Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crumbye. I'm a senior editor at Bloomberg.
Speaker 1: Today's guests are Julia Morporigo, who covers distressed debt for
Speaker 1: Bloomberg News in London. We're delighted to have you on
Speaker 1: the show. Thank you, James for having me. We're also
Speaker 1: very pleased to welcome Prida Silva. He's a senior credit
Speaker 1: analyst at Bloomberg Intelligence in Hong Kong covering Asian financial institutions.
Speaker 1: We'll be getting his insight later on in the show,
Speaker 1: but before we do. Julia Morpurigo with Bloomberg News, you
Speaker 1: cover distressed debt in Europe. There's always a ton of
Speaker 1: drama there. So you had a great story on a
Speaker 1: German company that has too much debt. It's not a
Speaker 1: bad business, but they couldn't afford to repay all the
Speaker 1: money that they borrowed. Now the creditors are going to
Speaker 1: take over. They essentially own that company. What's the situation
Speaker 1: and Julia, can you walk us through it? Yes? So,
Speaker 1: Taco Fashion is a German discount retailer selling mainly clothes,
Speaker 1: and it had been owned by private equity firm Appat's
Speaker 1: partners since twenty eleven. As many other retailers. For out
Speaker 1: the years, it faced the challenge of the shift from
Speaker 1: brick and mortar stores tool online. However, the real issues
Speaker 1: came with the pandemic, which happened before Apets could exit
Speaker 1: the company and monetize on its investment. In twenty twenty,
Speaker 1: it looked like the company was on the edge of
Speaker 1: a debt restructuring with the lockdowns shutting down stores in Germany,
Speaker 1: but eventually the performance turned around. In twenty twenty one,
Speaker 1: the cash shortfall was resolved by appats and other investors
Speaker 1: who plugged in money, and eventually in twenty twenty two,
Speaker 1: it faced an obstacle two highter surmount and at a
Speaker 1: time when the company is solding up in terms of performance.
Speaker 1: But there's also an issue for retailers, which is the
Speaker 1: fact that high inflation is really eighty into profit margins.
Speaker 1: Last year it started talks with creditors because it faced
Speaker 1: the insurmount them all abound of debt maturing in twenty
Speaker 1: twenty three, So how much debt are we talking about?
Speaker 1: And how much was about? Some mature so the company
Speaker 1: had in total about eight hundred and thirty million euros
Speaker 1: of debt, and it was all maturing in twenty twenty three.
Speaker 1: The bulk of it was made up by five hundred
Speaker 1: two million of vial notes due in November. But even
Speaker 1: before that there were some loans provided by banks that
Speaker 1: were coming due as soon as made twenty twenty three,
Speaker 1: an eighty million term loan and around one hundred eighty
Speaker 1: five millions of letter of credit, which are credit lines
Speaker 1: that are needed to support a company's cash flow. But
Speaker 1: the company, obviously they got hurt by the slowdown the economy,
Speaker 1: the inflation that's obviously can the consumption side, and you know,
Speaker 1: presumingly they're also getting hit by online shopping, but they
Speaker 1: is actually making money. It's not a classic distressed situation, right,
Speaker 1: I mean, why is it really hurting now? It's really
Speaker 1: hurting now because of two reasons. First of all, there's
Speaker 1: the matter of high borrowing costs that made the refinancing
Speaker 1: for Taco essentially impossible. The borrowing costs for junk rated
Speaker 1: companies that have really increased since the beginning of twenty
Speaker 1: twenty two as central banks across the were the raised
Speaker 1: interest rates, and that means that if they want to
Speaker 1: keep investors on board, they will have to really offer
Speaker 1: them a really high yield on the new bonds. Taco
Speaker 1: tried actually to refine and its bonds into late twenty
Speaker 1: twenty one, but it was offering a two over yielded
Speaker 1: for investors to be interested in, and it kind of
Speaker 1: missed the momentum with the breakout of the war in
Speaker 1: Ukraine and with surging inflation across Europe. But for investors
Speaker 1: it was really hard to keep it stay invested in
Speaker 1: their retail sector. Therefore, when individuals that have a lower
Speaker 1: disposable income, that's going to generate less demand than really
Speaker 1: going to impact top line and profits. Let me stop
Speaker 1: you there and talk about you mentioned the funding cost
Speaker 1: of shut Up. Obviously, rates globally I've gone up very
Speaker 1: very steeply, very quickly. That's caused lots of problems across
Speaker 1: the board. But when we're talking about high yields, how
Speaker 1: much do they have to pay? I mean, you said
Speaker 1: it's too high in the market, but how much was it?
