Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crumby. I'm a senior editor at Bloomberg.
Speaker 1: This week, we're very pleased to welcome to the show
Speaker 1: Gary Gurramoti, who covers high yield bonds at Bloomberg News
Speaker 1: in New York.
Speaker 2: How are you, Gary, all well water anized opportunity. Thank
Speaker 2: you for having me.
Speaker 1: Gary truly is the guru of junk bonds, so we're
Speaker 1: delighted to have her on the show and get her
Speaker 1: take on the markets. We're also very pleased to welcome
Speaker 1: back Rob Schiffman, a credit analyst with Bloomberg Intelligence in
Speaker 1: New York. We'll be coming back to Rob a bit
Speaker 1: later in the show to discuss artificial intelligence and how
Speaker 1: it's affecting credit. So do stay with us. But first,
Speaker 1: Gary Gurramoti with Bloomberg News, you're all over the junk
Speaker 1: bond market. It's where the drama is. It's at one
Speaker 1: point four trillion dollar market that includes household names like Ford,
Speaker 1: American Airlines and Uber. Essentially, we're talking about risky companies
Speaker 1: raising debt in the bond market for a wide variety
Speaker 1: of things projects, acquisitions, refinancing, payment of dividends to shareholders.
Speaker 1: They're typically the companies, though, that run into trouble when
Speaker 1: interest rates jump or if there's a slowdown in the economy.
Speaker 1: They have less of a cushion when the going gets tough.
Speaker 1: But despite the huge surge in rates and therefore funding
Speaker 1: costs that we've seen over the last few years, not
Speaker 1: to mention a banking crisis in March, growing recession fears,
Speaker 1: slower earnings, and a whole load of proliferating macro and
Speaker 1: geopolitical risks, junk bonds have had a great year, haven't
Speaker 1: they so. Gary, You've been covering this for a long time.
Speaker 1: We've had the pleasure of working together for many years.
Speaker 1: What's the story. How are junk bond's doing so well
Speaker 1: against all the odds?
Speaker 2: First, I would just say I agree with you that
Speaker 2: with all this secession fears, rate high drama, banking crisis,
Speaker 2: financial system coming to a halt, US high held has
Speaker 2: been doing pretty well. But there's a mildly disagreement in
Speaker 2: the sense there are there are there is no recession fear.
Speaker 2: They were early in the year they were talking about
Speaker 2: likely recession, possible recession, end of the year, etcetera. Etcetera.
Speaker 2: But recession fears have really gone out of the window.
Speaker 2: Nobody's thinking of recession, not in the near term, not likely.
Speaker 2: They're talking of you know, soft landing, slow landing, slow growth, etcetera.
Speaker 2: Growth creeping near a halt, but not really a recession.
Speaker 2: And therefore Hyyel has benefited from this sort of what
Speaker 2: should I say, goldilocks, You have a stable growth sort
Speaker 2: of tugging along and no corporate corporate balancees look reasonably healthy,
Speaker 2: so I really and that explains why hyl has been
Speaker 2: performing well. Hi Heel is not as read's sensitive as
Speaker 2: investment grade are investment grade bonds are, and therefore Hireless
Speaker 2: outperformed investment grade as well.
Speaker 1: I definitely agree with you that markets don't seem to
Speaker 1: be pricing in any kind of recession. But in house
Speaker 1: economists Bloomberg Intelligence, they think that there will be a
Speaker 1: recession starting in the fourth quarter in the US. Maybe
Speaker 1: it's not going to be a deep recession, but you know,
Speaker 1: possibly just a mild, you know, shallow dip. But going
Speaker 1: back to the junk bond market, also surprising to me
Speaker 1: at least, is that the riskiest bonds those rated triple C.
Speaker 1: That's the lowest credit rating. They've done really really well
Speaker 1: this year that you know, they're up, you know, double
Speaker 1: digits again. Are you surprised by that?
Speaker 3: Not really.
Speaker 2: Again, Triple c's are are very small, about ten to
Speaker 2: twelve percent of the total index, so it's very it's
Speaker 2: a very small percent. Even something small, they always can
Speaker 2: do a lot better than the rest of the market. Second,
Speaker 2: triple cs are more sensitive to equity volatility rather than
Speaker 2: rates volatility. Equity volatility, if you're going to just check
Speaker 2: the index, historically they have been below twenty. You know,
Speaker 2: it's been practically very low volatility there. Equities have performed
Speaker 2: very well here today, and so triple c's are reflecting
Speaker 2: equity performance.
Speaker 3: That's one.
Speaker 2: Secondly, as I said, it's a very small person, here's
Speaker 2: a total index, so I see no surprise there. And Thirdly,
Speaker 2: as I just mentioned a few minutes ago, it is
Speaker 2: more great concern now than growth concerns. Actually, people are
Speaker 2: pretty much there, all the big dealers, everyone talking about
Speaker 2: soft landing, slow economy, including the FED. They don't expect
Speaker 2: a recession in the near term or an immediate future,
Speaker 2: so growth concerns not really top of the mind. Equity
Speaker 2: markets are doing pretty well. Triple c's are very small.
Speaker 2: Person is a total market, so it naturally will outperformance
Speaker 2: to the market.
