Category: Articles

Amerco Bankruptcy & GGP: A Blueprint?

Post author By ToddSullivan
Post date March 22, 2009
4 Comments on Amerco Bankruptcy & GGP: A Blueprint?

The similarities are striking…Bill Ackman talks about it in the video at the end.

Why did Amerco file for bankruptcy?

Amerco took the action in 2003 to restructure its debt, officials said, adding that since the its assets are greater than its debt, it intends to repay its creditors in full pursuant to a full-value plan of reorganization. Amerco obtained a commitment from Wells Fargo Foothill (WFC) for a $300 million debtor-in-possession facility, officials said, and for a $650 million bankruptcy emergence facility.

On Oct. 15, 2002, Amerco defaulted on a $100 million principal payment owed to holders of 1997 asset-backed notes. That default triggered defaults on other debt outstanding. Until the filing, the company had been in negotiations with creditors about restructuring its debt.

“Business fundamentals at the company remain strong,” said Joe Shoen, Amerco’s chairman at the time. “Amerco has taken a positive step in choosing Chapter 11 to facilitate the restructuring of its debt. We are getting our financial house in order.”

Amerco’sJoint Plan of reorganization filed Oct. 2003

Debtors disclosure statement under the Joint plan

Here is the part is this bankruptcy that GGP shareholders need pay attention to

Specifically, the Debtors believe that their businesses and assets have significant going concern value that would not be realized in a liquidation, either in whole or in substantial part. According to the valuation analysis and the liquidation analysis prepared by management with the assistance of the Debtors’ restructuring advisors, Alvarez & Marsal, Inc. (“A&M”), and the other analyses prepared by the Debtors with the assistance of A&M, the Debtors believe that the value of the Estates of the Debtors is significantly greater in the proposed reorganization than in a liquidation.

So, as debtholders were made whole, through restructuring of the debt, this is what was propsed for the common and prefered stock

Existing Common Stock means shares of common stock, par value $0.25 per
share, of AMERCO that are authorized, issued and outstanding prior to the Effective Date. Other Interests means the preferred share purchase rights issued by AMERCO pursuant to that certain stock-holder rights plan adopted by the Board of Directors of AMERCO in July 1998, with each such right entitling its holder to purchase from AMERCO one one-hundredth of a share of Series C Junior Participation Preferred Stock (Series C), no par value per share of AMERCO, at a price of one one-hundredth (1/100th) of a share of Series C, subject to adjustment. The Plan does not alter or otherwise impair the Allowed Existing Common Stock and Other Interests.

Here was the thought process behind the debtors plan:

Shortly after filing for relief under Chapter 11 of the Bankruptcy Code, the Debtors focused on the formulation of a plan of reorganization that would allow them to quickly emerge from Chapter 11 and preserve their value as a going concern. The Debtors recognize that in the competitive arena in which they operate, a lengthy and uncertain Chapter 11 case may detrimentally affect the confidence in the Debtors by their respective vendors and employees, impair their financial condition, and negatively impact the prospects for a successful reorganization. The terms of the Plan are based upon, among other things, the Debtors’ assessment of their ability to successfully restructure their capitalization, make the distributions contemplated under the Plan, and pay their continuing obligations in the ordinary course of the Reorganized Debtors’ business.

Also, like GGP, Amerco had a very higher percentage of insider ownership of the common stock.

Well, you ask? What happened?

From 2003

AMERCO today announced that all of its creditor classes have approved the Company’s Plan of Reorganization. Creditors under the Plan will receive a combination of cash and new notes in AMERCO.

“Now that we have a 100 percent consensual agreement with all creditor groups, we are poised to emerge from Chapter 11,” stated Joe Shoen, chairman of AMERCO. “We are gratified that our creditors have recognized that our Plan is in the best interest of all of the company’s constituencies.”

