I felt a nice compliment to the T2 Presentation might be an explanation of a trade that I beleive could yield a nice return. Would love any feedback.
Now that BP has put the cap on the well its all gravy from here. Well....maybe not but the good news is this idea doesn't really depend on stellar out-performance. I am recommending a 1X1 vertical call spread. I would advise using the 1/20/2012 Calls at strikes of 42.5 and 45 (to avoid confusion I am advocating buying the 42.50s and selling the 45s at a 1:1 ratio). Based on midpoint pricing as of close on 7/15/10 the 42.50s trade at 6.90 and the 45s are at 6.13 this represents a $0.77 spread. So using simple math if at anytime up until 1/20/2012 BP's equity goes to 45 or above the position will have an intrinsic value of $2.50/share versus a cost of $0.77 or a nice profit of 3.25x invested capital. For frame of reference BP's equity closed trading today at $38.92. That means we have the potential to make 3.25x our money if the stock just goes up by 15.6% by 1/20/2012 - sounds like a pretty manageable gap to me.
Now for the nitty-gritty. Obviously BP will have to pay substantial sums for the damage they have caused to the Gulf Coast. Given our populist president and the current business hating environment I imagine these fees will be quite large. The ultimate cost to BP is impossible to know currently. The 1989 Exxon Valdez spill of 250 kbls cost Exxon US$3.8 bn. Assuming that a spill of similar size in the GoM could today cost $10 bn, allowing for inflation and the greater impact of this spill (a more highly populated and more economically relevant area). However, this estimate is subject to great uncertainty, as there is no useful recent comparison for a spill of this size in such a populated area. To be conservative we assume that BP (as an operator) bears 100% of the clean-up and legal costs, despite owning only 65% of the license. However, this is another key area of uncertainty; we do not know yet the exact reasons for the failures that led to the spill and which company might be responsible for it.
Just for fun lets make some nice round estimates on what the spill could ultimately cost. At $40,000 per barrel spilt, or $10 bn per 250 kbls (backed into by inflating Exxon’s US$3.8 bn costs relating to the Valdez spill in 1989 by 5% pa). Then a apply this cost to the total number of barrels spilt, and do not adjust for those barrels
that have been dispersed or evaporated, which could be as much as 50% of the total
volume. We also attribute 100% of this cost to BP, as the operator of the license, although it owns only a 65% stake in the block (and bless BP's heart they have been sending bills to their partners as incurred - payment of such bills is another topic all together). Lets be draconian, the well leaked for 85 days, lets assume the well leaked all in 1.65mbls (about 19kbls per day while there have been a number of outliers on estimates out there I decided to shoot the middle on this one). We then take that number multiplied by our $40,000 per barrel split to arrive at a total cost of $66B. Quite a staggering sum. However even using this amount the stock the stock would trade on an EV/DACF of 5.5x in 2010E and 4.5x in 2011E.
How would BP pay for this: BP has announced an intention to raise $10bn from non-core asset divestments over the next 12-months. This compares to BP's 'normal course' level of non-core divestments of $3-4bn per annum. There is an overhang of unsold refineries on the market - we count at least 25 with a capacity of 2.9 million bopd. So, we doubt BP will seek to compete in that oversupplied asset market. Retail asset divestments are always an option – given the damage to BP’s brand, it is possible that a buyer may see greater value by rebranding some outlets. Excluding Russia, BP has 22,400 retail sites. An exit from specialty (acetyls and aromatics) chemicals is possible – given capital employed of $5-6bn, this could be a useful ticket which would complete BP's exit from the chemicals segment following the sale of Innovene. Upstream, we sense that it more a buyer’s market for gas oriented assets and we doubt BP will U-turn following its recent build up in the US gas shale ($3.7bn acquisitions in H2 2008). This leaves oil biased upstream assets. We doubt BP will want to sell growth oriented (undeveloped) assets; we suspect it should rather sell more mature producing positions which are more straightforward to value and for which there is a relatively buoyant market. Such assets could include pieces in the UK North Sea, the Lower 48 (onshore USA), Canada and perhaps Colombia. We very much doubt BP will look to reduce its exposure to Angola or TNK-BP given their resource depth and long term growth potential. BP has three listed investments which have an aggregate market value of approximately $2.6bn that it might consider selling – a 1.3% stake in Rosneft (market value $880m), a 20% stake in China Aviation Oil Singapore (market value $150m) and a 71% stake in Castrol India (market value $1,600m). Aside from just the raw cashflow producing power of BP there are a number of avenues for additional cash.
