1 00:00:11,840 --> 00:00:14,920 Speaker 1: Hello, and welcome to the Credit Edge of Weekly Markets podcast. 2 00:00:15,200 --> 00:00:17,840 Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg. 3 00:00:18,280 --> 00:00:21,119 Speaker 1: Today's guests are Rachel Butt, who covers distress, debt and 4 00:00:21,120 --> 00:00:24,000 Speaker 1: bankruptcy for Bloomberg News in New York. We're delighted to 5 00:00:24,000 --> 00:00:24,760 Speaker 1: have you on the show. 6 00:00:25,560 --> 00:00:26,439 Speaker 2: Thanks for having me. 7 00:00:26,760 --> 00:00:29,680 Speaker 1: We're also very pleased to welcome Matthew Geitner, who covers 8 00:00:29,720 --> 00:00:32,879 Speaker 1: industrials for Bloomberg Intelligence, also in New York. Hey. 9 00:00:32,920 --> 00:00:34,120 Speaker 3: Everyone, We'll be. 10 00:00:34,120 --> 00:00:36,919 Speaker 1: Getting his insight later on in the show, including details 11 00:00:36,920 --> 00:00:40,080 Speaker 1: of some hidden gems in credit markets. But before we do, 12 00:00:40,800 --> 00:00:44,040 Speaker 1: Rachel Butt with Bloomberg News, you cover distressed debt in 13 00:00:44,080 --> 00:00:47,360 Speaker 1: the US. There's always a ton of drama there. And 14 00:00:47,400 --> 00:00:49,800 Speaker 1: you're out with a great scoop on Evergron this week. 15 00:00:50,159 --> 00:00:53,000 Speaker 1: What is that? Why has the company dominated the headlines 16 00:00:53,000 --> 00:00:55,880 Speaker 1: for so long, not just in the US, but globally, 17 00:00:55,440 --> 00:00:57,280 Speaker 1: particularly in Asia. 18 00:00:58,600 --> 00:01:01,840 Speaker 2: Yeah, so I've been tracked China Evergrand Grow for a 19 00:01:01,840 --> 00:01:05,640 Speaker 2: long time. Evergrand is a real state developer in China 20 00:01:06,200 --> 00:01:09,800 Speaker 2: and they have been borrowing a ton of debt to 21 00:01:10,040 --> 00:01:13,399 Speaker 2: help grow itself. It has more than a thousand, three 22 00:01:13,440 --> 00:01:17,440 Speaker 2: hundred projects across two hundred and eighty cities in China, 23 00:01:18,000 --> 00:01:21,520 Speaker 2: and it's the world's most indebted real estate developer with 24 00:01:21,560 --> 00:01:23,840 Speaker 2: more than three hundred billion of debt in. 25 00:01:23,840 --> 00:01:26,880 Speaker 1: Total dollars, right, yes, okay. 26 00:01:26,880 --> 00:01:32,559 Speaker 2: And within that amount, around nineteen billion is in offshore 27 00:01:32,920 --> 00:01:36,200 Speaker 2: dollar bonds, so that's the most among its peers. 28 00:01:36,560 --> 00:01:40,160 Speaker 1: By offshore, you mean sitting in the US credit markets. Yes, 29 00:01:40,200 --> 00:01:41,320 Speaker 1: that's right, okay. 30 00:01:41,840 --> 00:01:45,880 Speaker 2: So at the beginning of twenty twenty one, Chinese regulators 31 00:01:45,920 --> 00:01:49,520 Speaker 2: began to crack down on excessive borrowing in the market 32 00:01:50,080 --> 00:01:53,480 Speaker 2: and try to contain a real state bubble there without 33 00:01:53,560 --> 00:01:58,920 Speaker 2: hurting economic growth. Realestate is a pretty important sector in 34 00:01:59,000 --> 00:02:02,600 Speaker 2: terms of the Chinese economy, and Evergrant itself has been 35 00:02:02,640 --> 00:02:08,079 Speaker 2: trying to raise financing to help cover its debt obligations, 36 00:02:08,160 --> 00:02:10,880 Speaker 2: and they try to sell asset at some point but 37 00:02:11,040 --> 00:02:14,160 Speaker 2: fail to do so. And at the end of twenty 38 00:02:14,200 --> 00:02:20,000 Speaker 2: twenty one, they went into default after missing several coupon payments, 39 00:02:20,040 --> 00:02:24,280 Speaker 2: and they started to talk to their offshore bondholders on 40 00:02:24,360 --> 00:02:25,400 Speaker 2: a restructuring plan. 41 00:02:25,840 --> 00:02:28,520 Speaker 1: So just let me something that China is a massive economy. 42 00:02:28,680 --> 00:02:30,919 Speaker 1: There's a lot of people there, a lot of them 43 00:02:31,000 --> 00:02:33,359 Speaker 1: want to buy housing I mean, why wouldn't a real 44 00:02:33,480 --> 00:02:36,160 Speaker 1: estate company work in China? What's going on with that company? 45 00:02:37,560 --> 00:02:41,520 Speaker 2: The issue with Evergrant is its massive debt load and 46 00:02:42,000 --> 00:02:46,120 Speaker 2: sales have been going down when the economy in China 47 00:02:46,240 --> 00:02:50,520 Speaker 2: is cooling. So Chinese regulators have been laser focused in 48 00:02:50,600 --> 00:02:55,760 Speaker 2: trying to prop up the sector without derailing economic growth. 