WEBVTT - Bankruptcy Wave Has Only Just Begun; Utility Refuge 0:00:13.320 --> 0:00:16.240 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:16.640 --> 0:00:19.160 My name is James Crombie. I'm a senior editor at Bloomberg. 0:00:19.640 --> 0:00:22.639 Today's guests are Jeremy Hill, who reports on distressed debt 0:00:22.640 --> 0:00:24.959 for Bloomberg News in New York. We're delighted to have 0:00:25.000 --> 0:00:25.560 you on the show. 0:00:26.360 --> 0:00:27.440 Hi, thanks for having me. 0:00:27.640 --> 0:00:30.240 We're also very pleased to welcome back Jamin Patel, who 0:00:30.240 --> 0:00:32.320 covers utilities for Bloomberg Intelligence. 0:00:32.479 --> 0:00:33.440 Good to join, James. 0:00:33.720 --> 0:00:36.120 We'll be coming back to Jamin shortly. Lost of exciting 0:00:36.120 --> 0:00:38.280 stuff going on in the utility sector, so do stay 0:00:38.280 --> 0:00:42.959 with us. But first, Jeremy Hill, with Bloomberg News, you've 0:00:42.960 --> 0:00:46.159 been digging deep into distressed debt and bankruptcy. We've had 0:00:46.200 --> 0:00:48.800 the pleasure of working together on that for years. A 0:00:48.800 --> 0:00:50.720 lot of companies are running into trouble at the moment, 0:00:50.760 --> 0:00:53.960 with interest rates rising and the economy slowing, potentially tipping 0:00:53.960 --> 0:00:57.440 into a recession. Volatility in the financial sector doesn't help. 0:00:57.800 --> 0:01:00.480 Regional banks are struggling, and that means less for the 0:01:00.480 --> 0:01:03.040 companies that really need it. On top of that, we 0:01:03.080 --> 0:01:05.880 have a growing anxiety about the debt ceiling. I'd have 0:01:05.920 --> 0:01:07.920 to go back to twenty eleven for the last time 0:01:07.959 --> 0:01:11.360 it's been this fraud. A debt default by the US 0:01:11.400 --> 0:01:14.640 government would be a huge and potentially catastrophic event for 0:01:14.680 --> 0:01:18.360 the global economy. So, Jeremy, why the big spike in 0:01:18.440 --> 0:01:19.480 bankruptcies right now? 0:01:21.160 --> 0:01:24.880 That's a really interesting question, James. I think what's so 0:01:25.000 --> 0:01:29.200 fascinating about this uptick over the weekend is that there 0:01:29.240 --> 0:01:32.520 isn't any one factor that caused it. There wasn't some 0:01:32.560 --> 0:01:37.880 sort of acute influence like in twenty twenty COVID. It 0:01:37.920 --> 0:01:40.319 was something that nobody really saw coming. It was something 0:01:40.440 --> 0:01:43.199 like a rogue wave that just pulled down a bunch 0:01:43.240 --> 0:01:46.400 of companies that were already on the edge, and then 0:01:46.440 --> 0:01:51.600 it receded and things got back to their you know, abnormal. 0:01:52.000 --> 0:01:54.800 But this time, interest rates are just starting to bite 0:01:54.840 --> 0:01:57.559 and it's very organic, and it is while interest rates 0:01:57.640 --> 0:02:03.880 increased relatively quickly, it's just such a fundamental problem for 0:02:03.960 --> 0:02:06.640 anybody that is exposed to floating rate debt. 0:02:07.960 --> 0:02:12.240 So the context, Sorry, just to interrupt this past weekend 0:02:12.760 --> 0:02:15.920 we're talking mid May. Now. It was the busiest weekend 0:02:15.960 --> 0:02:19.200 for US bankruptcy filings since when and how many were there? 0:02:20.720 --> 0:02:24.760 There were seven filings between Sunday and Monday, and those 0:02:24.760 --> 0:02:29.480 are seven large I'm doing air quotes filings that we 0:02:29.520 --> 0:02:32.400 define that to be fifty million dollars of debt or more. 0:02:32.720 --> 0:02:36.400 And it's just not something that we have seen in 0:02:36.480 --> 0:02:39.680 the roughly fifteen years that we've at Bloomberg have been 0:02:39.720 --> 0:02:43.840 tracking the data. A really busy couple of days is 0:02:43.919 --> 0:02:49.440 like three or four large bankruptcy filings. So these filings 0:02:49.440 --> 0:02:55.880 were across various sectors. There was some oil, some healthcare. 