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 called Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. Let's bring in right now Frank Sorrentino. He is Shairming, CEO at Connect one Bank. It's Nasdaq traded the ticker CNOB And Frank, Wow, what
an insane week or you know two or three? Or how do you deal as a banker with the rates volatility like this?
Yeah? How about a year? How about an insane year?
Yes, that's fair.
It's been an interesting environment.
You know, certainly there are lots of things that Connect One that we try to control, but what the FED policy is and where rates are going and how the market reacts to those rates is something that's somewhat out of our control. And so yeah, it's been very challenging, not just for Connect one but for banks in general.
Frank, what sectors of the economy are you seeing actually absorb the effects of the fed tightening and what areas are maybe still waiting for the monetary policy lags to kick in.
Yeah, I think when you look at it, I think that question would be answered differently from different bankers from different parts of the country, But certainly here in the New York metro market at Connect one, we certainly see that the vast majority of our clients are absorbing those rate increases and it's showing up in lots of places right Rents are up. If you've been to a restaurant lately, you see that the price of a meal is up.
And I know, you know.
There's inflation component to all this, but that's part of the rate increase, and so it's building into the economy, and I think we're seeing it in higher prices, higher costs, and being incorporated in every aspect of our economy. I think our builders, for one, are for the first time in a very long time having to figure out what are the interest rates and what's the interest component of a construction project.
But they really didn't have to think about that too much in the past. So all these things are.
Leading to higher prices and definitely a more normalized environment where interest.
Has a cost but nothing normal about the current housing market, right, I mean in terms of residential, especially previously owned homes, that market seems to have grind to a halt.
So connect one. We do a lot of new home building.
We don't see a lot of the mortgage refinance although we do see some. And yes, for the existing home market, it's a difficult place today because folks have low interest rate loans. They really don't want to move and give up that rate where they can't. But on the new
housing front, we do see a level of optimism. Where As you know in the New York metro market and by the way, as the nation, we are under housed, right There's just not enough apartments, not enough housing units, and so new product that's coming to the market is able to absorb the higher costs due to inflation, the higher cost due to interest rates, and there is a ready market buying that product.
We hear all the time that builders offer incentives. You know, they're buying down points or they're giving lower rates. And I heard I was talking to a land developer the other day who said they are giving builders incentives, and I thought, you know, where does the buck stop, because obviously at some point somebody's got to pay the price.
The end consumer pays the price, right, So with.
Certainly seeing prices have somewhat leveled off relative to new home product.
We're also seeing it in the rental market.
Rents continue to go up over the last couple of years at a pretty drastic clip. We are, however, starting to see that level off and there are some places where we are seeing some level of concessions.
So I do think we're getting to a more normalized place.
And I think that's part of the message that came out of the FED is that the economy is beginning, as you first question you asked, beginning to absorb a more normalized rate environment.
Your notes it says that you think the economy is on a soft landing trajectory. I'm wondering what you see, as the CEO of a bank that deals with small businesses and deals with lenders, what are you seeing that maybe some of the other Wall Street prognosticators that are still calling for recession are missing.
Well.
Look, I start with employment, and in all the markets that connect one serves, we're seeing a shortage of people to fill jobs. We're seeing very very low unemployment. We're seeing a strong labor market overall rising wages, and that to me underpins everything. People that are that have a job feel good about their job and see their wages rising, can absorb those, you know, changes in the economy, higher interest.
Rates and everything else.
They can absorb rising rents, They can absorb higher costs of food and housing and everything else. And so to me, that's the that that that's the foundation on which the economy is built. And no one's been able to convince me that that's going to change anytime soon.
I just want to ask about deposits. How sticky are they? How do you fight deposit flight? Is it just a question of the rate you offer, or do you think that depositors also really look into services and the culture. I mean, what do you what's your view on on that look?
I think there was definitely back in March, a reorganization of the deposit market versus large banks, small banks, medium sized banks where people had funds, The entire notion that interest wasn't being paid on certain types of accounts, FDIC, insurance coverage, lots of questions, lots of things came to the four in those few weeks of March. In early April, I think the market overall, though, has pretty much settled out and people are pretty much staying where they are.
