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laterre

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  • BKLN Is Yielding Almost 5% And Has Over $6B In Assets, But Is It Worth The Risk? [View article]
    Let me be clear: I'm not saying that this thing is likely to blow up anytime soon. But it is exactly the *kind* of instrument that has the potential to blow up, and to blow up big time, in a stressed market. The paltry 4.5% doesn't come close to compensating for these risks.

    But just for the sake of discussion, I did want to respond to your assumptions, not because I expect to convince anyone else, but because (with all due respect) I think your assumptions are both faulty and widely shared.

    1) Lots of big institutions own this ETF. Ok, fair enough, but it's worth looking at which kinds of big institutions. What you've got here is institutional ownership by--and you'll pardon my insulting expression--dumb money. Pension funds, mutual funds, high net worth individuals steered here by advisors, etc. People who want to think that they're avoiding one kind of risk--interest rates--but aren't smart enough to see that they're actually setting themselves up for a far worse kind of risk: namely, illiquidity. Illiquidity has blown up more investors than IR moves. Look at any major financial crisis, and illiquidity is either the precipitating or exacerbating factor. If or when all these "big institutions" with 6B parked in this thing were to get spooked, and try to run for the exits, the leveraged loan market will literally explode. It's not made to handle large transactions at the speed demanded by an exchange traded product. Look at the HY market right now--virtually bidless for certain kinds of paper. Now imagine that you're trying to move a couple of $B of junky bank loans--many energy related--when people start panic selling. Forget about it. So I actually think that the size--and ownership--of this thing is part of what make it an outstanding "black swan" candidate. This is not owned by the kind of patient, savvy, and risk-tolerant institutions who are willing to stare at 25% capital losses and sit tight for five years and ride out a downturn. It's not being marketed as that kind of product, which is part of the risk.

    2) You didn't address the issue of the typical ETF's mandate to create or redeem shares to keep the market price more or less in line with NAV. I have no idea what mechanism they have in mind to address this, whether with cash redemptions or, more likely, doing it synthetically via CDS. But definitionally, one of two things must be true of every ETF: either they create and redeem shares, or they don't. If the former, then market sales of the ETF (and day to day market fluctuations) have the possibility of forcing them to unload assets. See my point #1 above for the problems with this, and the potential catastrophe of a "tail wags dog" situation where attacks on the ETF could trigger mandatory assets sales into a bidless market. If the latter, then there's the possibility that even with healthy, performing loans, this thing would open up a major adverse discount to NAV. If you are inclined to own this thing, I'd be reading the technicals on how, precisely, they handle this issue of share creation.

    3) I'll grant that maybe--just maybe--you are avoiding some IR risk because of the very short duration and floating nature of these loans. Empirically, however, in most situations where IR rises rapidly, junk tends to get hurt worse than IG or govt. And the short end of the curve tends to move more than the long end. But setting aside the facts, think about the other side of the equation: what does it mean to the borrower that when rates rise, so does their interest expenses? The inverse of IR rate risk here is exacerbating the credit risk of dicey borrowers. And the flip-side of short duration means that unlike your typical 5 year junk note, these things have to be rolled every year or three. What happens if we have a panic, the leveraged loan mkt tightens, and your typical B-ish borrower can't roll over these loans?

    4) Finally, on the credit risk, yes, these are senior loans (typically secured) at the top of the capital stack. Most of them are probably money good, or were when issued. This isn't the unrated mez crap that the BDCs have piled into. But still, look at these borrowers on your list. Heinz, ok. Energy Futures Intermediate Holdings?! Texas Competitive Electric is, unless I'm mistaken, in bankruptcy--so this is probably either a DIP financing or currently non-performing. Some of these look decent--and they're diversified--but still this is a rogue's gallery of heavily indebted private equity disasters. The kind of deals that get done by taking on lots of debt and placing it with....dumb money. Think about the mechanics of how a senior leveraged loan ends up in an ETF like this. It's the Akerloff "market for lemons problem" in a nutshell. If you're a bank or securitizer, you obviously want to keep the good business for yourself. But at the margins, you'll do an iffy loan--or a loan on terms that are unfavorable--cause you know you can always dump the loan off into a CLO or an ETF such as this one. These things are premised on precisely the principal-agent disconnect of securitization that we all found about about in 2008-2009.

    Bottom line: sure, probably this thing will be fine, and you'll collect your 4.5% and live another day. I sincerely hope so. But in eschewing interest rate risk, you are taking on some other, even worse kinds of risk for which you are not being paid adequately, in my opinion.