0:02:58.120 --> 0:03:01.200 There was a fire protection company, a company that makes 0:03:01.240 --> 0:03:06.680 like the smoke detectors and chemicals to put out fires. 0:03:06.760 --> 0:03:09.560 I mean, it was really across the spectrum. And the 0:03:09.919 --> 0:03:12.920 only thing that really unites almost all of them is 0:03:12.960 --> 0:03:15.800 that interest rates are higher now and lenders don't have 0:03:15.840 --> 0:03:17.119 the patience that they once did. 0:03:17.360 --> 0:03:19.360 So were they hitting a maturity will that was there 0:03:19.360 --> 0:03:20.760 a trigger in terms of, you know, you have to 0:03:20.760 --> 0:03:22.720 pay this debt by the weekend and if you don't, 0:03:22.840 --> 0:03:25.079 you go bust? I mean, what what what happened there? 0:03:26.320 --> 0:03:29.160 In the case of Envision, that was in Vision Healthcare 0:03:29.240 --> 0:03:33.600 is a KKR backed company that does physician staffing. Mostly 0:03:33.639 --> 0:03:39.279 they like provide doctors for medical practices, is my understanding. 0:03:41.040 --> 0:03:43.360 They they had some sort of debt payment that they 0:03:43.400 --> 0:03:45.800 needed to make recently, but that wasn't like all of 0:03:45.840 --> 0:03:48.560 the It's not that like all of these companies were 0:03:48.640 --> 0:03:54.640 running into imminent maturities. It is more so that these 0:03:54.680 --> 0:03:58.200 are companies that were kind of struggling, had been for 0:03:58.240 --> 0:04:02.360 a long time, really didn't have any hope of repaying 0:04:02.480 --> 0:04:07.640 their debt load. And now that the economy is not 0:04:07.760 --> 0:04:12.160 so great and interest rates are higher, lenders are not 0:04:13.200 --> 0:04:15.560 taking the time to be like, let's try to work 0:04:15.600 --> 0:04:17.800 out a deal or extend the runway a little bit more, 0:04:18.240 --> 0:04:20.120 see if we can find a way to turn it around. 0:04:20.240 --> 0:04:25.159 It's more just like game over, guys, it's time to 0:04:25.200 --> 0:04:25.479 move on. 0:04:25.560 --> 0:04:27.480 And none of these names was surprised to us, right, 0:04:27.480 --> 0:04:29.599 We've been tracking a lot of these situations for a 0:04:29.600 --> 0:04:31.080 long time. I think all of these have been on 0:04:31.120 --> 0:04:31.719 our calendar. 0:04:32.839 --> 0:04:34.640 Yeah. I mean there were a couple that we didn't 0:04:34.680 --> 0:04:37.920 that we didn't see coming, the fire protection company, and 0:04:38.240 --> 0:04:42.159 there was a small biopharma company that makes cancer therapies 0:04:42.200 --> 0:04:45.640 that weren't necessarily on the radar, but mostly they were. 0:04:45.839 --> 0:04:50.040 I mean, these are the other companies. Some people might 0:04:50.080 --> 0:04:53.360 call them zombies. Maybe it's an overused term. But these 0:04:53.400 --> 0:04:56.320 were companies that I mean, the writing has been on 0:04:56.360 --> 0:04:59.039 the wall for a long time. They just had so 0:04:59.160 --> 0:05:01.800 much debt and it was difficult to see them ever 0:05:01.839 --> 0:05:03.680 being able to pay that off. The question was just 0:05:04.360 --> 0:05:06.560 when will time be up? 0:05:07.320 --> 0:05:11.039 So they've been just kept alive by this you know, 0:05:11.240 --> 0:05:13.080 flood of cheat money that we've seen over the last 0:05:13.080 --> 0:05:15.800 ten years, and that finally ended, so they died. Is 0:05:15.800 --> 0:05:16.120 that right? 0:05:16.720 --> 0:05:18.599 Absolutely? I mean, if you're a lender to one of 0:05:18.640 --> 0:05:22.280 these companies and even you know that they're not going 0:05:22.320 --> 0:05:26.159 to be able to fully repay this stet load, but 0:05:26.240 --> 0:05:28.720 interest rates are super low and you need yield, and 0:05:28.760 --> 0:05:31.080 you don't want to be dealing with it with a default, 0:05:31.080 --> 0:05:33.840 with a bankruptcy. Why not come with some really creative 0:05:33.880 --> 0:05:37.080 way to extend the runway. It's a it's a lottery ticket, 0:05:37.120 --> 0:05:40.080 it's it's it's a chance. But interest rates are higher, 0:05:40.120 --> 0:05:42.320 you can get yield elsewhere. Now it's time to move on. 0:05:43.000 --> 0:05:45.320 And that's not just a flash in the pan for 0:05:45.320 --> 0:05:47.679 this year. Right, This year has also been very busy 0:05:47.720 --> 0:05:51.000 for bankruptcies. How does that stuck up us his history? 