Rockett Fuel For Maximum Burn

I Feel So Loved

2009-07-06T05:30:00.000-07:00

It has been a while since last post, but not for lack of material. In some ways it was the volume of important topics being mixed in with the banal that caused my absence. I, the slow calculating (but predominantly just slow) analyst, decided to sit on the sidelines a bit. This strategy was pretty much reflected in my investments - my watch list grew long while actual positions (whether actual or planned) were rather lacking. Apparently I missed a mini-rally; but that probably means I also missed the mini-collapse of that mini-rally. Cest la vie.

In the meantime, I find myself becoming more involved in recruitment, both in an official Rockett Bank role, as recruiter/interviewer for the famed Rockett Bank graduate program, and increasingly as an unofficial referee - and a few times, even by people I don't even know. Who knew that simply having a pulse could make you popular.

If market data continue to be convoluted and companies continue to make stupid but rather boring gaffes, then my plan is to do a short blog on each role.

Promoted or escaped?

2009-05-11T04:53:00.001-07:00

Contrary to rumours that I enjoy disseminating, if only to see who is stupid enough to believe me, former ANZ Australia* CEO Brian Hartzer did not quit ANZ because they decided to ban access to Twitter (and all other social networking sites). Instead, he is taking up a post as part of the new Redeem Team for Royal Bank of Scotland - where former ANZ Top Teller John MacFarlane sits on the board.

He apparently has been earmarked as a potential heir for RBS head teller Stephen Hester. Stop me if you've heard this story before; after making a perennial outperformer of ANZ Retail, Hartzer was seen by some as the top internal candidate to replace John MacFarlane in 2007. That was until Mike Smith came across from HSBC Hong Kong and promptly filled the executive team with HSBC and Standard Chartered alumni.

So is Hartzer that much of a career masochist that he is willing to be touted "next in line" again, but this time at a bank on life support? What could possibly be so attractive about RBS, a bank so entangled in the financial crisis at multiple points (including UK mortgages and leveraged buyout loans), and likely to be tethered to the UK Government for the foreseeable future? Perhaps it is not the promotion; maybe it's more of an escape pod.

Consider this:
- Smith & Co have publicly stated that Asia is THE endgame for them (more eloquently, of course). That is what they were hired for, and the team's ANZ legacy will be measured solely by the success or failure of achieving "superregional bank" status.
- With a recession in place and unknown timing of recovery, the strong growth in ANZ Australia's retail banking and mortgages arms is likely to stall or decline. As it is, any stability in the retail banking market is heavily underpinned by Federal Government initiatives (deposit guarantees, first home buyer grants, stimulus cash grants). If not for these, retail banks would be competing with mattresses** for deposits.
- SMEs, the other main clientele of ANZ Australia, are likely to suffer the same fate.

If I were in Hartzer's old wingtips, I would be thinking "damn, the wine in this chalice is tasting rather bitter". No growth. Not the main focus of the CEO. And if ANZ's big swing at Asia via RBS's Asia assets*** fails (whether by a failed bid, or it turns out to be a disastrous acquisition), then taking over the wreckage is not an inspiring thought. And those are just the very obvious reasons.

Besides, why pass up a chance to stick it against the guy who got your gig, by having a say at who you end up selling the precious RBS Asia assets to. Twice. The other competing bidders are thought to be HSBC and StanChart.

So on further examination, maybe taking up a post as a civil servant to Her Majesty for now, and positioning oneself to take the reins at the upswing (if it ever returns), is a far better proposition than sticking around at one of the last handful of profitable, AA-rated banks in the world.

Sell high, buy low, right?

* That is, retail and small business banking.
** While crap investments during high inflation periods, mattresses offer fantastic risk-adjusted returns at other times, mainly by not being subject to mark-to-market and bankers' fees.
*** Officially, ANZ is only "considering assets in Asia", but everyone knows who's in the game.

Blurby thing: Rockett Fuel owns ANZ shares, and really should be listening to himself. However, Rockett Fuel is allergic to crystallising losses. By the way, none of this is advice. Invest at your own peril. Mattresses, meanwhile...

Blackmail rules

2009-04-14T05:20:00.000-07:00

A bit disappointing to know that someone could fall backwards blindfolded into a toxic mess and come out the winner through corporate blackmail.

Nick "Shaggy" Bolton finally showed the hand we knew he was playing all along. And no, it wasn't his famous "recapitalisation strategy". It was revealed in today's BrisConnections EGM that he was paid $4.5M by Leighton Holdings (the contractor to build, and future equity holder in, BrisConnections) to vote against the resolutions he proposed. As a result, all resolutions that could have resulted in winding up Australia's largest infrastructure project were soundly rejected.

While the outcome was not unexpected (unless you were one of the unitholders who really was hoping for the best, but now find yourself still up for the $1 instalment on your unit worth $0.001), it is rather disheartening for an idealistic capitalist to see that blackmail remains a potent way to derive returns under the guise of shareholder activism.

It would not surprise me to see the other unitholders, without the benefit of 90x return on "investment", agitating for the same payout. Somewhere, lawyers and litigation funders are salivating.

Slow news week

2009-03-24T06:56:00.000-07:00

Must be tough for Melbourne journo, Mark Hawthorne, following the BrisConnections story. I mean, how much fun can it be, trying to stay awake while grown men in wigs take turns asking questions of a 26-year old who is clearly in way over his shaggy head.

Seriously, does this guy look like he ever had a "recapitalisation strategy" for a $4B toll road?

I can therefore chalk up last week's piss-poor fact checking effort to glazed eyes (thank you, Google cache). Hawthorne originally reported that ANZ would have a $322M hole in its pocket if BrisConnections' unitholders do not pay up on the $1 instalment, due 29 April. In fact, it has nothing to do with ANZ at all - Macquarie (aka Evil Doughnut Empire) holds this particular baby. Oh and by the way, I like how he said it was ANZ that "issued a clarification" to correct the article - nice way of making it seem like they got it wrong.

"Oh yes, sorry about that last tip, Marky Mark, we've gotten so used to being smack bang in the middle of lost money, we must have thought we were in this one too!"

Given that the deal involves over ten banks and has been public domain since mid-2008, I am puzzled, yet my benevolent side tells me to invoke benefit of the doubt for Marky Mark. Not sure ANZ shareholders would be as forgiving.

Speaking of forgiveness (or not), I don't think I can chalk this one up to boredom resulting in badly written articles being accidentally sent to the print room. I mean firstly, "BrisConn"? Biased much? And secondly, this gem: "for $600 he stands to lose the family home. it's outrageous, almost criminal". Really? Who's the criminal?

*RING RING!!!*

I think it's the Daily Telegraph, Marky Mark, they'd like to know if you could please bump up the reading level of your writing to the Tele's benchmark: that of a 10-year-old.

--------------------------

Jumping away from journalistic incompetence for a moment. I am compassionate to most people in most circumstances. People are often victim to unforeseeable turns of luck, and lose it all while doing nothing more than providing for their family. Even farmers, clearly playing a mug's game in a continent as dry as Australia, attract my compassion and admiration.

This is NOT one of those cases. It irks me when people, through their own ignorance, arrogance, or both, face to lose the shirts on their backs and then try to plead innocence and how the world should cut them a break. In this case, we have a few unitholders who bought units at $0.001 (not a typo) in the hope of a quick buck, and did not read the prospectus.

There was no misleading management. No wilful misinformation from the broker. There's no pyramid scheme. Brisbane did not suddenly disappear. It's not even a "toxic security" - it's a run-of-the-mill security that just happened to be on a layby program. They just DID NOT READ. And now they owe 2,000 times what they paid, and they want the rest of the unitholders to stop, pity them, and wind up a toll road? How about the other unitholders, who want to hold for the long-term, see the toll road get built, get used, and eventually see a return on their investment?

You clearly don't have a clue what you're doing. So who in their right mind would let you vote on anything?

Disclosure: Rockett Fuel has financial interests in both ANZ and the Evil Doughnut Empire, and tragi-comic interest in BrisConnections. Rockett Fuel also discloses that he believes Brisbane is a hole, and was surprised to learn there are enough cars there to warrant a car park, let alone a toll road. Basically, he only gives a rat's if the toll road got built insofar as it affects his interests in ANZ and EDE.

Rockett Twitter

2009-03-18T07:59:00.000-07:00

After doing a little trial of Twitter (using yet another disposable alter ego), I've decided that I used it often enough (and discreetly enough at boring meetings) to warrant using here on Rockett Fuel.

As with my posts, I don't guarantee that my tweets will be as funny, informative, profitable, inspiring nor witty as it seems in my head. But hopefully it means it will be (a) more frequent, and by virtue of "1 million monkeys with keyboards" theory of probability, it may also (b) hit on one of the above desired qualities.

Follow my tweets via the righthand sidebar.

Black Swan

2009-03-06T06:56:00.000-08:00

I've been having serious problems with my laptop, and hence unable to write anything. Though it seems to be behaving itself tonight, so let me do a bit of a link dump on some of the more interesting things I've come across during the current phase of the GFC...

BrisConnections
BrisConnections, a consortium tasked with building Brisbane's Airport Link toll road, was politely asked by a significant unitholder to wind itself up (in a thinly veiled attempt by the investor to avoid ponying up the remaining instalments worth $2/unit on securities worth 1/10 of one cent).

The company hit back and says "here's a better idea, how about we wind your sorry ass up".

Quote of the Year (and I know it's early, but this is hard to beat):
"The Goldman Sachs JBWere trader Richard Coppleson has been doing a disappointing impersonation of John Hopoate: inaccurately trying to pick the market's bottom." [link here.]

(For the non-Australians and/or forgetful among you, John Hopoate was a football player who was caught on tape sticking his digits into the backside of unfortunate opponents. We never did figure out why.)

Berkshire Hathaway posts profit declines; Buffett short-term ratings downgraded to "genius" from "demi-god". Long-term ratings remain stable at "unmatchable".

Finally, read "Outliers". And "The Black Swan".

Lawyers

2009-02-09T03:17:00.000-08:00

I like lawyers. Most people kindly think of them as a necessary evil, but I think better of them. It probably helps their cause that I have several lawyer friends, and that one day soon, Rockett Girlfriend will be joining their ranks (and thus accelerating my retirement plans... yesssss).

But there are times when you see a glimpse of the seedy underbelly of billable hours, the whoring of legal expertise to the highest bidder, just past the thin veneer of "client relationships" which is nothing but blatant conflicts of interest. Lawyers receive several streams of work from several (and often competing) corporates. In a market that is several notches short of perfect competition (like, oh I don't know, the Australian financial institutions industry), no lawyer can survive by faithfully acting for one player only; they must act for several (and the best ones act for all).

