Why Businesses Go Bankrupt: Corus Bankshares

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Corus Bankshares filed for Chapter 11 protection with the Chicago bankruptcy court in June of 2010, declaring assets of $314 million and liabilities of $533 million in its bankruptcy petition.  US banking regulators had taken control of Corus on Sept. 11, 2009 and transferred $7 billion of Corus deposits to MB Financial Inc., at a cost of $1.7 billion to the Federal Deposit Insurance Corp.  According to Reuters, Corus was the 7th largest bank to fail in 2009.  Corus stock,  had been selling at a peak price of $31.61/share as recently as 2006, when the company also enjoyed an $845 million book value.

Lesson Learned:  Corus was very transparent in its shareholder reports about the “unorthodox” strategy it pursued, with a loan portfolio invested almost exclusively in loans to condominium developers.   Corus management believed that this approach let it concentrate on the market it knew best, and that they also had sufficient equity cushion to cover themselves in the event of a downturn.  Further, Corus had diversified nationwide, with 36% of their loan portfolio in Florida, 16% in California (primarily San Diego), 11% in Las Vegas, 11% in Washington DC, and no other metropolitan area representing more than 10% of their loan portfolio as of 12/31/06.

But according to the Comptroller’s Handbook: : Loan Portfolio Management: “Risk diversification is a basic tenet of portfolio management.  Concentrations of credit risk occur within a portfolio when otherwise unrelated loans are linked by a common characteristic.  If this common characteristic becomes a source of weakness for the loans in concentration, the loans could pose considerable risk to earnings and capital.”

Despite their specialization in the condominium market,  Corus management was not quick enough to realize that the condominium market had become speculatively overheated in many, if not all of the key markets where they had concentrated their portfolio,  and as the market softened, their geographic diversification would be insufficient to avert an eventual financial collapse.   As reported by CNBC in April of 2007, “The poster children for excess construction generally reside on the coasts in markets where home price appreciation have boomed,” according to Suzanne Mulvee, senior real estate economist with Property & Portfolio Research, a Boston-based real estate research firm.   “That includes Florida – especially Tampa, Miami and Orlando – Chicago, Las Vegas, Palm Beach and San Diego.”

Blockbuster Declares Bankruptcy – A day late and a Business Model Short

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Blockbuster filed a Chapter 11 petition in NY City bankruptcy court on September 23rd, listing assets of $1.02 billion vs. debt of $1.46 billion.  The filing “provides the optimal path for recapitalizing our balance sheet and positioning Blockbuster for the future, as we continue to transform our business model to meet the evolving preferences of our customers,” CEO Jim Keyes said in a statement.  Blockbuster has arranged for sufficient “debtor-in-possession” financing to allow it to continue to operate its 3,300 U.S. stores, although analysts expect hundreds of additional closures soon, the “Huffington Post” reported.

Lessons Learned:  Competitor NetFlix’s stock hit an all-time high of $163.72/share the day Blockbuster declared bankruptcy, in testament to the power of ideas over assets.   When home ownership of DVD players hit a critical mass in the late 90’s, Reed Hastings sensed the time was right to launch NetFlix.   Without a bricks and mortar retail system to build and maintain, Netflix was able to carry many more titles than Blockbuster (e.g., 14,500 in 2002), and then created a proprietary recommendation system to encourage its subscribers to explore and choose from this “long tail” of DVD options.

By comparison, for much of its history, Blockbuster has seen increasing the number of its retail locations as the key to its growth,  either by building new stores or acquiring competitors.  This is just the strategy as one might expect from a company that was run in its early years by two former  executives of Waste Management, a trash management roll-up: John Melk and Wayne Huizenga.  And in the first ten years of Blockbuster’s life it worked beautifully: the pair made a fortune selling Blockbuster to Viacom for $8 billion in 1994.  But in the decade coming to a close in 2010,  it became apparent that NetFlix had built a better mousetrap, and Blockbuster shed unprofitable stores, adopted a “no late fees” policy, and tried to shore up its own website, but too late, from both a competitive and a financial standpoint. Acquisition of assets was so much a part of Blockbuster’s corporate DNA, that even as late in the game as February 2008, the company considered trying to acquire the struggling electronic-goods retailer Circuit City.

Why Businesses Go Bankrupt: Tribune Company

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When Sam Zell completed an $8.2 billion acquisition of the Tribune Company in December 2007 with an equity investment of only $315 million, he was described alternately as “reckless” and a “genius” by the financial press.  Zell’s main strategy was to sell assets and deleverage his position, but plans to sell the Food Network fell through, while plans to sell Wrigley Field and the Chicago Cubs were delayed, and Zell took the Tribune Company (excluding the baseball franchise) into bankruptcy in December of 2008, less than a year after the acquisition closed.

