Tag Archives: business

ZipCap

May 21, 2015 By in Banks, Industry Analysis, internet, Investment firms Tags: , , , , Leave a comment

ZipCap, short for Zip Code Capital, is a San Diego-based startup alternative lender featured in the Business section of today’s New York Times.  It provides low-cost loans to local businesses that aren’t able to get credit from traditional banks–presumably either because they’re not (or not very) profitable or because they don’t have a good enough financial handle on their enterprise to know whether they make money or not.

ZipCap helps a client business form an “Inner Circle” of customers who pledge to buy a minimum amount of stuff from the client over a specified period.  ZipCap lends against that commitment.  In the case of the restaurant/coffee house featured in the NYT article, 130 entities pledged to spend $475 each ($61,750 in total) over the following year.  That got Beezy’s Cafe a $10,000 loan at 3.99%.

If all of this were new spending, my back-of-the-envelope guess is that it would bring in $40,000 or so in fresh operating income, far in excess of what would be needed to repay the debt.  For Beezy’s to be better off simply from forming the Inner Circle, a quarter of the pledges would have to be new spending, or about $2.50 a week per Inner Circle member.  That figure would need to be adjusted up if not everyone keeps his word.

 

It seems to me, from the limited data in the NYT and on the ZipCap website, that ZipCap isn’t really about lending.

It’s not a social service, either.  Chances are that Beezy’s would be better off getting, say, business students from a local college to create financial tracking to help figure out what makes money for the cafe and what doesn’t.

What ZipCap does do, I think, is provide a socially acceptable, non-toxic way for a struggling business to proclaim that, though it might appear to be thriving, it isn’t   …and, at least implicitly, that it won’t be around for long unless it gets more community support.

Of course, there may be unintended consequences of the Inner Circle creation.   Assuming the extra spending doesn’t come out of thin air, IC creation at Cafe A may force Cafe B to close its doors.  Or it may make it extra hard for a new Cafe C to get started.

It will also be interesting to see how ZipCap deals with rising interest rates, as and when they occur.

 

the Supreme Court and 401k plans

May 20, 2015 By in bond market, How your broker gets paid, Industry Analysis, Investment firms, mutual fund holders and financial advisors, securities markets, stock market, Where are the customers' yachts? Tags: , , , , , , Leave a comment

On Monday, the Supreme Court made a narrow ruling on a technical point that may have far-reaching implications.

Participants in the 401k plan offered by Edison International, a California utility, sued the company claiming that it stocked the plan with “retail” versions of investment products that charge higher management fees than the lower-cost  “institutional” versions that it could have chosen instead.

The company defended itself by successfully arguing in a lower court that the statute of limitations for bringing such a lawsuit had expired.  The Supreme Court said the lower courts were mistaken.  An employer has a continuing duty to supervise its 401k offerings.  So even though years had passed since the 401k offerings were placed in the plan, the statute of limitations had not expired.

So the case goes back to the lower court, where presumably the question of whether Edison was right to offer a higher cost product than it might otherwise have.

Was this a mistake?

Why wouldn’t any company have the lowest cost share possible in the 401k plan?

The short answer is that the company receives a portion of the management fee in return for allowing the higher charges.

Typically the company argues that the fee-splitting helps cover the costs of administering the 401k plan.  In practical terms,thought, the move doesn’t eliminate the costs.  It shifts them from the company to the plan participants.

If the Wall Street Journal is correct, this is the case with Edison, which is reported as pointing out that the fee-splitting is disclosed in plan documents.

I have two thoughts:

–the sales pitch from the investment company providing the 401k services probably sounded good at the time.  The 401k would be inexpensive (free?) to Edison.  High fees would shift the cost onto employees instead–which makes sense, the seller might argue, since employees are the beneficiaries of the plan.

On the other hand, to anyone without a tin ear, this sounds bad.  The amounts of money are likely relatively small.  Edison is probably spending more on legal bills than it “saved” by choosing the plan structure it did.  And if it turns out that Edison is profiting from the arrangement rather than just covering costs, the reputational damage could be very great.

–fee-splitting arrangements on Wall Street are far more common than I think most people realize.  This case could have wide ramifications for the investment management industry if the courts ultimately decide that Edison acted improperly.

 

 

Tesla (TSLA) or Solar City (SCTY)–which to choose

May 6, 2015 By in Autos, battery power, Energy, family owned companies, Industry Analysis, securities markets, stock market, Technology Tags: , , , , , , , , Leave a comment

TSLA and SCTY are terrestrial companies run by Elon Musk.  TSLA makes electric-powered cars; SCTY generates electric power with solar cells.

what they have in common

Both are publicly traded.

Both are speculative stocks, in the sense that assessing their value involves projecting results far into the future.

Both are trying to transform staid industries that have been around for a long time.

Both are big users of capital.

Both face substantial regulatory barriers to their success.

–For TSLA, it’s the regulations in many states that prohibit a car manufacturer from selling its products direct to the consumer.  Instead, the carmaker has to use an independent dealer network.

–Because at present they generally have no ability to store power on-site, SCTY clients generally sell the power generated by their solar panels to the electric utilities and purchase power from the grid as they need it run their electrical devices.  Utilities would, naturally, like to buy at 2 and sell at 4.  Regulations, however, force them to trade both ways at the same price, but only so long as solar is a tiny percentage of their business.  In addition, electric utilities are the ones who inspect any local power storage batteries that a household/firm may install.  The utilities aren’t falling all over themselves rushing to do this.

I have small positions in both.

how they differ

Personally, I find SCTY the more conceptually interesting company.

On the other hand, I feel much more comfortable with TSLA.

Why?

It isn’t the industry or the capital structure.

It’s the gigantic battery factory that Musk is in the process of building.

Both TSLA and SCTY can be seen as different ways to create demand for highly sophisticated batteries.  Both are certainly radically dependent on having cutting-edge battery technology.  Arguably, batteries are the main source of value in the products of either firm.

But who owns the battery factory?  TSLA.  To me, this means that Elon Musk’s main economic interest likes in TSLA, not SCTY.  History says an investor wants to have his money in the same place as the entrepreneur he’s betting on.

 

spinoffs (3)–“bad” spinoffs

May 1, 2015 By in spinoffs, stock market Tags: , , , , , , , Leave a comment

In the typical case where multi-line company ABC spins off C, the biggest rewards go to holders of C, although there’s no reason to believe, simply from the fact of a spinoff, that the residual AB won’t do well, too.

value, but for whom?

There are some instances, however, in which the apparent intention of ABC is to stuff C full of detritus before spinning it off.  The whole idea is to make the residual AB more attractive, without regard for the fate of C and its owners.  In some cases, C is so weighted down with liabilities that it almost seems designed to fail.   Some do end up in bankruptcy a short time after they become independent.

In this case, the spinoff may create value   …but it is value for AB, not for C.

the Deal Doctor’s litany of bad spinoffs

I wrote a post about spinoffs that deals with the toxic variety about two years ago.  In it I reference a New York Times article which recites a litany of spinoff failures.  By Steven Davidoff Solomon, the “Deal Professor,” who teaches law at Cal Berkeley, the article is well worth reading.

what a bad spinoff looks like

The characteristics of a “bad” spinoff include:

–having weak operating performance and unattractive prospects

–being burdened with potential legal liabilities from, say, the cleanup of toxic chemicals improperly disposed of

–being loaded with excessive debt, sometimes caused by AB allocating too much of the corporate total to the spinoff.  Sometimes it’s worse, though.  As you can read in the NY Times article linked to above, sometimes AB forces C to borrow large amounts of money pre-spinoff and fork over the proceeds to AB.  This is pretty awful.  To my mind, it’s a clear sign not only to steer clear of the spinoff, but the parent as well.

bad, but not a secret–read the deal documents!

The one point I would make about defending ourselves from “bad” spinoffs is that none of the bad pre-separation stuff that is done to a C (and its shareholders) happens in secret.  Everything must be disclosed in the offering documents filed with the SEC.  The facts may not be in bold print, or underlined or in ALL CAPS.  But it’s there for anyone to read.

Don’t expect the warts to be headline material for the deal roadshow, either.  Don’t think the head of C, who (finally) gets to be an independent CEO, will be 100% objective about his (poor) prospects.  He probably figures he can manage himself out of anything–and it may be his only chance at commend, to boot.  So he’s likely to have serious stars in his eyes.

preliminary prospectus and final:  an arcane note

The preliminary prospectus, sometimes called a red herring, is circulated in advance to potential investors.  Technically speaking, it’s not the official information, however.  That’s only in the final prospectus, given to investors right after the offering.  In my experience, although professionals pore over the preliminary, no one reads the final.

I’ve only seen one instance where the final differed from the preliminary in any meaningful way.  It was Occidental Petroleum’s “bad” spinoff of its meatpacking subsidiary, IBP.  IBP was loaded up with $1 billion of debt at the last minute.  The information only appears in the final.  More info at the bottom of my 2011 post on preliminary and final prospectuses.

 

 

 

 

discounting and today’s equity market

April 21, 2015 By in Discounting, EU financial crisis, Greece, securities markets Tags: , , , , , , , , Leave a comment

Discounting is the term Wall Street uses for the idea that investors factor into today’s prices, to a greater or lesser degree, their beliefs about the future (I wrote a detailed post about the process in October 2012).

 

Two of the major macroeconomic factors the market is wrestling with now are the timing and extent of the Fed’s future moves to raise interest rates from their current emergency lows, and the possibility that Greece will default on its debts and exit the euro.

 

My experience is that almost nothing is ever 100% discounted in advance.  There’s always some price movement when the event actually happens.  Having said that, the coming rise in interest rates in the US has been so anticipated–and talked about by the Fed–for such a long time that there may even be a positive market reaction to the first rise.  This would be on the idea that Wall Street would give a sigh of relief when there’s no more anticipatory tension to deal with.  More likely, there’ll be a mild negative movement, for a short period, but that’s all.

The Greek financial crisis has also been in the news for a long time.  But we don’t have the same extensive history of behavior during past economic cycles to draw on, the way we do with the Fed.  We do have Argentina as a case study in what happens to the defaulting country (personally, I expect the consequences of default for Greece would be pretty terrible for its citizens).  But the focus of investors’ concern is what damage might be done to the EU by Greece’s leaving.  In addition, lots of non-economic factors are involved in this situation.  There’s Greece’s central role in Europe’s beliefs about its own exceptionalism.  There’s the Greek portrayal of the EU’s requirement that Greece implement structural economic reform as a condition for debt relief as 21st-century Nazism.  There’s the status quo in Greece that has benefited from the country’s profligate borrowing.  There’s fear of the unknown that must be urging politicians to paper over Greece’s problems.

In addition, my sense is that the markets’ overriding emotion so far is denial–hope that the whole situation will go away.  Current thinking seems to be that the parties will arrange for some sort of default, along with capital controls to restrict the flow of euros out of Greece, that will allow Greece to stay in the EU.  Still, I find it very hard to calculate odds or even to anticipate what the worst that can happen might be, or the best.  This makes me think that very little of the possible negatives of “Grexit” are factored into today’s prices.

More tomorrow.