Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 1: Today's guest Sir Erin Hudson, who reports on distressed debt
Speaker 1: for Bloomberg News in New York. We're delighted to have
Speaker 1: you on the show.
Speaker 2: Thanks so much for having me.
Speaker 1: We're also very pleased to welcome Paul Vickers, who covers
Speaker 1: energy for Bloomberg Intelligence in London.
Speaker 3: Yeah, thanks for having me as well.
Speaker 1: We'll be coming back to energy in a bit. There's
Speaker 1: lots of exciting stuff going on there, so do stay
Speaker 1: with us. But first, Erin Hudson, with Bloomberg News, you've
Speaker 1: been digging deep into distressed debt. A lot of companies
Speaker 1: are running into trouble at the moment, with interest rates
Speaker 1: rising and the economy slowing down, potentially tipping into a recession.
Speaker 1: Inflation and volatility in the financial sector don't help. A
Speaker 1: lot of regional banks are really struggling. Plus, the anxiety
Speaker 1: about the debt ceiling is the highest I've seen in years.
Speaker 1: I have to go back to twenty eleven for the
Speaker 1: last time it's been this exciting. So you've been talking
Speaker 1: to some very large distressed debt investors. What are they saying,
Speaker 1: is everything about to blow up? And what do they
Speaker 1: see as the big opportunity here erin?
Speaker 2: Well, it sounds like there's a lot to look at
Speaker 2: all over the place, and especially to do with the banks.
Speaker 2: You know, it sounds like everyone is doing work on
Speaker 2: what are the assets that various banks have, what is
Speaker 2: the structure of their capital their capital stack, So you know,
Speaker 2: they're sort of looking at how they can get involved,
Speaker 2: you know, where they want to make their bets and
Speaker 2: you know what the assets are. Obviously we kind of
Speaker 2: saw the issues with with Silicon Valley Bank and the
Speaker 2: duration of their treasuries. But you know, I think now
Speaker 2: people are sort of looking at the commercial real estate loans.
Speaker 2: I've had investors mentioned commercial and industrial loans in particulars
Speaker 2: as something they're they're taking a look at. So, yeah,
Speaker 2: it seems like this The feeling is that this also
Speaker 2: opens up opportunities outside just the banks themselves for direct ending,
Speaker 2: and you know, and then obviously companies themselves that no
Speaker 2: longer have the same access to credit if they relied
Speaker 2: on the regional banks.
Speaker 1: Let me just start me there on the banks So,
Speaker 1: I mean, we've saw this wave of distress. We saw
Speaker 1: Credit Swiss basically disappear, we saw all of these other
Speaker 1: regional banks. There was a kind of a domino effect.
Speaker 1: I mean, it just seemed very precarious even last you know,
Speaker 1: last few days, last few weeks, and we're talking sort
Speaker 1: of mid May. Now is the crisis over?
Speaker 2: I wish, I wish we knew. I don't know if
Speaker 2: anyone impossible to say, but I think there's a sense
Speaker 2: that there will be more distress for sure, and there's
Speaker 2: a lot more work to do.
Speaker 1: Okay, So people are sort of trading and betting on now.
Speaker 1: They're looking, as you say, the balance sheets of these banks.
Speaker 1: They're looking at exposure to treasuries which have gone down
Speaker 1: because of duration, looking at exposure to commercial real estate.
Speaker 1: And so do we expect now distressed investors to be
Speaker 1: much more actively engaged than looking at these banks much
Speaker 1: more closely? Is that the takeaway?
Speaker 2: It sounds like it. Yeah, And it also sounds like
Speaker 2: there's sort of a sense that depositors themselves are a
Speaker 2: bit more of a flight risk than you know before.
Speaker 2: So yeah, there's definitely a lot of moving pieces.
Speaker 1: Who actually made money on those trades.
Speaker 2: Some people Marathon Asset Management in particular, we reported that
Speaker 2: they made thirty million trading credits sweet sponds before the
Speaker 2: takeover by UBS. The You know, some of these that's
Speaker 2: will take a long time to play out. In Silicon
Speaker 2: Valley Bank, for instance, you know that bankruptcy is ongoing,
Speaker 2: so it'll take a while to know, you know, who
Speaker 2: made who who's the biggest winner or the biggest loser.
Speaker 1: But definitely an opportunity for the distress shops. They're also
Speaker 1: looking at consumer companies, right I mean, one of the
Speaker 1: people you were talking to is actually handling the liquidation
Speaker 1: of bed Bath and Beyond and Brick and more. To
Speaker 1: retail general is getting hit especially hard right now. What's
Speaker 1: the outlook there?
