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Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.

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Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg.

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Speaker 1: This week, we're very pleased to welcome Neil Callanan, our

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Speaker 1: London based corporate finance zar. How are you, Neil?

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Speaker 2: Very good, James, thank you for having me on the show.

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Speaker 1: Great to have you on the Credit Edge. Also on

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Speaker 1: the show this week we'll be talking to Jody Lurie

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Speaker 1: at Bloomberg Intelligence about the leisure sector, cruise lines, gambling,

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Speaker 1: all the fun stuff. So do stay with us. But

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Speaker 1: first Neil Callanan with Bloomberg News. Great to see you.

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Speaker 1: Let's start with the good news. The US economy is strong,

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Speaker 1: the war on inflation is one. Rates are coming down,

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Speaker 1: which should be a relief to borrowers. Essentially, the recession

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Speaker 1: that everyone was fearing has not happened, and yet you're

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Speaker 1: telling us we should still be worried about this year.

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Speaker 1: For those who missed it, Neil put out a great

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Speaker 1: story just before Christmas ruined everyone's holiday actually entitled Euphoria

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Speaker 1: on fed pivot pus ignores the lagging hangover. Essentially, we're

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Speaker 1: all getting ahead of ourselves thinking it's going to be okay,

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Speaker 1: there's a lot of stuff to be worried about. Actually,

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Speaker 1: So break it down for us, Neil, What is the story?

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Speaker 1: Why is there so much trouble in twenty twenty four?

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Speaker 2: Well, basically it comes out to the fact that interest

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Speaker 2: rates take a while to work their way into the

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Speaker 2: economy interest rate increases, and so particularly with so many

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Speaker 2: people not feeling the impacts through their mortgages in the US,

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Speaker 2: the actual full scale of what's happened in terms of

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Speaker 2: the rapid nature of the interest rate increases hasn't fully

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Speaker 2: filtered true to people yet. And the usual thing in

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Speaker 2: economics is just eighteen months to two years after you

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Speaker 2: started interest rate increases that people start to really feel

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Speaker 2: the impact and see the impact. And that of course

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Speaker 2: means that this year should in theory, whether in practice

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Speaker 2: and now will happen, see those interest rates really start

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Speaker 2: to hit the economy. Whether that will mean a soft

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Speaker 2: landing or not, we've yet to see. But there is

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Speaker 2: a massive eu furia about raycuts, and what usually happens

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Speaker 2: when raycouts are happening is actually recession is underway or

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Speaker 2: around the corner. And so there was this massive kind

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Speaker 2: of swell of you know euphoria in December, and the

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Speaker 2: fact that the FED is finally pivoting. The FED is

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Speaker 2: finally pivoting. What will actually happen in reality towards with

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Speaker 2: acid prices is yet to be seen.

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Speaker 1: So to open too soon, sorry to open the champagne

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Speaker 1: on the ray cuts. But you know, even if they

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Speaker 1: do start happening in March as some people predict, and

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Speaker 1: they do go as deep as some people predict one

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Speaker 1: hundred and fifty bases points some people think could happen

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Speaker 1: from the FED, that's not enough to save us.

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Speaker 2: Well, it depends on the sector, right, And I mean,

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Speaker 2: you know, the tech sector has been going gambusters, where

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Speaker 2: the that will continue and now we have to see

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Speaker 2: but a lot of what I'd be looking at in

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Speaker 2: the last years, the problems emerging in commercial real estate.

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Speaker 2: And I think regardless of the speed and size of

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Speaker 2: the ray cuts, there's still going to be an enormous

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Speaker 2: amount of distress there. There's almost three trillion of US

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Speaker 2: commercial real estate that due to mature within five years.

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Speaker 2: And the problem in a way is that you know,

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Speaker 2: he had a lot of people making a lot of

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Speaker 2: money and then borrowing cheaply with that money. To leverage

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Speaker 2: on top to buy assets that are now falling in

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Speaker 2: value because of the pandemic. And that's obviously in particular

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Speaker 2: the office sector, but also been going through a tough

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Speaker 2: time again. And it now looks like multifamily is going

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Speaker 2: to start going through a bit of a tougher time

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Speaker 2: as ren quote slows. So there's going to be a

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Speaker 2: lot of trouble in commercial real estate in the year ahead.

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Speaker 1: And let me start you because commercial real say, that's

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Speaker 1: something that comes up a lot, and it's a bit

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Speaker 1: confusing to be given that everyone is kind of back

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Speaker 1: to work in their office and all out shopping all

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Speaker 1: the time, and they're all, you know, I mean, there's

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Speaker 1: not enough real estate to go around. There seems to

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Speaker 1: be a huge demand for real estate, and yet we're

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Speaker 1: seeing still problems. It is it just a case that

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Speaker 1: there was just way too much debt put on. Why

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Speaker 1: are they still in trouble?

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Speaker 2: Yeah, so party, it's because so much of the debt

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Speaker 2: is interest only, so people haven't been repaying the debt,

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Speaker 2: they've just been paying the interest obviously. And what happens

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Speaker 2: then is when the loan comes toue from maturity, the

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Speaker 2: lenders have clamped down now because interest rates have gone up.

