Speaker 1: Welcome to the latest episode of Credit Edge, a weekly
Speaker 1: markets podcast. My name is Olivia Raymonde and I'm a
Speaker 1: reporter at Bloomberg News covering corporate finance and credit. My
Speaker 1: guest today will be my fellow colleague, Carmen Rio, who
Speaker 1: is a structured credit reporter at Bloomberg, as well as
Speaker 1: Mike Holland, senior analyst for Bloomberg Intelligence. And so let's
Speaker 1: get to it. Carmen, My first question is going to
Speaker 1: be to you. The market rally this year has been fierce,
Speaker 1: but it seems like there is one corner of the
Speaker 1: credit markets that maybe is feeling it a little bit
Speaker 1: more than others. Can you talk to us about that? Sure,
Speaker 1: thank you very much for having us here. One that's correct.
Speaker 1: All credit has basically rallied, but there's a part of
Speaker 1: the structure market that has seen like an even bigger rally,
Speaker 1: especially compared to last year, and that's mortgage backed securities,
Speaker 1: which are bonds that repackaged homelands backed by the government,
Speaker 1: backed by the agencies. And January saw was basically a
Speaker 1: record in terms of excess returns, which are gains beyond treasuries.
Speaker 1: The bonds saw basically the best start of the year ever,
Speaker 1: and that's a huge contrast to what we saw last
Speaker 1: year when the same bonds basically plunged in value and
Speaker 1: reached record loads in the fall. That was basically because
Speaker 1: the biggest buyers of the dead, which were US banks
Speaker 1: and the FED, stepped back from the market, meaning there
Speaker 1: was not not really like a huge demand for them,
Speaker 1: only like marginal buyers. Got it, got it. And then
Speaker 1: forgive my ignorance, but the real estate sector seems to
Speaker 1: have been hit pretty hard this year as the FED
Speaker 1: has risen rates and tightened up the economy a bit.
Speaker 1: Which area of the of your structured world does that
Speaker 1: impact the most? Sure? So, mortgage rates have you know,
Speaker 1: gone up by a lot in twenty twenty two, and
Speaker 1: they're still pretty high, and that has impacted both residential
Speaker 1: mortgages and commercial mortgages in basically the loans that go
Speaker 1: into this mortgage backed securities we were talking about earlier,
Speaker 1: that has been felt a lot. Homeowners basically have no
Speaker 1: incentive to refinance their houses, so they're not repaying their
Speaker 1: dead That impacts spawn holders a lot because now they
Speaker 1: can kind of calculate when they're going to see their
Speaker 1: bonds prepaid or when they're going to get the prepayments back.
Speaker 1: But that has also impacted real commercial real stata as well.
Speaker 1: In commercial mortgage bonds, which is CMBs, which prepackage commercial
Speaker 1: like commercial mortgages, we've seen a lot of like a
Speaker 1: slow down in issuance. I believe so far this year
Speaker 1: we're around ninety percent down compared to last Oh wow,
Speaker 1: big drop. And it's mainly on one of the reasons
Speaker 1: where it is that there's a little bit less activity
Speaker 1: in the real estate sector, a little bit less emana.
Speaker 1: I mean, I wouldn't want to buy a house where
Speaker 1: market traits are right now. So yeah, it's a little
Speaker 1: there's basically a slowdown, got it, Got it? And then
Speaker 1: you also do a lot of our coverage with clos
Speaker 1: can you speak to what's happening there? Sure, So the
Speaker 1: CLO market has has seen it also a big rally
Speaker 1: this year. So it's it's very interesting because that also
Speaker 1: like kind of triples down into leverage loans and there's
Speaker 1: a lot of demand for for the dead now. Um
Speaker 1: CLO triple A spreads half tightened a lot in January.