0:05:52.080 --> 0:05:57.159 Yeah, it's already quite busy. I mean, the numbers, the 0:05:57.240 --> 0:06:00.520 precise numbers are escaping me in terms of the level 0:06:00.600 --> 0:06:03.599 of filings, but I can tell you about the pace 0:06:04.120 --> 0:06:10.160 relative to the historical levels. We're having about the busiest 0:06:10.279 --> 0:06:13.480 year for large bankruptcies that we have seen since two 0:06:13.520 --> 0:06:16.920 thousand and nine. Two thousand and nine wasn't a very 0:06:17.000 --> 0:06:20.200 happy time, so it's a little bit dark. But I 0:06:20.240 --> 0:06:23.440 will say this, we're still nowhere close to that two 0:06:23.480 --> 0:06:26.320 thousand and nine pace. It's usually it changes week to week, 0:06:26.360 --> 0:06:28.799 but it's usually about half as busy as two thousand 0:06:28.839 --> 0:06:32.720 and nine and just about as busy as twenty twenty. 0:06:32.560 --> 0:06:36.360 They sort of change places sometimes, but it only seems 0:06:36.400 --> 0:06:39.720 to be getting busier. We're seeing more and more filings. 0:06:39.920 --> 0:06:42.560 So it's as bad as the twenty twenty shutdown of 0:06:42.600 --> 0:06:45.320 the entire global economy, which really did throw a lot 0:06:45.360 --> 0:06:47.080 of companies against the wall. 0:06:47.200 --> 0:06:49.560 Yeah, that's exactly right. But as I said earlier, this 0:06:49.600 --> 0:06:53.039 time it's a it's more organic. It's not some wild 0:06:53.160 --> 0:06:57.360 rogue wave that was caused by, you know, a fatal virus. 0:06:57.440 --> 0:07:01.159 This is simply money is more more expensive now, the 0:07:01.200 --> 0:07:02.479 economy is a little rickety. 0:07:03.160 --> 0:07:05.320 So neither of those things seem like they're going to 0:07:05.360 --> 0:07:08.800 change anytime soon. If anything, rates probably stay higher for longer. 0:07:08.920 --> 0:07:12.600 The economy is not in great shape. Does that mean 0:07:12.760 --> 0:07:14.840 this trend continues? Does it get worse from here? 0:07:15.600 --> 0:07:18.000 For sure? I mean I haven't I haven't spoken to 0:07:18.040 --> 0:07:23.360 anyone recently who is under the impression that this building 0:07:23.640 --> 0:07:28.920 distress is just going to disappear. I mean your default forecasts, Ferry. 0:07:29.400 --> 0:07:32.400 Some people are extremely bearish, think that there are going 0:07:32.440 --> 0:07:34.120 to be tons and tons of filings, it's going to 0:07:34.160 --> 0:07:36.560 be a big tsunami. Other people are more conservative, but 0:07:37.200 --> 0:07:40.480 the general consensus is up more defaults, more bankruptcies. 0:07:40.920 --> 0:07:42.800 And what does this say about the broad state of 0:07:42.920 --> 0:07:44.880 credit markets? I mean, we've been talking for a long 0:07:44.880 --> 0:07:48.840 time about a credit crunch, the easy money era being over, 0:07:49.960 --> 0:07:52.280 and as we've said, companies have too much debt. Is 0:07:52.320 --> 0:07:54.000 this really the beginning of the end. 0:07:55.720 --> 0:07:58.440 If you're a low quality borrower, you're going to have 0:07:58.440 --> 0:08:04.160 a hard time refinancing your opplique or getting reasonably priced debt. 0:08:05.560 --> 0:08:07.240 It is as simple as that. And there are a 0:08:07.280 --> 0:08:10.880 lot of low quality borrowers out there, so I would 0:08:10.920 --> 0:08:14.840 say that's that is the biggest takeaway so far. 0:08:16.320 --> 0:08:18.680 Is it isolated to a particular sector? You know, last 0:08:18.680 --> 0:08:21.640 time around, we saw a big retail crunch. We've seen 0:08:21.800 --> 0:08:24.080 energy get hit pretty hard in the past, but is 0:08:24.160 --> 0:08:27.040 you know, healthcare is also kind of undistressed. But are 0:08:27.040 --> 0:08:28.520 there any sectors that really stand out? 0:08:29.400 --> 0:08:32.440 You know, retail, We've seen a couple of retailers run 0:08:32.480 --> 0:08:35.000 into trouble this year, but a lot of the crummy 0:08:35.040 --> 0:08:40.199 retailers were shaken out in twenty twenty years before. Healthcare 0:08:40.400 --> 0:08:43.360 is a sector that comes up a lot because wages 0:08:44.000 --> 0:08:47.680 have been a big problem broadly in the healthcare space. 