WEBVTT - Junk Firms Slam Into Debt Wall; AT1s Strike Back 0:00:12.080 --> 0:00:15.240 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:15.600 --> 0:00:18.320 My name is James Crumbye. I'm a senior editor at Bloomberg. 0:00:19.079 --> 0:00:22.800 Today's guests are Julia Morporigo, who covers distressed debt for 0:00:22.840 --> 0:00:25.279 Bloomberg News in London. We're delighted to have you on 0:00:25.280 --> 0:00:29.520 the show. Thank you, James for having me. We're also 0:00:29.640 --> 0:00:32.680 very pleased to welcome Prida Silva. He's a senior credit 0:00:32.720 --> 0:00:36.919 analyst at Bloomberg Intelligence in Hong Kong covering Asian financial institutions. 0:00:37.280 --> 0:00:39.400 We'll be getting his insight later on in the show, 0:00:40.400 --> 0:00:43.879 but before we do. Julia Morpurigo with Bloomberg News, you 0:00:43.920 --> 0:00:46.800 cover distressed debt in Europe. There's always a ton of 0:00:46.880 --> 0:00:49.519 drama there. So you had a great story on a 0:00:49.680 --> 0:00:52.280 German company that has too much debt. It's not a 0:00:52.320 --> 0:00:54.600 bad business, but they couldn't afford to repay all the 0:00:54.640 --> 0:00:57.240 money that they borrowed. Now the creditors are going to 0:00:57.240 --> 0:00:59.960 take over. They essentially own that company. What's the situation 0:01:00.120 --> 0:01:03.360 and Julia, can you walk us through it? Yes? So, 0:01:03.560 --> 0:01:07.600 Taco Fashion is a German discount retailer selling mainly clothes, 0:01:08.120 --> 0:01:11.440 and it had been owned by private equity firm Appat's 0:01:11.480 --> 0:01:15.440 partners since twenty eleven. As many other retailers. For out 0:01:15.440 --> 0:01:18.320 the years, it faced the challenge of the shift from 0:01:18.319 --> 0:01:22.240 brick and mortar stores tool online. However, the real issues 0:01:22.280 --> 0:01:24.920 came with the pandemic, which happened before Apets could exit 0:01:25.000 --> 0:01:28.839 the company and monetize on its investment. In twenty twenty, 0:01:28.880 --> 0:01:30.400 it looked like the company was on the edge of 0:01:30.400 --> 0:01:35.039 a debt restructuring with the lockdowns shutting down stores in Germany, 0:01:35.200 --> 0:01:38.560 but eventually the performance turned around. In twenty twenty one, 0:01:38.800 --> 0:01:42.000 the cash shortfall was resolved by appats and other investors 0:01:42.040 --> 0:01:46.440 who plugged in money, and eventually in twenty twenty two, 0:01:46.959 --> 0:01:50.440 it faced an obstacle two highter surmount and at a 0:01:50.520 --> 0:01:53.800 time when the company is solding up in terms of performance. 0:01:53.880 --> 0:01:57.920 But there's also an issue for retailers, which is the 0:01:57.920 --> 0:02:01.240 fact that high inflation is really eighty into profit margins. 0:02:03.360 --> 0:02:08.720 Last year it started talks with creditors because it faced 0:02:08.760 --> 0:02:12.920 the insurmount them all abound of debt maturing in twenty 0:02:12.919 --> 0:02:15.760 twenty three, So how much debt are we talking about? 0:02:15.800 --> 0:02:19.240 And how much was about? Some mature so the company 0:02:19.360 --> 0:02:22.640 had in total about eight hundred and thirty million euros 0:02:22.800 --> 0:02:25.799 of debt, and it was all maturing in twenty twenty three. 0:02:26.200 --> 0:02:28.160 The bulk of it was made up by five hundred 0:02:28.200 --> 0:02:31.480 two million of vial notes due in November. But even 0:02:31.520 --> 0:02:34.040 before that there were some loans provided by banks that 0:02:34.080 --> 0:02:36.680 were coming due as soon as made twenty twenty three, 0:02:37.000 --> 0:02:40.359 an eighty million term loan and around one hundred eighty 0:02:40.400 --> 0:02:43.440 five millions of letter of credit, which are credit lines 0:02:43.440 --> 0:02:46.920 that are needed to support a company's cash flow. But 0:02:47.000 --> 0:02:51.320 the company, obviously they got hurt by the slowdown the economy, 0:02:51.400 --> 0:02:55.840 the inflation that's obviously can the consumption side, and you know, 0:02:55.960 --> 0:02:59.680 presumingly they're also getting hit by