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  • 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
  • One Way To Value Miller Energy Preferred D Shares (MILL -PD) -Potential For Up To 700% In Gains  [View instapost]
    A very carefully worded but pretty vapid statement about their "beliefs," given "current circumstances."

    What do we actually know now that we didn't know before:

    a) they've received in cash part of the Alaska payment, and "expect" to get the rest of it.
    b) they have some offers on the table for a refinancing/sale/lease... which, subject to closing conditions, are going to keep them from having to file for bk in the immediate future. Wouldn't it be truly alarming if they didn't have any offers?
    c) they "believe" that their assets are worth more than their liabilities, but are going to announce further and significant writedowns in a couple of weeks.

    Is this all better than a poke in the eye or a swift Ch. 11 filing? Sure. But it begs all the real questions: namely, (a) what kind of refinancing, on what terms, and where will this refi leave the preferreds in the capital structure (hint, almost definitionally, worse off than they currently stand: new money comes in secured, at the expense of the prefs); (b) how are they going to suddenly start turning profits from their disappointing wells; and (c) what are the actual marketable values of their assets in a worst case scenario?

    Sorry to be the eternal skeptic here, but nothing material has changed after these two statements: it's all in the recovery values, and anyone playing this for anything other than a recovery play from a restructuring is gonna be mighty disappointed...
    Jul 15, 2015. 12:02 PM | 1 Like Like |Link to Comment
  • Is Ambac A Good Buy?  [View article]
    Agree with your thesis generally, but with some significant cavils. Yes, AMBC is dirt cheap right now. Momo headline chasers and hedge funds seeking to hedge out PR bond exposure by shorting the monolines have beaten the crap out of this name.

    PR exposure is *very* manageable, as you say, though be careful with the equivalency of numbers for their face value exposure. The notional or par amount of COFINAs they're exposed to down the road (in 2047+) is a hefty $5-6B or so. The reason the headline # looks so much lower is because these are super long-dated zero coupon bonds that were issued at literally pennies on the $. The numbers they're citing--as I understand it--apply to the face value of the bonds when issued, not the par value they're responsible for down the road. So the ultimate exposure--in 30 years--is much larger. But given that they owe no interest payments on the bonds (zero coupons) in the meantime, the discounted present value of those liabilities is much smaller than it may someday become if COFINA gets a haircut in restructuring. They also have the optionality of retiring those exposures at ridiculous discounts to par by buying up the bonds in the mkt should the COFINA structure get compromised.

    Lack of catalyst? Um, how about the eventual settlement of the BOA lawsuit, which is likely to amount in the billions? Or any of the other mtg related lawsuits they're vigorously pursuing? This is a litigation play as much as a deep value play right now. Also, there will be heavy short covering once we get clarity on the PR situation in the next 6-12 months.
    Jul 14, 2015. 10:00 AM | 1 Like Like |Link to Comment
  • Partial victory for bond insurers in Puerto Rico case  [View news story]
    Agreed--which is why I said fed Ch. 9 is "more predictable" than a Creole bankruptcy undertaken in PR courts and solely at the discretion of PR judges.

    Detroit raised huge issues that weren't fully answered in the case, and like you say, the norm seems to have been GOs taking it on the chin relative to pensioners. But even in the worst outcome of a fed Ch. 9, I have a hard time seeing bonds backed by constitutional pledges or dedicated revenue streams getting whacked to the tune of 50% haircuts or whatever the market is currently implying.

    On the COFINA--it's a pretty strong lien within their capital structure, with a lockbox on the revenue stream. But in raising the issue of changing the sales tax to a VAT, they've already shown a willingness to revisit the revenue streams that support it. If you assume that recoveries will be proportionate to the strength of the lien, then you've got to think that COFINA will do well, at least relative to some of the flimsier credits.

    Still, the whole thing is a gigantic clusterfrack. One example: yesterday I was digging through the financials of some hospital revenue bonds, issued under the AFICA structure. These are POS's no doubt, but they were being offered at like .30 on the $, so I figure worth a look, right? Anyway, with only a cursory glance at the financials, it's clear they'd be totally insolvent if they paid their electrical bills, which are part of a ballooning accounts payable #. Just these two or three hospitals alone owe PREPA millions of $. So how do you sort this out: in this one instance, making PREPA good means busting an issue under the AFICA structure, and vice versa. I've never seen anything so convoluted and impossible to sort out.

    My modest proposal to save everyone years or time and hundreds of millions of $ in legal fees: everybody agree to take a 15% haircut across the board; issue a new series of PR bonds with an iron-clad lien; and we all move on to bigger and better things....
    Jul 8, 2015. 11:36 AM | 1 Like Like |Link to Comment
  • Partial victory for bond insurers in Puerto Rico case  [View news story]
    Recoveries under US Ch. 9 bk are likely to be more predictable--and favorable to creditors--than under the 2014 legislation proposed by PR (and struck down by the Fed appeals court). I'd prefer Congress not to authorize fed Ch. 9 because it gives more leverage to PR in a negotiated restructuring, but fed Ch. 9 is by no means the worst possible outcome for bondholders.

