| Here’s a bad idea. You’re a big public company, and you have some debt: A year ago, you sold $1 billion of bonds, due in 10 years, that pay, say, 7% annual interest. But now, a year later, things have changed. Specifically interest rates have gone down: Let’s say that the 10-year US Treasury rate was about 4% when you issued the bonds, but a year later let’s say it’s 2%. Meanwhile your business has gotten better: When you issued the bonds last year, you had to pay an interest rate that was 300 basis points higher than Treasuries (7% vs. 4%), but if you issued today you’d only have to pay a 200 basis point premium, because your credit has improved. So if you issued $1 billion of 10-year bonds today, they would carry a total interest rate of only 4% (the 2% Treasury rate plus a 200 basis point spread), not 7%. If you could get rid of the old 7% bonds and replace them with new 4% bonds, you could save $30 million of interest per year. Can you? Mostly, no. In general, corporate bonds are not freely prepayable: You can’t just send the 7% bondholders $1 billion and say “never mind.” The bondholders loaned you money because they wanted 10 years of guaranteed 7% interest payments; if those payments went away as soon as interest rates dropped, they’d be losing out. They’d have to go invest their money somewhere else — maybe in your new bonds — at only 4% interest. They bought a fixed-rate bond, and they want that fixed rate for 10 years. Now, you can get rid of the bonds early. The simplest way to do that would be to go to the bondholders, offer to buy them back and try to negotiate a deal. But the bonds trade, and their price has gone up: As interest rates fell and your credit improved, your 7% bonds became more attractive, and now they trade at about a 4% yield. So you’d have to pay up to buy them back at market prices. Probably you’d have to pay about 122 cents on the dollar, or about $1.22 billion, to buy back all the bonds. There is another way, though it doesn’t help you much. Bonds also commonly have a provision that automates this: Instead of calling up your bondholders, negotiating to buy back their bonds at market prices, and trying to get most of them to say yes, the bond documents have a section saying that you can force them to sell you the bonds if you want. But not at 100 cents on the dollar, or even at the market price. Instead, you have to pay a “make-whole premium” that is generously designed to capture any increase in value of the bonds. The make-whole premium is based on a formula written into the bond documents; most typically the formula is that you discount the future cash flows on the bond at 50 basis points over the relevant Treasury rate. Here, the make-whole would require you to pay about 136 cents on the dollar, or $1.36 billion, which is worse than you’d do in the open market. In the first paragraph, I said that, if you could replace your old 7% bond with a new 4% bond, you’d save $30 million a year in interest. But actually getting rid of the old 7% bond isn’t that easy: You’d have to pay an extra $220 million (at market prices) or $360 million (at the make-whole) to get rid of it, entirely (or more than entirely) offsetting the interest savings. Oh well. Any other ideas? Well, this is the bad idea. You could file for bankruptcy. Crudely speaking, what happens when you file for bankruptcy is that all your debts get accelerated and thrown into a big pot for the bankruptcy court to sort out. Ordinarily, there is not enough money to pay all the debts, so some senior creditors get paid off and some junior creditors end up owning the company. Here, though, you’re fine; your business is great. You have plenty of money and access to credit. So you go into bankruptcy and say “okay, sorry, we’re bankrupt, we have to pay everyone back now, but the good news is we have the money to do that, here you go bondholders, here’s your $1 billion back.” And the bondholders are like “sweet, this company went bankrupt and I still got back 100 cents on the dollar, that’s a pretty good recovery,” and are happy. And you got rid of the bonds for $1 billion, instead of $1.22 billion. And you emerge from bankruptcy and borrow new money at 4%. This is, again, a terrible idea, and will not work. Bankruptcy is expensive and uncertain, it will impair your credit and make it harder for you to borrow the new money at 4%, and also if you are just a perfectly healthy company the bankruptcy court probably won’t let you file for bankruptcy. Still! In May 2020, Hertz Global Holdings Inc. filed for bankruptcy. Hertz was not particularly healthy; it did not file for bankruptcy as a strategic trick. It filed for bankruptcy for pretty normal reasons, too much debt and an ailing car-rental business in a pandemic that was bad for travel. Nonetheless its stock went up, for what seemed (to me) like meme-stock reasons of ill-informed retail speculators not understanding that, in bankruptcy, normally shareholders lose everything and the creditors end up owning the company. But, nope! The speculators were right: Travel recovered, used-car prices went up, and Hertz emerged from bankruptcy a year later with lots of value for its pre-bankruptcy shareholders. In particular, Hertz was able to pay back every dollar of debt that it owed. A great success story. On the other hand, the creditors didn’t want every dollar of debt that they were owed. They wanted more. If