Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crumbie. I'm a senior editor at Bloomberg. We're very pleased to have with us on the show. Luk At de Powley, who covers distressed debt for Bloomberg News in London, thanks for joining us, Thanks for having me. We're also delighted to welcome Sharon Chen from Bloomberg Intelligence in Singapore. We'll be coming back to Sharon and a little bit to talk about SoftBank, a big name that
everyone's watching. So do stay with us. But first, Luc at the Powley with Bloomberg News, you've been digging deep into distress debt. There's a lot of it about. Let's talk about your latest scoop. A sixty four billion dollar pile of debt from some of the biggest companies has suddenly come to light. It was hidden, you found it. What's the story there?
Luca So a colleague and I have been through all of the latest file from the US where many companies have for the first time disclosed using arrangements called supplier financing. Supplier financing is effectively a form of financing where you pay your suppliers later, often with the help of a financial intermediary or a bank, and by doing so, you increase the amount of cash that you have. You basically suspend your liabilities for a period of time, and you
end up being more cash rich as a result. They were forced to disclose it by FASBY, which is the body that is basically in charge of accounting rules in the US, and similar rules will come into effect for other companies around the world. But this is the first time we've had a really good look at how many companies use this and how aggressively they use it, and I think we were kind of surprised by how many companies were doing it and.
The amount of supply chain financing that was going on.
So then just break it down for supply of finance, you kind of describe it, But how does it work? In really basic terms? Do I do I get someone to supply something to me and I'd pay them later, and then in the interim, I'm cash rich because I actually have the money myself. But what's the story? Yeah, I'm not, I understand.
So the most the most like basic way I like to think about it is if you've got a supermarket and a supermarket has you know, there's a hypothetical supermarket has suppliers.
Let's say that they're farmers.
And the original idea of this was that the farmers might want to get paid in sort of ten days or immediately, but the payment terms from you know, the supermarket, so someone like a Tesco in the UK or a Walmart in the US, you could reduce the amount of time that it took for that payment to be made by getting a bank to come in between and pay
the supplier earlier. So the farmer, rather than waiting ninety days for the eggs is given, he can get it in ten days and he pays a small discount, he gets paid sorry, a small discount by the lender, and then a lender gets paid in full when the invoice
is actually due. That's sort of like the most sort of vanilla and basic form of supplier financing and a hypothetical example, but it's been taken to sort of new and extreme heights based on the stuff that we've seen disclosed in the reports, to sort of you know, far longer payment terms and you know, an altogether different transaction than the one I described there.
So in basic terms, it's just like a bridge. You I need something from somebody, the bank will come in and just bridge that transaction, offering money to the supplier.
Yeah, so the supplier supply gets paid early, they take a small hit depending on the discount rate the prevailing interest rate, and then they can get their money quicker, which is what a lot of them want. Yes, so that's the basic idea, but it's been sort of it's gone a little bit more extreme than that in the past or ten years.
And what kinds of companies were talking about? You mentioned Tesca, but are we talking about big household names in the US.
So, yeah, I mean we're talking about Philip Morris, We're talking about Signa, which is an insurance company, a lot of auto parts companies, Doctor Pepper, curic A Cure, Doctor Pepper, even a really large sway that different companies Boeing around seventy or eighty that we found inside the S and P five hundred. I'm sure if we expanded our universe and looked through even more ten ques, then we could
maybe find some more. But my colleague Nicola White and I are pretty fed up of looking through them, to be honest, so we might just stick with.
Those but so you talk about it's getting more extreme. It's not just let me a million dollars for a week or something. It's now gone out much much further. So it's real like long term. What's the term we're talking about.
Yeah, So, I mean, it's not really totally clear from the filings that we have, so FASBIS compelled companies to give a certain amount of information, but not as much information as some people would have liked. So we have some idea of how long some programs are, but there are quite a few that seem to go to three hundred and sixty days, which, when you think about it,
is a crazy payment term to accept. Effectively, supplier is saying like, I'm happy to be paid in three hundred and sixty days, and then a financing party comes between them and could pay them earlier. But you know, you think about that as sort of like that's basically what they've agreed to. It's kind of a crazy thing for
the supplier to agree to. And then on the other side, what that can do is create this sort of debt debt like whatever you want to call it, effect where people are you know, suspending their payables for longer and then for increasing the amount of cash that's generated the company despite not you know, that not being due to anything organic sales or something like that.
