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All right, well, one stock this down about fifty percent is b Riley. It's facing a wider probe on some risk disclosure disclosure. So we want to get a little bit more into this with David Viacos. He is Bloomberg Legal reporter. Can you just explain to me, David, what's going on here? What this probe is.
The Security and Exchange Commission has been investigating for several months the accuracy of the financial disclosures from b Riley, which is a Los Angeles based investment firm, and we reported this morning that they're also looking into whether they've adequately disclosed the risk in some of the assets, and they're looking at possible improper trading by insiders as well.
The company today announced that it's likely to miss its earnings by a good bit and so I think the poor earnings announcement, combined with the SEC news, is punishing the shriffs.
Down fifty four percent over the trailing twelve months. That really does suggest that the stock market is really concerned about this thing. Is there a solution here? Is there a restructuring out there? Is there just is there something out there that can save this company and shareholders and bond holders?
I guess, well that's the question. I mean, Bryan Riley, the founder and CEO, said today that they're refocusing their business on their core operations, and I guess we'll see how investors react. Their problem is they have a lot of problematic debt that they're going to have to work
through now. And they also, uh, it's unknown just the precise nature of their relationship with a guy named Brian Khan, who be Riley helped take his company, Franchise Group public and then help him take it private, and so there's a lot of interlocking relationships between the two of them, and there's a criminal investigation that's caught up Brian Khan.
So why would anyone own the stock right now? I mean, what's in it for investors to hold onto the stock? Like how soon will this legal worries be resolved or not? Like how drawn out? Could this be?
It?
The company is contracting pretty rapidly. If you look at its market share, it's down considerably. So this could go quickly. And I guess it's a matter of whether investors still have faith in this company to right itself.
You know, I'm just looking at you know, when you think about these investors, banks, these brokers, firms, it's in the marketplace, it's all about trust. We saw that with Lehman Brothers, bear Stearns, much bigger firms. But if you lose that counterparty trust, you're done. Everybody just walks away from you. Is that kind of It feels like we're kind of at that point right now.
It does feel like we're at an inflection point, you know, whether investors will continue to trust and so I guess we'll have to see how the investigations play out as well.
All Right, David, thank you very much for that reporting. It looks like a brutal day for b Riley and A shareholders down fifty percent. Here David Orriaco's Bloomberg legal reporter, talking to us about b Riley. R I l Y is the ticker.
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Thirty, Malex Steel Paul SWEENI will be back momentarily. This is the Bloomberg Intelligence Radio. We bring you all the top news in business and finance and economics. There are lens of our Bloomberg Intelligence folks. They cover two thousand companies and one hundred and thirty industries worldwide. We also take you outside the Bloomberg Intelligence universe to get the read on what people are doing with their money, and for that we go to Christina Hooper, a chief Global
market strategist at Invesco. She joins us. Now, Christina, you're one of the best about putting situations in the market into context, into perspective. So just let's start broad. How would you categorize the last couple weeks within the within the market.
So Alex, I would characterize it this way. We have seen valuations get stretched. Let's face it, We've seen a very very strong rally over multiple multiple months without much of a pullback, So it makes sense that when stocks are closer to being priced for perfection, jitters enter the market environment, especially when we see some cracks appearing in the economy at the same time that the FED is
holding rates at very high levels. What I would argue is very restrictive given the level of disinflationary progress we've seen thus far. So I think of it as something of a small but almost perfect storm that caused a sell off. Certainly that was the case in the United States, of course, greatly exacerbated and initially triggered by what happened in Japan with the carry trade. The banker Japan gave a somewhat surprising rate hike, and that triggered an unwind.
And so we had several different events that came together to cause the sell off. But just as quickly as at occurred, we saw a retracing of much of it because those proximate causes dissipated. And by that I mean we heard from the Bank of Japan that in fact, they're going to be a lot more cautious with any more rate hikes if there is market turmoil or instability. And number two, we got a data point in labor.
The initial jobless claims that was better than expected because in the US, the trigger, of course for concerns about a heightened probability of recession came from the July jobs report, and that increased in unemployment. So we've seen something of a recovery. I think we're going to continue to see investors walking on eggshells in the near term because there's still a lot of uncertainty out there. But I think it definitely was an over sold situation.
