Welcome back!

This is a different type of newsletter than usual and will be covering three topics – 1) Citi’s insensitive layoffs campaign, 2) AT1 Debt and the UBS debt raise this past week, and 3) reflecting on the Twitter LBO more than one year later.

As a reminder, my merch site is live for the next month or so. If you use the following discount code: Chapter7 - you get $7 off if you purchase a minimum of 2 products. This offer is still available, but capped to a total of 22 people.

Citi Layoffs:

As many of you have seen, per CNBC, Citigroup is engaging in an aggressive set of layoffs over the coming weeks. The numbers are fluid, but there are expected to be cuts of AT LEAST 10% in several significant units. So far this year, Citi has laid off 7,000 employees, with 2,000 layoffs coming in 3Q23. However, headcount is still roughly flat at 240k due to hiring in other areas like regulatory areas. They are looking to reduce the number of management layers from 13 to 8, plus removing as many “co-heads” as possible and instead holding just one head accountable for their unit.

What’s pretty cruel about the story is that this significant headcount reduction plan is named “Project Bora Bora”. The first thing that popped into my head was Saul Goodman from the TV show Breaking Bad explaining that Walter should have redacted person “sent on a trip to Belize” – aka offing them.

For anyone unfamiliar with Bora Bora..it is a beautiful island in the South Pacific Ocean and a great place to vacation! Or, uh, a place you want your fired employees to head off to after sending them off to pasture.

Why the hell would the employees and consultants name a project where you’re firing people such an insensitive name? People noted that “hmmm that sounds very McKinsey like” and it checks out frankly given Fraser’s background as a McKinsey Consultant.

There’s a lot of speculation on The Layoff about when the layoffs will start and there’s speculation it could start as soon as this week.  

There are some caveats though. As mentioned, the reduction of reporting lines from 13 to 8 reduces bureaucracy and dozens of different committees are getting eliminated as well. From listening to Fraser’s speeches on the cuts, it sounds like reducing bureaucracy and cutting down meetings is a sensical move for a bank trying to streamline things a little bit better. Additionally, YTD headcount is flat at Citi (despite 7,000 layoffs already), while GS and Wells were among the lenders who have ~5% cuts this year. So given the operating environment and given not everyone can be as smart and handsome as Jamie Dimon, some level of cuts always needed to happen this year.

The sad part is that layoffs are never always a function of the lowest performer getting canned, there are always people who lose out because of “wrong place wrong time” or political reasons. In my handling layoffs and the different types of restructuring piece (now a premium piece) a key point I emphasized was that layoffs can be pretty vindictive and it’s not a testament to the quality of your work or how the rest of your career will play out and it’s just a job, it’s not your life. A job is only a way to drive cash flow to fund your livelihood.

I also called out in that piece that cuts in November 2023 through March 2024 would return as a result of FY24 budgeting, which I believe will play out given M&A activity is still in the dumps. Other firms that have called out cost cutting this past week include Carlyle, who had a decent round of layoffs back in June.

This isn’t great, and as usual not a great look in changing the perception of “Wall Street Fat Cats”/highly educated Wall Street professionals being deeply out of touch. It’s also a friendly reminder that your employer is not “a family”, or your friend…you’re just in a transactional relationship with them.

God Speed everyone as we enter peak-layoffs season.

AT1 Bonds:

Last Week, UBS priced $3.5B worth of AT1 bonds (a $1.75B ’28 and a $1.75B ’33) at a 9.25% yield. Both bonds now trade above par in the secondary. Let’s quickly define AT1s:

Additional Tier 1 (AT1) bonds, are a form of Contingent Convertible Bonds (CoCo Bonds) that qualifies as regulatory capital under Basel III standards and can convert into equity or be written down should a predefined trigger play out. So we’re talking about somewhere in the middle in terms of seniority compared to first-lien debt and equity. This is standard for European Banks, while in the U.S. you may just buy preferred equity. 

These were highly topical back in March when Credit Suisse (CS) needed their bailout financing. CS CoCos (AT1s) got wiped out. This was an odd situation because CS equity wasn’t wiped to zero, but the $17B worth of AT1s was wiped out because the situation was dubbed a “viability event” given the need for extraordinary government support.

Despite the pleas of Distressed investor legend, David Tepper, $17B of AT1s were wiped out. While aggrieved AT1 investor groups are still battling it out for some sort of cents on the dollar recovery, it’s quite the hit. In September, AT1 bonds on Cantor Fitzgerald’s desk inched up from 3-4 cents on the dollar to 9.5 cents on the dollar, 

Obviously, Tepper has had some great wins over the years, but this L, coupled with how terrible the Carolina Panthers look are two knee to the face moments for Tepper. I mean…he okayed this trade with the Bears below and then made the team pick Bryce Young over CJ Stroud:

As for this new deal? Per Bloomberg, Demand was 10x oversubscribed and the order books even included at least 2 investors who had got burned on the CS AT1s. $36B worth of orders this past week was wild. But UBS Chairman Sergio Ermotti called out that the market realized Credit Suisse’s AT1 writedown was idiosyncratic and that the asset class isn’t seen as uninvestable anymore.

