Executive Summary

• Treasury Markets: Treasury yields declined materially across the bull steepened curve following dovish signaling from Chair Powell at Wednesday’s FOMC press conference and the slew of bearish economic data released Thursday and Friday.听Between Wednesday and Friday, the market priced in nearly two additional rate cuts for 2024, now totaling 4.6 cuts by year-end following the sharper-than-expected contraction in the ISM Manufacturing PMI (46.8 reading against consensus at 48.8); a notable miss in July’s payrolls (+114k job adds against consensus at +175k), which was exacerbated by 29k of downward revisions; and uptick in the unemployment rate to 4.3%, the highest since October 2021 (4.5%). The unexpected softening in the previously rock solid labor market dashed hopes of a soft landing and pushed recession concerns back to the forefront, which resulted in the largest day-over-day move in the 2Y (-27 bp) and 10Y (-19 bp) yields year-to-date. The 2Y ended the week 50 bp lower to 3.88% as the 10Y declined 40 bp to 3.79%, both falling to recent lows last seen in May ’23 and July ’23, respectively. This further eased the curve inversion by 10 bp to just 9 bp inverted, the least inverted since July 2022.
• Credit Markets: Credit underperformed across-the-board amidst last week’s flight to quality, with IG widening 11 bp to 106 bp and HY gapping 62 bp wider to 372 bp, driving excess return losses of 0.87% and 1.74%, respectively.听Investors reached up the rating spectrum across both indices, resulting in outperformance among AAAs and AAs, which both widened 8 bp relative to single-As (10 bp) and BBBs (13 bp), and BBs and single-Bs, which widened a comparative 58 bp and 64 bp, respectively, relative to CCCs (81 bp). In IG, the material downshift in UST yields outweighed the relatively smaller spread widening to pull corporate yields 32 bp lower to 4.96%, the lowest since early February 2023, producing a whopping +2.07% weekly total return. HY yields rose 15 bp to 7.74% as the decline in rates only partially offset the outsized HY spread widening, resulting in a slight 0.12% total return loss for the week.
• Municipal Markets: The Muni Index earned 1.07% last week, the best one-week performance since December 2023, and the Broad Taxable Muni Index earned an eye-popping 2.92%.听This week’s new issue calendar totals $17.3 bn, which would be a 2 1/2 year high and more than double the 52-week average. Notable deals expected to price include a big state GO, two airports, a bunch of college bonds and the 3rd biggest AMT deal of the year.
• Equity Markets: Equity markets started the week off positively with all three major indices and the Russell 2000 rebounding on Wednesday following the dovish FOMC meeting before weaker-than-expected economic data sparked a broad selloff that pushed all four indices firmly into the red for the week.听The Russell 2000 reported a steep 6.7% decline, followed by the Nasdaq (-3.3%), which fell to 10% below the all-time high posted a month ago. The DJIA (-2.1%) and S&P 500 (-2.0%) fared better in comparison, just 4% and 6% below record highs set last month. Volatility spiked to an intraday peak of 29.66, last seen amidst the regional banking crisis in mid-March 2023, before settling at 23.39, 42.7% higher on the week.
• Commodity Markets: Despite market volatility, metal prices experienced a mixed week, with base metals declining, while gold, steel, and bulk commodities saw slight increases.听Crude prices declined to near the lows of 2024 on concerns over demand from the U.S. and China. WTI and Brent closed the week down 5% to $73.52/bbl and 5% to $76.81/bbl, respectively.
• Fund Flows: Net flows into fixed income ETFs fell 35% from the week before to $5.6 bn, just 4% less than the 13-week average of $5.8 bn.听IG corporate bond ETF flows totaled -$150 mn but 37 IG ETFs had positive net flows that totaled $1.53 bn while 9 ETFs lost a total of $1.55 bn (mostly from LQD). HY ETFs added $120 mn; on Friday, ETF turnover totaled 153% of the amount of HY bonds traded. Muni ETF flows hit a 39-week high of $1.3 bn. This week we have included our table of monthly fixed income mutual fund and ETF flows and the July market snapshot of the bellwether fixed income ETFs.

Relative Value

WW International听(aka Weight Watchers) debt fell yesterday leading into today鈥檚 Q2 2024 earnings report and again this morning, after the weight management company posted the听weaker-than-expected results, cut FY 2024 guidance and announced an operational restructuring plan.

