WEBVTT - Swiss AT1 Bond Carnage, Leisure Sector Risk 0:00:15.560 --> 0:00:18.840 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:19.160 --> 0:00:21.400 My name is James Crumby. I'm a senior editor at 0:00:21.400 --> 0:00:25.840 Bloomberg Today's Scasa Tasos Bossos who covers credit markets for 0:00:25.880 --> 0:00:28.920 Bloomberg News in London. Check out all his recent scoops 0:00:28.920 --> 0:00:31.520 on the meltdown in the banking sector. We're delighted to 0:00:31.520 --> 0:00:33.879 have you on the show, James, thanks for having me. 0:00:34.240 --> 0:00:37.360 We're also very pleased to welcome Jody Lewie. Hey, James, 0:00:37.360 --> 0:00:41.440 how are you? Jody covers travel, leisure, casinos, and hotels, 0:00:41.440 --> 0:00:45.120 among other things, for Bloomberg Intelligence in Princeton. Companies in 0:00:45.159 --> 0:00:47.680 those industries are highly exposed to the tightening and financial 0:00:47.680 --> 0:00:50.400 conditions that's happening as we speak, and we'll be getting 0:00:50.400 --> 0:00:53.760 her insight in a little bit, but before we do. 0:00:54.200 --> 0:00:56.800 Tassos Bossos with Bloomberg News in London, you've been at 0:00:56.800 --> 0:00:59.840 the epicenter of the credit Swiss collapse. It's a Swiss bank, 0:01:00.120 --> 0:01:02.320 had been struggling for a while. All of a sudden 0:01:02.320 --> 0:01:04.839 it was gone. One of the biggest banks in the world, 0:01:04.920 --> 0:01:08.119 over half a trillion dollars in assets, participation in all 0:01:08.120 --> 0:01:10.480 the main markets globally. Can you walk us through what 0:01:10.520 --> 0:01:12.959 happened there. I mean, indeed, it is a shark for 0:01:13.000 --> 0:01:16.680 the banking community, that's what you call it GC for 0:01:16.840 --> 0:01:19.760 normal people. That's a global systemically important bank, one of 0:01:19.800 --> 0:01:22.240 the bank that's not supposed to go down that you 0:01:22.319 --> 0:01:25.119 need in order to have a financial system that is function, 0:01:25.160 --> 0:01:28.040 that's working properly. Now. The problem the Credit Swiss, though, 0:01:28.040 --> 0:01:31.280 is that they were they were involved in so many 0:01:31.640 --> 0:01:34.520 interesting things over the years, from financing of yours and 0:01:34.600 --> 0:01:39.720 the securitization of it to Archie collapse for example, and 0:01:40.080 --> 0:01:43.399 they suffered a social media storm back in late twenty 0:01:43.480 --> 0:01:46.120 twenty two. This is when they saw out those because 0:01:46.120 --> 0:01:48.880 people thought that Credit Swiss may not be around in 0:01:49.200 --> 0:01:51.320 the month's time, for example, they want to take the 0:01:51.400 --> 0:01:53.920 money out. They did manage to survive that, but they 0:01:54.000 --> 0:01:57.040 reached the point earlier this month where they said, well, 0:01:57.040 --> 0:02:00.280 the numbers that we were releasing to the investor over 0:02:00.320 --> 0:02:03.640 the years, they may have some problems, and the USSC 0:02:04.240 --> 0:02:06.280 I said that that could be the case. This is 0:02:06.280 --> 0:02:10.320 when a panic ensued that was maximized by the fact 0:02:10.320 --> 0:02:12.600 that there was already a brewing crisis in the regional 0:02:12.639 --> 0:02:16.080 banking system in the US. So a number of counterparties 0:02:16.480 --> 0:02:20.359 started getting credit insurance against Credit Swiss, that is, through 0:02:20.480 --> 0:02:23.600 some contracts called credit default swaps. This is when everyone 0:02:23.840 --> 0:02:27.200 started paying attention. They said, okay, something is wrong. Is 0:02:27.240 --> 0:02:30.680 here this bank, even though it's massively important, seems to 0:02:30.680 --> 0:02:33.600 be going past Now we have to do something, So 0:02:33.639 --> 0:02:36.120 they started taking money out of it. At some point 0:02:36.280 --> 0:02:39.680 out those reached ten billion dollars a day, and things 0:02:39.760 --> 0:02:42.120 came to a head last weekend when the Swiss authority 0:02:42.200 --> 0:02:44.720 said we need to do something. What is that a 0:02:44.800 --> 0:02:48.680 shotgun marriage between the two national champions, that is UBS 0:02:48.680 --> 0:02:53.040 