1 00:00:17,800 --> 00:00:20,080 Speaker 1: Hello, welcome to a special edition of The Credit Edge. 2 00:00:20,120 --> 00:00:22,480 Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg. 3 00:00:22,840 --> 00:00:25,439 Speaker 1: We're joined today by Rob Schiffman, who covers the tech 4 00:00:25,440 --> 00:00:27,639 Speaker 1: sector for Bloomberg Intelligence. How are you doing, Rob? 5 00:00:27,920 --> 00:00:28,480 Speaker 2: Fantastic? 6 00:00:28,560 --> 00:00:32,320 Speaker 1: James also delighted to have George Ferguson, who covers aerospace, 7 00:00:32,360 --> 00:00:33,560 Speaker 1: defense and airlines with BI. 8 00:00:33,600 --> 00:00:36,239 Speaker 2: How's it going, George, very well, Thanks for having me on. 9 00:00:36,720 --> 00:00:38,320 Speaker 1: Great to have you both here. We are here to 10 00:00:38,360 --> 00:00:41,960 Speaker 1: discuss SpaceX, the big splashy markets story of the summer, 11 00:00:42,320 --> 00:00:45,440 Speaker 1: from a record breaking eighty six billion dollar IPO to 12 00:00:45,479 --> 00:00:49,760 Speaker 1: a poorly performing twenty five billion dollar bond deal. Between 13 00:00:49,840 --> 00:00:51,519 Speaker 1: us three, we probably have about one hundred years of 14 00:00:51,560 --> 00:00:53,920 Speaker 1: market experience, but none of us have seen anything like it. 15 00:00:54,840 --> 00:00:56,880 Speaker 1: They'll need to raise a huge amount of capital to 16 00:00:56,920 --> 00:00:59,520 Speaker 1: fund some very lofty ambitions. Let me read you a 17 00:00:59,560 --> 00:01:02,160 Speaker 1: little bit of the IPO road show notes, in which 18 00:01:02,200 --> 00:01:06,800 Speaker 1: SpaceX says its mission is quote to build the systems 19 00:01:06,840 --> 00:01:11,560 Speaker 1: and technologies necessary to make life multiplanetary, to understand the 20 00:01:11,600 --> 00:01:14,000 Speaker 1: true nature of the universe, and to extend the light 21 00:01:14,080 --> 00:01:18,320 Speaker 1: of consciousness to the stars. The Elon Musk Company also 22 00:01:18,360 --> 00:01:22,080 Speaker 1: goes on to say that quote AI's ability to revolutionize 23 00:01:22,200 --> 00:01:27,720 Speaker 1: human potential is directly dependent on meeting exponentially increasing resource demands. 24 00:01:28,200 --> 00:01:30,039 Speaker 1: So before we get to what this all means for 25 00:01:30,120 --> 00:01:34,320 Speaker 1: credit markets, I want to ask you both, what is SpaceX. 26 00:01:34,440 --> 00:01:37,399 Speaker 1: Is it a rocket company? Is it a telecoms provider? 27 00:01:37,760 --> 00:01:40,160 Speaker 1: Or is it an artificial intelligence play? Can we start 28 00:01:40,160 --> 00:01:40,880 Speaker 1: with you, George? 29 00:01:41,360 --> 00:01:41,640 Speaker 2: Sure? 30 00:01:41,720 --> 00:01:47,960 Speaker 3: I think it is a broadband Internet provider from low 31 00:01:48,040 --> 00:01:53,000 Speaker 3: ear satellites that is migrating into an AI company. And 32 00:01:53,040 --> 00:01:55,600 Speaker 3: you know that's sort of where all the dreams and 33 00:01:55,800 --> 00:01:59,720 Speaker 3: valuations are based on that AI company. Rockets just facilitate 34 00:01:59,800 --> 00:02:00,400 Speaker 3: that vision. 35 00:02:00,760 --> 00:02:01,920 Speaker 2: Yeah, I agree with George. 36 00:02:02,120 --> 00:02:04,920 Speaker 3: This company is one that's in transition. What it looks 37 00:02:05,000 --> 00:02:07,800 Speaker 3: like today is probably nothing like it's going to look 38 00:02:07,880 --> 00:02:10,040 Speaker 3: like in the next five years, and I can only 39 00:02:10,080 --> 00:02:11,960 Speaker 3: imagine what it's going to look like in the next 40 00:02:12,040 --> 00:02:14,720 Speaker 3: ten years. But I do agree with George. You know, 41 00:02:15,240 --> 00:02:18,560 Speaker 3: they're starting off on the back of a recurring satellite 42 00:02:19,360 --> 00:02:24,400 Speaker 3: beta business that has a recurring and somewhat growing revenue 43 00:02:24,400 --> 00:02:25,960 Speaker 3: stream that they're going to be able to use to 44 00:02:26,000 --> 00:02:29,240 Speaker 3: piggyback on to help pay for this AI build out. 45 00:02:29,720 --> 00:02:33,560 Speaker 3: Both I think terrestrial and eventually extra terrestrial. 46 00:02:33,400 --> 00:02:35,640 Speaker 1: And how much do we think it's actually worth. It 47 00:02:35,720 --> 00:02:38,280 Speaker 1: went above two point six trillion dollars at one point, 48 00:02:38,320 --> 00:02:40,840 Speaker 1: giving it the same market cap as Amazon, the fifth 49 00:02:40,840 --> 00:02:43,280 Speaker 1: biggest company in the world. Now it's worth just over 50 00:02:43,400 --> 00:02:45,520 Speaker 1: to trillion, which by the way, is about the size 51 00:02:45,520 --> 00:02:48,640 Speaker 1: of the GDP of Spain. How much do we really 52 00:02:48,680 --> 00:02:50,600 Speaker 1: think it should be valued at or is it just 53 00:02:50,639 --> 00:02:53,280 Speaker 1: a guess at the stage? 54 00:02:53,480 --> 00:02:55,079 Speaker 3: I'm happy to tell you some of the metrics we 55 00:02:55,200 --> 00:02:58,680 Speaker 3: pulled together, right, was that if you believe in the 56 00:02:58,680 --> 00:03:01,760 Speaker 3: full growth story, go from I think it's what twenty 57 00:03:01,800 --> 00:03:05,160 Speaker 3: billion dollars in revenue today to one hundred and sixty 58 00:03:05,200 --> 00:03:08,959 Speaker 3: billion and twenty thirty, we still find a company that 59 00:03:10,360 --> 00:03:14,240 Speaker 3: is valued sort of well above the other big tech 60 00:03:14,240 --> 00:03:17,960 Speaker 3: companies like Microsoft, Google, Made Amazon. So I mean, I 61 00:03:17,960 --> 00:03:20,000 Speaker 3: think you got to get to twenty thirty, and you 62 00:03:20,080 --> 00:03:21,919 Speaker 3: got to beat the plans that we have in front 63 00:03:21,960 --> 00:03:27,120 Speaker 3: of us from SpaceX or to even start to approach 64 00:03:27,200 --> 00:03:31,320 Speaker 3: the valuation of those other big integrators, and so to 65 00:03:31,400 --> 00:03:36,840 Speaker 3: us it looks pretty rich today. Listen from a credit perspective, 66 00:03:36,880 --> 00:03:38,640 Speaker 3: I think it's a bit of a different story. I 67 00:03:38,640 --> 00:03:41,200 Speaker 3: don't really care if it's worth a trillion dollars or 68 00:03:41,240 --> 00:03:44,920 Speaker 3: two trillion or three trillion dollars, the equity cushion is enormous, 69 00:03:44,960 --> 00:03:48,240 Speaker 3: and the capability to tap into that equity at some 70 00:03:48,320 --> 00:03:51,960 Speaker 3: point if they need to finance a buildout is very 71 00:03:52,080 --> 00:03:55,480 Speaker 3: likely going to be there. I do think it hurts 72 00:03:55,520 --> 00:03:59,440 Speaker 3: if the stock goes down. People are concerned about future 73 00:03:59,480 --> 00:04:03,880 Speaker 3: cash flows their ability to execute. But regardless of the 74 00:04:03,960 --> 00:04:07,160 Speaker 3: ultimate multiple, there's such a big cushion here. I think 75 00:04:07,160 --> 00:04:11,400 Speaker 3: it supports their investment grade ratings and their financing plans 76 00:04:11,440 --> 00:04:12,840 Speaker 3: over the next handful of years. 77 00:04:13,240 --> 00:04:15,200 Speaker 1: And know they actually earning money, George, I mean, how 78 00:04:15,240 --> 00:04:16,880 Speaker 1: do they actually make money at this point? 79 00:04:17,520 --> 00:04:21,400 Speaker 3: So in twenty twenty five, No, right now, the only 80 00:04:21,560 --> 00:04:25,440 Speaker 3: money making division in the business is the connectivity business, 81 00:04:25,440 --> 00:04:28,920 Speaker 3: and that's the satellite business. Right it's again lower to 82 00:04:29,000 --> 00:04:32,720 Speaker 3: orbit broadband and then direct to sell kind of products. 