Wednesday, June 30, 2010

Apple's Smartphone Competition Thins

The competition for turf fought over by iOS, Android, and the smoothly-named Windows Phone 7 has thinned with the apparent death of Microsoft's Kin platform.

After six weeks and under 10k units, we hardly knew ye ;-)

The unit, led by one-time MacBU manager Roz Ho, will be folded into MSFT's other phone OS unit and presumably decisions and coding will slow accordingly. Daring Fireball points out that the people under Roz Ho aren't just bad at making mobile products. However, Microsoft's acquisition of Danger as a strategy to get a high-quality mobile product was doomed from the outset by politics. The "Windows Everywhere" drones made sure that buying Danger for its superior software would go nowhere.

Do iOS and Android have anything to worry about?

Tuesday, June 29, 2010

Fitch on ACAS

Fitch assigned ACAS a post-exchange Issuer Default Rating of B+.

However, the headline on this news was that since ACAS restructured its debt by coercion – that is, by threatening a bankruptcy filing – ACAS was getting a D (okay, "RD", but it reads the same).

Of course ACAS restructured its debt by threatening bankruptcy – otherwise, why would creditors have voluntarily ceased taking default-rate interest from ACAS? This coercive restructuring is why Fitch slaps ACAS' hand: ACAS didn't just pay up according to the schedule in the original debt agreements, but forced its creditors to renegotiate. This could bother you if you were looking to lend to ACAS, but the lowered cost of funds and decreased risk of the overhead of a bankruptcy filing is what equity investors are interested to see.

Fitch's comments about ACAS' potential difficulties raising funds are out of synch with the real world. ACAS has had no trouble raising cash for its managed funds. While ACAS trades 35% below NAV, there's no reason for management to be excited about diluting their own interest by issuing shares, but ACAS hasn't had trouble issuing shares when manageemnt thought it made sense (e.g., the accretive ECAS stock swap and the April issuance to Paulson). So long as ACAS' NOI recovers with the decreased interest rate and the decreased principal (paying interest on the $1b+ in cash it had on the books was making my eyes roll something awful), investors should see interest coverage improve, and with improved interest coverage comes assurance that ACAS will be able to pursue its business as usual while the portfolio has time to recover. Parts of the portfolio were entered specifically to take advantage of economic downturns, and other parts of the portfolio will be in a position to improve as the broader economy improves. These things take time, and improved NOI following improved costs of funds will make time easier to handle.

The headline – ACAS Gets A "D" From Fitch – obscures the substance of ACAS' situation following the debt exchange rather than illuminating it. Its authors get an "F".

For shareholders, the question is whether ACAS has improved its situation, and the "Ratings outlook: Stable" and the "B+" seem to be where their answer lies.

Monday, June 28, 2010

ACAS Debt Exchange Presentation Posted

Investors can hear ACAS' presentation on the completed debt exchange, and download slides to follow along.

The upshot? ACAS paid in cash all the creditors who wanted to be paid cash and refinanced its outstanding debt with new fixed-rate debt ($1.03B at 8.96%, declining to 7.96% when principal falls below $1B) and floating debt ($281M at LIBOR+650bps, reducing to LIBOR+550bps when outstanding debt fallw below $1B; LIBOR subject to 2% floor). ACAS paid creditors a 2% closing fee on the new $1.3B debt, which is secured debt; a 1% fee will also be due on ACAS' outstanding balances on December 30 2011 and December 31 2012. $528M of the new debt is non-amortizing, and $779M is subject to a repayment schedule. The repayment schedule has two tiers: the amount ACAS must pay, and the amount ACAS must pay to avoid increased interest. The chunks aren't trivially small, but next to the cash ACAS has shown it can accumulate through exits, it's not frightening – especially the minimum amortization schedule, which calls for a payment at the end of December 2012 and one in the middle of 2013. The low-interest schedule doesn't have any principal payment until December of next year, and it's less than $71M.

