GE Shares Sink; Chime Hits Unicorn Status; New Credit Default Swap Rules

by 1 year ago

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THE HEADLINES

 

AAAND IT’S GONE

Welp, that didn’t take long. Less than six months into his tenure as CEO of GE, Larry Culp went all Elon Musk and ran his mouth at JPMorgan’s Aviation, Transportation and Industrials conference. Ok, so in all fairness, Culp didn’t do anything remotely illegal or unethical.

So what beans did Culp spill?

Sandwiched between industry buzzwords, Culp stated that industrial free cash flow “in 2019 will be negative.” No need to crack open “Corporate Finance for Dummies.” As a reminder, free cash flow is the cash left over after operating expenses and capital expenditures.

For context, in 2018 the once proud stalwart of American commerce generated $4.5B in FCF. And Culp didn’t beat around the bush, indicating a rough few years ahead especially in its energy biz, which lost $2.7 billion in free cash flow in 2018.

Don’t call it a comeback

Shares of GE fell almost 5% on the news yesterday. This comes amid a 47% increase in GE’s stock price since a Christmas Eve low.

 

CHIMING IN

Digital bank Chime has passed the $1B valuation mark thanks to a Series D financing round worth $200M. The funding round, led by DST Global, also included cash from Coatue, General Atlantic, Iconiq Capital, and Dragoneer.

Like other online-only banks, Chime is taking on the millennial market and looking for users who are tired of being bent over and shown the fifty-states by traditional brick-and-mortar banks. Users have a no-fee checking account, complete with debit card, and they aren’t fined for banking faux pas like dropping below a minimum balance or over drafting their account.

The app also has a feature that allows users to automatically move 10% of paychecks into a Chime savings account. Homeownership here we come.

Come on in, the water’s fine

Other “challenger banks” like Chime include N26, Revolut, Simple, and Moven. While as of now the market for branchless banking isn’t overcrowded, there are certainly monsters waiting in the shadows in the form of services like PayPal and Amazon. PayPal has already begun offering FDIC insured banking services to select customers, and Big Bad Bezos certainly has the resources to follow suit.

 

MOVING SIZE

Goldman Sachs, JPMorgan Chase, Apollo Global Management, and Ares Capital walk into a bar …

A who’s who of hedge funds and investment banks have agreed to clean up a shady portion of the derivatives market which accounts for some $8T. Meet the Credit Default Swap. The CDS is more or less an insurance policy for a fixed income product, set to pay out if … you guessed it, there is a default.

As it stands, investment firms have been able to make a pretty penny from the swaps by convincing companies to miss bond payments that they probably could have swung. This, understandably, has led to a decrease in market confidence and multiple legal battles.

The shenanigans came to a boiling point last year when GSO Capital Partners convinced Hovnanian Enterprises to miss an interest payment in return for a sweetheart loan. This trade was eventually reversed after hedge fund Solus Alternative Asset Management filed suit. Sore loser.

So what’s next?

The International Swaps and Derivatives Association (ISDA) will propose an official change later this week, ensuring a company’s missed bond payment is tied to their creditworthiness and not just because Chad and Brad greased some palms.

Of course, these new terms are totally voluntary so more villainous institutions (read: most of them) may still engage in the frowned upon activity. It’s worth noting, however, that any firm not on board will likely be blacklisted.


IN OTHER NEWS

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  • Goldman Sachs will begin allowing all of its employees to “dress down,” unless of course, you need to suit up for client meetings. Consider yourself warned, Manhattanites, pretentious dudes with names like Preston that went to Dartmouth will be frequenting NYC watering holes looking like your run of the mill fin-bro.

 

  • Make JUUL great again. Scott Gottlieb, not to be confused with former ESPN analyst, Doug Gottlieb, is stepping down as Commissioner of the FDA after roughly two years on the job. Gottlieb will be remembered for, among other things, waging war against the e-cigarette epidemic among teens.

 

  • Better ingredients, better pizza … better pack your sh*t and get the f*ck out. John “Papa John” Schnatter plans to step down from the board of his namesake company, on one condition: that he is allowed to have input on his replacement. Why do I have a feeling PJ’s recommendation is going to be a guy named “Uncle Ron” who looks a lot like Papa John with a fake mustache?

 

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