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Why It's Time to Sell High Yield · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
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  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Well
• 0:32
  Speaker 1: high yelled bonds has been an area that a lot
• 0:34
  Speaker 1: of investors have been hating for years, and yet it
• 0:37
  Speaker 1: has continued to deliver, with almost an eight gain last
• 0:42
  Speaker 1: year and on pace for a three point nine increase
• 0:45
  Speaker 1: just year to date. We're not even halfway through the year.
• 0:47
  Speaker 1: But now we have Peter Sheer, head of macro strategy
• 0:50
  Speaker 1: at Breen Capital, saying that it is important to start
• 0:52
  Speaker 1: being cautious on high yields, and I want to bring
• 0:54
  Speaker 1: them on to get a sense of why. Peter, thank
• 0:57
  Speaker 1: you so much for joining us. So at this time
• 0:59
  Speaker 1: when you don't have defaults picking up materially and you
• 1:02
  Speaker 1: don't necessarily see a recession within the next six month
• 1:05
  Speaker 1: horizon according to most forecasts, why is now a good
• 1:09
  Speaker 1: time to start getting barished on high yield You know?
• 1:11
  Speaker 1: I think there's two overriding themes. One is that spreads
• 1:15
  Speaker 1: are very tight, So credit spreads a contracted a lot,
• 1:18
  Speaker 1: you know, on the back of last year's rally and
• 1:19
  Speaker 1: what we've had so far this year, and overall yields
• 1:22
  Speaker 1: are pretty low given where treasuries are, so a lot
• 1:24
  Speaker 1: of these indices and index based products are kind of
• 1:27
  Speaker 1: giving you five and a half maybe six percent yields,
• 1:29
  Speaker 1: which is a little bit low for the risk. And
• 1:31
  Speaker 1: then the other big factor for me really is that
• 1:33
  Speaker 1: oil had been such a tale wind in the past year.
• 1:37
  Speaker 1: It had been very helpful to the whole industry and
• 1:39
  Speaker 1: story to the whole high yield portfolio. Right now, I
• 1:42
  Speaker 1: think oils, you know, stalled out. Peach here can we
• 1:46
  Speaker 1: read anything into this because spreads were below four in
• 1:50
  Speaker 1: mid two thousand seven, we know what happened then, and
• 1:53
  Speaker 1: then there was a decline in the high yield market,
• 1:57
  Speaker 1: and then spreads also were below in and after that
• 2:03
  Speaker 1: what happened drop in high yield is this said harbature
• 2:09
  Speaker 1: of things to come. I don't know that we'll see
• 2:11
  Speaker 1: that sort of drop, but I do think it is
• 2:13
  Speaker 1: a warning sign that the risk reward is now skewed
• 2:16
  Speaker 1: to the downside. People have to remember that how yield
• 2:18
  Speaker 1: does tend to when it sells off, it tends to
• 2:20
  Speaker 1: sell off fairly quickly and fairly aggressively. Two other little
• 2:24
  Speaker 1: warning signs that strike me as I look at some
• 2:27
  Speaker 1: of the high yield ets they have as much as
• 2:30
  Speaker 1: of their portfolio is technology and communications. If you go
• 2:35
  Speaker 1: back to right before the energy problems hit, energy sector
• 2:39
  Speaker 1: had to become a big part of these portfolios because
• 2:42
  Speaker 1: all these industries, they basically are based on the amount
• 2:45
  Speaker 1: of debt outstanding. So companies that need money tend to,
• 2:48
  Speaker 1: you know, issue a lot of debt become big parts
• 2:51
  Speaker 1: of these indusseries, and then they become very problematic if
• 2:54
  Speaker 1: that sector runs into a hiccup at all. So you're
• 2:56
  Speaker 1: talking about Sprint, for example, on the telecommunication side, and
• 3:01
  Speaker 1: then on the technology side, I mean, dell Is is
• 3:03
  Speaker 1: obviously the big example, and they're going to be selling
• 3:06
  Speaker 1: more debt to finance their l BO. So, UH, do
• 3:09
  Speaker 1: you think that we're going to see weakness in the
• 3:11
  Speaker 1: tech and the UH and the telecommunications areas in the
• 3:16
  Speaker 1: near term Because this has been a big question for
• 3:18
  Speaker 1: a lot of people because of what you're saying the
• 3:20
  Speaker 1: concentration in the index. And I'm not sure that we
• 3:22
  Speaker 1: will see weakness, but what I am fairly confident if
• 3:25
  Speaker 1: we see any weakness, it will be more than you
• 3:27
  Speaker 1: would expect otherwise, because the technicals will take over. Anytime
• 3:30
  Speaker 1: you get these big sectors have weakness, people are forced
• 3:34
  Speaker 1: to reduce exposure, and everyone already owns so much of
• 3:36
