Dimon In The Forest

Plus: Debt-laden healthcare firms need a stomach pump. ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

February 2, 2023

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Morning Brief

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The healthcare industry is not in good health.

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Chase is making ESG moves in 2023.

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Peloton gets back on the horse.

Healthcare

Debt Loads Weigh on US Healthcare Industry

US healthcare companies are ailing. The diagnosis? A case of possibly debilitating debt.

The etiology is a dual-pronged attack of rising labor costs and interest rates following a leverage-fueled dealmaking frenzy, according to a report in the Financial Times.

The Private Equity Firm Will See You Now

While historically inoculated against economic downturns, a large part of the healthcare sector is now finding itself immunocompromised. “Capital structures will become unsustainable,” claimed a Moody’s Investors Services report last month that analyzed healthcare firms with low-rated credit — a loathsome category many organizations in the sector find themselves in thanks to The Fed’s interest rate hike campaign (which started to ramp down on Wednesday) and its impact on the volatile leveraged loan market. The pandemic boomlet fueled widespread healthcare M&A, running the gamut from UnitedHealth’s $13 billion acquisition of health-tech company Change Healthcare to mega-mergers of local hospital systems. All that activity has landed the healthcare industry in second place on Morningstar’s “leveraged loan” index, behind only the software industry.

Then there’s private equity, which accounted for a stunning 50% of all funding regardless of sector in 2022, Edwin Conway Global Head of BlackRock Alternatives told the iConnections Conference in Miami on Tuesday. The past two years were the biggest on record for healthcare-private equity unions by deal volume and deal value, according to a recent report from Bain & Company. That frenetic dealmaking has only exacerbated the industry’s reliance on debt and loans, with 95% of healthcare companies on Moody’s distressed debt watchlist under the control of PE firms.

Now, soaring costs are moving the industry’s pain levels from “neutral-faced moderate” to “ultra-frowny very severe” on the doctor’s pain scale chart:

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After initially lagging other groups’ wage growth at the outset of the pandemic, healthcare workers are seeing their raises surpass most other peers’. From February 2020 to November 2022, private healthcare employees saw a 17% wage increase, compared to a 15% raise for all private sector employees, according to Kaiser’s Health Tracker System released last month.

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Swollen labor costs coupled with low margins led S&P Global Ratings to declare downgrades will outpace upgrades this year. Overall, firms on Moody’s distressed debt watchlist owed nearly $65 billion in December.

Point of Interest: Skilled nursing facilities and rural hospitals, which often just barely scrape by, are even more vulnerable to the crushing load of higher interest rates, John McClain, portfolio manager at Brandywine Global Investment told the FT, adding: “There are a number of zombie companies in the space… that need to be addressed either through recapitalization or elimination.” Let’s hope they find a cure.

– Brian Boyle

ESG

JPMorgan Invests Hundreds of Millions into Forestry and Minority-led Businesses Projects

When it comes to ESG investing, Jamie Dimon can see the forest for the trees.

JPMorgan Chase is kicking off the year with a pair of investments worth hundreds of millions into forestry and minority-led businesses, both of which will factor into the megabank’s massive 10-year target for spending on sustainable finance.

If A Tree Falls In The Forest, Does It Make A Profit?

On Wednesday, The Wall Street Journal reported that JP Morgan’s Timberland fund, which focuses on carbon credit forestry investments, purchased about 250,000 acres, roughly 400 square miles, of forest in the Southern pine belt for more than $500 million. A portion of the land will go toward wood production, and the rest of the trees will be left standing for carbon offsets.

Also on Wednesday, the WSJ reported Ariel Investments raised an impressive $1.45 billion to debut a new private equity fund, Project Black, that would acquire and create minority-led suppliers to Fortune 500 companies. JPMorgan is kickstarting that fund with a $200 million investment. Taken in totality, the two investments are one small step in meeting JPMorgan’s goal of plowing $2.5 trillion into ESG between 2020 and 2030. And it’s not alone:

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In November, Oak Hill Advisors paid a massive $1.8 billion for 1.7 million acres of forest in 17 states. The plan is to have much of the land go toward carbon offsets, while only 10% to 20% of revenue would come from logging.

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A report from consulting firm McKinsey & Co. says US companies have recently pledged to spend at least $50 billion on minority- and women-owned suppliers over the next decade. JPMorgan has pledged to put up $30 billion of that sum.

Going Green-ish: Adopting ESG policies is not without its risks. Eighteen US states have already passed legislation restricting their governments from doing business with companies that have ESG policies, the justification being that they get in the way of meeting financial targets. Plus, carbon offsets are rather ambiguous. It could mean buying a forest and not touching it, but it could also mean burning methane in a slightly less polluting way. Groups like JPMorgan have debuted data analysis tools to try to achieve a middle ground of double materiality: Will this investment help the world and line our pockets?

-Griffin Kelly

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Tech

Peloton Shows Signs of Life

(Photo credit: Peloton)

You know what they say about getting back on the bike after a headlong fall.

Peloton, the poster child for pandemic boom-and-bust companies, announced Wednesday it has managed to rein in its losses and grow its cash flow, beating Wall Street’s expectations and shifting the long-beleaguered company into a higher gear — presumably not on a recalled treadmill…

FaaS: Fitness As A Service

Peloton has done some serious cost-cutting, going through four rounds of layoffs last year (presumably the walking papers were delivered by zealously cheerful managers projected via screens) that cut its workforce by just less than half.

The company has also managed to backpedal from oblivion by focusing on its subscription services rather than its pricey machinery, according to CEO Barry McCarthy:

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Sales of Peloton’s subscriptions went up 20% in the last fiscal quarter while hardware sales sank by 50%, and the company disclosed on Wednesday that it is scrapping plans to sell off Precor, the workout equipment manufacturer Peloton acquired in 2021. Instead McCarthy and his team plan on “injecting new leadership, rightsizing Precor’s cost structure, with the goal of restoring its growth.”

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McCarthy told Bloomberg the company is looking to cut even more costs on the hardware side by making more units that consumers can assemble at home. The IKEA approach to home fitness — let’s just hope the bike is sturdier than the sideboard you put together with only half the screws you were meant to have.

McCarthy also told CNBC he doesn’t mind how expensive the machines are. “From my part, I don’t particularly care about the hardware margin,” he said. So he doesn’t care about the cost, but also he wants to shrink it? Sounds legit.

Easy M&A: Tech stocks are experiencing a small ChatGPT-induced high at the moment, but the industry is still pretty cash-strapped. Nonetheless, news of Peloton’s returning fortunes might be enough to entice former potential buyers back. Amazon and Nike were both reported to be in the mix in February of last year, and Peloton has partnered up with Amazon to deliver its equipment. So if Jeff Bezos starts to look any more swole, we’ll know why.

– Isobel Asher Hamilton

Extra Upside

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It’s an AI about nothing: Check out this endless, AI-generated take on Seinfeld.

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See you this time next year, right? Tom Brady announced his retirement. Again.

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