Rebel Traders – Analysis Without The Hype

This afternoon Blockbuster Inc (BBI) reported Q4 earnings:

Blockbuster Inc Reports Q4 -$0.24 v -$0.12 expected, Revenue $1.08B v $1.1B expected

- SSS (same store sales) -15.9% (domestic), -14.7% (worldwide)
- In 2010, continues to expect to close a range of 500 to 545 under performing domestic company-owned stores.

To say that Blockbuster is having problems would be an understatement.

The worst part of today’s earnings release is the statement that the company is a ‘going concern’

Blockbuster continues to actively explore various recapitalization opportunities, which may include a recapitalization of the Company’s outstanding debt or equity securities.

Management anticipates the report of the Company’s independent registered public accounting firm relative to the Company’s 2009 consolidated financial statements will contain an explanatory paragraph indicating that substantial doubt exists with respect to the Company’s ability to continue as a going concern. The Company’s independent public accountants have advised management that such an opinion will be related to the risk that the Company will have a low level of liquidity, particularly as a result of decreased cash from operations.

There are two phrases that CEO’s don’t want to hear. The first one is ‘”60 minutes is here for an interview”, and the other is that the auditors of the firm are using ‘going concern’. In my experience, when a company gets the dreaded ‘going concern’ from their auditors it usually does not work out well in the end.

Blockbuster (BBI) is trading at $0.32 per share in after hours following this news.

Illinois is technically insolvent…

Illinois appears to meet classic definitions of insolvency: Its liabilities far exceed its assets, and it’s not generating enough cash to pay its bills. Private companies in similar circumstances often shut down or file for bankruptcy protection.

"I would describe bankruptcy as the inability to pay one’s bills," says Jim Nowlan, senior fellow at the University of Illinois’ Institute of Government and Public Affairs. "We’re close to de facto bankruptcy, if not de jure bankruptcy." […]

[…] While Illinois doesn’t have the option of shutting its doors or shedding debts in a bankruptcy reorganization, it seems powerless to avert the practical equivalent. Despite a budget shortfall estimated to be as high as $5.7 billion, state officials haven’t shown the political will to either raise taxes or cut spending sufficiently to close the gap.

As a result, fiscal paralysis is spreading through state government. Unpaid bills to suppliers are piling up. State employees, even legislators, are forced to pay their medical bills upfront because some doctors are tired of waiting to be paid by the state. The University of Illinois, owed $400 million, recently instituted furloughs, and there are fears it may not make payroll in March if the shortfall continues.

Without quick corrective action or a sharp economic upturn, Illinois is headed toward a governmental collapse. At some point, unpaid vendors will stop bidding on state contracts, investors will refuse to buy Illinois bonds and state employees will get paid in scrip, as California did last year.

"The crisis will come when you see state institutions shutting down because they can’t pay their employees," says David Merriman, head of the economics department at the University of Illinois at Chicago.

A record $5.1 billion in state bills was past due at yearend, almost doubling to 92 days from 48 days a year earlier the average amount of time it takes the state to pay vendors such as doctors, hospitals, non-profit service providers and other contractors. (source: Chicago Business)

What happens when state budgets are broke? Only one of two things can happen, cut services and employees or raise taxes. Anyone care to guess which way Illinois will go?

In my own state of New Jersey, Governor Christie takes over the helm from Governor Corzine tomorrow. First order of business will be the budget. New Jersey has serious problems as well and expectations are for deep cuts across the board. But I won’t rule out tax hikes down the road either.

Stay tuned, the budget problems facing the states is just beginning.

Another one bites the dust… Capmark Investments LP files Chapter 11 bankruptcy, and updated commercial loan delinquency projections…

NEW YORK, Jan 15 (Reuters) – Capmark Investments LP, which said it manages more than $1.7 billion of equity real estate and mortgage-related investments, filed for bankruptcy protection on Friday, less than three months after its parent, Capmark Financial Group [CPFNG.UL], made its own filing.

