Third Eye Capital
Tel: (416) 601-2270
Fax: (416) 981-3393
Email Third Eye Capital

Brookfield Place
Bay Wellington Tower
181 Bay Street, Suite 2830
Toronto, Ontario, M5J 2T3

CEO Insights

CEO Insights

“I Promise to Pay…” (Q1-12)

“I Promise to Pay…” (Q1-12)

It is no surprise that the word “promise” features prominently within loan documentation. A borrower’s willingness and intent to repay a loan is just as important as his ability, and perhaps more so when conditions become stressful. Cash flows and the value of good collateral can decline during an economic slowdown, but the character of good managers always stays constant. A company’s success may be attributed to its products, technology, or market strategy, but it is ultimately the people that run the company and make the key decisions that determine its future. The character of a borrower’s management team has great significance in our credit analysis.

Assessing and measuring character requires judgment and experience. Prior to the Industrial Revolution, lenders and borrowers were intimately familiar with one another and staked their personal relationships, not just their business motives, behind the credit decision. Today, in an environment when loans are still made to be sold, and transactions are sourced in large volumes from around the world, lenders are challenged in making character determinations. This is further exacerbated inside a troubled company, where management is reluctance to communicate due to fear and denial.

We assess management character by examining two components: competency and integrity. Competency is checked through independent verifications of education, career experience, historical business performance, any criminal convictions and civil litigation, and personal credit scores. Any inconsistency between our checks and management representations are flagged for further investigation. Personal credit scores are an especially useful indicator because they demonstrate management’s attitude toward debt repayment. Our experience shows that credit information for management of a company explains a significant amount of variation in the performance of that company’s credit.

Indicators of management integrity are less easily observed and can take significant time to accumulate. However, the manner in which management communicates information provides important clues into their integrity. Examples include pattern of delays in information reporting, reluctance to provide disclosure, failure to provide specific and complete answers to questions, providing evasive information or being excessively defensive, destroying key documents, and overly complex transactions in the circumstances. We not only need to be able to understand the information we receive from management but should be able to trust it. Consistently failing to meet projections is a quick way to lose our trust. While companies cannot be expected to see into the future, flawed assumptions and unrealistic targets put management integrity into question.

We tend to avoid situations where company leaders have excessive control over the dissemination of information and there is fear (along with high turnover) among finance and accounting staff. Another red flag is if management has less to lose than we do, in relative terms, from a company failure. Any deception, misrepresentation, or lie is a clear and strong warning signal, and usually results in a permanent fracture of our relationship with management. In an ideal world, we can make accurate assessments of management character at the onset of a loan; however, more often, as unexpected crisis occur, or as a company and industry evolve, management’s true competence and integrity gets revealed.

Too many warning signs are an indication of distress. In such circumstances, many lenders simply revise the loan covenants. However, if management character is flawed, then loan covenants, no matter how often they are revised, will inevitably be breached. Liquidation is the only viable solution when management’s “promise” no longer holds meaning.

Excerpted from Third Eye Capital Management Inc.’s Q1 2012 Investor Letter.



Domestic (Canadian) Advisor registration form:

If you are an advisor that distributes or is interested in distributing a fund advised by Third Eye Capital Management Inc. you can register to request a call or meeting. You will be asked to provide information to confirm your qualifications to invest in or distribute the funds. This brief registration process allows us to conform to applicable securities laws and to obtain some basic information about you. Once we have qualified and approved your registration, we will get in contact with you to schedule a meeting.

    Personal Information

    I consent to receive information from Third Eye Capital.

    Domestic (Canadian) Investor registration form:

    If you are an existing or prospective accredited investor that distributes or is interested in distributing a fund advised by Third Eye Capital Management Inc. you can register to request a call or meeting. You will be asked to provide information to confirm your qualifications to invest in or distribute the funds. This brief registration process allows us to conform to applicable securities laws and to obtain some basic information about you. Once we have qualified and approved your registration, we will get in contact with you to schedule a meeting.

      Personal Information

      YesNo

      I consent to receive information from Third Eye Capital.

      International Investor registration form:

      For US persons
      If you are an existing or prospective accredited investor or an advisor that distributes or is interested in distributing a fund advised by Third Eye Capital Management Inc. you can register to request a call or meeting. You will be asked to provide information to confirm your qualifications to invest in or distribute the funds. This brief registration process allows us to conform to applicable securities laws and to obtain some basic information about you. Once we have qualified and approved your registration, we will get in contact with you to schedule a meeting.

        Personal Information

        I consent to receive information from Third Eye Capital.

        Address Information

        Investor Information

        An IndividualA Company

        U.S.Other (specify)

        Fund of FundsFamily OfficeBankOther (specify)

        $


        Instructions for the following sections: Individuals please answer Part A of Sections I and II; Institutions please have an authorized person answer Part B of Sections I and II.

        Section I - Accredited Investor Threshold Questions:

        Part A - For Individuals:

        1. I certify that I have an individual net worth, or my spouse and I have a combined net worth in excess of $1,000,000.

        2. I certify that I am highly a sophisticated investor who routinely invests sums of $250,000 or more.

        Part B - For Institutions:

        1. The submitter certifies that it is a bank, insurance company, registered investment company, business development company, or small business investment company.

        2. The submitter certifies that it is a charitable organization, corporation or partnership with assets exceeding $5 million, and that was not formed to invest the Fund.

        3. The submitter certifies that it is a corporation, partnership or trust with assets of at least $5 million, that was not formed to invest in the Fund, and whose purchases are directed by a sophisticated person.

        4. The undersigned certifies that all of its equity owners are “accredited investors” as defined in United States Securities and Exchange Commission Rule 501(a) and who can satisfy the higher criteria for the same set forth in Section I, Part A above.

        Section II - Qualified Purchaser Questions:

        Part A - For Individuals:

        1. I certify that I own not less than $1,000,000 in securities investments.

        Part B - For Institutions:

        1. The undersigned certifies that it is a bank, insurance company, registered investment company, business development company, or small business investment company

        2. The undersigned certifies that it is a "family owned company" (as defined below) that owns not less than $5,000,000 in securities investments. A "family owned company" is defined as a company that is owned directly or indirectly by or for two or more natural persons who are related as siblings or spouse (including former spouses), or direct lineal descendents by birth or adoption, spouses of such persons, the estate of such persons, or foundations, charitable organizations, or trust established by or for the benefit of such persons

        3. The undersigned certifies that it is a trust that was not formed to invest in the Fund, the trustee or decision-making authority of which, and every person contributing assets to the same, is a “Qualified Purchaser” under one of the other definitions of this Section

        4. The undersigned certifies that it is a person acting for its own account or for the accounts of other Qualified Purchasers who in the aggregate own and invest on a discretionary basis at least $5,000,000 in securities investments.

        Questionnaire Submission:

        Thank you for your patience in completing this questionnaire.

        If you have any questions, please contact Chris Vokes, VP of Investor Relations at Third Eye Capital:


        T 416-601-2270 ext 242
        E chris@thirdeyecapital.com