Speaker 1: Was it double digits now? Yes? So the average implied
Speaker 1: cost of new borrowing for Europe and i yeald issuers
Speaker 1: has increased from around three percent at the beginning of
Speaker 1: twenty twenty two two or around eight percent now, so
Speaker 1: it's almost three times where it was just over a
Speaker 1: year ago. Really, and this takes into account even the
Speaker 1: best rated of the junk rated companies, and Taco being
Speaker 1: a private equity owned company, definitely did not fall in
Speaker 1: that category. So for Taco it would have been most
Speaker 1: likely in the double digits. Okay, So the last time
Speaker 1: they tried to do a transaction in the bond market,
Speaker 1: was it in double digits? Is that how much they
Speaker 1: were offering and it didn't actually work out. I think
Speaker 1: that was just below the double digits, but it was
Speaker 1: because it was in November twenty twenty one, where interest
Speaker 1: lates were still low and central banks hadn't really started
Speaker 1: hiking them yet. But at the time, they had been
Speaker 1: on the verge of that restructuring just earlier that year,
Speaker 1: so investors didn't feel confident to piling in new bonds
Speaker 1: for that amount that they were offered, and therefore the
Speaker 1: Kann sing Gil did not go through. Later it became
Speaker 1: impossible for them to refinance, Okay. So what I found
Speaker 1: really interesting about this story particularly is that the creditors
Speaker 1: now own the company That's not a very common situation,
Speaker 1: at least where I'm based in the US. How common
Speaker 1: is it in Europe. In Europe, it is a quite
Speaker 1: common outcome if there is a debt restructuring. You write
Speaker 1: off your debt, but in exchange for writing of your debt,
Speaker 1: you get an equity stake in the company. Now, it
Speaker 1: hasn't really been common in the last years because we
Speaker 1: haven't had really many defaults on the companies debt, but
Speaker 1: it is something that we're seeing more and more of
Speaker 1: this year. We have seen a Spanish brideware company being
Speaker 1: taken over by creditors earlier this year called Pronavis. We
Speaker 1: have seen another Spanish casual dining chain, Telepizza, also being
Speaker 1: taken over by creditors, and we're expecting to see more
Speaker 1: companies that follow into this path. But fixed income investors,
Speaker 1: they essentially want to own securities so they can trade
Speaker 1: out to them and you know, they can value them
Speaker 1: and also some other things. But they end up with
Speaker 1: a company. I mean, is this something that they actually
Speaker 1: want to do? I mean, they don't want to be
Speaker 1: operating a German fashion store, do they? No? I think
Speaker 1: investors that had originally bought the notes apart when they
Speaker 1: were first issued, wouldn't want equity. Actually because they don't
Speaker 1: want equity, and because they want to don't do not
Speaker 1: want to risk the company defaulting and them getting stuck
Speaker 1: in it. They usually exit before it comes to that moment.
Speaker 1: With Taco, the bond that had been trading at the
Speaker 1: stress levels for a really long time, and so we
Speaker 1: saw opportunistic investors. They are happier with holding the equity
Speaker 1: of a company and actually for many of them it
Speaker 1: is a strategy called loan tour new pilot to a
Speaker 1: company's debt with the view that eventually to take it
Speaker 1: over and turn it around and sell it again. And
Speaker 1: so with Taco, what we had seen and the year
Speaker 1: earlier years and months was that hedge fund silver Point
Speaker 1: Capital had built a big position in the bonds and now,
Speaker 1: alongside Albacore and Napier Park, it's the majority shareholder of
Speaker 1: the company. So these are not common or garden mutual
Speaker 1: funds that just do sort of playing vanilla bond purchasing.
