Speaker 1: Hello, welcome to the Credit Edge of Weekly Markets podcast.
Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 1: This week, we're very pleased to have Paula Sambo, who
Speaker 1: covers private debt for Bloomberg News in Toronto. How are you, Paula,
Speaker 1: I'm doing great.
Speaker 2: How about you, Jane.
Speaker 1: All well, thank you very much. And we're also delighted
Speaker 1: to see Steve Flynn, who covers telecoms and media for
Speaker 1: Bloomberg Intelligence in New York. How's it going, Steve, Welcome
Speaker 1: back to the show.
Speaker 3: Oh good, thanks for having me.
Speaker 1: We'll be coming back to Steve a bit later to
Speaker 1: talk about Paramount Global, the media company that brought us
Speaker 1: top Gun Maverick, among other things. So do stay with us.
Speaker 1: But first, Paula Sambo with Bloomberg News. Why is everyone
Speaker 1: so excited about private credit right now?
Speaker 2: I know, right First, thanks for having me here and
Speaker 2: I'm a great kind of your work. And going back
Speaker 2: to private credit, it seems to be all everyone talks
Speaker 2: about these days. Canada has these huge pension funds that
Speaker 2: usually do much better than the US ones, and they
Speaker 2: have been in private markets for a long time. So
Speaker 2: I mean private credit is not It's a subject that
Speaker 2: has been talked about in Canada for a long time.
Speaker 2: But now we have a bunch of other smaller firms
Speaker 2: that are trying to do as well as the big
Speaker 2: pension funds, and it's a very booming operation up here.
Speaker 1: So talking about the big pension plans in Canada, I
Speaker 1: mean there are some huge, huge funds out there. You
Speaker 1: talked to the Pension Fund of British Columbia recently, right,
Speaker 1: they're the big one on the West coast. How much
Speaker 1: money they managing.
Speaker 2: So they manage two hundred and eleven Canadian dollars, so
Speaker 2: that's just north of one hundred and sixty billion US.
Speaker 2: They are pretty big, and they are out west in
Speaker 2: in Victoria. They are a very interesting player because they
Speaker 2: started doing private credit a bit later and their private
Speaker 2: credit operations are still under their public equities on team
Speaker 2: though they have been hiring specialists for that, and they
Speaker 2: grill their private ed operation to thirteen point five billion Canadians,
Speaker 2: which is a record for them.
Speaker 1: Why are they jumping into private credit right now?
Speaker 2: You know, they see it as the place with the
Speaker 2: best of you know, the best returns in all of
Speaker 2: the markets. So just yesterday I talked to THEIRS active
Speaker 2: vice president and he said that you they are just
Speaker 2: absolutely brilliant right now in the private credit space, so
Speaker 2: it's impossible to stay out of there. He says, there
Speaker 2: is nowhere else where you can get like double digit
Speaker 2: returns with you know, basically quarly payments.
Speaker 1: So yeah, it does sound brilliant. I mean, but by
Speaker 1: double digit, what are we talking about? Is it like
Speaker 1: ten percent or is it heading up towards twenty percent?
Speaker 1: Did he give you any sense.
Speaker 2: Of Oh, he did not. I mean, they are whole operation,
Speaker 2: because they are. They don't do a bunch of hyo.
Speaker 2: They do mostly what they would call very safe investments.
Speaker 2: So there are their gains was basically five percent, but
Speaker 2: he's seeing like deals that he says are in the
Speaker 2: double digits. I would think closer to ten percent because
Speaker 2: they they are not really going down the credit risk.
Speaker 2: But he did not. He did not advance on that.