Speaker 1: I still worry, though, because you know, triple c' is
Speaker 1: typically you know, they're the ones most likely to default
Speaker 1: on their debt when things get hard. We've seen a
Speaker 1: lot more bankruptcies this year, you know, so there is
Speaker 1: stress and as a funding costs jump, some of these
Speaker 1: companies just aren't going to be able to pay about
Speaker 1: the money. So I'm just wondering why, you know, markets
Speaker 1: just seem so blase about all this.
Speaker 2: I know that's a very predictable sort of response or question.
Speaker 2: People wonder triple c's are junkiest of junks and therefore
Speaker 2: they should default one default traits. Even the forecasts for
Speaker 2: default traits is not really very high. Even they predict
Speaker 2: about four percent five percent, when even the egregious default
Speaker 2: rate would be about five percent end of twenty twenty four,
Speaker 2: twenty twenty week, twenty twenty five, and that's not very
Speaker 2: high by historical standards. Number one two triple cs. Not
Speaker 2: the whole of triple c's is really bad. Triple cs
Speaker 2: are some sometimes technically triple c they are pretty reasonably
Speaker 2: good companies with high coupons, they're not necessarily going to
Speaker 2: default spike and default is not really expected. And the
Speaker 2: recent months we have seen that distressed universes also shrink.
Speaker 2: And with the economy, if the economy chugs along, you mean,
Speaker 2: you may see some default, but it's not going to
Speaker 2: really sort of bring the market down. It won't sort
Speaker 2: of crash the triple C market altogether.
Speaker 1: So we were kind of all wrong about worrying. I mean,
Speaker 1: there was a chicken licking and the sky was falling
Speaker 1: down earlier this year.
Speaker 2: Right, they always say it's a very cliche thing. You know,
Speaker 2: broken clock is right twice a day. So we may
Speaker 2: turn out to be right sometime someday, but not this year.
Speaker 2: And there's plenty of time for that.
Speaker 1: So we think that this continues this kind of performance.
Speaker 2: I you know, I'm not in the business of forecasting
Speaker 2: or predicting, but still I would say, I see no
Speaker 2: reason why there'll be a serious derailment or disruption. Why
Speaker 2: interstates have already pequed, they're not going to raise interest rates,
Speaker 2: so that they've ruled out almost higher for longer. The
Speaker 2: markets sort of uprising it in and growth is still
Speaker 2: okay for you. Perhaps four C will perhaps be still
Speaker 2: over than three Q. And earnings still look okay, though
Speaker 2: they are much lower than what they were in the
Speaker 2: earlier quarters. So corporate balance sheet looks pretty okay. Interest
Speaker 2: coverage may fall, but have no cause for concern. So
Speaker 2: I really don't see a major derailment in twenty twenty four,
Speaker 2: not in the fourth quarter. What happens in the first
Speaker 2: quart of twenty twenty four is again it's an open
Speaker 2: ended question. But even there one does not see a
Speaker 2: major disruption because economy is going to chug along, and
Speaker 2: if they say any serious disruption in the economy, you know,
Speaker 2: by the end of US quarter the FED will start
Speaker 2: cutting rates, though they are not thinking that. They're saying
Speaker 2: they will not cut rates. Markets think. Markets dually expect
Speaker 2: if there is going to be a serious disruption geopolitical
Speaker 2: disruption or major chaos, government shut down or gun or
Speaker 2: the counter doesn't pass the CR continuing resolution bill or
Speaker 2: does not pass the government budget, all this may cause
Speaker 2: some disruption, and FED intervene and try to not let
Speaker 2: things escalate. So I don't say anything happening till the
Speaker 2: first quarter of twenty twenty four. Nothing serious, there may
Speaker 2: be some volatility, spreads widening, and even now you see
Speaker 2: spreads around four hundred. Nothing, no sign of recession there.
Speaker 1: You're an economists. So one of my basic theories about
Speaker 1: this market, and you can tell me if it's all
Speaker 1: nonsense to you, is demand and supply that you know,
Speaker 1: there's consistent demand for yield, especially when the coupons are
Speaker 1: so high. Now double digits for stuff that you know
Speaker 1: previously not that long ago, you're getting five percent on it,
Speaker 1: so it looks really attractive. But meanwhile, the actual supply
Speaker 1: of this stuff has gone right down. I mean, this
Speaker 1: is a very bad year for issuance. So in that sense,
Speaker 1: I think the price just gets better and these things
Speaker 1: go up.
Speaker 2: There, you made my us you answered my question. So
Speaker 2: another important reason growth is not an important concern for
Speaker 2: the high yaled market. Equity volatility is pretty low, not really,
Speaker 2: not for any concern at all. And overall supply of
Speaker 2: new bands is very it's sort of maybe fifty percent
Speaker 2: about twenty twenty two, but that's a very low bar.
Speaker 2: It is still perhaps the lower since two thousand and
Speaker 2: eight or two thousand and nine, So supply is very thin.
Speaker 2: Economy is pretty robust. People have a lot of cash
Speaker 2: to invest in, so more demand fuel supply basic econ
Speaker 2: one oh one.
Speaker 1: On the supply side, though, you look at this stuff
Speaker 1: very closely, and everyone listening should should follow Gary on
Speaker 1: the terminal for her updates on the supply side, because
Speaker 1: it's essential stuff. What are you saying, what do you expect?
Speaker 1: Is there going to be a big increase next year
Speaker 1: and there's refinancing to do, right.
Speaker 2: I don't see a big sharp jump and used a
Speaker 2: junk band supply because, as I've always telled my colleagues
Speaker 2: and friends, supply comes for three to two broad reasons.