There is the ease of being able to move money from bank to bank, but folks, Connect One is mostly a business oriented bank. People come to us not necessarily for the highest rate. They come to us for services. There's generally we have clients who have multiple types of businesses with us, and so rate is not the number
one thing. That doesn't mean we're not going to pay a market rate, but it does mean that folks are making decisions in banks like hours relative to things like service and availability and the ability to talk to decision makers, and you know what the other side of the transaction looks like, if there's a loan there, or a business loan or something else. So I think things in general
have stabilized. Keep in mind, however, beside the FED raising rates, they've also been shrinking the money supply and shrinking the FED balance sheet. Right earlier this year we saw for the first time since nineteen forty nine that M two actually shrunk, and the FED is on a track to continue to reduce the size of its balance sheet. That's putting a lot of pressure on banks and other financial institutions.
Frank, great to get your views, really helpful context there. Frank Sorrentino is the chairman and CEO of Connect One Bank.
You're listening to the team. Ken's a 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 podcast.
Katie Greifeld in the studio with me Paul Sweeney on an extended lunch break right now. I'll be back at three pm. Let's talk right now about There was a Bloomberg story the other day that said the shrinking one point three trillion dollar col market is bad news for bankers, and people have been talking about this market as if it's hit a speed bump or maybe even frozen. Got a guest here in the studio says, not the case, not so fast. Thomas Majuski is a CEO of Eagle
Point Credit Management. He's got experience across the street from JP Morgan to bear Stearns and Mother Merrill and then obviously some smaller shops as well. Tom, Thanks so much for your time. What's your view of the CLO market right now.
Great, thanks for having me mat The market's far more vibrant, I think than the headlines suggest. There's always waysy can cut the data a lot of different ways. The actual new issue volume for colos remains quite robust. However, the activity of resetting or refinancing, which is where you go and reopen an old deal and re extend it, that slowed down significantly. So total volume is down, but the actual new volume created is not too far off from where it was last year.
Well, let's talk about one of the ways in which they cut the data. About forty percent of issuers in this area of corporate finance are yet to price a new deal this year. When you hear a stat like that, what's your reaction?
It's an indication perhaps of the state of their performance and a state of the market.
Broadly.
Markets investors in colos, including US, have certainly gotten far more selective in a raging bull market. There was an old saying two guys in a Bloomberg could print a COLO. The market needs a little more robust than that. And now that we have over twenty years of data for people's performance, it's easier to separate the top from the worst that forty is out of about one hundred and twenty. So the other way to cut that is two thirds of the market is operating kind of business as usual.
What's your view on financial conditions right now? It seems like they were getting tighter. The Fed was letting the market do its job until the Fed told the market that's what it was doing. And now the market isn't doing its job anymore. So how do they look to you?
Well, the underlying assets and clos are syndicated loans, small pieces of big loans to big American companies. Their floating rate and senior and secured, which means a problem, there's less risk of loss. The loan index is up about ten percent this year versus the Bloomberg ag is roughly flat for the year, down a tiny bit. That's investment
grade versus loans are below investment grade. And there was a lot of talk early in the year with increasing interest rates and loans are floating rate, that companies wouldn't be able to service their debt. There was going to be a recession coming and rates are going higher. As an investor, great, we get a floating rate for the companies. On the other hand, they have to pay that floating rate.
The reality though, is profits and revenue at most below investment grade companies continue to go up in this economy. Citybank just put out research that said more companies are getting upgraded than downgraded, and while there are some defaults, the default rate over this year has been roughly half the long term average. So it's the economy is at least the corporate borrower in leverage finances doing far better than the headlines would suggest.
Okay, so overall, not too much consternation over increased in interest expenses and servicing that debt. But for the pain that you are seeing, there certainly are companies out there that are struggling with that. Do they tend to be concentrated to any industry or what is the common denominator there?
