TheChek News Flow

Cofounder and CEO Michelle Larivee discusses expansion plans for the acupuncture business.

Acupuncture company Wthn is primed for growth.

It has closed a $5 million Series A led by L Catterton with participation from Jesse Draper’s Halogen Ventures and angel investors. The company also opened a new studio in Williamsburg, Brooklyn, studio Monday.

The company, cofounded by Michelle Larivee in 2019, was hit by stay-at-home orders due to the COVID-19 pandemic, but now is back in full expansion mode.

“[The] vision from literally Day One has always been to have a national footprint from a retail perspective,” said Larivee, also the company’s chief executive officer.

While the pandemic led the team to build out its growing line of products, which includes its bestselling Acupressure Mat Set, $78, and herbal supplements, $39, the team is now focused on both studio expansion and retail growth, according to Larivee.

New York is the focus over the next year, as the plan is to open two to three studios in 2024 starting with Williamsburg, where the company’s practitioners offer traditional Chinese medicine.

“We have a clear real estate strategy in New York in terms of what we’re looking for, for any location, so looking at the customer demographics, looking at other adjacent businesses in the wellness space,” Larivee said.

Williamsburg was the most requested location, Larivee said, and the demographic there aligns with Wthn’s current customer base.

“Our customer is someone who really is health-first, and that doesn’t mean that they’ve tried acupuncture. In fact 60 to 70 percent of our customers have never tried acupuncture,” she said, adding that the customer base tends to skew more towards women.

After New York expansion this year, the team is looking at Boston, California, Philadelphia and D.C. for future locations.

While Larivee’s sights are set on physical expansion, particularly with the $5 million raise, she is eager to double down on the product business in the next three years or so, she said. Pain, women’s health and digestion will be key areas of interest for future products — and are also issues that drive customers to the studios.

“Our mission is all about introducing Chinese medicine to more people and through our products, we can do that sooner at a larger level,” she said, adding that it could account for a larger portion of the business than studios in the future.

Private equity firm L Catterton, which has invested in major wellness brands like Nutrafol, Peloton and CorePower Yoga, joins early investors Gwenyth Paltrow, as well as SoulCycle and Peoplehood founders Elizabeth Cutler and Julie Rice.

“Accelerated by COVID-19, demand for preventative care and wellness is stronger than ever. With their innovative products and services, Wthn is offering new solutions and creating health breakthroughs that weren’t previously possible through Western methods alone,” said Whitney Casey, L Catterton partner and transaction lead, in a statement. “In helping and reaching new clients, Wthn is creating a market and we strongly believe in the potential of their omnichannel business model to disrupt this trillion-dollar opportunity.”

Wthn’s recent growth has been accelerated by ongoing trends within the $5.6 trillion global wellness business. At WWD’s 2023 wellness forum, Larivee discussed the factors driving the growth of services like acupuncture.

“Starting with the pandemic, there’s a great study that shows that over the past three years, 70 percent of people have started to reprioritize their health differently than they did before. That’s a huge contributing factor,” she said. “We’re also seeing the rise of chronic conditions or exacerbations of conditions, such as increased stress or anxiety. Chronic pain is up 30 percent since the pandemic.”

Currently, studios make up the bulk of the business, though products are growing quickly with wholesale growth of 40 percent year-over-year. The brand is expecting to grow three times its overall size in 2024.

Bank regulation on capital has made financial system more fragile

Rule changes have stemmed flows of funds across regions, increasing stability risks

Regulators and investors are worried about the fragility of government bond and funding markets.

This is understandable. These markets are vital for financing governments, for monetary policy transmission and for the hedging of interest rate risk for banks, investors and corporations. But they are experiencing repeated bouts of instability, such as the frenzied “dash for cash” in early 2020 and the 2019 blow-up in repos, a market for interbank lending.

Such concerns have sparked a series of reforms, including new rules from the Securities and Exchange Commission requiring more trades in US Treasuries to be cleared centrally, in line with other assets such as equities, futures and swaps.