Speaker 2: Yeah, I mean, obviously there have have been several retail
Speaker 2: bankruptcies so far this year and several notable liquidations, but
Speaker 2: you know, I think that the consumer is overall holding
Speaker 2: up better than expected. And in retail too, I think,
Speaker 2: you know, there's a sense that won't last, you know,
Speaker 2: and especially if a retailer is not you know, the
Speaker 2: top one or two in their sector, they are probably
Speaker 2: going to be facing some struggles. But it seems like
Speaker 2: there might be a little bit more runway there, but
Speaker 2: you know, there's there's definitely some big, big fundamental questions
Speaker 2: like like what is what is the value of a brand?
Speaker 2: You know, are people do people really have brand loyalty anymore?
Speaker 2: You know, so consumer behavior I think is changing. Consumer
Speaker 2: behavior is definitely something that like no one can really
Speaker 2: take for granted anymore, and it's it's maybe a bit
Speaker 2: harder to predict.
Speaker 1: They're also being quite affected by the pullback by regional banks, right,
Speaker 1: I mean, the they were funding a lot of these
Speaker 1: companies on the retail side, so that's going to hurt.
Speaker 1: And then as you say, the economy is slowing, there's inflation.
Speaker 1: Consumers have been resilient, but they're not presumably going to
Speaker 1: remain that way forever.
Speaker 2: Yeah, I think there's there's definitely a sense that, you know,
Speaker 2: cracks are starting to emerge. One investor was sort of
Speaker 2: mentioning just the delinquency rates in subpar car loans as
Speaker 2: one indicator that all is not well and that you know, yeah,
Speaker 2: there will be problems. There are problems, but it's taking
Speaker 2: a while to trickle through.
Speaker 1: Another one that we constantly hear about in the context
Speaker 1: of distress is healthcare and distress that investors seem to
Speaker 1: like that one. Why do they get involved there?
Speaker 2: Yeah? I think I think the sense is there's a
Speaker 2: lot of opportunity there to kind of, you know, right
Speaker 2: size a balance sheet, sort of adjust the valuation of
Speaker 2: these companies. And I think, you know, there's there's some
Speaker 2: some triggers there that you know, you can't always see coming,
Speaker 2: but you know, regulatory policy changes. So healthcare services is
Speaker 2: a business that they've sort of flagged as highly highly interesting.
Speaker 2: And then also pharma with the idea that you know,
Speaker 2: if a company loses a patent for rug, you know,
Speaker 2: that creates uh trouble for the company, and it's kind
Speaker 2: of an opportunity for distrussed investors. So yeah, there's been
Speaker 2: you know, there's obviously a lot of changes that have
Speaker 2: happened the strain of the pandemic. So I think there's
Speaker 2: a lot of headwinds there for those businesses, which creates
Speaker 2: opportunities for the distrusted investor community.
Speaker 1: We should those companies be in good shape. I mean,
Speaker 1: we're all getting older and sicker and you know, living
Speaker 1: on forever. So it wasn't isn't Why why aren't those
Speaker 1: firms seeing really really well.
Speaker 2: Well, it's so it's kind of like this mix of
Speaker 2: so if regulatory and policy changes happened that which have
Speaker 2: happened over the past couple of years, which changed the
Speaker 2: amount of you know, reimbursements that these companies can collect
Speaker 2: from health insurance or government agencies, then you have the
Speaker 2: labor pressures, you know, the difficulty hiring skilled staff, needing
Speaker 2: to pay them more and more. You know, those are
Speaker 2: a few of the things. And then with the pandemic,
Speaker 2: you know a lot of people you know, stopped going
Speaker 2: in for these elective, elective and preventive care type of treatment,
Speaker 2: so that those are sort of like the biggest moneymakers
Speaker 2: at times for many of these these healthcare services. And
Speaker 2: you know, it's also not always the most desirable job
Speaker 2: to have anymore. So I think there's just there's a
Speaker 2: whole you know, Bloomberg has done a lot of great
Speaker 2: reporting on on on the pressures that are facing healthcare.
Speaker 2: It does feel a little on it like counterintuitive, but yeah,
Speaker 2: it's definitely a sector that's in the crosshairs.
Speaker 1: Nothing that came up when you were talking to the
Speaker 1: distressed investors was ever grand, which is a massive Chinese
Speaker 1: property developer that we've talked a lot about on this show.