Speaker 2: One is funding acquisitions.
Speaker 3: Or leveraged buyouts.
Speaker 2: That's also broadly acquisitions, and second is refinancing outstanding bards.
Speaker 2: And third perhaps is you know, capital expenditure projects, et ceteraba.
Speaker 2: That's a third refinancing and repaying debt.
Speaker 3: So these are the two broad things.
Speaker 2: And see in the first category of acquisitions and LBOs
Speaker 2: you find they are very far and few and fewer
Speaker 2: and far between. They don't see very large number of
Speaker 2: them because of high cost of borrowing, not easy for
Speaker 2: private equity guys to buy companies and make money. There
Speaker 2: margins are every thin, so that's not super attractive high.
Speaker 3: Cost of borrowing.
Speaker 2: So given that LBOs and acquisitions are fewer in number,
Speaker 2: the reason for issuing new bonds is sort of not
Speaker 2: very exciting. So refinancing people talk of, and I was
Speaker 2: just looking at refinancing numbers. This could differ from day
Speaker 2: to day, and you wort three hundred billion expected roughly
Speaker 2: about till end of twenty twenty five. If I bring
Speaker 2: a twenty twenty four is I don't think much is
Speaker 2: really two twenty twenty four. So we're already refinancing all
Speaker 2: the outstanding bonds, pretty steady and so rEFInd and therefore
Speaker 2: I don't see a big jump and supply you may
Speaker 2: see it pretty much now it's going it's going to
Speaker 2: be about less than two hundred this time, two hundred million,
Speaker 2: maybe next year around the same, a little more couple
Speaker 2: of more LBOs, and I don't know if I'm carrying on,
Speaker 2: But you also see acquisitions and LBOs have another source
Speaker 2: of funding. They're dependent on high bonds and now and
Speaker 2: leverage loans. Now you will see a third source of
Speaker 2: funding is jet lending of what they call private credit.
Speaker 2: So even the fewer and far between LBOs are also
Speaker 2: sort of going into the private credit world, so that
Speaker 2: again takes out of bond supply bond is.
Speaker 1: Shoes, and again low supply means higher price.
Speaker 3: Higher price, and better returns.
Speaker 1: Let's just go back to the macro signals. I mean,
Speaker 1: I'm really interested in this concept of you know, the
Speaker 1: spreads being way lower than they should be if if
Speaker 1: anyone expects a recession. So presumably junk bond markets don't
Speaker 1: expect recession. But what else the signals from the market
Speaker 1: you're seeing.
Speaker 2: I'm not seeing any recession signals. Spreads are pretty tight,
Speaker 2: people are comparing, people complaining the spreads are very tight,
Speaker 2: not enough to give. And yields are pretty decent under
Speaker 2: ten percent, and you know, even triple CS is about
Speaker 2: under fourteen percent, pretty high yield, which is making attractive
Speaker 2: for that So that even that high yields narrow spreads
Speaker 2: do not suggest that there is a recession at all.
Speaker 2: And demand for junk bonds also high yield, I should
Speaker 2: say junk is a very sort of trivializing the bond market.
Speaker 2: I think also shows that there's a willingness for embracing risks.
Speaker 3: Risk appetite is still pretty robust.
Speaker 2: So although all these things don't indicate capital market open,
Speaker 2: is still open. People can still come in and borrow
Speaker 2: money for a price. So access to capital markets, willingness
Speaker 2: to embrace risk, tight spread, it's all these indicate to
Speaker 2: me that there is no sign of any immediate recession,
Speaker 2: not in the near term.
Speaker 1: What would it take, though, to derail the rally? What
Speaker 1: are you mostly worried about in terms of your I mean,
Speaker 1: you sound quite upbeat and optimistic about this market. But
Speaker 1: what worries you about the outlook?
Speaker 2: Sudden unexpected geopolitical tension? If this Israel Hamas conflict expands
Speaker 2: into Middle East thing, that was one thing. Oil prices
Speaker 2: it's been up and down. It's been pretty high. Now
Speaker 2: will it go? What happens and what happens to China's growth?
Speaker 2: If China really slows down, I think the fear of
Speaker 2: China's slowing down seems more exaggerated. But if China slows down,
Speaker 2: something happens in Europe that could detail market. But I
Speaker 2: still don't see a major disruption at all from any
Speaker 2: I cannot see where can it come from? High leverage? No,
Speaker 2: leverage is still not high. It is not what it
Speaker 2: used to be in two thousand and six, seven and eight,
Speaker 2: So leverage is pretty under control. Economy is chugging along.
Speaker 2: People have the willingness to embrace risk. Federal Reserve is
Speaker 2: watching like a hawk is on the sort of watching
Speaker 2: anything untoward. They're going to introvene. There's no doubt about that,
Speaker 2: whatever they say. So given all these things, I do
Speaker 2: not know where will the disruption come from. Unless there
Speaker 2: is an unexpected geopolitical tension, some bank failure. Nobody thought
Speaker 2: a regional bank would fail. Something that nobody is watching happens,
Speaker 2: we could see something. But otherwise I see some here
Speaker 2: and there, up and down, but no major derailment.
Speaker 1: And even some of those things you mentioned, I mean
Speaker 1: they have resulted in better prices on junk bonds because
Speaker 1: you know, oil goes up, that's positive for high yelk.
