Some Time to Be Valeant

The disease, not  the cure In our last post, we talked about the tangle Valeant got into with its banks over financial reporting delays. But the company’s problems didn’t end with the banks, and the banks weren’t the only creditors affected. On April 12, Centerbridge Partners, a fund that specializes in distressed debt investing, called a financial reporting default on $1 billion of bonds. Ten days later holders of four other Valeant bonds totaling $6.4 billion piled on with their own default notices. Valeant cured all of the bond defaults when it issued certified financial statements for fiscal 2015 on April 29. But for many investors, Valeant’s reporting troubles were more than a technicality. The company has $8.6 billion in what it calls “Tranche B Term Loans.” These are delayed-maturity, floating-rate, secured loans that are popular investments for collateralized loan obligations (“CLOs”). CLOs are debt securities backed by pools of corporate loans. Valeant’s Tranche B Term Loans are the most widely held investment among CLOs. In some CLOs Valeant’s loans account for as much as 4% of total investments. Those loans traded at around 94 cents on the dollar recently. The discounted price of the loans is a problem for CLOs, which are “overcollateralized” to make sure they can service their own debt. This means the value of the loans CLOs hold must exceed the value of the bonds it has issued. If the funds sold their Valeant loans at current prices, they would cut into their overcollateralization cushion, which is already under stress from a broad decline in energy sector loan prices. Deja vu all over again Valeant got...

No Time to Be Valeant

Valeant in trouble Valeant Pharmaceuticals has been a bit of a nightmare for customers, shareholders, and debt holders lately. Its strategy of acquiring established drugs, paying with debt, and doubling prices to cover the costs has provoked a furious response from consumers and lawmakers. Its mis-reporting of a troubling relationship with a specialty pharmacy called Philidor, two SEC investigations, delays in issuing its 2015 annual report, problems with its banks and bondholders, and turmoil in senior management ranks and on the board, have led to massive drops in its share and bond prices, soaring price increases in its credit default swaps, and a brutal series of downgrades from the rating agencies. The timeline of Valeant’s troubles goes like this: 10/21/15 Short-seller Andrew Left’s Citron Research suggests Valeant is using Philidor to artificially increase revenues 10/26/15 Valeant defends its revenue accounting but announces its board is investigating the Philidor relationship 10/30/15 Valeant terminates its relationship with Philidor, which shuts down 12/29/15 Valeant CEO Michael Pearson goes on leave with pneumonia 1/1/16 Former CFO Howard Schiller becomes interim CEO 2/22/16 Valeant admits to overstating about $58 million revenue in revenues to Philidor in 2014 but says the investigation is continuing 2/28/16 Michael Pearson returns as CEO, and the company withdraws its earnings guidance for the fourth quarter of 2015 2/29/16 Valeant announces that it will not be able to meet the March 15, 2016 filing deadline for its 2015 annual report; the SEC launches a formal investigation into Valeant’s financial reporting 3/15/16 Valeant misses the deadline for delivering its annual report to its banks and bondholders 3/21/16 Valeant admits to $21 million more of...

Oilmageddon

Citigroup analysts are calling the effect of falling oil prices on global financial markets “oilmegaddon.” We think the term works well to describe looming cash flow, dividend, and credit problems at major oil companies too. After peaking at $60.07 in June of 2015, the price of West Texas Intermediate Crude fell to $42.65 a barrel at year end. The effect on oil company cash flows was drastic, as BP’s experience shows. Adjusted for a $4.8 billion gusher of cash from declining receivables and inventories in the fourth quarter, the BP’s cash flow from operating activities was down deeply in the second half of the year. That did not stop the company from pumping money to its shareholders. Combined dividends and share repurchases in 2015 were $8.0 billion, and they actually increased as the year went on. Add heavy capital spending on exploration and production, and the deficit in cash flow after capital spending and shareholder payments was $11.1 billion for the year. BP plugged the cash flow leak by cutting working capital, selling assets, and tapping cash reserves. But the credit concern is that those are not sustainable sources of funding. If, as seems likely, oil prices stay low, BP will have to trim dividends and share buybacks or boost borrowings. Raising leverage in the face of falling business fundamentals is risky. Shell did it in 2015, and was rewarded with a rating downgrade from Standard & Poor’s. BP is starting 2016 with higher leverage (35.1% debt to capital) than Shell (26.2%), so it has less room for maneuver to avoid a downgrade. Not that BP is worried about...

