Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crumbie. I'm a senior editor at Bloomberg. Today's guest Sir Erin Hudson, who reports on distressed debt for Bloomberg News in New York. We're delighted to have you on the show.
Thanks so much for having me.
We're also very pleased to welcome Paul Vickers, who covers energy for Bloomberg Intelligence in London.
Yeah, thanks for having me as well.
We'll be coming back to energy in a bit. There's lots of exciting stuff going on there, so do stay with us. But first, Erin Hudson, with Bloomberg News, you've been digging deep into distressed debt. A lot of companies are running into trouble at the moment, with interest rates rising and the economy slowing down, potentially tipping into a recession. Inflation and volatility in the financial sector don't help. A
lot of regional banks are really struggling. Plus, the anxiety about the debt ceiling is the highest I've seen in years. I have to go back to twenty eleven for the last time it's been this exciting. So you've been talking to some very large distressed debt investors. What are they saying, is everything about to blow up? And what do they see as the big opportunity here erin?
Well, it sounds like there's a lot to look at all over the place, and especially to do with the banks. You know, it sounds like everyone is doing work on what are the assets that various banks have, what is the structure of their capital their capital stack, So you know, they're sort of looking at how they can get involved, you know, where they want to make their bets and you know what the assets are. Obviously we kind of saw the issues with with Silicon Valley Bank and the
duration of their treasuries. But you know, I think now people are sort of looking at the commercial real estate loans. I've had investors mentioned commercial and industrial loans in particulars
as something they're they're taking a look at. So, yeah, it seems like this The feeling is that this also opens up opportunities outside just the banks themselves for direct ending, and you know, and then obviously companies themselves that no longer have the same access to credit if they relied on the regional banks.
Let me just start me there on the banks So, I mean, we've saw this wave of distress. We saw Credit Swiss basically disappear, we saw all of these other regional banks. There was a kind of a domino effect. I mean, it just seemed very precarious even last you know, last few days, last few weeks, and we're talking sort of mid May. Now is the crisis over?
I wish, I wish we knew. I don't know if anyone impossible to say, but I think there's a sense that there will be more distress for sure, and there's a lot more work to do.
Okay, So people are sort of trading and betting on now. They're looking, as you say, the balance sheets of these banks. They're looking at exposure to treasuries which have gone down because of duration, looking at exposure to commercial real estate. And so do we expect now distressed investors to be much more actively engaged than looking at these banks much more closely? Is that the takeaway?
It sounds like it. Yeah, And it also sounds like there's sort of a sense that depositors themselves are a bit more of a flight risk than you know before. So yeah, there's definitely a lot of moving pieces.
Who actually made money on those trades.
Some people Marathon Asset Management in particular, we reported that they made thirty million trading credits sweet sponds before the takeover by UBS. The You know, some of these that's will take a long time to play out. In Silicon Valley Bank, for instance, you know that bankruptcy is ongoing, so it'll take a while to know, you know, who made who who's the biggest winner or the biggest loser.
But definitely an opportunity for the distress shops. They're also looking at consumer companies, right I mean, one of the people you were talking to is actually handling the liquidation of bed Bath and Beyond and Brick and more. To retail general is getting hit especially hard right now. What's the outlook there?
Yeah, I mean, obviously there have have been several retail bankruptcies so far this year and several notable liquidations, but you know, I think that the consumer is overall holding up better than expected. And in retail too, I think, you know, there's a sense that won't last, you know, and especially if a retailer is not you know, the top one or two in their sector, they are probably
going to be facing some struggles. But it seems like there might be a little bit more runway there, but you know, there's there's definitely some big, big fundamental questions like like what is what is the value of a brand? You know, are people do people really have brand loyalty anymore? You know, so consumer behavior I think is changing. Consumer behavior is definitely something that like no one can really take for granted anymore, and it's it's maybe a bit harder to predict.
They're also being quite affected by the pullback by regional banks, right, I mean, the they were funding a lot of these companies on the retail side, so that's going to hurt. And then as you say, the economy is slowing, there's inflation. Consumers have been resilient, but they're not presumably going to remain that way forever.
