FloridaBuilder's Financial Lesson
Let's get a few points out of the way. First, there is no one more important to the CAPs blogs than FloridaBuilder. Second, the reason I put his name in the title is I get AT LEAST twice as many hits and a few more recommendations. Third, my posts are not primarily for popularity but to simply make people think and not to necessarily agree with my position as socratic debate tends to lead to reasoned results. Finally, FloridaBuilder and I are conducting a friendly competition, so my pimping posts are intended to be no different than if we were playing poker and I was trying to throw him off his game or bluffing my brilliant hand.
Now with the above out of the way, back to the competition. FloridaBuilder has made some whacked out comments lately that simply can't go unanswered. For example, he has repeatedly tried to compare the MTH and HOV recent debt and equity offerings to his belief that SPF will somehow raise equity. The problem is seemingly FB is recovering from too much libation on vacation and too little concentration on the equation.
To keep it simple, let's just focus on HOV. Yes it raised equity, but only $150 million. When a company has lots of debt and poor revenue coverage, equity is that last place investors want to be because in a BK you are the last to get paid off. For HOV, the equity gamblers were only willing cough up $150 million(in MTH's case, it was only $100 million), and that was a company with B ratings on the lowest tranche of debt. If the debt is rated B, the equity is probably rated B- or CCC from a safety standpoint. (By the way CCC means that you are pretty much dead, but the doctor hasn't told you yet). You think if HOV could have raised more than a $150 million, Ara wouldn't have jumped at the chance as opposed to paying 11 1/2% on $600 million. Of course he would have and he and daddy Kevork would have made big donation as they flew on the company's private jet to a private charity function, but $150 million worth of bagholders was all Wall Street could scrap up.
This brings us back to SPF, in the last few days, SPF has received two CCC ratings on its lowest tranche of debt from two different ratings agencies. I can't belive the ratings agencies were so generous based on my review of the financials. However, if SPF's debt is now rated CCC, that means the equity is figuring out whether it wants to be buried or cremated since the doctor just took it off life support and the EKG is no longer beeping.
And FB is fantasizing that SPF is going to raise equity with two CCC debt ratings??????? And he compares SPF to much stronger HOV and MTH? That is like Ralph Nader still fantasizing he will be the next President of the United States. I have little doubt about the fantasy, the reality is simply a different matter.
Now it is possible that SPF might issue a convertible. But with a CCC rating, it will have to be an instrument that the lenders can hedge their losses fully. Last Fall SPF was able to scrape up $100 million with a very shareholder unfriendly convertible where SPF actually issued new shares to let the institutional lenders short. Now if that wasn't a situation where management intentionally hosed shareholders for their own benefit I don't know what is.....SPF raised only $100 million which facilitated executive bonuses a few months later but destroyed over $300 million of shareholder value within a few weeks of announcing the offering.....and we all knew it was coming since the current CEO with prestegious degrees and lots of investment experience and no homebuilding experience bought a few shares on the open market to help create the illusion that insiders were buying. What a con job that turned out to be just a few weeks later.
Today, the situation is much worse than it was in the Fall. SPF financial condition has deteriorated. The value of its assets have contracted and its revenues are evaporating. At this point, no self respecting "I am going to hose you" hedge fund manager would accept anything less than a true honest to goodness death sprial convertible(if you don't know what one is you can read about it on wikipedia). If SPF goes that route, it is pretty much the end for current stockholders because the holders of the convertible can basically convert it into an unlimited amount of shares wiping out any practical value for existing holders.
All of the above said, it is still a coin toss whether SPF or WCI goes BK first. From my perspective, if I am even close it is a victory because no one on the Street sees it coming(which is a whole seperate issue) and FB has it green thumbed. I really have no chance now!!!!!
Whether I win or lose, I am humbled to have a shot at the title against FB. He has given me a lot of insight on the BS of Wall Street and its "analysts." This will definitely have to become a much more important factor going forward....and I am indebted to FB for his assistance. That said, I still hope I can kick the backside out of him in this competition. Can you imagine, Costco boy beating Ferregamo Man-I see the headlines now. But just like Mr. Nader, I can fantasize too.