00:00I mentioned that BlackRock deal, a $12.5 billion bond at 7.53% yield, demand relatively tepid,
00:07about 1.6 times the deal size. Brian, is this the start of an era of weak demand and much
00:13higher
00:13costs for corporate debt? I think so. The short answer is yes, but I think let's focus on what's
00:22been causing this softness in the corporate bond market, which is this tech supply, a lot of it
00:28being these large structured deals, $10 to $30 billion or more, other being just traditional
00:33corporate bonds, but again, coming from a lot of these hyperscalers. I think the point I would want
00:38to make here is that historically, when an issuer or a sector would come with a lot of debt, there
00:45would be kind of a natural circuit breaker, almost a feedback loop from the bond market to those
00:49issuers saying, all right, we've had enough, and because of that, we're going to raise your cost
00:53of borrowing, and that's going to effectively disincentivize you from borrowing. And then you
00:57kind of get a more of a natural supply demand dynamic as things come into balance. This time
01:02around, you're talking about companies who are such believers in this AI trade and the data center
01:09need and the compute need. They're thinking about tripling or quadrupling their equity value
01:15based upon this spend. And so whether they borrow at 6.5% or 7% or 8% in
01:21the corporate bond market,
01:22honestly, the math doesn't matter because it's not the cost of the capital. It's only just getting
01:28the capital. And so, yeah, oh, you know what? We'll pay an extra 100 basis points. We need that
01:32$50 billion because we're going to spend it on this data center, and that's going to contribute
01:36to enormous growth and value for our shareholders. And so there's this new insensitive borrower to
01:44price in the marketplace. And in the beginning, the market was able to absorb it because we're in
01:48higher yields and there's a lot of insurance money, et cetera, buying it. But at this point,
01:52it starts to feel like a point of saturation, but it also doesn't feel like this spend and this
01:57borrowing is going to slow down anytime soon. So we have this interesting scenario here,
02:01an insensitive borrower, that is, and plenty of supply coming out. Winnie, is there anything
02:08that you see that would disincentivize the tech companies from borrowing?
02:13Yeah, I think that some of the points made there are just so top-notch, especially because
02:19these companies have been very highly rated, very cash flow generative, and also generally
02:25underleveraged in their balance sheets. So there is a lot of room there. Now, there are some exceptions
02:30to that with a handful of these issuers having a little bit lower rating, having a little bit of
02:35a track record of investors pushing back on some of the leveraging-type activities that they've
02:42done in the past. And so I think that in order for there to be an incentive to perhaps balance
02:48capital structures a little bit more in the equity market, we might need to see the bond market get a
02:53little bit more punitive in terms of cost of borrowing. It's also hard to say. July is not
02:59typically the most liquid month across financial markets in general, and we've had some overhang from
03:04the macro. So it is a little bit difficult to discern how much of the recent repricing is
03:09entirely due to the hyperscaler AI trend, and how much of it is due to some of the other
03:14seasonal technical macro factors.
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