Category: Articles

Tobacco and The FDA: A Partnership

Post author By ToddSullivan
Post date June 12, 2009

Here is a flashback to a post I wrote in April 2008.

Let’s take a look at the FDA Tobacco Bill and see what effect it may have on the industry.

The bill would effect tobacco products manufactured and sold primarily by R.J. Reynolds Tobacco (RAI), Loews Corp.’s Lorillard Tobacco (LTR), Vector Group Ltd.’s Liggett Group (VGR), British American Tobacco (BAT) and Altria (MO) in the US.

The bill will enable the FDA to prevent the introduction of new cigarette brands.

“`(1) NEW TOBACCO PRODUCT DEFINED- For purposes of this section the term `new tobacco product’ means–

`(A) any tobacco product (including those products in test markets) that was not commercially marketed in the United States as of June 1, 2003; or

`(B) any modification (including a change in design, any component, any part, or any constituent, including a smoke constituent, or in the content, delivery or form of nicotine, or any other additive or ingredient) of a tobacco product where the modified product was commercially marketed in the United States after June 1, 2003.

`(2) PREMARKET APPROVAL REQUIRED-

`(A) NEW PRODUCTS- Approval under this section of an application for premarket approval for any new tobacco product is required.”

Now, what could cause a new product to be denied?

“(2) DENIAL OF APPROVAL- The Secretary shall deny approval of an application for a tobacco product if, upon the basis of the information submitted to the Secretary as part of the application and any other information before the Secretary with respect to such tobacco product, the Secretary finds that–

`(A) there is a lack of a showing that permitting such tobacco product to be marketed would be appropriate for the protection of the public health;”

In other words, do not expect a new cigarette to be introduced in the US. What is here now is what will be here 20 years from now. If you are Altria (MO), and have over 50% market share, this is very good news indeed. It also means that recently introduced low cost products may come under review and alterations to the product may become necessary that will substantially raise the cost of it. A shrinking cost basis for consumers between brands, will most likely cause many to “trade up” to the premium brand.

Currently, any litigation risk in cigarettes surrounds alleged fraud. Fraud in marketing and fraud in labeling. What will the FDA bill do? It completely removes the risk of litigation for fraud and allows the tobacco companies to tell consumers that they are complying with government product safety standards. By doing this they assure a safer product produced under the guidance of the FDA. Let’s look.

Since most of the current litigation is of the “Light” cigarettes, lets go to that section.

SEC. 911. MODIFIED RISK TOBACCO PRODUCTS.

`(a) In General- No person may introduce or deliver for introduction into interstate commerce any modified risk tobacco product unless approval of an application filed pursuant to subsection (d) is effective with respect to such product.

`(b) Definitions- In this section:

`(1) MODIFIED RISK TOBACCO PRODUCT- The term `modified risk tobacco product’ means any tobacco product that is sold or distributed for use to reduce harm or the risk of tobacco-related disease associated with commercially marketed tobacco products.

This means FDA approval of all claims on “light” and “low tar” cigarettes. This clause means that FDA approval of these cigarettes does give their stamp of approval that “light” is “safer”.

What are the conditions for approval?

Approval-

`(1) MODIFIED RISK PRODUCTS- Except as provided in paragraph (2), the Secretary shall approve an application for a modified risk tobacco product filed under this section only if the Secretary determines that the applicant has demonstrated that such product, as it is actually used by consumers, will–

`(A) significantly reduce harm and the risk of tobacco-related disease to individual tobacco users; and

`(B) benefit the health of the population as a whole taking into account both users of tobacco products and persons who do not currently use tobacco products.

They do not have to be “safe”, just “safer” than the current choice to legally be called “light”.

The bill also requires the FDA to inspect tobacco sellers for counterfeit cigarettes and report instances to the applicable Attorney General “immediately”. This has been a very large issue for domestic manufacturers as foreign “knockoffs” have entered the country and cost Altria millions of dollars in annual revenue. The bill effectively makes the FDA the “sheriff” and forces them to protect the market.

