Speaker 1: Welcome to the Bloomberg Penel Podcast. I'm Paul Swinge. You
Speaker 1: along with my co host Lisa Brahma Wicks. Each day
Speaker 1: we bring you the most noteworthy and useful interviews for
Speaker 1: you and your money. Whether at the grocery store or
Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
Speaker 1: Podcast or wherever you listen to podcasts, as well as
Speaker 1: that Bloomberg dot Com. A piece of news that really
Speaker 1: shocked not just the sports world, but I think the
Speaker 1: market in general. Was the n b A coming out
Speaker 1: and suspending their season until further notice, really came out
Speaker 1: of nowhere. To get a sense of what that means
Speaker 1: for everybody involved, we welcome Scott Sashnik, sports business reporter
Speaker 1: for Bloomberg News, joining us here on a Bloomberg Interactive
Speaker 1: broker studio. So, Scott, really kind of shocking piece of
Speaker 1: news by the NBA. What are the ramifications? But shocking
Speaker 1: in that it happened, but in where we were headed
Speaker 1: and the news that we were looking at not really
Speaker 1: shocking at all. Because you had the nuclear scenario of
Speaker 1: a player testing positive for Corona. What are they to do?
Speaker 1: That player and his teammates must be isolated that had
Speaker 1: Phase six teams in that incubation period. They have to
Speaker 1: be isolated. You just cannot play. The referees have to
Speaker 1: be isolated. You don't have enough players to go around
Speaker 1: her teams anymore. You had no choice but to suspend
Speaker 1: this season. Can you give us some color on that
Speaker 1: one player who made fun of this whole thing and
Speaker 1: went around touching all the Michael that's the guy who
Speaker 1: tested positives, Rudy Gilbert, So I'm not sure he was
Speaker 1: making fun as much he was he. I believe from
Speaker 1: the folks I've read and talked to in the city,
Speaker 1: in the Salt Lake City that it was a bit
Speaker 1: of solidarity with the reporters saying this is not a
Speaker 1: solution to the problem, that you guys are six to
Speaker 1: eight feet away from us, and they were worried about
Speaker 1: by the way the reporters giving it to the players,
Speaker 1: and a solidarity, okay. At the same time, with hindsight,
Speaker 1: it seems seriously irresponse, absolutely insane that he went around
Speaker 1: and touched every absolutely And I'm wondering, you know, is
Speaker 1: there going to be some sort of penalty or something.
Speaker 1: I'm just throwing this out there because I read this,
Speaker 1: and I'm just thinking from a social responsibility, my guests
Speaker 1: would be no, there will be no penalty, but the
Speaker 1: ramifications we don't know yet. As you know, Paul, the
Speaker 1: NBA's backbone is the billion dollar TV contracts. That's Turner
Speaker 1: and espn Um. There are fource maasure clauses in the
Speaker 1: in the in the labor contract with the players, by
Speaker 1: the way, inserted after nine eleven, so you've got things
Speaker 1: like earthquakes, terrorism specifically inserted at that time, epidemics, so
Speaker 1: you would think, Uh, the labor contract calls for a
Speaker 1: forfeiture on the players for every game one nineties second
Speaker 1: point six of their salary, accounting for regular season, h
Speaker 1: preseason and the average of postseason games. So we did
Speaker 1: the math Lebron James, for instance, loses four and four
Speaker 1: thousand dollars per game not played. How long is this
Speaker 1: gonna lasts or any speculation from the NBA office or
Speaker 1: owners or anything like that. Mark Cuban is the one
Speaker 1: who speculated the most, saying we could be looking at
Speaker 1: the NBA into August, the most valuable from a TV perspective,
Speaker 1: from a ticket perspective, the most valuable time of year
Speaker 1: for the sports leagues, especially the NBA is the playoffs.
Speaker 1: You don't want to lose your playoffs. If you can
Speaker 1: nix six to eight weeks and come back in stage
Speaker 1: of playoffs, perhaps with the current standings, that would be
Speaker 1: best case scenario. How well do you play basketball? Not
Speaker 1: that well? All right, we can't. We can't count on
Speaker 1: just watching Scotch sashnik is, Bloomberg Sports columnist. Markets continue
Speaker 1: to sell off in a big way, off seven percent
Speaker 1: across the board. We did have that circuit breaker triggered
Speaker 1: earlier this morning. We were now trading again. One area
Speaker 1: I want to spend a few minutes on least night
Speaker 1: were we really like to focus on crude oil and
Speaker 1: it continues a free fall here West West Texas Intermediate
Speaker 1: crew down six percent today, about thirty one dollar a barrel.
