Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 1: Today's guests are Paula Seligson, a credit reporter for Bloomberg
Speaker 1: News in New York, and Rob Schiffman, who looks at
Speaker 1: the tech sector for Bloomberg Intelligence. It's been another very
Speaker 1: busy week, lots of excitement in global credit markets, which
Speaker 1: by some measures, are having the best January ever. I
Speaker 1: don't know what you make of this, but it all
Speaker 1: seems too much, too fast. Where does it all end.
Speaker 1: We'll get to that in a little bit, but before
Speaker 1: we do, I've got windmills on my mind. Of course,
Speaker 1: we all love sustainable energy. Everyone wants to save the planet.
Speaker 1: But did you read the wind turbines taller than the
Speaker 1: Statue of Liberty are falling over. There was a great
Speaker 1: Business Week story this week on that they set the
Speaker 1: scene out there in Oklahoma, a beautiful place. I used
Speaker 1: to live. There by the way, on a calm, sunny day,
Speaker 1: a man was feeding his cattle when he got the
Speaker 1: call from a local sheriff's dispatcher. A motorist reported that
Speaker 1: one of the huge turbines at a nearby wind farm
Speaker 1: had collapsed in dramatic fashion. The steel tower, which was
Speaker 1: hundreds of feet tall, was buckled in half, and the
Speaker 1: turbine blades, whose rotation took the machine higher than the
Speaker 1: Statue of Liberty, was splayed across the wheat fields below.
Speaker 1: What do you make of this? You know? Is it
Speaker 1: the end of sustainable energy? What about windmills? Who likes windmills? Here?
Speaker 1: What do you think, Paula, I'm just trying to imagine
Speaker 1: watching this thing fall straight down. I want to know
Speaker 1: the thud that it makes when it hits the ground.
Speaker 1: But yeah, I mean, I don't know. I hope they
Speaker 1: sorted out because I definitely want more wind energy. Personally,
Speaker 1: I think my biggest concern would be that the price
Speaker 1: of weed is going up and I have to pay
Speaker 1: more for my bagels. Possible A good angle, good angle.
Speaker 1: Don't get me started on ESG investment though, it's another
Speaker 1: topic for a different episode, I'm sure, But anyway. Paula Sellison,
Speaker 1: she's our ACE reporter in New York City covering all
Speaker 1: things credit. She's been behind some of the biggest scoops
Speaker 1: on your Bloomberg terminal over the last few years, and
Speaker 1: it's great to have you here in the studio. Thanks
Speaker 1: for having me. The latest big story from Paula. Well,
Speaker 1: it's a bit technical, but we're going to go into
Speaker 1: it and break it down. Feel free to interrupt anytime,
Speaker 1: Robbie if you have any questions. Here's the headline, fed
Speaker 1: up CLO buyers push managers to reject terms of libel switch.
Speaker 1: So let's start with the obvious one. What is a
Speaker 1: CLO and why do we care? That is a great question,
Speaker 1: and I am happy to be in a podcast where
Speaker 1: I can get pretty wonky because usually I can't get
Speaker 1: into this much detail normally. So CLO stands for collateralized
Speaker 1: loan obligation. That's a really fancy way of saying it's
Speaker 1: a structured product where people basically buy a bunch of
Speaker 1: really risky leverage loans, which is a form of corporate debt,
Speaker 1: and then they put it together in a big pool,
Speaker 1: and then they sell slices of it in the form
Speaker 1: of bonds in different tronches. And this could be triple
Speaker 1: A tronch which is very very safe, almost no chance
Speaker 1: of losing money, all the way down to double A
Speaker 1: and lower and then Eventually you get to the equity portion,
Speaker 1: which essentially gets what's left over in the structure at
Speaker 1: the end of each period. And you know, this is
Speaker 1: essentially a way to find It's a way. It's it's
Speaker 1: a lot of demand for leverage loans, so clos buy
Speaker 1: roughly two thirds or more of the leverage loan market,
Speaker 1: and so they also drive demand for buying leverage loans.
Speaker 1: It's a way. It sounds like a total casino here.
