WEBVTT - CLO Clash, Twitter Debt Drama; Technology Focus 0:00:00.120 --> 0:00:03.000 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:03.279 --> 0:00:05.880 My name is James Crumbie. I'm a senior editor at Bloomberg. 0:00:06.280 --> 0:00:09.840 Today's guests are Paula Seligson, a credit reporter for Bloomberg 0:00:09.880 --> 0:00:12.399 News in New York, and Rob Schiffman, who looks at 0:00:12.400 --> 0:00:15.840 the tech sector for Bloomberg Intelligence. It's been another very 0:00:15.880 --> 0:00:18.919 busy week, lots of excitement in global credit markets, which 0:00:18.960 --> 0:00:21.759 by some measures, are having the best January ever. I 0:00:21.760 --> 0:00:23.720 don't know what you make of this, but it all 0:00:23.760 --> 0:00:26.000 seems too much, too fast. Where does it all end. 0:00:26.480 --> 0:00:28.400 We'll get to that in a little bit, but before 0:00:28.440 --> 0:00:32.120 we do, I've got windmills on my mind. Of course, 0:00:32.400 --> 0:00:35.360 we all love sustainable energy. Everyone wants to save the planet. 0:00:35.360 --> 0:00:38.159 But did you read the wind turbines taller than the 0:00:38.159 --> 0:00:41.400 Statue of Liberty are falling over. There was a great 0:00:41.440 --> 0:00:44.159 Business Week story this week on that they set the 0:00:44.200 --> 0:00:46.879 scene out there in Oklahoma, a beautiful place. I used 0:00:46.880 --> 0:00:49.520 to live. There by the way, on a calm, sunny day, 0:00:49.560 --> 0:00:51.360 a man was feeding his cattle when he got the 0:00:51.360 --> 0:00:54.800 call from a local sheriff's dispatcher. A motorist reported that 0:00:54.840 --> 0:00:57.160 one of the huge turbines at a nearby wind farm 0:00:57.160 --> 0:01:01.840 had collapsed in dramatic fashion. The steel tower, which was 0:01:02.080 --> 0:01:04.280 hundreds of feet tall, was buckled in half, and the 0:01:04.319 --> 0:01:07.200 turbine blades, whose rotation took the machine higher than the 0:01:07.200 --> 0:01:09.919 Statue of Liberty, was splayed across the wheat fields below. 0:01:10.040 --> 0:01:12.120 What do you make of this? You know? Is it 0:01:12.200 --> 0:01:15.720 the end of sustainable energy? What about windmills? Who likes windmills? Here? 0:01:15.720 --> 0:01:18.120 What do you think, Paula, I'm just trying to imagine 0:01:18.160 --> 0:01:20.400 watching this thing fall straight down. I want to know 0:01:20.480 --> 0:01:22.240 the thud that it makes when it hits the ground. 0:01:23.080 --> 0:01:24.800 But yeah, I mean, I don't know. I hope they 0:01:24.880 --> 0:01:27.440 sorted out because I definitely want more wind energy. Personally, 0:01:27.920 --> 0:01:30.399 I think my biggest concern would be that the price 0:01:30.440 --> 0:01:31.920 of weed is going up and I have to pay 0:01:31.920 --> 0:01:35.280 more for my bagels. Possible A good angle, good angle. 0:01:35.520 --> 0:01:37.679 Don't get me started on ESG investment though, it's another 0:01:37.720 --> 0:01:42.040 topic for a different episode, I'm sure, But anyway. Paula Sellison, 0:01:42.160 --> 0:01:44.640 she's our ACE reporter in New York City covering all 0:01:44.680 --> 0:01:47.600 things credit. She's been behind some of the biggest scoops 0:01:47.600 --> 0:01:49.960 on your Bloomberg terminal over the last few years, and 0:01:50.000 --> 0:01:52.720 it's great to have you here in the studio. Thanks 0:01:52.720 --> 0:01:55.760 for having me. The latest big story from Paula. Well, 0:01:55.840 --> 0:01:58.720 it's a bit technical, but we're going to go into 0:01:58.760 --> 0:02:01.680 it and break it down. Feel free to interrupt anytime, 0:02:01.720 --> 0:02:05.240 Robbie if you have any questions. Here's the headline, fed 0:02:05.360 --> 0:02:10.720 up CLO buyers push managers to reject terms of libel switch. 