Friday, May 13, 2005

David Stockman, S&P Victim

Poor David Stockman.

One day Standard and Poor’s changes its mind about something, and a week later the former Budget Director of the entire United States loses his job.

Here’s how the linkage worked, as outlined in a brief, insightful article in today’s Wall Street Journal, with background from my own experience following Collins & Aikman, the auto-parts supplier over which Stockman had presided as Chairman and CEO until S&P changed its mind about something.

Dating back to a window-shade manufacturer in 1843 (no kidding), Collins & Aikman makes floors and roofs and door panels for DaimlerChrysler, GM and Ford, in about 100 plants around the world. GM and Ford are, unfortunately, around 50% of C&A’s revenue.

The current incarnation of C&A was shmooshed together by Heartland Industrial Partners, following ownership changes in the 80’s and 90’s that did nothing so well as remove value from the company, for the benefit of private equity partnerships.

Consequently, C&S is a highly leveraged company—not a great capital structure for an auto parts supplier—and depends on the kindness of banks as well as on more esoteric forms of debt to keep the lights turned on, not to mention the plants humming.

And one of those forms of debt involves borrowing against the money its customers owe it for the products its plants are producing, i.e. receivables.

Since C&A was already maxed out on its senior credit facility, the company needed to be able to access those receivables—sort of like borrowing against your future hoped-for income tax refund from H&R Block to buy tonight's dinner for the kids.

Then, S&P changed its mind about something. Specifically, about GM and Ford credit-worthiness.

S&P cut its debt ratings for both companies to junk, which triggered a reduction in the amount C&A could draw on its receivables facility with GM and Ford, which triggered violations in C&A’s own capital structure, for which it had to get waivers to keep buying the groceries.

Hence, the Chairman and CEO of C&A, David Stockman—whose main credentials for those job titles appear to be that he is a founder of Heartland, which still owns a big chunk of C&A stock and had the bright idea of loading up a capital-intensive, highly cyclical company with debt—resigned his positions after the company disclosed that it faces major liquidity issues following the S&P downgrades.

And what about Standard & Poor’s, which triggered the whole mudslide when it downgraded GM and Ford debt?

Well, yesterday S&P helpfully warned that Collins & Aikman itself might have to seek bankruptcy protection, “in the near term.”

In the grand scheme of things, the travails of a relatively small auto parts supplier in Troy, Michigan, do not mean a whole heck of a lot outside the terrible consequences for the employees who are going to get screwed thanks to the short-sighted machinations of the private equity groups that drained the company of whatever liquidity they could find.

But the next time the Fed raises the Fed Funds rate and a talking head on CNBC says “rates don’t matter…”—remember how David Stockman lost his job.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


Mithrophon said...


Are you doing anything with autos right now, long or short? Is there a point in time at which a company like DPH, which has very little actual bank debt relative to its base of monatizable assets, becomes interesting? Or is the pension thing just a black hole that you want no part of at any price?

The Unknown Broker said...

Good points on the Fed/interest rates/"doesn't matter. We tend to overlook the interconnection between events and those impacted downstream.

"The least movement is of importance to all nature. The entire ocean is affected by a pebble." - Pascal

Its_strange said...

NFI in the news lately yet no word from Bob . Why ?

Its_strange said...

Just read Herb's latest on NFI. ...."Stated income loans" ..what ? You just tell NFI some figure without proof ? Do you even have to tell them where you work ? Maybe you don't even have to tell them your real name ? ...I guess i am just to old for all of this. I mean interest only loans, ARM's ...Zero or little down payment.Sounds like nothing but quackery to me. So much of Wallstreet sounds like quackery. Nice job Grasso . GS , MER etc..Nice job SEC and Gov oversight committtee.........You all are all to often just plain bizarre.