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Speaker 1: Hello, and welcome to the Credit Edge, a weekly markets podcast.

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Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.

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Speaker 1: This week, we're very pleased to welcome John Wright, global

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Speaker 1: head of credit at Bain Capital.

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Speaker 2: How are you, John, I'm great, Thanks for having me, James,

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Speaker 2: Thanks so.

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Speaker 1: Much for joining today. We're excited to dig into your

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Speaker 1: market views and the outlook. We're also delighted to welcome

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Speaker 1: back Bloomberg's very own Lisa Lee covering credit markets from London.

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Speaker 1: Great to see you again, Lisa, to be here again,

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Speaker 1: and from Bloomberg Intelligence. Excellent, see Mike Holland again. Welcome back, Mike.

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Speaker 3: Thank you, James. Great to be here.

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Speaker 1: So let's start with you, John. It's great to have

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Speaker 1: you on the Credit Edge. Credit markets are trading at

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Speaker 1: very tight levels. There's more demand than suppliers. Investors race

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Speaker 1: to lock in these relatively high yields while they still

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Speaker 1: can before the Fed starts easing. But meanwhile we're seeing

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Speaker 1: record levels of issuance. Companies have a lot more refinanced

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Speaker 1: to do this year, and they're taking advantage of a

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Speaker 1: window to sell bonds and loans. But there's a lot

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Speaker 1: of debate also about how much and how soon the

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Speaker 1: FED will cut rates, which will also have a big

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Speaker 1: impact on credit. And at the same time, the economy

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Speaker 1: is expected to slow, which will have an impact on earnings.

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Speaker 1: Let's start there, John, In this environment, how do you

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Speaker 1: view valuations our investors being compensated enough for the corporate

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Speaker 1: credit risks, I mean all of the you know, the

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Speaker 1: likelihood of downgrades, defaults, and bankruptcies.

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Speaker 4: Yeah, sure, Well, I think to start with, i'd say

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Speaker 4: what a difference a year makes if we think about

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Speaker 4: the market outlook last year, at the beginning of the year,

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Speaker 4: consensus was very much focused on in imminent recession and

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Speaker 4: I think it was one of the most well predicted

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Speaker 4: recessions across the macro community. And clearly that recession recession

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Speaker 4: hasn't come to take place. And if anything, I think

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Speaker 4: our macro view is actually still pretty construct of the

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Speaker 4: on the back of what is very strong fiscal stimulus

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Speaker 4: from from the government, and so overall, i'd say the

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Speaker 4: economy has done much better than certainly we expected and

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Speaker 4: I think the market expected. How that translates into the

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Speaker 4: COLO market and what we're seeing happening in the COLO

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Speaker 4: market today at the end of last year into this year,

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Speaker 4: I'd say we finally are seeing some rationalization for what

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Speaker 4: has been very.

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Speaker 2: Widespread for COLO liabilities.

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Speaker 4: Part of that is driven by increased demand from banks

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Speaker 4: as well as just a recognition that the spread on

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Speaker 4: the COLO liability side has been much wider than the

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Speaker 4: underlying loan market relative to history, and so that's driving

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Speaker 4: a lot of activity, that's driving demand for loans, that's

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Speaker 4: driving COLO creation, and that's led to a place where

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Speaker 4: in the loan market we're seeing a lot of refinance activity.

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Speaker 4: I think we've seen close to seventy billion dollars of

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Speaker 4: repricings this year in the loan market. So taking that

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Speaker 4: all into context, I think now we're at a place

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Speaker 4: where loan valuations are really close to fair relative to historicals,

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Speaker 4: and I think from a macro perspective, we feel like

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Speaker 4: default rates have come up from sub one percent to

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Speaker 4: somewhere around two to three percent, and I think they're

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Speaker 4: likely to stay in that range. That's not a problematic

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Speaker 4: range for the COLO market of the market. I think

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Speaker 4: that's actually an area where firms like ours, where we're

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Speaker 4: credit pickers, where there is a good amount of dispersion

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Speaker 4: within the loan market, we feel like we can drive

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Speaker 4: differentiated return. So overall, I think valuations are fair and

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Speaker 4: I think the tightening and liability spreads for the COLO

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Speaker 4: market has been healthy. I do think as we roll

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Speaker 4: the clock forward for the next few months, we'd expect

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Speaker 4: to see some new.

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Speaker 2: Organic supply of loans.

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Speaker 4: The lack of supply of loans is partly driving that

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Speaker 4: technical support, and as that supply comes online, I think

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Speaker 4: we'll see some easing of this tightening pressure.

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Speaker 1: So a huge amount to unpack there, John, You've gone

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Speaker 1: right down the rabbit hole of colos. But I just

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Speaker 1: want to back up a little bit on your macro

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Speaker 1: view in terms of you know, first of all, recession,

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Speaker 1: do you expect one to be this year in the US?

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Speaker 2: We don't.

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Speaker 4: We don't expect a recession. I know you asked the

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Speaker 4: question about rates, and I think we've been surprised to

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Speaker 4: the upside. We as a market have been surprised to

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Speaker 4: the upside by how well the economy has done, and

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Speaker 4: we think there's still a lot of real support.

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Speaker 2: For economic activity.

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Speaker 4: As I mentioned, I think the piece that a lot

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Speaker 4: of economists miss was the impact of the deficit spending

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Speaker 4: the government's doing and how that's having an impact on

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Speaker 4: the economy. So I think on the margin, our view

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Speaker 4: is the economy is relatively robust in the short term,

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Speaker 4: that inflation is something that the FED is going to

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Speaker 4: be focused on containing, And while inflation has come down

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Speaker 4: a bunch, that doesn't mean that it can't go back up.

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Speaker 4: And that that means the cuts are probably not going

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Speaker 4: to come as quickly as the market expects.

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Speaker 2: So not much, I think, less than what the market expects.

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Speaker 4: You know, clearly, if the economy does slow down faster

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Speaker 4: than our expectations, they could come faster. But I think

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Speaker 4: our base case is that the markets expecting and almost

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Speaker 4: hoping for more cuts than than what's likely.

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Speaker 1: Okay, so you've gone into clos very quickly. That for

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Speaker 1: all our listeners out there who don't know about it,

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Speaker 1: it's collateralized loan obligations. That's kind of repackaging of leverage

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Speaker 1: loans into securities of different risk levels. That market has

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Speaker 1: been a bit of a tough one because there hasn't

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Speaker 1: been a lot of supply of leverage loans. The leverage

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Speaker 1: loan market seems to be a bit challenged on the

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Speaker 1: one hand because of defaults. I think people expect there's

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Speaker 1: be more defaults in leverage loans, and also because the

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Speaker 1: proposition for floating rate investments is somewhat diminished by the

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Speaker 1: fact that the FED is going to start an easy campaign,

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Speaker 1: so you won't get that upside of rates. How does

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Speaker 1: that all fit into your assessment of the outlook for clos.

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Speaker 4: John, Sure, we'll see alos in credit markets more broadly,

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Speaker 4: especially on the leverage loan side, our floating rate in nature,

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Speaker 4: and so they've benefited from higher rates. I think in

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Speaker 4: some ways as credit investors were looking at risks as

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Speaker 4: rates go higher, meaning the pressure that puts on companies

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Speaker 4: in terms of their interest bridge and their ability.

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Speaker 2: To pay their debts.

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Speaker 4: The flip side of that is, in a tougher economic environment,

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Speaker 4: if you do see those rate cuts come through, that

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Speaker 4: is actually a day one benefit to these floating rate borrowers.