Speaker 1: These are real specialists in this area and that's what
Speaker 1: they do right absolutely, But you can also expect that
Speaker 1: although they will add a smaller position, there's going to
Speaker 1: be some power investors that will have remained stuck in
Speaker 1: the deal. Okay, very interesting that, So just sort of
Speaker 1: looking at the bigger picture again, Companies around the world
Speaker 1: have been doing this kind of borrowing for years, taking
Speaker 1: on a lot of debt because up until quite recently
Speaker 1: it was very cheap. I mean, you know, yield and
Speaker 1: a lot of European debt were negative just a few
Speaker 1: years ago. So it's quite quite a widespread issue of
Speaker 1: over indebtedness across the board, not just in Europe, globally.
Speaker 1: I mean to me, that means that this German situation, Taco,
Speaker 1: that's not an isolated situation by any means who's next, Julie.
Speaker 1: What are the risks of other companies going the same way?
Speaker 1: So first of all, we have to remember that a
Speaker 1: lot of company actually managed to refinance their debt in
Speaker 1: the boom years of twenty twenty and twenty twenty one
Speaker 1: when rates were still low. That means that for them
Speaker 1: the maturity wall is not near, but rather it will
Speaker 1: come from twenty twenty five onwards. Still, we got some
Speaker 1: that didn't really seize the momentum, and adult there's a
Speaker 1: minority of them versus the broader iyel market. There are
Speaker 1: definitely some names that were keeping a track off, and
Speaker 1: especially there are some that not only they are they
Speaker 1: are facing nearing deadlines, but at the same time their
Speaker 1: performance is struggling. Among some names that work with NION,
Speaker 1: there's a French facility management company called Italian. It has
Speaker 1: bonds due in twenty twenty four and twenty twenty five,
Speaker 1: and it's really been struggling with loves making US business
Speaker 1: and losses in its home country of France. Then you
Speaker 1: also have companies that like Taco, are actually doing okay,
Speaker 1: but they are re hurt by the fact that they
Speaker 1: have a nimin and maturity wall. One of the companies
Speaker 1: that we've been taking a close look at is a
Speaker 1: furniture maker owned by BC Partners. It's called Ketter and
Speaker 1: it has one point two billionaires of that coming due
Speaker 1: in October twenty twenty three. Now, the issue with Catter
Speaker 1: is that they actually try to refinance in early twenty
Speaker 1: twenty two, but they were offering two low of a
Speaker 1: yield and investors pushed back on the deal. Now they
Speaker 1: have a maturity that's really getting closer, and they still
Speaker 1: haven't got a deal with investors. The company, on the
Speaker 1: other hand, is still holding up. Okay, they have a
Speaker 1: solid liquidity buffer and it's just not enough to pay
Speaker 1: the one point two billion of that that they have
Speaker 1: coming you, So they would have to negotiate something with
Speaker 1: predators before then. So before we talk to pretty silver
Speaker 1: Bloomberg Intelligence about banks. What's the big takeaway here? Julie's um,
Speaker 1: what should we learned from this? It sounds like a
Speaker 1: very cautionary tale. Yes, so definitely. I think that the
Speaker 1: that the lesson is to deal with your maturity was
Speaker 1: very far ahead of time, especially now that it is
Speaker 1: definitely trickier to refinance, and yeah, just proceed with caution.
Speaker 1: And the issuers also have to take into account that
Speaker 1: whatever if they can strike a refinancing deal, it will
Speaker 1: be for at a much higher price than what they
Speaker 1: were used to. Very interesting. Juliet with Bloomberg News in London.
Speaker 1: Thanks so much for joining us. We look forward to
Speaker 1: reading all your scoops on the Bloomberg terminal and of
Speaker 1: course at Bloomberg dot com. Thank you very much. Switching
Speaker 1: gears here a bit. As I mentioned earlier, we're delighted
Speaker 1: to welcome pre to Silva. He's a senior credit analyst
Speaker 1: at Bloomberg Intelligence in Hong Kong covering Asian financial markets.
