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tv   Bloomberg Real Yield  Bloomberg  December 29, 2019 5:30am-6:00am EST

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lisa: i'm lisa abramowicz. welcome to bloomberg "money undercover" the show that provides valuable insights into alternative investments. we take you inside the world of private debt, equity, and real estate. let's get straight to the burning issues in private markets, regulating private equity. the sec looking to democratize private markets to open up exclusive corners of risk and return. plus, one of the leading voices on credit deals, bill brady, breaks down this year's stress in debt. and we take a look at how some investors are earning 6000% returns by flipping sneakers.
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let's get straight into some of these burning issues. with me, bloomberg's allison, lisa, and jason kelly. let's start with allison. investors have debated about how to invest in this year's piling debt, given the u.s. economy is ok. let's hear what marathon's bruce richards had to say. bruce: we are starting to see a negative quarter, this past quarter of earnings growth being negative, and i think we will see a couple more quarters of that in the early part of 2020. and when earnings go down, that is going to be a very key point for some of these companies that are so over levered when they have lower earnings and meanwhile, have to service this heavy load of debt. lisa: you have been covering the distress we have been seeing. talk about how much there has been so far this year. >> so in november, we saw the supply distress debt hit $126 million, the most since august 2016.
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and really, the highest of this cycle. historically speaking, that is really not that much in the grand scheme of things compared to say the financial crisis or even the height of the oil crisis. it sort of shows you we are cutting back up to that high, but there is still a lot out there. lisa: what is interesting to me is that in 2016, you had oil prices tanking, and a lot of that stress was in the energy patch. this year, even though prices did not go down that much, what went so wrong, and for whom? >> yes. so what we really saw this year was a lot of idiosyncratic, or company specific situations. we have had oil prices stabilize in the $50 range. but for many companies, particularly those with very high debt loads and are very highly leveraged, that is not enough to keep going. we have seen them run into covenant issues, maturities, and also creditors who are just tired of giving them more time.
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lisa: meanwhile, some of these big, private debt companies are increasingly taking over for wall street. lisa, how are the likes of apollo and blackstone plowing into wall street's domain? >> they have been in lending for quite a while now, but what has changed is there has just been a flood of cash into direct lending. so there are bigger pools of capital, and really eating into the markets, syndicated markets. lisa: all right, how is that eating into wall street's underwriting business with leveraged loans? >> well, they are doing deals the size of $1.8 billion, $1.6 billion, deals that could've gone to the syndicated loan market. in war barclays, goldman sachs, others that may have a range to sell to institutional investors. direct lenders are just taking those deals away at the moment. murray lisa: how much could they -- lisa: how much could they how end up taking away from public markets, some of these wrong apollos and blackstones of the world?
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what we are seeing a real -- lisa: we are seeing a real emergence of a new asset class. apollo suggests as much as 10% of the high-yield loan and debt market could go private in the next five years. that is a huge amount. lisa: yeah and it brings up questions about the risk that is embedded when you have more of this business moving to private firms that focus on private debt, which brings me to jason. and as we talk about risk, regulators are focusing in on private markets, but figuring out ways to open them, not necessarily close them down or shut down risk. how is the sec trying to democratize private risk in equity? jason: it's a great question, and here in washington, lisa, they are looking at ways to make the pool at least a little bit bigger. this is the holy grail of sorts for the big private capital managers. the one they want more people to -- they want more people to give them money, put simply. the sec, widening it just a bit to say that if you have certain
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certifications, or if you are knowledgeable about the market by working with one of these financial firms, maybe you, too, can be an accredited investor. lisa: so why? why why does the sec want to open up the market so much? jason: they have gotten a lot of well pressure, candidly, from the firms themselves. but there is also this sense that every day investors, or at least a broader scope of investors are missing out on a lot of the gains and profits made in the private sector. you think about the gains that have been made on companies like peloton. once they go public, those private investors look much better and much more profitable than maybe the public investors. in the age of the unicorn, people want more access. lisa: yeah, although, more access, but this is inherently risky. i don't mean in terms of the actual investments, but the maturity profile. the fact that a lot of these investments don't come to fruition for a long period of time. they are not that liquid, so
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what are the risks here? jason: well, the risks are big, as you point out. and that is why we are here. the sec is meant to look after investors and keep them away from things that are, as you say, a little more risky. this is an opaque market in many ways. it doesn't have the transparency that a public market would, and people do lose money. and so you worry about folks the going into these investments not having the sophistication that maybe a professional investor would. lisa: jason, thank you for taking the time, and for all of our reporters. a question about the dynamism of i public equity markets with more companies going to direct listings, or not even necessary i listing at all or going public. wework tried and failed, but it is still in the news and still tugging along, this time with some financing details. with us now is our bloomberg finance reporter. let's talk about wework, they needed this financing package in order to help its transition to
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more softbank control. what is the latest here? >> the way i see it, this is softbank's first real hurdle cleared in their effort to save their investment bank. this gives the company time to get their act together. we are a few weeks removed from one of the greatest startup stories turned on its head. the ipo collapsed, and then softbank had to jump in with a big bailout package that gives them control of the company. the financing obviously gives them greater runway, more time to get back on the path to stability. at the same time, it also opens up a boatload of cash that was tied up with their earlier credit line. this is something, from a credit perspective, that becomes more appealing to investors. a long way to go, but a good start. lisa: let's talk about what this financing package actually is. it's goldman sachs, right? it is a loan that will stay on their books, or that they are ranging to syndicate out. how big is it? >> it is $1.7 billion in financing. goldman committed to it last week.
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goldman would not have done that if it was not confident that they could spread out that loan to other lenders. so how do creditors suddenly become comfortable with wework? they added a simple twist. they made softbank one of the technical borrowers on this line of credit. so effectively, lenders will be taking the softbank credit risk way better than the wework credit risk. that is why people have been able to get comfortable with it. that is why goldman was willing to underwrite it. and that is why wework now has a sufficient amount of capital to play with. lisa: which is really interesting, because softbank is taking the risk on its books in a very real way, and that is significant, raising questions about how much the vision fund is being conflated with the overall business of softbank, which is varied and financial, and perhaps a little bit less speculative than its startups. i'm wondering, what do we know? there was a feature in "businessweek" talking about the culture within softbank. can you give us a sense of what that is like, how that is informing some of the decisions? >> first off, fabulous story.
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if you haven't read the story, you have to go to the nearest news stand and pick up that "businessweek." it is the cover story, we have fabulous reporters on it. and it really paints a picture of chaos, confusion, and more importantly, recklessness, right. if you just look at the wework story itself, just a few months ago, adam neumann was marketing it as a grand tech play that would control the world. a few months later, we are talking about a real estate company that is hoping to work off their real estate arbitrage to make sure that there is a feasible business here. and that goes into the greater softbank deal, was it really smart to go into all of these startup investors, that you have to grow at all costs, forget about profitability? the conversation has shifted to figuring out whether profitability is what they need to focus on. lisa: thank you for coming on. coming up, this week's power player, bill brady, at the law firm paul hastings says the economy has a good tailwinds but there are still warning signs.
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>> leverage is high, the margin for error is low. so we really have winners and losers, in terms of which deals are succeeding and which aren't. ♪
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♪ lisa: i'm lisa abramowicz. this is bloomberg's "money undercover." now, time for "power play," a look at some of the most notable names in private markets. this week, we wanted to dig into the question of how to understand the rising volume of debt trading at distressed levels. is this a leading indicator of a stressed economy or a sign of a healthy market where investors are using discretion? i sat down with bill brady at the law firm paul hastings and we spoke about where we are in terms of the balance of deals falling apart, versus coming to market. bill: three months ago, i would've told you it's 50-50, but the pendulum has swung back the other way, so now it is 70%
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front end deals. very competitive, highly sought after deals, and 30% restructurings. but it is really for the first time in my 20-year career. it is typically 95/5 one way or the other. right, the markets are hot, deals aren't being restructured or we have a recession 10 years ago and everything is being restructured. this is the first time in my career where we are busy on both ends. lisa: what does that tell you? bill: from my perspective, i think it means there is still pretty good tailwinds economically, but leverage is high, the margin for error is low, so we really have winners and losers in terms of which deals are succeeding, which ones aren't. lisa: there is a belief out there that the pain and restructuring has been isolated to energy and retail. is that the reality, is this you just a sector-based problem, or is this something else having do with leverage and the structuring of deals? bill: it is more concentrated in those areas, but it is both.
