WEBVTT - Distressed Buyers Strike Paydirt; Utility Picks 0:00:09.680 --> 0:00:12.760 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:13.080 --> 0:00:15.800 My name is James Crumbie. I'm a senior editor at Bloomberg. 0:00:16.680 --> 0:00:19.799 Today's guest Sir Erin Hudson, who reports on distressed debt 0:00:19.800 --> 0:00:22.439 for Bloomberg News in New York. We're delighted to have 0:00:22.480 --> 0:00:23.120 you on the show. 0:00:23.400 --> 0:00:24.520 Thanks so much for having me. 0:00:24.960 --> 0:00:27.280 We're also very pleased to welcome Paul Vickers, who covers 0:00:27.400 --> 0:00:29.360 energy for Bloomberg Intelligence in London. 0:00:29.640 --> 0:00:30.840 Yeah, thanks for having me as well. 0:00:31.360 --> 0:00:33.080 We'll be coming back to energy in a bit. There's 0:00:33.120 --> 0:00:35.280 lots of exciting stuff going on there, so do stay 0:00:35.280 --> 0:00:39.680 with us. But first, Erin Hudson, with Bloomberg News, you've 0:00:39.720 --> 0:00:42.760 been digging deep into distressed debt. A lot of companies 0:00:42.760 --> 0:00:45.000 are running into trouble at the moment, with interest rates 0:00:45.360 --> 0:00:49.000 rising and the economy slowing down, potentially tipping into a recession. 0:00:49.560 --> 0:00:52.720 Inflation and volatility in the financial sector don't help. A 0:00:52.720 --> 0:00:56.000 lot of regional banks are really struggling. Plus, the anxiety 0:00:56.000 --> 0:00:58.960 about the debt ceiling is the highest I've seen in years. 0:00:59.120 --> 0:01:01.560 I have to go back to twenty eleven for the 0:01:01.640 --> 0:01:04.959 last time it's been this exciting. So you've been talking 0:01:05.000 --> 0:01:08.399 to some very large distressed debt investors. What are they saying, 0:01:08.440 --> 0:01:10.399 is everything about to blow up? And what do they 0:01:10.440 --> 0:01:12.120 see as the big opportunity here erin? 0:01:12.880 --> 0:01:15.320 Well, it sounds like there's a lot to look at 0:01:15.959 --> 0:01:19.000 all over the place, and especially to do with the banks. 0:01:20.440 --> 0:01:22.560 You know, it sounds like everyone is doing work on 0:01:22.920 --> 0:01:26.240 what are the assets that various banks have, what is 0:01:26.280 --> 0:01:31.240 the structure of their capital their capital stack, So you know, 0:01:31.280 --> 0:01:33.479 they're sort of looking at how they can get involved, 0:01:34.160 --> 0:01:36.920 you know, where they want to make their bets and 0:01:37.600 --> 0:01:41.360 you know what the assets are. Obviously we kind of 0:01:41.480 --> 0:01:45.520 saw the issues with with Silicon Valley Bank and the 0:01:45.640 --> 0:01:50.560 duration of their treasuries. But you know, I think now 0:01:50.640 --> 0:01:53.600 people are sort of looking at the commercial real estate loans. 0:01:54.400 --> 0:01:59.360 I've had investors mentioned commercial and industrial loans in particulars 0:01:59.520 --> 0:02:03.000 as something they're they're taking a look at. So, yeah, 0:02:03.040 --> 0:02:05.880 it seems like this The feeling is that this also 0:02:06.400 --> 0:02:12.320 opens up opportunities outside just the banks themselves for direct ending, 0:02:13.040 --> 0:02:17.320 and you know, and then obviously companies themselves that no 0:02:17.400 --> 0:02:20.160 longer have the same access to credit if they relied 0:02:20.240 --> 0:02:21.440 on the regional banks. 0:02:21.639 --> 0:02:23.040 Let me just start me there on the banks So, 0:02:23.120 --> 0:02:25.440 I mean, we've saw this wave of distress. We saw 0:02:25.520 --> 0:02:28.600 Credit Swiss basically disappear, we saw all of these other 0:02:28.720 --> 0:02:30.560 regional banks. There was a kind of a domino effect. 