Unitranche Loans

A unitranche loan, as the name implies, is one tranche of debt that can replace the traditional two tiered (i.e. first-lien/second-lien, senior/subordinated or secured/unsecured) debt structure for highly leveraged companies. For those unfamiliar with this increasingly popular structure, here is our summary. What they are Structure: One tranche of debt that is split into “first-out” and “last-out” pieces. First-out debt typically includes a revolver and part of the term loan; last-out debt is everything else. To replicate the differentiated seniority of traditional deals, unitranche deals define trigger events during which first-out debt is paid before any payments are made to last-out debt. Typical trigger events include a missed payment, bankruptcy or financial covenant default, or acceleration or other actions by first-out lenders to exercise their rights. Documentation: One credit agreement and one security agreement. In addition, if multiple investors will provide the debt, there is an additional agreement, the Agreement Among Lenders (“AAL”), which allocates interest and principal payments across the tranches and addresses other intercreditor issues. The borrower is not a party to the AAL. Pricing: One blended interest rate. The AAL replicates the different yields and repayment terms of the traditional two-tiered deal by skimming borrower payments and allocating them from the first-out lenders to the last-out lenders. Lenders: May be provided by a single lender (typically to companies with revenues between $10 and $50 million) or by multiple lenders. Participants in this market include finance companies, business development companies, and hedge funds.  Some banks also provide unitranche structures. Voting and exercise of remedies: Highly negotiated and vary significantly deal to deal. They are specified in the...

Unreal GDP

“The only function of economic forecasting is to make astrology look respectable,” John Kenneth Galbraith. A recent article in The Economist talks about the difficulties even the world’s best economists have forecasting economic growth. Approaches based on theory or empirical data or both yield poor results. Economies are just too complex to compress into accurate models, and forecasters give too much weight to the recent past when they look ahead into the future. Take the International Monetary Fund as an example. The IMF publishes forecasts for 189 countries for the current year and the next year every April and October, and even with that short a time horizon it’s regularly wrong. From 1999 to 2014, the IMF’s April forecast missed every recession in every country it covered; and its October forecast missed half of them. The IMF is not alone. The Federal Reserve Bank of Philadelphia publishes a survey of forecasts from economists at banks, consulting firms, businesses, and universities (as does the ECB). They are shockingly inaccurate. As the chart shows, one year in advance forecasters in the United States have consistently failed to predict when the economy goes into recession and how deep the fall in GDP is. This is at least understandable to the extent economists are confused by complexity. It’s at best regrettable to the extent they are reluctant to be the bearers of bad news. This chart shows that they do better 90 days ahead: they get the timing right more often, but they’re still wrong about the severity. The danger signs get clearer as the downturn gets closer, so it’s harder not to see a...

Why, Toshiba, Why?

Toshiba Corporation has been caught cooking the books, overstating pre-tax profits by ¥1.5 billion over the last seven years. The scandal began with an inquiry by Japan’s market regulator, the Securities and Exchange Surveillance Commission, in February. Toshiba started its own investigation in May, and the committee issued its report in July. The company abused project accounting rules to hide expenses in its construction businesses. It understated the cost of parts sold to contract manufacturers in its computer business. And it failed to wrote-down obsolete inventory in its semiconductor business. None of these tricks was very inventive; they are classics from the expense manipulation playbook. But at Toshiba there were no points awarded for originality, only penalties for failing to meet profit goals. And those penalties could be quite severe. According to the investigating committee’s report, it was standard practice for Toshiba’s last three chief executives to issue impossible earnings  “challenges” to subordinate business chiefs to make up for near-term profit shortfalls. Executives who failed to meet those challenges were disgraced, and their businesses were threatened with closure. Pressure to meet goals is nothing new in business in Japan or anywhere else. So there is nothing really special about Toshiba in that regard. What is special is how comprehensive the breakdown in integrity at Toshiba was: every control against financial misreporting failed. Starting at the top. The last three chief executives at Toshiba, Toshiba Hisao Tanaka, Atsutoshi Nishida, and Norio Sasaki, were all directly involved in hiding expenses. They were aware of and sometimes even approved of the bad accounting. Toshiba’s Corporate Audit Division failed to find the fraud....

