Speaker 1: Hello, welcome to a special edition of The Credit Edge.
Speaker 1: My name is James Crombie. I'm a senior editor at Bloomberg.
Speaker 1: We're joined today by Rob Schiffman, who covers the tech
Speaker 1: sector for Bloomberg Intelligence. How are you doing, Rob?
Speaker 2: Fantastic?
Speaker 1: James also delighted to have George Ferguson, who covers aerospace,
Speaker 1: defense and airlines with BI.
Speaker 2: How's it going, George, very well, Thanks for having me on.
Speaker 1: Great to have you both here. We are here to
Speaker 1: discuss SpaceX, the big splashy markets story of the summer,
Speaker 1: from a record breaking eighty six billion dollar IPO to
Speaker 1: a poorly performing twenty five billion dollar bond deal. Between
Speaker 1: us three, we probably have about one hundred years of
Speaker 1: market experience, but none of us have seen anything like it.
Speaker 1: They'll need to raise a huge amount of capital to
Speaker 1: fund some very lofty ambitions. Let me read you a
Speaker 1: little bit of the IPO road show notes, in which
Speaker 1: SpaceX says its mission is quote to build the systems
Speaker 1: and technologies necessary to make life multiplanetary, to understand the
Speaker 1: true nature of the universe, and to extend the light
Speaker 1: of consciousness to the stars. The Elon Musk Company also
Speaker 1: goes on to say that quote AI's ability to revolutionize
Speaker 1: human potential is directly dependent on meeting exponentially increasing resource demands.
Speaker 1: So before we get to what this all means for
Speaker 1: credit markets, I want to ask you both, what is SpaceX.
Speaker 1: Is it a rocket company? Is it a telecoms provider?
Speaker 1: Or is it an artificial intelligence play? Can we start
Speaker 1: with you, George?
Speaker 2: Sure?
Speaker 3: I think it is a broadband Internet provider from low
Speaker 3: ear satellites that is migrating into an AI company. And
Speaker 3: you know that's sort of where all the dreams and
Speaker 3: valuations are based on that AI company. Rockets just facilitate
Speaker 3: that vision.
Speaker 2: Yeah, I agree with George.
Speaker 3: This company is one that's in transition. What it looks
Speaker 3: like today is probably nothing like it's going to look
Speaker 3: like in the next five years, and I can only
Speaker 3: imagine what it's going to look like in the next
Speaker 3: ten years. But I do agree with George. You know,
Speaker 3: they're starting off on the back of a recurring satellite
Speaker 3: beta business that has a recurring and somewhat growing revenue
Speaker 3: stream that they're going to be able to use to
Speaker 3: piggyback on to help pay for this AI build out.
Speaker 3: Both I think terrestrial and eventually extra terrestrial.
Speaker 1: And how much do we think it's actually worth. It
Speaker 1: went above two point six trillion dollars at one point,
Speaker 1: giving it the same market cap as Amazon, the fifth
Speaker 1: biggest company in the world. Now it's worth just over
Speaker 1: to trillion, which by the way, is about the size
Speaker 1: of the GDP of Spain. How much do we really
Speaker 1: think it should be valued at or is it just
Speaker 1: a guess at the stage?
Speaker 3: I'm happy to tell you some of the metrics we
Speaker 3: pulled together, right, was that if you believe in the
Speaker 3: full growth story, go from I think it's what twenty
Speaker 3: billion dollars in revenue today to one hundred and sixty
Speaker 3: billion and twenty thirty, we still find a company that
Speaker 3: is valued sort of well above the other big tech
Speaker 3: companies like Microsoft, Google, Made Amazon. So I mean, I
Speaker 3: think you got to get to twenty thirty, and you
Speaker 3: got to beat the plans that we have in front
Speaker 3: of us from SpaceX or to even start to approach
Speaker 3: the valuation of those other big integrators, and so to
Speaker 3: us it looks pretty rich today. Listen from a credit perspective,
Speaker 3: I think it's a bit of a different story. I
Speaker 3: don't really care if it's worth a trillion dollars or
Speaker 3: two trillion or three trillion dollars, the equity cushion is enormous,
Speaker 3: and the capability to tap into that equity at some
Speaker 3: point if they need to finance a buildout is very
Speaker 3: likely going to be there. I do think it hurts
Speaker 3: if the stock goes down. People are concerned about future
Speaker 3: cash flows their ability to execute. But regardless of the
Speaker 3: ultimate multiple, there's such a big cushion here. I think
Speaker 3: it supports their investment grade ratings and their financing plans
Speaker 3: over the next handful of years.
Speaker 1: And know they actually earning money, George, I mean, how
Speaker 1: do they actually make money at this point?
Speaker 3: So in twenty twenty five, No, right now, the only
Speaker 3: money making division in the business is the connectivity business,
Speaker 3: and that's the satellite business. Right it's again lower to
Speaker 3: orbit broadband and then direct to sell kind of products.
