1 00:00:12,080 --> 00:00:15,240 Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast. 2 00:00:15,600 --> 00:00:18,320 Speaker 1: My name is James Crumbye. I'm a senior editor at Bloomberg. 3 00:00:19,079 --> 00:00:22,800 Speaker 1: Today's guests are Julia Morporigo, who covers distressed debt for 4 00:00:22,840 --> 00:00:25,279 Speaker 1: Bloomberg News in London. We're delighted to have you on 5 00:00:25,280 --> 00:00:29,520 Speaker 1: the show. Thank you, James for having me. We're also 6 00:00:29,640 --> 00:00:32,680 Speaker 1: very pleased to welcome Prida Silva. He's a senior credit 7 00:00:32,720 --> 00:00:36,919 Speaker 1: analyst at Bloomberg Intelligence in Hong Kong covering Asian financial institutions. 8 00:00:37,280 --> 00:00:39,400 Speaker 1: We'll be getting his insight later on in the show, 9 00:00:40,400 --> 00:00:43,879 Speaker 1: but before we do. Julia Morpurigo with Bloomberg News, you 10 00:00:43,920 --> 00:00:46,800 Speaker 1: cover distressed debt in Europe. There's always a ton of 11 00:00:46,880 --> 00:00:49,519 Speaker 1: drama there. So you had a great story on a 12 00:00:49,680 --> 00:00:52,280 Speaker 1: German company that has too much debt. It's not a 13 00:00:52,320 --> 00:00:54,600 Speaker 1: bad business, but they couldn't afford to repay all the 14 00:00:54,640 --> 00:00:57,240 Speaker 1: money that they borrowed. Now the creditors are going to 15 00:00:57,240 --> 00:00:59,960 Speaker 1: take over. They essentially own that company. What's the situation 16 00:01:00,120 --> 00:01:03,360 Speaker 1: and Julia, can you walk us through it? Yes? So, 17 00:01:03,560 --> 00:01:07,600 Speaker 1: Taco Fashion is a German discount retailer selling mainly clothes, 18 00:01:08,120 --> 00:01:11,440 Speaker 1: and it had been owned by private equity firm Appat's 19 00:01:11,480 --> 00:01:15,440 Speaker 1: partners since twenty eleven. As many other retailers. For out 20 00:01:15,440 --> 00:01:18,320 Speaker 1: the years, it faced the challenge of the shift from 21 00:01:18,319 --> 00:01:22,240 Speaker 1: brick and mortar stores tool online. However, the real issues 22 00:01:22,280 --> 00:01:24,920 Speaker 1: came with the pandemic, which happened before Apets could exit 23 00:01:25,000 --> 00:01:28,839 Speaker 1: the company and monetize on its investment. In twenty twenty, 24 00:01:28,880 --> 00:01:30,400 Speaker 1: it looked like the company was on the edge of 25 00:01:30,400 --> 00:01:35,039 Speaker 1: a debt restructuring with the lockdowns shutting down stores in Germany, 26 00:01:35,200 --> 00:01:38,560 Speaker 1: but eventually the performance turned around. In twenty twenty one, 27 00:01:38,800 --> 00:01:42,000 Speaker 1: the cash shortfall was resolved by appats and other investors 28 00:01:42,040 --> 00:01:46,440 Speaker 1: who plugged in money, and eventually in twenty twenty two, 29 00:01:46,959 --> 00:01:50,440 Speaker 1: it faced an obstacle two highter surmount and at a 30 00:01:50,520 --> 00:01:53,800 Speaker 1: time when the company is solding up in terms of performance. 31 00:01:53,880 --> 00:01:57,920 Speaker 1: But there's also an issue for retailers, which is the 32 00:01:57,920 --> 00:02:01,240 Speaker 1: fact that high inflation is really eighty into profit margins. 33 00:02:03,360 --> 00:02:08,720 Speaker 1: Last year it started talks with creditors because it faced 34 00:02:08,760 --> 00:02:12,920 Speaker 1: the insurmount them all abound of debt maturing in twenty 35 00:02:12,919 --> 00:02:15,760 Speaker 1: twenty three, So how much debt are we talking about? 36 00:02:15,800 --> 00:02:19,240 Speaker 1: And how much was about? Some mature so the company 37 00:02:19,360 --> 00:02:22,640 Speaker 1: had in total about eight hundred and thirty million euros 38 00:02:22,800 --> 00:02:25,799 Speaker 1: of debt, and it was all maturing in twenty twenty three. 39 00:02:26,200 --> 00:02:28,160 Speaker 1: The bulk of it was made up by five hundred 40 00:02:28,200 --> 00:02:31,480 Speaker 1: two million of vial notes due in November. But even 41 00:02:31,520 --> 00:02:34,040 Speaker 1: before that there were some loans provided by banks that 42 00:02:34,080 --> 00:02:36,680 Speaker 1: were coming due as soon as made twenty twenty three, 43 00:02:37,000 --> 00:02:40,359 Speaker 1: an eighty million term loan and around one hundred eighty 44 00:02:40,400 --> 00:02:43,440 Speaker 1: five millions of letter of credit, which are credit lines 45 00:02:43,440 --> 00:02:46,920 Speaker 1: that are needed to support a company's cash flow. But 46 00:02:47,000 --> 00:02:51,320 Speaker 1: the company, obviously they got hurt by the slowdown the economy, 47 00:02:51,400 --> 00:02:55,840 Speaker 1: the inflation that's obviously can the consumption side, and you know, 48 00:02:55,960 --> 00:02:59,680 Speaker 1: presumingly they're also getting hit by online shopping, but they 49 00:03:00,560 --> 00:03:04,960 Speaker 1: is actually making money. It's not a classic distressed