Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller.
Speaker 2: Every business day we bring you interviews from CEOs, market pros,
Speaker 2: and Bloomberg experts, along with essential market moving news.
Speaker 1: Find the Bloomberg Markets Podcast on Apple Podcasts or wherever
Speaker 1: you listen to podcasts, and at Bloomberg dot com slash podcast. Hey,
Speaker 1: we actually have an IPO to talk about, a big
Speaker 1: one coming up here. We want to get right to it.
Speaker 1: Billy Lipschultz, he covers all that IPO stuff and all
Speaker 1: the new market stuff for Bloomberg News. He joined us
Speaker 1: here in our Bloomberg Interactive Broker studio. All right, so,
Speaker 1: Bailly arm, it's part of the soft bank. They need
Speaker 1: to convince the market that as a chip designer, they
Speaker 1: are a great play on AI. How did they do that?
Speaker 3: The big sales pitch is being in AI, being in
Speaker 3: machine learning, being in and we looked at the filings
Speaker 3: the company actually only mentioned AI about fifty times. But
Speaker 3: the big focus will be when they're talking to investors
Speaker 3: is how they can get and become really a staple
Speaker 3: of those chips that are going to increasingly be used
Speaker 3: to bring AI to things like your cell phone and
Speaker 3: be able to incorporate their technology into data centers, which
Speaker 3: obviously are very very lucrative for the technology in the
Speaker 3: semiconductor space now.
Speaker 1: So the challenge there for sorry rot but is because
Speaker 1: the challenge is, if I'm sitting on the other side
Speaker 1: of the table or I'm at the Rubber Chicken lunch
Speaker 1: in New York, my thing is, but you guys aren't.
Speaker 1: So I have to believe that you aren't now really
Speaker 1: an AI play, but I have to believe that you're
Speaker 1: going to get there right.
Speaker 3: Yeah, And they, according to their data, are in something
Speaker 3: like ninety nine percent of smartphones. So their whole pitch
Speaker 3: is that smartphone market is drying. We've seen that play
Speaker 3: out with earnings from Qualcom, earnings from Apple. Well, now
Speaker 3: they're trying to skate to where the puck's going to
Speaker 3: be data centers AI and being able to use their
Speaker 3: technology and have customers used their blueprints, which they sell,
Speaker 3: collect royalties, some nice royalties off of other companies using that,
Speaker 3: and that's kind of where they're trying to position themselves,
Speaker 3: really not saying in video is one of their many customers,
Speaker 3: but they name dropped in Vida a few times as
Speaker 3: people who they're operating and working with and letting them
Speaker 3: use some of their AI technologies.
Speaker 2: So what has in Nvidia said about ARM? I mean,
Speaker 2: aren't the two pretty closely connected more than just sort
Speaker 2: of a customer relationship.
Speaker 3: And Video was set up to buy the company a
Speaker 3: few years ago and that deal fell apart. The big
Speaker 3: thing when you look at some of these Bloomberg reports
Speaker 3: is that ARM is talking to what they're framing as
Speaker 3: strategic investors in Vidia, according to Bloomberg reports, among those
Speaker 3: potential investors alongside the likes of Amazon and Intel, to
Speaker 3: actually buy into the IPO. So you're trying to look
Speaker 3: at the way ARMS positioning itself to benefit from not
Speaker 3: only selling to these customers and benefiting from their sales,
Speaker 3: but also getting them to buy into the stock, which
Speaker 3: creates kind of that familial environment for soft Bank, which
Speaker 3: has had a pretty rough go losing thirty billion dollars
Speaker 3: last year.
Speaker 1: Yeah, this would be a big home run for them.
Speaker 1: Great great story related to this on the Bloomberg terminal
Speaker 1: by my buddy Alex Barinka and min Yng Lee. It
Speaker 1: says ARM needed thirty five hundred words to explain it's
Speaker 1: China risk before IPO. Wow, So they've got a China
Speaker 1: risk here, So I guess investors have to get what
Speaker 1: is that risk?
Speaker 3: I guess ARM laid out that they generate about a
Speaker 3: quarter of their revenue from China and that's driven by
Speaker 3: ARM China, a unit that basically them in soft Bank
Speaker 3: are partnered with but they don't control. So there's uncertainty
Speaker 3: around slowing demand in China, which we've been seeing play out.
Speaker 3: We've seen in the filing that the company's royalties coming
Speaker 3: from China actually slowed in the last fiscal year.
Speaker 1: They warned that could continue to slow.
Speaker 3: And that's all on top of geopolitical risk with the
Speaker 3: US UK anything going on as it relates to China
Speaker 3: in Western countries. And you look at some of the
Speaker 3: reactions we've seen from Bloomberg and two eligence really laying
Speaker 3: out that China risks paired with slumping smartphone and consumer
Speaker 3: electronic sales, those are the key concerns for investors going
Speaker 3: through that's filing that hit yesterday evening.
Speaker 2: By the way, in terms of the proceeds, this is
Speaker 2: a sixty to seventy billion dollar valuation right as far
Speaker 2: as we've reported as far as we've reported, which means
Speaker 2: what they walk away.
Speaker 1: With soft Bank.
Speaker 3: Last week reported soft Bank would walk away with the
Speaker 3: eight to ten billion dollars because they bought back the
Speaker 3: remaining twenty five percent from their own vision fund, so
Speaker 3: they are selling shares into the open market eight to ten.
Speaker 3: We've been reporting that maybe it's going to be a
Speaker 3: bit lower because now they own the entirety of the company,
Speaker 3: So soft Bank actually brings in all of the sales
Speaker 3: and none of that money is going.
Speaker 2: To exactly that's the point. So none of these proceeds
Speaker 2: go get reinvested into arms business. Yep, that's an important point.
Speaker 3: And it goes back to soft Bank being able to
Speaker 3: take that cash and redeploy it to some of the
Speaker 3: other startups that they've tried to back and are looking
Speaker 3: to back and try to.
Speaker 1: All Right, here's another thing. I wonder what our reporting
Speaker 1: is showing, because last quarter day the company had little
Speaker 1: to know revenue growth dropped about one percent year. Okay,
Speaker 1: so give you that background. Is there any view coming
Speaker 1: from the street on valuation?
Speaker 3: Yet we saw in yours truly reported on this, we
Speaker 3: saw a burnstea note laying out expectations around forty billion.
Speaker 3: That was last month when we crunched the numbers looking
Speaker 3: at some comps they've We've been taught hearing investors in
Speaker 3: Wall Street talking up Synopsis and Cadence as better comps.
Speaker 3: When you look at a price of sales trailing on
Speaker 3: a twelve month average, evaluation comes.
Speaker 1: Closer to thirty two to forty three billion, So and
Speaker 1: the company is looking for what sixty to seventy as
Speaker 1: far as we've and they bought back that bit spread there.
Speaker 3: My friend, Well, they also bought back with that repurchase
Speaker 3: from SoftBank, they paid about sixteen billion for that twenty
Speaker 3: five percent stake, so sixty four billion dollars baked in.
Speaker 3: But the one thing that was interesting in the filing
Speaker 3: is SoftBank's warns, and this is verbatim. Investors are cautioned
Speaker 3: that the purchase price paid may not be indicative of
Speaker 3: it is not intended to reflect expectations regarding the completed deal.
Speaker 3: So they basically are warning that they paid sixty evaluation
Speaker 3: of sixty four billion, forget that that's part of a
Speaker 3: different deal. Don't worry about ascribing that valuation money, because
Speaker 3: that's the first place I would go to exactly, and
Speaker 3: that's what we're talking to investors and people who want.
Speaker 1: It's not going to be an easy deal, is it.
Speaker 1: It's going to be a fascinating deal.
Speaker 3: I mean, we've talked about at length about the dearth
Speaker 3: of IPOs, and the one view that I've been getting
Speaker 3: from a number of my sources is that arm is
Speaker 3: the type of company and they've stuck to their plans
Speaker 3: to go public this year that could really go public
Speaker 3: in most any market. It was public once before, back
Speaker 3: in twenty sixteen. Soft Bank took it private. It's more
Speaker 3: of an almost pe style play as opposed to your
Speaker 3: traditional money burning VC.