0:02:11.600 --> 0:02:14.799 So let's start with the obvious one. What is a 0:02:14.880 --> 0:02:18.320 CLO and why do we care? That is a great question, 0:02:18.440 --> 0:02:20.720 and I am happy to be in a podcast where 0:02:20.720 --> 0:02:23.160 I can get pretty wonky because usually I can't get 0:02:23.200 --> 0:02:27.640 into this much detail normally. So CLO stands for collateralized 0:02:27.760 --> 0:02:31.799 loan obligation. That's a really fancy way of saying it's 0:02:31.800 --> 0:02:35.320 a structured product where people basically buy a bunch of 0:02:35.440 --> 0:02:39.640 really risky leverage loans, which is a form of corporate debt, 0:02:40.000 --> 0:02:42.320 and then they put it together in a big pool, 0:02:42.760 --> 0:02:45.040 and then they sell slices of it in the form 0:02:45.080 --> 0:02:48.600 of bonds in different tronches. And this could be triple 0:02:48.639 --> 0:02:51.400 A tronch which is very very safe, almost no chance 0:02:51.400 --> 0:02:54.079 of losing money, all the way down to double A 0:02:54.280 --> 0:02:57.240 and lower and then Eventually you get to the equity portion, 0:02:57.520 --> 0:03:00.359 which essentially gets what's left over in the structure at 0:03:00.360 --> 0:03:03.160 the end of each period. And you know, this is 0:03:03.280 --> 0:03:08.440 essentially a way to find It's a way. It's it's 0:03:08.440 --> 0:03:10.919 a lot of demand for leverage loans, so clos buy 0:03:11.000 --> 0:03:13.600 roughly two thirds or more of the leverage loan market, 0:03:13.880 --> 0:03:17.000 and so they also drive demand for buying leverage loans. 0:03:17.240 --> 0:03:19.680 It's a way. It sounds like a total casino here. 0:03:19.680 --> 0:03:22.000 You've lost me already. Is it like a CDO, the 0:03:22.040 --> 0:03:24.120 thing that blew up the financial system in two thousand 0:03:24.200 --> 0:03:26.400 and eight. I'm glad you asked that, because everyone in 0:03:26.440 --> 0:03:29.000 the CLO market hates that comparison, and they remind me 0:03:29.040 --> 0:03:32.240 of it all the time. Structurally, it is similar to 0:03:32.280 --> 0:03:34.800 a CDO with the tranches and things like that. But 0:03:34.920 --> 0:03:37.880 as participants in the space like to remind everyone, clos 0:03:37.960 --> 0:03:40.280 did not blow up. In fact, even though they are, 0:03:40.680 --> 0:03:44.240 you know, part they use leverage loans, which are risky, 0:03:44.400 --> 0:03:47.200 highly indebted companies that have borrowed money. But the way 0:03:47.200 --> 0:03:49.880 the loans are structured, they're what's called secured, which means 0:03:49.920 --> 0:03:52.320 there's a lot of assets backing the loans. So even 0:03:52.360 --> 0:03:55.080 if that company went bankrupt. This type of lenders should 0:03:55.120 --> 0:03:58.800 be made fairly whole of assuming everything goes well. So 0:03:59.040 --> 0:04:02.160 it's both risky also safe at the same time. So 0:04:02.400 --> 0:04:05.400 they buy leverage loans. They also sound really scary. What 0:04:05.760 --> 0:04:08.040 a leverage loans? Can you break that down for us? Yeah, So, 0:04:08.080 --> 0:04:10.640 if you think about sort of the universe of investing, 0:04:10.920 --> 0:04:13.200 there's equity and then there's debt, right, and so debt 0:04:13.280 --> 0:04:16.280 is split up pretty much by its ratings. Anything above 0:04:16.320 --> 0:04:19.599 a certain rating is considered investment grade, which is fairly safe, 0:04:19.880 --> 0:04:22.760 and anything below a certain rating is considered high yield 0:04:22.839 --> 0:04:25.839 or junk. And so within that space you have two 0:04:25.920 --> 0:04:29.560 types of debt. You have junk bonds and leverage loans. 0:04:29.760 --> 0:04:32.680 And so leverage loan just means it's a loan where 0:04:32.720 --> 0:04:34.920 it is borrowed by a company that is rated high 0:04:34.960 --> 0:04:38.200 yield by ratings agencies. And these distinctions are very important 0:04:38.240 --> 0:04:40.680 because the types of investors who buy each form of 0:04:40.720 --> 0:04:43.599 debt are very different often and it's sort of split 0:04:43.680 --> 0:04:46.200 up within a portfolio. You know, this is our sector 0:04:46.360 --> 0:04:49.120 that's buying just hiled bonds. This is our portfolio manager 0:04:49.160 --> 0:04:51.840 who's just buying investment grade bonds, and so leverage loans 0:04:51.880 --> 0:04:54.440 are just sort of part of this overall universe. One 0:04:54.520 --> 0:04:57.240 of these big loans made to companies are the companies 0:04:57.240 --> 0:04:59.560 