Maneet Ahuja's "The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds" tells the stories and backgrounds of some of the most famous hedge fund managers in the world. Names like Ray Dalio, John Paulson, Marc Lasry, David Tepper, Bill Ackman, and Dan Loeb just to name a few. In my opinion, this is one of the best investing books released this year.
Ahuja does an amazing job of laying out the trials and tribulations these managers had to encounter in their time launching and managing each fund. The reporting here is spectacular. I learned many salient details of each of the hedge fund managers profiled in the stories that I had never read before. For instance, Ahuja noted that Bill Ackman "gave every investor in the Target-only fund a credit for any losses incurred that they could use against any future gains in the Pershing Square main funds." These seemingly small, innocuous facts bring real depth to managers often viewed as money-machine, super humans in the press at large.
One of the great aspects of the book is how Ahuja spents a significant amount of time talking about how each fund initially got started. Most analysts and portfolio managers at buy-side shops across the world (even if they do not admit it) want to start their own fund one day. Its interesting in that each of the fund managers interviewed in the book got to where they are today in wildly different paths. Each are remarkably successful in their own right and each took a unique method to getting where they are today.
This book is not a book on how to invest. It doesn't talk ratios or how to analyze companies. What it does do is lay out how each manager views the different opportunity sets in investing. And again, each manager has a unique world view and set of experiences that offers a paradigm to view the world through. And despite these different paradigms, each fund manager has put up remarkable returns over the years oftentimes investing in wildly different asset classes and geographies.
From the distressed debt investing angle, I was surprised how often the topic was discussed in profiling different managers. Of course the last few years was a bit of a boondoggle for distressed debt investing, it was fantastic to see the thought processes behind David Tepper, Dan Loeb, Marc Lasry and other's view on the crisis and the opportunities it presented to the to make out sized returns.
I would highly recommend The Alpha Masters to readers - very well written, great education in terms of the best manager's investment philosophies, and detailed descriptions of how each of them went from analyst to often-times billionaires.
Disclosure: I requested a copy from the book from the publisher, which they kindly sent to me.
7.24.2012
Distressed Debt Analysis: Deficiency Claims and Hawker Beechcraft
A deficiency claim in bankruptcy arises when the value of secured lender's collateral does not cover the secured loan principal amount. The difference between the loan value and the collateral value is the deficiency claim against the borrower which becomes part of the unsecured claims pool. With that comes the benefits of voting and recovery of the unsecured claims pool. For example, in previous airlines bankruptcies have seen large deficiency claims arising from under secured lenders that lent against value of airlines that fell in value over the years. In those cases lenders received recoveries from the sale of the loan collateral but also a distribution from the unsecured claims pool recovery (you are actually seeing some of this coming out of the AMR bankruptcy as well - where deficiency claims are being actively traded).
There are significant technical bankruptcy considerations when dealing with a deficiency claim especially in situations where the deficiency claim is large enough to control unsecured vote on a bankruptcy plan of reorganization (and thus 1111(b)(2) comes into play). A debtor may even try to classify a deficiency claim as its own class to push through a plan at the risk of judge striking down the plan as a result of gerrymandering. In fact different circuits have leaned differently in these sorts of cases and I encourage those interested to read up on those decisions (Loop 76, Boston Post Road Ltd., AOV Industries, and most recently in SDNY Quigley). For now, let's stick to the simple reading of deficiency claims and how it applies to bankruptcy analysis of a current distressed situations.
On July 9th, 2012, many distressed investors mouths went agape when it was announced that Superior Aviation Beijing would acquire Hawker Beechcraft for $1.79 billion (!). Hawker is a name that has been discussed in distressed circles for over 2 years now (in fact three write-ups of Hawker have been written up on the DDIC in the past 3 years). I was probably more bullish than most on Hawker's valuation as I generally believe that as world economies grow, the affluent class also grows (but at a faster rater) and hence use and demands for business jets increase. But I didn't think someone would pay a high single digit multiple on 2015/2016E EBITDA. I was very wrong as it turns out multiple parties seemingly want to pay that multiple.
Immediately the bank debt rose from the mid 50s context to the 70s and currently sit in the low 70s for the strip. What is interesting about this case was while the debtor's FA was marketing the assets to a number of parties, a plan and disclosure statement (Docket Items #304 and #305 respectively) was put in place in the event that the company would reorganize as a stand-alone entity. As per the restructuring support agreement ("RSA"), bank debt lenders would receive 81.1% of the new common stock for a $921.6M secured claim as well additional equity ownership as a result of their "Senior Credit Facility Deficiency Claims."
Some interesting news has come out since the Superior Bid for Hawker: 1) Textron's CEO stated on its Q2 2012 Earnings Call possible interest in either all of Hawker and/or just the defense business, which cannot be sold to Superior [I will note that this wasn't as exciting to me given earlier comments Donnelly said about the "pretty high number" and 2) More importantly, Perella Weinberg noted during last week's hearing that there was at least one bid close to the Superior bid and an auction is to be expected. At first blush there seemed like significant deal risk to the Superior bid clearing hurdles of approval of both US and Chinese governments, union workers, etc but with other possible bids out there, that seems less of a concern.
