Ford Bonds Are A Golden Opportunity If Rating Holds Up

credit analyst for Bloomberg Intelligence. And I mentioned his lanyard because it references a company called American Axle and Manufacturing and that leads us into automobiles. And we want to talk about the Ford Motor Company. Joel. This is a company whose stock has fallen more than thirty percent so far this year. They have more than eighty billion dollars in debt. It has a market cap of thirty three billion dollars. How do you balance that elephant on top

of the peanut without crushing the peanut? Well, I am a man with with with the landard um, but I would but I would say that the debt is mostly at the finance company. Uh, the debt at the manufacturing company is about sixteen billion dollars, so I guess it's about a two to one ratio in terms of market cap to the debt. So there's a little bit more

room than than the eight billion would imply. So does that room mean that the dividend that Ford is safe because they can afford to keep paying about fifteen cents per quarter per share. I don't think so. And the reason that I don't think so is because it's the dividend is running about a hundred and twenty free cash flow, and if you look at what the raiders focus on, which is liquidity, you can't spend more than you make

without bumping into your liquidity. So at some point that becomes an issue, and the company desperately wants to hold and retaine its investment grade ratings, which will require it at some point either to improve its profitability or to

you know, take an action on its dividends. All right, So just taking a step back, I mean, Ford is investment grade rated, but barely in the bond market, it is being treated basically as junk, right, I mean, I'm looking right now at its bonds that are maturing in six It was trading above par earlier this year at a hundred four cents to the dollar. It's currently trading at less than ninety cents in the dollar. This is

a huge move in the bond market. If you see a fourteen fiftcent decline in a bunch of months when the company is not going under, is pretty significant. No, what is that telling you? Yeah, the bonds have been crushed as CDs has doubled on the company earnings expectations. At the beginning of the year, we're about thirteen million dollars worth of EVRA, it's about ten billion today. So the fact that you're seeing that in the bond market as a reflection of the weakness of the business performance

and that's gonna continue LISA for several more quarters. So how much does it pressure them that they're borrowing costs arising so rapidly at a time when they need cheap financing to try to dig themselves out of this whole Oh, it's a It's a big issue for the finance company and it's one of the reasons why they really have to retain investment grade readings as a mechanism to reduce

the lower you know, or it's implausible. I think it is plausible, and and and in fact, you know, we wrote a note on it today because SMP had a closed door meeting for investors on Friday morning where they basically laid out a plan where they were saying, you know, they could reduce UH forwards ratings by a notch but not but not cutting into junk. So at some point it's gonna look like it looks like an ugly duckling today, but this thing is gonna look like a golden goose

not that far away. And that's what we've been writing about as well. Doesn't it all come down to whether they can sell more automobiles? Really they can sell more F one pickup trucks, well, it's selling more profitably as well, like that, you don't have to sell more product. In fact, they might consider the opposite of getting of divesting. F one fifty is very very profitable business for them. North

America is a very profitable business. But the rest of the world for them, Asia, the Middle Eastern Africa, Europe is money losing. And so sometimes it's additioned by subtraction. As how the math people work it and you if you get rid of the addition by subtraction, that's good. If you if you get rid of the of the painful parts of that business, it makes the overall forward

a stronger company. Joe, We'll have to have you back and talk more about this, because that's a bold call, basically that this could be a real buying opportunity essentially if for does retain its investment grade ratings. Unfortunately, we have to leave with their Joel Levington, senior credit analyst for Bloomberg Intelligence talking about the auto sector, and I will just give him a shout out that he nailed

that auto parts are auto auto suppliers. Bonds of those companies would not do well this year and they have absolutely been crushed. So he is somebody to listen to. Also with Tesla, I'm impressed by Joel's calls. We're getting a lot of predictions about what will happen in the wake of the midterm elections that are coming up in the next two weeks. Uh Coleman Sacks coming out this morning and saying that equity equity volatility may rise if

