Gordian Perspectives for March 2020

Each month members of Gordian Group team pick articles, posts or current news events that we found interesting and worth sharing with Gordian clients and our growing network . We provide some commentary and context and where applicable how Gordian Group can help.

Deja CLO All Over Again

Do you remember some of those ugly creatures from the 2008 Credit Crisis called CDOs?  These Collateralized Debt Obligations owned mortgages by the ton. Then they were sliced and diced into various bits and sold to investors.  It went very badly.

Now they’re back.  There is a big market in Collateralized Loan Obligations (CLOs) that have a lot of high risk paper on their books.  Instead of mortgages, the obligations they own are largely high yield loans of very leveraged corporate borrowers. And now the storm clouds are gathering over the CLO market.

Fortunately for investors, although this market is large, it is a whole lot smaller than the mortgage market.  The bad news is that there still could be a lot of losses and that the structure of these entities may prove to impede efforts to reorganize defaulting investments.  In turn, restructuring impasses can lead to even larger losses. We’ll see.

Commentary by Gordian Group CEO Henry Owsley

Bankruptcy Courts May Feel the Bern

What if?  What if the political talking heads are (again) wrong and Bernie Sanders can take the Democratic Presidential nomination and convert it into a victory vs. Trump?  We have been in uncharted territory as a country for a while, and it looks like anything can happen in the current political climate.

A recent piece in The Week, conjectured on some of the economic and political fallout from a Sanders victory.

The medical field would be upended, starting with the virtual elimination of the health insurance industry.  The effects would be felt throughout the life sciences field, from doctors to hospitals to drug companies, to researchers finding new cures.  And then there’s the Green New Deal. The number of companies that would be damaged is immense, and we believe that many firms would be forced to reorganize or go out of business.

Corporate and personal tax rates would soar.  We can all speculate as to the effect on capital flight and other anti-growth factors.  The nation would be caught in a wrenching spasm of political and economic change that would be staunchly opposed by conservatives.  In the view of the author, the ensuing melee would freeze business decision-making enough to further impair the economy.

The article is pretty pessimistic about the economic outlook for a Sanders Presidency.  But even if some of the critique is hyperbolic, there is plenty of reason to think that a Sanders administration could usher in a wave of insolvencies larger than most of us have ever seen.

Contact me if you’d like to discuss this further.

Commentary by Gordian Group CEO Henry Owsley

Restructuring Within the Cannabis Industry

Cannabis investing has been in the news a lot lately, stemming from the bear market in cannabis stock prices.  And when I spoke on industry trends at the Opal Winter Family Office Winter Forum in New York last week, investors seemed to be focused on near-term issues such as profiting from buying beaten-down equities.

My firm’s interest in the cannabis area is not picking short term winners and losers in the stock market.  Instead, it is based upon our experience that high-growth, high-volatility sectors (and cannabis certainly fits the profile) produce stresses that precipitate corporate financial crises – where Gordian Group can be helpful.  Some of my thoughts were expressed in this recent interview I had with Marijuana Business Daily.

Our (very cracked) crystal ball sees the industry upheavals unfolding in at least two phases.

We are in Phase 1 now.  Due to the advent of countless entrants into all levels of this industry, there are far too many competitors.  And many of these competitors have raised and spent gobs of capital unproductively. The prevailing consensus (with which I agree) is that there needs to be a period of significant corporate consolidation through mergers, restructurings and the like.  As a side note, the federal laws against cannabis likely render chapter 11 protection problematic for many industry players, but that is a topic for another blog post.

At the end of Phase 1, one would hope that there would be an efficient number of competitors carving up a dynamic, growing industry.  However, I believe the problem with this thesis is that the market cannot achieve long-term stability until there is legalization at the federal level.  When such a national market is established, the ingredients for competitive success will change. Just like in the alcohol and tobacco industries, branding and distribution clout will become paramount.

And, in our view, that is what Phase 2 will be all about.  Much larger players will enter the field, and use their strengths to alter how consumers evaluate the offerings and make purchase decisions.  It will be a very rocky road ahead for existing competitors.

How does a current cannabis competitor chart a course through all of these challenges?  We believe that an essential prerequisite is a stable capital base and access to additional funds, if needed.  My firm, Gordian Group, has been in business over 30 years assisting companies in lessening their debt loads and in creating more compelling investment platforms.  For today’s cannabis companies, this means dealing with increasingly agitated creditor constituencies, merging with the right partners to create a stronger enterprise and attracting new capital.  Gordian Group offers a range of services including: Restructuring and Debt Advisory; Mergers and Acquisitions, and, Access to Capital

Contact us if you’d like to discuss this further.

Commentary by Gordian Group CEO Henry Owsley