The company has noted that the currently breakdown of "value split" between secured creditors and unsecured creditors will stick. So the value of secured lenders ultimately receive is heavily reliant on determining the unsecured claims pool in which they will participate. And what makes this case fascinating is that the stalking horse proposal Superior has put in place excludes assumption of Hawker's pension plan which according to the PBGC is underfunded by $751M (see Docket #324 Exhibit C for the clearly defined exclusion of the pension). The IAM says the pensions are underfunded by approximately $500M. In Hawker's most recently 10K, they noted the pension was underfunded by $492.9M (using a discount rate of 5.40% which will obviously come down with the move in the treasury curve).
Assuming a $1.79B price sticks ($400M for defense to some other party), one must deduct the DIP draw as well as the $50M that is included in the purchase price for Superior's deposits to keep "Hawker jets business open and operational." The May MOR had Hawker's DIP balance at $230M. The Superior Bid also excludes cash other than customer deposits - cash was $147.9M per the MOR when you exclude the cash collaterized LOCs, though I believe most of this money is indeed customer deposits after reading through some old transcripts. Giving them the benefit of the doubt, I'll say the DIP draw is $250M and cash non-deposits are $50M and admin expenses are $30M (PW is getting 0.65% of the transaction value) for total distributable value of $1.510B ($1.790B - $50M - $250M - $30M + $50M).
We know that bank lenders have a $921.6M secured claim that will get 81.1% of the recovery with the remaining recovery coming from the deficiency claim. To determine the deficiency recovery we need to figure out the size of the GUC. To start, I will use the midpoint of the $500M reflected on the most recent balance sheet of Hawker's 10K and the PBGCs assertion of a $750M under-funding so $625M in pension rejection claims. There is approximately $780M of claims stemming from the deficiency claim of first lien lenders as well as $800M of senior notes (and $300M of senior sub notes that will not participate), along with $60M of unsecured notes related to the EDC facility. Adding in $100M for trade / other gets me to a GUC of $2,365M.
81.1% of $1.51B = $1.224B / $1.7B of bank debt = 72 points. Of the $285M which is going to the unsecured claimants per the Restructuring Agreement (18.9% of $1.51B), 33% is going to the deficiency claim ($780M deficiency / $2.365B of GUC), or $94M. $94M over $1.7B of bank debt is another 5.5 points on the bank debt for a total recovery of 77.5 or up less than 10% from today's levels.
This doesn't seem terrible attractive at these levels (most distressed investors shoot for IRRs 20%+). Upside comes from an auction producing a higher return or a much lower unsecured pool due to an agreement with the pensions being assumed by Superior or the eventual buyer of the company. We will keep readers up to speed on developments in the Hawker case.
7.17.2012
A Few Odds and Ends
This should be a quick post covering a few threads that I've been meaning to catch up on given how busy the past week has been in the distressed debt market.
1) A month ago I posted a deliberate practice investing exercise where I displayed summary financials for 3 companies and you were to guess the stock price. The savvy trickster readers noted they could simply sort the index in which I was drawing stock tickers from to determine the names and prices of the companies. For those that are still wondering:
4) The Distressed Debt Investors Club has a job board for contributing members (guests are unable to see). If you have a distressed job you'd like to post there, please contact me and I will put it up for you. Our analysts and PMs are some of the best in the business with investment analyses they can point to that have been written up and vetted on the site.
5) I promised a Hawker valuation last week. I'll post one on Thursday. I think the Term Loan isn't the slam dunk everyone is saying it is with real deal risk and a deficiency claim that might not get you to the mid 80s recovery a number of desks are pointing to.
6) A number of new distressed funds have been announced in the past few months. For instance, Bloomberg broke a story that Buckley Ratchford, former head of bank debt trading and distressed investing at Goldman, plans to launch a fund next year. A few weeks ago it was announced Kiernan Goodwin would also be launching a credit fund (Panning Capital Management) with a pretty stellar staff. If you are launching a credit / event-driven fund, or know of someone that is, and would like to be interviewed on the site, please reach out to me. Last month the site received nearly 200,000 visits from across the world including many endowments, pensions, and fund-of-funds that are looking for emerging managers to invest in. The content of past interviews has always been a favorite of mine (and readers) on the site and I want to add more of it in the future.
1) A month ago I posted a deliberate practice investing exercise where I displayed summary financials for 3 companies and you were to guess the stock price. The savvy trickster readers noted they could simply sort the index in which I was drawing stock tickers from to determine the names and prices of the companies. For those that are still wondering:
- The first company was BEBE. Stock price was $5.63. Of all the stocks, surprisingly this was the one most readers were closest to. I think most people realized that it was a weaker company given the lackluster sales grow combined with declining earnings and cash flows.
- The second company was EW trading at $100.66. I had never looked at Edwards Lifesciences before. This was the company that most investors undervalued and by a pretty dramatic margin. The average reader guessed in the $50-$60/range. Currently EW trades at 23x 2012E EBITDA. The stock is up 46% on the year.