Thankfully it's not one industry. Sometimes we've seen that, maybe in twenty fifteen we saw energy pose a problem. The problems where they do exist, and they're quite few, are generally broad based. In many case is it's due to either a company that just put on a little too much leverage or a company maybe with a less skilled management team would be some of the biggest things or change in regulation. One company recently, in Vision Healthcare, which defaulted,
had a number of businesses. Every business line was coincidentally infected by adverse changes in regulation for them, So just a perfect storm against that company, you think.
So, you think that regulatory capital reasons are the problem that some banks have, I guess bought other things than triple A clos. But you point out Japanese banks are still big buyers. Why is that? Why are Japanese banks notable here?
Absolutely, Japanese banks remained some of the largest buyers of COLO triple as and holders in the world. US banks also own meaningful amounts. Some of the largest money center banks own more than one percent of their gross assets and COLO paper. Frankly, we joke that had some of the regional banks that are no longer with US bought floating rate clos instead of mortgages, they might still be with US in fact, but the banks in the US
there's sometimes some stigma with the name. It's still a COLO that sounds like a cdo Many of those Japanese investors have been in the market for over twenty years, and across their triple A portfolios, what they've seen is everyone has paid off at par there's never been a default on any bond they bought in the COLO market.
And let's talk a little bit about what happened in March. Like you said, maybe if those banks had maybe shifted out of treasuries into colos, we'd still be with them. But when we talk about what happened in March, we talk about it as a boon to private credit. Certainly, private debt has been on fire this year. Where does the COLO market sit in relation to what we're seeing in private credit?
Sure so we're a net beneficiary of that in a number of ways. Frankly, banks in general are putting less capital out as Basel three comes to fruition and higher capital charges on banks are unambiguously trends in the market. The steady hand of private credit, which is typically in the form of private equity style funds, not short term funds with redemptions, but long ten year funds that can see a credit through from start to end. A lot
of capital going in there. They've frankly bailed out a number of triple C rated syndicated loans and taken that out of the syndicated loan market, brought it to private credit as one thing and another thing. We've seen a real increase in it. It's an opportunity we're very interested in, and I've been deploying a lot of capital in are
something called regulatory capital relief transactions for banks. This is where a large bank will take a portion of their corporate loans, or their auto loans, or their fund subscription line loans even and put them in a synthetic securitization. Some very loaded words there, but a good way to raise capital and they can basically transfer the risk of owning those two investors. Basically a way to raise capital without having to go to the stock market and do
a secondary offering. The reality is, over many years those investments have done very very well. And what we're seeing is banks are seeking more and more capital knowing they're going to be facing higher capital charges. They're coming to that market with greater frequency.
But the private credit market is one that banks are It seems like they're losing that business to almost a shadow banking group of lenders. Is that market even though I mean you point out their long term lenders, you know they aren't facing like immediate redemptions in a lot of cases, but there's not a lot of regulation there for how much business they're doing. So does that look like a place where regulation is going to grow into the good.
Part about it is it's a steady hand, and what goes wrong with banks as people take their money out. You and I can take our money out of our banks today with no consequence except for the person in line after us perhaps having these credits, even if there are riskier credits some cases in private credit or maybe a little more leverage, having a small number of owners in that loan, each with a long term mindset and
a steady hand, I think is net beneficial. The investors in those vehicles typically are large sophisticated pensions and insurance companies, so the investor is getting involved in these underlying funds that are making these private credit loans are quite sophisticated themselves.
Okay, so we don't have much time love with you, but I could see regulation being a potential risk here. Talking to you, everything sounds pretty rosy. But if you take a look at the CLO market overall, where else are you seeing risks lurk?
