Readers Digest: Dealmaking Indigestion - mba news

Investor memory—for better, more often for worse—is forgiving. Thailand and the Philippines were radioactive markets when broader Asia was spreading financial plague in the late 1990s; now both are drawing hot dollars and euros. Housing and junk bonds were crash-bound manias in the Haughty Aughties; one economic calamity later, they’re getting a second chance. Indeed, with aversion to risk so low once again, much of the most recent credit bubble has largely been forgiven and forgotten.

Thankfully, that era was so excessive that it keeps emanating reminders of its delusion.

For example, RDA Holding, the Reader’s Digest parent that’s the product of a $2.4 billion leveraged buyout from March 2007—including the assumption of about $800 million in debt—just filed its second Chapter 11 in less than four years. Though still one of the most read magazines around, Reader’s Digest has had to part with star siblings Every Day with Rachel Ray and Allrecipes.com to raise cash to try to service its loans. While lawyers call such a second trip to bankruptcy Chapter 22, the company dispensed with little euphemism to call the action an “agreement with key stakeholders to significantly reduce indebtedness.”

Hope, of course, springs eternal in buyout land, especially when trying to explain away the hubris of yesteryear. But the Reader’s Digest example shows how long a bad deal can keep haunting a company.

“After considering a wide range of alternatives, we believe this course of action will most effectively enable us to maintain our momentum in transforming the business and allow us to capitalize on the growing strength and presence of our outstanding brands and products,” Chief Executive Robert Guth said in the news release. (You’d think this was good news.)

Compare this second helping of bankruptcy with the breathlessness of its now six-year-old privatization announcement, where the executive chairman of acquirer Ripplewood Holdings said he was “delighted to complete this agreement and to take Reader’s Digest forward in the next chapter of building its brands and businesses.” The LBO shop projected that the deal for the consumer publisher, which had posted only profit declines and losses since 1999, would yield $20 million in savings. Instead, Reader’s Digest crumpled under the weight of interest expenses that ballooned to $176 million in 2008 from $48 million in 2006—just as its business was juggling deep cyclical and secular declines. The twice-bankrupt company is now hoping to cut its debt load by 80 percent.

Domestic circulation at Reader’s Digest plunged 14 percent in 2008, compared with a drop of less than 1 percent for the top 10 magazines. In June of the following year, the magazine said it would publish only 10 times per year instead of monthly, after earlier cutting 8 percent of its staff, mandating a week of unpaid leave, and stopping 401(k) matches. It was the confluence of revenue losses and a high debt load that slid the publisher into bankruptcy. And again three and a half years later. Reader’s Digest is now necessarily more busy moving around and renegotiating its various tiers of debt than focusing on “the next chapter of building its brands and businesses.”

“Companies with more than one default within a several-year period provide useful examples of the primary reasons why initial attempts at successful reorganization fail,” Fitch leveraged finance analysts Sharon Bonelli and Kellie Geressy-Nilsen wrote on Tuesday. “Key drivers of second defaults are failure to resolve operating cost issues or sufficiently reduce debt. Second defaults are also frequent for issuers in industries that are in a deep cyclical trough or chronic decline.”

You saw it with Tribune’s ill-starred privatization under Sam Zell, and with Philadelphia newspapers’ experience with debt-binged buyouts. Amazingly, the LBO-emboldened and fee-saddled Reader’s Digest pitched a combination with Time Inc. (TWX), the magazine publisher behind Time, People, and Sports Illustrated that is now in talks to bus a bunch of its titles to Iowa.

The Chapter 22′ing of Reader’s Digest is surely destined for the B-school canon, where MBAs will study it to debate a timeless question: Is such “financial sponsorship,” on balance, good or bad for companies? Or were they just better off left to their own declining devices?

No One Remembers When Bonds Went Truly Bad

All this consternation and kvetching—“headline risk,” traders call it—over a comeuppance in the bond market. Makes you wonder if investors and Wall Street, with its battalions of freshly hatched MBAs, have enough of a frame of reference for when a bond bear last truly happened: in 1994.

Mind you, that was also when this writer was in the throes of high school senioritis, as egged on by his 56k modem. But I’m also told it was an annus horribilis for Wall Street. For three years after the Gulf War recession, the Federal Reserve had kept rates low—“low” in those days was 3 percent—to help the financial system recover from its then-epic savings and loan crisis. When the Fed tightened, Wall Street’s bond-trading operations convulsed like they hadn’t since the 1920s. Treasuries fell a mere 3.3 percent in 1994. But U.S. bond expectations are built into everything but the water supply—which is a recipe for disaster when the Greenspan Fed, sensing inflationary threats, had to almost double its target funds rate to 5.50. All manner of fixed income sold off first, asking questions later.

Of course the world should learn from that bond bear, the likes of which took down hedge funds and brokerages. But has it maybe forgotten, now that every rise in interest rates over the past several years has been a head fake, keeping the bond bull running?

