Coal Stocks Trading at Cheap Valuations in Distressed Universe, Schultze Says

debt market. George Schultz is chief executive officer of Schultz Asset Management, which oversees about two million dollars and is based in Purchase, New York. And George, you know, when I talked to distressed debt investors, a lot of them are tearing their hair out because the size of the distressed debt market is shrunk to about the smallest since right before the financial crisis, and it seems like there just isn't enough to stress to go around. Are you trying?

Are you tear in your hair out? What's left of it that I've already corned most of it out? But alright, then, are there any opportunities right now? There are? There are, There are a lot of opportunities, especially in the energy market. A lot of companies in the oil and gas space and in the coal industry have defaulted in the past

eighteen months, and many of them have emerged now. So there are a lot of post reor equities trading as we call them, companies that have restructured, gone through a reorganization event and now trade as post reord equities, but many of them aren't that well known. UM. Interestingly, many of them are very cheap, but they're not in the form of debt anymore. They're they're mostly trading as equities now. Sure one is Energy twenty one, a company that's interesting

UH and much cheaper. There's another one, Sampson Resources that that was formerly one of the largest natural gas leverage bios ever restructured, came out of bankruptcy last year. There's a lot of smaller ones, a lot of them aren't that well known. And then there are some companies in other industries that trade as UH post distress equities as well, like for example, came out of restructuring several years ago, and there's an interesting news with that today with a

potential Chinese investor looking to buy the company. Another one, Hawaiian Telcom, which is a telecommunications company that restructured several years ago and was recently sold to Cincinnati Bell at a nice premium. And a third one also in a different industry, Tropicana, which is a casino company that's been that was restructured several years ago. UM had been trading as post distress equity and most recently benefited from a huge stock buy back. So there's plenty going on, it's

just not in the form of distress debt UM. It's more post distress equities these days, although I would imagine it you have a lot of competition because it seems like investors are fighting for any scrap of an opportunity they can find, just because of the incredibly high valuations and public liquid markets right now. Have you found that there is a lot of competition here or are these opportunities too small and too speculative to really attract the

big money. I think they're too small for the big money. A lot of the competition recently has been people pumping money into big name ets and index funds UM and, and there's also been a lot of chasing of returns in the sixth income market. Now we're clearly in a market where UH there's monetary tightening that's starting. UM interest rates are still at very low levels, but we expect them to rise. And now coming into the fall, it

looks like the SAID will be starting to reverse. It's it's quantitative using program, and with that we expect six income securities to trade off. So we think the best opportunity right now is in equities, but but not in blindly throwing money at et s and the largest companies like Google and Facebook and Microsoft. Rather, I think it's going to pay more to work as an active manager

and look for specific opportunities. And yes, sometimes they're smaller companies, but the but the valuation there makes it worthwhile to to focus there. How have you changed your mix of investments to more heavily weight equities versus debt? I mean, you're you completely out of your debt investments in preparation for some kind of market disruption in the wake of the end of QI or the beginning of the unwine. I don't want to make it sound so dramatic, since

they want to put us to sleep with this unwined. Yeah, we we have a decent amount of cash on the sidelines ourselves right now. UM typically over a cycle, we will our portfolios will evolve from being more heavily weighted to distress debt when the default rate is high and when the opportunities are plentiful too, when the default rate drops and is expected to climb again, to focus more on the equity side. So right now we're much more

focused on the equity side. I expect that going forward as the faults start to rise again with with higher interest rates, that's where we'll be shorting more equities and eventually growing our fixed income book again. But right now we're much more focused on equities and and and they tend to be event driven because usually when equities traded very cheap levels, good things happened to those companies over time, and that's what we've seen recently with a few names

I mentioned earlier. Energy twenty one and Samson Resources caught my attention in particular because I remember back in two thousand, fourteen and two fifteen, these were just decimated. I mean, it was sort of watching a sort of train wreck in front of your eyes when you looked at the debt prices of these particular companies during that time. I'm sure they did go into bankruptcy, how much is your

wager on their out of bankruptcy equity? How much does it depend on oil prices staying where they are or going higher. Well, these are commodity companies and they definitely are dependent on a good stable price of either natural gas or oil depending on the company. But interestingly, for those two companies, they benefit from having left behind massive

amount of debt when they're restructured. For Sampson, I think it left behind about six billion of of of debt in its restructuring and now there there's there's post re or equity, but it is private. It doesn't trade uh in too liquid of a fashion. Energy twenty one is also a little bit less liquid. That company I believe left behind about three billion in debt and other liabilities.

