Seeking Alpha

laterre

laterre
Send Message
View as an RSS Feed
View laterre's Comments BY TICKER:
Latest  |  Highest rated
  • SandRidge: Playing The Endgame With A Hedged Position [View article]
    I've already said above that I don't think the author understands the capital structure in SD. His "arbitrage" trade would have you potentially losing on both sides in a typical BK scenario. But the covenants being discussed--by him and the mgmt--*are* (not "might be") with respect to the senior secured revolving credit facility--not the bonds. And the consequences of having your working credit line yanked are indeed every bit as "supremely adverse" as he says.
    Jan 8, 2015. 04:18 PM | Likes Like |Link to Comment
  • SandRidge: Playing The Endgame With A Hedged Position [View article]
    He's prob talking about the revolver, not the notes. Notes typically don't have these kinds of restrictive covenants tied to earnings or leverage. They're unsecured. But I'll let the OP explain for himself...
    Jan 8, 2015. 10:51 AM | Likes Like |Link to Comment
  • SandRidge: Playing The Endgame With A Hedged Position [View article]
    Your entire premise for this article is a howler. SXDRP is EQUITY, albeit preferred equity and convertible. The 2021s are senior unsecured DEBT. They're behind the senior secured revolver, as you say, but in front of all other unsecured debt, as well as all the equity.

    Re. SXDRP:"In regard to the payment of dividends and UPON LIQUIDATION, the preferred shares rank JUNIOR to the company's senior debt, equally with other preferreds of the company, and senior to the common shares of the company."

    Check the prospectus for the preferreds and the 2021s if you don't believe me.

    http://1.usa.gov/14iAKLu

    No opinion on SD one way or the other, but if you think a buyout is in the offing, just keep it simple and buy the debt in size, or hedge some of the risk by shorting the common. My guess is that at this stage of the game the trade is uneconomical.
    Jan 6, 2015. 01:09 PM | 3 Likes Like |Link to Comment
  • Fishing In The Oil Patch [View instapost]
    Hey Darren,

    Thanks so much for the detailed run-though on your numbers for recoveries/ liquidation. That's fairly conservative, I agree. And I hadn't factored in the compensatory value of the hedges, which is why I was coming up with worse numbers. Never paid these small E&Ps much mind before they suddenly all went on sale.

    The preferreds still scare me, to be honest, but I began a small starter position of .5% of portfolio. Will be monitoring closely and hope that mgmt can make good on their "worst case" scenario for 2015. The risk/reward on this is just too good to overlook completely, but still can't go as deep into the water as you guys.

    @ jpmist: hey, greetings, and happy new year! I didn't read all the original covenant docs on the senior and 2nd liens, but ran through the recent modifications/ waivers fairly carefully. There's nothing outlandishly bad, other than Apollo Inv is sticking them for 13-14% on the supposedly secured 2nd lien (which might give some indication about where the shotgun preferreds ought to be yielding). The only thing that's unusual (and maybe this reflects my general ignorance of the small E&P space) is that the lenders are literally telling them what wells they can drill. It's like someone adult needed to step into the boardroom and takeover their capex given all the cash that's been squandered lately on dry wells.

    The serial preferred issuance at the market is also weird, frankly, but I guess it was more cost effective for them than a true senior unsecured bond issuance with a real underwriter.

    Something here just doesn't smell right to me, which explains why I'm only treating this one as a lottery ticket...
    Jan 3, 2015. 04:39 PM | 2 Likes Like |Link to Comment
  • Gundlach: Bull market for Treasurys to continue [View news story]
    His brand new LONG duration bond fund (DBLDX) is a very interesting product, both for expressing this contrarian view on IR (which I share) and as a macro hedge.

    Using agency CMO derivatives (which most small investors can't access) allows him to express this directional view on IR and also to capture a much fatter coupon than just buying a bunch of long dated treasuries.
    Jan 3, 2015. 10:32 AM | 2 Likes Like |Link to Comment
  • Ditching The 401(k) [View article]
    Apologies for the candid reaction, but while generally well-reasoned, this comes off as a really smug portrayal of retirement planning.

