ate dinner of exotic mushrooms cooked all different ways at a restaurant in building that also houses the local landrover distributorship
asked salesmen how goes biz, and collectively believe that gas/diesel consumption will continue to be up up and away even though china oficialdom just removed some subsidies on energy use
conclusion: the cb ilaines of this world will consume fewer landrovers, and the peasants of guizhou will partake in more of same
issue: the salesmen were not enthusiastic about indian taeover of landrover
in the mean time, the following just in in-tray
player one wrote
received this email from an MBA classmate of mine who happens to willingly suffer through reading my weekly rants.
With his permission, I forward you his current issues. Any thoughts as to what an intelligent response would be?
I also found it instructive that he can find investors, but not lenders. Banks seem to be unwilling to lend unless forced to do so...
Thoughts?
The company that I and a group of former MBNA colleagues started nearly two years ago is at an important juncture. We have to raise more capital through private equity firms and take on new investors, or we take an offer from a large financial institution who can provide balance sheet funding for our products. While the latter appears attractive in this market, it comes with some baggage -- namely the reality that we will have sold our company and gone to work for a large company all over again (albeit with some better upside than a normal corporate job).
So, here is the question. If we take the private equity route, we need to raise $25mm of equity or preferred equity for every $100mm of loans that we fund. The balance of the $75mm comes from warehouse lines of credit where the haircut (or credit enhancement) is the $25mm, or 25%. We have lots of PE firms lining up waiting to write checks for as much as $150mm (that's the good news), but we cannot find banks willing to do warehouse lending. I understand "why" banks cannot/will not lend right now, but I am wondering how long you think it will last. If I thought the banks would be back in business by early 2009, then I can get $100-200mm of warehouse funding from hedge funds at about 300-400bps higher rates. Not fun, but it bridges the gap.
I was hoping that 1Q'08 would be the cleansing quarter for US banks -- i.e., react to huge write-downs in 4Q07 by firing the CEO, hire a new CEO in 1Q08, have new CEO take even bigger write-downs to clear the books. Then, sometime in late Q208 or Q308, we would see some lending restarted. No such luck!
What do you think? Have we hit bottom? If not, what do you think would indicate that we have hit bottom?
player two wrote
The following is all JMHO and FWIW
I too have noticed there seems to be no shortage of investor money seeking perceived bargains (e.g. Canadians looking to buy what they think is "cheap" US RE) where there is no financial institution in the background -- just the investor's own "financial advisors".
One group in particular I know of is regularly flying its own appraiser down to various locations (e.g. LV, Fort Myers, Sacramento, etc.) at $5K a trip to evaluate prospective US RE themselves because they don't trust the locals -- so in that sense, they are being careful, but there doesn't seem to much fear of being too early to the disaster zone. There is also the USD issue, but it's impossible for me to know how or even whether they are hedging the currency risk.
I attribute this PE aggressiveness to a combination of old-fashioned greed and the poor deposit returns that drive people to look for alternative places to put their money -- so here in mid-2008, a year after the crunch began to bite in earnest, it seems that risk is still getting pushed into the back seat in the PE mindset because the risk-free rate is so low. IOW, a lot of people who probably either didn't get burned enough the first time (or perhaps not at all yet) are still psychologically game for taking a flyer on property that's been marked down 25-30% because they can't conceive that in another 12 months it might well become 50-60% off.
However, IMO this is no routine recessionary dip to be quickly bought, and the market is likely to wipe these early birds out a la 1931 -- and if I think that can happen, I suspect a lot of bankers do too, and they therefore want nothing to do with such deals.
And further to the bank behavior question, I read the attached UK article recently that touches upon these things, premised by David Roche's theories (which BTW I fully accept). I've copied & pasted the whole thing here -- the highlighting is my own --
Millions to suffer as economic death beckons struggling companies
James Mawson
16 Jun 2008
Joseph Stalin’s infamous quote, “one death is a tragedy; a million is a statistic”, has, slightly inappropriately, come to mind as the litany of troubled companies lengthens relentlessly.
Last year, David Roche, president of London consultants Independent Strategy, put the entire stock of assets and their funding (which includes derivatives and securitised debt as well as equity and other borrowings) at 10 times global gross domestic product. Though this was an estimate, the thinking behind it had some truth: syndication and derivatives had increased risk appetite by allowing trading and reducing individual security exposure alongside traditional boosts from falling interest rates and a growing global economy after 2000.
As the liquidity crunch struck last summer I wrote that the danger was a change in risk appetite and growing mercantilism limiting trade. This worry is striking home as empirical data from portfolio companies reveal tensions beyond the withdrawal of institutional liquidity witnessed by last summer’s crunch. Tensions are now rising in individual companies and a handful of restructurings and bankruptcies have been announced. Overall, the statistics are worrying.
Last week, agency Fitch Ratings said there was a disproportionate share of negative outlooks on credits on buyouts struck between 2004 and 2007 when compared with non-private equity-backed companies. Fitch said this pointed to further credit deterioration in the coming year and a heightened risk of default. Although no one knows the extent of the likely damage, the signs from the real economy are poor. It is indicative that headline personal saving rates have jumped 20% to 30% this year, which will knock consumer spending. Given that a 2% fall in consumer spending typically hits discretionary sales (non food and non-essentials) four times as much, this could lead to widespread destruction for companies in these spaces.
One chief executive of a retail business said sales were falling just as its inflationary indicators were increasing by 7% per year due to wage, rent and utility increases. As a result, it was conserving whatever cash it could, which, in turn, knocks the business-to-business market. Banks looking across their lending book are seeing this turmoil. As a result, there has been enormous churn in the number of banks still active in leveraged finance with half of last year’s top 10 dropping out of the list so far this year.
Some of the changes in rankings reflect the paucity of deals in banks’ home markets but others are prompted by orders from higher up to cut back. There is no question that the multiple of entire stock of assets and their funding to global GDP has fallen. Optimists would expect to capitalise as this fall is reversed over the longer term or just make money as GDP grows. Pessimists fear the 10x multiple was a high-water mark for a generation and this multiple contraction will more than offset any growth in the economy.
But just as the tragedy of Soviet Russia was felt by its people rather than Stalin, who reached old age and died in his sleep, the same will be true of economic wealth.
penews.com
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