you owned Hertz’s 7.125% unsecured notes due in 2026, Hertz stopped paying you interest when it filed for bankruptcy in May 2020, and when it emerged in June 2021 it paid you back 100 cents on the dollar. But what about the 7.125% interest that it owed you for the intervening year? And what about the 7.125% annual interest that it owed you for the next five years? If Hertz had tried to buy back those bonds in April 2020, it — uh, well, it would have paid about 50 cents on the dollar, because it was sliding into bankruptcy and those bonds looked distressed. But if it had tried to buy them back pre-pandemic, it would have paid more: In January 2020, they were trading at around 110 cents on the dollar. And if it had bought them back using the make-whole provision in the bond indenture, it would have paid even more. So Hertz’s bondholders sued, saying: We want our interest, and we want our make-wholes. Yesterday they won. Here is the opinion of the US Court of Appeals for the Third Circuit. Both sides had pretty good arguments: - Hertz’s basic argument is that the bankruptcy code explicitly denies claims for “unmatured interest.” When a company files for bankruptcy, the clock stops and all of its debts are reduced to “claims” in bankruptcy. If you have a $100 bond at 7% interest, bankruptcy transforms that into a claim for $100 — which might get paid back at 100 or 40 or 0 cents on the dollar — and gets rid of your interest.
- The bondholders’ basic argument is that the Hertz bankruptcy had lots of money left over, and if there’s money left over, it should go to pay them the interest they were owed rather than to shareholders. A basic principle of bankruptcy is that people get paid back in order of seniority, and bondholders are more senior than shareholders. The shareholders shouldn’t get paid until the bondholders get everything they were owed.
From the opinion: The debtors say [they don’t owe all the money] because of the Bankruptcy Code’s general rule barring interest accruing post-petition (in bankruptcy lingo, “unmatured interest”). That is one way the Code deals with the difficult distributional problems of the typical case, where there is not enough money to go around. But this is not the typical case. At the end of the reorganization, the debtors here were so flush that they paid their former stockholders (the “Stockholders”) roughly $1.1 billion.
That is: If there’s not enough money to go around, all the creditors should get back the same fraction of the money they loaned the company, ignoring future interest. But here there is enough money to go around, and lots more besides, so all the creditors should get back all the money they were owed, including future interest: Does the Bankruptcy Code as a whole ... require solvent debtors to pay unimpaired creditors interest accruing post-petition at the contract rate? It is a technical question of bankruptcy law, and we give that issue its nuanced due below. We can rephrase it in a way that makes the answer predictable: Can Hertz use the Bankruptcy Code to force the Noteholders to give up nine figures of contractually valid interest and spend that money on a massive dividend to the Stockholders? The answer is no. As the Supreme Court told us more than a century ago, “the rule is well settled that stockholders are not entitled to any share ... until all the debts of the corporation are paid.”
One judge dissented, and you could argue the other way. But I think this ruling makes sense if you start your thinking where I started this column, by imagining a company using bankruptcy strategically to get rid of its debt cheaply. That was probably not what Hertz was thinking when it filed for bankruptcy, but it would have been what Hertz did, unless the court made it pay up. Disclosure, I used to work at Goldman Sachs Group Inc., and I like to think that when I worked there its reputation would have been described with words like “sharp” and “creative” and “tough” and “aggressive” and “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” The thing about that reputation is that it attracts customers, but it also keeps them on their toes. Goldman would call up customers and say “we’ve got a clever idea for you,” and the customers would say “hmm probably you have found a clever idea for me, but also you have probably found a clever way to rip my face off.” The most important trading advice is, “if you can't spot the sucker in your first half-hour at the table, then you are the sucker.” Goldman was rarely the sucker. In particular, if Goldman was offering you a deal that seemed to be too good to be true, it probably was. We talked last year about a US Commodity Futures Trading Commission enforcement action against Goldman for, uh, let’s say exploiting some customer misunderstandings about the pricing mechanics of certain equity index swaps. Goldman was able to offer the customers attractive interest rates because they didn’t really understand what they were buying. The clients, said the CFTC, “often appeared to believe that they were receiving an advantageous interest rate, with no strings attached.” I made fun of this belief: The customer who thinks that Goldman Sachs are charitable idiots who are giving him a good deal for no reason is going to be getting a lot of calls from Goldman Sachs. “Hey bud, got another great deal for you,” his Goldman salesperson will giggle to him, a dozen times a day.