Some of the risks continue to be frankly that the biggest thing is the change in regulation and the impact on companies. I cited that one company before something that makes medicare reimbursement slower or things like that, a regulation, which might be a very valid regulation, then has an impact and changes a company's behavior overall. Things that people often talk about, the wall of maturities and loans has been pushed way out, frankly, and the ability of companies
to service their higher debts remains quite strong. Idiosyncratic risk is probably the biggest area that we look at, and then probably when we think about in our risk management meetings, frankly, continuing to look at our counterparties one of the things we look at, or what's the credit default spread pricing on banks that we do business with. While right now it seems most banks are on steady footing, again, that can change very quickly, so we keep our eye out
at the margins. We don't see a large systemic risk facing us, but no one was talking about a banking crisis in January of this year.
Absolutely, Thomas, thanks so much for your time, Really appreciated. Thomas Majuski is the CEO of Eagle Point Credit Management. If you want more from him, he's going to go on Bloomberg Television in a moment and talk a little bit Lisa Bromwitz about this as well.
You're listening to the tape. Catch our 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.
Katie Greifeld here with me in the Interactive Brokers studio. Paul Sweeney is out today. Well he'll be back, yeah, but not until three pm. He's taking an extended break right now. Gina ting in the house as well. She is the head of Global Index Portfolio Management team over at Franklin Templeton ETFs, and she will be a guest on our next week's ETFIQ program that's on Bloomberg Television every Monday at one pm.
So this is the warm up.
This is a deep tease, basically, Dina, just before we get into the important stuff, I wanted to address a story that Katie and Eric Belchunas they don't think it's that important, but I think it's very interesting and kind of a big deal, and that is a big push by regularly to shift to T plus one to faster settlement is going to drive up costs and create a lot of operational challenges for ETFs. What do you think about this drive to move to at some point will
be on tea. We'll just settle as soon as you make the transaction.
Yeah. I think all changes always have repercussion, right, So in the case of T plus one, I think at the end of the day, when everybody is prepared for it, it should not be causing an issue. I've seen an example in India where they move from T plus two to T plus one earlier this year and everybody was worried, especially because India the currency is restricted. Currency is a little bit more difficult. So I would imagine with more preparation in the US dollar in the US especially, that
it's less of an issue. And I don't know if you're aware, but in China it's actually T plus zero. WOWK, Yeah, good for them.
The concern is actually international settlements. So there are many US listed ETFs that are going to have to be settling plus one, but they hold you know ETFs that hold European assets for example, or international assets that settle plus two or plus five, how do they square that circle?
Yeah, so those are the balancing act that a portfolio manager has to do.
Right.
So when you're investing in the global markets, they all have different settlement cycles. So and if you're in the midst of rebalancing, how would you balance something that settles in three plus three if your funding is coming in at even longer settlement than that. But it's nothing unusual. So it's just about like, how would you handle the mismatch between where you're getting your funding versus where are
you going to deploy that particular cash. Right, So if you think about your example, so if let's say you're investing in European countries and you're buying a US equity, right, so the US equity will settle T plus one. But let's say to buy the US equity you require funding from selling the European equity. Then you have to short stand the cycle of that one in order to be able to fund or you can have a line of
credit to kind of handle that. So it's one of those things that at the end of the day, it is complicated.
Yeah, gosh, good thing that I the end investor probably don't have to worry about.
This, right, It's true, Like that's why you trust your money managers.
Well, unless you take to hit on the margins, she's going to have to pay a higher fee.
Frankly, perhaps, Yeah, all right.
Franklin Templeton ETFs. What are you guys pumped about?
So we are looking at dividendal strategy. So we're pumped about that strategy because very rarely a strategy that focus on dividend focus beyond just dividend. So a lot of the strategies out there all they care about is a higher dividend yield, right, But in reality, when you only singularly focus on higher dividend yield, you forget that you may be underperforming in some periods by a significant amount. Likewise, so the tracking era between your investment universe and your
strategy could deview it quite a bit. So at Franklin Templeton we have a suite of dividendial strategies where you're balancing the tracking error versus the investment universe and the dividend yield. So you're still getting a higher dividend yield, but you're not limiting yourself only two companies that pay higher yield, you actually run an optimization to be able to balance out the tracking air versus the investment universe while still delivering on the higher yield.