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Speaker 2: So even if the assets in a pretty good spot,

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Speaker 2: the person who owns it may find it difficult to refinance,

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Speaker 2: and if they do, they may have to inject a

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Speaker 2: lot more equity into the asset in order to make

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Speaker 2: it plashable for a lender to borrow. So, to give

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Speaker 2: you an example, you might have bought a building five

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Speaker 2: years ago and gotten an eighty percent loan from the bank.

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Speaker 2: Now the bank might only want to give you sixty

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Speaker 2: percent loan. The value they ask might be down. You

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Speaker 2: have to find that money in between, be it true

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Speaker 2: a junior loan or true equity, both of which are

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Speaker 2: hard to find and much harder to find now. And

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Speaker 2: that means that a lot of people are going to default,

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Speaker 2: and there's going to be a lot of people hand

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Speaker 2: the keys back to banks in particular, and regional banks

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Speaker 2: at that because regional banks account for twenty to forty

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Speaker 2: five percent of commercial real estate lending, depending on which

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Speaker 2: the sector is, and so when those problems come true,

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Speaker 2: it's the regional banks that are really going to feel it.

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Speaker 1: So the building could actually be in a really strong position,

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Speaker 1: they could have tenants, they could be performing that you know,

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Speaker 1: everyone's paying their rent and yet still is not gonna

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Speaker 1: not gonna make it.

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Speaker 2: Potentially, Yeah, I mean the bank may take a view

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Speaker 2: that like, you know, we wait for the ray cuts

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Speaker 2: to kick in and it'll all be fine. But the

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Speaker 2: reality is, in some cases you're going to see semi

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Speaker 2: decent ansets run into trouble. People were buying off on

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Speaker 2: you know, yields based on cheap money, based on quantitative easing,

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Speaker 2: which was pushing up basst prices and creating bubbles. And

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Speaker 2: whether or not they will be able to refinance those loans,

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Speaker 2: it's just unclear at the moment. Certainly the bank's appetite

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Speaker 2: for commercial real estate risk has fallen. They may tray open,

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Speaker 2: throw open the gates again if rates do fall, because

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Speaker 2: obviously they can do new loans at much higher rates.

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Speaker 2: It is more profit for them potentially in it the

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Speaker 2: spreads are better. But for now it still feels like

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Speaker 2: a time to be cautious about commercial real estate.

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Speaker 1: And is it the big banks that holding all this

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Speaker 1: debt or is it the smaller regional banks who's mostly

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Speaker 1: exposed to it.

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Speaker 2: Yeah, the big banks learned the lesson from the financial

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Speaker 2: crisis and they've largely stayed away from large scale lending

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Speaker 2: to commercial real estate. This time around, it's going to

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Speaker 2: be you know, small and regional lenders. If things get bad,

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Speaker 2: it'll be a bit like the same as trust issue

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Speaker 2: in the nineties, where you know, right throws suddenly there

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Speaker 2: being too much commercial real estate lending banks are bust,

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Speaker 2: and you know that that is a possibility. There are

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Speaker 2: many regional banks where forty percent of their loan books

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Speaker 2: and commercial redi estate maybe sometimes in some cases even more.

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Speaker 2: And some of those are probably going to be fine.

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Speaker 2: You know, some of them will be doctors' offices, and

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Speaker 2: you know, small stores and those kind of businesses tend

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Speaker 2: to survive even in a recession. What's going to be

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Speaker 2: harder is if you've got you know, large scale lending

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Speaker 2: to suburban office parks with tenants who are kind of

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Speaker 2: struggling along and maybe not able to handle the higher

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Speaker 2: rates themselves, which then will lead to an increase of

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Speaker 2: vacancy and potentially distress coming down the line.

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Speaker 1: And only or less than a year ago we saw

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Speaker 1: a regional banking crisis in the United States. Some of

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Speaker 1: those lenders just disappeared. That was for another reason, but

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Speaker 1: Is there a chance that we could see maybe some

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Speaker 1: contagion from this.

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Speaker 2: Yeah, I think I think it's certainly possible. I'm obviously

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Speaker 2: cautious about, you know, putting my neck in the line

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Speaker 2: saying something like that, because you don't know what's going

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Speaker 2: to happen again in terms of bailouts and the positive

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Speaker 2: guarantees and stuff. But yeah, I think it's only a

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Speaker 2: possibility that you could see some lenders run into trouble

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Speaker 2: later on here.

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Speaker 1: I know you've been traveling recently, you're all the Global

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Speaker 1: Zara and you're in Asia. Are there any particular hot spots?

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Speaker 1: I mean, we've heard a lot about Sweden, We've heard

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Speaker 1: a lot about China. You know, I look out the window.

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Speaker 1: I love looking out your window in London. I recall

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Speaker 1: some great stories you had about buildings just around the

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Speaker 1: corner from our office that are in trouble. Is it

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Speaker 1: is it localized or is it just everywhere?

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Speaker 2: What's really interesting this time around is that a lot

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Speaker 2: of it is office buildings in financial centers, which is

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Speaker 2: not something you'd intuitively think, you know, with the banking

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Speaker 2: system pretty good shape, So you know, New York, London, Frankfurt, Paris,

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Speaker 2: to a certain extent or a lot of fonts and powers,

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Speaker 2: which is the office district there, so Canary Wharf, the

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Speaker 2: owners of that, which are Brookfield and Qatar, are putting

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Speaker 2: in more money to you know, reduce to that levels there.

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Speaker 2: So that that's that's been somewhat surprising, but then it's

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Speaker 2: part of the way the trend of offices in general struggling.