Speaker 1: They were very very wide in the fall around I
Speaker 1: think they reached around to sixty basis points, which is
Speaker 1: very very wide, and now they're closer to one eighty,
Speaker 1: which that is really great if you want to issue
Speaker 1: a bond right now. Absolutely, and that drives demand for
Speaker 1: the underlying junk dead which is good. The junk bonds
Speaker 1: have been rallying, so there's definitely there's definitely a positive
Speaker 1: there for all structured assets. Although the last week's unemployment
Speaker 1: UM data like kind of like led mortgage backed securities
Speaker 1: for instance, to like the prices plunged a little bit
Speaker 1: in front like on Friday Monday, they've been they've had
Speaker 1: they have stabilized now, but they want down a little bit.
Speaker 1: And in the demand from the CLO warehouses, how's that going. Yeah,
Speaker 1: so managers are starting to you know, push out deals
Speaker 1: that they had been working on for a while. Many
Speaker 1: of them had warehouses that were underwater last year because
Speaker 1: low prices were very low last year, and now with
Speaker 1: loan prices rallying, it's it's a good window to kind
Speaker 1: of push that stuff out now. Excellent, excellent, that makes sense.
Speaker 1: And then aside from structure, I know you do a
Speaker 1: little bit of coverage in our distressed debt land and
Speaker 1: you had a story out recently talking about the state
Speaker 1: of healthcare within distressed debt on high level. Can you
Speaker 1: just let us know what's going on with that. Sure, So,
Speaker 1: from the sectors we've been looking at, healthcare is one
Speaker 1: is one of the leading sectors in terms of downgrades
Speaker 1: last year. It's it's definitely a little bit more distressed
Speaker 1: than others, and it's facing a lot of like inflationary costs,
Speaker 1: some struggles. Some labor costs are high as well. So
Speaker 1: the owners of the leverage or the leverage loans that
Speaker 1: are tied to this companies are taking a little bit
Speaker 1: of a harder look into the sector. Got it well?
Speaker 1: Good thing. We have a healthcare expert here with us,
Speaker 1: Bloomberg Intelligence, Mike collind Mike, you've been covering a lot
Speaker 1: in the healthcare space. Can you discuss a little bit
Speaker 1: about what's going on broadly across the sector falling some
Speaker 1: of the tough twenty twenty two performance that we saw. Sure,
Speaker 1: thanks Olivia for having me. Karmen, great to be here
Speaker 1: with you and thanks for having me on so twenty
Speaker 1: twenty two performance for the healthcare all subsectors across healthcare,
Speaker 1: we're pretty challenging. High yield. Healthcare in particular suffered from
Speaker 1: a series of downgrades and defaults. We had distressed exchanges,
Speaker 1: all sorts of litigation, whether it be opioid litigation or
Speaker 1: issues around regulatory challenges, as well as ongoing changes to
Speaker 1: the sort of the reimbursement environment how healthcare providers are paid,
Speaker 1: and all those conspired to, you know, give sector analysts
Speaker 1: like myself, one of the more difficult years in recent memory,
Speaker 1: you know, so far in twenty two, like we started
Speaker 1: out saying, market momentum has really proven supportive to the
Speaker 1: healthcare you know, broader healthcare credit sector m but but
Speaker 1: a lot of risks still remain. You know, something that
Speaker 1: Carmen's talking about is, you know, if you think about
Speaker 1: the high yield bond index that we cover here at Bloomberg,
Speaker 1: fifty percent of FARMA bonds are just training to stress,
Speaker 1: which is really right. And the main driver that is
Speaker 1: Bousch Health, which is the former valiant right, yes, Um,
Speaker 1: and they're doing a sort of a transaction where they're
Speaker 1: spinning out the most valuable asset Boush and Loam and
Speaker 1: leaving bondholders on the hook. So UM on the hook
Speaker 1: with a much smaller company with a lower earning space,
Speaker 1: so that's been a challenge. Also, providers, like Carmen said,
Speaker 1: are challenged by much higher labor costs. I mean, the
Speaker 1: rates have come down off their peaks. Um. You know,
Speaker 1: at one point, you know, we average employment or average
Speaker 1: hourly wages for hospitals and sort of healthcare providers, we're
Speaker 1: going up, you know, high single digits, low double digits,
