PLANTA DE PUERTO NUEVO DE LA AEE.

From Reuters

Puerto Rico’s debt-laden power utility, PREPA, and its bondholders have reached a new deal to restructure $8.9 billion in debt, according to a source familiar with the talks.

The deal could save an extra $1.5 billion over five years in debt servicing costs, as compared to a prior pending deal between the parties, said the person, who declined to be named because the deal is not yet public. (Reporting by Nick Brown; Editing by Alden Bentley).

 

Private

From Bloomberg

In a casino, doubling down can be dangerous. But in private equity, it’s increasingly becoming the best way to eke out a profit on a bet turned bad.

From Apollo Global Management LP to Bain Capital to Thomas H. Lee Partners, investors have bought hundreds of millions of dollars of debt in struggling businesses they took private, giving them positions as both stockholders and creditors.

The benefits of the strategy are baked into distressed investing, where Apollo’s considered the most shrewd player in the arena. When companies falter and the equity becomes drained of value, holding the right bonds can allow private equity sponsors to control the restructuring and potentially regain ownership after converting debt into new equity.

Now, more investment firms have taken notice and are starting to use the strategy as they desperately seek to salvage investments that are at risk of turning sour amid rising interest rates.

“We are seeing growing interest among more and more investors to pursue the tactic this year,” said Lewis Grimm, a lawyer at Jones Day, who specializes in risky companies. “People have been looking opportunistically for creative moves when they saw how relatively aggressive approaches have proven to be successful in recent cases.”

Apollo Pioneer

Neiman Marcus Group Inc. is among the companies potentially setting itself up to use the strategy, according to Noel Hebert, an analyst at Bloomberg Intelligence. The upscale fashion chain, reeling from slow mall traffic, gave some subsidiaries a designation that “provides sponsors Ares Management LP and the Canada Pension Plan Investment Board with options,” he wrote in a recent report.

“Neiman could be an interesting candidate for that tactic. If Neiman’s unsecured bonds go through another correction, you could see sponsors looking to buy the junior debt,” Hebert said in an interview. “Guitar Center is another name that sponsors can do something like that if things were to deteriorate materially.”

Guitar Center Inc. was bought by Bain Capital for $2.1 billion in 2007 and then acquired by Ares in 2014 in a debt-for-equity swap. Another example would be the buyout of iHeartMedia Inc. in 2008, in which Bain Capital and Thomas H. Lee Partners also acquired the company’s senior debt.

For Apollo, the strategy’s in its genes. In the wake of the last financial crisis, the firm purchased or bought back nearly $20 billion of debt in companies it owns — including CEVA Logistics, Caesars Entertainment Corp. and Realogy Holdings Corp. — for an average price of less than 50 cents on the dollar amid a broad market downturn.

To manage its position in the real estate holding company Realogy, which owns Century 21 and other well known brands, Apollo doubled its $1.34 billion investment by scooping up junior notes and converting them into shares before taking the company public in 2012, salvaging $920 million of equity it sank into the 2007 leveraged buyout.

Piling On

The strategy works in multiple scenarios. Bondholders profit as debt prices rise through exchanges. And equity values increase as the debt load is reorganized.

Take Claire’s Stores Inc. The retail chain owned by Apollo for 10 years has lost millions and is struggling under $3.1 billion of debt. Last year, the private equity firm bought most of the junior debt at less than 60 cents on the dollar. Then, after a series of exchanges, it converted $184 million of subordinated notes into new secured debt, bumping it to second in line in a prospective bankruptcy proceeding. In addition, by pushing out the maturity it bought the company time to turn around the business and kept its equity value from disappearing.

“Buying time can truly be valuable for an investor with a troubled situation when the delay creates a runway to actually improve performance,” said Cynthia Romano, a performance improvement and turnaround adviser at CR3 Partners. “Sometimes, though, delaying can look merely like the ‘extend-and-pretend’ strategy used commonly by lenders during the last recession.”

Retail Bank

From CNBC

The number of retailers filing for Chapter 11 bankruptcy protection is headed toward its highest annual tally since the Great Recession.