Speaker 2: Backed company, and it's the only game in town if
Speaker 2: you want access to a new issue. If it does well,
Speaker 2: I guess there'll be a cascade of IPOs that follow.
Speaker 3: Yes and no. We're expecting potentially Instacart to flip their
Speaker 3: S one sometime as early as this week. Clay Vio's
Speaker 3: another company. The big thing that I've been talking to
Speaker 3: my contacts, their view is fourth quarter twenty twenty three
Speaker 3: will be interesting with some of these big companies that
Speaker 3: probably should have or could go at most anytime. But
Speaker 3: the big focus is going to be early twenty twenty
Speaker 3: four when you're going to get more of those sweet
Speaker 3: spot IPOs.
Speaker 2: Just on a different topic completely. We were talking and
Speaker 2: have been talking for a long time with Ira Jersey
Speaker 2: about soccer, and I know messis come here, so it's
Speaker 2: pretty exciting for a sport that otherwise is just deadly
Speaker 2: boring to watch. Why doesn't professional lacrosse get a big
Speaker 2: pick up in this country? And I ask you, Bailey,
Speaker 2: because I've noticed that you were a lacrosse beat reporter
Speaker 2: at Citrus TV.
Speaker 1: Yeah.
Speaker 3: Man, I cut my teeth at at Syracuse University covering
Speaker 3: which I still view is probably the best men's lacrosse
Speaker 3: college team that did not win a national title.
Speaker 1: They were absolutely stacked. Yeah, And back when we were kids,
Speaker 1: that was it. It was Em and Jane Johns Hopkins
Speaker 1: and then now everybody plays its big tens all getting
Speaker 1: in on it. No.
Speaker 3: But that's interesting, Matt, because coming from the West Coast,
Speaker 3: I knew like two.
Speaker 1: People who played lacrosse.
Speaker 3: It was a rich kid San Diego sport that being
Speaker 3: east of LA was like, we play football, that's what
Speaker 3: men do.
Speaker 2: And in Ohio, by the way, same thing. Growing up
Speaker 2: in Ohio lacrosse with something only kids in like New
Speaker 2: Jersey and Connecticut played. But now at you know the
Speaker 2: schools that I all the schools I got kicked out
Speaker 2: of in Central Ohio, they all play lacrosse.
Speaker 1: Well, it's accelerating. The issue is in the this is
Speaker 1: the pitch.
Speaker 3: And I did a small stint covering sports here at
Speaker 3: Bloomberg and sports business is lacrosse is going to be
Speaker 3: gaining from parents who maybe don't want their kids to
Speaker 3: play football for fear of injuries, head injuries. The issue,
Speaker 3: the one kind of drawing factor is and the reason
Speaker 3: it's compared to hockey is it's.
Speaker 2: Not a cheap sport.
Speaker 3: There aren't a lot of fields to play. So if
Speaker 3: you don't have a tremendous amount of income where you
Speaker 3: can find a stick in a ball and find someone
Speaker 3: to play with, you can't go pick up and play
Speaker 3: like soccer, football or basketball where there's a court or
Speaker 3: there's just a grass field.
Speaker 1: You end the number one high school team in the
Speaker 1: country this year, the Lawrenceville School. Thank you very much,
Speaker 1: Thank you Bailly good stuff. Bell Leadership's covers the markets.
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Speaker 1: Let's talk about the hotel business, particularly the extended stay
Speaker 1: part of the business, which is probably a part of
Speaker 1: the business we don't talk about enough. And Skazafava joins us.
Speaker 1: She's the general manager and senior vice president of Extended
Speaker 1: Stay brands at Choice Hotels. Troyti, of course, is a
Speaker 1: New York Stock Exchange listed company. Ce HH is the
Speaker 1: ticker to load into your Bloomberg Professional Service and thanks
Speaker 1: so much for joining us. We appreciate you coming in
Speaker 1: all the way from Rockville, Maryland. Talk to us about
Speaker 1: the extended stay business. What are the drivers of your
Speaker 1: business and what are the trends been I guess over
Speaker 1: the last several years as the world's kind of reinvented
Speaker 1: itself a little bit.
Speaker 5: Yeah, no, that's great. So extended say caters primarily to
Speaker 5: non discretionaries day so think traveling nurses, construction crews. So
Speaker 5: we have a lot of tailwinds coming to us with
Speaker 5: the Infrastructure Bill, the Chips Act, etc. So we see
Speaker 5: a lot of demand in our future ahead of us
Speaker 5: at this point in time, I would say the one
Speaker 5: thing about the extended day brands is that they're pretty resilient.
Speaker 5: So even in face of recessions and pandemics, we tend
Speaker 5: to have an occupancy premium over the rest of traditional hotels.
Speaker 5: So even right now in the first half of the year,
Speaker 5: economy extended day has a nineteen percent occupancy point percentage
Speaker 5: over just regular economy transient hotels. So it's a very
Speaker 5: resilient business model.
Speaker 2: I guess your biggest competitor right now would be Airbnb.
Speaker 2: Is that fair to say? I mean, if I was
Speaker 2: going to go someplace and I had to stay there
Speaker 2: for two weeks, that would be sorry to say, my
Speaker 2: first thought.
Speaker 6: Yeah, I think Airbnb.
Speaker 5: Though when we look at that their price points are
Speaker 5: a little bit different, and those guests don't tend to
Speaker 5: look for kind of the standard guest experience that we
Speaker 5: provide across that. So the way we think about extended
Speaker 5: s A is that it's apartment like amenities with a
Speaker 5: hotel of a flexibility. So you still get the services,
Speaker 5: the cleaning, it's ed rad that you would expect from
Speaker 5: a hotel, but you have a full size kitchen in
Speaker 5: your room, you have some of those larger spaces and
Speaker 5: suites versus a small traditional hotel room.
Speaker 1: So are you primarily a franchise company? Okay? So how
Speaker 1: do you grow your business in terms? Is it simply
Speaker 1: going after and recruiting franchises? How does that work? How
Speaker 1: does that growth? Yeah?
Speaker 5: Absolutely, But I think developers at this point I'm are
Speaker 5: looking at extends as one of the hottest segments within
Speaker 5: the lodging industry. And really it's a hedge. It's a
Speaker 5: really different type of asset class than additional hotel. So
Speaker 5: over the last couple of years, even even during twenty twenty,
Speaker 5: Woodspring Suits a our largest brand. They ran gopu margins
Speaker 5: of fifty percent and they've gone up from there. So
Speaker 5: last year we were on average at sixty percent, So
Speaker 5: smart money is really kind of chasing us at this
Speaker 5: point in time and wanting to get into the segment.
Speaker 5: We've been able to capitalize on that. We've had over
Speaker 5: fifty percent more openings in the first half of this
Speaker 5: year than we did last year. We've grown our pipeline
Speaker 5: seventeen percent just in the first half of this year.
Speaker 5: So while we are, yes, of course going after some
Speaker 5: of the larger developers, they are certainly seeking us out
Speaker 5: as well.
Speaker 2: So does the does the change in work from home
Speaker 2: or the evolution of the way we work have a
Speaker 2: big effect on your business?
Speaker 5: Yeah, we've seen a lot of stays now where I mean,
Speaker 5: I hate the word leisure, but where you get the
Speaker 5: business traveler right and they're staying for five days and
Speaker 5: then they tack on.
Speaker 2: Wait, is that a word if people use, I mean, we.
Speaker 5: Do in the industry, Yeah, leisure, leisure, businessiness.
Speaker 2: Sure, leisure. I cannot believe that you're allowed to use
Speaker 2: that word.
Speaker 5: Somebody standard industry jargon. For sure, it was, yeah, but
Speaker 5: that certainly has changed. And then honestly, they're reshoring of
Speaker 5: a American manufacturing has also been a great tail wind
Speaker 5: for us at this point in time. So any of
Speaker 5: those large semiconductor plants that you're starting to see you
Speaker 5: move in, battery plants, et cetera, are also creating a
Speaker 5: lot of demand for the extended day segment.
Speaker 1: How about I mean, can I build a hotel these days?
Speaker 1: I mean the banks are just pulling back on lending
Speaker 1: across this across the board. How does that impact I
Speaker 1: guess you're franchisees.