Dave Lewis Has a Problem with Booze

Dave Lewis has been Tesco’s CEO since September 2014. As we said in an earlier post, his challenge is to counter the growing threat from discounters in the UK like Aldi and Lidl by holding on to a core set of customers who prefer Tesco’s variety and convenience over the discounters’ low prices. At the same time, he has to cut costs to support that still-big but smaller business. But Lewis is likely to find that harder to do than we first expected. That is because a £12.99 whiskey from Aldi won the top prize in a blind taste test, beating many of the famous brands that Tesco carries. Aldi has now received 12 major accolades in the past three years for its drinks, along with awards for many other products. The whiskey awards are a clear sign that ALDI is moving upmarket from a limited selection of low-priced generic products to a broader array of value-priced premium products. Aldi plans to offer nearly a third more premium products than it had in UK stores last year, and it’s broadening its appeal with more fresh foods. Aldi is after the customers Tesco plans to keep, shoppers who want higher quality and lots of choice. It’s following a classic strategy used by disruptors in industries from steel to groceries to disk drives. Successful new entrants get more resources, improve their capabilities, and start to move upmarket, drawn by higher growth and profits. They often keep a cost and pricing advantage as they move up, just as Aldi has vowed to do: “Whatever our competitors plan to do…we will not let them...

Tesco’s Not Even Close

Tesco just agreed to sell its South Korean operations for £4 billion, taking a loss of about £150 million on the sale. The deal will reduce borrowings by £4.2 billion over the next 18 months. That’s a step in the right direction, but it’s not enough. Tesco may also sell its operations in eastern European and in Thailand to cut debt even more. Analysts think they could be worth as much as £5.9 billion. But even that would not be enough. At the end of its latest fiscal year in February 2015, Tesco had £26.2 billion in adjusted debt, £4.2 billion in adjusted twelve-month EBITDAR, and shareholders’ equity of £7.1 billion. Adjusted debt to EBITDAR1 was 6.3x, and adjusted debt to capital was 79%. Proceeds from Korea would reduce those figures to 5.2x and 76%, while proceeds from Europe and Thailand would cut them to 3.8x and 70%.   As we said in an earlier post, because of the company’s high business risk we think it should be targeting debt to EBITDAR leverage of 3.0x and debt to capital of 40%. That means cutting debt by at least another £3.5 billion2 or raising EBITDAR to £5.3 billion and shareholder’s equity to £24.0 billion. We just don’t see an easy way for Tesco to get there. Cutting debt through asset sales is promising, but it has problems. If the company keeps taking losses when it sells assets, that will cut into shareholders’ equity, which already is at dangerously low levels. Asset sales take time. The Korea deal will span more than a year from deciding to sell to receiving payment and...

Takata May Get Blown Away

Takata Corporation is a Japanese maker of airbags and other automotive safety devices that has had a bad accident. It is recalling 53 million cars to replace defective airbag inflators that have caused six deaths and over 100 injuries around the world. The cost will be somewhere between ¥12,400 and ¥18,600 per vehicle, according to industry experts. That means the company will have to come up with as much as ¥986 billion to pay for the recall. That’s a lot for Takata, whose entire revenue for the fiscal year ending in March 2015 was ¥643 billion. The question is where will Takata get the money? We think the best way to answer that question is to consider where Takata could raise funds (potential sources) and when Takata could get them (probable timing). The table below summarizes the approach we use. Let’s see how it works for Takata. Internal sources of funds are those the company controls, while external sources come from other firms. Immediate sources of funds are readily available – in about ten business days or less. Takata has ¥69 billion in cash and ¥22 billion in investment securities, which it most likely can access within ten days. It’s not a commercial paper issuer, and its latest annual report doesn’t mention any unused bank lines of credit. So we can’t know how much immediate external funding is available to the company. In this framework, near-term means funds that begin to become available about 11 – 120 days in the future. Internal sources include sale of assets that are not integral to the company’s strategy, which we call surplus...