ACAS will be making debt payments as it operates: the secured debt agreements require ACAS to pay creditors a share of "excess" cash flow and asset dispositions above a threshold (above $580M, "excess" exits will be directed toward debt repayment at 50% until debt falls below $422M, then 25%). New equity raises aren't subject to paydowns at all for two years, but any new debt raising must be used to repay existing creditors. In other words, ACAS can refinance the secured debt but can't add to the secured debt until it's repaid its original creditors. This suggests that ACAS won't be raising its cheaper next round of debt from its existing creditors, or they'd be bidding against themselves to lower ACAS' interest rate. Apparently, the definition of "excess" and the application of the repayment threshold means that (according to slide 5) ACAS can raise $1.16B from exits of pledged assets and apply the funds for new investments or general corporate purposes.

ACAS' debt:equity ratio is 1:1 following the debt repayment, and ACAS has $11m in unsecured debt not exchanged in the transaction. ACAS' debt covenant breaches are now gone, and the ovehanging bankruptcy risk has been alleviated. Since ACAS has enjoyed $425M in net portfolio appreciation since the GDP turned positive in Q3 2009 and ACAS has enjoyed a 22% annualized ROE from that point through March 31, 2010, it seems that if the economy continues with positive GDP, ACAS will be in a great position to realize benefits through its diverse portfolio of equity investments.

As previously alluded to, the arcana of predicting the financial impact on ACAS of eliminating its debt covenant breach and lowering ACAS' cost of funds from the double-digit default rates it was paying before the exchange and reducing the principal of that debt by $1B seems sufficiently complex (there are lots of things impacting the shares other than these two factors) that we're condemned to wait for the next couple of quarterly reports to see the specific impact of (a) eliminating the debt covenant breach is on ACAS' NAV discount (which we learn after this quarter's results announcement) and (b) improving ACAS' NOI through improved debt spreads (which we begin to see in the announcement for the upcoming quarter's results).

Assuming the near-term play in ACAS had to do with fixing both of these conditions, it looks like we're going to be waiting about five months to get both the close of both quarters and ACAS' annoncement of those quarters' results. Assuming the economy doesn't go off a cliff (don't say "how much worse can it get?" -- you'll jinx it!), ACAS' performance over that period may give investors further reason to hold.

Looking forward to the news!

Wednesday, June 23, 2010

ACAS: Exchange A Done Deal

ACAS announced this morning that its creditors' votes now exceed the threshold for adopting the out-of-court exchange contemplated by the amended exchange offer.

The bankruptcy-related panic is all over but the shooting: some closing conditions are to be satisfied during a new deadline extension, and the deal deadline has been extended to 5PM on June 25 for that purpose.

The upside and downside? ACAS surely spent a fortune preparing for a bankruptcy that has become unnecessary. Had ACAS not prepared for the bankruptcy, however, it would not have had the hammer with which to compel creditors' participation in the out-of-court exchange. Still, this will weigh on ACAS as an expense over the quarter. The upside is that when ACAS reports its results for the quarter, the NAV it reports will be taken more seriously by people who previously feared bankruptcy would somehow cause that equity to go up in smoke. The result: going forward, the panic over ACAS' performance will be replaced with a more sober consideration of its actual investment performance. With the elimination of default-rate debt interest, ACAS' spread (and thus NOI) should enjoy immediate improvement going forward. This won't be immediately apparent in the results of this quarter – which was consumed under the old debt agreements – but will show up in the second quarter ACAS reports following the close of the exchange deal.

Now for more interesting questions: what will ACAS do with all that cash? (which exceeds its repayment requirements, particularly after some creditors have the right to exchange debt without early repayment) I'm hoping that the crazy economy provides some excellent investment entry opportunities to provide rocking returns for the next decade.

Thursday, June 17, 2010

Creditors Loving ACAS

ACAS posted an announcement that it amended its debt exchange offer. The news is interesting, to say the least.

ACAS had trouble getting bond holders on board with its previous a debt exchange that would make ACAS' unsecured creditors into secured creditors, in exchange for waiving the net asset covenants in ACAS' original debt agreements.

Stifel said ACAS was going to cough up more dough in the form of "make whole" payments to get the bond holders on board, and the stock rallied a little.