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Speaker 2: I have kind of a working theory that a lot

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Speaker 2: of the winners of the financial crisis, if I could

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Speaker 2: put it that way, are going to be the losers

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Speaker 2: this time around. And I think you're starting to see

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Speaker 2: some of that. China, the Nordic's, Germany are obvious examples

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Speaker 2: of that. What people may not be as aware of

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Speaker 2: his Korea as well, did a lot of overseas office

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Speaker 2: purchases in particular, and a lot of them are running

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Speaker 2: into trouble now as well, and a lot of mezzanine

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Speaker 2: final lending as well, and a lot of those funds

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Speaker 2: are going to go to zero percent navy from one

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Speaker 2: hundred percent because the scale of the downturn is such

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Speaker 2: that it's just going to wipe out all the equity

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Speaker 2: and that's going to really leave a lot of investors

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Speaker 2: hurting there.

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Speaker 1: So, apart from reading all your great coverage on the

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Speaker 1: Bloomberg terminal and of course bloombog dot com, where can

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Speaker 1: we find this stuff? What are the canaries in the

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Speaker 1: coal mine? You're looking at delinquencies, occupancy rates, work from

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Speaker 1: home rates, what's the where is the signal coming from?

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Speaker 2: I always find development land to be one of the

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Speaker 2: most interesting ones in that case, because you know, the

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Speaker 2: development land is bought on the basis of hope value,

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Speaker 2: so you're basically hoping you can sell things for a

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Speaker 2: certain price at the end, and it takes a huge

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Speaker 2: amount of uplront cash to actually build something, and then

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Speaker 2: when you start, you can't really stop, particularly if it's

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Speaker 2: a tower. So the amount of the falls and development

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Speaker 2: land will be really interesting because the price falls there

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Speaker 2: tend to be bigger. So you the price of a

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Speaker 2: like the housing market could fall ten percent, but the

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Speaker 2: value of the land and they need it could fall

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Speaker 2: seventy percent as a result. So for me, that's always

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Speaker 2: an interesting one. Whether people stop going going ahead with

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Speaker 2: developments or pull developments or the delay developments. And we're

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Speaker 2: going to see we're already seeing examples of that, but

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Speaker 2: we will see more of that, and then I just

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Speaker 2: think the short interest on a lot of the companies

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Speaker 2: is one of the things to watch this year. You know,

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Speaker 2: the FED narrative of you know interest right cuts and stuff.

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Speaker 2: You've seen a lot of headshuns cutting them into shorts

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Speaker 2: they have on things like multifamily operators, on mortgage rates,

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Speaker 2: et cetera. If that starts to reverse, that's going to

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Speaker 2: be super interesting indicator that actually we're in for a

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Speaker 2: much tougher time than people think. You know, there's a

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Speaker 2: possibility that this will go on for years. It doesn't

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Speaker 2: look like it's going to be a short, sharp downturn.

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Speaker 2: It's going to be a long drawn up talking about

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Speaker 2: commercial real estate there rather than the economy.

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Speaker 1: So before we talked so Jody Lurie over at Bloomberg Intelligence,

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Speaker 1: what else is on your radar? Neil and I also

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Speaker 1: wanted to kind of take a sort of you know,

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Speaker 1: the other side of the trade. If it were, let's

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Speaker 1: say there is a soft landing and rates come down

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Speaker 1: quickly and the US election is a clean and calm affair,

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Speaker 1: does all the distress just go away? I mean some

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Speaker 1: people actually are betting on that. You know, we had

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Speaker 1: a couple of guests on this show, some big guests

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Speaker 1: like KKR, who you know. One of their points is that,

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Speaker 1: you know, fear is the is the biggest thing holding

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Speaker 1: us back, that we should be much more aggressive at

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Speaker 1: this point in the cycle, that you know, it's all

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Speaker 1: good from here for credit. A lot of other big

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Speaker 1: firms like Black Soon and Apollo are really leaning into

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Speaker 1: this idea of, you know, take advantage of other people's fear.

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Speaker 1: They obviously have made a lot of money on real

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Speaker 1: estate in the past. Is there a being maybe too cautious?

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Speaker 1: I mean, you know, twenty twenty three started very nervous

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Speaker 1: about credit, but they actually performed really well. You know,

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Speaker 1: if you sat on cash, you didn't do very well.

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Speaker 1: Some people might say this is just, you know, one

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Speaker 1: of the great opportunities of our time.

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Speaker 2: Yeah, and totally. The credit providers are saying that. But

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Speaker 2: what's going to be interesting for in their regard is

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Speaker 2: how their legacy books perform, because that's where you're going

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Speaker 2: to see any stress that they see. So again, it's

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Speaker 2: like the visional banks, you know, it's the new lending

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Speaker 2: opportunities are fantastic at the rates at which they can lend,

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Speaker 2: but they also need to be very aware of the

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Speaker 2: legacy books in that regard. You know, credit does seem

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Speaker 2: to be in a really good place and a really

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Speaker 2: strong place at the moment. Sentiment is obviously very strong.

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Speaker 2: And I think you said three ifs in a row.

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Speaker 2: That's the perfect scenario. And I mean, that's a lot

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Speaker 2: of ifs. But there are certainly people more intelligent and

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Speaker 2: earning far more money than me who are betting on

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Speaker 2: these things all being turning out well, and they you know,

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Speaker 2: I would be head a debate against them, But I

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Speaker 2: don't think it's a smooth journey to the end of

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Speaker 2: this great stuff.

