Perhaps a Ballroom

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I feel like we should address why we were off-air for three weeks. People asked me about it.

No one asked me about it. No one asked me about it.

I got questions. Well, you had a vacation, then I had a vacation. Then we actually had

an episode. I think everyone in this room would agree. The greatest episode of the

money stuff podcasts in its history, except when I say we recorded it, I mean, we performed

from the accidently did not record. Yeah, so we'll never see the light of day.

We do, I believe, have your side of the audio, which I was joking. We should do like a space

ghost to ghost thing. We're like, we play your audio, and I just say non-secretors that set

you up to say something weird in between your audio. I was also thinking, like, mystery science

theater where I say something, and then you offer a snippy little comment. Then I say something

else, and you just respond. There are a lot of ways we could go with that audio.

Who has the time? No, who has the time? Not us. No, so we apologize to your listeners.

You're fine. I'm sure we all had a great couple of weeks. Yeah, everyone, we got a vacation

from us. It's fine. I'm going away on a couple of weeks. I'm going to a conference,

and you're going to a conference. I want to say this. I'm going to the Tulane M&A conference,

which is like the big M&A conference for like M&A bankers, the sometimes put lawyers to a very

large extent. So if you're there, say hi. And I'm going to go into this conference, but everyone

says it's fun because it's in New Orleans. That does sound really fun. And the weather should be

nice, but not horrible in March in New Orleans. I'm going to Vegas for an ETF conference.

Sure. I hate Vegas, but I'll be there. So if you're there, shout out the pod.

Hello, and welcome to the Money Stuff Podcast. You're a weekly podcast. Your occasional podcast,

where we talk about stuff related to money. I'm Matt Levine, and I read the Money Stuff

column for Bloomberg opinion. And I'm Katie Gryfeld, a reporter for Bloomberg News and an anchor

for Bloomberg Television. Where should we start, Katie? We could start with Warner Brothers.

That happens last week. It's still happening, but yeah, it's still happening, but I was on vacation,

and I left for vacation thinking that, okay, Netflix has kind of got this in the bag. They've

kind of had this in the bag, and they did not have it in the bag. They ended up walking away.

Yeah, it's fascinating, right? Like, Paramount had bid $30 to buy Warner Brothers.

Warner Brothers had said we'd rather take this Netflix bed, which is very more complicated, but

whatever, it was like worth more than $30, right? It's a Warner, they thought. And then Paramount

kept pestering them, and then they eventually raised their bed from $30 to $31. And Warner was

like, well, $31 is better than Netflix's bit, although $30 was not. So they went back to Netflix,

and they said, you have matching rights. Would you like to raise your bid above $31? And Netflix said,

no, thank you. See you later. Yeah. And so Netflix just draws out, and Paramount is buying

Warner for $31. I could see one world in which Paramount does go after Netflix next, because this

was pretty audacious. So you have this dynamic where Paramount thinks that it should be combined

with Warner Brothers. Warner Brothers kind of thinks it should be combined with someone,

or like Warner Brothers wants this out of. And so Paramount, which has a young, ambitious,

arguably, NEPO baby CEO. I was going to say a CEO with a well-deep pocketed father. Yeah, a CEO

with, let's say, something to prove. He's like, I want to buy Warner. And Warner has a CEO who

has kind of proven himself, and you know, wants to sell, right? And so it makes sense to combine

these two companies. I mean, probably makes sense. They think it makes sense. There's some

percentages, whatever. Makes sense to combine the companies. And it makes sense for Paramount's

executive team to control the combined company. But what doesn't make sense from a corporate

finance perspective is Paramount, which is teeny buying Warner, which is big. Like in a sort of

straightforward world, you'd be like, well, Warner will buy Paramount, and then they'll combine

them. And then you know, see, but it just didn't work out that way because of the dynamics of how

Warner is trying to sell itself and bidding against Netflix. And Paramount had offered

an all stock deal. Like it would not have worked, right? Yeah. So they offered it all cash deal,

which meant borrowing billions of dollars more than twice their market capitalization. Actually,

it's pretty fantastic. Sort of depends on your account. Like their market cap right now, Paramount's

market cap is like 13, 14 billion dollars, their equity market cap. And the debt for this deal,

I think, including like everything is like $79 billion. So it's like six times the market cap. But

that math is not quite right because like their market cap today is like 13 billion dollars,

but they're getting like a 40 something billion dollar equity check from Mary Allison. There.