  Speaker 1: that it tends to, you know, create a clearing price
• 3:39
  Speaker 1: much lower than you would expect. So I think that's
• 3:41
  Speaker 1: why we're very susceptible to a larger sell off. And
• 3:44
  Speaker 1: it is a reason too. I think I would really
• 3:46
  Speaker 1: look to finding good managers that you like. You know,
• 3:50
  Speaker 1: there's a whole debate passive versus active, I think right
• 3:52
  Speaker 1: now in the high yield space in particular, you want
• 3:55
  Speaker 1: to find a good active manager. Are you seeing money
• 3:57
  Speaker 1: flow more to active managers as a result or P
• 4:00
  Speaker 1: or investors sort of ignoring the tile is showing that
• 4:03
  Speaker 1: that perhaps an active manager uh, And frankly, in high
• 4:06
  Speaker 1: yield I think they have outperformed UH passive pretty consistently,
• 4:10
  Speaker 1: particularly in hig yield bonds. Yeah, and I think that's
• 4:12
  Speaker 1: going to be an area that how yield the active
• 4:15
  Speaker 1: did suffer with this whole kind of wards passive I
• 4:17
  Speaker 1: think is people take a closer look, they'll realize this
• 4:19
  Speaker 1: is a sector where credit expertise, building the right portfolio,
• 4:22
  Speaker 1: finding the right bonds, being able to participate in the
• 4:25
  Speaker 1: new issues can offer a lot of values. So I
• 4:27
  Speaker 1: think the active you know, if we're gonna draw a
• 4:29
  Speaker 1: line in the stand where actives can be passes, maybe
• 4:32
  Speaker 1: it's the high yield and that message has to get
• 4:33
  Speaker 1: out there a little bit. So with respect to you
• 4:35
  Speaker 1: sort of barish view on high yield saying that there's
• 4:38
  Speaker 1: more downside than upside. Right now, what's the best way
• 4:41
  Speaker 1: to play that? Do you recommend that people try to
• 4:43
  Speaker 1: short this debt because it's notoriously very difficult to short. Yeah,
• 4:47
  Speaker 1: I think it's very difficult to short. I would say
• 4:49
  Speaker 1: probably the best way to play it right now is
• 4:51
  Speaker 1: if you can do it by some maybe puts on
• 4:53
  Speaker 1: some of the e t F So there's j n
• 4:55
  Speaker 1: K and h y G, which are two very large
• 4:57
  Speaker 1: and liquid etf that have pretty deep options more market
• 5:00
  Speaker 1: so that would probably be the easiest way to play it.
• 5:03
  Speaker 1: Beyond that, you know you could short, you I would
• 5:05
  Speaker 1: not recommend shorting individual issues. I think that's just too hard.
• 5:09
  Speaker 1: He Is there a way for an investor to get
• 5:12
  Speaker 1: this kind of yield without taking this kind of risk?
• 5:16
  Speaker 1: Who That's a tricky question. I think there are some
• 5:20
  Speaker 1: other areas people have been very successful. We've had, you
• 5:22
  Speaker 1: know best successful looking at the closed end fund arena.
• 5:26
  Speaker 1: I also still like leverage loans, where that's the loan
• 5:30
  Speaker 1: equivalent of the high yeld bond market, but it's senior
• 5:32
  Speaker 1: secured in this floating rate. So I'm more comfortable in
• 5:35
  Speaker 1: that space because I don't think it's going to have
• 5:36
  Speaker 1: quite the volatility the high yeld bond market, so you
• 5:38
  Speaker 1: give up a little bit of yield, but I think
• 5:41
  Speaker 1: that risk reward characteristic is much more in your favorite
• 5:44
  Speaker 1: to be in the leverage loan space rather than the
• 5:45
  Speaker 1: bond space, right even even with author of pricing, because
• 5:48
  Speaker 1: basically what happens when people are flooding into into the
• 5:50
  Speaker 1: leverage loan market is that the borrowers can go back
• 5:53
  Speaker 1: to the investors and say, you know what, we can
• 5:55
  Speaker 1: get this loan for a better deal, so we're gonna
• 5:57
  Speaker 1: cut the rate that we're gonna pay you, and they're
• 5:58
  Speaker 1: doing that at a record pace. Doesn't that sort of
• 6:00
  Speaker 1: create a downside. Well, that's the thing, it doesn't really
• 6:03
  Speaker 1: create a downside. I mean your income will be less.
• 6:06
  Speaker 1: So to me though high yield, the bond side has
• 6:09
  Speaker 1: much more upside typically than the loans, and right now
• 6:12
  Speaker 1: I don't see that upside for the bond market. So
• 6:14
  Speaker 1: you're not giving up as much, right because a lot
• 6:16
  Speaker 1: of the bonds not only do they have fairly low yields,
• 6:19
  Speaker 1: a good portion of these industries are now yield the calls,
• 6:21
  Speaker 1: so they're say, trading at a one eighteen dollar price
• 6:24
  Speaker 1: and are callable at one oh eight in two years.