Speaker 1: You've lost me already. Is it like a CDO, the
Speaker 1: thing that blew up the financial system in two thousand
Speaker 1: and eight. I'm glad you asked that, because everyone in
Speaker 1: the CLO market hates that comparison, and they remind me
Speaker 1: of it all the time. Structurally, it is similar to
Speaker 1: a CDO with the tranches and things like that. But
Speaker 1: as participants in the space like to remind everyone, clos
Speaker 1: did not blow up. In fact, even though they are,
Speaker 1: you know, part they use leverage loans, which are risky,
Speaker 1: highly indebted companies that have borrowed money. But the way
Speaker 1: the loans are structured, they're what's called secured, which means
Speaker 1: there's a lot of assets backing the loans. So even
Speaker 1: if that company went bankrupt. This type of lenders should
Speaker 1: be made fairly whole of assuming everything goes well. So
Speaker 1: it's both risky also safe at the same time. So
Speaker 1: they buy leverage loans. They also sound really scary. What
Speaker 1: a leverage loans? Can you break that down for us? Yeah, So,
Speaker 1: if you think about sort of the universe of investing,
Speaker 1: there's equity and then there's debt, right, and so debt
Speaker 1: is split up pretty much by its ratings. Anything above
Speaker 1: a certain rating is considered investment grade, which is fairly safe,
Speaker 1: and anything below a certain rating is considered high yield
Speaker 1: or junk. And so within that space you have two
Speaker 1: types of debt. You have junk bonds and leverage loans.
Speaker 1: And so leverage loan just means it's a loan where
Speaker 1: it is borrowed by a company that is rated high
Speaker 1: yield by ratings agencies. And these distinctions are very important
Speaker 1: because the types of investors who buy each form of
Speaker 1: debt are very different often and it's sort of split
Speaker 1: up within a portfolio. You know, this is our sector
Speaker 1: that's buying just hiled bonds. This is our portfolio manager
Speaker 1: who's just buying investment grade bonds, and so leverage loans
Speaker 1: are just sort of part of this overall universe. One
Speaker 1: of these big loans made to companies are the companies
Speaker 1: that we've never heard of that are lurking in the shadows,
Speaker 1: the household names. It's usually not household names. The household
Speaker 1: names borrow with investment grade bonds and you've heard all
Speaker 1: of them before. You know, high yield rated companies can
Speaker 1: range from you know, some oil and gas companies to
Speaker 1: people who make you know, aftermarket auto parts. It's often
Speaker 1: a really key part of the world, but it's kind
Speaker 1: of the part that you don't notice day today. So
Speaker 1: thank you for that. I think it's becoming clear now.
Speaker 1: But going back to the headline, fed up clo buyers
Speaker 1: push managers to reject terms of libel switch. What's the
Speaker 1: situation with the managers pushing back? Why are they doing that?
Speaker 1: That's a great question. So I kind of have to
Speaker 1: take a step back to explain the libor switch to
Speaker 1: begin with. So libor, the London interbake offer rate, sorry,
Speaker 1: London Interbank Offered rate, is this key benchmark that was
Speaker 1: used across the world for many, many years. As the
Speaker 1: financial crisis unfolded, it was discovered that this was basically
Speaker 1: being fixed by a bunch of banks in London. It
Speaker 1: was a huge scandal and regulators across the globe decided
Speaker 1: they had to get rid of it. One of the
Speaker 1: key differences is as they've transitioned away from LIBOR, is
Speaker 1: that instead of it being one rate for the whole world,
Speaker 1: now each region has its own rate, and so the
Speaker 1: overall preferred replacement rate in the United States is for
Speaker 1: something called the secured Overnight Financing Rate or SOFUR. So
Speaker 1: we're in the midst of this transition. It's very complicated
Speaker 1: and very messy. So essentially everyone who is doing new
Speaker 1: deals had to stop using LIBOR at the beginning of
Speaker 1: twenty twenty two, but any existing deals have until the
Speaker 1: middle of twenty twenty three to make that switch. And
Speaker 1: we are in the very final stretch the last six
Speaker 1: months of this and the one point four trillion dollars
Speaker 1: US leverage loan market. Only about twenty five percent of
Speaker 1: these loans of switch so far, so we have about
Speaker 1: seventy five percent left now. Enter CLOS and what's going
Speaker 1: on there. So, as I mentioned before, Clos they are
Speaker 1: one of the biggest buyers of leverage loans, So what
Speaker 1: CLO managers are doing really impacts the entire leverage loan market.
Speaker 1: So within that you have the cloquity investor that's buying
Speaker 1: the riskiest tranche of clos And essentially there's this issue,
Speaker 1: which is that libor and sofur are not the same.
