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What do you think?
Back in September, just as the school year was about to begin, I suggested readers take their children’s trust funds and put them into Iridium LLC bonds and Nigerian bank stocks. Assuming, that is, if the high-risk bets didn’t work out the children would develop better character if forced to work for a living.
Now that the school year has drawn to a close, let’s see how the two bets would have done. So far, we have one A and one Incomplete, with a poor grade on exams that might be offset with an overdue paper. Net, you or your beneficiaries would have made good money.
I would have guessed that the Nigerian bank stocks were the more dangerous bet of the two. The country recently held elections that may not have been conducted according to Danish standards of probity, there is a general strike in the cities, and rising terrorism and criminality in the oil districts. The most frequent contact I have with the Nigerian financial system are daily e-mails from people claiming to be current or former officials, who say they trust me to help them loot the country’s reserves, if, in return, I send them my bank account number.
But I would have been wrong.
I mentioned two Nigerian bank stocks back in September, Zenith Bank PLC and Guaranty Trust Bank PLC. At the end of September, Zenith shares were selling for 19 US cents; they now are on offer for 42 cents. Guaranty Trust shares were at 12 cents, and are now at 25 cents. So they more than doubled, even with political turmoil and oil worker kidnappings.
Exotix, the emerging market securities brokers, follows the prospects for both, and liked them back then. Stuart Culverhouse of Exotix says that in spite of the bad news in the headlines: “At a macro level, Nigeria has improved a lot. The country paid off much of its debt, and is now a net creditor with a rating of BB minus. Inflation is below 10 per cent. The Obasanjo government’s banking sector reforms, which included increasing the minimum capital requirements and forcing consolidation, worked well, and it looks as though there will be policy continuity, to a degree, under the new government.”
Mr Culverhouse says Exotix is looking for similar plays in the Nigerian insurance sector. I don’t have an opinion yet, but I would look to see which Nigerian insurers form strategic partnerships with established developed world companies.
While the post-election strikes and faction fighting can probably be settled without too many casualties, the Niger Delta rebel/criminal movements could be more of a threat. The rebels’ successful kidnappings and product thefts are giving them a growing financial and political base. Before I would recommit money to Nigeria, I would want to see how the Delta people’s real grievances can be assuaged, and civil order more or less re-established. So I would take the winnings off the table.
Some of those winnings will be necessary to offset the mark you would have had to take on the chips you put down on the Iridium square on the craps table. The Iridium satellite system, now operated by a successor company, produced so little cash for its builder that Iridium LLC was forced to file under the US bankruptcy laws back in August 1999.
All that’s left of the company are claims being pursued by bondholders’ and stockholders’ committees. I liked the bondholders’ claim against Motorola, which supplied Iridium’s system. The bondholders make two fundamental assertions: first, that the company was insolvent from 1995 on, because its business plans were basically flawed, and second, that Motorola in effect controlled Iridium, and did not act as a fiduciary should. Motorola denies all this.
I recommended the Iridium bonds (for gamblers) in September when they were in the mid-20s. Now they’re about 20. At the time, the first phase of a bankruptcy court trial was about to begin in New York. I still think the bondholders have a good chance of prevailing on at least one of their arguments.
However, the distressed securities market has become, well, distressed, because the judge has indicated in the first phase of the trial (on the question of solvency), that he believes Motorola did not act in bad faith in making its financial projections. Some bondholders were expecting more hostility to the defence.
The judge’s decision on when Iridium became insolvent will probably be handed down before September. If he picks a date of 1995, Motorola may choose to settle, since it could be forced to pay back whatever it received from Iridium after that date, which would mean a huge win for the bondholders. If he picks 1999, Motorola has little exposure to the bondholders’ insolvency attack.
Even if the judge picks a date for Iridium’s insolvency that is unfavourable from the bondholders’ point of view, there is still the question of whether Motorola controlled Iridium, and, if so, whether the contracts it negotiated with the satphone company were fair. I would not necessarily bet on Motorola winning this phase of the trial.
So while the Iridium position is underwater, I wouldn’t abandon it now. If I’m wrong, though, you’d be lucky to get anything in a settlement. This is what we call a “binary pay-off”: you win or lose big.
For now, though, any reckless widows or orphans who took my advice back at the beginning of school would be in the money.