Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crombie. I'm a senior editor at Bloomberg. This week, we're very pleased to have on the show Janine A. Mordeo, who covers loans for Bloomberg News in New York.
How are you, Janine, I'm well, James, thank you and good morning. Thank you for having me on today.
Very excited to get your take on the markets. We're also delighted to see Mary Ellen Olson, who looks at commodities for Bloomberg Intelligence in Hong Kong. We'll be coming back to Mary Ellen a bit later in the show to talk about Indonesian high yield companies and electric vehicles. So do stay with us. But first, Janine Amadeo with Bloomberg News, you're the zen master of loans, one of my very favorite markets to cover. We've been working together
for more than a decade. We were in the market on the cell side for quite a while before that, so we're really delighted to have you on the show.
Thank you.
Leverage loans it's a one point four trillion roughly dollar market. It's the best performing part of credit this year with gains almost eight percent, making this I think the best year since two thousand and nine, so it really does stand out. But I'm just kind of when you get a sense for you to start off, gie, what's the tone right now in the leverage loan market?
Right now, we're actually having a euphoric risk one period. It had been quiet for a while when we've had some more concerns about FED raid hikes, but since there is news that they may pause, the equity markets have been soaring and doing quite well this year, and leverage loans have gone in tandem with that.
So just for the people that don't know this market very well, I mean, what is a leverage loan? How do they work? Break it down for us a bit of course.
So leverage loans are loans that are too sub investment grade companies. Generally, it could be for any company, even in your neighborhood. It could be, you know, a lumber plant, it could be a tire company. And how they're structured, they are generally speaking, seven years non amortizing that are bought by collateralized loan obligations who are the biggest buyers of this product, and they trade and some.
Of them pretty big, right you've get talking about you know, tens of billions of dollars in some cases billions.
Sometimes they could be a fifty million dollar add on, you know, to all equal to one point four trillion dollar total asset classes.
And even though you've talked about high yield and you know that sort of implies risk, they are sort of household names in lots of cases. I mean, there are companies in there that we recognize from the.
Right, Like we recently had a deal for Carnival Cruise Lines that came back in Carnival Corp. There's SeaWorld just did a repricing. So yes, very large. Some public companies. Many of these companies and leverage loans are companies that were bought out by private equity, so leverage buyouts, and that makes up a big portion of leverage loans M and A.
So from the investor side, why would investors like them in a rising rate environment?
Well, right now, the benchmark rate is called sour and it's a floating rate. We had library before, but we transition to sour, and in a rising rate environment, your benchmark rate is increasing. So the way lenders make money is the benchmark rate plus the margin plus a credit spread adjustment now for live or as well as receiving the loans at a discount generally and so under par. And so in this environment where rates have been rising, lenders are then earning more interest income.
And have the margins also been increasing.
The margins have been increasing. We had a difficult period of time back in twenty twenty two when we had a ton of hung debt, which is debt for deals that were closed before they were sold, to the tune of something like forty billion dollars. So after that, prices in general moved up for margins and discounts.
And just to go back to that hung debt point which you raised, I mean, we're going to come back to that in a bit. But hung debt basically, as I understand it, banks are agreeing to lend money to
companies and they kind of lock in a rate. But then the market changes, so you know, banks typically sell this stuff onto other investors, right, and then when the market suddenly changes, banks end up holding it and they're not they don't actually want to hold it, but they end up with it on their balance sheet.
Exactly, so they're holding it on their balance sheet. A lot of that actually has been whittled down since the beginning of the year as we've been in a more risk gone mode, and deals like Nielsen Citrix have basically sold down to you know, their whole levels.
So you know, you're talking about prices going up and use the word euphoric. We came into this year pretty bearish on high yield and leverage loans because of the recession outlook, because of the rates outlook, because of all the other pressures that we thought, and you know, everyone's been calling for a distress cycle for a long long time, and you know it seems to never happen. But why are prices going up right now?
Well, they've been going up before this burst of new launches. The last couple of weeks, they were going up because we had basically no supply. So when colos are printed, they have nowhere to go, so they have to buy in the secondary market, so more demand prices we're going high, higher, meaning towards par. Right now, they're staying relatively steady, a little bit under ninety five cents on the dollar. But we now have a very full calendar of new issuance
over twenty four deals in the general primary market. So I think we're seeing that level off a little bit, so I think it actually came down a slight bit yesterday.
But even with that burst divisions we've seen I mean, still on a year to date basis, the year has been pretty slow, right, I mean, it's not much volume so far this year.
Now, volume has been clearly clearly down at least over twenty percent over last year.