Speaker 1: They have, you know, tens of billions of dollars in debt,
Speaker 1: They've got a lot of creditors all around the world,
Speaker 1: specifically on the US investors side. I'm interested to kind
Speaker 1: of understand what did what did they learn from this process?
Speaker 1: It seemed to have progressed very very quickly, and you know,
Speaker 1: investors were very engaged. So what did they learn?
Speaker 2: Yeah, I mean it's it's it's far from over, it's
Speaker 2: not quite over, but it seems like they're sort of
Speaker 2: a some investors are walking away with a bit of
Speaker 2: a renewed sense of faith in the in the system
Speaker 2: and confidence I guess in the you know, the restructuring
Speaker 2: process that Chinese companies will undergo and how how they
Speaker 2: approach it. So I think, you know, that seems to
Speaker 2: be the takeaway for the moment, but you know, of
Speaker 2: course it's an ongoing situation, so whether it will pay
Speaker 2: off the way that they're hoping and expecting it will
Speaker 2: remains to be seen. So you know, story will continue
Speaker 2: to follow because, yeah, it would have some big impacts.
Speaker 1: I guess also, you know, China being the second biggest economy.
Speaker 1: They need capsule, They need foreign capital particularly to sustain
Speaker 1: and build that economy, and they're going to need a
Speaker 1: lot of it over a long period, So they want
Speaker 1: to keep foreign investors happy.
Speaker 2: Right, Yes, And that definitely came up as you know,
Speaker 2: an sort of the thesis that was kind of under
Speaker 2: underpinning that bet is the idea that you know, offshore
Speaker 2: creditors aren't going to be completely you know, completely shafted
Speaker 2: or put thrown to the side because you know eventually
Speaker 2: they will need to come into provide capital. So yeah,
Speaker 2: it seems like that is definitely the belief that's sort
Speaker 2: of driving a lot of those investors who have gotten involved.
Speaker 1: Okay, great, So before we talked to Paul Vickers at
Speaker 1: Bloomberg Intelligence, Stephan be what our investors surprised about right
Speaker 1: now and what are they preparing for for the next
Speaker 1: let's say, twelve months.
Speaker 2: Yeah, I mean, I think that the ongoing strength of
Speaker 2: the housing market is a point of surprise and sort
Speaker 2: of fascination. It seems like the shift to ev EV
Speaker 2: mandates electric vehicles. Yeah, and just that that whole shift
Speaker 2: in the in the auto sector. I think there's the
Speaker 2: feeling that that's going to cause a lot of disruption,
Speaker 2: which again is going to make distress investors and uh,
Speaker 2: the community of advisors in the distrust in world very busy.
Speaker 2: And then I think there's also sort of you know,
Speaker 2: just looking at the phenomena of the meme stocks, I
Speaker 2: think that's becoming a more a greater factor when people
Speaker 2: are evaluating these situations. There's sort of the sense that
Speaker 2: that has staying power. As much as the meme stock
Speaker 2: era seems to have passed, it seems like, you know,
Speaker 2: it's still lingering.
Speaker 1: And in terms of opportunity, I mean, we've been hearing
Speaker 1: for years I have, particularly distress investors dry powder, you know,
Speaker 1: billions and billions of it just stacking up on the sidelines,
Speaker 1: but never enough distress for them to really deploy all
Speaker 1: of that. Are we finally, I mean rates going up,
Speaker 1: the economy going down, all these other things, you know, geopolitics,
Speaker 1: all this other volatility. Is this now the moment for distressed?
Speaker 1: Are they excited now? Are they happy?
Speaker 2: I don't know. Unfortunately, I think there's I think there's
Speaker 2: some mixed feelings. One investor who probably put it best
Speaker 2: is looking at in the context of looking at commercial
Speaker 2: real estate is sort of like, you know, you see
Speaker 2: there's problems, but is this the moment or should you
Speaker 2: wait six months? Should you wait a year? Are think
Speaker 2: it's going to get even worse, and you know it
Speaker 2: makes an even more attractive investment opportunity. So I think
Speaker 2: time is going to tell.
Speaker 1: Grattef Aeron Hudson from Bloomberg News, thank you so much
Speaker 1: for joining us. Thank you read all of erin'scoops on
Speaker 1: the Bloomberg terminal and of course at Bloomberg dot com.
