High-Yield Boom; Communications Focus: Credit Edge

a ton of new issuance from junk rated borrowers. Let's get into that in a little bit, But before we do, I just wanted to ask Olivia Steve, what's up with Party City. We're clearly not buying enough giant heart shaped helium balloons. They had to file for bankruptcy. What's going on. We're not having enough fun in this country. What's your take, Olivia? I think that we are having enough fun in the country, and maybe that's why we don't need to go to

Party City. I think I love a good party. My kids are a little bit older now, so we don't visit Party City as much as we used to. But what I've been there, so we have to wait for Valentine's Day to buy those big heart shaped balloons. But that company's in trouble and retail sales just fell. You know that the consumer is not doing well. But let's get back to the issue Olivia. We've seen a big increase in high yield bond issuance lately, junk rated a

lot of cash after a real drought. Last year, issuance was down something like seventy twenty twenty two. What's the situation though, Why are they issuing now? It's a great question and a really interesting dynamic, James, that I think is going to play out through this entire year. When we look back at the end of last year, investors were really concerned about high yield bonds, especially ones in the lower rated tiers such as like triple C credits.

Now what we're seeing is that as borrowing costs are dropping, not compared to last year's levels, but dropping in size and scope, people are now rushing to add on risk. When they were maybe a little bit more positioned defensively. So now they're trying to get ahead of it, which has kind of caused this big rally. But what are the advantages of issuing nobs? Borrowing gone up, yields gone up,

everything's going up. Why do it no. I think that yields are down from their highest point of last year and that they will rise again, and I think that's what the base case of many strategists are. So therefore, if they have an opportunity to get in now, it's better than waiting until we hit maybe like an economic slowdown or a recession when yields spike even higher. And what are they using all that money for? Is it it's refinancing, is it new projects? Is it M and A?

What's the trend the Yeah, it's really interesting. Last year, the main trend we saw was that pretty much companies were only coming to the market if they had like an imminent financing need, like they needed money to fund like an acquisition for example. Now we're seeing more opportunistic financings in the market. People are coming into refinance debt, they're coming into fun tender offers, and we're seeing MNA picking up slightly. Is there one particular sector that's dominating.

I know we've had some energy companies which you know, they haven't been very apt to but but you know they've been enjoyed high oil prices. Are we seeing a big focus on one sectories it across the board. I think it's across the board. It's good to note the energy sector, that's a pretty strong sector and high yield right now. A lot of those names are DOUBLEB just the cusp of investment grade, so they have had they've been able to access the market more easily than other sectors,

even in the past few months. But we have seen others like for example, Dish Network was in looking to add another couple billion dollars onto a series that it launched in November. Well, and it we'll get to Dishtion a bit with Steve who focuses on that sector. But what is the outlook though for that market? You know, these bonds are junk, and they're cool junk for a reason. So you know, why is everyone buying them. Everyone's buying them right now because everyone's sort of jumping in on

this rally. It's kind of a fear of missing out. Stratagis do not think that this rally can be sustained. We have slowing economic growth, people are concerned about a recession. The Fed is not done hiking rates. So even though investors have I mean, even though borrowers have a little bit of a reprieve right now, and invest are jumping in. Stratagists don't think it will last, so spreads could easily

widen from here or yields go up. I think the base case in the market is expecting spreads to widen and yields to go up from here, because in a recession typically you know, we're it spreads around four hundred on USI yield, right, but in a recession you go to eight hundreds. So that's a big move from here, or even a thousand if you're looking at the pandemic. So,