The partnership once known as GMAC Institutional Advisors has more than $1 billion of assets and liabilities, according to its Chapter 11 petition filed with the U.S. bankruptcy court in Wilmington, Delaware.

Capmark Investments said it hired Lazard Freres & Co as its investment banker and financial adviser for the bankruptcy process. A spokesman for the partnership declined to comment.

Capmark Financial, a commercial real estate company, had sought protection from creditors on Oct. 25, wiping out the investments of several private equity firms including Kohlberg Kravis Roberts & Co [KKR.UL].

The company cited deteriorated financial and real estate market conditions and a lack of available capital for its filing, in which it reported $20.1 billion of assets and $21 billion of liabilities.[…] Source: Reuters

And while we are on the topic of mortgage related investments, take a look at the latest projections on commercial loan delinquencies issued today:

Moody’s: US CMBS loan delinquencies rise to 4.9%; 8%-9% rate expected by end of 2010. 

    Delinquencies on US CMBS loans in conduit/fusion deals ended 2009 at 4.9%, as measured by the Moody’s Delinquency Tracker (DQT). They began 2009 at 0.95% and therefore have increased five-fold during the year.

   Moody’s expects loan performance to deteriorate further in 2010 and projects that the DQT will reach 8%-9% by the end of the year. 

In 2009 the number of individuals and families filing for bankruptcy soared by almost one third. And this statistic is even more shocking when considering that in 2005 the banks pressured Congress to pass a bankruptcy reform bill. That bill made it more difficult for individuals to file for bankruptcy.

Hmmmm, could the banks have known they would be seeing a rapid rise in financial hardships back then before everything went to hell?

The number of Americans filing for personal bankruptcy rose by nearly a third in 2009, a surge largely driven by foreclosures and job losses.

And more people are filing for Chapter 7 bankruptcy, which liquidates assets to pay off some debts and absolves the filers of others [...]

Overall, personal bankruptcy filings hit 1.41 million last year, up 32% from 2008, according to the National Bankruptcy Research Center, which compiles and analyzes bankruptcy data[...]

[...]Chapter 7 filings were up more than 42% as of November 2009, compared with the same period a year earlier, according to the research center. November is the most recent month with analyzed data available. Chapter 13 filings rose by 12% and made up less than a third of 2009 filings as of November.[...] WSJ H/T Butch,Mike, Jen

One more time -

12/30/2009- YRC Worldwide (NASDAQ:YRCW) said it is still short of the needed levels of noteholder participation and would extend the offer for a sixth time, according to a Reuters report.

The extension is until December 30, 2009 – 11:59 PM ET.

Union workers plan to stage a protest on Wednesday against hedge funds and banks that they believe are blocking a successful exchange by holding positions that could generate profits from the company’s failure.

The company said that 84% of the company’s outstanding notes have been tendered in the proposed exchange for equity. However, YRC still had participation representing only 59% of its USF 8-1/2 % notes and needs about 70%.

YRC Worldwide said that its liquidity position is dire and it needs to secure the debt exchange by the end of the year.

I don’t know what YRC Worldwide is doing behind the scenes in order to win over additional debt holders, but whatever it is I would say it is not working as they are now on the sixth extension.It appears as if YRC is simply extending the deadline and pretending that they can be successful.

Like I said yesterday, YRC Worldwide is simply delaying the inevitable bankruptcy in my opinion. Even if the debt for equity exchange meets the set goals, it will probably only buy the company another 6 months to a year of life before they are in another dire situation.

Is the economy really getting any better? Is consumer spending improving? Try telling small businesses things are much better and let them tell you how things really are.

“While bankruptcies are up, overall, small-business closures are up even more,” Headd (SBA economist) said.

California has been particularly hard hit. The latest data show small-business bankruptcies up 81% in the state for the 12 months ended Sept. 30, compared with the previous year. Filings nationwide were up 44%, according to the credit analysis firm Equifax Inc. (emphasis added)

The actual number of small businesses in trouble is probably higher, experts said, because many owners file for personal bankruptcy rather than seek protection for the business.