Democrats take the House. Let's hear what Michael Jesus has to say, Michael Jesus ahead of US Public Policy and municipal credit Strategy at Morgan Stanley. Michael, thank you so much for joining us. First of all, what do you think is the most likely outcome from the midterm elections

and how should markets be positioning? Well, I mean, we're really just following the polls and the models here, and it tells you that over the last few weeks anyway, that the base case is becoming more and more likely. The base case being that the Democrats get get controlled the House, but the Republicans kind of hold serve in the Senate. And obviously there's a pretty substantial structural advantage of the Republicans have in the Senate at this time around,

because they're only defending nine seats. The Democrats are defending twenty six seats and ten of them are in red states. Uh. And what's happened is this kind of divergence in the polls over the last few weeks where the Democrats are doing better in the House and worse in those kind of red Senate seats that they're competing in. So, you know, what does the base case gets you? Um, I think it really just kind of gets you, at least for the next couple of years. The existing policy set that

we have on board more or less frozen. Right, So fiscal policy doesn't necessarily get any better or worse. Right, you don't get more tax cuts or any tax roll back. In trade policy is still kind of an independent variable. There's no sort of obvious reaction to the idea that a change in Congress means that the President is any less likely to to put a lot of pressure on China and escalate that situation further. Uh, you know, we think we're gonna get to a place relatively early next year.

We're probably gonna be teriffing everything that we that we import from China. So um. The most likely outcome, I think is that the existing policy set that you have right now is going to continue the more interesting divergences.

Or if the Democrats somehow win the Senate, or if the Republicans somehow holds hold their advantage in the House, well, let's just say with the consensus for just a second, Michael, and just give us your thoughts on a couple of key equity sectors such as pharmaceuticals, telecom as well as healthcare services. What do you think if the Democrats are able to take the House, what will happen to those sectors? Yes,

so those are the most outcome. Sense of the sectors less because it's less about whether or not the Democrats can get the House, and it's more about whether or not they can get the Senate in addition to the House. Because the reason those are the sense of the sectors is because, um, those are the sectors that have benefit the most from regulatory rollback. So it's any outcome that tells you that that regulatory rollback is less likely or could go in the other direction, that's gonna be that's

going to make them underperformers or vice versa. So if the Democrats get the Senate, it's not that they're going to be able to force the executive branchs to change direction on the regulatory rollbacks that they've initiated. But it tells you something given those barriers, how hard it would be to take the Senate. It tells you something about

how progressive minded the electorate has become. And think the market would start thinking ahead to what a possible democratic control of both of the White House and both has the Congress would mean for those sectors. Um. Conversely, if the Republicans are able to keep the House, uh, you know, that tells you that the elector it's not in a mood to deliver over the next few years the kind of uh you know, the kind of legislative backdrop that

would push back on the regulatory rollback that's helped those sectors. Michael, how much do you believe the polls? I think the polls are are are fine. Uh. Yeah, we get this question all the time. I think the problem is not with the polls. The problem is sometimes with how uh you know, not just investors, but all of us understand the probabilities implied by those polls. Right, So if you

think back to um, there weren't really polling errors at play. Um, you know, the national I think the national polling average lead for Clinton going into the election night was about four percentage points, with a kind of plus or minus three on each side, and she won the popular the rope by about two percent I believe so. And if you if you look at most states that everything was more or less within the margin of error. So the against the probabilities implied by that, which is to say

that going into election night you should have. You know, you shouldn't have thought of Clinton as more than a roughly seventy chance of winning, and anything that has a thirty percent chance of happening in this case, in that case, the Trump presidency, it shouldn't be that surprising events happened

quite frequently. I guess that there's a question that I have, which is, is there some sentiment or some population that isn't being picked up in the polls, or where polls, you know, aren't necessarily I don't know, representing the zeitgeist in the way that perhaps people would like a surprise. Maybe. Yeah, I mean, I guess I'm just trying to figure out where the disconnect came from people's confidence versus what's been