49 00:02:55,960 --> 00:03:01,560 Speaker 2: And so now Evergrant is seen as a really important 50 00:03:01,639 --> 00:03:03,880 Speaker 2: barometer for the rest of the industry in terms of 51 00:03:03,880 --> 00:03:06,640 Speaker 2: how it's going to navigate its restructuring. 52 00:03:07,040 --> 00:03:09,960 Speaker 1: Okay, so with three hundred billion dollars worth of debt 53 00:03:10,440 --> 00:03:12,440 Speaker 1: twenty billion or so in the US, I mean, that's 54 00:03:12,480 --> 00:03:15,200 Speaker 1: one of the biggest restructuring situations. It's only for a 55 00:03:15,240 --> 00:03:17,200 Speaker 1: company that I've seen in a long time. And what's 56 00:03:17,200 --> 00:03:21,040 Speaker 1: going on with restructuring now? I mean, how is the 57 00:03:21,080 --> 00:03:22,840 Speaker 1: process going? Are they reaching agreement? 58 00:03:23,680 --> 00:03:28,720 Speaker 2: So they did reach an agreement after a long period 59 00:03:28,800 --> 00:03:32,720 Speaker 2: of negotiation with their ad hoc group of investors. A 60 00:03:32,800 --> 00:03:36,520 Speaker 2: few weeks ago, every Grand released the details, which is 61 00:03:36,520 --> 00:03:41,040 Speaker 2: a two hundred page pages long restructuring agreement which would 62 00:03:41,080 --> 00:03:46,680 Speaker 2: allow their bondholders to get either new debt or in 63 00:03:46,720 --> 00:03:49,360 Speaker 2: the form of notes, or a combination of new debt 64 00:03:49,560 --> 00:03:54,360 Speaker 2: and instruments that are tied to their subsidiaries shares, so 65 00:03:55,120 --> 00:03:57,840 Speaker 2: tied to the shares of their property management unit and 66 00:03:57,880 --> 00:04:03,280 Speaker 2: also their electric vehicle units. That proposal covers the nineteen 67 00:04:03,480 --> 00:04:08,800 Speaker 2: billion in offshore notes and Evergrand would need over seventy 68 00:04:08,840 --> 00:04:12,360 Speaker 2: five percent of their bondholders to approve this plan in 69 00:04:12,440 --> 00:04:13,160 Speaker 2: order to proceed. 70 00:04:13,760 --> 00:04:15,440 Speaker 1: So they're up to what percentage so far? 71 00:04:16,120 --> 00:04:20,760 Speaker 2: They are just a little over thirty percent now. 72 00:04:20,720 --> 00:04:23,040 Speaker 1: Okay, so there is some momentum there. What kind of 73 00:04:23,080 --> 00:04:24,680 Speaker 1: foreign bondholds are we talking about here? 74 00:04:25,360 --> 00:04:29,200 Speaker 2: We are seeing a number of really notable US HESH 75 00:04:29,279 --> 00:04:32,640 Speaker 2: funds that got involved when they bought the Evergrand bonds 76 00:04:32,680 --> 00:04:40,719 Speaker 2: on the cheap. They'd include Redwood, Sava, Ellington, Davinson, Kapner, 77 00:04:40,760 --> 00:04:44,320 Speaker 2: and Varde. These funds are part of the ad hoc 78 00:04:44,360 --> 00:04:47,960 Speaker 2: group that helped shape the restructuring plan that was released 79 00:04:48,160 --> 00:04:52,200 Speaker 2: a couple of weeks ago, and they are part of 80 00:04:52,279 --> 00:04:58,200 Speaker 2: the no holders of Evergrand and its unit called Scenery Journey. 81 00:04:58,680 --> 00:05:01,440 Speaker 1: So what expecting to get here? I mean they're getting 82 00:05:01,520 --> 00:05:02,200 Speaker 1: paid back at par. 83 00:05:04,279 --> 00:05:08,400 Speaker 2: They are expected to either you know, roll into a 84 00:05:08,440 --> 00:05:13,200 Speaker 2: new debt so extending the maturities, or they are expected 85 00:05:13,240 --> 00:05:17,839 Speaker 2: to get instruments that are tied to the shares of 86 00:05:18,120 --> 00:05:20,640 Speaker 2: certain assets of every grant. 87 00:05:20,880 --> 00:05:23,000 Speaker 1: And I know this is a massive situation and very 88 00:05:23,000 --> 00:05:26,719 Speaker 1: complicated many different stakeholders, But why is it taking so 89 00:05:26,839 --> 00:05:28,240 Speaker 1: long to reach an agreement here? 90 00:05:29,400 --> 00:05:32,640 Speaker 2: Well, it's a massive debt pile. And I guess the 91 00:05:32,640 --> 00:05:36,239 Speaker 2: most important thing is this is a very closely washed 92 00:05:36,560 --> 00:05:40,640 Speaker 2: situation by not just investors, but the governments, and there's 93 00:05:42,080 --> 00:05:44,080 Speaker 2: for the every step of the way. I can imagine 94 00:05:44,120 --> 00:05:48,279 Speaker 2: a lot of