Here’s your weekly update with a handful of in-depth articles we think are worth a bit of your time.
The drug company on the frontlines
There haven’t been a lot of stories of foresight and preparedness in this pandemic, but the story of Gilead’s drug remdesivir is one. When cases of pneumonia suddenly started emerging in Wuhan late last year, Gilead knew next to nothing about it, just like the rest of the world. The World Health Organization hadn’t yet confirmed there was sustained human-to-human spread, and the extent of the outbreak in Wuhan wouldn’t become clear for weeks. Nobody knew at that point whether it would become a pandemic, but Gilead started planning on the assumption it could. As the most successful maker of antiviral drugs in history, Gilead fast-tracked remdesivir into mass production in the fight against coronavirus. Here’s why the company was prepared when no one else was.
Is it wrong for a company to sell stock they know is worthless?
The SEC thinks so. On Wednesday, Hertz suspended its plan to sell up to $500 million in stock in a last-ditch effort to raise money after the regulator said it would investigate the bankrupt rental car company’s controversial proposal.
Hertz filed for bankruptcy on May 22, and four days later its stock hit a low of $0.40. The stock price has been volatile since then. On June 8, Hertz’s stock went ballistic, surging over 1,400% to a high of more than $6 at one point. Why? Because to amateur investors with nothing else to do, bankruptcy meant opportunity.
Hertz wanted to use the sale to leverage interest in its stock, which had seen volatile trading in the wake of its bankruptcy filing. The company felt it was a better option than obtaining so-called debtor-in-possession financing. DIP financing is a loan that the company would need to pay back. However, if it were to sell stock, the funds it raises would not need to be reimbursed.
As all this was going on Hertz was still bankrupt, meaning it didn’t have enough assets to satisfy its debt obligations. And with almost $19 billion in debt, a turnaround would be unlikely. In its now-suspended plan to sell stock, Hertz wrote, “we expect that common stock holders would not receive a recovery through any plan unless the holders of more senior claims and interests…are paid in full.”
So even if Hertz emerged from bankruptcy, the common stock it planned to issue would almost certainly end up worthless. It was an incredibly creative plan, Hertz knew that the stock was worthless and the shareholders would lose their investment. But it decided to sell the stock nevertheless. That is, until the SEC decided to investigate.
To amateur investors, bankruptcies are the new safe havens!
In a market as bizarre as this, it seems only fitting that the next step would be a growing affinity for companies that can’t pay their debts. As small day traders salivate at any opportunity to get rich quick, a bankruptcy filing has apparently become a buy signal for many of them.
Car renter Hertz, oil driller Whiting Petroleum, and retailer J.C. Penney are among companies that have seen their shares more than double in recent trading sessions. These three companies have one thing in common, they’ve filed for bankruptcy protection. Chapter 11 bankruptcy is a process that allows companies to keep operating while working out a plan to repay creditors. It’s the same for Chesapeake Energy as it prepares a potential filing.
Normally such information isn’t available in real-time. But according to Robintrack, which uses Robinhood’s data to show trends in positioning, individual investors on the app have been flocking to bankruptcy-protected companies. Of course, some of these spikes may also be due to short covering.
The Federal Reserve’s quantitative easing measures are also to blame for this. Interest rates are hovering around 0% and they won’t be increasing them any time soon. The Federal Reserve has also announced unlimited quantitative easing, which comes with unlimited risk. Bankruptcies are only a small part of the story, the Federal Reserve may have broken the market’s pricing mechanism with its quantitative easing measures.