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Speaker 1: Neil Callanhan with Bloomberg News in London, thank you so

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Speaker 1: much for joining us.

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Speaker 2: Thanks James, looking forward to seeing how this year goes.

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Speaker 1: Read all of Neil's great scoops on the Bloomberg terminal

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Speaker 1: and of course at Bloomberg dot Com. I'm delighted to

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Speaker 1: welcome back on the Credit Edge Jody Lurie, who has

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Speaker 1: the best job in the world covering the leisure sector

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Speaker 1: for Bloomberg Intelligence. That's casinos, cruises, theme parks, all the

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Speaker 1: fun stuff.

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Speaker 3: How's it going, Jody, good and you are right about that, James,

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Speaker 3: it is not a bad job.

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Speaker 1: Thank you so much for coming back on the show. So,

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Speaker 1: the leisure sector was the surprise hit of twenty twenty

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Speaker 1: three in credit, generating huge returns for junk bond investors.

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Speaker 1: It's not a very large part of the market, but

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Speaker 1: if you'd invested there, you would have made more than

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Speaker 1: twenty percent last year, almost double the overall corporate bond market.

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Speaker 1: So you would have done really well. I'm not a

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Speaker 1: big gambler, as you know, and I've never been on

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Speaker 1: a cruise. I tend to stay away from theme parks. So, Frank,

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Speaker 1: I'm shocked that it did so well. Just so, I'm

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Speaker 1: not managing people's money or doing any research for anything

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Speaker 1: like that. But so Joy, my main question is does

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Speaker 1: this rally continue. I mean, the consumer's been strong for

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Speaker 1: so long. The revenge spending went on way longer than

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Speaker 1: anyone expected. Surely we're done now your slower economy, high rates, inflation.

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Speaker 1: They're all weighing or do we all need to go

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Speaker 1: on a cruise or go to the casino because there's

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Speaker 1: so much bad news at the moment. What's going on?

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Speaker 3: Well, first of all, i'd say, James, you're definitely in

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Speaker 3: the minority when it comes to not participating in the

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Speaker 3: travel industry. I guess you're just in love with your

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Speaker 3: job so much that you don't have time to go

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Speaker 3: to theme parks or on cruises. But putting that aside,

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Speaker 3: I will say that twenty twenty two and twenty twenty

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Speaker 3: three were very interesting years in terms of the revenge spending,

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Speaker 3: the revenge travel, the narrative around twenty twenty four, and

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Speaker 3: this is what we've talked about in our outlook is

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Speaker 3: that the momentum will continue, but it will moderate, So

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Speaker 3: we're not going to see the same robust level spending,

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Speaker 3: but we will see certain bright spots that will continue.

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Speaker 3: I mean, the cruise lines have already been talking about.

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Speaker 3: Royal and Carnival have both said this at investor events

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Speaker 3: that they are seeing still very high booking levels, you know,

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Speaker 3: tremendous booking levels. Carnival I think is two thirds book

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Speaker 3: for twenty twenty four already, so there's still this appetite,

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Speaker 3: particularly for certain parts of the leisure sector.

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Speaker 1: So I guess there is still demand. But in terms

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Speaker 1: of what the market's already done, I mean, it's done

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Speaker 1: a lot, so we're kind of seeing that it just

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Speaker 1: cannot be sustained. I mean, we're getting pretty close to

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Speaker 1: power on some of these bonds. So sure, there's only

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Speaker 1: so much more you can do. But so let's talk

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Speaker 1: about the cruise lines then, to start with, because you

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Speaker 1: mentioned those, they raised a ton of debt last year.

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Speaker 1: I guess they could issue more again this year. There's

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Speaker 1: an opportunity right now. They also have callable bones, you know,

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Speaker 1: they could refinance. What's the outlook for funding?

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Speaker 3: So just to touch on your earlier point when it

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Speaker 3: comes to where the bonds are trading and how much

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Speaker 3: more room we have to run, I would say a

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Speaker 3: couple of points to that. You know, what we've been

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Speaker 3: saying for twenty twenty four is it is more of

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Speaker 3: a credit by credit conversation. Case in point, you're seeing

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Speaker 3: companies take much more drastic steps to keep their momentum going.

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Speaker 3: We like to compare the six Flags and Cedar Fair

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Speaker 3: merger with the Choice Hotels hostile acquisition attempt of Windom,

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Speaker 3: because those are two very different scenarios that will result

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Speaker 3: in different ways that the bonds react. You know, for

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Speaker 3: six Flags and Cedar Fair, they're going to be leveraging

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Speaker 3: with this deal, they're not taking on additional debt, and

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Speaker 3: they're trying to do it in a way that's credit favorable,

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Speaker 3: Whereas for Choice, they're willing to risk the balance sheet

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Speaker 3: in order to get bigger and to keep the momentum going. Now,

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Speaker 3: going back to cruise lines, what we're seeing is the

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Speaker 3: companies are still in their turnaround story. Definitely a little

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Speaker 3: bit behind some of their peers in leisure as it

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Speaker 3: relates to paying down their debt load getting their balance

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Speaker 3: sheet in order. They're still not you know, I would

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Speaker 3: say they're probably fifth inning or so of this. You know,

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Speaker 3: Carnival brought down their debt low below thirty one billion,

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Speaker 3: which is a tremendous feat considering it was over thirty

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Speaker 3: five billion at the start of the year, but there's

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Speaker 3: still a lot to go. That's not the balance sheet

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Speaker 3: they had before the pandemic. That's not what they would

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Speaker 3: like to have. All three companies we're talking Carnival, Royal

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Speaker 3: and Norwegian are trying to get to investment grades sometime

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Speaker 3: in the next few years, and they've all been pretty

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Speaker 3: aggressive in terms of debt refinancing as well as repayment,

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Speaker 3: and I think they're going to do a combination of

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Speaker 3: both this year, So.

