Wednesday, April 27, 2016

Thoughts About Failing Businesses

I was just looking at the list of companies we've blogged about as potential failures that either did fail or else essentially wiped out shareholders in a restructuring:

First I looked at them in terms of industry categories. The biggest category was coal/mining, with 7 companies. Molycorp was what you call a science project stock, funded with expensive debt, not too hard to see poor equity returns coming there. But the six coal companies were on top of the world in 2011. Much cheaper natural gas came out of nowhere and destroyed them.

To have rationally invested in those coal companies, you needed to know what coal prices would be many years in the future. But that means knowing about the prices of coal's competition for electrical generation (natural gas, solar, etc.) which is tough.

The next category is oil & gas, where there were six failed companies. This is pretty similar to the thoughts on the coal companies; in fact the oil & gas glut is in a sense what caused all the coal failures. Once again, there were very explicit oil price assumptions that were necessary for the success of the companies' capital expenditures and for the success of equity investments in those companies.

Financials had six failed companies but they were all 2007-2009, there haven't been any recently obviously thanks to reflation. Maybe what's noteworthy is that they were extremely levered, which magnified the effect of bad investment decisions.

Next category is solar and alternative energy, with five failed companies. The alternative energy ones were once again science project stocks. Maybe it's a bad idea to invest in public companies with 9+ figure enterprise values that don't yet have a product that they can sell for more than it costs to make. And then the photovoltaic solar companies were dealing with a product where the underlying technology was rapidly improving but they had sunk huge capital into manufacturing plants. Also, there's the theory that the Chinese PV solar firms were a deliberate bust-out to take advantage of naive American investors.

Two of the firms were pharma - those fit the science project category again. Then two were shipping and two were building materials: firms that run with a lot of leverage to make up for low margins that come from undifferentiated products.

One thing that would be interesting to look at is how much these companies spent on capex in the final years of their lives when the businesses should've been in runoff mode. For example, Radio Shack was remodeling stores and buying "Super Bowl" ads right up until the end.


It's also remarkable how quickly the change from extreme best-ever success to failure can happen. In fact, it's almost as though those extreme levels of success can signal big change ahead.

Friday, April 22, 2016

Thursday, April 21, 2016

Great Review of Trump's The Art of the Deal

Great review:

I started the book with the question: what exactly do real estate developers do? They don’t design buildings; they hire an architect for that part. They don’t construct the buildings; they hire a construction company for that part. They don’t manage the buildings; they hire a management company for that part. They’re not even the capitalist who funds the whole thing; they get a loan from a bank for that. So what do they do? Why don’t you or I take out a $100 million loan from a bank, hire a company to build a $100 million skyscraper, and then rent it out for somewhat more than $100 million and become rich?

As best I can tell, the developer’s job is coordination. This often means blatant lies. The usual process goes like this: the bank would be happy to lend you the money as long as you have guaranteed renters. The renters would be happy to sign up as long as you show them a design. The architect would be happy to design the building as long as you tell them what the government’s allowing. The government would be happy to give you your permit as long as you have a construction company lined up. And the construction company would be happy to sign on with you as long as you have the money from the bank in your pocket. Or some kind of complicated multi-step catch-22 like that. The solution – or at least Trump’s solution – is to tell everybody that all the other players have agreed and the deal is completely done except for their signature. The trick is to lie to the right people in the right order, so that by the time somebody checks to see whether they’ve been conned, you actually do have the signatures you told them that you had. The whole thing sounds very stressful.

Friday, April 15, 2016

LINN Energy Announces Updates $LINE

As previously announced, the Company is currently in the process of exploring strategic alternatives to strengthen its balance sheet and maximize the value of the Company and has engaged its financial and legal advisors along with its lenders in discussions on how to best reduce the Company’s debt and ensure its long-term liquidity needs are met, including the possibility of restructuring under a chapter 11 plan of reorganization.

As part of this process, LINN and Berry intend to elect to exercise the 30-day grace period with respect to an interest payment due April 15, 2016 of approximately $31 million on LINN’s 8.625% senior notes due April 2020 and interest payments due May 1, 2016 of approximately $18.2 million on LINN’s 6.25% senior notes due May 2019 and approximately $8.8 million on Berry’s 6.75% senior notes due November 2020. If LINN fails to make the interest payments within the applicable 30-day grace period and is otherwise unable to obtain a waiver or other suitable relief from the holders under the indentures governing the senior notes prior to the expiration of the 30-day grace period, the resulting default under the applicable indenture will mature into an event of default, allowing the noteholders to elect to accelerate the outstanding indebtedness under the senior notes.

On April 12, 2016, LINN entered into the Eighth Amendment to its Sixth Amended and Restated Credit Agreement among LINN, Wells Fargo Bank, NA, as administrative agent (the “Agent”), and the lenders party thereto. The Eighth Amendment provides:

    An agreement that certain specified events will not become defaults or events of default until May 11, 2016;
    The borrowing base will remain constant until May 11, 2016, subject to reductions based on sales of assets or termination of hedge agreements; and
    LINN, the Agent and the lenders will negotiate in good faith an agreement in furtherance of a restructuring of the capital structure of LINN.

In addition, on April 12, 2016 Berry entered into the Twelfth Amendment to its Second Amended and Restated Credit Agreement among Berry, Wells Fargo Bank, NA, as administrative agent (the “Berry Agent”), and the lenders party thereto. The Twelfth Amendment provides:

    An agreement that certain specified events will not become defaults or events of default until May 11, 2016;
    The borrowing base will remain constant until May 11, 2016, subject to reductions based on sales of assets or termination of hedge agreements; and
    Berry will have access to $45 million in cash that is currently restricted in order to fund ordinary course operations; and
    Berry, the Berry Agent and the lenders will negotiate in good faith an agreement in furtherance of a restructuring of the capital structure of Berry.

Goodrich Petroleum Files For Bankruptcy $GDP

HOUSTON, April 15, 2016 /PRNewswire/ -- Goodrich Petroleum Corporation (OTC Markets: GDPM) (the "Company") today announced that it and its subsidiary has filed for reorganization under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas, Houston Division, in order to implement the terms of that certain Restructuring Support Agreement (the "RSA") previously announced. The RSA and the bankruptcy proceeding will allow for the restructuring of the Company's balance sheet, which will strengthen the Company's financial position by reducing long-term debt and enhancing financial flexibility.

Thursday, April 14, 2016

EXXI and BTU Finally Bankrupt

Energy XXI Management Incentive Plan in Restructuring Support Agreement $EXXI

The Plan Supplement shall include a long-term management incentive plan (the “ Management Incentive Plan ”) for the Reorganized Debtors. Such Management Incentive Plan will reserve up to 8% of the total New Equity on a fully diluted basis (the “ Equity Pool ”). The Management Incentive Plan will be a comprehensive equity based award plan with the New Board to formulate the types of equity based awards (including stock option and restricted stock units) on terms and conditions determined by the New Board. Awards under the Management Incentive Plan will be awarded to the Reorganized Debtors’ officers, directors, employees, and consultants at the discretion of the New Board; provided, however, that 3% of the Equity Pool will be allocated by the New Board to such officers, directors, employees, and consultants no later than 60 days after the Effective Date on terms and conditions determined by the New Board, including the type of equity based awards. Subject to the foregoing, the New Board will determine the additional terms of the Management Incentive Plan after the Effective Date, including the allocation, granting, and vesting of applicable awards under the Management Incentive Plan.