Thanksgiving

We normally don't celebrate Thanksgiving here in Oz, mainly because there's no major sporting event we can associate with it and use as an excuse to drink while wearing team/national colours. However, I thought I might as well use the occasion to list some of the things I am thankful for... some career-related, others are just good things.

Rockett Fuel is thankful for:
- a family that kept me grounded, despite the potential for dizzying highs and lows of the job;
- Rockett Girlfriend, who put up with all the times I was late, or stood her up, or wanted to vent about some of the idiots I encountered at/through work... for making me feel like I can take on the world... and because we can use words like "equitable", "leverage", "portfolio" and "Quistclose" in normal conversation;
- my team, one of the most respected in the market, who endured my inane questions, took the brunt of some of my most wicked email retorts... who taught me that to be a good banker, you need to have truly independent thinking... but to be a great banker, you need to have the balls to tell those thoughts to your client - even if it means losing the business;
- for the red football in the office... hours of mindless 1am fun;
- friends in other banks and law firms... for remaining rather cheerful despite our situation... for the endless rounds of coffee, lunches, dinners, absinthe on my birthday, and entertaining gossip... and for the rare combination of being smart, well-paid, but not being total douchebags;
- friends who aren't bankers or lawyers... for pretending to be fascinated by what I do, for all the life advice, and for making life more fun;
- the drycleaning lady who had to clean my suit after my birthday party - fantastic job;
- junk food manufacturers, who fuelled many an all-nighter;
- all the finance blogs I follow (dealbreaker.com, longorshortcapital.com amongst others) which are much funnier than this one.

Looking forward to Christmas!

Under A Rock

Well, I semi-deliberately decided in the past few weeks not to blog because (a) there was too much change to adequately process - not that I did much analysis anyway; and (b) I was a lazy so-and-so.

This week I watched the movie "Match Point" on DVD. Why? Because I am a banker, and currently, bankers have no [meaningful] work to do, so we go home and do what normal people have been doing for years. (Some would ask why now, given bankers don't normally have meaningful work anyway, but that's a discussion for another time.)

Play ping pong. Be sexy.

For those who haven't seen it, the opening sequence of this movie starts with a ball hitting the top of the net, deflecting up in slow motion. The voiceover of our protagonist (played by Jonathan Rhys Meyers) observes:

"The man who said "I'd rather be lucky than good" saw deeply into life... There are moments in a match when the ball hits the top of the net, and for a split second, it can either go forward or fall back. With a little luck, it goes forward, and you win. Or maybe it doesn't, and you lose."

At the moment, that quote just seems so relevant right now. What a different world we would be in had events turned out differently. What would the world have been, had those infamous Hanging Chads of Florida not been so ambiguous?

I've been in a rather introspective mood the past few weeks, mainly because I now have more time than I know what to do with. While I firmly believe that I am in a good place (at least relative to some of my peers, I am sad to say), there is a certain element of luck involved. I could have been toiling away at another job with less intellectual challenge (and commensurately lower pay), had it not been a lucky coincidence that at the same time I resigned, someone else resigned and left the spot which I now currently occupy. Sure, I am now blacklisted by a large multinational bank, but it's just business (right?).

Just my luck as well that the credit crisis struck as I was hitting my stride, translating to thousands of hours of top-notch work, fully rewarded by... keeping my job. But then my luck could have been worse: I could be hearing about my team closing down through gossip from friends. Something I unwittingly unleashed on an acquaintance at a large Euro bank. Oops.

(Dear friend, if by some stroke of terrible luck you are reading this entry, I am so truly sorry and I owe several drinks.)

I am not entirely sure how much longer my too-short stint in the periphery of high finance will last. I would like to think I will find my feet somewhere interesting, ride it out a couple of years, and then see where God decides I can create the least amount of havoc. In the meantime, I WILL try to continue to blog about stuff I find amusing about my little slice of geek heaven (or what's left of it). Who knows, maybe this Obama guy might actually be onto something :)

My Quote of the Week:

"Global Language Monitor, which follows linguistic issues, reports that in the final debate, Mr. Obama spoke at a ninth-grade reading level, while John McCain spoke at a seventh-grade level."