Speaker 1: SOFA typically prints consistently lower than libor. So if you
Speaker 1: just switched a loan from libor to sofur, the lenders
Speaker 1: who lend that money immediately lose money. It's only a
Speaker 1: few basis points. It depends on the day because all
Speaker 1: of this moves around. It could be you know, a
Speaker 1: point oh five percent, maybe point one percent, depending on
Speaker 1: what's going on, But that can add up a lot
Speaker 1: if you have a multimillion dollars portfolio of these assets. Right,
Speaker 1: So for CLO equity investors specifically, because they're getting the
Speaker 1: left over and what's left in the CLO after everyone
Speaker 1: else has been paid this interest, if there's a mismatch,
Speaker 1: it really hurts them and they can be on the
Speaker 1: line to lose millions of dollars. So it's all about
Speaker 1: the money. It's always about the money. Yeah, So basically
Speaker 1: CLO equity investors care because if they don't have what
Speaker 1: they consider a fair switch from Libor to sofur. They
Speaker 1: are the ones who lose money specifically. And so the
Speaker 1: big news that myself and my colleague Carmen Arroyo were
Speaker 1: able to break this week is that the Cello equity
Speaker 1: investors are actually organizing. So typically these markets are very
Speaker 1: you know, maybe you call your friend, maybe you instant
Speaker 1: message someone, but they're fairly unorganized and each actor is
Speaker 1: sort of acting on its own. But Eagle Point Credit
Speaker 1: specifically organized a call in early January to get a
Speaker 1: bunch of equity investors on the phone, and they all
Speaker 1: essentially discussed how they wanted a specific type of transition
Speaker 1: from libor to sover. They wanted this special rate that's
Speaker 1: the maximum rate they can get between the two benchmarks,
Speaker 1: and so they essentially said, okay, guys, we've talked about this.
Speaker 1: Now you should go to the Cello managers, the ones
Speaker 1: actually making these decisions, and ask them to ask for
Speaker 1: this highest version of this rate as these companies try
Speaker 1: to transition. Fascinating. Thank you for breaking that down. Clos
Speaker 1: leverage loans. Let's watch for more news on that, But
Speaker 1: before we go to Rob for a deep dive, into tech.
Speaker 1: Let's ask you, also, Paul It about Twitter, because you've
Speaker 1: been following that one very closely, and they have some
Speaker 1: money that they have to pay on some debt because
Speaker 1: Elon Musk spent billions buying the thing and then breaking
Speaker 1: it all apart. What's going on there? Yes, so the
Speaker 1: first deadline is coming up. Let's rewind for a second.
Speaker 1: When Elon Musk decided to acquire Twitter, he raised thirty
Speaker 1: three point five billion in equity commitments, but he also
Speaker 1: raised roughly twelve billion dollars of debt from a bunch
Speaker 1: of banks. And those banks actually had to fund all
Speaker 1: of that debt themselves because they weren't able to sell
Speaker 1: it to outside investors. So banks are the Twitter lenders
Speaker 1: right now, not like institutional asset managers like we normally see.
Speaker 1: And so you know, before Twitter's interest expense was less
Speaker 1: than one hundred million dollars a year. Now that Elon
Speaker 1: Musk added all this debt onto the company's balance sheet,
Speaker 1: it's annual interest expense is exceeding one point two billion
Speaker 1: dollars a year. So just think about how impactful that
Speaker 1: is for a company that wasn't making a ton of
Speaker 1: money to begin and so the way all this works
Speaker 1: is the first coupons should be coming due roughly three
Speaker 1: months after it closed, which should place it around this Friday.
Speaker 1: So Twitter will have to pay interest of roughly three
Speaker 1: hundred million dollars to a group of banks led by
Speaker 1: Morgan Stanley. There's been some questions are they going to
Speaker 1: pay it? Are they not going to pay it? I think?
Speaker 1: I mean, look, it's Elon Musk, so who knows. He
Speaker 1: is a wild card. He might do things that are
Speaker 1: very unexpected. But there's no real reason for him not
Speaker 1: to pay it at this point because if he did
Speaker 1: not pay this interest, or I should say, if Elon
Speaker 1: Musks not have Twitter pay this interest to the banks,
Speaker 1: then after some period of time, the banks could force
Speaker 1: a default which would force it into bankruptcy, and then
Speaker 1: the banks would probably end up owning Twitter. So really,
Speaker 1: unless it was some kind of strange negotiating tactic, there's
Speaker 1: no reason for Elon Musk to not have this interest
Speaker 1: paid unless he's willing to walk away from the company,
Speaker 1: which I don't think he's there yet. Do we think
Speaker 1: the banks want to own Twitter? I think they do
Speaker 1: not want to own Twitter. I think that they wish
Speaker 1: they could have sold this debt. Banks don't want to
Speaker 1: hold this type of debt. They want to sell it
Speaker 1: and move it off their books and just make a
Speaker 1: huge fee in the tune of multimillion dollars. So they
Speaker 1: want to move it. So I think what they probably
Speaker 1: most sincerely hope is that Elon Musk works a miracle,
Speaker 1: makes Twitter amazing, and then they can offload this debt
Speaker 1: in a few quarters. And the interesting thing is, yeah,
Speaker 1: I covered Twitter, and bondholders made out great. Bondholders had
Speaker 1: a one on one change of control, so not just
Speaker 1: equity holders got paid here, but original bondholders, legacy bond
Speaker 1: holders got paid. So the only ones really who are
Speaker 1: left holding the bag right now is Musk himself with
Speaker 1: all his equity exposure and the banks. And I agree.