Speaker 1: So you no, private credit generally, I mean, has just
Speaker 1: been such a big mania over the last you know,
Speaker 1: twelve eighteen months, And I absolutely get it from a
Speaker 1: Borough perspective that you know, rates have moved so much,
Speaker 1: markets are so volatiles for some companies, it's the only
Speaker 1: option now to get financing. But from an investor standpoint,
Speaker 1: which is which is what we're talking about here, you know,
Speaker 1: it made a lot of sense a few years ago
Speaker 1: when yields were zero, and you know some places they
Speaker 1: were negative and returns were very hard to get. But now,
Speaker 1: and we can talk to Steve Flynn about this in
Speaker 1: a minute, yields are over five percent now on high
Speaker 1: quality US corporate bonds, nine percent for junk bonds in
Speaker 1: the US. So why do you have to sacrifice liquidity
Speaker 1: and transparency for just a little bit more return?
Speaker 2: Oh yeah, that's a very interesting question. And you know,
Speaker 2: these smaller players in Canada are having a hard time fundraising.
Speaker 2: Like I spoke to a firm just a couple of
Speaker 2: weeks ago which I can't really name because it was
Speaker 2: on background, but they're aiming to raise one billion in
Speaker 2: a year and they actually raised just one hundred million.
Speaker 2: So like, that's a very tough place to raise money
Speaker 2: because of what you said. Really, I mean, it's just
Speaker 2: like you're getting good ills elsewhere, so why go into
Speaker 2: private credit where the risk is not as clear as
Speaker 2: in the public markets? For example? The dimension funds. They
Speaker 2: are all very well capitalized and their situation is different.
Speaker 2: Like they've I've been in this market for a long time.
Speaker 2: They do the larger deals. I mean, their money is there.
Speaker 2: They're not really fundraising is the writer like the people
Speaker 2: who are retiring money. So you know, they do have
Speaker 2: the capital and they think it makes sense to be
Speaker 2: there and they have to diversify where You're absolutely right.
Speaker 2: That's something that has been impacting the smaller players, especially
Speaker 2: the first time fundraisers. I mean they're having a tough
Speaker 2: time out there.
Speaker 1: And so to get these brilliant yields. As the Canadian
Speaker 1: fund managers are saying, how long do you have to
Speaker 1: lock your money up for?
Speaker 2: Oh, that's a very interesting question. Yeah, they are in
Speaker 2: it for the long haul, right, I mean they're patient
Speaker 2: investors their pensions so they can be there for as
Speaker 2: long as they need. They haven't mentioned, you know, what
Speaker 2: kind of terms they were working on, but in the
Speaker 2: past I've talked about this with other mentioned funds and
Speaker 2: they would like leave their money there for a long time.
Speaker 1: Is that five years, seven years, ten years, even more.
Speaker 2: Than sometimes even more than they can Okay, Yeah, they
Speaker 2: have a very long horizon.
Speaker 1: Yes, so all this lending and in private just that word,
Speaker 1: you know, is somewhat worrying in some senses, All this
Speaker 1: lending in the shadows, no transparency, no visibility. We can't
Speaker 1: see where and how this stuff is trading. Aren't we
Speaker 1: just setting ourselves up for a big fall here? I
Speaker 1: mean underlying it, isn't this a set of companies that
Speaker 1: that's most exposed to rising rates and the economic slowdown
Speaker 1: that we're seeing.
Speaker 2: Well, that's a very interesting question. I mean, we haven't
Speaker 2: seen very high default rates yet. I mean, these companies,
Speaker 2: like the banks, have been retreating from the sector for
Speaker 2: a bunch of reasons. Not just because these companies are
Speaker 2: not really good, but you know, they have higher like
Speaker 2: lending criteria, so sometimes the borer is a good one,
Speaker 2: but because of a bunch of rules that they have
Speaker 2: to obay to, they can really lend to these places.
Speaker 2: I mean, and these people are the ones that you know,
Speaker 2: they're there like you know, making your food, you know,
Speaker 2: doing all these real economy work that needs doing. So
Speaker 2: it's important to have players out there like willing to
Speaker 2: launch them. A lot of them are good payers and
Speaker 2: they just can't access the big banks so I don't
Speaker 2: think that's a sector that it's going anywhere anytime too,
Speaker 2: Like it's going to be there for the long term.
