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laterre

laterre
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  • Fishing In The Oil Patch [View instapost]
    Let's just say I've done a couple of those kinds of analyses.

    But the results are only as good as the numbers going in. Disclosed PV-10s of even the front-line operators are hopelessly confected. This E&P space is a cesspool. I much prefer the financial and real estate sectors for that very reason (Go OCN and GNW, BTW!)

    Will check it out in the next couple of weeks. I'm behind on a round of earnings releases I need to process first...
    May 1, 2015. 12:41 PM | Likes Like |Link to Comment
  • Fishing In The Oil Patch [View instapost]
    Thanks much for the tip on ESCRP. Will try to take a look and share any feedback, though I really scratch my head on these E&Ps. It's not clear you can trust the book numbers for recovery values. And looking at the game as chess rather than checkers, even if the prefs look like they're in the money now, there's usually no structural protection to them layering more debt in front of the prefs.

    Hey, sorry, didn't mean to be rooting against you in my call for $5!
    May 1, 2015. 11:00 AM | Likes Like |Link to Comment
  • Fishing In The Oil Patch [View instapost]
    Haha, I got lucky once--probably the smart thing would be to quit while I'm ahead rather than get involved again! Aesop's dog and all that... But at some point the prefs may become cheap enough that it's worth a VERY small bet.

    Yes, absolutely, if they declare a divvy these things are off to the races. I just don't see how they can afford to do so right now. Selling hedges to raise cash isn't an encouraging sign. But it does tend to confirm the hunch we talked about before: KeyBank wants out of this deal, bad. Maybe there's enough speculative hot money floating around out there that they can place some senior secured convertibles to take the uncooperative lenders out.
    May 1, 2015. 09:26 AM | Likes Like |Link to Comment
  • Fishing In The Oil Patch [View instapost]
    Hope I'm wrong, but none of these announcements bodes well for the lower echelons of the capital structure.... When they start talking about "stake-holders," watch your wallets.

    If you were an institutional investor eye-balling a PP investment in MILL, what kind of "Credit-enhancing capital" infusion would get you excited?

    a) some kind of senior secured convertible notes with a big kicker that would raise enough cash to get either KeyBank or the Apollo loansharks out of the picture? This would actually be a good move, assuming they could find someone who'd be willing to accept a lower interest rate in exchange for all the potential upside. The downside of this kind of deal for the preferreds is that anyone willing to get involved here can pretty much call the shots, and if the amount of the notes ends up being bigger than the current term debt outstanding (and given these guys' prodigious cash burn) the recovery on the prefs gets pushed farther down or even totally out of the money.

    b) "if the answer isn't yes, then it's probably no": I take this to mean no divvy declaration on the prefs. You see this in the price action on the prefs. Now would be the right time to tender some kind of exchange offer (say, a non-cash offer at .40 on the $) to convert these prefs into new equity. Do this in conjunction with the reverse split needed to get back into compliance. This could be voluntary to see if they can get any takers, or as part of an actual/ threatened pre-pack Ch. 11.

    c) on the Wells notice. Big surprise: looks like they overstated the value of their acquisitions. Didn't we already know this when they wrote all these back down? Is there a potential legal remedy here by the current regime against past management?

    In sum, this is still a big cluster-bump, but at $4 or 5 on the prefs, if they get there, I might take another punt...
    Apr 30, 2015. 03:37 PM | Likes Like |Link to Comment
  • Genworth +6.1% as "stability returns" [View news story]
    It's a classic case of one problem business unit (long term care) with really scary optics (but potentially interesting long-term upside if they can ever get the pricing right) completely overshadowing all the value in other units hiding in plain sight. They'll settle on the right capital transaction in the next 6 mos to a year (whether selling off a non-core unit, going private or whatever), and this will take off.

    Not sure book value is a realistic target, though. Don't their healthier peers in MI also sell at a pretty decent discount to book?