According to Richard Williamson, Regional Managing Director at Alvarez & Marsal, Inc., “AMERCO is positioned to accomplish one the most successful restructurings in recent history. On the effective date of the Company’s Plan of Reorganization, AMERCO will have restructured, on a consensual basis, over $1.2 billion in debt and lease obligations with no dilution to equity holders.” Alvarez and Marsal, Inc. has served as the exclusive financial advisor to AMERCO since May 2003, with respect to its negotiations with creditors and in the raising of exit financing and its capital restructuring.

A Confirmation Hearing is scheduled to be held by the U.S. Bankruptcy Court in Reno, Nevada beginning on February 2, 2004. Subject to confirmation by the Court and the completion of all necessary documentation, the Plan should become effective and be funded shortly thereafter.

The plans were approved and common shareholders were let whole.

This is part of the blueprint Ackman is looking at in my opinion. Were is not for the credit markets, GGP would have refinanced the debt and because of its strong operations, the company itself would be functioning.

Because of the similarities to Amerco, GGP can make the same arguments for the debt restructuring and the survival of the equity.

Now, a warning. I know people have been following into this investment. If you do, you must be prepared to lose all of it. There is no guarantee of the above outcome. Buying this stock now is essentially buying a call option on the company’s survival. It is hits, you win big, very big. If not, what you invested is worth nothing. I believe the above scenario plays out, I am also not going to be broke should it not.

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

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Tags ackman, ggp

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Weekend Reading

Post author By ToddSullivan
Post date March 21, 2009

Energy, Oil

– If government won’t do it, entrepreneurs will

– Chu’s got it all wrong

–
Disclosure (“none” means no position):

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Friday’s Links

Post author By ToddSullivan
Post date March 20, 2009

NetFlix, Atlas Shrugged, Reader, GE

– What does it cost to stream a movie?

– Not just a political novel

– Sony and Google take on Amazon

– What happened?
Disclosure (“none” means no position):

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FDIC’s Sheila Bair on ‘Bad Bank’ Plan

Post author By ToddSullivan
Post date March 19, 2009
2 Comments on FDIC’s Sheila Bair on ‘Bad Bank’ Plan

There is a real eye opening statement in this interview..

Talk about the Federal Reserve creating a “bad bank” to buy toxic assets from financial institutions has been floating around. Kai Ryssdal discusses with FDIC Chairwoman Sheila Bair how the plan would work.

Here is the part:
Blair said, “Well, I think they will certainly be worth more than the current valuations. I think that is the assumption. And I think that’s true. I mean, at the FDIC we sell troubled bank assets all the time. You know, when banks have to be closed, we take over as a receiver, so we’re pretty familiar with the market right now. So we think that that is absolutely true that the assets are worth more than the current market conditions assign to them. And so that, yes, over time there will be significant profits from these.”

Now, this was the original plan back in October 2008. It is also the plan Berkshire’s (BRK.A) wanted in on and the plan and fellow billionaires Wilbur Ross and John Paulson have recently offered to participate in. It is also the plan I argued for here in October several times.

This goes to the whole folly of the second batch of bailout funds. One can argue the first was necessary to stop the collapse. Step two and three ought to have been removing some of the worst assets and then modifications to market to market to reflect better valuations of all illiquid securities.

Instead we have thrown more money down the black hole and are only now considering MTM alterations and getting serious about the “bad bank” idea. Meanwhile the tab is over $1 trillion up from the initial $350 billion spent.

Such a waste of resources…

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Wicksell Rate Says Buy..

“Davidson” submits……

It is useful for value investors to see how this may be applied when investing in common stock as it reveals that the markets do indeed arbitrage with the principle of Relative Returns. For the many who have attempted the use of simple relationships, i.e. P/BV, Market Cap/GDP, P/E this will appear overly complicated, but I do not apologize. I only observe that the world of capital requires adjustments to valuation so that a competitive return can be had.

The basic formula is the long term Real GDP + adjustment for inflation = Wicksell Rate(proposed by Knut Wicksell in 1898).