On the other hand, in recent years Goldman got into consumer banking, and then got right back out of it again. If you have absolutely zero consumer lending business, and you want to get into consumer lending at scale quickly, what is the best way to do it? I don’t know, but a way to do it — not the best — is to make a lot of cheap loans to people with bad credit. Just, like, put up billboards saying “if your bank won’t lend to you, Goldman Sachs will.” Seems like a bit of a weird approach for Goldman to take but here we are: Goldman Chief Executive David Solomon said Monday the bank expects to incur the loss on the eventual sale of its General Motors credit-card business and a smaller, unrelated business. Goldman has been in talks for months with GM and Barclays about transferring the carmaker’s credit-card business to the British bank, The Wall Street Journal reported in April. Barclays has been unwilling to pay the price Goldman originally expected, in large part because of high charge-off rates in the program, according to people familiar with the matter. Charge-off rates refer to the portion of the balances the issuer has to write off because borrowers are unlikely to pay them back. ... The GM cards are largely targeted toward people who own and lease GM cars. Cardholders earn points they can put toward car payments or servicing, among other things. The partnership has roughly $2 billion in balances. The problematic accounts were primarily originated by Goldman after it took over the program from Capital One and began opening new accounts in 2022. … Goldman struggled to grow the number of GM credit-card accounts, partly because travel-rewards cards have been all the rage. To boost demand, it turned to third-party websites including Credit Karma to find new cardholders. But that attracted people with lower credit scores.
It is pleasing that, in its institutional business, Goldman is a sharp counterparty, while in its consumer business it was an easy mark. If you’re a sophisticated hedge fund trading with Goldman, you might worry that you are the sucker at the table; if you were a middle-class borrower with a Chevrolet and too many credit cards, Goldman was the sucker. Disclosure, I have a friend who worked at the US Securities and Exchange Commission, and through him I am the proud owner of an SEC raid jacket. (You know, the navy windbreaker with the SEC crest on the front and “SEC” in big yellow letters on the back.) I don’t think I have ever worn it, but I joke a lot about wearing it when I go to visit a hedge fund. I just think that would be good comedy. Make everyone nervous. “Shred everything,” they’d shout, as I walked up to the reception desk. In general, if the SEC pays a visit to your place of work, is that a bad sign? Here is a hilarious academic paper finding that the answer is yes: Leveraging de-identified smartphone geolocation data, we provide new insights into the SEC's monitoring practices by tracking SEC-associated devices that visit firm headquarters. Our findings reveal that the majority of SEC visits occur outside of formal investigations, with larger firms and those with a history of SEC enforcement actions being more frequently visited. These visits often cluster within industries. Notably, the SEC associated devices venture to firms both within and outside their own regions. On average, these visits are material, evidenced by significant stock price reactions, even in the absence of subsequent formal investigations or enforcement actions. Last, we observe a chilling effect on insider behavior around these SEC interactions; insiders are less likely to sell around visits. However, when sales do occur, insiders avoid substantial losses.
That’s “Watching the Watchdogs: Tracking SEC Inquiries using Geolocation Data,” by William Gerken, Steven Irlbeck, Marcus Painter and Guangli Zhang. Their main conclusion — that informal visits from the SEC are a bad sign for a company’s stock, “with three-month abnormal returns between -1.4% and -1.94%” — is maybe the least interesting part. More fun is the insider trading: Firm insiders are likely aware of SEC visits to the firm HQ. On one hand, firm insiders may avoid transactions to avoid the appearance of impropriety. On the other hand, since these visits are not publicly released, they may be tempted to sell shares in order to avoid abnormal losses. On average we find insiders - especially firm officers, those most likely to be physically at the headquarters - are less likely to sell around an SEC device visit. Specifically, insiders are 16% less likely to sell in the two weeks surrounding an SEC visit relative to periods with no visits. We also find this chilling effect is stronger when the firm experiences a subsequent SEC enforcement action. We find no effect on insiders buys. Notwithstanding the chilling effect, some insiders still place numerous trades around SEC device visits. When these insiders do sell around visits, they avoid three-month abnormal losses of 4.9%, on average.
