A word to my friends in Washington: As you contemplate all the whiz-bang things that you’re going to do with your new-found tax dollars, please consider an important lesson found in biology.
If you want to successfully feed off the lives of others, don’t kill the host.
Obama may imagine that we don’t have a spending problem, but DC can only rake off so much before we implode.
Parasites that want to survive, adapt to this truth.
I was reminded of this as I looked through companies that might struggle in 2013.
According to Professor Edward Altman, an expert on bankruptcy and corporate turnarounds, 2013 is shaping up to be tough for several industries.
Altman, of New York University, hosted the 12th annual Corporate & Sovereign Credit Market Outlook at the Union League Club in January and identified coal companies, media and mid-sized defense contractors as especially vulnerable this year.
From Reuters:
He did not name defense companies he thinks could be bankruptcy candidates, but he said the problems likely would hit smaller firms and that larger ones are not in danger.
In an interview with Reuters after his speech, Altman said the coal industry is expected to continue to suffer as natural gas remains a cheaper energy alternative. One major player in that industry - Patriot Coal Corp - filed for bankruptcy last year, blaming in part the glut of natural gas.
Altman said media companies will also face challenges as specialized online media outlets gain strength.
"The Internet media world is getting very crowded," Altman said in the interview.
And that means tough going for old-media outlets like movie theaters, as internet competitors continue to put price pressure on older distribution chains.
And this is where the music starts, as Mark Twain would say.
Because in 2002, Michael Bennet, who was later elected to the United States Senate as a Democrat from Colorado and subsequently became a prime architect on Obamacare, bought- at a huge discount- the senior debt of several movie chains while they were on the ropes. He then combined the three ailing movie theater groups into Regal Entertainment. This in turn allowed him to cut out other investors’ claims as he forced the companies into liquidation. Teachers' pension funds, which owned some of unsecured debt along with other investors, were forced to take pennies on the dollar for their investments in the distressed companies because the Bennet group owned the senior debt position.
It’s legal; and yes, this is how the law works; laws that guys like now-US Senator Mike Bennet write today.
In fact, Bennet’s campaign material for US Senate prominently cited his work on the Regal Entertainment scalping as a successful “restructuring” of the company’s debt, positioning him as a sort of guru on finance for adoring voters.
So let’s see what else the dedicated US Senator/finance guru did:
Within two years Bennet's group paid themselves back every penny they spent on the investment through the declaration of an extraordinary dividend of $715 million. Of that amount about half went to one shareholder and the company gave Bennet an $11 million pay day, while it took on another billion dollars in debt in the company. All this while, public investors- who gave them $342 million-, saw the price of the stock tank from $23.50 in the initial trading at the IPO to $14.78 currently.
This is what theLouisiana Teachers' Pension Fund said at the time:
“…(T)he real explanation for draining the Company of its cash [in the payment of the extraordinary dividend]is that the Board is looting Regal and its subsidiaries to pay the individual Board members hundreds of millions of dollars in dividends, which have no legitimate business purpose and provide absolutely no benefit to the company.”
“(O)utrageous transfer of cash, which is leaving Regal in a clearly weakened and precarious condition…”
And it wasn’t just disgruntled pensioners who were stunned by the deal.
“A Moody's rating analyst in 2004,” reported the Denver Post, “downgraded Regal's debts because of the huge payouts to shareholders, saying, ‘It's pretty mind-boggling to me that this company, recently out of bankruptcy, will pay out $1.6 billion.’"
While Regal has seen its stock price rise recently from a low of around $12 last year, credit rating company Fitch has warned of several potential trouble spots currently.
In an estimate released this month, Fitch calculates that if forced by business conditions into liquidation Regal debtors would only recover about 71 percent of the total debt outstanding, leaving shareholders with nothing- again.
And while liquidation isn’t a concern today, Fitch warns that there are several challenges facing Regal.
“The ratings also incorporate the intermediate/long-term risks associated with increased competition from at-home entertainment media,” says Fitch “limited control over revenue trends, the pressure on film distribution windows, increasing indirect competition from other distribution channels (such as DVD, VOD, and the Internet), and high operating leverage (which could make theater operators FCF [free cash flow] negative during periods of reduced attendance).”
Regal operates with a lot of debt, because it’s basically a real estate play. Its cash flow is dependent upon people going to movies and being able to pay higher ticket prices. Those are tough propositions right now and getting tougher for the foreseeable future.
Bennet’s actions in the case, Ron Rizzuto, a University of Denver business professor familiar with the Regal deal, told the Denver Post, would be questionable if it “then put the company in financial danger again by over-leveraging. That's clearly raiding the store."
While the company’s newest debt is still ranked on par with earlier debt, the debt carries a whopping 9.125 percent interest rate. High yield bond funds as of January 25th, 2012 were yielding 5.61 percent on average. In other words Regal’s debt demands a premium of 63 percent more than average “junk” bonds in the US. To give you a comparison: Greek 10-year Treasury notes are trading at 13.33 percent according to the European Central Bank.
I’m all for people making money in the free markets. And investors continue to be gulled into making a bet on Regal Entertainment.
Good for them. It’s a free market…sometimes.
But if you want know why Obamacare continues to be a bad bet for taxpayers in America, just think biology. And Michael Bennet. And Regal Entertainment.
As nationalized healthcare was put on life support in 2010, Senator Michael Bennet wrote a well-publicized letter to president Obama demanding that the Senate pass the healthcare “reform” measures now known as Obamacare.
Viola! That’s how Obamacare was reborn.
In return, Bennet has gotten lavish attention from Obama, with more outside funding from the Democrats than anyone in the Senate outside of Harry Reid. Recently he was choosen to chair the Democratic Senatorial Campaign Committee, despite being a very junior, junior senator.
But who really cares as long as the guys at the top make out while the rest of us pay the bill?
We all need to care because like the Regal debt deal, it’s unsustainable.
And the number one rule for survival, for vulture capitalists and politicians alike, is: Don’t kill the host.
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