There is a lot more I could talk about on the company and its cash producing prospects but I will leave that to the reader to discover.
While the dynamics may be unappealing to some - 100% loss versus 325% upside. I personally find a 3:1 trade with reasonable safety and a long life quite appealing.
Friday, July 16, 2010
Wednesday, June 16, 2010
Passport Capital Q1 2010 Letter
Below is Passport Capital's Q1 2010 letter. John Burbank is always worth a read (just look at that CAGR since inception!). They do a good job of giving readers insight into how one of the most successful recent macro funds operate. Enjoy:
Passport Capital Q1 2010 Letter
Passport Capital Q1 2010 Letter
Monday, June 7, 2010
Update of RAFI
For those of you still following the story, RAFI filed some additional documents with the SEC per their comments. Its a fairness opinion and it suggests a fair value of slightly north of $6. Hopefully this will be the last of the comments and we can move forward with the distribution. The presentation does do a good job of explaining what the company does. Enjoy:
http://www.sec.gov/Archives/edgar/data/99249/000119380510001644/e607130_ex99-c2.htm
http://www.sec.gov/Archives/edgar/data/99249/000119380510001644/e607130_ex99-c2.htm
Friday, May 28, 2010
Easy Money, Hard Truths
David Einhorn - the manager of Greenlight Capital, recently wrote an OpEd piece for the NYT (it was a reproduction of his speech at the Ira Sohn conference). It is worth a read. Really makes me question the investment merits of TIPS and reinforces my interest in natural resources like Timber and Gold. Without further ado, here is the article:
"Are you worried that we are passing our debt on to future generations? Well, you need not worry.
Before this recession it appeared that absent action, the government’s long-term commitments would become a problem in a few decades. I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation — not our grandchildren’s — will have to deal with the consequences.
According to the Bank for International Settlements, the United States’ structural deficit — the amount of our deficit adjusted for the economic cycle — has increased from 3.1 percent of gross domestic product in 2007 to 9.2 percent in 2010. This does not take into account the very large liabilities the government has taken on by socializing losses in the housing market. We have not seen the bills for bailing out Fannie Mae and Freddie Mac and even more so the Federal Housing Administration, which is issuing government-guaranteed loans to non-creditworthy borrowers on terms easier than anything offered during the housing bubble. Government accounting is done on a cash basis, so promises to pay in the future — whether Social Security benefits or loan guarantees — do not count in the budget until the money goes out the door.
A good percentage of the structural increase in the deficit is because last year’s “stimulus” was not stimulus in the traditional sense. Rather than a one-time injection of spending to replace a cyclical reduction in private demand, the vast majority of the stimulus has been a permanent increase in the base level of government spending — including spending on federal jobs. How different is the government today from what General Motors was a decade ago? Government employees are expensive and difficult to fire. Bloomberg News reported that from the last peak businesses have let go 8.5 million people, or 7.4 percent of the work force, while local governments have cut only 141,000 workers, or less than 1 percent.
Public sector jobs used to offer greater job security but lower pay. Not anymore. In 2008, according to the Cato Institute, the average federal civilian salary with benefits was $119,982, compared with $59,909 for the average private sector worker; the disparity has grown enormously over the last decade.
The question we need to ask is this: If we don’t change direction, how long can we travel down this path without having a crisis? The answer lies in two critical issues. First, how long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms? And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts — that is, by the printing of money?
