Gene Munster buttresses his armchair quarterbacking of tech stocks with something we might benefit from more of in analyst writing: data collection. Munster organized a surveillance program involving 25 man-hours of observation in which Apple seems to be increasing Mac sales (following a recent desktop product refresh). Sales of iPhones was below rates observed following the iPhone 3G release last summer, or ahead of the Christmas season, but considering the foreign sales Munster imagines Apple's sales target (4.4million units) is plausible for the quarter. Munster monitored iPods for the first time, and saw twice the rate of sales as on iPhones.
The iPods cost less than phones, but the new Shuffle is arguably Apple's highest-margin hardware. Apple's demand for the flash storage used in its handheld devices (which masquerade as phones and music players though the iPhone/iTouch products are Unix computers with quite sophisticated user interfaces) is so great that product preparation orders from Apple appear to create supply shortages for lower-priority buyers.
Apple's demand for flash may have a salutory effect on consumer access to cheap memory. Just as Apple's unilateral replacement of serial ports with USB created an environment encouraging hardware vendors to support USB (because there was a known user base, and USB wasn't a niche option any longer), leading to near-universal availability of highly-compatible USB devices capable of being connected to machines in large numbers using hubs, Apple's unquenchable thirst for small storage will reassure vendors that researching solutions to this problem will be rewarded with purchases. Apple, after all, was initially criticized for the high ($399) price of its original (5GB) iPod -- which retailed for the same price as the 1.8" hard drive inside it. The premium on the iPod was unquestionably attributable to Apple's willingness to spend more on components that would deliver adequate performance in a smaller, more convenient package. People laughed at the iPod for its price, but its convenience was such that it sold. (The fact Apple is known to prize small storage packages is emphasized by rumors like this.)
Competitors continued for a while to compete on either price (using larger hard drives) or size (using then-miniscule flash storage), but the future was clear: people wanted to carry substantial music libraries in insubstantial devices, and they would pay for the privilege. Apple's later movement into smaller players -- as flash sizes became larger, and Apple realized people wanted to buy even music players from Apple -- helped prevent competitors from obtaining a safe haven at some device size, and offered price points ranging from $50 to the sky.
Apple surely suffers as disposable income wanes in the current depression, but it offers products people want at prices they will tolerate and apparently is suffering along passably well despite everything. Let's hope the next round of Apple devices keeps the excitement up, and will lead the share price in the same direction.
If Intel's Paul Otellini is right, the PC turnaround is at hand and the future will be brighter for Apple and its competitors alike.
Wednesday, April 15, 2009
Tuesday, April 14, 2009
ACAS Still Making Money
Buying low and selling high still seems to be working at ACAS, which just announced both a $22 million cash receipt on the sale of a portfolio company, and a $6m net gain. Corrpro's buyer isn't another investment fund, but a pipeline services company making a strategic acquisition. Like HP's purchase of Extream Software, the sale of Corrpro to Insituform Technologies is not a product of speculators' excitement about a flipping game, but a business decision by organizations that produce valuable goods and services that ACAS' portfolio companies make good business sense to buy and run.
ACAS scores the investment as follows:
I don't have any special reason to conclude that ACAS lies about its holdings or their quality. I think the fact that ACAS has reported paper losses suggests that it takes its accounting responsibilities seriously despite viewing the applicable accounting principles as virtualy useless for producing information about its portfolio's past or prospective performance.
The data in which I am most interested is ACAS' future NOI. ACAS' ability to continue realizing interest income on debt investments is of more interest to me than the theoretical market value of those debt investments. ACAS' receipts of income from portfolio companies are of more import to me than the companies' modeled valuation. What I want to know is pretty simple: outside valuation models notwithstanding, how are ACAS' investments actually performing?
This is what I'm looking for going forward. If NOI is good, ACAS is probably a steal. If NOI collapses, the whole thing is probably a bust. Based on management's comments about its interest coverage, I'm inclined optimistically for ACAS.