So you could see a lot more supply but still be down on the year. Plus you've got what you know, you've described the callateralized loan obligations to CLO. They buy a lot of this stuff. We are now seeing kind of a bit of a recovery in that too, and we expect them to possibly come back, you know, quite strongly in September. So you've got this demand for still not love supply.
Right, I mean, what I think we will see in September is some of this hung debt that has not come forward to back to the market so to relaunch for deals like possibly Bright Speed, maybe Twitter Elon Musk's acquisition of Twitter, which has roughly thirteen billion dollars of debt on the on the bank's bound sheets. So we may see some of that come out post labor day.
Okay, but do you kind of think prices could still keep going up even though you'll get more supply.
Okay, So what would keep the prices moving in the direction towards par would be if the FED decides to halt any further rate hikes, if equities continue to perform as they are, if companies performance also improves, and ratings upgrades will also help the index go higher. Things that could bring it down would be some of this hung debt that also will be coming out still at steep discounts. So then you'll have a flood of that coming in for example, you know it could be in a ninety range.
You know, some of it we shall see.
When we started a lot of big thanks for calling for a default rate that was quite high in leverage loans. These companies, you know, they have a lot of floating debt. As you say, fundamentally, they'll be more tested by the big rate move. It costs them a lot more to service that debt. Won't there be more distress and defaults?
I mean there can be for the companies that cannot handle where their interest expenses right now. So you know, given you know where software is and where the margins are right now, that may be too much for companies that are already let's say rated B three and maybe have had felt some of the issues of a recession looming and their businesses can't handle that. So we could see some, we could see some. But you know, again, in a one point four trillion dollars the amount of default is minimal.
So it's not a huge part of the market, right.
And that's why it's also so attractive. So here you have, even though it's called junk loans, your returns are just hovering under eight percent.
You know, how long have you been looking at this market?
For?
How many years?
I have been in this market since the early nineties.
And how many times in that period have you heard regulators? Have you heard all sorts of people on the sideline say this is a scary market, stay away.
A gazillion times?
And why is it there? Always? That's always fascinated me that, you know, they talk about clo is blowing up, they talk about leverage loans blowing up, but it never happens.
It never happens. I just think because the product is one, it's a necessity. Because again, every every mom and pop shop to large public companies, to infrastructure, to other oil and gas companies. They all need leverage loans.
The other big topic that I wanted to hit very briefly, private debt. You know that it's loans directly from from a lender to a to a borough. We used to call them bilaterals a long time ago, but now it's private debt. How does that work with leverage loans? Does it take over the business? Does it encroach? Does it is it cannibalizing or is it living side by side in perfect harmonies?
You think, well, I won't say necessarily perfect harmony, but they have they have money to put to work. It's they had stepped in on a couple of deals to sort of do a bridge when our BSL broadly syndicated lown market was not as exuberant. And then we've even seeing deals where okay, they come, it's almost like a band aid, and they come and supply the money so the company could do the acquisition, and then later they bring it to the banks, so they have a role
for sure. And and does it make it a little more competitive definitely, So it's not like it's the business can just go to those bankers who underwrite and do the committed debt for all these buyout deals and acquisition deals, and you know, now they have competition. But as far as I have heard from my sources, private credit is actually bringing their prices down sort of sort of to compete more with the BSL market.
Interesting. So before we to Mary ellen Olsen at Bloomberg Intelligence, what's the next big thing to watch out for here? Janine, I mean, based on your experience, based on the knowledge of these markets, are you kind of more optimistic or more pessimistic about the rest of this year.
I'm actually optimistic. We have seen deals in the last few weeks come out for repricing of deals, so cutting the margins. We have seen companies that are strong pulling dividends out. We are expecting a deal this week and next week to launch for ten Ago, which was one of the hung debt deals, and it all seems to be going well. Many deals are tightening at least three
times upsizing and clearing out and pricing. So we only have a few weeks left of summer unfortunately, but I would say we're going to see some deals come the hung debt come and pull labor day and once that clears out, I think it's leading the path to more M and A and so what I'd be looking for is the building of M and A. I could come to the debt markets in the fourth quarter, it could maybe later in the fourth quarter, but I'd be looking for towards twenty twenty four.
Great stuff. Janine Amadevo from Bloomberg News, Thank you so much for joining us. Thank you for having me read all of janine' scoops on the Bloomberg terminal and of course at Bloomberg dot com. So, as I mentioned earlier, we're delighted to welcome back on credit Edge Mary Ellen Olsen, who covers commodities for Bloomberg Intelligence based in Hong Kong. How's it going, Mary Ellen?
Very good? Thank you so much for having me back again today.