online shopping, but they 0:03:00.560 --> 0:03:04.960 is actually making money. It's not a classic distressed situation, right, 0:03:04.960 --> 0:03:09.240 I mean, why is it really hurting now? It's really 0:03:09.280 --> 0:03:12.760 hurting now because of two reasons. First of all, there's 0:03:12.800 --> 0:03:16.320 the matter of high borrowing costs that made the refinancing 0:03:16.400 --> 0:03:23.120 for Taco essentially impossible. The borrowing costs for junk rated 0:03:23.520 --> 0:03:28.200 companies that have really increased since the beginning of twenty 0:03:28.280 --> 0:03:32.680 twenty two as central banks across the were the raised 0:03:32.760 --> 0:03:37.240 interest rates, and that means that if they want to 0:03:37.320 --> 0:03:40.400 keep investors on board, they will have to really offer 0:03:40.440 --> 0:03:44.880 them a really high yield on the new bonds. Taco 0:03:44.960 --> 0:03:48.840 tried actually to refine and its bonds into late twenty 0:03:48.880 --> 0:03:52.320 twenty one, but it was offering a two over yielded 0:03:52.400 --> 0:03:55.080 for investors to be interested in, and it kind of 0:03:55.080 --> 0:03:59.520 missed the momentum with the breakout of the war in 0:03:59.600 --> 0:04:04.400 Ukraine and with surging inflation across Europe. But for investors 0:04:04.440 --> 0:04:09.960 it was really hard to keep it stay invested in 0:04:10.000 --> 0:04:14.240 their retail sector. Therefore, when individuals that have a lower 0:04:14.240 --> 0:04:19.920 disposable income, that's going to generate less demand than really 0:04:19.960 --> 0:04:23.720 going to impact top line and profits. Let me stop 0:04:23.760 --> 0:04:26.240 you there and talk about you mentioned the funding cost 0:04:26.320 --> 0:04:29.360 of shut Up. Obviously, rates globally I've gone up very 0:04:29.440 --> 0:04:33.599 very steeply, very quickly. That's caused lots of problems across 0:04:33.640 --> 0:04:36.560 the board. But when we're talking about high yields, how 0:04:36.640 --> 0:04:38.800 much do they have to pay? I mean, you said 0:04:38.839 --> 0:04:41.000 it's too high in the market, but how much was it? 0:04:41.040 --> 0:04:46.960 Was it double digits now? Yes? So the average implied 0:04:47.000 --> 0:04:50.200 cost of new borrowing for Europe and i yeald issuers 0:04:50.640 --> 0:04:53.640 has increased from around three percent at the beginning of 0:04:53.680 --> 0:04:56.920 twenty twenty two two or around eight percent now, so 0:04:56.960 --> 0:04:59.359 it's almost three times where it was just over a 0:04:59.440 --> 0:05:05.360 year ago. Really, and this takes into account even the 0:05:05.400 --> 0:05:13.440 best rated of the junk rated companies, and Taco being 0:05:13.480 --> 0:05:16.080 a private equity owned company, definitely did not fall in 0:05:16.120 --> 0:05:19.440 that category. So for Taco it would have been most 0:05:19.480 --> 0:05:22.600 likely in the double digits. Okay, So the last time 0:05:22.640 --> 0:05:25.760 they tried to do a transaction in the bond market, 0:05:26.160 --> 0:05:28.040 was it in double digits? Is that how much they 0:05:28.080 --> 0:05:30.560 were offering and it didn't actually work out. I think 0:05:30.560 --> 0:05:33.159 that was just below the double digits, but it was 0:05:33.200 --> 0:05:35.800 because it was in November twenty twenty one, where interest 0:05:35.880 --> 0:05:41.040 lates were still low and central banks hadn't really started 0:05:41.120 --> 0:05:45.240 hiking them yet. But at the time, they had been 0:05:45.360 --> 0:05:48.200 on the verge of that restructuring just earlier that year, 0:05:48.320 --> 0:05:52.880 so investors didn't feel confident to piling in new bonds 0:05:52.960 --> 0:05:57.080 for that amount that they were offered, and therefore the 0:05:57.320 --> 0:06:00.320 Kann sing Gil did not go through. Later it became 0:06:00.360 --> 0:06:03.839 impossible for them to refinance, Okay. So what I found 0:06:03.880 --> 0:06:07.200 really interesting about this story particularly is that the creditors 0:06:07.360 --> 0:06:10.360 now own the company That's not a very common situation, 0:06:10.560 --> 