So the good news with commodity companies when their restructure is yes, you're still dependent on a healthy commodity market, but fortunately the balance sheet can be much cleaner, and you basically get a fresh a fresh star at a new lease on life. That you think about it um and if you have a little luck over the longer term with commodities, you should do well. Another interesting sector

is the coal space. In the coal industry, there have been just practically every major coal company in the US filed for bankruptcy in the past twenty four months and then came out. So companies like arch Coal and Peabody Energy,

we're trading at extremely cheap prices. And the the interesting thing in the coal market is that there are several types of coal, not just steam coal, which gets burned to generate electricity, but also metallurgical coal, which is used in making steal um, and that market has recovered quite nicely. So a number of the coal companies are trading at very cheap valuations through their equities as well, and that's

another area of focus for US lately. George, just in thirty seconds when you were talking about your preference for equities to bonds, it sounds like you think, I think that equities can keep rallying even if benchmark rates sell off. Thirty seconds. Why, yeah, Again, it's it's not at a high level. It's not you know, the biggest of the big names. It's not the SMP in general. It's more

individual companies that are trading at extremely cheap prices. Again, you know, good things tend to happen the cheap companies over time when they're so cheap because their their distress and nobody wants to have anything to do with them. That's usually when you find some bargains. George Schultz, thank you so much for joining us. Truly, uh fascinating to dig into some of these specific names that hold probably more promised than broad indices at these incredibly high valuations.

George Schultz is chief executive officer of Schultz Asset Management, which oversees about two hundred million dollars and is based in Purchase, New York. Herbal life it is the story that just keeps on giving. Met Townsends is here in the Bloomberg eleven three our studios. Met Townsend is a global business reporter for Bloomberg News. And I know that. And all of a sudden, you saw the shares surging this morning. You just got this excitement in you in

pre market, you know, you're shaking your head back. It's back. You get to talk about it to get what's going on. So so this has to do with Carl I can. Of course, herbal life was brought into our consciousness when there was a spat between Bill Ackman and Carl Icon over at Acman very in a high profile manner departed from the company. Now we have carl Icon remaining. Why

are the shares surging so much this morning? So the company came out and said that they are going to do a tender offer to buy back roughly six million dollars worth of shares um at sixty eight bucks. So the stock basically has been trading up towards sixty eight dollars. And they also said that they were in buyout talks or preliminary biot talks with someone which they didn't name, which we're trying to figure out that to think the

company public. And they had been in talks roughly since November, and these talks ended roughly last week. And so the company take the company private. Yes, take the company private, and which is something that Icon was rumored to be looking at as well. Um, So that news kind of creates this idea that, oh, maybe this will happen eventually, a company will like a private equity firm, will take a private another reason for the shares to go up, okay.

And then there also was this agreement that carl Icon, Yes, I agreed to back off, right, so I kind of agreed not to buy any shares for two years and sort of let this this process play out of their sort of strategy and how they're going forward. Um again, Icon, biggest shareholder of Verbal Life, has five representatives on the Third Team member board, so he's heavily invested in this company doing well. Um and you know this is a

fight that goes back. Actman first short of the stock or publicly announced his his short in uh the end of two thousand and twelve, so we're four plus years now into this. Shortly after Acman disclosed his short, Icon came out as a bull on the stock, bought a big steak, and they've had this public They've had a couple of public sparring matches going back and forth over the years. Obviously, Wall Streets loved all this drama. And here we are. So so Herbal Life is a company

that is under this FTC order. This is kind of this convoluted story. So into down sixty and the FTC came out after an investigation and said, Herbal Life, we don't like some parts of your business in the US. You need to change there. In the process of doing that, Actmin is still n in their belief that this will eventually hurt the company and in the stockwell decline. Well, right now, I'm looking at Herbal Life shares that are

up more than fort so far this year. So uh, Acman got out probably rightly so at least based on this year's performance when it came to betting against this company. Met Towns, and thank you so much for joining us, Matt town saying, global business reporter for Bloomberg News. And speaking of Carl Icon, he resigned from his special regulatory advisory role to President Trump. Tendered his letter of resignation on Friday. Sort of odd letter. I want to bring