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Speaker 4: So overall, I'd say we're still very constructive on the

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Speaker 4: opportunity and the credit market. And I think the COLO

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Speaker 4: market is one that is inherently, very closely linked to

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Speaker 4: the loan market because COLO is on about two thirds

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Speaker 4: of the underlying loan market and is really the largest

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Speaker 4: buyer of leverage loans, and the relationship between the borrowing

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Speaker 4: costs and the COLO market and the yields at which

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Speaker 4: you can buy loans is a relationship that tends to

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Speaker 4: drive what amount.

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Speaker 2: Of activity that there is.

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Speaker 4: So all of those things I think present some really

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Speaker 4: interesting opportunities, both on the COLO liability side as well

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Speaker 4: as the valuations in the loan market.

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Speaker 5: Talking about leverage loan suppli it's one of the reasons

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Speaker 5: why supply has been so low is that M and

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Speaker 5: A activity has been reduced. In addition, when there is

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Speaker 5: LBOs and M and A, a lot of those financings

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Speaker 5: have gone to what's now the emergent private credit space.

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Speaker 5: With clos improving, with the market improving, do you expect

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Speaker 5: some of that market share to come back? And what

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Speaker 5: will it take for us to see robust supply again.

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Speaker 4: Sure, that's a great question to address private credit versus

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Speaker 4: the broadly syndicated market. I think it's it makes the

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Speaker 4: most sense to look at it through the lens.

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Speaker 2: Of the borrowers.

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Speaker 4: And by the borrowers, I mean both the companies as

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Speaker 4: well as the predominantly private equity sponsors that own them.

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Speaker 4: These borrowers are sophisticated, and they're looking for a combination

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Speaker 4: of the lowest cost of borrowing they can get, as

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Speaker 4: well as in some instances certainty of execution or flexibility

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Speaker 4: in their debt. And when the broadly syndicated market is strong,

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Speaker 4: typically it's pricing at a lower yield and therefore a

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Speaker 4: lower borrowing costs for these companies relative to private credit providers.

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Speaker 2: If you look at a year.

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Speaker 4: Like twenty twenty three and even twenty two to some extent,

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Speaker 4: when the broadly syndicated market was not really fully functioning,

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Speaker 4: in underwriters, we're not openly looking to take a lot

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Speaker 4: of risk.

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Speaker 2: Private credit really has.

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Speaker 4: A key advantage in that it can provide that certainty

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Speaker 4: of execution and it can provide flexibility and financing. But

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Speaker 4: that's a pendulum that swings back and forth. So in short,

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Speaker 4: I do think the strength in the broadly syndicated market

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Speaker 4: will lead to a situation where broadly syndicated takes market

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Speaker 4: share from private credit in LBO financings. I don't think

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Speaker 4: either goes to zero. I think the private credit financing

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Speaker 4: for these megacap deals will continue to exist, but I

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Speaker 4: think the competitive dynamic has started to have that pendulum

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Speaker 4: swing back toward broadly syndicated and.

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Speaker 5: Part of you, as you noted, part of the reason

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Speaker 5: why the pendulum is swinging back is because COLO activity

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Speaker 5: has increased really on the backs of TRIPLEA prices tightening

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Speaker 5: a huge contrast from this year to even to the

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Speaker 5: end of last year, and I'm hearing that managers want

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Speaker 5: to press it down even lower. So where do you

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Speaker 5: think spresigo right now is about one point fifty? In

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Speaker 5: December it was one seventy. Where do you think how

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Speaker 5: low could it go and what would it take to

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Speaker 5: really bring the market back?

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Speaker 2: Yeah? Sure.

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Speaker 4: I mean the tightening that we've seen for COLO triple

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Speaker 4: a's over the last I would say two months has

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Speaker 4: been pretty significant. As you mentioned, we're now seeing triple

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Speaker 4: A spreads on some deals that are being talked even

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Speaker 4: below so for plus one hundred and fifty basis points.

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Speaker 4: That's a meaningful move from where we were for most

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Speaker 4: of twenty twenty three, and so I think in many

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Speaker 4: ways we are back. We're to a functioning market, We're

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Speaker 4: to a place where COLO formation is quite robust. January

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Speaker 4: has had a significant amount of new COLO formation, and

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Speaker 4: I think that's the result of two things. One is

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Speaker 4: a recognition that one hundred and fifty basis points for

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Speaker 4: that COLO triple A risk is still very attractive to

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Speaker 4: those triple A investors. And secondly, I think there's some

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Speaker 4: structural changes around bank appetite for COLO triple a's as

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Speaker 4: an asset class, and as they return to the market,

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Speaker 4: that's helping drive those spreads tighter. COLO managers are or

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Speaker 4: are going to want to try to drive borrowing costs

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Speaker 4: as low as possible, or ultimately COL equity investors are

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Speaker 4: going to want to do that.

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Speaker 2: But I think we're I think we are back.

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Speaker 4: I think they could go further tighter from here, but

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Speaker 4: the pace of that tightening very recently has been has

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Speaker 4: been notable.

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Speaker 1: And what about issuance volume, John, does it increase substantially

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Speaker 1: but compared to last year, I.

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Speaker 4: Do think there will be more issuance this year than

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Speaker 4: last year. You know, if you look at the dynamics

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Speaker 4: in the COLO market, the things that drive issuance activity

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Speaker 4: are number one.

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Speaker 2: Liability levels.

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Speaker 4: Because as liabilities tighten, you have not only organic new

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Speaker 4: issuance for clos but you also have deals that are

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Speaker 4: in the money to be refinanced or restructured, but also

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Speaker 4: as borrowing costs are lower, those who take a long

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Speaker 4: term view of colos want to lock in those spreads

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Speaker 4: for a long time. And so if you're an episodic issuer,

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Speaker 4: if you want to come to market when liability costs

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Speaker 4: are low, those are the types of deals that are

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Speaker 4: coming to market now. So I expect if liability spreads

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Speaker 4: stay where there are or tightened further, we will continue

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Speaker 4: to see a significant amount of issuance activity.

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Speaker 1: Okay, and so on the on the investor side, what

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Speaker 1: is the pitch right now to invest this because you

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Speaker 1: can get a you know, a high grade US bond

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Speaker 1: with a lot of liquidity, with a pretty fat yield

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Speaker 1: compared to history right now, Why do all the work?

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Speaker 1: Why bother? Why why get all fancy with a CLO

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Speaker 1: when you don't already have to?

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Speaker 3: Well?

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Speaker 4: I think colos as an as an asset class, you know,

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Speaker 4: have lived through varying degrees of investor adoption and understanding.

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Speaker 4: I do think over time, more and more institutional investors

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Speaker 4: appreciate the asset class and differentiate it from other structured

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Speaker 4: products that haven't had as strong an historical performance track record.

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Speaker 4: I think if you look at valuations today, there's a

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Speaker 4: couple of things to think about across fixed incoming credit markets.

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Speaker 4: Number one, yes, interest rates are higher across the board,

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Speaker 4: but the curve is inverted, and so being able to

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Speaker 4: own floating rate product at a higher yield than fixed

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Speaker 4: rate product because of that inversion is attractive to many investors.

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Speaker 4: And then you have to think about what your view

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Speaker 4: is on the pace of rate cuts as it relates

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Speaker 4: to spreads. If you look across fixed incoming credit markets today,

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Speaker 4: we've seen a lot of those spreads tightened to a

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Speaker 4: place where they're now either in the range of medium

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Speaker 4: spread levels or tighter than historical spreads. And what's true

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Speaker 4: for COLO debt, especially junior colo debt, is it's still

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Speaker 4: actually quite wide relative to its historic spread. And so

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Speaker 4: while your common is true you can get high grade

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Speaker 4: bonds at a higher yield than you've been able to

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Speaker 4: for a long time, you could also get colo debt

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Speaker 4: not only at a much higher yield than you typically can,

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Speaker 4: but also at a wider spread.