Terrifying Tesco

A few days ago Tesco announced its worst full-year loss ever and one that ranks among the biggest in the history of British business — £6.4 billion. The company took a cart load of special charges to account for three years of declining sales, profits, and cash flows and a financial reporting scandal. It also disclosed uncomfortably high leverage (adjusted debt to EBITDAR of 7.4x) and limited amounts of liquidity (a liquidity position of £3.4 billion). There are signs Tesco is getting better. It cut prices, improved service, laid off staffers, closed stores, and agreed to start funding its pension deficit. Customer traffic and purchases in the UK are growing again, and the rate of sales decline there slowed to (1.0%) in Tesco’s fourth quarter. Tesco’s CEO “Drastic Dave” Lewis made a lot out of this, saying, “They are pretty good vital signs,” and, “This patient is OK.” But he may be discounting his company’s immediate tactical problems. Worse, he may ignoring a long-term strategic threat. Tactically, Tesco is still in retreat. Discount grocers Aldi and Lidl are capturing more and more share from Tesco and the other mid-market chains in the UK. And they’re gaining at a growing rate.   We don’t think Lewis is trying to transform Tesco into a low-cost, low-price chain and win back lost market share. He’s trying to hold on to a core set of customers who prefer Tesco’s variety and convenience. He understands he has to shrink to a cost base that supports that still-big but smaller business. His plan may succeed in the short run but fail in the long run.  This has to do...

Breaking Tesco Out of the Box

Credit risk at Tesco Tesco disclosed details of its turnaround plan on January 8. The company was clear about its business problem — loss of share and profitability in the UK. And it was specific about the steps it is taking to tackle that problem — price cuts, store closings, and overhead cuts. Tesco was less clear about its financial problem — too much leverage. It promised to “protect and strengthen the balance sheet” through capital spending and dividend cuts, possible asset sales, and pension spin-offs.  But there was little sign of concern about the dangerous combination of risks we talked about in our last post, “Tesco’s in the Wrong Box,” nor was there a commitment to a better credit rating. Fully adjusted for off-balance-sheet debt equivalents like pension obligations and operating leases, Tesco’s leverage for its half-year ending in August 2014 was 5.0x debt to EBITDA and 50.8% debt to capital. That is too high. Given the company’s high business risk, we think it should be targeting debt to EBITDA leverage of 3.0x and debt to capital of 40%, putting it at the lower end of range of its peer group for those measures. Tesco can do that by improving earnings or reducing debt or both. We’re skeptical about a big or quick jump in earnings at Tesco. The challenge to its business model may be more than price and overhead cuts can overcome, there may be strong cultural resistance to change, and competitors are likely to respond with their own cuts. Cutting credit risk at Tesco That leaves paying down debt as Tesco’s most attractive option for reducing financial risk. At the...

Tesco’s in the Wrong Box

On January 8 Tesco announced more details of its plan to improve its competitive position in the UK, revive its profitability, and bolster its finances. It’s going to cut prices on popular brands, trim £250 million in operating costs, limit capital spending, stop the dividend, and sell assets. Some of the changes may already be working. The decline in UK sales is easing, with growth going from (5.4%) in the second quarter to (2.9%) in the third quarter to (0.3%) during the Christmas season. But January 8 brought more bad news as well. Moody’s downgraded Tesco’s credit rating to junk status (Ba1), and Standard & Poor’s did the same a few days later (BB+). Both agencies cited competition, profitability, and financial leverage as the reasons. Those are the risks we discussed in our January 5 blog post, “Testing Tesco.” But we think the rating agencies understate the risks. They don’t consider the difficulty of changing a company as large and as focused as Tesco. We see Tesco’s still unresolved financial reporting problems as symptoms of a damaged corporate culture that is likely to fight hard against change. The agencies don’t mention liquidity in their concerns about Tesco, but the declining trend in liquidity worries us at least as much as the increasing trend in leverage. The company’s liquidity position is at a four-year low, driven by growing current debt levels.   But our biggest worry isn’t any single risk or even the number of risks. It’s the compounding effects of Tesco’s risks, the way the company’s business and financial risks amplify one another. It’s common to think of credit risk in...