Not sure which is scarier: the fact that Obama thought it necessary to talk down to 9th grade level, or that by talking down to 7th grade level, McCain managed to win 46% of the popular vote.

US Investment Transaction

Making the rounds... (courtesy of several websites)


From: Henry Paulson
Date: 9/23/2008
Subject: Supper secret transaction Need you're help

Bright Greetings Dear American:

I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.

I am Ministry of Treasury of the Republic of America. My country has had a crisis that has caused the need for a large transfer of funds of 700 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.

I am working with renowned Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.

This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for reliable and trustworthy person who will act as a next of kin so the funds can be transferred.

Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we transfer your commission for this transaction. After I receive you're information, I will respond with detailed information about safeguards that will be used to protect the funds.

Wonderful salutations to you cherish friend from Republic of America.

Yours Faithfully Minister of Treasury Paulson


BONUS - Aussie market humour (courtesy of the SMH):

Market humour is doing the rounds while the Prime Minister is at the heart of the market chaos. We can see it now. Imagine Kevin Rudd back in New York at the night club Scores.

Imagine him seated in front of stage where a dancer with her back to him appears not to be wearing a top. Rudd, ever the policy junkie and only too aware of the market turmoil, notices the dancer's flimsy underwear, turns to his financial adviser and says: "I think I'm going to put a ban on shorts."

Art of the deal

I like it.

http://www.portfolio.com/slideshows/2008/09/cartoons0912

And then there were two... or is it one

On Monday, after hearing about Lehman Brothers and Merrill Lynch, I jokingly said to a colleague, "not long now before we only have two banks left: the US Treasury and Goldman Sachs".

Three days later, one of the biggest serendipitous calls of my life may yet come true: bye bye Morgan Stanley.

Speed dating

Wow.

Like the ugly tag-along to make up numbers in a speed dating session, Leh Man gets a "not compatible" vote from not one, but two well-endowed suitors: the Yankee, Bo America, and that uptight Brit, B. Clay. (I use the term 'well-endowed' loosely... if you're desperate, you can't complain.)

Except Leh wasn't even dumped for the hot one... she got dumped for just the second-ugliest girl in the joint, Merrill. To his credit, B. Clay was smart enough to avoid the beer goggles and walk away after the dating agency declined to give a "100% satisfaction or your money back" guarantee.

How long before the market is reduced to just the US Treasury and Goldman Sachs?

Mark To Market Doughnuts

You know that financial writedowns are having real economy effects when you see this...

If you like that, I also have some BBB loans at the same rate...

In other news, self-fulfilling prophecy #2... Lehman Brothers. Hedge Funds 2, Investment Banks 2,598,451 (counting impact of IB-created structured securities).

FM and FM now BFF with US TSY

Just a short one tonight.

The big news, of course, is that Fannie Mae and Freddie Mac, the two mortgage giants that underpin the US mortgage market, will be placed into conservatorship by the US Government in further attempts to stabilise the housing market and the financial system.

Markets around the world rallied on the news, with financial stocks (unsurprisingly) taking a large slice of the gains. But here's my question (and this is something I'd be happy to have explained to me): given that Fannie Mae and Freddie Mac had been treated like quasi-government agencies to begin with, what actual advantage does placing it into conservatorship actually create? Had this not happened, the US Government would still have had to bail out the twin entities one way or another, to prop up the mortgage market and ensure that the MBSs issued by the banks have a buyer.

One can argue that, by turning the implied government guarantee explicit, declines in mark-to-market valuations of mortgage securities will slow or even reverse - thus providing impetus for market recovery. However, I see this as merely a short-term impact. The root cause, the cycle of housing downturns resulting in defaults and negative equity, has not really been resolved. Let's say this action results in some settling in the market, translating in easing of credit spreads above Treasury rates. This leads to some easing in the debt service costs of home mortgages. This is great news! Unless, of course, you are a subprime borrower - you are still shut out of the market. At its peak, subprime accounted for ~20% of home loans... taking out that much money from the system is not something you recover easily from just by lowering the cost of borrowing by a few part of 1%.

