Friday, September 14, 2007

Check out those balance sheets

Some equities beyond financials have been trading significantly lower due to concerns about credit access. That's not news in the sense that companies that formerly had premiums built in on the expectation of a potential buy-out now don't have them, or have much less. Now, however, there is pressure spreading to companies with financial structures that have above average credit reliance.

Here are two examples. Alliance One International(AOI) is down 35% in two months, 50% in three months. There has been no visible change in the business to the observer relying on publicly available information. What is likely driving this is that the short term portion of long term debt is 80% of shareholders equity(that should be scary right now) and long term debt is 3X shareholders equity. Level Three(LVLT) is another case. This company has a much much stronger set of assets than AOI(no comparison there at all) but it has a long term debt to equity ration of almost 30 to 1. The stock price is down 25% in two months, and even though two months ago it was a stock viewed by many as oversold and ready for an upturn as soon as the weak holders were cleaned out. So much for that.

The allure of debt by choice as a way to enhance shareholder value is a lot less attractive at the moment. Going to the markets for a big rollover or refunding now will be very expensive. Renegotiating needed short term debt with banks will be a nightmare.

I don't remember the last time that I looked at balance sheets first when contemplating an equity investment. Oh yeah I do, all of them: '98 LTCM Russia; '97 Asia; '90-'91 recession/bank stress; and before that it was simpler. I just wanted my checking account to be in a place that stayed open.


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