January 4, 2024 • 31 mins
Commercial real estate faces a tough 2024 as trillions of dollars in debt comes due and refinancing gets harder, according to Neil Callanan, corporate finance czar at Bloomberg News. Offices in financial centers are especially under pressure after banks tightened lending standards, Callanan tells Bloomberg senior editor James Crombie in the latest episode of the BI Credit Edge Podcast. He’s watching for delayed and canceled new projects and short selling of real estate companies as signals of distress. In addition, Jody Lurie, Bloomberg Intelligence credit analyst, weighs the outlook for leisure-sector bonds after a stellar year in 2023. Gains are expected at a slower pace, while some junk cruise operators are heading for investment grade, according to Lurie. Business travel will boost hotels, while car rental firms are more challenged, she adds.
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Episode Transcript
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Speaker 1 (00:07):
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 welcome Neil Callanan, our
London based corporate finance zar. How are you, Neil?
Speaker 2 (00:19):
Very good, James, thank you for having me on the show.
Speaker 1 (00:21):
Great to have you on the Credit Edge. Also on
the show this week we'll be talking to Jody Lurie
at Bloomberg Intelligence about the leisure sector, cruise lines, gambling,
all the fun stuff. So do stay with us. But
first Neil Callanan with Bloomberg News. Great to see you.
Let's start with the good news. The US economy is strong,
the war on inflation is one. Rates are coming down,
which should be a relief to borrowers. Essentially, the recession
(00:44):
that everyone was fearing has not happened, and yet you're
telling us we should still be worried about this year.
For those who missed it, Neil put out a great
story just before Christmas ruined everyone's holiday actually entitled Euphoria
on fed pivot pus ignores the lagging hangover. Essentially, we're
all getting ahead of ourselves thinking it's going to be okay,
(01:05):
there's a lot of stuff to be worried about. Actually,
So break it down for us, Neil, What is the story?
Why is there so much trouble in twenty twenty four?
Speaker 2 (01:16):
Well, basically it comes out to the fact that interest
rates take a while to work their way into the
economy interest rate increases, and so particularly with so many
people not feeling the impacts through their mortgages in the US,
the actual full scale of what's happened in terms of
the rapid nature of the interest rate increases hasn't fully
filtered true to people yet. And the usual thing in
(01:38):
economics is just eighteen months to two years after you
started interest rate increases that people start to really feel
the impact and see the impact. And that of course
means that this year should in theory, whether in practice
and now will happen, see those interest rates really start
to hit the economy. Whether that will mean a soft
landing or not, we've yet to see. But there is
(02:00):
a massive eu furia about raycuts, and what usually happens
when raycouts are happening is actually recession is underway or
around the corner. And so there was this massive kind
of swell of you know euphoria in December, and the
(02:22):
fact that the FED is finally pivoting. The FED is
finally pivoting. What will actually happen in reality towards with
acid prices is yet to be seen.
Speaker 1 (02:31):
So to open too soon, sorry to open the champagne
on the ray cuts. But you know, even if they
do start happening in March as some people predict, and
they do go as deep as some people predict one
hundred and fifty bases points some people think could happen
from the FED, that's not enough to save us.
Speaker 2 (02:49):
Well, it depends on the sector, right, And I mean,
you know, the tech sector has been going gambusters, where
the that will continue and now we have to see
but a lot of what I'd be looking at in
the last years, the problems emerging in commercial real estate.
And I think regardless of the speed and size of
the ray cuts, there's still going to be an enormous
(03:11):
amount of distress there. There's almost three trillion of US
commercial real estate that due to mature within five years.
And the problem in a way is that you know,
he had a lot of people making a lot of
money and then borrowing cheaply with that money. To leverage
on top to buy assets that are now falling in
(03:33):
value because of the pandemic. And that's obviously in particular
the office sector, but also been going through a tough
time again. And it now looks like multifamily is going
to start going through a bit of a tougher time
as ren quote slows. So there's going to be a
lot of trouble in commercial real estate in the year ahead.
Speaker 1 (03:50):
And let me start you because commercial real say, that's
something that comes up a lot, and it's a bit
confusing to be given that everyone is kind of back
to work in their office and all out shopping all
the time, and they're all, you know, I mean, there's
not enough real estate to go around. There seems to
be a huge demand for real estate, and yet we're
seeing still problems. It is it just a case that
(04:11):
there was just way too much debt put on. Why
are they still in trouble?
Speaker 2 (04:18):
Yeah, so party, it's because so much of the debt
is interest only, so people haven't been repaying the debt,
they've just been paying the interest obviously. And what happens
then is when the loan comes toue from maturity, the
lenders have clamped down now because interest rates have gone up.
So even if the assets in a pretty good spot,
the person who owns it may find it difficult to refinance,
(04:42):
and if they do, they may have to inject a
lot more equity into the asset in order to make
it plashable for a lender to borrow. So, to give
you an example, you might have bought a building five
years ago and gotten an eighty percent loan from the bank.
Now the bank might only want to give you sixty
percent loan. The value they ask might be down. You
(05:02):
have to find that money in between, be it true
a junior loan or true equity, both of which are
hard to find and much harder to find now. And
that means that a lot of people are going to default,
and there's going to be a lot of people hand
the keys back to banks in particular, and regional banks
at that because regional banks account for twenty to forty
(05:26):
five percent of commercial real estate lending, depending on which
the sector is, and so when those problems come true,
it's the regional banks that are really going to feel it.
Speaker 1 (05:36):
So the building could actually be in a really strong position,
they could have tenants, they could be performing that you know,
everyone's paying their rent and yet still is not gonna
not gonna make it.
Speaker 2 (05:47):
Potentially, Yeah, I mean the bank may take a view
that like, you know, we wait for the ray cuts
to kick in and it'll all be fine. But the
reality is, in some cases you're going to see semi
decent ansets run into trouble. People were buying off on
you know, yields based on cheap money, based on quantitative easing,
(06:07):
which was pushing up basst prices and creating bubbles. And
whether or not they will be able to refinance those loans,
it's just unclear at the moment. Certainly the bank's appetite
for commercial real estate risk has fallen. They may tray open,
throw open the gates again if rates do fall, because
(06:28):
obviously they can do new loans at much higher rates.
It is more profit for them potentially in it the
spreads are better. But for now it still feels like
a time to be cautious about commercial real estate.
Speaker 1 (06:40):
And is it the big banks that holding all this
debt or is it the smaller regional banks who's mostly
exposed to it.
Speaker 2 (06:47):
Yeah, the big banks learned the lesson from the financial
crisis and they've largely stayed away from large scale lending
to commercial real estate. This time around, it's going to
be you know, small and regional lenders. If things get bad,
it'll be a bit like the same as trust issue
(07:07):
in the nineties, where you know, right throws suddenly there
being too much commercial real estate lending banks are bust,
and you know that that is a possibility. There are
many regional banks where forty percent of their loan books
and commercial redi estate maybe sometimes in some cases even more.
