Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller.
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Speaker 2: and Bloomberg experts, along with essential market moven news.
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Speaker 1: All right, I'm reading speaking of Bloomberg Intelligence, I'm reading
Speaker 1: some research here. It says most commodities are melting except
Speaker 1: for gold. What stops it? Let's go right to the
Speaker 1: person who wrote this stuff. Mike mcclooney covers all the
Speaker 1: commodity stuff. He's a senior macro strategist for Bloomberg Intelligence. Mike,
Speaker 1: what are you thinking about these days in terms of
Speaker 1: the commodity space? What are you telling your clients? What
Speaker 1: are the conversations you're having with your clients about commodities?
Speaker 3: Well, hello, Paul, I appreciate you reading that headline because
Speaker 3: it's something I like to re iterate periodically, particularly when
Speaker 3: it's relevant. Is typically historically over time, gold is the
Speaker 3: best performing commodity now, basically because it's not really a commodity.
Speaker 3: It's it's a store of value. It's a metal. I mean,
Speaker 3: you can store it on your body in terms of jewelry.
Speaker 3: But certainly lately it's been the key case. It's the
Speaker 3: best performing command this year. It's up ten percent, and
Speaker 3: the average, the Bloomberg Commodi Index this year is down
Speaker 3: sixteen percent. And the key thing I like to ask
Speaker 3: myself is those are bodies in motion. And as a strategist,
Speaker 3: I say, okay, is it going to stay the same
Speaker 3: reverse or accelerate. I think it's more likely accelerate, particularly
Speaker 3: at some point if we get to a point where
Speaker 3: the FED pivots, it's going to happen. But that's the
Speaker 3: bottom line is we had this massive pump and commandis
Speaker 3: last year and they're proving what they always do. Elastic
Speaker 3: supply demand makes commandies their worst enemy. It's the higher
Speaker 3: priced cure. As a farmers say, well, that's.
Speaker 4: Interesting, though, I feel like we're a far bit away
Speaker 4: at least if you listen to J Powell on Friday
Speaker 4: from when we see the FED reverse course, I mean,
Speaker 4: talk me through the timeline there. When would you expect
Speaker 4: goal to start showing some outporfore? I mean, I guess
Speaker 4: it is showing out performance.
Speaker 3: Right, that's the point. Goal's looking ahead, and that's a
Speaker 3: key point. They will probably not be cutting rates anytime soon,
Speaker 3: particularly in my view, until the stock market tells them to.
Speaker 3: And that's part of the lose lose for risk ads.
Speaker 3: There's then a high high connection and correlation between stock
Speaker 3: market bouncing this year, all this massive fiscal stimus and
Speaker 3: the FED hiking another one hundred basis points. They are
Speaker 3: still on that hiking trajectory. Despite then you look over
Speaker 3: a commodities, what's the number one source of demand historically
Speaker 3: at least the last twenty years or so, is China
Speaker 3: demand estimate revisions heading lower in China are just getting started,
Speaker 3: so their key customers, their key export customers Europe, US
Speaker 3: and Europe are in these early days of just getting
Speaker 3: showing signs of what you expect from high interest rates jumping.
Speaker 3: And then of course the leader of China, President z
Speaker 3: cozing up with Putin right before the war, so we
Speaker 3: see that tilt just get us out, and so that
Speaker 3: to me is this is early days. So I look
Speaker 3: at this is what's normally is potentially a very bear
Speaker 3: scenario for commodities, and you look at yourself so what's
Speaker 3: going to change is typically also you need a week dollar,
Speaker 3: and for the dollar to get week, we have a
Speaker 3: major issue there. It's the hardest, you know, most expensive
Speaker 3: to short commodity currency in the planet, particularly if you
Speaker 3: look very compared versus the top top top commodities and
Speaker 3: I'm sorry economies in the planet China, Japan, and Germany,
Speaker 3: US is just a much higher rate. So that to
Speaker 3: me is basically a train wreck heading for commodities and
Speaker 3: for deflation.
Speaker 1: So, Mike, I know you come from the land of
Speaker 1: the great American farmer. I wonder how the American farmers
Speaker 1: doing here. I'm looking at corn down thirty percent year
Speaker 1: to date, soybeans down eight percent year to date, wheat
Speaker 1: down twenty six percent year to date. How is the
Speaker 1: farmer doing these days?
Speaker 3: They are crushing it, so it will price us down
Speaker 3: so much, oh well down from where they were. So
Speaker 3: corn right now the number one, as I'm going back
Speaker 3: next to next week and lesson I learned going and
Speaker 3: raised and having owned the farm in the corn belt,
Speaker 3: we plant soybe so we can plant corn. We plant
Speaker 3: corn because that's what we do and that's where we
Speaker 3: make our Money's world's most significant commoditybeans the plant corn
Speaker 3: that fit. It's a rotation because soybeans add nitrogen and
Speaker 3: fertilizer to the soil and they're a legome. Corn takes
Speaker 3: it away. It's very nitro and expensive. It's a grass.
Speaker 3: It's just that rotation that the corn belt has crushed.
Speaker 3: But the bottom line is, partly because of this war
Speaker 3: in Europe, you've had prices well above their cost of
Speaker 3: productions and the cost of costs of production. For instance,
Speaker 3: anhydrous ammonia is collapsing, and so we're making a lot
Speaker 3: of money. It's just called profits. What a profits mean
Speaker 3: for farmers production. So this year is probably gonna be
Speaker 3: close to the biggest production year ever for corn, just
Speaker 3: in the weather is not so great. And also what
Speaker 3: did they do with corn and soybeans in Argentina and
Speaker 3: I'm sorry in South America, but most noted in Brazil
Speaker 3: record production I mean off the charts. So this is
Speaker 3: just a normal lasticity of supplying demand in the area
Speaker 3: of the commodites. We can bring on that supplying one
Speaker 3: year and the bottom line is are making a lot
Speaker 3: of money, and that means more supply, more production, and
Speaker 3: it means typically lower prices. But I'll just end with this.
Speaker 3: September is the worst monthly year for grains, typically buys
Speaker 3: a harvest, and that's how futures came about because it
Speaker 3: needed to start hedging, most knownly when they all try
Speaker 3: to sell at the same time.
Speaker 4: And I've been looking at it. I've been I've been
Speaker 4: pulling out, pulling back a little bit our our commodity
Speaker 4: price for corn, and we're levels where we were in
Speaker 4: late twenty twenty, but those are substantially higher than where
Speaker 4: we were in previous to that. Talk me through, Mike's
Speaker 4: what's happening in wheat, because you know we have all
Speaker 4: this stuff with a grain deal in Turkey. Very interesting
Speaker 4: to see where you think this is going.
