again also 0:21:54.520 --> 0:21:57.199 to Eliza ronalds Hannon from Bloomberg News. Read all of 0:21:57.240 --> 0:21:59.600 her scoops on the Terminal and at Bloomberg dot Com. 0:21:59.600 --> 0:22:01.880 Definitely important to keep an eye on the distressed debt 0:22:02.080 --> 0:22:04.440 story right now, no matter what part of the market 0:22:04.480 --> 0:22:06.720 you're in, and Eliza and her team will continue to 0:22:06.720 --> 0:22:09.159 break a lot of news in that market over the 0:22:09.240 --> 0:22:13.080 coming months and weeks. I'm James Bromby. It's been a 0:22:13.119 --> 0:22:22.000 pleasure having you. See you next week on Credit Edge.