Speaker 1: Moving on to another big topic. As I mentioned earlier,
Speaker 1: we are very fortunate to have with us Paul Vickers,
Speaker 1: who looks at energy for Bloomberg Intelligence. What's going on
Speaker 1: with the energy sector, Paul, Oil prices are down, We're
Speaker 1: heading into a recession, as we keep talking about, Plus
Speaker 1: theres a war going on just to the east of view.
Speaker 1: Is it all bad news over there?
Speaker 4: Well, not so much bad news, I think for the
Speaker 4: energy sectors. I work for Bloomberg Intelligence. I cover energy
Speaker 4: and utilities across Europe, a couple of global oils and
Speaker 4: of course the high old prices have been there been
Speaker 4: a windfall for them. They've done particularly well over the
Speaker 4: last eighteen months or so, less could be said for
Speaker 4: the utilities. You think again, being a sort of power producer,
Speaker 4: you think higher power prices would be good for these guys.
Speaker 4: That's not always the case there. They're often hedged very
Speaker 4: heavily up to one to three years ahead, and the
Speaker 4: high prices and volatility have created liquidity problems that the
Speaker 4: Russian supply comes.
Speaker 3: Impacted those that were dependent on them.
Speaker 4: It's caught companies like Uniper to its needs and nationalized
Speaker 4: nationalization by the German government.
Speaker 3: It's had for other reasons as well.
Speaker 4: Df was nationalized because it had to buy a lot
Speaker 4: of power in the market at very high prices. So
Speaker 4: for utilities, these higher power prices haven't haven't been a
Speaker 4: godsend at all. In fact, they've really threatened the very
Speaker 4: sort of structure of the entire industry. But what we
Speaker 4: have seen is the EU has responded to these Russian
Speaker 4: gas supplycasts.
Speaker 3: They're now running around ten percent of what they worked
Speaker 3: prior to the invasion.
Speaker 4: But they've posentially been replaced. It could have been happening
Speaker 4: with power prices or they stop gas prices. They're around
Speaker 4: thirty five years A mega walked out now are. They
Speaker 4: peaked at over three hundred during the during the last summer,
Speaker 4: and of course, with with gas prices setting turing, the
Speaker 4: price were paying the power market much of the time.
Speaker 4: The same thing's happened in power are they're around ninety
Speaker 4: years and make it allowed for a peak of over
Speaker 4: six hundred. So the prices have really fallen mainly because
Speaker 4: the use taking an awful lot of initiatives.
Speaker 3: It's boosted LNG.
Speaker 4: Supplies, it is pushed renewables, it's increased in imported gas
Speaker 4: by pipeline from countries like Norway. In Oligeer area, it's
Speaker 4: also made a big push to improve the energy efficiency
Speaker 4: and demand side management.
Speaker 3: And at the same time they also.
Speaker 4: Achieved their goal of having European gas storage stocks ninety
Speaker 4: five percent full at the start of the heating season.
Speaker 4: They achieved that and it never went below fifty and
Speaker 4: now they're restopping again. So really, when you've got fifty
Speaker 4: percent of your gas supply still full at the very
Speaker 4: sort of trough of the cycle moving into the summer
Speaker 4: sort of the period, a warmer period, and the gas
Speaker 4: demand it's in pretty good shape and power prices reflect that.
Speaker 4: So what's happened nows these companies have, you know, the
Speaker 4: risks have gone, those risks polatility of liquidity or of
Speaker 4: having to buy the sort of short power in the market,
Speaker 4: they've disappeared. These companies much better place right now. In fact,
Speaker 4: they're very well placed for this year as they've managed
Speaker 4: to put on hedges at higher levels. So it's quite
Speaker 4: a bit of earning sort of growth is baked in.
Speaker 4: So yeah, we're pretty relaxed about the utility set and
Speaker 4: I think from my perspective, it's probably you know, it
Speaker 4: looks like it's time to cool the end of the
Speaker 4: energy crisis. I think that's quite a sort of strong statement.
Speaker 4: I think the regulator would be less willing.
Speaker 3: To do so, but if he takes guidance from.
Speaker 4: The World Health Organization last week called it enter the
Speaker 4: COVID nineteen emergency status and they said it's time to
Speaker 4: transition into long term management.
Speaker 3: I think that's the.
Speaker 4: Same for the energy crisis. I think we're through it.
Speaker 4: It's never going to be the same again. I mean
Speaker 4: that Europe is now reliant, It has no ten percent
Speaker 4: of the sort of Russian gas applies that formerly supplied
Speaker 4: around forty percent of the market.