Speaker 3: Also, so the significance of wheat is that was at
Speaker 3: the epicenter of what happened with Russia's I'm sorry, President
Speaker 3: Putin's invasion of Ukraine. But it's been in a straight
Speaker 3: downward trajectory since reaching that high last year, right around
Speaker 3: thirteen dollars a bushel. But typically what we does now
Speaker 3: it's back to a level that was kind of en
Speaker 3: during before. Because what happens is you can bring on
Speaker 3: rate supply rapidly, and it's the most widely grown agricultural
Speaker 3: crop on almost every country will can grow wheat. Now,
Speaker 3: Ukraine was a big exporter US we explored over fifty
Speaker 3: five percent of our week. We grow less of it
Speaker 3: every day because it's so much easier to produce. It's
Speaker 3: basically considered a weed, and it's one commodity you never
Speaker 3: want to be long after it goes up. It's just
Speaker 3: the way it works because you're bringing on so we
Speaker 3: it's been a good indicator. Right now it's around six
Speaker 3: dollars a bushel, and I view it's all going to
Speaker 3: continue to trend lower unless we get some kind of
Speaker 3: surprise out of that war, which means hopefully not but
Speaker 3: something nuclear could do. But there's this is a situation
Speaker 3: similar to World War two for the grain, for the
Speaker 3: grain belt, corn belt which where I'm from, and that
Speaker 3: is prices and the war in Europe kept prices rather high,
Speaker 3: which meant US did very well, created more and more
Speaker 3: production and profited, and then it all collapsed when the
Speaker 3: war ended and we had way too much supply. That
Speaker 3: is the risk, and that's markets are looking ahead to.
Speaker 5: That so real quick.
Speaker 1: WTI crude oil going to switch gears here eighty dollars
Speaker 1: or barrel seems to found a little bit of a
Speaker 1: home here for a while.
Speaker 3: Yes, it's happy, it's consolidating. Well, it's the same prices.
Speaker 3: I'll put this back into history. This price here was
Speaker 3: first traded in two thousand and seven. Imagine we said
Speaker 3: that about the stock market. Yet over that time period
Speaker 3: the PPIs of fifty percent. In terms of gold, here's
Speaker 3: one for you. It takes point zero four to two
Speaker 3: ounces of gold to buy one barrel of cruel. That's
Speaker 3: the same price as nineteen thirty one. Cruel is the
Speaker 3: world's most auto correlated acid and has a lot of
Speaker 3: reason to continue trade lower after that big pump last year.
Speaker 3: Fifteen percent of all sales of evs and the world
Speaker 3: our automobiles are evs. And then course that supply out
Speaker 3: of the US. The biggest thing that's pressured crude all
Speaker 3: the last at least almost fifteen years is the US.
Speaker 3: We just create much more than we need, and with
Speaker 3: Canada are surplus every day. It's about four million barrels
Speaker 3: a day of lick with fuels. So we can spell
Speaker 3: up the spr that's cheating Pasolium reserve in just a
Speaker 3: few months.
Speaker 1: Interesting, all right, Mike always learned something with you. You put
Speaker 1: in soybeans the ducorn I learned that at That's new
Speaker 1: Mike mcglohone's senior macro strategist and Bloomberg's resident a farmer
Speaker 1: for Bloomberg Intelligence.
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Speaker 1: The I field market looks like it might be heating
Speaker 1: up a little bit. Had a couple of filings late
Speaker 1: last week arm Holdings, the chip maker, and then the
Speaker 1: grocery delivery company Instacart.
Speaker 5: So we want to talk about that deal.
Speaker 1: Brian Lynch joints as she's head of market insight at
Speaker 1: Equity Zen. She joins us here, so brand talked to
Speaker 1: us about Instacart here. What do we learn from their
Speaker 1: IPO filing last week?
Speaker 7: Yeah, thanks for having me. I think Instacart really painted
Speaker 7: a picture in that file of what companies are going
Speaker 7: to need to show if they want to have potentially
Speaker 7: a successful IPO. So this is a company that is growing.
Speaker 7: They grew transaction revenue thirty nine percent year over year.
Speaker 7: They're profitable with fifteen percent operating margins, which a lot
Speaker 7: of other players in the gig economy space that are public,
Speaker 7: like uber lyft Dash, you know, they all are not
Speaker 7: presenting profitability yet. And this is both a brand that
Speaker 7: people recognize and a business model that people know, so
Speaker 7: definitely a strong one that could potentially open up the
Speaker 7: IPO market for others.
Speaker 8: Well.
Speaker 4: The interesting bit as well to me, and we were
Speaker 4: talking with this about this with our equity reporter Bailey
Speaker 4: Lipshits earlier, is that this company had been valued much
Speaker 4: much higher as of twenty twenty one, I believe thirty
Speaker 4: nine billion dollars according to pitchbook, And now you know
Speaker 4: the valuation here is going to be maybe seventy percent less.
Speaker 4: Talk to me about how investors can I get comfortable
Speaker 4: allowing this company or going along with the company's plans
Speaker 4: to ibo here. How does this change the dialogue between
Speaker 4: the company and its existing investors.
Speaker 7: Sure so, Instacart has already been priming its investors about this.
Speaker 7: So while they did raise that thirty nine billion dollar
Speaker 7: round in twenty twenty one, their internal valuations have gone
Speaker 7: as low as ten billion dollars now closer to thirteen billion.
Speaker 7: So this is for the equity that they're issuing to
Speaker 7: new employees or you know, new stock grants. That's the
Speaker 7: valuation that they've given themselves. So internally at least they've
Speaker 7: accepted that haircut, and I think that's ultimately the tough
Speaker 7: pill that a lot of these venture backed companies are
Speaker 7: going to have to swallow. As we raised money at
Speaker 7: a crazy valuation in twenty twenty one, it's not where
Speaker 7: the market is anymore. And if we're going to raise
Speaker 7: capital and either the private or public markets, it's most
Speaker 7: likely going to be at a discount. And I think
Speaker 7: investors understand that as well, just given where multiples are.
Speaker 7: With a case of instacart, you have Dash as a
Speaker 7: public market competitor. That's a pretty good comp that helps
Speaker 7: from a valuation perspective.
Speaker 1: So speaking of DoorDash brand, I mean this has become
Speaker 1: a crowded space really since the pandemic, as this market's
Speaker 1: really developed and evolved. Where does instacart kind of position
Speaker 1: itself in terms of its competition, whether it is DoorDash
Speaker 1: or Uber Eats or Amazon and all the type of thing.
Speaker 7: Yeah, so they're by far the market leader. Both uber
Speaker 7: and DoorDash have less than one percent of the grocery market,
Speaker 7: and it's a market that they're aggressively pursuing, but they
Speaker 7: still are not big players in it. When you look
Speaker 7: at all of the grocery players, instackcart has partnerships with
Speaker 7: over eighty five percent of them, and this is a
Speaker 7: one point one trillion dollar market. Largest retail market is grocery,
Speaker 7: so it's a huge market where they are already the leaders.
Speaker 7: So there is a lot of competition, but they are
Speaker 7: one foot ahead. But to your point, it's not just
Speaker 7: these other kind of gig economy players they're up against.
Speaker 7: They're up against Amazon Fresh, They're up against Walmart, Grocery
Speaker 7: and other players that you have a lot more resources
Speaker 7: just from being bigger companies. So there is a lot
Speaker 7: of competition.