Speaker 2: Default rate hasn't been too bad, and you're right, I mean,
Speaker 2: there is less transparency for one time. But on the
Speaker 2: other hand, I mean, I mean this business they need
Speaker 2: money and they need people to be willing to launch
Speaker 2: to them. So I see them in there for the
Speaker 2: long haul.
Speaker 1: The Canadian pension funds, I mean, I think them is
Speaker 1: pretty conservative investors with very low tolerance for risk. Do
Speaker 1: they really know what they're getting into here?
Speaker 2: I mean, they've been in it for a very long time.
Speaker 2: They are pioneers. They have very qualified people, and they
Speaker 2: seem to know what they're doing. I mean, I can't
Speaker 2: speak on their behalf, but they have they give strong
Speaker 2: reasons why they are in this market and why it
Speaker 2: makes sense. I mean obviously now I even heard from
Speaker 2: the head of the biggest Canadian pension from the Canadian
Speaker 2: CPPA B, who said, like, now there's this huge of
Speaker 2: money chasing private credit, which makes which is making it
Speaker 2: harder to invest on right because you know, any deal
Speaker 2: we'll get so many people willing to go in that
Speaker 2: sometimes you know, the terms will be sacrificed, and they
Speaker 2: are not really willing to go in there. So I mean,
Speaker 2: if you have other places to invest on it doesn't
Speaker 2: always make sense to invest in private credit. But I mean,
Speaker 2: if you're well capitalized, you understand the market, and if
Speaker 2: you think it makes sense, like why not.
Speaker 1: And as you've written recently, you know there are other
Speaker 1: firms from outside Kinada pushing into Canada. So that's making
Speaker 1: the competition even more intense.
Speaker 2: Right, even more intense. And some people don't have a
Speaker 2: big track record. I mean, private credit is not for everyone.
Speaker 2: I mean you have to understand this, you have to
Speaker 2: be in it for a long time, or you have
Speaker 2: to you know, partner with someone who knows what they're doing.
Speaker 2: So yes, we've been hearing like a lot of firms
Speaker 2: that say, like, our clients are pushing us into private credit.
Speaker 2: We don't know it really well, but we don't want
Speaker 2: to lose clients. So I mean, some people are getting
Speaker 2: in there and we are not sure about how much
Speaker 2: they know about it. So it's getting a bit trick here.
Speaker 2: But and and and also like there's this huge, like
Speaker 2: I said, this huge role of money chasing private credit,
Speaker 2: which makes you know, some deals a bit overcrowded. Some
Speaker 2: people alls are also over allocated to the sector because
Speaker 2: you know, everyone is going private. But you know it's
Speaker 2: still an interesting market. And yes, other players are entering Canada,
Speaker 2: but the Canadian mention funds are also operating everywhere, so
Speaker 2: I don't think that makes a big difference for them.
Speaker 1: So it's not a fair Do you think it's definitely
Speaker 1: here to stay?
Speaker 2: I think so, yes.
Speaker 1: So before we talk to Steve Flynn at Bloomberg Intelligence,
Speaker 1: what's the next big story to watch on your beat? Pella,
Speaker 1: more big private investments, more Distress's what are.
Speaker 3: You looking for?
Speaker 2: So I'm definitely looking for more distress because you know,
Speaker 2: as a bunch of people invest in it and I'm
Speaker 2: now the covenants get loser and there is some stuff
Speaker 2: going on. So yes, we're chasing you know, some companies
Speaker 2: that are filing for bankruptcy and they are like a
Speaker 2: large part of someone's portfolio. So we've been chasing these stories.
Speaker 2: That's something to watch on. But also we are watching
Speaker 2: this huge influx into private credit. Where it's going, I mean,
Speaker 2: what it's doing to the market, what it's doing to
Speaker 2: specific deals.
Speaker 1: Great stuff Palosambo from Bloomberg News. Thank you so much
Speaker 1: for joining us.