In the Air But Grounded

Last December 28 AirAsia Flight 8501 left Surabaya in Indonesia bound for Singapore with 162 passengers and crew on board. An hour from takeoff the plane disappeared from radar, and five days later searchers found the wreck in the Java Sea. There were no survivors. AirAsia is one of the global airline industry’s great success stories. It was founded in 2001, when CEO Tony Fernandes, a former music company executive, bought the struggling company for $0.39. By 2014 he had made it into one of Asia’s largest discount airlines. Flight 8501 was AirAsia’s first fatal accident. With the untimely death of so many people and the shocked grief of so many families and friends, the loss of Flight 8501 is above all a tragedy. For AirAsia’s lenders and investors it’s also a major risk event and a test of management’s ability to meet the challenges rising from that event. We see meeting challenges to be one of the key factors in evaluating management and its impact on a company’s risk. By challenges we mean problems that go way beyond the ordinary operational and financial difficulties of running a business. They can range from integrating big acquisitions, to far-reaching business turnarounds, to comprehensive financial restructurings. Challenges also include responding to major product recalls, natural disasters, and accidents. There are two dimensions to meeting any event risk challenge: operational and financial. For AirAsia the operational tasks are to find the plane, recover the bodies, analyze the accident, and keep it from happening again. Of course, where human suffering occurs there is an added responsibility to comfort the injured and bereaved. AirAsia’s...

Testing Tesco

Tesco, Britain’s largest grocer, has been having a hard time lately. Last September it had to admit to overstating its net profits by £250 million. Then in October it announced a 4.4% drop in mid-year sales, a 91.9% drop in net profit, and an increase in the profit overstatement to £263 million. Right after that the chairman stepped down, Tesco dismissed eight senior managers, and the British government began an investigation into the company’s financial reporting. The share price plummeted, the rating agencies put the company’s credit rating on review for a downgrade, and the company cancelled the syndication of a £3 billion revolving credit. A damaged model Tesco’s problems go much deeper than an earnings shortfall, accounting anomalies, and a management shake-up. It has fundamental problems with its business model. Tesco’s business is built for size not speed, but it’s facing very lean, agile competitors. It’s the third largest retailer in the world, behind Wal-Mart and Carrefour, and it’s the UK’s grocery giant. Tesco has twice the market share of Asda, its next biggest competitor. Size matters: it gives Tesco bargaining power with suppliers, customers, regulators, lenders, and investors, driving profitability and profit growth. But with size comes complexity. To reach as many customers as possible, Tesco uses seven different store formats in the UK, ranging from giant hypermarkets to small convenience stores. Its stores carry as many a 40,000 different inventory items, about 50% of them from major brands and the rest under Tesco’s private labels. It also has other businesses, including digital tablets, coffee shops and restaurants, online retailing, and banking. And with complexity comes costs....

Private Equity Likes Strong Brand Names

Private Equity Funds often target companies with strong brand names in mature industries.  These companies often have strong, stable cash flows, which can be used to repay the acquisition debt.  Two transactions, both announced in February 2013, demonstrate this trend. Food behemoth H.J. Heinz Company agreed to be acquired by Brazilian PE firm 3G Capital and Warren Buffet’s Berkshire Hathaway at a total transaction value of $28.8 billion. As part of the transaction, both 3G and Berkshire invested approximately $4.1 billion to acquire common stock of the company.  Heinz is a leader in the mature condiments market with large and stable cash flow, and the potential for additional cost savings.  The transaction closed in June of 2013, and the new owners wasted no time in shaking up the HNZ management team by dismissing 11 executives and replacing them with new personnel. Dell Inc. announced a deal to sell the computer maker to founder Michael Dell and PE firm Silver Lake at a price of $13.65 per share, valuing the transaction at $24.4 billion.  The company also announced that the Board would commence a 45-day go-shop period to seek offers from other bidders. This action led to two competing offers, one from PE firm Blackstone, which offered $14.25 per share for the entire company, and one from Carl Icahn’s Icahn Enterprises, which offered $15.00 per share for a 58% stake. Blackstone eventually dropped out of the process after Dell reported declining sales, but Icahn continued to purse the transaction and offered several alternative structures to the Silver Lake deal. The Board of Directors was hesitant to pursue the Icahn deal...