Speaker 1: There's a lot of energy in the index. The other
Speaker 1: one is that you know, if you see problems in
Speaker 1: other parts of the world, often there's a kind of
Speaker 1: flight to the US as a kind of you know,
Speaker 1: home bias, just to just as a kind of haven.
Speaker 1: So all these things you mentioned, the potential risks that
Speaker 1: she have, you know, and also we had a banking
Speaker 1: crisis and the market just bounced right back.
Speaker 2: So you seem to be agreeing with me that I mean,
Speaker 2: no major disruption do you expect in the near term,
Speaker 2: As I said, something very unexpected, We can't think of.
Speaker 2: I cannot think of anything in the fourth quarter. At
Speaker 2: least you may have thin supply here and there's some
Speaker 2: volatility MisOr spread widening. Even the forecast was spread windening.
Speaker 2: Morgan Stanley was talking about fifty to seventy five basis
Speaker 2: on from end of September, which is four fifty four
Speaker 2: to seventy five, which is hardly and that is not
Speaker 2: any sign of recession. So interest coverage is dropping, yes,
Speaker 2: but nothing to worry about yet. Refinancing is still getting done,
Speaker 2: markets are still open, so I don't know where the
Speaker 2: disruption is going to come from.
Speaker 1: I just as a you know, a journalist who covers credit,
Speaker 1: I spend my time just worrying about bad things that
Speaker 1: could happen. But that's just me true.
Speaker 2: As a journalist, I do want something to be writing about.
Speaker 2: But as I said, market primary market is shut down
Speaker 2: for a whole for a whole week in October. Kick
Speaker 2: off to the four quarter was not great. Because of
Speaker 2: all this fear about higher for longer and people who've
Speaker 2: been talking about one more rate hike that'll make things worse.
Speaker 2: So all these things made and the sudden this Middle
Speaker 2: East conflict, all these things made people worry as to
Speaker 2: what is going to happen.
Speaker 3: Will there be a recession?
Speaker 2: But then FED officials quickly sort of came out and
Speaker 2: said that we are at the peak, unlikely to raise rates,
Speaker 2: and soft landing is what they all expect. So all
Speaker 2: these things again reassured the market and their story coming
Speaker 2: back to, you know, September.
Speaker 1: So before we talk to Rob Schiffman at Bloomberg Intelligence,
Speaker 1: tell us Gary, what else is on your radar? What
Speaker 1: else should we we've been watching for in junk bonds
Speaker 1: or higher bonds as your protocol?
Speaker 2: No, I think the higher bonds will end the year beating.
Speaker 2: I mean triple z's will beat so they corporate fixed income,
Speaker 2: they're going to be the best.
Speaker 3: Performing as a class.
Speaker 2: And of course leverage loans will always beat high bonds.
Speaker 2: I think leverage loans will do well and the HILD
Speaker 2: market is going to be pretty steady and chugging along.
Speaker 2: I see nothing to worry about in the market.
Speaker 1: And the bears will be just destroyed.
Speaker 2: They're waiting for it to happen and they have to
Speaker 2: come and go.
Speaker 1: Great stuff. Gary Guren Murty from Bloomberg News, thank you
Speaker 1: so much.
Speaker 3: For joining us, and thank you for having me read.
Speaker 1: All of gary scoops on the Bloomberg terminal and of
Speaker 1: course at Bloomberg dot Com. Pay attention to junk bonds everyone. Now,
Speaker 1: I'm delighted to welcome back to the credit Edge Rob Schiffman,
Speaker 1: who covers tech credit for Bloomberg Intelligence based in New York.
Speaker 1: How's it going, Rob?
Speaker 4: Awesome?
Speaker 2: Great?
Speaker 1: So, as we all know, the big theme in markets
Speaker 1: right now is artificial intelligence. Black Rock calls it a
Speaker 1: mega force for investors, but it's not really new. Stanley
Speaker 1: Kubrick was all over it in nineteen sixty eight with
Speaker 1: his sci fi classic two thousand and one, A Space Odyssey.
Speaker 1: Great film, by the way, I watched it again on
Speaker 1: the plane recently. So we've been talking about and mostly
Speaker 1: fretting over AI for at least the last fifty five years,
Speaker 1: and the machines haven't beatn us yet. But Rob, what
Speaker 1: does it all mean for credit? We're starting to see
Speaker 1: a bit more electronic trading of bonds. And I'm sure
Speaker 1: there's more people using chat GPT to write their daily
Speaker 1: market wraps. But how's it affecting the world? Do you cover?
Speaker 1: What's the scoop?
Speaker 2: Rob?
Speaker 4: Sure? Well, listen. Six months ago when we had our
Speaker 4: last chat, I told you spreads were a lot wider
Speaker 4: and there was a much more concern about a recession,
Speaker 4: that technology credits had never been better positioned than they
Speaker 4: were today. And I'll tell you six months later, technology
Speaker 4: credits have never been better positioned than they were than
Speaker 4: they are today. And a big part of that is
Speaker 4: the semiconductor space, where demand is just starting to boom.