Speaker 1: Really on that thirty dollar barrel, kind of a support
Speaker 1: level right there. Obviously a big issues in global supply
Speaker 1: demand concerns. So let's dig into that for a few minutes. Here.
Speaker 1: Wells Fitzpatrick, he's a managing director for E and P
Speaker 1: Research at sun Trust Robinson Hump. He joins us on
Speaker 1: the phone from Houston, Texas. So, Wells, I mean clearly
Speaker 1: there's a demand issue out there. We've seen that brewing
Speaker 1: in the coronavirus really putting a point on it. But
Speaker 1: in the last week we've also gotten a supply shock
Speaker 1: here and we've had a you know, a week or
Speaker 1: so here to kind of digest what's going on between
Speaker 1: Saudi Arabia and Russia. I want to get your informed
Speaker 1: opinion about what do you think Saudi's and the Russians
Speaker 1: are actually thinking here. Yeah, it's clearly a game of brinksmanship,
Speaker 1: and Saudi Is is putting in all the cards on
Speaker 1: the table to make it a credible, uh move for
Speaker 1: them to go up north of twelve million barrels a day. Obviously,
Speaker 1: they've they've contracted a fleet of tankers. Um, you know,
Speaker 1: they've they've they've lowered their selling prices. They you know,
Speaker 1: they are trying to gut check Rush. Um, you know,
Speaker 1: it's it's a game of chicken at this point. I mean,
Speaker 1: the fact is is that Saudi and the golf increasing
Speaker 1: production by you know, well over two million barrels means
Speaker 1: that they're selling out of storage. So is it a
Speaker 1: long term strategy? I don't know. I mean, swapping your
Speaker 1: storage for Chinese storage at less than thirty thirty dollars
Speaker 1: of barrel doesn't seem like it, but but clearly at
Speaker 1: this point it's a game of chicken, and specifically a
Speaker 1: game of chicken between UH two men, MBS and and putin.
Speaker 1: Right now, I'm looking at the shale patch, in particular
Speaker 1: high yield debt of the energy companies in the United States.
Speaker 1: I'm trying to understand how deep the pain is going
Speaker 1: to go. I'm looking right now at the market value
Speaker 1: of high yield junk of energy junk bonds. It's fallen
Speaker 1: by fifty billion dollars since the beginning of this year. Yeah,
Speaker 1: it's been it's been brutal. Um, it's been brutal, and
Speaker 1: and you know the market caps are are something similar.
Speaker 1: You know, all the traditional avenues for UH financing for
Speaker 1: the industry have have essentially been shut off. I mean,
Speaker 1: A and D was down over UH in in four
Speaker 1: Q before we really hit the skids. High yield, as
Speaker 1: you said, yield the worst is more than double. The
Speaker 1: bank revolvers are going to be down in the upcoming
Speaker 1: revolver redetermination season. And you know, no one's talking about
Speaker 1: issuing equities. So if you have uh near term debt maturities. Um,
Speaker 1: it's really something that you have to pay out of
Speaker 1: cash flow or out of some sort of fire sales.
Speaker 1: So the companies that were most cautious on are the
Speaker 1: ones with near term debt maturities and the ones that
Speaker 1: are largely drawn on their bank lines, because obviously those
Speaker 1: bank lines are gonna come down. So if if you
Speaker 1: have seventy out, um, you know, it's reasonable to expect
Speaker 1: that you would be a hundred percent or even overdrawn
Speaker 1: at the end of the spring redeterminations. Just to give
Speaker 1: a sense of the scope of the pain, what proportion
Speaker 1: of the shell producers, whether in the premium basin or
Speaker 1: elsewhere in the United States, what percentage do you think
Speaker 1: we'll run into solvency issues and have to either restructure
Speaker 1: or declare bankruptcy. Yeah, that's that's a great question. Um.
