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- [00:03]
Podcast Host
Bloomberg Audio Studios Podcasts Radio news. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10am Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app Listen on demand wherever you get your podcasts or watch us live on YouTube.
- [00:24]
Scarlett Fu
Another big deal in the tech space, and I mean not in the M and A space, but in the bond issuance space. Alphabet looks to raise about $15 billion from a U.S. bond sale. Just the latest big tech company hitting the bond market here. And why not? The market seems to be wide open. Let's check in with a professional here, Rob Schiffman. He covers the bond markets for the big TMT companies here. Rob, you've told us in the past that these tech companies, they raise money because they can, not necessarily because they need it, but now they kind of need it a little bit. Has that changed the narrative at all because they try to fund all this AI build out?
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Rob Schiffman
Yeah, I'd say they don't really need it.
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Scarlett Fu
Okay.
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Rob Schiffman
But there's plenty of access at reasonably low cost obviously all along the curve with 100 year deal on the market and in multiple currencies. So I think since demand for AI is so insatiable, I actually think you can still say that demand for these tech companies bonds are insatiable as well.
- [01:21]
Scarlett Fu
Okay, you mentioned 100 year bond. I thought 40 year bond for Oracle was kind of bananas, but 100 year bond, I mean we don't even know if this company is going to be around and granted they're going to refinance a lot of things. So you know, this isn't like in 100 years people will necessarily be collecting on this. But how does that make sense?
- [01:38]
Rob Schiffman
Yeah, well listen, based on what might happen with AI, we don't know if any company is going to be around. There you go, 30, 40 or 100 years. So the world's, the world changes sort of quickly. But when you actually think about the duration of 100 year bond, it's pretty much the same as a 40 year bond or a 30 year bond. So it sounds sort of astronomical, but, but really the risk to the credit is pretty much the same. So I wouldn't really think that too much about that. The one thing to think about is we continue to talk about how much excess capacity these companies have, how much borrowing capacity they have. This morning when S and P affirmed Alphabet's AA rating, they said they have 180 billion of additional debt capacity before they get to S&P's rating trigger. So it's not just that they have a lot of capacity. That's how much capacity they have at double A plus. What does that mean? What if they wanted to borrow a trillion dollars? Could they? So obviously that's not realistic, but there's just a lot of room here. And as these numbers get bigger and bigger, we also have to remember there's a flip side to this. Cash flow is also getting a lot bigger as well. So in the near term though, leverage is climbing a little bit. Again, there's a tremendous amount of capacity from both raiders and from bond markets. I think all the skepticism here is really on the equity side. It's all about multiples, what the right trading price for the equity is. What bondholders are telling you is we're trading at the right prices. We're actually near historical tights for the corporate bond market. And you know, these bonds don't offer tons and tons of yield. The bondholders are screaming, we are not worried.
- [03:08]
Scarlett Fu
They're not worried. And that's why these bonds don't offer tons and tons of yield. Isn't there a risk of concentration risk where investors. I mean, there's a lot of debt coming to market, a lot of it coming from big tech and everyone wants this stuff because these companies are good for it. But won't they be too overloaded on big tech debt?
- [03:24]
Rob Schiffman
Yeah, you know, we've heard this historically for the last few decades. Luckily I've been around a long time and I've seen this happen before where, you know, the market, people come back and say we're full, we can't have another bond. We have too much exposure to either one individual name or to this sector. And you know what changes that spreads? You offer a bigger concession and people will come in. There's a price for everything. So if Alphabet, a year ago or two years ago or five years ago might have printed a bond at treasuries plus a ago year, a 30 year bond at treasuries plus 50 or 60. So now they're going to print a bond at let's say 100 over. So there's just that right clearing level. We actually saw that with Oracle. We talked last week how that's the poster child for everything that people are worried about. And then they got $130 billion of demand because they boosted concessions higher. I don't think that's really an issue.