The real positive impact (and it has to benefit SOMEONE, since it's not immediately clear that taxpayers/homeowners will) may actually be that this process essentially turns corporate debt issued by Fannie and Freddie into government debt issued by the US Treasury... which is fantastic if you are a central bank or superannuation fund who invested in Fannie/Freddie bonds. I mean, US Treasury bonds, backed by a government with ballooning deficits and supported by a slowing economy, are the best proxy for risk-free assets, right?

Having said that, the greatest investor of our time disagrees with me, and he's had more time to think it over, so I may just be having a cynical moment.

UPDATE: Link to an article from the legendary Roger Lowenstein. Next up, let's play a game of "What Disaster Will Today's Morally Hazardous Actions Lead To?". At current pace, the next one should only be five years away.

Rockett Trails

Thought I might do this before I go home, since I do need to sleep once in a while...

- Bankers snubbed. But then, if there are no bankers, who are they going to screw to finance their latest silly "creative outburst"? With trust funds at all-time lows due to the current market crisis and Mummy and Daddy going on long, expensive SKI (spending kids' inheritance) trips, I foresee a long-term decline in clubby clubs, and the eventual lifting of banker bans.

- Research to prove what I had always known. Now that we have proof that the optimal genetic portfolio must contain proportions of both Black and White, I contend that even better genetic portfolio returns are achievable by having an Asian exposure in the genetic portfolio. I contend further that, with the right SPV structures, one can create super-returns through Mixed-squared portfolios. Sample portfolio shown below*:

* Past portfolio performance does not guarantee similar future performance. Please consult your adviser before investing.

(We like balanced growth portfolios here in Rockett Fuel.)

Why I should be paid more

My employer suffered a 19% share price slump in the three weeks I was on leave.

Fancy that

I've revamped my links using Google's/Blogger's new features.  I think it's kind of cool - also makes it easier to fish for blogging ideas.  Except I'd really prefer to have "Business only" Reuters newsfeeds.  If you know of any other blogs, news sites, and websites worth looking at, let me know!

Bankers vs Management Consultants

Another article to fan the flames of war between Bankers and Management Consultants (needs subscription to McKinsey Quarterly).  According to the article:

"A shortage of strong internal candidates for critical positions will force European banks to overhaul their talent-management efforts in order to stay competitive and ensure strong growth."

Bankers will point out that this article (a) is stating the bleeding obvious, and (b) simply contributes to the already-low employee morale by vaguely referring to some of them as 'second-tier talent'.

Consultants will point out that (a) hey, they're just telling everyone what bank executives told them, and (b) they added value by stating the bleeding obvious in prettier pictures.

LINK DUMP!!

CBA looking to acquire Australian arm of ABN AMRO.  From what I've seen for some time now, CBA has been a relatively distant thought in the corporate finance arena (with possible exceptions in project finance and equity sales), while competitors NAB, ANZ and Westpac have been relatively known quantities due to broader and more aggressive offerings.  This, along with the Westpac/St George merger (which is still unfinished, by the way) will tilt the game somewhat.

A new race for the North Pole is born.  Polar bears ponder shaving and migrating to more tropical regions.

Nick Moore at MQG must have put on a great song-and-dance number to get the 12% one-day bump up yesterday.  Disclosure 1: Rockett Fuel has MQG shares.

Via Dealbreaker: amusing job ad.  Even more amusing are the commenters all trying to out-geek and out-quant each other over a simple "heads or tails" exercise, while simultaneously failing in basic counting when trying to respond to each other. 

Will be back in Sydney by this time next week... 

London!!

In the rush leading up to the London trip, I haven't had a chance to write Part Two of the Conference.  In any case I will have to revert back to my notes (conveniently still on my work desk), so that will have to wait a little longer.