I mean, I don't get it. We're going through an earning season that could be tough, We're getting a FED that's getting quite hawkish, We're going through you know, there's there's a war on in Ukraine. Still, there's all sorts of issues around why people still piling in. I don't get it. The amount of investor optimism about the outlook

for the economy this year has been quite phenomenal. Actually, the market continues to bet on rate cuts, continuing to think that the FED is going to slow it's tightening, and that inflation is going to come down quicker than maybe once thought, and that's allowing everyone to sort of get ahead of themselves and start to make on what they think is going to happen further on down the

line past a recession. But the reality is is that we don't know what the recession is going to look like and when it's going to come, so people still need to remain defensive. Okay, So before we all Steve about that and his take on the issuance rush, you've also looked at leverage loans. You know, there's a there's a ton of loan debt outstanding, and of course that's all floating rate and libel jumped to almost five percent recently, and that's you know, it was close to zero just

a year ago, so that's a huge leap. Those borrowers a struggling. They're going to struggle to pay back that money. What's what's the situation there? Yeah, the loan market is a little bit more precarious than the bond market, James. It's not as highly rated, and the biggest issue of concern actually is borrowers who only have loans in their

capital structure, so they have no high yield bonds. That means there's no subordinated debt sitting beneath the loans, So that's less investor protection should there be a bankruptcy, and if the slows down the pace of hiking, does that offer some relief to them, do they get bailed out? Effect to be the feed stops. I think at this point there's so much about the impact of what the FED has already done that has not moved through the economy, and we have not fully seen those effects that are

materializing now but we just aren't aware of yet. So I think there's still a lot more room for a lot of volatility and a lot of surprises to the upside or downside and high old bonds this year, and on the loans specifically, more defaults in the loan section. We're probably going to see more defaults. That's because of those loan only issuers not having those high old bonds in their capital stacks. So they're smaller, they're riskier. They tend to not have access to the high old bond market.

That's why they're not there, not always, but often, And so these are the type of issuers that are even more vulnerable in a downturn because they don't have the same market capitalization as S and P five hundred company would. And your story really dug into the downgrades, which I think is really interesting. What's the trend there? What was happening with that? Yeah, right now we're seeing issuers that

only have loans in their capital structure. Those downgrades are at the highest level since the earlier days of the pandemic, and they're showing signs of accelerating. And on the other side, the banks, they got stuck with a whole lot of leverage buyout debt that they couldn't sell last year and they're still trying to sell it down. How are they reacting to this? Are they pulling back a bit? Are

they getting more more defensive and lending to junk companies? Definitely, the banks have to stop and think about who they want to lend to more now that they have so much excess loans stuck on their bank balance sheets. It's definitely clogged the global m and A pipeline, and I do think that they're going to have to think more carefully going forward about who they want to lend to and how much they can commit. Okay, great story, thanks

a lot. I'm going to turn now to Steve Flynn from Bloomberg Intelligence, who focuses on the communications sector and before we dig into that sector, I just wanted to ask you, Steve about high yeal bondishments specifically. It's being such an incredible start to the year, at least over the last you know, a few days or so. But

should we expect that to continue? Sure, if yield stay at current levels or removed lower, Yeah, I definitely think you'll see continued a robust volume for new issuance UM. You know, I've been covering the high old bomb market for a long time. One thing that remains true is that you issue when you can right and the market is open. So companies are taking advantage of it and tapping the high old bomb market. And Dish was one of the big names in UM. You know, they doubled

the size from five hundred billion. Have they resolved the liquidity needs in the short term, yes, they have so, but longer term I think they're going to need additional liquidity.

So they ended the year or began the twenty twenty three or about two point four billion in cash we estimate, and they you know, they priced one point five billion dollars on Tuesday, so that brings them ut to about three point nine billion, which listen, that is a lot of cash, but the company has significant calls on its liquidity. It has a one point five billion dollars bond do

on March first. The company is free cash flow negative due to its massive investment in its growing wireless business, and the company has a potential to purchase additional spectrum. The company also faces significant bomb maturities in the future. They have like three billion dollars and maturities in twenty four, two billion in two thou twenty five, and then an even larger amount doing in two thousand and twenty six.