- [04:14]
Scarlett Fu
They're not just issuing in dollars, are they?
- [04:16]
Rob Schiffman
No, they're doing Swiss francs as well as pounds. I also think there's other currencies they can go to. I mean, I've actually had a lot of people ask me this morning, why aren't they doing Euros? There is a huge bid in the euro market for tech paper because all of these companies are effectively US Denominated names issuing US dollar paper. So I think there's another market in Euros. There's also, I think could be a huge yen a bit as well. Historically, we've like, we've seen particularly in telecom and media attracting a lot of Asian capital. So I wouldn't be surprised if that might be the next market. The reality is some of these names they don' really need to worry about at this point. There's so much dollar demand. But it's interesting to see that I think they can price, they can price their bonds at tighter levels because there's demand around the globe in multiple currencies.
- [05:04]
Scarlett Fu
Stay with us. More from Bloomberg Intelligence coming up after this.
- [05:11]
Podcast Host
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10am Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app Listen on demand wherever you get your podcasts or watch us live on yout.
- [05:25]
Scarlett Fu
We've got a lot of dealmaking news today. It is Monday after all, so M and A is to be expected. But Eli Lilly has been especially busy today because it made an investment over the weekend. It also has made a purchase, an outright purchase as well. And this is of course, as the company is holding on pretty well with its obesity drugs, certainly in comparison it feels like to Novo Nordisk. Sam Fazelli is our director of research for Global Industries and senior pharmaceuticals analyst. And he joins us now to talk a little bit more about what's happening with Eli Lilly. So Sam, our BI drug boss, thanks for joining us. As always on this Monday, Eli Lilly buying a company called Orna Therapeutics for up to $2.4 billion in cash. Shortly after it has announced it's paying $350 million to Innovent Biologics from China. Talk about what the common thread is between both of these acquisitions or these transactions.
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Sam Fazelli
Yeah, sure, Scarlett. Common thread is I've got cash that is producing at a very rapid rate and I need to make sure that I've got a pipeline the day that people are going to start worrying about my patents expiring. So a long way off for these huge drugs. So the more assets that these guys have with their massive cash flow to invest in for R and D, the higher the probability that they'll be coming to that point where people start going just like they're doing with Merck oh gosh. Your $35 billion drug is about to come off patent. That's in Merck's scenario. What are you going to be replacing it with? And of course, Merck has been doing some moves there. Lilly is doing these things. These are two very separate deals. They've done about seven deals with this Chinese company that you're referring to Innovant, and the deal they bought. And I love the name of this company, Orna. It's circular rna. And I think I couldn't have imagined a better name for this company. It is another one of those ways of trying to use RNA to impact biology in the patient, in this person directly, like a vaccine, like cancer or whatever way you want to go. It's a very different approach, but it's very interesting approach.
- [07:36]
Scarlett Fu
Boy, the gloves are coming off. Sam, in this obesity market here. Novo Nordisk suing Hims and hers for making knockoffs of its obesity products. This seems really cut and dry to me. How do you view this knockoff market here for some of these drugs?
- [07:54]
Sam Fazelli
Well, you shouldn't have a knockoff market for these drugs. There's rules in the patent world. You invent something, you patent it. You're supposed to have a while to make some profits of it before generic companies come. There's a very well set process for this. Of course the companies try and extend their patents a bit and keep stay on the market for a bit longer. But at the end of the day, generics come and that's how the model works. The drugs get cheaper, good drugs get cheaper. Everybody gets access. So here having someone to go and say, okay, I'll go and buy and source the active agent from somewhere and put it in a syringe and sell it to people. That shouldn't be allowed during a period of lack of supply. Especially if you have a very difficult to manufacture drug, which these have been, that's fine, perhaps, and the FDA allows that. But that ended nine months ago. Why hasn't this happened earlier? I don't know. And I tell you, I love the take the gloves off analogy. Are these guys heavyweights obviously drugs or are they lightweights or featherweights? Let's see who's. Who's the heavyweights in this fight, Hims and hers.
