Barclays' hiring spree

[balrog]

True true - what goes down hopefully comes back up at some point - otherwise vultures starve as well. Did I hear someone say stagflation Expressionless ?



kr, you had any dealings with Barcap in distressed?

[kr]

re: stagflation, you may have some appreciation for the issues connected with overlevered commodity-heavy businesses... ultimately becomes an elasticity issue which is a bit tricky to judge.  Anyhow, my coal mine is getting closed by the EPA (Environmental Protection Agency), after the diggers hit some expensive 'bad geology'  Sad



re: barcap distressed, no, I have no contacts there, but if they are part of the shopping spree, I would certainly inquire about bids, if you heard a rumor of that nature. 



'comes back up at some point'... thank goodness, now I can be short DAL again!

[TonyC]

> stagflation, you may have some appreciation for the issues connected with overlevered commodity-heavy businesses..



speaking of over levered commodity biz . . . can any of you guys in distressed tell me why the hell did exelon/sithe-boston paper trade at 100.5 . . . why is this shit even aproaching par, there isnt a sane person that will pay par for those power plants . . .

[kr]

most likely b/c they are confident of getting refinanced in this environment



I'll give you an example I know a little better to show the risks of selling the paper and trying to push the price down... we are a decent-size holder of Energy Corp of America.  From the internal analyst report I have the following (no, this is not really private info):


---

ECA’s financial and operational performance is at the mid-range of the past four years. However, Noteholder beware…our conversations with Dan Luanski of Merrill Lynch (~$50MM Noteholder) indicated that ECA’s management team cannot be trusted. Merrill views the CEO John Mork (owns ~61% of ECA) as a ‘bad’ guy and ECA as the worst management team he’s ever been involved with. Merrill believes the Company has been ‘padding’ its pockets with extremely high G&A (Chris Jones of Wellington Management, ~$4MM Noteholder, agrees the Company has somewhat ‘artificially’ inflated its cost structure).






However, the Appalachian Basin (ECA’s principal area of business) is a hot market right now. Appalachian natural gas properties are in high demand. We can envision John Mork selling part of ECA to an investment-grade oil & gas company, at the right price (Mork’s known for being a shrewd buyer and seller of assets). At current high prices, a major asset sale would enable Mork to buy back the remaining Notes (~$86MM post-tender) and eliminate any possibility of a potential Note default. Merrill stated that should Mork & Co. fail to repay the Notes by maturity, that Merrill and Mackay Shields (~$40MM Noteholder and other informal ‘committee’ member) will ‘wide-out’ Mork & Co.


---

Hence, bonds trading around 95ish.  Yes, this is still something like 12% yield for a 3y maturity, but any less and it could be painful to be on the short side of the market. 



No offense to HF people standing around, but a lot of what's going on right now is pure asset-flipping, brought on by lots of loose money floating around and creating a market significantly detached from the real asset operation.  You could say it is a winner's-curse auction in slow motion.



geez, maybe I am part of the problem...  except my $20MM share of Eagle didn't actually take off, legal issues have finally loomed too large to get this thing closed.

[LondonPete]

[i]I seem to remember this being the talk when the i-bank guys tried to hype them up as potential spoilers for the Santander / Abbey bid.[/i]



Incidentally, anyone know what's happened/happening to Abbey Wholesale arm - ANTS (Abbey National Treasury Services) guys?  They were having a pretty rough time before the SCH bid...

[TonyC]

> Appalachian natural gas properties are in high demand. We can envision John Mork selling

> part of ECA to an investment-grade oil & gas company, at the right price (Mork’s known for being

> a shrewd buyer and seller of assets). At current high prices, a major asset sale would enable Mork

> to buy back the remaining Notes



yeah, i understand buying appalachian assets that i can hedge out with swaps, locking in some annuity type returns, and re-fiing the bonds, and keeping the PUDS for free, [or maybe selling swaptions against] . . .



but exelon/sithe-boston is backed SOLEY by power plants that are worth at most $0.75 on the dollar, don't really care if the replacement cost of pysical plants is the eqiv of the 125% of the debt . . . . boston is overbuilt and the plants are at best breakeven for the next 7 years [breakeven in the operating sense, no return of/on capital]



so why buy the bank debt at par . . . is it possible to organize a short squeeze on bank debt, is it even possible to short bank debt?

[kr]

Again, you can't guarantee you don't get refinanced.  Here's another example which could have been painful:  Denny's.  This piece of the 'food chain' (don't dare call it a restaurant around you) is now competing with a zillion other publicly traded chains, as well as a ton of nonpublic middlemarket players.  The bonds actually have minimal security - I think most if not all of the individual properties were bundled up in franchise securitizations which have also performed like crap... i.e. they are secured by dividends upstreamed by the overleveraged franchise deals.  Anyhow, without thinking too hard about it, it's easy to see that nobody in their right mind would pay for the franchise deal equity.  So - you can see for yourself on bbg - these high-coupon bonds traded down below 50.



