Speaker 1: Hello, and welcome to The Credit Edge, a weekly markets podcast.
Speaker 1: My name is James Crumbie. I'm a senior editor at Bloomberg.
Speaker 1: This week, we're very pleased to welcome Tristram Leech, co
Speaker 1: head of European Credit at Apollo.
Speaker 2: How are you, Tristram, I'm great, Thank you, Thanks very
Speaker 2: much for having me.
Speaker 1: Thank you very much for joining us today. We're also
Speaker 1: delighted to welcome back Lisa Lee, who covers credit markets
Speaker 1: from London. Great to see Lisa.
Speaker 3: Great to talk to you too, James.
Speaker 1: Also on the show, we're going to be talking to
Speaker 1: Matt Goyner at Bloomberg Intelligence about high rates are actually
Speaker 1: good for some companies, so do stay with us. But first,
Speaker 1: Christram Leach with Apollo, it's great to have you on
Speaker 1: the Credit Edge. You're based in London, you cover global credit,
Speaker 1: and then since you're there in Europe, I just thought
Speaker 1: we'd start there. So I'm going to start with a
Speaker 1: question about European credit. When we look at the years
Speaker 1: so far, it has been pretty dire for the most
Speaker 1: of the world's investment grade bonds. The US is headed
Speaker 1: for its third straight year of losses, which has never
Speaker 1: happened before. When we look at our fifty year history
Speaker 1: on our index, and that's mostly your rates issue. Obviously,
Speaker 1: you know, we don't expect Amazon to default on their debt,
Speaker 1: although some of their bonds are trading in the fifties
Speaker 1: so they look pretty stressed. Junk bonds have done better,
Speaker 1: especially the riskiest ones, unless you're in China, when you
Speaker 1: would have lost a lot of money this year. But
Speaker 1: when we look at Europe, it's really surprising to me
Speaker 1: that it's done so well across the board. If you'd
Speaker 1: invested in corporate bonds there and not in the US,
Speaker 1: you would have made much more money this year than
Speaker 1: anywhere else, even though the economies over there seem to
Speaker 1: be in poor shape generally speaking, and although you do
Speaker 1: seem to be doing a bit better on inflation. And
Speaker 1: I know that index is higher quality, but how has
Speaker 1: it done so much better Tristram than other parts of
Speaker 1: the world.
Speaker 2: Yeah, I guess there's a couple of things going on here.
Speaker 3: Look.
Speaker 2: Firstly, risk assets had that big rally in the early
Speaker 2: part of the year. Some of it's been given back,
Speaker 2: but spreads have been pretty contained in their moves all year,
Speaker 2: and rates have outperformed their US counterparts. Even though we've
Speaker 2: seen obviously weakening in rates globally, you know, the European
Speaker 2: picture is one that's been better, partly because we have
Speaker 2: seen some more softening and inflation data here in Europe.
Speaker 1: So when you look at europe credit generally, does this
Speaker 1: kind of out performance continue.
Speaker 2: Look, I think we think all in returns to credit
Speaker 2: are pretty great. Break evens are very very high, so
Speaker 2: it's relatively hard to visit yourself losing money in the
Speaker 2: medium term in credit. We like many other market participants,
Speaker 2: have been really forthcoming. I think that we think this
Speaker 2: is a great time to be engaged in the credit market,
Speaker 2: and we're hearing that from a lot of our ourps,
Speaker 2: our customers, you know, who are seeking to allocate money
Speaker 2: into credit. That being said, I don't think we think
Speaker 2: spreads are screaming by here. You've seen a little bit
Speaker 2: more weakness in kind of single bees, etc. In Europe
Speaker 2: versus the US, but economic data is slowing pretty fast,
Speaker 2: especially in Europe, so I think there's the scope for
Speaker 2: a little bit of spread weakness, possibly counterbalanced by more
Speaker 2: performance and rates.
Speaker 3: So you overseee a whole swath of different kinds of
Speaker 3: credit when you look at the relative value, where do
Speaker 3: you see the best buy in Europe versus US IG
Speaker 3: junk private clos One of the.