So then how does that set us up into CPI this week? Although I might say initial jobless claims before CPI, for example, more important, and then Jackson Hole, if position is kind of cleaned out a little bit, if we've kind of delevered enough, if technically we've already sort of stabilized, how does that set us up?
So I think we certainly will have jitters around, not just initial jobless claims, but clearly CPI, But we have to take it with a grain of salt, right because we are seeing other signs of disinflation. In fact, I thought the most important data point from the July jobs report was wage growth, which has fallen to three point
six percent year over year. But certainly we'll have markets hypersensitive to the data this week, especially CPI, and then of course we'll have a lot of sensitivity around Jackson Hole. Now I look to history and say that typically that is used as an opportunity for central bankers to signal shifts in monetary policy, and I would expect that to happen at Jackson Hole, not in every speech, but I think we should get some sense that the Fed will cut in September. Now, I don't think we're going to
get an emergency cut before then. I don't think we're going to get bigger than fifty basis points because the Fed seems to be very confident in their approach. And keep in mind, they did a similar thing back in twenty twenty two. Many thought they were behind I think they thought they might be behind it, but they still only started with twenty five basis points, and I think we'll see the same in September.
So to that point, how does the FED signal cuts when the market's already pricing in one hundred basis points of cuts? So it's like if they go too far and then all of a sudden, we're going to be looking at what fifty again are being priced in.
Well, I think it's a reiteration that we're going to be gradual, that we are going to start cutting, but don't expect it to be at the level you think it is, because we're very comfortable with where the economy is right now, although monetary policy is too restrictive, so I think that's going to be the approach. So certainly not not hawkish, but not the dubvishness that markets are pricing in at this point.
Do you feel, then, from that perspective that the carry trade unwine blow up thing that we saw is that over? Because the funny thing is if the FED cuts more than we think, that's actually worse for the carry trade blow up. Do we think that that part of the market turmoil is done?
I think it's largely done. I would say it's entirely but I do take comfort in the reassurances from the Bank of Japan and frankly, I don't think they need to hike again for some time. But yeah, certainly there could be wrenches thrown into it if the FED, for example, is more dubbish. I just don't see that on the very near term horizon.
All right, fair enough, what do you think we are going to see for CPI? On Wednesday.
I think we'll probably see it somewhat in line with expectations. But I always take a step back and say, Okay, let's say that the month over month number is higher than we'd want to see. At the end of the day, the FED is looking at a mosaic of data, and more important to the FED, of course, is forre PCEE. And also I think we often overlook that an important part of the Fed's calculus is consumer inflation expectations. We'll get the Michigan numbers on Friday, and I think that
plays a role. Keep in mind that back in June of twenty twenty two, when the FED decided to hike rate seventy five basis points rather than fifty, they gave as their argument in the press conference a couple of different data points that they had received, not just CPI but inflation expectations. So I think that's an important part of.
The Calculus's such a good point. And it's also like the trend, you know, the directionality to be important there too. So when my husband texts me and says, oh my gosh, look at this market, what are we doing here? We have to do something. What do I tell him like, calm down, stay in your positions, or are we going to buy the dip? Here?
Like?
How do you deal with it as a market participant?
Well, I look at it this way. If we had been sparn enough to turn off our.
Bloomberg terminals, this is so true, and turned on the TV and just watched the Olympics since the start, and then turned back everything on today, it wouldn't seem like anything dramatic, very dramatic had happened while we were enjoying the Olympics, including the break dancing section.
And yet that is not what we as humans tend to do. We fixate on every move and every data point. So I think to a certain extent, putting blinders on and thinking about the long term trajectory of where inflation is going, where the FED is going, can be helpful. I think we get so caught up in the short term data and market moves when we often as investors, we typically have much longer time horizons.
It's true, it's such a good point. I knew that double tasking here well on my terminal with my little TV up on the screen was the right call. Thank you for validating me, Christina. So does that mean that it's it's still going to be sort of growth or quality. Maybe you go out with quality quality over cyclicals or something. Is that a good way to also think about it.
Well, probably in the near term it's going to be quality because there is a nervousness. There still is some risk off sentiment, even though I think certainly conditions became over sold. Having said all that, if the FED begins to cut and we start to see an improvement in economic data, then I think there's this assumption on the part of markets that there will be a reacceleration. That's
my base case, and we'll see. In my opinion, markets anticipate that in advance, discount that in advance, which we would mean small caps and cyclicals are likely to outperform.
