TheChek News Flow

Remembering the golden age of private credit returns

Ah, the glory days of private credit. 

It was only two years ago that Stephen Schwarzman could hardly hide his excitement about the mouthwatering returns Blackstone was earning by simply clipping coupons on its private credit investments.

“If you can earn 12 per cent, maybe 13 per cent on a really good day in senior secured bank debt, what else do you want to do in life?,” he mused in a Parisian ballroom in September 2023.

Well, those days are over. On Thursday, the DD’s Antoine Gara reported that even mighty Blackstone concedes that private credit returns are falling.

In an interview, Jonathan Gray, president of the $1.2tn in assets giant, said Blackstone was no longer earning mid-teens returns on its private debt portfolio, as short-term interest rates fall and the return of banks to the leveraged loan market causes spreads to contract.

“Base rates and spreads have come down, so the absolute returns reflect that,” said Gray. “Some of that excess return, when you were getting mid-teens returns as a lender in senior credit two-and-a-half years ago, has gone away. So, yes, there has been some loss of absolute return.”

Blackstone and its peers in private credit like Apollo and KKR still believe strongly that they can originate loans that carry large premiums to liquid high-yield and investment grade bonds.

Nonetheless, the basic arithmetic of falling overall returns for private credit has big ramifications for Wall Street. 

DD will be watching so-called business development companies, many of which now have dividend payout ratios well in excess of their projected interest income. Private BDCs could also face pressure.

But it’s not all doom and gloom.

The swift increase in interest rates between 2022 and 2024 was meant to pummel private equity, pressuring the finances of levered companies and making new deals hard to pull off. A reduction in borrowing costs could be the relief valve many PE investors have been praying for.

“It is helpful for your borrowers when they have to pay less debt service. So I think it is supportive on the credit side, and it’s very supportive on the transaction side,” said Gray, who noted that “the dealmaking dam is breaking” after a series of megadeals this year.

Paramount or bust for Warner Bros Discovery

After months of rebuffed advances, Paramount has finally forced Warner Bros Discovery’s hand.

Having swatted away at least three friendly approaches from Paramount’s billionaire owner David Ellison, WBD’s board has now hung the “for sale” sign on the lot.

The latest offer — about $23.50 a share — has forced other potential bidders to consider making a move. Netflix, Amazon and Comcast have all expressed “interest”, people familiar with the matter told DD, but mostly in bits and pieces.

Netflix would love HBO as it’s the only brand that could cement its status as the world’s number-one streamer. But it has zero appetite for CNN or the rest of Warner’s linear baggage. Buying the whole company just to spin off the parts would trigger a monster tax bill and a regulatory migraine.

Then there’s Amazon, which faces the same dilemma plus a Federal Trade Commission that’s already on its case. Jeff Bezos is likely to be spared some of the regulatory hurdles given he’s become more Maga friendly but it would be hard to justify, according to competition experts.

Comcast looks like a long shot too. Its chief executive Brian Roberts isn’t exactly on friendly terms with the current administration, and few big media deals get through Washington these days without at least a wink from the White House. Plus Comcast is going through its own split so the timing for a deal may be sub-optimal.

That leaves Paramount. It’s the only bidder that can credibly buy all of WBD and make the economics work. HBO and the Warner studio fit neatly with Paramount’s film and streaming assets (and Paramount Plus desperately needs more content).

The linear overlap offers fat cost-cutting potential. Obviously, regulators might not love a combined CNN-CBS, but that could all change if Bari Weiss is in charge of both. 

Paramount also comes with useful friends: Ellison’s father Larry is one of the richest men in America and a close ally of President Donald Trump. Plus he’s flanked by Gerry Cardinale’s RedBird Capital, which knows how to structure a media deal.

WBD chief David Zaslav may be sitting pretty in the hot seat, but may have to play nice.

WBD’s board appears ready to play ball, especially given that Paramount’s interest has helped lift its stock 100 per cent since the start of the year. It’s hard to believe that WBD shareholders won’t launch a rebellion if the board just walks away. 

How many European companies does it take to beat SpaceX?

Europe is home to several national champions in the aerospace and defence sector.