0:08:47.840 --> 0:08:50.560 So if those don't come down soon, you're going to 0:08:50.600 --> 0:08:54.240 see more trouble in that area. And of course, real estate, 0:08:54.320 --> 0:08:58.760 especially commercial real estate, just tons of debt and offices 0:08:58.880 --> 0:09:01.840 are not filling up the way that they need to 0:09:01.840 --> 0:09:07.520 to support those debt levels. So healthcare cri that they're 0:09:07.520 --> 0:09:08.200 coming up a lot. 0:09:08.920 --> 0:09:12.439 The word you use in your piece is zombies. That's 0:09:12.480 --> 0:09:15.800 an interesting concept. I mean, these companies, you know, they're 0:09:15.840 --> 0:09:18.720 sort of living dead. They're sort of stumbling through with 0:09:18.960 --> 0:09:21.200 you know, cheap money keeping them alive, but there is 0:09:21.240 --> 0:09:23.040 no reason for them to live. I mean, we may 0:09:23.080 --> 0:09:25.800 have an emotional attachments to companies like bed Bath and 0:09:25.800 --> 0:09:28.679 Beyond and Radio Chat for various reasons. And obviously there's 0:09:28.720 --> 0:09:31.800 a loss of jobs and there's a big impact on communities. 0:09:31.800 --> 0:09:36.280 But you know, in you know, harsh, you know there 0:09:36.400 --> 0:09:38.959 capitalistic terms, do we really care about their demise? 0:09:40.400 --> 0:09:43.000 Yeah, this is really interesting to me. I was speaking 0:09:43.040 --> 0:09:47.959 with Ed Altman, who is a pretty famous finance professor 0:09:47.960 --> 0:09:50.560 at NYU. He invented something called the Z score. It's 0:09:50.559 --> 0:09:52.960 a default prediction metric, and I asked him. We were 0:09:53.000 --> 0:09:56.040 talking about repeat bankruptcies, so called Chapter twenty two's, and 0:09:56.080 --> 0:09:58.560 I asked him, like, why does it matter if companies 0:09:58.640 --> 0:10:01.480 keep failing over and over again? Like who cares? The 0:10:01.480 --> 0:10:04.719 people stay employed and you know, we get to keep 0:10:04.760 --> 0:10:08.480 going to some some retailer that we like. And his 0:10:08.600 --> 0:10:13.000 take on that was, this is money and time and 0:10:13.120 --> 0:10:16.200 energy that could be put into more productive endeavors. That's 0:10:16.200 --> 0:10:18.880 why it matters. I thought it was fascinating. I haven't 0:10:18.920 --> 0:10:22.480 thought about it like that. So these these are these 0:10:22.559 --> 0:10:24.800 kind of zombie companies that maybe don't really have a 0:10:24.840 --> 0:10:28.600 reason to exist. The people that are taking care of 0:10:28.640 --> 0:10:34.080 these firms and employed by them, it'll be painful for 0:10:34.160 --> 0:10:39.480 them to disappear or shrink substantially, but it may be 0:10:39.600 --> 0:10:44.400 more productive overall to shift those resources that are propping 0:10:44.520 --> 0:10:47.040 up something that just shouldn't be alive in its current 0:10:47.120 --> 0:10:50.080 form and moving them into some other area of the economy. 0:10:50.360 --> 0:10:52.600 So short term pain, but maybe long term game for 0:10:52.640 --> 0:10:55.600 the US economy. But you mentioned repeat bankruptcies. I mean, 0:10:55.679 --> 0:10:58.280 as we call them chapter twenty twos, that just seems 0:10:58.280 --> 0:10:59.839 like a waste of time. I mean, you know, is 0:10:59.880 --> 0:11:02.000 the bankruptcy system really working in this country? 