Mr. Solomon received $25 million in total compensation last year, down from $35 million in 2021. His 2022 pay package consisted of a $2 million base salary, a cash bonus of $6.9 million and a $16.1 million stock award that is tied to how well the bank performs in the next few years, Goldman said in a regulatory filing.
Mr. Solomon’s 2022 compensation reflects the bank’s performance compared with 2021, Goldman said in the filing. Profit fell 48% last year, and revenue declined 20%, largely due to a slowdown in corporate deal-making that had previously fueled blockbuster earnings. Still, Goldman shares outperformed the KBW Nasdaq Bank Index and the broader S&P 500 last year.
In 2021, the bank’s shares were soaring and the bank was minting money in a merger boom that kept its high-price bankers busy.
Goldman doubled Mr. Solomon’s pay that year, an acknowledgment of the bank’s record profits and following a year when he was penalized for the firm’s involvement in the 1MDB corruption scandal. The bank also awarded Mr. Solomon a one-time stock award of about $30 million that year, citing “the rapidly increasing war for talent in the current environment.”
Late last year, Mr. Solomon engineered a restructuring of Goldman’s businesses meant to spotlight steadier businesses like asset and wealth management, taking some of the focus off its more volatile Wall Street operations.
He’s also paring back the bank’s consumer-facing Marcus operations and has admitted that Goldman’s attempts to do too much there contributed to missteps. The bank’s newly created Platform Solutions division, which houses credit cards and other pieces of the consumer business, lost about $2 billion on a pretax basis in 2022.
Mr. Solomon has moved to cut costs at Goldman. The bank laid off some 3,000 employees this month and slashed bonuses for many bankers by up to 40%.
Goldman’s compensation committee also considered the bank’s “continued progress in its strategic evolution as well as Mr. Solomon’s strong individual performance and effective leadership,” according to the filing.
Mr. Solomon’s pay fell more than his Wall Street counterparts.
Morgan Stanley
paid Chief Executive James Gorman $31.5 million for his work in 2022, a 10% pay cut from the year before.
JPMorgan Chase
& Co. awarded CEO Jamie Dimon $34.5 million in 2022 compensation, in line with a year earlier.
Wells Fargo
& Co. CEO Charles Scharf’s 2022 pay also stayed flat at $24.5 million in 2022.
Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com
& Co. reached a $3.7 billion deal with regulators to resolve allegations that it harmed more than 16 million people with deposit accounts, auto loans and mortgages.
The settlement with the Consumer Financial Protection Bureau includes a $1.7 billion penalty, the agency’s largest-ever fine, and more than $2 billion in consumer restitution, the regulatory agency said Tuesday.
The consumer watchdog agency said the bank illegally assessed fees and interest charges on loans for cars and homes. Some consumers had their vehicles illegally repossessed while others had overdraft fees unlawfully applied, the agency said.
Wells Fargo’s regulatory troubles continue to ripple through the bank more than six years after its fake account scandal burst into public view. Other problems later surfaced across the San Francisco-based bank, including in its lending and deposit-taking businesses.
The CFPB settlement resolves a major penalty hanging over Wells Fargo but leaves it handcuffed by other regulators. The Federal Reserve has had a cap on the bank’s asset growth in place for nearly five years. Politicians continue to target the bank, and investors have filed a series of class-action lawsuits.
“Wells Fargo is a corporate recidivist,” said CFPB Director
Rohit Chopra,
on a call with reporters Tuesday. He said the settlement “should not be read as a sign that Wells Fargo has moved past its longstanding problems.”
The bank had been negotiating with the CFPB for months in an effort to lump as many outstanding issues into the settlement as possible, according to people familiar with the matter.
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Much of the $2 billion remediation included in the settlement has already been doled out to customers. The bank, for example, has paid $1.3 billion to 11 million customers who had auto-loan servicing issues, the CFPB said.
Wells Fargo has been working for years to resolve a series of regulatory matters stemming from a fake-accounts scandal in 2016. Afterward, other problems surfaced across the bank, including in its mortgage and auto-lending businesses.
The CFPB said the bank’s actions span over a decade. Wells Fargo incorrectly applied auto-loan payments because of technology and compliance failures from 2011 through 2022, the agency said. Errors in its home loan modification process went on from 2011 to 2018, the agency said.
The bank sometimes charged overdraft fees even when a customer had enough funds available to make a debit-card transaction or ATM withdrawal, CFPB said. Wells Fargo is required to refund customers about $205 million in fees since the beginning of last year that weren’t yet reversed. CFPB will oversee that process.
Mr. Chopra, an appointee of President Biden, has said he plans to target repeat offenders. “Corporate recidivism has become normalized and calculated as the cost of doing business,” he said in a speech earlier this year. He has also sought to make his agency more adversarial toward financial firms.
The CFPB said Wells Fargo has accelerated efforts to clean up its act since 2020. Tied to the settlement, the agency will terminate one of the consent orders it had placed on the bank in 2016 and clarify that a 2018 consent order will terminate in no more than three years.
Wells Fargo, led by CEO Charlie Scharf, had signaled for months that it expected another large regulatory penalty.
Photo:
Drew Angerer/Getty Images
“This far-reaching agreement is an important milestone in our work to transform the operating practices at Wells Fargo and to put these issues behind us,” Chief Executive
Charlie Scharf
said in a statement.
Mr. Scharf was brought in to clean up the bank in 2019. He has overhauled the top executive ranks, cut its workforce and gave priority to remaking the bank’s back-end systems for managing internal controls and risk.
