In China, a Dot-Com Déjà-Vu

If it seems similar to the dot com boom then it probably is. However remember this: Everyone overestimates what will happen in 2 years and underestimates what will happen in 10 years.....Aivars Lode

We’ve seen it before: the crazy spending, the stratospheric valuations. Twenty years later, it looks like the dot-com boom all over again, but this time the players are much bigger—and Chinese.

A Beijing-based startup that lets consumers order coffee via smartphones raced into so-called unicorn territory—a $1 billion valuation—in seven months from launch. The value of another firm, billed as an “Uber for trucks,” has soared to 300 times 2017 revenue; Uber Technologies Inc. itself is worth only about 10 times revenue.

But where some investors see dynamic exuberance, others see a market increasingly threatened by a confluence of forces including onerous domestic regulations and global trade tensions. The biggest risk? Another dot-com reckoning, the Chinese version of a cycle that erased billions of dollars of value from America’s tech sector in the 2000s and chilled tech investment for years.

Alibaba and the Future of Business

This is what happens when you don't have legacy systems.... Aivars Lode


Alibaba hit the headlines with the world’s biggest IPO in September 2014. Today, the company has a market cap among the global top 10, has surpassed Walmart in global sales, and has expanded into all the major markets in the world. Founder Jack Ma has become a household name.

From its inception, in 1999, Alibaba experienced great growth on its e-commerce platform. However, it still didn’t look like a world-beater in 2007 when the management team, which I had joined full-time the year before, met for a strategy off-site at a drab seaside hotel in Ningbo, Zhejiang province. Over the course of the meeting, our disjointed observations and ideas about e-commerce trends began to coalesce into a larger view of the future, and by the end, we had agreed on a vision. We would “foster the development of an open, coordinated, prosperous e-commerce ecosystem.” That’s when Alibaba’s journey really began.

View from the Lake: Is the United States a “AAA” Credit?

The slowly deteriorating credit standing of the US seems to prove the old judgment that Americans will always do the right thing after exhausting all of the other possibilities. Is the USA a AAA hashtag#credit? Aivars Lode

A perspective by R. Christopher Whalen, September 3, 2018

Grand Lake Stream | The discussions this weekend at Leen’s Lodge in Maine were wide ranging and, as always, of great interest. Will Argentina’s economy implode? (A: Sadly yes).  Argentina is trading at a discount to Uruguay. Will the commercial real estate market in the UK likewise collapse as the train wreck called Brexit unfolds?  (A: In progress).  When will the yield curve invert? (A: Soon).

One of the most interesting points of debate was the impact of the 2001 decision by the US Treasury to focus debt issuance on the front of the yield curve in order to minimize the debt service cost to the United States.  Along the way, the question arose: Is the United States really a “AAA” credit?

Readers of The Institutional Risk Analyst know that we have recently been focused on how Fed policy has manipulated the pricing of the yield curve as well as private credit spreads.  But so too has the Treasury’s decision almost two decades ago to limit issuance of 30-year debt affected the cost of credit and, at the present time, is exacerbating the flattening of the yield curve.  On October 31, 2001, following the 9/11 attacks, Treasury Undersecretary for Domestic Finance Peter Fisher famously made the following statement:

“We do not need the 30-year bond to meet the government's current financing needs, nor those that we expect to face in coming years. Looking beyond the next few years, as I already observed, we believe that the likely outcome is that the federal government's fiscal position will improve after the temporary setback that we are now experiencing.”

But of course the Treasury’s fiscal situation did not improve. Since 9/11, continued profligacy in Washington has caused the federal debt to explode.  As the surge of tax receipts generated by the aging of the baby boom have ebbed, the indebtedness of the United States has soared and with it the portion of US debt that is issued in short-term maturities.  The 2017 tax legislation has only accelerated an already negative fiscal trend. 

The Pension Hole for U.S. Cities and States Is the Size of Germany’s Economy

Whilst most people miss these headlines there are a lot of them around the world. Will the need for these funds liquidity force the next financial crisis? Aivars Lode

Many retirement funds could face insolvency unless governments increase taxes, divert funds or persuade workers to relinquish money they are owed

For the past century, a public pension was an ironclad promise. Whatever else happened, retired policemen and firefighters and teachers would be paid.

That is no longer the case.

Many cities and states can no longer afford the unsustainable retirement promises made to millions of public workers over many years. By one estimate they are short $4 trillion, an amount that is roughly equal to the output of the world’s fourth-largest economy.

Certain pension funds face the prospect of insolvency unless governments increase taxes, divert funds or persuade workers to relinquish money they are owed. It is increasingly likely that retirees, as well as new workers, will be forced to take deeper benefit cuts.

