Doug Poretz's  Instablog

 

 

1.     The most important lesson: there is a great life after Chapter 11. When NVR went into Chapter 11, its share price collapsed from a high in the low-mid $40.00 range to under $1.00. Furthermore, it had two publicly traded debt issues, selling at around $0.10 per dollar of face value for the senior bonds and even lower for the junior convertible bonds. When the company came out of Chapter 11, it had to execute a reverse split to reduce the number of shares that would be outstanding after debt was converted into (new/additional) equity. As a result, the pre-Chapter 11 equity holders incurred dramatic dilution and the value of their investment was clobbered. But look what has happened since. The following chart is the ten year chart for NVR (the top line in dark blue), and then Hovnanian (HOV) in green, Toll Brothers (TOL) in red, Ryland (RYL) in light blue, Lennar (LEN) in gold, and Kaufman and Broad KBH) in light purple. You can plug in other homebuilders, and the S&P homebuilders index. NVR will still be at the top. There is life, even for the pre-crash shareholders, after Chapter 11.

 

 

 

 

 

 

 

 

 

 

 

 

2.  The Chapter 11 process is a business development boom for the legal and accounting professions, among others. There are all sorts of groups in a Chapter 11 process, even with the best, most “greased” pre-packaged arrangement. For example, NVR had a senior bondholders group, a junior bondholders group, a banking group, a group representing creditors of land positions, etc. etc. The important point to note is that each group had its own lawyers. Furthermore, each of the components of each group had lawyers. So, if Jones Capital, Smith Capital and Green Capital all had ownership positions in the senior bonds, they would each have their own legal counsel and there would be another legal counsel for the senior bond group itself. You can imagine how many lawyers were involved. Often, outside auditors were also involved. Forget about the cost of all that outside advice. Just think of how many lawyers were arguing for their individual points, usually presented as the most important points to consider, and how each attorney had to assert some opinion to prove their value. The entire process for GM will take a long time, in direct relation to the number of lawyers involved. Because the Obama Administration seems to be directing this effort, one major contribution they can make: tell the attorneys and other consultants to cut the crap and just get down to business.

 

3.     The Chapter 11 process should be a learning experience. NVR learned a great deal from the process of going into Chapter 11 protection. It didn’t come from all the attorneys and consultants. It came from being forced to understand why the company had to deal with them in the first place, and by developing a strong aversion to ever again getting involved with such non-productive work. The biggest lesson for NVR was that it learned to stay away from buying land. They decided that NVR would design, build, market and finance new homes, but would not be a land speculator. As a result, the company focused on its core operations, became the most efficient builder, obtained the highest industry margin (from selling homes as opposed to selling land with a house on it), and kept a rational balance sheet that has been only nominally leveraged. It was a great learning experience for NVR, and it can be for GM. One basic requirement: get pass the ego issue of thinking that this was out of your control. Yes, some bad things happened. But you could have taken actions that would have prevented this situation, even though those actions would have been very tough and may have had to be taken several years ago. Nevertheless, if GM can get pass the ego issues that arise when you go through the humiliation of being bankrupt, they can exit from Chapter 11 a much smarter company.

 

4.     Most importantly, the process takes great and steady management that works as a team. The NVR team pulled together and was focused on getting in and out of bankruptcy as quickly and as successfully as possible. To a very large degree, the management team that led that effort was the same team that produced the industry-leading stock chart above. If we start seeing key executives leaving GM that could be a leading indicator that things aren’t going well internally. But if the team hold together, it’s very possible that the team that ends up managing GM after Chapter 11 would be very smart and very unified, which will be very important assets in the pursuit of success.

 

Disclosure:  I do not have equity positions in any of the companies mentioned.