Speaker 4: And I think that an explosion of AI has really
Speaker 4: hit the market in terms of concept and hope more
Speaker 4: so than fundamentals at this point. But I do think
Speaker 4: that there's a path for a large segment of the
Speaker 4: semiconductor space, both from the developers as well as the foundries,
Speaker 4: to take enormous advantage of a growing pie of revenues
Speaker 4: and cash flow over an extended period of time. You're
Speaker 4: spot on, Listen, Is AI really something new? The answer
Speaker 4: is no. Computing power has always made an enormous difference
Speaker 4: in how everybody lives and works, and there's always been
Speaker 4: this massive rapid advancement of how things change over time
Speaker 4: with technology. I do think the real benefit though, from
Speaker 4: a credit perspective, is that this is not just going
Speaker 4: to change how people live their lives, or how work
Speaker 4: is done, or how commuting is done, or how healthcare
Speaker 4: the act on the healthcare system changes, but we're really
Speaker 4: going to see I think a boom from a fundamental
Speaker 4: standpoint over the next few years that's supportive of both
Speaker 4: credit and equity.
Speaker 1: Let's talk about some names though, that you cover in video.
Speaker 1: What is it is, how important is it to credit investors?
Speaker 1: And how are they using AI?
Speaker 4: Yeah, so listen, why is everybody talking about in Vidia
Speaker 4: and not talking about so many other chip designers? And
Speaker 4: the real reason is that right now in Vidia has
Speaker 4: a stranglehold on the most powerful AI chips. Effectively, they're
Speaker 4: dominating seventy percent of the market. And the type of
Speaker 4: financial guidance that they've given creates a path towards numbers
Speaker 4: from revenue to ebitdata free cash flow in terms of
Speaker 4: growth rates that really haven't been seen before. I mean
Speaker 4: back in the early two thousands and the days of
Speaker 4: the dot com boom. You know, there were hopes that
Speaker 4: at least from a valuation perspective, that you know, eyeballs
Speaker 4: would be followed by dollars, and in this case, we're
Speaker 4: starting to see the dollars lead. So Nvidia's ramp up
Speaker 4: in terms of free cash flow, for instance, over the
Speaker 4: next five years might be going from you know, two
Speaker 4: three billion of free cash flow to fifty billion a
Speaker 4: free cash flow five years from now. This is real,
Speaker 4: This is no longer just theoretical. They're not going to
Speaker 4: be the only winners here though. In fact, I think
Speaker 4: there's winners across the board, from the cloud players, whether
Speaker 4: that's Amazon, Google, Microsoft, to hardware providers i e. Apple,
Speaker 4: to a whole host of foundaries, whether that's Taiwan, Semi
Speaker 4: or Micron, or even an Intel, which is a separate
Speaker 4: story and of itself but is likely to catch up.
Speaker 4: And then you layer on top of that all the
Speaker 4: other designers, whether it's somebody like an NXP or an
Speaker 4: AMD or an Intel itself. There's a tremendous room for growth,
Speaker 4: because again, this is going to be an enormously growing pie.
Speaker 4: That being said, though, in video really is the only
Speaker 4: one from a fundamental standpoint, that's really starting to see
Speaker 4: that increase in demand show up on their balance sheet.
Speaker 4: The interesting thing, though, you know, I started off by
Speaker 4: talking about how tech is so well positioned from a
Speaker 4: credit perspective. You can make an argument that it's the
Speaker 4: biggest names, the ones that I rattled off that are
Speaker 4: the highest rated, that are going to benefit the most.
Speaker 4: You know, the rich get richer in videos rated single A.
Speaker 4: They're going to have so much excess free cash. I
Speaker 4: think over the next few years the only option they're
Speaker 4: going to have for their money is to give it
Speaker 4: back to shareholders. It becomes an Apple Microsoft style story.
Speaker 4: How much better can their credit get? Well? Listen, in theory,
Speaker 4: if they wanted to be a double A credit, they
Speaker 4: could be, but they don't need to be. They have
Speaker 4: very few borrowing needs. They're going to have again a
Speaker 4: build up in cash and listen, this is not just
Speaker 4: me saying it. They announced an increase in their buyback
Speaker 4: program by twenty five billion dollars. You know, I already
Speaker 4: mentioned I think that they can grow free cash flow
Speaker 4: to fifty billion in the next five years. So I
Speaker 4: think that's just going to get sort of bigger and bigger.
Speaker 4: So if you own in Vidia bonds, Congratulations, you're in
Speaker 4: great shape. You're not getting a ton of yield. But
Speaker 4: it's sort of like the it's sort of a microcosma
Speaker 4: the rest of the tech space is that you're not
Speaker 4: buying Apple bonds, or Google bonds, or Microsoft bonds or
Speaker 4: in Video bonds because you think they're going to tighten dramatically.
Speaker 4: You're buying them because you think that they're safe and
Speaker 4: there's lower volatility in bond spreads, and that in times
Speaker 4: of stress, whether that's higher recession concerns or increasing rate environment,
Speaker 4: that your bond prices are going to hold in a
Speaker 4: lot better than capable investment grade names. And that's what
Speaker 4: I think is going to happen here. So in Video
Speaker 4: becomes a great poster child for AI. They're going to
Speaker 4: benefit from a credit perspective in terms of stability, and
Speaker 4: from an equity perspective. Obviously, with a valuation now over
Speaker 4: a trillion dollars, you know, the market is seeing those
Speaker 4: same sort of dollar signs that we are, and quite frankly,
Speaker 4: you know, buying back twenty five billion dollars a stock
Speaker 4: for a trillion dollar equity doesn't really make a difference.
Speaker 4: It's just a sign of I think, how good things
Speaker 4: are to come.
Speaker 1: But the stock has basically gone up five times in
Speaker 1: one year. I'm old enough to remember the dot com
Speaker 1: boom and bust. I start to worry when I see
Speaker 1: that level of you know, enthusiasm and excitement over one stock.