0:02:30.560 --> 0:02:34.280 I mean, it just seemed very precarious even last you know, 0:02:34.680 --> 0:02:37.240 last few days, last few weeks, and we're talking sort 0:02:37.280 --> 0:02:40.400 of mid May. Now is the crisis over? 0:02:42.440 --> 0:02:46.000 I wish, I wish we knew. I don't know if 0:02:46.000 --> 0:02:53.760 anyone impossible to say, but I think there's a sense 0:02:53.800 --> 0:02:57.839 that there will be more distress for sure, and there's 0:02:57.880 --> 0:02:59.040 a lot more work to do. 0:02:59.560 --> 0:03:03.000 Okay, So people are sort of trading and betting on now. 0:03:03.000 --> 0:03:05.680 They're looking, as you say, the balance sheets of these banks. 0:03:05.800 --> 0:03:09.160 They're looking at exposure to treasuries which have gone down 0:03:09.200 --> 0:03:12.400 because of duration, looking at exposure to commercial real estate. 0:03:13.639 --> 0:03:16.360 And so do we expect now distressed investors to be 0:03:16.480 --> 0:03:19.000 much more actively engaged than looking at these banks much 0:03:19.000 --> 0:03:20.639 more closely? Is that the takeaway? 0:03:21.000 --> 0:03:23.720 It sounds like it. Yeah, And it also sounds like 0:03:23.720 --> 0:03:27.200 there's sort of a sense that depositors themselves are a 0:03:27.240 --> 0:03:29.840 bit more of a flight risk than you know before. 0:03:30.000 --> 0:03:35.120 So yeah, there's definitely a lot of moving pieces. 0:03:35.080 --> 0:03:36.720 Who actually made money on those trades. 0:03:38.520 --> 0:03:44.960 Some people Marathon Asset Management in particular, we reported that 0:03:45.040 --> 0:03:49.160 they made thirty million trading credits sweet sponds before the 0:03:49.200 --> 0:03:55.040 takeover by UBS. The You know, some of these that's 0:03:55.040 --> 0:03:59.000 will take a long time to play out. In Silicon 0:03:59.080 --> 0:04:02.200 Valley Bank, for instance, you know that bankruptcy is ongoing, 0:04:02.720 --> 0:04:05.200 so it'll take a while to know, you know, who 0:04:05.240 --> 0:04:08.840 made who who's the biggest winner or the biggest loser. 0:04:09.440 --> 0:04:11.720 But definitely an opportunity for the distress shops. They're also 0:04:11.760 --> 0:04:14.360 looking at consumer companies, right I mean, one of the 0:04:14.400 --> 0:04:16.919 people you were talking to is actually handling the liquidation 0:04:16.960 --> 0:04:20.039 of bed Bath and Beyond and Brick and more. To 0:04:20.120 --> 0:04:22.960 retail general is getting hit especially hard right now. What's 0:04:23.000 --> 0:04:23.680 the outlook there? 0:04:24.880 --> 0:04:30.240 Yeah, I mean, obviously there have have been several retail 0:04:30.279 --> 0:04:37.960 bankruptcies so far this year and several notable liquidations, but 0:04:38.120 --> 0:04:41.640 you know, I think that the consumer is overall holding 0:04:41.680 --> 0:04:45.120 up better than expected. And in retail too, I think, 0:04:45.320 --> 0:04:48.159 you know, there's a sense that won't last, you know, 0:04:48.200 --> 0:04:52.000 and especially if a retailer is not you know, the 0:04:52.040 --> 0:04:56.440 top one or two in their sector, they are probably 0:04:56.920 --> 0:05:00.839 going to be facing some struggles. But it seems like 0:05:00.960 --> 0:05:05.680 there might be a little bit more runway there, but 0:05:05.760 --> 0:05:09.160 you know, there's there's definitely some big, big fundamental questions 0:05:09.200 --> 0:05:13.120 like like what is what is the value of a brand? 0:05:13.320 --> 0:05:16.240 You know, are people do people really have brand loyalty anymore? 0:05:17.360 --> 0:05:21.960 You know, so consumer behavior I think is changing. Consumer 0:05:22.040 --> 0:05:25.640 behavior is definitely something that like no one can really 0:05:25.640 --> 0:05:28.880 take for granted anymore, and it's it's maybe a bit 0:05:28.920 --> 0:05:29.760 harder to predict. 0:05:30.040 --> 0:05:33.040 They're also being quite affected by the pullback by regional banks, right, 0:05:33.080 --> 0:05:35.239 I mean, the they were funding a lot of these 0:05:35.400 --> 0:05:38.279 companies on the retail side, so that's going to hurt. 0:05:38.320 --> 0:05:41.880 And then as you say, the economy is slowing, there's inflation. 0:05:42.040 --> 0:05:45.960 Consumers have been resilient, but they're not presumably going to 0:05:46.040 --> 0:05:47.000 remain that way forever. 