and Credit Swiss. And as part of this agreement, they said, 0:02:53.960 --> 0:02:56.400 somebody needs to take a loss. Who is that going 0:02:56.480 --> 0:02:58.960 to be? That's going to be some people who hold 0:02:59.000 --> 0:03:02.919 some funky instruments called additional tier one bonds. And this 0:03:02.960 --> 0:03:05.239 is when all hell broke loose when they were written 0:03:05.280 --> 0:03:08.320 down seventeen billion of them. So before we get that 0:03:08.400 --> 0:03:11.720 there was a there's basically a shotgun marriage. Basically, UBS, 0:03:11.760 --> 0:03:13.760 the biggest or one of the biggest banks, the other 0:03:13.760 --> 0:03:18.720 biggest bank in Switzerland acquired Credit Swiss for three three 0:03:18.720 --> 0:03:23.560 billion dollars or so um. Basically of course, sale, how's 0:03:23.600 --> 0:03:26.919 that all shaking out what's going on at that point. Well, 0:03:26.960 --> 0:03:31.040 at that point, UBS said, Credit Swiss has quite a 0:03:31.040 --> 0:03:34.560 bit of um let's call it baggage. Chances are if 0:03:34.600 --> 0:03:36.560 we acquire them, we're going to be taken to court 0:03:36.600 --> 0:03:40.000 by some of their ex clients for a number of 0:03:40.040 --> 0:03:42.720 different scandals that were involved over the years. There is 0:03:42.960 --> 0:03:45.560 what in banking terms you're called a lot of accumulated 0:03:45.800 --> 0:03:49.119 bad will. So somebody needed to take a loss. Now, 0:03:49.160 --> 0:03:52.280 at first there was an issue of paying almost nothing 0:03:52.400 --> 0:03:55.600 or a very lobal price for the share of Credit Swiss. 0:03:56.080 --> 0:03:59.240 There was some pushback on that. Eventually that the price 0:03:59.320 --> 0:04:02.560 tag was raised three billion, but still somebody needed to 0:04:02.600 --> 0:04:05.160 take a loss because UBS was not going to acquire 0:04:05.640 --> 0:04:09.960 the whole capital structure of Credit Twists. You mentioned a 0:04:10.000 --> 0:04:12.280 type of debt that we've been looking at very closely, 0:04:12.320 --> 0:04:15.000 and you've broken a lot of news on eighty one. 0:04:15.360 --> 0:04:19.320 Some people refer to it as cocos that essentially became worthless. 0:04:20.040 --> 0:04:23.440 Let's start with the obvious question, what is an eighty 0:04:23.520 --> 0:04:26.560 one for? You know, the person on the street who's 0:04:26.600 --> 0:04:31.080 not following this closely. When Lehman collapsed, people thought, the 0:04:31.160 --> 0:04:35.040 regulators thought, okay, Lehman was capitalized to a certain extent, 0:04:35.200 --> 0:04:37.880 but it was overleveraged. We need to come up with 0:04:37.920 --> 0:04:41.920 some bonds that provide capital so when you are going 0:04:41.960 --> 0:04:44.560 into trouble as a bank, you can rely on that 0:04:44.640 --> 0:04:47.760 capital to stay alive. That's in very basic terms. So 0:04:47.800 --> 0:04:49.479 they try to come up with a new type of 0:04:49.520 --> 0:04:53.919 bonds that when your capital levels decline below a certain level, 0:04:54.680 --> 0:04:57.200 these bonds can be triggered. What that means is that 0:04:57.240 --> 0:05:00.560 they can be converted into equity or written to reduce 0:05:00.600 --> 0:05:04.880 your liabilities. And that was called additional Tier one because 0:05:04.880 --> 0:05:08.800 it stand just above common equity. And when it was 0:05:08.880 --> 0:05:11.799 created back in twenty ten, that was the Basil Committee, 0:05:11.839 --> 0:05:14.600 what we know as Basil three. It was hailed as 0:05:14.640 --> 0:05:17.680 the greatest innovation we've seen of a several decades in 0:05:17.680 --> 0:05:20.479 the banking market. This is what we're going to save 0:05:20.600 --> 0:05:23.359 us from future crisis. I think this is going to 0:05:23.400 --> 0:05:26.400 be the end of history for banking capital instruments. And 0:05:26.520 --> 0:05:29.120 things went well for the past thirteen years. Well, there 0:05:29.120 --> 0:05:33.120 were some wobbles along the line, some write offs in 0:05:33.160 --> 0:05:36.279 Spain for example, and there was some concerns at some 0:05:36.360 --> 0:05:39.839 point that Deutsche Bank several years ago couldn't pay coupons 