0:06:13.000 at least where I'm based in the US. How common 0:06:13.080 --> 0:06:16.359 is it in Europe. In Europe, it is a quite 0:06:16.400 --> 0:06:21.360 common outcome if there is a debt restructuring. You write 0:06:21.360 --> 0:06:24.359 off your debt, but in exchange for writing of your debt, 0:06:24.880 --> 0:06:27.960 you get an equity stake in the company. Now, it 0:06:28.000 --> 0:06:30.200 hasn't really been common in the last years because we 0:06:30.240 --> 0:06:34.880 haven't had really many defaults on the companies debt, but 0:06:35.240 --> 0:06:37.359 it is something that we're seeing more and more of 0:06:37.480 --> 0:06:41.560 this year. We have seen a Spanish brideware company being 0:06:41.600 --> 0:06:45.599 taken over by creditors earlier this year called Pronavis. We 0:06:45.720 --> 0:06:51.080 have seen another Spanish casual dining chain, Telepizza, also being 0:06:51.120 --> 0:06:54.840 taken over by creditors, and we're expecting to see more 0:06:54.920 --> 0:06:59.880 companies that follow into this path. But fixed income investors, 0:07:00.000 --> 0:07:02.599 they essentially want to own securities so they can trade 0:07:02.600 --> 0:07:04.360 out to them and you know, they can value them 0:07:04.400 --> 0:07:06.599 and also some other things. But they end up with 0:07:06.640 --> 0:07:09.440 a company. I mean, is this something that they actually 0:07:09.480 --> 0:07:10.880 want to do? I mean, they don't want to be 0:07:10.920 --> 0:07:16.000 operating a German fashion store, do they? No? I think 0:07:16.160 --> 0:07:19.400 investors that had originally bought the notes apart when they 0:07:19.400 --> 0:07:23.240 were first issued, wouldn't want equity. Actually because they don't 0:07:23.240 --> 0:07:26.280 want equity, and because they want to don't do not 0:07:26.400 --> 0:07:30.000 want to risk the company defaulting and them getting stuck 0:07:30.040 --> 0:07:33.920 in it. They usually exit before it comes to that moment. 0:07:34.040 --> 0:07:36.960 With Taco, the bond that had been trading at the 0:07:37.000 --> 0:07:40.040 stress levels for a really long time, and so we 0:07:40.120 --> 0:07:45.120 saw opportunistic investors. They are happier with holding the equity 0:07:45.240 --> 0:07:47.960 of a company and actually for many of them it 0:07:48.120 --> 0:07:50.760 is a strategy called loan tour new pilot to a 0:07:50.800 --> 0:07:53.840 company's debt with the view that eventually to take it 0:07:53.880 --> 0:07:57.320 over and turn it around and sell it again. And 0:07:57.360 --> 0:08:01.920 so with Taco, what we had seen and the year 0:08:02.000 --> 0:08:06.680 earlier years and months was that hedge fund silver Point 0:08:06.720 --> 0:08:11.520 Capital had built a big position in the bonds and now, 0:08:11.600 --> 0:08:18.720 alongside Albacore and Napier Park, it's the majority shareholder of 0:08:18.760 --> 0:08:21.560 the company. So these are not common or garden mutual 0:08:21.560 --> 0:08:25.880 funds that just do sort of playing vanilla bond purchasing. 0:08:25.880 --> 0:08:28.840 These are real specialists in this area and that's what 0:08:28.880 --> 0:08:32.360 they do right absolutely, But you can also expect that 0:08:32.520 --> 0:08:35.959 although they will add a smaller position, there's going to 0:08:36.000 --> 0:08:38.800 be some power investors that will have remained stuck in 0:08:38.800 --> 0:08:42.480 the deal. Okay, very interesting that, So just sort of 0:08:42.520 --> 0:08:45.040 looking at the bigger picture again, Companies around the world 0:08:45.080 --> 0:08:48.280 have been doing this kind of borrowing for years, taking 0:08:48.280 --> 0:08:50.600 on a lot of debt because up until quite recently 0:08:50.600 --> 0:08:52.679 it was very cheap. I mean, you know, yield and 0:08:52.720 --> 0:08:55.400 a lot of European debt were negative just a few 0:08:55.480 --> 0:08:59.680 years ago. So it's quite quite a widespread issue of 0:09:00.040 --> 0:09:03.520 over indebtedness across the board, not just in Europe, globally. 0:09:03.640 --> 0:09:08.680 I mean to me, that means that this German situation, Taco, 0:09:08.679 --> 0:09:12.439 that's not an isolated situation by any means who's next, Julie. 