"Yield to Worse" Investors

The banking industry continues on life support with government created money inflation infusions the only thing keeping many operators from bankruptcy. At the same time, a much more fascinating situation is developing in the media industry.

With many media properties in as bad a situation as banks, the savvy "yield to worse" (Ytows) investors are circling. However, there are no government money infusions in the media sector, so it is an ideal situation to observe how non-government investors are operating on a crashing industry.

It's also interesting to note that the Ytows are generally not the government connected players that are circling the banking industry. The players circling the banking industry are DC based vultures who are expecting major government handouts to fund most of their maneuvers.

For the Ytows, it's their money and the money of their investors.

What the Ytows are doing now is buying up the debt in struggling media companies. As NyPo points out, they are not doing this to "save" the companies (government bailout style) but instead to generate high yields or position themselves to have a voice in a potential bankruptcy or to gain control of a company on the cheap.

Carl Icahn, for example, is buying up debt in privately held movie studio Metro-Goldwyn-Mayer in the hopes of forcing a merger with Lionsgate should MGM default on its loans.

Carlos Slim's New York Times investment is paying him a 14 percent interest rate.

Bond-traders consider a deal is worth doing if the "yield-to-worse [case scenario]" return is 15 percent or greater.

In many cases, the senior-secured debt is the debt to own, since those that own it will have a call on all assets before anyone else gets paid down the line on less secured debt.

In other cases, companies with strong cash flow are considered "money good" and junior debt is safe to pick up.

So what you have in the media sector is private industry sorting things out. If a company like NYT simply needs a cash infusion, Carlos Slim provides it. If a company is headed for bankruptcy but there are some assets worth salvaging, possibly through a merger, a Carl Ichan type steps in.

Strength of cash flow is evaluated, without dangerous political influences. No taxpayer money gets involved, and the very best asset evaluators in the world, such as Ichan, get involved to sort out the mess and make sure that the divisions that should be kept running, are kept running and that the other assets are liquidated. How tough are these asset evaluators? The late Larry Tisch could certainly be put into this group. The story that goes around CBS is that, after he took over CBS, he was given a tour of the CBS music studios. He was shown where the jazz recording studios were, the rock recording studios and the classical music studios.Was his first question something like, "Gee, who were some of the great jazz players that have played here?" Not quite. His immediate question to the head of the CBS music division, "Which category has the best profit margins?" These guys are focused.

There is no reason that the Ytows wouldn't have circled the banking industry if the government didn't interfere. They would have determined which banks would have just needed a cash infusion and which would have had to go through bankruptcy. If government had stayed out, the best assets evaluators in the world, without using tax money, would have straightened things out by forcing into bankruptcy the banks that needed to file for bankruptcy, and by saving divisions that deserved to be saved. There would have been no need for "sacrifice" speeches from President Obama, and it would have been the Carl Ichan's of the world, not the Timothy Geithner's of the world evaluating assets.

The Ytows will have the media companies polished and humming by the time this recession is over. Does anyone think that the banking system, now run by the government, is going to be anywhere close?