that we've never heard of that are lurking in the shadows, 0:05:00.040 --> 0:05:04.560 the household names. It's usually not household names. The household 0:05:04.640 --> 0:05:07.240 names borrow with investment grade bonds and you've heard all 0:05:07.240 --> 0:05:10.440 of them before. You know, high yield rated companies can 0:05:10.560 --> 0:05:13.800 range from you know, some oil and gas companies to 0:05:14.080 --> 0:05:17.440 people who make you know, aftermarket auto parts. It's often 0:05:17.560 --> 0:05:20.480 a really key part of the world, but it's kind 0:05:20.480 --> 0:05:23.160 of the part that you don't notice day today. So 0:05:23.360 --> 0:05:25.640 thank you for that. I think it's becoming clear now. 0:05:25.720 --> 0:05:28.880 But going back to the headline, fed up clo buyers 0:05:28.920 --> 0:05:32.320 push managers to reject terms of libel switch. What's the 0:05:32.360 --> 0:05:35.400 situation with the managers pushing back? Why are they doing that? 0:05:35.400 --> 0:05:37.680 That's a great question. So I kind of have to 0:05:37.680 --> 0:05:39.800 take a step back to explain the libor switch to 0:05:39.839 --> 0:05:43.679 begin with. So libor, the London interbake offer rate, sorry, 0:05:43.760 --> 0:05:47.240 London Interbank Offered rate, is this key benchmark that was 0:05:47.320 --> 0:05:50.359 used across the world for many, many years. As the 0:05:50.360 --> 0:05:53.359 financial crisis unfolded, it was discovered that this was basically 0:05:53.400 --> 0:05:55.800 being fixed by a bunch of banks in London. It 0:05:55.880 --> 0:05:58.680 was a huge scandal and regulators across the globe decided 0:05:58.680 --> 0:06:00.640 they had to get rid of it. One of the 0:06:00.720 --> 0:06:03.560 key differences is as they've transitioned away from LIBOR, is 0:06:03.600 --> 0:06:06.160 that instead of it being one rate for the whole world, 0:06:06.400 --> 0:06:08.520 now each region has its own rate, and so the 0:06:08.560 --> 0:06:11.880 overall preferred replacement rate in the United States is for 0:06:12.000 --> 0:06:16.039 something called the secured Overnight Financing Rate or SOFUR. So 0:06:16.080 --> 0:06:18.880 we're in the midst of this transition. It's very complicated 0:06:18.920 --> 0:06:23.880 and very messy. So essentially everyone who is doing new 0:06:23.960 --> 0:06:26.680 deals had to stop using LIBOR at the beginning of 0:06:26.760 --> 0:06:30.159 twenty twenty two, but any existing deals have until the 0:06:30.200 --> 0:06:33.000 middle of twenty twenty three to make that switch. And 0:06:33.040 --> 0:06:35.520 we are in the very final stretch the last six 0:06:35.600 --> 0:06:38.400 months of this and the one point four trillion dollars 0:06:38.480 --> 0:06:42.160 US leverage loan market. Only about twenty five percent of 0:06:42.200 --> 0:06:43.919 these loans of switch so far, so we have about 0:06:43.920 --> 0:06:47.400 seventy five percent left now. Enter CLOS and what's going 0:06:47.400 --> 0:06:50.400 on there. So, as I mentioned before, Clos they are 0:06:50.520 --> 0:06:53.120 one of the biggest buyers of leverage loans, So what 0:06:53.240 --> 0:06:57.760 CLO managers are doing really impacts the entire leverage loan market. 0:06:58.160 --> 0:07:01.039 So within that you have the cloquity investor that's buying 0:07:01.040 --> 0:07:05.839 the riskiest tranche of clos And essentially there's this issue, 0:07:06.000 --> 0:07:08.760 which is that libor and sofur are not the same. 0:07:09.400 --> 0:07:12.920 SOFA typically prints consistently lower than libor. So if you 0:07:13.040 --> 0:07:17.120 just switched a loan from libor to sofur, the lenders 0:07:17.160 --> 0:07:20.760 who lend that money immediately lose money. It's only a 0:07:20.800 --> 0:07:23.040 few basis points. It depends on the day because all 0:07:23.040 --> 0:07:24.760 of this moves around. It could be you know, a 0:07:24.800 --> 0:07:28.000 point oh five percent, maybe point one percent, depending on 0:07:28.040 --> 0:07:30.000 what's going on, But that can add up a lot 0:07:30.040 --> 0:07:33.040 if you have a multimillion dollars portfolio of these assets. Right, 0:07:33.680 --> 