Speaker 1: It's just too good to be true. I mean, are
Speaker 1: you not worried at all? The no risk?
Speaker 4: Well, luckily I'm the credit guy and not the equity guy,
Speaker 4: so I don't have to really worry about multiples. I
Speaker 4: do think though, when you just think about justification about
Speaker 4: why there's been such multiple expansion, it's again, it's one
Speaker 4: is that it's it's not just a multiple, but it's
Speaker 4: a multiple expansion on top of what's likely to be
Speaker 4: a big earnings boom. And again, I you know, you
Speaker 4: have to sort of wait and see it. But this
Speaker 4: is not a promise of hope that you can monetize something.
Speaker 4: They are already starting to monetize their chips. You know,
Speaker 4: the cost of an Nvidia AI chip is multiples of
Speaker 4: that of what would be a typical chip for standard
Speaker 4: GPU in a cloud or an on premise based server,
Speaker 4: so you have a higher margin product that's there's almost
Speaker 4: a monopoly style business here, likely for the next few years,
Speaker 4: where the demand is known and we're actually seeing it
Speaker 4: flow through financials. The Again, this this is the beginning phases,
Speaker 4: so you know there could be a lot that goes wrong.
Speaker 4: That being said, clearly, Nvidia is the best positioned all
Speaker 4: the semiconductor names that we cover from a credits perspective.
Speaker 4: Let's say I'm wrong, and I'm wrong by fifty percent
Speaker 4: that that free cash flow is not fifty billion in
Speaker 4: five years, it's only twenty five billion. Let's say it's
Speaker 4: only fifteen billion. I would argue it could still be
Speaker 4: a single a credit. So the real concern would be, hey,
Speaker 4: if you have growth rates that are slower and the
Speaker 4: stock loses fifty percent of the value, do they start
Speaker 4: buying a lot more stock and say, hey, let's be
Speaker 4: like Oracle, Let's load the balance sheet up with debt
Speaker 4: to buy back stock and fall a triple B. That's
Speaker 4: the type of concern you can have as a credit analyst.
Speaker 4: I think the probability of that in the near to
Speaker 4: intermediate term the next two to three years is really
Speaker 4: very very low, and it doesn't really make me pause.
Speaker 4: I do think when you look at some of the
Speaker 4: other names. You know, if you look across the board
Speaker 4: at how equity and credit have performed this year. Credit's
Speaker 4: been pretty stable, you know, Returns are basically close to zero.
Speaker 4: Spreads are mildly tighter, you know, measured by basis points.
Speaker 4: But equities are up dramatically.
Speaker 2: Now.
Speaker 4: Part of that is that they were down so much
Speaker 4: last year. Part of that is that there's real hope
Speaker 4: that there's a fundamental shift. I'm actually seeing that fundamental shift.
Speaker 4: We're getting a lot of green shoots in terms of
Speaker 4: return of revenue and cash flow growth in twenty twenty four.
Speaker 4: So listen that credit markets are always a little bit
Speaker 4: less excited than the equity markets and a little less violatile.
Speaker 4: But I think credits telling you something that even with
Speaker 4: a much higher rate environment, equity values don't have to
Speaker 4: worry about credit as one of the reasons why they're
Speaker 4: not going to go up.
Speaker 1: What about AMD, I remember when they were junk. Now
Speaker 1: they're the stars. How do they get there? And why
Speaker 1: are they doing so well?
Speaker 4: Yeah, you know, everyone does does a little bit different.
Speaker 4: You know, it's so funny, like in technology, you tend
Speaker 4: to talk about it as one giant group. But the
Speaker 4: reality is no company does something exactly the same as another,
Speaker 4: and even within semiconductors, it's it's meaningfully different. You know,
Speaker 4: a MD had benefited over the years. You know five
Speaker 4: years ago that they were single V and now they're
Speaker 4: single A, and you know they were able to really
Speaker 4: build a little bit better mousetrap than Intel and steal
Speaker 4: a significant amount of market share when it comes primarily
Speaker 4: to the PC market. And listen, you know the power
Speaker 4: that's been needed, you know forgetting about AI. Think about
Speaker 4: the last ten years about the power of gaming related
Speaker 4: PCs and and how the explosion of both gaming and
Speaker 4: at home PC use, particularly post COVID, has really exploded higher.
Speaker 4: And I think what happens when you're a much bigger,
Speaker 4: larger company, particularly like Intel, where you're both a designer
Speaker 4: of chips and a manufacturer of chips, and you're spending
Speaker 4: a tremendous amount of capital on foundriies, sometimes you take
Speaker 4: the eye off, you know, you take your off the
Speaker 4: ball when you're the industry leader. And AMD was just
Speaker 4: able to create you know, a whole set of of chips.
Speaker 4: You can talk to, you know, Equity team about the
Speaker 4: real differences. You know, I'm just sort of the dumb
Speaker 4: right hand side of the balancey guy. But really create
Speaker 4: a little bit of better chips that created much more
Speaker 4: demand that dramatically increase cash flow. The thing though, is
Speaker 4: that you know, you can't stake your future on the
Speaker 4: PC business. You know, PCs are extraordinarily cyclical. You know,
Speaker 4: we're seeing that now in terms of during COVID. There's
Speaker 4: such huge demand for PCs, both personal and enterprise, and
Speaker 4: we've seen a significant drop over the last twelve to
Speaker 4: eighteen months. So even if you have a bigger piece
Speaker 4: of a smaller of a smaller pie, that that doesn't
Speaker 4: really create the future. But the the real future is
Speaker 4: going to be creating chips uh for enterprises, for servers,
Speaker 4: for storage, for cloud computing, and taking a much bigger
Speaker 4: piece of what is this cloud related enterprise business in particular.