Speaker 3: They've gone.
Speaker 4: They're not coming back, but the authorities have taken measures
Speaker 4: to replace it and to compensate for it.
Speaker 3: And I think we're in the much calmer waters ahead, So.
Speaker 1: It's all looking pretty rosy then, Paul. I mean, would
Speaker 1: you call this sector specifically the energy sector? Would you
Speaker 1: call it defensive relative to other parts of the economy.
Speaker 4: What's certainly the only gas sector I'd say is in
Speaker 4: all the prices you see have fallen from their peaks,
Speaker 4: you know, OPEK classes doing what it can to sort
Speaker 4: of maybe support that, so that there's, you know, the
Speaker 4: feeling that they're sort of their ideal sort of support level.
Speaker 3: More might be around eighty dollars a barrel.
Speaker 4: So if you open that sort of level, then look
Speaker 4: at the let's thing at the oil natures and they
Speaker 4: have break even level. This is after dividends and capex
Speaker 4: have been paid around forty to fifty dollars, so they're
Speaker 4: still thrown off an awful lot of free cash flow
Speaker 4: that level. They may well be returning it mostly to
Speaker 4: shelders now, but it doesn't really matter because they managed
Speaker 4: to bring leverage down to in some cases there's negative
Speaker 4: levels and other cases sort of single digits sort of
Speaker 4: debt to.
Speaker 3: Equity, So there's an allthwort of capacity for.
Speaker 4: These guys to releverage the balance you so even if
Speaker 4: all does drop a little bit more, they'll can't share
Speaker 4: buybacks back down. But there's still plenty of capacity to
Speaker 4: re leverage without threatening credit quality, and that's sort of
Speaker 4: key for the sector. So yes, I would say that
Speaker 4: the oiler gas is a safe haven. I think the
Speaker 4: other side of the coin of utilities is whereas the
Speaker 4: risk we are on the downside previously, I don't see much
Speaker 4: outside because I think these companies will use any sort
Speaker 4: of windfalls they get from higher edge levels just to
Speaker 4: reinvest more and more into the renewables sector. This is
Speaker 4: really any constraints to their growth the sort of balance sheets,
Speaker 4: and they're really fairly stretched, so they don't have the
Speaker 4: same flexibility gas companies due to re leverage. So the
Speaker 4: higher earnings they're seeing from these power prices now from
Speaker 4: say inflation linked to earnings in the regulated name by businesses,
Speaker 4: these are all allowing them to actually sort of take
Speaker 4: on more debt and drive renewables growth. I mean they're
Speaker 4: looking some companies, you know, fifteen to twenty percent sort
Speaker 4: of growth over the sort of mid term as they
Speaker 4: rolled out wind and solar and hydrogen network up great projects.
Speaker 4: So yeah, this is there's a great growth phase going
Speaker 4: on the utility centrum and you're not really seeing that
Speaker 4: in the on a gas sector. These guys haven't really
Speaker 4: boosted cafes that much. You know that there's an element
Speaker 4: of rising spending, but it's not really about growth.
Speaker 3: That's really about cash flow.
Speaker 4: Whereas I think in futilities, whereas the risks were very
Speaker 4: heavily on the downside at the middle of last year,
Speaker 4: so Unicer went went went, Das got nationalized, the VMG
Speaker 4: and other German gas supplier or almost got a national
Speaker 4: when I say, managed to do a last minute deal
Speaker 4: to avoid it. All the energy suppliers in the UK
Speaker 4: were going fast and almost on a daily basis. Those
Speaker 4: risks have gone now and I think they can look
Speaker 4: forward to you know, so it's future with a lot
Speaker 4: more confidence, with sort of solid high meter single figures
Speaker 4: of earnings growth, stable leverage and a couple of companies
Speaker 4: maybe looking at sort of you know a little bit
Speaker 4: of credit. Upside of looking at s SE recently in
Speaker 4: the UK is with energy supplier that's doing very well.
Speaker 4: It's managing to fund its growth by selling states in
Speaker 4: its network and it's in its renewables businesses. So it
Speaker 4: really is a massive growth question and the key is
Speaker 4: how to fund it. And now they've got a much
Speaker 4: more stable environment with prices sort of really flat lining
Speaker 4: around those sort of thirty five level and here's make
Speaker 4: one our level of the gas that really gives them
Speaker 4: conference I think to spend and drive that sort of
Speaker 4: renewables to push forward.
