Tuesday, September 2, 2014

Nixon pardons Nu Skin

Richard M. Nixon did many amazing things in his life.

He hung out with Elvis:



He hung out with Mao Zedong:




But by far the most amazing thing he has done is rise from the dead and get a job at JPMorgan Chase Bank.

You might think I am kidding, but Richard Milhouse Nixon as Saint Lazarus of Bethany is a thought/nightmare interrupting my sleep.

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Attached to the last Nu Skin 10-Q were several contracts for Nu Skin's debt facilities.

This is a link to the fifth amendment to the JPMorgan Chase debt facility dated 5 May 2014.

And here is the signature block for JPMorgan Chase's signature.


JPMORGAN CHASE BANK, N.A., as
Administrative Agents and as a Lender

By:                        Richard M. Nixon
Title:                    Senior Underwriter

The facility is signed by Richard M. Nixon on behalf of JPMorgan - the same name including middle initial as the (presumably) deceased President of the United States.

I was surprised.

I did a full text search of the SEC database for any other persons named "Richard M. Nixon" and I only found references to the former President.

I searched LinkedIn - and whilst there are many people with the same name as the former President none I could find works for JPMorgan.

I rang JPMorgan Chase and asked whether they had a staff member called Richard Nixon and was informed they did not. I asked for that in writing.

I received an email saying that they did have someone who worked at JPMorgan called Richard Nixon (but they had no reference to the middle initial). However they noted he would not have signed the document as he did not have the authority.

I asked JPMorgan to put this in writing but they would not, however I rang other people in the bank and received the same answer.

When you ring the switch it turns out there is a Richard Nixon in their internal phone book with no phone number and no initial. He is not an employee of the bank, but rather a consultant paid by an external party. They would not tell me which external party. They said categorically that he was not entitled to sign for the bank.

They did tell me he was based in Texas - which makes him an unlikely person to sign for a Utah Company under New York law. Moreover Richard Nixon does not have an internal email at JPMorgan. Quote them: he is a ghost.

There may - despite my concerted and failed efforts to find them - be a person called Richard M. Nixon who is authorized to sign for and did sign for JPMorgan - but much effort has got me nowhere.

One alternative however is unthinkable. It is that Nu Skin has been hawking fake documents which modify their debt covenants - possibly so they can make undisclosed borrowings contrary to their debt covenants.

Either "Richard M. Nixon" is a real person who has signed a single SEC document for Nu Skin or Nu Skin's CFO (the other signature on the document) has some explaining to do.

The strange signature block

It is so comically unlikely that Tricky Dick has been resurrected as a bank underwriter, that I would naturally lean towards the existence of some Richard M. Nixon working somewhere in the giant institution that is JPMorgan.

There is one minor detail which leans you towards nastier interpretations. In the signature block JPMORGAN CHASE BANK is acting as "Administrative Agents and as a Lender". The word "Agents" has an "s".

The phrase "Administrative Agent and as a Lender" where Agent is in the singular [no "s"] is a common phrase in the SEC database. Other than this filing the phrase "Administrative Agents and as a Lender" does not appear anywhere in the SEC database or for that matter anywhere in the Google database. It is like there is a one-off typo in this document to go with the rather unusual name. Everywhere else in the same document the spurious "s" is absent.

I would like a confirm/denial from JPMorgan in writing as to whether Richard Nixon actually signed this document on behalf of the bank. I promise I will post it as soon as received.

The covenants matter

That Richard Nixon signed the covenant modification for Nu Skin is very convenient for Nu Skin because Nu Skin has been in breach of their loan covenants (at least pre-modifications) since the end of the first quarter of this year. They have however managed to get modifications.

They breached their covenants and received what looks to be an (ex) Presidential Pardon.

Linked is a public google sheet of Nuskin's cash flow statement, quarterly since time immemorial. The data is courtesy the indispensable CapitalIQ.

I have given you this spreadsheet because it is required to work out the debt covenants. There are many covenants (eg restrictions on related party transactions, restrictions on types of finance lease, limitations on amounts that may be borrowed by foreign subsidiaries).

The key covenant is dependent on cash flow from operations less capital expenditures. And they have breached that covenant.