ACAS scores the investment as follows:
Including investments in Corrpro by American Capital's affiliated funds under management, total inception to date realized gains and dividends received were $9 million. American Capital's compounded annual rate of return, including interest, dividends and fees earned over the life of its investment was 21%. The proceeds received by American Capital were greater than the fourth quarter 2008 valuation of the investment by $0.5 million, or 2%.The larger scorecard of exited investments is here, and the existing catalog of portfolio companies can be viewed here. Since the information there doesn't provide averages weighted by ACAS' amount invested, it's worth looking at ACAS' report on its overall returns:
MarketWatch
Since American Capital's August 1997 IPO through the fourth quarter of 2008, the company has earned a 17% compounded annual return, including interest, dividends, fees and net gains, on 249 realizations of senior debt, subordinated debt and equity investments, totaling $11 billion of committed capital. These realizations represent 47% of all amounts invested by American Capital since its August 1997 IPO. Proceeds from these realizations exceeded the total associated prior quarter valuation of the investments by less than 1%. American Capital earned a 30% compounded annual return on the exit of its equity investments, including dividends, fees and net gains.The question on everyone's mind is, of course, whether what's left unsold is some kind of awful witch's brew of unsalable failures. Management has dealt with this issue in conference calls, and reports interest in exiting losers in order to recover capital it could more effectively deploy; thus, it isn't exiting only winners in order to build a large stable of losers. The exited portfolio company listing reinforces this: it's got investments that apparently went to zero, and it admits the fact.
I don't have any special reason to conclude that ACAS lies about its holdings or their quality. I think the fact that ACAS has reported paper losses suggests that it takes its accounting responsibilities seriously despite viewing the applicable accounting principles as virtualy useless for producing information about its portfolio's past or prospective performance.
The data in which I am most interested is ACAS' future NOI. ACAS' ability to continue realizing interest income on debt investments is of more interest to me than the theoretical market value of those debt investments. ACAS' receipts of income from portfolio companies are of more import to me than the companies' modeled valuation. What I want to know is pretty simple: outside valuation models notwithstanding, how are ACAS' investments actually performing?
This is what I'm looking for going forward. If NOI is good, ACAS is probably a steal. If NOI collapses, the whole thing is probably a bust. Based on management's comments about its interest coverage, I'm inclined optimistically for ACAS.
Monday, April 13, 2009
MSFT's Next Big Hit
MSFT's major profit-producing products are unquestionably its operating system and application products. MSFT's effort to re-invogorate those profits with a post-Vista operating system upgrade may face a bit of friction, however: most businesses apparently don't plan to buy it next year (or even the year after). Forcing consumers to buy it by eliminating OEM licensing of new copies of old editions is a tried and proven strategy to get millions of users on a new MSFT operating system, of course. But even this kind of force hasn't kept MSFT from seeing losses in its operating system division, as users trying to avoid being dragged into operating system upgrades fought to avoid Vista.
Given the reception apparently gathering for Microsoft's Windows 7, one might not seem out-of-touch to expect improvement in adoption of Linux and Android as alternatives in the larger commodity PC market. With Microsoft's dominant business desktop operating system, XP, turning a decade old in just a couple of years, developers interested in leveraging new frameworks for pulling the most performance out of modern multiprocessor computing hardware may just not be drawn to Microsoft's products: the old one isn't there, and the new one isn't deployed broadly enough to expect sales. Microsoft's Win-95-style mass adoption may be a thing of the past.
When's Windows 7 going to be released, anyway? I seem to recall Longhorn going through a series of revised release dates. Has Redmond worked out how to release a product in the target year?
Release dates aren't MSFT's biggest issue, though. However, MSFT's recent history of blown deadlines may have contributed to its real problem:
Given the reception apparently gathering for Microsoft's Windows 7, one might not seem out-of-touch to expect improvement in adoption of Linux and Android as alternatives in the larger commodity PC market. With Microsoft's dominant business desktop operating system, XP, turning a decade old in just a couple of years, developers interested in leveraging new frameworks for pulling the most performance out of modern multiprocessor computing hardware may just not be drawn to Microsoft's products: the old one isn't there, and the new one isn't deployed broadly enough to expect sales. Microsoft's Win-95-style mass adoption may be a thing of the past.
When's Windows 7 going to be released, anyway? I seem to recall Longhorn going through a series of revised release dates. Has Redmond worked out how to release a product in the target year?