Speaker 1: So the outperformer, sorry boy you mentioned is.
Speaker 4: It s s SC Yes is the UK listed renewables
Speaker 4: and networks company, has transmission and distribution assets and is
Speaker 4: really the sort of the UK's green energy champion if
Speaker 4: you like. There are other ones across Europe, particularly a
Speaker 4: droller for example, some of the Spanish champion, or you
Speaker 4: know RWE in Germany or EVP in Portugal. These are
Speaker 4: all companies that have got very high ambitions in renewables,
Speaker 4: rolling out wind and solar projects and already have a
Speaker 4: sort of pipeline that for the next sort of three
Speaker 4: to five years that there's very well covered by projects
Speaker 4: under construction.
Speaker 3: Been a read.
Speaker 4: So again these prices are fairly well or sort of
Speaker 4: growth is very well baked in.
Speaker 3: And you know, they renewables often set.
Speaker 4: A price or they may have some sort of price support,
Speaker 4: so they don't probably taking market risk on the price,
Speaker 4: so they can actually do these prices up front their
Speaker 4: contract for difference or something like that with the supplier.
Speaker 4: So it really it's about the construction risk and giving
Speaker 4: it done and actually there in life is probably the
Speaker 4: biggest risk they face, the those inflationary risks. The cost
Speaker 4: of a wind turbine has gone up significantly, a cost
Speaker 4: of steel, for example, all the component parts or the
Speaker 4: electronics and go into it.
Speaker 3: That's rising and that is causing some problems. And what
Speaker 3: we're seeing is.
Speaker 4: Some companies aren't just pairing back their renewables targets, has
Speaker 4: to compensate for that. Others are maintaining their renewables targets
Speaker 4: but maybe increasing and increasing their sort of capex budgets
Speaker 4: and you know, pushing leverage a bit more or looking
Speaker 4: at other ways like ssee and selling off stakes five
Speaker 4: percent stakes in their distribution businesses. They're looking at other
Speaker 4: ways or bringing in partners to raise that capital, to
Speaker 4: recycle the capital in order to maintain their growth. As
Speaker 4: someone like Austa for example, as a policy of every
Speaker 4: farm they bring into operation their self. If center it
Speaker 4: off to the third party investor, they don't reinvest that
Speaker 4: in the next one, and the next one and so on.
Speaker 4: They simply don't have the capital to provide their growth.
Speaker 4: But I think the utility search is all about growth
Speaker 4: now and much lower risk growth with a much more
Speaker 4: stable environment.
Speaker 1: If a lot of that cash, though, Paul is being
Speaker 1: pushed back to equity investors, What is the opportunity for
Speaker 1: a credit investor of any particular pockets of relative value
Speaker 1: right now?
Speaker 4: What?
Speaker 3: Certainly on the gas sectors that spreads are very tight.
Speaker 4: A Chevrons, Shells, Total energies companies like that, there.
Speaker 3: Are more opportunities. I think in the utility sector.
Speaker 4: There are still some companies there who are fairly low rated,
Speaker 4: sort of triple B type level.
Speaker 3: And one of the more interesting areas.
Speaker 4: Of the market is is the hybrids, which is like
Speaker 4: subordinated bonds if you like. They're often rated couple not
Speaker 4: as lower, so they might be like a non investment
Speaker 4: grade a subordinated bond with equity type characteristics, unlike a
Speaker 4: senior bond which might investment grade rating obviously you get
Speaker 4: a lot higher high yields on those on those hybrids.
Speaker 4: But yeah, the market has been been playing ball. They've
Speaker 4: been changed with the hybrids. You have maybe a five
Speaker 4: year called corn and replace them, a corn and replace
Speaker 4: again kind of kicking the count down the road and
Speaker 4: company has been doing that. And if you like a
Speaker 4: company like a Patroller, you could buy a very expensive
Speaker 4: senior bond that may be I don't know, thirty basis
Speaker 4: points over a smart curd, or you could go subordinated
Speaker 4: in the same company and probably by a hybrid for
Speaker 4: two hundred basis points, taking a couple of notches down.
Speaker 3: The capital structure.
Speaker 4: It's about equity, but it's a low the bonds, so
Speaker 4: there are opportunities there. And also I think with the
Speaker 4: sort of the energy transition, these companies are all instring
Speaker 4: or of green bonds and even green hybrids in some cases,
Speaker 4: and these are also attracted to you know, a whole
Speaker 4: wave investors who are looking at sort of the SG
Speaker 4: right now, the utilities are the biggest esg issuing sector
Speaker 4: in Europe in terms of sustainability, link bonds, green bonds,
Speaker 4: the entire sort of product range, and I think that
Speaker 4: set to keep maintaining their position, probably grow going forward.