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Speaker 2: And so for those.

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Speaker 4: Investors that are comfortable with the acid class, that are

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Speaker 4: willing to go through the complexity of the asset class

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Speaker 4: and are willing to think through manager performance and all

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Speaker 4: those dynamics.

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Speaker 2: We think it's actually a compelling opportunity.

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Speaker 1: That on the complexity side, A lot of people have

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Speaker 1: kind of made the analogy just purely by association of

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Speaker 1: you know CLO cdo therefore you know complexity equals risk,

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Speaker 1: therefore you know financial crisis, et cetera. What do you

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Speaker 1: say to that one? I mean, how do you how

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Speaker 1: do you convince them that this is actually quite safe?

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Speaker 2: Sure?

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Speaker 4: I think to start with, if you look at the

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Speaker 4: historic track record, there is a stark difference between abs,

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Speaker 4: CDOs and clos. If you look at the historic default

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Speaker 4: rates of COLO debt, it's it's virtually zero across different

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Speaker 4: tranches of COLO debt. And so I think there is

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Speaker 4: the proof is in the putting from an historic performance perspective,

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Speaker 4: and then secondly, just going through and thinking about the

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Speaker 4: dynamics of a senior secured portfolio that includes a cross

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Speaker 4: section of the economy, both from an industry and company

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Speaker 4: diversity perspective, and you go through that level of detail

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Speaker 4: and understand some of the cash traps and the features

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Speaker 4: that exist in clos.

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Speaker 2: That protect debt investors.

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Speaker 4: For those investors that are willing to go through that analysis,

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Speaker 4: typically they get comfortable with the product.

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Speaker 2: I do think there are some.

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Speaker 4: Investors who just choose to to to not bother with

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Speaker 4: that level of detail, and those are the ones who stay,

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Speaker 4: stay away.

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Speaker 1: And yet we still do it top more defaults and

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Speaker 1: much lower recoveries right compared to history. So there is

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Speaker 1: possibly a much high level of risk on the on

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Speaker 1: the loan level. But are you saying that when you

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Speaker 1: package them and diversify then you're not exposed to that.

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Speaker 4: Yeah, I think you're exposed to it to varying degrees

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Speaker 4: depending on how deep in the capital structure you are.

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Speaker 4: For clos I think historic default rates are applicable in

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Speaker 4: my opinion. I think historic recovery rates is where we're

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Speaker 4: seeing a difference versus today. Some of the dynamics around

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Speaker 4: the restructuring process, some of the inter creditor dynamics and

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Speaker 4: flexibility that lives within the underlying loan documents. Today presents

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Speaker 4: a situation where we have seen a deterioration in loan

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Speaker 4: recoveries as well as a higher dispersion of loan recoveries.

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Speaker 4: So the outcomes are much broader now, not just across

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Speaker 4: different companies, but across a single restructuring for different lenders,

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Speaker 4: and so I think the risk really presents itself in

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Speaker 4: the recovery rate.

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Speaker 5: Johnson, is you're the global head, I'm going to move

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Speaker 5: the discussion over to Europe, where I'm based and ask

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Speaker 5: what do you think about credit spreads and valuation here?

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Speaker 5: Given that economic outlook isn't as bright as in the US,

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Speaker 5: but the nature of the market is a little bit

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Speaker 5: less deep, less liquid, and to your point what you

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Speaker 5: just made about recovery levels, recovery levels probably might not

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Speaker 5: be as bad as those in Europe when you weigh

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Speaker 5: all those things together. What's your outlook for Europe?

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Speaker 2: Yeah? Sure, I think Europe versus the US.

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Speaker 4: To start with, from a macro standpoint, I think the

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Speaker 4: constructive dynamics we see around the economy.

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Speaker 2: Of the US is.

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Speaker 4: Slightly in favor from an underlying macro perspective relative to

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Speaker 4: the countries in Europe in aggregate. That said, I think

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Speaker 4: from a valuation perspective, our underlying view evaluations of the

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Speaker 4: credit market in Europe versus the US right now is

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Speaker 4: there about a fair fight, with the benefit in Europe

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Speaker 4: being you haven't seen quite as rapid or repricing on

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Speaker 4: the loan side that you've seen in the US.

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Speaker 2: You are correct.

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Speaker 4: Europe generally is is more concentrated, less liquid. It's not

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Speaker 4: as deep or as large a market as the US,

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Speaker 4: but that presents some interesting opportunities.

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Speaker 2: And I think.

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Speaker 4: Across traded credit as well as structured credit, we continue

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Speaker 4: to find opportunities from you know, single be and.

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Speaker 2: Up across the capital structure.

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Speaker 4: So I'd say right now, on a relative value basis,

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Speaker 4: even though we think the macro favors the US from

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Speaker 4: evaluations perspective, we don't have so negative a view of

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Speaker 4: Europe that we think credit is risking going wider. So

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Speaker 4: we think it's a fair fight on a relative value basis.

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Speaker 5: And so you mentioned the repricings and as they've been

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Speaker 5: wild in the US, and that's so in Europe is

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Speaker 5: still substantial. When you look at the repricings, could those

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Speaker 5: actually stop the party? And with the r guests so

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Speaker 5: back the CLO creation, will that stopped because own spreads

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Speaker 5: get too tight, because we sealers have just come back

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Speaker 5: and just become the normal market as it was.

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Speaker 4: Yeah, absolutely, Again, you know, I think the question is

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Speaker 4: to what degree and when that happens, you know, When

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Speaker 4: we look at the context of repricings this year, as

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Speaker 4: I mentioned in the US, I think we're about seventy billion.

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Speaker 4: I think last year it was about eighty billion for

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Speaker 4: the full year. So we're here on the last day

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Speaker 4: of January and you know, we've almost already exceeded last year.

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Speaker 4: So the pace of repricings has been has been significant

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Speaker 4: to start the year. When we think about spread coming

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Speaker 4: out of the market, ultimately the driver of COLO Ishman's

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Speaker 4: activity is how attractive that equity is and whether it's

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Speaker 4: attractive enough to invest in the equity, and that's going

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Speaker 4: to be a function of the relationship between the asset

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Speaker 4: yield and the liability spread. And if you see that

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Speaker 4: asset yield coming down because of rampant repricings, that will

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Speaker 4: slow COLO formation, which will in turn decrease the demand

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Speaker 4: for loans, and therefore you'll see a decrease in the repricings.

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Speaker 4: That said, I think in the US, for as much

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Speaker 4: as we've seen on the repricing side, I think the

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Speaker 4: average spread decrease this year is still in the single digits,

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Speaker 4: something like eight basis points across the market. So while

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Speaker 4: it feels painful, to see that spread leaving the market.

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Speaker 4: I don't think that we've seen enough repricing that it's

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Speaker 4: really going to change the rate at which clos are

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Speaker 4: being issued.

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Speaker 3: Hey, John, Mike Collins, your quick question on sector biases.

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Speaker 3: As a healthcare credit analy CFPI, we've seen a lot

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Speaker 3: of loan issues in the healthcare sector. I wonder you

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Speaker 3: know also on the telcoatside, obviously, do you have a

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Speaker 3: bias right now and what you're out looked for the

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Speaker 3: troubled sectors? Maybe what do you see maybe blossoming or

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Speaker 3: getting a little better in twenty twenty four.

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Speaker 2: Sure.

