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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: Today's guests are Paula Seligson, who covers leverage finance for

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Speaker 1: Bloomberg News in New York. We're delighted to have you

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Speaker 1: on the show. Thanks for having me, and Aidan Cheslin,

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Speaker 1: who covers telecoms, media and technology for Bloomberg Intelligence in

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Speaker 1: London to be here. We'll be getting Aiden's insight later

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Speaker 1: on in the show, but before we do. Paula Sellegson

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Speaker 1: with Bloomberg News, you cover a leverage finance in the

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Speaker 1: US where there's always a lot of drama. Let's start

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Speaker 1: with a hiyuel bond market. It recently reopened after the

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Speaker 1: banking crisis, which had shut out issuers for almost a month.

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Speaker 1: How have funding conditions changed for junk rated companies? Can

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Speaker 1: all borrowers that need cash access it now? How much

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Speaker 1: more expensive it is it to borrow? So things have

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Speaker 1: gotten better, but they're still not great. So in the

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Speaker 1: middle of a march, during the middle of the crisis

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Speaker 1: with the banks, the average borrowing costs for junk bonds

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Speaker 1: or the average yield it spiked to more than nine percent.

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Speaker 1: That's now fallen to around eight point five percent as

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Speaker 1: risk pressures of ease, which has helped a lot, and

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Speaker 1: that's why we've started to see some more companies come

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Speaker 1: to market because there's also just more stability in general

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Speaker 1: now that we kind of have a sense of what

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Speaker 1: happened with these banks. But you know, this is still

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Speaker 1: very different than it was in January twenty twenty two.

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Speaker 1: It was only four and a half percent average yield

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Speaker 1: for junk bonds at that time, so you can tell

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Speaker 1: it's still much more expensive for companies to borrow. And

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Speaker 1: so what we're still really seeing is a bifurcation in

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Speaker 1: the market. Higher rated, safer, more recession resistant companies. I

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Speaker 1: think they have a lot more access. But if a

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Speaker 1: company has been really hurt by rising rates, is already

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Speaker 1: very levered, is hurt by inflation potential recession, those companies

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Speaker 1: are going to have more trouble. So for example, Triple c's,

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Speaker 1: which are the lowest ratings bucket they're average old, are

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Speaker 1: more than thirteen percent right now. So other than some

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Speaker 1: energy companies that taking advantage of the oil price increase,

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Speaker 1: the big junk deal right now that everyone is talking

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Speaker 1: about is Citrix. Can you talk about what that is?

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Speaker 1: What matters? Yeah, So this goes back to a big

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Speaker 1: theme we cover last fall, which is that basically a

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Speaker 1: bunch of banks committed debt financing for leveraged buyouts and

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Speaker 1: acquisitions before rates rose, and they ended up stuck with

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Speaker 1: a lot of that debt hung on their balance sheets

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Speaker 1: because they couldn't easily sell it to institutional investors. And

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Speaker 1: so there's this huge transaction for the leveraged buyout of

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Speaker 1: a company called Citrix, which does like cloud software technology,

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Speaker 1: and a group of banks led by Bank of America,

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Speaker 1: Credit Swiss, and Goldman Sachs, provided fifteen billion dollars of

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Speaker 1: debt right before rates increased, and so the maximum interest

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Speaker 1: rate levels they promised the company and the private equity

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Speaker 1: sponsors were just way lower than the market was to

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Speaker 1: buy it at afterwards. So the banks were able to

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Speaker 1: sell about half of that debt last September at pretty

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Speaker 1: steep discounts to par for ninety two cents and eighty

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Speaker 1: five cents for the loan and secured bond, respectively, but

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Speaker 1: they still had a lot left in their balance sheets,

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Speaker 1: and so they've been slowly chipping away at this overtime,

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Speaker 1: and the big news this week is that they were

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Speaker 1: finally able to sell the riskiest final chunk of this,

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Speaker 1: the three point eight billion secondly in peace on Tuesday.