situation, right, 50 00:03:04,960 --> 00:03:09,240 Speaker 1: I mean, why is it really hurting now? It's really 51 00:03:09,280 --> 00:03:12,760 Speaker 1: hurting now because of two reasons. First of all, there's 52 00:03:12,800 --> 00:03:16,320 Speaker 1: the matter of high borrowing costs that made the refinancing 53 00:03:16,400 --> 00:03:23,120 Speaker 1: for Taco essentially impossible. The borrowing costs for junk rated 54 00:03:23,520 --> 00:03:28,200 Speaker 1: companies that have really increased since the beginning of twenty 55 00:03:28,280 --> 00:03:32,680 Speaker 1: twenty two as central banks across the were the raised 56 00:03:32,760 --> 00:03:37,240 Speaker 1: interest rates, and that means that if they want to 57 00:03:37,320 --> 00:03:40,400 Speaker 1: keep investors on board, they will have to really offer 58 00:03:40,440 --> 00:03:44,880 Speaker 1: them a really high yield on the new bonds. Taco 59 00:03:44,960 --> 00:03:48,840 Speaker 1: tried actually to refine and its bonds into late twenty 60 00:03:48,880 --> 00:03:52,320 Speaker 1: twenty one, but it was offering a two over yielded 61 00:03:52,400 --> 00:03:55,080 Speaker 1: for investors to be interested in, and it kind of 62 00:03:55,080 --> 00:03:59,520 Speaker 1: missed the momentum with the breakout of the war in 63 00:03:59,600 --> 00:04:04,400 Speaker 1: Ukraine and with surging inflation across Europe. But for investors 64 00:04:04,440 --> 00:04:09,960 Speaker 1: it was really hard to keep it stay invested in 65 00:04:10,000 --> 00:04:14,240 Speaker 1: their retail sector. Therefore, when individuals that have a lower 66 00:04:14,240 --> 00:04:19,920 Speaker 1: disposable income, that's going to generate less demand than really 67 00:04:19,960 --> 00:04:23,720 Speaker 1: going to impact top line and profits. Let me stop 68 00:04:23,760 --> 00:04:26,240 Speaker 1: you there and talk about you mentioned the funding cost 69 00:04:26,320 --> 00:04:29,360 Speaker 1: of shut Up. Obviously, rates globally I've gone up very 70 00:04:29,440 --> 00:04:33,599 Speaker 1: very steeply, very quickly. That's caused lots of problems across 71 00:04:33,640 --> 00:04:36,560 Speaker 1: the board. But when we're talking about high yields, how 72 00:04:36,640 --> 00:04:38,800 Speaker 1: much do they have to pay? I mean, you said 73 00:04:38,839 --> 00:04:41,000 Speaker 1: it's too high in the market, but how much was it? 74 00:04:41,040 --> 00:04:46,960 Speaker 1: Was it double digits now? Yes? So the average implied 75 00:04:47,000 --> 00:04:50,200 Speaker 1: cost of new borrowing for Europe and i yeald issuers 76 00:04:50,640 --> 00:04:53,640 Speaker 1: has increased from around three percent at the beginning of 77 00:04:53,680 --> 00:04:56,920 Speaker 1: twenty twenty two two or around eight percent now, so 78 00:04:56,960 --> 00:04:59,359 Speaker 1: it's almost three times where it was just over a 79 00:04:59,440 --> 00:05:05,360 Speaker 1: year ago. Really, and this takes into account even the 80 00:05:05,400 --> 00:05:13,440 Speaker 1: best rated of the junk rated companies, and Taco being 81 00:05:13,480 --> 00:05:16,080 Speaker 1: a private equity owned company, definitely did not fall in 82 00:05:16,120 --> 00:05:19,440 Speaker 1: that category. So for Taco it would have been most 83 00:05:19,480 --> 00:05:22,600 Speaker 1: likely in the double digits. Okay, So the last time 84 00:05:22,640 --> 00:05:25,760 Speaker 1: they tried to do a transaction in the bond market, 85 00:05:26,160 --> 00:05:28,040 Speaker 1: was it in double digits? Is that how much they 86 00:05:28,080 --> 00:05:30,560 Speaker 1: were offering and it didn't actually work out. I think 87 00:05:30,560 --> 00:05:33,159 Speaker 1: that was just below the double digits, but it was 88 00:05:33,200 --> 00:05:35,800 Speaker 1: because it was in November twenty twenty one, where interest 89 00:05:35,880 --> 00:05:41,040 Speaker 1: lates were still low and central banks hadn't really started 90 00:05:41,120 --> 00:05:45,240 Speaker 1: hiking them yet. But at the time, they had been 91 00:05:45,360 --> 00:05:48,200 Speaker 1: on the verge of that restructuring just earlier that year, 92 00:05:48,320 --> 00:05:52,880 Speaker 1: so investors didn't feel confident to piling in new bonds 93 00:05:52,960 --> 00:05:57,080 Speaker 1: for that amount that they were offered, and therefore the 94 00:05:57,320 --> 00:06:00,320 Speaker 1: Kann sing Gil did not go through. Later it became 95 00:06:00,360 --> 00:06:03,839 Speaker 1: impossible for them to refinance, Okay. So what I found 96 00:06:03,880 --> 00:06:07,200 Speaker 1: really interesting about this story particularly is that the creditors 97 00:06:07,360 --> 00:06:10,360 Speaker 1: now own the company That's not a very common situation, 98 00:06:10,560 --> 00:06:13,000 Speaker 1: at least where I'm based in the US. How common 99 00:06:13,080 --> 00:06:16,359 Speaker 1: is it in Europe. In Europe, it is a quite 100 