WEBVTT - The $64 Billion Hidden Debt Hazard; SoftBank Focus 0:00:10.280 --> 0:00:13.160 Hello, and welcome to The Credit Edge, a weekly markets podcast. 0:00:13.280 --> 0:00:15.680 My name is James Crumbie. I'm a senior editor at Bloomberg. 0:00:16.120 --> 0:00:18.200 We're very pleased to have with us on the show. 0:00:18.520 --> 0:00:21.680 Luk At de Powley, who covers distressed debt for Bloomberg 0:00:21.720 --> 0:00:24.480 News in London, thanks for joining us, Thanks for having me. 0:00:24.640 --> 0:00:27.800 We're also delighted to welcome Sharon Chen from Bloomberg Intelligence 0:00:27.840 --> 0:00:30.040 in Singapore. We'll be coming back to Sharon and a 0:00:30.080 --> 0:00:32.479 little bit to talk about SoftBank, a big name that 0:00:32.520 --> 0:00:36.159 everyone's watching. So do stay with us. But first, Luc 0:00:36.159 --> 0:00:38.560 at the Powley with Bloomberg News, you've been digging deep 0:00:38.600 --> 0:00:41.320 into distress debt. There's a lot of it about. Let's 0:00:41.320 --> 0:00:45.040 talk about your latest scoop. A sixty four billion dollar 0:00:45.200 --> 0:00:47.440 pile of debt from some of the biggest companies has 0:00:47.479 --> 0:00:50.639 suddenly come to light. It was hidden, you found it. 0:00:50.920 --> 0:00:51.720 What's the story there? 0:00:51.760 --> 0:00:57.440 Luca So a colleague and I have been through all 0:00:57.480 --> 0:01:03.720 of the latest file from the US where many companies 0:01:03.720 --> 0:01:08.000 have for the first time disclosed using arrangements called supplier financing. 0:01:08.560 --> 0:01:13.760 Supplier financing is effectively a form of financing where you 0:01:14.880 --> 0:01:18.880 pay your suppliers later, often with the help of a 0:01:18.920 --> 0:01:22.960 financial intermediary or a bank, and by doing so, you 0:01:23.160 --> 0:01:25.360 increase the amount of cash that you have. You basically 0:01:25.360 --> 0:01:28.360 suspend your liabilities for a period of time, and you 0:01:28.520 --> 0:01:34.280 end up being more cash rich as a result. They 0:01:34.319 --> 0:01:38.320 were forced to disclose it by FASBY, which is the 0:01:38.360 --> 0:01:41.399 body that is basically in charge of accounting rules in 0:01:41.400 --> 0:01:44.840 the US, and similar rules will come into effect for 0:01:44.880 --> 0:01:46.840 other companies around the world. But this is the first 0:01:46.880 --> 0:01:49.920 time we've had a really good look at how many 0:01:49.960 --> 0:01:52.720 companies use this and how aggressively they use it, and 0:01:52.760 --> 0:01:55.160 I think we were kind of surprised by how many 0:01:55.160 --> 0:01:56.760 companies were doing it and. 0:01:56.720 --> 0:01:59.440 The amount of supply chain financing that was going on. 0:02:00.000 --> 0:02:02.160 So then just break it down for supply of finance, 0:02:02.840 --> 0:02:04.480 you kind of describe it, But how does it work? 0:02:04.480 --> 0:02:06.520 In really basic terms? Do I do I get someone 0:02:06.520 --> 0:02:08.400 to supply something to me and I'd pay them later, 0:02:08.440 --> 0:02:12.080 and then in the interim, I'm cash rich because I 0:02:12.120 --> 0:02:14.560 actually have the money myself. But what's the story? Yeah, 0:02:14.760 --> 0:02:15.720 I'm not, I understand. 0:02:15.800 --> 0:02:19.280 So the most the most like basic way I like 0:02:19.320 --> 0:02:21.720 to think about it is if you've got a supermarket 0:02:21.919 --> 0:02:25.240 and a supermarket has you know, there's a hypothetical supermarket 0:02:25.600 --> 0:02:26.639 has suppliers. 0:02:26.720 --> 0:02:27.919 Let's say that they're farmers. 