Speaker 3: I think it's just the broadband that makes money. We
Speaker 3: still think that come twenty thirty that business, the connectivity business,
Speaker 3: will be the one that's probably bringing in the majority
Speaker 3: of the profits. I think we're up sort of in
Speaker 3: the sort of maybe fifteen billionaires level on profits from
Speaker 3: that at the end of the next five years, we
Speaker 3: think that the AI business, and I should say my
Speaker 3: colleagues man Deep Singh tech analyst, and John Butler or
Speaker 3: the connectivity analysts. They put together the model. So it's
Speaker 3: not just an aerospace guy speaking at the end of
Speaker 3: twenty thirty Man Deep thinks there's a small profit like
Speaker 3: half a billion or less on the AI business and
Speaker 3: the rocket business. We think you could be break even
Speaker 3: maybe a little bit of loss. The rocket business is
Speaker 3: a little bit peculiar here because what they do in
Speaker 3: the rocket business is if they're shooting something for a
Speaker 3: company inside SpaceX, the rocket business doesn't recognize any revenue
Speaker 3: or any profit or any expenses. They just take the
Speaker 3: cost of the rocket shot and they put it on
Speaker 3: the balance sheet of again, either the connectivity business, which
Speaker 3: is where it's going now, or the AI business, and
Speaker 3: they'd appreciate that over the useful left of the asset.
Speaker 3: So I don't think we have a full value in
Speaker 3: the rocket business, but I still think it's clear the
Speaker 3: value right now is in that connectivity business, and it's
Speaker 3: and the dream is sold on the value that AI business.
Speaker 1: So what's the reason to get involved now as an investor?
Speaker 1: On the equity side. I mean, you know, the huge
Speaker 1: amount could happen in the next four years. And this
Speaker 1: is stuff that we've never seen before. You know, they're
Speaker 1: talking about building colonies on Mars, So why jump in now?
Speaker 2: Yeah?
Speaker 3: So, I mean I think I think you got to
Speaker 3: sort of you got to look past the colony of Mars.
Speaker 3: That's sort of the big, big, long term vision. Like
Speaker 3: I think SpaceX and Elon Musk are going the right direction.
Speaker 3: And the right direction probably is data centers work better
Speaker 3: in space. There's a lot of technology to get around
Speaker 3: to get that to work, you know, and in the
Speaker 3: data center area, you know, generating power in orbit and
Speaker 3: cooling in orbit. I hear it's not as easy as
Speaker 3: we might all think. I could tell you from the
Speaker 3: aerospace side they need bigger rockets, which are building they
Speaker 3: call starship. But if you I mean, I think the
Speaker 3: direction generally is correct for SpaceX, and I think Elon
Speaker 3: Musk has proven his ability to execute in the past, right.
Speaker 3: And so if you look at Test, it's the only
Speaker 3: new car company you'd have in the US, all the
Speaker 3: new car company you've had and probably I don't know,
Speaker 3: a century maybe right, And so he has a way
Speaker 3: of bringing new technology to the four and being successful
Speaker 3: in it. There are heavy, heavy risks, but I take again,
Speaker 3: I the reason you get involved now despite our concerns
Speaker 3: about valuations and technology risks, would be his ability to
Speaker 3: execute in the past. And there's a couple of things
Speaker 3: to pull apart there. One is Elon Musk himself just
Speaker 3: pulls at different emotions for people, and I think as
Speaker 3: a credit analyst, I tried to lock that out and
Speaker 3: just think about the ability to generate cash over time.
Speaker 3: And if you start talking about profitability, well, none of
Speaker 3: the hyperscalers are profitable at this moment. Now, the double
Speaker 3: a's and triple a's that are spending one hundred and
Speaker 3: fifty two hundred billion, you know, we think Alphabet might
Speaker 3: spend three hundred billion of CAPEX next year, are going
Speaker 3: to make any money for the next few years. And
Speaker 3: quite frankly, they're going to have meaningfully greater negative free
Speaker 3: cash will, I think than a name like SpaceX is
Speaker 3: going to have. And that's why they've been borrowing hundreds
Speaker 3: of billions of dollars of debt. Relative to SpaceX is
Speaker 3: puny twenty five billion dollar debt deal. So that's one thing,
Speaker 3: and then two is you know, extrapolating on some of
Speaker 3: the verbiage in the S one. I sort of get it,
Speaker 3: and it seems like, you know, this stuff is a
Speaker 3: little bit craziness. But the reality is the rating agencies
Speaker 3: are not looking at any of that sort of language
Speaker 3: that you brought up in terms of building out Mars
Speaker 3: or the Moon in terms of credit ratings. They recognize
Speaker 3: that's what some of the company's long term goals and
Speaker 3: what must vision may be. But when it comes down
Speaker 3: to financial models and how they're thinking about what money
Speaker 3: is going to be spent and what it's going to
Speaker 3: be spent on, it's going to be much more on
Speaker 3: traditional connectivity and AI businesses, even from the terrestrial side
Speaker 3: versus the extraterrestrial side. So I think we have to
Speaker 3: stop talking a little bit about you know, this out
Speaker 3: of this world style language and just think about what
Speaker 3: is more reality versus what this longer term vision of
Speaker 3: extra planetary views are, because it just doesn't come into
Speaker 3: playing the models these days. And I do think that
Speaker 3: if this company is successful, which I think it's going
Speaker 3: to be, that you know, maybe come twenty thirty or
Speaker 3: twenty thirty five, they're going to have so much cash
Speaker 3: they're going to be able to send somebody to whatever
Speaker 3: planet or solar system or galaxy they want.
