Monthly Archives: December 2007

Anyone left to argue? Rudco liquidated, CLIENTS LOSE MONEY

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It’s peaceful around here this morning. I’m in Stellenbosch running a financial modelling course for the Faculty and Institute of Actuaries, in conjunction with the Actuarial Society of South Africa. The sun is shining, the skies are blue and although the wind is getting up, it is still a pleasant day. But that has nothing to do with why it’s quiet.

Why Rudco has always been a bad idea

Some commentors on previous posts about Rudco suggested that there was no risk to dealing with Rudco. As some background, Rudco has been offering fixed-rate home loans at 6% per annum, often to borrowers who have already been blacklisted. My initial posts highlighted how lending money, long-term at a fixed rate of 6% per annum doesn’t make any sense from an economic perspective. Hence, the business is non-viable, and thus borrowers should stay away.

How borrowers could and did lose money

It since emerged that “borrowers” were required to pay fees and instalments to Rudco before receiving their loan. Now if that doesn’t ring warning bells, I don’t know what will.

Rudco liquidated and clients lose money

Now to put this story to bed, since I would rather move on to more interesting risk, optimisation and value generation stories and ideas. Yesterday, the National Credit Regulator succesfully obtained an order from the High Court to place Rudco into liquidation. This was a direct result of not having met the 6 December 2007 date for an independent audit report (pdf from NCR website) outlining that they did in fact have the money to provide the loans, and to refund the money received from clients before they were granted their loans. Who knows if there is any money available to refund these clients.

Which finally settles the questions about Rudco. I’m just amazed at how some commentors were still pushing Rudco as recently as Wednesday. At one stage it was suggested that I have a personal vendetta against Rudco (I really don’t care about them). I wonder what the motivation of these blinkered commentors was?

Directors’ Dealings – Information, Noise and the role of Randomness

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I was reading an article about the directors of Imperial and Steinhoff purchasing shares in their respective companies. Steinhoff directors made the news when the CEO originally used Single Stock Futures to gear his exposure to a significant position in the company. (This position has since been converted into a direct position with about the same total exposure.)

This raises the question of whether directors’ dealings provide information as to the future performance of the company.

Information content of directors’ sales

Directors may sell shares for many reasons unrelated to perceived valuation differences in the share price. A director may sell to raise cash for other purposes, to decrease exposure to a single company, in a single entitty, in a single country where salary and bonuses are also tied to that company’s fortunes.

Information content of directors’ purchases

On the other hand, directors buying shares in their own companies is usually a good sign. Putting management’s general optimism about their own businesses aside, if they believe that their business is significantly undervalued, the incentive to buy more shares make this a worthwhile sign. This is especially true given the reasons mentioned above to reduce exposure to your own company.

Empirical evidence

I don’t have the references at hand, but I’m fairly confident that this has been supported to some extent by empriical “event” studies that analyse the relationship between Total Shareholder Return and purchases and sales by known company insiders.

The other side

Steinhoff’s performance recently has been quite horrible. A mixture of trading conditions and global economic changes (exchange rates amongst others) have meant that the share expecting operating performance of the business had deteriorated. The share has been accordingly downrated – see the chart below (the purchase was in July 2007).

Steinhoff Share Price Peformance 2007

So in this case, a heavily geared vote of confidence in the company by knowledgeable managers did not provide useful information (over the 6 or so months since that point) to outside investors. But before we throw the baby out, consider the following points:

  • This is one example. We (hopefully by now) don’t expect to hit gold with every turn of the wheel.
  • 6 months is a short time-period for committed investors (not traders) who may be happy to stick by the company for 5 or 10 or 50 years. If the prospects of the company are good, they should be good for a longer period than 6 months.
  • Very much related to this point is the idea that the swings of the global economy and exchange rates and the day-to-day vagaries of consumer confidence, inflation and interest rates are difficult to predict. We should not judge a decision at a point based solely on the outcomes. We must consider all other possible outcomes as well, weighted by the probability of their occurrence, and then we can fairly assess whether the decision was appropriate or not.

So what now?

Am I going to invest in Steinhoff? Well, no, not yet, not until I have actually done some proper research into the fundamentals of the company. And also not until I have understood the reasons for the decline in price over the last year properly. If the market thinks they are worth less, I had better know why the market thinks so before I disagree too strongly.

Having said that, I pay careful attention to knowledgeable insiders when they put their money where there collective mouths are and vote with their personal wealth and risk appetites that a company is a good bet.

US CPAs to start speaking French

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Until very recently, multinationals listed in the US but not resident in the US were required to show a reconciliaton of their local GAAP financial statements to the US GAAP equivalent. Many of these large companies (based in Europe and the Far East) incurred high costs in time, energy and hard cash in preparing US GAAP accounts for this purpose only.

As a result, listing on a US exchange started to appear less attractive to these and other new potential listings. The SEC had been mulling over how to deal with this for a while, and fairly suddenly has now announced that these companies do not need to provide the reconciliaton to US GAAP. As a result, many large companies have already opted not to produce the US GAAP figures.

The next major step would be if the SEC decides that US companies who decide to report under IFRS do not need to provide US GAAP figures. As IFRS gains traction around the rest of the world, nobody wants to be left behind as the special case. This is still a way off, and their is also plenty of trouble brewing with IFRS (Phase 2 Insurance Project particularly) but it does look like many US accountants will need to polish their European language skills.

The wheels (of justice) turn. Just too slowly for Rudco.

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“E.s.” commented on my earlier post:
Too Good To Be True
about the ridiculous proposition for turning lead into gold
(offering fixed rates home loans in the South African Rand at 6% interest). The interesting
thing here is that since Rudco’s initial plans were announced, interest rates have ticked
up several points, and are likely to increase further in December (consensus from the
market is currently around 50bps) and quite possibly again early next year.

I’m sorry E.s., you clearly haven’t been reading the blogs and comments here and other places. To repeat the four themes:

  1. The business model is not viable therefore you should expect problems sooner or later.
  2. Rudco are in contravention rules, regulations and judgements, so you should expect problems sooner.
  3. There has been precious little evidence that Rudco actually has any of the money to either grant new loans or transfer loans from other banks.
  4. From what I’ve seen, Rudco is more in the habit of collecting money from customers rather than paying out money. There are real financial risks to prospective clients.

Lastly, when Rudco finally disappears (long overdue) staff, brokers and customers will be burnt. Even if you misguidedly think that there is no risk to you (I disagree), you should also recognise that there is no upside since this structure cannot work, and there is definite downside to others involved in the process.

If anyone thinks that the other banks, Treasury, the Reserve Bank and the FSB are going to bail out the fools who were looking for a too-good-to-be-true deal, think again. I’ve been following the comments around the web for several months now.

The first few months were characterised by a few words of warning, and many commentors saying “don’t knock Rudco” and “just because someone is looking out for the little guy doesn’t mean the big banks should try to shut him down” and similar utter nonsense. The weight of comments has now swung heavily towards complaints and hard questions.

Rudco is finished. They were finished at the start for anyone who had their eyes open.