0:09:12.679 --> 0:09:15.559 What are the risks of other companies going the same way? 0:09:15.840 --> 0:09:17.679 So first of all, we have to remember that a 0:09:17.679 --> 0:09:21.160 lot of company actually managed to refinance their debt in 0:09:21.240 --> 0:09:23.679 the boom years of twenty twenty and twenty twenty one 0:09:24.000 --> 0:09:27.160 when rates were still low. That means that for them 0:09:27.200 --> 0:09:30.439 the maturity wall is not near, but rather it will 0:09:30.480 --> 0:09:34.800 come from twenty twenty five onwards. Still, we got some 0:09:34.960 --> 0:09:39.520 that didn't really seize the momentum, and adult there's a 0:09:39.559 --> 0:09:43.160 minority of them versus the broader iyel market. There are 0:09:43.240 --> 0:09:47.520 definitely some names that were keeping a track off, and 0:09:47.760 --> 0:09:53.679 especially there are some that not only they are they 0:09:53.679 --> 0:09:56.720 are facing nearing deadlines, but at the same time their 0:09:56.760 --> 0:10:02.520 performance is struggling. Among some names that work with NION, 0:10:02.679 --> 0:10:07.439 there's a French facility management company called Italian. It has 0:10:07.480 --> 0:10:10.440 bonds due in twenty twenty four and twenty twenty five, 0:10:11.080 --> 0:10:15.480 and it's really been struggling with loves making US business 0:10:15.679 --> 0:10:20.360 and losses in its home country of France. Then you 0:10:20.440 --> 0:10:24.680 also have companies that like Taco, are actually doing okay, 0:10:24.720 --> 0:10:27.199 but they are re hurt by the fact that they 0:10:27.200 --> 0:10:30.200 have a nimin and maturity wall. One of the companies 0:10:30.200 --> 0:10:33.040 that we've been taking a close look at is a 0:10:33.080 --> 0:10:37.000 furniture maker owned by BC Partners. It's called Ketter and 0:10:37.160 --> 0:10:40.440 it has one point two billionaires of that coming due 0:10:40.520 --> 0:10:43.559 in October twenty twenty three. Now, the issue with Catter 0:10:43.679 --> 0:10:46.880 is that they actually try to refinance in early twenty 0:10:46.960 --> 0:10:48.960 twenty two, but they were offering two low of a 0:10:49.040 --> 0:10:53.959 yield and investors pushed back on the deal. Now they 0:10:54.200 --> 0:10:58.160 have a maturity that's really getting closer, and they still 0:10:58.160 --> 0:11:01.120 haven't got a deal with investors. The company, on the 0:11:01.120 --> 0:11:05.320 other hand, is still holding up. Okay, they have a 0:11:05.440 --> 0:11:11.080 solid liquidity buffer and it's just not enough to pay 0:11:11.120 --> 0:11:12.720 the one point two billion of that that they have 0:11:12.760 --> 0:11:15.560 coming you, So they would have to negotiate something with 0:11:15.640 --> 0:11:19.360 predators before then. So before we talk to pretty silver 0:11:19.440 --> 0:11:23.400 Bloomberg Intelligence about banks. What's the big takeaway here? Julie's um, 0:11:23.480 --> 0:11:25.079 what should we learned from this? It sounds like a 0:11:25.160 --> 0:11:29.839 very cautionary tale. Yes, so definitely. I think that the 0:11:30.400 --> 0:11:33.360 that the lesson is to deal with your maturity was 0:11:33.600 --> 0:11:36.760 very far ahead of time, especially now that it is 0:11:36.800 --> 0:11:42.880 definitely trickier to refinance, and yeah, just proceed with caution. 0:11:43.080 --> 0:11:46.440 And the issuers also have to take into account that 0:11:46.720 --> 0:11:49.600 whatever if they can strike a refinancing deal, it will 0:11:49.679 --> 0:11:52.040 be for at a much higher price than what they 0:11:52.360 --> 0:11:57.480 were used to. Very interesting. Juliet with Bloomberg News in London. 0:11:57.520 --> 0:11:59.520 Thanks so much for joining us. We look forward to 0:11:59.600 --> 0:12:01.920 reading all your scoops on the Bloomberg terminal and of 0:12:01.960 --> 0:12:06.920 course at Bloomberg dot com. Thank you very much. Switching 0:12:06.960 --> 0:12:09.400 gears here a bit. As I mentioned earlier, we're delighted 0:12:09.440 --> 0:12:12.200 to welcome pre to Silva. He's a senior credit analyst 0:12:12.240 --> 0:12:15.880 at Bloomberg Intelligence in Hong Kong covering Asian financial markets. 