This week's interesting finds

Etienne, partner since 2012 (Shediac, New Brunswick – “Lobster Capital of the World”)   

This week in charts 

Asset classes 

Shareholder returns  

KKR’s Latest Bankruptcy Deal Is a Bad Omen for Lenders 

The bankruptcy of GenesisCare, a cancer treatment specialist backed by private equity powerhouse KKR & Co. and China Resources Pharmaceutical Group Ltd., is the latest cautionary tale of how much value is being destroyed when companies go bust now. 

In previous default cycles, leveraged-loan providers would expect to get 70% to 80% of their cash back from failing companies. Those days are over. Some GenesisCare investors are bracing for a mid-teen percentage, according to people familiar with the matter who aren’t authorized to speak publicly — a new blow to a lending market headed for record low recoveries. 

It’s yet another financial weak spot exposed by the end of the easy-money era, as tighter credit pushes overindebted businesses toward the brink. While some investment banks hope for a softer economic landing than feared, the crash in leveraged-loan recoveries is ominous for lenders. 

Like last year’s blowup of KKR-backed Envision Healthcare, the GenesisCare situation shows how companies are taking advantage of the looser loan protections that lenders swallowed as they hunted for yield in a low interest-rate world. GenesisCare has snagged a so-called “debtor in possession” financing, including a $200 million pledge to let it keep operating, that disadvantaged existing loan-holders, the people familiar say. 

GenesisCare joins an expanding list of restructuring deals that have scarred US lenders lately. A first-lien loan to Envision is expected to recover close to zero, according to an August report from Bank of America strategists. Media firm Diamond Sports and air-miles specialist Loyalty Ventures have implied recovery rates running at about 10%, the report says, while tech company Avaya Inc. and energy firm Heritage Power are around 30%. 

The strategists estimate recoveries from bankrupt companies are running at 25% on average this year — based on loan prices 30 days after a default — and they predict 50% in the long term. 

The outlook for lender rights isn’t bright either. In June a Texas judge upheld a 2020 emergency refinancing by Serta Simmons Bedding, which handed the mattress maker $200 million of new cash to stay afloat but pushed some lenders including Apollo back in the repayment line. 

Many lenders have started to include “Serta blockers” in their loan documents by hardening up the legal wording, according to a recent report from Moody’s Investors Services. But about half the leveraged loans it examined still didn’t include protective language. 

One glimmer of hope is the brightening economic outlook and the knowledge that market prices for loans don’t reflect precisely how much lenders will ultimately claw back. The sample size is relatively small still. 

Nevertheless, even the most upbeat estimates see recoveries way below previous cycles. Leveraged loans involve a balancing of two risks: the likelihood of a borrower going under, and how much money you get back when they do. Even if default rates are better than feared, the result will be ugly for lenders if recoveries crater.   

This week’s fun finds 

No rest for the wicked 

The leaves are still on the trees, but the fall season’s already started. It was a matchup against last season’s semifinal opponent, but unfortunately the result was again a loss. The squad loves a challenge and looks to start a new regular-season winning streak next week. 

Bonus points to anyone who can spot the team’s new mascot, Louis!   

Bringing a taste of Montréal to the Toronto office 

Four members of EdgePoint’s Québec team brought us the freshest possible Montréal-style smoked meat for their moai (our version of bringing EdgePointers together for a meal) by ordering from Scarborough deli SumiLicious. (The head chef worked at Montréal’s Schwartz’s for almost 20 years!)

Merci to Sylvie, Sabrina, Marc-Antoine and Catherine!   

The Republic of Cows 

A remote island in the Gulf of Alaska, Chirikof is about the size of two Manhattans. It lies roughly 130 kilometers southwest of Kodiak Island, where I am waiting in the largest town, technically a city, named Kodiak. The city is a hub for fishing and hunting, and for tourists who’ve come to see one of the world’s largest land carnivores, the omnivorous brown bears that roam the archipelago. Chirikof has no bears or people, though; it has cattle. 

At last count, over 2,000 cows and bulls roam Chirikof, one of many islands within a US wildlife refuge. Depending on whom you ask, the cattle are everything from unwelcome invasive megafauna to rightful heirs of a place this domesticated species has inhabited for 200 years, perhaps more. Whether they stay or go probably comes down to human emotions, not evidence. 