Clearing will provide some capital relief for banks, by allowing them to net off exposures. But in themselves, the new rules are no panacea. Short-term funding markets have become more fragile largely because of a recent shift in the constitution of the financial system: the segregation of bank capital by jurisdiction.

Until 2016, banks were primarily regulated at a global, consolidated level, by their home regulators. Banks could shift capital more or less seamlessly between their subsidiaries, across products and currencies, as market conditions warranted. This was particularly the case when moving capital between activities with similar implications for consolidated capital, such as positions in US, UK and European government debt.

Things changed in July that year, when the Federal Reserve began to require foreign banks with more than $50bn of US assets to set up special holding companies for their local operations. Each of these holding companies is governed by its own board of directors and is subject to the full rigours of US banking supervision, including local capital and liquidity standards as well as annual stress tests. In 2019, Europe followed suit with a similar set of rules; the biggest US and UK banks were compliant within about a year.

The new regimes were well-intentioned, of course: the US reforms were part of the Dodd-Frank Act, a sweeping provision aimed at preventing a repeat of the 2007-08 meltdown. But the result is that shifting capital between bank subsidiaries now requires the recommendation of the local management team, the approval of the local board, consideration of local stress tests and, at times, approval from local regulators. Capital mobility has become time-consuming, costly and uncertain.

In short, bank capital is trapped. When capital can no longer move across jurisdictions, balance sheets in each region are fixed. It is no surprise that markets have stiffened, and that policymakers now have to stabilise markets more often. The official sector is filling a role that was once left to bank capital.

The best illustration of this is in the repo market, a liquid market with trillions of dollars in daily volumes. Before 2016, repo shocks often spilled across borders. Our analysis shows that when the US market was disrupted, a dislocation normally occurred somewhere in European or UK repo, too. Contagion was global, in this respect, as banks shifted capital towards trouble-spots and out of equivalent activities elsewhere. This spread shocks across multiple jurisdictions, reducing their severity.

Now, shocks are more localised. When volatility spikes in US repo, other parts of the front end — including short-dated Treasuries — also experience disruptions. Dislocations in Europe, too, are more likely to affect multiple types of collateral. And as it is now harder for capital buffers to be deployed across borders, the hits are harder. In the US, repo shocks are 26 per cent more frequent than they were pre-2016 and 31 per cent more severe, and tend to last much longer. It’s a similar picture in Europe and the UK.

Further regulations, mandates and constraints are likely to compound this calcification of markets. Among the most significant are the Basel III reforms, due to be phased in from 2025, which look set to push up banks’ capital requirements. This would make it more expensive for banks to intermediate in government bond markets, which would in turn raise costs for participants trying to arbitrage price differences. Persistently wider spreads and lower volumes would add to price and yield volatility — which would increase banks’ regulatory requirements once more.

The US is looking especially vulnerable given that the Treasury market is on course to expand rapidly as federal deficits remain wide. More bonds outstanding implies a greater need for financing and hedging, as well as for transactions in futures and swaps. Market stability is likely to remain under pressure.

Largest US banks set to log sharp rise in bad loans

Earnings are expected to have shrunk in last quarter of 2023 due to unpaid debts and impact of high interest rates

A pile-up of bad debt threatens to sour investors’ growing optimism about the prospects for the US’s largest banks when they report fourth-quarter earnings this week.

Non-performing loans — debt tied to borrowers who have not made a payment in at least the past 90 days — are expected to have risen to a combined $24.4bn in the last three months of 2023 at the four largest US lenders — JPMorgan Chase, Bank of America, Wells Fargo and Citigroup, according to a Bloomberg analysts’ consensus. That is up nearly $6bn since the end of 2022.

The analysts estimate bank earnings shrunk in the final three months of 2023, dragged down by those unpaid loans as well as the lingering impact of higher interest rates, which has raised the cost of deposits. In addition, in December, a number of big banks said they planned to take a one-time charge by the end of the year to pay for a special assessment being imposed by the Federal Deposit Insurance Corporation to recover the $18.5bn last year’s failures of Silicon Valley Bank and Signature cost the regulator’s insurance fund.