In reality this comes down to using the Dallas Fed 12mo trimmed mean PCE as the measure of core inflation and for US investors the Real US GDP long term trend which today sits at 3.16% and over the next 10yrs will fall to 3.15% based on 80yrs of history. Based on the Feb 2009 Dallas Fed PCE release of 2.2%, the Wicksell Rate at the moment is ~5.4%. This is the moving Wicksell Rate(Capital Return Benchmark) that essentially rises and falls with core inflation while Real US GDP does not vary very much for 5yr forecasting purposes. This approach is not for next quarter’s GDP or even next year’s GDP as we all know that no one has ever forecasted these levels with precision. However, IF WE KNOW WHEN THE MARKET IS OVER VALUED OR UNDERVALUED VS. THE WICKSELL RATE, WE CAN KNOW WHEN TO COMMIT FUNDS AND WHEN TO REMOVE FUNDS BASED ON RELATIVE RATE OF RETURN.

In using this approach one needs to be cognizant that psychology plays a significant role in market valuations for periods as long as several years. I call attention to the sell signal given when the SP500 return fell below that of the Wicksell Rate in 1997 and did not provide a buy signal till August of 2002. In general this valuation approach would have sold during periods of excess valuation and bought only after corrections had mostly run their course. The fact that it resulted in a buy signal just prior to the Fall 2008 collapse demonstrates that when market valuation rules change so does the ability of the market players to know where the values are in the market place. They just sell out and wait for the dust to settle. This was the stark effect of imposing an artificial price-based Mark-to-Market valuation methodology to securities known to be of much higher quality than those prices reflected.

The other half of the process, i.e. developing a reliable forward return for the SP500, requires the knowledge that 1) SP500 ROE has been surprisingly steady at ~14%, 2) SP500 BV has had surprisingly growth of ~6% since 1978 and the SP500 represents ~90%+ of US market capitalization. Together, these facts let us assume that the next few years will run along the same trend. This method is to divide the 2yr forward SP500 Book Value into the current SP500 Index Price and multiply this by the ROE to get a measure of how much of this ROE the investor receives at the current SP500 Price level. The 2yr number is based on the rational that Value investors look at least 2yrs into the future.(Value investors are not traders) The calculation looks like this:

(SP500 Price)*(SP500 ROE Trend of 14.2%)/(2yr Forward SP500 Book Value) = 2yr Forward Return at the Current SP500 Price Level

This proves that the market does have a rational Relative Return process at work. It also proves just as simply that regulations and psychology can tamper with the relationship over shorter periods such as the one we find ourselves in today.

The current market is an extraordinary buying opportunity!!

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GE on the Hot Seat

GE (GE) is having an investor meeting today.

Some commentary:

Too be honest I blew in on GE. When shares sat around $7 and $8 I fiddled on buying more shares but decided to wait due to the uncertainty I had about it. With shares today over $11, look like I let 50% run by me in a week and a half.

Will I run out and buy now? No.

I still think both GE ans the market as a whole now are due for a pull back. The good news is I am more convinced that GE will be just fine. When the pullback comes, I will be ready to buy this time.

If it never comes, oh well. At least the shares I already own are making some money…just not as much. I guess the lesson here is to trust yourself?

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

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Sears’ Balance Sheet "Problem"??

Post author By ToddSullivan
Post date March 19, 2009

So there was an article out last week that brought up the issue of Sears Holdings (SHLD) and its balance sheet. It focused on Sears credit revolver and its upcoming renewal in 2010. It also misses the point.

First, here is the article. For those who do not want to read the whole thing, here are the main points in it.

One nitpicky point. The author claimes the revolver is a $3.8 billion one. It is a $4 billion one.

Disregard the reported fourth-quarter profits, when Sears earned $2.94 a share. The company is expected to post quarterly losses in the coming three quarters, which are seasonally weaker; that’s likely to pressure EBITDA levels, which have been falling steadily for a few years. Coupled with the expiration of a March 2010 $3.8 billion credit revolver, poor EBITDA could bring the spotlight to the company’s balance sheet.

Although that revolver doesn’t need to be replaced for another 12 months, the company will need to line up a replacement later this year, ahead of the peak working capital needs during the holiday season. (In fiscal 2008, Sears tapped roughly $3.0 billion of the revolver, and the company can ill afford to risk coming up against the revolver’s limits this time around, which would appear to be the case in light of still-negative comps that will likely pressure cash generation for months to come.)