All right, Christina, did you like break dancing? Like? How do we feel about that? In the Olympics so no one else will talk about this with me in radio? How did you feel about it?
Well, I was very curious about it. I have to say that's something that I think of fondly as a out of the eighties. But I'm not sure I've seen breakdance moves like the ones I saw at the Olympics, so I didn't know if there were different rules in place.
This is fair enough. John Tucker has something he wants to say, sport. No, it's not a whatever. Skate Do you think skateboarding is a sport?
Yes?
Okay, So what's the difference because they're on a board? Okay, I don't know. I don't know about that. I loved it. I'm so sad it's over all getting into a curmudgeon. By the way, I'm not turning you into anything. I'm just setting you up with certain questions. All right, Christina, thanks a lot. We appreciated Christina Hooper, chief Global market strategist at Invesco, to be totally fair to John Tucker.
I'm not entirely clear on the break dancing thing either, but I support winners and that's all fine.
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The headline in a good way is Gocha Bank buying about fourteen point nine percent of Key Corp for about two point eight billion dollars. Now, remember Key Corp was one of the regional banks that was hit pretty hard in the tumult of twenty twenty three. So naturally, who do we go to? Herman Chan Bloomberg Intelligence senior analyst for US regional banks. Usually we call on him when things are going poorly. But this feels to be a good thing for Key Corp. Can you walk us through.
Let's walk us through what Key Corp actually was before a Scochia bank decided to get in here.
Sure, so Key Corp regional bank based in Ohio Cleveland, strong presence in commercial ending and has a really robust investment bank and capital markets capability for its size. On the flip side, the bank was really has been really pressured by the higher interest re environment. It got caught off sides a little bit by both its hedging strategy and its investments in lowly yielding securities when interest rates
were near zero. So it's it's margin and profitability has lagged the peer group over the past couple of years. That being said, things were improving and didn't require any additional capital infusion. There was on a path to self help. Margin had already reached the bottom. But now the with the two point eight billion capital infusion from Scotia Bank, they can accelerate that earnings profitability improvement story.
How long does it take to get something like this done? Like, has this been in the works for a while or what?
Yeah, it seems like based on both the calls that that Key Corp. And Scotia Bank conducted earlier this morning, the CEOs had ongoing conversations about a potential investment. From what I understand, Scotia Bank wanted to expand in the US and had done a lot of due diligence in looking at opportunities, and Key Porp was their top choice.
So it adds a great earning stream and exposure to the US for Scotia Bank and for Key Corp. It really improves its capital and liquidity and really puts them on offense rather than playing defense for the past couple of years.
How are the banks like Key Corp doing as interest rates may fall somewhat soon.
Yeah, I guess I would contrast it with the tumult of March and April of last year. The banks had largely been very defensive pretty much up to the end of last year. Reducing its lending capacity, trying to improve its capital and liquidity ahead of both fears about deposits leaving and also higher regulatory burden. Right now, it seems like they're in a much stronger position. Capital has been
built up, they're back to lending. The only issue is there's not a lot of demand, and the banks are positioned for potentially or interest rates that can improve some lending going forward. They've had a lot of the potential rate decline, so they're in a fairly good position to really prosecute the opportunity.
What about deposits? Has deposit flight stopped, particularly if rates wind up coming down. I'm just waiting for my market's account all of a sudden started to tick lower and yield where are we here with that?
My high savings account is already ticked down in anticipation for Rencooks, so American Express, I'm not a big fan of that. I would say that the posits have really stabilized. There's no real rush to build the posits now because as I said before, there's not a lot of demand for the lending side, so you don't need a lot of deposits to really fuel that that you know, the
muted demand appetite out there for loans. That being said, the positle cards aren't rising either, and they're pretty stable because the Feds stabilized there the Fed funds rate for a bit now, and we'd expect, you know, some stable margin depending on the bank, some could be upcome, some could be down over the next year just based on their balance sheets.
Are there other potential targets for investments from other banks in this kind of scenario.