But for Europe as a whole to compete globally with the US and China, those national champions will need to turn to M&A to create continental leaders. Yet while rhetoric for such deals has increased, few have happened because of domestic concerns in each market.

Thursday provided a rare example of action: the Franco-German Airbus, Italy’s Leonardo, and France’s Thales announced a long-awaited deal to combine their space businesses in order to create a pan-European champion that can compete in a market that has been disrupted by Elon Musk’s SpaceX. 

Under the structure of the unusual deal, the new Toulouse-based entity will employ about 25,000 people and have annual revenues of €6.5bn. Airbus will own 35 per cent, with the others holding 32.5 per cent each, the FT’s Peggy Hollinger and Sylvia Pfeifer reported.

Active talks took place over the past year. Deutsche Bank advised Leonardo, while Lazard worked with Thales and Goldman Sachs was with Airbus.

The new group is to operate under joint control, with the companies saying the entity will be modelled on MBDA, Europe’s missile champion created in 2001 by Airbus, the UK’s BAE Systems and Leonardo.

The deal, in many ways a response to Trump’s focus on US defence spending, won’t become operational until 2027, deep into his second presidency. 

Only then will it prove whether it can compete in a space dominated by Americans. Any signs of success will give momentum to cross-border consolidation in Europe, something bankers will be cheering from London to Frankfurt.

The rift with SpaceX is the latest symptom of the disarray engulfing the US agency and its ambitions

US President Donald Trump is determined to beat China to the moon — and then to Mars. Yet if anyone in Beijing were truly anxious about America’s progress, they might be reassured by the events of recent days. 

The public spat between Elon Musk, whose SpaceX business is Nasa’s most important contractor, and Sean Duffy, US transport secretary and acting head of the space agency, may look like a clash of egos. In reality, it is merely the latest symptom of the disarray engulfing Nasa and its ambitions.

For the past nine months, the US space agency has been operating without a permanent leader. It has been struggling to cope with thousands of departures forced by Musk’s so-called Department of Government Efficiency, a proposal for dramatic cuts to its science budget and the uncertain future of many programmes on which international partnerships rely.

Now it appears to have become the focus of a power struggle over its leadership, and its status as an independent agency.

It began on Monday with Duffy’s declaration that SpaceX was falling behind in its contract to adapt its Starship rocket into a lunar lander capable of taking astronauts to the surface of the moon by 2027. Addressing a theme dear to Trump’s heart, Duffy insisted that the only way to beat the Chinese — who aim to land taikonauts on the moon by 2030 — was to reopen SpaceX’s contract and invite new bidders.

Musk’s riposte was swift. “SpaceX is moving like lightning compared to the rest of the space industry,” he posted on his social media platform X. “Starship will end up doing the whole moon mission. Mark my words.”

But when reports emerged that Duffy had suggested Nasa could be integrated into the Department of Transportation, Musk snapped. Duffy’s proposal looked like a naked power grab. It came even as speculation mounted that Jared Isaacman, the billionaire who has twice flown on Musk’s rockets, was back in the running to lead Nasa after his nomination had been pulled abruptly in May. (The last time Musk turned on the administration, Isaacman was one of the casualties.)

So with the leadership of his biggest customer in contention, Musk got personal. “The person responsible for America’s space program can’t have a 2 digit IQ,” he posted. Calling the secretary “Sean Dummy”, the SpaceX founder asked followers to take a poll that alluded to Duffy’s record as a champion lumberjack athlete. “Should someone whose biggest claim to fame is climbing trees be running America’s space program?” Musk asked.

This may all seem rather entertaining, if childish. But the spat is doing nothing to resolve the deeper crisis over Nasa’s direction and credibility.

While Duffy may be correct that Starship is running behind schedule, he failed to mention that the entire Artemis programme — Nasa’s mission to return astronauts to the moon — is also running late, and not just because of delays to SpaceX’s lunar lander. Veteran space reporter Eric Berger of Ars Technica noted that vital kit such as the lunar space suits would not be ready in time. No point landing humans if they can’t walk on the surface.

As for Nasa’s target date of 2027? “Almost nobody believes in that date,” said Greg Autry, the administration’s nominee for Nasa finance director, in an interview for the FT’s Tech Tonic Mission to Mars podcast last month.