Notice that the insiders who do sell avoid much bigger losses than the average negative returns of companies with SEC visits. I think the intuition is that, if the SEC visits your company for something kinda bad, you will probably be careful not to sell stock to avoid the appearance of impropriety, but if the SEC visits your company for something really bad, you don’t care about that stuff and just dump your stock. Also though the data! The researchers “use de-identified smartphone geolocation data for a sample of US phones from January 2019 to February 2020,” obtained “from an online data vendor that provides data commercially to businesses, governments, and researchers” and “works with numerous mobile application providers that track ‘pings’ of the location of a phone while the application is either currently in use or is running in the background.” Then they use the addresses of SEC offices and corporate headquarters, and then match the smartphone pings to the buildings. A smartphone is assumed to belong to an SEC employee if it “pinged for at least 20 unique workday hours within one SEC location during the month” and “the accumulated time in that SEC building [is] greater than in any other buildings in the respective month.” And then they go measure which companies those SEC employees visited. The paper is dated September 2024, and their data is from 2019 through 2020, but … data vendors clearly sell real-time-ish phone location data to hedge funds? And so, as is so often the case with academic finance papers, my main questions are: - Is this signal — -1.4%-ish abnormal returns over three months — just an academic curiosity that practitioners can’t use?
- Or is it a signal that hedge funds are already using, and the academics have blown up their spot?
- Or is it a signal that hedge funds didn’t think of, but that the academics did, and that the hedge funds will now incorporate into their models?
I don’t know, if you work at a hedge fund and you use SEC employee phone location data to trade companies’ stocks, or if you don’t yet but you’re going to start now, please do email me about it. Also, if you do, and you are watching the little glowing map and you see a bunch of SEC phones heading to your office, what do you do about it? Please tell me that the answer is “shred everything.” This is just a fun little mergers-and-acquisitions drama. In June, ANI Pharmaceuticals Inc. announced that it would acquire Alimera Sciences Inc. for $5.50 per share in cash (plus up to $0.50 of earnouts), or about $381 million. Alimera held a shareholder vote last week, and the shareholders approved the deal. Often that is the last step of a public-company merger, and the deal closes later that same day. Not here, though. Here there was no closing press release, and then yesterday Alimera announced that it was suing ANI to get it to close the deal: “Alimera has fulfilled all its requirements to close the Merger Agreement, yet ANI has failed to adhere to its obligation to close on time. We believe the merger offers compelling value for our shareholders and remain focused on completing the transaction. Accordingly, we are committed to taking all actions necessary to ensure that happens. We are confident we will prevail in the Delaware Court of Chancery and look forward to consummating the merger of our companies.”
Oops! Alimera’s stock had been quite steady between $5.50 and $5.60 since the deal was announced; it dropped as low as $4.32 on this announcement. But then ANI announced, no no, just a misunderstanding: We note the Alimera press release issued today. The Company continues to work in good faith toward closing of the acquisition. Any delay is a result of discussions regarding closing conditions, which the Company expects to resolve promptly.
That helped the stock, though not all the way back to $5.50; “discussions regarding closing conditions” could still be bad. But then this morning everything was fine again: ANI Pharmaceuticals, Inc. (NASDAQ: ANIP) (“ANI”) and Alimera Sciences, Inc. (NASDAQ: ALIM) (“Alimera” or the “Company”) today jointly announced that they have scheduled the closing of their transaction pursuant to the companies’ previously announced Merger Agreement for before the market opens on Monday, September 16, 2024.