You can either say “Oh it was idiosyncratic” or “I’m never touching AT1s again” but either way the resounding return of AT1s shows the market certainly has a short memory.

The Twitter LBO:

No, we’re not calling it X. It’s been more than a year since Elon Musk took the helm at Twitter and gave us a massive LBO to speculate about. Look let’s call this LBO a mixed bag, Elon at his current net worth is going to be fine, but compared to every other comparable LBO, this is truly atrocious. Let’s go through the Pros and Cons of the LBO so far in more detail. We can save the political side of the equation for another day and I’ll stick to the financial aspects of the deal.

Pros:

• Headcount reductions were real: Wtf were all these people at Twitter doing all day? Twitter was able to let go of 80%+ of the workforce and other than some minor throttling the app works fine.

• Community Notes: This is a good opportunity for people to correct misinformation that travels around the internet. This is cool and should be done, unless it’s me making a joke about how BlackRock owns everything.

• Setting up a recurring revenue model through subscriptions: At least this is a new way to generate recurring revenue, and a lot of people initially skeptical of blue checkmarks ended up signing up. However…that’s somewhat all for naught when everyone with ad payouts makes more than enough to cover that. The payouts haven’t been great after the initial large payouts that went around, but as long as it’s more than $11/month you’re basically getting paid to goof around on social media. I definitely believe Meta should be paying larger accounts to use Instagram and Threads.

Cons:

• Revenue is atrocious: Monthly advertising revenue is regularly reported as horrific and down more then -60% usually. A lot of advertisers have lost faith in the Company and were aggressive in pulling spend right after the LBO.

• The Valuation is Terrible: Per Bloomberg, Twitter is now valued at $19B, instead of the $44B EV it was valued at last year.

• Monthly Users are down -15% y/y. People are starting to leave and drop off: Talk to anyone on FinTwit, or go through your following list, there’s a growing number of people who haven’t posted in months or deleted their accounts a while back. According to Similar Web, Twitter Monthly Active Users in September 2023 were down -15% y/y globally and -18% y/y in the United States.

• Bots aren’t going away: It’s a really annoying experience. Every big poster on Twitter automatically has 3 bots replying crypto scams immediately every time they tweet. If you see this in the hidden replies section of any of my tweets DO NOT CLICK ON ANY LINKS FROM ANY THE DEFI BOTS

• Threads remains waiting in the wings: While the vast majority of people that joined Threads don’t check it and went back to Twitter, Threads is ominously waiting for any F-it up moment. As of now, Threads is just “the backup site” - but don’t rule them out just yet - the site is less than a year old.

• The Company remains overlevered and is burning cash: I’d still bet the cash flow is pretty terrible at this company. A lot of it has to do with the massive spike in interest rates, but frankly Elon just overpaid. It was a brutal overpay. It’s hard to believe claims that “We’ll be profitable soon!” because they’re probably using pro forma adjusted EBITDA to measure profitability instead of FCF. Remember, Twitter wasn’t necessarily a great FCF story prior to the buyout.

While, we’ve seen some bad deals get moved off of Bank balance sheets in 2023, Twitter has been the big exception. There is not going to be credit investor appetite for this and the haircut will be too deep for Banks to swallow. Unfortunately, Elon didn’t reply to my offer to help syndicate 😕 

Given the poor operating results and the tough interest rate environment, this deal is hung.

However, that doesn’t mean that Twitter is going to spiral out of Elon’s control.

Conclusion: As much I want the lenders to pry the Company out of Elon’s hands, it won’t happen; it’s just a meme joke. The Banks aren’t syndicating it because the Buyside doesn’t want this crap paper. So with the Banks stuck, they’re not going to Loan-To-Own Elon. If they screw him over, the bankers who made the calls will never ever be part of the book to do deals with Tesla, Space X, or other Musk companies ever again. That’s a lot of business to lose and is untenable when dealing with the richest man in the world.

Additionally, with $12B in debt..Elon is worth over >$225B and can PG or pay down the debt and delever if he wants. It’s not great for equity returns or good capital allocation, but hey he could do that. It’d be quite the cost to go liquid given the $$$ he has tied up in stock, but it’s certainly possible.

Ultimately, this “business” is less of a business and more of a non-profit. It’s Elon’s way of having a “town hall” and then trying to do a bunch of things no one wants like turning Twitter into a payments and banking platform…

While this was a brutal overpay, this may be for Elon the equivalent of us buying a shiny car or buying a flashy rolex. This is a monumental asset with significant geopolitical importance, but for him it’s also a hobby to repost bad memes on.

Closing Notes

• Remember to check out the Merch site during the holiday season.

• Three more newsletters will be released before year end. This will include a Credit Recruiting Newsletter available to only Premium Subs.

• I’m interested in connecting with any Private Equity Associates/Senior Associates or Direct Lending Professionals (Associate and up) who want to talk about their recruiting processes and what they’ve learned along the way. Please DM me if interested.

Best,

HYH

This newsletter was a different type of newsletter – instead of a long formed piece, this covered three different topics in a concise way that incorporated memes. Did you like it? Did you hate it? Let me know in the poll.