Hello, and welcome to The Credit Edge, a weekly markets podcast. My name is James Crumbie. I'm a senior editor at Bloomberg. This week, we're very pleased to welcome back on the show Rashmi Bassu, our senior distress debt reporter in New York. How are you, Reshmi? Go ahead?
How are you dying?
Very well? Great to have you back on the show. Also on the Credit Edge, this week, we're going to be talking to Cecilia Chan at Bloomberg Intelligence in Hong Kong about the Chips war and casinos in China. So do stay with us. But first Rashmi Bassu with Bloomberg News. Great to have you back on the Credit Edge. Let's start with we work Fascinating Saga, a company that was not that long ago valued at almost fifty billion dollars,
now bankrupt. It was the world's most valuable startup, with a colorful founder who started the office rentals firm with an essential amenity beer on tap. They grew very rapidly and spent extravagantly. But essentially it's a real estate business offering flexible workspaces and also on a mission to blur the boundaries between work and social life. By twenty nineteen, we Work had rebranded as we Co with a mission of quote elevating the world's consciousness. But Rashbie, why did
they file for bankruptcy? What happened?
I think the business model had just really come under question. I mean, the company hasn't turned a profit. It was valued at these, as you said, very frothy valuations. But the key is life changed after COVID and when you have a lot of debt on the balance sheet and people are not going into offices in these shared spaces, it really created a lot of issues for the company.
But they did restructure their debt earlier this year. Why did that not work?
It was still too much debt And you know, quite honestly, like you know, if you look at their two the second quarter results, you really see that so much of their expense is tied to these leases.
So how much are they really a casualty of the pandemic? I mean they really did boom in twenty nineteen, right before the global economy shut down.
No, I think it's a combination of a balance sheet issue and that they have way too much debt, but also an issue of these kind of venture capitalists loving a business concept versus actually understanding what the business meant.
But let's talk about the business. I mean, presumably it does survive in some form. Most of us are back in the office again. Flexibility is the key. Surely it's a model that still works. I mean renting out office space to people who want it, especially when you live in a city like New York where you know most people, you know, spaces at a premium, rents a high People don't always have an extra room in their house to work out of. So you know, you throw in some
free beer and everyone's happy. Why wouldn't it work? Just now, you know, the.
Beer just wasn't enough. You know, during its court hearing, the CEO did say that, you know, the company needs to renegotiate these office leases with over four hundred landlords. And this process started back, you know, in twenty twenty two. So it's just we have to understand that a line share of the company's revenue in the second quarter was tied to these lease payments. I mean, basically, what I'm trying to say is that the lease payments kind of consumed a lot of these revenues.
So we're talking about them taking out leases on buildings at this pretty height of the rent. You know, the costs of those leases were very, very high. Then they ran into the pandemic. They can't afford to service those leases, is that right, So they filed bankruptcy to sort of put a pin in those leases.
Yeah. I mean, you know, the reason why a company files for bankruptcy, especially we see in the retail space, is it allows you to reject leases. And what we're going to see as a rejection of leases combined with the company kind of begging landlords to give them confessions, meaning to decrease those payments.
So you really do dig in very deeply to the kind of the creditor mess that ensues any bankruptcy. There is some big companies involved, soft bank, King Street Brigade. They're all fighting over the scraps here. Will they recover anything?
They will, you know, Time Hotel, but we saw them kind of take the equity and the reorganized company assuming that it exits bankruptcy and Time Hotel like you know, I've spoken to people involved in the situation who said, this really is the success of rework is going to depend on its negotiations from landlords.
Is there anything that we can spin sort of broader than just rework or is it very specific to we work in this case.
I think we're just seeing, you know, a lot of disturbance happening to the commercial real estate market. And you know, one way to look at it is the more and more of these leaf's payments to landlords go down, they're also going to start seeing their cash flow come down. So does that mean they're going to default potentially?
So there are other companies in a similar situation.
Yeah, I mean, I think little landlords are really hurting and just have not been quite able to salvage themselves post COVID.