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Speaker 1: The coupon was nine percent, which reflects the cap or

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Speaker 1: the maximum interest rates the banks promised, but they had

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Speaker 1: to sell it at a discount of seventy nine cents

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Speaker 1: on the dollar to get to an all in yield

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Speaker 1: of about fourteen percent, which is where the market would

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Speaker 1: buy that kind of debt today. And keep in mind,

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Speaker 1: this is pretty risky debt. It was rated basically triple

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Speaker 1: C by ratings agencies, and it's the first subordinated deal

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Speaker 1: we've seen this year, right, yeah, you know, you don't

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Speaker 1: normally see that. Originally this bond was actually unsecured debt,

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Speaker 1: which means there were no assets directly backing it, and

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Speaker 1: so they kind of change the structure a bit a

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Speaker 1: while ago to be second lean debt, so at least

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Speaker 1: it has the second claim on assets backing some of

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Speaker 1: the citric set, but it's still it's not like a

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Speaker 1: safe like first lean secure debt you'd want to see

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Speaker 1: for most investors right now, and the yield as you

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Speaker 1: say fourteen percent, that's the highest in a long time.

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Speaker 1: I mean, I haven't seen that. When do we last

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Speaker 1: yields that high? We last saw a deal last fall

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Speaker 1: for AMC Networks. This is the walking dead AMC Networks,

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Speaker 1: not the movie chain AMC Theaters, And they had a

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Speaker 1: bond that they sold at around a fifteen percent yield.

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Speaker 1: But you don't normally see companies with that risk profile

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Speaker 1: come to the market right now. Things are just so difficult.

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Speaker 1: They're mostly staying on the sidelines and it's less risky

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Speaker 1: companies that are doing that. So yeah, and I will say,

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Speaker 1: like this Centrics debt, it did receive fairly decent demand.

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Speaker 1: Originally the banks were trying to sell it at around

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Speaker 1: seventy eight cents, and they were able to bring that

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Speaker 1: up a little bit to seventy nine cents and at

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Speaker 1: least as of Wednesday morning after at price, so it

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Speaker 1: priced on Tuesday and Wednesday morning it did trade up

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Speaker 1: two points to about eighty one cent the dollar. Who's

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Speaker 1: buying this stuff? Is it distressed debt funds? You know,

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Speaker 1: it's a mixture. We're honestly not entirely sure everyone, but

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Speaker 1: we were able to confirm that both Elliott and Carlyle

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Speaker 1: were buying some of this debt. Elliot's very notable because

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Speaker 1: this was a leveraged buyout by Vista and Elliott. So

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Speaker 1: Elliott is essentially buying the debt of some of its

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Speaker 1: portfolio companies at a steep discount. And so we'd actually

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Speaker 1: reported last September that when Citrics first came to market

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Speaker 1: and sold a lot of the debt, that Elliott bought

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Speaker 1: a billion dollars of the secured bonds to boost its

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Speaker 1: own bet on the company. Right, you're the sponsor, You

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Speaker 1: already have done the credit work, and so you already

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Speaker 1: believe in the story and the thesis of this investment.

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Speaker 1: And so it's a way for that type of private

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Speaker 1: equity firm or sponsor, I should say, to just basically

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Speaker 1: double down on that kind of investment. Do we expect

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Speaker 1: other deals like this to try and get rid of

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Speaker 1: that LBO backlog from last year? Yeah, that's a great question.

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Speaker 1: It's still not easy to sell especially risky debt. And

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Speaker 1: the biggest deals still in the pipeline. Will you have

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Speaker 1: leverage buyouts of autoparts maker Tenaco and then a technology

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Speaker 1: company called Breight Speed, and those are both Apollo LBOs

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Speaker 1: that just banks could not sell that debt last year,

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Speaker 1: and I think those are riskier and will be harder

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Speaker 1: for them to eventually offload. And then one of the

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Speaker 1: other biggest ones is Twitter, right almost thirteen billion dollars

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Speaker 1: of debt and that's not going anywhere anytime soon. Can

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Speaker 1: you imagine trying to sell Twitter debt right now? As

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Speaker 1: Elon Musk is tweeting and adding like the dogecoin symbol

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Speaker 1: as the home symbol on Twitter dot com, it's that

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Speaker 1: one's going to be stuck there for a while, I think.

