🔥Dimon Thinks the Fed Sucks🔥

And: It's Interest Payment Day for Evergrande LOL

💥What to Make of the Credit Cycle💥

Restructuring professionals have a lot of time on their hands these days. The recession sparked by the pandemic lasted a whole two months thanks to extraordinary fiscal and monetary policy — and an astonishing amount of liquidity in the system — and the economy whipsawed back with (i) the list of stressed and distressed credits cut by 75% in a matter of months and (ii) the stock market ultimately reaching all time highs. That has a lot of professionals asking, “what’s going to be the catalyst for an uptick in activity?”

It’s a different time with the same old theme song: many people seem to think that increased interest rates may play a role. And with the Fed signaling that a taper followed by rising rates is coming, those higher rates may be here sooner rather than later. The bond market has reacted accordingly.

Here ⬇️ is a chart reflecting the 10-year Treasury yield (source: JPMorgan). It shows the 10Y rate rising over 20bps in 3 days as of Monday, landing at 1.50%. Prior to Monday’s open, BofA Securities indicated that 1.50% would be the next big resistance point. That prediction didn’t fare well. On Tuesday, there was no resistance whatsoever and the 10Y hit a three-month high of 1.54% — as did the spread between the 2Y and 10Y (now 1.23%).

Make no mistake: on a historical basis these levels remains quite low. But it does reflect that investors are increasingly convinced that interest rates will be higher in the future — perhaps in part due to Fed signaling and, in part, due to signs that inflation may not prove as transitory as the Fed believed. Look no farther than Brent crude…

…and natural gas prices that hit a multi-year high. As a second order ramification, query the effect this will have on the consumer, especially if there’s a harsh winter. Here is CNN:

Americans should brace for sticker shock on home heating costs as temperatures drop this fall and winter.

Prices for natural gas, the most common way to heat homes and a leading fuel source for generating electricity, have surged more than 180% over the past 12 months to $5.90 per million British thermal units. Natural gas hasn't been this expensive since February 2014.

It obviously doesn’t help matters that both China and Europe are having energy shortages. Many fear this will spread.

BofA Securities thinks the 10Y will hit 1.8% by the end of the year which means that consensus — outside of the Fed anyway — is that inflation may not be so transitory after all.

This could get interesting.

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Speaking of interesting, JPMorgan Chase Co. ($JPM) CEO Jamie Dimon apparently thinks the Fed is f*cking this all up. Speaking to CNBC last week, he indicated that the Fed should be moving quicker to taper and raise rates (PETITION Note: not that Dimon is an unbiased party: investing 101 tells us that financials like JPM stand to gain from rising rates). He said:

“I doubt [come] December, people will say it’s all transitory when it’s now been going on for quite a while … if inflation is so high that the Fed has to do more … like jam on the brakes, pull out liquidity, then you’re going to see a huge reaction. And I’m not predicting that, but it’s possible they have to do that sometime next year. The Fed can’t always be proactive — I mean, sometimes they’re going to have to be reactive.”

Indeed, given how the economy turned around so quickly and given fiscal stimulus, it seems increasingly clear that the Fed is playing a bit of catchup. All that stimulus is flowing through our collective veins sparking demand. This is contributing to supply chain bottlenecks that are, in turn, pushing up input prices like freight and shipping and ultimately pushing up the prices consumers pay at the register.

Two perspectives on all of this really struck us this week.

First, Princeton Energy Advisors LLC’s Steven Kopits wrote in a note this week (with apologies for the long block quote):

Whereas the Saudis have run produced crude inventories below normal levels, US shale producers have run drilled but not completed inventories in the ground below normal.  The plain vanilla read is that the industry is going to find itself flat-footed as demand recovers next year, with the implication of high oil prices heading into H1 2022, all other things equal.

But will all other things actually be equal?  The inflation thesis is something we have not seen in the US since the 1970s and early 1980s.  