Speaker 1: Banks never want to hold on to loans. They want
Speaker 1: to sell them as fast as I can. And if
Speaker 1: there was a bid for those loans right now, they'd
Speaker 1: be gone. Eventually, they'll reach a price where I think
Speaker 1: institutional investors will own them, but it's probably going to
Speaker 1: take a little while. Great story, and we'll be watching
Speaker 1: for your updates. Poor as we hit the deadline for
Speaker 1: repayments and Also, as you said, it's Elon Musk. Anything
Speaker 1: could happen, so it's gonna be exciting times. So let's
Speaker 1: switch gears now, rub rub Shiftman, bloom Bug Intelligence. You
Speaker 1: specialize in the tech sector and that's really where a
Speaker 1: lot of the drama is right now. Um, you know,
Speaker 1: big tech stock and bond returns with significantly negative last year.
Speaker 1: But we're going through earnings. Now what do we expect
Speaker 1: from that? And you know, are the fundamentals deteriorating? And
Speaker 1: you know, what do we expect for this year? What's
Speaker 1: the outlook? Yeah, my world is so much easier than Paulus.
Speaker 1: You know, my companies they sell a lot of gadgets,
Speaker 1: make a lot of money. Stocks go up, bonds go up,
Speaker 1: they sell a lot less stuff, and you have the reverse.
Speaker 1: The reality is there's a huge economy between technology equity
Speaker 1: performance and bond performance. It looks like last year that
Speaker 1: returns were similar. You know, in general big tech was down,
Speaker 1: say twenty five percent, and tech high gratee tech bonds
Speaker 1: were also down twenty to twenty five percent. But the
Speaker 1: reality is mom and pop might be buying Apple or
Speaker 1: Microsoft or Google, but they're not buying their bonds. Institutional
Speaker 1: investors are buying their bonds, and rather than just just
Speaker 1: outright taking rate risk and credit risk, institutional investors hedge.
Speaker 1: So excess returns on tech last year were really like
Speaker 1: three hundred basis points, you know, not that much of
Speaker 1: a loss. The vast majority of loss for bonds or
Speaker 1: we're affected by rising rates. So what do we have
Speaker 1: as we walk into the beginning of this year. We
Speaker 1: have rates that have stabilized to gone down, spreads that
Speaker 1: have stabilized to gone down, and we've got positive returns
Speaker 1: across the board. Lo and behold. We walk into early
Speaker 1: earning season with hopes that the worst is gone, and
Speaker 1: you have Microsoft in Texas Instruments report both huge bellweathers. Right,
Speaker 1: Microsoft has this massive cloud business and they're saying that
Speaker 1: it's going to continue to decelerate next quarter. Texas Centuriance
Speaker 1: is an analog semiconductor business, which means that pretty much
Speaker 1: they sell to every business incorporation that provides any gadget
Speaker 1: that's not a phone or a PC, but pretty much
Speaker 1: everything else. And their business is down as well. So
Speaker 1: it sort of bodes poorly for Industrial America. It boats
Speaker 1: poorly for big tech, whether it's cloud businesses like Amazon
Speaker 1: or Alphabet, and it also continues to bode poorly for
Speaker 1: semiconductors across the board. That being said, credit quality for
Speaker 1: big tech is dramatically better than people perceive equity valuations.
Speaker 1: Equity valuations might be down twenty five thirty five percent,
Speaker 1: but credit quality across the board last year really didn't change,
Speaker 1: and in fact, in many cases it actually got better.
Speaker 1: And I I think that's going to be the model
Speaker 1: for this year, is that we're going to worry when
Speaker 1: we really hit the bottom, and whenever we do, that'll
Speaker 1: define when we can see a long standing rally. But
Speaker 1: in the meantime, tech credit is a place for people
Speaker 1: to put their money, hide, tuck it under a pillow,
Speaker 1: and worry about other things. We're not worried about the
Speaker 1: supply chain though, because that was a really big issue
Speaker 1: last year and there are problems with the China and
Speaker 1: all sorts of other issues around the world. I mean,
Speaker 1: how does that affect this sector. Well, listen, bond folks
Speaker 1: worry about everything, you know. I worry about whether or
Speaker 1: notf the train is going to be on time, or
Speaker 1: how much snows there is going to be tomorrow. So yeah,
Speaker 1: there's Listen, there's lots of macro headwinds, whether it's wars,
Speaker 1: whether it's COVID, whether it's supply, whether it's demand. We're
Speaker 1: always concerned that. Being said, the margin of error for
Speaker 1: big tech is enormous. Like I tend to wonder when
Speaker 1: when we really think about credit quality, does it matter
Speaker 1: if Microsoft has sixty billion of free cash flow this
Speaker 1: year or fifty billion. You know, it does matter, But
Speaker 1: it matters more to the equity holder because they're going
Speaker 1: to get less returned. The bond holder is still going
Speaker 1: to get their coupon. This is not a question of
Speaker 1: Twitter and whether Musk is going to make a coupon payment.