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i could close my eyes and pick 10 different restructurings from my desk. it might be 10 different industries. there is more concentration in troubled industries, retail is a big one. but with high leverage, if management makes a misstep, they can find themselves at the back of the table. lisa: given the fact that it is so prevalent, some of the ebitda add backs of paying dividends, etc., do you think the next cycle will be really painful, more so than people are prepared for? bill: no, well kind of depending on which people and which constituents. for some of the shareholders, it may be painful. but there is so much dry powder on the sidelines, there is a lot of distressed funds that have been raised, and they haven't been deployed yet, the cash hasn't been deployed. but unlike 2009, whenever the next recession comes, and frankly i don't think it is coming that soon, i've been saying that for five years. lisa: congratulations, you have
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gotten it right. for the last five years. bill: but i think it will be a softer landing. because in 2009, when the banks pulled back, you didn't have billions and billions of dollars in distressed debt funds ready to come in, and other kind of private debt funds, rescue funds. so there was a hard landing for a lot of companies. i think a lot of those borrowers today will have a softer landing, but there is a price, right, for the distressed lender to come in. they are going to be compensated for the risk. that compensation will come in the form of probably a higher interest rate, probably a huge equity kicker, they are going to take a big piece of the equity. but for the company, and also ancillary to that, jobs i think can be saved through that softer landing. lisa: do you think that private debt funds are going to significantly outperform private equity funds over the next five to 10 years, based on what you are talking about, the dynamic of private equity perhaps being the one that feels the pain more
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than the lender? bill: you know, there are a lot of experts, pundits talking about the next recession coming. there is a number of people saying it is not coming. there is still time before the next recession hits. when it happens, and it always does, at some point, i do think the private debt funds will be pretty well-positioned in the market, not withstanding high leverage, because the private debt funds, many of them have the underwriting capability, and the appetite where if they have to own it, they will. they are night in the business alone to own, they are in the business of lending. they do have the personnel with the private equity background and this was part of my practice as well. if, for unforeseen reasons, the lender has to take the keys, they have the capacity, they can bring in the experts, turn around the business, and three to five years later, they can sell it and possibly recoup not only their equity, but a good portion of their debt. lisa: that was my conversation
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with bill brady at the law firm of paul hastings. the big takeaway perhaps is that distress in credit has remained confined to specific companies, idiosyncratic if you will. but it does speak to a bigger issue in terms of how deals are being crafted. there are good deals and bad deals, but when things go bad, recoveries will probably be a lot lower, which means losses may be significantly higher than they've been in the past. still, the economy seems to be chugging along. coming up, you may be surprised to know that the global resale shoe market has reached billions of dollars. next, we talk to an executive who left wall street to cash in on this booming market. this is "money undercover" on bloomberg. ♪
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lisa: i'm lisa abramowicz. this is bloomberg "money undercover." time for trendsetter, our look at a person in the private market that is blazing a new way, in this case, a new asset class. scott cutler is previously the head of global listings at the new york stock exchange. now he is doing a listing of a different kind, as the ceo of a sneaker exchange called stockx, which has become a booming part of the shoe market. i asked him how it works and how
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he drives consumers to his business. scott: today's consumer wants access to amazing brands, but they also want to make sure that those brands are authentic. and as a platform of a stock market of things, which was the original concept of this business, it is transformative to have a marketplace powered by sellers from around the world but giving access to authenticated items has been the differentiator, why this is one of the fastest-growing e-commerce companies anywhere in the world. lisa: how do you check the authenticity, do you actually guarantee it? scott: if you look at the product experience, it starts with coming to the page of a product. it is the only place you can find it. that product is very transparently available to the customer at prices people can see. and then once that transaction is completed in a very much stock-market-like way, where you can bid on a sneaker, ask, sell a sneaker and other items.