0:12:16.120 --> 0:12:21.760 Thanks for being beyond James. So, banks have been in 0:12:21.800 --> 0:12:23.960 the news a lot lately, firstly because of the failure 0:12:24.000 --> 0:12:26.440 of a handful of regional banks in the US, then 0:12:26.480 --> 0:12:30.000 the for sale of Credit Swiss to UBS in Europe. 0:12:30.480 --> 0:12:33.679 But I wanted to ask about additional tier one or 0:12:33.760 --> 0:12:37.240 eighty one securities. So for those who were not following 0:12:37.280 --> 0:12:40.840 the recent blow up in great detail, we're talking about 0:12:40.880 --> 0:12:45.160 the riskiest form of bank debt, also known as contingent 0:12:45.200 --> 0:12:49.240 convertibles or sometimes referred to as cocos. There are sort 0:12:49.240 --> 0:12:52.560 of hybrid security somewhere between stocks and bonds. But what 0:12:52.720 --> 0:12:55.160 is the latest on that pre great question, James, And 0:12:55.280 --> 0:12:57.480 just to give some background, as part of the eleventh 0:12:57.640 --> 0:13:01.240 our for Saler Cretty Sweets to ub S, the Swiss 0:13:01.280 --> 0:13:05.720 regulator FINMAK wiped down Credit Suiss's entire slug of additional 0:13:05.720 --> 0:13:11.760 tier one securities, which, as you mentioned, essentially preferred equity 0:13:11.840 --> 0:13:17.680 and arguably to make this forced marriage more palatable to UBS. 0:13:17.720 --> 0:13:21.920 This write down caused an immediate, broad and steep sell 0:13:21.960 --> 0:13:25.080 off in the entire eighty one asset class, not to 0:13:25.120 --> 0:13:29.520 mention a lot of confusion. So the Bloomberg Global eighty 0:13:29.559 --> 0:13:33.240 one index, which is probably the best proxy out there 0:13:33.240 --> 0:13:37.320 for the entire asset class, dropped almost ten percent in 0:13:37.360 --> 0:13:41.960 the aftermath. But the eighty one index now is creating 0:13:42.000 --> 0:13:46.720 pretty close to pre Credit Swiss levels, having almost made 0:13:46.760 --> 0:13:51.600 a full round trip in just two weeks. So in 0:13:51.640 --> 0:13:55.360 the case of Credit Swiss, eighty ones were marked down 0:13:55.360 --> 0:14:00.679 to zero, but equity holders actually recovered something, and so 0:14:00.800 --> 0:14:04.560 to some people that meant that the one market was 0:14:04.640 --> 0:14:08.480 essentially dead. Why does it still work and why does 0:14:08.480 --> 0:14:13.480 it work in Asia? I think in the case, I 0:14:13.520 --> 0:14:17.600 don't necessarily subscribe to that view, And the recent being 0:14:18.480 --> 0:14:23.800 is the eighty one as a class is a fairway 0:14:23.800 --> 0:14:27.320 there as a class, So anyone investing in it needs 0:14:27.400 --> 0:14:31.680 to know that you are last absorbing capital. But as 0:14:31.720 --> 0:14:35.680 to why the equity got something and the eighty ones 0:14:35.800 --> 0:14:40.240 didn't get anything, I think it's more a practical matter. 0:14:40.880 --> 0:14:45.000 The equity for more than forty billion of booque equity 0:14:45.000 --> 0:14:48.120 got only three billion, so it's not a great recovery, 0:14:48.160 --> 0:14:51.440 but there was something in there. But I think the 0:14:51.480 --> 0:14:55.200 practical aspect of it is the regulators needed to make 0:14:55.280 --> 0:15:01.480 the deal work for the buyer, and so UBS took 0:15:01.560 --> 0:15:05.760 on created suites in the level tower, almost falling on 0:15:05.880 --> 0:15:08.760 a grenade. And so how do you make it work 0:15:09.520 --> 0:15:12.920 by taking on less liabilities? And I think when you 0:15:13.360 --> 0:15:18.840 consider the full picture, it becomes obvious that if they 0:15:18.840 --> 0:15:23.280 were just going down the capital structure and there was 0:15:23.320 --> 0:15:28.200 seventeen billion of additional tier one securities that provided their cushion, 0:15:28.400 --> 0:15:33.360 whereas UB suffering a billion dollars or billion franc at 0:15:33.400 --> 0:15:37.600 the onset, that wasn't really going to change the dynamics 0:15:37.640 --> 0:15:42.600 of it that much. So when this all happened and 0:15:42.760 --> 0:15:46.680 Credit switch, did, you know, shockingly to most people, essentially 0:15:46.680 --> 0:15:50.040 just disappear and you know, it's a huge financial institution. 