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  • Miller Energy files for Chapter 11 in deal with Apollo, Highbridge [View news story]
    Ok, so maybe there will be some scrap warrants thrown to the Prefholders as a sweetener--options to put up more NEW cash to capture some of the future upside. But your original investment is gone, poof. You also have to realize that Apollo is stipulating a lowball valuation precisely to make it seem like the Prefs are out of the money. If the enterprise were valued higher in the BK, prefholders could well be entitled to a real recovery. But the only way that is going to happen is if Prefholders pony up for legal rep, organize a committee, and contest the pre-pack plan. Collective action problem 101...

    Also, it'ill be interesting to see how the unsecured creditors behave. You can bet that they're already organizing a committee and planning to sit at the table. They're ahead of you (prefs) in line, so if they get screwed, you will too...
    Oct 6, 2015. 10:40 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]
    Bummer folks, and my sincere condolences. This one has been quite a roller coaster to follow, and maybe the story isn't over yet.

    It's not really an "offer," it's a pre-packaged bankruptcy petition with the option for a mgmt committee to seek a better deal on the side (an upside call currently out of the money with the Apollo deal on the table).

    Just glancing *quickly* at the petition and the DIP financing, the plea is that the 2nd lien is impaired, meaning that Apollo claims the company is worth less than the outstanding 2nd lien, and thus Apollo gets to take 100% of the equity in the Newco for themselves. Under this baseline scenario, the preferred and common equity holders get wiped out--or are offered some token warrants as a sweetener not to raise a fuss in court. As an impaired class, the preferred and common equity holders would ordinarily be "deemed to reject," meaning that they don't get to vote on the restructuring.

    NB: it's in Apollo's interests to low-ball this valuation so as to be able to keep 100% of the company for themselves.

    Where might the Pref holders come into the equation? One of two scenarios, as I read it. (a) the company mgmt committee is able to put together a better outside offer than the DIP financing and the pre-packaged deal with Apollo. It would seem that mgmt is heavily incentivized to try to secure something better from an arm's length lender, although the fact that they weren't able to do so before declaring makes this a longshot (though it looks like they were forced to file to get ahead of an invol filing by creditors...). (b) the option available to any of you pref holders, individually or collectively, to form a Pref committee, seek legal representation in AK, and mount a challenge to the valuation Apollo is assigning to the whole shebang. They're trying to push this through quickly, so even token legal resistance would likely give you bargaining leverage for a slice of the Newco, especially if the spitball valuations folks were throwing around earlier can be made to stick. Absent the formation of a Pref committee, and some legal push-back to argue that Apollo's 2nd lien isn't impaired and there's value left down through the unsecured creditors and Prefs, it looks like Apollo will walk off with the whole corpse.

    On warrants: let's assume they do throw some in to purchase equity in the Newco to sweeten the deal and give the insiders who got wiped a chance to buy back in. Would it be wise to exercise these? Maybe, depending on the value they're assigning to the company. Assume that Apollo's is truly a *lowball* valuation. The bull thesis was that the prefs were money good. The purely rational thing to do would be to exercise the warrants and buy into the Newco at the depressed valuation. You're buying X% of the company at, say, .7X. If you believe in the company (I don't) and think they can make money with their debt burden reduced (they can't), then the smart trade (assuming a lowball valuation and a perfectly rational market) may be to throw more good money after bad. The very same lowball valuation by which Apollo is trying to screw you makes exercising the warrants, potentially, a good deal.
    Oct 5, 2015. 06:50 PM | 2 Likes Like |Link to Comment
  • Will Puerto Rico Sales Tax Bonds And PREPA 'Securitization' Be Subordinated To GOs? [View article]
    Assuming all the conditions for the deal are satisfied (e.g. the insurers sign off, and the ratings agencies play nice), it will be an interesting exercise in chicken/ game theory to see what percentage of PREPA holders outside the Ad Hoc group will tender.