Nine retailers have filed in just the first three months of 2017, according to data provided exclusively to CNBC from AlixPartners consulting firm. That equals the number for all of 2016. It also puts the industry on pace for the highest number of such filings since 2009, when 18 retailers resorted to that action.

The rising number of retail bankruptcies comes as consumers are making more purchases online, and shifting their spending toward travel and other experiences. Meanwhile, the supply of physical stores continues to outweigh shopper demand, putting pressure on the industry’s profits.

But it isn’t just those factors pushing retailers out of business. More than half the filings year to date have come from retailers that were previously purchased by private equity firms, according to AlixPartners. That’s up from an average 31 percent over the prior five years.

These transactions, known as leveraged buyouts, occur when a private equity firm uses a combination of equity and debt to purchase a firm — saddling the company with debt in the process.

The industry’s pain is far from over. The number of retailers on Moody’s distressed list is also at its highest level since the Great Recession, as several other chains that were targeted by private equity firms struggle to turn around their businesses. They include names like J. Crew and Claire’s Stores.

“It’s just kind of this perfect storm where things are coming together, and it’s going to continue for awhile,” Deb Rieger-Paganis, a managing director in the turnaround and restructuring practice at AlixPartners, told CNBC.

Private equity’s role in retail bankruptcies often boils down to the firms’ operational strategies. Many of these companies seek out undervalued retailers and look for costs to remove from their businesses. As part of that process, they often fail to invest sufficient money in critical areas like the brand’s store fleet or digital operations, Rieger-Paganis said.

Problems at these types of distressed chains are about to get more acute. Already struggling to bring in cash, the gradual rise in interest rates will make it tougher for them to refinance their debt as it comes due.

“This is going to be a cycle for quite awhile,” Rieger-Paganis said.

In addition to the nine retailers who have already liquidated or are working to reorganize, Payless and Bebe are expected to add their names to that list.

A spokeswoman from Payless declined to comment on a recent Bloomberg report saying the chain will soon close up to 500 locations and file for bankruptcy. A spokeswoman for Bebe, which said earlier this month that it is exploring strategic alternatives, did not immediately respond to CNBC’s request for additional information.

Regardless of their reason for filing for bankruptcy, more retailers who enter Chapter 11 are ending up in liquidation. That’s because of a change in the bankruptcy code in 2005, which trimmed the timeline retailers have to gain approval for sale or reorganization.

While they used to be able to spend more than a year in bankruptcy, they now have 210 days to decide whether to keep a store’s lease. Because going-out-of-business sales can take 90 days to run, senior lenders often try to make that decision in as little as 120 days.

As chains liquidate or restructure, their store footprints are eliminated or whittled down. Aeropostale, for example, shuttered nearly 600 stores in its reorganization last year. Meanwhile, Sports Authority’s 460 locations went dark after it liquidated.

Year-to-date Chapter 11 filings:

  • Gordmans Stores
  • Gander Mountain
  • General Wireless Operations (formerly RadioShack)
  • HHGregg
  • BCBG Max Azria
  • Michigan Sporting Goods Distributors
  • Eastern Outfitters
  • Wet Seal
  • Limited Stores

But it isn’t just bankrupt retailers chopping off real estate. Macy’s, J.C. Penney, Sears and Kmart are in the process of closing nearly 400 stores, as smaller chains like GameStop and Abercrombie & Fitch take similar actions. Those vacancies are likely to have ripple effects through the industry, Rieger-Paganis said.

“People don’t like to shop where there’s a lot of vacant space,” she said.

As the industry contracts, incumbent retailers like Kohl’s and Target are investing in their physical shops in hopes of grabbing more market share. Between Macy’s, Penney’s, Sears and Kmart, Fung Global Retail & Technology estimates some $2.5 billion in sales will be captured by competing retailers.

Yet for traditional chains to grab their piece, they’ll have to beat out the likes of Amazon. That could prove tough for these retailers, which have historically been slow to adopt change.

After attending last week’s Shoptalk conference in Las Vegas, Citi analyst Paul Lejuez told investors that it’s “easy to be impressed” by some of the technologies now available to retailers. However, the implementation of these technologies is likely to be slow and weigh on chains’ profitability.