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Speaker 1: So going back to the banks, you know, they as

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Speaker 1: you said, they underwrote, as in they promise to give

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Speaker 1: the companies this money at a certain level. The market

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Speaker 1: move dramatically, much faster and more than anyone expected in

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Speaker 1: terms of rates, leaving the banks with this big chunk

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Speaker 1: of debt on the balance sheets. Do they take losses

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Speaker 1: on this? They do, and they have taken a lot

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Speaker 1: of losses on centrics. So with them selling the three

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Speaker 1: point eight billion of second Lean debt on Tuesday at

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Speaker 1: about seventy nine cents on the dollar, that is roughly

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Speaker 1: losses of more than six hundred and seventy million dollars.

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Speaker 1: It's hard to know exactly because we don't know exactly

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Speaker 1: how many fees the banks received for this transaction, but

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Speaker 1: it's huge, right. And then this comes on top of

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Speaker 1: losses that they've already realized last Sleeptember when they sold

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Speaker 1: about half the debt back then. So at that time

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Speaker 1: they sold more than six hundred million in losses or sorry,

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Speaker 1: they had more than six hundred million in losses. And

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Speaker 1: so you know, it's hard to know for sure, but

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Speaker 1: i'd say roughly about one point three billion or more

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Speaker 1: of losses for these banks for just this one transaction.

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Speaker 1: I do want to put that in context. This is painful.

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Speaker 1: It's not a systemic risk kind of thing, right, It's

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Speaker 1: just a hit that they had to take. It's a

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Speaker 1: lucrative business, but it's lucrative because it's risky, and this

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Speaker 1: was one of those times where the risk turned against

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Speaker 1: them and they had to pay up. Okay, so bank

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Speaker 1: losses fourteen percent yields, which don't sound sustainable to me.

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Speaker 1: A recession writes going through the roof inflation. You know,

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Speaker 1: there's all sorts of really bad stuff on the horizon.

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Speaker 1: What are we looking for? Next in leverage finance, what

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Speaker 1: are we worried about? I think the main thing is

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Speaker 1: we're trying to see if the new issuance process really

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Speaker 1: reopens or not. We've had a trickle of some high

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Speaker 1: old bonds and leverage loans launch new deals recently, but

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Speaker 1: until we kind of get the normal, steady pace of issuance,

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Speaker 1: it means it's very hard to refinance debt right you're

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Speaker 1: not and so the worry is that some companies that

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Speaker 1: might have near term maturities will have issues if there

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Speaker 1: isn't this robust, churning market where they can sell debt

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Speaker 1: to refinance they're existing bonds or loans. There's also a

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Speaker 1: big question of if the emin A and LBO pipeline

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Speaker 1: is going to restart anytime soon. That often drives a

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Speaker 1: lot of activity in this space, and it's very muted

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Speaker 1: right now, though maybe that'll change in the coming months.

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Speaker 1: And then, just to come back to one of my

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Speaker 1: favorite nerdy topics, libor transition, we still have a lot

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Speaker 1: of wood to chop in one quarter left to do it.

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Speaker 1: Leverage loans, about seventy percent of this one point four

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Speaker 1: trillion dollar AS class still needs to make the switch.

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Speaker 1: To sofa between now in July first, and then in addition,

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Speaker 1: clos or collateralized loan obligations they're essentially all going to

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Speaker 1: have to flip at the same time on June thirtieth,

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Speaker 1: So it will probably be fine question mark. I mean,

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Speaker 1: no one's raising any huge red flags, but it's definitely

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Speaker 1: a big question mark in the market right now. Great stuff.

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Speaker 1: Paula Seleson from Bloomberg News, Thanks so much for joining us.

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Speaker 1: We look forward to reading all your scoops on the

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Speaker 1: Bloomberg terminal and of course at Bloomberg dot com. Thank you.

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Speaker 1: Switching gaze here a bit. As I mentioned earlier, we're

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Speaker 1: delighted to welcome Aidan Cheslin, who covers technology, media and

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Speaker 1: telecom for Bloomberg Intelligence in London. Thanks for being on

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Speaker 1: the show. Thanks Joe, So, the banking crisis toppled one

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Speaker 1: of the biggest banks in Europe. How has that affected

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Speaker 1: the companies that you covered? They did everything blow up?