Effectively, if you think about it.
For yourself, you were you know, if you could delay all of your liabilities, your mortgage or whatever by a year, you'd have more cash, but you wouldn't actually be richer. And that's effectively what a lot of companies seem to have done here. So yeah, it's more extreme than I would have anticipated. And the financing is a lot longer than sort of what you'd normally associate with something in the accounts payable line in a set of companies accounts.
It's not sort of invoices waiting to get paid. It's three hundred and sixty days long.
And just so people understand what is FASBE you mentioned that earlier.
FASB is basically the body that looks after accounting regulation in the US, so they govern us GAP so that they're in charge of instituting new rules, and this is one of the new rules the instituted actually interestingly at the behest, at least in part of ratings agencies who said, like, look, we don't have enough disclosure around this sort of debt,
like line item. We need more disclosure because if we don't have it, then we can't rate these companies properly, you know, and a lot of the ratings agencies have.
Been trying to sort of guess around this for a while. You know.
I have general rules that like anything beyond ninety days should be considered sort of debt, and anything less than that, you know, it wouldn't be considered debt for the company with the supplier of financing program. But yeah, that's sort of the why this has come up now. The industry itself has been growing for years and years and years.
But the reason that we wrote the story now is because the first time we've got a decent data set, and we don't have everyone a lot of companies haven't reported yet.
We've got a decent data set.
We can see roughly how big this form of financing is, and it's pretty big, but.
It could be more than sixty four billion dollars.
Yeah, so I mean it's really hard to know. I mean, there is there are some trade bodies who try and take a stab at how big supply chain finance is. One figure from a sort of a trade publishing house called BCR. They reckon the two point two trillion dollars of supply chain finance was issued globally last year. It's just a sort of you know, that's a poll for people within the market that they've done, and it's not
always totally clear. You know, it's not an easy number to get a hold of, but that's a huge amount of financing, and I don't think it's sort of impossible based on what we found and what's still like a relatively small subsection of companies.
But the companies we've talked about Philip Morris, TESCA, I mean, they're not companies that are in trouble at all. They've got cash, they can you know, this is just like administration. Really it doesn't seem like a problem. But when could it be a problem?
Does it?
Does it become an issue for weaker companies when credit gets tied? I mean, how does it all unravel in the worst case scenario?
Yeah? Sure. So.
One of the problems I have is because I'm a distressed debt reporter, everyone sort of panics when I bring him up.
And I don't think that's like necessarily the case here.
I don't think, you know, people are going to you know, fall apart under the weight of the supply chain financing programs. But you do have some pretty, you know, sizable examples where supply chain financing has played a really important role, not so much in the US, but definitely in Europe. So I think it's still the UK's biggest bankruptcy ever was Karellian and Karellion collapsed almost instantly.
In twenty eighteen. I think it was, yeah, twenty eighteen.
When a lot of a lot of the reason that it was so leveraged and its leverage was kind of disguised, was because it was using supply chain financing really aggressively. So rather than coming up in their sort of debtline of their accounts, it came up in their accounts payable. An analyst kind of knew something was going on, but they didn't have a really good idea of, you know,
quite how leverage this company was. In the UK, generally companies go into administration and then you know, restructuring advisors come in and try and find a solution for the company. Here, the company just went straight into liquidation because there was no recovery to be at. It was just, you know, they basically one of the best recoveries they've had. We still don't know the number is issuing the order to
signed off on a lot of this stuff. Then there's a company called ab and Goer which had several brushes with insolvency over the years, like a Spanish company which did some creative accounting. There was you know, there was some supply chain finance there. And then the example that people talk about a lot is green Sill, which although really the problem with green Sill was kind of more exotic than supply chain financing and more to do with
you know, future receivables or whatever. That was one of the businesses, you know, one of the businesses they operate, and certainly the business they were most vocal about was you know, doing supply chain financing for big companies like.
General Mills or Vodaphone.