Release dates aren't MSFT's biggest issue, though. However, MSFT's recent history of blown deadlines may have contributed to its real problem:
The contrast between Windows 7's glowing beta reports and tepid sales forecasts -- as implied by surveys such as the KACE/Dimensional Research study--shows that, when it comes to Windows 7, Microsoft's biggest challenge may have less to do with technical matters and more to do with restoring lost credibility in the enterprise PC market.Given the skepticism likely endemic in the buying population after MSFT's last decade of marketing hype, I suspect the only thing that can repair MSFT's reputation for operating system software is a workmanlike release.
Information Week
Friday, April 10, 2009
On the Cost of Macs
Elliott asked about my cost of ownership on my Mac.
I have to decline details for several reasons: I don't have the data from my 8yo Mac or the various software I bought; my software pricing will be different from others' due to large-volume site-licenses to which I had access; the purposes to which others will direct their machines will necessitate quite different software (and options) than I might (or did) use; and I have but an N of 1 for Macs that have gone entirely through their life cycle to death, and thus make a lousy source of meaningful conclusions (and providing a single data point for a later project of summing the numerous experiences of available bloggers will surely yield results skewed from whatever norm would represent one's own likely use).
Instead, I point out that Google can help one find "total cost of ownership" analyses depicting Macs (or Linux, or even OS/2 (which had its own zealots, and those who preached they weren't really zealots just sound thinkers)) against competition from Microsoft. (Heck, these guys offer a TCO study on how to run MS-Win applications most cheaply without actually buying MS-Windows machines.) One offers a TCO spreadsheet for calculating comparisons. The Unofficial Apple Weblog (TUAW) offers predictable fanboy praise of Apples as relatively cost-effective. Supporters of Microsoft's products' pricing tend to focus on up-front hardware cost. (Some question the comparisons on even the up-front costs, of course. Interesting comments in last link, incidentally. UPDATE: McCracken posted a comparison article that offers a number of feature comparisons before finally lining up spec-comparable prices.) Yet, up-front costs can be dwarfed by things like support costs and other overhead. This last link is interesting because it tries to address the arguable expensiveness of "free" software, discussing factors of interest to any cost-of-ownership thinking; it also contains this worthwhile reminder:
The real answer on raw price turns on what you require the machine to do. Many applications require software whose licensing costs (MSFT's server products?) or support overhead (anyone's relational database products for use in a custom database application?) dramatically overshadow the cost of hardware or operating system software. If this is your situation, the Mac/PC up-front cost debate isn't for you: it's immaterial. The real cost all happens post-purchase, and hardware pricing variance will be a mere rounding error. Some people have needs that are easily enough met on either platform that their purchase decision is made on quality-of-life issues involving their susceptibility to support by relatives, their need for tech support at all, the availability of previously-bought software, the capabilities of pre-installed software, or aesthetic aspects of the hardware or software. In some cases, the need for a waterproof computer or a machine that withstands dust storms restricts choices to one of relatively few hostile-environment vendors. In one comparison, the built-in ability of MacOS X to create PDFs from any application that supports printing turned out to make Apple's product cheaper than alternatives. What you need to do will dictate what you will need (at minimum) to buy.
What you want the machine to do will not only dictate its price coming into your hands, it will dictate the torture the machine must survive in use -- which in turn impacts lifespan, and thus impacts annual cost to solve your computer needs. My Powerbook that died last year had suffered drinks spilled directly into it on more than one occasion, which is why I had dubbed it the Aquanaut. Might this have lowered its lifespan? Who knows. Another reason my personal experience may not be extensible to readers :-)
Good luck, and don't get "taken" by shallow ads!
[NOTE: PC/Mac is a debate so old, and so fraught with religious tension, that the only possible defense against pure evangelism is perspective. Some worthwhile looks at the recent flare-up in the price comparison excitement include that at Fortune (including comments in both directions).]
UPDATE: Business Week offers a response to Microsoft's price-based ad campaign in an article titled "Mac vs. PC: What You Don't Get for $699"; the page with the meat of the author's argument is here.
