Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside my co host Matt Miller.
Every business day we bring you interviews from CEOs, market pros, and Bloomberg experts, along with essential market moving news.
Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. Hey, we actually have an IPO to talk about, a big one coming up here. We want to get right to it. Billy Lipschultz, he covers all that IPO stuff and all the new market stuff for Bloomberg News. He joined us here in our Bloomberg Interactive Broker studio. All right, so,
Bailly arm, it's part of the soft bank. They need to convince the market that as a chip designer, they are a great play on AI. How did they do that?
The big sales pitch is being in AI, being in machine learning, being in and we looked at the filings
the company actually only mentioned AI about fifty times. But the big focus will be when they're talking to investors is how they can get and become really a staple of those chips that are going to increasingly be used to bring AI to things like your cell phone and be able to incorporate their technology into data centers, which obviously are very very lucrative for the technology in the semiconductor space now.
So the challenge there for sorry rot but is because the challenge is, if I'm sitting on the other side of the table or I'm at the Rubber Chicken lunch in New York, my thing is, but you guys aren't. So I have to believe that you aren't now really an AI play, but I have to believe that you're going to get there right.
Yeah, And they, according to their data, are in something like ninety nine percent of smartphones. So their whole pitch is that smartphone market is drying. We've seen that play
out with earnings from Qualcom, earnings from Apple. Well, now they're trying to skate to where the puck's going to be data centers AI and being able to use their technology and have customers used their blueprints, which they sell, collect royalties, some nice royalties off of other companies using that, and that's kind of where they're trying to position themselves, really not saying in video is one of their many customers, but they name dropped in Vida a few times as
people who they're operating and working with and letting them use some of their AI technologies.
So what has in Nvidia said about ARM? I mean, aren't the two pretty closely connected more than just sort of a customer relationship.
And Video was set up to buy the company a few years ago and that deal fell apart. The big thing when you look at some of these Bloomberg reports is that ARM is talking to what they're framing as strategic investors in Vidia, according to Bloomberg reports, among those potential investors alongside the likes of Amazon and Intel, to
actually buy into the IPO. So you're trying to look at the way ARMS positioning itself to benefit from not only selling to these customers and benefiting from their sales, but also getting them to buy into the stock, which creates kind of that familial environment for soft Bank, which has had a pretty rough go losing thirty billion dollars last year.
Yeah, this would be a big home run for them. Great great story related to this on the Bloomberg terminal by my buddy Alex Barinka and min Yng Lee. It says ARM needed thirty five hundred words to explain it's China risk before IPO. Wow, So they've got a China risk here, So I guess investors have to get what is that risk?
I guess ARM laid out that they generate about a quarter of their revenue from China and that's driven by ARM China, a unit that basically them in soft Bank are partnered with but they don't control. So there's uncertainty around slowing demand in China, which we've been seeing play out. We've seen in the filing that the company's royalties coming from China actually slowed in the last fiscal year.
They warned that could continue to slow.
And that's all on top of geopolitical risk with the US UK anything going on as it relates to China in Western countries. And you look at some of the reactions we've seen from Bloomberg and two eligence really laying out that China risks paired with slumping smartphone and consumer electronic sales, those are the key concerns for investors going through that's filing that hit yesterday evening.
By the way, in terms of the proceeds, this is a sixty to seventy billion dollar valuation right as far as we've reported as far as we've reported, which means what they walk away.
With soft Bank.
Last week reported soft Bank would walk away with the eight to ten billion dollars because they bought back the remaining twenty five percent from their own vision fund, so they are selling shares into the open market eight to ten. We've been reporting that maybe it's going to be a bit lower because now they own the entirety of the company, So soft Bank actually brings in all of the sales and none of that money is going.
To exactly that's the point. So none of these proceeds go get reinvested into arms business. Yep, that's an important point.
And it goes back to soft Bank being able to take that cash and redeploy it to some of the other startups that they've tried to back and are looking to back and try to.
All Right, here's another thing. I wonder what our reporting is showing, because last quarter day the company had little to know revenue growth dropped about one percent year. Okay, so give you that background. Is there any view coming from the street on valuation?
Yet we saw in yours truly reported on this, we saw a burnstea note laying out expectations around forty billion. That was last month when we crunched the numbers looking at some comps they've We've been taught hearing investors in Wall Street talking up Synopsis and Cadence as better comps. When you look at a price of sales trailing on a twelve month average, evaluation comes.
Closer to thirty two to forty three billion, So and the company is looking for what sixty to seventy as far as we've and they bought back that bit spread there.
My friend, Well, they also bought back with that repurchase from SoftBank, they paid about sixteen billion for that twenty five percent stake, so sixty four billion dollars baked in. But the one thing that was interesting in the filing is SoftBank's warns, and this is verbatim. Investors are cautioned that the purchase price paid may not be indicative of it is not intended to reflect expectations regarding the completed deal.
So they basically are warning that they paid sixty evaluation of sixty four billion, forget that that's part of a different deal. Don't worry about ascribing that valuation money, because that's the first place I would go to exactly, and that's what we're talking to investors and people who want.
It's not going to be an easy deal, is it. It's going to be a fascinating deal.
I mean, we've talked about at length about the dearth of IPOs, and the one view that I've been getting from a number of my sources is that arm is the type of company and they've stuck to their plans to go public this year that could really go public in most any market. It was public once before, back in twenty sixteen. Soft Bank took it private. It's more of an almost pe style play as opposed to your traditional money burning VC.