Yeah, I think there's there's definitely a sense that, you know, cracks are starting to emerge. One investor was sort of mentioning just the delinquency rates in subpar car loans as one indicator that all is not well and that you know, yeah, there will be problems. There are problems, but it's taking a while to trickle through.
Another one that we constantly hear about in the context of distress is healthcare and distress that investors seem to like that one. Why do they get involved there?
Yeah? I think I think the sense is there's a lot of opportunity there to kind of, you know, right size a balance sheet, sort of adjust the valuation of these companies. And I think, you know, there's there's some some triggers there that you know, you can't always see coming, but you know, regulatory policy changes. So healthcare services is a business that they've sort of flagged as highly highly interesting.
And then also pharma with the idea that you know, if a company loses a patent for rug, you know, that creates uh trouble for the company, and it's kind of an opportunity for distrussed investors. So yeah, there's been you know, there's obviously a lot of changes that have happened the strain of the pandemic. So I think there's a lot of headwinds there for those businesses, which creates opportunities for the distrusted investor community.
We should those companies be in good shape. I mean, we're all getting older and sicker and you know, living on forever. So it wasn't isn't Why why aren't those firms seeing really really well.
Well, it's so it's kind of like this mix of so if regulatory and policy changes happened that which have happened over the past couple of years, which changed the amount of you know, reimbursements that these companies can collect from health insurance or government agencies, then you have the labor pressures, you know, the difficulty hiring skilled staff, needing to pay them more and more. You know, those are
a few of the things. And then with the pandemic, you know a lot of people you know, stopped going in for these elective, elective and preventive care type of treatment, so that those are sort of like the biggest moneymakers at times for many of these these healthcare services. And you know, it's also not always the most desirable job to have anymore. So I think there's just there's a whole you know, Bloomberg has done a lot of great reporting on on on the pressures that are facing healthcare.
It does feel a little on it like counterintuitive, but yeah, it's definitely a sector that's in the crosshairs.
Nothing that came up when you were talking to the distressed investors was ever grand, which is a massive Chinese property developer that we've talked a lot about on this show. They have, you know, tens of billions of dollars in debt, They've got a lot of creditors all around the world, specifically on the US investors side. I'm interested to kind of understand what did what did they learn from this process? It seemed to have progressed very very quickly, and you know,
investors were very engaged. So what did they learn?
Yeah, I mean it's it's it's far from over, it's not quite over, but it seems like they're sort of a some investors are walking away with a bit of a renewed sense of faith in the in the system and confidence I guess in the you know, the restructuring process that Chinese companies will undergo and how how they
approach it. So I think, you know, that seems to be the takeaway for the moment, but you know, of course it's an ongoing situation, so whether it will pay off the way that they're hoping and expecting it will remains to be seen. So you know, story will continue to follow because, yeah, it would have some big impacts.
I guess also, you know, China being the second biggest economy. They need capsule, They need foreign capital particularly to sustain and build that economy, and they're going to need a lot of it over a long period, So they want to keep foreign investors happy.
Right, Yes, And that definitely came up as you know, an sort of the thesis that was kind of under underpinning that bet is the idea that you know, offshore creditors aren't going to be completely you know, completely shafted or put thrown to the side because you know eventually they will need to come into provide capital. So yeah, it seems like that is definitely the belief that's sort of driving a lot of those investors who have gotten involved.
Okay, great, So before we talked to Paul Vickers at Bloomberg Intelligence, Stephan be what our investors surprised about right now and what are they preparing for for the next let's say, twelve months.
Yeah, I mean, I think that the ongoing strength of the housing market is a point of surprise and sort of fascination. It seems like the shift to ev EV mandates electric vehicles. Yeah, and just that that whole shift in the in the auto sector. I think there's the feeling that that's going to cause a lot of disruption, which again is going to make distress investors and uh, the community of advisors in the distrust in world very busy.
