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

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

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Speaker 1: This week, we're very pleased to welcome back Paula Selekson

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Speaker 1: and Lisa Lee, two senior reporters in our global private

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Speaker 1: credit team. Paula is based in New York. Great to

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Speaker 1: see you, glad to be here, and Lisa covers credit

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Speaker 1: markets from London. How are you, Lisa fine?

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Speaker 2: Thank you, Happy to be joining you both.

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Speaker 1: Also on today's show, we'll be talking to Rina Quark,

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Speaker 1: who covers Asian banks for Bloomberg Intelligence in Singapore. There's

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Speaker 1: a lot going on in that region, so do stay

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Speaker 1: with us. But first, great to have you on the

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Speaker 1: Credit Edge, Lisa Lee and Paula Seligson. Let's talk about

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Speaker 1: private debt. It's been a huge year. We're in a

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Speaker 1: golden age for private credit, or so they say. Why

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Speaker 1: all the hype though, do you think it's justified? Paula

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Speaker 1: oh Man.

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Speaker 3: That's a tough question. It's definitely grown a lot. So

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Speaker 3: the size of the private credit market is now about

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Speaker 3: one point six trillion, and Prequent projects it will reach

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Speaker 3: two point eight trillion by the year twenty twenty eight,

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Speaker 3: so you can see the growth is continuing a lot,

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Speaker 3: but a lot of private credit. We focus on direct lending,

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Speaker 3: which is the corporate borrowing side of this, and that's

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Speaker 3: been fairly quiet, mostly because there hasn't been as much

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Speaker 3: leveraged buyout in an a activity. So I think in

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Speaker 3: a lot of ways, the outlook depends on if private

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Speaker 3: equity sponsors can start agreeing on valuations between buyers and sellers,

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Speaker 3: and if that happens, we could see a significant increase

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Speaker 3: in deals next year.

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Speaker 1: Lisa, do you buy the hype?

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Speaker 2: I think there is some legitimacy to it. As Paula said,

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Speaker 2: deal activity hasn't been great, but when you look at

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Speaker 2: the LP side and investors and where people want to

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Speaker 2: allocate their money, there's a huge growing interest in what

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Speaker 2: private credit is. It's starting to offer in some ways

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Speaker 2: eels that are superior to private equity, offering a lot

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Speaker 2: more lot less risk. And so if LP's and the

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Speaker 2: flow of capital is going to private credit, then I

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Speaker 2: think that's what's causing sort of the excitement and the heatedness.

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Speaker 1: So what about next year? What do we expect more

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Speaker 1: of the same, even bigger deals, more participants, more deals

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Speaker 1: being taken away from public markets and done privately. What's

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Speaker 1: your outlook for twenty twenty four, Paula.

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Speaker 3: I think bigger deals. I mean, that's what people keep saying.

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Speaker 3: We've now seen a roughly five billion dollar deal this year,

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Speaker 3: and it could just keep growing and eating into the

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Speaker 3: highl bond and leverage loan markets. There's also a lot

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Speaker 3: of highled bonds and leverage loans that are maturing soon

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Speaker 3: and it's challenging for these borrowers to refinance in those markets,

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Speaker 3: and so they might be coming to private credit for

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Speaker 3: some solutions such as payment in kind or pick interest

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Speaker 3: where you can basically pay interest with more debt instead

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Speaker 3: of cash, which is very helpful if you're struggling with liquidity.

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Speaker 1: Lisa, do you expect continuation of this trend?

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Speaker 4: Oh?

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Speaker 2: Yes, when you get cuptivity and at which has been

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Speaker 2: two of the creativity still in play right now, it

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Speaker 2: hasn't happened, but direct lenders and are looking at maybe

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Speaker 2: five point five to six billion dollars of financing at A.

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Speaker 2: Vinta was the largest deal at four point five billion euros.

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Speaker 2: You look at them and they were more interests from

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Speaker 2: private credit than there was the size of these loan packages,

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Speaker 2: so they could definitely get bigger. I think what might

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Speaker 2: happen next year, especially in the US and less so

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Speaker 2: in Europe, is that banks are starting to come back

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Speaker 2: and they are starting to start to compete for these

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Speaker 2: So that's going to put more pressure for also on size,

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Speaker 2: and also on pricing, and also on structure and also

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Speaker 2: on covenants. You're starting to see, especially with these bigger deals,

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Speaker 2: with the private credit deals starting to bleed and look

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Speaker 2: more like Bradley syndicated deals.

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Speaker 1: So this is just basically old school lending with a

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Speaker 1: new label, is it. I mean, what's the difference between

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Speaker 1: this and what we used to see twenty years ago

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Speaker 1: in the loan market? Is any different?

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Speaker 2: Yes, I mean that I think you have. I think

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Speaker 2: you have a really good point. It is back to

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Speaker 2: the back to the future in some sense. The biggest

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Speaker 2: difference between what used to happen twenty thirty years ago

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Speaker 2: is one of the size and also the financing. So

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Speaker 2: private credit looks a lot like what maybe the leveraged

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Speaker 2: loan market used to do or the higho ball market.

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Speaker 2: But when you look at what's where the pool of

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Speaker 2: capital is now they're being backed by third party capital

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Speaker 2: or BDC's or clos, so longer term capital that doesn't

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Speaker 2: quite have the asset viability mismatch that banks did, or

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Speaker 2: financial firms like g Capital or CIIT. What do you think, Paula, Yeah.

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Speaker 3: I mean I think I've had a lot of people

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Speaker 3: say that private credit is like leverage loans in maybe

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Speaker 3: the nineteen eighties, and that market obviously saw a huge

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Speaker 3: development over time where it was originally bilateral loans, it

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Speaker 3: turned into loans where a group of banks would do

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Speaker 3: it and then eventually being syndicated that debt out to

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Speaker 3: institutional asset managers. And that's how the market currently works.