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Speaker 1: I'm more like to pay down debt row and raise

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Speaker 1: new debt.

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Speaker 3: You think they'd like to net pay down debt. That said,

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Speaker 3: we've talked with management about this topic quite a bit,

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Speaker 3: particularly recently, and the companies have indicated that if rates

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Speaker 3: are in such a way that it's attractive for them

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Speaker 3: to refinance and push out debt, they will do that

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Speaker 3: as well. But their preferred method is to repay debt.

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Speaker 1: And do you think it's feasible that they could get

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Speaker 1: to invest in grade in that timeframe that you mentioned

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Speaker 1: it by next year?

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Speaker 3: We've run our models and we've looked at what you know,

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Speaker 3: the Moody's and SMP requirements are to be investment grade

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Speaker 3: and whether or not, you know, from an optimistic standpoint,

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Speaker 3: a more base case than a pessimistic standpoint, if they

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Speaker 3: could get there, and I don't think their expectations for

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Speaker 3: Royal it's twenty twenty five, for Carnival's twenty twenty six.

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Speaker 3: Norwegian has a little bit more vague investment grade like metrics.

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Speaker 3: They didn't specifically say investment grade, and they never were

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Speaker 3: investment grade before the pandemic. But for Royal and Carnival

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Speaker 3: twenty five twenty six. I believe is doable. It's just

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Speaker 3: a question of geopolitical risks, whether anything that could sort

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Speaker 3: of waylay these plans that they have to sort of

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Speaker 3: put a wrench in the activity that they're seeing.

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Speaker 1: I just wanted to flip to gaming brief because you've

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Speaker 1: had a good piece out on casars and you cover

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Speaker 1: all of that set. But what I'm kind of most

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Speaker 1: interested in in that context is the China effect because

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Speaker 1: that has been really kind of huge in terms of,

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Speaker 1: you know, the gaming exposure to Macau, which is a

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Speaker 1: huge gambling center in Asia. What's the outlook generally for

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Speaker 1: gaming firms in yours that you cover.

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Speaker 3: So gaming's a little bit more mixed. It's definitely more

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Speaker 3: of a company by company perspective. And I say that

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Speaker 3: in such a way that for the regional gaming companies,

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Speaker 3: the companies that have more regional United States gaming, it

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Speaker 3: might be a little bit more difficult depending on how

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Speaker 3: we go economically, depending on where we are with interest rates,

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Speaker 3: depending on where we are with inflation, depending on where

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Speaker 3: we are with jobs. Right, So a lot of the

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Speaker 3: narrative is what twenty twenty four could look like in

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Speaker 3: terms of if it's going to be a soft landing,

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Speaker 3: hard landing, you know what the Fed's going to do.

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Speaker 3: We've seen, especially yesterday, dubbish commentary, and so I think

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Speaker 3: that it's all going to play into the gaming sector,

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Speaker 3: particularly for the second half of twenty twenty four. For

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Speaker 3: the first half twenty twenty four, Vegas actually has a

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Speaker 3: lot of positive events going on. Case in point, the

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Speaker 3: super Bowl. They have a couple of premier events that

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Speaker 3: tack on to the second half of twenty twenty three

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Speaker 3: that will be positive from just a top line perspective

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Speaker 3: for these companies. Now, if you look at Macau and

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Speaker 3: you look overseas there, it's still in a turnaround phase,

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Speaker 3: but it's a much quicker sort of move upward than

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Speaker 3: what we've seen in Vegas because of China's restrictions in

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Speaker 3: terms of reopening that opened last January. So we're still

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Speaker 3: getting the benefit of those tailwinds. That will moderate over time,

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Speaker 3: I believe, but we are seeing that the companies there

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Speaker 3: are benefiting still from this appetite in Macau. Elsewhere internationally,

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Speaker 3: we're seeing you online gaming being a positive for these companies.

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Speaker 3: We're also seeing expansion into other areas such as the UAE,

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Speaker 3: and so I think there's a lot of interesting elements

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Speaker 3: going on. That said, it's not all credit positive, right,

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Speaker 3: So if you look at MGM, they are being very expansionary,

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Speaker 3: very much focused on boosting themselves and trying to balance

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Speaker 3: both shareholders and bondholders by pulling back in terms of

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Speaker 3: how much they're giving back to shareholders. But at the

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Speaker 3: end of the day, they have tremendous capex plans that

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Speaker 3: will sort of put a dent in their narrative around

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Speaker 3: being credit friendly. For Caesars, they're looking to repay debt, refinance,

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Speaker 3: get their balance sheet in order before they sort of

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Speaker 3: think of anything else beyond that.

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Speaker 1: Credit participant. Is there a relative value opportunity there by

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Speaker 1: Caesars sell MGM or something like that.