Speaker 4: Yeah, does that competition scare would be investors in this
Speaker 4: space at all? Because you know, you think of Amazon
Speaker 4: coming into any space and it's just sort of you know,
Speaker 4: that has the potential to be transformative, even if they've
Speaker 4: struggled a little bit with their with expanding their grocery footprint.
Speaker 7: Yeah, so they got a strong vote of confidence by Pepsi,
Speaker 7: who's investing one hundred and seventy five million in this
Speaker 7: IPO and a lot of the thesis or you know,
Speaker 7: the bulk that they see is around the advertising piece
Speaker 7: of instacarts business. So about thirty percent of their revenue
Speaker 7: comes from advertising. So when they highlight different products you know,
Speaker 7: on their marketplace to users, and this actually helps diversify
Speaker 7: their revenue stream in ways that you know, some of
Speaker 7: these other players haven't done yet. And it's also the
Speaker 7: piece of their business that is driving their profitability. So
Speaker 7: that's kind of a unique or you know, a strong
Speaker 7: point that they have now that investors have found compelling.
Speaker 1: Growth has slowed a little bit for this company. Is
Speaker 1: that just a post pandemic kind of evening out of
Speaker 1: this marketplace in terms of number of subscribers in terms
Speaker 1: of that metric.
Speaker 7: Yeah, in terms of I would say they haven't saturated
Speaker 7: the market fully, but you know, they did see such
Speaker 7: growth during the pandemic that it's probably more about activation.
Speaker 7: So of these customers you have who have used instacart,
Speaker 7: how do you get people, you know, more captive on
Speaker 7: the platform. They haven't admitted and understand that it's not
Speaker 7: going to be onlinely for every customer. People will still
Speaker 7: be going to stores. So it's more about you know,
Speaker 7: activating those customers and then just improving their margins. You know,
Speaker 7: amongst those who are transacting, so they have grown revenue,
Speaker 7: They've grown grown average cart size over the same period,
Speaker 7: So even if their customer base isn't growing, you know,
Speaker 7: their revenue is growing.
Speaker 4: We saw as well, filing by ARM for its megalistic
Speaker 4: I believe it was a filing, but we uh, what
Speaker 4: threads are there here for you that you're starting to
Speaker 4: see evolve in the the IPO space, because I think
Speaker 4: there was a bit, a fair bit of hesitancy for
Speaker 4: a while, just given what had happened to IPOs in
Speaker 4: twenty twenty one, and now maybe we were turning around.
Speaker 7: It looks like we're starting to turn around. This year
Speaker 7: has been the worst year for IPOs since two thousand
Speaker 7: and nine. We really haven't seen that many blockbuster names
Speaker 7: hit the market, and Instacart and ARM those will be
Speaker 7: the largest IPOs in the US since Rivian in twenty
Speaker 7: twenty one, So definitely starting to signify this turning tide,
Speaker 7: and ultimately you have over fourteen hundred unicorn tech companies
Speaker 7: sitting in the private markets, many of who have been
Speaker 7: waiting for the right opportunity to have an exit. Their
Speaker 7: investors are ready for an exit. Their employees who maybe
Speaker 7: have got in some liquidity but are looking for you know,
Speaker 7: broader liquidity, are looking for an exit. And I think
Speaker 7: the fact that you know, while there's been some recent
Speaker 7: market volatility, you have the nastac up thirty percent, You've
Speaker 7: seen a few successful IPOs though not tech ipo is
Speaker 7: like Kava oddity and can you hit the market. People
Speaker 7: are feeling a little bit more comfortable, like this may
Speaker 7: be the time if they're looking to exit this year.
Speaker 1: I think for a lot of investers, I think for me,
Speaker 1: the thing that jumped out of me is, as Simone
Speaker 1: was mentioning earlier, the dramatic reduction in valuation. I think
Speaker 1: that's kind of been kind of a gating issue for
Speaker 1: a lot of these companies not tapping the public markets
Speaker 1: because they didn't want to take that big write down
Speaker 1: on valuation. Is the expectation that maybe Instacartal maybe opened
Speaker 1: the way for more companies to kind of bite the
Speaker 1: bullet if you will.
Speaker 7: Absolutely, I think Instacart doing this and kind of taking
Speaker 7: it on the chin is going to open the door
Speaker 7: for others who realize it will become less taboo. Essentially, as
Speaker 7: more companies accept these valuation right downs, it becomes less
Speaker 7: of you know, a negative and just more reflection of
Speaker 7: how multiples have cracked. So I do think that they
Speaker 7: will make it easier for other companies doing this as well.
Speaker 7: You know, Klavio is another company, a marketing automation platform
Speaker 7: that also filed their S one on Friday. Got a
Speaker 7: little lost in the Instacart news, but this is a
Speaker 7: company that raised at a nine and a half billion
Speaker 7: dollar valuation twenty twenty one, so they are likely to
Speaker 7: be one that is you know, trading down from those
Speaker 7: levels as well. So it's just kind of a reality
Speaker 7: for where we are in the market.
Speaker 1: All right, Brian, thanks so much for joining us. I
Speaker 1: really appreciate getting your thoughts there. We're getting some IPO
Speaker 1: filing starting to hit the tape. Maybe get a little
Speaker 1: bit of a action in the fall here with the
Speaker 1: IPO market Brand Lynch, head of market insight at Equity
Speaker 1: Zen and again, you like to think maybe we're going
Speaker 1: get a little bit of deal activity once everybody comes
Speaker 1: back from the summer.
Speaker 4: Yeah, i mean busy Friday, even though even though Klavio
Speaker 4: is not quite as large a company and likely will
Speaker 4: not be quite as large a company when Instacart.
Speaker 1: Yeah, Instacart, you know, it's going to be a pretty
Speaker 1: big transaction. We're going to have all the big investment banks.
Speaker 1: So this deal is being led by Goldman Sachs, so
Speaker 1: it'll be certainly a deal that people will pay attention to.
Speaker 1: And there are some comps out there, as brand was mentioning,
Speaker 1: so see how that plays out.
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Speaker 5: I'm looking.
Speaker 1: I mean, we're talking about Vinfest. You know what a
Speaker 1: crazy name that is. Story that is the exact opposite,
Speaker 1: might be Minnesota mining and manufacturing three m. You're talking
Speaker 1: industrial heartland, been around forever. I'm looking at this stock
Speaker 1: over the last five years, it's down ten percent on
Speaker 1: a compounded annual basis, where the S and P's up
Speaker 1: a little more than ten percent, so really underperformed the market.
Speaker 1: But they're in the news today and we want to
Speaker 1: talk about three M. We want to talk about industrial America.
Speaker 1: What's happening out there? Brooks Southerland. She covers all that
Speaker 1: so well for us. She's a columns covering.
Speaker 5: Industrials and deals for Bloomberg Opinion.
Speaker 1: She joins us live here in our Bloomberg Interactive Brooker Studio.
Speaker 1: So three M, I guess the story today Brooke agrees
Speaker 1: to pay more than five point five billion dollars over
Speaker 1: combat earplugs.
Speaker 5: Can you give us the background of this story? Sure?