83 00:04:32,760 --> 00:04:35,960 Speaker 3: I think it's just the broadband that makes money. We 84 00:04:36,040 --> 00:04:41,200 Speaker 3: still think that come twenty thirty that business, the connectivity business, 85 00:04:41,279 --> 00:04:44,160 Speaker 3: will be the one that's probably bringing in the majority 86 00:04:44,200 --> 00:04:46,520 Speaker 3: of the profits. I think we're up sort of in 87 00:04:46,560 --> 00:04:50,480 Speaker 3: the sort of maybe fifteen billionaires level on profits from 88 00:04:50,520 --> 00:04:53,080 Speaker 3: that at the end of the next five years, we 89 00:04:53,200 --> 00:04:56,200 Speaker 3: think that the AI business, and I should say my 90 00:04:56,240 --> 00:05:00,200 Speaker 3: colleagues man Deep Singh tech analyst, and John Butler or 91 00:05:00,279 --> 00:05:03,240 Speaker 3: the connectivity analysts. They put together the model. So it's 92 00:05:03,279 --> 00:05:05,720 Speaker 3: not just an aerospace guy speaking at the end of 93 00:05:05,800 --> 00:05:09,440 Speaker 3: twenty thirty Man Deep thinks there's a small profit like 94 00:05:09,760 --> 00:05:12,800 Speaker 3: half a billion or less on the AI business and 95 00:05:13,120 --> 00:05:16,520 Speaker 3: the rocket business. We think you could be break even 96 00:05:16,680 --> 00:05:18,960 Speaker 3: maybe a little bit of loss. The rocket business is 97 00:05:18,960 --> 00:05:21,920 Speaker 3: a little bit peculiar here because what they do in 98 00:05:22,000 --> 00:05:24,480 Speaker 3: the rocket business is if they're shooting something for a 99 00:05:24,520 --> 00:05:30,200 Speaker 3: company inside SpaceX, the rocket business doesn't recognize any revenue 100 00:05:30,760 --> 00:05:33,279 Speaker 3: or any profit or any expenses. They just take the 101 00:05:33,360 --> 00:05:36,599 Speaker 3: cost of the rocket shot and they put it on 102 00:05:36,680 --> 00:05:39,839 Speaker 3: the balance sheet of again, either the connectivity business, which 103 00:05:39,839 --> 00:05:42,480 Speaker 3: is where it's going now, or the AI business, and 104 00:05:42,520 --> 00:05:44,960 Speaker 3: they'd appreciate that over the useful left of the asset. 105 00:05:45,360 --> 00:05:46,680 Speaker 3: So I don't think we have a full value in 106 00:05:46,720 --> 00:05:50,000 Speaker 3: the rocket business, but I still think it's clear the 107 00:05:50,080 --> 00:05:55,080 Speaker 3: value right now is in that connectivity business, and it's 108 00:05:55,440 --> 00:05:59,039 Speaker 3: and the dream is sold on the value that AI business. 109 00:05:59,520 --> 00:06:02,200 Speaker 1: So what's the reason to get involved now as an investor? 110 00:06:02,240 --> 00:06:04,080 Speaker 1: On the equity side. I mean, you know, the huge 111 00:06:04,080 --> 00:06:06,840 Speaker 1: amount could happen in the next four years. And this 112 00:06:06,880 --> 00:06:08,680 Speaker 1: is stuff that we've never seen before. You know, they're 113 00:06:08,680 --> 00:06:12,240 Speaker 1: talking about building colonies on Mars, So why jump in now? 114 00:06:13,400 --> 00:06:13,599 Speaker 2: Yeah? 115 00:06:13,640 --> 00:06:15,600 Speaker 3: So, I mean I think I think you got to 116 00:06:15,640 --> 00:06:18,360 Speaker 3: sort of you got to look past the colony of Mars. 117 00:06:18,360 --> 00:06:21,400 Speaker 3: That's sort of the big, big, long term vision. Like 118 00:06:21,560 --> 00:06:24,600 Speaker 3: I think SpaceX and Elon Musk are going the right direction. 119 00:06:25,440 --> 00:06:28,239 Speaker 3: And the right direction probably is data centers work better 120 00:06:28,320 --> 00:06:30,520 Speaker 3: in space. There's a lot of technology to get around 121 00:06:31,040 --> 00:06:33,719 Speaker 3: to get that to work, you know, and in the 122 00:06:33,800 --> 00:06:37,880 Speaker 3: data center area, you know, generating power in orbit and 123 00:06:38,480 --> 00:06:40,880 Speaker 3: cooling in orbit. I hear it's not as easy as 124 00:06:40,880 --> 00:06:43,120 Speaker 3: we might all think. I could tell you from the 125 00:06:43,160 --> 00:06:45,960 Speaker 3: aerospace side they need bigger rockets, which are building they 126 00:06:46,000 --> 00:06:49,200 Speaker 3: call starship. But if you I mean, I think the 127 00:06:49,279 --> 00:06:54,159 Speaker 3: direction generally is correct for SpaceX, and I think Elon 128 00:06:54,279 --> 00:06:57,880 Speaker 3: Musk has proven his ability to execute in the past, right. 129 00:06:57,960 --> 00:07:00,680 Speaker 3: And so if you look at Test, it's the only 130 00:07:00,720 --> 00:07:04,159 Speaker 3: new car company you'd have in the US, all the 131 00:07:04,200 --> 00:07:07,160 Speaker 3: new car company you've had and probably I don't know, 132 00:07:07,200 --> 00:07:10,239 Speaker 3: a century maybe right, And so he has a way 133 00:07:10,480 --> 00:07:15,200 Speaker 3: of bringing new technology to the four and being successful 134 00:07:15,200 --> 00:07:18,960 Speaker 3: in it. There are heavy, heavy risks, but I take again, 135 00:07:19,000 --> 00:07:23,120 Speaker 3: I the reason you get involved now despite our concerns 136 00:07:23,160 --> 00:07:27,080 Speaker 3: about valuations and technology risks, would be his ability to 137 00:07:27,120 --> 00:07:29,960 Speaker 3: execute in the past. And there's a couple of things 138 00:07:29,960 --> 00:07:34,520 Speaker 3: to pull apart there. One is Elon Musk himself just 139 00:07:34,680 --> 00:07:37,920 Speaker 3: pulls at different emotions for people, and I think as 140 00:07:38,560 --> 00:07:41,200 Speaker 3: a credit analyst, I tried to lock that out and 141 00:07:41,240 --> 00:07:44,840 Speaker 3: just think about the ability to generate cash over time. 142 00:07:45,680 --> 00:07:48,920 Speaker 3: And if you start talking about profitability, well, none of 143 00:07:48,920 --> 00:07:51,880 Speaker 3: the hyperscalers are profitable at this moment. Now, the double 144 00:07:51,920 --> 00:07:54,480 Speaker 3: a's and triple a's that are spending one hundred and 145 00:07:54,560 --> 00:07:58,520 Speaker 3: fifty two hundred billion, you know, we think Alphabet might 146 00:07:58,560 --> 00:08:01,640 Speaker 3: spend three hundred billion of CAPEX next year, are going 147 00:08:01,720 --> 00:08:04,440 Speaker 3: to make any money for the next few years. And 148 00:08:04,520 --> 00:08:08,920 Speaker 3: quite frankly, they're going to have meaningfully greater negative free 149 00:08:08,920 --> 00:08:11,840 Speaker 3: cash will, I think than a name like SpaceX is 150 00:08:11,840 --> 00:08:14,400 Speaker 3: going to have. And that's why they've been borrowing hundreds 151 00:08:14,440 --> 00:08:17,560 Speaker 3: of billions of dollars of debt. Relative to SpaceX is 152 00:08:17,640 --> 00:08:21,400 Speaker 3: puny twenty five billion dollar debt deal. So that's one thing, 153 00:08:21,440 --> 00:08:24,240 Speaker 3: and then two is you know, extrapolating on some of 154 00:08:24,240 --> 00:08:28,320 Speaker 3: the verbiage in the S one. I sort of get it, 155 00:08:28,800 --> 00:08:31,120 Speaker 3: and it seems like, you know, this stuff is a 156 00:08:31,160 --> 00:08:35,079 Speaker 3: little bit craziness. But the reality is the rating agencies 157 00:08:35,160 --> 00:08:39,600 Speaker 3: are not looking at any of that sort of language 158 00:08:39,800 --> 00:08:42,120 Speaker 3: that you brought up in terms of building out Mars 159 00:08:42,160 --> 00:08:45,840 Speaker 3: or the Moon in terms of credit ratings. They recognize 160 00:08:45,880 --> 00:08:48,920 Speaker 3: that's what some of the company's long term goals and 161 00:08:48,960 --> 00:08:53,000 Speaker 3: what must vision may be. But when it comes down 162 00:08:53,040 --> 00:08:56,280 Speaker 3: to financial models and how they're thinking about what money 163 00:08:56,320 --> 00:08:57,840 Speaker 3: is going to be spent and what it's going to 164 00:08:57,840 --> 00:09:00,360 Speaker 3: be spent on, it's going to be much more on 165 00:09:00,600 --> 00:09:06,480 Speaker 3: traditional connectivity and AI businesses, even from the terrestrial side 166 00:09:06,520 --> 00:09:09,600 Speaker 3: versus the extraterrestrial side. So I think we have to 167 00:09:09,760 --> 00:09:13,920 Speaker 3: stop talking a little bit about you know, this out 168 00:09:13,960 --> 00:09:16,240 Speaker 3: of this world style language and just think about what 169 00:09:16,360 --> 00:09:22,120 Speaker 3: is more reality versus what this longer term vision of 170 00:09:23,720 --> 00:09:27,959 Speaker 3: extra planetary views are, because it just doesn't come into 171 00:09:27,960 --> 00:09:29,679 Speaker 3: playing the models these days. And I do think that 172 00:09:30,000 --> 00:09:32,160 Speaker 3: if this company is successful, which I think it's going 173 00:09:32,200 --> 00:09:35,480 Speaker 3: to be, that you know, maybe come twenty thirty or 174 00:09:35,480 --> 00:09:37,320 Speaker 3: twenty thirty five, they're going to have so much cash 175 00:09:37,520 --> 00:09:40,080 Speaker 3: they're going to be able to send somebody to whatever 176 00:09:40,160 --> 00:09:42,240 Speaker 3: planet or solar system or galaxy they want. 177 00:09:42,480 --> 00:09:44,120 Speaker 1: I do want to come back to the investment grade rating. 