Structured Credit; Healthcare Distress

be to you. The market rally this year has been fierce, but it seems like there is one corner of the credit markets that maybe is feeling it a little bit more than others. Can you talk to us about that? Sure, thank you very much for having us here. One that's correct.

All credit has basically rallied, but there's a part of the structure market that has seen like an even bigger rally, especially compared to last year, and that's mortgage backed securities, which are bonds that repackaged homelands backed by the government, backed by the agencies. And January saw was basically a record in terms of excess returns, which are gains beyond treasuries.

The bonds saw basically the best start of the year ever, and that's a huge contrast to what we saw last year when the same bonds basically plunged in value and reached record loads in the fall. That was basically because the biggest buyers of the dead, which were US banks and the FED, stepped back from the market, meaning there was not not really like a huge demand for them,

only like marginal buyers. Got it, got it. And then forgive my ignorance, but the real estate sector seems to have been hit pretty hard this year as the FED has risen rates and tightened up the economy a bit. Which area of the of your structured world does that

impact the most? Sure? So, mortgage rates have you know, gone up by a lot in twenty twenty two, and they're still pretty high, and that has impacted both residential mortgages and commercial mortgages in basically the loans that go into this mortgage backed securities we were talking about earlier,

that has been felt a lot. Homeowners basically have no incentive to refinance their houses, so they're not repaying their dead That impacts spawn holders a lot because now they can kind of calculate when they're going to see their bonds prepaid or when they're going to get the prepayments back. But that has also impacted real commercial real stata as well. In commercial mortgage bonds, which is CMBs, which prepackage commercial like commercial mortgages, we've seen a lot of like a

slow down in issuance. I believe so far this year we're around ninety percent down compared to last Oh wow, big drop. And it's mainly on one of the reasons where it is that there's a little bit less activity in the real estate sector, a little bit less emana. I mean, I wouldn't want to buy a house where market traits are right now. So yeah, it's a little there's basically a slowdown, got it, Got it? And then you also do a lot of our coverage with clos

can you speak to what's happening there? Sure, So the CLO market has has seen it also a big rally this year. So it's it's very interesting because that also like kind of triples down into leverage loans and there's a lot of demand for for the dead now. Um CLO triple A spreads half tightened a lot in January.

They were very very wide in the fall around I think they reached around to sixty basis points, which is very very wide, and now they're closer to one eighty, which that is really great if you want to issue a bond right now. Absolutely, and that drives demand for the underlying junk dead which is good. The junk bonds have been rallying, so there's definitely there's definitely a positive

there for all structured assets. Although the last week's unemployment UM data like kind of like led mortgage backed securities for instance, to like the prices plunged a little bit in front like on Friday Monday, they've been they've had they have stabilized now, but they want down a little bit. And in the demand from the CLO warehouses, how's that going. Yeah, so managers are starting to you know, push out deals

that they had been working on for a while. Many of them had warehouses that were underwater last year because low prices were very low last year, and now with loan prices rallying, it's it's a good window to kind of push that stuff out now. Excellent, excellent, that makes sense. And then aside from structure, I know you do a little bit of coverage in our distressed debt land and you had a story out recently talking about the state of healthcare within distressed debt on high level. Can you

just let us know what's going on with that. Sure, So, from the sectors we've been looking at, healthcare is one is one of the leading sectors in terms of downgrades last year. It's it's definitely a little bit more distressed than others, and it's facing a lot of like inflationary costs, some struggles. Some labor costs are high as well. So the owners of the leverage or the leverage loans that are tied to this companies are taking a little bit of a harder look into the sector. Got it well?