Speaker 3: In some companies, the.
Speaker 4: Nineteen ninety five percent of what they're spending is aligned
Speaker 4: with the EU taxonomy, which means it will sort of
Speaker 4: qualify if you like, for green investments, So they're very
Speaker 4: well placed. I think certainly green bonds are an area
Speaker 4: of interest. Subordinated or hybrid bonds or hybrids if you
Speaker 4: hYP dore not really bonds parts, but there are another
Speaker 4: area as well. Those companies. I think s S has
Speaker 4: some positive preventing. EEDF is another company we quite like.
Speaker 4: It's one of our focus ideas. It has autoric year
Speaker 4: last year after the government forced it to sell a
Speaker 4: lot of it's nuclear power to third parties at a
Speaker 4: fixed price that costed billions and billions of euros because
Speaker 4: they have to buy that power in the market at
Speaker 4: has elevated prices. It also had some safety issues in
Speaker 4: a nuclear plant, which means its production was a lot
Speaker 4: that we're again had to replace. That put its edges
Speaker 4: of very high market prices. Those two factors have gone
Speaker 4: this year. They're not going to be effecting their EBIT dark.
Speaker 4: They went from an eighteen billion profits of five billion
Speaker 4: even lost last year but I think they can need
Speaker 4: to get back up to that level this year and
Speaker 4: probably hit there, you know, for loads of the four
Speaker 4: times of leverage target as well. So it's been nationalized
Speaker 4: now again, which was like some sort of backstops. I
Speaker 4: think EDIF is certainly named to watch this year. They
Speaker 4: have plenty of hybrids as well, so you can really
Speaker 4: get some quiet uite juice yields on some coordinated df
Speaker 4: for hybrids.
Speaker 1: On the ESG, Paul, you mentioned a lot of renewables,
Speaker 1: you mentioned transition, mentioned green barns, all of this great stuff.
Speaker 1: Investors love it. But in the context of energy, I
Speaker 1: mean this is fossil fuels essentially for a lot of them,
Speaker 1: is you know, the bulk of their business. That's not
Speaker 1: a very clean or environmental business for ESG investors to
Speaker 1: be getting into. Is it not a bit of contradiction there?
Speaker 1: Is it not just like marketing, What's what's really going on?
Speaker 1: And that's that side.
Speaker 4: Yeah, it's utilities that are the ones who are already
Speaker 4: the favorites of the green or in versus if you like.
Speaker 4: I mean, they're they're phasing out their col fire generation.
Speaker 4: You know, they're using gases and LERG and and those
Speaker 4: sort of areas. That's a sort of transition fuel abviosuly
Speaker 4: nuclear co two three. Apart from that, they're pushing very
Speaker 4: hard on the renewables, the wind and solar, even moving
Speaker 4: into areas like hydrogen. You know, the networks that are
Speaker 4: upgrading and expanding to income to all these renewables projects.
Speaker 3: They're all qualifying for these green projects.
Speaker 4: The utility sector, that's what I say, is one of
Speaker 4: the biggest green issues, or the fact the biggest green issue.
Speaker 3: In the European market.
Speaker 4: But for the on a gas companies for example, as
Speaker 4: you say that they're not they're not really in that
Speaker 4: market at all. They're still a few companies a year
Speaker 4: or so ago, two years ago, BP was talking about
Speaker 4: coming back or production, you know, with the historic kind
Speaker 4: of changes moved. They've got very high renewables and ambitions,
Speaker 4: but really they realize there's so much funny to be
Speaker 4: made for more than gas production with even eighty dollars
Speaker 4: a barrel, that the return of capital is like phenomenal,
Speaker 4: prepared to what it would be on maybe some renewables
Speaker 4: projects they could build. You know, they've got existing old
Speaker 4: fields that just keep this, keep drilling and let's keep hunting.
Speaker 3: We can make them tons of cash. We can give
Speaker 3: back your shelterers doing that.
