Hi, I got some feedback from one reader on GGP. He has some rather interesting insights. He brings to critical issues to the fore:
1. Can the bankrupt REIT take the massive interest rate hikes in order to emerge from bankruptcy? More importantly for the equity investor, how much of its massive debt must be swapped for equity in order for it to emerge a healthy entity? In other words, how much dilution is going to hit the equity holders? And at what price will it be justified to buy GGP stock given the dilution that is about to occur?
2. There is another issue going on in this saga - substantive consolidation. Substantive consolidation (Brasher, Substantive Consolidation: A Critical Examination) is the pooling of the assets and liabilities of technically distinct corporate entities. In simple terms, an individual property secured by an asset is securitized in this case into a CMBS tranche. The key question here is: can you take those cashflows to service other debt in bankruptcy?
I've done some digging on the second issue. It still remains undecided in the US courts. No definitive judgement has been passed on it. If the courts decide that you can't use cash flows of one asset to service other debt in bankruptcy. This will have disasterous consequences for GGP. It will mean it can't cross service its debt held under various structures.
On the first issue, I've run some basic models with the following assumptions.
A. Net Operating Income (NOI) haircut of 10%
B. Average interest rate rise from 5.2% to 10% post bankruptcy
27-Jun-09
GGP (10K) (in M)
Total Debt 24,853
Interest Exp 1,299
Interest Rate 5.2%
NOI 2,105
Assumptions
Debt for Equity 35.0%
Debt Left 16,155
Est Interest Rate 10.0%
Interest Exp 1,615
NOI Haircut 10.0%
NOI (predict) 1,895
Net Profit 279
From the simple model, we see that a 35% reduction in debt is required to get GGP back on its feet again. The model is simple and leaves out a lot of other possible variables, like maintenance Capital expenditure. The point I'm trying to make is the level of debt reduction that must take place for GGP to emerge from bankruptcy is going to be significant.
I took a hard look at Ackman's model as posted in Zero Hedge. There are a few things I'm not too comfortable with. First, maintenance capex is predicted ranging from $156M to $210M over the next 5 years. Now I back checked against GGP's capex in their 2008 10K was $1.19B. That number includes acquisition/development of real estate and property additions/improvements. I've looked through the document the 10K doesn't really mention how much maintenance capex is required. So it's hard to figure out how much maintenance capex is really required on a year to year basis.
Second, I think that the increase in the interest rate to 6.02% post bankruptcy from an average of 5.2% in 2008 is kinda low. What happens if the debtors want an increase interest rate to a higher number (I used 10%) to compensate for the increased risk they are having to take with GGP?
I pose these questions as points to think about. There are probably no right or wrong answers, just educated guesses. On a personal note, I'm going to continue to keep the GGP saga in view before investing in it. I do believe that there is value but I'm waiting to see what the negotiations with the debt holders yield before getting my feet wet.
I want to once again thank my readers for their excellent feedback and insight. If you have something to add to the issues and ideas that I've posted here, please feel free to either post it or contact me at shaunhhh@gmail.com.
Friday, June 26, 2009
Tuesday, June 9, 2009
General Growth Properties (NYSE: GGP)
I just read this article by Bill Ackman of Pershing Square Capital on why General Growth Properties' (NYSE: GGP) common stock is a buy.
The thesis is rather intriguing. Ackman alleges that GGP was forced into bankruptcy due to a liquidity crisis (ie unable to re-finance its debt). It was heavily dependent on the CMBS market for its debt issues. When that market froze this year, it was unable to re-finance its currently due debt. This lead to its debtors forcing it to declare bankruptcy even though it was not insolvent (ie liabilities more than assets). This mean that even in a liquidation scenario, the common stockholders obtain a payback larger than its share price, which was very low (around $1). He makes a rather convincing case of this scenario.
Here's Ackman's original presentation:
http://zerohedge.blogspot.com/2009/05/ackman-on-general-growth.html
I'd like to thank Zero Hedge for highlighting this intriguing opportunity.
The thesis is rather intriguing. Ackman alleges that GGP was forced into bankruptcy due to a liquidity crisis (ie unable to re-finance its debt). It was heavily dependent on the CMBS market for its debt issues. When that market froze this year, it was unable to re-finance its currently due debt. This lead to its debtors forcing it to declare bankruptcy even though it was not insolvent (ie liabilities more than assets). This mean that even in a liquidation scenario, the common stockholders obtain a payback larger than its share price, which was very low (around $1). He makes a rather convincing case of this scenario.
Here's Ackman's original presentation:
http://zerohedge.blogspot.com/2009/05/ackman-on-general-growth.html
I'd like to thank Zero Hedge for highlighting this intriguing opportunity.
Sunday, June 7, 2009
Goodpack (SGX: G05.SI)
I got interested in Goodpack from looking at the list of top losers this morning on Business Times. The company manufactures specialized Intermediate Bulk Containers (IBC). G05 has EBIT margins of 32% to 33% which are remarkably good. But the news reports say that the company has engage Macquarie to sell itself. Its still profitable as of Q1 09. I suspect the reason for the management's pessimism is the US$25.88M in debt coming due this year.
I've seen quite a couple of these re-financing/ liquidity crunch situations occur over the last year. For example, Cemex (NYSE: CX). They provide a good opportunity for a bargain buy, provided that you buy in cheap enough. A good metric to check is price to book. Or EV to EBIT. Often, these companies are selling at way below book. A rule of thumb I use is a minimum price of 40% discount to book value. This accords you a margin of safety.