The real story is a bit more subtle. There are many claims, each different, by different creditors: lines of credit payable without penalty at will, debt-swap agreements whose parties have speculative future potential rights to payments, and bond holders with a right to fixed payments over a specific time period and the right to keep getting paid through a stated maturity date. As reported by ACAS previously, the folks who can be repaid at will without penalty were 100% on board with ACAS' proposed plan, and so were those with contingent future payment rights. However, the bond holders -- the creditors with protection against early repayment -- had single-digit approval (~6%) now being offered (a) the right not to get paid immediately on approval of the restructuring deal, and (b) continued call protection for the future. And they are now signing onto the restructuring plan: public note holders' approval has jumped from 43% to 72%. Essentially, this suggests that the holdout creditors' main problem with the restructuring plan was the risk they might stop being ACAS creditors. In other words, the problem isn't lack of faith in ACAS but ire at being deprived of their stake in ACAS.

If this isn't a bullish indication of creditor sentiment in favor of ACAS, I don't know what is.

Friday, June 11, 2010

HP Service: An Oxymoron

When HP emailed me to survey me about my recent email support contact, I wrote this in the little box in the web form:

Email "support" demanded I re-do everything I explained I'd done in my original support contact message, including all the testing tips on the tech support site, which the idiot just cut and pasted into his email without apparently reading anything I wrote. Then, he was unable to resolve problem; when he realized this, the promised call to arrange item replacement never came. HP products suck, HP doesn't stand behind its products, and HP lies about how it will try to make things right.

I think this about sums it up. I have a 1990s-era HP LaserJet 6P that works like a champ. Somewhere along the way, HP forgot how to make a quality product.

UPDATE: On, June 28, 2010, HP called about the replacement I was promised. (Although the call traced back to a Buford, GA address, the speaker sounded very convincingly like a worker at a foreign call center.) For a fee, HP promised to expedite the replacement, but in HP's defense they aren't charging me to send the HP in (prepaid FedEx label) and doesn't require receipt of the broken unit prior to sending a replacement. (Of course, they wanted my credit card number to hold hostage against my promise to send the broken unit.) Let's see if the new unit works when it arrives ....

Thursday, June 10, 2010

Ameriprise Bank: Not Worth Your Trouble

Years ago, a relative who was trying to take control of her retirement finally expressed willingness to have her state retirement plan's funds rolled into an IRA account she would be able to invest at her discretion. The State was not easy to deal with, but at last we had a rollover check for a six-figure sum (excluding decimals) that was more than anyone in their right mind wanted to lose.

I had her send it to Ameriprise Bank. Ameriprise has a dizzying array of account types – bank accounts, IRA accounts, brokerage accounts, Simple Employee Retirement accounts, who knows what else – and the cover letter spelled out very clearly what account type the check needed to get into, what account number, and the name on the account. It was all quite straightforward. We watched the account for a while, waiting to see the money show up so she could begin buying things she'd become interested in (like Apple, which has done damn well in the last five years).

After a while, we called for an update: when would the check be in?

Amerprise's answer: "What check?"

Ameriprise lost a six-figure check sent by a state retiree from a state retirement fund from which obtaining a subsequent check would be like pulling teeth from an angry tiger. After some lengthy "discussion" about the check (we were told we might have forgotten to send it, etc.), it turned out that the department with the check was not the department that handled IRA accounts at all, and that it was a department that used an entirely different mailing address than the one to which we sent the check. It also had its own phone number. And that department didn't have any accounts with the tax characteristics required by my retiring relative.

Not an auspicious start.

I am here to tell you that in the intervening years, Ameriprise hasn't gotten any more organized. I've had an Ameriprise Bank account since the company was part of American Express. I used the exact same userID to log into the bank account as I did to log into my American Express credit card accounts. I used the same password. American Express still recognizes them. Ameriprise? Ha. Ameriprise has undergone repeated website infrastructure reorganizations – based on the error messages I get from Amerprise's site, all of which involve Microsoft products – and with each, I get new headaches. Features that stop working, features that are re-implemented with new third-party partners, features that are obsoleted ... and when I call for support on any of these I get the same level of service Amerprise has always delivered.