I have to decline details for several reasons: I don't have the data from my 8yo Mac or the various software I bought; my software pricing will be different from others' due to large-volume site-licenses to which I had access; the purposes to which others will direct their machines will necessitate quite different software (and options) than I might (or did) use; and I have but an N of 1 for Macs that have gone entirely through their life cycle to death, and thus make a lousy source of meaningful conclusions (and providing a single data point for a later project of summing the numerous experiences of available bloggers will surely yield results skewed from whatever norm would represent one's own likely use).
Instead, I point out that Google can help one find "total cost of ownership" analyses depicting Macs (or Linux, or even OS/2 (which had its own zealots, and those who preached they weren't really zealots just sound thinkers)) against competition from Microsoft. (Heck, these guys offer a TCO study on how to run MS-Win applications most cheaply without actually buying MS-Windows machines.) One offers a TCO spreadsheet for calculating comparisons. The Unofficial Apple Weblog (TUAW) offers predictable fanboy praise of Apples as relatively cost-effective. Supporters of Microsoft's products' pricing tend to focus on up-front hardware cost. (Some question the comparisons on even the up-front costs, of course. Interesting comments in last link, incidentally. UPDATE: McCracken posted a comparison article that offers a number of feature comparisons before finally lining up spec-comparable prices.) Yet, up-front costs can be dwarfed by things like support costs and other overhead. This last link is interesting because it tries to address the arguable expensiveness of "free" software, discussing factors of interest to any cost-of-ownership thinking; it also contains this worthwhile reminder:
Both types of products have their pros and cons. It's best to pick the right product based on the project needs rather than viewing the product as a hammer, and all projects as nails.Still, if one hunts I'm one can find specific enterprises have studied expected long-term costs of implementing different hardware or software solutions and have produced. Does one of these enterprises sound like it does what you do? Guessing the impact of software choices on your cost to operate isn't something that flows easily from buzz-words or ad campaigns, and products touted as creating savings can be as easily suspected of consuming resources (or at might result in a 'savings' that "excludes some migration costs and the price of software licenses" -- oops). Just figuring out your total cost of ownership turns out to be a white-paper subject. (Entertainingly, the site of the prior link offers on this page a few paid-for white-papers, including this gem: "This presentation, entitled Standardizing on Windows XP Instead of MAC OS X, provides a pre-packaged option for defending Windows XP against MAC OS X." In the old days -- well, after Windows 95 and NT hit the market at any rate -- you'd never see anyone dedicating the time to explain why to buy MSFT over Apple; it was self-evident that you would be buying MSFT, and nobody would dream of selling you an explanation for it. How the world has turned ....)
The real answer on raw price turns on what you require the machine to do. Many applications require software whose licensing costs (MSFT's server products?) or support overhead (anyone's relational database products for use in a custom database application?) dramatically overshadow the cost of hardware or operating system software. If this is your situation, the Mac/PC up-front cost debate isn't for you: it's immaterial. The real cost all happens post-purchase, and hardware pricing variance will be a mere rounding error. Some people have needs that are easily enough met on either platform that their purchase decision is made on quality-of-life issues involving their susceptibility to support by relatives, their need for tech support at all, the availability of previously-bought software, the capabilities of pre-installed software, or aesthetic aspects of the hardware or software. In some cases, the need for a waterproof computer or a machine that withstands dust storms restricts choices to one of relatively few hostile-environment vendors. In one comparison, the built-in ability of MacOS X to create PDFs from any application that supports printing turned out to make Apple's product cheaper than alternatives. What you need to do will dictate what you will need (at minimum) to buy.
What you want the machine to do will not only dictate its price coming into your hands, it will dictate the torture the machine must survive in use -- which in turn impacts lifespan, and thus impacts annual cost to solve your computer needs. My Powerbook that died last year had suffered drinks spilled directly into it on more than one occasion, which is why I had dubbed it the Aquanaut. Might this have lowered its lifespan? Who knows. Another reason my personal experience may not be extensible to readers :-)
Good luck, and don't get "taken" by shallow ads!
[NOTE: PC/Mac is a debate so old, and so fraught with religious tension, that the only possible defense against pure evangelism is perspective. Some worthwhile looks at the recent flare-up in the price comparison excitement include that at Fortune (including comments in both directions).]
