"The World is Over-Leveraged" (ACG Recap on Buying Distressed Assets)

Jeff Werbalowsky, co-CEO of Houlihan Lokey, stated in November 2007 that the "world is over-leveraged." (See video of the interview here.) Based on his comments from Tuesday's ACG Luncheon, I doubt he thinks much has changed in the 18 months since then.

Alongside Jeff was Daryle Uphoff (Mg Partner of Lindquist & Vennum) and Steve Rosen (co-founder of turnaround firm Resilience Capital). Houlihan's Jeff Arnesen acted as emcee.

Here are some highlights:

• Risk is currently overpriced. Rosen mentioned that had been underpriced in the past, but now believes that risk is being overpriced. The pendulum has swung too far toward fear, and away from risk, he said.


• Comment from Drew: Does this mean that it's a buyers' market? Rosen continued to be pessimistic about buying opportunities, which seemed to conflict with his "risk is overpriced" question. I wish I had the opportunity to ask him whether he's overall bullish or bearish on asset valuations.



• Goodbye, Refi. Gone are the halcyon days of easy hedge fund refinancing and corporate debt default rates. At the end of 2006, corporate defaults occured <1%.>. Find that here.



• A Broad-based Economic Downturn. Daryle noted that past recessions were contained because they were industry- or geographic-specific (1981 S&L crisis, 1998 Asian Currency/Long-Term Capital Mgmt and 2001 .com). This recession, in contrast, has had a 'systematic' effect. As a result, it's infecting all aspects on the economy. The fact that there are fewer industries that are doing well means there isn't an impetus to jumpstart the economy and adds to the fear of an "L" or "U" shaped recovery rather the "V" to which we've become accustomed

• The Slow Motion Commercial Real-Estate Tsunami. Werbalowsky argued that commercial real estate is the next bubble to pop. No one disagreed. His reason -- and I find this compelling -- is that the financing of real estate is on a different time horizon than banks. Banks are financed on overnight or 30-day commercial paper. Thus, when things go bad, the liquidity hits them quickly as they fail to roll over their liabilities. The opposite is true with commercial real estate: their tenants sign long-term contracts that renew on a much slower timetable than banks -- 12, 24, or 36 months. "That's my future inventory" Werbalowsky said.
• Connecting this comment to Uphoff's (regarding systematic vs. contained recessions), I am trying to determine how broad-based commercial real estate is. Are its 'tentacles' so broad that a downturn there has domino results elsewhere? Or, alternatively, does a downturn in commercial real estate mean lower SG&A expenses for other businesses (lower lease costs) and thus better margins? Does one compound the other, or is one's pain the other's gain?
• Your thoughts are welcome: askniffin@stthomas.edu

I'm off to canoe the Buffalo River for the next week, so be patient if I don't report anything immediately regarding the upcoming TGT shareholder's mtg.