9.18.2012

An Open Letter to CFOs Across America

Dear CFO -

I hope this letter finds you well. My name is Hunter and I started and currently run a collection of sites focused on credit - specifically distressed and speculative credit. Our readers come from across the world and include every major U.S investment bank and many hedge funds, law firms, and asset managers in the country. I've spent the majority of my career working in leverage finance as an investor allocating and providing capital to sub-investment grade issuers and companies in bankruptcy.

You might be wondering why I am writing to you today. As an active participant in both the primary and secondary credit markets, I spend a significant amount of time gauging the risk appetite of investors that provide financing in the U.S. bond and bank debt markets, up and down the risk and ratings spectrum. Simply put: You are doing your investors and your company a disservice if you are not tapping the credit markets as soon as possible. If you are not planning a new bond or bank debt offering, call your relationship manager at your preferred investment bank of choice and put the wheels in motion. Whether it be refinancing your capital structure, financing an acquisition, dividend, or share repurchase, or simply stuffing the war chest for a rainy day, I behoove you to issue into this market.

If you read the news and watch CNBC, you may assume all is wrong in the world. Unemployment rates are high, Europe is a mess, China's booming economy seems to be slowing, Middle East tensions run high, oil prices and food prices are rising, a significant fiscal cliff will hit America beginning in January 2013, etc. Of course, there are things to be positive about: Chairman Ben Bernanke is poised to grow the domestic economy with further monetary stimulus, Apple is selling a lot of IPhones, and the stock market continues to make new highs.

From your perspective, and for your shareholders perspective, one thing to be immensely positive about is the seemingly endless demand for credit coming from institutional buyers. Maybe its because we have been told that interest rates will stay low for the foreseeable future and investors are looking for yield. Maybe its because corporate balance sheets are robust. Its hard to actually pinpoint the exact reasons. With that said, you, as steward of your corporation's finances, need to use this voracious demand to you and your company's advantage.

Here are a few salient goals you can accomplish with tapping the credit markets today:

  • Lower your cost of financing
  • Extend maturities
  • Loosen terms
  • Remove covenants
  • Add cash to the balance sheet for that big acquisition you've been dreaming about.
If you are a more risky credit and have been told in the past that "the market isn't quite ready for you", I'm here to tell you things have changed. Tier 2 and Tier 3 investment banks and syndicate desks are bringing bonds and bank debt that are oversubscribed by institutional investors. Issuer's whose debt traded at double digit yields just a year ago are bringing 10 year paper with a 5-6% coupons. Investment grade issuers are seeing record tight pricing for their paper, and in spite of that, investor demand is insatiable. In the last few days, more dividend and shareholder friend deals have been announced in the bank debt market since the go go times on late 2006 and early 2007. Don't like covenants? Not a problem in this market.

Like all of us, you want to get ahead in this world. You want to do whats best for your company. You want to lower expenses, grow cash flow, and provide flexibility for your company for the uncertain road ahead. Take it from me: Issue a bond or bank financing. You won't regret it.

All the best,

-Hunter

15 comments:

Anonymous,  9/18/2012  

Do I sense some sarcasm in this post ? LOL

David Merkel 9/18/2012  

Hunter, what you are saying is that lenders are willing to give up safety to get yield. Who's buying? Has the CDO bid returned? Very interested in how well-funded the ultimate purchasers of the debts are...

Anonymous,  9/18/2012  

I hope this is an attempt to spur more bankruptcy investment opportunities for yourself; because if this letter is serious you have no idea how the economy works or any relevant macro insight.

Anonymous,  9/18/2012  

In response to ^ I think he is being sarcastic! At least that is what I got from it.

Anonymous,  9/18/2012  

He is not being sarcastic. The credit markets are in a frenzy, and sub-IG issuers are seeing some of the best yields in my lifetime. If I were a CFO I would be issuing (and locking in rates) as much as possible and amending/extending everything in my capital structure that isn't nailed down. New HY issuances are down ~200bps (in yield) in the last month or so.

Anonymous,  9/18/2012  

What's the downside vs upside of issuing debt right now?

Downside: If deflation gains traction, you need to repay expensive principal in 5 to 10 years.

Upside: You'll have cash that will give you a competitive advantage over your competitors as they IMMEDIATELY struggle with less revenue in a deflationary environment.


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Upside: In an inflationary environment, you're paying 4% interest while your competitors have to pay substantially more to issue paper.

Downside: Is there any downside to paying 2% interest when the inflation rate is 8%?

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It's a no-brainer.

Anonymous,  9/18/2012  

To continue on my comment^, here's a stab at the current general market view (this is just one analyst's humble opinion):

The Fed has more or less told the markets not to expect any recovery in interest rates for the short to medium term. Thus, anyone standing on the sidelines waiting for better yield has little choice but to jump in now, even if they're fully aware that in the long run yields have to come back up. Most asset managers can't afford to wait 12, 24, or 36 months for the market to turn. They need to generate returns for their clients over the next 90, 180, 360 days, or their assets will find new management who can.

Most probably reason that when the turn comes, they'll be able to get out before the rest of the market (and thus with their shirts). History (and arithmetic) says that a lot of them will be wrong.

Albert Fuma 9/19/2012  

They need to change the way they are running their business asap. America looks like it's going to explode if this
endures, just wait until inflation runs high - very high.

Anonymous,  9/19/2012  

What is the best way to express a view on this? I'm sure it will continue on for a bit. Not having access to things like CDS, would it be shorting JNK or some other high yield ETF or perhaps using puts at some point?

Anonymous,  9/19/2012  

Definitely an attempt to ensure huge distressed supply in 5 years...let's face it, the Fed is going to keep rates low for a long time - that's what they keep telling us. The next distressed cycle might take a long time to get here. Until then, he's right, every CFO in the US should be borrowing in this market, and probably should also be buying back a lot of stock.

Anonymous,  9/19/2012  

He is 100% serious in this post. I will remain anonymous, but my workflow is directly related to HY bank and bond issuance, and I have not been this busy in years.

Justdoit 9/19/2012  

Of course he is serious. Are you kidding. Anyone that doesn't understand this post shows a real lack of understanding. Why would a company continue to hold paper paying 7, 8 or 9 percent interest when they can refinance it at 3 to 4 % interest???? I own bonds in my employer with a 8 3/8 coupon. Why do they not call those?!?!?!? And they even owe Shylock Buffett money on preferreds. Damn get rid of him and those high rates.

Anonymous,  9/20/2012  

What make you think that CFOs have not or are not planning to do so? What worries people is when cost of credit is low, people will more MORE, rather than just refinance what they need.

Anonymous,  9/20/2012  

Relevant:

http://dealbook.nytimes.com/2012/09/20/cheap-loans-could-spell-long-term-headaches/

JN 9/21/2012  

First anonymous....I think you lack insight. This is how the economy works....fed keeps rate low to spur borrowing which they he will spur caped, hiring,etc...,( or maybe high equity/asset prices to boost the wealth effect). If you are a rationale CEO you take advantage of the low rates....eventually the boom turns to a bust and the cycle begins again. Econ 101

Email

hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.