•
The recent United States credit crisis was attributable in large measure to capital requirements and risk models that incorrectly assumed AAA-rated securities were exempt from default risk. We learned the hard way that when the market ignores credit risk, the behavior of borrowers and lenders becomes distorted.
It was once unthinkable that “risk-free” institutions could fail — so unthinkable that the chief executives of the companies that recently did fail probably didn’t realize when they crossed the line from highly creditworthy to eventually insolvent. Surely, had they seen the line, they would, to a man, have stopped on the solvent side.
Our government leaders are faced with the same risk today. At what level of government debt and future commitments does government default go from being unthinkable to inevitable, and how does our government think about that risk?
I recently posed this question to one of the president’s senior economic advisers. He answered that the government is different from financial institutions because it can print money, and statistically the United States is not as bad off as some other countries. For an investor, these responses do not inspire confidence.
He went on to say that the government needs to focus on jobs now, because without an economic recovery, the rest does not matter. It’s a valid point, but an insufficient excuse for holding off on addressing the long-term structural deficit. If we are going to spend more now, it is imperative that we lay out a credible plan to avoid falling into a debt trap. Even using the administration’s optimistic 10-year forecast, it is clear that we will have problematic deficits for the next decade, which ends just as our commitments to baby boomers accelerate.
Modern Keynesianism works great until it doesn’t. No one really knows where the line is. One obvious lesson from the economic crisis is that we should get rid of the official credit ratings that inspire false confidence and, worse, are pro-cyclical, aggravating slowdowns and inflating booms. Congress has a rare opportunity in the current regulatory reform effort to eliminate the rating system. For now, it does not appear interested in taking sufficiently aggressive action. The big banks and bond buyers have told Congress they want to continue the current system.
As William Gross, the managing director of the bond management company Pimco, put it in his last newsletter, “Firms such as Pimco with large credit staffs of their own can bypass, anticipate and front run all three [rating agencies], benefiting from their timidity and lack of common sense.”
Given how sophisticated bond buyers use the credit rating system to take advantage of more passive market participants, it is no wonder they stress the continued need to preserve the status quo.
It would be better to have each investor individually assess credit-seeking entities. Certainly, the creditworthiness of governments should not be determined by a couple of rating agency committees.
Consider this: When Treasury Secretary Timothy Geithner promises that the United States will never lose its AAA rating, he chooses to become dependent on the whims of the Standard & Poor’s ratings committee rather than the diverse views of the many participants in the capital markets. It is not hard to imagine a crisis where just as the Treasury secretary seeks buyers of government debt in the face of deteriorating market confidence, a rating agency issues an untimely downgrade, setting off a rush of sales by existing bondholders. This has been the experience of many troubled corporations, where downgrades served as the coup de grâce.
The current upset in the European sovereign debt market is a prequel to what might happen here. Banks can hold government debt with a so-called zero-risk weighting, which means zero capital requirements. As a result, European banks stocked up on Greek debt, and sold sovereign credit default swaps, and now need to be bailed out to avoid another banking crisis.
As we saw first in Dubai and now in Greece, it appears that governments’ response to the failure of Lehman Brothers is to use any means necessary to avoid another Lehman-like event. This policy transfers risk from the weak to the strong — or at least the less weak — setting up the possibility of the crisis ultimately spreading from the “too small to fails,” like Greece, to “too big to bails,” like members of the Group of 7 industrialized nations.
We should have learned by now that each credit — no matter how unthinkable its failure would be — has risk and requires capital. Just as trivial capital charges encouraged lenders and borrowers to overdo it with AAA-rated collateral debt obligations, the same flawed structure in the government debt market encourages and therefore practically ensures a repeat of this behavior — leading to an even larger crisis.
•
I don’t believe a United States debt default is inevitable. On the other hand, I don’t see the political will to steer the country away from crisis. If we wait until the markets force action, as they have in Greece, we might find ourselves negotiating austerity programs with foreign creditors.
