Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is Olivia Raymonde and I'm a corporate finance reporter here at Bloomberg News. This week, we are extremely pleased to have Paula Selvison back on the show with us. She covers leverage, finance and private credit for Bloomberg News in New York. How are you doing, Paula.
I'm doing good, Glad to be here.
Glad to have you on. We're also delighted to chat with Jody Lurie later on in the show. She looks at the leisure sector for Bloomberg Intelligence in New York. We'll be coming back to Jody a bit later in the show, so please do stay with us. But first back with Paula with Bloomberg News. Paula, August is typically a quiet month for sales in the US corporate finance markets, and it's common for us to look forward into September and it looks like this is going to be a
pretty active month, specifically for mergers and acquisitions. Could you walk us through sort of the dynamic that's playing out there in the markets.
Yeah, absolutely so.
Right now, there is more than fifteen billion dollars of committed debt financing for leverage buyouts.
Now, let's break down what that means.
So a lot of times when one company or private equity firm buys another company, they fund part of that acquisition with debt financing. Investment banks like the big ones think JP, Morgan City, et cetera. They will provide essentially temporary bridge financing that they commit to and then the intention though is to sell that debt financing to outside institutional investors in the form of junk bonds and leverage
loans before the deal closes. So right now, what we're looking at is a you know, a small but growing pipeline there. I mean, fifteen billion dollars wasn't big a few years ago, but it is a recovery after some issues when rates rose last year for the banks, where they lost a lot of money on these types of transactions.
So yeah, so basically there's a lot that could basically launch first thing in September, once the market comes back to life, once some bankers come back from the Hamptons and we're all back at our desks after Labor Day.
Awesome, And yes, you mentioned some trouble for the banks last year for our listeners new to leverage finance. The banks got themselves in a little bit of a conundrum when it came to underwriting merger and acquisition deals. Could you just give us a quick recap so our listeners know sort of where the banks are coming from.
Yeah.
So when banks provide committed bridge financing for leverage finance transactions, they actually also provide a maximum interest rate on that debt. So essentially they tell let's say the private X firm, you know, we hope to sell this at let's say eight percent, but maximum this will cost ten percent for the company. This is based off of current rates. And so when the Fed rapidly increased interest rates to combat inflation, basically banks just were on the other side of that
and got really burned. All of a sudden, the market levels for selling that debt was well above the maximum interest rate levels that they promised these companies. So that meant if the banks wanted to get the debt off their balance sheets, they had to sell it at a discounted price so that the all in yield would be higher, and they were on the hook for that difference, and in some cases they lost billions of dollars as a group on some of these transactions. In fact, some of
this debt is still stuck on their balance sheets. For example Twitter, that's about thirteen billion dollars of debt, no sign of them selling that anytime soon. And also for a company called bright Speed, but they were able to sell most of the debt that got stuck, which opened their balance sheets back up to do more deals. And the key thing for banks is they don't want to hold this debt right, do this as a temporary commitment and they make fees off of it. Then they recycle
their balance sheet into the next deal. And that process is finally restarted in recent months, and that's why we have this pipeline going into the fall.
Got it.
That makes a lot of sense, Thank you. And if I'm correct, I think we have a couple of acquisitions in the market, some familiar names. Simon and Schuster the publisher, a handful of others. Can you, you know, walk us through some of the big names that you're going to be looking for next week?
Yeah, So I think one of the more notable ones is Simon and Schuster just because it's such a household name. So this is the book publishing company. So they're old owner Paramount Global. So that's the home of like CBS and some of the big you know, broadcast brands. Paramount Global actually has owned Simon and Schuster and so they are now selling it to a really major a KKR, to a really major private equity firm called KKR for
about one point six billion dollars. As part of the financing, KKR is doing this in the form of a leverage buyout. So there's all so roughly one billion dollars of debt financing provided by a group of banks led by Jeffries, and so that could come, you know, essentially whenever they
think the market is ready to handle it. In you know, leverage finance world, one billion of debt isn't actually that big, and so the biggest transaction we're waiting for is this private equity firm called GTCR is buying a majority stake in a payments firm called World Pay and that has more than eight billion of debt in the form of junk bonds and leverage loans. This is a pretty chunky deal.
