Here's today's article from the same source:
Wed: Tense nerves
Shlomo Greenberg
22.11.2000 16:26
The situation is still fluid, uncertainty is still strong, and the adjustments to economic multiples are still at their height. In addition to everything else, the Federal Reserve announced yesterday that its attitude to credit will probably be tougher in the near future.
The Fed conducted its regular quarterly credit survey. It appears that the big lenders, from the banks and insurance companies to the Wall Street bonds players, are become stricter regarding the identity of future borrowers. In other words, the lenders are saying, “The party’s over, now we are also checking if you can repay.”
It is hard to estimate how much money flowed to companies via junk bonds – the cheapest bonds – but it certainly amounts to hundreds of billions of dollars, and we heard amounts of over $1 trillion bandied about. In any event, what is certain is that this is a lot of money, some of which will probably never be repaid.
This phenomenon has always been characteristic of stock exchange booms, or more accurately since Michael Milken invented the ingenious device called the junk bond, thereby “improving” the way Wall Street values convertible bonds. Don’t be misled, the method of cheap convertible junk bonds is proper and essential, but in boom times such as the one leaving us in the lurch now, lending conditions become so easy for the borrower until sometime thereafter, when the market falls and up pop all kinds of prissy nitpickers who complain that Wall Street allowed such things to happen.
There is a long line of Israeli and half-Israeli companies which took various kind of bond money during the boom. This “free” money is causing these companies no end of trouble, rapidly sinking their shares because investors are throwing them overboard out of concern for the weight of the debts. Take the example of Orckit (ORCT) and Tioga Techs (TIGA), to which Orckit has a large past debt, which in the opinion of many investors is beginning to put pressure on the balance sheet. Orckit and Tioga continued their nosedive yesterday, plummeting 5.7% and 13% respectively, and together they are now worth $6.5, compared to $90 in March.
The bottom line is that the companies took out large loans, but failed to grow quickly and strongly afterwards, and are now stuck in a falling market. The loans are now beginning to hurt the balance sheet and the debt/equity ratio. In such cases, when things go bad, the analysts are quick to lower the share rating, and before you can say Jack Robinson, rumors start flying through Wall Street that the company can’t meet its interest payments. Such rumors, regardless of their veracity, can kill a share, and indeed they die.
Let us begin with Gilat Satellite Networks (GILTF) – a very profitable company with enormous potential and warm recommendations even now. It fell yesterday to $39.75, a third of its forecast price by Merrill Lynch’s experts. What apparently began pressuring Gilat was its inability to realize the issue of its subsidiary Starband, formerly Gilat-To-Home, at present. It seems that many people feared that in the present market climate, Gilat would not be able to raise the money which could hurt its future profits.
Why is this so interesting? Because all too frequently, exceptional buy opportunities arise in such cases. In the 1980s, there were three companies that raised money through convertible bonds that seemed to be “free” during the 1987 boom. Following the crash, it seemed that they would be unable to meet their interest payments and would face a such a great crisis that their ability to survive was in doubt. The three companies were Comverse (CMVT), Sapiens International Corp (SPNS) and Laser Industries, now ESC Medical Systems (ESCM). Comverse!? Yes, Comverse.
What emerged later? Not only did all three companies continue to exist, they blossomed commercially.
In conclusion, a good thing is happening on Wall Street. It is the assessment that interest rates will soon be dropping and will gather momentum. Yesterday rise of the dollar, despite the substantial worsening of the October balance of trade, is beginning to intensify the pressure on the Fed in this direction. The combination of the rise of the dollar and the incipient economic slowdown is a bad thing for both the US economy and its leading companies whose exports are hurt. We assume that the US industrial lobby is beginning to press for lower interest rates. This lobby has enormous power, especially when the also powerful real estate lobby is already complaining about the situation. As we have claimed for a month now, it seems that the interest rate will start falling sometime in Q1 2001. Remember what happened the last time the US interest rate started to fall?
Published by Israel's Business Arena on 22 November 2000 |