    One interesting dynamic to watch: there's a bifurcation not only among PR bondholders (GO-owners versus the PREPA coalition), but among the monoline bond insurers themselves. Unlike AGO, MBI, and SYCRF, which are on the hook for the PREPA utility, AMBAC has minimal PREPA exposure. Their big problem (in 2047) is the COFINA structure. So there's some sense in which they could conceivably support a Ch. 9 authorization that stiffs the PREPA crowd but doesn't pierce the COFINA structure (i.e. UTGOS versus Water and Sewer in Detroit...). Just as there'll be winners and losers among the bondholder constituency, it's entirely possible that there'll be divisions among the monolines depending on which way this all heads politically.

    So many moving parts in the capital structure...
    Jul 7, 2015. 05:02 PM | 3 Likes Like |Link to Comment
  • Partial victory for bond insurers in Puerto Rico case  [View news story]
    Getting this Creole bankruptcy threat off the table is a big positive for PREPA and other bondholders. Takes away the biggest uncertainty/ tail risk, IMO. US Ch. 9 is at least somewhat predictable.

    But rather than going there, how about we all just take a 15% haircut in exchange for a more secure, perfected lien (a la Detroit), ring the cash register for a 100% profit, and move along on our merry way?
    Jul 7, 2015. 03:14 PM | Likes Like |Link to Comment
  • Western Asset Mortgage Capital Corporation And My Bearish Interest Rate Assessment  [View article]
    Vaya con Dios, yield lovers! WMC is a great operation, and was once my single largest holding. It may be some day again when the price comes down 15-20%.
    Jul 6, 2015. 08:33 PM | Likes Like |Link to Comment
  • Greece Referendum: No - 61.1%. Yes - 38.9%  [View news story]
    Excellent move by the Greeks. In a choice between taking a lot of pain upfront, or languishing in a condition of debt servitude for decades, they chose the lesser of two evils. It'll be chaos for 12-18 months, and some folks are prob gonna lose their life savings, but they should be able to devalue their currency, repudiate the external debt, revive the economy, and maybe--just maybe, given that people have the attention span of a mayfly--they'll be able to access international capital markets again in a couple of years.
    Jul 5, 2015. 03:32 PM | 5 Likes Like |Link to Comment
  • A Speculative 38% Yield From EXXI Preferred Stock  [View article]
    That's the 640M question, no? If any one of us knew the answer to that, with even a moderate degree of certainty, we'd all be significantly wealthier :)

    All you can say is that there's a non-trivial probability they'll end up BK (say, 30%), weigh that off the prospective rewards if they make it (asy, 3-10 times your investment, depending where you are in the capital structure), and size your bets accordingly (Kelly rule).

    That's the game. Some are better at it than others.
    Jul 5, 2015. 10:54 AM | Likes Like |Link to Comment
  • Western Asset Mortgage Capital Corporation And My Bearish Interest Rate Assessment  [View article]
    All the bells and whistles aside (and I generally do like bells and whistles...), this boils down to whether WMC is expensive or cheap right now. And it looks to me like it's exceedingly rich relative to its peers. I was shocked to see it keep climbing further into ex-div and even higher afterward. They've got to be considering an SPO.

    Dividend hogs reaching to eak out an extra 4-5% yield over peers selling at 20% discounts to NAV need to be very, very careful at these prices....
    Jul 4, 2015. 08:32 AM | Likes Like |Link to Comment
  • Scanning The SA Family For Alpha: Rosenose  [View article]
    Kudos to RS and RN for showing how the platform is supposed to work.

    Alas, wish that this were the rule rather than the exception on SA. Don't get me wrong, there are some excellent and thoughtful commenters and authors I'm pleased to have gotten to know, and learn from. But can't even count the articles written by authors who literally know *nothing* about their subjects, present conjectures rather than hard data, or offer recommendations that willfully omit anything disconfirming of their thesis. And worst of all, many of them--unlike RS--seem unwilling to change their minds when presented with counterfactual evidence.

    SA is a human sociological laboratory--featuring the best and worst of said. Crowd-sourcing and the decentralized aggregation of information, check, but also an object lesson in confirmation bias, anchoring, framing effects, overconfidence, etc. Yours truly is hardly immune, I'm sad to say.

    Disclosures are kind of redundant, no? If someone has a good idea, and they're willing to take the time to write it up, I just assume they've got money riding on it. Why wouldn't they?
    Jul 3, 2015. 01:59 PM | 3 Likes Like |Link to Comment
  • Ambac confirms PR exposure, sets conference call  [View news story]
    Yeah, they've got some problematic exposure in PR, but the brunt of it doesn't come due (6B of COFINA zeros) until 2047. So they owe no coupons in the meantime, and stand a good shot at being able to remediate some of the potential losses by buying up the exposure in the market.
    Jul 2, 2015. 08:40 PM | Likes Like |Link to Comment
  • PREPA reportedly reaches deal to cover debt payment  [View news story]
    Safety is a function of price. At .40 on the $, even trash debt from PR can be pretty safe.
    Jul 1, 2015. 10:10 AM | 2 Likes Like |Link to Comment
  • MBIA plunges further as Puerto Rico mulls bankruptcy  [View news story]
    Ok, I *know* the numbers are misleading, but AMBC is currently selling for 1.5 times trailing earnings. Get your head around that #: a PE of 1.5!

    So their recent earnings probably aren't directly replicable, and they've got a couple billion of potential exposure to PR (which looks worse than it probably is), but still, you've gotta at least kick the tires on this one and give it a look...
    Jun 30, 2015. 05:22 PM | Likes Like |Link to Comment