Backed company, and it's the only game in town if you want access to a new issue. If it does well, I guess there'll be a cascade of IPOs that follow.
Yes and no. We're expecting potentially Instacart to flip their S one sometime as early as this week. Clay Vio's another company. The big thing that I've been talking to my contacts, their view is fourth quarter twenty twenty three will be interesting with some of these big companies that probably should have or could go at most anytime. But the big focus is going to be early twenty twenty four when you're going to get more of those sweet spot IPOs.
Just on a different topic completely. We were talking and have been talking for a long time with Ira Jersey about soccer, and I know messis come here, so it's pretty exciting for a sport that otherwise is just deadly boring to watch. Why doesn't professional lacrosse get a big pick up in this country? And I ask you, Bailey, because I've noticed that you were a lacrosse beat reporter at Citrus TV.
Yeah.
Man, I cut my teeth at at Syracuse University covering which I still view is probably the best men's lacrosse college team that did not win a national title.
They were absolutely stacked. Yeah, And back when we were kids, that was it. It was Em and Jane Johns Hopkins and then now everybody plays its big tens all getting in on it. No.
But that's interesting, Matt, because coming from the West Coast, I knew like two.
People who played lacrosse.
It was a rich kid San Diego sport that being east of LA was like, we play football, that's what men do.
And in Ohio, by the way, same thing. Growing up in Ohio lacrosse with something only kids in like New Jersey and Connecticut played. But now at you know the schools that I all the schools I got kicked out of in Central Ohio, they all play lacrosse.
Well, it's accelerating. The issue is in the this is the pitch.
And I did a small stint covering sports here at Bloomberg and sports business is lacrosse is going to be gaining from parents who maybe don't want their kids to play football for fear of injuries, head injuries. The issue, the one kind of drawing factor is and the reason it's compared to hockey is it's.
Not a cheap sport.
There aren't a lot of fields to play. So if you don't have a tremendous amount of income where you can find a stick in a ball and find someone to play with, you can't go pick up and play like soccer, football or basketball where there's a court or there's just a grass field.
You end the number one high school team in the country this year, the Lawrenceville School. Thank you very much, Thank you Bailly good stuff. Bell Leadership's covers the markets.
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Let's talk about the hotel business, particularly the extended stay part of the business, which is probably a part of the business we don't talk about enough. And Skazafava joins us. She's the general manager and senior vice president of Extended Stay brands at Choice Hotels. Troyti, of course, is a New York Stock Exchange listed company. Ce HH is the ticker to load into your Bloomberg Professional Service and thanks so much for joining us. We appreciate you coming in
all the way from Rockville, Maryland. Talk to us about the extended stay business. What are the drivers of your business and what are the trends been I guess over the last several years as the world's kind of reinvented itself a little bit.
Yeah, no, that's great. So extended say caters primarily to non discretionaries day so think traveling nurses, construction crews. So we have a lot of tailwinds coming to us with the Infrastructure Bill, the Chips Act, etc. So we see a lot of demand in our future ahead of us at this point in time, I would say the one thing about the extended day brands is that they're pretty resilient.
So even in face of recessions and pandemics, we tend to have an occupancy premium over the rest of traditional hotels. So even right now in the first half of the year, economy extended day has a nineteen percent occupancy point percentage over just regular economy transient hotels. So it's a very resilient business model.
I guess your biggest competitor right now would be Airbnb. Is that fair to say? I mean, if I was going to go someplace and I had to stay there for two weeks, that would be sorry to say, my first thought.
Yeah, I think Airbnb.
Though when we look at that their price points are a little bit different, and those guests don't tend to look for kind of the standard guest experience that we provide across that. So the way we think about extended s A is that it's apartment like amenities with a
hotel of a flexibility. So you still get the services, the cleaning, it's ed rad that you would expect from a hotel, but you have a full size kitchen in your room, you have some of those larger spaces and suites versus a small traditional hotel room.
So are you primarily a franchise company? Okay? So how do you grow your business in terms? Is it simply going after and recruiting franchises? How does that work? How does that growth? Yeah?
Absolutely, But I think developers at this point I'm are looking at extends as one of the hottest segments within the lodging industry. And really it's a hedge. It's a really different type of asset class than additional hotel. So over the last couple of years, even even during twenty twenty, Woodspring Suits a our largest brand. They ran gopu margins
of fifty percent and they've gone up from there. So last year we were on average at sixty percent, So smart money is really kind of chasing us at this point in time and wanting to get into the segment. We've been able to capitalize on that. We've had over fifty percent more openings in the first half of this year than we did last year. We've grown our pipeline seventeen percent just in the first half of this year.
So while we are, yes, of course going after some of the larger developers, they are certainly seeking us out as well.
So does the does the change in work from home or the evolution of the way we work have a big effect on your business?
Yeah, we've seen a lot of stays now where I mean, I hate the word leisure, but where you get the business traveler right and they're staying for five days and then they tack on.
Wait, is that a word if people use, I mean, we.
Do in the industry, Yeah, leisure, leisure, businessiness.
Sure, leisure. I cannot believe that you're allowed to use that word.
Somebody standard industry jargon. For sure, it was, yeah, but that certainly has changed. And then honestly, they're reshoring of a American manufacturing has also been a great tail wind for us at this point in time. So any of those large semiconductor plants that you're starting to see you move in, battery plants, et cetera, are also creating a lot of demand for the extended day segment.
How about I mean, can I build a hotel these days? I mean the banks are just pulling back on lending across this across the board. How does that impact I guess you're franchisees.