government intervention on how the negotiations go. 95 00:05:48,600 --> 00:05:52,280 Speaker 2: And given the company is very important to the health 96 00:05:52,320 --> 00:05:55,240 Speaker 2: of the economy and also the housing market in China, 97 00:05:56,320 --> 00:06:01,880 Speaker 2: and it's also really important to investors. And it's in 98 00:06:01,920 --> 00:06:06,200 Speaker 2: the sense that China would honor or try to follow 99 00:06:06,400 --> 00:06:09,800 Speaker 2: foreign restructuring principles and in terms of how they treat 100 00:06:10,120 --> 00:06:14,560 Speaker 2: foreign creditors, which would be pretty important source of funding 101 00:06:14,720 --> 00:06:18,520 Speaker 2: going forward for any companies in China. 102 00:06:18,680 --> 00:06:20,280 Speaker 1: Do we think this is a company that really has 103 00:06:20,279 --> 00:06:21,280 Speaker 1: a long term future. 104 00:06:22,839 --> 00:06:26,640 Speaker 2: It seems like the bondholders think so. The housing market 105 00:06:26,720 --> 00:06:31,480 Speaker 2: has shown signs of improvement lately in terms of new sales, 106 00:06:32,600 --> 00:06:37,040 Speaker 2: and it seems like at least the ad hoc Group 107 00:06:37,120 --> 00:06:42,800 Speaker 2: members are pretty bullish on the company's ability to survive 108 00:06:42,960 --> 00:06:45,160 Speaker 2: and grow in the long term. 109 00:06:45,360 --> 00:06:47,520 Speaker 1: So what's the next event on the radar? What else 110 00:06:47,560 --> 00:06:48,560 Speaker 1: should we be looking out for. 111 00:06:48,560 --> 00:06:53,440 Speaker 2: Here, Well, we're all closely watching the deadline on April 112 00:06:53,480 --> 00:06:57,720 Speaker 2: twenty seventh. That's the deadline for investors outside of the 113 00:06:57,760 --> 00:07:01,080 Speaker 2: ad hoc group to throw a head heat in and 114 00:07:01,360 --> 00:07:03,880 Speaker 2: try to you know, get on board with the plan. 115 00:07:04,360 --> 00:07:07,680 Speaker 2: If they do get on board, then they get a 116 00:07:07,800 --> 00:07:11,200 Speaker 2: you know, a sweetener, which is a consent fee. So 117 00:07:13,040 --> 00:07:16,040 Speaker 2: we'll see how many people are on board by April 118 00:07:16,120 --> 00:07:16,760 Speaker 2: twenty seventh. 119 00:07:17,920 --> 00:07:20,280 Speaker 1: So what when you step back from this situation, we'll 120 00:07:20,320 --> 00:07:22,520 Speaker 1: be covering it for some time, you know years in 121 00:07:22,560 --> 00:07:26,160 Speaker 1: some cases, what are we learning here about about China, 122 00:07:26,200 --> 00:07:29,200 Speaker 1: about real estate, about investing in emerging markets? 123 00:07:30,880 --> 00:07:35,760 Speaker 2: Ever, Grant is really a risky bet for foreign investors 124 00:07:35,840 --> 00:07:39,320 Speaker 2: because not just because of its massive debt load, but 125 00:07:39,480 --> 00:07:44,240 Speaker 2: because of it's how politically important it is. And so 126 00:07:46,040 --> 00:07:49,720 Speaker 2: it's it's a bet where you have to make assumptions 127 00:07:49,840 --> 00:07:52,960 Speaker 2: on what the Chinese government would do in order to 128 00:07:53,040 --> 00:07:57,440 Speaker 2: preserve the stability of the housing market. And so there's 129 00:07:57,480 --> 00:08:01,160 Speaker 2: a lot of psychology that goes in and in some way, 130 00:08:01,240 --> 00:08:02,960 Speaker 2: it is a big political debt. 131 00:08:03,480 --> 00:08:05,880 Speaker 1: So we're trying to get inside the minds of the 132 00:08:05,920 --> 00:08:08,360 Speaker 1: people that run the Communist Party of China. Sounds like 133 00:08:08,360 --> 00:08:09,520 Speaker 1: at all orders me. 134 00:08:11,600 --> 00:08:12,120 Speaker 2: Exactly. 135 00:08:12,920 --> 00:08:16,000 Speaker 1: But okay, so before we talk to Matt Goyner and 136 00:08:16,000 --> 00:08:18,360 Speaker 1: thanks for the rundown on Evergrend, I definitely think we 137 00:08:18,400 --> 00:08:21,040 Speaker 1: should be watching that more closely over here. Sure, what's 138 00:08:21,080 --> 00:08:23,120 Speaker 1: the next big story to watch on your beat? Rachel? 139 00:08:23,160 --> 00:08:25,160 Speaker 1: I know you're covering a ton of different situations. What 140 00:08:25,200 --> 00:08:28,440 Speaker 1: else should we be worrying about in distress debt? Right now? 141 00:08:28,960 --> 00:08:33,440 Speaker 2: Right now I am watching Bad Bath and Beyond really closely. 