the arc of the covenant
is bending towards chaos
first off here’s Demi, proudly achieving her ~third-ever no-vomit car ride. good dog.
When J.Crew filed for bankruptcy a few months ago, it presented what I thought was the best opportunity to talk about the trapdoor two-step, the most innovative dance in credit markets of recent years — in very broad strokes, it’s shuffling a valuable thing you promised to some lenders through a few hidden doors so it can be promised to new lenders. It’s the Renegade of corporate borrowing, if you will. I was stoked; I’m always looking for ways to do so-called “finance” stories at Planet Money, and here was an opening!
So we did a whole episode on J.Crew’s rise and fall, which was very fun; I tore my hair out trying to explain unrestricted subsidiary IP transfers and Delaware corporations in Planet Money’s conversational style. And we did it!! We only said “collateral” one time, and we never even said “covenant,” which is actually wild. (You have to parcel out the not-everyday words or people just turn your voice off.) Then our genius TikTokTeam miraculously made the episode into a genius TikTok (involving a skateboard and a demon) which has become one of our most beloved TikToks. Incredible!
So you can imagine my pain now, having already done all that, as I watch the absolute chaos breaking out in parallel situations. There are a great many parallel situations, since deteriorating covenants are meeting with desperate times, and also double-promising collateral is obviously a great and lucrative thing to do and much easier to get away with than you’d expect (I wrote a lil about that last yr). But this past week saw two meltdowns in particular which, before ~all this~ / 2020, would have felt very improbable.
First: years ago, funds including Brigade Capital Management lent Revlon money, in a loan backed by collateral, as one does. Then more recently in the now-classic move we’ve grown to love, Revlon moved intellectual property, and used it to back NEW debt. Brigade & friends were pissed, said the old loan was in default, and therefore they were owed their $$. Revlon said the asset transfer was allowed under the documents.
There’s more salt, as Bloomberg News reported: Brigade thinks Citigroup, the loan’s administrator, was even MORE rude bc it helped Revlon “create a credit line to manipulate a lender vote and override the objections of a majority of debtholders to secure the deal.” !
Last week, Brigade and other lenders sued Revlon, saying their collateral was siphoned off unfairly: “Covid-19 is no license to breach contractual commitments to lenders…and to steal and reuse collateral for alternative purposes.” Revlon called the suit baseless, and also called the angry lenders “desperate,” which, ouch.
All that makes it extra funny that THIS week, Citigroup just accidentally … sent … Brigade … the money. Just wired $176.2 million to Brigade, and hundreds of millions to others for a total of $900 million.
Obviously, Citi was immediately like “oh sht sorry, do u mind giving that back, that was an accident.” They’d meant to just send an interest payment and accidentally paid the principal. Who among us.
Brigade would not give the money back. They said that, ~unfortunately,~ they’d already distributed the money to like 40 funds so that exact money was already gone, and could be anywhere by now, unfortunately! It would almost be literally impossible to track down those exact dollars. Yikes! Sorry that happened, tho!
So Citi sued, and said, in one of those delightful moments in a lawsuit where they sell why this infraction is the worst ever, “Brigade’s actions are not just unconscionable; they threaten the integrity of the administrative agency function and the trust in the global banking system.” Wow. They must be stopped!!
Buuut, also obviously, as Brigade sees it, that was money they should have been sent. What a ~Weird Accident~ to send them exactly what they were owed! “It is not believable that a sophisticated institution like Citibank could have transferred nearly $1 billion, in the exact amount outstanding under the 2016 Credit Agreement, in error.”
lol ok I get that Brigade is doing an argument here, but I … is it more believable that Citi randomly had a fit of pity? like “ohhh poor hedge funds :( maybe they are right about that default, that was so mean of us/Revlon, let’s go ahead and, unprompted, make it right” ? That would be an exciting development in capital markets, but … I’m not convinced.
Anyway so Citi backed out of arranging a CLO for Brigade the day before it was due to price, I guess to keep the saltiness going. And the dueling lawsuits are continuing so, if you like gifs, feel free to imagine a popcorn-related one here.
The second one is crazier than accidentally transferring about $900 million to people who feel they’re owed exactly about $900 million.
So: Neiman Marcus filed for bankruptcy, remember. But before it did, it did its own trapdoor two-step, shuffling a valuable thing, MyTheresa, to where it could safely back more debt.
Predictably, creditors balked and tried to fight, led by Daniel Kamensky of Marble Ridge Capital. But unlike many/most of these situations, he prevailed: Neiman’s PE owners agreed to a settlement with the unsecured creditors that gave them $150+ million in MyTheresa shares, plus Neiman would fork over $10 million cash. Incredible.
That was July 30th. What a great day for him. But then, the very next day….
Apparently: some creditors who got those MyTheresa shares wanted to sell them, happy to take a discount because they are illiquid; Marble Ridge was offering 20 cents on the dollar. But Kamensky caught wind that some client of Jefferies wanted to offer more, like ~30 cents. So he freaked out, and Instant-Bloomberged [aka expensive-gchatted] Jefferies, telling them to “stand DOWN. DO NOT SEND IN A BID,” according to a Department of Justice trustee report that just came out; he threatened to cut off business with Jefferies (which, in the first half of this year, had meant $200k for Jefferies in trading commissions), and to use his seat as co-chair of the unsecured creditor committee to block Jefferies from buying the shares. (Personally I’m confused on the logistics of that threat, because that is exactly where higher prices would be most welcome, but … I think I’m thinking too hard).
As word started to get around about his lil outburst, Kamensky seemed to realize what he’d done and went into damage-control mode. He called someone at Jefferies, opening with “this conversation never happened,” so naturally his friend at Jefferies immediately started recording. (which made me wonder — all bank lines have to be recorded, right? But with work-from-home… are yall Tape-A-Call-ing every call?) Kamensky tried to assert legit-ish reasons for his earlier comments, like listen man I was just worried that the bank was not being serious with this bid. And, he added, according to the report: “they’re going to say that I abused my position as a fiduciary, which I probably did, right?” he said. “Maybe I should go to jail. But I’m asking you not to put me in jail.”
For me this does a full reverse-backlash into feeling bad for him. Just seems very relatable to be luxuriating in a huge victory and then … snatch a breach of fiduciary duty from the jaws of a settlement. The fallout is bad: Marble Ridge is shutting down, and a judge might agree with him that he might should go to jail (h/t Eliza for many many links).
Listen, we have all had a hard time keeping ourselves together this year, with all the stress and isolation. Months ago I started to worry that, without the daily interactions that smooth our rough edges and correct us back into social norms — the weird looks at the coffee machine when you overshare or when your joke doesn’t land — we’d eventually emerge from our homes the most sharply, violently ourselves we’ve ever been. For good and bad. I see now where I was wrong — we may never emerge. And I didn’t anticipate the extent to which this would make many/most of us more prone to just Saying Things Out Loud, legally ill-advisable things, or make us momentarily forget a fiduciary duty. I guess it is almost foreseeable that this disorienting boredom-plus-extreme-stress marathon would result in someone accidentally sending $900 million to exactly the wrong parties (or exactly the right parties, depending). I am just glad it wasn’t me.
That we have such chaos on BOTH sides of these transfers — those doing the shuffle and those pissed about it, even the rare victor in fighting a transfer — leads me to conclude that they must be cursed. I can think of no other explanation. I asked some friends and:
(Please feel free to send in your best and final jokes on this topic.)
For me, the lesson is: maybe you DON’T only get one opportunity to seize everything you ever wanted; maybe you have “JScrewed” now, but even as we speak people are incubating things beyond your imagination. Something to think about!
For you, maybe the lesson is: I know you know to exploit covenant loopholes at your own risk. But things are really spiraling out there! For real be careful!!!
Other episodes of Planet Money I’ve worked on, in the long months since JScrewed:
Patent Racism: a story-within-a-story, about racism through the lens of inventions then, and racism in the economics world now. [link to the paper central to all the stories]
Getting Out of Prison Sooner: as the U.S. was talking about the front end of our criminal justice system — the public’s relationship with police — we looked at the other side, when you’ve been convicted and locked up and then maybe the laws change and you get commuted out.
Mask Communication: using behavioral economics to understand why some people don’t wanna wear masks, and how they could be “nudged” into it. Featuring an appearance by Lois Griffin of Family Guy. !!
As always, if you know of any absurd and fun adventures in credit markets (and i guess “stocks,” or whatever else), wild capers with unexpected twists and turns, I’m all ears. In part because I miss you and love hearing from you, but also because the people deserve to know, now more than ever.
A non-exhaustive collection of #content from people who are not me:
This ep of the Indicator features Claire Boston, revisiting Cardiff’s pet junk bond, Hornbeck Offshore (Becky for short)
My coworker Jacob Goldstein has a very good book coming out soon!! “Money: The True Story of a Made-Up Thing.” If you like money, you’ll love this book.
“The recession is over for the rich, but the working class is far from recovered” + the “‘K’ shaped recovery”
I trust you’ve watched “Indian Matchmaking” on Netflix? (+ worthwhile criticism)
and listened to Nice White Parents?
“Relatives of three of the top four members of China’s Communist Party have in recent years bought luxury homes in Hong Kong worth more than $51 million combined.” + Twitter thread by one of the authors
“Beginning in October, [Tiffany] will provide expanded origin details for newly sourced, individually registered diamonds that trace the stone’s path from the ground to the jewelry case. The project, which the company says is an industry first, took nearly two decades to complete.”
How Ben & Jerry’s does better at corporate activism than other companies
“'Severe inhumanity': California prisons overwhelmed by Covid outbreaks and approaching fires”
riPPPle effects: “Efforts to root out scammers in the $670 billion Paycheck Protection Program and $374 billion Economic Injury Disaster Loan program are sweeping up legitimate borrowers. Business owners have had their loan funds frozen, often along with their personal bank accounts, after tripping alarms meant to prevent fraud.” and “Some [business] owners are moving their money permanently to smaller banks that were able to deliver their PPP funds.”
In Dog News,
due to sheer luck at the dog park, Demi our pandemic-adopted bb dog was miraculously reunited with her sister, Gracie. We’d met Gracie as a pup when we picked up Demi, and she is unforgettable and also their familial resemblance is very strong, so when we saw her trot into the dog park one day we were like — omg — and the rest is history that they’ll tell at each others’ weddings.
We are now friends with Gracie’s people, and these beautiful terrors have playdates at least twice a week (we are distanced, the dogs … are not). They run together like wild horses and lope around the park like they are gonna Bonnie & Clyde the place.
Can you even BELIEVE this joy:
Demi is the one getting absolutely crushed here. She has since learned she is marginally more agile than Gracie, so the games have gotten a little less directional. We are proud.
Wow! What an interesting read!