Some believe this could be avoided by printing money. Despite the promises by the Federal Reserve chairman, Ben Bernanke, not to print money or “monetize” the debt, when push comes to shove, there is a good chance the Fed will do so, at least to the point where significant inflation shows up even in government statistics.
That the recent round of money printing has not led to headline inflation may give central bankers the confidence that they can pursue this course without inflationary consequences. However, printing money can go only so far without creating inflation.
Government statistics are about the last place one should look to find inflation, as they are designed to not show much. Over the last 35 years the government has changed the way it calculates inflation several times. According to the Web site Shadow Government Statistics, using the pre-1980 method, the Consumer Price Index would be over 9 percent, compared with about 2 percent in the official statistics today.
While the truth probably lies somewhere in the middle, this doesn’t even take into account inflation we ignore by using a basket of goods that don’t match the real-world cost of living. (For example, health care costs are one-sixth of G.D.P. but only one-sixteenth of the price index, and rising income and payroll taxes do not count as inflation at all.)
Why does the government understate rising costs? Low official inflation benefits the government by reducing inflation-indexed payments, including Social Security. Lower official inflation means higher reported real G.D.P., higher reported real income and higher reported productivity.
Subdued reported inflation also enables the Fed to rationalize easy money. The Fed wants to have low interest rates to fight unemployment, which, in a new version of the trickle-down theory, it believes can be addressed through higher stock prices. The Fed hopes that by denying savers an adequate return in risk-free assets like savings deposits, it will force them to speculate in stocks and other “risky assets.” This speculation drives stock prices higher, which creates a “wealth effect” when the lucky speculators spend some of their gains on goods and services. The purchases increase aggregate demand and lead to job creation.
Easy money also aids the banks, helping them earn back their still unacknowledged losses. This has the perverse effect of discouraging banks from making new loans. If banks can lend to the government, with no capital charge and no perceived risk and earn an adequate spread, then they have little incentive to lend to small businesses or consumers. (For this reason, higher short-term rates could very well stimulate additional lending to the private sector.)
Easy money also helps the fiscal position of the government. Lower borrowing costs mean lower deficits. In effect, negative real interest rates are indirect debt monetization. Allowing borrowers, including the government, to get addicted to unsustainably low rates creates enormous solvency risks when rates eventually rise.
While one can debate where we are in the recovery, one thing is clear — the worst of the last crisis has passed. Nominal G.D.P. growth is running in the mid-single digits. The emergency has passed and yet the Fed continues with an emergency zero-interest rate policy. Perhaps easy money is still appropriate — but a zero-rate policy creates enormous distortions in incentives and increases the likelihood of a significant crisis later. It was not lost on the market that during this month’s sell-off, with rates around zero, there is no room for further cuts should the economy roll over.
EASY money has negative consequences in addition to the risk of inflation and devaluing the dollar. It can also feed asset bubbles. In recent years, we have gone from one bubble and bailout to the next. Each bailout has rewarded those who acted imprudently. This has encouraged additional risky behavior, feeding the creation of new, larger bubbles.
The Fed bailed out the equity markets after the crash of 1987, which fed a boom ending with the Mexican crisis and bailout. That Treasury-financed bailout started a bubble in emerging market debt, which ended with the Asian currency crisis and Russian default. The resulting organized rescue of Long-Term Capital Management’s counterparties spurred the Internet bubble. After that popped, the rescue led to the housing and credit bubble. The deflationary aspects of that bubble popping created a bubble in sovereign debt, despite the fiscal strains created by the bailouts. The Greek crisis may be the first sign of the sovereign debt bubble bursting.
Though we don’t know what’s going to happen next, the good news for our grandchildren is that we will have to face our own debts. If we realize that our own future is at risk, we might be more serious about changing course. If we don’t, Mr. Geithner and others might regret having never said never about America’s rating.
David Einhorn is the president of Greenlight Capital, a hedge fund, and the author of “Fooling Some of the People All of the Time.” Investment accounts managed by Greenlight may have a position (long or short) in the securities discussed in this article."
