dbuch

Sorry meant to say 11 cents for LQD 120 puts expiring in December 2020 so 1 month (not December 2021). So the cost to hedge would be 70 bps/month and only protected below 120 so this would be a tail bet in case of another March/April type period. That is very expensive compared to what Ackman can do.

I think the only way an average investor could replicate this hedge is HYG or LQD ETF put options. You could buy an OTM put on LQD Dec 2021 at $120 for .11 cents. LQD fell to $105 in March so the return would be $15/.11 or 136x your investment. Seems expensive compared to Bill buying IG CDX for 50 bps a year. It would cost 70 bps/month for us (1/136).

https://www.wired.com/story/you-should-buy-disc-drive-playstation-5/#intcid=_wired-right-rail_a6fbe0c1-f115-41bc-91e4-a143ae198162_popular4-1

IR isn't responding to my questions on asset allocation. This may be cheap but i'm really questioning their leadership at this point. If this got back to $20 eps on 47mm shares that would have been $23.50 eps on 40mm shares assuming they used the $350mm to buy back stock at $50. Instead they are issuing equity at a 2.5x normalized P/E to acquire a business in which they haven't given any revenue or EBITDA guidance on (probably not much there). Either they really need this business to remain competitive, which should be a negative read through, or they are absolute idiots about capital allocation. I know most management teams are very focused on the business and capital allocation is an afterthought but to me this just seems incompetent. If ADS really does need to continue to invest in fintech to remain competitive and this was a sort of catch up from under investing then true economic cash flows need to be reduced for that ongoing maintenance capex/M&A. Maybe $100-$200mm a year needs to be used to acquire/build new technology to remain relevant in which case they were over-earning pre Covid and true earnings power needs to be reduced to say $16 eps at 2019 levels. I don't really think this is the case as the "pay as you go" might be a growth driver but not a must have to remain relevant. I think this was just a misuse of capital. Best question on the call and Ralph just glossed right the f**k over it Q - Ryan Nash maybe just talk about how you think about the strategic benefits of this versus other uses of capital? And I guess just given where the stock is trading today, it seems that you simply you could have reduced shares by a material amount. So I'm curious just how do you weigh the long-term strategic benefits versus the near-term financial implications? A - Ralph Andretta Yeah, Ryan. So I'll start then I'll ask Tim to chime in. This is Ralph. So I think there are a couple of things. I think if COVID-19 has taught us anything, it has taught us the value of ecommerce. And you've seen that in the first and second quarter and we'll continue to see e-commerce pretty much explode. So for us, this investment was power markets. The technology that Bread brings to the table and the talent they bring to the table is very much in our strategic plans as we move forward. So I think long term this is the right decision for us. A - Tim King We feel it's very, very important strategically, while of course maintaining the balance of flexibility we have at the parent level. Our capital allocation strategy remains, if we're finding things that we find are this important to our business, of course we're going to invest in them, but from there of course maintaining our dividend and not doing any share repurchases.

I agree the dilution is not huge but the acquisition either means A) they need this to remain competitive in which case maybe their competitive advantage has eroded over the last several years or B) Bread is wildly accretive or C) They suck at capital allocation Probably a combination of A and C which is concerning. That being said, they still appear very cheap at the current price which provides some margin of safety against the above.

ADS spend $450mm including $100mm in stock to buy digital payments firm BREAD. Not sure how this is more "accretive" than buying back shares at a mid single digit multiple. They could have taken out 7 to 9mm shares or 14-19% of the outstanding. If they have the liquidity for M&A why not buy shares at the decade low? Either they are ignorant about capital allocation or this thing is wildly accretive. Seems the former to me.

I think WEB can buy 25% of BAC so he sold his other financials in order to increase BAC to 25%. That's it. WFC will be fine but he was limited in what he could buy.

My understanding was WEB can't go above 10% on WFC per regulators (Without becoming a bank holding company). Some of BRK businesses have had relationships with WFC so that is unlikely to change. Regulators gave WEB their blessing to go above 10% on BAC so that is what he's doing. WFC was spending $20Bish per year buying back stock and at $50 that was shrinking the share count fast so he may have sold a decent chunk to stay under that 10% limit.

yep, skipped interest payment started 30 day clock. Unsecured's trading at 5c and TL at 20c so bondholders don't expect much recovery.

Where did you see this?

Agree that this is not a simple analysis or that it is a sure thing the unsecured get all the equity but typically the first impaired asset is the fulcrum security. Secured and Silverlake have little say in the matter if they are made whole. The company has survived for a long time with 4-5x debt to ebitda levels so just because secured and Silverlake want equity and want lower leverage doesn't make it so. Also the EBITDA is conservative as is the multiple in this scenario. But even so 750 x 5 = 3750 so very little probability senior secured gets equity, they get par. Even if the rest was equity that would be only 3.3x gross debt which is substantially lower leverage. Assume $300mm DIP and admin costs and 4.5x leverage, secured gets par debt, Silverlake gets $500mm par and the $100mm equity and unsecured gets equity. If the business is valued at 5x which is very low to historical valuations then Silverlake gets 30% and unsecured gets 70% of the equity. If instead we assume EBITDA is $850 and a fair multiple is 7.5x, everyone is made whole and equity is worth $6. So obviously there is a lot of unknowns.

The SilverLake convertible is $600mm + $2500mm secured debt + $3000mm unsecured. If i assume 5x EV/EBITDA and EBITDA is lowballed at $750 then the whole business is worth $3750mm. Silverlake and secured get paid in full and unsecured gets equity. I could just invert and ask is the whole business worth less than $3.1B (convert +secured). If I assume zero debt that adds back $300mm in interest and FCF would be at least $500-$600mm. It would seem the unsecured are the fulcrum security to me.

At 8x EV/EBITDA, AMC equity ought to be worth $10 but unlikely they get valued that high. At 7x equity is $4 and at 5-6x equity gets nothing and unsecured would be worth 90 cents.

They have a 6x secured leverage covenant which will be tested in Sept and they won't be below that. I don't think they could issue secured debt at this point and unsecured is yielding 33% ytw so the market is not open for them. CNK unsecured's are 11% so the bond market is pricing in bk for AMC.

Bond holders mostly get screwed by being primed with higher secured debt or diluted with pari passu debt, cash or assets allowed to leave the restricted subs, etc. A hedge fund could own the fulcrum security and the senior debt and push for equity at the unsecured etc. you want to own the fulcrum security that will be a loan to own and get the equity. Not always and easy thing to figure out. AMC has tapped their existing secured capacity and the unsecured market is basically shut off for them. So the unsecured at 30 cents is saying they don’t expect much recovery or any gov help.