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  • BreitBurn Energy Partners' Lifeline Just Got A Bit Shorter [View article]

    Debt must be paid, or noteholders will force a BK. Units (and prospective distributions thereon) can be ignored or deferred indefinitely.

    There is no logical rationale for retiring units when there's a massive donut hole in their capital structure. Indeed, given the market implied worthlessness of the equity units, they should be ISSUING more equity units (in exchange for debt), not buying them back.

    Think about it this way: their capital structure consists of, top to bottom: (a) senior secured revolver; (b) any secured or 2nd liens; (c) unsecured notes (trading at .55-.60 on the $); (d) common units. If the unsecured notes are trading at .6 on the $ or whatever, and are senior to the units, the market implied value of the equity units is ZERO. They have an option value, obviously, which is why all the bulls on here are holding on to them (that and loss aversion and sunk cost biases). But the bond market is saying that the unsecured notes are the fulcrum security, and they should be doing everything they can to take these out.
    Aug 20, 2015. 10:41 AM | Likes Like |Link to Comment
  • AK Steel: Unsecured Notes At 65 And Stock At $3 Are Attractive For Aggressive Investors [View article]
    Yes, and I'm sure the fast Track TPP authorization is really going to do a GREAT job of protecting American industry (sarc on). You and other Americans staring down globalization have my sympathies...
    Aug 19, 2015. 10:15 AM | Likes Like |Link to Comment
  • AK Steel: Unsecured Notes At 65 And Stock At $3 Are Attractive For Aggressive Investors [View article]
    Good point, and I don't dispute that this is where things stand, right now, with their current capital structure. And if they're cash flow positive--and can remain so--then my worries are moot. But the potential trouble with the *unsecured* debt of all these leveraged commodity players is that it doesn't take much in the way of asset write-downs and new (secured) debt issuance to throw the unsecured notes out of the money. We've seen this already in all the coal players, E&P, iron ore, copper, etc. The game is chess, not checkers.

    Now if you can pick up some of those senior secured notes with an 8.75 coupon at a decent discount to par, that's another story. As things stand right now, though, I'd personally pass on the unsecured at 65 as a sucker bet. At 30-40, maybe these start to look interesting as a recovery play. Respect to others who see the risk-reward differently or who feel like they have more insights into the direction of this biz, the commodity cycle, US tariff policy, etc. I just don't feel like I have any edge there.
    Aug 19, 2015. 09:22 AM | Likes Like |Link to Comment
  • AK Steel: Unsecured Notes At 65 And Stock At $3 Are Attractive For Aggressive Investors [View article]
    I think we probably agree more than disagree, but for the sake of conversation, let me push the other argument as to how it could relate to AKS.

    No dispute that the world is likely to continue to abound in liquidity. And we've seen that post-Great Recession, the most tangible effect of all this monetary liquidity (in conjunction with an historically unprecedented capital investment campaign by the Chinese govt) has been to inflate the price of assets--both real and financial.

    But something funny has started to happen in the last 18 months. The avalanche of liquidity hasn't slowed. And yet whatever transmission mechanism that had for the past 4-5 years been carrying this over into the price of commodities has broken down. We're now confronting a world where the psychology and meta-narratives of run-away commodity inflation as a response to "money printing" are starting to break down, and commodity prices are "catching down" to the real economy, which is by any tangible measure going into a recession. Exacerbating this is all the overcapacity in things such as iron ore, coal, oil, etc. that was beget by this liquidity cascade.

    The results for commodity prices are truly scary, and don't bode well for coal, steel, copper, oil, etc. producers--including AKS.

    But all of this macro-stuff is, IMHO, beside the point in considering this as an investment. Like Howard Marks always says, we can't know the future. All we can do in D/D-land is to determine what's the worst case, and is there a margin of safety.

    In these AKS unsecured notes, there isn't, really, and the risk-reward isn't attractive at these prices. At 65, and figuring in a couple years coupons, your best case is you make 50-75%. Your worst case is you lose everything. Just spit-balling, and without assigning any bogus probability weightings based on useless macro forecasts about the future, I don't find the prospects of losing everything to make a paltry 50% or so to be a very attractive proposition.