Speaker 1: You know, I think that I think that there's a
Speaker 1: there's a very reasonable case if this continues for a
Speaker 1: couple more quarters that we that we challenge the I
Speaker 1: don't want to even call it a record, but the
Speaker 1: previous record of of thirty four uh e MP bankruptcies
Speaker 1: in a quarter, and that was second quarter. A few
Speaker 1: thousand and sixteen. Um, you know, it couldn't get that
Speaker 1: brutal again. Yeah, if they go through with this, with
Speaker 1: this price war, and and oil stays in in the
Speaker 1: low thirties or even dips into the twenties, it gets
Speaker 1: pretty bad pretty quick for a lot of these folks.
Speaker 1: Um and other perhaps under appreciated aspect of a lot
Speaker 1: of these companies had three way hedges, so you know,
Speaker 1: you sell another put to get a little bit more upside. Uh.
Speaker 1: And it's so far out of the money that two
Speaker 1: months ago we didn't really think about them. But you
Speaker 1: know now you have to build all those into your model,
Speaker 1: and these companies have them. Uh And and it limits
Speaker 1: the downside protection. It essentially it limits your insurance. So
Speaker 1: there's a lot of moving parts, um and frankly, not
Speaker 1: a lot of them are good, except for maybe maybe
Speaker 1: the gas side. So well, when are we going to
Speaker 1: see some of the majors come in here and just
Speaker 1: scoop up and buy some quality assets that really just
Speaker 1: kount of prices. You know, that's a great question. I mean,
Speaker 1: I think that they are in in full uh full
Speaker 1: defense of their uh their distributions. Um. I mean it's
Speaker 1: gonna be hard for the big guys, even Exxon to
Speaker 1: to to defend their dividends, uh with with thirty dollar
Speaker 1: w T. I maybe maybe they can do stock deals
Speaker 1: for some of these companies, come in and rescue them.
Speaker 1: But um, you know, to to it to your earlier point,
Speaker 1: If a company's debt is trading at thirty cents on
Speaker 1: the dollar, do you really want to go in and
Speaker 1: buy them out and and make those bond holders whole?
Speaker 1: Um when when you know that value might not be there.
Speaker 1: So when when bonds get this low, I think it
Speaker 1: actually freezes up to a and D market a little
Speaker 1: bit more than the valuation should in theory. Help Wells.
Speaker 1: Thank you so much for being with us well as Fitzpatrick,
Speaker 1: Managing director of NP Research at SunTrust Robinson Humphrey, there
Speaker 1: is a question just to go back to this, uh,
Speaker 1: this sort of idea that the bear market is signaling
Speaker 1: an over chance of recession. Luckily we have someone who
Speaker 1: can kind of weigh it on what to expect in
Speaker 1: a potential downturn in a recession this time around, given
Speaker 1: the lead up, Robert Lawrence, We're so glad to have
Speaker 1: he has, Professor of International Trade and Investment at Harvard
Speaker 1: Kennedy School, former economic advisor to President Clinton, with decades
Speaker 1: of experience throughout watching the economy. I'm trying to get
Speaker 1: your sense of where we are. People say that we
Speaker 1: had a lot of momentum in the United States heading
Speaker 1: into this coronavirus induced slow down. Do you agree with
Speaker 1: that let's start there. Well, I think we we did
Speaker 1: have momentum, but I think it's come to a halt.
Speaker 1: I think that all of the movement is obviously in
Speaker 1: the opposite direction. I think not only is the stock
Speaker 1: market signaling immense uh trouble lies ahead, um. But in
Speaker 1: a sense, the big issue is is there enough liquidity
Speaker 1: in the system. Currently? The big banks look like they're
Speaker 1: in good shape, but the question is are they going
Speaker 1: to be lending to many other companies who have cash
Speaker 1: flow issues? Um. Ironically, I think because we're fighting the
Speaker 1: last war where there was a lot of credit risk
Speaker 1: the current issues that that may have made them more prudent,
Speaker 1: But in a sense, that's simply shifting some of the
Speaker 1: problems onto those who are much less, much more liquidity constrained. So, Robert,
Speaker 1: what do you think the administration needs to do here?