0:07:37.000 So for CLO equity investors specifically, because they're getting the 0:07:37.080 --> 0:07:40.040 left over and what's left in the CLO after everyone 0:07:40.080 --> 0:07:42.800 else has been paid this interest, if there's a mismatch, 0:07:42.840 --> 0:07:44.600 it really hurts them and they can be on the 0:07:44.640 --> 0:07:47.320 line to lose millions of dollars. So it's all about 0:07:47.320 --> 0:07:50.920 the money. It's always about the money. Yeah, So basically 0:07:51.320 --> 0:07:54.720 CLO equity investors care because if they don't have what 0:07:54.760 --> 0:07:57.920 they consider a fair switch from Libor to sofur. They 0:07:57.920 --> 0:08:00.960 are the ones who lose money specifically. And so the 0:08:00.960 --> 0:08:04.080 big news that myself and my colleague Carmen Arroyo were 0:08:04.080 --> 0:08:07.120 able to break this week is that the Cello equity 0:08:07.160 --> 0:08:11.080 investors are actually organizing. So typically these markets are very 0:08:11.120 --> 0:08:13.800 you know, maybe you call your friend, maybe you instant 0:08:13.800 --> 0:08:17.960 message someone, but they're fairly unorganized and each actor is 0:08:17.960 --> 0:08:21.200 sort of acting on its own. But Eagle Point Credit 0:08:21.640 --> 0:08:25.920 specifically organized a call in early January to get a 0:08:25.920 --> 0:08:28.800 bunch of equity investors on the phone, and they all 0:08:28.880 --> 0:08:32.280 essentially discussed how they wanted a specific type of transition 0:08:32.320 --> 0:08:35.360 from libor to sover. They wanted this special rate that's 0:08:35.400 --> 0:08:38.319 the maximum rate they can get between the two benchmarks, 0:08:38.559 --> 0:08:41.640 and so they essentially said, okay, guys, we've talked about this. 0:08:41.960 --> 0:08:44.200 Now you should go to the Cello managers, the ones 0:08:44.240 --> 0:08:47.640 actually making these decisions, and ask them to ask for 0:08:47.679 --> 0:08:50.480 this highest version of this rate as these companies try 0:08:50.520 --> 0:08:54.000 to transition. Fascinating. Thank you for breaking that down. Clos 0:08:54.040 --> 0:08:56.200 leverage loans. Let's watch for more news on that, But 0:08:56.280 --> 0:09:01.240 before we go to Rob for a deep dive, into tech. 0:09:01.640 --> 0:09:04.480 Let's ask you, also, Paul It about Twitter, because you've 0:09:04.480 --> 0:09:06.920 been following that one very closely, and they have some 0:09:06.960 --> 0:09:09.160 money that they have to pay on some debt because 0:09:09.400 --> 0:09:12.720 Elon Musk spent billions buying the thing and then breaking 0:09:12.720 --> 0:09:15.120 it all apart. What's going on there? Yes, so the 0:09:15.160 --> 0:09:18.360 first deadline is coming up. Let's rewind for a second. 0:09:18.400 --> 0:09:21.920 When Elon Musk decided to acquire Twitter, he raised thirty 0:09:21.960 --> 0:09:24.720 three point five billion in equity commitments, but he also 0:09:24.960 --> 0:09:28.440 raised roughly twelve billion dollars of debt from a bunch 0:09:28.480 --> 0:09:31.200 of banks. And those banks actually had to fund all 0:09:31.200 --> 0:09:33.679 of that debt themselves because they weren't able to sell 0:09:33.720 --> 0:09:37.520 it to outside investors. So banks are the Twitter lenders 0:09:37.600 --> 0:09:40.920 right now, not like institutional asset managers like we normally see. 0:09:41.600 --> 0:09:45.080 And so you know, before Twitter's interest expense was less 0:09:45.080 --> 0:09:47.520 than one hundred million dollars a year. Now that Elon 0:09:47.640 --> 0:09:50.240 Musk added all this debt onto the company's balance sheet, 0:09:50.600 --> 0:09:53.480 it's annual interest expense is exceeding one point two billion 0:09:53.520 --> 0:09:57.160 dollars a year. So just think about how impactful that 0:09:57.280 --> 0:09:59.280 is for a company that wasn't making a ton of 0:09:59.280 --> 0:10:02.240 money to begin and so the way all this works 0:10:02.440 --> 0:10:05.719 is the first coupons should be coming due roughly three 0:10:05.760 --> 0:10:08.920 months after it closed, which should place it around this Friday. 