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A spa that for years has served only women must admit men if they claim to be women, a judge has ruled.

The constitutional rights of the owners, employees, and patrons of the Olympus Spa in Washington state weren’t infringed when officials in the state ordered the facility to provide services to “transgender women” with male genitalia, Washington District Court Judge Barbara Jacobs Rothstein said in a June 5 ruling.

The spa was described by its owners, who are Christian, as being designed based on the belief that “a male and a female should not ordinarily be in each other’s presence while in the nude unless married to each other,” according to a complaint filed by the owners.

Many services provided by the spa require patrons to be fully naked, and the employees who work on-site are all female.

Requiring admission of men claiming to be women violates the Constitutional rights to freedom of speech, free exercise of religion, and freedom of association, the spa owners, workers, and patrons asserted.

Rothstein disagreed, finding that a state law called the Washington’s Law Against Discrimination “does not discriminate on its face, and it does not by its terms favor a particular religion or the non-exercise of religion.”

That means the law survives if it is rationally related to a legitimate governmental purpose. Rothstein said the law’s legitimate purpose is, as stated in the law, to protect “the public welfare, health, and peace of the people of this state.”

She also said that the Washington Human Rights Commission, which investigates complaints of violations of the law, in its order to the spa to remove language about only admitting “biological women,” didn’t infringe on the plaintiffs’ rights.

“The compelled speech to which Olympus Spa points is ‘plainly incidental’ to the [law]’s regulation of discriminatory conduct,” Rothstein said.

By way of analogy, she quoted a U.S. Supreme Court ruling: “‘Congress … can prohibit employers from discriminating in hiring on the basis of race,’ and ‘that this will require an employer to take down a sign reading ‘White Applicants Only’ hardly means that the law should be analyzed as one regulating the employer’s speech rather than conduct.’”

The free association claim also failed because the only requirement placed on patrons was that they be female, which is outside the protection based on freedom of association, the judge said.

“The Court does not minimize the privacy concerns at play when employees are performing exfoliating massages on nude patrons. Aside from this nudity, though, there is simply nothing private about the relationship between Olympus Spa, its employees, and the random strangers who walk in the door seeking a massage,” she said. “Nor is there anything selective about the association at issue beyond Olympus Spa’s ‘biological women’ policy.

“The Court therefore has little difficulty concluding that the personal attachments implicated here are too attenuated to qualify for constitutional protection.”

Lawyers for the state didn’t respond to requests for comment.

Lawyers for the plaintiff said they plan to enter an updated complaint.

The spa can file an amended complaint within 30 days, the judge said. She ruled in the federal case because she’s a visiting federal judge.

She was appointed by former President Jimmy Carter.

Alleged Discrimination

The situation started when Haven Wilvich, a male who identified as a woman and hasn’t undergone sex change surgery, complained to the state commission, alleging the spa’s policy was in violation of the state law against discrimination.

Wilvich alleged, “[The spa] denied me services and stated that transgender women without surgery are not welcome because it could make other customers and staff uncomfortable.”

Spa policy dictates admitting only females older than 13.

An investigation by the spa owners found no evidence that Wilvich had ever been to the spa, which has facilities in Tacoma and Lynnwood and has been operating for more than 20 years. Myoon Woon Lee, one of the spa owners, also expressed concern that exposing female customers, especially minors, to male genitalia could open the spa up to criminal penalties based on state laws governing lewd conduct and public indecency.

The commission nevertheless determined that the policy violated the law and said it was in violation of the law, which states in part that people have “the right to be free from discrimination because of … sexual orientation.”

“When dress and grooming standards are applied only to a protected class and are applied specifically because of the protected class status, the standards are discriminatory,” a commission representative told the spa in a letter. “This is the case with Olympus Spa’s policy, which denies services to transgender women who have not had surgery specifically because their physical appearance is not ‘consistent’ with the traditional understanding of biological women.”

The spa had to remove language regarding serving only biological women from its website and undergo training based on commission-provided materials or it could face prosecution, the representative warned.