Speaker 1: The vast majority of tech names and large internet names
Speaker 1: our investment grade have tens if not over one hundred
Speaker 1: billion dollars of cash generate tens of billion dollars of
Speaker 1: free cash flow. I do think this is going to
Speaker 1: be a continued down earning cycle. I think revenues are
Speaker 1: going to continue to trend downwards. And what we've seen
Speaker 1: to start off earning season is that we have not
Speaker 1: reached the bottom. Nobody is forecasting yet. When we've seen
Speaker 1: an inflection point in revenues and cash flows. So headwinds
Speaker 1: are going to continue to be out there, but I
Speaker 1: think incrementally relative to the concerns that people had last year,
Speaker 1: the vast majority of the bad news is already baked
Speaker 1: into most of these names. Again, I'm not an equity guy,
Speaker 1: but I think it's mostly from the equity side as
Speaker 1: well as from the credit side. But as you say,
Speaker 1: they've got billions on their balance sheet, why do they
Speaker 1: keep issuing new debt and they issue about one hundred
Speaker 1: billion dollars a year. Yeah, we get to ask that
Speaker 1: question all the time. And you know, part of it
Speaker 1: is weighted average cost of capital issue. You know, if
Speaker 1: your cost of equity is ten percent and your weighted
Speaker 1: average cost of debt is only one percent, you know,
Speaker 1: economics just say, let's issue more debt that's really done
Speaker 1: in a little bit of a lower rate, higher valuation
Speaker 1: and environment. You know, one of the main reasons that
Speaker 1: big tech, whether it's Apple, Microsoft, Google, Amazon, or now
Speaker 1: Meta has come to the market is because they want
Speaker 1: enhanced financial flexibility to buy back stock. We are seeing
Speaker 1: just you know, massive record breaking stock and dividend payments.
Speaker 1: I don't think that's going to end. You know, when
Speaker 1: you see valuations go down, you buy back more. You
Speaker 1: don't need to be more conservative. Apples sitting one hundred
Speaker 1: and seventy billion dollars of cash, they've got nothing to buy.
Speaker 1: What do you do with the money? You give it
Speaker 1: back to shareholders, and you give it back in size.
Speaker 1: You know, we've projected for a name like Apple, over
Speaker 1: the next couple of years, they're going to get to
Speaker 1: a point that in the past, in the past decade,
Speaker 1: they're gonna have given back a trillion dollars of cash
Speaker 1: in both share buybacks and dividends. So you borrow more
Speaker 1: and give it to shareholders, and that's, you know, all
Speaker 1: a risk that bondholders always have to take. I think
Speaker 1: we're going to see more of that. There's little need
Speaker 1: for M and A financing, though there are a couple
Speaker 1: deals out there that need to be funded. You know.
Speaker 1: One of the tails is like is Microsoft is trying
Speaker 1: to buy Activation for sixty nine billion dollars of cash.
Speaker 1: They don't have a bank loan, they're not relying on
Speaker 1: the capital markets for that. They're sitting on close to
Speaker 1: one hundred billion dollars of cash. They just write the check,
Speaker 1: But what do they do afterwards? To me, they write
Speaker 1: the check, and then they go out and issue fifty
Speaker 1: billion of bonds and reload on cash to either give
Speaker 1: back to shaholders or do some form of other M
Speaker 1: and A. In some of the big tech space, you know,
Speaker 1: if you're an alphabet or a meta or even an Apple,
Speaker 1: the government is going to try to block everything, so
Speaker 1: it's hard to write a big enough check for a
Speaker 1: transaction that's going to put your balance sheet at risk.
Speaker 1: So I think we continue to see this pattern, so
Speaker 1: it's going to be pure opportunistic financing. I think as
Speaker 1: soon as rates start going down again, even though companies
Speaker 1: don't need it, tech borrowing is going to click back
Speaker 1: over that hundred billion dollars annually that we've seen over
Speaker 1: the past decade. Are there any particular issues or parts
Speaker 1: of the tech sector that you like and you think
Speaker 1: we'll outperform over the next twelve months. Yeah, listen, I
Speaker 1: think tech overall is going to outperform, particularly high quality tech,
Speaker 1: And I think you want to take a Barbell approach.
