Jim Thompson

Email Jim at jim.thompson@ipulpmedia.com

Financial Innovation is, sometimes, shaky ground. Some of you may be surprised to know that I have spent much of the last 39 years involved in the financing of pulp and paper assets. Me, without a degree in finance and few collegiate courses on the subject.

I think the experiences I had early on that helped me with this field was my ability to purchase two first class apartment buildings when I was twenty-four. Then I started a business when I was twenty-eight which failed (there went the apartment buildings). This was all before 1980, when many of you were still choosing a career path.

Since then, I have spent much time working on financial matters in the pulp and paper industry, from small projects worth less than $50,000 to mills costing half a billion dollars, I have done them all. I have sat at dinners in Cali, Columbia where the wet-behind-the-ears junior associates of a world-renowned consulting firm pumped me for all the information they could get about the pulp and paper industry so they could write a half way intelligent report on the same opportunity I was studying for the same client.

I have been to a dinner in rural Alabama where the client wanted a bankable study "two inches thick." That was the only specification we received from him.

I have done over twenty tax exempt solid waste exclusion bond projects in pulp and paper and (surprise!) steel.

Bankers have hired me to ride along as they assess whether or not to push a borrower into bankruptcy. In one of these cases, the borrower excused himself mid-morning to go to lunch with his golf friends at the local club. This was while we were deep in his numbers. You can imagine the recommendation I gave in this case. He was in bankruptcy the next week.

I have read reports from licensed appraisers that compare a paper mill to a machine shop as equivalent appraisals.

I had a prospect wanting me to author a report on his potential project, paying me conditionally on whether he was successful at financing it or not. I declined; this would be a conflict of interest.

Three clients ended up in prison for the shenanigans they pulled.

I have been a plaintiff expert witness on projects where the defendants should have ended up in prison.

An often-seen problem is that senior management promises a certain number to the board, a number they arrived at by taking out a number of assets that are necessary for the project to succeed.

Watch out for "EBITDA" (Earnings Before Interest, Taxes, Depreciation and Amortization). Why? This is not a recognized "GAAP" (Generally Accepted Accounting Practice) term--it can literally mean anything.

Like engineering and physics, if the financing is too cute or looks like pulling rabbits out of a hat, run the other way.

Be safe and we will talk next week.

For a deeper dive, go here.

Study Guide: Financial Innovation in the Pulp and Paper Industry

This study guide provides a comprehensive review of Jim Thompson's insights on financial innovation within the pulp and paper industry, based on nearly four decades of professional experience. It covers the practical realities of asset financing, ethical considerations in consulting, and the potential pitfalls of non-standard financial metrics.

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Instructions: Answer the following questions in two to three sentences based on the provided text.

1. What is the author's professional background regarding the pulp and paper industry?
2. What early life experiences influenced the author's understanding of financial matters?
3. How does the author describe his interaction with junior associates from a world-renowned consulting firm in Colombia?
4. What was the specific requirement requested by a client in rural Alabama for a "bankable study"?
5. In which industries has the author utilized tax-exempt solid waste exclusion bonds?
6. What specific behavior by a borrower led the author to recommend that bankers push them into bankruptcy?
7. What error did the author identify in the reports provided by some licensed appraisers?
8. Why did the author decline a project that offered payment conditional on the success of the financing?
9. According to the author, how does senior management sometimes manipulate project numbers for the board?
10. What is the author's primary criticism of using "EBITDA" in financial assessments?

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Part II: Answer Key

1. What is the author's professional background regarding the pulp and paper industry? The author has spent 39 years involved in the financing of pulp and paper assets. Despite lacking a finance degree, he has managed projects ranging from $50,000 to $500 million mills.
2. What early life experiences influenced the author's understanding of financial matters? At age 24, the author purchased two first-class apartment buildings, but later lost them when a business he started at age 28 failed. These experiences occurred before 1980 and served as his early education in the field.
3. How does the author describe his interaction with junior associates from a world-renowned consulting firm in Colombia? While at dinner in Cali, the "wet-behind-the-ears" associates attempted to extract as much information as possible from the author regarding the industry. They intended to use this information to write a report for the same client the author was already studying.
4. What was the specific requirement requested by a client in rural Alabama for a "bankable study"? The client provided no technical specifications other than requiring the study to be "two inches thick." This was the only guideline the author received for the project.
5. In which industries has the author utilized tax-exempt solid waste exclusion bonds? The author has completed over twenty such projects. These projects were primarily located within the pulp and paper industry and the steel industry.
6. What specific behavior by a borrower led the author to recommend that bankers push them into bankruptcy? While the author and bankers were deep in the middle of reviewing the company's financial numbers, the borrower excused himself to go to lunch with golf friends at a local club. This lack of commitment and seriousness led to a recommendation for bankruptcy the following week.
7. What error did the author identify in the reports provided by some licensed appraisers? The author noted that some licensed appraisers lacked industry-specific accuracy, such as comparing a paper mill to a machine shop as if they were equivalent for appraisal purposes.
8. Why did the author decline a project that offered payment conditional on the success of the financing? The author declined the project because he viewed conditional payment as a conflict of interest. He believed that authoring a report under those terms would compromise his professional integrity.
9. According to the author, how does senior management sometimes manipulate project numbers for the board? Senior management may promise a specific financial outcome to the board by artificially inflating the perceived success of a project. They do this by removing necessary assets from the calculations, even though those assets are essential for the project to actually succeed.
10. What is the author's primary criticism of using "EBITDA"? The author cautions against it because it is not a recognized "GAAP" term and lacks a standardized definition. Consequently, he argues that the term can be manipulated to mean almost anything.

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Part III: Essay Questions

Instructions: Use the information provided in the source text to develop comprehensive responses to the following prompts.

1. The Role of Practical Experience vs. Formal Education: Analyze the author's perspective on how practical experience in asset management and business failure can inform a career in high-stakes financial consulting, even in the absence of a formal finance degree.
2. Ethics and Integrity in Financial Reporting: Discuss the various ethical challenges described in the text, including conflicts of interest, "shenanigans" leading to imprisonment, and the responsibility of expert witnesses.
3. Identifying Financial Red Flags: Based on the author's anecdotes, categorize and describe the warning signs that suggest a project or a borrower may be headed for failure or legal trouble.
4. The Dangers of Simplification in Industry Appraisals: Using the examples of the "two-inch thick" study and the machine shop comparison, evaluate the risks of prioritizing document optics or incorrect benchmarks over technical industry knowledge.
5. Transparency in Corporate Governance: Examine the author's warning regarding senior management's reporting to boards and the use of non-GAAP terms. How do these practices obscure the true health or viability of a project?

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Part IV: Glossary of Key Terms

Term Definition

Bankable Study A formal report or feasibility study required by financial institutions to determine if a project is worthy of receiving funding.

Conflict of Interest A situation, such as being paid only if a project is successfully financed, that potentially undermines the impartiality of a consultant or expert.

EBITDA An acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization; a metric the author warns against because it is not standardized.

GAAP Generally Accepted Accounting Practice; a collection of commonly followed accounting rules and standards for financial reporting.

Pulp and Paper Assets The industrial machinery, mills, and related physical property used in the manufacturing of paper products, often requiring complex financing.

Solid Waste Exclusion Bonds A specific type of tax-exempt financing used for industrial projects, utilized by the author in the pulp, paper, and steel sectors.

Tax-Exempt Bonds Financial instruments used for projects that provide certain tax advantages, often applied in industrial waste management or infrastructure.

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