Speaker 1: Thanks for being beyond James. So, banks have been in
Speaker 1: the news a lot lately, firstly because of the failure
Speaker 1: of a handful of regional banks in the US, then
Speaker 1: the for sale of Credit Swiss to UBS in Europe.
Speaker 1: But I wanted to ask about additional tier one or
Speaker 1: eighty one securities. So for those who were not following
Speaker 1: the recent blow up in great detail, we're talking about
Speaker 1: the riskiest form of bank debt, also known as contingent
Speaker 1: convertibles or sometimes referred to as cocos. There are sort
Speaker 1: of hybrid security somewhere between stocks and bonds. But what
Speaker 1: is the latest on that pre great question, James, And
Speaker 1: just to give some background, as part of the eleventh
Speaker 1: our for Saler Cretty Sweets to ub S, the Swiss
Speaker 1: regulator FINMAK wiped down Credit Suiss's entire slug of additional
Speaker 1: tier one securities, which, as you mentioned, essentially preferred equity
Speaker 1: and arguably to make this forced marriage more palatable to UBS.
Speaker 1: This write down caused an immediate, broad and steep sell
Speaker 1: off in the entire eighty one asset class, not to
Speaker 1: mention a lot of confusion. So the Bloomberg Global eighty
Speaker 1: one index, which is probably the best proxy out there
Speaker 1: for the entire asset class, dropped almost ten percent in
Speaker 1: the aftermath. But the eighty one index now is creating
Speaker 1: pretty close to pre Credit Swiss levels, having almost made
Speaker 1: a full round trip in just two weeks. So in
Speaker 1: the case of Credit Swiss, eighty ones were marked down
Speaker 1: to zero, but equity holders actually recovered something, and so
Speaker 1: to some people that meant that the one market was
Speaker 1: essentially dead. Why does it still work and why does
Speaker 1: it work in Asia? I think in the case, I
Speaker 1: don't necessarily subscribe to that view, And the recent being
Speaker 1: is the eighty one as a class is a fairway
Speaker 1: there as a class, So anyone investing in it needs
Speaker 1: to know that you are last absorbing capital. But as
Speaker 1: to why the equity got something and the eighty ones
Speaker 1: didn't get anything, I think it's more a practical matter.
Speaker 1: The equity for more than forty billion of booque equity
Speaker 1: got only three billion, so it's not a great recovery,
Speaker 1: but there was something in there. But I think the
Speaker 1: practical aspect of it is the regulators needed to make
Speaker 1: the deal work for the buyer, and so UBS took
Speaker 1: on created suites in the level tower, almost falling on
Speaker 1: a grenade. And so how do you make it work
Speaker 1: by taking on less liabilities? And I think when you
Speaker 1: consider the full picture, it becomes obvious that if they
Speaker 1: were just going down the capital structure and there was
Speaker 1: seventeen billion of additional tier one securities that provided their cushion,
Speaker 1: whereas UB suffering a billion dollars or billion franc at
Speaker 1: the onset, that wasn't really going to change the dynamics
Speaker 1: of it that much. So when this all happened and
Speaker 1: Credit switch, did, you know, shockingly to most people, essentially
Speaker 1: just disappear and you know, it's a huge financial institution.
Speaker 1: But when when the at ones were marked down to zero,
Speaker 1: this was an event that really did affect the whole
Speaker 1: of the eighty one market globally, and the ones were
Speaker 1: selling off and there was you know a bit of
Speaker 1: distress in the air. But we're basically taking away from
Speaker 1: this that what happened at Credit Swiss in Switzerland was
Speaker 1: unique to that country. Yes, absolutely, Um, I think there
Speaker 1: were a couple factors that cost the eighty one market
Speaker 1: to rebound and rebound very sharply. One is the realization
Speaker 1: that Credit Suis was an idiosyncretic event and the other
Speaker 1: large global banks are in a much better and sound
Speaker 1: financial footing, and comments by various central bankers and public officials,
Speaker 1: including Japan's finance minister, have gone a long way in
Speaker 1: this regard. I think the second point to note is
Speaker 1: the opportunity cost of sitting on the sidelines. When yields
Speaker 1: are at double digits, it's a lot to give up
Speaker 1: to sit on cash, and especially when an institutional investors
Speaker 1: are managing to a benchmark. And if you are to
Speaker 1: look at the Bloomberg Global co Core Index, the yield
Speaker 1: and the index right now is almost ten percent still
Speaker 1: even after the rebound. So that's a lot to give
Speaker 1: up in terms of opportunity cars. But let's talk about
Speaker 1: the speed of the rebound. I mean, that is astonishing
Speaker 1: in that you know, only one month earlier we're talking
Speaker 1: today it's middle of April, but but in March it
Speaker 1: was a complete catastrophe that this huge financial institution, you know,
Speaker 1: solid with global reach, just blew up essentially and disappeared.