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Speaker 4: One of the things that I think is most interesting

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Speaker 4: about what we've seen developed from an industry and sector

383
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Speaker 4: basis across the loan market in the US is industries

384
00:18:52,400 --> 00:18:57,639
Speaker 4: that traditionally were identified as defensive versus industries that typically

385
00:18:57,680 --> 00:19:00,600
Speaker 4: were defined as cyclical. If you think about commodities, if

386
00:19:00,600 --> 00:19:03,000
Speaker 4: you think about metals and mining. When you go through

387
00:19:03,040 --> 00:19:06,000
Speaker 4: the loan market today and you parse dispersion, and by dispersion,

388
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Speaker 4: I mean kind of the range of spreads that you

389
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Speaker 4: see between the widest spread names and the tightest spread names,

390
00:19:11,760 --> 00:19:16,679
Speaker 4: dispersion is the least pronounced in those industries that are cyclical,

391
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Speaker 4: and it's most pronounced in industries where they were typically

392
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Speaker 4: thought of as being defensive, things like healthcare and telecom

393
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Speaker 4: and software. What we like about that is I think

394
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Speaker 4: that plays to our strengths in credit selection. So as

395
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Speaker 4: we think about our industry overweights and underweights, I'd say

396
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Speaker 4: we tend to be overweight things that are relatively defensive

397
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Speaker 4: industries like aerospace and defense. Healthcare and telcolor are the

398
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Speaker 4: two largest industries in the loan market, so we obviously

399
00:19:45,440 --> 00:19:47,200
Speaker 4: have a lot of exposure there, and we then sub

400
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Speaker 4: segment that into sub sectors. But ultimately, I think we

401
00:19:50,480 --> 00:19:53,400
Speaker 4: appreciate and are happy that we're in a situation where

402
00:19:53,400 --> 00:19:56,320
Speaker 4: dispersion is wide in those sectors, so we have opportunities

403
00:19:56,359 --> 00:19:58,040
Speaker 4: to go through and pick our spots on a company

404
00:19:58,040 --> 00:19:58,960
Speaker 4: by company basis.

405
00:19:59,280 --> 00:20:03,280
Speaker 5: You mentioned when these struggling companies go into distress and

406
00:20:03,359 --> 00:20:08,040
Speaker 5: default recoveries have been just horrifying, like ten cents twenty

407
00:20:08,080 --> 00:20:12,000
Speaker 5: cents versus a historical of seventy eighty. Do you think

408
00:20:12,040 --> 00:20:16,160
Speaker 5: that's the secular change. I know people are expecting lower recoveries,

409
00:20:16,200 --> 00:20:18,000
Speaker 5: but not this low. Do you think it's just just

410
00:20:18,040 --> 00:20:20,679
Speaker 5: a first batch they're a poor or are you braced

411
00:20:20,720 --> 00:20:24,480
Speaker 5: for really poor recoveries and more lender and under violence,

412
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Speaker 5: which has been one of the real drivers of low

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Speaker 5: recoveries this go around.

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Speaker 4: Sure, I think there are two related but different points

415
00:20:33,320 --> 00:20:36,440
Speaker 4: on this. The first is I do think low recoveries

416
00:20:36,520 --> 00:20:39,520
Speaker 4: are lower, and I think that's a function of weaker

417
00:20:39,560 --> 00:20:46,840
Speaker 4: documentation and you know, abilities for different participants to extract

418
00:20:46,920 --> 00:20:50,160
Speaker 4: value in different ways. But the second thing I would

419
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Speaker 4: say about that is for a given company, I don't

420
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Speaker 4: think there is a single recovery anymore. And the reason

421
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Speaker 4: for that is that if you are a holder of

422
00:20:59,240 --> 00:21:03,080
Speaker 4: prepetition and you go through restructure, and whether or not

423
00:21:03,080 --> 00:21:06,800
Speaker 4: you're participating in subsequent fundings has a meaningful impact in

424
00:21:06,840 --> 00:21:10,440
Speaker 4: what your recovery value is. And so I think, yes,

425
00:21:10,480 --> 00:21:12,399
Speaker 4: the average recovery rate will be lower and loans and I

426
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Speaker 4: think we've already seen that, right, We've seen recoveries average

427
00:21:14,560 --> 00:21:17,760
Speaker 4: somewhere between forty and fifty five sixty cents as opposed

428
00:21:17,800 --> 00:21:21,080
Speaker 4: to the historic seventy five to eighty. But the dispersion

429
00:21:21,119 --> 00:21:24,239
Speaker 4: around that is relevant, as well as the fact that

430
00:21:24,280 --> 00:21:27,399
Speaker 4: for a given restructuring, not all creditors are having the

431
00:21:27,440 --> 00:21:29,679
Speaker 4: same outcome. It depends whether you're in the group and

432
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Speaker 4: whether you're participating in these additional fundings.

433
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Speaker 1: So, John, you mentioned earlier private credit, which is what

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Speaker 1: everyone wants to talk about on this show, and it's

435
00:21:38,280 --> 00:21:41,000
Speaker 1: just growing so quickly. At what point do we see

436
00:21:41,000 --> 00:21:44,159
Speaker 1: private credit clos Yeah, I mean.

437
00:21:44,040 --> 00:21:48,720
Speaker 4: We do see private credit colos today as a part

438
00:21:48,760 --> 00:21:51,760
Speaker 4: of the market. And one of the interesting and I

439
00:21:51,760 --> 00:21:56,080
Speaker 4: think very constructive evolutions of the middle market or private

440
00:21:56,080 --> 00:22:00,680
Speaker 4: credit COLO space is you know, traditionally middle markets we're

441
00:22:00,680 --> 00:22:04,680
Speaker 4: done as a financing tool for holders of private credit

442
00:22:04,760 --> 00:22:07,600
Speaker 4: or middle market loans, things like BDCs or funds that

443
00:22:07,640 --> 00:22:10,960
Speaker 4: owned the underlying loans, and this was just a mechanism

444
00:22:11,000 --> 00:22:15,239
Speaker 4: for for going out and in financing those portfolios. What

445
00:22:15,240 --> 00:22:18,280
Speaker 4: we're seeing now is is much more proactive still some

446
00:22:18,359 --> 00:22:20,359
Speaker 4: of that using the COLO market as a financing but

447
00:22:20,440 --> 00:22:23,720
Speaker 4: more creation for the sake of owning a part of

448
00:22:23,720 --> 00:22:26,680
Speaker 4: the capital structure in a private credit or middle market COLO.

449
00:22:26,800 --> 00:22:29,960
Speaker 4: More demand for middle market COLO equity as an asset

450
00:22:29,960 --> 00:22:32,119
Speaker 4: class as opposed to just owning the assets in various

451
00:22:32,160 --> 00:22:34,679
Speaker 4: forms of financing. And so I think we're going to

452
00:22:34,680 --> 00:22:39,040
Speaker 4: continue to see that private credit middle market COLO market

453
00:22:39,080 --> 00:22:41,600
Speaker 4: share grow and I think it's a I think it's

454
00:22:41,600 --> 00:22:42,200
Speaker 4: a healthy thing.

455
00:22:42,680 --> 00:22:45,040
Speaker 1: And what about the big private credit deals that are

456
00:22:45,040 --> 00:22:47,680
Speaker 1: getting done. I mean it's becoming ever more mainstream. Does

457
00:22:47,680 --> 00:22:50,040
Speaker 1: that mean that you're, you know, going beyond the middle

458
00:22:50,040 --> 00:22:52,080
Speaker 1: market in terms of clos.

459
00:22:52,040 --> 00:22:53,240
Speaker 2: We have ban capital are not.

