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"Risk comes from not knowing what you're doing" Warren Buffett I look and sift the world for such misplaced bets. When I occasionally find one, I first exploit it for profit. Then, I write about it for anyone else interested in such ideas. Twitter: @unemon1 Scribd:... More
  • USEC Inc. An Example Of Market Failing To Immediately Reach Its Equilibrium.  1 comment
    Dec 16, 2013 4:59 PM | about stocks: LEU

    On December 16, 2013, USEC Inc. ("USEC" or the "Company") announced that it has reached an agreement with a majority of the holders of USEC's outstanding 3.0% convertible senior notes due October 1, 2014 (the "Convertible Notes") on the terms of a financial restructuring plan.

    THE MARKET STILL NEEDS TO REFLECT SUCH A TRANSACTION IN ITS VALUATIONS.

    The Convertible holders agreed to cancel the Convertible bond ($540m) in exchange of a $200m new debt/bond and 79.04% of the new Company.

    --> "79.04% was valued 340m USD" of face Value.

    Since Current shareholders will get 5% of the New Co., the implied value of the current shares shares was $4.38 (21.4m market Cap)

    However, to see the fair price of USU shares currently trading ... it is useful to look at the trading price of the Convertible Bond.

    The USEC 2014 convertible Bond is currently trading at 30% of its face value. Theoretically you could get the 540m convertible bonds for just 162m USD.

    So, for "just" 62m USD ... you could get 200m of Debt of the new post-reorganization Company .. and ...79.04% of its post-reorganization common shares!!

    Scenario 1 - New bond/debt will be trading at face value.

    This would mean that by spending $162m today you could own a bond valued at $200m and ...79.04% of the new USEC.

    THE 79.04% Equity would be valued at $-38m ($162m-$200m).

    resulting in an implied value of all the current shares of about -$2.40m ... or $-0.49 per share (on a 4.9m outstanding shares basis)

    Scenario 2 - New bond/debt will be trading at 50% of the face value.

    This would mean that by spending $162m today you could own a bond valued at $100m and ...79.04% of the new USEC.

    THE 79.04% Equity would be valued at $62m ($162m-$100m).

    resulting in an implied value of all the current shares of about -$3.92m ... or $0.80 per share (on a 4.9m outstanding shares basis)

    The market is clearly not in Equilibrium... since USU shares are currently trading at $3.75

    In order for the market to be in Equilibrium (under Scenario 2.) the Convertible Bond (currently outstanding) ... should be trading at 72.22% of it face Value (currently trading at 30%)!

    72.22% =( ((($3.75m*4.9m)/0.05)*0.7904)+$100m)/($540m)

    I do expect the price of the USU shares and the bond Prices to converge. Bond will outperform Shares until the Equilibrium is reached!

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  • UNEMON1
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    Comments (251) | Send Message
     
    Author’s reply » Correction: the Convertible Bond Nominal Value is not $540m ... BUT $530m

     

    This causes the true/real numbers to be slightly different to those presented here.
    27 Dec 2013, 03:41 AM Reply Like
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