Sure, it is impossible for one lawyer to act for more than one side in one transaction; but there is nothing stopping them from acting for one bank in one transaction, then act against the same bank (but a different division, perhaps) in another transaction. For all the talk of "Chinese walls" and "managing conflicts of interest", is it really possible for a lawyer to disregard the idea that, by negotiating well for one client in one transaction, that he or she might be jeopardising future income from the other side (who is, perhaps, a much better-paying client)?

For the past two months we had been advising one of our debt teams on a leveraged transaction. The borrower is an infrastructure fund, being advised by an investment bank fondly known in the small-pond Aussie industry as "a bunch of douchebags". Said investment bank has a lot of fingers in a lot of pies, which is a lawyer's wet dream because it means a never-ending stream of deals... if you are on their good books.

I was on a conference call last week with two colleagues, discussing and refining the terms and conditions on a draft agreement to line up with our negotiating position. On the other line is our external lawyer, a partner at a top Sydney corporate law firm. The idea was that we would discuss what points we want reflected in the agreement, our lawyer will draft the document as such, then send the document back to the borrower's advisers and lawyers (a different firm - there is at least the appearance of objectivity) so they can tweak it with their negotiation points.

Amongst other points, we were negotiating the definition of "Distributions", which is important because it basically defines how cash can leave the business. In highly leveraged transactions, cash is definitely king. Lenders want it to stay in the business, to support spending, service the debt and generally act as buffer against a downturn. Financial sponsors want it out of the business and into their pockets, because the longer it stays in the business, the greater the risk of losing it, and the lower the IRR on their investment becomes. Typical of highly leveraged transactions is the presence of different tranches of debt; in basic structures, Senior Debt and Subordinated Debt. As the names imply, Senior Debt get priority over the cash flows of the business - its interest and principal get paid first (in return for this relative safety, it charges a lower interest). Subordinated Debt ranks behind Senior in the cash flow priority - in fact, in some cases Sub Debt interest is not paid, it is accumulated instead (oh the boom years, how I miss thy funky structures). In all cases, Sub Debt principal is only paid after Senior Debt principal has been completely paid out.

For some strange reason, the original deal had allowed "Distributions" to include prepayment of principal in Sub Debt... i.e. if the borrower chose to, it could have prepaid Sub Debt principal ahead of Senior Debt (the reasons why this was allowed in the first place is unknown, and for my own sake, I would rather not know). This would be utterly disastrous for Senior Debt, because if things go pear-shaped, there is no cash or Sub Debt to take the first loss. We pick up the conference call at this point:

[Us - Rockett Fuel, CS, BJ] [Lawyer: GR]

Us: "I think we are OK with the rest of the "Distributions" definition, just take out the reference to "principal" in Sub Debt and send it through."

Lawyer: "Really? It doesn't make a difference does it?"

(Quizzical look around the table.)

Us: "Uh... yes it does. We don't want to get paid out after Sub."

Lawyer: "Hang on, let's think this through. I'll tell you what they'll say (NB: "they" being the advisers)... they'll say that a dollar out is a dollar out, no matter if it is paid out as interest, principal, equity dividends or share buybacks. I'm not a banker so maybe I'm missing something, but to me it doesn't seem to make a difference."

(During that little lesson on Capital Structure Theory To Suit You, the mute button was pressed and the phrase "WTF" may or may not have been expressed. We checked to make sure we were, in fact, the ones paying for this billable hour - we were. Un-mute.)

Us: "That is exactly why we don't want Sub principal getting paid out, because we have already allowed them the ability to reduce their capital base by allowing share buybacks."

Lawyer: "OK let's think this through. Let's say you have $20 in earnings and $100 in Sub Debt, and there is $10 of Sub interest due via Distributions. But let's say instead of the company paying $10 out of earnings, it pays it via prepayment of Sub Debt. You still have $110 of capital left over, so on cash basis you are in the same position."

Us: "However we now have only $90 of Sub Debt as buffer, so we have $10 less protection."

Lawyer: "Yes but the same cash went out the door."

(Unknown speaker): "Just delete it, you backstabbing lowlife whore!"

(Pause.)

Lawyer: "OK. By the way, in clause 5 I inserted that you have 2 Business Days to respond to a Clause 5 Notice."

Us: "We didn't ask for that! Why the hell did you do that?"

Lawyer: "Because I know they will ask for it."

I kid you not.

Happy New Year!

2009-01-01T05:54:00.000-08:00

2008. The year of unforeseen events.

It was when ten years of karma caught up with the Bear, as a $2 note.

When Iceland became the first handball-playing nation to become insolvent.

A $700 billion bailout plan was approved, to buy new money printing presses.

When US auto executives feared for their lives, riding in the cars they made.

The year when pirates got so rich, they were using media reps.

And the second-greatest scam ever didn't even involve Nigerian spammers (much to their chagrin).

If you have survived all that in 2008, then you have much to be thankful for - most too obvious to notice.

In 2009, please remember to be kind to those less fortunate - yes, even bankers.

I look forward to 2009, watching more dead cats bounce with you.

Thanksgiving

2008-11-28T15:04:00.000-08:00

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

2008-11-10T01:42:00.000-08:00

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

2008-09-24T17:05:00.000-07:00

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

2008-09-22T06:19:00.000-07:00

I like it.

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

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

2008-09-17T17:36:00.000-07:00

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

2008-09-15T03:56:00.001-07:00

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

2008-09-13T19:34:00.000-07:00

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

2008-09-08T07:26:00.000-07:00

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

2008-08-18T04:41:00.000-07:00

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

2008-07-28T16:32:00.000-07:00

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

Fancy that

2008-07-24T17:32:00.000-07:00

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

2008-07-23T15:10:00.000-07:00

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!!

2008-07-11T08:12:00.000-07:00

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

2008-06-27T10:54:00.001-07:00

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

2008-06-16T06:39:00.000-07:00

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

2008-06-01T06:55:00.000-07:00

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

2008-03-19T06:18:00.000-07:00

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

2008-03-12T05:23:00.000-07:00

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):

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.
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.
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?
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".
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

2008-02-29T04:03:00.000-08:00

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

2008-02-25T02:47:00.000-08:00

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

2008-02-12T03:14:00.000-08:00

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

2008-01-24T04:45:00.000-08:00

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?

2008-01-22T05:30:00.000-08:00

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

2008-01-07T03:17:00.000-08:00

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?)

Wii Points Index

2007-11-25T03:15:00.001-08:00

I recently got a Wii. How I am going to find time to play it is irrelevant, I just wanted one.

Those who have one, or may have been following its progress, would probably know that Nintendo has a Wii Points system to allow players to purchase retro games from its online channels. The games are priced by Wii Points, with the more popular/more recent games obviously charging higher prices.

That, and my great admiration for The Economist's Big Mac Index, gave me a thought: how much do these Wii Points cost in different countries? Clearly every Wii Point is exactly the same, and should theoretically be worth exactly the same. In practice, regional restrictions mean there are no arbitrage opportunities. In any case, I started with what I could find off the net, as follows:

Cost of 2000 Wii Points
Country	Local Currency	Store	Price (in local currency)	Implied FX Rate to USD
US	USD	Toys R Us	21.9900	1.0000
UK	GBP	Woolworths	13.9900	1.5718
AUS	AUD	EB	35.0000	0.6283
CAN	CAD	Sears Canada	24.9900	0.8800
JAP	JPY	Indicative	2,000.0000	0.0110

Country	Local Currency	Current FX Rate (USD equiv) www.xe.com	Implied Price based on Current FX Rate	Over/(under) pricing relative to current FX rate
US	USD	1.0000	21.9900	N/A
UK	GBP	2.0609	10.6701	31.11%
AUS	AUD	0.8770	25.0741	39.59%
CAN	CAD	0.9895	22.2233	12.45%
JAP	JPY	0.0092	2,390.2174	(16.33%)

So the lesson isn't so much about international economics and arbitrage; it's simply that UK and AUS gamers are clearly being ripped off by local retailers, who aren't passing on the benefits of a weaker USD. Time to campaign, geeks. Japanese players, as usual, are treated to an entirely different echelon of gaming goodness. I would move there just to be hooked into Nintendo nirvana.

Highly doubt this will replace the Big Mac Index; for one, it does not account for the "basket of goods". Still, makes you realise why game console makers continue to maintain region coding even though there are clear benefits to gamers to remove them (i.e. being able to import hot games from overseas, rather than relying on the pitiful supply from local distributors).

Bring Green Pencil To Voting Booth!

2007-11-23T17:52:00.000-08:00

Can't decide the lesser of several evils in this election?

Vote Laberalocrats First - with a green pencil! The ultimate fence-sitting vote, and it's QUINTUPLE VALUE voting!! (Take that, cheap Greenies with your double value voting.)

How To Lose $3 Billion in 21 Days

2007-11-12T02:03:00.000-08:00

Well, banker karma got to me. After the last post which arose from superchronopossession, three deals dropped on my desk at the same time, and closing pretty much one after the other (which was last Friday). Hence the extended absence of tales of Rockett Fuel office shenanigans.

Since the last post, Messrs E Stanley O'Neal and Charles O Prince III (no, the OTHER Charles) will, sadly, be leaving the great ships Merrill Lynch and Citi. In a loving tribute, both were handsomely rewarded as a result of the deft management. If you think it is easy to lose tens of billions of dollars, think about this: you have 24 hours to spend $5 million, and not a cent less, and you can't keep a cent or keep anything you buy with it or make any money out of it. Yes... not so easy to think of how to make $5 million disappear into thin air. It takes a special kind of leader to do the almost-impossible.

But my oh my, aren't we all blessed in our lifetimes to see two high-profile leaders achieve exactly this. That is why, ladies and gentlemen, they will be walking away with roughly $200 million, give or take a lazy few tens of millions. It takes talent, it takes bravado, and unrivalled knack for timing the market (i.e. jumping into high-risk debt and structured products at the exact time they were turning unsustainable). You and your silly quant models could not have timed it any better. Unless you are Bear Stearns.

Why I now dislike redneck unemployed lying useless lazy criminal borrowers even more than I did before (subprime crisis impact - it's PERSONAL)
Keeping it brief due to propensity to cry when thinking about it:
- not happy* with bonus
- not happy* with pay rise
- pay rise actually lower than that offered by competing bank earlier in the year, when I was as green as Link's costume
- making me think... can one actually do a valuation on loyalty, and therefore, did I overvalue it?

* NOTE: gross understatement of the night.
** The irony of my situation, in light of the above take on Wall St maths, is not lost on me. Please do not rub it in by pointing it out.

Why bankers + free time = stupidity

2007-10-15T07:05:00.000-07:00

Often, simply saying "I'm an investment banker" is enough to make women (esp at Establishment) swoon... if that's your thing. This list is for the more discerning banker, one who is trying to find a woman who is switched on and "gets it". And there's no better way to test her "getting-it-ness" than to pile on the jargon and see. So here we present the latest Frankenstein lovechild of banker brain power and permanently adolescent humour: banker pick-up lines.

