Companies with lots of Debt

[hyten1]

I generally hate and stay away from companies with lots of debt. However recently, this past year or so I started to look at them due to various post on this forum in regards to companies like AIQ, GNCMA, telecom (mostly due to packer)

 

i am still getting comfortable with it, I was wondering what are somethings you guys look out for and how do you get comfortable with them? (I think I have a deep psychological disdain for debt which can get irrational sometimes)

 

i understand you look at debt coverage with cash, interest coverage and its trend etc.

 

would like to hear peoples comments, suggestions, gotchas, experience etc.

 

hy

[Guest wellmont]

look for stable businesses. more stable the better. some growth is helpful. make sure there is cash left over every quarter or six months to do all the maint cap ex and some growth cap ex if needed. you want some cash left over after cap ex to pay down principal. pay attention to maturities. make sure there is not a big cliff coming where the company could not refinance if capital markets shut down. study CHTR for a company that is levered, but appropriately so. you also may want to study lvlt and how they managed to take leverage down to reasonable level.

[ItsAValueTrap]

Didn't Charter emerge out of bankruptcy?

[Guest wellmont]

yes. I should have said study charter post bk. actually you should study the entire history. then you can see what too much debt, not enough ebitda does to even stable business models. :)

[bmichaud]

Iron Mountain (IRM) is a great example of appropriate use of significant leverage.

[Palantir]

Girls just wanna have FUN!

[rayfinkle]

IMO one of the best ways to learn about debt and how it impacts operating results and management behavior is to roll up your sleeves and read a credit agreement. Understanding covenant calculations etc. can sometimes provide an edge vs. folks who don't take the time to read. A great example of this is town sports holdings (CLUB) a few years back. The market was pricing in a covi issue but a quick look at churn rates suggested that you'd need to see a cascade of unlikely events and unprecedented churn to hit cf / earnings to the point of the credit danger zone....

[ItsAValueTrap]

To answer the original question... you should look into the history of John Malone and Liberty Media.  You definitely see what happens when companies are leveraged to the hilt.

 

When Malone started off as the CEO of TCI, TCI almost went bankrupt.  Those were not fun times.  One of the bankers' weaknesses is that they sometimes don't want to push a company into bankruptcy and take it over (even though that's what they ought to do).  If they push the company into bankruptcy, then they'd actually have to figure out how to operate the business.  They'd also have to immediately recognize losses, which banks sometimes don't want to do for perverse reasons.

 

Fast forward to 2008/2009.  Malone had to sell shares of Liberty Media (LMDIA at the time), presumably due to a margin call.  Liberty shares skyrocketed after the sale.

 

During the financial crisis, Sirius XM ran into a lot of trouble.  Bondholders were about to take over the company.  With only a few days until Sirius' debt was due, Malone came in and refinanced the company.  This became a massive home run investment for Liberty Media (now LMCA).  Sirius' profits were steadily growing but it ran into liquidity issues since too much debt was due and the capital markets were frozen due to the financial crisis.  This created an opportunity for Malone to come in and make a really great investment.

 

Hopefully there will be another crash and the heavily leveraged Liberty companies will trade at huge discounts again.

 

Some relevant blog posts of mine:

http://wp.me/p1mOGr-y8

http://wp.me/p1mOGr-iE