Mortgages, Private Debt, Banks, and Twitter

that some mortgage markets. When we want to talk, you know, what's going on in the MBS, that's mortgage backed securities. We bring in Eric Heidelberg, MBS strategists for Bloomberg Intelligence. What is the super strava biker? I don't know. I know that I probably put too much, too many miles on my bike. So Paul's a big peloton guy, But

you actually move on your bicycle. Uh, this time of year, I might be on something called Swift, which is inside, but we feel like we're moving because it's like in a cartoon world with other people. So it's in the metaverse alright, Erica, So again, you know we look at I n go to give us a snapshot of all the indexes out there, and just in fixed and come world, like the equity world, just read everywhere. Talk to us

about how the mortgage backed security market has been behaving. Well, um, there there probably aren't enough big words to describe it, but basically it's it's having its worst year ever by a significant margin, like at minus fourteen at some point in the middle of last month, we were approximately ten times worse than the mortgage market had ever been year

to date. Um. And that's what happens when you have a bear market because a lot of that is really just driven by interest rates, which have turned around a little bit recently, but some of that is driven by spread widening too, as the FED has stopped buying, and you know, there's a lot of volatility in the market's not you know, with so much uncertainty around what's going to go on with inflation, etcetera. When was the last time we had a big bear market in mortgage backed securities?

Before I was born? So how does the FEDS, I mean, how does QT play into this? How do rate rises play into this? Because um, didn't your own pali snap at somebody who asked if they were going to start selling nbs at the last press conference. Yeah, well, he they refused to take that off the table, which is probably wise, especially with some of his UH colleagues going on and saying we really shouldn't have be supporting a credit market, which I guess they consider mortgage backed securities

to be. So, you know, he has some FED other other FED members job owning sales, and I think they want to leave that on the table because if mortgage rates aren't responding to their activity, then you know, they want to probably dangle that out there is to potentially keep spreads relatively wide because they are using mortgage backed securities and mortgage rates generally sorry, not really mortgage back securities, but mortgages rates as a lever to try to slow

down the inflation rate by trying to slow on the housing market and ali inflationary aspects that a red hot housing market. Cause Google shows me seven point three three six percent for a thirty year fixed mortgage. I think you can shop around and do a little bit better if you need to, but yeah, the effect are great. Yeah. Sure. The effective rate that came out from the NBA this morning was some point oh six, which is the first

time it's topped seven percent. Other mortgage rates have been showing it above seven um, and that is the first time we've seen that since two thousand and six, where it actually only reached that level. I was looking at a minute ago, um briefly in two thousand and six, and then before that it's really the early two thousand's

before sustained there. And the big difference right now is just that so many homeowners have three percent mortgage rate, whereas at that point, Yeah, you concluded, Matt got it, But I will say that I bought at the absolute top of the market, so I got a good rate, but I paid way too much for my house. Yeah, and and maybe you're better off getting a worse rate, but you know, wait until the housing market comes down

a little bit and you can refinance. If if rates ever do turn around that this is certainly a big trend in the opposite direction. Even the arms cost a lot of ten six arms seven point six four four huh Yeah, I think again, you can shop around and do a little bit better there. But I'm not a mortgage originator, so I don't know. So I mean Erica Tuto about the I didn't know anything about really the

mortgage backed securities market until the Great Financial Crisis. Then I got like everybody else, I got very smart, very quickly. One of the things I learned is you have to really pay attention to the credit quality of the mortgages in your mbs. Just generally speaking, how do we feel about credit quality out there? The credit quality is by a large stellar compared to before the Great Financial isis.