Yeah, from what I understand that there's a unique way of accounting for the Canadians where some small portion of investments in financial institutions has a as a positive capital calculation, So it might be more focused on the Canadians in general. But that being said that we have seen some pickup in traditional M and A activity in the United States. Discover Capital one is the biggest one that we're still waiting for regulatory regulatory approval, and then there's some smaller
banks that have done some deals as well. So it seems like that the the activity is going to rebound even more once we get rate cuts.
All right, really good stuff, Thank you so much. Herman chan He is so happy when he comes in and doesn't have to talk about banks blowing up, so exactly.
I'm no longer the grim Reapers.
It was like Sam Fizzelli for a while with COVID, and it was Herman Chan with the bank blow up, and now you know, we're in a different places. Herman Chan Bloomberg Intelligence, senior analysts for US regional banks. We very much appreciate that.
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Thirty, Alex Stee, Paul Swinny live here in our Bloomberg Interactive Broker's studio. Also streaming video on YouTube ahead over YouTube dot com and search Bloomberg Podcast. That's where you will find us. Boy, if you think back a week ago, right now, the market was panicking. It felt like, I mean, people, we're selling everything across the board, and it is a real confluence of events there that really spooked the market.
The market stabilized kind of midday and into the afternoon on Monday, and then kind of clawed back some of that selling later in the week, which brings us today kind of a mixed market, red and green on the screen here. But let's see where we go from here, and we do that with a professional. Sarah Ponzik, Financial Advisor, UBS, Private Wealth Management, full disclosure. That's where the Sweeney pile of cash is at UBS. So they have a whole
wing just taking care of me. That's nice. Yes, I've heard that Tonio c He does it just because he likes me. All right, Sarah, what were you What kind of conversations were you having with your clients last week? It must have been Monday. Must have been a little dicey, it was.
And what a difference just a couple of days makes On Monday, if you woke up and you looked at the headlines, then you saw what had happened overseas, and then you looked at futures markets, and then the market opened at nine thirty am and it was just a sea of red.
It felt like the world was falling apart. And I did.
I mean I had incoming calls all day long from clients asking what is going on?
Do we need to be concerned?
Should we be selling our stock portfolio, and the answer was emphatically no, because as we saw by the end of the week, what a difference a couple of days makes. And if we think back to why why did Monday happen? Last week, there was a confluence of events. Yes, we saw the yen carry trade unwinding. It was, you know, just more concerns about recession posts that jobs report, and just also consider the fact that we had seen almost
no volatility this year. We were due for some volatility, and then it just took a couple of days an initial job as claim suport, which showed maybe the labor market isn't as dire as the prior Friday had really suggested, which usually doesn't move markets, but it did. And then by the end of the week, if you had fallen asleep the entire week, you would have never known Monday happened. The S and P five hundred was unchanged by the end.
I so wish that I had done that. I sleeping as my superpower. I could definitely have done that for like a whole week. So, Sarah, I guess the question then is, so if someone says, oh my gosh, I'm panicking, do I change what I do. You're like, no, just hang tight, But can you rotate kind of within that and take advantage then of some of the opportunity that came about.
Absolutely last week presented opportunity. So especially if you're someone who's been sitting on cash and it's been great, you can sid in a money market, you're earning you know, five and a half percent in cash, fantastic.
But now we're closer than.
Ever to really believing that that's not going to be the case in quite some time. We're going to see interest rates coming down. So what do you want to do with that cash? Obviously, if you're conservative, you could go by high quality fixed income. But last week really
presented an opportunity in the stock market. If you were someone who's been waiting for an entry port, entry point, last Monday presented that self, you know, start putting that cash to work, getting invested, putting a plan in place to get invested in the equity market, And when you think about certain pockets of the market, I mean, we just saw tech absolutely hammered last week, and tech is
still a place that we're really still optimistic about. And if you look at US tech valuations last month, they were trading around thirty two times twelve month forward earnings. Now they're down to around twenty seven, so more reasonable and again an opportunity to get invested in a place that had been so high flying and many were just scared chase returns in the beginning of the year.
So aside from technology, which again a lot of folks are saying, stick with it, stick with it, where else do you guys see opportunities at there? Because there are again a lot of people that are thinking about if interest rates are coming down, this might be a time for me to think about doing take on more risk Bres.
Yes, absolutely so.
We've still been very much pushing at the top of our list, I would say high quality growth, which you know at the top of that list is tech. But when you think about more so tactical trades, maybe looking to small caps.