Speaker 10: So threems sold. They were dual ended earplugs to the
Speaker 10: US military through its Arrow Technology subsidiary which it acquired,
Speaker 10: and the idea was that on one side it was
Speaker 10: sort of block out everything, and the other would block
Speaker 10: out sort of immediate near term gunfire sounds that you
Speaker 10: could still hear the person sitting next to you, which
Speaker 10: obviously has a lot of appeal for the US military.
Speaker 10: But the veterans have claimed that these airplugs did not
Speaker 10: in fact work and left them instead with hearing loss
Speaker 10: and tonightis and so this has been sort of a
Speaker 10: mushrooming legal challenge for three M. Veterans were increasingly winning
Speaker 10: bell weather trials at THREEM then made the move last
Speaker 10: summer to put the aerotechnology sublicidiary into bankruptcy as a
Speaker 10: means of sort of speeding up the resolution of those claims. Now,
Speaker 10: a judge earlier in June said you can't do that.
Speaker 10: This is not a valid reorganization purpose, and you know,
Speaker 10: the company was appealing that, but it looked like a
Speaker 10: rocky road. We've seen J and J run into legal
Speaker 10: challenges with a similar ploy involving some of those talk
Speaker 10: claims for that company, and so it looks like the
Speaker 10: company three M is instead moving toward a settlement, which
Speaker 10: makes sense. I mean, this was really the only way
Speaker 10: that this probably was going to end for the company.
Speaker 4: Now I understand that there are more issues the three
Speaker 4: AM space, But first, is this it for this specific issue?
Speaker 4: Is this likely to kind of settle all the claims
Speaker 4: around the ear plug issue?
Speaker 10: So we don't know a lot of the details, and
Speaker 10: so Bloomberg News has reported on this Sunday that this
Speaker 10: was in the works. It's a tentative deal at this point.
Speaker 10: I think it'll be interesting to see what the actual
Speaker 10: details look like once we get the final paperwork. One
Speaker 10: of the things that's been reported is that this settlement
Speaker 10: would be paid out over five years, which is not
Speaker 10: what Wall Street was expecting. If you think about the
Speaker 10: type of hearing loss we're talking talking about. If you,
Speaker 10: you know, lost your hearing because you were exposed to
Speaker 10: very loud gunfire, this is not something that plays out
Speaker 10: over time that we were sort of waiting to see happen,
Speaker 10: like you would with cancer coins. Okay, so I think
Speaker 10: analysts had been bracing for more sort of an upfront payment,
Speaker 10: So it wo'd be interesting to see what that actually
Speaker 10: looks like. But you know, theoretically, I don't think they
Speaker 10: would be moving forward with something like this unless they
Speaker 10: thought it was really going to put this issue behind them.
Speaker 10: Now there will be sort of ramification down the road.
Speaker 10: I do think you have to worry about a dividend
Speaker 10: cut at three M just given the fact that they've
Speaker 10: also separately agreed to a twelve point five up to
Speaker 10: twelve point five billion dollar settlement. Regarding p Fast and
Speaker 10: drinking water, but that is not the end of their
Speaker 10: p Fast liabilities by any stretch. And I think that
Speaker 10: dividend is just going to be under pressure.
Speaker 1: He Yeah, the dividend you'll looking just about five point
Speaker 1: eight percent, So that might be that's some risk there.
Speaker 5: For three M.
Speaker 1: I mean, was this hearing were these hearing aid issues
Speaker 1: just from the left since f Afghanistan in Iraq from
Speaker 1: that time period or is it even before that.
Speaker 10: I'm not sure exactly on the dates of the claims,
Speaker 10: but like I said, this has been sort of a
Speaker 10: mushrooming issue that has you.
Speaker 1: Know, certain of stocks stocks up about three or four percent,
Speaker 1: So I guess the Marco's thinking maybe it would have
Speaker 1: been a bigger number.
Speaker 10: Maybe sure, And so you know a lot of analysts
Speaker 10: have been bracing for something in the ten billion dollar range,
Speaker 10: and you know, I think the stock is up because
Speaker 10: quite frankly, any progress is good progress for three M
Speaker 10: on its legal issues. You know, the stock has lost
Speaker 10: more than fifty billion dollars in market values since CEO
Speaker 10: mic Roman took over in twenty eighteen. Like you said,
Speaker 10: it's been a serious underperformer, and some of that has
Speaker 10: to do with execution issues, operational hiccups within the company,
Speaker 10: tougher industrial markets, but a lot of it has to
Speaker 10: do with these legal liabilities that have just been hanging
Speaker 10: over the company's head. And they're very open ended and
Speaker 10: nobody could really put a number on it. So the
Speaker 10: fact that we now have a number that we're talking about,
Speaker 10: I think is a relief to shareholders.
Speaker 4: Yeah, can you talk to us a little bit about
Speaker 4: these PFEST obligations. There's one twelve plus billion dollars, but
Speaker 4: there may be more than that.
Speaker 10: Sure, So the settlement that they've agreed to covers claims
Speaker 10: that Pfast polluted drinking water supplies, and that's with US
Speaker 10: public water systems.
Speaker 4: But these are forever chemicals. They exist forever. You ingest
Speaker 4: them somehow and then they're bad.
Speaker 10: So three M manufactured them for a range of products
Speaker 10: for years. They stopped making some of the most problematic
Speaker 10: compounds several decades ago, and then more recently have come
Speaker 10: out and said we're getting out of past altogether. But
Speaker 10: so we're talking about legacy manufacturing from years and years back.
Speaker 10: So the settlement involves drinking water claims, but then there
Speaker 10: are also potentially liabilities involving state attorney generals, potentially the EPA,
Speaker 10: the military. Then there are also foreign governments to consider
Speaker 10: because three M has factories all over the world. So
Speaker 10: Barclay's analyst, Julian Mitchell has put some of these outstanding
Speaker 10: liabilities at about sixteen billion addition to the twelve point
Speaker 10: five billion that we've been talking about, and that does
Speaker 10: not include any sort of deals with the foreign government.
Speaker 8: That's just us.
Speaker 10: One of the biggest budgets is personal injury claims, property
Speaker 10: damage claims. They just brought in a very big lawyer
Speaker 10: or trying to bring in a big lawyer to help
Speaker 10: with some of those claims. He was the one who
Speaker 10: got the big tobacco settlement, and so I think we
Speaker 10: could still see some big, multi billion dollar settlements.
Speaker 1: Brooke, you cover a lot of the big industrial companies.
Speaker 1: A lot of those companies are conglomerates and conglomerates. It
Speaker 1: seems like in time and time are in favor, some
Speaker 1: of the times are out of favor. I've pitched it
Speaker 1: both ways. As a banker, you know which way the
Speaker 1: winds are blowing. You have a fascinating column out on that.
Speaker 1: Where are we now with just conglomerates to investors like them,
Speaker 1: did they not like them? What's going on?