"Are you worried that we are passing our debt on to future generations? Well, you need not worry.
Before this recession it appeared that absent action, the government’s long-term commitments would become a problem in a few decades. I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation — not our grandchildren’s — will have to deal with the consequences.
According to the Bank for International Settlements, the United States’ structural deficit — the amount of our deficit adjusted for the economic cycle — has increased from 3.1 percent of gross domestic product in 2007 to 9.2 percent in 2010. This does not take into account the very large liabilities the government has taken on by socializing losses in the housing market. We have not seen the bills for bailing out Fannie Mae and Freddie Mac and even more so the Federal Housing Administration, which is issuing government-guaranteed loans to non-creditworthy borrowers on terms easier than anything offered during the housing bubble. Government accounting is done on a cash basis, so promises to pay in the future — whether Social Security benefits or loan guarantees — do not count in the budget until the money goes out the door.
A good percentage of the structural increase in the deficit is because last year’s “stimulus” was not stimulus in the traditional sense. Rather than a one-time injection of spending to replace a cyclical reduction in private demand, the vast majority of the stimulus has been a permanent increase in the base level of government spending — including spending on federal jobs. How different is the government today from what General Motors was a decade ago? Government employees are expensive and difficult to fire. Bloomberg News reported that from the last peak businesses have let go 8.5 million people, or 7.4 percent of the work force, while local governments have cut only 141,000 workers, or less than 1 percent.
Public sector jobs used to offer greater job security but lower pay. Not anymore. In 2008, according to the Cato Institute, the average federal civilian salary with benefits was $119,982, compared with $59,909 for the average private sector worker; the disparity has grown enormously over the last decade.
The question we need to ask is this: If we don’t change direction, how long can we travel down this path without having a crisis? The answer lies in two critical issues. First, how long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms? And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts — that is, by the printing of money?
•
The recent United States credit crisis was attributable in large measure to capital requirements and risk models that incorrectly assumed AAA-rated securities were exempt from default risk. We learned the hard way that when the market ignores credit risk, the behavior of borrowers and lenders becomes distorted.
It was once unthinkable that “risk-free” institutions could fail — so unthinkable that the chief executives of the companies that recently did fail probably didn’t realize when they crossed the line from highly creditworthy to eventually insolvent. Surely, had they seen the line, they would, to a man, have stopped on the solvent side.
Our government leaders are faced with the same risk today. At what level of government debt and future commitments does government default go from being unthinkable to inevitable, and how does our government think about that risk?
I recently posed this question to one of the president’s senior economic advisers. He answered that the government is different from financial institutions because it can print money, and statistically the United States is not as bad off as some other countries. For an investor, these responses do not inspire confidence.
He went on to say that the government needs to focus on jobs now, because without an economic recovery, the rest does not matter. It’s a valid point, but an insufficient excuse for holding off on addressing the long-term structural deficit. If we are going to spend more now, it is imperative that we lay out a credible plan to avoid falling into a debt trap. Even using the administration’s optimistic 10-year forecast, it is clear that we will have problematic deficits for the next decade, which ends just as our commitments to baby boomers accelerate.
Modern Keynesianism works great until it doesn’t. No one really knows where the line is. One obvious lesson from the economic crisis is that we should get rid of the official credit ratings that inspire false confidence and, worse, are pro-cyclical, aggravating slowdowns and inflating booms. Congress has a rare opportunity in the current regulatory reform effort to eliminate the rating system. For now, it does not appear interested in taking sufficiently aggressive action. The big banks and bond buyers have told Congress they want to continue the current system.
As William Gross, the managing director of the bond management company Pimco, put it in his last newsletter, “Firms such as Pimco with large credit staffs of their own can bypass, anticipate and front run all three [rating agencies], benefiting from their timidity and lack of common sense.”
Given how sophisticated bond buyers use the credit rating system to take advantage of more passive market participants, it is no wonder they stress the continued need to preserve the status quo.