in Mario Parker. He's agricultural reporter for Bloomberg News in our Chicago bureau. And uh, Mario, can you just tell us a little bit about why Carl Icon, a billionaire investor, resigned from this position and what this position was? Sure? Absolutely, Lisa, so Uh. Carl Icon was named special advisor on regulations to President Trump. Um uh a little over a month um or so after Trump's victory in November. He was

an early endorser of President Trump's campaign. Um. Someone that's President Trump name checked quite a bit on the stop um,

particularly about his business acumen, etcetera. And so what was happening during the same time was that Icon is a major owner of an independent oil refiner, CVR Energy, and CVR Energy, among with a select few of other refiners, had been pushing for changes to UH the US ethanol mandate UM, saying that the cost to comply with the program were too onerous, and so Icon had become kind of the public face of this campaign as well, UH really kind of pushing the Environmental Protection Agency to UM

to make these changes UM. After President Trump assumed office and after again UM Mr Icon's UM designation or appointment as a special regulatory Advisor, there was increased scrutiny about whether or not he would be using that position to kind of influence UM that change that he had been advocating for H for the better part of the the last year. And UH was there any evidence that this

increased rutiny and potential legal jeopardy. As a New Yorker article kind of put it right after UH Carl Icon resigned from the board, that this was the reason for his resignation. Well, the letter that Mr Icon sent UM sent to President Trump on Friday, you know, referring to this departure, he specifically mentioned that he only spoke about broad matters of policy affecting the refining industry. UM and that UM, you know, he shared, you know, his limited

knowledge about certain insights with uncertain subjects. But what we know and what are reporting has shown. Uh, both myself and our colleague Jen de Louis and Washington was that UM. Earlier this year, Mr Icon was trying to broke her

a deal between the administration and the biofuels lobby. What happened once that that news broke UM, it had an impact on different markets ranging from corn to crude oil to gasoline UM out of concern or speculation that Mr Icon would prevail in this rule he was trying to get changed. Essentially, the rule he was trying to get changed would move the owners from refiners like the one that he owns closer to the customer UM that that

delivers the gas, the gas and ethanol to two gasoline stations. Yeah. And you guys did some great reporting on how much money he made off of just market speculation that the rule would be changed. Uh. And his letter is fascinating and very odd, and I recommend everybody read it. UH. Sort of him resigning from a non job where he did nothing, but it's not illegal and he's resigning. Well. For a number of years we heard quite a bit about pure to pure lending. It was going to completely

disrupt the big financial firms in the industry. Then there was some skepticism. Now we're kind of getting to this new equilibrium where big banks are trying to incorporate more peer to peer type technology into their day to day routines. Here to join us is Jared Hecked. He's CEO and co founder of Fundera, which is based in New York and is an online lender specifically trying to hook up businesses with people that have money, whether it's banks, or

whether it's hedge funds, or whether it's you name it. Jared, can you give me a sense of how many transactions your platform has been facilitating of late? Uh, it's about three years old, right, Yeah, so we're first off, thanks for having me, Lisa. Um. So we're around three years old. To date, we've done close to half a billion dollars in volume through our platform, servicing around eight thousand different small business owners. Uh, and currently around twenty five million

dollars a month is facilitated through our platform. So what's the model. Here, a business wants to get a loan, how do you come into the picture here. Yeah, So, generally speaking, a small business owner has a problem or an opportunity, and they think that some form of credit

can be a viable solution for that. UM they'll do a search for something like small business loans or line of credit in in search of actually educating themselves on what they're eligible for, and they'll they'll stumble on fundera UM. We then provide business owners an immense amount of education and literature about the different types of products that are accessible to business owners and the different types of lenders

that actually service them. We also provide them what we call a common application, so it's a very easy way for a business owner to enter in a bit of information, provide a little bit of documentation. We then verify some of that information and determine which lenders and products in

our network they're actually eligible for. Those products spanned from things like business credit cards that would be provided by the American Expresses, Capital, wand and Chases of the world old to online loans and lines of credit that are provided by companies like Lending Club, on Deck, Cabbage, and Swift Capital. So This is something more than just peer

to peer lending or even pure lending. This is more like being an online business advisor, some kind of combination between a robo advisor and UH an online platform to hook you up with lending. That's exactly right, with the core focus on, you know, advisory services and education and then the matchmaking and taking a lot of the cumbersome issues and applying for a loan and uncertainty out of that process. How do you make money? We make money.

