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Wait until Propublica learns that lenders are underwriting based on pro-forma forward Adjusted EBITDA net leverage, not past EBITDA leverage. The whole idea of

by PEJOE 6y ago

Wait until Propublica learns that lenders are underwriting based on pro-forma forward Adjusted EBITDA net leverage, not past EBITDA leverage. The whole idea of Adjusted EBITDA is insane to me. We add back "one-time," expenses and other items, but the underlying business ends up seeing similar "one-time," costs every year. The result is that companies often borrow at a leverage ratio that looks 30% smaller than it actually is. This year we are doing "COVID-19," addbacks. What the fuck? You lost money because of COVID, so add it back to EBITDA so that you are still meeting your loan covenants? Lenders are in on it too, because they don't want to see their clients default and deal with bankruptcy or taking control of the assets.

lotsofpulp 6y ago
That’s the beauty of working in finance, it’s all subjective. A janitor can’t fudge a dirty bathroom, a mechanic can’t fudge a broken car, a plumber can’t fudge cold water into hot water. But in finance, you can make whatever results you want come true for a long time. And if you have the government’s back who can print funds, that long time could be until the country blows up.
- Enginerrrd 6y ago
  >And if you have the government’s back who can print funds, that long time could be until the country blows up. I wonder about this. I suspect that if the fed keeps buying junk corporate bonds to prop up share prices, there's got to be a reckoning somewhere. For one, it incentivizes stupid & risky behavior among corporations. I wonder if even the fed can absorb the scope of real contractions in GDP with tricks like this. Color me extremely skeptical. Seems like something will have to give.
- nickpinkston 6y ago
  Disagree - every job has bad work that doesn't appear so until later. The mechanic who just uses a cheap fix to get you out of there, the plumber whose work results in a frozen pipe that leaks behind a wall, etc. Finance is no different. The only issue is that in a capitalist society, bankers hold a lot of political/economic influence, and this results in bad incentives for the rest of us.
  - spking 6y ago
    *crony capitalist society There is a difference.
    - jiveturkey 6y ago
      there's no other kind, in practice
  - lotsofpulp 6y ago
    You are correct. But the intention of my comment is that those failures are evident quickly and more easily, and don’t have as much of a shield from plausible deniability.
  - me_me_me 6y ago
    Yes, the other day I found out my mechanic did terrible job fixing my car and in fact they damaged it. I came back to the garage and rewarded them with obscene bonus money. I also reassured them that I will be coming back for more business in the future.
code4tee 6y ago
The bogus Adjusted EBITDA metrics popular with financially unhealthy startups and others really does need to stop. In most cases these metrics may as well just say “Hey, if for a moment you ignore all the things about our business model that make it unsustainable our finances look quite good! Ain’t that cool.” Of course the creative accounting that goes into these things tries to say they’re just “one time” expenses and other factors that justify ignoring these costs but of course most companies that play these games seem to have tons of “one time expenses” every quarter so...
css 6y ago
There is nothing wrong with that if the banks are allowed to fail when the loans don’t pan out. Underwriting is supposed to be about managing risk, not completely avoiding it. The problem isn’t the analysis, rather it is not letting banks absorb the consequences of being wrong. > The whole idea of Adjusted EBITDA is insane to me. The straitjacket bank regulators have placed around the ability of banks to go outside of the government defined process of evaluating credit-worthiness doesn’t help. The rules (mainly FDIC insurance requirements) make it near impossible for many companies to get loans. This problem incentivizes companies to play games to get around the crazy restrictions. This is also why there is an emerging trend of non-traditional lenders (e.g. some VCs and PE firms). I’m sure the government will find a way to regulate them eventually. > This year we are doing "COVID-19" addbacks. What’s wrong with that? Ability to repay is based on expected future cash flows. If COVID losses are believed to be non-recurring (a big if), then that makes sense.
- PEJOE 6y ago
  > There is nothing wrong with that if the banks are allowed to fail when the loans don’t pan out. Underwriting is supposed to be about managing risk, not completely avoiding it. The problem isn’t the analysis, rather it is not letting banks absorb the consequences of being wrong. I agree with you, with the caveat that many of these receivables are taken off balance sheet through a securitization process, and the resulting structure is almost unable to technically default as long as the AAA tranche interest is paid. Responsibility for originating good loans, meaning they are creditworthy in a downturn, goes down if you can securitize them into a credit enhanced structure or sell them to another investor. > Generally, I agree. The straitjacket then bank regulators have placed around the ability of banks to go outside of the government defined process of evaluating credit-worthiness doesn’t help. The rules make it near impossible for many companies to get loans. This problem incentivizes companies to play games to get around the crazy restrictions. In my opinion (not worth much) the industry is simultaneously under and over regulated. Enough bad actors that reducing the regulation is a bad idea, but the existing regulation makes lending more challenging and constrains growth on most businesses, who are operated in good faith.
- jiveturkey 6y ago
  > There is nothing wrong with that if the banks are allowed to fail when the loans don’t pan out. And if investors (of the banks, or of the securities backed by such loans) are accurately apprised of the risk factors.
anthony_r 6y ago
I present you - the EBIDTAC coffee mug: https://www.zazzle.com/ebitdac_mug-168211177356617433 https://www.zazzle.com/ebitdac_mug-168211177356617433 It only gives brownie points if you purchased it before the blowup!
mason55 6y ago
I think you're losing out if you only look at one metric or the other. Yes, companies can stuff recurring charges into the one-time column in their adjusted EBITDA metric. But there are certainly cases where an adjusted EBITDA metric gives you a better long-term view of the business. The issue is not adjusted EBITDA per se, it's that stuff gets jammed in there dishonestly. The only true answer is that if this matters to you then you need to dig into the adjusted EBITDA and see how they are really calculating it and decide how good of a picture of the business it's painting. But there is value there.
almostaf82 6y ago
It’s almost as if economics of ephemeral ideas is just math itself and has nothing to do with the trade of stuff I get a laugh out of men who say other ephemeral objects can’t exist but stocks and 401ks, indeed even a specific currency or finance is anything more than emotional belief of some hierarchy “They’re value stores!” No it’s functional fixedness. Decades of denialism of science by the god heads and y’all still follow them along believing they’re anything more than just copies of the pasts god headed would be authoritarians Neuroscience is revealing much about how we transfer and carry on activity in our brains from one another. To suggest history can’t repeat itself seems to not agree with science. The masters of commerce back in the day bought off the average person with emotionally satisfying promises and literally abusive practices of deflating the value of their efforts to maintain power The literal expressions in the form of nation state conquest need not exist for an idea like “history repeats itself” to mean something that’s true It’s random annotations on numbers that don’t mean anything except what we define the annotations themselves to mean. We don’t get to have say so of course you’re confused. The narrative around economics is out of your hands. None of these fellows seem to have understood Godel wasn’t talking about the universe. He was putting constraints on consciousness. They keep trying to find that complete recursive set of axioms for economics by ignoring it’s all just people
- kkotak 6y ago
  Wut?
jeiuejs9 6y ago
Humans chase novelty Old language acquires new annotations The goal, whether it’s intuitive or planned, is to keep it from looking like the system itself can ever grind to a halt They don’t care about your buy in to some language but keeping agency at scale economically active Varoufakis was literally in the room as masters of market finance made shit up to keep markets moving Humans do it all the time. To ever pretend some language model that “fits society” will ever stay the same is a fools errand
koheripbal 6y ago
If covid-19 is really a one-time hit, then actually that makes perfect sense since debt ratios are based on long-term revenue projections.