Service at Amerprise works like this:
Amerirpise: I can reset your password for you and you'll be ready to go.
JadedConsumer: Great!
A: Write this down: y-e-j --
JC: Uppercase or lowercase?
A: It doesn't matter. y-e-j-m-3-#. Can you read that back to me? Good. Now log in and it will let you change your password!
JC: Well, stick with me for a minute to see if this works. I've been through something like this before, and it was a bust. Yeah. Like this. Using the window where I normally log in, it doesn't log me in. It just gives me the same window again. No error message, or anything.
A: What web site are you using?
JC: The one I bookmarked when I opened the account.
A: Try w-w-w-dot-amerprise-dot-com.
JC: Okay ... now it's asking me to enter a password ... and now it's giving me an error, saying it doesn't like the password.
A: What password are you using?
JC: The same one I used for years.
A: But you wanted to reset it.
JC: No I didn't. I wanted to log in. You said you could fix my problem by resetting it. And now it won't take the password that it used to take.
A: You need to use a new password.
JC: What's wrong with my old password? I could remember my old password. That way I didn't need to call for resets.
A: If you want to reset your password, you need to use a new password.
JC: I didn't want to reset my password. I said I wanted to log in. You said you could solve the problem with a password reset. I still can't log in.
Next the new password failed with the exact same Error 500 Internal Server Error courtesy of Microsoft Internet Information Server's Active Server Pages technology. Eventually A said I needed to call back the next day and talk to a web support team. I explained that it wasn't me who forgot the pasword, and it wasn't my browser that was generating pages that said "Error 500: Internal Server Error", and that the last time I had this it took days to sort out. I suggested that he pass mu number to the web support team so they could call me when they figured out how to get my account accessible. Alas, A would not. A pretended that the web support team was somehow cloistered away from public access and unable to phone anyone no matter what they learned. I pointed out that he'd just ordered me to contact them by phone, so they clearly had phones. And since the problem was clearly within Ameriprise's control and not mine – I can't generate Ameriprise server errors, for example – it made sense that the web team be alerted to the problem so it could be fixed.

Although A kept insisting that only Web Support could fix the problem and that I had to call Web Support the next day, it still took about 15 minutes to talk him out of the number I was supposed to call to reach Web Support. He preferred to win an argument with me first regarding the necessity of speaking with them at all.

When I called the number the next day, it wasn't Web Support's number. The people there put me through a series of identification-verifying questions that didn't seem irritating as a precondition to transfering me to Web Support, until after they transferred me to Web Support I was made to answer all the exact same questions all over again. I mean, there's only so many hours in the day. A2 told me to log in, and I reminded him that as I'd just explained, my password had been reset the previous day from the one I had used for years. He told me he'd reset it again. "Write this down. It's not case-sensitive ...."

The exact same failure repeated. What kind of computer system was I using, he asked?

A: That Safari browser is not ... they changed some settings with that browser.
JC: Safari is one of the most standards-compliant browsers on the planet. What is wrong with your server configuration that it is having trouble serving Safari the same content it serves anyone else?
A: Don't be so quick to blame our server, they changed some settings in Safari and we're trying to figure out how to handle it. Did you download Firefox?

In Firefox, the login was made to work. However, when I clicked the "bill pay" option, I got this:

We cannot process your request at this time. Please contact customer service at (800) 297-7378.

Instead of risking this new number, I asked A2 what we should do. He put me in touch with the integrated services department, which (he said) handled bill pay. The discussion with A3 didn't go well.
A: How much are you trying to pay?
JC: I have no idea. Just trying to set up a bill payment leads to an error message.

After explaining where I was on their site (the top-level account summary window you get on login) and what caused the error (clicking the button to look at the bill pay options), A3 began to clue in – or so I thought.

"Oh!" she said. "Bill pay is listed as inactive in your account." Bollocks. I'd used it for years, in the past. Just not recently. Some new back-end change, apparently, that blenderized everyone's existing settings. "I'll activate it for you. Close your browser and try again."

I wasn't about to close every window – including the one in which I was writing this – at the suggestion of the recorded message she'd been taught in 1999. So I logged out and back in, and got the same results.
A: You may have to clear your cookies in your browser.
JC: The last guy said that if I used a different browser, then everything would work fine, and it's not. Why don't you tell me exactly what it is you want me to do and I will try to do it.
A: First, open Internet Explorer.
JC: That is going to be a problem.
A: Well, you need to open Internet Explorer to clear your cookies.
JC: I don't have Internet Explorer and have never needed it to access any of your site's online banking features. If you think the solution to this problem is that I begin using a Microsoft product famous for its insecurity and for not working properly, I'll suggest that we need to get someone on the line who actually understands what is wrong here so we can get it fixed.
Eventually, I was put on hold (for about the 10th time) and then informed that the people who run bill pay said that it would take 24h from her re-activation for it to have any chance of working.