0:15:50.280 --> 0:15:52.960 But when when the at ones were marked down to zero, 0:15:53.720 --> 0:15:57.280 this was an event that really did affect the whole 0:15:57.400 --> 0:16:00.520 of the eighty one market globally, and the ones were 0:16:00.520 --> 0:16:03.560 selling off and there was you know a bit of 0:16:03.560 --> 0:16:07.480 distress in the air. But we're basically taking away from 0:16:07.520 --> 0:16:11.520 this that what happened at Credit Swiss in Switzerland was 0:16:11.640 --> 0:16:15.480 unique to that country. Yes, absolutely, Um, I think there 0:16:15.520 --> 0:16:18.800 were a couple factors that cost the eighty one market 0:16:18.880 --> 0:16:22.920 to rebound and rebound very sharply. One is the realization 0:16:23.040 --> 0:16:27.640 that Credit Suis was an idiosyncretic event and the other 0:16:27.920 --> 0:16:31.640 large global banks are in a much better and sound 0:16:31.680 --> 0:16:37.160 financial footing, and comments by various central bankers and public officials, 0:16:37.160 --> 0:16:41.320 including Japan's finance minister, have gone a long way in 0:16:41.960 --> 0:16:46.120 this regard. I think the second point to note is 0:16:46.200 --> 0:16:51.200 the opportunity cost of sitting on the sidelines. When yields 0:16:51.200 --> 0:16:54.760 are at double digits, it's a lot to give up 0:16:54.760 --> 0:17:00.200 to sit on cash, and especially when an institutional investors 0:17:00.000 --> 0:17:03.760 are managing to a benchmark. And if you are to 0:17:03.840 --> 0:17:08.720 look at the Bloomberg Global co Core Index, the yield 0:17:08.720 --> 0:17:11.760 and the index right now is almost ten percent still 0:17:11.800 --> 0:17:15.360 even after the rebound. So that's a lot to give 0:17:15.440 --> 0:17:19.880 up in terms of opportunity cars. But let's talk about 0:17:19.880 --> 0:17:22.360 the speed of the rebound. I mean, that is astonishing 0:17:22.560 --> 0:17:26.679 in that you know, only one month earlier we're talking 0:17:26.800 --> 0:17:31.440 today it's middle of April, but but in March it 0:17:31.520 --> 0:17:36.119 was a complete catastrophe that this huge financial institution, you know, 0:17:36.400 --> 0:17:40.360 solid with global reach, just blew up essentially and disappeared. 0:17:40.359 --> 0:17:44.440 I mean, but now one month later, everything's okay, yes 0:17:44.480 --> 0:17:50.720 and no. UM, it's the recovery has been almost as 0:17:50.720 --> 0:17:55.520 fast as the downturn, but it's been an uneven recovery, 0:17:55.600 --> 0:17:59.280 so to speak. The biggest so called better credits I think, 0:17:59.320 --> 0:18:02.600 have had than others, but we still have a ways 0:18:02.640 --> 0:18:05.200 to go. And kind of going back to the same 0:18:05.560 --> 0:18:09.600 Bloomberg eighty one index. Yes, the rebound, as you noted, 0:18:10.480 --> 0:18:14.960 recovered to the index, recovered to the precs levels, but 0:18:15.080 --> 0:18:19.280 it's still down for the year. So that's one And 0:18:19.520 --> 0:18:24.400 I think the other thing to note is we still 0:18:24.440 --> 0:18:29.200 haven't seen a major bank come to the market and 0:18:29.560 --> 0:18:34.639 spr speaking on the eleventh of March, sorry, eleventh of April, 0:18:34.760 --> 0:18:39.959 bigger pardon, MUFG, Japan's largest bank, is in the market 0:18:40.840 --> 0:18:44.680 with a four parts senior bond offering, and I think 0:18:45.320 --> 0:18:49.560 that'll go a long way towards establishing market confidence and 0:18:49.760 --> 0:18:53.399 to show that the banks can access capital markets. But 0:18:53.520 --> 0:18:57.600 I think the real litmus test is when a bank 0:18:57.680 --> 0:19:02.399 issues a new eighty one UM. But do you expect 0:19:02.440 --> 0:19:07.240 that to happen soon? I expect Sumitomo Mitsui Financial Group, 0:19:07.359 --> 0:19:10.800 Japan's second biggest banking group, to come to the market 0:19:11.280 --> 0:19:16.160 on around