Chinese Distress (Short Transparency, Long Process Risk)

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There's been a lot of news surrounding HNA Holding Group Co. of late. The company is a large shareholder of Hilton Worldwide Holdings Inc. ($HLT) and Deutsche Bank AG. Now (a) the US government is seeking more information (video), (b) the ECB is considering a review, (c) ratings agencies are downgrading certain segments of the conglomerate, (d) a bankrupt company is suing HNA, and (e) bond prices are decreasing. The company - maybe best known for its proposed acquisition of Anthony Scarramucci's fund of funds - has made more than $40b of acquisitions since 2016. While it is unclear to what degree the capital structure is in trouble, the company is divesting assets, such as a Sydney building to Blackstone Group for $161mm. 

The company also serves as a warning signal to distressed investors with an eye towards China. This past week, Bill Bishop of Sinocism highlighted that the Chinese media has been told to tone down coverage of the firm's travails. They're concerned that market forces will further compound the company's issues. While we don't endorse opacity ever, we surely appreciate - given the recent trends with Toys R Us - why this might be. Per Bloomberg, the company faces some heavy bond maturities from Q3 2018 through Q3 2019. With pressure on the bonds, there very well could be a distressed opportunity here. Provided, that is, you can get your arms wrapped around all kinds of categories of risk. Including, of course, a government-imposed lack of information. 

Speaking of risk, it appears - thanks, of course, to a lot more transparency - that Chinese investors are comfortable with investing in stressed US-based companies (like Community Health Systems ($CYH)). 

Healthcare (Short Predictions, Long Distress)

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"What comes next?" we asked back in June. Looks like a lot of professionals are becoming increasingly convinced that '18 will be rife with healthcare activity as distress rises to "epidemic" levels. Hmmm. Okay. We'll see. Distress watchlists in the space DO seem to be expanding with names like HCR Manorcare, Genesis Healthcare Corporation ($GEN), Prime Healthcare Services Inc., Signature Healthcare LLC, and Community Health Systems ($CYH), among many others. Meanwhile, to the degree that healthcare providers are suffering from regulatory and other headwinds, management may want to move data security up higher on their list of priorities. After all, 21st Century Oncology Holdings and Morehead Memorial Hospital both serve as examples of what can happen when precautions aren't implemented early. One last note on healthcare distress, looks like biglaw attorneys aren't immune to increased healthcare spending. According to Abovethelaw.com, certain biglaw shops aresurreptitiously passing the cost of rising healthcare coverage costs to their associates. Living the dream.

Notable: (Community Health Systems, Fairway Market, Nordstrom, etc.)

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Airlines. Another European airline jumps into administration (the third this year). 

Community Health Systems. This just keeps getting better and better. 

EFH. The Judge continues to perplex people. Sempra Energy jumping through hoops to get the Oncor deal done.

Fairway Market. Perhaps it will avoid its (inevitable) Chapter 22 thanks to John Catsimatidis. 

Family Offices. Long them.

Hedge Funds. Short them. Or...uh, maybe not? Wethinks the hedge fund PR machine is in overdrive. 

Nordstrom. Struggling with its attempts to go private.

Offshore Drilling. Not much of a US focus, but some are bullish. We were surprised by this. 

Payday Lenders. Peace out...if this happens.

Toys R Us. Thanks to advisory fees, perhaps the private equity sponsors didn't fare as poorly as many think.

Notable (Sears Canada, Joyus, Community Health Systems & More)

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Busted Tech. Joyus, an online shopping platform that relied heavily on video, shuttered this past week announcing in a leaked memo that it would undertake an assignment for the benefit of creditors. The company had no venture debt but did raise nearly $70mm from Accel Partners, a Time Warner venture arm and investors affiliated with a Walmart ($WMT) venture affiliate.