"Is there anything else I can do to help you?"
"Well, it doesn't look like it."
"Thank you for calling Ameriprise Bank."

So ... sign up for an account -- today!

Tuesday, June 8, 2010

Electrozone: Don't Buy Switched-After-Baited Products

I called Electrozone about a 58" Samsung plasma television I ordered (PN58B860, for those who want to follow at home) with delivery 7-14 days from over a week ago, to find out when they were going to let me know when to expect delivery. The thing isn't small and it isn't light and someone needs to be able answer the door when they plan delivering it. Being there is important.

The guy who answers says I ordered shipping without tracking information. Yes, I say, but has it shipped yet? Oh – today. Today, he says. By the way, have I ordered from Electrozone before? No? Let me tell you how the company works, he says. We buy overstock from closing companies and so forth to get deals, and when Samsung opens the boxes to verify the products they are shipped out new and unused but we have to invoice them as "Class A Refurbished."

So, it's not new, I repeat, trying to make sure I have it right, and despite your site saying nothing about the product being used or secondhand or the like ... you plan selling me a refurbished product? One that will get me into trouble with the manufacturer when I need warranty service? One that won't be eligible for American Express' warranty-extending program?

He says the manufacturer will offer a year of warranty, but that the manufacturer "opened" the box "for verification" that the product was okay.

The product description on the site and in online price-comparison aggregators give no indication Electrozone plans fulfilling orders with refubs, of course. And the guy at Electrozone can't explain why, if they are buying unopened new stock from a closing competitor, they think it's necessary to ship those new and unopened products to Samsung "for verification" instead of selling the closed new boxes as new, while expecting Samsung to honor its new-product warranties for the new products. The guy sounds like he really expects me to believe that sending unopened new boxed electronics to the manufacturer to be relabeled "refurbished" is the most natural business practice in the known universe.


I canceled. Don't bother ordering from Electrozone. They can't be trusted.

New Security Theory

For ages, Americans have fought to reconcile their love of representative governance with their loathing of their elected representatives. Samuel Longhorne Clemens, better known as Mark Twain, wrote in the 1800s that America had no distinctly native criminal class except Congress. Congress' repute hasn't improved much since, though it has voted itself significant increases in income.

Perhaps politicians can provide a valuable service to the nation, after all. In this era of asymmetric warfare and media manilupation, perhaps the same characteristics that make politicians so loathsome to Americans who must live with the results of their decisions may offer some valuable contribution against modern national threats.

The Jaded Consumer offers a modest proposal. Rather than keep politicians "safely" at home in the United States where they are apt to pass absurd laws that lower the quality of life for Americans, we should consider sending them abroad to talk our enemies to death. In a place with less ubiquitous access to health care, a stopped heart would surely kill.

Let's not waste time. Let's identify the politicians best able to so serve their nation and arrange an itinerary. The world is full of possibility.

Monday, June 7, 2010

Apple's iAds

As I write, this blog has gotten 73 page impressions today (just over 1300 for June so far), for an estimated advertising earnings of $0.01 (for June so far, $0.24). And this is a pretty good month for the Jaded Consumer (unless someone actually clicks an ad or searches, which is worth quite a bit more apparently). I think Google has cut a check one time since this blog began, largely on the strength of clicks I got while people were reading about the Olympics.

(I had rolled my eyes at judged sports and China's human rights during the games and the bad sportsmanship evident even at the highest levels in some sports. Apparently this was worth good money.)

So, why is the Jaded Consumer writing about pathetic site revenue? For perspective. Apple just announced $60m in 2010 commitments to its iAd platform, slated to go live July 1, 2010. 60% of this will be paid to developers whose apps display the iAd content, and Apple will keep the other 40% (from which the cost to serve the ads and other overhead will naturally be taken).

