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Axios Markets

1 big thing: How Fed policy can narrow racial divides

2. Catch up quick

3. Inflation’s poster child

4. So much for global mega banks

5. Charted: Hedge funds still can’t match the S&P 500  

💰 Good morning, Markets friends! Today's newsletter is 1,065 words, 4 minutes.

🚨 It’s Lael Brainard’s turn to head to the Senate today, where she’ll make her case to be confirmed as vice chair of the Federal Reserve. The hearing kicks off at 10am ET, and some Senate Republicans are open to voting yes, Axios’ Hans Nichols and Neil Irwin report. 

1 big thing: Gap grows between rich, poor countries

An illustration of the world as a cracked piggy bank.

3. Powell's next four years

Federal Reserve Chair Jerome Powell. Photo: Graeme Jennings-Pool/Getty Images

4. One piece of the worker shortage

5. Exclusive: King Center, Goldman's One Million Black Women partner

https://images.axios.com/veMWeVOjfFMWe4Ha31Ka8oRN-bA=/0x435:3264x2271/1920x1080/2022/01/11/1641944830414.jpg

👋 Good morning! Today’s newsletter is 1,206 words, 5 minutes.

👀 All eyes will be on the latest inflation numbers when they’re released this morning. 

Economists expect that as of December, the Consumer Price Index will show an increase of 7% over the course of the year. 

1 big thing: Putin's (natural) gaslighting of Europe

Photo illustration of Vladimir Putin surrounded by yellow stars and pipelines.

Bonus chart: Europe's natural gas problem

3. Meme stock test

Outside view of the closed AMC Theater, amid the coronavirus pandemic

4. More Fed trading fallout

Outgoing Fed vice-chair Richard Clarida at his 2018 confirmation hearing. Andrew Harrer/Bloomberg via Getty Images

5. Not-so-private capital

☀️ Good morning, Markets people! Today’s newsletter is 1,228 words, 5 minutes. 

🚨 This morning, Fed chair Jerome Powell heads to his confirmation hearing before the Senate Banking Committee. 

In his opening statement, he’ll pledge to use the Fed’s tools to prevent higher inflation from becoming entrenched. See his full statement here. 

1 big thing: The labor shortage is bigger than the pandemic

Bonus chart: Missing in action

3. Rising mortgage rates could slow house price surge

4. Corporate America's incredibly profitable pandemic

5. Court nixes workplace vax mandate

🥳 Happy Friday! We Markets newsletter writers will be off on Monday observing Martin Luther King Jr. Day — we'll be back in your inbox Tuesday.

🚨Breaking late last night: President Biden's nominees for the Federal Reserve's board of governors. Read more about Sarah Bloom Raskin, Lisa Cook and Philip Jefferson — and what their nominations mean for the future of the Fed. 

⏱ Today's newsletter is 1,189 words, 4.5 minutes. 

Alex Jones’ gambit to use the bankruptcy court to shield himself from litigation damages has come to an end after less than two months. 

Driving the news: The embattled right-wing talk show host and hawker of wellness supplements has withdrawn the bankruptcy petitions of three companies linked to his Infowars empire. 

Why it matters: Jones tried to use a new subchapter of the U.S. code to his advantage, but in a way that it wasn't intended. It didn't work. 

What they're saying: "From the beginning, it was clear that Alex Jones concocted this bankruptcy scheme to avoid facing the Sandy Hook families before a jury. The dismissal of this bankruptcy at this juncture only confirms it," Avi Moshenberg, a lawyer for the Sandy Hook families, tells Axios. 

The backstory: Jones was about to face a damages trial after being found liable for defamation in suits brought by families whose children were murdered in the 2012 Sandy Hook school shooting. 

At issue: Jones repeatedly insisted the shooting was a hoax planned by gun-control advocates. His followers took to harassing the families.

Between the lines: Companies often file for bankruptcy to utilize bankruptcy's "automatic stay" (or freeze) of litigation and consolidate and settle pricey damages (think Purdue Pharma’s opioid liabilities and the wildfire-related claims against PG&E). 

But Jones' legal strategy was different. If successful, it would have set a new precedent for how companies could wield the bankruptcy code against litigation foes. 

Instead of filing for personal bankruptcy, or putting the main operating company that holds his Infowars business into Chapter 11, Jones put three small entities that engaged in little to no business activity into bankruptcy. 

That enabled him to use a new subchapter of the code that's exclusively meant to help struggling small businesses reorganize.

The so-called subchapter V offers a streamlined process. There are no creditors' committees with reams of costly advisers, and — crucially — creditors don’t get to vote to accept or reject the bankruptcy deal (more on that here). 

Using subchapter V could have allowed for a process in which the bankruptcy court decided on the damages amount, leaving creditors (i.e., Sandy Hook claimants) no choice but to accept the deal.