UPDATE: Business Week offers a response to Microsoft's price-based ad campaign in an article titled "Mac vs. PC: What You Don't Get for $699"; the page with the meat of the author's argument is here.
Thursday, April 9, 2009
MSFT Publishes On 'Apple Tax'
Microsoft's ad campaign targeting Apple (video linked here) now includes an "Apple Tax Return" depicting the additional cost for a family buying either PCs or Macs for the household.
The price comparison has some interesting features. The hypothetical Apple buyers are assumed to buy Microsoft Office at retail price as well as Intuit's Quicken and an upgrade of iWork, plus both Mobile Me and a one-to-one personal support agreement. Think about this for a moment. Do you actually buy this stuff when you buy a new machine?
Moreover, the hypothetical PC buyers are assumed to buy none of this. No online data synchronization tool or other service (storage, web hosting, etc.). No prepackaged accounting software. Instead of two office suites, zero. The "Other Software" budgeted for Mac users at $70? Nada. Maybe they aren't allowed, or can't afford software. Who knows?
Outside the computers themselves, Apple buyers and PC buyers are expected to buy entirely different wireless router/firewall appliances, at completely different prices. This, despite that I've used both the mentioned devices on Mac networks, and both work just fine with PCs. Some of the extras are priced similarly: an external hard drive and and 2GB RAM are shown at similar prices, for example, though I rather doubt all the vendors offer RAM at the same markup. (Maybe Microsoft expects RAM sticks as after-market add-ons?) However, when both buyers are assumed to buy a Blu-Ray player for the PC (on this point, I'm kinda mystified; why does my PC need a Blu-Ray player if I'm not recording data to it? maybe I'm outside the demographic MSFT is targeting), Microsoft charges the Mac buyers more for an external unit.
One interesting feature in the comparisons is the difference in price of the ATi Radeon HD 4870, which costs more from Apple than is reported from HP. Sometimes, these cards are clocked differently from different OEM vendors, but I don't have any information that Apple's part in this case delivers a different customer benefit. If you have info on this, leave comments :-) The fact that Apple's 3-year extended warranty costs $59 more than Dell's might be explained by the company's relative customer service rating, so I don't attribute much to it. I've talked to people who called Dell's support, and I wouldn't pay any price for that kind of "service".
The most belly-laugh garnering item on the list is the "Other Software" the Mac buyer is expected to pay for. The PC buyer is apparently not buying "Other Software". Not depicted for PC buyers are the likely relative costs of anti-virus, the relative time (or money) spent reinstalling (or having someone reinstall) an operating system atop infected installations for several years, or the like. The possibility that a Mac user might be happy with OpenOffice, or might not upgrade the still-working-just-fine but free-with-purchase iWork installation seems to escape Microsoft utterly. Why Dell or HP buyers won't spend money on software a Mac user would buy is sort of perplexing.
The hardware purchase price difference is listed at $1751, and that might be legit -- assuming you believe the computers listed are otherwise substitutes for one another. You are free to check out the supposed comparables and determine whether you believe one or the other is actually a better machine than its supposed equivalent. Personally, my experience with the longevity of Macs is that they work for eight years. That is, they remain useful years longer than most assume a computer will even run. I am not into modding hardware or buying upgrades, so this reflects what I get out of a single hardware purchase. Obviously, your mileage may vary; but I strongly suspect that the cost per year of the machines over their actual use -- and under actual software budgets as they occur in a real household -- will be rather substantially different than depicted by Microsoft in its anti-Apple ad.
The interesting thing is that Microsoft has felt it necessary to advertise against Apple as a competitor. I mean ... if Apple is no threat, why bother?
The price comparison has some interesting features. The hypothetical Apple buyers are assumed to buy Microsoft Office at retail price as well as Intuit's Quicken and an upgrade of iWork, plus both Mobile Me and a one-to-one personal support agreement. Think about this for a moment. Do you actually buy this stuff when you buy a new machine?
Moreover, the hypothetical PC buyers are assumed to buy none of this. No online data synchronization tool or other service (storage, web hosting, etc.). No prepackaged accounting software. Instead of two office suites, zero. The "Other Software" budgeted for Mac users at $70? Nada. Maybe they aren't allowed, or can't afford software. Who knows?