Cost-cutting also continues. Citigroup, which is in the middle of its largest reorganisation in years, is likely to take a charge to cover lay-offs and other related expenses. Wells Fargo last month said it was setting aside $1bn for severance costs in the fourth quarter.

In all, earnings at the six big banks, which includes Goldman Sachs and Morgan Stanley, are forecast to have dropped an average of 13 per cent in the last three months of 2023 compared with the same period a year earlier.

“Year-ahead outlooks get a lot of attention in fourth-quarter earnings calls,” said Jason Goldberg, an analyst at Barclays. “I’m expecting that banks will indicate that the recent drop in net interest income will hit its trough this year.”

Despite the expected earnings drop, investors have been buying up bank shares, which have risen 20 per cent since the end of October, according to the KBW Nasdaq Bank index. Fuelling the rally is the Federal Reserve’s signal late last year that it is probably done raising interest rates. Higher rates hit banks in 2023, raising deposit costs and lowering the value of their bond portfolios.

“Banks are very interest rate-driven,” said Matt Anderson, a banking industry analyst at commercial property research group Trepp. “And investors have an optimistic read on the economy in 2024.”

But even as interest rate pressures are easing, a jump in unpaid loans could continue to hold down bank profits.

The current level of non-performing loans is still below the $30bn peak of the pandemic. The big banks have indicated they think the rise in unpaid debts could slow soon. A number of banks cut the amount of money they put away for future bad loans, so-called provisions, in the third quarter.

Provisions are expected to have shrunk again in the final three months of the year. But if the money that banks are putting away for bad loans unexpectedly jumps, that could raise alarms for investors.

“Credit is still very much a wild card,” said Scott Siefers, a bank analyst at Piper Sandler. “It has been very good, but I think we are going to continue to see a deterioration from here.”

Commercial property, and in particular mortgages on less-full office buildings, had been one of the biggest factors pushing up problem debts.

More recently though, delinquencies have been rising on consumer loans, particularly credit cards and car debt. That has made some analysts nervous, especially because what the banks are putting away for loan-loss reserves now is considerably smaller than what they set aside when bad loans were rising at the start of the pandemic.

“Bank reserves are adequate right now because we are nowhere near the stress levels of back then,” said Gerard Cassidy, a bank analyst at RBC Capital Markets. “But have they reserved enough for an economic hard landing? The answer is no.”

BofA, Citi, JPMorgan and Wells will be the first of the large banks to disclose their results for the final three months of 2023 on January 12.

Goldman Sachs and Morgan Stanley, whose businesses skew more towards investment banking, trading and asset management, report results on January 16.

Brazil warns dengue cases could hit 5mn as extreme weather takes toll

Climate change and El Niño threaten ‘epidemic’ of mosquito-borne diseases in some regions, says health ministry

Health officials in Brazil have warned that the number of dengue cases in the country could hit a record 5mn this year as climate change and the El Niño weather pattern in the Pacific Ocean fuel the spread of mosquito-borne diseases.

“We have a situation that is very worrying because of climate change [and] mainly the El Niño phenomenon,” said Ethel Maciel, secretary of surveillance at the health ministry. “There will be [an acceleration] in transmission.”

The ministry’s worst-case scenario of 5mn cases would represent more than a three-fold increase from the caseload of 1.6mn recorded in 2023 that resulted in 1,079 deaths. Its average projection is for 3mn cases this year.

El Niño, a naturally occurring warming of sea surface temperatures in the Pacific Ocean, is believed by many scientists to be driving increasingly severe weather patterns worldwide. Some meteorologists say its effects are being exacerbated by climate change.

In Brazil, the current El Niño pattern has been linked to a record heatwave, extreme drought in the Amazon rainforest and prolonged heavy rains and flooding in the country’s south.

These conditions have enabled increased transmission of mosquito-borne viruses such as dengue, chikungunya and zika, which was linked to a surge in microcephaly cases — babies born with a very small head — in Brazil in 2015-16.