0:05:48.000 --> 0:05:50.480 Yeah, I think there's there's definitely a sense that, you know, 0:05:50.600 --> 0:05:54.800 cracks are starting to emerge. One investor was sort of 0:05:54.800 --> 0:05:58.480 mentioning just the delinquency rates in subpar car loans as 0:05:58.720 --> 0:06:04.799 one indicator that all is not well and that you know, yeah, 0:06:05.480 --> 0:06:09.200 there will be problems. There are problems, but it's taking 0:06:09.200 --> 0:06:10.200 a while to trickle through. 0:06:10.600 --> 0:06:13.640 Another one that we constantly hear about in the context 0:06:13.720 --> 0:06:18.440 of distress is healthcare and distress that investors seem to 0:06:18.560 --> 0:06:20.599 like that one. Why do they get involved there? 0:06:21.839 --> 0:06:24.279 Yeah? I think I think the sense is there's a 0:06:24.279 --> 0:06:28.080 lot of opportunity there to kind of, you know, right 0:06:28.200 --> 0:06:32.880 size a balance sheet, sort of adjust the valuation of 0:06:32.960 --> 0:06:38.120 these companies. And I think, you know, there's there's some 0:06:38.120 --> 0:06:43.239 some triggers there that you know, you can't always see coming, 0:06:43.320 --> 0:06:49.320 but you know, regulatory policy changes. So healthcare services is 0:06:49.400 --> 0:06:54.080 a business that they've sort of flagged as highly highly interesting. 0:06:54.760 --> 0:06:57.800 And then also pharma with the idea that you know, 0:06:57.880 --> 0:07:01.120 if a company loses a patent for rug, you know, 0:07:01.480 --> 0:07:05.520 that creates uh trouble for the company, and it's kind 0:07:05.520 --> 0:07:09.760 of an opportunity for distrussed investors. So yeah, there's been 0:07:10.240 --> 0:07:12.680 you know, there's obviously a lot of changes that have 0:07:12.760 --> 0:07:16.600 happened the strain of the pandemic. So I think there's 0:07:16.720 --> 0:07:21.080 a lot of headwinds there for those businesses, which creates 0:07:21.080 --> 0:07:24.880 opportunities for the distrusted investor community. 0:07:25.120 --> 0:07:26.800 We should those companies be in good shape. I mean, 0:07:26.840 --> 0:07:29.119 we're all getting older and sicker and you know, living 0:07:29.120 --> 0:07:31.720 on forever. So it wasn't isn't Why why aren't those 0:07:31.720 --> 0:07:33.640 firms seeing really really well. 0:07:34.120 --> 0:07:36.800 Well, it's so it's kind of like this mix of 0:07:36.880 --> 0:07:44.520 so if regulatory and policy changes happened that which have 0:07:44.600 --> 0:07:47.080 happened over the past couple of years, which changed the 0:07:47.120 --> 0:07:50.200 amount of you know, reimbursements that these companies can collect 0:07:50.320 --> 0:07:55.680 from health insurance or government agencies, then you have the 0:07:55.800 --> 0:08:00.400 labor pressures, you know, the difficulty hiring skilled staff, needing 0:08:00.440 --> 0:08:04.560 to pay them more and more. You know, those are 0:08:04.640 --> 0:08:06.680 a few of the things. And then with the pandemic, 0:08:06.760 --> 0:08:09.760 you know a lot of people you know, stopped going 0:08:09.760 --> 0:08:14.800 in for these elective, elective and preventive care type of treatment, 0:08:15.000 --> 0:08:18.040 so that those are sort of like the biggest moneymakers 0:08:18.120 --> 0:08:22.960 at times for many of these these healthcare services. And 0:08:23.520 --> 0:08:26.560 you know, it's also not always the most desirable job 0:08:26.600 --> 0:08:30.920 to have anymore. So I think there's just there's a 0:08:30.960 --> 0:08:33.720 whole you know, Bloomberg has done a lot of great 0:08:33.760 --> 0:08:37.560 reporting on on on the pressures that are facing healthcare. 0:08:37.600 --> 0:08:42.040 It does feel a little on it like counterintuitive, but yeah, 0:08:42.080 --> 0:08:45.439 it's definitely a sector that's in the crosshairs. 