Speaker 1: I do want to come back to the investment grade rating.
Speaker 1: But George, you mentioned Elon Musk a few times, and
Speaker 1: so did you Rob. So is there a key person
Speaker 1: risk in this investment thesis? I mean, what happens if
Speaker 1: Elon walks or something else happens to Elon and we're
Speaker 1: left with different management, different leadership.
Speaker 3: Yeah, I mean I think I think it looks materially
Speaker 3: different that way, right. I think absolutely there's a big
Speaker 3: vision by Elon that I think I think that helps him,
Speaker 3: that helps him raise money, ups drive the company forward,
Speaker 3: vote focus in the technology. I would also point out
Speaker 3: that he owns a majority of the B shares. There's
Speaker 3: two there's two share classes in this Actually there's multiple
Speaker 3: share classes, but right now issued there are.
Speaker 2: Two a's and b's.
Speaker 3: Bees have ten votes apiece, Ace have one vote a piece.
Speaker 3: He has the majority bes, he controls the company. So
Speaker 3: you're absolutely on an Elon Musk trip. But again, I think,
Speaker 3: do you think his vision and his ability to raise
Speaker 3: money is a large portion of this company right now?
Speaker 2: Yeah, I listen.
Speaker 3: Everyone agrees on this right Elon Musk is SpaceX, So
Speaker 3: there's a huge risk there, and the rating agencies have
Speaker 3: actually pointed this out in terms of governance. When you've
Speaker 3: got one person effectively not just in control from an
Speaker 3: ideal perspective, but in control from a voting perspective, it
Speaker 3: raises issues. I think the credit ratings would be even
Speaker 3: higher if this was a just a standard CEO and board.
Speaker 3: S and P is rated one notch lower than the
Speaker 3: other rating agencies, and they specifically brought up governance as
Speaker 3: the reason why they were notch lower. I'm less worried
Speaker 3: about governance, to be honest, because I think it's about
Speaker 3: his vision. But when you have one man controlling really everything,
Speaker 3: if something goes wrong with that one man, there's issues.
Speaker 3: That being said, I think it would become a much
Speaker 3: more conservative business without him, credit would probably still be fine.
Speaker 2: I think the.
Speaker 3: Equity would be the area where people would be more
Speaker 3: concerned than the credit side.
Speaker 1: On the IG racing, though, I'm wondering how anyone Moody's,
Speaker 1: S and P, fish anyone comes up with an investment
Speaker 1: grade racing how they even can make that determination given
Speaker 1: the history, given the dream that is out there. But
Speaker 1: the market also seems to disagree in that. You know,
Speaker 1: when when they price they widen out a lot, they're
Speaker 1: they're they're widening according to the analysis that I've seen,
Speaker 1: to the extent that they don't even look like triple
Speaker 1: B minus. I know this is a very hard company
Speaker 1: to comp but but how do you see that Robinson's
Speaker 1: of the trading after they actually sold the bones.
Speaker 3: Yeah, I, sir, would beg to differ with most of that.
Speaker 3: So listen, what makes an investment grade company investment grade ratings?
Speaker 3: So three major rating agencies EA A one, triple B,
Speaker 3: triple B plus. So if this is not on the
Speaker 3: borderline of non investment grade, you know it's not a
Speaker 3: junk company. Doesn't look like a junk company to me.
Speaker 3: I don't think it's gonna be anywhere near junk anytime soon. Also,
Speaker 3: all through rating agencies have stable outlooks. You know, they've
Speaker 3: also put their necks out on the line to see.
Speaker 3: To see ratings change in any short time period would
Speaker 3: be an absolute shock. You know, this is as high
Speaker 3: profile as you get, and I think they these ratings
Speaker 3: in place with very low probability they're going to change
Speaker 3: anytime soon. So you know what makes up these ratings
Speaker 3: and how do you get comfortable with an investment grade rating? Well, listen,
Speaker 3: liquidity goes a long way, right. They, as you said,
Speaker 3: they raised a chunk of money via their IPO and
Speaker 3: this bondie originally was supposed to be twenty billion, but
Speaker 3: it was upsized to twenty five because demand was nearly
Speaker 3: ninety billion. So they're sitting on over one hundred billion
Speaker 3: dollars of cash right now, and they've committed to keeping
Speaker 3: at least twenty five billion of cash on the books,
Speaker 3: and their revolver undrawn at five billion dollars. So massive liquidity.