Speaker 1: and that's come down to mid single digits. But we're
Speaker 1: resetting at a higher rate, and so costs for providers,
Speaker 1: whether it be hospitals or physician practice management groups, um,
Speaker 1: you know, remain elevated, and that'll be a pain point
Speaker 1: in twenty two twenty twenty three. Really interesting and I
Speaker 1: think you covered some of this in what you just said,
Speaker 1: But my understand ending was that in the past, healthcare
Speaker 1: was a place to go during a recession. That's that
Speaker 1: was almost like a safe haven, and it really does
Speaker 1: not seem to be one anymore. Could you clarify for us,
Speaker 1: like what has changed? Yeah, absolutely, if you if you
Speaker 1: go back to twenty ten through twenty fifteen, we had
Speaker 1: this period of really really aggressive cost increases in healthcare,
Speaker 1: and that was a combination one of drug pricing increases,
Speaker 1: which you know, valiant, this kind of case in point right,
Speaker 1: the the black sheep of the space. But but more importantly,
Speaker 1: you know, hospital costs were also going up as well,
Speaker 1: kind of unabated um and as a result, the cost
Speaker 1: of healthcare was increasing. And if you think about you know,
Speaker 1: your your insurance payments, right, you know, and premiums have
Speaker 1: gone up, but deductibles went up big time, right, oh yeah,
Speaker 1: very high, very high. Yeah, the and and the consumer
Speaker 1: became the first payer even even though you're supposed to
Speaker 1: have this insurance. But if you've got a deductible that's
Speaker 1: five thousand or ten thousand dollars for a family, you're
Speaker 1: going to defer care. So what was previously consumer non
Speaker 1: discretionary in a way has become consumer discretionary. I would
Speaker 1: caveat that by saying, you know, healthcare insurance companies, health
Speaker 1: insurance companies, the payers are pretty resilient, right because you're
Speaker 1: paying them. The battle between the payers and the providers
Speaker 1: has been ongoing for a very long time, and that's
Speaker 1: where the negotiations and contracting becomes an issue, and why
Speaker 1: you see these payers and providers try to become as
Speaker 1: big as possible so that they can you know, throw
Speaker 1: their weight around and help control those contracting processes. If
Speaker 1: you look at CVS today, look at UNH today, United Health,
Speaker 1: they are getting big for a reason. They are getting
Speaker 1: big for a reason, that's for sure. And one thing
Speaker 1: that has been the hallmark of really markets across twenty
Speaker 1: twenty and into twenty three, especially in distressed is the volatility.
Speaker 1: What stands out to you there. You know, there's a
Speaker 1: lot of different components of healthcare in terms of like
Speaker 1: I mentioned earlier, the evolution of reimbursements and the payer
Speaker 1: provider battles. Some of the names that I've looked at
Speaker 1: recently that are you know, we we've talked a lot
Speaker 1: about Boushe Health over the past year. The volatility there.
Speaker 1: Bond prices there are in the forties for the unsecured bonds,
Speaker 1: and basically that that's a result of Carl Icon and
Speaker 1: some of the equity investors that are in the name
Speaker 1: that are effectuating this extraction of Boush and Loan. That's
Speaker 1: one that you know, we've touched upon a lot. I
Speaker 1: think what's what's more interesting to me today, it's sort
Speaker 1: of these one off names that are smaller. Two credit
Speaker 1: stories in particular really jump out to me. The first one,
Speaker 1: which we have a pretty positive view on as rallied
Speaker 1: really strongly since the beginning of the year. We wrote
Speaker 1: on Acumen back in late December. An Acumen is this
Speaker 1: really niche mobile diagnostic imaging company. So think about like
Speaker 1: trucks with MRI machines in them that that drive to
Speaker 1: a rural hospital when there's increased demand for imaging. UM.
Speaker 1: They also have trailers that sort of are a little
Speaker 1: more stationary. But Acumen bought Alliance Healthcare a couple of
Speaker 1: years ago, which was product had a little bit more
Speaker 1: of the mobile imaging capability, and the company hasn't really
Speaker 1: grown and so for last year the bond price is
Speaker 1: really plummeted. UH. We had a couple of different issues.
