Wednesday, March 4, 2015

What Are The Walter Energy Longs Thinking?

The stock is 77% owned by institutions and mutual funds, names like the College Retirement Equities Fund-Stock Account, the Vanguard Small-Cap Index Fund, the MFS New Discovery Fund (as of various 2014 reporting dates).

Meanwhile, the current yields on the bonds are 70-80 percent, and bondholders appear to be converting to stock through exchanges with the company just so that they can get liquid more easily.

How can you own this thing? Asleep at the switch?

Walter Bonds At New Lows

  • A million+ of the 8.5s traded at 12; current yield of 71%.
  • 700k of the 9.875s traded at 12; current yield of 82%

Walter Energy Dilution

From the annual report:

"During 2014, in three separate transactions, the Company issued an aggregate of 9.3 million shares of its common stock and paid $5.2 million in cash in exchange for $112.0 million of 9.875% Senior Notes and recognized a net gain of $54.1 million, or $0.81 per basic and diluted share."
Then, this week:
"We have agreed to issue an aggregate of 8,650,000 shares of our common stock, par value $0.01 per share, in exchange for $66,725,000 aggregate principal amount of our 8.5% Senior Notes due 2021"
So, that's 17.95 million shares since the beginning of 2014, bringing the current count up to 80.6 million. The crazy part is that they should have been doing more debt swaps all along.

"Whitebox Investment Principles: Ten Enduring Principles to Interpret Constant Market Change"

From Whitebox, I really like these principles:

  1. The source of investment return is the efficient reduction of risk.
  2. Know the drivers of your investment; maximize exposure to the mispricing and minimize exposure to everything else.
  3. Right or wrong, the market always has a message; listen critically.
  4. Ask yourself THE 4 QUESTIONS: How large is the apparent mispricing?; What is your level of confidence in the mispricing?; What is the most efficient hedge?; What is your level of confidence in the hedge?
  5. Focus one level below the obvious.
  6. See a lot, be a generalist. Be security agnostic.
  7. Be more invested at the bottom than the top. If more things can go wrong than can go right, you are too close to the top.
  8. Surprise is the enemy of thought; plan for volatile scenarios before they occur.
  9. Avoid strategies that might overwhelm your abilities—or sensibilities.
  10. The most dangerous mistake is the one you miss because it hasn’t lost any money—yet.

Tuesday, March 3, 2015

Great Piece on Greece "Austerity"

Highlights from Ricardo Hausmann, Austerity Is Not Greece’s Problem,

  • [T]he recession in Greece has little to do with an excessive debt burden. Until 2014, the country did not pay, in net terms, a single euro in interest: it borrowed enough from official sources at subsidized rates to pay 100% of its interest bill and then some.
  • But by 2007, Greece was spending more than 14% of GDP in excess of what it was producing, the largest such gap in Europe – more than twice that of Spain and 55% higher than Ireland's. In Spain and Ireland, though, the gap reflected a construction boom; euro accession suddenly gave people access to much cheaper mortgages. In Greece, by contrast, the gap was mostly fiscal and used for consumption, not investment.
  • Greece never had the productive structure to be as rich as it was: its income was inflated by massive amounts of borrowed money that was not used to upgrade its productive capacity. According to the Atlas of Economic Complexity, which I co-authored, in 2008 the gap between Greece's income and the knowledge content of its exports was the largest among a sample of 128 countries.
  • Unfortunately, this is not what many Greeks (or Spaniards) believe. A large plurality of them voted for Syriza, which wants to reallocate resources to wage increases and subsidies and does not even mention exports in its growth strategy. They would be wise to remember that having Stiglitz as a cheerleader and Podemos as advisers did not save Venezuela from its current hyper-inflationary catastrophe.

Monday, March 2, 2015

Walter Energy Distressed Exchange

Walter Energy:

We have agreed to issue an aggregate of 8,650,000 shares of our common stock, par value $0.01 per share, in exchange for $66,725,000 aggregate principal amount of our 8.5% Senior Notes due 2021 (the “Senior Notes”) held by a noteholder.

We will not receive any cash proceeds as a result of the exchange of our common stock for the Senior Notes, which notes will be retired and cancelled. We executed this transaction to reduce our debt and interest cost, increase our equity, and improve our balance sheet.
Nice dilution.

Friday, February 27, 2015

Chinese Real Estate Motto

"If you build it they will come."