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  • Orchid Island Capital: A Deep Look Part II [View article]
    I have no position in Bimini or Orchid--and no axe to grind one way or another.

    But as someone who's followed the mreit and mortgage finance space for many years, I have to say that this article and the other are pretty shallow.

    Like several of the other more aggressive non-agency mreits, Bimini blew up during the financial crisis under the management of Zimmer (who jumped ship to form ARR) and the current crew (who stayed put to clean up the mess). They were playing with jumbo and non-conforming mortgages at high leverage, and like so many players at the time (including, we forget so easily, Freddie Mac's proprietary book with Gary Kain at the helm) they got fried when the non-agency market seized up. Draw whatever conclusions you want to draw from their performance in the face of that crisis, which took down half of Wall Street, the Agencies, several BDCs, and virtually everybody who had anything to do with the more aggressive end of the mortgage origination market.

    The copious "litigation" you cite is virtually all related to the 2007-2009 blowup--either claims that they misled investors in securitizations or failed to make good on commitments to buyback securities. Everyone in the origination/ securitization end of this space has had to wade through these kinds of lawsuits, some of which undoubtedly have merit.

    They had (if I recall) some legacy assets, whose value was being completely obscured by the overhang of pending litigation. No underwriter would do a capital raise for Bimini due to this overhang. Thus, Orchid was spun off as a "clean" vehicle into which the legacy assets and new capital could be put to work.

    The mgmt agreement that you cite as so egregious--with the triple cancellation penalties and sliding scale on expenses and AUM--is standard for the industry and designed (a) to incubate the fledlgling spinoff and (b) serve as a poison pill to keep someone (Goldstein and Bulldog, cough...) from buying up the assets below book and stripping them from the mgmt team.

    Whether these guys know how to run an mreit is an open question. You can be the judge of how probitive we ought to consider failure in 2007-2009 for answering that question. But I personally don't think that any of the random factoids you gather together have much relevance to their likely performance going forward.

    No position or any intention to initiate one.
    Jun 12, 2014. 04:58 PM | 3 Likes Like |Link to Comment
  • RadioShack: Will The Vultures Circling RadioShack Have To Call Off Their Feast? [View article]
    "'re telling me there's a chance!"--Jim Carrey
    Jun 12, 2014. 03:46 PM | 6 Likes Like |Link to Comment
  • RadioShack: The Reports Are Telling [View article]
    Thanks for the kind words, billyjoerob.

    I'm happy to chime in occasionally when I see something egregiously wrong that is likely to cost people money, but there's nothing I can gain--financially or professionally--from contributing to SA. Too much time already to make comments. So I'll stay in the peanut gallery ;)
    Jun 11, 2014. 12:40 PM | Likes Like |Link to Comment
  • RadioShack: The Reports Are Telling [View article]
    Takes some courage to come out and admit you were wrong, so mad props to you for the follow-up mea culpa. They may still have some kind of exchange offer, debt for equity swap up their sleeves that can keep the lights on into 2015, but this is (as should have been obvious from the get-go) headed for zero sooner or later.

    But turning this into a teachable moment, as a "hedge fund analyst" you might consider where your investment thesis went wrong.

    Unlike some of the other bulls on here (who *still* haven't figured out that you can't just take the amount of cash on hand, divide by the number of shares, and derive a liquidation value...) you were aware from the get go that there is no margin of safety with this stock. The downside is zero, and there's a very high probability of a complete loss for the equity-holders at any moment should they declare Ch. 11. So at least you started off with the disclaimer that this was all highly speculative (i.e. gambling not an investment).

    Given that we know the downside is zero, what is the reasonable upside in a turnaround (short squeeze)? Until recently the call options were pretty cheap, and thus taking a flier on cheap OTM calls (accompanied by any favorable news) would have gotten you at least 4 or 5 to 1. Assuming a 5:1 payout on any material positive developments, this implies more than an 80% chance of a near term bankruptcy. Does this seem high or low given what we knew about the capital structure before earnings?