- The last company was ITC at $69.13. The studious readers guessed this was a utility given increasing dividends, earnings, asset base and capex, and priced the utility accordiningly.
I hope you enjoyed this exercise. I will contact the winning reader about getting together here in NYC this week.
2) Yesterday I was looking for a Seth Klarman quote. Thanks to readers, I think I have found it. It is from an interview Jason Zweig conducted with Seth Klarman in the Financial Analysts Journal in 2010 (Volume 66, Number 5):
Zweig: Seth, you started your career at Mutual Shares, working for Max Heine and alongside Mike Price. Can you give us a couple of lessons you learned from those gentlemen?
Klarman: What I learned from Mike—and I worked most closely with him—was the importance of an endless drive to get information and seek value. I remember a specific instance when he found a mining stock that was inexpensive. He literally drew a detailed map—like an organization chart—of interlocking ownership and affiliates, many of which were also publicly traded. So, identifying one stock led him to a dozen other potential investments. To tirelessly pull threads is the lesson that I learned from Mike Price.Later in the interview, the "pulling of threads" comes up again. In asking what Baupost looks for in hiring:
Klarman: We also look for ideational fluency, which essentially means that someone is an idea person. In response to an issue, do they immediately have 10 or 15 different ideas about how they would want to analyze it—threads they would want to pull à la Michael Price—or are they surprised by the question? We don’t want them to be sitting at their desks not knowing how to pursue the next opportunity when it comes along.3) On June 20th, I wrote a post stating I was short CMEDY stock. After what I have described to colleagues as one of the craziest situations I have ever been a part of, a stock squeeze pushed the stock up to $12/share. I shorted a bit more with my average cost working out to around $7.50/share (I was a bit early in upping the short). I will admit that this one was an emotional one for me - angry emotions. Subsequently the SEC halted the stock and OTC slapped BB on CMEDY (buyer beware). The stock re-opened on Monday as the SEC can only halt shares for two weeks administratively. The stock trades in the grey markets now and closed the day at $3.00. Roddy Boyd, a favorite blogger and writer of mine (his book on AIG is one of the best out there) has been keeping readers up on the situation: Financial Investigator on CMEDY.
4) The Distressed Debt Investors Club has a job board for contributing members (guests are unable to see). If you have a distressed job you'd like to post there, please contact me and I will put it up for you. Our analysts and PMs are some of the best in the business with investment analyses they can point to that have been written up and vetted on the site.
5) I promised a Hawker valuation last week. I'll post one on Thursday. I think the Term Loan isn't the slam dunk everyone is saying it is with real deal risk and a deficiency claim that might not get you to the mid 80s recovery a number of desks are pointing to.
6) A number of new distressed funds have been announced in the past few months. For instance, Bloomberg broke a story that Buckley Ratchford, former head of bank debt trading and distressed investing at Goldman, plans to launch a fund next year. A few weeks ago it was announced Kiernan Goodwin would also be launching a credit fund (Panning Capital Management) with a pretty stellar staff. If you are launching a credit / event-driven fund, or know of someone that is, and would like to be interviewed on the site, please reach out to me. Last month the site received nearly 200,000 visits from across the world including many endowments, pensions, and fund-of-funds that are looking for emerging managers to invest in. The content of past interviews has always been a favorite of mine (and readers) on the site and I want to add more of it in the future.
Bankruptcy Investing: The Service List
Bankruptcy investing is very much a relational business. While one could get by reading dockets and SEC filings, too much is going on in and out of the the court room and certain issues are too complex to be navigated without the help of others. Furthermore, I am not a lawyer, and I often lean on lawyer friends to help me with certain nuances of the code and the way certain courts and judges lean on various issues.
The Service List is a document that lists the names, addresses, phone numbers, and emails of interested parties in a bankruptcy case. Here is an example from Rescap: Rescap's Service List. These parties receive relevant bankruptcy docket entries as they are filed with the court. Many times you can find these service lists at the Claims Agent sites in Excel format (they are provided by the Debtor).
And then you know what you do with this document? You pick up the phone and call until your fingers hurt.
Some parties will not talk to you. Debtors Counsel will be very cagey speaking to you as well to not divulge any MNPI (material non public information). But some parties, more than likely lawyers representing an equity or creditor committee will talk to you and provide you salient details on the case and issues affecting recoveries. FAs will also talk to you. Both groups want to repeat business (further engagements) and you, as a potential customer, can provide that.
What kind of questions to ask? Most bankruptcy cases boil down to a few major issues that will affect recoveries. Hell, ask that question itself: What are some of the issues here that will swing the valuation? Who should I talk to to get more clarity on these issues. Rinse and repeat.
I wish I could find the quote but I remember a comment about Seth Klarman and Michael Price during their time together under Max Heine. The essence of the quote was that you tease out and pull the strings that lead to a strong determination of the intrinsic value of securities. (If anyone has the quote, can you email it to me).