Russians brought cattle to Chirikof and other islands in the Kodiak Archipelago to establish an agricultural colony, leaving cows and bulls behind when they sold Alaska to the United States in 1867. But the progenitor of cattle ranching in the archipelago is Jack McCord, an Iowa farm boy and consummate salesman who struck gold in Alaska and landed on Kodiak in the 1920s. He heard about feral cattle grazing Chirikof and other islands, and sensed an opportunity. But once he’d bought the Chirikof herd from a company that held rights to it, he got wind that the federal government was going to declare the cattle wild and assume control of them. McCord went into overdrive. 

By 1980, the government had created the Alaska Maritime National Wildlife Refuge (Alaska Maritime for short), a federally protected area roughly the size of New Jersey, and charged the US Fish and Wildlife Service (USFWS) with managing it. This meant preserving the natural habitat and dealing with the introduced and invasive species. Foxes? Practically annihilated. Bunnies? Gone. But when it came to cattle? 

Alaskans became emotional. “Let’s leave one island in Alaska for the cattle,” Governor Frank Murkowski said in 2003. Thirteen years later, at the behest of his daughter, Alaska’s senior senator, Lisa Murkowski, the US Congress directed the USFWS to leave the cattle alone.

This week's interesting finds

Syd, partner since 2017 (Toronto, Ontario)   

This week in charts 

Imports and exports 

Return on capital by region

Private mortgage lender Romspen cuts monthly distribution for fourth time, cites ‘disappointing’ loan repayments 

On Tuesday, Romspen informed investors in its flagship Mortgage Investment Fund that their monthly distribution was cut to two cents a unit, down two-thirds from July, 2022. 

As a private mortgage lender, Romspen raises cash from individual investors, then lends the money out to real estate companies, often in the form of short-term construction loans. The company has $2.7-billion in assets under management and has delivered an average annual yield of 7.3 per cent in its Mortgage Investment Fund over the past 10 years. 

Because of its high payout, Romspen’s assets swelled over the past two decades as investors searched for yield when benchmark interest rates were close to zero. Yet the real estate industry is now adjusting to central banks’ aggressive rate hike campaigns, and the development sector that Romspen specializes in is one of the most hobbled. 

With troubles mounting, Romspen froze redemptions from its fund in November, an act known as “gating” in the investment industry, to conserve cash. But it wasn’t enough, and multiple distribution cuts have also been necessary. The fund now yields 2.5 per cent annually, roughly half of what investors can earn from ultrasafe guaranteed investment certificates. 

Romspen also told investors in a quarterly report earlier this month that 2023 is proving to be “one of the most challenging for the fund since the mid-90s.” 

Romspen’s portfolio is largely comprised of construction and predevelopment loans across the United States and Canada. Because the borrowers are often higher-risk development companies, Romspen occasionally has to take control of some properties when their associated loans aren’t repaid. 

In a normal market, Romspen would sell the properties to recoup the cash it is owed, but commercial real estate transactions have slowed considerably. “The challenge these days is not so much signing a purchase agreement, but finding the funds to close,” Romspen explained in its quarterly commentary. 

Even when buyers emerge, banks are much less likely to extend the financing to complete the purchase. “We have already seen two anticipated unconditional sale transactions fall through this year, each with seven figure deposits forfeited,” Romspen explained. 

To this end, Romspen has been locked in a court battle with its largest borrower this year after multiple loan defaults allegedly totalling $333-million. To recoup the money, Romspen asked the Ontario Superior Court to appoint a receiver to take control of three properties that underpin the distressed loans, and then sell them. The three affected properties are located in Toronto: Woodbine Mall and Rexdale Mall, in the city’s northwest corner, and 1500 Birchmount Rd., in the city’s northeast corner.

This week’s fun finds 

EdgePoint Football Club finishes its first season 

While the season ended with a loss in penalties during the consolation final, the team met its pre-season goal of making the playoffs. The squad is looking forward to recovering from injuries and building on their experience during the fall season starting next week!   

EdgePoint – even faster and more furious 

Several partners made their way to Bowmanville to live their racing dreams on the asphalt. In the final race of the day, Ruairi edged out Teddy and Norm for the gold. 