0:05:39.839 --> 0:05:44.320 of these bonds. But generally speaking, things were smooth. So 0:05:44.360 --> 0:05:48.719 if these bonds essentially became worthless even after equity investors 0:05:48.720 --> 0:05:51.640 recovered something, what does that mean for the eighty one 0:05:51.680 --> 0:05:54.799 market as a whole. Well, you invest in the eighty 0:05:54.839 --> 0:05:58.560 one market with a basic assumption that you are senior 0:05:58.600 --> 0:06:02.200 to equity. So if anything wrong goes happens to the bank, 0:06:02.240 --> 0:06:05.960 you would expect story shareholders to first of all burn 0:06:06.040 --> 0:06:09.719 through entirely down to the last cent, and then be touched. 0:06:10.240 --> 0:06:12.839 And now Credit Swiss, obviously they had tens of billions 0:06:12.880 --> 0:06:16.200 of dollars in CT one capitalized. It's called that that's 0:06:16.279 --> 0:06:19.719 common equity pretty much, and you could be rather safe 0:06:19.720 --> 0:06:23.039 that nothing was going to happen to you. Now, there 0:06:23.120 --> 0:06:29.839 was a very rare trading session happening on Sunday, extraordinarily 0:06:30.160 --> 0:06:34.240 among bond holders and bond trading desks, especially in the US. 0:06:34.240 --> 0:06:36.760 And when the news came out that Ubas is going 0:06:36.800 --> 0:06:40.279 to pay something, or shareholders at least anything, this is 0:06:40.279 --> 0:06:43.000 when you saw the prices of those bonds shooting up 0:06:43.440 --> 0:06:46.560 because nobody could fathom the fact that they could take 0:06:46.640 --> 0:06:50.839 any loss, even of one cent if shareholders are getting 0:06:50.920 --> 0:06:53.840 something and this is what happened was a total shock afterwards. 0:06:54.760 --> 0:06:57.200 So did that whole market collapse? I mean, if if 0:06:57.240 --> 0:07:00.080 the credit Swiss at one bonds are worth nothing, it 0:07:00.120 --> 0:07:03.440 doesn't mean all eighty ones are worth nothing. This is 0:07:03.440 --> 0:07:08.440 what started happening on Monday morning when markets reopened in 0:07:08.480 --> 0:07:10.680 Asia and Europe, and you saw the prices of these 0:07:10.720 --> 0:07:13.880 bonds just collapse in historic terms where we're talking about 0:07:13.920 --> 0:07:16.720 like prize drops of more than ten points. You never 0:07:16.760 --> 0:07:20.560 see that whatever happens in the past. So there was 0:07:20.680 --> 0:07:24.240 a really serious fear that the one capital instrument that 0:07:24.240 --> 0:07:27.240 we had since the global financial crisis that we thought 0:07:27.240 --> 0:07:30.680 we could rely on is becoming worthless and that could 0:07:30.720 --> 0:07:34.679 have really serious repercussions for the global banking market. Really, 0:07:34.880 --> 0:07:37.400 but this is when you had regulators, for example, the 0:07:37.440 --> 0:07:40.440 European Central Bank in the Bank of England coming out 0:07:40.480 --> 0:07:43.280 to say, what the Swiss did, It's not something we 0:07:43.360 --> 0:07:45.720 will do if we are ever in their position. They 0:07:45.840 --> 0:07:48.880 wanted to calm the market, and somehow they managed to 0:07:48.920 --> 0:07:52.360 stave off at least in the immediate crisis. So it's 0:07:52.360 --> 0:07:56.120 true that different countries, different regulators will treat these bonds 0:07:56.160 --> 0:07:58.240 differently in the event of a collapse of a bank. 0:07:58.360 --> 0:08:01.720 Is that right? That is correct, But the problem is 0:08:01.760 --> 0:08:04.040 that you thought you had a certain degree of certainty 0:08:04.080 --> 0:08:05.880 in the past that at least everyone is going to 0:08:05.920 --> 0:08:08.239 follow the same rules, and this is not what happened 0:08:08.240 --> 0:08:11.240 with Switzerland, and this is why people were rather concerned 0:08:11.280 --> 0:08:14.800 about whether they can trust any authority really across the 0:08:14.880 --> 0:08:18.120 major banking jurisdictions. So given that is this is still 0:08:18.280 --> 0:08:21.120 still a viable market, you know, do we think that 0:08:21.160 --> 0:08:27.000 this market survives? Broadly speaking, it should because well, frankly speaking, 0:08:27.000 --> 0:08:29.760 there's no alternatives