One of the things that triggered that was that there was a lot of subprime lending, and a lot of that subprime lending was made in the form of mortgages that reset upwards when rates went up. They were these teaser rates. They were you know, payoups and arms. And as a result, as soon as rates began to rise a little bit in the mid two thousands, those homeowners yeah, okay,

good stuff. Erica started kind forge to get to an appointment with a FED president, Eric Heidelberg, NBA strategist for Bloomberg Intelligence, giving us a lowdown on the mortgage market here, like all the other fixed single markets, really has had a very tough I guess this Elon must Twitter deal is on. That's the news yesterday. Twenty cents I'll believe it when I see on for now. Yeah, the signatures

on the documents. Let's do a deep dive into how this might all play out at the Low West coast corresponding for Bloomberg News, he joins us here in our Bloomberg Interact broker studio, as does men Deep seeing our senior technology annals for Bloomberg Intelligence, and let's start with you. Sure well, I guess it's back on, but it is pending a resolution or stay of these legal issues. Is

that going to happen. I haven't heard anything, yes, so Must said that he reverts to his original offer fifty four dollars twenty cents to share on the exact same terms that were signed between the two parties April. In his letter to Twitter, he said that it's contingent on a stay of legal proceedings, which Twitter has not indicated either way what they're going to do. Really, all they've said is that they want to close the transaction at that fifty four dollar twenty cents price, and you know,

the timing super interesting, you know. According to one source, legal must legal team looked at it, and they looked at what the judge in the case, who was due to preside had said, and they didn't fancy their chances. So that's where we're at. But I mean, so from the Twitter perspective, the best thing to do would be to go through with the lawsuit and have the courts order Musk to buy it, because otherwise, if they agree to drop the suit, then he could just back out again. Yeah.

I mean, Twitter has at least been consistent. They sued Musk for specific performance of assigned contract, and they have maintained all along that their intent has always been to close the deal at fifty four dollars twenty cents. The reason I brought all that up is all they said last night was a reiteration that they want to close at fifty four dollars twenty cents. They didn't say whether they dropped legal proceedings. They didn't say whether they accept

Musk's latest and reversion of the offer. And so I think that's a really key point you're waiting for, as well as what on earth these Wall Street bankers will do with the debt. All right, men, deep, let's say that Ellen does buy Twitter. I mean it needs some work here. I mean it needs some work in terms of engagement and growing the revenue and what does he

dollar asset forty four billion dollars. Yeah, Well, with any large M and A, you have to have some sort of premium, right, You're not going to get it at market value or fair price. So that's a big, big, big premium, big premium. And I think what's uh kind of not clear yet is how he plans to monetize it. Clearly he has his ideas around you know, coming up with a subscription model or just kind of leveraging the franchise as you know, a super app, which is what

he tweeted about yesterday. X So, look, I think with Musk, because he's the face of Tesla, and Tesla as a company has had a very good ear in terms of attracting talent and what they're doing around you know, supercomputer and robots and just evis in general. I think what he's looking for is not to go through the trial because there will be bad PR and it's gonna hurt Tesla and then so really it's really care about bad PR. I mean, if there's one billionaire out there that's gotten

bad PR, it is Elon Musk. He's the king of bad PR. Well, they had an AI day on Friday, where it was really aimed at getting more talent, attracting talent around AI and machine learning to help him with his supercomputer and you know all the things that tell SLA is doing. So they really care about talent right now. And I think if he goes through this trial, it's going to bring in a lot of negative publicity talking

about twelve or thirteen billion dollars a debt. I'm looking at the f A function on the bloomber terminal consensus IBATA is like a billion a billion three. They can't have that kind of leverage. What are they thinking? Well, so, I mean his plans is to get Twitter to one billion in daily active users, which is five times where they are now. And uh right, and he wants to bring out the cyber truck by last year. That's not gonna happen, all right, timing, What's when do we think

this thing is gonna close? Actually? Is there anybody's venturing? I guess this is what's so fascinating. He wants to do the deal at the original terms of April. If you look at section two point to the closing se and I love that and the articles of closing that we're in there. They've all been fulfilled. The Twitter shareholders voted for it, the regulatory waiting periods of past. That's why I say focus on Twitter and what Twitter does, because they seem to be in control here if they