happening in elections. Yeah, I mean again, I think it's you know, the the recent history up to would suggest that or sort of would make people feel that a three or four percentage point lead in polls should be pretty solid. And in fact, if you think back to the polling error actually went in favor of Barack Obama versus meant Romney and so, and he was the leader

going in. So I think some of this is recency bias where investors perceive a polling lead as insurmountable, even if it's relatively small, and so what I would recommend is, yet you should have appropriate um respect for you know, a small single digit lead suggest that there's a meaningful probability that the outcome is different than the poll lead, right, And so for for this particular election, you know, the base case that we described at the top of this talk,

it probably is not no more than a sixty or sixty five probability outcome tells you that it's almost a toss up. That's something different. Either the Democrats get control of both houses or the Republicans hold on to control.

Uh is something you really have to seriously consider. That's almost at chance that one of those two things will happen, and the markets move in very different directions based on that, which is you know why in our last note we said we think the equity volatility is very week We got to run, but we're sorry, thanks very much. Michael Jesus He is the chief US policy and municipal strategist for Morgan Stanley. We're going to focus on a story

that is interesting from so many angles. It talks about how Blackstone it managed to get a twenty billion dollar commitment from Saudi Arabia's main fund for its infrastructure fund. And it talks about the fee structure which was beneficial, and some other perks. And this comes at a time when US Saudi relationships has been strained significantly. Let's bring in the author of this story, Jillian Tans, and your reporter for Bloomberg News. Julian, can you first explain exactly

what Blackstone promised Saudi Arabia in order to get their money. Sure, I guess at the very heart of the story, and the main point that is surprising to a lot of folks today is that Blackstone agreed to deal where for every dollar that any other investor, for example, Pennsylvania teachers or Texas teachers, or whoever it may be, that pays a management fee to Blackstone, for every dollar that one other investor pays, Saudi Arabia's Sovereign Wealth Fund gets to

pay fifteen cents less. So it's essentially structured as a revenue sharing agreement. It's offset as a fifteen percent discount to the fees that they would pay. But very clearly in our story, we have a chart that sort of illustrates exactly how that money is taken off pi's commitment.

So just in other words, Saudi Arabia not only is being offered lower fees, but in order to offset its fees, some of the fees that other investors, including pensions and others in the United States that are investing in this fund, the fees that they pay are funneled to Saudi Arabia. Essentially, yes, but I guess the word funnel is a little bit touchy, but it's yeah, it's offset against the phase that Saudi

Arabia would pay. So hypothetically Blackstone could write a fifteen percent check, but that's unnecessary given that Saudi's owe them so much in pease anyway, so it just comes off their fee. Tital are other investors when they were being pitched this fund? Were they given the same deal or were they at least alerted to what they would be buying into in terms of how that would change the

relationship financially between Saudi Arabian investment and the fund. Okay, on the first point, um, all other investors were not offered the same to so based on public filings, we can see that, for example, the biggest investor that's not the Saudi Fund is Pennsylvania Teachers Fund, and they are paying seventy five basis points for the first two years, and that quickly jumps to ninety basis points after that.

The Saudi Fund gets to pay seventy five basis points on the first ten billion, and then sixty five basis points after that. So that's just the very basic fact. Is that unusual? That b it's less unusual because you know, it's such a big commitment. Black Stone points out, it's I think the biggest commitment in their history, maybe ten times the size of any other commitment. What is unusual

is the revenue sharing that comes after that. Sort it's an additional concession where fift of what any other investor is paying Blackstone then comes off the Saudi fees. Okay, so this isn't this comes at an interesting time. I imagine you would have written this story even if Saudi Arabia and the US who weren't engaged in a sort

of tense situation right now. But it's complicated by this fact that Saudi Arabia, which has a lot of money that it wants to invest, is now sort of being accused of some pretty substantial human rights violations and clamping down on the freedom of press, and it sort of caused some executives to back away. So has there been any kind of rethink, Is there an ability to rethink from Blackstone's part? How does that kind of come into this.