And some of those are probably going to be fine.
You know, some of them will be doctors' offices, and
(07:29):
you know, small stores and those kind of businesses tend
to survive even in a recession. What's going to be
harder is if you've got you know, large scale lending
to suburban office parks with tenants who are kind of
struggling along and maybe not able to handle the higher
rates themselves, which then will lead to an increase of
vacancy and potentially distress coming down the line.
Speaker 1 (07:51):
And only or less than a year ago we saw
a regional banking crisis in the United States. Some of
those lenders just disappeared. That was for another reason, but
Is there a chance that we could see maybe some
contagion from this.
Speaker 2 (08:04):
Yeah, I think I think it's certainly possible. I'm obviously
cautious about, you know, putting my neck in the line
saying something like that, because you don't know what's going
to happen again in terms of bailouts and the positive
guarantees and stuff. But yeah, I think it's only a
possibility that you could see some lenders run into trouble
(08:26):
later on here.
Speaker 1 (08:27):
I know you've been traveling recently, you're all the Global
Zara and you're in Asia. Are there any particular hot spots?
I mean, we've heard a lot about Sweden, We've heard
a lot about China. You know, I look out the window.
I love looking out your window in London. I recall
some great stories you had about buildings just around the
corner from our office that are in trouble. Is it
is it localized or is it just everywhere?
Speaker 2 (08:49):
What's really interesting this time around is that a lot
of it is office buildings in financial centers, which is
not something you'd intuitively think, you know, with the banking
system pretty good shape, So you know, New York, London, Frankfurt, Paris,
to a certain extent or a lot of fonts and powers,
(09:10):
which is the office district there, so Canary Wharf, the
owners of that, which are Brookfield and Qatar, are putting
in more money to you know, reduce to that levels there.
So that that's that's been somewhat surprising, but then it's
part of the way the trend of offices in general struggling.
I have kind of a working theory that a lot
(09:31):
of the winners of the financial crisis, if I could
put it that way, are going to be the losers
this time around. And I think you're starting to see
some of that. China, the Nordic's, Germany are obvious examples
of that. What people may not be as aware of
his Korea as well, did a lot of overseas office
(09:54):
purchases in particular, and a lot of them are running
into trouble now as well, and a lot of mezzanine
final lending as well, and a lot of those funds
are going to go to zero percent navy from one
hundred percent because the scale of the downturn is such
that it's just going to wipe out all the equity
and that's going to really leave a lot of investors
(10:14):
hurting there.
Speaker 1 (10:15):
So, apart from reading all your great coverage on the
Bloomberg terminal and of course bloombog dot com, where can
we find this stuff? What are the canaries in the
coal mine? You're looking at delinquencies, occupancy rates, work from
home rates, what's the where is the signal coming from?
Speaker 2 (10:32):
I always find development land to be one of the
most interesting ones in that case, because you know, the
development land is bought on the basis of hope value,
so you're basically hoping you can sell things for a
certain price at the end, and it takes a huge
amount of uplront cash to actually build something, and then
when you start, you can't really stop, particularly if it's
(10:53):
a tower. So the amount of the falls and development
land will be really interesting because the price falls there
tend to be bigger. So you the price of a
like the housing market could fall ten percent, but the
value of the land and they need it could fall
seventy percent as a result. So for me, that's always
an interesting one. Whether people stop going going ahead with
(11:17):
developments or pull developments or the delay developments. And we're
going to see we're already seeing examples of that, but
we will see more of that, and then I just
think the short interest on a lot of the companies
is one of the things to watch this year. You know,
the FED narrative of you know interest right cuts and stuff.
(11:37):
You've seen a lot of headshuns cutting them into shorts
they have on things like multifamily operators, on mortgage rates,
et cetera. If that starts to reverse, that's going to
be super interesting indicator that actually we're in for a
much tougher time than people think. You know, there's a
(11:59):
possibility that this will go on for years. It doesn't
look like it's going to be a short, sharp downturn.
It's going to be a long drawn up talking about
commercial real estate there rather than the economy.
Speaker 1 (12:12):
So before we talked so Jody Lurie over at Bloomberg Intelligence,
what else is on your radar? Neil and I also
wanted to kind of take a sort of you know,
the other side of the trade. If it were, let's
say there is a soft landing and rates come down
quickly and the US election is a clean and calm affair,
does all the distress just go away? I mean some
(12:32):
people actually are betting on that. You know, we had
a couple of guests on this show, some big guests
like KKR, who you know. One of their points is that,
you know, fear is the is the biggest thing holding
us back, that we should be much more aggressive at
this point in the cycle, that you know, it's all
good from here for credit. A lot of other big
firms like Black Soon and Apollo are really leaning into
this idea of, you know, take advantage of other people's fear.
(12:56):
They obviously have made a lot of money on real
estate in the past. Is there a being maybe too cautious?
I mean, you know, twenty twenty three started very nervous
about credit, but they actually performed really well. You know,
if you sat on cash, you didn't do very well.
Some people might say this is just, you know, one
of the great opportunities of our time.
Speaker 2 (13:14):
Yeah, and totally. The credit providers are saying that. But
what's going to be interesting for in their regard is
how their legacy books perform, because that's where you're going
to see any stress that they see. So again, it's
like the visional banks, you know, it's the new lending
opportunities are fantastic at the rates at which they can lend,
but they also need to be very aware of the
legacy books in that regard. You know, credit does seem
(13:37):
to be in a really good place and a really
strong place at the moment. Sentiment is obviously very strong.
And I think you said three ifs in a row.
That's the perfect scenario. And I mean, that's a lot
of ifs. But there are certainly people more intelligent and
earning far more money than me who are betting on
these things all being turning out well, and they you know,
(13:59):
I would be head a debate against them, But I
don't think it's a smooth journey to the end of
this great stuff.
Speaker 1 (14:06):
Neil Callanhan with Bloomberg News in London, thank you so
much for joining us.
Speaker 2 (14:10):
Thanks James, looking forward to seeing how this year goes.
Speaker 1 (14:13):
Read all of Neil's great scoops on the Bloomberg terminal
and of course at Bloomberg dot Com. I'm delighted to
welcome back on the Credit Edge Jody Lurie, who has
the best job in the world covering the leisure sector
for Bloomberg Intelligence. That's casinos, cruises, theme parks, all the
fun stuff.
Speaker 3 (14:28):
How's it going, Jody, good and you are right about that, James,
it is not a bad job.
Speaker 1 (14:34):
Thank you so much for coming back on the show. So,
the leisure sector was the surprise hit of twenty twenty
three in credit, generating huge returns for junk bond investors.