So, yeah, like it has been a problem in the past, and I guess the real issue is, like if you got into a situation where banks were less likely to give you credit, this is something they can pull immediately. It's not like a facility. It's not like a loan or a bond where you have a maturity and you know you've got this capital until a certain date and
then you're got to pay it back. This can just be pulled pretty much whenever, depending on you know, the specific contracts, which you know, I'm not really privy to. This is mostly almost entirely uncommitted as far as I
can tell. And that's kind of a risky sort of thing to happen with have within the capital structure, because you know, if all of a sudden you've got to accelerate all of those liabilities you've extended for three hundred and sixty days, you're going to find yourself incapable of doing that. In a lot of cases, you know, do you have a revolving credit facility that can cover that?
Do you have cash in your bank account that can cover that? Maybe not?
And in a ties of credit market, it's you know, while it doesn't seem like it's likely to happen to, you know, these big companies that we've been talking about, it seems likely they could happen to someone as a bank step back from lending to corporates.
And you mentioned rating agencies. Is it a ratings issue that some of these bigger companies liable to a downgrade because of the stuff you.
Think potentially, but it's it's a hard one because how you characterize this is still pretty hard to do based on some of the disclosures. I mean, we've spoken to a number of people from from raising's agencies and you know, interested investors, and they say like, well, there's just not really enough disclosure to make, you know, sort of hard and fast, like Okay, we think that there's actually a few more turns of leverage on there, so we're going
to knock you down a notch or whatever. But I think I think it, Yeah, it's quite feasible that it will happen to someone of the hundreds of companies which are going to have to report this over the next few years, as you know, the rules outside of the US get implemented as well. So yeah, that that is a real possibility. And the other thing that is going to happen is credit is not only becoming more scarce, but as a result being more scarce is getting more expensive.
And one of the things that we're starting to see happen is like suppliers who remember in this transaction, actually bear the cost of the financing. They're the ones who get paid earlier for you know, a smaller amount than what they're owed are looking at instead of like, you know, oh it's only a couple of percent or whatever. With the way rates have gone up recently, are now looking at a far larger chunk of their invoices being spent on financing for.
You know what.
Although may be sort of like helping the supplier, is also in a lot of cases definitely helping the larger company, which is sort of an interesting roundabout way of financing yourself, right.
And the bank's going to be making a lot of money on this.
Yeah, I mean it was. It's not a very risky form of lending. It's as I say, we don't have all the contracts for all the different for all the different agreements that are with the parties.
But I would wager.
That you know, they're in a pretty good position. Nobody really wants to sort of renege on their debts. It's very short term, so it's sort of you know, you've got that sort of you're temporally senior at some people like to say you're at the front of the queue because you're the first people who are going to you know, get paid out of a company. So so yeah, it's
considered like quite unrisky in a lot of cases. There are also examples of people who buy this as investors, not just the banks that are doing it, but from people I've spoken to in the market. A lot of this is done by sort of the corporate banks of a particular company, you know, the sort of relationship banks. They're the ones who are providing the financing. And yeah, it's probably sort of a fairly unrisky way to provide
credit to the suppliers. But you know, also to an extent, the larger company with the with the program.
Great stuff. Luk at Appali from Bloomberg News, thank you so much for joining us. Thank you read all of lucas scoops on the Bloomberg terminal and of course at Bloomberg dot com. Moving on to another big topic. As I mentioned earlier, we're very fortunate to have with us Sharon Chen, who covers a whole load of things infrastructure, telecoms, utilities across Asia for Bloomberg Intelligence based in Singapore. How's it going over there, Sharon?
Great? James, how are you very well?
Thank you thanks for joining us. So there are a number of names that we're going to focus on in particular, but before we do. What's the mood on the ground over there are people upbeat about the economy where you are.
I think Singapore is obviously a bit more exposed, but I think Southeast Asia there's a lot of talk about southeas Asia in general being a safe haven, you know, if you know the global economy slows down.
Okay, interesting, So let's start with a big one that you cover. Soft Bank. We hear about them all the time. The news isn't always good. First of all, let me ask what is soft Bank? Why are they so important?
So?
