The NYT Magazine printed a piece over the weekend called "Too Much Credit," penned by hedge funder Ben Heller, who runs the emerging markets desk at his firm. Heller wrote about the frustration he would inspire in salesmen trying to pitch him to make loans and investments in developing countries, by asking "pointed questions," and sometimes-- OMFG-- passing on deals. One guy was particularly pissed off that Heller turned down a gas project in Indonesia after it came out that it was "controlled by a shady family that defaulted on lenders a few years before, sticking them with losses of 90 cents on the dollar."
As the credit bubble grew, and more bankers started taking Heller's rejections personally, he stopped saying no fucking way from the get-go, listened to every ridic pitch, and actually said yes to a few he later regretted the morning after ("Anybody out there care for a small Argentine oil field? I've been assured that the angry gang of Mapuche activists blockading it will be gone soon.")
Then, last year, when things got really bad, Heller's firm decided it had to take off the beer goggles (kidding: it is a serious, prudent firm that never drinks on the job) and drastically cut back on EM loans (much like...a lot of places). And passing on the deals they might've in better times given a drunken bang (ultimately leading to PCD-- post-coital depression) felt good! Sayeth BH:
The constraint on new investment paradoxically restored my freedom. "No!" I declared.
"Just ... no?"
"Should I elaborate?" I asked. I told him that it was the dumbest idea I'd heard in a long while, and that I'd sooner pile up hundred-dollar bills to make a bonfire than invest.
I hung up abruptly, and I began to feel a long-forgotten rush. The rush of calling foolishness by its true name. The pleasure of meting out chastisement to presumption. The satisfaction of knowing that my no meant a death blow for this bad idea, because there wasn't an uncritical yes waiting next door. I am capital's gatekeeper, and you shall not pass!
Nice! Standards and whatnot. Obviously, though, we wanted more horror stories, so we emailed Ben and asked him to tell us about some other deals that had been de-nied (as recently as...yesterday).
During the late stage of the credit boom, the deal flow reached a fever pitch of ridiculousness. If I had more time, I could probably make a book out of the collected dross thrown over the transom by capital-hungry bankers, brokers and other intermediaries. I'm sure people at other funds could do the same. There are some classics that get referred to again and again on the desk here...
- A "pre-IPO" (incidentally, in retrospect there is a touching optimism in the term "pre-IPO", sort of the same inspired by the description "aspiring actor") equity deal for a Siberian forestry company. The company boasted low extraction costs. These were the result of a murky concession agreement with the region that owned the forest land and the fact that the company relied on "North Korean contract labor." I think the colloquial term for that is "slaves." This was buried deep in the deal docs. The company claimed, though, that investors shouldn't worry too much about the North Korea Ministry of Forestry withdrawing from the "contract labor" arrangement, because it actually imposed higher costs than the alternative. Yeah, because you can definitely get workers in the deep forests of Siberia cheaper than from the North Korea government... As for the ehtical implications, they went unmentioned except for a passing reference to the potential for negative public relations related to the Nork arrangement.
- A series of promissory notes issued by the Ministry of Health (or perhaps Finance, we can't remember exactly) of Equitorial Guinea. These amounted to north of EUR70mio. They had been issued to a Spanish construction company, which was selling. The company had been contracted to build a "hospital." Out of curiosity, I asked to see the specs on this hospital. It turned out to be a very modestly-sized dialysis center, which experts told us could not possibly cost even a fraction of the face value of the prom notes. A clear indication of corruption. Not that the authorities in Equitorial Guinea likely cared (or, they did care -- they wanted it to go through because they were the beneficiaries, perhaps?); and the Spanish authorities, well, I guess they are too busy trying to indict Jay Bybee and John Yu to investigate, you know, actual Spanish companies possibly ripping off poor Africans. This deal, I heard, got done, and ran into payment issues.
- Loan to a Colombian oil services company with a book of business with the state-owned oil company there. The main shareholder came to prominence in the used-car business in Colombia, but his car dealership company had wound up defaulting in ugly fashion. A few weeks after we were shown this deal, the main shareholder's name apparently showed up on the laptop of a Colombian drug kingpin caught in Brazil and the oil services company's contracts were threatened with suspension. A Colombian bank actually wound up doing this deal and found itself with a default on its hands mere weeks after disbursing.
- Loan to a start-up salt extraction project in Djibouti, a partnership between a smallish Spanish company involved in manufacturing equipment for the salt industry (which desired to get into salt harvesting for the first time) and a local Djiboutien guy close to the President. It involved harvesting salt from a salt lake at close to what was touted as "the hottest place on Earth." The government concession clearly stated that the company should only extract renewable resources. It seemed odd to us that extracting salt crust from the bank of an inland lake would be renewable. The promoters told us that there was a geological process involving water coming down from the mountains in the rainy season and somehow restoring the crust. We sent an expert to Djibouti who reported that indeed there was such a process, but it operated a different lake in Djibouti. I think this got done as a pure equity deal...
And, in response to the NYT Magazine piece, an email from a guy pitching a deal in Mongolia.
"Your article said you make loans and "other investments" in the developing world. I wondered if by any chance you would have an interest in a large copper resource in Mongolia. I represent the [redacted] which owns 700,000 tons of zinc copper which translates to about $3.3 billion value according to April 19, 2009 prices. [redacted] has completed the JORC certification process which is strong enough to launch an IPO but they would prefer to find a financial partner that can help conduct further exploration and development. The train depot is 120 miles away for the next couple of years after which new tracks will reduce that distance by 75%. [redacted] is looking for a $75 million investment partner."