142 00:08:34,520 --> 00:08:38,439 Speaker 2: The retailer is once again preparing to file for bankruptcy, 143 00:08:38,480 --> 00:08:42,280 Speaker 2: which could come as soon as this week, and the 144 00:08:42,320 --> 00:08:46,000 Speaker 2: company is trying to look for financing options that would 145 00:08:46,040 --> 00:08:50,920 Speaker 2: help fund the operations through bankruptcy. So that is a 146 00:08:50,960 --> 00:08:55,559 Speaker 2: retailer that has been through a very rocky and volatile 147 00:08:56,520 --> 00:09:00,439 Speaker 2: process in which we thought they would be filing couple 148 00:09:00,400 --> 00:09:03,199 Speaker 2: of months ago, but they managed to get some rescue 149 00:09:03,200 --> 00:09:08,280 Speaker 2: financing from a hedge fund investor, which bought their shares 150 00:09:08,280 --> 00:09:11,679 Speaker 2: at a discount. But the Bad Bath has been struggling 151 00:09:11,720 --> 00:09:15,160 Speaker 2: to keep their shares above a certain threshold for that 152 00:09:15,440 --> 00:09:20,640 Speaker 2: equity financing. So now they're in real danger of a 153 00:09:20,920 --> 00:09:25,560 Speaker 2: potential bankruptcy and we're closely watching if you know, who's 154 00:09:25,720 --> 00:09:28,600 Speaker 2: going to provide financing for them and who is going 155 00:09:28,679 --> 00:09:34,559 Speaker 2: to take certain assets or even their intellectual property as 156 00:09:34,600 --> 00:09:35,800 Speaker 2: a result of this process. 157 00:09:36,160 --> 00:09:38,120 Speaker 1: Do they have a trigger event that's on the horizon, 158 00:09:38,160 --> 00:09:40,559 Speaker 1: like maturity or something that's you that's pushing them over 159 00:09:40,559 --> 00:09:43,079 Speaker 1: the edge, or is there anything to look at In 160 00:09:43,200 --> 00:09:44,400 Speaker 1: terms of the calendar. 161 00:09:45,960 --> 00:09:49,240 Speaker 2: There is a deadline which is on April twenty six, 162 00:09:49,720 --> 00:09:53,000 Speaker 2: by which bad Bath has to raise another three hundred 163 00:09:53,360 --> 00:09:58,320 Speaker 2: million from equity investors, so we are expecting the company 164 00:09:59,200 --> 00:10:01,800 Speaker 2: to file for bank see before that debtline. 165 00:10:02,240 --> 00:10:04,560 Speaker 1: Great stuff, Rachel, but from Bloomberg News, thank you very 166 00:10:04,640 --> 00:10:06,400 Speaker 1: much for joining us, and make sure you read all 167 00:10:06,440 --> 00:10:09,160 Speaker 1: of Rachel's scoops on the Bloomberg terminal and of course 168 00:10:09,200 --> 00:10:12,160 Speaker 1: at Bloomberg dot com. Switching gears here a bit. As 169 00:10:12,200 --> 00:10:16,360 Speaker 1: I mentioned earlier, we're delighted to welcome Matthewkitner, who covers industrials, 170 00:10:16,440 --> 00:10:21,040 Speaker 1: aerospace and defense, transportation and logistics and machinery at Bloomberg Intelligence. 171 00:10:21,480 --> 00:10:24,040 Speaker 1: That's a lot of stuff to cover Matt, how do 172 00:10:24,080 --> 00:10:27,080 Speaker 1: you do it? Thank you for being on the show. 173 00:10:27,800 --> 00:10:29,800 Speaker 1: Thank you for being on the show. So, as Rachel says, 174 00:10:29,800 --> 00:10:31,360 Speaker 1: there's a ton of risk out there, there's a lot 175 00:10:31,400 --> 00:10:33,760 Speaker 1: of things to worry about. The economy slowing down. That's 176 00:10:33,800 --> 00:10:36,240 Speaker 1: got a hurt earnings. At the same time, inflation is 177 00:10:36,320 --> 00:10:39,839 Speaker 1: hurting consumer demand, and higher rates means increased borrowing costs 178 00:10:39,840 --> 00:10:42,160 Speaker 1: for the companies that you cover. In addition, we have 179 00:10:42,160 --> 00:10:44,840 Speaker 1: a ton of volatility coming from the banking sector, which 180 00:10:44,880 --> 00:10:47,480 Speaker 1: went through quite a lot of termoil recently. And then 181 00:10:47,520 --> 00:10:50,880 Speaker 1: there's geopolitics, oil, the debt ceiling. I mean, a lot 182 00:10:50,880 --> 00:10:54,760 Speaker 1: of bad stuff out there, right. That means downgrades, defaultse distress. 183 00:10:55,400 --> 00:10:57,679 Speaker 1: Is that the overall trend map more downgrades. 184 00:10:58,440 --> 00:11:00,719 Speaker 4: Yeah, So we we've seen a nig a bias over 185 00:11:00,760 --> 00:11:05,040 Speaker 4: the last year with writing downgrades sort of far outpacing upgrades, 186 00:11:05,040 --> 00:11:07,839 Speaker 4: and we don't really see that trend debating through year end. 187 00:11:08,000 --> 00:11:10,360 Speaker 3: And that analysis started using. 