Tuesday, May 09, 2017

Tough To Read

Here is a Bloomberg article on the decline of Sears.  It is a sad story for a company that was America's top retailer for nearly 100 years.  The article states that Sears' decline in the 1980s when it "made a real estate play instead of focusing on selling stuff."  I am not a fan of financiers owning retailers, but Sears' issues pre-date Eddie Lambert's acquisition of it in 2004, although he has played his part in Sears' downfall:
Since then, Sears and Kmart have been slowly dismantled by Lampert. Implementing a culture of warring tribes, one in which divisions would battle it out for resources, little cash was funneled back into reviving physical stores. Chunks of the business were sold to keep the lights on. In January, the company sold the famous tool brand Craftsman to Stanley Black & Decker Inc. for about $900 million. “He did nothing to maintain the stores—nothing to spiff them up and make them a nice place to go shopping,” said Robin Lewis, a longtime industry analyst and chief executive of the Robin Report.

Monday, May 08, 2017

Is A Financial Flu Contagious?

I received a long email from Walton International, the large land syndicator, describing its Canadian parent's restructuring.  I don't know Canadian bankruptcy terms, but it sounds like a Chapter 11 restructuring.  Walton offered many land deals in the United States, but its Canadian housing operations were always touted as the backbone of the organization.  Here is part of the email:
On April 28th, 2017 Walton International Group Inc. (“Walton Canada”), an entity organized in the province of Alberta Canada, and several other Canadian affiliates and Canadian development entities (collectively, the “Canadian Filing Entities”), announced that they have obtained an Initial Order from the Court of Queen’s Bench of Alberta (the “Canadian Court”) for creditor protection under the Companies’ Creditors Arrangement Act (“CCAA”). This filing in Canada (the “CCAA Proceeding”), allows Walton Canada to stabilize its affairs, with a goal of restructuring certain obligations and other attributes of the Canadian Filing Entities and Walton Canada emerging as quickly as possible as a more profitable operating company. The Canadian Filing Entities are wholly owned direct and indirect subsidiaries of Walton Global Investments, Ltd. (“Walton Global”), a parent company also organized in Alberta Canada, which is not a Canadian Filing Entity.

The relief requested by the Canadian Filing Entities was precipitated by the downturn in the Alberta economy. The primary driver of the poor economic situation in Alberta is the severe and sustained drop in energy prices that began in 2014. The resulting decrease in demand for Walton’s products in Canada and resulting liquidity and financial difficulties of certain development projects in Alberta has created this situation.
I have been trying to think of a situation where the financial problems of a sponsor have not impacted its funds, even though the funds are separate entities from the sponsor.  No example jumps to mind.  Walton goes to great lengths in its email to distinguish between its Canadian operations and entities and its American land funds, and this is correct.  One thing about Walton though, there was always lack of transparency on the other entities involved, besides the U.S. funds, on its U.S. land deals, so I would not be surprised to learn that U.S. investors own land near or adjacent to land owned by a Walton Canadian entity.

Walton has been sloooooow to sell its land deals, in large part, in my opinion, because the longer Walton owns the land the more of the up front reserved management fees it gets to keep (and believe me, Walton reserved years of fees).  With its Canadian financial problems, and a stack of prepaid, reserved fees in its U.S. land funds, do not look for Walton to start selling properties until its gets all those reserved fees.

Towards the end of the email Walton says, "While we know this information may cause concern, we ask for your patience in contacting Walton with further inquiries on the situation while we work through this restructuring."  Don't call us, we'll call you.  Comforting.