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Speaker 3: So we can't say buyseller hold, But we've been saying

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Speaker 3: that Caesar's bonds could tighten t MGM for a while,

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Speaker 3: and I think that that spread will continue to narrow.

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Speaker 1: The other sector that I'm really interested in, and you know,

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Speaker 1: all the money I don't spend on casinos and cruises,

434
00:23:24,480 --> 00:23:28,240
Speaker 1: I spend on hotels and car rentals and airlines obviously

435
00:23:28,840 --> 00:23:31,920
Speaker 1: to go and see my family, but the hotels and

436
00:23:32,080 --> 00:23:35,200
Speaker 1: car rental firms. Are they still getting a boost from

437
00:23:35,240 --> 00:23:38,600
Speaker 1: this spending, this revenge spending holidaymakers, or is it now

438
00:23:38,680 --> 00:23:40,360
Speaker 1: coming from business travel? What's going on there.

439
00:23:41,720 --> 00:23:43,840
Speaker 3: I think that business travel piece is where you're going

440
00:23:43,880 --> 00:23:46,200
Speaker 3: to see some of the tail tailwinds. We're going to

441
00:23:46,240 --> 00:23:49,680
Speaker 3: see conferences and business travel as the main sort of

442
00:23:50,320 --> 00:23:55,440
Speaker 3: propeller into twenty twenty four. Companies will probably have to

443
00:23:55,520 --> 00:23:59,720
Speaker 3: play around with their rates a little bit. Coming into

444
00:23:59,760 --> 00:24:03,000
Speaker 3: this last year, they could really command higher prices just

445
00:24:03,080 --> 00:24:05,720
Speaker 3: because there were so many customers who wanted to go places.

446
00:24:06,440 --> 00:24:08,119
Speaker 3: This year, it might be a little bit more of

447
00:24:08,200 --> 00:24:10,960
Speaker 3: that game of trying to identify where the actual demand is,

448
00:24:11,080 --> 00:24:13,879
Speaker 3: what the supply is, and sort of balancing those pieces.

449
00:24:15,000 --> 00:24:17,280
Speaker 3: But I think what's so interesting that we're going to

450
00:24:17,320 --> 00:24:19,760
Speaker 3: see over the next few years in the hotel space

451
00:24:19,960 --> 00:24:23,359
Speaker 3: is this amalgamation among the companies in terms of the

452
00:24:23,440 --> 00:24:27,240
Speaker 3: different levels. So you're talking about the different types of

453
00:24:27,400 --> 00:24:31,680
Speaker 3: class of hotel right the high end luxury to the economy,

454
00:24:31,760 --> 00:24:34,520
Speaker 3: and we're starting to see the Marriotts and the Hiltons

455
00:24:34,560 --> 00:24:37,320
Speaker 3: of the world really dipping their toe in the water

456
00:24:37,560 --> 00:24:42,480
Speaker 3: both domestically and internationally. As it relates to economy, extended stay,

457
00:24:42,760 --> 00:24:47,119
Speaker 3: and areas that they're less traditionally not in as they

458
00:24:47,200 --> 00:24:50,560
Speaker 3: are now. Now Hyatt is sort of going all in

459
00:24:50,720 --> 00:24:53,480
Speaker 3: on the all inclusive and more of the luxury element

460
00:24:53,600 --> 00:24:57,320
Speaker 3: as well as vertical integration as it relates to travels.

461
00:24:57,320 --> 00:24:59,920
Speaker 3: So that should continue for the rental car space, where

462
00:25:00,200 --> 00:25:06,560
Speaker 3: were a little bit more cautious on only because they

463
00:25:06,680 --> 00:25:10,520
Speaker 3: had such tremendous tailwinds due to the used car market

464
00:25:10,600 --> 00:25:13,760
Speaker 3: and due to the residual value of their fleets. Hurts

465
00:25:13,800 --> 00:25:18,080
Speaker 3: has really been going big into electric vehicles and not

466
00:25:18,160 --> 00:25:22,480
Speaker 3: really understanding what the you know, what the depreciation cost is,

467
00:25:22,600 --> 00:25:25,359
Speaker 3: what the aftermarket costs for the vehicles are, what the

468
00:25:25,440 --> 00:25:28,840
Speaker 3: sort of additional elements related to it for collision, et cetera.

469
00:25:28,920 --> 00:25:30,720
Speaker 3: And so I think that that's going to continue being

470
00:25:30,760 --> 00:25:36,000
Speaker 3: a dent on them despite the top line element of

471
00:25:36,119 --> 00:25:38,440
Speaker 3: it doing well right moment, They're still going to be

472
00:25:38,480 --> 00:25:40,840
Speaker 3: demand for rental cars. It's more of how they manage

473
00:25:40,880 --> 00:25:43,840
Speaker 3: their business through this sort of changing environment.

474
00:25:45,200 --> 00:25:47,240
Speaker 1: Well, they stop charging me so much a heath reful.

475
00:25:50,640 --> 00:25:53,639
Speaker 3: I can't promise anything on that. Yeah, the prices have

476
00:25:53,720 --> 00:25:56,400
Speaker 3: definitely shot up, and it doesn't help when you're looking

477
00:25:56,440 --> 00:26:01,040
Speaker 3: at the cars that are are not your EV friendly cars,

478
00:26:01,160 --> 00:26:04,160
Speaker 3: and they charge you the emissions costs and whatever other

479
00:26:04,280 --> 00:26:07,359
Speaker 3: costs related to your traditional sort of cars.