Outside the computers themselves, Apple buyers and PC buyers are expected to buy entirely different wireless router/firewall appliances, at completely different prices. This, despite that I've used both the mentioned devices on Mac networks, and both work just fine with PCs. Some of the extras are priced similarly: an external hard drive and and 2GB RAM are shown at similar prices, for example, though I rather doubt all the vendors offer RAM at the same markup. (Maybe Microsoft expects RAM sticks as after-market add-ons?) However, when both buyers are assumed to buy a Blu-Ray player for the PC (on this point, I'm kinda mystified; why does my PC need a Blu-Ray player if I'm not recording data to it? maybe I'm outside the demographic MSFT is targeting), Microsoft charges the Mac buyers more for an external unit.
One interesting feature in the comparisons is the difference in price of the ATi Radeon HD 4870, which costs more from Apple than is reported from HP. Sometimes, these cards are clocked differently from different OEM vendors, but I don't have any information that Apple's part in this case delivers a different customer benefit. If you have info on this, leave comments :-) The fact that Apple's 3-year extended warranty costs $59 more than Dell's might be explained by the company's relative customer service rating, so I don't attribute much to it. I've talked to people who called Dell's support, and I wouldn't pay any price for that kind of "service".
The most belly-laugh garnering item on the list is the "Other Software" the Mac buyer is expected to pay for. The PC buyer is apparently not buying "Other Software". Not depicted for PC buyers are the likely relative costs of anti-virus, the relative time (or money) spent reinstalling (or having someone reinstall) an operating system atop infected installations for several years, or the like. The possibility that a Mac user might be happy with OpenOffice, or might not upgrade the still-working-just-fine but free-with-purchase iWork installation seems to escape Microsoft utterly. Why Dell or HP buyers won't spend money on software a Mac user would buy is sort of perplexing.
The hardware purchase price difference is listed at $1751, and that might be legit -- assuming you believe the computers listed are otherwise substitutes for one another. You are free to check out the supposed comparables and determine whether you believe one or the other is actually a better machine than its supposed equivalent. Personally, my experience with the longevity of Macs is that they work for eight years. That is, they remain useful years longer than most assume a computer will even run. I am not into modding hardware or buying upgrades, so this reflects what I get out of a single hardware purchase. Obviously, your mileage may vary; but I strongly suspect that the cost per year of the machines over their actual use -- and under actual software budgets as they occur in a real household -- will be rather substantially different than depicted by Microsoft in its anti-Apple ad.
The interesting thing is that Microsoft has felt it necessary to advertise against Apple as a competitor. I mean ... if Apple is no threat, why bother?
Friday, April 3, 2009
On ACAS' Debt
The comments on the last ACAS post have gotten long enough they deserve their own separate discussion. Imperator posted that (a) mark-to-market accounting changes should improve ACAS' NAV, but (b) creditors' power to accelerate payment under unsecured lines of credit could threaten ACSA, so (c) the ACAS bonds (which he noticed increasing in value) look attractive.
First, ACAS' bonds. If there seemed a liquid market for the things, I'd have bought. I have been informed the volume is so bad that when I ask, there are no offers. I easily believe other brokers make it easier to get quotes on "junk bonds" but mine apparently does not. But I'm not exactly overwhelmed with angst over missing them. Why? The bond holders aren't the ones with the right to accelerate, and though they are unsecured creditors like the banks offering ACAS lines of credit (in default not from nonpayment but by the technical terms of the line of credit, which require ACAS to maintain a minimum tangible net worth), bond holders would not be entitled to quicker repayment than provided in the terms of the indenture, which places their due date after the date of an acceleration demand. In short, it looks like these bond holders would be paid last among the unsecured creditors.
