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Non-Tech : FTL- Fruit of the Loom
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To: Arthur Tang who wrote (115)8/12/2001 11:39:43 AM
From: Clement  Read Replies (1) of 161
 
Arthur:

> If you know banks, you know they protect their loans
> with more loans or dispose the problem to another of
> their customers.

I work for a bank. Yes you could assume liability and it is done all the time between banks and vulture capital. The problem is that when it is in default -- or even when there is a threat of default, the price on the loan is already discounted substantially -- and if the loans are already sold at the discounted price, there is no incentive to wait it out when you can have the cash now.

The point is that banks want to get rid of the problem as soon as possible. They are not in the business of running other companies. To add additional capital to already a risky problem compounds the original problem for the bank officer who ultimately approved the loan. Banks are a lot more efficient at looking at capital -- especially when loans are that big. First, the amount of money sunk in is a sunk cost -- it is done -- the only question is what remains. The value of the loan is not the same as it was when the company was solvent. It will have been discounted -- either implicitly (using discount rate) or explicitly (e.g. 80 cents on the dollar).

To invest another couple hundred million in an insolvent enterprise will factor like any new investment decision -- ie what will the returns be for the risk taken on?

> The shares can be sold even as we speak. The question is at what price?

This is irrelevant. They will expire worthless -- the real question is -- at what time? Even if a vulture were to take over the business, why would they inject additional capital without restructuring first? ie why would they want to share the upside with others? At current debt levels, the company is not a viable entity.

While your hope is admirable, I think it is misplaced -- I cannot see any scenario where the current shareholders will receive anything. The one hope would have been a sale for a significant amount -- but that clearly will no longer happen. The current debtors, should they reject the auction outcome by Lazard, will need to inject additional capital and restructure the company -- and as the restructuring files state, the current shareholders will still get nothing.

Clement
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