1) Let's correlate.
2) That's not a Capital Market Line in my pocket.
3) No, it's not a Laplace distribution either.
4) I'm a big fan of two-asset models.
5) Only the price-earnings ratio matters, baby... your price, and my earnings.
6) You're already a positive NPV investment. (I've lowered my expected rate of return.)
7) I'd like to be on your efficient frontier.
8) I'll be the alpha, you be the beta.
9) I'm long-only.
10) I'd like to Ctrl + "+" then C if you'll let me.
11) I'm into M&M. No, I'm not talking about the chocolates either.
12) May I toggle your PIKs?
13) You can subordinate me tonight.
14) I'm experienced in long, drawn-out mergers.
15) Baby, you are the market portfolio.

P.S. I like this. "Take a quick look around you right now. If you are surrounded by attractive models, fast cars, and high-quality cocaine, you have a good pickup line. Either that or you are an investment banker, in which case you also probably have syphilis."

P.P.S. I don't have syphilis. Honestly.

What's he saying?

2007-10-11T03:53:00.000-07:00

After Citi's $5.9B third quarter writedown, what is the very regal Citi CEO Charles O. Prince III saying here?

(a) "But luckily for me, it was your 5.9 billion dollars."
(b) "And I'll see YOU in the penthouse *wink*"
(c) "If I go down, you're coming with me."
(d) "You stay classy, Planet Earth."
(e) "Quick pull my finger, I can't hold it anymore!"

EXXXcel

2007-10-04T06:17:00.000-07:00

You know you have a serious problem when this turns you on. I have already scheduled my appointment with a shrink.

I am where I should be.

2007-10-03T06:53:00.000-07:00

R.I.P. Rockett Stepdad. I know you'd be stoked about where I am and what I do. Thanks for believing in me. I am where I should be. My only regret is, you only got to see it in your mind's eye.

Labour Day Holiday (oxymoron alert)

2007-10-02T05:44:00.000-07:00

Last week was a little quieter than I expected. Or rather, my expectation did not normalise for the fact that last week was the annual Private Equity Schoolies Week, hence nothing gets done, unless you include golf and mistresses (phwoar indeed). It's like the grown-up version of all those school excursions to fun places... a site/activity is chosen, and it is somehow made to look weakly related to the curriculum to justify miles of beaches (Geography), Men's Gallery (Phys Ed), and rollercoasters (Maths, what else).

With the market being so hot right now (yawn), the office environment becomes a tinderbox, ready to explode at any moment. For example, on Friday night we nearly had to settle a heated argument about where we should go for Friday night drinks... with a coin toss. Luckily my leadership skills saved the day, and everyone managed to have an equally bad time all round.

Yesterday being a Labour Day holiday in this fair city, I decided to take advantage of the great weather and leave the office, Jimmy Cayne-style, for a game of golf. Unfortunately I had some trouble procuring my golf clubs (they are 'in transit', so to speak), and so I was reduced to borrowing the clubs for hire. Any hardcore belief that golf is a non-discriminatory sport was quickly assuaged by the fact that I, as a tall southpaw, was given the worst set of clubs I have seen in my life. I couldn't hold the clubs without nearly sitting down. The putter was short, skinny, crooked, and went both ways... who wants a stick like that? Needless to say, the craftsman was frustrated by his tools. I would have scored better kicking the ball along.

In general news unrelated to my golfing prowess:

UBS and Citi write off enough money for the past three months to give US $1 to every person alive (give or take a few dollars).

RAMS sells name to get cash to delay its death. I wish I could sell my name to pay off my debts too.

Signs of life or just a dead-cat bounce...

2007-09-19T04:55:00.000-07:00

OK been a while since the last post, I figure it's time to show some minor sign of life. Maybe a link dump to warm up with...

For the young ones, who thought bank runs were a relic of the "old world" like the gold standard, Lotus 1-2-3 and EMH, Northern Rock must have been a fascinating read. And if the rumours of low-ball bids end up true, then I will flip out if Northern Rock executives reject the bids because they are "opportunistic" (as seems to be the excuse given by many management teams who are unlikely to be given equity in the acquired entity). Aren't all bids opportunistic?

An interesting take on magic, and its implications for IP law.

Investment bank third quarter reporting season is upon us, with Lehman Brothers and Morgan Stanley starting things off, and Goldman Sachs and Bear Stearns following on Thursday ET (Friday AEST). These firms have been in the middle of the current crisis, so their third quarter results will be very interesting if only as a barometer of the impact of the crisis on its most visible players. By the way, the Bear Stearns and Goldmans results announcements are open to the public; you can dial in for a live conference call (10am ET and 11am ET respectively), or download from their sites afterwards.

Since the last post, our US and UK sources have been reporting doom and gloom... credit markets are closed... devalued portfolios... massive (~US$400B-odd) overhang of loans that no one wants to buy... bankers trying to jump out of reinforced windows and instead bouncing back to the office floor... it's terrible.

Here though, we are seeing some twitching (though I wouldn't say "normality", given how flexible the term is). Semblances of deals are trickling in at a slower yet steady rate. Normally this would make me quite happy because deals = fees = nice fat bonus. The problem, however, is two-fold:
1) there still appears to be some insistence on pricing debt at pre-August levels; and
2) no one wants to commit!

The first issue is pretty easy to solve - you can wait it out until they come crawling back (as happened to a few major local deals already... though the "restructure" of the packages is more froth and optics than an actual restructure).

With the second issue, perhaps remind them of the fact that they are sitting on billion-dollar cash boxes if they don't do any deals - and a lazy balance sheet for a PE firm is (though tastily ironic to me) a sure way to lose your BSD status in the market. This is more of a medium-term approach though... sort of like tapping someone's leg with your boot for hours, and then when they eventually try to get up, they fall into a heap because you've pulped their muscle... but I digress.

Anyway, the situation is a double-edged sword: one the one hand, the crisis has weeded out a lot of terrible deals (though certainly not all...). On the other hand, even those sitting on very good, leverageable (note: must check if this is a bastardisation of the English language) businesses are hesitant to do deals - deals that any banker worth his salt will do without even blinking.

And it is wrecking my already Lara Flynn Boyle-esque social life. I had to turn down several invites because I "am juggling a number of deals"... and so far none of them have gravitated back to my hands yet. So I'm sitting there waiting for signs of life, when I could instead have been out and about, blessing this city's somewhat tolerable establishments with my presence. And I know, I JUST know, that they will all suddenly go live next week - just before the long weekend.

Lost magic

2007-08-27T17:32:00.000-07:00

I previously posted here about the real diversification benefits of investing in wine and artwork (either directly or via the funds that do).

Anyway I was trawling through old not-so-urgent news and found this. A downturn in the art market? So if the values of residential properties, commercial properties, high-risk asset-backed debt, high-yield LBO debt, investment-grade corporate debt, stocks across the corporate spectrum, and "alternative assets" like artwork and wines seem to move in sync of each other... where are the diversification benefits when it matters the most?

Of course, none of this is really surprising for those who first heard about diversification in undergrad and thought it wasn't all it was cracked up to be (and hence subsequently struggled for brownie points from Investment Management lecturers). I remember in one class, the lecturer began explaining diversification thus:

Lecturer: "Don't put all your eggs in the one basket, that way if you drop one basket, you still have eggs in the other baskets."

Student: "What if all your baskets are in the same cart and it crashes?"

Lecturer (himself not that far out out undergrad): "... then you have a big problem."

ABSOLUTE NONSENSE: There is no truth to the rumours that I sparked the selloff in the art world with my blog entry, which was one month before the Bloomberg report in the above link. Of course, truth is only a small percentage of what moves the markets...

Urdhva Dhanurasana for dummies (and other news bites)

2007-08-19T05:34:00.000-07:00

It has been a while since the last blog, and the start of the market downturn, and I was tempted to give an update on how awesome it is to watch it unfolding, with my entire watchlist bathed in a sea of blood, and me doing my best re-enactment of Warren Buffett's infamous "oversexed guy", having too much to buy and nowhere near enough money to buy them all with.

But lo and behold I pick up the Sunday paper (for the first time in what must be years), and front page is this article, which I decided is funnier to write about. Justin Hemmes, self-proclaimed god of the totally substandard Sydney nightlife and owner of the no. 1 meat market, The Establishment (or "The Stab" as locals quite appropriately call it...), is throwing a hissy fit that the powers-that-be are not performing the Urdhva Dhanurasana so that his $150M new [meat market] hip strip can get its alcohol licence.

Mr Hemmes is "distressed" that he has taken "100% risk" by developing without certainty of being licenced, somehow thinking that just because he sunk his [i.e. the banks'] money into the development that he is therefore entitled to "the dream" of separating sleazy drunks and their cash. Mr Hemmes' stakeholder relations strategy is interesting, and will likely make for at least a hilarious case study at a local second-tier MBA program. He first pleads with the police not to "stamp out the dream" and then tells them exactly what they should be doing instead of policing the regular alcohol-related problems on George St: "government bodies such as the police should be bending over backwards to help innovative and creative developments." Instant classic.

Anyway, after I wiped up the milk that came out of my nose from laughing after reading that quote, I managed to find a few other, more worthy, articles:

Ms Gail Kelly wins the Westpac chief teller job. Well done (and that wasn't a sarcasm-laced congratulatory remark, either). This means the mighty red-and-white will be headless (much like their football team, really).

Exclusive from Rockett Fuel: Westpac takes over St George Bank. It must be crossing Ms Kelly's mind every ten seconds. They don't even have to change corporate colours! You know I'm right.

Talk about picking the top of the market to sell: check out when RAMS Home Loans (ASX: RHG) listed at $2.50 a couple of weeks ago and how it's gone since. There will be a few PE firms who are ecstatic about NOT buying an asset. The question is, did management see their fate in the tea leaves before they listed, and knowing how hard it would be to refinance their $6B warehousing loans in the ailing credit markets in a few months, decided to sell up?

UPDATE: in another "exclusive interview", NSW Police Commissioner Ken Moroney denies all reports that the NSW Police's lagging performance in their core [in]competency is leading them to diversify into property development, as may have been implied by Mr Hemmes' comments. The Commissioner states that Sydney's egotistas have a competitive advantage in this area and believe the industry (and the Police business model) is better served by maintaining status quo.

For next blog: how much money I lost by being cash-strapped during a stock market correction.

SECOND UPDATE!! Congratulations to everyone who passed their CFA exams (especially Level 2). I will see the rest of you next year hehe.

Dive! Dive! DIVE!!

2007-08-01T03:19:00.000-07:00

So how about that market huh?