460
00:22:54,560 --> 00:22:57,720
Speaker 4: You know, we've seen the private credit space, in the

461
00:22:57,760 --> 00:23:00,840
Speaker 4: direct lending space evolve a lot, as many of our

462
00:23:00,840 --> 00:23:05,000
Speaker 4: public competitors have moved moved into you know, really megacap

463
00:23:05,359 --> 00:23:09,240
Speaker 4: private credit and direct lending deals where you know, they're

464
00:23:09,320 --> 00:23:13,280
Speaker 4: multi billion dollar sub you know, sub syndicates almost where

465
00:23:13,280 --> 00:23:16,840
Speaker 4: you're just dis intermediating the broadly syndicated market. We're active

466
00:23:16,840 --> 00:23:19,560
Speaker 4: in the core mintal market where these companies are for

467
00:23:19,600 --> 00:23:24,000
Speaker 4: the most part still private equity and sponsor backed, but

468
00:23:24,840 --> 00:23:27,760
Speaker 4: they're twenty five to seventy five million dollars EBADOC companies

469
00:23:27,760 --> 00:23:31,800
Speaker 4: and so the size of the financings are are smaller. Uh,

470
00:23:31,840 --> 00:23:34,320
Speaker 4: And we typically are in a control position in those

471
00:23:34,720 --> 00:23:37,920
Speaker 4: and we feel as though we get better structure in

472
00:23:38,200 --> 00:23:41,520
Speaker 4: the documents, better covenants, and we think better relative value there.

473
00:23:41,760 --> 00:23:43,960
Speaker 2: So we have not moved up market.

474
00:23:44,440 --> 00:23:48,960
Speaker 4: I do think to Lisa's question earlier, as you see

475
00:23:49,000 --> 00:23:51,480
Speaker 4: the recovery in the broadly syndicated market. And as you

476
00:23:51,520 --> 00:23:54,720
Speaker 4: think about the inherent kind of cost of a private

477
00:23:54,760 --> 00:23:58,919
Speaker 4: credit strategy relative to broadly syndicated it does you know,

478
00:23:59,000 --> 00:24:00,840
Speaker 4: I think pose the question how do you compete with

479
00:24:00,840 --> 00:24:04,040
Speaker 4: a broadly syndicated market on a cost basis? And I

480
00:24:04,040 --> 00:24:06,200
Speaker 4: think those lenders are going to really have to differentiate

481
00:24:06,520 --> 00:24:09,760
Speaker 4: more in terms of flexibility or providing more leverage or

482
00:24:10,040 --> 00:24:12,879
Speaker 4: lending to risk your companies that broadly syndicated market is

483
00:24:12,960 --> 00:24:15,959
Speaker 4: unwilling to finance in order to continue to see the

484
00:24:15,960 --> 00:24:19,240
Speaker 4: same levels of deal activity for those megacap deals.

485
00:24:19,359 --> 00:24:21,200
Speaker 1: Yeah, I was you seeing a lot of competition between

486
00:24:21,200 --> 00:24:23,960
Speaker 1: the two sides at this point In terms of opportunities

487
00:24:24,520 --> 00:24:27,520
Speaker 1: globally or you know, global credit position, you probably look

488
00:24:27,520 --> 00:24:29,040
Speaker 1: at a lot of different things. What do you think

489
00:24:29,080 --> 00:24:31,440
Speaker 1: the best opportunity is in credit for this year when

490
00:24:31,480 --> 00:24:32,639
Speaker 1: you look at everything.

491
00:24:33,000 --> 00:24:35,800
Speaker 4: Yeah, there are a lot of really compelling opportunities in credit.

492
00:24:35,880 --> 00:24:39,360
Speaker 4: And maybe i'll start with your comment about global One

493
00:24:39,400 --> 00:24:42,280
Speaker 4: of the areas where we haven't seen a lot of

494
00:24:42,880 --> 00:24:47,560
Speaker 4: growth in traditional either private credit or or other kind

495
00:24:47,560 --> 00:24:50,960
Speaker 4: of corporate lending is in Asia, and we have been

496
00:24:51,119 --> 00:24:55,119
Speaker 4: capital have a large presence in Asia in private equity.

497
00:24:55,119 --> 00:24:58,399
Speaker 4: We have a large presence presence in Asia in special sits,

498
00:24:59,080 --> 00:25:01,359
Speaker 4: and we have a lot charge presence and credit and

499
00:25:01,400 --> 00:25:04,520
Speaker 4: have been lending to companies through our special sets funds

500
00:25:04,560 --> 00:25:08,800
Speaker 4: as well as we have some dedicated investments in Australia

501
00:25:08,960 --> 00:25:11,320
Speaker 4: where we're doing direct lending. And then away from that,

502
00:25:11,720 --> 00:25:15,560
Speaker 4: I'd say the opportunity across private credit continues to be

503
00:25:15,640 --> 00:25:19,399
Speaker 4: quite robust. We think the freeze and activity on the

504
00:25:19,520 --> 00:25:23,119
Speaker 4: M and A and private equity sponsor side is thawing.

505
00:25:23,200 --> 00:25:27,320
Speaker 4: We're seeing pipelines build and activity starting to come to market,

506
00:25:27,320 --> 00:25:31,560
Speaker 4: and I think that will beget a really attractive vintage

507
00:25:31,640 --> 00:25:35,320
Speaker 4: of senior and potentially junior capital transactions on the private

508
00:25:35,840 --> 00:25:39,520
Speaker 4: on the private credit side, as well as some capital

509
00:25:39,560 --> 00:25:45,600
Speaker 4: solution oriented investments. We recently closed a strategy that focuses

510
00:25:45,600 --> 00:25:49,080
Speaker 4: on junior capital investments in private companies and we expect

511
00:25:49,119 --> 00:25:52,160
Speaker 4: that with evaluation changes over the last few years, as

512
00:25:52,200 --> 00:25:54,720
Speaker 4: well as the increase in interest rates, there are a

513
00:25:54,800 --> 00:25:57,280
Speaker 4: number of capital structures that need to get refinanced where

514
00:25:57,480 --> 00:26:01,240
Speaker 4: there will be a shortfall from the senior lender that's

515
00:26:01,240 --> 00:26:03,480
Speaker 4: stepping in versus the one who's being repaid and I

516
00:26:03,480 --> 00:26:07,479
Speaker 4: think that will get some really interesting opportunities for junior capital.

517
00:26:08,760 --> 00:26:11,080
Speaker 4: That and again where we started on the liquid credit

518
00:26:11,119 --> 00:26:14,080
Speaker 4: market side, we think both the dispersion in the liquid market,

519
00:26:14,080 --> 00:26:17,679
Speaker 4: even though the liquid market has tightened significantly, presents some

520
00:26:17,720 --> 00:26:21,720
Speaker 4: good idiosyncratic opportunities. And we think the COLO opportunity is

521
00:26:21,720 --> 00:26:23,520
Speaker 4: going to stay with us for the better part of

522
00:26:23,520 --> 00:26:23,880
Speaker 4: this year.

523
00:26:24,160 --> 00:26:26,639
Speaker 1: But when you say Asia, I mean other than Australia,

524
00:26:26,680 --> 00:26:29,520
Speaker 1: Which countries and what sectors are you specifically thinking about there?

525
00:26:30,960 --> 00:26:31,200
Speaker 5: Yeah?

526
00:26:31,240 --> 00:26:34,240
Speaker 4: Sure, So, as I mentioned, we do have a dedicated

527
00:26:34,880 --> 00:26:38,280
Speaker 4: lending platform in Australia that has been operating for years.