178 00:09:44,160 --> 00:09:46,079 Speaker 1: But George, you mentioned Elon Musk a few times, and 179 00:09:46,120 --> 00:09:48,000 Speaker 1: so did you Rob. So is there a key person 180 00:09:48,160 --> 00:09:52,040 Speaker 1: risk in this investment thesis? I mean, what happens if 181 00:09:52,280 --> 00:09:55,280 Speaker 1: Elon walks or something else happens to Elon and we're 182 00:09:55,320 --> 00:09:57,520 Speaker 1: left with different management, different leadership. 183 00:09:58,800 --> 00:10:00,559 Speaker 3: Yeah, I mean I think I think it looks materially 184 00:10:00,640 --> 00:10:03,680 Speaker 3: different that way, right. I think absolutely there's a big 185 00:10:03,760 --> 00:10:07,719 Speaker 3: vision by Elon that I think I think that helps him, 186 00:10:07,800 --> 00:10:10,520 Speaker 3: that helps him raise money, ups drive the company forward, 187 00:10:11,400 --> 00:10:14,680 Speaker 3: vote focus in the technology. I would also point out 188 00:10:14,720 --> 00:10:18,920 Speaker 3: that he owns a majority of the B shares. There's 189 00:10:18,960 --> 00:10:22,240 Speaker 3: two there's two share classes in this Actually there's multiple 190 00:10:22,240 --> 00:10:24,000 Speaker 3: share classes, but right now issued there are. 191 00:10:23,960 --> 00:10:25,679 Speaker 2: Two a's and b's. 192 00:10:26,400 --> 00:10:30,199 Speaker 3: Bees have ten votes apiece, Ace have one vote a piece. 193 00:10:30,240 --> 00:10:33,160 Speaker 3: He has the majority bes, he controls the company. So 194 00:10:33,720 --> 00:10:37,920 Speaker 3: you're absolutely on an Elon Musk trip. But again, I think, 195 00:10:38,000 --> 00:10:40,640 Speaker 3: do you think his vision and his ability to raise 196 00:10:40,640 --> 00:10:43,640 Speaker 3: money is a large portion of this company right now? 197 00:10:44,080 --> 00:10:44,960 Speaker 2: Yeah, I listen. 198 00:10:45,320 --> 00:10:49,280 Speaker 3: Everyone agrees on this right Elon Musk is SpaceX, So 199 00:10:49,760 --> 00:10:52,800 Speaker 3: there's a huge risk there, and the rating agencies have 200 00:10:52,840 --> 00:10:56,080 Speaker 3: actually pointed this out in terms of governance. When you've 201 00:10:56,080 --> 00:11:00,200 Speaker 3: got one person effectively not just in control from an 202 00:11:00,200 --> 00:11:05,000 Speaker 3: ideal perspective, but in control from a voting perspective, it 203 00:11:05,120 --> 00:11:08,200 Speaker 3: raises issues. I think the credit ratings would be even 204 00:11:08,280 --> 00:11:12,600 Speaker 3: higher if this was a just a standard CEO and board. 205 00:11:13,400 --> 00:11:15,080 Speaker 3: S and P is rated one notch lower than the 206 00:11:15,080 --> 00:11:18,640 Speaker 3: other rating agencies, and they specifically brought up governance as 207 00:11:18,720 --> 00:11:23,160 Speaker 3: the reason why they were notch lower. I'm less worried 208 00:11:23,160 --> 00:11:26,320 Speaker 3: about governance, to be honest, because I think it's about 209 00:11:26,360 --> 00:11:29,840 Speaker 3: his vision. But when you have one man controlling really everything, 210 00:11:30,160 --> 00:11:33,120 Speaker 3: if something goes wrong with that one man, there's issues. 211 00:11:33,160 --> 00:11:35,040 Speaker 3: That being said, I think it would become a much 212 00:11:35,080 --> 00:11:39,240 Speaker 3: more conservative business without him, credit would probably still be fine. 213 00:11:39,320 --> 00:11:39,719 Speaker 2: I think the. 214 00:11:39,679 --> 00:11:42,480 Speaker 3: Equity would be the area where people would be more 215 00:11:42,520 --> 00:11:44,679 Speaker 3: concerned than the credit side. 216 00:11:44,880 --> 00:11:48,280 Speaker 1: On the IG racing, though, I'm wondering how anyone Moody's, 217 00:11:48,320 --> 00:11:50,680 Speaker 1: S and P, fish anyone comes up with an investment 218 00:11:50,720 --> 00:11:54,040 Speaker 1: grade racing how they even can make that determination given 219 00:11:54,559 --> 00:11:58,240 Speaker 1: the history, given the dream that is out there. But 220 00:11:59,120 --> 00:12:02,040 Speaker 1: the market also seems to disagree in that. You know, 221 00:12:02,080 --> 00:12:04,480 Speaker 1: when when they price they widen out a lot, they're 222 00:12:04,559 --> 00:12:07,400 Speaker 1: they're they're widening according to the analysis that I've seen, 223 00:12:08,440 --> 00:12:10,840 Speaker 1: to the extent that they don't even look like triple 224 00:12:10,880 --> 00:12:13,280 Speaker 1: B minus. I know this is a very hard company 225 00:12:13,320 --> 00:12:17,040 Speaker 1: to comp but but how do you see that Robinson's 226 00:12:17,040 --> 00:12:19,520 Speaker 1: of the trading after they actually sold the bones. 227 00:12:19,760 --> 00:12:22,080 Speaker 3: Yeah, I, sir, would beg to differ with most of that. 228 00:12:22,200 --> 00:12:27,320 Speaker 3: So listen, what makes an investment grade company investment grade ratings? 229 00:12:27,520 --> 00:12:30,880 Speaker 3: So three major rating agencies EA A one, triple B, 230 00:12:31,880 --> 00:12:34,400 Speaker 3: triple B plus. So if this is not on the 231 00:12:34,440 --> 00:12:37,760 Speaker 3: borderline of non investment grade, you know it's not a 232 00:12:37,840 --> 00:12:40,160 Speaker 3: junk company. Doesn't look like a junk company to me. 233 00:12:40,440 --> 00:12:43,839 Speaker 3: I don't think it's gonna be anywhere near junk anytime soon. Also, 234 00:12:43,880 --> 00:12:47,680 Speaker 3: all through rating agencies have stable outlooks. You know, they've 235 00:12:47,679 --> 00:12:50,120 Speaker 3: also put their necks out on the line to see. 236 00:12:50,160 --> 00:12:54,160 Speaker 3: To see ratings change in any short time period would 237 00:12:54,200 --> 00:12:57,680 Speaker 3: be an absolute shock. You know, this is as high 238 00:12:57,679 --> 00:13:02,400 Speaker 3: profile as you get, and I think they these ratings 239 00:13:02,440 --> 00:13:05,920 Speaker 3: in place with very low probability they're going to change 240 00:13:06,040 --> 00:13:09,720 Speaker 3: anytime soon. So you know what makes up these ratings 241 00:13:09,920 --> 00:13:13,880 Speaker 3: and how do you get comfortable with an investment grade rating? Well, listen, 242 00:13:13,920 --> 00:13:16,600 Speaker 3: liquidity goes a long way, right. They, as you said, 243 00:13:16,640 --> 00:13:19,480 Speaker 3: they raised a chunk of money via their IPO and 244 00:13:20,400 --> 00:13:22,400 Speaker 3: this bondie originally was supposed to be twenty billion, but 245 00:13:22,440 --> 00:13:26,920 Speaker 3: it was upsized to twenty five because demand was nearly 246 00:13:27,080 --> 00:13:30,400 Speaker 3: ninety billion. So they're sitting on over one hundred billion 247 00:13:30,480 --> 00:13:33,800 Speaker 3: dollars of cash right now, and they've committed to keeping 248 00:13:33,800 --> 00:13:35,840 Speaker 3: at least twenty five billion of cash on the books, 249 00:13:36,400 --> 00:13:42,839 Speaker 3: and their revolver undrawn at five billion dollars. So massive liquidity. 250 00:13:42,920 --> 00:13:44,760 Speaker 3: And you know, George can walk you through what he 251 00:13:44,800 --> 00:13:48,040 Speaker 3: thinks is going to be their negative free cash over 252 00:13:48,080 --> 00:13:50,120 Speaker 3: the next few years. But at least over the next 253 00:13:50,160 --> 00:13:51,719 Speaker 3: couple of years, I think they don't even have to 254 00:13:51,800 --> 00:13:57,160 Speaker 3: raise another penny and can afford their buildout plans. So 255 00:13:57,240 --> 00:13:59,839 Speaker 3: on top of having massive liquidity, the company is also 256 00:14:00,200 --> 00:14:03,959 Speaker 3: you know, relatively low amounts of debt. You know, if 257 00:14:03,960 --> 00:14:06,200 Speaker 3: you add in some sell lease back debt, which is 258 00:14:06,240 --> 00:14:08,680 Speaker 3: probably just under ten billion dollars, you know, they have 259 00:14:08,720 --> 00:14:12,840 Speaker 3: thirty five odd billion dollars of non adjusted debt, and 260 00:14:12,920 --> 00:14:15,720 Speaker 3: they're committing to a two to three times leverage target. 