Sears Bankruptcy

It appears that Sears, once the world’s largest retailer, may file for bankruptcy as soon as this weekend. One alternative being explored is a Section 363, or stalking horse, filing. In a Section 363 filing, the company would sell some of its assets, but the sale would still have to be approved by the bankruptcy court. For example, CEO Eddie Lampert has already offered $480 million for the company’s Kenmore appliance and home improvement division. If successful, the company would exit the bankruptcy with fewer assets, but less debt as well.

Michael's Bond Losses

As Hurricane Michael hits the Gulf Coast, pension funds, endowments, and other large investors are getting nervous.  About $15.7 billion wort of CAT bonds are exposed to a Florida hurricane. Large investors have been drawn into CAT bonds because of higher potential returns and the diversification these bonds can provide. The total CAT bond market is currently at $30 billion. For a major catastrophe, an insurance company typically cover the first part of its loss, then relies on reinsurance or securities to help cover the rest. If the trigger is hit on a CAT bond, often the bond is cancelled, meaning the bondholder receives no further coupon payments and no par value upon redemption. 

Papa John's Extra Cheese

Papa John's stock has been battered this year after comments made by founder John Schnatter on a conference call. Schnatter resigned as chairman in July, but still owns about 30 percent of the company's stock. In a nod to the bidding wars that can occur in a takeover battle, the stock jumped nearly 8 percent today when it was announced that Trian Fund Management is considering a bid to buy the company and take it private.

Interest Rates And Bond Prices

As we noted in the textbook, an increase in interest rates will decrease the price of a bond. And recently, interest rates have been rising. U.S. high-grade debt is down 2.53 percent this year and the 10-year U.S. Treasury bond has lost 3.23 percent this year as well. To give you an idea of the magnitude of losses worldwide, the Barclays Multiverse Index, which includes investment grade and high yield bonds from around the globe, has lost about $916 billion in market value this year.

Inflation Expectations

One thing to keep in mind with present value calculations, if you calculate the present value using real cash flows and the real interest rate or nominal cash flows and the nominal interest rate, the present value will be unaffected. This is true for capital budgeting as well So where can you get expectations of future inflation? One place is the New York Federal Reserve, which publishes microeconomic data, including expectations of consumer inflation. We should warn you, these are expectations, and like any expectations, are not exact.

New Lease Accounting Standards

Beginning January 1, 2019, public companies have to begin disclosing the present value of lease of future lease payments as a liability on the balance sheet. Previously, many leases were kept off the balance sheet. The result will be that for companies that rely heavily on leases, the debt may increase dramatically. However, we would like to make an important point in that while the balance sheet debt will increase because of the new leasing accounting standards, it will only have a minimal, if any, effect on leasing cash flows, meaning that he NAL calculation we discuss is still the correct analysis to determine whether to lease or buy.

Comcast Bonds

In order to finance the $39 billion acquisition of Sky Plc, Comcast sold $27 billion worth of unsecured bonds. This is the second largest bond offering of the year and the fourth largest all-time. The company sold 12 different bonds, ranging from a 2-year maturity to a 40-year maturity in the offer. Investors jumped at the bonds, putting in orders for $88 billion, which allowed Comcast to issue the 40-year maturity at a yield spread of 1.75 percent above Treasuries. The bond issue will increase Comcast's leverage from 2.2 times EBITDA to 3.6 times EBITDA. The bonds are rated A with a negative outlook, which means there may be a downgrade in the future.