Speaker 1: The U S Government needs to do here, aside from
Speaker 1: what we're already seeing from the federal Reserve, in order
Speaker 1: to combat this coronavirus and mitigate its economic impacts. Well,
Speaker 1: I think certainly it has to be fiscal policy. Uh. First,
Speaker 1: I think the administration has to give the public a
Speaker 1: sense it knows what it's doing. UM. The idea of
Speaker 1: prematurely going public with programs that weren't fully conceived, I
Speaker 1: think was extremely undermining of confidence. Uh. Secondly, I think
Speaker 1: we need across the board physical stimulus UM. You know,
Speaker 1: with with numerous dimensions helping people. I'm less impressed with
Speaker 1: the idea of dealing with payroll taxes, but I think, um,
Speaker 1: we need a We need a whole host of issues
Speaker 1: focused on problems that people are now going to face
Speaker 1: in those who are out of work, UM, extending unemployment,
Speaker 1: insurance helping. By the way, with medical testing, it's very striking.
Speaker 1: We just heard about Tom Hanks UH in Australia where
Speaker 1: tests are available for free. I think, uh that should
Speaker 1: be true in the United States as well. UM. So,
Speaker 1: I think health related dimensions in all respects should be
Speaker 1: focused on and and and physical stimul list should be
Speaker 1: used in order to UH. To do that, the focus
Speaker 1: increasingly on fiscal stimulus. Meanwhile, central banks are throwing what
Speaker 1: they can at the problem, or they're throwing some things
Speaker 1: they can at the problem. Federals are of cutting rates
Speaker 1: by an emergency fifty basis points. They're expected to cut
Speaker 1: rates by another hunter basis points based on FED funds
Speaker 1: futures next week. Meanwhile, the ECB today we got out uh,
Speaker 1: something that was highly disappointing for markets. With now the
Speaker 1: European stock markets tumbling the most on record, is this
Speaker 1: the year the central bank put died? Maybe? I mean, uh,
Speaker 1: you know, uh quite frankly that they appeared cheap, uh
Speaker 1: not moving down and expected the ten basis points, a
Speaker 1: rather small movement by any measure. Um, really deeply disappointed
Speaker 1: the markets. So what we what we've seen is a
Speaker 1: host of measures by policy makers. The markets have have
Speaker 1: viewed these as an inadequate and and that's a striking
Speaker 1: contrast to uh, you know what Mario Druggi did, where
Speaker 1: he made it very evident that he would do whatever
Speaker 1: it would take in order to change the situation. And
Speaker 1: I think that's what the central banks and and particularly
Speaker 1: as we've indicated the physical authorities need to be doing so, Professor,
Speaker 1: if this coronavirus spread a mirror somewhat like what happened
Speaker 1: in China, what do you think the economic impact will
Speaker 1: be on the US? Is that almost guarantee a recession? Well,
Speaker 1: you know what's very striking is that today that China
Speaker 1: doesn't look in bad shape, um so. And that's because
Speaker 1: I think off to Wuhan, they took very decisive action.
Speaker 1: And it's very interesting you eyeball what's happened to stock
Speaker 1: markets around the world. You see the one that's the
Speaker 1: most stable is actually the Chinese. So um so. I
Speaker 1: think the real problem is we if we don't mirror
Speaker 1: what happened in China, where after the Wuhan debacle they
Speaker 1: took very very decisive action, and I think, um it's
Speaker 1: not too late, but social distancing as a matter of
Speaker 1: overt public policy is essential, and so we actually have
Speaker 1: numerous examples in Asia now where countries have been able
Speaker 1: to stem the acceleration, and I think that's the key.
Speaker 1: If we fail to do that, then I think a
Speaker 1: recession is almost inevitable. So do you think, professor, this
Speaker 1: is actually a really compelling point here that China will
Speaker 1: emerge stronger or actually be the fastest to record our
Speaker 1: economically just in general, despite the fact that they're still
Speaker 1: kind of affected by the slowdown globally of commerce and growth.
Speaker 1: I think I think that is right. I think it's ironic.
Speaker 1: You know, they'll lose a point or two um from
Speaker 1: there from the expected growth rate, you know. So so
Speaker 1: from our standpoint, we'd love to have their growth rate
Speaker 1: of say it will be four percent instead of six.
Speaker 1: But um, the fact is that they have taken very,
Speaker 1: very decisive, coordinated action. And what's very striking is if
Speaker 1: you look at what's happening to infection rates outside of Wuhan, um,
Speaker 1: and they've seemed to have flattened out. So um, So
Speaker 1: I think, um, it could turn out. And and certainly
Speaker 1: this is what the Chinese already saying that the centralized
Speaker 1: system has great advantages. We couldn't have had, you know,
Speaker 1: a stronger demonstration of the failures of our health system.