The ASX 200 starts last week at 6,422.3 and at today's close is sitting at 5,941.2 (-7.5%). Today alone it was down 3.3%. Key factors (in the Aussie market at least) look to be continued uncertainty in the US market due to the subprime debt fallout, and increased risk of another rate rise from the RBA next week.

The subprime debt crisis is the slowest-moving crisis I've seen in my (admittedly short) life. I compare this to watching "House of Wax". Paris Hilton is in the movie. Ergo, she will die. It's just a matter of time. But it doesn't happen fast enough so that you can get over it and get on with the rest of the (crappy) movie. I feel the same way about this subprime thing. I think it will (and in some ways, already does) have a contagion effect. I know it will be bad. Others think it will be bad - the point of contention is the degree of severity. But it just won't happen fast enough so everyone can have a good cry over it and move on to buying up the decent scraps left in the crash.

Notwithstanding some potentially profitable trades now made available to me, the whole situation poses an interesting chicken-and-egg financial conundrum. So whose fault was it - the low-income high-risk borrowers who, in pursuit of happiness or the Great Aussie Dream or some other noble variant, thought it's worth mortgaging everything they own (and then some), lying on their forms, and buying overpriced houses, cars and goods? Or is it the fault of the banks who, seeing an opportunity for profits, went out and met the demands of these high-risk borrowers? Is it those baby boomers who, as they approached their twilight years, demanded ever-higher returns from their investments? Or is it the institutional investors who promised they could deliver it by investing in "safe" packages of loans to risky borrowers?

I'll continue to ponder those thoughts while I await approval for my margin loans. Surely, surely, this approval is a done deal - my job in leveraged finance means I'm a low-risk borrower. Right?

Finance jargon of the day

2007-07-24T04:45:00.000-07:00

Pier Financing: a bridge loan (short-term acquisition loan) with no defined "takeout" (repayment method).

Commonly used in: financing the acquisition of crappe` assets.

Commonly associated with and/or mistaken for: pier jumping - an action whereby the investment banker, who lent out the pier financing at rock-bottom rates and now finds himself/herself unable to syndicate it, decides the honourable thing to do is go for a long walk on a short pier and never come back.

When we're not busy...

2007-07-17T05:07:00.000-07:00

#1
CS: "Hey Rockett, I can't find the executed documents in Debtdomain."
Me: "Why would they be there?"
CS: "Didn't you say it was on Debtdomain?"
Me: "Mate we're using Intralinks for this deal, why would I say that?"
CS: "Hmmm OK that makes sense now."

#2
BV: "What's the deal with your hair?"

#3
Source unknown: "Credit can wait, Days Of Our Lives is on."

#4
CS (talking about deal teams): "ST, you and I are 0-for-10. Rockett and I are 1-for-1. This is the dream team right here."

#5
BD: "Rockett how much debt do you think we can stuff into this?"
Me: "Depends - is their EBITDA $30M or $120M?"
(Nervous laughter at the thought of another nightmare deal.)

#6
Multiple sources and in various permutations: "So when are we doing the due diligence and management meeting for Perisher Blue? I hear the snow's good this season."

UPDATE: Added a new blog link to my list, Aleph Blog. Check it out.

Plonk and doodle investing

2007-07-14T05:16:00.000-07:00

Recent students of finance will know that theoretically, a "market portfolio" consists of all possible assets that one could invest in, traded in a liquid market. There was a time when this was only very partially true, and even then, the wider range of asset classes to make up a "market portfolio" were only available to the rich.

However, with improvements in technology, better financial engineering, and the sheer weight of money begging to be invested, investment funds specialising in "alternative assets" like fine wine and arts (apart from your run-of-the-mill long-short funds and CDO's/CLO's) have sprung up to meet the demand.

In theory the wider range of asset classes improves the ability of an investor or fund manager to diversify investment risks, as each asset class responds differently to economic and business cycles, and the returns of some asset classes may move in a different direction to certain other asset classes. My question (and perhaps it's because I haven't delved into this long enough) is that a fund that invests in "prestige assets" like fine wine and artwork will be investing in assets that (a) derive their value from conspicuous consumption of the rich, and (b) are traded in very illiquid markets (if at all), and hence pricing signals and valuations are difficult to come by.

I imagine that demand for luxury goods don't change all that much in the stratosphere that the super-rich mingle in, so I guess demand for Bordeaux wines and Picasso paintings are fairly inelastic. Of course, I am also assuming that the noveau riche have marginal impact on the market for luxury goods; and that the funds investing in wines and artwork are not relying on a healthy market supported by freshly-minted millionaires to realise their profits. Because if they are, and the economic cycle turns, then the market liquidity could easily dry up, making it difficult to buy and sell assets at the "right price" and seriously endangering their ability to create significant supernormal returns uncorrelated to "traditional" assets like bonds and shares.

Simply put, if the economy tanks, we will have less rich people, which means less demand for luxury goods, driving their value down along with the rest of the general investment market. Not exactly the definition of diversification. Happy for someone to explain this to me in more detail...

The open secret

2007-07-09T06:32:00.000-07:00

Now I may not be entirely aware of the situation, as the private equity industry tends to be, well, private (at least for a little while until just before announcements, when someone who owes somebody a favour leaks just enough to offer a profit opportunity and call it even stevens). But I have a question, which I believe is a valid question, and I think you will agree once I explain.

What I don't understand is this: why hasn't anyone bought out Limited Brands (NYSE: LTD)? Now for non-American readers, you might be thinking "what the heck is Limited Brands?" and to which I will reply with two words... "Victoria's Secret".

Yes dear reader (if you exist), Limited Brands is the proud owner of Victoria's Secret. Purveyor of the most seductive undies ever imagined. Brought to the limelight some of the most beautiful women in world history (and almost single-handedly justified the Spanish colonisation of South America. Almost.) Made it acceptable for men to be found in the ladies' section - not to be judged and jeered, but to be respected as thoughtful and confident men purchasing very expensive intimates as a sign of their affections for their female beloveds. Created the one unifying dream for the common appreciation of man and woman alike... that of the woman (preferably of Alessandra Ambrosio-like proportions) prancing around in their lacies with angel wings attached to their backs.

OK seriously, why hasn't this happened? Let's compare it to a typical private equity checklist:

- growing sales: CHECK... but hampered by underperforming departments.
- high and consistent profit margins: CHECK. EBIT margins of 10-11% in retail in the past five years?! And how about Victoria's Secret... 19-20%!!
- recent setbacks/mismanagement resulting in worse financial performance: CHECK... gross profit margins have reduced from 38% in 1Q06 to 34.7% in 1Q07, which flows on to a virtual halving of NPBT margins.
- low gearing: CHECK. 1Q07 debt/equity = $1.664B/$3.010B = 0.55 (anything below 1.00 is healthy/undergeared)... and debt/LTM EBITDA* = $1.664B/$1.435B = 1.16x (anything under 2.00x is regarded as undergeared.)
(*LTM EBITDA = last 12 months' EBITDA, calculated by adding the last three quarters of FY06 to 1Q07... EBITDA = operating income and add back depreciation & amortisation.)
- competitive advantage: CHECK, CHECK, CHECK. Adriana Lima. Alessandra Ambrosio. Gisele Bundchen. Karolina Kurkova. Our very own Miranda Kerr. Best-known underwear brand in the world. Five times the number of stores as your next-best competitor. I mean seriously, if you don't think those constitute "competitive advantage", you shouldn't be playing with other people's money. In fact, you should hand it over to me.
- room for operational improvement: CHECK. See point 3 above.
- thorough due diligence: CHECK. What, you don't think the legions of accountants, tax practitioners, lawyers and management consultants wouldn't be falling all over each other to examine this business, check every nook and cranny, hold multiple site visits, conduct product testing to the nth degree, and discuss "key person" contracts? I swear to you, they would do it FOR FREE.
- easy syndication in debt capital markets: CHECK. By the same token, you think the bankers will say no for the once-in-a-lifetime opportunity to have Victoria's Secret catalogues lying around on their desks, plastered all over their cubicle walls, and strewn all over the male bathroom, AND be able to say "it's for a deal I'm working on" with a straight face? It will be the most oversubscribed debt issue of the year.
- a liquid market to sell off the business to in five years' time: CHECK. You mean we get a SECOND SHOT at due diligence on this company? Hot-diggity!! (The real dilemma is whether you would want to sell it in five years.)

So what am I missing here?
Have women stopped buying sexy lingerie? (No.)
Have men stopped appreciating women who wear sexy lingerie? (Hell no.)
Have they started making a "Victoria's Secret Stash" in plus size? (Oh dear Lord please no.)
Is there a strong supermodel-led campaign against VS with a catchcry of "wearing nothing is better than wearing VS"? (ummm... I can see the pros and cons of both arguments...)

Anyway, I think I've made my point. Kravis, Roberts, Schwarzman... I know you want to.

Just add wings.

UPDATE: Read this report. This was obvious three years ago! You have to respect any report (no matter how unpolished) that somehow manages to use the technical term "going commando".

Cuff me

2007-07-04T04:18:00.000-07:00

I'm so ticked off at myself right now. I was packing for Melbourne tonight and I dropped one of my favourite cufflinks on a hard surface, cracking one of the stones. Very ticked off. I want a new pair. Must be red.

EDIT: I'm not being a princess. Any male who works in finance knows that style is in the detail. Any half-arsed street bum can wear a nice suit, shirt and tie (and often do, judging from the beggars in Martin Place). How do you stand out in a stream of suits during rush hour, or at a management presentation with other bankers, or a celebratory cocktail function to nab the ladies?

Subtlety. There's something different about you, but no one can put their finger on it... one by one they chat you up to get a closer look, and little by little the subtleties are revealed... sharply pressed suit... dark purple pinstripe (not blue like everyone else)... European slim cut shirt with fine detailing, and a bold but complementary tie for contrast... impeccably shiny high-grade leather shoes...

And then you reach out your hand to shake theirs, and from your sleeve, out comes the ace... a glimpse of your cufflinks, perfectly suited to your attire, your personality, and the occasion. Uniquely you.

If I am this good with fashion, imagine what I can do for your money.

Maybe I am a sore loser with a bad case of Mondayitis

2007-07-02T05:14:00.000-07:00

One of the most difficult things in my line of work is losing a large, high-profile deal (or more in one day, if you are really unlucky) at the finish line. Those who like competition live for those moments, and get a euphoric rush from photo finishes. But it is devastatingly depressing when you come in second.

Today was one of those days. We lost two large high-profile deals today (any wonder why Monday is the most depressing day of the week?) and the mood was predictably down. One of them we sort of expected to lose anyway - it was far too large for our balance sheet, the international banks had the upper hand (the clients clearly said so), and the PE firms we were supporting weren't even sure they would like to stay in the hunt. Eventually they decided it was not profitable enough for them, backing out over the weekend, leaving all leveraged finance houses bidding for the lead arranger rights deflated.