0:02:28.440 --> 0:02:31.840 And the original idea of this was that the farmers 0:02:31.919 --> 0:02:35.200 might want to get paid in sort of ten days 0:02:35.280 --> 0:02:39.040 or immediately, but the payment terms from you know, the supermarket, 0:02:39.120 --> 0:02:42.120 so someone like a Tesco in the UK or a 0:02:42.160 --> 0:02:46.480 Walmart in the US, you could reduce the amount of 0:02:46.480 --> 0:02:49.520 time that it took for that payment to be made 0:02:49.800 --> 0:02:53.280 by getting a bank to come in between and pay 0:02:53.320 --> 0:02:56.400 the supplier earlier. So the farmer, rather than waiting ninety 0:02:56.480 --> 0:02:58.560 days for the eggs is given, he can get it 0:02:58.560 --> 0:03:00.960 in ten days and he pays a small discount, he 0:03:01.000 --> 0:03:03.840 gets paid sorry, a small discount by the lender, and 0:03:03.880 --> 0:03:07.640 then a lender gets paid in full when the invoice 0:03:07.880 --> 0:03:11.760 is actually due. That's sort of like the most sort 0:03:11.760 --> 0:03:17.000 of vanilla and basic form of supplier financing and a 0:03:17.040 --> 0:03:20.200 hypothetical example, but it's been taken to sort of new 0:03:20.280 --> 0:03:23.440 and extreme heights based on the stuff that we've seen 0:03:23.880 --> 0:03:26.720 disclosed in the reports, to sort of you know, far 0:03:26.880 --> 0:03:31.560 longer payment terms and you know, an altogether different transaction 0:03:31.600 --> 0:03:32.760 than the one I described there. 0:03:32.960 --> 0:03:36.480 So in basic terms, it's just like a bridge. You 0:03:36.840 --> 0:03:40.320 I need something from somebody, the bank will come in 0:03:40.400 --> 0:03:44.200 and just bridge that transaction, offering money to the supplier. 0:03:44.560 --> 0:03:48.120 Yeah, so the supplier supply gets paid early, they take 0:03:48.120 --> 0:03:52.600 a small hit depending on the discount rate the prevailing 0:03:52.640 --> 0:03:56.840 interest rate, and then they can get their money quicker, 0:03:57.040 --> 0:04:00.120 which is what a lot of them want. Yes, so 0:04:00.160 --> 0:04:04.040 that's the basic idea, but it's been sort of it's 0:04:04.080 --> 0:04:06.720 gone a little bit more extreme than that in the 0:04:06.760 --> 0:04:07.840 past or ten years. 0:04:08.040 --> 0:04:10.240 And what kinds of companies were talking about? You mentioned Tesca, 0:04:10.240 --> 0:04:13.240 but are we talking about big household names in the US. 0:04:13.840 --> 0:04:17.880 So, yeah, I mean we're talking about Philip Morris, We're 0:04:18.600 --> 0:04:22.000 talking about Signa, which is an insurance company, a lot 0:04:22.040 --> 0:04:28.240 of auto parts companies, Doctor Pepper, curic A Cure, Doctor Pepper, 0:04:28.279 --> 0:04:33.520 even a really large sway that different companies Boeing around 0:04:33.800 --> 0:04:36.479 seventy or eighty that we found inside the S and 0:04:36.520 --> 0:04:39.600 P five hundred. I'm sure if we expanded our universe 0:04:39.640 --> 0:04:43.120 and looked through even more ten ques, then we could 0:04:43.160 --> 0:04:46.560 maybe find some more. But my colleague Nicola White and 0:04:46.600 --> 0:04:48.839 I are pretty fed up of looking through them, to 0:04:48.880 --> 0:04:50.560 be honest, so we might just stick with. 0:04:50.520 --> 0:04:54.000 Those but so you talk about it's getting more extreme. 0:04:54.040 --> 0:04:56.800 It's not just let me a million dollars for a 0:04:56.839 --> 0:04:59.080 week or something. It's now gone out much much further. 0:04:59.120 --> 0:05:01.440 So it's real like long term. What's the term we're 0:05:01.440 --> 0:05:02.000 talking about. 0:05:02.200 --> 0:05:06.280 Yeah, So, I mean, it's not really totally clear from 0:05:06.600 --> 0:05:10.159 the filings that we have, so FASBIS compelled companies to 0:05:10.160 --> 0:05:12.560 give a certain amount of information, but not as much 0:05:12.560 --> 0:05:15.560 information as some people would have liked. So we have 0:05:15.880 --> 0:05:19.000 some idea of how long some programs are, but there 0:05:19.000 --> 0:05:20.720 are quite a few that seem to go to three 0:05:20.800 --> 0:05:24.839 hundred and sixty days, which, when you think about it, 0:05:24.279 --> 0:05:27.520 is a crazy payment term to accept. Effectively, supplier is 0:05:27.560 --> 0:05:29.920 