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Speaker 1: Not so much. Senior Investment Grade Telecoms or TMT has

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Speaker 1: been a pretty resilient space, not just through the res

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Speaker 1: and banking volatility, but also during the pandemic and the

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Speaker 1: war in Ukraine. In fact, given the pressures that the

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Speaker 1: utility companies have faced over the last year and a half,

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Speaker 1: it's TMT has almost become the sort of up more

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Speaker 1: utility like sector in Europe. I think the exception to

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Speaker 1: that has been the hybrid bond market, the corporate hybrid

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Speaker 1: bond market, which I also cover, and I think there

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Speaker 1: you've seen a huge amount of volatility with the market

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Speaker 1: starting to price in a greater risk over a call

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Speaker 1: an extension for those securities. So that's been that's been

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Speaker 1: much more volatile. And then within my courage universe, I

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Speaker 1: think the satellite names as well, there's been some m

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Speaker 1: and a there with consolidation sort of damaging the credit

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Speaker 1: profiles or some of the major operations there too. So

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Speaker 1: let me start, you know what, why is this a

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Speaker 1: safe haven? Why why are these um you know, technology, media, telecom.

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Speaker 1: There's so many different companies there and it seems like

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Speaker 1: a lot of them could be quite volatile, could be

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Speaker 1: quite risky. Why where is why is why is this

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Speaker 1: somewhere you should go when there is a financial storm.

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Speaker 1: I think fundamentally the flipping answers people still want to

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Speaker 1: use their phones, but you know, it's it's UM a

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Speaker 1: sector where we've had earnings forecast upgraded more often than

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Speaker 1: downgraded than the last twelve months, we've had very stable

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Speaker 1: credit ratings. The companies have done a reasonably good job

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Speaker 1: of deleveraging when they had to. UM. You know, there's

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Speaker 1: there's there's a lot of pre financing happened, so, particularly

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Speaker 1: within the investment grade universe. UM. The companies have verygular

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Speaker 1: liquidity and haven't really been troubled by the smaller new

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Speaker 1: issue market. UM. So all in all, the earnings have

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Speaker 1: been very resilient and the companies have been able to

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Speaker 1: switch into deleveraging mode when they've to. And going back

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Speaker 1: to what you said about hybrid what are you talking

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Speaker 1: about here? What do we mean by hybrid bonds? So,

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Speaker 1: corporate hybrid debt is deeply subordinated ultra long dated or

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Speaker 1: sometimes undated securities with mechanisms for deferral of interest, potentially

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Speaker 1: for coupon step ups if the bonds are not called

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Speaker 1: on the first call date. So it's kind of a

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Speaker 1: corporate version of eighty one, if you like, in a way.

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Speaker 1: And while it's it's kind of become commonplace for banks

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Speaker 1: not to call hybrid debt of its uneconomic dating back

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Speaker 1: to you know, in Deutsche Bank made that shock decision

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Speaker 1: back in two thousand and eight on its lower tier

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Speaker 1: two corporate hybrid debt has for the most part been

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Speaker 1: called at the first call date, with the exception of

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Speaker 1: some very distressed situations like the French retailer Casino or

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Speaker 1: Luftancer during the worst phrase of the pandemic. But I

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Speaker 1: think the market has started to worry that with interest

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Speaker 1: rates on the rise, where the corporates might be tempted

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Speaker 1: to go down that bank route of making more economic

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Speaker 1: decisions about replacing bonds on time, and the market therefore

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Speaker 1: started to price in a greater risk of non call

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Speaker 1: or even even skipped coupons. So, but why buy them now?

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Speaker 1: It doesn't that whole thing. I mean, eighty ones have

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Speaker 1: been you know, they blew up. Everyone thought that market

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Speaker 1: was going to die. There's just so many risks out there.