Speaker 4: Obviously the AI side has has the biggest upside, but
Speaker 4: that's what that's what you're starting to see, you know,
Speaker 4: names like you know NXP for instance, moving you know,
Speaker 4: from graphics and gaming more towards the server side. You're
Speaker 4: going to see a lot a lot more of that.
Speaker 4: So the market is expanding certain parts of the market
Speaker 4: are not uh a m D I think from a
Speaker 4: credit perspective is sort of in the Nvidia category. How
Speaker 4: much better can it get? Probably not that much better.
Speaker 4: You know. What differentiates a name like that from other
Speaker 4: credits is absolute size of debt. They just don't have
Speaker 4: a lot of bonds outstanding, you know, in the scheme
Speaker 4: of investment grade, they're almost a non player. It's just,
Speaker 4: you know, you have a couple of billions of bonds outstanding.
Speaker 4: You know, when we're comping that to names like Apple
Speaker 4: with one hundred billion of bonds or the Intels or
Speaker 4: Oracles of the world with fifty or seventy five or
Speaker 4: eighty billion, you know, they're sort of a small player.
Speaker 4: So it's really much more of an equity story that
Speaker 4: being said to me, Names like an AMD that don't
Speaker 4: have the free cash flow run rate that in Nvidia
Speaker 4: have they could benefit in theory from issuing more bonds
Speaker 4: and being more aggressive on a financial policy. I would
Speaker 4: argue maybe the reason why they don't do that is
Speaker 4: just simply the rate environment. Right, if we were back
Speaker 4: two years ago, names like AMD probably would be issuing
Speaker 4: more bonds. But when you have a you know, five
Speaker 4: year trading close to five percent. You know, even if
Speaker 4: your spreads are only one hundred basis points. You know,
Speaker 4: over treasuries, you know, you're talking about six percent bonds
Speaker 4: versus a few years ago. You know, these names were
Speaker 4: issuing one percent and two percent bonds.
Speaker 1: So rule should we expect less supply from tech in
Speaker 1: tons of issuance?
Speaker 4: Well, you know, there's less of a need. Over the
Speaker 4: last couple of years, a lot of companies have done
Speaker 4: a significant amount of refinancing. You're definitely seeing a drop
Speaker 4: in both high yield and investment grade issuance. I think
Speaker 4: that's likely to continue in the near term. The benefit
Speaker 4: of this space and having such high credit quality is
Speaker 4: that they you know, they don't need to borrow. And
Speaker 4: I could say that about almost any name that I cover,
Speaker 4: and that's a huge, you know, differentiating factor among but
Speaker 4: you know, between this sector and others. It's why you know,
Speaker 4: on a consolidated basis, high yield and IG tech trade
Speaker 4: tighter than pretty much every other sector. It's because of
Speaker 4: that financial flexibility. In terms of upcoming maturities, they're just
Speaker 4: not that great over the next year. You know, it's
Speaker 4: in the neighborhood of sixty five odd billion dollars, the
Speaker 4: vast majority of which is coming from the largest credits
Speaker 4: that don't really need to borrow. There there was the
Speaker 4: potential for some large scale m and a related financing
Speaker 4: broadcom buying VMware, of which thirty plus billion dollars was
Speaker 4: a bridge facility, including eight billion dollars of assumed debt,
Speaker 4: so forty billion dollars of new debt. They could have
Speaker 4: easily went out and the deal's supposed to close at
Speaker 4: the end of the month and just borrowed all that money.
Speaker 4: The reality, though, is that it's cheaper and easier for
Speaker 4: them to borrow from banks. So they replaced their thirty
Speaker 4: thirty two billion dollar bridge with twenty eight billion dollars
Speaker 4: of bank term loans. And could they turn that out
Speaker 4: over time? Yeah, the answer is of course. But if
Speaker 4: you can get a much lower rate and banks are
Speaker 4: willing to write you the check, why term it out now?
Speaker 4: So I think funding needs from that. That transaction, you know,
Speaker 4: which people thought could have been the biggest deal of
Speaker 4: the year, might end up being a zero this year.
Speaker 4: Then on the other side, when you're talking about super
Speaker 4: high quality, it looks like Microsoft event is going to
Speaker 4: be able to buy Activision. It's sixty nine billion dollars
Speaker 4: of cash. I mean that's sort of like again just
Speaker 4: goes back to our theme of like who can write
Speaker 4: a sixty nine billion dollar check? And they didn't have
Speaker 4: any bank loans, they had no bridge wrote it. Because
Speaker 4: they have one hundred plus billion dollars of cash on
Speaker 4: the books, it would have made you know, a year
Speaker 4: plus ago when they announced this, it would have made
Speaker 4: sense just to turn that out or at least a
Speaker 4: big chunk of it, add cash to the balance sheet,
Speaker 4: continue to buy back you know, fifty sixty billion dollars
Speaker 4: a stock each year, pay big dividends, and then still
Speaker 4: be on the lookout for more M and A. But again,
Speaker 4: in this sort of rate environment, you know, do they
Speaker 4: really need to have one hundred billion on the books
Speaker 4: right now? Probably not, And they can continue to buy
Speaker 4: back just as much stock as they have without borrowing.