I had lunch with a contact based in London, who confirmed what I've only read about to date; essentially, the London market is stuffed.  Deal volumes are down, only mild improvements in debt overhang, with recession prospects and a depreciating sterling likely to magnify the problems.  While the investment banking employment market is not entirely dead, you do need to look harder for the right opportunities.  It was certainly a very informative chat over a couple of beers (plus some free advice on the London lifestyle), and certainly someone worth staying in touch with.

An interesting development in London (and one more than likely to be repeated in Australia) is the increased use of mezzanine debt and equity/quasi-equity to take up the slack from senior debt.  While more expensive, the non-cash nature of the costs means that it improves the cash conservation of a deal, improving debt serviceability to make the deal palatable for senior and subordinated debt investors.  

We are seeing a slow but steady move towards mezz debt in Australia; in fact this was one of the key topics discussed at the conference.  How well it gets accepted I think will depend on arriving at terms that maintain the right risk-return metrics as well as the senior ranking against equity.  Will mezz holders get pro rata benefit from dividend recaps?  Are equity kickers the way to go?

Overshadowing all this (and may possibly render it all moot) is that the credit crisis has not fully unravelled, and it is now widely accepted that it is impacting hugely on the economic fundamentals.  Combined with higher commodity prices feeding into higher inflation expectations, the questions will need to move from "how long will the credit crisis last" to "how long will the slower growth in the developed economies last".  One imagines that economic fundamentals will take far longer to turn around than declines in the debt or equity markets, but one that feeds back to the prospects of those tradeable securities.

Conference, Day One

I got back from the team offsite conference just a few hours ago. It was interesting finally getting to meet the rest of the team in Melbourne and New Zealand, as well as a lot of other people from other units (Credit, Syndications etc) who I have spoken to on the phone regularly but haven't properly met face-to-face.

The two-day conference went well enough. The first day was essentially the "team building" day and the second was the "strategy" day. Some observations which I thought were relevant or amusing:

Double Agent
With the right type of information and appealing incentives, mistrust and accusations skyrocket at the slightest hint of unexpected behaviour. The "right type of information", of course, being a lie.

Weak Links
Team-building activities tend to have the ironic effect of revealing that, as much as we like to think that we work best as coordinated teams, we can actually derive just as much value by being a loose collaboration of individual performers.

Too many cooks
Having two Global Heads, plus a known extrovert, in your corporate games team is a surefire way to see a leadership struggle unfold.

Does this mean anything Part I
I was in the same team as the Global Kahuna of Leveraged Finance, and the Global Head of Syndications. In the first game we played, they both participated, and we lost. In the second game we played, we were running behind halfway through the game; but then both Global Heads left during the game to take phone calls. The team (sans Heads) managed to catch up and almost steal the second game.

Does this mean anything Part II
There were six games played all up. We won two games: one involved throwing bags at numbers, the other involved finding and touching scattered numbered cards in ascending order. In classic Rockett Fuel geekdom-inspired dry humour, I went up to the Global Kahuna after winning the last game and deadpanned: "So we can win games that involve numbers." It was the first time he laughed during the games.

I overheard him repeating my lame joke at the bar later that night.

Unsure if this is a compliment or a hex
Global Kahuna talking to Director, No Credit: "There's two really hard workers in our team; Rockett Fuel is one of them."

On that note, I will keep my mobile turned off during my London holidays.

Serendipity?
My new line manager (after my previous one left to join the Dark Side), on me securing a seat at the geek table that just happened to have all the bigwigs in it: "Nice work getting into the head table."

Not that I planned it; when I walked into the dining room, I was just thinking "crap, I forgot my glasses. Now I have to sit at the front".

The relatively more informative Day Two commentary will be posted later.

Frustration

One of the frustrating aspects of my job is that, because we are the key point for the transaction, all the peripherals that were previously attached or have since been attached to our transaction becomes MY problem. Disregard the fact that the silly bilateral facility out to a tiny JV in south Kazhakstan is 0.000001% the size of the leveraged transaction I continue to manage (God knows why when we can easily be free of the problem for 70c on the dollar). The seemingly harmless note that it is unsecured is enough to send the Credit Chain Gang into a frenzy, and demand reams of useless information simply so they can "assess" whether it's better to demand refinance of the pimple facility now (assuring no payment and the ire of the borrower), or give them 30 days to do it. Geez guys do you really need the 5-year forecast to make a decision?