To me, that is a perfectly acceptable - it is the nature of the business. The first imperative is to make the investment worth it, not how the banks feel about all the hours they put in. After all, the PE firms also worked hard (moreso than the banks), it is their equity and reputation, so they call the shots. They communicated their intentions clearly and openly, and conducted themselves well during the deal.

The second loss, however, was not. It has been a six-month long slog, having gone through numerous permutations, and at each turn the two competing banks were pitted mercilessly against each other. Competition I can handle. Wait, let me clarify - FAIR competition, I can handle. In an attempt to short-circuit the long-running saga and get to a decision (whether in our favour or not), we at one stage asked what the other firm was offering and we will match it if we could. We were told that it was not going to happen - but apparently, from what we can gather from reliable sources (and what we can logically gather from market developments), it did.

I get it - business is a competition, and had we been in the shoes of the other firm, we too would take advantage of the leg up. I also do not have a problem with the client shopping around - I would act the same way in their shoes. What I would NOT do, however, is tell one firm "hey, I won't give you a leg up by showing you the other firm's offer, it would be unfair to them and totally anti-Confucian in nature"... then turning around and DOING EXACTLY WHAT I SAID I WOULD NOT DO. I also would not go and keep the firm in limbo, when I had already made my choice. I would also not wait until the deal is practically public knowledge before giving notice of the decision.

This is the ugly side of dealmaking. Perhaps I am still a little naive, thinking that business can still be done within gentlemanly (or gentlewomanly) conduct. But seriously, what is wrong with acting with a bit of decorum? Who exactly loses out by doing business as if your word IS your bond? Isn't this fundamental to how our markets work?

LBO to the head

2007-07-01T06:02:00.000-07:00

Standard & Poors recently did a study in Australia (which unfortunately is not publicly available on their site) that discusses what is driving the risk profile of a particular segment of debt capital markets here. In summary, the study believes that the risk profile is being driven by:

- benign economic conditions (low interest rates, high and growing earnings, low default rates); and
- unprecedented bargaining power in the borrowers' hands, as banks aggressively fight for market share,
which feeds into:
- inflated asset values (if you can borrow more, you can bid a higher price); and
- mispriced debt (i.e. interest charged is too low compared to the risks being borne by the banks),
thus substantially increasing the risk profile for the banks and debt investors.

The question for you is, is it talking about residential loans, or leveraged buyout (LBO) debt?

My title would have given it away: it is indeed discussing LBO debt. But what I wanted to highlight was that it could have equally applied to residential mortgages. The reason I wanted to draw the parallels is that, as of right now, the residential mortgage market in the US is in turmoil (the current poster boy for this being the Bear Stearns hedge funds that spectacularly collapsed in recent weeks).

While it appears that Australia has been able to escape such spectacular failure in our residential mortgage market, it is not a stretch of the imagination to see that it could happen to our corporate debt market. And I am unsure if we can pull a similar Houdini act again.

The LBO market in Australia is relatively young, though it is developing rapidly and adopting many features of the US and European LBO debt structures (e.g. heavy reliance on pro-forma forecasts, equity cures, generous covenant headroom, and not long from now, covenant-lite structures). Often, of course, this is because the client demands these terms, and a bank who wants to participate has no choice in the matter. The terms are great for the client because of the flexibility it offers them, thus they can concentrate on their core competency: improving businesses (or overpaying for assets, if you are cynically inclined).

But in finance, risks are transferred, not eliminated; because of the debt structures, banks are increasingly taking on risks that would have made them vomit not even two years ago. It is the classic "frog in slow-boiling water" (though whether frogs are really that stupid, I don't know yet). Debt levels in deals have been slowly but steadily increasing (while returns earned from them decline), and as they continue to compete aggressively, debt appetites are also slowly (if reluctantly) increasing. It does not help that there is a gross mismatch between the long-term sustainability objectives of a bank (i.e. minimise loss of capital) and the short-term performance objectives of its bankers (i.e. do the biggest deals, charge the highest fees, gain the best dealmaking reputation). Given the tight market, I highly doubt any banker who writes deals now will be around to see those deals flounder or flourish - by then, they would have either moved on to another bank or taken residence in the Caymans. The only impact these bankers see is the provisions charge against the profits they generate - and with default rates at current lows, these provisions are not onerous enough to prevent mispricing of risk.

Should there be a severe shock to the system, the self-fulfilling nature of our financial markets means things could rapidly get ugly for participants (which was what the S&P study was driving at). Of course, it is these same financial markets, demanding ever-higher returns while desiring little risk (or ignoring it altogether), that drove banks to this kind of risk-taking behaviour. So in a way, there is a poetic justice to it all, a vivid reminder that high risks do not mean high returns... such is the painful but necessary reality of our markets.

When we're not busy...

2007-06-25T04:44:00.000-07:00

#1...

CS: "There's an error in the model!" (followed by laughter from ST and CS).
Me: "I thought it was all hardcoded?"
CS: "Yeah... there's a formula in it!"

#2...

ST: "Woo-hoo!"
Me: "Must be good news?"
ST: "My model's working! Wait, what's it doing? Why is it doing that? Dammit!"

#3... (after another late night marathon session with credit executives that goes nowhere)

SM: "That's it, I'm going for a pizza and editing my resume."

#4...

*SMASH*
(Sound of another Blackberry dying an honorable death at the hands of an angry director.)

#5... (after a mandatory fire drill)

HM: "Wow I'm tired after walking down 19 friggin' flights of stairs."
CM: "You fat bastard."

UPDATE: back-to-back-to-back-to-back-to-back 4.30am finishes are not fun, even more so when the "hard deadline" you were working towards gets moved because your client couldn't get their equity piece in place BEFORE they asked for debt (as most right-minded managers would do). Many Blackberries died last week due to this, please take a moment of silence to commemorate them before we upgrade.

How to kill a deal

2007-06-17T01:48:00.000-07:00

Email conversation this week between myself and a client's analyst on a deal. We had told them through the night and into the morning that the $500M+ debt they were looking for was, well, a tad high for a business they had done zero due diligence on, and which they gave us a 2-day deadline for. We said low 300's via securitising the debtors was as good as they can get with what they had given us. They asked us to sharpen our pencils again (who uses pencils these days???). Let's pick up from this point...

Me: "Hi [deal analyst], just checking if we can have a chat to you about the deal this afternoon - if not, let me know what time we can call you."
Analyst: "Is it a discussion about a number with a 5 in front of it?"
Me: "It starts and ends at 5." [Imaginary response I wanted to send back, but out of respect for his boss and mine, I didn't.]

I realise it's a negotiation and everyone's trying to get an upper hand, and maybe I am a bit of a nice guy, but getting lip like that from an analyst (whose fault it was that no due diligence had been done in three weeks) is uncalled for, doesn't improve his negotiating position, and lastly doesn't even answer the question. Did he mean he's not interested in talking if we don't give up 500 big ones? Who are you, Linda Evangelista?

Sometimes it pays to know what your real bargaining position is before you lord it over someone. His boss eventually called up and said they'll take the $300M.

Rockett Trails:
Like the recent (well, for Australia anyway) episode of "Heroes", we go forward in time to see the aftermath of the Blackstone Group's IPO. Hiro Nakamura isn't happy.

In shocking and unexpected news, good times encourage more risk-taking, as evidenced here.

Good primers for CDO's and CLO's, which are helping drive the appetite for riskier debt.

BRW Rich 200

2007-06-07T05:02:00.000-07:00

So I finally got around to buying my annual copy of the BRW Rich 200. I think it's terribly unfair that the cutoff has (AGAIN!) been raised, this year to $180M net worth. It was disappointing. I was THIS CLOSE to getting into the list which is within earshot of the list that is on the way to the BRW Sort Of On The Way To Being Somewhat Middle Class 200, which as you know is not far from the Rich 200.

Anyway I got a copy and sent an email out to my colleagues, see if any of them wanted to mentally crucify themselves by reading about the filthy rich. Especially when some on the list are probably less qualified than my Masters-level, CFA-suffering, Excel-accredited peers. Or, that we are more likely to be begging them for deals than they are to beg us to watch their TV network with stupid shows like this one. (Just on this note - wonder what Mr MacKenzie, as the new king of the idiot box, thinks about a show like this... somehow I don't think his Excel model shows a high IRR on it.)

Based on Mr SC's reply to my email invitation, he's already started to feel the pain before seeing the first page:

Me: "Copy of Rich 200 on my desk. Boozy lunch tomorrow will be the perfect opportunity to discuss the increasing gap between the have's and the have-far-too-much's."
Mr SC: "And the have-not-nearly-enough's."

There will be much lobbying for bonuses in the next three months.

PS I've only just caught up with Going Private's latest... I know, shame on me... and as always, EP's dug up some gems...

Number 1: everyone's been really hard on on this poor girl, but when you (presumably) work long hours and have lost all your friends (so sad), what else would you do with your money? Exactly - you too would buy a $3,500 bag and help the poor Chinese 14-year old girl earn her 35 cents. Don't hate her. Just laugh and move on to...

Number 2: "It made me say, 'You know what? This firm has shown a commitment to me. Let me in turn show some commitment to the firm.'" He pauses, a twinkle in his eye. "So this is a merger, if you will - Josh and KPMG." Oh dear God. The accountants think they're special.

News items

2007-06-03T07:51:00.000-07:00

I wanted to have a section in my blog where updated news items of relevance to this blog would appear. I tried "newsreel" but it looked kind of ugly - I just want the headlines, not search results. I tried the "shared items" from Google Reader but it doesn't update itself.

Will try and figure out a way of doing this...

CFA Level II Exam

2007-06-02T06:23:00.000-07:00

It's the night before the CFA Level II Exam, and I am sitting at home relaxed and blogging.

I decided I won't sit this year's exams. I didn't realise when I enrolled that I would have the job I have now. Needless to say the job meant many late nights, robbing me of precious socialising/drinking time. To maintain work/life balance, I instead maintained my social life and reduced my sleeping hours. However, this turned out to be unsustainable (given my natural tendency to be a morning zombie).

So in order to do the long work hours, maintain a good social life (after all, one must celebrate deals) and still get roughly four hours' sleep per night, I decided I will instead postpone taking the exam. I know, weak. I should hang my head in shame. But I was never great at exams (mainly because of poor study habits). Hopefully having an extra 12 months means I will eventually end up with four weeks to cram rather than the two weeks of cramming I did for Level I.

To my fellow CFA Level II Candidates, all the very best for you. I will see most of you next year (after all, you can't all be in the 36% that annually passes Level II). For those who are smart enough to pass Level II in less than three turns, hats off to you, don't turn into an arrogant jerk!

Blind leading the blind

2007-05-31T04:57:00.000-07:00

Here's a simple question: oil company has excess cash that it needs to invest, or return to shareholders. It acquires an internet company, saying it was doing it to get the best returns for its shareholders. The question is, do you believe the company did the right thing.

