Debt Chickens Coming Home to Roost

Posted on | January 21, 2010 | 5 Comments

Today’s online newspapers have real drawbacks.

First, they don’t let you to scan all the news. Second, all too often important articles in the print edition never make it to the paper’s website. And let’s not forget how fewer and fewer people are getting real newspapers delivered these day. As a result, there is a ton of important developments that go unnoticed by an ever growing portion of the public at large.

Now, just getting a real newspaper doesn’t means you read it or even absorb the information presented there, but what I saw today that really caught my attention in Globe & Mail’s Report on Business section were a raft of business failure related articles and announcements.

It made me think: finally, we’re starting to see all the big debt and business failure ‘chickens coming home to roost’ for a bunch of high profile / high flyer companies in a really public way. And because of that, and how the rest of us in business could learn important lessons from these situations, it made me think of car crashes.

Bankruptcies Really Are Like Car Crashes

Car crashes always get lots of attention.

The bigger they are, the more destruction they cause, the more fatal their outcome only serves to compel us all the more to slow down and take a good look at what happened. You know what I am taking about. Picture the scene: all those flashing lights, all the police and emergency vehicles, all their personnel taking charge, and all the traffic tie-ups.

But what value is there in slowing down to look?

I for one do so out of the belief that ‘there but for the grace of God go I’. I also do it because maybe I can learn something from someone else’s misfortune that will save my life or the ones I love some day. Now I do admit with hesitation that my wife tells me regularly how I have a worrisome habit of driving a tad too fast and a tad to close (my wording, not hers). But because beneath my understated, typically Canadian persona lies the heart of a real A-type personality, I am pretty good at mentally deflecting her cautions. I do this with invocations of thoughts on how really such a skilled and experienced driver I am and how driving the way I do is what it takes to get around on Toronto’s roads these days.

However, seeing a real crash-up, particularly one where some unfortunate has been hurt or killed, does indeed truly shake my confidence (dare I say my conceit). And I can testify how that leads to my being more careful and cautious on the roads. So rubber-necking does have practical social value. And witnessing a car wreck is a more real and accessible alternative for many than the graphic experience teenagers get when the police go and park a drunk-driver-caused, fatal-accident car wreck in front of their high school for a week or so.

So, I trust you’ll agree with me that car accidents are public smash-ups we can and should all learn from. But what about other examples of societal carnage, like company smash-ups?

I think business failures go too little noticed. But they shouldn’t because we here in North America are not so ridiculously filthy rich that we can casually, callously and coldly brush off such things as nothing but ‘the cost of doing business’. More over, lots of real people get seriously hurt by business failures all too often and many have their careers, retirement savings and investment portfolios killed by these ‘should-have-been-avoided’ events. Even more over, our economy and societies truly become threatened when boards and management teams foolishly play Russian roulette with their companies and lose.

Corporate Failures Publicized on Jan 21, 2010

Here is the list of corporate wreckage that made the business news in the Globe & Mail today:

1. Whistler a Step Closer to the Auction Block: a story about Intrawest Holding’s looming death due to acquisition debt over reach
2. Icahn Set to Acquire Fontainebleau Las Vegas: For what is considered a bargain price, investor Carl Icahn is about to purchase the bankrupt Fontainebleau Las Vegas project.
3. Uno Restaurants Files for Bankruptcy Protection: the Boston-based company that operates 179 Uno Chicago Grills in 28 states, filed for Chapter 11 bankruptcy protection today as it seeks to restructure its debt.
4. Rol-Land Farms (formerly Essex Kent Mushrooms Ltd.) Notice of CCAA Protection Filing by PriceWaterhouseCoopers, Court-appointed Monitor
5. Shoeless Joe’s Restaurants Assignment in Bankruptcy Filing Notice by Mathew & Associates Ltd., Trustee in Bankruptcy
6. M.V. Caledonia Ship For Sale By Receiver Notice by BDO Canada Limited due to insolvency of Canadian Sailing Expeditions Inc.
7. Obama Gets Tough on US Banks: To avoid a re-occurrence of having US banks get too big to fail like Fannie Mae, Freddie Mac, Bear Stearns, AIG, et al, U.S. President calls for tougher regulations on banks that would limit the size and complexity of large financial
8. Bankruptcies Keep Sliding: Businesses, consumers file fewer bankruptcies in November from October, though they remain higher than last year’s

As to the potential for new corporate wrecks coming, here is what and who made business news that way today:

