Don’t bail out F&P

Almost unsurprisingly F&P is struggling in the current environment. Given that we are experiencing a global recession there was always going to be a huge fall off in demand for appliance products (something that hasn’t really happened in New Zealand yet interestingly).

Stuff has already put up a few articles on the event (* and *) and Bruce Sheppard has suggested a bail out. Let me just say that I am completely against a bail out.

Now, if F&P is still in a position where it will be profitable in the medium term, but drastic conditions in the credit market prevent F&P gaining any finance, I could accept the government loaning money to F&P temporarily at a high rate of interest. Bailing out F&P should not be an option – after all, what is growth promoting about forcing all of society to cover businesses mistakes?

As far as I can tell they are in trouble as their debt was denominated in foreign currency and the value of the NZ dollar collapsed. Now excuse me if I’m wrong – but isn’t this just hedging on their part. A few months ago they were complaining that the dollar was too strong and was reducing the profitability of their manufacturing. Now that the dollar is weak (improving the return on what they make) they have lost out on their debt. By denominating their debt in foreign currency they were hedging their losses stemming from a high dollar – why should we be bailing them out when the tide turns?

Update Kiwiblog and Anti-Dismal more explicitly discuss the moral hazard problem.

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    I wonder if the debt they accumulated is largely related to moving production to Mexico and Thailand and Italy (from NZ, Aus and US). If that is the case then it wouldn’t be so much to do with hedging their risk but more in line with possibly inter-company loans (and therefore when preparing their consolidated accounts it would be transferred into NZ dollars since this would be their reporting currency) for the re-structuring and redundancies. This could also apply in some respects to any inventory run-ups they did before shutting those factories down.

    They are looking at selling their Auckland site along with the Oz one in hopes of leasing it back (Fletcher Building just did this with their Penrose building I believe) for around $90mill. The rationale behind this would probably tell how deep they are in. I.E. if it is a voluntary move to reduce debt or if the banks/creditors are pushing them to do it. So far they have said they don’t need Govt assistance; I hope for everyone’s sake that stage of financing isn’t needed.

  • “If that is the case then it wouldn’t be so much to do with hedging their risk but more in line with possibly inter-company loans”

    They could still have denominated these loans in $NZ if they wished though.

    “The rationale behind this would probably tell how deep they are in. I.E. if it is a voluntary move to reduce debt or if the banks/creditors are pushing them to do it. So far they have said they don’t need Govt assistance; I hope for everyone’s sake that stage of financing isn’t needed.”

    Indeed – a good issue to keep an eye on.

    Still, no wonder the manufacturing stats are so bad in NZ at the moment 😉

  • DanT

    I think that it can only be justified if there is a risk of unemployment from the company faltering (workforce 1600) and this is determined to be undesirable. However I think if that is the case dealing with the problem directly – assistance to those made redundant (benefits, training to get new work) – is more logical than providing transfers to shareholders.

    If F&P is a viable business in the medium to long term but is merely stuck in a bad place right now because it doesn’t have enough reserves to ‘ride out the storm’, then it will not suddently shut down forever, but its assets purchased by someone with more cash (or bankrupted – same thing) and the current shareholders will bear the brunt for their poor decisions but F&P as a producer of whiteware will continue. If on the other hand F&P is structurally inefficient and a poor use of the resources tied up in it… then let it fail. Either way the government has no part to play here.

    If the govt is worried about the consequences of unemployment, deal with the consequences of unemployment. Don’t prop up a long term unviable firm or give transfers to shareholders who invested with eyes open.

  • Scott

    “By denominating their debt in foreign currency they were hedging their losses stemming from a high dollar”.

    This isn’t an example of hedging. It is more accurately described as gambling/speculating (that the NZD would strengthen or remain stable).

  • Hi DanT,

    I completely agree, but …

    Don’t forget that there is a credit crisis – and that the inherent asymmetric information problem in the credit market is inflamed. The fact that governments can still borrow implies that they can alleviate this problem – in theory 😛

  • “This isn’t an example of hedging. It is more accurately described as gambling/speculating (that the NZD would strengthen or remain stable).”

    Agreed Scott. The reason I view it as “hedging” is because the return on their sales depends on the value of the NZ$. As a result, setting up debt in this way would ensure that a lower dollar will increase their debt level but also increase revenue while a higher dollar will lower debt but also lower revenue.

  • Scott

    Matt I take your point. Thanks.

    What they did was the equivalent of buying high, selling low. If they were smart they would have purchased the foreign debt at historically high NZD levels and waited for the correction. The subsequent increase in revenue would have made the pay off easier. And as an added bonus they would have known exactly what the value of their debt obligation (in NZD) was at any given time. If the NZD had subsequently strengthened their only concerns would have been (a) reducing revenue and (b) lost opportunity to purchase the debt at a better exchange rate. Id take that scenario over ballooning debt obligations AND shrinking revenue any day. They doubled down and now will pay the price.

  • Miguel Sanchez

    Oh for f**k’s sake, you’d think this country had never been through a downturn before. F&P haven’t even moved out of profitability yet and they’re already sounding out the government for a handout? Harden up.

  • steve

    someone needs to do a cost benefit analysis. further the government needs to include other costs and benefits such as the welfare for the lost jobs,loss of skilled workforce who move overseas, the cost/benefit of buying foreign whiteware and a whole list of other quantifiable costs/benefits.

    my suspicion is that if it makes sense for government to buy in, it prob makes sense for private equity. however during a credit crunch like what we have this might not be the case. therefore the government could justify buying in short term, and seeking private equity to buy in after the credit crisis is over.

  • David C

    Where is JK getting the money to pay for this bailout??

    Is he going to tax the productive business in NZ so as to bailout the non-productive. Great idea JK not!!

  • “What they did was the equivalent of buying high, selling low. If they were smart they would have purchased the foreign debt at historically high NZD levels and waited for the correction”

    There is no way I would have given them that advice – it was crazy 🙂

  • “Oh for f**k’s sake, you’d think this country had never been through a downturn before. F&P haven’t even moved out of profitability yet and they’re already sounding out the government for a handout? Harden up.”

    I don’t think they asked for one – National just decided to start offering them 😛

  • “someone needs to do a cost benefit analysis”

    I am not sure I trust government C-B analysis enough in this case. They need to work out the right counterfactual in order to sort out whether it is the right thing to do – and I’m afraid they will pick one with “too much” structural unemployment.

    “my suspicion is that if it makes sense for government to buy in, it prob makes sense for private equity. however during a credit crunch like what we have this might not be the case. therefore the government could justify buying in short term, and seeking private equity to buy in after the credit crisis is over.”

    Or just offer a loan to the business – if the business doesn’t take it then they shouldn’t be there in the first place …

  • “Where is JK getting the money to pay for this bailout??

    Is he going to tax the productive business in NZ so as to bailout the non-productive. Great idea JK not!!”

    I think he believes F&P is still productive – again I think they need some way of making F&P reveal whether it would be solvent in normal economic conditions.

    As it is still solvent now, such a debate is relatively academic 😛