It's not a very large part of the market, but
if you'd invested there, you would have made more than
twenty percent last year, almost double the overall corporate bond market.
So you would have done really well. I'm not a
(14:54):
big gambler, as you know, and I've never been on
a cruise. I tend to stay away from theme parks. So, Frank,
I'm shocked that it did so well. Just so, I'm
not managing people's money or doing any research for anything
like that. But so Joy, my main question is does
this rally continue. I mean, the consumer's been strong for
so long. The revenge spending went on way longer than
(15:15):
anyone expected. Surely we're done now your slower economy, high rates, inflation.
They're all weighing or do we all need to go
on a cruise or go to the casino because there's
so much bad news at the moment. What's going on?
Speaker 3 (15:28):
Well, first of all, i'd say, James, you're definitely in
the minority when it comes to not participating in the
travel industry. I guess you're just in love with your
job so much that you don't have time to go
to theme parks or on cruises. But putting that aside,
I will say that twenty twenty two and twenty twenty
three were very interesting years in terms of the revenge spending,
(15:52):
the revenge travel, the narrative around twenty twenty four, and
this is what we've talked about in our outlook is
that the momentum will continue, but it will moderate, So
we're not going to see the same robust level spending,
but we will see certain bright spots that will continue.
I mean, the cruise lines have already been talking about.
(16:12):
Royal and Carnival have both said this at investor events
that they are seeing still very high booking levels, you know,
tremendous booking levels. Carnival I think is two thirds book
for twenty twenty four already, so there's still this appetite,
particularly for certain parts of the leisure sector.
Speaker 1 (16:35):
So I guess there is still demand. But in terms
of what the market's already done, I mean, it's done
a lot, so we're kind of seeing that it just
cannot be sustained. I mean, we're getting pretty close to
power on some of these bonds. So sure, there's only
so much more you can do. But so let's talk
about the cruise lines then, to start with, because you
mentioned those, they raised a ton of debt last year.
(16:58):
I guess they could issue more again this year. There's
an opportunity right now. They also have callable bones, you know,
they could refinance. What's the outlook for funding?
Speaker 3 (17:09):
So just to touch on your earlier point when it
comes to where the bonds are trading and how much
more room we have to run, I would say a
couple of points to that. You know, what we've been
saying for twenty twenty four is it is more of
a credit by credit conversation. Case in point, you're seeing
companies take much more drastic steps to keep their momentum going.
(17:29):
We like to compare the six Flags and Cedar Fair
merger with the Choice Hotels hostile acquisition attempt of Windom,
because those are two very different scenarios that will result
in different ways that the bonds react. You know, for
six Flags and Cedar Fair, they're going to be leveraging
(17:51):
with this deal, they're not taking on additional debt, and
they're trying to do it in a way that's credit favorable,
Whereas for Choice, they're willing to risk the balance sheet
in order to get bigger and to keep the momentum going. Now,
going back to cruise lines, what we're seeing is the
companies are still in their turnaround story. Definitely a little
(18:11):
bit behind some of their peers in leisure as it
relates to paying down their debt load getting their balance
sheet in order. They're still not you know, I would
say they're probably fifth inning or so of this. You know,
Carnival brought down their debt low below thirty one billion,
which is a tremendous feat considering it was over thirty
five billion at the start of the year, but there's
still a lot to go. That's not the balance sheet
(18:34):
they had before the pandemic. That's not what they would
like to have. All three companies we're talking Carnival, Royal
and Norwegian are trying to get to investment grades sometime
in the next few years, and they've all been pretty
aggressive in terms of debt refinancing as well as repayment,
and I think they're going to do a combination of
both this year, So.
Speaker 1 (18:53):
I'm more like to pay down debt row and raise
new debt.
Speaker 3 (18:56):
You think they'd like to net pay down debt. That said,
we've talked with management about this topic quite a bit,
particularly recently, and the companies have indicated that if rates
are in such a way that it's attractive for them
to refinance and push out debt, they will do that
(19:16):
as well. But their preferred method is to repay debt.
Speaker 1 (19:21):
And do you think it's feasible that they could get
to invest in grade in that timeframe that you mentioned
it by next year?
Speaker 3 (19:28):
We've run our models and we've looked at what you know,
the Moody's and SMP requirements are to be investment grade
and whether or not, you know, from an optimistic standpoint,
a more base case than a pessimistic standpoint, if they
could get there, and I don't think their expectations for
Royal it's twenty twenty five, for Carnival's twenty twenty six.
(19:49):
Norwegian has a little bit more vague investment grade like metrics.
They didn't specifically say investment grade, and they never were
investment grade before the pandemic. But for Royal and Carnival
twenty five twenty six. I believe is doable. It's just
a question of geopolitical risks, whether anything that could sort
(20:09):
of waylay these plans that they have to sort of
put a wrench in the activity that they're seeing.
Speaker 1 (20:16):
I just wanted to flip to gaming brief because you've
had a good piece out on casars and you cover
all of that set. But what I'm kind of most
interested in in that context is the China effect because
that has been really kind of huge in terms of,
you know, the gaming exposure to Macau, which is a
huge gambling center in Asia. What's the outlook generally for
gaming firms in yours that you cover.
Speaker 3 (20:39):
So gaming's a little bit more mixed. It's definitely more
of a company by company perspective. And I say that
in such a way that for the regional gaming companies,
the companies that have more regional United States gaming, it
might be a little bit more difficult depending on how
we go economically, depending on where we are with interest rates,
depending on where we are with inflation, depending on where
(21:01):
we are with jobs. Right, So a lot of the
narrative is what twenty twenty four could look like in
terms of if it's going to be a soft landing,
hard landing, you know what the Fed's going to do.
We've seen, especially yesterday, dubbish commentary, and so I think
that it's all going to play into the gaming sector,
particularly for the second half of twenty twenty four. For
the first half twenty twenty four, Vegas actually has a
(21:23):
lot of positive events going on. Case in point, the
super Bowl. They have a couple of premier events that
tack on to the second half of twenty twenty three
that will be positive from just a top line perspective
for these companies. Now, if you look at Macau and
you look overseas there, it's still in a turnaround phase,
(21:45):
but it's a much quicker sort of move upward than
what we've seen in Vegas because of China's restrictions in
terms of reopening that opened last January. So we're still
getting the benefit of those tailwinds. That will moderate over time,
I believe, but we are seeing that the companies there
are benefiting still from this appetite in Macau. Elsewhere internationally,
(22:10):
we're seeing you online gaming being a positive for these companies.