Lee and others then brought the lawsuit, alleging the state was infringing on their rights.

In the complaint, spa owners said that anybody who “presents in the nude as female” was allowed into the spa, including, theoretically, males who identify as women but have had surgery. Likewise, females who had surgery to give the impression of having male genitalia would not be allowed in, the owners said.

NexTier Oilfield Solutions and Patterson-UTI Energy discuss deal that would create bigger player in consolidating industry

NexTier Oilfield Solutions NEX -3.41%decrease; red down pointing triangle and Patterson-UTI Energy PTEN -4.69%decrease; red down pointing triangle are holding talks over a possible merger that would create a bigger player in the oil-field-services industry, according to people familiar with the matter.

A deal isn’t imminent, and it’s not certain that the talks will result in a transaction, the people cautioned.

Houston-based NexTier has a market capitalization of just under $2 billion after its shares dropped roughly 11% this year. Shares of Patterson-UTI, also based in Houston, have fallen around 35% as natural-gas prices have dropped, dragging its market value down to about $2.2 billion.

While oil-field services has morphed into a more consolidated sector, its companies are catering to a shrinking pool of clients—oil and gas producers—creating a need for fewer, bigger providers, according to analysts.

The giant influx of cash that energy producers received in 2022 as oil and gas prices hit multiyear highs following Russia’s invasion of Ukraine has spurred a wave of deals.

Exxon Mobil, on the hunt for a blockbuster deal, had preliminary talks with Pioneer Natural Resources about a possible acquisition, The Wall Street Journal previously reported. Chevron recently deepened its commitment to oil-and-gas drilling in the U.S., spending more than $6 billion to acquire a rival with sizable operations in Texas and Colorado.

A merger with NexTier would allow Patterson-UTI, which is mostly focused on onshore-drilling services, to get bigger in fracking.

NexTier, born out of a merger between C&J Energy Services and Keane Group in 2019, provides well-completion and production services, according to its website. The company’s revenue surged 128% in 2022 to $3.24 billion, in part thanks to an increase in fracking activity and higher prices.

Patterson-UTI provides contract-drilling, fracking and directional-drilling services to companies in the U.S. and elsewhere, according to its website.

It is the second-largest rig provider in contract drilling after Helmerich & Payne, providing mostly so-called super-spec rigs, the most advanced and efficient on the market, according to analysts at research firm Morningstar. The company booked about $2.7 billion in revenue last year, roughly double what it collected in 2021.

Those torrid revenue gains could ebb as oil-and-gas producers reduce activity amid depressed natural-gas prices.

The U.S. benchmark natural-gas price has fallen from around $9 per million British thermal units last year to slightly over $2 on the back of an unusually warm winter.

Since the end of April, companies have cut down the number of rigs drilling for gas by 26 to 135, according to the latest count by oil-field-services firm Baker Hughes.

US junk loan defaults surge as higher interest rates start to bite

Total this year exceeds 2021 and 2022 combined in a market that is a critical source of financing for many companies

Defaults in the $1.4tn US junk loan market have climbed sharply this year as the Federal Reserve’s aggressive campaign of interest rate rises increases the pressure on risky companies with “floating” borrowing costs.

There were 18 debt defaults in the US loan market between January 1 and the end of May totalling $21bn — greater in number and total value than for the whole of 2021 and 2022 combined, according to a Goldman Sachs analysis of data from PitchBook LCD.

May alone saw three defaults totalling $7.8bn — the highest monthly dollar amount since the depths of the Covid-19 crisis three years ago.

The failures underscore the pressure being exerted on lowly rated companies with large debt piles as they bear the brunt of the US central bank’s tighter monetary policy to curb high inflation.

“There is a payment shock unfolding among the weakest issuers in the loan market,” said Lotfi Karoui, chief credit strategist at Goldman Sachs.