Speaker 5: Yeah, so we're the only company that has two entry
Speaker 5: points into extended day for both the economy segment and
Speaker 5: the mid scale segment. So what we've done knowing that
Speaker 5: new constructional lending is a challenge, right, and some of
Speaker 5: our franchisees can can get that they have community banks,
Speaker 5: that they've got local relationships, proven track records, and so
Speaker 5: they're still getting that lending. But a lot of folks
Speaker 5: where we have markets that have no extended stay to supply,
Speaker 5: there's a ton of traditional hotels. We came up with
Speaker 5: a really innovative solution that we call kitchen in a Box.
Speaker 5: So we worked with engineers, architects, the trades, mechanical, electrical, plumbing,
Speaker 5: et cetera, and came up with this concept where you
Speaker 5: can take a traditional hotel room and into an extended
Speaker 5: stay room, and we have twenty of those transformations going
Speaker 5: on across the country.
Speaker 1: What's an extended stay room entail?
Speaker 5: So you must have a full sized kitchen, full size kitchen,
Speaker 5: full sized kitchen, okay. And the way that we like
Speaker 5: to think about it is guests use these rooms for
Speaker 5: both workplay, me space. Right. They need to be flexible
Speaker 5: spaces so that it's more kind of like your home,
Speaker 5: even thoughtful things like you know, you want a larger
Speaker 5: vanity in the bathroom because you're going to be there
Speaker 5: for many weeks. You want to be able to put
Speaker 5: all yourself out right. So that's how we think about
Speaker 5: designing that with the consumer first and how they're going
Speaker 5: to use that space.
Speaker 2: How have labor costs been because I know, you know,
Speaker 2: in the pandemic, or even at the end of the pandemic,
Speaker 2: Paul and I would interview hoteliers. How do you say
Speaker 2: that hoteliers, that's pretty good. Yeah, And they told us,
Speaker 2: you know, it's very difficult to get people to come
Speaker 2: to work.
Speaker 1: Yeah.
Speaker 5: So the beauty of extended day is in the economy
Speaker 5: segment in particular, there's only six or seven full time employees.
Speaker 5: And the reason that is is because we only do
Speaker 5: housekeeping bi weekly, so the labor model is super light
Speaker 5: in these hotels, which also enables those high margins that
Speaker 5: I spoke about earlier. So yes, we are not immune
Speaker 5: to that, but it certainly lends itself a little bit
Speaker 5: easier than what you're seeing in traditionally.
Speaker 2: I see though, so extended stay facilities are not housed
Speaker 2: within your traditional hotel facilities. They're actually completely separate.
Speaker 5: Yeah so yeah, So so take a Woodspring Speets for instance. Prototype.
Speaker 5: Prototype is one hundred and twenty two rooms and they
Speaker 5: come standard with the kitchens, et cetera. There's also guest laundry,
Speaker 5: fitness facilities, et cetera, so that you can really maintain
Speaker 5: your lifestyle there, so you would not see them withinside
Speaker 5: a traditional hotel.
Speaker 1: But no, like restaurants or any that type of this
Speaker 1: is just stays. Okay, Yeah, who do you compete against?
Speaker 2: Really?
Speaker 1: Matt mentioned Airbnb, but on the in terms of the
Speaker 1: traditional extended stay, who's the company?
Speaker 5: Yeah? Well, I mean we're starting to see a lot
Speaker 5: of new competitors come into the space. So Marriotte, Hill
Speaker 5: and High have all really brand launches at this point
Speaker 5: in time. I think for us though we've been in
Speaker 5: the space for a really long time. We acquired Woodspring
Speaker 5: Suites back in twenty eighteen have kind of re invigorated
Speaker 5: the segment. We have over four hundred open and operating
Speaker 5: extended stay hotels right now, with another three hundred in
Speaker 5: the pipeline.
Speaker 1: And where those are the regional areas that you guys
Speaker 1: are focusing on, or I mean coast to coast.
Speaker 5: We certainly see a lot of demand right now in
Speaker 5: Texas and Florida. The relocation has been big for us
Speaker 5: as well. So think places like Boise, Idaho that are
Speaker 5: just growing kind of urban areas at this point in time.
Speaker 1: Talk to us about rowing.
Speaker 2: Yeah, she's in the Athletic Hall of Fame. I mean,
Speaker 2: no joke.
Speaker 1: What's a Coxswaine? Is that the one that says stroke,
Speaker 1: stroke or go.
Speaker 5: It's a little more sophisticated. So you actually have a
Speaker 5: microphone and there are speakers underneath the seat, right, and
Speaker 5: so I can whisper and the crew would be able
Speaker 5: to hear you. But yes, I steered the boat and
Speaker 5: then you made sure that we were making race moves.
Speaker 2: What are you should in the front though right in
Speaker 2: the back so you can see. I see. So you
Speaker 2: actually do steer literally literally and then you're the motivator
Speaker 2: of the crew. Correct, absolutely, So what's the athletic Hall
Speaker 2: of Fame? Like, do you have like your jersey there or.
Speaker 5: I have met my plaque and it's you know, on
Speaker 5: the riverfront. So we have our boat house out there.
Speaker 5: So that's what river is washing it Chester River. So
Speaker 5: in Maryland.
Speaker 1: Yeah, I don't know anybody who rose.
Speaker 2: Uh yeah, I know some.
Speaker 1: I know some.
Speaker 2: I actually only know women who row.
Speaker 5: But it's a big D three so it's huge.
Speaker 1: Yeah, it's huge.
Speaker 2: I mean I know a lot of Boston women who
Speaker 2: row in the Charles.
Speaker 5: That's amazing. We we we came in third, I want
Speaker 5: to say one of the years on the Charles. And
Speaker 5: of course it's a big tradition to throw the Coxon
Speaker 5: in if you win.
Speaker 1: All right, good stuff and Skazafava, general manager and Senior
Speaker 1: VP of Extended Stay Brands at Choice Hotels.
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Speaker 1: You know, Matt, I don't know about this whole you know,
Speaker 1: yield curve thing. It's you know, I'm an equities guy,
Speaker 1: so this is kind of something new for me. But
Speaker 1: Lisa Bromowitz has been schooling me for years on this
Speaker 1: and the latest thing she says I have to focus
Speaker 1: on is real yield for the tenure hit two percent?
Speaker 1: The highest in a very long time. I think it's
Speaker 1: two two thousand and nine. What does that mean? I
Speaker 1: don't know. Somebody ask somebody who's smart about this kind
Speaker 1: of stuff.
Speaker 2: And this is what the Fed wanted, right They said
Speaker 2: they wanted to get real yields positive. At the time
Speaker 2: that Powell was complaining about it, they were negative, yep.
Speaker 2: And now they're way up there. So the question is
Speaker 2: are they then able to achieve their goal of reducing
Speaker 2: inflation to two percent?
Speaker 1: And let's ask somebody about that. Jay Haffield, he's the
Speaker 1: CEO and founder and portfolio manager of Infrastructure Capital Management.
Speaker 1: It has been kind enough to join us here in
Speaker 1: our Bloomberg Interactive Broker Studio. So, Jay, talk to us
Speaker 1: about your call on inflation. I got this real yield
Speaker 1: thing at two percent. That's the highest since July of
Speaker 1: two thousand and nine, So that gets my attention. What's
Speaker 1: going on out there?
Speaker 7: Thanks Paul Matt for having me on. Well, we actually
Speaker 7: I think that the Fed is a little bit of
Speaker 7: out of play right now. So in other words, they
Speaker 7: may or may not raise one more time. We don't
Speaker 7: think they will. There was a story in the Journal today,
Speaker 7: but we did some data in preparation for this. The
Speaker 7: labor markets really weakening. That sixty percent of jobs added
Speaker 7: are in the medical sector, and we all know that
Speaker 7: that's more of a secular increase than cyclical. And also
Speaker 7: wages are tenuating, So I think that data. We don't
Speaker 7: think the Fed's going to raise. They don't know that yet,
Speaker 7: but they're going to get some more data, particularly on
Speaker 7: the on the labor side, even though that doesn't really matter,
Speaker 7: but that's what they focus on. And also inflation is
Speaker 7: going to gradually cool. The measurement of inflation already has cool,
Speaker 7: but the measurement of inflation will continue to cool. So
Speaker 7: we're optimistic that the FED will not raise again, but
Speaker 7: we're very concerned about the ECB in case you want
Speaker 7: to talk about that, because we think that's critical.