Speaker 10: So it's interesting because we went through a moment during
Speaker 10: the pandemic where all of a sudden, diversity was an
Speaker 10: asset again because it was very helpful to not just
Speaker 10: be an aerospace company, for example, but even beyond that,
Speaker 10: you sort of had different markets were covering at different
Speaker 10: rates as we came out of the pandemic, and you
Speaker 10: actually heard a lot more companies talking about diversity as
Speaker 10: an asset, and that message is not resonating in the
Speaker 10: same way now that we're sort of on the other
Speaker 10: side of that initial robust COVID comeback, and we're sort
Speaker 10: of seeing some market slow down, other markets being more robust,
Speaker 10: and diversity is becoming a liability again. Now there's not
Speaker 10: that many big diversified industrial conglomerates left just because so
Speaker 10: many have done breakups, spinoffs, what have you. Even three
Speaker 10: MS you know is planning to spin off its healthcare
Speaker 10: unit at the end of this year. But there are
Speaker 10: a couple and I think, you know, we may see
Speaker 10: them under more scrutiny.
Speaker 4: Is this a cyclical sort of thing, because are there
Speaker 4: various times, you know, over when you look over periods
Speaker 4: of decades where it helps to be diversified because it
Speaker 4: helps insulate you from some risk, and then all of
Speaker 4: a sudden, you know, the market recovers and activists say
Speaker 4: get rid of your XYZ division.
Speaker 10: It definitely is cyclical, and to your point, you know,
Speaker 10: it's one thing to argue that diversity is a liability,
Speaker 10: and then when times get tough and you're just an
Speaker 10: aerospace company, then the numbers don't look so great. But
Speaker 10: you know, I do think it goes in waves. And
Speaker 10: one of the comments that the industrials always make is
Speaker 10: if you look outside of manufacturing, look at finance, for example,
Speaker 10: some of the big banks are in a wide variety
Speaker 10: of businesses. Look at the tech companies. Amazon will deliver
Speaker 10: goods to your front door, but then they also sell
Speaker 10: cloud computing services, and they own whole foods, and so
Speaker 10: there is you know a number of examples of conglomerate
Speaker 10: out there in the markets. And I think one of
Speaker 10: the ironic things is for all the times that this
Speaker 10: business structure has been pronounced dead, it actually has quite
Speaker 10: a lot of staying power and just reincarnates itself into
Speaker 10: sort of different visions.
Speaker 5: What are you working on these days. What's the next
Speaker 5: cool thing coming out of your Bloomberg terminal?
Speaker 10: Oh, well, I mean all kinds of things. But certainly,
Speaker 10: watching this diversity issue and how it plays out, I
Speaker 10: think will be really interesting. And we haven't really seen
Speaker 10: a lot of activists investors in the industrial sector for
Speaker 10: a while. The last big time I can remember somebody
Speaker 10: pushing for changes at an industrial conglomerate was in twenty
Speaker 10: nineteen with D. E. Shaw and Emerson Electrics, So it's really.
Speaker 5: While and Emerson did do something.
Speaker 10: They did break up, although that was not so much
Speaker 10: I don't know how much that was connected to the activist.
Speaker 10: They got a new CEO who had a lot of
Speaker 10: energy and a lot of vision for what he wanted
Speaker 10: this company to look like, and I think that was
Speaker 10: sort of more the driving force in that case. But
Speaker 10: we really haven't seen that many activists in industrials, which
Speaker 10: is fascinating, And so I wonder if you know now
Speaker 10: that sort of the pendulum is swinging the other way
Speaker 10: on diversity, if we might diversity of businesses, if we
Speaker 10: might see, you know, some activists come out of the
Speaker 10: woodwork and take a look at these companies. Honeywell, stock
Speaker 10: in particular has been under pressure since they announced a
Speaker 10: CEO change, and I think investors are just sort of
Speaker 10: waiting and watching to see what that new CEO of
Speaker 10: vim Wi Kapor might do with that mix of businesses.
Speaker 10: They're sort of the last remaining really big industrial conglomerate
Speaker 10: that has not done a massive spin off. They spent
Speaker 10: off two smaller businesses in twenty eighteen, but we haven't
Speaker 10: seen the kind of full scale breakup we've seen elsewhere.
Speaker 1: All Right, brook thanks so much for joining us. As always,
Speaker 1: Brooks Subland and Calumnists. She covers industrials and deals for
Speaker 1: Bloomberg Opinion. Joining us here on all things industrial, including
Speaker 1: Minnesota mining and manufacturing.
Speaker 6: You're listening to the Team Cancer Live program, Bloomberg Markets
Speaker 6: weekdays at ten am Easter and on Bloomberg, the iHeartRadio
Speaker 6: app and the Bloomberg Business App, or listen on demand
Speaker 6: wherever you get your podcast.
Speaker 1: Our next guest, I would say it just feels like
Speaker 1: consistently bullish on the state of California. Several weeks ago,
Speaker 1: we discussed San Francisco, and the numbers bear out a
Speaker 1: bullish outlook there. Today it's the city of Angels, Los Angeles.
Speaker 1: Matt Winker joins us. He is the founder of Bloomberg News.
Speaker 1: He is the editor emeritus right now of Bloomberg News,
Speaker 1: joining us via zoom Matt. When I think LA, I
Speaker 1: think Hollywood, because I'm a former media analyst, and Hollywood's
Speaker 1: kind of on its backside these days with the actors
Speaker 1: on strike, the writers on strike. Tell us about what
Speaker 1: the numbers show you about the health of the LA economy.
Speaker 11: Always great to be with you, and truth be told,
Speaker 11: it's not just Hollywood actors and screenwriters. At some point
Speaker 11: this year, you've had airports, shuttle drivers, boat captains, crane operators,
Speaker 11: sanitation workers, duty mechanics, custodians, longshoremen which handled, by the way,
Speaker 11: forty percent of US imports from Asia, and nurses and
Speaker 11: school teachers all on strike. However, that pervasive perception of paralysis,
Speaker 11: if you like, is really belied by the reality that
Speaker 11: not only does Los Angeles still work, its ten largest
Speaker 11: publicly traded companies are number one in sales and employee
Speaker 11: growth among the same group of firms based in each
Speaker 11: of the ten most populated US cities now and for
Speaker 11: the foreseeable future. And what are we talking about The
Speaker 11: ten run the gamut from banks, financial services, insurance to
Speaker 11: consumer discretionary staples and industrials healthcare. They're doing better as
Speaker 11: a group than any top ten companies in any of
Speaker 11: the top ten US cities.
Speaker 4: Now, does this analysis that you've done here apply to
Speaker 4: having more people work from these firms in LA itself
Speaker 4: or is it just simply that these firms are based
Speaker 4: in LA they're successful. I guess I'm trying to connect
Speaker 4: to the home base of these companies and actually bringing
Speaker 4: benefits back for the city itself.
Speaker 11: Okay, so that's a great question, And of course, none
Speaker 11: of this would be meaningful unless, as you query, all
Speaker 11: the people we're talking about are in LA proper and
Speaker 11: we are talking about employee growth within Los Angeles, not
Speaker 11: outside Los Angeles, inside Los Angeles. And there really is
Speaker 11: no city that comes close to this double digit sales
Speaker 11: gain from its top ten firms. San Jose, by the way,
Speaker 11: is the closest firm at ten percent, and LA is
Speaker 11: way above that, and way above Chicago, Phoenix, Philadelphia, and Diego.