do stay legal proceedings. I think there's a big portion of the market that says it's reasonable to think this deal could close in the days rather than weeks. Could happen very quickly. But as I said, maybe we still do go to some somewhat form of trial. Maybe the court has jurisdiction over the closing dynamic and a little bit out of Musks control, it seems. I mean, doesn't that make sense for them to ask the judge to just guarantee the closing because they can say, look, okay,

he's agreed again. But last time he agreed, he signed all the documents, he committed himself legally, he made it a binding commitment, and then he backed out. So you know what's thet from. You know, there are many voices in the market that thinks the judge will keep an eye on this. Remember this is a chance recurt case. To Paul's point though that I think any of us knew what chance three court was before this week. What is the It's just corporate m and a court. You know,

she has the final say. It would have taken her months to reach the decision. But the debt, you know, the Wall Street bankers that musk Haide have to go to the asset managers and sell twelve and a half billion dollars of leverage buyout debt. That is much less attractive than it was in April when this whole thing was hatched. I don't I mean, are you hearing anything from Wall Street the men deep about this capital structure here? I kind of feel like he's got to go to

get some more private equity here. Well, the good thing is it's still you know, when you compared to the deck to equity ratio thirty three billion in equity and the remainder twelve point five billion in debt, which is still relatively low, typical buyouts like the Citrix buyout, that component is much higher. So did anybody want a piece of the Citrics buyout? People wouldn't want to touch it

with a ten foot pole. Are banks lost six hundred million dollars on the Citrix But that's gonna be dropping a bucket compared to this, I think us can still raise the money by selling his stock. He has hundred and seventy billion in Tesla stocks, so he can, didn't he see from the tweets are from the text messages, I should say that there are a lot of very rich people that want to help him out with cash. Yeah, but again, what does this all come down to? You know? Trust?

This has been a bit of a roller coaster and what we don't know from the court filings and disclosures as part of the discoveries, what do all those rich people think today? October five, Levan, a Eastern Are they willing to get on board? Who knows? Alright, guys, great stuff. Appreciate you coming in here. Ed Ludlow, West Coast correspondent for Bloomberg News. He's been trolling around New York for the past few weeks. We have no idea what's going on,

but we got Mandeep Sing. He's a Bloomberg in bloom b I industry. Uh. He covers all things technology and he's in the office quite off. Yeah, he's in your office quite often. He's one of these proud of him we are, so we always appreciate getting that round table. So looks. We'll keep our eyes on this Twitter. Will they close? Boy? Talk about it in public markets? Two just Marketer on everywhere and deals. You don't see I p O s. You see E t F launches, But

that's pretty much it. I mean, so if here's you should have a television show about that on Monday Steam. So people go into the private market, we hear more and more about this private equity, private debt. We're going to dive deeper into that biz. And we can do that with Randy Schumer. He's co had of Senior Lending and senior managing director Churchill Asset Management. He joined us live here in our Bloomberg Interactive Broker studio. So, Randy,

it's been tough everywhere out there for investors. Talk to us about the private capital business that you've been so involved in. How two been for you guys, Well, for somebody who's been in it for a long long time, it's interesting to actually see it coming into its own And part of the reason is because, as you guys have described, what the FED is doing with quantitative tightening and interest rate hikes is creating a vacuum in the

public markets. So there's no clearing price for public bonds right now, and the loans are both loans and bond market are kind of offline because nobody knows how much if you're an issuer, how much is that going to

cost me? So what they're doing is they're going to the private markets, in large part because it's long term capital that's been locked up for us to invest in companies and other peers of ours, and we can go out with those companies and say we actually can give you capital that's not volatile, that's not that is going to be positive in terms of for investors interest rates going forward because it's a floating rate asset class and

for senior debt. So that's why it's getting attention. And the other thing for investors is that because you've got a somewhat risk off environment, leverages coming down, covenants are tighter, and even more important, yields are higher right now for private credit? Are they do these borrowers continue to agree to floating rates? I mean, I guess now you want it, right because as we're starting to get to what feels like the top, you want to get into a floating rate. Well,

they want it because it's available capital. So they're willing to pay the price. Secondly, the unitrunch financings that were higher leverage, so six and seven times cash flows are no longer in the market, and so from an investor perspective, at five times and even less, that's very attractive. Junior capital now is being put into these capital structures to

provide the issue where the little bit more flexibility. Now junior capital is a fixed rate instrument, so it's good for the issue where because they lock in their cost, and it's good for an investor because the fixed rate cost is it's higher, it's you know, ten to twelve percent. Even senior debt today is close to ten percent. So it's very attractive from an investor perspective. It's been so hot.