They're also doing a rights offering, which I love explain that. And why do you love it?

Well, I love it because just doesn't make sense for like this teeny company to borrow so

much money to buy this bigger company. You do it the reverse, right? And the rights offering is

their way to like very slightly moving the correct direction, which is like we should have more stock

outstanding. If we're going to swallow this giant company. And so they're offering to sell about

three billion dollars of stock to whoever wants public investors on the same terms that Mary Allison

is buying. So Paramount is essentially a controlled company like in the personal ownership of

like the Ellison family, but it has public shareholders and they can put in some more money.

Basically, if you're a public shareholder, you have the right to buy some stock at the 16 bucks

that Mary Allison is paying. Which like, you know, it's three billion of stock, which it's three

billion less of debt load than you'd otherwise need. And like they have a lot of debt.

They do have a lot of debt to the point where they were downgraded to junk buy fish in the after

math of this, which I guess isn't that surprising when we're talking about these levels.

I was thinking about like when they were trying to get this deal. So there's a long time where

Paramount was pestering Warner to take their deal instead of Netflix and Warner was saying no.

And it was hard for them to say no because a lot of shareholders wanted the certainty and cash

of the Paramount deal. And so the board had to defend their deal. And one thing the board said was

the Paramount deal would be the largest leverage buyout ever. And we have doubts that they can get

it done. And like in some sense, that's like a weird thing to say because the Warner board

represents the Warner shareholders. They have a fiduciary duty at this point to get the best

price for the Warner shareholders. And if you say, well, the Paramount deal involves barring a lot

of money. It would be hard to pay down all that debt. Like that doesn't matter. Like that's not

your problem, right? The shareholders are cashed out at that point. If it runs into trouble after

the HBO, that's not the shareholders problem. So it's not the board's problem. And the board is

defending this and saying, well, we don't think they can even raise the financing to do this

which is kind of a weird thing to think because it's like Larry Ellison and it's like it's people

who can raise the financing. But now that they've signed the Paramount deal, I'm like, oh yeah,

this is the largest HBO ever. And like I can see why someone with ties to Warner Brothers

would be nervous about that. There's going to be a lot of job cuts. There's going to be

probably a lot of cuts in production, although there's debate about that. But like to service all

of this debt, it's going to be difficult. And it's going to lead to like hard business choices

at Paramount Warner. And if you sold to Netflix, which has plenty of money, you wouldn't have those

pressures. You made a lot of pressures, right? Like Netflix is not necessarily a lavish benign

overload for movie companies, but like having that much debt makes it harder to run the business.

Yeah. I mean, there were questions about theatrical releases, etc. When it came to the Netflix

bid, Netflix is like, you can have your theory of mind of Netflix, but they have plenty of money.

Yeah. It's funny. I mean, take a look at our reporting. Both Ted Sarandos and David Ellison had

spent a lot of time in DC sort of pitching for this deal. And it seems like one of the factors,

though, was the idea that when it came to the regulatory side of things that it would be a

quicker experience going with the Paramount bid than with Netflix that probably would have lasted

well into 2027. A lot of people think that Paramount definitely pushed that narrative.

Ted Sarandos was going on saying, no, no, it's fine. We have no problem. We really got

them perfectly. So I don't know the answer, but like, yes, certainly people were nervous about

the Netflix regulatory approval process. And you know, this is on the backdrop of everything is

about Donald Trump's personal whim. But anyway, so like, there's a sense that like Netflix is

politically on the outs and Paramount is politically on the end. But like, but Netflix very consistently

said, no, no, it's no problem. We're fine. We're doing great. So I don't know.

Yeah, I mean, Netflix in walking away said that this was solely a bell price that they were

confident. Which is fascinating. Yeah. You've come this far. You've done this much time and money

this deal. And they're like, could you pay one more dollar? And you're like, no, it's amazing.

It's an amazing display of just one. No, by the way, it's one more dollar, but it's also they

get a big breakup fee for for walking away. Which Paramount is paying. There's been a lot of talk

about Paramount agreeing to pay that breakup fee. And like, I have always found that talk

very perplexing because obviously, if you've been $31 per share in cash to buy a company,

the incidence of the breakup fee is on you. Like, nobody could possibly pay it other than Paramount.