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Speaker 3: And so now we've also been seeing banks trying to

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Speaker 3: get into private credit because their hild bond and leverage

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Speaker 3: loan businesses are losing ground. And as they get into

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Speaker 3: private credit, it seems like they're almost trying to create

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Speaker 3: hybrid models, so to speak, where they kind of combine

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Speaker 3: you know, syndication, but also still using some of their

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Speaker 3: own money on their balance sheet while also still partnering

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Speaker 3: with outside capitals. So it's a very interesting graying of

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Speaker 3: the lines between hiled bonds, leverage loans, and direct lending.

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Speaker 1: So all this competition, we've had direct lenders traditionally, like

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Speaker 1: the original direct lenders take you know, real charge with

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Speaker 1: this market, and it grew very quickly. Now the banks

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Speaker 1: are coming back in and now it's become extremely popular

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Speaker 1: with everybody. Everyone wants in. Is that not a recipe

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Speaker 1: for disaster? That you know, there's all this demand, all

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Speaker 1: this competition for deals, there aren't enough deals. Are things

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Speaker 1: going bad? Things being badly pressed? Lisa, I think it's.

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Speaker 2: Hard to say exactly because it is not very terribly transparent,

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Speaker 2: but picks definitely pick debt, the idea that you can

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Speaker 2: pay interest with more debt rather than with cash, that's

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Speaker 2: a sign of a bubble. But beyond that, it's really

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Speaker 2: hard to see clear clear signs of bubbles as of yet.

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Speaker 2: Because of the high interest rate environment, Leverage hasn't gone

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Speaker 2: as high as let's say, what we used to see

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Speaker 2: in the broadly syndicated market in twenty eighteen or twenty nineteen,

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Speaker 2: definitely less so than what we saw before the financial crisis,

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Speaker 2: So you might be seeing the start of a bubble.

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Speaker 2: I'm not sure we're full on bubble yet, but with

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Speaker 2: all the capital coming in and with the banks coming

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Speaker 2: back and competition heating up, it's definitely a place to

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Speaker 2: watch for maybe an emergent bubble period.

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Speaker 3: One thing we're definitely trying to look for is any

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Speaker 3: data that shows just what is happening with all these

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Speaker 3: existing loans. It's very hard because most of the data

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Speaker 3: is only the BDC portion of the market, which is

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Speaker 3: probably the higher quality portion, and it's only a part

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Speaker 3: of the segment. But there was an interesting data point

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Speaker 3: from Lincoln International recently which tracks covenant defaults and so

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Speaker 3: this occurs when you know, any kind of covenant is tripped,

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Speaker 3: and those have actually been trending lower in the past

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Speaker 3: two quarters. So that's good for the market. But that's

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Speaker 3: because borrowers and lenders have been proactively amending loans before

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Speaker 3: a default can even occur, which can include you know,

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Speaker 3: extending maturities or adding equity into the business. So that

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Speaker 3: does show that there's a lot going on. People are

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Speaker 3: having to you know, get together in a room negotiate

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Speaker 3: figure out some solutions for companies, but it just doesn't

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Speaker 3: quite show up in the data. So it's very hard

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Speaker 3: to track and know.

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Speaker 2: And also I was can say that even the product

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Speaker 2: credit market really is sort of bifurcated. You have these

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Speaker 2: deals that are competing against the broadly syndicated levige on

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Speaker 2: and high yo bomb market, but there's also a portion

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Speaker 2: of the market that's very much small and medium sized

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Speaker 2: businesses that are really under the radar, and it's hard

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Speaker 2: to know. In one sense, you have tighter covenants on

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Speaker 2: those companies, but the other they are a little bit

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Speaker 2: more weak sensitive to economic downturn, and especially if we

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Speaker 2: go into a recession next year, which is still like

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Speaker 2: touch and go, we could have some economic softness. It's

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Speaker 2: going to be interesting to see what happens to those loans.

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Speaker 1: One thing that has struck me on the loans, and

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Speaker 1: what's really pushing the demand is the very high yields

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Speaker 1: up with some fifteen percent on some of these deals.

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Speaker 1: That's obviously great if you're an investor, but how good

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Speaker 1: is it for the borrow is how can they afford

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Speaker 1: to pay that and stay alive?

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Speaker 3: That is very challenging, and it's a fair question. There's

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Speaker 3: a point at which the interest rates just become too high.

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Speaker 3: And I think you know, the entire market is now

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Speaker 3: trying to assess whether certain companies basically have balance sheets

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Speaker 3: that are too levered or too indebted compared to current

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Speaker 3: day interest rates. You know, I heard a lot of

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Speaker 3: people say to me when interest rates started rising that

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Speaker 3: a lot of companies could handle that for about one year,

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Speaker 3: But if it lasted more than a year, there would

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Speaker 3: be a lot of firms that would have issues with

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Speaker 3: paying that higher interest expense, especially if at the same

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Speaker 3: time it's combined with a slow down in economic activity

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Speaker 3: or slow down in revenue or earnings growth. So it's

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Speaker 3: an open question. I mean, I think we're already seeing

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Speaker 3: a lot of creative refinancings, We're already seeing a lot

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Speaker 3: of amendments to existing loan documents. So I think that's

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Speaker 3: going to be a very big issue in twenty twenty four.

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Speaker 1: Lisa, do you have any thoughts on defaults or the

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Speaker 1: stress that these issues are under Yes, I.

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Speaker 2: Mean that is one of the reasons why I pick

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Speaker 2: is becoming so popular and people are asking it for it,

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Speaker 2: because high interest rates means that it's harder for companies

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Speaker 2: to pay. As Paula said, inflation has made revenues and

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Speaker 2: earnings high as they've made interest rates high, and so

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Speaker 2: many portfolio companies that I've talked to as sponsors have

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Speaker 2: said that they've been able to make these higher interest payments,

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Speaker 2: but if there's any economic softness, that's going to start

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Speaker 2: to really cut into what they can pay. And already

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Speaker 2: you're starting to see suns, hints and canaries in the

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Speaker 2: coal mine of corporate owning weakness. And so I think

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Speaker 2: next year is going to be really the year whether

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Speaker 2: we test defaults. Remember, part of some of the weakness

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Speaker 2: in the last couple of years has been weaker covenant

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Speaker 2: and that means that that gives companies a longer runway

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Speaker 2: before they have to deal with problems. So it might

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Speaker 2: be a while before we start seeing real distress or defaults.