Speaker 1: There's an investor in the name that has the option
Speaker 1: to UH pick to toggle their payment, which right now
Speaker 1: so it's stone Peak is the investor in Acumen that
Speaker 1: has a sizeable investment, and they have the option the
Speaker 1: end of the year to toggle their UH their their
Speaker 1: bonds to cash pay, and the company doesn't really have
Speaker 1: that much capability of doing that at this point, given
Speaker 1: constrained liquidity, So the bonds sold off big time. Uh
Speaker 1: what's you know what's interesting now is, you know, since
Speaker 1: the beginning of the year, I think most of a
Speaker 1: lot of investors have seen the possibility of Stone Peak
Speaker 1: basically forcing this company into bankruptcy as you know, you know,
Speaker 1: shooting off their own foot. There's no reason for them
Speaker 1: to do that. It wouldn't serve their their purposes. So
Speaker 1: you know, the bonds had traded to the low sixty
Speaker 1: cents on the dollar range. There's two different bonds and
Speaker 1: they both rallied about ten to twelve points since the
Speaker 1: beginning of the year, which is a big, you know,
Speaker 1: twenty percent gainer. Yeah. Sure. And the equity even more interesting,
Speaker 1: you know, through yesterday was up eighty percent. You know,
Speaker 1: this is a stub equity piece that's trading about it,
Speaker 1: you know, dollar thirty dollar twenty right right now. But
Speaker 1: it was a big gain. So you know, the market
Speaker 1: was really concerned about accounting delays and some management concerns,
Speaker 1: but sentiments starting to improve. So that's been one that's
Speaker 1: been been pretty interesting. It definitely seems like a pretty
Speaker 1: good bye opportunity there, you know, based on what you're saying,
Speaker 1: I know, you you flagged one of the bonds to
Speaker 1: me doing twenty twenty eight that we're trading as low
Speaker 1: as six decents on the dollar and yielding eighteen percent.
Speaker 1: So there's like some pretty hefty yields, right collects right
Speaker 1: if you believe the company is going to survive. That's
Speaker 1: a really interesting opportunity. Also what's interesting too is these
Speaker 1: are smaller businesses that could be targeted for an acquisition.
Speaker 1: I mean, I think down the road management here wouldn't
Speaker 1: mind getting some interest from a large hospital system, you know,
Speaker 1: to maybe make make an investment down the road. But
Speaker 1: we have to see them sort of write the ship
Speaker 1: a little bit management to sort of clear up some
Speaker 1: of the concerns are our management and you know, sort
Speaker 1: of show some growth because it's been a challenging growth story.
Speaker 1: The predecessor company that they bought, Alliance Healthcare, was you know,
Speaker 1: it was a stable company, but wasn't It was never
Speaker 1: really a grower. So we're going to wait and seed
Speaker 1: position right now, Wait and seed position. Yeah, I just
Speaker 1: want to circle you back to M and A really
Speaker 1: quickly because I know that that's going to be a
Speaker 1: top theme in the healthcare space today. But the M
Speaker 1: and A pipeline globally has has slowed quite a bit.
Speaker 1: Can you talk to me about how that slow down
Speaker 1: is going to impact potential acquisitions and how successful they
Speaker 1: might be within the healthcare space. Absolutely, it's it's really
Speaker 1: one of the most topical issues in the healthcare space.
Speaker 1: Right You have consolidation and deconsolidation going on all the time.
Speaker 1: Big hospital systems do a big round or consolidation about
Speaker 1: ten years ago around the time of the Affordable Care Act,
Speaker 1: and you also have so you've a big strategic interest.
Speaker 1: You also have a lot of private equity involvement in
Speaker 1: the sector in the sense of you know, buying practices
Speaker 1: and rolling them up. Usually it's a you know, usually
Speaker 1: pretty good growth opportunity because people, you know, as we
Speaker 1: were talking about earlier, healthcare demand is you know, is
Speaker 1: usually growing, and you know, we have the graying of
Speaker 1: America and the demographics are always saying, you know, there's
Speaker 1: going to be more and more folks requiring healthcare. So
Speaker 1: it's a very investable space from the pe perspective. As
Speaker 1: I mentioned earlier, UNH and CBS along with Danaher last week,
Speaker 1: was talking about buying a life sciences company called Catalant.
