Continuing on my theme of the value of debt restructuring and recapitalization, I wanted to make note of a recent transaction by the public telecommunications company Knology. Knology recently closed on a credit facility amendment that extended the term of its facility by two years and increased its unused revolver by 40%. The result: it's market cap (market value of its equity) increased approximately 35+%. All this, even though the interest rate was increased by more than a full percentage. Ohh but wait, the new terms allow for dividends and stock re-purchases; read recapitalization. The market run-up is an endorsement for the value of longer-term debt and flexible terms (money security) over lower rates (money expense).
While the typical small business is not managing their balance sheet for the public markets, there is a lesson to be learned here. If a company's current bank has increased their credit line review frequency to quarterly and the LOC is at risk despite positive financial performance; the equity value is being squeezed. If a small company can find another lender willing to extend longer-term loans conventionally or via an SBA program, management could add significant value to the equity of the company just by restructuring the debt even in the face of higher rates. This is no easy task these days but not impossible.
October 26, 2009
October 13, 2009
Market Confirmation
In my previous blog I advocated small businesses and even individuals using debt to fund investments or even build a cash reserve for the potential double dip recession on the premise that money is extremely cheap and since its being subsidized by YOU; be sure to get your slice. Seems other folks agree with this view. According to Dealogic, for the first 9 months of 2009, of all debt issued by non financial companies, only 9 of the 100 largest bond deals globally and only 6 of the 100 biggest US deals, were for expansion, capital expenditures, investments or project finance, while 65 of the top 100 US deals were for refinancing or working capital. When companies issue debt, they tell investors why they're doing it in the prospectus they file. Most of these companies explanations suggest they are hoarding cash or repairing finances. Many also listed "acquisitions" as a use. When companies borrow debt without an immediate opportunity for a return on investment that exceeds the cost of capital, it is a good sign they either fear things could get worse (and capital will dry up) or they believe debt is so cheap that it is better to get your hands on it while it last and figure out what to do with it later.
October 06, 2009
Your Slice of Stimulus
For most individuals and small businesses, the easiest way to benefit from the stimulus efforts is to borrow. Whether it be refinancing a home mortgage or applying for a SBA loan, their has never been a better time to access cheap debt. 30 year fixed rate mortgages are under 5% and SBA loan fees, which can be 2-3% of the principal amount have been waived until years-end. The absence of fees and increase of federal guarantees to 90% LTV through the end of this year makes the 7(a) and 504 programs very attractive sources of financing. 504 loans can be 20-year amortizations with rates below 5.5%.
The Fed's balance sheet has grown well over a trillion dollars over the past year in an effort to stabilize credit markets and keep capital accessible. The Fed owns $692B of mortgage back securities and represents over 70% of this market's activity. Fed activity combined with huge inflows of private money into short-term bond funds continues to keep rates down. If there is inflation anywhere, it exists in fixed income assets. Money market funds yield near zero, high yield bond spreads are below pre-Lehman levels and some Bond ETF's are trading at up to 5% premiums to their Net Asset Values. Is there an asset bubble in debt securities? Low yields means high prices for debt. To borrow is to sell debt and there is never a better time to sell than when buyers are paying too much. Best of all, if the critics of the Fed are correct and we suffer from rampant inflation and higher taxes, your debt obligation balance declines in real terms without doing a thing and the interest tax deduction becomes more valuable.
Of course, don't borrow just for the sake of borrowing, but small business owners with solid investment or growth opportunities should not pass them by on the assumption that no one is lending. The SBA loan volume in its most recent financial quarter was up 18% from the previous year and nearly as high as 2007 quarterly levels. Again, this market is supported by the Fed's TALF buying whose balance has risen from $6B in April 2009 t0 $42B at the end of September. Sure, lending standards have tightened and reporting requirements have risen, but if a small business has good financial management and planning and a compelling business case, the lending markets are open. If the Fed buying activity winds down and SBA fee waivers are not extended, this window of opportunity may close.
The Fed's balance sheet has grown well over a trillion dollars over the past year in an effort to stabilize credit markets and keep capital accessible. The Fed owns $692B of mortgage back securities and represents over 70% of this market's activity. Fed activity combined with huge inflows of private money into short-term bond funds continues to keep rates down. If there is inflation anywhere, it exists in fixed income assets. Money market funds yield near zero, high yield bond spreads are below pre-Lehman levels and some Bond ETF's are trading at up to 5% premiums to their Net Asset Values. Is there an asset bubble in debt securities? Low yields means high prices for debt. To borrow is to sell debt and there is never a better time to sell than when buyers are paying too much. Best of all, if the critics of the Fed are correct and we suffer from rampant inflation and higher taxes, your debt obligation balance declines in real terms without doing a thing and the interest tax deduction becomes more valuable.
Of course, don't borrow just for the sake of borrowing, but small business owners with solid investment or growth opportunities should not pass them by on the assumption that no one is lending. The SBA loan volume in its most recent financial quarter was up 18% from the previous year and nearly as high as 2007 quarterly levels. Again, this market is supported by the Fed's TALF buying whose balance has risen from $6B in April 2009 t0 $42B at the end of September. Sure, lending standards have tightened and reporting requirements have risen, but if a small business has good financial management and planning and a compelling business case, the lending markets are open. If the Fed buying activity winds down and SBA fee waivers are not extended, this window of opportunity may close.
October 01, 2009
The Twighlight Zone
This weekend marked the 50th anniversary of the show, The Twilight Zone. For those of you who have seen an episode or two, you know that the magic of the show was that you could never really be sure of what was reality and what wasn't. And the answers didn't come at the close of the show, either. During a NPR story about the show's anniversary this past Friday, the guest remarked, "what The Twilight Zone was doing was providing this extraordinary timely, and I think prophetic, transition between the kind of secure era of the Eisenhower period and what would become known as the 60's, when we would completely challenge everything that we normally thought was true and solid and established." Feel familiar? As I heard these words, I immediately thought of today's economic uncertainty.
Forget for a moment the guiding ideological differences in past administrations; since the 1980's, there has been a familiar mix of monetary and fiscal policy used to control inflation, exit recessions and guide the economy. Combine that with American ingenuity and the entrepreneurial spirit (and lots of easy credit - it turns out) and you always had confidence things would get back on trend whenever we hit bumps in the road. This time feels different, more uncertain.
Long-term, I'm optimistic but for now, the September jobs report points to the only certainty I can find. Employment is going to be slow to rebound and when it does, it will be accompanied by a wage & benefit reset for many American workers. While a reset would be good for getting back to full employment, understanding what that and less credit means to US consumption and GDP feels like passing through the Twilight Zone.
Forget for a moment the guiding ideological differences in past administrations; since the 1980's, there has been a familiar mix of monetary and fiscal policy used to control inflation, exit recessions and guide the economy. Combine that with American ingenuity and the entrepreneurial spirit (and lots of easy credit - it turns out) and you always had confidence things would get back on trend whenever we hit bumps in the road. This time feels different, more uncertain.
Long-term, I'm optimistic but for now, the September jobs report points to the only certainty I can find. Employment is going to be slow to rebound and when it does, it will be accompanied by a wage & benefit reset for many American workers. While a reset would be good for getting back to full employment, understanding what that and less credit means to US consumption and GDP feels like passing through the Twilight Zone.
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