Let’s look. From Sears recent 8-K, “Reduced total short-term borrowings on our $4.0 billion revolving credit facility from $1.9 billion at November 1, 2008 to $435 million at January 31, 2009”. The “tapping” of the credit facility is done for inventory purposes and then is paid off as that inventory is sold.

Regarding inventory, from the same 8-K, “Merchandise inventories were approximately $8.8 billion at January 31, 2009 as compared to $10.0 billion at February 2, 2008. Domestic inventory levels declined from $9.1 billion at February 2, 2008 to $8.1 billion at January 31, 2009 despite the addition of $120 million of Kmart footwear inventory which was added when Kmart began operating its footwear department in January 2009. Inventory levels at Sears Canada decreased $181 million, largely due to the impact of foreign currency exchange rates.”

The implication here is that Sears is getting a better handle on inventory and carrying less.

Back to the piece. It goes on to say more store closings and less share repurchases would have avoid Sears being in this situation, then this:

How much EBITDA Sears can generate this year has important implications for the retailer’s efforts to replace that $3.8 billion credit revolver. Sears’s EBITDA fell from $2.55 billion in fiscal 2008 to $1.6 billion in fiscal 2009, and a drop of a similar magnitude this year would be a big problem. For example, the retailer needs at least $500 million simply to support interest payments and maintenance capex. With little cash available to support other badly needed investments in the store base, the retailer’s competitive positioning — already weak — could weaken yet further.

As Sears looks to replace that revolver, it appears that it will be hard to secure an additional $3.8 billion line. Yet as noted above, Sears needs nearly that much money to support seasonal working capital needs (which peak in November). Securing a smaller revolver may not be an option, which may lead the retailer to sell good assets such as the Land’s End catalog business, one of the few jewels in the empire. Suffice it to say a revolver that is far smaller could lead to a severe liquidity crisis

Scary right? Well, not if you undestand the credit agreement and how it is usd. Let’s look.

From the December 2008 10-Q

We have a $4.0 billion, five-year credit agreement (the “Credit Agreement”) in place as a funding source for general corporate purposes, which includes a $1.5 billion letter of credit sublimit. The Credit Agreement, which has an expiration date of March 2010, is a revolving credit facility under which Sears Roebuck Acceptance Corp. (“SRAC”) and Kmart Corporation are the borrowers. The Credit Agreement is guaranteed by Holdings and certain of our direct and indirect subsidiaries and is secured by a first lien on our domestic inventory, credit card accounts receivable and the proceeds thereof.

Availability under the Credit Agreement is determined pursuant to a borrowing base formula, based on domestic inventory levels, subject to certain limitations. As of November 1, 2008, we had $1.9 billion of borrowings and $1.0 billion of letters of credit outstanding under the Credit Agreement with $1.1 billion of availability remaining under the Credit Agreement.

The $1.9 billion in borrowings, borrowed in the first nine months of fiscal 2008, are classified within short-term borrowings on our Condensed Consolidated Balance Sheet as of November 1, 2008 as we expect to repay the entire $1.9 billion of borrowings in December 2008 (although we do expect to borrow on the revolver again in the month of January 2009). The Credit Agreement does not contain provisions that would restrict borrowings or letter of credit issuances based on material adverse changes or credit ratings.

Our $4.0 billion Credit Agreement is funded by a consortium of banking entities, including an affiliate of Lehman Brothers. This affiliate has a $207 million total commitment in the $4 billion revolving credit facility, but since September 17, 2008 has not funded its proportionate share of our borrowings under the facility.
The majority of the letters of credit outstanding under the Credit Agreement are used to provide collateral for our insurance programs.

Here is the actual agreement.