Speaker 1: We have a we have a we have a we
Speaker 1: have a health system that is basically essentially designed to
Speaker 1: as if all health problems are private. Robert Lawrence, Professor
Speaker 1: of Trade and Investment at the Kennedy School of Government
Speaker 1: at Harvard University. Is also a Senior Fellow at the
Speaker 1: Peterson Institute for International Economics. We appreciate you for coming
Speaker 1: on and sharing your thoughts here on the coronavirus and
Speaker 1: potential economic impact. We keep quoting the stock markets today
Speaker 1: because the swoons are remarkable. That said, the focus of
Speaker 1: what's going on right now very much is in credit,
Speaker 1: is in solvency, It is in cash flow. It is
Speaker 1: do companies have enough money on hand and can they
Speaker 1: get it quickly enough to stay in business even if
Speaker 1: people stop coming at their doors and doing business and
Speaker 1: giving them money because of the social distancing and other
Speaker 1: measures due to the coronavirus. Joining us here is someone
Speaker 1: who's been covering this very closely, broken a lot of
Speaker 1: really important news on this matter, Shradar naturage and finance
Speaker 1: reporter for Bloomberg News. Joining us here in our interactive
Speaker 1: Brokers Studios three. I want to get started with this
Speaker 1: concept of drawing down credit lines. That companies basically have
Speaker 1: these revolving lines of credit credit at banks, and they
Speaker 1: have been prophylactically drawing the entire day down so that
Speaker 1: they can have cash in their balance sheets. What do
Speaker 1: we know so far? Well, so let's let's start with
Speaker 1: what a revolvers essentially a credit cards for companies, right, You,
Speaker 1: You drawn them periodically, you pay them down when things
Speaker 1: are going fine, you needed for some specific reason of
Speaker 1: the other, use it, pay back the banks. Everything's good.
Speaker 1: These are These are essentially relationship loans. Banks don't expect
Speaker 1: companies to be tapping them. It's basically saying, hey, here's
Speaker 1: there any day fun for you. If you need it,
Speaker 1: you can use it when you want. But the expectation
Speaker 1: is never that on mass every one will come for it.
Speaker 1: That seems to have changed in the last few weeks,
Speaker 1: or at least the sentiment about how to treat these
Speaker 1: revolvers has changed in the last few weeks. Yesterday we
Speaker 1: had news leaking at one after the other. You had
Speaker 1: going willing to tap down its entire fourteen billion dollar
Speaker 1: alone win Hilton Blackstone and Carlisle, two big private equity shops,
Speaker 1: urging some of their companies. Blackstones, especially those companies that
Speaker 1: are in the virus hit sectors, urging them to go
Speaker 1: out there and draw down their credit lines. Now, that
Speaker 1: seems like a prudent move, that seems like a smart move,
Speaker 1: but at the same time, you have to wonder if
Speaker 1: that accelerates, if that spreads to other companies and to
Speaker 1: other sectors, how does it affect banks which then suddenly
Speaker 1: have a lot of exposure to companies that seem to
Speaker 1: be in a lot of pain right now. Again, if
Speaker 1: everything were to turn around today and we're magically stopped
Speaker 1: going down, we're okay. If it deteriorates, then you have
Speaker 1: to worry about the second order effects. So are the
Speaker 1: banks here do they? I guess? The question is do
Speaker 1: they have if something comes in and draws down their
Speaker 1: credit line or borrows off of their facility? The banks
Speaker 1: can't say no, can they? I guess the rule of
Speaker 1: law upright? So you have governance and you have you
Speaker 1: you have things on dotted lines that tell you in
Speaker 1: the contract how much you can with draw how much
Speaker 1: you can't. The energy sector, for for example, it's a
Speaker 1: very interesting space right every six months or so, they
Speaker 1: have these borrowing base redeterminations where the amount of credit
Speaker 1: that extended to these oil and natural gas producers, for instance,
Speaker 1: is driven off commodity prices. Commodity prices one month ago
Speaker 1: fifty sixty dollars on the barrel commodity prices now horrible.