That doesn't exactly scare me, though; after all, I more-than-doubled my own ACAS holdings with a purchase at $1.80 after appreciating the current state of ACAS' recently-renegotiated unsecured line of credit. Why is that? First, the Trump principle: when you owe $1,000 and you can't pay it back, you have a problem ... but if you owe $1,000,000,000 and you can't pay it back, your bank has a problem. With the new mark-to-market rules in particular, a bank's power to make its balance sheet look good while ACAS is making regular, timely, quarterly payments in full of the amount due that quarter is much better than if the bank announces an impossible-to-meet acceleration and has to admit in its next quarterly filing that a previously performing asset was in fact now not being paid at all. Second: ACAS' management hasn't received any guarantees or waivers, but apparently has an understanding that the best thing for it and its creditors is to pay "default-rate" interest but remain free of acceleration demands. The banks get to declare timely payment and get a higher rate from a borrower with apparently solid interest coverage, which is much perfarable to the alternative.
Supposing an acceleration demand, though ... think about it. This isn't a margin call gone bad, in which ACAS' broker liquidates its account the next day. The only people who can sell ACAS' illiquid assets (which ACAS holds, not a broker) are ACAS' people. Liquidation won't happen any faster than ACAS can cause orderly sale, unless a bankruptcy trustee attempts a fire sale, which is definitely not in the interest of creditors, who want to be paid. Remember, ACAS' debt-to-equity doesn't leave the unsecured creditors with a lot of room if sales prices don't meet valuation levels. So the people in charge of the liquidation (if any) would almost surely be ACAS personnel, by agreement of the creditors and debtor in bankruptcy.
Once you see the eventual seller is ACAS itself and not a bankruptcy trustee, one must ask why the bank would bother to drag ACAS into bankruptcy in the first place. And there's your answer: as long as ACAS continues to offer attractive interest coverage, its lender banks probably prefer receiving default interest to the prospect of having to find another solvent borrower.
Thus, I agree with ACAS' management: acceleration demand isn't on the immediate horizon. Moreover, the right to demand acceleration isn't the power to make ACAS' illiquid assets suddenly liquid, so the effect of an aceleration demand isn't likely to aid the banks much, making it relatuvely unattractive. (If ACAS' assets were liquid and easily sold for full value by a bankruptcy trustee, this might be different, but they're not.)
Thus, I don't see a special reason the ACAS bonds are a better deal than the ACAS equity, unless one needs current income. The appreciation on the bonds on maturity will be nice -- but so will the appreciation of ACAS shares as share prices approaches NAV on the normalization of the markets in the same couple-of-years time frame in which the bonds would mature.
Yes, I wanted to buy the ACAS bonds for a triple on maturity plus interim interest, but I couldn't without work -- and I have enough work already, than you. Maybe in the future when I have time to rearrange my finances, I'll work out another solution for making my trades, and use a platform that will quote me all the weird CUSIPs on which I inquire. TD Ameritrade isn't it.
I think the bonds are a good deal. I think the equity will prove better, though of course the equity will lose in the event of insolvency. In the event of the catastrophic destruction of ACAS -- which I'm betting against, based on its ability to service debt; and I continue to be attracted by the likelihood of entering very nice deals in this distressed market -- people buying bonds at these levels probably will get their money back even if the company dissolves in bankruptcy, as ACAS' debt ratio has been managed to remain low. The debt is a conservative bet, if you can get a quote -- and I'd have done it if it weren't so much work.
So Imperator is right on the bonds, but I don't think I'm necessarily agreeing with him on the ACAS bonds for the reasons he suggests it ;-) On the other hand, I disagree for the time being on acceleration as a cause for near-term panic, and suggest that it doesn't help bond-holders though, in bankruptcy they would likely get paid (though it might be worth looking at the relative priority of the banks and the bond holders; I haven't checked that out).
First, ACAS' bonds. If there seemed a liquid market for the things, I'd have bought. I have been informed the volume is so bad that when I ask, there are no offers. I easily believe other brokers make it easier to get quotes on "junk bonds" but mine apparently does not. But I'm not exactly overwhelmed with angst over missing them. Why? The bond holders aren't the ones with the right to accelerate, and though they are unsecured creditors like the banks offering ACAS lines of credit (in default not from nonpayment but by the technical terms of the line of credit, which require ACAS to maintain a minimum tangible net worth), bond holders would not be entitled to quicker repayment than provided in the terms of the indenture, which places their due date after the date of an acceleration demand. In short, it looks like these bond holders would be paid last among the unsecured creditors.