    As far as an actual "turnaround," which you were postulating without any supporting data or projections, start with the assumption that SGA and debt service is a sunk cost. Assuming no change to margins, what revenue levels would they have to achieve in order to make a turnaround viable? Does it seem reasonable that revenues could be increased that much (even with the fancy new website that was your single "data" point in the last post) in a hyper-competitive retail space where their better positioned challengers are also struggling?

    Flipping it around the other way, assume revenues stayed constant (they won't, but assume so for the upside case...). Again, taking the fixed overhead costs and debt service as a constant, what MARGINS would they have to achieve on the exact same revenue stream in order to get back to break-even levels on EBITDA? Does margin expansion to this level seem reasonable as compared to their peers such as Best Buy, etc.?

    Hint: for at least the past two years, the results of all these calculations (not to speak of the bond prices) did not auger that a turnaround is within the subset of reasonable possibilities.

    A better process would, I think, have discouraged you from making this call. But as with any of these stocks floating around in the BK zone, it may still spike for the day traders for reasons that have absolutely nothing to do with a "turnaround."
    Jun 11, 2014. 10:34 AM | Likes Like |Link to Comment
  • RadioShack flies higher. Catalyst? [View news story]
    2019 Notes have crept up nearly 10pts in the past week (well before the big options trade). Anyone smell an exchange offer, unsecured debt for equity?
    May 29, 2014. 11:53 AM | 3 Likes Like |Link to Comment
  • RadioShack: The Ultimate Contrarian Play [View article]

    With all due respect, I don't understand your focus on the existence of "revenues" as forming some kind of positive catalyst for this company. Yes, they have "revenues"--not inconsiderable ones given that they're a national chain with locations in practically every regional mall and strip center. And revenues are indeed a necessary condition for any viable company. But they're not a sufficient condition, and what matters is the cost of those revenues, margins, and most importantly, the debt load. In RSH's case, it's this last point that you and the bulls are ignoring. There is no way a company with their free cash flow can service the amount of debt they are carrying. They are burning cash--a fact which they're trying to disguise by liquidating inventory and (unsuccessfully) trying to close down stores. Unless they do something to restructure the debt, the service will kill them in a matter of 2-3 quarters.

    Don't believe the bears on this? Just look at where the bond market is pricing their 2019 unsecured debt: .40 on the $, which in bond-speak is 100% certainty of a default, and mixed prospects for any recovery on the unsecured debt. If you own the stock and they file, you get zip, nada.

    So in the interest of "dialogue," what do you know that the bond market doesn't see?
    May 21, 2014. 09:24 AM | 1 Like Like |Link to Comment
  • RadioShack: The Ultimate Contrarian Play [View article]
    Sedric has it right...

    Look at where the equity stands relative to the senior debt. They owe so much to the senior lenders, the credit lines, and the senior unsecured bondholders that the equity is worthless. Book value is mainly inventory and improvements, and any cash is borrowed and pledged to lenders senior to equity in the capital structure.
    May 18, 2014. 06:52 PM | 1 Like Like |Link to Comment
  • RadioShack: The Ultimate Contrarian Play [View article]
    Did I say the business was sound? Let me be crystal-clear: the company is a financial disaster, and this is very likely a zero.

    But just because the capital structure is a mess and they're likely headed for bankruptcy, that does not mean this is a safe and juicy short with lots of meat left on the bone. With the heavy short interest, there are ways that shorts can get their fingers burned on this one, as in any terminal BK play.

    Going long the equity is a really dumb and dangerous play, and I'm short the stock via puts myself. But I think the risk/reward on this is one is only meh. Puts are expensive, and the mgmt has every incentive to keep the lights on (and theta burning) as long as possible.

    I give this a 6.5/10 as a short play....
    May 18, 2014. 09:24 AM | Likes Like |Link to Comment
  • RadioShack: The Ultimate Contrarian Play [View article]
    In fairness, there are a couple of points that do support the bull case.

    The short interest is huge, and I could imagine any kind of restructuring announcement/ exchange offer for the 2019s that leaves the equity intact (a la Genco) being regarded as positive (and sparking a short squeeze).

