by tonytran2015 (Melbourne, Australia).
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(Blog No. 185).
As the Central Banks of major countries sent interest rates to zero or even negative values, people in those countries had to take their retirement savings out of Government Bonds and they had been tempted into sending their money into the Stock Markets of their respective countries. The people are not verse in calculating return and risks so they may grab any “established names” on the Stock Exchange and pay outrageous prices for them only to find out that they had bought “Trojan horses”.
There are Vulture Funds who live off that ignorance and float the old loss making companies (called here Zombies companies) into the markets and do creative accounting tricks to hide the losses (for few years only). Those buying the Zombies at Initial Public Offer (IPO) usually lose most or significant parts of their money right after the contracts have been signed!
This blog reveals the tricks of selling Zombies on the Stock Exchanges.
#restructured company, #float, #zombie float, #zombie company, #IPO, #time-bomb loan
1. Outline of the tricks.
Company directors usually hide the assets from shareholders making them selling out their shares cheaply to vulture funds. Vulture funds then control those target companies, de-list them from the Stock Exchange, take away all profitable parts. Vulture funds then bind predatory, time-bomb loans to those target companies leaving them with just a bare chance of survival (even in the fairest weather) for the coming 3 years. Vulture funds then re-float target companies (already bound to time-bomb loans) by IPO’s on the Stock Markets as “revamped companies” but they are actually Zombie Companies.
The latter are financial traps for inexperienced Stock Markets investors. After 3 years, most Zombie companies would fail due to predatory loans from their own (Vulture Funds) floaters. As creditors, the Vulture Funds again would come in to take possession of most assets of Zombie Companies.
2. Details of the tricks.
1. A Vulture fund buys a long suffering loss making target company for next to nothing. It usually buys the target company when it goes into liquidation by insolvency.
2. Vulture fund sacks most low level employees. They would lose their job anyway by the liquidation. The company then ceases trading for few months.
3. The company books are then scanned for any realizable, significant assets for the Vulture fund to take.
4. Vulture fund draws up a predatory (lob-sided) management contract between the newly acquired target company with one of its subsidiary companies (a debt collecting company disguised as a management company). The management contract is an irrevocable, very expensive management for the target company. If the target company survive it has to pay very expensive management fees to the subsidiary of the Vulture fund.
(As management fees to another company at expensive rate are not classified as a debt, the restructured company is now debt free except for an expensive loan used as working capital. The irrevocable management contract just keeps sending money to the other company (debt collecting disguised as management company) whether the management is effective or not. The contract is effectively an obligatory debt repayment scheme but is OFF the BALANCE SHEET.)
5. Vulture fund provides a thin working capital to the acquired target company from an expensive, predatory, time-bomb loan from his other company (debt collecting disguised as management company). The loan is characterized by complex conditions such that prospective investors would not understand. The loan typically is locked in for decades and provides low interest for only 3 years, after that period interest rate will become exorbitant. This kind of loan is called time-bomb loan and is designed to bankrupt the target company.
6. New low level employees are hired and the target company with long established name re-open its doors for trading (in a way which is precarious but is hard to be noticed by prospective investors).
7. The company is then called “restructured” and floated on the Stock Exchange for naive, unwary investors to buy in.
8. The money from new investors helps paying back the loans from the Vulture fund and will make installments to pay the management fees (which are actually installments to pay off an additional debt to the schemer). (Most capital raised from the float of the zombie will be used to repay the loan for working capital and then sent to the “debt collecting disguised as management company” over the time.)
9. The target company usually go bankrupt after a short while of 3 years. The finance subsidiary of the Vulture fund that lend working capital to the target company then comes in as a creditor to claim most assets of the target company.
(The director of the zombie company is untouchable by any company law or security law as the management fault lies with the management company (outside his control) but he cannot revoke the management contract.)
3. Illustration by an every day example.
If someone got a wrecked car from a yard, refit it with an engine (on an expensive hire purchase plan from him) and sell it to you. Would you buy that car?
But why do you let your Pension Funds, Superannuation Funds buy the zombie companies on your behalf?
4. Well known Zombie floats.
Sears in USA is a typical case in USA. [3, 4]
The better known cases of zombie floats from the Australian Stock Exchange (ASX) are:
The Dick Smith Electronic Company (2015) [5, 6],
The Myers Company (2009) [7, 8].
The floating of the zombies does make the Stock Exchange look like an arena for rigged games where novice investors are ripped off by Vulture Funds.
1. Investors should stay well clear of any “revamped company” floated by some Vulture Funds or Private Equities.
Investors have to check the trading records for the preceding three years of the floated company even if it is traded on the Stock Exchange.
A new float of an old company may be very risky as only the company name is established while the management and operation are totally untested. Investors are buying into only a dream, the dream may turn out to be a nightmare.
Any management contract of the floated company to any external company must be examined in details (How much fee per year, for how many year, whether it is revocable, what are the required termination conditions). The conditions are usually hard to obtained from any such prospectus. For this reason alone, any such float should be avoided.
Investors have to find out if the floater of the new float has a reputation in floating successful companies after claimed “restructuring”. Some floaters are known for only floating non-viable companies.
On the only basis of transparency, I would avoid any float of “restructured companies” [9, 10].
2. A reform on company laws is needed.
Vulture Funds should be regulated differently from other companies and banks. They should not be allowed to float company with locked in management contracts and with loans from their related companies.
Vulture Fund kills Sears
. dick smith blames-private-equity-owners-greed-for-collapse, http://mobile.abc.net.au/news/2016-01-06/dick-smith-blames-private-equity-owners-greed-for-collapse/7069604
. dick-smith-class-action-ready-to-launch, au.wordpress.com/business/breaking-news/dick-smith-class-action-ready-to-launch/news
. the-private-equity-giants-the-greek-target-and-a-trojan-horse, October 28, 2015
. report-says-big-buyouts-are-likelier-to-default, date 05Nov2009
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