00:06:16,400 --> 00:06:21,360 Speaker 1: common outcome if there is a debt restructuring. You write 101 00:06:21,360 --> 00:06:24,359 Speaker 1: off your debt, but in exchange for writing of your debt, 102 00:06:24,880 --> 00:06:27,960 Speaker 1: you get an equity stake in the company. Now, it 103 00:06:28,000 --> 00:06:30,200 Speaker 1: hasn't really been common in the last years because we 104 00:06:30,240 --> 00:06:34,880 Speaker 1: haven't had really many defaults on the companies debt, but 105 00:06:35,240 --> 00:06:37,359 Speaker 1: it is something that we're seeing more and more of 106 00:06:37,480 --> 00:06:41,560 Speaker 1: this year. We have seen a Spanish brideware company being 107 00:06:41,600 --> 00:06:45,599 Speaker 1: taken over by creditors earlier this year called Pronavis. We 108 00:06:45,720 --> 00:06:51,080 Speaker 1: have seen another Spanish casual dining chain, Telepizza, also being 109 00:06:51,120 --> 00:06:54,840 Speaker 1: taken over by creditors, and we're expecting to see more 110 00:06:54,920 --> 00:06:59,880 Speaker 1: companies that follow into this path. But fixed income investors, 111 00:07:00,000 --> 00:07:02,599 Speaker 1: they essentially want to own securities so they can trade 112 00:07:02,600 --> 00:07:04,360 Speaker 1: out to them and you know, they can value them 113 00:07:04,400 --> 00:07:06,599 Speaker 1: and also some other things. But they end up with 114 00:07:06,640 --> 00:07:09,440 Speaker 1: a company. I mean, is this something that they actually 115 00:07:09,480 --> 00:07:10,880 Speaker 1: want to do? I mean, they don't want to be 116 00:07:10,920 --> 00:07:16,000 Speaker 1: operating a German fashion store, do they? No? I think 117 00:07:16,160 --> 00:07:19,400 Speaker 1: investors that had originally bought the notes apart when they 118 00:07:19,400 --> 00:07:23,240 Speaker 1: were first issued, wouldn't want equity. Actually because they don't 119 00:07:23,240 --> 00:07:26,280 Speaker 1: want equity, and because they want to don't do not 120 00:07:26,400 --> 00:07:30,000 Speaker 1: want to risk the company defaulting and them getting stuck 121 00:07:30,040 --> 00:07:33,920 Speaker 1: in it. They usually exit before it comes to that moment. 122 00:07:34,040 --> 00:07:36,960 Speaker 1: With Taco, the bond that had been trading at the 123 00:07:37,000 --> 00:07:40,040 Speaker 1: stress levels for a really long time, and so we 124 00:07:40,120 --> 00:07:45,120 Speaker 1: saw opportunistic investors. They are happier with holding the equity 125 00:07:45,240 --> 00:07:47,960 Speaker 1: of a company and actually for many of them it 126 00:07:48,120 --> 00:07:50,760 Speaker 1: is a strategy called loan tour new pilot to a 127 00:07:50,800 --> 00:07:53,840 Speaker 1: company's debt with the view that eventually to take it 128 00:07:53,880 --> 00:07:57,320 Speaker 1: over and turn it around and sell it again. And 129 00:07:57,360 --> 00:08:01,920 Speaker 1: so with Taco, what we had seen and the year 130 00:08:02,000 --> 00:08:06,680 Speaker 1: earlier years and months was that hedge fund silver Point 131 00:08:06,720 --> 00:08:11,520 Speaker 1: Capital had built a big position in the bonds and now, 132 00:08:11,600 --> 00:08:18,720 Speaker 1: alongside Albacore and Napier Park, it's the majority shareholder of 133 00:08:18,760 --> 00:08:21,560 Speaker 1: the company. So these are not common or garden mutual 134 00:08:21,560 --> 00:08:25,880 Speaker 1: funds that just do sort of playing vanilla bond purchasing. 135 00:08:25,880 --> 00:08:28,840 Speaker 1: These are real specialists in this area and that's what 136 00:08:28,880 --> 00:08:32,360 Speaker 1: they do right absolutely, But you can also expect that 137 00:08:32,520 --> 00:08:35,959 Speaker 1: although they will add a smaller position, there's going to 138 00:08:36,000 --> 00:08:38,800 Speaker 1: be some power investors that will have remained stuck in 139 00:08:38,800 --> 00:08:42,480 Speaker 1: the deal. Okay, very interesting that, So just sort of 140 00:08:42,520 --> 00:08:45,040 Speaker 1: looking at the bigger picture again, Companies around the world 141 00:08:45,080 --> 00:08:48,280 Speaker 1: have been doing this kind of borrowing for years, taking 142 00:08:48,280 --> 00:08:50,600 Speaker 1: on a lot of debt because up until quite recently 143 00:08:50,600 --> 00:08:52,679 Speaker 1: it was very cheap. I mean, you know, yield and 144 00:08:52,720 --> 00:08:55,400 Speaker 1: a lot of European debt were negative just a few 145 00:08:55,480 --> 00:08:59,680 Speaker 1: years ago. So it's quite quite a widespread issue of 146 00:09:00,040 --> 00:09:03,520 Speaker 1: over indebtedness across the board, not just in Europe, globally. 147 00:09:03,640 --> 00:09:08,680 Speaker 1: I mean to me, that means that this German situation, Taco, 148 00:09:08,679 --> 00:09:12,439 Speaker 1: that's not an isolated situation by any means who's next, Julie. 