Tag: restructuring

Dr. Nouriel Roubini, please take a bow

And then grab a stage break

Nobody can be right all the time, but Dr. Nouriel Roubini has come pretty darn close so far. That does not, however, preclude being correct into perpetuity.

Dr. Roubini has now grasped near constant media attention, and I believe the media’s insatiable desire for content to force down the world’s throats will eventually perpetuate the production of new material that may not fit Dr. Roubini penchant for diligence. In other words, the man is in demand, and I fear it will eventually lead to some slips (if it hasn’t already):

So what can the government do? The easy part is lowering interest rates and buying toxic assets. The hard part, he says, will be tackling housing. Roubini says that the housing market, like a company restructuring in bankruptcy, needs to have “face value reduction of the debt.” Rather than go through mortgages one by one, he says reduction has to be “across the board…break every mortgage contract.”

This proposal smells faintly like an attempt at populism – and it surely would be well received by the indebted, everywhere. However, I’m not sure if Dr. Roubini thinks that by simply restructuring every mortgage on the planet borrowers will take the lesson to heart – if he does I think he is suffering from a bit of media fatigue. I’m somewhat more convinced that such a debt reduction will eventually find its way back to the balance sheets of citizens, in the form of new digital televisions and other like-kind frivolities, the desire for in the grand scheme of keeping up with the Joneses which got us into such a nasty mess in the first place. Make no mistake about it – lowering interest rates, the first-round enabler of the Jones family’s now cracked granite countertops, will guarantee it.

On a separate note, the prognostication continues at RGE Central:

Earnings per share (EPS) of S&P 500 firms will be in the $ 50 to 60 range, but they could fall to $40. The price earnings (P/E) ratio may fall in the 10 to 12 range in a U-shaped recession. If earnings are closer to 50 or the P/E ratio falls to 10 then the S&P could fall to 600 (12 x 50 or 10 x 60) or even to 500 (10 x 50). Equivalently the Dow (DJIA) would be at least as low as 7000 and possibly as low as 6000 or 5000.

See anything you can use to leverage informed decision making? I didn’t think so. The rest of us are looking at the charts, and seeing a potential bottom on the S&P of around 450. Charts are pretty much bunk as well.

Conclusion

There are laws of diminishing returns with respect to all analysis. My suggestion is Dr. Roubini take a breather from his, before the attention firestorm results in paralysis.

Chapter 11 reorganization transfers risk to the willing

Jeffrey Miron opines that instead of accepting a bailout, banks facing failure should opt for bankruptcy filing instead:

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

Further, Chapter 11 passes restructuring risk to willing participants – those motivated and capable of adding new value to the business, whether it be capital, brainpower, or in most cases both. As banks go, I am not sure who understands the credit derivatives transaction chain well enough to take on such contingencies (but I’m am certain they exist), and court-supervised reorganization does allow for due diligence time if the entity can hold out (often assuming debtor-in-possession financing is available too, which could be questionable in this credit environment).

Outside of the banking crisis, Forbes notes it is never a bad idea to be prepared:

If you feel your business may be facing financial distress, meet with a work-out attorney now, before it is too late and your business becomes another statistic.

What Forbes doesn’t tell you is that once in Chapter 11, you’ll be faced with a myriad of financial and operational decisions that can become, to put it mildly, emotionally overwhelming. Add that in a reorganization you will be required to prove the business is worth more alive than dead, meaning get ready for a ton of strategy shifting and number crunching.

Editor’s Note: If you need someone who can stay alert during the trauma, priming objective decision making and spreadsheet mashing during trying times, contact me. I’m not only capable – I actually enjoy the stress. And I have plenty of references, both professional and personal, that can attest to the effectiveness of my candor and elbow grease.

Mortgage Security Bondholders Facing a Cutoff of Interest Payments

If it was corporate senior or subordinate debt, the cutting off interest payments is usually followed by a restructuring that often includes conversion of debt to equity. Quite difficult (if not impossible) to do here. So much for those AAA ratings.

UPDATE: Difficult to repossess plasma TVs from within bundled loans too.

Is Countrywide’s next stop DIP financing?

After liquidity trouble, Countrywide was cut short in the commercial paper market – hence yield skyrocketed. They found a savior in Bank of America, and that deal likely included some restructuring directives, including but not limited to canning up to 12,000 employees.

Now it looks like it may not be enough – the company needs yet more capital to keep the wheels spinning, and the WSJ is now suggesting that the Bank of America “coup” could turn out less than angelic.

I’ll take a wild guess that Countrywide’s longer-term securities experience a little bump in interest, and that the next turn in this saga’s financing story is accompanied by a yellow sign with the letters “D-I-P” imprinted on it.

Advice on turnarounds, from an internet guy

Maybe calling Marc Andreessen an “internet guy” is putting it lightly – with all the big-name fanfare regarding his blogging exploits I say what the hell. You have to give credit where credit is due, and his latest is a doosie…turnaround tactics.

For the most part, it is politically incorrect. That generally means it’s all true and wholly justified and should be followed with fervor bordering on religious fanatism. Nonetheless, it’s an open source world and there are some classes and functions worth adding to:

“Identify the 3-5 things that are working surprisingly well in your business, and double down on those.”

I love the double-down concept. And, if you can find one thing working surprisingly well in a turnaround situation, call yourself lucky.

“Identify the 3-5 things that are consuming a lot of money and time and yet going nowhere, and kill those.”

That includes customers, with emphasis on the real pain-in-the-butt ones you know are only dealing with you to further some internal agenda of theirs.

“Look at the market, figure out 3-5 new areas in which your company is not currently playing or winning, but are clearly going to grow a lot — and acquire the best company in each of those areas.”

This is often not an option in distressed situations. Cash is king, and your equity is often valueless as acquisition currency.

“But first, throw your predecessor completely under the bus.”

Additionally, if you take this step and subsequently fall flat on your face, you can always run for public office.