Risks - The 2 big risks here are first that Goodpack starts a fire sale of its assets to meet the repayment of debt. What this means is that the accounting book measure that you use might not be a good reflection of the price. 'coz assets will be sold at a deep discount to book. It also diminishes your residual book value.
Second risk is that the company gets forced into a liquidity bankruptcy. This means that the debtors put the company into bankruptcy even though the company is not insolvent (ie liabilities more than assets). I believe that the risk of this occurring is slight at best because the company is currently rated by Moody's at Aa2 (spot) and Baa3 over a 5 year median. So currently investment grade debt. This might mean a better chance of re-financing the debt. Also, the company is solidly profitable, which would obviously factor into re-financing discussions. The one concern I have with the company is its CapEx. It's been spending really large amount (in relation to its operating cash flow) on CapEx. Often the figure exceeds operating cash flow and is financed by increased debt levels. The company has a consistent policy over the last few years of spending on CapEx in excess of cash generated from operations. The wisdom of this move is questionable. Although the company has cut back on CapEx in Q1 09, I feel that this is too late.
Overall, I like this company and the business. There are 2 questions that face a value investor. The first question is whether the business can cut back on CapEx without damaging the franchise? The second question is the price. How cheap do I need to buy in to be profitable? Bearing in mind that this might be a fire sale situation or that the company might be sold to a external buyer. I need to do more research on the company both in terms of industry comps as well as historical comps.
I've seen quite a couple of these re-financing/ liquidity crunch situations occur over the last year. For example, Cemex (NYSE: CX). They provide a good opportunity for a bargain buy, provided that you buy in cheap enough. A good metric to check is price to book. Or EV to EBIT. Often, these companies are selling at way below book. A rule of thumb I use is a minimum price of 40% discount to book value. This accords you a margin of safety.
Risks - The 2 big risks here are first that Goodpack starts a fire sale of its assets to meet the repayment of debt. What this means is that the accounting book measure that you use might not be a good reflection of the price. 'coz assets will be sold at a deep discount to book. It also diminishes your residual book value.
Second risk is that the company gets forced into a liquidity bankruptcy. This means that the debtors put the company into bankruptcy even though the company is not insolvent (ie liabilities more than assets). I believe that the risk of this occurring is slight at best because the company is currently rated by Moody's at Aa2 (spot) and Baa3 over a 5 year median. So currently investment grade debt. This might mean a better chance of re-financing the debt. Also, the company is solidly profitable, which would obviously factor into re-financing discussions. The one concern I have with the company is its CapEx. It's been spending really large amount (in relation to its operating cash flow) on CapEx. Often the figure exceeds operating cash flow and is financed by increased debt levels. The company has a consistent policy over the last few years of spending on CapEx in excess of cash generated from operations. The wisdom of this move is questionable. Although the company has cut back on CapEx in Q1 09, I feel that this is too late.
Overall, I like this company and the business. There are 2 questions that face a value investor. The first question is whether the business can cut back on CapEx without damaging the franchise? The second question is the price. How cheap do I need to buy in to be profitable? Bearing in mind that this might be a fire sale situation or that the company might be sold to a external buyer. I need to do more research on the company both in terms of industry comps as well as historical comps.
Friday, June 5, 2009
Nam Tai Electronics Inc
Nam Tai Electronics (NYSE: NTE) is an interesting company. It is a Chinese manufacturer of electronics, basically a contract manufacturing company. The curious thing about Nam Tai is that it has a market cap of about USD 192M, short term debt of USD 1M, no long term debt. As of end of Q1 2009, it has USD 230M in cash and cash equivalents. What we have here is an impossible event under efficient market theory. There is no way that a company can sell under its cash value. Hey... but here it is!
Furthermore, if you look at its competitors Jabil Circuit (NYSE: JBL) and Flextronics (NASDAQ: FLEX), both are trading way above book value. JBL's price to book is 1.28x. FLEX is trading at 1.83x book.
My investment thesis is simple: NTE is a good value play because it is trading way below its book value, even under its cash value. There is no good reason for this occurrence. The fact that it is trading under its cash value offers the necessary safety margin.
Risks - The way I see it there are 2 major risks. First, accounting fraud. The company doesn't have as much cash as it says on the books. This is a possibility, witness Satayam. NTE's CFO has just resigned (9 Mar 09), replaced by the company's founder, Mr Koo. Second, this downturn continues for an indefinite period, burning through NTE's cash reserves.
If you have any questions or comments, either post it on the blog or email me at shaunhhh@gmail.com.
One final comment, I own NTE stock.
Furthermore, if you look at its competitors Jabil Circuit (NYSE: JBL) and Flextronics (NASDAQ: FLEX), both are trading way above book value. JBL's price to book is 1.28x. FLEX is trading at 1.83x book.
My investment thesis is simple: NTE is a good value play because it is trading way below its book value, even under its cash value. There is no good reason for this occurrence. The fact that it is trading under its cash value offers the necessary safety margin.
Risks - The way I see it there are 2 major risks. First, accounting fraud. The company doesn't have as much cash as it says on the books. This is a possibility, witness Satayam. NTE's CFO has just resigned (9 Mar 09), replaced by the company's founder, Mr Koo. Second, this downturn continues for an indefinite period, burning through NTE's cash reserves.
If you have any questions or comments, either post it on the blog or email me at shaunhhh@gmail.com.
One final comment, I own NTE stock.
Just got back to Singapore
Just got back to Singapore. Sorry for the lack of posts for the last one month. Things have been quite busy with the move and all. I'm definitely going to be posting a lot more now.
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