- [08:59]
Scarlett Fu
That Stock is down 25% today, year to date, down about 50%, 52 week low. So it's definitely feeling it.
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Definitely feeling it. Sam, Novo and Hims actually had a partnership, I believe last year, but they scrap that and their relationship has worsened. What did that partnership look like? And perhaps did that give him some room to feel like it could move forward on, you know, coming up with these knockoff versions?
- [09:27]
Sam Fazelli
Yeah, wouldn't it be the easiest thing to do is just to go to, to. No, I don't think actually, just to answer your question directly there, I don't think so. I don't think they could have back engineered the Novo Nordisk product because the latest thing that finally brought this to an, to it, to this hiatus that we come to, to this pinnacle of fighting that we've come to was the oral drug. But they couldn't have had access to the oral drug. It was only just got launched. So reverse engineering something isn't something you do over three or four months. So I doubt that was the case. I think they could have had a good relationship. Novo could have carried on, used them as a platform, but then Inovo created its own platform, Novocare, just like Lilly direct, etc. So I don't know how much lasted, how much revenue Novo got out of it, but it couldn't have been very much.
- [10:16]
Scarlett Fu
Sam. So having a drug here for obesity, just a gold mine. You can just, and just think about how big this marketplace could be. How about some type of medicine for, I don't know, baldness that a couple of my good senior BI people in London may be interested in.
- [10:34]
Sam Fazelli
Who needs a drug for baldness? We are higher up on the evolutionary tree, my friend.
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Scarlett Fu
I know, but that would, isn't, isn't something like that in the offing as well?
- [10:43]
Sam Fazelli
There is, there's in fact a company that's just IPO that's got some ideas there. I think there are drugs already, alopecia drugs out there, but these are more for serious cases, not for someone like me that nobody cares anymore. I think that everyone will be shocked if I turned up with a bit of hair. So there are companies out there. This is something that folks who for whatever reason lose hair really early in their youth. I had a friend of mine who at the age of 18 was going bald. So of course that's very tough for somebody at that age. And even, you know, 40 year olds who don't want to end up losing that beautiful hair they have. It was too late for me. But those guys, yes, there is a meaningful market. They're not going to be as big as obesity though, I don't think.
- [11:26]
Scarlett Fu
Stay with us. More from Bloomberg Intelligence coming up after this.
- [11:33]
Podcast Host
You're listening to the Bloomberg Intelligence podcast. Catch us live weekdays at 10am Eastern on Apple CarPlay and Android Auto with the Bloomberg business app, Listen on Demand. Wherever you get your podcasts or watch us live on YouTube, it's Monday, which.
- [11:48]
Scarlett Fu
Means we often get a lot of M and A activity, and we certainly did today in the energy space. Transocean, you remember them from the BP thing. Transocean to buy Valeris in a stock deal valued at $5.8 billion. Scott Levine joins us here. He covers the energy space for Bloomberg Intelligence. Scott, who's Transocean, who's Volaris, and why are they getting together here?