149 00:09:12,679 --> 00:09:15,559 Speaker 1: What are the risks of other companies going the same way? 150 00:09:15,840 --> 00:09:17,679 Speaker 1: So first of all, we have to remember that a 151 00:09:17,679 --> 00:09:21,160 Speaker 1: lot of company actually managed to refinance their debt in 152 00:09:21,240 --> 00:09:23,679 Speaker 1: the boom years of twenty twenty and twenty twenty one 153 00:09:24,000 --> 00:09:27,160 Speaker 1: when rates were still low. That means that for them 154 00:09:27,200 --> 00:09:30,439 Speaker 1: the maturity wall is not near, but rather it will 155 00:09:30,480 --> 00:09:34,800 Speaker 1: come from twenty twenty five onwards. Still, we got some 156 00:09:34,960 --> 00:09:39,520 Speaker 1: that didn't really seize the momentum, and adult there's a 157 00:09:39,559 --> 00:09:43,160 Speaker 1: minority of them versus the broader iyel market. There are 158 00:09:43,240 --> 00:09:47,520 Speaker 1: definitely some names that were keeping a track off, and 159 00:09:47,760 --> 00:09:53,679 Speaker 1: especially there are some that not only they are they 160 00:09:53,679 --> 00:09:56,720 Speaker 1: are facing nearing deadlines, but at the same time their 161 00:09:56,760 --> 00:10:02,520 Speaker 1: performance is struggling. Among some names that work with NION, 162 00:10:02,679 --> 00:10:07,439 Speaker 1: there's a French facility management company called Italian. It has 163 00:10:07,480 --> 00:10:10,440 Speaker 1: bonds due in twenty twenty four and twenty twenty five, 164 00:10:11,080 --> 00:10:15,480 Speaker 1: and it's really been struggling with loves making US business 165 00:10:15,679 --> 00:10:20,360 Speaker 1: and losses in its home country of France. Then you 166 00:10:20,440 --> 00:10:24,680 Speaker 1: also have companies that like Taco, are actually doing okay, 167 00:10:24,720 --> 00:10:27,199 Speaker 1: but they are re hurt by the fact that they 168 00:10:27,200 --> 00:10:30,200 Speaker 1: have a nimin and maturity wall. One of the companies 169 00:10:30,200 --> 00:10:33,040 Speaker 1: that we've been taking a close look at is a 170 00:10:33,080 --> 00:10:37,000 Speaker 1: furniture maker owned by BC Partners. It's called Ketter and 171 00:10:37,160 --> 00:10:40,440 Speaker 1: it has one point two billionaires of that coming due 172 00:10:40,520 --> 00:10:43,559 Speaker 1: in October twenty twenty three. Now, the issue with Catter 173 00:10:43,679 --> 00:10:46,880 Speaker 1: is that they actually try to refinance in early twenty 174 00:10:46,960 --> 00:10:48,960 Speaker 1: twenty two, but they were offering two low of a 175 00:10:49,040 --> 00:10:53,959 Speaker 1: yield and investors pushed back on the deal. Now they 176 00:10:54,200 --> 00:10:58,160 Speaker 1: have a maturity that's really getting closer, and they still 177 00:10:58,160 --> 00:11:01,120 Speaker 1: haven't got a deal with investors. The company, on the 178 00:11:01,120 --> 00:11:05,320 Speaker 1: other hand, is still holding up. Okay, they have a 179 00:11:05,440 --> 00:11:11,080 Speaker 1: solid liquidity buffer and it's just not enough to pay 180 00:11:11,120 --> 00:11:12,720 Speaker 1: the one point two billion of that that they have 181 00:11:12,760 --> 00:11:15,560 Speaker 1: coming you, So they would have to negotiate something with 182 00:11:15,640 --> 00:11:19,360 Speaker 1: predators before then. So before we talk to pretty silver 183 00:11:19,440 --> 00:11:23,400 Speaker 1: Bloomberg Intelligence about banks. What's the big takeaway here? Julie's um, 184 00:11:23,480 --> 00:11:25,079 Speaker 1: what should we learned from this? It sounds like a 185 00:11:25,160 --> 00:11:29,839 Speaker 1: very cautionary tale. Yes, so definitely. I think that the 186 00:11:30,400 --> 00:11:33,360 Speaker 1: that the lesson is to deal with your maturity was 187 00:11:33,600 --> 00:11:36,760 Speaker 1: very far ahead of time, especially now that it is 188 00:11:36,800 --> 00:11:42,880 Speaker 1: definitely trickier to refinance, and yeah, just proceed with caution. 189 00:11:43,080 --> 00:11:46,440 Speaker 1: And the issuers also have to take into account that 190 00:11:46,720 --> 00:11:49,600 Speaker 1: whatever if they can strike a refinancing deal, it will 191 00:11:49,679 --> 00:11:52,040 Speaker 1: be for at a much higher price than what they 192 00:11:52,360 --> 00:11:57,480 Speaker 1: were used to. Very interesting. Juliet with Bloomberg News in London. 193 00:11:57,520 --> 00:11:59,520 Speaker 1: Thanks so much for joining us. We look forward to 194 00:11:59,600 --> 00:12:01,920 Speaker 1: reading all your scoops on the Bloomberg terminal and of 195 00:12:01,960 --> 00:12:06,920 Speaker 1: course at Bloomberg dot com. Thank you very much. Switching 196 00:12:06,960 --> 00:12:09,400 Speaker 1: gears here a bit. As I mentioned earlier, we're delighted 197 00:12:09,440 --> 00:12:12,200 Speaker 1: to welcome pre to Silva. He's a senior credit analyst 198 00:12:12,240 --> 00:12:15,880 Speaker 1: at Bloomberg Intelligence in Hong Kong covering Asian financial markets. 