Speaker 3: And you know, George can walk you through what he
Speaker 3: thinks is going to be their negative free cash over
Speaker 3: the next few years. But at least over the next
Speaker 3: couple of years, I think they don't even have to
Speaker 3: raise another penny and can afford their buildout plans. So
Speaker 3: on top of having massive liquidity, the company is also
Speaker 3: you know, relatively low amounts of debt. You know, if
Speaker 3: you add in some sell lease back debt, which is
Speaker 3: probably just under ten billion dollars, you know, they have
Speaker 3: thirty five odd billion dollars of non adjusted debt, and
Speaker 3: they're committing to a two to three times leverage target.
Speaker 3: Much much of their capital expenditures are discretionary, so if
Speaker 3: things are working, they can pour more fuel onto the fire.
Speaker 3: If they're not, they could pull back. If capital markets
Speaker 3: get weaker, they can slow down. But this leverage target
Speaker 3: is going to be dependent upon how they execute. So
Speaker 3: as EBITDAD grows, they can borrow more money. And if
Speaker 3: EBADOD does grow, there's going to be more bond older
Speaker 3: demand because they're going to say that this is working.
Speaker 3: So you know, just real quickly on the bond deal.
Speaker 3: You know, I let me tell you something from what
Speaker 3: I see around here. You know, we work at a
Speaker 3: news you know, a technology firm that does a lot
Speaker 3: of news and research, but bad news cells. And it's
Speaker 3: very easy to write really bad news articles on companies
Speaker 3: like this when you've got you know, three days of
Speaker 3: trading history.
Speaker 2: So we did.
Speaker 3: Why now the first few days, you know, we're tighter
Speaker 3: today by about a nickel across the board, So it
Speaker 3: was it was a little bit weak on the break.
Speaker 3: You know, hedge funds, we're trying to make quick money.
Speaker 3: It's not so different that what happened with the IPO.
Speaker 3: The stock shot up to what, George, over two hundred
Speaker 3: bucks right and we're sitting at one point fifty right now.
Speaker 3: So you know, you can't make money every single day
Speaker 3: in these credit markets. Last week, this last month was
Speaker 3: one of the worst months for AI and think Microsoft
Speaker 3: lost over five hundred billion dollars and we're not really
Speaker 3: talking about it. It's because the safe SpaceX was in
Speaker 3: the news this week. So I actually think that, you know,
Speaker 3: there's a fair amount of confidence there's a lot of
Speaker 3: money on the sidelines that would be be willing to
Speaker 3: lend to SpaceX over time. And again, I think as
Speaker 3: they grow into their business, people get more comfortable with
Speaker 3: the credit profile and get over the sort of this
Speaker 3: shock that you have a company that's negative free cash
Speaker 3: flow but investment grade and sort of just move on
Speaker 3: to Wow, I can't believe how much they're revenues in
Speaker 3: EBITDAU grew last quarter.
Speaker 1: George, any thought from your side, Yeah, I mean I
Speaker 1: think that, you know, as Rob said, there's a lot
Speaker 1: of a lot of this cash already sitting in the
Speaker 1: balance that they'll start to invest.
Speaker 3: I think there's already been some nice successes. They've built
Speaker 3: two data centers, Colossus one and Colossus two. They built
Speaker 3: them pretty quickly. They use brown fields instead of green fields,
Speaker 3: save them a lot of time. Maybe it saves some
Speaker 3: money they're leasing out capacity in those I think it
Speaker 3: shows SpaceX's willingness to look at things in a different light,
Speaker 3: you know, not say that you need a brand new
Speaker 3: data center which takes a longer period of time to
Speaker 3: put together, then again sort of existing facility. And I think,
Speaker 3: as Rob points out, there's a lot of companies that
Speaker 3: are investing in the same space, the other hyperscalers Microsoft
Speaker 3: and and Amazon and Google and Meta and so they're
Speaker 3: bringing cash from other businesses that are, you know, a
Speaker 3: pretty successful in order to use it here. I mean
Speaker 3: Elan Musk is a little bit of a you know
Speaker 3: that he's more of the startup. He doesn't have that
Speaker 3: sort of big money maker, uh to to dig into
Speaker 3: the pot to build out. Perhaps that means they'll be
Speaker 3: a little more judicious and how they how.
Speaker 2: They build out.
Speaker 3: And at the end of the day, again, I think
Speaker 3: we're it's about AI. If AI is successful, if AI works,
Speaker 3: I guess is this company we'll have a nice place
Speaker 3: in that in that industry, in that business, and will
Speaker 3: do well.
Speaker 2: So I think there's a bit of bigger risk there.