528
00:26:38,359 --> 00:26:41,679
Speaker 4: I think that's one of the strongest bankruptcy regimes in

529
00:26:41,720 --> 00:26:44,480
Speaker 4: the world, and so there are a lot of great

530
00:26:44,560 --> 00:26:48,720
Speaker 4: kind of creditor aspects to that geography as well as

531
00:26:49,280 --> 00:26:53,600
Speaker 4: you know, a strong developed underlying economy. I think India

532
00:26:53,680 --> 00:26:57,800
Speaker 4: is a very interesting region as it relates to the

533
00:26:57,880 --> 00:27:02,120
Speaker 4: robustness of the underlying of me. It's obviously not as

534
00:27:02,200 --> 00:27:04,800
Speaker 4: developed as a place like Australia, but I think India

535
00:27:04,960 --> 00:27:07,960
Speaker 4: is one of the largest geographies we expect.

536
00:27:07,640 --> 00:27:08,360
Speaker 2: To have activity.

537
00:27:08,359 --> 00:27:11,440
Speaker 4: And then again, given we have such a large team

538
00:27:11,760 --> 00:27:15,760
Speaker 4: across different regions within Asia. We do expect that we're

539
00:27:15,760 --> 00:27:19,280
Speaker 4: going to have opportunities across different countries beyond India and Australia,

540
00:27:19,320 --> 00:27:21,119
Speaker 4: but I think those two will be the largest.

541
00:27:21,240 --> 00:27:24,440
Speaker 1: Great So before we talk to Mike Holland, Bloombong Towns

542
00:27:24,520 --> 00:27:26,360
Speaker 1: is a bit more detail about healthcare. I just wanted

543
00:27:26,359 --> 00:27:28,480
Speaker 1: to kind of get you to sum up the risks

544
00:27:28,520 --> 00:27:33,320
Speaker 1: because obviously everybody's everyone in credit is worried about stuff generally,

545
00:27:33,400 --> 00:27:34,680
Speaker 1: and there's seems to be a lot of stuff to

546
00:27:34,680 --> 00:27:36,760
Speaker 1: worry about. But what do you what keeps you up

547
00:27:36,760 --> 00:27:37,080
Speaker 1: at night?

548
00:27:38,119 --> 00:27:41,840
Speaker 4: Sure, I think the the recovery rates in the loan

549
00:27:41,880 --> 00:27:45,439
Speaker 4: market has been topical and for good reason. You know,

550
00:27:45,480 --> 00:27:48,560
Speaker 4: the question you mentioned earlier, Lisa is one that that

551
00:27:48,640 --> 00:27:52,280
Speaker 4: we think a lot about, which is when you're looking

552
00:27:52,280 --> 00:27:54,640
Speaker 4: at a company that's a performing company, when you're doing

553
00:27:54,640 --> 00:27:57,159
Speaker 4: the analysis of thinking what a structuring would look like,

554
00:27:58,520 --> 00:28:00,560
Speaker 4: you know, we've we we really have to get creative

555
00:28:00,640 --> 00:28:03,040
Speaker 4: in terms of thinking about downside cases and thinking about

556
00:28:03,040 --> 00:28:05,480
Speaker 4: how bad that could be. And I think you can't

557
00:28:05,840 --> 00:28:09,840
Speaker 4: take comfort from being a senior secured lender in the

558
00:28:09,840 --> 00:28:12,919
Speaker 4: way that historically you could. And so that's something that

559
00:28:12,920 --> 00:28:14,919
Speaker 4: we do spend a lot of time on We have

560
00:28:15,000 --> 00:28:19,439
Speaker 4: an existing restructuring group here at being capital Credit that

561
00:28:19,480 --> 00:28:22,080
Speaker 4: we've beefed up over the last couple of years, and

562
00:28:22,119 --> 00:28:24,800
Speaker 4: I think we're just very actively thinking about how to

563
00:28:24,840 --> 00:28:28,359
Speaker 4: manage those situations. Another comment I'd make about that is

564
00:28:28,400 --> 00:28:31,480
Speaker 4: I do think that's a case where being a scale

565
00:28:31,520 --> 00:28:35,200
Speaker 4: player matters. We've seen instances where if you're a small lender,

566
00:28:35,760 --> 00:28:38,000
Speaker 4: you're not part of a group, but if you're a

567
00:28:38,080 --> 00:28:40,640
Speaker 4: larger lender, you're really you have to be a part

568
00:28:40,680 --> 00:28:43,640
Speaker 4: of the equation, and so you can really do everything

569
00:28:43,720 --> 00:28:46,120
Speaker 4: you can to make sure you're looking out on behalf

570
00:28:46,160 --> 00:28:49,520
Speaker 4: of your investors in a way that's differentiated relative to

571
00:28:49,640 --> 00:28:52,000
Speaker 4: some of the smaller managers in the market. So I

572
00:28:52,000 --> 00:28:56,760
Speaker 4: think that's an example of scale helping to drive better outcomes.

573
00:28:58,000 --> 00:29:01,440
Speaker 4: So that's one I'd say, and the other is just

574
00:29:01,520 --> 00:29:06,000
Speaker 4: broadly macro risk and thinking about positioning in liquidity and

575
00:29:06,120 --> 00:29:09,880
Speaker 4: how markets respond to different interest rates interest rate environments.

576
00:29:11,040 --> 00:29:14,280
Speaker 4: And I'd say the last one fundamentally is if we're

577
00:29:14,360 --> 00:29:17,160
Speaker 4: right about our economic outlook, that the economy is strong

578
00:29:17,200 --> 00:29:20,280
Speaker 4: and that rates are going to stay higher for longer

579
00:29:20,320 --> 00:29:23,640
Speaker 4: than the market expects, there is a question of for

580
00:29:23,720 --> 00:29:26,400
Speaker 4: how long can these borrowers continue to make their interest

581
00:29:26,480 --> 00:29:30,240
Speaker 4: payments at elevated levels. And we do stress analysis on

582
00:29:30,280 --> 00:29:33,640
Speaker 4: our portfolio very regularly, and what we've seen happen over

583
00:29:33,640 --> 00:29:36,000
Speaker 4: the last couple of years with higher interest rates is

584
00:29:36,040 --> 00:29:39,000
Speaker 4: that interest covers has held in better than expected, but

585
00:29:39,080 --> 00:29:43,640
Speaker 4: that's generally been covered by dipping into liquidity, and so

586
00:29:43,720 --> 00:29:46,120
Speaker 4: that liquidity will cover you for a period of time.

587
00:29:46,160 --> 00:29:50,280
Speaker 4: But the longer high rates last, the more you deplete

588
00:29:50,280 --> 00:29:53,440
Speaker 4: that liquidity. And so I think that's a counter to

589
00:29:54,040 --> 00:29:57,640
Speaker 4: a relatively constructive economic outlook that we think about pretty

590
00:29:57,640 --> 00:30:00,280
Speaker 4: regularly and we stress in the portfolio stuff.

591
00:30:00,360 --> 00:30:02,760
Speaker 1: John Right, Global head of credit at Baine Capital, thank

592
00:30:02,760 --> 00:30:03,880
Speaker 1: you so much for being on the show.

593
00:30:04,200 --> 00:30:05,360
Speaker 2: Thank you very much for having me.

594
00:30:05,760 --> 00:30:07,160
Speaker 1: Also want to say a big thanks to Lisa Lee

595
00:30:07,200 --> 00:30:08,840
Speaker 1: with Bloomberg News in London. Great to see you on

596
00:30:08,880 --> 00:30:09,200
Speaker 1: the show.

597
00:30:09,400 --> 00:30:10,760
Speaker 5: Great, thank you for having me again.

