Sunday 19 March 2017

Lesson from Ezra Bankruptcy: Asset "Rich", Cash Flow Poor

By now, some of you would have read Ezra's filing for bankruptcy protection in the United States. Previously a billion dollar company, Ezra's fall from grace was due to the fall in oil prices. Nevertheless here are a few things we can learn from it.

1) Cash/Cashflow is key

One reason for Ezra''s decision to file for bankruptcy was due to its inability to pay creditors. The reason was simple - Ezra's assets was neither generating sufficient cash flow to meet its daily expenses nor did it have enough cash reserves. If one were to examine Era's balance sheet over the years; despite a growing asset base, Ezra's assets were generating paltry cash flow.

In the personal finance sphere, it highlights to us the importance of our assets (income from work or property rental income) to generate the necessary cash to service our cash expenses. This is because regardless of your asset's worth, if your cash expenses exceeds the amount of cash your assets are able to generate; chances are you will run yourself to the ground.

2) Stated Asset Value vs Value of Asset when Force Sold

In Ezra's FY16 balance sheet, Ezra's stated assets were worth US$622 million with a net asset of US$378 million. Logically, all Ezra had to do was sell off some assets on its balance sheet to raise the necessary cash to tide over. However, I have reasoned that this could not be achieved because the true recoverable value of Ezra's assets were perhaps only about 30% of its stated value. This is largely due to the oversupply of offshore oil equipment in Ezra's deep waters industry.

It highlights how in times of distress, the value one's assets is perceived to fetch might not be real. In fact, it reminds how during a financial crisis, property values can be so depressed because no one is interested to buy a home and home owners are desperately trying to sell properties to cover their cash expenses. The valuation as appraised by valuers is one thing, but the true market value of your property is another. This is something we have to take note of in light of Singapore's property market which is oversupplied; What happens if your rental income from property are decreasing. Do you have enough cash generating assets to tide over your cash expenses during these hard times?

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