We haven't seen deals of this size in quite a while, so it'll be interesting to see, you know, the test of the depths of the market to see if people are willing to invest that much money. So far, it looks like debt investors probably will be very receptive to it because they're hungry for new deals because the leverage buyout machine essentially got gummed up for about a year.
They haven't had like the new paper, the new money for them to invest in, and so they're looking for new deals so that they can put money to work.
And you're talking to investors all the time. A lot of the sources that I speak to this year, they continue to talk to me about this up and quality trade. They want to be investing in higher quality credits, whether that's investment grade or maybe the higher end of the junk bond and the leverage loan space. But when we look at leverage buyouts, they aren't always the safest bets. So could you walk us through sort of what investors are thinking about in terms of risk taking on these deals.
Yeah, So it's really interesting.
So while the market has reopened, it's definitely been for safer companies in general.
Right, So you're double bees, higher rated.
Single bees, you know, lower rated single bees, and especially triple C rated debt it's still fairly a no man's land. Most people just don't want to touch it or deal with it because of the risks. And so what we've seen with some of these leverage buyouts, it's hard to speak to specific ones, but broadly, the color we've heard is that leverage is down right. So if maybe a deal would have been levered around six times last year, or it's now more around five times or four point
five times. And that also reflects the hiring borrowing costs, because you know, the companies can only support so much debt if the interest rates are higher. So investors, you know, they're going to see this new crop of LBOs that should be lower levered. Investors might be able to fight for better covenants now since you know they can get those investor protections again, since it's been more of a
debt buyer's market than a debt seller's market. But yeah, in general, investors are still looking for higher quality names, and you know, there's still afraid there could be a recession, right so you know, even though it seems like some of those predictions were early or you know, overblown, there still could be a recession at some point in the coming quarters. So investors want companies that are recession resistant, that still do well during the bad part of cycles.
And they're also hyper aware of that borrowing costs are higher, so they don't want to lever companies up too high and then have to deal with the restructuring in a few years.
Got it.
So it sounds like they are putting less debt onto these companies compared to the equity than maybe they did a few years ago.
Is that right?
Yes, So sponsors across the board do seem like they've now had to come down on the leverage levels when they do buy other companies.
Got it, And circling back to the banks and what they went through last year, I know that. You know, mergers and acquisitions, leverage buyouts are sort of the engine of this market. But after losing billions of dollars, you know, why is Wall Street coming back now? Why do they want to do these deals now?
Because these deals make them a lot of money.
Because basically, the way investment banking works in this part of the market is the banks want to constantly have a turn of leverage buyout transactions because they can make a fee of two points or three points. You know, if you make a fee of three percent on billions of dollars. That adds up really fast. So they took their loss is they dealt with it. These losses were painful, but nothing like the financial crisis.
Right.
They were bad here, and now they've moved on and they're ready to make money again off this business. And in general, what we've heard across the board is that because rates rose and because for a period of time it was harder to get debt financing, banks were able to get better terms for themselves.
Right, so their current.
Maximum interest rates are now once again based off of the current market levels, which are much higher than they were before the FED started this process. So you know, overall color i've heard is also that the what are called flex and caps, which is essentially the way they do the maximum interest rates, that those are just higher. They're more favorable for the banks, and so they should be able to do this more safely for them, hopefully
for them. But that being said, this isn't in a vacuum, right, because the banks are competing against each other for these deals, and they're also competing against private credit lenders, and so private credit lenders this other asset class where instead of doing a temporary financing. They just come in and borrow the money, sometimes with just a few firms for billions
of dollars of debt. You know, they can offer more flexible terms to sponsors, and they can also typically they're pricing is higher than the you know, hoped for rate that the banks are doing, but it can be like an X right, they're competing. They're trying to undercut each other on price, on other terms, on protections. So if banks stay out of the market, they're just going to keep losing market share to private credit.