• 6:26
  Speaker 1: So there's no upside in the bonds either. So that's
• 6:28
  Speaker 1: happening through time as those bonds become callable. So I
• 6:31
  Speaker 1: think that differential is less. I would agree. You know,
• 6:34
  Speaker 1: if you get a bit of a sell off, then
• 6:36
  Speaker 1: you're gonna want to high yield bonds and avoid that
• 6:38
  Speaker 1: repricing risk. Peter, are there investors or even professionals that
• 6:43
  Speaker 1: have gotten into the high yield business that shouldn't be
• 6:46
  Speaker 1: there and will be washed out when or if there's
• 6:50
  Speaker 1: a decline? You know, I'm not sure about that, but
• 6:54
  Speaker 1: I do think this whole friend towards index investing doesn't
• 6:59
  Speaker 1: work quite as well in the credit space or the
• 7:01
  Speaker 1: fixed income space, because there really does tend to be
• 7:04
  Speaker 1: a longer term disconnect. The companies that issue debt are
• 7:07
  Speaker 1: the ones that become dominant in these indices over time.
• 7:10
  Speaker 1: They tend to be not the companies that you want
• 7:12
  Speaker 1: to own the most of. So that's the big disconnect.
• 7:15
  Speaker 1: So I think in the fixed income space and the
• 7:17
  Speaker 1: credit space and some of these ets, we should see
• 7:20
  Speaker 1: a slowdown in et F and people look to managers
• 7:22
  Speaker 1: and look to building their own portfolios. Even Peter, this
• 7:25
  Speaker 1: is such a tough time. Imagine that when you talk
• 7:27
  Speaker 1: to investment managers, they say to you, you know this
• 7:29
  Speaker 1: is this is a boring market. I mean, we just
• 7:31
  Speaker 1: don't see a big catastrophe on the horizon, and nothing
• 7:34
  Speaker 1: looks that great either. Are people just like angsting to
• 7:37
  Speaker 1: you these days? Yeah? I think the industry of the
• 7:40
  Speaker 1: whole seems every it's frustrated, right, it's we've been churning.
• 7:44
  Speaker 1: I guess, for lack of a better word, we go
• 7:46
  Speaker 1: up a little bit, we go down a little bit.
• 7:47
  Speaker 1: There's been no clear trend. What seems to work one
• 7:50
  Speaker 1: day gets banged up by Washington the next day. It's
• 7:54
  Speaker 1: been a very tough and frustrating market. The strategies that
• 7:57
  Speaker 1: I believe are winning are doing well. Are people who
• 7:59
  Speaker 1: have moved to far less liquid bond given up some
• 8:03
  Speaker 1: liquidity maybe into more structured debt. But the bomb there
• 8:07
  Speaker 1: is they're making it through yield and his excess, you know,
• 8:10
  Speaker 1: interest margin that just takes a long time to show
• 8:13
  Speaker 1: up in the numbers. It's not like you buy a
• 8:14
  Speaker 1: bond and stuff eight points and you know everyone's high
• 8:16
  Speaker 1: five in each other. It's the steady grind and not
• 8:19
  Speaker 1: making mistakes. That's what we look for you to do.
• 8:22
  Speaker 1: Help us navigate those potential mistakes. Thanks very much, Peter Cheer,
• 8:26
  Speaker 1: head of macro strategy at Breen Capital. You can follow
• 8:30
  Speaker 1: him on Twitter at t F m k T s Now, however,
• 8:48
  Speaker 1: we want to get an update on what is going
• 8:50
  Speaker 1: on with auto sales and how the sales have been
• 8:53
  Speaker 1: slowing and used car resell values have been declining. How
• 8:56
  Speaker 1: long will this continue? Jamie Butters has that for us.
• 8:59
  Speaker 1: He's UUs autos reporter for Bloomberg News and he comes
• 9:03
  Speaker 1: to us from Detroit. So Jamie, you know, can we
• 9:06
  Speaker 1: just take a look, take scope of what's happened so far,
• 9:09
  Speaker 1: how much uh, you know, car sales have declined, and
• 9:12
  Speaker 1: how much more car executives think that they will continue
• 9:16
  Speaker 1: to decline. But you know, that's the that's the billion
• 9:19
  Speaker 1: dollar question, Lisa. You know, sales are down only about
• 9:22
  Speaker 1: you know, one and a half percent so far this year,
• 9:24
  Speaker 1: and they might follow by you know, out of a
• 9:27
  Speaker 1: seventeen and a half million market by two or three
• 9:29
  Speaker 1: hundred thousand for the year, which is all pretty manageable.
• 9:33
  Speaker 1: But the big, the big question, the big issue hanging
• 9:35
  Speaker 1: out you know, two or three years down the road
• 9:37
  Speaker 1: is is this, uh we can do a lot of
• 9:40
  Speaker 1: people are hoping and predicting that this is a plateaus
• 9:43
  Speaker 1: sales will say, around seventeen million, uh, near the near
• 9:47
  Speaker 1: the all time records, uh, and just kind of scuffle
• 9:50
  Speaker 1: along there. But uh, some other folks are looking at
• 9:52
  Speaker 1: and saying, this is not an industry that plateaus, this
• 9:55
  Speaker 1: industry that booms and bus and is this really the
• 9:57
  Speaker 1: start of a traditional cyclical contraction that would take a
• 10:02
  Speaker 1: few million units out of the market. So that's kind
• 10:04
  Speaker 1: of really the thing to keep watching. And Jamie, can
• 10:07
  Speaker 1: I interest you in a fifty dollar minivan is a
• 10:11
  Speaker 1: lovely minivan that is a really nice car. Tell people
• 10:14
  Speaker 1: the story of this minivan, this Chrysler Pacific. I think
• 10:18
  Speaker 1: it's a very cool product when you get into it.