right now. You can't just move to 0:08:29.800 --> 0:08:32.520 a different type of capital instrument because there's no regulation 0:08:32.559 --> 0:08:35.640 that allows you to do so. For now, what investors 0:08:35.640 --> 0:08:39.680 are doing they are pretty much blacklisting Swiss banks. They 0:08:40.080 --> 0:08:43.840 have created what's what's called the premium, a yield premium 0:08:43.880 --> 0:08:46.560 for Swiss banks. So if a Swiss bank would want 0:08:46.600 --> 0:08:48.439 to issue another additional tier one that will have to 0:08:48.480 --> 0:08:50.920 pay up quite a lot. At this stage they can't 0:08:50.920 --> 0:08:53.559 possibly issue that. Nobody will want to buy that. But 0:08:53.600 --> 0:08:56.160 at least in the secondary market you see a large 0:08:56.200 --> 0:08:59.679 price gap between Swiss eighty ones and eighty ones from 0:08:59.679 --> 0:09:02.320 other restrictions and that will most likely remain the case 0:09:02.320 --> 0:09:05.480 for the forsueable future. Do you expect litigation as well? 0:09:06.120 --> 0:09:09.599 Oh yes, I mean lawyers have already smelled blood in 0:09:09.640 --> 0:09:13.240 the water. There was already some calls to day by 0:09:13.320 --> 0:09:16.640 some large legal firms trying to drop up interest because 0:09:16.640 --> 0:09:19.920 at this stage eighty one bond holders have absolutely nothing 0:09:19.920 --> 0:09:22.280 to lose, and if anything, they have a lot of 0:09:22.320 --> 0:09:25.240 game because they believe that the lawyers on their side. 0:09:25.240 --> 0:09:28.640 There was even a presentation by Credit Swiss on March 0:09:28.720 --> 0:09:31.959 the fourteen, that's like five days before they collapsed, before 0:09:32.000 --> 0:09:34.920 these eighty ones were written down, that said that you 0:09:34.920 --> 0:09:37.960 guys are senior to shareholders and that is they're in 0:09:37.960 --> 0:09:40.280 black and white. So these bondholders believe they have the 0:09:40.360 --> 0:09:43.400 law on their sides. They do have already some law 0:09:43.440 --> 0:09:45.360 firms that are willing to represent them, so just a 0:09:45.360 --> 0:09:49.559 matter of time. Well, they're broader credit market implications from 0:09:49.559 --> 0:09:52.760 this and that the investors in the riskiest types of 0:09:52.840 --> 0:09:56.920 bonds are getting pretty badly burned here, does that make 0:09:56.960 --> 0:09:59.920 them more risk averse? That cuts off funding to other 0:10:00.360 --> 0:10:03.120 companies and borrowers that need to get funding right now, 0:10:03.760 --> 0:10:05.600 That is true and that's going to have a very bad, 0:10:05.880 --> 0:10:09.040 very bad repercussions for the bank lending market, because if 0:10:09.080 --> 0:10:12.920 your cost of capital is increasing in general, then you're 0:10:12.920 --> 0:10:14.720 going to be you're going to be tightening your own 0:10:14.800 --> 0:10:17.559 lending standards. This is something that a number of people 0:10:17.559 --> 0:10:21.360 have mentioned as a potential risk because it means that 0:10:21.400 --> 0:10:25.480 it's like several bank hikes by central banks, for example, 0:10:25.559 --> 0:10:28.560 happening all at once in one day. Because eighty ones 0:10:28.679 --> 0:10:30.600 used to be a cheap way of having up your 0:10:30.600 --> 0:10:34.760 balance sheets and then being able to lend onto corporate clients, 0:10:34.800 --> 0:10:37.560 normal people. If that's becoming much more expensive, then you 0:10:37.559 --> 0:10:39.840 have to tighten your lending standards. That's going to have 0:10:40.600 --> 0:10:43.520 a second effect impact on put much. To be comma, 0:10:44.520 --> 0:10:46.160 I've got to ask on the point that you know, 0:10:46.559 --> 0:10:49.920 invest want to litigate here. It was pretty clear from 0:10:49.960 --> 0:10:52.800 the paperwork. Maybe it's very deep on page one hundred 0:10:52.800 --> 0:10:54.920 and fifty of the perspectives, but it was clear that 0:10:54.960 --> 0:10:57.000 this is what this is what would happen in the 0:10:57.000 --> 0:10:59.559 event of a collapse, and it was also apparently on 0:10:59.600 --> 0:11:02.800 the Swiss regulators website. I mean, this is information that 0:11:02.880 --> 0:11:05.240 was available. Why is everyone surprised now and why they 0:11:05.280 --> 0:11:07.720 why do they think they've got a chance to litigate. Well, 0:11:07.760 --> 0:11:10.240 I'm not going to go into the legal details. Also 0:11:10.320 --> 0:11:12.439 because a number of people who are bit unclear about 0:11:12.480 --> 0:11:15.520 that this was a risk factor and not a m 0:11:15.679 --> 0:11:17.480 Some of the detractors would say, some of the people 0:11:17.480 --> 0:11:19.800 who wanted to litigate, what that means is that you 0:11:19.840 --> 0:11:24.120 were just being told what may happen in case, you know, 0:11:24.200 --> 0:11:28.480 a resolution or any other intervention had to take place, 0:11:28.559 --> 0:11:31.680 didn't tell you what will definitely happen. So they believe 0:11:32.360 --> 0:11:34.960 there's the belief that because that was just a risk factor, 0:11:35.320 --> 0:11:38.400 they can litigate against that. And also, yes, that was 0:11:38.440 --> 0:11:41.280 a fine print, the larger print, as I mentioned before 0:11:41.280 --> 0:11:44.800 the presentation that came out a few days before the collapse, 0:11:44.920 --> 0:11:47.240 that was actually quite unequivocal as well. At the end 0:11:47.280 --> 0:11:51.480 of the day, though bondholder is not lawmakers, lawmakers are 0:11:51.480 --> 0:11:55.040 actual lawmakers. And what they did was they tweaked the 0:11:55.120 --> 0:11:57.760 rules in the weekend in order to allow a shotgun 0:11:57.800 --> 0:12:01.280 marriage to happen. And I guess you have good ahead 0:12:01.280 --> 0:12:03.400 with that or just trying to see the government and 0:12:03.480 --> 0:12:06.840 that's going to be a rather difficult proposition. So before 0:12:06.880 --> 0:12:09.160 we talk to Jody Lurie at Bloomberg Intelligence about the 0:12:09.200 --> 0:12:12.079 impact that the banking cresis is having on US companies, 0:12:12.080 --> 0:12:15.600 and you know all of that call out, what's the 0:12:15.600 --> 0:12:17.679 big takeaway for you here, Teslas? It may be too 0:12:17.679 --> 0:12:19.160 soon to say because we're still kind of in the 0:12:19.200 --> 0:12:21.560 eye of the storm. But what are the lessons learned? 0:12:21.640 --> 0:12:24.960 Is it simply another case of by everywhere for credit 0:12:25.000 --> 0:12:27.200 markets investors need to read the small print or is 0:12:27.200 --> 0:12:30.160 there something more nuanced and sophisticated we can pull from 0:12:30.200 --> 0:12:33.079 the wreckage right now? Well, the problem with a two 0:12:33.120 --> 0:12:36.760 ones so eighty ones became very popular among European investors 0:12:36.840 --> 0:12:39.280 during the era of zero interest rates. So when you 0:12:39.320 --> 0:12:42.680 were getting nothing or even negative interest rates on senior bonds, 0:12:42.960 --> 0:12:45.600 these junior bonds were paying you six seven, eight nine percent, 0:12:46.120 --> 0:12:50.760 so you wanted to believe that there isn't going to 0:12:50.800 --> 0:12:53.000 be any negative avecome from that. You just even get 0:12:53.000 --> 0:12:55.760 the bonds, get the nine percent coople every year and 0:12:55.840 --> 0:13:00.280 hopefully get called five years time. What it means got 0:13:00.320 --> 0:13:01.880 out of it is that, first of all, as you 0:13:01.880 --> 0:13:04.600 said before, everyone needs to read the fine print, even 0:13:04.600 --> 0:13:08.000 if it is a risk factor. Take it seriously. When 0:13:08.040 --> 0:13:11.280 you see a ten percent Cooper Normalscent Coopers credit risk 0:13:11.920 --> 0:13:15.160 issued last year. Well, you have to think that it 0:13:15.160 --> 0:13:17.360 comes with a certain risk. You don't just get it 0:13:17.400 --> 0:13:22.160 for free. And whenever a band goes into trouble, just 0:13:22.320 --> 0:13:25.480 think of the seniority ladder, even a two ones. Yes, 0:13:25.559 --> 0:13:27.800 I know that they're seeing into equity, but when it 0:13:27.800 --> 0:13:30.280 comes to death, they were like rock bottom. So if 0:13:30.280 --> 0:13:32.800 anything goes wrong, chances are you can be here as well. 0:13:34.520 --> 0:13:36.920 Prot Us from Bloomberg News, thanks so much for joining us. 0:13:36.960 --> 0:13:39.600 This is a really fascinating story with broad implications, and 0:13:39.640 --> 0:13:41.960 we look forward to reading all of your scoops on 0:13:42.000 --> 0:13:44.640 the Bloomberg terminal and of course at Bloomberg dot com. 0:13:45.080 --> 0:13:48.120 Thank you. Switching gears here a bit. As I mentioned earlier, 0:13:48.120 --> 0:13:51.120 we're very fortunate to have Jody Lewie from Bloomberg Intelligence. 