Credit Bubble Begins to Exact its Pound of Flesh: GT Advanced Tech Soars, Crashes, and Burns

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Successor of failed GT Solar International

Easy come, easy go. A few months ago, GT Advanced Technologies was still riding Apple’s iPhone-hype coattails. The company makes sapphire displays. And Wall Street had been puffing up its stock by proffering the hope that these displays would end up in the iPhone 6, and that unlimited fortunes would follow.

Last November, the company had signed a “multi-year agreement” with Apple. But it did “not guarantee volumes,” and it did “require GT to maintain a minimum level of capacity.” The deal came with a “prepayment of approximately $578 million” that GT would have to reimburse over five years.

The company’s revenues had been eviscerated quarter after quarter, and red ink was everywhere. Back in the day, in calendar year 2011, it sported revenues of $873 million; in 2012, $734 million. Then everything went to heck. In 2013, revenues plunged to $299 million, down 66% in two years. They’ve since fallen further and are now a mere shadow of what they were, at $80 million for the first two quarters of 2014.

In its prior iteration, the company, then called GT Solar International, had attached itself to the clean-tech boom as “global provider of specialized production equipment, process technology and turnkey manufacturing services for the solar power industry.” A boom that didn’t live long before it screeched to a halt. So the company went after the Apple iPhone boom, and Wall Street loved it.

Debt ballooned. The company’s “Debt, Convertible Notes & Prepayment Obligation” soared in large quarterly increments from $75 million in Q1 2012 to $644 in Q2 2014 – multiplying by a factor of 8.6 in just nine quarters – even while its revenues were being eviscerated by reality. By then, it was profusely bleeding red ink.

Undeterred, Wall Street pumped up the stock with nothing but Apple-coattail hype. In early July, as iPhone 6 hype was turning into foaming-at-the-mouth frenzy, the stock pierced the $20-mark, a new high, giving it a market capitalization of nearly $3 billion. A miracle would have to happen to make this work.

But miracles are hard to come by these days. A month ago, when its sapphire displays didn’t show up in the new iPhone, its stock began to swoon. By Friday, it was down to $11, giving it a still ludicrous market capitalization of $1.5 billion.

Then today, the company announced that it had filed for bankruptcy court protection under Chapter 11. Party over.

“GT has a strong and fundamentally sound underlying business,” explained CEO Tom Gutierrez. So the company expects to “conduct business as usual,” as it struggles to put together a reorganization plan and line up debtor-in-possession financing.

It wasn’t “business as usual” for the stockholders. They’ve most likely been dispossessed in one fell swoop. Creditors will end up with much or all of the company. Shares fell off a cliff and after numerous trading halts landed at $0.80 a share, down 93% in a single day.

Predictable?

Not if you ask Wall Street. Only hype, hope, and hoopla matter. Buy, buy, buy. The hype was deafening. The financial media had jumped on board. GT’s sapphire displays in millions of iPhones would make everyone rich.

How GT Advanced Technologies was able to accumulate so much debt in such a short time, how it found creditors willing to extent that much credit even while its business was falling apart for all to see – that’s the miracle here. The mere hope of an iPhone deal, however unsubstantiated, caused creditors to close their eyes and hold their noses and extend credit. And it lured investors into plowing their money into the stock and inflate it to where at its peak in July the company was worth $3 billion. Which has now evaporated.

This is what the Fed has purposefully wrought. By wringing any notion of risk from the system, by making sure everyone believed that all debt would be paid off in full no matter how shaky the company and that all assets would only rise in value, and by pushing yield-desperate investors to the end of their wits, the Fed has enabled GT to get and burn new money. And it has encouraged Wall Street to push new investors into the trap.

But this Fed-inflated credit bubble is scheduled for demolition. QE is petering out this month. Interest rates are likely to rise next year. Yield investors are opening their eyes and taking whiffs, and they suddenly see that they have something to fear: losing their capital. They’re no longer quite as willing to plow new money into iffy companies to bail out old money. When that happens, as it did with GT, it’s the end for stockholders. And numerous other companies, burdened by what was once an endless supply of nearly free debt that suddenly congeals and can’t be dealt with any longer, will be contemplating the same fate the moment their access to this supply of nearly free money begins to dry up.

On a day like this, when markets stumble, maybe you have other things to worry about. But you no longer know if any of the quotes you see are real. Read…. This Chart Shows How You Get Screwed in the Stock Market

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  4 comments for “Credit Bubble Begins to Exact its Pound of Flesh: GT Advanced Tech Soars, Crashes, and Burns

  1. Petunia
    Oct 6, 2014 at 5:35 pm

    The biggest take away here is that a set of audited financial statements is worthless. Just like Bear Stearns, Lehman, and Enron, one minute they are the best the next minute they are gone, and nobody saw it coming.

  2. emma
    Oct 6, 2014 at 5:47 pm

    Thanks tony spot on again.

    The tick data => http://bit.ly/1fMcakI is indicator the pros use, and has been deadly accurate lately, and hinting more dowside on Russell and Nassie soon. Short term.

    With all this syria, ebola, fed speaking coming, this week is sure setting up to be a beauty. :-) helmets with chin straps required yes?

  3. Vespa P200E
    Oct 6, 2014 at 6:11 pm

    Is GT Advanced Tech the canary in the coal mine of both equity and bond market going amok or some kind of black swan moment akin to Lehman/Bear Stearns 6 yrs ago?

    I mean if AAPL’s key component supplier goes belly up than what does it say about what may be indeed fragile electronics supply chain mostly based in China and Taiwan?

    • Oct 6, 2014 at 10:00 pm

      It could well be a canary in the coal mine.

      GT was not actually a key component supplier to Apple. That was just Wall Street hype. I don’t know how close they got to making a real deal on supplying displays. Could very well have been just a distant and very faint possibility that was held out for investors to swallow hook, line, and sinker. And they did.

      The bankruptcy is a sign that they couldn’t get any more new money. The credit market was shutting the door in their face. And that is a canary for stocks: that’s why bankruptcies happen.

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