We're also seeing expansion into other areas such as the UAE,
and so I think there's a lot of interesting elements
going on. That said, it's not all credit positive, right,
So if you look at MGM, they are being very expansionary,
(22:30):
very much focused on boosting themselves and trying to balance
both shareholders and bondholders by pulling back in terms of
how much they're giving back to shareholders. But at the
end of the day, they have tremendous capex plans that
will sort of put a dent in their narrative around
being credit friendly. For Caesars, they're looking to repay debt, refinance,
(22:55):
get their balance sheet in order before they sort of
think of anything else beyond that.
Speaker 1 (23:00):
Credit participant. Is there a relative value opportunity there by
Caesars sell MGM or something like that.
Speaker 3 (23:06):
So we can't say buyseller hold, But we've been saying
that Caesar's bonds could tighten t MGM for a while,
and I think that that spread will continue to narrow.
Speaker 1 (23:18):
The other sector that I'm really interested in, and you know,
all the money I don't spend on casinos and cruises,
I spend on hotels and car rentals and airlines obviously
to go and see my family, but the hotels and
car rental firms. Are they still getting a boost from
this spending, this revenge spending holidaymakers, or is it now
coming from business travel? What's going on there.
Speaker 3 (23:41):
I think that business travel piece is where you're going
to see some of the tail tailwinds. We're going to
see conferences and business travel as the main sort of
propeller into twenty twenty four. Companies will probably have to
play around with their rates a little bit. Coming into
this last year, they could really command higher prices just
(24:03):
because there were so many customers who wanted to go places.
This year, it might be a little bit more of
that game of trying to identify where the actual demand is,
what the supply is, and sort of balancing those pieces.
But I think what's so interesting that we're going to
see over the next few years in the hotel space
is this amalgamation among the companies in terms of the
(24:23):
different levels. So you're talking about the different types of
class of hotel right the high end luxury to the economy,
and we're starting to see the Marriotts and the Hiltons
of the world really dipping their toe in the water
both domestically and internationally. As it relates to economy, extended stay,
and areas that they're less traditionally not in as they
(24:47):
are now. Now Hyatt is sort of going all in
on the all inclusive and more of the luxury element
as well as vertical integration as it relates to travels.
So that should continue for the rental car space, where
were a little bit more cautious on only because they
had such tremendous tailwinds due to the used car market
(25:10):
and due to the residual value of their fleets. Hurts
has really been going big into electric vehicles and not
really understanding what the you know, what the depreciation cost is,
what the aftermarket costs for the vehicles are, what the
sort of additional elements related to it for collision, et cetera.
And so I think that that's going to continue being
(25:30):
a dent on them despite the top line element of
it doing well right moment, They're still going to be
demand for rental cars. It's more of how they manage
their business through this sort of changing environment.
Speaker 1 (25:45):
Well, they stop charging me so much a heath reful.
Speaker 3 (25:50):
I can't promise anything on that. Yeah, the prices have
definitely shot up, and it doesn't help when you're looking
at the cars that are are not your EV friendly cars,
and they charge you the emissions costs and whatever other
costs related to your traditional sort of cars.
Speaker 1 (26:08):
And on the hotel expansion and sort of you know
them sort of spreading their wings a bit. Do they
need to borrow a lot of money to do that?
Speaker 3 (26:18):
So for Hilton and hy I mean sorry for Hilton
and Marriott, they're not so much borrowing money for the
expansion per se, but they are helping out the hotel
owners where they can. Case in point, last March, when
we had the issue with regional banks, or sort of
the worries about regional banks, there was a lot of
(26:39):
discussion about how the hotels could expand if say, for instance,
the hotel owners had issues getting financing, and a bunch
of the hotel companies you know, including some of the
you know large and smaller ones, even you know Windham
for example, have remarked to that they are willing to
(27:03):
help out where they can from a financing standpoint to
get these new facilities opening, because you know, once they open,
they sort of run themselves and the company's benefit because
they're mostly managers now they aren't actual owners, so they
don't have a lot of the capex costs, they don't
have a lot of the overhead costs the way that
(27:24):
you see companies that own and run properties do.
Speaker 2 (27:28):
Got it.
Speaker 1 (27:29):
So not a ton of new issuance then from those companies.
Speaker 3 (27:32):
Well, it doesn't mean that we won't see new issuance.
I think we'll still see new issuance. I mean, you
take Marriott for example, they have very much a lather,
rinse repeat model in that they have debt coming do,
they refinance it and they push it out right, That's
what they do over and over again. They also, you know,
one of the things that Marriotte did was they pushed
to get their ratings back to mid triple B level.
(27:53):
And it wasn't just because they wanted to have the
ratings that they had pre pandemic. It was that they
are an active participant in the commercial paper market and
they very much showed earlier this year when they borrowed
quite a substantial bound was over a billion. I'm actually
blanking down an exact figure at the moment, but they
you know, they are an active user of the commercial
(28:14):
paper market just to fill in gaps, but then they'll
go and replace it with longer term financing when they do,
or they'll repay it with cash on hand. But that said,
I mean they see the debt markets as an area
to always go to, and I think you'll see that
with Hilton. You know, Hilton is less cares about their
balance sheet than Marriott. They are high yield rated and
I think they'll stay there unless they actively commit verbally
(28:37):
to being investment grade. But you know, they are an
active issuer as well, and I think we'll continue to
see that that the hotel companies will come to market.
Getting back to actually the cruise lines, something that we've
said is that for Royal Caribbean, for example, they were
also an active participant in the commercial paper market before
(28:59):
the pan if that gives you any indication of what
they'd like to achieve.
Speaker 1 (29:06):
So to sum up the set to you cover at
the start, we talked about, you know, massive performance, really
great performance last year. We expect it to do well,
but not maybe as well as it did in twenty
twenty three. But what are you most excited about for
this year, Jody? And on the flip side, what are
you most worried about? What gives you the most sleepless nights?
Speaker 3 (29:27):
What doesn't give me sleepless nights. As a credit analyst,
you're always looking for the boogieman over your shoulder, and
I definitely do feel a little uncomfortable about being constructive
on the cruise lines. But at the same time, I
think the momentum is there. It's really a question of
are these caveats of geopolitical risks, for example, going to
waylay their plans. But overall, I think that that's an
(29:48):
area that you'll continue to see the de leveraging and
the benefit of that for the bonds. That said, for
rental car companies, I think yeah, I think this adjustment
from the sort of really robust levels of IBADAD that
we saw in twenty twenty two, how that then translates
(30:10):
to twenty twenty four when we have a very different environment.
You know, we're despite the fact that I think you'll
see the activity that will feed into revenue, I don't
know if you'll never necessarily see that from a margins
and cashulow perspective.
Speaker 1 (30:24):
Thank you very much, Jody Lewie of Bloomberg Intelligence. You
can read all of her great analysis on the Bloomberg terminal.
Do check it out, and I hope to see you
back on the show soon.