0:13:51.360 --> 0:13:53.280 You get to cover all the fun stuff. Thanks for 0:13:53.280 --> 0:13:55.640 being on the show. Thank you for having me, James, 0:13:55.640 --> 0:13:58.520 I'm so excited to be here. The companies you look at, 0:13:58.600 --> 0:14:00.840 let's talk about how they're acted by what's going on 0:14:00.880 --> 0:14:03.200 in the banking sector. I mean, it's not just credit sweets. 0:14:03.559 --> 0:14:06.920 As TESSAs mentioned, several regional banks also blew up over 0:14:06.920 --> 0:14:08.800 the last few weeks. That doesn't help at all. How's 0:14:08.840 --> 0:14:14.680 this crisis playing out? Sure, So, just for an aside, 0:14:14.679 --> 0:14:17.679 I mean the process of reading Treasury Gitner's book on 0:14:17.760 --> 0:14:20.920 stress testing and on the two thousand and eight events, 0:14:20.960 --> 0:14:26.240 and it's interesting to listen to Tassos and the parallels 0:14:26.280 --> 0:14:29.800 of words that he's using that were words that we 0:14:30.000 --> 0:14:33.240 used as everyday jargon in two thousand and eight. And 0:14:33.280 --> 0:14:37.000 I think the clear issue here is the question of 0:14:37.040 --> 0:14:40.600 whether this issue with credit sweets as well as the 0:14:40.640 --> 0:14:43.960 regional banks becomes more of a lack of a better word, 0:14:44.000 --> 0:14:47.000 contagent for the general market if it reaches from Wall 0:14:47.040 --> 0:14:50.840 Street to Main Street, and what that echo effect has 0:14:51.000 --> 0:14:54.600 on sectors like mine where it's more directly associated with 0:14:54.680 --> 0:14:57.160 consumers and what consumers like to do when they feel 0:14:57.200 --> 0:15:02.160 more comfortable in the economy. These companies U cover. I mean, 0:15:02.160 --> 0:15:04.840 we should probably talk about which companies and which sectors 0:15:05.120 --> 0:15:07.240 a bit more detail. But they are seeing a big 0:15:07.280 --> 0:15:09.680 revival in demand as people get back to what they 0:15:09.680 --> 0:15:12.040 were doing before the pandemic. And at the same time, 0:15:12.080 --> 0:15:13.520 a lot of them have a ton of debt that 0:15:13.680 --> 0:15:16.720 got suddenly got a lot more expensive to refinance into 0:15:16.800 --> 0:15:20.880 services as rates jumped. What sectors and companies are the 0:15:20.920 --> 0:15:24.680 most exposed to a list and why? Sure, James, So 0:15:24.720 --> 0:15:26.680 I think I think we need to take a step 0:15:26.720 --> 0:15:28.280 back and think about two thousand and twenty. So in 0:15:28.320 --> 0:15:31.360 two thousand and twenty, the companies in my sect sector, 0:15:31.440 --> 0:15:33.960 so we're talking the cruise lines, we're talking the theme parks, 0:15:33.960 --> 0:15:37.720 we're talking the hotels and the restaurants, they issued eighty 0:15:37.720 --> 0:15:40.760 five billion in two thousand and twenty in debt alone 0:15:40.840 --> 0:15:43.840 in the US markets. You compare that two and twenty 0:15:43.840 --> 0:15:45.600 one and it was forty nine billion, and then in 0:15:45.600 --> 0:15:48.720 twenty twenty two is thirty six billion. So these are 0:15:48.880 --> 0:15:52.400 large scale amounts as compared to pre pandemic levels that 0:15:52.440 --> 0:15:55.200 were only small margins of what we saw in two 0:15:55.200 --> 0:15:57.640 thousand and twenty and onward. So these companies have been 0:15:57.680 --> 0:16:00.640 pretty dependent on the capital markets to help finance their 0:16:00.680 --> 0:16:04.200 operations while people have sort of backed off from what 0:16:04.240 --> 0:16:07.800 they normally do. As we've seen people return to normalcy, 0:16:07.840 --> 0:16:10.800 we've seen fewer and fewer companies come to market because 0:16:10.840 --> 0:16:14.760 they're able to finance their operations with cash flows, as 0:16:14.800 --> 0:16:17.640 companies should do. But you take the cruise lines, for example, 0:16:17.640 --> 0:16:20.440 they're still heavily dependent on the capital markets to fill 0:16:20.480 --> 0:16:23.440 in cash gaps, as they get more people on the ships, 0:16:23.800 --> 0:16:27.080 as they get back to normalcy, as they start generating 0:16:27.080 --> 0:16:29.200 cash flow, and I think we're probably a year out 0:16:29.320 --> 0:16:34.040 before these companies feel really comfortable with their operational standpoint 0:16:34.360 --> 0:16:38.040 to finance their business without use of the capital markets. 