Dennis McGoldrick, a bankruptcy lawyer in Torrance, said his clients are all stuck in similar situations — capital is hard to come by, customers are tough to attract and debt is piling up.

“We can’t keep up,” McGoldrick said. “There’s more people that want to come in every day than I can see.” [...]

[...]Over the last year, the Los Angeles, Riverside/San Bernardino and Sacramento metropolitan areas have led the nation in small-business bankruptcy filings, said Tim Klein, a spokesman for Equifax.

About 19,000 small businesses filed for bankruptcy in California during the 12 months ended Sept. 2009, up from 10,500 the previous year.

During September alone, 2,229 small businesses filed for protection, up from 1,503 filings in September 2008, the firm reported.[...] (H/T Butch) source: LA Times

Bank failures, air traffic, profits from death, foreclosures, and more items from the web and the news wires. Also this weeks schedule of events.

Citadel Broadcasting files for bankruptcy

Busy (and very expensive) weekend for bank failures.

• First Federal Bank of California (cost to the FDIC: $146.3 million + $5.3 billion in loss-share agreements)
• Imperial Capital Bank (cost to the FDIC: $619.2 million + $2.5 billion loss-share agreements)
• Independent Bankers’ Bank of Illinois (cost to the FDIC: $68.4 million)
• New South Federal Savings Bank (cost to the FDIC: $212.3 million + $1.2 billion in loss-share agreements)
• Citizens State Bank (cost to the FDIC: $76.6 million)
• Peoples First Community Bank (cost to the FDIC: $556.7 million + $1.4 billion in loss-share agreements)
• RockBridge Commercial Bank (cost to the FDIC: $124.2 million)

And while we are talking about costs to the FDIC, consider just how bad the FDIC is at estimating the ‘real’ cost – FDIC estimated Colonial Bank cost would be $2.8 billion, but the real cost has risen to $5.8 billion.

2010 forecasts from the Market Oracle

$36 /hour to $13 /hour. White-collars turn blue

Global air passenger traffic drops by largest amount in aviation history

Obama’s “Home Affordable Modification Program” – Huge Failure

Foreclosure backlog is huge

Goldman Sachs ditches attempts to profit from death

Fewer states add jobs – Green shoot is dying (RT note: watch for the surge in layoffs in retail sectors in January and February)

AIG – cough up the e-mails

Washington for Sale – Bill Moyer video link , Robert Kuttner and Matt Taibbi guests.

Iceland – Sovereign rating at risk yet again over internal financial battles. One more rating cut and Iceland will be classified as junk.

Greece admits that sovereign rating may be cut by Moody’s

Things are big in Oklahoma – like their record setting deficit

United Kingdom – Property is a black hole, more bank losses.

(IQ) Earlier on Sunday, Iraq halted crude oil exports from its northern oil fields to the Ceyhan port near Turkey – Press (Update)
- The move came after it was reported that a main pipeline in northern Iraq was attacked.
- The attack occurred at around 8:30 p.m.on Saturday (1730 GMT)
- According to one estimate, the pipeline’s capacity is equal to about 450K bpd (approximately 23% of Iraq’s exports) (wire report)

Events for the week of December 21 to 25:

Monday:

08:30 -  Nov Chicago Fed Index (last -1.08)

Tuesday:

Short of any miracle it is now expected that CIT, the nations largest lender to small and medium sized businesses will file for Chapter 11 bankruptcy this Sunday afternoon or evening.

[...] CIT’s board was meeting about the likely filing early Sunday afternoon, these people said, and the company expected to seek Chapter 11 protection in New York in a matter of hours. The lender expected to have considerable support from creditors for its “prepackaged” reorganization, which could allow CIT to have its plan approved quickly and emerge from bankruptcy by the end of the year, other people familiar with the matter said.

The filing comes after a previous debt-exchange offer made to CIT’s bondholders failed. But CIT garnered broad support for a prepackaged bankruptcy, people familiar with the matter said.

The $2.3 billion in taxpayer money spent to save CIT is likely to be wiped out, as the lender prepares for the filing.

