Vertical Pulse

China is an Aggressive Acquirer

In 2007, Chinese companies have spent $29.2 billion acquiring foreign companies while investors from the rest of the world have bought $21.5 billion of Chinese companies. In recent months, Chinese entities have taken large stakes in companies such as Morgan Stanley, Standard Bank, Blackstone, Barclays and Fortis.

The implications of China acquiring American companies is the focus of several events hosted by the Business Development Academy. Visit www.bdacademy.com or call 609-919-1895 ext. 100 for more information.

Patience Is A Virtue

The much talked about era of distressed funds has yet to arrive. Don't get too impatient. Many analysts  expect a slowdown in corporate profits over the next 12 months, which means debt-laden companies could struggle and eventually become crippled by a slowdown in the global economy.

"A net 60 percent of fund managers now expects corporate profits to deteriorate in the next 12 months — the most pessimistic response in almost a decade — while a net 62 percent expects the global economy to weaken," a Wednesday Merrill Lynch press release states. If this prognosis is correct, distressed debt funds and vulture investors will shine in late 2008 and throughout 2009.

"Investors' love affair with emerging markets continues despite a sharp rise in the number of fund managers expecting a slowdown in China's economic growth. A net 25 percent of respondents expect the Chinese economy to weaken in 2008. Only 4 percent in took this view in November," Merrill analysts found.

I would imagine distressed debt managers will wait for bond valuation to come more in line with market conditions. The Merrill poll found that a net 13% think equities are undervalued while a net 43% believe bonds are overvalued.

These are some of the issues that are discussed at IncreMental Advantage's conferences. For more information please click here.

Indian Pharmaceuticals

There was an interesting article in The Wall Street Journal today about Indian drug firms. According to the article, Indian generics makers such as Cipla and Glenmark are working to increase sales domestically and in emerging markets. Analysts estimate Indians will spend $30 billion a year on drugs in the next decade or so, up from $8 billion currently. Also, Indian generics companies stand to gain as multinational drug makers reduce costs by shifting drug production from high-cost locales such as the United States to India.

The Business Development Academy is running a seminar on Managing Intellectual Property in India in early 2008. For more information, please visit www.bdacademy.com.

Commercial Loans Experience Delinquency Uptick

According to the November edition of Real Estate Forum, "CMBS delinquencies continued to climb for the second straight quarter ... [which] jumped 16.2%, with $1.9 billion in loans being late, up from nearly $1.7 billion during the second quarter. Of the overdue paper, loans originated in 2005 and 2006 saw the biggest hike."

The delinquency rates will only increase as commercial mortgage-backed securities reach their peak default period in the next three to four years. Of all types of commercial activity, retail delinquencies continued to rise the most. "At the end of the third quarter, the amount of retail property-backed loans delinquent was $408.8 million, a 56% increase from Q2 and a 90% increase since March," the article continued. Of course, the hardest hit retail loans were in areas where home values have fallen the most.

If CMBS continue to be delinquent and then later default, expect investors to get jittery about valuing these assets during uncertain economic times. However, at the same time, patient investors can scoop up these securities at a discount. Consider today's news in The Wall Street Journal that sales of all retailers excluding auto and parts dealers surged in November by 1.8%; economists expected a 0.7% increase. May be the economy won't slip into a recession after all.

These are some of the issues that will be discussed at IncreMental Advantage's March 25 & 26 real estate conference. For more information, please visit www.incrementaladvantage.com.

Business Statistics

There was an interesting article in The Wall Street Journal discussing people's proclivity to commit certain actions based on their names or initials. For instance, some studies have suggested that people with an "A" or "B" in their initials get better grades than those with the initials "C" and "D".

Many of these studies have very tenuous statistical underpinnings.

It is very important that business professionals understand basic statistics since your competitors, suppliers, and clients regularly use numbers to persuade you to adopt their agendas. Your ability to decipher the integrity of the numbers presented to you and the ability to detect lies masquerading as statistics will improve your decision making.

Understanding how to employ probabilistic reasoning in the quantification of risk allows the professional to better appraise and evaluate the cost-benefit of virtually all business and financial decisions. This course will help you base your decisions on firmly-grounded probability rather than wishful thinking.

These are some of the issues that will be discussed at The Business Development Academy's courses on Business Statistics and Statistics for Lawyers. More information about these programs is available at:
www.bdacademy.com.

Chinese IPOs

There was an interesting article on Chinese IPOs in The Wall Street Journal. Many Chinese companies are duel listing their shares in both Shanghai and Hong Kong. The Class-A shares are listed in mainland China. They typically command a 45% premium to the H-shares which are traded in Hong Kong.

