Posts Tagged‘debt’

Dick Smith Electronics in Dire Straits.

The year is 1999 and my parents have informed me that I will no longer be “spending their money”. This is their no-so-subtle way of telling me that I need to get a job if I want to keep doing the things I’m doing, like upgrading my PC every 6 months. I’ve already heard horror stories of my mates working at McDonalds and other, typical first time job places so I’ve set my sights elsewhere. To my surprise the first Dick Smith Electronics store I put my resume in at calls me back right away. No less than a month (and a few questionable training videos later) I’m out on the sales floor, a place I’d come back to routinely for another 6 years.

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So suffice to say that I have something of a soft spot for the electronics retailer, even long after it dropped the iconic branding and reputation for being the place to get electronic components and kits. Of course I had long knew about the troubles the company was facing, partly from online but also from their less-than-stellar own product brand. Things were looking up in recent times after they were bought out from Woolworths and then refloated on the ASX however it turns out that might have been the first turn in its current demise.

As it turns out the buyout by Anchorage Capital, a private equity firm, was a carefully constructed scheme to buy DSE for a song and then reap themselves a healthy profit. The whole blog is worth reading in its entirety however the pertinent details are thus. Anchorage “purchased” DSE for a total of $115 million however only $10 million of that was financed with actual cash. The rest was derived from writing down their stock holdings and then selling them off at fire sale prices. This generated them a huge operating cash flow which they then used to pay back the outstanding amounts to Woolworths. Then, prior to relisting DSE on the stock exchange, they used the previous write downs and projections from the clearance sales to forecast a believeable profit for the coming years. This is what allowed them to list DSE for some $525 million, all of which they were able to receive after selling all their shares in September 2014.

This, of course, didn’t leave the company in the greatest state something which was reflected in the share price which meandered around $2 until late last year. Then after their FY2014 earnings failed to meet expectations their share price began to tumble, losing almost 90% of its value. In a desperate attempt to stem the tide DSE then engaged in what many called a “suicidal” sale of their current inventory, hoping to win enough business during the christmas period in order to stay afloat. This, unfortunately, did not work and today they have requested that the ASX put a trading halt on their shares while they look to restructure their debt obligations.

Given this recent turmoil it’s going to be incredibly hard for DSE to find a willing debtor to pull them out of this grief. Previously DSE looked strong due to its lack of debt however the fire sales that Anchorage engaged in to pay back Woolworths left the company without the inventory it needed to continue business. This meant taking on debt in order to keep suppliers on the books, something which is fine if the sales are there to support it. However, as their fire sale over christmas has shown, they simply aren’t making the kinds of sales required to support that way of doing business and so we find ourselves in this current situation.

It’s a prime example of how corporate raiders can carve up a company for a large short term gain that cripples it in the long term. DSE always struggled against the bigger retail giants, especially when it branched out into their territory in early the early 2000s, but it was at least sustainable. Now it’s quite likely that DSE will end up in receivership, unable to finance its debt obligations leaving it incapable of continuing business. For a former employee it’s a sad thing to see happen and I sincerely hope I’m wrong about them being able to restructure their debt.

The Cyprian Banking Industry is Damaged Beyond Repair.

If there’s one thing that Australia has going for it at the moment it’s the duo of a well regulated banking industry coupled with a strong economy that has seen us weather some of the worst financial crisis we’ve seen in decades. The Global Financial Crisis came and went without leaving much of a lasting impact and for the most part we’ve been immune to the Eurozone Crisis. For an industry that relies on trust you really couldn’t find a better environment than Australia at the moment as compared to nearly every other place on earth the trust in our banking system is extremely high.

Bank of Cyprus

If I was to choose a place that is the exact opposite my country of choice would of course be Cyprus. For the uninitiated Cyprus is a small island nation of about 1 million people or so and is renown for being something of a tax haven. This is due to its extremely favourable tax rates on savings accounts there and led to the banks storing more wealth than the entire nation’s GDP. When everything’s going well this isn’t much of a problem as the steady flow of capital helps keep both the nation and the banks afloat. However when things turn bad, like they have done during the Eurozone Crisis, what you have is an island nation that’s left in a rather difficult situation as it lacks the tools to deal with such colossal entities failing.

The issues stem from the Greek financial crisis as the Cyprian banks had amassed some  €22 billion worth of Greek private sector debt. As a result of the writing down of much of this debt in order to save Greece (and thus the Euro itself) the Cyprian banks were hit hard by this and in turn had their credit rating downgraded. This lead to a downward spiral of bad debt piling up, banks defaulting on loan payments and the Cyprian government, with a GDP below that of the debt their banks had amassed, being completely unable to deal with it. So like any other EU member they approached European Commission, the International Monetary Fund, and the European Central Bank for a bailout. They were able to secure one however before they could get it they needed to raise some €7 billion and the method by which they did this was, to put it bluntly, incredibly retarded.

The initial proposal, according to IVA, was to raise these funds was a one off tax on all savings deposits with accounts under €100,000 losing 6.7% and above that losing 9.9%. They began musing this particular deal over the weekend in order to be able to enact the legislation before everyone had a chance to get their money out but as soon as news began to spread the beginnings of a bank run started taking shape. ATMs were quickly emptied of their cash and long lines formed as people tried to get as much of their cash out of Cyprian banks before they were slugged with the tax. The initial proposal didn’t get through however and the Cyprian government had to order the banks not to open and they’ve been closed ever since.