Basic business know-how tells you that this is a preposterous situation for a company, and any shareholder who buys this crap deserves to get their money taken from them. Internet companies have volatile returns because of their inherent risk, which is the source of the high returns as well as high losses.

But apparently that is not the correct answer, according to the Monkey Tutor they have "teaching" finance at Rockett Girlfriend's university. Apparently the oil company did the right thing because "risk = return" and because it diversifies the oil company's earnings stream.

Firstly, only ignorants who don't understand how business and markets work think that "risk = return". There is no God-given right to high returns just because you took great risks. However you do earn the rights to great losses if you are inept enough to put oil managers in charge of an internet company. Risk does not equal return - otherwise, what's so risky about it? This is a subtly important but highly misunderstood concept, and the misconception is spread because tutors (often students themselves) everywhere are careless with their teaching, or worse, don't understand the concept themselves.

As for the point on diversification, another misunderstood concept. Any basic corporate finance textbook will tell you that diversification has limited benefits, and these benefits almost always occur at portfolio level (where a portfolio manager acquires diversified shares) rather than at corporate level (where one company may acquire a company unrelated to itself). The risk of loss is magnified when you have one management team (say, from an oil company) taking over or presiding over the management of the unrelated firm (say, an internet company). So not only do you have the inherent business risk, you have added management risk - clearly antithetical to the whole point of diversification!

Theory aside, I am appalled that this tutor saw fit to confuse his students by using incorrect justifications. If he was trying to play "devil's advocate", the responsible thing to do was to clarify this, state the correct answer, and the correct responses against his "devil's advocate" response. To leave it up in the air causes two things to happen: to confuse a weaker student, and to convince the stronger student (or her Rockett Fuel boyfriend) that the tutor is an idiot.

Happy birthday to me

2007-05-24T06:51:00.000-07:00

There is eight minutes left on my birthday, and I am at work.

Dammit.

Slater & Gordon: I don't like being third!!

2007-05-22T08:17:00.000-07:00

[Personal opinion only, no financial advice. Heed this at your own peril.]

So on Monday, a local law firm, Slater & Gordon, listed on our humble stock exchange, the first law firm to do so in this sunburnt country. This is the quintessential law firm... fighting for the battlers, setting right what the mega-corporates (and their larger lawyers) did wrong. Who wouldn't want to invest in something so representative of the tall-poppy syndrome? Apparently quite a few wanted a piece of this Aussie-ness; one week in the market and it's trading at $1.585, 58.5% higher than the listing price (maths skills remain sharp as ever).

Ignoring the perennial argument over whether the bookrunners underpriced the stock at launch, it is rather interesting (read: puzzling) what the appeal of this stock is. It's a tiny firm, and they do LITIGATION. They sue poor, defenseless, hardworking mega-corporations for a living. How much more anti-capitalist can you get?

Well, the irony is not lost on me. No way am I investing (a totally capitalist recreational pursuit) in an anti-capitalist company. So it's not the fact that it's a tiny firm that can't crack the biggest city in Oz and produces a tiny return on equity while booking dubiously valued "Work In Progress" which may or may not turn into cash. It's the fact that it clearly and unequivocally states that their duty is firstly to the courts, then to the clients, then to the shareholders... SHAREHOLDERS!! A DISTANT THIRD!! Well, I'm not joining this silly new "I Like Being Third" Club.

The funniest thing that will come out of this though, is when the inevitable writeoff of WIP happens, the company goes insolvent (hello, Knights) and there is a shareholder class action against the company... what if your clients ARE your shareholders?! I'll bring the popcorn.

Travesty of travesties

2007-05-20T05:56:00.000-07:00

There is something evil happening at the University of the Real Capital of Australia right now.

Rockett Girlfriend has a financial analysis assignment that she has asked me to look over. One of the things she has to do is rip apart the valuation model used in their case study by a hypothetical retarded financial analyst (how dare this hypothetical character use that hallowed title).

We got to the section on whether to use "arithmetic returns" or "geometric returns". Easy right. Apparently not. To the confusion of all finance students in the University of the Real Capital of Australia who have a modicum of maths skill, their lecturer (and probably their lecture notes as well) claimed that "the majority of finance people recommend arithmetic mean returns".

WHAT?!

Who uses arithmetic mean? Which firm do they work for? I want to know this. I will IMMEDIATELY short their stock. If they don't have stock, I will advise them to go through an IPO, and then I will IMMEDIATELY short their stock.

Can you imagine, throngs of university students graduating, thinking "arithmetic mean returns is the market standard calc for everything". They will go NUTS when they start working. "Geometric mean returns? Yeah, I've heard of that. What? You want me to value using geometric returns? Ummm yeah, of course I can. [sweat. gulp. pee.]"

As far as we care, arithmetic mean is a mathematical oddity that has no practical use. Like pi and imaginary numbers and the sideways 8 (actually, we like using the sideways 8 to demonstrate blue sky potential of our valuations, but that's another story).

Please, University of the Real Capital of Australia. DO NOT teach this crap to your students. When our stocks show returns of 25%, 60% and 128%, we only say "the three-year average return is 71%" for our simpleton investors because it's a bigger number than the REAL geometric return of 65%. (Oops just gave that one away.)

Placeholder blog

2007-04-30T03:46:00.000-07:00

Well I'm back from my Japan trip, refreshed, ready to take on the world, blah blah blah. I don't really want to divert away from this blog's primary topic (which for the time being is "anything somewhat related to finance"), so I won't say much about it except that it was an awesome experience, made even moreso by the fact that the Japanese yen seems to be in out of FX favour at this time. Sadly, even high demand for Nintendo Wii's and Sony PS3's aren't enough to prop up the big JPY.

Anyway, I walked in to work last week, and before I even sat down, I get a call from my director:

Him: "G'day how are you this morning?"
Me: "Great, I just got in. What's up?"
Him: "How's your calendar looking for today?"
Me: "I have no idea, I haven't opened it yet, and you guys don't want to give me a Blackberry." (OK, not the last bit. But I thought it.)
Him: "OK well I want you on these two deals. The first meeting is 9am, then another at 10.30am. I'll see you on the ground floor of [address of IB] and we can grab coffee 20 minutes before."
Me: "OK. Let me just check if I've broken my record of most unread emails during my holidays, then I'll come out."

No rest for the wicked.

In other news, I was talking to a couple of friends of mine, Mr JJ and Ms CC (I didn't realise that until just then...). Ms CC is at a rival bank. She's thinking of quitting. Hours are too long, and the team is too small to handle the deal flow. Plus spreadsheets can get kind of boring. (HERETIC!!!) Mr JJ, her partner, got offered a job in an IB, which he turned down because of the hours. They're slightly ahead in the "stages of life" cycle, so I guess for them it's about finding a comfortable routine, building a foundation on which to start a family and raise a few little rascals.

I guess I'm in a slightly lucky position where I think I can afford to make the sacrifice right now. I don't have any kids (that I know of). I don't have a mortgage, and am quite willing to travel for work. But I haven't quite decided if I'd be willing to do this down the track. I haven't quite figured out where I could go if I do decide the change tracks, either. Plus, sitting around at a desk all day makes me fat, and I don't like it.

I had a chat with someone today (who was sussing out my interest in joining a rival bank's team), and after the usual chat about how grossly underpaid I am, he goes "you're in a good position anyway, in 6-12 months you'll have more experience, then I assume you would want to naturally move to a larger IB". And I nodded, but in my head I thought, do I?

2007-03-29T22:19:00.000-07:00

Oh how exciting. Now THIS has the potential to make politics interesting, irrespective of the new lows they happen to plumb over the next four years (click here).

I'm flying out to Japan tomorrow morning, and so probably will not be able to blog for the next three weeks. Not that you care.

Recruitment Season Part 2

2007-03-27T18:32:00.000-07:00

I always hear stories from HR about the weird and wonderful applications people send in during recruitment season. I always thought they were a bit of a stretch, until recently when I, trying to be a good corporate citizen, promoted my company's graduate program in Asia to my contacts. They obviously then sent it on to their contacts, because I then received some choice emails from random strangers. It was quite an experience - if I was in HR, I would be compiling a "Most Entertaining Applications" collection, publishing it and making some money on the side. I don't really want to embarrass anyone through specific references, so instead I have compiled an imaginary FAQ for all would-be applicants from here on:

- Do we send applications to you? No... All applications must go through the website. I cannot forward them to HR for you, because it's against my beliefs.

- Are you the hiring manager? No... I wish I was, but the company won't give me a free holiday.

- Can you be my referee? For a price.

- So what good are you to me then? It's called "currying favour" to "get an edge" through "inside information". Geez, what DO they teach in university these days?

- I graduated more than 12 months ago OR I won't graduate until after 2008 - can I apply? No, because it means you are either too old (which probably means you are as jaded as veterans like us) or too young (which means we have to teach you how to make coffee).

- Are the work hours long? As long as my... deal flow list. More deals = more hours = more bonus money. Pick your poison.

- Will I get paid well? That depends on your definition of "well".

- Are the people nice? That depends on your definition of "nice".

- Do I get to work in Australia? Of course not. We are hiring graduates in Asia for the Asian outposts because it is cheaper than sending a more senior person there. If we brought you here, that cancels out the expected cost savings, doesn't it? Basic business analysis. Go back to school.

- Do I need a commerce/business degree? Yes. Although sometimes we tolerate second-rate physicists because they have mad modelling skills. And maybe the odd Arts graduate or two because they are hot.

- Do I need to be good at maths? No. That's what second-rate physicists are for.

- Do I need to be good at English? No. We have an in-house random word generator that we use for drafting approval papers and loan agreements. We hire expensive top-tier lawyers to spell-check for us (and sometimes tell us where the random word generator went wrong).

- What do I need to know then? How to play golf; how to laugh at stupid racist/sexist jokes made by really really rich people; how many ping-pong balls will fit into a Boeing jumbo jet; how I like my coffee (strong, one sugar).

Recruitment Season Part 1

2007-03-26T16:51:00.000-07:00

It is that time of the year when final year students of all shapes, sizes and IQ levels try to parlay their expensive degrees into somewhat meaningful careers - thereby absolving them of the guilt and regret they might otherwise feel for having spent most of their university lives passed out.

Most hopefuls I come in contact with are considering accounting, finance (I hate it when people lump those two together - they are clearly different and only an ignoramus would think otherwise), law or consulting. Clearly the poster boys for "meaningful careers". I guess this is because these careers don't really require an understanding of string theory (of which we have none), but plenty of fleece theory instead (of which we are abundant in). It's also the fastest way to repay the student loans from your parents/the government. A Nobel Prize takes, what, at least 25 years of hard slogging, and you only get $1 million (which you'll probably have to share)? In commerce or law, you can easily get that in 20*.