by PEJOE 6y ago

lotsofpulp 6y ago

That’s the beauty of working in finance, it’s all subjective. A janitor can’t fudge a dirty bathroom, a mechanic can’t fudge a broken car, a plumber can’t fudge cold water into hot water. But in finance, you can make whatever results you want come true for a long time. And if you have the government’s back who can print funds, that long time could be until the country blows up.

Enginerrrd 6y ago
>And if you have the government’s back who can print funds, that long time could be until the country blows up. I wonder about this. I suspect that if the fed keeps buying junk corporate bonds to prop up share prices, there's got to be a reckoning somewhere. For one, it incentivizes stupid & risky behavior among corporations. I wonder if even the fed can absorb the scope of real contractions in GDP with tricks like this. Color me extremely skeptical. Seems like something will have to give.
nickpinkston 6y ago
Disagree - every job has bad work that doesn't appear so until later. The mechanic who just uses a cheap fix to get you out of there, the plumber whose work results in a frozen pipe that leaks behind a wall, etc. Finance is no different. The only issue is that in a capitalist society, bankers hold a lot of political/economic influence, and this results in bad incentives for the rest of us.
- spking 6y ago
  *crony capitalist society There is a difference.
  - jiveturkey 6y ago
    there's no other kind, in practice
- lotsofpulp 6y ago
  You are correct. But the intention of my comment is that those failures are evident quickly and more easily, and don’t have as much of a shield from plausible deniability.
- me_me_me 6y ago
  Yes, the other day I found out my mechanic did terrible job fixing my car and in fact they damaged it. I came back to the garage and rewarded them with obscene bonus money. I also reassured them that I will be coming back for more business in the future.

code4tee 6y ago

The bogus Adjusted EBITDA metrics popular with financially unhealthy startups and others really does need to stop. In most cases these metrics may as well just say “Hey, if for a moment you ignore all the things about our business model that make it unsustainable our finances look quite good! Ain’t that cool.” Of course the creative accounting that goes into these things tries to say they’re just “one time” expenses and other factors that justify ignoring these costs but of course most companies that play these games seem to have tons of “one time expenses” every quarter so...