    The management is also incentivized with those cash bonuses to keep the lights on until early 2015. Notice that they voted themselves CASH bonuses--not stock options. They all know this is going to end in Ch. 11 sooner or later with the equity worthless.

    The downside options are expensive and there isn't a huge amount of meat left on the bone in terms of a short here, IMO. Easy money was made last year (grins;)

    All that said, this is an awful capital structure, saddled with way too much debt on terms that make Rick's Pawn Shop look generous. Something like 25-30% of their free cash flow is going to debt service. With the senior lenders now taking a hard line, there will come a time very soon when they push back against cash going out the door to pay coupons on the unsecured 2019s. Either the 2019s will have to agree to a voluntary restructuring that gives them all or most of the equity, or it'll go into an invol Ch. 11.

    This can go either way. Maybe the bulls will double their money in a short term trade/ short squeeze. Weird things happen when these companies are in the BK zone. Look at OSH last year. But it's just as likely, IMO, that sometime in the next six months the lenders will pull the plug on the credit line over some covenant violation or other, and this puppy will file a quick and dirty Ch. 11 late one Sunday night, and the bulls will wake up on Monday AM with worthless equity. Heads you win 100%, tails you lose 100%. That's not investing, it's gambling. Make sure you're wearing your asbestos mittens if you want to play this one...

    Disclosure: long 2019 bonds; Jan 15 puts, with very low conviction either way.
    May 15, 2014. 10:04 AM | 5 Likes Like |Link to Comment
  • RadioShack: The Ultimate Contrarian Play [View article]
    Question for all the RSH bulls:

    If the equity is supposedly such a great contrarian deal, why is the senior unsecured debt (above the equity in the capital structure) trading at .40 on the $1?

    What are you seeing here that the bond market is missing?
    May 14, 2014. 07:28 PM | 3 Likes Like |Link to Comment
  • Avoid These 2 High-Yield Mortgage REITs [View article]
    Hah, yep, your "avoid" call was right for the wrong reasons! Better than being wrong for the right reasons.

    I still like WMC--and more at these prices than at $16+--but I really question their move into the hybrid model. Non-agency has already been so bid up, it's like they're late to the party, and there's less look-through possible on the hybrid model.

    It's all in the price, I suppose, and playing the cycle. It'll pick up .50 or $1 once the divvy announcements come rolling around.
    May 8, 2014. 09:25 AM | Likes Like |Link to Comment
  • Avoid These 2 High-Yield Mortgage REITs [View article]
    Hey Tucker,

    Yah, can't please all of the people all of the time ;) But for anyone in the FI world, there's no comparison in terms of mgmt talent between the guys at Wamco (the Pimco of Pasadena) and a couple of guys down in FL who already blew up one mreit and struggled even during the great bull mreit run. Of course price enters into the equation, too. I'd prob rather buy ARR at a 20% discount to book than put new money into WMC when it was trading at 15% premium to NAV, and the mgmt all but fired a flare gun warning there'd be an SPO...

    Turns out the SPO was accretive both to book as well as to earnings (by diluting the mgmt expenses across a larger capital base). So there goes your theory that mgmt behaved irresponsibly and dilutively.

    On a *very* quick glance, the decisive parts of the earnings look decent once one gets past the ugly headline #. NIM at 1.8% is solid given where the others are at in the space; they've cranked the leverage back up to 8ish (plus the return on the original asset), or 1.8 * 9=16% gross ROE. Not too shabby. Depending on how aggressive they want to get, I could see a .55 divvy maintained pretty easily.

    Book is up nicely to close to $15, meaning it's currently trading at a slight discount. I got my fill at the SPO, but might be a buying opp as the market spits up a little bit on a misreading of the ugly headline loss #s...

    Look forward to their color on the CC as the the big pivot to a hybrid and how they see things going forward.