Although Google makes billions in online revenue, the mobile ad revenue pie is apparently a bit smaller: Apple reckons the $60m commitment for the second half of 2010 to represent over half of the US mobile ad revenue. As the mobile space grows, will Apple figure out how to dominate it? Will advertisers figure Apple's service to be an effective vehicle for converting eyeballs into customers?

Interesting stuff.

Friday, June 4, 2010

Stifel on ACAS

The Stifel "research" derided here as made without any evident basis has been updated, according to an email I got from someone watching a Java-based feed to which I can't post a link. Stifel apparently claims ACAS is likely to cave into bondholder demand for a bigger payoff in the exchange, reducing bankruptcy risk.

As envisioned, ACAS' exchange offer would pay down 39% of the company's outstanding unsecured debt, exchange remaining unsecured debt with newly-issued secured debt (at no change in principal value in the unpaid debt; this isn't forgiveness, it's a new debt agreement without the old net asset requirements, but providing secured lender status), and give the creditors a 2% "thank you for your cooperation" bonus on the exchanged principal value in immediate cash.

It sounds like some of the unsecured creditors want more than 2%, or they want 2% of more than just the debt that's exchanged, or something; but they want a bigger cash payoff.

Frankly, ACAS would do better in court. Creditors before a bankruptcy court are only entitled to what they contracted to be paid and not extra bonus payments. Conversion to secured status is surely consideration enough for the removed net asset covenant. If ACAS can reduce interest payments to non-default rates and continue as debtor-in-possession indefinitely, ACAS could outwait the bondholders until their debentures mature and not pay them a wooden nickel more than they bargained for prior to the 2008 liquidity panic drove the air from ACAS' NAV.

Why is it good news that management might cave into extortion like this? Extortion like this is why the United States has bankruptcy courts in the first place. This is exactly why ACAS should file. The 2% should be a reward for playing nice, not an invitation to commit a mugging. Call the law on the bastards!

I'm not sure who's more irrational, the public whom Stifel (correctly) thinks will panic on the news of a Chapter 11 filing, or Stifel for thinking that caving to extortion is good business (better than standing on principle to enforce one's rights in court, which though ugly can be effective). Shareholders want profit, not placation of stranger bondholders. Why should Stifel think placation is better business now than in 1939, or more likely to prevent further unreasonable demands?

When the irrationality-based post-filing panic hits, I'll be waiting at the bottom with my wallet and my margin account.

(If I were certain of the filing, I'd liquidate and wait to re-buy on collapse; however, I'm no short-term prophet and I don't want to miss the upside, so I'll sit through the punches that come while this plays out.)

Thursday, June 3, 2010

Dollar Ascendant Again?

Remember when Russia said the dollar sale of oil was coming to a close and the Middle East said oil would be priced in Euros?

Iran, no lover of the Great Satan of the West, has announced its central bank is selling Euros in favor of dollars and gold.

While the dollar has a lot of inflationary concerns weighing on it (at least in my mind), the Euro is apparently much worse. One wonders how this might impact China's potential unlinking of its currency to the dollar.

The fact that enemies of the United States are left investing in its currency does have a certain irony.

ACAS: To Fear Bankruptcy?

There's been some fear and uncertainty about ACAS in connection with the debt restructuring and the lock-up agreement's extension to June 8. Allow me to explain why I think ACAS is turning into a screaming buy.

ACAS is Solvent
ACAS hasn't failed to make any payment due under any of its debt agreements. It makes principal and interest payments timely, even at the jacked-up interest rates with which it's been stuck since the breach of the net asset covenant during the market collapse in 2008. Nobody at ACAS is going unpaid, and none of the creditors are being stuck with a bounced check. Under these circumstances, ACAS is not insolvent. ACAS is a diligent debt payor.

ACAS is also creating huge cash piles with which to pay obligations as they come due, including the anticipated obligation to make substantial principal payments in connection with a planned debt restructuring agreement.

Restructuring Isn't Liquidation
A bankruptcy court presiding over a proceeding conducted under Chapter 7 of the United States Bankruptcy Code is basically a funeral director: it invites all the mourners, says a few words over the corpse, and lets everyone go home red-eyed and empty-handed. (By the time a company files Chapter 7, even the optimists have long since given up; there's not much left to chew on.) Chapter 7 is the end of a dying business, and is conducted to wipe the slate clean of claims for whomever is left alive. Chapter 7 is the debtor's winter.

