US Foods: KKR discloses stake in company; intends to engage in discussions with company's management (18.55 -0.24)
- KKR disclosed an ownership stake of approx. 9.5%.
- "The Reporting Persons [KKR Fresh and affiliates] acquired the securities reported herein for investment purposes and intend to review their investments in the Issuer [USFD] on a continuing basis. [...] The Reporting Persons intend to engage in discussions with management or the board of directors of the Issuer about its business, operations, strategy, plans and prospects, from time to time. In addition, subject to the Investment Agreement, the Reporting Persons may engage in discussions with management or the board of directors of the Issuer, stockholders or other securityholders of the Issuer and other relevant parties or take other actions concerning any extraordinary corporate transaction [...], a sale or transfer of a material amount of assets, a change in the board of directors or management, a material change in the capitalization or dividend policies, other material changes in the Issuer's business or corporate structure..."
Closing Stock Market SummaryThe S&P 500 declined 0.8% on Thursday, failing to overcome weak economic data and a fresh increase in U.S.-China tensions. The Dow Jones Industrial Average lost 0.4%, and the Nasdaq Composite lost 1.0%. The small-cap Russell 2000, however, eked out a 0.1% gain.
Losses broadened out to ten of the 11 S&P 500 sectors, including energy (-1.5%) and information technology (-1.4%). The industrials sector (+0.2%) was the lone sector to close in positive territory, thanks to shares of Boeing (BA 139.00, +5.68, +4.3%) after the stock was initiated with an Outperform rating at RBC Capital Mkts.
Regarding today's economic data and U.S.-China news, it should be prefaced that the market wasn't too shocked or upset by the news. That's been the case since its March 23 low, at least. In fact, advancing issues outpaced declining issues at the NYSE, but the market was without the leadership from its mega-cap components.
Weekly initial claims decreased by 249,000 to 2.438 million (consensus 2.400 million), bringing the nine-week total to 38.636 million; continuing claims increased to an all-time high of 25.073 million; and existing home sales fell 17.8% m/m in April to a seasonally adjusted annual rate of 4.33 million (Briefing.com consensus 4.32 million).
On the U.S.-China front, the White House issued a report criticizing China's economic and military policies, President Trump accused China of a "disinformation and propaganda attack" on the U.S. and Europe, and a bipartisan group of Senators planned to introduce legislation to sanction China over new national security laws in Hong Kong.
Separately, buyers appeared to concentrate their efforts to the retail space following positive earnings/reopening news from TJX Cos. (TJX 54.30, +3.45, +6.8%) and BJ's Wholesale (BJ 35.25, +6.28, +21.7%). Best Buy (BBY 77.98, -3.56, -4.4%) was an exception despite reporting positive quarterly results. The SPDR S&P Retail ETF (XRT 39.09, +0.7) rose 2.0%.
On a related note, Starbucks (SBUX 78.05, +0.29, +0.4%) told partners that it's tracking slightly above its forecasted recovery curve.
U.S. Treasuries finished the session little changed. The 2-yr yield declined one basis point to 0.15%, and the 10-yr yield was unchanged at 0.68%. The U.S. Dollar Index increased 0.3% to 99.44. WTI crude increased another 1.3%, or $0.45, to $33.96/bbl.
Reviewing Thursday's economic data, which featured the weekly jobless claims report:
- Initial claims for the week ending May 16 decreased by 249,000 to 2.438 million (consensus 2.400 million), bringing the 9-week total to 38.636 million. Continuing claims for the week ending May 9 surged by 2,525,000 to 25.073 million, which is an all-time high.
- The key takeaway from the report in the market's mind is that the pace of initial claims is decelerating; however, the real-world takeaway is that the economic damage runs deep as initial claims and continuing claims keep piling up.
- Existing home sales plummeted 17.8% m/m in April to a seasonally adjusted annual rate of 4.33 million (consensus 4.32 million). That is the lowest level of home sales since July 2010.
- The key takeaway from the report is that sellers pulled listings amid the COVID-related downturn in demand, yet the inventory constraint translated into higher prices for buyers remaining in the market.
