In The Headlines

Beginning of the End of “Too Big to Fail?”

The “never a bailout” crowd might soon get a boost from Washington. A bill designed to help a big bank through a potential Lehman Brothers-style collapse without using taxpayer money is receiving broad support on Capitol Hill. The Financial Institutions Bankruptcy Act (FIBA), which passed the House Judiciary Committee unanimously in September, made it through the House recently. The bill has a high chance of becoming law this year since it has been packaged within a larger financial-services budget bill.

The bill would amend existing federal law regarding big banks, giving regulators and bankruptcy judges more control over what happens with a failing firm. These government officials would have more power to sort through the firm’s debts and decide how to stabilize an institution as it continues to operate.

Effectively, the bill would allow the government to transfer assets from a failed or failing bank or insurance firm to a government-operated institution, a so-called bridge bank, within two days of a bankruptcy. That could help address a problem that cropped up during the last financial crisis. When Lehman Brothers collapsed, catalyzing the crisis in 2008, it took several months to understand who owed what to whom. Years later, Lehman is still not fully wound down. That in turn made it hard for courts to approve any transactions—putting several of Lehman’s counterparts under duress as well.

“FIBA potentially solves this problem by transferring the assets of the failed institution to a bridge institution within two days’ time,” Ben Iverson, an assistant professor of finance at the Kellogg School of Management at Northwestern University said. “Then, this new institution can continue to operate and service all of the contracts, while the old institution works out the details of how to resolve the bankruptcy.”

It could also make it easier for banks to deal with a major part of their regulatory responsibility following the financial crisis: Keeping a so-called “living will.” These “living wills” for banks are outlines from each of the country’s largest financial institutions regarding how they would wind down in the event of a crisis without using taxpayer money and without damaging the economy. In April, five out of the country’s eight largest financial institutions were told they had failed the test. The banks that passed did not do much better.

But FIBA could take a load off the banks. “I think the reason why big banks are pro-FIBA is because they will be able to claim that their ‘living wills’ are feasible now, which might result in federal regulators putting less emphasis on the stress tests,” Iverson said. “But it definitely remains to be seen if FIBA would truly allow the bankruptcy system to handle another Lehman-like event.”

Under the bill, creditors would also be prevented from collecting collateral or accelerating debt during the 48-hour window immediately after a large financial institution has filed for bankruptcy.

Citations

1. http://for.tn/29B701A – Fortune
2. http://bit.ly/29x0zOn – Congress.gov

The Fall(s) and Rise of the Twinkie

Hostess Brands LLC, the maker of Twinkies and Ding Dongs, plans to become a publicly listed company, marking a revival for an iconic American baker that just three years ago was facing liquidation. The company will go through a complex deal on its route to becoming public, with investors ponying up $725 million. The baker’s current owners will own 42% of the new company, which will be renamed Hostess Brands Inc.

The deal marks a comeback for a brand that was close to extinction before Apollo and Metropoulos bought it out of bankruptcy in 2013. Hostess was founded in 1919 and gained popularity with its cream-filled, swirled-icing cupcakes. In 1930, the company introduced Twinkies, a snack that became a mainstay of American supermarkets and popular culture. “Hostess presents a unique opportunity to invest in an iconic brand with strong fundamentals that is poised for continued growth,” Gores Group Chairman and CEO Alec Gores said in a statement. Gores added that the new company will have an initial enterprise value of about $2.3 billion, 10.4 times its forecast 2016 adjusted operating profit of about $220 million. The company had about $650 million in revenue in the year ended May 31.

While Twinkies have strong brand recognition, taking Hostess public will test investor appetite for a company that trades in the kind of processed sugary treats that Americans are increasingly trying to avoid. That trend took a toll on Hostess in recent years, contributing to the company’s two bankruptcies in the past decade. Hostess emerged from bankruptcy in 2009 under the control of buyout firm Ripplewood Holdings LLC and lenders.