0:10:09.559 --> 0:10:12.360 So Twitter will have to pay interest of roughly three 0:10:12.440 --> 0:10:15.040 hundred million dollars to a group of banks led by 0:10:15.040 --> 0:10:17.959 Morgan Stanley. There's been some questions are they going to 0:10:18.040 --> 0:10:21.040 pay it? Are they not going to pay it? I think? 0:10:21.320 --> 0:10:24.160 I mean, look, it's Elon Musk, so who knows. He 0:10:24.400 --> 0:10:26.200 is a wild card. He might do things that are 0:10:26.280 --> 0:10:29.200 very unexpected. But there's no real reason for him not 0:10:29.280 --> 0:10:32.240 to pay it at this point because if he did 0:10:32.240 --> 0:10:34.760 not pay this interest, or I should say, if Elon 0:10:34.800 --> 0:10:37.240 Musks not have Twitter pay this interest to the banks, 0:10:37.559 --> 0:10:40.280 then after some period of time, the banks could force 0:10:40.320 --> 0:10:42.720 a default which would force it into bankruptcy, and then 0:10:42.720 --> 0:10:45.800 the banks would probably end up owning Twitter. So really, 0:10:45.920 --> 0:10:48.560 unless it was some kind of strange negotiating tactic, there's 0:10:48.600 --> 0:10:51.160 no reason for Elon Musk to not have this interest 0:10:51.160 --> 0:10:53.480 paid unless he's willing to walk away from the company, 0:10:53.480 --> 0:10:55.720 which I don't think he's there yet. Do we think 0:10:55.760 --> 0:10:58.880 the banks want to own Twitter? I think they do 0:10:58.960 --> 0:11:00.800 not want to own Twitter. I think that they wish 0:11:00.840 --> 0:11:04.240 they could have sold this debt. Banks don't want to 0:11:04.280 --> 0:11:06.679 hold this type of debt. They want to sell it 0:11:06.720 --> 0:11:08.400 and move it off their books and just make a 0:11:08.520 --> 0:11:13.240 huge fee in the tune of multimillion dollars. So they 0:11:13.360 --> 0:11:15.160 want to move it. So I think what they probably 0:11:15.200 --> 0:11:18.439 most sincerely hope is that Elon Musk works a miracle, 0:11:18.640 --> 0:11:20.800 makes Twitter amazing, and then they can offload this debt 0:11:20.800 --> 0:11:23.000 in a few quarters. And the interesting thing is, yeah, 0:11:23.000 --> 0:11:28.760 I covered Twitter, and bondholders made out great. Bondholders had 0:11:28.800 --> 0:11:31.120 a one on one change of control, so not just 0:11:31.200 --> 0:11:34.520 equity holders got paid here, but original bondholders, legacy bond 0:11:34.520 --> 0:11:38.439 holders got paid. So the only ones really who are 0:11:38.520 --> 0:11:42.160 left holding the bag right now is Musk himself with 0:11:42.200 --> 0:11:45.920 all his equity exposure and the banks. And I agree. 0:11:46.040 --> 0:11:48.120 Banks never want to hold on to loans. They want 0:11:48.160 --> 0:11:50.199 to sell them as fast as I can. And if 0:11:50.200 --> 0:11:52.760 there was a bid for those loans right now, they'd 0:11:52.760 --> 0:11:56.080 be gone. Eventually, they'll reach a price where I think 0:11:56.200 --> 0:11:58.760 institutional investors will own them, but it's probably going to 0:11:58.800 --> 0:12:01.520 take a little while. Great story, and we'll be watching 0:12:01.520 --> 0:12:04.920 for your updates. Poor as we hit the deadline for 0:12:05.000 --> 0:12:07.640 repayments and Also, as you said, it's Elon Musk. Anything 0:12:07.640 --> 0:12:10.520 could happen, so it's gonna be exciting times. So let's 0:12:10.840 --> 0:12:16.160 switch gears now, rub rub Shiftman, bloom Bug Intelligence. You 0:12:16.280 --> 0:12:19.439 specialize in the tech sector and that's really where a 0:12:19.480 --> 0:12:22.280 lot of the drama is right now. Um, you know, 0:12:22.400 --> 0:12:25.920 big tech stock and bond returns with significantly negative last year. 0:12:26.920 --> 0:12:29.600 But we're going through earnings. Now what do we expect 0:12:29.720 --> 0:12:33.160 from that? And you know, are the fundamentals deteriorating? And 0:12:33.720 --> 0:12:35.360 you know, what do we expect for this year? What's 0:12:35.360 --> 0:12:38.559 the outlook? Yeah, my world is so much easier than Paulus. 0:12:38.640 --> 0:12:41.280 You know, my companies they sell a lot of gadgets, 0:12:41.320 --> 0:12:43.880 make a lot of money. Stocks go up, bonds go up, 0:12:44.120 --> 0:12:46.640 they sell a lot less stuff, and you have the reverse. 