261 00:14:16,400 --> 00:14:20,400 Speaker 3: Much much of their capital expenditures are discretionary, so if 262 00:14:20,400 --> 00:14:23,200 Speaker 3: things are working, they can pour more fuel onto the fire. 263 00:14:23,520 --> 00:14:26,000 Speaker 3: If they're not, they could pull back. If capital markets 264 00:14:26,040 --> 00:14:30,320 Speaker 3: get weaker, they can slow down. But this leverage target 265 00:14:30,360 --> 00:14:32,560 Speaker 3: is going to be dependent upon how they execute. So 266 00:14:32,720 --> 00:14:35,680 Speaker 3: as EBITDAD grows, they can borrow more money. And if 267 00:14:35,720 --> 00:14:38,440 Speaker 3: EBADOD does grow, there's going to be more bond older 268 00:14:38,480 --> 00:14:40,400 Speaker 3: demand because they're going to say that this is working. 269 00:14:41,280 --> 00:14:44,320 Speaker 3: So you know, just real quickly on the bond deal. 270 00:14:44,400 --> 00:14:46,560 Speaker 3: You know, I let me tell you something from what 271 00:14:46,640 --> 00:14:48,680 Speaker 3: I see around here. You know, we work at a 272 00:14:49,880 --> 00:14:52,960 Speaker 3: news you know, a technology firm that does a lot 273 00:14:53,000 --> 00:14:55,720 Speaker 3: of news and research, but bad news cells. And it's 274 00:14:55,960 --> 00:14:59,560 Speaker 3: very easy to write really bad news articles on companies 275 00:14:59,600 --> 00:15:02,160 Speaker 3: like this when you've got you know, three days of 276 00:15:02,200 --> 00:15:03,000 Speaker 3: trading history. 277 00:15:03,080 --> 00:15:03,880 Speaker 2: So we did. 278 00:15:03,880 --> 00:15:06,320 Speaker 3: Why now the first few days, you know, we're tighter 279 00:15:06,320 --> 00:15:09,840 Speaker 3: today by about a nickel across the board, So it 280 00:15:09,880 --> 00:15:11,800 Speaker 3: was it was a little bit weak on the break. 281 00:15:11,840 --> 00:15:13,640 Speaker 3: You know, hedge funds, we're trying to make quick money. 282 00:15:13,680 --> 00:15:15,800 Speaker 3: It's not so different that what happened with the IPO. 283 00:15:15,960 --> 00:15:18,120 Speaker 3: The stock shot up to what, George, over two hundred 284 00:15:18,160 --> 00:15:20,480 Speaker 3: bucks right and we're sitting at one point fifty right now. 285 00:15:20,560 --> 00:15:23,280 Speaker 3: So you know, you can't make money every single day 286 00:15:23,360 --> 00:15:25,920 Speaker 3: in these credit markets. Last week, this last month was 287 00:15:25,960 --> 00:15:29,240 Speaker 3: one of the worst months for AI and think Microsoft 288 00:15:29,280 --> 00:15:32,120 Speaker 3: lost over five hundred billion dollars and we're not really 289 00:15:32,160 --> 00:15:34,480 Speaker 3: talking about it. It's because the safe SpaceX was in 290 00:15:34,520 --> 00:15:37,480 Speaker 3: the news this week. So I actually think that, you know, 291 00:15:37,520 --> 00:15:39,480 Speaker 3: there's a fair amount of confidence there's a lot of 292 00:15:39,480 --> 00:15:42,400 Speaker 3: money on the sidelines that would be be willing to 293 00:15:42,520 --> 00:15:45,920 Speaker 3: lend to SpaceX over time. And again, I think as 294 00:15:45,960 --> 00:15:49,920 Speaker 3: they grow into their business, people get more comfortable with 295 00:15:50,000 --> 00:15:51,680 Speaker 3: the credit profile and get over the sort of this 296 00:15:51,760 --> 00:15:55,080 Speaker 3: shock that you have a company that's negative free cash 297 00:15:55,080 --> 00:15:58,040 Speaker 3: flow but investment grade and sort of just move on 298 00:15:58,120 --> 00:16:00,480 Speaker 3: to Wow, I can't believe how much they're revenues in 299 00:16:00,520 --> 00:16:01,680 Speaker 3: EBITDAU grew last quarter. 300 00:16:02,720 --> 00:16:05,920 Speaker 1: George, any thought from your side, Yeah, I mean I 301 00:16:05,920 --> 00:16:09,080 Speaker 1: think that, you know, as Rob said, there's a lot 302 00:16:09,080 --> 00:16:11,200 Speaker 1: of a lot of this cash already sitting in the 303 00:16:11,200 --> 00:16:13,280 Speaker 1: balance that they'll start to invest. 304 00:16:13,880 --> 00:16:17,400 Speaker 3: I think there's already been some nice successes. They've built 305 00:16:17,440 --> 00:16:20,760 Speaker 3: two data centers, Colossus one and Colossus two. They built 306 00:16:20,760 --> 00:16:23,800 Speaker 3: them pretty quickly. They use brown fields instead of green fields, 307 00:16:24,360 --> 00:16:26,520 Speaker 3: save them a lot of time. Maybe it saves some 308 00:16:26,640 --> 00:16:29,480 Speaker 3: money they're leasing out capacity in those I think it 309 00:16:29,560 --> 00:16:33,880 Speaker 3: shows SpaceX's willingness to look at things in a different light, 310 00:16:34,440 --> 00:16:36,120 Speaker 3: you know, not say that you need a brand new 311 00:16:36,200 --> 00:16:38,800 Speaker 3: data center which takes a longer period of time to 312 00:16:38,840 --> 00:16:43,560 Speaker 3: put together, then again sort of existing facility. And I think, 313 00:16:44,560 --> 00:16:46,960 Speaker 3: as Rob points out, there's a lot of companies that 314 00:16:47,000 --> 00:16:50,920 Speaker 3: are investing in the same space, the other hyperscalers Microsoft 315 00:16:51,040 --> 00:16:56,960 Speaker 3: and and Amazon and Google and Meta and so they're 316 00:16:56,960 --> 00:16:59,760 Speaker 3: bringing cash from other businesses that are, you know, a 317 00:17:00,000 --> 00:17:02,720 Speaker 3: pretty successful in order to use it here. I mean 318 00:17:03,200 --> 00:17:04,879 Speaker 3: Elan Musk is a little bit of a you know 319 00:17:04,920 --> 00:17:06,840 Speaker 3: that he's more of the startup. He doesn't have that 320 00:17:07,440 --> 00:17:10,920 Speaker 3: sort of big money maker, uh to to dig into 321 00:17:10,960 --> 00:17:14,560 Speaker 3: the pot to build out. Perhaps that means they'll be 322 00:17:14,560 --> 00:17:16,480 Speaker 3: a little more judicious and how they how. 323 00:17:16,400 --> 00:17:17,080 Speaker 2: They build out. 324 00:17:17,200 --> 00:17:18,680 Speaker 3: And at the end of the day, again, I think 325 00:17:18,720 --> 00:17:24,040 Speaker 3: we're it's about AI. If AI is successful, if AI works, 326 00:17:25,119 --> 00:17:27,840 Speaker 3: I guess is this company we'll have a nice place 327 00:17:27,880 --> 00:17:30,080 Speaker 3: in that in that industry, in that business, and will 328 00:17:30,119 --> 00:17:30,560 Speaker 3: do well. 329 00:17:31,000 --> 00:17:33,239 Speaker 2: So I think there's a bit of bigger risk there. 330 00:17:33,240 --> 00:17:36,439 Speaker 3: So yes, George before about raw Lal but and you 331 00:17:36,560 --> 00:17:39,760 Speaker 3: just brought up like how poorly it seems like these 332 00:17:39,800 --> 00:17:43,760 Speaker 3: bonds are performing well. This name is rated higher than Oracle, 333 00:17:43,840 --> 00:17:46,240 Speaker 3: which I know is also sort of then how to 334 00:17:46,320 --> 00:17:49,680 Speaker 3: favor it's still a big software company, but you know, 335 00:17:50,040 --> 00:17:54,320 Speaker 3: now it's a new hyperscaler, but it's still trades inside 336 00:17:54,320 --> 00:17:57,480 Speaker 3: of where Oracle trades, and and part of the reason 337 00:17:57,520 --> 00:18:02,719 Speaker 3: why people might be attracted SpaceX is that this is 338 00:18:03,160 --> 00:18:06,680 Speaker 3: the tightest that investment grade and high yield bonds have 339 00:18:06,800 --> 00:18:11,280 Speaker 3: traded in something like the last twenty years. So clients 340 00:18:11,359 --> 00:18:17,880 Speaker 3: investors need incremental yield. SpaceX is trading, you know, one 341 00:18:18,040 --> 00:18:22,600 Speaker 3: hundred beeps wider than many of its investment grade peers. 