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Speaker 1: So we've had a lot of guests on this show

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Speaker 1: talk about the risks and in private debt. One of

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Speaker 1: them raised the red flag about how fast the market

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Speaker 1: has grown. You know, went from zero to one point

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Speaker 1: five trillion in about ten years, which is bigger than

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Speaker 1: the US high yel bond market. There's no transparency, there's

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Speaker 1: not much liquidity if any, and companies risk falling behind

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Speaker 1: on their debt payments as rates stay high for longer.

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Speaker 1: The question earlier about new entrants, though, I mean that

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Speaker 1: seems to worry people that I talked to, you know,

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Speaker 1: about the risk of a blow up at what they

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Speaker 1: are calling private debt tourists. You know, these are maybe

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Speaker 1: less sophisticated participants who come in and just try and

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Speaker 1: get the yield, and maybe they're not quite as o

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Speaker 1: fay with the market as some of the big incumbents.

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Speaker 1: Do You worry about that that there is sort of

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Speaker 1: loose money, fast money coming in and that may result

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Speaker 1: in problems, Paula, I.

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Speaker 3: Think it's definitely a possibility. I've heard a lot of

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Speaker 3: people say that because private credit grew during a very

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Speaker 3: strong bull market during easy money, that every private credit

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Speaker 3: manager is kind of viewed the same. But as we

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Speaker 3: start to see how returns shake out in twenty twenty

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Speaker 3: three and twenty twenty four, when markets are not easy,

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Speaker 3: we're going to finally see, you know, who's the tier

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Speaker 3: one manager versus tier two or tier three. And I

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Speaker 3: think there's a lot of concern from some of the

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Speaker 3: big established players that new people chasing into this asset

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Speaker 3: class could have really bad results, which could make the

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Speaker 3: entire industry look bad. And I will say it's also

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Speaker 3: just very crowded, right, So if you want to do

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Speaker 3: large caps or backed lending, I mean you have to

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Speaker 3: compete with Blackstone, Areas, Apollo, et cetera. If you want

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Speaker 3: to do middle market, that's already a robust ecosystem of

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Speaker 3: middle market lenders as well. One place you can try

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Speaker 3: to do is a non sponsor of corporate lending. But

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Speaker 3: that's really hard to originate, right because you don't have

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Speaker 3: like one private equity firm you work with over and over. Instead,

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Speaker 3: you have to have an independent relationship for every single loan.

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Speaker 3: So we saw, for example, Wells Fargo partner with center

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Speaker 3: Bridge Partners earlier this year to create like a basically

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Speaker 3: a partnership where Wells Fargo originates a non corporate or sorry,

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Speaker 3: a non sponsor backed corporate loan, and center Bridge funds it.

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Speaker 3: So that's one solution tapping like a bank's network. But

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Speaker 3: it's just very hard to find a place that isn't

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Speaker 3: already very crowded. If you're new to this place.

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Speaker 2: I think it's similar, very similar, but probably the number

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Speaker 2: is smaller and it doesn't feel as crowded here the

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Speaker 2: dominant players are more set is a smaller market and

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Speaker 2: to the idea of like new entrance to me, it's

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Speaker 2: not the newness. It's because, to Paula's point, the last

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Speaker 2: ten years has been pretty easy. So being in this

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Speaker 2: market for six, seven years or six months, to me,

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Speaker 2: what matters more is how are they able to work

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Speaker 2: out a trouble loan. The fact is, when the market

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Speaker 2: is one point six trillion in size, it beggars belief,

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Speaker 2: this belief that there will be no problems. There's going

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Speaker 2: to be everyone's going to have some portfolios, some credit

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Speaker 2: that doesn't perform well. And because there's very little liquidity

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Speaker 2: in this market now, you can't sell out of it.

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Speaker 2: You can't just walk away from the problem. You have

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Speaker 2: to work it out. And working out a trouble loan

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Speaker 2: takes a lot of energy. And the question is do

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Speaker 2: they have the manpower and the resources and the know

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Speaker 2: how to sit through and try to extract the best recovery.

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Speaker 2: And I think that's going to really show who is

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Speaker 2: going to differentiate themselves in this next one or two years.

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Speaker 3: And that reminds me, Lisa, you had a really good

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Speaker 3: story earlier this year about how bad they are covers

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Speaker 3: have been for some leverage loans on the public debt side.

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Speaker 3: I mean that was just shocking. I think you reported

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Speaker 3: some er fifteen cents on the dollar.

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Speaker 2: Yeah, because it's all about the covenants, the lack of

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Speaker 2: investor protection and so, and then the fact that you

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Speaker 2: have no maintenance cup performance cup measurements, so you can

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Speaker 2: just kick the camp down the roof till the very end.

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Speaker 2: And then you have lender and under violence and all

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Speaker 2: these liability managements and sponsors extracting as much value. And

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Speaker 2: so historically leverage loans should return about seventy to eighty cents,

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Speaker 2: but instead they're returning like twenty five cents and some

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Speaker 2: even worse. And so is that the new normal or

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Speaker 2: is it the first batch of defaults or the worst batch?

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Speaker 2: And then it begs the same question, because leverage loans

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Speaker 2: and private credit loans are very similar. Is it going

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Speaker 2: to be better because private credit is supposed to have

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Speaker 2: better covenants and so maybe is it more like the

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Speaker 2: old days where you get seventy cents or are these

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Speaker 2: smaller companies that are just going to have less lee,

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Speaker 2: way un less room to maneuver and going to produce

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Speaker 2: worse recovery Because I think you have to look at

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Speaker 2: defaults plus recovery together. If you have like a lot

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Speaker 2: of defaults, but you get all your money back. It's

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Speaker 2: a bit of a pain, but you're still your returns

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Speaker 2: are okay. You have a few defaults, but you have huge,

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Speaker 2: really bad recoveries, and your returns can be really bad.

