Chinese property developer Country Garden has posted a record $6 billion loss for the first half of the year as new home developments dry up. At the same time, toymaker Lego has seen a decline in profits as bumper pandemic sales growth starts to fade. If we want to avoid a recession, it’s time to start building houses, Lego or otherwise.

The lowdown

• 😶 Chinese property developer Country Garden warns it may default on loans after $6 billion first half loss.

• ⏬ Toymaker Lego sees profits fall 18% in first half as pandemic sales tailwind drops off.

• 🕵️ The SEC is investigating the potential misuse of Tesla funds to build Elon Musk a ‘glass house’.

Flex your finance muscle 💪

Debtor-in-possession loans

A debtor-in-possession (DIP) loan is a (usually very boring) type of financing extended to companies undergoing Chapter 11 bankruptcy. When traditional financing channels dry up for these distressed companies, DIP loans step in to ensure that companies have enough liquidity to maintain operations and fulfill short-term obligations.

These loans are granted "super-priority" status, which means they're repaid before existing debt and other claims in case of liquidation. This prime position in the repayment hierarchy is meant to encourage an essential lifeline for companies striving to navigate the waters of bankruptcy and eventually re-emerge stronger. Savvy lenders can, however, use these loans to impose terms that effectively allow them to seize control of companies ($).

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BoE’s bond losses are mounting

The Bank of England bought bonds to support the UK economy in the wake of the financial crisis (the big 2008 one, not the mini budget blip). The losses on these bonds are now predicted to be significantly higher than previously thought.

The bond buying program ran from 2009 to 2022, amassing £895 billion in holdings at low interest rates. The BoE began reducing its bond holdings last year and, as interest rates rose, the value of government bonds decreased, which meant the BoE was now unloading them at a loss.

The UK Government will indemnify the bank for these losses, so what this really boils down to is a drag on government finances. BUT the BoE made some pretty serious gains when interest rates were low ($) which it passed along, so for the UK Government this is more a case of easy come, easy go.

The content we're consuming today

• FT: Colm Kelleher was always meant to become Europe’s most powerful banker ($).

• The Baffler: Hanging in the Balance Sheet: Dramatizing the quest for market share.

• Unhedged podcast: The central bankers’ rodeo.

Off-balance sheet items

• I have spent quite a lot of time making croissants lately, and given the last batch I made were described as ‘not bad,’ I have decided to take the win and move on to something else. Next up is this key lime pie recipe, again from Claire Saffitz.

The bottom line