And it's just like sort of smoke and mirrors that Warner was like, oh, they have to pay the

break of fee. But anyway, yeah, they're paying it. Yeah. Well, also just to the point on the

DC relationship, apparently, President Trump told Cerandos at some visit not to overpay for the

company. So apparently, he took his advice. I don't know. He was he was going to overpay.

Yeah. Trump gave him some business advice. If the president tells you that, I mean,

kind of feels like the writings on the wall. Like, this is. I don't think so. I don't think

that's like, if you overpay, well, go on. I think that's just like, I think it's to be in business.

Yeah. Yeah. I mean, I wasn't actually in the room. So, yeah, we're

speculating a little bit about what that conversation is. I know what room it was. What's at the

Oval Office? It could be any room. Yeah. Perhaps a ballroom. Just from a human level. I mean,

just reading this, I feel like I was getting my feelings hurt. Like, the fact that it took so many

months Paramount was rebuffed. It's so many turns. It feels like Warner Brothers. The board really

didn't want to do this and then found themselves in a position where they sort of couldn't say no.

I feel like if I was in Paramount shoes, I would just feel really bad all the time. But interesting.

I don't know. I mean, maybe I just don't have the bullheaded confidence, you know?

Warner would never say we really don't want to sell the paramount. I mean, they're a board of

competent directors that have a fiduciary duty to get the best price for their shareholders.

I think that they like the Netflix deal for whatever reason they like the Netflix deal.

You know, they'll tell you girls certainty and the value of the cable stuff and whatever.

But there was always some price. I mean, there had to have always been some price that Paramount

could pay. That would be enough for them. And it turned. This was $1 more, which is funny.

The other thing that happened that it's so strange is that Netflix, you know, was like, we'll pay

the complicated packages they had paying. This is our best and final offer. And Paramount said,

we offer $30 and it is not our best and final offer. And so he would like,

Warner could not accept that deal. It would be just absolute malpractice to be like, we'll take

you're not best offer. So they had to hold that for something more. And everything else is in

the background of like, oh, we had to hold that for more. And like, I don't know if they explicitly

said 31 is our best and final offer, but like 31 was enough. Yeah. Well, it'll be interesting

to see how long this actually does take to get through. The other thing is, well, I don't think

I don't think I want to get through. I think they've already gotten some of their clients.

There's a lot of European railways, a lot of locking still happen. But the other interesting thing

is like, if your model of this is they have taken on crippling that and won't be able to service it,

like you read some people being like Netflix's plan here is to buy the whole thing in three years

on a false part, which is one way to put.

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Private credit has been a thing. Oh my gosh.

Yes, gosh. It is just great.

It is just great. Nobody to see all these things.

Yeah. Becred, Blackstone, stepping up to meet these redemptions personally.

Right. Becred, the Blackstone non-traded private credit business development company.

That's not a name. That's just what it is.

Yeah. Its name is Becred. All these non-traded BDCs, they call them like semi-liquid vehicles.

Every quarter, they offer to redeem up to 5% of the stock, the tender offer.

So if you are invested in this fun, you can't sell it on the stock exchange. There's no way

to get liquidity except every quarter, they will buy back your shares if you want, if you want out.

But only up to 5%. So last quarter, they got 7.9% of the fund in redemption requests,

which is a record that's reported. And so they had to scrape to do those redemptions.

Not because they didn't have the money. They have like,

they have credit facilities. They can do the money, but because like,

the way the tender offer works, they can't. It's boring.

But they couldn't actually meet all those redemptions. And rather than say no,

which is not quite the same thing as gating the fund.

Many are quotes, but like, yeah, they look like gating and people get mad and upset.

So rather than say no to anymore, they let everyone get out. And to do that,

they paid about 7% of them out with Becred's money. And they paid the remaining 0.9% out with

money from Blackstone, the firm, and from the personal accounts of some Blackstone employees.

Yeah. You know, get into the fund. It's like meant to be a show conference.

It's like, we will cash you out at par and we will pay par with our own money because

we really believe in these credits. Specifically, it was more than 25 senior leaders from

Sure. Across Blackstone. We reported. Yeah, I've heard that too. I was talking to someone

about this on Bloomberg TV yesterday. And they were like, I take this as a very bullish sign.