  

Why Everyone's Worried About Their Attention Span—and How to Improve Yours 

Most people without chronic attention issues could likely focus fairly well if given a task in a quiet, empty room—but they'd probably perform worse if they did the same task in a room where people are talking and music is playing. In modern life, [professor of psychiatry and behavioral sciences Margaret] Sibley says, we’re essentially living in a room filled with distractions all the time, thanks to the competing demands of work and home life, societal stressors like the pandemic, and the constant temptation of phones, social media, and the internet. 

Human brains want novelty, excitement, and social connection, and devices play into those desires. Checking a notification flashing across your screen can provide a small hit of dopamine, creating a sense of reward that keeps you coming back for more. 

Despite the draw of technology, Barbara Shinn-Cunningham, director of the Neuroscience Institute at Carnegie Mellon University, says she’s not convinced we’re losing the ability to focus. Instead, she says, we’re using devices in exactly the way tech companies want us to: constantly. “I’m not sure that it’s changing how our brains operate,” Shinn-Cunningham says, "but [rather] leveraging how our brains operate to keep us engaged with our electronics." 

In [co-director of the Center for Attention, Learning, and Memory at St. Bonaventure University Adam] Brown’s opinion, there’s one adjustment that’s more important than any other: “Remove the device. In times of needed focus, take that device and put it someplace else,” he says. Turning your phone facedown isn’t always enough; research suggests that simply having a phone within eyesight can make it harder to focus, and the buzz of a single notification can ruin concentration. 

When you have a big task at hand, putting your phone in another room is the best option, Brown says. But it’s also important to learn how to be around screens without letting them derail your concentration, a process that he says largely comes down to muscle memory. Just as you get used to constantly checking your phone, you can build a habit of not looking at it all the time, Brown says. “When your phone goes off, you want to go look at it,” he says. “But over the course of weeks and months, if you deliberately ignore it…you will get better at focus.” 

It’s also important to assess your priorities and focus your energy there, rather than trying to split your limited time and attention in a million directions, Sibley says. That might mean dropping non-crucial commitments in pursuit of being fully present for the ones that really matter to you, she says.

This week's interesting finds

Greg, partner since 2017 (Toronto, Ontario)  

This week in charts

Industrial robots installed: China vs Rest of the World

Trends in payrolls by high, medium, and low-median wage industries

How China cornered the market for clean tech 

Late last year in Beijing, officials from several of China’s technology, trade and defence agencies were called to a series of secret meetings with a single purpose: to respond to America’s sweeping restrictions on selling computer chips to Chinese companies. 

In July, Beijing announced its response: it imposed restrictions on the exports of gallium and germanium, metals used in the production of a number of strategically important products, including electric vehicles, microchips and some military weapons systems.

Matthew Funaiole, a China expert with the Center for Strategic and International Studies, a US think-tank, says the move was a “shot across the bow” which caught some in Washington off guard.

“Outside of technical circles and the defence industry, it [gallium] is not a critical mineral that people were aware of,” he says.

The episode has highlighted an inconvenient truth for the west: China is by far the lowest-cost and biggest supplier of many of the key building blocks for clean technologies. The two metals are among a series of products vital to the energy transition in which China dominates. 

China is responsible for the production of about 90 per cent of the world’s rare earth elements, at least 80 per cent of all the stages of making solar panels and 60 per cent of wind turbines and electric-car batteries. In some of the materials used in batteries and more niche products, China’s market share is close to 100 per cent. 

China’s cornering of the clean tech supply chain has drawn comparisons to the high level of influence that Saudi Arabia enjoys in the oil market. Just as petrochemical production provides an immovable strategic buffer for the Gulf state, China’s dominance over these clean energy sectors is adding to growing geopolitical competition and has the potential to complicate the world’s fight against global warming. 

Western governments are now desperately attempting to catch up with China’s ascendance to the top of the world’s critical minerals and renewable energy industrial supply chains. US president Joe Biden and his counterparts in Europe have started deploying hundreds of billions of dollars in taxpayer-funded subsidies. 

Analysts, however, diverge on how long it will take the west to extricate itself from Chinese control of large swaths of the clean tech supply chain — or if this can be achieved at all.
 

This week’s fun finds 

Semifinals! 