- The Conference Board's Leading Economic Index decreased 4.4% m/m in April (consensus -5.3%) following a downwardly revised (and record) 7.4% decline (from -6.7%) in March.
- The key takeaway from the report is the Conference Board's conclusion that the breadth and depth of the decline in the index does not imply a fast rebound for the economy at large, even with the imminent reopening of some sectors.
- The Philadelphia Fed Index for May increased to -43.1 (consensus -43.0) from the -56.6 reading in April.
Investors will not receive any notable economic data on Friday.
- Nasdaq Composite +3.5% YTD
- S&P 500 -8.7% YTD
- Dow Jones Industrial Average -14.2% YTD
- Russell 2000 -19.2% YTD
Whitbread: purple strain
In the wake of Covid-19, resilience has supplanted earnings growth as the main investment premise
How we long for the normal unpredictability of life before coronavirus. Bosses, bankers and financial scribblers could plausibly pretend they knew what was happening. Covid-19 has dispelled that illusion, as a £1bn rights issue from Whitbread shows. Resilience has supplanted earnings growth as the main investment premise.
The purple-liveried UK budget hotel chain is raising cash equivalent to one-quarter of its undisturbed market worth on this precautionary basis. The money may be needed to tide it over the coronavirus-induced closures. Or it could help Whitbread seize opportunities created by the collapse of weaker competitors.
In a UK rights issue, shareholders face an unwelcome choice. They can either stump up to maintain their proportionate stake, or sell rights to new stock and risk subsequent earnings dilution. Whitbread has an enviable £2.4bn in largely undrawn credit facilities. Why not use that instead?
Because the company will become scarily leveraged anyway. The numerator — lease-adjusted net debt of £1.8bn — should not change. But the denominator of ebitda has collapsed. It stood at £680m in the year to February. Whitbread’s half-year net cash outflow could be more than £600m. Pencil in a possible hit of £300m in the second half, assuming travel is slow to restart. The bulk of the capital raise will then be needed.
Whitbread’s £950m revolving credit facility is only available normally if it sticks to conventional leverage limits of about 3.5 times. Lenders have waived that, but on condition net debt stays below £2bn. For many companies, the dry powder of undrawn facilities will look equally damp on closer inspection.
The leverage covenants that usually apply to mature businesses become useless during an earnings collapse. A narrowly profitable company could have net debt to ebitda measured in meaningless thousands. Analysts are either providing finger-in-the-air estimates for Whitbread, or wisely reserving judgment.
A plan to reopen UK hotels between July and September looks reasonable given budget airlines may start flying again next month. There is some reassurance in the record of chief executive Alison Brittain. She sold the Costa café chain to Coca-Cola for a knockout price, returning £2.5bn to shareholders.
A belt-and-braces financing makes sense when initial predictions about the outbreak — Lex’s included — were so wide of the mark. The effect of coronavirus is, to paraphrase William Burroughs: “Nothing is true. Everything is possible.”
China to impose sweeping national security law in Hong Kong, bypassing city’s legislature
China’s Communist Party will impose a sweeping national security law in Hong Kong by fiat during the annual meeting of its top political body, officials said Thursday, criminalizing “foreign interference” along with secessionist activities and subversion of state power.
The move is the boldest yet from Beijing to undercut Hong Kong’s autonomy and bring the global financial hub under its full control, as it works to rewrite the rules that have allowed the territory to enjoy a level of autonomy for the past 23 years.
After steadily eroding Hong Kong’s political freedoms and independent legal system, Beijing signaled that the national security law will be a new tool that allows it to directly tackle the political dissent that erupted on Hong Kong’s streets last year. The months-long and sometimes violent protests began last June and fizzled out only over public health concerns related to the coronavirus outbreak.
Comments from top Communist Party officials also indicated that they are prepared to change the Basic Law, Hong Kong’s mini-constitution, which sets out rights unavailable in mainland China such as freedom of assembly and the press.
