This is sad for promoters of positive cash flow EBITDA
So, you think EBITDA is easier to manipulate than net income? Far from it. BTW, most bankers (at least the ones who can read financial statements), after looking at EBITDA, then look for what must come out of EBITDA (besides debt service and cash taxes) to maintain and grow the business. In other words, CAPEX and working capital needs. What's left over is free cash flow, BTW.
In WCOM's case, Sullivan fudged the numbers. He tried to make a case for his accounting treatment of the expenses (see rd.yahoo.com*http://www.thestreet.com/_yahoo/markets/marketfeatures/10029290.html ), but at best, he only showed he's a lousy accountant. And at worst, bad at talking his way out of trouble after getting caught, though according to TSC, he was preparing to write down/reverse these CAPEX amounts before the issue went to the BoD. In any case, there is no way anyone who is not "inside" the books as an auditor, employee, SEC investigator, etc. could have discovered this.
Though historical EBITDA, just like net income, was seriously and egregiously overstated, historical free cash flow is unaffected. It remains to be seen whether future free cash flow, the thing all the bankers should be focused on in deciding what to do next, will take a hit from large scale customer defections and other potential operating effects of these events.
Lastly, since the banks are currently unsecured, putting them in the same line as all the other creditors, it remains to be seen whether they will see their chances of repayment as being improved by a bankruptcy as opposed to waiving any technical default and negotiating a refi that gives them a better collateral position going forward. If they choose the latter, IMO, the chances of survival and eventual repayment of all the debts are much better.
The media is even starting to talk about how Sidgmore deserves some credit for bringing this to light and correcting it as part of his house cleaning, not waiting until action was forced from outside. Perhaps there's another plot twist to come in this movie.
Bob |