It would be better to have each investor individually assess credit-seeking entities. Certainly, the creditworthiness of governments should not be determined by a couple of rating agency committees.
Consider this: When Treasury Secretary Timothy Geithner promises that the United States will never lose its AAA rating, he chooses to become dependent on the whims of the Standard & Poor’s ratings committee rather than the diverse views of the many participants in the capital markets. It is not hard to imagine a crisis where just as the Treasury secretary seeks buyers of government debt in the face of deteriorating market confidence, a rating agency issues an untimely downgrade, setting off a rush of sales by existing bondholders. This has been the experience of many troubled corporations, where downgrades served as the coup de grâce.
The current upset in the European sovereign debt market is a prequel to what might happen here. Banks can hold government debt with a so-called zero-risk weighting, which means zero capital requirements. As a result, European banks stocked up on Greek debt, and sold sovereign credit default swaps, and now need to be bailed out to avoid another banking crisis.
As we saw first in Dubai and now in Greece, it appears that governments’ response to the failure of Lehman Brothers is to use any means necessary to avoid another Lehman-like event. This policy transfers risk from the weak to the strong — or at least the less weak — setting up the possibility of the crisis ultimately spreading from the “too small to fails,” like Greece, to “too big to bails,” like members of the Group of 7 industrialized nations.
We should have learned by now that each credit — no matter how unthinkable its failure would be — has risk and requires capital. Just as trivial capital charges encouraged lenders and borrowers to overdo it with AAA-rated collateral debt obligations, the same flawed structure in the government debt market encourages and therefore practically ensures a repeat of this behavior — leading to an even larger crisis.
•
I don’t believe a United States debt default is inevitable. On the other hand, I don’t see the political will to steer the country away from crisis. If we wait until the markets force action, as they have in Greece, we might find ourselves negotiating austerity programs with foreign creditors.
Some believe this could be avoided by printing money. Despite the promises by the Federal Reserve chairman, Ben Bernanke, not to print money or “monetize” the debt, when push comes to shove, there is a good chance the Fed will do so, at least to the point where significant inflation shows up even in government statistics.
That the recent round of money printing has not led to headline inflation may give central bankers the confidence that they can pursue this course without inflationary consequences. However, printing money can go only so far without creating inflation.
Government statistics are about the last place one should look to find inflation, as they are designed to not show much. Over the last 35 years the government has changed the way it calculates inflation several times. According to the Web site Shadow Government Statistics, using the pre-1980 method, the Consumer Price Index would be over 9 percent, compared with about 2 percent in the official statistics today.
While the truth probably lies somewhere in the middle, this doesn’t even take into account inflation we ignore by using a basket of goods that don’t match the real-world cost of living. (For example, health care costs are one-sixth of G.D.P. but only one-sixteenth of the price index, and rising income and payroll taxes do not count as inflation at all.)
Why does the government understate rising costs? Low official inflation benefits the government by reducing inflation-indexed payments, including Social Security. Lower official inflation means higher reported real G.D.P., higher reported real income and higher reported productivity.
Subdued reported inflation also enables the Fed to rationalize easy money. The Fed wants to have low interest rates to fight unemployment, which, in a new version of the trickle-down theory, it believes can be addressed through higher stock prices. The Fed hopes that by denying savers an adequate return in risk-free assets like savings deposits, it will force them to speculate in stocks and other “risky assets.” This speculation drives stock prices higher, which creates a “wealth effect” when the lucky speculators spend some of their gains on goods and services. The purchases increase aggregate demand and lead to job creation.
Easy money also aids the banks, helping them earn back their still unacknowledged losses. This has the perverse effect of discouraging banks from making new loans. If banks can lend to the government, with no capital charge and no perceived risk and earn an adequate spread, then they have little incentive to lend to small businesses or consumers. (For this reason, higher short-term rates could very well stimulate additional lending to the private sector.)