The bank had signaled for months that it expected another big regulatory penalty, and it took a $2 billion charge in the third quarter tied to resolving long-running legal and regulatory issues. The bank said Tuesday that it expects an operating losses expense of $3.5 billion in the current quarter.
Income-seeking investors are looking at an opportunity to scoop up shares of real estate investment trusts. Stocks in that asset class have become more attractive as prices have fallen and cash flow is improving.
Below is a broad screen of REITs that have high dividend yields and are also expected to generate enough excess cash in 2023 to enable increases in dividend payouts.
REIT prices may turn a corner in 2023
REITs distribute most of their income to shareholders to maintain their tax-advantaged status. But the group is cyclical, with pressure on share prices when interest rates rise, as they have this year at an unprecedented scale. A slowing growth rate for the group may have also placed a drag on the stocks.
And now, with talk that the Federal Reserve may begin to temper its cycle of interest-rate increases, we may be nearing the time when REIT prices rise in anticipation of an eventual decline in interest rates. The market always looks ahead, which means long-term investors who have been waiting on the sidelines to buy higher-yielding income-oriented investments may have to make a move soon.
During an interview on Nov 28, James Bullard, president of the Federal Reserve Bank of St. Louis and a member of the Federal Open Market Committee, discussed the central bank’s cycle of interest-rate increases meant to reduce inflation.
When asked about the potential timing of the Fed’s “terminal rate” (the peak federal funds rate for this cycle), Bullard said: “Generally speaking, I have advocated that sooner is better, that you do want to get to the right level of the policy rate for the current data and the current situation.”
Fed’s Bullard says in MarketWatch interview that markets are underpricing the chance of still-higher rates
In August we published this guide to investing in REITs for income. Since the data for that article was pulled on Aug. 24, the S&P 500
SPX,
-0.50%
has declined 4% (despite a 10% rally from its 2022 closing low on Oct. 12), but the benchmark index’s real estate sector has declined 13%.
REITs can be placed broadly into two categories. Mortgage REITs lend money to commercial or residential borrowers and/or invest in mortgage-backed securities, while equity REITs own property and lease it out.
The pressure on share prices can be greater for mortgage REITs, because the mortgage-lending business slows as interest rates rise. In this article we are focusing on equity REITs.
Industry numbers
The National Association of Real Estate Investment Trusts (Nareit) reported that third-quarter funds from operations (FFO) for U.S.-listed equity REITs were up 14% from a year earlier. To put that number in context, the year-over-year growth rate of quarterly FFO has been slowing — it was 35% a year ago. And the third-quarter FFO increase compares to a 23% increase in earnings per share for the S&P 500 from a year earlier, according to FactSet.
The NAREIT report breaks out numbers for 12 categories of equity REITs, and there is great variance in the growth numbers, as you can see here.
FFO is a non-GAAP measure that is commonly used to gauge REITs’ capacity for paying dividends. It adds amortization and depreciation (noncash items) back to earnings, while excluding gains on the sale of property. Adjusted funds from operations (AFFO) goes further, netting out expected capital expenditures to maintain the quality of property investments.
The slowing FFO growth numbers point to the importance of looking at REITs individually, to see if expected cash flow is sufficient to cover dividend payments.
Screen of high-yielding equity REITs
For 2022 through Nov. 28, the S&P 500 has declined 17%, while the real estate sector has fallen 27%, excluding dividends.
Over the very long term, through interest-rate cycles and the liquidity-driven bull market that ended this year, equity REITs have fared well, with an average annual return of 9.3% for 20 years, compared to an average return of 9.6% for the S&P 500, both with dividends reinvested, according to FactSet.
This performance might surprise some investors, when considering the REITs’ income focus and the S&P 500’s heavy weighting for rapidly growing technology companies.
For a broad screen of equity REITs, we began with the Russell 3000 Index
RUA,
-0.18%,
which represents 98% of U.S. companies by market capitalization.
We then narrowed the list to 119 equity REITs that are followed by at least five analysts covered by FactSet for which AFFO estimates are available.
If we divide the expected 2023 AFFO by the current share price, we have an estimated AFFO yield, which can be compared with the current dividend yield to see if there is expected “headroom” for dividend increases.
For example, if we look at Vornado Realty Trust
VNO,
+1.01%,
the current dividend yield is 8.56%. Based on the consensus 2023 AFFO estimate among analysts polled by FactSet, the expected AFFO yield is only 7.25%. This doesn’t mean that Vornado will cut its dividend and it doesn’t even mean the company won’t raise its payout next year. But it might make it less likely to do so.
Among the 119 equity REITs, 104 have expected 2023 AFFO headroom of at least 1.00%.
Here are the 20 equity REITs from our screen with the highest current dividend yields that have at least 1% expected AFFO headroom:
Company
Ticker
Dividend yield
Estimated 2023 AFFO yield
Estimated “headroom”
Market cap. ($mil)
Main concentration
Brandywine Realty Trust
BDN,
+1.82%
11.52%
12.82%
1.30%
$1,132
Offices
Sabra Health Care REIT Inc.
SBRA,
+2.02%
9.70%
12.04%
2.34%
$2,857
Health care
Medical Properties Trust Inc.
MPW,
+1.90%
9.18%
11.46%
2.29%
$7,559
Health care
SL Green Realty Corp.
SLG,
+2.18%
9.16%
10.43%
1.28%
$2,619
Offices
Hudson Pacific Properties Inc.
HPP,
+1.55%
9.12%
12.69%
3.57%
$1,546
Offices
Omega Healthcare Investors Inc.
OHI,
+1.30%
9.05%
10.13%
1.08%
$6,936
Health care
Global Medical REIT Inc.