Previously known as Interstate Bakeries Corp., the company changed its name to Hostess Brands that year. When Hostess again went under roughly three years later, Apollo and Metropoulos came to the rescue, paying as much as $410 million for the name. The new owners resumed production and expanded distribution, officially returning Twinkies to store shelves in 2013 after a seven-month hiatus. The Metropoulos family, which has purchased other American brands such as Pabst beer, dubbed the baker’s revival the “sweetest comeback in history ever.”

The next chapter for Hostess takes place as the U.S. food industry’s sales and profit are slumping. Consumers are seeking out fresh and natural options, shifting away from processed grocery staples that dominated store shelves for decades. Changing consumer tastes have been hard on big packaged-food makers, with sugar in particular targeted as a health hindrance by U.S. consumers. “It’s not in tune with where customers are going,” said Ken Shea, an analyst at Bloomberg Intelligence. “There will be a high level of scrutiny on their ability to grow.”

Regardless of the headwinds facing sweet snacks, Hostess plans to double down on indulgence, according to Toler. The company has improved the shelf life of Twinkies and will introduce frozen varieties to grocery stores later this year, seeking to capitalize on the rise of snacking in the U.S. Hostess expects sales to grow 11% this year to $722 million, with an 8% bump forecast for 2017, the company said in a presentation. “Hostess has an incredible brand power,” Toler said on a conference call Tuesday, going on to add, “It has an amazing emotional connection with consumers.”

Another deal for a maker of sweet snacks also is percolating, with weakness at Hershey Co. making that company a takeover target. Mondelez International Inc., said last week that it had made a bid for the chocolate maker, which Hershey rejected. Despite troubles for food makers, the uncertainty surrounding the recent Brexit vote and the U.S. election make the companies an attractive investment opportunity, Shea said. The Standard & Poor’s 500 packaged-food index gained 14% this year through last week, compared with a 2.9% gain for the larger S&P 500. “This is a vote of confidence that packaged food is an attractive place for investors,” Shea said, adding, “It’s traditionally viewed as a place that money flocks to in times of uncertainty.”

Citations

1. http://bloom.bg/29jqds1 – Bloomberg
2. http://cnnmon.ie/29x2tyh – CNN

The Good News Is . . .

• Employment in the private sector rose more than expected in June, led by gains in small-business jobs, according to a report from ADP and Moody’s. Private sector jobs grew by 172,000, Small businesses, those with fewer than 50 employees, accounted for 95,000 of those jobs, up from 84,000 in May. Medium-sized businesses, those with an employee count between 50 and 499, added 52,000 jobs, down from 60,000 in May, while large businesses accounted for an extra 25,000.

• Walgreens Boots Alliance Inc., a global pharmacy-led, health and wellbeing enterprise, reported earnings of $1.18 per share, an increase of 15.7% over year-earlier earnings of $1.02 per share. The firm’s earnings topped the consensus estimate of analysts by $0.04. The company reported revenues of $29.5 billion, an increase of 2.4%. Management attributed the company’s results to the strength of its retail pharmacy sales in the U.S. and synergies from its combination with Boots Alliance in the United Kingdom.

• Danone, the French company that sells Stonyfield yogurt and Evian water, said on Thursday that it had agreed to buy the WhiteWave Foods Company—maker of Horizon Organic dairy products and Earthbound Farm salad greens, among other brands—for $10 billion in cash. The deal, aimed at enhancing the American profile of the company that makes Dannon and Activia yogurts, will significantly increase Danone’s presence in the lucrative organic foods market. Also, through WhiteWave’s ownership of the Silk brand of soy and nut milks, the purchase will give Danone a toehold in the flourishing market for plant-based dairy substitutes. The acquisition underscores Danone’s determination to meet the changing tastes of consumers, including an aggressive shift toward the use of organic milk, which is more expensive than conventional milk.

Citations

1. http://reut.rs/29HxEbN – Reuters
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/29uYumP – Walgreens Boots Alliance
4. http://nyti.ms/29tbica – NY Times Dealbook

Planning Tips

Guide to Apps that Can Improve Your Financial Life

Keeping a balanced budget can help you stay on track and sleep better at night. But if your money-management system requires sifting through piles of receipts and retrieving cash from various pockets and purses, it is time to reconsider your approach. With the apps below, you can put away the paperwork and get a better understanding of your daily, weekly, monthly, and annual spending habits. Be sure to ask your financial advisor for help with selecting and understanding the apps that are best for your situation.

