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Illiquidity Strikes BackDave Forest It's been awhile since we heard the phrase "liquidity problems". In October 2008, you couldn't set browser on internet without hearing about liquidity problems somewhere. During the financial crisis, cash disappeared into the cracks of the financial system. Leaving a lot of people in the lurch. Interesting then that liquidity issues have once again emerged this week. In at least two high-profile locations globally. Today, Australia's Griffin Coal announced the company will go into receivership after defaulting on $22 million in interest payments due on $475 million worth of bonds issued to U.S. investors. Management cited a "temporary liquidity shortage" as the reason for the delay in interest payments. This is a critical development. Griffin is the second-largest supplier of coal to electricity generators in Western Australia. The company produces 5 million tons of coal yearly. This is a major operation. It's unclear at this point why the major producer has run out of cash. But suspicions are the crunch has to do with money the company invested building a 400MW power plant near its coal fields at Collie, Australia. The start-up of the plant has been delayed. Meaning no revenues are yet coming in from the company's big up-front investment in the facility. Apparently, Griffin had been counting on those monies to help pay bondholders. And now the company can no longer wait for revenues to materialize. The next move is likely the sale of some or all of the company's assets in order to raise cash. Even then, it's not clear whether there will be enough for bondholders. The second of this week's reported liquidity issues is even larger. Enough that it may severely stress one nation's banking system. Last week, Korean conglomerate Kumho Asiana revealed the company is struggling with a major liquidity problem. The issue stems from Kumho's 2006 purchase of a controlling interest in Daewoo Engineering and Construction (a major player in mining services). Kumho purchased a gross 72% of Daewoo. But immediately resold 39% to some of the investors who helped fund the deal. This raised cash for Kumho, and reduced the company's overall debt load. But those investors retained the right to force Kumho to buy back the 39% stake, at 32,510 won per share. With the stock currently trading at less than 13,000 won, a forced buyback was in the works. Meaning Kumho would have to come up with 4 trillion won ($3.44 billion) on short notice to purchase the shares. Apparently this money wasn't available. Forcing Kumho to admit its problems to creditors, and look for alternative solutions. This week, the company agreed with its major debt-holder Korea Development Bank to submit to restructuring of several of its subsidiaries. Kumho owns a wide range of businesses, from clothing to petrochemicals to Asiana airline. The most critical part of this story is Kumho's credit risk to some of Korea's biggest banks. Banks have an estimated $13.5 billion exposure to Kumho through loans, debt securities and other instruments. This is the second-largest loan default in Korea's history. Causing share prices of Korean banks to fall as much as 3% before New Years, as investors speculated about the ultimate impact of this bankruptcy on the financial system. The message is: there are still problems coming down the pipe in the world's economic and financial networks. The recovery of the last year gave investors and businesses some breathing room. In many cases debt-holders were willing to temporarily forgive repayment, allowing companies to come up with a plan for survival. But creditors will only wait so long. With economic conditions improving, we're starting to see investors once again asking for their money. And at least two companies weren't able to come up with it. Watch for more during the coming months. Here's to cash in the bank. Jan 4, 2010 Copyright ©2009-2010 Resource Publishers Inc. Note: To subscribe to Pierce Points please click here: www.piercepoints.com Pierce Points
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