Speaker 2: Things we've been I think pretty forthcoming about is that
Speaker 2: private credit is generally offering a really attractive pickup to
Speaker 2: syndicate it in public markets at the moment. If you
Speaker 2: look at where the European syndicated loan market is currently trading,
Speaker 2: and you look at where similar quality credit is pricing
Speaker 2: in the unitranch, you know, private debt market, that pickup
Speaker 2: is really striking. For very similar quality companies. You're getting
Speaker 2: a material spread pickup, and obviously the all in returns
Speaker 2: is very very attractive. So that's certainly something we'd call
Speaker 2: out as a very attractive relative value. I think the
Speaker 2: relative value piece of cross geographies is a little bit
Speaker 2: more nuanced. You know, there's a little bit more spread
Speaker 2: at a given level of credit quality in Europe versus
Speaker 2: the US. However, the European growth data has been you know,
Speaker 2: really slowing very fast. It's pretty eye catching how rapidly
Speaker 2: we're seeing Europe slow down, and so I think that
Speaker 2: probably does argue that you need a little bit more
Speaker 2: spread to compensate you for a more challenged economy.
Speaker 3: Do you think there kindly does to be slowing down,
Speaker 3: which suggests to me that there might be more defaults
Speaker 3: coming up. Do you feel like that's correctly priced in
Speaker 3: in especially in the high yield and leavised loan markets.
Speaker 3: And also what do you think about recoveries, because they've
Speaker 3: been pretty drastically low in the US but a bit
Speaker 3: higher in Europe.
Speaker 2: So as to whether the future default environment is appropriately priced,
Speaker 2: I think, you know, it's implied by the fact that
Speaker 2: you know, we think there's probably room for spreads to
Speaker 2: widen a little bit here, that it's it's possibly not
Speaker 2: as fully priced as it might be. You know, you
Speaker 2: look around the cell side and strategists, I think most
Speaker 2: people are calling for a pickup in in defaults given
Speaker 2: the higher rate environment, and given the slowing we're seeing
Speaker 2: in macro, it would be somewhat surprising with that not
Speaker 2: to eventuate. I think we've certainly been calling for and
Speaker 2: seeing more dispersion in credit outcomes. You know, you've now
Speaker 2: got a market where you know, there's really a real
Speaker 2: sense of winners and losers, and obviously some of those
Speaker 2: losers are gonna gonna tip over the edge into defaults,
Speaker 2: So it makes sense to me that directionally you're probably
Speaker 2: going to see a little bit more in terms of
Speaker 2: in terms of recoveries. Yes, we've seen lower recoveries at
Speaker 2: the moment, the sample size we're dealing with is still
Speaker 2: pretty small, right, We're still in the early stages, so
Speaker 2: it's relatively hard to draw super firm conclusions about why
Speaker 2: those recoveries are lower and how durable that's likely to be.
Speaker 2: Look across the Atlantic, we've definitely seen more of these
Speaker 2: aggressive liability management exercises going on, which are going to
Speaker 2: tend to depress recoveries. In Europe that hasn't as yet
Speaker 2: been a material feature of the market, and all things equal,
Speaker 2: can can militate for recoveries being a little bit better
Speaker 2: on the side of the Atlantic.
Speaker 1: On the private credit side, though, Tristan, you mentioned the
Speaker 1: big yield pick up there, We've had people tell us
Speaker 1: that it's not enough to compensate for the lack of
Speaker 1: transparency and the potential increase to fault risk, and you know,
Speaker 1: you just don't know what's going on there. Can you
Speaker 1: kind of put some numbers on it? Can you quantify
Speaker 1: like how much more of a pickup, how much more
Speaker 1: compensation are you getting for that extra risk.
Speaker 2: Yeah, Look, i'd say the way i'd i'd look at
Speaker 2: at the moment as follows. I think your proper looking
Speaker 2: at a four fifty market for a for a standard
Speaker 2: syndicated single B so four to fifty in spread, and
Speaker 2: you're looking at six twenty five six fifty maybe for
Speaker 2: similar quality corporates in the in the private debt market.
Speaker 2: So to the extent you can perform like for like,
Speaker 2: and it's challenging because there are reasons companies are going
Speaker 2: one route or the other. But to the extent you
Speaker 2: can do like for like, I think you're probably getting
Speaker 2: almost two hundred basis points of pickup for being on
Speaker 2: the on the private side of things, which for us
Speaker 2: feels ample compensation when additionally you're generally getting slightly better documentation,
Speaker 2: you're close to it, you have a real bilateral dialogue
Speaker 2: with the issuer and the sponsor. You know, that's a
Speaker 2: pretty compelling setup for US versus being in a super
Speaker 2: loosely documented syndicated loan, and.