In contrast, companies like Purdue and PG&E that have utilized the bankruptcy process to deal with sprawling litigation claims have not used subchapter V — so they ultimately had to come to a deal that claimants would vote to accept.

The Justice Department's bankruptcy watchdog quickly sought to dismiss the Infowars-linked bankruptcy cases, saying that they "undermine[d] the integrity of the bankruptcy system."

The Sandy Hook families also took action: They decided to drop the bankrupt entities from their litigation — and as a result, they could continue to seek damages from Jones himself.

The latter move effectively made the bankruptcy cases moot, since Jones could no longer use the cases to force a stay of litigation — and a settlement deal — with those creditors. So this week, Jones withdrew the bankruptcy cases altogether. 

What's next: A damages trial will go forward in Connecticut state court in September, as the WSJ reports. Jones may face much higher penalties than the $10 million he offered in the bankruptcy deal. 

Infowars ends bid to use bankruptcy as shield

Alex Jones tried to use a new bankruptcy law in a way it wasn't intended. It didn't work.

Alex Jones of InfoWars talks to reporters outside a Senate Intelligence Committee hearing concerning foreign influence operations' use of social media platform

Alex Jones. Photo: Drew Angerer/Getty Images

Lawsuits

Alex Jones’ <a class="gtmContentClick" data-vars-link-text="gambit to use the bankruptcy court" data-vars-click-url="https://www.axios.com/2022/06/02/infowars-bankruptcy-law-shell-game" data-vars-content-id="2e2fddd1-b649-4028-b75c-08231ed7fed3" data-vars-headline="Infowars ends bid to use bankruptcy as shield" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2022/06/02/infowars-bankruptcy-law-shell-game" target="_self">gambit to use the bankruptcy court</a> to shield himself from litigation damages has come to an end after less than two months. Driving the news: The embattled right-wing talk show host and hawker of wellness supplements has withdrawn the bankruptcy petitions of three companies linked to his Infowars empire.

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

Meme stock traders have a new favorite stock: Zombie cosmetics company Revlon, which filed for bankruptcy protection last week.

Driving the news: Its shares — which face the very real prospect of being wiped out in bankruptcy proceedings — have caught fire. They're up 615% since their low point last week.

Why it matters: This isn't typically the market reaction after a company acknowledges it's insolvent and files for Chapter 11 protection.

How it works: Bankruptcy court is where a company that doesn't have enough money to pay everyone is allowed time to figure out who will get paid what. Creditors — like bondholders and lenders — would have to get their money back in full before the shareholders see a dime. 

If there’s nothing left for shareholders, they take a zero. This happens all the time in bankruptcy court. 

Flashback: Hertz became an O.G. meme stock after its 2020 bankruptcy when a Robinhood-fueled rally catapulted its shares, which Wall Street pros had deemed virtually worthless. 

Retail investors proved the haters wrong when shareholders recouped a tidy payout as part of Hertz’s bankruptcy plan.

Yes, but: Retail traders who want to replicate the Hertz win with Revlon could be in for a rude awakening.

Hertz filed for bankruptcy at a unique moment in time — May 2020, basically the economic nadir of the pandemic. Its business had ground to a halt thanks to COVID-19 lockdowns, ultimately triggering what amounted to a freak margin call in its intricate stack of asset-backed debt.

A few months later, with the economy awash in fiscal and monetary stimulus, summer weather beckoned lockdown-grizzled America out onto the road. Hertz actually had a business again. 

But while Hertz was an indebted company that couldn't make its payments because of a once-in-a-lifetime pandemic, Revlon has been a poorly performing debt zombie for years. It previously completed distressed debt exchanges in an attempt to put off the inevitable. 

Its brick-and-mortar strategy of selling in drug stores failed to help it grow enough to service its debtload, as cosmetics sales shifted to online and direct-to-consumer models.

And, zooming out, back when Hertz filed the market was headed into an upswing — good for valuations — while now, we're barreling through bear territory. 

These differences make it less obvious that there's a temporary, Hertz-like valuation discount for Revlon shareholders to take advantage of, or a catalyst for a quick bounceback in the business. 

One wildcard: Fixing problems in its supply chain could unlock some value. But to really invest in that, Revlon would need to shed its overbearing, cash-gobbling debtload ... which by definition won't happen in time to hand shareholders a recovery in a bankruptcy plan. 

What the bond market says: Distressed debt hedge funds are in the business of buying bonds of bankrupt companies at huge discounts — say, 30 cents on the dollar — with the expectation they’ll get paid back a lot more in the end. Maybe not 100 cents on the dollar, but enough to pocket a nice profit. 