    Edit--market not digesting the headline #s well. if this thing tanks much below 14 (heading there fast) I may pick up some more shares. getting wmc at 10% discount and a 15-16% ROE is tempting...
    May 8, 2014. 08:55 AM | Likes Like |Link to Comment
  • Avoid These 2 High-Yield Mortgage REITs [View article]
    You are 100% correct that the WMC secondary was probably mildly dilutive to book value. However, what you fail to mention is that it was also accretive to earnings and ROE going forward, as it increased substantially the number of shares against which management expenses (a fixed cost) were charged. TWO did a couple of marginal SPOs for this same reason early on in their buildout, as did EFC not too long ago, if I'm not mistaken. Fulton (the former CIO) estimated on the Yahoo board that increasing their share count could add upwards of 1% to ROE on a going-forward basis. That's a permanent juice to earnings versus a one-time hit to NAV--arguably a responsible trade-off.

    Agree that the WMC dividend is likely to be cut slightly on a going-forward basis as they transition from a straight-shot agency mreit into a hybrid under the guidance of the new CIO. Still, even at a draconian cut to .50, this is nearly 14%. I'm expecting .55, which comes in around 15%. Hardly chump change. And the move into the non-agency/ hybrid space (which I personally think is ill-timed, FWIW, and makes me less enthusiastic about them) comes with lower leverage and a negative duration. Again, a reasonable trade-off.

    Mentioning the (in)competency of the mgmt of ARR and WMC in the same article is like mixing horse piddle with a fine bourdeaux. Agree with you that ARR is a train wreck in progress.
    May 7, 2014. 02:24 PM | 3 Likes Like |Link to Comment
  • This ETN Focuses On Business Development Companies And Offers A 13% Yield [View article]
    Not sure whether bluedreamdreamer's response was meant for me, but revisiting my comment six months or so onward, I still don't think this is a great investment (though it's gotten cheaper, which always helps).

    So the counter-arguments (which makes a lot of sense, BTW) are the following:

    A) some of these BDCs issue floating rate loans, which will help cushion the "inevitable" increases in rates. True enough, but while higher rates and low durations are great for the lenders, they're not necessarily a good thing for cash-strapped borrowers. If Such-and-Such Industries is a marginal credit with 1.1 coverage when the loan is at the floor rate, what kind of credit is it going to be when rates spike 200bps and suddenly that coverage is now .95? Given the disproportionate leverage you're able to undertake when rates are so low, the effects of rising rates (if indeed rates are rising) is magnified for borrowers in terms of coverage and debt service. What looks like a decent credit when debt service is at .75 EBITDA smells a little different when it suddenly starts consuming all your free cash flow.

    B) The performance of these middle market loans is more highly correlated with the overall economy ("credit") than with rates ("duration"), and so long as the overall economy ticks along, Marginal Business, Inc. will do just fine. Again, maybe that's the case, but not only don't I see the green shoots, but I see shrinking corporate earnings pretty much across the board. If these are showing up at blue chips like McDs or IBM, how do you think they must be impacting smaller, more highly leveraged credits with constrained balance sheets, narrow margins, and where a decrease of 10% in top line earnings could have major impacts on debt coverage ratios.

    To be clear: I'm not saying this or any of the BDCs are going to turn out as bad investments in the short or immediate term. I'm just saying that these things are the absolute ground-zero, poster children for the distortionary effects of QE and ZIRP, and that at some point in the medium to long term there will be fallout. Also, notwithstanding my hypotheticals above about rising rates (which seems to backstop the bull thesis for these BDCs) I see rates going lower in the short term, meaning that you're better off buying duration than credit...
    Apr 26, 2014. 11:19 AM | 1 Like Like |Link to Comment
  • Farmland Partners IPO Offers Investors Unique Opportunity To Own Farmland [View article]
    Ugly opening, as expected. Might be worth putting in a junk bid as this is a rough day to be peddling an IPO and weird things can happen with the tape. But given that we don't know the fair market value of the land, it's hard to figure out what a respectable discount might be to NAV at which to buy. By the time you take all the debt and convoluted ownership structure of the OP units into account, even $10 may be overpaying...
    Apr 11, 2014. 10:22 AM | 1 Like Like |Link to Comment