Speaker 1: The relative liquidity doesn't bother you.
Speaker 2: Look, obviously, that's part of what you're getting paid for.
Speaker 2: It's a much less liquid product or even a wholey
Speaker 2: liquid product. But when you put your credit underwriting at
Speaker 2: the center of your process in the way we do,
Speaker 2: you know we have the confidence in our credit views
Speaker 2: and to lean into them. And when we're getting two
Speaker 2: hundred basis points that a pick up to give up
Speaker 2: liquidity in something which we've underwritten and we're super confident in,
Speaker 2: then you know that's something that is a trade that
Speaker 2: I think you're meant to do.
Speaker 3: These private credit deals are getting larger and larger in Europe.
Speaker 3: We have one that could possibly be the biggest ever
Speaker 3: in this market. As these loans get bigger, do you
Speaker 3: worry that there'll be a confluence between leverage loans and
Speaker 3: some of the documentations will weaken, some of the terms
Speaker 3: will weaken, or do you think there's still a differentiation.
Speaker 2: There's still a delta for sure at the moment between
Speaker 2: the terms you're getting in even the large UNITRNE and
Speaker 2: direct lending deals versus where the syndicated market is. So
Speaker 2: that convergence hasn't happened yet. I think it's true that
Speaker 2: the two markets are coming closer together. You know, you're
Speaker 2: seeing a direct lending market that's able to speak for
Speaker 2: bigger and bigger deals is able to you know, price
Speaker 2: really material slugs of debt, and you know, is another
Speaker 2: option for all but the very very largest companies. So
Speaker 2: I think we're seeing the syndicated and direct lending markets
Speaker 2: coming closer together. The way we've set up our credit
Speaker 2: business in Europe is really allowing us to pivot with
Speaker 2: issuers between the two. So if you look at some
Speaker 2: of the biggest financings we've done on both sides of
Speaker 2: the Atlantic this year, they've been in kind of public
Speaker 2: private structures, So deals like the as the deal that
Speaker 2: we did here in Europe that was a direct piece
Speaker 2: of financing. But for a company with a high your
Speaker 2: bond curve, I think you're going to see more and
Speaker 2: more of that, and I think setting up your business
Speaker 2: to be able to pivot with issuers between the multiple
Speaker 2: sources of funding is a really compelling offering to partner
Speaker 2: with them.
Speaker 1: Private credit really is the hot thing this year. People
Speaker 1: are talking about the Golden Age and we just tell
Speaker 1: a story. We're showing showing that, you know, there's five
Speaker 1: hundred billion dollars of new money raised for it and
Speaker 1: not a lot to buy. How do you kind of
Speaker 1: find opportunities and do you have a kind of sector focus.
Speaker 1: I mean, do you have anything you particularly like at
Speaker 1: the moment in terms of sector.
Speaker 2: So, look, we definitely agree it's a golden age. I
Speaker 2: think there's a few nuances in terms of the way
Speaker 2: we look at private credit versus a lot.
Speaker 3: Of our peers.
Speaker 2: You know, you'll have heard our CEO, Mark Rowan talking
Speaker 2: about the way we think of private credit not just
Speaker 2: in terms of financing LBOs, but but really a much
Speaker 2: broader opportunity set, so including lots and lots of investment
Speaker 2: grade opportunities. If you look at investment grade issuers in Europe,
Speaker 2: a lot of them are looking to diversify their funding
Speaker 2: sources away from the bond market. You look at it
Speaker 2: deals like the deal we did with Venovia in the
Speaker 2: in the spring of this year, where you know, the
Speaker 2: company had really good assets but was seeking to protect
Speaker 2: its rate and by speaking you know, in scale and
Speaker 2: being thoughtful around structure, we were able to do something
Speaker 2: which was protective to their rating and you know, very
Speaker 2: very attractive for us. So I think that's really an
Speaker 2: important angle for us in terms of what we look
Speaker 2: to do in private credit rather than exclusively in the
Speaker 2: in the kind of traditional unit change space in terms
Speaker 2: of sectors. Look, it's it's probably a bit a bit
Speaker 2: glib and interesting to say that with macro data slowing
Speaker 2: the way it is, we're steering clear of anything that's
Speaker 2: going to cycle super hard. For example, a lot of
Speaker 2: the post COVID winners, you know, the travel, the revenge
Speaker 2: travel dynamic, you saw, a lot of that stuff has
Speaker 2: done super well. Pricing has been pushed enormously in a
Speaker 2: lot of those issuers, and I think it's something we'd
Speaker 2: probably seek to to steer clear of. You know, there's
Speaker 2: there's plenty of returns to be made top of capital
Speaker 2: structure in non sectical businesses where your ability to be
Speaker 2: speaking in size, quick to execute, and sophisticated in your
Speaker 2: underwright really is enough of an edge.
