value and opportunity

Today, a big European oil refiner, Petroplus, filed for bankruptcy. This was not really unexpected.

Instead of analyzing if the bonds are an interesting investment (the Distressed Debt investing blog has a great post) I wanted to quickly focus on possible secondary consequences.

Zero Hedge in its typical style states the following:

What is scary is that instead of finding a resolution, banks decided to accelerate and seek to control the underlying assets, in what continues to confirm that all of Europe is desperately battling a wholesale collateral crunch, and banks will do anything to procure any viable assets, even send the obligor in bankruptcy court.

Out of my own experience, I would conclude the exact opposite. For me, this is rather one of the first signs that banks are not in the “extend and pretend” mode anymore, which means they just extend loans in order pretend that everything is fine.

Putting a company into bankruptcy in the first step locks up a lot of capital in the underlying assets (much more than in a bad but performing loan). Capital charges for a direct stake in a refinary or a non performing loan in bankruptcy are much higher than for any performing loan.

So the decision to let Petroplus go into bancruptcy is for me actually a sign of strength for the participating banks which is the first step in really cleaning up corporate loan books.

I am not yet “ready” to really analyse bank equity, but apart from all the headline noise, the underlying fundamentals seem to shift in favour of the banks.