• 10:21
  Speaker 1: But what is going on with a fifty dollar minivan?
• 10:24
  Speaker 1: I mean, it's it's like a entertainment center on wheels.
• 10:27
  Speaker 1: I was. I was just so amazed I got the
• 10:29
  Speaker 1: chance to drive this car and I and I got
• 10:31
  Speaker 1: in and I was like, wow, you know, this is
• 10:32
  Speaker 1: this is really nice. I had heard about and I
• 10:35
  Speaker 1: had read about. How you know, it's so much better
• 10:37
  Speaker 1: made than all the previous Chrysler's, which you know, are
• 10:40
  Speaker 1: traditionally not the highest quality, really among the among the
• 10:43
  Speaker 1: lowest quality, uh, in all the big surveys. But this
• 10:46
  Speaker 1: is a really well made vehicle. It's got great materials.
• 10:50
  Speaker 1: And then you get in the back seat and their
• 10:52
  Speaker 1: twin touch screens. You can play multiple videos on them,
• 10:55
  Speaker 1: you can play video games against each other. The third
• 10:58
  Speaker 1: row seats reclined. There's the the built in vacuum cleaner.
• 11:01
  Speaker 1: I guess if you spill your hundred dollar cheerios or something. Uh.
• 11:05
  Speaker 1: And it is just it is not at all, not
• 11:07
  Speaker 1: at all a traditional you know, kind of family holler,
• 11:10
  Speaker 1: it's more like a more like a luxury vehicle. It
• 11:12
  Speaker 1: was just fantastic, But then I look and it was,
• 11:15
  Speaker 1: you know, forty nine for fifty before taxes or license
• 11:19
  Speaker 1: or any of that, and it is. It just kind
• 11:21
  Speaker 1: of blew my mind at how we really keep reaching
• 11:25
  Speaker 1: into new levels of luxury and higher prices, because that's
• 11:28
  Speaker 1: of course where the automakers make their money. The higher
• 11:31
  Speaker 1: price tickets, higher price items they can sell you, the
• 11:33
  Speaker 1: bigger the margins are well and are there people out
• 11:36
  Speaker 1: there who have a robust demand and appetite for a
• 11:41
  Speaker 1: fifty minivan? Well, we'll see. I mean, it's certainly worth exploring.
• 11:45
  Speaker 1: Right if you're a Fiat Chrysler and you invented that segment.
• 11:49
  Speaker 1: They still have a lower end minivan, the Dodge Caravan
• 11:52
  Speaker 1: is still on the market, and and the range of
• 11:54
  Speaker 1: the Pacific as uh, you know, starts in the high
• 11:57
  Speaker 1: twenties and then reaches up. So we'll see. You know,
• 11:59
  Speaker 1: they have had they've given a lot of thought to
• 12:01
  Speaker 1: many vans over the years. Up at Auburn Hills, where
• 12:04
  Speaker 1: Chrysler is based has long been based and uh, and
• 12:07
  Speaker 1: there have been some who believe that it's really going
• 12:09
  Speaker 1: to be the vehicle of retirement, you know, for boomers
• 12:12
  Speaker 1: who drove them when they were uh young and had
• 12:15
  Speaker 1: young families, that they might might be what they want
• 12:18
  Speaker 1: in retirement. Is it's easier ingress and easier to get
• 12:22
  Speaker 1: in and out of than than a big suv h
• 12:26
  Speaker 1: But we'll see it's certainly it's a it's an exciting offering.
• 12:29
  Speaker 1: Anyone else going down the same road. We'll see, you know,
• 12:33
  Speaker 1: we're gonna see a new minivan from Honda, I believe
• 12:37
  Speaker 1: later this year, and we'll see how how far upscale
• 12:40
  Speaker 1: they go. Honda is has has gotten higher prices traditionally
• 12:45
  Speaker 1: for their Odyssey minivan than Chrysler got for the town
• 12:48
  Speaker 1: and country that the PACIFICA replaces. Whether they try to
• 12:51
  Speaker 1: go this far up, it'll be really interested to watch
• 12:55
  Speaker 1: that what the high end is on the new Odyssey.
• 12:57
  Speaker 1: We'll go for a ride with you. Jamie Butters are
• 13:00
  Speaker 1: US Autos reporter joining us from our Detroit bureau, and
• 13:03
  Speaker 1: you can follow him on Twitter at mitten hawk. That's
• 13:08
  Speaker 1: m I double t e n Hawk. Jamie Butters, thank
• 13:11
  Speaker 1: you very much talking about fifty dollar Chrysler minivans. We
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  Speaker 1: more at Bloomberg dot com slash lens. Well, we'd like
• 14:05
  Speaker 1: to find out what's going on in Washington, d C.