You know, we did see a big.
Rotation to small caps in July when we started thinking about interest rates potentially coming down. When we think about interest rates moving lower, small caps are going to be that prime beneficiary of that. They have a lot of debt on their balance sheets. But at the same time, if you're someone who is concerned about a recession, and I will say for now a soft landing is still our base case. But in the case of a recession, small cap small caps.
Is really not where you want to be overweight, so.
Finding that balance but small caps potentially, and then also you can look at some other cyclical industries like industrials. If we do start to see you know, growth continue to move forwards, interest rates come down, maybe balancing out that high growth exposure with a little bit of cyclicality. But again, if we do see more concerns that a recession might be on the horizon cyclicals and small caps, that's where it can get a little bit dicey.
It was interesting though, I'm just looking at a one month comp chart of the S and P and the rustle and they didn't really diverge that much. Like small caps didn't tank in relation to the S and P. They sort of moved in tandem. Today they're a little bit off, maybe a little bit more than but like not that much.
No, it really was when we think about the rotation we saw in July, it was a one week major snap in which we saw small caps outperform. And now, like like you mentioned, Alex, we really haven't seen a continuation of that, and we are actually of the belief, Look, you should have diversification, you should have a little bit of small caps mid caps in your portfolio.
But when we think about where, where is really where are we going.
To see the bulk of the growth and the bulk of returns and outperformance in the years to come. We still believe that's high quality growth, large cap tech, and large part because look, we went from talking about great economic projections to talking about maybe a recession, and frankly, if there are recession concerns, where do people go. They want high quality, they want growth, they want earnings, and nowadays that has become megacap tech.
So we still are optimistic there.
Yes, you want diversification, but we're not huge proponents of a major rotation, just quite yet.
All right, you're in South Florida. It seems like everybody and your brother's coming down there.
Yeah, sure, she's from there.
So well, that's actually what I say all the time, alex Is, Look I did. I moved down to Florida twenty twenty one, when the entire world living in Florida, everyone's still moving there. But I say, in defense, look I was here first.
I grew up here. I promise I'm not an outsider.
Is it still is it? Are they still coming? Do you think? I mean, I know you and your office and all the other folks down there are welcoming everybody down.
It's Look, it's it's not twenty twenty one, twenty twenty two anymore. It's definitely slowed. Even if you look at the real estate market by US prices haven't come down, but they are not, you know, sky continuing to skyrocket at ridiculous, ridiculous paces. So I would say, yes, every now and then, I'm still meeting people on the street you say, oh, I just moved here from New York, I just moved here from New Jersey. I just moved
here from California. All the time, but it has slowed from you know, the breakneck pace at which we were seeing just a couple of years ago.
All those stories that like there's not enough schools, like not a private schools, not enough highways for all the traffic.
Like I know, yes, there's traffic has gotten a lot worse. And at the same time, anyone who has kids, not yet me, but thinking about if you're moving down here, you've got to get your kid on waitless for school. Public schools are all overcrowded for trying to get you know, a young child into daycare. They're the first person you have to tell that you might be having a child, because you know, you have to get on the weight load.
All my neighbors are telling me this. But yeah, I know it's it's it's definitely different.
It's very real.
All those stories that you hear, they come from a place of truth.
It's just you wonder how, I mean, how long that economy can support all that? I mean, I.
Wonder the same.
No, we have seen a slowing it's it's not the same, but we're still welcoming people down there.
With Florida taxes, like, you don't pay a lot of tax, no.
State income tax.
Wait, doesn't that change because you got to like build the stuff like or just.
Get its revenue.
Property taxes are higher, Okay, so are higher property taxes, you know, real estate taxes. But yeah, no state income tax, of which I would also say, you know, I have a lot of clients up here.
That's why I'm in studio today.
I'm right here visiting clients, a lot of people trying to change residency for that very reason really, So it's definitely a factor that comes into play, you know, with the alert.
So that's that's why if your financial advisor, like Sarah, you have to be up on the municipal bond market buying. See we're going to get Alex into the municipal bond market.
Hey man, I have to handle all those segments when you're out. On Friday, I started sending prep messages to our producer.
Great tax free income, Alex, Great tax free.
