PE Firms Will Take Your Cheap Corporate Debt

Plus: The EPA puts its thumb on the scale for EVs ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

April 13, 2023

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TOGETHER WITH

Good morning.

Add firefighter to the resume of Andy Dietderich, attorney to everyone’s favorite out-of-control crypto exchange. Dietderich said FTX has so far recovered more than $7.3 billion in cash and liquid crypto assets, which will go toward paying back customers and creditors such as Goldman Sachs, The New York Times, Netflix, Apple, and Spirit Airlines.

Dietderich made the colorful observation in court Wednesday: “The situation has stabilized, and the dumpster fire is out.” As the crypto sector bounces back, FTX is actually considering giving it a second shot. It’s safe to say at least one person won’t be allowed back in the office, though.

Morning Brief

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A cunning plan for private equity.

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Anti-pollution expectations weigh heavily on cars and planes.

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Cash is far from king.

Private Equity

Private Equity Firms are Purchasing Cheap Debt from Portfolio Companies

(Photo Credit: Patrick Weissenberger/Unsplash)

In a land of panicky banks, the fearless, risk-loving private equity firm is king.

With banks conducting fire sales of corporate bonds, capital-potent PE firms are taking advantage of deep discounts and hoovering up the high-yield debt. Even better, a good portion of the bargain corporate debt was issued by companies already in their investment portfolios, Bloomberg reported Wednesday.

Why Buy?

With the Fed still fighting inflation using ongoing hikes, overnight interest rates are sitting at 4.75% to 5%. Coupled with those recent bank runs and lenders looking to de-risk their balance sheets, PE firms are shopping for debt at clearance rack prices and pocketing the surging yields that come with them. Plus, while no PE firm wants to see one of its companies flop, it does want to be first in line to get paid back in a bankruptcy. So they’re taking some of the load off portfolio businesses by making a point of buying their debt even at lower tiers.

“Buying the debt of a portfolio company at a discount is an interesting way of potentially creating more equity value at a cheaper level,” Brad Rogoff of Barclays told Bloomberg. “If you liked it at one price, you probably like it more at a cheaper price.”

Others might cautiously brace for a rainy day, but the private equity sector is sitting on trillions of dollars of cold hard cash that it needs to deploy, so doubling down on the capital structures of already vetted companies is almost a no-brainer:

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Just last week, Elliott Management dropped $550 million on Citrix debt. This comes only a few months after the Paul Singer-led firm bought about $1 billion of the junk-bond deal supporting its own buyout of the software company.

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Last summer, Clayton, Dubilier & Rice bought $464 million of payment-in-kind notes backing its acquisition of Cornerstone Building Brand for 60 cents on the dollar. In November, it purchased $475 million in debt while purchasing a majority stake in Roper Technologies’ industrial business.

Risk vs Reward: Lest we forget, there’s a reason corporate debt is so cheap today. Even with the turmoil after the collapses of Silicon Valley Bank and Signature Bank, the Fed projects at least one more rate hike in the near future. That, plus a looming recession that folks like Jamie Dimon continue to prophesize, will only make those debts worth less. Elliott bought their Citrix debt for 79 cents on the dollar, but further shake-ups in the economy could force it to sell them for 60 cents on the dollar, which makes the 14% yield that Elliott gets that much sweeter.

– Griffin Kelly

Transportation

EPA Proposes New Crackdown on Tailpipe Emissions

The Environmental Protection Agency is putting a pedal to the electrically-powered metal.

On Wednesday, The EPA proposed a new set of regulations that would require more than two-thirds of all vehicles made in the US to be fully electric by 2032. If adopted, these rules would ramp up the US’ climate strategy, giving automakers nine years to beef up for a market that currently represented 5.8% of all new vehicles sold in the US last year.

Tight 3-point Turn

The EPA’s proposed regulations are intended to set a cap on emissions so tight that automakers would be crazy not to favor EVs over gas-guzzlers. The Biden Administration has set itself a target of reaching net-zero emissions by 2050 and has brought in so many tax breaks for green tech that it’s got US trade partners squawking the subsidies will lure their local talent to America. Not surprisingly, the EPA’s proposed regulations are not especially popular with automakers.

The Alliance for Automotive Innovation, an automaker trade association, said the rules would be trying to cram a “massive, 100-year change to the US industrial base and the way Americans drive” into a little under a decade:

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A major hurdle for converting consumers to EVs is a dramatically insufficient charging network. The Biden Admin wants to hit 500,000 chargers by 2030, a 900% jump from the 50,000 dotted around the country as of last year.

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On average, EVs are also still more expensive than their dinosaur-juice-fuelled brethren, but a combination of government incentives and falling prices for lithium and cobalt could make that problem fade remarkably soon.

American automakers aren’t the only ones feeling the pinch. On Wednesday, a report funded by European aviation lobbying groups found that in order to hit its net zero target by 2050, the industry will need to spend €‎800 billion on cleaner fuels and new technologies.

And Now For A Change, Some Good News: While automakers and aviators may be bemoaning the speed at which they’re expected to stop polluting the planet, the world’s overall fossil fuel usage may actually have peaked. A study from energy analysis group Ember found renewables generated a record 12% of global electricity this year, and could satisfy all growing demand as soon as this year.

– Isobel Asher Hamilton

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Currency

Banknote Maker Warns of Dismally Low Demand

In the near future cash won’t be cold or hard anymore. In fact, it won’t have any physical characteristics at all.

De La Rue, a UK-based company that designs more than a third of the world’s banknotes, said on Wednesday that demand for hard cash is at a 20-year low, causing its share price to drop more than 30%.

Cashlesslessness

While cashless payments may already seem ubiquitous to our readers, the embrace of the tap-and-go has not been a fully global phenomenon. De La Rue’s home country, however, has welcomed cashless payments with a full-on bear hug as banking body UK Finance found in August 2022 that roughly 23 million out of Britain’s population of 60 million used virtually no cash the previous year.

De La Rue’s warning indicates that the shift from cash to tap will spread fast, and that countries which have held onto hard currency a little more firmly than Blighty are starting to loosen their grip:

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De La Rue’s board announced its estimated operating profit for 2024 is “in the low £20 million range,” whereas previously it had been set around £40 million.

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The announcement came the day after De La Rue’s new CFO Charles Andrews started in his role. Heck of a second day.

Royal Disappointment: De La Rue is the company in charge of designing and printing the first UK banknotes to carry the face of its new monarch, King Charles III. Although he will be getting crowned in May, the notes won’t be circulated until the middle of next year. Poor Charles, after waiting so long to see his face on a banknote, the currency is basically obsolete. Then again, given the track record of English kings called Charles, he’s doing relatively well…

– Isobel Asher Hamilton

Extra Upside

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HBO Go away: Streaming platform HBO Max is dropping the cable titan from its name to simply be called Max.

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Public protest: Elon Musk’s fight with NPR continues as news outlet ends activity on all 52 of its Twitter accounts.

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Just For Fun

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Along for the ride.

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