Speaker 1: I mean, but now one month later, everything's okay, yes
Speaker 1: and no. UM, it's the recovery has been almost as
Speaker 1: fast as the downturn, but it's been an uneven recovery,
Speaker 1: so to speak. The biggest so called better credits I think,
Speaker 1: have had than others, but we still have a ways
Speaker 1: to go. And kind of going back to the same
Speaker 1: Bloomberg eighty one index. Yes, the rebound, as you noted,
Speaker 1: recovered to the index, recovered to the precs levels, but
Speaker 1: it's still down for the year. So that's one And
Speaker 1: I think the other thing to note is we still
Speaker 1: haven't seen a major bank come to the market and
Speaker 1: spr speaking on the eleventh of March, sorry, eleventh of April,
Speaker 1: bigger pardon, MUFG, Japan's largest bank, is in the market
Speaker 1: with a four parts senior bond offering, and I think
Speaker 1: that'll go a long way towards establishing market confidence and
Speaker 1: to show that the banks can access capital markets. But
Speaker 1: I think the real litmus test is when a bank
Speaker 1: issues a new eighty one UM. But do you expect
Speaker 1: that to happen soon? I expect Sumitomo Mitsui Financial Group,
Speaker 1: Japan's second biggest banking group, to come to the market
Speaker 1: on around April nineteenth and if that deal is successful,
Speaker 1: I think that would more or less recap our cap
Speaker 1: the rebound in the bank eighty one space. And what
Speaker 1: do you expect demand to be like for that kind
Speaker 1: of transaction. It'll depend on pricing, I reckon. Okay, okay,
Speaker 1: just going back to the the you know, one of
Speaker 1: the fears about eighty ones was, you know, traditionally they
Speaker 1: have been called, they have been refinanced at the first
Speaker 1: call day. Is that you know, guaranteed in age of
Speaker 1: those deals that are outside some background there in the US,
Speaker 1: coming out of the financial crisis and frank regulators made
Speaker 1: it clear to banks and to investors that, um, if
Speaker 1: you want these instruments to be treated as permanent capital,
Speaker 1: you need to treat them as permanent capital and not
Speaker 1: call them on the first call date. And over time,
Speaker 1: studying in the UK and then in Europe, now the
Speaker 1: asset class is being treated almost like if banks will
Speaker 1: call if they if they if the economics are in
Speaker 1: the favor of the issue. And just last year April,
Speaker 1: the Australian regulator also put out a notice saying banks
Speaker 1: should only redeem additional tim and security it's on the
Speaker 1: first call date only if it makes economic sense. So
Speaker 1: I think in most parts of the world the rules
Speaker 1: have been set so that issuers could call them or
Speaker 1: should call them only if the economics make sense. Parts
Speaker 1: of Asia it's still not treated as that, and they
Speaker 1: get called on the first call date. So disc I
Speaker 1: think could could be an interesting time. But what's interesting
Speaker 1: in Asia is in some of the maze major Asian
Speaker 1: countries there's not a whole lot of at ones come
Speaker 1: in due. In Japan, for instance, the next Japanese N
Speaker 1: eighty one comes to you in December, so there's a
Speaker 1: lot of time. And in the case of Chinese banks,
Speaker 1: they've been redeeming and replacing offshore at ones in the
Speaker 1: on show market at lower cost. So I think between
Speaker 1: those two it's an interesting time. But let's see, because
Speaker 1: luck could happen between now and then. Yeah, I mean,
Speaker 1: the problem for me seems to be that the investors
Speaker 1: have been pricing them to call, and if they don't
Speaker 1: get called, they panic. So there's a lot of you know, uncertainty,
Speaker 1: and investors don't like uncertainty. Yeah, absolutely, investors don't like uncertainty.