Speaker 1: You know that there's there's sort of two ways to
Speaker 1: play it. Super high quality names that are really liquid,
Speaker 1: they trade tight, but have limited volatility. That Apple Microsoft, Google,
Speaker 1: and even Amazon Amazons is a ton of debt. They've
Speaker 1: had so much in terms of warnings of their business,
Speaker 1: cash flying out the door, and bonds barely move. So
Speaker 1: I think you move up the quality for names like that,
Speaker 1: and then you move down in quality to the triple
Speaker 1: B space where names have either levered up for M
Speaker 1: and A or buybacks, but know that they've reached the
Speaker 1: point where they can't put their their investment grade ratings
Speaker 1: at risk. And that's a broad calm or an intel.
Speaker 1: You know, massive balance sheets, large transactions that that's levered up.
Speaker 1: That's levered them up. They've borrowed a ton, but spreads
Speaker 1: are now much wider than other triple B industrials. Yet
Speaker 1: fundamentals suggest that they can deliver pretty rapidly. And you
Speaker 1: know the benefit that you have from buying large triple
Speaker 1: B tech that's been aggressive is that if you have
Speaker 1: fifty billion, seventy five billion, one hundred billion dollars a debt,
Speaker 1: you cannot be a junkraded company because you cannot stay
Speaker 1: in business. You're seeing that with Twitter on a much
Speaker 1: smaller scale. So you get to that point where you
Speaker 1: push the boundaries of low trip will be and then
Speaker 1: everybody becomes a bondholder's best friend, and you deliver. Bonditors
Speaker 1: can take advantage of that. You add to those names,
Speaker 1: and as soon as they go through that delivering process
Speaker 1: and they start stabilizing and they get ready to reload
Speaker 1: on that next deal or that next big buyback, that's
Speaker 1: when you get out. But you can pick incremental yield
Speaker 1: down the curve, and you can get safety up the curve.
Speaker 1: So just one area of jug and that popped out
Speaker 1: when you were talking barbell approach. What on earth do
Speaker 1: you mean by that? Well, you know, listen, you can
Speaker 1: look at my physique and you tell a workout a ton.
Speaker 1: You know, when you load up a giant barbell, you
Speaker 1: put heavy weights on both sides, it sort of bends
Speaker 1: in the middle and both ends stay much lower to
Speaker 1: the ground. That's what we're talking about. You can buy
Speaker 1: both ends of the spectrum that offer potentially lower risk
Speaker 1: and higher reward without all stress of being in the
Speaker 1: middle of those names that are smaller, that have much
Speaker 1: more violatility, that could bounce around that much more. But
Speaker 1: the the outlet you're giving is quite rosy. One we're
Speaker 1: potentially heading into a recession. You know, the inflation hasn't
Speaker 1: gone away, as you mentioned, all the geopolitical noise out there,
Speaker 1: and you know, earnings maybe maybe getting pretty tough. And
Speaker 1: also we've had a huge rally in the first month
Speaker 1: of the year, I mean, the best best January for
Speaker 1: investment grade globally. Ever, it looks like based on our data,
Speaker 1: so is there still value and you know, is there's
Speaker 1: still room to perform better even at that level or
Speaker 1: do we expected to sort of cool off a bit
Speaker 1: from here? Yeah. Listen, if I had the crystal ball
Speaker 1: that could call returns, I wouldn't be sitting in this seat.
Speaker 1: I'd be sitting in a much more leathery, plush sort
Speaker 1: of seat. That being said, I think, you know, in
Speaker 1: this space, the risk is reasonably limited, excess financial flexibility,
Speaker 1: high quality, free cash flow. I do think, like you know,
Speaker 1: the street gets way ahead of where fundamentals are. The
Speaker 1: you know, stock and bond prices saw this last year.