The author claims that Sears EDITDA this year will “have implications” for what it quaifies for in renewal. But, the current agreement says:

Borrowing Base” means, at any time, an amount equal to (a) 85% of the aggregate outstanding Eligible Credit Card Accounts Receivable at such time plus (b) the lesser of (i) 70% of the Net Eligible Inventory at such time minus 100% of Other Borrowing Base Reserves and (ii) 85% of the Net Orderly Liquidation Value at such time. The Agent may, in its Permitted Discretion and with 5 days notice to the Borrowers, reduce the advance rates set forth above or adjust one or more of the other elements used in computing the Borrowing Base.

As the 10-K above says, borrowing of it are “inventory based”, not based on earnings

Now let’s also look at uses of some funds. Last year Sears produced $990 million in cash from operation, repaid $262 million in long term debt and repurchased almost $700 million in stock. It sits on $1.2 billion in cash as of 1/31/2009.

Clearly we can assume that should the economy deteriorate further the nearly $1 billion spent on debt repayments and share repurchases last year would not be used for those purposes in this one. Also, if you look closer at the timing of the uses for the line of credit, it says the $1.9 billion was used “in the first 9 months of 2008” meaning the holiday season is funded well in advance. It also means 2009’s Season is just fine.

The reality is that the author’s claim that Sears needs near $3.8 billion “to support working capital needs” grossly overexaggerates the reality. They “needed” a mear $1.9 billion in 2008 and should they stop paying down debt and repurchasing shares this year, that drops to around $900 million.

The question isn’t whether or not Sears gets the revolver renewed, they will. The question, given the current state of credit markets is just how expensive it will be to do so.

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

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Thursday’s Links

Blogs, thank you, New sports,Nat Gas

– Timing of this is odd as having conversations with several IR Depts… hope they read this

– Sullivan, AIG, Sptizer & Melissa Theuriau all in one post!!

– Victory for Title IX, chicks in panties playing football

– Lock in those prices if you can
Disclosure (“none” means no position):

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Sears Holdings Buys More Sears Canada Shares

Post author By ToddSullivan
Post date March 18, 2009
11 Comments on Sears Holdings Buys More Sears Canada Shares

Vintage Lampert, buying shares of a company he offer to buy for less than he offered two years ago…patience..

From the National Post

Sears Holdings Corp. (SHLD) continues to add to its nearly 73% stake in Sears Canada Inc. The U.S. retailing giant bought 29,600 shares of its Canadian subsidiary for around $17.85 per share between March 9 and March 10, 2009. This brought SHLD Acqusition Corp.’s holdings in the Canadian retailer to 20,756,173 shares. The transactions follow Sears Holdings Corp.’s purchase of 32,000 shares on Dec. 1, 2008.

In November 2006, Sears Canada shareholders rejected an $888-million bid by its parent after some investors said the $17.97 per share takeover price was too low. However, the potential deal sent Sears Canada shares nearly 50% higher since the offer was made to almost $30 per share.

Now follow this. As of 1/31, Sears Canada (SCC) had 107 million shares out and $891 million in cash on the books or, $8.32 a share. So, Lampert pays $17 a share, and then gets to add the $8.32 a share to Sears Holdings cash balance because of his ownership percentage for a nice 52% return. Beautiful…

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

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Why Are AutoNation Shares Surging?

Post author By ToddSullivan
Post date March 18, 2009

For those who have not noticed, AutoNation (AN) shares have surged 193% from their October 2008 lows. They sell cars …….why?

Reasons:
1- Cars fall apart. Demand for auto’s does not disappear. As a matter of fact, it has not fallen by that much, as sales numbers would have you believe. AutoNation CEO Mike Jackson has said he has full showrooms of customers, they just cannot get the credit to buy cars. Demand is steadily is building and customers will surge to pick up low priced vehicles when credit loosens.

2- Market share. Thousands of dealerships have closed of the last two year sand near a thousand more this year will go under. The good news for shareholders is they are not AutoNation’s. AN is picking up large market share gains “through attrition” as Jackson predicted they would last year in my interview with him.

3- Microsoft’s (MSFT) Bill Gates and Sears Holdings (SHLD) Eddie Lampert have been aggressively buying shares and own over 58% of it.

All that is great Todd you say. BUT, when does auto credit loosen? Well, it just might be now.