342 00:18:22,920 --> 00:18:25,000 Speaker 3: It's still trading tighter than Oracle, which is which is 343 00:18:25,560 --> 00:18:29,800 Speaker 3: a notch lower. But a lot of the risks are 344 00:18:29,840 --> 00:18:32,320 Speaker 3: built into this name. Now again it's trading like an 345 00:18:32,359 --> 00:18:36,960 Speaker 3: investment grade name. It's trading like a mid to maybe 346 00:18:37,040 --> 00:18:40,720 Speaker 3: lowers triple B versus high a solid high triple B. 347 00:18:40,880 --> 00:18:45,760 Speaker 3: Like it's rated. But if you believe there there is 348 00:18:46,200 --> 00:18:49,719 Speaker 3: the potential growth that exists from this AI business, and 349 00:18:49,720 --> 00:18:53,840 Speaker 3: that they can fund it over time, that there's a 350 00:18:53,880 --> 00:18:59,480 Speaker 3: lot of potential for excess bond returns relative to triple B, 351 00:19:00,800 --> 00:19:04,840 Speaker 3: relative to much higher quality double A and triple A 352 00:19:05,480 --> 00:19:09,639 Speaker 3: tech hyperscaling names. If you also think about supply, you know, 353 00:19:09,640 --> 00:19:12,760 Speaker 3: remember some of these other names, you know, Alphabet and Amazon. 354 00:19:12,760 --> 00:19:17,160 Speaker 3: They're coming with fifty billion at a time in multiple currencies. 355 00:19:17,800 --> 00:19:20,480 Speaker 3: It seems never ending. This was a twenty five billion 356 00:19:20,520 --> 00:19:22,080 Speaker 3: dollar deal. I don't think they're going to be back 357 00:19:22,119 --> 00:19:24,640 Speaker 3: this year. They're probably going to be back next year. 358 00:19:25,880 --> 00:19:27,639 Speaker 3: But if you think about these guys having an issue 359 00:19:27,640 --> 00:19:30,760 Speaker 3: twenty five billion dollars a year for the next you know, two, three, 360 00:19:30,840 --> 00:19:34,040 Speaker 3: four years, and then I agree with George that you know, 361 00:19:34,080 --> 00:19:36,240 Speaker 3: these guys could raise one hundred billion dollars a debt 362 00:19:36,280 --> 00:19:38,160 Speaker 3: by twenty thirty. I think they can do it because 363 00:19:38,200 --> 00:19:40,760 Speaker 3: Ebadat can grow up and can grow as well. I 364 00:19:40,760 --> 00:19:43,200 Speaker 3: think demand will be there because it's not in a 365 00:19:43,359 --> 00:19:45,400 Speaker 3: relative scale of things. You know, we think about twenty 366 00:19:45,400 --> 00:19:49,640 Speaker 3: five billion dollar deals today, they're not that big. They're 367 00:19:49,680 --> 00:19:52,000 Speaker 3: just not They're big, but they're not that big. Relative 368 00:19:52,080 --> 00:19:54,600 Speaker 3: to the world we grew up in, you know, one 369 00:19:54,680 --> 00:19:57,160 Speaker 3: hundred years ago, where if you did a two billion 370 00:19:57,200 --> 00:19:59,159 Speaker 3: dollar deal it was big. 371 00:19:59,520 --> 00:20:02,200 Speaker 1: Definitely, and uses want liquidity, they want variety, They want 372 00:20:02,240 --> 00:20:05,080 Speaker 1: to see relative value opportunities across the curve. But how 373 00:20:05,119 --> 00:20:08,720 Speaker 1: has it affected the tech sector rub or ig overall? 374 00:20:08,720 --> 00:20:11,320 Speaker 1: Because spreads are widening out. Is that a result of 375 00:20:11,840 --> 00:20:13,280 Speaker 1: all of this tech issuance? Do you think? 376 00:20:14,280 --> 00:20:19,720 Speaker 3: Well, yeah, in general tech is wider from a year ago, 377 00:20:19,960 --> 00:20:22,719 Speaker 3: and it's just because there's been so much supply. There 378 00:20:22,760 --> 00:20:26,840 Speaker 3: really hasn't been any ratings risk you know, there haven't 379 00:20:26,840 --> 00:20:31,480 Speaker 3: been any downgrades. Outlooks across the border generally stable, particularly 380 00:20:31,520 --> 00:20:36,560 Speaker 3: for the Mount rushmoor'es of of the hyperscalers. So we 381 00:20:36,960 --> 00:20:38,560 Speaker 3: have seen a little bit of weakness. 382 00:20:38,600 --> 00:20:38,760 Speaker 2: You know. 383 00:20:39,040 --> 00:20:43,639 Speaker 3: Historically investment Grede Technology traded you know, ten fifteen basis 384 00:20:43,640 --> 00:20:47,600 Speaker 3: points through where the corporate the Bloomberg Corporate Index traded, 385 00:20:48,040 --> 00:20:51,040 Speaker 3: you know, and now we're about a nickel wider. And 386 00:20:51,080 --> 00:20:54,280 Speaker 3: that's understandable. It's it's it's again, it's not because credit 387 00:20:54,640 --> 00:20:57,199 Speaker 3: is any weaker. There are there are concerns that this 388 00:20:57,240 --> 00:21:00,720 Speaker 3: is good money after bad but it's not a credit 389 00:21:00,800 --> 00:21:03,600 Speaker 3: quality issue, it's just a technical issue. What's starting to 390 00:21:03,640 --> 00:21:05,520 Speaker 3: help is that there's been a lot of private deals 391 00:21:06,119 --> 00:21:08,680 Speaker 3: which have offloaded a lot of the dollars that would 392 00:21:08,680 --> 00:21:12,480 Speaker 3: have come to the public US dollar markets, and there's 393 00:21:12,520 --> 00:21:16,600 Speaker 3: been this enormous demand across currencies, whether it's you know, 394 00:21:16,640 --> 00:21:20,040 Speaker 3: the largest Canadian deals, or euro deals, or Yen deals 395 00:21:20,320 --> 00:21:22,359 Speaker 3: or Swiss francs. I think you're going to see a 396 00:21:22,400 --> 00:21:25,679 Speaker 3: lot of all of those going forward. It's going to 397 00:21:25,760 --> 00:21:30,840 Speaker 3: create mild technical pressure on the space. But again, within 398 00:21:30,880 --> 00:21:34,560 Speaker 3: the context of historical spreads, we're still really tight. So 399 00:21:34,760 --> 00:21:37,760 Speaker 3: if you were ever thinking about, hey, I'm going to 400 00:21:37,800 --> 00:21:40,480 Speaker 3: spend five trillion dollars building a brand new business and 401 00:21:40,520 --> 00:21:41,879 Speaker 3: no one knows if it's ever going to work or 402 00:21:41,920 --> 00:21:43,760 Speaker 3: pay off, and we don't know what the rois are, 403 00:21:44,080 --> 00:21:46,440 Speaker 3: you know this is the time to do it. 404 00:21:46,480 --> 00:21:48,639 Speaker 1: Is there a natural bid developing from the fact that 405 00:21:48,680 --> 00:21:51,399 Speaker 1: they're included in indexes, George, you know that you have 406 00:21:51,440 --> 00:21:53,400 Speaker 1: to buy it because you're tracking an index. 407 00:21:54,160 --> 00:21:55,119 Speaker 2: I think it's coming right. 408 00:21:55,160 --> 00:21:57,960 Speaker 3: I think they're going to get pulled into the NASDAC 409 00:21:58,040 --> 00:22:01,160 Speaker 3: and so they've got some of that nowral bid. I'm 410 00:22:01,200 --> 00:22:03,720 Speaker 3: not sure if it's gonna if it's gonna move this 411 00:22:03,760 --> 00:22:07,439 Speaker 3: stock as aggressively as people might hope, And then I 412 00:22:07,480 --> 00:22:10,639 Speaker 3: think they've still got a still much bigger way to 413 00:22:10,640 --> 00:22:13,720 Speaker 3: get into the S and P. But they've got some 414 00:22:13,720 --> 00:22:14,720 Speaker 3: some tail in there. 