I think we will see some parallels between the Chinese and US housing markets coming up in the next 30 to perhaps 60 days.  The collapse of Chinese real estate developer Evergrande was the result of authorities there tightening standards to quell excessive speculation and risk.  Of course, this ostensibly sound step to reduce risk triggered the very meltdown it was intended to avoid.  The irony is that the Chinese government is now trying to induce other developers there, including those owned by the state, to buy out the properties which Evergrande was unable to sell.  Or put another way, the government is now trying to quietly bail out the industry because it was taking steps to try to ensure it would not have to bail out the industry.  This has a tragi-comic feel, but it won't be limited to China.

The Fed is going to try to taper, cratering the housing and stock markets as we can see in the news today, with yields spiking and tech stocks tanking, even as inflation is surging through the economy.  Thus, the Fed will either have to let interest rates rise and see housing tank, or 'facilitate normalization of the market' while buying every mortgage it can lay its hands on.  This again has a tragi-comic feel, and it might be even funnier if it weren't happening to us.  Fed Chair Powell will go down as the modern version of Arthur Burns, and they'll have to disinter Paul Volcker's lengthy remains to get the situation back under control at some point. (emphasis added) 

And then there is Brad Slingerlend of NZS Capital LLC, who summed up the supply chain situation nicely in his missive on Sunday:

As commerce continues its pandemic-accelerated shift from analog to digital, we are experiencing the collision of bits with bricks. While there is no limit to how many times I can click the buy button on Amazon, there is a real world limit to how many container ships, port/warehouse workers, vans, and drivers are available to get me those shipments. Examples of the strain on the physical world abound. FedEx reduced its earnings expectations for their current fiscal year last week, citing the tight labor market. In discussing the FedEx shortfall, the WSJ pointed out that the US may exceed available shipment capacity by 4.7M packages per day in November and December. Vanageddon, as Scot Wingo calls it, may be with us for a while as services of all types struggle to locate new vans or parts to keep old vans running. The CEO of Flexport, Ryan Petersen, said on CNBC last week that around 20% of ships in the Pacific are in a holding pattern as they wait to load/unload in congested ports (largely due to labor shortage and compressed demand as the economy catches up from COVID). The WSJ puts the number even higher for all of North America, stating that 40% of all cargo ships are waiting to get to port to unload. Petersen deemed the situation a national security crisis and called on the government to help unload containers. With the holiday season coming soon, toy companies are increasingly using airplanes to bring products West. Nike lowered its guidance last week as COVID-related supply chain issues, largely in Vietnam, are causing a shortfall in shoe supply. Meanwhile, Costco is limiting purchase of paper and cleaning products as it deals with driver shortages and supply chain challenges (unlike last year’s hoarding, this appears to be more of a supply issue). Even the king of digital, Amazon, tacked on a $9.95 fee for Whole Foods grocery delivery for Prime members, attributing the change to increased costs. Unless there is a structural change like reduced consumerism, significant reshoring of manufacturing …or increased wages to entice people back into the workforce, we are likely in for a long haul as the analog world struggles to keep up with the digital transition – not only in logistics, but across a multitude of sectors. This trend is likely to continue to lift up technology as the deflationary and efficiency solution to our analog hurdles. In the meantime, I think we are about to experience a very strange few months of random out-of-stock items leaving us all to exclaim in puzzlement: “we don’t make that in the US? And, it’s going to take how long before it’s available!?” Random holes are opening up in retail shelves across the country as the Grinch clasps his hands and looks eagerly down on Whoville. 

This sentiment sparked our recollection of this message from mid-August, sent by Michael Preysman, the Founder & CEO of Everlane Inc. Things haven’t improved since then, clearly.

We’ll be watching all of this closely.


⛽️Update: Basic Energy Services Inc.⛽️

Back in August, we discussed the chapter 22 of Basic Energy Services Inc. ($BASX) and 12 affiliates (collectively, the “debtors”). Thanks to a $10mm super-priority bridge loan, the debtors had enough runway to negotiate with their creditors and line up stalking horse bidders before filing chapter 11. We wrote:

The debtors have entered into three binding “stalking horse” purchase agreements for a material portion of their business. First, with Select Energy Services Inc. (“Select”) for their water logistics business outside of California, saltwater disposal wells, certain real property locations, and certain accounts receivables [the “Non-California Water Logistics Assets”], for an aggregate purchase price of $20mm. Second, with Berry Corporation (“Berry”), for assets and equipment related to the debtors’ California business lines and certain real property locations [the “California Assets”], for an aggregate purchase price of $27mm. And, finally, with Axis Energy Services Holdings LLC (“Axis” and, together with Select and Berry, the “Stalking Horse Bidders”), for assets associated with the Company’s well servicing and completion and remedial business lines [the “Non-California Well Servicing Assets”] for an aggregate purchase price of $25 million with $17.5 million to be paid in cash and $7.5 million of Class D preferred units of Axis. For the math challenged, that equates to a total of $64.5mm in cash. Each of the purchase agreements also contemplates the purchase of working capital and the assumption of liabilities. The debtors hope to have a sale hearing — assuming there are qualified bids to compete with the stalking horses — no later than September 24, 2021. This date is driven by tight liquidity in the DIP budget and, by extension, tight milestones under the DIP (which also requires payment upon closing of the sales).

We quipped that, with those numbers, the math didn’t look great for unsecured creditors. But, since then, the narrative has changed in some respects but stayed the same in others.

First, the good news: for two of those sets of assets, the debtors received bids that blew the stalking horse bids out of the water. Here’s an updated list of asset sales after the auction:

  • The Non-California Water Logistics Assets: $20mm sale to Select.*

  • The California Assets: $43mm sale to Berry;

  • Non-California Well Servicing Assets: $36.65mm sale to Ranger Energy Acquisition, LLC; and

The debtors held their sale hearing on September 23, 2021. At the time of the hearing, there were two unresolved objections, both of which were focused on somewhat ancillary issues. An objection raised by U.S. Specialty Insurance Company related to the specific process by which the debtors would treat certain surety bonds, and another objection raised by various taxing authorities related to the treatment of any tax liens on the assets to be sold. The court overruled both of these objections and approved the slate of asset sales.

This is a good result, a validation of the bankruptcy sale process and a relative win for the secureds. Beyond them, however, it doesn’t much move the needle.

You’ll recall that there was about $475mm in funded secured debt (including the DIP) against sale proceeds of about $72mm upon the filing. Now, the debtors have been given the green light to sell those same assets for $99.65mm. This is a fraction of the debtors’ stated $331mm in book value but still beats the hell out of liquidation value which, if we had to guess, is about a hair less than the initial sale prices baked into the original APAs to begin with.

Upon the filing we wrote:

In case anyone is hoping there might be something here for unsecured creditors and/or non-Ascribe equity holders to play with, well, let’s review: 

  • There’s $87mm in unpaid trade, litigation and unsecured claims, 

  • Only about $72mm of sale consideration (half of which will pay off the DIP), and 

  • Very little in the way of what’s left after the assets are sold in the three proposed sales (some real estate?). 

The math ain’t pretty.

The math got prettier thanks to the sale process — to the tune of $27.65mm. It just didn’t get pretty enough to give the unpaid trade, litigation and unsecured claimants a recovery.

* The debtors didn’t receive any qualified bids for these assets, so they went through with the stalking horse APA.

⚡️Update: China Evergrande Group⚡️

Despite Mr. Kopits’ concern, the market seems to have moved on from the short-lived shock that was China Evergrande Group to even more depressing (domestic) crises such as the debt limit, infrastructure, and inflation. Despite ghosting its foreign bondholders and triggering a 30-day grace period, the company is acting as if its business as usual. Should a bit of a financial crisis thwart plans to build one of the world’s largest soccer stadiums, for instance?

Indeed. Of course not.

Make no mistake: this sh*t is still ugly. Note some of the stories out on the subject this week:

  • There are signs of intra-Chinese contagion. Another major Chinese developer, Sunac China Holdings, saw its capital structure get napalmed this week. Per the WSJ, “Its U.S.-dollar-denominated bonds also retreated, with 7% bonds due in July 2025 quoted at about 81 cents on the dollar by late afternoon Monday in Hong Kong, according to Tradeweb. This debt was quoted above 98 cents on the dollar at the start of the month, and as recently as July Sunac was able to raise $500 million of new debt funding from bond investors.” 😬

  • Back here at home, the Federal Reserve is, to be safe, questioning big US banks about their exposure to Evergrande. Similarly, the Office of the Comptroller of the Currency and the Securities and Exchange Commission have reportedly been probing banks to determine whether there is any and to what degree there is any risk.