• 14:07
  Speaker 1: And there's no one better than Eric Watson are a
• 14:10
  Speaker 1: congressional reporter for Bloomberg. Eric, thanks for being with us.
• 14:14
  Speaker 1: Where do you want to begin the spending bill that
• 14:16
  Speaker 1: gets rid of some of Donald Trump's favorite programs, or
• 14:20
  Speaker 1: should we look internally at the White House and what's
• 14:22
  Speaker 1: going on between cabinet officials and White House advisors. Where
• 14:26
  Speaker 1: do you want to go? Well, I want to talk
• 14:28
  Speaker 1: about the spending bill that released that was released at
• 14:30
  Speaker 1: to eighteen in the morning. This is a typical practice
• 14:33
  Speaker 1: for Congress to drop a trillion dollars spending bill in
• 14:36
  Speaker 1: the middle of the night when no one's looking. Uh.
• 14:38
  Speaker 1: This deal is a real winner for Congressional Democrats. President
• 14:42
  Speaker 1: Trump was looking to make about eighteen billion dollars and
• 14:45
  Speaker 1: cuts to the budget for the bill that will fund
• 14:48
  Speaker 1: the government through September. Those cuts are not being made.
• 14:51
  Speaker 1: He was also looking for border wall money to build
• 14:54
  Speaker 1: the wall on the border with Mexico. That's also not
• 14:58
  Speaker 1: happening in this bill. Uh. Democrats were basically able to
• 15:01
  Speaker 1: get Republican leaders to go along under the argument that
• 15:05
  Speaker 1: if the government were to shut down, which it would
• 15:07
  Speaker 1: on Friday evening without another spending bill, that Democrats would
• 15:11
  Speaker 1: be would not be the ones blamed. Instead would be
• 15:14
  Speaker 1: Trump and Republicans because they control Congress. Well, Eric, what
• 15:18
  Speaker 1: does this particular bill that got passed say about Republican
• 15:22
  Speaker 1: support for President Trump's agenda? Well, I should mention, first
• 15:25
  Speaker 1: of all, it's it's not been passed yet, it was
• 15:27
  Speaker 1: released in the middle of the night. It's probably going
• 15:28
  Speaker 1: to be voted on Wednesday, and it will probably be
• 15:31
  Speaker 1: a biparson vote with Democrats and and and most Republicans
• 15:35
  Speaker 1: going for it Altho'll be a number of fiscally conservative
• 15:38
  Speaker 1: Republicans who won't be able to support it because it
• 15:40
  Speaker 1: does not cut spending. I think it shows at this point,
• 15:44
  Speaker 1: at least on spending bills which require Democrats, Republicans don't
• 15:47
  Speaker 1: have a sixty vote uh filibuster proof majority in the Senate.
• 15:52
  Speaker 1: Trump doesn't have the upper hand that he might have
• 15:55
  Speaker 1: on on tax or or healthcare, where they can use
• 15:57
  Speaker 1: special budget procedures in order to sort of ram bills
• 16:00
  Speaker 1: through Congress without democratic support. You know, Eric, you started
• 16:04
  Speaker 1: off by saying that the budget was delivered at two
• 16:08
  Speaker 1: in the morning. What was it to eighteen? That's right,
• 16:10
  Speaker 1: all right? So is there any possibility that the actual system,
• 16:14
  Speaker 1: the machinery of government has broken down to the point
• 16:17
  Speaker 1: where people just shrugged their shoulders when the federal government
• 16:21
  Speaker 1: threatens to shut down. I think it's it is interesting
• 16:25
  Speaker 1: the way that these things are done. You know, we
• 16:27
  Speaker 1: have a democracy, yet bills are often rammed through before
• 16:30
  Speaker 1: people really have a chance to read it. I think
• 16:32
  Speaker 1: a lot of people will be voting on this bill
• 16:34
  Speaker 1: on Wednesday, and they'll have really very little idea of
• 16:37
  Speaker 1: what's in it. We all hear at Bloomberg. We have
• 16:39
  Speaker 1: very good team at Bloomberg. Government as well are combing
• 16:42
  Speaker 1: through all the texts of this and there's a lot
• 16:44
  Speaker 1: of hidden provisions. Uh there. There's benefits from everyone from
• 16:47
  Speaker 1: home builders to mining companies in here, you know. But
• 16:52
  Speaker 1: the way these things are released it does raise questions
• 16:54
  Speaker 1: about democracy, I have to say that well. And not
• 16:57
  Speaker 1: only that, but also it only extends the deadline and
• 17:00
  Speaker 1: for one, government would get shut down until September, right,
• 17:03
  Speaker 1: I mean, we're gonna be doing this all over again
• 17:04
  Speaker 1: in a couple of months, that's right. We are already
• 17:06
  Speaker 1: seven months into the current fiscal year. There couldn't be
• 17:09
  Speaker 1: any agreement. Actually it's spending Panel members tried to come
• 17:12
  Speaker 1: up with an agreement in December, but President Trump, when
• 17:15