- [12:10]
Scott Levine
Yeah, so two of the bigger names in offshore drilling, Transocean has the largest backlog, Valeris has largest fleet. Valeris name may not be that familiar to a lot of folks here. It was actually a combination of two companies called Ensco and Rowan a few years ago. They are two of the biggest offshore drillers. And I think that this deal really has both offensive and defensive motivations. Offshore drilling is in a little bit of a recovery mode really. Kind of has been. Most of the drillers went bankrupt actually during the 2020, 21 downturn. Transocean was really one of the only companies that did not go bankrupt. Valeris did. And so Transocean's kind of been saddled with all this debt as a result of not having their balance sheet wiped during bankruptcy. And so that's been a limiting factor for quite some time. And this deal, which is an all stock deal, will accelerate their deleveraging process and remove some of that burden from them and better enable them to capitalize on an upturn in offshore drilling. And the second thing that's important to note here is that it brings a jackup fleet jet. So a jackup fleet jackups are basically shallow water rigs. Okay. As opposed to the deep water drill ships or floaters. And Transocean had a exclusively been a floater fleet. Jackups are more to the seabed, seabeds lower in shallow water. And Velaris is one of the biggest players there. And so this gives Transocean exposure to the the jackup or shallow water market, which has really undergone an interesting phase in that it was a bit of a downturn the last couple years. The biggest jackup driller is Saudi Aramco. And a couple of years ago, Saudi Aramco made significant cuts to their drilling program. They essentially, Saudi Arabia abandoned plans to increase their oil production capacity to 13 million barrels a day. And what we've seen since then is a lot of jackup rigs being laid off effectively in 2024 and 2025.
- [14:28]
Scarlett Fu
Right.
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Scott Levine
Indications suggest those rigs will return this year. So that market is bottomed and maybe on the cusp of an upswing. So this deal will give Transocean the ability to participate in that recovery.
- [14:43]
Scarlett Fu
So in terms of why now when it comes to the timing of this deal, the CEO of Transocean cited a multi year drilling up cycle. Where are we in that cycle? Are we, you know, first inning? Are we.
- [14:55]
Scott Levine
It's kind of been an interesting up cycle. So we saw an inflection in 22 and 23 and 24 and 25. We've seen kind of a plateau to a slight pullback. Now I do believe we're in a recovery and have been and this has kind of been more of a mid cycle pause associated rather than a downturn in offshore drilling. So I do think the recovery is intact, but I think the cadence has certainly slowed and in fact deteriorated. And offshore drillers like energy service companies have been off to the races this year. I think the oil prices held in better than expected. Some of that is due to some of the tensions in the Middle East, Iran, etc. Venezuela as well. So the punchline really is that we're still in, I think a mid cycle pause until maybe the second half of this year. And in terms of what inning we're in, I think we're probably like third, fourth earning third, fourth inning. But it's been in kind of an unconventional recovery.
- [16:00]
Scarlett Fu
Will the regulators allow these two companies to get together?
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Scott Levine
Yeah, I think so. And it's a good question. These are the two of the largest players that are out there and rig's CEO expressed extreme confidence that that will be the case. It's a competitive market. There's a lot of fragmentation, smaller players in the market, and it's generally the quality of certain assets that determine which guys win which contracts. A lot of it depends on which rigs are capable of drilling for which projects. And so no, I do think that this should get a relatively quick approval. Certainly they're talking second half of this year. That's a much shorter timeline than the last major oil field services merger, which was Schlumberger Champion X that took over a year to a year and a half to approve and required significant divestitures. But offshore drilling is a different market.
- [17:02]
Scarlett Fu
Stay with us. More from Bloomberg Intelligence coming up after this.
- [17:08]
Podcast Host
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10am Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube.
- [17:22]
Scarlett Fu
The Trump administration is considering a potential antitrust probe into US Homebuilders. Presumably this kind of goes to the issue of affordability or lack thereof in the housing market. The question is how impactful is it for this industry and for the companies, the homebuilders in this industry. To get some answers there, we turn to Drew Redding and covers all the homebuilders for Bloomberg Intelligence. He also is ensconced down in Princeton, New Jersey at our campus down there. Drew, talk to us about this potential lawsuit by the Trump administration. How serious is the industry taking this?