199 00:12:16,120 --> 00:12:21,760 Speaker 1: Thanks for being beyond James. So, banks have been in 200 00:12:21,800 --> 00:12:23,960 Speaker 1: the news a lot lately, firstly because of the failure 201 00:12:24,000 --> 00:12:26,440 Speaker 1: of a handful of regional banks in the US, then 202 00:12:26,480 --> 00:12:30,000 Speaker 1: the for sale of Credit Swiss to UBS in Europe. 203 00:12:30,480 --> 00:12:33,679 Speaker 1: But I wanted to ask about additional tier one or 204 00:12:33,760 --> 00:12:37,240 Speaker 1: eighty one securities. So for those who were not following 205 00:12:37,280 --> 00:12:40,840 Speaker 1: the recent blow up in great detail, we're talking about 206 00:12:40,880 --> 00:12:45,160 Speaker 1: the riskiest form of bank debt, also known as contingent 207 00:12:45,200 --> 00:12:49,240 Speaker 1: convertibles or sometimes referred to as cocos. There are sort 208 00:12:49,240 --> 00:12:52,560 Speaker 1: of hybrid security somewhere between stocks and bonds. But what 209 00:12:52,720 --> 00:12:55,160 Speaker 1: is the latest on that pre great question, James, And 210 00:12:55,280 --> 00:12:57,480 Speaker 1: just to give some background, as part of the eleventh 211 00:12:57,640 --> 00:13:01,240 Speaker 1: our for Saler Cretty Sweets to ub S, the Swiss 212 00:13:01,280 --> 00:13:05,720 Speaker 1: regulator FINMAK wiped down Credit Suiss's entire slug of additional 213 00:13:05,720 --> 00:13:11,760 Speaker 1: tier one securities, which, as you mentioned, essentially preferred equity 214 00:13:11,840 --> 00:13:17,680 Speaker 1: and arguably to make this forced marriage more palatable to UBS. 215 00:13:17,720 --> 00:13:21,920 Speaker 1: This write down caused an immediate, broad and steep sell 216 00:13:21,960 --> 00:13:25,080 Speaker 1: off in the entire eighty one asset class, not to 217 00:13:25,120 --> 00:13:29,520 Speaker 1: mention a lot of confusion. So the Bloomberg Global eighty 218 00:13:29,559 --> 00:13:33,240 Speaker 1: one index, which is probably the best proxy out there 219 00:13:33,240 --> 00:13:37,320 Speaker 1: for the entire asset class, dropped almost ten percent in 220 00:13:37,360 --> 00:13:41,960 Speaker 1: the aftermath. But the eighty one index now is creating 221 00:13:42,000 --> 00:13:46,720 Speaker 1: pretty close to pre Credit Swiss levels, having almost made 222 00:13:46,760 --> 00:13:51,600 Speaker 1: a full round trip in just two weeks. So in 223 00:13:51,640 --> 00:13:55,360 Speaker 1: the case of Credit Swiss, eighty ones were marked down 224 00:13:55,360 --> 00:14:00,679 Speaker 1: to zero, but equity holders actually recovered something, and so 225 00:14:00,800 --> 00:14:04,560 Speaker 1: to some people that meant that the one market was 226 00:14:04,640 --> 00:14:08,480 Speaker 1: essentially dead. Why does it still work and why does 227 00:14:08,480 --> 00:14:13,480 Speaker 1: it work in Asia? I think in the case, I 228 00:14:13,520 --> 00:14:17,600 Speaker 1: don't necessarily subscribe to that view, And the recent being 229 00:14:18,480 --> 00:14:23,800 Speaker 1: is the eighty one as a class is a fairway 230 00:14:23,800 --> 00:14:27,320 Speaker 1: there as a class, So anyone investing in it needs 231 00:14:27,400 --> 00:14:31,680 Speaker 1: to know that you are last absorbing capital. But as 232 00:14:31,720 --> 00:14:35,680 Speaker 1: to why the equity got something and the eighty ones 233 00:14:35,800 --> 00:14:40,240 Speaker 1: didn't get anything, I think it's more a practical matter. 234 00:14:40,880 --> 00:14:45,000 Speaker 1: The equity for more than forty billion of booque equity 235 00:14:45,000 --> 00:14:48,120 Speaker 1: got only three billion, so it's not a great recovery, 236 00:14:48,160 --> 00:14:51,440 Speaker 1: but there was something in there. But I think the 237 00:14:51,480 --> 00:14:55,200 Speaker 1: practical aspect of it is the regulators needed to make 238 00:14:55,280 --> 00:15:01,480 Speaker 1: the deal work for the buyer, and so UBS took 239 00:15:01,560 --> 00:15:05,760 Speaker 1: on created suites in the level tower, almost falling on 240 00:15:05,880 --> 00:15:08,760 Speaker 1: a grenade. And so how do you make it work 241 00:15:09,520 --> 00:15:12,920 Speaker 1: by taking on less liabilities? And I think when you 242 00:15:13,360 --> 00:15:18,840 Speaker 1: consider the full picture, it becomes obvious that if they 243 00:15:18,840 --> 00:15:23,280 Speaker 1: were just going down the capital structure and there was 244 00:15:23,320 --> 00:15:28,200 Speaker 1: seventeen billion of additional tier one securities that provided their cushion, 245 00:15:28,400 --> 00:15:33,360 Speaker 1: whereas UB suffering a billion dollars or billion franc at 246 00:15:33,400 --> 00:15:37,600 Speaker 1: the onset, that wasn't really going to change the dynamics 247 00:15:37,640 --> 00:15:42,600 Speaker 1: of it that much. So when this all happened and 248 00:15:42,760 --> 00:15:46,680 Speaker 1: Credit switch, did, you know, shockingly to most people, essentially 249 00:15:46,680 --> 00:15:50,040 Speaker 1: just disappear and you know, it's a huge financial institution. 