And where are they now?  Back above par, because somebody is putting a new deal together.  Probably they are getting something from a third party involved in the franchise securitization.  And like your example, it's not really about operating the asset either, because this will never be a business with real margin (supporting detail:  have looked at three really awful restaurant chain bankruptcy deals in the last year).  My guess is that this deal is like the KMart one, somebody figures they can value the underlying real estate net of foreclosure on the franchise securitization debt, they will pick things apart and raze the buildings or whatever.  Now in your case this is not an option either, but as long as there is potential for a strategic to emerge, there is a floor.  Classic case would be this whole WLRoss/Intl Steel deal - he engineered it, strategic buyer appeared, and he got huge money back.



which reminds me of my favorite line in the original Thomas Crown:  "You paid too much."



if you really wanted to do this, you need to control a huge piece of the capital structure.  Let's say you structure a TRswap and hedge with the underlying, take down your net exposure to a reasonable level (b/c you don't really want to have a mid-nine-figures deal blow up in your face), then JUST MAYBE you can force the thing into bankruptcy... Anyhow, the objective is to get some credit for the fundamental statistics, and the way you do this is through the whole corporate action game and exercising your rights as a securityholder (even if you've done a fancy trade so that your economics are something completely different).

[kr]

Ok, so I got my lazy fingers to actually extract some data points on Exelon, and the conclusion I came to is that you are probably looking at a small piece of the Exelon empire, which includes a bunch of operating subs which may include assets you're not looking at.  It may be that the profitability of some of their asset portfolio isn't too attractive, but the debt is almost certainly crossguaranteed in this situation - in the dire situation that any given operating unit is too tight on cash to pay interest expense, they will just borrow cash from the holdco.  On a consolidated basis, EXC has shown fairly volatile net income, so any given quarter's interest coverage isn't really indicative, but even the loss for last year is only roughly 1.5x interest expense.  To put this quantity in perspective, they have more than that amount in cash/marketables on hand AFTER paying their bills, but beyond that they have huge receivables on the books on the order of 5x annual interest expense... i.e. they could run on empty for a long time.  



From an asset coverage point of view, I'm assuming that your 75 bid for the assets is against the 'net PP&E' number.  But current liabilities+LT debt is actually 73% of net PP&E, so in an immediate liquidation I guess I'd just take your 75 bid and walk away without a scar.  



Fact is, this thing is rated Baa1/A-.  From where I come from, that looks like gold.  In many situations, asset coverage of debt by itself is inadequate and the debt is critically supported by continuing operation of the asset.  This is a much trickier situation b/c you will realize a massive gap in the asset valuation upon default - let's just say this gap is not correctly represented by the Merton lognormal-asset-diffusion model!  The classic case for us is various consulting or service operations which undertook a big national expansion plan, required branch offices in a dozen different places, and raised debt to finance all the fixed assets.  I'm not talking about the office space specifically, which they will lease (read: incur off-balance-sheet debt), but computers, fixtures/furniture, vehicles and other crap which doesn't really sell well at auction.  Fact is that this debt will be supported to a great extent by the ability of the firm to generate additional contracts for their services in the future.  This ability may lie solidly in the hands of management, but these people are not slaves to the corporation.  If you try to collect on your debt, they will just say, ok, fuck you, we walk and you get nothing.  We have been involved in this area and I will say I am none too keen on this business.  In one case, the consulting business went to hell, mgmt (who built the firm themselves) said screw it, we have our own cash mountain and no liabilities, and proceeded to do an excessive amount of vacationing (all the while remaining at the top of the payroll).  We bumped them, wrote off half the debt (bought at 40, so still above water), and are crossing our fingers on business turnaround (so far, so good).  But when my credit officer screamed at me when I slapped a low rating on the thing, he goes off telling me how business is covering the interest expense... I tell him, listen, if they hit another bump in the road, we're dead, recovery on the remaining will be near zero, if the company gets wound down, that's it.           



One last thing about EXC:  The numbers attached to their nuclear energy business are very large.  I do not know the first thing about accounting for nuclear energy, but probably there's some work to do on that level before I'd be sounding the all-clear.  There are billion-dollar decommisioning reserves and lots of other odd charges.  It's an interesting question what will happen to these assets when they get old... i.e. can you really spin them off to a high-risk operator of weak assets, or are there too many regulatory issues that would prevent you from doing that?  On this, my concern again is a big downward jump in the asset valuation process which is not really hedgeable in any decent way, and bad for debtholders.  Parallel example there is this year's Panamsat deal which got scuttled b/c one of their satellites took too much radiation from passing UFOs and gave up the ghost.

[TonyC]

exelon/sithe-boston is not exelon, exelon threw the keys to the boston plants at the banks and walked . . . the banks saw the keys flying at them and ducked [didnt put plants in bankruptcy cause then they are an publicily essentail facility in bankruptcy and FERC steps in] the banks are operating the plants, the operations arent covering the debt



the bank debt can only look to the plants, not exelon



but its the friday before christmas, go home [i'm only the net cause i'm trying to avoid my nieces and nephews carroling in the downstairs library]

[kr]

ok, will fiddle a little further - after vacation  Smiley



boss is playing scrooge to us, this building is on weekend schedule - actually had to sign in, and there is no heat - but when somebody else is working night and day, they love to drag everybody else into their miserly... but yeah, as soon as we hear from the lawyers I am gone



merry christmas