Part of the problem is that Nasa has taken a vastly more complicated route to send its astronauts to the Moon, combining SpaceX’s Starship lander with the agency’s own over-budget and much-delayed Space Launch System. And while the US programme stumbles from one delay to another, China is still talking about its 2030 target.

“This is a neck-and-neck race,” Autry told me last month. “The Chinese solution is much simpler — less capable in a lot of ways than our initial moon plans, but very practical.”

Meanwhile, the government shutdown and radical budget proposals have left Nasa adrift and demoralised. “I’ve seen hurricanes, seen shuttle crashes. I’ve never seen the entire agency — top to bottom — freaked out like they are now,” said Keith Cowing, a former Nasa scientist currently running the news site NasaWatch. “They don’t know what’s going to happen.”

With such turmoil it is difficult to see how Trump will fulfil his ambition to plant the stars and stripes on the moon before China lifts its five-starred red flag. Without clear leadership, there can be no plan. And without a plan, there can be no mission.

Blackstone-backed theme park giant under pressure after debt sell-off

Struggles at Legoland owner Merlin Entertainments are raising the prospect of a debt restructuring

Blackstone-backed Merlin Entertainments is under increasing financial strain ahead of a critical refinancing, as the Legoland-owner’s weak performance has led to a sell-off in its bonds and heightened fears over a potential restructuring.

On Tuesday Moody’s downgraded Merlin, which also owns Madame Tussauds and the London Eye, further into junk territory.

The rating agency noted that “maintaining a sustainable capital structure will be challenging without further asset disposals or shareholder support,” as it cut Merlin’s rating to Caa1, seven notches below investment grade.

Merlin has struggled with rising operating costs and subdued consumer spending since it was taken private in a £6bn leveraged buyout in 2019 — a deal that left the group saddled with more than £4bn of debt. As of the end of 2024 Merlin operated 135 attractions in 22 countries.

Bonds issued by the leisure group have sold off in recent months, ahead of a refinancing of £630mn of debt maturing in 2027. Merlin’s safest senior secured bonds, which were trading at par in March, now trade at 86 cents on the dollar.

One high-yield bond trader said Merlin had been hit by a “perfect storm,” including a “harsh business environment, plus there’s high new capex needed, and an upcoming finance need . . . it needs a restructuring, big time”, he added.

The year after Merlin was taken private — by a consortium of Blackstone, Canadian pension fund CPPIB and Kirkbi, the investment vehicle of Lego’s founding family — it was forced to close all but nine of its 130 sites when the Covid-19 pandemic struck.

Merlin subsequently turned to bond markets to raise €500mn of emergency funding.

Moody’s downgrade this week comes two months after a downgrade from another rating agency, S&P, which warned that Merlin could run low on cash next year as a result of depressed earnings and interest expenses.

Merlin’s pre-tax losses more than doubled to £492mn in 2024 after it wrote down the value of some of its largest assets by £384mn, including a £163mn impairment of Madame Tussauds.

Alongside struggles at Merlin’s long-held assets, the company has said returns generated by Legoland New York and Legoland Korea, which opened in 2021 and 2022 respectively, have failed to meet expectations.

Helen Rodriguez, head of special situations at CreditSights, said that Merlin’s profitability was being “gnawed away” by “under-investment, tired and less relevant assets, a downturn in US visitor numbers across the sector and a weak UK consumer”.

Merlin’s “scattergun overexpansion” has forced it to look at dialling back its sprawling portfolio, Rodriguez added.

Multiple restructuring advisers said Merlin was on their watchlist, while several credit investors questioned the sustainability of its capital structure.

Merlin said it was improving profitability and its “smart spending” programme would generate roughly £50mn of annual cost savings.

“Merlin continues to maintain a healthy operating cash flow with ample liquidity . . . and continues to invest in capex in support of the long-term growth of the business,” the company said.

The company is due to receive around £200mn from the sale of 29 Lego Discovery Centres to the Lego Group by early 2026. It shelved the sale of its British aquariums this summer after bids fell short of expectations.

A spokesperson for Blackstone and Kirkbi said: “We have confidence in Merlin and its management team, and believe the financial profile of the business will continue to strengthen.”

