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One thing to start: Twitter chief executive Jack Dorsey has pledged $1bn of his equity in Square, the payments company he co-founded, to fund global relief for coronavirus. The announcement, made on Twitter, said the contribution amounted to 28 per cent of his wealth.

Now on to today’s edition . ..

In biblical terms, fallen angels are expelled from heaven. In financial markets, fallen angels are expelled from the coveted investment-grade bond bracket and into junk status. As the name might suggest, it’s not quite hell — but tell that to a corporate treasurer looking for cheap financing.

For years traders have talked about the number of companies teetering on the edge of their investment-grade status — in bond market speak that means credit ratings of triple B or above — and how difficult it would be for markets to absorb a huge amount of junk debt if that came to be. 

Coronavirus sparks rise in downgrades to junk

Investors who hold corporate bonds have certain risk parameters and many of them are not allowed to hold junk-rated debt. So if a company is downgraded from investment-grade to junk, some are forced to sell that company’s bonds. If this happens in a controlled way, ie a handful of ratings downgrades a year, it’s not such a big deal because there are buyers out there who want to hold riskier bonds. You may have seen them referred to as yield-starved investors.

But if there are a large number of downgrades in succession, the junk bond market becomes overloaded with too many sellers and not enough buyers — the investment-grade market is six times the size of the high-yield bond market — which causes a host of issues for businesses in need of financing. 

Until this year, that didn’t seem like such a problem. The last time we saw companies go from investment grade to junk at breakneck speed was the financial crisis. 

Then the coronavirus outbreak hit.

A record $90bn of debt fell to junk status in March, according to Deutsche Bank analysts. And that’s just the half of it, according to Bank of America, which warns that the total for the year could reach $200bn. Trading figures suggest investors are set for even higher tallies with $360bn of triple B rated bonds, the lowest rung of investment grade, trading with yields comparable to that of double B rated debt as of last week. 

© Financial Times

So who has lost their wings so far? Carmaker Ford is the latest addition to a long list that includes Occidental Petroleum, Macy’s and Kraft Heinz

The biggest risk indicator of a company’s downgradability is debt. Or, as Saint Peter might see it, the second deadly sin: gluttony. 

This is a must-follow trend for financiers around the world and the FT’s Joe Rennison delivers the full story here.

WeWork sues SoftBank 

WeWork was once the jewel in SoftBank’s start-up crown. Now it’s merely an opposing party in a Delaware lawsuit.

 A special committee of board members at the troubled office space start-up sued WeWork’s largest shareholder SoftBank, run by Masayoshi Son, pictured below, and its Vision Fund this week for pulling out of a $3bn tender offer agreed last year. That agreement was part of the Japanese group’s rescue deal.

© Bloomberg

The lawsuit in the Delaware court of chancery centred on two key allegations. First, part of the $3bn share buyout had involved WeWork’s joint venture in China in which the Vision Fund held shares.

The buyout could not close until the Vision Fund exchanged those shares for stock directly in WeWork. This required minority investors in the joint venture to waive certain rights of first-refusal.

WeWork alleges that Son along with his lieutenants encouraged Trustbridge Partners, one of the minority investors, not to do so — thereby giving him an out on the buyout.

Second, WeWork is under investigation by the Department of Justice, Securities and Exchange Commission and others, which SoftBank has also used to try and back out of the deal.

© Reuters

WeWork says in the lawsuit the “investigations were not a surprise, given [Adam] Neumann’s conduct and the company’s loss of billions of value”. It then alleges:

“Certain of the investigations concerned statements that SoftBank made regarding its own threats in October 2019 not to fund the warrant when it came due in April 2020.”

The “warrant” is the $1.5bn equity investment SoftBank originally agreed to early in 2019.

SoftBank will “vigorously” defend itself, a spokesperson said, describing the lawsuit as “a desperate and misguided attempt” to rewrite the tender agreement.

“Nothing in the special committee’s filing today credibly refutes SoftBank’s decision to terminate the tender offer,” the Japanese group said, adding that it remained fully committed to WeWork’s success.