Speaker 1: You know, M and A is really how these come
Speaker 1: panies grow once they get to a certain size. So
Speaker 1: on the strategic side, you know, we're seeing the big,
Speaker 1: the big companies growing larger, and we're seeing we're also
Speaker 1: seeing companies like ge Healthcare, which was just spun out
Speaker 1: Thermo Fisher has done some deals. Deals are really you know,
Speaker 1: the biggest driver in my view of the space of
Speaker 1: growth in this space. But what we're seeing on the
Speaker 1: private equity side, you know, is potentially a slowdown as
Speaker 1: rates rise, as costs grow. You know, we're seeing a
Speaker 1: slowdown maybe a little bit in the investment on the
Speaker 1: provider side. So there's a lot of activity in the
Speaker 1: VET space right now, outpatient surgical centers, musculo skeletal you know,
Speaker 1: those those deals are going on. But I think the
Speaker 1: pace of M and A will slow and a lot
Speaker 1: of these private equitowners will have to focus on their
Speaker 1: existing investments and maybe hold them for a little longer,
Speaker 1: hold them for a little longer. Really interesting, And then
Speaker 1: I want to throw another name out there, Um, what's
Speaker 1: going on with weightwatch we Watchers is a fun story, uh,
Speaker 1: not your typical healthcare name. It's kind of sort of
Speaker 1: a in between er, a tweener between consumer and healthcare.
Speaker 1: It is discretionary rights, it is discretionary and one of
Speaker 1: the you know, if you look at the history of
Speaker 1: the company, which was it was started sixty years ago, UM,
Speaker 1: and you know, it's had its up and ups and
Speaker 1: downs over the years. Back in the mid teens, you know,
Speaker 1: around twenty fifteen twenty sixteen, the company was struggling a
Speaker 1: little bit in terms of growth and Oprah came back in,
Speaker 1: came in and really rejuvenated the brand, invigorated it and
Speaker 1: saw growth, uh really peak in twenty I think it
Speaker 1: was twenty eighteen, Thank goodness for Oprah. Right well, uh
Speaker 1: lately though, you know, since Covid hit UM, the company
Speaker 1: had to, you know, deal with the fact that people
Speaker 1: couldn't go out, so the studio business became a real drag.
Speaker 1: So they really reduced their exposure to in person meetings
Speaker 1: and studios, which you know, frankly was one of the
Speaker 1: big I think drivers of this company's success over the
Speaker 1: last say sixty years. And so they've pivoted to a
Speaker 1: more digital offering with a new CEO, and Sima Sistani
Speaker 1: is the new CEO. She's she's brought a lot of
Speaker 1: energy and social media chops to the to the to
Speaker 1: the brand, but uh, you know it, we're still in
Speaker 1: sort of a weight and C mode and as a
Speaker 1: result of the declines in studio membership and frankly folks,
Speaker 1: maybe not being as focused on weight loss as dieting
Speaker 1: sometimes in some circles has become taboo. Um. The business
Speaker 1: is struggling a little bit. I mean, if you right now,
Speaker 1: we're basically with the company looking at a top line,
Speaker 1: you know, revenue around of a billion and earnings EBATA
Speaker 1: around two hundred and sixty million on a trailing basis
Speaker 1: as a last quarter. This company had trot when they
Speaker 1: brought open. We're trying to get to two billion of
Speaker 1: top line and they were around five hundred million at
Speaker 1: their peak of IBATA, So we're really declining um and
Speaker 1: leverage is getting close to eight times wow, which is
Speaker 1: which is a little scary for a business that doesn't
Speaker 1: have a very big competitive moat given all the alternatives
Speaker 1: out there. You could go on YouTube and just watch
Speaker 1: a video on how to do some so not the
Speaker 1: same as weight watchers, but I guess the concern is
Speaker 1: right now, the bonds are trading you know, around fifty
Speaker 1: cents on the dollar, which is pretty low for um,
Speaker 1: pretty pretty low for this business that has been pretty
Speaker 1: pretty strong over the years. UM. So I don't know.