“The mosquito depends on heat, it grows more with heat and rain. So as long as the temperature is kept higher for a long time, the replication of the mosquito and, consequently, the virus is facilitated,” said Ester Sabino, professor at the Institute of Tropical Medicine at São Paulo university.

“We’re having higher temperatures for longer and this means that transmission occurs for a longer period of time during the year. We will probably see an increase in chikungunya cases, too.”

A potentially fatal disease, dengue can cause high fever, muscle pain and internal bleeding. It is transmitted by the Aedes aegypti mosquito, which thrives in pools of stagnant water. Chikungunya is spread by the same mosquito type and provokes similar symptoms to dengue but is caused by a different virus.

The number of reported dengue cases in Brazil rose 16 per cent in 2023 compared with the previous year. This year, the health ministry has warned of an “epidemic level” of cases in Brazil’s central-west region as well as a “potential epidemic” in the south-east.

The virus has four serotypes — or variations — and infection by one does not create immunity for the others. Brazilian health officials are particularly concerned this year because of the re-emergence of the third serotype known as DENV-3.

“For the first time in a long time we have four serotypes circulating in Brazil,” said Maciel. “Serotype three had not been present since 2007, so we will have many susceptible people.”

The World Health Organization last month described dengue fever as a “substantial public health challenge”, noting a “10-fold surge in reported cases worldwide increasing from 500,000 to 5.2mn” between 2000 and 2019.

The health body reported more than 5mn dengue cases worldwide last year. It said Brazil accounted for more than 2.9mn of the global total, according to its own data for suspected cases.

Sabino said the country’s overweighting in the number of suspected cases was probably due to Brazil’s stricter standards of notification.

The health ministry last month rolled out a dengue vaccine, but supply has been restricted to priority regions due to manufacturing bottlenecks.

UN space tsar calls for increase in junk clean-up efforts

Official says implementing voluntary guidelines more important than new global treaty

Governments and industry should speed up efforts to implement voluntary guidelines for the sustainable use of space, rather than push for a new global treaty that will be “difficult” to conclude, according to a leading UN official.

A rapid increase in rocket launches and satellites has sparked concerns over risks of dangerous collisions generating volumes of “space junk”, sparking calls for tighter regulation of activities in low earth orbit. 

“We do need a multilateral process [and] as much collaboration as possible,” said Aarti Holla-Maini, new director of the UN Office of Outer Space Affairs.

But delivering a binding treaty at a time of global tensions and international rivalry in space “will be contentious and take time”, she said. An agreement that “solves all of the problems . . . would be difficult”.

Instead, Holla-Maini said, national regulators should accelerate implementation of a suite of voluntary UN guidelines issued in 2019. This would greatly boost space sustainability, which has become a priority for many countries as satellite services become critical to digital-based infrastructure.

“There is a lot of content [in the guidelines] that could be turned into norms,” she said. These include proposals to manage activity in space safely, mitigate debris and share more data on the operation of satellites, anti-collision measures and weather patterns.

“Implementing the guidelines is the only chance we have to move in the right direction,” said Holla-Maini, who took up her role in September after 25 years in the space industry.

She said more inflation on orbital activity and debris, for example, was an important first step. “The more data that is shared the safer space is,” she said.

Nasa estimates roughly 9,000 tonnes of debris are orbiting the earth at speeds of up to 25,000km/h — old rocket bodies, defunct satellites, or fragments from exploded engines. Even the tiniest pieces of debris pose a threat. In 2016 a fleck of paint chipped a window on the International Space Station.  

Levels of launch traffic in low earth orbit (LEO) are 27 times higher than a decade ago, according to the Space Sustainability Rating, an initiative launched by the World Economic Forum. The LEO region, up to 2,000km above the earth, has been the focus of most recent activity, and also accounts for 96 per cent of space debris.

“This accumulation of debris and active satellites poses significant risks for the rest of the [space] environment,” the SSR said in a recent report.