Speaker 4: It's a lot longer game to play to build that
Speaker 4: renewables capacity. So you know, some like Total Energies that
Speaker 4: they have been issuing hybrids, not not green ones, but
Speaker 4: just hybrids to fund their renewables and ambitions. And you know,
Speaker 4: by twenty thirty they want to be one of the
Speaker 4: biggest renewables players in the world. As the VP, they
Speaker 4: have a long way to go, and right now, I
Speaker 4: think for them to capital allocation decision, do we get
Speaker 4: us a huge reternal capital from the best known a
Speaker 4: gas or do we take a much higher risk, low
Speaker 4: return option on pushing renewables. Right now on the gas
Speaker 4: is winning, which again sort is precludely done for really
Speaker 4: issue in the green bombs. They can issue hybrids, but
Speaker 4: again just sort of regular hybrids rather than green ones.
Speaker 4: So yeah, they are the gas companies really a long
Speaker 4: way off from being any major green bond issuers because
Speaker 4: their core business it is going to stay for a
Speaker 4: very long time.
Speaker 1: Interesting, okay, thank you. So overall it's a pretty rosy
Speaker 1: picture for European energy and utilities. But you know, I'm
Speaker 1: a credit guy, Paul, and I worry all the time,
Speaker 1: but everything. So what keeps you up at night worrying?
Speaker 1: What are you scared of in the context of what
Speaker 1: you cover, anything gnawing away inside you?
Speaker 3: Well, I mean there's still risk to the market.
Speaker 4: I say, the Andrew is calling the energy crisis, your
Speaker 4: energy crisis is over. There's risk to that, clearly, just
Speaker 4: like calling the COVID nineteen pandemic over.
Speaker 3: There's a risk to that.
Speaker 4: It could be a research and I mean, these are
Speaker 4: just things you have to live with now. I guess
Speaker 4: that's the same. For example, Russia is still pumping around
Speaker 4: the ten percent of what it used to into Europe
Speaker 4: of southern corridors. That could be cut again, that half
Speaker 4: of your replaced again. That could be a shot. We
Speaker 4: could see a resurgent demand from Asia and has happened
Speaker 4: about two years ago after sort of COVID sort of
Speaker 4: restrictions were first sort of lifted.
Speaker 3: That I call the LERG cargots. I mean, there's only
Speaker 3: finite energy capacity.
Speaker 4: It takes a long time to build a new capacity,
Speaker 4: both the gasification and or regasification liquor faction as well,
Speaker 4: So you know it takes a long time.
Speaker 3: So if all those cargoes go tow Asia, then Europe
Speaker 3: again could be looking at well, where we're going to
Speaker 3: get our gas from.
Speaker 4: They also got got off lightly I think somewhat in
Speaker 4: Europe with a fairly mild wind, and so.
Speaker 3: The demand that gas is always that's peak demand.
Speaker 4: It was never that extreme, that's quite so if you've
Speaker 4: got a combination of Russia cancer last ten percent. If
Speaker 4: Asia recovers strongly, rebound strongly and it takes all the
Speaker 4: energy away from Europe, is they can ship the energy
Speaker 4: anywhere from Australia to two year or to America to China.
Speaker 4: I mean it doesn't manage just to ship on a
Speaker 4: sea like an oil tank. So if that take gets
Speaker 4: dragged to and to Asia, you can't replace him, So
Speaker 4: you could leave Europe a bit shorter. In context with
Speaker 4: a cold of winter, we could be looking at.
Speaker 3: A higher prices.
Speaker 4: In fact, the future's gas curve does share high prices
Speaker 4: for this winter. There's still nowhere in where we were
Speaker 4: maybe a sixty euros thirty five at a minute, and
Speaker 4: still that that's a reasonable level. But it is still
Speaker 4: a type market. There is still the structural risks we're
Speaker 4: going to have to learn to do. But at the
Speaker 4: same time taking measures like building out with rble's capacity
Speaker 4: and increasing energy and for capacity and all these factors
Speaker 4: that should smooth it over time. But there are some
Speaker 4: risks still that we could see. We can see prices rise,
Speaker 4: we could see some companies, yeah, maybe struggling again. But
Speaker 4: I think that, you know, the worst is by far over,
Speaker 4: so I'm not being kept up at night.
Speaker 1: Got it. Thanks very much Paul Vickers of Bloomberg Intelligence.
Speaker 1: You can read all his great analysis on the Bloomberg
Speaker 1: Terminal to check it out. And thanks again to Aaron
Speaker 1: Hudson from Bloomberg News. Read all of her scoops on
Speaker 1: the terminal and at Bloomberg dot Com. I'm James Crumbie.
Speaker 1: It's been a pleasure having you. See you next week
Speaker 1: on the Credit Edge.