Speaker 3: So yes, George before about raw Lal but and you
Speaker 3: just brought up like how poorly it seems like these
Speaker 3: bonds are performing well. This name is rated higher than Oracle,
Speaker 3: which I know is also sort of then how to
Speaker 3: favor it's still a big software company, but you know,
Speaker 3: now it's a new hyperscaler, but it's still trades inside
Speaker 3: of where Oracle trades, and and part of the reason
Speaker 3: why people might be attracted SpaceX is that this is
Speaker 3: the tightest that investment grade and high yield bonds have
Speaker 3: traded in something like the last twenty years. So clients
Speaker 3: investors need incremental yield. SpaceX is trading, you know, one
Speaker 3: hundred beeps wider than many of its investment grade peers.
Speaker 3: It's still trading tighter than Oracle, which is which is
Speaker 3: a notch lower. But a lot of the risks are
Speaker 3: built into this name. Now again it's trading like an
Speaker 3: investment grade name. It's trading like a mid to maybe
Speaker 3: lowers triple B versus high a solid high triple B.
Speaker 3: Like it's rated. But if you believe there there is
Speaker 3: the potential growth that exists from this AI business, and
Speaker 3: that they can fund it over time, that there's a
Speaker 3: lot of potential for excess bond returns relative to triple B,
Speaker 3: relative to much higher quality double A and triple A
Speaker 3: tech hyperscaling names. If you also think about supply, you know,
Speaker 3: remember some of these other names, you know, Alphabet and Amazon.
Speaker 3: They're coming with fifty billion at a time in multiple currencies.
Speaker 3: It seems never ending. This was a twenty five billion
Speaker 3: dollar deal. I don't think they're going to be back
Speaker 3: this year. They're probably going to be back next year.
Speaker 3: But if you think about these guys having an issue
Speaker 3: twenty five billion dollars a year for the next you know, two, three,
Speaker 3: four years, and then I agree with George that you know,
Speaker 3: these guys could raise one hundred billion dollars a debt
Speaker 3: by twenty thirty. I think they can do it because
Speaker 3: Ebadat can grow up and can grow as well. I
Speaker 3: think demand will be there because it's not in a
Speaker 3: relative scale of things. You know, we think about twenty
Speaker 3: five billion dollar deals today, they're not that big. They're
Speaker 3: just not They're big, but they're not that big. Relative
Speaker 3: to the world we grew up in, you know, one
Speaker 3: hundred years ago, where if you did a two billion
Speaker 3: dollar deal it was big.
Speaker 1: Definitely, and uses want liquidity, they want variety, They want
Speaker 1: to see relative value opportunities across the curve. But how
Speaker 1: has it affected the tech sector rub or ig overall?
Speaker 1: Because spreads are widening out. Is that a result of
Speaker 1: all of this tech issuance? Do you think?
Speaker 3: Well, yeah, in general tech is wider from a year ago,
Speaker 3: and it's just because there's been so much supply. There
Speaker 3: really hasn't been any ratings risk you know, there haven't
Speaker 3: been any downgrades. Outlooks across the border generally stable, particularly
Speaker 3: for the Mount rushmoor'es of of the hyperscalers. So we
Speaker 3: have seen a little bit of weakness.
Speaker 2: You know.
Speaker 3: Historically investment Grede Technology traded you know, ten fifteen basis
Speaker 3: points through where the corporate the Bloomberg Corporate Index traded,
Speaker 3: you know, and now we're about a nickel wider. And
Speaker 3: that's understandable. It's it's it's again, it's not because credit
Speaker 3: is any weaker. There are there are concerns that this
Speaker 3: is good money after bad but it's not a credit
Speaker 3: quality issue, it's just a technical issue. What's starting to
Speaker 3: help is that there's been a lot of private deals
Speaker 3: which have offloaded a lot of the dollars that would
Speaker 3: have come to the public US dollar markets, and there's
Speaker 3: been this enormous demand across currencies, whether it's you know,
Speaker 3: the largest Canadian deals, or euro deals, or Yen deals
Speaker 3: or Swiss francs. I think you're going to see a
Speaker 3: lot of all of those going forward. It's going to
Speaker 3: create mild technical pressure on the space. But again, within
Speaker 3: the context of historical spreads, we're still really tight. So
Speaker 3: if you were ever thinking about, hey, I'm going to
Speaker 3: spend five trillion dollars building a brand new business and
Speaker 3: no one knows if it's ever going to work or
Speaker 3: pay off, and we don't know what the rois are,
Speaker 3: you know this is the time to do it.
Speaker 1: Is there a natural bid developing from the fact that
Speaker 1: they're included in indexes, George, you know that you have
Speaker 1: to buy it because you're tracking an index.
Speaker 2: I think it's coming right.
Speaker 3: I think they're going to get pulled into the NASDAC
Speaker 3: and so they've got some of that nowral bid. I'm
Speaker 3: not sure if it's gonna if it's gonna move this
Speaker 3: stock as aggressively as people might hope, And then I
Speaker 3: think they've still got a still much bigger way to
Speaker 3: get into the S and P. But they've got some
Speaker 3: some tail in there.