The weight management company’s revenue shrank 10.9% year over year听to $202.1mn for Q2 2024, below the FactSet consensus of $208.5mn. Net income for the period, meanwhile, plunged 54%听to $23.3mn, versus $50.8m YoY.

While Sequence subscribers jumped 119.8% YoY in the second quarter, overall subscribers declined 6.1% YoY with subscription revenues slipping 5.4% to $200mn.

On the heels of the report, WW鈥檚 $500mn 4.5% secured notes due 2029 fell around three points, trading at 27 today, down from 30.2 yesterday. The bonds dropped 10 points yesterday from 40 on July 31, according to trade data.

Common shares were 16% lower today, trading at $0.90, for a $75.3mn market cap, down 89.5% YTD.

Its original $945mn听(S+CSA+350) term loan due April 2028 is quoted 37.1-39.3, versus 44.7-46.9 at the start of June and 70.3-72.3 at the beginning of the year, according to Markit.

Legal counsel Gibson Dunn organized a听听earlier this year in anticipation that capital structure talks may be on the horizon. In turn, LME-savvy advisors such as PJT have been pressing management to retain outside help and negotiate with creditors on a series of transactions听aimed at boosting liquidity and alleviating cash flow pressures, 补蝉听LFI听.

The company鈥檚 various headwinds include a lull in demand for core business offerings. Meanwhile, WW faces听听across the weight-loss drug market that threatens to cap the upside of Sequence,听the听recently acquired upstart telehealth firm central to turnaround plans. Ongoing shortages and persistent high demand also threaten to limit growth of GLP-1 products,听LFI听sister publication听BMI听听in a report.

Sequence competitor Hims & Hers Health announced on May 20 that by teaming up with generic drug makers, it will start selling compounded, non-FDA approved versions of popular GLP-1 products priced听听, including Wegovy and Zepbound. 鈥淲ith WW firmly declaring it has no intention to offer compounded versions of GLP-1s, it faces risk in the near to intermediate term of market share erosion for its Clinical business,鈥� wrote听糖心视频听Senior Analyst, Special Situations, Jory Eisenberg in a report titled听.

Amid higher competition, WW lowered its FY 2024 revenue outlook to $770mn from a prior range of $830mn-$860mn. The company also announced a cost-cutting plan aimed at reducing its headcount to save $100mn.

鈥淲e are refining our operational framework against our product roadmap, concentrating on high impact initiatives to enhance efficiency, accountability and speed. These actions are part of a comprehensive cost reduction plan, targeting $100mn in annualized savings, including $20mn of savings currently reflected in our 2024 guidance,鈥� said CFO Heather Stark in a company press release.

糖心视频听analysts noted that the WW 鈥渞emains vulnerable to a near-to-medium term liquidity crunch which could ultimately be addressed by taking certain liability management approaches, to the detriment of existing credit investors.鈥�

As of June 29, liquidity stood at roughly $104mn, consisting of $42.7mn of cash and $61.2mn of covenant-capped availability on a $175mn undrawn revolver due 2026. That compares to $91.4mn in cash and $61.2mn in borrowing capacity under its revolver a year prior.

Related documents:

Red Lobster听gained conditional approval from the Middle District of Florida Bankruptcy for its disclosure statement this morning, subject to changes, after a ruling that the opt-out provision was invalid. Prior to the hearing, the debtor announced that it has canceled its auction for the business and designated the听听as the successful bid.

Judge Robson heard arguments from both the US Trustee and King & Spalding on whether the debtor鈥檚 opt-out procedures to the third-party release provision were allowable in the jurisdiction. The 鈥渞eal issue for me is the opt-out provision鈥� according to Judge Robson, as there are some cases in the district that can go 鈥渆ither way.鈥� Specifically, the issue for Judge Robson was case law that could direct her听, as she believes the highest court left open what the definition of a “consensual relief” is.

Judge Robson ruled that the third-party provision, not the exculpation provision, was invalid as written, and the debtor agreed to changes. Judge Robson ruled that there was a lack of consideration for the broadly written opt-out provision as written due to the open-ended nature of unsecured creditor recovery. The provision will be a more narrowly tailored definition of liability under New York law.