    Ok, so the 3% employer match isn't great, and you may not stay long enough to collect the full benefit, but even 2% is something (assuming you leave early). True--the tax advantaging is contingent on your highest adjusted marginal bracket, so in your case it may be, say, 10%. And let's assume that your fund choices aren't great in terms of either performance of fees.

    Even so, you are conservatively leaving 12% on the table right off the bat by declining to participate. And if you're a true saver, as you say, and socking $ away (versus having cash in hand now in your paycheck) is a real priority for you, you can get a lot more money (up to 18K per year, plus the match) into tax advantaged accounts via the 401k than by means of individually managed accounts, and in many cases do a Roth IRA on top of the 18K. Maximizing the amount of $ that's shielded from the tax man every year has an ongoing benefit, as it's amazing how much taxes eat into gross profits, even for supposed "buy and hold" investors.

    Lastly, maybe you're right and your plan options all suck. This happens frequently as (gasp) employers put little thought into designing these things. However, as mediocre as the options may be, I would bet you dollars for donuts that over a 10 year investment horizon, even dollar-cost averaging into that crappy, fee-heavy large cap US equity fund they're offering you will still outperform your own attempts to beat the S&P by assembling your portfolio of dividend growth stocks. If it were so easy, everyone would do it, and beating it isn't the point so much as doing so on a risk-adjusted basis.

    But to each his own, and good luck to you, really ;)
    Dec 29, 2014. 08:51 AM | 21 Likes Like |Link to Comment
  • Fishing In The Oil Patch [View instapost]
    Thanks much for the detailed info on Mill-Pref. Wow, this one has some *serious* hair on it. If these prefs are your single largest position, I really hope you've gotten the sizing right... Vaya con Dios, my friend!

    How confident are you that they won't immediately hit the new covenants in the amended credit agreements? By my very quick reading (and without cross-checking against the originals) these waivers look like they were designed by the lenders as a stopper to put a brake on cash going out the door to the preferreds (or more stupid capex). Based on the current price of the Prefs, Mr. Market is assigning 100% prob of a dividend cessation in the immediate future. Wouldn't be the worst thing to preserve some cash.

    Not sure on your buyback theory, though, as I'm assuming the secured lenders would insist on any FCF going to paydown the senior and 2nd liens, no? That's more or less the demand they've made w/r/t the impending Alaska credit receivable. Why would they allow cash to go out the door beneath them in the cap structure, even if, as you correctly point out, it's more accretive than drilling?

    I'm also less sanguine than you on the margin of safety through the prefs. Given the huge write-downs to reserves in the last Q, don't you worry that another big chunk of their assets could vanish with the stroke of a pen? You've also got to haircut the rigs, equipment, etc. for a firesale liquidation. And with any further preferred issuance at a standstill, what's to stop them from issuing something else senior and secured to the prefs, leaving them with nothing? I notice the lenders ratcheted up to 90% their senior security claims on the assets. Doesn't exactly scream confidence in valuations.

    Pretty much the only truly positive signal I see on the prefs is that one of the Directors just ponied up to buy some in the open market.

    Mad props to these guys if they can make it to the other side of the mountain and carry the pref holders with them. Fantastic upside r/rw on these things. But thus far, this company looks like a well-oiled machine designed for taking money from the state of Alaska, drilling dry holes, and selling dodgy preferreds to the retail market.
    Dec 28, 2014. 01:38 PM | 2 Likes Like |Link to Comment
  • Seventy Seven Energy: Underfollowed Special Situations Gem Trading At A Deeply Distressed Valuation [View article]
    With 5 minutes of research, I get a conservative liquidation value of their assets at 1840M, over and against 2084 in curr liab and LT debt, for a stressed valuation of (200M). The equity is a zero in a bk.

    With the spin they issued 500M of unrated debt and...promptly paid it to CHK. Nice trick.

