Hello, welcome to the Credit Edge of Weekly Markets podcast. My name is James Crumbie. I'm a senior editor at Bloomberg. This week, we're very pleased to have Paula Sambo, who covers private debt for Bloomberg News in Toronto. How are you, Paula, I'm doing great.
How about you, Jane.
All well, thank you very much. And we're also delighted to see Steve Flynn, who covers telecoms and media for Bloomberg Intelligence in New York. How's it going, Steve, Welcome back to the show.
Oh good, thanks for having me.
We'll be coming back to Steve a bit later to talk about Paramount Global, the media company that brought us top Gun Maverick, among other things. So do stay with us. But first, Paula Sambo with Bloomberg News. Why is everyone so excited about private credit right now?
I know, right First, thanks for having me here and I'm a great kind of your work. And going back to private credit, it seems to be all everyone talks about these days. Canada has these huge pension funds that usually do much better than the US ones, and they have been in private markets for a long time. So I mean private credit is not It's a subject that has been talked about in Canada for a long time.
But now we have a bunch of other smaller firms that are trying to do as well as the big pension funds, and it's a very booming operation up here.
So talking about the big pension plans in Canada, I mean there are some huge, huge funds out there. You talked to the Pension Fund of British Columbia recently, right, they're the big one on the West coast. How much money they managing.
So they manage two hundred and eleven Canadian dollars, so that's just north of one hundred and sixty billion US. They are pretty big, and they are out west in
in Victoria. They are a very interesting player because they started doing private credit a bit later and their private credit operations are still under their public equities on team though they have been hiring specialists for that, and they grill their private ed operation to thirteen point five billion Canadians, which is a record for them.
Why are they jumping into private credit right now?
You know, they see it as the place with the best of you know, the best returns in all of the markets. So just yesterday I talked to THEIRS active vice president and he said that you they are just absolutely brilliant right now in the private credit space, so it's impossible to stay out of there. He says, there is nowhere else where you can get like double digit returns with you know, basically quarly payments.
So yeah, it does sound brilliant. I mean, but by double digit, what are we talking about? Is it like ten percent or is it heading up towards twenty percent? Did he give you any sense.
Of Oh, he did not. I mean, they are whole operation, because they are. They don't do a bunch of hyo. They do mostly what they would call very safe investments. So there are their gains was basically five percent, but he's seeing like deals that he says are in the double digits. I would think closer to ten percent because they they are not really going down the credit risk. But he did not. He did not advance on that.
So you no, private credit generally, I mean, has just been such a big mania over the last you know, twelve eighteen months, And I absolutely get it from a Borough perspective that you know, rates have moved so much, markets are so volatiles for some companies, it's the only option now to get financing. But from an investor standpoint, which is which is what we're talking about here, you know, it made a lot of sense a few years ago when yields were zero, and you know some places they
were negative and returns were very hard to get. But now, and we can talk to Steve Flynn about this in a minute, yields are over five percent now on high quality US corporate bonds, nine percent for junk bonds in the US. So why do you have to sacrifice liquidity and transparency for just a little bit more return?
Oh yeah, that's a very interesting question. And you know, these smaller players in Canada are having a hard time fundraising. Like I spoke to a firm just a couple of weeks ago which I can't really name because it was on background, but they're aiming to raise one billion in a year and they actually raised just one hundred million. So like, that's a very tough place to raise money
because of what you said. Really, I mean, it's just like you're getting good ills elsewhere, so why go into private credit where the risk is not as clear as in the public markets? For example? The dimension funds. They are all very well capitalized and their situation is different. Like they've I've been in this market for a long time. They do the larger deals. I mean, their money is there. They're not really fundraising is the writer like the people
who are retiring money. So you know, they do have the capital and they think it makes sense to be there and they have to diversify where You're absolutely right. That's something that has been impacting the smaller players, especially the first time fundraisers. I mean they're having a tough time out there.
And so to get these brilliant yields. As the Canadian fund managers are saying, how long do you have to lock your money up for?