And to make sure people will answer your calls in the future, provide some value to your counter-parties. Maybe a law firm or an FA would like to know who is involved in a certain situation to possibly pitch their services to. Maybe a trustee needs some information about the trading activities of a security. Or Maybe a large unsecured creditor has no idea where a company's bonds are trading. And check in on people every once in a while to see what they are working on and how you can help them (usually help them make more money).
One of the reasons I find bankruptcy investing so interesting is the people aspect of it. Some of my closest friends are also distressed debt professionals, relationships developed over many years working together through situations (good and bad). Sometimes you are on the same side of the fence, and other times you are in a heated valuation fight of a debtor. Surprisingly, over the last few months I've made a point to network via the blog more aggressively and its been a great (and profitable experience). It is very difficult to be an excellent distressed investor without an excellent network of contacts to draw experiences and knowledge (often times very technical) from. Get out there and start dialing and adding value to the community - it will pay itself in dividends (and returns) many times over.
The Service List is a document that lists the names, addresses, phone numbers, and emails of interested parties in a bankruptcy case. Here is an example from Rescap: Rescap's Service List. These parties receive relevant bankruptcy docket entries as they are filed with the court. Many times you can find these service lists at the Claims Agent sites in Excel format (they are provided by the Debtor).
And then you know what you do with this document? You pick up the phone and call until your fingers hurt.
Some parties will not talk to you. Debtors Counsel will be very cagey speaking to you as well to not divulge any MNPI (material non public information). But some parties, more than likely lawyers representing an equity or creditor committee will talk to you and provide you salient details on the case and issues affecting recoveries. FAs will also talk to you. Both groups want to repeat business (further engagements) and you, as a potential customer, can provide that.
What kind of questions to ask? Most bankruptcy cases boil down to a few major issues that will affect recoveries. Hell, ask that question itself: What are some of the issues here that will swing the valuation? Who should I talk to to get more clarity on these issues. Rinse and repeat.
I wish I could find the quote but I remember a comment about Seth Klarman and Michael Price during their time together under Max Heine. The essence of the quote was that you tease out and pull the strings that lead to a strong determination of the intrinsic value of securities. (If anyone has the quote, can you email it to me).
And to make sure people will answer your calls in the future, provide some value to your counter-parties. Maybe a law firm or an FA would like to know who is involved in a certain situation to possibly pitch their services to. Maybe a trustee needs some information about the trading activities of a security. Or Maybe a large unsecured creditor has no idea where a company's bonds are trading. And check in on people every once in a while to see what they are working on and how you can help them (usually help them make more money).
One of the reasons I find bankruptcy investing so interesting is the people aspect of it. Some of my closest friends are also distressed debt professionals, relationships developed over many years working together through situations (good and bad). Sometimes you are on the same side of the fence, and other times you are in a heated valuation fight of a debtor. Surprisingly, over the last few months I've made a point to network via the blog more aggressively and its been a great (and profitable experience). It is very difficult to be an excellent distressed investor without an excellent network of contacts to draw experiences and knowledge (often times very technical) from. Get out there and start dialing and adding value to the community - it will pay itself in dividends (and returns) many times over.
7.11.2012
Patriot Coal Bankruptcy: Hidden Value for the 8.25% Guaranteed Notes?
Yesterday, I introduced readers to the Patriot Coal bankruptcy. More information continues to hit the docket. With this post, I am trying something new with the blog by introducing something I do not believe the market has caught on to and asking for feedback from readers (you can email me at hunter [at] distressed-debt-investing.com). Let me warn you this post may get messy and technical, but I think its an interesting and less talked about concept as it relates to the valuation of Patriot Coal's guaranteed bonds (8.25% of 2018 trading at 36.5-37.5).
Starting on page 108 of this document (First Day Affidavit), Patriot Coal lays out each of its assets, breaking down owned versus leased tons of coal, per LLC entity (in this post I'll call this Exhibit the "LLC Document".
This is significantly more detailed than the 10K disclosures that PCX has laid out in the past, reproduced below.:
Footnote 1 here states: "Assigned reserves represent recoverable coal reserves that we have committed to mine at locations operating as of December 31, 2011. Unassigned reserves would require new mine development, mining equipment or plant facilities before operations could begin on the property." Assigned reserves then should have more value then unassigned reserves (Patriot lists 666M tons of assigned reserves vs 1,265M of unassigned reserves). According to the LLC document in the First Day Affidavit, which corresponds to the 10K filing, there are 678M of owned reserves and 1,253M of leased reserves.
The LLC Document in the First Day Affidavit breaks down each LLC into an individual reserve area and geographic location (county and state). So for example, Central States Coal Res. of KY, LLC has 7 distinct reserve areas representing ~146M of owned coal and 153M of leased coal. And if you are looking for the breakdown of Patriot vs Magnum Coal subsidiaries (Patriot made a large acquisition of Magnum Coal in July 2008), it can be found here: Patriot vs Magnum Subs. The point to remember from this paragraph is each mine has its own LLC.