1. Buffett Sour on Kraft’s Cadbury Deal: Warren Buffett said Kraft Foods Inc’s (KFT.N) proposed $19.6 billion acquisition of Cadbury Plc (CBRY.L) is a "bad deal" and questioned how Chief Executive Irene Rosenfeld chose to pay for it.
2. Crib Recall has Dorel in Crisis Plan Mode: Jan 21, 2010 … The U.S. Consumer Product Safety Commission on Tuesday announced a voluntary recall by Dorel (TSX: DII.B) of 635000 cribs sold by major retailers such as …
3. Superior Plus to Acquire Griffith Holdings in New York, Cuts Full-year Profit Outlook: Superior Plus Corp. (TSX:SPB) is expanding its U.S. fuel distribution business with its US$125-million acquisition of Griffith Holdings Inc. in upstate New York, while anticipating more recession induced cashflow reductions.
4. China’s Regulators Apply Brakes to Bank Lending: Authorities rein in rapid growth in loans – up 32 per cent last year – over fears of brewing bubbles in real estate prices and stocks prompting fears about the strength of US economic turnaround to grow

Corporate Chickens Are Coming Home to Roost

From all the business carnage and economic bad news in the papers today, it seems like ‘the (corporate) chickens are (starting) coming home to roost’. The result of this is that it will show just how shareholders, banks, suppliers, employees and Government tax revenues have all taken big killer hits they prayed somehow they would have avoided.

This is a blood-flowing-in-the-streets situation that has been building for some time, but it is entirely expected according to my friend Alex Jurshevski, CEO at Recovery Partners here in Toronto. Indeed Alex knows the situation well for he’s on top of what’s been going on in the domestic and international banking scene having spent more than 20 years in such positions as Head of Portfolio Risk Management at Nomura International plc in London, Head of Portfolio Management at the New Zealand Treasury, Co Head of Capital Markets – Tokyo and Vice President, Global Swaps Group – Toronto for CIBC Wood Gundy and Head, Futures and Options at the Bank Of Montreal.

According to Alex, Banks having been putting off the gruesome task of ‘shooting their dead horses’ because the market for non and under performing loans has been so bad since the start of the Great Recession in 2008. For quite some time now they have been limping along nursing their loan loss exposures while hoping their insolvent situations don’t turn impossible because of evaporating positive cash flows. These however are circumstances that could not and cannot continue indefinitely. Indeed, it has been the evaporation of Banker patience with Intrawest is what is behind their scheduled Feb 19, 2010 resort auction. Hey, if you like skiing and have some spare money to put up, now is the time you can get a great deal buying up Steamboat Springs in Colorado, Mont Tremblant in Quebec or the majority ownership stake in Whistler Blackcomb really cheap.  I assure you if you do, you will own some incredible real estate with absolutely priceless views. Too bad, however, how the Canadian Ski Council reports that the number of skiers and snowboarders that hit Canadian slopes fell 10 per cent last season, to 18.4 million visitors, from a record 20.5 million visitors in the 2007/08 season So, I recommend, if you buy, don’t count on robust cash flows to carry any debt you might take on.

Today, Alex’s business is acquiring distressed and off-strategy financial assets and providing related advisory services to financial sponsors and companies in distress. I can tell you that he’s primed and ready to clean up lots of corporate debt disasters because he’s expecting the current trickle will soon turn into a flood. That’s why, if you know of a situation worth saving, don’t wait too long to call him, for even his time and resources have a limit.

Business Wrecks Like Car Wrecks Hurt Real People

As I mentioned above, I believe corporate wrecks should get more public visibility. They should be seen and hear like car crashes, not like trees falling deep in the woods far away from everyone’s notice. The more business people get to see about today’s all too common corporate failures, the more they will realize how all too easily they could see their business go out of control and have an accident where the company has a big crash and burn.

When corporate insolvency disasters happen, real people and real companies get hurt. Some see their business careers or corporate existence killed. And because of the domino effect, the trauma and economic destruction usually spreads far and wide. Too often these situations never take-on a public face, but that makes them no less real.

A local example of this has been Burlington Technologies Inc. (BTI), a Canadian owned Tier 1 automotive parts manufacturer here in Southern Ontario, which went under in late 2008 and got reorganize and sold off to a US company in spring last year.  Now according to court filed documents, BTI at the time of their failure had a huge debt burden of some C$70 million. This was clearly excessive because the Company’s revenue was only C$89 in 2008 having fallen from C$107 in 2006, and no company in the skimpy profits auto parts industry could ever earn enough money in any reasonable period to service and pay-off such a debt load.