Speaker 2: To Well, let's get to But I do want to
Speaker 2: talk about your view on inflation, because you have your
Speaker 2: own index CPI R and I'm looking at it on
Speaker 2: the infrastructure, on infracap funds dot com on your website.
Speaker 2: How do you see this working out in terms of inflation?
Speaker 2: Is it really going to come back down to two percent?
Speaker 2: And is that going to be anytime soon? Maybe the
Speaker 2: heke one more time, but do we hold at that
Speaker 2: level or are you worried it bounces back?
Speaker 7: Well, the two things to focus on in terms of
Speaker 7: potential bounce back are energy prices and housing prices. So
Speaker 7: energy we do a lot of work on that. We
Speaker 7: think that we're kind of stuck in this seventy five
Speaker 7: ninety five range and also in the fallitude weaken up,
Speaker 7: so we're not worried about energy. And also it's important
Speaker 7: in the US we have natural gas. The trades at
Speaker 7: the equivalent about eighteen dollars a barrel, so it's highly
Speaker 7: deflationary here, not sure the West of the world. Rest
Speaker 7: of the world, natural gas trades roughly be to you,
Speaker 7: why is it same as well? So we're not concerned
Speaker 7: about that. And I think the chances of housing prices
Speaker 7: taking off like a rocket when mortgage rates are seven
Speaker 7: and a half percent is close to zero. So we're
Speaker 7: not concerned about a reacceleration. And then we know that
Speaker 7: the current measurements for CPI and PCE or flawed because
Speaker 7: of their shelter component. And also we don't like pc
Speaker 7: because it has twenty percent medical. But I would say,
Speaker 7: we don't stick this on our website, but we calculate
Speaker 7: pceh R, so that corrects for shelter and that's only
Speaker 7: a two point six percent right now.
Speaker 2: And well CPI R is only one percent year over year,
Speaker 2: right correct.
Speaker 7: Yeah, So we think inflation is already behind that problem
Speaker 7: behind us, and no signs again looking at the forward indicators,
Speaker 7: because we were massively concerned about inflation early twenty one.
Speaker 7: So we think that's behind us. Whether the FED raises
Speaker 7: one more time or not, we don't think it's that critical.
Speaker 7: But we do think the global type monetary power is
Speaker 7: an issue, and I think that's what is driving long
Speaker 7: term rates up right now.
Speaker 2: So all right, let's get then to Europe, what's the
Speaker 2: inflation picture look like to you over there? If it's
Speaker 2: subdued here, but you mentioned we have deflationary natural gas prices,
Speaker 2: and of course they don't. How does inflation look to
Speaker 2: you on the continent?
Speaker 7: Well, I think that that's that is a real problem
Speaker 7: because they've had an enormous increase over the last two years,
Speaker 7: and that's they're less competitive. But our biggest concern is
Speaker 7: that global monetary base. And we will publish this on
Speaker 7: our website as well. Although you can get the data
Speaker 7: you can just if you can add you can get
Speaker 7: it on the terminal as well, but it's still good
Speaker 7: to publish it because even I haven't focused on enough
Speaker 7: dropped by seven hundred billion in the last two months,
Speaker 7: which is an enormous drop. That's now what what dropped
Speaker 7: the global monetary base? Okay, so the global central Bank
Speaker 7: sucked out seven hundred billion dollars of capital.
Speaker 2: And we've seen them two fall here as well.
Speaker 7: Right, yeah, so those are bit more lag But if
Speaker 7: you look at the I would suggest look at the
Speaker 7: monitary base because that's the leading indicator, because it's the
Speaker 7: major component. And I would also say don't ignore this
Speaker 7: so I've made a good call to least our clients.
Speaker 7: When the FED interviewed, I said, okay, that's the sign
Speaker 7: back in pandemic. They're adding, you know, one point two
Speaker 7: trillion of capital to the capital market every year. That's
Speaker 7: just enormous. That's like Warren Buffett, you know, putting is
Speaker 7: one hundred billion to work ten times. So I wouldn't
Speaker 7: ignore the monetary base and those radical changes in particular,
Speaker 7: if they're small, you can ignore them. So we think
Speaker 7: that's the key driver behind this big rise in rates,
Speaker 7: and we did that work because really, frankly, our call
Speaker 7: was that we're going to drop and it was dead wrong.
Speaker 7: So said, well, how can this be? And that's when
Speaker 7: we discovered, because we should have been tracking it as
Speaker 7: well more closely, that the ECB has just done this
Speaker 7: massive QT and that affects all rates in the in
Speaker 7: the world. That it's our bond is eighty five percent
Speaker 7: correlated with all the benchmark bonds. So coming up with
Speaker 7: an explanation just focused on the US is not going
Speaker 7: to be correct when you're talking about the world bond market.
Speaker 1: So what happens to interest rates? When can I refinance
Speaker 1: my mortgage at.
Speaker 2: A lower rate. Well is single minded and focused on
Speaker 2: the high mortgage rate that he got. It's adjustable though,
Speaker 2: because he was figuring at the time, well, next year,
Speaker 2: I'll be able to refinance at the lower rate.
Speaker 7: Yes, so I have adjustable rate mortgages as well. So
Speaker 7: I'm very focused on this. But I don't think that
Speaker 7: we're going to get any relief till probably mid next
Speaker 7: year because of the Fed's about a year behind what
Speaker 7: they should be doing. So you should have cut when
Speaker 7: the banking crisis started. And that is another reason why
Speaker 7: they should pause, and I think that maybe even they'll
Speaker 7: figure this out, is that the banking system is under
Speaker 7: pressure being downgraded. They were downgraded this morning. They should
Speaker 7: be focused on that. So I think we'll get relief
Speaker 7: next year. But the thing to watch, and the reason
Speaker 7: that we're sticking with our bullish call on interest rates,
Speaker 7: is that we do think that the European economy is
Speaker 7: going to crack. They have mostly floating rate mortgages, way
Speaker 7: more than they do in the United States. They have
Speaker 7: this natural gas problem. Germany is levered to China, and
Speaker 7: their ECB is a single mandate central bank, so they're
Speaker 7: going to continue to tighten really probably tell their economies crack,
Speaker 7: So I think that's when rates will come down. Long
Speaker 7: rates will come down when it becomes more obvious that
Speaker 7: Europe has headed into a recession, which is our call
Speaker 7: that they're almost certainly going to probably even substantial.
Speaker 1: Despite all the Americans over their traveling.
Speaker 7: At the margin, that does help. Yeah, the US definitely
Speaker 7: does prop up the rest of the world. But still,
Speaker 7: when you think about all those factors are negative, then
Speaker 7: what is the bowl case for you?
Speaker 1: So how about China? Just because we've been talking a
Speaker 1: lot over the last several weeks report on the weaker
Speaker 1: than expected economic data out of China, how do you
Speaker 1: kind of view all.
Speaker 7: That well when with regard to oil, which is what
Speaker 7: we mostly focus on China about, is that the thing
Speaker 7: to keep in mind is that, of course reporters have
Speaker 7: to write stories. So why is oil down? We talked
Speaker 7: them about this, Well, it's because of China. Well it's
Speaker 7: usually not the case. They have very slow growth in
Speaker 7: oil demand, that's very sticky, so we don't think that
Speaker 7: that demand's going to drop, But we also think that
Speaker 7: that could be positive for long term rates because the
Speaker 7: I'm sorry that the Chinese Central Bank is definitely going
Speaker 7: to cut rates. There's a disappointment when they cut last time,
Speaker 7: but they're going to continue to cut rates. They've really
Speaker 7: hammered their economy through regulation. It's a good example why
Speaker 7: maybe capitalism is superior to communism, and so when you
Speaker 7: do that, it hurts economic growth, and so they're going
Speaker 7: to offset it with monetary policy, and that should also
Speaker 7: be bullish for long term rates.