saying like, I'm happy to be paid in three hundred 0:05:29.920 --> 0:05:35.880 and sixty days, and then a financing party comes between 0:05:35.880 --> 0:05:39.120 them and could pay them earlier. But you know, you 0:05:39.120 --> 0:05:41.120 think about that as sort of like that's basically what 0:05:41.160 --> 0:05:45.200 they've agreed to. It's kind of a crazy thing for 0:05:45.520 --> 0:05:48.720 the supplier to agree to. And then on the other side, 0:05:49.160 --> 0:05:52.000 what that can do is create this sort of debt 0:05:52.400 --> 0:05:55.000 debt like whatever you want to call it, effect where 0:05:55.000 --> 0:06:00.040 people are you know, suspending their payables for longer and 0:06:00.120 --> 0:06:02.760 then for increasing the amount of cash that's generated the 0:06:02.760 --> 0:06:06.720 company despite not you know, that not being due to 0:06:07.520 --> 0:06:10.039 anything organic sales or something like that. 0:06:10.240 --> 0:06:11.480 Effectively, if you think about it. 0:06:11.360 --> 0:06:15.040 For yourself, you were you know, if you could delay 0:06:15.080 --> 0:06:18.559 all of your liabilities, your mortgage or whatever by a year, 0:06:19.600 --> 0:06:21.960 you'd have more cash, but you wouldn't actually be richer. 0:06:22.440 --> 0:06:25.080 And that's effectively what a lot of companies seem to 0:06:25.600 --> 0:06:30.119 have done here. So yeah, it's more extreme than I 0:06:30.160 --> 0:06:34.400 would have anticipated. And the financing is a lot longer 0:06:34.440 --> 0:06:37.800 than sort of what you'd normally associate with something in 0:06:37.839 --> 0:06:41.000 the accounts payable line in a set of companies accounts. 0:06:41.120 --> 0:06:45.039 It's not sort of invoices waiting to get paid. It's 0:06:45.240 --> 0:06:46.600 three hundred and sixty days long. 0:06:47.320 --> 0:06:50.280 And just so people understand what is FASBE you mentioned 0:06:50.279 --> 0:06:50.720 that earlier. 0:06:51.360 --> 0:06:56.760 FASB is basically the body that looks after accounting regulation 0:06:56.839 --> 0:07:02.800 in the US, so they govern us GAP so that 0:07:02.960 --> 0:07:05.839 they're in charge of instituting new rules, and this is 0:07:05.839 --> 0:07:09.240 one of the new rules the instituted actually interestingly at 0:07:09.279 --> 0:07:14.840 the behest, at least in part of ratings agencies who said, like, look, 0:07:14.920 --> 0:07:20.080 we don't have enough disclosure around this sort of debt, 0:07:20.280 --> 0:07:24.080 like line item. We need more disclosure because if we 0:07:24.080 --> 0:07:26.200 don't have it, then we can't rate these companies properly, 0:07:26.680 --> 0:07:29.000 you know, and a lot of the ratings agencies have. 0:07:28.960 --> 0:07:31.680 Been trying to sort of guess around this for a while. 0:07:32.520 --> 0:07:32.680 You know. 0:07:32.680 --> 0:07:36.720 I have general rules that like anything beyond ninety days 0:07:37.120 --> 0:07:41.080 should be considered sort of debt, and anything less than that, 0:07:41.480 --> 0:07:44.320 you know, it wouldn't be considered debt for the company 0:07:44.320 --> 0:07:48.560 with the supplier of financing program. But yeah, that's sort 0:07:48.600 --> 0:07:52.920 of the why this has come up now. The industry 0:07:52.960 --> 0:07:55.960 itself has been growing for years and years and years. 0:07:56.360 --> 0:07:57.640 But the reason that we wrote the story now is 0:07:57.640 --> 0:08:00.000 because the first time we've got a decent data set, 0:08:00.040 --> 0:08:02.280 and we don't have everyone a lot of companies haven't 0:08:02.320 --> 0:08:03.040 reported yet. 0:08:03.240 --> 0:08:04.920 We've got a decent data set. 0:08:04.960 --> 0:08:08.280 We can see roughly how big this form of financing is, 0:08:08.560 --> 0:08:10.520 and it's pretty big, but. 0:08:10.560 --> 0:08:12.560 It could be more than sixty four billion dollars. 