Sunday, September 25, 2016

Sequa Corp Failing after a Decade Under PEU Management



Carlyle purchased Sequa Corporation in December 2007 when private equity firms paid premium prices to buy companies.  That debt is coming due.  Bloomberg reported:

All of Sequa’s debt is due next year, according to Standard and Poors, starting with its $1.3 billion term loan in June 2017, followed by $350 million of bonds in December.
At the time of Carlyle's purchase Sequa had $2.19 billion in revenues and $700 million in debt, which Carlyle assumed as part of the $2.7 billion deal.

Sequa had "six businesses with leading positions in niche markets," according to Carlyle's website.  Forbes story on the $2.7 billion buyout said Sequa had seven divisions.  It's down to two today with annual revenues of $1.3 billion.

CNBC reported on Carlyle's buyout:

The Sequa deal, expected to close in the fourth quarter, will be financed through a combination of equity contributed by investment funds affiliated with Carlyle, and external debt financing provided by Lehman Brothers, Citigroup and JP Morgan.  
The Lehman-Carlyle-Sequa link is reflected in the 2012 board bio:

Mr. Adam J. Palmer is a Managing Director of Carlyle and has been the Head of the Global Aerospace and Defense sector team since 2011. Mr. Palmer joined Carlyle in 1996 as a member of the Aerospace, Defense and Government Services sector team. Prior to joining Carlyle, Mr. Palmer was with Lehman Brothers focusing on mergers, acquisitions and financings for defense electronics and information services companies. He currently serves on the board of directors of Wesco Aircraft, RPK Capital Management Group, LLC, Sequa Corporation, Triumph Group, Inc. and Landmark Aviation, and previously served on the board of directors of Standard Aero, Ltd., U.S. Investigations Services, Inc. and Vought Aircraft Industries, Inc. 
Since 2012 Palmer landed board seats at Global Jet Capital, Dynamic Precision Group and Novetta Solutions LLC.

Mr. Palmer could tell us what happened to four or five Sequa businesses since Carlyle bought the company.  The board sold Sequa Automotive Group for $400 million in 2012.  It's not clear what Carlyle did with the proceeds.

Sequa 2007 was a thriving company with numerous divisions in growing niche industries.  After nearly ten years of Carlyle Group ownership it's a stressed shell of its former self.

Carlyle put $1.01 billion of investor money into the 2007 buyout of Sequa, according to fund marketing documents viewed by Bloomberg News.
SEC filings on the buyout show the mix of equity and debt.  Carlyle borrowed $2 05 billion to seal the deal.

Equity Financing - It is expected that up to $900 million of the Merger consideration will be provided through the issuance by Parent of common equity to Carlyle Partners V, L.P. and certain of its affiliates and co-investors. 

Debt Financing - Parent has received a debt commitment letter, dated as of July 8, 2007, from Lehman Brothers Inc., Lehman Commercial Paper Inc., Lehman Commercial Bank, Citigroup Global Markets Inc., JPMorgan Chase Bank, N.A. and JPMorgan Securities Inc. (collectively, the “Banks”), which provides the following, subject to the conditions described below: 
 • a $1.2 billion senior secured first lien term loan facility (the “First Lien Term Loan Facility”); 
 • a $150 million senior secured revolving credit facility (the “Revolving Facility” and together with the First Lien Term Loan Facility, the “Senior Facilities”); and 
 • $700 million aggregate gross proceeds of unsecured senior notes
Moody's shows current debt levels of $1.76 billion

$1,228 million (outstanding) senior secured term loan due 2017, downgraded to Caa3 (LGD3) from Caa1 (LGD3)
$175 million senior secured revolver due 2017, downgraded to Caa3 (LGD3) from Caa1 (LGD3)
$350 million senior unsecured notes due 2017, downgraded to C (LGD5) from Ca (LGD5) 
Carlyle "grew" Sequa down nearly $900 million in annual revenue over a nine year period while retiring/offloading $254 million in debt.   Company wide revenue declined 41%, while debt decreased 12.4%.

I wonder how the family of founder Norman Alexander feels about the deal with Carlyle today.  They might want to give the Brinton's clan a call.

Thursday, September 22, 2016

Why Can't Wells Fargo Management Hear?


A handful of Wells Fargo employees reported unethical sales behavior to the company's ethics hotline and Human Resources.  One spoke out in 2011 and another in 2013.  Shortly after sharing their concerns each was fired.  CNN reported:

One former Wells Fargo human resources official even said the bank had a method in place to retaliate against tipsters. He said that Wells Fargo would find ways to fire employees "in retaliation for shining light" on sales issues. It could be as simple as monitoring the employee to find a fault, like showing up a few minutes late on several occasions.
This story is evidence of the shift from human resources to human abuse in most companies.  Executives like to say human resources has become more strategic.  HR no longer is the balance between worker and management.  It directly serves and implements executive wishes, i.e. it maximizes CEO pay.