Speaker 1: The vast majority of the pain was taken well before
Speaker 1: it showed up in fundamentals. So now that we start
Speaker 1: to see fundamentals finally declining, it's really no surprise. And
Speaker 1: that's where when I say we look for hints of
Speaker 1: this inflection point, because I think once you find that
Speaker 1: bottom is when things get much much better and valuations
Speaker 1: improve dramatically. So I think even though the fundamentals are
Speaker 1: are really starting to show up as negative, it's actually
Speaker 1: a brighter point when it comes to valuation, particularly for
Speaker 1: those that have higher credit quality and don't have that
Speaker 1: same sort of downsize risk. So you know, I know
Speaker 1: it sounds overly bullish. Um, it's because these names are
Speaker 1: super super well positioned. You know, you could even throw
Speaker 1: out names like I cover China. Um, names like Ali
Speaker 1: Baba and ten Cent that got absolutely annihilated over the
Speaker 1: last two years, you know. And what's happened over the
Speaker 1: last just a few months. You know, there's been this
Speaker 1: huge uptick in both bond and equity prices, just on
Speaker 1: the hope that the worst is starting to come to
Speaker 1: the end. You're still seeing um negative fundamentals, but once
Speaker 1: you realize that the downside is mostly out of the way,
Speaker 1: that's when markets rally. So um, you know, I listen,
Speaker 1: I don't I don't know what returns are going to
Speaker 1: be over the next two minutes, two hours, two days,
Speaker 1: through months, two years, But I do know this space
Speaker 1: is much better position than generic industrials and that you know,
Speaker 1: these companies that sell tens hundreds of billions of dollars
Speaker 1: of goods do so for a reason. They've got they've
Speaker 1: got the products that people want, got the financial muscle
Speaker 1: to take smaller players out of business. They're running pseudo monopolies,
Speaker 1: and as soon as demand picks up, they're going to
Speaker 1: get at all. So it's just a matter of more
Speaker 1: more cyclical concerns than secular ones. Okay, thank you. But also,
Speaker 1: being a journalist, I'm extremely pessimistic just by nature, and
Speaker 1: also i'm a credit journalist as well as that just
Speaker 1: makes me doubly pessimistic. And that's being British also makes
Speaker 1: me even more pessimistic. But that's what makes markets. Apple
Speaker 1: sorry no alphabets. Google recently sued by the Department of Justice,
Speaker 1: and you know that's not good news. Surely, what does
Speaker 1: that all mean? Yeah, I hate to sort of pooh
Speaker 1: pooh what seems to be pretty bad news. You know
Speaker 1: a lot of these companies also, you know, not only
Speaker 1: are they going through legal fights with the government, but
Speaker 1: they they've been firing a bunch of people. You know,
Speaker 1: oftentimes you see stocks rally when you fire peoplecause you're
Speaker 1: gonna save costs. You know, generally those moves are sort
Speaker 1: of small when when it comes to legal risk. Listen,
Speaker 1: legal risk takes a long time to play out, years,
Speaker 1: if not decades. You know. A lot of this is
Speaker 1: political theater. Tech names, whether it's it's meta, Apple, Microsoft,
Speaker 1: Alphabet have been under scrutiny um for a long time,
Speaker 1: you know, but they also have a lot of political
Speaker 1: capital on their side. And I think that you know
Speaker 1: that when the government wants to show strength, they they
Speaker 1: they hire lawyers and start a lawsuit. In the end.
Speaker 1: You know, do I think Alphabet's going to get broken up? No?
Speaker 1: Do I think they'll have to change some business practices
Speaker 1: and maybe pay a small fine. Yes, we've seen this
Speaker 1: game before. It takes a long time to play out,
Speaker 1: you know. I actually think when when names trade down
Speaker 1: on something like that, it's more opportunity than than true
Speaker 1: downside risk. You actually saw Alphabet barely budged when these
Speaker 1: headlines came out. Also, this has been in the works
Speaker 1: now for you know, more than a year, so it
Speaker 1: hasn't really surprised anybody. Um, So we're looking for like
Speaker 1: new real news I just don't think this is it
Speaker 1: from a credit perspective. You know, Alphabet only has um
Speaker 1: you know, a little over ten billion of bonds outstanding.
Speaker 1: They trade supertight with double A ratings. I just don't
Speaker 1: see bond spreads going anywhere. And as you mentioned, layoffs
Speaker 1: are kind of piling up. Is that good for credit? Yeah,
Speaker 1: it's you know, it's one of those other things. You know,
Speaker 1: it's bad for main street, good for wall streets type
Speaker 1: of thing. It's certainly an indication that demand is on
Speaker 1: the decline and you want to save costs. The reality is, though,
Speaker 1: you know, when you start looking at some of these
Speaker 1: companies with layoffs. You know, Amazon for instance, moved layoffs
Speaker 1: up from ten thousand to eighteen thousand. You know, but
Speaker 1: take take a look. You know, they hired five hundred
Speaker 1: thousand people since at the beginning of COVID, so you know,
Speaker 1: from a from a percentage of workers perspective, it's pretty
Speaker 1: close to zero impact. When you think about where they're
Speaker 1: positioned relative to two years ago, they still have many
Speaker 1: more employees. So the rate of growth is likely to slow.
Speaker 1: That doesn't mean growth is going to slow, you know,
Speaker 1: So I listen, I hate to see layoffs. It's not
Speaker 1: good for anyone. But once when it comes to security,
Speaker 1: pricing and credit, you know, unfortunately it is generally received
Speaker 1: as positive. Thank you very much, Robert Schiffman. Bloomberg Intelligence
Speaker 1: will watch your analysis of the tech sector with great interest.