Sometimes we get randoms from the Arts faculty who have somehow come to the conclusion that studying Turkmenistani philosophy makes them perfect investment bankers. Maybe so, but until they can prove they know how to securitise and hedge it, they will have to settle on being management consultants (which they invariably do).

In commerce and law faculties throughout the sunburnt country, students listen with eagerness as waves of investment banks, law firms and consulting firms ply their wares. Nothing much changed from back in my days. Common themes become obvious early on:

- every bank, law firm and consulting firm is Number One at something... #1 junk bond syndications team... #1 M&A advisory house ("OF COURSE you should take them over!")... #1 in "most number of recycled knowledge peddled out to clients for fat fees"... #1 in "most number of conflicts of interest"...

- every student will try to impress, even the lowliest analyst or legal clerk, trying to curry favour to "give them an edge" during the interview process. Analysts and clerks, despite their enormous workload, usually like attending careers fairs because they get to lord it over students. It's the only ego boost they will get at that stage in their careers.

- there will be at least one director/partner (invariably male) representing at the careers fair who will hit on a much younger hottie (invariably female). And they will get away with it. This will earn great hate and respect from all male students, motivating them to emulate said director's/partner's success (for better or worse).

- students will all try to ask questions which to them sound unique and intelligent... not realising that question has already been asked (probably originally by me all those years ago), is no longer unique, and makes you sound like a twat who doesn't deserve to even work as a doorman for any of these prestigious firms.

- firms will usually fall into two categories: those that boast about their "work-life balance", and those that scoff at it. The former will bait those Generation Y'ers who believe work is an optional activity, just like lunchtime soccer, yoga, and committed relationships. The latter will bait those who think they are "elite" and have no use for such nonsense as exercise, family, or the ability to make decisions without using nested IF functions, and hence don't need balance. Either way, the end result is eager beavers of today ---> rocket fuel for tomorrow.

Anyway, I was asked to participate in this year's carnival to represent my employer and paint it in glowing terms. As much as the afternoon off would have been nice, I declined for two reasons:

- another firm is still using their three-year-old brochures... and I'm in it. How you could justify using the same brochure when over half the people in it have left is a mystery to me. This has to be in breach of TPA or something.

- they stuffed up my original application... twice. I am still bitter over this.

As a compromise, I voluntarily promoted our graduate program via email to contacts, especially for the Asian offices. Actually this is rather interesting on its own, and deserves its own post later. For now, I must find some other distraction from this stupid game of chicken that we are playing with the client.

* Under certain unrealistic Modigliani-Miller-type assumptions.

2007-03-14T18:51:00.000-07:00

There is a bit of downtime at the moment. We are putting the finishing touches to the board paper seeking approval for the deal we are working on. I hear there will be at least four, possibly six, board members sitting to listen and approve/decline the deal. This is not good. Normally there is only two or three. More board members means more brains thinking of ways to trip you up. This current downtime has the eerie feel of the eye of a storm.

Downtime has benefits beyond thinking of the multitude of ways your carefully crafted deal might fall over. For instance, I've been able to read more news, such as this (click here). This is shameful. If I were the president, this would never happen on my watch.

UPDATE

Had some tech difficulties at work, so couldn't publish the above post. Anyway, since the above was written, we had held the board meeting to discuss the deal. Seven board members participated in person or by phone. After fielding the expected questions, and managing to satisfactorily answer a left-field question (how do you prepare for a question on legal risks that arose from the board member being privy to confidential information on a similar business he happened to be an adviser to?), we received approval for our deal. Now we just need the client to accept the terms, and we are good to go... very relieved to have this deal go through.

Look who's come crawling back...

2007-03-14T00:39:00.000-07:00

I am floundering here. Too much to learn. Too many variables. Model is ugly and does not flow properly, requiring me to fix them at every scenario change. Hence, not enough time allocated for frivolous (but entirely cathartic) blogging. Until tonight anyway.

Yes, I haven't posted for over two months of this fledgling blog. I will make a very bad father. A great uncle, maybe, the favourite uncle that buys lots of nice expensive presents and doesn't mind wearing the crappy pirate costume for impromptu comedy. But based on my ability to devote time to a newborn blog, and extrapolating that 20 years into the future, and adjusting for terminal value, the NPV of my fatherly instincts are almost zero. I contend it's not negative in an effort to convince myself it is worth improving, and also for the unproven correlation between blogging frequency and fatherhood.

Anyway, I have been working fairly average IB hours since starting in my new role. Actually we just finished writing up a deal, which has given me enough breathing time to be writing this entry up and then playing indoor soccer later tonight. OK "playing" might be an overstatement; my job is to dynamically occupy enough space so as to minimise the other team's score. I can't even call it goalkeeping... I think it's more akin to space-hogging.

New plan is to try and write short entries while waiting for a model to fall on my lap (the financial kind, unfortunately), or sipping my hot chocolate while updating myself on the news, and write the longer ponderings at home in front of the TV (note to self: multitasking is bad for you).

Let's see if we can keep up the new plan.

Rockett Trails

2007-01-04T01:41:00.000-08:00

I found some interesting links, which will be a nice break from my usual tirade...

The Harvard Business School has an interview with Josh Lerner regarding the private equity boom. Click here for the podcast. Seems like an ominous term to use; in word association exercises, I associate "boom" with "bust" 100% of the time (although it doesn't apply as well vice versa).

The McKinsey Quarterly website has a few articles I found interesting. Find them here and here. (Requires registration to see full articles.)

DealBook had a short article on how the SEC (the Securities and Exchange Commission in the US) plans to curb the hedge fund industry, by making it more difficult to qualify as a "wealthy investor", by moving the minimum net worth from $1M to $2.5M. Only investors (which includes companies, partnerships and trusts) with a minimum $2.5M net worth can invest in hedge funds. My guess is that this will have very little effect. Even people who are nowhere near that level of wealth are already exposed to hedge funds... through their superannuation/pension funds.

Another DealBook article gives hope to that hardworking lot, the investment bankers, of finding true love in between spreadsheets and tender documents.

Finally, this is one of the best videos of 2006, so I'm putting it here. Watch this first... then watch this and this.

2007-01-03T05:04:00.000-08:00

The big financial topic for 2007 (and hopefully, 2008) will be private equity. Or so says a number of top CEO's interviewed in a recent Australian Financial Review article.

The last year gave us great trophy deals: KKR jumping into Australia and buying the Cleanaway business, and painting a great big bullseye for other firms to aim at; the thwarted attempt at buying out one half of the grocery duopoly (Coles); the buyout of the Flying Kangaroo (Qantas); and so on.

It was also the year when people, having noticed the frequency that "private equity" and "leveraged buyout" was appearing in texts and flowing from everyone's lips, started to ask: what is it; is it good; and will it last. The year 2007 will have people sitting down with popcorn to watch and find the answer.

The "what" is easy. Imagine taking out a home loan. You put in a 10% deposit (more or less), and borrow the rest. You buy a house "with potential", you renovate, add bits and pieces, in the meantime paying the loan off using rent income or other income (most likely your salary). Then you pick a time to sell, and hopefully you sell at a nice profit.

For private equity, replace "house" with "public company", replace "income" with "operating cash flow", and there you have it.

The next two questions are much harder, and will depend on your perspective on the market. If you own a dog of a company, with bad management that you can't seem to get rid off, then a PE firm willing to pay a premium on the market price to take the company off your hands is a blessing. Same thing if you manage the company, are sick of the short-termism of the market, and have grand plans to make the company a success - if only someone would give you the capital and help you realise your dreams.

If, however, you are one of a (currently small but growing) number of people who believe the market is becoming/already is overvalued, then PE firms are to the market what petrol is to fire. Paying premiums for companies that are (in your belief) already overvalued is a sure sign that it's time to short some stocks. If you believe that most companies worth buying have already done all the cost-cutting and window-dressing that can be done, then PE firms will be buying companies that have no upside. If the market tanks during the typical 5-7 year investment horizon held by PE firms, then selling out at a profit (like selling a renovated home at the bottom of the market) will be almost impossible.

And of course, how long it lasts will depend on how long it takes until a major blow-up occurs and sends everyone running for cover.

This year will be an interesting one. Personally, I've been a believer in investments based on fundamentals. On one hand, I think PE firms do that: they buy firms with good foundations but mediocre structure or management, fix it up so the companies live up to their potential, and receive the rewards. They are the ultimate renovators.

But more and more, PE firms are paying higher prices, which to me does not seem like sound investing. It will reduce their ROI unless they do one of two things: borrow more as a proportion of the purchase price ("gearing up", which increases default risk), or somehow offload their investments to someone else at an even higher price. Whether that someone else is another PE firm or the public, whoever ends up with it will be playing a similar game of "pass the bomb" that was played in the late 90's/early 2000's during to dotcom bubble. But then again, I'm sure they know more than me, and that's why they're in the game and I'm not.

On the other hand, I've got to be feverishly optimistic about the prospects of PE in Australia, because my new job lives and dies by it. If the market tanks or PE firms go out of favour, the deal flow stops, and I sit there twiddling my thumbs (or worse, I lose my job and will have to go back to my old job).

At the end of the day, I believe PE is just like any other investment strategy: the asset has to be sound, the entry price low, and the exit price high. At the moment, I am beginning to wonder how much all three will hold up.

My 2006

2007-01-01T00:51:00.000-08:00

I got this from fallenbutflying's Xanga site.

What did you do in 2006 that you'd never done before?
I flew to Hong Kong with some church friends for a holiday.
I crushed the vain hopes and futile dreams of many university students presenting nonsensical ideas and half-baked projects, as a judge in the National SIFE Competition.

Did you keep your new year's resolutions, and will you make more for next year?
I don't think I kept them. I don't call my goals "resolutions" because it would assure failure.

Did anyone close to you give birth?
None immediately come to mind, so no. (If I missed someone, well, you should've made me godfather...)

Did anyone close to you die?
No, thankfully.

What countries did you visit?
The colonies:
- Hong Kong (previously British)
- Macau (previously Portuguese)
- New Zealand (currently Australian, but they're still in denial)

What would you like to have in 2007 that you lacked in 2006?
Absolute power.
Barring that, my apartment; my new, smaller, faster laptop; my PDA; and my Nintendo Wii.

What date from 2006 will remain etched upon your memory, and why?
November 20, 2006. First year anniversary. We went to the zoo (my first time in over 10 years), and thoroughly enjoyed it. Saw a chimp grabbing its own faeces. Quality entertainment throughout.

What was your biggest achievement of the year?
Passing CFA Level 1 exams.
Negotiating my way into Leveraged Finance after two years of frustration.
Managing to convince Rockett Girlfriend that I was worth her time.

What was your biggest failure?
No golf lessons.

Did you suffer illness or injury?
Only of the mind.