Speaker 11: They're all distant. Also, rans San Antonio and Dallas are
Speaker 11: going to have average revenue decline. So LA really is
Speaker 11: out front here and employee growth. It's the same story
Speaker 11: all over again. So and you can see that, by
Speaker 11: the way, on the Bloomberg terminal, if you were to
Speaker 11: graph Los Angeles, for example, against the Russell three thousand,
Speaker 11: which is big and small companies alike publicly traded, the
Speaker 11: gap between the two has widened, maybe close to a
Speaker 11: record actually.
Speaker 1: Right now, Hey, Matt, if I were to listen to
Speaker 1: the leaders of states like Florida and Texas, I would
Speaker 1: get a different narrative. It seems like that, Oh, everybody's
Speaker 1: leaving California the high taxes. That's not pro business. They're
Speaker 1: coming down here to lower no tax states. What's what
Speaker 1: is the data show you?
Speaker 11: You could fit Florida, maybe a couple of them inside California.
Speaker 5: Yep, without missing a being exactly you could fit you.
Speaker 11: Could probably all of corporate Florida, all of corporate Florida
Speaker 11: inside of LA and not miss abeat. The point is
Speaker 11: that California is huge, all right, Let's be clear about this.
Speaker 11: So there's been a according to the Census, you know,
Speaker 11: three percent decline in population since twenty twenty in Los Angeles.
Speaker 11: Having said that California is thirty nine million people, Okay,
Speaker 11: that's at least ten million more than any other state.
Speaker 11: Texas is number two, and then corporate California dwarfs corporate anywhere,
Speaker 11: Corporate Texas, Corporate New York, corporate Florida. You could fit
Speaker 11: any of those economies comfortably into California without so much
Speaker 11: as a bulge. That's the reality. And you know, look,
Speaker 11: George Orwell said this best. He said, you know, to
Speaker 11: see what is in front of one's nose needs a
Speaker 11: constant struggle. And that's really the reality for California, particularly
Speaker 11: Los Angele is that it's a very diverse city. By
Speaker 11: the way, it's still got the largest manufacturing base that's
Speaker 11: five hundred thousand plus people of any city in the
Speaker 11: United States. So it's not only you know, a place
Speaker 11: where you have if you like Hollywood screenwriters, but you
Speaker 11: also have aerospace going back decades, and that's just a
Speaker 11: bigger footprint than anywhere else.
Speaker 8: You know.
Speaker 4: Interestingly, Los Angeles is one of those places that's struggling
Speaker 4: with these these empty office or not empty, but much
Speaker 4: more much high office buildings with very high vacancy rates,
Speaker 4: to the point that their owners are sometimes giving the
Speaker 4: keys back to the banks. Do you get any sense
Speaker 4: of how Los Angeles is going to tackle that problem.
Speaker 4: Is it any different than somewhere like San Francisco might
Speaker 4: be trying to tackle that problem.
Speaker 11: Well, look, it's early days. We're talking about a peer
Speaker 11: really since the pandemic, which was unprecedented in our lifetime,
Speaker 11: So who's to say, you know, what kind of calamity
Speaker 11: this really is. Certainly in the short term it seems so.
Speaker 11: But look, one of the people that we have followed
Speaker 11: closely is a thirty three year old co founder and
Speaker 11: chief executive officer of a company called Relativity Space. It's
Speaker 11: an eight year old startup. Made the first three D
Speaker 11: printed rocket to enter space. That's the one hundred and
Speaker 11: ten foot Tehran. One is the largest metal object three
Speaker 11: D printed. Okay, it's right in the backyard of Los Angeles.
Speaker 11: It's actually in Long Beach, but it's close enough, and
Speaker 11: their offices are in Los Angeles. And he'll tell you,
Speaker 11: speaking about downtown and everything else, that most of his
Speaker 11: friends are engineered, but he's friends with artists, people in fashion,
Speaker 11: people in other industries. And that's the kind of innovation
Speaker 11: and mentality says that with take to do something as
Speaker 11: crazy as put a million people on Mars and I
Speaker 11: forgot to mention he's from Plano, Texas, right, Okay, he
Speaker 11: loves California. So be careful. You know what the prevailing
Speaker 11: narrative is, because this being Bloomberg, you look at the data, and,
Speaker 11: as our owner likes to say, you know, in God
Speaker 11: we trust, but everybody else bring data.
Speaker 5: Hey, Matt, thanks so much for joining us.
Speaker 1: Matt Winkler, he is the founder of Bloomberg News fascinating
Speaker 1: column on the great city of Los Angeles and how
Speaker 1: well it is doing economically.
Speaker 5: At this point, you're listening to the tape.
Speaker 6: Can's our live program Bloomberg Markets weekdays at ten am
Speaker 6: Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and.
Speaker 9: The Bloomberg Business App.
Speaker 6: You can also listen live on Amazon Alexa from our
Speaker 6: flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Speaker 1: Goldman is offloading a wealth unit to two hundred and
Speaker 1: forty billion dollar money manager. Shrinana Rojen reported that story.
Speaker 1: He joins us here in our Bloomberg Interactive Broker studio,
Speaker 1: shre what is Goldman doing here?
Speaker 5: I thought they liked the wealth management business.
Speaker 12: Well, they still like the wealth management business. But what
Speaker 12: they're doing here is another strategic flip flop, and we've
Speaker 12: seen a little bit of that over the course of
Speaker 12: the last twelve months. This is an ria investment advisory
Speaker 12: business that purchased in twenty nineteen for seven hundred and
Speaker 12: fifty million dollars. Goldman has a dominant presence when catering
Speaker 12: to the ultra rich, the ultra high net worth individuals.
Speaker 12: No one does it better than Goldman. You know, people
Speaker 12: who have twenty five thirty fifty million dollars per account.
Speaker 12: The most affluent market is one where people could have
Speaker 12: a million dollar account on average. One point to one
Speaker 12: point three million dollar account is what they got when
Speaker 12: they purchased United Capital with about twenty two thousand clients.
Speaker 12: Four years in, they've realized that really is not where
Speaker 12: they want to be. It has been a little bit
Speaker 12: of a drag on their profit pre tax margins as well,
Speaker 12: so they've decided to shed that. They're selling it to
Speaker 12: this two hundred and forty billion dollar wealth manager called
Speaker 12: Creative Planning, which is run by a very interesting gentleman
Speaker 12: by the name of Peter Muluk. But for Goldman What
Speaker 12: that means is you refocus your attention on the part
Speaker 12: of the business that you're really good at, which is
Speaker 12: serving the ultra rich. It mirrors some of their stumbles
Speaker 12: with consumer banking, which is something we've spoken about a
Speaker 12: lot over the course of the last year. Again another
Speaker 12: way to expand beyond their core roots and go into
Speaker 12: the retail banking markets. And in many ways, I think
Speaker 12: it's fair to call it an attempt that flopped, and
Speaker 12: they're getting out of much of that through trying to
Speaker 12: sell off its credit cards businesses, trying to sell off
Speaker 12: the installment lender, shutting off its lending platform for consumers.
