Posts Tagged ‘Debt’

Chinese Debtors Offer Fingers to Loan Sharks

Monday, November 7th, 2011

November 7, 2011: Loan sharks have been a problem in the Western World for centuries. From traditional Vegas sharks to payday lenders, the poor have been subject to atrocities by creditors for years, despite government intervention. The situation today is no better for China’s small entrepreneurs. Many businessmen have been forced into bankruptcy recently as local credit has been tightening. Not able to withstand public humiliation, some choose suicide, while others find themselves under the burden of creditors and “tattooed thugs.”

According to a recent Businessweek article, Zhong Mong, a Chinese pharmacy owner, offered his fingers to a group of private lenders because if they repossessed one of his stores, it would be impossible to pay back another 130 small local creditors, many of whom are local friends and neighbors. Zhong had borrowed 30 million yuan or $4.7 million at rates as high as 7% per month to expand his franchise!

Similar to the U.S., small and medium sized businesses account for 80% of jobs in greater China, but these businesses always find it difficult to obtain local bank financing. Other forms of financing are often much more expensive, leading to complications and often default. Since April, at least 90 CEOs have fled Zhong’s city of Wenzhou for the same reason. The 400,000 businesses in the city are facing higher costs because of inflation and soaring black market interest rates because of the sudden credit squeeze. Imagine how fast a business must grow to pay Zhong’s 7% monthly interest…


Black market interest rates have doubled this year, growing faster than local profits. Informal lending has given rise to real estate developers driving prices ever higher, leading to more inflation. Similar problems have also surfaced in the industrial province of Guangdong, to the South.

Wenzhou is home to 9 million Chinese and produces 90% of China’s eyeglasses and lighters. Many residents of Wenzhou take out bank loans at 1% per month and lend out money at 2%+ per month, pocketing the difference. China’s official lending rate is only 6.56%, compared to rates between 20-40% that small businesses are charged here.

Local suicides have prompted Premier Wen to visit the city and pledge to raise bonds to help finance smaller businesses, even if NPLs are higher. Unfortunately for Zhong, it may be too late. He will probably lose his business and will be hired as a paid manager. He and his wife will probably have nothing left.

KKR Tries to Fool Investors with Toys R’ Us IPO

Wednesday, March 2nd, 2011

Toys R Us was an Opco-Propco deal done by KKR, Bain, and Vornado in 2005 for $6.5+ billion.  The company was one of the largest owners of real estate in the United States, other than McDonalds.  Since the toy business was not performing well and Babies R Us could not yet produce enough EBITDA to drive the company’s public valuation, these three players found an opportunity to take advantage of its real estate holdings (good call, right?).  Unfortunately, the company now has $5.5 billion in debt on its balance sheet and only has 2.3% growth in sales, a $35mm loss in earnings, down from $95mm in profit last year, and a 25% increase in expenses year over year (SA).  Cash used in operations also increased from $800mm to $1.2 billion over that time period.  Sounds like a great time to IPO, right?  Well, the sponsors in this deal seem to think so.  With equity markets topping, they are trying their hardest to take advantage of foolish retail investors.  Invest at your own risk:

“(Reuters) – Toys R Us Inc TOY.UL is looking to raise around $800 million in an initial public offering in April, though a final decision has not been reached, the New York Post said on Saturday.

The New Jersey-based retailer, which operates stores under its namesake brand and the Babies R Us and FAO Schwarz labels, had put off plans for an IPO in 2010.

“Toys R Us took more market share from competitors last year than they have in the past 20 years,” said one source the Post described as close to the company. “But I don’t think they were satisfied with how they did on the profit level.”

Toys R Us spokeswoman Kathleen Waugh said the company could not comment on the matter.

For December 2010, Toys R Us reported a 5.4 percent total sales rise at its U.S. unit as it lured holiday shoppers away from No. 1 toy retailer Wal-Mart with more temporary stores and exclusive toys. But same-store sales fell 5 percent at its international segment.

Overall, a tough 2010 holiday season had margins hit across the toy industry by bargain-seeking, recession-hit consumers.

So the economic environment has stoked continued debate between management and owners at Toys R Us about whether this is the best time to re-launch an IPO, according to a source briefed on the situation, the Post reported.

Toys R Us was taken private in 2005 by Kohlberg Kravis Roberts KKR.AS, Bain Capital and Vornado Realty Trust in a $6.6 billion deal.

In May 2010, the company filed to raise as much as $800 million in an IPO. But that was not launched.

Toys R Us’s net loss widened to $93 million in the third quarter ended on October 30, 2010, from $67 million a year earlier. While sales were up 1.9 percent in the period, total operating expenses rose about 9.4 percent.

Last fall, the retailer opened 600 smaller “pop-up” stores that added to the more than 850 larger year-round stores it operates in the United States, the Post said.”

What is Capital? Debt & Equity

Wednesday, March 10th, 2010

Great video explaining equity and debt as sources and uses of capital.

[youtube]http://www.youtube.com/watch?v=c2w8b8uZOXA[/youtube]

~Saving & Investing

Who Are Providers & Users of Capital?

Wednesday, February 24th, 2010

This video explains the capital markets in simple terms:

[youtube]http://www.youtube.com/watch?v=_LCdIEFJESQ&feature=related[/youtube]

~Saving & Investing

Who Issues Bonds?

Wednesday, February 24th, 2010

Who issues Bonds?  To learn, please watch this video:

[youtube]http://www.youtube.com/watch?v=8bKJ6b2oKqo&feature=related[/youtube]

~Saving & Investing

MGM to Issue $1 Billion of Additional Debt

Sunday, November 8th, 2009

MGM Mirage

MGM Mirage currently has about $5.8 billion in bank facilities coming due in 2011.  It also posted a 3rd quarter loss last week on a $1.7 billion dollar write-down.  As a result, the company may issue $1 billion of additional debt after obtaining an amendment to its credit agreement.  MGM Mirage hinted that it would issue unsecured debt and that half of the issuance would be used to repay existing debt.

Bank of America Merrill Lynch recently issued $1.5 billion in bonds for MGM in the form of senior secured notes.  The deal was done in two tranches due in 2014 and 2017.

According to Bloomberg, MGM informed creditors in September that it would skip a $12 million coupon payment.  Moelis and Company was advising the firm as the time on a $3.7 billion debt for equity swap.

Please see Leveraged Finance News for full news update…

Default Rate Soars on Speculative Grade Debt

Sunday, November 8th, 2009

Moody's Logo

According to Moody’s Investor Service, the 12 month global high yield bond default rate rose to about 12.4% in October.  The last time global default rates were this high was in 1991, when they reached 12.2%.  According to Moody’s, speculative grade defaults have set a new post-Great Depression peak.  The U.S. speculative grade default rate reached about 13.4% in October.  This default rate is predicted to reach 13.6% by next month.  For leveraged loans, the 12 month default rate was about 10.8% in October, up from 3% last year.  This may be a peak in defaults and loan losses, but even so, there is much more carnage left to come.

Please see Leveraged Finance News for the full news article…