Every time alone is offered and accepted on our platform, a lender or an issuer will pay us what is essentially the equivalent of a referral fate. And that's largely done because we're stripping out a lot of marketing costs and operational costs from their system because we really take care of all the search for the business owner and the packaging process as well. It sounds like kind of the business model for some of the middle get lenders, of which there are many, and I imagine that the

competition is pretty fierce. Is that right? Yeah? I think the business model is similar to some of the companies on the consumer end, like credit Karma or potentially nerd wallet UM where We're really focused on orienting a potential borrower around what's actually out there for them. UM. But the competition, to your point, is fierce, right, there's a lot of people that are trying to get in front

of small business owners. We just take I think, a very deliberate and focused approach that's not about selling a business owner, but more of oriented around educating a business owner. So what types of businesses have used your platform? Who runs the gamut? I'd say the most popular industries are somewhat conventional mainstream businesses, whether those are retail shops or restaurants. We do a lot of work with independent consultants and

contractors as well. They might be veterinarians or doctor's offices. I think the thing that we've learned is that no too small business owners are alike, so we really try and provide a comprehensive solution to all the business owners

that are out there. Interesting, and you said that you did raise a twenty million dollars equity financing UM, And I'm wondering whether you put any of your own money up or is it purely in operations that you have to continue as far as having the educational resources and arranging all of the connecting lenders to the platform. So did I put any of my own personal money? Now? I mean, like on an ongoing basis, is there the company's money capital up in the platform. We don't lend

a single dollar. We think that that's really important because it enables us to maintain a high degree of objectivity. Um the second we start lending capital, all of our lender partners would generally believe that we're trying to actually be the primary lender of record. And I also think it biases us in a way that's unfavorable to the business owner because then our intentions may not be quite clear. We're really there to help find them the best product

and lender for their needs. You know, one thing that a lot of big banks have complained about is that the demand for loans, specifically among size and smaller businesses just isn't there. That people aren't investing in UH, in their infrastructure or their businesses. Do you find the same thing, Well, we're not really talking about mid market loans here at Fondera, you know, generally speaking, or the average sized loan that a customer wants to our platform is around sixty dollars.

We don't see any slowdown demand or appetite for business owners who are looking for working capital to invest in their growth. And what about due diligence? What kind of due diligence is there on the system on the platform UM SO, I think it's two fold. We do due diligence on every single small business owner that comes to

FUNDERA and starts to submit an application. We work with third party credit bureaus and a bunch of third party data providers to make sure that the business is real UM and that's really done so that we're making sure that the business owner has to do as little work as possible, and it's a high quality service for our lender partners so they know that the information that they're getting is real inbedded. And then we also do due diligence in regards to the types of lenders that we

work with. Since we're providing us service to a business owner, we want to make sure that the lenders that are on our platform are high integrity, you know, technology enabled lenders that are going to provide a great service with competitive and compelling rates out there. Where do you think the peer to peer industry is heading right now? UM

that's a great question. I think that in the peer to peer industry or just online lending, non bank lending, I think what we're seeing is the bigger lenders are becoming more stable and increasingly big overtime, and I think that we're seeing a hyper competitive market for the smaller players where it makes them very difficult for them to

actually get traction and prove that they're sustainable, viable businesses. So, like most markets, as they mature, the bigger players are getting bigger and becoming increasingly viable and stronger in the market. Jared hec thank you so much for joining me. Thank you. It's a fascinating time for online lending and uh, frankly online advising and kind of margically two is really interesting.

Jared Hect is chief executive officer and co founder of Fondero, which is based in New York and has been around since two thousand fourteen. Well, starting at the beginning of next year, a new regime of regulations will go into effect in Europe that potentially could vastly change the way that European investment managers consume research. But the changes may be more profound than that. Here to talk about that is Sarah Jones, UK finance reporter for Bloomberg News, coming

to us from our London bureau. Sarah, can you give us just a sense, a very quick brief overview of what these MITED regulations are and what some of the big concerns are about its implementation at this point? Hid there sure? The I mean I can see outsets regulators. What regulators are trying to do is make the system more transparent and make individual industry players, whether it be asset managers or the sales side, more accountable us to how money has been invested in how you know client