Oh, that's a very interesting question. Yeah, they are in it for the long haul, right, I mean they're patient investors their pensions so they can be there for as long as they need. They haven't mentioned, you know, what kind of terms they were working on, but in the past I've talked about this with other mentioned funds and they would like leave their money there for a long time.
Is that five years, seven years, ten years, even more.
Than sometimes even more than they can Okay, Yeah, they have a very long horizon.
Yes, so all this lending and in private just that word, you know, is somewhat worrying in some senses, All this lending in the shadows, no transparency, no visibility. We can't see where and how this stuff is trading. Aren't we just setting ourselves up for a big fall here? I mean underlying it, isn't this a set of companies that that's most exposed to rising rates and the economic slowdown that we're seeing.
Well, that's a very interesting question. I mean, we haven't seen very high default rates yet. I mean, these companies, like the banks, have been retreating from the sector for a bunch of reasons. Not just because these companies are not really good, but you know, they have higher like lending criteria, so sometimes the borer is a good one, but because of a bunch of rules that they have to obay to, they can really lend to these places.
I mean, and these people are the ones that you know, they're there like you know, making your food, you know, doing all these real economy work that needs doing. So it's important to have players out there like willing to launch them. A lot of them are good payers and they just can't access the big banks so I don't think that's a sector that it's going anywhere anytime too, Like it's going to be there for the long term. Default rate hasn't been too bad, and you're right, I mean,
there is less transparency for one time. But on the other hand, I mean, I mean this business they need money and they need people to be willing to launch to them. So I see them in there for the long haul.
The Canadian pension funds, I mean, I think them is pretty conservative investors with very low tolerance for risk. Do they really know what they're getting into here?
I mean, they've been in it for a very long time. They are pioneers. They have very qualified people, and they seem to know what they're doing. I mean, I can't speak on their behalf, but they have they give strong reasons why they are in this market and why it
makes sense. I mean obviously now I even heard from the head of the biggest Canadian pension from the Canadian CPPA B, who said, like, now there's this huge of money chasing private credit, which makes which is making it harder to invest on right because you know, any deal we'll get so many people willing to go in that sometimes you know, the terms will be sacrificed, and they are not really willing to go in there. So I mean, if you have other places to invest on it doesn't
always make sense to invest in private credit. But I mean, if you're well capitalized, you understand the market, and if you think it makes sense, like why not.
And as you've written recently, you know there are other firms from outside Kinada pushing into Canada. So that's making the competition even more intense.
Right, even more intense. And some people don't have a big track record. I mean, private credit is not for everyone. I mean you have to understand this, you have to be in it for a long time, or you have to you know, partner with someone who knows what they're doing. So yes, we've been hearing like a lot of firms that say, like, our clients are pushing us into private credit. We don't know it really well, but we don't want
to lose clients. So I mean, some people are getting in there and we are not sure about how much they know about it. So it's getting a bit trick here. But and and and also like there's this huge, like I said, this huge role of money chasing private credit, which makes you know, some deals a bit overcrowded. Some people alls are also over allocated to the sector because you know, everyone is going private. But you know it's
still an interesting market. And yes, other players are entering Canada, but the Canadian mention funds are also operating everywhere, so I don't think that makes a big difference for them.
So it's not a fair Do you think it's definitely here to stay?
I think so, yes.
So before we talk to Steve Flynn at Bloomberg Intelligence, what's the next big story to watch on your beat? Pella, more big private investments, more Distress's what are.
You looking for?
So I'm definitely looking for more distress because you know, as a bunch of people invest in it and I'm now the covenants get loser and there is some stuff going on. So yes, we're chasing you know, some companies that are filing for bankruptcy and they are like a large part of someone's portfolio. So we've been chasing these stories. That's something to watch on. But also we are watching
this huge influx into private credit. Where it's going, I mean, what it's doing to the market, what it's doing to specific deals.
Great stuff Palosambo from Bloomberg News. Thank you so much for joining us.