480
00:26:08,440 --> 00:26:11,280
Speaker 1: And on the hotel expansion and sort of you know

481
00:26:11,600 --> 00:26:13,679
Speaker 1: them sort of spreading their wings a bit. Do they

482
00:26:13,760 --> 00:26:15,520
Speaker 1: need to borrow a lot of money to do that?

483
00:26:18,080 --> 00:26:20,680
Speaker 3: So for Hilton and hy I mean sorry for Hilton

484
00:26:20,720 --> 00:26:24,200
Speaker 3: and Marriott, they're not so much borrowing money for the

485
00:26:24,320 --> 00:26:29,920
Speaker 3: expansion per se, but they are helping out the hotel

486
00:26:30,040 --> 00:26:34,240
Speaker 3: owners where they can. Case in point, last March, when

487
00:26:34,440 --> 00:26:37,600
Speaker 3: we had the issue with regional banks, or sort of

488
00:26:37,600 --> 00:26:39,800
Speaker 3: the worries about regional banks, there was a lot of

489
00:26:39,840 --> 00:26:43,720
Speaker 3: discussion about how the hotels could expand if say, for instance,

490
00:26:44,200 --> 00:26:49,920
Speaker 3: the hotel owners had issues getting financing, and a bunch

491
00:26:49,920 --> 00:26:52,320
Speaker 3: of the hotel companies you know, including some of the

492
00:26:53,240 --> 00:26:55,720
Speaker 3: you know large and smaller ones, even you know Windham

493
00:26:55,840 --> 00:27:02,720
Speaker 3: for example, have remarked to that they are willing to

494
00:27:03,400 --> 00:27:06,960
Speaker 3: help out where they can from a financing standpoint to

495
00:27:07,520 --> 00:27:11,880
Speaker 3: get these new facilities opening, because you know, once they open,

496
00:27:11,920 --> 00:27:15,680
Speaker 3: they sort of run themselves and the company's benefit because

497
00:27:15,680 --> 00:27:19,959
Speaker 3: they're mostly managers now they aren't actual owners, so they

498
00:27:20,040 --> 00:27:22,400
Speaker 3: don't have a lot of the capex costs, they don't

499
00:27:22,400 --> 00:27:23,920
Speaker 3: have a lot of the overhead costs the way that

500
00:27:24,000 --> 00:27:27,600
Speaker 3: you see companies that own and run properties do.

501
00:27:28,720 --> 00:27:29,000
Speaker 2: Got it.

502
00:27:29,080 --> 00:27:32,040
Speaker 1: So not a ton of new issuance then from those companies.

503
00:27:32,840 --> 00:27:34,959
Speaker 3: Well, it doesn't mean that we won't see new issuance.

504
00:27:35,000 --> 00:27:36,960
Speaker 3: I think we'll still see new issuance. I mean, you

505
00:27:37,080 --> 00:27:39,760
Speaker 3: take Marriott for example, they have very much a lather,

506
00:27:39,880 --> 00:27:42,480
Speaker 3: rinse repeat model in that they have debt coming do,

507
00:27:42,760 --> 00:27:45,000
Speaker 3: they refinance it and they push it out right, That's

508
00:27:45,040 --> 00:27:48,080
Speaker 3: what they do over and over again. They also, you know,

509
00:27:48,440 --> 00:27:50,320
Speaker 3: one of the things that Marriotte did was they pushed

510
00:27:50,400 --> 00:27:53,120
Speaker 3: to get their ratings back to mid triple B level.

511
00:27:53,440 --> 00:27:55,200
Speaker 3: And it wasn't just because they wanted to have the

512
00:27:55,320 --> 00:27:57,680
Speaker 3: ratings that they had pre pandemic. It was that they

513
00:27:57,920 --> 00:28:01,480
Speaker 3: are an active participant in the commercial paper market and

514
00:28:01,680 --> 00:28:05,200
Speaker 3: they very much showed earlier this year when they borrowed

515
00:28:05,840 --> 00:28:08,200
Speaker 3: quite a substantial bound was over a billion. I'm actually

516
00:28:08,200 --> 00:28:11,399
Speaker 3: blanking down an exact figure at the moment, but they

517
00:28:11,920 --> 00:28:14,280
Speaker 3: you know, they are an active user of the commercial

518
00:28:14,320 --> 00:28:16,880
Speaker 3: paper market just to fill in gaps, but then they'll

519
00:28:16,960 --> 00:28:19,480
Speaker 3: go and replace it with longer term financing when they do,

520
00:28:19,960 --> 00:28:23,280
Speaker 3: or they'll repay it with cash on hand. But that said,

521
00:28:23,359 --> 00:28:25,760
Speaker 3: I mean they see the debt markets as an area

522
00:28:25,840 --> 00:28:27,520
Speaker 3: to always go to, and I think you'll see that

523
00:28:27,560 --> 00:28:30,959
Speaker 3: with Hilton. You know, Hilton is less cares about their

524
00:28:31,000 --> 00:28:33,760
Speaker 3: balance sheet than Marriott. They are high yield rated and

525
00:28:33,840 --> 00:28:36,919
Speaker 3: I think they'll stay there unless they actively commit verbally

526
00:28:37,040 --> 00:28:42,720
Speaker 3: to being investment grade. But you know, they are an

527
00:28:42,760 --> 00:28:45,480
Speaker 3: active issuer as well, and I think we'll continue to

528
00:28:45,520 --> 00:28:47,760
Speaker 3: see that that the hotel companies will come to market.