Speaker 1: And when you look across the board at everything, I
Speaker 1: mean you cover quite a broad sworth of credit globally.
Speaker 1: Is private credit the best opportunity let's take it on
Speaker 1: a twelve month horizon. Is that the best thing to
Speaker 1: look at right now?
Speaker 2: Yes, Look, there's a ton of opportunity across the credit market.
Speaker 2: You know, there's some very interesting features to the high
Speaker 2: your bond market in Europe, given how short dated that
Speaker 2: market's got, So we're super engaged in looking at you know,
Speaker 2: the names that need to refine will and won't be
Speaker 2: able to et cetera. But if I had to pick
Speaker 2: a single area that I think you're mental lean into
Speaker 2: and frankly where we're seeing, where we're seeing clients lean
Speaker 2: into as well, it is private credit.
Speaker 1: And is it mostly in the Europe or mostly in
Speaker 1: the US or any particular geographic focus.
Speaker 2: No, Look, I think I think you're seeing attractive opportunities
Speaker 2: on both sides of the Atlantic. You know, I struggle
Speaker 2: really to differentiate in terms of there being one market
Speaker 2: that's outright compelling versus the others. There's probably a little
Speaker 2: bit more spread still in Europe in a lot of
Speaker 2: private credit, but as we touched it at the beginning, that's,
Speaker 2: you know, possibly for good reason, given slightly softer macro here.
Speaker 2: So I don't think there's like a standout relative value
Speaker 2: in terms of private credit product on either side of
Speaker 2: the Atlantic.
Speaker 3: You mentioned refinancings. So far, within this higher rate environment,
Speaker 3: there hasn't been that much of a need because a
Speaker 3: lot of companies pushed out maturities doing COVID and right afterwards.
Speaker 3: But now the matuary wall is starting to build and
Speaker 3: people are companies that are going to have to deal
Speaker 3: with it next year and the year after. Do you
Speaker 3: think there's enough capital and appetite to refinance all these firms?
Speaker 3: Given the higher interest rate which seems to be staying
Speaker 3: higher for longer, they might not be able. Many companies
Speaker 3: might not be able to hold the debt burdens that
Speaker 3: they have now. So can you address that a bit?
Speaker 2: Yeah, that's what's so interesting. So if you look at
Speaker 2: the European high yield market at the moment, it's the
Speaker 2: short to status that's ever been. The waighted average life
Speaker 2: of the European h how your market is about three and
Speaker 2: a half years, So for these companies, the time really
Speaker 2: is now. It made sense that they weren't refinancing all
Speaker 2: that proactively, given both credit spreads and rates were higher.
Speaker 2: But over the next couple of years, in the next
Speaker 2: three years, fifty percent of the European high your market
Speaker 2: has got to refinance, and they're going to refinance that
Speaker 2: higher all in cost of funding. That's a super interesting
Speaker 2: dynamic for us because if you're buying bonds materially below
Speaker 2: par on average, they're taking out sixteen months ahead of maturity,
Speaker 2: So you've got a real pull to part story there.
Speaker 2: But you've got to get it right because some of
Speaker 2: these companies aren't going to be able to and you
Speaker 2: haven't got very much time, you know, if something goes wrong,
Speaker 2: you haven't got very much time to correct your mistake
Speaker 2: to get yourself into a refinance of our shape. So
Speaker 2: we think there's this is why you're going to start
Speaker 2: to see even more dispersion because the maturity is the
Speaker 2: best catalyst for establishing whether you know credit is viable
Speaker 2: or not. In terms of whether there's enough capital out there. Yeah,
Speaker 2: I think there is across across private, private debt and
Speaker 2: public markets that there's still a lot of capital. There's
Speaker 2: an enormous amount of appetite for credit generally because of
Speaker 2: the way risk reward has improved at the top of
Speaker 2: the capital structure. But that's going to be pointed at
Speaker 2: the viable businesses, the capital structures that work, and for
Speaker 2: those who are just two levered running into refinancing, you know,
Speaker 2: they're not all going to make it, and that kind
Speaker 2: of catalyst the environment is something that's very invigorating for
Speaker 2: us as a fundamental driven credit house.
