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Investors in two subordinated bonds from Lehman Brothers received word that a payment is coming, just two weeks after the 12th anniversary of one of the world’s most spectacular banking collapses, Bloomberg News reported. A proposed “initial interim payment” will go to owners of a 200 million euro ($234 million) note and a $500 million issue, according to a statement from liquidators distributed on Tuesday. The size of this payment will be disclosed in a formal payment notice. The collapse of one of the world’s largest investment banks on Sept. 15, 2008, was the iconic moment of the great financial crisis, prompting fear among policymakers that the global economy would seize up. While the Federal Reserve’s subsequent intervention staved off total disaster, Lehman Brothers has since become a byword for the nadir of the crisis. The noteholders who stand to gain from the new payout hold “enhanced capital advantaged preferred securities,” or ECAPS. The notes, issued backed in 2007 by U.K.-based special purpose entities, were designed to raise regulatory capital and benefited from a guarantee by the parent group. Following Lehman Brothers’ bankruptcy a year later, the price of these high-coupon notes fell to mere cents. Both notes are still indicated at around 3 cents in a thin market, with at least one broker offering a bid at less than a cent, based on data compiled by Bloomberg. The liquidators at RSM Restructuring Advisory LLP held 9.8 million euros, net of costs, in a fund set up for the entity that issued the euro-denominated notes, according to a notice to holders a year ago. It held more than $27 million in the dollar note issuer’s fund. 

U.S. high-yield bond sales reached an annual record of $329.8 billion yesterday as companies reap the benefits of the Federal Reserve’s liquidity-boosting policies and investors grasp for yield, Bloomberg News reported. The crush of debt offerings accelerated in April after the U.S. central bank began purchasing some high-yield bonds as part of its efforts to support the corporate credit markets. Since then, issuance has eclipsed the prior annual sales record of $329.6 billion set in 2012, according to data compiled by Bloomberg. Companies staring at sharp, pandemic-induced revenue declines were emboldened to borrow billions of dollars to help ride out the pandemic. Some of the most virus-battered borrowers, including airlines, hotels and even cruise operators, were able to tap investors for financing, sometimes paying double-digit coupons. “A lot of the issuance was to get as much liquidity as you can, because things were looking like they were going to be stalled out for a while,” said Douglas Lopez, senior partner and portfolio manager at Aristotle Credit Partners. “This was the prudent move, but some companies may be building the liquidity bridge to nowhere.” The junk market’s record year follows the U.S. investment-grade bond market, which reached a new annual issuance high in mid-August. Europe’s high-yield bond sales surged in July, the busiest for that month since 2009. The Fed’s near zero-interest rate policy, now expected to last through 2023, has paved the way for billions of dollars to flow into funds that invest in high-yield debt as investors search for yield. The support has effectively turned high-yield into a borrower’s market, and all-in yields for U.S. junk bonds have dropped to 5.81 percent, near pre-pandemic levels, according to Bloomberg Barclays index data. Since July, some 65 percent of new high-yield bonds have come with sub-6 percent coupons, according to research by Barclays Plc strategists. 

The U.S. Virgin Islands has been locked out of America’s bond market for years as it wrestles with the same economic forces that drove its bigger neighbor, Puerto Rico, into financial ruin, Bloomberg News reported. Now, with a credit rating cut deeply into junk and under pressure to raise cash as a tourism drought stings its economy, the U.S. territory is seeking to sell nearly $1 billion in debt this month by extending an unusual promise to investors: the bonds will be repaid even if it goes bankrupt. The step, pitched to the island by investment bank Ramirez & Co. and a New York advisory firm, is similar to a tactic used by Puerto Rico and Chicago to pledge a big chunk of tax collections directly to public corporations that pay off debt backed by the revenue. That was intended to assure investors that the funds wouldn’t be diverted even if the financial strains worsened, reducing the risk to bondholders and driving down their borrowing costs. In the case of the Virgin Islands, it’s pledging the nearly $250 million a year it receives each year from the U.S. government, the territory’s cut of the excise taxes on rum it ships to the mainland. The bond offering, set to be priced as soon as Thursday, will provide a major test of the $3.9 trillion municipal bond market, where investors have continued to snap up riskier securities as benchmark yields hold near the lowest in decades. That’s allowed some borrowers hard hit by the nation’s economic collapse to easily raise cash. The Virgin Islands’ bonds are using a so-called bankruptcy remote structure. That involves steering the money to a newly created corporation and providing a legal pledge that the cash won’t be siphoned off even if the government is forced to restructure its debts in federal bankruptcy court. Bondholders have reason for skepticism. Lisa Washburn, a managing director for Municipal Market Analytics, said such a structure is not necessarily “bankruptcy proof,” though it would likely give investors a better negotiating position. Even though Puerto Rico’s bonds securitized by its sales taxes weren’t walled off from bankruptcy, owners recouped as much as 93 cents on the dollar, more than other creditors stand to receive.

