Saturday, November 23, 2013

Barron's Cover Story About SiriusXM Illustrates an Important Point About Corporate Restructurings

The current (November 25) edition of Barron's displays a bullish cover story about SiriusXM, the satellite radio company. The article reiterates how SiriusXM was only "hours" away from filing for Chapter 11 in February, 2009, when instead it closed on a financing package from Liberty Media and avoided bankruptcy. altogether.  The article is slightly off in describing the terms of the financing:  first, press reports on the day of the closing, February 17th, reported it to have been $530 million, consisting of $430 million of new funded loans and an offer to buy up to $100 million of existing loans; and second, the package included not merely an option to acquire 40% of SXM's common, as the article says, but the actual issuance that day of 2 new series of preferred stock convertible into that proportion.  But the gist is right:  Liberty put in the capital SXM needed and got back both a dollar of high-priced secured debt for every dollar it invested and an equity stake of 40% to boot.  A great deal for LM, but one that the board evidently believed was better for stakeholders than the uncertainty of a chapter 11 case in the environment that prevailed in February, 2009. A shareholder suit challenging their judgment was thrown out as well.

What would have happened in an 11 is unknown, but what is known, as the article reports, is that SXM stock has risen over 7000% since its low of $0.05 in February 2009; it seems hard to argue in the face of that kind of value creation that any significant group of stakeholders would have been better off had SXM filed a traditional "free fall" chapter 11 in February, 2009, that could easily have stretched into 2010.

So the LM / SXM deal can stand as fairly impressive evidence of the success that can be achieved from not filing chapter 11 to effect a restructuring, at least a balance sheet restructuring, and evidence that a company does not always need to enter chapter 11 to achieve the goals of chapter 11 - to obtain a breathing spell, to keep the operations running, to maximize value, etc.

But there is a second point, along those same lines, that is less well known but deserves more attention.  The Barron's article goes on to note that "The company has spent the last five years weaning itself from oppressive contracts."  An executive is quoted stating that SXM has been able to reduce its programming costs by over one-third, from $450 million to "under $300 million".

One of the big arguments for chapter 11 is that management can use the "tools" of bankruptcy law to "fix" a company.  And the paradigmatic example of those tools is the power to reject burdensome executory contracts and unexpired leases, the damage claims arising from which are then eliminated through payment of "little bankruptcy dollars" as opposed to full 100% satisfaction.

Yet here is a company, once so deeply financially distressed that its stock traded at a nickel and it was "hours" away from entering chapter 11, that was able to rid itself of "oppressive contracts" and shrink a major source of expenses by over one-third -- without resort to the rejection powers of the bankruptcy laws and the concomitant expense and uncertainty of a full-blown bankruptcy filing.

Certainly there are companies that need to file chapter 11 and need to reject contracts and leases to fix their operations or, if those can't be fixed, to stanch the bleeding of cash on those contracts and leases to preserve the remaining value for broader constituencies of creditors.  But the SXM restructuring experience shows that bankruptcy is not always necessary, that there are more than one "tool" to achieve what the "tools" of bankruptcy can achieve in improving cash flow.

But what determines when a company can effect its operational restructuring outside of chapter 11?  It's pretty clear it's the strength of the balance sheet, the maturity profile of its debt, its access to fresh capital and its liquidity.  A company whose financial condition is strong enough can last long enough to make operational changes without filing bankruptcy.  This is obvious: solvent companies do it all the time.

And this in turn has important implications even for companies that do file for chapter 11.  It teaches that fixing the balance sheet is often perfectly sufficient to achieve the goals of chapter 11.  A company can get a breathing spell to work on its operations by lingering in chapter 11 for 18 to 24 months with a bad balance sheet, or it can get a breathing spell to work on its operations by fixing its balance sheet through a 4 to 6 month pre-negotiated or prepackaged chapter 11, and use the rest of the time it would have been in chapter 11 to work on its operations just like any other solvent company.  Companies often don't need to linger in chapter 11 to fix themselves.  It's at least as often the case that particular investor constituencies, junior debt or equity, that are the only ones who gain any benefit from delaying the emergence from 11.  (And of course bankruptcy professionals who bill by the hour ...).

