Hybrid Vigor: Vol 2 Issue 46 "Do The Right Thing"

It can be maddening to watch bad actors (and I’m not talking the Ben Afflecks, Keanu Reeveses and Chris O’Donnells of the world) get rewarded. We’ve all seen it. We’ve seen football teams mess with equipment on the way to winning. We’ve seen ballplayers juice to put up big statistics and get even bigger contracts. We’ve seen retail chains known for poor treatment of their employees run commercials extolling the joy of giving. Heck, we’ve seen investment managers misrepresent their performance, qualifications and operational procedures on the way to building assets.

But things have a funny way of catching up. A reader told us he thinks the case of Geno Smith has wider relevance. For those readers who avoid football, Mr. Smith is the New York Jets’ quarterback who lost his job after a teammate broke his jaw for refusing to pay a $600 debt. $600 to an NFL quarterback is, shall we say, chump change. But given the damage done to his career and reputation, Mr. Smith may find that $600 becoming an increasingly big percentage of his future earnings. Nobody worth his salt wants to work with someone who reneges on handshake deals for sport.

We see it in the capital-raising world as well. In the convertible world we use the term “repeat offender” whimsically and with positive connotations, referring to companies that use our favorite asset class again and again over time. How do they do this? Mostly, of course, by performing well. But also by dealing ethically—operating within not only the letter but also the spirit of the essential investor-issuer compact. Errors happen when deals get done under time pressure. Taking undue advantage of them may make a few bucks one time, but the longer-term cost will likely be much higher. And if those errors were in fact intentional, so much the worse.

Surely the convertible market’s familiarity over many years with Teva Pharmaceuticals helped push through a large mandatory issue last week. Speaking of mandatories, we’re finally seeing some indications this morning in the recent Kinder Morgan issue—surely the bane of many convertible pros’ existence in recent weeks—of a change in dividend policy that will improve the mandatory’s relative (and maybe even absolute) value. Companies that continue a dividend-growth policy in the face of bad fundamentals don’t fool anyone. Remember how AIG raised equity in the spring of 2008 and simultaneously increased its dividend? Oh yeah, there was a mandatory there too. And we know how that turned out.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).