And then I think there's also sort of you know, just looking at the phenomena of the meme stocks, I think that's becoming a more a greater factor when people are evaluating these situations. There's sort of the sense that that has staying power. As much as the meme stock era seems to have passed, it seems like, you know, it's still lingering.
And in terms of opportunity, I mean, we've been hearing for years I have, particularly distress investors dry powder, you know, billions and billions of it just stacking up on the sidelines, but never enough distress for them to really deploy all of that. Are we finally, I mean rates going up, the economy going down, all these other things, you know, geopolitics, all this other volatility. Is this now the moment for distressed? Are they excited now? Are they happy?
I don't know. Unfortunately, I think there's I think there's some mixed feelings. One investor who probably put it best is looking at in the context of looking at commercial real estate is sort of like, you know, you see there's problems, but is this the moment or should you wait six months? Should you wait a year? Are think it's going to get even worse, and you know it makes an even more attractive investment opportunity. So I think time is going to tell.
Grattef Aeron Hudson from Bloomberg News, thank you so much for joining us. Thank you read all of erin'scoops on the Bloomberg terminal and of course at Bloomberg dot com. Moving on to another big topic. As I mentioned earlier, we are very fortunate to have with us Paul Vickers,
who looks at energy for Bloomberg Intelligence. What's going on with the energy sector, Paul, Oil prices are down, We're heading into a recession, as we keep talking about, Plus theres a war going on just to the east of view. Is it all bad news over there?
Well, not so much bad news, I think for the energy sectors. I work for Bloomberg Intelligence. I cover energy and utilities across Europe, a couple of global oils and of course the high old prices have been there been a windfall for them. They've done particularly well over the last eighteen months or so, less could be said for the utilities. You think again, being a sort of power producer, you think higher power prices would be good for these guys.
That's not always the case there. They're often hedged very heavily up to one to three years ahead, and the high prices and volatility have created liquidity problems that the Russian supply comes.
Impacted those that were dependent on them.
It's caught companies like Uniper to its needs and nationalized nationalization by the German government.
It's had for other reasons as well.
Df was nationalized because it had to buy a lot of power in the market at very high prices. So for utilities, these higher power prices haven't haven't been a godsend at all. In fact, they've really threatened the very sort of structure of the entire industry. But what we have seen is the EU has responded to these Russian gas supplycasts.
They're now running around ten percent of what they worked prior to the invasion.
But they've posentially been replaced. It could have been happening with power prices or they stop gas prices. They're around thirty five years A mega walked out now are. They peaked at over three hundred during the during the last summer, and of course, with with gas prices setting turing, the price were paying the power market much of the time. The same thing's happened in power are they're around ninety years and make it allowed for a peak of over
six hundred. So the prices have really fallen mainly because the use taking an awful lot of initiatives.
It's boosted LNG.
Supplies, it is pushed renewables, it's increased in imported gas by pipeline from countries like Norway. In Oligeer area, it's also made a big push to improve the energy efficiency and demand side management.
And at the same time they also.
Achieved their goal of having European gas storage stocks ninety five percent full at the start of the heating season. They achieved that and it never went below fifty and now they're restopping again. So really, when you've got fifty percent of your gas supply still full at the very sort of trough of the cycle moving into the summer sort of the period, a warmer period, and the gas demand it's in pretty good shape and power prices reflect that.
So what's happened nows these companies have, you know, the risks have gone, those risks polatility of liquidity or of having to buy the sort of short power in the market, they've disappeared. These companies much better place right now. In fact, they're very well placed for this year as they've managed to put on hedges at higher levels. So it's quite a bit of earning sort of growth is baked in.
So yeah, we're pretty relaxed about the utility set and I think from my perspective, it's probably you know, it looks like it's time to cool the end of the energy crisis. I think that's quite a sort of strong statement. I think the regulator would be less willing.
To do so, but if he takes guidance from.
The World Health Organization last week called it enter the COVID nineteen emergency status and they said it's time to transition into long term management.
I think that's the.