Here are the BTI backers that suffered big time losses from their ownership’s bad management:

  Royal Bank – commercial bank’s operating loan:          C$15.0 million
  Royal Bank – commercial bank’s capital leases :          C$16.0 million
  Maple Trade Finance – asset based lender:                  C$  4.8 million
  Export Development Canada (“EDC”) – insurer:           C$  5.2 million
  Aleris International Inc. – aluminum supplier:              C$  6.0 million
  Trade and other creditors:                        in excess of C$10.0 million
  Secured cash contributions by BTI owners:           over C$17.0 million

  BTI Grand Debt Total at time of failure:      over C$74.0 million

Now I know two people who personal lost big time as a result of BTI’s failure.

First there’s Peter the super B2B auto parts account / program manager. He tells me he got cheated out of about $40,000 in sales commissions by his being arbitrarily shifted from working for the main BTI company to supposedly working for a subsidiary they then let go bankrupt. And now, he’s out of his job and with no money to sue. Furthermore, his reemployment prospects are really dim given the state of the car industry today. What the future for Peter and the many other well educated, really capable unemployed like him will be is a real guess. Likely he and they will be having to do without much for quite some time. (Anybody out there in auto parts or related sectors that needs a proven successful business development person, please call me as I’d happy to refer Peter to you.)

Second there’s Arnie the machine shop owner. Now Arnie’s company took a huge loss of close to three quarters of a million on BTI going under and it just about killed the company. Even today, having won a new contract from GM, he’s still running hard to get off shaky ground. I’m praying really hard that Arnie’s company doesn’t become a delayed casualty of BTI’s bad management and ownership practices. If BTI had been better and more prudently run, they’d be still here today, maybe bloodied and bruised, but still in the parts game and owned by the Ken Carpenter family.

Other victims of the Burlington Technologies failure are the nameless, faceless hundreds of people who lost their jobs as a result, as well as the numerous smaller BTI suppliers that are forced to die lonely corporate deaths with little to mark their graves and few or none to eulogize their lives.

Business Lessons Out There For All To Learn

Too many overwrought business strategies fail because entrepreneurs and CEOs and the boards that back them get to impatient to get rich. Yeah, I know that business is all about taking risk, but such risk shouldn’t be rash, imprudent or reckless. Companies are legislated entities that have been structured to endlessly survive which is why those who run them should manage things in such a way that they and their company will always be there able to ‘play another day’. Really, this is the only approach that honours the true long-term interests of shareholders.

Unfortunately, too few are prepared to settle for quiet, boring success. It’s too slow or not enough for them. I guess that’s because the alternative is so much more dramatic and ego appealing. Maybe this happens for competitive reasons, for when investment bankers supported by far-right, over-privileged, irresponsible, rabid Republicans and their like are all taking home tons of ill-gotten gain earned from selling bad investments to an unwary and returned-crazed public, how could any of the rest of us in business long resist the urge trying to gorge at the profit trough as well?

But now that we have paid the price of all that, maybe we can appreciate how managing to at least ensure boring-quiet-success is the best way to run a business.

Many now say the Canadian Banks represent the best example of how to prudently run a financial institution even though they too all suffered high loan losses. Given the prudent approach that regulators and their relatively smaller sized enforced, I do agree they are fine examples but there are others to be found elsewhere as well. One American boring success story to consider is Bank of Hawaii, which made good money last year in the midst of the financial crisis.

But if lessons from the world of banking don’t seem that relevant to what you do, take some time to reflect on those big and small corporate wrecks shown above that made the news today. There but for the grace of God go you too.

So next time you face an big business decision, or get all revved up with thoughts of big profits to come, remember to consider the downside that might come from what you do.

Because in life and in business serious miscalculations can significantly hurt or kill you and your company, take comfort by conforming your actions to the knowledge that business fame accrues only to those who mange to stay in the game. Like how shooting stars are but flashes in the sky in the process of duding out, don’t go trying to join those impatient business leaders with big egos and (over) ambitious plans that seem never to survive their shots at fame.

Real money takes time to make. That’s why you should play the odds of gain in business with a primary view to safety, not upside. (That’s the secret behind how Warren Buffett became the richest man in the world.) I assure you that you think safety first, gain second, you ’ll feel so much better in the morning if you do. Many that depend on you for their well being and livelihoods will thank you in spades too. Don’t make the alternative of your showing up as a corporate wreck in the business news someday become your fate.

Related Articles:

How did Intrawest rack up so much debt?