Patriot has assigned "Complex" names in its 10K representing multiple mines. Here is the list of Complex Names for Patriot and the amount of owned vs leased coal reserves:
This is where things start to get a little technical. As you can see in the above chart, I have listed whether a complex was unionized or not and the disclosure of percentage of union members. In the First Day Affidavit, CFO Mark Schroeder notes: "Approximately 42% of these employees are unionized and are represented by the United Mine Workers of America (the “UMWA”) under collective bargaining agreements." The 42% is off of the 4,000 people in active status. This is relative to PCX providing "healthcare and other benefits to 10,286 primary insureds and 12,145 beneficiaries, amounting to a total of 22,431 individuals covered by the Debtors’ benefit plans."
From here we need to make the distinction between post-retirement healthcare benefits and pensions. This is an important distinction. In Patriot's case, the bulk of the legacy liabilities are post-retirement healthcare benefits. We now need to defined "Control Group Liability" which, under ERISA, means a plan sponsor and each corporation under control by that plan sponsor. If we were talking legacy liabilities in terms of pensions at Patriot (there are multi-employer pensions at Patriot), each mine listed above would be jointly responsible in a distressed termination of the pension and privy to rejection claims. But that's not what is happening here.
Under Section 1114 of the Bankruptcy Code, a debtor in possession can modify retiree benefits. A question then arises if retiree benefits have vested or not. If not vested, claims do not arise. If vested, claims do arise as an unsecured claim for damages as a result of modification or termination. While there is some issues with PCX specifically as it relates to collective bargaining agreements with UMWA and how Section 1113 comes into play, that is for another post. We do not yet have a break down of vested versus unvested.
We know the 8.25% bonds are guaranteed by "substantially all of the Debtor subsidiaries of Patriot Coal." The prospectus lists the guarantors which matches pretty well with the list of filing entities. When I first looked at Patriot's guaranteed bonds I assumed they would be pari with claims arising under 1114 of the Bankruptcy code due to changes they expect to make with the post-retirement obligations.
But now I think that's wrong.
I now believe the guaranteed bonds will be ahead of the damage claims (but still behind any priority claim which now includes a large DIP) in the mines / mining operations of non-unionized work forces (per each individual LLC). These complexes include Blue Creek, Campbell's Creek, Paint Creek, Panther, Bluegrass and Dodge Hill. So bond holders will really have two sources of value: 1) The value of the mines that are not burdened by post retirement liabilities - this value will flow exclusively to the guaranteed bonds after fulfilling DIP claims 2) The value of the mines that do have post retirement damage claims - this value will be shared with the larger claims pool. The mines probably do have SOME post retirement liabilities but until we see the schedules, its impossible to determine the real number.
A caveat here is that this perceived 'seniority' would go away if Patriot sold these non-unionized mines piecemeal to pay down the DIP.You'd then be in the same spot you were before. But to the extent there is residual value after DIP and admin claims, I believe you will be ahead of the post retirement damages.
And I couldn't write this post without mentioning the ruling in the Third Circuit in Visteon. I do not think anyone really follows that decision so I do not believe it will come into play here.
I plan on exploring pensions and post retirement liabilities much more in depth in the future with our team of legal writers. Given that just in the past 48 hours we've seen adversary proceedings in both Eastman Kodak and AMR as it relates to these subjects, I think its topical to say the least. In meantime, if you have any thoughts on the above post, please shoot me an email or write in comments below.
Starting on page 108 of this document (First Day Affidavit), Patriot Coal lays out each of its assets, breaking down owned versus leased tons of coal, per LLC entity (in this post I'll call this Exhibit the "LLC Document".
This is significantly more detailed than the 10K disclosures that PCX has laid out in the past, reproduced below.:
Footnote 1 here states: "Assigned reserves represent recoverable coal reserves that we have committed to mine at locations operating as of December 31, 2011. Unassigned reserves would require new mine development, mining equipment or plant facilities before operations could begin on the property." Assigned reserves then should have more value then unassigned reserves (Patriot lists 666M tons of assigned reserves vs 1,265M of unassigned reserves). According to the LLC document in the First Day Affidavit, which corresponds to the 10K filing, there are 678M of owned reserves and 1,253M of leased reserves.
The LLC Document in the First Day Affidavit breaks down each LLC into an individual reserve area and geographic location (county and state). So for example, Central States Coal Res. of KY, LLC has 7 distinct reserve areas representing ~146M of owned coal and 153M of leased coal. And if you are looking for the breakdown of Patriot vs Magnum Coal subsidiaries (Patriot made a large acquisition of Magnum Coal in July 2008), it can be found here: Patriot vs Magnum Subs. The point to remember from this paragraph is each mine has its own LLC.
Patriot has assigned "Complex" names in its 10K representing multiple mines. Here is the list of Complex Names for Patriot and the amount of owned vs leased coal reserves:
You will note I have only listed assigned reserves on this chart. Each of the listed entities have unassigned reserves (proven and probable) which require more development, though I still have not found a good breakdown other than the LLC document which requires some guess work on tie-ins. With that said, unassigned reserves do have value. And for my reference, of the exclusive met mines, Panther is lower quality met coal (high-vol B met coal), Rocklick and Wells are high-vol A. Kanawha Eagle is also high-vol B.