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Speaker 1: Why buy hybrid bonds now? So our call has been

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Speaker 1: that that pessimism is a bit overstated. And the reason

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Speaker 1: we think that is corporates issue hybrids for ratings credit. Essentially,

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Speaker 1: they get fifty percent equity credit from the rating agencies

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Speaker 1: for these bonds, so they usually done in connection with

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Speaker 1: m and A transactions, or perhaps when eve it does

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Speaker 1: falling and they want to maintain their credit ratings that

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Speaker 1: they don't have to raise equity or cut dividence or

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Speaker 1: whatever it might be. So if companies start acting in

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Speaker 1: a non friendly way, start deferring coupons or or missing

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Speaker 1: call dates, they start to lose equity credit on these

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Speaker 1: bonds pretty quickly, they start to lose the ability to

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Speaker 1: raise any more of this type of debt very quickly,

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Speaker 1: and then they start to take a hit on the

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Speaker 1: credit rating side of things. So you know where you've

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Speaker 1: got companies like in the telecom sector, for example, Telephonica, Vodaphone, Orange,

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Speaker 1: big issuers of this stuff. It's a serious layer of

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Speaker 1: their capital structure that would pretty much be rendered useless

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Speaker 1: if they stopped behaving in a positive manner. So that's

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Speaker 1: why we think for companies that are reasonably well capitalized

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Speaker 1: and not overstretched, it's still very much within their interest

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Speaker 1: to carry on behaving properly. The exception to that, i'd

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Speaker 1: say is probably in the real estate sector, where obviously

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Speaker 1: things are balances are a lot more stressed, and there's

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Speaker 1: a lot more innovative ways of drumming up cash for

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Speaker 1: those kind of companies. But within the TMT space, we

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Speaker 1: think there's very few risk risks around deferrals, so borrows

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Speaker 1: are incentivized to do the right thing, and for investors

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Speaker 1: it's just too cheap to miss at this point. Yeah,

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Speaker 1: I think so when you look at you know, one

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Speaker 1: of the metrics we track in our research is we

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Speaker 1: look at where the average yield for European corporate hybrids

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Speaker 1: is and we compare that to most of this stuff

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Speaker 1: is kind of mid triple B or high triple B

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Speaker 1: companies issuing low triple B or mid double B kind

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Speaker 1: of hybrid debt too notch is lower. So what we

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Speaker 1: tend to do is you compare the average hybrid yield

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Speaker 1: to senior double bats in the High Yield Index. And

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Speaker 1: this as the hybrid market kind of matured up until

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Speaker 1: about two years ago, hybrid truck started trading closer and

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Speaker 1: closer and closer to high yield, to the point where

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Speaker 1: they started trading flat to double B high yield. That's

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Speaker 1: widened back out again. It's almost three to four percent

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Speaker 1: difference in yields, so you're getting investment grade default risk,

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Speaker 1: admittedly lower recovery risk if something did go wrong, oh sorry,

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Speaker 1: low recovery of something did go wrong, But you're getting

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Speaker 1: paid three or four percent extra over the top of

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Speaker 1: double b senor. We think that's pretty compelling. So looking

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Speaker 1: overall at technology, media and telecom aid, you know, when

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Speaker 1: you look at the single names, what do you absolutely

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Speaker 1: love and what do you hate? I mean as you

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Speaker 1: as you put it your you know what's your picks

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Speaker 1: and pans in this sector. So we've highlighted SCS the

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Speaker 1: satellite company, but particularly they are short dated hybrids as

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Speaker 1: being particularly dislocated from peers. So SCS has obviously been

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Speaker 1: subjects some news very recently around potential M and A.

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Speaker 1: But the important thing for the short dated hybrids is

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Speaker 1: that this company's in line to receive several billion dollars

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Speaker 1: from proceeds from the sale of their CE band spectrum

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Speaker 1: at the end of this year, and the timing of

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Speaker 1: that's going to be just before they have to make

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Speaker 1: a decision on the call on that shorter dated hybrid bond.

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Speaker 1: So we think there's a very high probability that that

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Speaker 1: bond is called on time, whether it's replaced or whether

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Speaker 1: it's just taken out and replaced with senior debt doesn't

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Speaker 1: really matter. We think that that bond will probably be called,

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Speaker 1: and it's trading now as if it probably wouldn't be.

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Speaker 1: So we think that one stands out SES sor can

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Speaker 1: you just define what that is and where where it is? SES? Yeah? Sure.