April nineteenth and if that deal is successful, 0:19:16.359 --> 0:19:20.320 I think that would more or less recap our cap 0:19:20.440 --> 0:19:25.679 the rebound in the bank eighty one space. And what 0:19:25.720 --> 0:19:27.880 do you expect demand to be like for that kind 0:19:27.920 --> 0:19:34.399 of transaction. It'll depend on pricing, I reckon. Okay, okay, 0:19:34.640 --> 0:19:36.600 just going back to the the you know, one of 0:19:36.640 --> 0:19:40.480 the fears about eighty ones was, you know, traditionally they 0:19:40.560 --> 0:19:43.359 have been called, they have been refinanced at the first 0:19:43.400 --> 0:19:46.760 call day. Is that you know, guaranteed in age of 0:19:46.920 --> 0:19:51.399 those deals that are outside some background there in the US, 0:19:51.520 --> 0:19:56.920 coming out of the financial crisis and frank regulators made 0:19:56.960 --> 0:20:01.000 it clear to banks and to investors that, um, if 0:20:01.000 --> 0:20:04.080 you want these instruments to be treated as permanent capital, 0:20:04.560 --> 0:20:07.080 you need to treat them as permanent capital and not 0:20:07.200 --> 0:20:11.120 call them on the first call date. And over time, 0:20:11.920 --> 0:20:15.679 studying in the UK and then in Europe, now the 0:20:15.760 --> 0:20:20.720 asset class is being treated almost like if banks will 0:20:20.800 --> 0:20:23.600 call if they if they if the economics are in 0:20:23.640 --> 0:20:28.560 the favor of the issue. And just last year April, 0:20:28.680 --> 0:20:32.879 the Australian regulator also put out a notice saying banks 0:20:32.880 --> 0:20:37.119 should only redeem additional tim and security it's on the 0:20:37.119 --> 0:20:41.000 first call date only if it makes economic sense. So 0:20:41.119 --> 0:20:45.520 I think in most parts of the world the rules 0:20:45.520 --> 0:20:48.280 have been set so that issuers could call them or 0:20:48.320 --> 0:20:52.399 should call them only if the economics make sense. Parts 0:20:52.400 --> 0:20:57.520 of Asia it's still not treated as that, and they 0:20:57.560 --> 0:21:00.520 get called on the first call date. So disc I 0:21:00.560 --> 0:21:04.680 think could could be an interesting time. But what's interesting 0:21:04.840 --> 0:21:08.400 in Asia is in some of the maze major Asian 0:21:08.440 --> 0:21:11.240 countries there's not a whole lot of at ones come 0:21:11.280 --> 0:21:15.240 in due. In Japan, for instance, the next Japanese N 0:21:15.359 --> 0:21:19.040 eighty one comes to you in December, so there's a 0:21:19.040 --> 0:21:23.320 lot of time. And in the case of Chinese banks, 0:21:23.400 --> 0:21:27.560 they've been redeeming and replacing offshore at ones in the 0:21:27.680 --> 0:21:31.440 on show market at lower cost. So I think between 0:21:31.480 --> 0:21:38.320 those two it's an interesting time. But let's see, because 0:21:38.600 --> 0:21:42.679 luck could happen between now and then. Yeah, I mean, 0:21:42.720 --> 0:21:44.360 the problem for me seems to be that the investors 0:21:44.359 --> 0:21:46.440 have been pricing them to call, and if they don't 0:21:46.440 --> 0:21:50.480 get called, they panic. So there's a lot of you know, uncertainty, 0:21:50.480 --> 0:21:55.960 and investors don't like uncertainty. Yeah, absolutely, investors don't like uncertainty. 0:21:56.040 --> 0:21:59.520 But I see the point that the regulators are trying 0:21:59.560 --> 0:22:04.880 to make is if these instruments should qualify as permanent capital, 0:22:05.400 --> 0:22:08.200 then I think investors need to do a better job 0:22:08.440 --> 0:22:11.920 and be most selective about what they buy and also 0:22:11.960 --> 0:22:16.080 the structure. And if you, um, if you think something 0:22:16.240 --> 0:22:19.720 is priced not to all mail, maybe you shouldn't be 0:22:19.760 --> 0:22:23.320 buying that. And that's my view and I think that's 0:22:23.359 --> 0:22:27.920 where credit analysts and the investment analysts should stand up 0:22:27.920 --> 0:22:32.040 and raise their hand and on their on their web page. 0:22:34.119 --> 0:22:36.200 So on the financial set to generally, I mean, you 0:22:36.480 --> 0:22:38.520 