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laterre

laterre
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  • Lumber Liquidators A Value Play? [View article]
    I love situations where pure uncertainty reigns. But the problem is that the price of LL isn't yet reflecting the full range of potential outcomes--one of which is zero. My guess is people are anchoring (mistakenly) on the fact that this used to be a $100 stock and thinking $30 and change looks like a fair discount. But it was so grossly overpriced to begin with that even now, it looks like a decent but not screaming bargain for a company facing no legal difficulties. Needs to go much lower before the bottom fishing can really begin. Otherwise, for day-traders--have at it. None of the real issues at stake are going to get resolved here for years...
    Mar 19, 2015. 11:02 AM | 1 Like Like |Link to Comment
  • Miller Energy Resources - Another Distressed Preferred With 176% Upside Potential [View article]
    Great analysis, firsttracks. Confirms my impression (and my reason for tossing this hot potato ASAP) that the lenders are now steering the sinking ship.

    Quietly issuing preferreds on those terms ATM is pure desperation--and could arguably (admitted, very arguably) be an SEC violation. Have they updated the outstanding shelf registration statement under which they're doing the pref issuance to reflect material changes in the business and its risks?

    I've seen some messed up capital structures, but wow, this is right up there...
    Mar 15, 2015. 05:17 PM | 1 Like Like |Link to Comment
  • 18.4% Dividend Western Asset Mortgage Capital Is Betting On Higher Interest Rates [View article]
    It's an empirical question, and we'll find out the answer in a couple of weeks when the announce the divvy. They typically provide updated book value, no?

    Regardless of the answer, I stick to my point that when you're running as much leverage as they're using--and that negative convexity magnifies risks to the upside--it's not a dumb move to be overhedged, especially when hedging is so cheap.

    Lastly, it's also worth considering how easy it is to undo the effects of their putative overhedging. If you like the divvy but also want to capture any gains in book from falling rates, you can just add duration in your own portfolio using zeros, TSY futures, etc. Hedging is expensive and difficult to replicate at home, but cheap and easy to undo.
    Mar 6, 2015. 07:59 AM | 1 Like Like |Link to Comment
  • 18.4% Dividend Western Asset Mortgage Capital Is Betting On Higher Interest Rates [View article]
    reikreik is correct, FWIW: "Our portfolio has been positioned to perform well in this environment with increases in the value of our agency and non-agency holdings during the month of January more than offsetting a decline in the value of our hedge positions. As a result our estimated book value has improved since the end of 2014. Anup Agarwal will go into more detail on our outlook investment strategy for 2015."

    Look, I tend to agree with you about the merits of running a duration gap, and am personally anticipating falling--not rising--rates. So in this respect I'm sympathetic to your criticism. it would have been nice in hindsight if they were less hedged. But hindsight is always 20/20, and if rates had spiked last Q, people would be whining that they'd allowed themselves to get broadsided by another rate increase.

    Like it or not, their strategy of overhedging is the more conservative strategy. As volatility in IR increases, there's something to be said for being conservatively positioned, especially as there's more danger to the upside than there is to the downside. Also, as they've made clear numerous times, they dynamically adjust their hedges within a range--taking off some protection as rates move toward the top of their range, and adding something as they move lower.

    One other factor to consider: they're running a higher effective leverage than almost any of their peers (by effective, I mean taking into account the extra volatility of their non-agency securities, some of which, believe it or not, do have positive duration...). When you're more aggressive in one facet of your book, it never hurts to be more conservative on another.

    As for price, I've been reducing the trading bucket of my WMC into this runup. Still one of my largest holdings.
    Mar 5, 2015. 11:20 AM | 1 Like Like |Link to Comment
  • Walter Energy to issue 8.65M shares in exchange for $66.7M in notes [View news story]
    I'm the biggest scoff around (and proudly so!) and take no offense whatsoever. But there's a distinction between betting on coal (which I really kinda like, actually) and expecting this mangled corpse of a capital structure that is WLT to get up and dance around. Coal's still got a great future ahead of it, but alas, numbers do tell stories, and the numbers on WLT say to stick a fork in them.

    Charbon's probably right that there's at least one last convulsive short squeeze left in the stock before the end of 2015.
    Mar 4, 2015. 09:04 AM | Likes Like |Link to Comment
  • Walter Energy to issue 8.65M shares in exchange for $66.7M in notes [View news story]
    Yup, still following this as the last of what was originally a short equity/ long the unsecureds trade. Closed out the short leg of the trade a long time back. Because of the theta/ cost of hedging, my original wager really amounted to whether they died quickly or slowly. Had they gone quickly, I would have made a fair amount. As it went, I'll break even or do just slightly better--depending how many more coupons they squeeze out, or, failing that, what the nuisance value of the unsecureds ends up being in BK. Unsecureds might be good for *maybe* two more coupons, best case, plus a courtesy tip for 3-5% of the Newco to head off all the nuisance objections. There's no upside to selling at 12, so I'll wait.