GMRE,
+2.03%
8.75%
10.59%
1.84%
$629
Health care
Uniti Group Inc.
UNIT,
+0.28%
8.30%
25.00%
16.70%
$1,715
Communications infrastructure
EPR Properties
EPR,
+0.62%
8.19%
12.24%
4.05%
$3,023
Leisure properties
CTO Realty Growth Inc.
CTO,
+1.58%
7.51%
9.34%
1.83%
$381
Retail
Highwoods Properties Inc.
HIW,
+0.76%
6.95%
8.82%
1.86%
$3,025
Offices
National Health Investors Inc.
NHI,
+1.90%
6.75%
8.32%
1.57%
$2,313
Senior housing
Douglas Emmett Inc.
DEI,
+0.33%
6.74%
10.30%
3.55%
$2,920
Offices
Outfront Media Inc.
OUT,
+0.70%
6.68%
11.74%
5.06%
$2,950
Billboards
Spirit Realty Capital Inc.
SRC,
+0.72%
6.62%
9.07%
2.45%
$5,595
Retail
Broadstone Net Lease Inc.
BNL,
-0.93%
6.61%
8.70%
2.08%
$2,879
Industial
Armada Hoffler Properties Inc.
AHH,
-0.08%
6.38%
7.78%
1.41%
$807
Offices
Innovative Industrial Properties Inc.
IIPR,
+1.09%
6.24%
7.53%
1.29%
$3,226
Health care
Simon Property Group Inc.
SPG,
+0.95%
6.22%
9.55%
3.33%
$37,847
Retail
LTC Properties Inc.
LTC,
+1.09%
5.99%
7.60%
1.60%
$1,541
Senior housing
Source: FactSet
Click on the tickers for more about each company. You should read Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.
The list includes each REIT’s main property investment type. However, many REITs are highly diversified. The simplified categories on the table may not cover all of their investment properties.
Knowing what a REIT invests in is part of the research you should do on your own before buying any individual stock. For arbitrary examples, some investors may wish to steer clear of exposure to certain areas of retail or hotels, or they may favor health-care properties.
Largest REITs
Several of the REITs that passed the screen have relatively small market capitalizations. You might be curious to see how the most widely held REITs fared in the screen. So here’s another list of the 20 largest U.S. REITs among the 119 that passed the first cut, sorted by market cap as of Nov. 28:
Company
Ticker
Dividend yield
Estimated 2023 AFFO yield
Estimated “headroom”
Market cap. ($mil)
Main concentration
Prologis Inc.
PLD,
+1.29%
2.84%
4.36%
1.52%
$102,886
Warehouses and logistics
American Tower Corp.
AMT,
+0.68%
2.66%
4.82%
2.16%
$99,593
Communications infrastructure
Equinix Inc.
EQIX,
+0.62%
1.87%
4.79%
2.91%
$61,317
Data centers
Crown Castle Inc.
CCI,
+1.03%
4.55%
5.42%
0.86%
$59,553
Wireless Infrastructure
Public Storage
PSA,
+0.11%
2.77%
5.35%
2.57%
$50,680
Self-storage
Realty Income Corp.
O,
+0.26%
4.82%
6.46%
1.64%
$38,720
Retail
Simon Property Group Inc.
SPG,
+0.95%
6.22%
9.55%
3.33%
$37,847
Retail
VICI Properties Inc.
VICI,
+0.41%
4.69%
6.21%
1.52%
$32,013
Leisure properties
SBA Communications Corp. Class A
SBAC,
+0.59%
0.97%
4.33%
3.36%
$31,662
Communications infrastructure
Welltower Inc.
WELL,
+2.37%
3.66%
4.76%
1.10%
$31,489
Health care
Digital Realty Trust Inc.
DLR,
+0.69%
4.54%
6.18%
1.64%
$30,903
Data centers
Alexandria Real Estate Equities Inc.
ARE,
+1.38%
3.17%
4.87%
1.70%
$24,451
Offices
AvalonBay Communities Inc.
AVB,
+0.89%
3.78%
5.69%
1.90%
$23,513
Multifamily residential
Equity Residential
EQR,
+1.10%
4.02%
5.36%
1.34%
$23,503
Multifamily residential
Extra Space Storage Inc.
EXR,
+0.29%
3.93%
5.83%
1.90%
$20,430
Self-storage
Invitation Homes Inc.
INVH,
+1.58%
2.84%
5.12%
2.28%
$18,948
Single-family residental
Mid-America Apartment Communities Inc.
MAA,
+1.46%
3.16%
5.18%
2.02%
$18,260
Multifamily residential
Ventas Inc.
VTR,
+1.63%
4.07%
5.95%
1.88%
$17,660
Senior housing
Sun Communities Inc.
SUI,
+2.09%
2.51%
4.81%
2.30%
$17,346
Multifamily residential
Source: FactSet
Simon Property Group Inc.
SPG,
+0.95%
is the only REIT to make both lists.
Group AG warned it would lose around $1.6 billion in the fourth quarter after customers pulled their investments and deposits over concerns about the bank’s financial health.
The warning of a big pretax loss pushed Credit Suisse’s shares to a new closing low, below a previous nadir hit in late September as concerns swirled about the bank’s financial health.
Switzerland’s No. 2 bank by assets said outflows were around 6% of its total $1.47 trillion assets, or around $88.3 billion, between Sept. 30 and Nov. 11. Customers in its wealth-management arm—its main business serving the world’s rich—removed $66.7 billion from the bank. Credit Suisse in late October said that a social-media frenzy around its finances was causing large outflows. The bank typically attracts at least $30 billion in net new assets in a year and hasn’t posted an annual net outflow since 2008, according to its filings.