What was the best thing you bought?
For myself: my "Friday Night" blue pinstripe shirt with french cuffs. I wore it to Rockett Girlfriend's birthday.
For someone else: the black dress for Rockett Girlfriend to wear to a friend's wedding. Summery, elegant, and totally hot.

Whose behavior merited celebration?
Mr DP, for finally getting married in April, when a few years back even he was saying he may just be single for life. And for having the guts to leave a lucrative legal career in London to be a fulltime pastor in a church there.

Whose behavior made you appalled and depressed?
A certain person who tried some character assassination in order to prevent my promotion.

Where did most of your money go?
Food and giving presents away. Oh and petrol.

What did you get really, really, really excited about?
Changing jobs.
Passing my CFA exam.
Hong Kong.

What song(s) will always remind you of 2006?
Justin Timberlake - Read My Blog (sorry, Be My Love)
Scissor Sisters - I Don't Feel Like Dancing (just way too catchy)

Compared to this time last year, are you:
i. happier or sadder? – happier!!!
ii. thinner or fatter? – fatter...
iii. richer or poorer? – hmmm... about the same

What do you wish you'd done more?
Exercise.

What do you wish you'd done less of?
Waiting.

What was your favorite TV program?
Lost and 24.

Do you hate anyone now that you didn't hate this time last year?
"Hate" is too strong. More along the lines of "vitriolic dislike" and "extreme incompatibility". And yes.

What was the best book you read?
Liar's Poker.

What was your greatest musical discovery?
Pandora.com

What did you want and get?
Business class. Leg room. Heaven.

What was your favorite film of this year?
The Departed.

What did you do on your birthday, and how old were you?
I turned 25. I just had dinner with Rockett Girlfriend and Rockett Family. It was the week before my CFA exam so I couldn't really celebrate.

What one thing would have made your year immeasurably more satisfying?
Golf lessons.

How would you describe your personal fashion concept in 2005?
Subtle and sleek, with a hint of vibrant colour.

What kept you sane?
Rockett Girlfriend. Mr JW and Mr MR, my constant source of career advice and sounding board during those rough times. Mother Rockett and Brother Rockett, for listening to my grand career plans no matter how boring they were.

Which celebrity/public figure did you fancy the most?
Ms Jessica Alba. Drool.

What political issue stirred you the most?
General and English skills testing for migrants applying to be Australian citizens.

Who did you miss?
Stepfather Rockett. Mr DP. My goddaughters.

Who was the best new person you met?
Mr LO. Great company (notwithstanding clipping my kart and costing me the win).

Tell us a valuable life lesson you learned in 2006:
Have faith. Show initiative. Take risk.

What was the nicest thing someone told you about yourself:
"You're not fat, baby." I know she's fibbing, which is why it was so nice. (Granted, I am only 4kgs over my ideal weight, so it's not a big lie.)

The most touching experience you've had this year?
When Brother Rockett told me that I inspire him. I have no idea why, or what I inspire him towards, but it was nice of him to say so.

What did you like most about yourself this year?
I made time for regular healthy pursuits.
I was more patient.

What did you hate most about yourself this year?
I tolerated idiots.
I spent too much money.

Quote a song lyric that sums up your year:
"It's something unpredictable, but in the end it's right, I hope you had the time of your life" - Green Day

Was 2006 a good year for you?
In many ways, yes.

What was your favorite moment of the year?
Debating with Rockett Girlfriend.

What was your least favorite moment of the year?
Standing in the middle of Sydney CBD, ready to have a great night out, and finding hardly anything worth doing or going to. I need to get out of this town.

Where were you when 2006 began?
Ms ML's house for the 1920's themed party.

Who were you with?
The gang.

Where will you be when 2006 ends?
Watching the fireworks down the road from Mr BT's house.

Who will you be with when 2006 ends?
Mr BT and Ms MM. This question is not as fun when done retrospectively.

What was your favorite month of 2006?
October. Spent one weekend being lazy at the beach. Turned off my phone so no work calls get through. Very satisfying.

What was your favorite record from 2006?
New Jack Swing compilation of old skool songs.

How many concerts did you see in 2006?
A couple not really worth mentioning.

Did you drink a lot of alchohol in 2006?
Yes.

Do a lot of drugs in 2006?
No.

Did you do anything you are ashamed of this year?
Perhaps. I'll know for sure when it bites me in the ass later.

How much money did you spend in 2006?
Too much.

What was your proudest moment of 2006?
Watching Rockett Girlfriend present in the SIFE finals in front of major league executives. Smart, confident women are HOT.

What was your most embarrassing moment of 2006?
Failing miserably at bodyboarding.

If you could go back in time to any moment of 2006
and change something, what would it be?
Buying side street junk from HK and now I have nowhere to put them.

What are your plans for 2007?
Work hard(er). Exercise (more). Tend to my spiritual side. Be more involved. Do more stupid things. Be a better wingman.

How are you different now that the year has ended?
I am very slowly thinking of settling down sometime. Within 10 years.

What are your wishes for the new year?
That all successes be well-deserved, and all failures be well-learned.

2007-01-01T00:08:00.000-08:00

For NYE, two friends and I decided we will forgo the mobs, the hours and hours of walking and waiting (and walking some more), and general stench of alcohol drifting across the CBD. We had a cook-in/movie night instead.

About halfway in the night we were getting calls to come out to the city and join a party. With the road closures and blind-drunk mortals covering the roads, driving there was not an option unless one wanted to recreate scenes from their "Worst Moments Of Asian Holidays".

This set off about an hour's worth of to-ing and fro-ing and general indecisiveness. Contrary to first impressions, we were not simply being old fuddy-duddies. We did actually find the partying aspect appealing. We also thought that maybe one of our friends kept asking us to come out as a subtle way of signalling for rescue away from relatives. We were prepared to do that as well. But the subsequent troubles in getting home was a big concern.

Public transport is only acceptable if you also like having someone's vomit on you. Taxi drivers are price-gouging hyenas, the stench of desperation in the streets sending them into a laughing frenzy as they extort upfront payments of 10 times (or more) the normal trip fare. No thanks. Given it was at least a 45-minute walk, and the risk of thunderstorms looming, we decided to stay home, instead choosing to watch the fireworks from the street five minutes away.

It didn't rain a drop.

Nonetheless, we managed to have a good time. The food came out well and the movies weren't too bad. We certainly did not miss the jostling and the lengthy tiring walks. Resolutions to do more exercise in 2007 were quickly made.

SHAMELESS PLUG

I love Singstar and Buzz on the Sony Playstation 2. We played them at my cousins' place after the New Year family lunch. Nothing brings people together better than competition. Establishing once and for all who is the smartest in the pack was very satisfying (it was me, not that it was in any doubt). And singing along to the video clips of the songs is far, far better than normal karaoke, where you normally sing along to some retarded 80's romance clip populated by ugly people with really bad hair and extremely unbearable acting "skills". Of course, the clip doesn't help your singing prowess in any way.

We could easily do away with the contrived drama, idiotic judges and general ineptitude of Australian Idol by just letting all wannabes compete on Singstar. Let the totally objective and finely calibrated computer chip decide who is the best ("best" being a relative term; s/he may still be utter crappe`, excuse my French). Anything that gets rid of Mark Holden and Kyle Sandilands can only be a good thing. Sorry Marcia.

2006-12-28T02:33:00.000-08:00

It's been two days since the Christmas break. I'm trying to get work done with not much success. Everyone's trying to get back into gear for work, and it's taking a bit of time. However, inspired by Australia's favourite fat playboy, Shane Warne, we have managed to turn the boardroom into a temporary indoor cricket pitch. I count that an achievement.

Most of my clients are on holidays. Very thankful for that. As much as I love them, I'm probably not in the right frame of mind to get a phone call to save them from another mess they've put themselves in.

I've only gotten around to telling a few of them that I won't be around anymore in a couple of weeks. Given most of them are still away, I will probably have to resort to a mass email sometime tomorrow. I fully expect many tears. Not sure how many will be tears of joy. We bankers are such an underappreciated bunch.

Tomorrow's the last Friday of the year. I assume there will be long lunches and much drinking in the summer sun. Another day of no actual work being done. Another reason why it should just be declared a holiday. Not that I'm complaining - not long now before slow days are few and very far between.

I haven't figured out what resolutions I'm going to break for next year. However, my girlfriend wrote me a list of things to do while she is away on holidays overseas. That's probably a good starting point. "No. 5 - Have an alcohol-free week after New Year's"... that's a toughie. Might break that one first.

Agent Double-O-Rational

2006-12-27T06:23:00.000-08:00

Yesterday is Boxing Day here. For non-Commonwealth readers, it does not refer to the day devoted to violence arising from poor gift selection the day prior. Here, it means Massive Storewide Sales, and a day devoted to violence at the bargain bins and checkout stalls.

If ever there was a case for debunking the notion of "rational economic agents", MSS is a behavioral economist's wet dream. People have just spent days and weeks (or in my case, hours) shopping, shopping and shopping some more, looking for that "perfect present" (more perfect than last year's "perfect present"), paying top dollar for each purchase... and then a day after, those same presents are 30, 40, 50, even 70% cheaper. The obvious question is, why don't people wait until Boxing Day to buy presents?

Christmas is a huge emotional investment for most people (those with friends anyway), and gift-giving has little reliance on logic. This is a slap in the face of rational economic thought. Or as my old school principal noted in one memorable school assembly: it is a sabot in the cogs of the windmill, therefore the Dutch are terrorists and we should stop funding their operations through purchase of magic brownies. Or something.

Being of financial leanings, the profiteering and wastefulness in the days leading up to Christmas often worries me (because of the inevitable credit card bill). But when your beloved gives you a nice new power tie with which to intimidate negotiators in the private equity deal to take over that retailer you just bought your beloved's negligee from, all the worry evaporates. Nope, definitely not rational economic agents.

Rockett Fuel Genesis

Cool name for a manga series. Unfortunately, not quite that cool.

In a couple of weeks, I will be starting my new job as an analyst for the leveraged finance outfit of a major bank. For the slightly initiated, it probably sounds very prestigious. For the uninitiated, it means absolute zip. For those in the industry, my types are derisively referred to as "rocket fuel". Those that don't sputter out after a few years are rewarded with massive bonuses to help finance our many addictions and maybe our first (or if we're lucky, second) divorce settlements.

I started this blog with no expectation of being able to write in it regularly, but the thought of being able to if or when I can was quite nice. It will probably be a bit of a vent outlet, and a place to ruminate on ideas. It will not be a source of market-moving rumours, I guarantee that now. Nor will it be a reliable source of humour or satire - any that you find here are purely accidental.

Eventually I might get my beloved, Miss Rockett (temporary name), to start posting here too. She's a corporate lawyer-in-training, so it won't be long before she too will be slaving the long hours and for all intents being a "rocket fuel".