    But hey, that's just me!
    Aug 18, 2015. 07:18 PM | 2 Likes Like |Link to Comment
  • AK Steel: Unsecured Notes At 65 And Stock At $3 Are Attractive For Aggressive Investors [View article]
    Nice, thoughtful, detailed analysis, and you make a generally compelling case for the Notes.

    Just for the sake of stress-testing your thesis, though:

    The fact that 70% of their revenues comes from contracted production could be a negative rather than a positive. Dangers to revenues/ margins as the contracts roll off or get bumped down? What would their #'s look like if they were selling at current market prices? Being leveraged to the US auto industry (itself leveraged to cheap credit and ridiculous financing terms/ weighed down by sagging demand in China) is a potential negative.

    Unsecureds look to fare reasonably well as far as recoveries go, if the credit event were to happen right now. But the real question is how will they look in 2-3 years as more senior secured debt on usurious terms gets layered on in front of them?

    Not a bad thesis, but you're perhaps overstating the bullish case and neglecting the worst case scenario. If the global economy stagnates over the next 2 years, pulling US consumers down with it, this company--including the unsecured notes--are potentially zeros.
    Aug 18, 2015. 11:45 AM | 3 Likes Like |Link to Comment
  • BreitBurn Energy Partners' Lifeline Just Got A Bit Shorter [View article]
    That's *exactly* the right analogy, Daniel. Imagine that any of us would have been given the opp to buy back our own mortgage at .50 on the $ during the financial crisis at discounts implied by where the mbs securitization happened to be trading at that moment. You, I, and everyone else on this board would have been scraping together every single spare $ (and eating ramen noodles to boot) to take advantage of that deal.

    Sure, the kids might scream about the allowance you'd promised to pay them, but at the end of the day, they'd be much better off having their allowances cut off for a short time than failing to earn these kinds of ROI from retiring debt.
    Aug 13, 2015. 04:16 PM | 3 Likes Like |Link to Comment
  • BreitBurn Energy Partners' Lifeline Just Got A Bit Shorter [View article]
    Let's assume for the sake of argument that they *could* afford to continue paying the dividend and also survive (either because oil prices recover, or because the numbers will work even if it doesn't). This grants the most bullish assumptions. I don't share these, but that's irrelevant for these purposes.

    The real question for mgmt is whether they *should* continue paying the dividend given the high opportunity cost of doing so. They can repurchase debt in the market right now at a 40-50% discount to par. That's an eye-popping rate of return and an instant riskless profit on every single $ they divert to repurchasing those notes, not to mention a substantial interest savings over the next 4-5 years when those notes are scheduled to mature. Where else can they earn those kinds of ROI, not to mention pushing the BK threat farther off the horizon?

    If they are indeed healthy and can muster a sufficient cash flow to pay a divvy, there is no question but that every single $ they can raise should be diverted to debt repurchases. The market rarely gives you opps like this, and if you're smart, you jump all over these like a hungry pooch. They shouldn't make the mistake that so many of the (now defunct) coal names made, namely, pissing away cash when there was heavily distressed debt in the market that could be retired or exchanged at pennies on the $, and sitting around praying that maybe, just maybe, commodity prices would rebound next year.
    Aug 13, 2015. 10:23 AM | 3 Likes Like |Link to Comment
  • 2 Interesting Stocks In The Oil Patch [View article]
    Definitely a call option, but as someone above correctly pointed out, the expiration date corresponds to a potential bankruptcy in 2017-2018 as the hedges run off and the unsecured debt comes due. This isn't bashing or speculation, it's the mathematical reality of their capital structure (confirmed by the fact that the unsecured debt is trading at .50 on the $).

    If oil rebounds significantly (say, to $70) in the next two years, they'll probably make it. If it languishes for the next two years, they're toast. A purely speculative gamble, particularly because no one (regardless of who they used to work for, or what figures they cite) knows what's going to happen to oil prices in 2-3 years.

    Heads we have a global recession and oil goes to $25 as debt-strapped producers can't afford to stop pumping; tails there's a revolution in Saudi Arabia? This is totally unknowable.
    Aug 11, 2015. 11:29 AM | Likes Like |Link to Comment
  • Genworth Financial Revisited: The Risk/Reward Scenario [View instapost]
    Mgmt must have read your posts (or looked at the stock ticker). There's your insider buying from last week, at sub $5 a share (albeit in relatively small amounts, and still trivial ownership stakes for mgmt). Start of a larger trend, let's hope!