It's a kin to share buybacks or insider buying or something like that. Yeah. So that is the

obviously what it's meant to be. That's the optimistic angle. But the headlines keep coming.

And I mean, like the angle is like some retail investors in this private fund having read bad headlines

wanted to take their money out. And there are offsetting inflows from experienced private credit

professionals who work at Blackstone and know the portfolio, right? That's a good story. How do you say no?

Yeah, you had to like, you know, you had to like twist the arms of the employees. Yeah,

how do you say no? That's what I would love to know. Like, okay, more than 25 or about 25 said,

yes, did anyone say no? Did anyone feel like they could? I want to talk to that person.

The other thing that bothered me about this is like, if you came to me, and I was like a

sharp elbowed private credit professional, and you were like, I can see it. You were like,

all of our retail investors are panicking in one out of our lovely fund, which has great credits.

So good. Would you like, again, I'd be like, sure, that sounds like a fire sale. I'd be happy

to get in when these people are panicking. And then my bosses would be like, great, you're buying

at a hundred cents on the other. I'd be like, no, that's not the news and bad news. I don't want to,

like, if I think they're worth 100 cents on the dollar and everyone's panicking, I want to buy 90

because I should get a discount. You know, you think about like the professionals at the firm

using their money to buy the controversial assets. The classic story is in like, I don't know,

like 2011 or something. Sometimes shortly after the financial crisis, credit suites had this

like giant pile of what people called the toxic assets. Like, yeah, like mortgage derivatives.

And there's two weird stuff from the crisis. And they were like, we can't sell this. It has a huge

capital hit. So we're going to package it into a box and give shares of the box to our like

managing directors. And so they've just paid bonuses one year in toxic assets.

And like, those people all got rich. Like, they immediately recovered and they did so well

because like, they got these toxic assets at the marks they were at, which was a distress mark.

But here, everything's a bar, you know, they're distress marks. You're getting a price that does

not reflect necessarily the level of nervousness that your retail investors are shy when they

Yeah. And that's the thing. I mean, we heard from Blackstone's global head of private credit

strategies at Bloomberg Invest this week saying that the noise that you're seeing doesn't match

the solid credit fundamentals of the fund's assets. It almost feels like the conversation

has sort of moved beyond that when it comes to the redemption request that you're seeing. And even

if it's not headlines about Blackstone specifically, there's a lot of stories. I mean, there was one

on Thursday about BlackRockWat marking a private loan they had made to zero.

Let me just mark down on some ones. Yeah. I don't know that it'll be

you know, we're still across all these these ones. But like, all these people, all these like

senior private credit people are going around expressing confidence in their portfolios, which

one might be true. And two, they have to say. Right. But then like, there's this separate question

of if everyone is panicking and you are confident in the portfolio, like, yeah, you should step

in and buy. But it's weird to have to buy a hundred cents on the dollar. Yeah. And this is why

I love the trade that Boa's Weinstein is doing. The Boa's Weinstein of it all. So we're recording

this on Thursday and that's one I think today or yesterday for the Starwood private reader. Yeah.

And two weeks ago, he announced one for these blue owl private BDCs. We're basically he's going

around tendering to buy shares of these non-traded semi-liquid vehicles that people are nervous about.

He's offering to buy them like, you know, 75 cents on the dollar. Presumably, he's more skeptical

than like blackstone is, but like less skeptical than these retail investors, right? He thinks

these credits are fine. Or he's had his own credit. I don't know. But like, he's getting these

credits at a discount because retail investors are almost like panicking, but they're nervous.

Well, that's what I wanted to ask you was what is the trade here for Boa's? The trade is like the

value of liquidity in these vehicles has gone up enormously in the last month. People now want

this liquidity. And if people really want liquidity, they should pay for liquidity. And Boa's

will be the one to get paid. Yeah. In theory. I'm wondering like, how...

Maybe no one will tender. Like, this might just be trolling. Yeah. Nothing forces anyone to tender.

Because these vehicles all have mechanisms to cash you out at a hundred cents on the dollar.

Like, yeah, perfect. There's gates, whatever. But because like you sort of expect to get cash out

at a hundred cents on a dollar, you might not want a tender to Boa's at 75. But you might. Yeah.