Good thing. We have a healthcare expert here with us, Bloomberg Intelligence, Mike collind Mike, you've been covering a lot in the healthcare space. Can you discuss a little bit about what's going on broadly across the sector falling some of the tough twenty twenty two performance that we saw. Sure, thanks Olivia for having me. Karmen, great to be here with you and thanks for having me on so twenty twenty two performance for the healthcare all subsectors across healthcare,

we're pretty challenging. High yield. Healthcare in particular suffered from

a series of downgrades and defaults. We had distressed exchanges, all sorts of litigation, whether it be opioid litigation or issues around regulatory challenges, as well as ongoing changes to the sort of the reimbursement environment how healthcare providers are paid, and all those conspired to, you know, give sector analysts like myself, one of the more difficult years in recent memory, you know, so far in twenty two, like we started

out saying, market momentum has really proven supportive to the healthcare you know, broader healthcare credit sector m but but a lot of risks still remain. You know, something that Carmen's talking about is, you know, if you think about the high yield bond index that we cover here at Bloomberg, fifty percent of FARMA bonds are just training to stress,

which is really right. And the main driver that is Bousch Health, which is the former valiant right, yes, Um, and they're doing a sort of a transaction where they're spinning out the most valuable asset Boush and Loam and leaving bondholders on the hook. So UM on the hook with a much smaller company with a lower earning space, so that's been a challenge. Also, providers, like Carmen said, are challenged by much higher labor costs. I mean, the

rates have come down off their peaks. Um. You know, at one point, you know, we average employment or average hourly wages for hospitals and sort of healthcare providers, we're going up, you know, high single digits, low double digits, and that's come down to mid single digits. But we're resetting at a higher rate, and so costs for providers, whether it be hospitals or physician practice management groups, um, you know, remain elevated, and that'll be a pain point

in twenty two twenty twenty three. Really interesting and I think you covered some of this in what you just said, But my understand ending was that in the past, healthcare was a place to go during a recession. That's that was almost like a safe haven, and it really does not seem to be one anymore. Could you clarify for us,

like what has changed? Yeah, absolutely, if you if you go back to twenty ten through twenty fifteen, we had this period of really really aggressive cost increases in healthcare, and that was a combination one of drug pricing increases, which you know, valiant, this kind of case in point right, the the black sheep of the space. But but more importantly, you know, hospital costs were also going up as well, kind of unabated um and as a result, the cost

of healthcare was increasing. And if you think about you know, your your insurance payments, right, you know, and premiums have gone up, but deductibles went up big time, right, oh yeah, very high, very high. Yeah, the and and the consumer became the first payer even even though you're supposed to have this insurance. But if you've got a deductible that's five thousand or ten thousand dollars for a family, you're going to defer care. So what was previously consumer non

discretionary in a way has become consumer discretionary. I would caveat that by saying, you know, healthcare insurance companies, health insurance companies, the payers are pretty resilient, right because you're paying them. The battle between the payers and the providers has been ongoing for a very long time, and that's where the negotiations and contracting becomes an issue, and why you see these payers and providers try to become as big as possible so that they can you know, throw

their weight around and help control those contracting processes. If you look at CVS today, look at UNH today, United Health, they are getting big for a reason. They are getting big for a reason, that's for sure. And one thing that has been the hallmark of really markets across twenty twenty and into twenty three, especially in distressed is the volatility.

What stands out to you there. You know, there's a lot of different components of healthcare in terms of like I mentioned earlier, the evolution of reimbursements and the payer provider battles. Some of the names that I've looked at recently that are you know, we we've talked a lot about Boushe Health over the past year. The volatility there.

Bond prices there are in the forties for the unsecured bonds, and basically that that's a result of Carl Icon and some of the equity investors that are in the name that are effectuating this extraction of Boush and Loan. That's one that you know, we've touched upon a lot. I think what's what's more interesting to me today, it's sort of these one off names that are smaller. Two credit stories in particular really jump out to me. The first one, which we have a pretty positive view on as rallied

really strongly since the beginning of the year. We wrote on Acumen back in late December. An Acumen is this really niche mobile diagnostic imaging company. So think about like trucks with MRI machines in them that that drive to a rural hospital when there's increased demand for imaging. UM. They also have trailers that sort of are a little

more stationary. But Acumen bought Alliance Healthcare a couple of years ago, which was product had a little bit more of the mobile imaging capability, and the company hasn't really grown and so for last year the bond price is really plummeted. UH. We had a couple of different issues.