Speaker 4: They don't have massive maturities coming up. So when we
Speaker 4: just think about like the natural course of like what
Speaker 4: A maturities look like over the next year, they're reasonably low.
Speaker 4: What does M and A needs look like over the
Speaker 4: next year, they're reasonably low. So so I think That's
Speaker 4: one of the things that also benefits this space is
Speaker 4: that we're seeing a meaningful decline in new issuance, and
Speaker 4: that helps improve technicals. Everyone is sort of looking for
Speaker 4: higher quality, higher yielding names. The tech space, particularly out
Speaker 4: the curve, has historically offered that they've been pretty steep
Speaker 4: curves because there's a lot of twenty and thirty year
Speaker 4: paper out there, but there's not a lot of new
Speaker 4: paper coming and I just don't see that happening at
Speaker 4: least until early next year, and who knows what the
Speaker 4: rate environment will be like then.
Speaker 1: So before we wrap things up, well, where is the
Speaker 1: value here? As you've noted, even though they have very
Speaker 1: high credit ratings, most tech bonds have been trading below PA.
Speaker 1: You know, Microsoft's rated triple A is one of the
Speaker 1: few names that is yet some of its bonds look
Speaker 1: like they're actually distressed when you look at the price,
Speaker 1: even though there's no danger of default. So shouldn't everyone
Speaker 1: be loading up where they can? It seems like a
Speaker 1: screaming buy. Where would you say is the value in
Speaker 1: the market right now? Credit market?
Speaker 2: Yeah?
Speaker 4: You know, we just put out a note highlighting you know,
Speaker 4: ninety percent of the indexes that we cover high grade
Speaker 4: and high yield tech bonds are trading below par and
Speaker 4: the reality is the primary reason for that or rate moves.
Speaker 4: You know, if you have a triple A or double
Speaker 4: A bond trading in the fifties, that's not a it's
Speaker 4: not a statement about credit quality whatsoever. It's purely math
Speaker 4: and rates. If you look at spreads, spreads year to
Speaker 4: date both in high yield and IG are tighter. Total
Speaker 4: returns are reasonably flat because of rates. You know, the
Speaker 4: vast majority of investment grade portfolio managers are hedging treasuries,
Speaker 4: so it's really about spread, not about dollar price. So
Speaker 4: it sort of makes you salivate, like I can buy
Speaker 4: Apple for fifty eight cents on the dollar. Wow, that
Speaker 4: seems like a home run. But the reality as your
Speaker 4: yield is still reasonably low relative to others. So what's
Speaker 4: the play. The play is that if you are concerned
Speaker 4: about a recession, rate volatility or spread volatility, the tech
Speaker 4: space remains a place to park your money and hide
Speaker 4: and wait for a better day to invest. I do
Speaker 4: think that there's a Barbell style strategy with owning super
Speaker 4: high quality names the double as and triple a's that
Speaker 4: we've talked about as well as moving down the curve.
Speaker 4: You know, you can pick up pretty good incremental yield
Speaker 4: for names like Broadcom or Oracle that have levered their
Speaker 4: balance sheet meaningfully over the past couple of years but
Speaker 4: really have little to no risk of falling to junk.
Speaker 4: But you can pick up fifty or seventy five basis points,
Speaker 4: depending upon what part of the curve you're looking at,
Speaker 4: and that can create excess returns that could help create
Speaker 4: outperformance within the space. In terms of high yield, there's
Speaker 4: some you know, some higher quality names like Uber or
Speaker 4: even names like Match that generate a lot of free
Speaker 4: cash that could be rising towards investment grade. They trade
Speaker 4: tight to peers. Though, listen, you're just going to hear
Speaker 4: that over and over again from me talking about tech.
Speaker 4: The vast majority of names trade tight to peers. Doesn't
Speaker 4: mean you don't want to own them, but it certainly
Speaker 4: means if you're going to own them. On the names
Speaker 4: whose credit quality has lower volatility or has some upside.
Speaker 4: But this is definitely a game where you're not looking
Speaker 4: to hit home runs. You're looking to hit singles. And
Speaker 4: I'll tell you you can make the hall of fame
Speaker 4: by hitting a lot of singles.
Speaker 1: You can just get your automated investment managers to do
Speaker 1: all the work for you as well.
Speaker 4: Eventually you'll have a computer talking a lot smarter than
Speaker 4: I will.
Speaker 1: Thank you very much. Rob Schiffman Bloomberg Intelligence. You can
Speaker 1: read all of his great analysis on the Bloomberg Terminal.
Speaker 1: Do check it out, and Rob's Bloomberg messages all bear
Speaker 1: the legend tech is my life call me so do
Speaker 1: take him up on that. Thanks Rob, Thanks James, hope
Speaker 1: to see you back on the show soon before the
Speaker 1: machines take over. And thanks again to Gary gour Murphy
Speaker 1: from Bloomberg News. Read all of her great scoops on
Speaker 1: the terminal and at Bloomberg dot com, and please do
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Speaker 1: my surname and the number eight at Bloomberg dot net.
Speaker 1: Please do get in touch. I'm James CRUMBI. It's been
Speaker 1: a pleasure having you join us again next week on
Speaker 1: the credit edge