  Speaker 1: he was coming in said he wanted to weigh in
• 17:18
  Speaker 1: in order to influence the bills. But what's really striking
• 17:21
  Speaker 1: about it is the lack of influence that the administration
• 17:24
  Speaker 1: has on these bills. It's very much similar to the
• 17:27
  Speaker 1: deal that was on the table in December. One notable exception, though,
• 17:30
  Speaker 1: is a fifteen billion dollar increased to the Pentagon. Trump
• 17:34
  Speaker 1: had sought a thirty billion dollar increase in Pentagon funding
• 17:38
  Speaker 1: and he's going to get about half that well, and
• 17:40
  Speaker 1: he will get about a billion dollars and a half
• 17:42
  Speaker 1: for border security, but it can't use to be used
• 17:45
  Speaker 1: for the border wall or additional ICE officials, immigration and
• 17:50
  Speaker 1: Customs enforcement agents, right, I mean, so in other words,
• 17:52
  Speaker 1: it's sort of he kind of got more support for
• 17:54
  Speaker 1: some of his law enforcement push, but not really to
• 17:58
  Speaker 1: exactly back his initiatives. Correct, that's right. I mean Democrats,
• 18:01
  Speaker 1: many Democrats have been on record saying they support you know,
• 18:04
  Speaker 1: increased border security, better you know, technology along the border,
• 18:08
  Speaker 1: upgrades to existing equipment. They do not want to be
• 18:11
  Speaker 1: seen backing Trump's call for a quote, deportation force. So
• 18:15
  Speaker 1: that's why they put a restriction in the in this
• 18:17
  Speaker 1: bill on hiring additional ICE agents. And they also do
• 18:20
  Speaker 1: not want to fund a coast to coast border wall,
• 18:23
  Speaker 1: which they view as an incredible waste of money, and
• 18:26
  Speaker 1: they say that it would actually cost about seventy billion
• 18:29
  Speaker 1: dollars if you went through and built that. I was
• 18:31
  Speaker 1: looking at the reports about this legislation. It's over sixteen
• 18:35
  Speaker 1: hundred pages. Correct, that's right. And that's just the text.
• 18:39
  Speaker 1: There's also what's called explanatory statements where they explain or
• 18:43
  Speaker 1: have other hidden provisions. So there's just a lot of
• 18:45
  Speaker 1: paper that was was dumped on us in the middle
• 18:47
  Speaker 1: of the night. Okay. The reason I bring that up
• 18:49
  Speaker 1: is because I mean, has do you believe anybody has
• 18:52
  Speaker 1: actually read all sixteen hundred and sixty five pages. I
• 18:56
  Speaker 1: don't think there's one person I know there's Uh. The
• 18:58
  Speaker 1: way they do is they have teams of staff re
• 19:00
  Speaker 1: being through but that's that's broken up into eleven different subcommittees.
• 19:04
  Speaker 1: So yeah, as to whether the chairman or anyone who's
• 19:06
  Speaker 1: actually read the whole thing, I would tend to doubt it.
• 19:09
  Speaker 1: So Eric, is the fact that the House and Senate
• 19:12
  Speaker 1: Democrats and Republicans came to this agreement in itself representative
• 19:16
  Speaker 1: of actually somewhat of a truce between both members of
• 19:20
  Speaker 1: the different parties, I think so. I think it also.
• 19:23
  Speaker 1: You know, the Trump has for for the next budget,
• 19:25
  Speaker 1: the one that begins in September, called for very big changes,
• 19:29
  Speaker 1: called for fifty four billion dollars and cuts to federal agencies,
• 19:32
  Speaker 1: and already is having places like the Environmental Protection Agency
• 19:36
  Speaker 1: and State Department prepare for a massive reductions in the
• 19:40
  Speaker 1: federal workforce. I think it shows that Congress has very
• 19:43
  Speaker 1: little appetite for that, and and those who work for
• 19:46
  Speaker 1: the federal government may rest a little bit easier tonight
• 19:49
  Speaker 1: that their jobs are more likely to be secure. Eric Wasson,
• 19:52
  Speaker 1: thank you so much for joining us. Eric Watson as
• 19:54
  Speaker 1: Congressional reporter for Bloomberg News based in Washington, d C.
• 19:58
  Speaker 1: Talking about the one point one trillion dollar are spending
• 20:00
  Speaker 1: bill that will likely be passed this week to stave
• 20:03
  Speaker 1: off a government shutdown. Definitely something we will keep you
• 20:06
  Speaker 1: up to date as we hear more details. Let's turn
• 20:21
  Speaker 1: to a potential media deal I want to bring in
• 20:24
  Speaker 1: Paul Swiney. Paul, of course, is our chief director of Research.
• 20:29
  Speaker 1: I guess us director of Research, a senior media Internet
• 20:32
  Speaker 1: analyst for Bloomberg Intelligence. He wears a couple of different
• 20:35
  Speaker 1: hats in that role. Great to have you, as always, Paul, Um,
• 20:39
  Speaker 1: what is this deal or not deal going to look like? Fox?