Speaker 1: So Christian. Before we talk to Matt Gooynder over at
Speaker 1: Bloomberg Intelligence, I just kind of wanted to push a
Speaker 1: bit on the risks. Obviously, this is a credit show.
Speaker 1: We credit guys. We worry about stuff all the time,
Speaker 1: and there's so much macro stress, there's so much political stress,
Speaker 1: there's so much you know, fundamental stress. Frankly, what really
Speaker 1: keeps you up at night worrying about credit at the moment,
Speaker 1: what are you most concerned about?
Speaker 2: Well, look, the the higher rates environment is part of
Speaker 2: the opportunity here, but as Lisa just touched on it,
Speaker 2: it's also part of the threat. You know, all these
Speaker 2: capital structures that were put in place in a very
Speaker 2: different rates environment and frankly speaking normally a lower spread environment,
Speaker 2: have now got to reset their debtor. Their capital structures
Speaker 2: at are much much higher all in interest cost. If
Speaker 2: that's happening at a time when macro is deteriorating fast
Speaker 2: and you're unable to improve your earnings, that obviously can
Speaker 2: be a very uncomfortable vice that these companies are put in.
Speaker 2: So the macro slowdown, combined with the fact that at
Speaker 2: least so far in Europe, you haven't seen rates collapse.
Speaker 2: Is an uncomfortable place for the market to be in.
Speaker 2: It's providing a huge array of opportunities, it's providing great
Speaker 2: all in returns to credit, which they say, on the
Speaker 2: medium term we think are ultra attractive and you're meant
Speaker 2: to be in. But you've got to be relying on
Speaker 2: your credit selection making sure you're not going to find
Speaker 2: yourself in one of these capital structures where with this
Speaker 2: confluence of factors it just doesn't work inn.
Speaker 1: So the best head is just to avoid what could
Speaker 1: blow up.
Speaker 2: Yeah, look, it's a glib thing to say, and you'll
Speaker 2: always find fundamentals driven credit managers like us saying that
Speaker 2: it's the most important thing. But it's more the most
Speaker 2: important thing now than it has been for most of
Speaker 2: the ten years, the last ten years. Rather because the
Speaker 2: last ten years have seen you know, endlessly falling rates,
Speaker 2: easy refinancing conditions, generally speaking, very tight spreads. That period
Speaker 2: is over, so it really really matters now. And as
Speaker 2: I said, because of the relatively short dated nature of
Speaker 2: the market, and that's in both high yield and leverage loans.
Speaker 2: The you know that the test of all these capital
Speaker 2: structures is coming sooner rather than later.
Speaker 1: Great stuff. Christram Leach, co head of European Credit at Apollo,
Speaker 1: thank you so much for joining us.
Speaker 2: Thank you very much, indeed, and Lisa lu.
Speaker 1: Bloomberg News in London. Brilliant to see you again.
Speaker 3: Cheers, thanks, bye bye.
Speaker 1: So, as I mentioned earlier, we were joined by Matt
Speaker 1: Ginner with Bloomberg Intelligence in New York. How's it going, Matt,
Speaker 1: Everything's going good. Thanks for having me on again, appreciate
Speaker 1: it great. So last time you were on the show,
Speaker 1: we talked about revenge spending. We all did it. Maybe
Speaker 1: it's cooling off a bit now, but today we're going
Speaker 1: to look at pensions. Most of us have one, or
Speaker 1: at least some kind of savings plan. But why do
Speaker 1: we care about pensions in the context of credit Matt?
Speaker 4: Yeah, So our team we recently did some work trying
Speaker 4: to assess the potential impact of the surge and rates
Speaker 4: that we've seen for companies within the S and P
Speaker 4: five hundred, they have some of the largest underfunded pension positions,
Speaker 4: So there's a lot of inputs that sort of get
Speaker 4: distilled down into coming up with total assets within the pension,
Speaker 4: total liabilities, and those assets need to fund into future.