That doesn't exactly scare me, though; after all, I more-than-doubled my own ACAS holdings with a purchase at $1.80 after appreciating the current state of ACAS' recently-renegotiated unsecured line of credit. Why is that? First, the Trump principle: when you owe $1,000 and you can't pay it back, you have a problem ... but if you owe $1,000,000,000 and you can't pay it back, your bank has a problem. With the new mark-to-market rules in particular, a bank's power to make its balance sheet look good while ACAS is making regular, timely, quarterly payments in full of the amount due that quarter is much better than if the bank announces an impossible-to-meet acceleration and has to admit in its next quarterly filing that a previously performing asset was in fact now not being paid at all. Second: ACAS' management hasn't received any guarantees or waivers, but apparently has an understanding that the best thing for it and its creditors is to pay "default-rate" interest but remain free of acceleration demands. The banks get to declare timely payment and get a higher rate from a borrower with apparently solid interest coverage, which is much perfarable to the alternative.
Supposing an acceleration demand, though ... think about it. This isn't a margin call gone bad, in which ACAS' broker liquidates its account the next day. The only people who can sell ACAS' illiquid assets (which ACAS holds, not a broker) are ACAS' people. Liquidation won't happen any faster than ACAS can cause orderly sale, unless a bankruptcy trustee attempts a fire sale, which is definitely not in the interest of creditors, who want to be paid. Remember, ACAS' debt-to-equity doesn't leave the unsecured creditors with a lot of room if sales prices don't meet valuation levels. So the people in charge of the liquidation (if any) would almost surely be ACAS personnel, by agreement of the creditors and debtor in bankruptcy.
Once you see the eventual seller is ACAS itself and not a bankruptcy trustee, one must ask why the bank would bother to drag ACAS into bankruptcy in the first place. And there's your answer: as long as ACAS continues to offer attractive interest coverage, its lender banks probably prefer receiving default interest to the prospect of having to find another solvent borrower.
Thus, I agree with ACAS' management: acceleration demand isn't on the immediate horizon. Moreover, the right to demand acceleration isn't the power to make ACAS' illiquid assets suddenly liquid, so the effect of an aceleration demand isn't likely to aid the banks much, making it relatuvely unattractive. (If ACAS' assets were liquid and easily sold for full value by a bankruptcy trustee, this might be different, but they're not.)
Thus, I don't see a special reason the ACAS bonds are a better deal than the ACAS equity, unless one needs current income. The appreciation on the bonds on maturity will be nice -- but so will the appreciation of ACAS shares as share prices approaches NAV on the normalization of the markets in the same couple-of-years time frame in which the bonds would mature.
Yes, I wanted to buy the ACAS bonds for a triple on maturity plus interim interest, but I couldn't without work -- and I have enough work already, than you. Maybe in the future when I have time to rearrange my finances, I'll work out another solution for making my trades, and use a platform that will quote me all the weird CUSIPs on which I inquire. TD Ameritrade isn't it.
I think the bonds are a good deal. I think the equity will prove better, though of course the equity will lose in the event of insolvency. In the event of the catastrophic destruction of ACAS -- which I'm betting against, based on its ability to service debt; and I continue to be attracted by the likelihood of entering very nice deals in this distressed market -- people buying bonds at these levels probably will get their money back even if the company dissolves in bankruptcy, as ACAS' debt ratio has been managed to remain low. The debt is a conservative bet, if you can get a quote -- and I'd have done it if it weren't so much work.
So Imperator is right on the bonds, but I don't think I'm necessarily agreeing with him on the ACAS bonds for the reasons he suggests it ;-) On the other hand, I disagree for the time being on acceleration as a cause for near-term panic, and suggest that it doesn't help bond-holders though, in bankruptcy they would likely get paid (though it might be worth looking at the relative priority of the banks and the bond holders; I haven't checked that out).
Wednesday, April 1, 2009
GM Bankruptcy Watch: April 2009 Update
GM's new CEO says the biggest U.S. auto maker may face bankruptcy. Hmm. Where have we heard that bankruptcy might be GM's best shot before?
I guess that's why they pay these brainiacs the BIG bucks ;-)
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