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Biden Administration to Ask Congress to Approve F-16 Sale to Turkey

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The Biden administration is preparing to seek congressional approval for a $20 billion sale of new F-16 jet fighters to Turkey along with a separate sale of next-generation F-35 warplanes to Greece, in what would be among the largest foreign weapons sales in recent years, according to U.S. officials.

Administration officials intend the prospect of the sale to prod Turkey to sign off on Finland and Sweden’s accession to the North Atlantic Treaty Organization, which Ankara has blocked over objections to their ties to Kurdish separatist groups. Congress’s approval of the sale is contingent on Turkey’s acquiescence, administration officials said. The two countries ended decades of neutrality when they decided to join NATO last year in reaction to Russia’s invasion of Ukraine.

The sale to Turkey, which the administration has been considering for more than a year, is larger than expected. It includes 40 new aircraft and kits to overhaul 79 of Turkey’s existing F-16 fleet, according to officials familiar with the proposals.

Congressional notification of the deal will roughly coincide with a visit to Washington next week by Turkey’s Foreign Minister

Mevlut Cavusoglu.

The sale to Turkey also includes more than 900 air-to-air missiles and 800 bombs, one of the officials said.

Turkish President Recep Tayyip Erdogan has faced U.S. pressure to approve NATO expansion.



Photo:

adem altan/Agence France-Presse/Getty Images

The separate sale to Greece, which was requested by the Greek government in June 2022, includes at least 30 new F-35s. The F-35 Joint Strike Fighter is the U.S.’s most advanced jet fighter. While officials described the timing of the notifications for both Turkey and Greece as coincidental, it could quell protests from Athens over the F-16 sale if its request is also granted. Greece and Turkey are historic regional rivals and a sale to Turkey alone would likely draw swift condemnation from Athens.

The potential sale of the aircraft could have far-reaching implications for Washington’s efforts to shore up ties with a pair of NATO allies amid the Western response to Russia’s assault on Ukraine.

A State Department spokesman declined to comment on potential arms transfers as a matter of policy until and unless they are formally notified to Congress. Congress has never successfully blocked a foreign arms sale requested by the White House.

The proposed deal with Turkey comes at a moment of tension in U.S.-Turkish relations, with Washington also attempting to convince President Recep

Tayyip Erdogan

to do more to enforce sanctions on Russia and to approve the entry of Finland and Sweden into NATO.

The proposal also sets up a possible showdown with some congressional leaders who have vowed to oppose weapons sales to Turkey. Sen.

Bob Menendez,

a Democrat from New Jersey who is the chairman of the Senate Foreign Relations Committee, has said he wouldn’t approve any F-16 sale to Turkey, citing human-rights concerns.

In recent months, Mr. Erdogan has also threatened to launch a new military incursion against Kurdish militants in Syria. Last month a Turkish court also convicted the mayor of Istanbul, a popular opponent of Mr. Erdogan, of insulting public officials in what human rights groups said was part of a crackdown on the Turkish opposition. The Turkish government says its courts are independent.

Under U.S. arms-export laws, Congress will have 30 days to review the deal. If Congress wants to block the deal it must pass a joint resolution of disapproval. Congress can also pass legislation to block or modify a sale at any time until the delivery.

The Biden administration is looking to sell at least 30 new F-35 jet fighters to Greece.



Photo:

robert atanasovski/Agence France-Presse/Getty Images

U.S. officials say they are encouraging Mr. Erdogan to drop his opposition to Finland and Sweden joining NATO. One official characterized the F-16s as the “carrot on a stick” to get Turkey to agree.

This, officials said, could ease opposition to the sale among some members of Congress. Officials within the State Department have argued for months that the expansion was imperative to NATO’s collective security. However, officials expect that while the Greece package could sail through Congress, the F-16s may be delayed over some members’ reluctance to embolden Ankara with the additional firepower.

Mr. Erdogan first threatened to veto the two countries’ entrance over their ties to Kurdish militant groups in Iraq and Syria. Turkey has fought a slow-burning war with Kurdish armed groups for decades in a conflict that has left tens of thousands dead.

NATO leaders say that Finland and Sweden have addressed Turkey’s concerns, upholding an agreement signed last year that called for both countries to evaluate Turkish extradition requests and drop restrictions on arms sales to Ankara.

Turkish officials say that Sweden hasn’t done enough to uphold its obligations to Turkey, citing what they say is continuing activity by the militant Kurdistan Workers’ Party in Sweden. The Turkish government this week summoned Sweden’s ambassador over a demonstration in Stockholm in which protesters hung a puppet of Mr. Erdogan by its feet. The Turkish president’s hard line against Sweden has broad support within Turkey, including among opposition parties, who have long opposed what they see as a permissive approach to Kurdish militant groups in Europe.

The timing of a vote on NATO expansion in the Turkish parliament will also depend on Turkey’s national election this year, in which Mr. Erdogan faces a close race amid public discontent over the country’s struggling economy.

The Turkish Ministry of Foreign Affairs didn’t respond to a request for comment.

The Biden administration remains cautiously optimistic that Turkey will eventually come around on Finland and Sweden. U.S. officials said last year that there would be no quid pro quo for Turkey’s approval of the NATO expansion, and said that the timing of the F-16 sale was dependent on the administration’s own internal process to complete the deal.

The proposed sales also come amid heightened tensions between Turkey and Greece, two longtime adversaries who have traded threats over the past year in the eastern Mediterranean.

Turkey was originally a participant in the U.S.’s cutting-edge F-35 program but was expelled after Mr. Erdogan approved the purchase of Russia’s S-400 air defense system. The U.S. government said the Russian weapons system could potentially hack the F-35.

Biden administration officials have argued that selling F-16s to Turkey could help restore ties with the country, which maintains the second-largest army in NATO.

Under Mr. Erdogan, Turkey has played an important role in the Ukraine crisis, facilitating negotiations over prisoner exchanges and helping to broker an agreement that allowed Ukraine to resume its exports of grain through Black Sea ports. Mr. Erdogan’s close relationship with Russia’s President

Vladimir Putin

has also raised concerns in Washington, with scrutiny of inflows of Russian money to Turkey, including oligarch assets.