Speaker 4: So despite all that, there's a couple of levers that
Speaker 4: can really get these liabilities moving one way or the other.
Speaker 4: Those being the discount rate used to measure the pension
Speaker 4: liabilities owed and the return on assets within the pension plan,
Speaker 4: the difference, if any, when the liabilities exceed the pension
Speaker 4: plan assets being referred to as the underfunded portion.
Speaker 1: Let me just start you that because it's getting very
Speaker 1: very technical, very very quickly break it down for us,
Speaker 1: for those who don't know how this stuff works. How
Speaker 1: does it work in practice? I mean, you mentioned underfunded,
Speaker 1: You mentioned discount rate. Break it down in really basic
Speaker 1: terms for us.
Speaker 4: Yeah, So the mechanics of the discount rate is pretty straightforward.
Speaker 4: So the higher the potential rate you can theoretically earn,
Speaker 4: the lower the future payments would be, and vice versa.
Speaker 4: So the yield on the Moody's Double A index is
Speaker 4: what's typically used as a proxy for where discount rates
Speaker 4: could end up when these companies snap the line or
Speaker 4: take their measurement, which happens at year end. So we've
Speaker 4: seen yields on the double A index continue to climb,
Speaker 4: which started in twenty twenty one, as the FED has
Speaker 4: aggressively raised so for contacts last year, the surgeon rates
Speaker 4: helps drive down total underfunding by about forty percent. So
Speaker 4: using the EQS function that we have available on the terminal,
Speaker 4: were identified the top fIF teen most underfunded pension plans
Speaker 4: that could stand a benefit by revising upward their discount
Speaker 4: rate that they use to measure those liabilities. The guys
Speaker 4: at surface to the top were ge Lockheed, Boeing, Exxon,
Speaker 4: and AT and T. With the entirety of those underfunded
Speaker 4: pension obligations totally about eighty five billion, and those top
Speaker 4: fifteen comprising a little over half of that figure.
Speaker 1: But in really basic terms of these are large companies
Speaker 1: in the US that are basically saying to their employees
Speaker 1: paying to some plan, and when you retire, will give
Speaker 1: you x amount as a recurring payment over time.
Speaker 4: That's exactly correct.
Speaker 1: And what we're talking about is how the funds that
Speaker 1: the companies have available in those funds in the pension pools.
Speaker 1: I'm not going to use funds because it's confusing, is
Speaker 1: not sufficient to cover what they need to pay in
Speaker 1: the future, or it has not been sufficient in the past,
Speaker 1: but now because of higher rates, they're catching.
Speaker 4: Up, that's correct, So there would be the underfunded portion
Speaker 4: or the shortfall, so the rise in rates would help
Speaker 4: effectively shrink that gap.
Speaker 1: And when rates were effectively zero for such a long time,
Speaker 1: companies were running short by how much.
Speaker 4: Yeah they were they were getting, they were getting pretty big.
Speaker 4: So for that forty percent figure, that was over one
Speaker 4: hundred and forty billion just last year. So the yield
Speaker 4: on the double A index is hovering around six percent
Speaker 4: right now, and that's relative to five percent to start
Speaker 4: the year, which will provide a potential tailwind for financial
Speaker 4: risk profiles and adjusted leverage all us being equal, And
Speaker 4: that's important because raiders include those obligations in their deck
Speaker 4: calculations as these are a liabilities or obligations that are owed.
Speaker 4: So each company's sensitivity is different, so the potential upside
Speaker 4: can vary by company. So for example, a company I
Speaker 4: cover is Boeing, so their discount rate is about five
Speaker 4: point four percent, so that's a little over fifty basis
Speaker 4: points below where yields currently are with their sensitivity to
Speaker 4: just a twenty five basis point increase in that discount
Speaker 4: rate equivalent to an almost one point three billion dollar
Speaker 4: improvement in underfunding. So you know, with all the puts
Speaker 4: in takes, we calculated more and having of these liabilities
Speaker 4: for the OEM, which given some of the issues they're
Speaker 4: contending with now related to the max and pressure on
Speaker 4: delivers here in near term related to the app bole
Speaker 4: cet issue, the improvement can help drive some financial flexibility
Speaker 4: as they look to complete rework without incurring the potential
Speaker 4: for more negative rating activity.