0:08:13.240 --> 0:08:15.960 Yeah, so I mean it's really hard to know. I mean, 0:08:16.240 --> 0:08:20.040 there is there are some trade bodies who try and 0:08:20.120 --> 0:08:23.760 take a stab at how big supply chain finance is. 0:08:24.360 --> 0:08:29.720 One figure from a sort of a trade publishing house 0:08:29.840 --> 0:08:35.880 called BCR. They reckon the two point two trillion dollars 0:08:36.200 --> 0:08:40.320 of supply chain finance was issued globally last year. It's 0:08:40.400 --> 0:08:42.360 just a sort of you know, that's a poll for 0:08:42.520 --> 0:08:45.680 people within the market that they've done, and it's not 0:08:46.080 --> 0:08:48.840 always totally clear. You know, it's not an easy number 0:08:48.880 --> 0:08:53.240 to get a hold of, but that's a huge amount 0:08:53.240 --> 0:08:56.880 of financing, and I don't think it's sort of impossible 0:08:56.960 --> 0:08:59.160 based on what we found and what's still like a 0:08:59.200 --> 0:09:01.760 relatively small subsection of companies. 0:09:02.720 --> 0:09:05.520 But the companies we've talked about Philip Morris, TESCA, I mean, 0:09:05.520 --> 0:09:08.240 they're not companies that are in trouble at all. They've 0:09:08.280 --> 0:09:10.959 got cash, they can you know, this is just like administration. 0:09:11.080 --> 0:09:13.720 Really it doesn't seem like a problem. But when could 0:09:13.760 --> 0:09:14.319 it be a problem? 0:09:14.360 --> 0:09:14.559 Does it? 0:09:14.720 --> 0:09:18.480 Does it become an issue for weaker companies when credit 0:09:18.520 --> 0:09:20.839 gets tied? I mean, how does it all unravel in 0:09:21.720 --> 0:09:22.880 the worst case scenario? 0:09:23.360 --> 0:09:24.079 Yeah? Sure. So. 0:09:24.400 --> 0:09:25.760 One of the problems I have is because I'm a 0:09:25.800 --> 0:09:28.600 distressed debt reporter, everyone sort of panics when I bring 0:09:28.640 --> 0:09:28.920 him up. 0:09:28.960 --> 0:09:31.079 And I don't think that's like necessarily the case here. 0:09:31.080 --> 0:09:34.200 I don't think, you know, people are going to you know, 0:09:34.320 --> 0:09:38.439 fall apart under the weight of the supply chain financing programs. 0:09:39.040 --> 0:09:43.160 But you do have some pretty, you know, sizable examples 0:09:43.679 --> 0:09:46.120 where supply chain financing has played a really important role, 0:09:46.600 --> 0:09:50.640 not so much in the US, but definitely in Europe. 0:09:50.720 --> 0:09:54.040 So I think it's still the UK's biggest bankruptcy ever 0:09:54.160 --> 0:09:59.280 was Karellian and Karellion collapsed almost instantly. 0:10:00.760 --> 0:10:04.600 In twenty eighteen. I think it was, yeah, twenty eighteen. 0:10:05.679 --> 0:10:09.480 When a lot of a lot of the reason that 0:10:09.520 --> 0:10:12.160 it was so leveraged and its leverage was kind of disguised, 0:10:12.480 --> 0:10:15.600 was because it was using supply chain financing really aggressively. 0:10:16.000 --> 0:10:18.199 So rather than coming up in their sort of debtline 0:10:18.200 --> 0:10:20.800 of their accounts, it came up in their accounts payable. 0:10:21.160 --> 0:10:24.000 An analyst kind of knew something was going on, but 0:10:24.000 --> 0:10:26.440 they didn't have a really good idea of, you know, 0:10:26.559 --> 0:10:29.600 quite how leverage this company was. In the UK, generally 0:10:29.600 --> 0:10:33.400 companies go into administration and then you know, restructuring advisors 0:10:33.400 --> 0:10:35.520 come in and try and find a solution for the company. Here, 0:10:35.559 --> 0:10:37.520 the company just went straight into liquidation because there was 0:10:37.679 --> 0:10:39.920 no recovery to be at. It was just, you know, 0:10:40.280 --> 0:10:42.760 they basically one of the best recoveries they've had. We 0:10:42.800 --> 0:10:44.719 still don't know the number is issuing the order to 0:10:44.880 --> 0:10:47.559 signed off on a lot of this stuff. Then there's 0:10:47.600 --> 0:10:50.760 a company called ab and Goer which had several brushes 0:10:50.920 --> 0:10:55.400 with insolvency over the years, like a Spanish company which 0:10:55.440 --> 0:10:59.719 did some creative accounting. There was you know, there was 0:10:59.760 --> 0:11:02.280 some supply chain finance there. And then the example that 0:11:02.280 --> 0:11:05.160 people talk about a lot is green Sill, which although 0:11:05.360 --> 0:11:08.040 really the problem with green Sill was kind of more 0:11:08.080 --> 0:11:10.840 exotic than supply chain financing and more to do with 0:11:11.280 --> 0:11:14.800 you know, future receivables or whatever. That was one of 0:11:14.840 --> 0:11:17.160 the businesses, you know, one of the businesses they operate, 0:11:17.200 --> 0:11:19.560 and certainly the business they were most vocal about was 0:11:19.640 --> 0:11:23.320 you know, doing supply chain financing for big companies like. 0:11:24.240 --> 0:11:28.040 General Mills or Vodaphone. 0:11:29.400 --> 0:11:32.559 So, yeah, like it has been a problem in the past, 0:11:32.720 --> 0:11:35.480 and I guess the real issue is, like if you 0:11:35.840 --> 0:11:40.480 got into a situation where banks were less likely to 0:11:40.720 --> 0:11:43.359 give you credit, this is something they can pull immediately. 0:11:43.800 --> 0:11:46.319 It's not like a facility. It's not like a loan 0:11:46.480 --> 0:11:48.720 or a bond where you have a maturity and you 0:11:48.800 --> 0:11:51.400 know you've got this capital until a certain date and 0:11:51.400 --> 0:11:53.080 then you're got to pay it back. This can just 0:11:53.120 --> 0:11:57.320 be pulled pretty much whenever, depending on you know, the 0:11:57.360 --> 0:11:59.800 specific contracts, which you know, I'm not really privy to. 0:12:00.880 --> 0:12:04.880 This is mostly almost entirely uncommitted as far as I 0:12:04.920 --> 0:12:07.800 can tell. And that's kind of a risky sort of 0:12:07.800 --> 0:12:10.480 thing to happen with have within the capital structure, because 0:12:10.920 --> 0:12:12.600 you know, if all of a sudden you've got to 0:12:12.640 --> 0:12:16.000 accelerate all of those liabilities you've extended for three hundred 0:12:16.000 --> 0:12:18.520 and sixty days, you're going to find yourself incapable of 0:12:18.559 --> 0:12:20.760 doing that. In a lot of cases, you know, do 0:12:20.800 --> 0:12:22.840 you have a revolving credit facility that can cover that? 0:12:23.400 --> 0:12:25.559 Do you have cash in your bank account that can 0:12:25.559 --> 0:12:26.800 cover that? Maybe not? 0:12:28.280 --> 0:12:30.959 And in a ties of credit market, it's you know, 0:12:31.080 --> 0:12:32.840 while it doesn't seem like it's likely to happen to, 0:12:33.200 --> 0:12:35.600 you know, these big companies that we've been talking about, 0:12:36.040 --> 0:12:38.520 it seems likely they could happen to someone as a 0:12:38.559 --> 0:12:41.240 bank step back from lending to corporates. 0:12:41.760 --> 0:12:44.160 And you mentioned rating agencies. Is it a ratings issue 0:12:44.280 --> 0:12:46.720 that some of these bigger companies liable to a downgrade 0:12:46.760 --> 0:12:47.559 because of the stuff you. 0:12:47.520 --> 0:12:56.080 Think potentially, but it's it's a hard one because how 0:12:56.120 --> 0:12:59.520 you characterize this is still pretty hard to do based 0:12:59.559 --> 0:13:02.280 on some of the disclosures. I mean, we've spoken to 0:13:02.320 --> 0:13:04.880 a number of people from from raising's agencies and you know, 0:13:04.960 --> 0:13:09.040 interested investors, and they say like, well, there's just not 0:13:09.080 --> 0:13:12.000 really enough disclosure to make, you know, sort of hard 0:13:12.040 --> 0:13:14.680 and fast, like Okay, we think that there's actually a 0:13:14.679 --> 0:13:17.040 few more turns of leverage on there, so we're going 0:13:17.120 --> 0:13:21.160 to knock you down a notch or whatever. But I 0:13:21.160 --> 0:13:24.040 think I think it, Yeah, it's quite feasible that it 0:13:24.080 --> 0:13:27.400 will happen to someone of the hundreds of companies which 0:13:27.400 --> 0:13:28.760 are going to have to report this over the next 0:13:28.760 --> 0:13:32.120 few years, as you know, the rules outside of the 0:13:32.200 --> 0:13:35.400 US get implemented as well. So yeah, that that is 0:13:35.400 --> 0:13:40.360 a real possibility. And the other thing that is going 0:13:40.400 --> 0:13:42.760 to happen is credit is not only becoming more scarce, 0:13:42.840 --> 0:13:45.360 but as a result being more scarce is getting more expensive. 