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Home » Browns » The other investigation.

The other investigation.

Still open.

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They’ve had no issue with suppliers and their stores have remained open.

Did anyone else take notice when Jimmy Haslam (in the press conference embedded below) sought to allay concerns about PFJ’s health by noting that none of his stores closed in the immediate aftermath of the FBI/IRS action?  That PFJ was able to maintain a supply of diesel fuel to all its shops (although something something Minneapolis something something)?

Were you – like me – thinking:  Wait.. WHAT?  Isn’t that your business?  How is this even on the table?  And, NO, I do not feel better about the health of your company for having had this assurance.  I’m going to circle back to this point, but first:

That was a flag and there have been others.

  • Its largest competitor in the truck-stop travel center business, Flying J, went bankrupt in 2009.
  • Not buying the Browns outright with 35% (~$367,500,000) due to Randy Lerner in 2016.
  • Wresting the ‘player lowest salary cap hit’ crown away from the Bengals’ Mike Brown.
  • And now a Moody’s review of all its PFJ ratings, including the previously-downgraded Probability of Default rating.

I’m not a financial analyst or an MBA; open invite to any in the audience who can add insight to this.

But let’s take a look at what – for Browns fans worried about whether or not Jimmy Haslam will be the owner long-term – is the more serious investigation.

A Moody’s action will do more to force a Browns sale than rebate fraud.

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Screen Shot 2013-04-25 at 6.27.20 AM

Click for link to Moody’s. Registration required.

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Navigating Moody’s

All the data I’m putting forward is straight from Moody’s.  You can access the same data, you just have to register.  Screen-cap above is linked to the research reports found dating back to the Flying J acquisition in 2009.

The initial report says:

Proceeds from the proposed bank revolver and term loans will be used to re-finance existing debt and partially fund Pilot’s acquisition of the travel center assets of Flying J Travel Centers (Flying J) for approximately $1.845 billion.

That’s $2,000,000,000 in debt for the Flying J ‘merger.’  I’ve been unable to find the cost to Pilot for taking on bankrupt Flying J.  The FTC did order PFJ to sell 20 travel centers to competitor Love’s but I have no idea on the cash that would bring in.

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First downgrade:  Probable Default Rating (PDR).

Probable Default Rating?  That’s a fairly ominous term, no?

In 2011, two years AFTER the Flying J merger we see an update of the listing of PFJ’s debt and downgrade of PFJ’s PDR.

Approximately $2.9 Billion of debt securities affected

… Moody’s lowered Pilot’s Probability of Default Rating (PDR) to Ba3 from Ba2 and changed its rating outlook to stable from positive.

The downgrade of the PDR to Ba3 is driven by Pilot’s proposed all bank capital structure which increases the company’s overall probability of default as well as expected recovery in a distress scenario.

Corporate Family Rating of Ba2

  1. $500 million senior secured revolving credit facility expiring 2014 at Ba2 (LGD 4, 59%)
  2. $500 million senior secured term loan A due 2014 at Ba2 (LGD 4, 59%)
  3. $666.5 million senior secured term loan B due 2016 at Ba2 (LGD 4, 59%)
  4. $345 million senior secured term Loan C due 2017, at Ba2 (LGD 4, 59%)

I don’t know why PFJ would want to an all bank capital structure.  I don’t know what could have PFJ worth $2.9B that would satisfy the security side of this transaction.   But we wouldn’t be doing our job if we didn’t note that Knoxville banking practices have been suspect in the past.

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40% Y/Y bump on debt.

The next notable Moody’s report comes in July 2012, apparently coincidental with the Browns purchase.  I don’t know whether this 7/2012 report was prompted by NFL ‘due-diligence’ or if was a routine review.  There is no downgrade but it is notable that PFJ’s debt has increased markedly.

Approximately $4.0 billion of rated debt securities affected

Ratings affirmed and LGD (Loss-Given-Default Assessment, FAQs here.) point estimates adjusted are:

  • $800 million senior secured revolving credit facility expiring 3/30/2016 at Ba2 (LGD 3, 38% from LGD 3, 39%)
  • $800 million senior secured term loan A due 3/30/2016 at Ba2 (LGD 3, 38% from LGD 3, 39%)
  • $1.0 billion senior secured term loan B due 3/30/2018 at Ba2 (LGD 3, 38% from LGD 3, 39%)
  • $343 million senior secured term Loan C due 9/30/2018 at Ba2 (LGD 3, 38% from LGD 3, 39%) <– approximate amount still due Randy Lerner.

It’s hard to look at this and not think that at least a billion of these monies were earmarked for the Randy Lerner sandbox.  The flag with this, for me, remains, why not buy outright?  Why postpone $305,000,000 portion of the Browns purchase until 2016?  Why is that capital needed so much that you’re willing to eat the [apparent] 343-305= $38,000,000 in interest for use of that money through 2016?