But the idea of this we work specifically the restructuring, the bankruptcy all this, is that they do survive in some form. What form do we think that they will come out of this in?
Yes, a much much smaller business.
Okay, so the learnings here, the lessons don't expand too quickly, manage your debt, properly, run the company in a bit more of a measured and rational way.
Right, don't fall in love with the business concept. You really just have to understand what you're doing. And I think you know this is also maybe a warning to lender is that maybe don't fall for these like sky high valuations.
I mean, we've been looking a lot of the lower quality companies that's called them like triple C rated through this earning cycle, and they really are getting punished when they miss earnings. You know, some of these bonds are dropping ten cents on the open. There seems to be a lot of fear out there as credit distress rises, not just limited to we work, but across the board. Would you say that that's the case.
Yeah, we're definitely seeing that more and more a company for having a challenging time servicing their debt given this very high interest great environment.
On those you know, companies that are the riskiest in credit, the ones rated triple C we have seen yields almost double over the last let's say eighteen months, So they are having real trouble servicing that debt just as the maturities start to come due.
Right right, We're seeing just so much pain in the market right now. You know, it's been great for the advisors, but maybe bad for the lenders.
Good for the lawyers too.
Absolutely so.
Before we talks of Cecilia Chen at Bloomberg, and as I mentioned about China, what else is on your radar?
Reshme.
It's been a big year for bankruptcy and distress. Do we expect that to continue through year end? What sectors are under pressure? Where are you most focused right now?
Right now, I'm focused on the technology space, telecoms, et cetera, because they were kind of built to survive a low interest environment, and that's actually saying quite a bit, but now we're really seeing them getting their earnings getting punctured by this environment.
Technology that's really hot space for a lot of people, but it's a particular area in distress.
You know, one company that we've been kind of focused on is lumin Technologies, which announced a deal last week, and there's a lot of going back and forth on, you know, on whether or not the deal was a little bit too aggressive. And you know, we're just very focused on education tech companies as well, and obviously the telecoms, especially the service providers.
To that space. I mean, these all sound like good businesses to be in, but in these cases it's just too much debt, not very well managed.
Too much debt. It's kind of the story for Attech. It's just you know, when these lbls are leveraged, buy out for Dawn. They were done at like sky high multiples, and now we're kind of seeing the earnings of Toury and not really match up with those valuations.
Great stuff, Reshmi Bassie with Bloomberg News in New York. Thank you so much for joining us.
Hi, thank you so much. This was fun.
Read all of Reshmi's great distress debt scoops on the Bloomberg terminal and of course at Bloomberg dot com. So right now, we're delighted to welcome to the Credit Edge Cecilia Chan, who covers technology, among other things, for Bloomberg Intelligence in Hong Kong. How's it going, Cecilia, Yeah, I'm fine.
Thanks for inviting me.
Great to have you on the show. So you're looking at the market for semiconductors or chips. They're increasingly in focus as AI becomes the hot new thing for investors. We talked to Rob Schiffman about that recently, a great conversation. You can find it on our podcast website. But Cecilia, chips have also become a huge geopolitical issue, with the Biden administration stepping up efforts to keep advanced chips and
equipment out of China. We're talking about the essential components of AI here, and they are also used in the military and super computing applications. And I understand also the Japan and Netherlands have also adopted similar measures. So there seems to be kind of a tech cold war happening. I just wanted to start with us. You know, basic question, Cecilia, why is this happening now? Why don't these countries want to supply chips to China?
Well, first of all, Asia actually is a very critical region to the semi conductors industry because the region actually as around like our semi five to eighty percent of the production hub as a production hub for the global chip manufacturing. And so for China it is especially like it's a major market because it is home to manufactories that make products using chips like the smartphones, cars, computers,
household electronics, et cetera. And so those are like both imported, I mean exported around the world and also purchased by these consumers in China. And so for for China itself, it has been looking into boosting its own like domestic semi conducted instruct industry because it wants to like target for the self reliance and we know of it's reliance
in like the foreign semi conductive firms. But then for US, well, it's more like a political reason that is trying to restrict the export of those adventures to China for use in ai military use and supercomputers and so, and also on the export of those high end semiconductive manufacturing equipment to the country. And so the purpose of that is to stop Beijing from receiving those cutting edge US technology to strengthen its military.
