Wednesday, September 26, 2012

Trade Opportunity: GMX Resources 5% Note Due in February 2013 ($GMXR)

With the exchange offer for their 2013 and 2015 notes that concluded last week, GMXR has reduced the balance of its notes due February 2013 to $27.1 million. (By comparison, the company has a market capitalization of roughly $60 million.)

These 2013 notes are trading in the high 70s, for a yield to maturity of close to 100 percent (annualized)!

It does not make sense for these notes to trade at such a steep discount when the market cap is twice the outstanding balance of the notes - the valuations are mutually inconsistent.

The opportunity is to buy the 2013 notes (probably a buy in their own right) and short stock as a hedge. It seems likely that the company will continue to issue stock in exchange of these notes, which will put pressure on the share price. That means you could likely earn a 33% total return on the notes, and break even or make money on the short leg of the trade.

In the most recent investor presentation, the company mentions that the "Remaining balance [of the 2013 notes may be] addressed by: Debt for debt or debt refinancing, Debt for equity, or Cash or proceeds from asset sales". (Note that on page four, the company spells "lien" incorrectly.)

It shouldn't be hard to induce the convert arb funds owning the 2013 notes to take equity instead of cash at maturity, an outcome the company would undoubtedly prefer (look at their annualized growth in shares outstanding). For example, they could offer to exchange these notes for stock at a ten percent discount to the current market price (basis 71 cents). That would result in the issuance of 40 million new shares if the entire balance of the 2013 notes was equitized.


misha said...

I can't find this note (38011MAB4?) available at any of 4 different retail brokerages (Interactive, ETrade, TD Ameritrade, OptionsXpress). Sigh.

CP said...

Yeah, it's hard for retail to buy bonds. And there's only $27mm outstanding.