  • We recall seeing a funny skit years and years back about the construction workers toiling away while building the second Death Star and how crappy it must have been for them to be collateral damage in the Rebellion’s war against the Empire. There’s a similar dynamic here at play in Evergrande — though hardly anyone is laughing. While the Chinese government purportedly attempts to shift projects away from one developer to another so as to salvage the entire property market and rescue depositors from a catastrophic loss, it's unclear what will happen to the unpaid bills of those working those jobs. Here is a Reuters article about the owner of a cleaning business owned $3.1mm by Evergrande. His company employs 100 people and uses 700-800 contractors to clean apartments before they hit the market. To pay off his own debts and wages, the poor guy had to sell off his Porsche Cayenne and put his apartment on the market. We imagine stories like these are pervasive across China.

  • This sh*t about shadow banking “trusts” is bananas. Much like in the US, financing is potentially available from shadow banking trusts when regular-way banks aren’t an option. The trust industry in China is $3t large. Apparently tens of thousands of Chinese households provided financing to Evergrande by way of these trusts and — ⚡️surprise!⚡️— Evergrande hasn’t made payments on the funds provided by these trusts. This is the company’s single biggest source of debt, people. This is insane. Apparently now the trusts themselves are going out of pocket to finance investor payments. How long will they be able to do so? The numbers are staggering. Per Bloomberg, “The clock is ticking for Evergrande to make these investors whole. The cash-strapped firm faces repayments in the fourth quarter on $1.8 billion of high-yield products sold through trusts to wealthy clients and institutions. Another $4 billion is due next year, according to data provider Use Trust.” YIKES. This is not good: “Evergrande’s dependence on trusts and other asset management products began growing after banks were directed to cut back on their lending to the property sector. By the end of 2019, Evergrande had done business with most of the 68 trust companies in China, which accounted for 41% of its total financing, based on the last borrowing disclosure.” But the trusts were completely devoid of risk protocols; they began reducing their exposure in the first half of ‘21, decreasing loans by 17%. Remember those stories about Evergrande’s wealth management products? Well once the shadow banking trusts decided that Evergrande was a deadbeat and reduced funding, Evergrande just went out with their own products to their employees, acting like predatory d*ckwads with no regard for the fact that they might be ruining the life savings of many an unsuspecting loyal employee. This story just gets worse and worse as more details come out.

  • China Evergrande New Energy Vehicle Group issued the equivalent of a going concern warning. HAHAHAHAHA. NO FRIKKEN SH*T. Just so you understand the magnitude of this absolute dumpster fire of a sh*tshow, a mere five months ago this thing had a market cap of $84b which makes it valued more than Ford Motor Co. ($F) — despite never producing a working frikken automobile!! You can’t make this stuff up.

  • Evergrande has another interest payment due today on its 9.5% ‘24 dollar-denominated bond. Oh. My. Whatever may happen with that? 🤔 😂

In closing, here is an intentionally provocative piece by Niall Ferguson which, in a nutshell, says that China is f*cked and therefore overrated. If so, it’s hard, given the interconnected nature of the global economy, to imagine a scenario where this all goes south in China and remains contained.

But employing logic hasn’t been the most fruitful way to make money for years. So 🤷‍♀️.


⚡️Announcement⚡️

Here’s a casual reminder that, a few weeks ago, we, in our infinite wisdom, decided it would be a good idea to start an Instagram account populated primary with genius memes such as this one ⬇️.

Whatever. We can all use extra laughs. We would love you to join the party and follow us on Instagram here ⬇️.

Follow PETITION on Instagram


⚡️Announcement⚡️

We sh*t on the restructuring community all of the time and so it only seems fair to highlight when the community rallies together behind a good cause.