Speaker 1: What's interesting I think too is during COVID they were
Speaker 1: able to refinance their you know, close to nine percent
Speaker 1: coupon bonds with four percent or four and a fantastic
Speaker 1: for the great for the company, right, but when rates
Speaker 1: are rising, uh, that four and a half percent can
Speaker 1: lead you know, as rates rise, that will be punitive
Speaker 1: on the on the price for those bonds. So that's
Speaker 1: part of the reason why we are where we are today. UM.
Speaker 1: I would also say two that, uh, you know, this company,
Speaker 1: like I said earlier, has been really volatile in terms
Speaker 1: of membership growth over the years, and so the company
Speaker 1: really needs to be invigorated. And you know, we're going
Speaker 1: to wait and see if the new CEO can can
Speaker 1: really generate new buzz around the business. Got it? Got
Speaker 1: it for sure? Yeah. It seems like the pandemic and
Speaker 1: the aftermath of the pandemic, which is still ongoing, continues
Speaker 1: to impact so many businesses. Could you expand a little
Speaker 1: bit more on sort of how the pandemic is still
Speaker 1: having lingering effects on these companies. Yeah, you know, I
Speaker 1: think in particular with with Weight Watchers, part of the
Speaker 1: part of the concern is, you know, one, people were
Speaker 1: flushed with cash back during the pandemic. You had the
Speaker 1: support payments, you had, the market was flushed with cash.
Speaker 1: Individuals were when that's pulled away. You know, the Weight
Speaker 1: Watchers plans are something pretty cheap, right, twelve to twenty
Speaker 1: five bucks a month. But when in our environment today,
Speaker 1: when you're paying ten or twenty five bucks a month
Speaker 1: for six different subscriptions to Netflix or you know, Disney
Speaker 1: Plus or whatever it is, UM, you start to be
Speaker 1: a little more selective and how you spend your money. Also,
Speaker 1: when you can have free options that are out there,
Speaker 1: you know, maybe you'll you'll defer to those UM. You know.
Speaker 1: And as I said earlier, the market environment with rates
Speaker 1: where they were back in twenty twenty one when the
Speaker 1: company refinanced their their bonds, you know, that was a
Speaker 1: big issue for you know that we're suffering as bond
Speaker 1: holders in Weight Watchers from the rising in rates. UM. Also,
Speaker 1: I think consumer preferences have evolved since the pandemic, right,
Speaker 1: people have changed, uh and have you know different world.
Speaker 1: It feels like it. Uh. And so you know, I
Speaker 1: think one thing is people don't talk about very much
Speaker 1: with weight watchers, but the rise of sort of body
Speaker 1: positivity has has maybe taken away a little bit of
Speaker 1: the impetus behind a lot of their membership. Um, you know,
Speaker 1: staying uh, staying on plan and so uh, you know,
Speaker 1: it remains to be seen. We find out, you know,
Speaker 1: really this company has membership that signs up at the
Speaker 1: end of the year and you know, go to four
Speaker 1: and a half maybe five million of subscribers and it
Speaker 1: usually trends down by eight hundred thousand to a million
Speaker 1: subscribers by the year end. We'll see how this year
Speaker 1: plays out, whether or not they'll be able to sustain
Speaker 1: membership at current levels. Sustaining membership at current levels, that
Speaker 1: will be the trick. Thank you very much, Mike from
Speaker 1: Bloomberg Intelligence. You can read all of his analysis on
Speaker 1: the Bloomberg Terminal. And thank you so much to Carmen
Speaker 1: Rio from Bloomberg News. You can catch all of her
Speaker 1: coverage and scoops on the terminal or Bloomberg dot Com.
Speaker 1: I'm Olivia Romande. It's been a pleasure having you see
Speaker 1: you next week on Credit Edge