Speaker 1: And to just wrap things up here, I mean, as
Speaker 1: I mentioned at the beginning, credit markets have done a
Speaker 1: huge amount this year. Every market has really rallied, and
Speaker 1: that's from a very low base because last year was
Speaker 1: such a terrible year and everyone wants to forget that
Speaker 1: and move on. But it seems like everyone only wants
Speaker 1: to look at the good news now and they only
Speaker 1: want to think about what could be bullish for for
Speaker 1: this sector, this asset class. I'm wondering, you know, from
Speaker 1: your perspective, both of you. I mean, you're you're watching
Speaker 1: this day and day out. I'm sort of buried in
Speaker 1: it myself. What is your biggest fear right now in
Speaker 1: terms of the next phase of this cycle? And we
Speaker 1: are we going to suddenly be booted off our track?
Speaker 1: Is the is the bullish thing suddenly going to go bust?
Speaker 1: How does this move in the next you know, three
Speaker 1: three months or so. What's what's your view, Paula Paula
Speaker 1: Selexon from Bloomberg News. I think a lot of investors
Speaker 1: are keen to see what private companies report. The way
Speaker 1: debt works is a lot of private companies issue debt
Speaker 1: there and so these investors have access to private company earnings.
Speaker 1: They come out after public company earnings, So it'll be
Speaker 1: about a month or so after the current rush we're
Speaker 1: seeing in the market, and that will give us a
Speaker 1: really good clue into just how impacted these companies are
Speaker 1: by really two things. Recession slash potential recession how bad
Speaker 1: you know that's affecting revenues. But then also the cost
Speaker 1: of borrowing has increased a lot. A lot of these
Speaker 1: companies have floating rate debts, so as the FED increases
Speaker 1: interest rates, their actual interest to every quarter has increased
Speaker 1: a lot, and so that really eats into cash flow.
Speaker 1: So I think there's a very big question mark over
Speaker 1: who are going to be the losers in that and
Speaker 1: who are not going to be able to support their
Speaker 1: debt loads going forward. Yeah, I think the FED is
Speaker 1: a positive catalyst. You know, just like I said, as
Speaker 1: you start getting near the bottom, if the FED starts
Speaker 1: slowing down and we go to twenty five basis points
Speaker 1: for from fifty basis points increases with hints that they're
Speaker 1: coming to an end. You know. I think if you
Speaker 1: see a rate rally, you know, it's obviously enorm positive
Speaker 1: for credit. From a fundamental perspective, I don't see fundamentals
Speaker 1: getting much better over the next few quarters. But again
Speaker 1: we can separate fundamentals, um from from valuation. You know,
Speaker 1: it's UM. I think the biggest concerns that we that
Speaker 1: we have are not things like true supply and demand
Speaker 1: there they're big exogenous changes um UM, like war and
Speaker 1: covid um as is I think, UM, you know, as
Speaker 1: those issues hopefully start to go into the background, UM,
Speaker 1: there's there's meaningfully more upside. And I just think people
Speaker 1: always need to take a step back to last big
Speaker 1: dynamic shifts in the market, you know, and the real
Speaker 1: last one, um it was the beginning of covid um.
Speaker 1: Market bounced back very quickly. If we go back to
Speaker 1: the last one and go back to OA to the
Speaker 1: financial crisis, and go back to Paul thies um collateralized
Speaker 1: issues from the housing market that really crushed us. You know,
Speaker 1: banks are in much better financial position than they were
Speaker 1: you know eight, corporate bounce sheets are in much better
Speaker 1: financial position than they are in Oh eight. Rates historically
Speaker 1: are still reasonably low, and the cost of borrowing is
Speaker 1: historically low. And that's why I think when we start
Speaker 1: talking about recession, you're talking about not a real deep recession.
Speaker 1: So it's you know, what are those real risks to me? There? There?
Speaker 1: It's the FED number one, and then it's always that
Speaker 1: exogenous risk. And if you can sort of avoid the
Speaker 1: Fed getting meaningfully more hawkish, and I think fundamentals as
Speaker 1: we get to the back half the year start getting better,
Speaker 1: you know, and it sets us up for I think
Speaker 1: a strong second half of the year from a credit
Speaker 1: performance perspective, as well as twenty twenty four. Thank you
Speaker 1: very much. Rob Schiffman, who looks at the tech sects
Speaker 1: of a Bloomberg intelligence ending on a high notes, also
Speaker 1: thank you very much, indeed too, PAULA Selson, credit reporter
Speaker 1: in New York City. I'm James Crumby at Bloomberg News,
Speaker 1: and thank you very much for joining us for they
Speaker 1: Credit Edge