There's an investor in the name that has the option to UH pick to toggle their payment, which right now so it's stone Peak is the investor in Acumen that has a sizeable investment, and they have the option the end of the year to toggle their UH their their bonds to cash pay, and the company doesn't really have that much capability of doing that at this point, given

constrained liquidity, So the bonds sold off big time. Uh what's you know what's interesting now is, you know, since the beginning of the year, I think most of a lot of investors have seen the possibility of Stone Peak basically forcing this company into bankruptcy as you know, you know, shooting off their own foot. There's no reason for them to do that. It wouldn't serve their their purposes. So you know, the bonds had traded to the low sixty

cents on the dollar range. There's two different bonds and they both rallied about ten to twelve points since the beginning of the year, which is a big, you know, twenty percent gainer. Yeah. Sure. And the equity even more interesting, you know, through yesterday was up eighty percent. You know, this is a stub equity piece that's trading about it, you know, dollar thirty dollar twenty right right now. But

it was a big gain. So you know, the market was really concerned about accounting delays and some management concerns, but sentiments starting to improve. So that's been one that's been been pretty interesting. It definitely seems like a pretty good bye opportunity there, you know, based on what you're saying, I know, you you flagged one of the bonds to me doing twenty twenty eight that we're trading as low as six decents on the dollar and yielding eighteen percent.

So there's like some pretty hefty yields, right collects right if you believe the company is going to survive. That's a really interesting opportunity. Also what's interesting too is these are smaller businesses that could be targeted for an acquisition. I mean, I think down the road management here wouldn't mind getting some interest from a large hospital system, you know,

to maybe make make an investment down the road. But we have to see them sort of write the ship a little bit management to sort of clear up some of the concerns are our management and you know, sort of show some growth because it's been a challenging growth story. The predecessor company that they bought, Alliance Healthcare, was you know, it was a stable company, but wasn't It was never really a grower. So we're going to wait and seed

position right now, Wait and seed position. Yeah, I just want to circle you back to M and A really quickly because I know that that's going to be a top theme in the healthcare space today. But the M and A pipeline globally has has slowed quite a bit. Can you talk to me about how that slow down is going to impact potential acquisitions and how successful they might be within the healthcare space. Absolutely, it's it's really one of the most topical issues in the healthcare space.

Right You have consolidation and deconsolidation going on all the time. Big hospital systems do a big round or consolidation about ten years ago around the time of the Affordable Care Act, and you also have so you've a big strategic interest. You also have a lot of private equity involvement in the sector in the sense of you know, buying practices

and rolling them up. Usually it's a you know, usually pretty good growth opportunity because people, you know, as we were talking about earlier, healthcare demand is you know, is usually growing, and you know, we have the graying of America and the demographics are always saying, you know, there's going to be more and more folks requiring healthcare. So

it's a very investable space from the pe perspective. As I mentioned earlier, UNH and CBS along with Danaher last week, was talking about buying a life sciences company called Catalant. You know, M and A is really how these come panies grow once they get to a certain size. So on the strategic side, you know, we're seeing the big, the big companies growing larger, and we're seeing we're also seeing companies like ge Healthcare, which was just spun out

Thermo Fisher has done some deals. Deals are really you know, the biggest driver in my view of the space of growth in this space. But what we're seeing on the private equity side, you know, is potentially a slowdown as rates rise, as costs grow. You know, we're seeing a slowdown maybe a little bit in the investment on the provider side. So there's a lot of activity in the VET space right now, outpatient surgical centers, musculo skeletal you know,

those those deals are going on. But I think the pace of M and A will slow and a lot of these private equitowners will have to focus on their existing investments and maybe hold them for a little longer, hold them for a little longer. Really interesting, And then I want to throw another name out there, Um, what's going on with weightwatch we Watchers is a fun story, uh, not your typical healthcare name. It's kind of sort of a in between er, a tweener between consumer and healthcare.