Okay, got it. So do we expect this conflict to be resolved anytime soon? Do you expect it to get worse? I mean, we're going into a huge election year for the US. It's a massive political issue. So is there a postentially a risk this situation gets worse?
Uh?
Probably, I think this will stay or I cannot talk about the government on behalf of the government. But then yeah, I think that this geopolitical tension would probably remain a big headwind to the Asian chip makers our credit, even though the risk so far is still actually manageable, especially for those like Korean chip makers and the Taiwanese chip makers.
Okay, so just let's talk about China quickly. The reaction. As you said, they've started producing more of their own to become self sufficient. Are the chips that they're making just as good as any other or they better? I mean pretulay, they're also a bit cheaper than the US, are they actually?
Like I guess I should say that like because under the current restriction, China shouldn't be able to like produce those advent ships, like those that are like fourteen nanometers or below. But then in we saw that Huawei launched its new mobile mid sixty Pro and that actually surprised the market because it can connect to the next five G networks, even though, like despite US mansions that aim
to cut Chinese type tech giants from this technology. And so, according to tech Insights, the phone is actually powered by a new advance chip that is domestically produced using an advanced seven nanometer technology, and rumor is saying that it is produced by SMIC, but it's just market speculation and so, but I guess what is surprised to the market is that people with think Chinese technology would stop at fourteen nine meters after restriction, but it seems like China has
been able to stay around two to two point fine modes behind the world's best chip companies.
So they're catching up. Seems like yes, interesting, interesting, So maybe the US policy is backfiring. So you mentioned the producer of the Hildwai chips. Is that a Chinese company?
Oh yeah, it's uh, it's called s M I C or it's just a rumor thing that it produced, okay, and so yeah.
And other the other chip makers also in different countries. You mentioned Korea, Taiwan. Are they also affected by this ban?
Uh? Yeah, because from this band it actually also well uh, it actually affected the Chinese flaps uh owned by those Korean chip makers, and also the the Taiwanese chip makers like s M I see uh sorry not s M I S but like a Samsung s K Highnex and tsmc U. But the good thing is like in this October, well, since last October during the trips restriction, they have been receiving an indefinite wafair from US to import the equipment to their Chinese flaps and so, and then this year
they actually also received an indefinite wafair and so it seems like the immediate risk to their Chinese flats has been easy because previously people are worried about, oh, what will happen if they don't get a waiverer then, because they have spent so much money in those Chinese facts and so it's going to definitely destroy the supply train chain. But then since they are able to receive the wafer and so I guess the market is slightly more relief.
And also like the k PAX spending in well, previously people are forecasting maybe they will start spending k PAX in like moving the production back to their own country. But then now it seems like they will be able to eat that in the short term.
So just so listen. As a clear some Korean chip makers have received a waiver which allows them to receive the US semi conductors.
Is that right? Uh? Yeah, they allow them to export the Chinese I mean the.
Tech okay, okay, so even though their plants are based in China, they're still able to use this technology.
Mm hm that's right.
Interesting thing, okay, So let's let's talk about the credit aspects of this cecilia. You look at that very closely, and then that's what some of our readers are very interested in. Is there any relative value here? Are there are there winners? And losers. Are there companies that do well out of this and others that don't.
Yeah, like the Korean chip makers ki Hynix, So we'd like we think the bonds could titan versus it US my peer called Micron, because sk Hynix actually is the leader in high bandwidth memory ships, and because there's the robust demand in the generator AI and also we are expecting there will be a recovery in the DRAM demand starting from twenty twenty four, and so we expect the dollar ponds could tighten against it's our closest a usper and also retrearchful of the company even though it's an
active in twenty twenty three. But the focus we are looking at will be on twenty twenty four, which we expect there will be a turnaround in the memory ship demand and so that will drive the free casual positive again. And also, as I've mentioned before, the indefinite WAIFA that they have received from the US actually removed the urgency to move the capacity back to Korea from China, and so we think that could also stringthen their free cultural generation.