April Rudin is an adviser to wealth managers and other financial-services outfits. Most brokerages, she says, “have no communications plan” for when the bear strikes. “Instead,” she says, “when there is good news they reach out to clients, and when there is bad news they hide under their desks. Some younger investors or others may not be aware when they should be preparing their clients ahead of time, and not just when in crisis mode.”

Bloomberg’s Dave Wilson worked his terminal magic to hook me up with a July 1994 story about a rare breed of activist fixed-income investor known as a “bond vigilante”: he who ratchets up government bond yields to punish politicians and heads of state for their fiscally dangerous spendthriftiness. “Anytime a government or a central bank does something that the markets perceive as potentially inflationary,” remarked then-Dallas Fed President Robert McTeer in the piece, “then you see it immediately in long-term bond prices.” Those macro-marauders helped push up U.S. 10-year Treasury yields to 7.28 percent from 5.79 percent; Germany’s bonds to 7.04 percent from 5.53 percent; and poor old Canada’s to 9.16 percent from 6.63 percent. (Bond prices move inversely to yield; the more rates shoot up, the more yesterday’s and today’s buyers lament committing to their lower-yielding issues).

One Seinfeld, Friends, and Sopranos later, legions of new brokerage “producers” are being recruited from business schools and colleges. None were financially aware in the age of the vigilantes and, before that, the bond-mauling interest rate environment of the late 1970s and early ’80s.

Today, according to the Leuthold Group, if corresponding interest rates were to shoot up a mere point from where they are now over 12 months, a T-bond maturing in February 2031 would sustain a total hit of between 6 percent and 11 percent (your yield gets subsumed by the bond’s plunging price).

So what about the clients of those greenhorn brokers? To what extent are investors soaking in these loss hazards at a time when the taxable-bond funds have taken in $310 billion in just two years?

In a thoughtful Morningstar survey, “Why Are Investors Buying Bonds?” small investors betray a good deal of naiveté. “Many,” wrote Morningstar’s (MORN) Christine Benz, “noted that hurtling toward retirement—combined with the memory of clawing their way back from losses during recent bear markets—had prompted a greater bond allocation in their portfolios.”

“We can’t afford to take a 2008-like hit at this point,” responded one small investor.

“The yields aren’t amazing—anywhere from 2% to 6% depending on the maturity date—but I sleep at night,” said another.

“I don’t care at all about forecasts that future bond returns will be low; bond returns are normally low, compared to stocks,” said another. “I own them to preserve capital in downturns, not for their returns. I don’t especially care that their interest rates are low, although this does influence my choice of bond types. I have never fallen for the fallacy that interest has any relationship to income.”

The stock market’s many crashes since the dot-bomb have transpired in an age of information overflow. “Twitter, blogs, and the like,” says Rudin, “have shown they can move markets. That is a seismic difference between 1994 and now: the speed and amount of information.” Yet somehow that echo chamber has yet to process a potential crash in bonds.

No One Remembers When Bonds Went Truly Bad - mba news

All this consternation and kvetching—“headline risk,” traders call it—over a comeuppance in the bond market. Makes you wonder if investors and Wall Street, with its battalions of freshly hatched MBAs, have enough of a frame of reference for when a bond bear last truly happened: in 1994.

Mind you, that was also when this writer was in the throes of high school senioritis, as egged on by his 56k modem. But I’m also told it was an annus horribilis for Wall Street. For three years after the Gulf War recession, the Federal Reserve had kept rates low—“low” in those days was 3 percent—to help the financial system recover from its then-epic savings and loan crisis. When the Fed tightened, Wall Street’s bond-trading operations convulsed like they hadn’t since the 1920s. Treasuries fell a mere 3.3 percent in 1994. But U.S. bond expectations are built into everything but the water supply—which is a recipe for disaster when the Greenspan Fed, sensing inflationary threats, had to almost double its target funds rate to 5.50. All manner of fixed income sold off first, asking questions later.

Of course the world should learn from that bond bear, the likes of which took down hedge funds and brokerages. But has it maybe forgotten, now that every rise in interest rates over the past several years has been a head fake, keeping the bond bull running?

April Rudin is an adviser to wealth managers and other financial-services outfits. Most brokerages, she says, “have no communications plan” for when the bear strikes. “Instead,” she says, “when there is good news they reach out to clients, and when there is bad news they hide under their desks. Some younger investors or others may not be aware when they should be preparing their clients ahead of time, and not just when in crisis mode.”

Bloomberg’s Dave Wilson worked his terminal magic to hook me up with a July 1994 story about a rare breed of activist fixed-income investor known as a “bond vigilante”: he who ratchets up government bond yields to punish politicians and heads of state for their fiscally dangerous spendthriftiness. “Anytime a government or a central bank does something that the markets perceive as potentially inflationary,” remarked then-Dallas Fed President Robert McTeer in the piece, “then you see it immediately in long-term bond prices.” Those macro-marauders helped push up U.S. 10-year Treasury yields to 7.28 percent from 5.79 percent; Germany’s bonds to 7.04 percent from 5.53 percent; and poor old Canada’s to 9.16 percent from 6.63 percent. (Bond prices move inversely to yield; the more rates shoot up, the more yesterday’s and today’s buyers lament committing to their lower-yielding issues).

