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  • 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...

    http://1.usa.gov/1TgkjaA
    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
  • Genworth -5.3% following earnings miss  [View news story]
    Hm, so a .24 qtr, annualized forward is a buck +/- earnings, before they even get ramped up on the US mortgage insurance biz. Means the stock is selling now at roughly 6 times trough earnings, and something like .3 of book value.

    Cheap anyone?
    Aug 5, 2015. 09:53 AM | Likes Like |Link to Comment
  • The Bleeding Has Only Begun: Western Asset Mortgage Capital  [View article]
    Not sure what people were expecting--or why these numbers came as such a surprise. It was pretty obvious that (a) the current divvy wasn't going to be fully covered on a going-forward basis, and (b) that the stock was way expensive relative to (a modestly lower) NAV.

    Maybe I just had low expectations, but I actually thought it was a pretty decent qtr for them, esp. given some of the other debacles in the space.

    Thing that jumps out to me is the steady migration into credit risk. I've said this before and will say again: they need to lighten up the leverage if they're going to take on this much credit risk. You can hedge away some of the vol/ duration in mbs, but credit risk+leverage=explosive combo.
    Jul 31, 2015. 02:53 PM | 3 Likes Like |Link to Comment
  • Annaly Capital higher on Gundlach mention  [View news story]
    In most cases, the mgmt agreements make it virtually impossible to strip the assets (at par) from the mgmt firm/ traded vehicle (at 20% discount). Even if you could accumulate enough shares to take control of the board, in most of these pups there are huge break-up fees for releasing the mgr that would make it prohibitive to ditch them.

    These things are rife with conflicts of interest, which is, arguably, one of the reasons why they ought more naturally to trade at some discount to NAV...
    Jul 21, 2015. 09:07 AM | 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]
    "Longer term the pref's will be in a better situation because Miller will remain solvent instead of going BK."

    I can see why it'd appear this way to most folks, but this is a fallacy. You're correct that the ability of Mill to continue operating in the short term (rather than being pushed into immediate BK) keeps the upside scenario alive. Mill could survive and thrive. Every dumpster divers' dream!

    However, in the longer term, a restructuring and protracted distress is almost axiomatically bad for the preferred holders, who would be better off with an **immediate** bankruptcy filing. Let me repeat that so that it can sink in. You would actually be better off if they filed and restructured under the current capital structure before new money comes in the door (secured) and core assets start getting sold off.

    I've seen this movie hundreds of times before. In fact, I'm on the other side of it right now with some unsecured Walter Energy notes that were well covered when I bought them. Unless they can stanch the cash burn, they will hock everything of value and you will be left with nothing.

    Unsecured debt (or even worse, preferreds)+extended cash burn=crap for recoveries.

    Let's see the terms of the refinance when they come out on the 29th, or whenever. Everyone will applaud because the net interest expense goes down. Only the savvy will notice that the prefs are materially worse off in their coverage ratio (margin of safety) in the wake of the restructuring.

    Hope I'm wrong, but only time will tell...
    Jul 16, 2015. 09:45 AM | 2 Likes Like |Link to Comment
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