Chapter 11 is Spring. Under Chapter 11, a business with a liquidity problem can get turned around under a reorganization plan that takes account of everybody's interests. The alternative is a feeding frenzy that causes every creditor to tear flesh from the debtor as fast as possible in order to avoid losing the race to the assets. Chapter 11 is about the orderly process of reorganizing debtors' affairs with an equal eye to all the interested parties. ACAS has a reorganization plan to which 100% of its $1.4B in unsecured creditors agree, and varying percentages of its bond holders agree. The agreement ACAS has obtained is very close to statutory thresholds that would require the Court to order the reorganization plan urged by ACAS. With a few percent more of certain debt classes, ACAS would be entitled to stuff its plan down the throats of uncooperative debtors over their most strenuous objections. And let's face it: while ACAS continues to make all its interest payments, ACAS is entitled to continue to conduct its business as debtor-in-possession despite the preferences of some unhappy creditors. (Mind you, I don't think the creditors are unhappy at all: I think they love getting paid default rates of interest and don't want to see the golden goose killed, so they are doing everything possible to delay the debt restructuring. ACAS is so solvent, and so full of cash, there's no risk that other creditors would get advantage by delay – so I think all the creditors have a pecuniary incentive to toss sand into the gears.)

While ACAS continues its business, it becomes more liquid because it keeps piling up more cash. (By the end of April, unrestricted cash stood at $1.2 billion. Not million but billion.) At some point, ACAS can simply ask the Court to approve the payoff of the unhappy creditors' principal (the uncooperative creditors' claims are based on a few hundred million in principal, well within ACAS' budget), which would free ACAS to agree to a restructuring with whomever is left. That is, if the Court doesn't first order the parties to perform the restructuring plan urged by ACAS.

Of course, there are Chapter 7 debtors (like KSRP Ltd., now pending in the Southern District of Texas) that pretend to be Chapter 11 debtors. KSRP Ltd. has reported to the Court that it has no income and has made no expenses in the last year because it's had no active operations, but it turns out that lots of immigrants with H1-B visas are telling the INS they are employed by KSRP. Since KSRP hasn't had income or expenses in over a year, it's clear the only reason KSRP is trying to avoid liquidation is to keep all these fraudulent visas from being discovered by the INS and causing lots of deportations to India. For the employment with KSRP to have been legitimate, the immigrants would have to be drawing income from KSRP; it's a sham intended to perpetrate an immigration fraud. This, of course, all came as a surprise to KSRP's creditors – you don't expect the principal of a firm to admit all this under oath. Usually they are better advised and know when to plead the Fifth. Ridiculous Chapter 11 filings like KSRP Ltd. get converted into Chapter 7 proceedings pretty quickly.

But ACAS is a real Chapter 11 story: it has plenty of power to pay the interest on its debt, and even a well of cash for paying down principal without interfering with ongoing operations. So long as a Chapter 11 debtor can make interest payments at the non-default rates of interest, the bankruptcy rules allow the debtor to continue operating his business as debt0r-in-possession. If ACAS were to stop paying interest above the non-default rates while in bankruptcy court, as the Rules apparently invite, ACAS' NOI would soar as its cost of funds plummeted back not only to single digits, but to levels not seen since 2008. ACAS' NOI is based in large part on the spread between its borrowing price and the interest it is paid by portfolio companies, so ACAS really wins if it is allowed to pay only non-default interest as the price of continuing its operations. Unless ACAS decided to pay default rates of interest simply to keep creditors happy, ACAS' NOI could multiply overnight simply by making a $1039 or so filing fee with the local bankruptcy court.

The question what happens in Chapter 11 is not "what" really, but "when" – ACAS has the power to pay creditors indefinitely, and despite the default interest, its business is apparently improving. It can either urge the Court to quickly approve its reorganization plan or it can enjoy the benefits of having creditors over a barrel to get a better deal and prolong the non-default-interest while doing business as usual. Creditors deprived of default-rate interest might suddenly decide the reorganization plan is attractive and sign on, but that's not essential to ACAS' financial success. Since no claims are being eliminated in the reorganization, and no creditor is becoming an equity owner, there's no impact on equity owners other than (a) the flight of institutions forbidden by their charters to hold equities under the jurisdiction of a bankruptcy court, and (b) the reorganization of ACAS debt to lower interest rates and the consequent increase in NOI as ACAS' cost of funds plummets out of the double-digit range.