The “Wall Street Journal” reported on 8/3/10 that Houlihan Lokey, a Los Angeles based investment bank, rejected the Tribune Company’s 2007 request for a “solvency opinion” that would have described Zell’s proposed takeover as financially sound. According to WSJ sources, Houlihan Lokey was concerned about the Tribune’s health in particular, and the fortunes of the newspaper industry in general, and felt the deal was “DOA.”  After being snubbed by Houlihan Lokey, the Tribune turned to a smaller firm, Valuation Research, to get the fairness opinion it sought.  A bankruptcy court examiner, Kenneth Klee, recently criticized Valuation Research, saying it “used faulty methods to reach its conclusions.”

On 7/27/10, the Chicago Sun-Times reported that Klee, a Los Angeles attorney and law professor,  had found that Tribune managers did not act forthrightly in procuring the solvency opinion issued by Valuation Research” and that “one of more of Tribune’s officers breached their fiduciary duties.”

Looking at Tribune Company’s 10-Q reports before and after the deal shows that on 3/31/07, they had $3.6 billion of long term debt, and $4.3 billion of shareholders’ equity and on 3/31/08, one year later, long term debt had nearly tripled to $11.6 billion and there was a shareholders’ deficit of ($1.7 billion). It will be fascinating to see  Klee’s detailed comments about the judgment of Tribune’s officers when his 1,000 page report is fully released to the general public.  I’ll also be interested to see if he comments on the judgment of Tribune’s principal lenders: JP Morgan Chase, Bank of America and Citigroup.

Taverna Kyclades is Doing Everything Right in Astoria

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A recent visit to Taverna Kyclades, located at 33-07 Ditmars Boulevard in Astoria, Queens left me thinking that they may be the most profitable restaurant of its size I’ve ever seen.   From a business perspective, they seem to be doing everything right:

  • No Empty Tables – The food is delicious, the seafood is as fresh as can be, and the prices are very fair, which draws new and repeat customers from Queens, Manhattan and beyond.    Their “no reservations” policy lets  the hostess efficiently seat customers on a first come, first served basis, with no empty tables.  If you arrive after 5:15pm on most nights, plan to wait outside on the sidewalk, or stroll up and down Ditmars Boulevard, while you wait to get a call on your cell phone.
  • Doing More With Less – I would estimate that the dining area represents 75% of the restaurant’s square footage – maybe more considering they have summer seating in an enclosed area on part of the sidewalk. The kitchen turns out an amazing amount of food considering its size.  At 6:30pm on a weeknight, we had to wait to get glasses of water until the dishwasher was emptied, all of the clean glasses were already being used by other diners.  Taverna Kyclades bring in seafood fresh every day from the fish market, and they are located next to the Astoria “Farmer’s Market”, so they are probably working on no more than one day of inventory.  The restaurant is open 7 days per week, and an average of 11 hours per day.
  • Accurate Pricing – When I saw that the spinach pie was priced at $5.80, it showed me that someone at Taverna Kyclades really understands their costs, and is trying their best to make the product a great value for their customers.  Red Snapper, Sea Bass and Striped Bass are “Market Pricing,” which means the restaurant can offer them, and still not lose money when supplies are scarce.   Lunch specials are available, which guarantees that customers will start lining up pretty much at the noon opening.

Check out Taverna Kyclades next time you are near Astoria, you’ll love it!

Why Businesses Go Bankrupt: Movie Gallery – The Sequel

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Movie Gallery filed for bankruptcy on February 2, 2010, announcing plans to close 760 stores. The company had previously filed for bankruptcy in October 2007, emerging from Chapter 11 in May 2008, with private equity firms Sopris Capital Advisors and Aspen Advisors as its primary owners. Movie Gallery’s website is asking consumers with rented movies in their possession from stores that have closed to return them “in a reasonable time frame” to one of the 1,906  stores that will remain open.

Lessons Learned:  Movie Gallery’s first bankruptcy was attributable to the unmanageable debt they took on in their acquisition of competitor Hollywood Video for $1 billion in 2005. The second Movie Gallery bankruptcy is due to bad fundamentals for bricks and mortar movie rental locations – even worse than anticipated by the two private equity firms who took it out of its first bankruptcy.  (Retail movie rental is turning out to be such a weak business that market leader Blockbuster is once again at risk of bankruptcy. ) The private equity firms would have done better to put their money in shares of Netflix, which has increased from $39/share in May, 2008 to a current price of nearly $70/share.