Analysts at JPMorgan said the outflows and the anticipated loss were much worse than they expected. The bank “is not out of the woods yet in terms of stabilizing the franchise,” they said.
The fast pace of withdrawals meant the bank’s liquidity fell below some local-level requirements, the bank said. It said it maintained its required group-level liquidity and funding ratios at all times. Banks must keep enough liquid assets on hand to meet expected cash outflows in a 30-day period, under post-financial-crisis-era rules.
Credit Suisse’s stock fell 6.1% Wednesday to end at 3.62 Swiss francs, a record closing low. The shares are down 59% this year, according to FactSet.
The cost to insure the bank’s debt against default rose Wednesday.
The warning comes at a precarious time for the bank, which weeks ago launched a sweeping overhaul of its operations. Credit Suisse received shareholder approval Wednesday on a plan to raise more than $4 billion in new stock. It is in the process of selling a large group within its investment bank to free up capital, as part of its recovery effort.
The new stock is being sold to new and existing investors, with terms due to be finalized Thursday. Saudi National Bank said it would take a stake of up to 9.9% as a new shareholder. Some analysts are concerned the new capital raising may not be enough if Credit Suisse’s revamp doesn’t go to plan. The bank’s capital needs depend on selling and exiting some businesses, and on how its continuing businesses perform.
Chairman
Axel Lehmann
said shareholders showed their confidence in the bank by approving the stock increase.
The reduction of customer assets means Credit Suisse has less money to manage and earns less in fees. A broader slowdown in activity in its wealth-management division and investment bank contributed to the warning of a pretax loss of around $1.6 billion for the quarter, it said.
In all, more than $100 billion has left the bank since June, according to Credit Suisse’s filings. It said client balances have stabilized in its Swiss bank and that the outflows have slowed in wealth management, but haven’t reversed.
Wealth management, the business of managing rich people’s money, is Credit Suisse’s largest and most important business. The bank’s overhaul is meant to reduce its reliance on risky Wall Street trades and double down on the steady fee-collecting business of working with the world’s ultra wealthy.
Large outflows indicate that some of those well-heeled clients have grown wary of Credit Suisse’s troubles despite its more than 160-year history. The bank was hit hard when a client, family office Archegos Capital Management, defaulted in March 2021, triggering a loss of more than $5 billion.
Uncertain markets have meant clients aren’t transacting as much across wealth managers. However, crosstown rival UBS Group AG reported around $35 billion in net new fee generating assets from wealth- and asset-management clients in the third quarter.
Concerns about the bank reached a fever pitch in October when commentators on social-media platforms Twitter and Reddit called into question the bank’s health.
Credit Suisse warned last month it would make a net loss in the fourth quarter, in part because of costs from the overhaul. It posted consecutive quarterly losses this year after starting to restructure its operations late last year. In last year’s fourth quarter, it lost around $2.2 billion.
The bank said it is still targeting a capital ratio of at least 13% between 2023 and 2025 as it restructures.
Write to Margot Patrick at margot.patrick@wsj.com
Corrections & Amplifications Credit Suisse reported about a $2.2 billion net loss in the fourth quarter of 2021. An earlier version of this article incorrectly said it lost around $1.7 billion in the quarter. (Corrected on Nov. 23)
takeover of Twitter Inc. plan to hold all $13 billion of debt backing the deal rather than syndicate it out, according to people familiar with the matter, in another blow to a market that serves as a crucial source of corporate funding.
Twitter could have the dubious distinction of being the biggest so-called hung deal of all time, surpassing a crop of them in the global financial crisis, when banks were stuck with around $300 billion of committed debt they struggled to sell to investors.
Twitter will become a private company if Elon Musk’s $44 billion takeover bid is approved. The move would allow Musk to make changes to the site. WSJ’s Dan Gallagher explains Musk’s proposed changes and the challenges he might face enacting them. Illustration: Jordan Kranse
The Twitter move threatens to bring the faltering leveraged-buyout pipeline to a standstill by tying up capital that Wall Street could otherwise use to back new deals.
The $44 billion Twitter takeover is backed by banks including Morgan Stanley,
Bank of America Corp.
and Barclays PLC, which signed agreements in April to provide Mr. Musk with the debt financing he needed to buy the company. They had originally intended to find third-party investors, such as loan asset managers and mutual funds, who would ultimately lend the money as is customary in leveraged buyouts.
But rising interest rates and growing concerns about a recession have cooled investors’ appetite for risky loans and bonds. Mr. Musk’s past criticism of Twitter’s alleged misrepresentation of the condition of its business and the number of fake accounts on the platform aren’t helping either—nor is a deterioration in Twitter’s business, the people added.
Banks would likely face losses of around $500 million or more if they tried to sell Twitter’s debt at current market prices, The Wall Street Journal previously reported. If all the banks hold the debt instead, they can mark it at a higher value on their books on the premise that prices will eventually rebound.
Banks also face a timing problem: Mr. Musk and Twitter have until Oct. 28 to close his planned purchase, and there is still no guarantee the unpredictable billionaire will follow through or some other trouble won’t arise. (If the deal doesn’t close by that time, the two parties will go to court in November.) That means the banks wouldn’t have enough time to market the debt to third-party investors, a process that normally takes weeks, even if they wanted to sell it now.
Assuming the deal closes, banks hope to be able to sell some of Twitter’s debt by early next year, should market conditions improve by then, some of the people said. Twitter’s banks are discussing how to potentially slice up the debt into different pieces that could be easier for hedge-fund investors or direct lenders to swallow, one of these people said.
