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laterre

laterre
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  • After Losing Half Of Its Value, The Largest Gold Producer Is Still A Sell [View article]
    I don't think we fundamentally disagree--or at least our observations are compossible with each other.

    45X coverage is risible--that's like having no debt at all. 3X coverage isn't investment grade, which is why it's realistically a BB or BBB credit. Looks like they've aggressively made some acquisitions (including some bad ones) and are now eating some of them by write-downs. Probably got a little in front of their skis when gold prices were supposed to go through the roof.

    All that said, I don't lose a lot of sleep with a company covering their interest 3X over--neither do other investors, apparently, which is why their notes are trading only 300 bps wide of treasuries. $850 AISC is still profitable at $1150 an ounce, and they've got assets they can unload to delever themselves. They won't come out and say it, but an equity issuance wouldn't be a bad thing. Certain kinds of enterprises, especially deeply cyclical commodities, really ought to be financed mainly with equity.

    Re. "solvency"--I'm not sure what you mean by that. very few cos--even IG credits--would be solvent if they were suddenly unable to roll their debt. ABX is easily covering their debt service; has ample liquidity over the next 2-3 years; has cut capex and opex in response to the new price environment; is planning to sell assets to raise more cash to retire LT debt; and looks to have an enterprise value and assets that cover the unsecured debt.

    is this a great business going forward if we stay at $1100 gold? Probably not. But mgmt obviously cares about the debt (and is behaving responsibly) by delevering and diverting operating cash flows from capex to debt retirement. The red flag would be if they can't execute any sales to deleverage--or if gold tanks below $1000.

    Not my area--and I don't follow this co closely--but your characterization seems excessively dire.
    Mar 22, 2015. 11:15 AM | 2 Likes Like |Link to Comment
  • After Losing Half Of Its Value, The Largest Gold Producer Is Still A Sell [View article]
    Any company in a position to reduce its long term debt by $3B a year is by definition not in distress.

    Show us the debt service coverage ratios. Unless they're below 1.5:1, yawn... It's a boring BBB credit.
    Mar 21, 2015. 08:58 PM | 3 Likes Like |Link to Comment
  • After Losing Half Of Its Value, The Largest Gold Producer Is Still A Sell [View article]
    No opinion on whether the equity is overpriced or underpriced. It's probably a first derivative of gold prices, and your guess (which is what it amounts to) is as good as anyone's. Flip a coin it goes up or down, with gold. But the bond market does not share your view that that debt is "stressed." YTM on even the lowest coupon debt is in the 4.5-5% range--borderline investment grade. If your thesis is that high debt is going to take them down, what's your revisionist estimate on coverage? Looking at it for 5 minutes, I don't see any short or long term coverage/liquidity issues.
    Mar 21, 2015. 08:53 PM | 1 Like Like |Link to Comment
  • Pacific Coast Oil Trust: 6.5% Yield With Income Upside [View article]
    With a $3 handle this is starting to look *very* interesting. Price sensitive, time insensitive folks might want to: (a) read the trust indentures *very* carefully (Philadelphia lawyer-like) and reassure themselves of the covenants re. liquidation upon 2 years of minimum income; and (b) upon satisfactory completion of (a), start stashing some of this away for a rainy day.
    Mar 21, 2015. 08:04 PM | 1 Like Like |Link to Comment
  • Dovish Comments From The Fed Make 12% Dividend American Capital Agency Attractive [View article]
    He also blew up (or, more charitably: presided over the blow up) of the 2ND (not the first) largest mbs portfolio in the world. Make of that fact what you want. I tend to think it's irrelevant in the current environment, but FWIW...

    Like somebody below says, didn't keep him from getting his hat handed to him in 2013 when the Fed tapered prematurely. But then again, he wasn't alone.
    Mar 20, 2015. 07:36 PM | Likes Like |Link to Comment
  • Lumber Liquidators A Value Play? [View article]
    Lots of us in the "market" like to make wagers that have positive expectancy--unlike Roulette. Like "heads we win a little, or only lose a little; tails we win a lot."

    LL doesn't seem to meet these criteria, yet.
    Mar 20, 2015. 04:13 PM | Likes Like |Link to Comment
  • Lumber Liquidators A Value Play? [View article]
    Thanks. Will have to check out the options route, although I hate going there--especially if there's some distressed debt to pick up with nice carry, which I gather there isn't here, yet.