Yeah, so we're the only company that has two entry points into extended day for both the economy segment and the mid scale segment. So what we've done knowing that new constructional lending is a challenge, right, and some of our franchisees can can get that they have community banks, that they've got local relationships, proven track records, and so they're still getting that lending. But a lot of folks where we have markets that have no extended stay to supply,
there's a ton of traditional hotels. We came up with a really innovative solution that we call kitchen in a Box. So we worked with engineers, architects, the trades, mechanical, electrical, plumbing, et cetera, and came up with this concept where you can take a traditional hotel room and into an extended stay room, and we have twenty of those transformations going on across the country.
What's an extended stay room entail?
So you must have a full sized kitchen, full size kitchen, full sized kitchen, okay. And the way that we like to think about it is guests use these rooms for both workplay, me space. Right. They need to be flexible spaces so that it's more kind of like your home, even thoughtful things like you know, you want a larger vanity in the bathroom because you're going to be there for many weeks. You want to be able to put
all yourself out right. So that's how we think about designing that with the consumer first and how they're going to use that space.
How have labor costs been because I know, you know, in the pandemic, or even at the end of the pandemic, Paul and I would interview hoteliers. How do you say that hoteliers, that's pretty good. Yeah, And they told us, you know, it's very difficult to get people to come to work.
Yeah.
So the beauty of extended day is in the economy segment in particular, there's only six or seven full time employees. And the reason that is is because we only do housekeeping bi weekly, so the labor model is super light in these hotels, which also enables those high margins that I spoke about earlier. So yes, we are not immune to that, but it certainly lends itself a little bit easier than what you're seeing in traditionally.
I see though, so extended stay facilities are not housed within your traditional hotel facilities. They're actually completely separate.
Yeah so yeah, So so take a Woodspring Speets for instance. Prototype. Prototype is one hundred and twenty two rooms and they come standard with the kitchens, et cetera. There's also guest laundry, fitness facilities, et cetera, so that you can really maintain your lifestyle there, so you would not see them withinside a traditional hotel.
But no, like restaurants or any that type of this is just stays. Okay, Yeah, who do you compete against?
Really?
Matt mentioned Airbnb, but on the in terms of the traditional extended stay, who's the company?
Yeah? Well, I mean we're starting to see a lot of new competitors come into the space. So Marriotte, Hill and High have all really brand launches at this point in time. I think for us though we've been in the space for a really long time. We acquired Woodspring Suites back in twenty eighteen have kind of re invigorated the segment. We have over four hundred open and operating extended stay hotels right now, with another three hundred in the pipeline.
And where those are the regional areas that you guys are focusing on, or I mean coast to coast.
We certainly see a lot of demand right now in Texas and Florida. The relocation has been big for us as well. So think places like Boise, Idaho that are just growing kind of urban areas at this point in time.
Talk to us about rowing.
Yeah, she's in the Athletic Hall of Fame. I mean, no joke.
What's a Coxswaine? Is that the one that says stroke, stroke or go.
It's a little more sophisticated. So you actually have a microphone and there are speakers underneath the seat, right, and so I can whisper and the crew would be able to hear you. But yes, I steered the boat and then you made sure that we were making race moves.
What are you should in the front though right in the back so you can see. I see. So you actually do steer literally literally and then you're the motivator of the crew. Correct, absolutely, So what's the athletic Hall of Fame? Like, do you have like your jersey there or.
I have met my plaque and it's you know, on the riverfront. So we have our boat house out there. So that's what river is washing it Chester River. So in Maryland.
Yeah, I don't know anybody who rose.
Uh yeah, I know some.
I know some.
I actually only know women who row.
But it's a big D three so it's huge.
Yeah, it's huge.
I mean I know a lot of Boston women who row in the Charles.
That's amazing. We we we came in third, I want to say one of the years on the Charles. And of course it's a big tradition to throw the Coxon in if you win.
All right, good stuff and Skazafava, general manager and Senior VP of Extended Stay Brands at Choice Hotels.
You're listening to the tape Cat's are Live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, the tune in app, Bloomberg dot Com, and the Bloomberg Business App. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa play Bloomberg eleven thirty.
You know, Matt, I don't know about this whole you know, yield curve thing. It's you know, I'm an equities guy, so this is kind of something new for me. But Lisa Bromowitz has been schooling me for years on this and the latest thing she says I have to focus on is real yield for the tenure hit two percent? The highest in a very long time. I think it's two two thousand and nine. What does that mean? I don't know. Somebody ask somebody who's smart about this kind of stuff.
And this is what the Fed wanted, right They said they wanted to get real yields positive. At the time that Powell was complaining about it, they were negative, yep. And now they're way up there. So the question is are they then able to achieve their goal of reducing inflation to two percent?
And let's ask somebody about that. Jay Haffield, he's the CEO and founder and portfolio manager of Infrastructure Capital Management. It has been kind enough to join us here in our Bloomberg Interactive Broker Studio. So, Jay, talk to us about your call on inflation. I got this real yield thing at two percent. That's the highest since July of two thousand and nine, So that gets my attention. What's going on out there?
Thanks Paul Matt for having me on. Well, we actually I think that the Fed is a little bit of out of play right now. So in other words, they may or may not raise one more time. We don't think they will. There was a story in the Journal today, but we did some data in preparation for this. The labor markets really weakening. That sixty percent of jobs added are in the medical sector, and we all know that that's more of a secular increase than cyclical. And also
wages are tenuating, So I think that data. We don't think the Fed's going to raise. They don't know that yet, but they're going to get some more data, particularly on the on the labor side, even though that doesn't really matter, but that's what they focus on. And also inflation is going to gradually cool. The measurement of inflation already has cool,
but the measurement of inflation will continue to cool. So we're optimistic that the FED will not raise again, but we're very concerned about the ECB in case you want to talk about that, because we think that's critical.