Auto parts supplier gets bankruptcy protection, cuts 130 jobs

Canadian Diecaster Makes Bankruptcy Claim

Cerion LLC and parent company Revstone Industries purchase assets of Intermet, two other struggling diecasters

© Blog.TonyJohnston.biz & Compass North Inc. 2010

Article by –

Tony Johnston, CMC, CGA, MBA, BA (Econ)
President
Compass North Inc.
18 Balding Court
Toronto ON
M2P 1Y7
Office:  416-342-5652
Mobile: 416-346-4140
www.CompassNorthInc.com
www.CNiRapidResearch.com

Tony Johnston is a business results specialist, top level executive and management advisor. Having successfully led 4 turnarounds and with many significant operations, deal making and finance oriented accomplishments to his credit, Tony helps companies drive:

› top line growth (revenue)
› bottom line improvement (profits)
› cashflow management (credit line control)
› growth strategy (more / new)
› financing & stakeholder relationship management (debt / equity)
› enterprise value maximization (mkt price)
› acquisition planning & execution (find / close)
› divestiture preparation & execution (prep / negotiate)
› information gathering (competitive intel / market research)
› crisis control (turnarounds & wind-downs)
› enterprise leadership (CEO / CRO / CFO)

Compass North Inc. is a management & advisory services firm that helps companies achieve important, challenging operational, financial and transaction oriented goals. Examples of what we do include helping companies and their owners:

– make better decisions by providing customized competitive intelligence,
– grow by crafting strategic plans and implement them,
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– borrow more money and/or raise more equity, and
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   transitions.

Bottom-line: The benefit that Tony and Compass North Inc. deliver is helping company owners maximize both what they earn while they own their business and what they bank when they sell.

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Comments

5 Responses to “Debt Chickens Coming Home to Roost”

1. BizSugar.com
   January 22nd, 2010 @ 10:04 am

   Debt Chickens Coming Home to Roost | Biz Money Matters |…

   Bankruptcies really are like car crashes. Most times with more prudent, careful driving they could be avoided. That is why business owners and company leaders need to think safety first, gain second before they go and take on significant business risk….

2. Anita Campbell
   January 25th, 2010 @ 9:45 am

   Hi Tony — good piece!

   I agree with a lot of it, although I think you’re unfairly placing the blame on Republicans. The Democrats as well as the Republicans have equally been co-opted by big business, big labor, special interests players like George Soros, etc. They’re just different special interests in each case.

3. Tony Johnston
   January 25th, 2010 @ 3:20 pm

   Anita,

   Thanks for your much appreciated comment and feedback.

   Calling me out of the Republican reference is fair. Certainly, I do not want to suggest the Democrats have that much to crow about, particularly lately, other than the fact that they are not the party who gave the world the Bush/Cheney dynamic duo.

   No, to clarify, I was taking a shot at ideologues, who in the context of the US right I describe as ‘Rabid Republicans’. This elitist group from the time of Reagan forward has, I believe, abused rightist principals to create a modern day ‘capitalistic wild west’ where they could take all they wanted regardless of the risk and hurt to the wider economy. Indeed, I think the ‘Rabid Republican’ cabal played on the ‘big Government’ fears many Americans have to bring about, certainly in the financial markets, a situation where effectively there was no Government moderation, no effective regulatory control, and no level playing field. And now we’re all paying big time for their self-interest, greed and irresponsibility.

   Heck, why was that allowed to happen? Everyone knows how in sport, be it golf, football, baseball or whatever, fairly contested games can never happen without first there being unbiased rules and empowered referees in place to control the competition.

   Personally I’m a centrist, somewhat right leaning small ‘c’ conservative on business and economic matters, and slightly left leaning, small ‘l’ liberal on humanistic matters. Not surprisingly, therefore, I advocate that we the majority best avoid at any and all cost all ideologues who say ‘I know better than you’, ‘here’s what I say you must do’ and ‘this is what I want and I don’t care about you’, no matter be they ‘Rabid Republicans’, McCarthyites, Marxists, Taliban, Special / Narrow Interest Groups or any other type of self-interested, self-serving, domineering extremist of any ilk.

4. Tony Johnston
   February 4th, 2010 @ 12:19 pm

   The following is 1 comment that was posted on the THOMAS PROFESSIONALS: Toronto / Hamilton / Oakville / Mississauga And Surrounding Professionals Group Discussion page:

   Thanks for your article Tony, very good and I appreciated the “imagery” as it is a good way to relate.

   Suzanne Soto-DaviesEditor & Publisher at Silver and Gold Magazine (http://www.sngmagazine.com/) – Posted Jan 23, 2010

5. Sales Training
   February 6th, 2010 @ 3:35 pm

   The question comes down to who is driving and who gets hurt. If I want to gamble my future and end up in bankruptcy, so be it. The problem comes when I ruin the lives of my workers who were not in it for the risk. A healthy amount of risk is always necessary to build a free economy. So is a healthy amount of respect for the passengers who are likely to crash with you.

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