This is the lesson of Barron's lookback at the progress SiriusXM has made since it restructured outside of chapter 11 in 2009 - bankruptcy is not always necessary to fix a business and effect the goals of chapter 11.  A strong balance sheet with access to sufficient liquidity and no near-term debt maturities works at least as well.

Thursday, November 21, 2013

Where I was When I Heard the News that JFK had been shothot

On November 22, 1963, I was attending first grade in St. Mary Magdalen School, a fairly new parish school serving Catholic families  in the first ring of postwar suburban migration out of Eastern cities.   The parish at that time didn't have a stand-alone church; rather, the school and church shared the same 2 story brick building; the church occupied half the first floor, and about 14 classrooms filled the rest.  But even though the building was just a few years old, the baby boom had swelled enrollment past the number that could fit in that building, and so my first grade class of 41 six-year olds was lodged in a portion of the basement of the adjacent convent where the Benedictine nuns who taught in the school lived. The underground location was touted as an advantage when we practiced atomic bomb drills. The classroom was so makeshift that the desk of our teacher, Sister Jean d'Arc, was at the foot of the stairs that led to the ground floor of the convent. 

Even for a nun in those days of Latin mass and Baltimore catechism (both of which I remember), keeping order among 41 six-year-olds was a challenge, so some of the mothers -- including mine -- pitched in to settle students in at the start of the day and help out at lunchtime.

Sometime after lunch that afternoon, the nuns' housekeeper rushed halfway down the stairs to our classroom, and told Sister Jean d'Arc -- loud enough that the whole class could hear it -- that President Kennedy had been shot in Dallas. Fifty years on, I still remember seeing her crouching down on those stairs delivering the news.  Sister Jean d'Arc was completely stunned.  She and the housekeeper must have decided that the news had to be conveyed to the rest of the school community in the main building, but neither of them thought to pick up the phone and dial the principal's office.   I suppose that can be attributed to the shock of the moment, especially since it was a Catholic school and JFK was, of course, the first Catholic President, and thus revered in so many Catholic communities.  They decided that, while the housekeeper would go back to monitoring the news, Sister would keep order in the class of 41 six-year-olds, many of whom were picking up on the adults' reactions and were themselves becoming agitated, and she would dispatch one of the first-graders to go over to the main building and deliver the news. 

I stood out a little from the 40 others in that class.  I had begun reading around the age of 3 and entered first grade reading at a fourth-grade level.  I was very interested in current events: my parents would say that, when I was three years old, I was asked by a relative what my favorite TV show was, and I answered guilelessly, "The CBS Evening News with Howard K. Smith."  (I suspect that only happened once because it probably elicited a good laugh which would have puzzled me and caused me not to repeat that answer.) 

I was also an extremely quiet and obedient boy. My mother had told me to obey nuns and never to talk in school, and I obeyed her to the letter, to the point where I thought it was wrong even to talk during recess, and thus I didn't, making recess very boring for a few weeks until someone brought this to my mother's attention and she clarified her instructions, and I became a little more socially normal.   

With this resume, however, I was, in Sister Jean d'Arc's mind at that moment, the perfect candidate to bear the news that the President had been shot to the rest of the school.  I don't recall the details of my conversation with her, but in a few minutes, I was walking across the parking lot, which doubled as our playground, to the back door of the school.  I remember that moment vividly because it was the first time I had ever been on the school grounds when they weren't bustling for recess, morning drop-off or afternoon pick-up.  The contrast to what I had always experienced out there made a lasting impression on me. Everything was so quiet and peaceful.  The sky, I still see in my mind's eye, was clear and blue. 

I entered the main school by the back door and to my right, behind a makeshift accordion partition that looked, from my six-year old vantage point, to be about 12 feet tall, was the other first-grade class, presided over by Sister Trinitas.  I knocked on the partition and she came over, slid it back enough to stick her head out, and I told her what I had been asked to relay: "Sister Trinitas, Sister Jean d'Arc told me to come over and tell you it was announced on the radio that President Kennedy has been shot in Dallas, and we should pray for him."  I don't remember her reaction in detail except that she was gracious and thanked me.  Then I went across the hall to the second grade classroom where my cousin Jean Marie was assigned, and told the same thing to her teacher Sister Anthony. 