Same for the energy crisis. I think we're through it. It's never going to be the same again. I mean that Europe is now reliant, It has no ten percent of the sort of Russian gas applies that formerly supplied around forty percent of the market.
They've gone.
They're not coming back, but the authorities have taken measures to replace it and to compensate for it.
And I think we're in the much calmer waters ahead, So.
It's all looking pretty rosy then, Paul. I mean, would you call this sector specifically the energy sector? Would you call it defensive relative to other parts of the economy.
What's certainly the only gas sector I'd say is in all the prices you see have fallen from their peaks, you know, OPEK classes doing what it can to sort of maybe support that, so that there's, you know, the feeling that they're sort of their ideal sort of support level.
More might be around eighty dollars a barrel.
So if you open that sort of level, then look at the let's thing at the oil natures and they have break even level. This is after dividends and capex have been paid around forty to fifty dollars, so they're still thrown off an awful lot of free cash flow that level. They may well be returning it mostly to shelders now, but it doesn't really matter because they managed to bring leverage down to in some cases there's negative levels and other cases sort of single digits sort of debt to.
Equity, So there's an allthwort of capacity for.
These guys to releverage the balance you so even if all does drop a little bit more, they'll can't share buybacks back down. But there's still plenty of capacity to re leverage without threatening credit quality, and that's sort of key for the sector. So yes, I would say that
the oiler gas is a safe haven. I think the other side of the coin of utilities is whereas the risk we are on the downside previously, I don't see much outside because I think these companies will use any sort of windfalls they get from higher edge levels just to reinvest more and more into the renewables sector. This is really any constraints to their growth the sort of balance sheets, and they're really fairly stretched, so they don't have the
same flexibility gas companies due to re leverage. So the higher earnings they're seeing from these power prices now from say inflation linked to earnings in the regulated name by businesses, these are all allowing them to actually sort of take on more debt and drive renewables growth. I mean they're looking some companies, you know, fifteen to twenty percent sort of growth over the sort of mid term as they rolled out wind and solar and hydrogen network up great projects.
So yeah, this is there's a great growth phase going on the utility centrum and you're not really seeing that in the on a gas sector. These guys haven't really boosted cafes that much. You know that there's an element of rising spending, but it's not really about growth.
That's really about cash flow.
Whereas I think in futilities, whereas the risks were very heavily on the downside at the middle of last year, so Unicer went went went, Das got nationalized, the VMG and other German gas supplier or almost got a national when I say, managed to do a last minute deal to avoid it. All the energy suppliers in the UK
were going fast and almost on a daily basis. Those risks have gone now and I think they can look forward to you know, so it's future with a lot more confidence, with sort of solid high meter single figures of earnings growth, stable leverage and a couple of companies maybe looking at sort of you know a little bit of credit. Upside of looking at s SE recently in the UK is with energy supplier that's doing very well. It's managing to fund its growth by selling states in
its network and it's in its renewables businesses. So it really is a massive growth question and the key is how to fund it. And now they've got a much more stable environment with prices sort of really flat lining around those sort of thirty five level and here's make one our level of the gas that really gives them conference I think to spend and drive that sort of renewables to push forward.
So the outperformer, sorry boy you mentioned is.
It s s SC Yes is the UK listed renewables and networks company, has transmission and distribution assets and is really the sort of the UK's green energy champion if you like. There are other ones across Europe, particularly a droller for example, some of the Spanish champion, or you
know RWE in Germany or EVP in Portugal. These are all companies that have got very high ambitions in renewables, rolling out wind and solar projects and already have a sort of pipeline that for the next sort of three to five years that there's very well covered by projects under construction.
Been a read.
So again these prices are fairly well or sort of growth is very well baked in.
And you know, they renewables often set.
A price or they may have some sort of price support, so they don't probably taking market risk on the price, so they can actually do these prices up front their contract for difference or something like that with the supplier. So it really it's about the construction risk and giving it done and actually there in life is probably the
biggest risk they face, the those inflationary risks. The cost of a wind turbine has gone up significantly, a cost of steel, for example, all the component parts or the electronics and go into it.