    Do as you like, but I wouldn't touch this with a 10 foot pole.
    Dec 15, 2014. 09:23 AM | 2 Likes Like |Link to Comment
  • BKLN Is Yielding Almost 5% And Has Over $6B In Assets, But Is It Worth The Risk? [View article]
    I have to respectfully disagree. This ETF is one of the most misconceived, rube-goldberg financial creations one could possible imagine. Why not take a super-illiquid, bespoke financial instrument like senior bank loans, for which there is no ready OTC market and for which settlement times are in months not days, and put it into an ETF wrapper which potentially has to face day-to-day share redemptions and creations? And what's the reward for all the potential illiquidity and duration mismatch to the underlying? A lousy 4.5% Sounds great!!! Now let's pitch it to retail as a safe place to hide from big, bad rising interest rates.

    This thing has admittedly been less volatile than JNK or HYG, but it still moves .5% or more on big days, and--mark my words on this--if the high yield market *truly* seizes up along the lines of 2009, it will drop like a stone like every other exchange traded product. Absolutely rewardless risk, in my opinion.
    Dec 12, 2014. 08:10 PM | 8 Likes Like |Link to Comment
  • Measure P Defeated - Here's What It Means For Pacific Coast Oil Trust [View article]
    Sorry for your losses, w.sak, but I expect you're not the only one in this boat. Hardly a consolation, I know.

    Can't claim credit for predicting the crude-induced drop in any of these dogs, but I've never liked the gimmicky MLP structure and thus steered clear of these things altogether. Just picked up some BBEP bonds the other day, actually, for a starter position. Their cash flows look ok to me for the next 12-18 months as far as supporting the debt (divvy another story). Once the dust settles there will be some real opportunities in these names.

    At these prices, especially for the B to CCC+ish debt now trading in the 60s and 70s, I think we're going to see some really nice risk/rewards. RISKY, no doubt, if WTI hangs around in the $60 and $70 for any extended period. But if we get even the *hint* of problems in the Middle East, conflagrations in Iran, further destabilization in Venez, Nigeria, Russia, etc., a major pipeline attacked by terrorists in Saudi, another whiff of the Arab Spring in any of the Gulf States, these pups are going to explode like rocket fuel.

    People were way off-sides from chasing yield. Now everyone's rushed to the other side of the trade. When the consensus is unanimous that something *must* happen, and people are selling indiscriminately, I like to take what others won't or can't be seen holding.
    Dec 7, 2014. 11:40 AM | 1 Like Like |Link to Comment
  • Measure P Defeated - Here's What It Means For Pacific Coast Oil Trust [View article]
    Ouch--just ouch! Let's have a golf clap for the sharp insiders at Breitburn who IPO'ed this pig to retail at exactly the right moment. Well played, sirs! At this point, I'd love to see a complete dividend cessation, such that the inefficiencies of the market would make this a fantastic long-term pick-up on the reserves.
    Dec 6, 2014. 10:09 AM | Likes Like |Link to Comment
  • Linn Energy: Buy On The Drop? [View article]
    Don't have the spreads in front of me right now, but assuming your description is correct and they're pari passu, you're getting a higher current yield on the 2020s because right now the distressed market is pricing everything to YTM (for cap gains) rather than for current yield (not uncommon in distressed situations). In a more normal, unstressed market, there might be an incremental diff in current yield based on the fact that the 2020s have a slightly longer maturity/ higher duration, and thus marginally higher interest rate exposure. There may also be a diff in the coupons that could account for some of the diff.

    But here the bet is a binary: does Linn make it to 2019 or 2020 to pay off the bonds? In that circumstance, buyers are saying that there's very little difference in the ultimate risk, which people are willing to take for 11%. The difference in current yield is negligible over and against the big risk of default and recovery.

    One other thing to keep in mind. Don't be a yield hog, and pay attention to the price you're paying--not just the current yield. In situations like this, one school of thought (the correct one, LOL!) says to always buy the lower priced bond (thus increasing your margin of safety), rather than trying to pick up the maximum current yield. It's not a big difference in this case, but if, hypothetically, two bonds were available, and one with a lower coupon and longer maturity was trading at, say, 80, while another with a higher coupon and shorter maturity was trading at 90, I'd personally buy the bond with the lower price and be content to take my profits on the cap gain rather than trying to max the yield. When things go bad and they default, you're happier to have paid less rather than more.