So they got to get back in.
Now that's super interesting. It seems like everything is owned by private markets these days. I'm glad that you mentioned private credit because it's a really important asset class in the credit space. It's just grown extremely large in size. But why would a company want to go to private credit, Like why not just stick with, you know, a big bank that has a familiar name.
That's a great question. So there's a lot of different pros and cons.
So if you do the public markets, so hild bonds, leverage, loans, and again we say public in a relative sense. These aren't, you know, like equities, but they're relatively public because so many people buy them, you know, hild bonds and leverage loans.
Typically the borrowing costs are cheaper than private credit, but you have to do the debt commitments and then at some point in the future, sometimes months later, you then sell the junk bonds and leverage loans, and you know, yields can change in that period of time, marketing conditions can change. So why people like private credit is even though it can be more expensive, you just kind of
get it all done at once. You know, there's a certainty of execution, as a lot of people in the market like to say, where you can just go to a few lenders and they say, okay, we did the deal.
It's done right.
There's no headaches of you know, fifty sixty one hundred investors having differing opinions on your company and you don't have to worry about it. And then the other thing is that private credit lenders can also provide, you know, so different kinds of flexibility.
On the terms.
So one of the biggest ones is they can provide what's called pick or payment in kind. So if let's say you lever up a company with a lot of debt and you think it's going to grow into this debt load. But in the meantime you're a little bit worried about liquidity or just the actual interest costs of cash. Leaving the business to investors. Every year you can do a pick, so that means instead of paying your interest in cash, you pay in more debt that only comes
due at the end when it matures. So there's just some you know, flexibility. It's more bespoke. It's just more like contracts between some parties. So that's kind of the difference. You know, banks, it's going to be cheaper if the banks sell it to institutional asset managers, but it's a more specific way it has to be done. Whereas private credit lenders, they're more expensive, but you have the certainty of execution and more flexibility.
Thank you for walking us through that, and we're going to turn to Jody Lurie at Bloomberg Intelligence shortly, but before we do, Paula, I know, private credit is an asset class that you follow their closely. What what are the big things?
You know?
What are you watching there? What's what's the next big thing for investors and people curious about this space to look out for in the fall.
Yeah, so I think a really interesting dynamic is right now. We've been talking about new deals, right, leverage biots, new transactions, but there's a lot of leverage loans and hiled bonds that are outstanding and need to be refinanced soon. It's not like a cliff, A lot of it's already been dealt with, but there is a good chunk of the of this debt that still does need to be refinanced in the next one to two years. And it's harder to do that in the broadly syndicated markets, and it's
also more expensive. And so I think we're going to keep seeing a trend of private credit lenders stepping into refinance leverage loans and hiled bonds, especially leverage loans because they're very similar structure. And so we've seen a couple of really big examples of that recently. One was the Phenostra example, which is currently the largest private credit deal
ever at more than five billion of total size. And then we're also now seeing a group of private credit lenders refinance the leverage loans for a company called Highland Software. So we do expect to see more examples of refinancing happen, which means that the leverage loan market especially could shrink some.
That's super interesting. Great stuff from Paula Selderson at Bloomberg News. Thank you so much for joining us.
Paula, thanks for having me anytime, and.
You can read all of Paula's scoops on the Bloomberg terminal and of course at Bloomberg dot com. Please do check out her coverage. So, as I mentioned earlier, we are delighted to welcome Jody Luriy on the Credit Edge podcast this week. Jody covers the leisure sector for Bloomberg Intelligence based here in New York. How's it going, Jody.
It's going great, Olivia.
