Bankruptcy Primer

Bankruptcy- What exactly is it ?

I’ve been studying bankruptcy as part of a wider project around distressed and event driven investing. I came across a lot of jargon and had to Google extensively. To clarify concepts for myself I took it upon me to write a simple primer that I am sharing here. (Nothing very original here as it’s stuff I found in different places on the internet).

Management Compensation in LBO

How do management teams get compensated during private equity deals?— —
This is an opaque area and has been largely kept hush. So using my own proprietary and coinvestment deal data as well as copious notes I’ve taken over the years, I examined 29 private equity buyouts (all in the U.S.) to arrive at real world insights into team compensation. I provide color here on components such as retention bonus, transaction bonus, new equity incentive, equity rollover and other general comp characteristics.

As these deals are private I am not identifying them by name nor sharing anything more than aggregated insights.

Financial Sector Restructuring : Visiting History

History never repeats itself but does it really rhyme? I have been reflecting on ‘those who cannot remember the past are condemned to repeat it’.  In 2020 I examined 10 historical financial sector restructurings across USA, Sweden, Korea, Malaysia, France, Japan – the contagion, the transmission mechanism as well as government interventions. Having had the privilege of a ringside seat, as well as participated in some of these events, this reflection has helped me connect multiple dots. I hope you find it useful too.

Development Banks Must Now Find a New Raison D’être

Development banks have done precious little to bring about meaningful development for their member states. Their members remain mired in poverty, their efforts have spurred little economic growth, and for the most part have done little to attract private capital or catalyze strides. These institutions have been parking places for bureaucrats, served as jobs programs for mediocre but well connected civil servants pursuing careers with cushy benefits, low expectations and job security with precious little accountability.  To be relevant they need to do more than lend. They need to catalyze financial flows, beef up on new products, as well as mobilize newer resources. And U.S. tax payer should stop funding such agencies.

I have some recommendations here.

Climate Change

Climate Change — — I wear my investments and public policy hat and distill the essence from 9 reports, multiple academic papers and internet searches. My takeaways summarized in a 4 minute long video deck here (no narration).

Contents: Adaptation vs. Mitigation, Government, Global Financial Markets, Banking Sector, Socially Responsible Investment (SRI), Socially Responsible Investments, Sustainable Development Investments, Commodity Markets, Carbon Markets, Finance, Emissions Trading, Green Financing, Clean Development Mechanism, Project Based Transactions, Pricing of Carbon, Emission Trading Players, Comparison of Government and Corporate Buyers, Water Markets, Key Vulnerabilities of Developing Countries, Environmental Issues, Deforestation Issues

40 Activist Hedge Fund Transactions Reconstructed

Companies are likely to become vulnerable to activist investors during the coronacrisis period. I have been tracking activist hedge funds for many years now. To explain transaction mechanics, activist hedge fund motives and criteria, I analyze and present over 40 historical transactions here. Every deal is different but analyzing the anatomy of a transaction provides insight into how these funds operate. I draw attention to the share price charts during the period too.  Also, you can derive your own optimal portfolio allocation to activist and other hedge fund strategies on activeallocator.com.

Transaction examples range from: • Carl Icahn • Goodwood Inc and Burton Capital • Highfields Capital Management • JANA Partners • Pardus Capital Management • Pirate Capital • Tracinda Corp • Trian Fund • Polygon

History Lesson: How Did the 2008 Crisis Spread in the U.S.?

History never repeats itself but does it really rhyme? As one who lived through the 2008 global financial crisis I have been reflecting on ‘those who cannot remember the past are condemned to repeat it’.  To seek lessons, I recreate the broad building blocks of the ’08 crisis. The contagion, the transmission mechanism as well as government interventions. The financial crisis was a lot more complex than the coronacrisis. This visual built off my research, that I hope to expatiate on forthcoming, speaks a thousand words.

How did the 2008 crisis spread in the US

 

Principal Component Analysis of Contagion Spread in 2008 vs 2020

We examined multiple likely causal reasons that in combination exacerbated the 2008 crisis in the United States. Our analysis removed the “least important” variables and left us with four variables with high explanatory power – decline in home prices, a doubling in oil and higher energy prices, wealth destruction in equity markets and large reduction in credit availability. We do not see this combination of factors during 2020.

History Lesson: How Did European Banking System Recover After 2008?

#ActiveAllocator Research- responding to WSJ article today Tue, May 26, B1 ‘European Banks Exposed to Sudden Downturn’. We examined the events affecting the European Banking sector during the 2008 crisis and identified key drivers of recovery. They raised capital, increased liquidity, reduced their U.S. structured credit exposure and relied on the economy to recover to reduce non-performing loans. We opine that they now need to build capital (and cut balance sheets) from recent levels, take account of an increasing level of loan losses, not just from problems emerging to date from the crisis, but over the course of a developing economic down-turn.

While governments have rightly stood behind European banks, these banks are still in a weaker position, relative to their American counterparts, due to past capital policy – with the shock of coronacrisis led events posing risks to damaging market confidence and trust. The effective closure of mainstream sectors of economy is a major issue for banks, and may call for further intervention. In the longer term banking models are likely to change (a reversion to tradition?) under taxpayer-shareholder and regulatory pressure – but reforms need to be introduced at a measured pace for fear of further unbalancing.

15-european banks recovery

History Lesson in Distress: Japanese Bank Restructuring

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While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way Japan resolved its own crisis.

History Lesson in Distress: French Bail-out of Crédit Lyonnais (1995)

8-credit lyonnais9-credit lyonnaise timeline

While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way France resolved its own crisis. An example was the Credit Lyonnais bailout.

History Lesson in Distress: Malaysian Bank Restructuring

6-malaysian7-malaysia banks

While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way Malaysia resolved its own crisis.

History Lesson in Distress: Korea Asset Management Corporation

5-kamco

While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way Korea resolved its own crisis. An example here of the KAMCO bailout.

History Lesson in Distress: Korean Banking Crisis (1997-99)

4-korean

While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way Korea resolved its own crisis.

History Lesson in Distress: Restructuring Nordbanken and Gotha

3-nordbanken

While governments will stand behind banks as the Coronacrisis unravels, most banks will be left in a weaker position when all this ends. Government will inevitably have to step in and rescue and restructure the financial sector if the crisis drags on and migrates from the real economy to the banking sector.  In examining past instances, and the history of financial sector restructuring, I was particularly impressed (and summarize here), with the way Sweden resolved its own crisis. And example here of how it restructured some large banks.

Financial Sector Distress – Restructuring and Common Solutions

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#ActiveAllocator Research – If the corporate sector is increasingly distressed, won’t the financial sector follow? Historically, governments have used a variety of tools to address financial crisis and recessions with policies of either containment or resolution. For example, in 2008, government intervention moved from the provision of short-term liquidity, through distressed asset funds to medium-term guarantees to full-scale bank capital injections, nationalization and brokered rescues. Whilst the banking system seems secure in the coronacrisis, I think it is inevitable that governments will borrow from previous playbooks.

As one who was a front row participant in the 2008 crisis here are some of my takeaways to what may be an inevitable sector restructuring – if not in the U.S., then most certainly in many countries where the contagion is already spreading from the real to the financial sector.