Wells Fargo's management practices relied on incentives, bribing people to do a good job, and hard targets, where employees were punished for not meeting arbitrary numbers set by management.

Executives created a giant Skinner box where humans were treated like rats.  However, rats don't e-mail the company President, send messages to HR or call the Ethics Line.  Ethical people did.

Executives couldn't hear because that would force them to examine the horrific, dehumanizing system they created to personally enrich themselves.  They couldn't see because their eyes were trained on the layers of executive incentive pay they would receive if the company met or beat its goals.

Image obsessed leaders don't want to hear bad news and view employees raising issues as troublemakers.  Troublemakers need to go and a loud chorus of "La, la, la" must be sung until they are escorted from the premises.  

Wells Fargo is like thousands of other companies where core management underpinnings are greed and vanity. Congressional theater has elected officials acting like they understand, while they work to spread the very same toxicity to your doctor's office.

Rats.  Doctors used to study them.  Now they are one in Medicare's eyes.

Wednesday, September 21, 2016

Medicare to Spread Toxic Pay for Performance to Your Doctor's Office


Because your doctor does not have a good job to do Medicare plans to rank/rate/grade physicians and "reward" them for clinical outcomes.    Alfie Kohn, author of Punished by Rewards wrote:

Recall the line of research finding that rewards tend to undermine the very things they’re used to promote. Remove the reward and there’s no longer any desire to continue performing the task. Assuming that we seek to nurture an attraction to the given activity (learning, painting, inventing, etc.), this evaporation of interest is disturbing enough in itself, but it also has the consequence of yielding poorer quality work in many instances, as scores of studies have confirmed.
The number of clinical parameters for each patient are conceptually endless and most of them are not truly under your doctor's control.  They are a product of individual genetics/biology and personal choices made over a lifetime.

Healthcare payment experts would be wise to revisit corporate executive behavior under stock option incentive compensation.  Executives backdated 30% of options to optimize their individual pay, at the expense of shareholders.  Extrinsic reward programs reduce the natural interest in performing a task, but they also cause people to take any method possible to garner the reward.  Ask 5,300 Wells Fargo workers.   

Prior Medicare efforts to reward healthcare organizations utilized a quartile ranking system, where over time "top performers" got a small percentage reward and "poor performers" or nonparticipants a deduction.  From year to year the pay for performance system was not predictive, i.e top performers one year did not stay in that category.  A system that is not predictive is not based on knowledge.  One failure of a theory requires its revision. 

Former Interim Medicare Chief Dr. Don Berwick called pay for performance at the individual level a toxic daisy chain.  That's exactly what Medicare is doing to your physician, if you are lucky enough to have one at the moment.  I'm sure a number of my physician friends will stop taking Medicare patients or simply retire.  Long ago they stopped taking Medicaid patients outside their ER call.

Our healthcare system relies on complexity and hoops seeming designed to deny or postpone needed care.  I predicted PPACA could not deliver on its promises to control healthcare costs.  America does not have a healthcare system.  It has a series of individual parts, with many concerned more about their bottom line than care delivery.

PPACA and the world's sick management culture have made most healthcare jobs difficult and at times distasteful.  They now want to enslave your doctor with financial handcuffs.  Doing something well and doing something for reward (or to avoid punishment) are clearly two different things.  Ask the folks at Wells Fargo. 

Sunday, September 18, 2016

Perelman's Financial Games for SG


Bloomberg reported:

Scientific Games Corp. shareholders loved the slot machine and lottery company’s decision to consider an initial public offering of its fast-growing interactive-gaming unit. Bondholders, not so much.

Shares of Scientific Games jumped almost 17 percent after the Las Vegas-based company said on Sept. 7 it would consider joint ventures, an IPO and other options for the business, which makes casino-style games for mobile devices. The bonds fell and remain lower a week after Scientific Games designated the business an unrestricted subsidiary, raising concerns among bondholders about how any proceeds may be used. Scientific Games, 40 percent-owned by New York billionaire Ronald Perelman, had $8.07 billion in long-term debt as of June 30.
Such a decision would need to be made by SG's board of directors, which holds fiduciary responsibility for the company and its many subsidiaries.  Here's a list of board members who will ultimately decide what happens with the interactive gaming unit.


Most of them are Perelman's people or came with the acquisition of WMS Industries and Bally Technology, the two interactive game companies SG acquired in 2013 and 2014.