So there's opportunity in the Korean chip makers and less so in the Chinese that maybe are under more pressure.
Yeah, for the Chinese one, well only one has a dollar bond which is called s m C, but it's currently under the sansion and so I think right now, even though the ratings is I would say it's quite stable because as long as the the the restriction will not affect their mature, not production, than their their their market position and the technology leadership domestically could support its troop will be minus ratings. But yeah, for the Born to Titan, I think the chance could be a bit slim for now.
Okay, okay, but it will be very interesting to see this sm I see rumor about the railway chips as she is confirmed, right, that would be very interesting development.
Yeah, definitely on one thing other.
Other than that.
I know you you look at a multitude of things, Cilia, and one thing that has been catching my attention over here in the US covering Asian credit is the casinos. I know you look at those. I just kind of wanted to wrap this up by asking you about that industry because it is quite important for a lot of high yield companies in the US dollar market. How is that industry doing? Is Macau completely swamped with gamblers.
Now.
Ah, yeah, I actually went to Macau on last Saturday with my family. And then well, I guess it depends on which casino you are going to, like the US based one like our sand China with Macau and also MGM, the casino flower is actually quite attractive because I guess many tourists actually will go to those those casinos, and then for the local ones maybe a little bit they
well I guess they still need to catch up. But yeah, but for the sector, we think despite you know, we know that the China property market has been.
Yeah, a lot of pressure there, Yeah, a lot of pressure.
Well, many things happening in the Chinese property markay, I guess I should say, yeah, And so I guess the Macau casino sector it could be a safest spot to look at, yeah, because we think that there's limited incremental risk in the factor, especially like after the casinos, they are able to renew the concession for other ten years.
And also we see that the mcau's growth gaming revenue coming back, and so into twenty twenty four, we actually are expecting another twenty two percent increase in the growth gaming revenue despite there's like weakness in China economy, and so we definitely think like for mcaucasin knows, yeah, it's something to watch for in twenty twenty four. And then for me in terms of like relative valuation, I think the ones that are best as the US parent like than China, and also MGM could be uh the bonds
could be tightening. The reason is because they for example, for Fan China, they have I mean a positive outlook and so there's a chance for the company to upgrade. And then for MGM China, we see that they have been like driving so much market share from the local ones and the market shaking actually is also sustainable, and so that could also tighten the dollar bonds.
And when you're walking the floor there in Macau and the big casinos, we got to post sorry pre pandemic levels of expending.
Uh.
I think for if you compared to twenty nineteen, probably it's still not yet there. The reason is because first of all, they have some stuff issue before, like there's a shortage of stuff and so they need to fill back in. And then also there are some casinos recorded the statellite casinos they have been closing, and so that also affects like it's not the supply wise, it's not
fully back to twenty nineteen. But then at the same time, there are so many new casinos coming in twenty twenty three and off to well we are now in the end twenty twenty three and twenty twenty four, and so it's definitely going to boost up the supply again. And then also people coming in, like we can see that tourists from China and even the Tier two city tstory cities are tourists coming into Macau, and so that will also boost up the visitation.
So Celia Cham with Bloomberg Intelligence in Hong Kong, thank you so much for joining us.
Thank you James, thanks for inviting me.
We look forward to having you back on the show very soon. And please listeners do check out Cecilia's great analysis on the Bloomberg Terminal and we will catch up very soon. And thanks again to Reshmi Basu with Bloomberg News in New York. Read all of her scoops on the Terminal and at Bloomberg dot com, and please do subscribe wherever you get your podcasts. We're on Apple, Google and Spotify. Give us a review, tell your friends, and you can also email me directly at Jcromby eight at
Bloomberg dot net. That's j C R O M B I E as in my surname and the number eight at Bloomberg dot net. I'm James Crombie. It's been a pleasure having you join us again next week on the Credit Edge