So I know you cover a lot of different countries and companies, but I wanted to focus on Indonesia and in particular the high yield sector there. Let's start with nickel. It's a key component of electric vehicle batteries. Indonesia as a big producer of the metal. Why is the sector in focus right now?
I think the sector is in focus baker as there is more and more investment opportunities. Just this year, we've seen one high yield bond issuance from Nickel Industries, which is a nickel producer operating in Indonesia, and we've also had a couple nickel IPOs. So I think what you're seeing here is investors response to the government's regulatory policy, which is encouraging downstream processing, especially in nickel and copper and other metals.
You talk about the regulation, I mean you've written actually about what you call resource nationalism. That doesn't usually sound good for investors. What's the situation in Indonesia.
I think in Indonesia, what's been happening with some of the companies is that some of the export bands and downstream processing requirements have actually enabled the build out of infrastructure, which is going to bring in new investment in new opportunities over the long term. So in a way, I
see it as beneficial. I think that there has been some criticism about some of the export bands from agencies like the WTO, but it's really targeted at, you know, bringing the added value on shore to Indonesia, and I think it will lead to more investment opportunities for people over time.
Okay, but for foreign investors. That doesn't usually work out particularly well, and why is there an opportunity do you think in Indonesia.
In Indonesia, what we're seeing is a lot of the companies that are operating there are are domestic companies, so they do have you know, they're in the loop in terms of right now helping to build out this EV supply chain especially, and it's interesting to see that with, for example, the coal mining companies, which you do have majority ownership by domestic entities, and what we're seeing is that they're trying to put some stance between themselves being
predominantly driven by coal revenues and they're diversifying to support the EV supply chain. So we have a Darro Energy that's looking at building an aluminum smelter and also looking at building a hydro electric plant to support the smelter, you know, within a certain period of time. And then we have another cool company in Dica Energy, which is actually opening up a business that focuses on the two
wheel EV motorcycle. So they've actually you know, come out with some new motorcycle models and they're really trying to invest in what they see as a more green and sustainable business so I think that that's kind of the path that these companies are going down because they're trying to transition to participate in the new energy EV supply chain.
So that all sounds great if you're in Indonesia and you're an Indonesian company. But if I'm a credit investor, you know, an international credit investor sitting in New York or Hong Kong, why sorry, or London, why should I look at Indonesian commodities right now?
Again? Because I think they're attracting a lot of investment. If you look at some of the new projects that are coming in, they're quite big. We're seeing interest from some of the major car makers to come in to invest in some nickel assets to make sure that they have the resources they need to sustain their business over the long term. And Indonesia's nickel deposits they account for
about a quarter of the global reserves. So if nickel is in demand, and certainly critical minerals are in growing demand to support the EV supply chain and new energy, you having assets in Indonesia could be a bonus.
And the companies that we're talking about here, I mean you mentioned a few, but are they mostly companies that fund in dollar bond markets.
It's a mix. I would say that in Indonesia you do see some of the high yeal companies leaning on US dollar borrowings as well as some local currency borrowings. But we've seen what I've seen most recently is equity equity raising. So in the two IPOs that just went out, of course we're in Indonesian Rupia. For one of the company's Nickel Industries, which is a company I just wrote a b I focused the idea on, they actually attracted funding from one of the domestic companies, United Tractors, also
through the equity market. So we're seeing a good mix of funding. And I think the funding is not only coming from onshore but also from offshore as well, because Nickel Industries just did that four hundred million dollar bond in April.
Okay, So again, if I'm sitting outside of Indonesia, outside Asia, is there a liquid of debt that I could invest in?
Yes. Across the six companies that may be more focused just on mining exclusively, there's about I think twelve billion in dollar bonds outstanding. It really ranges from company to company. Some of the well, probably the state back company, which is mind ID, which is the holding company for the state mining assets, that has the biggest amount of debt outstanding, and probably the smallest would be Nickel Industries, which has only about four hundred million. So it's a it's a
good chunk of change. But really, if you look at some of the majors globally like valet or Rio Tinto, they probably on a standalone basis would have seven billion in dollar debt outstanding, So still still a lot of room to grow. But yeah, I think that it's gaining mass as we continue to see new companies trying to raise.
Money and all the yields more tracts of though.
Yes, definitely. I think that when you look at the coal companies, so previously or historically, the major issuers have been the coal companies, and they've always traded wide simply because they have, you know, the mounting coal risks and ESG concerns, So even within the high yield category, they've tended to trade quite wide to their peer group. So yeah, YELD in the high yield sector, I think Indonesian high YELD definitely trades wide to what you would get overseas.