Speaker 2: Thank you for having me read.
Speaker 1: All of Palace scoops on the Bloomberg terminal and of
Speaker 1: course at Bloomberg dot com. So, as I mentioned earlier,
Speaker 1: we're very pleased to have with us Steve Flynn, who
Speaker 1: looks at telecoms and media for Bloomberg Intelligence in the US.
Speaker 1: How's it going, Steve?
Speaker 3: I'm good, How are you great?
Speaker 1: Thank you? So what's the tone right now in your sector?
Speaker 1: I see that both media and telecoms are doing very well.
Speaker 1: They're beating the high grade index this year. What's drive
Speaker 1: that and to be expected to continue?
Speaker 2: Sure?
Speaker 3: A couple of things.
Speaker 4: Number one, some of the largest players are trying to
Speaker 4: improve their balance sheet. So if you think about like
Speaker 4: an AT T, A Verizon T Mobile US, they're all
Speaker 4: striving for better debt profiles and lower leverage, which is
Speaker 4: positive to the overall market. And then you have a
Speaker 4: few really wide trading names that are also focused on
Speaker 4: improving their balance sheet, names like Warner Brothers, Discovery, Paramount,
Speaker 4: and Charter Secured Bonds.
Speaker 1: You mentioned Paramount, I mean, other than top Gun and
Speaker 1: Tom Cruise. Why do we care about them at the moment.
Speaker 4: Paramount is a very interesting credit because the bond's trade
Speaker 4: very wide. Appears it's rated triple B by all the
Speaker 4: three major credit rating agencies. They all have a stable outlook,
Speaker 4: Yet their bonds trade almost or about one hundred and
Speaker 4: twenty basis points wide of the regression curve of like
Speaker 4: rated bonds in the communications sector. Interestingly, they are also
Speaker 4: about one hundred and twenty basis points at max inside
Speaker 4: of double B rated communications bonds, so they're kind of
Speaker 4: right in the middle between the triple B and the
Speaker 4: double B curves. Yet we think that there's a much
Speaker 4: higher than fifty percent chance that it stays investment great,
Speaker 4: and I think that the bonds could narrow towards the
Speaker 4: regression curve of their IG rated peers and therefore outperform.
Speaker 1: And they recently slashed the dividend, didn't they to preserve cash.
Speaker 3: Yes.
Speaker 4: Now they've taken a number of steps to improve their
Speaker 4: credit profile, which I think is positive. Number One, they've
Speaker 4: slashed their dividend, which saves them over five hundred million
Speaker 4: dollars a year, which is extra cash that they can
Speaker 4: use for debt reduction. Number Two, they've said that twenty
Speaker 4: twenty three will be the peak year of investment in
Speaker 4: their streaming services. So we think about Powermount Plus, you
Speaker 4: mentioned top Go, Maverick, you know, all these things that
Speaker 4: they're doing for the streaming service. This will be the
Speaker 4: peak year of investment and that's so we'll get past
Speaker 4: that this year. Third, the company is pursuing a sale
Speaker 4: of Simon and Schuster. It's been reported in the news
Speaker 4: that second round bids are due mid July. They could
Speaker 4: fetch potentially in the low two billion dollar area, and
Speaker 4: that can reduce net leverage by almost a full turn
Speaker 4: for this full year two thousand and twenty three. And
Speaker 4: then fourth, there's been several media reports over the past
Speaker 4: few months of the companies selling Beet Media Group with
Speaker 4: a potential sale price in the three billion dollar range.
Speaker 4: So when we think about you know, potentially better organic
Speaker 4: results in twenty twenty four, as we have passed the
Speaker 4: upfront screaming costs in twenty three, and we think about
Speaker 4: proceeds from asset sales to reduce debt, I think the
Speaker 4: company's credit profile could improve meaningfully next year.
Speaker 1: So why are they trading so wide right now?