And so it feels like income has been one of the primary things that investors have been looking for, whether it's through t bills funds, whether it's through these options overlay ETFs. How does demand for dividends actually looked like?
Yeah, so we're seeing over like three hundred billion allocated to like income slash dividend yield strategies. Within our lineup, our dv product dv I, which is international developed dividend tilt strategies, we were seeing like close to like half
a billion in netflows coming through. So income is an area that, regardless of the environment, people are looking for, and especially in the higher volatility environment that we're seeing right now, it gives you a little bit of downside protection as well as providing you the income that you're looking for.
You know, it was a lot of talk about the S and P today. Amligriffe Oros story about the fact that a lot of the companies in the S and P are smaller than companies in the S and P four hundred MidCap index, all of the games are really about the big seven getting bigger. Right, does diversification matter right now? Or do you just have to make the right.
Bet the ication?
Diversification always matter?
Right?
The fact that the S and P five hundred is driven by these seven companies actually is a challenge. Right, It's not like that for ten years ago. It's not
like that twenty years ago. A company or an indices needs to be diversified because that's how you kind of believe in like the returns potential, Because if you're just relying on seven to drive the contribution of return, which I heard the number is like eighty five percent this year, right, it's not a balance because imagine when it's doing well, of course is good, but when it's not doing so well,
then it's less so. So that's why we're always a big believer on like the MidCap segment and liver in a balance approach, whether that's through a smart bab or through a combination of strategies around.
But even still, it just feels like all of the attention has been on the big seven, and I mean, how are you seeing a filter cross.
These different and we don't have time for ohm questions.
Oh no, I was just gonna started.
There's only twenty seconds left.
Okay, never mind, we'll ask it next month.
We'll talk to you next week. Right next week at one pm, you can hear more from Dina Ting, head of Global Index Portfolio Management at Franklin Templeton etf She's going to join me and Katie and Eric Belchunis on Bloomberg TV Crypto Sorry etf IQ.
You're listening to the tape can's our 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.
Let's say at Heidaword nexkus Mark Douglas CEO of Mountain. They call themselves the hardest working software in television. They build advertising software. I really do. I can remember back Mark. It had to be like fifty years ago when we were first getting cable in the area and my brother made the pitch to the old man saying it's great, lots of sports and they don't have advertising on cable now. It's just like, I feel the same thing as happening to me with streaming. What's the story.
Well, I mean that works for the first three providers, which are willing to pay for maybe four, and then all the other cable channels they're not getting any of that subscription money so they have to have ads. And then it comes full circle and the ones you weren't getting ads from were like, well, we could double our revenue if we add ads too, So we're just kind of as back to the future. We're reliving that moment in cable, but we're doing it on streaming that.
Yeah, but I don't watch those ads, and Scarlett, I know your kids aren't watching the ads.
Gen Z is just angry about having to watch advertising because they've grown up where they haven't had to do it, and so when they're forced to sit through it, it's just, you know, something that really gets at them is the advertising that they're going to see on streaming services going to be markedly different than what we got on network television in the eighties and nineties.
Yeah, I mean that's it's I mean, it's literally exactly what my company Mount does, so we democratize TV ads, So what you're going to see is a lot more advertisers and they're all competing to get your attention so that they're going to be more entertaining instead of it just being kind of the same old bear brands and
car brands. You're going to see a much you know, a lot of merging brands that are actually using television now on streaming to kind of basically just show you the products they have, but do it in a very entertaining way, so it is a bit different. You're also starting to see the ads get shorter, and Netflix just announced like ten second ad formats for you know, their
their property. So I mean just expect more entertainment from the ads, more university of advertisers, and hopefully over time they get a lot shorter just to connect with that consumer.
Will it look more like Super Bowl ads or our Super Bobowl ads a thing unto themselves that that won't be replicated anywhere else because of the budgets, because of the big audience.
Well, I mean some of the best advertisings coming out of my company have been for the you know, not huge amounts of money we have maximum mevro Ryan Reynolds ad agency is literally a part a mount then, so they do ads for as little as tens of thousands of dollars and they I think they might be doing a Super Bowl ad, so they do them for millions. Also, it just depends on how much special effects and the actors and all that kind of stuff that controls the cost.