Many “junk”-rated companies loaded up on leveraged loans — debt with floating borrowing costs that move with prevailing interest rates — when the Fed slashed rates close to zero at the peak of the Covid crisis. Issuance nearly doubled between 2019 and 2021 to $615bn, data from PitchBook LCD shows.

However, the Fed has lifted its “target range” for interest rates to 5 per cent to 5.25 per cent in just over 14 months.

That has left borrowers facing much higher interest payments, just as slowing economic growth threatens to squeeze earnings. 

This combination is “really problematic for companies that have a big chunk of their liabilities in floating-rate form”, added Karoui.

Among the companies to have defaulted this year for the first time, as classified by rating agency Moody’s, are cinema advertising group National CineMedia and infrastructure services provider QualTek. Some companies that defaulted in 2023 had already previously defaulted, such as Envision Healthcare and mattress company Serta Simmons.

Many companies that are rated junk now rely on leveraged loans as a critical source of financing — the asset class has swelled to roughly the same size as the junk bond market.

Bank analysts and rating agencies expect defaults to rise further as market expectations shift to interest rates staying higher for longer and as the lagging effects of successive rate rises are felt.

The threat is overshadowing investors holding particularly risky debt in a scenario that threatens to fuel even more downgrades, restructurings and bankruptcies as borrowers struggle to access fresh funding.

“We are lining up here for a pretty meaningful default cycle,” said Steve Caprio, head of European and US credit strategy at Deutsche Bank.

Loan issuance fell sharply in 2022 and has been meagre this year because most companies do not urgently need cash, after replenishing their coffers and pushing out maturities while money was cheap.

Compounding the situation, the biggest buyers of leveraged loans — known as “collateralised loan obligations” — are unable to hold large amounts of very risky debt because of safety mechanisms in their own capital structures. They have a typical cap of 7.5 per cent of their assets for “triple-C” rated loans.

If more companies have their credit ratings downgraded to triple-C, it could trigger a process that cuts off cash flows to the lowest rung of investors in the CLO structure in order to redirect money to investors higher up the CLO ladder. 

There is still demand for lower-quality single-B loans, said Drew Sweeney, a loan portfolio manager at asset manager TCW, referring to the rating just above triple-C. But investors “have to have some faith that those are not going to be the most likely loans to be downgraded”.

Market estimates of defaults are rising, although forecasts vary depending on the breadth of loans, definitions of default and different economic forecasts.

For the 12 months to May 2023, the loan default rate stood at 1.58 per cent, according to LCD — up from 1.31 per cent in April and the highest figure since May 2021.

Karoui pointed out that were relatively few defaults in 2021-2022, so the market could simply be reverting “back to normal”.

But loan defaults are still rising at a faster pace than defaults in their corporate bond counterparts, which have fixed coupons and therefore are slower to feel the effect of Fed policy changes.

According to a Goldman’s analysis of Moody’s data, the annualised default rate for US junk bonds in the three months to April 30 stood at 3 per cent — flat since February and up only slightly from 2 per cent a year earlier. In contrast, the same measure of defaults for loans reached 6 per cent in April, up from 2 per cent a year earlier.

On top of interest rate pressures, “the credit quality of the loan space is poorer than the bond space”, noted John McClain, a portfolio manager at Brandywine Global Investors.

Rating agency S&P believes that the 12-month trailing loan default rate could rise to its long-term average of 2.5 per cent by next March, up from 1.42 per cent in April 2023. But in a pessimistic scenario, the number of “stressed borrowers” could surge and credit challenges persist — meaning “many issuers cannot access capital”.

TCW’s Sweeney said that some companies with strong prospects will still find willing lenders.

Private equity firms, which back many loan issuers, are “not going to walk away from a capital investment when they think it could be worth much more — and so that they contribute a certain amount of capital, and then go through the process of an amend and extend”, he said.

Biden administration’s clean energy and semiconductor incentives spur German chipmaker to review its plans

Infineon, the world’s largest supplier of silicon chips to the car industry, said it was considering moving more manufacturing across the Atlantic to comply with recently passed legislation that seeks to boost the US semiconductor industry.