No, it's just it hurts my brain. But before we let you go, though, I had a question about the cash so money market fun cash, right, that's sitting there, You're like five percent that's going to go away. Is there like a level where you guys think about where you're like, if it hits three percent, that's when the cash really moves, Like I've been thinking about that with say my high savings account.
That is a good question.
I don't know if there's really a level in which people are going to say, oh my gosh, now I need to start moving cash. I think that mentality, that psychological shift needs to start happening now because look, interest rates are going to come down. We more so think about it, especially if you're someone who's living off of your portfolio, think of it, Okay, how much are you spending every year off your portfolio?
Maybe you still want to keep.
That in cash or cash like securities like a CD or a Treasury bill, so you know that even if there's volatility in the market, you don't have to sell your stocks at a discount. You're not worried about that you have enough cash on hand anything beyond that unless you have something that that cash is Earmark tour, you probably want to get that invested.
So in a typical you know, ubs account that that you handle. Have your clients been holding more cash because they, in fact can make a decent return.
I would say yes.
Over the last year we've been trying to encourage them to get invested, and most of the time, look, we like to put an entire plan in place and say look, especially if you're someone look work, we work with a lot of business owners. You come at a liquidity event and all of a sudden, you have a lot of cash on hand. That's scary. You would control over your business, you don't have control over the capital markets. How do
you think about investing that? So it's not as though you were going to go ahead and you're going to get all of that cash invested in a month. You're going to take time to get that invested, but maybe locking in yields and fixed income now before yields come down, and then on the stock side, figuring out how much risk are you comfortable with and maybe dollar cost averaging over six months, twelve months, even eighteen months, depending on
your risk tolerance. But that's really where the psychological psychological shift takes place, when you go from running a business where you have so much control over your income to all of a sudden being subject to volatility in the capital markets. It's working through that change.
Interesting, all right, Sarah, thank you so much for joining us. Always great to see you. Sarah as a former reporter here at Bloomberg.
Now she's doing I haven't seen you since Kaley's wedding.
It's fine, right, I just saw Kelly. She's in town just for the day, so I was so lucky I got to say hi.
All right, Sarah Pinzac. She's a financial advisor ubs private wealth management down there in Boca Ratona, Florida. This is hot in the summer.
But why do you go to California? From to Florida. Well, they're like the same for me.
No, no, no, it's in the taxas.
The weather in California is not warm. I guess that's true unless you're inland and then it's crazy hot. But on the coast it's cool. They have instead of having fog, you know what, they have marine layer.
Marine layer.
It's not fog. It's a marine layer. That's how they do in San Diego, Carmel. It's just fog. So we'll see.
You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at ten am Eastern on applecar Play and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station, Just Say Alexa play Bloomberg eleven thirty.
Bloomberg Intelligence Radio. We are live from the INTERACTI Broker Studio right here in Midtown Manhattan. Also check us out on YouTube. The Big Take story are always the best stories. They dig into different topics that not only Wall Street but also Main Street can kind of sync their teeth into. And today's big story, A Big Take story is no different. The title is Hedge Funds Smell Blood as lenders turn on each other. The title was so good I read the whole piece before I even knew I was doing
this segment. Eliza Reynolds Hannon joins us. She's senior debt reporter and she's standing by, so Eliza, before we get into the nuts and bolts of the story. The way I think of it is, Okay, you're a company, you need money, you go, you go to lenders, you take out some loans, and there's a capital structure, and that's it. And if I default, then the person on the bottom end of the capitol structure doesn't get a money, doesn't
get the money, or it gets a reduced payment. And that's normal, right, That's not where we are anymore in this world. No, it's not.
It's like the security that you thought you once enjoyed as a lender, especially as secured lender or a top priority lender, just kind of can disappear right before your.
Eyes these days.
And that's because the lender protections on these leverage loans or high yield bonds has just eroded over a decade of high competition for the higher yielding paper in the market in a bid to get a chunk of some of those rare, really nice, high yielding loans. Investors have agreed to waive all sorts of terms and protections that once put them in the position to be able to say not so fast.
You know, I basically own.
You now, which is really crazy because then it also opens the door to then a company going to all its different creditors right and trying to strike different deals. Can you walk me through that part?
Right?