This is where things start to get a little technical. As you can see in the above chart, I have listed whether a complex was unionized or not and the disclosure of percentage of union members. In the First Day Affidavit, CFO Mark Schroeder notes: "Approximately 42% of these employees are unionized and are represented by the United Mine Workers of America (the “UMWA”) under collective bargaining agreements." The 42% is off of the 4,000 people in active status. This is relative to PCX providing "healthcare and other benefits to 10,286 primary insureds and 12,145 beneficiaries, amounting to a total of 22,431 individuals covered by the Debtors’ benefit plans."
From here we need to make the distinction between post-retirement healthcare benefits and pensions. This is an important distinction. In Patriot's case, the bulk of the legacy liabilities are post-retirement healthcare benefits. We now need to defined "Control Group Liability" which, under ERISA, means a plan sponsor and each corporation under control by that plan sponsor. If we were talking legacy liabilities in terms of pensions at Patriot (there are multi-employer pensions at Patriot), each mine listed above would be jointly responsible in a distressed termination of the pension and privy to rejection claims. But that's not what is happening here.
Under Section 1114 of the Bankruptcy Code, a debtor in possession can modify retiree benefits. A question then arises if retiree benefits have vested or not. If not vested, claims do not arise. If vested, claims do arise as an unsecured claim for damages as a result of modification or termination. While there is some issues with PCX specifically as it relates to collective bargaining agreements with UMWA and how Section 1113 comes into play, that is for another post. We do not yet have a break down of vested versus unvested.
We know the 8.25% bonds are guaranteed by "substantially all of the Debtor subsidiaries of Patriot Coal." The prospectus lists the guarantors which matches pretty well with the list of filing entities. When I first looked at Patriot's guaranteed bonds I assumed they would be pari with claims arising under 1114 of the Bankruptcy code due to changes they expect to make with the post-retirement obligations.
But now I think that's wrong.
I now believe the guaranteed bonds will be ahead of the damage claims (but still behind any priority claim which now includes a large DIP) in the mines / mining operations of non-unionized work forces (per each individual LLC). These complexes include Blue Creek, Campbell's Creek, Paint Creek, Panther, Bluegrass and Dodge Hill. So bond holders will really have two sources of value: 1) The value of the mines that are not burdened by post retirement liabilities - this value will flow exclusively to the guaranteed bonds after fulfilling DIP claims 2) The value of the mines that do have post retirement damage claims - this value will be shared with the larger claims pool. The mines probably do have SOME post retirement liabilities but until we see the schedules, its impossible to determine the real number.
A caveat here is that this perceived 'seniority' would go away if Patriot sold these non-unionized mines piecemeal to pay down the DIP.You'd then be in the same spot you were before. But to the extent there is residual value after DIP and admin claims, I believe you will be ahead of the post retirement damages.
And I couldn't write this post without mentioning the ruling in the Third Circuit in Visteon. I do not think anyone really follows that decision so I do not believe it will come into play here.
I plan on exploring pensions and post retirement liabilities much more in depth in the future with our team of legal writers. Given that just in the past 48 hours we've seen adversary proceedings in both Eastman Kodak and AMR as it relates to these subjects, I think its topical to say the least. In meantime, if you have any thoughts on the above post, please shoot me an email or write in comments below.
7.09.2012
Patriot Coal (PCX) Files for Bankruptcy
Today was one of the busier days in distressed debt investing for 2012 with an eye-popping bid for Hawker's assets and rumors all day of a Patriot bankruptcy filing which was definitively announced after the close. Tomorrow I will do a post on Hawker and the Superior bid and what it means for recovery, but tonight's post with focus on Patriot Coal's bankruptcy filing. I first wrote about Patriot Coal a few weeks ago: "Hot Topics in Distressed: Coal Names"
Salient Facts of the Case:
Salient Facts of the Case:
- Main Case Number: 12-12900; Southern District of New York
- Judge: The Honorable Shelley C. Chapman; Previous/currents cases include 4Kids Entertainment, LightSquared, Ambac, InnKeapers, Boston Gen
- Representation: David Polk & Wardwell represent Patriot. Blackstone is serving at their FA. AlixPartners' Ted Stenger will be the CRO. In the bankruptcy filing, the company also named a conflicts counsel (Curtis, Mallet-Prevost, Colt & Mosle LLP)
- The Patriot Coal claims agent site can be found here: Patriot Coal Claims Agent.
- 99 Chapter 11 cases were filed today - a motion for joint administration has been put on the docket
- $802M DIP coming with proceeds used to "refinance certain of the Company's obligations under the existing credit facility and the existing securitization facility, and for working capital, capital expenditures and other general corporate purposes"
- The bankruptcy petition for holding company is embedded below
The docket can be found here: Patriot Coal Bankruptcy Docket
In addition, here is the schedule for the entities filing for bankruptcy today:
For readers reference, the guaranteed bonds (8.25% of '18) went out 33.5-34.5, flat. The converts were last quoted at 7.5-9.5, though I saw a buyer at the very end of the day at DB bidding 7. The guaranteed and converts started the day at 41-43 and 31-33, respectively.