    And @rlp2451 below: yes, they are senior unsecured, meaning they come below the senior secured revolver in the credit stack but above the member's equity. That does not mean that you get zero in a bk. It only means that you're below the most senior lenders. What you get in a bk depends on the value of their assets and the coverage, which right now is ok, but could deteriorate if they rack up more debt in coming years. But the main point--which all the falling knife catchers might take careful note--if indeed they go bk in two years and the senior unsecureds get nothing in recoveries, the equity is toast: a complete zero.
    Dec 4, 2014. 08:40 AM | 2 Likes Like |Link to Comment
  • Linn Energy: Buy On The Drop? [View article]
    Ditto. Picked up some of the orphaned Berry Petroleum senior unsecured notes with a YTM of close to 12%. It gives me some peace of mind that they can always sport a big distribution number (real or imagined) and sell more units to the yield-starved masses beneath me on the capital structure.
    Dec 3, 2014. 06:11 PM | Likes Like |Link to Comment
  • Linn Energy: What To Do After Friday's Massacre [View article]
    2:18 pm ET
    Dec 1, 2014 CREDIT
    Bond Prices of Junk-Rated Energy Companies Tumble

    http://on.wsj.com/1wdRpfo

    "The most actively traded junk bonds midday Monday were Linn Energy LLCLINE -5.45%’s two single-B-rated notes due 2019, which fell 9% to 82 cents on the dollar, pushing yields up to about 11.5%, according to data provider MarketAxess. Trading volume was about $90 million."

    "Some analysts are recommending that investors begin looking for bargains. 'We believe the opportunity is now growing to benefit from the near-term distress of energy producers and potentially add to positions as the price stress plays out,' Steven Wieting, global chief investment strategist with Citigroup Private Bank, wrote in a note to clients on Monday."

    LOL, Translation: our bond desk at Citi is sitting on a crap-load of junk debt that's rapidly turning into toxic waste, and we need to find some suckers to take it off our hands...
    Dec 1, 2014. 02:43 PM | 7 Likes Like |Link to Comment
  • Linn Energy: What To Do After Friday's Massacre [View article]
    Dam in the HY energy bonds seems to be cracking this AM. Ugliest B- and CCC HY E&P issues are off 10 points from Friday, and down 20-30 points from highs. You could drive a truck between the bid-asks. I'd buy some of the stronger (i.e. least ugly) of these in the 60s once the panic selling really kicks in...
    Dec 1, 2014. 09:53 AM | Likes Like |Link to Comment
  • Linn Energy: What To Do After Friday's Massacre [View article]
    If you're bullish here, why not buy the bonds instead? 9-10% YTM if they make it to the other side, and you're higher in the capital structure in the case of a BK.

    The plays in high yield energy debt are just starting to look interesting, although there's a scarcity of babies and plenty of bathwater...
    Dec 1, 2014. 08:22 AM | Likes Like |Link to Comment
  • Update: The FBI Is Looking Into American Realty Capital Properties [View article]
    People are missing the real potential danger. This doesn't go to zero on some aggressive AFFO numbers or even a big dividend cut. Unless this is some kind of Enron-style ponzi scheme (extremely unlikely), the risk is with the leverage and debt covenants. Anyone looked closely at the covenants on the senior debt facility? Are they in danger of blowing through anything now that they can't unload Cole and de-leverage, as planned? One of the ratios is debt to equity, no? They also issued some bonds recently but given that they're unsecured I assume there's no big issue with covenants on those.

    Haven't looked closely at this yet, but if you're going dumpster diving here, look beneath the hood at the debt, not the equity...
    Nov 3, 2014. 11:55 AM | 1 Like Like |Link to Comment
  • Buy This Coal Company For Superior Income [View article]
    Best account I've seen so far of what makes them distinctive, and thanks much for taking the time to contextualize their market position. Will have to look deeper and more carefully at this one...
    Oct 16, 2014. 02:33 PM | Likes Like |Link to Comment
  • Walter Energy: Dramatic Price Decline Appears Overdone [View article]
    Good points all.

    We'll see, and I personally wouldn't mind collecting a few more coupons on the WLT unsecured bonds.

    Just a couple of quick, random thoughts.

    Re. delaying filings until the bitter end. It's mainly ego/ incentives rather than rational judgment, IMO. Everybody wants to collect a paycheck as long as possible, and maybe most importantly, no one wants to admit that they're a failure. Bk is such a powerful legal remedy that more companies ought to use it sooner, but alas, they burn cash till the bitter end (much to the chagrin of unsecured creditors).