    I'm on the fence based on what they've shown so far. Assuming there's a discernible group that materializes to organize a holdout effort (and thus I can free-ride, LOL), I actually like the chances of a legal challenge to PREPA's fabricated claims of insolvency. They've set the threshold pretty high in terms of % that needs to tender, so you wonder if they wouldn't just consider paying the holdouts as a necess cost of the deal. The likely threat will be that they try to stiff completely the holdouts, and there will be ugly litigation, but I'm not sure that 100% recovery isn't at least a possible scenario. Absent more conclusive info, my gut says tender some at 85, bank a decent profit on stuff I bought in the 50s, and hold on to some for a wild ride....

    Totally agree with the author on how stupid and self-defeating this default gambit was. After gaining market access with those GOs--ugly but it worked--they managed, with horrific advice, to snatch defeat from the jaws of victory.
    Sep 10, 2015. 03:47 PM | Likes Like |Link to Comment
  • BreitBurn Energy Partners Maintains Its Distribution - For Now [View article]
    Nice article, Casey, and agree with you 100%.

    As for these comments:

    Ok, so they're not Linn, management is seasoned, we all believe the oil market is going to turn, Pickens is a genius, kumbaya, yada, yada, yada...

    That all may be true (or not) but it's completely *irrelevant* to the question of whether they cut the dist to buy back debt.

    This is capital allocation 101. They can earn .50 on every $ they divert to buying back notes. That's an instant, risk-free, 50% return on investment that de-leverages them in the event that oil prices don't rebound and gives them a leg up on the debt wall that's coming up. There is nothing--I repeat nothing--they could do with a $ right now that is more accretive to enterprise value than buying back those notes.
    Aug 26, 2015. 01:22 PM | Likes Like |Link to Comment
  • A Bullish Development For Western Asset Mortgage Capital [View article]
    Both--as must be the case once you get beyond some tipping point and people have to start selling things. First you sell what you want to sell, and then you start selling anything and everything indiscriminately. Or the margin clerks start selling it for you, and they're not typically too price sensitive.

    Take Dell Computer (247025AE9)--a yieldy, decent high-mid BB junk credit, seemingly unconnected to energy or commodities. Over the past month it's off 3-5 points in price, and 50bps in yield, recently trading 3 points below par.

    For a while the HY market looked like it could hive this thing off as an "oil-related" (then suddenly "commodity-related") phenomenon. That was my feel for things back in Dec/Jan. People were dumping crappy E&P and oil services paper, but everything else seemed solid. But the way this market is driven by ETFs, the unavoidable effect of someone slamming JNK or HYG (even if it's only to hedge some illiquid paper that they don't want to be forced to sell at the wrong moment) is to broaden the price declines and spread them across all the underlying components.

    Question isn't with contagion in HY, but whether forced selling will bleed over into credit sensitive mbs, or even more illiquid stuff like cmbs mez or whole loans. I'm not predicting a disaster comparable to what we've seen in energy, but it's also hard to imagine them swimming upstream against a larger credit selloff. Still, even a 3-5 point move can sting when you've got something leveraged a couple of turns.
    Aug 25, 2015. 12:12 PM | 1 Like Like |Link to Comment
  • A Bullish Development For Western Asset Mortgage Capital [View article]
    Whenever things are happening in the market that I don't understand, I get to the sidelines (cash). As tempting as bargains might seem in mreit-land, and with similar 20% flash crashes in FI HY Cefs, I'm gonna pass until there's a decisive momentum shift in high yield.

    Putting aside all the insane vol in equities, something's not right. HY credit (JNK or HYG) has been in a steady bleed downward for more than a year, and looks like it may have briefly taken out 2011 lows yesterday while now trading back near 2010 levels. Commodities are trading near decade lows. Most alarming to me, rather than soaring the way it should have--and confirming the longstanding inverse relationship between equity vol and the long bond rate--TSY 10 and 30Y had horrible days yesterday relative to what one might have expected. Whatever flight to safety bid should have been there disappeared as someone big was obviously (forced) dumping TSY into the carnage.

    I usually believe in mean reversion, but when you get market moves this extreme, there has to be more collateral damage somewhere.
    Aug 25, 2015. 09:33 AM | 1 Like Like |Link to Comment
  • The #1 Stock In The World [View article]
    Egads, rough day for vol sellers!