In other news, I continue to lose money on all the stocks that I have not yet been banned from trading. Which unfortunately consists almost entirely of financial stocks, because our silly "Four Pillars" policy and the fact that no one wants to touch them with a barge pole virtually guarantees no deals... for now.

Career-wise, we have had some pretty heavy losses - a very experienced director has switched to the Dark Side (PE), and another manager has gone to the Land of the Long Lunch (Syndications). Interesting since finance is supposed to be seeing a slowdown in hiring. There is now an unofficial ranking table on the biggest flight risks in the office, which would probably work better if people weren't such rampant liars about the interviews they are going to.

For what it was worth, I told my new director exactly what had been discussed with my old one, where I thought I was heading, by when, and my key development points before the deadline. It is an unfortunate irony that, while every team would love to have a stable core, in reality it creates serious problems of its own. Excluding our graduate/model monkey, everyone on the team has been there around 15-18 months or more. Naturally, this bunch of overachievers will all be angling for promotions by end of the year. In a high-octane, tight-knit group, promoting one person over another will inevitably cause serious disruption to the team's chemistry. It makes for a very interesting analysis of the Flight Risk Table rankings. It would be funny, I think, to find out that someone believes my eerily normal behaviour, coupled by steadily increasing number of coffees per week, translates to multiple interviews each week. (My coffee meetings are all legitimate business, by the way.) Overanalysis is fun to watch.

I will be off to London in a couple of weeks for some R&R. Hoping to catch up with old friends, I'm sure some of them will have plenty of time to spare, given the wrath of Bernstein's Gods is on a rampage over there. I will of course endeavour to get a feel for the situation there (as much as I can get a feel for in between pints of beer, anyway), and write about it here. See how we go!

Death and reanimation

RIP Bear Stearns. One day, when the "behind the scenes" book about your demise is written, it will sit proudly next to my copy of "When Genius Failed". Delicious irony.

Anyway, Rockett Fuel is alive and relatively well, and will AGAIN try to blog more regularly. I just had to mark the occasion.

JP Morgan and Bear Stearns

Just a very quick post on the very interesting deal that is JP Morgan's offer to buy each Bear Stearns share for 0.05473 JPM shares.

At close on 18/03/08, JPM closed at US$42.71 (notional value of the offer is $2.338), while BSC shares closed at $5.91 (and I'm sure the hedge funds have already taken their positions to arbitrage this).

Does this really improve BSC's chances of attracting a higher bid (from JPM or someone else)?

And with Goldman Sachs, Morgan Stanley and Lehman Brothers announcing results better than or in line with expectations, will there be someone out there thinking we might be out of the woods, and the window of opportunity is slowly narrowing?

Brain teasers

Some brain teasers (along with other interview questions) kindly posted here. Apparently these are used in interview with investment banks. I have heard some get used, but most interviews I've gone to were either very technical (discuss DCF, how do you get WACC, why are AA-rated CDOs great investments for local councils with little to no sophisticated investment expertise), or very personality-based (what did you do when someone got all the credit for all your hard work? [hint: if you say "I hid his body in the river", remember to laugh]).

Anyway.

With graduate interviews coming up, here are the brain teasers and my attempt at answering them (quiet night at the office):

1. What is the present value of a zero-coupon perpetuity?
   [Ballsy answer] There are two key variables: are you selling it, and who are you selling it to.
   If you are the one tasked with selling this bond, the PV will be equivalent to the arranging fees you managed to charge the CLO into which the bond is going to be stuffed into before being on-sold to abovementioned local councils.
   If you are the buyer, and a local council as well, then simply put a "-" sign in front of the above calculation. But at least you learned that there is a high correlation between investment returns from local unemployed liars and returns from overseas unemployed liars.
   