    As far as revenues, assuming a 2014 annualized base of 2B, over and against OPEX of 1600, SG&A of 110M, and Interest expenses of 100M, they are/were FCF positive to the tune of 200M as of the last Q.

    Stressing for a 25% reduction in revenues in 2015 and assuming some inelasticity of expenses, you get 1500-(1280+110+100)=or roughly breakeven for FCF.

    Anything more than a 25% decline in revenues and they're burning cash. 50% decline and they'll burn through the revolver in 12-18 months.

    Not the biggest POS in the dog park, but nothing to write home about.
    Dec 19, 2014. 10:14 AM | 2 Likes Like |Link to Comment
  • Seventy Seven Energy: Underfollowed Special Situations Gem Trading At A Deeply Distressed Valuation [View article]
    Ditto on the debt question...huge omission.

    You *absolutely* have to stress for debt coverage before concluding that this is worth more than zero.

    Moreover, and without even glancing at the 10-Q or other docs, I want to vent about a new favorite pet peeve of mine that I'm noticing more and more often from all the Joel Greenblatt fetishists around here. Namely, that not all "spins" are good opportunities, and many of them are outright scams intended to offload debt-ridden subsidiaries onto the gullible.

    I can name a dozen recent bankruptcies that originated as "spins," which were really thinly veiled dumps of debt. Case in point: many of the Sears divestitures such as Orchard Supply Hardware. Back when spins were underfollowed and misunderstood, the Greenblatt trick worked. But now that everyone knows that everyone else knows the trick, nudge-nudge, wink-wink, companies are mercilessly spinning off debt-laded subsidiaries that are designed to fail. To me, the fact that this was a top of the market spin is a red flag NOT to invest.

    No idea whether this is a bargain or not, but the fact that the senior unsecured debt is changing hands in the 50s is not a good omen.
    Dec 19, 2014. 09:38 AM | 3 Likes Like |Link to Comment
  • Key Energy At $1: Priced Like An Option With Upside Potential To Match [View article]
    Thanks much, hoyt. Yep, it's conservative but also reflects what you might reasonably expect in a true liquidation. A solid % of current assets, moderate % of hard assets that have value only to another industry player, and writing off the intangibles. I prefer to build in a decent margin of safety. If anything, that's probably generous in terms of what some of these cyclical industry assets might bring in a fire sale.

    On the credit agreement: looks at a glance like Wells or the syndicate agreed to relax the covenants temporarily in recognition of the FCPA problems in exchange for lowering the amount. It's scheduled to decrease to 350M by July. They may hit the new covenants. Haven't stressed for those as I assume they'd get them waived.

    Not to say they can't refi and get more secured debt in front of the unsecured bonds, but I kinda like the fact that they're currently locked out of the capital markets. Rather than a long-drawn out chess game, what you see is pretty muh what you get in terms of the capital structure. They either make it to the other side of the mountain in the next 9-12 months, or they file. Equity is a call option, like hawk says.
    Dec 17, 2014. 01:03 PM | 2 Likes Like |Link to Comment
  • Key Energy At $1: Priced Like An Option With Upside Potential To Match [View article]
    Disclosure: I've been following this one closely, as well as Basic Energy, and have initiated a small starter position in the bonds. So don't take what I'm saying as bashing: I am long KEG at a different point in the capital structure.

    I would second the author's point about the liquidity position as being strong. Taking a very conservative liquidation value of the assets, I end up with 1250M as the highly stressed NAV, over and against LT debts of 975M, for a coverage in liquidation of 1.3 times through the senior unsecured bonds. Assuming they draw down fully the revolver tomorrow, for a total debt of 1000M, there's still 1.22 coverage through the bonds, with a little something left for the equity holders.

    From a capital structure standpoint, these guys are in better shape than Basic, and hence the rationale for the recent S&P UPGRADE to BB-.

    But here's the problem, which Hawk slides right past. They are subject to an ongoing and expensive FCPA investigation, which is a few million a year drag in legal expense with the possibility of a nasty penalty waiting down the road.