0:08:45.960 --> 0:08:48.560 Nothing that came up when you were talking to the 0:08:48.640 --> 0:08:52.360 distressed investors was ever grand, which is a massive Chinese 0:08:52.400 --> 0:08:55.160 property developer that we've talked a lot about on this show. 0:08:55.200 --> 0:08:57.400 They have, you know, tens of billions of dollars in debt, 0:08:57.440 --> 0:08:59.840 They've got a lot of creditors all around the world, 0:09:01.280 --> 0:09:03.760 specifically on the US investors side. I'm interested to kind 0:09:03.760 --> 0:09:06.239 of understand what did what did they learn from this process? 0:09:06.120 --> 0:09:09.720 It seemed to have progressed very very quickly, and you know, 0:09:09.880 --> 0:09:12.480 investors were very engaged. So what did they learn? 0:09:14.080 --> 0:09:17.680 Yeah, I mean it's it's it's far from over, it's 0:09:17.720 --> 0:09:21.560 not quite over, but it seems like they're sort of 0:09:21.600 --> 0:09:25.560 a some investors are walking away with a bit of 0:09:25.559 --> 0:09:30.360 a renewed sense of faith in the in the system 0:09:30.720 --> 0:09:35.080 and confidence I guess in the you know, the restructuring 0:09:35.120 --> 0:09:39.680 process that Chinese companies will undergo and how how they 0:09:40.640 --> 0:09:44.280 approach it. So I think, you know, that seems to 0:09:44.320 --> 0:09:47.920 be the takeaway for the moment, but you know, of 0:09:47.960 --> 0:09:52.560 course it's an ongoing situation, so whether it will pay 0:09:52.600 --> 0:09:55.920 off the way that they're hoping and expecting it will 0:09:57.040 --> 0:10:01.520 remains to be seen. So you know, story will continue 0:10:01.520 --> 0:10:05.479 to follow because, yeah, it would have some big impacts. 0:10:06.440 --> 0:10:08.960 I guess also, you know, China being the second biggest economy. 0:10:08.960 --> 0:10:12.520 They need capsule, They need foreign capital particularly to sustain 0:10:12.640 --> 0:10:15.160 and build that economy, and they're going to need a 0:10:15.200 --> 0:10:17.520 lot of it over a long period, So they want 0:10:17.559 --> 0:10:19.319 to keep foreign investors happy. 0:10:19.080 --> 0:10:22.040 Right, Yes, And that definitely came up as you know, 0:10:22.160 --> 0:10:25.160 an sort of the thesis that was kind of under 0:10:27.440 --> 0:10:31.880 underpinning that bet is the idea that you know, offshore 0:10:31.920 --> 0:10:37.200 creditors aren't going to be completely you know, completely shafted 0:10:37.559 --> 0:10:41.880 or put thrown to the side because you know eventually 0:10:42.040 --> 0:10:48.160 they will need to come into provide capital. So yeah, 0:10:48.160 --> 0:10:52.160 it seems like that is definitely the belief that's sort 0:10:52.160 --> 0:10:55.040 of driving a lot of those investors who have gotten involved. 0:10:55.440 --> 0:10:57.880 Okay, great, So before we talked to Paul Vickers at 0:10:57.880 --> 0:11:02.360 Bloomberg Intelligence, Stephan be what our investors surprised about right 0:11:02.400 --> 0:11:04.320 now and what are they preparing for for the next 0:11:04.400 --> 0:11:06.400 let's say, twelve months. 0:11:06.800 --> 0:11:10.679 Yeah, I mean, I think that the ongoing strength of 0:11:10.720 --> 0:11:15.000 the housing market is a point of surprise and sort 0:11:15.000 --> 0:11:21.440 of fascination. It seems like the shift to ev EV 0:11:21.600 --> 0:11:27.760 mandates electric vehicles. Yeah, and just that that whole shift 0:11:27.800 --> 0:11:30.720 in the in the auto sector. I think there's the 0:11:31.480 --> 0:11:33.480 feeling that that's going to cause a lot of disruption, 0:11:33.640 --> 0:11:37.080 which again is going to make distress investors and uh, 0:11:38.559 --> 0:11:43.160 the community of advisors in the distrust in world very busy. 0:11:43.640 --> 0:11:47.040 And then I think there's also sort of you know, 0:11:47.440 --> 0:11:50.880 just looking at the phenomena of the meme stocks, I 0:11:50.880 --> 0:11:54.720 think that's becoming a more a greater factor when people 0:11:54.760 --> 0:11:58.760 are evaluating these situations. There's sort of the sense that 0:11:58.760 --> 0:12:01.720 that has staying power. As much as the meme stock 0:12:01.800 --> 0:12:04.840 era seems to have passed, it seems like, you know, 0:12:04.880 --> 0:12:05.800 it's still lingering. 