Speaker 1: Okay, so again you're throwing out indexes and double as
Speaker 1: and that sort of thing. I'm just going to ask
Speaker 1: the dumb question again, So why do we look at
Speaker 1: that index particularly? Is that what the companies in their
Speaker 1: pension plans are invested in or is that what the
Speaker 1: companies are raising.
Speaker 4: Yes, so it's used as a proxy for what they
Speaker 4: could potentially earn. It's a high quality basket of bonds.
Speaker 4: So you know, as I mentioned earlier earlier, the big
Speaker 4: lever that they could drive underfunding wire lower also includes
Speaker 4: those returns on pension plan assets. So those moneies are
Speaker 4: invested in different types of assets which generate hopefully positive
Speaker 4: returns for the year, which would in theory increase assets
Speaker 4: and leus reduce your underfunding. So those returns could prove
Speaker 4: more muted this year based on our analysis of a
Speaker 4: sort of broad array of benchmark indicties with mixed performance
Speaker 4: across various asset classes, but that would still be better
Speaker 4: than the significantly negative returns that we saw in twenty
Speaker 4: twenty two. So we saw that sea of red which
Speaker 4: offset some of the benefits that were derived from the
Speaker 4: higher discount rates, which this year may not have such
Speaker 4: a sort of deleterious impact. So i'd highlight that you
Speaker 4: know the discount rates pension returns, they can vary based
Speaker 4: on asset allocations. In the case of Boeing, their investments
Speaker 4: are heavily weighted toward fixed income at a little over
Speaker 4: sixty percent the Moody Double A Index being a fixed
Speaker 4: income INDUSICY and equities near fifteen percent, private equity and
Speaker 4: real estate each under ten percent, and head funds the remainder,
Speaker 4: whereas a guy like AT and T, who was also
Speaker 4: in the list, is weighted forty five percent towards fixed income,
Speaker 4: eleven percent equities, thirty percent between real estate and private equity,
Speaker 4: and the remainder is sort of a hodgepodge of different
Speaker 4: asset holdings and.
Speaker 1: When in the past these pension funds were actually running
Speaker 1: underfunded and there was a big gap. How much was
Speaker 1: the credit market penalizing them for that? Did it matter?
Speaker 4: It does matter for some of the some of the
Speaker 4: bigger guys, because obviously, at least from a credit standpoint,
Speaker 4: you know, if you hypothetically had a bankruptcy, these obligations
Speaker 4: would be sort of perry pursue with senior and scure bondholders,
Speaker 4: which is sort of our bread and butter here at
Speaker 4: BI Credit. So you know, that's definitely something that you
Speaker 4: need to keep an eye on to understand that those
Speaker 4: are also technically creditors of the company outside of just
Speaker 4: what you would traditionally think of as a bondholder or
Speaker 4: somebody who has loans.
Speaker 1: So when you flip it now and you're looking at
Speaker 1: the gap closing, how much are credit markets rewarding these
Speaker 1: companies that are closing that gap.
Speaker 4: That's a good question. It couldn't. I can't pinpoint it
Speaker 4: down to an exact sort of science.
Speaker 1: Is there relative value though in the companies that are
Speaker 1: benefiting most potentially, you know, they have less of a
Speaker 1: risk because they're to funk outs have been closed, Therefore
Speaker 1: they are for better value potentially.
Speaker 4: Well, certainly from a credit standpoint, because you would certainly
Speaker 4: be improving your financial risk profile all else equally, you
Speaker 4: would have lower adjusted leverage, all sort of driving relative
Speaker 4: value views on some of the bonds, as those would
Speaker 4: be obligations that were once larger are now smaller.
Speaker 1: So higher rates are actually good. I mean, they've been
Speaker 1: hammering bonds across the board because of duration, but higher
Speaker 1: rates in this context are actually good for some companies.
Speaker 4: Or the silver lining behind the surgeon rates that we've
Speaker 4: seen ysa shrinking of these liabilities.
Speaker 1: You mentioned a few of them, Are there any other
Speaker 1: names that stand out?