415 00:22:15,720 --> 00:22:17,840 Speaker 1: A number of people of also commented that if you 416 00:22:17,880 --> 00:22:21,680 Speaker 1: want to participate in these sorts of AI futuristic stories, 417 00:22:21,880 --> 00:22:23,639 Speaker 1: you're better off doing it on the equity side. That 418 00:22:23,680 --> 00:22:25,359 Speaker 1: you know, you really are capped to one hundred on 419 00:22:25,400 --> 00:22:27,320 Speaker 1: the credit so why bother? Why not just get into 420 00:22:27,320 --> 00:22:30,400 Speaker 1: the acting. And I'm interested in both of you debating 421 00:22:30,440 --> 00:22:34,880 Speaker 1: that subject fiercely between you, which is better the equity 422 00:22:35,000 --> 00:22:35,720 Speaker 1: or the or the debt. 423 00:22:36,160 --> 00:22:39,920 Speaker 3: I think it's a dumb argument. I'm sorry I've heard 424 00:22:39,920 --> 00:22:42,720 Speaker 3: this so many times the last couple of weeks. This 425 00:22:42,960 --> 00:22:46,800 Speaker 3: is the history of the fixed income markets, right, You've 426 00:22:46,840 --> 00:22:50,720 Speaker 3: always been able only to get back coupon and par 427 00:22:51,280 --> 00:22:53,560 Speaker 3: You can make an argument for any name there should 428 00:22:53,640 --> 00:22:56,320 Speaker 3: not be a corporate debt market because everyone should just 429 00:22:56,440 --> 00:22:59,800 Speaker 3: invest in the equity. And there's there's reasons here. You 430 00:23:00,359 --> 00:23:03,879 Speaker 3: you get decent carry right, So on SpaceX, if you're 431 00:23:03,880 --> 00:23:06,640 Speaker 3: earning six percent a year, you're actually getting paid six 432 00:23:06,680 --> 00:23:09,680 Speaker 3: percent a year. You know, they don't pay dividend, they're 433 00:23:09,720 --> 00:23:12,760 Speaker 3: not going to buy back any shares for years, so 434 00:23:13,160 --> 00:23:18,560 Speaker 3: you get paid for risk by your spread and or 435 00:23:18,680 --> 00:23:22,959 Speaker 3: your your total yield. So I just think that, you know, 436 00:23:23,040 --> 00:23:27,400 Speaker 3: because AI has so much theoretical upside, that's why people 437 00:23:27,400 --> 00:23:30,600 Speaker 3: are bringing this up because if this stuff does work, 438 00:23:31,040 --> 00:23:33,720 Speaker 3: you know, and you know SpaceX has a two trillion 439 00:23:33,760 --> 00:23:35,960 Speaker 3: dollar equity value today, who knows, maybe it's going to 440 00:23:36,000 --> 00:23:38,480 Speaker 3: be ten trillion dollars in five years and you're still 441 00:23:38,480 --> 00:23:41,520 Speaker 3: only be collecting your six percent. But I think you're 442 00:23:41,560 --> 00:23:45,080 Speaker 3: downside risk for credit, whether it's any of the double 443 00:23:45,119 --> 00:23:50,280 Speaker 3: A hyperscalers or the triple B names. I think the 444 00:23:50,720 --> 00:23:52,840 Speaker 3: type of volatility that you're going to see from the 445 00:23:52,840 --> 00:23:55,560 Speaker 3: credit markets is still going to be dramatically lower than 446 00:23:55,560 --> 00:23:58,160 Speaker 3: what you're going to see in equities. Right, you didn't 447 00:23:58,200 --> 00:24:01,040 Speaker 3: see Microsoft bonds lose five one hundred billion dollars of 448 00:24:01,119 --> 00:24:03,720 Speaker 3: value this month, It didn't move at all, but you 449 00:24:03,760 --> 00:24:06,520 Speaker 3: saw that that equity drop. So you know, it's only 450 00:24:06,640 --> 00:24:09,200 Speaker 3: times when you see a bond deal widen, you know, 451 00:24:09,520 --> 00:24:12,240 Speaker 3: ten or fifteen basis points off the break that people 452 00:24:12,280 --> 00:24:15,560 Speaker 3: start bringing this up. But they tend to forget like, oh, 453 00:24:15,680 --> 00:24:18,800 Speaker 3: what what has history taught us before? And that that 454 00:24:18,880 --> 00:24:21,800 Speaker 3: you know, one one tick does not a pattern make 455 00:24:22,160 --> 00:24:23,000 Speaker 3: do you agread George? 456 00:24:23,960 --> 00:24:26,560 Speaker 2: So I guess I'm I'm going to fracture down the 457 00:24:27,640 --> 00:24:28,800 Speaker 2: line that you know. 458 00:24:28,960 --> 00:24:31,560 Speaker 3: I work on equities most of the day, so we're 459 00:24:31,560 --> 00:24:33,439 Speaker 3: going to fracture across the lines that we work on. 460 00:24:33,840 --> 00:24:37,080 Speaker 3: I think, yeah, I think this is a big text story, 461 00:24:37,080 --> 00:24:39,959 Speaker 3: a big dream story, like I said, And so I 462 00:24:39,960 --> 00:24:44,640 Speaker 3: think that getting paid six percent it's okay. I understand though. 463 00:24:45,160 --> 00:24:47,080 Speaker 3: I used to work in credit markets, used to work 464 00:24:47,840 --> 00:24:51,159 Speaker 3: at Blackrock and Meryl where I was putting leverage loan money, 465 00:24:51,320 --> 00:24:55,119 Speaker 3: you know, to work and things like that. So I 466 00:24:55,160 --> 00:24:57,600 Speaker 3: guess you you play in the market that you have 467 00:24:57,640 --> 00:25:00,560 Speaker 3: your mandate for. But to me, the upside for the 468 00:25:00,640 --> 00:25:05,200 Speaker 3: equity should be a heck of a lot higher obviously 469 00:25:05,240 --> 00:25:08,440 Speaker 3: than six percent. All that said, though, again the valuation 470 00:25:08,520 --> 00:25:11,120 Speaker 3: looks pretty rich to us out of the box. 471 00:25:11,480 --> 00:25:13,000 Speaker 2: And so I don't know. 472 00:25:13,040 --> 00:25:14,960 Speaker 3: Maybe maybe Rob's right, maybe it's better to be in 473 00:25:15,600 --> 00:25:18,040 Speaker 3: on the dead side. But I think this is you're 474 00:25:18,040 --> 00:25:24,399 Speaker 3: playing for domination in spacelift. They already the dominator in Spacelift. 475 00:25:24,880 --> 00:25:30,320 Speaker 3: You're you're buying into being the lead AI company, and 476 00:25:30,359 --> 00:25:33,760 Speaker 3: I think you're already it's already the lead low Earth 477 00:25:33,920 --> 00:25:38,280 Speaker 3: orbit communication provider, and so to me, I think you 478 00:25:38,320 --> 00:25:41,040 Speaker 3: got to get double digit returns for something like that, 479 00:25:41,119 --> 00:25:45,080 Speaker 3: and so well into double digits. So to me, the 480 00:25:45,080 --> 00:25:47,880 Speaker 3: way to play it is to be on the equity side. 481 00:25:47,920 --> 00:25:49,320 Speaker 3: Maybe you don't put all your money in it, but 482 00:25:49,400 --> 00:25:51,120 Speaker 3: I think that the equity side is the way to play, 483 00:25:51,680 --> 00:25:54,320 Speaker 3: and I don't necessarily disagree. Listen, I am a big 484 00:25:54,359 --> 00:25:57,160 Speaker 3: AI fan. I think every single data point that we've 485 00:25:57,240 --> 00:26:01,080 Speaker 3: seen points to all this money that being spent is 486 00:26:01,359 --> 00:26:05,359 Speaker 3: is going to earn a return that's even greater than 487 00:26:05,440 --> 00:26:09,160 Speaker 3: what the market's anticipating right now. So obviously the equity 488 00:26:09,200 --> 00:26:12,000 Speaker 3: is going to benefit the most. I'm just saying, though, 489 00:26:12,359 --> 00:26:16,480 Speaker 3: you know, there's a huge population that needs to invest 490 00:26:16,760 --> 00:26:22,480 Speaker 3: in fixed income markets and owning solid, stable, high growth 491 00:26:23,160 --> 00:26:28,200 Speaker 3: triple B names that trade one hundred basis points wide, 492 00:26:28,200 --> 00:26:31,560 Speaker 3: to peers, is a way to help perform on a 493 00:26:31,600 --> 00:26:37,080 Speaker 3: relative basis. So we can't we can't have our cake 494 00:26:37,119 --> 00:26:39,200 Speaker 3: and eat it too. We can't say that AI risk 495 00:26:39,359 --> 00:26:41,479 Speaker 3: is so great and none of this is going to work, 496 00:26:41,520 --> 00:26:43,159 Speaker 3: and they're spending too much money. Let's just down the 497 00:26:43,200 --> 00:26:46,440 Speaker 3: equity because there's more upside, and then forget, oh, bonds 498 00:26:46,480 --> 00:26:49,520 Speaker 3: are reasonably stable, they're not nearly as volatile. It's a 499 00:26:49,560 --> 00:26:52,320 Speaker 3: it's lower risk, lower return, but don't forget the lower 500 00:26:52,400 --> 00:26:55,199 Speaker 3: risk side. But again, if I, you know, if I 501 00:26:55,200 --> 00:26:58,879 Speaker 3: had my own dollar to invest, yeah, the equities, I think, 502 00:26:59,280 --> 00:27:00,920 Speaker 3: you know, I don't cover these equities. I don't know 503 00:27:00,960 --> 00:27:02,679 Speaker 3: what the pe s should be. But I just know 504 00:27:02,720 --> 00:27:04,160 Speaker 3: I think all the numbers are going up, and they're 505 00:27:04,200 --> 00:27:05,840 Speaker 3: going up by a lot, and they're going to go up, 506 00:27:05,880 --> 00:27:07,760 Speaker 3: I think more than what consensus. 507 00:27:07,240 --> 00:27:07,760 Speaker 2: Is looking at. 508 00:27:08,240 --> 00:27:10,159 Speaker 1: Still, we don't know, Himan. There's so much untested and 509 00:27:10,240 --> 00:27:12,800 Speaker 1: so much unchasted water out there that you know, and 510 00:27:12,840 --> 00:27:15,840 Speaker 1: I uh, as you know, rob to the side of pessimism. 