Criminals using AI are driving sharp rise in UK fraud cases

As part of a tech arms race, banks are also using artificial intelligence to stop scams with increasing effectiveness

Criminals are using artificial intelligence to increase their “attack rate” on UK victims, with investment fraud and romance scams hitting record levels in the first half of the year.

The number of confirmed fraud cases surpassed 2mn in the first half of this year — a 17 per cent rise on the previous year — according to statistics compiled by UK Finance, the banking trade body. The amount of money criminals stole from victims surpassed £629mn, a 3 per cent rise.

Fraudsters are using AI “to enhance tried and tested tactics more quickly, at a greater scale, in different languages and to a greater effect,” said Ben Donaldson, managing director of economic crime at UK Finance.

“It’s pretty much impossible for fraud victims to tell if AI has played a role or not, but anecdotally, it absolutely has,” he said. The cost and availability of the technology means it is fast becoming part of everyday life — even for criminals, who are using AI to scale up the distribution of scam texts, emails and direct messages on social media platforms and create ever more sophisticated content to deceive their victims.

Investment scam losses increased by 55 per cent to nearly £100mn in the period — an average loss of more than £15,000 per victim. The sophisticated tactics that criminals use are increasingly powered by AI, such as deepfake videos featuring trusted financial figures appearing to punt cryptocurrency investment opportunities or share tipping services.

Criminals often create fake websites allowing victims to log in and view a dashboard showing how well their “investment” has performed, and even withdraw some of the profits. However, this is a prelude to the scammers tempting them to invest even larger amounts.

Cases of romance fraud rose by 19 per cent, with losses increasing by 35 per cent to £20.5mn. Typically carried out over a long period as scammers gain the trust of victims, there are an average of nine scam payments per case, UK Finance said, adding that it was aware of some cases involving over 100 separate money transfers.

Banks are also using AI to prevent fraud with increasing effectiveness. In the first six months of this year, £870mn of unauthorised fraud was prevented by advanced security systems — 20 per cent more than in the first half of 2024 — and equivalent to 70p in every £1 attempted.

Ruth Ray, director of fraud policy at UK Finance, said banks were increasingly investing in AI-powered tools that worked in real time to detect anomalies that could indicate a customer was “under the spell of a fraudster”.

However, this has led to a rise in lower value fraud. Criminals will often make multiple purchases of cheaper items that can easily be sold on — such as gift cards — in an attempt to bypass banks’ anti-fraud systems.

The use of other new technologies is rising too. The Dedicated Crime and Payment Card Unit (DCPCU), a specialist police unit sponsored by the banking industry, has caught criminals in crowded areas of central London using “SMS blasters” which act as an illegitimate phone mast. These have been concealed in the boots of cars and even inside suitcases on the London Underground network, blitzing every mobile phone in the vicinity with spam texts.

Victims typically click on a link leading to a fake website — such as a government body or delivery firm — where they are duped into handing over personal details.

UK Finance stressed the shared responsibility for social media companies and the telecommunications industry to step up fraud detection and prevention.

“Rather than rely on banks to try and prevent crime at the moment it’s happening, we should be working together to prevent fraud from occurring in the first place,” said Donaldson.

US health agency reapproves GSK blood cancer drug after new trial

FDA gives go-ahead to UK drugmaker’s multiple myeloma treatment Blenrep

GSK’s chief executive said the company has shown its commitment to pioneering treatments after winning US approval for a blood cancer drug that had previously been withdrawn from sale.

The Food and Drug Administration has approved Blenrep despite the regulator’s own advisory committee voting in July against recommending it, finding that the risks outweighed the benefits. About a third of patients taking the drug, which is designed to tackle treatment-resistant multiple myeloma, suffer temporary blurred eye sight as a side effect. 

The advisory vote in July sent GSK’s shares down as much as 7 per cent. The FDA then extended its review period until October and GSK’s shares have sharply rebounded since and are 21 per cent higher this year.

Emma Walmsley, GSK’s chief executive who will be replaced by chief commercial officer Luke Miels at the start of next year, said Blenrep, was “one of the most important” medicines and would help the drugmaker meet its target of £40bn in annual revenue by 2031.

