Wednesday, July 20, 2011

Financial analysis

We got a nice chunky package in the mail yesterday.

I was quite excited. After all, nobody takes the trouble to send a chunky package for bad news, do they? A single sheet of paper - that's a rejection letter. An acceptance contains all kinds of inserts - contract, conditions, instructions for your first day, occasionally even a complete employee handbook. A bulky package must be good, right?

Turns out, not so much.

The package is from Blue Star, a troubled printing company in which we invested some money a few years ago. (Mind you, I don't recall anyone using the word "troubled" back then.) We bought bonds. Now - stripped to its essentials - the company wants us to trade in those bonds for new ones that will be worth considerably less. If we don't, they threaten without much ceremony, they'll go out of business and we'll get nothing.

Well, first thing to note is that times evidently aren't so hard that they can't afford to put together a 150-page, glossy, full-colour prospectus for these new and improved bonds. Mind you, it's a printing company, they probably got a good deal on that.

But something stinks about this offer. How can a company renege on its debts, and continue trading? Surely that's the definition of 'insolvent'. If they offered to renegotiate the debt, that's one thing - but this isn't negotiation, this is blackmail.

See, while we bondholders are being asked to take a scalping to the tune of at least half of our investment (and absolutely no guarantee that it won't yet be 100% - in fact, the de-ranking of our debt makes that even more likely), the shareholders aren't being asked to give up squat. On the contrary: one shareholder in particular, Champ Funds, is offering a loan of $15 million - at an interest rate way higher than we've been offered - in return for getting higher ranking among the company's creditors.

Seems to me, that's not the sort of terms you would offer if you had much faith in the company's future.

I was taught, way back in economics class, that it's shareholders who take the risks - when the company thrives, they get the profits, and when it sinks, they take the hit. Bondholders get a smaller return for a smaller risk. But that's not what's happening here. We, the bondholders, are being asked to bail out the shareholders. (Well, one shareholder in particular, but others will obviously get a renewed window of opportunity to dump shares that would be worthless if the company folds immediately.)

The company's own 'independent advisor' - KPMG - endorses the offer in the weakest possible terms. I paraphrase, but the gist of it is: "on the strength of the information we've been given, we can't be sure that this is a complete ripoff, so we don't quite have sufficient grounds to prevent it from being put".

I say the hell with it. If the company is insolvent, let it fold now. If it isn't insolvent, then it can come up with a better offer than this. Worst case, I'm willing to lose a few grand to uphold the principle that shareholders don't get to just take money from small investors.

It may seem irrational to choose nothing over something, but if the price of 'something' is that your economy is to be run by bandits - I'll take a big ol' handful of nothing, thanks.


bahumbug said...

The phrase corporate governance springs to mind. Where is it? Conventional wisdom suggests it's one of the things that distinguishes developed economies from frontier ones. Oh, erm, right. Silly me!

On a serious note, technically it looks to me as if they are negotiating, their position being take it or leave it. In the latter case you still technically have all your rights (I'd presume), but trying to enforce them is likely to be a waste of time.

Unless perhaps you can pool wisdom and resources with other victims. For example, if you were to post to a financial website like The Motley Fool you might just find expert advice and/or action groups.

mumsie said...

Bully for you. There is also an old saying about throwing good money after bad...

vet said...

bh: the auditors do admit that the offer is "more fair" to other stakeholders than it is to bondholders, which is an interesting but, I thought, reasonably honest way of phrasing it.

I agree that this can be seen as a form of negotiating, but it's a form I feel I can't accept. Yes, we still have our rights, unless 75% of the bondholders vote to give them up - which, judging from the comments I've seen online, really shouldn't happen (unless of course Champ Funds also happens to own 75% of the bonds).

I've seen one commentator speculating that the directors actually want this offer to be turned down, which is why they've made it so offensive. It's quite possible they're playing brinkmanship with Champ.

There's a bondholders' meeting on 10 Aug to vote on the offer, and as luck would have it, it's within walking distance of our house. At this point it promises to be pretty bloody. I'm looking forward to it.

mumsie - nobody's asking us for more money. Frankly I'd rather they were, at least it would imply there's some chance of getting our investment back...

bahumbug said...

Are you planning to arm yourself with an alternative proposal for the bondholders meeting?

A proposal as simple as put the company in administration and seek the best offer for the assets asserts your precedence over shareholders and, in particular, calls Champ's bluff.