The new tactic marks an escalation in Beijing’s crackdown in the former British colony and the clearest indication that it views Hong Kong as a restive region to be brought to heel after last year’s protests.
The city’s future has become a point of contention in the intensifying rivalry between China and the United States; on Wednesday, Secretary of State Mike Pompeo said Washington was “closely watching what’s going on” in Hong Kong. Pro-democracy protesters in Hong Kong have directly appealed to Washington for intervention, frequently waving American flags on the streets, and see themselves as the last bastion of resistance against an increasingly assertive Beijing under President Xi Jinping.
On Thursday, China made clear it was asserting control over Hong Kong through “improvement” of its governance.
“We will ensure the long-term stability of ‘one country, two systems,’” Wang Yang, head of the Chinese People’s Political Consultative Conference, said at the opening of the annual meeting of China’s top political advisory body. The meeting is the first part of the Two Sessions political gatherings, which will continue Friday with the National People’s Congress (NPC), the rubber-stamp parliament.
“We will continue to support the improvement of the implementation of the systems and mechanisms of the constitution and Basic Law,” Wang said in a report to the meeting.
Later Thursday, representatives from Beijing’s Hong Kong and Macao Affairs Office met with Hong Kong delegates to China’s legislature to explain the details of the national security law. The law, a direct response to last year’s protests, will ban secession, subversion of state power, foreign interference and terrorism, said Stanley Ng, a Hong Kong deputy to the NPC, who attended the meeting.
The legislation could pass as early as next week and will bypass all of Hong Kong’s usual processes.
“The social unrest last year showed that the Hong Kong government was unable to handle passing [national security legislation] on its own,” said Ng, a Beijing loyalist who has for years pushed for a similar law. “Hong Kong’s status will be sacrificed with or without this law if society is unstable due to the protesters’ violence.”
The Hong Kong dollar weakened sharply against the U.S. dollar as the reports emerged.
Beijing blamed last year’s unrest on secessionist forces and foreign influence. A government proposal to allow extraditions to mainland China touched off the unrest, but the movement grew into a broader and sometimes violent rebellion calling for full democracy and opposing China’s efforts to chip away at Hong Kong’s firewall with the mainland.
Wang did not elaborate on what “improvement” meant. But he also referred to the Chinese territory of Macao, a gambling hub where open displays of political dissent are rare and where most leaders toe Beijing’s line.
The shift will have far-reaching effects. Under the agreement Britain signed with China before it handed back Hong Kong in 1997, the territory is supposed to enjoy its relative freedoms until at least 2047 under the “one country, two systems” framework.
This arrangement helped Hong Kong to flourish as a global financial center even after returning to Beijing’s overall control, and has allowed the United States and other nations to treat the city differently to China. It also allowed Hong Kong to run its own affairs, except foreign affairs and defense.
But under Xi’s leadership, the Communist Party has encroached on Hong Kong’s autonomy with stunning speed.
“I'm speechless,” said Dennis Kwok, a pro-democracy lawmaker, of the proposed national security legislation. Kwok was singled out for criticism by Beijing and was recently removed from his chairmanship of a key legislative council committee. “This is a complete and total surprise and I think it means the end of one country, two systems.”
Kwok said that the Hong Kong government and Beijing had used the coronavirus pandemic as cover to clamp down on the city.
“When the world is not watching they are killing Hong Kong, killing one country, two systems, and using social distancing rules to keep people from coming out to protest,” he said. “This is the most devastating thing to happen to Hong Kong since the handover.”
On Wednesday, Pompeo warned China about its actions in Hong Kong, saying that the city’s pro-democracy lawmakers had been “manhandled” this week “while trying to stop a procedural irregularity by pro-Beijing legislators.”
“Leading Hong Kong activists like Martin Lee and Jimmy Lai were hauled into court,” Pompeo told a news conference in Washington. “Actions like these make it more difficult to assess that Hong Kong remains highly autonomous from mainland China,” he said.
For the United States to treat Hong Kong as a separate entity, mostly for commercial purposes, the State Department must certify that the city retains “a high degree of autonomy” from China. Pompeo said its latest decision on this was still pending.