So my understanding is that all the investors that are already committed, including pif UM and the US pensions that are already locked in, they've signed pretty tight agreements. But I think this more impacts the investors that Blackstones out speaking to today or you know, this week, this month, this year, next year. Um. I think they're raising right until next March, and I think that's when the fund will close for a little while and then they'll invest

that money. But the interesting thing will be if other pensions sort of feel uncomfortable with the fact that you know, every dollar of their management phase is you know, that will offset the Southeast and if you think about the broad sort of political content next, you know, investing alongside the Saudis is very fraught in itself right now because you have a situation where the Saudi Arabian government is being accused of killing the journalist Jamal Kashogi in their

consulate in Is temple correct. So if that's the case and investors other than the Saudis are getting a less virtuous deal, then isn't there a way for them to say to the people running the fund, we want the same deal as the Saudias, and if we can't get the same deal as the Saudis, we don't necessarily want to participate. Can they pull out? I think the existing investors will have a hard time because UM just knowing how all these fear agreements or just general relationships agreements

are structured, they're pretty water tight. They probably won't be able to pull out. But it's more the ones that are perspective, they probably will look at that, and they'll

look at the current landscape. There's just so any other infrastructure funds being raised right now, Brookfield and g I P with massive funds of their own, Morgan Stanley, others three I. There's just a lot of options out there, and if you can kind of deal with the firm that's maybe not um investing along or where you would not be investing alongside the Saudis, maybe that's a better option for them. Do you do you see that the board of directors of the pension funds in this case Pennsylvania.

Would they get involved at this nitty gritty level, and would the people who benefit from the pension fund, the pensioneers, they're now going to learn about this in equal investment opportunity. Yes, So they've declined to comment to me. They only just got back to me this morning. For sure, their their pension is can lolly them. I'm sure they'll hear from them. I think people might be a little bit upset, a

little bit outraged. Um, But yeah, I think for the folks that are in I don't know if they're stuck, I'm very interested in that. The other thing that I would just point out that we haven't talked about is the cipious I was going to get there. That's what I think is really interesting as well. Yeah, so in part of our reporting, we sort of learned a few things that PIV has some rights where they PEP being the Saudi Arabian Fund is the Saudi Arabian Fund Um.

They and Blackstone sort of struck a deal where black Stone can and piff sorry for keeping using PIV, but they can, in their best interests encourage CIFIUS not to require certain disclosures about folks on the on the Saudi board um in deference to their royalty, and that's because crown prints Muhammad bin Salman is on the PIFF board. So in other words, basically there is certain controls in place.

There are certain controls and police where the Saudi Arabian Fund can get involved in specific deals if they run a mark of Siphius, or they can be sort of a little bit more hands on with certain investments. Uh just I wouldn't structure it just like that. It's more that they can opt out or be excluded from deals where Syphius might you know, throw a fit because it threatens national security, whether it's an airport support or utilities.

Incredible story. Thank you very much Jillian Tan for sharing it with us. You can follow Jillian on Twitter at Jillian Tan. That's all one word, and uh, well, we'll have to see what happens with those other investors. They include the Teachers Retirement System of the State of Illinois, Teachers Retirement System of Texas, and the New Mexico State Investment Council, among other major investors in that fund that Blackstone launched for infrastructure twenty billion dollars. The topic right now,

maybe a little early in the day for some. But the topic is whiskey and joining us as the founding partner and managing director of Glass Revolution Imports. Raj sabarrow Wall he joins us now he's the founding partner. Raj, thank you very much for being with us. How did you come to create eat this company, Glass Revolution Imports? Why did you decide to do this? Pam First, thanks

for having me on this morning. I appreciate it. Um. I was in the corporate world, got tired of working for big corporations and decided to follow my passion and started the company in two thousand and nine. At that time, we were lucky enough to get access to arm Roots single malt, which was the first single malt out of India to be exported, and we started with that brand. Um, like I said, nine years ago, we've added several different brands now and are one of the leading importers of