Walmsley took GSK back into oncology in 2018, after her predecessor Andrew Witty retreated from the specialism in 2015. The company generated £1bn in oncology sales last year. Blenrep is expected to generate at least £3bn in sales in its peak year.

But GSK’s re-entry into the lucrative market has not been smooth, with Blenrep withdrawn from sale in the US in 2022 after a trial found it was no better than other treatments. 

GSK designed another trial, where patients took Blenrep in conjunction with a drug BorDex. This new trial showed a “statistically significant and clinically meaningful” effect. 

“I think sometimes when you get knocked down, it’s about the courage to get back up again,” Walmsley told the Financial Times. 

She added that the BorDex study found the drug combination can help patients live an average of three years longer than standard treatment. “That is, by any standards, very meaningful,” she said. 

Miels said the company had hired experts, many from AstraZeneca and Roche where he has previously worked, to help design the trial.

“The emergence of a really, really deep oncology business over the next ten years can be very, very exciting,” said Miels. “We’re in very early days, step one or two of a very long staircase.” 

Now, GSK will have to convince doctors and healthcare systems to use Blenrep, which has already been approved in the UK and the EU. 

GSK is gaining a reputation for turning around overlooked treatments, having uncovered several promising therapies through acquisitions and licensing deals.

A new antibiotic for UTIs, licensed by GSK from Spero Therapeutics in 2022, was so effective that a recent trial was stopped early. It had previously been rejected by the US regulator on the basis of earlier trial results. 

Another GSK blood cancer drug, Ojjaara was approved in the US in 2023 after positive clinical trials.

The drug previously showed disappointing results in a late-stage phase 3 trial when it was owned by US biotech Gilead. Gilead subsequently sold it to Sierra Oncology for just $3mn, and GSK bought Sierra for $1.9bn in 2022.

GSK believes Ojjaara will sell more than $1bn a year at its peak. 

Walmsley said: “Anyone can spend money, the question is, can we pick assets that have a chance of winning in their field and where the returns will be truly competitive?”

Zhi Dong Zhang, an accused Chinese drug boss, fled house arrest in Mexico, traveled to Cuba and was denied entry by Russia

Zhi Dong Zhang, accused of being a major link between Chinese chemical producers and Mexican cartels, is now in U.S. custody.

Zhang escaped house arrest in Mexico in July, traveling to Cuba and then being denied entry by Russia.

MEXICO CITY—The accused Chinese drug boss was this close to the perfect getaway.

In July, Zhi Dong Zhang escaped from house arrest in Mexico, where he was set to be extradited to the U.S. on drug-trafficking and money-laundering charges. The Justice Department accuses him of being the most important link between Chinese chemical producers and the Mexican cartels that make fentanyl.

He then hopped onto a private jet to Cuba and boarded a flight to Russia, beyond the reach of U.S. and Mexican prosecutors. Authorities in Russia, perhaps not knowing Zhang’s true identity, refused him entry and ordered his immediate return to Cuba, said law-enforcement officials familiar with the case.

Now, Zhang is in U.S. custody. He had been detained in Cuba, which extradited him back to Mexico on Thursday. From there he was delivered to the U.S., the Mexican government said.

Bringing Zhang to justice represents a major blow for the global underworld network that links China to Mexico’s most powerful drug-smuggling cartels and their narcotics-distribution and money-laundering networks in the U.S., officials familiar with the case said. The Justice Department considers him one of the world’s most important drug traffickers, on par with Mexico’s most-wanted cartel bosses.

Zhang is accused of smuggling tons of chemical precursors to make fentanyl for Mexico’s top two criminal organizations, the Sinaloa and Jalisco cartels. U.S. and Mexican officials consider Zhang a criminal mastermind because of what they say is his logistical prowess and expertise in developing new formulas for the addictive opioid. He also allegedly brought in Chinese chemists to train the cartels’ own lab operators.

Zhang’s bold escape from house arrest in July infuriated Mexican President Claudia Sheinbaum. The breakout was an embarrassment for Mexican authorities who were trying to prove to the U.S. that they were tackling fentanyl trafficking and head off unilateral American military action against cartels.

The Mexican Attorney General’s Office estimates that Zhang made more than $150 million a year from his global trafficking network. U.S. prosecutors in Georgia charged him with laundering millions of dollars through U.S. banks.

Recapturing Zhang was crucial for Mexican authorities, who saw his deportation from Cuba and extradition to the U.S. as a vindication of their efforts.

Late Thursday, Mexican Security Minister Omar García Harfuch thanked Cuba’s government for its “valuable collaboration.”

The Mexican government has historically had close relations with Cuba and has often acted as a go-between for Washington and Havana.

García Harfuch wrote on X that Zhang had “alliances with criminal groups with a presence in the Americas, Europe and Asia.”

The U.S. Justice Department designated Zhang one of the world’s top drug traffickers. Like the Jalisco cartel boss Nemesio “El Mencho” Oseguera, Zhang is a Consolidated Priority Organization Target, a Justice Department designation that requires extensive evidence by case officers across agencies to demonstrate the regional reach of criminal activity.

A U.S. indictment in Georgia charges Zhang with trafficking large amounts of cocaine and fentanyl into the U.S. and making numerous cash deposits to U.S. banks.

Zhang’s U.S. extradition request alleges that he smuggled more than 2,000 pounds of cocaine, almost 4,000 pounds of fentanyl and over 1,300 pounds of methamphetamines to the U.S. Officials said he was a top broker of coveted Chinese chemicals needed to manufacture fentanyl, a synthetic opioid that is extremely addictive. Hundreds of thousands have died in the U.S. as a result of fentanyl overdoses.

Zhang arrived in Mexico from China before the pandemic, married a Mexican woman and acquired Mexican citizenship. A fluent Spanish speaker, Zhang answers to many names. Among them: El Chino, Brother Wang, Hehe, Haha and Nelson Mandela, according to authorities.

Officials familiar with the case believed Cuban authorities took their time with the deportation as the island’s vaunted intelligence agents methodically extracted information about Zhang’s vast criminal network in China, Mexico and the U.S.

Cuba’s Foreign Ministry said Thursday that Zhang was detained July 31 because he was traveling with false identification.

The Russian Embassy in Washington didn’t respond to a request for comment. A spokesman for China’s Embassy in Washington said he isn’t familiar with Zhang’s case, but said the government has been striking hard against fentanyl-related crimes.

Mystery still shrouds Zhang’s escape in July, following a late-night court hearing in Mexico City at which a judge unexpectedly granted him house arrest. At the time, Sheinbaum said the judge should have kept him behind bars.

“He was granted house arrest with no grounds for it,” she said during a daily news conference in July. “We’ve been insisting that there is corruption in the judiciary.”

A spokeswoman for the federal body responsible for the administration of Mexico’s judiciary declined to comment.

Zhang, who had been held in a maximum-security prison, left the courtroom in Mexico City and arrived at a house protected by Mexican security officers. The house was next to a residence owned by a criminal organization, said the officials familiar with the case. Investigators later found a hole in the wall linking the two houses. Left behind was Zhang’s court-issued electronic ankle bracelet.

Mexican authorities launched a manhunt. Security officials tracked a vehicle with surveillance cameras as it left the house, believing Zhang was inside. The car headed toward Guerrero state on Mexico’s Pacific coast, people familiar with the case said.

Guerrero’s law-enforcement officials stopped the vehicle, these people said. Mexican authorities informed senior U.S. officials that Zhang had been recaptured. Then, minutes later, they said they didn’t have him.

Within hours, Zhang was on a private jet en route to Cuba.

A spokesperson for the Guerrero state police said there was no record that Zhang was detained. One person familiar with the case said that Zhang wasn’t in the vehicle.

Mexico put out a global Interpol “red alert” seeking Zhang’s capture.

From Cuba, Zhang flew to Russia. But authorities there ordered his immediate return to Cuba, the people familiar with the case said. Along with Zhang, Cuba also detained two suspects, one Chinese and one Mexican national, Mexico’s government said.

Russian officials seem to have missed the value of a top fugitive wanted by the U.S. with information about the American underworld, probably because Zhang was carrying false identification and the Interpol alert for him had been issued by Mexico, and not the U.S., these people said.