what clients are actually paying for. So it's starting off to make more transparent, make it safer. But of course see consequence of that as is you start to enforce some of this regulation and starts become more prescriptive. Is you start to get these other unintended effects. Um So, you know, an obvious one is job losses within the

research part. But it's not just research. That's I mean, research is more controversial part of the of the new rules, but it's it's it's it's going to affect everything from creating volumes to um to you know, how how many funds were sold by a distributor on the continent. It's very far reaching, and then those consequences aren't yet known yet. Talking about the implementation of this rule, my understanding is that a lot of investment firms are quite behind under

the implementation. Is there any chance that, I don't know, people might get a bit of a extra cushion of time to implement this or do you expect a rush of changes to happen in the next few months. Well, I think all firms, whether it's self side to buy side, aiming to be compliant. But I think given the vast impact it's going to have, I think regulators are going to give a sort of a buffer period. I mean,

certainly in research for example. UM I think the UK regulator at least has said, well, you don't have to determine prices for the next you know, you've got three months before you figure out exactly how you're going to price for research, which has it's been a good because at this stage and I'll be really, I mean everybody is still keeping their cards quite close to their chest. So that's one example. I mean, as for others, UM, I think it's it's it's going to be a work

in progress. Sarah, you were talking about potential slowdowns in trade. Can you talk about can you sort of walk us through how that would transpire and what in the regulations would lead to that outcome. So this particular reporting was

done by our London based regulator reporter Celebrush. So, I mean, I didn't do the number crunchy on this, but the gist of what his report was about was very conflicting rules between let's say the US and the UK, and it sees rules and around how you trade that that could potentially um have an impact. Now how long that

impact will last? I mean, I'm sure you know it's the dust settle, it all go back to normal, but it could be quite disruptive um and so much so that some of the lobby groups are coming out and begging that, you know, they could delay these regulations as it pertains to say derivatives trading until after the regime sort of sorry, the regulators between individual companies that of reconcile because at the moment they're rather conflicting and and

so and hence the confusion. I mean, these are question marks and whether that you know, it might be it might be just it might be settled before January. But it's only five months out, so you have to wonder how how how quickly they're going to resolve this problem, you know, sir, I have to wonder, we've already seen thousands of cuts from research departments across street over the past number of years. Have all of the sort of

job productions been baked in because these regulations are no secret? Yeah? Quite, I don't think so. Um as this. I think every analyst still has a job as it stands now. I haven't heard of any you know, job cuts and analysts, you know, certainly this year. Um. I mean, I'm sure there have been. Maybe people are starting to sort of read the you know, the writings on the wall and do other things. McKinsey put McKinsey put out a decent report.

So it's quite interesting that since the crisis, you know, in sales and and and sales trading, you know, you've seen the head counts drop by something like what is it forty in sales and trading, and for research it's sort of a cash equity research we're talking about. This

is not even including credit research. It's fallen by just twelve percent since twenty eleven, So, you know, and next coupled with the with the the data that they expect, you know, investment spending in research for investment banks to sort of dropped by thirty So I mean, I mean, you know, I don't there's any hard numbers about how many how many job losses there will be, but I think less demand for research surely that's going to mean

less demand for analysts. Yeah. Well, one thing that I've heard when I've talked to people about this is that they're expecting the top banks to continue with their staff. In other words, the Bank of America is the GP

Morgans of the world. Uh, it's the sort of mid tier banks that are probably going to suffer the biggest job losses because you're going to have sort of nothing between the top tier research shops and the sort of niche specialists that could potentially charge less because they've got lower overhead. And then the middle is what's going to get really crunched. Um. And so I've seen that yet exactly.

So it's the sort of barbel between you know, the bold brackets and sort of the bespoke specialist housing houses rather and so what happens in the middle, I guess the conversations that I was having in Again, this is all anecdotal as yet because its actually happen. There's no hearten of us data yet. Um, if you're not ranked in the top I mean as the managers are going through a moment of okay, well how do how do we've your research? And we have to be more discerning.

So if you're not ranked in the top three or four and you it happened to fall out of it in five seven, you know, why would you keep paying for that research? It's expensive? So and that's yeah, Thank you so much and I'm sure that we will continue to follow this. Sarah Jones, UK finance reporter with Bloomberg News, coming to us from London. Thank you so much. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud

or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.