The banks have good reason to want to hold the debt for as short a time period as possible.
Holding loans and bonds can force them to set more capital aside to meet regulatory requirements, limiting the credit banks are able to provide to others. Banks also face year-end stress tests, and they will want to limit their exposure to risky corporate debts before regulators evaluate the soundness of their balance sheets.
So far this year, banks have already taken hundreds of millions of dollars worth of losses and been forced to hold a growing amount of buyout debt.
Twitter’s debt, including $6.5 billion of term loans and $6 billion of bonds, would add to the increasing pile banks eventually intend to syndicate, recently estimated by
Goldman Sachs
at around $45 billion.
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Banks’ third-quarter earnings showed a steep drop-off in revenue tied to deal-making. Goldman’s debt-underwriting revenue dropped to $328 million in the third quarter from $726 million a year earlier.
Morgan Stanley CEO
James Gorman
said recently that his bank has been “quite cautious in the leveraged-finance arena” for new deals, while Bank of America’s
Brian Moynihan
said “there’s been a natural retrenching” in the leveraged-loan market and the bank “was working to get through the pipeline” of existing deals.
Private-equity firms, which rely heavily on debt to fund their buyouts, have increasingly turned to private-credit providers such as Blackstone Credit and
Blue Owl Capital Inc.
These firms don’t have to split up and sell debt and can provide funding from investment vehicles established to do so. Although it is more expensive and harder to come by than earlier this year, private-credit providers have been the main source of buyout financing recently.
To deal with debts they have already committed to, banks have gotten increasingly creative.
In a take-private of Citrix Systems Inc., banks agreed to turn some $6 billion of syndicated term loans into a more traditional bank loan that they chose to keep on their balance sheets, but they sold around $8 billion of bonds and loans at a loss of more than $500 million, the Journal reported. There was also a revision in the financing structure of the Nielsen Holdings PLC take-private, with $3 billion in unsecured bonds becoming a junior secured loan that private-credit provider
Ares Capital Corp.
agreed to lead. The banks held the remainder of Nielsen’s roughly $9 billion of debt on their balance sheets.
—Matt Wirz contributed to this article.
Write to Laura Cooper at laura.cooper@wsj.com and Alexander Saeedy at alexander.saeedy@wsj.com
are facing the possibility of big losses now that the billionaire has shifted course and indicated a willingness to follow through with the deal, in the latest sign of trouble for debt markets that are crucial for funding takeovers.
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As is typical in leveraged buyouts, the banks planned to unload the debt rather than hold it on their books, but a decline in markets since April means that if they did so now they would be on the hook for losses that could run into the hundreds of millions, according to people familiar with the matter.
Banks are presently looking at an estimated $500 million in losses if they tried to unload all the debt to third-party investors, according to 9fin, a leveraged-finance analytics firm.
Representatives of Mr. Musk and Twitter had been trying to hash out terms of a settlement that would enable the stalled deal to proceed, grappling with issues including whether it would be contingent on Mr. Musk receiving the necessary debt financing, as he is now requesting. On Thursday, a judge put an impending trial over the deal on hold, effectively ending those talks and giving Mr. Musk until Oct. 28 to close the transaction.
The debt package includes $6.5 billion in term loans, a $500 million revolving line of credit, $3 billion in secured bonds and $3 billion in unsecured bonds, according to public disclosures. To pay for the deal, Mr. Musk also needs to come up with roughly $34 billion in equity. To help with that, he received commitment letters in May for over $7 billion in financing from 19 investors including
Oracle Corp.
co-founder and
Tesla Inc.
then-board member
Larry Ellison
and venture firm Sequoia Capital Fund LP.
Twitter will become a private company if Elon Musk’s $44 billion takeover bid is approved. The move would allow Musk to make changes to the site. WSJ’s Dan Gallagher explains Musk’s proposed changes and the challenges he might face enacting them. Illustration: Jordan Kranse
The Twitter debt would be the latest to hit the market while high-yield credit is effectively unavailable to many borrowers, as buyers of corporate debt are demanding better terms and bargain prices over concerns about an economic slowdown.
That has dealt a significant blow to a business that represents an important source of revenue for Wall Street banks and has already suffered more than $1 billion in collective losses this year.
The biggest chunk of that came last month, when banks including Bank of America,
Goldman Sachs Group Inc.
and
Credit Suisse Group AG
sold debt associated with the $16.5 billion leveraged buyout of Citrix Systems Inc. Banks collectively lost more than $500 million on the purchase, the Journal reported.
Banks had to buy around $6 billion of Citrix’s debt themselves after it became clear that investors’ interest in the total debt package was muted.
“The recent Citrix deal suggests the market would struggle to digest the billions of loans and bonds contemplated by the original Twitter financing plan,” said Steven Hunter, chief executive at 9fin.
People familiar with Twitter’s debt-financing package said the banks built “flex” into the deal, which can help them reduce their losses. It enables them to raise the interest rates on the debt, meaning the company would be on the hook for higher interest costs, to try to attract more investors to buy it.
However, that flex is usually capped, and if investors still aren’t interested in the debt at higher interest rates, banks could eventually have to sell at a discount and absorb losses, or choose to hold the borrowings on their books.
Elon Musk has offered to close his acquisition of Twitter on the terms he originally agreed to.