These are some of the issues that will be discussed at The Business Development Academy's sessions on Doing Business with Chinese Companies and Managing Transactions in China. Further information is available at: www.bdacademy.com.

Mergers & Acquisitions of Chinese Companies

According to a survey by Duke University and CFO Magazine, 37% of Chinese companies surveyed plan to acquire other companies or buy assets over the next year. That compares with 40% of U.S. companies. Nineteen percent of the Chinese companies surveyed said they plan to sell all or part of their own firms.

These are some of the issues that will be discussed at The Business Development Academy's course on Chinese transactions. More information is available at www.bdacademy.com.

CDO Doom

The bad news continues for collateralized debt obligations. According to the Financial Times' Alphaville, "As of December 3, 33 CDOs have reported events of default to S&P." One CDO, named Adams Square I, was liquidated recently at less than 25% of par value. The FT is reporting that note holders received nothing. "AAA notes? Nothing. Not a penny."

"Proceeds from the Adams Square I liquidation weren’t even sufficient to cover the termination payments to the CDS counterparty (Adams Square is, or was, a hybrid CDO, containing straightforward ABS and also CDS on ABS). Unable to meet its CDS payments, Adams Square had to draw down the balance from the super-senior swap counterparty. Thus there was no money left to pay the actual owners of the CDO - the bondholders. Adams Square, which was arranged by Credit Suisse, had 79 per cent of its total RMBS collateral downgraded by the rating agencies in October," Alphaville reporter Sam Jones writes.

E*Trade's portfolio of ABS was valued at 27 cents on the dollar by rescue hedge fund Citadel. More and more information is hitting the street of CDOs and mortgage backed securities from liquidation events and sales, which will give everyone an idea of these securities values. Doesn't look good.

Rick Bookstaber writes about "mark to value versus mark to liquidity during market crises" issues that gets at the heart of most these issues. Its a good read and worth your time.

Also worth reading is Brian Wesbury's editorial in today's Wall Street Journal where he explores how a "desire for government intervention to fix problems that grown adults have created for themselves is dangerous." He focuses on government's handling of the sub-prime mortgage mess, which to say is probably more politically, than economically, motivated.

LBOs To Mirror Sub-Prime Sorrow?

For the last few months this blog's authors have stated deep concerns about the good possibility of a downturn in the LBO market in the near future. What everyone has seen in the tumbling housing market, and subsequently in the mortgage-backed securities meltdown, could be replicated in the leveraged buyout debt market. The Wall Street Journal and Barron's ran stories this week about how paper tied to businesses buried under LBO debt is selling at steep discounts in light of an economic slowdown or recession.

"Many LBO-linked senior loans are trading for as low as 90 cents on the dollar," the Journal reports. This does not bode well for private equity fund investors who may see their returns dry up in the coming months as portfolio companies struggle just to pay off interest on their debt. For instance, Apollo-owned Realogy, its "annual cash flow, which topped $1 billion in 2005, could drop to $700 million this year, meaning the company is barely covering its interest costs of $650 million. Next year could be even worse," reports Barron's.

The Journal's punch line: "Of course, private-equity firms have the luxury of waiting out bad markets, and the terms of their debt packages were excessively forgiving. It's a long stretch to say that overpaying for a company leads to bankruptcy. But it can destroy the lifeblood of the private-equity industry: returns. 'Their returns are less likely to be double digit,' said Jake Newman, a media analyst at research firm CreditSights Ltd. 'They won't be able to get out [of investments] as soon as they want. And there will be some that fail.'"

Some of the currently souring LBO deals both publications report on include:

• Univision's first-lien paper is trading at 91.6 cents of par
• Freescale Semiconductor's term loan is changing hands at 93.2 cents
• Realogy's 10 1/2% senior unsecured notes due in 2014 trade around 75 cents on the dollar and yield 17%, while the 12 1/2% subordinated notes due in 2015 trade for 62 and yield 23%. They were issued at about 98
• Linens 'n Things' debt now trades at about 55 cents on the dollar
• Swift Transportation 12 1/2% bonds were fetching just 52 cents on the dollar last week, for a 26% yield to maturity
• Bonds issued by Columbia Sussex (which acquired casino operator Aztar) were trading last week at 68 cents on the dollar, to yield 17%
• Claire's Stores subordinated 10 1/2% bonds of 2017 trade for 62, for a 19% yield
• Dollar General's subordinated 11 7/8% debt due in 2017 has fallen to about 80 from par of 100 when it was sold in late June, and now yields 16%.

For vulture funds and some hedge funds, I'm sure they will be making unusually small loans to ailing private businesses, who are desperate for cash infusions, in order to monitor their financial health. When the timing is right, these funds will swoop in and pick apart the carcasses.