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  • Confident Of Outcomes In Puerto Rico, MBIA Aggressively Returns Capital To Shareholders  [View article]
    I own many defaulted bonds (Detroit, etc.) whose coupons are being paid--in part or whole--by the insurers, and the interest (whether paid by the issuer or insurer) remains tax deductible. If I'm wrong about this, then the IRS can come and take me away in handcuffs.

    What is NOT tax deductible are discounts to par (i.e. capital gains) for bonds purchased in the secondary market below face value. Insofar as a significant portion of the YTM from a potential buyback of distressed bonds comes via a purchase discount, this needs to be accreted as TAXABLE income throughout the life of the bond.
    Nov 23, 2015. 09:21 AM | Likes Like |Link to Comment
  • Confident Of Outcomes In Puerto Rico, MBIA Aggressively Returns Capital To Shareholders  [View article]
    It's a conceptual point, and prob moot in any case, but YTM (a large component of which in a distressed case such as this one would be a function of the discount to par) is a rough (though not perfect) inverse of the net present value of the future liability.

    Take AMBAC, for example, where they insure a bunch of super long dated CABs (zero coupons, 2047 maturity, e.g. CUSIP 74529JAN5). These are currently changing hands at 10, for a YTM of 7.2%. Here the "yield to maturity" is 100% a function of the discount to par, and conversely, the current market price (i.e. .10 on the $) represents the market's approximation of the NPV of the future liability (the payout in 2047). If AMBAC bought up all of these today, they'd limit their exposure to .10 on the $ (representing a discount rate of 7.2%, which would otherwise be accreted to the owner throughout the term of the bond).

    It's slightly more complicated in the case of a coupon-paying bond, where the YTM is the accretable discount + the coupon, but still it's a spit-ball way of thinking about how one might model the future liability. This ONLY works, of course, if MBI or whoever actually takes advantage of the discount and BUYS THE BOND. Otherwise, as you say, it makes more sense to use the lower discount rate of whatever they're otherwise earning on their portfolio.

    Yes, payments from bond insurers in lieu of defaulted tax exempt issuers are also tax exempt (for anyone entitled to the tax exemption). The only question would be whether corporate holders such as MBI (if they bought the bonds) are entitled to the tax exemption in the first place. I don't know the answer to this, but in terms of the market pricing for existing holders, it shouldn't matter.
    Nov 20, 2015. 02:22 PM | Likes Like |Link to Comment
  • Confident Of Outcomes In Puerto Rico, MBIA Aggressively Returns Capital To Shareholders  [View article]
    With a quick scan, 2020-2025-ish NATL-wrapped PREPA 5s are being offered at 99-101. Hardly prices that one needs to jump on. If things get worse (and NATL needs to become really concerned) prices of the insured debt will fall.

    I disagree about using YTM of their PR wraps as the appropriate discount rate for future PR liabilities. Imagine that you have $100 of future liabilities (say, a balloon mortgage). Imagine further that you can retire that liability at .75 on the $. Your expected return (and the opportunity cost) is the annualized YTM of that potential investment.

    Not to say that they could buy ALL their future obligations back at a discount...
    Nov 20, 2015. 10:41 AM | Likes Like |Link to Comment
  • Confident Of Outcomes In Puerto Rico, MBIA Aggressively Returns Capital To Shareholders  [View article]
    True--the discount rate to arrive at NPV of future PR liabilities would most conservatively be the current rate of return on their portfolio, which prob isn't that high. But given the long-term nature of most of their obligations, even a modest discount rate of 3 or 3.5% yields a much less scary number than those you're floating.

    Another way of looking at it is that the appropriate discount rate to use would be the current YTM of their outstanding insured PR liabilities, on the assumption that they could buy these back at market prices and "earn" the current 5-8% YTM. Thinking about their liabilities that way--given the optionality of purchasing bonds at a discount--yields an even more modest expectation for losses.

    As to whether they've been buying back aggressively--really not sure, but I'd suspect prob no. The main reason why they might logically have chosen to *wait* is that prices of National-wrapped PR debt haven't dipped nearly to the extent of uninsured PR credits. There's endogeneity in this strategy, no, to the extent that the market places confidence in National's ability to make good on the liabilities, there's not as much of an opportunity to purchase at material discounts. Conversely, if indeed things get worse in PR--and the stronger GO and COFINA credits end up taking material haircuts--then (and not last summer) would be the time to start actively buying.