0:16:38.760 --> 0:16:40.440 But they all said, you said they'd borrowed a ton 0:16:40.600 --> 0:16:42.360 during you know, when they really needed the money, and 0:16:42.360 --> 0:16:46.160 that money eventually comes to you. Are they building themselves 0:16:46.200 --> 0:16:48.600 into a massive putting to a massive problem with the 0:16:48.640 --> 0:16:53.120 maturity will eventually? So the maturity wall is definitely a 0:16:53.200 --> 0:16:55.600 question that we have. In twenty twenty four and two 0:16:55.920 --> 0:16:59.960 twenty five, you see a large spike in maturities, particularly 0:17:00.000 --> 0:17:03.520 the high yield market, particularly in the consumer discretionary area, 0:17:03.600 --> 0:17:06.359 which is where my companies fall. And a lot of 0:17:06.400 --> 0:17:09.120 the companies have already started tapping the debt markets before 0:17:09.720 --> 0:17:13.359 the SVB and credit suites fallout, so a lot of 0:17:13.359 --> 0:17:17.880 them have locked in financing in advance of this. However, 0:17:18.160 --> 0:17:20.879 we are seeing that there's probably a separation between the 0:17:20.880 --> 0:17:22.800 companies that are in good standing and the companies that 0:17:22.840 --> 0:17:25.280 are still a little bit more in the transitional period. 0:17:25.560 --> 0:17:27.840 By that, I mean you take a company in like Marriott, 0:17:27.880 --> 0:17:31.159 and they've already repaid all of their debt that they 0:17:31.240 --> 0:17:34.399 borrowed during the pandemic, So they they took down their 0:17:34.400 --> 0:17:37.720 whole entire credit line. Now they've repaid it, they brought 0:17:37.720 --> 0:17:41.399 themselves back to pre pandemic credit ratings of triple B flat, 0:17:41.880 --> 0:17:45.080 and they've tapped the capital market the excuse me, the 0:17:45.080 --> 0:17:48.840 commercial paper markets in order to anancer business. And you 0:17:48.880 --> 0:17:51.560 hear commercial paper markets, you get concerned because it's short 0:17:51.640 --> 0:17:55.360 term financing. However, when a company reaches a certain credit quality, 0:17:55.520 --> 0:17:58.200 when a company is in good standing and they feel comfortable, 0:17:58.320 --> 0:18:01.280 they feel comfortable using the commercial paper markets as opposed 0:18:01.280 --> 0:18:05.280 to using something like their longer term vehicle like a revolver, 0:18:05.720 --> 0:18:08.160 to finance any sort of cash gaps that they have. 0:18:08.440 --> 0:18:10.560 So you take a company like Marriott, you pair that 0:18:10.600 --> 0:18:14.320 with a company like Carnival Cruise Lines that has thirty 0:18:14.359 --> 0:18:17.880 five thirty six billion of debt outstanding. They've paired back 0:18:17.880 --> 0:18:21.840 their short term debt maturities significantly, but they still have 0:18:22.000 --> 0:18:24.400 thirty three billion in long term debt outstanding that they'll 0:18:24.400 --> 0:18:27.000 need to address over the next few years. Right, So 0:18:27.200 --> 0:18:32.120 the ones that are most exposed other than cruise lines, 0:18:32.160 --> 0:18:35.640 who are you most worried about him? So, I think 0:18:35.680 --> 0:18:39.320 when we think about any sort of contagion risk or 0:18:39.320 --> 0:18:42.800 any sort of broader sort of market eco effects, I 0:18:42.840 --> 0:18:44.879 think you have a couple of different areas that you 0:18:44.920 --> 0:18:48.159 could see this as problematic. Firsus the casinos. If we 0:18:48.240 --> 0:18:51.439 talk more broadly of a recession, which has been a 0:18:51.480 --> 0:18:54.480 discussion point since the beginning of this year, you could 0:18:54.560 --> 0:18:58.960 definitely see the casinos feeling a little bit stretched or 0:18:59.000 --> 0:19:04.560 a little bit pressured by lack of financing, lack of 0:19:05.040 --> 0:19:08.840 market liquidity, lack of the ability to access the capital markets, 0:19:08.880 --> 0:19:12.240 as well as consumers pulling back on their on their spending. 