SG's press release on the WMS deal stated:

WMS was acquired for approximately $1.5 billion in cash. In connection with the merger, Scientific Games entered into a new $2.6 billion credit facility, consisting of a $2.3 billion term loan facility and a $300 million revolving credit facility that was undrawn at closing. The term loan facility was used, in part, to finance the acquisition, to pay off existing indebtedness and to pay fees and expenses relating to the merger and related financing.
Las Vegas Review Journal reported on the Bally deal:

Scientific Games is paying $83.30 per share to acquire all outstanding shares of Bally, valued at $3.3 billion. The lottery company is assuming $1.8 billion in debt.

Scientific Games completed the financing for the buyout earlier this week, pricing out $3.15 billion of debt to be used in the transaction. In October, the company said it raised $2 billion for the merger.
Much of Scientific Games debt was added to buy the firms they may want to spin off. Surely the debt would go with it.  Nope, and that's the bondholders' concern:

The view is different for bondholders, according to Barbara Cappaert, an analyst with KDP Investment Advisors Inc.  Putting the interactive business in an unrestricted subsidiary means that cash may not be available to pay interest or reinvest in the company’s other businesses, she said.  Funds could be used to buy back stock or declare a dividend.

“Given what has happened with other issuers due to the opportunistic use of unrestricted subsidiaries, bondholders are right to be concerned,” said Anthony Canale, head of high-yield research at Covenant Review, a research firm that analyzes credit agreements. He cited Caesars, which sold some of its hotels to an affiliate and then put its most heavily-indebted unit in bankruptcy
Bondholders are rightfully concerned they will be subject to a PEU slight of hand move.  SG's board will make any decisions and should be liable for any harm they cause in the service of Ron Perelman's billions in fortune.

Saturday, September 17, 2016

SEC Discounts Fine for PEU First Reserve

In May 2016 PEHub reported:

First Reserve agreed to reimburse its investors $12.7 million and pay a $5 million fine to settle a Securities and Exchange Commission investigation  into various fee and expense practices.
By September the amount reimbursed investors fell to $8.3 million and the fine dropped to $3.5 million.  Why the $5.9 million difference?  Only the SEC knows.


First Reserve is an energy focused private equity underwriter (PEU) established in 1983.  Cofounders William Macaulay and John Hill came from Wall Street and the U.S. Government, Office of Management and Budget and Federal Energy Administration.  The pair spoke with Oil and Gas Financial Journal in 2013.  The article stated:

First Reserve and its active controlled companies have invested over $5 billion of equity in platform investments and add-on acquisitions and mergers in 2012.
Ouch.  That $5 billion went to work when oil prices were over $100/barrel.

WSJ ran a piece last summer on First Reserve's struggles with declining energy prices. 

WSJ identified difficulties with two First Reserve affiliates, CHC Group and Midstates Petroleum.  In February 2016 Moody's downgraded the debt of affiliate AFGlobal.  That report stated:

Given the highly levered capital structure, with around $800 million in reported debt, and the significantly lower earnings base, Moody's is concerned about the sustainability of the company's capital structure.

The SEC settlement cited First Reserves cooperation as a factor in fine setting.  It would not surprise me if ability to pay was another.  Former DOJ Chief Eric Holder went out of his way to ensure government fines wouldn't contribute to systemic risk.  I wonder if the SEC adopted a similar frame for First Reserve. 

ZeroHedge took a slightly different stand on the SEC in its piece today on former HFT enforcer Greg Berman landing at  HFT powerhouse Citadel:

And just like that all is well again in the corrupt world, in which the market "regulators" pretends to protect the little guy, when in reality all they only cater to the most criminal with the simple hope of landing a job there one day and getting paid in 1 year what they make in 10 at the SEC or any other government agency.  
Might a reward wait SEC staffers who gave First Reserve a $1.5 million discount? 

Monday, September 12, 2016

Wells Fargo Exec Over Fraudulent Activity Retiring with $125 Million


ZeroHedge reported:

There was a burst of righteous populist anger anger last week, when it emerged that Wells Fargo had engaged in pervasive, "massive" fraud since at least 2011, including opening credit cards secretly without a customer’s consent, creating fake email accounts to sign up customers for online banking services, and forcing customers to accumulate late fees on accounts they never even knew they had. For this criminal conduct, Wells was fined $185 million (including a $100 million penalty from the CFPB, the largest penalty the agency has ever issued). In all, Wells opened 1.5 million bank accounts and "applied" for 565,000 credit cards that were not authorized by their customers. 

As "punishment" Wells Fargo told CNN that it had fired 5,300 employees related to the shady behavior over the last few years. The firings represent about 1% of its workforce and took place over several years.  The fired workers went to far as to create phony PIN numbers and fake email addresses to enroll customers in online banking services, the CFPB said. 