Easy money also helps the fiscal position of the government. Lower borrowing costs mean lower deficits. In effect, negative real interest rates are indirect debt monetization. Allowing borrowers, including the government, to get addicted to unsustainably low rates creates enormous solvency risks when rates eventually rise.
While one can debate where we are in the recovery, one thing is clear — the worst of the last crisis has passed. Nominal G.D.P. growth is running in the mid-single digits. The emergency has passed and yet the Fed continues with an emergency zero-interest rate policy. Perhaps easy money is still appropriate — but a zero-rate policy creates enormous distortions in incentives and increases the likelihood of a significant crisis later. It was not lost on the market that during this month’s sell-off, with rates around zero, there is no room for further cuts should the economy roll over.
EASY money has negative consequences in addition to the risk of inflation and devaluing the dollar. It can also feed asset bubbles. In recent years, we have gone from one bubble and bailout to the next. Each bailout has rewarded those who acted imprudently. This has encouraged additional risky behavior, feeding the creation of new, larger bubbles.
The Fed bailed out the equity markets after the crash of 1987, which fed a boom ending with the Mexican crisis and bailout. That Treasury-financed bailout started a bubble in emerging market debt, which ended with the Asian currency crisis and Russian default. The resulting organized rescue of Long-Term Capital Management’s counterparties spurred the Internet bubble. After that popped, the rescue led to the housing and credit bubble. The deflationary aspects of that bubble popping created a bubble in sovereign debt, despite the fiscal strains created by the bailouts. The Greek crisis may be the first sign of the sovereign debt bubble bursting.
Though we don’t know what’s going to happen next, the good news for our grandchildren is that we will have to face our own debts. If we realize that our own future is at risk, we might be more serious about changing course. If we don’t, Mr. Geithner and others might regret having never said never about America’s rating.
David Einhorn is the president of Greenlight Capital, a hedge fund, and the author of “Fooling Some of the People All of the Time.” Investment accounts managed by Greenlight may have a position (long or short) in the securities discussed in this article."
Tuesday, May 18, 2010
Regency Affiliates, Inc.
Regency Affiliates, Inc. (RAFI) is a publicly traded, they are the parent company of several subsidiary business operations. This play on this name is a take private that has already been approved by shareholders and the board and is currently awaiting comments (if any) from the SEC. The deal is as follows:
They will be doing a 1-for-100 reverse stock split immediately followed by a 100-for-1 forward stock split. The purpose of the split / re-split is to reduce the shareholder count below 300. Under SEC rules, a company with a class of securities registered under the Securities Exchange Act of 1934 may choose to terminate its registration if certain conditions are met - one such condition is if the securities have fewer than 300 record holders. By de-registering they will be able to avoid costly SEC listing requirements. Stockholders owning fewer than 100 shares of common stock immediately before the reverse stock split will no longer own such shares after the effective time and, in lieu thereof, will receive from RAFI $6.00 in cash, without interest, for each of such shares of common stock.
Based on this and today's closing price, investors can make a quick 43% return (non-annualized and excluding trading fees). Based on my discussions with the GC and with a couple of corporate lawyers the only risk is if the SEC comments on the transaction, thus stalling the process. The transaction was submitted to the SEC when they filed their proxy on March 1, 2010. The SEC than has (again according to the GC and confirmed by others) 60 days to review the transaction and if no comment is made the stock will split and repurchase will commence.
It almost doesn't matter what RAFI does but for those who care:
RAFI is more than 50 years old. It was reorganized in 1987 to be the successor to Transcontinental Oil Corporation, which existed since 1947. RAFI owns a partnership interest in the Security Land and Development Company Limited Partnership. The Partnership owns a two story office building and a connected six story office tower occupied by the United States Social Security Administration Office of Disability and International Operations under a fifteen year lease, expiring in 2018. On April 30, 2004, RAFI, through a newly-formed, wholly-owned subsidiary called Regency Power Corporation, acquired a 50% membership interest in MESC Capital, LLC, from DTE Mobile, LLC. MESC Capital was formed to acquire all of the membership interests in Mobile Energy Services Company, LLC. Mobile Energy owns an on-site energy facility that supplies steam and electricity to a Kimberly-Clark tissue mill in Mobile, Alabama. RAFI owns, through it 75% owned subsidiary, 80% of National Resource Development Corporation which has as its principal asset approximately 70 million + short tons of previously quarried and stockpiled rock located at the site of the Groveland Mine in Dickinson County, Michigan.