So while this was great for them near term boosts all liquidity funds them through this year, they're going to need additional cash in the future. Okay, thank you. So So, looking more broadly at the communication sector, which credit portfolios, sorry profiles, do you think likely to improve this year? Well, listen, we do like the communications sector. There's a few things

to like about at number one. It has compelling attributes, including ample liquidity, little international exposure, most of those businesses are domestic and they provide you know, essential services that people need, such as fixed broadband and mobility. My colleague Shifman likes the technology sector. Technology companies have strong balance

sheets with significant cash holdings. He believes that many of them, if you look at like Apple, Microsoft, Alphabet have very high credit ratings, hundreds of billion dollars of cash, and seemingly impenetrable business models. So those are two sectors that we like in high grade. So those are sectors that could withstand a slowdown or a recession potentially correct. Yes, I would say tech given the amount of liquidity it has.

In communications, again, it provides essential services, right, so typically in recession, people are very resonant to cut back on cable, on their mobile phone, on data. Those are things they need. So those sectors are relatively defensive. Yeah, we'll have to watch Netflix through these tough times. So looking at the actual price of these bonds, I mean, they got really beaten up last year and that's why a lot of

people seem to pile in again. But do you think that they are fairly valued based based on your assessment of fundamentals right now? Yeah, sure, I think they're fairly value. I think some probably you're going a little bit too wide. You know, we have a few that are really trying to deliver. So if you look at the names, like a teen T Verise and Warner Brothers Discovery. They're each striving to improve their leverage ry shows over the next

couple of years. If we think about a tent verse and those are two of the largest names in the corporate bond market, and they should be able to chip away at their debtloads with free cash flow and access to dividend payments. If you look at a name like Warner Brothers Discovery, that company was created in April twenty twenty two with a merger of Discovery and Wardermania, which was separated from AT and T. You know that was

highly leveraged. They've borrowed a lot of fun of payment to a T and T. But they you know, they expect significant free cash flow generation and epidog growth which will allow them to reduce their net leverage. Ray show. Those bonds are rated low, trip will be they trade very wide. There is a fear that listen, they have exposure to advertising its recession. Advertising pulls back in recession, but they do have a lot of levers to pull, I think to make to improve their credit ratio, particularly

with realizing massive cost energies from the combination those two companies. Okay, and what types of communications borrowed. Do you think is most at risk and why? Well, I think the one names that are most our investors are most concerned about are those with heavy exposure to advertising given the potential for recession, potential for advertisers to slow their spend, right, and so that is the media company. So that is

companies like Paramount, Warner Brothers, Discovery. You know, there's definitely some concern about them. There's also concern about companies that have relatively high leverage, like within investment grade. So a name like Charter Charter has high leverage they have they produce a lot of free cash flow, they have a robust business model, but they do have a high leverage. So some of those names will trade wide investment crede.

If you move over a high yield obviously your credit quality goes down, right, So there's a lot of names that trade at very low prices. You know, Dish we talked about they need liquidity. You have a name like AMC and or Team in movie Theories, which which trades wide. You have some of the wireline companies like a Frontier,

Loom and Consolidated, they all trade pretty wide. You mentioned AMC, that's everyone's favorite meme stuck and has been through a real up and down, right, I'd be interested and you'll take on what the outlook is for that that company. I mean, do they survive in this environment? Sure? Well, AMC's revenue in Ibada may improve over the next couple

of years as theater attendance continues to rebound. And while we asked me, the company has about six hundred million dollars of cash proforming to start the year, which is, you know, probably enough to absorb losses, invest in the business, and dress debt maturities over the next few years, like through twenty twenty five. But the main challenge for AMC is they have a massive, massive maturity wall in twenty twenty six that may just be too high of a

hurdle for them to overcome. And as a result, you see that many of their secured, second lean and unsecured bonds are currently trading at distress prices. You think that they lust through them through the next two years. They I mean, based on expectations for you know, cash flow and given what maturities they have to deal with, I think they can last a couple of years. The company has been relatively proactive too. They've been issuing their APE shares.

