Sunday, December 6, 2009

The Hype Award goes to FT's Henny Sender

Here is a good example of the hype style financial reporting, amazingly enough coming from the FT. In an article called Reckless banks still to pay Henny Sender writes:

Two recent judicial opinions rebuking the banks offer a window into the lending practices that fuelled the boom and the tactics that banks resorted to in a belated attempt to cut their losses. These cases highlight just how reckless the banks have been and how that recklessness may come back to haunt them – and their bottom lines.

She discusses two cases, one of which has to do with Tousa, a Florida homebuilder. Citi indeed was reckless in its lending practices with this firm. Tousa’s business was on the brink when Citi extended it a loan that allowed it to refinance an earlier loan used for some highly leveraged acquisitions.

But as financial reporters often do, she starts with a valid point, but then moves on to a case that is actually unrelated (bunching it all into one anti-banking rant). Her second example deals with Charter Communications and JPMorgan. And that’s where the logic completely breaks down.

The second case involves Charter Communications, the fourth largest cable company in the US, and one of the most hotly contested battles to confirm an operational plan in the wake of a Chapter 11 filing. The judge rejected the banks’ claim that their loans were impaired, and said the banks were holding up the company’s emergence from bankruptcy protection just to change the terms of their loans and earn more interest. The adverse ruling could deprive the banks of $1bn in tax savings, a lawyer for the banks said. The banks in this case were led by JPMorgan whose spokesman declined to comment.

What Ms. Sender either doesn’t want to discuss or is simply clueless about is that Charter loan was always solid. There was absolutely nothing reckless about lending to Charter – there has been and still is plenty of asset coverage for the senior loan. The Charter case involves an intercreditor dispute. When a company files for bankruptcy, senior lenders generally have a say in the restructuring of the firm. In Charter’s case the management sought to file and restructure without involving the senior lenders. The firm then restructured the subordinated debt and simply reinstated its existing senior loans. These loans will remain in place as they have been prior to filing. There is going to be no principal loss for lenders.

What the lenders wanted was to restructure the senior loans in order to raise the coupon. As generally happens with covenant violations or other credit agreement “triggers”, the lenders can push the company to renegotiate the terms. For some reason the judge in the case sided with the company, refusing to allow the senior lenders to the negotiating table. That means they are stuck with the original low coupon.

But the Charter case has nothing to do with “reckless” lending. Charter, in spite of being quite leveraged was (and still remains) a prudent exposure for the lenders. Attempting to increase the interest rate on this loan in a bankruptcy scenario is exactly what banks are supposed to do. The fact that JPMorgan was unsuccessful in doing so speaks more to the changing nature of Chapter 11 than to any recklessness on behalf of lenders. Just to round things off, Ms. Sender ends the story by bringing up the Enron case from way back without any clarity on how it relates to "reckless lending".

In the environment where it is fashionable to bash banks, rather than focus on unbiased journalism and independent research, nobody seems to question or contradict Ms. Sender’s story. Misinformation that stokes anger continues to sell papers after all. FT’s Henny Sender will therefore receive the Sober Look hype award. Congratulations.
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