One Seinfeld, Friends, and Sopranos later, legions of new brokerage “producers” are being recruited from business schools and colleges. None were financially aware in the age of the vigilantes and, before that, the bond-mauling interest rate environment of the late 1970s and early ’80s.

Today, according to the Leuthold Group, if corresponding interest rates were to shoot up a mere point from where they are now over 12 months, a T-bond maturing in February 2031 would sustain a total hit of between 6 percent and 11 percent (your yield gets subsumed by the bond’s plunging price).

So what about the clients of those greenhorn brokers? To what extent are investors soaking in these loss hazards at a time when the taxable-bond funds have taken in $310 billion in just two years?

In a thoughtful Morningstar survey, “Why Are Investors Buying Bonds?” small investors betray a good deal of naiveté. “Many,” wrote Morningstar’s (MORN) Christine Benz, “noted that hurtling toward retirement—combined with the memory of clawing their way back from losses during recent bear markets—had prompted a greater bond allocation in their portfolios.”

“We can’t afford to take a 2008-like hit at this point,” responded one small investor.

“The yields aren’t amazing—anywhere from 2% to 6% depending on the maturity date—but I sleep at night,” said another.

“I don’t care at all about forecasts that future bond returns will be low; bond returns are normally low, compared to stocks,” said another. “I own them to preserve capital in downturns, not for their returns. I don’t especially care that their interest rates are low, although this does influence my choice of bond types. I have never fallen for the fallacy that interest has any relationship to income.”

The stock market’s many crashes since the dot-bomb have transpired in an age of information overflow. “Twitter, blogs, and the like,” says Rudin, “have shown they can move markets. That is a seismic difference between 1994 and now: the speed and amount of information.” Yet somehow that echo chamber has yet to process a potential crash in bonds.

How High Will Mortgage Rates Go? - mba news

My heart beat a little faster when I read the news that the average interest rate for a 30-year mortgage reached a four-month high yesterday, at 3.53 percent for a loan. As a renter, I couldn’t help but wonder if I’m missing out on this once-in-a-lifetime chance to borrow for next to nothing.

Rates are now up almost a quarter point from the mid-November record low of 3.31 percent, but looking into the numbers, it’s clear that I shouldn’t be worried. Mortgage rates will be going up over the next two years–but not too fast, according to the most recent forecast by the Mortgage Bankers Association. The MBA expects rates to hit 4 percent in the second quarter and 4.4 percent by the end of the year. By the end of 2014, the trade group predicts rates will scooch up a bit more to 4.6 percent. Having rates rise more than a full percentage point does start adding up to real money in a household budget. An extra percentage point on a 30-year, $300,000 loan adds about $3,000 a year in payments.

“If the economy went into the tank, mortgage rates would go lower,” says Greg McBride, senior financial analyst at Bankrate.com. “That’s winning the battle but losing the war.” He says the slow pace of the economic rebound, high unemployment, and active Federal Reserve policy will continue to keep rates low.

But to keep this all in perspective, let’s remember that we’re still near record-low levels. Even if rates do hit 4.6 percent by the end of 2014, that’s still lower than what they were before the housing bubble. In the last 25 years, the average 30 year loan has been closer to 7 percent. Since 1972, the average rate has been 8.64 percent, pulled up by the early 1980s when rates peaked at a brutal 18.36 percent. That’s higher than credit card rates these days, which are unsecured loans. In 2012, buying was more affordable than ever, according to data compiled by the National Association of Realtors, which predicts 2013 will be the third best year on record. As McBride says, “everything is relative.”

Getting fit in 2013?

A Recipe for tracking weight loss! Also: New Triggers for Vimeo, Etsy, Gmail, and Pocket, plus more. Track your progress with this Recipe: Record your Body Scale measurements to a calendar by masayukig on October 24, 2012 We’ve been busy in the new year improving the Channels you use and love! The Vimeo, Etsy, Gmail, and Pocket Channels introduced Triggers that opened up creative possibilities for new Recipes.   Try out some of the recent additions with these hand-picked Recipes: Save Vimeo Staff Picks to view later in Pocket by alexander on January 16, 2013 Email me when a new item is listed in a shop by etsy on January 10, 2013 Log rain in your city to a spreadsheet as it happens by linden on September 04, 2012 Schedule reminders to review starred emails by jeff on January 09, 2013 Automatically tweets what you favorite in Pocket by readitlater on December 17, 2012 Good luck keeping your resolutions this year. One month down, eleven more to go!   —The IFTTT Team   This newsletter was automatically sent to yangquebec.mba1@blogger.com because you signed up for IFTTT with that address. To disable this communication, you can manage your email settings or unsubscribe from the IFTTT Newsletter.   IFTTT · 923 Market Street #400 · San Francisco, CA 94103