Finland and Sweden have formally applied to join NATO, but Turkey has threatened to block them from joining. WSJ’s Shelby Holliday explains why Turkish President Recep Tayyip Erdogan sees the expansion as a threat to Turkey’s national security. (Video first published in May 2022). Photo composite: Sebastian Vega

—William Mauldin contributed to this article.

Write to Jared Malsin at jared.malsin@wsj.com and Vivian Salama at vivian.salama@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Business

GM’s U.S. Sales Recovered From Early 2022 Woes to Post Full-Year Rise

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The U.S.’s largest auto makers confronted another challenging year in 2022 with supply-chain snarls and poorly stocked dealership lots denting sales results and concerns mounting about an economic downturn.

The Detroit auto maker also retook its U.S. sales crown from

Toyota Motor Corp.

TM -0.65%

, outselling its Japanese rival by about 165,630 vehicles last year.

Toyota had overtaken GM in 2021 as the U.S.’s top-selling auto maker, an upending of the traditional pecking order that was largely due to parts shortages that both car companies viewed as temporary.

Toyota said its U.S. sales were down 9.6% in 2022, and

Hyundai Motor Corp.

closed last year with a 2% decline.

Most other car companies report throughout the day Wednesday.

Ford

plans to report 2022 sales results Thursday.

Industrywide, U.S. auto sales are projected to total 13.7 million vehicles in 2022, the lowest figure in more than a decade and an 8% decrease from the prior year, according to a joint forecast by J.D. Power and LMC Automotive. Sales are expected to remain well below prepandemic levels of roughly 17 million.

WSJ toured Rivian’s and Ford’s electric-vehicle factories to see how they are pushing to meet demand. Illustration: Adam Falk/The Wall Street Journal

The drop-off marks a reversal for a sector that started the year hoping historically low interest rates and an end to parts shortages would fuel a rebound in sales. Instead, vehicles continued to be in short supply as car makers mostly waited for scarce computer chips. Russia’s invasion of Ukraine, a key supplier of auto parts, added to the supply-chain troubles.

A prolonged shortage of semiconductors created pent-up demand for new vehicles, which meant that cars and trucks went to waiting buyers almost as soon as they hit the dealer lot. The lack of availability left buyers paying top dollar for the rides they could secure, pushing the average price paid for a vehicle in December to a near record high of $46,382, according to J.D. Power.

The record high prices buoyed auto maker profits last year despite shrinking sales volume and insulated the industry from a broader decline in consumer spending. 

Now, while some supply constraints are easing, auto executives are confronting other obstacles, such as rising interest rates and soaring materials costs. Inventory levels are bouncing back, putting pressure on car companies to resist the kinds of profit-damaging discounts that have been historically used to counter slowing demand.  

Photos: The EV Rivals Aiming for Tesla’s Crown in China

Some analysts caution that it is still too early to tell if rising prices are pushing buyers away. Heavy snowfall in large parts of the northern U.S. weighed on December sales, making it hard to see the impact of higher prices, JPMorgan analysts wrote in a note to clients. 

Still, there are early signs that demand might be slowing, even for the hottest car makers.

Tesla Inc.

reported Monday that it fell short of its growth projections last year, in part because of Covid-related shutdowns at its Shanghai factory and changes in the way it manufactures and distributes vehicles.

Analysts have pointed to decreased wait times for Tesla vehicles as a sign of softening demand. Tesla offered a rare discount on some of its vehicles if buyers agreed to take delivery before the end of 2022.

Electric-vehicle sales accounted for 3% of the U.S. retail market in 2021 and nearly 6% in 2022, according to J.D. Power.

Executives have been investing billions of dollars on new models and factories, in the belief that sales will continue to expand rapidly over the next decade.

But rising prices for raw materials used in lithium-ion batteries pushed up EV prices throughout 2022, and some executives warned of a looming battery shortage. 

General Motors cut its EV sales target for 2023 because of a slower-than-expected increase of battery production.

The semiconductor shortage, while easing for some other sectors, such as smartphones and personal computers, remains a challenge for autos, in part because car companies typically use inexpensive, commodity silicon for vehicles. Toyota, citing a lack of chips, cut its production outlook for the current fiscal year through March.

Falling used-car values are also discouraging to potential buyers, who have trade-ins and are looking to use them to offset the higher cost of a new vehicle. 

SHARE YOUR THOUGHTS

What is your outlook on the auto industry for 2023? Join the conversation below.

That bodes poorly for sales this year, as retailers worry that buyers who were unable to buy a car as a result of shortages will now be priced out of the market, according to a survey of dealers conducted by Cox Automotive.

The research site Edmunds expects new-car sales to hit 14.8 million in 2023, a marginal increase from last year but well below prepandemic levels. A combination of rising rates, inflation and economic turmoil could push vehicles out of reach for many buyers, Edmunds said.

Write to Sean McLain at sean.mclain@wsj.com

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Business

Dow falls nearly 500 points after strong data, bearish comments by David Tepper

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U.S. stocks traded lower on Thursday, erasing most of their gains from their biggest rally in three weeks after a round of upbeat economic data and a warning from hedge-fund titan David Tepper that he was “leaning short” against both stocks and bonds on expectations the Federal Reserve and other central banks will continue tightening into 2023.

Positive economic news can be a negative for stocks by underlining expectations that monetary policy makers will remain aggressive in their efforts to quash inflation.

What’s happening
  • The Dow Jones Industrial Average
    DJIA,
    -1.51%
    fell 472 points, or 1.4%, to 32,903.
  • The S&P 500
    SPX,
    -1.99%
    shed 71 points, or 1.8%, to 3,807.
  • The Nasdaq Composite
    COMP,
    -2.84%
    fell 272 points, or 2.5%, to 10,437.

A day earlier, all three major indexes recorded their best gain in three weeks as the Dow advanced 526.74 points.

What’s driving markets

Investors saw another raft of strong economic data Thursday morning, including a revised reading on third-quarter gross domestic product which showed the U.S. economy expanded more quickly than previously believed. Growth was revised up to 3.2%, up from 2.9% from the previous revision released last month.

See: Economy grew at 3.2% rate in third quarter thanks to strong consumer spending

The number of Americans who applied for unemployment benefits in the week before Christmas rose slightly to 216,000, but new filings remained low and signaled the labor market is still quite strong. Economists polled by The Wall Street Journal had forecast new claims would total 220,000 in the seven days ending Dec 17.