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Speaker 2: So you do have to look at the two in combination.

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Speaker 1: So given how quickly we've gone from a market that

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Speaker 1: was only a few years ago known as shadow banking

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Speaker 1: by a group of very deep pocketed, very large funds

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Speaker 1: who knew what they were doing and could probably afford

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Speaker 1: to take a few losses, to now you know everyone,

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Speaker 1: to you know, Canadian teachers are getting involved with their

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Speaker 1: pension funds. At what point does the regulators step in

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Speaker 1: and say, let's have a closer look.

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Speaker 3: Regulators are definitely taking more notice of this. I want

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Speaker 3: to be clear that regulators fears right now are centered

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Speaker 3: around transparency. We've not had anyone call for systemic risk

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Speaker 3: questions that is not in play. But I think the

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Speaker 3: fear is they don't know what they don't know right

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Speaker 3: because it's so private, there's not much transparency. As this

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Speaker 3: risk has left the banking system into private credit, they

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Speaker 3: just don't know what's happening. And maybe it's fine, but

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Speaker 3: maybe it's not so. For example, in May, the Federal

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Speaker 3: Reserve had to report that essentially said it wasn't worried

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Speaker 3: about private credit, but it did lack the transparency for

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Speaker 3: them to assess the risks to the broader financial system.

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Speaker 3: And then very recently two senior Democrat senators in the

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Speaker 3: US wrote that the rapid rise of private credit, you know,

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Speaker 3: it could cause unforeseen threats to the banking system, and

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Speaker 3: they essentially asked regulators to figure out a way to

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Speaker 3: assess dangers better and have more transparency. And then I

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Speaker 3: know in Europe and Lisa you can talk about this.

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Speaker 3: The Bank of England also put this on their radar

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Speaker 3: as well.

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Speaker 2: Yeah, the Bank of England is definitely worried. They're definitely

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Speaker 2: they're watching. And the one sense the idea is it

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Speaker 2: is remove from the banking system, which is the most

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Speaker 2: fragile part of our financial system that's always been banking crisis,

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Speaker 2: and so moving it out this risk two asset managers

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Speaker 2: with long term capital. It's hard to see if this

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Speaker 2: this sector sort of cratered the transmission system that would

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Speaker 2: infect the rest of the financial system, versus say, leverage

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Speaker 2: loans in which you can see a leverage loan market cretering.

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Speaker 2: That would infect the higher bond market. That would then

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Speaker 2: that would infect ig credit, and then the broader equities market.

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Speaker 2: There is no transmission system that people have identified, so

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Speaker 2: it may just be contained. But at the same time,

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Speaker 2: lending matters and lending has always been important to the

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Speaker 2: broader health of the economy. So regulators are starting to

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Speaker 2: peer in and think, Okay, how do we how do

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Speaker 2: we engage with this sector.

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Speaker 1: I wonder what, though, when when the market is called private,

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Speaker 1: whether they will get any transparency, But we shall see.

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Speaker 1: So to wrap things up, you know, let's leave everyone

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Speaker 1: on a on a high I know, if we can.

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Speaker 1: We've talked about all the risks and all the trouble,

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Speaker 1: but there's still seems to be this great euphoria about

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Speaker 1: this market. Are we still in a golden age? Pola?

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Speaker 3: I need everyone to stop saying the words golden age

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Speaker 3: of private credit. Please please stop using that phrase. It's uh.

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Speaker 3: I know everyone said it this year, but it's uh.

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Speaker 3: I don't know. I mean it's I think there's a

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Speaker 3: lot of good going on in this asset class, right Like,

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Speaker 3: from one perspective, a lot of pension funds need alternative

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Speaker 3: asset classes to meet their return goals, right, and that

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Speaker 3: really does matter. But you have to think about what

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Speaker 3: are these loans actually funding in the economy. You know,

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Speaker 3: they're allowing for private equity leverage buyouts. Is that always

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Speaker 3: a good thing? Is that a bad thing? There's always

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Speaker 3: bigger questions there. But I think overall, so far, so good, right, Like,

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Speaker 3: so far, so good, But I think there's still a

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Speaker 3: lot of questions that are going to have to be

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Speaker 3: answered as we see the asset class grow and eventually

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Speaker 3: be tested by its first full cycle.

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Speaker 2: And I say, like, if you want to say golden

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Speaker 2: era in that sense that people is becoming a conscious

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Speaker 2: known thing definitely, Like if you said private credit a

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Speaker 2: year ago, I think very few people would have understood

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Speaker 2: or cared and this year it's become a very topical

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Speaker 2: something that regulators care about, investors care about, and also

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Speaker 2: the broader audience but perhaps not you know, mom and pop,

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Speaker 2: but the broader financial world cares about. So to that

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Speaker 2: sense that it is a golden age for that. But

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Speaker 2: to paul what Paula said is that the golden age

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Speaker 2: when when you're paying twelve percent for your interest it

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Speaker 2: perhaps not is probably a little bit of a reaction

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Speaker 2: to the height interest rate and the fact that the

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Speaker 2: broadly syndicated market and hig obam markets are a little

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Speaker 2: frozen and not completely healthy. It is partly a reaction

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Speaker 2: to a sort of broken public market.

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Speaker 3: And I just wanted to add one thing, which is

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Speaker 3: like access to capital really matters, right, Like, this is

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Speaker 3: what makes the world go around, This is what keeps

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Speaker 3: companies functioning. And you know, the sense that I have

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Speaker 3: there's not really data, but my sense is that well,

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Speaker 3: even though private credit has eaten away some at the

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Speaker 3: hiled bond and leverage loan market, the total pie has

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Speaker 3: gotten bigger. Right, So if you're just a company or

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Speaker 3: you're a private equity firm that needs to use doubt funding,

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Speaker 3: like you have more options, you have more capital as well,

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Speaker 3: So you know, in terms of access to capital, there

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Speaker 3: appears to be more, even though that has come at

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Speaker 3: the expense of the public markets.

