At 2:30 pm this afternoon, US Central Time, the judge will bring down the gavel, calling the proceedings to order. Before the judge, on either side will be a host of somber-looking, well-dressed lawyers and accountants representing the two sides of this dispute. On one side will be representatives for Diebold Nixdorf Holdings, a US corporation. While on the other side will be the Diebold creditors.
What brings all these legal and accounting professionals together is a small matter of nearly $1.5 billion. Funds that Diebold owes to various creditors and now apparently cannot pay.
You may be familiar with the Diebold name; they are one of the principal manufacturers of ATM Machines, and point-of-sales terminals, those bar code readers seen in most grocery stores. Most recently, Diebold has become notorious for making the vote tallying equipment that created such controversy during the last Presidential Election.
This 164-year-old company employs 23,000 workers in 130 countries worldwide. And while the details of its core business are fascinating today, we will focus on its finances because Diebold represents what is becoming a trend in our economy, a trend toward Bankruptcy and companies that cannot pay their bills. So far this year, more than 340 major corporations have declared that they are bankrupt, and six of those companies, including Diebold, owe creditors more than $1 Billion (USD).
In total, Diebold owes $1.47 Billion to international creditors. Here, in the United States, Diebold has moved to receive relief from interest owed to its bondholders, from a Bankruptcy Court in Texas, under Chapter 11 of the Bankruptcy Law. Today’s Court Hearing in Ohio, where Diebold is headquartered, involves Dutch Creditors and is filed under Chapter 15 of the Code. There is little doubt that before we are through, this will be one of the most complex filings in history involving multi-national laws and creditors.
The lawsuit reflects Diebold’s global portfolio of businesses. But behind the legal complexity of just who owes whom what and where? There lies some pretty straightforward economics. Simply put, Diebold can’t pay its expenses.
A quick review of Diebold’s latest income statement provides the answer. We begin by looking at Diebold sales for the first quarter. Everything is fine here; in fact, sales during that first quarter were higher this year by $30 million than last year. So income is satisfactory.
Let’s look at expenses. There’s the answer. One expense item has doubled from last year to this year: interest expenses. Interest expense nearly doubled from last year to this year. In the first quarter of 2023, Diebold interest expense reached $81.9 million. And it’s not just this year. All of the projected interest lies in front of Diebold. That was enough for management to put the company into Bankruptcy.
You see, any good Financial Officer can project how much debt, bonds, loans, and notes the company has coming due in the next few months. Then calculated the new interest rate and went to an answer of whether or not Diebold could pay those new higher loan rates.
It’s a piece of cake for anyone with basic accounting skills. But what the Diebold financial person saw must have blown their mind. Remember, a little over a year ago, primary interest (Fed Funds) was a mere 25 basis points. Today the Federal Reserve has raised that rate to 5% plus. That’s a 20-fold increase in interest in a little over a year.
For Diebold, that means that every time a bond matures, or a loan comes due, they will need to refinance that debt at a much higher rate. This year that means their interest expense nearly doubled. But that process will continue as old debt is replaced with new. Imagine if Diebold’s interest expense increases over the next three or four years by doubling each year. It would reach a level that no company could sustain.
And that’s the real reason Diebold management is electing Bankruptcy now. It’s because they can see what lies ahead, and if they don’t get relief soon, it may be too late, and the company would have to close its doors.
So far, as we said, 340 companies have joined Diebold in seeking bankruptcy relief. I expect that number to increase dramatically as we go through the rest of this year.
For 14 years, the Federal Reserve taught corporate America that the best way to finance a company was with debt. The Fed gave companies the most potent incentive by making debt virtually free. The capital models showed that the most profitable way to build a business was on the back of the Fed’s free debt.
But here’s the problem, Corporate America is caught in the Federal Reserve’s Interest Rate Trap. For years the Fed enticed corporations to borrow as much as possible on their Zero Interest Rate Policy. And then, when inflation rose, the Fed stated that it was only “transitory,” implying that even then, the Fed would likely not raise rates. And then, when companies like Diebold took the Fed at its word and used debt to fund its capital structure, the Fed pulled out the rug—trapping major corporations into skyrocketing interest expense and compelling them to file Chapter 11 or other Bankruptcy.
Stay tuned; I fear many more corporations will follow Diebold’s example.