Speaker 4: So Steve Flynn, who's part of our team, our TMT team,
Speaker 4: put together some work looking at relative impacts within the
Speaker 4: TMT space, so AT and T could stand up benefit
Speaker 4: as obligations owed at year end were the highest with
Speaker 4: Intel co and that account for forty five percent of
Speaker 4: the sector itself, with leverage ratios inclusive of pension shortfalls
Speaker 4: having the biggest potential impacts for guys he covers like
Speaker 4: Paramount or Lumen given their relatively lower absolute ebitabase and
Speaker 4: Mike Campalone, who's part of our consumer team, rates to
Speaker 4: guys like Kroger and Albertson's, which have a pending acquisition
Speaker 4: in both maintaining significant multi employer pension plans as well
Speaker 4: as some shelf insurance liabilities and some leases, which altogether
Speaker 4: can increase the adjusted debt that raiders look at by
Speaker 4: over eight billion, So we could see some potential improvement
Speaker 4: there in terms of those adjusted figures. So hopefully that
Speaker 4: gives a little bit of flavor to everyone listening on
Speaker 4: the importance of looking at the ads and rates and
Speaker 4: the potential impact on financial risk profiles.
Speaker 1: Yeah, and this closing of the gap, does it continue
Speaker 1: at this pace?
Speaker 4: If you have higher for longer? That's would certainly mean
Speaker 4: that the rates that you set can sort of be
Speaker 4: a more steady state. But well, I guess we'll have
Speaker 4: to see what the what the future brings through through
Speaker 4: mid decade.
Speaker 1: Okay, So just to wrap things up, Mat, I mean,
Speaker 1: what else are you looking at right now? You cover
Speaker 1: a huge range of industry, But what else should we
Speaker 1: be paying attention to? What's on your radar?
Speaker 4: What else is on my radar right now? I mean,
Speaker 4: we're sort of in the thick of it with earnings.
Speaker 4: So I think one of the more interesting stories is
Speaker 4: the sort of retheon and the large defunded buyback that's
Speaker 4: sort of doing so. I would expect them to be
Speaker 4: coming to market here pretty soon to sort of turn
Speaker 4: out the bridge loan that they took out as part
Speaker 4: of their accelerated cherry purchases. They sort of grind through
Speaker 4: the powdered metal contaminant issue that's sort of grounding some
Speaker 4: of the GTF engines and accelerating some of those infections.
Speaker 4: So it's probably one of the more interesting stories going on.
Speaker 1: But raising debt to payback stockholders. That's not good for
Speaker 1: the bonds, is it.
Speaker 4: No, Generally, that's not a good thing. That's why the
Speaker 4: BAA one tile plus ratings are now moved to negative
Speaker 4: outlook to and to ensure that the GTF issues don't
Speaker 4: materially spread beyond what's already assumed and more importantly that ratheon.
Speaker 4: When they accelerate these cherry purchases, they'll turn around and
Speaker 4: then deleverage the balance sheet through mid decade, in line
Speaker 4: with what is sort of expected by both Moodies and
Speaker 4: S and P.
Speaker 1: Do we worry about a downgrade for them in the
Speaker 1: short term?
Speaker 4: In down grade, they've already gone to negative outlooks, So
Speaker 4: I think right now they're probably okay. I think it
Speaker 4: really becomes a question of funding mix when they turn
Speaker 4: out the bridge one that they have, how much short
Speaker 4: term debt do they expect to have in order to
Speaker 4: pull a lever to be able to deleverage the balance
Speaker 4: sheet and have absolute production. Some moody is expecting somewhere
Speaker 4: around five billion dollars, which would be half of what
Speaker 4: the total ASR is. And then you have some maturities
Speaker 4: which is a little around three billion dollars, but they
Speaker 4: could also pay down. And there also have some pending
Speaker 4: asset sales which could bring in another three billion in
Speaker 4: pro seeds. So they certainly have levers that they could
Speaker 4: put in place and then pull to de leverage of
Speaker 4: balance sheet. It's a matter of the magnitude and how
Speaker 4: quickly they want to want to do it.
Speaker 1: We'll definitely be keeping an eye on raytheon and we'll
Speaker 1: be keeping an eye on your research and analysis. Mac
Speaker 1: pointed with Bloomberg Intlligence in New York. Thank you so
Speaker 1: much for joining us, Thanks for hammer appreciate it. Look
Speaker 1: forward to having you back on the show very soon.
Speaker 1: And thanks again to Tristram Leach with Apollo, as well
Speaker 1: as Lisa Lee from Bloomberg News. Read all of Lisa's
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