188 00:11:10,200 --> 00:11:13,200 Speaker 4: The Ratt function that we have on the terminal, So 189 00:11:13,200 --> 00:11:17,040 Speaker 4: we wanted to see from a bottoms up analysis across 190 00:11:17,120 --> 00:11:20,600 Speaker 4: various subsectors, were there any sort of pockets of positive 191 00:11:20,600 --> 00:11:24,720 Speaker 4: bias or light despite all the macroeconomic uncertainty that you 192 00:11:24,760 --> 00:11:28,320 Speaker 4: just highlighted in Economists Projecting, I think this morning on 193 00:11:28,360 --> 00:11:30,959 Speaker 4: ECFC it was like a sixty five percent probability of 194 00:11:31,000 --> 00:11:33,280 Speaker 4: the full or recession. 195 00:11:32,800 --> 00:11:33,920 Speaker 3: Here in twenty twenty three. 196 00:11:33,960 --> 00:11:36,800 Speaker 4: So that was kind of the progenitor behind the Global 197 00:11:36,800 --> 00:11:39,440 Speaker 4: Team deech that we did last week, which garnered quite 198 00:11:39,480 --> 00:11:40,160 Speaker 4: a bit of interest. 199 00:11:40,640 --> 00:11:43,120 Speaker 1: So you're seeing some companies that stand out in this 200 00:11:43,679 --> 00:11:45,559 Speaker 1: sort of bucking that trend. Can you talk a bit 201 00:11:45,559 --> 00:11:46,079 Speaker 1: more about that? 202 00:11:46,559 --> 00:11:49,880 Speaker 4: Yeah, So in MySpace, the company I found is a 203 00:11:49,920 --> 00:11:53,080 Speaker 4: company called Helmet, which is an aerospace supplier and they 204 00:11:53,120 --> 00:11:57,200 Speaker 4: make many different products primarily rated to commercial aerospace and 205 00:11:57,240 --> 00:11:59,360 Speaker 4: some defense, but they include a lot of the jet 206 00:11:59,400 --> 00:12:02,440 Speaker 4: engine intry. Their products can be found on the hot 207 00:12:02,480 --> 00:12:04,680 Speaker 4: part of part of the engine as well as they 208 00:12:04,760 --> 00:12:09,080 Speaker 4: make fasteners, engineered structures, as well as some aluminum forge 209 00:12:09,080 --> 00:12:12,839 Speaker 4: wheels for the trucking space. But they're doing pretty well, 210 00:12:12,880 --> 00:12:15,640 Speaker 4: and that's all thanks to the sustained recovery and air 211 00:12:15,720 --> 00:12:19,720 Speaker 4: travel actions to reduce debt and earnings growth, which is 212 00:12:19,720 --> 00:12:23,240 Speaker 4: helping them deleverage their their balance sheets. So they're targeting 213 00:12:23,280 --> 00:12:25,880 Speaker 4: around one and a half to two times net leverage, 214 00:12:25,920 --> 00:12:28,600 Speaker 4: which is important because if we look at it, you know, 215 00:12:28,640 --> 00:12:31,160 Speaker 4: what does what does that look like for a rating perspective. 216 00:12:31,200 --> 00:12:33,760 Speaker 4: It's in line with our triple B median that we 217 00:12:33,800 --> 00:12:35,720 Speaker 4: have on the terminal, which is higher than their current 218 00:12:35,760 --> 00:12:39,360 Speaker 4: credit ratings. So with the outlook for leverage next year, 219 00:12:39,440 --> 00:12:42,199 Speaker 4: that appears to be on track to go below some 220 00:12:42,280 --> 00:12:46,800 Speaker 4: radar adjusted metrics based on our scenario asis and forward 221 00:12:46,880 --> 00:12:50,280 Speaker 4: look for margins that screen stronger than even higher rated 222 00:12:50,480 --> 00:12:53,680 Speaker 4: companies than themselves. We think those factors could spark a 223 00:12:53,760 --> 00:12:58,720 Speaker 4: rating review Moody's or SMP, given that those metrics look 224 00:12:58,800 --> 00:13:01,400 Speaker 4: like they might surpass the be A one double B 225 00:13:01,520 --> 00:13:03,960 Speaker 4: plus ratings that they have set for them. 226 00:13:04,520 --> 00:13:06,640 Speaker 1: Just to start you in the aerospace transport, I only 227 00:13:06,679 --> 00:13:08,240 Speaker 1: hit bad news in that sector. I mean, you know, 228 00:13:08,320 --> 00:13:11,679 Speaker 1: delays and groundings and people missing their flights and all 229 00:13:11,720 --> 00:13:13,920 Speaker 1: sorts of stuff, And what makes you think that sector 230 00:13:13,920 --> 00:13:14,760 Speaker 1: is in good shape? 