0:19:13.040 --> 0:19:16.320 Separate from that, a sort of niche area that we've 0:19:16.320 --> 0:19:21.879 been trying monitor is the relationships that things like hotels 0:19:21.960 --> 0:19:26.080 have with their counterparties. And by that we mean the reets, 0:19:26.520 --> 0:19:30.000 we mean the hotel owners and franchisees. Those are the 0:19:30.040 --> 0:19:35.720 companies that might be caught off guard by regional bank 0:19:35.800 --> 0:19:39.280 issues that you might not necessarily see otherwise with such 0:19:39.520 --> 0:19:44.880 large companies. Similarly, you might see something happen with companies 0:19:44.880 --> 0:19:47.760 such as McDonald's that rely so heavily on the franchise business, 0:19:47.920 --> 0:19:52.320 so their franchisees depend on regional banks more so than 0:19:52.720 --> 0:19:55.360 you'd see at these large scale companies that work with 0:19:55.400 --> 0:19:59.440 the largest investment banks out there. Okay, and the winners 0:19:59.440 --> 0:20:01.720 other than are there any other companies that are in 0:20:01.760 --> 0:20:04.080 good shapes to kind of withstand all these pressures that 0:20:04.119 --> 0:20:07.080 we're seeing right now. So I think you have to 0:20:07.119 --> 0:20:09.600 think about it from a standpoint of brand. I think 0:20:09.640 --> 0:20:11.280 you have to think about it from a standpoint of 0:20:11.280 --> 0:20:14.520 companies that have really put themselves in good standing. The 0:20:14.840 --> 0:20:17.520 theme parks that have been doing pretty well over the 0:20:17.640 --> 0:20:20.080 past year year and a half, and that's because people 0:20:20.119 --> 0:20:24.400 have been wanting to go and do and the companies 0:20:24.440 --> 0:20:27.520 have taken advantage of that by bringing down their debtload 0:20:29.320 --> 0:20:32.639 having cash put away. They have been spending their cash 0:20:32.640 --> 0:20:35.560 on shareholders, but I think that they'd probably opt to 0:20:35.600 --> 0:20:38.480 squirrel away some cash if they thought that it weren't 0:20:38.480 --> 0:20:40.800 so easy to do that. If you look at the 0:20:40.840 --> 0:20:43.880 rental card companies, they're an interesting sort of situation because 0:20:43.920 --> 0:20:49.000 they have a combination of better credit quality, lower leverage, 0:20:49.280 --> 0:20:52.800 but they also have created an exposure for themselves by 0:20:52.880 --> 0:20:55.360 way of risk vehicles and by that we mean those 0:20:55.359 --> 0:20:57.520 are the vehicles that they're buying outright that they're going 0:20:57.560 --> 0:21:00.200 to have to offload themselves, as opposed to the program 0:21:00.280 --> 0:21:03.359 vehicles that they can give back to the autos. So 0:21:04.040 --> 0:21:07.000 I think there's pockets of opportunity. I think it's really 0:21:07.040 --> 0:21:09.880 a question of company by company basis. If you look 0:21:09.920 --> 0:21:12.480 at something that Kilton, they've been doing very well for themselves, 0:21:12.640 --> 0:21:14.760 but they also don't care to bring down their debtload 0:21:14.760 --> 0:21:17.160 as much as Marriott does. So you have these sort 0:21:17.200 --> 0:21:20.600 of opportunities both in high yield and in investment grade. 0:21:20.600 --> 0:21:23.560 And I think it's really a question of individual companies 0:21:23.560 --> 0:21:28.520 and also managements policies towards ratcheting in or bringing in 0:21:28.600 --> 0:21:31.440 any sort of shareholder spending that they're doing, as well 0:21:31.480 --> 0:21:34.720 as being a little bit more prudent on capex if 0:21:35.080 --> 0:21:38.080 times get tough, if purse strings get get a little tighter. 0:21:39.320 --> 0:21:41.160 So we came into this year and everyone was talking 0:21:41.200 --> 0:21:43.080 about the Year of the bond, because last year was 0:21:43.080 --> 0:21:46.640