Friday, April 4, 2014


The Genco restructuring is inexplicably generous to the equity, and the problem is that if you give them an inch they'll take a mile. There's a big risk that they will view what they are being offered as a floor and agitate for more. They'll say that the new enterprise proposal is underlevered, that the bonds trading at par prove that the equity is in the money and should get more than warrants.

It's a bizarre, chaotic feedback loop where the appraised ship values don't seem to cover the outstanding debt yet everyone is so bullish on shipping - someday, someday rates will be higher - that the prices of the entire capital structure kept inching higher.

Lesson: don't get between underinvested distressed debt investors and ships.

The comeuppance will come when shipping rates don't improve (or get worse in the next recession), but it will be too late to save a short position here.



Anonymous said...

There may be some upside for those who will become the new equity holders, but not for non-equity holders, like those with their equity interests being wiped out.

I think price for GNK shares (strike that and insert warrants) will drop and hover between $.75 to $1.25 over the next one to two weeks.

The rights offering solicitation will commence before 4/16, and the bankruptcy petition date will fall sometime between 4/9-21, so the plan should get approved between the 14th to 26th.

The logic behind my thinking comes from the options trading: the market bought puts heavily at 4/19 + 5/17 ask prices and wrote 4/19 OTM calls at discounted bids all of yesterday morning.

Bears know what is bound to happen as the proceedings begin.

If you want to turn your short loss into a gain, I'd suggest buying ITM 2015 and 2016 puts.

You'd gain full value if the warrants do not get issued and you'd gain a decent return when people realize how overpriced the new warrants are.

Anonymous said...

I think what you guys are forgetting is that the equity is probably going to view this as a floor/starting point and argue for more.

Meanwhile, the breakeven on 2015 ITM puts is below $1, e.g. $0.75, and there seems to be a very real chance that the equity gets more value than that.

In hindsight, bonds trading at 85 was a signal to close shorts and bonds trading at par now is definitely a signal to close shorts.

Anonymous said...

Surely the holders of equity would love better T&C but they have no leverage in a Chapter 11 process which is canceling their shares.

The T&C of the backstopped rights offering remain unspecified and will determine the actual new equity price (this is the foundation, I would argue, since it is the source from which the new warrant price can be derived with a Black-Scholes calculation).

The backstoppers of the 80 and 20% blocks have leverage and will negotiate favorable T&C to dilute the offering in consideration of their $100 backstopping commitment (e.g. by receiving an additional % shares, a discounted price, or both).

I had previously mentioned you should not short GNK in previous comments because of the chance of a backstopped rights offering (as was done in the SBLK case).

However, if smart money actually wanted to buy and hold the warrants as priced by the existing shares, then they would buy ITM calls.

The put-call ratio is lopsided for a reason.

If you bought the equity at the $1.93 trading price it's trading, the new gnk equity would need to double before the warrants expire just break even.

That is surely not going to happen based upon the dilution from the new and MIP warrants as well as the earnings forecasted by the company.

The multiple of peak EBITA is at least 8x and EBITA is projected to decline back into negative even though the company no longer has the financing costs overhanging the equity that it once had.

The only circumstance in which the warrants would be worth above an 8x EBITA multiple is if there were companies who were seeking to acquire GNK.

The July puts offer higher returns if you'd like to take on more timing and liquidity risk.

In my view, there is not much risk involved in the long-term OTM puts.

Take the $3 puts, for example: do you really think there's a chance the new equity valuation will be above $2.75-3.5 billion (the $1.9 price and $3 strike of option)?

The bonds trading at par indicates the new equity valuation is 1/2 to 1/3 of the $2.75-$3.5 billion.

So if you are using the debt as a basis to determine the fair value of the new GNK equity, the market is affording you the option to lock into a 0-33% gain by purchasing the $3 2015 put for $1.90.

The market (and I) seems to prefer the $2 and $1 2015 puts rather than the $3 2015 put that I detailed above, but we mostly bought in when GNK peaked on Friday morning.

Every analyst covering GNK is bearish and has reduced price targets below $0.50 cents.

It is just a matter time... a few days for the bankruptcy process to start, 4-8 weeks for it to be carried out, and about 2 months for you to realize your gain.