After an exciting inaugural season, EdgePoint Football Club qualified for the playoffs. The excitement was evident with most of the roster showing up for a holiday Monday match. After taking a 2-0 lead into half, the opposing squad tied it up in regulation to force penalty kicks. In the end it was a 3-4 loss, but it left the team with a lot to build on for the future. 

   

Starting off the long weekend right 

Oyster afficionado Jeff shucked a lot of bivalves in the kitchen to get everyone ready for the Civic Holiday! 

Meanwhile, Adam and Claire also added some spicy margaritas to the mix.

Forget 10,000 steps – walking just 5,000 is enough to lower your risk of death, says science 

Published in the European Journal of Preventive Cardiology, the paper brought together data from 17 existing studies involving 226,889 people. 

It’s the first to assess the impacts of walking up to 20,000 steps a day, as well as whether the risk of dying differs depending on age, sex, or where in the world people live. 

The answer? The study found that the more you walk, the better – regardless of your age, sex, or the climatic conditions of your region. 

In fact, the scientists found that every additional 1,000 steps a day you do on top of the minimum reduces your risk of death by 15 per cent. 

These benefits keep increasing with no upper limit, according to the scientists. The data reveals that for those walking fanatics who stride as many as 20,000 times a day, the benefits only continue to build. Insufficient physical activity is the fourth biggest risk factor for death across the world, according to World Health Organization – being associated with 3.2 million deaths a year.

This week's interesting finds

Vanita, partner since 2023 (Toronto, Ontario)   

This week in charts 

Retail sales  

Large-cap stocks 

Canadian mortgages   

This week’s fun finds 

EdgePoint Football Club closes out the regular season undefeated 

The squad showed that their chemistry extended outside of the office as they seamlessly integrated two first timers onto the pitch for an 8-2 win. With a 5-0-2 record, they enter the playoffs hungry for more.

Take them out to the ballgame 

With the Blue Jays currently holding the last American League Wildcard spot, EdgePointers cheered on the hometown team against the league-leading Baltimore Orioles to a 4-1 win. Looks like the event was a hit! 

Drake’s Korean moai 

Drake called in a few favours at home and his mom made an amazing Korean meal for his moai (our version of bringing EdgePointers together for a meal). Several partners stated it was the “best they ever had”.   

An ultra-processed diet made this doctor sick. Now he's studying why

Amid the global boom in diet-related diseases, including obesity and Type 2 diabetes, Dr. Chris van Tulleken, the author of Ultra-Processed People, made himself a test subject for a brief, one-month experiment. 

Van Tulleken, an infectious disease physician in his mid-40s, swapped his normal, healthy diet full of fruits, vegetables, lean proteins and whole grains for foods that mostly came from packages, boxes and bottles. 

We spoke to van Tulleken about his book and his research. 

“Overall, about 80% of my calories came from ultra-processed foods, and that's very easy to do. Most bread in the supermarket is ultra-processed, almost all of our breakfast cereals and snack foods are ultra-processed, and most of our convenience foods are ultra-processed too.” 

“I became very unwell very quickly. I felt terrible. I stopped sleeping, I developed anxiety and became very unhappy. I was the pilot patient in a study I'm running with colleagues at University College London. We found there were effects on my gut hormones. So inside all of our bodies we've got hormones that tell us when to stop eating. They're very well evolved. All animals have them and ultra-processed food interferes with those hormones. So at the end of a meal, my hunger hormones would still be sky high.” 

“There is a very reputable scientist, Kevin Hall, in the United States. He ran a clinical trial and found that when people eat an ultra-processed food diet, they eat about 500 calories more per day, compared to people on a whole food diet, eating the same amounts of fat, salt, sugar and fiber. And there's a lot of epidemiological evidence that shows it is the ultra-processed food that interferes with our body's ability to say, "you know what, I can stop eating now." 

“There isn't an absolutely clear boundary between traditional food processing and ultra-processed foods. We chop, cook, smoke, pickle, salt, grind, pulverize — we've been doing all that for millennia and we have to do it. So processing is fine. But ultra-processing is where food is made in factories. It's wrapped in plastic. It has strange additives in it that you don't find in kitchens. And the purpose of the food is profit. So, I eat cheese, but I don't eat processed cheese. I eat butter, but I don't eat margarine. I eat traditional flour bread, but I don't eat emulsified, supermarket bread.”