The Chinese Foreign Ministry, through its office of the commissioner to Hong Kong, said Thursday that Pompeo was “blackmailing” the Hong Kong government and accused him of “blatant interference” in China’s internal affairs. It also took aim at Sen. Marco Rubio (R-Fla.) for placing “unjustifiable pressure on China’s central government.”
“Certain U.S. politicians are repeatedly carping on about [Hong Kong’s] legislative and judiciary branches in a vain attempt to glorify and exculpate the rioters who oppose China and seek to stir up trouble in Hong Kong,” it said. “They just don’t want to see Hong Kong heal its divides and get back on track: Their sinister motives are thoroughly exposed, and their ‘black hands’ are bared for all to see.”
In recent months, Beijing has installed a tough new representative in Hong Kong, called for patriotic education to instill more allegiance to China, and promoted a bill that would make it a criminal offense to disrespect China’s national anthem.
Delegates from Hong Kong, including Carrie Lam, the city’s chief executive, arrived in Beijing on Thursday for the Two Sessions.
Wang said Beijing supports the Hong Kong deputies’ efforts to “avoid violence in Hong Kong and to restore order.”
Carmaker McLaren clashes with bondholders over emergency financing
Investors say they already have claim to ‘heritage cars’ to be pledged in new debt
Efforts by UK sports car maker McLaren to raise emergency funding have triggered a spat with its bondholders, who say they already have a claim on a collection of classic cars it is trying to pledge to new lenders.
McLaren, which owns a Formula One team in addition to making high-end sports cars, has this month sounded out hedge funds and other investors about a new bond deal of at least £250m, according to people familiar with the matter, and has hired JPMorgan to manage the deal.
The company is offering to mortgage its headquarters in Surrey and a valuable collection of what it calls “heritage cars” to the new lenders. Those assets would be offered up as collateral to raise money needed to ride out the coronavirus-related interruption to the F1 season, along with a plunge in demand for new cars.
But investors in McLaren’s existing £525m bond issued in 2017 are fiercely resisting the move. They argue that the company already pledged these assets to them in that deal, when the debt was raised to buy out a stake owned by the group’s former chairman Ron Dennis.
A group of bondholders has hired US law firm Paul Hastings to push back against the new fundraising, according to people familiar with the matter. On Wednesday the group sent a letter to the company’s management to outline their opposition to the new deal.
McLaren did not immediately respond to a request for comment. JPMorgan declined to comment.
While the company and its advisers believe the move is legal, the bondholders argue that the company is trying to abuse a loophole often known as a “J Crew trapdoor”, after the recently bankrupted US retailer. The company’s private equity owners caused uproar when they pulled off a similar trick in 2017 by transferring intellectual property rights across to new lenders.
In contrast, the brand and intellectual property of McLaren would stay with its existing bondholders under the proposed deal, but certain physical assets would be transferred across to the new lenders.
The documents for the carmaker’s 2017 bond deal value the company’s technology centre, production centre and its heritage cars at nearly £600m. The documents explicitly state that the debt would not be initially secured against the classic car collection, but suggest that these vintage vehicles — then valued at £170m — would be pledged to bondholders in future.
Similar disagreements over collateral have erupted in US debt markets in recent weeks and months. The McLaren spat suggests that tensions are spreading to Europe, as companies that missed out on state support seek creative ways to pawn their assets for private sector financing.
Sky News reported earlier this month that McLaren has resorted to this expensive new round of fundraising because the UK government rejected its request for a £150m loan. The group’s shareholders, which include Bahrain’s sovereign wealth fund Mumtalakat, provided £300m of fresh equity to the business in March.
The US junk bond market has seen tens of billions of dollars of new deals secured against assets, some of which have caused alarm because existing lenders have been “primed” — market parlance for when new debt is given priority ahead of old bondholders.
In contrast, Europe has so far seen little secured corporate debt issuance, as many large companies have been able to tap government-backed lending schemes via their banks.