    The biggest problem, though, comes in terms of revenues. Their current annualized revenue is +/- 1250M. Assume that's the baseline for 2014. But against that, they're only generating a measly 130M in EBITDA. This provides a respectable 2.37 coverage of their 55M in annual interest expenses, but doesn't leave any margin for error.

    Let's assume that revenues decline by a *mere* 25% from the baseline of 1250M, down to 950M annualized for 2015. Over and against that, they have 225M per year in G&A expenses; 55M in interest expense; and assuming some inelasticity of their OPEX (80% of previous year) or 1066M, you get total expenses of +/- 1346M.

    950M-1350M=(400M) cash flow deficit based on only a 25% decrease in revenues, which would kill them in less than a year. You can do the math yourself and assume an even more draconian decline in revenues, but the results are the same: a speedy trip to Ch. 11.

    One can quibble with my estimates of the inelasticity of costs as being too conservative (feel free to correct my #'s), but the bottom line is that these guys are barely cash flow positive under current conditions. I think the risk/reward on the bonds looks much better, especially given the asset coverage.
    Dec 17, 2014. 10:33 AM | 4 Likes Like |Link to Comment
  • BKLN Is Yielding Almost 5% And Has Over $6B In Assets, But Is It Worth The Risk? [View article]
    Cool. Look forward to it.

    Meanwhile, be careful with this one. $6B all trying to get out a very small door at once can get ugly. Single file, no shoving...
    Dec 16, 2014. 10:12 PM | 1 Like Like |Link to Comment
  • BKLN Is Yielding Almost 5% And Has Over $6B In Assets, But Is It Worth The Risk? [View article]
    Hey Reuben,

    You're a man of great equanimity to indulge my rants ;)

    We can agree to disagree on this one, all the more so if, as you say, these loans are being sourced by private equity firms such as Bain Capital and off-loaded into an ETF vehicle.

    LT
    Dec 16, 2014. 08:56 AM | 1 Like Like |Link to Comment
  • BKLN Is Yielding Almost 5% And Has Over $6B In Assets, But Is It Worth The Risk? [View article]
    Maybe, Vincent, but that assumes two things.

    First, that longer term interest rates--i.e. TSY10--are bound to rise shortly. The empirical evidence of history (never let this get in the way of a good narrative meme...) is that when the Fed tightens, the short end (which they kinda sorta control) moves up in response, but the long end stays steady or even gains. Obviously the evidence is still out on this. It's equally likely, IMO, that the Fed raises rates and either nothing happens to the long end of the curve, or the whole stock market tanks, and TSY actually *gains* as a result.

    Second, and more germaine to my tirade above against BKLN, it assumes that these short duration, junky leveraged loan products will perform better than a longer duration portfolio in an environment of rising rates. Mathematically, and in theory, you're absolutely correct: they have a lower duration than TSY10. But think about the opportunity cost calculation of a capital allocation decision in a scenario with a flattening yield curve. Fed aggressively hikes 150 bps (say) over the course of a year, and the curve out to 3-5 years blows out and the yield curve inverts. Given the new investment landscape, would you prefer to own a 5 yr treasury that pays 2.5%, or a junky leveraged loan fund paying 4.5%? Under these conditions, in my view, low duration junk funds look less--not more--desirable.
    Dec 15, 2014. 01:06 PM | 1 Like Like |Link to Comment
  • BKLN Is Yielding Almost 5% And Has Over $6B In Assets, But Is It Worth The Risk? [View article]
    Let me be clear: I'm not saying that this thing is likely to blow up anytime soon. But it is exactly the *kind* of instrument that has the potential to blow up, and to blow up big time, in a stressed market. The paltry 4.5% doesn't come close to compensating for these risks.

    But just for the sake of discussion, I did want to respond to your assumptions, not because I expect to convince anyone else, but because (with all due respect) I think your assumptions are both faulty and widely shared.