“Jobless claims ticking slightly up but coming in below expectations could be a sign that the Fed’s wish of a slowing labor market will have to wait until 2023. While weekly jobless claims aren’t the best indicator of the overall labor market, they have remained in a robust range these last two months suggesting the labor market remains strong and has withstood the Fed’s tightening, at least for the time being,” said Mike Loewengart, head of model portfolio construction at Morgan Stanley Global Investment Office, in emailed comments.

“While weekly jobless claims aren’t the best indicator of the overall labor market, they have remained in a robust range these last two months suggesting the labor market remains strong and has withstood the Fed’s tightening, at least for the time being,” he wrote. “It’s no surprise to see the market take a breather today after yesterday’s rally as investors parse through earnings data, and despite some beats this week, expectations that earnings will remain as resilient in 2023 may be overblown.”

Stocks were feeling pressure after Appaloosa Management’s Tepper shared a cautious outlook for markets based on the expectation that central bankers around the world will continue hiking interest rates.

“I would probably say I’m leaning short on the equity markets right now because the upside-downside doesn’t make sense to me when I have so many people, so many central banks, telling me what they are going to do, what they want to do, what they expect to do,” Tepper said in a CNBC interview.

Key Words: Billionaire investor David Tepper would ‘lean short’ on stock market because central banks are saying ‘what they’re going to do’

A day earlier, the Conference Board’s consumer confidence survey came in at an eight-month high, which helped stoke a rally in stocks initially spurred by strong earnings from Nike Inc. and FedEx Corp. released Tuesday evening. This optimistic outlook helped stocks clinch their best daily performance in three weeks.

Volumes are starting to dry up as the year winds down, making markets more susceptible to bigger moves. According to Dow Jones Market Data, Wednesday saw the least combined volume on major exchanges since Nov. 29.

Read: Is the stock market open on Monday after Christmas Day?

In other economic data news, the U.S. leading index fell a sharp 1% in November, suggesting that the U.S. economy is heading toward a downturn.

Many market strategists are positioned defensively as they expect stocks could tumble to fresh lows in the new year.

See: Wall Street’s stock-market forecasts for 2022 were off by the widest margin since 2008: Will next year be any different?

Katie Stockton, a technical strategist at Fairlead Strategies, warned clients in a Thursday note that they should brace for more downside ahead.

“We expect the major indices to remain firm next week, helped by oversold conditions, but would brace for more downside in January given the recent downturn,” Stockton said.

Others said the latest data and comments from Tepper have simply refocused investors on the fact that the Fed, European Central Bank and now the Bank of Japan are preparing to continue tightening monetary policy.

“Yesterday was the short covering rally, but the bottom line is the trend is still short and we’re still fighting the Fed,” said Eric Diton, president and managing director of the Wealth Alliance.

Single-stock movers
  • AMC Entertainment Holdings 
    AMC,
    -14.91%
    was down sharply after the movie theater operator announced a $110 million equity capital raise.
  • Tesla Inc. 
    TSLA,
    -8.18%
    shares continued to tumble as the company has been one of the worst performers on the S&P 500 this year.
  • Shares of Verizon Communications Inc. 
    VZ,
    -0.53%
    were down again on Thursday as the company heads for its worst year on record.
  • Shares of CarMax Inc. 
    KMX,
    -6.60%
    tumbled after the used vehicle seller reported fiscal third-quarter profit and sales that dropped well below expectations.
  • Chipmakers and suppliers of equipment and materials, including Nvidia Corp.
    NVDA,
    -8.60%,
    Advanced Micro Devices 
    AMD,
    -7.17%
    and Applied Materials Inc.
    AMAT,
    -8.54%,
    were lower on Thursday.

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Business

FTX’s Sam Bankman-Fried Charged With Criminal Fraud, Conspiracy

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FTX founder

Sam Bankman-Fried

oversaw one of the biggest financial frauds in American history, a top federal prosecutor said in charging that the former chief executive stole billions of dollars from the crypto exchange’s customers while misleading investors and lenders.

An indictment by the U.S. attorney’s office for the Southern District of New York, unsealed Tuesday, charges Mr. Bankman-Fried with eight counts of fraud. Prosecutors allege that he took FTX.com customers’ money to pay the expenses and debts of Alameda Research, an affiliated trading firm. Mr. Bankman-Fried is charged as well with conspiring to defraud the U.S. and violate campaign-finance rules by making illegal political contributions.

Damian Williams,

the U.S. attorney for the Southern District of New York, said he authorized the charges against Mr. Bankman-Fried last Wednesday and a grand jury voted on the indictment Friday.

“This investigation is very much ongoing, and it is moving very quickly,” Mr. Williams said at a press conference in Manhattan on Tuesday. “While this is our first public announcement, it will not be our last.”

John J. Ray III, the new chief executive of FTX, testified in front of a House committee Tuesday on the collapse of the crypto exchange. Photo: Nathan Howard/Getty Images

Separately, John J. Ray III, the new chief executive of FTX, said at a congressional hearing Tuesday that FTX incurred losses in excess of $7 billion. Mr. Ray, who oversaw the Enron Corp. bankruptcy early in the 2000s decade, said funds were taken from FTX and Alameda, an affiliated trading firm that incurred trading losses. 

Mr. Ray described Enron as having been brought down by sophisticated people whose machinations aimed to keep transactions secret. FTX presents as “old-fashioned embezzlement,” Mr. Ray said. “It’s taking money from customers and using it for your own purpose.”

Also Tuesday, the Securities and Exchange Commission alleged in a civil lawsuit that Mr. Bankman-Fried diverted customer funds from the start of FTX to support Alameda and to make venture investments, real-estate purchases and political donations. The Commodity Futures Trading Commission filed a lawsuit Tuesday linking his allegedly fraudulent conduct at Alameda and FTX to markets that the CFTC regulates.  

“

Sam Bankman-Fried

built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” SEC Chair

Gary Gensler

said.

The charges are the latest twist in a saga that has rattled the world of cryptocurrencies, a largely unregulated market that boomed during the pandemic but has been hammered this year by rising interest rates and the failure of several significant industry players. 

FTX, one of the largest crypto exchanges in the world, filed for bankruptcy last month after the firm ran out of cash and a merger with rival Binance collapsed. The firm’s failure marked a sudden fall from grace for Mr. Bankman-Fried, who portrayed FTX as a safer crypto exchange to use and cast himself as an ally of regulation.