    As potential buyers, MBI's position is no different than anyone else looking across the capital structure of PR. Thus far, the people who have done best investing in PR have been those who've purchased the longest dated, lower coupon, dicier credits in the .40-.60 range. Those who've been absolutely monkey-hammered are the folks who tried to be cute and buy what were perceived as the stronger credits (COFINAs, short-dated PREPAs, and to some extent the wrapped bonds).

    Game theory says wait to buy back: best case, haircuts end up being modest and limited to the non-constitutional debt, and thus prob solved; worst case, the whole capital structure is impaired, and prices on National-wrapped debt drop even further....
    Nov 20, 2015. 10:11 AM | Likes Like |Link to Comment
  • Confident Of Outcomes In Puerto Rico, MBIA Aggressively Returns Capital To Shareholders  [View article]
    Always better to be pessimistic, and to consider the worst case. So I agree with your general point about the potential negatives and the fact that even under the worst case, it's still a decent buy.

    But you're conceptualizing the losses the wrong way, IMO.

    You're counting both the estimated interest payments they'd need to cover along the way, as well as the final principal payments due at maturity, at gross notional value. That ignores the fact that the net present value of all these future obligations will be lower. You're also ignoring the possibility that they can mitigate some of their exposure by purchasing insured bonds at discounts.

    I worry the GOs may also get a modest haircut, though....
    Nov 19, 2015. 09:20 AM | Likes Like |Link to Comment
  • Confident Of Outcomes In Puerto Rico, MBIA Aggressively Returns Capital To Shareholders  [View article]
    True, there's no clawback to Holdco or National, but if corp goes under, there's also no potential upside from writing it back up in the future. Am I wrong that any potential R&W litigation claims or subrogation rights flow through Corp? In which case, any material losses on Zohar would negate the possibility of ever righting that ship (and potentially adding further value back).

    Point being: this thing is stupid cheap, but it's also likely to be a while before all the dust settles and the true value is realized.
    Nov 11, 2015. 09:12 AM | Likes Like |Link to Comment
  • Confident Of Outcomes In Puerto Rico, MBIA Aggressively Returns Capital To Shareholders  [View article]
    Indeed, this company is ridiculously cheap and misunderstood. Other than Puerto Rico they've got some other warts, such as the Zohar (always confuse that with the dreadful Adam Sandler movie...) CLOs, and the Chicago/ IL overhang. So even when the PR thing clears, there'll still be some litigation uncertainty/ headline risk. But across a 2-3 year horizon this co--like Ambac--is a very attractive investment.
    Nov 8, 2015. 01:32 PM | Likes Like |Link to Comment
  • Is Citron Research Out In 'Left' Field On Valeant?  [View article]
    Disclosure: no position, but watching with great amusement.

    Here's the real problem that the author is pooh-poohing. VRX's drug portfolio, by and large, has very little natural moat, and their outsized ROE is only made possible by (a) incentivizing MDs and patients to prescribe and pay for overpriced on-patent drugs that are incrementally diff from widely available generics sold at a fraction of their overblown prices; and (b) finding insurance cos that are willing to reimburse them for inflated branded prices. Hence the need for the Specialty Pharmacy workarounds.

    Neither of these conditions is likely to obtain now that the cat is out of the bag on their business strategy. Insurers will stop paying for their overpriced on-patent meds. Formerly, some MD prescribes one of the acne medications (say, 5/1 benzaclin) and gives the patient a coupon waiving their copay, they sell a tube of acne cream for $800, with the insurer picking up the tab. Those days are over. From now on, faced with the patient having to shuck out $75-100 in copays--and/or the complete unwillingness of insurers to reimburse VRX products--all that MD will do is write a scrip for a slightly diff formulation (say off-patent Benzoil peroxide you can buy in the store without a scrip and generic 1% clindamycin) and the patient gets exactly the same drug for $10.

    I'm not exaggerating: this is one of their bread and butter products, and it's not atypical. Hard contact lenses, derm creams, aesthetic products, etc. A substantial part of their portfolio are overpriced tweaks on cheap, widely available generics. The demand for these KINDS of products may be relatively inelastic, as you say. But virtually every one of their branded products confronts dozens of generic alts that everyone would pick if they had to eat the copays themselves. Once insurers balk, as they already have, VRX's moat is gone.