0:12:06.400 --> 0:12:08.280 And in terms of opportunity, I mean, we've been hearing 0:12:08.320 --> 0:12:13.000 for years I have, particularly distress investors dry powder, you know, 0:12:13.040 --> 0:12:15.480 billions and billions of it just stacking up on the sidelines, 0:12:15.480 --> 0:12:20.240 but never enough distress for them to really deploy all 0:12:20.240 --> 0:12:22.920 of that. Are we finally, I mean rates going up, 0:12:23.160 --> 0:12:27.560 the economy going down, all these other things, you know, geopolitics, 0:12:27.600 --> 0:12:30.840 all this other volatility. Is this now the moment for distressed? 0:12:30.960 --> 0:12:32.360 Are they excited now? Are they happy? 0:12:33.600 --> 0:12:37.200 I don't know. Unfortunately, I think there's I think there's 0:12:37.240 --> 0:12:42.120 some mixed feelings. One investor who probably put it best 0:12:42.160 --> 0:12:45.199 is looking at in the context of looking at commercial 0:12:45.200 --> 0:12:47.080 real estate is sort of like, you know, you see 0:12:47.120 --> 0:12:50.120 there's problems, but is this the moment or should you 0:12:50.160 --> 0:12:52.400 wait six months? Should you wait a year? Are think 0:12:52.400 --> 0:12:54.360 it's going to get even worse, and you know it 0:12:54.400 --> 0:12:59.280 makes an even more attractive investment opportunity. So I think 0:12:59.400 --> 0:13:00.840 time is going to tell. 0:13:01.400 --> 0:13:03.800 Grattef Aeron Hudson from Bloomberg News, thank you so much 0:13:03.840 --> 0:13:06.800 for joining us. Thank you read all of erin'scoops on 0:13:06.840 --> 0:13:10.120 the Bloomberg terminal and of course at Bloomberg dot com. 0:13:10.640 --> 0:13:12.880 Moving on to another big topic. As I mentioned earlier, 0:13:12.880 --> 0:13:14.800 we are very fortunate to have with us Paul Vickers, 0:13:14.800 --> 0:13:18.280 who looks at energy for Bloomberg Intelligence. What's going on 0:13:18.320 --> 0:13:20.920 with the energy sector, Paul, Oil prices are down, We're 0:13:20.920 --> 0:13:23.559 heading into a recession, as we keep talking about, Plus 0:13:23.559 --> 0:13:25.839 theres a war going on just to the east of view. 0:13:26.000 --> 0:13:27.280 Is it all bad news over there? 0:13:27.679 --> 0:13:29.160 Well, not so much bad news, I think for the 0:13:29.240 --> 0:13:32.319 energy sectors. I work for Bloomberg Intelligence. I cover energy 0:13:32.360 --> 0:13:35.240 and utilities across Europe, a couple of global oils and 0:13:35.320 --> 0:13:37.960 of course the high old prices have been there been 0:13:38.000 --> 0:13:40.680 a windfall for them. They've done particularly well over the 0:13:40.720 --> 0:13:44.760 last eighteen months or so, less could be said for 0:13:44.800 --> 0:13:47.640 the utilities. You think again, being a sort of power producer, 0:13:47.679 --> 0:13:50.240 you think higher power prices would be good for these guys. 0:13:50.360 --> 0:13:52.679 That's not always the case there. They're often hedged very 0:13:52.679 --> 0:13:55.400 heavily up to one to three years ahead, and the 0:13:55.480 --> 0:13:58.880 high prices and volatility have created liquidity problems that the 0:13:58.960 --> 0:14:00.160 Russian supply comes. 0:14:01.800 --> 0:14:03.719 Impacted those that were dependent on them. 0:14:03.720 --> 0:14:07.000 It's caught companies like Uniper to its needs and nationalized 0:14:07.480 --> 0:14:09.040 nationalization by the German government. 0:14:09.120 --> 0:14:11.480 It's had for other reasons as well. 0:14:11.640 --> 0:14:14.439 Df was nationalized because it had to buy a lot 0:14:14.440 --> 0:14:16.880 of power in the market at very high prices. So 0:14:16.880 --> 0:14:20.320 for utilities, these higher power prices haven't haven't been a 0:14:20.320 --> 0:14:23.920 godsend at all. In fact, they've really threatened the very 0:14:23.920 --> 0:14:26.720 sort of structure of the entire industry. But what we 0:14:26.800 --> 0:14:29.680 have seen is the EU has responded to these Russian 0:14:29.720 --> 0:14:30.840 gas supplycasts. 