no_free_lunch Posted August 18, 2015 Share Posted August 18, 2015 Are people not worried with LILA about the puerto rico economy? I know that macro is tough but it seems to be in a long-term decline both historically and forecasted. The country has missed a debt payment, has net emigration, there are calls for leftist government, I don't see much to like. Chile on the other hand is in a slump but I am fairly comfortable with. Link to comment Share on other sites More sharing options...
rogermunibond Posted August 18, 2015 Share Posted August 18, 2015 I've been on the other side of Malone in UCOMA. But it pissed me off so much I sold out of LBTYA since the exchange ratio for UCOMA to LBTYA was a rip off. I'm ready to live with it now. :) Actually I wasn't sure, so was checking to see if anyone had followed Malone's investment in Columbus International. I looks like C&W and LILA don't overlap. If anything C&W would be a takeover candidate for LILA. Right. But even that could be considered conflict of interest. As I said, if you invest in Malone cos, you have to live with that. :) Link to comment Share on other sites More sharing options...
folivera13 Posted August 18, 2015 Share Posted August 18, 2015 Economy in PR is horrible (I'm from and live in PR), but LILA can take market share from Claro (DSL) which helps mitigate macro headwinds. No currency risk with PR either. Link to comment Share on other sites More sharing options...
Guest JoelS Posted August 18, 2015 Share Posted August 18, 2015 Are people not worried with LILA about the puerto rico economy? I know that macro is tough but it seems to be in a long-term decline both historically and forecasted. The country has missed a debt payment, has net emigration, there are calls for leftist government, I don't see much to like. Chile on the other hand is in a slump but I am fairly comfortable with. I am. I may average into LiLac over time but, at least for me, the LiLac stock has been too popular given 1. serious economic instability in Puerto Rico, and Chile 2. The point in the cycle we are currently in, and how tracking stocks have historically performed in distressed markets 3. Currency instability in those markets given Lilac has to hedge. I understand the no-macro approach, but I worry that the macro may affect the micro in this case. Notwithstanding the attractive qualitative characteristics of cable. Long term I think there is real promise for Lilac, but if I miss out on the gains in the time it takes me to understand the underlying dynamics, and get comfortable with the business - all good. Link to comment Share on other sites More sharing options...
ni-co Posted August 18, 2015 Share Posted August 18, 2015 I am, too – with EM as a whole. I shorted EEM against my LILA. And it's even only half the LILA position because I think/hope I might get the other half much cheaper because of the global macro environment. Link to comment Share on other sites More sharing options...
frommi Posted August 19, 2015 Share Posted August 19, 2015 Isn`t your internet connection the last thing you cut in case you lose your job? Is this is different in PR or Chile? I am more worried about the strong USD, but since i am already long USD i see LILA as a currency diversification. Link to comment Share on other sites More sharing options...
muscleman Posted August 19, 2015 Share Posted August 19, 2015 Why is JM hedging the currency risk of LILA's debt but not LILA's OCF? Does anyone know? Link to comment Share on other sites More sharing options...
no_free_lunch Posted August 19, 2015 Share Posted August 19, 2015 There are costs to the hedging, even if currency rates stay constant. I think he hedges the debt because a currency move, even short-term, could lead to financial problems but otherwise he just gambles on the the currency. Link to comment Share on other sites More sharing options...
DeepSouth Posted August 19, 2015 Share Posted August 19, 2015 Why is JM hedging the currency risk of LILA's debt but not LILA's OCF? Does anyone know? He's hedging VTR's USD debt (easier to issue) against the entity's operating currency (CLP) through swaps. That's simple ALM for the firm's cash flows. The firm's OCF/FCF is unknown and variable. Attempting to hedge OCF into dollars could put you at a large competitive disadvantage if a currency move went against you - that's really speculation not hedging. Hedging the debt lowers financial risks for the firm, "hedging" OCF increases risk to the firm. Shareholders are free to attempt to hedge out currency exposure if they wish. Link to comment Share on other sites More sharing options...