Editor Side Note: Last week PCX's equity was up nearly 100%. I had asked around what the hell was going on. I had heard there were multiple buy-ins before the holiday, accelerating when markets opened on Thursday. Bonds during that time really weren't doing much.
CFO Mark Schroeder's Declaration in Support of First Day Motions can be found here: PCX Bankruptcy First Day Declaration. Some take-aways from the document:
- Twelve active mining complexes consisting of nineteen surface and underground mines
- PCX controls 1.9B of proven and probable reserves (including leases)
- LTM 3/31/2012 results: Revenue of $2.33B, Adjusted EBITDA of $164M on 29.4m tons of coal
- Interesting details on their benefit plans: 10,286 primary insureds and 12, 145 beneficiaries for a total of 22,431 individuals covered under the benefit plan. Compare this to an active work of nearly 4,500.
- On Petition Date: $300M LOCs, and $25M direct borrowings under their $427.5M Revolver. $51.8M LOCs against the $125M AR facility.
- Coal's share of total power generation was down to 36% in 1Q 2012 from 45% in 1Q 2011
- Coal price forecasts: $2.38 per MMBtu in 2012 and $2.30 MMBtu in 2013
- Patriot names the two parties that defaulted on contractual obligations to purchase coal: Bridgehouse Commodities Trading Limited and Keystone Industries - both of which PCX has filed actions against for damages
- Declaration goes on to blame legacy liabilities for one of the reasons for the restructuring; specifically the fact that 42% of PCX's employees are represented by the UMWA (vs 11.4% of the industry) and that brings about restrictions to the the National Bituminous Coal Wage Agreements of 2011.
- PCX currently contributes $12k per year for each unionized employee. This is projected to increase to more than $27k per employee in 2017 and $46k per employee in 2020 (!!! good lord !!!)
- PV of Coal Act liabilities at $140M. Black lung liabilities of $186M looking to go higher due to Obama-Care but these could be put to BTU. $73M in workers comp liabilities.
- The BTU disclosure is somewhat confusing. Anyone have color on this? Who is on the hook?
- DIP Terms: $125M 'First Out' DIP ABL and Term Loan. 'Second Out' DIP of $302M which will roll existing Letters of Credit under the existing Revolver. New money / liquidity will be approximately $425M which I believe is slightly higher than the market was anticipating.
- Cash is listed at $19.7M as of May 31, 2012
- Numerous Schedules listing Letters of Credit and Security Deposits, Owned and Leases Premises (broken down by type of mine and location)
- Debtor is forecasting a $27M cash inflow for the 30 days following the petition date.
- $25M of Critical Vendor claims (Docket #14)
Depending on how bulled up you are on coal, comps trade anywhere from 4.5x-7.0x 2013E EBITDA. The problem of course with Patriot is that as of today's filing (that I can see) we do not have a good handle on the size of the unsecured claims pool due to lack of clarity on vested vs. unvested post-retirement liabilities (vested can be rejected and therefore establish a claim in bankruptcy). The asset side can be broken down per mine (whether it be thermal / met, leased or owned, CO2 content, etc). It remains to be seen if any of the domestic majors are willing to add capacity in the CAPP; though that's not to say you may not see foreign entities or even steel players come in looking to add some vertical integration (though PCX's vol-B coal is not in high demand today).
I have to think given the size of the DIP, and absent large asset sales for cash generation, the guaranteed bonds will need to step up for some sort of rights offering to keep leverage at manageable levels on an exit. Is there any sort of litigation strategy for the converts against the syndicate that was leading the term loan syndication a month ago or even against BTU for the spin (hail mary?).
Depending on how juicy / tight the terms of the DIP are, it could be interesting. With no real way to hedge the unsecured guaranteed bonds, there doesn't seem like a lot to do until more information comes out. Will will keep readers updated to our valuation work and would welcome any thoughts if you are working through this bankruptcy as well.
7.08.2012
JOBS Act Update: General Solicitation Provision
I first introduced readers to the JOBS Act in April of this year. For hedge fund managers, especially ones running smaller books, I believe the JOBS Act is one of the most important pieces of legislation that will affect their business. Under Title II of the bill, managers can generally solicit REG D offerings to the public as long as all ultimate purchasers are accredited. Previously, one needed to have a previous relationship to market to investors. In theory, that is all about to change.
The bill gave the SEC 90 days to revise the general solicitation rules that are currently used. That day was SUPPOSED to be July 5th. Unfortunately, the SEC will not meet the deadline. SEC Chairman Mary Schapiro said this to Congress a few weeks ago:
The SEC has put on their website all the public comments they have received regarding Title II of the JOBS Act - you can read them here: Public Commentary on Title II of JOBS Act. One of my favorite is from Phillip Goldstein, head of Bulldog Investors, a well known hedge fund (Goldstein is one of my favorite investors, unfortunately I do not know anyone that works at Bulldog), that faced off against the Massachusetts government that said he was marketing his fund to average investors by having a website that discussed Bulldog's tactics. The case nearly made it to the Supreme Court.