An Uncertain Future: New Entrants In The Food Delivery Space Decline As Existing Startups Struggle

Food delivery failure reminds us of the Dot Com era.....
Aivars Lode

Munchery's recapitalization and plummeting valuation highlight challenges in food delivery, with fewer fundings, increased M&A activity, and some companies shutting down.

Food delivery startups originally became popular among VC investors in the early 2010s, with many large players such as Blue Apron ($2B valuation) quickly reaching high valuations, thus encouraging more new competitors to enter the market. However, as competition has increased and startups have struggled to find a financially viable business model, the challenges of food delivery have become more apparent to investors and activity in the space has begun to cool.

Most recently, Munchery made headlines for a recapitalization financing worth $5.6M led by Menlo Ventures and Sherpa Capital. The recapitalization was seen as a last resort by the company to attract investors after a turbulent year in which the company burned through much of its cash and laid off employees. The new financing has lowered Munchery’s valuation to $80M from $300M.

In a climate in which an increasing number of food delivery startups have been acquired or died, we took a look at how the once-overcrowded food delivery market has changed over the past few years.

We used CB Insights data to create a timeline of first fundings to US food delivery startups between 2011 and 2017 YTD (4/3/2017). For our graphic, we only featured food delivery startups that have raised at least $5M in total funding. We also chose to highlight any subsequent mergers, acquisitions, or deaths among companies that fit the aforementioned criteria.

We define food delivery as companies facilitating the delivery of food to users’ doors, including restaurant delivery, grocery delivery startups like Instacart, farm-to-table services like Door-to-Door Organics, meal delivery startups like Delivery Hero or Sprig, and meal kit services like Blue Apron.

Notes: Graphic only includes US companies that raised their first equity funding round after 1/1/2011, and that raised over $5M in total.

Key insights from the infographic above:

• Initial success: Notable food delivery startups like Blue Apron ($2B valuation), DoorDash ($659M), and Postmates ($609M) quickly reached large valuations after their initial financings between 2011-2013, encouraging more new competitors to enter the market.
• A slowdown in new entrants: The heaviest flurry of first fundings took place in 2012 and 2013, and again in 2014 through the first half of 2015, periods in which notable companies like Instacart, Blue Apron, and EatWith Media first attracted investor attention. However, 2016 and 2017 have only seen a combined 7 new entrants, compared to 8 in 2014, and 12 in 2013.

Published on LinkedIn by Natan Ready - CB Insights

Avaya: How an $8 Billion Tech Buyout Went Wrong

As we have previously discussed ...we will see a lot more of these....

Aivars Lode

Telephony company bought by TPG and Silver Lake in 2007 is weighing chapter 11 bankruptcy filing

At a 2007 meeting to discuss a potential buyout of Avaya Inc., some employees of private-equity firm TPG expressed concerns that the company was at risk of becoming technologically outmoded, a “buggy-whip business,” as one put it.

To them, Avaya’s business of installing and managing corporate phone systems appeared vulnerable to the same forces that were making landlines scarce in households across the U.S., according to people familiar with the meeting.

But their concerns, not unusual in deal deliberations, didn’t prevent TPG from partnering with Silver Lake on a roughly $8 billion deal to take Avaya private. The firms were betting that Avaya’s sales of corporate telecommunications gear would chug along while they cut costs and teed up a profitable exit.

Instead, the ensuing financial crisis decimated corporate spending. And when companies started buying again, Avaya faced stiff competition from rivals Cisco Systems Inc., Microsoft Corp. and, later, from Internet-based phone services.

As sales fell, Avaya began to buckle under the weight of a multibillion-dollar debt load the buyout firms layered on and pension obligations largely dating back to the company’s time as a unit of AT&T.

Now Silver Lake and TPG stand to lose most of the more than $2 billion they invested in the buyout and two related acquisitions. Avaya is weighing a chapter 11 bankruptcy filing to slash its $6 billion debt load.

Read full article - click here

By Matt Jarzemsky and Marie Beaudette 

Refinancing woes short-circuit Aspect Software

Golden Gate Capital's equity bites the dust....Aivars Lode

Golden Gate Capital-backed Aspect Software Inc. has sought bankruptcy protection, just months after a ratings agency warned that the company would have a difficult time refinancing $1 billion in debt.

The Phoenix provider of contact center software solutions and services submitted its petition in the U.S. Bankruptcy court for the District of Delaware in Wilmington on Wednesday, March 9, along with four related entities. The companies requested joint administration of their cases with parent Aspect Software Parent Inc. serving as the lead case.

Judge Mary F. Walrath has yet to set a first-day hearing in the case.