What Wells did not disclose publicly to anyone is that the head of the group responsible for Wells' biggest consumer fraud scandal in years, is quietly leaving the bank with a $125 million bonus. 
Carrie Tolstedt ran the community banking division of the bank, which included its retail banking and credit card divisions, during the entire period in which the customer abuse was alleged, which goes back to 2011. The CFPB said about three quarters of the unauthorized accounts opened by employees of Wells Fargo were bank deposit accounts. Another 565,000 were unauthorized credit card applications. Tolstedt took over the division in 2008, after Wells Fargo merged with Wachovia during the financial crisis..
There are multiple layers to Wells Fargo's management crime.  The first is incentives distort behavior.  Add management imposed hard targets that prioritize bank profits over customer needs and bad behavior goes exponential.  Management learned long ago that 30% of executives cheated by backdating stock options.  They didn't need to lie, cheat or steal to keep their job like many Wells Fargo employees.

Bad management is perpetually surprised when their simplistic methods of motivation, bribing people or firing them, backfire on a widespread basis as people respond to the poor system management created. 

Like the co-worker with body odor bad management never recognizes their offense. 

Wells Fargo’s CEO John Stumpf said Tolstedt had been one of the bank’s most important leaders and “a standard-bearer of our culture” and “a champion for our customers.” 
She is a standard-bearer for greed and driving in fear.  She is a champion for executives who blame the little people for trying to survive in a situation where the employee is damned no matter what.  She is a champion for sticking her executive head in the sand for years while her division assaulted customers financially.   Her retirement pay reflects the bizarre lack of balance and absence of accountability executives get from each other and their corporate board of directors.



Management in our world today is absurd, i.e wildly unreasonable, illogical, or inappropriate.  Carrie Tolsedt is the latest poster child in that regard.  Unfortunately, the system is chock full of absurd corporate executives.  It's the water in which they swim. 

Update 9-22-16:  Management was complicit in covering up the predictable bad outcomes from P4P and hard targets. CNN reports they went as far as firing whistleblowers who "tried to put a stop to the bank's illegal tactics only to be met with harsh, prompt and severe retaliation by the bank.  Almost half a dozen workers who spoke with us say they paid dearly for trying to do the right thing: they were fired."  Greed and vanity (image management at all costs) are the basis for today's management practices.

Friday, September 9, 2016

House CPA Votes to Return PEUs to Shadows


The House of Representatives voted 261-145 to relax what little Dodd-Frank did to "regulate" private equity underwriters (PEU).  Bloomberg reported  on passage of H.R. 5424, the “Investment Advisers Modernization Act”:

Among the issues the SEC has found is what’s known as accelerated monitoring fees. Monitoring fees, which private equity firms charge companies they own annually for advisory work, were accelerated into lump-sum payments when a company was sold or taken public ahead of schedule, even when future work wouldn’t be performed. The regulator found that Apollo and Blackstone didn’t adequately disclose the practice to clients.
PEU Report chronicled accelerated management fee collections for the following deals:

Dunkin Donuts - $14 million to The Carlyle Group
CommScope -- $20 million to terminate the Carlyle Group management agreement
PQ Holdings - mentions $ obligation to Carlyle but did not list a specific amount

Economist Sam Wilkin wrote in Wealth Secrets of the 1% (Daily Mail):

...behind almost every great fortune, there lies what he calls a 'wealth secret'. This is a piece of knowledge or a technique that, while not exactly criminal, certainly skirts the customs of the time, and possibly the laws as well. All of them, he says, involve 'some sort of scheme for defeating the forces of market competition'. Many involve legal manoeuvrings or the exercising of political influence. Boldness and fearlessness are a given. Mild psychopathy probably helps, too.
The House of Representatives vote fulfills my assessment/reaction to Wilkin's statement.

America's Red and Blue political teams cater to the .1%, which is largely represented by the PEU class.  Customs skirted, check.  Legal and financial manipulation (tax avoidance, management fees, dividend recaps), check.  Exercising of political influence on a bipartisan basis, check.  Boldness, fearlessness, psychopathy and the complete and total absence of guilt, check. 
Who's overpaying these undisclosed fees?  It could be your pension/retirement plan. 

One might expect a CPA to vote for fee disclosure which has legal accountability.  Not my representative, Congressman Mike Conaway.   His top donor list for this election cycle lists the Private Equity Growth Captial Council. 

PEU Report readers know I jokingly call their lobbying group PECKER (for Private Equity Capital Knowledge Executed Responsibly). 

The House of Representatives, especially my representative, listened to PECKER's memes and voted their wallets.   The Senate is up next.