And I was looking at that before the podcast. And it's interesting for let's say Indeka Energy. At Daro Energy, they have bonds due in twenty twenty four and they're yielding over seven percent. So for a double B minus US dollar corporate bond, it's it's below seven percent. It's about six and a half percent at the moment at the one year mark. So yeah, they're yielding yielding more.
And I think that those bonds for the coals have come in a lot recently simply because they've the core prices have been so high and they've been able to amass such a great amount of cash on their balance sheet, which has helped them reduce some of the refinancing risks.
So the room to films are rarely further do you think from here?
I think so. The bonds are still trading a little bit below par, so you could see some upside for them as they close it on maturity, especially since the maturity is only a year away. And certainly for a Daro.
A Daro is actually a it has a triple B minus rating from Fitch and it's still offering a a yield in excess of seven percent, and it had at the end of December or at the end of March it had about three billion in cash and its balance shape so it definitely has limited relative to about seven hundred and fifty million of bonds outstanding, So you know, it seems as though they're liquid enough and you know, to support that bond repayment within a year's time.
Cool though, I mean, I know it's perform though, But isn't that sort of a dying business and everyone wants to get out because as you mentioned, the ESG risk is quite high.
You know, I think it's a transitioning business. I wouldn't be surprised to see less refinancing in the dollar bond market. But I'm certainly seeing a lot of companies right now looking to acquire coal assets, whether they're an Indian steel company or there's another Indonesia company that is a coal service and contractor Booma, which is looking at some of
the BHP assets in Australia. So I'm not sure exactly how those assets are going to be financed going forward, but there is an interest among players to still acquire those assets. And you've got to remember in Indonesia, I think that you know the majority of their power generation is coming from coal fired assets. Still, it'll take a while for that to go It'll take a while for that to kind of go away.
Yeah, on the on the flip side of the nickel thing, I mean that plays into the ev story, which is such a hot theme, and it does kind of play into the the E and the ESG. Is there a lot of upside in those bones? Do you think the nickel side.
Yeah, it's a it's a single B B plus B one rated credit. So obviously that's at the lower end of the high yield spectrum. So it does, you know, indicate that there's more risk in a bond like that which deserves a higher yield, so relative to its it's peers, I still think it looks a little bit wide and
can close the gap. And in the story I just published a couple a couple of days ago, what I highlight as for the catalysts are really the fact that it has been able to tap the debt markets, it's been able to bring in new equity, and it's really pivoting to focus on the electric vehicle supply chain with its production rather than selling into the stainless steel markets.
And so when you sort of step back and look at all the things you're covering, and I know you have quite a broad coverage area. How does Indonesian high yield sort of fit into that. Is it the big opportunity right now or is it just one of many.
Well, what we're seeing is I'm seeing more interest in Indonesia, I think because of what's been happening in the Chinese property market. So people are looking to diversify their portfolios a little bit more away maybe from the Chinese high yield, which you know, has had a lot of challenges this year, and of course it's been limited for them because most of the exposure in my sectors has been through the
coal companies, which do have esgu related concerns. So now that there's this transition that is happening, I think that it does open the door for more people to invest in this space, especially you know, if they can come through and actually come through with some sustainable products that you know are green, you know, I think that that is definitely going to bring more investors in.
Right, Okay, when I've got to ask allso Mary, and last time we spoke, an Indian company called the Danta was on your radar. They were in a bit of trouble what's the latest there is there? Is it all sorted out now? Are there any problems on the horizon yet not to worry about? Still?
Well, yeah, that I think there's still some liquidity concerns for the Danta. They have a dollar bond coming due in January, so they still haven't really completely closed the funding gap as I see it through you know, through the end of March, they're still going to need to raise some additional funds and the fundraising still remains relatively slow and the information remains relatively thin. So I think
I think with Vedanta, it's the January bond. They just extended a intercompany loan which should provide them with some liquidity to to funnel towards that. They've been increasing their brand fees, and there was a rumor that potentially they could use some future brand fees as security against some new debt that they could potentially raise, which would bring in liquidity. But at the moment, there's been nothing concrete
that's happened there, so it's still evolving. And at the same time, we're hearing a lot from the company about the chip factory that it wants to open up and some of the investments there, so there's still a lot of unanswered details and a quite still a big maturity wall the coming years.
Thanks very much, Mary and Neilson of Bloomberg Intelligence. You can read all her great analysis on the Bloomberg Terminal. Do check it out and hope to see you back on the show soon.
Mary Ellen, thanks for having me.
And thanks again to Janine Amadeo from Bloomberg News. Read all of her great credit scoops on the Terminal and at Bloomberg dot Com. I'm James Crombie. It's been a pleasure having you join us again next week on the Credit Edge.