On the one hand but on the other hand...

http://dealbook.blogs.nytimes.com/2010/02/03/defaults-could-fall-by-half-this-year-altman-says/#more-175037

Red Hawk 2009 Review Highlights

Please note that Red Hawk Associates, my consulting firm, is a firm of hands on restructuring ("keeping the good parts of a business and leaving behind the bad") and performance improvement professionals. We realize that our success is solely dependent on that of our Clients and we sincerely thank them for their efforts in the last year and for their confidence in us. Some highlights of our firm's work in 2009;

David Brown led two significant restructurings and turnarounds during the year. One turnaround was of a world leading rubber products manufacturer. EBITDA improved from annualized negative 20% to above annualized positive 10% within 6 months. Red Hawk compromised unsecured debt over 6 years with no interest.

The second turnaround continues with a leading manufacturer with multiple plants. The economy damaged this company drastically resulting in a drop of sales of 50%. Sales are rebounding and costs have been cut substantially. The prognosis is good but creditors need to support the turnaroud and be patient.

David also spent considerable time in '09 on two buy-side engagements for private equity firms searching for value investment opportunities in the lower/middle market. Those engagements are ongoing in 2010.

Ron Caporossi led two major engagements in '09 including a very successful performance improvement effort using Six Sigma techniques for a large publicly traded polymer manufacturer. The project focused on analyzing the economic value of certain customers, plants and product lines and providing recommendations to senior management. The second project is ongoing and involves essentially performing as a non-judicial receiver on behalf of a large regional bank.

Brad Eldridge, Advisory Director, led numerous valuations in '09 including of a large casino.

Sam Ahmad, Director, worked with David on the turnaround of the rubber products manufacturer. Sam played a critical role in improving the recipe and process to reduce costs and helped train management and operators to bring the process into control. He spent much of the remainder of the year in China, helping his Client, a specialty chemical maker, market and sell product to Chinese tire manufacturers. Partly as a result of Sam's efforts, China is now the world's largest producer of tires and coincidentally, purchased 30% more cars in '09 than did the US.

William Sinn, Advisory Director, also spent most of the year in or traveling to/from China while representing American companies developing markets there for their products.

Again, thank you to our Clients and to our referral sources.

These are the Times that try men's souls

"The market was very strong today, exhibiting across the board strength in almost every sector. Particularly strong were financials. The S&P has now been up four days in a row for the first time since November, when the market (so far) bottomed. It is not particularly common for the market to be up five or more days in a row, so some people are selling into this strength." said blogger Brent Luce today.
I am worried, if one can, save cash now for worsening conditions this year and next.

How to reduce manufacturing costs by 1000 basis points...

1. Reduce price of purchased material by substituting less expensive material
2. Reduce price of purchased material by negotiating actively with vendors, creating auctions, to gain lowest market price
3. Increase material yield in manufacturing process by reducing scrap

It's easy to do, just takes a lot of work and commitment.

Two Days in a Row of DJ Index Drop Greater than 200 points

Even though reports of last quarter's growth of the US and World economies were above average, the DJ dropped. Remember how businesses are valued, which is on the present value of future cash flow. The recent drop suggests that investors believe that current prices overstate value.

The "so what" to me is that business managers who create real value above expectations will be rewarded greatly.

Change in dynamics relating to turnaround exits

I have noticed in the past couple of years that lenders with troubled assets in their portfolio have a much easier time (generally) now exiting from those credits. The exit is not through participating in a workout with the borrower but much more frequently through selling their position to a hedge fund (sometimes posing as a lender). This trend is great for banks as they can take advantage of liquidity to reduce loan losses, reduce expenses related to maintaining their own workout staffs and reduce the time it takes to convert an asset to cash.

But this trend makes it more difficult for borrowers who have a loan sold since the new buyer (lender) does not have the instituitional knowledge or lending knowledge needed to help in the situation. It also makes business development much more difficult for turnaround consultants for a number of reasons including the fact that their prospective referral sources for troubled loans are often in a different location than the borrower and the consultant. The hedge fund lender is also less aware of what value a consultant can add and so is less likely to refer consultants to his/her borrowers.

David Cho of the Washington Post on 1/31/07 reported that private equity funds spent $540 billion in 2006, compared to $59 billiion in 2003. Hedge funds may be included in that number. The point is that there was 10X increase in capital spent and available in just 3 years.

Year end

In 2007, I hope to have even more opportunities to help managers and shareholders improve the performance of their businesses. Merry Christmas, Happy Holidays and Happy New Year!