Could the FDA ban tobacco? The bill says no.

“`(3) POWER RESERVED TO CONGRESS- Because of the importance of a decision of the Secretary to issue a regulation establishing a tobacco product standard–

`(A) banning all cigarettes, all smokeless tobacco products, all little cigars, all cigars other than little cigars, all pipe tobacco, or all roll your own tobacco products; or

`(B) requiring the reduction of nicotine yields of a tobacco product to zero,

Congress expressly reserves to itself such power.”

Will Congress ban tobacco? Never…..How will the States ever replace the billions of dollars in tax revenue they receive from taxing them?

What the bill does is stop the FDA from banning tobacco and forces them to endorse it…..

The final bill passed yesterday (it is not materially different that the previous bill above)and cheers were heard from many in the Tobacco industry. That ought to have been clue #1, that this was not as advertised by those in government.

It essentially creates a government sponsored Tobacco Cartel in the US that cannot be broken into by outside players. Personally, I do not care either way. I am no longer an Altria shareholder, preferring to holds my Phillip Morris International (PM) share received in the spin off from Altria.

The government can’t kill Tobacco as they rely on it too much for tax revenues. As a matter of fact, states who are receiving master settlement money have already mortgaged the future there selling bonds based on that revenue. The final bill mandate the FDA cannot remove nicotine from cigarettes so they will still be just a addicting. The bill “reduces advertising” it claims. So what? They hardly advertise now? But, hey, at least the warning labels will get bigger because we know people pay attention to those…yeah..

This bill will only serve to strengthen Big Tobacco in the US and considerable expense to US tax payers and is yet another example of why government needs to stay out of business.

Disclosure (“none” means no position):Long PM, none

Tags MO, PM

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CRE/CMBS Disaster Imminent? Not So Fast

Post author By ToddSullivan
Post date June 12, 2009
7 Comments on CRE/CMBS Disaster Imminent? Not So Fast

The general theory has been, and even I speculated here in March that commercial real estate (CRE) & commercial mortgage backed securities (CMBS) may be the next shoe to drop. But, there have been some event recently that force us to take a closer look.

Since March we have seen improvement in the AAA rated CMBS market, mostly due to the TALF being used there. Again, no comment on the “right or wrong” of this action, but it is undeniably helping this market.

Then we had none other than Sam Zell coming out and saying that all the talk of a REIT industry “melt down” was overblown.

Most recently was the very important news that loan servicers were looking at extending maturities on debt from the customary 6-12 months to out as far as 5 years

Now this from the WSJ:

With the commercial real-estate industry bracing itself for the onslaught of hundreds of billions of dollars in maturing loans, the Treasury is considering issuing rules that will make it easier for property developers and investors and their loan servicers to restructure debt, according to people familiar with the matter.

Tax rules make it difficult for borrowers who are current on their payments to hold restructuring talks with the servicers of commercial mortgages that were packaged and sold as bonds. This lack of flexibility was one of the reasons cited by the management of mall giant General Growth Properties Inc. for its Chapter 11 bankruptcy filing in April.

At present, developers and investors complain that only those who are delinquent can talk to servicers of these bonds, named commercial-mortgage-backed securities, or CMBS. But now the Treasury is considering issuing guidance that would allow servicers to start talking about ways to avoid defaults and foreclosures sooner, possibly at least two years ahead of the maturity date of a loan, these people said. The Treasury guidance, which could be released within weeks, would essentially enable loan-modification talks to take place without triggering tax consequences, these people say.

What does it mean? If we convert this to housing. You are having trouble with you loan. Under the current rules, the banks could not talk to you about altering your loan until you defaulted. Once is default on commercial loans, all sort of cross defaults and debt covenants are triggers across other debt. This is bad.

When Treasury alters the current rules, loans can be altered BEFORE default. This huge and it retrospect may have save General Growth Properties (GGWPQ) from Chapter 11 as it was not able to restructure loans until it defaulted which then drove into 11.

Back to the article:

… property owners and investors hoping to restructure troubled mortgages are hearing a tough message from CMBS servicers: We can’t talk to you unless you first fall behind on payments. This is because when CMBS offerings are created, the underlying mortgages are legally held by tax-free trusts. The trusts can be forced to pay taxes if the underlying loans are modified before they become delinquent, according to current CMBS rules.

“It can be frustrating,” says Monty Bennett, chief executive of Ashford Hospitality Trust Inc. The Dallas-based real-estate investment trust that owns 102 upscale hotels has tried to start negotiations with servicers for extensions of payment deadlines for CMBS loans coming due. They have had little success. “You’re trying to be proactive and get a plan together to address [a loan maturity], but you can’t get someone to talk to you

There are scores of operationally healthy REIT’s that will simply not be able to restructure debt as it comes due to stagnant credit markets and will suffer the same fate as GGWPWQ. By allowing refinancing (for lack of a better word) before default, many will be avoided. Will there still be defaults and REIT collapses? Yes. But the key difference will be that those falling by the wayside will not be healthy organizations but the weak that deserve to fade away.

Yesterday I had an email exchange with Davidson on the subject and he said:

All the noise about Alt-A and Commercial Real Estate being the tsunami on the horizon tells me that this one will be solved as well. I can tell you that private equity funds of $billions have been established to capture value. Roth of Vornado (VNO), Simon of Simon Prop (SPG) have cash to buy up the best properties that may be thrown on the market. Some one may take a hit but these guys may be stumbling over themselves to buy this troubled stuff and in the end a solution will clear the inventory.

It would seem that the commercial real estate (CRE) market has watched and learned something from what happened in housing. They are taking proactive steps to stave off a total meltdown. For instance REIT’s have already issued equity and cut dividends (issuing them in stock rather than cash) ahead of problems rather than well after as the banks did with housing. This means that going into any problem they are already capitalized to levels that will allow far more of them to remain healthy and actually expand operations as this develops.

Does it mean there is not some pain in store? There surely is. But, I think one has to revisit the “total collapse” meme and perhaps materially alter that. Now if Treasury opts not to modify the current rule (which does not make much sense by the way) then we may very well see considerable pain here. Based on recent actions though, I think it is safe to assume something is coming from them.

I am going to begin to look far closer at this sector and will report in as I find things..

Disclosure (“none” means no position):Long GGWPQ, None

Tags davidson, ggp

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The CMBS Market Inventor Interviewed $$

Post author By ToddSullivan
Post date June 12, 2009

This is a wide ranging interview. Really well done…

Ethan Penner – Interview

Publish at Scribd or explore others: Finance Business & Law real estate commerci

Disclosure (“none” means no position):

Tags CRE

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Friday’s Links

Post author By ToddSullivan
Post date June 12, 2009

Amherst, Natural Gas, Fed, Shareholders

– This may be a bit odd, but I take pleasure in seeing some little firm take the major banks for a ride…legally.

– Now is the time…it is going higher

– This story could develop into something. There will be a patsy that goes down in all of this, it remains to be seen if it is Lewis, Bernanke or Geithner…

– This is too bad. Barney Frank makes some good points in this piece on shareholder rights but is such a hostile person, he ruins it at the end with a tantrum…He seems to not get the point that this is an interview, not a speech…

Disclosure (“none” means no position):

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Davidson: "Risk to Trust Always Present"

Post author By ToddSullivan
Post date June 11, 2009

Davidson is back with more data and commentary inferring the worst may indeed be over. He has provided the charts at the end of his commentary.

“Davidson” sumbits:

The point to observe in all this is that market psychology went from cautious to panic on the Lehman failure Sept. 15th, 2008. Corporations experienced an almost immediate freezing of short term cash accounts which cascaded into Money Market funds as a literal “run on the bank” and an almost complete halt to credit based import/export and capital transactions in the US and around the world.

The reason the global financial system works is that all participants trust that certain rules will be followed and that terms in contracts will be honored. When it became clear that marginal participants had gamed the system and infected it with contracts that had violated the accepted standards of conduct, trust in exactly which contractual arrangements would be honored experienced a dramatic decline for all contracts.

The psychology of trust is elemental to a global financial system. With trust the system works! Without trust the system fails!

The system requires rules that all understand and that cannot be arbitrarily changed.

At the moment trust in the global financial system is returning as is reflected in The Conference Board’s reports of the past few days. Declaring victory, declaring the “End of the Recession” as many would like to do at this time is always subject to continuing trust in the system.

I have just finished Amity Shlaes’ “The Forgotten Man” a new and refreshing look at the Great Depression. I highly recommend it. While many previous authors have focused on policy issues, legislation errors, banking errors and the like, Shlaes’ focus is centered on the intangible quality of “Trust in the System” and how when trust is lost the system fails to function. Corporations and individuals hold on to cash not knowing who or what to trust. Just as we recently experienced!

Trust is returning, but if someone again games the rules, then trust can be lost. Market participants are working through the issues one at a time.

Risk to trust is always present.

Disclosure (“none” means no position):

Tags davidson

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Wall St. Media 6/10

Talking about General Growth Properties (GGWPQ), Oil (USO), Gold (GLD), Natural Gas (UNG) and Red Sox/Yanks

See more video at Wall St. Media

Disclosure (“none” means no position):

Tags ggp

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Thursday’s Links

Post author By ToddSullivan
Post date June 11, 2009

Taxes, Reading, Shoe, Jobs

– We live in a world without traditional borders. The US tax rate MUST compete internationally or we will lose jobs. There is no debate on that. NY & California have seen that with their wealthy resident as they decided to move rather than pay exorbitant taxes. Nations will suffer the same fate

– Interesting polls on what people tend to read re: their views.

– Now, I’m not a fan of the guy but this is is bit much. But, it does go to the hyper-sensitive nature of Israel right now feeling isolated. That is very, very dangerous

– What is dissapointing is that the MSM is letting this go. There IS NO way to measure what the administration claims. Why do they continue to let them claim it?

Disclosure (“none” means no position):

Tags bgp

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Substantive Conslidation, CMBS, GGP

Post author By ToddSullivan
Post date June 10, 2009
4 Comments on Substantive Conslidation, CMBS, GGP

June 17th. D-Day for many lenders in the General Growth (GGWPQ) bankruptcy case. Why?

From Reuters:

group of creditors and loan servicers is scheduled to ask U.S. bankruptcy Judge Allan Gropper on June 17 to dismiss about a dozen malls from the case.

Chicago-based General Growth set up each mall as a special purpose entity — a separate company — that protected General Growth from each of the malls’ obligations. Each SPE was be governed by independent directors, and each entity’s cash was to be managed separately. They were intended to be “bankruptcy remote.”

During the hearing next week, the creditors of the SPEs will argue that General Growth put the SPEs into bankruptcy in order to give the company more leverage from which to negotiate loan modifications and extensions.

The commercial real estate and the lending sectors will be watching this hearing and the overall bankruptcy, said experts speaking at the Commercial Mortgage Securities Association conference in New York.

“I think the debtor (General Growth) is inclined to fast track this, and we will have to wait to see what proposals come out short of a dismissal to see if the a negotiated exit is possible,” Cross said.

When General Growth filed for bankruptcy protection in April, it swept 166 of its malls along with it, replacing the directors with new ones who voted to put the SPEs into bankruptcy. The entities in bankruptcy were facing $24 billion of debt, about $15 billion of which consisted of commercial mortgage-backed securities.

The remainder of General Growth’s other 200 or so malls are joint ventures and are not in bankruptcy nor is the General Growth’s management company.

Will the judge rule to consolidate or not?

When a corporation files for bankruptcy, the court must address a fundamental question: Are these entities legally distinct or should they be collapsed?

Substantive consolidation is the pooling of the assets and liabilities of technically distinct corporate entities. For the purposes of confirming a Chapter 11 plan or for liquidating assets under Chapter 7, the creditors of the previously distinct subsidiaries are creditors of a single debtor. Although courts use language akin to “piercing the corporate veil,” the doctrines are quite distinct—instead of pooling assets vertically (e.g. parent and subsidiary), substantive consolidation pools asserts horizontally (e.g. subsidiary and subsidiary).

Is this valid in the GGP Chapter 11? In many instances, yes. What we have brewing is a ruling of the lending agreements vs the actual structure and operations of the SPE. In many instances in the malls in question, there was no defined separate director (or whether or not there was one is debatable) and cash flows were not managed independently from other operations. This enables them to be consolidated under Chapter 11. The consolidation will be done on a mall by mall ruling but expect many to be folder into the current filing.

How does this effect shareholders. Directly, it doesn’t as we only care about the big picture (what is left after debt claims settled). Indirectly, it does. If GGP is victorious in this ruling, they then will have more sway over debtholders. The more debt that can be extended, the stronger the resulting entity that emerges remains. Also, the fewer moving parts in a filing, the faster it is then able to emerge from Chapter 11.

Disclosure (“none” means no position):

Tags ggp

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Beige Book: "Economic Conditions Remained Weak or Deteriorated"

Post author By ToddSullivan
Post date June 10, 2009
1 Comment on Beige Book: "Economic Conditions Remained Weak or Deteriorated"

Here is the line most are looking for:

Reports from the twelve Federal Reserve District Banks indicate that economic conditions remained weak or deteriorated further during the period from mid-April through May. However, five of the Districts noted that the downward trend is showing signs of moderating. Further, contacts from several Districts said that their expectations have improved, though they do not see a substantial increase in economic activity through the end of the year.

This goes to our expectations. The decline moderates or perhaps stop and then we just slog around for a while.

Read the last section on pricing. This is the first reports we have seen of steady or increasing prices in certain areas. Now, that those increases are coming in food and fuel are concerning because people cannot do without either. This bears close watching…

Fed Beige Book 6-2009

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Interesting Oil Discussion

Post author By ToddSullivan
Post date June 10, 2009

I have no idea who this guy is, but this is the first unique view on oil (USO) and its rise aside from the usual demons (inflation/dollar weakness).

He makes a valid point that the inflation argument for oil does not really hold up as Gold (GLD) has not participated in the current rise w/oil.

To me the “endless bid” theory makes perfect sense. Now, all three have a part in its rise and I am not saying this is the sole reason, but the bid theory does explain why oil is moving opposite fundamentals recently.

Disclosure (“none” means no position):none

Tags uso

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Jim Grant Talks Inflation, The Fed and What He’d Do.

Post author By ToddSullivan
Post date June 10, 2009
8 Comments on Jim Grant Talks Inflation, The Fed and What He’d Do.

Grant is great. A nice reasoned opinion. If I am being honest I was getting more that a little frustrated at the CNBC crew interrupting him incessantly. New Rule: If you ask more than a 1 word answer question, please allow for it to be answered.

Not for nothing but Carlos there letting us know how many Google hits “inflation” gets vs “deflation” has to just about be the most useless bit of information ever expelled from any orifice on air. Really Carlos, you have Jim Grant sitting there and you are doing a Google search?

Anyway, here it is…

Disclosure (“none” means no position):

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Commercial Mortgage Servicers Extending Maturities

Post author By ToddSullivan
Post date June 10, 2009
3 Comments on Commercial Mortgage Servicers Extending Maturities

For shareholders of General Growth Properties (GGWPQ) this bit of news is huge….it really is.

From Reuters:

U.S. commercial real estate mortgage servicers are seeking to extend maturing loans for up to five years in a bid to prevent borrowers from defaulting and giving up office, retail and apartment buildings at distressed levels, an industry executive said on Tuesday.

The moves by special servicers, which oversee mortgages in or near default, would sharply increase the maturity of the loans from the six- to 12-month extensions commonly negotiated today, John D’Amico, a senior managing director at Centerline Capital Group, told Reuters after a panel hosted by the Commercial Mortgage Securities Association in New York.

Modifying loans has consumed the $700 billion market for commercial mortgage securities this year. Frozen credit markets have limited refinancings for maturing loans in commercial mortgage-backed securities, resulting in a wave of defaults and exacerbating the impact of the U.S. economic recession.

Loans coming due in CMBS will grow to $42 billion in 2010 and $69 billion in 2011, from $15 billion this year, according to Credit Suisse.

So why is this such a big deal? It is an admission by the industry that market were broken AND that the best way to prevent a cascade of defaults is to materially extend maturities of current debt.

This scenario is the reason for GGP’s Chapter 11 and expected to be the very plan put forward when it files the plan of reorganization later this year. The plan stands a far better chance of acceptance by the court and will resist challenges from any dissenting groups if the plan runs in accordance with already established practices by the industry. Creditors will not be able to argue the plan is “unfair” if what is being proposed is in some form what is already being practiced.

From the article:

The loan “workout” process has often turned “nasty” as servicers try to hammer out terms agreeable to a variety of borrowers, lenders and investors that will limit losses and prevent foreclosures, a lawyer said at the CMSA conference on Monday. Among sticking points, lenders often demand borrowers put up additional equity, and the extensions add risk for CMBS investors because it delays return of their principal.

But with property prices falling and outlooks dire, parties are coming to terms with longer extensions, D’Amico said.

“I think we will see more cases where people will put more (equity) in the properties” to get extensions of up to five years, D’Amico said.

This gives even more credence to the cram-down scenario we brought up here in April. It is not by any means unreasonable to think the court will simply say that since the market is currently operating in this fashion, it is going to handle to Chapter 11 in a similar way and simply extend all debt.

A cram-down in this case that uses existing practices as a general guide would make for an expedited Chapter 11 and give a certain level of stability to a market that desperately needs it. It also is the best scenario to ensure both debtholders and stake holder are kept whole.

Disclosure (“none” means no position):Long GGWPQ

Tags ggp

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Berkowitz, Marsico and Weitz Talk Stocks

Post author By ToddSullivan
Post date June 10, 2009

Classic line….. from Berkowitz on what stocks to buy, “You want a company where your idiot nephew can make money”

Covered: Sears (SHLD), Leucadia (LUK), Berkshire (BRK.A) Pfizer (PFE)

Berkowitz Marsico and Weitz

Publish at Scribd or explore others: Finance Business & Law bruce berkowitz wall

Disclosure (“none” means no position):Long SHLD, none

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A Special Invitation for ValuePlays Readers

Post author By ToddSullivan
Post date June 10, 2009
1 Comment on A Special Invitation for ValuePlays Readers

I have been playing around with SkyGrid for a while now. It is in beta and is currently offered to people by invitation only. I think this has the possibility to replace much of what I currently use Google Reader for as it enable me to group stories by topic, ticker, portfolio, etc… enabling far more efficient information gathering.

It is also Twitter connected making it easy to share items with your Twitter folks.

There are only a limited number of invites so follow this link to get your invitation if you are interested

Disclosure (“none” means no position):

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Wednesday’s Links

Post author By ToddSullivan
Post date June 10, 2009

Taxes, Krugman, SCOTUS,

– For anyone who has ever run a small business, this plan is disastrous. It will cause booking costs to explode and it essentially places the burden on tax collection from the IRS to the payer of services, not the payee. If we just went to a straight consumption tax, we could rid ourselves of all of this

– Paul needs to make up his mind….it was just recently he said 2009 was lost. Now he expects us to recover? Still can’t figure out why anyone listens to him..really, i can’t.

– Place your bets on Sotomayor. Personally I find racism of ANY kind distasteful and she ought to be eliminated. Has anyone asked her why “Lady Justice” is blindfolded? Because color/race/gender are not supposed to come into the mix. Just ask the all lily white court that ruled in Brown v Board of Education.

– Vitaliy is right. The best thing for everyone now is to see stock values rising. 401K’s look better, investment accounts gains value and people feel safer.

Disclosure (“none” means no position):