world whiskey into the US. So let's talk about how whiskey is taking off. And I'm thinking about whiskey bars that are starting up in Brooklyn, and I feel like that that hard drinks, in particular whiskey and bourbon are kind of overtaking in some places even beer among millennials. What do you think is driving us how many? How much more can whiskey and urban kind of infiltrate the

alcohol scene and gain share here? I let you go question. So, I think that obviously beer sales are declining and they're giving way to spirits. Spirits continue to uh increase in sales UH, And I think that the consumers really are looking for different uniqueness. Um. You know, we can see that premium Scotch sales are up slightly, Bourbon sales that

you mentioned, and world whiskey in general. I mean, I think led by the Japanese praise um, and now that's being affected by both shortages in Japanese whiskey availability and increasing prices. So I think consumers are still appreciating brown spirits as a general category and spirits overall. RAJ, in addition to Amerate whiskey that you import, you also have in your portfolio Blackadder whiskey, English whiskey stock, and barrel whiskey.

You also have gin. What does it come we have to do in order to get RAJ interested in importing it into the United States? Great question. We everything we bring in is either owned by a small family distillery or have some history in producing product, So we're dealing directly with the owners of the company and the distillers. UM. You know the gin you mentioned that is from Spain. It's one of the oldest chins in the world, goes

back to fifty that they've been producing it. This is correct, and so we're always looking for a unique story, UH, something that will have authenticity behind the brand and allow the brand to stand out. So Rauj, I have to ask, you know, we've been talking a lot about trade tensions

and tariffs over the past few months. How has that impacted what you do, especially since some European countries have actually targeted whiskey UH in recent in recent months, Well, the target by the European county is primarily on American whiskey that is being exported to Europe. Are basically as importers and the fact that we're bringing in product from

non traditional markets, we have not really been impacted by tariffs. However, we actually see UH the ability to grow because as other products are targeted in the availability declines and the prices go up, we're seeing a hole that we can fill with our brands. RAGE how important are these whiskey fest events. They take place all over the world. You had Whiskey Fest San Francisco at the beginning of the year. I believe you just had Spirits in the Sky in Brussels.

You've got Whiskey Fest coming to New York in December. Are those big events for you? Do you really make a lot of business happen during those events? Him? I think those are very important because, you know, when you have a product that's not familiar to consumers, Uh, the only way to convince them and get them excited about

it is getting them to try. So rather than them going into a retail store and paying, you know, for a ball of whiskey, they can go to a show and try different products and therefore make their own decision whether or not they like it. Um. We found that education is a huge factor, and the more exposure we have to the consumer directly impacts our sales. Him. What's your favorite drink? Well, it actually is water? Yes? Sorry, sorry,

but here's here's a question for your rage. Are you scheduled to go to the Whiskey Extravaganza in Washington that's on the twenty five this month. I'm feeling a lot of lawmakers could use a lot of help. Now I will be there definitely. I'm not only exhibiting, but also we'll be leading a master class on the effect of would on aging whiskey. So we're gonna taste six different whiskeys, all aged in different barrels, to highlight what factors wood

has on aging. The raj what's your favorite whiskey? Wait, so that depends on the time of day, who I'm with, and what I'm doing. Eight am on a Monday, you have a happy to have a breakfast whiskey. So Harmond single Malt, which is a lighter whiskey, more fruit notes and floral. Uh, it makes a great breakfast whiskey. Love it? You speak of my language? Love it? Rush soaperall, thank

you so much for joining us. Ross sober Walls founding partner and managing director at Glass Revolution in Boards, based in Pittsburgh Water pim Fox. Come on, sorry, you know, honestly, it's I actually just pulled my husband. I asked him what his favorite liquor was. It's bourbons. He's more of a bourbon person because it's not as sweet he likes. The whiskey isn't really either, and It's good standalone too. Thanks for listening to the Bloomberg P and L podcast.

You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm Pim fall Box. I'm on Twitter at pim Fox. I'm on Twitter at Lisa abramowits one before the podcast. You can always catch us worldwide on Blueberg Radio