To quote the 10-Q (which again mentions the JPMorgan Chase loan):

As of June 30, 2014, the Company was in violation of its restricted payments covenant under its amended and restated note purchase and private shelf agreement (multi-currency), dated as of May 25, 2012, among the Company, Prudential Investment Management, Inc. and certain other purchasers, as amended (the "Prudential Agreement") and the amended and restated credit agreement, dated as of May 25, 2012, among the Company, various financial institutions, and JPMorgan Chase Bank, N.A. as administrative agent (the "JPMC Agreement"), which restricts the Company from making dividend payments or stock repurchases to the extent the aggregate amount of such payments exceed $100 million plus the cumulative cash flow from operations less capital investments since June 30, 2012. Effective August 8, 2014, the Company entered into an amendment of the Prudential Agreement that allows the aggregate amount of restricted payments to exceed the allowed threshold by no more than $110 million for the quarter ending June 30, 2014 and $50 million for the quarter ending September 30, 2014, to avoid default or acceleration provisions of the Prudential Agreement. The JPMC Agreement expired pursuant to its terms on August 8, 2014, prior to which all amounts outstanding thereunder were repaid in full. 
On the spreadsheet I have done the calculation of whether they breached the debt covenant two ways. One way is looking at buy-backs of shares net of shares issued (which seems reasonable but is contrary to the words of the coveant). The other is the covenant as written.

It doesn't matter which way you look at it. They breached the covenant in the first quarter. This is disclosed in the first-quarter 10-Q.

As of March 31, 2014, the Company was in violation of its restricted payments covenant under its amended and restated credit agreement, dated as of May 25, 2012, among the Company, various financial institutions, and JPMorgan Chase Bank, N.A. as administrative agent, as amended (the "JPMC Agreement") and its amended and restated note purchase and private shelf agreement (multi-currency), dated as of May 25, 2012, among the Company, Prudential Investment Management, Inc. and certain other purchasers, as amended (the "Prudential Agreement"), which restricts the Company from making dividend payments or stock repurchases to the extent the aggregate amount of such payments exceed $100 million plus the cumulative cash flow from operations less capital investments since June 30, 2012. Effective May 6, 2014, the Company entered into amendments of the JPMC Agreement and the Prudential Agreement that allow the aggregate amount of restricted payments to exceed the allowed threshold by no more than $50 million for the quarter ending March 31, 2014, $100 million for the quarter ending June 30, 2014 and $50 million for the quarter ending September 30, 2014, to avoid default or acceleration provisions of these agreements. The amendment of the JPMC Agreement also fixed the applicable interest rate at LIBOR plus 0.75%, increased the commitment fee to 0.25% and extended the term of the agreement from May 9, 2014 to August 8, 2014, with $15 million reductions in the commitment amount on June 30, 2014 and July 31, 2014.

They amended this breach after quarter end (which it seems required the signature of Richard M. Nixon).

You will note however the wording of the amended covenant changed between the first quarter filing and the second quarter filing. This is pursuant to more modifications of covenants dated 8 August as described above (and repeated here):

Effective August 8, 2014, the Company entered into an amendment of the Prudential Agreement that allows the aggregate amount of restricted payments to exceed the allowed threshold by no more than $110 million for the quarter ending June 30, 2014 and $50 million for the quarter ending September 30, 2014

Strangely they breached that covenant too (as demonstrated in the attached Google sheet).

This restricted them from paying dividends (and presumably also led to default debt acceleration).

Dividend delays

The second page of the spreadsheet contains the dividend announcement, ex and payment date since 2001. That data is courtesy Nasdaq's website.

These are quarterly dividends. They went "ex" a dividend in August of every year since 2005 except this year.

This year they are going "ex" the dividend in September. The announcement was similarly delayed.

The reason they delayed the dividend was that they were in breach of their loan covenants. The day after the dividend was announced they announced yet another loan amendment. This one was on the Bank of America agreement and unfortunately we cannot see who signed on behalf of BofA.

The agreement extends the term from September to December.

Cash scramble

Nu Skin's balance sheet shows $234 million of cash, equivalents and current investments. Most of that cash is offshore (see the 10-Q).

The CFO states in the conference call that there is no difficulty repatriating this foreign money. To quote:

Yes, generally our cash is fully available, with the exception of Venezuela. There are some timing issues throughout some of our markets in Asia where you declare a dividend and then you can remit the dividend back to corporate headquarters. But even in -- especially our larger markets like China, we can get money out through back-to-back loans. So yes, it really is not a cash issue,having the cash tied up overseas.
Okay - so we should not have any difficulty getting cash back to head office. It's really not an issue.

However the company has been borrowing fairly aggressively offshore. This disclosure from the Q is interesting (and involves borrowing up to the limits of covenants).
In July 2014, the Company's subsidiary in Japan borrowed 3 billion Japanese yen (approximately $30.0 million), which is due on September 30, 2014.  In July 2014, the Company's subsidiary in South Korea borrowed $20.0 million, which is due in December 2014, with a right to extend the term for an additional six months.
The borrowing of $30 million in Japan for two months is outright strange. It's like hey, I got $234 million in the bank, can you spot me $30 million for two months?

Meeting covenants in the third quarter

The covenants require that they get the "aggregate amount of restricted payments" to exceed the defined cash flow amount by less than $50 million by the end of the third quarter.