You cover a lot of companies, but as the summer comes to a close, I want to take a special look at theme parks and the cruise lines. There's been a lot of activity there and a lot to sort of of dive into. Can you talk sort of high level you know, where does the leisure sector go from here?
Sure? So, I think the leisure sector is definitely one of the most interesting ones. In my opinion, I'm a little biased this year just from the standpoint that I think consumers have really outdone themselves in terms of participating in the leisure space and in different areas of leisure, different areas than we saw a year ago. You know, people are getting a little bit more international in their reach.
They want to go and do, they don't want to be stuck inside, and so even though there's discussion of possibly a pullback economically, we're not yet seeing that prove out in the leisure space in general. That said, we are starting to see pockets of moderation normalization from these post pandemic highs of certain parts of the leisure space.
Got it for sure, And can you talk a little bit about some of the major forces that are driving your outlook for the theme parks?
So I think that theme parks are a bit interesting in and of themselves because they mostly shut down during the pandemic but found ways to still stay relevant in terms of food and beverage events and any area to stay open, Which compares to the cruise lines that had
to fully stop. They are now. They were able to transition out of the pandemic a little bit quicker as a result, and last year had very strong years in terms of season pass rates, in terms of just people going and visiting the theme parks, and doing because it's a nice, nice easy experience that you can do once,
you know, once every month or every week. Now this year we're seeing that there's a bit of a pullback, and part of that, interestingly, is because of things like weather, which obviously we can't plan for weather, but it's definitely creating a little bit of a wrinkle in their plan and showing the sensitivity that they have as compared to other parts of the leisure space this year as people sort of look elsewhere to spend their time and spend their leisure.
Interesting, so where else are you seeing that? Where is the consumer going right now? What are you seeing as their preference?
The biggest areas that have been really growing this year has been international travel, which has really not returned to pre pandemic levels yet. Business and conference travel is of course improving as well. That's a little bit slower, and that's not so much leisure, although there is that element of leisure which is business and leisure blended. So you go to a conference and you or you go on a business trip and you extend it by a few
days for leisure travel. That said, I mean, I think you know, cruise lines are a great example of an alternative of where people are spending their time because they can book they booked it in advance. They want to go and do something that's a little bit more exotic
than going to your regional theme park. That said, something like a SeaWorld is benefiting a little bit more than a Six Flags and a Cedar Fair from the standpoint that they have that southern California Florida focus, but that doesn't completely keep them unexposed to some of the trends
in theme parks, namely weather. And you're seeing that for all three of these major companies, is that they're really actually being affected by the fact that the first and second quarter we're not very kind to them in terms of heat, in terms of monsoons. Now we have the hurricane season coming up. And these companies with more of a global reach, like the cruise lines can sort of manage through some of these difficulties. And obviously a cruise ship, if the weather is not good in one place, you
can sort of move to another. Not always, but you can reroute it a little bit. You can't do that when you have giant rollercoasters.
Yeah.
Absolutely. I guess an important thing to think about is that the theme parks are rooted in one spot that they're not moving physically, whereas consumers can go to different locations that have a desirable location and destination for the weather, and the crews can take them there anytime during the year.
But you know, Jody, and I know you know this so well before our listeners, the cruise lines had a really tough time in twenty twenty when the pandemic shut down all their operations and they really needed to rely on the debt markets. For somebody who isn't as clued in as you to this space, could you just walk us through kind of what that sector has been going through over the past couple of years.
So I think that's a great question, Olivia, because you have to remember that this moratorium that they went through, which was basically they had to completely shut down all their operations during a good portion of the pandemic, it really set them back, particularly compared to other parts of the leisure space. They're about a year or so behind from in this transition period in the post pandemic era.
