Wednesday, March 25, 2009

Reduce your Lease and/or Loan Debt?

My ATF comedian, Lewis Black, would likely say something like this ….. holy-shit, somewhere, someone is getting fucked!

Reported in the Saint Petersburg Times on March 23, 2009:
OSI Restaurant Partners Inc. got some much-needed breathing room from its debt burden by buying back some of its high-interest junk bonds at about 33 cents on the dollar. In a tender offer managed by Miller Buckfire & Co., OSI, the Tampa parent of Outback Steakhouse, Bonefish Grill and Carrabba's Italian Grill, paid $73 million to retire $240 million in high-interest, unsecured debt due in 2010. (It is my understanding that these bonds carried an interest rate of 10% and were due in 2015.)

Gee whiz, it would be cool if the bank that holds the mortgage on my house would accept my “tender offer” to purchase my mortgage from them for 30 cents on the dollar. If I originally paid $300,000 for my house and, at that time, took out a mortgage for $300,000, I’d have no equity in my house, but I’d be on the hook for $300,000.

Then, roll the clock forward about two years. I call the bank, tell them that I’m in financial trouble, may not be able to pay my mortgage payments, and that I may be on the brink of bankruptcy. And, then, I offer to buy my mortgage from them for $100,000 cash. If they accept my offer, the cost of my house would end up being just that, $100,000, instead of the $300,000 I had originally paid. Cool beans. Great deal for me, but someone got fucked.

Back to OSI, the parent of Outback Steakhouse (and several other restaurant chains), in 2007, Outback’s original founders teamed up with Bain & Co and Catterton Partners, two private equity groups, to take OSI private. Purchase price was somewhere around $3.2 billion. Most of that purchase price was financed with bond debt. In order to finance the LBO (leveraged buyout), a bunch of bonds, unsecured debt, what people refer to as “junk bonds,” were underwritten (by guess who – Lehman Brothers) and sold. To whom those bonds were sold, I have no idea. It could very well be that Lehman Brothers held onto some of the bonds for its own portfolio, and/or that Lehman Brothers sold the bonds to investors, and/or that Lehman Brothers packaged these junk bonds with other junk bonds into one of those indecipherable “structured investment vehicles” (SIV’s) and sold those SIV’s to investors. (Perhaps even some small town in Norway or Sweden bought these bonds as a “safe” investment.)

Well, roll the clock forward to “present day”; OSI’s business is not doing well (to put it mildly), chain restaurant businesses, Outback among them, are suffering because of lower revenues, and OSI is losing a lot of money. One cure to OSI’s problem – lower its debt. Well, with the purchase of some of their bonds at 30 cents on the dollar, they just did that.

Which provokes two questions:

(1) Where did OSI get the money to buy back its bonds? Well, I would imagine that that money came from OSI’s shareholders – Bain?, Catterton?, OSI/Outback’s original founders? All of them have “deep pockets.” As to Outback’s original founders, they got very rich when they took Outback public years ago, and they got even richer when the company was taken private. With the recent buy-back of bonds, the owners of OSI, just realized a $167 million reduction in the purchase price they paid for OSI.

(2) Inasmuch as $240 million in bonds was just bought-back for $73 million in cash, who got fucked? Someone did. Who “tendered” (sold back) their OSI bonds? Could it be that the firm running the liquidation of Lehman Brothers sold back to OSI, OSI bonds that were still in Lehman Brother’s portfolio? Could it be that some of the banks and financial institutions (those we are bailing out with taxpayer money) were holding OSI bonds in their portfolios (toxic assets?) and that they are using taxpayer money to cushion the consequences of losing money on their sell-back of OSI bonds?

(By the way, I do occasionally go to OSI’s restaurants, including Outback, Carrabas, Bonefish, Leroy Selmon’s and Roy’s, and I like all of them; I think they give you a good deal for your money. I especially like the 2,400 calorie "Bloomin' Onion" at Outback, but I can only order that when my wife is not with me.)

Now, since my blog-site is supposed to focus on stuff and issues related to the reprographics industry, I think I should relate this OSI crap to the reprographics world ….. your world, your business.

We’ve talked about “right-sizing” your business during this recession. (I previously did a post on that subject.) In addition to all the other things that you can do to “right-size” your business, why not consider attempting a restructuring or buy-back of your company’s debt. Why not go to your lessors and banks and ask them if they’ll take 30, 50, 70 (or whatever) cents on the dollar for your outstanding lease debt and/or loan debt? Certainly some of you must have rich Uncles or Fathers or Grandfathers (or being politically correct, rich Aunts, Mothers or Grandmothers) who will, if asked, cough up cash to buy out or buy down your lease or loan debt? Well, that's it for my ridiculous thought of the day.

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