598
00:30:11,040 --> 00:30:13,440
Speaker 1: Read all of Lisa's great scoops on the Bloomberg terminal

599
00:30:13,480 --> 00:30:17,360
Speaker 1: and of course at Bloomberg dot com. So Mike Holland

600
00:30:17,360 --> 00:30:19,720
Speaker 1: at Bloomberg Intelligence. You look at healthcare, which is a

601
00:30:19,840 --> 00:30:22,560
Speaker 1: very broad area and for some reason full of distress

602
00:30:22,600 --> 00:30:25,239
Speaker 1: when it comes to the debt, your coverage extends all

603
00:30:25,280 --> 00:30:27,200
Speaker 1: the way to weight Watchers, which is having a tough

604
00:30:27,240 --> 00:30:30,720
Speaker 1: time in the debt markets. Their bonds when I last

605
00:30:30,920 --> 00:30:34,160
Speaker 1: looked were below fifty cents on the dollar. When I

606
00:30:34,160 --> 00:30:37,320
Speaker 1: looked in October they were up at seventy. They're now

607
00:30:37,400 --> 00:30:40,600
Speaker 1: yielding twenty percent, which is a pretty high implied risk

608
00:30:40,680 --> 00:30:43,360
Speaker 1: of default. What's going on, Mike's what's the problem with

609
00:30:43,360 --> 00:30:43,920
Speaker 1: weight Watchers?

610
00:30:45,440 --> 00:30:47,959
Speaker 3: Yeah, so, you know, this is when we spoke about

611
00:30:48,040 --> 00:30:51,480
Speaker 3: together a couple of months ago, and as you said,

612
00:30:51,520 --> 00:30:55,640
Speaker 3: the bonds were about twenty points higher. One of the

613
00:30:55,760 --> 00:31:00,680
Speaker 3: challenges that weight Watchers has today under its new leadership

614
00:31:00,800 --> 00:31:05,800
Speaker 3: is pivoting from you know, behavioral based sort of treatment

615
00:31:05,840 --> 00:31:10,640
Speaker 3: opportunity to one in which these new GLP ones we

616
00:31:10,720 --> 00:31:16,760
Speaker 3: go these and manjarros are are dispensed and through telehealth

617
00:31:16,800 --> 00:31:20,680
Speaker 3: and prior authorizations through the sequence business, which is now

618
00:31:20,720 --> 00:31:24,520
Speaker 3: called weight Watchers Clinic. And I think one of the

619
00:31:24,600 --> 00:31:29,400
Speaker 3: challenges the company had was not alienating their existing customer

620
00:31:29,440 --> 00:31:32,240
Speaker 3: base for you know, what has really been a sixty

621
00:31:32,320 --> 00:31:37,280
Speaker 3: year old institution weight Watchers has, and pivoting that company

622
00:31:37,720 --> 00:31:41,080
Speaker 3: to something that sort of goes against its original foundations

623
00:31:41,080 --> 00:31:47,200
Speaker 3: of behavioral change absence, you know, medically assisted treatment. What

624
00:31:47,240 --> 00:31:51,560
Speaker 3: we're seeing today anecdotally and through some of the alternative

625
00:31:51,640 --> 00:31:56,680
Speaker 3: data that Bloomberg has on the terminal is the existing

626
00:31:56,800 --> 00:32:01,000
Speaker 3: business seems to be suffering, meaning the membership base seems

627
00:32:01,040 --> 00:32:04,080
Speaker 3: to be churning faster and not growing, and the company

628
00:32:04,200 --> 00:32:06,040
Speaker 3: is sort of put all of its eggs in this

629
00:32:07,280 --> 00:32:10,240
Speaker 3: Weight Watchers clinic basket. And we're, you know, while we

630
00:32:10,280 --> 00:32:11,960
Speaker 3: can see a little bit of that data on the

631
00:32:12,040 --> 00:32:15,920
Speaker 3: terminal of the Sequence sales, so that rather than the

632
00:32:15,960 --> 00:32:19,760
Speaker 3: twenty dollars a month or twenty dollars subscription, you go

633
00:32:19,800 --> 00:32:23,480
Speaker 3: into a ninety nine dollars a month subscription for Sequence.

634
00:32:23,720 --> 00:32:27,120
Speaker 3: We haven't seen the uptake really kick off yet. Now

635
00:32:27,440 --> 00:32:32,160
Speaker 3: earnings for weight Watchers will will hit in early March

636
00:32:32,240 --> 00:32:35,440
Speaker 3: and we'll have a good read through on Sequence growth.

637
00:32:35,640 --> 00:32:39,640
Speaker 3: And so I guess the question really is is will

638
00:32:39,720 --> 00:32:43,840
Speaker 3: the new business take off fast enough before the existing

639
00:32:43,880 --> 00:32:46,520
Speaker 3: business runs out of cash? And I think that's what

640
00:32:46,560 --> 00:32:49,480
Speaker 3: investor concerns are right now. I think a lot of

641
00:32:49,680 --> 00:32:52,000
Speaker 3: I get a lot of calls by equity options traders

642
00:32:52,040 --> 00:32:54,760
Speaker 3: on this one, and you've seen a lot of equity volatility,

643
00:32:55,040 --> 00:32:57,160
Speaker 3: but you've also seen a lot of volatility on the

644
00:32:57,160 --> 00:33:01,080
Speaker 3: bonds as well. The company's levered, you know, earnings around

645
00:33:01,160 --> 00:33:03,680
Speaker 3: you know, one hundred and thirty million probably for twenty

646
00:33:03,760 --> 00:33:08,240
Speaker 3: twenty three. The company's leveraged over ten times, and without

647
00:33:08,320 --> 00:33:12,880
Speaker 3: a growth catalyst that's exhibiting itself. I mean, we're still

648
00:33:12,880 --> 00:33:15,680
Speaker 3: waiting to see if sequence will we'll launch. If it

649
00:33:15,720 --> 00:33:18,800
Speaker 3: does launch and it grows, then this company could be

650
00:33:18,840 --> 00:33:22,400
Speaker 3: a It could be a real big return for equity

651
00:33:22,400 --> 00:33:25,520
Speaker 3: holders today and bond holders who get in around fifty

652
00:33:25,560 --> 00:33:28,960
Speaker 3: cents on the dollar. But there's certainly some real questions

653
00:33:28,960 --> 00:33:30,560
Speaker 3: that remain in risks that are out there.

654
00:33:30,840 --> 00:33:33,160
Speaker 1: But the yield would suggest it should be rated much lower,

655
00:33:33,200 --> 00:33:34,600
Speaker 1: right I mean, it's single B right now. It should

656
00:33:34,600 --> 00:33:36,400
Speaker 1: be triple C based on that yields, isn't it?

657
00:33:37,880 --> 00:33:41,040
Speaker 3: Yes? I think you know this company has been triple

658
00:33:41,080 --> 00:33:46,680
Speaker 3: C before, and I would imagine if you know, according

659
00:33:46,720 --> 00:33:50,600
Speaker 3: to raiders targets on this company. You know, we put

660
00:33:50,640 --> 00:33:53,520
Speaker 3: out in our notes that Moody's and S and P

661
00:33:53,640 --> 00:33:56,440
Speaker 3: basically say if leverage is over eight times for Moody's

662
00:33:56,440 --> 00:33:59,160
Speaker 3: and over seven times for S ANDP, that there will

663
00:33:59,280 --> 00:34:02,760
Speaker 3: trigger it down raid, We're we're right in that wheelhouse

664
00:34:02,840 --> 00:34:05,560
Speaker 3: right now, So it would it would look like the

665
00:34:05,640 --> 00:34:12,279
Speaker 3: agencies might might not sus over time. But you know,

666
00:34:12,440 --> 00:34:14,880
Speaker 3: with the bonds training where they are already, I wouldn't

667
00:34:14,920 --> 00:34:18,200
Speaker 3: imagine it would have that much of a you know,

668
00:34:18,640 --> 00:34:22,280
Speaker 3: a negative impact to price, given we're already below fifty

669
00:34:22,280 --> 00:34:24,400
Speaker 3: cents on the dollar for the bonds. Mind you, the

670
00:34:24,480 --> 00:34:26,520
Speaker 3: term loan is also six and cents on the dollar,

671
00:34:26,840 --> 00:34:30,240
Speaker 3: and the bond, as we're talking earlier with John Wright,

672
00:34:30,320 --> 00:34:34,319
Speaker 3: is technically senior secured along with the term loan, just

673
00:34:34,600 --> 00:34:38,600
Speaker 3: but you know, really in name only. But I thought

674
00:34:38,600 --> 00:34:39,399
Speaker 3: i'd highlight that.

