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  • 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
  • Buy This Coal Company For Superior Income [View article]
    I find this MLP puzzling, and wonder what's the "secret sauce" that allows them to make money when everyone else in the industry is bleeding cash? Apparently they have been able to secure long-term (now above-market?) "contracts" to insure that their production is spoken for. But two questions emerge: why are they uniquely able to hedge their sales into the future, whereas others are stuck sitting on large inventory or forced to move it at increasingly risible prices? Why hasn't someone else stepped in and outbid them? And assuming that these long-term contracts are in-the-money (viz. above-market) aren't they liable to exactly the same dangers as the shippers: namely, that counter-parties have every incentive to play hard-ball and try to break/ default/ renegotiate extant contracts?

    Beyond empty blandishments about the genius of their management, can someone explain exactly what their durable advantage is, when other coal producers in North America literally can't give away coal assets? Is their coal somehow better than the coal of others?

    Color me skeptical but open to being convinced...
    Oct 15, 2014. 08:42 AM | Likes Like |Link to Comment
  • Walter Energy: Dramatic Price Decline Appears Overdone [View article]
    Well-said, and no real disagreement here. It's all about the Met prices.

    It's just worth noting that "turnarounds" and "bankruptcies" aren't mutually exclusive (something the RSH bulls have yet to fathom), and these coal companies seem to have a hair-trigger when it comes to filing. If/ when they file, the equity is toast.

    At these current prices (mid to high 20s), the senior unsecured bonds are also essentially OTM calls, but with a slightly less binary and more compressed range of payouts.
    Oct 14, 2014. 05:00 PM | Likes Like |Link to Comment
  • Pacific Coast Oil Trust And Measure P [View article]

    Or, see Poundstone's Fortune's Formula--a terrific read.

    FWIW, I personally won't venture more than 1/2 Kelly on any single situation unless there's an absolute margin of safety (heads I win a little, tails I win a lot).
    Oct 14, 2014. 04:52 PM | Likes Like |Link to Comment
  • Walter Energy: Dramatic Price Decline Appears Overdone [View article]
    Here's to miracles: great for sainthood, not so good as an investment thesis.

    The relevant question isn't whether there are other heavily indebted companies that have recovered from a sub $2.00 share price. Loads of them. The better question is whether any companies with bonds trading in the .20-.30 range have successfully avoided filing Ch. 11. The answer is few and far between, and the equity rarely survives in these scenarios.
    Oct 14, 2014. 11:28 AM | Likes Like |Link to Comment
  • Pacific Coast Oil Trust And Measure P [View article]
    That seems like a very optimistic "worst case," as it's at $8.50 already even when everyone seems to think the Measure is a longshot to pass. With passage, the headline risk is mid single digits, I'd think. Roughly symmetrical risk reward.

    Upon passage, and with a likely dip into the $4.50-6 range, you'd be looking at 2 or even 3:1 asymmetric risk reward.

    Under the passage scenario, I'd take the bet with a decent Kelly factor.
    Oct 14, 2014. 11:22 AM | Likes Like |Link to Comment
  • Pacific Coast Oil Trust And Measure P [View article]
    These guys now have two potential problems, the Measure P uncertainty and tanking oil prices.

    Haven't looked at the materials for a while, but my recollection is that the initial hedges on oil prices from the IPO are rolling off and this will become more sensitive to market prices in WTI/Brent.

    I'd actually play this the opposite way as CubRob. In the event that Measure P passes, and this thing tanks to low single digits, buy a modest position and patiently wait from them to pursue their legal remedies.

    PS: even some of the less uncertain royalty trusts are getting pounded. BPT and some of the others are starting to look interesting...
    Oct 13, 2014. 09:29 AM | Likes Like |Link to Comment
  • GT Advanced Technologies: What Went Wrong And What Investors Need To Know About The Bankruptcy Process [View article]
    Interesting interpretation of the evidence. That exchange--and others throughout the CC transcript--show at least modest indications of deception.

    See Spy the Lie by Houston, Floyd, and Carnicero.
    Oct 9, 2014. 02:03 PM | 1 Like Like |Link to Comment