News reaches us today that the Cyprian government has managed to reach a resolution with the one off tax now being restricted to accounts over €100,000. What the particular rate will be though remains a mystery but you can guarantee it will have to be higher than the initial proposal to make up for the revenue lost on accounts below that threshold. The deal will also see one of the bigger banks broken down into a toxic asset dump and a small, feasible business but there have been calls for the same thing to happen to its largest bank. No matter what they end up doing however the damage has been done to their banking industry and I’m not sure it’ll ever be able to recover.

You see banking relies on a certain amount of trust, especially when it comes to things like savings accounts. You trust your bank won’t lose your money and, in the case of the government, you trust that they won’t come after it unless you’re directly responsible for something. The Cyprian people, and their foreign depositors, are essentially being punished for the mistakes of the banks and there’s no amount of guarantees that they can make that something like this won’t happen again. Thus the only smart thing for anyone to do is to get their money out of there as soon as humanly possible lest the same thing repeat itself in the future.

It’s not like this couldn’t happen elsewhere, indeed New Zealand is considering a similar move, but the reputation Cyprus had as a great place to store capital is now in tatters. Future depositors will think twice before sending money there again because it’s clear that the tiny nation can’t deal with the mistakes of its banks due to the huge influence they have their economy. After the tax goes down I doubt any of the large creditors will be keeping their money in there for long and its likely a bank run will still occur once the banks reopen their doors. With that the finance industry in Cyprus will be dealt a crippling blow, one which it will be unlikely to recover from.

It might be for the good of the country in the long term however since no one will store capital there any more it’s unlikely they’ll get into a situation like this again. I’m not entirely sure that’s a good thing though as it takes an axe to what was once a very profitable industry for the Cyprian people. Realistically though the blame for all of this lies directly with their government, one that should have taken better precautions to avoid a situation like this in the first place.

The debt advisors are those people whose contacts you must o have in your phone.

The Sound Economics of Australia’s Education System.

Australia has one of the best education systems available as evidence by our top 10 rankings for literacy, science and mathematics as well as our overall education index of 0.993, tying us for first place with countries like Denmark and Finland. While our system isn’t exactly unique in its implementation I do believe schemes like HECS/HELP are one of the main reasons that the majority of Australians now pursue tertiary education and whilst this might bring about other issues (like a lack of people in trades) it’s clear that benefits far outweigh the costs. Indeed as someone who couldn’t have afforded university without the help of the government and now has a great career to show for it I’m something of a testament to that idea.

Recently however there’s been some criticism of the HECS-HELP system, mostly focused on the amount of student debt owing to the government and the sizeable chunk of that which is never expected to be repaid:

The Grattan Institute’s annual Mapping Australian Higher Education report finds that students and former students have accumulated HECS-HELP debts of $26.3 billion.

This is about an extra $10 billion owing, in real terms, than in 2007.

The interest bill on the income-contingent loan scheme, formerly known as HECS, is nearly $600 million a year, the institute estimates.

And it says HELP debt not expected to be repaid rose to $6.2 billion in 2012.

The report makes for some intriguing reading and does indeed state that there’s a good 25% or so of the current student debt that’s likely to never be repaid. The reasons behind it though are interesting as whilst some would have you think that it’s due to students skipping out on their debts in way or another (ala Liberal MP Steve Ciobo) it’s in fact primarily due to students either dying or moving overseas. Now there’s not a whole lot we can do about the former (except maybe investing more in the health care sector) but the latter is a problem that’s been around for decades and I’ve yet to see a solution proposed, either from the government or the private sector.

Australian graduates, especially in some sectors, suffer from a distinct lack of choice when it comes to finally finding a career once they’re done with their university studies. Whilst I might have managed to make a decent career without looking too far you have to appreciate the fact that my degree isn’t in IT, it’s in engineering, and such is the case for many graduates who try to find something in their chosen path. Usually they can get close but the chances of landing an opportunity directly in their field of study are usually pretty slim and that leads them to look overseas. I myself did exactly that not too long after I graduated and was pretty staggered at the number of opportunities available abroad that I was more than qualified for.

HELP Debt outstanding 1989 to 2011

Another point that the report makes is that student debt is seemingly sky rocketing when compared decades prior. The graph above demonstrates that quite clearly but it doesn’t give you any indication as to why this is happening. For starters Australia’s population has increased by about 5.8 million in since 1989 or about 35%. At the same time participation in tertiary education has well over doubled in this time with the vast majority having some form of tertiary qualification and  27% of all Australians now carrying a bachelor’s degree or higher. Essentially there’s been a major cultural shift over the past 2 decades towards pursuing an education through universities rather than other avenues and this is what is responsible for the increase we’ve seen. This isn’t exactly an issue considering our GDP has quadrupled in the same time frame and whilst I won’t say there’s a causative link there I’d say you’d be hard pressed to uncouple higher education rates from improved GDP figures.

Realistically the issue of unpaid student debts isn’t much of an issue for the Australian government considering the wide reaching benefits that our high quality and freely available education system gives us. We still need to do something about our best and brightest moving overseas to greener pastures but it’s clear that the economic benefits of free education for anyone who wants it vastly outweighs the cost of providing it. Even if we were to erase all student debt in one year it would still be only a few percent of the total budget, something that could be easily done should there be any burning need for it to happen. There isn’t of course since the cost of servicing that debt is so low (comparatively) and there are much better things to spend that money on.