In Revlon’s case, some of its bonds — which, again, are supposed to get paid back in full before any money goes to equity holders — are trading at just 5 cents on the dollar, according to BondTicker. 

Translation: The savviest bankruptcy investors on Wall Street — who, by the way, are salivating for investment opportunities after two years of artificial Fed support propping up zombie companies — don’t think Revlon’s bonds are going to eek much more than pennies on the dollar out of a bankruptcy plan. 

The bottom line: Of course, Wall Street's savviest could be wrong. They were wrong in Hertz, after all.  

Meme stock crowd targets bankrupt Revlon

But traders who want to replicate the Hertz win could be in for a rude awakening

Animated illustration of a tube of lipstick rolling up to reveal a hundred dollar bill. 

Bankruptcy

Americans' fears of job loss are growing

The share of workers who fear a loss of employment income over the next month rose in June from the prior month, poll finds.

Jobs

<div><figure><div id="av-hermes/2022-06-21-2134-percentage-of-workers-7MMVL" style="max-width:100%"><img alt="Data: Morning Consult/Axios Inequality Index; Chart: Axios Visuals" class="axios-visual-newsletter-fallback-image" src="https://graphics.axios.com/hermes/2022-06-21-2134-percentage-of-workers/fallbacks/2022-06-21-2134-percentage-of-workers-fallback.png" width="1154" height="856"/><img alt="Data: Morning Consult/Axios Inequality Index; Chart: Axios Visuals" class="axios-visual-apple-fallback-image" src="https://graphics.axios.com/hermes/2022-06-21-2134-percentage-of-workers/fallbacks/2022-06-21-2134-percentage-of-workers-apple.png" width="1131" height="1377"/></div><figcaption>Data: Morning Consult/Axios Inequality Index; Chart: Axios Visuals</figcaption></figure></div>Job security jitters are on the rise. And why not? Recession chatter is all over the news (guilty ✋).

The Texas bankruptcy of entities linked to conspiracy theorist Alex Jones' Infowars empire could set a new precedent for how companies can — or can't — wield the bankruptcy court against their litigation foes.

Context: It’s not uncommon for companies to file for bankruptcy as a way to consolidate and settle onerous litigation damages (think Purdue Pharma’s opioid liabilities, and the wildfire-related claims against PG&E).

Why it matters: Still, Infowars' April bankruptcy — filed by three corporate entities related to Jones and the publication — seeks to use a new section of the law in a way that could break through previously understood boundaries of what the bankruptcy code is intended to accomplish. 

The litigation that Jones seeks to deal with is particularly timely and controversial. The claims are being brought by Sandy Hook families against Jones for his calling America’s most deadly school shooting a hoax — putting the families on the receiving end of harassment by Jones' followers.

This comes at a time when Texas, where Jones is based and where some of the litigation was filed, is fresh off a mass school shooting within its borders that’s already spawned misinformation about 'false flag' operations.

The impact: The Justice Department is seeking to dismiss the bankruptcy case altogether. In April, its bankruptcy watchdog wrote that "the strategy employed here ... is a novel and dangerous tactic that is abusive and undermines the integrity of the bankruptcy system."

Meanwhile, some of the key creditors are in the the process of removing themselves from the case — more on that below. 

State of play: Jones was found liable in multiple defamation lawsuits brought by the Sandy Hook families against him and his companies. The damages trial was set to go forward when the three small Jones-affiliated companies filed for Chapter 11 bankruptcy, using a relatively new “subchapter” meant to help struggling small businesses reorganize rather than face liquidation.

This is where it gets technical: The so-called 'subchapter V' offers a streamlined process. There are no creditors committees with reams of costly advisors, and — crucially — creditors don’t get to vote to accept or reject the bankruptcy deal. 

The key: In order to be eligible, a company’s debt load can’t exceed $3 million, and it also must be engaged in business activities.

Since the companies that Jones put in bankruptcy hold few assets themselves, the idea was for Jones to funnel them some money, have the bankruptcy court decide damages, force creditors (i.e. the Sandy Hook claimants) to accept them — and viola! He can move on. 

So how’s this different from Purdue, PG&E and the like?

First off, those others didn’t use subchapter V. Jones chose to hive off some smaller entities and file those for bankruptcy, rather than filing personally or putting the main operating company that holds his business in bankruptcy. As such, he utilized the new small-biz subchapter, and the lack of creditor rights that comes with it. 

Purdue and PG&E may have used the bankruptcy process as a way to deal with sprawling litigation claims — but in regular Chapter 11 they ultimately had to come to a deal that claimants would vote to accept.

And critics of Jones' strategy point out another wrinkle: the law requires the companies that file for bankruptcy to be "engaged in business activities" — which the bankrupt Infowars entities arguably are not. 