Speaker 1: A number of people of also commented that if you
Speaker 1: want to participate in these sorts of AI futuristic stories,
Speaker 1: you're better off doing it on the equity side. That
Speaker 1: you know, you really are capped to one hundred on
Speaker 1: the credit so why bother? Why not just get into
Speaker 1: the acting. And I'm interested in both of you debating
Speaker 1: that subject fiercely between you, which is better the equity
Speaker 1: or the or the debt.
Speaker 3: I think it's a dumb argument. I'm sorry I've heard
Speaker 3: this so many times the last couple of weeks. This
Speaker 3: is the history of the fixed income markets, right, You've
Speaker 3: always been able only to get back coupon and par
Speaker 3: You can make an argument for any name there should
Speaker 3: not be a corporate debt market because everyone should just
Speaker 3: invest in the equity. And there's there's reasons here. You
Speaker 3: you get decent carry right, So on SpaceX, if you're
Speaker 3: earning six percent a year, you're actually getting paid six
Speaker 3: percent a year. You know, they don't pay dividend, they're
Speaker 3: not going to buy back any shares for years, so
Speaker 3: you get paid for risk by your spread and or
Speaker 3: your your total yield. So I just think that, you know,
Speaker 3: because AI has so much theoretical upside, that's why people
Speaker 3: are bringing this up because if this stuff does work,
Speaker 3: you know, and you know SpaceX has a two trillion
Speaker 3: dollar equity value today, who knows, maybe it's going to
Speaker 3: be ten trillion dollars in five years and you're still
Speaker 3: only be collecting your six percent. But I think you're
Speaker 3: downside risk for credit, whether it's any of the double
Speaker 3: A hyperscalers or the triple B names. I think the
Speaker 3: type of volatility that you're going to see from the
Speaker 3: credit markets is still going to be dramatically lower than
Speaker 3: what you're going to see in equities. Right, you didn't
Speaker 3: see Microsoft bonds lose five one hundred billion dollars of
Speaker 3: value this month, It didn't move at all, but you
Speaker 3: saw that that equity drop. So you know, it's only
Speaker 3: times when you see a bond deal widen, you know,
Speaker 3: ten or fifteen basis points off the break that people
Speaker 3: start bringing this up. But they tend to forget like, oh,
Speaker 3: what what has history taught us before? And that that
Speaker 3: you know, one one tick does not a pattern make
Speaker 3: do you agread George?
Speaker 2: So I guess I'm I'm going to fracture down the
Speaker 2: line that you know.
Speaker 3: I work on equities most of the day, so we're
Speaker 3: going to fracture across the lines that we work on.
Speaker 3: I think, yeah, I think this is a big text story,
Speaker 3: a big dream story, like I said, And so I
Speaker 3: think that getting paid six percent it's okay. I understand though.
Speaker 3: I used to work in credit markets, used to work
Speaker 3: at Blackrock and Meryl where I was putting leverage loan money,
Speaker 3: you know, to work and things like that. So I
Speaker 3: guess you you play in the market that you have
Speaker 3: your mandate for. But to me, the upside for the
Speaker 3: equity should be a heck of a lot higher obviously
Speaker 3: than six percent. All that said, though, again the valuation
Speaker 3: looks pretty rich to us out of the box.
Speaker 2: And so I don't know.
Speaker 3: Maybe maybe Rob's right, maybe it's better to be in
Speaker 3: on the dead side. But I think this is you're
Speaker 3: playing for domination in spacelift. They already the dominator in Spacelift.
Speaker 3: You're you're buying into being the lead AI company, and
Speaker 3: I think you're already it's already the lead low Earth
Speaker 3: orbit communication provider, and so to me, I think you
Speaker 3: got to get double digit returns for something like that,
Speaker 3: and so well into double digits. So to me, the
Speaker 3: way to play it is to be on the equity side.
Speaker 3: Maybe you don't put all your money in it, but
Speaker 3: I think that the equity side is the way to play,
Speaker 3: and I don't necessarily disagree. Listen, I am a big
Speaker 3: AI fan. I think every single data point that we've
Speaker 3: seen points to all this money that being spent is
Speaker 3: is going to earn a return that's even greater than
Speaker 3: what the market's anticipating right now. So obviously the equity
Speaker 3: is going to benefit the most. I'm just saying, though,
Speaker 3: you know, there's a huge population that needs to invest
Speaker 3: in fixed income markets and owning solid, stable, high growth
Speaker 3: triple B names that trade one hundred basis points wide,
Speaker 3: to peers, is a way to help perform on a
Speaker 3: relative basis. So we can't we can't have our cake
Speaker 3: and eat it too. We can't say that AI risk
Speaker 3: is so great and none of this is going to work,
Speaker 3: and they're spending too much money. Let's just down the
Speaker 3: equity because there's more upside, and then forget, oh, bonds
Speaker 3: are reasonably stable, they're not nearly as volatile. It's a
Speaker 3: it's lower risk, lower return, but don't forget the lower
Speaker 3: risk side. But again, if I, you know, if I
Speaker 3: had my own dollar to invest, yeah, the equities, I think,
Speaker 3: you know, I don't cover these equities. I don't know
Speaker 3: what the pe s should be. But I just know
Speaker 3: I think all the numbers are going up, and they're
Speaker 3: going up by a lot, and they're going to go up,
Speaker 3: I think more than what consensus.