Speaker 2 (30:31):
Jody.
Speaker 1 (30:32):
Cheers, have a good one and thank us again to
Neil Kellenan with Bloomberg News in London. Read all of
his 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, or email me directly at Jacroumbi eight at
Bloomberg dot net. That's j c r Mbi E as
in my surname and the number eight at Bloomberg dot net.
(30:55):
I'm James Crombie. It's been a pleasure having you join
us again next week on the Credit e
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 welcome Neil Callanan, our
London based corporate finance zar. How are you, Neil?
Speaker 2 (00:19):
Very good, James, thank you for having me on the show.
Speaker 1 (00:21):
Great to have you on the Credit Edge. Also on
the show this week we'll be talking to Jody Lurie
at Bloomberg Intelligence about the leisure sector, cruise lines, gambling,
all the fun stuff. So do stay with us. But
first Neil Callanan with Bloomberg News. Great to see you.
Let's start with the good news. The US economy is strong,
the war on inflation is one. Rates are coming down,
which should be a relief to borrowers. Essentially, the recession
(00:44):
that everyone was fearing has not happened, and yet you're
telling us we should still be worried about this year.
For those who missed it, Neil put out a great
story just before Christmas ruined everyone's holiday actually entitled Euphoria
on fed pivot pus ignores the lagging hangover. Essentially, we're
all getting ahead of ourselves thinking it's going to be okay,
(01:05):
there's a lot of stuff to be worried about. Actually,
So break it down for us, Neil, What is the story?
Why is there so much trouble in twenty twenty four?
Speaker 2 (01:16):
Well, basically it comes out to the fact that interest
rates take a while to work their way into the
economy interest rate increases, and so particularly with so many
people not feeling the impacts through their mortgages in the US,
the actual full scale of what's happened in terms of
the rapid nature of the interest rate increases hasn't fully
filtered true to people yet. And the usual thing in
(01:38):
economics is just eighteen months to two years after you
started interest rate increases that people start to really feel
the impact and see the impact. And that of course
means that this year should in theory, whether in practice
and now will happen, see those interest rates really start
to hit the economy. Whether that will mean a soft
landing or not, we've yet to see. But there is
(02:00):
a massive eu furia about raycuts, and what usually happens
when raycouts are happening is actually recession is underway or
around the corner. And so there was this massive kind
of swell of you know euphoria in December, and the
(02:22):
fact that the FED is finally pivoting. The FED is
finally pivoting. What will actually happen in reality towards with
acid prices is yet to be seen.
Speaker 1 (02:31):
So to open too soon, sorry to open the champagne
on the ray cuts. But you know, even if they
do start happening in March as some people predict, and
they do go as deep as some people predict one
hundred and fifty bases points some people think could happen
from the FED, that's not enough to save us.
Speaker 2 (02:49):
Well, it depends on the sector, right, And I mean,
you know, the tech sector has been going gambusters, where
the that will continue and now we have to see
but a lot of what I'd be looking at in
the last years, the problems emerging in commercial real estate.
And I think regardless of the speed and size of
the ray cuts, there's still going to be an enormous
(03:11):
amount of distress there. There's almost three trillion of US
commercial real estate that due to mature within five years.
And the problem in a way is that you know,
he had a lot of people making a lot of
money and then borrowing cheaply with that money. To leverage
on top to buy assets that are now falling in
(03:33):
value because of the pandemic. And that's obviously in particular
the office sector, but also been going through a tough
time again. And it now looks like multifamily is going
to start going through a bit of a tougher time
as ren quote slows. So there's going to be a
lot of trouble in commercial real estate in the year ahead.
Speaker 1 (03:50):
And let me start you because commercial real say, that's
something that comes up a lot, and it's a bit
confusing to be given that everyone is kind of back
to work in their office and all out shopping all
the time, and they're all, you know, I mean, there's
not enough real estate to go around. There seems to
be a huge demand for real estate, and yet we're
seeing still problems. It is it just a case that
(04:11):
there was just way too much debt put on. Why
are they still in trouble?
Speaker 2 (04:18):
Yeah, so party, it's because so much of the debt
is interest only, so people haven't been repaying the debt,
they've just been paying the interest obviously. And what happens
then is when the loan comes toue from maturity, the
lenders have clamped down now because interest rates have gone up.
So even if the assets in a pretty good spot,
the person who owns it may find it difficult to refinance,
(04:42):
and if they do, they may have to inject a
lot more equity into the asset in order to make
it plashable for a lender to borrow. So, to give
you an example, you might have bought a building five
years ago and gotten an eighty percent loan from the bank.
Now the bank might only want to give you sixty
percent loan. The value they ask might be down. You
(05:02):
have to find that money in between, be it true
a junior loan or true equity, both of which are
hard to find and much harder to find now. And
that means that a lot of people are going to default,
and there's going to be a lot of people hand
the keys back to banks in particular, and regional banks
at that because regional banks account for twenty to forty
(05:26):
five percent of commercial real estate lending, depending on which
the sector is, and so when those problems come true,
it's the regional banks that are really going to feel it.
Speaker 1 (05:36):
So the building could actually be in a really strong position,
they could have tenants, they could be performing that you know,
everyone's paying their rent and yet still is not gonna
not gonna make it.
Speaker 2 (05:47):
Potentially, Yeah, I mean the bank may take a view
that like, you know, we wait for the ray cuts
to kick in and it'll all be fine. But the
reality is, in some cases you're going to see semi
decent ansets run into trouble. People were buying off on
you know, yields based on cheap money, based on quantitative easing,
(06:07):
which was pushing up basst prices and creating bubbles. And
whether or not they will be able to refinance those loans,
it's just unclear at the moment. Certainly the bank's appetite
for commercial real estate risk has fallen. They may tray open,
throw open the gates again if rates do fall, because
(06:28):
obviously they can do new loans at much higher rates.
It is more profit for them potentially in it the
spreads are better. But for now it still feels like
a time to be cautious about commercial real estate.
Speaker 1 (06:40):
And is it the big banks that holding all this
debt or is it the smaller regional banks who's mostly
exposed to it.
Speaker 2 (06:47):
Yeah, the big banks learned the lesson from the financial
crisis and they've largely stayed away from large scale lending
to commercial real estate. This time around, it's going to
be you know, small and regional lenders. If things get bad,
it'll be a bit like the same as trust issue
(07:07):
in the nineties, where you know, right throws suddenly there
being too much commercial real estate lending banks are bust,
and you know that that is a possibility. There are
many regional banks where forty percent of their loan books
and commercial redi estate maybe sometimes in some cases even more.
And some of those are probably going to be fine.
