Dec 1, 2009 8
Realogy Dodges A Bullet; Future Looks Good
Almost a year ago, at a time when various folks in finance and real estate were ready to write eulogies for Realogy, I spent a few posts arguing that the rumors of Realogy’s demise were ahh… premature. My basic point then was that the bondholders of Realogy have very little incentive to push Realogy into bankruptcy:
The reason isn’t that I know something others don’t about the strength of Realogy or any such thing. The reason mostly has to do with incentives for bankers and bondholders to allow a default and the consequences of such. There is next to zero incentive for any creditor of Realogy to force the company into bankruptcy.
Realogy has next to no assets. Really. If you think about their business model, as a franchisor of service businesses, their main assets are the brand names and the people who work at their various company-owned stores or franchisees.
In the case of some of the other firms named by Crains, such as JetBlue or Hovnanian Enterprises, they own real assets that can be auctioned off or sold off to raise a fair amount of money. Airplanes and real estate are both real assets. In those cases, it might make a lot of sense for creditors to push those companies into Chapter 7 liquidation proceedings and recover their losses that way.
But Realogy’s real assets are negligible, to say the least. It owns no buildings that I know of (unlike other franchise models where the franchisor owns the franchise location and receives rent from the franchisee). All of its company owned stores are lessees of other landlords. Whether its servers, technology equipment, office equipment, and such are worth a lot is unknown, but one suspects that Realogy probably doesn’t own the equipment in its datacenters (it probably leases them from the hosting facility), and used furniture isn’t exactly going to make a huge dent in the billions owed.
A year later, the latest news from Realogy (PDF) is that it has posted $58m in profits in Q3 of 2009 on $1.2b in revenues. Critically, Realogy managed to stay in compliance with the debt-to-income ratio in its loan covenants.
Looking through some of the details, however, it appears that Realogy has really dodged a bullet this time around… but the way in which they dodged said bullet augurs a promising future.
