Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is Olivia Raimonde and I'm a corporate finance reporter here at Bloomberg News. This week, we're delighted to have on the show Jill Shaw, who covers leverage loans for Bloomberg News in New York. How are you doing, Jill, good, Thanks for having me. We're also delighted to chat with Daniel Fan, he covers China properties for Bloomberg Intelligence in Hong Kong. He is going to walk us through the
latest news on Country Garden. We'll be coming back to Daniel a bit later in the show, so please do stay with us. But first we turned to Jill Shaw with Bloomberg News. Jill, August is typically a very slow month for credit deals, especially in the high old market, but we've seen more than expected, particularly in loans. Could you talk to us about what's driving that issuance and sort of set the scene for us for what's happening in your market right now.
Absolutely.
So.
The leverage loan market has been in a bit of a rally in recent weeks, and you know, prices, secondary prices for loans just crossed ninety five cents on the dollar for the first time since just about a year ago. So what's driving that, you know, part of it is the macro macro conditions that all financial markets have been observing, which is that inflation data is better than expected and inflation is slowing. And also, at the same time, the
economy is still performing well. There's decent economic growth. So all of that gives leverage loan investors some you know, some comfort that the economy is not going to go into a severe recession, which would really impact leverage loan borrowers and companies that are highly indebted. At the same time, investors are flush with cash and the yields in this market are hard to ignore. So you know, the year to date returns in the ASSA class are above eight percent,
and investors are essentially hunting for paper. Issuance has been really lagging this year, and so most of the deals that we've seen recently are borrowers trying to sort of tap this rally, but many are refinancings or amended extent, so it's not quite new money, and that means that, you know, investors are still kind of hunting for paper that is high yielding.
That makes a lot of sense. Thanks so much for walking us through that, Jill. But there was one deal, right, I believe it was Tenaco that was stuck on banks books that price recently. Could you talk to me a little bit about that and sort of how that came to the market.
Now, Yeah, I mean, you know, the Teneco story is one of tapping this credit rally at the right time. So Teneco is an auto parts maker. It was a buy out by Apollo Management Global Management last year and it got stuck on banks books after banks tried to sell some of the bonds and loans financing that deal. And that was because investors were fleeing risky assets, right and in the auto industry was in much worse shape last year than it is now. And so at the
time investors really shown the deal. And what we'd heard also was that the terms or the terms governing the documentation were sort of not an investor's favor. We are very you know, One thing to remember is that we are in a bit of a buyer's market right now. In that like, investors have been pushing back on documentation, which has deteriorated in the loan market over deck over years and starting to ask for more tight documentation in
case companies fall into distress. So anyway, fast forward to this rally, it seems that you know, banks are really banks that were led by a city group in Bank of America, noted the sort of increase in prices in the secondary market, noted investor demand for deals, and likely saw some sort of macro improvement in the auto industry enough to bring this deal. And it got done. You know, it still got done at fairly steep discounts, but they were able to move that risk off their balance sheet.
And remember, banks had about more than forty or so odd billion dollars stuck on their balance sheet last year when investors fled these markets. So Tenaco is one of a few remaining Teneco was one of a few remaining deals on banks balance sheets, and I'm sure they're quite relieved to be.
Rid of it. That makes a lot of sense. Yes, last year, there was tens of billions of dollars of these loans, as you said, stuck on bank's books when the market massively repriced. But there are still some deals lingering, Jill, Is that right? Can we expect to see those anytime soon? Yeah?
I mean, what's left on banks balance sheets is really led by a few deals. So Twitter, which is of course Elon Musk's buy out of the social media platform that's now called x That's a significant chunk of debt sitting on banks balance sheets, and then bright Speed, which is Apollos buyout of some broadband holdings from Lumen. So you know, I think that those deals are probably further out.
Twitter is quite volatile in terms of the changes that Elon Musk is making right now, and what the performance of that company looks like under this new sort of ownership is something I think people are watching closely, but would need a lot more data before banks could credibly bring that deal to market. And Bright Speed has some ongoing litigation, which just means that it's sort of impossible right now as well. So Teneco is probably one of the last hung deals that we will see come to market.
But from my conversations with bankers, that risk is now you know, much of that risk has been marked down in prior quarters for banks, and historically speaking, that amount is low, and so that's not really getting in the way of new underwriting for.
Banks looking for new underwriting, and banks for sure after last year's levels, So can you talk to me a little bit though, So we're getting all this supply, now, what does that mean for like the post Labor Day deal pipeline, which is when we typically see a lot of these deals come to market.
Yeah, So you know, the supply that we're getting right now is a lot of refise, a lot of amend and extend deals, which is when companies try to push out their maturities. So a lot of the issuers that can deal with their maturities are coming now and taking advantage of this rally right and the tightening of prices. We've also seen some dividend deals and an occasional acquisition smaller acquisition deal post Labor Day. What I think we're expecting is a lot of the big financings that banks
have signed up for mergers and acquisitions. So you know, Sineos is one World Pay is a massive cross border deal which banks have underwritten. There was also a one billion dollar loan for the buyout of Simon and Schuster. So there's quite a few deals in the pipeline for September. Beyond that, I think the pipeline is a little quiet, But what we're hearing is that their process is underway and banks may be able to bring more more debt into the syndicated markets.
