Blog on the Run: Reloaded

Friday, October 23, 2009 8:56 pm

Another item from the How-Is-This-Even-Legal? file; or, End Casino Capitalism

R.H. Donnelley:

  • $500+ million cash on hand when it declared bankruptcy.
  • Positive cash flow every single month since declaring bankruptcy.
  • No debt coming due in 2009
  • Most recent audit was clean.
  • Projected 2009 EBITDA: $1 billion.
  • Bankrupt anyway.

Why? If you believe the CEO of the company’s largest creditor,

There is one simple reason: The CEO will make more money bankrupting the company than keeping it alive. It takes a year or more for shareholders to elect new board members who in turn elect the CEO. As a result, when the CEO and board of a company feel threatened they may lose their jobs; they can wipe out current equity at any time regardless of the company’s financial condition by declaring bankruptcy. David Swanson, R.H. Donnelley’s CEO, cut a deal with bondholders to keep his job and have management acquire a 10% stake of the Company when it emerges from bankruptcy. Management had approximately 1% of the shares before bankruptcy. Equity was destroyed before the shareholders could have the CEO or the board members removed. The Company has wiped out six billion dollars of debt through the bankruptcy process and significantly lowered its debt service payments. A conservative valuation puts Management’s 10% stake at a couple hundred million dollars. The stake could be worth considerably more if the economy recovers over the next few years.

The CEO adds, “I believe this is a clear breach of management’s fiduciary duty to stockholders.”

Ya think?

In the past few years, the government has made it more difficult for individuals to file for, and emerge from, bankruptcy. Apparently the reverse has happened for large corporations. And it ain’t just R.H. Donnelley’s stockholders and bondholders whom this screws:

[A]llowing solvent companies to declare bankruptcy raises the cost of capital for all companies. If a company that can pay its debt is allowed to enter bankruptcy, then investors will require a higher interest rate due to the increased risk of all companies defaulting. This will make it harder for companies to undertake new projects and reduce corporate profits. Fewer projects will be profitable for companies, and hiring will suffer as a result. It will mean fewer jobs in America.

Of course, Donnelley employees will lose their jobs. And, the CEO points out, other large companies will follow suit. This is not the kind of thing that is supposed to happen in our system, and it’s just another example of how the game is rigged:

The problems that the Company had were the direct result of inept management. Management should be removed as a consequence of poor decision-making, not rewarded and supported by U.S. bankruptcy courts. The current corporate governance system rewards failure.  R.H. Donnelley sold a billion dollars in bonds last year and made only one interest payment before voluntarily defaulting on its debt.  One can only wonder what would happen if a homeowner walked away from their mortgage after one payment. Would the homeowner be rewarded in the same manner? The Company’s actions not only negatively impacted the equity holders and bond holders, but also Company employees who put in years of sacrifice to make the Company a success and the retirees counting on a pension. Many stockholders were also the Company’s employees and retirees. These people were doubly hurt by the bankruptcy.  The CEO and board of directors must be removed upon the failure of a company rather than be rewarded with hundreds of millions of dollars. This is what happens when banking institutions are taken over by the FDIC, and it should be what happens when any public company fails. Management must be held accountable for its actions.

End Casino Capitalism. Now.

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