To Well, let's get to But I do want to talk about your view on inflation, because you have your own index CPI R and I'm looking at it on the infrastructure, on infracap funds dot com on your website. How do you see this working out in terms of inflation? Is it really going to come back down to two percent? And is that going to be anytime soon? Maybe the heke one more time, but do we hold at that level or are you worried it bounces back?
Well, the two things to focus on in terms of potential bounce back are energy prices and housing prices. So energy we do a lot of work on that. We think that we're kind of stuck in this seventy five ninety five range and also in the fallitude weaken up, so we're not worried about energy. And also it's important in the US we have natural gas. The trades at the equivalent about eighteen dollars a barrel, so it's highly
deflationary here, not sure the West of the world. Rest of the world, natural gas trades roughly be to you, why is it same as well? So we're not concerned about that. And I think the chances of housing prices taking off like a rocket when mortgage rates are seven and a half percent is close to zero. So we're not concerned about a reacceleration. And then we know that the current measurements for CPI and PCE or flawed because of their shelter component. And also we don't like pc
because it has twenty percent medical. But I would say, we don't stick this on our website, but we calculate pceh R, so that corrects for shelter and that's only a two point six percent right now.
And well CPI R is only one percent year over year, right correct.
Yeah, So we think inflation is already behind that problem behind us, and no signs again looking at the forward indicators, because we were massively concerned about inflation early twenty one. So we think that's behind us. Whether the FED raises one more time or not, we don't think it's that critical. But we do think the global type monetary power is an issue, and I think that's what is driving long term rates up right now.
So all right, let's get then to Europe, what's the inflation picture look like to you over there? If it's subdued here, but you mentioned we have deflationary natural gas prices, and of course they don't. How does inflation look to you on the continent?
Well, I think that that's that is a real problem because they've had an enormous increase over the last two years, and that's they're less competitive. But our biggest concern is that global monetary base. And we will publish this on our website as well. Although you can get the data you can just if you can add you can get it on the terminal as well, but it's still good to publish it because even I haven't focused on enough dropped by seven hundred billion in the last two months,
which is an enormous drop. That's now what what dropped the global monetary base? Okay, so the global central Bank sucked out seven hundred billion dollars of capital.
And we've seen them two fall here as well.
Right, yeah, so those are bit more lag But if you look at the I would suggest look at the monitary base because that's the leading indicator, because it's the major component. And I would also say don't ignore this so I've made a good call to least our clients. When the FED interviewed, I said, okay, that's the sign back in pandemic. They're adding, you know, one point two trillion of capital to the capital market every year. That's just enormous. That's like Warren Buffett, you know, putting is
one hundred billion to work ten times. So I wouldn't ignore the monetary base and those radical changes in particular, if they're small, you can ignore them. So we think that's the key driver behind this big rise in rates, and we did that work because really, frankly, our call was that we're going to drop and it was dead wrong.
So said, well, how can this be? And that's when we discovered, because we should have been tracking it as well more closely, that the ECB has just done this massive QT and that affects all rates in the in the world. That it's our bond is eighty five percent correlated with all the benchmark bonds. So coming up with an explanation just focused on the US is not going to be correct when you're talking about the world bond market.
So what happens to interest rates? When can I refinance my mortgage at.
A lower rate. Well is single minded and focused on the high mortgage rate that he got. It's adjustable though, because he was figuring at the time, well, next year, I'll be able to refinance at the lower rate.
Yes, so I have adjustable rate mortgages as well. So I'm very focused on this. But I don't think that we're going to get any relief till probably mid next year because of the Fed's about a year behind what they should be doing. So you should have cut when the banking crisis started. And that is another reason why they should pause, and I think that maybe even they'll figure this out, is that the banking system is under pressure being downgraded. They were downgraded this morning. They should
be focused on that. So I think we'll get relief next year. But the thing to watch, and the reason that we're sticking with our bullish call on interest rates, is that we do think that the European economy is going to crack. They have mostly floating rate mortgages, way more than they do in the United States. They have
this natural gas problem. Germany is levered to China, and their ECB is a single mandate central bank, so they're going to continue to tighten really probably tell their economies crack, So I think that's when rates will come down. Long rates will come down when it becomes more obvious that Europe has headed into a recession, which is our call that they're almost certainly going to probably even substantial.
Despite all the Americans over their traveling.
At the margin, that does help. Yeah, the US definitely does prop up the rest of the world. But still, when you think about all those factors are negative, then what is the bowl case for you?
So how about China? Just because we've been talking a lot over the last several weeks report on the weaker than expected economic data out of China, how do you kind of view all.
That well when with regard to oil, which is what we mostly focus on China about, is that the thing to keep in mind is that, of course reporters have to write stories. So why is oil down? We talked them about this, Well, it's because of China. Well it's
usually not the case. They have very slow growth in oil demand, that's very sticky, so we don't think that that demand's going to drop, But we also think that that could be positive for long term rates because the I'm sorry that the Chinese Central Bank is definitely going to cut rates. There's a disappointment when they cut last time, but they're going to continue to cut rates. They've really
hammered their economy through regulation. It's a good example why maybe capitalism is superior to communism, and so when you do that, it hurts economic growth, and so they're going to offset it with monetary policy, and that should also be bullish for long term rates.