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Speaker 1: Great stuff, Lisa Lee and Paula Seligson. Great to have

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Speaker 1: you on the Credit Edge. Please come back on the

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Speaker 1: show soon and all the best of twenty twenty four.

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Speaker 1: I hope it's a good one.

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Speaker 2: Oh, thank you for having us.

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Speaker 4: Thank you.

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Speaker 1: Read all of Lisa and Paula's great scoops on the

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Speaker 1: Bloomberg terminal and of course at Bloomberg dot com. So,

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Speaker 1: as I mentioned earlier, we're delighted to welcome back on

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Speaker 1: the credit edge. Rina Quok from Bloomberg Intelligence in Singapore,

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Speaker 1: How are you arena of good health?

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Speaker 4: Like you changed?

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Speaker 1: Very good? Thank you. You're based in Singapore, but you

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Speaker 1: cover banks across Asia. So let's start with the big picture.

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Speaker 1: China is slowing down, as is the rest of the world.

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Speaker 1: How does that affect the banks in your region?

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Speaker 4: If I would just summon up for the banks that

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Speaker 4: covered our banks, I would use one word, which is resilience. Now,

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Speaker 4: if we look into the RCM banks, the major RSUM

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Speaker 4: banks could face modest asset quality we're sending next year

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Speaker 4: amid a more challenging environment, and we do expect higher

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Speaker 4: levels or credit costs to materialize for our secret retailed

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Speaker 4: loans as well as loans to smmes likely to be

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Speaker 4: at most risks. But that being said, the impact of

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Speaker 4: defaults on the major lenders balance sheet would be manageable

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Speaker 4: as they are largely offset by solid provisions as well

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Speaker 4: as the tighter risk control that the lenders have over

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Speaker 4: the years.

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Speaker 1: So a story really of resilience, and we have talked

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Speaker 1: about that in the past on this show. The banks

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Speaker 1: are in good shape. But within Southeast Asia the region

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Speaker 1: you cover, where do you think we'll see some outperformance?

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Speaker 1: What will do better?

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Speaker 4: Sure? I think as we look within the selfist Asia region, firstly,

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Speaker 4: Indonation and Time banks could see a very gradual uptake

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Speaker 4: and non performing loans after the expiry of the four

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Speaker 4: balance matches at the end of this year, premise on

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Speaker 4: the more orderly resolution of the restructured loads. As we

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Speaker 4: look into the laggards, I would say TIE banks could

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Speaker 4: continue to resort to active MPR management to boster the

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Speaker 4: balance sheets, and their credit costs could actually remain elevated

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Speaker 4: and underperform other selfist Asian banking sectors due to a

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Speaker 4: more slugly economic recovery. We do expect their average banking

435
00:22:39,480 --> 00:22:42,000
Speaker 4: sector credit cards to Thailand to come in the range

436
00:22:42,000 --> 00:22:45,640
Speaker 4: of one point three to one point five percent next year. Now,

437
00:22:46,400 --> 00:22:49,200
Speaker 4: where are the curios that we see for Time banks?

438
00:22:49,400 --> 00:22:53,440
Speaker 4: I would see the structuring weakness and assembly loans continue

439
00:22:53,480 --> 00:22:56,680
Speaker 4: to be a curious for TIGE banks, while the mortgages

440
00:22:56,800 --> 00:23:00,920
Speaker 4: risks could be contained and employment conditions hold up despite

441
00:23:00,920 --> 00:23:04,760
Speaker 4: the elevated household dead In terms of bright sports are

442
00:23:04,840 --> 00:23:09,080
Speaker 4: definitely Singapore banks as equality could continue to remain peer

443
00:23:09,160 --> 00:23:12,160
Speaker 4: leading with a very marginal increase in the non performing

444
00:23:12,240 --> 00:23:14,880
Speaker 4: loans next year, and the credit costs could be at

445
00:23:14,960 --> 00:23:18,000
Speaker 4: normalized levels since they have really set and for provision

446
00:23:18,080 --> 00:23:18,880
Speaker 4: since the pandemic.

447
00:23:19,600 --> 00:23:22,240
Speaker 1: So when we look at dollar bonds and performance there

448
00:23:22,760 --> 00:23:25,199
Speaker 1: the outlook for next year, what do you what do

449
00:23:25,200 --> 00:23:26,880
Speaker 1: you make of that? What's going to do well? What's

450
00:23:26,880 --> 00:23:27,520
Speaker 1: going to do badly?

451
00:23:28,200 --> 00:23:31,440
Speaker 4: Sure? I think you know, for the major rm mans

452
00:23:31,480 --> 00:23:34,440
Speaker 4: dollar bonds performers, they could still be resilient next year.

453
00:23:34,760 --> 00:23:37,920
Speaker 4: And why so a couple of reasons right there, most

454
00:23:37,960 --> 00:23:40,840
Speaker 4: of the major lenders in this region, the risk buffers

455
00:23:40,920 --> 00:23:44,520
Speaker 4: are really strong enough to cushion potentially more that spread

456
00:23:44,560 --> 00:23:49,080
Speaker 4: widening as we see in the microeconomic heres now. Another

457
00:23:49,200 --> 00:23:52,919
Speaker 4: positive is that the manageable refinancing needs for most of

458
00:23:52,960 --> 00:23:56,600
Speaker 4: the lenders in this region are positive for their bond technicals.

459
00:23:56,800 --> 00:23:58,560
Speaker 1: So it is certainly sector that a lot of people

460
00:23:58,680 --> 00:24:01,040
Speaker 1: like you know in the US and globally, they like

461
00:24:01,119 --> 00:24:06,000
Speaker 1: financials for next year there's particularly been interested in the

462
00:24:06,040 --> 00:24:09,240
Speaker 1: eighty one bonds this year after Credit Swiss collapsed in March.