This requires something like $150 million of net cash generation in this quarterThis would be inconsistent with the guidance but is within the range that they generated in the last two quarters of 2013.

It seems unlikely to me that the company is going to exceed its guidance by such a massive amount in this quarter.

But miracles happen. After all - even with all his bad karma Richard M. Nixon seems to have been reincarnated as an accommodating but hard to reach banker at JPMorgan Chase.







John

PS. Ford pardoned Nixon on Sep 8, 1974, almost exactly 40 years ago. It is good to take this occasion to remember.

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Post script:

I am barely awake (early morning in Sydney) but the company has put out a brief SEC filing in response to this blog post. To quote:
In response to questions regarding the Fifth Amendment (the "Amendment") to the Amended and Restated Credit Agreement (the "JPMC Agreement"), among Nu Skin Enterprises, Inc. (the "Company"), various financial institutions, and JPMorgan Chase Bank, N.A. as administrative agent, filed as Exhibit 10.3 to the Company's quarterly report on Form 10-Q on August 12, 2014, the Company notes that the Amendment, as filed, contained an inadvertent typographical error on the signature page. The Amendment was signed by Richard M. Hixson, Senior Underwriter, JPMorgan Chase Bank, N.A., not Richard M. Nixon. As previously disclosed, the JPMC Agreement expired pursuant to its terms on August 8, 2014, prior to which all amounts outstanding thereunder were repaid.
This it appears clears up the resurrection of a dead President. It does not clear up the (substantial) breach of loan covenants - a breach I think is inevitable next quarter.

I am intrigued as to how the typo arose. I have not had time to confirm or deny that the document was signed by Richard Hixson but I would be surprised if it were not. There is press focus on the issue now.

I have found a Richard Hixson of appropriate rank at JPMorgan - however he works in IT so is not really a candidate. But JPM is a big place. There is also a George Bush there...

There is no reference (other than this filing) in the SEC database to "Richard M. Hixson" and no reference at all to "Richard Hixson". I have not yet tried all the other spellings.





25 comments:

Tom said...

I rather enjoyed the Martin Sheen film Frost vs Nixon and am very much looking forward to the sequel, Hempton vs Nixon!

Anonymous said...

if this Nixon story turns out to have a natural explanation, it was still great great reading. if it turns out not to have a normal explanation it is one of the best financial scoops ever.

Anonymous said...

"If you are going to lie, you go to jail for the lie rather than the crime. So believe me, don't ever lie."
The real Richard M Nixon to John Dean in April 1973. Dean was due to testify before the Senate Watergate Committee, which he did on 25 June 1973.

PSC said...

1) This is magic.
2) The first thing that gives me slight pause is that bank underwriters who could sign for the document would be in their mid 40s right now - and someone named after Richard Millhouse Nixon is not quite as unlikely as we might think
3) The second thing that gives me slight pause is that JP Morgan Chase is not a hotbed of organisational cohesion, and - if you'll forgive some hyperbole - it would not surprise me were there two whole teams selling loans to the same customers who hadn't heard of each other.

Anonymous said...

One of the best blog posts I've read this year. Great work John!

Doug said...

One possible explanation - I worked for a major bank that a major credit card issuer. We acquired most of our accounts via junk mail solicitations. Accompanying every application was a carefully-worded "invitation letter," signed by some important-sounding executive at the bank. Here's the thing - the name and signature were fake. We used to have a real executive sign the letter, but persistent customers would track him down and figure out how to call his direct line. I don't know if banks are allowed to sign loan documents that way, but they do sign other documents with fictitious people.

Kid Dynamite said...

but if they were making up a fake name, why would they use something so blatant as Richard M Nixon?

The only reason to use a name like that is to make it hard to verify that the person exists (ie: all searches online point to the President), but that explanation makes no sense if the Company is denying his existence at the firm anyway...

babar ganesh said...

Straight out of the credits from Monty Python and the Holy Grail.

Robert in Chicago said...

Unfortunately, writing this post to maximize the entertainment value required burying the lede: THE STATED CASH IS NOT THERE. On first look, no other good explanation exists for why they would borrow $30 million for two months.

Faking the covenant waiver means they have some painful events coming as their creditors balk, but the business keeps going. Faking the cash means the business could collapse.

Anonymous said...

It can't be official policy to use a fake name or identity, cos only authorized signatories can sign for the company. If a company denies the existence or authority of the guy who signed on its behalf, that's not good news for the other party to the transaction.
And surely if a guy at JPM has been using "Richard M. Nixon" as his signature block for any length of time somebody would have snarked?

CurmudgeonlyTroll said...

"You're all going to jail! And don't expect me to grant a pardon like that sissy Ford!"

http://www.hulu.com/watch/55873

Colin Lee said...

What did your check of the Prudential Investment Management signatory reveal?

Anonymous said...

