š„Inexactš„
Exactech Inc., TGI Fridays Inc., Lumio Holdings Inc., Sunnova Energy International Inc. ($NOVA), Global Wound Care Medical Group PC & More.
The ironically-named United States of America (āU.S.A.ā) is, once again, on the eve of the most consequential, epochal, historic, seminal, portentous elections in its 248-year history. Yeah, another one of those g*ddamn āhumanityās future is at stakeā elections.Ā Given the magnitude of the moment, youād think there would be similarly consequential, epochal, historic, etc., activity in financial markets as investors handicap the apocalypse.Ā
Thereās been none of that.
Sure, October payrolls were a dismal 12k, but thatās all because of Hurricanes Helene and Beryl and the port strike. Ditto the miss in ISM Manufacturing (46.5%Ā in October vs. 47.6% forecast).Ā But consumer confidence rose to 108.7 from 99.2. Core PCE may have increased month over month ā per Goldman Sachs ($GS) economists, due mostly to āresidual seasonality in PCE componentsā (eg, airfares) ā but it declined year over year, which is more important. One might even argue that a ānarrativeā is forming before our eyes. Per The Wall Street Journal:
Indeed, the economic statistics disseminated by government agencies certainly paint a āremarkableā picture of āgrowthā in a statistical sense. Whether it bears any resemblance to the economy that exists outside Federal mainframes is a different story. Our favorite economist Torsten SlĆøk of Apollo Global Management offers a rational theory for the economyās strength: less sensitivity to interest rates, as consumers locked in low rates during the pandemic; the āstructural boomā of AI/data center buildout; and an āeasy fiscal policyā as a result of the CHIPS Act, the Infrastructure Act and defense spending. The Great American Consumer is in fine shape:
Bullishness abounds ā even at historically high P/E levels:
So thereās been a bit of a dip in recent weeks. So what? The trend is the important thing. The hoary old Dow lagging the S&P 500? Not to fear: once Intel Corp. ($INTC) is out of the DJIA (despite its breakout on Friday) and Nvidia Corp. ($NVDA) is in, that gap will close in a matter of minutes. With interest rates set to decline some more later this week ā yes, friendly reminder, there IS a Fed meeting RIGHT AFTER the election ā thereās reason to suspect that as rates go down, outflows from lower-yielding money market funds and treasuries will eventually transpire and feed the equity beast. To the moon, we say! š
You know who doesnāt say that? Warren Buffett. With 72% of the S&P having already reported earnings and EPS coming in at 14% in the aggregate, homeboy is nevertheless getting liquid AF. Hereās one interpretation:
And hereās another:
Admittedly, both notions crossed our minds before we even saw these tweets. Who knows whatās really happening? Certainly not us but pardon the obvious: Warren is no spring chicken. Heās also no dummy. What is he (or are his acolytes) seeing that the market isnāt, š¤?
What are the credit markets telling us? Spreads are tight. Like, historically tight. Thereās very little fear in the high yield and investment grade markets. Which may, in fact, be reason enough to be fearful.
How about leveraged loans? Thereās been $1 TRILLION of loans printed year to date. Thatās 23% over last year, and 8% ahead of the prior record in set in ā17:Ā
Around half of that trillion came from repricings, Pitchbook says, and thereās more to come: āWith new-issue borrowing spreads hovering near multiyear lows, roughly 40% of all outstanding US leveraged loans have been repriced so far this year, and more borrowers are waiting in the wings.ā
Still, FitchRatings says there are still names to follow in leveraged loan land:
āTen issuers across eight sectors defaulted on $5.8 billion of leveraged loan debt in September, driving the TTM September default rate to 4.68%, up from 4.49% in August. Each default involved a highly levered issuer grappling with high interest expenses that pressured liquidity. This led to a missed interest payment in the cases of Mavenir Systems and American Rock Salt. Some issuers were also simultaneously facing weakening operational performance from lower demand for their services or lower-than-expected growth. This was the case for Digital Media Solutions, New Constellis and Pretium Packaging. Rising competition, inconsistent or weakening demand and the industryās destocking headwinds in 2023 played a key role in the deterioration of operating performance for Polar US Borrower, LLC (CCC) and ASP Unifrax Holdings, Inc. (RD). Both chemical sector issuers completed distressed debt exchange (DDE) defaults.ā (emphasis added)
But, per S&P Global Ratings, the list of names is getting smaller and smaller. Lots of deals are getting done. Per Pitchbook:
āRecord amend-and-extend activity, a proliferation of distressed liability management exercises and, increasingly, private credit lenders stepping in to meet refinancing needs have driven down the share of US loan issuer āWeakest Linksā for a third consecutive quarter.
LCDās Weakest Links count ā a forerunner for potential default activity ā includes companies rated B-minus or lower (excluding defaulted deals) by S&P Global Ratings that have a negative outlook or implication, and are therefore on the cusp of a downgrade to, or further into, the vulnerable triple-C category.
With financial conditions easing, and the US Federal Reserve cutting rates for the first time since 2020 during the period, the tally of these at-risk issuers tracked by LCD fell to 136 as of Sept. 30, down from 154 in Q2 and a post-pandemic high of 183 at the end of 2023.ā
They include this handy chart:
One deal that didnāt get done? Exactech Inc. The manufacturer and seller of medical implant devices that may or may not have caused thousands of people some serious medical problems was the lone constituent of the Morningstar LSTA US Leveraged Loan Index to default this past week. Not in that index? TGI Fridayās, though it, like Exactech, filed a chapter 11 bankruptcy this week ā marking a big week by Ropes & Gray LLP, which represents both companies as legal counsel.
We cover both names and more below. Letās dig in ā¬ļø.
š„New Chapter 11 Bankruptcy - Exactech Inc.š„
On October 29, 2024, FL-based Exactech Inc. and four affiliates (collectively, the ādebtorsā) filed chapter 11 bankruptcy cases in the District of Delaware (Judge Silverstein). The debtors are in the business of manufacturing and selling medical implant devices such as replacement hips, joints, shoulders and feet. Hopefully you havenāt had one of these surgeries and gotten one of these devices implanted because a primary factor in this bankruptcy filing is the fact that these devices have allegedly been faulty as-all-f*ck. Luckily, the debtorsā lead counsel, Ryan Preston Dahl of Ropes & Gray LLP, has not had one of these implants, despite his ābrief football career,ā a detail that Mr. Dahl felt absolutely compelled to share at the debtorsā first day hearing.* Cue the soundtrack Johnny!
Snark aside, the football career is pertinent because itās very clear that blocking and tackling is going to be (and has already been) a huge part of Mr. Dahlās assignment here. This situation has it all: lenders duking it out with private equity bros duking it out with plaintiffsā attorneys. Strap your helmets on, folks.