- [17:56]
Drew Redding
Right, so according to the report, there's actually no indication that any formal investigation has started. I guess what's at play here is that it was hinted at that one of the industry trade groups, the leading Builders of America, builders within that, including some of the large public builders that were highlighted, like Adir Horton and Lennar, were sharing information that could be used to restrict home prices or inventory. You know, we've seen this, this tactic from the administration in the past where they'll leak some information to the public kind of as to put out a feeler for, you know, what the industry's response will be, you know, but to this point, it doesn't appear that there's actually any concrete evidence of wrongdoing. It's interesting because the home builders have been in the crosshairs of the administration since the end of last year. You know, there's been rhetoric saying that if the builders don't put their lots into production and start building houses, that the GSEs could pull liquidity. There's been dialogue suggesting that the public home builders shouldn't be buying back their stocks, they should be putting that into production. And that's actually become a big part of their business model. There's also been talk about them not being able to utilize their forward purchase commitments, which is how they've gotten buyers monthly payments so low by buying down mortgage rates. So I think this certainly heightens the rhetoric and I think it's something that's going to continue as we go through the year.
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Scarlett Fu
Okay, so even as they've been, as there's been tension between the White House and the homebuilding industry, there's also some talk of them working together.
- [19:32]
Rob Schiffman
Right.
- [19:32]
Scarlett Fu
There's all this discussion about Trump homes builders working on a plan for massive program to develop these so called Trump homes that would at least address the supply shortage.
- [19:44]
Drew Redding
Yeah, that's a great point, Scarlett. And it's interesting because, you know, the tone of this relationship between policymakers and the home builders seems to change by the day I just mentioned that they've been in the administration's crosshairs. But at the same time we've heard from the administration and from the large public builders during their earnings calls that they have been working collaborative, collaboratively to find a solution to housing affordability's problem. Whether that's through, you know, demand side stimulus or finding ways to bring new supply to market. You know, so it is interesting to hear that, you know, just a day after you mentioned that the builders brought the concept of Trump homes, which would essentially be a rent to own program, that we're hearing this from the administration.
- [20:27]
Scarlett Fu
Interest rates, mortgage rates. What's the industry saying about mortgage rates and where they may go throughout the course of this year?
- [20:34]
Drew Redding
Yes, we've actually made pretty good progress on mortgage rates. We're down about 100 basis points from last year. The administration's directive for the GSEs to purchase 200 billion worth of MBS has certainly helped. I think the consensus is that a lot of the juice from the policy end has been squeezed. If you look at spreads between 30 year mortgages and 10 year treasury rates, we're approaching more normalized levels. There maybe is a little bit more room you can make up there, but I think the bulk of the move has already happened. I think in order to get lower mortgage rates, you probably have to see lower 10 year treasury yields which are going to respond to fiscal policy and things of that nature. You know, affordability has improved a little bit from last year, but we still haven't seen that significant demand response. I think that a lot of builders have been hoping for. And you know, the reason for that, and we've highlighted this several times, is that there's just more concern out there in the market as to the direction of the economy, what's going to happen with the labor market. So it's taken a lot of urgency out of home shoppers. And you know, the other thing to point out is I think that there's a lot of people sitting out there on the sidelines who are saying, you know, I think in the next six to 12 months mortgage rates and or home prices are cutting down, come down. So I think there might be a better time to get into the market very quickly.
- [21:54]
Scarlett Fu
Drew. We also know that we have some homebuilders reporting results in the weeks to come. Toll Brothers, which of course is big in luxury housing, is reporting on February 17th. What's the tone going to be like?
- [22:08]
Drew Redding
Yes. So by and large, I think the move up in luxury segments of the market have done better on a relative basis. And, you know, it makes total sense. You have the lower end to whose buyers are more sensitive to fluctuations in mortgage rates. So pricing has held up better at the higher end. I think we're going to continue to hear that. What's important to remember is, though, just because you're at the high end, you're somewhat insulated from what's happened in the market, but you're not immune because housing is an ecosystem. And in order to get more volumes at higher price points, you need to see demand funnel up from from the low end.
- [22:41]
Podcast Host
This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get. Your podcasts listen live each weekday 10am to noon Eastern, on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live Every weekday on YouTube and always on the Bloomberg Terminal.