You know, some of them will be doctors' offices, and
(07:29):
you know, small stores and those kind of businesses tend
to survive even in a recession. What's going to be
harder is if you've got you know, large scale lending
to suburban office parks with tenants who are kind of
struggling along and maybe not able to handle the higher
rates themselves, which then will lead to an increase of
vacancy and potentially distress coming down the line.
Speaker 1 (07:51):
And only or less than a year ago we saw
a regional banking crisis in the United States. Some of
those lenders just disappeared. That was for another reason, but
Is there a chance that we could see maybe some
contagion from this.
Speaker 2 (08:04):
Yeah, I think I think it's certainly possible. I'm obviously
cautious about, you know, putting my neck in the line
saying something like that, because you don't know what's going
to happen again in terms of bailouts and the positive
guarantees and stuff. But yeah, I think it's only a
possibility that you could see some lenders run into trouble
(08:26):
later on here.
Speaker 1 (08:27):
I know you've been traveling recently, you're all the Global
Zara and you're in Asia. Are there any particular hot spots?
I mean, we've heard a lot about Sweden, We've heard
a lot about China. You know, I look out the window.
I love looking out your window in London. I recall
some great stories you had about buildings just around the
corner from our office that are in trouble. Is it
is it localized or is it just everywhere?
Speaker 2 (08:49):
What's really interesting this time around is that a lot
of it is office buildings in financial centers, which is
not something you'd intuitively think, you know, with the banking
system pretty good shape, So you know, New York, London, Frankfurt, Paris,
to a certain extent or a lot of fonts and powers,
(09:10):
which is the office district there, so Canary Wharf, the
owners of that, which are Brookfield and Qatar, are putting
in more money to you know, reduce to that levels there.
So that that's that's been somewhat surprising, but then it's
part of the way the trend of offices in general struggling.
I have kind of a working theory that a lot
(09:31):
of the winners of the financial crisis, if I could
put it that way, are going to be the losers
this time around. And I think you're starting to see
some of that. China, the Nordic's, Germany are obvious examples
of that. What people may not be as aware of
his Korea as well, did a lot of overseas office
(09:54):
purchases in particular, and a lot of them are running
into trouble now as well, and a lot of mezzanine
final lending as well, and a lot of those funds
are going to go to zero percent navy from one
hundred percent because the scale of the downturn is such
that it's just going to wipe out all the equity
and that's going to really leave a lot of investors
(10:14):
hurting there.
Speaker 1 (10:15):
So, apart from reading all your great coverage on the
Bloomberg terminal and of course bloombog dot com, where can
we find this stuff? What are the canaries in the
coal mine? You're looking at delinquencies, occupancy rates, work from
home rates, what's the where is the signal coming from?
Speaker 2 (10:32):
I always find development land to be one of the
most interesting ones in that case, because you know, the
development land is bought on the basis of hope value,
so you're basically hoping you can sell things for a
certain price at the end, and it takes a huge
amount of uplront cash to actually build something, and then
when you start, you can't really stop, particularly if it's
(10:53):
a tower. So the amount of the falls and development
land will be really interesting because the price falls there
tend to be bigger. So you the price of a
like the housing market could fall ten percent, but the
value of the land and they need it could fall
seventy percent as a result. So for me, that's always
an interesting one. Whether people stop going going ahead with
(11:17):
developments or pull developments or the delay developments. And we're
going to see we're already seeing examples of that, but
we will see more of that, and then I just
think the short interest on a lot of the companies
is one of the things to watch this year. You know,
the FED narrative of you know interest right cuts and stuff.
(11:37):
You've seen a lot of headshuns cutting them into shorts
they have on things like multifamily operators, on mortgage rates,
et cetera. If that starts to reverse, that's going to
be super interesting indicator that actually we're in for a
much tougher time than people think. You know, there's a
(11:59):
possibility that this will go on for years. It doesn't
look like it's going to be a short, sharp downturn.
It's going to be a long drawn up talking about
commercial real estate there rather than the economy.
Speaker 1 (12:12):
So before we talked so Jody Lurie over at Bloomberg Intelligence,
what else is on your radar? Neil and I also
wanted to kind of take a sort of you know,
the other side of the trade. If it were, let's
say there is a soft landing and rates come down
quickly and the US election is a clean and calm affair,
does all the distress just go away? I mean some
(12:32):
people actually are betting on that. You know, we had
a couple of guests on this show, some big guests
like KKR, who you know. One of their points is that,
you know, fear is the is the biggest thing holding
us back, that we should be much more aggressive at
this point in the cycle, that you know, it's all
good from here for credit. A lot of other big
firms like Black Soon and Apollo are really leaning into
this idea of, you know, take advantage of other people's fear.
(12:56):
They obviously have made a lot of money on real
estate in the past. Is there a being maybe too cautious?
I mean, you know, twenty twenty three started very nervous
about credit, but they actually performed really well. You know,
if you sat on cash, you didn't do very well.
Some people might say this is just, you know, one
of the great opportunities of our time.
Speaker 2 (13:14):
Yeah, and totally. The credit providers are saying that. But
what's going to be interesting for in their regard is
how their legacy books perform, because that's where you're going
to see any stress that they see. So again, it's
like the visional banks, you know, it's the new lending
opportunities are fantastic at the rates at which they can lend,
but they also need to be very aware of the
legacy books in that regard. You know, credit does seem
(13:37):
to be in a really good place and a really
strong place at the moment. Sentiment is obviously very strong.
And I think you said three ifs in a row.
That's the perfect scenario. And I mean, that's a lot
of ifs. But there are certainly people more intelligent and
earning far more money than me who are betting on
these things all being turning out well, and they you know,
(13:59):
I would be head a debate against them, But I
don't think it's a smooth journey to the end of
this great stuff.
Speaker 1 (14:06):
Neil Callanhan with Bloomberg News in London, thank you so
much for joining us.
Speaker 2 (14:10):
Thanks James, looking forward to seeing how this year goes.
Speaker 1 (14:13):
Read all of Neil's great scoops on the Bloomberg terminal
and of course at Bloomberg dot Com. I'm delighted to
welcome back on the Credit Edge Jody Lurie, who has
the best job in the world covering the leisure sector
for Bloomberg Intelligence. That's casinos, cruises, theme parks, all the
fun stuff.
Speaker 3 (14:28):
How's it going, Jody, good and you are right about that, James,
it is not a bad job.
Speaker 1 (14:34):
Thank you so much for coming back on the show. So,
the leisure sector was the surprise hit of twenty twenty
three in credit, generating huge returns for junk bond investors.
It's not a very large part of the market, but
if you'd invested there, you would have made more than
twenty percent last year, almost double the overall corporate bond market.
So you would have done really well. I'm not a
(14:54):
big gambler, as you know, and I've never been on
a cruise. I tend to stay away from theme parks. So, Frank,
I'm shocked that it did so well. Just so, I'm
not managing people's money or doing any research for anything
like that. But so Joy, my main question is does
this rally continue. I mean, the consumer's been strong for
so long. The revenge spending went on way longer than
(15:15):
anyone expected. Surely we're done now your slower economy, high rates, inflation.