SoftBank is a very high profile investment holding company that's focused on investing in startups in the technology sector. So it's always making headlines right in terms of what they're investing in, whether it's we work, whether they're trying to IPO arm and in the credit space in particular. It's a very bond issuers. So they've got about forty billion dollars of bonds outstanding, and that's why I'm very, very focused on this company.
So that's one of the biggest issues. They're based where in Japan?
Yes, it's based out of Japan.
Okay. They were recently downgraded. There was lots of news about that what led to a weakening credit credit profile at the bank.
So S and P downgraded to double B. Moodies has it at BA three with negative outlook. I guess this is going back a bit. But back in twenty twenty one we saw soft Bank really ramp up investments through SoftBank Vision Fund too. And obviously, starting from last year we've seen rising interest rates and all the technology stops come under pressure. More recently, we've got Silicon Valley Bank collapsing and that has reduced liquidity for all these startups.
So the soft Bank Vision Fund has really wracked up some investment losses in the past year. It was about thirty eight billion dollars worth of investment losses, and so SoftBank has had to sell some of its other better quality assets to shore up its balance sheet. Is liquidity, and you know, it used to own close to I think twenty percent of Ali Baba and now they've monetized
almost everything and that's by far the strongest. So the portfolio quality for SoftBank has has really suffered in the past couple of years.
Interesting, So what's the near term risk shown? Is it manageable?
Yes?
Actually so, even though it's just been downgraded. The company is actually in a fairly good position at least in the next couple of years. It's got about thirty billion dollars worth of cash, it has proven that it has good funding access, especially to the Japanese yend market, and it's also lowered it's adjusted loan to value to twenty four percent, so that's a fairly healthy level.
And what are we looking for next? There's an IPO in the works. Can you talk a bit about that and how it will affect them?
Yes, so I mentioned earlier an IPO of ARM. So ARM is chip designer, and you know, if you've been following the news and VideA and some of the other chip companies out there have really rallied very strongly because there's so much excitement about AI in general, and so there was some consens about execution risks just given the
IPO market hasn't been the strongest this year. But you know, looking at how some of their peers are doing, I would I believe the company could be in a position to IPO And it's target is by the end of this.
Year, So what happens after that? Are they going to increase investments? They can do share buybacks, so you know.
All thatse being equal.
Obviously the rm IPO would be positive, right, it would lower LTV, it would improve liquidity and also the portfolio quality. But then I don't expect software to really sit on
a mountain of cash and not do anything right. So the company has been that if you follow their earnings called previously they keep talking about being in a defensive mode, but now in the latest one they do talk about, you know, there could be potential opportunity out there, and they are in a good position to you know, pivot away from the defense mode when they see the right opportunity.
So the question I think from a credit perspective is how fast will soft Bank ramp up their investments, you know, because you know the macro backdrop isn't isn't the strongest yet, so that's one thing to watch. SoftBank is also prone to doing a lot of large share buy bags, so that could be another use of proceeds, and obviously if they use some of the process to repay that, that'll be great.
And the medium to long term and they've got a large portion of the portfolio and startups within the soft Bank Vision Fund. What's going on.
There so I mentioned earlier they've sold off Ali Baba if they did ramp up investment and division funds. So if you look at the portfolio now compared to pre COVID, pre COVID, I think Ali Baba, which is rated single A is made up about half of soft Bank's portfolio, and now that's close to almost zero, and you've got soft Bank Vision Fund at about forty percent of the portfolio.
Majority of these are unlisted, less mature companies and obviously higher risks, especially if you're compared to the likes of Ali Barber. So there's just less visibility in terms of, you know, how they can realize some of you know, monetize some of these assets in the future. And the other thing that has been happening is there's been quite a few senior management changes in software in the past couple of years and could potentially we could potentially see
some you know, shifts and investment strategy. That's another uncertainty. I mean, there's been talk about soft Bank looking at private credit, for example, which is a brand new area for the company.
Is that a good thing for them? And we hear so much about it. I'm based in New York, obviously, and we hear we hear about private credit being the big new thing. I mean, what what what does soft Bank? You know, what's their edge in private credit?
Well, so, as I mentioned before, they haven't really done it, but obviously I think they would leverage their know how and their expertise in the technology sector already to branch into this this mark. So we'll have to see how how they fare, because it sounds like that it's getting quite competitive.