0:11:03.520 --> 0:11:06.760 Such a good question. Yeah, I mean, we have seen 0:11:08.559 --> 0:11:12.480 more chapter twenty twos again, in line with the general 0:11:12.559 --> 0:11:15.000 rise in bankruptcies, more chapter twenty twos this year than 0:11:15.040 --> 0:11:20.959 we've seen since two thousand and nine. And what does 0:11:21.000 --> 0:11:24.080 it say about the bankruptcy system. I mean, it's a 0:11:24.120 --> 0:11:28.920 little bit embarrassing because in the US, restructuring plans aren't 0:11:28.960 --> 0:11:32.800 supposed to get approved by a federal judge unless there's 0:11:32.840 --> 0:11:36.000 some specific language. But the general idea is that you 0:11:36.080 --> 0:11:38.440 need to not go bankrupt again. It needs to be 0:11:38.480 --> 0:11:40.640 pretty clear that this plan is going to fix the 0:11:40.640 --> 0:11:44.040 company's problems, because the bankruptcy court can do all kinds 0:11:44.080 --> 0:11:46.160 of things that you can't get anywhere else. You can 0:11:46.200 --> 0:11:48.880 just reject leases, you can force people to accept less 0:11:48.880 --> 0:11:52.439 than their owne all in the name of restructuring a company. 0:11:53.280 --> 0:11:56.120 So it's not great. It doesn't mean the bankruptcy system 0:11:56.200 --> 0:11:59.920 is broken. But seeing an uptick in repeat filers is 0:12:01.880 --> 0:12:05.440 it's it's ugly. You don't love it. 0:12:05.440 --> 0:12:07.040 It's supposed to be the best system in the world. 0:12:07.120 --> 0:12:12.280 But that's that's that's an interesting statement. But before we 0:12:12.320 --> 0:12:14.960 talk to jam and platel Boomberg Intelligence, what's the next 0:12:14.960 --> 0:12:16.920 big story to watch on your beat? Jeremy, what else 0:12:16.920 --> 0:12:17.800 do we need to worry about? 0:12:19.320 --> 0:12:24.000 What is the next big story? That's a hard one 0:12:24.000 --> 0:12:26.480 to answer, James, because all of a sudden, we've gotten 0:12:26.520 --> 0:12:31.040 so busy that I feel like I'm treading water. This 0:12:31.080 --> 0:12:33.280 is this is the thing that we have been waiting for. 0:12:34.080 --> 0:12:38.080 It's it's it's felt like when are rate's going to 0:12:38.120 --> 0:12:40.679 go up? And what is that going to mean? And 0:12:41.559 --> 0:12:44.320 kind of out of nowhere here it seems like the 0:12:44.360 --> 0:12:49.000 mood has just flipped and there are lots of companies 0:12:49.040 --> 0:12:51.760 that are that are on the cusp. Lenders are organizing 0:12:52.559 --> 0:12:56.440 all the time and they're concerned about their debt holdings. 0:12:56.520 --> 0:13:00.319 So the big story is, uh, stay glued to your 0:13:00.360 --> 0:13:03.040 terminals at Bloomberg dot com because there are many more 0:13:03.040 --> 0:13:03.960 markruptcies to come. 0:13:04.280 --> 0:13:06.480 Great stuff. Jeremy Hill from Bloomberg News, thanks so much 0:13:06.480 --> 0:13:09.560 for joining us. Do as Jeremy said, read all of 0:13:09.600 --> 0:13:12.040 his scoops on the Bloomberg terminal and of course at 0:13:12.080 --> 0:13:14.679 Bloomberg dot com. Moving on to another big topic. As 0:13:14.679 --> 0:13:16.880 I mentioned earlier, we are very fortunate to have with 0:13:16.960 --> 0:13:20.199 us Jamin Patel, who looks at utilities for Bloomberg Intelligence. 0:13:20.760 --> 0:13:22.000 What's going on with utilities? 0:13:22.080 --> 0:13:22.319 Jam in? 0:13:22.400 --> 0:13:24.800 Tons of bad news out there is Jeremy's just outlined 0:13:24.840 --> 0:13:26.960 for us. Shouldn't we just be taking all our cash 0:13:26.960 --> 0:13:29.080 and keeping it in a mattress right now, or at 0:13:29.120 --> 0:13:31.719 very least in an easy access saving his account with 0:13:31.760 --> 0:13:34.440 a five percent yield? I mean, why should we be 0:13:34.480 --> 0:13:35.480 looking at utilities? 0:13:36.480 --> 0:13:40.040 Well, that easy access account may give you a five 0:13:40.040 --> 0:13:41.560 percent yield, but how long is they're going to give 0:13:41.600 --> 0:13:45.720 you that for? Right? If reads start coming down and 0:13:45.760 --> 0:13:50.080 I'm not calling for indecline anytime soon, but if they do, 0:13:50.320 --> 0:13:52.360 then you want to start looking at something that you 0:13:52.400 --> 0:13:54.920 can tie your money up in for a little bit longer. 