Geopolitical tensions between the west and Russia and China are likely to complicate talks to address the new dynamics in space, experts said. The Outer Space Treaty of 1967, designed when the US and Soviet Union were vying for technological supremacy, is widely accepted to be ill suited to the rapid development of a commercial space sector. The UN itself called for a new legal framework last year.

“New treaties are complicated,” said H Ludwig Moeller, director of the European Space Policy Institute think-tank. “I would not put this on my critical path if I wanted a solution to a problem that is growing by the day. Guidelines alone do not give a direct solution, but best practices should be encouraged.”

Nearly a decade in development, the guidelines were regarded as a significant advance in international space governance. But they are not binding and now more than 70 countries and hundreds of private sector companies have activities or ambitions in space. National regulators have struggled to keep up with this changing environment. 

A recent report to the UN by the Space Generation Advisory Council, a group which brings together 25,000 young space professionals to support the multilateral agency, found that, while some governments have begun translating many of the guidelines into national law, “a number have yet to do so, which presents a potentially major gap”.

China seeks to ease video game industry’s fears of another crackdown

Beijing fires prominent regulatory official and fast-tracks consultations on proposed measures

Beijing is acting quickly to ease fears of another regulatory crackdown on China’s video game industry, including firing a prominent official and convening consultations on new measures at short notice, according to people familiar with the matter.

Shares in the leading online gaming companies Tencent and NetEase fell sharply last month after the National Press and Publication Administration proposed guidelines that suggested much tighter controls on the world’s largest gaming market.

The stocks staged a partial recovery at the end of December after the regulator approved the release of 105 games, the most in 17 months, and said it would support “healthy development” of the industry and study responses to its plans.

Beijing also ousted the head of the publication bureau of the Communist party’s propaganda department, responsible for the country’s gaming regulatory body, at the end of the month, according to four people familiar with the matter.

Feng Shixin was a senior figure who had been seen at events discussing video game approvals and real-name verification requirements for gamers. He was removed from his position for not consulting top economic supervisors or incorporating the opinions of key gaming companies before releasing the draft, said two people close to the regulator. The propaganda department did not respond to a request for comment.

“Although the rising regulatory power was widely anticipated in the gaming industry, this proposal was still shocking because there was insufficient prior communication and the terms were extremely stringent,” said a person with direct knowledge of the matter. Reuters first reported Feng’s firing.

“We were told before that most of the regulation would be focused on minors. However, many of the strict measures in the final draft turned out to control all users, making us really nervous,” said an executive from a gaming start-up who did not wish to be named.

The proposed regulations aim to curb spending and engagement on online games. The draft had been in the works for several years and was first presented to game companies and industry experts at the beginning of 2021.

According to two people familiar with the 2021 draft, the version released last month differed substantially from the previous one, with a significant increase in supervision and more detailed directives. Its release sparked an $80bn stock market sell-off and led to widespread criticism of the government’s handling of the situation.

Leading game developers have now been summoned by Beijing and provincial regulators for closed-door seminars to discuss the feasibility and impact of the draft regulations, according to four people familiar with the situation.

The process normally takes three to six months, but this one is expected to be completed as early as the end of January, said two people close to the regulators.

Tencent and NetEase shares are still 6 per cent and 8 per cent lower, respectively, from where they were immediately before last month’s announcement. The numbers reflect Huatai Securities’ research suggesting Tencent’s top 20 mobile games and NetEase’s top 15 mobile games would suffer revenue declines of 6 per cent and 8 per cent, respectively, if user spending were strictly limited.

“Multiple provisions of this regulatory draft are like targeted explosions, accurately and brutally hitting the monetisation and market models of game companies,” said the gaming start-up executive. “The panic caused by this draft requires actual government action to alleviate it truly.”

China’s video game market had been slowly recovering from rules that authorities implemented in 2021 to limit the time minors could spend on gaming. Game approvals had been put on hold, and the NPPA only began granting licences for new video games in April 2022.

“The industry is prepared to face another wave of regulatory crackdown, and some have already reacted to tweak their games according to the draft,” said a senior product manager at a gaming company who wished to remain anonymous.