Speaker 1: And I'm just reading a notes here, real quick, thirty
Speaker 1: seconds fourth quarter for the stock market SMP range of
Speaker 1: forty five hundred to five thousand.
Speaker 7: Correct, although I would say that that's dependent on rates
Speaker 7: at least stop rising, you know, as fast as they
Speaker 7: have been over the last month or so.
Speaker 1: Okay, and anything added Jackson Hole.
Speaker 7: We think it's going to be a non event because
Speaker 7: the Feds already signaled what they want to do. They
Speaker 7: have the dot plot, and we know there's a dubvish camp,
Speaker 7: so that we won't get a repeat of last year
Speaker 7: where Pallet comes out and kind of talks the market
Speaker 7: down right.
Speaker 2: Interesting, all right, Jake, So you don't think there'll be
Speaker 2: a hawkish bent.
Speaker 7: Little bit, but not anything significant like it was.
Speaker 2: Lasting right home about right.
Speaker 1: But let's send the team out there anyway.
Speaker 2: Yeah, two teams, Yeah sure yeah.
Speaker 1: Jay Hatfield, CEO, founder and portfolio manager does it all.
Speaker 1: Infrastructure capital management one of the smarter discussions Matt and
Speaker 1: I have as we try to think about these markets
Speaker 1: and navigate through that.
Speaker 2: And I like his website infracap infracap infracap Funds dot com.
Speaker 1: Boom there you go, go check it out.
Speaker 4: You're listening to the team Ken's are live program Bloomberg
Speaker 4: Markets weekdays at ten am Eastern on Bloomberg dot Com,
Speaker 4: the iHeartRadio app and the Bloomberg Business app, or listen
Speaker 4: on demand wherever you get your podcasts.
Speaker 1: All right, let's get this banking thing. We got S
Speaker 1: and P coming in better relate than never, I guess,
Speaker 1: kind of saying, hey, there's challenges for the regional banking
Speaker 1: sector and they take down some names. Here, let's break
Speaker 1: it down with our experts. That would be Herman Chant,
Speaker 1: and that would be Arnold. Herman joins us live here
Speaker 1: in our Bloomberg Interactive Broker studio. Arnoldlekuda making use of
Speaker 1: the zoom functionality out there. He joins us as well. Arnold.
Speaker 1: Let's start with you on the credit side. Where do
Speaker 1: you see kind of the pressure that we're seeing across
Speaker 1: the regional bank space in the credit side.
Speaker 8: Yes, I think some of these actions by Moody's and
Speaker 8: SMP I think just gives us a reminder that this
Speaker 8: you know, now, I guess I wouldn't call it a
Speaker 8: crisis anymore, but you know, these issues still exist where
Speaker 8: there is pressure on these banks and their balance sheets. Right,
Speaker 8: funding costs are rising, deposits have fled. Yes, So I
Speaker 8: think a lot of these things that the rating agencies
Speaker 8: are coming out with now are Yeah, it is backward looking,
Speaker 8: but it is a reflection that, you know, all things
Speaker 8: aren't all fine and dandy in regional bank land.
Speaker 1: So if if I wanted to go out I'm a
Speaker 1: regional bank of reasonable credit quality, can I go out
Speaker 1: there and raise capital in your credit markets? And if so, like,
Speaker 1: am I going to really have to pay through the nose?
Speaker 8: Oh? I mean, you know, the the before March regional
Speaker 8: bank debt it was, you know, we're in a totally
Speaker 8: different world. It used to be they trade really tight
Speaker 8: and you couldn't get enough of it right, and it
Speaker 8: trade tight for the credit rating. Now we're in this
Speaker 8: opposite world. Of you know it trades wider. I mean
Speaker 8: things have you gotten better obviously since the heydays of
Speaker 8: March and May, but you know, compared to before, spreads
Speaker 8: are wider, and a lot of these will be hit
Speaker 8: with new debt requirements. So we expect debt issuans to
Speaker 8: pick up for a lot of these. And we have
Speaker 8: seen a couple of regional banks to tap the market.
Speaker 8: We have Charles Schwap today and then we had what
Speaker 8: is it, Huntington and P and C come you know,
Speaker 8: in the in the past week or so. So it
Speaker 8: is available. If the debt does come uh, you know,
Speaker 8: with with some a little bit meat on the bone.
Speaker 8: Let's let's put it that, then there will be demand.
Speaker 2: Herman, what do you think about the uh, you know,
Speaker 2: the banks that were specifically downgraded by S and P.
Speaker 2: You've got Key Corp, Comerica, Valley National, umb and Associated
Speaker 2: Bank Corp R So.
Speaker 9: I would say that the the issues that that the
Speaker 9: rating agencies have highlighted a couple of them, Key Corp
Speaker 9: co America, they're facing some weaker needitors margins than some
Speaker 9: others that in the in our our peer group. That's
Speaker 9: really driven by some higher deposit costs. They actually these
Speaker 9: two banks in particular miss have mishedged their balance sheet
Speaker 9: a bit where they were expecting interest rates to decline
Speaker 9: potentially next year, and it seems like we're in a
Speaker 9: higher for longer environment, so that's actually crimping their margins
Speaker 9: a bit more than some others.
Speaker 2: The is the deposit flight the kind of thing that's
Speaker 2: still ongoing. You know. I was actually at a cocktail party,
Speaker 2: shocking I think like three or four weeks ago, with
Speaker 2: a group of ladies talking about how they got you know,
Speaker 2: high interest rates in this one bank account. And I
Speaker 2: saw one woman, you know, just over the course of
Speaker 2: a conversation at like six pm on a Saturday, say,
Speaker 2: you know what, I'm just gonna move like one hundred
Speaker 2: thousand dollars from my savings account and my bank that
Speaker 2: I've always used into this I can't remember if it
Speaker 2: was the Sacks account or some other, but you know,
Speaker 2: four and a half percent yielding savings account and just
Speaker 2: boom done.
Speaker 7: Right.
Speaker 9: So what we've seen since the fallout in margin April
Speaker 9: is that the deposit actually the deposit bounces have actually
Speaker 9: stabilized across the industry. And how that's happened is they're
Speaker 9: just paying up for those deposits. So you're you're seeing
Speaker 9: high interest savings accounts, high savings accounts approaching five even
Speaker 9: above five percent CDs above five percent for one year term,
Speaker 9: fifteen month term. So that's really the gist of it.
Speaker 9: The banks are paying up and that's really crimping that
Speaker 9: dig's margins and pressuring profitability going forward.
Speaker 1: Arnold, are you seeing any investors come in in your
Speaker 1: market and saying, boy, I see some real value here
Speaker 1: in some of these bonds.
Speaker 8: Well, I mean I think, you know, definitely for you know,
Speaker 8: in a market let's say into until from May to August, right,
Speaker 8: it was a classic risk on uh treasure yields, higher
Speaker 8: spreads tightening and and and the world where everything seemed
Speaker 8: to be pricing to perfection. One of the things that
Speaker 8: are we're still cheap is is kind of the regional banks,
Speaker 8: right and given what they went through. So so yeah,
Speaker 8: I think there is a lot of demand for regionals,
Speaker 8: but I think at the right price, right, And and
Speaker 8: if you look at credit spreads now where they are,
Speaker 8: you know, tighter if you would have woken up today
Speaker 8: versus you know, not knowing what happened from from you know,
Speaker 8: all of this year. You wouldn't even know that there
Speaker 8: was a banking crisis this year, right, given given how
Speaker 8: things have recovered, So you know, I think at the
Speaker 8: right price, they'll be demand. But you know, things have
Speaker 8: you know, we've had a bit of a kind of
Speaker 8: you know, everything sell off in August, right that that's
Speaker 8: coincided with these rating downgrades, rate negative outlook cuts. But
Speaker 8: I think things had been pricing a little bit for perfection.
Speaker 8: But I think if if these new issues Who's come
Speaker 8: to market with a bit of a little bit of
Speaker 8: meat on the bone, then I think you'll see investors
Speaker 8: step up and go through.
Speaker 2: The stocks haven't really recovered, herman. If you look at
Speaker 2: if I look at KRE for example, which is the
Speaker 2: regional s and P spider s and P Regional Banking ETF,
Speaker 2: it's still at the same levels that it hit after
Speaker 2: you know, the big problems that we had, the drop
Speaker 2: that we saw in March.
