This article discusses the debt covenants engaged in by Overstock.com in their loan with Wells Fargo.
A debt covenant is basically an agreement over a loan that restricts some of the actions a borrower may engage in. If the covenant is violated then the lender has the right to repossess their loan. Often these covenants will refer to accounting information, including restrictions on leverage ratios. An academic study by Illa Dichev and Doug Skinner found that debt covenants that are violated by healthy firms are not always repossessed, however, if we were to believe Gary Weiss, if Overstock violates their covenant it might be because they are heading to bankruptcy...
Do you agree with Gary Weiss on Overstock's impending doom?
How might the loan affect your forecasts of overstocks operating performance?
After seeing all of the restricting agreements of the loan, I would be concerned with the company. It seems like it will not be able to sneeze without permission of Wells Fargo. The debt covenants clearly show that Wells Fargo does not have a tremendous amount of confidence in Overstock. Further, investors seem to think the company is heading downhill. Its stock has declined substantially for the last 1 1/2 years. Gary seems to have a severe disliking for the company; I agree with him that the company is in turbulent waters although my doubt and suspicions are not nearly as strong as his.
ReplyDeleteThis would also worry me about Overstock's long term situation. No doubt that a company can bounce back from being in trouble but not all companies do. I would want to see what management is going to do differently/better to get the company turned around. I would also hope that this loan is not managements attempt to be a temporary fix on the situation. Overstock's performance needs to perform well for consecutive quarters in order to get investors confidence back.