To the point he could be trolling, I was looking at some of his tweets, including the one he announced.

This and someone commented something like, you're hilarious, man. It is pretty funny. It's a funny trade.

Yeah. It's a funny trade because like, there's all these headlines.

Oh, private credit liquidity. And then like, there's all these private credit people coming

around on TV being like, it's fine. Our portfolios are good. And then Boa's like, I'll pay 75.

Yeah. That's a good trade. Well, I was wondering. It's like a little bit pouring fuel on the fire.

Like, how it works out for him. Like, is he... He might get zero shares. I don't know.

I mean, it would be nice to ask the man himself. But like, is this a him calling the bottom?

And hoping like how it's being traded in the market that it will go back to a hundred cents,

or is he just hoping that he will get cash out at a hundred cents.

There could be all sorts of trades. Yeah. He could be short the credits, right? But like,

to me, like, the obvious trade is like, the liquidity premium of these funds has gone way up.

And he can capture that. Yeah. Well, Boa's come on the podcast. Just the point I wanted to make

when it comes to like the fundamentals almost not mattering. I do just wonder about the psychological

aspect of it all, the fact that over the past several years, all these private asset, private credit

folks have been pushing so hard into the retail market, whether this experience overall,

even if the fundamentals are fine, we'll just demand going forward from retail.

My bet is always on people having short memories, but right now, yeah.

Like, no one's like, oh, we really need to do our retail private credit pressure. Like,

not this week. Not this week. I don't know. There's a lot of plan. There's like a lot of

like interval fund type things that are supposed to push out in the next couple of months. So,

yeah, we'll see. We'll see. We'll see.

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them earlier, and how men can access meaningful support. Listen to the new season of the visibility gap,

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Speaking of private assets, let's talk about what's going on in the ETF space.

Why not? You know, while we're here, so we're talking specifically

about private companies because there's this fascinating ETF. The government name is the ER shares.

Private public crossover ETF. It's X over crossover X over X over. It owns SpaceX.

Not outright, but through a special purpose vehicle. And the SEC has a cap on how much of an ETF,

any open-ended fund can have in a liquid asset. It's 15%. The problem that the CTF keeps running

into is that it keeps getting outflows. So it's stake as a percentage of the portfolio keeps going

up. It hit like 44% or somewhere close to it in the past couple of weeks.

Also, SpaceX's evaluation is like, you know, the quintuple of the last year's budget.

Morningstar has been very vocal on this. Specifically, this man named Jeffery Patak.

I hope that's, I'm saying it's last name, right? That if you take a look at the performance of

the ETF, it doesn't necessarily reflect the fact that SpaceX's evaluation has quintupled,

which is also a big question mark. This is like the opposite of private credit. Like,

private credit everyone's like, yeah, the marks are fine. Everyone's like, I don't know,

but these marks them on this one. This mark should be much higher. Which is weird to me that people

wouldn't usually hear what mark things up. Yeah. Well, that's the big question there. Like, why,

like, you would think that this fund is absolutely crushing it. But Morningstar has made the case

that if you take a look at the performance of the CTF, its performance can be almost entirely

explained by its public holdings rather than its SpaceX holdings, which again, it's a question mark.

What's the case, too? Why is that happening? That's, that's the big one.

I mean, the answer, I don't know the answer. I don't know the answer either.

They've looked at new SPV and the shares aren't there and like, oops, and they close up and forget about.

Well, that's one of the theories, right? Just that the SPV, well, the SPV, that's like a very

pessimistic, 100% of our performance fee inside. Well, it could partly be explained by SPV costs.

It was a filing this week where the firm said that in the prior period, the funds like total

expense ratio was 1.18% even though the management fee is only 75 basis points and they said that

they've since switched to an SPV that has no management fee and no carried interest. So,

this isn't going to be a problem anymore. So, it's going to be interesting to see how that

shakes out. But what we do know is that you take a look at the, the share of SpaceX that is

this portfolio and it is wildly above the SEC's limit on how much you can actually hold in

the liquid securities. So, the point being, this is a story that's developing right now and it's

going to be interesting to see how it shakes out. And it sort of puts the whole push on putting

private assets or at least private companies in an open-ended vehicle. It kind of takes the

shine off because with an ETF, you can take your money out at any time. These funds ETFs aren't

and that can cause your portfolio to do really funky things if you have to sell your liquid assets.

