Ten of the Worst Bond Bets of the Decade
There were more than a few debt deals that went sideways in 2019, but the past 10 years had some real doozies.
(Bloomberg) -- Some strange bets were made in the world of debt this year.
At the beginning of 2019, investors couldn’t lend Tesla money fast enough despite difficulties delivering the Model 3 to customers. The carmaker may be doing better now, but its prospects for sustained profitability are cloudy at best. Neiman Marcus investors meanwhile gave more time to a department store that, like other retailers, is headed into the teeth of a retail apocalypse. Then there was WeWork, the ultimate unicorn-gone-wrong drama that culminated with SoftBank agreeing to a $5 billion rescue.
But when you look back at the entire decade, the picture is decidedly worse. Do the names MF Global or Noble Group ring a bell? How about Argentina?
More than a few prognosticators are warning that, despite some uplifting news of late, the recession everyone has been predicting may finally arrive in 2020. Traditionally, a downturn is bad news for stocks and good news for debt. But often, that’s when some bad decisions are made. Since the Great Recession, and thanks to surging global debt levels, there have been some real doozies.
So in honor of the decade’s end, we wanted to remind you of some of the more colorful face-plants. From high finance to pet food and even tuna boats, a lot of good money was thrown at some really risky deals.
2011: MF Global Holdings
Less than three years after the implosion of Lehman Brothers Holdings—the biggest bankruptcy in U.S. history—and the subsequent global financial collapse it augured, investors piled into another ambitious trading firm. Thanks to what also became a historic financial collapse, it didn’t go well.
The year was 2011, when MF Global Holdings was led by ex-Goldman Sachs Co-Head (and ex-New Jersey Governor and ex-U.S. Senator) Jon Corzine. The firm sold $650 million worth of bonds that promised to pay extra interest if Corzine departed for a position with the Obama administration (he didn’t). Instead, ill-timed bets on European government bonds led to MF Global’s swift descent into bankruptcy—before the new debt’s first interest payment. As luck would have it, many creditors of its brokerage were eventually made whole. A spokesman for Corzine declined to comment.
2013: Mozambican Tuna Co.
Six years ago, Credit Suisse and VTB Capital Plc lent $850 million to Empresa Mocambicana de Atum SA, also known as Mozambican Tuna Co., to finance a flotilla of tuna boats for one of the world’s poorest nations. The loan was sliced up and sold to bond investors with a government guarantee and an 8.5% yield, despite the fact that the sale document was only a few pages long and the company didn’t meet with lenders beforehand. The deal ended up being part of a $2 billion scandal.
Investors got quite the surprise when they learned that some of the broader funding package paid for anti-piracy boats that could be equipped with cannons. Fitch said at the time that noteholders should have known better when in 2016 they were asked to restructure their notes. Bondholders finally reached an agreement earlier this year to exchange existing debt for new notes maturing as late as 2031.
2013: Banco Popular Espanol SA
The Spanish lender first sold 500 million euros ($554 million) worth of a new kind of bond in 2013. The goal was to shore up its capital requirements following (what many thought was) the end of the European debt crisis. The debt came with an eye-popping 11.5% annual interest rate, since the notes could be canceled even without a default.
By 2017, about 2 billion euros worth of notes were written off entirely after regulators forced a sale of the bank to Banco Santander SA.
2016: Petroleos de Venezuela SA
When the state-owned Venezuelan oil company last sold bonds back in September 2016, seeking to refinance existing debt, investors were paid just 8.5% for the first-lien notes, even though low oil prices were already raising default concerns.
In November 2017, Venezuela President Nicolas Maduro said he was suspending payments and seeking talks with creditors. Today, bondholders are still waiting to get paid on more than $9 billion of defaulted government and Petroleos de Venezuela SA debt as the country remains in turmoil and under sanctions.
2017: Argentina’s century bond
It took about 15 years for Argentina to reach a final settlement following its unprecedented, $95 billion default. But the ink was barely dry when the South American country returned to the capital markets. This time, it wanted to sell $2.75 billion worth of 100-year bonds.
Investors were willing to lend at a 7.917% yield even though Argentina had defaulted three times in just over two decades. Today, the country’s economy is again in crisis and its bonds are trading at deeply distressed levels. Originally sold at 90 cents on the dollar, the century bonds now trade closer to 46 cents. A spokesman for the government didn’t immediately return a request for comment.
2017: PetSmart Inc.
Investors agreed to lend $2 billion to the then-struggling pet store chain PetSmart to finance the purchase of direct-to-consumer brand Chewy.com. Meanwhile, the bonds sold to fund the chain’s original buyout had begun to slide. A year later—in a move that mimicked similar maneuvers by retailers J. Crew Group and Claire’s Stores Inc.—the company transferred one-third of Chewy’s equity to a holding company controlled by BC Partners—and out of the reach of creditors.
Lawsuits ensued, and an initial public offering of Chewy benefited bondholders. Things are looking much better for the company now, but the episode was nevertheless a cautionary tale.
2018: Noble Group Ltd.
Once Asia’s largest commodity trader, Noble has faced allegations since February 2015 of improper accounting. Even as its shares and earnings plunged, investors and banks nevertheless agreed to extend it $3 billion of credit.
The company’s hedge fund creditors took it over in a $3.5 billion debt-for-equity swap, but its accounting practices and management remain under investigation by Singapore authorities. As of November, it was still struggling to shake off billions of dollars in losses and the drawn-out restructuring. With an uncertain future, the company’s bonds are trading at double-digit yields. A request for comment wasn’t immediately returned.
2018: Infrastructure Leasing & Financial Services Ltd.
The Indian infrastructure and shadow banking conglomerate’s debt ballooned 44% between 2015 and 2018, a warning sign that was seemingly overlooked by investors and credit rating agencies. Still, the company maintained high ratings and borrowed repeatedly in the local debt market before its August default on about $12.5 billion of debt, which sparked a stock market sell-off and concern about the stability of the financial system.
By October, ILFS was taken over by the government.
2018: Chuying Agro-Pastoral Group Co.
The small pork producer is emblematic of the ongoing problem among Chinese companies taking on too much debt amid slowing economic growth.
In November 2017, Chuying offered to repay the owners of 500 million yuan ($71.4 million) of local short-term bonds in ham or pork gift packages instead of cash. Two months later, it ran low on pork after swine fever wiped out its stock of pigs. In June, Chuying missed a 798 million yuan bond payment, with 98% of creditors agreeing to rollover the debt. .
2018: Envision Healthcare Corp.
Investors financed a $9.9 billion buyout of Envision Healthcare Corp. by KKR & Co. last year, only to see the value of their holdings plunge amid concerns with the impact of proposed legislation prohibiting providers from sending “surprise’’ balance bills to patients.
Such a move could lead to significant lost revenues for Envision as it faces a high debt load, with bonds sold last year trading with yields of almost 20%. Envision didn’t immediately respond to a request for comment.
To contact the editor responsible for this story: David Rovella at drovella@bloomberg.net, Rick Green
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