    Today might be one of those days to initiate a starter position.
    Aug 24, 2015. 02:34 PM | 1 Like Like |Link to Comment
  • A Bullish Development For Western Asset Mortgage Capital [View article]
    Kudos to anyone who managed to grab some during the flash crash sale this AM. Definitionally, something is better when it's cheaper, and this is starting to look good at lower prices. But at the risk of repeating myself (endlessly!), I worry less about how these guys are navigating their rate exposure and more about what's happening to their credit exposure. The CT Ave risk-sharing and other credit sensitive stuff have been bouncing around like crazy--not the sort of vol paper you want to have leveraged. HY credit is positively sick and vomiting in the streets, and the worry has got to be that at some point this begins to affect credit sensitive mbs prices....
    Aug 24, 2015. 02:15 PM | 2 Likes Like |Link to Comment
  • BreitBurn Energy Partners' Lifeline Just Got A Bit Shorter [View article]
    "issuing more units (in exchange for debt)"

    You think I jest, but *if* they continue down this spiral of distress (not saying they will, but one can't rule it out, esp. if oil prices stay low for another 18 months), they will inevitably offer to exchange deeply distressed debt for more dilutive equity. That's the next logical step in the distressed playbook. I certainly don't hope they end up there, nor am I predicting it, but that is a worst case scenario that's very much on the table.

    As of now, mgmt is still in denial about their level of distress. Nothing that higher oil prices can't resolve, they're telling themselves. Hunker down, keep paying the dist, and maybe things will correct in 6 mos. And maybe they'll be right. But there's a big discrepancy between what the bond markets are saying they're worth (with a 40% haircut through the unsecured bonds) and the $500m of market value optionality that the equity market cap is implying. This discrepancy will eventually be resolved in one of two ways. Either the bonds will go back to par, or the remaining equity will disappear.
    Aug 20, 2015. 04:50 PM | 1 Like Like |Link to Comment
  • BreitBurn Energy Partners' Lifeline Just Got A Bit Shorter [View article]

    Debt must be paid, or noteholders will force a BK. Units (and prospective distributions thereon) can be ignored or deferred indefinitely.

    There is no logical rationale for retiring units when there's a massive donut hole in their capital structure. Indeed, given the market implied worthlessness of the equity units, they should be ISSUING more equity units (in exchange for debt), not buying them back.

    Think about it this way: their capital structure consists of, top to bottom: (a) senior secured revolver; (b) any secured or 2nd liens; (c) unsecured notes (trading at .55-.60 on the $); (d) common units. If the unsecured notes are trading at .6 on the $ or whatever, and are senior to the units, the market implied value of the equity units is ZERO. They have an option value, obviously, which is why all the bulls on here are holding on to them (that and loss aversion and sunk cost biases). But the bond market is saying that the unsecured notes are the fulcrum security, and they should be doing everything they can to take these out.
    Aug 20, 2015. 10:41 AM | Likes Like |Link to Comment
  • AK Steel: Unsecured Notes At 65 And Stock At $3 Are Attractive For Aggressive Investors [View article]
    Yes, and I'm sure the fast Track TPP authorization is really going to do a GREAT job of protecting American industry (sarc on). You and other Americans staring down globalization have my sympathies...
    Aug 19, 2015. 10:15 AM | Likes Like |Link to Comment
  • AK Steel: Unsecured Notes At 65 And Stock At $3 Are Attractive For Aggressive Investors [View article]
    Good point, and I don't dispute that this is where things stand, right now, with their current capital structure. And if they're cash flow positive--and can remain so--then my worries are moot. But the potential trouble with the *unsecured* debt of all these leveraged commodity players is that it doesn't take much in the way of asset write-downs and new (secured) debt issuance to throw the unsecured notes out of the money. We've seen this already in all the coal players, E&P, iron ore, copper, etc. The game is chess, not checkers.