Chris Langbein is a former Kirkland & Ellis LLP associate and Lazard director who was diagnosed with sarcoma a few years back. In the years since, the restructuring community — led by professionals out of Chicago — have promoted “Team Langbein” for the Sarcoma Foundation of America’s “Race to Cure.” This year the Team’s goal is to raise $100k and, at the time of this writing, it is about 69% of the way there. No pressure but every little bit counts so if you’re look at your tally of charitable contributions for 2021 and realize that you’re a bit of a deadbeat when it comes to doing your part to help others or support worthwhile orgs, here’s a good chance to help make up for that ⬇️. Support Team Langbein today.

Go Team Langbein!


📚Resources📚

We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥. We’ve recently updated the list to include some new releases such as “Damsel in Distressed: My Life in the Golden Age of Hedge Funds” by Dominique Mielle (formerly of Canyon Partners) and “The Platform Delusion: Who Wins and Who Loses in the Age of Tech Titans” by Jonathan Knee. We haven’t read either yet but they both certainly look interesting.


📤Notice📤

Brendan Gage (Associate) joined Goulston & Storrs PC from Paul Hastings LLP.

Brian Greer (Partner) joined Greenberg Traurig LLP from Dentons LLP.

Edward Mahaney-Walter (Associate) joined Intercept Pharmaceuticals (as Associate General Counsel) from Skadden Arps Slate Meagher & Flom LLP.

Jeff Truitt (Senior Managing Director) joined B. Riley Financial from FTI Consulting Inc.

John Sordillo (Senior Managing Director) joined B. Riley Financial from CBIZ Corporate Recovery and Litigation Services.

Mark Kronfeld (Managing Director) joined Province Inc. from Blackrock.

Megan Preusker (Partner) joined Mintz Levin from McDermott Will & Emery LLP.

Nathan Coco (Partner) joined Mintz Levin from McDermott Will & Emery LLP.

Tim Hannon (Managing Director) joined B. Riley Financial from Bonduelle Fresh Americas.

🙌Congratulations to:🙌

Erin Edelman (Partner) for being selected to lead Armstrong Teasdale’s Restructuring, Insolvency and Bankruptcy practice.

Judge Robert Drain on a long distinguished career as a bankruptcy practitioner and bankruptcy judge. He announced this week that he’d be retiring next year, eight years ahead of the expiration of his term. We can’t help but assume that the Purdue Pharma case took an awful lot of wind out of his sails.


💰New Opportunities💰

Boeing Capital Corporation is seeking driven professionals to join our Supplier Financial Risk Management team. These individuals will be responsible for helping to assess risk, develop risk-mitigation solutions, and lead the development of strategies in connection with our suppliers. For more information, please contact Stevie Mussie (stevie.n.mussie@boeing.com).

Greenhill is seeking an experienced associate to join its Restructuring & Financing Advisory team in New York.  The position offers qualified individuals the opportunity to assume significant responsibilities on both restructuring and financing matters, and provides a unique opportunity to work closely with clients and experienced senior professionals.  For more information, please visit here to apply online, or submit your resume via email to thomas.mccarthy@greenhill.com

PETITION is making two (paid) internship slots available for the Fall semester. We’re looking for entrepreneurial, commercial, creative and, frankly, not too “corporate” MBA or Law school students to work with us and help take us to the next level. Primary responsibilities include (i) research and writing and (ii) ownership of some new strategic and creative initiatives. We want to try some new sh*t — even if that means failing. Current paying subscribers will get first look (logically, paying subscribers have a much better sense of what we write about and what we stand for). Email us at petition@petition11.com and write “PETITION Intern” in the subject line.

ToneyKorf Partners is recruiting talented, experienced, and driven people for our Vice President and Senior Associate levels. If you are interested in a culture that focuses on making a difference in people's lives, colleagues who know and care for each other, and clients who appreciate our commitment and passion for their businesses, then ToneyKorf Partners would like to hear from you. ToneyKorf Partners is a results-driven management and advisory firm specializing in helping healthcare organizations address complex and critical challenges. For more information, please visit here or contact us at Careers@ToneyKorf.com.

XCLAIM, an online global marketplace for trading bankruptcy claims, seeks a Director of Business Development to join its team in Los Angeles (remote optional). If you are interested in learning more about this position please go here.

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Looking for quality people? PETITION lands in the inbox of 1000s of bankers, advisors, lawyers, investors and others every week. Email us at petition@petition11.com to learn about posting your opportunities with us.