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Last week’s notice of review.

Here’s the Moody’s release and I’ll just highlight the areas of concern.

New York, April 16, 2013 — Moody’s Investors Service today placed all ratings of Pilot Travel Centers LLC (Pilot) on review for downgrade, including its Ba2 senior secured bank ratings, Ba2 Corporate Family Rating (CFR) and Ba3-PD Probability of Default Rating (PDR).

The following ratings are placed on review for downgrade

  • Corporate Family Rating of Ba2
  • Probability of Default Rating of Ba3-PD
  • Senior Secured Bank Ratings of Ba2 (LGD 3, 38%)

The review for downgrade is prompted by the recent announcement that Pilot is the subject of an ongoing federal investigation. The review will focus on the details of the investigations as they become available and any potential impact the investigation or its findings could have on the company’s overall operations, supply or its liquidity, including maintaining orderly access to its bank revolver.

Pilot’s Ba2 CFR reflects the company’s relatively good debt protection measures, good liquidity, meaningful scale, geographic reach, and relatively diverse profit stream. The ratings are constrained by Pilot’s reliance on high volume, low margin fuel sales, some regional concentration, and concern that financial policies with respect to dividends and acquisitions could become more aggressive.

A downgrade could occur in the event that liquidity contracted beyond current levels or debt protection metrics weaken. The adoption of an aggressive financial policy or growth strategy that negatively impacted debt protection metrics or liquidity could also pressure the ratings. Specifically, ratings could be downgraded if debt to EBITDA exceeded 4.5 times, EBITA coverage of interest fell below 1.75 times, or liquidity deteriorated.

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What does a downgrade mean?

If we look on the PFJ secured loans is subject to the same market rules as a bond:  what happens when a bond is downgraded?  Its price goes down meaning the seller (PFJ in this case) must stipulate a higher yield to get the cash.  I’m not tuned into the workings well enough to know whether yields are adjusted automatically in the event of a downgrade.  (So I can’t say whether a downgrade would automatically force PFJ in increase their current debt servicing obligations.)  Obviously though, it will be more expensive for PFJ to get more cash when the next round of financing happens in 2016.

Obviously, this increases liquidity problems.

Or in other words, “We kept our travel centers open this weekend” becomes a bullet point in the Monday morning con calls.

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Liquidity is a word that we’re seeing way too often in relation to the PFJ/Haslam financial discussions.

Putting together some of the pieces now:  you’ve got a business that runs on an operating margin of under 3%.  Your business relies on high volume, low margin sales.  You have an $800,000,000 revolving credit account but you felt compelled to assure the world that your stores are staying open.

I’m sensing a house of cards and I wish I weren’t.  We know it was liquidity that forced Art Modell’s hand.  This has the potential to dwarf any problems Modell had.

We don’t know with certainty whether the Browns and PFJ debt is co-mingled.  Frankly, for all we know, the liquidity provided by the printing press that is the NFL is being eyed to prop up PFJ.

If I might ask a favor of our paid reporters:  could someone ask Haslam at the next opportune time whether any of the PFJ senior secured term loans are being using to purchase the Browns?  Perhaps a specific question on the seeming coincidence of senior secured term Loan C being roughly equivalent to the remaining amount due Randy Lerner.

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On the plus side.

The Moody’s investigation is a problem.

But this does not change my perspective on the FBI-IRS interdiction.  What I see is a probable cause based on intimidation of witnesses to enforce contracts whose terms are unknown to prosecute an alleged theft/fraud of some unknown amount of money.  This seems soft to me; this seems dangerously close to police state stuff.

I also need to correct on myself on an earlier Haslam criticism concerning the talking publicly about the investigation.  Initially I found it hubris-laden and legally speaking, unwise.  But leaders need to lead.  I give Haslam high marks for getting out front of the criminal investigation and taking the reins.  That’s his job, yes, but a lot of CEOs would struggle to find their courage here.

Other Kanick posts on Haslam PFJ:

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Haslam’s first presser, 4/19.

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10 Comments

  1. bupalos says:

    Kanick do you have any idea what the meaning of “cost-plussing” might be in the context of Pilot’s business? I mean, I know what that means, but how would it apply to selling diesel? I can only guess it means a set markup from the price pilot purchased each lot of fuel at. But I don’t see how that could reap the windfall that the guy in the warrant is talking about UNLESS Pilot was playing some games with that price or the time it got marked, like creating some kind of buffer between their purchase time and when it got booked. I know that is a kind of fraud that happens in securities trading, and perhaps a market like diesel could be ripe for that too?

    If that is ultimately what this is about, that could be HUGE. And if such a practice had anything to do with creating a competitive advantage that drove their competitor out, we’d be looking at corporate death penalty stuff I think.

