It has a diversified business portfolio with different lines of business. But regional concentration is still high (62% in America).
Sale of commercial real estate is 50% off and it will only worsen.
Leasing business is volume-business. In today's environment, shrinking is the only result.
Red Flag 1: adjusted EBITDA is now around 11.9%(page 24). But the firm is so desperate for cash that in the first 6 months of 2009, it borrowed a new subordinate loan of 435m. The interest rate is 11.625% (10-Q CFS). The firm is pretty much work for the bank now.
According to historical experience during the 1991 recession, EBITDA margin will decline further. NO HOPE of rebounce in one year.
Red flag 2: negative operating cash flows and investing cash flows. First 6 months, OCF is -82.7m, inv.C.F,-63.5m. Total -146.2m.
Negative OCF will appear again in Q3 2009 report(we will see on Thursday morning). 2009 first half year's Inv.C.F. is already 80% off compared with first 6 months of 2008. It is abnormal to cut it to 0 or even lower.
Therefore, I will expect every quarter, the cash deficit will be around 73m--must be satisfied with new cash inflow.
Flag 3. Desperate financing: Paulson Co. gave 100m to the firm in Q2. Average price is around 6.5 to 7. Desperate low price. The firm works hard to reduce leverage ratio.
The firm can take advantage of the high price now to issue more stocks, but it is going to hurt stock price.
It could not borrow more since it might have to pay even higher rate now. All banks know that their CRE loan portfolio is deteriorating every day. Only bloody idiots will give more loans here.
Red flag 4. Inevitable impairment charge: hit to the equity account with potential impact of covenant breaches.
The only good news is that it fired DT as the auditor for 2008 (which charged 5.9m of audit fee) and replaced with KPMG (5.1m for 2008 audit). Really a good cost saving, or maybe even nicer auditor who will give in to the client pressure in 2009.
In sum, tough road ahead. I will expect a miserable Q3 of 2009.
Now the firm resorts to stock sale to raise more cash...
If EBITDA is so great, why the firm does not disclose its cash flow statement when it announce earnings news?
Why it starts to sell new stocks BETWEEN earnings announcement date and 10-Q official filing date?
hehe. Desperate move at desperate time.
i'm pretty sure i made it clear that my point on EBITDA versus "traditional" cash flow is specific to large corporate credits (and even more so for CBG). for smaller companies that don't have easy access to the capital markets (ability to sell stock, issue bonds, etc..), you need to use the traditional cash flow analysis.
as i said before, if this traditional cash flow analysis was so important, why does every large loan from a bank (say $100 million or more) have covenants using EBITDA ? why does every buyout firm and/or major investor (like paulson in CBG) use EBITDA to value their acquisition and/or investment target ?
another company in the news alot is LVS. i'm long on that one (i bought jan 2011 $15 calls and sold jan 2011 $25 calls). LVS has some real assets (hotels/casinos) unlike CBG but it is also "governed" by EBITDA and "owned" by its lenders.
We had a chance to discuss this issue in detail a couple of months ago:
As you can see, I agree with you. EBITDA is flawed, particularly for equity investors.
EBITDA is subject to accrual manipulation. It can be a good proxy of cash flow, but it is not the actual operating cash inflow.
I only trust cash flows. Anyway, nobody can pay their debt with accrual earnings,right? Finally, it is always the cash that is the king.
I'm still short, although I've lost a couple grand on this position so far. Whether we'll ever agree on using EBITDA vs. cash flow statements is up for debate, but you and I both seem to agree CBG is in a tough spot.
Very much looking forward to seeing the 10Q. Continue to be amazed that they could sell $100 million worth of shares to someone at $7.44 or whatever they issued at earlier this year...but then again that might be why I don't have $100 million :O)