Speaker 9: The stocks have rebounded a bit from the lows back
Speaker 9: in April and May, but still well below.
Speaker 2: Pre SVB.
Speaker 9: Fallout.
Speaker 2: So I mean the KRE dropped to forty four and
Speaker 2: a half on March thirteenth and right now it's trading
Speaker 2: at forty three sixty.
Speaker 1: Right.
Speaker 9: Valuations are really reflecting the tough environment that Moody's and
Speaker 9: SMP have articulated, So tougher profitability, weaker land. Regulatory requirements
Speaker 9: are going to increase, and we still haven't really seen
Speaker 9: the shoe to drop on the asset quality side, in
Speaker 9: particular office commercial real estate quite yet. So there's going
Speaker 9: to be a lot of headwinds and the banks will
Speaker 9: just need to navigate that and any upside really is
Speaker 9: going to be dependent on where interest rates go and
Speaker 9: potentially cuts down the road.
Speaker 1: So Herman, what do we know about the regulatory changes
Speaker 1: coming along?
Speaker 9: So the regulators in the FED have have put out
Speaker 9: a thousand page documents that outlines some changes to the
Speaker 9: regulatory requirements for particularly the largest banks and the largest
Speaker 9: regional banks of one hundred billion dollars and above. That's
Speaker 9: really focused on tightening how the capital ratios are calculated,
Speaker 9: including unrealized losses in the securities portfolio in the af
Speaker 9: secure portfolio into capital calculations, increasing the debt stack, as
Speaker 9: Arnold mentioned a bit earlier, but there's still going to
Speaker 9: be some other areas that the regulators are focused on.
Speaker 9: I recall during the SBB crisis that uninjured deposits was
Speaker 9: a big thing, So the FDIC is looking at that,
Speaker 9: and then the Fed is also going to come out
Speaker 9: with some regulatory issues on.
Speaker 1: Liquidity as well.
Speaker 9: So there's still more down the road and so the
Speaker 9: banks will just need to have to manage.
Speaker 1: Through it all right, guys, I really appreciate getting the
Speaker 1: update there again, S and P. Following Moody's and doungrading
Speaker 1: some of those regional banks. Really nothing new in kind
Speaker 1: of what they're doing, but simply kind of reflecting kind
Speaker 1: of what I believe the market's known for some time.
Speaker 1: Hermit Chin, Arnold, Cokuda. They cover the regional banks, all
Speaker 1: the banks on the regional side for Bloomberg Intelligence, Arnold
Speaker 1: on the credit side, Herman on the equity side. So
Speaker 1: we got you all covered there on the regional bank space.
Speaker 4: You're listening to the tape Cat's are live program Bloomberg
Speaker 4: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 4: tune in app, Bloomberg dot Com, and the Bloomberg Business App.
Speaker 4: You can also listen live on Amazon Alexa from our
Speaker 4: flagship New York station. Just say Alexa play Bloomberg eleven thirty.
Speaker 1: Wet's talk Microsoft. It would like to buy Activision, in fact,
Speaker 1: so much so that it's got a sixty nine billion
Speaker 1: dollar transaction on the table, needs regulatory approval, and the
Speaker 1: UK was really a sticking point. But maybe they're rethinking
Speaker 1: their strategy here. Maybe this steal gets done. So let's
Speaker 1: go to Jen Ree. She's a senior litigation analyst. She's
Speaker 1: covering all the anti trust stuff for Bloomberg Intelligency. Joins
Speaker 1: us here in our Bloomberg Interactive Brokers studio. So, Jen,
Speaker 1: it looks like the UK has taken a little bit
Speaker 1: of an about face and may take a fresh look
Speaker 1: at this deal.
Speaker 6: Yeah, and that looks like what's happening. As a matter
Speaker 6: of fact, they've been looking at it again for about
Speaker 6: a month, and I think Microsoft actually tried to push
Speaker 6: this through on a second look without doing what it's
Speaker 6: done now, which has made some concessions to transfer some
Speaker 6: games to Ubisoft, and that didn't really work. We thought
Speaker 6: maybe there'd be a final report by August twenty ninth
Speaker 6: by the UK. Now it's been pushed to October because
Speaker 6: the deal's been restructured and they have to take a
Speaker 6: look at that the new concession. But it's looking pretty
Speaker 6: good from Microsoft. You know, they've been talking to the UK,
Speaker 6: they know where they are. There's been open communication and
Speaker 6: I really doubt they'd be moving forward with this unless
Speaker 6: they thought that they were going to get clearance at
Speaker 6: the end of this road.
Speaker 1: Look just looking at the stocking Ubisoft, which trades on
Speaker 1: French Exchange up eight and a half percent today.
Speaker 2: So are those concessions going to be what the UK
Speaker 2: wanted to see? Isn't it all about Call of Duty?
Speaker 2: I mean does anything else matter?
Speaker 6: I mean, really this was about Call of Duty, but
Speaker 6: the UK has made it beyond. You know, they don't
Speaker 6: know what's coming out from Activision. These are content creators, right,
Speaker 6: and maybe it'll be the Activision that creates the next
Speaker 6: Call of Duty or you know, the next really popular game.
Speaker 6: So they were really just concerned more about the future
Speaker 6: because they think the future will be more of what
Speaker 6: they call these Triple A games. And also the future
Speaker 6: will be streaming games through the cloud rather than downloading
Speaker 6: them to hardware. So that's what they're trying to protect,
Speaker 6: and that's what they've done by requiring or Microsoft agreeing
Speaker 6: that they will transfer all of the Activision games, including
Speaker 6: Call of Duty for the next fifteen years to Ubisoft,
Speaker 6: so Ubisoft can then license those games to be streamed
Speaker 6: through the cloud.
Speaker 2: Where are we staying in the US?
Speaker 6: Yeah, well, the US, you know, it's been really quiet
Speaker 6: and you don't see much in the news. There's still
Speaker 6: an appeal. The FDC is still fighting this deal in
Speaker 6: the US. They lost in court and then they lost
Speaker 6: their attempt to get an emergency stay. After they lost
Speaker 6: their attempt to lock the deal, they do have an
Speaker 6: appeal pending. The briefing is going to be done in September.
Speaker 6: You could probably have oral argument maybe by the end
Speaker 6: of this year. I mean, if this deal gets uk
Speaker 6: a clearance in October and the deal closes, it means
Speaker 6: the FTC's appeal will be gone going after the deal's
Speaker 6: already consummated and integrated.
Speaker 1: So is that typically happen. There's still going to be
Speaker 1: a review of a deal that's closed.
Speaker 6: It can happen, and the FTC has done that. I'm
Speaker 6: a little surprised by it, you know, after they lost
Speaker 6: in the district court and then lost their effort to
Speaker 6: get an emergency stay. I didn't really think they'd continue
Speaker 6: to pursue this appeal because they lost pretty soundly in court.
Speaker 6: I mean, the judge really said, you just don't really
Speaker 6: have any evidence to prove out your theories of harm
Speaker 6: in this case. And I don't see this. I see
Speaker 6: it as a losing battle and I'm a little bit
Speaker 6: surprised that they're continuing on that road. They may still
Speaker 6: withdraw it after this agreement with the UK that might
Speaker 6: give them the ammunition they need to say, Okay, things
Speaker 6: are different now.
Speaker 1: Is it political so the Biden can go on the
Speaker 1: campaign trail and say I'm tough on business.
Speaker 2: Of course, it's political. It's always political and asking nice.
Speaker 6: Road question, you know, anti trust decisions on mergers are
Speaker 6: not supposed to be political, and really, honestly, in the
Speaker 6: past they mostly were not. I would say now it
Speaker 6: has moved into the political realm for sure. I mean,
Speaker 6: you have a political viewpoint right now that we've allowed
Speaker 6: too much consolidation in the market and we need to
Speaker 6: stop it. We need to slow down M and A
Speaker 6: activity in many industries, and that's why we're seeing these
Speaker 6: aggressive actions by the FTC and DOJ.
Speaker 1: And that is political all right, So what else do
Speaker 1: we have out there? So it looks like this deal's
Speaker 1: moving forward? What else is in your hell?