That's rising and that is causing some problems. And what we're seeing is.
Some companies aren't just pairing back their renewables targets, has to compensate for that. Others are maintaining their renewables targets but maybe increasing and increasing their sort of capex budgets and you know, pushing leverage a bit more or looking at other ways like ssee and selling off stakes five percent stakes in their distribution businesses. They're looking at other ways or bringing in partners to raise that capital, to
recycle the capital in order to maintain their growth. As someone like Austa for example, as a policy of every farm they bring into operation their self. If center it off to the third party investor, they don't reinvest that in the next one, and the next one and so on. They simply don't have the capital to provide their growth. But I think the utility search is all about growth now and much lower risk growth with a much more stable environment.
If a lot of that cash, though, Paul is being pushed back to equity investors, What is the opportunity for a credit investor of any particular pockets of relative value right now?
What?
Certainly on the gas sectors that spreads are very tight.
A Chevrons, Shells, Total energies companies like that, there.
Are more opportunities. I think in the utility sector.
There are still some companies there who are fairly low rated, sort of triple B type level.
And one of the more interesting areas.
Of the market is is the hybrids, which is like subordinated bonds if you like. They're often rated couple not as lower, so they might be like a non investment grade a subordinated bond with equity type characteristics, unlike a senior bond which might investment grade rating obviously you get a lot higher high yields on those on those hybrids. But yeah, the market has been been playing ball. They've
been changed with the hybrids. You have maybe a five year called corn and replace them, a corn and replace again kind of kicking the count down the road and company has been doing that. And if you like a company like a Patroller, you could buy a very expensive senior bond that may be I don't know, thirty basis points over a smart curd, or you could go subordinated in the same company and probably by a hybrid for two hundred basis points, taking a couple of notches down.
The capital structure.
It's about equity, but it's a low the bonds, so there are opportunities there. And also I think with the sort of the energy transition, these companies are all instring or of green bonds and even green hybrids in some cases, and these are also attracted to you know, a whole wave investors who are looking at sort of the SG right now, the utilities are the biggest esg issuing sector in Europe in terms of sustainability, link bonds, green bonds, the entire sort of product range, and I think that
set to keep maintaining their position, probably grow going forward.
In some companies, the.
Nineteen ninety five percent of what they're spending is aligned with the EU taxonomy, which means it will sort of qualify if you like, for green investments, So they're very well placed. I think certainly green bonds are an area of interest. Subordinated or hybrid bonds or hybrids if you hYP dore not really bonds parts, but there are another area as well. Those companies. I think s S has some positive preventing. EEDF is another company we quite like.
It's one of our focus ideas. It has autoric year last year after the government forced it to sell a lot of it's nuclear power to third parties at a fixed price that costed billions and billions of euros because they have to buy that power in the market at has elevated prices. It also had some safety issues in a nuclear plant, which means its production was a lot that we're again had to replace. That put its edges of very high market prices. Those two factors have gone
this year. They're not going to be effecting their EBIT dark. They went from an eighteen billion profits of five billion even lost last year but I think they can need to get back up to that level this year and probably hit there, you know, for loads of the four times of leverage target as well. So it's been nationalized now again, which was like some sort of backstops. I
think EDIF is certainly named to watch this year. They have plenty of hybrids as well, so you can really get some quiet uite juice yields on some coordinated df for hybrids.
On the ESG, Paul, you mentioned a lot of renewables, you mentioned transition, mentioned green barns, all of this great stuff. Investors love it. But in the context of energy, I mean this is fossil fuels essentially for a lot of them, is you know, the bulk of their business. That's not a very clean or environmental business for ESG investors to be getting into. Is it not a bit of contradiction there? Is it not just like marketing, What's what's really going on? And that's that side.
Yeah, it's utilities that are the ones who are already the favorites of the green or in versus if you like. I mean, they're they're phasing out their col fire generation. You know, they're using gases and LERG and and those sort of areas. That's a sort of transition fuel abviosuly nuclear co two three. Apart from that, they're pushing very hard on the renewables, the wind and solar, even moving
into areas like hydrogen. You know, the networks that are upgrading and expanding to income to all these renewables projects.