231 00:13:15,280 --> 00:13:15,480 Speaker 3: Yeah? 232 00:13:15,640 --> 00:13:17,960 Speaker 4: I think you know, we've sort of ascribed a six 233 00:13:18,000 --> 00:13:20,839 Speaker 4: to twelve month timeframe around which we think that that 234 00:13:20,880 --> 00:13:22,520 Speaker 4: could happen, So that would get us towards the end 235 00:13:22,559 --> 00:13:25,319 Speaker 4: of next year and into twenty twenty four. But the 236 00:13:25,760 --> 00:13:28,080 Speaker 4: tailwind really is if you look at Iyada and some 237 00:13:28,120 --> 00:13:30,559 Speaker 4: of the commentary out of the airlines. You know, we're 238 00:13:30,559 --> 00:13:32,959 Speaker 4: going to be passenger traffic's going to be returning to 239 00:13:33,240 --> 00:13:36,000 Speaker 4: two levels in line with pre pandemic levels next year, 240 00:13:37,160 --> 00:13:41,360 Speaker 4: led by domestic North America here in the US in 241 00:13:41,400 --> 00:13:42,240 Speaker 4: twenty twenty three. 242 00:13:42,360 --> 00:13:44,160 Speaker 3: So, you know, a lot of the. 243 00:13:44,120 --> 00:13:48,680 Speaker 4: Headlines that we've seen across the aerospace sector has been 244 00:13:48,760 --> 00:13:52,560 Speaker 4: really you know, supply versus demand. There's there's no shortage 245 00:13:52,559 --> 00:13:55,360 Speaker 4: of demand right now. It's really sort of a supply issue, 246 00:13:55,679 --> 00:13:58,280 Speaker 4: which is probably the issue would rather have because you 247 00:13:58,360 --> 00:14:01,920 Speaker 4: want the demand. So it's really get planes into customers' 248 00:14:01,920 --> 00:14:04,960 Speaker 4: hands to sort of fly the public around. 249 00:14:05,200 --> 00:14:07,120 Speaker 1: And to be clear, how met the company that we're 250 00:14:07,120 --> 00:14:10,839 Speaker 1: talking about here, they produce airplanes and they sell them 251 00:14:10,840 --> 00:14:11,840 Speaker 1: to airlines, is that right? 252 00:14:12,000 --> 00:14:14,400 Speaker 4: So they're a supplier of a lot of the componentry 253 00:14:14,440 --> 00:14:18,280 Speaker 4: that goes into the engines or fastening the different component 254 00:14:18,280 --> 00:14:21,720 Speaker 4: trees onto the aircraft, which then the OEMs like Bowing 255 00:14:21,840 --> 00:14:24,960 Speaker 4: or Airbus would then to deliver to the airlines who 256 00:14:25,000 --> 00:14:27,640 Speaker 4: would then use them to fly. And the value proposition 257 00:14:27,680 --> 00:14:30,880 Speaker 4: there is that the new aircraft would generally be much 258 00:14:30,880 --> 00:14:33,760 Speaker 4: more fuel efficient, which is a huge sort of operating 259 00:14:33,840 --> 00:14:36,480 Speaker 4: expense that airlines can sort of save money on. 260 00:14:36,840 --> 00:14:39,120 Speaker 1: And they make stuff that others aren't easily able to make. 261 00:14:39,200 --> 00:14:41,040 Speaker 3: They have, Yeah, that's exactly correct. 262 00:14:41,040 --> 00:14:43,840 Speaker 4: So when you're on the hot engine, you have you know, suck, squeeze, bang, 263 00:14:43,920 --> 00:14:46,120 Speaker 4: and boil. Right, you have a huge fan that sucks 264 00:14:46,120 --> 00:14:49,640 Speaker 4: in all this air, compresses it, and then you ignite 265 00:14:49,800 --> 00:14:51,080 Speaker 4: that compressed air with. 266 00:14:53,400 --> 00:14:56,680 Speaker 3: Jet fuel obviously, and when you ignite it, what comes 267 00:14:56,720 --> 00:14:57,680 Speaker 3: out is the exhaust. 268 00:14:57,680 --> 00:15:01,680 Speaker 4: So the componentry needs to stand incredible levels of heat 269 00:15:02,000 --> 00:15:05,560 Speaker 4: and a lot of cycle time. Obviously, it's operating in 270 00:15:05,600 --> 00:15:08,680 Speaker 4: a very difficult environment. So there's very high barriers to 271 00:15:08,840 --> 00:15:10,760 Speaker 4: entry for these businesses. 272 00:15:11,160 --> 00:15:13,320 Speaker 1: Okay, so how met the where are they based? 273 00:15:14,480 --> 00:15:15,840 Speaker 3: They're based out in Pennsylvania. 274 00:15:15,880 --> 00:15:17,480 Speaker 1: And how much are we talking about? 275 00:15:18,080 --> 00:15:20,960 Speaker 4: So the total debt that we that they have outstandings 276 00:15:20,960 --> 00:15:24,560 Speaker 4: about four billions, so not quite the Rachel's three hundred 277 00:15:24,600 --> 00:15:28,840 Speaker 4: million for Forever Grand a little smaller scale, but they'll 278 00:15:28,880 --> 00:15:31,600 Speaker 4: already own a will be minus rating at Fitch. So 279 00:15:32,360 --> 00:15:36,400 Speaker 4: for the purposes of those bonds, an upgrade at S 280 00:15:36,400 --> 00:15:40,000 Speaker 4: and P or Moody's would qualify those bonds for inclusion 281 00:15:40,040 --> 00:15:43,320 Speaker 4: in our or Bloomberg's investment grade indices because you need 282 00:15:43,320 --> 00:15:47,160 Speaker 4: at least two ratings if you have three raiders rating 283 00:15:47,200 --> 00:15:51,360 Speaker 4: you to qualify for inclusion. So those would be those 284 00:15:51,360 --> 00:15:54,040 Speaker 4: would be qualify for upgrade out of high yield in disease. 