I mean, Paul and I talked to so many UM fund managers who are starting to get into private markets and more and more we talked to private capital managers. What if we have a big recession? What you know, the the narrative has been short, shallow recession until recently, and now I think people are starting to worry about a longer term, deeper recession. Is that a problem, Well, it is a problem for the overall markets because we

don't know how that recession is going to unfold. It's going to be like a no way do none seems unlikely because the bank capital balance sheets are pretty strong right now. It doesn't feel like it's going to be an industry focus because we've had rolling recessions like that

over time in retail and so forth. Um, what probably is going to happen is it's going to be an interest expense UH coverage issue because as interest rates go up, companies that were highly leveled, too highly leveled in our view, are going to suffer because they're not gonna be able to pay their interests. Because think about it, Treasury rates were zero a year ago. There four percent today that

described and that's not changing. By the way, the Fed fight against inflation is going to be continuing this year and next year, and so you're gonna see interest rates pretty high. So we think active management is critical. If you are in industries the way Churchill is that are more defensive, like healthcare and technology and software, those businesses are going to do well typically through all cycles. But if you're in chemicals, gaming, energy, housing, those businesses are

going to get hurt. And that's where you're going to see in a recession um tighter interest and potentially default. We're already seeing some kickups in large cap defaults just because of that. All right, Let's just assume I'm a super wealthy person out there and I want I just bought a social media company and I need twelve or thirteen billion dollars in debt. Is there even a market out there for me? Well, I think there's there's probably a market. But the question is what's the price right now?

And if you look at the public markets, and you're seeing it in spades over the last several days in the public equity markets, but we're seeing it all the time in the credit markets, what is the clearing price? And the clearing price is determined by the value. What is the value of the business and or the or the assets, And that's going to be driven a lot by what is the expectation for the cycle going forward.

You tell me where we're going to be with rates next year, and and somebody who's asking me whether we're gonna have a hard landing. We're a barely a one percent growth rate right now. We had negative growth in

the first and second quarters. Some folks, you know in Bloomberg including you're saying kind of a one percent It's hard to have a hard landing when you're going along at one percent growth, right, So, what I think we see as sort of a sloppy sideways where companies are are going to be continually trying to figure out, Okay, where do I maneuver through these supply chain shortages? How do I keep my costs down? In an era of inflation,

food prices, energy prices continue to go up. And again, if you're if you're in an active management scenario where um, you're having a manager look very carefully at the free cash flows of these businesses. Are retail investors gonna say, Okay, I'm comfortable with this manager because they've been through a downturn before. We've been around for twenty years, We've seen these ups and downs. You're dealing with though much more

institutional investors. I mean, you're dealing with big numbers, right, Do you have big assets under management? Um? Is there room for a smaller player in private capital? Is there room for retail investors really get into it? Well, there's definitely room for retail investors. And in that case, it's really a question of education. What is private credit how does it help defining it as an uncorrelated asset class,

so it doesn't move with all the markets. So we don't care where the DAO is today or yesterday or tomorrow. What we care is and when we look at our portfolio companies, how are those businesses going to go through a cycle? And then explaining it to investors, here's why you should be comfortable with our track record with very few losses over the last twenty years, through multiple cycles, and with very careful screening of companies to make sure that if we do hit a downturn, that those companies

are going to be safe. Real quick, thirty seconds. What's a typical deal for you? What do you look for? So we look for companies that are leaders in their field. We look for companies that are backed by the best private equity firms that we have close relationships with, who do a lot of the thought leadership about Okay, why the sector and why this business um And we look for structures that are conservative fully secured by ass that's in cash flow, low leverage pricing that is at a