Speaker 12: All that they've left is that Marcus Savings business, which
Speaker 12: by the way, is very successful, is a big benefit
Speaker 12: to Goldman because it doesn't mind accumulating deposits that way
Speaker 12: because what it has to pay out on that is
Speaker 12: less than what it has to pay out when it
Speaker 12: has to raise my from the market, so that they
Speaker 12: will stick with. But pretty much every other vestige of
Speaker 12: their consumer banking for a is either being you know,
Speaker 12: chucked overboard or in the process of being chucked overboard.
Speaker 4: Well, yeah, so this was purchased United Capital. This RII
Speaker 4: was purchased for seven hundred and fifty million dollars back
Speaker 4: in twenty nineteen. Is that where does that seven hundred
Speaker 4: fifty million dollars go.
Speaker 12: That's a good question because when Goldman announced the deal,
Speaker 12: which came a little bit after our story a few
Speaker 12: minutes back, they did confirm the sale of this business,
Speaker 12: they didn't give us a price, so we don't know
Speaker 12: what price this platform fetched. But they do have an
Speaker 12: important line in their press release that says when this
Speaker 12: deal closes, which they expect by the end of the
Speaker 12: fourth quarter, there will be a gain. There will be
Speaker 12: an accounting gain. That doesn't necessarily mean that the buyer
Speaker 12: is paying more than seven hundred and fifty million dollars,
Speaker 12: But the way with most of these transactions is you
Speaker 12: buy something, you have some goodwill. That goodwill gets amortized,
Speaker 12: appreciates over the years. Relative to that, I think you
Speaker 12: will see an accounting gain. And I think that's what
Speaker 12: they're signating at rather than necessarily telling us that this
Speaker 12: is something where they will get in excess of seven
Speaker 12: to fifty million.
Speaker 1: Sure, the beginning of this discussion, you characterize this deals
Speaker 1: perhaps a flip flop. Investors don't like flip flops. What's
Speaker 1: going on at the senior ranks of Goldman sacks here
Speaker 1: a lot of flip flopping in terms of what they own,
Speaker 1: what they don't own, strategies.
Speaker 12: Two ways to look at it. Right, When David Solomon
Speaker 12: took over in October twenty eighteen, there were two key pillars,
Speaker 12: which is, expand the businesses you're really good at, grow earnings.
Speaker 12: There they benefited hugely benefited from that boom in trading
Speaker 12: and deal making set off by the pandemic and every
Speaker 12: other dynamic that continued after that. But the other important
Speaker 12: pillar for David Solomon and his management team was to
Speaker 12: try and improve the stock multiple, try and convince investors
Speaker 12: the stock is worth a lot more that their price
Speaker 12: to book creature, price earnings, whatever fancy technical metric you
Speaker 12: want to throw out there, deserves more. They haven't really
Speaker 12: succeeded in doing that. A lot of book value growth
Speaker 12: because of earning's growth, but not any success in convincing
Speaker 12: investors that you can do the multiple growth. Maybe now
Speaker 12: that they've done a strategy pivot or have done the
Speaker 12: slip flop, there perhaps in the place where they want
Speaker 12: to be, and maybe investors come on board.
Speaker 1: All right, Sre, thanks so much for joining us. Glad
Speaker 1: you could join us here in studio. Shri Nana Rogen
Speaker 1: from Bloomberg News. He covers Goldman Sacks. He covers a
Speaker 1: big investment banks. He is all over Goldman Sachson, including
Speaker 1: some of the recent changes in strategy.
Speaker 6: You're listening to the tape cats are live program Bloomberg
Speaker 6: Markets weekdays at ten am Eastern on Bloomberg Radio, the
Speaker 6: tune in app, Bloomberg dot Com.
Speaker 9: And the Bloomberg Business App.
Speaker 6: You can also listen live on Amazon Alexa from our
Speaker 6: flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Speaker 1: Whyant Electric Industries? It stocks up forty three percent? Looks
Speaker 1: like the company saying, hey, wait a minute, maybe we're
Speaker 1: not so much to blame. Maybe the there's a they're
Speaker 1: putting out a statement on. Maybe there's some other causes
Speaker 1: as and.
Speaker 4: As Billy talking about it still down sixty seven percent
Speaker 4: this year.
Speaker 5: Yep.
Speaker 1: So it's interesting. So I have to get the latest here.
Speaker 1: But let's do that with an analyst who covers the bonds.
Speaker 1: Here covers the credit side of the utilities. Jamon Patel.
Speaker 1: He's a senior Fixed and Come strategist for Bloomberg Intelligence,
Speaker 1: joining us via zoom. Jamie, what do you know about
Speaker 1: what's happening here with Hawaiian Electric? Quite the turnaround here.
Speaker 8: Well, you know.
Speaker 13: What, we're we're really very much in the early days here, right,
Speaker 13: So you're gonna you've had allegations being filed, you've had
Speaker 13: some responses, you've had some findings. But over the next
Speaker 13: you know, weeks, months, as as a pg and Ek
Speaker 13: showed us, this sort of thing can take a really
Speaker 13: long time. There'll be more findings, there'll be more allegations
Speaker 13: and so on. But this latest one seeds to be
Speaker 13: very interesting. Up until we you know this, this particular
Speaker 13: statement that came out from the company, Hawaiian Electric had
Speaker 13: really not mentioned anything about de energizing its lines. In fact,
Speaker 13: it said that it didn't de energize its lines simply
Speaker 13: because they were concerned about emergency usage hospitals, et cetera
Speaker 13: that would you know, be damaged obviously if if the
Speaker 13: if the powers turned off. But today they came out
Speaker 13: with a statement saying that the first fire, the one
Speaker 13: that occurred in the morning, had been contained and then
Speaker 13: according to the Maui Department of Fire, it had been extinguished.
Speaker 13: Then the second fire, which was the one that I
Speaker 13: believe created most of the damage, didn't really start to
Speaker 13: about six hours later, and they apparently, or a little
Speaker 13: bit more than six hours they had de energized their lines,
Speaker 13: presumably because of the first fire. So at the end
Speaker 13: of the day, it really depends upon the findings that
Speaker 13: come out of the next few weeks and months, what
Speaker 13: the courts decide, uh, and then how that liability is
Speaker 13: is apportioned.
Speaker 1: All right, So just the Bloomberg reporting here, Hawaii utility source,
Speaker 1: after pointing blame for the fire at the county Hawaiian
Speaker 1: Electric says power lines de energized before the fire.
Speaker 4: Yeah, And I guess the the interesting bit is there
Speaker 4: there is that they're sort of drawing this line this
Speaker 4: was not a continuation of the first fire, but rather
Speaker 4: a second fire.
Speaker 8: And of course, yeah, exactly exactly.
Speaker 13: I think I think what they you know, what, what
Speaker 13: the litigants, maybe not the county so much, but certainly
Speaker 13: the litigants will will try to claim and try.
Speaker 8: To prove is that the first the first fire.