They're now finally this year starting to see more normal levels of activity, whereas if you look at other parts of the leisure space. They got the benefit of that a year year and a half ago as people started going and doing that. Said, I think what's happening with the cruise lines is they're pleasantly surprised by how quickly people are starting to jump into cruising. We're seeing advanced booking rates much higher, which means that cash flows are
getting better. We're seeing revenue also getting booked because people are actually cruising, so they can actually book that advance bookings as revenue. And you're starting to see any of these band aids that they put on, like these future cruise credits that they gave people during the pandemic, you're seeing those roll off. So from a balance sheet perspective, they're still not in great shape, but they're improving and you're starting to see a light at the end of
the tunnel. Might be a few years out, but the companies are talking about how they want to get back to investment grade territory, how they want to improve their balogie, bring down their debt loads relatively quickly or as quickly as they can, and using cashloads to do so.
And you bring up a grade point with the downgrades. Because some of these companies were investment grade before the pandemic and subsequently were downgraded to junk when their operations were shut down for such an extended period of time due to the virus. But I think correct me if I'm wrong, But one of the cruise lines did have an upgrade earlier this month.
Is that correct?
That is correct? So Roal Caribbean is benefiting quicker than its peers in terms of upgrades. What's happening. What you're seeing is the way that the companies manage themselves through the pandemic is you're starting to see that play out in how quickly they're around each quarter. We've been talking about for a few quarters now about how Royal Caribbean has been about a quarter ahead of its peers in
terms of turnaround. Part of that is it got its shipped in the water quicker it you know, it didn't completely stop its CAPEX plans for its shipped modifications, just the maintenance CAPEX the same way that Carnival did. Carnival really pulled back a lot, and so they they have to dedicate a little bit more cash this year to CAPEX to sort of get all their ships in order.
They also have a larger fleet than Royal Caribbean. There's some complicating factors to that that you know, made Royal a little bit more nimble than Carnival as we get into this transition period. That said, you are seeing that the rating agencies are looking at these companies a little bit more with a positive tone, but I think hesitantly because they know that there's still a lot of hurdles that all of them have to cross and they probably
will continue to do so. They don't want to they don't want to penalize them for what these companies have gone through. They want, but they want to make sure that the companies are in good working order before they start kind of moving up their ratings. And I think that we'll probably see investors respond quicker to the companies turnaround stories and the raiders.
Might I'm glad you mentioned the investors, Jodie, because there are a lot of opportunities not only to make investments around these upgrades and downgrades, rising stars, falling angels, but we've seen a lot of various outperformance in the leisure sector. Can you talk to me about some of the areas that have stood out to you this year in terms of outperformance and where you're sort of seeing you know that trend continue.
Yes, I mean I think I think the whole leisure space in general has done has performed relatively well in comparison on a relative basis compared to other parts of the credit space or consumer discussionaries. I mean, you know, I like to do things with my colleague Mike Camplone about leisure versus retail, right, so he covers the retail space, and that's been an interesting one in a different way in terms of how consumers are spending or not spending there.
And I think what we're what we're seeing is up until this year, much of the leisure space was starting to was moving very much in tandem in that a lot of the companies were affected negatively by the pandemic and so their bonds were much wider than what they were trading, much wider than a lot of other areas of be their consumer discretionary and also other parts of the credit space in general. Now we're starting to see tightening.
We're starting to see companies benefit from their own personal policies. Case in point, now we're not talking about the gaming space, but Las Vegas Sounds was downgraded TI yield. They've started, they've finally bumped back up to investment grade as they work towards improving their balance sheet, as they were towards this post pandemic era of being a better company than they were during the pandemic. And so I think that we are seeing companies getting back into shape some quicker
than others. You know, McDonald's in a Starbucks, which is, mind you, restaurants a little bit different of an area, but we cover that as well. They are much quicker to get their balance sheets in check than some of the other areas of leisure and other related areas. And so we are starting to see a differentiation between companies.
But we've been of the opinion that we think will start seeing that from the standpoint of for instance, the cruise lines are focused on improving their balance sheets, whereas the theme parks are sort of getting past that point and are starting to deal with the hairiness of their own individual sector.