511 00:27:15,880 --> 00:27:18,159 Speaker 1: But just let me point you to a Bank for 512 00:27:18,240 --> 00:27:21,800 Speaker 1: International Settlements report just put out an annual report listing 513 00:27:21,800 --> 00:27:24,960 Speaker 1: the threats to the global economy. Among them, AI quote, 514 00:27:25,080 --> 00:27:28,080 Speaker 1: disappointment in returns could trigger a sudden pullback in financing 515 00:27:28,119 --> 00:27:30,960 Speaker 1: and turn the capex boom into a protracted investment bust 516 00:27:31,200 --> 00:27:34,479 Speaker 1: with potential knock on effects on financial conditions. That's what 517 00:27:34,520 --> 00:27:39,720 Speaker 1: the BIS says. They pinpoint. The circular financing deals is 518 00:27:39,720 --> 00:27:43,040 Speaker 1: an issue. For example, chip makers and hyperscalers taking stakes 519 00:27:43,040 --> 00:27:45,480 Speaker 1: in AI labs or neo cloud providers who in turn 520 00:27:45,720 --> 00:27:49,639 Speaker 1: commit to multi year purchase of chips or computing power. 521 00:27:49,960 --> 00:27:52,040 Speaker 1: There are a lot of things that they are raising 522 00:27:52,080 --> 00:27:54,280 Speaker 1: that you know, when we talk to people in the market, 523 00:27:54,320 --> 00:27:58,159 Speaker 1: they also are concerned about what for you are the 524 00:27:58,200 --> 00:28:00,840 Speaker 1: big risks ahead. Let's start with George. 525 00:28:00,800 --> 00:28:02,760 Speaker 2: I mean, I think, I mean, you're touched on it. Right. 526 00:28:02,760 --> 00:28:05,600 Speaker 3: It feels like it's a bit circular inside this business now, right, 527 00:28:05,640 --> 00:28:09,320 Speaker 3: the chip making AI business. It feels like, you know, 528 00:28:10,320 --> 00:28:12,720 Speaker 3: guys are buying the chips, right, and then they're putting 529 00:28:12,760 --> 00:28:14,959 Speaker 3: in the data centers, and they're trying to get their 530 00:28:15,040 --> 00:28:20,399 Speaker 3: data centers to learn faster and therefore think for all 531 00:28:20,440 --> 00:28:22,160 Speaker 3: of us. That's kind of a simplistic way I think 532 00:28:22,200 --> 00:28:23,000 Speaker 3: about this whole thing. 533 00:28:24,160 --> 00:28:24,520 Speaker 2: I don't know. 534 00:28:24,520 --> 00:28:26,720 Speaker 3: Maybe I'll get a little bit philosophical here and just 535 00:28:26,800 --> 00:28:29,040 Speaker 3: say I'm not sure that I'm ready to live in 536 00:28:29,080 --> 00:28:31,760 Speaker 3: a world where a computer is smarter than me, or 537 00:28:32,080 --> 00:28:34,879 Speaker 3: maybe that's not that hard. Maybe the combined intelligence of 538 00:28:34,880 --> 00:28:37,160 Speaker 3: the world that we need computers to think for us. 539 00:28:37,960 --> 00:28:39,800 Speaker 2: But there's a lot of investment going. 540 00:28:39,840 --> 00:28:41,720 Speaker 3: Into this, and the you know in the view that 541 00:28:43,000 --> 00:28:45,880 Speaker 3: you know, artificial intelligence is really going to come up 542 00:28:45,920 --> 00:28:49,800 Speaker 3: the curve and really be the best cutting edge, you know, 543 00:28:49,920 --> 00:28:53,800 Speaker 3: kind of kind of way to tackle problems. And I 544 00:28:53,840 --> 00:28:59,280 Speaker 3: still still think the human mind is amazingly intelligent and elegant, 545 00:28:59,400 --> 00:29:01,280 Speaker 3: and I'm not sure I'm ready to live in that world. 546 00:29:01,320 --> 00:29:03,240 Speaker 2: So I don't know. I think that's the big risk 547 00:29:03,480 --> 00:29:03,800 Speaker 2: I do. 548 00:29:04,000 --> 00:29:06,040 Speaker 3: I do wonder if it feels like we're all going 549 00:29:06,360 --> 00:29:08,520 Speaker 3: the same direction, we're all buying from each other, We're 550 00:29:08,520 --> 00:29:10,560 Speaker 3: all on one side of the boat. I kind of 551 00:29:10,560 --> 00:29:12,520 Speaker 3: worry when Eric gets in one side of the boat. 552 00:29:12,800 --> 00:29:15,320 Speaker 3: I think a Gentakai is here to stay and it's 553 00:29:15,400 --> 00:29:18,520 Speaker 3: only going to get bigger, and its use cases are 554 00:29:18,640 --> 00:29:22,640 Speaker 3: going to be extrapolated. Every business is going to be 555 00:29:22,720 --> 00:29:26,760 Speaker 3: using as fast as they can. The only reason why 556 00:29:27,000 --> 00:29:31,080 Speaker 3: we can't do more is because the infrastructure is not 557 00:29:31,200 --> 00:29:34,680 Speaker 3: there yet, the workflows are not there yet. But it's happening. Listen, 558 00:29:34,720 --> 00:29:36,520 Speaker 3: the world is changing. You got to you got to 559 00:29:36,560 --> 00:29:38,360 Speaker 3: think about how we're going to change along with it. 560 00:29:38,440 --> 00:29:41,120 Speaker 3: And people always want to the good old days is 561 00:29:41,160 --> 00:29:43,680 Speaker 3: the best way how things work. And this is not happening, 562 00:29:43,760 --> 00:29:46,640 Speaker 3: and the world is sort of moving forward. There are 563 00:29:46,720 --> 00:29:48,480 Speaker 3: a lot of risks, though. The biggest risk that I 564 00:29:48,560 --> 00:29:53,280 Speaker 3: see is access to capital. It's it's not the demand side. 565 00:29:53,560 --> 00:29:56,280 Speaker 3: I do think that the circular financing is a cool, 566 00:29:56,320 --> 00:29:59,440 Speaker 3: interesting point, and it is happening. But that's just because 567 00:29:59,800 --> 00:30:01,760 Speaker 3: you know, know, it's a little bit of robin hood, 568 00:30:01,840 --> 00:30:03,960 Speaker 3: you know, a little bit taken from those that do 569 00:30:04,040 --> 00:30:06,320 Speaker 3: have cash flow to fund the ones that don't have 570 00:30:06,360 --> 00:30:08,480 Speaker 3: cash flow that eventually will have cashflow and they'll be 571 00:30:08,520 --> 00:30:11,120 Speaker 3: able to pay back. The real risk though, is that 572 00:30:11,280 --> 00:30:14,040 Speaker 3: you know, you know, we sort of pooh pooh, like, oh, 573 00:30:14,040 --> 00:30:16,440 Speaker 3: you can only earn six percent, why do you care? Well, 574 00:30:16,440 --> 00:30:18,760 Speaker 3: that's the beauty is that if you borrow long dated 575 00:30:18,800 --> 00:30:21,240 Speaker 3: money it's six percent, you want to do that all 576 00:30:21,320 --> 00:30:25,480 Speaker 3: day long to fund your negative free cash flow. But 577 00:30:25,560 --> 00:30:28,360 Speaker 3: what happens if that's eight percent or ten percent and 578 00:30:28,440 --> 00:30:31,440 Speaker 3: you need another you know, if we think SpaceX needs 579 00:30:31,480 --> 00:30:35,560 Speaker 3: another seventy five billion, or Alphabet needs another one hundred 580 00:30:35,560 --> 00:30:38,480 Speaker 3: and fifty billion. Quite frankly, if you look at SMP's report, 581 00:30:39,240 --> 00:30:42,000 Speaker 3: they're projecting SpaceX is having as much as two hundred 582 00:30:42,000 --> 00:30:43,560 Speaker 3: and fifty billion dollars a debt. 583 00:30:43,840 --> 00:30:44,960 Speaker 2: So it's like, I. 584 00:30:44,960 --> 00:30:46,560 Speaker 3: Don't think they're going to get there, but let me 585 00:30:46,560 --> 00:30:48,160 Speaker 3: tell you something that they're not going to get there 586 00:30:48,160 --> 00:30:52,000 Speaker 3: in an eight percent or ten percent yield environment. So 587 00:30:52,120 --> 00:30:55,719 Speaker 3: whatever goes wrong with the world that pushes yields higher 588 00:30:56,400 --> 00:30:59,960 Speaker 3: is going to contract capital. And this, this this AI 589 00:31:00,120 --> 00:31:03,960 Speaker 3: boom has been built on access to low cost capital. 590 00:31:04,680 --> 00:31:07,240 Speaker 3: It's required, and it's going to need to be required 591 00:31:07,720 --> 00:31:10,960 Speaker 3: over the next you know, at least three years at least, 592 00:31:11,000 --> 00:31:14,760 Speaker 3: if not longer. So that that's the biggest thing that 593 00:31:14,960 --> 00:31:18,360 Speaker 3: I worry about. The second thing I worry about is 594 00:31:18,400 --> 00:31:21,640 Speaker 3: I'm just wrong and that the demand for AI is 595 00:31:21,680 --> 00:31:24,920 Speaker 3: not anywhere near what we thought. And if that's the case, 596 00:31:25,000 --> 00:31:28,000 Speaker 3: you know, it's the lower down the credit scales names 597 00:31:28,000 --> 00:31:31,520 Speaker 3: that are going to suffer. It's going to be the SpaceX's, Oracles, 598 00:31:31,600 --> 00:31:37,760 Speaker 3: Core weaves, those like the Metas alphabets, Amazon's, Microsoft's. You know, 599 00:31:37,800 --> 00:31:41,360 Speaker 3: what if if they wasted you know, five hundred billion 600 00:31:41,400 --> 00:31:44,200 Speaker 3: dollars on Capex, you know, the equities will take it 601 00:31:44,360 --> 00:31:47,560 Speaker 3: on the chin. They'll lose another thirty percent. The credit's 602 00:31:47,560 --> 00:31:49,080 Speaker 3: going to be fine. You know, does it really make 603 00:31:49,080 --> 00:31:51,320 Speaker 3: a difference if you're a double A plus and you 604 00:31:51,360 --> 00:31:54,600 Speaker 3: get downgraded to double A minus, then it doesn't matter. 