When's a debt not a debt? When it's publicly traded bondholders' debt seems to be the answer to that one.
Both Freescale and NXP have managed to substantially reduce some of the enormous debts imposed on them by their private equity owners Blackstone and KKR by a financial stratagem which appears to have cost them nothing.
Freescale has knocked $1.5 billion to $2 billion off the $10 billion which Blackstone loaded onto it after taking it over in 2006. And NXP seems to have knocked $1 billion off the $6 billion debt which KKR loaded onto it.
They've reduced these debts not by paying them off at face value, but by offering the bondholders new debt which wipes out the old debt, while being valued at a discount to the old debt but giving the new debt holders security over assets which would be advantageous if the companies went bankrupt.
These seem like the right sort of debts to have! You go to your creditor and say 'I'm paying you back at x cents on the dollar' and he says 'fine'. What a wheeze. Except paying your creditors x cents on the dollar used to be called going into liquidation.
Now it seems it's just another day's work in the wacky wonderful world of high finance which, as the whole world now knows, lies next door to Wonderland.
So, I asked Rich Beyer, the CEO of Freescale: 'Why don't you put out really pessimistic reports, and say how bad everything is, and put out accounts which look horrible, so as to get the publicly traded debt trading at just a few cents on the dollar and then buy all the debt back for a song and - bingo - all the debt's paid off and there is no more interest to pay?'
"If I did that both I, and my CFO, would go to jail," replied Beyer.
Drat! I was just beginning to think I might get some of this Magical Disappearing Debt to indulge myself in the purchase of one of the smaller
There's always a snag somewhere.
Pity Freescale doesn't have the scale of the banks of america. Because, if they were as big, the CEO/CFO wouldn't go to jail for trading off billions of dollars of debt for a song. They'd be invited to a congressional tea party, where, with all the pretense of humility in the world, they would have to nod their heads while saying "yes, we get it".
You are absolutely right Cheese, the politicians still seem to be over-awed by the bankers despite all the trouble the bankers have caused
It does rather look like smoke and mirrors to me. But when you stop and think about it then it actually begins to make sense, from both points of view.
The interests of the company are obvious - lower debt, hence lower interest payments. But for the bondholders there is a clear benefit IF they think the company is going to go under. They get a little less interest for a while, but more of their money back if (or when) the company goes bust.
In the end it's a gamble of course, but it is only made possible by the extremely shaky position of Freescale and NXP. For that reason it seems a little inappropriate for Mr Beyer to be quite so pleased about the process.
Well Ian if you take into consideration the fact that Beyer was brought in last year to recover a situation which looked awful, and which was none of his making, then I think it's understandable that he's pleased that he's made the situation better.
It was under Beyer's predecessor, Michel Mayer, that Freescale was sold to Blackstone in 2006 and loaded up with $10 billion of debt just before a semiconductor downturn. Mayer walked away with $40 million leaving Freescale to find $700 million a year in interest payments on this debt. Beyer took over as CEO in 2008.
So I think Beyer can be justifiably pleased with the fact that he's managed to reduce the annual interest payment by $100 million.
I still don't get it! I understand the financial mechanics of what happened, however what I can't fathom is the motivation of the secured note holders to accept the conversion of "unsecured notes" into senior secured debt. Makes no sense.
Think about it. If I'm standing at the front of the line ready to carve up NXP and regain at least my initial investment, before ANYONE else even gets a look at the Pie. Why would I trade my position in the line with someone standing at the back of the line, who, in reality, has little hope of ever getting even a penny on the dollar for his slice of the NXP in liquidation. Surely the secured debt holder will balk and force an involuntary liquidation.
These are strange times in which we live, I think the real answer to this puzzle probably has to do with the banks having bigger problems to fix than this little mess, so everyone found a way to delay the decision date.
Robert
Robert, as I understand it, and my understanding may well be imperfect, what NXP have done is offer the guy at the end of the line a chance to buy a new ticket to get nearer to the front of the line.
He seems to have a better interest rate, about the same redemption date and exchanges a ticket worth a nominal $100 for a ticket worth a nominal $30.
I suppose if your original ticket is being flogged on the debt market at $10, and liquidation seems a possibility, then this is a good deal.
Meanwhile of course you have to ask who are the people who bought the original ticket? The answer is these lousy banks we're all paying out to rescue.
So the lousy banks can say to their governments: 'We've got this toxic NXP debt please give us a hand-out from the taxpayer to cover the loss'.
It's enough to make your head spin!
Regarding the debt swap, I would draw the same conclusion as you have in your post today Mr Manners.
BUT, would we be so wrong for assuming that Mr Beyer expects the next accounting period to look hideous, and, would we really be surprised if new investors came in and bought some of that debt back prior to the alleged upturn? Now, that may sound cynical, but, if that’s not what’s going to happen I’ll be surprised; because the lawyesr will make sure it's all legit right? ;-)
As much as the vast majority of us don’t like to see exploitation, we would be foolish to think we can do anything about it.
Well Philip, Mr Beyer did add: 'We can do that on an on-going basis' so I wouldn't be surprised if you are absolutely right and he has a few more stabs at this thing. And why not? In my book. Freescale is a good company producing useful things unlike the PE people and the Banks which only shuffle paper while currently occupying the 'Public Enemy No.1' slot.
Is that last bit not what traders do on a daily basis and dont go to jail? Capitalist extremism
Absolutely Steve, but what's legal for the trader (so long as he's not got insider info) is a criminal offence for a CEO/CFO