Hairiness of their own individual sector. That makes a lot of sense. One company that I've seen you write about that I think a lot of our listeners will be familiar with is six Flags. Can you talk to us, talk to me a little bit about what's going on with that company?
Sure, and I hope you don't envision hairiness on the roller coasters or you envision somebody's too pick laying off as they ride it. But I mean, I think, I think for a company like six Flags, it's a little complicated because management really wants to get their leverage down. They have they have similar net leverage targets to their peer of three to four times. SeaWorld was the crikets to get it down to three times and actually below
three times. Cedar Fair is nearing that level and six Flags is a little bit above and they you know, six Flags it's a complicated company because they have a long history of some challenges from a credit perspective, but obviously a very different company now than they were. They're just much larger than their peers like SeaWorld, so there
are some comparisons between the two. They've had some management changes over recent years, and I think that what they're trying to do is be good stewards of their balance sheet as much as they can within the constraints.
That they have.
So they're trying to reinvent how they do things, pushing season passes similar to Cedar Fair and Sea World to have that reoccurring revenue. But what they're finding is by pushing season passes, they're losing out on additional dollars per customer necessarily because you're not charging for the single pass. The benefit you get is you have more deferred revenue, you have more of an idea of what your cash flows could be, your consistent cash flows, and so it's
sort of a mixed bag. And they've been playing around with their food options, and they've been playing around with a bunch of different things that have affected their cash flow kind of negatively. So they're still very much in a transition period. They've been active in the credit markets this year as much as they can be to sort of address their neo mature and debt and anything that
seems attractive. But the interest rate environment doesn't make it as easy for them to refinance that as I think they would like.
Certainly not.
Yes, interest costs are higher for almost everyone except maybe if you're thinking about some of the double digit coupons that the cruise lines had to pay at the start of the pandemic.
Absolutely, although we did see a return of the double cruise line debt unfortunately.
Yes, yes, I think they're going to be paying high costs for a while.
You know.
Speaking of you know, how these companies are doing. We're talking a lot about their outperformance this year and how they're sort of, you know, regaining their footing after you know, so much upheaval for the pandemic. But can you talk to me about what some of these companies' goals are, you know, as it relates to their business and to their credit and you know, how attainable those might be looking ahead into twenty twenty four.
Sure, so, I think from a goal standpoint, the companies have made it pretty clear that obviously they want operations to be very strong, you know, they want to increase their their occupancy levels as well as their advanced bookings and all those sort of pieces that are important, you know, taking in new new vessels and having the financing for it. But part and parcel to that is the focus on
cash flows and debt repayment. They're not necessarily thinking about their shareholders at the moment, which in my opinion, is very good thing that they're not, because they are way, way, way, way too early in the game to be thinking along those lines. That said, I mean, I think as you
as you look up twenty twenty four. I think you could probably see a few more ratings upgrades provided they continue on this path, they don't get waylaid by some unforeseen event like a pandemic, and you might end up seeing a few ratings upgrades. However, I don't know if you would necessarily see investment grade until twenty twenty five or twenty six for some of the names, and I
think that that's more attainable. That's possible, but it's definitely encouraging and one of those stories that I think a lot of investors like to hear because there's fewer and fewer of those at the moment in terms of these turnaround plays that investors are looking for.
Absolutely, yes, the upgrade story and the you know, reaching for that rising star going from junk to investment grade is definitely going to be something that we're all going to be watching very closely. That was Jody Lurie everyone. Thank you very much, Jody Jody Luriy of Bloomberg Intelligence. You can read all of her great analysis on the Bloomberg Terminal. Please do check it out, and Jody, hope to see you back on the show again soon. Thank you,
and thanks again to Paula Selvison from Bloomberg News. You can read all of her great scoops and her coverage on the Terminal and at Bloomberg dot Com. I'm Olivia Raymonde. It's been a pleasure having you. Please join us again next next week on the Credit Edge,