guys have never been more popular. You know, you you 0:22:38.840 --> 0:22:42.280 you you credit analysts of banks, and you know it's 0:22:42.520 --> 0:22:45.040 traditionally not been the most exciting set, and you know 0:22:45.160 --> 0:22:47.359 for good reason. But you know you've probably been up 0:22:47.359 --> 0:22:50.280 all night covering this. Um this crisis. Is it over now? 0:22:53.920 --> 0:22:58.480 Is it over now? I think for the most part, yes, 0:22:59.000 --> 0:23:04.600 um um. The credit special event, especially around that I 0:23:04.640 --> 0:23:08.080 think is an idiosyncratic one. In the US, I think 0:23:08.119 --> 0:23:11.560 the regulators have done enough. Although I thought and I 0:23:11.640 --> 0:23:17.720 expected them to increase the US deposit insurance limit, either 0:23:17.840 --> 0:23:21.160 on a temporary basis or permanent basis, probably temporary basis, 0:23:21.520 --> 0:23:24.560 which would have really put an end to the crisis. 0:23:25.920 --> 0:23:28.920 They had some of the regional banks are phrasing, but 0:23:29.520 --> 0:23:33.040 I think at this point we are past the peak 0:23:33.400 --> 0:23:39.040 and the bank earning season is probably the key test now. 0:23:39.960 --> 0:23:41.879 And on the regional banks, I mean, just to just 0:23:41.920 --> 0:23:44.919 to wrap this up, but regional banks that were very 0:23:45.000 --> 0:23:48.120 concentrated in a sector, you know, like Silicon Valley Bank, 0:23:48.240 --> 0:23:50.720 very concentrated in tech, and also had a ton of 0:23:51.400 --> 0:23:54.000 treasury builds on the balance sheet that were worth a 0:23:54.000 --> 0:23:55.800 lot less than they thought they were. I mean, you 0:23:55.840 --> 0:23:59.360 know this, this small financial institution that's very very exposed 0:23:59.359 --> 0:24:01.280 to one set to Is that not an issue across 0:24:01.280 --> 0:24:02.920 the world. I mean, you don't have the same problem 0:24:03.000 --> 0:24:06.040 in Asia. In some countries. Yes, if you look at 0:24:06.080 --> 0:24:08.720 the three banks that failed in the US, they were 0:24:08.760 --> 0:24:13.359 all very highly concentrated in one way or another, either 0:24:13.760 --> 0:24:18.679 tech or crypto or something around the lines. In Asia, 0:24:18.880 --> 0:24:23.680 we do have banks like that, and occasionally they tend 0:24:23.720 --> 0:24:27.280 to get more into trouble. And what I do like 0:24:27.359 --> 0:24:31.399 about the larger banks is their diversity. And if you 0:24:31.440 --> 0:24:35.800 are a large, well diversified bank, if one or two 0:24:36.400 --> 0:24:40.879 off your lines of business aren't doing that well, you 0:24:40.960 --> 0:24:45.560 still have others, other businesses that are pulling the weight. 0:24:46.119 --> 0:24:51.760 And the same goals with the risk profile at the company. 0:24:51.880 --> 0:24:56.840 So yes, there are a smaller banks that are, but 0:24:56.960 --> 0:25:00.480 I call mono line institutions and they are more rescued 0:25:00.520 --> 0:25:03.120 them the more diversive faid months. But the good thing 0:25:03.119 --> 0:25:06.320 from a credit investor standpoint is more so the debt 0:25:06.400 --> 0:25:10.520 outstanding tends to be issued by the larger, more diversified banks. 0:25:10.800 --> 0:25:15.560 So I think that's the saving grace for credit investors. 0:25:15.640 --> 0:25:18.280 Very good, Thank you very much, Pretty Silver Bloomberg Intelligence. 0:25:18.520 --> 0:25:21.040 You can see all of his analysis on the Bloomberg terminal. 0:25:21.200 --> 0:25:23.560 There's a lot going on in banking, so do check 0:25:23.600 --> 0:25:26.760 it out and pleasure to see you pretty. Thanks a lot. 0:25:26.760 --> 0:25:29.800 We'll have you back on the show soon. Likewise, see 0:25:29.800 --> 0:25:33.640 you then, take care. Thanks a lot, and thanks again 0:25:33.680 --> 0:25:37.040 to Julia more Portugal from Bloomberg News. We'd all her 0:25:37.080 --> 0:25:41.080 scoops on the terminal and at Bloomberg dot Com. I'm 0:25:41.160 --> 0:25:43.760 James Crumby. It's been a pleasure having you. See you 0:25:43.800 --> 0:25:59.800 next week on the Credit Edge.