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laterre

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  • 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
  • Walter Energy to issue 8.65M shares in exchange for $66.7M in notes [View news story]
    Alas, too little, too late, Charbon. What's that--like a 15% dilution of the equity just to take out a fractional slice of just one series of noteholders? And you can bet those precious 9M shares will be bleeding out into the market just as fast as the former noteholders can unload them.

    I'm thinking they'll pay the 6/15 coupons on the unsecureds, default on the 12/15 payment, and file sometime in Jan 16 during the 30 day grace period. Senior lenders will take 95% of the company, noteholders will (I'm hoping!) get a nuisance share of the Newco, and equity holders will get a big, fat zero.

    So sad, so avoidable :(
    Mar 3, 2015. 10:04 AM | 1 Like Like |Link to Comment
  • The End Of Western Asset Mortgage's 20% Dividend Yield [View article]
    Not a problem, and don't want to be nit-picky, but you know how things go on the web. Somebody uses the wrong word and suddenly WMC is now a subprime originator... Otherwise, agree 100%.

    Since you bring it up, the whole loan market looks like it could be a really attractive niche. Assume that they can do non-conforming 5 year ARMs at 5%, 30% down, with either a rate reset to Libor+ or a balloon at the end of the initial term. That's a nice fat spread over their short term financing costs, and very little IR risk. Assuming it's well collaterallized and underwritten, that's exactly the kind of loan banks love to hold on their books.

    Now imagine they manage to assemble 50-100 Million worth of these loans. You can securitize the cash flows by selling AAA-rated matched term bonds against 75% of the collateral value to investors who are willing to accept 2.5%. You've locked in permanent, non-recourse financing at a 2.5% spread, you keep the excess cash flows and backends for yourself, and most of the credit risk shifts to the investors. Good work if you can get it...
    Mar 3, 2015. 09:22 AM | Likes Like |Link to Comment
  • The End Of Western Asset Mortgage's 20% Dividend Yield [View article]
    @JHH Alpha

    Actually, in the interest of being 100% accurate, the loans they've acquired are higher in quality than agency mortgages, they're just non-conforming (i.e. loan balances too high to qualify for agency purchase). It's not a bad market, actually, as the borrowers are tightly underwritten and have large downpayments and lots of skin in the game. These are typically the kinds of juicy home loans that banks like to hold on their own books. They're also usually 5/1 or 7/1 ARMS which helps to cut down on the IR risk.

    Don't disagree with your point about overall riskiness, though. WMC's a great company, but anyone playing with mbs at 6 or 7 times leverage is by definition taking some kinds of risk.
    Mar 2, 2015. 02:58 PM | 1 Like Like |Link to Comment
  • The End Of Western Asset Mortgage's 20% Dividend Yield [View article]
    Your characterization of their move into whole loans is misleading. What they're buying--at least as they've described it--are *not* subprime but Alt-A loans. This isn't semantics, as there's a huge distinction in terms of credit quality.

    Subprime are typically deadbeats with 600 credit scores buying 100K bungalows with 5% down. By way of contrast, the kinds of whole loans they're targeting are rich, self-employed people with 750 credit scores who are putting down 30% cash toward a $2.3 Million place in Palo Alto or Miami Beach. Credit risk, yes, but apples and oranges in terms of the loans, and it's technically wrong to refer to these as subprime.

    Presumably once they've assembled enough of these whole loans the plan is to securitize them into MBS, keep the unrated backends for themselves, and profit from the cheap, guaranteed term financing of the securitization.
    Mar 2, 2015. 02:48 PM | 3 Likes Like |Link to Comment
  • Western Asset Mortgage: Best-In-Breed Status? [View article]
    I like these guys a lot, and think they're doing an awesome job. But running above a 7:1 leverage on a hybrid portfolio (as they did at some point in the Q before taking something off at the end) is aggressive. They're still preponderantly an agency portfolio, so it's not apples to apples, but compare that leverage to other "hybrids" such as TWO, MFA, or CIM and you can see how they're throwing off so much spread income compared to peers. They'll probably be fine, but given how much prices on the new GSE risk-sharing securities have bounced around, and that they're moving into illiquid stuff like whole loans and European CMBS, I kinda wish they'd dial it back a little bit....
    Mar 1, 2015. 12:11 AM | 1 Like Like |Link to Comment
  • Western Asset Mortgage: Are You Ready For The 20% Dividend Yield? [View article]
    Happy to have been wrong on the earnings, but looks (at a very quick glance) like they were over-hedged. NIM and spread income look great. Most importantly, market likes what it sees :)

    Trimmed my position 20% today (trading shares, bought in the high 13s) on the big bounce.
    Feb 27, 2015. 03:27 PM | Likes Like |Link to Comment
  • Buying LQD Is A Waste Of Time [View article]
    Agree with the author's main thesis about LQD, and generally support the notion of buying individual bonds as opposed to an ETF or OEF wrapper. If you're concerned about duration/ IR risk, and are content to "lock-in" a given yield by holding to maturity, this is unquestionably the way to go.

    But Unknown Investor nails the bigger problem spot-on. Even for widely traded and *relatively* liquid issues, unless you're trading in blocks of 100K and with a loyal broker dealer who values your repeat business, you're going to get murdered in terms of bid-ask spreads and forget about liquidity when you need it most. If you *truly* intend to hold a bond to maturity, this isn't a huge deal. You get gigged a quarter or half point or so going in, and by the time you amortize this across the life of the bond, it's no biggie. But woe to you if you need to unload an odd lot of something in the meantime, even if it's IG and generally liquid. One round trip in and out of a single bond can eat up as much as the annual fees for a whole portfolio invested in LQD. Word to the wise: that liquidity will not be there when you need out. The better brokers will allow you to show a solid offer out to the market directly, but many/ most will make you solicit bids even if there's an outstanding bid in the market. I've seen normally benign bid-ask spreads explode so wide you could drive a truck between them on a moment's notice. And this is all for plain vanilla IG corporates. For munis or anything high yield, forget about it. You will be crucified if you need to sell an odd lot.