463
00:24:09,560 --> 00:24:12,440
Speaker 1: That's additional tier one bonds, the riskiest type of bank

464
00:24:12,480 --> 00:24:15,080
Speaker 1: debt for those who are new to this, but that

465
00:24:15,119 --> 00:24:18,840
Speaker 1: market did recover very quickly from the losses related to

466
00:24:19,040 --> 00:24:22,359
Speaker 1: the banking crisis earlier. Do we expect supply risks for

467
00:24:22,520 --> 00:24:25,840
Speaker 1: Asian banks eighty ones into twenty twenty four? Yeah?

468
00:24:25,840 --> 00:24:28,399
Speaker 4: I think you're rightly pointed out, James. You have seen

469
00:24:28,440 --> 00:24:31,359
Speaker 4: that globally. You know, the global banks eighty one have

470
00:24:31,480 --> 00:24:34,920
Speaker 4: recovered and recently we have seen really strong demand for

471
00:24:35,000 --> 00:24:38,160
Speaker 4: the UBS eighty one as well. Now, however, as we

472
00:24:38,240 --> 00:24:41,080
Speaker 4: take a closer look at where I am in southatht Asia,

473
00:24:41,680 --> 00:24:45,720
Speaker 4: eighty one issuances by their major RCM banks look said

474
00:24:45,760 --> 00:24:49,160
Speaker 4: to be loan next year, but possibly actually negative. Let's

475
00:24:49,200 --> 00:24:52,800
Speaker 4: supply due to low refinancing its given the ample capital

476
00:24:52,920 --> 00:24:56,200
Speaker 4: reserves that we pointed out earlier, as well as mutant

477
00:24:56,240 --> 00:25:00,159
Speaker 4: growth in riskwaded assets given a bigger loan for and

478
00:25:00,200 --> 00:25:03,280
Speaker 4: show amid the interest for uncertainties as well as the

479
00:25:03,400 --> 00:25:04,560
Speaker 4: macro humans.

480
00:25:05,080 --> 00:25:07,800
Speaker 1: So let's supply more demand? Does that just mean higher price?

481
00:25:08,400 --> 00:25:12,679
Speaker 4: I would say you know firm the major rs ON banks,

482
00:25:12,960 --> 00:25:16,000
Speaker 4: they do not rely heavily on aty launches to maintain

483
00:25:16,040 --> 00:25:19,560
Speaker 4: their capital adequacy. Their earnings are cruel are more than

484
00:25:19,600 --> 00:25:24,000
Speaker 4: able to actually compensate for the risk for the assets consumption,

485
00:25:24,240 --> 00:25:27,879
Speaker 4: so they are unlikely to come to the market unless

486
00:25:27,920 --> 00:25:32,080
Speaker 4: it's opportunistic. And that being said for major RCM banks,

487
00:25:32,080 --> 00:25:35,440
Speaker 4: they could still access cheaper on shore funding and has

488
00:25:35,520 --> 00:25:37,720
Speaker 4: less reliance of off shore funding if they have to.

489
00:25:38,720 --> 00:25:40,240
Speaker 1: So another thing we've been looking at in the context

490
00:25:40,280 --> 00:25:43,520
Speaker 1: of eighty ones is the non call risk. That is

491
00:25:43,760 --> 00:25:46,399
Speaker 1: when I guess investors are kind of pricing these things

492
00:25:46,800 --> 00:25:49,439
Speaker 1: to call and then the bank doesn't call them for

493
00:25:49,480 --> 00:25:51,600
Speaker 1: whatever reason. I mean, it's obviously an option of the

494
00:25:51,640 --> 00:25:54,080
Speaker 1: issue doesn't it's not an obligation, they don't have to

495
00:25:54,080 --> 00:25:56,240
Speaker 1: do it. But when when they don't do it, investors

496
00:25:56,240 --> 00:25:59,400
Speaker 1: sometimes are surprised. What is the risk risk of non

497
00:25:59,440 --> 00:26:01,560
Speaker 1: call in the eighty.

498
00:26:01,320 --> 00:26:03,639
Speaker 4: One sure change? I think, you know, in terms of

499
00:26:03,720 --> 00:26:06,359
Speaker 4: long chorus, definitely, this is one of the keys to

500
00:26:06,440 --> 00:26:09,800
Speaker 4: watch amid the elevated interest phrase and Ania Trump. Now

501
00:26:09,840 --> 00:26:13,120
Speaker 4: as we look into selvas Asia, we only have one

502
00:26:13,200 --> 00:26:16,560
Speaker 4: dollar eighty one that's callable within self as Asia in

503
00:26:16,600 --> 00:26:20,240
Speaker 4: twenty twenty four, and that is actually from TMB Bank,

504
00:26:20,359 --> 00:26:23,639
Speaker 4: a high bank, a pretty major bank and Thailand. And

505
00:26:24,080 --> 00:26:27,800
Speaker 4: we actually see a low non chorus for TMB dollar

506
00:26:27,920 --> 00:26:31,560
Speaker 4: eighty one next year, given that you know, the lender

507
00:26:31,640 --> 00:26:35,639
Speaker 4: has ample capital results with their core capital ratios at

508
00:26:35,760 --> 00:26:40,040
Speaker 4: least eight percent above their regulatory minimum minimum huddles and

509
00:26:40,119 --> 00:26:44,720
Speaker 4: even so the lender has actually mper capital results even

510
00:26:44,760 --> 00:26:47,120
Speaker 4: if they choose not to refinances eighty one.

511
00:26:48,160 --> 00:26:50,639
Speaker 1: Okay, great. So the other thing that we are looking

512
00:26:50,640 --> 00:26:54,560
Speaker 1: at here is the Basil three reforms effective twenty twenty four.

513
00:26:55,600 --> 00:26:58,479
Speaker 1: People are calling it the end game. How does that

514
00:26:58,520 --> 00:27:02,320
Speaker 1: impact capital buffers and debt issuance in Singapore?