Speaker 4: Well, there are a couple of reason debt, right, you know,
Speaker 4: they do trade wide, and there are there are reasons why.
Speaker 4: Number one, like I said, this is a peak gear
Speaker 4: for investment into its streaming services, including Paramount Plus, there's
Speaker 4: a shift in viewers and advertising dollars away from traditional
Speaker 4: linear based TV to streaming services. You know, Paramount obviously
Speaker 4: is moving in that direction themselves, but they'd have a
Speaker 4: fair exposure to linear based TV advertising. You know, there's
Speaker 4: a chance of an economic slowdown this year, and you know,
Speaker 4: whenever you get economic slowdowns, that typically means lower spending
Speaker 4: on advertising, which hurts media companies. So you know, those
Speaker 4: are a few factors why paramounts. You know, ibit DAH
Speaker 4: is expected to decline about twenty five percent this year,
Speaker 4: and it's going to push leverage into the high five
Speaker 4: times area, which is high. And those are some of
Speaker 4: the reasons why the bonds have traded so wide. Now again,
Speaker 4: the good things are is that the company wants investment
Speaker 4: grade rated profile. They're going to be moving towards improving
Speaker 4: the credit profile, and the rating agencies, as I said earlier,
Speaker 4: all have stable outlooks as they look. They're looking past
Speaker 4: this peak investment year, and a lot like a lot
Speaker 4: of things the company is doing, like asset sales and
Speaker 4: slashing the dividend.
Speaker 1: Other companies in this sector, you know, Warner Brothers, Discovery,
Speaker 1: they're exposed to exactly the same trends as Paralyn, yet
Speaker 1: you know they're trading at lower yields. Why is that.
Speaker 4: Yeah, so Warner Brothers Bonds have actually done very well
Speaker 4: this year, So you're right, they're focused. They're facing the
Speaker 4: same challenges as Paramount that You've got a changing video landscape,
Speaker 4: they have a lot of exposure to advertising amid potential
Speaker 4: economic slowdown. They're investing a lot of money into their
Speaker 4: streaming services. You know, they just launched Max about a
Speaker 4: month ago, and they have high leverage. Yet there's one
Speaker 4: important lever that Warner Brothers has to pull which Paramount doesn't,
Speaker 4: and that is mergers synergies. So you know, Discovery merged
Speaker 4: with AT and t's Warner Brothers a little more than
Speaker 4: a year ago and at the time they outlined steps
Speaker 4: to achieve about three billion dollars in annual cost savings.
Speaker 4: And this is huge because the cost savings will boost
Speaker 4: EBITDAH and help improve their credit profile. So, you know,
Speaker 4: Warner Brothers reiterated recent as recently as May that they
Speaker 4: expect net leverage to be comfortably below four times this
Speaker 4: year and then achieve their long term target of two
Speaker 4: and a half to three times by the end of
Speaker 4: twenty four.
Speaker 3: So they're moving in the right direction.
Speaker 1: Maybe look at the landscape. I mean, I look at
Speaker 1: all the streaming services I now subscribe to, which customer
Speaker 1: more than the package used to. Isn't this an area
Speaker 1: that's right for consolidation in this paramount a target in that.
Speaker 3: Yeah, I know, I agree.
Speaker 4: There are a lot of streaming providers out there, and
Speaker 4: we've seen a shift over the past couple of years.
Speaker 3: Right.
Speaker 4: It used to be like subscribers, subscriber subscribers, just get
Speaker 4: more subscribers, spend as much as you can, and yet
Speaker 4: companies like Netflix that would borrow in the high field
Speaker 4: market and realize big free cash flow losses. But they
Speaker 4: kept getting subscribers and driving higher revenue, and that's where
Speaker 4: everybody was going for it. Now, you know, in the
Speaker 4: past year, things have shifted. People want to see positive
Speaker 4: free cash flow. Netflix has turned to positive free cash flow,
Speaker 4: and a lot of the other providers are behind Netflix
Speaker 4: and they're focused now on cost cutting, and you know
Speaker 4: a lot of them are talking about this year being
Speaker 4: the year of streaming losses and next year it's going
Speaker 4: to get better. But as you think about ways to
Speaker 4: lower cost and gain more scale, it's through consolidation. So
Speaker 4: when you think about all the streaming platforms out there, yes,
Speaker 4: I agree there should be consolidation.