Photo:
Mike Blake/REUTERS
The leveraged loans and bonds for Twitter are part of $46 billion of debt still waiting to be split up and sold by banks for buyout deals, according to Goldman data. That includes debt associated with deals including the roughly $16 billion purchase of
Nielsen Holdings
PLC, the $7 billion acquisition of automotive-products company
Tenneco
and the $8.6 billion takeover of media company
Tegna Inc.
Private-equity firms rely on leveraged loans and high-yield bonds to help pay for their largest deals. Banks generally parcel out leveraged loans to institutional investors such as mutual funds and collateralized-loan-obligation managers.
When banks can’t sell debt, that usually winds up costing them even if they choose not to sell at a loss. Holding loans and bonds can force them to add more regulatory capital to protect their balance sheets and limit the credit banks are willing to provide to others.
In past downturns, losses from leveraged finance have led to layoffs, and banks took years to rebuild their high-yield departments. Leveraged-loan and high-yield-bond volumes plummeted after the 2008 financial crisis as banks weren’t willing to add on more risk.
Indeed, many of Wall Street’s major banks are expected to trim the ranks of their leveraged-finance groups in the coming months, according to people familiar with the matter.
Still, experts say that banks look much better positioned to weather a downturn now, thanks to postcrisis regulations requiring more capital on balance sheets and better liquidity.
“Overall, the level of risk within the banking system now is just not the same as it was pre-financial crisis,” said Greg Hertrich, head of U.S. depository strategy at Nomura.
Last year was a banner year for private-equity deal making, with some $146 billion of loans issued for buyouts—the most since 2007.
However, continued losses from deals such as Citrix and potentially Twitter may continue to cool bank lending for M&A, as well as for companies that have low credit ratings in general.
“There’s going to be a period of risk aversion as the industry thinks through what are acceptable terms for new deals,” said Richard Ramsden, an analyst at Goldman covering the banking industry. “Until there’s clarity over that, there won’t be many new debt commitments.”
—Cara Lombardo contributed to this article.
Write to Alexander Saeedy at alexander.saeedy@wsj.com, Laura Cooper at laura.cooper@wsj.com and Ben Dummett at ben.dummett@wsj.com
WASHINGTON—Eleven of the world’s largest banks and brokerages will collectively pay $1.8 billion in fines to resolve regulatory investigations over their employees’ use of messaging applications that broke record-keeping rules, regulators said Tuesday.
The fines, which many of the banks had already disclosed to shareholders, underscore the market regulators’ stern approach to civil enforcement. Fines of $200 million, which many of the banks will pay under the agreements, have typically been seen only in fraud cases or investigations that alleged harm to investors.
But the SEC, in particular, has during the Biden administration pushed for fines that are higher than precedents, saying it wants to levy fines that punish wrongdoing and effectively deter future potential harm. The SEC’s focus on record-keeping is likely to be extended next to money managers, who also have a duty to maintain written communications related to investment advice.
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Last month, the SEC alleged that hedge-fund manager Deccan Value Investors LP and its chief investment officer failed to maintain messages sent over
Apple
iMessage and WhatsApp. In some cases, the chief investment officer directed an officer of the company to delete their text messages, the SEC said. The claims were included in a broader enforcement action, which Deccan settled without admitting or denying wrongdoing.
The Wall Street Journal reported last month that the settlements announced Tuesday were likely to top $1 billion and would be announced before the end of September.
Eight of the largest entities, including Goldman Sachs and Morgan Stanley, agreed to pay $125 million to the SEC and at least $75 million to the CFTC. Jefferies will pay a total of $80 million to the two market regulators, and
Nomura
NMR -1.20%
agreed to pay $100 million. Cantor agreed to pay $16 million.
The SEC said it found “pervasive off-channel communications.” In some cases, supervisors at the banks were aware of and even encouraged employees to use unauthorized messaging apps instead of communicating over company email or other approved platforms.
“Today’s actions—both in terms of the firms involved and the size of the penalties ordered—underscore the importance of recordkeeping requirements: they’re sacrosanct. If there are allegations of wrongdoing or misconduct, we must be able to examine a firm’s books and records to determine what happened,” said SEC Enforcement Director
Gurbir Grewal.
Bank of America, which faced the highest fine from the CFTC, had a “widespread and long-standing use of unapproved methods to engage in business-related communications,” according to the CFTC’s settlement order. One trader wrote in a 2020 message to a colleague: “We use WhatsApp all the time, but we delete convos regularly,” according to the CFTC.
One head of a trading desk at Bank of America told subordinates to delete messages from their personal devices and to communicate through the encrypted messaging app Signal, the CFTC said. The head of that trading desk resigned this year, although the bank was aware of his conduct in 2021, the CFTC said.
At Nomura, one trader deleted messages on his personal device in 2019 after being told the CFTC wanted them for an investigation, the agency said. The trader made false statements to the CFTC about his compliance with the records request, the regulator said.
Broker-dealers have to follow strict record-keeping rules intended to ensure regulators can access documents for oversight purposes. The firms settling with the SEC and CFTC admitted their employees’ conduct violated those regulations.
JPMorgan Chase
& Co.’s brokerage arm was the first to settle with the two market regulators over its failure to maintain required electronic records. JPMorgan paid $200 million last year and admitted some employees used WhatsApp and other messaging tools to do business, which also broke the bank’s own policies.
Regulators discovered that some JPMorgan communications, which should have been turned over for separate enforcement investigations, weren’t collected because they were sent on employees’ personal devices or apps that the bank didn’t supervise.
The two banks sold new loans and bonds for Avaya, a cloud-communications company, in late June. Investors included Brigade Capital Management LP and Symphony Asset Management LLC, people familiar with the matter said.