0:12:46.960 --> 0:12:52.000 The reality is there's a huge economy between technology equity 0:12:52.040 --> 0:12:56.640 performance and bond performance. It looks like last year that 0:12:56.840 --> 0:12:59.880 returns were similar. You know, in general big tech was down, 0:13:00.040 --> 0:13:03.520 say twenty five percent, and tech high gratee tech bonds 0:13:03.559 --> 0:13:06.400 were also down twenty to twenty five percent. But the 0:13:06.440 --> 0:13:10.760 reality is mom and pop might be buying Apple or 0:13:10.800 --> 0:13:14.120 Microsoft or Google, but they're not buying their bonds. Institutional 0:13:14.120 --> 0:13:17.120 investors are buying their bonds, and rather than just just 0:13:17.320 --> 0:13:23.800 outright taking rate risk and credit risk, institutional investors hedge. 0:13:24.120 --> 0:13:27.920 So excess returns on tech last year were really like 0:13:28.040 --> 0:13:31.000 three hundred basis points, you know, not that much of 0:13:31.000 --> 0:13:33.719 a loss. The vast majority of loss for bonds or 0:13:35.840 --> 0:13:38.720 we're affected by rising rates. So what do we have 0:13:38.760 --> 0:13:41.080 as we walk into the beginning of this year. We 0:13:41.160 --> 0:13:43.720 have rates that have stabilized to gone down, spreads that 0:13:43.760 --> 0:13:47.200 have stabilized to gone down, and we've got positive returns 0:13:47.240 --> 0:13:50.080 across the board. Lo and behold. We walk into early 0:13:50.120 --> 0:13:54.040 earning season with hopes that the worst is gone, and 0:13:54.120 --> 0:13:58.280 you have Microsoft in Texas Instruments report both huge bellweathers. Right, 0:13:58.679 --> 0:14:04.079 Microsoft has this massive cloud business and they're saying that 0:14:04.400 --> 0:14:07.600 it's going to continue to decelerate next quarter. Texas Centuriance 0:14:08.200 --> 0:14:11.120 is an analog semiconductor business, which means that pretty much 0:14:12.000 --> 0:14:16.439 they sell to every business incorporation that provides any gadget 0:14:16.720 --> 0:14:20.400 that's not a phone or a PC, but pretty much 0:14:20.480 --> 0:14:23.520 everything else. And their business is down as well. So 0:14:23.640 --> 0:14:26.920 it sort of bodes poorly for Industrial America. It boats 0:14:27.000 --> 0:14:32.560 poorly for big tech, whether it's cloud businesses like Amazon 0:14:33.120 --> 0:14:36.960 or Alphabet, and it also continues to bode poorly for 0:14:37.360 --> 0:14:42.040 semiconductors across the board. That being said, credit quality for 0:14:42.160 --> 0:14:48.080 big tech is dramatically better than people perceive equity valuations. 0:14:48.080 --> 0:14:52.160 Equity valuations might be down twenty five thirty five percent, 0:14:52.640 --> 0:14:55.840 but credit quality across the board last year really didn't change, 0:14:56.800 --> 0:14:59.040 and in fact, in many cases it actually got better. 0:14:59.640 --> 0:15:02.240 And I I think that's going to be the model 0:15:02.520 --> 0:15:05.520 for this year, is that we're going to worry when 0:15:05.520 --> 0:15:09.520 we really hit the bottom, and whenever we do, that'll 0:15:09.560 --> 0:15:12.360 define when we can see a long standing rally. But 0:15:12.440 --> 0:15:15.480 in the meantime, tech credit is a place for people 0:15:15.560 --> 0:15:18.920 to put their money, hide, tuck it under a pillow, 0:15:19.160 --> 0:15:21.440 and worry about other things. We're not worried about the 0:15:21.440 --> 0:15:23.120 supply chain though, because that was a really big issue 0:15:23.200 --> 0:15:25.560 last year and there are problems with the China and 0:15:25.600 --> 0:15:27.400 all sorts of other issues around the world. I mean, 0:15:27.840 --> 0:15:31.200 how does that affect this sector. Well, listen, bond folks 0:15:31.320 --> 0:15:34.160 worry about everything, you know. I worry about whether or 0:15:34.200 --> 0:15:35.640 notf the train is going to be on time, or 0:15:35.680 --> 0:15:38.120 how much snows there is going to be tomorrow. So yeah, 0:15:38.120 --> 0:15:43.160 there's Listen, there's lots of macro