0:13:46.760 --> 0:13:49.600 And one of the things that we're starting to see 0:13:49.679 --> 0:13:53.200 happen is like suppliers who remember in this transaction, actually 0:13:53.280 --> 0:13:56.040 bear the cost of the financing. They're the ones who 0:13:56.040 --> 0:13:59.840 get paid earlier for you know, a smaller amount than 0:13:59.880 --> 0:14:02.880 what they're owed are looking at instead of like, you know, 0:14:03.240 --> 0:14:05.600 oh it's only a couple of percent or whatever. With 0:14:05.720 --> 0:14:07.840 the way rates have gone up recently, are now looking 0:14:07.880 --> 0:14:12.199 at a far larger chunk of their invoices being spent 0:14:12.280 --> 0:14:13.480 on financing for. 0:14:14.000 --> 0:14:14.920 You know what. 0:14:15.120 --> 0:14:19.280 Although may be sort of like helping the supplier, is 0:14:19.360 --> 0:14:22.680 also in a lot of cases definitely helping the larger company, 0:14:23.480 --> 0:14:28.080 which is sort of an interesting roundabout way of financing yourself, right. 0:14:28.800 --> 0:14:30.120 And the bank's going to be making a lot of 0:14:30.120 --> 0:14:30.480 money on this. 0:14:31.440 --> 0:14:34.640 Yeah, I mean it was. It's not a very risky 0:14:34.680 --> 0:14:38.320 form of lending. It's as I say, we don't have 0:14:38.520 --> 0:14:42.000 all the contracts for all the different for all the 0:14:42.040 --> 0:14:45.600 different agreements that are with the parties. 0:14:45.640 --> 0:14:47.760 But I would wager. 0:14:49.080 --> 0:14:51.560 That you know, they're in a pretty good position. Nobody 0:14:51.600 --> 0:14:53.920 really wants to sort of renege on their debts. It's 0:14:54.040 --> 0:14:57.200 very short term, so it's sort of you know, you've 0:14:57.360 --> 0:15:00.000 got that sort of you're temporally senior at some people 0:15:00.240 --> 0:15:01.840 like to say you're at the front of the queue 0:15:01.840 --> 0:15:04.160 because you're the first people who are going to you know, 0:15:04.240 --> 0:15:08.800 get paid out of a company. So so yeah, it's 0:15:08.880 --> 0:15:13.440 considered like quite unrisky in a lot of cases. There 0:15:13.480 --> 0:15:17.119 are also examples of people who buy this as investors, 0:15:17.160 --> 0:15:19.920 not just the banks that are doing it, but from 0:15:20.000 --> 0:15:22.240 people I've spoken to in the market. A lot of 0:15:22.280 --> 0:15:24.800 this is done by sort of the corporate banks of 0:15:24.840 --> 0:15:27.720 a particular company, you know, the sort of relationship banks. 0:15:27.840 --> 0:15:30.240 They're the ones who are providing the financing. And yeah, 0:15:30.280 --> 0:15:33.000 it's probably sort of a fairly unrisky way to provide 0:15:33.000 --> 0:15:37.920 credit to the suppliers. But you know, also to an extent, 0:15:37.920 --> 0:15:41.080 the larger company with the with the program. 0:15:41.360 --> 0:15:43.640 Great stuff. Luk at Appali from Bloomberg News, thank you 0:15:43.720 --> 0:15:47.040 so much for joining us. Thank you read all of 0:15:47.160 --> 0:15:49.760 lucas scoops on the Bloomberg terminal and of course at 0:15:49.760 --> 0:15:52.520 Bloomberg dot com. Moving on to another big topic. As 0:15:52.520 --> 0:15:54.600 I mentioned earlier, we're very fortunate to have with us 0:15:54.680 --> 0:15:58.080 Sharon Chen, who covers a whole load of things infrastructure, telecoms, 0:15:58.320 --> 0:16:02.600 utilities across Asia for Bloomberg Intelligence based in Singapore. How's 0:16:02.600 --> 0:16:03.520 it going over there, Sharon? 