Speaker 1: But I see the point that the regulators are trying
Speaker 1: to make is if these instruments should qualify as permanent capital,
Speaker 1: then I think investors need to do a better job
Speaker 1: and be most selective about what they buy and also
Speaker 1: the structure. And if you, um, if you think something
Speaker 1: is priced not to all mail, maybe you shouldn't be
Speaker 1: buying that. And that's my view and I think that's
Speaker 1: where credit analysts and the investment analysts should stand up
Speaker 1: and raise their hand and on their on their web page.
Speaker 1: So on the financial set to generally, I mean, you
Speaker 1: guys have never been more popular. You know, you you
Speaker 1: you you credit analysts of banks, and you know it's
Speaker 1: traditionally not been the most exciting set, and you know
Speaker 1: for good reason. But you know you've probably been up
Speaker 1: all night covering this. Um this crisis. Is it over now?
Speaker 1: Is it over now? I think for the most part, yes,
Speaker 1: um um. The credit special event, especially around that I
Speaker 1: think is an idiosyncratic one. In the US, I think
Speaker 1: the regulators have done enough. Although I thought and I
Speaker 1: expected them to increase the US deposit insurance limit, either
Speaker 1: on a temporary basis or permanent basis, probably temporary basis,
Speaker 1: which would have really put an end to the crisis.
Speaker 1: They had some of the regional banks are phrasing, but
Speaker 1: I think at this point we are past the peak
Speaker 1: and the bank earning season is probably the key test now.
Speaker 1: And on the regional banks, I mean, just to just
Speaker 1: to wrap this up, but regional banks that were very
Speaker 1: concentrated in a sector, you know, like Silicon Valley Bank,
Speaker 1: very concentrated in tech, and also had a ton of
Speaker 1: treasury builds on the balance sheet that were worth a
Speaker 1: lot less than they thought they were. I mean, you
Speaker 1: know this, this small financial institution that's very very exposed
Speaker 1: to one set to Is that not an issue across
Speaker 1: the world. I mean, you don't have the same problem
Speaker 1: in Asia. In some countries. Yes, if you look at
Speaker 1: the three banks that failed in the US, they were
Speaker 1: all very highly concentrated in one way or another, either
Speaker 1: tech or crypto or something around the lines. In Asia,
Speaker 1: we do have banks like that, and occasionally they tend
Speaker 1: to get more into trouble. And what I do like
Speaker 1: about the larger banks is their diversity. And if you
Speaker 1: are a large, well diversified bank, if one or two
Speaker 1: off your lines of business aren't doing that well, you
Speaker 1: still have others, other businesses that are pulling the weight.
Speaker 1: And the same goals with the risk profile at the company.
Speaker 1: So yes, there are a smaller banks that are, but
Speaker 1: I call mono line institutions and they are more rescued
Speaker 1: them the more diversive faid months. But the good thing
Speaker 1: from a credit investor standpoint is more so the debt
Speaker 1: outstanding tends to be issued by the larger, more diversified banks.
Speaker 1: So I think that's the saving grace for credit investors.
Speaker 1: Very good, Thank you very much, Pretty Silver Bloomberg Intelligence.
Speaker 1: You can see all of his analysis on the Bloomberg terminal.
Speaker 1: There's a lot going on in banking, so do check
Speaker 1: it out and pleasure to see you pretty. Thanks a lot.
Speaker 1: We'll have you back on the show soon. Likewise, see
Speaker 1: you then, take care. Thanks a lot, and thanks again
Speaker 1: to Julia more Portugal from Bloomberg News. We'd all her
Speaker 1: scoops on the terminal and at Bloomberg dot Com. I'm
Speaker 1: James Crumby. It's been a pleasure having you. See you
Speaker 1: next week on the Credit Edge.