Speaker 1: So when prices now horrible, and when you go and
Speaker 1: do the redetermination again, their credit line availability is going
Speaker 1: to shrink remarkably. So they're going out there and tapping
Speaker 1: that as much as they can. And the other interesting
Speaker 1: aspect that we have to think about here is the
Speaker 1: thing that people always tell you about credit lines is
Speaker 1: it's always available until you need it was back in
Speaker 1: no wait, there was the other dynamic. Banks were trying
Speaker 1: to freeze the credit lines, were trying to walk out
Speaker 1: of contracts and uh negotiations that they've had with these companies.
Speaker 1: So it's how much you needed, how much banks are
Speaker 1: willing to lend. When it's sort of attacking you from
Speaker 1: both sides, then we have a problem. You wrote a
Speaker 1: story on the Bloomberg that said that two and a
Speaker 1: half trillion dollars of lines undrawn. That's how much credit
Speaker 1: companies have to withdraw. At least it was at the
Speaker 1: end of last year. Probably a somewhat different now given
Speaker 1: how many are actually started to draw them down. Two
Speaker 1: thirds of that held or extended by the four of
Speaker 1: the biggest banks, JP, Morgan City Group, Bank of America,
Speaker 1: and Wells Fargo. How concerned are people about the ability
Speaker 1: of these banks and others to make good on these
Speaker 1: credit lines, extend these loans to companies that could be
Speaker 1: potentially in perilous positions. So let's let's look at that
Speaker 1: based on the people who would who would presumably have
Speaker 1: the best insight into it, the executives of the banks,
Speaker 1: the analyst covering the banks, the investors sort of invested
Speaker 1: in these stocks, executives at the banks. Yet Brian moynihan,
Speaker 1: Michael Corbett sitting next to Donald J. Trump yesterday in
Speaker 1: the over well in the White House and talking about
Speaker 1: how they could help in this time. But there's a
Speaker 1: lot of the questions were also around how strong our banks,
Speaker 1: and one after the other, all the senior executives said,
Speaker 1: we're in great shape, well capitalized. Perhaps a lot of
Speaker 1: it does go down to the fact as to what
Speaker 1: happened after the previous global financial crisis, where we put
Speaker 1: in place a lot of measures that that ten years
Speaker 1: later have resulted in people being able to comfortably say
Speaker 1: that banks are well capitalized, banks are healthy, and banks
Speaker 1: are in a good position. That's what the banks say,
Speaker 1: That's what a lot of the bank analysts say. We're
Speaker 1: a note from City Group today that said, you know,
Speaker 1: they have been getting a lot of questions on what
Speaker 1: happens if everyone starts drawing these credit lines, and they
Speaker 1: said even a hundred percent of the lines were to
Speaker 1: be drawn, we don't think the impact would be dramatic
Speaker 1: that you would have to worry about it in in
Speaker 1: any sort of systemic sense. But then it goes back
Speaker 1: to the discussion we were having off Fair just before
Speaker 1: we started, right where we spoke to Jim biuncle and
Speaker 1: he said he whipped out the crisis at our joke
Speaker 1: about the window washer falling from the tenth floor. When
Speaker 1: he's going by the third floor, he looks in and says,
Speaker 1: so far, so good. That's the problem. We don't know
Speaker 1: what the bottom is. That's the struggle. We don't know
Speaker 1: how to model it, and that is why you're seeing
Speaker 1: this sort of a bout of panic in the markets
Speaker 1: out there. All right, Well, the good news is for us,
Speaker 1: as we know, you're going to continue to follow this
Speaker 1: story and keep us up to date on kind of
Speaker 1: where what floor we're on at them on the street
Speaker 1: not a rog and Financial reporter Bloomberg News joining us
Speaker 1: here on a Bloomberg in our Active Broker Studio. Thanks
Speaker 1: for listening to the Bloomberg P and L podcast. You
Speaker 1: can subscribe and listen to interviews at Apple Podcasts or
Speaker 1: whatever podcast platform you prefer. Paul Sweeney, I'm on Twitter
Speaker 1: at pt Sweeney. I'm Lisa Abramoy. It's I'm on Twitter
Speaker 1: at Lisa A. Bramo. It's one before the podcast. You
Speaker 1: can always catch us worldwide on'm Bloomberg Radio