250 00:15:50,280 --> 00:15:52,960 Speaker 1: But when when the at ones were marked down to zero, 251 00:15:53,720 --> 00:15:57,280 Speaker 1: this was an event that really did affect the whole 252 00:15:57,400 --> 00:16:00,520 Speaker 1: of the eighty one market globally, and the ones were 253 00:16:00,520 --> 00:16:03,560 Speaker 1: selling off and there was you know a bit of 254 00:16:03,560 --> 00:16:07,480 Speaker 1: distress in the air. But we're basically taking away from 255 00:16:07,520 --> 00:16:11,520 Speaker 1: this that what happened at Credit Swiss in Switzerland was 256 00:16:11,640 --> 00:16:15,480 Speaker 1: unique to that country. Yes, absolutely, Um, I think there 257 00:16:15,520 --> 00:16:18,800 Speaker 1: were a couple factors that cost the eighty one market 258 00:16:18,880 --> 00:16:22,920 Speaker 1: to rebound and rebound very sharply. One is the realization 259 00:16:23,040 --> 00:16:27,640 Speaker 1: that Credit Suis was an idiosyncretic event and the other 260 00:16:27,920 --> 00:16:31,640 Speaker 1: large global banks are in a much better and sound 261 00:16:31,680 --> 00:16:37,160 Speaker 1: financial footing, and comments by various central bankers and public officials, 262 00:16:37,160 --> 00:16:41,320 Speaker 1: including Japan's finance minister, have gone a long way in 263 00:16:41,960 --> 00:16:46,120 Speaker 1: this regard. I think the second point to note is 264 00:16:46,200 --> 00:16:51,200 Speaker 1: the opportunity cost of sitting on the sidelines. When yields 265 00:16:51,200 --> 00:16:54,760 Speaker 1: are at double digits, it's a lot to give up 266 00:16:54,760 --> 00:17:00,200 Speaker 1: to sit on cash, and especially when an institutional investors 267 00:17:00,000 --> 00:17:03,760 Speaker 1: are managing to a benchmark. And if you are to 268 00:17:03,840 --> 00:17:08,720 Speaker 1: look at the Bloomberg Global co Core Index, the yield 269 00:17:08,720 --> 00:17:11,760 Speaker 1: and the index right now is almost ten percent still 270 00:17:11,800 --> 00:17:15,360 Speaker 1: even after the rebound. So that's a lot to give 271 00:17:15,440 --> 00:17:19,880 Speaker 1: up in terms of opportunity cars. But let's talk about 272 00:17:19,880 --> 00:17:22,360 Speaker 1: the speed of the rebound. I mean, that is astonishing 273 00:17:22,560 --> 00:17:26,679 Speaker 1: in that you know, only one month earlier we're talking 274 00:17:26,800 --> 00:17:31,440 Speaker 1: today it's middle of April, but but in March it 275 00:17:31,520 --> 00:17:36,119 Speaker 1: was a complete catastrophe that this huge financial institution, you know, 276 00:17:36,400 --> 00:17:40,360 Speaker 1: solid with global reach, just blew up essentially and disappeared. 277 00:17:40,359 --> 00:17:44,440 Speaker 1: I mean, but now one month later, everything's okay, yes 278 00:17:44,480 --> 00:17:50,720 Speaker 1: and no. UM, it's the recovery has been almost as 279 00:17:50,720 --> 00:17:55,520 Speaker 1: fast as the downturn, but it's been an uneven recovery, 280 00:17:55,600 --> 00:17:59,280 Speaker 1: so to speak. The biggest so called better credits I think, 281 00:17:59,320 --> 00:18:02,600 Speaker 1: have had than others, but we still have a ways 282 00:18:02,640 --> 00:18:05,200 Speaker 1: to go. And kind of going back to the same 283 00:18:05,560 --> 00:18:09,600 Speaker 1: Bloomberg eighty one index. Yes, the rebound, as you noted, 284 00:18:10,480 --> 00:18:14,960 Speaker 1: recovered to the index, recovered to the precs levels, but 285 00:18:15,080 --> 00:18:19,280 Speaker 1: it's still down for the year. So that's one And 286 00:18:19,520 --> 00:18:24,400 Speaker 1: I think the other thing to note is we still 287 00:18:24,440 --> 00:18:29,200 Speaker 1: haven't seen a major bank come to the market and 288 00:18:29,560 --> 00:18:34,639 Speaker 1: spr speaking on the eleventh of March, sorry, eleventh of April, 289 00:18:34,760 --> 00:18:39,959 Speaker 1: bigger pardon, MUFG, Japan's largest bank, is in the market 290 00:18:40,840 --> 00:18:44,680 Speaker 1: with a four parts senior bond offering, and I think 291 00:18:45,320 --> 00:18:49,560 Speaker 1: that'll go a long way towards establishing market confidence and 292 00:18:49,760 --> 00:18:53,399 Speaker 1: to show that the banks can access capital markets. But 293 00:18:53,520 --> 00:18:57,600 Speaker 1: I think the real litmus test is when a bank 294 00:18:57,680 --> 00:19:02,399 Speaker 1: issues a new eighty one UM. But do you expect 295 00:19:02,440 --> 00:19:07,240 Speaker 1: that to happen soon? I expect Sumitomo Mitsui Financial Group, 296 00:19:07,359 --> 00:19:10,800 Speaker 1: Japan's second biggest banking group, to come to the market 297 00:19:11,280 --> 00:19:16,160 Speaker 1: on around April nineteenth and if that deal is successful, 298 00:19:16,359 --> 