675
00:34:39,680 --> 00:34:41,719
Speaker 1: So if you have to bet either way, do you

676
00:34:41,760 --> 00:34:44,120
Speaker 1: think they'll make it?

677
00:34:44,280 --> 00:34:49,800
Speaker 3: Oh? Wow, it's a great question. My My my bias

678
00:34:49,920 --> 00:34:52,600
Speaker 3: is as a credit analyst is more of a cynic

679
00:34:52,640 --> 00:34:55,560
Speaker 3: and a realist. And you know, hopes and dreams don't

680
00:34:55,560 --> 00:35:00,160
Speaker 3: make a great credit investor, so, uh, you know, I'm

681
00:35:00,200 --> 00:35:03,120
Speaker 3: conditioned to say it is probably not. But you know,

682
00:35:03,200 --> 00:35:06,040
Speaker 3: if they are able to get a small uptake on sequence,

683
00:35:06,120 --> 00:35:10,879
Speaker 3: meaning you know, fifty to one hundred thousand new new

684
00:35:10,920 --> 00:35:15,439
Speaker 3: subscriptions to that new initiative, it could really change the game,

685
00:35:15,520 --> 00:35:18,520
Speaker 3: right it's it could really add liquidity to the picture.

686
00:35:18,520 --> 00:35:21,920
Speaker 3: It could to drive earning's growth, and so you know,

687
00:35:21,960 --> 00:35:25,960
Speaker 3: it's a wait and see story right now. And again

688
00:35:26,000 --> 00:35:28,720
Speaker 3: as a credit as a credit investor or credit analyst,

689
00:35:28,760 --> 00:35:32,319
Speaker 3: I'm I'm biased to the negative and you know, looking

690
00:35:32,360 --> 00:35:35,360
Speaker 3: the condition down to cushion downside, So I would not

691
00:35:35,480 --> 00:35:37,799
Speaker 3: be betting all my cards.

692
00:35:37,520 --> 00:35:39,920
Speaker 1: On this one. They're really so pessimistic on me. Is

693
00:35:39,960 --> 00:35:42,719
Speaker 1: there any read through, Mike for the for the sector though,

694
00:35:42,760 --> 00:35:44,600
Speaker 1: or is it very specific to this one name?

695
00:35:45,680 --> 00:35:48,279
Speaker 3: Oh, I think this is very specific, right, But to

696
00:35:49,080 --> 00:35:54,440
Speaker 3: weight Watchers it's the idiosyncratic risk curios is meaningful. I

697
00:35:54,480 --> 00:35:57,480
Speaker 3: think it does provide a read through in a sense

698
00:35:57,640 --> 00:36:01,919
Speaker 3: to the uptake on GLP ones more broad Oddly, you know,

699
00:36:02,719 --> 00:36:06,480
Speaker 3: what WeightWatchers is trying to do is to you know,

700
00:36:06,520 --> 00:36:09,720
Speaker 3: in a sense, almost become a specialty pharmacy that drives

701
00:36:09,760 --> 00:36:14,720
Speaker 3: prior authorizations and distributes or manages the distribution of GLP

702
00:36:14,800 --> 00:36:19,440
Speaker 3: ones to a new customer base. And I think that

703
00:36:19,680 --> 00:36:21,839
Speaker 3: it's a big jump for what they from what they

704
00:36:21,880 --> 00:36:25,560
Speaker 3: were before. And it remains to be seen really at

705
00:36:25,560 --> 00:36:29,200
Speaker 3: this point whether or not that trajectory will We'll launch and.

706
00:36:29,160 --> 00:36:31,680
Speaker 1: I'd say, my dumb question for us, what are GLP ones?

707
00:36:31,719 --> 00:36:32,600
Speaker 1: Can you explain that to me?

708
00:36:34,680 --> 00:36:37,880
Speaker 3: These really exciting new drugs that are out there that

709
00:36:37,920 --> 00:36:42,480
Speaker 3: were previously drugs prescribed for diabetes have been known to

710
00:36:42,840 --> 00:36:47,600
Speaker 3: reduce weight loss by about twenty percent. You could reduce

711
00:36:47,600 --> 00:36:52,319
Speaker 3: your by twenty percent if you take these drugs weekly injections.

712
00:36:52,360 --> 00:36:57,760
Speaker 3: But they're very expensive, predominantly cash pay for wealthy folks.

713
00:36:57,840 --> 00:37:02,120
Speaker 3: It's not generally covered by commercial and insurance or Medicare

714
00:37:02,560 --> 00:37:04,480
Speaker 3: or really that there are some states I believe they

715
00:37:04,520 --> 00:37:07,760
Speaker 3: covered on Medicaid, but for diabetes mainly. So the question

716
00:37:07,840 --> 00:37:10,800
Speaker 3: is whether or not insurance companies will pay for weight loss,

717
00:37:10,840 --> 00:37:13,239
Speaker 3: but is something they haven't really done previously, And I

718
00:37:13,280 --> 00:37:17,760
Speaker 3: think Weight Watchers is leading the charge really in trying

719
00:37:17,800 --> 00:37:24,360
Speaker 3: to modify perceptions about weight launched drugs and really drive coverage.

720
00:37:24,440 --> 00:37:27,319
Speaker 3: So we'll see over time if their initiatives pay off.

721
00:37:27,880 --> 00:37:29,360
Speaker 1: And they have the brand name, they've been around for

722
00:37:29,360 --> 00:37:31,200
Speaker 1: a long time. Everyone knows that it's a household name,

723
00:37:31,239 --> 00:37:34,160
Speaker 1: so maybe there's something there. But Mike Colin at Bloomberg Intelligence,

724
00:37:34,160 --> 00:37:35,640
Speaker 1: thank you again for joining us.

725
00:37:36,280 --> 00:37:37,000
Speaker 3: Thank you, James.

726
00:37:37,239 --> 00:37:39,480
Speaker 1: Check out all of Mike's research on the Bloomberg Terminal.

727
00:37:39,520 --> 00:37:42,239
Speaker 1: It's great stuff, or do contact him directly if you

728
00:37:42,280 --> 00:37:45,080
Speaker 1: need more information. And thanks again to John right Over

729
00:37:45,120 --> 00:37:47,879
Speaker 1: at Benkcapsule and to Lisa Ly from Bloomberg News. Read

730
00:37:47,920 --> 00:37:50,360
Speaker 1: all of Lisa's great scoops on the terminal and at

731
00:37:50,400 --> 00:37:53,480
Speaker 1: Bloomberg dot com. And please do subscribe wherever you get

732
00:37:53,520 --> 00:37:56,640
Speaker 1: your podcasts. We're on Apple, Google and Spotify. Give us

733
00:37:56,680 --> 00:37:59,160
Speaker 1: a review, tell your friends, or email me directly at

734
00:37:59,239 --> 00:38:03,920
Speaker 1: j Crumby at Bloomberg dot net. I'm James Crombie. It's

735
00:38:03,960 --> 00:38:06,160
Speaker 1: been a pleasure having you join us again next week

736
00:38:06,239 --> 00:38:08,000
Speaker 1: on the Credit Edge