😬Securitization Run Amok (Long the ABS Market)😬

On Sunday, in “💥Securitize it All, We Say💥,” we continued our ongoing “What to Make of the Credit Cycle” series with discussion of, among several other things, Otis, a new startup that intends to securitize cultural assets and collectables like sneakers, comic books, works of art, watches and more. We quipped, “What isn’t getting securitized these days?” If we do say so ourselves, that is a: GOOD. EFFING. QUESTION. Why is securitization all of the rage these days? EVEN. BETTER. EFFING. QUESTION. The answer: YIELD, BABY, YIELD.

Back in early June, Bloomberg’s Brian Chappatta reported on the rise of “esoteric asset-backed securities known as ‘whole business securitizations.’” Restaurant chains with large swaths of franchisees, long-standing operations, and dependable brands, he wrote, are using these instruments to access cheaper financing in a yield-starved market. He wrote:

The securities are about as straightforward as the name implies — franchise-focused companies sell virtually all of their revenue-generating assets (thus, “whole business”) into bankruptcy-remote, special-purpose entities. Investors then buy pieces of the securitizations, which tend to have credit ratings five or six levels higher than the companies themselves, according to S&P Global Ratings. Creditors take comfort in knowing the cash flows are isolated from bankruptcy.

Cumulative gross issuance of whole-business securitizations reached about $35 billion at the end of 2018, compared with about $13 billion just four years earlier, according to S&P. The past two years have been banner years for the structures, with $7.9 billion offered in 2017 and $6.6 billion last year, according to data from Bloomberg News’s Charles Williams.

These structures are contributing to the deluge of BBB-rated supply.

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What to Make of the Credit Cycle (Part 4)

We’ve spent a considerable amount of space discussing what to make of the credit cycle. Our intent is to give professionals a well-rounded view of what to expect now that we’re in year 8/9 of a bull market. You can read Parts one (Members’ only), two, and three (Members’ only), respectively.

Interestingly, certain investors have become impatient and apparently thrown in the towel. Is late 2019 or early 2020 too far afield to continue pretending to deploy a distressed investing strategy? Or are LPs anxious and pulling funds from underperforming or underinvested hedge funds? Is the opportunity set too small - crap retail and specialized oil and gas - for players to be active? Are asset values too high? Are high yield bonds priced too high? All valid questions (feel free to write in and let us know what we’re missing: petition@petition11.com).

In any event, The Wall Street Journal highlights:

A number of distressed-debt hedge funds are abandoning traditional loan-to-own strategies after years of low interest rates resulted in meager returns for investors. Some are even investing in equities.

PETITION Note: funny, last we checked an index fund doesn’t charge 2 and 20.

The WSJ continues,

BlueMountain Capital Management LLC and Arrowgrass Capital Partners LLP are some of the bigger funds that have shifted away from this niche-investing strategy. And lots of smaller funds have closed shop.

A number of smaller distressed-debt investors have closed down, including Panning Capital Management, Reef Road Capital and Hutchin Hill Capital.

PETITION Note: the WSJ failed to include TCW Group’s distressed asset fund. What? Too soon?

We should note, however, that there are several other platforms that are raising (or have raised) money for new distressed and/or special situations, e.g., GSO and Knighthead Capital Management.

Still is the WSJ-reported capitulation a leading indicator of increased distressed activity to come? Owl Creek Asset Management LP seems to think so. The WSJ writes,

Owl Creek founder Jeffrey Altman, however, believes that if funds are shutting down and moving away from classic loan-to-own strategies then a big wave of restructuring is around the corner. “If anything, value players leaving credit makes me feel more confident that the extended run-up credit markets have been enjoying may finally be ending,” Mr. Altman said.

One’s loss is another’s opportunity.

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Speaking of leading indicators(?) and opportunity, clearly there are some entrepreneurial (or masochistic?) investors who are prepping for increased distressed activity. In December, The Carlyle Group ($CG), via its Carlyle Strategic Partners IV L.P. fund, announced a strategic investment in Prime Clerk LLC, a claims and noticing administrator based in New York (more on Prime Clerk below). Terms were not disclosed — though sources tell us that the terms were rich. Paul Weiss Rifkind & Wharton LLP served as legal counsel and Centerview Partners as the investment banker on the transaction.

On April 19th, Omni Management Group announced that existing management had teamed up with Marc Beillinson and affiliates of the Beilinson Advisory Group (Mark Murphy and Rick Kapko) to purchase Omni Management Group from Rust Consulting. Terms were not disclosed here either. We can’t imagine the terms here were as robust as those above given the market share differential.

The point is: some opportunistic folk sure seem to think that there’s another cycle coming. And they’re putting their money where their mouth is, thinking that there will be money to be made in the (seemingly saturated) case administration business. Time will tell.

Caesars = "One of the Great Messes of Our Time"?

The Embattled Caesars Entertainment is FINALLY out of Bankruptcy

Last week we highlighted this tweet that poked fun at recent asset stripping (aka dropdown financing) strategies. Great timing, if we do say so ourselves, as Caesars Entertainment has finally emerged from bankruptcy. Not great timing? This (note our reply).

To commemorate Caesars' accomplishment, the Financial Times published this post-mortem (warning: firewall). It’s a solid read. 

A few bits we wanted to highlight:

THIS is understanding who is boss: “One hedge fund investor wondered, then, if the advice of bankers was intrinsically tainted. ‘Private equity firms cut a wide swath,’ the investor said. ‘You do not want to cross them and risk the golden goose.’”

THIS is how you advocate for your client: 

“…[A] lawyer at Paul Weiss who represented the parent Caesars company controlled by Apollo and TPG and who is the longtime outside counsel to Apollo, responded: “I have been a restructuring and bankruptcy lawyer for 28 years and I do not believe David Sambur was more difficult in the Caesars case than anyone else nor in any other transaction I have worked on. David was completely fair and responsible.’” Hahaha. What else is he going to say about his “longtime” client? “Yeah, sure, FT, he was the biggest a$$ imaginable.” Talk about not wanting to cross and risk the golden goose. P.S. Mr. Sambur is now on the board of the reorganized entity. Sounds like a solid source of recurring revenue for a loyal...uh, we mean, commercial, lawyer. 

THIS is key advice (in the comments) to in-house legal representing bondholders: “‘Baskets’. Devil in the detail [sic]”. See, e.g., J.Crew. Haha. YOU THINK?

P.S. There appears to be some healthy skepticism about Caesars' long term outlook.