    1) Lots of big institutions own this ETF. Ok, fair enough, but it's worth looking at which kinds of big institutions. What you've got here is institutional ownership by--and you'll pardon my insulting expression--dumb money. Pension funds, mutual funds, high net worth individuals steered here by advisors, etc. People who want to think that they're avoiding one kind of risk--interest rates--but aren't smart enough to see that they're actually setting themselves up for a far worse kind of risk: namely, illiquidity. Illiquidity has blown up more investors than IR moves. Look at any major financial crisis, and illiquidity is either the precipitating or exacerbating factor. If or when all these "big institutions" with 6B parked in this thing were to get spooked, and try to run for the exits, the leveraged loan market will literally explode. It's not made to handle large transactions at the speed demanded by an exchange traded product. Look at the HY market right now--virtually bidless for certain kinds of paper. Now imagine that you're trying to move a couple of $B of junky bank loans--many energy related--when people start panic selling. Forget about it. So I actually think that the size--and ownership--of this thing is part of what make it an outstanding "black swan" candidate. This is not owned by the kind of patient, savvy, and risk-tolerant institutions who are willing to stare at 25% capital losses and sit tight for five years and ride out a downturn. It's not being marketed as that kind of product, which is part of the risk.

    2) You didn't address the issue of the typical ETF's mandate to create or redeem shares to keep the market price more or less in line with NAV. I have no idea what mechanism they have in mind to address this, whether with cash redemptions or, more likely, doing it synthetically via CDS. But definitionally, one of two things must be true of every ETF: either they create and redeem shares, or they don't. If the former, then market sales of the ETF (and day to day market fluctuations) have the possibility of forcing them to unload assets. See my point #1 above for the problems with this, and the potential catastrophe of a "tail wags dog" situation where attacks on the ETF could trigger mandatory assets sales into a bidless market. If the latter, then there's the possibility that even with healthy, performing loans, this thing would open up a major adverse discount to NAV. If you are inclined to own this thing, I'd be reading the technicals on how, precisely, they handle this issue of share creation.

    3) I'll grant that maybe--just maybe--you are avoiding some IR risk because of the very short duration and floating nature of these loans. Empirically, however, in most situations where IR rises rapidly, junk tends to get hurt worse than IG or govt. And the short end of the curve tends to move more than the long end. But setting aside the facts, think about the other side of the equation: what does it mean to the borrower that when rates rise, so does their interest expenses? The inverse of IR rate risk here is exacerbating the credit risk of dicey borrowers. And the flip-side of short duration means that unlike your typical 5 year junk note, these things have to be rolled every year or three. What happens if we have a panic, the leveraged loan mkt tightens, and your typical B-ish borrower can't roll over these loans?

    4) Finally, on the credit risk, yes, these are senior loans (typically secured) at the top of the capital stack. Most of them are probably money good, or were when issued. This isn't the unrated mez crap that the BDCs have piled into. But still, look at these borrowers on your list. Heinz, ok. Energy Futures Intermediate Holdings?! Texas Competitive Electric is, unless I'm mistaken, in bankruptcy--so this is probably either a DIP financing or currently non-performing. Some of these look decent--and they're diversified--but still this is a rogue's gallery of heavily indebted private equity disasters. The kind of deals that get done by taking on lots of debt and placing it with....dumb money. Think about the mechanics of how a senior leveraged loan ends up in an ETF like this. It's the Akerloff "market for lemons problem" in a nutshell. If you're a bank or securitizer, you obviously want to keep the good business for yourself. But at the margins, you'll do an iffy loan--or a loan on terms that are unfavorable--cause you know you can always dump the loan off into a CLO or an ETF such as this one. These things are premised on precisely the principal-agent disconnect of securitization that we all found about about in 2008-2009.

    Bottom line: sure, probably this thing will be fine, and you'll collect your 4.5% and live another day. I sincerely hope so. But in eschewing interest rate risk, you are taking on some other, even worse kinds of risk for which you are not being paid adequately, in my opinion.

    Do as you like, but I wouldn't touch this with a 10 foot pole.
    Dec 15, 2014. 09:23 AM | 2 Likes Like |Link to Comment
COMMENTS STATS
503 Comments
636 Likes