Well, we'll be certainly looking out for those deals. I want to circle back to Tenaco real quick, if you allow me. So, you mentioned the discount, could you give us some color. I know it was eighty five cents on the dollar for the bond. Would you be able to talk to us a little bit about the color you were getting from investors, you know, when the talks and the discussions around the ultimate pricing were happening.
Yeah.
I mean I think that you know, Teneco is a cyclical company, and so investors that are wary of auto in general are not likely to play in the deal. But I what I imagine that investors who did play in the deal saw was like a significant discount there
that looked pretty attractive. And I think that, you know, this year is a much better year two for an auto parts supplier than last year, and so I think all of those things combined kind of and then you know, let's not forget that the documentation on that deal became more investor friendly. It did when they first brought it out like a week or so ago, and then it did again before pricing, so investors were certainly, it seems,
jockeying for that. So yes, the price got it done, but also I think, you know, some concessions from the sponsor on the on the deal terms was probably the thing that pushed it over the finish line.
Got it. Got it, Thanks so much. And so we've been talking a lot about some of these riskier deals. I want to pivot to another one of your stories that you put out this week that was fantastic. It talked about loan defaults and how they're outpacing the defaults in junk bonds. Can you walk us through that, because I always thought it was typically the other way around.
Yeah, I mean, you know what it typically has been is that they kind of move in tandem. And what we're seeing for the first time and like thirty years, is this divergence right where loan defaults are up to like four percent and high held bond defaults are still closer to three or two point seven. So that margin, that difference of like one point three percentage points is the biggest in thirty years. Why is this happening. It's
really a rate story, right. Leverage loans are floating rate, which means that as as rates go up, the interest that borrowers pay on that debt goes up, whereas junk bonds are affects right, and so they don't see the new sort of rates regime regime until until they come back to the market and refinance their deal. There's other reasons too, I think, generally speaking, compositionally, the leverage loan market is lower quality now than the high held market.
There's a number of reasons for that. One, the leverage loan market is where you know, six almost sixty percent of borrow or private equity backed, which tends to mean
more leverage on those companies they're smaller generally speaking. And then you know, because private equity likes really to borrow at that B three level, they're lower rated and falling below that means that you know, lever's loan borrowers lose access to a lot of their investors clos The high yield market, in contrast, has actually been getting in better
quality in recent years. You know, the last time that the high yeld market saw many many defaults, as most listeners credit listeners will remember, is like the twenty fifteen twenty sixteen cycle of energy to faults and really many many of you know, many of those defaults have sort of moved out of the market, and now that market is a lot healthier and a lot of a lot of bars have also moved to the leverage loan market.
So what we have is on one end, a higher quality market and high yield, the rates regime really catching up to that market just yet though, though that maturity wall is approaching. And on the other side, we have a market that is lower quality, favored by private equity, which means more debt, and where the rates regime has
already caught up. You know, these benchmark rates where that leverse loan leverse loans are PEG two have already risen dramatically, and some companies have seen their their interest costs like essentially double over the last you know, the last eight months or whatever of rate hikes.
Wow, that is that is a steep increase. And then another thing that I've thought about when looking at this topic is that another reason why historically loan defaults have been lower is because they sit higher in the capital structure and they are usually those investors are paid back before junk bond investors. Is that correct, Jill, And could you talk about that dynamic and how it's changed.
Yeah, I mean loan investors tend to sit senior secured. There's a couple of things here. So one senior secured is definitely going to get paid first. If you have a loan only capital structure, though it's only it's all loans all, you know, sort of everybody has has the same priority, whereas like you know, those mixed capital structures where there are loans and bonds, Yes, the loans would
get paid first. And so we do have like loan only borrowers, and they are seen to be more risky in the leverish loan market because not only do you have a capital structure that is exposed to interest rate, entire capital structure that is exposed to interest rates. Many of these companies did not hedge against inflation or against arise in rates. You know, no one really, no, broadly speaking across Wall Street, the aggressive regime of raid hikes
was not expected. And so that's sort of the reason as well that like leverage lown borrowers are kind of getting hit harder earlier.
That makes a lot of sense, and I'm sure that that is going to be a theme and a topic that the entire fixed income market is going to be watching very closely, especially as we move into the end of the year and see how growth holds up well. Jill, thank you so much for coming on. Great stuff. That was Jill Shaw from Bloomberg News. Thank you so much for joining us. You can read all of Jill's coverage and her scoops on the Bloomberg terminal and of course at Bloomberg dot com.
Thanks for having me.
As I mentioned earlier, I'm delighted to welcome Daniel Fan to the Credit Edge. He covers China properties for Bloomberg Intelligence based in Hong Kong. Today we are going to focus on the distressed Chinese developer Country Garden Holdings. Daniel, can you set the scene for us what's going on here?