   [Real but boring answer] Zero. A zero coupon perpetuity bond will give you zero cash flows forever. Although just the fact that you called it something fancy like a "perpetuity" would have probably been enough to sell it to some poor sap.
   

2. It’s 9:45 pm, how would you go about finding the angle between the minute and hour hand?
   [Ballsy answer] I would turn on the light, look at the clock, then point at the angle.
   
   [Real but boring answer] At 9.45pm, let's use the minute hand (pointed at "9") as the starting point. At 45 minutes, we are 3/4 of the way to 10pm, so the hour hand should be 3/4 of the way between "9" and "10". We know that the angle between hours is 30 degrees (360 degrees / 12). So the angle between the hands should be 3/4 * 30 = 22.5 degrees.
   

3. Two boats are going at 10miles/hour. They are 5 miles from one another. How long before they hit?
   [Ballsy answer] Depends on whether he chickens out.
   
   [Real but boring answer] Trick question. Which direction is each boat going?
   

4. What is the sum of all the numbers between one and one hundred?
   [Nerdy but wrong answer] 5,050. An old trick is to go (1+100) + (2+99) + (3+98) +...+ (50+51), which is basically 50 sets of 101.
   
   [Real but very correct answer] 4,949. Note the question said "between one and one hundred".
   

5. If this table was full of pennies, do you think they could stack up to measure this building?
   [Ballsy answer] Well, some guys might think their penises could stack up to measure this building, but they're delusional because none of them would even stack up to measure a ruler. Except me. [Whisper whisper.] Oh. Wait. Oh right. Sorry. I have mild dyslexia. I was telling the truth though.
   
   [Really ballsy answer] Sorry I don't know what pennies look like, can we use $100 bills instead?
   
   [Real but boring answer] Another trick question. It depends on the area of the table, how much weight it can support, and in fact how many layers of pennies does "full" mean (i.e. is covering the entire area of the table with one layer of pennies considered "full", or is it as many pennies as you can stack on the table until it buckles under).
   

Sprains

I badly sprained my ankle (and quite possibly tore a ligament, as yet undetermined) playing some after work sports and, stupid me, limped back to work to finish off a couple of things and pick up my stuff. This is obviously the exact opposite of the RICE principle used to treat sprains. The brave front I put on at work ("it's just a sprain, I'm not infectious") was quickly shut down by my doctor the next day, saying it was quite silly I'm still walking around on it and making it worse than it already was (it had bloated to the size of a melon overnight and cause some serious pain, and therefore cursing in between microsleeps). So I had to take the last couple of days off to keep my leg elevated every hour or so and undo my self-inflicted damage.

Being stuck at home on a work day is really crap. For one, I can't play office soccer because all the breakables are at my expense. Another is the fact that I missed out on Friday night drinks, which is particularly important tonight as I was scheduled to catch up with various friends I have not seen for a little while (apparently my fault, but whatever). I did have the option of going to drinks supported by my crutch, but somehow I don't think it qualified as "acceptable accessory" in the pretentious bar scene that this stupid city is so desperate to cultivate. Not worth the trouble.

Anyway, the one good thing is that I can do a link dump of all the fun things that recently happened:
- ABC Learning (ASX: ABS) continues its trading halt. I once had some money invested in this company, and fundamentally speaking the business idea is great, the capital structure just really sucks in the current market. Whoever is trying to buy it at current prices will pick up a great bargain... if it has a healthy balance sheet itself.
- Every company that says anything spooky becomes a takeover target; IAG is the latest in a recent line that includes MFS, Allco, and ABC Learning. Interestingly, not the Macquarie Group.
- With this much money disappearing, why aren't any hitting my pockets? Are my pants not baggy enough?
- Rockett Girlfriend has a certain affinity for this firm at the moment. And I know that one day, calling this firm "Allen's Ovaries" will get me in trouble with an actual lawyer working there.
- By the way, Rockett Girlfriend totally missed out on proposing to me on Feb 29, so her loss. I better get a decent present from London to compensate.