Speaker 2: Let me just get quickly. So if the FTC and CON,
Speaker 2: I mean clearly they're going to appeal and appeal and appeal,
Speaker 2: but at some point that's over. And if the UK
Speaker 2: approves this, who else has to give it the blessing?
Speaker 2: Their blessing? I mean, is there an EU regulator that
Speaker 2: they need? Is there a Chinese regular that they need?
Speaker 2: Is there, you know, Asian African regulator that they need?
Speaker 2: Does Australia want to block the deal?
Speaker 6: I mean, you know they have everybody else they need.
Speaker 6: And it's really telling because almost all of these jurisdictions,
Speaker 6: and some of which are very serious when it comes
Speaker 6: to antitrust, like Brazil cleared this deal without concessions. Now
Speaker 6: the EU is saying, look, this is a new deal.
Speaker 6: It's been restructured, and we reached a settlement with Microsoft
Speaker 6: and we need to make sure this doesn't impact our settlement,
Speaker 6: so we may have to take another look. I don't
Speaker 6: think that's going to be hindrance to getting the deal
Speaker 6: closed by the deal's end in October.
Speaker 1: Though, And just refresh our memory. The UK gets a
Speaker 1: look at this deal because of Brexit, so they're no
Speaker 1: longer abide by the EU review of the deal, right
Speaker 1: A right.
Speaker 6: That's a thing about the UK used to be part
Speaker 6: of the EU, and it was part of Brussels refew.
Speaker 6: It got you know, glombed in with all the other
Speaker 6: EU countries that were part of that. You know, there
Speaker 6: were thresholds that could be triggered in just the UK previously,
Speaker 6: even before Brexit, but most big deals were assessed by
Speaker 6: the EU and not by UK.
Speaker 1: Oh well, that maybe makes Brexit all worth it to
Speaker 1: get to review deals and destroy the economy.
Speaker 2: By the way, in terms of not political, I'm looking
Speaker 2: at the FTC board here, Lena Kahan. It says she's
Speaker 2: a Democrat, went to ya Law school, by the way.
Speaker 2: Rebecca Slaughter, she's a Democrat. That's right, went to Yale
Speaker 2: Law school, by the way.
Speaker 1: I'm sensing something.
Speaker 2: Alvarro Bedoya, he's a Democrat, a Democrat went to Yale
Speaker 2: law school.
Speaker 1: What's the deal?
Speaker 2: I mean, if it's not political, why do they stack
Speaker 2: the board of Democrats who went to Yale.
Speaker 6: Well, any administration right can appoint commissioners, right, and there
Speaker 6: are five commissioners and no more than three can be
Speaker 6: from one political party. So generally, when we have a
Speaker 6: Democrats are vacant, the other two are vacant. Right now,
Speaker 6: there's some talk of nominees that an appointees coming, right,
Speaker 6: but there's really no pressure on Biden to do that
Speaker 6: and move forward with that. I think he probably will,
Speaker 6: but at the end of the day, it doesn't really
Speaker 6: matter because it requires a majority vote. So when you
Speaker 6: have three Democrats and two Republicans, which will eventually have
Speaker 6: once those two spots are filled, you're still likely going
Speaker 6: to have the majority vote be along the Democratic lines.
Speaker 6: And these three have pretty much aligned on almost everything
Speaker 6: so far.
Speaker 1: And in my world of median telecommunications, it's the Federal
Speaker 1: Communication Commission, and it's exact same same situation. You know,
Speaker 1: whoever's in power gets the gets the role there. And
Speaker 1: Yale is Yale the best law schools most rankings.
Speaker 2: Certainly, I don't know.
Speaker 6: Apparently they like the anti trust regulators.
Speaker 1: On the rankings, isn't it. I guess it's I.
Speaker 6: Think it's up there. I don't know, yeah, but I
Speaker 6: think I think it's up there. I'm look, it's Yale yeah,
Speaker 6: of course it's great.
Speaker 1: Exactly all right. So what else on antitrust front are
Speaker 1: you looking at here? What are some of the big
Speaker 1: trades out there that are still need some approval?
Speaker 6: You know, we're looking at Adobe Figma now that obviously
Speaker 6: one of the one is a private company, but that's
Speaker 6: been sort of lagging. I suspect the dj is likely
Speaker 6: to challenge that deal. You know, we're waiting for Kroger
Speaker 6: and Albertson's. That's before the FTC. I wouldn't be surprised
Speaker 6: at all if the FDC went to court to try
Speaker 6: to block that deal as well, and trial will start
Speaker 6: in October. In the Jet Blue Spirit deal, who cares?
Speaker 2: Do we care?
Speaker 1: In the markets that are don't get a lot of
Speaker 1: service and you care about I want both jet Blue
Speaker 1: and Spirit to serve my right.
Speaker 6: I mean they have two very different models, right. Jet
Speaker 6: Blue is considered a low cost carrier, whereas Spirit's ultra
Speaker 6: low cost, which really means everything's all a part. Right,
Speaker 6: you can get the absolute cheapest fair without any other perks,
Speaker 6: no food, no luggage, nothing else, and you can't pick
Speaker 6: your seat. There is a set of consumers that prefers
Speaker 6: to have that option right for when they travel. And
Speaker 6: what will happen is that this deal, at least the
Speaker 6: allegation is, will take that option out of many markets,
Speaker 6: or reduce the option from two which we're Frontier and Spirit,
Speaker 6: down to just one, which would be Frontier when Jet
Speaker 6: Blue takes over.
Speaker 2: On the other hand, it's hard for Jet Blue and
Speaker 2: also for Spirit and a Frontier to compete with the
Speaker 2: duopoly that we essentially have here. Right, You've got Delta, United,
Speaker 2: American American who hog all the slots, you know.
Speaker 6: And that's what Jet Blue says, right, And that's their argument,
Speaker 6: And that's been an argument an airline merger with some
Speaker 6: of the low cost carriers and the ultra low cost
Speaker 6: carriers in the past. I will say that in twenty
Speaker 6: years that I've been watching this, the argument that we
Speaker 6: need to merge in order to better compete with the
Speaker 6: top guys never seems to work. It just doesn't really
Speaker 6: work because if you take that merger on its own,
Speaker 6: and it's anti competitive and might have a price increasing
Speaker 6: effect or an output reducing effect, it doesn't really matter
Speaker 6: that much. It can't be outweighed by that argument.
Speaker 1: I'm looking at the Spirit map. I mean they fly
Speaker 1: pretty much everywhere, I mean, including the Caribbean and Central
Speaker 1: American stuff like that. So it's a much bigger, more
Speaker 1: denser map than I thought.
Speaker 2: So, but only in this essentially, you know, only in
Speaker 2: sort of North.
Speaker 1: America, yeah, right, North and Central America. Yeah, so not
Speaker 1: any international stuff other than.
Speaker 2: And jef Leu has now branched out, so now they
Speaker 2: go to London, they go to Amsterdam, and they go
Speaker 2: to Paris.
Speaker 6: Yeah, but that was hindered a little bit because the
Speaker 6: Department of Justice challenged their northeast alliance with American right,
Speaker 6: which kind of hindered some of that.
Speaker 1: All right, Jen, thanks so much, We appreciate it. And
Speaker 1: re senior litigation analyst Bloomberg Intelligence.
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Speaker 1: One of the areas of the market that we've been
Speaker 1: talking a lot about over the last several years, increasingly
Speaker 1: so is the private credit market. We all know about
Speaker 1: the private equity business, but the private credit business has
Speaker 1: been a been getting a lot of capital flows and
Speaker 1: has been very active. I wanted to get a little
Speaker 1: bit more details on that market. Jackie Ward joins us.
Speaker 1: She's a director of private Investments for umb Bank Family Wealth.
Speaker 1: She joins us via zoom. Jackie talk to us about
Speaker 1: how you guys at umb you know, address and deal
Speaker 1: and play in the private credit business.
Speaker 10: Absolutely, thanks for having me here at you and b
Speaker 10: There's a number of different ways we kind of play
Speaker 10: in the private credit business. In my world, we have
Speaker 10: a couple of bank owned funds that invest in private credit,
Speaker 10: so we're regularly looking at opportunities in the private credit space,
Speaker 10: mezzanine debt, junior lean debt, and working with companies that way.