Chris Weston starts as utility has to persuade investors and watchdogs over its turnaround plan

Thames Water’s new chief executive, Chris Weston, takes the helm of Britain’s largest privatised water company on Monday, facing the daunting task of persuading investors, lenders and regulators to support plans to turn around the debt-laden business.

Weston, a former executive at power supply firm Aggreko and at British Gas, has to convince investors nursing multimillion-pound losses that he has the management expertise and vision to put the water monopoly on a stable footing, despite ongoing regulatory uncertainty and the threat of penalties and legal fines for leakage and sewage outflows. 

He takes over after the former chief executive, Sarah Bentley left the company last June, following a boardroom bust-up that sparked fears over Thames Water’s financial viability, forcing the government to draw up plans for the utility’s temporary nationalisation.

Thames Water’s overarching group is burdened with a consolidated debt mountain of £18.3bn as of March 31, up from £15.4bn the year before. It needs to refinance £1bn of debt by the end of 2024 as well as raising £3.25bn of new equity by 2030, which is needed to continue to operate and maintain the business.

There is a risk that investors — including private equity, sovereign wealth and pension funds — could object to injecting fresh equity.

There was “no certainty” that the conditions for any additional shareholder funding would be met, Thames Water warned in a prospectus issued to bondholders in October. In addition, any funding “could be vetoed by a shareholder or shareholders”, it added.

The company, which provides water and sewerage services to around a quarter of the population in England, is also facing operational pressures including poor performance on leakage and sewage discharges and an increase in maintenance costs, which is sucking up cash.

The average water trunk main — some of which are large enough to require scuba divers for repairs — is over a century old in London, or 78 years old across the region, while around 14 per cent of the oldest cast-iron pipes have been buried in the ground for 150 years, according to Thames Water.

Colm Gibson, managing director at Berkeley Research Group, said there were all the hallmarks of a “particularly eventful year for Weston, who would need to demonstrate early successes to win over stakeholders”.

The task of persuading investors to inject equity is difficult after Thames Water’s largest shareholder, the Canadian pension fund Omers, took a 28 per cent writedown on the value of its holdings in the year to March 2023. Thames Water’s second-largest investor, the USS — which represents the retirement savings of academics in the UK — has written down the value of its holding by almost two-thirds. 

The USS said last week that it views its stake in the water utility as a “long-term investment” and that it has “shown willingness to commit more [funds] in the future”.

Its writedown implies that the value of Britain’s biggest water company may have fallen from almost £5bn in 2022 to around £1.9bn last year, according to Gibson, meaning that the company is seeking more in equity than it is currently worth.

Investors are waiting on a draft ruling from regulator Ofwat in June as to whether it will allow Thames Water to increase customer bills by more than 40 per cent by 2030 before they agree to inject new equity. They are also seeking limits on regulatory penalties handed down for performance failures such as sewage outflows or leakage.

Additional hurdles faced by Weston include potential court fines as a result of Environment Agency and Ofwat investigations into whether it and other water companies breached permits on sewage outflows that could cost it tens of millions of pounds. Class action claims against five companies — Anglian, Northumbrian, Yorkshire, United Utilities and Severn Trent — have been filed to the Competition Appeal Tribunal. Thames Water is expecting a similar claim, the company says in its prospectus.

One person close to an investor said they increasingly fear “any equity injection could be wiped out by inflationary cost pressures and fines for missing environmental and other performance targets”.

Another more immediate task facing Weston is the renegotiation of a £190mn loan facility held at its parent company, Kemble Water, that is due in April, and that the company is hoping lenders will agree to extend.

That loan has already led credit rating agency Fitch to downgrade Kemble Water Finance Ltd further into junk territory and may diminish capital market appetite for Thames Water debt, making it even more expensive, experts said.

Thames Water said that its regulated entity “is in a solid financial position and has supportive shareholders”. It added: “Our shareholders have also confirmed the expected need for additional equity funding”.