🚗Auto is the New Healthcare🚗
⚡️Update: Auto is the New Healthcare⚡️
In Sunday’s Members’-only briefing entitled “Auto Disruption ⬆️. Syncreon Group ⬇️,” we discussed, among many other topics (e.g., the macroeconomy, oil and gas distress, FTD Companies Inc., etc.), Syncreon Group BV as a proxy for upcoming auto distress. It seems that bankruptcy professionals have grown tired of saying that healthcare will be the hot area of distress and so focus is turning to auto. Here is Foley & Lardner LLP highlighting warning signs of supplier distress.
On Tuesday, auto industry consultants J.D. Power and LMC Automotive indicated that:
U.S. auto sales are expected to drop about 2.1 percent in March from a year earlier, partly due to bad weather, mixed economic data and lower tax refunds….
Mmmm hmmm.
Per Reuters:
Retail sales are expected to touch 1,195,000 units in March, a 3.4 percent decline from a year earlier, the consultancies said on Tuesday.
The first-quarter sales are off to its slowest start since 2013, according to the industry consultants, who estimate retail sales in the quarter to be about 2.94 million vehicles - a decline of 4.9 percent compared to the same period a year ago.
“This is the first time in six years that Q1 sales will fall short of 3 million units. While the volume story could be better, there is remarkable growth in transaction prices, with records being set monthly,” Thomas King, senior vice-president of the data and analytics division at J.D. Power, said.
Interestingly, the average transaction price increased over $1,000 YOY. It is unclear but that could be attributable to a move from lower cost sedans to higher-priced utility vehicles. If consumer confidence wanes — and there are some indications that it is increasingly shaky — this upward trend in pricing should be next to slow down.
💸Goldman Sachs Hops Aboard the Mall Short💸
In last Wednesday’s “Thanos Snaps, Retail Disappears👿,” we listed a LOOOOOONG list of retailers that are shutting down stores. Subsequently, J.Crew Group announced that it is closing a net 10 stores (20 J.Crew locations offset by 10 Madewell openings), Williams-Sonoma Inc. ($WSM) announced that it plans to close a net total of 30 stores, Hibbett Sports Inc. ($HIBB) announced approximately 95 stores will close this year, and Tommy Hilfiger closed its global flagship store on Fifth Avenue (Query: is New York City f*cked?) and its Collins Avenue store in Miami.
The point of the…
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⚡️Notice of Appearance⚡️
This week we welcome a “Notice of Appearance” by Ross Waetzman, a Director in the Corporate Recovery group of Gavin/Solmonese.
PETITION: In the most recent Gavin/Solmonese newsletter, "The Next Chapter," you provide a solid macroeconomic summary in your "2019 Outlook." You conclude, "...the U.S. benefited from strong growth in 2018 that could continue into 2019. However, threats to growth far outweigh potential for simulative surprises. In short, prudent corporations in or nearing distress should undertake corrective action soon, while opportunity still permits." To what degree does the tweet below — particularly combined with the recent disappointing February job numbers — affect your 2019 outlook, if at all?
In the words of Douglas Adams, “Don’t Panic!” one month of data—particularly erratic data—does not make a trend. Yes, nonfarm payrolls grew 89% fewer jobs than expected. This could very well be just a “fluky” result. Since the end of the government shutdown, there have been a number of recent economic surprises (see the Citigroup Economic Surprise Index). This could simply reflect government agencies challenged to catch-up following a historically long shutdown. If true, expect data revisions in upcoming months to smooth out “fluky” reports.
Flukes aside, there are some interesting takeaways to glean from the labor market. In January, U.S. job vacancies hit an all-time high. Curiously, Europe is also facing labor shortages despite an economy that is slowing more rapidly than in the US, notably in the UK and Germany. This suggests that baby boomers are retiring faster than millennials are entering the market. Further pressures come from the February jobs report, which showed that wages grew at their fastest pace since April 2009.
Continued wage increases could lead to higher consumer purchases, a harbinger for inflation, and ultimately Fed rate hikes. How likely is this scenario?
On March 20, the Fed said it would not raise rates anytime soon. They lowered guidance for GDP growth and inflation while raising their guidance for unemployment. The following day (and for the first time since 2007), the Treasury yield curve fully inverted, a widely recognized signal for a recession. The market, through Fed Fund futures, is reflecting a zero probability for a rate hike in 2019 with a 31% probability for a rate cut.
This sets up an interesting dynamic. Economic data is signaling high inflation but the Fed and markets are anticipating lower GDP growth. Periods of sluggish growth coupled with high inflation lead to stagflation, a serious economic condition that historically has challenged central bankers.
Academic theory aside, the message to distressed debtors remains the same: reach out to your advisors and take corrective action asap. The reasons for an end to the recent boom cycle is secondary to the fact that the sands of easy credit are quickly slipping through the hourglass.
PETITION: What kinds of corrective actions have you found yourself recommending to clients lately? What, if anything, are you hearing from clients (or just generally in the marketplace) that you weren't hearing just 12 months ago?
The middle market appears to be relatively unchanged during the last year. We are hearing more general chatter about when the next recession might start. In cases where we are selling a client’s assets, we have seen prospective investors express more concern about how our client’s assets will perform in declining economic conditions. Our job has been to kick the tires harder during due diligence and to be more proactive in supporting rationale for upside projections. In some cases, that means helping our clients understand they may need to temper aggressive forecasts.
PETITION: What is the biggest inefficiency in the restructuring process? If you had the opportunity to lobby to change one thing, what would that be and why?
Professional fees are easily a huge disadvantage to the bankruptcy process, which many would argue is an inefficiency. However, the professionals are largely present for good reasons and are working to help their clients.
Larger debtors are often able to absorb these costs and still emerge from bankruptcy. The challenge for smaller debtors can be much more formidable. These firms may have similar professional needs but have less cash or profitability to cover their costs. The result is after budgeting for debtor professionals, a creditors committee may find they have less than adequate funds to pay for their professionals. Certainly lenders have little desire to amply fund a potential adverse party.
There is no easy solution to this issue. The debtor has the greatest need for professionals, yet there has to be a balance. In many cases, unsecured creditors could posture that the debtor only is able to pay its professionals because unsecured creditors have not yet been paid. Fundamentally, this creates a systemic problem – by making chapter 11 too costly for the smaller end of the middle market, these companies delay seeking relief so long that many options for recovery are foreclosed upon by the passage of time. The system needs to be more accessible to smaller companies, and the only way to accomplish that is through procedural and structural changes.
PETITION: One of the great things about PETITION is that we have the senior-most professionals at certain firms that read us AND we have a lot of law and business school students that read us. Thinking about the latter, what is one book that you've read that's helped you become a better professional? Thanks for participating.
Without question it’s been Sun Tzu’s The Art of War. While there are many comparisons of how TAOW can be applied to business, there are similar comparisons to medicine which I find very applicable to the distressed space.
Being the first boots on the ground of a distressed company is akin to being an emergency room doctor (not to diminish the tremendous credentials required by actual medical professionals). From the outset, professionals need to question if they can make a difference or if the patient is too far gone (TAOW: Move not unless you see an advantage; use not your troops unless there is something to be gained). We next read vital signals of our patients through financial reports and analyses (TAOW: know your enemy). Often plagued by a host of problems, we triage to address the most critical issues first (TAOW: ponder and deliberate before you make a move).
The parallels go on but really cement the similarities between human and corporate health. The very positive takeaway is that corporations, like humans, are wired to survive and will fight tenaciously to do so. It’s in this context that we as turnaround professionals can feel truly blessed to work in this field where we support those fighting, in many cases, the battles of—and for—their lives.
PETITION Note: The Art of War is becoming a recommendation of choice from the various members of our community who’ve made a Notice of Appearance. While there’s a social commentary there, we will, for once, just leave it alone. 😉
💰New Opportunities💰
PETITION LLC, in conjunction with the one-year anniversary of our Membership launch, is looking to expand the team. Specifically, we are looking for a Chief Strategy Officer (or other commensurate title) to help take PETITION to the next level. The right candidate must be entrepreneurial, commercial, creative and, frankly, not too “corporate.” She/he must be willing to get her/his hands dirty in all aspects of the company, including, first and foremost, leading new strategic initiatives, but also engaging in sales, research/production, administration, etc. We will look at all candidates but financial advisory, legal, and/or journalism experience is preferred. Current Members will also get first look (logically, Members have a much better sense of what we write about and what we stand for). Email us at petition@petition11.com and write “PETITION CSO” in the subject line.
If your firm has job opportunities, please email us at petition@petition11.com.
📚Resources📚
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.
Nothing in this email is intended to serve as financial or legal advice. Do your own research, you lazy rascals.