Mint – This popular app gives you all the tools you need to manage your earnings, spending, saving, and budgeting. It syncs up all your accounts, from bank accounts and mutual funds to your 401(k) or IRA. Each section is organized to give you the big picture of your finances. The Updates section includes all transactions and how you have been using your accounts. In Overview, you can get account totals, monthly budget, credit score, alerts for where you went over budget, and spending broken down by category. Mint shows your cash flow in real time, including deposits, expenses, credit card debts, and other investments. This format is great if you are especially into using your debit or credit cards for all purchases, but it also works with cash as long as you enter every purchase. In addition to adding up all your accounts, and outlining budget and savings goals, Mint analyzes your spending habits, helping you pinpoint areas where you can potentially save. If you are forgetful about balances, you can set a low-budget alert and Mint will email or text when you hit it.

GoodBudget – This is an app for people who are ready to start creating a budget based on their cash flow. The envelopes system is similar to putting allocated amounts of cash into actual envelopes per month, which is charmingly old school. You use the Envelopes section to divvy up your monthly budget and understand spending habits in each area of your life. For items that land in your recurring budget, select the time frame as monthly, weekly, semi-monthly, or every two weeks, and then pick a start date. This app is also optimal for people whose pay schedules vary (e.g., freelancers). The “irregular” option lets you track spending that is not routine. For example, maybe you have a “holiday gifts” or “vacation” envelope that you contribute to every other month—or when you can.

Mvelopes – This app starts with a few simple questions about your financial goals and then guides you through ways to think about money long term. It starts by syncing up your bank accounts. The app takes security very seriously, as it should, and requires rounds of email confirmation to sync up. After syncing, Mvelopes functions similar to GoodBudget with the envelopes system, but asks you to define income and create a budget before filling the spending envelopes. After loading the accounts, Mvelopes takes you through defining your income and creating a budget, and then separates spending from the total amount in your bank accounts. That way, you are spending based on a budget rather than your net worth, or how much is in your accounts.

HomeBudget – The home screen of HomeBudget shows the following categories: Expenses, Bills, Income, Budget, and Accounts, and the dollar amounts in each one. Right below that, you see a chart with expense as percentage of income and a total balance. Below, there are three more tabs: Payees, Reports, and Search. All the financial big-picture options can be found under the “reports” table. If you want a broader month-to-month look at your spending, budgeting, and accounts, you can get that as well. If you have people you regularly pay, you can add them to the Payees section. This app is especially useful for freelancers.

Expensify – Expensify offers both smartphone and web interfaces to track your expenses. The interface features four big buttons: SmartScan, Add Expense, Track Time and Track Distance. “SmartScan” lets you photograph, categorize, and tag receipts, and then add them to expense reports if necessary. You can also enter the merchant name, total amount spent, and date for each expense. This is great for anyone who wants to save receipts but does not want to hang on to a paper copy. If you prefer manual input, “Add Expense” offers the categorizing options. You can also note if the expense is billable and/or reimbursable by the flip of a few switches. The “Track Distance” option is especially handy for freelancers who travel by car and want or need to bill by distance; here, you can track by odometer or just turn on location and use the app’s GPS. The “Track Time” option offers a way to keep tabs on hourly earnings, which are based on a set hourly rate. You can add your debit and/or credit card through the web version of Expensify, and then you will be able to track your total account balances alongside daily expenses and earnings. Later, you can export your expense reports or send invoices straight from the app or the web version.

Citations

1. http://cnb.cx/29nFsPk – CNBC
2. http://bit.ly/29sKuvl – AARP
3. http://bit.ly/1jkfWLU DailyWorth.com
4. http://ti.me/29tchtl – Money
5. http://bit.ly/29W2yK4 – DailyDot.com