“The bottom line — it is hard to leave the Shoptalk conference feeling any better about the specialty retail and department store group,” Lejuez said. He did, however, add the need for a physical store presence is “still apparent.”

The Brazilian

From Huffington Post

In previous pieces, we have analyzed the run up to the still-ongoing Brazilian recession as a combination of factors. Given an “anemia” of productivity increases, an appetite for public spending without prioritization led to a condition of fiscal “obesity”. The external factors that provided for a boom in the new millennium, notwithstanding underlying vulnerabilities, have dissipated. The economic policy adopted as a response to the growth decline aggravated those vulnerabilities. On top of those, a disruption of existing large domestic corporate structures followed broad corruption investigations (Canuto, 2016a)(Canuto, 2016b) (Canuto, 2016c).

Here, with the help of five charts, we touch on another dimension of Brazil’s economic boom and bust, namely, a credit cycle, the downward phase of which helps understand why the post-crisis recovery has been so hard to obtain. In our view, the profile of such a credit cycle in effect points to it as a special chapter of our previously approached determinants of the Brazilian economic crisis.

Brazil’s economic boom of 2004-2013, during which only a short and shallow recession occurred in 2009 and annual GDP growth averaged 4.5%, benefited from a positive feedback loop with a credit surge (Chart 1). Total credit to the private sector more than doubled as a share of GDP from 2003 to 2015, rising roughly 30 percentage points.

We see Peculiar features of the credit surge in Chart 2. Notice the rising weight of earmarked bank credit to both non-financial corporations and households from 2008 onwards, including keeping the overall stability of the latter after 2010. In passing, observe that the non-financial corporation relative exposure to external indebtedness and debenture issues seems to be lower than in other comparable emerging markets (Canuto, 2015).

The relative stability of overall household debt levels since 2011 has a counterpart on its service as a share of disposable income, as displayed on the left side of Chart 3, with mortgage payments partially occupying the space of other types of debt service. Furthermore, the rising role played by public banks – including the official major development bank (BNDES) – in sustaining the earmarked-credit pillar of loan expansion, especially 2012 onwards, can be visualized on the right side of the same chart.

Prior to 2008, rising shares of credit to GDP to a large extent reflected its elasticity to growth as well as structural reforms and innovations leading to financial deepening (e.g., payroll bill loans, legal enhancement of collaterals). From 2011 onwards, in turn, they primarily reflected the government policy of responding to the loss of GDP dynamism by stepping up earmarked credit through public debt-funded transfers to public banks: BNDES lending directly and through on-lending via other banks to non-financial corporations; the two largest government-owned commercial banks providing higher amounts of rural credit and residential housing finance.

That also comes out in the IMF study of financial and business cycles in Brazil released last November – see IMF (2016). When examining macro-financial linkages, they decompose Brazil’s output gap evolution between 1999 and 2015, as depicted in Chart 4. The study remarks (p.12-13):

Financial shocks in the chart are measured using an indicator of financial conditions combining money market spreads, collateral values (stock prices, house prices), total credit, interest rates, and external financial conditions (EMBI, real exchange rate). It captures and partially reflects changing external financial conditions, positive from 2009 to 2013, while turning negative following the taper tantrum and a hike in foreign funding costs.

The decomposition in Chart 4 also shows how, more recently, public and private credit and financial conditions all converged pulling output downward. While private credit started contracting first, public credit moved south since early 2015, when fiscal considerations led to curbs on the expansion of public debt-funded lending by public banks. Chart 5 exhibits the beginning of debt deleveraging from the standpoint of annual rates of increase of earmarked versus non-earmarked outstanding loans. Non-earmarked credit never fully recovered its pace of before 2008, and kept a downward trend until starting to unwind more recently. Earmarked outstanding loans, in turn, held a high speed until 2014 but began reversing until beginning to shrink in the case of non-financial corporations.

Let me suggest the following takeaways:

1. The Brazilian economy has indeed gone through a full credit cycle, and it is currently on its downward phase. Positive feedback loops between finance and macroeconomic activity turned negative in this stage, as deleveraging of balance sheets is imposed or pursued on both supply and demand sides of finance.