They also have an agreement to swap some debt for some APE shares, and so they're trying to do what they can and hopefully the box office will continue to rebound. Like I don't think we're anywhere near the eleven billion dollars domestic box office that we used to do on a yearly basis pre pandemic, but we're we're marching towards improvements. I think forecasts this year or for over eight billion dollars, and so you know that will help. If if it

goes even higher, obviously that will help more. And they also diverse into minding, though it seems like a bit of a confused strategy from the top. Yeah, that was a small investment that you made that was probably more noise than anything. So as far as you know your credit analysis, I really don't factor that in. Okay. On the flip side, are there any good ones the junk that should be high grade? Do you think the most interesting name or what we'd call a rising star company

that rises out of high yield into investment grade? And the driver there is that you need two of the three main credit rating agencies to rate you high grade to be high grade, and if we look at a company like Netflix, Netflix is high grade by SMP. They don't have a Fitch rating and Moodies is be a

one with a positive outlook. And given the potential for given that Netflix has reached sustained a positive free cash flow, I think there's a good chance that they could be a rising star in twenty twenty three and could get upgraded. They need to make more shows, though they seem to kind of have the shows and then they wait too long for me anyway, they always cancel after the second season.

Maybe those are shows that only you guys watch. Netflix has a massive content budgets, so there are cash outlays were content I think is around seventeen billion dollars offer twenty twenty two. We should get an update shortly about their budget for twenty twenty three. I've expected to be in that similar range. So they do spend a lot of money. So just dialing back, I mean, do you think there is more consolidation to come in the sets

or overall? Do you think there's more emanates come? Yes, particularly when you brought up streaming right, So if you go back a couple of years, most investors were okay with these streaming companies producing large deficits, which Netflix did for many years until the pandemic. As long as they continue to grow subscribers, people are okay with the deficits. But now a lot of investors are looking for positive free cash flow or like, you know, when are these

streaming business is going to be profitable? Right? And Netflix, after many years of lasses has reached sustained positive free cash flow, which is a big thing. The rating agencies we're looking for, and a lot of their lenders we're looking for. But now if we look across the board, you know, if you want to compete with somebody the size and Netflix or somebody the size that did which has you know, Disney, ESPN, Hulu, you need to be bigger. Right.

So if we look at there's lots of streaming providers out there, a lots of them that are losing money and there could be some sort of combination when you think about you know you got well you have Warner Brothers and HBO Max um or HBO Max and Warner Brothers Discovery, the discovery platforms looking to get to merge this year as far as the platforms are concerned. You have you know, you have got Paramount, You've got obviously Amazon, You've got you know, tons of other streaming providing at UM.

You know, Comcast has or Peacock service, So there's a lot out there. I think you may see some consolidations against some scale on the streaming side. I have about eight subscriptions to these things and my kids each have one and they'll watch one show each and it custs me the same as old school cables, so I don't wrap them all into one. Yeah, exactly. So I think, you know, you see, I think there's a chance you can get consolidations to try and bulk up some of

these platforms. Okay, great, so appreciate it. Steve Flynn Bloomberg Intelligence, and just to wrap this up for this week, what is the outlook from both of you? You know, start with Olivia Raymond Day from Bloomberg News. You're looking at these markets all day long. The Fed hiking, there's a war on in Ukraine, sial, there's inflation, there's you know, geopolitical issues, there's all sorts of trouble on the horizon. But we bullish or bearish yere we're getting ahead of

ourselves and being too excited about these markets. I think we're getting a little bit ahead of ourselves, James. There's just way too many uncertainties, many of them that you just mentioned that are still not fully baked into market prices. And I do think spreads are gonna move wider, and I do think yields will go higher in the near term. How about you, Steve Flynn. Yeah, I'm probably a little bit more constructive. I think a lot of companies realize

that they have to deal with their debt. I think, you know, the lack of issuance last year really was a concern for companies that they may have to look for other ways to pay down their obligations and may be focused on improving their leverage ratios and credit profiles. So I think management teams are going to be focused on their debtloads, which is I think positive. Okay, great, Thank you very much again, Steve Flinn from Bloomberg Intelligence.

Olivia ra Monday from Bloomberg News. I'm James Crumby. It's been a pleasure of having you. See you next week. Yes, thank you.