    Yah, ditto on Tilson. Guy's a walking contrary indicator: the nicest euphemism I can come up with without getting myself banned from SA is that no one ever went broke fading T.
    Mar 19, 2015. 04:09 PM | 1 Like Like |Link to Comment
  • Lumber Liquidators A Value Play? [View article]
    Hey, thanks Max. Just went back and read the *outstanding*, clear-eyed analyses you've done of the complicated technical issues of testing. A model of inductive thinking for all investors--bulls and bears alike.

    Technically, what you say makes sense, and my gut is that LL is getting a raw deal from the "gotcha" crowd. But at the same time, bulls can be 100% right in the technical analysis of the flaws (or regulatory irrelevance) of deconstructive testing but the company still gets buried by legal/ administrative/ reputational factors.

    I like that they have/had little or no debt, and could potentially ride out a decline in sales for some time until the brouhaha calms down. At the same time, though, when one tries to spitball a range of potential outcomes and assign weighted probabilities for an expected valuation, the arithmetic mean may be positive but the geometric mean is still a zero. I'd need it to get *much* cheaper before jumping in...
    Mar 19, 2015. 12:57 PM | Likes Like |Link to Comment
  • Lumber Liquidators A Value Play? [View article]
    I love situations where pure uncertainty reigns. But the problem is that the price of LL isn't yet reflecting the full range of potential outcomes--one of which is zero. My guess is people are anchoring (mistakenly) on the fact that this used to be a $100 stock and thinking $30 and change looks like a fair discount. But it was so grossly overpriced to begin with that even now, it looks like a decent but not screaming bargain for a company facing no legal difficulties. Needs to go much lower before the bottom fishing can really begin. Otherwise, for day-traders--have at it. None of the real issues at stake are going to get resolved here for years...
    Mar 19, 2015. 11:02 AM | 1 Like Like |Link to Comment
  • Miller Energy Resources - Another Distressed Preferred With 176% Upside Potential [View article]
    Great analysis, firsttracks. Confirms my impression (and my reason for tossing this hot potato ASAP) that the lenders are now steering the sinking ship.

    Quietly issuing preferreds on those terms ATM is pure desperation--and could arguably (admitted, very arguably) be an SEC violation. Have they updated the outstanding shelf registration statement under which they're doing the pref issuance to reflect material changes in the business and its risks?

    I've seen some messed up capital structures, but wow, this is right up there...
    Mar 15, 2015. 05:17 PM | 1 Like Like |Link to Comment
  • 18.4% Dividend Western Asset Mortgage Capital Is Betting On Higher Interest Rates [View article]
    It's an empirical question, and we'll find out the answer in a couple of weeks when the announce the divvy. They typically provide updated book value, no?

    Regardless of the answer, I stick to my point that when you're running as much leverage as they're using--and that negative convexity magnifies risks to the upside--it's not a dumb move to be overhedged, especially when hedging is so cheap.

    Lastly, it's also worth considering how easy it is to undo the effects of their putative overhedging. If you like the divvy but also want to capture any gains in book from falling rates, you can just add duration in your own portfolio using zeros, TSY futures, etc. Hedging is expensive and difficult to replicate at home, but cheap and easy to undo.
    Mar 6, 2015. 07:59 AM | 1 Like Like |Link to Comment
  • 18.4% Dividend Western Asset Mortgage Capital Is Betting On Higher Interest Rates [View article]
    reikreik is correct, FWIW: "Our portfolio has been positioned to perform well in this environment with increases in the value of our agency and non-agency holdings during the month of January more than offsetting a decline in the value of our hedge positions. As a result our estimated book value has improved since the end of 2014. Anup Agarwal will go into more detail on our outlook investment strategy for 2015."

    Look, I tend to agree with you about the merits of running a duration gap, and am personally anticipating falling--not rising--rates. So in this respect I'm sympathetic to your criticism. it would have been nice in hindsight if they were less hedged. But hindsight is always 20/20, and if rates had spiked last Q, people would be whining that they'd allowed themselves to get broadsided by another rate increase.

    Like it or not, their strategy of overhedging is the more conservative strategy. As volatility in IR increases, there's something to be said for being conservatively positioned, especially as there's more danger to the upside than there is to the downside. Also, as they've made clear numerous times, they dynamically adjust their hedges within a range--taking off some protection as rates move toward the top of their range, and adding something as they move lower.