    I bought a nice bucket of their debt when it was way down and just hope that however they re-jigger the capital structure will lead to a credit upgrade.
    Apr 29, 2015. 03:46 PM | Likes Like |Link to Comment
  • Genworth +6.1% as "stability returns" [View news story]
    Nice Qtr. Looks like the worst is behind them. Free up some cash with a strategic sale of the lifestyle unit, secure some more LTCR rate increases, and they're in bizness...
    Apr 29, 2015. 08:25 AM | Likes Like |Link to Comment
  • Lumber Liquidators Overshot To The Downside [View article]
    Hope you're all right. You all are way more confident in the tort system in the US than me.

    Problem is that unlike defective pants or child-labor made shoes, formaldehyde is a toxin, potentially carcinogenic and with lots of other known health hazards. IF--and this is big IF--they can be shown to have had knowledge that they were cutting corners and selling a potentially dangerous product, this becomes more than a nuisance settlement.

    A more conservative analogy than LULU or Nike is A. H. Robins or Manville. I don't think it'll unfold this way, but you're kidding yourself if you don't allow that this worst case scenario is at least within the realm of possibility. Things are never quite as good as we'd like to hope, nor as bad as we fear.
    Apr 15, 2015. 10:53 AM | Likes Like |Link to Comment
  • Lumber Liquidators Overshot To The Downside [View article]
    I don't doubt but that you're right on the facts. Indeed, I hope you are proven correct. This has been as nasty a smear job as I can recall.

    But the best/worst thing about civil tort liability in the US is that the facts are largely irrelevant to whether one can assemble a class or win a judgment. Now that there's blood in the water, every would-be plaintiff whose kid got a brain tumor or whose wife's asthma became debilitating will be out in droves. And all it takes is one smoking gun/ incautiously worded email (all of which will be subpoenaed) between LL's buyers and the suppliers and they're chum.
    Apr 13, 2015. 05:53 PM | Likes Like |Link to Comment
  • Lumber Liquidators Overshot To The Downside [View article]
    No position here, but the analogy is fallacious.

    Unlike Nike, which weathered bad press and scrutiny, LL faces unquantifiable civil tort liability from droves of class action bottom-feeders.

    I think they've gotten a bum rap, but the morality of the situation is irrelevant. The stock is still expensive relative to the potential legal overhang.
    Apr 13, 2015. 10:41 AM | 1 Like Like |Link to Comment
  • Spreads And Durations And Swaps... Oh, My! Digging Deeper Into Western Asset Mortgage [View article]
    Makes sense, and I think you're exactly right that (a) a lot of this is "non-economic" in the sense that it's about GAAP book keeping requirements to account for things whose economic fundamentals aren't really impacted but that (b) the ambiguities do potentially allow for some fudging or creative accounting. You're right to keep your eyes on this. I've found it peculiar that rather than just closing out swaps at a loss (which would require them to book the loss) they instead avoid the ugly tax consequences of this by taking on another off-setting receiver swap, which presumably nets out. And there's also the ambiguity that in many cases the "yields" they report on mbs aren't necessarily reflective of actual cash flows but are modeled in advance and locked in at purchase (thus giving them the discretion to claim a "catch up" credit if actual prepays come in slower than the original projections, or necessitating subsequent write downs if the model was too optimistic). I can remember during the halcyon days AGNC was able to juice earnings a couple of quarters by pulling that rabbit out of the hat.

    Bottom line: MBS fundamentals are complicated enough, and the accounting rules add another layer of difficulty that's hard to penetrate even for a bond investor.
    Apr 12, 2015. 10:01 AM | Likes Like |Link to Comment
  • Spreads And Durations And Swaps... Oh, My! Digging Deeper Into Western Asset Mortgage [View article]
    CWMF,

    Nice work, and you're asking some interesting questions. I don't have time to dig into this right now, but will try to come back and look at this all more carefully someday shortly.

    But a couple of things jump out as ?

    1) Your chart of the Negative Duration Contribution of swaps per Q (which shows the declining neg duration). That could be indicative of several things on the part of mgmt. Either (a) it represents them taking off some swaps because they're loosening up a little bit and are now willing to run a bigger duration gap; or (b) the shifts they're making in the portfolio into non-agency floating-arms, jumbo balloons, and whole loans mean that they don't any longer NEED to hedge as aggressively given that these products are intrinsically less sensitive to IR risks than the 30yr agency 3s and 3.5s they were heavy on previously. I'd suspect it's a little of both, but mainly (b). That's the double-win you get in taking on some credit risk: spreads get wider, and you trade-off some of the extreme IR sensitivity of low coupon agency fixed rate paper for the credit risk of whole loans. So your premise that they may need to "replace" this negative duration in the future may not hold.

