It doesn't matter what you call it, if a company with negative earnings and high cash burn needs financing can't pay its debts, the ultimate bagholders are its common shareholders. This is happening all over small-cap and micro-cap land.
There's excellent posts here about how homeowners have been using HELOCs to pay off their first mortgages. But the same thing has been going on among companies below the S&P 500. The only difference is that these companies have expropriated the equity for the benefit of their owners and top executives, not the stupid bagholder small-cap shareholders like Sebastian.
When bagholder buy small-cap stocks these days, they have no clue what they are getting. Mostly, fraud and debts.
Paying debt with more debt is not paying off anything at all--it's creating more debt.
"There is one cause, and only one cause, of all panics and depressions in the economic world. That cause is debt. Credit is debt."
---Freeman Tilden, in A World in Debt, 1935
I would just like to reiterate that a whole new investment sub-industry has morphed into respectability called PIPEs.
PIPEs = private investment in public equity.
The target market for PIPEs is small-cap and micro-cap public companies that can't get acccess to financing through any more legitimate sources.
PIPEs = loan sharks for small cap companies.
If you are an averaging money-challenged company with market cap of $150 million, PIPES will loan you money at 10%. But if you don't dot every i in the agreeement, your interest rate goes to 15% and 50% dilution of your common shareholders. If you fail to dot every i the second time, the interest rate goes to 20% and 100% dilution. And so on.
Why do small-cap companies do these deals? They're desperate.
"Every debt is eventually repaid, either by the borrower or the lender"
--Some guy, referring to why we won't experience hyperinflation in a country whose wealth-holders are the lenders and control the inflation mechanism.
Did I mention the wealth-holders can seize the borrowers future earnings via new laws they impose, because the wealth-holders also control the government?
Thanks for the compliment. There's a whole generation of small-cap U.S. companies that have been built on mountains of debt, and if you read all the documents with an eagle eye, the only people who can possible profit from these company's longshot odds of success are the owners, top executives and insiders. They've manipulated public markets in the most leveraged, cynical ways imaginable. When I see a**holes like Sebastian talk about buying these companies, I just laugh.
"wawawa writes:
Question is what kind of stupid lender would finance such a nonsense? That is the incredible part of it."
Probably some of the buyers were part of the same brain trust that bought all the subprime paper. But I'd guess that most investors in PIK's were dedicated "high yield" (junk bond) investors - who should know better.
PIK's sort of make sense as a way to attempt a workout rather than force a bankruptcy (which rarely works out in favor of bond holders). They appeared in the great Junk Bond bubble of the 1980s and had largely disappeared thereafter. However, the stupidity level rose up again and they reappeared.
I was amongst a large group of people who were surprised by the subprime blowup. We thought that the corporate bond market was going to blow up before residential loans, not the other way around. Hoocoodanode?
CR,
If you are still reading these comments, I suggest you go back and read my recent post under Comparing Starts and Sales. I think you are underestimating the overhang based on your 9 year numbers rather than using 30 year numbers.
When the wealth holders are the only ones who can sell their PIKwicks to Uncle Ben, it doesn't matter what kind of loans the wealth holders write, in the end they can turn it in for gold simply for having the paper.
I have been busy farming for the past few days and have needed a fix. This story does it. I was hoping my first person interviews with producers were out of the main stream but are apparently not. Spoke to a hog producer who is losing $3 per pig he ships beccause of feed prices. Truckers parking their rigs due to high fuel prices. Panicked wheat growers who bought the fertilizer and fuel to put in the crop and now wheat is dropping like a rock. They can't issue more debt to pay their bills. The banks are tight. The course is set. Hang on for a rough year.
Why do small-cap companies do these deals? They're desperate.
rich | 05.18.08 - 9:35 pm | #
They don't know how to 'live small first'& use organic growth... borrowing is frequently a death sentence delayed. Their managers should know better - but most of them probably came form a large corp environment with capital behind them - they have no idea how to fight a guerrilla war. So they model the systems they know - GE, Honeywell, Citi, etc.
Thanks for the compliment. There's a whole generation of small-cap U.S. companies that have been built on mountains of debt, and if you read all the documents with an eagle eye, the only people who can possible profit from these company's longshot odds of success are the owners, top executives and insiders. They've manipulated public markets in the most leveraged, cynical ways imaginable. When I see a**holes like Sebastian talk about buying these companies, I just laugh.
The only ones that are any good are probably still private - not PE either but owned & operated by the founders. I'm suspicious of the others.
They don't know how to 'live small first'& use organic growth... borrowing is frequently a death sentence delayed. Their managers should know better - but most of them probably came form a large corp environment with capital behind them -
It's my impression that a lot of small-cap public company CEOs learn most of what they know from MBA programs or the Wall Street financiers that call on them and woo them. I doubt many of them have had extensive Fortune 500 experiences.
They are so academic and green and gullible to the siren song of Wall Street that's it's scary. If they had deep experience with a Microsoft, GE, or equivalent, they would be a lot better off.
OBAMA: 'We can't drive our SUVs and eat as much as we want and keep our homes on 72 degrees at all times... and then just expect that other countries are going to say OK'...
rich - excellent points. And more than a little frightening. So much for the strongest engine of jobs growth.
Purely anecdotal point, but I own what I guess would be classified as a "micro" business, with five employees. I have made it a point never to take on more than a dash of credit here and there for cash management purposes, and never for more than two or three weeks. But I have been really surprised at how unusual that seems to be, and how prevalent the idea is that working capital = borrowed money from the bank. It is a very strange conversation to have your bank call you and ask why you aren't using your line of credit more often.
"'We can't drive our SUVs and eat as much as we want and keep our homes on 72 degrees at all times"
OOOOOhhhh YEAH!!! Americans love sacrifice and aiming to come in fifth (or lower). Picturing Jimmy carter in a cardigan in front of a fireplace looking "Presidetial". It was the beginning of the end for Carter.
I guess I'm the only veteran of the junk bond wars of the late 80's on this site. PIK's were a creation of Michael Milken, Drexel Burnham and KKR. They worked in a few cases and failed in others. Most interestingly, they arose near the end of that bubble.
Just goes to show not just how much companies are addicted to debt, but extremely cheap debt at that. Very, very few companies are AAA these days, but the global chase for yield drove interest rates down such that any company could get cash at ridiculously low rates.
the american people will pick a "straight-talking" old war criminal anytime.
anyone who's saying the "murican way of life" might be negotiable after all or may be subject to peak oil and economic reality may as well find another line of work.
Just visited your site. You'll regret that statement "The obituaries for real estate have been premature." Knife-catchers don't make good economic indicators.
Many of the decisions to PIK interest are made in light of the fact that debt is trading at substantial discounts. Even very strong companies (or their private equity fund owners) can reasonably expect to be able to buy outstanding debt on the open market for as little as 80 cents on the dollar. By PIKing their interest, they're just increasing their savings when they buy and retire their debt (rather than repaying it at 100 cents on the dollar). In addition, by starving their banks of cash, they're providing extra incentives for the banks to sell.
I have to think that's a factor with Univision, whose total senior credit facility runs in the neighborhood of $10 billion (of which cash-strapped Citibank holds the largest share).
For those mega-borrowers, the solvency (or lack thereof) of lenders may be driving decisions to take down optional borrowings. In view of the continuing nonsense around the Clear Channel deal, borrowers with hundreds of millions of dollars of supposedly committed credit have good reason to wonder whether the banks will be there should they need to borrow against their lines. Better to find out now--when you don't really need the money and can afford the litigation--than when your back's against the wall.
Given what's out there about Univision's performance and balance sheet, it would surprise me if that's not what happened there.
Kind of late to the remark, but this got me thinking about another industry I knew to be facing hard times, so I did some digging...
"Coachmen Industries Inc., whose sales have declined 40 percent over the past three years, is borrowing against the value of life-insurance policies it holds on employees and retirees. So far, the Elkhart, Ind., company has tapped about half the cash value of those policies, according to filings with the Securities and Exchange Commission."
"Coachmen has borrowed $23.7 million"
"Such insurance typically is purchased by a company on the lives of its employees and pays the company when an employee dies. In its filings, Coachmen has said the policies were intended to fund executive retirement benefits."
This doesn't sound good.
CR:
Are you sure there is not going to be a Depression? Paying debt with more debt just sounds like insolvency to me.
Sweet another version of a HELOC to make the Mortgage payments.
This is what I've been trying to tell you about.
It doesn't matter what you call it, if a company with negative earnings and high cash burn needs financing can't pay its debts, the ultimate bagholders are its common shareholders. This is happening all over small-cap and micro-cap land.
There's excellent posts here about how homeowners have been using HELOCs to pay off their first mortgages. But the same thing has been going on among companies below the S&P 500. The only difference is that these companies have expropriated the equity for the benefit of their owners and top executives, not the stupid bagholder small-cap shareholders like Sebastian.
When bagholder buy small-cap stocks these days, they have no clue what they are getting. Mostly, fraud and debts.
Any idea total size of the PIK market?
Paying debt with more debt is not paying off anything at all--it's creating more debt.
"There is one cause, and only one cause, of all panics and depressions in the economic world. That cause is debt. Credit is debt."
---Freeman Tilden, in A World in Debt, 1935
I would just like to reiterate that a whole new investment sub-industry has morphed into respectability called PIPEs.
PIPEs = private investment in public equity.
The target market for PIPEs is small-cap and micro-cap public companies that can't get acccess to financing through any more legitimate sources.
PIPEs = loan sharks for small cap companies.
If you are an averaging money-challenged company with market cap of $150 million, PIPES will loan you money at 10%. But if you don't dot every i in the agreeement, your interest rate goes to 15% and 50% dilution of your common shareholders. If you fail to dot every i the second time, the interest rate goes to 20% and 100% dilution. And so on.
Why do small-cap companies do these deals? They're desperate.
"Every debt is eventually repaid, either by the borrower or the lender"
--Some guy, referring to why we won't experience hyperinflation in a country whose wealth-holders are the lenders and control the inflation mechanism.
Question is what kind of stupid lender would finance such a nonsense? That is the incredible part of it.
When the borrowers don't repay the loan, then the wealth holders aren't so wealthy any more, are they?
Rich great insight. Remember a company does not have to be bankrupt for its common stock to become worthless. Soon equity holders will realize this.
El cliffo speak on it brother! Debt is hanging over many like the grim reaper.
Did I mention the wealth-holders can seize the borrowers future earnings via new laws they impose, because the wealth-holders also control the government?
Wall St will buy these bonds at a discount, package them as CLO to be used as Fed loans.
Tim,
Thanks for the compliment. There's a whole generation of small-cap U.S. companies that have been built on mountains of debt, and if you read all the documents with an eagle eye, the only people who can possible profit from these company's longshot odds of success are the owners, top executives and insiders. They've manipulated public markets in the most leveraged, cynical ways imaginable. When I see a**holes like Sebastian talk about buying these companies, I just laugh.
If you only knew...
By the way, kudos to CR for picking up on this story.
CR is the beast of bloggers.
Best of bloggers?
Common stock is the most liquid asset companies have and to be sure it will be diluted, sold, if necessary for survival of upper management salaries.
"wawawa writes:
Question is what kind of stupid lender would finance such a nonsense? That is the incredible part of it."
Probably some of the buyers were part of the same brain trust that bought all the subprime paper. But I'd guess that most investors in PIK's were dedicated "high yield" (junk bond) investors - who should know better.
PIK's sort of make sense as a way to attempt a workout rather than force a bankruptcy (which rarely works out in favor of bond holders). They appeared in the great Junk Bond bubble of the 1980s and had largely disappeared thereafter. However, the stupidity level rose up again and they reappeared.
I was amongst a large group of people who were surprised by the subprime blowup. We thought that the corporate bond market was going to blow up before residential loans, not the other way around. Hoocoodanode?
Owner Earnings writes:
Any idea total size of the PIK market?
about 550 trillio
CR,
If you are still reading these comments, I suggest you go back and read my recent post under Comparing Starts and Sales. I think you are underestimating the overhang based on your 9 year numbers rather than using 30 year numbers.
When the wealth holders are the only ones who can sell their PIKwicks to Uncle Ben, it doesn't matter what kind of loans the wealth holders write, in the end they can turn it in for gold simply for having the paper.
He who hath the gold hath the wealth.
I have been busy farming for the past few days and have needed a fix. This story does it. I was hoping my first person interviews with producers were out of the main stream but are apparently not. Spoke to a hog producer who is losing $3 per pig he ships beccause of feed prices. Truckers parking their rigs due to high fuel prices. Panicked wheat growers who bought the fertilizer and fuel to put in the crop and now wheat is dropping like a rock. They can't issue more debt to pay their bills. The banks are tight. The course is set. Hang on for a rough year.
Why do small-cap companies do these deals? They're desperate.
rich | 05.18.08 - 9:35 pm | #
They don't know how to 'live small first'& use organic growth... borrowing is frequently a death sentence delayed. Their managers should know better - but most of them probably came form a large corp environment with capital behind them - they have no idea how to fight a guerrilla war. So they model the systems they know - GE, Honeywell, Citi, etc.
Thanks for the compliment. There's a whole generation of small-cap U.S. companies that have been built on mountains of debt, and if you read all the documents with an eagle eye, the only people who can possible profit from these company's longshot odds of success are the owners, top executives and insiders. They've manipulated public markets in the most leveraged, cynical ways imaginable. When I see a**holes like Sebastian talk about buying these companies, I just laugh.
The only ones that are any good are probably still private - not PE either but owned & operated by the founders. I'm suspicious of the others.
ogawd , obama's a PO'er
no link , drudge should sufice
It's my impression that a lot of small-cap public company CEOs learn most of what they know from MBA programs or the Wall Street financiers that call on them and woo them. I doubt many of them have had extensive Fortune 500 experiences.
They are so academic and green and gullible to the siren song of Wall Street that's it's scary. If they had deep experience with a Microsoft, GE, or equivalent, they would be a lot better off.
Rich, take back the GE comment.. i'm beggin you
Fast-forward to 2012:
This shows how loose the lending standards were for sovereign debt.
Well that was quick for Claire's Stores--its LBO by Apollo closed last May .
This is what Hyman Minsky called `Ponzi finance'.
Small caps are ideas. Large caps are businesses. I like good businesses with good ideas.
AFP: Obama camp spies endgame in Oregon
OBAMA: 'We can't drive our SUVs and eat as much as we want and keep our homes on 72 degrees at all times... and then just expect that other countries are going to say OK'...
I personally liked "non-negotiable way of life"
just seemed more hopeful
Rich, take back the GE comment.. i'm beggin you
PonziMonetizaCoruptiCapatlism |
Sorry, I take it back.
I never said that.
rich - excellent points. And more than a little frightening. So much for the strongest engine of jobs growth.
Purely anecdotal point, but I own what I guess would be classified as a "micro" business, with five employees. I have made it a point never to take on more than a dash of credit here and there for cash management purposes, and never for more than two or three weeks. But I have been really surprised at how unusual that seems to be, and how prevalent the idea is that working capital = borrowed money from the bank. It is a very strange conversation to have your bank call you and ask why you aren't using your line of credit more often.
"'We can't drive our SUVs and eat as much as we want and keep our homes on 72 degrees at all times"
OOOOOhhhh YEAH!!! Americans love sacrifice and aiming to come in fifth (or lower). Picturing Jimmy carter in a cardigan in front of a fireplace looking "Presidetial". It was the beginning of the end for Carter.
Obama is starting early LOL!!
rich - TWM story. I have taken some lumps on my TWMs BTW, fighting the tape...
Expired
rich - what do you think of using short long bond ETFs like RYJUX and TBT? Is their another easy way for a small investor?
"PIK and Roll" during the NBA playoffs.
Very clever !!
Jim
I guess I'm the only veteran of the junk bond wars of the late 80's on this site. PIK's were a creation of Michael Milken, Drexel Burnham and KKR. They worked in a few cases and failed in others. Most interestingly, they arose near the end of that bubble.
LOL thanks CR. I remember PIK and paper thin spreads 1 yr ago! Lenders are slaves to history
Just goes to show not just how much companies are addicted to debt, but extremely cheap debt at that. Very, very few companies are AAA these days, but the global chase for yield drove interest rates down such that any company could get cash at ridiculously low rates.
barely - just so.
the american people will pick a "straight-talking" old war criminal anytime.
anyone who's saying the "murican way of life" might be negotiable after all or may be subject to peak oil and economic reality may as well find another line of work.
Tom,
Just visited your site. You'll regret that statement "The obituaries for real estate have been premature." Knife-catchers don't make good economic indicators.
" . . .Spoke to a hog producer who is losing $3 per pig he ships because of feed prices"
I bet the pig will pay him at least twice that just to forget about the whole deal.
Dang! That Subprime Crisis just doesn't quit!
"....intends to pay interest on $350 million of its bonds with additional debt rather than cash."
And there is it. American economic strategy summed up. Minsky was right.
Now, only The Mortgage Pig turns a profit.
I think the lenders were given a choice: either except more debt for debt, or they had first dibbs on items from the bargain rack.
My understanding is that some decided to go for the bling.
Yeah those PIK bonds are nuts; way, way worse than receiving those pieces of paper called 'Federal Reserve Notes' (which are like, totally solid.)
I am just waiting for W to put a HELOC on 1600 Pennsylvania Ave before I pack my bags for the north pole.
A fish rots from the head back. Where did PIK's
originate? Why, Treasuries, of course.
RK -
Nice point on Treasuries. Wow. I feel incredibly stupid for not thinking of them like that before. Thank you.
Q: is there ANY part of our economy that is not rotten to the core?
Many of the decisions to PIK interest are made in light of the fact that debt is trading at substantial discounts. Even very strong companies (or their private equity fund owners) can reasonably expect to be able to buy outstanding debt on the open market for as little as 80 cents on the dollar. By PIKing their interest, they're just increasing their savings when they buy and retire their debt (rather than repaying it at 100 cents on the dollar). In addition, by starving their banks of cash, they're providing extra incentives for the banks to sell.
I have to think that's a factor with Univision, whose total senior credit facility runs in the neighborhood of $10 billion (of which cash-strapped Citibank holds the largest share).
For those mega-borrowers, the solvency (or lack thereof) of lenders may be driving decisions to take down optional borrowings. In view of the continuing nonsense around the Clear Channel deal, borrowers with hundreds of millions of dollars of supposedly committed credit have good reason to wonder whether the banks will be there should they need to borrow against their lines. Better to find out now--when you don't really need the money and can afford the litigation--than when your back's against the wall.
Given what's out there about Univision's performance and balance sheet, it would surprise me if that's not what happened there.
Kind of late to the remark, but this got me thinking about another industry I knew to be facing hard times, so I did some digging...
"Coachmen Industries Inc., whose sales have declined 40 percent over the past three years, is borrowing against the value of life-insurance policies it holds on employees and retirees. So far, the Elkhart, Ind., company has tapped about half the cash value of those policies, according to filings with the Securities and Exchange Commission."
"Coachmen has borrowed $23.7 million"
"Such insurance typically is purchased by a company on the lives of its employees and pays the company when an employee dies. In its filings, Coachmen has said the policies were intended to fund executive retirement benefits."
Source - US economy puts tight squeeze on RV makers |
WSBT - News, Weather, Sports
South Bend
| Consumer News