In interviews since the filing, Mr. Bankman-Fried said he bore responsibility for FTX’s collapse but denied he committed any fraud.

Mark Cohen,

a lawyer for Mr. Bankman-Fried, said Tuesday that his client “is reviewing the charges with his legal team and considering all of his legal options.”

Mr. Bankman-Fried, 30 years old, was arrested Monday in the Bahamas. He appeared in court Tuesday in Nassau. He was denied bail and has been remanded to jail until Feb. 8, according to a person familiar with the matter.

A U.S. court official said that while the case had been assigned to a federal judge in Manhattan, there was no timing yet for Mr. Bankman-Fried’s extradition.

The tales of Mr. Bankman-Fried’s alleged misdeeds resonated with crypto customers around the world, even those who haven’t suffered significant losses as various firms by turns suspended withdrawals and collapsed.

Vasco Tagachi, a 42-year-old Portuguese-Sri Lankan trader based in China, said he felt a sigh of relief after learning of Mr. Bankman-Fried’s arrest. He said he had $57,423 in an FTX account this fall but was able to withdraw almost all of it just before the firm stopped honoring withdrawal requests.

“I had a little bit of tears in my eyes hearing that,” he said.

Prosecutors allege that from 2019 through November 2022, Mr. Bankman-Fried conspired with unnamed individuals to defraud customers and lenders. He provided false and misleading information to lenders on the financial condition of Alameda, according to the indictment.  

Sam Bankman-Fried was arrested in the Bahamas on Monday, a day before he was expected to testify on the sudden collapse of FTX before the House Committee on Financial Services. Illustration: Jacob Reynolds

While the 14-page indictment was light on detailed allegations, it says that on Sept. 18, 2022, Mr. Bankman-Fried caused an email to be sent to an FTX investor in New York that contained false information about FTX’s financial condition. In June 2022, the indictment says, Mr. Bankman-Fried and others misappropriated FTX.com customer deposits to satisfy the loan obligations of Alameda.

Mr. Bankman-Fried is also accused of defrauding the Federal Election Commission starting in 2020 by conspiring with others to make illegal contributions to candidates and political committees in the names of other people. 

He and his associates contributed more than $70 million to election campaigns in recent years, The Wall Street Journal previously reported. He personally made $40 million in donations ahead of the 2022 midterm elections, most of which went to Democrats and liberal-leaning groups.

Mr. Ray, the FTX CEO, said FTX is investigating whether any loans taken by FTX executives were improperly used for campaign contributions.

Mr. Ray added that tracing fund flows from FTX to executives and third parties was difficult because of the lack of a paper trail for many corporate transactions at FTX.

“We’re dealing with a paperless bankruptcy,” he said. “It makes it very difficult to trace and track assets.”

The CFTC’s complaint contains a detailed discussion of events at Alameda and FTX and argues that the agency, generally less visible to the public than the SEC, also has jurisdiction over the case. While the CFTC regulates U.S. derivatives markets, it can go after fraud that affects some commodity markets.

Besides giving Alameda access to its customer deposits, FTX granted the crypto hedge fund controlled by Mr. Bankman-Fried a series of trading-execution privileges that provided it an edge against other traders on the platform, the CFTC lawsuit alleges.

The CFTC said that while institutional customers had their orders routed through the FTX system, Alameda was able “to bypass certain portions of the system and gain faster access.” It resulted in Alameda’s orders being received by FTX several milliseconds faster than those of other institutional clients.

The lawsuit also alleges that Alameda wasn’t subject to certain automated verification processes, including on whether it had available funds before executing a transaction, giving it further advantage on the speed of its trades.

The edge wasn’t enough to keep Mr. Bankman-Fried from thinking about shutting down Alameda in September, according to the CFTC complaint.

In a document titled “We came, we saw, we researched,” Mr. Bankman-Fried laid out reasons for shutting down Alameda, according to the CFTC lawsuit. Chief among them: Alameda wasn’t making enough money to justify its existence, he wrote.

The CFTC said the statements contradicted what Mr. Bankman-Fried and Alameda were saying publicly at the time.

Tuesday’s congressional hearing was the first public appearance for Mr. Ray on FTX’s bankruptcy. Mr. Bankman-Fried had been scheduled to appear virtually at the same hearing, before he was arrested in the Bahamas at the request of the U.S. government. Bahamian police have said that they would keep him in custody and that they are awaiting an extradition order from U.S. authorities.

“The operation of Alameda really depended, based on the way it was operated, on the use of customer funds,” Mr. Ray said, responding to questions from members of Congress at the hearing. “There were virtually no internal controls…whatsoever.”

He described numerous loans totaling billions of dollars taken out by Mr. Bankman-Fried from Alameda. 

“We have no information at this time as to what purpose or use of those funds were,” Mr. Ray added. He said Mr. Bankman-Fried had signed as the issuer and recipient for some of the loans.

Mr. Ray pushed back against recent statements made by Mr. Bankman-Fried that he had little to no involvement in the management of Alameda after passing control of the company to

Caroline Ellison

and

Sam Trabucco,

as well as Mr. Bankman-Fried’s statements that customer funds were passed to Alameda because of an accounting error.

“I don’t find those statements to be credible,” Mr. Ray said.

The Justice Department’s indictment of Mr. Bankman-Fried includes an array of charges with few supporting details, a tactic that could give federal prosecutors flexibility in navigating the rules involving extradition.

The charges against Mr. Bankman-Fried run the gamut from wire fraud to securities fraud conspiracy to conspiring to launder money and conspiring to break campaign-finance laws.

The statutes charged, with the exception of the campaign-finance offense, are enormously broad, said Rebecca Mermelstein, a former federal prosecutor who is now at O’Melveny & Myers LLP.

“By not being superspecific, you protect yourself later against an argument that charges relating to different criminal conduct are being added,” she said.

The arrest of Mr. Bankman-Fried is the latest case to highlight prosecutors’ push to bring white-collar cases to justice faster. 

Deputy U.S. Attorney General Lisa Monaco said in a September speech that making prosecutors and companies feel that they were “on the clock” in these cases was a key priority for the department. 

FTX founder Sam Bankman-Fried sat down with The Wall Street Journal to discuss what happened to the billions of dollars deposited by the exchange’s customers. Photo: Kenny Wassus/The Wall Street Journal

“We need to do more and move faster,” she said. “In individual prosecutions, speed is of the essence.”