0:13:55.760 --> 0:13:58.920 And that's why utilally bond. A lot of people would 0:13:58.920 --> 0:14:01.960 say utili stocks too, but we'll talk about the differences 0:14:01.960 --> 0:14:06.560 between those two. It's interesting that, you know, we started 0:14:06.559 --> 0:14:11.280 this off talking about bankruptcies, because bankruptcies in the utility 0:14:11.360 --> 0:14:14.920 sector and one of the reasons why the sector, at 0:14:14.960 --> 0:14:21.040 least at the operating utilities level, is considered a refuge 0:14:21.120 --> 0:14:25.480 during times of turmoil. We've had very few bankruptcies. They've 0:14:25.600 --> 0:14:30.720 always been related to something very specific going on as 0:14:30.760 --> 0:14:33.360 opposed to what happens with the sector as a whole. 0:14:34.200 --> 0:14:37.720 In fact, I beyond the pg and E bankruptcies which 0:14:37.760 --> 0:14:40.560 we're all familiar with, I can only remember in the 0:14:40.560 --> 0:14:43.720 thirty years I've covered this sector Public Service in New 0:14:43.760 --> 0:14:47.880 Hampshire and Texas New Mexico Power, and in both those cases, 0:14:48.280 --> 0:14:51.960 bondholders came out whole, and the same with PGEN. In fact, 0:14:52.000 --> 0:14:55.480 with PGNE, bondholders weren't secured at the utility level and 0:14:56.080 --> 0:14:57.200 they came out secure. 0:14:58.600 --> 0:15:00.760 Other than those companies. Just my, what what are we 0:15:00.800 --> 0:15:03.080 talking about in utilities? Because it does cover a huge 0:15:03.240 --> 0:15:05.080 range of companies, right it does? 0:15:05.160 --> 0:15:08.120 It does? You've got you know, over over one hundred 0:15:08.160 --> 0:15:14.200 different utilities around the country. Uh, most of them are 0:15:14.520 --> 0:15:20.520 fall on the investor owned utility sector. And then you've 0:15:20.640 --> 0:15:24.760 you've got the you've got the holding companies. Now, if 0:15:24.760 --> 0:15:27.400 you're down at the operating utility level, imagine you know, 0:15:27.400 --> 0:15:30.160 you're in a situation where you have a monopoly in 0:15:30.200 --> 0:15:34.560 your service territory. Your rates, the rates that you charge 0:15:34.600 --> 0:15:37.120 your customers, and therefore your revenues and your earning stream 0:15:37.160 --> 0:15:41.520 based on a return on equity is almost guaranteed, regardless 0:15:41.520 --> 0:15:45.240 of what the usage is, what weather impact there is, 0:15:45.360 --> 0:15:48.600 and so on. Uh. In the event of a crisis, 0:15:49.200 --> 0:15:51.560 as we saw with Hurricane Katrina in New Orleans, we've 0:15:51.560 --> 0:15:55.000 seen with fpn L in Florida, we saw in Houston 0:15:55.040 --> 0:16:01.360 with CNP, if your assets are destroyed or or very 0:16:01.400 --> 0:16:05.880 heavily damaged, you have the right to have an adjustment 0:16:06.200 --> 0:16:09.680 made your rates to cover those costs over a period 0:16:09.680 --> 0:16:11.800 of time. UH. And you can go out and issue 0:16:11.880 --> 0:16:15.120 debt in the meanwhile, right, So you had you know, 0:16:15.200 --> 0:16:18.000 PGIN was very much a one off sort of case 0:16:18.040 --> 0:16:21.520 in my opinion. But you've got the situation where at 0:16:21.560 --> 0:16:26.320 the operating utility level, you've almost got a quasi treasury 0:16:26.920 --> 0:16:28.600 type of bond. 0:16:29.120 --> 0:16:31.600 So as you say there are a refuge, we are 0:16:31.640 --> 0:16:37.080 saying great economic financial turmoil right now. So in terms 0:16:37.120 --> 0:16:40.280 of you know, the utility picks. You know, what what 0:16:40.320 --> 0:16:42.040 do you where do you look in terms of like 0:16:42.080 --> 0:16:44.120 what types of utilities? You know, where do you look? 0:16:44.280 --> 0:16:46.360 What's what's the best place to be in right now? 0:16:46.600 --> 0:16:51.320 Okay, So with that safety comes a price, and that's 0:16:51.320 --> 0:16:54.760 generally lower yels, right as you would expect. And at 