“We believe almost anything can happen in financial markets and the only way smart people can get clobbered, really, is through leverage.” - Warren Buffett
Smart people run Group 1. The question now is whether they get clobbered.
In the spring of 2009, a dollar of Group 1’s debt was valued at 56 cents. That was the market saying it did not expect to be paid back. Americans had stopped buying cars, and General Motors and Chrysler were on their way into bankruptcy.
But Group 1 did not go bankrupt. It did not even break the terms of its bank loans.
The same fear is back. This summer Group 1 agreed to buy ten dealerships in Atlanta for $1.3 billion. In September it borrowed $1.25 billion to pay for them. The buyback that made me call it a cannibal has stopped.
In 2009 Group 1 had 24.5 million shares. Today it has 11.9 million, and you can watch every year of it on Buyback Radar.
The stock was at $480 within the last year. Last week it closed at $232.
I went through the debt line by line. Then I gave Group 1 another 2009 and watched what happened to every loan. Can they pay it? Or can this company go bankrupt?
Why the debt looks worse than it is
Add up everything Group 1 owed at the end of June and you get about $5.6 billion. And that was before the new $1.25 billion. It looks like a company that is already in trouble. But that number mixes two very different kinds of debt.
The first kind pays for the cars on the lot. When a new Lexus arrives at a Group 1 store, Group 1 does not pay Toyota for it. A lender does. The car stands on the lot for about seven weeks. When a customer buys it, the lender gets its money back. Then the next car arrives.
The industry calls this floorplan financing. It is about $2.2 billion, and it will never be paid off, because there is always a next car. Every dollar of it is tied to a car that is for sale. And the carmakers pay most of the interest, because they want their cars on dealer lots. In the second quarter Group 1 paid $22.0 million of interest on these loans and got $21.9 million back.
The second kind stays when the car is gone. Bonds, bank loans and mortgages on the buildings. After Atlanta it will be about $4.4 billion, once you subtract the cash. The interest is about $250 million a year, and nobody helps Group 1 with it.
This is the debt that can hurt.
I ran the 2009 crisis on today’s Group 1. For two years it sits right at the edge of what its banks allow. And inside those two years, a $750 million bill comes due.