515
00:27:02,920 --> 00:27:04,760
Speaker 4: Sure? So, if I may just take a step back

516
00:27:04,800 --> 00:27:08,800
Speaker 4: and give a bit more background about this buzzo regulations

517
00:27:09,000 --> 00:27:12,760
Speaker 4: now within Southace Asia, Singapore or rather Singapore banks are

518
00:27:12,840 --> 00:27:16,040
Speaker 4: actually at the forefront of what we call the buzzer

519
00:27:16,200 --> 00:27:20,600
Speaker 4: rules adoption now as their fully loaded buzzer rules, you

520
00:27:20,640 --> 00:27:23,840
Speaker 4: know as the final Buzzer rules or kicking effective July

521
00:27:24,000 --> 00:27:27,400
Speaker 4: next year. We believe it's actually on a graduate basis

522
00:27:27,400 --> 00:27:30,679
Speaker 4: starting from twenty twenty four on the facing over the

523
00:27:30,680 --> 00:27:34,199
Speaker 4: fires to twenty twenty nine, and we actually see the

524
00:27:34,320 --> 00:27:37,800
Speaker 4: capital impact of the fully loaded final Buzzit Tree rules

525
00:27:37,800 --> 00:27:40,879
Speaker 4: on Singapore banks to be manageable, and this is thanks

526
00:27:40,920 --> 00:27:44,840
Speaker 4: to their diversified businesses as well as the modest training books.

527
00:27:44,840 --> 00:27:47,480
Speaker 4: At about four to ten percent of the total risk

528
00:27:47,520 --> 00:27:52,000
Speaker 4: weighted assets as of June twenty twenty three. Now, we

529
00:27:52,119 --> 00:27:55,600
Speaker 4: believe that simple banks could still stay well capitalized without

530
00:27:55,640 --> 00:27:58,960
Speaker 4: their extra capital races to meet the new rules, and

531
00:27:59,000 --> 00:28:02,040
Speaker 4: the dividend policy is unlikely to be impacted as well.

532
00:28:02,720 --> 00:28:05,560
Speaker 1: One thing I'm interested in that is a big theme

533
00:28:05,560 --> 00:28:09,080
Speaker 1: for this podcast. I know we haven't talked about this,

534
00:28:09,160 --> 00:28:13,359
Speaker 1: you and I, but private credit. It's a massive opportunity

535
00:28:13,400 --> 00:28:15,760
Speaker 1: for the global lenders. They're all trying to get into it,

536
00:28:15,800 --> 00:28:17,879
Speaker 1: even though it just seems like old school lending to me.

537
00:28:19,040 --> 00:28:22,360
Speaker 1: To what extent is there private credit going on amongst

538
00:28:22,400 --> 00:28:23,280
Speaker 1: the banks that you cover?

539
00:28:24,200 --> 00:28:28,200
Speaker 4: Sure? I think within Service Asia private credit, well, it's

540
00:28:28,280 --> 00:28:31,080
Speaker 4: definitely a big topic. You know, some of the global

541
00:28:31,080 --> 00:28:34,359
Speaker 4: banks have really, you know, started like units just for

542
00:28:34,480 --> 00:28:38,960
Speaker 4: this space. I would say within Service Asia, this popularity

543
00:28:38,960 --> 00:28:42,240
Speaker 4: of private credit for my space is still more muted.

544
00:28:42,800 --> 00:28:46,160
Speaker 4: I would still say it's still at a very nascent stage.

545
00:28:46,600 --> 00:28:48,800
Speaker 4: If you see for the long growth that we have

546
00:28:48,920 --> 00:28:53,000
Speaker 4: within self as Asia, most of the traditional banks are

547
00:28:53,040 --> 00:28:56,680
Speaker 4: still doing the lending to the borrows because in as

548
00:28:56,760 --> 00:28:58,920
Speaker 4: of I would say the nine months are twenty twenty

549
00:28:58,960 --> 00:29:03,160
Speaker 4: three figures. Across Southace Asia, long growth has been robust

550
00:29:03,360 --> 00:29:08,320
Speaker 4: in Indonesia, uh, fairly healthy in Philippines as well as

551
00:29:08,560 --> 00:29:10,920
Speaker 4: even though in Singapore and loan growth is quite muted

552
00:29:10,960 --> 00:29:13,960
Speaker 4: because of the elevated interest rates. But definitely I think

553
00:29:14,560 --> 00:29:17,920
Speaker 4: private credit is one of their you know, key space

554
00:29:18,000 --> 00:29:20,360
Speaker 4: to watch for the banking going forward as well, but

555
00:29:20,520 --> 00:29:23,080
Speaker 4: less so for southest Asia at this point in time.

556
00:29:23,880 --> 00:29:26,640
Speaker 1: So just to wrap things up, Ana, if you look

557
00:29:26,640 --> 00:29:29,960
Speaker 1: at twenty twenty four across all of your coverage areas,

558
00:29:30,400 --> 00:29:32,680
Speaker 1: where do you think the best relative value is from

559
00:29:32,720 --> 00:29:34,840
Speaker 1: the point of view of a foreign investor?

560
00:29:35,960 --> 00:29:39,160
Speaker 4: Sure, I think you know, as we look into the

561
00:29:39,200 --> 00:29:43,040
Speaker 4: capital structure of the major r CM banks, meaning the

562
00:29:43,040 --> 00:29:45,680
Speaker 4: addition the tailman bonds that you mentioned are the tier

563
00:29:45,720 --> 00:29:48,840
Speaker 4: two boards as well as the seniors. Now among the

564
00:29:48,960 --> 00:29:54,200
Speaker 4: dollar tier twos, we believe that bank called Bank Dollar

565
00:29:54,240 --> 00:29:59,120
Speaker 4: Tiertoos could offer relative value and might actually tighten the

566
00:29:59,240 --> 00:30:04,680
Speaker 4: emerging banks peer curve next year due to relative outperformance.