• 20:43
  Speaker 1: Century Fox maybe buying or teaming up with black Stone
• 20:48
  Speaker 1: Stephen Schwartzman's Blackstone in order to what purchased some TV
• 20:51
  Speaker 1: stations from Tribune even more, that's right, that's right true
• 20:55
  Speaker 1: Tribune as as a large TV station group owner, and
• 20:57
  Speaker 1: they've been you know, rumored to be for sale. Um,
• 21:00
  Speaker 1: I guess it. Really over the last several weeks, Sinclair
• 21:03
  Speaker 1: Broadcast Group, which is the largest owner of TV stations
• 21:06
  Speaker 1: in the US, has been widely reported to be talking
• 21:09
  Speaker 1: to them and trying to get a deal done maybe
• 21:10
  Speaker 1: in the high thirty dollars per share range that would
• 21:14
  Speaker 1: create an even bigger TV station group. And and just
• 21:17
  Speaker 1: most just over the last day or so, I think
• 21:19
  Speaker 1: Fox g maybe not so fast. Maybe we want to
• 21:21
  Speaker 1: take a look at these Tribune stations. And and I
• 21:24
  Speaker 1: think they were also looking for a financial partner to
• 21:26
  Speaker 1: come in and help them finance it and create maybe
• 21:29
  Speaker 1: a separate, standalone broadcasting company consisting of Fox stations, which
• 21:33
  Speaker 1: they own a lot of the big Fox affiliates in
• 21:35
  Speaker 1: the New York, l A, Chicago, the big markets, uh,
• 21:38
  Speaker 1: and combine that with the Tribune stations across the country.
• 21:40
  Speaker 1: So Blackstone is the one that supposedly is talking with
• 21:44
  Speaker 1: twenty one century Fox to make this bid four Tribune. Um.
• 21:47
  Speaker 1: And it sort of came as a surprise to me
• 21:49
  Speaker 1: that Blackstone is teaming up with twenty century Fox. I mean,
• 21:52
  Speaker 1: do they have a history of doing deals together Uh no,
• 21:55
  Speaker 1: they don't, per se. But the private equity business um
• 21:59
  Speaker 1: has has been a big fan of the broadcasting business
• 22:01
  Speaker 1: for decades, you have, believe it or not. The radio
• 22:04
  Speaker 1: and TV business, while it's not the fastest growing, sexiest
• 22:07
  Speaker 1: business in the world, it produces tremendous cash flow and
• 22:10
  Speaker 1: tremendous free cash flow which then of course can support
• 22:13
  Speaker 1: debt which drive equity returns. So we've seen TV stations, uh,
• 22:17
  Speaker 1: you know, being swapped in and out by the private
• 22:20
  Speaker 1: equity sector for really thirty or forty years. And so
• 22:23
  Speaker 1: this is another example of I think, uh, you know,
• 22:26
  Speaker 1: prop probably you know, the Blackstone folks coming in and
• 22:29
  Speaker 1: teaming up with obviously the great strategic partner in Century
• 22:32
  Speaker 1: Fox to invest money in the sector. So before we
• 22:35
  Speaker 1: get to what the potential gain would be for Century Fox,
• 22:39
  Speaker 1: I have to ask does Tribune have a lot of
• 22:41
  Speaker 1: debt and how much could they potentially add with this
• 22:44
  Speaker 1: partnership with Blackstone and Century Fox. So so the broadcasting
• 22:49
  Speaker 1: industry in general can support very high levels of debt,
• 22:51
  Speaker 1: you know, four or five times net debt the IBADA,
• 22:54
  Speaker 1: which is very good if you're private equity player. Tribune
• 22:57
  Speaker 1: does have some debt and even twenty or Century Fox
• 23:00
  Speaker 1: has some debt and they're also Century Fox is also
• 23:03
  Speaker 1: trying to close on a multibillion dollar acquisition of Sky
• 23:07
  Speaker 1: in the UK, so they're trying to keep their powder
• 23:09
  Speaker 1: dry a little bit there. So I think twenty one
• 23:11
  Speaker 1: Century Fox said, listen, we could go out and by Tribune.
• 23:14
  Speaker 1: It's only about a four billion dollar transaction value, but
• 23:17
  Speaker 1: there's a lot of debt that would be that we'd
• 23:19
  Speaker 1: have to assume, and that would, you know, constrain us
• 23:21
  Speaker 1: a little bit, uh in some of the other things
• 23:23
  Speaker 1: we want to do globally. So let's bring in a
• 23:25
  Speaker 1: financial partner in terms of black Stone. Uh. They love
• 23:27
  Speaker 1: the business, they understand the business, and we can then
• 23:30
  Speaker 1: you know, we will contribute our TV stations and black
• 23:33
  Speaker 1: Stone will contribute to cash, and that'll be a nice,
• 23:36
  Speaker 1: well capitalized company consisting of really a lot of big
• 23:39
  Speaker 1: Fox affiliates, uh, and some other stations around the country.