So what happens is the company needs often at least a majority, bare majority, of lenders to agree to pulling some of these maneuvers, like stripping assets from the collateral package of one loan and moving them into a new, unrestricted subsidiary, in order to all of a sudden have new collateral that it can raise that against. So it goes to lenders and says, hey, if you agree to this, you know, you and a few friends who all together
hold fifty one percent of this loan. Sometimes it's a higher percentage, we will let you actually skip ahead of the rest in the new capital structure. We'll let you, for instance, be the funds who can put in the new debt that we're asking for, which we'll be backed by the old assets that you used to think you already had as collateral, and for that reason, you actually
won't have to write off this whole investment. You'll have another chance at collecting even more yield and eventually getting repaid on everything.
So how do hedge funds come in on this?
Then, well, the hedge funds have you know, distressed investors are no stranger to underhanded tactics or kind of just rough strategies, but nevertheless you have sort of seen them go through stages of grief, it seems, with regard to this new order. So in the beginning, somewhere in denial, you saw them say not my not my company, not.
My private equity sponsor.
They wouldn't do me like that.
And as it's happened, even more and more they started saying, Okay, we need to go on the defensive. We need to organize to you know, almost protest that this that this happened, and say, already, you know sixty percent of us have gotten together and said we're not going to work with you, and so you can't actually pull this off. And that's we talk about in the story, that's the co op
agreement phenomenon. But others are now saying forget defensive. We need to get offensive, And so they are piling up on cash so that when indeed the company does say, whoever here can give us new money, We're going to put you in the prime position and you can kick all your peers down in the repayment line. You know, we're going to give you the actual the new claim to that collateral as long as you top us off
with some new financing. So the way to play this new phenomenon well and when is to always have cash on hand that you can and say, hey, put me in the best position and I'll give you a little more financing.
Man, this makes my head hurt. I mean, this is a dumb question. But if I'm a senior debt lender, why do I want to get involved in this at all? If I don't know if I could go to bed one night and feel very secure in my investment and the next morning wake up and have like thirty cents on the dollar, Like, why would I even do that?
Well, you kind of don't have a choice.
There's not anywhere else to go in the market up until now to get those high returns that will keep you employed as a portfolio manager or keep you getting new money in. It's a little bit of a you know, an immediacy bias that you want. You're only looking to the next quarter or the quarter after that. You need to be churning out these high yields for your investors to stay happy, and you really are just kind of crossing your fingers and hoping it doesn't come to your company.
But then when it does, these liability management exercises, so they're called, or the instances of violence, are often designed to actually give the company another chance at a turnaround. So if the obstacles to the company are a bit macroeconomic based or you know, supply demand, there's some sort
of phenomenon that's not totally secular. They say, you know what, we can take on a little bit more of an interest burden, and if we can just get to next year, when all of a sudden this or that regulation will change, this company can actually turn it around. We avoid filing
for bankruptcy, and then everything will work out fine. So, you know, the hedge fund managers who go to sleep and decide to keep investing in this are kind of feeling like they don't have anywhere else to turn to generate the iells that they need to generate.
How many of those companies actually do survive, though.
That's the important question, and so some of that data is really trickling out now, and we do analyze it in the story. Some of them survive, but we have seen increasingly the companies that do one of these exercises in say twenty twenty one, by twenty twenty three, they ended up having to file for bankruptcy anyway, and that's where you see. You might think that that means the whole exercise was meaningless, but in a way, it becomes all the more meaningful because that's where the removal of
collateral or the transfer of collateral really becomes relevant. Because in a bankruptcy, and say the company is getting liquidated, or even if it's not, all those creditors got pushed down and their collateral was taken away from them. They're recovering zero cents on the dollar or one or two or three cents we show in a chart.
And those who.
Frogged them by putting a new capital.
They come out pretty well.
They get ninety cents on the dollar, ninety five seventy Just you see the devastating impact that the original asset Shift has on creditors. When all is said and done in the company needs to hand out its assets in order to give people recoveries.
Eliza really appreciate it. I also heard it's your day off and you're doing this anyway. That shows dedication. Thank you very much, Eliza, Roynald Hannah and a senior debt reporter. Really great story is today's Big Take. You can check it out. You can read more of this story on the Bloomberg and at bloomberg dot com slash Big Take again that headline hedge funds smell blood as lenders turn on each other. Definitely go ahead and check that out.
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