Speaker 2: Is looking at.
Speaker 1: Still, we don't know, Himan. There's so much untested and
Speaker 1: so much unchasted water out there that you know, and
Speaker 1: I uh, as you know, rob to the side of pessimism.
Speaker 1: But just let me point you to a Bank for
Speaker 1: International Settlements report just put out an annual report listing
Speaker 1: the threats to the global economy. Among them, AI quote,
Speaker 1: disappointment in returns could trigger a sudden pullback in financing
Speaker 1: and turn the capex boom into a protracted investment bust
Speaker 1: with potential knock on effects on financial conditions. That's what
Speaker 1: the BIS says. They pinpoint. The circular financing deals is
Speaker 1: an issue. For example, chip makers and hyperscalers taking stakes
Speaker 1: in AI labs or neo cloud providers who in turn
Speaker 1: commit to multi year purchase of chips or computing power.
Speaker 1: There are a lot of things that they are raising
Speaker 1: that you know, when we talk to people in the market,
Speaker 1: they also are concerned about what for you are the
Speaker 1: big risks ahead. Let's start with George.
Speaker 2: I mean, I think, I mean, you're touched on it. Right.
Speaker 3: It feels like it's a bit circular inside this business now, right,
Speaker 3: the chip making AI business. It feels like, you know,
Speaker 3: guys are buying the chips, right, and then they're putting
Speaker 3: in the data centers, and they're trying to get their
Speaker 3: data centers to learn faster and therefore think for all
Speaker 3: of us. That's kind of a simplistic way I think
Speaker 3: about this whole thing.
Speaker 2: I don't know.
Speaker 3: Maybe I'll get a little bit philosophical here and just
Speaker 3: say I'm not sure that I'm ready to live in
Speaker 3: a world where a computer is smarter than me, or
Speaker 3: maybe that's not that hard. Maybe the combined intelligence of
Speaker 3: the world that we need computers to think for us.
Speaker 2: But there's a lot of investment going.
Speaker 3: Into this, and the you know in the view that
Speaker 3: you know, artificial intelligence is really going to come up
Speaker 3: the curve and really be the best cutting edge, you know,
Speaker 3: kind of kind of way to tackle problems. And I
Speaker 3: still still think the human mind is amazingly intelligent and elegant,
Speaker 3: and I'm not sure I'm ready to live in that world.
Speaker 2: So I don't know. I think that's the big risk
Speaker 2: I do.
Speaker 3: I do wonder if it feels like we're all going
Speaker 3: the same direction, we're all buying from each other, We're
Speaker 3: all on one side of the boat. I kind of
Speaker 3: worry when Eric gets in one side of the boat.
Speaker 3: I think a Gentakai is here to stay and it's
Speaker 3: only going to get bigger, and its use cases are
Speaker 3: going to be extrapolated. Every business is going to be
Speaker 3: using as fast as they can. The only reason why
Speaker 3: we can't do more is because the infrastructure is not
Speaker 3: there yet, the workflows are not there yet. But it's happening. Listen,
Speaker 3: the world is changing. You got to you got to
Speaker 3: think about how we're going to change along with it.
Speaker 3: And people always want to the good old days is
Speaker 3: the best way how things work. And this is not happening,
Speaker 3: and the world is sort of moving forward. There are
Speaker 3: a lot of risks, though. The biggest risk that I
Speaker 3: see is access to capital. It's it's not the demand side.
Speaker 3: I do think that the circular financing is a cool,
Speaker 3: interesting point, and it is happening. But that's just because
Speaker 3: you know, know, it's a little bit of robin hood,
Speaker 3: you know, a little bit taken from those that do
Speaker 3: have cash flow to fund the ones that don't have
Speaker 3: cash flow that eventually will have cashflow and they'll be
Speaker 3: able to pay back. The real risk though, is that
Speaker 3: you know, you know, we sort of pooh pooh, like, oh,
Speaker 3: you can only earn six percent, why do you care? Well,
Speaker 3: that's the beauty is that if you borrow long dated
Speaker 3: money it's six percent, you want to do that all
Speaker 3: day long to fund your negative free cash flow. But
Speaker 3: what happens if that's eight percent or ten percent and
Speaker 3: you need another you know, if we think SpaceX needs
Speaker 3: another seventy five billion, or Alphabet needs another one hundred
Speaker 3: and fifty billion. Quite frankly, if you look at SMP's report,
Speaker 3: they're projecting SpaceX is having as much as two hundred
Speaker 3: and fifty billion dollars a debt.
Speaker 2: So it's like, I.
Speaker 3: Don't think they're going to get there, but let me
Speaker 3: tell you something that they're not going to get there
Speaker 3: in an eight percent or ten percent yield environment. So
Speaker 3: whatever goes wrong with the world that pushes yields higher
Speaker 3: is going to contract capital. And this, this this AI
Speaker 3: boom has been built on access to low cost capital.