    Don't have to be a Monday AM QB to conclude that these guys squandered some big opportunities to delever their balance sheet. Instead they just piled on more debt. Sure, they were running against a nasty met coal market, but part of being a successful capital allocator in a cyclical industry is that your best case or even baseline scenario shouldn't require historically high prices for met. Sorry, but that's on them.

    Who really knows why they took the exchange offer. Depending on your risk aversion or need to maintain positive carry for investors, sometimes taking less upfront and moving down the road is worth it, especially if you're a fund that needs to maximize cash flow/yield. Some have the luxury of playing the long game, other don't. But even on your more hopeful construal of the endgame, you'd have to agree that they're gonna dispose of the shares sooner rather than later, lest they end up right behind me, and even more SOL, in Delaware.
    Mar 3, 2015. 02:52 PM | 1 Like Like |Link to Comment
  • Walter Energy to issue 8.65M shares in exchange for $66.7M in notes [View news story]
    Ah, Charbon, mon ami, I envy your optimism--I really do!

    You likely answered your own question as to why the noteholders would do this deal--they want out with something, and the equity is more liquid than trying to unload a big chunk of the unsecured notes or sticking it out through a long and convoluted bk with no positive carry. Can you imagine? Some folks just don't have an appetite for such things. Doubt they'll dump the shares in any way that's noticeably lumpy, but they'll bleed them out over time to maximize their recovery.

    Sheer genius on mgmt's part to issue stock at $7.71. But just imagine if they'd instead issued stock (raised cash) at $20 a share when they had the chance last year, or, imagine this, financed the whole Western Coal acquisition with equity rather than leveraging up to the hilt at the top of the market. But, ah, no, that would have interfered with their incentives and precious stock options vesting. Better to bury their heads in the sand, postpone any major capital structure moves, and pray like crazy for met prices to recover. That usually works.

    As a noteholder, I'd be up for a soft restructuring where I got a significant portion of the new equity, but I doubt the senior lenders--who are already going to take a haircut in this mess--are feeling especially magnanimous. And rather than accept a tender offer in soon-to-be worthless stock, I'd much prefer to hold out, force them into BK when they can't pay me, and take my chances fighting it out with the senior lenders. The more dupes who take the tender in shares, the less us remaining noteholders have to share in BK.

    Good luck to all of us left riding on the SS Walter as we lurch onward to Delaware!
    Mar 3, 2015. 12:32 PM | 2 Likes Like |Link to Comment
  • Walter Energy to issue 8.65M shares in exchange for $66.7M in notes [View news story]
    Alas, too little, too late, Charbon. What's that--like a 15% dilution of the equity just to take out a fractional slice of just one series of noteholders? And you can bet those precious 9M shares will be bleeding out into the market just as fast as the former noteholders can unload them.

    I'm thinking they'll pay the 6/15 coupons on the unsecureds, default on the 12/15 payment, and file sometime in Jan 16 during the 30 day grace period. Senior lenders will take 95% of the company, noteholders will (I'm hoping!) get a nuisance share of the Newco, and equity holders will get a big, fat zero.

    So sad, so avoidable :(
    Mar 3, 2015. 10:04 AM | 1 Like Like |Link to Comment
  • The End Of Western Asset Mortgage's 20% Dividend Yield [View article]
    Not a problem, and don't want to be nit-picky, but you know how things go on the web. Somebody uses the wrong word and suddenly WMC is now a subprime originator... Otherwise, agree 100%.

    Since you bring it up, the whole loan market looks like it could be a really attractive niche. Assume that they can do non-conforming 5 year ARMs at 5%, 30% down, with either a rate reset to Libor+ or a balloon at the end of the initial term. That's a nice fat spread over their short term financing costs, and very little IR risk. Assuming it's well collaterallized and underwritten, that's exactly the kind of loan banks love to hold on their books.

    Now imagine they manage to assemble 50-100 Million worth of these loans. You can securitize the cash flows by selling AAA-rated matched term bonds against 75% of the collateral value to investors who are willing to accept 2.5%. You've locked in permanent, non-recourse financing at a 2.5% spread, you keep the excess cash flows and backends for yourself, and most of the credit risk shifts to the investors. Good work if you can get it...
    Mar 3, 2015. 09:22 AM | Likes Like |Link to Comment
  • The End Of Western Asset Mortgage's 20% Dividend Yield [View article]
    @JHH Alpha

    Actually, in the interest of being 100% accurate, the loans they've acquired are higher in quality than agency mortgages, they're just non-conforming (i.e. loan balances too high to qualify for agency purchase). It's not a bad market, actually, as the borrowers are tightly underwritten and have large downpayments and lots of skin in the game. These are typically the kinds of juicy home loans that banks like to hold on their own books. They're also usually 5/1 or 7/1 ARMS which helps to cut down on the IR risk.