The disclosure statement outlines a proposed chapter 11 plan that offers a dual-track sale through either a 363 sale or equity sale. Both options involve the transfer of either the company’s purchased assets or reorganized debtor equity. The final decision will be dictated by the specifics of the sale transaction documents and the orders of the court.

RL Purchaser LLC, an entity formed by the debtor鈥檚 prepetition term loan lenders, is the stalking horse bidder,鈥痺ith a bid comprising 100% of the DIP term loan. The DIP facility includes $100mn in new-money term loans and a $175mn roll-up of prepetition term loans. Notably, the鈥�痑llocates $2.5mn for general unsecured creditors from the proposed credit bid and sale of the company.

Press release:听CHARLOTTE, N.C.–()–Belk, Inc. (鈥淏elk鈥� or the 鈥淐ompany鈥�), a privately-owned department store with nearly 300 stores across the Southeastern United States, today announced that it has completed a value-maximizing deleveraging transaction (the 鈥淭ransaction鈥�) with the Company鈥檚 first and second lien lenders and equity sponsor, Sycamore Partners (鈥淪ycamore鈥�). Through the Transaction, Belk has reduced its outstanding debt by more than $950 million, amended its existing asset-based credit facility to extend the maturity date to July 2029, and secured approximately $485 million in new capital, including (i) $275 million of secured term loans and (ii) a $210 million securitization facility secured by revenue streams from the Company鈥檚 loyalty credit card program.

The Transaction is the result of Sycamore鈥檚 efforts with Belk鈥檚 lenders to significantly deleverage the Company鈥檚 capital structure, preserve thousands of jobs, and provide the business with additional liquidity to expand national vendor partnerships. This strategic step strengthens the Company鈥檚 financial position and further enhances its ability to deliver for its customers and partners.

鈥淭oday鈥檚 announcement marks a pivotal milestone for Belk as we move into the future with a capital structure that positions our business for sustainable, long-term growth and profitability,鈥� said Don Hendricks, Belk鈥檚 Chief Executive Officer. 鈥淲e are confident that our stronger balance sheet will enable us to build on the momentum and growth we鈥檝e seen in recent quarters, better serve our customers and their communities and be an even stronger partner to our vendors.鈥�

Through this transaction, certain of Belk鈥檚 existing lenders, including funds associated with KKR and Hein Park, will have a controlling interest in the business, as the Company continues to execute its strategic plan and drive growth.

Advisors

Kirkland & Ellis LLP served as legal advisor, Lazard Fr猫res & Co. LLC served as investment banker, KKR Capital Markets LLC served as the structuring agent and sole arranger on the card program securitization, and C Street Advisory Group served as strategic communications advisor to Belk.

Paul, Weiss, Rifkind, Wharton & Garrison LLP served as legal advisor, and Evercore served as investment banker to an ad hoc group of first lien term loan lenders.

Chicken Soup for the Soul听(CSSE) converted its chapter 11 case to a chapter 7 liquidation after the company听announced to the Delaware Bankruptcy Court yesterday that it failed to reach听a consensus with prepetition lenders due to the lack of a viable budget to fund its path through bankruptcy. Michael Cooley of Reed Smith for the debtor stated to presiding Judge Thomas Horan at a status conference yesterday that 鈥渢his is heartbreaking because we think there is value but the lenders are not willing to take the risk associated with a [chapter 11 bankruptcy].鈥�

Richard Pachulski, special counsel for CSSE鈥檚 management, stated that the reality is that there is not enough income to cover payroll and ongoing employee health insurance despite听the $8mn interim DIP facility. Even after securing the $8mn in financing, CSSE is $1.5mn short in funding health benefits.

The debtor filed for chapter 11 on June 28 with an original鈥�$20mn DIP commitment鈥痜rom prepetition lender Owlpoint. However, the debtor鈥檚 first-day hearing on July 1 was adjourned, as court filings revealed that the debtor was behind 10 days on payroll. Prepetition creditor HPS stepped in and agreed to provide $8mn in initial DIP financing to allow the debtor to fund payroll and restore health benefits, with an increase to the facility available in the future.

Despite the attempts to secure additional financing for the debtor鈥檚 bankruptcy operations, CSSE and its creditors stated to the court yesterday that it failed to produce a viable 13-week DIP budget that would see the case through emergence.