2. However, this is no macro-financial-cycle business as usual. Instead of pure “animal spirits” or any type of Hyman Minsky’s “endogenous financial instability” created by private agents jointly willing to skyrocket leverage, it acquired a “fiscal” nature after 2011. Its extension and depth cannot be understood without taking into account the issuance and transfer of public debt from the Treasury to public banks, as a component of pro-active fiscal and industrial policies (Canuto, 2013). Ultimately its halt was dictated by fiscal policy considerations.

3. As a strongly policy-driven cycle, embedding subsidies, it led to private sector indebtedness likely above those levels that would stem from the elasticity of credit to GDP and structural determinants of financial deepening. In a recent note, Priscilla Burity, from BTG Pactual, estimates a peak of private sector credit close to 40% of GDP as a reference for that matter (“Too much of a good thing”, BTG Pactual Macroeconomic Research, 19 December 2016).

4. Given structural determinants unfavorable to higher overall levels of private investment – which we have approached in Canuto (2013) and Canuto (2016c) – , it became one of those “investment-less credit booms” mentioned by the World Bank in chapter 3 of its newly released Global Economic Prospects, January 2017. Subsidies associated with earmarked credit seem to have induced more of a debt substitution than an overall increase of investment.

5. Monetary policy effectiveness was negatively affected by the fact that the credit channel of transmission received contradictory impulses. Furthermore, given that banks tend to compensate costs derived from earmarked credit via higher spreads in non-earmarked lending, the relationship between basic interest rates and financial costs became increasingly distorted. On the other hand, given the absence of any fiscal space for government-sponsored balance sheet fixing, hopes for a smoother deleveraging process are now relying mostly on loosening of monetary policy – which has started after finally inflation converged toward its target.

All in all, when looking closer to the Brazilian recent financial cycle and the so-called “balance-sheet recession”, we find those same diseases that we approached in previous pieces.

SunEdison

From Biz Journals

SunEdison Inc.’s unsecured creditors are opposed to the bankrupt company’s plan to sell its shares in its two yieldcos — TerraForm Power and TerraForm Global — for $2.5 billion.

SunEdison’s official committee of unsecured creditors filed objections to the motions for approval of the deals, Bankrupt Company news reports.

The unsecured creditors say the deal would leave them with next to nothing, Law360 reports. The committee is calling for discovery so they can fully investigate the deal.

The unsecured creditors claim the yieldco share sale plan will form the core of SunEdison’s bankruptcy restructuring.

Canada-based Brookfield Asset Management earlier this month announced deals to take over both of the yieldcos, acquiring TerraForm Global Inc. and taking a controlling stake in TerraForm Power. Brookfield is acquiring TerraForm Global for $787 million in cash, as well as assuming approximately $455 million in debt. In a separate deal, Brookfield is taking a 51 percent ownership stake in TerraForm Power, paying $11.46 per share.

John Dubel, CEO and chief restructuring officer of SunEdison, said SunEdison was supportive of the deals.

Maryland Heights-based SunEdison filed for Chapter 11 bankruptcy in April stating it had assets of $20.7 billion and liabilities of $16.1 billion as of Sept. 30, 2015.

singapore

From Bloomberg

Default fears are resurfacing in Singapore ahead of a wall of maturing corporate debt, as a U.S. bankruptcy filing by a firm from the city flags lingering pain despite economic recovery.

Pressure to pay down obligations has been unrelenting. Companies excluding banks must repay S$38 billion ($27 billion) of local bonds over the next four years. The maturities peak in 2020, when S$11.2 billion comes due, the most since 2012, according to data compiled by Bloomberg.

For some of Singapore’s small debt-laden firms, a reboundin manufacturing and exports hasn’t been enough to bolster bottom lines sufficiently. In the latest sign of strains, Ezra Holdings Ltd., which provides engineering services to the offshore oil and gas sector, filed for Chapter 11 protection March 18 in the U.S. The Singapore government, seeking to make it easier to restructure debt at home, voted earlier this month to enact several changes to its Companies Act that are expected to take effect by March 31.