285 00:15:54,480 --> 00:15:56,680 Speaker 1: When do we expect them to get an investment grade rating? 286 00:15:57,640 --> 00:16:00,560 Speaker 4: I think it's a six to twelve month frame, So 287 00:16:00,680 --> 00:16:02,640 Speaker 4: that gets here in towards the end of the years, 288 00:16:02,720 --> 00:16:06,200 Speaker 4: we can see has the has air demand played out 289 00:16:06,240 --> 00:16:07,840 Speaker 4: the way that we think it has, And you'll get 290 00:16:07,840 --> 00:16:09,800 Speaker 4: a bit of a FOURD look on twenty twenty four, 291 00:16:11,080 --> 00:16:13,120 Speaker 4: and I think that that outlook would probably be enough 292 00:16:13,160 --> 00:16:16,360 Speaker 4: for one of, if not both, the raiders to sort 293 00:16:16,400 --> 00:16:18,440 Speaker 4: of move and feel comfortable enough that the strides that 294 00:16:18,440 --> 00:16:20,640 Speaker 4: they've make made over the last couple of years in 295 00:16:20,680 --> 00:16:24,160 Speaker 4: this year would keep them worthy of investment. 296 00:16:24,200 --> 00:16:27,000 Speaker 1: Create the markets are supposed to sort of anticipate this, 297 00:16:27,040 --> 00:16:29,320 Speaker 1: and credit markets are supposed to be the smartest. How 298 00:16:29,400 --> 00:16:30,560 Speaker 1: much of this is already priced in? 299 00:16:30,880 --> 00:16:31,080 Speaker 3: Yeah? 300 00:16:31,160 --> 00:16:31,560 Speaker 2: Some of it? 301 00:16:31,680 --> 00:16:33,040 Speaker 3: Some of it is is priced in. 302 00:16:33,080 --> 00:16:38,520 Speaker 4: They trade tighter than the double B tier capital goods curve, 303 00:16:39,640 --> 00:16:41,720 Speaker 4: maybe even a little tighter than some of the double 304 00:16:41,760 --> 00:16:44,000 Speaker 4: B plus guys. But when you look at how they 305 00:16:44,040 --> 00:16:48,240 Speaker 4: trade forces a very large sample of triple B tier 306 00:16:48,280 --> 00:16:52,160 Speaker 4: cap goods guys. There's still about fifty basis points of 307 00:16:53,720 --> 00:16:57,360 Speaker 4: yield on average across their curve, So that should help 308 00:16:57,440 --> 00:17:01,040 Speaker 4: kind of dimensionalize the discount which their bonds are trading 309 00:17:01,040 --> 00:17:03,440 Speaker 4: currently if you believe in that thesis. 310 00:17:03,840 --> 00:17:07,360 Speaker 1: So Holmet wants to watch potential upgrade candidate what other 311 00:17:07,440 --> 00:17:09,200 Speaker 1: companies matter in a similar situation. 312 00:17:09,800 --> 00:17:12,880 Speaker 4: Yeah, So for our team highlighted a bunch of different names, 313 00:17:13,119 --> 00:17:16,920 Speaker 4: which includes guys like Uber, how Met, We've discussed Selna's 314 00:17:17,000 --> 00:17:20,119 Speaker 4: Las Vegas Sands and some of the oil and gas 315 00:17:20,160 --> 00:17:22,960 Speaker 4: guys as a potential crossover candidates. 316 00:17:23,400 --> 00:17:24,800 Speaker 1: Any names you want to give us. 317 00:17:26,240 --> 00:17:29,760 Speaker 4: I'm sure there's certainly going to be idiosyncrasies that go 318 00:17:29,880 --> 00:17:32,119 Speaker 4: on with some of the names we looked at. But 319 00:17:32,119 --> 00:17:33,719 Speaker 4: if I had to peg sort of like a general 320 00:17:33,760 --> 00:17:36,520 Speaker 4: theme on the momentum that we're seeing, it'd just be 321 00:17:36,600 --> 00:17:41,719 Speaker 4: that of recovery, recovery from the pandemic driven interruptions to travel, leisure, 322 00:17:41,800 --> 00:17:45,360 Speaker 4: and mobility that guys like Uber, how Met and Las 323 00:17:45,480 --> 00:17:48,879 Speaker 4: Vegas Sans are exposed to. So for for Uber, we 324 00:17:49,119 --> 00:17:52,280 Speaker 4: see a continued improvement in their earnings and cash flow, trajectory, 325 00:17:53,320 --> 00:17:55,800 Speaker 4: how met, which we've discussed as it would benefit from 326 00:17:55,880 --> 00:17:58,080 Speaker 4: similar trends as well as Las Vegas sands, which are 327 00:17:58,560 --> 00:18:02,679 Speaker 4: consumer analyst Joe Lur sort of pegs to this idea 328 00:18:02,680 --> 00:18:06,679 Speaker 4: of revenge spending after lockdowns as being a sort of 329 00:18:06,760 --> 00:18:10,639 Speaker 4: key driver of future financial risk strengthening for these guys. 330 00:18:10,880 --> 00:18:13,720 Speaker 1: Yeah, I saw that phrase in the note revenge spending. 