You can read the lawsuit here. The exhibits, including the communications from SoftBank that sparked the lawsuit, are here

The legal battle comes as the coronavirus pandemic weighs heavily on WeWork’s business. Thousands of its tenants have refused to pay rent or sought to terminate their leases over the past month, including some big businesses such as the cruise ship operator Royal Caribbean

It has exacerbated a rise in WeWork’s vacancy rate, which was already climbing as the company opened a spate of new properties. 

Occupancy at the start of April has fallen to just 64 per cent, down from the 79 per cent level it reported at the end of September. And as one current employee cautioned DD’s Eric Platt and the FT’s Andrew Edgecliffe-Johnson, that drop did not yet account for the full economic fallout of the crisis and the surge of cancellations the company was still girded for.

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The most active part of the M&A market: hand sanitiser

A few weeks ago, DD puzzled over how you could agree to a price for a hand sanitiser business in these extraordinary times. 

The Swedish private equity firm EQT Partners has found a way. It’s in exclusive talks with Air Liquide to buy its Schülke unit, which makes alcohol-based hand rubs and hospital disinfectants, at a valuation of about €900m. 

© AFP

Sellers had (of course) wanted buyers to offer a “coronavirus premium” over the €1bn price tag that Air Liquide first hoped to fetch when it put the business up for sale last year — catch up on the FT’s story on that here

But that hope has collided with reality. “Nobody moved” when sellers asked them to raise their bid on the grounds that “there’s been a shift in the way people will use these products going forward”, an adviser to another bidder said.

It shows you can still just about do a pre-crisis-era type of deal in the age of coronavirus. The valuation of 12 times adjusted ebitda is punchy, and above last year’s European average of 10.9 times. 

And even with European public debt markets seized up, EQT was able to bring the auction process to an early end with the help of HPS Investment Partners, the private credit group spun out of JPMorgan Chase, which is providing the debt. 

Maybe this is the future for private equity. Or maybe it’s the sort of thing you can only do when the deal involves the hottest commodity on the planet. 

Job moves

  • Jason New has joined Onex Corporation as co-chief executive to lead the investment management group with Stuart Kovensky. New was previously at Blackstone, where he held a senior role in its GSO Capital Partners hedge fund. 

  • Paula Price is leaving her post as chief financial officer of Macy’s after less than two years on the job.

  • UBS has promoted Barry Donlon to lead debt capital markets for Europe, the Middle East and Africa.

  • White & Case has added Dongho Lee as a partner to its global M&A practice in Seoul from rival Herbert Smith Freehills.

Smart reads

Boatload of debt $17bn of demand for $4bn in bonds issued by the world’s largest cruise operator, which is leaking monumental amounts of cash monthly and whose ships have been labelled “floating Petri dishes” due to coronavirus outbreaks? Head scratcher. Luckily DD’s Rob Smith goes into the details behind the demand. (FT

To furlough or not to furlough That is the big question for the Big Four accounting firms who on Friday got together, remotely of course, to discuss how much of a reputational hit they would take if they were to accept government funds. Partners at Deloitte, PwC, EY and KPMG earned an average of £720,000 last year. (FT)

Seeking comfort Over the past decade, the makers of heavily processed food were struggling to keep sales up as changing consumer tastes led them to drop canned beans and frozen pizza in favour of organic kale and quinoa. The coronavirus shutdown reversed that trend. A bittersweet victory for the likes of Kraft Heinz, Campbell Soup and JM Smucker. (New York Times

News round-up

The CEO’s coronavirus conundrum: how much pay to sacrifice? (FT)

LVMH and Kering backtrack on French state support for staff (FT)

Hudson Yards developer scrutinises finances of rental refuseniks (FT)

SoFi to purchase Galileo for $1.2bn to expand banking tech (Bloomberg)

Stock buybacks expected to halve as companies bolster defences (FT)

Asos plans £200m share placing and extends debt (FT)

GSV bids $2.5bn for Malaysia Airlines, says funded by European bank (Reuters)

Nelson Peltz’s Trian Partners lost 16% in March (BBG)

Due Diligence is written by Arash Massoudi, Kaye Wiggins and Robert Smith in London, Javier Espinoza in Brussels, James Fontanella-Khan, Ortenca Aliaj, Sujeet Indap, Eric Platt and Mark Vandevelde in New York, Miles Kruppa in San Francisco and Don Weinland in Beijing. Please send feedback to due.diligence@ft.com



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