“I see ongoing distress which could lead to further defaults in the local bond market, in particular in oil and gas and shipping,” said Thomas Dillenseger, Hong Kong-based managing director at restructuring firm Alvarez & Marsal.

Even before Ezra’s Chapter 11 filing, six firms had defaulted on S$1.2 billion of notes since November 2015.

Singapore’s government late last year introduced measures to boost marine and offshore engineering companies’ access to working capital, including providing loans to eligible firms. “Up to now, local lenders have generally been supportive, although it remains to be seen how long this resolve will last,” said Emmanuel Chua, Singapore-based senior associate at Herbert Smith Freehills.

Robin Chiu, Ezra’s chief restructuring officer, said in court papers that the company’s recent financial difficulties resulted from the “significant weakness and volatility in the oil price environment,” which has persisted since 2014. He added that the “prolonged challenging operating environment” in the oil and gas industry made it difficult for Ezra to carry out fundraising.

Ezra bondholders, who have seen prices slump to 5 cents on the Singapore dollar from 30 cent at the start of the year, face uncertainty as they navigate a U.S. bankruptcy process.

“I expect the recovery prospect for Ezra’s bondholders could be pennies on the dollar under the U.S. bankruptcy process,” said Kurt Metzger, a Singapore-based director at GEM Advisory, a debt restructuring consulting firm.

Ezra referred to the announcement on the firm’s Chapter 11 filing when asked about recovery prospects for bondholders.

Noteholders “may seek to assert rights in the Chapter 11 case,” the announcement said. The firm intends to convene meetings with the bondholders to update them on its current position and provide further information regarding the filing.

Blackstone

From Bloomberg

Blackstone Group just sent an ominous message to many debt-fund managers: They are promising their clients too much.

Since the 2008 financial crisis, asset managers have pledged they could both invest in risky, infrequently traded assets while allowing clients to withdraw their money whenever they wanted. This was a supremely attractive feature for investors who had just been stung by a credit seizure that challenged people’s faith in “safe” assets. But this structure doesn’t work over the long term. It will either lead to lower returns, or, in a worst-case scenario, a complete breakdown.

Blackstone, the world’s biggest alternative asset manager, just closed a $3 billion distressed-debt hedge fund that allowed periodic withdrawals. It gave clients the option to transfer their money to Blackstone funds that lock up capital for longer periods.

The New York-based firm highlighted a rather stunning bit of data as a reason for its decision: The fund returned an annualized average of 6.5 percent since its launch in 2005, compared with a 17 percent net annualized return in a 2007 mezzanine credit fund with a longer lockup period and 13 percent in a similar 2011 pool.

Oi_EUA

From UK

SAO PAULO (Reuters) – A new reorganization plan from Brazil’s debt-laden phone carrier Oi SA boosted shares on Thursday, but analysts continued to focus on the need for fresh capital after a heavy fourth-quarter loss.

Changes to the plan revealed late on Wednesday would offer Oi’s financial creditors 25 percent of its equity or convertible bonds to be called in three years, at which point they could own up to 38 percent of the company’s shares.

The updated plan would more than halve Oi’s total financial debt to about 21 billion reais from 48 billion reais, analysts at Credit Suisse said on Thursday. If approved, Oi’s plan would impose an 86 percent writeoff on bondholders owed about 31 billion reais of claims, according to Itaú BBA analysts.

Oi’s common shares (OIBR3.SA) rose nearly 16 percent to 4.81 reais on Thursday, on track for their biggest one-day gain in nearly three weeks.

Itaú analysts said Oi is offering better restructuring terms, but they underscored a need for a capital injection to ensure Oi maintains investment capacity.

Oi’s Chief Executive Marco Schroeder told Reuters that the company generates enough cash to meet financial obligations and make necessary investments after the restructuring.

“A capital injection could be important, but we would only accept one if we receive a balanced proposal that takes into account the interests of all stakeholders,” he said in an interview.

Talks with potential investors including Cerberus Capital Management and Paul Singer’s Elliott Management Corp have not produced concrete results, he added.