From Reuters

The first asset-backed securities offering under the Federal Reserve’s TALF program met with robust demand on Tuesday, leaving hungry investors clamoring for more of Nissan’s $1.3 billion deal.

“The deal was four to five times oversubscribed in the first eight minutes that it was announced,” said Mike Kagawa, portfolio manager at Payden & Rygel in Los Angeles, who did not get a chance to participate in the sale.

Through its Term Asset-Backed Securities Loan Facility, or TALF, the Fed aims to unclog the consumer loan market and jump-start the fledgling ABS market, nearly shut down by the credit crunch and soaring funding costs last year. ABS supply slumped by 82 percent to $159.8 billion in 2008 and has totaled just over $4 billion so far this year.

Under the plan, the Fed will make loans to investors for the purchase of ABS securities. Once the securities are sold, issuers of bonds will have freed up capacity on their balance sheets to make new loans to consumers.

JPMorgan Securities and Banc of America Securities are underwriting the “AAA”-rated four-part sale, which includes a 0.32 percent issue offered at a spread of 40 basis points over one-month Libor, a one-year issue offered at 185-200 basis points over eurodollar swap futures and two-year and 3.16 year notes at spreads of 200 to 225 basis points and 325 to 350 basis points over swaps, market sources said.

Other ABS investors agreed the deal met with very strong interest. “It quickly came and went,” another investor said.

Automakers, which rely heavily on the securitization market for funding of their auto loans, are expected to benefit the most from the plan. World Omni is also expected to be in the line-up of TALF-eligible auto sales over the near-term, market sources said.

I first picked up shares in May last year at $15 an change a then quadrupled the position in Sept-Oct between $7 and $8 for a now average cost of just over $9. Since they are up over 40% am I thinking of selling? No.

The turnaround story here is just beginning. AN is now a very lean operation and there are years of markedly improved earnings coming. As I first said in August last year and still believe, eventually AutoNation, Sears auto and AutoZone become one.

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

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Wednesday’s Links

Prank, Barney Frank, Short Squeeze, Apps

– This is really funny

– BS outrage at AIG

– They should have done this already

– Free blackberry apps
Disclosure (“none” means no position):

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Jim Rogers & Waren Buffett Singing Same Song

Post author By ToddSullivan
Post date March 17, 2009
3 Comments on Jim Rogers & Waren Buffett Singing Same Song

Check out the following videos…

Courtesy All Things Jim Rogers. This ought to be the first stop for Jim Rogers devotees.

Part 1

Jim Rogers told Bloomberg that the U.S. risks sending the world into a depression as its bailouts of failed companies rob healthy businesses of capital.

Part 2

Visit All Things Jim Rogers for rest of videos (2 more).

Now in his recent letter to shareholders Berkshire’s (BRK.a) Warren Buffett recently said:

“Clayton’s lending operation, though not damaged by the performance of its borrowers, is nevertheless threatened by an element of the credit crisis. Funders that have access to any sort of government guarantee – banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella – have money costs that are minimal. Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels.

Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be. This unprecedented “spread” in the cost of money makes it unprofitable for any lender who doesn’t enjoy government-guaranteed funds to go up against those with a favored status. Government is determining the “haves” and “have-nots.” That is why companies are rushing to convert to bank holding companies, not a course feasible for Berkshire.

Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.”

This is the real cost of the government bailouts. Healthy enterprises are being starved for capital. If they get it, its cost is such that the scope of the economic activity they can produce from it is limited because of what it took to get it.

This is severely hampering economic recovery. The government THINKS they are helping by making the guarantees. The truth is they are hurting healthy companies.

This just ass backwards. Healthy companies MUST have a lower borrowing cost than those who aren’t. This is what is called “unintended consequences” of government action. Try to save a few companies and then you hurt thousands more.

Disclosure (“none” means no position):None

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More Thoughts on General Growth Properties

Post author By ToddSullivan
Post date March 17, 2009
4 Comments on More Thoughts on General Growth Properties

Took the evening to digest the General Growth Properties (GGP) news. Here is what I came up with for to affirm the investing thesis of the equity (stock).