0:14:30.960 --> 0:14:33.240 They're now running around ten percent of what they worked 0:14:33.280 --> 0:14:34.280 prior to the invasion. 0:14:34.920 --> 0:14:37.440 But they've posentially been replaced. It could have been happening 0:14:37.440 --> 0:14:41.320 with power prices or they stop gas prices. They're around 0:14:41.320 --> 0:14:43.560 thirty five years A mega walked out now are. They 0:14:43.760 --> 0:14:47.240 peaked at over three hundred during the during the last summer, 0:14:47.880 --> 0:14:50.480 and of course, with with gas prices setting turing, the 0:14:50.480 --> 0:14:52.520 price were paying the power market much of the time. 0:14:52.720 --> 0:14:54.840 The same thing's happened in power are they're around ninety 0:14:54.880 --> 0:14:56.800 years and make it allowed for a peak of over 0:14:56.840 --> 0:14:59.840 six hundred. So the prices have really fallen mainly because 0:15:00.120 --> 0:15:02.280 the use taking an awful lot of initiatives. 0:15:02.400 --> 0:15:03.920 It's boosted LNG. 0:15:03.840 --> 0:15:08.560 Supplies, it is pushed renewables, it's increased in imported gas 0:15:08.640 --> 0:15:12.400 by pipeline from countries like Norway. In Oligeer area, it's 0:15:12.440 --> 0:15:17.280 also made a big push to improve the energy efficiency 0:15:17.360 --> 0:15:18.760 and demand side management. 0:15:19.160 --> 0:15:20.880 And at the same time they also. 0:15:20.680 --> 0:15:23.840 Achieved their goal of having European gas storage stocks ninety 0:15:23.880 --> 0:15:25.920 five percent full at the start of the heating season. 0:15:26.480 --> 0:15:29.040 They achieved that and it never went below fifty and 0:15:29.040 --> 0:15:31.760 now they're restopping again. So really, when you've got fifty 0:15:31.760 --> 0:15:34.720 percent of your gas supply still full at the very 0:15:34.760 --> 0:15:39.120 sort of trough of the cycle moving into the summer 0:15:39.160 --> 0:15:43.120 sort of the period, a warmer period, and the gas 0:15:43.600 --> 0:15:47.680 demand it's in pretty good shape and power prices reflect that. 0:15:47.800 --> 0:15:50.960 So what's happened nows these companies have, you know, the 0:15:51.080 --> 0:15:55.040 risks have gone, those risks polatility of liquidity or of 0:15:55.080 --> 0:15:58.160 having to buy the sort of short power in the market, 0:15:58.400 --> 0:16:01.840 they've disappeared. These companies much better place right now. In fact, 0:16:01.840 --> 0:16:04.480 they're very well placed for this year as they've managed 0:16:04.480 --> 0:16:07.440 to put on hedges at higher levels. So it's quite 0:16:07.480 --> 0:16:09.520 a bit of earning sort of growth is baked in. 0:16:10.040 --> 0:16:12.400 So yeah, we're pretty relaxed about the utility set and 0:16:12.400 --> 0:16:15.680 I think from my perspective, it's probably you know, it 0:16:15.680 --> 0:16:17.160 looks like it's time to cool the end of the 0:16:17.240 --> 0:16:20.280 energy crisis. I think that's quite a sort of strong statement. 0:16:20.320 --> 0:16:22.400 I think the regulator would be less willing. 0:16:22.160 --> 0:16:24.680 To do so, but if he takes guidance from. 0:16:24.880 --> 0:16:29.320 The World Health Organization last week called it enter the 0:16:29.320 --> 0:16:32.760 COVID nineteen emergency status and they said it's time to 0:16:33.080 --> 0:16:34.960 transition into long term management. 0:16:35.640 --> 0:16:36.240 I think that's the. 0:16:36.200 --> 0:16:39.480 Same for the energy crisis. I think we're through it. 0:16:39.480 --> 0:16:41.200 It's never going to be the same again. I mean 0:16:41.200 --> 0:16:45.160 that Europe is now reliant, It has no ten percent 0:16:45.200 --> 0:16:48.640 of the sort of Russian gas applies that formerly supplied 0:16:48.640 --> 0:16:49.880 around forty percent of the market. 