Frankly, I can't tell why ACAS didn't file months ago.

Any big downward post-filing price move in ACAS shares is a buy: it's based not on rational appraisal of ACAS' likely long-term results, but on the fear caused by ignorance of Chapter 11 proceedings and terror of the stigma of bankruptcy courts. Also: imagine the post-bankruptcy pop when ACAS, free of any debt default, emerges with a low cost of funds to continue business as usual. Yes, a definite buy.

Even for the ACAS-overcommitted Jaded Consumer!

Tuesday, June 1, 2010

And You Thought Your Potholes Were Bad

As you get further South, the cockroaches get worse, and apparently the potholes too. This specimen, developing in the wake of the tropical storm Agatha, was photographed in Guatemala:

115 died in Central America when the storm hit, and it'll be a long while repairing what isn't forever lost.

Apple and the iPad Party

When the iPad was announced, a certain fraction of the gallery wondered what the big deal was; the market was so small for such devices that it could hardly be expected to matter to a company whose market capitalization is so large as Apple's.

After selling a million within a month (twice as fast as the iPhone) and two million in less than sixty days, Apple is now expected to sell more iPads than computers in the third quarter. Apple already sells more iPads than MacBooks.

Given that the iPad, like the iPhone, synchs to a computer, Apple is planting the seeds of more Mac purchases. Given that the iPad – like the iPhone and the touch-screen iPods – runs applications sold through a high-volume application store capable of generating substantial post-sales revenue, one might wonder whether the iPad is a bigger deal for Apple over the long run than desktop computers. (Though pricier, full-on computers' longer usable life combines with their lack of post-sales revenue to suggest second-fiddle status for many models. Complete computer systems from Apple have traditionally been out of the range of most global buyers, making the addressable market for iPads dramatically larger. Assuming iPad add-ons such as protective covers, docks, cables, and so on are also high-margin products, Apple may be making more money on iPads than the sticker price suggests.) Whether Apple can sustain 200,000 units per week is something we should learn over the next few quarters; much of this may be initial-order backlog not yet worked off by new unit production.

Apple seems to be doing for tablets what it did for music players: delivering an integrated package so attractive to users that it actually changed the size of the market.

In the meantime, Apple's competitor Google – also a global surprise for figuring out how to get rich from online search engine activity – is being depended on by people who apparently trust their common sense less. Ms. Rosenberg followed Google's walking-directions beta onto a freeway, where she was struck by a car, and has filed suit. I predict victory for the defense, though perhaps not cheaply. California is a famously costly place to litigate.

Apple's other competitor, Microsoft, said Google was doomed to play second-fiddle to MSFT in the tablet space. This ignores MSFT's effort to compete with Linux by dropping Windows XP licenses to $15 on netbooks (half the usual cost of the "Starter Edition"), and its subsequent effort to upsell OEMs to higher-cost versions in Windows 7. No news yet on how successful MSFT's upsell effort has been, but MSFT's history of declining OS revenues doesn't bode well for its future ability to keep the cash cow mooing as the world moves toward standards that devalue MSFT APIs such as Win32. The claim Google will never catch Microsoft curiously ignores that Apple has apparently taken the bulk of the previously-minuscule tablet market with a seven-digit-per-quarter sales volume.

Google will likely benefit from non-MSFT operating systems, whether they involve Google's Linux-based OS or anyone else's: Google will have a better chance to reach customers with standards-compliant browsers and search tools that aren't biased against Google. The primary losers in the move toward standards are sellers of developer tools such as Adobe and Microsoft. Google wins on search regardless who takes the OS share. Apple wins only to the extent Apple gains sales, but since Apple is apparently taking the lion's share of the tablet market and is likely to keep the high end of the market, this plays toward Apple in the foreseeable future.

UPDATE: Morgan Stanley offers some charts and numbers suggesting that netbooks may have peaked and that iPads are on track to eclipse the netbook market. The revised market numbers suggest iPad's release caused not just a flattening but a decline in netbook sales compared to the year-previous April.