< meta name="DC.Date.Valid.End" content="20050825"> Amendment Nine: The China Problem

Saturday, December 18, 2004

The China Problem

Someone asked the other day to define the China problem more clearly for them. I confess, I am unable to define the problem caused by China in the global economy today. It is too big. Too interconnected. Too complex. I can, however, offer a glimpse into just how much of a vacuum China has become, and just how interdependent the US and China are. Hopefully, from this, one will be able to see a little more clearly why China is such an issue for the US, and the rest of the developed world for that matter.

American Commercial lines is a barge operator based in IN. Not exactly your most glamorous business, and not exactly a business you would expect to be adversely affected by troubles in Beijing. Of course, if you owned a junior preferred PIK note in this now bankrupt company, you wouldn't say that. In fact, you'd say that Beijing is the single most important driver of the reorganized company's future.

The POR for American Commercial pegs total EV at $450M. Creditors holding the Jr preferred PIKs are arguing up that valuation to the tune of $650M. Of course, Jr creditors arguing up the value of a company in 11 is nothing new, though arguing it up 40% is a little bit unusual. As an aside, I would predict, and have predicted, that as the dollar continues to slide, valuation fights in C. 11 proceedings will get uglier and uglier.

What is unique though about the valuation fight here is that it almost exclusively depends on the demand caused by further growth in China. If China continues to expand at its current rate, the 10% increase in commodity hauling is well low of the '08 mark. In fact, the POR's prediction of 436.9M tons hauled in '08 would likely be eclipsed in '06, or possibly sooner, should China continue to surge. However, if China doesn't grow at quite the red-hot pace we've seen, the PIKs are essentially worthless and they would be lucky to get mere warrants in the reorganized business. There isn't much room for compromise here, and it all depends on a rather disinterested, highly removed, completely uncontrollable 3rd party, the Chinese economy.