0:16:49.880 --> 0:16:50.320 They've gone. 0:16:50.320 --> 0:16:54.600 They're not coming back, but the authorities have taken measures 0:16:54.600 --> 0:16:57.080 to replace it and to compensate for it. 0:16:57.120 --> 0:17:00.160 And I think we're in the much calmer waters ahead, So. 0:17:00.080 --> 0:17:02.640 It's all looking pretty rosy then, Paul. I mean, would 0:17:02.640 --> 0:17:05.879 you call this sector specifically the energy sector? Would you 0:17:05.920 --> 0:17:09.240 call it defensive relative to other parts of the economy. 0:17:09.600 --> 0:17:12.520 What's certainly the only gas sector I'd say is in 0:17:12.640 --> 0:17:14.920 all the prices you see have fallen from their peaks, 0:17:15.359 --> 0:17:19.120 you know, OPEK classes doing what it can to sort 0:17:19.119 --> 0:17:21.359 of maybe support that, so that there's, you know, the 0:17:21.480 --> 0:17:24.480 feeling that they're sort of their ideal sort of support level. 0:17:24.960 --> 0:17:26.760 More might be around eighty dollars a barrel. 0:17:26.800 --> 0:17:28.680 So if you open that sort of level, then look 0:17:28.720 --> 0:17:30.920 at the let's thing at the oil natures and they 0:17:30.960 --> 0:17:34.360 have break even level. This is after dividends and capex 0:17:35.040 --> 0:17:38.480 have been paid around forty to fifty dollars, so they're 0:17:38.520 --> 0:17:41.560 still thrown off an awful lot of free cash flow 0:17:41.680 --> 0:17:44.080 that level. They may well be returning it mostly to 0:17:44.160 --> 0:17:47.200 shelders now, but it doesn't really matter because they managed 0:17:47.240 --> 0:17:50.320 to bring leverage down to in some cases there's negative 0:17:50.400 --> 0:17:52.560 levels and other cases sort of single digits sort of 0:17:52.560 --> 0:17:52.840 debt to. 0:17:52.880 --> 0:17:55.600 Equity, So there's an allthwort of capacity for. 0:17:55.560 --> 0:17:58.359 These guys to releverage the balance you so even if 0:17:58.359 --> 0:18:01.360 all does drop a little bit more, they'll can't share 0:18:01.400 --> 0:18:05.679 buybacks back down. But there's still plenty of capacity to 0:18:05.680 --> 0:18:08.159 re leverage without threatening credit quality, and that's sort of 0:18:08.240 --> 0:18:09.960 key for the sector. So yes, I would say that 0:18:10.000 --> 0:18:12.280 the oiler gas is a safe haven. I think the 0:18:12.320 --> 0:18:16.200 other side of the coin of utilities is whereas the 0:18:16.280 --> 0:18:19.080 risk we are on the downside previously, I don't see much 0:18:19.080 --> 0:18:21.600 outside because I think these companies will use any sort 0:18:21.600 --> 0:18:24.800 of windfalls they get from higher edge levels just to 0:18:24.840 --> 0:18:28.199 reinvest more and more into the renewables sector. This is 0:18:28.320 --> 0:18:32.080 really any constraints to their growth the sort of balance sheets, 0:18:32.080 --> 0:18:33.919 and they're really fairly stretched, so they don't have the 0:18:33.920 --> 0:18:38.240 same flexibility gas companies due to re leverage. So the 0:18:38.320 --> 0:18:41.440 higher earnings they're seeing from these power prices now from 0:18:41.920 --> 0:18:45.840 say inflation linked to earnings in the regulated name by businesses, 0:18:46.480 --> 0:18:48.360 these are all allowing them to actually sort of take 0:18:48.400 --> 0:18:51.080 on more debt and drive renewables growth. I mean they're 0:18:51.119 --> 0:18:54.240 looking some companies, you know, fifteen to twenty percent sort 0:18:54.240 --> 0:18:56.320 of growth over the sort of mid term as they 0:18:56.400 --> 0:19:01.480 rolled out wind and solar and hydrogen network up great projects. 0:19:01.480 --> 0:19:05.560 So yeah, this is there's a great growth phase going 0:19:05.560 --> 0:19:07.760 on the utility centrum and you're not really seeing that 0:19:07.960 --> 0:19:10.160 in the on a gas sector. These guys haven't really 0:19:10.160 --> 0:19:13.479 boosted cafes that much. You know that there's an element 0:19:13.800 --> 0:19:16.080 of rising spending, but it's not really about growth. 