They're all qualifying for these green projects.
The utility sector, that's what I say, is one of the biggest green issues, or the fact the biggest green issue.
In the European market.
But for the on a gas companies for example, as you say that they're not they're not really in that market at all. They're still a few companies a year or so ago, two years ago, BP was talking about coming back or production, you know, with the historic kind
of changes moved. They've got very high renewables and ambitions, but really they realize there's so much funny to be made for more than gas production with even eighty dollars a barrel, that the return of capital is like phenomenal, prepared to what it would be on maybe some renewables projects they could build. You know, they've got existing old fields that just keep this, keep drilling and let's keep hunting.
We can make them tons of cash. We can give back your shelterers doing that.
It's a lot longer game to play to build that renewables capacity. So you know, some like Total Energies that they have been issuing hybrids, not not green ones, but just hybrids to fund their renewables and ambitions. And you know, by twenty thirty they want to be one of the
biggest renewables players in the world. As the VP, they have a long way to go, and right now, I think for them to capital allocation decision, do we get us a huge reternal capital from the best known a gas or do we take a much higher risk, low return option on pushing renewables. Right now on the gas is winning, which again sort is precludely done for really issue in the green bombs. They can issue hybrids, but again just sort of regular hybrids rather than green ones.
So yeah, they are the gas companies really a long way off from being any major green bond issuers because their core business it is going to stay for a very long time.
Interesting, okay, thank you. So overall it's a pretty rosy picture for European energy and utilities. But you know, I'm a credit guy, Paul, and I worry all the time, but everything. So what keeps you up at night worrying? What are you scared of in the context of what you cover, anything gnawing away inside you?
Well, I mean there's still risk to the market.
I say, the Andrew is calling the energy crisis, your energy crisis is over. There's risk to that, clearly, just like calling the COVID nineteen pandemic over.
There's a risk to that.
It could be a research and I mean, these are just things you have to live with now. I guess that's the same. For example, Russia is still pumping around the ten percent of what it used to into Europe of southern corridors. That could be cut again, that half of your replaced again. That could be a shot. We could see a resurgent demand from Asia and has happened about two years ago after sort of COVID sort of restrictions were first sort of lifted.
That I call the LERG cargots. I mean, there's only finite energy capacity.
It takes a long time to build a new capacity, both the gasification and or regasification liquor faction as well, So you know it takes a long time.
So if all those cargoes go tow Asia, then Europe again could be looking at well, where we're going to get our gas from.
They also got got off lightly I think somewhat in Europe with a fairly mild wind, and so.
The demand that gas is always that's peak demand.
It was never that extreme, that's quite so if you've got a combination of Russia cancer last ten percent. If Asia recovers strongly, rebound strongly and it takes all the energy away from Europe, is they can ship the energy anywhere from Australia to two year or to America to China. I mean it doesn't manage just to ship on a sea like an oil tank. So if that take gets dragged to and to Asia, you can't replace him, So
you could leave Europe a bit shorter. In context with a cold of winter, we could be looking at.
A higher prices.
In fact, the future's gas curve does share high prices for this winter. There's still nowhere in where we were maybe a sixty euros thirty five at a minute, and still that that's a reasonable level. But it is still a type market. There is still the structural risks we're going to have to learn to do. But at the same time taking measures like building out with rble's capacity and increasing energy and for capacity and all these factors that should smooth it over time. But there are some
risks still that we could see. We can see prices rise, we could see some companies, yeah, maybe struggling again. But I think that, you know, the worst is by far over, so I'm not being kept up at night.
Got it. Thanks very much Paul Vickers of Bloomberg Intelligence. You can read all his great analysis on the Bloomberg Terminal to check it out. And thanks again to Aaron Hudson from Bloomberg News. Read all of her scoops on the terminal and at Bloomberg dot Com. I'm James Crumbie. It's been a pleasure having you. See you next week on the Credit Edge.