Men’s Wearhouse Plays Defense

On September 18, 2013 men’s clothing retailer Jos. A. Bank (ticker JOSB) made a $2.3 billion unsolicited offer to acquire larger rival Men’s Wearhouse (ticker MW). JOSB was seeking to take advantage of MW during a vulnerable time for the company. The MW Board of Directors had dismissed its founder, public spokesman and executive chairman George Zimmerman in June due to disagreements over company strategy. Shortly afterwards, the company announced a cut in its expected profit forecast. Even though the offer price was a substantial premium to MW’s market price, the MW Board considered it below the intrinsic value of the company. After rejecting the offer, the Board implemented a flip-in poison pill that would allow existing shareholders to acquire stock at a discount if a third party acquires more than 10% of the company in a transaction not approved by the Board. In November, MW went a step further by undertaking a Pac Man strategy, launching its own $1.5 billion unsolicited offer to acquire the smaller JOSB. The JOSB Board rejected the unsolicited offer, declaring it too low and not in the best interest of shareholders. MW vowed to continue its pursuit of JOSB, possibly by nominating its own directors at the next JOSB shareholder meeting. On January 6, 2014, MW further increased the pressure on JOSB by increasing its bid from $55.00 per share to $57.50 per share, placing a value of $1.6 billion on the company. There is still a chance the two companies will combine their operations, as most analysts believe it makes strategic and financial sense. But who will play the role of acquirer and who...

Kodak’s Dilemma

In our previous post, we talked about how Kodak fell to competition from digital photography and promised to explain why in our next. This post is about why Kodak failed. It’s because of what we call “the incumbent’s dilemma,” which this presentation explains. Our ideas about how companies succumb to competition from entrants who bring a new technology or process to the fight depend a lot on Clay Christensen’s and Michael Overdorf’s research on innovation and competition. You can find their article “Meeting the Challenge of Disruptive Change” by clicking on the...

The Rise and Fall of Kodak

Kodak dominated mass-market consumer photography for over a century. But it failed to meet the challenge from digital photography and went bankrupt a year ago. How could a company as strong as Kodak fail so badly? This post explains what happened to Kodak. In our next post we’ll explain why it happened in terms of an important risk dynamic we call the “Incumbent’s...

A Swing Line for Swingline

In November 2011, ACCO Brands, a leading manufacturer of office products, and MeadWestvaco Corporation, a leader in packaging, agreed to merge MeadWestvaco’s Consumer & Office Products business into ACCO Brands in a transaction valued at approximately $860 million. The deal, which closed in May 2012, gave MeadWestvaco shareholders 50.5% of the combined company.  Among the company’s many products are Kensington computer accessories, Mead school supplies, and Swingline Staplers. As part of the transaction, ACCO refinanced virtually all of its existing debt.  The new capital structure included $500 million of high yield bonds and over $750 million of term loans.  In addition, the company obtained two revolving credit facilities: $200 million U.S. dollar, and $50 million multi-currency. Let’s take a look at the $200 million U.S. dollar revolver.  It has commitments from 16 banks, ranging from about $4 million to about $20 million (i.e. 2% to 10% of the total facility) and was expected to be used for general liquidity needs and letters of credit.  If the company has a financing need, say $100 million for 6 months, it sends a borrowing notice to the administrative agent, in this case Barclays, who sends a notice to the other 15 banks, who all advance their proportionate share of the total borrowing.  This process happens for hundreds of syndicated revolvers every day. But what if the borrowing need isn’t $100 million for 6 months, and is, instead, $10 million for 6 days?  The process could work the same as for the larger, longer need, but that would mean that the bank with the smallest commitment, in this case Deutsche Bank, would have...

What’s That Burning at Tesla?

We blogged about Tesla just over a year ago, looking at what we called the company’s “liquidity burn.” We thought they only had about a year’s worth of liquidity left. Since then, burning through liquidity hasn’t been Tesla’s biggest problem. Instead, Tesla’s troubles have been with burning cars. Three of its sleek Model S cars have caught fire recently, and that may hurt sales or force a recall. Can Tesla afford it? A slowdown in sales or a recall would hurt cash flow, which has been improving lately. Free cash flow was $25.8 million dollars in the third quarter this year, driven by the success of the Model S. If cash flow falters, Tesla’s next line of defense will be its liquidity reserves, which also have grown a lot in 2013. Tesla used to keep about $200 million in liquidity in the form of cash and short-term investments. But in May 2013 the company raised $660 million in the convertible bond market and $617 million in the equity markets, using $452 million to repay its loans from the U.S. government and $178 million to hedge the convertible bonds. Tesla used the remaining $647 million to recharge its liquidity reserves. At the end of September 2013, they stood at $795 million. Is that enough? The size of a liquidity reserve should be based on the company’s ability to generate free cash flow and its vulnerability to event risk. Event risk is the unexpected need for cash caused by natural disasters, accidents, and product recalls. The cost to Toyota for its 2009 recall of 8.1 million cars for faulty break pedals was...