0:16:54.800 --> 0:16:59.600 the operating utility level you've got, you know, you've got 0:16:59.600 --> 0:17:02.480 a fair narrow range depending upon the maturity that you're 0:17:02.480 --> 0:17:05.520 looking at a narrow range of bond spreads. So the 0:17:05.600 --> 0:17:09.320 real interest tends to come in and the real credit 0:17:09.400 --> 0:17:11.600 risk tends to come in at the parent level, right 0:17:11.680 --> 0:17:14.760 because the parent itself is not regulated. It's reliant on 0:17:15.080 --> 0:17:19.000 dividends coming up from the utilities to service both the 0:17:19.040 --> 0:17:22.840 shareholder dividend as well as to service its own debt. Now, 0:17:24.040 --> 0:17:27.840 if you have a parent with what just one utility, 0:17:28.520 --> 0:17:31.159 clearly that's that's a high risk situation, right. So and 0:17:31.280 --> 0:17:33.920 that's what we had with PG and E. What investors 0:17:33.960 --> 0:17:38.200 see with Edison International. If you if PGN owned more 0:17:38.240 --> 0:17:41.160 than one utility, the parent may not have had quite 0:17:41.160 --> 0:17:43.680 the same problems that it did. But in this case, 0:17:43.720 --> 0:17:46.320 the parent filed for bankruptcy. So what we look for 0:17:46.720 --> 0:17:51.560 our companies that have multiple diverse utilities operating across multiple jurisdictions, 0:17:51.600 --> 0:17:58.040 Companies like Excellent Duke Energy, American Electric Power, and so on. 0:17:58.800 --> 0:18:03.600 These these are companies that do rely on the dividends 0:18:03.680 --> 0:18:06.280 coming up to the parent to service their debt. But 0:18:06.520 --> 0:18:08.719 in the event that you have a situation at one 0:18:08.760 --> 0:18:11.920 particular utility, you still have cash flows coming up from 0:18:11.920 --> 0:18:12.560 the others. 0:18:13.040 --> 0:18:15.840 So you're looking essentially for diversification. 0:18:15.600 --> 0:18:18.560 Yes, across jurisdictions as well as geographies. 0:18:19.040 --> 0:18:22.600 Okay, but you mentioned there are credit risks. Are you 0:18:22.640 --> 0:18:25.280 concerned about liquidity or access to capital markets there? 0:18:26.480 --> 0:18:29.320 Certainly not at the operating utility level. At the parent level, 0:18:29.320 --> 0:18:34.000 one of the concerns we've seen is that as we've 0:18:34.119 --> 0:18:38.680 enter this period of high growth, largely driven by renewables 0:18:39.440 --> 0:18:44.440 and perhaps accelerated by the Inflation Reduction Act, there's been 0:18:45.000 --> 0:18:48.959 a significant amount of capex projected and actual down at 0:18:48.960 --> 0:18:51.879 the utility level. Now, that comes with borrowing. Right now, 0:18:51.920 --> 0:18:54.320 if you think of traditional utility, the way they've financed 0:18:54.359 --> 0:18:57.959 their capex and investments is approximately fifty percent debt and 0:18:58.080 --> 0:19:02.240 fifty percent equity. Now that equity comes from retain cash flow. 0:19:02.440 --> 0:19:06.200 Right If the capex is higher than you expect. Where 0:19:06.320 --> 0:19:09.800 is that additional equity going to come in from. We've 0:19:09.840 --> 0:19:13.119 seen in many instances it's a reduction in dividends that 0:19:13.160 --> 0:19:15.680 would go up to the parent, and we've actually seen 0:19:15.880 --> 0:19:20.560 equity coming down from the parent level. Right So where 0:19:20.560 --> 0:19:26.400 does the parent get that cash? Utilally generally don't issue equity. 