topofeaturellc

Lear management owned sufficiently small amounts of equity that the fulcrum security holders were able to make the economics of a ch11 filing favorable for management. You can look at the size of the equity grants to see that. You can also look at how many companies exit ch11 with net cash balance sheets. Not many. Management enriched themselves and handed the company from the equity holders to the debt holders.

Total EAF growth ex China is basis points at this point. The shift is mostly complete. And electrode utilization improves overtime

I believe Seadrift has been in bankruptcy twice in the last 20 years.

Nah. GrafTech levered up to buy Seadrift at the top of the cycle and then filed in the downturn. Brookfield bot the whole thing in ch11. The only thing that really matters here is the needle coke economics. The actual electrode business is a commodity conversion business that doesn't grow so any excess capacity impacts the market for years. Needle coke used to be the same so no one wanted to spend capital to make it. I guess that's changed.

Lear's bankruptcy was linked to management being paid to file. GMs bankruptcy was actually good for suppliers as they were told by the usg to pay their suppliers in distress see AXL where GM post reorg basically rescued them.

They problem isn't the current leverage and liquidity, it's the margin of safety in even a mild downturn. Also IIRC you need to pay attention to where the cash is. If it doesn't require a large recap it is undoubtedly very cheap where youve got the self inflicted pain and the cycle.

I mean go ahead and believe that. History says everyone who plays in this market, in this way, goes bust. The pay off profile of a loan is very different from an equity. As a value equity guy, so long as you can tolerate the vol ( which Fido et Al. often can't) you live for another day. Unfortunately loans are selling puts. If they don't cash flow, you have to take marks against your capital. The idea that all of these Banks avoid a high risk adjusted roa strategy because they are dumb or lazy - it's kind of crazy. Look at how much market share these guys have taken in new entrant markets - they don't know the players how can the have an underwriting advantage? This game had been seen before, is just history rhyming.

Why do you think it is that other Banks, with better funding bases don't want to be in that business?

I think that’s totally fair if not the decision I would make. I think if you want to buy something over-earning you need to be comfortable with what a stress scenario does to the cap structure and be really honest with yourself about what likely scenarios will shake you out from doubling down if real pain does hit. I love the classic marathon capital cycle stuff but I think it’s important to remember it’s not just buy cyclicals in pain, it’s buy them when capital is exiting the sector, ie D>capex

They benefited a lot in the last downturn from being the best capitalized in the parts space. They don’t have that advantage this time around. Still well run company, all that. Just don’t quite get the appeal of parts at the top of the cycle

Land value is just a levered exposure to the underlying project. Land prices in any market can very easily cyclically decline The issue with being wholesale funded isn’t about rates, it’s about liquidity. If the asset side starts to look weak people won’t extend wholesale deposits, and cre lending business can’t just shut down loan growth, you’ve got to be able to let the developer pull down the loan through completion or you’ll end up with an even bigger haircut. So you end with a liquidity crisis.

You said it was an easy set up. I'm just telling you it's not. SAAR can roll before it delevers, those backlogs can disappear real fast, and long term there is a pretty viable existential issue for the parts business given they are marginal capacity in components whose demand is structurally impaired by EVs. And Management's arguments on that last topic are a little tough to buy, especially if you think about their customers own economics and desire for economies of scale.

PS claimed it had collateral in the form of reserves. It was only after the thing imploded was that lie revealed. And retaining the loans makes the quality of the funding even more Paramount. But yeah I agree IF this thing ends up imploding it's more Anglo-Irish than Penn Square, and I think your last paragraph is where the controversy lies. How it's funded and how they retain the risk don't matter if you think they've got a better mousetrap, just hard to see how given bank lending is a commodity for the customers. If they really had a less risky book you'd also see it in lower than peer asset yields, but I don't think that's the case here.

The comparison to Penn Square is mostly about wholesale funding to grow project lending at super high rates. If you think about it lending on O&G reserves and lending on prospective real estate projects isn't actually that different. You put the money upfront beting on cash to amortize the loan from the liquidation of the asset. Fundamentally it comes down to how good a job you did of getting positive selection on the projects, because you know one day it all rolls, and you just want to survive. Ordinarily the guy growing faster than everyone else isn't the guy with positive selection. And then you double down on that because of how it's funded. Ie if you had deposits and capital maybe you survive, but if you're deposits run its over.

Seriously? It's marginal auto production capacity at the top of the cycle? That's why it seems too good to be true. You might eventually get paid but it'll either be because you gutted out a cycle or Saar takes forever to roll and you get multiple expansion before then. It's not an easy story.