0:19:16.080 --> 0:19:17.160 That's really about cash flow. 0:19:17.200 --> 0:19:21.120 Whereas I think in futilities, whereas the risks were very 0:19:21.160 --> 0:19:23.000 heavily on the downside at the middle of last year, 0:19:23.040 --> 0:19:27.000 so Unicer went went went, Das got nationalized, the VMG 0:19:27.119 --> 0:19:29.720 and other German gas supplier or almost got a national 0:19:29.720 --> 0:19:31.960 when I say, managed to do a last minute deal 0:19:32.000 --> 0:19:34.200 to avoid it. All the energy suppliers in the UK 0:19:34.280 --> 0:19:37.040 were going fast and almost on a daily basis. Those 0:19:37.119 --> 0:19:39.400 risks have gone now and I think they can look 0:19:39.440 --> 0:19:40.880 forward to you know, so it's future with a lot 0:19:40.880 --> 0:19:44.879 more confidence, with sort of solid high meter single figures 0:19:45.040 --> 0:19:48.359 of earnings growth, stable leverage and a couple of companies 0:19:49.160 --> 0:19:51.080 maybe looking at sort of you know a little bit 0:19:51.080 --> 0:19:53.480 of credit. Upside of looking at s SE recently in 0:19:53.520 --> 0:19:56.560 the UK is with energy supplier that's doing very well. 0:19:56.560 --> 0:20:00.600 It's managing to fund its growth by selling states in 0:20:00.640 --> 0:20:03.720 its network and it's in its renewables businesses. So it 0:20:03.760 --> 0:20:05.720 really is a massive growth question and the key is 0:20:05.720 --> 0:20:07.120 how to fund it. And now they've got a much 0:20:07.119 --> 0:20:11.440 more stable environment with prices sort of really flat lining 0:20:11.800 --> 0:20:13.920 around those sort of thirty five level and here's make 0:20:13.960 --> 0:20:16.080 one our level of the gas that really gives them 0:20:16.160 --> 0:20:19.000 conference I think to spend and drive that sort of 0:20:19.640 --> 0:20:20.800 renewables to push forward. 0:20:21.720 --> 0:20:23.880 So the outperformer, sorry boy you mentioned is. 0:20:23.800 --> 0:20:28.520 It s s SC Yes is the UK listed renewables 0:20:28.520 --> 0:20:32.879 and networks company, has transmission and distribution assets and is 0:20:33.000 --> 0:20:35.760 really the sort of the UK's green energy champion if 0:20:35.760 --> 0:20:38.159 you like. There are other ones across Europe, particularly a 0:20:38.200 --> 0:20:41.520 droller for example, some of the Spanish champion, or you 0:20:41.560 --> 0:20:46.520 know RWE in Germany or EVP in Portugal. These are 0:20:46.560 --> 0:20:50.359 all companies that have got very high ambitions in renewables, 0:20:50.920 --> 0:20:53.639 rolling out wind and solar projects and already have a 0:20:53.640 --> 0:20:56.280 sort of pipeline that for the next sort of three 0:20:56.280 --> 0:20:58.600 to five years that there's very well covered by projects 0:20:58.640 --> 0:20:59.320 under construction. 0:20:59.680 --> 0:21:00.240 Been a read. 0:21:00.320 --> 0:21:02.800 So again these prices are fairly well or sort of 0:21:02.840 --> 0:21:04.080 growth is very well baked in. 0:21:05.240 --> 0:21:07.680 And you know, they renewables often set. 0:21:07.480 --> 0:21:09.800 A price or they may have some sort of price support, 0:21:09.920 --> 0:21:13.200 so they don't probably taking market risk on the price, 0:21:13.280 --> 0:21:15.560 so they can actually do these prices up front their 0:21:15.560 --> 0:21:17.960 contract for difference or something like that with the supplier. 0:21:18.240 --> 0:21:20.240 So it really it's about the construction risk and giving 0:21:20.240 --> 0:21:22.320 it done and actually there in life is probably the 0:21:22.320 --> 0:21:25.840 biggest risk they face, the those inflationary risks. The cost 0:21:25.880 --> 0:21:28.880 of a wind turbine has gone up significantly, a cost 0:21:28.880 --> 0:21:31.639 of steel, for example, all the component parts or the 0:21:31.920 --> 0:21:33.600 electronics and go into it. 0:21:34.200 --> 0:21:36.520 That's rising and that is causing some problems. And what 0:21:36.520 --> 0:21:37.280 we're seeing is. 0:21:37.720 --> 0:21:41.359 Some companies aren't just pairing back their renewables targets, has 0:21:41.359 --> 0:21:45.160 to compensate for that. Others are maintaining their renewables targets 0:21:45.160 --> 0:21:48.480