605 00:31:54,640 --> 00:31:57,800 Speaker 3: So the same way equity has that most upside, it 606 00:31:57,800 --> 00:32:00,120 Speaker 3: has the most downside. So it's just if to and 607 00:32:00,600 --> 00:32:02,800 Speaker 3: is slower, we've seen. You know, this is such a 608 00:32:03,160 --> 00:32:06,560 Speaker 3: show me environment that you know, somebody misses their their 609 00:32:06,600 --> 00:32:09,360 Speaker 3: cloud or AI revenues. But you know, by one hundred 610 00:32:09,400 --> 00:32:11,960 Speaker 3: basis points or fifty basis points is stock cells off 611 00:32:12,320 --> 00:32:14,640 Speaker 3: ten percent. So if you can't borrow and you can't 612 00:32:14,640 --> 00:32:18,920 Speaker 3: fund yourself, that becomes an issue. The circular financing thing, 613 00:32:18,960 --> 00:32:22,040 Speaker 3: to me is actually a positive because there's pockets of 614 00:32:22,120 --> 00:32:25,560 Speaker 3: capital that you can grab that you don't have to 615 00:32:25,600 --> 00:32:29,240 Speaker 3: rely on the capital markets for. So that's that's a 616 00:32:29,240 --> 00:32:31,680 Speaker 3: good thing versus a bad thing. But if you really 617 00:32:31,720 --> 00:32:34,000 Speaker 3: think it's just a house of cards right now, you're 618 00:32:34,040 --> 00:32:34,680 Speaker 3: in the minority. 619 00:32:34,880 --> 00:32:36,400 Speaker 2: You know, And a. 620 00:32:36,320 --> 00:32:38,360 Speaker 3: Lot of the stories that we get reading. You know, 621 00:32:38,400 --> 00:32:40,200 Speaker 3: I read that article over the weekend, James, that you 622 00:32:40,200 --> 00:32:43,120 Speaker 3: brought up. Yeah, I just think bad news sales. It's 623 00:32:43,160 --> 00:32:45,240 Speaker 3: it's got a lot of publicity when you say the 624 00:32:45,240 --> 00:32:47,880 Speaker 3: sky is falling, but you know, the sky has not fallen. 625 00:32:47,920 --> 00:32:51,440 Speaker 3: We had the same conversation twelve months ago, nine months ago, 626 00:32:51,680 --> 00:32:55,680 Speaker 3: six months ago, three months ago, and valuations have held 627 00:32:55,720 --> 00:32:58,040 Speaker 3: up pretty well, both in credit and equity. The other 628 00:32:58,040 --> 00:33:00,520 Speaker 3: thing I might just add, there's don't know if so 629 00:33:00,600 --> 00:33:03,360 Speaker 3: much as the sky is falling, is there can be 630 00:33:03,400 --> 00:33:06,840 Speaker 3: over investment. There often is, especially in the tech world, 631 00:33:06,880 --> 00:33:09,600 Speaker 3: and so sometimes it takes a little while for things 632 00:33:09,640 --> 00:33:13,080 Speaker 3: to catch up, and so we overinvest things fought, prices 633 00:33:13,120 --> 00:33:14,320 Speaker 3: fall off for the assets. 634 00:33:14,960 --> 00:33:17,480 Speaker 2: They're not as valuable as we thought they were, and 635 00:33:17,640 --> 00:33:18,000 Speaker 2: it takes a. 636 00:33:18,000 --> 00:33:20,960 Speaker 3: Little time to catch up to valuations, and usually we 637 00:33:21,120 --> 00:33:23,920 Speaker 3: pick up that tech and later on it drives forward. 638 00:33:24,000 --> 00:33:29,440 Speaker 3: But there are periods of overinvestment in investing in cycles. Yeah, 639 00:33:29,480 --> 00:33:31,600 Speaker 3: you're right, and listen the couple of the other things 640 00:33:31,640 --> 00:33:34,240 Speaker 3: they'll remember, Like people just think about the worst case scenarios. 641 00:33:34,240 --> 00:33:36,840 Speaker 3: They think about the dot com bubble, where you know, 642 00:33:37,160 --> 00:33:40,800 Speaker 3: companies went from sky high valuations to zeros. Those were 643 00:33:40,800 --> 00:33:45,160 Speaker 3: different businesses. Those were basing valuations on eyeballs or clicks 644 00:33:45,520 --> 00:33:48,160 Speaker 3: and not on revenue or cash flow. So now we 645 00:33:48,200 --> 00:33:50,880 Speaker 3: have the most of the big strong companies that are 646 00:33:50,920 --> 00:33:54,120 Speaker 3: generating lots of revenues, not necessarily free cash flow, but 647 00:33:54,200 --> 00:33:57,520 Speaker 3: lots of Ebitah from other businesses, so they're real businesses. 648 00:33:57,560 --> 00:34:00,400 Speaker 3: And then you look at two thousand and eight, where you know, 649 00:34:00,440 --> 00:34:02,400 Speaker 3: we had to collapse of this financial system because it 650 00:34:02,480 --> 00:34:04,600 Speaker 3: was way over levered, and we don't have that now, 651 00:34:04,680 --> 00:34:08,040 Speaker 3: even a name like SpaceX, we're talking about a target 652 00:34:08,120 --> 00:34:10,600 Speaker 3: of two to three times leverage. So the not the 653 00:34:10,680 --> 00:34:13,359 Speaker 3: absolute numbers are big. You know, if you look at 654 00:34:13,360 --> 00:34:16,120 Speaker 3: the other hyperscalers that are borrowing so much, you know, 655 00:34:16,160 --> 00:34:19,600 Speaker 3: their leverage on a on a net basis is basically 656 00:34:19,719 --> 00:34:22,120 Speaker 3: zero and on a gross basis is still only like 657 00:34:22,200 --> 00:34:25,600 Speaker 3: one times. So we're not in an over levered scenario. 658 00:34:25,640 --> 00:34:29,719 Speaker 3: But George, you are spot on right. Sometimes you too overspend. 659 00:34:30,160 --> 00:34:31,000 Speaker 2: You see, you. 660 00:34:30,880 --> 00:34:33,800 Speaker 3: Know, the the pot at the end of the rainbow, 661 00:34:34,360 --> 00:34:36,880 Speaker 3: and it's you know, not filled with as much gold. 662 00:34:37,000 --> 00:34:39,640 Speaker 3: And again I really think that, you know, it's going 663 00:34:39,719 --> 00:34:41,160 Speaker 3: to take a couple of years for us to figure 664 00:34:41,160 --> 00:34:43,640 Speaker 3: that out. I think the biggest risks though on the 665 00:34:43,640 --> 00:34:45,839 Speaker 3: equity side and less so on the credit side. 666 00:34:46,320 --> 00:34:49,080 Speaker 1: It's agreed to keep us talking and writing all day 667 00:34:49,080 --> 00:34:53,040 Speaker 1: long until it replaces us. Great stuff, Rob Schiffman and 668 00:34:53,080 --> 00:34:55,560 Speaker 1: George Ferguson with Bloomberg Intelligence. Thank you so much for 669 00:34:55,640 --> 00:34:56,680 Speaker 1: joining us on the Credit Edge. 670 00:34:56,760 --> 00:34:57,880 Speaker 2: Thanks James, Thank you. 671 00:34:58,840 --> 00:35:01,680 Speaker 1: Read more analysis all of Robin George's great work on 672 00:35:01,719 --> 00:35:04,840 Speaker 1: the Bloomberg Terminal. Bloomberg Intelligence is part of our research department, 673 00:35:04,840 --> 00:35:07,880 Speaker 1: with five hundred analyst and strategists working across all markets. 674 00:35:08,080 --> 00:35:11,160 Speaker 1: Coverage includes over two thousand equities and credits and outlooks 675 00:35:11,160 --> 00:35:13,719 Speaker 1: on more than ninety industries and one hundred market indices, 676 00:35:13,760 --> 00:35:17,720 Speaker 1: currencies and commodities. Please do subscribe to the Credit Edge 677 00:35:17,880 --> 00:35:20,920 Speaker 1: wherever you get your podcasts. We're on Apple, Spotify, and 678 00:35:21,000 --> 00:35:23,920 Speaker 1: all other good podcast providers, including the Bloomberg Terminal at 679 00:35:23,960 --> 00:35:27,280 Speaker 1: b pod Go. Give us a review, tell your friends, 680 00:35:27,360 --> 00:35:30,400 Speaker 1: or email Meet direct directly at jcromby eight at Bloomberg 681 00:35:30,480 --> 00:35:33,520 Speaker 1: dot net. I'm James Crombie. It's been a pleasure having 682 00:35:33,520 --> 00:35:36,000 Speaker 1: you join us again. Next time on the Credit Edge.