00:19:20,320 Speaker 1: I think that would more or less recap our cap 299 00:19:20,440 --> 00:19:25,679 Speaker 1: the rebound in the bank eighty one space. And what 300 00:19:25,720 --> 00:19:27,880 Speaker 1: do you expect demand to be like for that kind 301 00:19:27,920 --> 00:19:34,399 Speaker 1: of transaction. It'll depend on pricing, I reckon. Okay, okay, 302 00:19:34,640 --> 00:19:36,600 Speaker 1: just going back to the the you know, one of 303 00:19:36,640 --> 00:19:40,480 Speaker 1: the fears about eighty ones was, you know, traditionally they 304 00:19:40,560 --> 00:19:43,359 Speaker 1: have been called, they have been refinanced at the first 305 00:19:43,400 --> 00:19:46,760 Speaker 1: call day. Is that you know, guaranteed in age of 306 00:19:46,920 --> 00:19:51,399 Speaker 1: those deals that are outside some background there in the US, 307 00:19:51,520 --> 00:19:56,920 Speaker 1: coming out of the financial crisis and frank regulators made 308 00:19:56,960 --> 00:20:01,000 Speaker 1: it clear to banks and to investors that, um, if 309 00:20:01,000 --> 00:20:04,080 Speaker 1: you want these instruments to be treated as permanent capital, 310 00:20:04,560 --> 00:20:07,080 Speaker 1: you need to treat them as permanent capital and not 311 00:20:07,200 --> 00:20:11,120 Speaker 1: call them on the first call date. And over time, 312 00:20:11,920 --> 00:20:15,679 Speaker 1: studying in the UK and then in Europe, now the 313 00:20:15,760 --> 00:20:20,720 Speaker 1: asset class is being treated almost like if banks will 314 00:20:20,800 --> 00:20:23,600 Speaker 1: call if they if they if the economics are in 315 00:20:23,640 --> 00:20:28,560 Speaker 1: the favor of the issue. And just last year April, 316 00:20:28,680 --> 00:20:32,879 Speaker 1: the Australian regulator also put out a notice saying banks 317 00:20:32,880 --> 00:20:37,119 Speaker 1: should only redeem additional tim and security it's on the 318 00:20:37,119 --> 00:20:41,000 Speaker 1: first call date only if it makes economic sense. So 319 00:20:41,119 --> 00:20:45,520 Speaker 1: I think in most parts of the world the rules 320 00:20:45,520 --> 00:20:48,280 Speaker 1: have been set so that issuers could call them or 321 00:20:48,320 --> 00:20:52,399 Speaker 1: should call them only if the economics make sense. Parts 322 00:20:52,400 --> 00:20:57,520 Speaker 1: of Asia it's still not treated as that, and they 323 00:20:57,560 --> 00:21:00,520 Speaker 1: get called on the first call date. So disc I 324 00:21:00,560 --> 00:21:04,680 Speaker 1: think could could be an interesting time. But what's interesting 325 00:21:04,840 --> 00:21:08,400 Speaker 1: in Asia is in some of the maze major Asian 326 00:21:08,440 --> 00:21:11,240 Speaker 1: countries there's not a whole lot of at ones come 327 00:21:11,280 --> 00:21:15,240 Speaker 1: in due. In Japan, for instance, the next Japanese N 328 00:21:15,359 --> 00:21:19,040 Speaker 1: eighty one comes to you in December, so there's a 329 00:21:19,040 --> 00:21:23,320 Speaker 1: lot of time. And in the case of Chinese banks, 330 00:21:23,400 --> 00:21:27,560 Speaker 1: they've been redeeming and replacing offshore at ones in the 331 00:21:27,680 --> 00:21:31,440 Speaker 1: on show market at lower cost. So I think between 332 00:21:31,480 --> 00:21:38,320 Speaker 1: those two it's an interesting time. But let's see, because 333 00:21:38,600 --> 00:21:42,679 Speaker 1: luck could happen between now and then. Yeah, I mean, 334 00:21:42,720 --> 00:21:44,360 Speaker 1: the problem for me seems to be that the investors 335 00:21:44,359 --> 00:21:46,440 Speaker 1: have been pricing them to call, and if they don't 336 00:21:46,440 --> 00:21:50,480 Speaker 1: get called, they panic. So there's a lot of you know, uncertainty, 337 00:21:50,480 --> 00:21:55,960 Speaker 1: and investors don't like uncertainty. Yeah, absolutely, investors don't like uncertainty. 338 00:21:56,040 --> 00:21:59,520 Speaker 1: But I see the point that the regulators are trying 339 00:21:59,560 --> 00:22:04,880 Speaker 1: to make is if these instruments should qualify as permanent capital, 340 00:22:05,400 --> 00:22:08,200 Speaker 1: then I think investors need to do a better job 341 00:22:08,440 --> 00:22:11,920 Speaker 1: and be most selective about what they buy and also 342 00:22:11,960 --> 00:22:16,080 Speaker 1: the structure. And if you, um, if you think something 343 00:22:16,240 --> 00:22:19,720 Speaker 1: is priced not to all mail, maybe you shouldn't be 344 00:22:19,760 --> 00:22:23,320 Speaker 1: buying that. And that's my view and I think that's 345 00:22:23,359 --> 00:22:27,920 Speaker 1: where credit analysts and the investment analysts should stand up 346 00:22:27,920 --> 00:22:32,040 Speaker 1: and raise their hand and on their on their web page. 347 00:22:34,119 --> 00:22:36,200 Speaker 1: So on the financial set to generally, I mean, you 348 00:22:36,480 --> 00:22:38,520 Speaker 1: guys have never been