Then I went upstairs to the rest of the classrooms, which were united by a single long hall that ran east to west.  I started at the east end because that was where the stairs let me out.  I did not know the teachers in those rooms by name, but they had little signs outside of the room with the room number and the teacher's name on them, so I read the teacher's name, knocked on the door, and when she came to the door and opened it, I repeated my message: "Sister ____, Sister Jean d'Arc told me to come over and tell you that it was announced on the radio that President Kennedy has been shot in Dallas, and we should pray for him."   Their reactions were, uniformly, one of shock.  Then they would say something to me, close the door and I would go on to the next classroom and repeat the message to another shocked teacher.  But I had watched the evening news often enough that I knew the men who reported bad news did so calmly without betraying much emotion and, as best I remember, that is how I conducted myself. 

By the time I reached the upper grades at the west end of the hall, someone had already reached them with the message.  I learned this when the teacher in one of those grades opened the door at my knock and snapped at me when I began to deliver the news, "Yes, we already know and we are praying for him! Go back to your classroom!."   Being trained to obey the nuns, I did what she said.  As I walked back to the convent basement, the sky was still clear and blue and the playground was still quiet and calm.  I went back to my classroom and waited with my classmates for my mother to come and pick me up and take me home.   

Like every other family in America that had a television set then, my family spent the next four days glued to it, watching people file past his casket as he lay in state, until on the fourth day he was buried.  It was a memorable event, obviously, for all Americans, but devout Catholics like my family felt a particular grief in the loss of a man with whom they identified through their religion.  I still remember coming in to the room where our TV set was, late in the afternoon over the weekend, when light had all disappeared outside, and the (black-and-white) TV was the only light in the room.  No one could move away, even to turn on the lights in the room as it grew dark.

Throughout my life, I have been regarded as someone who does not get perturbed in times of stress (which thankfully have been few and far between).  I wonder sometimes if that state of mind has its roots in that day, when I was called on to deliver the news just like those very serious men on the evening news I watched on television.   

But, years later, in 1988, when the 25th anniversary of the assassination was being commemorated, I watched a documentary about it, at night in my basement.  Near the end, they were showing a clip from one of the home movies taken of the motorcade that afternoon in Dallas.  JFK was looking right at the camera, smiling and waving as the limousine passed by, looking so relaxed and fully enjoying the moment, and you know as you see him smiling and waving that he had less than a minute left to live and no idea of the fate that awaited him, and his family, and his country, when the limousine would take that excruciatingly slow hairpin turn at the Texas School Book Depository, and he was smiling and waving in slow motion, and I could only think about how much life disappeared in that next minute, and I cried.

Monday, November 11, 2013


Flipping through the New York Times front section today, I came across a story about the Maduro government in Venezuela sending the military in to take over a five-store retail chain selling electronics goods because they were purportedly selling at prices that were too high and Christmas is coming (and some municipal elections).  Inflation is not the result of disastrous government policy, it's the retailers' fault!  Now the military has marked down all the stock and is liquidating it at the marked-down prices.  That's quite an approach to retail insolvency they have in Venezuela. Don't bother with that chapter 7 or 11 stuff or hire Gordon Brothers to run your liquidation, just have the military do it all!  

I've written before about the use of this strategy by Argentina and some other Latin American governments -- when a party takes power on a program of increasing hand-outs to the lower class, it has to perpetually confiscate other people's property to fulfill its promises (because if you're getting handouts just for voting, why would you ever bother to get a job and work hard to create your own savings?).   And those who try to hang on to their business and savings have to be marginalized and demonized, so that public sympathy cannot build in their favor and jeopardize the officeholders' hold on power, so the confiscation program is always accompanied by rhetoric in which the confiscator aligns himself or herself with the popular will and the defenders of private property and savings are characterized as unpatriotic enemies of the state.  This is "chavismo" or "chavismo -lite" depending on how far the party in power goes, and it has been a successful electoral strategy in Argentina, Ecuador, Venezuela,  and so on.  Recently Cristina Fernandez, the president of Argentina, succeeded, for example, in disemboweling Clarin, the leading media business in that nation, on anti-trust grounds, although most would say it was because Clarin no longer gave her the unconditional support she thought was her due.  And here you can see Cristina arguing that credit rating agencies are being used by the media and people with interests contrary to Argentina to fool people.