premium to the public markets. And second and third ways out because we all know that things happen you want to make sure their ways out if something happens that's unexpected, and then there always is all right, good stuff. Randy Schwimmer, co head of Senior Lending and Senior Managing Director Churchill Asset Management, talking about the private capital business and again

as the public markets. And you've got a very popular newsletter. Yeah, well we should that because you have a big readership and for this kind of a niche industry, right, I think it's a pretty big deal. I appreciate that the lead left dot com and it's free to any friends of this group right here because we're friends of Bloomberg. Good stuff. I love to hear that. I range Schimmer Joints as we appreciate that. In studio he had the long walk across the street, So we appreciate folks. They're out,

they're getting out. And about how about that Hurricane Ian has come and gone, but boy, the destruction in Florida and some other places is just extraordinary. Let's put some numbers around, uh, the costs of the storm. We can do that with Matthew Palozzola. He's a senior analyst covering property and casualty insurance for Bloomberg Intelligence. He trains is

here in our Bloomberg Interactive Brokers studio. So, Matt, what's the headline number in terms of the insured loss coming from this storm, which I think is one of the biggest ones sure, So it's shaping up to be perhaps the second largest insured hurricane loss ever after Katrina, after Katrina. Um, and you know, it's actually even bigger than the Twitter Elon deal at at around sixty billion dollars of insured losses, which could imply that the economic losses would be over

a hundred billion dollars. And who backs up? The difference is that does the government take over that some of it's a government A lot of infrastructure is not insured, so a lot of it would be that a lot of it could be uh, you know, uninsured properties too. Yea, all right, so this was bad. But if it hit Tampa, I think we were talking to you a week or so ago that could but had a much bigger number. But still this is just huge. So we avoided the worst case. But it's just it's just a less bad

bad case. Um. The direction on Tampa people were talking about that kind of scenario costing insurance companies a hundred billion dollars which might have cost two dred billion in economic losses. So, um, what is the result here for the insurers? I mean, um, they're obviously prepared for this kind of thing, but this is pretty big. So this is a big um. This will hit the reinsurance market,

which is insurance for insurance companies. A couple of things to note is that catastrophe losses there haven't been a lot so far in the year, especially in the quarter, so they have budgets for these things. We we have some analysis that says this could cost about of third quarter earnings on average for a selected group of companies, which is what we would say an earnings event, not a capital event. All right, So to us about just the insurance industry in in Florida in general, because it

kind of goes to the insurance business. I mean, it's not it. I thought the insurance infrastructure umbrella in place like Florida, which has so you know, they're so prone to these storms, would be more robust. But it's really not, is it. And it's it's in trouble. So one of the biggest, not the biggest insurer in the state is the state. So if you can't get insurance from private insurance companies. You have to go to citizens, which is

the state fund. Uh and the policies and forces have been growing and growing, and what's essentially happening is the reinsurance companies don't want to give reinsurance to the primary companies there and a lot of the smaller ones have either left the state are actually gone insolvent. What does this mean for rates for premiums? So typically the adages you get a big storm loss and rates kind of spike up. Um rates will be going up for homeowners

insurance anyway. Rates on the commercial side have been going up for a couple of years anyway, So I don't think that adage is gonna hold this at a time when rates rates are going up. Oh well, you know, interest rates are going up, which helps the insurance comes on the investment income side, which theoretically means they don't need to raise prices as much, but they still will get your hopes what percentage of you know, you drag denistry.

