Desperate, or Distracted? Elon Musk's Tesla has offered to acquire Elon Musk's cousin's SolarCity for 0.122 to 0.133 Tesla shares. Tesla shares are tumbling on the news, as perhaps they read the five reasons why SolarCity pain is only just beginning? As Herb Greenberg asked, "is this even legal?"
For those who need a quick and easy recap of all the main events that took place in the oil and gas services sector, here it is courtesy of Credit Suisse's James Wicklung who present the various "things we've learned this week."
We have argued the inevitability of Fed-administered hyperinflation, prompted by a global slowdown and its negative impact on the ability to service and repay systemic debt. One of the most politically expedient avenues policy makers could take would be to inflate the debt away in real terms through coordinated currency devaluations against gold, the only monetize-able asset on most central bank balance sheets. To do so they would create new base money with which to purchase gold at pre-arranged fixed exchange prices, which would raise the general price levels in their currencies and across the world to levels that diminish the relative burden of debt repayment (while not sacrificing debt covenants). The odds of this occurring seem to have risen, judging by the gold prices.
While the warning flags are raging in Illinois and Connecticut, JPMorgan's Michael Cembalest states that New Jersey's problems are "not mathematically solvable." The stunning admission from a status-quo-sustaining bank that is “very focused on the total indebtedness of US states," should be worrisome enough but as Cembalest explains the answer to a debt problem is not always piling up more debt - "when debt reaches a certain level, the can kicking is over and difficult decisions need to be made;" the issue is to address the root of the problem, which can be a delicate and at times politically incorrect topic.
As of today, we now have three consecutive quarters of tightening lending standards. In fact, based on the latest survey, net lending standards tightened even more than during Q4 as shown in the chart below, and are now the tightest on net since the financial crisis. Needless to say, if a recession and a default cycle has always followed two quarters of tighter lending conditions, three quarters does not make it better.
One week ago, we warned that "Valeant Lenders Demand Two Pounds Of Flesh For Covenant Waivers", a function of Valeant having virtually no leverage. Well, while Valeant proudly announced it had obtained a covenant waiver from its lenders late last week, it appears not everyone was onboard with the plan, and as a result moments ago Valeant stock crashed (below $30) after hours as major bond investor Centerbridge has notified the company that it intends to call a default event, presumably on annual report delays breaking covenants.
The market bond market, which is now frontrunning not just what the ECB has announced it will buy but what it may buy, just led to a record European junk bond issuance, when French cable and telecom operator Numericable "stunned the market" (as Reuters put it), when it upsized what was originally supposed to be a $2.25 deal by more than 100% to a whopping $5.2 billion bond deal on Wednesday. This was the largest single high-yield bond tranche ever issued.
Three days ago, the latest catalyst to weigh down Valeant stock was news that the company's lenders were pushing back on its demands to obtain a default waiver and to loosen restrictions on its negative debt covenants. It appears, however, that that issue has been resolved, and as the company reported moments ago in a press release on its website, VEX "has obtained the requisite lender approval for the amendment and waiver to its credit facility. The Company expects to close the amendment and waiver next week."
Valeant Pharmaceuticals International, Inc. (NYSE: VRX and TSX: VRX) today announced that the ad hoc committee of the board of directors (the "Ad Hoc Committee") believes that its review of various Philidor and related accounting matters is complete, and that it has not identified any additional items that would require restatements beyond those required by matters previously disclosed.
Moments ago the market got a harsh reminder that Valeant is effectively negotiating default compliance with a group of banks who realize they are dealing with a company that has a $9 billion market cap and can thus ask for anything and management and shareholders have no choice but to say yes unless that $9 billion to quickly go to $0. According to Bloomberg, Valeant, just as predicted, "is facing push back from some of its lenders as it seeks to waive a default and loosen restrictions on its debt, according to people with knowledge of the matter."
Pearson is out; Ackman is in... accounting mis-statements (balmed ojn improper conduct of CFO) resulting in worse than expected results... and no confirmation on the waivers from lenders... warning of possible default.
As if the historic collapse of Valeant and his hedge fund crashing by 26% YTD was not enough, moments ago S&P added insult to injury when it warned it may downgrade Pershing Square, because "Pershing Square Holdings' net asset value has dropped substantially, largely because of a precipitous decline in the market value of Valeant Pharmaceuticals" and "as a result, Pershing Square's debt-to-total assets ratio increased to above 20% as of March 15, 2016, from 15% at the end of October 2015. We are placing our 'BBB' issuer credit and senior unsecured debt ratings on the company on CreditWatch with negative implications."
Suddenly, what was until incomprehensible - a Valeant default - appears all too likely: under its loan agreements, Valeant has until March 30 to file audited financial reports. If it fails to do so, it then has 30 days before lenders can demand accelerated repayment. Needless to say, Valeant would be unable to fund such a loan acceleration without rapidly selling off key assets in a liquidation firesale, although there even exist limits on just how many assets Valeant can sell.
For the thousands of new entrants into the oilfield services (OFS) industry in the past 15 years - both workers and companies – if you didn’t know what senior secured lending covenants were a year ago, you sure do now. Many new borrowers are enduring a painful education on the legal implications of the lending documents they signed. There is said to be lots of capital on the sidelines looking for deals. OFS owners and managers up against a debt wall should consider finding some.