"I think it's fair to say that the drafters of subchapter V didn't envision this type of filing. Subchapter V is intended to rehabilitate small businesses," Ryan Preston Dahl, a partner in Ropes & Gray's business restructuring group, who's not involved in the case, tells Axios. 

Where it stands: The Sandy Hook plaintiffs, in response, also have a few tricks up their sleeve.  

They're in the process of dismissing the debtors from their lawsuits, with the goal of freeing themselves from the bankruptcy case altogether, so they can continue to seek damages from Jones himself. 

What's next: A Texas bankruptcy judge is set to hear the DoJ's motion to dismiss the bankruptcy case next week. 

Infowars' bankruptcy law shell game

The DoJ’s bankruptcy watchdog called the case “a novel and dangerous tactic” and an abuse of the system.

Illustration of a gavel emerging from a shadow

The Texas bankruptcy of entities linked to conspiracy theorist Alex Jones&#x27; Infowars empire could set a new precedent for how companies can — or can&#x27;t — wield the bankruptcy court against their litigation foes.Context: It’s not uncommon for companies to file for bankruptcy as a way to consolidate and settle onerous litigation damages (think Purdue Pharma’s opioid liabilities, and the wildfire-related claims against PG&amp;E).

Surging borrowing costs are making it tougher for struggling companies to raise new capital — a big shift from the last few years of unusually easy access to markets. It's also changing the deal calculus for private equity funds that buy companies using as much borrowed money as they can. 

Why it matters: These are examples of how rising rates ripple out into the markets and the lending ecosystem. And when the credit spigot slows, the riskiest borrowers are the first to get choked off. 

Driving the news: Revlon filed for bankruptcy this week, finally capitulating after staving it off for years with a string of debt-extension deals. (And who can forget the infamous "fat-finger" incident in which Citigroup accidentally paid off a Revlon loan — at full value — that had been trading at 30 cents on the dollar?)

Revlon has long been a "zombie"-type company, able to operate but not pay off debts or invest in growth. The end of the easy money era may be the catalyst that drives more zombies into bankruptcy court. 

State of play: Last Friday’s inflation report kicked off a re-pricing throughout the credit world, as the benchmark Treasury note hit an 11-year high — and everything else followed suit. 

The average yield on high-yield (aka non-investment grade) bonds has surged by more than three-quarters of a percentage point since then, to 8.25%. With the exception of a brief window at the beginning of the pandemic, that’s the highest it’s been since 2016. 

The riskiest subset of high-yield bonds — those with the lowest “CCC” ratings — shot up by a full percentage point, to 14%.

The impact of this volatility splinters out in a few different ways. For one, it inhibits virtually any company with rock-bottom "CCC" ratings that needs to raise money. 

“The rise in borrowing costs impacts companies that need regular access to capital every couple of years,” says Roberta Goss, senior managing director and head of the bank loan and CLO platform at Pretium.

Yes, but: The good news is that thanks to the flow of cheap money throughout 2021, few high-yield companies face a make-or-break need to raise cash in the next year or two. 

In the private equity world, leveraged buyouts are often backed by high-yield bonds — but some buyouts won't be sound if a chunk of their capital costs 14%. More equity, less debt, is the theme of the moment. 

“If a ‘CCC’ bond is going to be 13% or 14%, that really changes the math for private equity sponsors. It's really hard to make it work,” Christopher Miller, senior analyst and director of capital markets at Neuberger Berman, tells Axios. 

Where it stands: High-yield placements have slowed to a trickle, with the window opening for brief bursts like the first week of June — before that grim CPI report. 

Prior to that, the market was pretty closed for a time: Just $4 billion worth of deals priced in May (compared to an average of $39 billion per month in 2021), according to deal data provider LCD. None of May's deals were "CCC" rated.

What to watch: There may be brief periods where the window is open for lower-rated deals — but until inflation breaks and the Fed can ease back on its tightening campaign, that window will be closed far more often than it's open, says Bill Zox, high-yield portfolio manager at Brandywine Global. 

Fed hikes are bad news for cash-starved companies

Surging borrowing costs will make it tougher for struggling companies to raise new capital.

Bond markets

Surging borrowing costs are making it tougher for struggling companies to raise new capital — a big shift from the last few years of unusually easy access to markets. It&#x27;s also changing the deal calculus for private equity funds that buy companies using as much borrowed money as they can. Why it matters: These are examples of how rising rates ripple out into the markets and the lending ecosystem. And when the credit spigot slows, the riskiest borrowers are the first to get choked off.

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Stories

Meme stock crowd targets bankrupt Revlon

Americans' fears of job loss are growing

Fed hikes are bad news for cash-starved companies

Infowars ends bid to use bankruptcy as shield

Infowars' bankruptcy law shell game

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