First, here is the news (linked for those who have already read it):

So, why invest in the common stock, does bankruptcy destroy it, why aren’t lenders forcing it, will it be a Chapter 11 (reorganization) or Chapter 7 (liquidation)?

The answers are all tied up and related so lets go through it:

If (when) there is a bankruptcy filing, why 11 and not 7? The simple answer is having the second largest mall operator go into liquidation and throwing 200 million square feet of retail space up for sale would destroy the commercial real estate market. Why? The sudden supply of properties without bidders (loans still are very tough to get) would mean they would have to be placed on the market below “fire sale” prices to sell. Because of that, all other operators real estate values would fall, dramatically, and in turn, causing debt covenants for them to be tripped. That would create a cascading effect on the whole industry. For those not sure, this would be a very, very bad thing. You think you have seen write-downs in home mortgage loans at banks? Force liquidation of GGP and as the saying goes “you ain’t seen nothing yet”.

It also means the banks holding the loans on the properties would then be forced to take pennies on the dollar, very bad for them. In a Chapter 7, shareholders, debt holders and the industry as a whole suffer. No one wins.

So, if we rule out liquidation. What happens in Chapter 11? Who wins there? Here is what Bill Ackman said yesterday in the WSJ:

Some investors, however, consider a bankruptcy filing likely. Among them is activist investor Bill Ackman of Pershing Square Capital Management LLC, who bought 7.5% of General Growth’s stock in recent months and put another 18% under swap contracts in a bet that the company’s equity will survive a bankruptcy unscathed. Mr. Ackman also expects to soon get a seat on General Growth’s board.

“We think the company will ultimately have to file for bankruptcy, but we think that it’s a wholly solvent company with a liquidity problem,” Mr. Ackman said in an interview Monday. “I don’t think they’ll need to dilute shareholders. All they need to do is extend the maturities [in bankruptcy court] and they can refinance those debts as they come due.”

Now, one must know that Ackman took his stake AFTER GGP’s troubles were known. This is not a situation where we have an investor trying desperately to save a bad investment. He bought in knowing this scenario we now face was likely.

The typical bankrupcty is forced because the liabilities (debt) outsize the assets. In this case the common shareholders are wiped out. But, we know that the assets GGP has are in excess of the liabilities. In this case, even in a worse case Chapter 11, shareholders are not wiped out.

But, this goes even further. Again from Ackman “Most of the time, insolvent companies go bankrupt,” Ackman said. “It’s rare for a solvent company to go bankrupt. This is a solvent company with a liquidity problem.”

General Growth is not losing money. Rents are stable, occupancy rates are over 90% and FFO (funds from operations) remain healthy. What is the problem? Credit. GGP has loan due that they typically just rollover into longer maturities. With the current credit “lock down”, they cannot do that. That means bulk payment come due and the cash is not there. It should be noted that this is not an odd situation, this is what REIT’s typically do with their debt.

With a Chapter 11 debt holders are put in a room and told by a Judge, “we can pay you all 100% but we need to change and lengthen maturities OR we can liquidate and you can pick up scraps for pennies on the dollar”. Here are the new terms. The choice is rather obvious

The banks all recognize this too. This is the reason they have not been paid a dime since late last year and have not forced a Chapter 11 filing. They do not want to take the risk of writing down loan portfolio’s. Remember, our mark-to-market world means they just do not just write down GGP loans, they then have to write down ALL of them on their books. Again, this is very bad. So we get endless extensions to pay.

Why? The banks are riding this out. If we get MTM changes in Congress then we may see the log jam break. In that case a Chapter 11 would not have a cascading effect on their whole portfolio and restructuring the loans to again begin receiving payments makes perfect sense. They may be hoping for an economic turnaround late this year that enables GGP to sell some property to pay them off. They may all be playing a waiting game hoping someone restructures and set the bar for the rest of them that is better than a bankruptcy judge will do.

Who knows the exact reason why for each lender. We do know what they don’t want right now, a Chapter 11 filing. If they wanted it they could force it easily.