Speaker 10: From umb Bank standpoint as a senior lender, we also
Speaker 10: often work with junior capital providers to fill out the
Speaker 10: rest of the capital stack, so we get to interact
Speaker 10: with private credit, whether it's from a senior position or
Speaker 10: actually doing investment in private credit ourselves.
Speaker 1: So my understanding is the private credit business really kind
Speaker 1: of took hold in terms of growing after the Great
Speaker 1: Financial crisis, when a lot of the banks, from a
Speaker 1: regulatory standpoint had to pull back a little bit from
Speaker 1: certain types of loans and in terms of what they
Speaker 1: could own on their balance sheet. Is that still the
Speaker 1: primary driver of what's driving the growth of this business.
Speaker 10: I think it's a little bit of both. I think
Speaker 10: two thousand and eight put private credit on the map
Speaker 10: because the question in two thousand and eight was when
Speaker 10: our big bank's going to come back into lending, and
Speaker 10: I think the answer was it might take some time,
Speaker 10: and so you saw the launch of private credit. But
Speaker 10: these days, I think private credit is growing a lot
Speaker 10: just around direct lending efforts. Also, as banks kind of
Speaker 10: tightened in general, you're seeing less senior stretched at you're
Speaker 10: seeing more debt fall into the private credit space, and
Speaker 10: you're also seeing unitraanch financing become a huge spot in
Speaker 10: the market. So with syndications down in general, a lot
Speaker 10: of companies are looking for a single provider that can
Speaker 10: provide a senior junior credit type blend through one instrument
Speaker 10: versus working with two different providers, and that's driving a
Speaker 10: lot of growth as well.
Speaker 1: You know, Jamie Dimond, I think probably talking his own book,
Speaker 1: but you know, He kind of says, hey, this private
Speaker 1: credit market's not regulated. Do we really know what's going
Speaker 1: on out there? How do you respond to that?
Speaker 10: You know, private credit, these are funds. They're regulated as funds,
Speaker 10: and asset managers are not regulated by bank regulators. I
Speaker 10: think there's a few different ways to look at that. One,
Speaker 10: they're not regulated by bank regulators because they have a
Speaker 10: different source of funds. So private credit funds are also
Speaker 10: or raising money directly to invest in private credit, it's
Speaker 10: opposed to using deposit or money. And because of that
Speaker 10: they have they're able to take a little bit different
Speaker 10: outlook and potentially a longer point of view. I do
Speaker 10: think with any private and investment, you know, the lack
Speaker 10: of regulation makes it really important to know who you're
Speaker 10: working with. You know, private credit funds that have long
Speaker 10: histories or attached institutions like you and b that have
Speaker 10: long histories tend to do well because of course we're
Speaker 10: we're working with a broader market. I think it just
Speaker 10: goes back to diligence and knowing who you're working with
Speaker 10: and who you're investing your dollars with.
Speaker 1: What types of deals are you guys seeing these days?
Speaker 10: You know, in our group, we're seeing a lot of
Speaker 10: deals in the manufacturing distribution space, especially in distribution where
Speaker 10: you might be dealing with an asset like company that
Speaker 10: still has a lot of working capital, needs a lot
Speaker 10: of growth. We're also seeing a lot of Bolton deals,
Speaker 10: so in our portfolio, the vast majority of our companies
Speaker 10: or platform companies, so we're actively looking for new opportunities
Speaker 10: and looking for M and A opportunities and it's a
Speaker 10: great way for us to put in more junior debt.
Speaker 10: So with the credit kind of tightening, some of that
Speaker 10: senior stretched at falling into our space is creating a
Speaker 10: lot of opportunity in both of those industries.
Speaker 1: And do most of the deals that come across your
Speaker 1: desk are they from Are they private equity sponsored deals? Primarily?
Speaker 10: Yeah, we work primarily with private equity sponsors as well
Speaker 10: as you know LBO type funds. We're often working with
Speaker 10: them or independent sponsors where they're taking down the entire
Speaker 10: opportunity and they're looking for partners in the capital stack.
Speaker 1: Interesting, So what is deal flow like these days? Because
Speaker 1: we've heard from you know, some of the larger publicly
Speaker 1: traded investment banks that not a lot getting done per se,
Speaker 1: What are you seeing in your market?
Speaker 2: You know, we were.
Speaker 10: Kind of in the lower middle market and we're actually
Speaker 10: seeing a lot of opportunity and most of the deals
Speaker 10: that we're investing in, you know, we're looking at enterprise
Speaker 10: values of one hundred million or under and activity in
Speaker 10: that space. You still have a lot of companies owned
Speaker 10: by generations that are looking to make exits. You still
Speaker 10: have a lot of companies that are seeing an opportunity
Speaker 10: for M and A. So we're still seeing a good
Speaker 10: number of deals in our space. I think as you
Speaker 10: move up market, the markets get a little bit tighter
Speaker 10: and a little bit harder to raise debt. So we're
Speaker 10: very happy to be in the space we're in.
Speaker 1: And you guys are you and b you're based in
Speaker 1: Kansas City, right, yeah? And so do you do I mean,
Speaker 1: do you try to lend your regional expertise to the
Speaker 1: private equity sponsors out there? The companies out there is
Speaker 1: that's kind of where you guys, you know, kind of
Speaker 1: do your knitting.
Speaker 10: So you know, we get to work with the private
Speaker 10: equity groups in a lot of different ways. We have
Speaker 10: ways on the commercial bank side that we work with
Speaker 10: our private equity groups. Our bank is largely located, you know,
Speaker 10: Midwest focus groups like mine, We operate coast to coast,
Speaker 10: working with different private equity sponsors on direct and investment
Speaker 10: in their deals, either using mezzanine or minority equity. But
Speaker 10: we often you know, U and B Bank is one
Speaker 10: large family, so we're often working with all the different divisions,
Speaker 10: you know, in concert to make sure that we're looking
Speaker 10: at the deal.
Speaker 4: The right way.
Speaker 1: Interesting. So here, we've got a big, big increase in
Speaker 1: the interest rates over the past twelve to eighteen months.
Speaker 1: How's that impacted your business maybe, what kind of deals
Speaker 1: you see, what kind of structures you put in place.
Speaker 10: You know, in our world, a lot of our deals,
Speaker 10: you know, slightly higher interest rate interest only. We still
Speaker 10: have a lot of room and flexibility on that spread.
Speaker 10: I know one thing that we're watching just in the
Speaker 10: market in general is private credit is doing really well
Speaker 10: right now. I think there are a lot of funds
Speaker 10: that might have put out notes twelve to eighteen months
Speaker 10: ago in a different brain environment. So we're keeping a
Speaker 10: really close eye on defaults coming into the back end
Speaker 10: of this year and early next year to make sure
Speaker 10: that doesn't have an impact on them, but kind of
Speaker 10: going back to the source of funding for a lot
Speaker 10: of private credit because we're not utilizing deposit dollars in
Speaker 10: that sense, we have a different kind of cost structure
Speaker 10: that we get to compare against, and that gives us
Speaker 10: a little bit more flexibility.
Speaker 1: And so for your funds, who's a typical investor.
Speaker 10: For our funds? So on our family wealth side, we
Speaker 10: do have a number of single asset holdings that tend
Speaker 10: to be institutional and high net worth. The primary fund
Speaker 10: we invest private credit out of is a bank owned fund,
Speaker 10: and so a number of years ago that bank seated
Speaker 10: us with cash and we've been recycling that capital since.
Speaker 5: Hi.
Speaker 1: Fascinating stuff. Always love talking about the private credit business again,
Speaker 1: a fast, fast growing business within financial services, seen to
Speaker 1: spring out of nowhere after the Great Financial Crisis and
Speaker 1: now it's a major major player. Jackie Ward, she's the
Speaker 1: director of private Investments at mb Bank Family Wealth.
Speaker 2: Thanks for listening to the Bloomberg Markets podcast. You can
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Speaker 2: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
Speaker 2: at Matt Miller nineteen seventy three.
Speaker 1: And I'm fall Sweeney. I'm on Twitter at pt Sweeney.
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