A few weeks later, Avaya announced that it would miss by more than 60% its previous forecasts for adjusted earnings in the third quarter, which ended June 30. It gave no explanation. The company also said that it would miss revenue targets and announced it was removing its chief executive officer.
Prices of the newly issued debt plummeted, hitting investors who lent Avaya the money with paper losses exceeding $100 million, according to analyst commentary and data from MarketAxess and Advantage Data Inc.
Avaya said Tuesday that it “has determined that there is substantial doubt about the Company’s ability to continue as a going concern.” It also said that the audit committee of the board of directors had opened an internal investigation “to review the circumstances surrounding” the most recent quarter. The committee is also investigating a whistleblower letter, but it didn’t give details.
Avaya also tapped law firm Kirkland & Ellis LLP and turnaround adviser AlixPartners LLP as it considers its options, The Wall Street Journal reported Tuesday.
New CEO
Alan Masarek
held an abbreviated conference call Tuesday to discuss third-quarter earnings and declined to take questions from Wall Street analysts. Mr. Masarek attributed Avaya’s poor performance in part to clients signing up for smaller and shorter software subscription contracts than expected, potentially out of fear about the company’s debt load.
“I understand very clearly that there is disappointment, there’s worry, there’s concern out there across effectively all Avaya stakeholders,” Mr. Masarek said. “I’m going to thank you in advance for your patience… Give us some time to demonstrate a better future.”
Avaya’s 6.125% bond due 2028 fell as low as 48.50 cents on the dollar after the presentation, down from a close of 56.25 cents on Monday, according to data from MarketAxess.
Some analysts were already skeptical of Avaya’s financial forecasts.
“Why [are] your projections always faltering when you report quarterly results? Why can’t you have a stable outlook?” asked
Hamed Khorsand,
an analyst at BWS Financial, after the company’s last quarterly earnings report in May. Avaya undershot that quarter’s adjusted-earnings targets by about 10%.
Avaya’s former CEO Jim Chirico, applauding at the company’s stock listing in 2018, was removed last month.
Photo:
Richard Drew/Associated Press
Then-CEO
Jim Chirico
attributed the fumble to Avaya’s adoption of a new sales strategy that forced the company to recognize revenue more slowly. “We believe we’re over that hurdle,” he said at the time.
Avaya emerged as a telecommunications-equipment supplier to corporations in 2000, when it spun out of Lucent Technologies. Private-equity firms TPG and Silver Lake Partners bought the company in 2007, but it struggled to transition from selling hardware to selling software, and with servicing debt from the buyout. The company filed for bankruptcy protection a decade later before reorganizing. Mr. Chirico took the helm in 2017 and shifted to developing cloud-based software for enterprises.
“Avaya squandered a lot of money and time and has little to show for it,” independent enterprise communications analyst Dave Michels wrote in a recent report. “Many of us have wondered why the board didn’t act sooner—years sooner.”
A spokeswoman for Avaya declined to comment on analysts’ critiques.
The financial crunch hit this spring when Avaya’s cash reserves shrank to $324 million—down from almost $600 million a year earlier, according to company filings. The company tried to raise new debt to refinance a $350 million convertible bond that was coming due in 2023, according to company filings.
Goldman initially proposed a $500 million loan with a 12.6% yield but found few buyers, according to data provider LevFin Insights. The bank ultimately placed a $350 million secured loan yielding 15.5% with investors. Lenders included Symphony, which has invested in Avaya since before its bankruptcy, the people familiar with the matter said.
Avaya approached JPMorgan in late June to raise additional funds, according to one of the people. The bank placed a $250 million secured convertible bond. Investors included Brigade, the people said.
During the marketing process, Avaya executives told lenders that the company was on track to hit its earnings guidance, some of the people familiar with the matter said.
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The company had set Ebitda guidance of about $145 million for the quarter ended June 30 but cut that to between $50 million and $55 million on July 28. (Ebitda refers to earnings before interest, taxes, depreciation and amortization.) Avaya reported $54 million of Ebitda for the quarter on Tuesday, a figure that barely covers the quarterly interest expenses it disclosed in recent earnings reports.
“It is a surprising outcome for a company that priced $600 million of fresh capital…just four weeks ago,” said
Lance Vitanza,
a stock analyst at Cowen Inc. “It may be too late to accomplish much without radically restructuring Avaya’s balance sheet.”
The newly issued loans were quoted around 65 cents on the dollar Tuesday, down from 87 cents in late July, according to Advantage Data. The new convertible bond is likely to trade at similar prices in the near future, Mr. Vitanza said.
Losses have been heavier for owners of Avaya stock, which fell to as low as 82 cents last week from around $2.50 in early July and about $10 at the start of May. Avaya shares fell 46% Tuesday to 61 cents.
Alexander Gladstone and Andrew Scurria contributed to this article.
said Monday that second-quarter earnings fell 47%, capping an earnings season where weak and volatile markets crimped investment banking revenue across the industry but boosted trading.
But what was bad for investment bankers was good for traders. Widespread volatility meant investors placed more trades across a variety of asset classes, and banks took advantage. At Goldman, second-quarter trading revenue rose 32% to $6.5 billion. The other banks also reported big increases in trading revenue.
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However, all the major U.S. banks reported double-digit declines in profit, and most of them missed analysts’ expectations. Year-ago results were juiced by reserve releases across the industry, when the banks let go of some of the money they had socked away for pandemic losses.
This year so far has marked a comedown from what had been near-perfect conditions for Wall Street at the height of the pandemic. The stimulus from governments and central bankers in response to Covid led to a swift recovery from a recession and ebullient capital markets. The effects of the pandemic also led to changes in how customers and businesses operate, which sent corporate chieftains on a deal making spree.