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but when the transaction is completed, the most important part is every one of those items goes through an authentication center somewhere around the world for us. we authenticate and inspect every item for its authenticity before it is sold out to the end consumer. it has created a high level of i trust for great brands in a marketplace-like experience. lisa: is there a market size for the resale sneaker market? i'm just thinking about one pair of sneakers that sold for $50,000. is that par for the course? scott: if you look at the entire sneaker market worldwide, it's estimated to be a $100 billion market. the resale component this year is estimated to be over $7 billion, and it's been growing at, you know, roughly triple digit growth rates. so that is significant relative to even the e-commerce size of the sneaker market alone. so what we are seeing is really just explosive growth relative to general e-commerce rates, but we are also just seeing,
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effectively, a different value proposition, which is people coming, trying to find a new release that they cannot find from the brand, that they cannot get from the retailer, and coming to stockx because it's about access, it's about something not available anywhere else, and you are buying it as if it is in its original condition for the first time. lisa: so nike recently launched a brand on the stockx exchange, adidas has done something similar. i'm wondering why they are coming to you to debut their items. scott: we did an ipo, an initial product offering, with adidas, which is obviously one of our top-selling brands on the platform in october. it was a new, revolutionary way to release products that, in this case, was never again to be recreated out of their maker lab. we released those to the market in a unique way and they priced above what they would in retail. and we had over 10,000 people
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that came to bid on those items. so over time, we actually expect that the brands that sell on our platform to work with us directly, because the consumers are here. lisa: what are you seeing in terms of returns, people using sneakers as a sort of investment vehicle? i saw one story about a return of 6600%. scott: it is amazing. this has become an asset class, an asset class of people that do collect, hold on to these items, trade these. obviously, a sneaker that would be trading at thousands of dollars originally retailed at $200. i look at my own portfolio of sneakers this year, well outperformed the s&p, well outperformed the rest of the market, but it is also an acknowledgment that these are items that have persistent trading value. there are a lot of people using the platform to fund a college education, fund a platform, to
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fund their business and passion. lisa: i cannot wait to ask somebody, how did you fund your child's college education, and they say, flipping sneakers. i do have to, though, wonder what the logic is of flipping sneakers over time. -- appreciation of sneakers over time. because under my use, they tend to lose value as i use them. i'm just wondering, how do you ensure this is not a repeat of tulips? scott: this is important. we started with this concept of the stock market of things, where at any given time, the price of a product that we show transparently is very visible to the consumer. and that price actually varies from minute to minute. the difference on our platform is that what you are buying is a product that is in what is called in sneakers dead stock condition, which is as if it were originally released. it is not used, it is not worn. so what is interesting is that, while releases drive a lot of people to get access to the
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product, they actually come back and look at items that may have been released eight weeks ago to maybe 10 years ago, and they are buying that product as if it were the first time. so different from other sites selling used items, you are talking about access to new items in perfect condition. and some of these things actually have appreciated significantly over time because, quite frankly, the supply of these things is much more why scarce. it is limited, it is not available. lisa: that was my interview with stockx ceo scott cutler. time now for this week's big number. it has been an historic year for the female-founded unicorns. in 2019, there were 21 startups founded or cofounded by a female that passed the $1 billion valuation mark. this includes beauty brand glossier, hims, and the international payment startup air-wallet. in 2015, there were only 15 unicorns born with at least one female founder. that does it for us. happy holidays to everyone. a reminder, you can watch us
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every tuesday at 1:00 p.m. new york time. this is bloomberg. ♪
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♪ juliette: coming up on "bloomberg best," the year's most compelling conversations on business, finance, and politics in asia. >> there was no escaping the trade tensions that kept china and the u.s. at odds. the negotiators need to come to the table and figure this out. >> the u.s. is not the international police. >> central banks saw their role expand as the economy slowed. we may combine various monetary tools. >> the important message is


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