Thank you for having me read.
All of Palace scoops on the Bloomberg terminal and of course at Bloomberg dot com. So, as I mentioned earlier, we're very pleased to have with us Steve Flynn, who looks at telecoms and media for Bloomberg Intelligence in the US. How's it going, Steve?
I'm good, How are you great?
Thank you? So what's the tone right now in your sector? I see that both media and telecoms are doing very well. They're beating the high grade index this year. What's drive that and to be expected to continue?
Sure?
A couple of things.
Number one, some of the largest players are trying to improve their balance sheet. So if you think about like an AT T, A Verizon T Mobile US, they're all striving for better debt profiles and lower leverage, which is positive to the overall market. And then you have a few really wide trading names that are also focused on improving their balance sheet, names like Warner Brothers, Discovery, Paramount, and Charter Secured Bonds.
You mentioned Paramount, I mean, other than top Gun and Tom Cruise. Why do we care about them at the moment.
Paramount is a very interesting credit because the bond's trade very wide. Appears it's rated triple B by all the three major credit rating agencies. They all have a stable outlook, Yet their bonds trade almost or about one hundred and twenty basis points wide of the regression curve of like
rated bonds in the communications sector. Interestingly, they are also about one hundred and twenty basis points at max inside of double B rated communications bonds, so they're kind of right in the middle between the triple B and the double B curves. Yet we think that there's a much higher than fifty percent chance that it stays investment great, and I think that the bonds could narrow towards the regression curve of their IG rated peers and therefore outperform.
And they recently slashed the dividend, didn't they to preserve cash.
Yes.
Now they've taken a number of steps to improve their credit profile, which I think is positive. Number One, they've slashed their dividend, which saves them over five hundred million dollars a year, which is extra cash that they can use for debt reduction. Number Two, they've said that twenty twenty three will be the peak year of investment in their streaming services. So we think about Powermount Plus, you mentioned top Go, Maverick, you know, all these things that
they're doing for the streaming service. This will be the peak year of investment and that's so we'll get past that this year. Third, the company is pursuing a sale of Simon and Schuster. It's been reported in the news that second round bids are due mid July. They could fetch potentially in the low two billion dollar area, and that can reduce net leverage by almost a full turn
for this full year two thousand and twenty three. And then fourth, there's been several media reports over the past few months of the companies selling Beet Media Group with a potential sale price in the three billion dollar range.
So when we think about you know, potentially better organic results in twenty twenty four, as we have passed the upfront screaming costs in twenty three, and we think about proceeds from asset sales to reduce debt, I think the company's credit profile could improve meaningfully next year.
So why are they trading so wide right now?
Well, there are a couple of reason debt, right, you know, they do trade wide, and there are there are reasons why. Number one, like I said, this is a peak gear for investment into its streaming services, including Paramount Plus, there's a shift in viewers and advertising dollars away from traditional linear based TV to streaming services. You know, Paramount obviously is moving in that direction themselves, but they'd have a
fair exposure to linear based TV advertising. You know, there's a chance of an economic slowdown this year, and you know, whenever you get economic slowdowns, that typically means lower spending on advertising, which hurts media companies. So you know, those are a few factors why paramounts. You know, ibit DAH is expected to decline about twenty five percent this year, and it's going to push leverage into the high five times area, which is high. And those are some of
the reasons why the bonds have traded so wide. Now again, the good things are is that the company wants investment grade rated profile. They're going to be moving towards improving the credit profile, and the rating agencies, as I said earlier, all have stable outlooks as they look. They're looking past this peak investment year, and a lot like a lot of things the company is doing, like asset sales and slashing the dividend.
Other companies in this sector, you know, Warner Brothers, Discovery, they're exposed to exactly the same trends as Paralyn, yet you know they're trading at lower yields. Why is that.