    Don't disagree with your point about overall riskiness, though. WMC's a great company, but anyone playing with mbs at 6 or 7 times leverage is by definition taking some kinds of risk.
    Mar 2, 2015. 02:58 PM | 1 Like Like |Link to Comment
  • The End Of Western Asset Mortgage's 20% Dividend Yield [View article]
    Your characterization of their move into whole loans is misleading. What they're buying--at least as they've described it--are *not* subprime but Alt-A loans. This isn't semantics, as there's a huge distinction in terms of credit quality.

    Subprime are typically deadbeats with 600 credit scores buying 100K bungalows with 5% down. By way of contrast, the kinds of whole loans they're targeting are rich, self-employed people with 750 credit scores who are putting down 30% cash toward a $2.3 Million place in Palo Alto or Miami Beach. Credit risk, yes, but apples and oranges in terms of the loans, and it's technically wrong to refer to these as subprime.

    Presumably once they've assembled enough of these whole loans the plan is to securitize them into MBS, keep the unrated backends for themselves, and profit from the cheap, guaranteed term financing of the securitization.
    Mar 2, 2015. 02:48 PM | 3 Likes Like |Link to Comment
  • Western Asset Mortgage: Best-In-Breed Status? [View article]
    I like these guys a lot, and think they're doing an awesome job. But running above a 7:1 leverage on a hybrid portfolio (as they did at some point in the Q before taking something off at the end) is aggressive. They're still preponderantly an agency portfolio, so it's not apples to apples, but compare that leverage to other "hybrids" such as TWO, MFA, or CIM and you can see how they're throwing off so much spread income compared to peers. They'll probably be fine, but given how much prices on the new GSE risk-sharing securities have bounced around, and that they're moving into illiquid stuff like whole loans and European CMBS, I kinda wish they'd dial it back a little bit....
    Mar 1, 2015. 12:11 AM | 1 Like Like |Link to Comment
  • Western Asset Mortgage: Are You Ready For The 20% Dividend Yield? [View article]
    Happy to have been wrong on the earnings, but looks (at a very quick glance) like they were over-hedged. NIM and spread income look great. Most importantly, market likes what it sees :)

    Trimmed my position 20% today (trading shares, bought in the high 13s) on the big bounce.
    Feb 27, 2015. 03:27 PM | Likes Like |Link to Comment
  • Buying LQD Is A Waste Of Time [View article]
    Agree with the author's main thesis about LQD, and generally support the notion of buying individual bonds as opposed to an ETF or OEF wrapper. If you're concerned about duration/ IR risk, and are content to "lock-in" a given yield by holding to maturity, this is unquestionably the way to go.

    But Unknown Investor nails the bigger problem spot-on. Even for widely traded and *relatively* liquid issues, unless you're trading in blocks of 100K and with a loyal broker dealer who values your repeat business, you're going to get murdered in terms of bid-ask spreads and forget about liquidity when you need it most. If you *truly* intend to hold a bond to maturity, this isn't a huge deal. You get gigged a quarter or half point or so going in, and by the time you amortize this across the life of the bond, it's no biggie. But woe to you if you need to unload an odd lot of something in the meantime, even if it's IG and generally liquid. One round trip in and out of a single bond can eat up as much as the annual fees for a whole portfolio invested in LQD. Word to the wise: that liquidity will not be there when you need out. The better brokers will allow you to show a solid offer out to the market directly, but many/ most will make you solicit bids even if there's an outstanding bid in the market. I've seen normally benign bid-ask spreads explode so wide you could drive a truck between them on a moment's notice. And this is all for plain vanilla IG corporates. For munis or anything high yield, forget about it. You will be crucified if you need to sell an odd lot.

    Also, part of the reason why it might be advantageous to own multiple issues from a single credit is diversification of maturity (not just issuer).

    Another advantage of actively managed OEFs is that they're going to get a look at a wider range of credits than retail investors will ever see. And once you get down beneath the IG credits, what you as a retail investor "see" on offer or in dealer inventory is generally what the smart money no longer wants. It's adverse selection bias. Whenever you see a big bundle of some new B-ish credit suddenly appear in the market, you can be sure that someone else knows something you don't know, and that they're trying to get out before the deluge.
    Feb 25, 2015. 03:06 PM | 9 Likes Like |Link to Comment
  • Annaly Capital Management's (NLY) CEO Wellington Denahan on Q4 2014 Results - Earnings Call Transcript [View article]
    "[I]n a perfect world we would love it if we could time these things perfectly where we put all of our swap book on when rates are low and then buy all of our assets when rates are high. Unfortunately that is not how it goes."

    LOL, understatement of the day by Welli! Betcha they wish they could have a do-over on Fall 2012 through end of 2013, rather than having gotten it exactly backward. Any consolation...at least they weren't alone.
    Feb 25, 2015. 01:16 PM | Likes Like |Link to Comment
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