And I'm just reading a notes here, real quick, thirty seconds fourth quarter for the stock market SMP range of forty five hundred to five thousand.
Correct, although I would say that that's dependent on rates at least stop rising, you know, as fast as they have been over the last month or so.
Okay, and anything added Jackson Hole.
We think it's going to be a non event because the Feds already signaled what they want to do. They have the dot plot, and we know there's a dubvish camp, so that we won't get a repeat of last year where Pallet comes out and kind of talks the market down right.
Interesting, all right, Jake, So you don't think there'll be a hawkish bent.
Little bit, but not anything significant like it was.
Lasting right home about right.
But let's send the team out there anyway.
Yeah, two teams, Yeah sure yeah.
Jay Hatfield, CEO, founder and portfolio manager does it all. Infrastructure capital management one of the smarter discussions Matt and I have as we try to think about these markets and navigate through that.
And I like his website infracap infracap infracap Funds dot com.
Boom there you go, go check it out.
You're listening to the team Ken's are live program Bloomberg Markets weekdays at ten am Eastern on Bloomberg dot Com, the iHeartRadio app and the Bloomberg Business app, or listen on demand wherever you get your podcasts.
All right, let's get this banking thing. We got S and P coming in better relate than never, I guess, kind of saying, hey, there's challenges for the regional banking sector and they take down some names. Here, let's break it down with our experts. That would be Herman Chant, and that would be Arnold. Herman joins us live here in our Bloomberg Interactive Broker studio. Arnoldlekuda making use of the zoom functionality out there. He joins us as well. Arnold.
Let's start with you on the credit side. Where do you see kind of the pressure that we're seeing across the regional bank space in the credit side.
Yes, I think some of these actions by Moody's and SMP I think just gives us a reminder that this you know, now, I guess I wouldn't call it a crisis anymore, but you know, these issues still exist where there is pressure on these banks and their balance sheets. Right,
funding costs are rising, deposits have fled. Yes, So I think a lot of these things that the rating agencies are coming out with now are Yeah, it is backward looking, but it is a reflection that, you know, all things aren't all fine and dandy in regional bank land.
So if if I wanted to go out I'm a regional bank of reasonable credit quality, can I go out there and raise capital in your credit markets? And if so, like, am I going to really have to pay through the nose?
Oh? I mean, you know, the the before March regional bank debt it was, you know, we're in a totally different world. It used to be they trade really tight and you couldn't get enough of it right, and it trade tight for the credit rating. Now we're in this opposite world. Of you know it trades wider. I mean things have you gotten better obviously since the heydays of March and May, but you know, compared to before, spreads are wider, and a lot of these will be hit
with new debt requirements. So we expect debt issuans to pick up for a lot of these. And we have seen a couple of regional banks to tap the market. We have Charles Schwap today and then we had what is it, Huntington and P and C come you know, in the in the past week or so. So it is available. If the debt does come uh, you know, with with some a little bit meat on the bone. Let's let's put it that, then there will be demand.
Herman, what do you think about the uh, you know, the banks that were specifically downgraded by S and P. You've got Key Corp, Comerica, Valley National, umb and Associated Bank Corp R So.
I would say that the the issues that that the rating agencies have highlighted a couple of them, Key Corp co America, they're facing some weaker needitors margins than some others that in the in our our peer group. That's
really driven by some higher deposit costs. They actually these two banks in particular miss have mishedged their balance sheet a bit where they were expecting interest rates to decline potentially next year, and it seems like we're in a higher for longer environment, so that's actually crimping their margins a bit more than some others.
The is the deposit flight the kind of thing that's still ongoing. You know. I was actually at a cocktail party, shocking I think like three or four weeks ago, with a group of ladies talking about how they got you know,
high interest rates in this one bank account. And I saw one woman, you know, just over the course of a conversation at like six pm on a Saturday, say, you know what, I'm just gonna move like one hundred thousand dollars from my savings account and my bank that I've always used into this I can't remember if it was the Sacks account or some other, but you know, four and a half percent yielding savings account and just boom done.
Right.
So what we've seen since the fallout in margin April is that the deposit actually the deposit bounces have actually stabilized across the industry. And how that's happened is they're just paying up for those deposits. So you're you're seeing high interest savings accounts, high savings accounts approaching five even above five percent CDs above five percent for one year term, fifteen month term. So that's really the gist of it.
The banks are paying up and that's really crimping that dig's margins and pressuring profitability going forward.
Arnold, are you seeing any investors come in in your market and saying, boy, I see some real value here in some of these bonds.
Well, I mean I think, you know, definitely for you know, in a market let's say into until from May to August, right, it was a classic risk on uh treasure yields, higher spreads tightening and and and the world where everything seemed to be pricing to perfection. One of the things that are we're still cheap is is kind of the regional banks,
right and given what they went through. So so yeah, I think there is a lot of demand for regionals, but I think at the right price, right, And and if you look at credit spreads now where they are, you know, tighter if you would have woken up today versus you know, not knowing what happened from from you know, all of this year. You wouldn't even know that there was a banking crisis this year, right, given given how things have recovered, So you know, I think at the
right price, they'll be demand. But you know, things have you know, we've had a bit of a kind of you know, everything sell off in August, right that that's coincided with these rating downgrades, rate negative outlook cuts. But I think things had been pricing a little bit for perfection. But I think if if these new issues Who's come to market with a bit of a little bit of meat on the bone, then I think you'll see investors step up and go through.
