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Tennenbaum and Vitesse

The WSJ profiles Tennenbaum Capital Partners in a Page One article today ($$$ Link to WSJ). I harbor no illusions about the risk inherent in my Vitesse Semiconductor (VTSS.pk) investment. The worst case scenario for the company is a liquidity crunch, which would leave it in the hands of creditors. The creditor most likely to benefit is Tennenbaum, and their track record should rightfully concern Vitesse investors.


In mid-2005, Radnor Holdings Corp., a supplier of foam cups to restaurants, was losing money and struggling under a pile of debt. When plans for an initial public offering fizzled, it began searching for $50 million in fresh capital.

To the rescue came Tennenbaum Capital Partners LLC, a fast-growing investment firm. After two months analyzing the Philadelphia cup maker, Tennenbaum invested $25 million in Radnor’s equity and lent the company a further $95 million at interest rates of more than 11%.

But Radnor didn’t get fixed, at least not initially. Its business deteriorated further and it filed for bankruptcy protection. Tennenbaum, however, had a fallback position. Most of its investment was backed by Radnor’s assets. After battling other creditors in court, Tennenbaum became Radnor’s new owner a couple of weeks ago. It renamed the company and installed a new chief executive.

The primary challenge for Vitesse is to be operationally cash flow positive without entering a position that would require them to sell assets mortgaged to Tennenbaum. I believe Vitesse will do this.

Alternative means of raising cash include the sale of their fab in Colorado Springs and the potential sale of business units (See Vitesse Investment Thesis). The major catch is that any such asset sale must be approved by Tennenbaum, as documented in their loan covenants. Nothing prevents Tennenbaum from acting in a malicious way, simply blocking the sale of these assets in order to force the company into insolvency. Such behavior, while reprehensible, is entirely possible.

Critics say firms like Tennenbaum are “vulture lenders,” preying on weak companies by charging high interest rates and swooping in when they fail to repay.

Because the stakes are so high, bankruptcy proceedings are often becoming slugfests. In the case of Radnor, the other creditors — led by money managers, banks and other holders of its unsecured bonds — accused Tennenbaum in court of deliberately pushing the company into bankruptcy in order to wrest control.

Full disclosure: I am long Vitesse

Discussion

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  1. Andrew,

    Why such the high volume on VTSS today? Is it related to the WSJ article? Is Chapman selling for a loss?

    Posted by tr | December 12, 2006, 1:27 PM
  2. All turn-arounds are largely depending on the skill and ability of the management. VTSS is in the hands of the CFO and the CEO, so is your investment.

    Posted by yf | December 12, 2006, 3:22 PM
  3. Andrew,
    A while ago you did a really nice analysis of the VTSS cash position. Have you refreshed recently?

    Posted by m@ | December 12, 2006, 11:28 PM
  4. See here.

    I wouldn’t call it analysis.

    Posted by Andrew Schmitt | December 13, 2006, 5:28 AM
  5. They had a buyer for the Colo Springs bldg.

    They had temps moving stuff at on Monday.

    The deal fell through yesterday.

    The temps came back to put things back into place.

    Posted by jason and the argos | December 13, 2006, 11:06 AM
  6. Matches information I heard. I’ve asked the company for confirmation since it now appears to be public.

    UPDATED: Confirmed.

    It doesn’t appear that the sale fell through for reasons related to Tennenbaum stepping in front. If they were seeking to entrap the company they would have used this opportunity to cut off any source of liquidity.

    Posted by Andrew Schmitt | December 13, 2006, 12:46 PM
  7. As a result, I heard that Chapman dumped another 6 million share yesterday. With Chapman out of the picture, things might become quieter.

    Posted by yf | December 13, 2006, 11:13 PM
  8. Did VTSS sell the facility in Colorado? YES OR NO

    Posted by AC | December 14, 2006, 1:05 AM
  9. What do you think of the accounting resuts. Can we move on? There is enough bad news into this stock?

    Posted by Vick | December 20, 2006, 10:58 AM
  10. i was under the belief that the tennenbaum loan was less restrictive than the siliclon valley bank line they lost.

    Posted by sgrm1 | January 2, 2007, 3:01 PM
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