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Speaker 1: You know, the short dated hybrid cause trading around as

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Speaker 1: zed spread of four hundred basis points at the moment.

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Speaker 1: So if you look at other bonds with around nine

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Speaker 1: to twelve months to the first call date, so whether

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Speaker 1: it's a very defering Telephonica, etc. Those are trading around

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Speaker 1: one fifty to two hundred. So you know you're getting

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Speaker 1: an extra two percent on a very short duration bond

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Speaker 1: for that risk. And what kind of company is it?

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Speaker 1: Where where are they situated and what do they do?

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Speaker 1: So they're one of the big European satellite races. Okay,

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Speaker 1: got it? And what else do you like? S? Are

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Speaker 1: you in? So? M remembering what I said about these

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Speaker 1: bonds being rated two notches beneath the senior debt, it

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Speaker 1: means a lot of triple B plus companies issue these

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Speaker 1: bonds with triple B minus ratings. A lot of triple

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Speaker 1: B companies issue these bonds with double B plus ratings.

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Speaker 1: In that latter camp, Vodafone has some double B plus

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Speaker 1: hybrids where we think there's a chance that Vodafone's senior

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Speaker 1: rating is going to go up to triple B plus

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Speaker 1: in the short mid term, which should obviously raise the

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Speaker 1: hybrids into investment grade. When you look at the difference

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Speaker 1: between where triples and w B plus hybrids trade, it's

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Speaker 1: around one hundred and fifty basis points one hundred, one

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Speaker 1: hundred and fifty basis points. So we think with the

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Speaker 1: possibility of Vodafone getting an upgrade, I think Voda phone

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Speaker 1: hybrids are worth to look as well throughout the curve,

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Speaker 1: and that's a that's a steeper curve than the SS one.

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Speaker 1: So I think, you know, the sort of more middated

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Speaker 1: bonds there are interesting given they've already been doing some

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Speaker 1: liability managements at the front end. Got it. What are

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Speaker 1: the biggest risks right now and what keeps you up

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Speaker 1: wearing at night? So I think although the sort of

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Speaker 1: t M and A risk has diminished in TMT given

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Speaker 1: the funding situation, I think Utel SAT, which is one

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Speaker 1: of the other major satellite or prices in Europe, you know,

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Speaker 1: they're they're doing an M and A deal with one Web,

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Speaker 1: and I think that you're going to see a multi

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Speaker 1: notch credit rating downgrade there, perhaps more than the market

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Speaker 1: is expecting, down at least into the low double bees,

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Speaker 1: possibly even into the high single bees from its crossover

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Speaker 1: ratings at present, so that you know that's a potential negative.

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Speaker 1: And just as you know, we were starting to get

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Speaker 1: more optimistic in January and February about primary markets for

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Speaker 1: high yield the back where the banking failures having come along,

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Speaker 1: it's kind of cut that dead a little bit in

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Speaker 1: Europe at the moment. So i'd be looking quite carefully

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Speaker 1: at refinancing risk in high yield, just as we were

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Speaker 1: saying earlier on particularly with companies with a lot of

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Speaker 1: short dated bonds or those that kind of overly reliant

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Speaker 1: on the loan market. You know, several within TMT, several

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Speaker 1: issues have switched into the loan market rather than the

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Speaker 1: bond market in the last few years, and obviously that

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Speaker 1: comes with a lot shorter dated kind of paper in general,

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Speaker 1: and I think i'd be looking at names like Iliad,

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Speaker 1: maybe our Teas the kind of traditional TMT high your

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Speaker 1: cap structures with a lot of refinancing as potentially risky

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Speaker 1: the longer this hiatus in the high yel market goes on.

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Speaker 1: Thanks very much Aidan Cheslin and a Bloomberg Intelligence. You

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Speaker 1: can see all of his analysis on the Bloomberg Terminal.

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Speaker 1: There's a lot going on, so do check it out.

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Speaker 1: And thanks again to Paula Selexon from Bloomberg News. Read

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Speaker 1: all her scoops on the terminal and at Bloomberg dot Com.

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Speaker 1: I'm James Crumby. It's been a pleasure having you. See

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Speaker 1: you next week on the Credit Edge.