Former federal prosecutors say that high-profile financial cases with lots of victims can increase the pressure on authorities to bring cases more quickly.

“Appearances matter when it comes to criminal justice,” said Mark Chutkow, a former federal prosecutor who is currently head of government investigations and corporate compliance at Dykema Gossett PLLC.  

If Mr. Bankman-Fried remains in the Bahamas while the details of his potential extradition to the U.S. are worked out, there is only one prison there: the Bahamas Department of Correctional Services, commonly known as Fox Hill Prison. 

Prison inmates reported removing human waste by buckets and developing bed sores from lying on the bare ground, according to a 2021 human-rights report on the Bahamas by the U.S. State Department. Cells were infested with rats, maggots and insects, the report said. 

Inmates are supposed to get an hour every day outside for exercise. Because of staff shortages and overcrowding, there are times when inmates will only get 30 minutes a week, said Romona Farquharson, an attorney in the Bahamas. 

The prison has different sections that separate those serving terms for violent crimes, for instance, from those who aren’t. Because of overcrowding, there have been instances in which inmates awaiting trial for minor crimes have been sent to the maximum-security facility, said Ms. Farquharson.

“I think they’ve got to be careful not to have him in really rough areas in the prison,” she said. 

—Angel Au-Yeung, Ben Foldy and Hannah Miao contributed to this article.

Write to Corinne Ramey at corinne.ramey@wsj.com, James Fanelli at james.fanelli@wsj.com, Dave Michaels at dave.michaels@wsj.com, Alexander Saeedy at alexander.saeedy@wsj.com and Vicky Ge Huang at vicky.huang@wsj.com

Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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Health

Why You Can’t Find Wegovy, the Weight-Loss Drug

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Novo Nordisk

NVO 0.61%

A/S flubbed the launch of its buzzy new weight-loss drug Wegovy, missing out on hundreds of millions of dollars in sales and squandering a head start before a rival could begin selling a competing product.

Wegovy is among a new class of drugs that health regulators have approved to cut the weight of people who are obese, a goal long sought by doctors and patients. Their weight-dropping potential became a viral sensation on social media. Elon Musk tweeted about Wegovy in October. And a related drug for diabetes, Ozempic, is a hot topic in Hollywood among celebrities seeking to stay thin, according to doctors.

SHARE YOUR THOUGHTS

Will Novo Nordisk A/S be able to retain its competitive edge with its weight-loss drug? Why or why not? Join the conversation below.

Yet Denmark-based Novo underestimated how big demand for the drug would be, and wasn’t ready to make enough to fill the prescriptions that flooded in after U.S. approval last year. Then a contract manufacturer halted production to address inspection issues.

“We should have forecasted better, which we did not,” Novo Chief Executive

Lars Fruergaard Jørgensen

said. “Had we forecasted that, we would have built a different supply chain.”

The missteps have proven costly for Novo, which was forced to ration Wegovy to patients who already had started taking it. The company has recorded around $700 million in sales to date, well short of the $2 billion in 2021 and 2022 sales that some analysts had projected before supply issues hit.

Novo Nordisk Chief Executive Lars Fruergaard Jørgensen admits the drug company misjudged how popular Wegovy would be.



Photo:

Carsten Snejbjerg/Bloomberg News

Amber Blaylock, a music teacher from Springfield, Mo., said she has been trying to get Wegovy to help her reduce weight since hearing about the drug on TikTok and YouTube. She asked her doctor in September to prescribe it, but hasn’t been able to find it. 

“Frustrated and impatient for sure,” said Ms. Blaylock, 29 years old.

To turn things around, Mr. Jørgensen said Novo has increased its capacity to make Wegovy and plans a “relaunch” early next year, which should fulfill all orders.

Novo, however, lost valuable time establishing a beachhead in the lucrative obesity-drug market before rival

Eli Lilly

LLY 1.20%

& Co. can enter. Lilly is expected to launch a similar, competing drug named Mounjaro late next year or in early 2024.

The market for anti-obesity drugs, now worth $2.4 billion worldwide, could reach $50 billion in 2030, Morgan Stanley estimates.

“Novo has left the door open for Lilly,” said BMO Capital Markets analyst Evan David Seigerman. 

Mr. Jørgensen said the company can regain lost ground because of high demand for Wegovy and the large potential for what is still a mostly untapped market. He said he was unconcerned with the looming competition with Lilly’s drug, because there is room for both products.

“We disappointed physicians and patients in the first round,” he said. “The company wants to be better prepared for the second round.” Novo lists Wegovy at $1,349 a month. Some commercial insurers cover the drug.  

Wegovy works by imitating a hormone called GLP-1, which occurs naturally in the body and suppresses appetite, among other effects. 

Novo developed GLP-1 drugs to treat diabetes. In 2017, the company began selling semaglutide, the active ingredient in Wegovy, under the brand name Ozempic to treat diabetes. 

During the drug’s development, Novo found that weight loss was a side effect, prompting the company to probe using semaglutide to treat obesity. A key trial found that Wegovy helped people with a high body-mass index shed up to 15% of their weight, surpassing the results for older obesity drugs like Novo’s Saxenda. 

Saxenda and other older weight-loss drugs had sold modestly, partly due to their limited weight loss, as well as some unpleasant side effects and the refusal of many health insurers to pay up. 

Novo worked with Catalent to fill its Wegovy weight-loss drug into syringes.



Photo:

yara nardi/Reuters

Given the experience, Novo figured Wegovy sales would increase gradually. To augment its own production, Novo contracted with a single manufacturer,

Catalent Inc.,

to fill the drug into syringes. Novo said it thought it would have time to add manufacturing capacity to meet a gradual increase in demand.

Wegovy may be superior to older drugs, but “we thought it would still be a journey to open up the market,” Mr. Jørgensen said. 

When Novo started selling Wegovy in the U.S. in June last year, however, demand took off. Doctors with large followings on social media touted Wegovy as groundbreaking, while users posted photos holding injection pens and shared their progress losing weight. 

“Demand for these new agents has been unlike anything I’ve ever seen in my time in medicine,” said Dr. Michael Albert, a physician specializing in weight-loss treatment at telehealth provider Accomplish Health who has consulted for Novo. Many of his patients began asking about Wegovy, he said, after they heard about it in Facebook groups or on TikTok.