css 6y ago

There is nothing wrong with that if the banks are allowed to fail when the loans don’t pan out. Underwriting is supposed to be about managing risk, not completely avoiding it. The problem isn’t the analysis, rather it is not letting banks absorb the consequences of being wrong. > The whole idea of Adjusted EBITDA is insane to me. The straitjacket bank regulators have placed around the ability of banks to go outside of the government defined process of evaluating credit-worthiness doesn’t help. The rules (mainly FDIC insurance requirements) make it near impossible for many companies to get loans. This problem incentivizes companies to play games to get around the crazy restrictions. This is also why there is an emerging trend of non-traditional lenders (e.g. some VCs and PE firms). I’m sure the government will find a way to regulate them eventually. > This year we are doing "COVID-19" addbacks. What’s wrong with that? Ability to repay is based on expected future cash flows. If COVID losses are believed to be non-recurring (a big if), then that makes sense.

PEJOE 6y ago
> There is nothing wrong with that if the banks are allowed to fail when the loans don’t pan out. Underwriting is supposed to be about managing risk, not completely avoiding it. The problem isn’t the analysis, rather it is not letting banks absorb the consequences of being wrong. I agree with you, with the caveat that many of these receivables are taken off balance sheet through a securitization process, and the resulting structure is almost unable to technically default as long as the AAA tranche interest is paid. Responsibility for originating good loans, meaning they are creditworthy in a downturn, goes down if you can securitize them into a credit enhanced structure or sell them to another investor. > Generally, I agree. The straitjacket then bank regulators have placed around the ability of banks to go outside of the government defined process of evaluating credit-worthiness doesn’t help. The rules make it near impossible for many companies to get loans. This problem incentivizes companies to play games to get around the crazy restrictions. In my opinion (not worth much) the industry is simultaneously under and over regulated. Enough bad actors that reducing the regulation is a bad idea, but the existing regulation makes lending more challenging and constrains growth on most businesses, who are operated in good faith.
jiveturkey 6y ago
> There is nothing wrong with that if the banks are allowed to fail when the loans don’t pan out. And if investors (of the banks, or of the securities backed by such loans) are accurately apprised of the risk factors.

anthony_r 6y ago

I present you - the EBIDTAC coffee mug: https://www.zazzle.com/ebitdac_mug-168211177356617433 https://www.zazzle.com/ebitdac_mug-168211177356617433 It only gives brownie points if you purchased it before the blowup!

mason55 6y ago

I think you're losing out if you only look at one metric or the other. Yes, companies can stuff recurring charges into the one-time column in their adjusted EBITDA metric. But there are certainly cases where an adjusted EBITDA metric gives you a better long-term view of the business. The issue is not adjusted EBITDA per se, it's that stuff gets jammed in there dishonestly. The only true answer is that if this matters to you then you need to dig into the adjusted EBITDA and see how they are really calculating it and decide how good of a picture of the business it's painting. But there is value there.

almostaf82 6y ago

It’s almost as if economics of ephemeral ideas is just math itself and has nothing to do with the trade of stuff I get a laugh out of men who say other ephemeral objects can’t exist but stocks and 401ks, indeed even a specific currency or finance is anything more than emotional belief of some hierarchy “They’re value stores!” No it’s functional fixedness. Decades of denialism of science by the god heads and y’all still follow them along believing they’re anything more than just copies of the pasts god headed would be authoritarians Neuroscience is revealing much about how we transfer and carry on activity in our brains from one another. To suggest history can’t repeat itself seems to not agree with science. The masters of commerce back in the day bought off the average person with emotionally satisfying promises and literally abusive practices of deflating the value of their efforts to maintain power The literal expressions in the form of nation state conquest need not exist for an idea like “history repeats itself” to mean something that’s true It’s random annotations on numbers that don’t mean anything except what we define the annotations themselves to mean. We don’t get to have say so of course you’re confused. The narrative around economics is out of your hands. None of these fellows seem to have understood Godel wasn’t talking about the universe. He was putting constraints on consciousness. They keep trying to find that complete recursive set of axioms for economics by ignoring it’s all just people

kkotak 6y ago
Wut?

jeiuejs9 6y ago

Humans chase novelty Old language acquires new annotations The goal, whether it’s intuitive or planned, is to keep it from looking like the system itself can ever grind to a halt They don’t care about your buy in to some language but keeping agency at scale economically active Varoufakis was literally in the room as masters of market finance made shit up to keep markets moving Humans do it all the time. To ever pretend some language model that “fits society” will ever stay the same is a fools errand

koheripbal 6y ago

If covid-19 is really a one-time hit, then actually that makes perfect sense since debt ratios are based on long-term revenue projections.