331 00:18:13,760 --> 00:18:14,320 Speaker 1: What does it mean? 332 00:18:15,280 --> 00:18:17,720 Speaker 4: I just people just getting so sick and tired of 333 00:18:17,760 --> 00:18:21,520 Speaker 4: being locked up, myself and my wife included trying to 334 00:18:21,560 --> 00:18:24,760 Speaker 4: get out and see family and do things that we 335 00:18:24,800 --> 00:18:28,439 Speaker 4: didn't get to do in the twenty twenty one area. 336 00:18:28,720 --> 00:18:31,439 Speaker 1: But who you're taking revenge on? Is it the virus generally? 337 00:18:31,600 --> 00:18:35,280 Speaker 3: Or yeah? Yeah, right, just the promise? Yes, okay. 338 00:18:35,880 --> 00:18:38,080 Speaker 1: And so the companies that we sort of see is 339 00:18:38,119 --> 00:18:39,960 Speaker 1: sticking out the sort of diamonds and the reugh What 340 00:18:40,760 --> 00:18:43,960 Speaker 1: do they have in common? Is it scale, diversification, monopoly powering? 341 00:18:43,960 --> 00:18:46,080 Speaker 1: What is it that you think is their secret? 342 00:18:46,400 --> 00:18:48,640 Speaker 3: Yeah? I think it's a combination of all three. 343 00:18:48,720 --> 00:18:50,480 Speaker 4: But I think from the credit side, a lot of 344 00:18:50,520 --> 00:18:53,040 Speaker 4: these guys, the tail ones are just driving and improving 345 00:18:53,040 --> 00:18:55,080 Speaker 4: earnings and cash hold trajectory. And we've seen a lot 346 00:18:55,080 --> 00:18:58,240 Speaker 4: of these guys sort of take cash that they're getting 347 00:18:58,240 --> 00:19:01,480 Speaker 4: in and paying down absolute debt levels, so you get 348 00:19:01,480 --> 00:19:05,680 Speaker 4: the combination of both your numerator and denominator getting better. 349 00:19:05,760 --> 00:19:07,960 Speaker 4: So I think, you know, at the end of the day, 350 00:19:08,000 --> 00:19:10,720 Speaker 4: it's it's hat as that sort of stack up to 351 00:19:11,080 --> 00:19:13,879 Speaker 4: the raider frameworks and what do we think is going 352 00:19:13,960 --> 00:19:15,160 Speaker 4: to eventually tip them over? 353 00:19:15,640 --> 00:19:17,960 Speaker 1: But surely even these ones aren't risk free though, right, 354 00:19:18,000 --> 00:19:20,720 Speaker 1: I mean, we're credit guys. We always worry about what 355 00:19:20,760 --> 00:19:23,639 Speaker 1: could go wrong. What are the biggest concerns that you 356 00:19:23,720 --> 00:19:25,520 Speaker 1: have met, what keeps you up at night worrying? 357 00:19:25,880 --> 00:19:27,920 Speaker 4: Yeah, I think I think at least well for guys 358 00:19:27,960 --> 00:19:30,160 Speaker 4: like how Matt or some of these other guys, I think, 359 00:19:30,280 --> 00:19:32,920 Speaker 4: you know, just sort of a deep recession rather than 360 00:19:33,640 --> 00:19:37,480 Speaker 4: some type of soft landing that really alters people's sort 361 00:19:37,520 --> 00:19:40,720 Speaker 4: of spending patterns, moving back away from the chit of 362 00:19:40,960 --> 00:19:43,560 Speaker 4: travel and leisure return that we've seen and back towards 363 00:19:43,640 --> 00:19:48,399 Speaker 4: maybe goods or just far less spending in total would 364 00:19:48,440 --> 00:19:52,159 Speaker 4: be sort of the largest overarching risk that needs to 365 00:19:52,520 --> 00:19:54,200 Speaker 4: sort of have an eye kept on. 366 00:19:54,840 --> 00:19:57,720 Speaker 1: Very good, Thank you very much, Matt. Goinner. With Bloomberg Intelligence, 367 00:19:58,160 --> 00:20:00,639 Speaker 1: you can see all of his analysis on the bloom Terminal. 368 00:20:00,840 --> 00:20:03,159 Speaker 1: There's a lot going on in those companies, so do 369 00:20:03,320 --> 00:20:05,800 Speaker 1: check it out. And thanks again to rachel Bert from 370 00:20:05,840 --> 00:20:08,119 Speaker 1: Bloomberg News. Read all of her scoops on the Terminal 371 00:20:08,160 --> 00:20:12,040 Speaker 1: and at Bloomberg dot Com. I'm James Crombie. It's been 372 00:20:12,080 --> 00:20:13,919 Speaker 1: a pleasure having you. See you next week on the 373 00:20:13,920 --> 00:20:14,600 Speaker 1: Credit Edge.