Speaker 3: It's required, and it's going to need to be required
Speaker 3: over the next you know, at least three years at least,
Speaker 3: if not longer. So that that's the biggest thing that
Speaker 3: I worry about. The second thing I worry about is
Speaker 3: I'm just wrong and that the demand for AI is
Speaker 3: not anywhere near what we thought. And if that's the case,
Speaker 3: you know, it's the lower down the credit scales names
Speaker 3: that are going to suffer. It's going to be the SpaceX's, Oracles,
Speaker 3: Core weaves, those like the Metas alphabets, Amazon's, Microsoft's. You know,
Speaker 3: what if if they wasted you know, five hundred billion
Speaker 3: dollars on Capex, you know, the equities will take it
Speaker 3: on the chin. They'll lose another thirty percent. The credit's
Speaker 3: going to be fine. You know, does it really make
Speaker 3: a difference if you're a double A plus and you
Speaker 3: get downgraded to double A minus, then it doesn't matter.
Speaker 3: So the same way equity has that most upside, it
Speaker 3: has the most downside. So it's just if to and
Speaker 3: is slower, we've seen. You know, this is such a
Speaker 3: show me environment that you know, somebody misses their their
Speaker 3: cloud or AI revenues. But you know, by one hundred
Speaker 3: basis points or fifty basis points is stock cells off
Speaker 3: ten percent. So if you can't borrow and you can't
Speaker 3: fund yourself, that becomes an issue. The circular financing thing,
Speaker 3: to me is actually a positive because there's pockets of
Speaker 3: capital that you can grab that you don't have to
Speaker 3: rely on the capital markets for. So that's that's a
Speaker 3: good thing versus a bad thing. But if you really
Speaker 3: think it's just a house of cards right now, you're
Speaker 3: in the minority.
Speaker 2: You know, And a.
Speaker 3: Lot of the stories that we get reading. You know,
Speaker 3: I read that article over the weekend, James, that you
Speaker 3: brought up. Yeah, I just think bad news sales. It's
Speaker 3: it's got a lot of publicity when you say the
Speaker 3: sky is falling, but you know, the sky has not fallen.
Speaker 3: We had the same conversation twelve months ago, nine months ago,
Speaker 3: six months ago, three months ago, and valuations have held
Speaker 3: up pretty well, both in credit and equity. The other
Speaker 3: thing I might just add, there's don't know if so
Speaker 3: much as the sky is falling, is there can be
Speaker 3: over investment. There often is, especially in the tech world,
Speaker 3: and so sometimes it takes a little while for things
Speaker 3: to catch up, and so we overinvest things fought, prices
Speaker 3: fall off for the assets.
Speaker 2: They're not as valuable as we thought they were, and
Speaker 2: it takes a.
Speaker 3: Little time to catch up to valuations, and usually we
Speaker 3: pick up that tech and later on it drives forward.
Speaker 3: But there are periods of overinvestment in investing in cycles. Yeah,
Speaker 3: you're right, and listen the couple of the other things
Speaker 3: they'll remember, Like people just think about the worst case scenarios.
Speaker 3: They think about the dot com bubble, where you know,
Speaker 3: companies went from sky high valuations to zeros. Those were
Speaker 3: different businesses. Those were basing valuations on eyeballs or clicks
Speaker 3: and not on revenue or cash flow. So now we
Speaker 3: have the most of the big strong companies that are
Speaker 3: generating lots of revenues, not necessarily free cash flow, but
Speaker 3: lots of Ebitah from other businesses, so they're real businesses.
Speaker 3: And then you look at two thousand and eight, where you know,
Speaker 3: we had to collapse of this financial system because it
Speaker 3: was way over levered, and we don't have that now,
Speaker 3: even a name like SpaceX, we're talking about a target
Speaker 3: of two to three times leverage. So the not the
Speaker 3: absolute numbers are big. You know, if you look at
Speaker 3: the other hyperscalers that are borrowing so much, you know,
Speaker 3: their leverage on a on a net basis is basically
Speaker 3: zero and on a gross basis is still only like
Speaker 3: one times. So we're not in an over levered scenario.
Speaker 3: But George, you are spot on right. Sometimes you too overspend.
Speaker 2: You see, you.
Speaker 3: Know, the the pot at the end of the rainbow,
Speaker 3: and it's you know, not filled with as much gold.
Speaker 3: And again I really think that, you know, it's going
Speaker 3: to take a couple of years for us to figure
Speaker 3: that out. I think the biggest risks though on the
Speaker 3: equity side and less so on the credit side.
Speaker 1: It's agreed to keep us talking and writing all day
Speaker 1: long until it replaces us. Great stuff, Rob Schiffman and
Speaker 1: George Ferguson with Bloomberg Intelligence. Thank you so much for
Speaker 1: joining us on the Credit Edge.
Speaker 2: Thanks James, Thank you.
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