The current environment is far less friendly. The highest inflation in decades, sharply higher interest rates, and significant geopolitical concerns have sent markets for a loop, with the S&P 500 recently finishing its worst first half in more than 50 years. That uncertainty has given corporate executives pause about taking their companies public or selling additional stock.
Likewise, the U.S. economy has been flashing disparate signals about its health. The finances of U.S. consumers and businesses remain relatively strong. Executives at Bank of America, which also reported second-quarter results on Monday, said their customers were spending and borrowing at a strong clip.
But higher costs for groceries, gas and rent are hurting many consumers, and U.S. households have started spending some of the savings they accumulated during the pandemic. Bank executives across the industry are concerned about a possible recession, although they haven’t seen clear evidence of one just yet.
Goldman CEO David Solomon noted conflicting signals on the inflation outlook.
Photo:
patrick t. fallon/Agence France-Presse/Getty Images
Goldman CEO
David Solomon
pointed to conflicting signals on the inflation outlook Monday. He said the bank’s corporate clients continue to experience persistent inflation in their own supply chains, but added that the firm’s economists expect inflation to slow in the rest of the year.
Goldman’s second-quarter profit fell to $2.9 billion from $5.5 billion a year ago. Revenue fell 23% to $11.9 billion, though both beat the expectations of analysts polled by FactSet.
Bank of America’s profit fell 32% to $6.2 billion and revenue rose 6% to $22.7 billion.
Goldman shares rose 2.5%. Bank of America shares were roughly flat.
Within the investment banks, stock-selling businesses were hit especially hard. In 2021, companies raced to go public via initial public offerings and blank-check companies known as SPACs. That activity has ground to a halt so far this year.
Goldman is planning to slow its hiring pace in the second half of the year, after staffing up for the pandemic deal making boom. The bank had 47,000 employees at the end of June, up from about 41,000 a year ago. Finance chief
Denis Coleman
also said the bank would bring back annual performance reviews for its workers, a practice Goldman had mostly suspended during the pandemic.
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Citigroup executives said last week they expected the slowdown to be temporary and wouldn’t change their pace of hiring more investment bankers. “You’re going to see us take a strategic look at this and a long-term look rather than just a shooting from the hip on the expenses side, because we’re building the firm for the long term here,” CEO
Jane Fraser
said.
At Bank of America, where total investment banking revenue fell 46%, Chief Financial Officer
Alastair Borthwick
said investment banking would “rise back to more normal levels in the next few quarters when economic uncertainty becomes more muted.”
Total trading revenue grew 25% at Citigroup, 21% at Morgan Stanley, 15% at JPMorgan and 11% at Bank of America. Goldman’s 32% jump was powered by a big rise in fixed income, currencies and commodities.
JPMorgan generated more trading revenue than any second quarter except during the middle of the pandemic and notched its best-ever second quarter for equities trading.
“Trading markets whipsawed with each release of economic data during the quarter,”
Daniel Pinto,
JPMorgan’s president and the head of the corporate and investment bank, told staff in a memo last week.
—Orla McCaffrey and David Benoit contributed to this article.
said Monday that its second-quarter profit declined 32%.
The second-largest U.S. bank earned $6.2 billion, down from $9.2 billion a year earlier. Per-share earnings of 73 cents missed the 75 cents that analysts polled by FactSet had expected.
Revenue increased 6% from a year ago to $22.7 billion, slightly below analysts’ expectations.
Last week,
JPMorgan Chase
JPM 4.58%
& Co.,
Citigroup Inc.,
Wells Fargo & Co. and
Morgan Stanley
all reported double-digit drops in profit. Executives at the country’s largest banks said there is more uncertainty than usual about where the economy is headed.
Bank of America released $48 million in funds it had set aside to cover potential future losses. A year ago, the bank released $2.2 billion, lifting its profits at the time.
Some bank executives believe a recession is on the horizon, and that the Federal Reserve’s attempts to curb inflation with interest-rate increases could help spark the downturn. Investors are watching bank earnings closely because they are viewed as a bellwether for the broader economy.
The Federal Reserve has been raising interest rates this year, including two big increases in the second quarter. Higher rates allow banks to charge more on loans, which can juice profits. The resulting market gyrations have also helped banks’ trading desks, which benefit from volatility.
Bank of America’s net interest income, including its lending profits, rose 22% from a year earlier to $12.4 billion, thanks largely to higher rates and stronger demand for loans.
Noninterest income, which includes fees, fell 9% from a year earlier to $10.2 billion. Lower investment-banking fees and changes to the bank’s overdraft policy dragged down fee income, Bank of America said. The bank said in January it would cut overdraft fees from $35 to $10.
The U.S. could be headed toward a recession, according to economists and latest GDP figures. But this recession might be different from past ones because of one main indicator: unemployment. WSJ’s Jon Hilsenrath explains.
Investment banking fees fell 46% from a year earlier to $1.2 billion. Investment banking revenue fell 54% at JPMorgan, 55% at Morgan Stanley and 46% at Citigroup in the second quarter.
Adjusted trading revenue increased 11% to about $4 billion.
Outstanding loans and leases grew 12% from a year earlier to just over $1 trillion. Loans in the bank’s commercial division rose 16%, while loans to consumers increased 7%. That is positive news for a bank that, like its peers, struggled to profit from lending for much of the pandemic because of rock-bottom interest rates and tepid loan demand.
Bank of America’s total expenses increased 1.5% to $15.3 billion.