You look at some of these homes, are they all insured or do people just say it's too expensive, I'm just going to roll the dice. So if you have a mortgage, you need insurance right, And if you're in a flood zone and you have a mortgage, you need flood insurance. I think what where the we're not going to do it is is the take up on flood

insurance outside of designated flood zones. So like if you looked at these counties down there, that take up rate people who buy the flood insurance is around thirty and that's probably only the people who need to buy it. So the people who don't need to buy it don't buy it, and then they have a flood loss and it's out of there. And that's what these losses are, right, because it was the surge that was the most damaging. So some of it is when I'd say sixty billion,

that is not including the flood. It might include some of the National Flood Insurance Program, but it's not. That's mostly not the flood losses because a lot of that will be uninsured. So what's it like to be an insurance company these days? With wildfires every day in the news. If it's not wildfires, it's raining, then the mud slides from the stuff that was burnt, or hurricanes or superstorms to I mean, I guess they just adjust their models

on the risk premium, and they do they go merrily along. Well, if and if it's not that it's a pandemic, and if it's not that it's a war in Ukraine. So uh, you know, look, they're they're used to these things. Non correlated risks are are tough, or massively correlated risks are also tough. So uh, they've been adapting to new things. But one thing that's interesting is there's a ton of

stuff that just isn't insured. So it's it's a little bit of an exciting time to be an insurance company because you know, there's cyber there's there's tons of things, there's a lot of new opportunities. They'll be very weary to get into these things, but I think the ones who first move will be good. So away from this storm, when you're at a dinner party, and I'm sure you get a lot of invites as the insurance analysts, of course,

what are you excited about? What do you what do you talk to people about when when when the woman next to you says, hey, what are some good opportunities out there? What do you recommend? Um? You know, the the interesting companies, to be honest, are the boring companies. Right, So you look at the bell Weather is like a chub um. You know, it's just a company that keeps growing every year, keeps being the best underwriter every year.

And you know what another one's interesting is a I G. They're they're working on a spinoff of their life insurance unit. Their valuation is much lower than the than the group average, and I think their performance has been catching up to the group. So it's it's a nice kind of turnaround story. Kicks me out? Did they how come they insured something

for me? And they were great about it, like no questions asked, here's the money, thanks very much, and that they were like, you're not coming back your Picasso, and then they dropped exactly exactly all right. Matthew Palazzola, thanks so much for joining us here our studios here. Matthew Palozola. He covers property and count casualty insurance companies in industry for Bloomberg Intelligence. So he's been a person in demand.

He always seems to be this time of year. So, man, I guess so earnings will be kicking off in a couple of weeks and it usually leads with the big investment banks um and I think it's gonna be a little dicey for these guys that the major earning season. I'm focused on a number of other companies. I saw that til Ray is coming out with earnings on Friday. That's the marijuana um we brand company, and then a couple of other weed companies are coming out on Tuesday.

I just find it so interesting. I've been talking to some analysts um in the industry, those who are allowed to because it's difficult to get coverage on this, and they're saying, like, these socks are trading for two time sales for five times earnings. I mean, they're priced for uh, some kind of drop in demand. But of course it's only going to ride. This is more and more stags go.

All right, but let's talk Wall Street. We do that with Alison Williams, Senior Global Banks and Asset Manager Analysts. I hired her as the Bank Sandles, but her title keeps getting bigger and bigger and bigger. Bloomberg Intelligence Paul has always taking credit for you, by the way, yeah always, let's why tell us what we should be thinking about for these earnings coming off for the big banks and investment banks that you follow me what's JP Morgan, what's

Morgan Stanley? What are they gonna be saying in this quarter? So one thing we know is week fees Okay, so I P O S have you know, are are sort of completely gone away almost compared to record year last year. Fees are gonna be down fift Wealth management fees are going to be weak. Asset management fees are gonna week over draft fees are gonna be weak. So okay, but don't we have a steeping and we have a steeping yield curve. Isn't that good for you? So stepien and

yield curve is good. But it does take a while to to sort of feed through. And I think one of the things that we're gonna be watching um at the at the US Bank is loan growth and that interest margin expansion because we think there's gonna be some slowing. Our overdraft fees going to be weak because consumers have been so responsible in terms of watching what they spend. I think because banks have been pressured to cut eliminate. I will never understand this. Why do they when that