The stock was at $5.54 as of noon today. You’re really not supposed to do this! If your counterparty in a merger is being annoying about the closing documents, or not responding to emails quickly enough, pick up the phone! Pay them a visit! Putting out a press release saying, like, “the deal is dead and we’re suing” is not the preferred approach. Though I guess it got their attention. In general, if you are extremely wealthy and really want to buy a thing — a house, a painting, a stock — you won’t want the seller to know that. If they know that you have unlimited money and desire, they will jack up the price. You will come to the open house in a wig, or send a proxy to the art auction, so the seller doesn’t know who you are. Conversely, if you are the seller, you will want to know the identity of your buyer, and if the buyer is super-rich you’ll want to jack up the price. Different markets have different norms for this, but in general it seems to me that counterparty anonymity is the common norm, and buyers get to be anonymous if they want. Sometimes the sellers don’t like it: The seller of [Jeff Bezos’s] $79 million home is suing real-estate brokerage Douglas Elliman, which handled both sides of the transaction, saying the company misled him about the identity of the buyer and cost him $6 million in the process. Leo Kryss, co-founder of Tectoy, a Brazilian toy and electronics company, paid $28 million for a waterfront property on Indian Creek Island in 2014 through T.A.M. Investments, according to property records. In May of 2023, he listed the seven-bedroom house, which has a wine cellar, library, theater and pool, for $85 million. The next month, Bezos paid $68 million for a three-bedroom house next door to Kryss’s property. When Kryss received a $79 million offer a short time later, he asked Elliman if the billionaire Amazon.com founder was behind it. Jay Parker, Elliman’s CEO of the Florida region, called Kryss personally to say that Bezos wasn’t the buyer and that the purchaser wouldn’t pay more than $79 million, according to a complaint filed in the circuit court of the 11th Judicial Circuit in Miami-Dade County. Kryss then agreed to sell at a 7.1% discount—only to find out after closing that the purchaser was in fact an entity tied to Bezos, the complaint says.
I suppose denying that he is the buyer is different from saying “I’m sorry I can’t disclose who the buyer is,” but of course if you say that then that just means “yes it’s Bezos.” I wrote the other day about a Spotify streaming arbitrage. The essence of the arbitrage is that each Spotify customer pays a fixed monthly price for unlimited streaming (call it $12), and then a portion of that subscription money is divided up among musicians based on how many streams they get. Therefore a customer who streams a lot of music — say, 24 hours a day, 30 days a month — will end up allocating more than her $12 subscription price to the bands she listens to. I wrote about a guy who allegedly did the most egregious form of this arbitrage: Sign up a thousand fake Spotify accounts, stream his own music 24/7, and get millions of dollars more in streaming revenue than he paid for the accounts. That’s apparently a crime, say US prosecutors, though I will note that some of my readers disagree and I have some sympathy. But there are many, many softer forms of this. If you are a musician who likes money and who has actual fans, you can, you know, inform them about how the algorithm works and encourage them to allocate money to you efficiently. Here is an extremely detailed guide to streaming from the US BTS Army. And then there’s Sleepify. Quite a few readers emailed me about it; from Wikipedia: Sleepify is an album by the American funk band Vulfpeck, released March 2014. The release consists solely of ten roughly 30-second-long tracks of silence. The album was made available on the music streaming service Spotify, where the band encouraged consumers to play the album on a loop while they slept. In turn, royalties from the playing of each track on the "album" were to be used to crowdfund a free concert tour by the band. The album was pulled by Spotify on April 26, 2014, citing violations of the service's content policies.
They weren’t arrested, though, and they seem to have gotten about $20,000 in payments from it. If you get actual fans to engage in somewhat weird behavior to boost your revenue, I guess that’s okay; if you get thousands of bots to do it that’s a crime. Not legal advice. Anyway I have a soft spot for Vulfpeck because, when we were developing the Money Stuff podcast, I pointed to one of their songs as the sort of thing that would sound cool for the intro music. I did not know about Sleepify at the time, but I am pleased to see that Vulfpeck is also a pioneer in financial arbitrage. UniCredit Makes Move on Commerzbank as Germany Starts Exit. Germany Wrong-Footed by Shock UniCredit Move on Commerzbank. ExodusPoint Offers Clients Lower Fees If Returns Lag Behind Cash. How Wall Street won ‘capitulation’ from the Federal Reserve on new bank rules. Maldives hunts for bailout to avoid first Islamic sovereign debt default. Mexican Legislature Passes Judicial Overhaul That Has Rattled Investors. New Starbucks chief pledges to end ‘drift’ from its coffee house roots. AC Milan owner says private equity investment has ‘massively inflated’ sports valuations. The World’s Biggest Construction Project Is a Magnet for Executives Behaving Badly. If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! | 