The stocks haven't really recovered, herman. If you look at if I look at KRE for example, which is the regional s and P spider s and P Regional Banking ETF, it's still at the same levels that it hit after you know, the big problems that we had, the drop that we saw in March.
The stocks have rebounded a bit from the lows back in April and May, but still well below.
Pre SVB.
Fallout.
So I mean the KRE dropped to forty four and a half on March thirteenth and right now it's trading at forty three sixty.
Right.
Valuations are really reflecting the tough environment that Moody's and SMP have articulated, So tougher profitability, weaker land. Regulatory requirements are going to increase, and we still haven't really seen the shoe to drop on the asset quality side, in
particular office commercial real estate quite yet. So there's going to be a lot of headwinds and the banks will just need to navigate that and any upside really is going to be dependent on where interest rates go and potentially cuts down the road.
So Herman, what do we know about the regulatory changes coming along?
So the regulators in the FED have have put out a thousand page documents that outlines some changes to the regulatory requirements for particularly the largest banks and the largest
regional banks of one hundred billion dollars and above. That's really focused on tightening how the capital ratios are calculated, including unrealized losses in the securities portfolio in the af secure portfolio into capital calculations, increasing the debt stack, as Arnold mentioned a bit earlier, but there's still going to be some other areas that the regulators are focused on.
I recall during the SBB crisis that uninjured deposits was a big thing, So the FDIC is looking at that, and then the Fed is also going to come out with some regulatory issues on.
Liquidity as well.
So there's still more down the road and so the banks will just need to have to manage.
Through it all right, guys, I really appreciate getting the update there again, S and P. Following Moody's and doungrading some of those regional banks. Really nothing new in kind of what they're doing, but simply kind of reflecting kind of what I believe the market's known for some time. Hermit Chin, Arnold, Cokuda. They cover the regional banks, all the banks on the regional side for Bloomberg Intelligence, Arnold
on the credit side, Herman on the equity side. So we got you all covered there on the regional bank space.
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Wet's talk Microsoft. It would like to buy Activision, in fact, so much so that it's got a sixty nine billion dollar transaction on the table, needs regulatory approval, and the UK was really a sticking point. But maybe they're rethinking their strategy here. Maybe this steal gets done. So let's go to Jen Ree. She's a senior litigation analyst. She's covering all the anti trust stuff for Bloomberg Intelligency. Joins
us here in our Bloomberg Interactive Brokers studio. So, Jen, it looks like the UK has taken a little bit of an about face and may take a fresh look at this deal.
Yeah, and that looks like what's happening. As a matter of fact, they've been looking at it again for about a month, and I think Microsoft actually tried to push this through on a second look without doing what it's done now, which has made some concessions to transfer some games to Ubisoft, and that didn't really work. We thought maybe there'd be a final report by August twenty ninth by the UK. Now it's been pushed to October because the deal's been restructured and they have to take a
look at that the new concession. But it's looking pretty good from Microsoft. You know, they've been talking to the UK, they know where they are. There's been open communication and I really doubt they'd be moving forward with this unless they thought that they were going to get clearance at the end of this road.
Look just looking at the stocking Ubisoft, which trades on French Exchange up eight and a half percent today.
So are those concessions going to be what the UK wanted to see? Isn't it all about Call of Duty? I mean does anything else matter?
I mean, really this was about Call of Duty, but the UK has made it beyond. You know, they don't know what's coming out from Activision. These are content creators, right, and maybe it'll be the Activision that creates the next Call of Duty or you know, the next really popular game. So they were really just concerned more about the future because they think the future will be more of what
they call these Triple A games. And also the future will be streaming games through the cloud rather than downloading them to hardware. So that's what they're trying to protect, and that's what they've done by requiring or Microsoft agreeing that they will transfer all of the Activision games, including Call of Duty for the next fifteen years to Ubisoft, so Ubisoft can then license those games to be streamed through the cloud.
Where are we staying in the US?
Yeah, well, the US, you know, it's been really quiet and you don't see much in the news. There's still an appeal. The FDC is still fighting this deal in the US. They lost in court and then they lost their attempt to get an emergency stay. After they lost their attempt to lock the deal, they do have an appeal pending. The briefing is going to be done in September. You could probably have oral argument maybe by the end
of this year. I mean, if this deal gets uk a clearance in October and the deal closes, it means the FTC's appeal will be gone going after the deal's already consummated and integrated.
So is that typically happen. There's still going to be a review of a deal that's closed.
It can happen, and the FTC has done that. I'm a little surprised by it, you know, after they lost in the district court and then lost their effort to get an emergency stay. I didn't really think they'd continue to pursue this appeal because they lost pretty soundly in court. I mean, the judge really said, you just don't really have any evidence to prove out your theories of harm in this case. And I don't see this. I see it as a losing battle and I'm a little bit
surprised that they're continuing on that road. They may still withdraw it after this agreement with the UK that might give them the ammunition they need to say, Okay, things are different now.
Is it political so the Biden can go on the campaign trail and say I'm tough on business.
Of course, it's political. It's always political and asking nice.
Road question, you know, anti trust decisions on mergers are not supposed to be political, and really, honestly, in the past they mostly were not. I would say now it has moved into the political realm for sure. I mean, you have a political viewpoint right now that we've allowed too much consolidation in the market and we need to stop it. We need to slow down M and A activity in many industries, and that's why we're seeing these aggressive actions by the FTC and DOJ.
And that is political all right, So what else do we have out there? So it looks like this deal's moving forward? What else is in your hell?
Let me just get quickly. So if the FTC and CON, I mean clearly they're going to appeal and appeal and appeal, but at some point that's over. And if the UK approves this, who else has to give it the blessing? Their blessing? I mean, is there an EU regulator that they need? Is there a Chinese regular that they need? Is there, you know, Asian African regulator that they need? Does Australia want to block the deal?
I mean, you know they have everybody else they need. And it's really telling because almost all of these jurisdictions, and some of which are very serious when it comes to antitrust, like Brazil cleared this deal without concessions. Now the EU is saying, look, this is a new deal. It's been restructured, and we reached a settlement with Microsoft and we need to make sure this doesn't impact our settlement,
so we may have to take another look. I don't think that's going to be hindrance to getting the deal closed by the deal's end in October.
Though, And just refresh our memory. The UK gets a look at this deal because of Brexit, so they're no longer abide by the EU review of the deal, right A right.
That's a thing about the UK used to be part of the EU, and it was part of Brussels refew. It got you know, glombed in with all the other EU countries that were part of that. You know, there were thresholds that could be triggered in just the UK previously, even before Brexit, but most big deals were assessed by the EU and not by UK.
Oh well, that maybe makes Brexit all worth it to get to review deals and destroy the economy.
By the way, in terms of not political, I'm looking at the FTC board here, Lena Kahan. It says she's a Democrat, went to ya Law school, by the way. Rebecca Slaughter, she's a Democrat. That's right, went to Yale Law school, by the way.
I'm sensing something.
Alvarro Bedoya, he's a Democrat, a Democrat went to Yale law school.
What's the deal?
I mean, if it's not political, why do they stack the board of Democrats who went to Yale.
Well, any administration right can appoint commissioners, right, and there are five commissioners and no more than three can be from one political party. So generally, when we have a Democrats are vacant, the other two are vacant. Right now, there's some talk of nominees that an appointees coming, right, but there's really no pressure on Biden to do that and move forward with that. I think he probably will, but at the end of the day, it doesn't really
matter because it requires a majority vote. So when you have three Democrats and two Republicans, which will eventually have once those two spots are filled, you're still likely going to have the majority vote be along the Democratic lines. And these three have pretty much aligned on almost everything so far.
And in my world of median telecommunications, it's the Federal Communication Commission, and it's exact same same situation. You know, whoever's in power gets the gets the role there. And Yale is Yale the best law schools most rankings.
Certainly, I don't know.
Apparently they like the anti trust regulators.
On the rankings, isn't it. I guess it's I.
Think it's up there. I don't know, yeah, but I think I think it's up there. I'm look, it's Yale yeah, of course it's great.
Exactly all right. So what else on antitrust front are you looking at here? What are some of the big trades out there that are still need some approval?
You know, we're looking at Adobe Figma now that obviously one of the one is a private company, but that's been sort of lagging. I suspect the dj is likely to challenge that deal. You know, we're waiting for Kroger and Albertson's. That's before the FTC. I wouldn't be surprised at all if the FDC went to court to try to block that deal as well, and trial will start in October. In the Jet Blue Spirit deal, who cares?
Do we care?
In the markets that are don't get a lot of service and you care about I want both jet Blue and Spirit to serve my right.
I mean they have two very different models, right. Jet Blue is considered a low cost carrier, whereas Spirit's ultra low cost, which really means everything's all a part. Right, you can get the absolute cheapest fair without any other perks, no food, no luggage, nothing else, and you can't pick your seat. There is a set of consumers that prefers
to have that option right for when they travel. And what will happen is that this deal, at least the allegation is, will take that option out of many markets, or reduce the option from two which we're Frontier and Spirit, down to just one, which would be Frontier when Jet Blue takes over.
On the other hand, it's hard for Jet Blue and also for Spirit and a Frontier to compete with the duopoly that we essentially have here. Right, You've got Delta, United, American American who hog all the slots, you know.
And that's what Jet Blue says, right, And that's their argument, And that's been an argument an airline merger with some of the low cost carriers and the ultra low cost carriers in the past. I will say that in twenty years that I've been watching this, the argument that we need to merge in order to better compete with the
top guys never seems to work. It just doesn't really work because if you take that merger on its own, and it's anti competitive and might have a price increasing effect or an output reducing effect, it doesn't really matter that much. It can't be outweighed by that argument.
I'm looking at the Spirit map. I mean they fly pretty much everywhere, I mean, including the Caribbean and Central American stuff like that. So it's a much bigger, more denser map than I thought.
So, but only in this essentially, you know, only in sort of North.
America, yeah, right, North and Central America. Yeah, so not any international stuff other than.
And jef Leu has now branched out, so now they go to London, they go to Amsterdam, and they go to Paris.
Yeah, but that was hindered a little bit because the Department of Justice challenged their northeast alliance with American right, which kind of hindered some of that.
All right, Jen, thanks so much, We appreciate it. And re senior litigation analyst Bloomberg Intelligence.
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One of the areas of the market that we've been talking a lot about over the last several years, increasingly so is the private credit market. We all know about the private equity business, but the private credit business has been a been getting a lot of capital flows and has been very active. I wanted to get a little bit more details on that market. Jackie Ward joins us. She's a director of private Investments for umb Bank Family Wealth.
She joins us via zoom. Jackie talk to us about how you guys at umb you know, address and deal and play in the private credit business.
Absolutely, thanks for having me here at you and b There's a number of different ways we kind of play in the private credit business. In my world, we have a couple of bank owned funds that invest in private credit, so we're regularly looking at opportunities in the private credit space, mezzanine debt, junior lean debt, and working with companies that way.
From umb Bank standpoint as a senior lender, we also often work with junior capital providers to fill out the rest of the capital stack, so we get to interact with private credit, whether it's from a senior position or actually doing investment in private credit ourselves.
So my understanding is the private credit business really kind of took hold in terms of growing after the Great Financial crisis, when a lot of the banks, from a regulatory standpoint had to pull back a little bit from certain types of loans and in terms of what they could own on their balance sheet. Is that still the primary driver of what's driving the growth of this business.
I think it's a little bit of both. I think two thousand and eight put private credit on the map because the question in two thousand and eight was when our big bank's going to come back into lending, and I think the answer was it might take some time, and so you saw the launch of private credit. But these days, I think private credit is growing a lot
just around direct lending efforts. Also, as banks kind of tightened in general, you're seeing less senior stretched at you're seeing more debt fall into the private credit space, and you're also seeing unitraanch financing become a huge spot in
the market. So with syndications down in general, a lot of companies are looking for a single provider that can provide a senior junior credit type blend through one instrument versus working with two different providers, and that's driving a lot of growth as well.
You know, Jamie Dimond, I think probably talking his own book, but you know, He kind of says, hey, this private credit market's not regulated. Do we really know what's going on out there? How do you respond to that?
You know, private credit, these are funds. They're regulated as funds, and asset managers are not regulated by bank regulators. I think there's a few different ways to look at that. One, they're not regulated by bank regulators because they have a different source of funds. So private credit funds are also or raising money directly to invest in private credit, it's opposed to using deposit or money. And because of that they have they're able to take a little bit different
outlook and potentially a longer point of view. I do think with any private and investment, you know, the lack of regulation makes it really important to know who you're working with. You know, private credit funds that have long histories or attached institutions like you and b that have long histories tend to do well because of course we're we're working with a broader market. I think it just goes back to diligence and knowing who you're working with and who you're investing your dollars with.
What types of deals are you guys seeing these days?
You know, in our group, we're seeing a lot of deals in the manufacturing distribution space, especially in distribution where you might be dealing with an asset like company that still has a lot of working capital, needs a lot of growth. We're also seeing a lot of Bolton deals, so in our portfolio, the vast majority of our companies or platform companies, so we're actively looking for new opportunities and looking for M and A opportunities and it's a great way for us to put in more junior debt.
So with the credit kind of tightening, some of that senior stretched at falling into our space is creating a lot of opportunity in both of those industries.
And do most of the deals that come across your desk are they from Are they private equity sponsored deals? Primarily?
Yeah, we work primarily with private equity sponsors as well as you know LBO type funds. We're often working with them or independent sponsors where they're taking down the entire opportunity and they're looking for partners in the capital stack.
Interesting, So what is deal flow like these days? Because we've heard from you know, some of the larger publicly traded investment banks that not a lot getting done per se, What are you seeing in your market?
You know, we were.
Kind of in the lower middle market and we're actually seeing a lot of opportunity and most of the deals that we're investing in, you know, we're looking at enterprise values of one hundred million or under and activity in that space. You still have a lot of companies owned by generations that are looking to make exits. You still have a lot of companies that are seeing an opportunity for M and A. So we're still seeing a good
number of deals in our space. I think as you move up market, the markets get a little bit tighter and a little bit harder to raise debt. So we're very happy to be in the space we're in.
And you guys are you and b you're based in Kansas City, right, yeah? And so do you do I mean, do you try to lend your regional expertise to the private equity sponsors out there? The companies out there is that's kind of where you guys, you know, kind of do your knitting.
So you know, we get to work with the private equity groups in a lot of different ways. We have ways on the commercial bank side that we work with our private equity groups. Our bank is largely located, you know, Midwest focus groups like mine, We operate coast to coast, working with different private equity sponsors on direct and investment
in their deals, either using mezzanine or minority equity. But we often you know, U and B Bank is one large family, so we're often working with all the different divisions, you know, in concert to make sure that we're looking at the deal.
The right way.
Interesting. So here, we've got a big, big increase in the interest rates over the past twelve to eighteen months. How's that impacted your business maybe, what kind of deals you see, what kind of structures you put in place.
You know, in our world, a lot of our deals, you know, slightly higher interest rate interest only. We still have a lot of room and flexibility on that spread. I know one thing that we're watching just in the market in general is private credit is doing really well right now. I think there are a lot of funds that might have put out notes twelve to eighteen months
ago in a different brain environment. So we're keeping a really close eye on defaults coming into the back end of this year and early next year to make sure that doesn't have an impact on them, but kind of going back to the source of funding for a lot of private credit because we're not utilizing deposit dollars in that sense, we have a different kind of cost structure that we get to compare against, and that gives us a little bit more flexibility.
And so for your funds, who's a typical investor.
For our funds? So on our family wealth side, we do have a number of single asset holdings that tend to be institutional and high net worth. The primary fund we invest private credit out of is a bank owned fund, and so a number of years ago that bank seated us with cash and we've been recycling that capital since.
Hi.
Fascinating stuff. Always love talking about the private credit business again, a fast, fast growing business within financial services, seen to spring out of nowhere after the Great Financial Crisis and now it's a major major player. Jackie Ward, she's the director of private Investments at mb Bank Family Wealth.
Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller nineteen seventy three.
And I'm fall Sweeney. I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio