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BUYOUT LENDING SOARING
Facing a possible hike in capital gains tax rates proposed by President Joe Biden, companies are scurrying to conclude mergers and acquisitions ahead of it—and lenders are accommodating them with billions in cheap loans, enabled by the U.S. Federal Reserve keeping its base interest rate barely above zero.
This year through September, lenders made $119.8 billion in leveraged loans, according to S&P Global Market Intelligence, close to the record $124 billion doled out in the first three quarters of 2007.
When software firm Cornerstone OnDemand went on the market this summer, Clearlake Capital Group rushed a $2.2-billion loan from JP Morgan Chase and put in a successful bid before a planned auction could happen, The Wall Street Journal reported.
Three private equity firms are now shopping $7 billion in loans from Goldman Sachs among potential investors willing to help the trio buy Medline Industries.
“I’ve signed eight deals since June and in a typical summer I average one per month,” partner Elizabeth Cooper at law firm Simpson Thacher & Bartlett said to the WSJ.
The frenzy has pushed selling prices higher.
In 2007’s record year, the average deal carried $2 billion in debt and equity; this year, the average is $2.5 billion, a 25-percent increase.
With prices climbing and debt loads returning to near-record levels, some economists worry that when the economy slows and interest rates rise, debtor companies will be unable to make their payments.
However, 2022’s default rate will be only about 1 percent, S&P Global Ratings has predicted, compared to the historical average of 2.68 percent.
TREND FORECAST: That low forecast does not speak to what might happen when interest rates spike nor the default rate in 2023 and beyond. Whatever the risk will be, it will be shared more widely than in the past and we forecast, at higher failure rates.
In 2007, investment banks made and held loans for leveraged buyouts.
After the Great Recession, new regulations made it prohibitively expensive for the banks to hold the loans on their balance sheets for an extended time.
Now investment banks still arrange and close deals, but quickly sell them to pension funds, insurance companies, and private equity firms.
Increasingly, the deals also are sold to investment vehicles called “collateralized loan obligations,” relatives of the mortgage-backed securities that fell apart in 2007 and ignited the Great Recession.
In 2013, the U.S. Federal Reserve cautioned banks to avoid deals in which debt would exceed six times a company’s earnings before interest, taxes, depreciation, and amortization (EBITA). Deals that year hovered around 5.41 times EBITA, according to S&P.
This year, the Fed has offered no guidance and the ratio has edged up to 5.67 times EBITA.
At last month’s Fed meeting, staff economists rated deal valuations as “elevated” and ranked vulnerabilities in the U.S. financial system as “notable,” an unusually strong signal of concern, the WSJ said.
TREND FORECAST: Once again, history is repeating itself. In 2007, Gerald Celente, seeing the destructive economic future ahead, took out the domain name, Panicof07.com
The signals were all there. Among them, $124 billion of leveraged loans were doled out in the first three quarters of 2007.
In our 27 April 2021 Trends Journal article “Leveraged Mega-Buyouts Back in Fashion,” we not only highlighted the rising buyout frenzy but also issued this warning: as interest rates rise, market for debt-fueled takeovers will cool and the higher rates move, the more difficult it will become for a growing number of borrowers to meet their payments.
The default rate will rise with interest rates.
CONOCOPHILLIPS BECOMES SECOND-LARGEST U.S. OIL PRODUCER
ConocoPhillips has paid $9.5 billion to buy Royal Dutch Shell’s 225,000 oil and gas producing acres in the West Texas portion of the Permian Basin.
When the deal closes in this year’s final quarter, the purchase will make Conoco the second-largest oil and gas producer in the contiguous 48 states, The Wall Street Journal reported, lifting it ahead of Chevron, EOG Resources, EQT Corp., and Occidental Petroleum.
In January, amid an oilfield cash crunch and wave of consolidations during the COVID War, Conoco traded $9.7 billion in stock to buy Concho Resources, a large Permian independent producer pumping 319,000 barrels a day of Permian oil. (See “Industry Giants Merging Amid Industry Turmoil,” 27 Oct 2020.)
The Concho deal boosted Conoco’s Permian production to about 1.5 million barrels daily.
Adding Shell’s 200,000-barrel daily Permian output brings Conoco closer to catching ExxonMobil’s million-barrel daily production in the lower 48 states.
TRENDPOST: Most of the oil majors are still driven by the growth mindset, sailing against the growing headwind of public opinion and private investment that is balking at the idea of an energy future dominated by fossil fuels.
Shell unloaded its Permian holdings to have more cash to invest in clean energy, a strategy we documented in “How and When Electric Vehicles Will Go Mainstream” (21 Sep 2021).
In contrast, Conoco is playing the same risky game we noted in “Oil Majors Withhold Investment in New Production” (3 Aug 2021): they need to expand their reserves to please Wall Street and their shareholders, a strategy that could lead to billions of dollars in “stranded assets” if and when electric vehicles and renewable energy for buildings reaches a critical market mass.
We reported on this prospect in “Fossil Fuels: $6T in Worthless Assets?” all the way back on 9 June, 2015.
By amassing more and more reserves, Conoco is betting against the trend.
NETFLIX BUYS ROALD DAHL’S LIFE WORK
Streaming service Netflix has bought the Roald Dahl Co., the firm that controls rights to the British author’s copyrights governing “Charlie and the Chocolate Factory,” “The Fantastic Mr. Fox,” and other renowned stories that have shown appeal to children as well as adults.
More than 300 million of Dahl’s books have been sold worldwide.
Netflix plans to use Dahl’s stories and characters as source material for animated films, theatrical productions, and consumer products, the company said.
Terms of the sale were not made public.
Netflix is adding Dahl’s content as part of a wave of conglomeration within the entertainment industry.
In May 2021, Amazon bought MGM Studios for $8.45 billion, calling it a “treasure trove” of old and classic films that would attract viewers to Amazon’s Prime Video subscription service.
In 2019, the Walt Disney Co. paid $4.05 billion for LucasFilms, the company that created the Star Wars franchise.
TREND FORECAST: We continue to note, as the Bigs grow bigger without limits, there is little need for advancement and innovation since there is no competition in the fight for market share.
And indeed, the so called “entertainment industry” clearly exemplifies the boring stagnation and cultural void of a soulless and passionless Big industry.
Thus, across the spectrum there will be OnTrendpreneur® opportunities to fill market gaps in business sectors the “Bigs” won’t see, feel or touch as they can only be interested in the bottom line.
MAJOR TALENT AGENCIES MERGE
Creative Artists Agency (CCA) has signed an agreement to buy ICM Partners, formerly International Creative Management, for an undisclosed amount.
ICM represents clients in all fields of entertainment as well as podcasting and politics and its’ book division will feed content to CAA’s movie and television businesses, the agencies said in a joint statement announcing the deal.
“The strategic combination of CAA and ICM bolsters our collective resources, expertise, and relationships to deliver even more opportunities for our world-class clients to build their careers and their brands across multiple disciplines and platforms in an evolving marketplace,” CAA’s co-chairs Kevin Huvane, Richard Lovett, and Bryan Lourd said in a joint statement.
“Our strong financial position enables us to continue to expand and diversify our businesses,” they noted.
The deal leaves talent representation dominated by the “Big Three” of CCA, the United Talent Agency, and WME, which resulted from the 2009 merger of Endeavor with the William Morris Agency, Pollstar reported.
TREND FORECAST: Again, as we continue to note, with the Bigs in control, the bottom line—not creativity, soul, passion, style, grace and culture—is their primary focus. Thus, with the Bigs in control of both the talent pool and industry, the future of entertainment will be more of the same and worse.
However, as we note, there are OnTrendpreneur® opportunities to fill the market gaps with a Renaissance style that will lift the spirits of a downtrodden society.
NEW AMAZON CAMPUS IGNITES GROUNDSWELL OF OPPOSITION
Amazon’s plan to establish a 20-acre campus near popular Table Mountain in Cape Town, South Africa, has fired opposition by local groups.
The planned development includes housing, running and cycling tracks, 20 acres of public parkland, and office space, in which Amazon will be the chief tenant.
The new campus is projected to create 6,000 permanent jobs and another 14,000 during construction, the developer has said in public statements.
The country’s severe COVID-era lockdown pushed unemployment to 44 percent and shrank the economy 6.4 percent, The Wall Street Journal noted.
Amazon already has offices in Cape Town but plans to use the new, expanded space as a regional headquarters to grow its presence on a continent where technology and logistics services are lagging but smartphone use is growing.
The new development is opposed by ethnic, historic, and civic groups that complain about irregularities in zoning for the project, environmental concerns, and the site’s historic value to indigenous peoples.
Negotiations among the parties produced 276 separate versions of the site plan, the developer said.
Images published in September of Amazon’s giant new depot built in a Tijuana, Mexico slum, sharpened resentments about Amazon’s wealth and the issue of growing inequality, the WSJ reported.
TREND FORECAST: There will be citizens’ groups opposing Amazon’s continuing takeover of global retailing—building distribution centers closer and closer to every home, indenturing larger shares of the workforce, and putting small business retailers out of business.
Despite local opposition, politicians who get paid off with bribes (imbeciles call it “campaign contributions”) will permit Amazon expansions.
In Africa, which has sunk into a deep economic abyss, the promise of jobs and shiny new real estate developments will lead politicians to approve the project; the promise of regular wages and indoor work will appeal to many Africans who now struggle to survive and who long to have money to buy the same gadgets as Westerners own.
U.S. BANKS MERGING AT A STAGGERING PACE
U.S. banks have announced or completed $54 billion in mergers and takeovers during the first nine months of this year, according to data firm Dealogic, compared to just $17 billion for the same period in 2020.
The deals are fewer than in 2019, but more regional banks are up for sale, so the collective value of the deals is greater.
The pace puts the industry on track to notch the most combinations since 2008, when many banks sold themselves to avoid collapse during the Great Recession.
Today’s economy isn’t at a point of collapse, but interest rates are low, bank profits are meager, and many banks are putting themselves on the market rather than face a cloudy future, according to The Wall Street Journal.
The average net interest margin, a gauge of banks’ profitability, sank to a record-low 2.5 percent in this year’s second quarter, the WSJ reported, adding to smaller and regional banks’ difficulties in creating the online powerhouses that bigger banks have set up.
“Neither potential sellers nor buyers wanted to do a transaction last year because of the uncertainty”—in the form of bad loans—“that could be on folks’ balance sheets,” Kevin Riley, CEO of Montana’s First Interstate BancSystem told the WSJ.
However, the expected wave of COVID-era defaults failed to materialize and the merger market has come back to life.
“Banks are no longer fearful of the bottom falling out,” analyst Nathan Stovall at S&P Global Market Intelligence, said to the WSJ. “They are no longer looking at a deal like trying to catch a falling knife.”
In September, Riley’s First Interstate BancSystem agreed to take over Great Western Bancorp, an acquisition that will swell First Interstate’s assets to $32 billion. In the same month, U.S. Bancorp announced plans to buy MUFG’s retail banking business, expanding U.S. Bancorp’s West Coast footprint.
Citizens Financial Group is in the process of buying Investors Bancorp, which abandoned merger discussions with another institution last year when COVID came along.
Tacoma’s Columbia Banking System is buying Bank of Commerce Holdings in Sacramento; in Denver, First Western Financial has agreed to acquire the parent company of Rocky Mountain Bank.
“For a $300 or $500 or $700-million bank, it used to be that you could have a nice little business that could go on for a long time,” Scott Wylie, CEO of First Western Financial, said in a WSJ interview.
“These days,” he added, “that’s really hard.”
TREND FORECAST: Once-upon-a-time, the Big Banksters that destroyed the lives of millions with their criminal activities leading up to the Panic of ’08 were going bust. But, being that they are of a higher level than We the People of Slavelandia, it was declared by Presidents G.W. Bush and Barack Obama that they were “Too Big to Fail.”
Thus, between December 2007 to July 2010, the Federal Reserve Gang pumped in $29 trillion secretly into the banking system to bail them out.
As detailed, it was the deregulation of the financial industry that allowed speculation on derivatives backed by cheap, junk-issued mortgage back securities, available to even those with rotten creditworthiness, that was the primary cause of the 2008 financial crash.
So, once again, when the next market crash happens, the economy dives and the commercial real estate market tanks, in America, where the one percent controls the nation, the Bigs will again get bailed out.
WALMART WILL HIRE ANOTHER 150,000 WORKERS
Walmart, the U.S.’s biggest employer with 1.6 million Americans on its payroll, hopes to add 150,000 workers in advance of the holiday shopping season, the company announced.
However, most of the new jobs will be long-term, not seasonal, Julie Murphy, chief people officer for Walmart U.S., said in comments quoted by The Wall Street Journal.
Walmart also aims to hire 20,000 additional warehouse workers, Murphy said.
To entice more workers into the company during today’s tight labor market, Walmart raised its base pay from $11 an hour to $12 late last month. The company’s average wage is $16.40, the retailer claimed.
Walmart hired 500,000 additional people in 2020 to cope with the COVID-era surge in online shopping, according to the WSJ.
Walmart faces competition for workers from Target, which wants another 100,000 employees.
Amazon said last month that it plans to take on another 125,000 “associates” and matched Target’s promise to pay the cost of college tuition and books for some employees.
TREND FORECAST: As we indicated in “Hiring, Wages Rise in June” (13 Jul 2021), an average hourly wage of $16.40 or raising pay from $11 to $12 an hour is not an income that will allow people to survive.
Many workers remain off the job not because they are lazy or getting fat on $300 a week in federal unemployment checks. A growing number of people are simply refusing to return to Slavelandia.
To attract and keep workers, more companies will have to offer the kinds of incentives that Amazon and Walmart have, such as help with college tuition to help people lift themselves into skilled or semi-skilled jobs. But overall, these “rewards” will prove minimal.
TREND FORECAST: We continue to note that as the Bigs grow bigger without limits, there is little need for advancement and innovation since there is no competition in the fight for market share. Overall, with a few selling the most, there are less consumer choices for wide varieties of products and services that would be available if there were more businesses in the sectors.
Therefore, from sounds and style, to health and wellbeing, from hi-tech to heavy industry… across the spectrum there will be OnTrendpreneur® opportunities to fill market gaps in virtually every business sector of society that the “Bigs” won’t see, or will be too small for them to invest in.