☀️☕️ Companies "R” Bust [The MoneyFitt Morning 18/05/23]

..... ▷ We all heard about massive layoffs at the big tech companies, but struggling companies were already axing workers a year ago to reduce costs and are now “running out of time” in the face of a slowing economy, fast-rising interest rates and persistent inflation. Especially hard hit have been those with growth rather than profitability-focused business models usually egged on by venture capitalists (funded by investors facing 0% on their money) and those with massive debt burdens, many of which were taken over and then piled high with borrowings by private equity firms (also funded by investors facing 0% on their money.)

..... ▷ Of course, Vice wasn't the only digital media company to struggle in recent times, with the likes of The Huffington Post, BuzzFeed, Refinery29 (bought for $400mn by Vice), Mashable, The Verge, Engadget, TechCrunch and Gizmodo already laying off employees, cutting costs and restructuring their businesses. Declining ad revenue (partly due to the rise of ad blockers and the shift to mobile devices), rising costs (of producing high-quality content as well as acquiring new users) and increasing competition (from deep-pocketed tech giants like Google, Facebook and TikTok) make them sound like the old media companies they once disrupted.

..... ▷ Meanwhile, Dealogic data shows that US companies are concerned that the US debt ceiling negotiations will go wrong and blow up the global financial system, so they are rushing to issue corporate bonds (i.e. to borrow money from the market) while the going is good, demand is high, and rates are relatively attractive. "Investment-grade" companies (the ones who are assessed by credit rating agencies to be more likely to repay their debts) have been bringing forward their planned deals and issued $112bn of bonds so far this month, 3x what they'd issued in April (and more than 4x the same month last year.)

..... ▷ Just as President Biden was saying he expected an imminent "thaw" in relations with China, Beijing barred US memory chipmaker Micron from selling to key domestic industries as it “pose(s) significant security risks to China’s critical information infrastructure” in apparent retaliation against expansive sector controls introduced by the US last year. But the ban seems limited to the telecom and transport sectors while Micron mainly sells to the mobile device and consumer electronics sectors, which Chinese authorities will almost certainly be aware of. So it could be that it's more for show than any real escalation of the conflict between China and the West and probably won't really have a significant real positive impact on Micron's rivals in China (SMIC, Hua Hong Semi) or Korea (Samsung Electronics, SK Hynix).

- When a distressed company, usually one with far too much debt, "files under Chapter 11" of the United States Bankruptcy Code, it means its assets are "protected" from creditors in the sense that the company is allowed to maintain control over its business or property while it reorganises its finances so it can repay its debts over time. Operations are heavily restricted and the company may have to sell some of its assets.

- This way, it can help save jobs and avoid liquidation, though in some cases, it may just be a matter of time before it happens anyway. (In a liquidation, or Chapter 7, the company is wound up and ceases to exist, with all remaining assets after expenses and taxes divided fairly among creditors. Only what is left over, if anything, would go to the shareholders.)

- The company or person owing money is called the "debtor", and the companies or people who are owed money are called the "creditors." Creditors include the taxman (always the taxman), any banks that lent money, suppliers and employees, but not shareholders.

- Any reorganization plan must be in the best interest of the creditors (not the shareholders) and may involve a court-appointed change of management to do so.