They're all weighing or do we all need to go
on a cruise or go to the casino because there's
so much bad news at the moment. What's going on?
Speaker 3 (15:28):
Well, first of all, i'd say, James, you're definitely in
the minority when it comes to not participating in the
travel industry. I guess you're just in love with your
job so much that you don't have time to go
to theme parks or on cruises. But putting that aside,
I will say that twenty twenty two and twenty twenty
three were very interesting years in terms of the revenge spending,
(15:52):
the revenge travel, the narrative around twenty twenty four, and
this is what we've talked about in our outlook is
that the momentum will continue, but it will moderate, So
we're not going to see the same robust level spending,
but we will see certain bright spots that will continue.
I mean, the cruise lines have already been talking about.
(16:12):
Royal and Carnival have both said this at investor events
that they are seeing still very high booking levels, you know,
tremendous booking levels. Carnival I think is two thirds book
for twenty twenty four already, so there's still this appetite,
particularly for certain parts of the leisure sector.
Speaker 1 (16:35):
So I guess there is still demand. But in terms
of what the market's already done, I mean, it's done
a lot, so we're kind of seeing that it just
cannot be sustained. I mean, we're getting pretty close to
power on some of these bonds. So sure, there's only
so much more you can do. But so let's talk
about the cruise lines then, to start with, because you
mentioned those, they raised a ton of debt last year.
(16:58):
I guess they could issue more again this year. There's
an opportunity right now. They also have callable bones, you know,
they could refinance. What's the outlook for funding?
Speaker 3 (17:09):
So just to touch on your earlier point when it
comes to where the bonds are trading and how much
more room we have to run, I would say a
couple of points to that. You know, what we've been
saying for twenty twenty four is it is more of
a credit by credit conversation. Case in point, you're seeing
companies take much more drastic steps to keep their momentum going.
(17:29):
We like to compare the six Flags and Cedar Fair
merger with the Choice Hotels hostile acquisition attempt of Windom,
because those are two very different scenarios that will result
in different ways that the bonds react. You know, for
six Flags and Cedar Fair, they're going to be leveraging
(17:51):
with this deal, they're not taking on additional debt, and
they're trying to do it in a way that's credit favorable,
Whereas for Choice, they're willing to risk the balance sheet
in order to get bigger and to keep the momentum going. Now,
going back to cruise lines, what we're seeing is the
companies are still in their turnaround story. Definitely a little
(18:11):
bit behind some of their peers in leisure as it
relates to paying down their debt load getting their balance
sheet in order. They're still not you know, I would
say they're probably fifth inning or so of this. You know,
Carnival brought down their debt low below thirty one billion,
which is a tremendous feat considering it was over thirty
five billion at the start of the year, but there's
still a lot to go. That's not the balance sheet
(18:34):
they had before the pandemic. That's not what they would
like to have. All three companies we're talking Carnival, Royal
and Norwegian are trying to get to investment grades sometime
in the next few years, and they've all been pretty
aggressive in terms of debt refinancing as well as repayment,
and I think they're going to do a combination of
both this year, So.
Speaker 1 (18:53):
I'm more like to pay down debt row and raise
new debt.
Speaker 3 (18:56):
You think they'd like to net pay down debt. That said,
we've talked with management about this topic quite a bit,
particularly recently, and the companies have indicated that if rates
are in such a way that it's attractive for them
to refinance and push out debt, they will do that
(19:16):
as well. But their preferred method is to repay debt.
Speaker 1 (19:21):
And do you think it's feasible that they could get
to invest in grade in that timeframe that you mentioned
it by next year?
Speaker 3 (19:28):
We've run our models and we've looked at what you know,
the Moody's and SMP requirements are to be investment grade
and whether or not, you know, from an optimistic standpoint,
a more base case than a pessimistic standpoint, if they
could get there, and I don't think their expectations for
Royal it's twenty twenty five, for Carnival's twenty twenty six.
(19:49):
Norwegian has a little bit more vague investment grade like metrics.
They didn't specifically say investment grade, and they never were
investment grade before the pandemic. But for Royal and Carnival
twenty five twenty six. I believe is doable. It's just
a question of geopolitical risks, whether anything that could sort
(20:09):
of waylay these plans that they have to sort of
put a wrench in the activity that they're seeing.
Speaker 1 (20:16):
I just wanted to flip to gaming brief because you've
had a good piece out on casars and you cover
all of that set. But what I'm kind of most
interested in in that context is the China effect because
that has been really kind of huge in terms of,
you know, the gaming exposure to Macau, which is a
huge gambling center in Asia. What's the outlook generally for
gaming firms in yours that you cover.
Speaker 3 (20:39):
So gaming's a little bit more mixed. It's definitely more
of a company by company perspective. And I say that
in such a way that for the regional gaming companies,
the companies that have more regional United States gaming, it
might be a little bit more difficult depending on how
we go economically, depending on where we are with interest rates,
depending on where we are with inflation, depending on where
(21:01):
we are with jobs. Right, So a lot of the
narrative is what twenty twenty four could look like in
terms of if it's going to be a soft landing,
hard landing, you know what the Fed's going to do.
We've seen, especially yesterday, dubbish commentary, and so I think
that it's all going to play into the gaming sector,
particularly for the second half of twenty twenty four. For
the first half twenty twenty four, Vegas actually has a
(21:23):
lot of positive events going on. Case in point, the
super Bowl. They have a couple of premier events that
tack on to the second half of twenty twenty three
that will be positive from just a top line perspective
for these companies. Now, if you look at Macau and
you look overseas there, it's still in a turnaround phase,
(21:45):
but it's a much quicker sort of move upward than
what we've seen in Vegas because of China's restrictions in
terms of reopening that opened last January. So we're still
getting the benefit of those tailwinds. That will moderate over time,
I believe, but we are seeing that the companies there
are benefiting still from this appetite in Macau. Elsewhere internationally,
(22:10):
we're seeing you online gaming being a positive for these companies.
We're also seeing expansion into other areas such as the UAE,
and so I think there's a lot of interesting elements
going on. That said, it's not all credit positive, right,
So if you look at MGM, they are being very expansionary,
(22:30):
very much focused on boosting themselves and trying to balance
both shareholders and bondholders by pulling back in terms of
how much they're giving back to shareholders. But at the
end of the day, they have tremendous capex plans that
will sort of put a dent in their narrative around
being credit friendly. For Caesars, they're looking to repay debt, refinance,
(22:55):
get their balance sheet in order before they sort of
think of anything else beyond that.