    2) On the cost of hedges varying so wildly between Qs. One way to think about this (the wrong way, I think) is to assume that the cost of hedging via swaps is relatively constant, and thus spending more or less per q is indicative of adding/subtracting some stable notional amount of IR protection. But the price of IR protection via swaps and swaptions isn't a constant but a variable, and thus it costs you more to put on (or take-off via off-setting variable pay) some notional amount X of IR protection depending on market expectations at that moment for the future direction of IR rates. Could changes in the price it costs them to hedge out the risk and/or some friction between the costs of taking off protection by purchasing off-setting swaps explain some of the variance? What was happening in IR rates and future forward curves when they were in the market for swaps in each of those Qs?
    Apr 10, 2015. 04:37 PM | Likes Like |Link to Comment
  • Miller Energy Resources - Another Distressed Preferred With 176% Upside Potential [View article]
    Don't have a horse in this race anymore (flipped some of the prefs a few months back for a quick trade), but this capital strategy of selling prefs at the market for .30 on the $ is insanity. Hedged or unhedged, and at any price of oil, there's no way they can earn a return on capital sufficient to justify that cost of funds. The divvies will be paid so long as Apollo (who's clearly calling the shots) thinks there's still something to be gained from dumping new pref shares into the market. After that, lights out...
    Apr 8, 2015. 02:37 PM | 3 Likes Like |Link to Comment
  • Pacific Coast Oil Trust: 6.5% Yield With Income Upside [View article]
    Yah, it's that "or" that could bite you in the rear!
    Mar 23, 2015. 10:36 AM | Likes Like |Link to Comment
  • After Losing Half Of Its Value, The Largest Gold Producer Is Still A Sell [View article]
    Points well taken: they were buyers at the top of the market and now will be divesting in a much less favorable market.

    Still, they're raking in a couple of billion a year in AFFO, have lots of stuff to sell (albeit not for the top dollar prices they paid). Unlike some of the more constrained producers (I own CDE's 7.785s of 2021), they've still got a decent leash to maneuver before being in true distress.

    Ultimately they (and most others in the space) will live or die by the price of gold, which is largely indeterminable.
    Mar 23, 2015. 10:33 AM | 1 Like Like |Link to Comment
  • After Losing Half Of Its Value, The Largest Gold Producer Is Still A Sell [View article]
    I don't think we fundamentally disagree--or at least our observations are compossible with each other.

    45X coverage is risible--that's like having no debt at all. 3X coverage isn't investment grade, which is why it's realistically a BB or BBB credit. Looks like they've aggressively made some acquisitions (including some bad ones) and are now eating some of them by write-downs. Probably got a little in front of their skis when gold prices were supposed to go through the roof.

    All that said, I don't lose a lot of sleep with a company covering their interest 3X over--neither do other investors, apparently, which is why their notes are trading only 300 bps wide of treasuries. $850 AISC is still profitable at $1150 an ounce, and they've got assets they can unload to delever themselves. They won't come out and say it, but an equity issuance wouldn't be a bad thing. Certain kinds of enterprises, especially deeply cyclical commodities, really ought to be financed mainly with equity.

    Re. "solvency"--I'm not sure what you mean by that. very few cos--even IG credits--would be solvent if they were suddenly unable to roll their debt. ABX is easily covering their debt service; has ample liquidity over the next 2-3 years; has cut capex and opex in response to the new price environment; is planning to sell assets to raise more cash to retire LT debt; and looks to have an enterprise value and assets that cover the unsecured debt.

    is this a great business going forward if we stay at $1100 gold? Probably not. But mgmt obviously cares about the debt (and is behaving responsibly) by delevering and diverting operating cash flows from capex to debt retirement. The red flag would be if they can't execute any sales to deleverage--or if gold tanks below $1000.

    Not my area--and I don't follow this co closely--but your characterization seems excessively dire.
    Mar 22, 2015. 11:15 AM | 2 Likes Like |Link to Comment
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