    Now if you can pick up some of those senior secured notes with an 8.75 coupon at a decent discount to par, that's another story. As things stand right now, though, I'd personally pass on the unsecured at 65 as a sucker bet. At 30-40, maybe these start to look interesting as a recovery play. Respect to others who see the risk-reward differently or who feel like they have more insights into the direction of this biz, the commodity cycle, US tariff policy, etc. I just don't feel like I have any edge there.
    Aug 19, 2015. 09:22 AM | Likes Like |Link to Comment
  • AK Steel: Unsecured Notes At 65 And Stock At $3 Are Attractive For Aggressive Investors [View article]
    I think we probably agree more than disagree, but for the sake of conversation, let me push the other argument as to how it could relate to AKS.

    No dispute that the world is likely to continue to abound in liquidity. And we've seen that post-Great Recession, the most tangible effect of all this monetary liquidity (in conjunction with an historically unprecedented capital investment campaign by the Chinese govt) has been to inflate the price of assets--both real and financial.

    But something funny has started to happen in the last 18 months. The avalanche of liquidity hasn't slowed. And yet whatever transmission mechanism that had for the past 4-5 years been carrying this over into the price of commodities has broken down. We're now confronting a world where the psychology and meta-narratives of run-away commodity inflation as a response to "money printing" are starting to break down, and commodity prices are "catching down" to the real economy, which is by any tangible measure going into a recession. Exacerbating this is all the overcapacity in things such as iron ore, coal, oil, etc. that was beget by this liquidity cascade.

    The results for commodity prices are truly scary, and don't bode well for coal, steel, copper, oil, etc. producers--including AKS.

    But all of this macro-stuff is, IMHO, beside the point in considering this as an investment. Like Howard Marks always says, we can't know the future. All we can do in D/D-land is to determine what's the worst case, and is there a margin of safety.

    In these AKS unsecured notes, there isn't, really, and the risk-reward isn't attractive at these prices. At 65, and figuring in a couple years coupons, your best case is you make 50-75%. Your worst case is you lose everything. Just spit-balling, and without assigning any bogus probability weightings based on useless macro forecasts about the future, I don't find the prospects of losing everything to make a paltry 50% or so to be a very attractive proposition.

    But hey, that's just me!
    Aug 18, 2015. 07:18 PM | 2 Likes Like |Link to Comment
  • AK Steel: Unsecured Notes At 65 And Stock At $3 Are Attractive For Aggressive Investors [View article]
    Nice, thoughtful, detailed analysis, and you make a generally compelling case for the Notes.

    Just for the sake of stress-testing your thesis, though:

    The fact that 70% of their revenues comes from contracted production could be a negative rather than a positive. Dangers to revenues/ margins as the contracts roll off or get bumped down? What would their #'s look like if they were selling at current market prices? Being leveraged to the US auto industry (itself leveraged to cheap credit and ridiculous financing terms/ weighed down by sagging demand in China) is a potential negative.

    Unsecureds look to fare reasonably well as far as recoveries go, if the credit event were to happen right now. But the real question is how will they look in 2-3 years as more senior secured debt on usurious terms gets layered on in front of them?

    Not a bad thesis, but you're perhaps overstating the bullish case and neglecting the worst case scenario. If the global economy stagnates over the next 2 years, pulling US consumers down with it, this company--including the unsecured notes--are potentially zeros.
    Aug 18, 2015. 11:45 AM | 3 Likes Like |Link to Comment
  • BreitBurn Energy Partners' Lifeline Just Got A Bit Shorter [View article]
    That's *exactly* the right analogy, Daniel. Imagine that any of us would have been given the opp to buy back our own mortgage at .50 on the $ during the financial crisis at discounts implied by where the mbs securitization happened to be trading at that moment. You, I, and everyone else on this board would have been scraping together every single spare $ (and eating ramen noodles to boot) to take advantage of that deal.

    Sure, the kids might scream about the allowance you'd promised to pay them, but at the end of the day, they'd be much better off having their allowances cut off for a short time than failing to earn these kinds of ROI from retiring debt.
    Aug 13, 2015. 04:16 PM | 3 Likes Like |Link to Comment