With $71 billion in assets, CIT would have the fifth-largest bankruptcy filing in U.S. history, trailing only those of Lehman Brothers Holdings Inc., Washington Mutual Inc., Worldcom Inc. and General Motors Corp. CIT’s Utah bank, which has about $10 billion in assets, wouldn’t be part of the bankruptcy filing.[...]

Source: WSJ

The Wall Street Journal is reporting that CIT, a major lender to small businesses intends to file for bankruptcy protection in New York within days, perhaps as soon as this Sunday.

CIT had already received $2.3 Billion of tax payer funds to keep the company alive. Under the possible bankruptcy filing the money that came from the tax payers is at jeopardy of being completely lost for good.

[...] The $2.3 billion in taxpayer money spent to save CIT Group Inc. is likely to be wiped out, as the lender prepares to file for bankruptcy protection in a high-stakes restructuring plan aimed at keeping the firm in business.[...]

[...] With $71 billion in assets, CIT would have the fifth-largest bankruptcy filing in U.S. history, trailing only those of Lehman Brothers Holdings Inc., Washington Mutual Inc., Worldcom Inc. and General Motors Corp. CIT’s Utah bank, which has about $10 billion in assets, wouldn’t be part of the bankruptcy filing.

One loser from a bankruptcy would be the U.S. Treasury. Late last year it injected $2.3 billion of funds from the Troubled Asset Relief Program to help stabilize the lender, which was weighed down by billions of dollars of bad student loans and subprime mortgages. The government investment is likely to be wiped out, said people familiar with the matter. Common shares would likely drop to zero, too, these people said. [...]

[...] A filing could also be a blow to some of the tens of thousands of small- to medium-size businesses that are customers of the century-old lender. Unlike public corporations — which enjoy access to reinvigorated credit markets — small borrowers are finding capital remains scarce.

Even if CIT emerges intact, its lending capacity could drop to less than 20% of what it was two years ago, according to an estimate by Brian Charles, a debt analyst at R.W. Pressprich & Co. CIT made just under $40 billion in new commercial loans in 2007, not including an additional $45 billion for trade financing, according to company figures. That plunged to just $4.4 billion in the first half of 2009. [...]

(source: WSJ)

The lender for small and medium-sized business is having increasingly more difficulties in reaching an agreement on restructuring its debt. Just as it emerged a few weeks ago that GS had an interest in CIT’s bankruptcy, it would appear today that most bondholders are not following either on refinancing its debt or approving a prepackaged bankruptcy.

The main reason being that many “vultures” attracted by the huge portfolio of CIT and the perspective of splitting it up are playing hardball, considering that they have more to earn from a bankruptcy (particularly if they have securitized loans guaranteed by collaterals). Of course, one of these is the ominous GS.

For those who rant about bailouts, CIT has received about 2.3 Bn $ in TARP funds, all of which would most likely be lost for the taxpayer in the event of a bankruptcy of CIT. In terms of market efficiency, this is one case where letting “pure capitalism” play would end up with a disastrous result on many levels.

First, it would shut down one source of financing for small businesses which have been suffering in this recession. Second, it would concentrate into the hands of the bailed out giants the control of the market, thus restricting competition and creating an oligarchic structure. Finally, as could be expected, a whole sector of the lending market would be wiped out or submitted instantaneously to costly conditions. And I have left out the question of the loss to the taxpayer…

CIT Group Inc is seeing little interest from bondholders in a debt exchange offer aimed at repairing its fragile balance sheet, making bankruptcy increasingly likely, sources familiar with the matter said.

The lender to small and medium-sized businesses said earlier this month it was looking for investors to approve a large debt exchange that would reduce its borrowings, or to approve a prepackaged bankruptcy.

CIT is now more likely to try a prepackaged bankruptcy, two people familiar with the matter said. They declined to be identified because the exchange offer is ongoing and information about its progress is private.

But separately, investors in CIT securities said it is possible the company will not find enough debtholder approval for a prepackaged bankruptcy, which requires sufficient support before the company files for protection from creditors. Instead, CIT might have to aim for a prenegotiated bankruptcy, which typically has less support before the actual filing.