And it's not as easy to sell in SPV. I mean, counterpoint, it's SpaceX. This is

that a very good counterpoint, right? Because like three months ago, we're going to be in credit

another time. But like, it is a counterpoint, which is that people are like, ooh, I'm surprised

I've been outflushing because people want to own SpaceX and if they're performance reflected

their SpaceX shares, they would want that. Close follow performance. This is probably more

a conversation around like SPVs because there is an ETF that does hold SpaceX outright. The ticker

is Ron B. It's the Baron First Principles ETF. But they've also classified their SpaceX holdings

not as illiquid but as less liquid, which is something that I didn't actually really appreciate

until I started looking into the Ron B ETF that you, as the portfolio manager, classified

illiquidity of your holding to the SEC rather than the other way around.

Right. And by the way, like, obviously, there's not just the game up, but like,

I kind of see why someone would say, yeah, SpaceX is kind of liquid, right? Like it's kind of

the way it's a $2 trillion company or whatever it really is. It's theoretically going public

in the next couple months. Yeah, but like also, there's secondary trading and let's talk now.

There's millions of SPVs. Like if you were like, go into your head, you have to liquidate your

SpaceX shares in a week. Like you could do it at like today's prices. Yeah. For hundreds of

millions of dollars of size, right? Not for tens of billions of dollars. So I don't know. I don't

know. I don't know. Like keep saying private markets, so then public markets, right? Like the,

there's a continuum of liquidity and like, SpaceX is more liquid than a lot of public stuff.

Yeah. What's interesting? I mean, as far as I can tell, this ETF hasn't liquidated any of

its SpaceX SPV holdings. Right. Also, why would it? Yeah. Like it's a marketing matter.

Well, probably to get below the 15. Yeah. But once you, once you solve that problem by saying

it's liquid, then as a marketing matter, it's really better to be like, hey, I'm an ETF that's

full of SpaceX than to be like, hey, I'm an ETF with a little bit of SpaceX and all other stuff.

Baron, for example, is somewhat of a special case. People familiar with the matter have run this

plan by the SEC part of their reported logic in why they classified it this way is that they've

been investing in SpaceX since 2017 and they have like, in established and good relationship

with the company that it seems like they would have an easier time getting their hands on more

SpaceX than maybe other firms and funds out there. I don't know like if any issue work could

go to the SEC and be like, actually, this private company, we think it's less liquid. It's not

eliquid. I'm going to. I could solve SpaceX shares. It doesn't seem like a big problem.

Do you really know these interesting these funds as I'm, they just said like, you'd rather be like,

hey, this is an ETF with SpaceX than like, then cats and dogs and SpaceX. Yeah.

Like, there's obviously a demand for a publicly traded SpaceX proxy, just by how liquid SpaceX

and one thing I've heard is that people talk about these ETFs as like a trade where the trade is,

you buy the ETF and like with, with, with, with X over, there's like a, they're like a sort of

indexy mechanistic list of their other public stocks. You buy the ETF, you short the other

public stocks and what you're left with is a trade that's just long ETF, short public stocks

and ETFs that you're left with, just long SpaceX. And I think that that's like kind of a marketed

trade of like, this is how you get your SpaceX exposure, you buy this ETF and you hedge out the

public stocks, which reminds you a little bit of the trades we talked about with ARC with ARC ETFs

where these ETFs looked like they might get allocations and hot IPOs, and so people would

heartbeat into the ETFs to get some brave gratefuls. But this is like, this is like a sort of,

you know, way to isolate SpaceX exposure. If that's the sort of thing you're looking for,

which I feel like a lot of public market investors are. Yeah, perhaps this fund did run up quite a bit.

I mean, it grew to like $1.8 billion in assets at one point, and I have to imagine that was

entirely because it was marketed as having SpaceX exposure, but it's since seen pretty significant

apples. Yeah, you know, it doesn't go up a lot with the SpaceX shares that it's not a very good

SpaceX proxy. And that was the money stuff podcasts. I'm Matt Levine. And I'm Katie Grifeld.

You can find my work by subscribing to the money stuff newsletter on bloomberg.com.

And you can find me on Bloomberg TV every day on the close between three and five PM Eastern.

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