Healthcare. Community Health Systems ($CYH) announced its preliminary Q2 financial and operating results and they weren't very pretty. Net operating revenues were down nearly $400mm relative to the same quarter last year. Categorical losses, however, were generally lesser than the year before. The stock - and that of spun-off Quorum Health Corporation ($QHC) took a dive after the report. Meanwhile, smaller ($1-10mm) healthcare providers continue to file for bankruptcy.

Noble Group. With $3b of debt and various other issues, lots of folks are souring on the name.

Och-Ziff. We've heard of camp counselor bonuses from satisfied parents but this $280mm package takes things to a whole new level. Also, long luck. 

Pure Unsupported Fantasy. Otherwise known as Sycamore Partners' claim that Dollar Tree Stores submarined the Family Dollar merger. So Dollar Tree says, anyway.

Sears Canada. And we thought we were aggressive with some of our commentary:nice headline. Meanwhile, it appears that Eddie Lampert and Bruce Berkowitz couldn't figure out a way to get along in the sandbox, calling off their joint effort to bail out the embattled Canadian retailer. Now ESL Partners LP may sell some of its stake to take a tax loss. Berkowitz's Fairholme Capital Management LLC increased its holdings not too long ago.

Shopping Holidays. Get ready because it is undoubtedly coming. Fresh on the heels of Amazon Prime Day, other retailers are getting jiggy with it (looking at you Walmart and JD.com) and intend to start their own shopping holidays. Looks like the big retailers want to make Labor Day even more pointless.

News for the Week of 3/12/17

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  • Commercial Real Estate Backed Loans. Looks like J.C. Penney store closures could impair $30b of loans.
  • European Elections & CDS. Investors perceive greater redenomination risk in France and Germany.
  • European Retail. It seems the bloody retail phenomenon isn't exclusive to US retailers. Jack Wolfskin, a German producer of outdoor wear and equipment, is in the midst of a restructuring of its $365mm of debt. The Blackstone Group is the company's sponsor and PJT Partners is shopping the company. Meanwhile, Jaeger, a UK-based clothier is also on the block, with an administration within the bounds of possibility. AlixPartners is advising the company.
  • High Yield. Valeant Pharmaceuticals, Foresight Energy and Community Health Systems all issued new high yield debt this past week and what screams of a massive yield grab. No, we're not joking: this actually happened. And demand was so strong that upsizing took place. We repeat: "demand was so strong that upsizing took place."
  • Oil & Gas Fallout. Like we said last week, we're crushing Ramen so it's hard to feel sorry for a man pulling in $2mm and a $50k/month consulting fee, but its interesting to see some of the effects of the energy downturn - here, relating to Energy XXI's former CEO. 
  • Power. The Westinghouse saga got juicier with Weil and the Japanese Prime Minister basically saying put up or shut up. Meanwhile, FirstEnergy is involved in shenanigans and Exelon is now getting active. 
  • Private Equity History Lesson. A review of J.Crew's take-private transaction and private equity's affinity for dividends, long-term viability be-damned. 
  • Puerto Rico. Sh*t is getting real and people are starting to clamor for bankruptcy.
  • Television. Netflix is going after unscripted reality TV. Choice quote: "The competition should be scared out of their minds. These guys are monsters — they're coming in to play and play hard."
  • Uber. Expansion in India seems to be predicated upon a mountain of driver debt.
  • Rewind I: Five weeks ago we reported the following: "The Finish Line Inc. announced its sale of Jack Rabbit Sports this week (66 locations) for undisclosed terms. "Undisclosed terms" = GU gels and a jock-strap." Apparently, we were too generous with our characterization of the financial consideration. Something tells us this won't stop Peter J. Soloman from dutifully and opportunistically noting the tombstone on its pitch materials for the next big retail mandate.  See, also, this.
  • Rewind II: Looks like Avaya Inc. has a potential buyer in publicly-traded Extreme Networks Inc. for its networking business (for $100mm).
  • Rewind III: Store closures. Add Staples to the list (70 locations) and Signet Jewelers (165 stores). And here is one report on the failure of BCBG.
  • Chart of the Week: 
  • Chart of the Week II: