Mortgages, “Wall St”, Ray Kroc, Independence
– Latest plan, this one for seconds
– The sequel is coming….finally
– What makes America great
– 6 Banks fail test
– Is it possible?
Disclosure (“none” means no position):
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Category: Articles
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On Wall St. Media 4/29
Here is the latest. Talking Starbucks (SBUX)/Mcdonalds (MCD), Iran/Israel, Oil, GDP
View more investing video at Wall St. Media
Disclosure (“none” means no position):Long MCD, none
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Starbucks Reports Dismal Quarter
I did not know they were reporting today when I wrote this. Glad to see management helped cement my points..
Starbucks late today reported fiscal second-quarter net income fell 77% to $25 million, or 3 cents a share, due to charges to close stores. A year ago, Starbucks earned $108.7 million, or 15 cents a share. Sales fell to $2.3 billion from $2.5 billion. Excluding charges, Starbucks said it made 16 cents a share. Analysts had expected Starbucks to earn 16 cents a share on sales of $2.38 billion, according to FactSet Research.
BUT
Starbucks said that its cost savings plans were ahead of schedule as it reduced expenses by $120 million during the period.
So, explain this?
While the company triumphs its cutting, total expenses only dropped 2% to $2.32 billion which included $152 million in restructuring fees. Not going to get it done
What really matters? Customer are not going in.
US comparable store sales were down 8% for the quarter.
Sad…..and it was avoidable…
Disclosure (“none” means no position):
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So, Where Is That Stimulus Again?
Please read paraghraph 4. Can anyone tell me how this happened when we just passed over $1 trillion is “stimulus” packages?
GROSS DOMESTIC PRODUCT: FIRST QUARTER 2009 (ADVANCE)
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 6.1 percent in the first quarter of 2009, (that is, from the fourth quarter to the first quarter), according to advance estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP decreased 6.3 percent.
The Bureau emphasized that the first-quarter “advance” estimates are based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4). The first- quarter “preliminary” estimates, based on more comprehensive data, will be released on May 29, 2009.
The decrease in real GDP in the first quarter primarily reflected negative contributions from exports, private inventory investment, equipment and software, nonresidential structures, and residential fixed investment that were partly offset by a positive contribution from personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, decreased.
The slightly smaller decrease in real GDP in the first quarter than in the fourth reflected an upturn in PCE for durable and nondurable goods and a larger decrease in imports that were mostly offset by larger decreases in private inventory investment and in nonresidential structures and a downturn in federal government spending.
Motor vehicle output subtracted 1.36 percentage points from the first-quarter change in real GDP after subtracting 2.01 percentage points from the fourth-quarter change. Final sales of computers added 0.05 percentage point to the first-quarter change in real GDP after subtracting 0.02 percentage point from the fourth-quarter change.
Wasn’t this stimulus supposed to be for “shovel ready” projects? Clearly that was not the case.
Here is further breakdown of Gov’t spending both Federal and Local (comps are to Q4 2008):
Real federal government consumption expenditures and gross investment decreased 4.0 percent in the first quarter, in contrast to an increase of 7.0 percent in the fourth. Real state and local government consumption expenditures and gross investment decreased 3.9 percent, compared with a decrease of 2.0 percent.
This gives huge merit to those who made the arguments as this package was being passed that this stimulus was not “Keynesian” even by the most liberal definition of it. For, if it was, we would not have seen decreases in spending.
Now we have to wait until revisions (ought not mater much) and then Q2 numbers. If there is not a significant jump (ought to be a record amount to match the size of the “stimulus”) in government spending in Q2, those who thought this was a good idea got hosed….big time.
Disclosure (“none” means no position):
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The Destruction of the Starbucks Brand
Hat tip reader Chris for alerting me to this. Can you imagine Coke (KO) saying is was shifting its focus to the Sprite brand OR Anheuser-Busch (AHBI) saying that Busch Beer was going to be its focus this year? If not, then read this:
From Yahoo Finance
Starbucks Corp. is hoping its Seattle’s Best Coffee chain will be its growth engine during the recession.
Even as Starbucks shutters hundreds of namesake locations, cuts jobs and shaves other costs, it is seeking franchisees to open new cafes and kiosks of Seattle’s Best Coffee nationwide.
Since Starbucks took over the chain in 2003, most new Seattle’s Best Coffee cafes have opened inside Borders (BGP) bookstores and kept a relatively low profile. Many consumers don’t know there’s a connection: Seattle’s Best Coffee’s logo is red, Starbucks’ is green, and there is no mention of Starbucks inside Seattle’s Best Coffee stores.
Not only could opening more franchised cafes help Starbucks — which reports its second-quarter earnings Wednesday — expand without increasing its operating costs. Promoting Seattle’s Best Coffee also could help Starbucks pursue two distinct streams of the coffee market simultaneously.
Seattle’s Best Coffee’s food, including ice cream and hot sandwiches, targets a broader market than the pastries and sandwiches and high-end juices and protein drinks at most Starbucks. And its much milder beans have been available since January in more than 2,800 Subway restaurants.
“It gives them an opportunity to reach out to a different audience,” analyst Darren Tristano of Technomic Inc., a food industry consulting firm, said of the plan to open more Seattle’s Best Coffees.
Starbucks says the slightly lower prices and milder taste of Seattle’s Best Coffee make it an especially viable vehicle for growth now, though the company declined to say how many new stores it hopes to open or where.
“We believe that the Seattle’s Best Coffee brand can play a unique role in helping capture a larger share of the coffee segment by providing options and a variety to a broader spectrum of customers,” Starbucks Chief Executive Howard Schultz said in January when he announced the plan.
Relying on growth from Seattle’s Best while at the same time closing thousands of Starbucks location is the closest thing you’ll ever see to an admission from Schultz that the Starbucks brand has been catastrophically mismanaged to the point it is now a negative.
Offering breakfast sandwiches did not work. Promotion that offer discounted drinks failed. Spending millions on new coffee machines? Nope. Bringing back Howard Schultz? Fail. “Gold cards” for frequent customers? Nada.
On a side note. Did anyone think the promotions were really going to work? Remember? “buy a coffee in the morning, save the receipt and come back between 2:17 and 2:28 and get a $2 something”. Of course I am being sarcastic but the reality of the promotion was not much different.
The result? Management has finally thrown in the towel and decided to go with the secondary brand. This is not a slap at Seattle’s best, I think they do a fine job at what they do. This is a slap at management that is forced to do one at the expense of the other.
The Starbucks brand has been so possibly irreparably harmed that folks in Seattle are slowly moving the company is a different direction. Sad.
For investors, if you think there has been a fundamental change in consumer behavior and “cheap is chic” then do not expect any rebound or significant improvement anytime soon…
Disclosure (“none” means no position):
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Why McDonalds Steamrolls Competition.
As I read the McDonalds (MCD) earnings call transcript, it stood out like a Yankee fan at Fenway.
Here are the results from CEO James Skinner:
Global comparable sales were up 4.3%, operating income increased 5% in constant currency and EPS reached $0.87, a 17% increase in constant currency.
Our sales momentum is continuing with April comparable sales trending at least as strong or better than the first quarter in every area of the world. McDonald’s is well positioned for continued growth. Our global system is aligned around the right strategies to manage in the current global economic environment and to seize future opportunities.
Outstanding results, second to none in the industry (and most of the S&P 500). So, how did the accomplish it?
We remain focused on our customers and restaurants through our plan to win. Everyday, customer relevance is job one at McDonald’s. We all know the state of today’s consumers. They’re scaling back and being more discerning about what they purchase. This means a strong value proposition is critical, from price to product, to experience.
McDonald’s offers strong value across our entire menu board. Our value menus around the world offer predictable, every day affordability and our core menu, including iconic products like the Quarter Pounder provide great value at the mid tier. This tiered pricing across the board value means we are in a position to grow our market share not only in the near term but in the long term as well.
The word “value” is mentioned 5 times in the two paragraphs and in every sentence that Skinner uses to explain what they offer customers. Is there any doubt the focus of the company?
I’d be willing to bet you could ask anyone in the entire organization what they offer customers and every person would have the word “value” in the answer. There is no doubt of that in my mind.
Disclosure (“none” means no position):Long MCD
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Wednesday’s Links
Swine, GM, Mortgages, Toxic
– Just scrap it and start over already!!!
– Another effort to bail out irresponsible people
– Ross is a buyer
Disclosure (“none” means no position):
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News Corp. Looks Interesting
So, after reading that the WSJ was actually increasing circulation figures in an environment that is seeing newspaper circulation plummet, I began digging into it owner, News Corp.
Overview:
OVERVIEW OF THE COMPANY’S BUSINESS
The Company is a diversified global media company, which manages and reports its businesses in eight segments:
• Filmed Entertainment, which principally consists of the production and acquisition of live-action and animated motion pictures for distribution and licensing in all formats in all entertainment media worldwide, and the production and licensing of television programming worldwide.
• Television, which, principally consists of the operation of 27 full power broadcast television stations, including nine duopolies, in the United States (of these stations, 17 are affiliated with the FOX network, and ten are affiliated with the MyNetworkTV network), the broadcasting of network programming in the United States and the development, production and broadcasting of television programming in Asia.
• Cable Network Programming, which principally consists of the production and licensing of programming distributed through cable television systems and direct broadcast satellite operators primarily in the United States.
• Direct Broadcast Satellite Television, which principally consists of the distribution of premium programming services via satellite and broadband directly to subscribers in Italy.
• Magazines and Inserts, which principally consists of the publication of free-standing inserts, which are promotional booklets containing consumer offers distributed through insertion in local Sunday newspapers in the United States, and the provision of in-store marketing products and services, primarily to consumer packaged goods manufacturers in the United States and Canada.
• Newspapers and Information Services, which principally consists of the publication of four national newspapers in the United Kingdom, the publication of approximately 147 newspapers in Australia, the publication of a metropolitan newspaper and a national newspaper (with international editions) in the United States and the provision of information services.
• Book Publishing, which principally consists of the publication of English language books throughout the world.
• Other, which principally consists of NDS Group plc (“NDS”), a company engaged in the business of supplying open end-to-end digital technology and services to digital pay-television platform operators and content providers; Fox Interactive Media (“FIM”), which operates the Company’s Internet activities; and News Outdoor, an advertising business which offers display advertising in outdoor locations primarily throughout Russia and Eastern Europe.
So, why consider buying?
Looking forward at the business. I divide it into entertainment (film ,tv, book) and News (papers, cable tv (broadcast)). The first is very dependent on the consumer and the timing of releases vs prior years so the period to period comparison is not always apples to apples and one would expect it to be highly cyclical. The news and papers I would consider to give a more steady gauge as to the health of the overall company.
Here are the segments operating income that tend to back the assertion of certain segments being more volatile.
For instance, 2008 Film Results:
For the three months ended December 31, 2008, revenues at the Filmed Entertainment segment decreased $491 million, or 25%, as compared to the corresponding period of fiscal 2008. The revenue decrease was primarily due to a decrease in worldwide home entertainment revenue from theatrical and television products. The three months ended December 31, 2008 included the worldwide home entertainment release of Horton Hears a Who, the worldwide theatrical releases of The Day the Earth Stood Still, Australia and Max Payne and the domestic theatrical release of Marley & Me and their related releasing costs.
Also contributing to the three months ended December 31, 2008 were the pay television performances of Juno and 27 Dresses. The three months ended December 31, 2007 included the home entertainment performances of The Simpsons Movie, Live Free or Die Hard and Fantastic Four: Rise of the Silver Surfer and the theatrical releases of Alvin and the Chipmunks and Juno. For the six months ended December 31, 2008, revenues at the Filmed Entertainment segment decreased $814 million, or 23%, as compared to the corresponding period of fiscal 2008. The revenue decrease was primarily due to a decrease in worldwide home entertainment revenue from theatrical and television products, as well as a decrease in worldwide theatrical revenues as a result of the difficult comparisons to The Simpsons Movie and Live Free or Die Hard in the six months ended December 31, 2007.
Fox News:
For the three and six months ended December 31, 2008, Fox News’ revenues increased 18% and 19%, respectively, as compared to the corresponding periods of fiscal 2008, primarily due to an increase in net affiliate and advertising revenues. Net affiliate revenues increased 37% and 32% for the three and six months ended December 31, 2008, respectively, primarily due to an increase in the average rate per subscriber, a higher number of subscribers and lower cable distribution amortization as compared to the corresponding periods of fiscal 2008. Advertising revenues increased 6% and 8% for the three and six months ended December 31, 2008, respectively, primarily due to higher volume and higher pricing as compared to the corresponding periods of fiscal 2008. As of December 31, 2008, Fox News reached approximately 95 million Nielsen households.
Here are the most recent results vs rival CNN, MSNBC. Fox wins every hour..if you combined their results, they still do.
From the recent 10-Q
The Company’s revenues decreased 8% and 2% for the three and six months ended December 31, 2008 as compared to the corresponding periods of fiscal 2008. The decreases were primarily due to revenue decreases at the Filmed Entertainment, Television and Book Publishing segments. The decreases at the Filmed Entertainment segment were primarily due to decreased worldwide home entertainment revenues. Television segment revenues decreased primarily due to decreased advertising revenues as a result of general weakness in the advertising markets. The decreases at the Book Publishing segment were primarily due to strong title offerings in the corresponding periods of fiscal 2008 with no comparable titles in fiscal 2009.
These decreases were partially offset by increases in revenues at the Cable Network Programming and Newspapers and Information Services segments. Cable Network Programming segment revenues increased primarily due to increases in net affiliate and advertising revenues. The increases at Newspaper and Information services were primarily due to the inclusion of revenue from Dow Jones & Company, Inc. (“Dow Jones”), which was acquired in December 2007.
This is very important news. At a time when ad rates are falling like stones throughout the industry, News Corp. is actually increasing them. That can only be taken as it having a industry best “brand” that advertiser recognize and want and one could take that even further to say they do have a moat around their news division.
Essentially you have News’ cable operations getting stronger during the industry downturn and this bodes well for the recovery.
Here are the revenue results (click to enlarge):
Cash:
As of December 31, 2008, the Company complied with all of the covenants under the revolving credit facility, and it does not anticipate any violation of such covenants. The Company had consolidated cash and cash equivalents of approximately $3.6 billion as of December 31, 2008.
Debt (from 10-K):
News has $13 billion of debt outstanding. Over $12 billion of that does not come due for in excess of 5 years ($1 billion is due in less than 5) and of that $12 billion, 30% has maturities extended out until 2035 and 2037. This will not be a strain on cash.
Valuation:
Even after writing down $8.4 billion in Q4, NWS shares prices at $8.50 sell at 65% of book value of $29 billion. 20%o the current market cap of the company as of 12/31 is the cash sitting on the books. Here are the write-down details:
As a result of this impairment review, the Company recorded a non-cash impairment charge of approximately $8.4 billion in the three and six months ended December 31, 2008. The charge consisted of a write-down of the Company’s indefinite-lived intangibles (primarily FCC licenses) of $4.6 billion, a write-down of $3.6 billion of goodwill and a write-down of Newspapers and Information Services fixed assets of $185 million in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” As a result of the continued adverse economic conditions in the markets in which the Company conducts business, the Company will continue to monitor its goodwill, indefinite-lived intangible assets and long-lived assets for possible future impairment.
Insider Controlling Shareholder:
As of December 31, 2008, Cruden Financial Services was the beneficial owner of 306,623,480 Shares, constituting approximately 38.4% of the total number of outstanding Shares at such date. All of the 306,623,480 Shares beneficially owned by Cruden Financial Services are also beneficially owned by the Murdoch Family Trust. Cruden Financial Services has the power to vote and to dispose or direct the vote and disposition of the Shares owned by the Murdoch Family Trust. Cruden Financial Services, the sole trustee of the Murdoch Family Trust, is a Delaware limited liability company with six directors.
As of December 31, 2008, the Murdoch Family Trust was the beneficial owner of 306,623,480 Shares, constituting approximately 38.4% of the total number of outstanding Shares at such date. The Murdoch Family Trust is a trust governed by Nevada law whose trustee is Cruden Financial Services. Cruden Financial Services, as sole trustee, has the power to vote and to dispose or direct the vote and disposition of the Shares owned by the Murdoch Family Trust.
As of December 31, 2008, K. Rupert Murdoch was the beneficial owner of 317,290,709 Shares, constituting approximately 39.7% of the total number of outstanding Shares at such date. Of the 317,290,709 Shares beneficially owned by K. Rupert Murdoch, 306,623,480 of such Shares are directly owned by the Murdoch Family Trust. Cruden Financial Services has the power to vote and to dispose or direct the vote and disposition of the Shares owned by the Murdoch Family Trust. As a result of Mr. Murdoch’s ability to appoint certain members of the board of directors of Cruden Financial Services, the corporate trustee of the Murdoch Family Trust, Mr. Murdoch may be deemed the beneficial owner of the Shares beneficially owned by the Murdoch Family Trust. Mr. Murdoch, however, disclaims any beneficial ownership of such Shares.
This is much like my AutoNation (AN) purchase. A company doing well in a poor operating environment. 75% of operating profits are from very stable and growing segments of the company. The other 25% is cyclical and release date dependent which causes volatility. Currently shares are excessively being punished for that section of earnings and being given very little credit for the other 75%.
That gives us a ValuePlay…I’m getting very close to buying some at these levels…
Disclosure (“none” means no position):Long AN, none
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Latest Neilsen Economic Scorecard..
While it is good that >90% of folks surveyed agree we are in recession and not living in denial, it is bad that only 20% think things will be better in a year. That attitude affects behavior. A cautious consumer will keep the economy either in recession or teetering on the edge of it (remember GDP is 2/3 consumer spending).
Download full report here:
This also goes the administration’s budget projections for 2010. Remember they budgeted 3.5% GDP growth next year. It is increasingly becoming very apparent that the outlook is far too optimistic. This means the $1.7 Trillion deficit projected is just too low and ought to easily surpass $2 trillion. This is a stunning number.
It also means that the next budget will requires either or both of two things, sharp spending decreases or/and large tax increases. Large tax increases, while revenue killers long term will raise revenue in the short term and give the “we are reducing the deficit” rhetoric some truth (it will also stifle growth). Spending decreases will accomplish the same. Unfortunately, both are bad when the economy depends on their current levels.
Stocks? I think it means there is no rush to buy. The current run up is in anticipation of a 2nd half recovery. When that does not materialize, pop goes the rally. Will it test the low’s? I do not know, I hope not. I do think 7000 is a likely number we see again.
With that being said, a 1000 pt. sell-off will take most equities with it so rushing in to buy now is not necessary and you may end up kicking yourself.
A little patience here I think will be well rewarded….
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Tuesday’s Links
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Latest Wall St. Media Appearance
Talking swine flu, General Growth Properties, GM & the market
Also, Mr. Doug eat his required crow for the Red Sox DOMINATION of his beloved yet marginally talented Yankees
Disclosure (“none” means no position):
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Latest Wall St. Media Appearance
Talking swine flu, General Growth Properties, GM & the market
Also, Mr. Doug eat his required crow for the Red Sox DOMINATION of his beloved yet marginally talented Yankees
Disclosure (“none” means no position):
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Bill Ackman on Charlie Rose 4/24 (video)
A conversation about the economy with Bill Ackman, major investor and hedge fund manager of Pershing Square Capital Management LP, Kate Kelly, Andrew Ross Sorkin and Joe Stiglitz, economist and a member of Columbia University faculty
Stiglitz has a great line “They’ve (policy makers) confused the notion of too big to fail with too big to financially reorganize”.
Go to the 9 minute mark as Ackman talks about how to fix the bank problem. How many billions have we wasted? How many?
Disclosure (“none” means no position):
I am of the opinion that the recent wave of inside selling is tax related, not necessarily an indication of dire outlooks.
Executives and insiders at U.S. companies are taking advantage of the steepest stock market gains since 1938 to unload shares at the fastest pace since the start of the bear market.
Gap Inc.’s (GPS) founding family sold $45 million of shares in the largest U.S. clothing retailer this month, according to Securities and Exchange Commission filings compiled by Bloomberg. Daniel Warmenhoven, the chief executive officer at NetApp Inc., liquidated the most stock of the storage-computer maker in more than six years. Sales by the co-founders of Bed Bath & Beyond Inc. (BBY) were the highest since at least 2001.
While the Standard & Poor’s 500 Index climbed 28 percent from a 12-year low on March 9, CEOs, directors and senior officers at U.S. companies sold $353 million of equities this month, or 8.3 times more than they bought, data compiled by Washington Service, a Bethesda, Maryland-based research firm, show. That’s a warning sign because insiders usually have more information about their companies’ prospects than anyone else, according to William Stone at PNC Financial Services Group Inc.
“They should know more than outsiders would, so you could take it as a signal that there is something wrong if they’re selling,” said Stone, chief investment strategist at PNC’s wealth management unit, which oversees $110 billion in Philadelphia. “Whether it’s a sustainable rebound is still in question. I’d prefer they were buying.”
Now, I am not by any means saying we are due for a rebound in the economy anytime soon. I think the most likely scenario is we bottom and just drag along it for quit some time. But, the market has had an irrational rally (in my view). Execs also recognize this and further, they know the the Obama administration has plans to raise the capital gains tax next year.
If you are an owner or an executive at a public company who sees the balance of 2009 being stagnant at best for the overall economy, why wouldn’t they take advantage of a 25% market run to sell out and take advantage of capital gains taxes that are sure to be lower now than in the future.
The argument of course is “why do it now?”. “Why not wait for the year to progress and see if the market rises more”? I am assuming even they recognize the rally vs. fundamentals argument making the case for flat prices from here on out at best and most likely falling. It could also be a case of not wanting to take any chances after seeing your holdings rally this much.
The tax argument is huge. The administration has danced around the issue in terms of specifics. First saying the “Reagan Era” rate of 28% was fair then backing of that and now ignoring the subject. So, while the “how much” is not clear, the “its coming” is.
That causes tax behavior. People will sell assets now, in the anticipation of higher taxes in the future. This dynamic seems to be lost on those in power rather frequently.
Disclosure (“none” means no position):None
Based on the verbiage coming out of General Growth (GGWPQ), this seems to be the way this is headed.
So, what is a Chapter 11 “Cram Down“?
If all of the legal requirements of a reorganization plan are met, with the exception of a successful confirmation vote by creditors, the plan may still be confirmed over the objection of a dissenting class. If the plan does not discriminate unfairly and is fair and equitable to the dissenting class, it can be crammed down on the impaired class that votes against the plan.167 In a cramdown, the debtor may (1) reduce the principal amount of the secured claim to the value of the collateral; (2) reduce the interest rate; (3) extend the maturity date; or (4) alter the repayment schedule.168 The debtor may also make a minimal payment on the unsecured claim. Under the Bankruptcy Code a cramdown is permissible when the plan provides a dissenting secured class with consideration equal to the amount of its claim or when no class below the dissenting unsecured class participates under the plan, the plan.169
Feasibility Requirements of a Cramdown Plan
Before a court confirms a cramdown plan, the court must, among other things, determine whether the plan is feasible. In other words the court must believe that the plan probably will not be followed by an unproposed liquidation or a need for further financial reorganization.188 According to the United States Supreme Court, “[h]owever honest in its efforts the debtor may be, and however sincere its motives, the District Court is not bound to clog its docket with visionary or impractical schemes for resuscitation.”189 Although the feasibility requirement does not guarantee the success of the reorganized debtor, it does require that the plan enable the reorganized debtor to emerge solvent and with reasonable prospects of financial stability and success.190 The burden is on the debtor to prove that the plan is feasible.191
Generally, the factors that the court considers in determining feasibility include: (1) the earning power of the business; (2) the sufficiency of the capital structure; (3) the condition of the collateral and any deterioration that may have occurred throughout the bankruptcy process; (4) economic conditions; (5) management efficiency; (6) the availability of credit, if needed; and (7) the debtor’s ability to meet capital expenditures.192 The court is obligated to evaluate past earnings to determine if they are a reliable criterion of future performance and, if not, to make an estimate of future performance by inquiring into foreseeable factors that may affect future prospects. To enable the court to evaluate past earnings and to estimate future earnings, the debtor must present competent, concrete, and reliable evidence.193
Therefore, although debtors may propose to restructure their debts, debtors have a significant burden to establish that they will be able to satisfy the payments proposed in their plans. In a single asset real estate case, the court will deny confirmation if the debtor cannot demonstrate the plan’s feasibility based upon realistic and verifiable projections establishing the existence of adequate cash flow.
Important note: Under a cram down plan, if all senior credit classes are made whole, then the equity is permitted to remain in tact.
Now, even if all senior creditors are not made whole equity can remain in tact under the “new value exception”. It was set forth in dicta in a 1939 United States Supreme Court case, Case v. Los Angeles Lumber Products Co.175 This exception allows equity holders to keep their ownership interests even though unsecured creditors do not receive full payment of their claims, provided that equity holders contribute new capital to the reorganized debtor in an amount reasonably equivalent to their retained interest in the debtor.176 The new value exception requires that the equity holders’ infusion of capital be (1) substantial, (2) new, (3) reasonably equivalent to the interest being retained, (4) in the form of money or money’s worth that constitutes more than a promise by the equity holders to make future payments,177 and (5) necessary to a reorganization.
So, right now the equity of General Growth is worth $190 million. That would be the interest to be retained, a pittance given the potential value of the equity in a cram down scenario.
Now, let’s talk about “secured creditors”. General Growth has its malls in separate entities, each (for the most part) with its own mortgage (some properties are grouped together). The secured creditors in this case have their loans secured by those properties. Does this mean that the value of the loan is what is secured? No.
The US Supreme Court has held that there is a “disposition value” to the claim. The actual value of the property on the market (or what the creditor would receive in a liquidation) is treated as secured and anything over that, now becomes unsecured.
This simply means that the current fall in CRW prices gives GGP huge leverage over the creditors in this case. Any reorganization that gives creditors more than they would see in a liquidation (it can be reasonably argued that liquidation prices are far below even current ones) will be looked at favorably by both the court and creditors in terms of the “fairness” test. It also allows an easy debt restructure guide as the new loan amount would be the present value of the property with the balance being repaid as equity or, an additional loan with a longer dated maturity because an unsecured creditor in this case can elect to have its claims treated as secure with a:
1111(b)(2) election: (1) the undersecured creditor loses the right to vote regarding the previously unsecured claim; and (2) the unsecured creditor must make the election before the conclusion of the hearing on the disclosure statement. Often, this second requirement forces the undersecured creditor to elect before adequate disclosure has been made concerning the plan and the proponent’s intentions. By making a section 1111(b)(2) election, a creditor may significantly affect whether the amount of deferred cash payments proposed under a plan and the present value of those payments satisfy the cramdown confirmation standards of section 1129(b)
Based on statements from management, one can only assume this is the direction they plan on heading. Should they be successful, it is not only good but fantastic for the equity.
Disclosure (“none” means no position):Long GGPWQ