I Feel So Loved

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?

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

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

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

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

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

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.