Yeah, so Warner Brothers Bonds have actually done very well this year, So you're right, they're focused. They're facing the same challenges as Paramount that You've got a changing video landscape, they have a lot of exposure to advertising amid potential economic slowdown. They're investing a lot of money into their streaming services. You know, they just launched Max about a
month ago, and they have high leverage. Yet there's one important lever that Warner Brothers has to pull which Paramount doesn't, and that is mergers synergies. So you know, Discovery merged with AT and t's Warner Brothers a little more than a year ago and at the time they outlined steps to achieve about three billion dollars in annual cost savings. And this is huge because the cost savings will boost
EBITDAH and help improve their credit profile. So, you know, Warner Brothers reiterated recent as recently as May that they expect net leverage to be comfortably below four times this year and then achieve their long term target of two and a half to three times by the end of twenty four.
So they're moving in the right direction.
Maybe look at the landscape. I mean, I look at all the streaming services I now subscribe to, which customer more than the package used to. Isn't this an area that's right for consolidation in this paramount a target in that.
Yeah, I know, I agree.
There are a lot of streaming providers out there, and we've seen a shift over the past couple of years.
Right.
It used to be like subscribers, subscriber subscribers, just get more subscribers, spend as much as you can, and yet companies like Netflix that would borrow in the high field market and realize big free cash flow losses. But they kept getting subscribers and driving higher revenue, and that's where everybody was going for it. Now, you know, in the past year, things have shifted. People want to see positive
free cash flow. Netflix has turned to positive free cash flow, and a lot of the other providers are behind Netflix and they're focused now on cost cutting, and you know a lot of them are talking about this year being the year of streaming losses and next year it's going to get better. But as you think about ways to lower cost and gain more scale, it's through consolidation. So when you think about all the streaming platforms out there, yes, I agree there should be consolidation.
So paramount trading wide yields a high versus peers. But there is some potential good news around the corner on the fundamentals. I mean, it's a potential an opportunity there for credit investors. Definitely, we'll be watching that closely. But just to wrap up, Steve, I mean you've also been looking at the maturity wall, which I find really interesting, sort of you know, a big picture level in credit market. Who has the big payments coming up? And what does that mean for issuance.
Yeah, so like Hiyala has picked up this year, it's up maybe let's call it roughly twenty percent from last year. But last year was a very slow year, right, and it's there's still well below you know, the pace that we're at twenty nineteen, twenty twenty, twenty twenty one, and there's still a lot of companies that that are going to be facing big maturities of the next couple of years, and so it's going to be interesting to watch. There's
a lot of refinancing that has to be done. If I look at, you know, my sector communications, we have a lot of distressed bonds out there. So whether you're looking at a dish, allumin consolidated Communications, all TCUSA, there's a lot of companies that have trade with very low bond prices, very high yields, and their new term liquidity is okay. But the next couple of years, those are companies that are going to have to you know, improve their credit profiles and try and refinance.
And hopefully their overall market backdrop will be better.
But at the same time, interest rates to just shut up, so the costs of funds is massively higher than it was, you know, a couple of years ago. What do they have to do now? I mean, do they have to sell assets to get the ship right to or what.
Do they do?
Yeah, a lot of them need to sell assets, look for alternative sources of liquidity, whether it's equity or equity linked or you know, try and sell assets.
Yeah, you know, all the above.
We'll refinance it much higher rates.
Yeah, No, rates are muchhih. It was interesting.
You know.
We always used to look at companies that had callable bonds and that they can you know, call them earlier, like high you almost bonds are callable and you can call it early and.
Be finance it.
But now rates have gone up so much and their coupons are low that you're not seeing that happen anymore. But you're still going to run into the maturities which you have to deal with.
Thanks very much, Steve playing a Bloomberg intelligence Thank you. You can read all of his great analysis on the Bloomberg Terminal. Do check it out. Hope see you back on the show soon.
Steve.
Look forward to join you again, and.
Thanks again to Paula Sambo from Bloomberg News. Read all of her great private debt scoops on the Terminal and at Bloomberg dot Com. I'm James Crumbie. It's been a pleasure having you join us again next week on the Credit Edge.
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