EA, Take-Two, and why I love games

Electronic Arts, the biggest video game maker in the world, offers $26/share of Take-Two, a 49.8% premium. This comes a pretty good second on my list of "Dream Deals To Work On", after a potential takeover of Limited Brands. Sometimes (relatively OK capital markets aside) I absolutely hate working in this backwater colony of a city.

Take-Two board and management will be hard-pressed to justify rejecting this deal, given current markets and the relatively high premium on the table. Other thoughts on the matter:
- it will be interesting to see what the "crucial initiatives" are, and how certain these are to create value for shareholders.
- at the heart of it, video game creation has common characteristics with other R&D businesses. It is a capital-intensive enterprise, even more so for Take-Two, who have specialised in creation of large, complex and immersive 3D worlds. It has a bit of a "hit or miss" nature, and missing is very costly. Eventually, franchises will have to be revamped or replaced with new ones, and the result may or may not appeal to players.
- The very nature of Take-Two's most popular franchises (M-rated or higher) means a fair portion of the gaming population (kids under 15, females) are unable to get into the games, and a fair few others who can play it, won't, because of the large time investment involved in some of these games (a general criticism for most game makers, but still applicable).
- On the other hand, having a successful stable of franchises is half the battle, both as sources of relatively dependable revenue (from sequels), and as a legitimising factor when launching new franchises ("these guys created Grand Theft Auto; they know what they're doing"). Success breeds success, and all that.
- What exactly does EA see that the market didn't? Do they really think the franchises, the game brains, and the marketing team are worth 50% more under EA management than on their own? Is there alot of fat in this business? Is it just to take out one of its serious competitors? And is that really good for gamers?

On a somewhat related note, given the current development in video game technology (both computing power and the ability to create highly complex worlds with realistic and causal parts), why is there such an utter lack of good business simulation games? I think we are well beyond the "Tycoon" and "Sim" simulators that keep getting churned out, which tend to focus on closed systems (zoo, theme park, etc) rather than a full-scale corporate environment with many industries all interacting, competing, cooperating, and co-depending. If I build a theme park, I want to be able to sell the damn thing to Disney! While of course remaining as owner of the plot of land, charging exorbitant rent, and using this cash cow to fund the growing army of politicians I employ.

Imagine playing as a private equity barbarian, a hedge fund activist, or the CEO of a Fortune 500 (or a startup!). Imagine getting calls and emails through your Blackberry, which causes you to rush out of some inane meeting, just so you can send instructions to your "executives" about that hostile takeover! Imagine being Greenspan or Bernanke, overreacting in a dizzy panic and unwittingly setting off the start of a new bust several years in the future!

I love games.

Intelsat

Thanks to Going Private for writing about this interesting deal.

Intelsat key stats:
Initial equity investment = $128M
Investment period = 37 months
Current (last sale) equity value = $1.2B
Estimated IRR = 106.65% pa (go on, lick that IRR, you know you want to)

Current EV = $16.5B
Total Debt = $15.4B ($10.4B of existing debt to roll over + $5B bridge loan, arranged by Credit Suisse, Morgan Stanley and Bank of America)
Total Leverage = ~9.8x EBITDA (after annualising YTD published Sep 07 results)

Even if we assume that this is a high-margin, high-growth, limited competition business (which a cursory glance at the company information and financials seem to indicate, but I must dig further), 9.8x is a very high leverage multiple. Quite rightly, a few comments point out that this leverage would never have happened had the lead banks worked on the assumption that they would have to hold a significant chunk of the debt on their books (and all its related risks). The bridge loan will be problematic - it is basically a bet by the lead banks that by the time it matures, things will be considerably closer to normal and that it can be refinanced in the debt market.

Also it seems that this is a HoldCo lend (i.e. the debt is borrowed by the holding company that owns the actual operating companies), which raises an extra level of risk. HoldCos rely on dividend streams from the OpCos to pay the expenses and repay debt. Often, OpCos have their own debt to service (which appears to be the case with Intelsat), and there are (or should be) severe restrictions on the dividends it can pay to HoldCo. Should things go slightly askew at OpCo level, the dividend stream might get dammed up by the banks lending to the OpCos - which means less cash to HoldCo, putting HoldCo principal and interest repayments at risk.