her go to issues? Yeah, but you know what, you only get charged and overgraph fee if you spend more money than you have in your account. Just don't do that right, rightly. That part of fiscal responsibility that everyone should learn it is opt in service, right, you have to opt in for that service. So so it is

interesting that the continued scrutiny there. But um but fees week, as we said, um, loan growth slowing, and I think that's something that we've been worried about, right, Like everyone's excited about rates going up because it's good for the margin, but you need people to borrow, and as rates are going up, are gonna we haven't had any of your your big banks that you however, nobody's pre announced yet, have they No one's pre announced, And I think that a lot of the as they said, a lot of

the bad news, as we now always relates to the outlook, right Like we're not we're not so worried about the last three months, but we're worried about what's ahead. So what what are the trends in loan growth? What does

that tell us about next year? And then provisions that's still a wild card, right, So in terms of the economy and in terms of the accounting at these banks, banks have to look ahead, reserve over the life of the loans UM and so there are some accounting and assumptions there, and as the assumptions get tougher, UM will there be some provisions. The exciting thing this earnings go around is we have four big banks kicking off next Friday, so we'll have all the answers, if you will, sort

of in one day. UM. Fixed income trading, the rate side of things is going to be very strong. So that's positive for for people like JP Morgan and City when they kick off the results equity trading UM, it's probably gonna be down from the prior year. UM and again we'll be looking to see those investment banking pipelines. Is there any potential to execute uh that you know some of that pipeline going into your end. That's really going to depend on the market. So you don't cover credit,

sweee credit? You do? Okay? So what's the deal here? Have they just had uh? Have they just had a lack of faith in UM market partners? Well, I'll say two things with the recent price action. First, when a bank comes out and says they're evaluating their strategy, and that strategy may or may not include a capital raise, that's that's never going to be good for the stock. Stocks hate uncertainty, and especially if that uncertainty, um, you know, could relate to dilution, it's going to be hard for

those shares to study. And then when you have markets like we've had, right, So Credit Sweets was very volatile on Monday. It was not a strong market, so that's obviously a contributor. Banks in general are under pressure. There's a lot of uncertainty about banks. European banks are under pressure. But they've had to reneg on deals they've made with clients, right. Apparently they lend out stock to clients, agreed to do it contractually obligated, and then they realized they can't get

that stock from other market participants, so they've had to cancel. Well, I'm you know, Bloomberg News has reported that I'm you know, less familiar with those intimate details inside the bank, but I would say that, you know, the the bigger picture for Credit suitees is risk management, right, So that's really what killed them last year. They had all these they had all these hits. Um, they made some steps potentially

not aggressive enough. You know, sometimes hindsight, if the market had been a great market this year, maybe maybe things would have been different, but they're not. They need to make deeper cuts. They've made changes at the top UM and and you know, I guess that the tough thing is gonna be what are they going to say to instill confidence? Because whatever plan they come out with, that's also gonna take time and patient capital capital. Alison Williams,

thank you so much for joining us. Alison Williams, Senior banks analysts for Bloomberg Intelligence. One of the biggest I think themes in investment in the last decade plus has been E s G, Environmental, social, and governance. It's attracted a lot of assets for investors that are looking to, you know, focus on those issues in their investing. But I think it's getting a little some pushback recently. UM Bloomberg has a story out on that. We welcome Priscilla,

reporter for Bloomberg News. She's in our London office. Priscilla, talk to us about kind of the work you guys have been doing looking at this E s G investment picture, It seems like it may not be delivering some of some of the benefits that it that some of the early folks were talking about. What did you find, Hey, good turnoon here from London. Thank you for having me so. Uh. This story that we have out that is also in the Markets magazine that it is going to come out

next week. Um. It's also the result of an investigation that we did for six months. We looked into companies that issue sustainability linked bonds in particular. So sustainability linked bonds are different from green social and sustainable bonds because when I'll do like a short explanation, when a company comes to the market and they issue a label bond like green Social sustainable, the money that they take from investors for that bond needs to be allocated for a