• 23:44
  Speaker 1: I want to understand that there's one radio station, correct
• 23:47
  Speaker 1: w g N, that's the big station that that is
• 23:50
  Speaker 1: currently owned by Tribune, and then there are forty three
• 23:54
  Speaker 1: additional television stations that are also up for grabs. Other
• 23:58
  Speaker 1: regulatory hurdles that twenty for Century Fox would have to
• 24:02
  Speaker 1: jump over. Yes, and and and what's driving this M
• 24:05
  Speaker 1: and A consolidation is we are, in fact getting a
• 24:08
  Speaker 1: lot of deregulation under the Donald Trump f CC. I
• 24:11
  Speaker 1: was just at in Las Vegas last week at the
• 24:13
  Speaker 1: National Association of Broadcasters conference, and the dominant discussion point
• 24:17
  Speaker 1: was M and A and consolidation. Uh. We've already seen
• 24:21
  Speaker 1: the FCC just in the last several weeks rollbacks some
• 24:24
  Speaker 1: ownership restrictions on the television industry. Uh, most investors feel
• 24:28
  Speaker 1: like we're going to get even more deregulatory moves coming
• 24:31
  Speaker 1: out of this FCC. If in fact we do that,
• 24:34
  Speaker 1: could then you know, help some of these deals get done.
• 24:36
  Speaker 1: Most notably twenty one Century Fox will need some more
• 24:39
  Speaker 1: deregulation than than what's already been ad been announced to
• 24:42
  Speaker 1: get this deal done. So Centric Foxes shares are down
• 24:46
  Speaker 1: almost per cent. I'm just wondering, what's the benefit here
• 24:49
  Speaker 1: for for that company? UM. I think the benefit for
• 24:52
  Speaker 1: Century Foxes there's probably a little bit of a balance
• 24:54
  Speaker 1: sheet uh improvement proformer for this deal by bringing in Blackstone.
• 24:59
  Speaker 1: But I think if you're any first Century Fox, you
• 25:01
  Speaker 1: really think of yourself as a global content player with
• 25:04
  Speaker 1: the movie studio and cable networks, and and you know
• 25:07
  Speaker 1: those are maybe faster growing, a little bit more sexier
• 25:10
  Speaker 1: businesses content in the digital world. Maybe the ownership of
• 25:14
  Speaker 1: local television affiliates around the United States isn't necessarily core
• 25:17
  Speaker 1: to your business. It's certainly core to your Fox network
• 25:20
  Speaker 1: in the United States, but maybe you don't need to
• 25:22
  Speaker 1: have full ownership of those stations. So I think it's
• 25:25
  Speaker 1: a little bit of strategic move on the part of
• 25:27
  Speaker 1: Fox to focus more on their faster growing global businesses,
• 25:30
  Speaker 1: including this pending deal for Sky in the UK. Uh.
• 25:35
  Speaker 1: And then it's also a way to for them to
• 25:36
  Speaker 1: give them some financial flexibility with their balance sheet. Just
• 25:39
  Speaker 1: comparing Fox to the other broadcasters, whether it's CBS or Comcast,
• 25:45
  Speaker 1: who's in the best position right now? Well, CBS is
• 25:47
  Speaker 1: is interesting. CBS really is a pure play US broadcasting company.
• 25:52
  Speaker 1: They own the CBS network, they owned Showtime, UH, they
• 25:55
  Speaker 1: own their big affiliates. They've pretty much gotten out of
• 25:58
  Speaker 1: a lot of their other businesses, including right now they're
• 26:01
  Speaker 1: trying to uh emerge their radio business with Intercom, So
• 26:04
  Speaker 1: they're really going to focus on their US broadcast and
• 26:08
  Speaker 1: premium channel, and they've their stock has done really well
• 26:11
  Speaker 1: over the last four or five years as Les Moonves
• 26:13
  Speaker 1: has been able to drive higher ratings at his broadcast
• 26:16
  Speaker 1: network and higher revenue from advertising and from retransmission fees.
• 26:20
  Speaker 1: Real quick, you think the sale is gonna get done
• 26:21
  Speaker 1: with twenty century Fox and Blackstone. I don't know there's
• 26:24
  Speaker 1: a big competitor out there that once this company and
• 26:26
  Speaker 1: that Sinclair Broadcast Group, but I think this Fox Blackstone
• 26:29
  Speaker 1: group is really the group to beat. Paul Sweeney, thank
• 26:32
  Speaker 1: you so much for joining us. Really an interesting development
• 26:34
  Speaker 1: and I'm sure there will be more consolidation to come,
• 26:37
  Speaker 1: as Paul was saying, because some of the regulation by
• 26:39
  Speaker 1: the FCC has been ruling back. Paul Sweeney as US
• 26:43
  Speaker 1: director of Research and senior Media and Internet Analyst for
• 26:46
  Speaker 1: Bloomberg Intelligence, and he is here with us in our
• 26:49
  Speaker 1: Bloomberg eleven three oh studio. Thanks for listening to the
• 26:55
  Speaker 1: Bloomberg P and L podcast. You can subscribe and listen
• 26:58
  Speaker 1: to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform
• 27:02
  Speaker 1: you prefer. I'm Pim Fox. I'm on Twitter at pim Fox.
• 27:07
  Speaker 1: I'm on Twitter at Lisa abramowits one before the podcast.
• 27:10
  Speaker 1: You can always catch us worldwide on Bloomberg Radio