more popular. You know, you you 349 00:22:38,840 --> 00:22:42,280 Speaker 1: you you credit analysts of banks, and you know it's 350 00:22:42,520 --> 00:22:45,040 Speaker 1: traditionally not been the most exciting set, and you know 351 00:22:45,160 --> 00:22:47,359 Speaker 1: for good reason. But you know you've probably been up 352 00:22:47,359 --> 00:22:50,280 Speaker 1: all night covering this. Um this crisis. Is it over now? 353 00:22:53,920 --> 00:22:58,480 Speaker 1: Is it over now? I think for the most part, yes, 354 00:22:59,000 --> 00:23:04,600 Speaker 1: um um. The credit special event, especially around that I 355 00:23:04,640 --> 00:23:08,080 Speaker 1: think is an idiosyncratic one. In the US, I think 356 00:23:08,119 --> 00:23:11,560 Speaker 1: the regulators have done enough. Although I thought and I 357 00:23:11,640 --> 00:23:17,720 Speaker 1: expected them to increase the US deposit insurance limit, either 358 00:23:17,840 --> 00:23:21,160 Speaker 1: on a temporary basis or permanent basis, probably temporary basis, 359 00:23:21,520 --> 00:23:24,560 Speaker 1: which would have really put an end to the crisis. 360 00:23:25,920 --> 00:23:28,920 Speaker 1: They had some of the regional banks are phrasing, but 361 00:23:29,520 --> 00:23:33,040 Speaker 1: I think at this point we are past the peak 362 00:23:33,400 --> 00:23:39,040 Speaker 1: and the bank earning season is probably the key test now. 363 00:23:39,960 --> 00:23:41,879 Speaker 1: And on the regional banks, I mean, just to just 364 00:23:41,920 --> 00:23:44,919 Speaker 1: to wrap this up, but regional banks that were very 365 00:23:45,000 --> 00:23:48,120 Speaker 1: concentrated in a sector, you know, like Silicon Valley Bank, 366 00:23:48,240 --> 00:23:50,720 Speaker 1: very concentrated in tech, and also had a ton of 367 00:23:51,400 --> 00:23:54,000 Speaker 1: treasury builds on the balance sheet that were worth a 368 00:23:54,000 --> 00:23:55,800 Speaker 1: lot less than they thought they were. I mean, you 369 00:23:55,840 --> 00:23:59,360 Speaker 1: know this, this small financial institution that's very very exposed 370 00:23:59,359 --> 00:24:01,280 Speaker 1: to one set to Is that not an issue across 371 00:24:01,280 --> 00:24:02,920 Speaker 1: the world. I mean, you don't have the same problem 372 00:24:03,000 --> 00:24:06,040 Speaker 1: in Asia. In some countries. Yes, if you look at 373 00:24:06,080 --> 00:24:08,720 Speaker 1: the three banks that failed in the US, they were 374 00:24:08,760 --> 00:24:13,359 Speaker 1: all very highly concentrated in one way or another, either 375 00:24:13,760 --> 00:24:18,679 Speaker 1: tech or crypto or something around the lines. In Asia, 376 00:24:18,880 --> 00:24:23,680 Speaker 1: we do have banks like that, and occasionally they tend 377 00:24:23,720 --> 00:24:27,280 Speaker 1: to get more into trouble. And what I do like 378 00:24:27,359 --> 00:24:31,399 Speaker 1: about the larger banks is their diversity. And if you 379 00:24:31,440 --> 00:24:35,800 Speaker 1: are a large, well diversified bank, if one or two 380 00:24:36,400 --> 00:24:40,879 Speaker 1: off your lines of business aren't doing that well, you 381 00:24:40,960 --> 00:24:45,560 Speaker 1: still have others, other businesses that are pulling the weight. 382 00:24:46,119 --> 00:24:51,760 Speaker 1: And the same goals with the risk profile at the company. 383 00:24:51,880 --> 00:24:56,840 Speaker 1: So yes, there are a smaller banks that are, but 384 00:24:56,960 --> 00:25:00,480 Speaker 1: I call mono line institutions and they are more rescued 385 00:25:00,520 --> 00:25:03,120 Speaker 1: them the more diversive faid months. But the good thing 386 00:25:03,119 --> 00:25:06,320 Speaker 1: from a credit investor standpoint is more so the debt 387 00:25:06,400 --> 00:25:10,520 Speaker 1: outstanding tends to be issued by the larger, more diversified banks. 388 00:25:10,800 --> 00:25:15,560 Speaker 1: So I think that's the saving grace for credit investors. 389 00:25:15,640 --> 00:25:18,280 Speaker 1: Very good, Thank you very much, Pretty Silver Bloomberg Intelligence. 390 00:25:18,520 --> 00:25:21,040 Speaker 1: You can see all of his analysis on the Bloomberg terminal. 391 00:25:21,200 --> 00:25:23,560 Speaker 1: There's a lot going on in banking, so do check 392 00:25:23,600 --> 00:25:26,760 Speaker 1: it out and pleasure to see you pretty. Thanks a lot. 393 00:25:26,760 --> 00:25:29,800 Speaker 1: We'll have you back on the show soon. Likewise, see 394 00:25:29,800 --> 00:25:33,640 Speaker 1: you then, take care. Thanks a lot, and thanks again 395 00:25:33,680 --> 00:25:37,040 Speaker 1: to Julia more Portugal from Bloomberg News. We'd all her 396 00:25:37,080 --> 00:25:41,080 Speaker 1: scoops on the terminal and at Bloomberg dot Com. I'm 397 00:25:41,160 --> 00:25:43,760 Speaker 1: James Crumby. It's been a pleasure having you. See you 398 00:25:43,800 --> 00:25:59,800 Speaker 1: next week on the Credit Edge.