Peter Wawer, head of Infineon’s green technology division, said the German chipmaker was reviewing requirements in the Inflation Reduction Act that relate to the value of goods manufactured in the US.

“We of course need to watch this, that we comply with these rules,” Wawer said, and “that we are not excluded from business due to a certain share of value that we do not have in the US”.

Wawer said the company was currently happy with its footprint in the US but added that in the future it “might need to transfer a certain amount of product, or certain additional manufacturing, into the US.”

The Munich-based company has seven manufacturing sites across the US and one in Mexico, largely thanks to acquisitions in the past decade such as the $3bn it paid for International Rectifier in 2015 and its $9bn takeover of rival Cypress Semiconductor in 2019.

President Biden’s $369bn package of subsidies and tax incentives has sparked concern among European policymakers as high-tech industries needed for the green transition eye opportunities across the Atlantic.

Germany too has devoted billions of euros in subsidies to encourage manufacturing at home after coronavirus pandemic-induced chip shortages hit its car industry hard and highlighted how essential the sector is.

Infineon benefited from demand that coincided with a pandemic-induced bottleneck in semiconductor production. The company last month broke ground on a plant in the eastern German city of Dresden, which it received €1bn in subsidies — roughly a fifth of the cost — to build.

Wawer said that the pandemic revealed how many industries were reliant on semiconductors, which mostly come out of Taiwan.

“Now everybody is starting to think: ‘oops, what if something happens between China and Taiwan’.

This of course accelerates this whole discussion.”

Infineon specialises in less advanced chips that, rather than being used in computationally powerful devices, are made for industries such as the automotive sector, which makes up 45 per cent of the company’s sales.

Even though car sales are slowing, Infineon is betting it will benefit from the transition to electric vehicles, which require more chips than those run by combustion engines.

Amit Harchandani, head of European technology research at Citi, said Infineon’s power-efficiency chips made it a “big beneficiary of the shift to renewables”.

“I would expect any company with exposure to the energy transition in particular to be evaluating the Inflation Reduction Act incentives,” he said.

Wawer’s green industrial power division last year made up only 13 per cent of Infineon’s €14.2bn in sales. But Wawer said the increase in green energy infrastructure such as wind turbines, solar panels, electric car chargers as well as transmission lines required to connect everything to the grid meant demand for chips had “simply exploded”.

The division expects annual revenue growth of more than 10 per cent “for the years to come”, Wawer said.

Infineon last year made 11 per cent of revenues in the US, compared with the 29 per cent that came from mainland China.

Savvy shells out $8bn on deals in 18 months in rapid push to diversify revenues and acquire soft power

Saudi Arabia has spent almost $8bn acquiring and building stakes in gaming companies across the globe in the past 18 months as part of a turbocharged investment spree with the aim of becoming a dominant force in the growing entertainment industry. 

Saudi-backed Savvy Games Group has led the deals, including a significant stake in China’s VSPO, Sweden’s Embracer Group, and the acquisition of US-based Scopely, as Riyadh deploys its petrodollar wealth to muscle its way into a diverse range of sectors. 

Launched in January 2022, Savvy is wholly owned by Saudi Arabia’s $650bn Public Investment Fund and chaired by Crown Prince Mohammed bin Salman, who said his aim was to transform the kingdom into “the ultimate global hub for the games and esports sector” in just seven years.

To back his characteristically ambitious plans, Savvy has been given a $38bn war chest.

“It’s a bulldozer approach,” said Piers Harding-Rolls, games analyst at Ampere Analysis, a research company. “The industry in Saudi Arabia is nascent: they have to build it literally from the ground up.”

The kingdom aims to become home to 250 gaming companies and studios and create 39,000 jobs with the industry contributing 1 per cent to gross domestic product by 2030. The plans include a foray into e-sports through the partnership with VSPO.

Officials familiar with the kingdom’s plans say more deals are in the pipeline. They say the focus on gaming is part of an overhaul of the country’s economy to diversify beyond oil, leading Saudi Arabia to invest in a diverse set of growing industries such as electric vehicle production.

