Saturday, December 15, 2012

Pay to Play with Fitch Ratings and Harbinger Group Inc.

The ratings analysts over at Fitch must be sniffing glue or on the take, or both.  I don’t see any other plausible explanation for their failure to downgrade this disaster.

What I’d like to do is highlight events, pending litigation, and contingent factors which have been incurred over the last 12 months while Fitch has affirmed its B rating..  When you consider these points together, a credit downgrade seems way overdue.  

From November 2011 until now, Fitch has held Harbinger Group Inc rating at ‘B’.  

 December 12, 2012
-Long-term Issuer Default Rating (IDR) 'B', Outlook Stable.

November 07, 2012
                ‘B’ Issuer Default Rating

November 1, 2011
--Long-Term Issuer Default Rating (IDR) at 'B';

1)  Brains behind operation charged with Securities Fraud

This I just don’t understand.  The mastermind behind the Harbinger publicly traded investment vehicle gets charged with securities fraud and ratings are uneffected?  Perhaps a case of something like insider trading pursued as a means to boost fund returns for the benefit of investors I could understand.  But Falcone is accused of conduct directly counter to the interests of his investors.  Acts of dishonestly such as concealing a “loan” he took/stole from his investors in his private fund so he could afford to pay his his IRS tax liability. 
 $49 million Upper East Side 
June 27, 2012

Indoor Pool
$39 Million St Barts Villa
When you take something that’s not yours, conceal that fact, is that not stealing?

2.)  Harbinger Capital Partners and Additional Share Sales

In the event Harbinger Capital (private funds) faces redemptions or needs cash for things like keeping this pig alive, and unless you believe the “anonymous sources” assuring fund capital is sufficient, I think we saw our first signs of trouble yesterday with Harbinger Capital selling $150mil worth of its HRG group holdings..

I think this thing turns into a death spiral the moment capital gets tight and they no longer can buy assets/interests, mark them up to any value they feel like, and book the difference as revenue.  Instead, they'll start rushing to sell interests to raise capital.  Harbinger Capital Partners holds shares 1400x the average daily trading volume for HRG.  

The Harbinger Group Inc's shares in Spectrum Brands are pledged as collateral for its outstanding outstanding debt.  HRG and SPB play accounting games which have the affect of artificially inflating their balance sheet, earnings, and share price.  This results in the value of posted collateral to debt to rise thereby further encouraging more lending.

Functions much like a Ponzi Scheme, the biggest difference is that when this collapses no one will go to jail.

3).  Termination of Deal with Australia Acquisition Corp NOV 15 2011 

This was Falcones ticket for disposing of these interests but the swap deal was canceled a couple weeks ago.  The plan was for HCP to swap his interests in Ferrous and Asian Coast Development (Canada) in exchange for Australia Acquisition Corp shares. The plan sounds like they they intended on listing the AAC shares in London.  

“AAC and HCP announced in July that they had entered into an agreement whereby AAC would acquire certain assets held by funds managed by HCP in exchange for newly issued common shares in AAC.”

“The Harbinger is looking for a buyer for its 26% share in Ferrous since at least February, aiming to raise funds to honor a loan from Jefferies Group Inc.”

Without a scheme to mask, launder, inflate, and dispose of these interests I question what HRG is going to do and how this will impact their capital position longer term.  I feel this increases the risk HRG shares are going to be the go to shares to sell.

Basically it’s the same hocus pocus they've done in HRG and SPB, packaging a bunch of tainted muck together, again and again until its been laundered enough to the point tracing its initial origins is a nightmare, its share price has been walked up cost effectively to the highest point possible, and you've hopefully developed a market that can handle a large block of stock. 

The article below with Passport Capital; it throws me the vibe Burbank wants out of Ferrous too.  The fact this deal fell through means Falcone doesn’t have a counterparty to take this rotting fish off his hands.  Unless they come up with something clever to dispose of this, this is yet another funding problem for Harbinger Capital Partners which could negatively impact HRG's share price due to potential share sales by HCP.

By Kelly Bit - Jul 10, 2012 4:38 PM CT

Oh, right, Mr. Fake Bid…Carl Icahn.  These guys quite often look to help each other out through stuff like this.  Icahn trying to goose the stock for the benefit of Falcone.

April 11 (Bloomberg) -- Billionaire investor Carl Icahn is nearing agreement to buy a stake in a closely held Brazilian iron ore mining company from Phil Falcone’s Harbinger Capital Partners LLC, according to four people familiar with the talks.

How many times can this guy pull the same bullshit without people catching on?  You ever notice how many companies he offers to buy which he backs out of and literally that is the top tick?  Go back and look at Icahns roll in WCI Communities and ask yourself if a guy that plugged in and wealthy, is really that clueless that he’d get long housing when all his buddies were buying credit default swaps against housing?  I think its more likely he was trying to goose the concern to get some shorts off.

4)  Lightsquared Implosion

Put most simply—Falcone bet and bet big on lightsquared and it turned out to be a spectacular failure and costly for investors.  This is not a material for Fitch?  Not even when its coupled with Falcone being charged with securities fraud?   

What about Falcone being short things like Lightsquared or Harbinger Group Inc?  Hell, why wouldn't he is the better question?  If that sounds insane to you I suggest you dig into certain lawsuits, structured finance transactions, and then go through the companies disclosures and perhaps you can tell me what would be improper?

Read these 5 pages from the Book of Daniel Drew.  Tell me if that little scheme doesn't sound familiar, both on the way up and on the way down.   (Read Pages 170-175. The Book of Daniel Drew)

5)  LightSquared Creditors vs Harbinger Capital and potential $263.8 million liability.

“The lender group says a $263.8 million loan LightSquared got in July 2011 from Harbinger was an "equity infusion" that was "incorrectly styled" as a loan. They've argued the loan was "preferential" to Harbinger, which is LightSquared's controlling owner, by making sure Harbinger's claims will get paid ahead of their more than $1 billion in debt.”

Chalk that up for another contingent liability which if the court rule against Harbinger, sales of HRG shares could be necessary.

6).  More capital raising.

December 14, 2012 

So they are using 500m to retire the Nov 2015 10.625 notes, but that still means they just added another 200mil worth of debt. 

In Conclusion:

Falcone is trading different markets, different strategy, and has serious pending legal charges.  Those points in my opinion are major red flags, and when you account for his fund outflows and fund performance how does one not question whether this guys gone on tilt?

If I was Mr Falcone I’d a nervous standing anywhere near this HRG.  Not even a year has passed since he blew up LightSquared and with the CDO he built and dubbed HRG looking ready to collapse at any time, I can't imagine that will look very good when he defends himself against securites fraud charges.

Falcone Ticket Out of Trouble?
In regards to Falcones pending charges which he adamantly defends he’s innocent and acted in the best interest of his private fund investors.  What if his plan all along was to inflate build and inflate HRG as high as possible for the purpose of shorting it.  If HRG were to shit the bed and his funds cleaned up on the short side, then would he not be vindicated?

I was actually kidding when I wrote about Fitch being on the "take" earlier and was shocked when I found this to be actually true.  

DEC 20, 2012 UPDATE

I just wanted to document that I sent my concerns to Fitch Ratings and I have 17 page visits from their domain.

These imagines and Blog post are property of Donald Shekels.  They are also for sale.

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