Definitely. Yeah. Okay, So the other company we're going to talk about Rakuten, also in Japan, another very interesting situation. But before we dig into the details, just let us know, tell us Sharon, what what is Rakutan? And you know, why do we care about them?
So?
Racketan is really a conglomerate. It's one of the leading e commerce and fintech players in Japan. But the reason why I've been watching it closely is actually a fairly new business. So it entered the domestic mobile market about a couple of years ago and has really been struggling there in terms of to gain market share, and they've been making still they're still lost making after two years.
It's nowhere as big as soft Bank in terms of you know, their bonds outstanding, but we have seen a lot of volatility in their bonds, and that's because of Rakuten's poor liquidity position. The company has just raised about three trend billion yen of equity, but even so, their five year CDs is currently at above five hundred basis points, which is pretty much double soft banks even though they're both rated double B by SMP.
So it's a fairly volatile name.
They have a ton of debt coming due over the next few years, right, yes.
So.
I mentioned the the equity base. I think that should tie them over until maybe sometime in twenty twenty four. But then between mid twenty twenty four and mid twenty twenty five, they've got over five billion dollars worth of bonds coming due, and that was really the reason why some of their bonds were trading at distress levels and still are, and because the company is still free cash flow negative due to the mobile losses, so they have to rely largely on refinancing to meet these maturities.
Will they able to able to do that or will they defaulte?
So I mean I mentioned earlier it's the leading e commerce and fintech player, right, so it's hard to see the company really defaulting because they do have good quality businesses. Ideally, you know they've bought time to stabilize the mobile business until say sometime in second half of twenty twenty four, and the company is working hard on this. So ideally you'd want them to stabilize the mobile business so that the market feels better about them and they can refinance
the bonds that are coming due. In terms of the mobile business, the issue here, I think is really their poor network quality. So to give you some idea, even after two years, Rocketan only has about two percent market share, and I think generally the perception is that the network quality is really subper compared to the incumbents. So Rocoton
is taking steps to do this. So, for example, it came up with a new roaming agreement with KDDI, which is the second largest mobile player in Japan, and it's expanded the roaming to cover high traffic districts and major cities. They removed speed cabs. I do think this would help, but as we know, with a lot of consumer facing brands,
it takes a while to shift consumer's perspective. So you know, we're going to watch the next few quarters but I think it's still going to be slow going, but hopefully that there would be some improvement. They've also cut mobile carepack, so that should at least help reduce the cash fleet in the near term.
And we should expect from them some liability management transactions over the next few months or years.
So the equity definitely helps, right I mentioned that it should tie them over until sometime in twenty twenty four. The company is also still looking to sell assets. They've been very active here. They listed rocketan Bank actually earlier this year, when you know, the whole thing about Credit Citizen Silicon Valley Bank was going on, so valuation was lowered and expected, so they did raise some funds there. They've sold some minority stakes. They've also sold the twenty
percent stake in Rocketense Securities to Mizuho. Going forward, what they're trying to do is ipo Rocket and Securities as well, but I think they might need to wait for the market to recover somewhat so that the evaluation might be closer to what they sold to Mizuho. They have another eighty eight billion of investments on balance sheet which can be sold, but again these amounts might be still small compared to the bonds that are coming due.
And when you step back and look at the entire capital structure, are their opportunities there for investors now or should investors be very cautious? Do you think.
That's a that's a very tough question.
So in terms of the bonds that they have outstanding in hard currency, they've got, you know, the twenty twenty four late twenty twenty four bonds, senior bonds, they are coming due, and they have some perpetual notes as well.
So I would say the perpetuals definitely are the higher risk ones, you know, because they can defer these and if you know, and the mobile business continues to struggle, there's obviously a high risk that they might not call this while while the senior bornes are structurally stronger.
Okay, great, So two big names to watch SoftBank and Record ten. Thank you very much, Sharon Chen of Bloomberg Intelligence. You can read all her great analysis on the Bloomberg terminal. Do check it out and hope see you soon. Sharon. Thanks James, and thanks again to look at the Pali from Bloomberg News. Read all of his great distressed debt 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,