CIT spokesman Curt Ritter declined to comment.

CIT has limited time to work out its debt difficulties. It has about $3 billion of debt to repay in the fourth quarter, including both secured and unsecured obligations, according to a CIT quarterly filing with regulators.

CIT has lost access to unsecured debt markets, but has billions to refinance in coming years. In three of the next four years, it will have more debt to repay than cash to pay it back. CIT has roughly 1 million customers and more than $70 billion of assets, but many of its borrowers are struggling amid the worst recession since the Great Depression.

The company’s debt exchange aims to reduce CIT’s borrowings by at least $5.7 billion, with specific targets for lowering the company’s liabilities through 2012. The exchange offer expires on October 29.

AT LEAST TWO WANT MORE

At least two groups of investors are pushing for better terms in a bankruptcy than those suggested by the company earlier this month, one of the sources and investors said.

A subordinated debt holder said last week he was hoping to press for either more equity, or for a promise from the company to pay extra money to current subordinated debt holders if the company’s assets perform well enough.

Separately, investors holding debt that funded CIT business in Canada are pushing for greater consideration in any bankruptcy plan, too. These investors are entitled to recover money from Canadian assets and the parent company in the United States and could therefore get close to 100 cents on the dollar in any bankruptcy.

One investor that would take a hit in a CIT bankruptcy is the U.S. government. The United States’ Troubled Asset Relief Program invested $2.3 billion in CIT in December and much or all of that could be lost if the company files for bankruptcy, analysts said.

But many debt investors are likely to end up with much more than zero if CIT files for bankruptcy. One group of bondholders lent $3 billion to the company in July. That loan is collateralized by an estimated $30 billion of assets, which would ensure that the July loan could likely be paid back in full.

The beautiful Cayman Islands which is a hot spot for cruise ships and tourists is of course also known for being one of the hot spots for ‘offshore’ business operations (to avoid paying taxes) and for the wealthy to hide money (for the same reason).

The blowup in the global economy has not hurt these offshore hideaways and now the Government of the Cayman Islands is near bankruptcy.

The white sands of Seven Mile Beach on Grand Cayman have long caressed the toes of the world’s wealthiest financiers, who flock to this balmy spit to avoid the taxman’s prying eyes.

But the world’s biggest hedge-fund venue and fifth-biggest bank centre is now threatened, as the government of the Cayman Islands heads for bankruptcy — unable to pay its own staff and facing the prospect of introducing taxes as income from the world’s shrunken financial system collapses.

But the situation is about to get worse after the British government, which has ultimate responsibility for the islands, last week refused to bail out the Caribbean idyll. It is not convinced the country will have the money to pay it back.

At the same time, hundreds of civil servants found that pension contributions and health insurance payments were missing from their pay slips. Contractors and government suppliers also had bills unpaid.[...] (Source: Guardian)

Will the United States have to come along and bail out the Cayman Islands? Stay tuned to this one… this could get interesting.

Apparently the term green shoots only applies to a select few, but is translated into a ‘one size fits all’ catch phrase. The store owner who has to close up shop after 65 years of business, people still losing their homes to foreclosure, losing their jobs, and running out of unemployment insurance. They don’t see any green shoots. And if these are the people who share in the 70% responsible for the nations GDP then I ask where are the green shoots at?

Now these people are facing even harder times and are forced to resort to bankruptcy.

Consumer bankruptcies surged in July to their highest level since October 2005 as U.S. households struggle under the burden of past debt and rising unemployment.

Total filings reached 126,434 in July, a 34.3% increase from the same period a year ago and an 8.7% increase over June, according to a report released Tuesday from the the American Bankruptcy Institute.

The number of filings was the highest monthly total since the Bankruptcy Abuse Prevention and Consumer Protection Act went into effect in October 2005.

“Today’s bankruptcy filing number reflects the sustained and growing financial stress on U.S. households,” said ABI Executive Director Samuel J. Gerdano in a written statement. (Source CNNMoney)

(hat tip Butch)