0:16:05.000 --> 0:16:06.680 Great? James, how are you very well? 0:16:06.720 --> 0:16:09.080 Thank you thanks for joining us. So there are a 0:16:09.160 --> 0:16:11.840 number of names that we're going to focus on in particular, 0:16:11.920 --> 0:16:13.920 but before we do. What's the mood on the ground 0:16:13.920 --> 0:16:16.360 over there are people upbeat about the economy where you are. 0:16:18.800 --> 0:16:21.640 I think Singapore is obviously a bit more exposed, but 0:16:22.400 --> 0:16:24.840 I think Southeast Asia there's a lot of talk about 0:16:24.880 --> 0:16:26.960 southeas Asia in general being a safe haven, you know, 0:16:27.040 --> 0:16:29.040 if you know the global economy slows down. 0:16:29.280 --> 0:16:31.960 Okay, interesting, So let's start with a big one that 0:16:32.000 --> 0:16:35.280 you cover. Soft Bank. We hear about them all the time. 0:16:35.560 --> 0:16:38.680 The news isn't always good. First of all, let me 0:16:38.720 --> 0:16:41.280 ask what is soft Bank? Why are they so important? 0:16:42.880 --> 0:16:43.120 So? 0:16:43.120 --> 0:16:47.400 SoftBank is a very high profile investment holding company that's 0:16:47.400 --> 0:16:51.200 focused on investing in startups in the technology sector. So 0:16:51.440 --> 0:16:53.600 it's always making headlines right in terms of what they're 0:16:53.600 --> 0:16:56.440 investing in, whether it's we work, whether they're trying to 0:16:56.480 --> 0:16:59.520 IPO arm and in the credit space in particular. It's 0:16:59.560 --> 0:17:02.560 a very bond issuers. So they've got about forty billion 0:17:02.640 --> 0:17:07.240 dollars of bonds outstanding, and that's why I'm very, very 0:17:07.240 --> 0:17:08.240 focused on this company. 0:17:08.359 --> 0:17:10.200 So that's one of the biggest issues. They're based where 0:17:10.200 --> 0:17:10.639 in Japan? 0:17:11.880 --> 0:17:13.119 Yes, it's based out of Japan. 0:17:13.400 --> 0:17:17.320 Okay. They were recently downgraded. There was lots of news 0:17:17.320 --> 0:17:21.440 about that what led to a weakening credit credit profile 0:17:21.480 --> 0:17:22.080 at the bank. 0:17:24.359 --> 0:17:27.280 So S and P downgraded to double B. Moodies has 0:17:27.320 --> 0:17:31.720 it at BA three with negative outlook. I guess this 0:17:31.800 --> 0:17:34.040 is going back a bit. But back in twenty twenty 0:17:34.040 --> 0:17:37.120 one we saw soft Bank really ramp up investments through 0:17:37.240 --> 0:17:41.520 SoftBank Vision Fund too. And obviously, starting from last year 0:17:41.560 --> 0:17:44.840 we've seen rising interest rates and all the technology stops 0:17:44.920 --> 0:17:48.440 come under pressure. More recently, we've got Silicon Valley Bank 0:17:49.080 --> 0:17:53.600 collapsing and that has reduced liquidity for all these startups. 0:17:54.080 --> 0:17:57.239 So the soft Bank Vision Fund has really wracked up 0:17:57.240 --> 0:18:00.960 some investment losses in the past year. It was about 0:18:00.960 --> 0:18:05.600 thirty eight billion dollars worth of investment losses, and so 0:18:05.600 --> 0:18:09.440 SoftBank has had to sell some of its other better 0:18:09.680 --> 0:18:12.560 quality assets to shore up its balance sheet. Is liquidity, 0:18:13.000 --> 0:18:15.080 and you know, it used to own close to I 0:18:15.080 --> 0:18:18.879 think twenty percent of Ali Baba and now they've monetized 0:18:18.920 --> 0:18:21.280 almost everything and that's by far the strongest. So the 0:18:21.560 --> 0:18:24.399 portfolio quality for SoftBank has has really suffered in the 0:18:24.400 --> 0:18:25.720 past couple of years. 0:18:25.760 --> 0:18:28.520 Interesting, So what's the near term risk shown? Is it manageable? 