In a Wednesday declaration, Stewart M. Bloom, chairman and CEO of ASP, said it had reached a deal on a restructuring transaction that would cut $320 million in second-lien debt. Additionally, the deal would give holders of $60 million of first-lien claims 100% of the reorganized debtor’s equity.

Funds managed by GSO Capital Partners LP, MidOcean Credit Fund Management LP and Guggenheim Partners Investment Management LLC have agreed to backstop a rights offering that would lead to the $60 million in first-lien debt, the proceeds of which would be used in the paydown of the second-lien debt.

Lenders on the company’s $585 million first-lien term loan, owed $446.4 million as of Sept. 30, would receive a restated $386 million senior secured first-lien term loan, court papers show.

Second-lien noteholders, owed $275 million on 10.625% second-lien notes due May 15, 2017, would have the right to participate in a $60 million new money investment for new PIK securities that would convert into 25% of the reorganized debtor’s equity in certain circumstances, subject to dilution. (The second-lien debt was issued on April 4, 2011.)

General unsecured creditors would be paid in full in cash, the declaration said.

Equity holders would be wiped out. Golden Gate announced the $1 billion acquisition of Aspect on July 6, 2005, but the San Francisco private equity firm won’t get completely wiped out because it does have some unsecured claims.

According to the declaration, holders of 33.3% of first-lien revolver claims, 94% of first-lien term loan claims and 42% of second-lien note claims have agreed to the deal, which would serve as the basis for a restructuring support agreement.

Aspect intends to complete its restructuring within 105 days.

In its petition, Aspect indicated that certain lenders had agreed to provide the company with debtor-in-possession financing, though it did not provide additional details about the financing. Prepetition lender Wilmington Trust NA would serve as administrative agent for the DIP. (Aspect spokesman Tim Dreyer declined to provide more details on the financing.)

Bloom said that Aspect has “left no stone unturned and no path unfollowed” in a year’s worth of pursuing strategic alternatives for the company. The software company has pursued “every realistic in-court and out-of-court restructuring solution” it could, including considering a sale, a debt-for-equity swap, a standalone reorganization, and a reorganization backed by third-party investors.

Ultimately, Aspect opted to pursue its current strategy because it provided the quickest exit from Chapter 11, maximized the value of the debtor’s estate and gave the company the flexibility to pursue alternative proposals from other interested parties.

“The term sheet and the PSA elegantly achieve these goals and leaves open the possibility of consummating a higher or better alternative, to the extent one emerges during the course of these Chapter 11 cases,” Bloom said in the declaration.

The Deal reported on Dec. 7 that Aspect may have a hard time refinancing its large debt load.

Moody’s Investors Service Inc. on Dec. 7 downgraded the company’s corporate family rating to Caa2 from B3, the first-lien debt to B3 from B1 and the second-lien notes to Caa3 from Caa2. The ratings agency said the outlook is negative.

In the report, Moody’s said the downgrade was driven by challenges the company faces in offsetting declines in its legacy product lines, high debt levels and upcoming debt maturities.

Aspect’s legacy products include its Signature call center infrastructure software, which helps a company run call centers, direct calls and control how the calls are distributed at the call center.

In the report, the ratings agency said Aspect is a longstanding leader in the contact center industry but noted: “The business is evolving, and it is unclear if the landscape will favor Aspect’s full-suite hardware and software competitors. Aspect remains particularly exposed to being displaced from its legacy installed base as customers consider contact center purchases as part of enterprise wide unified communications build-outs rather than standalone decisions – a shift that benefits some of Aspect’s key competitors.”

At the time, the company had fully drawn down on its $30 million first-lien revolver and had $446.4 million outstanding on its first-lien term loan as of Sept. 30. The revolver and term loan, led by administrative agent Wilmington Trust, are priced at Libor plus 525 basis points, with a 1.75% floor on Libor.

The revolver matures on March 8, 2016, and the term loan comes due on May 7, 2016. The first-lien debt was issued on May 7, 2010.

Aspect had $936.59 million in assets and roughly $1 billion in liabilities as of Sept. 30.

In its petition, the company said its largest unsecured creditors include U.S. Bank NA (owed $320 million), Golden Gate ($4.83 million), Microsoft Corp. (MSFT) ($1.53 million), Ernst & Young LLP ($1.16 million) and United States Advanced Network Inc. ($824,654).

William A. Guerrieri, James H.M. Sprayregen, Joshua A. Sussberg and Aparna Yenamandra at Kirkland & Ellis LLP and Morton Branzburg, Domenic E. Pacitti and Michael W. Yurkewicz at Klehr Harrison Harvey Branzburg LLP are debtor counsel. Sprayregen, Sussberg, Pacitti and Branzburg couldn’t immediately be reached for comment Wednesday.

By Kelsey Butler - The Deal