567
00:30:04,720 --> 00:30:07,520
Speaker 4: That is actually given that the bank is actually likely

568
00:30:07,600 --> 00:30:10,160
Speaker 4: to face the list risk as well as the peer

569
00:30:10,240 --> 00:30:14,760
Speaker 4: leading risks buffers amid the more nascent economic recovery in Thailand. Now,

570
00:30:15,120 --> 00:30:16,960
Speaker 4: let me just share with you what we think actually

571
00:30:17,280 --> 00:30:20,800
Speaker 4: bank or Bank as Equality could actually remain peer leading

572
00:30:20,880 --> 00:30:23,840
Speaker 4: among the peers next year. A couple of reasons right

573
00:30:23,960 --> 00:30:26,959
Speaker 4: as Firstly, it has a safer loan mix as compared

574
00:30:27,000 --> 00:30:30,080
Speaker 4: to its peers now about forty four percent of bank

575
00:30:30,200 --> 00:30:33,280
Speaker 4: k bank total loans are too large corporates which are

576
00:30:33,280 --> 00:30:38,640
Speaker 4: actually safer better able to willstand any microeconomic tatements if

577
00:30:38,680 --> 00:30:43,480
Speaker 4: the tourism recovery is not as forecoming they expected. Now, secondly,

578
00:30:43,760 --> 00:30:46,320
Speaker 4: it has the lower share of four barians loans as

579
00:30:46,400 --> 00:30:49,560
Speaker 4: compared to the banking sector average, so that helps to

580
00:30:49,680 --> 00:30:52,280
Speaker 4: actually mitigate o would say, any cleave effect that we

581
00:30:52,440 --> 00:30:55,720
Speaker 4: might see once the four barons measure and next this

582
00:30:56,080 --> 00:30:59,520
Speaker 4: end of this year. And lastly, actually bankok Bank has

583
00:30:59,600 --> 00:31:03,400
Speaker 4: the high years loan loss risk buffers about two hundred

584
00:31:03,440 --> 00:31:06,160
Speaker 4: and eighty three percent and a quarter, and this is

585
00:31:06,280 --> 00:31:09,120
Speaker 4: well above the banking sector average you know, as well

586
00:31:09,200 --> 00:31:11,560
Speaker 4: as the peer average. So we do like a bank

587
00:31:11,640 --> 00:31:13,360
Speaker 4: of banks credit profile.

588
00:31:13,680 --> 00:31:17,080
Speaker 1: And just to close on the risks. Know what worries

589
00:31:17,120 --> 00:31:20,280
Speaker 1: you about the outlook there? What's the one big thing

590
00:31:20,360 --> 00:31:21,440
Speaker 1: to worry about for next year?

591
00:31:21,880 --> 00:31:24,000
Speaker 4: I would say one of the key is that we

592
00:31:24,160 --> 00:31:27,360
Speaker 4: are looking at as the elevated interest rates. I think

593
00:31:27,400 --> 00:31:29,880
Speaker 4: the market is now sitting on the fence whether world

594
00:31:29,920 --> 00:31:33,120
Speaker 4: interest rates can't happen, be in the first half or

595
00:31:33,160 --> 00:31:37,480
Speaker 4: second half, but assuming if interest rates remain elevated higher

596
00:31:37,560 --> 00:31:40,719
Speaker 4: for longer, I think that might actually put more pressure

597
00:31:40,760 --> 00:31:43,960
Speaker 4: on the weaker borrows, such as what we mentioned earlier

598
00:31:44,080 --> 00:31:48,120
Speaker 4: are the unsecured retailed loans loans to the small medium

599
00:31:48,240 --> 00:31:50,680
Speaker 4: enterprises what we call SMME. So I think that is

600
00:31:50,760 --> 00:31:54,120
Speaker 4: something to watch. But at least what's more comforting if

601
00:31:54,200 --> 00:31:56,440
Speaker 4: you look into the banks in this region, they have

602
00:31:56,680 --> 00:32:01,560
Speaker 4: ample risk buffers to cushion the credit laws across its earnings,

603
00:32:01,920 --> 00:32:05,800
Speaker 4: capital reserves as vis provisions, So that could actually mutigate

604
00:32:05,880 --> 00:32:07,840
Speaker 4: impact on the balashits and.

605
00:32:07,880 --> 00:32:12,000
Speaker 1: You'll of course be writing about that in great detail definitely,

606
00:32:12,120 --> 00:32:15,760
Speaker 1: so stay tuned. We will great stuff. Rinaquok at Bloomberg

607
00:32:15,800 --> 00:32:17,880
Speaker 1: Intelligence in Singapore, thank you so much for joining us.

608
00:32:18,040 --> 00:32:19,200
Speaker 4: Thanks for having me James.

609
00:32:19,800 --> 00:32:22,400
Speaker 1: Read all of Rena's excellent analysis on the Bloomberg Terminal

610
00:32:22,480 --> 00:32:24,400
Speaker 1: or do reach out to her directly for more information.

611
00:32:25,400 --> 00:32:28,080
Speaker 1: And thanks again to Paula Selexon and Lisa Lee. Read

612
00:32:28,120 --> 00:32:30,640
Speaker 1: all of Lisa and Paula's great scoops on the Bloomberg

613
00:32:30,720 --> 00:32:33,600
Speaker 1: Terminal and of course at Bloomberg dot com. And please

614
00:32:33,640 --> 00:32:36,560
Speaker 1: do subscribe wherever you get your podcasts. We're on Apple,

615
00:32:36,920 --> 00:32:40,360
Speaker 1: Google and Spotify. Please give us a review, tell your friends,

616
00:32:40,440 --> 00:32:44,000
Speaker 1: or email me directly at Jcrumb eight at Bloomberg dot net.

617
00:32:44,560 --> 00:32:47,240
Speaker 1: That's j cro O, M B I E as in

618
00:32:47,280 --> 00:32:51,040
Speaker 1: my surname and the number eight at Bloomberg dot net.

619
00:32:51,560 --> 00:32:54,000
Speaker 1: We do want to hear from you. I'm James Cromby.

620
00:32:54,040 --> 00:32:56,480
Speaker 1: It's been a pleasure having you join us again next

621
00:32:56,560 --> 00:32:57,920
Speaker 1: week on the Credit Edge