0:18:29.280 --> 0:18:29.560 Yes? 0:18:29.600 --> 0:18:32.719 Actually so, even though it's just been downgraded. The company 0:18:32.760 --> 0:18:34.639 is actually in a fairly good position at least in 0:18:34.640 --> 0:18:37.320 the next couple of years. It's got about thirty billion 0:18:37.400 --> 0:18:40.439 dollars worth of cash, it has proven that it has 0:18:40.520 --> 0:18:45.359 good funding access, especially to the Japanese yend market, and 0:18:45.440 --> 0:18:48.280 it's also lowered it's adjusted loan to value to twenty 0:18:48.320 --> 0:18:50.880 four percent, so that's a fairly healthy level. 0:18:51.720 --> 0:18:53.439 And what are we looking for next? There's an IPO 0:18:53.480 --> 0:18:54.879 in the works. Can you talk a bit about that 0:18:54.920 --> 0:18:56.040 and how it will affect them? 0:18:56.640 --> 0:18:58.960 Yes, so I mentioned earlier an IPO of ARM. So 0:18:59.160 --> 0:19:02.840 ARM is chip designer, and you know, if you've been 0:19:02.880 --> 0:19:05.200 following the news and VideA and some of the other 0:19:05.280 --> 0:19:08.520 chip companies out there have really rallied very strongly because 0:19:08.520 --> 0:19:11.600 there's so much excitement about AI in general, and so 0:19:11.840 --> 0:19:14.280 there was some consens about execution risks just given the 0:19:14.280 --> 0:19:17.119 IPO market hasn't been the strongest this year. But you know, 0:19:17.280 --> 0:19:21.080 looking at how some of their peers are doing, I 0:19:21.080 --> 0:19:23.399 would I believe the company could be in a position 0:19:23.480 --> 0:19:25.840 to IPO And it's target is by the end of this. 0:19:25.880 --> 0:19:28.840 Year, So what happens after that? Are they going to 0:19:28.880 --> 0:19:32.840 increase investments? They can do share buybacks, so you know. 0:19:33.119 --> 0:19:34.119 All thatse being equal. 0:19:34.119 --> 0:19:36.600 Obviously the rm IPO would be positive, right, it would 0:19:36.680 --> 0:19:40.280 lower LTV, it would improve liquidity and also the portfolio quality. 0:19:40.880 --> 0:19:44.439 But then I don't expect software to really sit on 0:19:44.480 --> 0:19:46.840 a mountain of cash and not do anything right. So 0:19:46.920 --> 0:19:49.920 the company has been that if you follow their earnings 0:19:49.960 --> 0:19:53.520 called previously they keep talking about being in a defensive mode, 0:19:54.520 --> 0:19:57.680 but now in the latest one they do talk about, 0:19:57.720 --> 0:20:00.720 you know, there could be potential opportunity out there, and 0:20:00.760 --> 0:20:02.960 they are in a good position to you know, pivot 0:20:03.000 --> 0:20:05.680 away from the defense mode when they see the right opportunity. 0:20:06.080 --> 0:20:08.439 So the question I think from a credit perspective is 0:20:08.880 --> 0:20:11.479 how fast will soft Bank ramp up their investments, you know, 0:20:11.560 --> 0:20:15.440 because you know the macro backdrop isn't isn't the strongest yet, 0:20:15.720 --> 0:20:19.840 so that's one thing to watch. SoftBank is also prone 0:20:19.880 --> 0:20:22.960 to doing a lot of large share buy bags, so 0:20:23.119 --> 0:20:25.119 that could be another use of proceeds, and obviously if 0:20:25.160 --> 0:20:27.040 they use some of the process to repay that, that'll 0:20:27.080 --> 0:20:27.800 be great. 0:20:28.160 --> 0:20:31.240 And the medium to long term and they've got a 0:20:31.320 --> 0:20:34.000 large portion of the portfolio and startups within the soft 0:20:34.320 --> 0:20:36.920 Bank Vision Fund. What's going on. 0:20:36.880 --> 0:20:40.439 There so I mentioned earlier they've sold off Ali Baba 0:20:40.520 --> 0:20:42.840 if they did ramp up investment and division funds. So 0:20:43.160 --> 0:20:46.159 if you look at the portfolio now compared to pre COVID, 0:20:46.359 --> 0:20:49.000 pre COVID, I think Ali Baba, which is rated single 0:20:49.040 --> 0:20:52.760 A is made up about half of soft Bank's portfolio, 0:20:52.960 --> 0:20:56.359 and now that's close to almost zero, and you've got 0:20:56.400 --> 0:20:59.439 soft Bank Vision Fund at about forty percent of the portfolio. 0:21:00.000 --> 0:21:04.320