    One other factor to consider: they're running a higher effective leverage than almost any of their peers (by effective, I mean taking into account the extra volatility of their non-agency securities, some of which, believe it or not, do have positive duration...). When you're more aggressive in one facet of your book, it never hurts to be more conservative on another.

    As for price, I've been reducing the trading bucket of my WMC into this runup. Still one of my largest holdings.
    Mar 5, 2015. 11:20 AM | 1 Like Like |Link to Comment
  • Walter Energy to issue 8.65M shares in exchange for $66.7M in notes [View news story]
    I'm the biggest scoff around (and proudly so!) and take no offense whatsoever. But there's a distinction between betting on coal (which I really kinda like, actually) and expecting this mangled corpse of a capital structure that is WLT to get up and dance around. Coal's still got a great future ahead of it, but alas, numbers do tell stories, and the numbers on WLT say to stick a fork in them.

    Charbon's probably right that there's at least one last convulsive short squeeze left in the stock before the end of 2015.
    Mar 4, 2015. 09:04 AM | Likes Like |Link to Comment
  • Walter Energy to issue 8.65M shares in exchange for $66.7M in notes [View news story]
    Yup, still following this as the last of what was originally a short equity/ long the unsecureds trade. Closed out the short leg of the trade a long time back. Because of the theta/ cost of hedging, my original wager really amounted to whether they died quickly or slowly. Had they gone quickly, I would have made a fair amount. As it went, I'll break even or do just slightly better--depending how many more coupons they squeeze out, or, failing that, what the nuisance value of the unsecureds ends up being in BK. Unsecureds might be good for *maybe* two more coupons, best case, plus a courtesy tip for 3-5% of the Newco to head off all the nuisance objections. There's no upside to selling at 12, so I'll wait.

    Don't have to be a Monday AM QB to conclude that these guys squandered some big opportunities to delever their balance sheet. Instead they just piled on more debt. Sure, they were running against a nasty met coal market, but part of being a successful capital allocator in a cyclical industry is that your best case or even baseline scenario shouldn't require historically high prices for met. Sorry, but that's on them.

    Who really knows why they took the exchange offer. Depending on your risk aversion or need to maintain positive carry for investors, sometimes taking less upfront and moving down the road is worth it, especially if you're a fund that needs to maximize cash flow/yield. Some have the luxury of playing the long game, other don't. But even on your more hopeful construal of the endgame, you'd have to agree that they're gonna dispose of the shares sooner rather than later, lest they end up right behind me, and even more SOL, in Delaware.
    Mar 3, 2015. 02:52 PM | 1 Like Like |Link to Comment
  • Walter Energy to issue 8.65M shares in exchange for $66.7M in notes [View news story]
    Ah, Charbon, mon ami, I envy your optimism--I really do!

    You likely answered your own question as to why the noteholders would do this deal--they want out with something, and the equity is more liquid than trying to unload a big chunk of the unsecured notes or sticking it out through a long and convoluted bk with no positive carry. Can you imagine? Some folks just don't have an appetite for such things. Doubt they'll dump the shares in any way that's noticeably lumpy, but they'll bleed them out over time to maximize their recovery.

    Sheer genius on mgmt's part to issue stock at $7.71. But just imagine if they'd instead issued stock (raised cash) at $20 a share when they had the chance last year, or, imagine this, financed the whole Western Coal acquisition with equity rather than leveraging up to the hilt at the top of the market. But, ah, no, that would have interfered with their incentives and precious stock options vesting. Better to bury their heads in the sand, postpone any major capital structure moves, and pray like crazy for met prices to recover. That usually works.

    As a noteholder, I'd be up for a soft restructuring where I got a significant portion of the new equity, but I doubt the senior lenders--who are already going to take a haircut in this mess--are feeling especially magnanimous. And rather than accept a tender offer in soon-to-be worthless stock, I'd much prefer to hold out, force them into BK when they can't pay me, and take my chances fighting it out with the senior lenders. The more dupes who take the tender in shares, the less us remaining noteholders have to share in BK.

    Good luck to all of us left riding on the SS Walter as we lurch onward to Delaware!
    Mar 3, 2015. 12:32 PM | 2 Likes Like |Link to Comment
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