In addition to the extra "s" in "Agents", the signature block also does not contain the "/s/" designation for a signature.

And as with the extra "s", the prior 4th amendment does have the "/s/" in both signature blocks. http://www.sec.gov/Archives/edgar/data/1021561/000102156114000049/ex10-1.htm

Dave said...

As far as possible types of fraud go, creating a falsely executed credit agreement amendment and filing it with the SEC would have to be one of the dumbest and most easily discovered things that I could imagine.

If Nu Skin was actually dumb enough to do that, the clear next steps would be: the JP Morgan monitoring team sees it and realizes that that JPM didn't sign it; JP Morgan/bank group calls the loan; and JP Morgan/bank group sues Nu Skin - and almost certainly its executives individually - for fraud while also being sure to call up a local prosecutor.

Anonymous said...

"if they were making up a fake name, why would they use something so blatant as Richard M Nixon?"

If someone on the team thought what they were doing was wrong, but wasn't willing to get fired fighting it, then they could possibly soothe their conscience by putting in something that will attract attention like this.

Anonymous said...

Great Blog John
And I am sure you picked up that
NUS ceo Mr Hunt has TRUMAN
as middle name .... A man of vivid imagination..
Alex

Anonymous said...

Yes, there is a senior underwriter named Richard M Hixson.

Bernard said...

John,
As always, your good blogs are outstanding - and this is another one of them.

In passing, you've taught everyone a lesson: we need our journalists to do things your way more of the time, not rehashing corporate BS (yes, I've been guilty of that too).

However, a few other trite but true phrases we hear in realtion to news journalism are: "never let the truth get in the way of a good story", and "given the choice between a conspiracy and a f*$k-up, choose the latter every time".

My 60-second Google search using the terms "Richard M Hixon" and "jp morgan" has turned up this SEC filing from 2011:

http://www.sec.gov/Archives/edgar/data/706698/000109690611002229/ex10.htm

(yes, that document came up second on the list, so 2 mouse clicks to find it)

I haven't looked any further, don't think i need to. So, yes, it seems the good folks at JPM don't always know who is working for them nor what they do.

I also agree with the other comment that the bigger story is the cash flow shortfall - and the signature box story has managed to attract attention to that far more effectively than a pure accounting piece would ever achieve.

Badr Rharbaje said...

if this Nixon story turns out to have a natural explanation, it was still great great reading. if it turns out not to have a normal explanation it is one of the best financial scoops ever.
skin bleaching creams

Anonymous said...

Did you find any agreements signed by Jerry Gallo?

https://m.youtube.com/watch?v=artK07bYjIY

Anonymous said...

Signature blocks in legal documents almost always are inserted automatically from standardised precedents, with only the name field requiring details to be added. So the stray 's' would not typically be the result of a typographical error.

In credit agreements, there is only a single Administrative Agent (but there may be a back-up named or, more often, a procedure for replacing the Administrative Agent if necessary).

On balance, I think you may be right to question the 'Admistrative Agents' title, because one possible explanation is that it was inserted by someone who doesn't know what they are doing.

Contra: Documents are usually left to the lawyers to get right. Finance lawyers tend to work long hours, especially in the run up to execution, and there are very often last minute hiccups which cause a frenzy of redrafting. So one possible explanation is that the title 'Administrative Agents' (which looks wrong) is merely an error which crept in due to insufficient attention to detail by an exhausted lawyer who may have been focused on more important edits.

As for the Richard Nixon name, there may be many explanations for that. I once saw an execution block with the name of a banker who happened to share the same name as a football player. It happens!

John Stossel of Cleveland said...

John-

I don't want to be a jerk here but your math is wrong and your reading of the covenant amendment is simply WRONG. The amendment states that they get +110mm of relief at 2Q14 beyond the previous level (which was already cumulative FCF + 100m)-> so new amendment is (cumulative FCF +100 + 110). I did the math with capiq quarterly financials -> it's works out almost perfectly that they needed 110mm as the number. This steps down to only +50mm beyond previous limit at 3Q14. So they need to generate 60mm (110 - 50) + dividends of 20mm = 80mm of FCF in 3Q14.

I have heard that you do not like talking to the company. doesn't matter, get stuff right then. not good to get stuff wrong here, you look lazy.

John Hempton said...

They sought and received another amendment to pay the dividend.

The covenant math is not wrong.

And they have a BIG problem in Q3.

J

Anonymous said...

Agree that thy received 2nd amendment to get the dividend out the door in sept. but your reading is wrong, they need 80mm of Fcf in 3q.

Hemp tons uncle chilly. said...

Your -209.5 of Fcf not including issuance is spot on. See how that equals -100 plus -110 equals -210? So that extra 110 cov relief made them compliant. Now that 110 steps down by 60 and we know at least 20mm of div in September means 80mm, John. Get it?

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.