    • jimkanicki says:

      cost plus sounds like a straight froward pricing model just like you outlined. PFJ buys all their diesel at one price, say $1/gallon, and that’s their cost. a customer who purchases 100,000 gallons gets cost plus 50%, say 1.50. when that customer breaks a ceiling, say 500,000 gallons, then they get, say, cost plus 40% or 1.40/gallon for either purchases moving forward or retro-active for everything they bought.

      it sounds like a bookkeeping nightmare. for example, up here many people heat with oil. when their tank is filled up the price per gallon is on the invoice. but if youve got 500 trucks filling up daily at PFJs all over the country at different prices via direct bill it seems it’d be hard to manage. it’d be close to impossible if you just send your truckers out with a credit card and then try to reconcile everything quarterly.

      but i think youre pointing to playing the futures market and profiting from the spread. that is something PFJ should be doing and i wouldnt think it’s illegal. as an example, my first job was with Corn Products in Chicago. they’d get carloads of corn into the plant, steep it for 30 days, then transform it into corn oil (MAZOLA!), starch, corn syrup (KARO!), dextrose, and HFCS. they would buy corn futures at the CBOT as hedge against price fluctuations and to gain control over their costs. that’s all legit… i shouldn’t think that if PFJ is using oil futures it represents anything untoward… especially on the non-compete side since FTC let the flying j ‘merger’ go through. as far as i know, it’s kosher to buy as right as possible and the only governor on the price charged at the pump is market forces.

      me, im still not seeing the fraud piece, though unethical and maybe illegal (need to see the contracts), as adding up to a whole lot of money. but the damaged personal relationships in this small trucking community wil hurt them a lot.

      and mainly, i’m still struck by a CEO with an $800,000,000 revolving line of credit needing to assure us that his stores stayed open.

      • bupalos says:

        What I’m thinking is not futures, but that with the quick in-and-out in the diesel business, PFJ might be buying lots of fuel very frequently, which might allow them to play accounting games with exactly when they claim their fuel was purchased. If the price is going up (went up), a slight accounting delay reaps them a windfall. If it’s going down (went down), you mark it quickly and accurately and don’t lose. I think this has been known to happen with stock brokerages. It’s enabled by high volume frequent transactions in a volatile market. Just seems like maybe diesel could be analogous.
        >>> http://www.investopedia.com/articles/fundamental-analysis/09/mark-to-market-accounting.asp

        Interestingly when I looked up stuff for these diesel cost plus programs, there were a few analysts advising trucking companies against using this because of the potential for fraud.

        • jimkanicki says:

          shee-itt… that’s the old milken/drexel scam isn’t it? or maybe it’s the sub-prime credit default swap AIG scam? either way, yeah.. i *think* that’s a big no-no.

          but the other side of that coin is that PFJ reported $600M income on $29 revenue. so if what you’re suggesting actually happened, the money is off-shore somewhere… certainly not showing up on that very thin income statement.

          fwiw, such a theft would change my perspective on the FBI-IRS actions.

          but yet.. i still don’t think this is in play and i base that thinking on the browns failure to spend their cap money. (only partly kidding.)

  2. Could it be that the 30% ownership stake is paying off the monies owed to parties that were relieved of their duty prematurely? My thoughts at the time were that Haslam didn’t want to be on the hook for Lerner’s mistakes and the only way to accomplish that would be retaining Lerner as an owner for the duration of those obligations.

  3. Capitalgg says:

    I’m going to preface by saying I’m pretty much an idiot when it comes to big business finance. my analytical computer programmer brain didn’t understand the what looks like shenanigans to me of the process (supporting evidence: the accounting course i took in college was by far my most perplexing and tax form confuse me more than the supposed logic of the Browns front office since the return).

    with that said, in fine internet tradition, I’m going to weigh in on something i know absolutely nothing about…

    1. my biggest concern with the Haslem situation right now is as you state liquidity. the fact that he had to even bring it up is the not reassuring part to me.
    2. over leveraging by businesses types always feels like a way to temporarily pump up the balance sheet in the short term to reward the executives while emperaling the firm’s long term outlook. sure sometimes firms are ok, but even a minor shock (like say an expensive federal investigation?) can doom such a firm.
    3. knowing that i know nothing about nothing, could the delayed sale of the remaining prevent be a Lerner request? my thought is the thinking being that nfl franchises surely appreciate in value even over a short 3 year term, thereby allowing that percentage to have a below market sale price, possibly for tax purposes. you would think at the prices we are talking it wouldn’t greatly maker a rate difference (100 million here, 100 million there) but based upon the original franchise purchase price (500M), 650M now and 350M below market later might be significant.

    to sum up, i too am worried about Jimmy’s liquidity. and I’m devastated that you removed the “Type A-ness” caption from you original story.

  4. In related news, Moody’s also “downgraded” my expectations for tonight’s draft.

    Looks like Dan Gilbert – who specializes in ripoff loans and ripoff casinos – is the stronger of the two owners. Who would have thought?

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