    Also, part of the reason why it might be advantageous to own multiple issues from a single credit is diversification of maturity (not just issuer).

    Another advantage of actively managed OEFs is that they're going to get a look at a wider range of credits than retail investors will ever see. And once you get down beneath the IG credits, what you as a retail investor "see" on offer or in dealer inventory is generally what the smart money no longer wants. It's adverse selection bias. Whenever you see a big bundle of some new B-ish credit suddenly appear in the market, you can be sure that someone else knows something you don't know, and that they're trying to get out before the deluge.
    Feb 25, 2015. 03:06 PM | 8 Likes Like |Link to Comment
  • Annaly Capital Management's (NLY) CEO Wellington Denahan on Q4 2014 Results - Earnings Call Transcript [View article]
    "[I]n a perfect world we would love it if we could time these things perfectly where we put all of our swap book on when rates are low and then buy all of our assets when rates are high. Unfortunately that is not how it goes."

    LOL, understatement of the day by Welli! Betcha they wish they could have a do-over on Fall 2012 through end of 2013, rather than having gotten it exactly backward. Any consolation...at least they weren't alone.
    Feb 25, 2015. 01:16 PM | Likes Like |Link to Comment
  • Seeking Baupost: 'Feel-Good' Bubble Disturbs Hedge Fund Yeti - Part II [View article]
    "Klarman and Buffett talk about value investing in basically the same way..."

    This is an interesting suggestion, and I'm far from an expert on either one of them (so happy to stand corrected or initiate a discussion here).

    But I've never had this impression. Both purport to "buy things cheap" and take advantage of behavioral disconnects e.g. "fearful when others are greedy, and vice-versa" etc. But Klarman (at least based on my recollection of MOS) seems to be more like the original Buffet, that is, buying things that are deeply out of favor (and sometimes for good reason) but for which there is little or no downside in something approaching the absolute worst case, or, alternatively, where the upside is so great that it massively outweighs the downside (asymmetric risk-rewards where "heads I win a little, or at least don't lose everything, tails I win a whole lot"). I'd imagine that LNG, OCN, and a lot of those mysterious biotech names would fit into that basket.

    By contrast, at least by my reckoning, the later Buffet is more concerned about great franchises, moats, and paying a reasonable price for reliable growth. He's not out there picking up cigar butts or applying the Kelly Rule to place surgical bets on unusual situations and off-the-run instruments where the facts are hard or not widely understood.

    Maybe I'm wrong, but I see their styles as very different, though both broadly focused on finding "value" and avoiding large drawdowns.
    Feb 25, 2015. 10:32 AM | 1 Like Like |Link to Comment
  • Seeking Baupost: 'Feel-Good' Bubble Disturbs Hedge Fund Yeti - Part II [View article]
    Lots of asymmetric risk-rewards, which may be the best you can do in a market where virtually nothing is strictly speaking "cheap." Agree that LNG is a bit speculative in that it's heavily forward-looking, but assuming that things line up the way they're projecting in the next 2-3 years, it has monster potential; it's also a derivative of natural gas that's been historically depressed, and takes advantage of the behavioral distortion that most investors are time sensitive and price insensitive. So I don't see LNG as so far outside his sweet spot.
    Feb 24, 2015. 07:36 PM | Likes Like |Link to Comment
  • Walter Energy's Q4 Results: Pure Disappointment [View article]
    I'll take a look at the terms if I have time, but I'd argue that any buyback of the unsecureds is now a fraudulent conveyance. They won't make it another year, and the only "value" the unsecureds have is the future value of the expected coupons (maybe one or two more coupons at most?). Paying any more than the price of 1 coupon is a a waste of cash, and secured lenders should rightly object.
    Feb 19, 2015. 08:23 AM | Likes Like |Link to Comment
  • Walter Energy's Q4 Results: Pure Disappointment [View article]
    They missed the window for some kind of soft restructuring back when it was a reasonable strategy for survival. Time for a debt to equity swap has long since passed--who'd agree to take their common stock now as anything other than a sweetener alongside cash?

    And as for an outright purchase for $, I think the legal issue at this stage of the game is probably a matter of fraudulent conveyance. If I'm a secured creditor, first thing I argue in BK is that this cash out the door to the unsecureds needs to be rolled back. I'm also assuming that the senior secured lenders would have some say-so in nixing $120M (or 25% of their remaining liquidity) waltzing out the front door. They must surely be operating on covenant waivers by now?

    Ugly situation all round in coal-land, but WLT prob won't be the last.
    Feb 18, 2015. 06:52 PM | Likes Like |Link to Comment
  • Keeping Up With The Contrarians [View article]
    "Betting on Ocwen now is extremely risky, not to mention immoral."

    Classic! And yet you did it anyway, LOL!!! Tsk-tsk-tsk, for shame ;)

    When somebody finds an opportunity to invest in puppies (humanely bred, of course!), orphan children, and smiley unicorns that offers 3-4 times upside and a margin of safety in a runoff, give me a call. I won't be holding my breath waiting...

    Long OCN (and much worse)
    Feb 18, 2015. 06:29 PM | 2 Likes Like |Link to Comment
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