Speaker 1: So paramount trading wide yields a high versus peers. But
Speaker 1: there is some potential good news around the corner on
Speaker 1: the fundamentals. I mean, it's a potential an opportunity there
Speaker 1: for credit investors. Definitely, we'll be watching that closely. But
Speaker 1: just to wrap up, Steve, I mean you've also been
Speaker 1: looking at the maturity wall, which I find really interesting,
Speaker 1: sort of you know, a big picture level in credit market.
Speaker 1: Who has the big payments coming up? And what does
Speaker 1: that mean for issuance.
Speaker 4: Yeah, so like Hiyala has picked up this year, it's
Speaker 4: up maybe let's call it roughly twenty percent from last year.
Speaker 4: But last year was a very slow year, right, and
Speaker 4: it's there's still well below you know, the pace that
Speaker 4: we're at twenty nineteen, twenty twenty, twenty twenty one, and
Speaker 4: there's still a lot of companies that that are going
Speaker 4: to be facing big maturities of the next couple of years,
Speaker 4: and so it's going to be interesting to watch. There's
Speaker 4: a lot of refinancing that has to be done. If
Speaker 4: I look at, you know, my sector communications, we have
Speaker 4: a lot of distressed bonds out there. So whether you're
Speaker 4: looking at a dish, allumin consolidated Communications, all TCUSA, there's
Speaker 4: a lot of companies that have trade with very low
Speaker 4: bond prices, very high yields, and their new term liquidity
Speaker 4: is okay. But the next couple of years, those are
Speaker 4: companies that are going to have to you know, improve
Speaker 4: their credit profiles and try and refinance.
Speaker 3: And hopefully their overall market backdrop will be better.
Speaker 1: But at the same time, interest rates to just shut up,
Speaker 1: so the costs of funds is massively higher than it was,
Speaker 1: you know, a couple of years ago. What do they
Speaker 1: have to do now? I mean, do they have to
Speaker 1: sell assets to get the ship right to or what.
Speaker 3: Do they do?
Speaker 4: Yeah, a lot of them need to sell assets, look
Speaker 4: for alternative sources of liquidity, whether it's equity or equity
Speaker 4: linked or you know, try and sell assets.
Speaker 3: Yeah, you know, all the above.
Speaker 1: We'll refinance it much higher rates.
Speaker 3: Yeah, No, rates are muchhih. It was interesting.
Speaker 2: You know.
Speaker 4: We always used to look at companies that had callable
Speaker 4: bonds and that they can you know, call them earlier,
Speaker 4: like high you almost bonds are callable and you can
Speaker 4: call it early and.
Speaker 3: Be finance it.
Speaker 4: But now rates have gone up so much and their
Speaker 4: coupons are low that you're not seeing that happen anymore.
Speaker 4: But you're still going to run into the maturities which
Speaker 4: you have to deal with.
Speaker 1: Thanks very much, Steve playing a Bloomberg intelligence Thank you.
Speaker 1: You can read all of his great analysis on the
Speaker 1: Bloomberg Terminal. Do check it out. Hope see you back
Speaker 1: on the show soon.
Speaker 2: Steve.
Speaker 3: Look forward to join you again, and.
Speaker 1: Thanks again to Paula Sambo from Bloomberg News. Read all
Speaker 1: of her great private debt scoops on the Terminal and
Speaker 1: at Bloomberg dot Com. I'm James Crumbie. It's been a
Speaker 1: pleasure having you join us again next week on the
Speaker 1: Credit Edge.
Speaker 2: Just