Joe Femenia, the head of distressed-debt trading at Jefferies Financial Group Inc., set in motion one of the most astonishing falls-from-grace to captivate the world of hedge funds, Bloomberg News reported. The 43-year-old former Navy SEAL is the unidentified executive outlined in court filings last week, whose taped conversation led to the swift downfall of Dan Kamensky’s Marble Ridge Capital. Kamensky allegedly tried pushing Femenia to abstain from submitting a rival bid for part of bankrupt retailer Neiman Marcus. But instead, Femenia raised alarms, providing enough details on the incident to a U.S. trustee to threaten Kamensky’s standing in the industry. By the end of last week, Kamensky had acknowledged he committed a “grave mistake” and his firm told investors it’s shutting down. Kamensky told the U.S. Trustee that his messages were “motivated by panic” that the Jefferies bid would interfere with his own proposal for the shares.

A bankruptcy judge in Texas raised the question of whether the findings of an investigation into Marble Ridge founder Dan Kamensky should be referred to federal prosecutors to determine whether the investment manager committed a crime, Bloomberg Law reported. At the end of a court hearing on Friday, U.S. Bankruptcy Judge David R. Jones asked lawyers for the Office of the U.S. Trustee, an arm of the Department of Justice that deals with bankruptcy matters, whether they had given the results of their probe into Kamensky to federal prosecutors. The Trustee’s office said on Wednesday that the hedge fund manager had improperly tried to stop another bidder from buying some of Neiman Marcus Group Inc.’s best assets in the department store’s bankruptcy case. When told by a lawyer for the Office of the U.S. Trustee that it wasn’t clear whether prosecutors are involved, Judge Jones said that he will set a further court hearing on the matter. Kamensky declined to comment.

In related news, Marble Ridge Capital LP, a hedge-fund firm known for investing in distressed companies, is shutting down after a government inquiry found that founder Dan Kamensky tried to suppress bidding for a piece of bankrupt retailer Neiman Marcus Group Ltd, WSJ Pro Bankruptcy reported. A spokesman for Marble Ridge said on Friday that it is “winding down.” The decision marks a stunning fall for Kamensky, who built a reputation sifting through the subprime mortgage meltdown, founded Marble Ridge in 2015 and grew it to a firm with roughly $1 billion in assets under management. Since 2018, Kamensky has waged a legal campaign against Neiman’s private-equity backers, helping snare a big settlement that became his undoing. On Wednesday, watchdogs from the Justice Department concluded that Kamensky had secretly coerced a major investment bank not to bid for shares in Neiman’s e-commerce business, MyTheresa, that are part of that deal. Read more.

Last October, Catie McKee, a hedge fund analyst, had been scrutinizing the mortgages on the nation’s malls, and was convinced that some of those malls would default on their loans, the New York Times reported. McKee made her case to Carl Icahn, who had made a similar wager and invited her team to discuss the trade. Nothing would bolster her confidence — and the prospects for her trade — more than if the billionaire and onetime corporate raider backed her up. Both agreed that e-commerce, changing consumer habits and evolving demographics had pummeled all malls to some degree in recent years, but some were far worse off than others. So by betting on their demise, both could profit handsomely — which they did. Icahn, whose hostile takeover of TWA in the 1980s established him as a major dealmaker, has made $1.3 billion on the trade since that meeting. And the investors that made the trade within McKee’s firm, MP Securitized Credit Partners, more than doubled their money. Trapped between the growth of online shopping and the popularity of discount chains, many retailers have struggled to find a foothold in the changing firmament. The nation’s roughly 1,000 shopping malls (excluding strip and outlet malls) have borne the brunt of the problems, with hundreds of them fighting low occupancy and the loss of major stores, known as anchors. The coronavirus pandemic, which prompted stay-at-home orders, increased the financial strain on malls by choking off much-needed foot traffic and cash flow. “The pandemic sped up the rate of demise for CMBX 6 malls by being the final straw for a lot of struggling retailers and mall owners,” McKee said, referring to the obscure real estate index that she bet against because of its exposure to troubled malls. The private equity fund Apollo Global Management, which runs an internal hedge fund that focuses on credit investing, made more than $100 million shorting the CMBX 6 and other commercial real estate securities — one of the fund’s most successful trades of the year. Jason Mudrick, whose New York hedge fund, Mudrick Capital, focuses on distressed investments, estimated that he had made the same amount. So did Scott Burg, chief investment officer at Deer Park Road, a fund in Steamboat Springs, Colo. So far this year, 16 percent of all retail industry loans are delinquent, according to statistics tracked by the data firm Trepp. Major retailers, including J.C. Penney, Neiman Marcus and Modell’s Sporting Goods, have filed for bankruptcy, and new tenant demand for mall space has never been weaker, according to an analysis of national malls by the advisory firm Green Street.