Speaker 1 (23:00):
Credit participant. Is there a relative value opportunity there by
Caesars sell MGM or something like that.
Speaker 3 (23:06):
So we can't say buyseller hold, But we've been saying
that Caesar's bonds could tighten t MGM for a while,
and I think that that spread will continue to narrow.
Speaker 1 (23:18):
The other sector that I'm really interested in, and you know,
all the money I don't spend on casinos and cruises,
I spend on hotels and car rentals and airlines obviously
to go and see my family, but the hotels and
car rental firms. Are they still getting a boost from
this spending, this revenge spending holidaymakers, or is it now
coming from business travel? What's going on there.
Speaker 3 (23:41):
I think that business travel piece is where you're going
to see some of the tail tailwinds. We're going to
see conferences and business travel as the main sort of
propeller into twenty twenty four. Companies will probably have to
play around with their rates a little bit. Coming into
this last year, they could really command higher prices just
(24:03):
because there were so many customers who wanted to go places.
This year, it might be a little bit more of
that game of trying to identify where the actual demand is,
what the supply is, and sort of balancing those pieces.
But I think what's so interesting that we're going to
see over the next few years in the hotel space
is this amalgamation among the companies in terms of the
(24:23):
different levels. So you're talking about the different types of
class of hotel right the high end luxury to the economy,
and we're starting to see the Marriotts and the Hiltons
of the world really dipping their toe in the water
both domestically and internationally. As it relates to economy, extended stay,
and areas that they're less traditionally not in as they
(24:47):
are now. Now Hyatt is sort of going all in
on the all inclusive and more of the luxury element
as well as vertical integration as it relates to travels.
So that should continue for the rental car space, where
were a little bit more cautious on only because they
had such tremendous tailwinds due to the used car market
(25:10):
and due to the residual value of their fleets. Hurts
has really been going big into electric vehicles and not
really understanding what the you know, what the depreciation cost is,
what the aftermarket costs for the vehicles are, what the
sort of additional elements related to it for collision, et cetera.
And so I think that that's going to continue being
(25:30):
a dent on them despite the top line element of
it doing well right moment, They're still going to be
demand for rental cars. It's more of how they manage
their business through this sort of changing environment.
Speaker 1 (25:45):
Well, they stop charging me so much a heath reful.
Speaker 3 (25:50):
I can't promise anything on that. Yeah, the prices have
definitely shot up, and it doesn't help when you're looking
at the cars that are are not your EV friendly cars,
and they charge you the emissions costs and whatever other
costs related to your traditional sort of cars.
Speaker 1 (26:08):
And on the hotel expansion and sort of you know
them sort of spreading their wings a bit. Do they
need to borrow a lot of money to do that?
Speaker 3 (26:18):
So for Hilton and hy I mean sorry for Hilton
and Marriott, they're not so much borrowing money for the
expansion per se, but they are helping out the hotel
owners where they can. Case in point, last March, when
we had the issue with regional banks, or sort of
the worries about regional banks, there was a lot of
(26:39):
discussion about how the hotels could expand if say, for instance,
the hotel owners had issues getting financing, and a bunch
of the hotel companies you know, including some of the
you know large and smaller ones, even you know Windham
for example, have remarked to that they are willing to
(27:03):
help out where they can from a financing standpoint to
get these new facilities opening, because you know, once they open,
they sort of run themselves and the company's benefit because
they're mostly managers now they aren't actual owners, so they
don't have a lot of the capex costs, they don't
have a lot of the overhead costs the way that
(27:24):
you see companies that own and run properties do.
Speaker 2 (27:28):
Got it.
Speaker 1 (27:29):
So not a ton of new issuance then from those companies.
Speaker 3 (27:32):
Well, it doesn't mean that we won't see new issuance.
I think we'll still see new issuance. I mean, you
take Marriott for example, they have very much a lather,
rinse repeat model in that they have debt coming do,
they refinance it and they push it out right, That's
what they do over and over again. They also, you know,
one of the things that Marriotte did was they pushed
to get their ratings back to mid triple B level.
(27:53):
And it wasn't just because they wanted to have the
ratings that they had pre pandemic. It was that they
are an active participant in the commercial paper market and
they very much showed earlier this year when they borrowed
quite a substantial bound was over a billion. I'm actually
blanking down an exact figure at the moment, but they
you know, they are an active user of the commercial
(28:14):
paper market just to fill in gaps, but then they'll
go and replace it with longer term financing when they do,
or they'll repay it with cash on hand. But that said,
I mean they see the debt markets as an area
to always go to, and I think you'll see that
with Hilton. You know, Hilton is less cares about their
balance sheet than Marriott. They are high yield rated and
I think they'll stay there unless they actively commit verbally
(28:37):
to being investment grade. But you know, they are an
active issuer as well, and I think we'll continue to
see that that the hotel companies will come to market.
Getting back to actually the cruise lines, something that we've
said is that for Royal Caribbean, for example, they were
also an active participant in the commercial paper market before
(28:59):
the pan if that gives you any indication of what
they'd like to achieve.
Speaker 1 (29:06):
So to sum up the set to you cover at
the start, we talked about, you know, massive performance, really
great performance last year. We expect it to do well,
but not maybe as well as it did in twenty
twenty three. But what are you most excited about for
this year, Jody? And on the flip side, what are
you most worried about? What gives you the most sleepless nights?
Speaker 3 (29:27):
What doesn't give me sleepless nights. As a credit analyst,
you're always looking for the boogieman over your shoulder, and
I definitely do feel a little uncomfortable about being constructive
on the cruise lines. But at the same time, I
think the momentum is there. It's really a question of
are these caveats of geopolitical risks, for example, going to
waylay their plans. But overall, I think that that's an
(29:48):
area that you'll continue to see the de leveraging and
the benefit of that for the bonds. That said, for
rental car companies, I think yeah, I think this adjustment
from the sort of really robust levels of IBADAD that
we saw in twenty twenty two, how that then translates
(30:10):
to twenty twenty four when we have a very different environment.
You know, we're despite the fact that I think you'll
see the activity that will feed into revenue, I don't
know if you'll never necessarily see that from a margins
and cashulow perspective.
Speaker 1 (30:24):
Thank you very much, Jody Lewie of Bloomberg Intelligence. You
can read all of her great analysis on the Bloomberg terminal.
Do check it out, and I hope to see you
back on the show soon.
Speaker 2 (30:31):
Jody.
Speaker 1 (30:32):
Cheers, have a good one and thank us again to
Neil Kellenan with Bloomberg News in London. Read all of
his 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, or email me directly at Jacroumbi eight at
Bloomberg dot net. That's j c r Mbi E as
in my surname and the number eight at Bloomberg dot net.
(30:55):
I'm James Crombie. It's been a pleasure having you join
us again next week on the Credit e
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