The interesting part is that BC Partners (the new owners) and the banks chose to roll over the existing loans rather than have the existing loans refinanced by new debt as part of the transaction (which is how these are typically done). The reason? The current leveraged loans market is not conducive to issuing new debt. So instead of having to sell a fresh new $15B batch of debt to a group of banks suffering indigestion, why not just let the existing bankers (who presumably still like their debtor) stick around? Sure, this means lower fees for the lead arrangers, but given the option to forgo some fees to significantly reduce your headache and the hit to your capital provisions, it's worth it.


Other tidbits
- Our new graduate started last Monday. The second thing I did (after I said hello) was rescue him from the fiery exchange between our Executive Assistant and some back office guy in Bangalore. The next day he brought his iPod with noise-cancelling earphones.
- Overheard:
[Person 1 gets flicked in a certain protruding area of the thorax region]
Person 1: "I don't know if I should feel good or bad about that."
Person 2: "It's because you feel guilty about how good it feels."
- Interesting analysis of the BHP Billiton-Rio Tinto deal from Deal Professor.

Soc-ked In

Wow. Societe Generale just lost 4.9B euro in what looks like a fraudulent job by a junior trader. In today's hyper-automated trading desks, VaR, and layers upon layers of compliance measures, I thought maybe you could get away with a couple of hundred million, at most, before you (a) get caught, (b) reach a safe haven island, or (c) kill yourself.

Crap job by SocGen. All those millions of euros spent on risk management and compliance, and you couldn't stop a noob trader trading some vanilla futures. You might as well just have given him a nice big vault full of cash, you would have lost less money.

And while it is very very wrong and illegal and should not be done by anyone under any circumstances, kudos to the junior trader. (Hey, it's Biblical so it's OK.) You give hope to many subpar traders the world over that if they dream it, it will happen. May you receive a lucrative book/movie deal out of this. Might be the next Liar's Poker. Or not.

Where's an open window when you need one?

So today, all eyes were on the bloodbath in the market, with the S&P ASX 200 shedding 7% today, officially entering "bear market" territory (thank you, Mr/Ms Hedge Fund Manager) and essentially wiping out all the gains of the past 12 months.

Neeeeeeaaat. And to have it happen during my lifetime... what a story to tell the kids. I look forward to the day when people will be writing about the current crop of wheelers and dealers, and how it was such an extravagant lifestyle fueled by debt and ego, etc etc. The 80's baby... when it comes back, it comes roaring back!

Sure, he started it, but he didn't love the 80s like I do.

Now my 99% cash allocation doesn't look so stupid anymore, and who knows, I might even go on a bit of a bargain hunt.

I like this article, dedicated to a mostly illiterate audience, just in case they've been holidaying in the Pacific for six months using the money found after they mortgaged their house and retirement savings. I especially like this section: "What is the sub-prime market?" It's you and your kind, you bogan (and valued reader).

UPDATE: The Fed has made an emergency cut of 75 bp to its target rate. George Bush also announces new expansionary policy to stimulate the economy, to be funded by a (larger-than-ever) budget deficit, and proceeds from sales of a half-share in the USA to a consortium led by the Carlyle Group and Saudi sovereign funds.

Adios 2007, and haroo 2008

Well after the flurry of blogging leading up to the final month of the year, Rockett Fuel falters, tripped up by the many Christmas functions to attend. And a deal or three in between. So a belated Merry Christmas, Happy New Year, and so on.

Now my normal blogus modus operandi is to get one of those question lists you get from your spamming friends, and answer them here. Unfortunately I am yet to receive such spam (perhaps because I have alienated many friends in the past 12 months), so this is a placeholder entry until I find such a list.

In other news:

Oil touches USD 100/barrel.
Latest megarich toy: a brand-name US or European bank.
Rockett Fuel: go-to guy for jumpstarting failed syndications. (Well, can't link to them, obviously. Who wants to announce failed syndications?)