Luke, partner since 2022 (Calgary, Alberta)
This week in charts
Fixed income
Housing
Investors spend $200mn on ‘worthless’ Bed Bath & Beyond shares
Investors have spent almost $200mn trading theoretically worthless shares in Bed Bath & Beyond since the homewares retailer went bankrupt at the start of May, in the latest manifestation of the meme stock craze.
Bed Bath & Beyond was one of a handful of unloved consumer brands that became popular with retail investors during the coronavirus pandemic, with small investors arranging on social media to push share prices far above what most professionals considered rational.
Many of the companies used the enthusiasm as an opportunity to prop up their ailing businesses by issuing new shares, but Bed Bath & Beyond eventually filed for Chapter 11 bankruptcy protection earlier this year and was delisted.
Nevertheless, an average of 18mn of the company’s shares have changed hands each day on over-the-counter markets since then, according to Bloomberg data. Users of the Reddit website have been sharing highly speculative theories about possible turnround plans for the retailer.
When a company declares bankruptcy, it is delisted from the major exchanges and its stock trades on the pink sheets for a fraction of its original value. “These stocks will lurk around until the bankruptcy estate is settled, which can take months or years,” said Steve Sosnick, chief strategist at Interactive Brokers.
Whether shareholders receive anything at the end of bankruptcy proceedings depends on whether bondholders, who get paid before equity holders, can recover their money.
However, the bonds of Bed Bath & Beyond are trading at less than 2 cents on the dollar. “The bond market is telling you the stock is worthless,” Sosnick added.
Subprime Auto Bondholders Face Possible First Hit in Decades
Bonds backed by car loans made by U.S. Auto Sales and American Car Center, two used-car dealers that shut their doors earlier this year, have been veering into distress in recent weeks. Borrowers have been falling behind on payments, and Citigroup believes that some of the riskiest parts of three different asset-backed deals could fail to return principal to investors.
Any lost principal would be a rare event in the ABS market, where subprime auto bonds haven’t failed to return investors’ money since the 1990s, Citigroup said. Prices on a bond issued by U.S. Auto Sales, owned by private equity firm Milestone Partners, have dropped to distressed levels, trading at a little over 18 cents on the dollar on June 26, according to Trace data.
The disruption is a major test for the subprime auto ABS market, where issuance grew by more than 70% to $40.5 billion in the five years through 2021, according to data compiled by Bloomberg News.
The deterioration of the bonds issued by ACC and U.S. Auto Sales comes months after both companies announced they were closing their dealerships. Both firms transferred the collection of payments on their loans, known as servicing, to Westlake Portfolio Management after going bust. A spokesperson for Westlake declined to comment.
“The bonds are deteriorating in part” because it takes a few months to transfer the servicing of the loans “and meanwhile consumers may cease making payments,” Eugene Belostotsky, a securitized products strategist at Citi, said in an interview. “The lenders went under because borrowers were not paying back the debt, now that’s just accelerating.”’
One of the reasons auto ABS losses are almost unheard of is the use of investor protections known as overcollateralization. That means the amount of loans backing the bonds exceeds the size of the principal on the bonds, allowing at least some borrowers to default without any losses for bondholders.
But for the two subprime issuers that ran into difficulties this year, those protections have waned dramatically on some securities. The overcollateralization for the 2022 U.S. Auto bond has fallen to just 5.5%, compared with a target of 35%, according to a Citigroup report dated June 30.
This week’s fun finds
Meghan brings Detroit to the office
Meghan’s moai (our version of bringing EdgePointers together for a meal) was Detroit-style pizza. Now that’s deep and delicious!
EdgePoint Football Club “ties” another one on
After leading for most of the game, the opposing team scored a late goal to tie the match 3-3. With a record of 2-0-2, the team’s still on track to make the playoffs.
An otter in Santa Cruz is hassling surfers — and stealing their boards
An aggressive sea otter in California is hassling locals by riding boards she stole from surfers in the lineup.
Steamer Lane is a legendary point break nestled along the rocky shores of Santa Cruz, home to swaths of experienced surfers, as well as a 5-year-old female sea otter with a growing reputation for repeatedly confronting surfers and kayakers.
A team from the California Department of Fish and Wildlife (CDFW) and the Monterey Bay Aquarium is looking for the otter to catch and rehome her. Unfortunately, once the otter is caught, Monterey Bay Aquarium spokesperson Kevin Connor told NPR, she won't be able to return to the wild.
The animal, officially known as otter 841, was born in captivity — because its mother had also been too friendly with humans — and then successfully released into the wild in June 2020, Connor told NPR. It wasn't until September 2022 that she started exhibiting her bizarre behavior at Steamer Lane.
The mathematically correct way to tie your shoes
If you’re wearing shoes right now, this is something you can tell simply by looking at them. Look at the bow in your shoes and notice how it sits.
- Does the knot sit “squared up” above your shoelaces, do the loops want to orient themselves horizontally across your laces, and if you try to move them to an angle in either direction, do they revert to that horizontal position?
- Or does the knot twist at an angle above your laces, do the loops want to twist to the side at a severe angle rather than sit horizontally across your laces, and if you try to move them to an angle to the horizontal, are they happy to remain there?
If you’re in the first camp, you’ve likely tied a good (reef) knot that will remain tied all day long. If you’re in the second camp, you’ve likely tied a bad (granny) knot that will come undone at some point throughout the day. Some people, in an attempt to mitigate a bad knot, have adopted the tactic of simply “double-knotting” their shoelaces, but even that is often insufficient to keep them from coming undone throughout the day. (This also applies to any bow tie-wearers out there. If your bow tie wants to twist at an angle, you’re probably granny-knotting it without even thinking about it!)
With three either/or decisions to affect the configuration of your knot, these eight total possibilities can lead to either a reef knot (which is good) or a granny knot (which is bad), all dependent on which combination you choose.
