An unprecedented call for CEO/Investor/Debt holder and Landlord-Tenant deal-making
Companies struggling with a hundred-year storm in terms of loss of revenue will have limited ability to pay debt, landlords, and will be forced to shut down or lay off workers, impeding any potential rebound. As it stands today with current credit needs, in the U.S. alone, we’ll be trying to soak up an ocean with a sponge.
No one wants the logical financial outcomes that would follow the current situation if left to traditional covenants and workouts and landlord-tenant leases. Who wants the vast cost of wind-downs or bankruptcies that will leave so many unemployed, destroy equity and debt-holder value, and take years to get back pennies on the dollar? Most debt holders don’t want to take the reins and step into running the vast number of companies in which they have loans. Landlords don’t want vacant properties for which no one will have the capital to re-open restaurants, shops, and local services. The banks are already saying they’d rather see a delay in payments than foreclose.
I believe that equity investors and their debt holders, landlords, and tenants could quickly come together to self-mediate better solutions. This would save millions of jobs, thousands of companies, and help stem a downward slide. A shared agreement on levels of loss or simply reduced profits could be determined with a shared model of potential outcomes. Proactive and sensible deal-making can help flatten the financial curve. As Ben Franklin said, “We must, indeed, all hang together or, most assuredly, we shall all hang separately.”
Things we learned from Stax’s analyses from the Great Recession and asset values along the way, if you give people time, most will pay off their debts. Force a fire sale and you create a downward spiral that damages 99.9%, probably including your own economic value. And if there is any value, you won’t be the one getting it.
In 2009, I wrote an op-ed “What Obama Needs Now: A Chief Investment Officer” suggesting that the U.S. government take all of the real estate assets it was backing, turn them into rentals over time, and put those into a real estate vehicle that would fund social security with the long-term income stream which is needed to support this under-funded national long-term liability. If the taxpayer took the risk, why not capture the upside. Instead, the assets were sold quickly while still at depressed prices and a few savvy investors bought and held, and they are still generating returns from those assets.
In another op-ed on the recent tax repatriation deal, “Repatriation for Education,” I noted that share buyback programs would likely be the only beneficiary of corporate repatriated income. Better, the same dollars could provide more value to those companies and the taxpayers in the long run by providing updated education for the current and aging workforce, ultimately delivering a better total return to the U.S. population. Let’s think about our whole ecosystem and utilize the data to make better decisions for the long term.
What I’m currently suggesting is hopefully already happening in more forms than this framework I outline: The equity and debt holders should get together with a model that has real data, potential outcomes, and scenarios. Share the data about where we are, possible outcomes over the next 3, 6, 9, and 12 months, and what that could mean for cash flow. This informs the potential losses before return to profitability and what it takes to get back, with some level of information on the changing customer behavior pre-and-post lockdowns. Such data will rapidly come into better light as lockdowns subside, and if the model is set up correctly, ideally in a dashboard, new data can continuously update information for all parties. It’s the same analysis Stax does and has done many times for credit investors, PE firms evaluating distressed companies and we’re already doing this exercise for credit investors looking at discounted credits in the market.
In parallel, model the equity and debt returns, and the potential with a forced action/forced sale/force liquidation, and net of work-out fees and long-term liabilities. Figure out a reasonable loss divided versus massive losses individually, and if you’re lucky, just a moderated return over time and everyone needs to buy themselves some time. Any investment fund that was more than 50% invested before March will be in a challenged vintage, so it’s worth making the best of it. Matt Cullen, the CEO chief executive of Bedrock, a development company in Detroit created by billionaire Dan Gilbert, is doing this right now. He is making a deal with his tenants, providing free rent for 3 months with tenants he thinks could survive, because he sees the bigger picture, a healthy, future business district.
Lots of debt holders will just want to quickly liquidate their holdings for plenty of reasons and the market will be full of great values for the foreseeable future. We’ll continue helping our clients with that kind of work because liquidity providers are critical to ensure that capital continues to flow to business over the long term and what we do professionally is help investors identify value. We’re also going to see plenty of re-underwriting diligence, in which the equity sponsor is looking at the business disruption and potential for both their equity and the chance to buy back much of the now discounted debt of a portfolio company. Re-underwriting has already become more common practice for equity sponsors, 2-3 years into a 5-year hold so that they can better time exits. No matter what, there will be plenty of credit deals at discount in the near term.
In suggesting that equity and debt holders come together to mediate their own “updated and modified deal,” I’m suggesting a much bigger, more urgent market need, that might help flatten the curve of financial losses and stem the tidal wave of job losses. As much as any credit investor is looking for deep value buys, I can’t imagine any investor that Stax works with who wouldn’t prefer to save so many valuable companies and jobs in the U.S. and globally. No matter how much dry powder PE firms have on hand, they’d rather see more companies saved and deals worked out and have fewer deep value plays in the market.
Kudos to anyone already having these conversations. We can’t look at this situation and have the failure of the imagination to save our companies, jobs, and value of the equity and debt holders. The stakes are too high. Financial and moral obligations are materially aligned. We certainly have the talent to figure it out and I believe the ethos to pull it off. And it is easily actionable to get started. Make the call and take the call.