    Will this go to zero? Doubtful. But they're facing a permanent impairment of revenues, margins, and goodwill--irrespective of whatever fines or laws they've broken. This will never be the same high-flying company again.
    Nov 4, 2015. 01:43 PM | 1 Like Like |Link to Comment
  • Peabody Energy - When False Perceptions Become Reality  [View article]
    Sorry, "my view"="one's view"

    My own view is the unsecureds are toast.
    Nov 2, 2015. 01:08 PM | Likes Like |Link to Comment
  • Peabody Energy - When False Perceptions Become Reality  [View article]
    Financial assets traded there because of uncertainty--that is, we were operating in an environment of what Howard Marks likes to call "unknown unknowns." Some people were able to keep their wits, reason back to an underlying margin of safety, and it turned out that their hunch that the world wasn't coming to an end and the financial institutions would be bailed out proved to be correct. It might have gone down differently, we shouldn't forget, and those who bought BAC prefs (myself included) could have been hosed like the FNMA prefholders. Anything else is hindsight bias.

    But the fact that these conditions obtained in the case of financial stocks in the Great Recession says nothing about the predicament of deeply indebted coal companies facing the trough of a secular decline in natural resources. They're completely different scenarios, and to infer something about the latter from the former is illogical.

    Most importantly, there's no uncertainty here--only readily calculable risks, whereby unless something very unlikely comes to pass (sharp, quick rebound in coal prices), the unsecured debt will be worthless and wiped out in a BK within 2 years. Calculating cash burn, the inevitable priming of the unsecureds, and the measly recovery values for energy resources right now make this preponderantly likely. That's why the bonds are pricing at +/- 2 years coupons.

    Again, I hope that I'm wrong!
    Nov 2, 2015. 01:05 PM | 2 Likes Like |Link to Comment
  • Peabody Energy - When False Perceptions Become Reality  [View article]
    Also, I get why you think you're right. You have identified some metrics and a meta-narrative that leads you to think you've identified value that everyone else is missing because of irrational fears, biases, prejudices, counter-narratives, etc.

    But I guess what I'm asking is the converse: namely, what do you think OTHER PEOPLE are seeing that leads them to such different conclusions? Why have others thrown this under the bus? Are they seeing something that you aren't?

    Sorry for hectoring you, and getting all philosophical, but I always find it useful to try to see things from the other side, especially when my view is truly an outlier.

    Vaya con Dios!
    Nov 2, 2015. 09:52 AM | 1 Like Like |Link to Comment
  • Peabody Energy - When False Perceptions Become Reality  [View article]
    Maybe you'll be proven right--if indeed coal rebounds and they can weather the storm. More power to you if you can make this one happen.

    But the only margin of safety in the unsecureds is 1.5 to 2 years of coupon payments. Not bad odds, but it's purely a gamble.
    Nov 2, 2015. 09:45 AM | 4 Likes Like |Link to Comment
  • Peabody Energy - When False Perceptions Become Reality  [View article]
    PS: who do you think would participate in a convertible bond deal at this point? The senior secured debt is already de facto a "convertible" in the sense that it'll end up owning the lion's share of the Newco after any filing. Who's going to be willing to put up new money to get in line after that? What rate do you think someone would require to lend them money junior to the revolver?

    My 2 cents: I don't see a viable restructuring here. BK is good for some companies.
    Nov 2, 2015. 09:33 AM | 1 Like Like |Link to Comment
  • Peabody Energy - When False Perceptions Become Reality  [View article]
    Why do you think the bond market is pricing in nearly a 100% chance of default and negligible recovery on their unsecured notes? As you know, they're currently trading in the .15-.18 on the $ range with YTM of almost 80% on the nearest maturity (yield curve inverted). I'm just curious why you think that everyone else (not just the Goldman guy) is getting this so wrong, and you're right?

    It seems like the only irrationality here is that the market is assigning $240M in value through the common equity. Personally wouldn't touch those unsecured notes with asbestos mittens....
    Nov 2, 2015. 09:28 AM | 7 Likes Like |Link to Comment
  • Basic Energy Services misses by $0.08, beats on revenue  [View news story]
    CC highlights...

    So, including seasonality, it looks like Q4 is going to really suck--12-15% decline in revs, but they're hopeful for 1Q 2016.

    They think they can stay cash flow positive for an extended period so long as things don't get much worse.

    Capital structure and liquidity look solid through 2016; after this, they'd look to take on more secured debt (and prime the Notes).

    I still think they survive the cycle, but time will tell...

    Unsecured notes at 40, figuring in two years of coupons, gets you 3 times your money if they make it to the other side.
    Oct 23, 2015. 10:09 AM | Likes Like |Link to Comment