In December, Oi received a binding proposal from a group of bondholders supported by Orascom TMT Holdings SAE to inject up to $1.25 billion into the carrier in exchange for a 95 percent stake.

Schroeder said Orascom’s plan would be hard to implement as it offers unequal treatment to distinct bondholder groups. Also, this plan gives creditors too large a stake, the executive said.

Oi’s updated plan should be submitted to the court in its current form, but technically it can be changed until the moment creditors formally vote on it in court, Schroeder said.

Schroeder said Oi included an immediate debt-for-equity swap, which he expects will face a creditor vote by June, to accommodate feedback from creditors.

Oi also reported losing 3.3 billion reais in the final quarter of 2016, a narrower loss from the comparable quarter in 2015 due to cost cutting and lower financial expenses.

KKR

From Bloomberg

KKR & Co. has proposed a plan to help India’s government clean-up the $180 billion of stressed assets that are weighing on the South Asian nation’s banking system and economy.

Lenders should shift all soured debt above a certain limit to an agency that would be set up by the government and private capital must be used to revive these assets, Sanjay Nayar, chief executive officer for KKR’s India unit said at a Bloomberg private equity forum in Mumbai on Friday. This will prevent “cherry picking” of assets that banks dispose off and the government can inject equity into state-controlled lenders to make good the losses, Nayar said, without providing more information about the plan.

Calls for a state-run asset manager, an idea rejected by former central bank Governor Raghuram Rajan, are growing as India’s stressed assets — made up of bad loans, restructured debt and advances to companies that can’t meet servicing requirements — surge. They make up about 16.6 percent of total loans in India, the highest level among major economies, data compiled by the nation’s Finance Ministry show.

“People don’t appreciate how leveraged India is on the corporate level and how big the problem is,” Mintoo Bhandari, senior partner and managing director at Apollo Global Management LLC in India, said at the PE forum. Bhandari pegs soured debt in Asia’s third-largest economy at about $300 billion as almost half of the top 1,000 companies have unsustainable levels of debt.

The surge in bad debt can be traced to loans sanctioned early this decade, when optimism ran high that India could sustain a 9 percent or even 10 percent economic expansion amid a “super cycle” for commodities and emerging markets. Indian policymakers have unveiled at least three programs to reduce stressed assets in the banking system but they have had limited success.

Some of the rash of credit extended for infrastructure and power plants soured as growth slowed and projects were delayed. Local lenders including IDBI Bank Ltd., Indian Overseas Bank and Syndicate Bank have been downgraded by international credit assessors amid rising concern over bad debts.

Banks haven’t managed to reduce stressed loans because lenders are reluctant to write down assets sufficiently, while founders of companies are not willing to accept “the true market value,” Aisha De Sequeira, Morgan Stanley co-country head and head of investment banking in India, said at the forum. Credit Suisse Group AG estimates lenders will have to put aside at least 860 billion rupees ($13 billion) in the next 12 months to comply with higher central bank requirements for the older soured debt.

The stressed-assets issue “has to eventually land at the doorstep of the government,” Puneet Bhatia, managing director and country head for TPG Capital in India said at the forum. “Banks need to be provided capital and have to create a facilitative kind of environmental backdrop. That is the only way to solve the problem.”

To read a forecast on bad loans by India’s biggest bank, click here

India’s government is seeking to assure that they are resolving bad loans in an unbiased manner, while minimizing the equity that has to be infused into lenders and ensure that private capital is not taking anyone for a ride, said KKR’s Nayar.

A “toolkit” to handle distressed assets is being readied, Nayar said. “We need a proper process to resolve the asset quality issues. We have provided them with some schematics and diagrams on that.”

Robins

From The Street

“When you are unshakeable, you make smart decisions,” says entrepreneur, philanthropist and New York Times Best-Selling Author Tony Robbins. In his new book, Unshakeable, Robbins will teach you to be just that and he will help you make educated, long-term investment decisions, based on his extensive research with market pros. Even better, 100% of the proceeds will go to Feeding America. As a kid, there was a time when Robbins didn’t know where his next meal was coming from so now he is on a mission to provide 100 million meals to people in need.