In his letter, he points out that a large contingent of the public commentary calling for very strict and onerous hurdles on future general solicitation is coming from the mutual fund industry which will now have to compete for investor's dollars with hedge funds that publicly market themselves to the public. Goldstein writes:
The bill gave the SEC 90 days to revise the general solicitation rules that are currently used. That day was SUPPOSED to be July 5th. Unfortunately, the SEC will not meet the deadline. SEC Chairman Mary Schapiro said this to Congress a few weeks ago:
"The rulemakings to revise Rule 506 and Rule 144A are both required to be completed within 90 days of enactment of the JOBS Act. As I stated to Congress prior to the passage of the Act, time limits imposed by the JOBS Act are not achievable. Here, the 90 day deadline does not provide a realistic timeframe for the drafting of the new rule, the preparation of an accompanying economic analysis, the proper review by the Commission, and an opportunity for public input. Although we will not meet this deadline, the staff has made significant progress on a recommendation and economic analysis, and it is my belief that the Commission will be in a position to act on a staff proposal in the very near future."You can read her entire testimony here: Mary Schapiro's Testimony re JOBS Act
The SEC has put on their website all the public comments they have received regarding Title II of the JOBS Act - you can read them here: Public Commentary on Title II of JOBS Act. One of my favorite is from Phillip Goldstein, head of Bulldog Investors, a well known hedge fund (Goldstein is one of my favorite investors, unfortunately I do not know anyone that works at Bulldog), that faced off against the Massachusetts government that said he was marketing his fund to average investors by having a website that discussed Bulldog's tactics. The case nearly made it to the Supreme Court.
In his letter, he points out that a large contingent of the public commentary calling for very strict and onerous hurdles on future general solicitation is coming from the mutual fund industry which will now have to compete for investor's dollars with hedge funds that publicly market themselves to the public. Goldstein writes:
"Ironically, these commentators, which include the Investment Company Institute and a variety of self-proclaimed advocates for investors, do not disclose their real motives. Having failed to persuade Congress or President Obama of the merits of their arguments, they now appeal to the Commission to water down the lifting of the ban on general advertising and solicitation by imposing onerous regulations on unregistered issuers that Congress did not mandate and that would undermine its intent. (In the case of the ICI, it also does not disclose that its true motive is to protect its member mutual funds from competition by hedge funds for accredited investors.)"A meeting has been scheduled for August 22nd, 2012 to consider the rules to eliminate the ban on general solicitation. Seems like we will be waiting until at least then. For small, up and coming hedge funds, this is important stuff to be on top of. In addition, if you are a content provider, you have a new client that could advertise on your site: banner ads for hedge funds. Going to be very interesting to see what comes out of this. Stay tuned.
7.07.2012
Distressed Weekly Links of Interest: Slow Week Edition
The July 4th week is always a slow one in the credit markets. Few primary deals are brought to the market and not too much happens in the bankruptcy courts. For those looking to catch on things you may have missed during the week, here is Distressed Debt Investing's weekly links of interest:
Roddy Boyd explores the perplexing situation at CMEDY [The Financial Investigator]
Solus sues Perry Capital over a trade in Madoff claims [NY Superior Court System]
July 2012 Hedge Fund Events [Hedge Fund Law Blog]
Commentary on the SYMS bankruptcy [Ragnar is a Pirate]
Cap on management comp plans under 502(b)(7) in Verasun [Delaware Business Bankruptcy Report]
Interesting situation in a public LBO at Fortune Industries [Oddball Stocks]
Analysis on Southern Community Financial Preferreds [Enterprising Investor]
Analysis on the final chapter in Arctic Glacier [Seeking Alpha]
**Editor Note: I have also written up Arctic Glacier on the Distressed Debt Investors Club, coming up with similar numbers to the Seeking Alpha article. It is my largest position. I encourage all those interested in the DDIC to reach out to me for question. Our members consist of buy side and sell side analysts from major hedge funds and asset managers as well as analysts across Wall Street and the quality and number of ideas grows every day. We would love to add more of the best in bankruptcy investing. Hope to see you there.
Roddy Boyd explores the perplexing situation at CMEDY [The Financial Investigator]
Solus sues Perry Capital over a trade in Madoff claims [NY Superior Court System]
July 2012 Hedge Fund Events [Hedge Fund Law Blog]
Commentary on the SYMS bankruptcy [Ragnar is a Pirate]
Cap on management comp plans under 502(b)(7) in Verasun [Delaware Business Bankruptcy Report]
Interesting situation in a public LBO at Fortune Industries [Oddball Stocks]
Analysis on Southern Community Financial Preferreds [Enterprising Investor]
Analysis on the final chapter in Arctic Glacier [Seeking Alpha]
**Editor Note: I have also written up Arctic Glacier on the Distressed Debt Investors Club, coming up with similar numbers to the Seeking Alpha article. It is my largest position. I encourage all those interested in the DDIC to reach out to me for question. Our members consist of buy side and sell side analysts from major hedge funds and asset managers as well as analysts across Wall Street and the quality and number of ideas grows every day. We would love to add more of the best in bankruptcy investing. Hope to see you there.