    Be careful with + shareholder equity. That's an accounting number and not what their assets would reasonably fetch in a fire sale in today's market. Witness the calamity that is the JRCC bk auction.

    Acquisition by another firm would imply that assets are worth more than total outstanding debts, which the bonds are clearly signalling is unrealistic. And if you were an outside acquirer, why would you possibly swoop in and buy them now (and pay something to the equity) when you'll surely be able to bid on the choice assets (minus any of those troubling liabilities) at the BK sale in 12-24 months?

    One possible catalyst (theoretically, as I haven't read all the relevant indentures and covenants): if you're one of the senior secured creditors, how much longer are you willing to sit back and watch WLT send cash out the door to pay those coupons on the unsecured bonds? You could care less about the PIK/ toggle crap they've recently issued, but actual cash payments for coupons to those beneath you on the credit stack will start to rankle.

    There's one factor that does strongly support your thesis that a BK isn't immediately forthcoming. The Patriot BK, which everyone cites as a template for coal companies filing sooner rather than later with cash on the books, was a slightly unusual case in that the PCX itself was clearly designed to fail--a BK-destined, debt/pension dump for the forming companies. One could argue that the reason PCX rushed a filing with cash on the books was that they were just looking for any excuse to file, so that they could haircut the debt and offload the pension liabilities.
    Oct 16, 2014. 09:56 AM | 2 Likes Like |Link to Comment
  • Walter Energy: Dramatic Price Decline Appears Overdone [View article]
    The legal standard is that they have to be "insolvent," that is, liabilities have to be greater than assets. This can be understood very broadly, but it seems pretty clear that WLT's capital structure would currently qualify. The debtload is unsustainable and needs to be restructured, even if they have some cash on hand (it's all borrowed, after all).

    For all kinds of irrational psychological reasons, companies typically run the tank until it's dry--and then file once they can't make some major debt maturity or a vendor shuts them off--i.e. when they literally have no other choice but to file. But Ch. 11 doesn't mean the company ceases operating. So the first thing that most companies in Ch. 11 need to do is to arrange DIP financing within BK, in which case a lender steps in and agrees to provide operating cash in exchange for being first in line to be paid. DIP financing can be pricey, especially for a coal company where most of the assets are tied up in highly illiquid mines and coal reserves.

    The idea behind a quick, preemptive filing with cash on the books is that they wouldn't have to seek a DIP loan (which often screws over current bondholders by pushing them down the capital structure) and they can continue to operate more or less normally throughout the BK process.

    Why "not a good idea" to screw over existing shareholders? At this stage, the company is de facto owned by the senior secured lenders and bondholders anyway. Once they enter the zone of insolvency, the legal/ fiduciary duty of mgmt shifts from shareholders to creditors. You sometimes even notice this in press releases where mgmt starts talking about arrangements "for the benefit of all stakeholders." That language is a polite way of saying the equity is toast...

    They haven't adopted that tone here, yet, of course, but keep your eyes open for it.
    Oct 16, 2014. 07:37 AM | 1 Like Like |Link to Comment
  • Pacific Coast Oil Trust And Measure P [View article]
    It also came online with some attractive hedges in place at much higher prices than current spot WTI/ Brent. Unless I'm mistaken, those have rolled off, or are shortly to do so. They won't be replicable at current prices in any event. So regardless of P, they aren't going to be able to keep up the original "yieldy" distributions that got people on board at $20 per share.

    I hate to keep beating this thing up. Once the uncertainty goes away, I'd hold this at the right price. But focusing on the fact that it IPO'd at $20 (or traded at $15 before the Measure P uncertainty) is anchoring bias, plain and simple. This is one of those typical "top of the market" IPOs where insiders seized the moment and flipped some solid but long-in-the-tooth properties to retail. It is what it is, so the key determination is whether you can get it at the right price.

    As things now stand, BPT looks interesting, as does the busted CHK convertible pref.
    Oct 16, 2014. 07:18 AM | 1 Like Like |Link to Comment
  • Pacific Coast Oil Trust And Measure P [View article]
    Well, that was quick... We bumped up against Stifel 's "worst-case" number of $7.50 today--well before the decisive vote. Sell-side research, LOL: take it for what it's worth (exactly squat).

    Let me reiterate what I've been saying for months on this name. While it's now getting very interesting as pricing in some very bad economic news indeed, it's still a potential falling knife until *after* the P vote...
    Oct 15, 2014. 10:42 AM | Likes Like |Link to Comment
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