As of the most recent 10-Q (9/30/09) RAFI has approximately $7m in cash and marketable securities vs. $0 in debt.
So to reiterate the simplicity of this thesis - buy 99 shares (use limit orders so you don't get bad pricing due to the illiquidity) then sit and wait and receive $6 per share or approx 43% return in less than a month or so (annualize if you want but the number is satisfactory enough in its un-annualized state). Assuming you can get closing pricing your profit potential is ~ $180 before commissions so around $170 ex commissions. It is true you won't profit greatly from this trade, but at least its enough of a profit to go out to eat....maybe there is such a thing as a free lunch...
Target: $6.00 Current Price: $4.19
They will be doing a 1-for-100 reverse stock split immediately followed by a 100-for-1 forward stock split. The purpose of the split / re-split is to reduce the shareholder count below 300. Under SEC rules, a company with a class of securities registered under the Securities Exchange Act of 1934 may choose to terminate its registration if certain conditions are met - one such condition is if the securities have fewer than 300 record holders. By de-registering they will be able to avoid costly SEC listing requirements. Stockholders owning fewer than 100 shares of common stock immediately before the reverse stock split will no longer own such shares after the effective time and, in lieu thereof, will receive from RAFI $6.00 in cash, without interest, for each of such shares of common stock.
Based on this and today's closing price, investors can make a quick 43% return (non-annualized and excluding trading fees). Based on my discussions with the GC and with a couple of corporate lawyers the only risk is if the SEC comments on the transaction, thus stalling the process. The transaction was submitted to the SEC when they filed their proxy on March 1, 2010. The SEC than has (again according to the GC and confirmed by others) 60 days to review the transaction and if no comment is made the stock will split and repurchase will commence.
It almost doesn't matter what RAFI does but for those who care:
RAFI is more than 50 years old. It was reorganized in 1987 to be the successor to Transcontinental Oil Corporation, which existed since 1947. RAFI owns a partnership interest in the Security Land and Development Company Limited Partnership. The Partnership owns a two story office building and a connected six story office tower occupied by the United States Social Security Administration Office of Disability and International Operations under a fifteen year lease, expiring in 2018. On April 30, 2004, RAFI, through a newly-formed, wholly-owned subsidiary called Regency Power Corporation, acquired a 50% membership interest in MESC Capital, LLC, from DTE Mobile, LLC. MESC Capital was formed to acquire all of the membership interests in Mobile Energy Services Company, LLC. Mobile Energy owns an on-site energy facility that supplies steam and electricity to a Kimberly-Clark tissue mill in Mobile, Alabama. RAFI owns, through it 75% owned subsidiary, 80% of National Resource Development Corporation which has as its principal asset approximately 70 million + short tons of previously quarried and stockpiled rock located at the site of the Groveland Mine in Dickinson County, Michigan.
As of the most recent 10-Q (9/30/09) RAFI has approximately $7m in cash and marketable securities vs. $0 in debt.
So to reiterate the simplicity of this thesis - buy 99 shares (use limit orders so you don't get bad pricing due to the illiquidity) then sit and wait and receive $6 per share or approx 43% return in less than a month or so (annualize if you want but the number is satisfactory enough in its un-annualized state). Assuming you can get closing pricing your profit potential is ~ $180 before commissions so around $170 ex commissions. It is true you won't profit greatly from this trade, but at least its enough of a profit to go out to eat....maybe there is such a thing as a free lunch...
Target: $6.00 Current Price: $4.19
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