headwinds, whether it's wars, 0:15:43.600 --> 0:15:48.440 whether it's COVID, whether it's supply, whether it's demand. We're 0:15:48.480 --> 0:15:51.880 always concerned that. Being said, the margin of error for 0:15:52.080 --> 0:15:56.840 big tech is enormous. Like I tend to wonder when 0:15:56.960 --> 0:15:59.920 when we really think about credit quality, does it matter 0:16:00.200 --> 0:16:03.480 if Microsoft has sixty billion of free cash flow this 0:16:03.560 --> 0:16:07.200 year or fifty billion. You know, it does matter, But 0:16:07.240 --> 0:16:09.920 it matters more to the equity holder because they're going 0:16:09.960 --> 0:16:12.000 to get less returned. The bond holder is still going 0:16:12.040 --> 0:16:13.960 to get their coupon. This is not a question of 0:16:14.480 --> 0:16:16.800 Twitter and whether Musk is going to make a coupon payment. 0:16:17.040 --> 0:16:20.360 The vast majority of tech names and large internet names 0:16:20.640 --> 0:16:24.560 our investment grade have tens if not over one hundred 0:16:24.560 --> 0:16:28.960 billion dollars of cash generate tens of billion dollars of 0:16:29.040 --> 0:16:31.560 free cash flow. I do think this is going to 0:16:31.560 --> 0:16:34.960 be a continued down earning cycle. I think revenues are 0:16:35.000 --> 0:16:37.080 going to continue to trend downwards. And what we've seen 0:16:37.120 --> 0:16:40.160 to start off earning season is that we have not 0:16:40.240 --> 0:16:45.160 reached the bottom. Nobody is forecasting yet. When we've seen 0:16:45.200 --> 0:16:48.720 an inflection point in revenues and cash flows. So headwinds 0:16:48.800 --> 0:16:50.600 are going to continue to be out there, but I 0:16:50.640 --> 0:16:55.680 think incrementally relative to the concerns that people had last year, 0:16:56.160 --> 0:16:59.680 the vast majority of the bad news is already baked 0:16:59.720 --> 0:17:03.000 into most of these names. Again, I'm not an equity guy, 0:17:03.120 --> 0:17:05.400 but I think it's mostly from the equity side as 0:17:05.400 --> 0:17:07.200 well as from the credit side. But as you say, 0:17:07.200 --> 0:17:09.240 they've got billions on their balance sheet, why do they 0:17:09.280 --> 0:17:11.720 keep issuing new debt and they issue about one hundred 0:17:11.720 --> 0:17:13.399 billion dollars a year. Yeah, we get to ask that 0:17:13.480 --> 0:17:15.840 question all the time. And you know, part of it 0:17:15.920 --> 0:17:18.719 is weighted average cost of capital issue. You know, if 0:17:18.760 --> 0:17:20.960 your cost of equity is ten percent and your weighted 0:17:21.000 --> 0:17:23.399 average cost of debt is only one percent, you know, 0:17:23.520 --> 0:17:26.200 economics just say, let's issue more debt that's really done 0:17:26.200 --> 0:17:29.320 in a little bit of a lower rate, higher valuation 0:17:29.359 --> 0:17:32.760 and environment. You know, one of the main reasons that 0:17:33.720 --> 0:17:39.120 big tech, whether it's Apple, Microsoft, Google, Amazon, or now 0:17:39.240 --> 0:17:43.040 Meta has come to the market is because they want 0:17:43.119 --> 0:17:47.280 enhanced financial flexibility to buy back stock. We are seeing 0:17:47.320 --> 0:17:53.280 just you know, massive record breaking stock and dividend payments. 0:17:53.600 --> 0:17:55.160 I don't think that's going to end. You know, when 0:17:55.200 --> 0:17:58.280 you see valuations go down, you buy back more. You 0:17:58.280 --> 0:18:01.000 don't need to be more conservative. Apples sitting one hundred 0:18:01.040 --> 0:18:03.920 and seventy billion dollars of cash, they've got nothing to buy. 0:18:04.320 --> 0:18:06.919 What do you do with the money? You give it 0:18:06.920 --> 0:18:09.080 back to shareholders, and you give it back in size. 0:18:09.240 --> 0:18:11.760 You know, we've projected for a name like Apple, over 0:18:11.800 --> 0:18:13.480 the next couple of years, they're going to get to 0:18:13.560 --> 0:18:16.400 a point that in the past, in the past decade, 0:18:16.480 --> 0:18:19.159 they're gonna have given back a trillion dollars of cash 0:18:19.520 --> 0:18:23.160 in both share buybacks and dividends. So you borrow more 0:18:23.440 --> 0:18:25.480 and give it to shareholders, and that's, you know, all 0:18:25.400 --> 0:18:28.520 a risk that bondholders always have to take. I think 0:18:28.520 --> 0:18:30.680 we're going to see more of that. There's little need 0:18:30.760 --> 0:18:33.040 for M and A financing, though there are a couple 0:18:33.119 --> 0:18:35.080 deals out there that need to be funded. You know. 0:18:35.840 --> 0:18:40.440 One of the tails is like is Microsoft is trying 0:18:40.440 --> 0:18:42.840 to buy Activation for sixty nine billion dollars of cash. 0:18:43.080 --> 0:18:45.840 They don't have a bank loan, they're not relying on 0:18:45.880 --> 0:18:49.680 the capital markets for that. They're sitting on close to 0:18:49.720 --> 0:18:51.640 one hundred billion dollars of cash. They just write the check, 0:18:51.920 --> 0:18:54.840 But what do they do afterwards? To me, they write 0:18:54.840 --> 0:18:56.600 the check, and then they go out and issue fifty 0:18:56.600 --> 0:18:59.120 billion of bonds and reload on cash to either give 0:18:59.160 --> 0:19:02.560 back to shaholders or do some form of other M 0:19:02.640 --> 0:19:05.440 and A. In some of the big tech space, you know, 0:19:05.480 --> 0:19:08.639 if you're an alphabet or a meta or even an Apple, 0:19:08.920 --> 0:19:12.040 the government is going to try to block everything, so 0:19:12.119 --> 0:19:14.560 it's hard to write a big enough check for a 0:19:14.600 --> 0:19:17.000 transaction that's going to put your balance sheet at risk. 0:19:17.240 --> 0:19:19.320 So I think we continue to see this pattern, so 0:19:19.440 --> 0:19:22.800 it's going to be pure opportunistic financing. I think as 0:19:23.320 --> 0:19:28.320 soon as rates start going down again, even though companies 0:19:28.359 --> 0:19:32.440 don't need it, tech borrowing is going to click back 0:19:32.480 --> 0:19:35.840 over that hundred billion dollars annually that we've seen over 0:19:35.880 --> 0:19:39.560 the past decade. Are there any particular issues or parts 0:19:39.640 --> 0:19:41.560 of the tech sector that you like and you think 0:19:41.600 --> 0:19:45.280 we'll outperform over the next twelve months. Yeah, listen, I 0:19:45.280 --> 0:19:48.880 think tech overall is going to outperform, particularly high quality tech, 0:19:49.200 --> 0:19:51.160 And I think you want to take a Barbell approach. 0:19:51.400 --> 0:19:53.560 You know that there's there's sort of two ways to 0:19:53.600 --> 0:19:57.160 play it. Super high quality names that are really liquid, 0:19:57.280 --> 0:20:02.640 they trade tight, but have limited volatility. That Apple Microsoft, Google, 0:20:03.400 --> 0:20:06.720 and even Amazon Amazons is a ton of debt. They've 0:20:06.720 --> 0:20:09.520 had so much in terms of warnings of their business, 0:20:09.840 --> 0:20:13.159 cash flying out the door, and bonds barely move. So 0:20:13.200 --> 0:20:15.040 I think you move up the quality for names like that, 0:20:15.320 --> 0:20:17.520 and then you move down in quality to the triple 0:20:17.560 --> 0:20:20.919 B space where names have either levered up for M 0:20:20.920 --> 0:20:23.520 and A or buybacks, but know that they've reached the 0:20:23.600 --> 0:20:26.880 point where they can't put their their investment grade ratings 0:20:26.920 --> 0:20:30.520 at risk. And that's a broad calm or an intel. 0:20:31.400 --> 0:20:36.919 You know, massive balance sheets, large transactions that that's levered up. 0:20:36.960 --> 0:20:41.880 That's levered them up. They've borrowed a ton, but spreads 0:20:41.960 --> 0:20:45.760 are now much wider than other triple B industrials. Yet 0:20:45.960 --> 0:20:50.320 fundamentals suggest that they can deliver pretty rapidly. And you 0:20:50.359 --> 0:20:54.040 know the benefit that you have from buying large triple 0:20:54.160 --> 0:20:57.479 B tech that's been aggressive is that if you have 0:20:57.600 --> 0:21:00.920 fifty billion, seventy five billion, one hundred billion dollars a debt, 0:21:01.400 --> 0:21:04.640 you cannot be a junkraded company because you cannot stay 0:21:04.640 --> 0:21:07.680 in business. You're seeing that with Twitter on a much 0:21:07.720 --> 0:21:11.120