Frustration

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

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

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

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

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

Death and reanimation

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

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

JP Morgan and Bear Stearns

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

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

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

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

Brain teasers

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

Anyway.

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

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

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

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

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

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

Sprains

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

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

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

EA, Take-Two, and why I love games

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

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

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

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

I love games.

Intelsat

Thanks to Going Private for writing about this interesting deal.

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

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

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

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

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


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