Speaker 13: Had not been extinguished and and had eventually led to
Speaker 13: the second fire. If that's the case, then the question becomes, well,
Speaker 13: is is Maui County, through the Department of Fire liable
Speaker 13: at the end of the day, I you know, and
Speaker 13: and in addition to all this, I think you sort
Speaker 13: of have to kind of take a step back, you
Speaker 13: so you know, what's going to affect the bonds uh,
Speaker 13: and and the equity, which is you know, where where
Speaker 13: we'd started this. The whole question depends upon how much
Speaker 13: the liability is, how much h E is is determined
Speaker 13: to be responsible for, how much of it will they share?
Speaker 9: Uh?
Speaker 13: And then once that's determined, will that be tax deductible
Speaker 13: for the company, because that obviously reduces the overall.
Speaker 8: Liability, And then where.
Speaker 13: The the regulators will allow them to recover that liability
Speaker 13: as well as the obviously the restoration costs that they
Speaker 13: have to go through through rates. If they don't, that's
Speaker 13: you know, obviously not good for the bonds and and
Speaker 13: certainly not good for the equity.
Speaker 1: So, Jamie, what has the company done to date to
Speaker 1: maybe from a balance sheet perspective, to prepare for, you know,
Speaker 1: maybe some some downside scenarios.
Speaker 13: Well, so far they've they've you know, there's not much
Speaker 13: they can do on the balance sheet side, but they.
Speaker 8: Have tried to shore up their liquidity.
Speaker 13: They drew down the two revolvers that they have, one
Speaker 13: for one hundred and seventy million up at the parent
Speaker 13: and then two hundred million down at the intermediate parent
Speaker 13: Hawaiian Electric Company. So that plus any dividends that may
Speaker 13: come up from American Savings Bank and any cash that
Speaker 13: they have on hand, will hopefully take them through the
Speaker 13: restoration period through to the end of the year so
Speaker 13: that they can they can get their power up and
Speaker 13: running to all the all the customers that don't have it.
Speaker 4: At this point, I'm looking at bonds of Hawaiian Electric
Speaker 4: Do in December twenty twenty eight. It looks like they're
Speaker 4: training around eighty six cents on the dollar. How should
Speaker 4: we interpret that, jaymen? How dire are things for the
Speaker 4: company with respect to its credit worthiness?
Speaker 13: So you have to sort of differentiate between the bonds
Speaker 13: up at the parent level and then the intermediate holding
Speaker 13: company and down at the utilities the parent level bonds have,
Speaker 13: you know, and this is sort of what differentiates Hawaiian
Speaker 13: Electric from PG and E pgn E had just the
Speaker 13: electric utility as its only subsidiary. Hawaiian Electric has American
Speaker 13: Savings Bank as a separate subsidiary through which they can
Speaker 13: upstream dividends in the normal course of business to continue
Speaker 13: to service their debt. Down at the utility level, you
Speaker 13: don't have that. Everything is purely dependent upon the earnings
Speaker 13: at the utility in terms of the ability to service debt.
Speaker 13: But I think you know, we haven't seen the bonds
Speaker 13: move as much today as certainly not as much as
Speaker 13: the share prices. I think you know two reasons for that.
Speaker 13: One is the liquidity most of these bonds are privately placed,
Speaker 13: don't trade as much as you would expect. But two
Speaker 13: also the junk ratings on the bonds, right, and the
Speaker 13: bonds are going to trade in line with their ratings
Speaker 13: until there is a change those ratings.
Speaker 5: So Jim.
Speaker 1: And for these utilities, whether it's you know, you know
Speaker 1: the at in California that we saw several years ago
Speaker 1: or here in Hawaii, there's just a ton of risk
Speaker 1: that these utilities have in a world of climate change
Speaker 1: and more and more fires, some of which are caused
Speaker 1: by utility lines. Is there any way for them to
Speaker 1: ensure against that? Or if you're a creditor or you're
Speaker 1: a shareholder. You just have to assume this growing risk
Speaker 1: going forward.
Speaker 8: Yeah.
Speaker 13: So, I you know, most of the transmission assets that
Speaker 13: are owned by utilities, and those are the ones that
Speaker 13: are you know, generally the most susceptible, whether it's to
Speaker 13: hurricanes or to wildfires, are generally not in short, and
Speaker 13: the understanding there is that if they are damaged, regulators
Speaker 13: will allow the utility to recover through increased rates, recovery
Speaker 13: of those assets, and to rebuild those assets. Certainly, that's
Speaker 13: what we saw with Entergen New Orleans when when Katrina hit.
Speaker 13: That's what we saw with CNP and and FP and
Speaker 13: L when when both those were hit by hurricanes. You know,
Speaker 13: it remains to be seen what's gonna happen over here.
Speaker 8: At PG and E there wasn't the full recovery.
Speaker 13: Because PGNU was found to be liable to to the
Speaker 13: significant extent. So I think I think utilities are not
Speaker 13: those boring UH investments that that they have traditionally been,
Speaker 13: you know, sort of buying and and put away. I
Speaker 13: think you've got more risk perhaps at at at individual
Speaker 13: utilities then at the holding company to the extent that
Speaker 13: the holding company owns more than one utility. Diversification is
Speaker 13: probably the way to go. You have a utility that's
Speaker 13: operating in one jurisdiction, uh and in in different geographic
Speaker 13: localities as opposed to another. So when you've got multiple utilities,
Speaker 13: you've got a little bit of diversification that helps to
Speaker 13: prevent a hit up at the parent level and for
Speaker 13: the equity.
Speaker 4: Yeah, that's interesting. And is PG and E is that
Speaker 4: the sort of situation that we really should see as
Speaker 4: indicative of how this might play out? Or do you
Speaker 4: think we could see some sort of answer as to
Speaker 4: who's liable, et cetera more quickly. And I'm sorry we
Speaker 4: have only about twenty seconds here.
Speaker 13: So in terms of your question, is are we wondering
Speaker 13: how this is going to play out in relative to
Speaker 13: PG and E. So PG and E's you know, obviously
Speaker 13: you had a much bigger utility. The advantage that PG
Speaker 13: and E had as it came out of bankruptcy was
Speaker 13: it shared California primarily with two other solid utilities, investment
Speaker 13: grade utilities. So California was able to set up this
Speaker 13: wildfire farm twenty billion dollars plus, which all of the
Speaker 13: utilities have had to contribute into, and will continue to
Speaker 13: contribute into, and will be at least partially be able
Speaker 13: to recover through rates. That's sort of I don't want
Speaker 13: to use the word subsidizes, but maybe that is the
Speaker 13: one that comes first to mind, subsidized PG and e's
Speaker 13: liabilities with the other two.
Speaker 8: But of course it works all ways.
Speaker 5: Right yep, all right, Jamie, thanks so much for joining us.
Speaker 1: We really appreciate you getting some of your analysis here today,
Speaker 1: big news for Hawaiian Electric jam and Pateel, senior fixed
Speaker 1: income strategists for Bloomberg Intelligence, joining us from Bloomberg Princeton Campus.
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