KUHN CAPITAL Monday, October 23, 2017
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Dead Men Walking

5/4/09

While the stock market shows unpredicted (and, in our opinion, unfounded) enthusiasm, thereís another silent and ominous development afoot.

You wonít find it described in the press and even those directly affected donít talk about it much for understandable reasons.

Itís the thousands of companies with 2007 balance sheets and 2009 income statements. Many of them are dead men walking. Their cash flows are no longer sufficient to cover debt payments, theyíre violating covenants and, with asset prices at historic lows, they canít sell enough of whatever's lying around to dig themselves out.

Maybe itís denial, maybe itís holding on waiting for a turnaround, or maybe itís just that thereís nothing they can do. Compounding the confusion, many banks Ė particularly TARP recipients Ė are also behaving badly, sometimes swooping in with no notice to padlock the doors, sometimes making threatening noises then suddenly reversing course and backing off. Maybe the root of these erratic zig-zags is the banksí own indecisiveness over whether to classify a loan and take the heat from the Feds or hold their breath and muddle on.

What we know is that hiding under the bed is almost always a mistake. Sales arenít going to pick up fast enough to save these debtors. In the meantime, theyíre gutting their companyís future by shoveling out the door every spare dime in principal and interest payments. Thatís a death spiral.

Better to take a close look at the situation before crisis hits. Maybe with lender cooperation, new lender money, investor infusions and skinny overhead you can preserve enough of the company to fight another day.

No surprise, weíre doing a lot of that sort of work today Ė recapitalizing balance sheets, intermediating with banks and trade creditors, extolling the virtues of equity investing at bargain prices.

There are many companies out there that deserve to survive. They can survive if their managers take a hard look at their situation and move proactively to address it.


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