Thank you Olivia. Yeah, the scene is actually about Country Gardens stress situation. The company used to be one of the largest, if not the largest, in the past six years in terms of sales. The developer failed to make its kep on on payment on time on August six. That create a lot of concern about the financial health of the company and also drag down the bond price of the whole center. That also creates some issue about whether the China property seer has some systematic risk.
Do you think the Country Garden is going to get a bailout from the government. Is that an option on the table.
I think there's a lot of expectations that the government may do something, but I think the chance, based on what we have seen, is not that high. It was once a two big to fail developer, and it's now becoming maybe a bit too big to be rescued by government, especially at the local level, given the size. It has more than three hundred projects nationwide, and it would be
difficult for any local government to handle. So in short, the government the top agenda is to ensure project delivery while leaving the developer to deal with its own financial problems.
Got it? Got it? And how likely is it that Country Garden will extend its offshore debt.
It's getting more likely now because the options available on the table are getting less. It tried to do a share placement at the end of July, but for some reason it did not go through, and then share price dropped from one point four Hong Kong dollar around eighty cents yesterday closing. So it's a little bit difficult to attack the equity market in terms of getting financing I mean, I mean in terms of financing coming deal. It has two convertible bonds pay about in December and one come
football coming deal in January. The total amount is around one point nine billion US dollars.
One point nine billion US dollars. That's quite a chunk of change. So talk to me about the impact this is going to have on Asia's fixed income sector. If Country Garden needs to extend offshore.
Deb uh, the impact more coming from like as a location perspective, Country Garden has around eight point four billion dollar bond outstanding in the Bloomberg Asia Higher Bond Index, the ind size is around like six six seventy six billion. Basically, fund managers need to find something else to replace Country Garden. And also another thing is Country Garden used to be a core holding of many fund managers in their portfolio.
Are there like can you give us like a sense of sort of like what other options there are? Like what could they be reallocating to or what are some opportunities that you are hearing are out there for investors besides Country Garden.
I think naturally you have a smaller index after Country Garden. If they don't pay, they will be out of the index preis, and then I think you have an impact on the China how you market in the sense that people kind of like feel skeptical about the market. They may look for somewhere else outside of China for investment opportunities. Maybe they may look into like Japan or even Australia to broader the concept of Asia. In the past, when we talk about Asia, we usually talkt about Asia excluded
in Japan and also excluding Australia. Now, yeah, we may need to change the concept Asia may include Japan and Australia. And the second point is they may they may get out of the hire market and focus more in the investment grade market. That will be some of the impact in the.
Very interesting Yeah, a lot of people, a lot of my sources talking to me about, you know, the up and quality trade, whether it's China property or you know, US investment grade bonds. A lot of investors in the market are looking to move up in quality and capture those yields that we haven't seen in such a long time. So I want to switch from the fixed income markets to the physical housing market. How is that impacted by everything that's going on with Country Garden.
Because Country Garden is kind of like a household name alsore in the in the physical market, it will have damage in terms of home buiased confidence. They don't know which developer is trustworthy if they want to buy a piece of property. I think that is the most important impact in the physical market and also there if Country Garden is not trustworthy, then who else? And then people may think it's the whole like property center, not safe
from I mean from a home buased perspective. If we look at like Evergrand, Evergrand, we can still say it's a stand alone case because I think people kind of understand its business model is using a higher leverage the Country Garden. What's a different story. It was rated investment grade just like more than slightly more than a year ago and a high quality developer when the government launched it first arrow of a rescue plan.
Very interesting. So is policy stimulus going to help at this point? Can you talk about it? Talk to us about it from that angle?
Yeah, I think the policy matches trying to help to adjust the demand side, like easing home purchased restriction a lower deposit RAISO. I think the more important pon their stressing is to ensure delivery. It's kind of like a double as sol because they won't try to ensure delivery, so meaning that they require developers to keep more cares at the project level to make sure they're able to complete the project and deliver to the hands of their
home buyers at the same time. Decide effect is developer they are less able to use the cares available for debt surfacing, especially for offshore bondholders, so that this is one point and the other thing is in their second row to support the center the government wire the agencies provide guarantee onsore for developers to issue onsore bonds, but at the same time they require developers to post collateral
against the guarantee. So because a lot of the Chinese property developers they depend very much more than ninety percent of their revenue from project development, many of them they don't have like sizable investment properties or unpledged assets to provide to the government as collateral against which they get guarantee on their bond issuance.
Also got it, Got it, And then I wanted to follow up with you again on like the home buyers are people you talked about a crisis of confidence, you know in the home buyers who are who are looking to buy property, but has anyone lost their homes or is anyone's homes at risk because of this?
We see some cases that like people are protesting because the unit they put money on are still not like completely yet. We see cases here and there, but not in a law scale so probably due to the policy to mature delivery by the government.
Thanks very much that it was Daniel Fan Bloomberg Intelligence. You can read all of his great analysis on the Bloomberg Terminal. Do check it out. Hope to see you back on the show soon, Daniel. Thank you, and thanks again to Jill Shaw from Bloomberg News. Read all of her great stuff on the terminal and at Bloomberg dot com. And I'm Olivia Raymonde. It's been a pleasure having you join us again next week on the Credit Edge.