specific project. With this sustainability linked bonds, the story is slightly different. So you take the money from investors, you can use that money for whatever you want as long as you and you tie this this bond to a bigger like corporate climate goals, so you can take this money as long as you achieve other goals at a

company level. And it turns out out then when looking at those bonds that boomed in Europe over the past two to three years, uh, most of those goals they were irrelevant, they were weak, or they were already achieved so the companies they weren't like they were achieving goals that were already achieved. So yeah, so the penalties like they weren't. Uh, the industry itself wasn't living up to

its potential. I mean, of course, why would you put yourself as a company in a position where you're forced to pay millions of dollars and penalties. I mean, if you have a whole bunch of investors who are willing to give you money for cheap because they think you're going to do something special, and then, um, you said, super easy goals for yourself, low hurdles that you clear with no problem, that's like a win win for the company,

right exactly, that an absolute win win. In those bones, they were super subscribed by investors, especially in an environment of low interest rates like that we had in the past two years. That's the part I don't get. So why why this is the part I don't get. Um, I understand why Chanel uh did the deal. I don't understand why the deal was oversubscribed. I mean, who wants to give them a better rate for pretending to be green? Well, so investors did. At the time. The bond was super

subscribed by investors. So when in an in an environment where interest rates are so low, everything that comes to the market is super subscribed, right. And also when you have a new portfolio, a bond that is labeled, it gives the impression that you're doing good. So this bond is fulfilling, uh, sort of like E s G investment mandate. But there's so much going on, so many bonds coming to the market, that maybe investors are credit analysts. They

didn't dig down into the numbers to look at this. So, Priscilla, is there any sense that you know, investors are like latching onto this idea that hey, maybe this isn't such a great deal. Is there any pushback from the investment community. Yes, So lately we've we've started seeing the headlines coming. We've seen investors like moving Toro prize that they said like criticizing those products, saying that they are not living up

to their expectations. That companies are doing this and they took massive advantage of those conditions to bring those zeals. So those criticism is there and it is becoming more and more evident. Did um central banks participate in these deals? Because I remember at the time the e C B was all green as well as was the EU. Yes, so the European Central Bank. So the market really started off in Europe at the end of two thousand nineteen,

but we had like one to three deals. The first one was a bound for ann L, the Italian utility company, which is by the way, one of the biggest issuer

of this product. Um. So the market started in but it really kicked off in two thousand twenty one, and that's because the ECB started buying those bonds, so sustainability linked bones started being eligible as collateral for the European Central Bank from then and since then, because the central Bank was able to participate in those sales, they boomed.

It's amazing. It's almost like, I mean, a conspiracy theorist would say that the board that Chanel knows some people on the e C being convinced them to do this to get them easier financing. Um. But I guess those days are gone, right. The pool of investors, you right, has shrunk and central banks clearly are pulling back. Yes, that's right. And now there's also more and more attention into those deals and people are looking at the documentation

because the market now has evolved. We have because it was new right in two thousand ninety, not only a lot of people knew what they are what they were looking at. So now there's more base, there's more point of comparison, so you can go into the material and to the documentation of such bonds and actually see what they're all about. And investigators are looking into it even beyond you, right, I mean, uh, courts. Well, Uh, that's

what we hope, that's what we hope. So far, the regulators haven't gone down in Europe to the route of looking at the ambitiousness of the goals, but we could only hope that is more and more deals come to the market and investors are more of the work, we start seeing that they're not achieving the goals are actually relevant to climate and to climate change into addressing the the proposed goals, I was gonna say go ahead now, out of like all the deals that we've that we've analyzed,

there's not a single bond that pays more than one percent penalty if they failed to achieve, So this is not relevant for a company at all. Yeah, that makes sense. Interesting stuff. Priscillassato Roca, reporter for Bloomberg News, talking about the e s G Investing son I think getting some pushback on maybe some of the initial promises that were made by folks in the E s G community. Thanks

for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller three. Put on false Sweeney I'm on Twitter at pt Sweeney before the podcast. You can always catch us worldwide at Bloomberg Radio.