0:19:26.440 --> 0:19:28.479 They tend to be very e retician to do that. 0:19:29.160 --> 0:19:32.520 Although we've seen a little bit of convertible equity being 0:19:33.840 --> 0:19:36.560 picking up a little bit here, but they don't buy 0:19:36.560 --> 0:19:38.679 that back there stocks either. They just don't have the 0:19:38.680 --> 0:19:41.919 cash flow to do that. So what we've been seeing 0:19:42.080 --> 0:19:46.359 is an increasing level of parent debt and that raises 0:19:46.400 --> 0:19:49.920 a little bit of a concern. Right now, where does 0:19:49.960 --> 0:19:53.720 that concern come in? It's if you're looking at purely statistics, 0:19:53.800 --> 0:19:58.520 credit statistics and regular metrics like leverage and debt service 0:19:58.600 --> 0:20:00.440 and so on, yes, then it's a little bit of 0:20:00.480 --> 0:20:04.040 a concern. But we did we did a little bit 0:20:04.080 --> 0:20:08.280 of a study recently where we looked at across the 0:20:08.400 --> 0:20:11.720 entire sector. We looked at the book equity of the 0:20:11.760 --> 0:20:16.200 operating utilities, took a multiple of that based upon where 0:20:16.240 --> 0:20:20.120 these have traded or sold or where pieces of them 0:20:20.160 --> 0:20:24.160 have sold recently, which was about a two times multiple. 0:20:25.080 --> 0:20:29.159 That gave us almost a trillion dollars of equity. Potential 0:20:29.200 --> 0:20:33.520 equity that can be released and released not in the 0:20:33.560 --> 0:20:35.680 sense that the utility would have to go in and 0:20:36.320 --> 0:20:38.160 the parent would have to go in and sell that utility. 0:20:38.440 --> 0:20:41.280 They're able to monetize pieces of this and we've seen 0:20:41.320 --> 0:20:44.800 that happening with First Energy Douke Energy recently where they've 0:20:44.800 --> 0:20:50.000 sold pieces of their subsidiaries uh to to pay down 0:20:50.040 --> 0:20:51.160 debt at the parent level. 0:20:51.480 --> 0:20:54.679 And listeners can get that. So they they look up 0:20:54.720 --> 0:20:56.160 your bio on the terminal, can they change? 0:20:56.240 --> 0:20:59.920 Yes, Yes, it's in. It's in something that I called 0:21:00.080 --> 0:21:04.000 over nine hundred billion equity value could drive utilities firepower. 0:21:04.359 --> 0:21:07.359 Okay, well look that up, thank you. The other big 0:21:07.400 --> 0:21:10.479 concern right now is rising interest rates. How does that 0:21:10.520 --> 0:21:13.000 affect utilities in comparison to other sectors. 0:21:14.040 --> 0:21:18.679 So, because utilities are regulated and all of their costs 0:21:18.760 --> 0:21:22.320 or most of their costs based upon how the regulators 0:21:22.400 --> 0:21:25.200 view them and whether they approve them or not, are 0:21:25.240 --> 0:21:28.399 passed through, right, So if you've got any short term 0:21:28.920 --> 0:21:33.840 debt that's floating, you can apply for that to be 0:21:33.880 --> 0:21:37.160 passed through as an increation rate. Most of their death though, 0:21:37.280 --> 0:21:40.159 is fixed. Right. Utilities are very very big borrowers, but 0:21:40.200 --> 0:21:42.720 they tend to and they are able to borrow for 0:21:42.760 --> 0:21:45.399 thirty year bonds. So a lot of their debt, at 0:21:45.480 --> 0:21:49.240 least at the operating level, is thirty year bonds. So 0:21:50.440 --> 0:21:53.919 in the immediate term they are perhaps more protected from 0:21:54.000 --> 0:21:56.760 higher interest rates than pretty much any other sector. 0:21:57.640 --> 0:21:59.679 But on the flip side, if you're a holder, you've 0:21:59.680 --> 0:22:01.200 been hit pretty hard on the duration. 0:22:01.040 --> 0:22:04.960 Right, yes, But then that's you know, pretty much any sector, 0:22:05.000 --> 0:22:07.080 right if you're going to own a twenty or thirty 0:22:07.119 --> 0:22:10.119 year moond in technology or banks or where have you. 0:22:10.680 --> 0:22:14.040 So that's the choice pot hold the right and the 0:22:14.080 --> 0:22:16.159 risks that they run pretty much in any sector. 0:22:17.000 --> 0:22:18.919 So if you're looking at just sort of you know, 0:22:18.960 --> 0:22:21.800 the big picture now as we're heading into potentially a recession, 0:22:22.080 --> 0:22:25.160 you know, potentially stagflation, there's all sorts of other big 0:22:25.280 --> 0:22:30.639 risks out there. Is the utility sector a hedge against this? 0:22:30.920 --> 0:22:33.840 Is it something that you can just you know, protect 0:22:33.840 --> 0:22:36.480 your your returns with and clip the coup? I mean, 0:22:36.480 --> 0:22:38.399 how do you how do you envisage it as a 0:22:38.440 --> 0:22:40.440