It is discretionary rights, it is discretionary and one of the you know, if you look at the history of the company, which was it was started sixty years ago, UM, and you know, it's had its up and ups and downs over the years. Back in the mid teens, you know, around twenty fifteen twenty sixteen, the company was struggling a little bit in terms of growth and Oprah came back in, came in and really rejuvenated the brand, invigorated it and saw growth, uh really peak in twenty I think it

was twenty eighteen, Thank goodness for Oprah. Right well, uh lately though, you know, since Covid hit UM, the company had to, you know, deal with the fact that people couldn't go out, so the studio business became a real drag. So they really reduced their exposure to in person meetings and studios, which you know, frankly was one of the big I think drivers of this company's success over the last say sixty years. And so they've pivoted to a more digital offering with a new CEO, and Sima Sistani

is the new CEO. She's she's brought a lot of energy and social media chops to the to the to the brand, but uh, you know it, we're still in sort of a weight and C mode and as a result of the declines in studio membership and frankly folks, maybe not being as focused on weight loss as dieting sometimes in some circles has become taboo. Um. The business

is struggling a little bit. I mean, if you right now, we're basically with the company looking at a top line, you know, revenue around of a billion and earnings EBATA around two hundred and sixty million on a trailing basis as a last quarter. This company had trot when they

brought open. We're trying to get to two billion of top line and they were around five hundred million at their peak of IBATA, So we're really declining um and leverage is getting close to eight times wow, which is which is a little scary for a business that doesn't have a very big competitive moat given all the alternatives

out there. You could go on YouTube and just watch a video on how to do some so not the same as weight watchers, but I guess the concern is right now, the bonds are trading you know, around fifty cents on the dollar, which is pretty low for um, pretty pretty low for this business that has been pretty pretty strong over the years. UM. So I don't know.

What's interesting I think too is during COVID they were able to refinance their you know, close to nine percent coupon bonds with four percent or four and a fantastic for the great for the company, right, but when rates are rising, uh, that four and a half percent can lead you know, as rates rise, that will be punitive on the on the price for those bonds. So that's

part of the reason why we are where we are today. UM. I would also say two that, uh, you know, this company, like I said earlier, has been really volatile in terms of membership growth over the years, and so the company really needs to be invigorated. And you know, we're going to wait and see if the new CEO can can really generate new buzz around the business. Got it? Got it for sure? Yeah. It seems like the pandemic and the aftermath of the pandemic, which is still ongoing, continues

to impact so many businesses. Could you expand a little bit more on sort of how the pandemic is still having lingering effects on these companies. Yeah, you know, I think in particular with with Weight Watchers, part of the part of the concern is, you know, one, people were flushed with cash back during the pandemic. You had the support payments, you had, the market was flushed with cash.

Individuals were when that's pulled away. You know, the Weight Watchers plans are something pretty cheap, right, twelve to twenty five bucks a month. But when in our environment today, when you're paying ten or twenty five bucks a month for six different subscriptions to Netflix or you know, Disney Plus or whatever it is, UM, you start to be a little more selective and how you spend your money. Also, when you can have free options that are out there,

you know, maybe you'll you'll defer to those UM. You know. And as I said earlier, the market environment with rates where they were back in twenty twenty one when the company refinanced their their bonds, you know, that was a big issue for you know that we're suffering as bond holders in Weight Watchers from the rising in rates. UM. Also, I think consumer preferences have evolved since the pandemic, right, people have changed, uh and have you know different world.

It feels like it. Uh. And so you know, I think one thing is people don't talk about very much with weight watchers, but the rise of sort of body positivity has has maybe taken away a little bit of the impetus behind a lot of their membership. Um, you know, staying uh, staying on plan and so uh, you know,

it remains to be seen. We find out, you know, really this company has membership that signs up at the end of the year and you know, go to four and a half maybe five million of subscribers and it usually trends down by eight hundred thousand to a million subscribers by the year end. We'll see how this year plays out, whether or not they'll be able to sustain membership at current levels. Sustaining membership at current levels, that will be the trick. Thank you very much, Mike from

Bloomberg Intelligence. You can read all of his analysis on the Bloomberg Terminal. And thank you so much to Carmen Rio from Bloomberg News. You can catch all of her coverage and scoops on the terminal or Bloomberg dot Com. I'm Olivia Romande. It's been a pleasure having you see you next week on Credit Edge