    Form 4s from Friday...
    Aug 10, 2015. 01:20 PM | Likes Like |Link to Comment
  • One Way To Value Miller Energy Preferred D Shares (MILL -PD) -Potential For Up To 700% In Gains [View instapost]
    Yah, wouldn't surprise me if the lenders weren't the ones who picked up the phone and called the SEC! After, of course, conveniently waiting long enough to muscle mgmt into issuing all those worthless pref shares ATM and getting their own cash out.

    The whole thing stunk like a dirty diaper from the get-go. First, senior secured lenders don't just suddenly up and start grabbing cash like that because oil/gas prices take a dip. My guess is that with disappointing drilling results and the cash burn, the lenders decided to take a closer look and were aghast at what they'd lent into.

    Now add some litigation/ fraud uncertainty to the mix, and who knows what this puppy will be worth once the dust clears. May be worth a flyer, esp. if they can clawback some of the cash through litigation. If
    Aug 7, 2015. 09:47 AM | 1 Like Like |Link to Comment
  • One Way To Value Miller Energy Preferred D Shares (MILL -PD) -Potential For Up To 700% In Gains [View instapost]
    Real bummer. Explains why the lenders got spooked and started grabbing cash. This news didn't just materialize today out of thin air. Given the lender's behavior, one could have inferred that something this egregious was brewing. They got snookered too, but likely figured it out before the memo got circulated.

    Sorry, and hope there's at least some recoveries for you!
    Aug 6, 2015. 02:22 PM | 1 Like Like |Link to Comment
  • Genworth -5.3% following earnings miss [View news story]
    Just can't see this going to zero (though I've been 100% wrong so far on the recent pricing of this one and AMBC)! Long-dated unsecured notes do seem to be selling off a few points in sympathy with the equity, post-earnings.

    We'll see. I'd be satisfied with a bounce-back to $8-10 in the next 12-24 months.
    Aug 6, 2015. 12:56 PM | Likes Like |Link to Comment
  • Genworth -5.3% following earnings miss [View news story]
    Good thoughtful analysis, Brian. Agree with most of your points. But don't you think that the ramp-up of the US mortgage insurance business has the potential to greatly increase earnings and ROE? Haven't been following this one so closely, but my impression was that they're deleveraging and disposing of non-core assets such that they can deploy these resources into USMI--pending sufficient capital ratios and credit upgrades. LTC continues to be the wild card--a call option on them being able to do what no one else has been able to do and figure out this biz...
    Aug 6, 2015. 09:45 AM | 1 Like Like |Link to Comment
  • The Linn Energy Drop Has Created A Buying Opportunity For Long-Term Investors [View article]
    If you're interested in making an extremely leveraged bet on USO/UNG via Linn's capital structure (which is what this trade really amounts to), why not do exactly what Linn's mgmt is doing and buy their notes at a 35% discount to par? They've essentially given up on the common units now that there's no room to issue more/ dilute unitholders.

    If Linn goes under, it's likely the same result for the units and the unsecured notes (a big zero!). If they survive another 2-3 years, you recapture a substantial part of your investment by collecting a couple of years worth of coupons. And if they make it to the other side, you're looking at a 100% return on the unsecured notes at these prices.

    Just to be clear: at this stage of the game, even the unsecured notes look like a sucker bet to me, and you could argue that Linn's mgmt is buying them only because they have to. But if you're determined to speculate on Linn's future, it seems like the unsecured notes are the least bad way to play this one...

    My 2 cents, FWIW. Traded in and out of some of the Berry notes earlier in the year, but no position here.
    Aug 6, 2015. 09:34 AM | 1 Like Like |Link to Comment
  • Genworth Financial Revisited: The Risk/Reward Scenario [View instapost]
    Yah, I don't get this one either. At 5-6 times trough earnings and .25 or whatever of book, this is absurd.

    Though I've been wrong here so far!
    Aug 5, 2015. 10:25 AM | Likes Like |Link to Comment