529
00:28:48,840 --> 00:28:51,560
Speaker 3: Getting back to actually the cruise lines, something that we've

530
00:28:51,640 --> 00:28:56,320
Speaker 3: said is that for Royal Caribbean, for example, they were

531
00:28:56,400 --> 00:28:59,560
Speaker 3: also an active participant in the commercial paper market before

532
00:28:59,640 --> 00:29:03,000
Speaker 3: the pan if that gives you any indication of what

533
00:29:03,360 --> 00:29:04,280
Speaker 3: they'd like to achieve.

534
00:29:06,040 --> 00:29:08,160
Speaker 1: So to sum up the set to you cover at

535
00:29:08,200 --> 00:29:10,680
Speaker 1: the start, we talked about, you know, massive performance, really

536
00:29:10,680 --> 00:29:14,520
Speaker 1: great performance last year. We expect it to do well,

537
00:29:14,600 --> 00:29:17,080
Speaker 1: but not maybe as well as it did in twenty

538
00:29:17,120 --> 00:29:19,800
Speaker 1: twenty three. But what are you most excited about for

539
00:29:19,880 --> 00:29:22,680
Speaker 1: this year, Jody? And on the flip side, what are

540
00:29:22,680 --> 00:29:24,760
Speaker 1: you most worried about? What gives you the most sleepless nights?

541
00:29:27,120 --> 00:29:29,719
Speaker 3: What doesn't give me sleepless nights. As a credit analyst,

542
00:29:29,720 --> 00:29:32,440
Speaker 3: you're always looking for the boogieman over your shoulder, and

543
00:29:32,760 --> 00:29:37,160
Speaker 3: I definitely do feel a little uncomfortable about being constructive

544
00:29:37,360 --> 00:29:39,360
Speaker 3: on the cruise lines. But at the same time, I

545
00:29:39,400 --> 00:29:41,880
Speaker 3: think the momentum is there. It's really a question of

546
00:29:42,080 --> 00:29:45,920
Speaker 3: are these caveats of geopolitical risks, for example, going to

547
00:29:45,960 --> 00:29:48,800
Speaker 3: waylay their plans. But overall, I think that that's an

548
00:29:48,840 --> 00:29:53,680
Speaker 3: area that you'll continue to see the de leveraging and

549
00:29:54,160 --> 00:29:59,080
Speaker 3: the benefit of that for the bonds. That said, for

550
00:29:59,400 --> 00:30:02,120
Speaker 3: rental car companies, I think yeah, I think this adjustment

551
00:30:02,360 --> 00:30:06,520
Speaker 3: from the sort of really robust levels of IBADAD that

552
00:30:06,600 --> 00:30:10,719
Speaker 3: we saw in twenty twenty two, how that then translates

553
00:30:10,720 --> 00:30:13,400
Speaker 3: to twenty twenty four when we have a very different environment.

554
00:30:14,520 --> 00:30:17,000
Speaker 3: You know, we're despite the fact that I think you'll

555
00:30:17,040 --> 00:30:20,360
Speaker 3: see the activity that will feed into revenue, I don't

556
00:30:20,360 --> 00:30:22,760
Speaker 3: know if you'll never necessarily see that from a margins

557
00:30:22,800 --> 00:30:23,880
Speaker 3: and cashulow perspective.

558
00:30:24,560 --> 00:30:27,280
Speaker 1: Thank you very much, Jody Lewie of Bloomberg Intelligence. You

559
00:30:27,320 --> 00:30:29,640
Speaker 1: can read all of her great analysis on the Bloomberg terminal.

560
00:30:29,680 --> 00:30:31,000
Speaker 1: Do check it out, and I hope to see you

561
00:30:31,080 --> 00:30:31,840
Speaker 1: back on the show soon.

562
00:30:31,960 --> 00:30:32,200
Speaker 2: Jody.

563
00:30:32,320 --> 00:30:34,360
Speaker 1: Cheers, have a good one and thank us again to

564
00:30:34,480 --> 00:30:37,000
Speaker 1: Neil Kellenan with Bloomberg News in London. Read all of

565
00:30:37,040 --> 00:30:39,200
Speaker 1: his scoops on the terminal and at Bloomberg dot com,

566
00:30:39,880 --> 00:30:42,320
Speaker 1: and please do subscribe wherever you get your podcasts. We're

567
00:30:42,360 --> 00:30:45,440
Speaker 1: on Apple, Google and Spotify. Give us a review, tell

568
00:30:45,480 --> 00:30:48,920
Speaker 1: your friends, or email me directly at Jacroumbi eight at

569
00:30:48,960 --> 00:30:52,120
Speaker 1: Bloomberg dot net. That's j c r Mbi E as

570
00:30:52,120 --> 00:30:55,000
Speaker 1: in my surname and the number eight at Bloomberg dot net.

571
00:30:55,920 --> 00:30:58,280
Speaker 1: I'm James Crombie. It's been a pleasure having you join

572
00:30:58,360 --> 00:31:00,120
Speaker 1: us again next week on the Credit e