The bottom line is if you have something a product people interested in and you present it to them an interesting way, people do actually respond to the advertising and you know, go check out your product and potentially become a customer. And that's at the end of the day. You're just trying to correct connect like match consumers with brands are potentially gonna love. It's not like jingles anymore and just pushing brands on you. It's more about making that connection.
Is it right to say Netflix has sort of taken the lead on this? And if so, based on that, what can we what is Disney hoping to achieve?
Well?
I wouldn't say Netflix has taken the lead. I would say they have the most green field because they have no legacy business. Disney is kind of trapped in the upfront and thirty seconds and fifteen second formats. When Netflix is starting from scratch and they can just kind of reinvent what television advertising looks like. But that being said, it's not easy to do, and so they're they're, you know,
out the gate struggling a little bit. But I think they will wind up becoming as innovative on the ad side of their business as they've been on the consumer side. The thing to remember when Netflix is they kind of reinvented the relationship between the consumer and the content.
Making it on.
You know, you no longer had to wait for the show, you could just binge it all all those kinds of things, And now they have an opportunity to do the same on advertising. It's kind of reinvent the relationship between the advertiser which funds all this programming for the ad supported options on Netflix, and reinvent that relationship between the advertiser and the content. And I think they will if They've been a very innovative company for a very long time.
But what counts as sorry, what counts for innovation in cystalizing? I mean an example, Yeah.
So a lot has to do with the formats I think is like, again, you know, you don't have to sit there for thirty seconds. The if you look at social Like if you look at ads on TikTok and you look at them on Instagram, even though they're both somewhat feeds, the ad content is very different. I think on TikTok it feels much more like the content that you're scrolling through on Instagram, it feels a little more tradition.
There's a mix of.
Video, so it's it's subtle changes that just make the ad format again feel like a form of the entertainment. So you're not like dreading the interruption, You're like kind of like hopefully entertained by it. Yeah, and you know, one thing that makes the advertising like something that we do is what we call fasphatizing where the ads are and this is like the maximum effort where the ad the ad content is like just extremely culturally relevant. It's
like like today's cultural news becomes literally tomorrow's ad. There's no delay. And so having that kind of support where you don't have to planet a half year in advance, you can just come up with something right now and get it on the TV. I think that's pretty important. I think that's something Netflix and pretty much all networks are going.
To start to support.
So as we look ahead to Disney earnings on Wednesday, Mark, I wonder if Disney has room to innovate advertising on Disney Plus or ESPN Plus that really takes advantage of its different businesses, including theme parks. What can it do innovation wise that other media companies, other streamers can't do well.
I think that they, I mean, they can do whatever they want. I think bob Byger for quite a while now has been saying that he wants to kind of do away with the concept of an upfront, and he wants the advertising, the advertisers to have a lot more freedom and just kind of Disney be where they want to be, not where they're trapped into enough front contract.
That being said, I mean, I think the first order of business that Disney is really to get all the business units operating like at their best, and you know, almost all of them have been struggling on some level for growth, for profitability. So I mean, he'll probably Disney, bob Byger that team there, they'll probably somewhat follow the same path on as Netflix in terms of like, Okay, we can innovate these app formats. We don't have to stay stuck in the thirty second upfront format. But that
being said, they have to get the viewers. People have to want to go and actually see the content before they want to see the apps.
Mark always a pleasure, appreciate it, good to see it. Mark Douglas, CEO Mountain. They call themselves the harness working software in TV. You know c the new CFO Disney.
Hugh Johnson. He's a pepsiley, I don't want to say lifer, but he's been there for decades, for.
Decades, and I inducted him into the Hall of Fame of our high school. Did he really my classmate at CBA?
Wow?
Look at you guys.
Yeah, he's there and I'm Aaron.
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 on Fall Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always cut just worldwide at Bloomberg Radio.