The effort fits alongside attempts to acquire global soft power that have seen the kingdom spending heavily in sports such as football and golf, which critics say are an attempt to distract attention from the country’s human rights record.

The gaming strategy has created ripples in the industry as Riyadh vies with giants such as Tencent, Microsoft and Sony for top talent and intellectual property.

“Saudi Arabia is making its mark on the gaming industry and the growth of the global gaming industry as a whole,” said Vincent Wang, general manager of global publishing and global esports at Tencent Games.

Gaming is popular in Saudi Arabia, where 70 per cent of its population of 36mn is under the age of 35.

A similar percentage of its citizens identify as gamers, according to Saudi gaming officials.

Prince Mohammed is an avowed gamer.

“It is an extremely exciting market and partner for us,” said Danny Tang, VSPO’s chief financial officer and head of global strategy. “Saudi Arabia is a very young nation with a highly engaged gaming community.”

Separately to Savvy’s dealmaking, the PIF has bought an 8 per cent holding in Nintendo, making it the Japanese company’s largest outside investor, as well as holdings in Activision Blizzard and Ubisoft.

Officials say the kingdom wants to leverage its financial clout to build a sizeable stake in the gaming sector, which, according to industry tracker NewZoo, is worth $200bn. A report last year by PwC predicted global video games revenue could surpass $300bn and account for more than a tenth of total entertainment and media spending by 2026.

A generational shift in consumption habits means some analysts predict gaming will overtake traditional television to become the largest source of entertainment revenue in the coming years.

“The region is populated with demographics that are favourable to us,” said Brian Ward, chief executive of Savvy. “When you fold in the national strategy . . . and the desire to diversify the economy away from oil and gas, it’s a natural assumption to be making a lot of investments in Saudi Arabia towards games.”

Regional and national governments around the world have long used tax breaks, start-up financing and other incentives to attract talent to the sector, which offers policymakers a compelling mix of technical innovation and creativity.

But industry executives say that cash alone may not be enough to win over any developer that Savvy might target.

To some in the sector, the $5bn Scopely transaction merely indicated that Savvy would have to overpay to win deals. “The price they got, nobody could believe it,” said one industry veteran, adding that Scopely had been looking for an exit acquisition or to do an initial public offering “for some time”.

“They are pretty explicit about it: there is a premium for everything associated with them,” this person said, adding that the Saudis were willing to pay above the market price. “Nobody is going to move to Riyadh or Jeddah for the nightlife.”

Saudi Arabia has been unable to shake its reputation for human rights abuses despite Prince Mohammed’s social reforms. Even as he made changes such as allowing women to drive and mixed-gender concerts to be staged, the 2018 murder of Saudi commentator Jamal Khashoggi by state agents prompted many companies to balk at doing business in Riyadh. The CIA said that Prince Mohammed had ordered the “capture or kill” operation. He denied responsibility.

Businesses have since returned to Riyadh, lured by the tens of billions of dollars the PIF is spending at home and abroad.

But the government remains under attack by rights groups for rounding up critics, even as it pushes further into acquiring entertainment assets.

The PIF has invested in sports in particular, such as spending £305mn to buy English Premier League football club Newcastle United and, last week, committing an estimated $3bn to seal a merger between Saudi-backed LIV Golf and the US-based PGA Tour.

“I don’t think they are an aspirational buyer for most games studios,” said one investor. “I’m not sure how much of a creative environment they are going to create for the companies they buy.”

The kingdom’s billions may have arrived at a pivotal moment. Growth in the games industry is slowing to single digits as it can no longer piggyback on the success of the smartphone, which now accounts for half of industry revenues, and marketing costs have climbed.

Private games studios may prefer to sell to Savvy than take a tortuous path to an initial public offering, even as reservations linger about doing business with the Saudi regime on ethical grounds.

“The public markets are closed and investors are getting tired,” says one investor. “I’m sure there will be other Scopelys.”