It took only five weeks for doctors to write new prescriptions for Wegovy at the same weekly volume that Saxenda took four years to reach, according to Mr. Jørgensen. “It’s a completely different ballgame that we’re in,” said Ambre Brown Morley, the company’s vice president of media and digital global communication. 

Within weeks, supplies were strained. Novo warned that patients might experience delays in receiving their prescriptions. Then in December 2021, Catalent temporarily stopped deliveries and manufacturing at its plant after Food and Drug Administration inspections found faulty air filters and damaged equipment.

To date, Novo has recorded around $700 million in Wegovy sales compared with the $2 billion in 2021 and 2022 sales that some analysts had projected before supply issues emerged.



Photo:

JACOB GRONHOLT-PEDERSEN/REUTERS

Many people who couldn’t get Wegovy for weight loss have sought prescriptions for Novo’s Ozempic and Lilly’s Mounjaro, according to analysts, even though the FDA hasn’t approved the latter two drugs for such use. Ozempic sales increased so much that certain doses are in short supply through at least January, the FDA said.

Lilly is studying Mounjaro, its GLP-1-containing drug for diabetes, for weight loss. 

Novo and Lilly said they don’t promote their diabetes drugs for the “off-label” use treating obesity.

A Catalent spokesman said the company is still making improvements to the plant and working with customers to limit the impact of supply constraints on patients. The company restarted filling Wegovy syringes at the facility in the spring. 

Novo has been amassing a sufficient inventory before the Wegovy relaunch, Mr. Jørgensen said. When Wegovy relaunches, he said, insurance coverage will be broader than when the drug first went on sale. 

Write to Peter Loftus at Peter.Loftus@wsj.com and Denise Roland at denise.roland@wsj.com

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20 dividend stocks with high yields that have become more attractive right now

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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.

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Business

Credit Suisse Warns of $1.6 Billion Loss After Clients Pull Money

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Credit Suisse

CS -6.85%

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)

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How Elon Musk’s Twitter Faces Mountain of Debt, Falling Revenue and Surging Costs

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To make the deal work, Mr. Musk has been trying to add subscription revenue and reassure advertisers about the platform’s future. Twitter was losing money before Mr. Musk bought the company, and the deal added a debt burden that requires fresh sources of cash.

It is tough to determine the state of the company. Twitter no longer has to file regular financial reports to the Securities and Exchange Commission, which are crucial tools for determining a company’s financial health.

Analysts and academics have been able to piece together a picture of the company from information Mr. Musk has offered as well as details of the deal and the company’s last regulatory filings. Bankruptcy could be one result. Mr. Musk, the world’s richest person, could also raise new funds, or buy back debt from lenders, giving Twitter a buffer to turn around its business. 

Here is a look at their assessments of Twitter’s financial situation and prospects. 

Twitter Finances, Pre-Musk

Twitter is and was a popular tool for politicians, celebrities and journalists. But as a business, it was stagnating. 

It hasn’t booked an annual profit since 2019, and posted a loss in eight years of the past decade. The company’s net loss narrowed in 2021, to $221.4 million from $1.14 billion the previous year.

Twitter has struggled to attract new users and increase revenue, which came in at about $5.1 billion last year. In its last quarterly filing as a public company, for the period ended June 30, revenue was $1.18 billion, down slightly year-over-year. 

Nearly 90% of its revenue last year came from advertising, and it traditionally has been the company’s main source of revenue. In 2021, Twitter took in $4.51 billion from advertisers, and $572 million from licensing data and other services.

The company had more than $2 billion in cash and less than $600 million in net debt before the takeover talks—very little debt for a company in the S&P 500 index. But that cash position was down 35% from a year earlier as of June 30, filings show, and Mr. Musk paid for Twitter by taking on $13 billion in debt. He paid for the rest in equity, some contributed by multiple investors. 

Twitter had a market capitalization of $37.48 billion in March, the month before Mr. Musk agreed to buy it, S&P data showed. Social-media stocks have slumped sharply since then. But now, according to

Jeffrey Davies,

a former credit analyst and founder of data provider Enersection LLC, “This thing’s probably not worth more than what the debt stack is, quite frankly, unless you put a lot of option value just on Elon.” Mr. Musk last month said he and investors were overpaying for the company in the short term. 

Revenue Under Musk

Mr. Musk said earlier this month that Twitter had suffered “a massive drop in revenue” and was losing $4 million a day. It isn’t clear if that reflects the broader downturn in the digital ad market or the pause in advertising by several companies since Mr. Musk bought the business. 

Some companies, including burrito chain

Chipotle Mexican Grill Inc.,

cereal maker

General Mills Inc.

and airline

United Airlines Holdings Inc.,

have paused their ad spending on Twitter over uncertainty around where the company is headed. The departure of several top executives from its ad department have soured relationships, The Wall Street Journal has reported.

The exodus of advertisers poses a threat for a company so reliant on that revenue stream. “As an online ad company, you’re flirting with disaster,” said

Aswath Damodaran,

a finance professor at New York University’s Stern School of Business. 

Elon Musk has purchased Twitter, ending a monthslong saga over whether or not he would go through with his offer to acquire the social media platform. WSJ takes an inside look at the tweets, texts and filings to see exactly how the battle played out. Illustration: Jordan Kranse

Deal negotiations for long-term contracts that usually begin at the end of the year haven’t taken place yet or have been put on hold. Those deals comprise more than 30% of Twitter’s U.S. ad revenue, The Wall Street Journal reported.

Revenue will likely remain under pressure until advertisers fully grasp the new business model, potentially leading many of them to return to the platform, said

Brent Thill,

a senior analyst at Jefferies Group LLC, a financial-services firm. “Those advertisers will come back if they feel that the users are there and there’s an ability to monetize their advertisement,” Mr. Thill said. 

But that could take time. Mr. Thill said it could take months for advertisers to get clarity. “It’s an enigma,” he said.  

Market-research firm Insider Intelligence Inc. recently cut its annual ad-revenue revenue outlook for Twitter by nearly 40% through 2024. 

Mr. Musk wants the company to lean more on subscriptions and depend less on digital advertising. He said last Tuesday that the company’s upgraded subscription service, costing $7.99 a month, would launch Nov. 29. 

A walkway at Twitter headquarters in San Francisco. The company has aggressively cut staff to reduce expenses.