Because of the financial situation of GGP, there is no need to convert debt to equity. Restructuring the loans would allow for payments to be made, equity holders would remain intact, the banks again have performing loans on their books and everyone is happy…..VERY happy.

I think the specter of Ackman going on the board must give the banks pause and perhaps want them to restructure sooner rather than later. Then knowing he wants a Chapter 11 I am guessing will bring people to the negotiating table a bit faster…

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

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Tags ackman, ggp

Articles

Issac: Mark-To-Market Has Destroyed $1 Trillion in Lending

Post author By ToddSullivan
Post date March 17, 2009

William Issac, former chair of the FDIC testified before Congress on March 12th. His testimony is the most damning I have seen on the mark-to-market debate to date.
March 12, 2009

For those who want to skip the whole testimony, here is the most striking chart (click to enlarge):

Issac’s point holds as he makes valid comparisons to the S&L Crisis of the 1980’s. Had banks been forced to MTM then, claims Issac, the recession we faced then would have been far worse and the bailouts we see today would also have happened.

When markets are not functioning properly, as they are now says Issac, MTM accounting produces “terribly inaccurate” accounting results.

It is definitely worth the read

Testimony MTM House Financial Services 3-12-09-WIsaac-Final

Publish at Scribd or explore others: Presentations & Slid congress mark to mar

Disclosure (“none” means no position):

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Articles

Is Case-Shiller Flawed??

“Davidson” makes the case that it is indeed flawed analysis….

Robert Shiller has made quite an impact with his various appearances in the media and his active financial consulting business heavily promoting his negative market views. I downloaded his spreadsheets with the goal of understanding his views better, but was surprised to discover serious errors in his approach. I start with his analysis of the housing data and then follow with his view of the SP500.

This is an analysis of Robert Shiller’s data downloaded from his site with out modification. His chart is inflation adjusted Housing Prices in arithmetic format. My chart below is of his Nominal Housing Price Index in semi-log format.

Price/time series of this type require semi-log analysis and clearly reveal that conditions over the series are non-uniform. The point to make with this comparison is that Prof. Shiller draws conclusions regarding housing trends from 1890-Present (Chart 1) treating the period as if the conditions affecting housing prices had been uniform. My chart below Chart 2) provides a clear indication that this is an erroneous supposition as the pre-1933 environment greatly differed from the post-1933 environment. Namely, the Banking Act of 1933 and the Glass-Steagall Act provided improved financial stability which led to a ~300% growth rate in the housing index post-1933 vs. pre-1933. No analytical method can make a valid combination of pre-1933 data and post-1933 data and hope to come to conclusions with any validity.

Prof. Shiller’s housing forecasts are simply meaningless based on the data he presents.

Chart 1: Shiller’s Inflation Adjusted Housing Index Chart arithmetic scale

Chart 2: “Davidson’s Chart of Shiller’s Nominal Housing Index in semi-log format.

Next I turned to Prof. Shiller’s analysis of the Inflation Adjusted SP500 Index and again compared his chart (Chart 3)analysis vs. the proper semi-log format unadjusted SP500 Index(Chart 4). Prof. Shiller draws conclusions and makes forecasts based on the SP500 Inflation Adjusted chart below. He assumes that uniform conditions applied throughout the period. This is shown to be a very simplistic and incorrect assumption by observation of my semi-log non-inflation adjusted plot of the SP500 below. Pre-1933 and post-1933 environments are readily observed. Again one cannot combine the pre-1933 period with the post-1933 period as he has and make any intelligible analysis much less a valid forecast.

Note that the SP500 grew ~400% faster post-1933 when compared to the pre-1933 pace.

The greatest difference in both instances of Shiller’s analyses is that the laws enacted in 1933 to protect the US financial system, greatly reduced the rate of bank failure post-1933 and the subsequent capital destruction. Prof. Shiller has failed to recognize this in his assumptions that conditions remained uniform throughout the period of his analyses. He needs to reassess his approach.

Chart 3: Shiller’s Inflation Adjusted SP500 Index