Thus, the Times story notes that Maduro and his cronies claim "his government is facing an 'economic war' waged by what he calls the right-wing opposition in Venezuela and its backers in Colombia and the United States."  Standard operating procedure.

Of course, voters here in the United States are far too intelligent to subscribe to these kind of populist paranoid fantasies, aren't we?  No intelligent voter would ever fall for the argument that persons defending their businesses and savings against politicians' pandering to lower-income votes are "waging an 'economic war'" against the nation.

Reading on to the opinion page, I saw Paul Krugman titled his column for the day  "The Plot Against France".  Wow.  A plot?  Sure sounds sinister.   Who are the plotters?  Krugman identifies "Standard & Poors ... The Economist  ... CNN Money ... and Mr Olli Rehn, Europe's commissioner for monetary and regulatory  affairs".  An interesting cabal - 2 publications, a rating agency and a bureaucrat.  Remarkably, it's the very same coalition that Cristina in Argentina and Maduro in Venezuela are fighting against - media, rating agencies and non-complicit government figures. 

And what does the plot consist of?   In S&P's case, they downgraded France.  Quelle horreur!  And the media have published critical stories about France's external debt.  And Mr. Rehn? He called on France to stop raising taxes.  To Krugman, these evildoers are "using debt fears to advance an ideological agenda".  That "right wing opposition" that Maduro is fighting against, is everywhere!

Fortunately, we have Krugman to set them straight.  Because France's fiscal policy is "exemplary" he says.  And their "fiscal prospects look distinctly nonalarming".  This of course from the man who in January 2008 titled Europe "The Comeback Continent".  But hey, no one's perfect.  Let's look at the exemplary fiscal policy of France -- since debt is incurred in nominal dollars,  the following table compares France's general government debt to its nominal GDP. 

Here, in nominal numbers, are the debt and GDP numbers for France (trillions of euros):

Increase from first year to last.
Nominal government debt outstanding[1]
(50% increase)
Nominal GDP[2]
(<1% increase)

As the table shows, France has increased its debt by 50% over 6 years, yet its nominal GDP has barely budged.  For every 50 euros of additional debt, France got less than 1 euro of additional income. Which clearly puts a strain on its debt servicing capability.

Per the IMF, France has run federal budget deficits > 3% of GDP for 6 straight years. That's a pretty long experiment with Keynesian stimulus. Clearly its multiplier is bumping along the zero bound and there is no evidence for any economic growth to be gained by continued deficit spending.

To address France's debt problem, Krugman advocates "temporary tax hikes" which he says are better than spending cuts.  He cites to "research from the IMF" but the link just runs to one "working paper" which says it does not reflect the official views of the IMF.  In fact, there are many research papers the IMF has published on the subject of tax vs. spending multipliers and they find many different things, including some that find tax multipliers to be greater than spending multipliers, the antithesis of Krugman's position.  In general, the consensus is that fiscal multipliers are small for developed nations whether the policy involves tax or spending changes.

As far as France goes, with government spending constituting 56% of GDP, and a deficit of 4%, obviously tax revenue is already 52% of GDP.  All that is left to "temporarily" tax is 48% of the economy! While at the same time, the larger share of the economy already captured by the government is off limits to the Krugmaniacs of the world.   France's debt burden is to be borne entirely, under Krugmanian policy, by taking more from the private sector and cutting back privately funded consumption.   And those who take a different perspective are just "plotters against France".

Unfortunately it looks like the chavismo model of political economy is moving north with the Krugmaniacs of the world serving as its mules.  I think the northern  version needs a new name which I've decided should be "Krugismo".  But it might behoove the Times to look at what happened to Clarin and think twice about what happens to elite organizations and freedom of speech in the chavismo / Krugismo model.

[1] Source: Eurostat
[2] Source: IMF