Photo:

George nikitin/Shutterstock

Reducing Costs

The company has moved quickly to slash costs, including cutting its staff by half. Salaries and other compensation make up a large chunk of overall expenses. The company had 7,500 full-time employees at the end of 2021, up from 5,500 a year earlier, filings show.

The layoffs of roughly 3,700 people could save the company roughly $860 million a year, if the employees that are leaving made an average of about $233,000 annually—the company’s most recently disclosed median pay figure. The estimated savings would represent about 15% of Twitter’s $5.57 billion in costs and expenses last year. Its costs and expenses climbed 51% from the previous year, as hiring drove up its payroll.

More employees left the company last week, rejecting Mr. Musk’s demand that they commit to working “long hours at high intensity” to stay.

Debt Mountain 

Before Mr. Musk’s acquisition, net debt totaled $596.5 million as of June 30, according to S&P Global Market Intelligence, a data provider. That compares with a negative balance of $2.18 billion the prior-year period, indicating a cash surplus.

Twitter paid $23.3 million in interest expense in the quarter ended June 30, according to a filing. 

Now, the company will have to pay at least $9 billion in interest to banks and hedge funds over the next seven to eight years, when the $13 billion in debt matures, according to a review of Twitter’s loans by Mr. Davies, the former credit analyst.

The interest payments are substantial for a company that reported $6.3 billion in total operating cash flow over the past eight years, he said. 

What’s more, the company’s debt stack now includes floating-rate debt, meaning that interest costs are set to rise as the Federal Reserve continues to increase interest rates. Twitter’s debt was entirely fixed rate before the deal. 

Twitter’s credit ratings, which were below investment grade before the transaction with Mr. Musk, have deteriorated further.

Moody’s

Investors Service on Oct. 31 downgraded Twitter’s rating to B1 from Ba2, a two-notch drop, and S&P Global Ratings on Nov. 1 downgraded it to B- from BB+, a five-notch drop. 

If Twitter files for bankruptcy, Elon Musk’s $27 billion investment would likely be wiped out.



Photo:

Susan Walsh/Associated Press

Financial Prospects 

Twitter’s financial challenges could result in the company filing for bankruptcy, raising equity or buying back some debt from its lenders, analysts and academics said. 

If Twitter files for bankruptcy, as Mr. Musk warned was possible in an all-hands meeting earlier this month, his $27 billion investment would likely be wiped out because equity holders are the last to be paid when a company restructures.

Buying back debt from lenders at a steep discount would help the company reduce its debt load and interest costs as well as its valuation, which would be beneficial in the long run, Mr. Davies said. 

“I don’t think they can issue any more debt,” Mr. Davies said. “It’s a really, really tough structure.” 

The company could also replace some of the debt with equity, both from Mr. Musk and from outside investors, said

David Kass,

a finance professor at the University of Maryland’s

Robert H. Smith

School of Business. For that, Mr. Musk would need to persuade potential investors that he has a viable long-term business plan, he said. Replacing debt could enable the company to generate cash. Mr. Musk has said some of his latest

Tesla Inc.

stock sale, yielding almost $4 billion in cash, was because of Twitter. 

If successful, the company could generate positive free cash flow in two or three years, which it could use to pay down the residual debt and eventually go public again, Mr. Kass said. “The prospect of an eventual IPO within three to five years would be a very attractive enticement for large funds,” he said. 

—Theo Francis and Jennifer Williams-Alvarez contributed to this article.

Write to Mark Maurer at mark.maurer@wsj.com

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Carvana Faces Cash Crunch From High Debt, Rising Interest Rates

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Carvana Co.

CVNA -3.13%

, the used-car dealer that was a pandemic winner, is rushing to conserve cash as once-plentiful financing options dry up and business deteriorates.

On Friday, Carvana laid off about 1,500 people, its second round in six months. Its weakening finances mean raising funds would be difficult and costly, and it could run out of cash in a year, analysts say.

Few companies have been hit harder by rising interest rates than Carvana. The company’s interest expense nearly doubled early this year when it paid up to get financing for an acquisition. Its cost to finance car purchases is up by three-quarters this year, and some of its real estate has lost value. Car buyers, meanwhile, are holding off purchases in the hope that rates fall.

In a memo to Carvana’s employees announcing the layoffs, Chief Executive

Ernie Garcia III

blamed an uncertain economic environment that he said was particularly tough on fast-growing companies that sell products affected by higher interest rates. “We failed to accurately predict how this would all play out and the impact it would have on our business,” he said.

The company said it has millions of satisfied customers, and that disrupting the auto industry isn’t easy. “We have seen many e-commerce companies written off early in their journey only to become market leaders. We plan to follow suit,” a spokesman said. Earlier this month, Carvana executives said cash flows and profitability are the strategic focus now.

WSJ’s Ben Foldy explains the factors that helped drive Carvana’s growth and why investors are now questioning its future. Illustration: Preston Jessee

Carvana became wildly popular among car buyers, with heavy advertising and haggle-free cars delivered to their doors. Investors bought in, driving the shares up more than sixfold. The stock has fallen more than 97% from its peak last year. Carvana’s bonds are trading at distressed levels. 

“They built an infrastructure across the enterprise with the assumption that the growth would be there,” said Daniel Imbro, a managing director at Stephens Inc. 

The ratings firm S&P Global Ratings warned that Carvana’s liquidity likely would erode faster than expected, and changed the outlook on its CCC+ rating to negative earlier this month. It said the company’s standing to raise more cash from stock and bond investors has deteriorated.

Less than a year ago, Carvana was still trying to keep up with demand. In February, it agreed to buy a car-auction business that would help boost inventory. Car sales slowed, though. 

The day the deal was completed in May, Mr. Garcia said it had overshot on growth and laid off 2,500 workers. Days earlier, it had issued a $3.275 billion bond with a 10.25% coupon to fund the purchase. The high coupon almost doubled Carvana’s annual interest expense and reflected investors’ fears of a recession and rising inflation. 

Carvana CEO Ernie Garcia III and his father, Ernest Garcia II, when the company went public in 2017.



Photo:

Michael Nagle/Bloomberg News

Carvana thrived when interest rates were low because it could borrow cheaply to buy cars and make loans to customers. Its credit line from

Ally Financial

to buy cars had an average 2.6% interest rate last year, compared with 4.5% at the end of September. Ally required Carvana to set aside 12.5% of the amount borrowed as of late September, up from 7.5%, further tightening its cash situation. An Ally spokesman declined to comment.

Carvana earned big profits selling its car loans to investors who were hungry for yield. Gains from the loans help Carvana offset the losses it makes selling cars. When investors turned choosier on these securities in the spring, Carvana sold many of the loans to Ally instead, on less-favorable terms. The gains it books from loan sales fell by around one-third in the third quarter from the year-earlier period.

Mr. Garcia told analysts on a call Nov. 3 that the company would keep cutting costs and that it has access to around $4 billion in liquidity, in addition to its $316 million cash and some other assets. The amount includes what it can borrow on credit lines to buy cars and make loans. It also included around $2 billion of real estate, which isn’t typically considered a liquid asset.

The company’s chief financial officer said Carvana could borrow against the real estate, which includes sites it bought this year. It previously raised around $500 million from selling some sites where it inspects cars and then leasing them back for 20 or 25 years. 

That step might work, analysts said, but would also add expenses. They said any real-estate deals would likely occur piecemeal over time, or involve high rent payments because of Carvana’s credit troubles. 

Scott Merkle, a managing partner at SLB Capital Advisors, which specializes in sale-leaseback transactions, said the long-term leases in the space generally rely on financially sound tenants that can be expected to make their lease payments for years. He said that overall conditions for sellers have softened in that market because of higher interest rates, but that sale-leasebacks still provide a better cost of capital for companies than other financing. 

Carvana said it is testing ways to make more from its car sales, such as having customers pick up cars from its vending machines.



Photo:

USA TODAY NETWORK/Reuters

Some Carvana-leased properties have received a tepid response on the market. A 12-story “flagship” car-vending machine in Atlanta that Carvana sold and leased back in December was relisted this summer. It is still on the market, and the asking price has since been lowered.

Carvana said it is testing ways to make more from its car sales, such as taking payment before delivery and having customers pick up cars from its vending machines. 

“We’ve got a bunch of committed liquidity. We’ve got a bunch of real estate, and I think that we feel like that puts us in a good position to ride out this storm,” Mr. Garcia told analysts on the Nov. 3 call.

—Ben Foldy, Will Feuer and Ben Eisen contributed to this article.

Write to Margot Patrick at margot.patrick@wsj.com and Kristin Broughton at Kristin.Broughton@wsj.com

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Business

Opinion: This record number in Nvidia earnings is a scary sight

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Nvidia Corp.’s financial results had a bit of a surprise for investors, and not on the good side — product inventories doubled to a record high as the chip company gears up for a questionable holiday season.

Nvidia reported fiscal third-quarter revenue that was slightly better than analysts’ reduced expectations Wednesday, but the numbers weren’t that great. Revenue fell 17% to $5.9 billion, while earnings were cut in half thanks to a $702 million inventory charge, largely relating to slower data-center demand in China.

Gaming revenue in the quarter fell 51% to $1.57 billion. Nvidia said it is working with its retail partners to help move the currently high-channel inventories.

While the company was writing off the inventory for China, its own new product inventory was growing. Nvidia
NVDA,
-4.54%
reported that its overall product inventory nearly doubled to $4.45 billion in the fiscal third quarter, compared with $2.23 billion a year ago and $3.89 billion in the prior quarter. Executives cited its coming product launches, designed around its new Ada and Hopper architectures, when asked about the inventory gains.

In the semiconductor industry, high inventories can make investors nervous, especially after the industry had so many supply constraints in recent years that quickly swung to a glut of chips in 2022. With doubts about demand for gaming cards and consumers’ willingness to spend amid sky-high inflation this holiday season, having all that product on hand just amps up the nerves.

Full earnings coverage: Nvidia profit chopped in half, but tweaked servers to China offset earlier $400 million warning

Chief Financial Officer Colette Kress told MarketWatch in a telephone interview Wednesday that the company’s high level of inventories were commensurate with its high levels of revenue.

“I do believe….it is our highest level of inventory,” she said. “They go hand in hand.” Kress said she was confident in the success of Nvidia’s upcoming product launches.

Nvidia’s revenue reached a peak in the April 2022 quarter with $8.3 billion, and in the past two quarters revenue has slowed, with gaming demand sluggish amid a transition to a new cycle, and a decline in China data-center demand due to COVID-19 lockdowns and U.S. government restrictions.

For its data-center customers, the new architectures promise major advances in computing power and artificial-intelligence features, with Nvidia planning to ship the equivalent of a supercomputer in a box with its new products over the next year. Those types of advanced products weigh on inventory totals even more, Kress said, because of the price of the total package.

“It’s about the complexity of the system we are building, that is what drives the inventory, the pieces of that together,” Kress said.

Bernstein Research analyst Stacy Rasgon believes that products based on Hopper will begin shipping over the next several quarters, “at materially higher price points.” He said in a recent note that he believes Nvidia’s numbers were likely hitting a bottom in this quarter.

“We remain positive on the Hopper ramp into next year, and believe numbers have at this point likely reached close to bottom, with new cycles brewing and an attractive secular story even without China potential,” Rasgon said in an earnings preview note Tuesday.

Read also: Warren Buffett’s chip-stock purchase is a classic example of why you want to be ‘greedy only when others are fearful’

Nvidia Chief Executive Jensen Huang reminded investors on a conference call that the company’s inventories are “never zero,” and said everyone is enthusiastic about the upcoming launches. But it doesn’t take too long of a memory to conjure up a time when Nvidia went into a holiday with an inventory backlog that included new architecture and greatly disappointed investors: Four years ago, Huang had to cut his forecast for holiday earnings twice amid a “crypto hangover” with similar dynamics to the current moment

Investors need faith that this holiday season will not be the same, even as demand for some videogame products declines after a pandemic boom just as the market for cryptocurrency — some of which has been mined with Nvidia products — hits a rough patch. Huang said that Nvidia’s RTX 4080 and 4090 graphics cards based on the Ada Lovelace architecture had an “exceptional launch,” and sold out.

Nvidia shares gained more than 2% in after-hours trading Wednesday, suggesting that some are betting that this time will be different. That enthusiasm needs to translate into revenue for Nvidia so that this big gain in inventories does not end up being part of another write-down at some point in the future.

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