abitofvalue Posted August 19, 2015 Share Posted August 19, 2015 Why is JM hedging the currency risk of LILA's debt but not LILA's OCF? Does anyone know? they say they use hedges to minimize the impact of "foreign currency movements, particularly with respect to borrowings that are denominated in a currency other than the functional currency of the borrowing entity" My understanding is that as a borrower you want to end up with debt payments in the same currency as your revenues / CFs. You can achieve this by either converting your revenues earned in currency X to the currency of your borrowing currency Y. Or you can convert your borrowings in Y into X. You also want to know what those debt payments will be so you can plan your business. Since you don't know the exchange rate in the future, you use currency hedges to achieve this. But you only need to convert one - either revenues or debt payments to end up with the same currency for both. Since debt payments are more definite and known, it is easier to hedge debt payments than revenue (notional amount of the contract). Link to comment Share on other sites More sharing options...
ni-co Posted August 20, 2015 Share Posted August 20, 2015 It looks like we will get a big chance to load up on LILA. There are more and more signs of an EM crisis driven by the strong USD. There are very good reasons for worrying. Yet, this is exactly why Malone & Co. hedge the debt payments of LILA. I think there's going to be blind selling before market participants are going to recognize that there are hedged companies with strong balance sheets and the rest. Link to comment Share on other sites More sharing options...
Yours Truly Posted August 20, 2015 Share Posted August 20, 2015 I was fully anticipating a massive sell-off in this due to the sheer size ($1 billion vs LBTYA) and uncertainty of EM's. I hope it has finally arrived. Link to comment Share on other sites More sharing options...
muscleman Posted August 20, 2015 Share Posted August 20, 2015 Why is JM hedging the currency risk of LILA's debt but not LILA's OCF? Does anyone know? they say they use hedges to minimize the impact of "foreign currency movements, particularly with respect to borrowings that are denominated in a currency other than the functional currency of the borrowing entity" My understanding is that as a borrower you want to end up with debt payments in the same currency as your revenues / CFs. You can achieve this by either converting your revenues earned in currency X to the currency of your borrowing currency Y. Or you can convert your borrowings in Y into X. You also want to know what those debt payments will be so you can plan your business. Since you don't know the exchange rate in the future, you use currency hedges to achieve this. But you only need to convert one - either revenues or debt payments to end up with the same currency for both. Since debt payments are more definite and known, it is easier to hedge debt payments than revenue (notional amount of the contract). Why do you think hedging the OCF is difficult? This is a very stable business. Right now they have hedges to sell the USD.CLP pair that covers their debt service. They can simply increase it by 400M USD size to also cover the OCF. It won't cover 100% of their OCF but a majority of it. Link to comment Share on other sites More sharing options...
no_free_lunch Posted August 20, 2015 Share Posted August 20, 2015 I would have assumed that spinoff dynamics (e.g. blind selling of the smaller company) wouldn't apply to a malone entity but perhaps I was wrong. However, at the same time I wonder if it wasn't just priced too high. Link to comment Share on other sites More sharing options...
frommi Posted August 20, 2015 Share Posted August 20, 2015 They can simply increase it by 400M USD size to also cover the OCF. It won't cover 100% of their OCF but a majority of it. For 1 year, yes. And after that year? Link to comment Share on other sites More sharing options...
muscleman Posted August 20, 2015 Share Posted August 20, 2015 They can simply increase it by 400M USD size to also cover the OCF. It won't cover 100% of their OCF but a majority of it. For 1 year, yes. And after that year? What do you mean? Are you saying that their OCF will decline sharply after 1 year? Link to comment Share on other sites More sharing options...
frommi Posted August 20, 2015 Share Posted August 20, 2015 What do you mean? Are you saying that their OCF will decline sharply after 1 year? That depends on the currency rate after that year. Link to comment Share on other sites More sharing options...
DeepSouth Posted August 20, 2015 Share Posted August 20, 2015 Why is JM hedging the currency risk of LILA's debt but not LILA's OCF? Does anyone know? they say they use hedges to minimize the impact of "foreign currency movements, particularly with respect to borrowings that are denominated in a currency other than the functional currency of the borrowing entity" My understanding is that as a borrower you want to end up with debt payments in the same currency as your revenues / CFs. You can achieve this by either converting your revenues earned in currency X to the currency of your borrowing currency Y. Or you can convert your borrowings in Y into X. You also want to know what those debt payments will be so you can plan your business. Since you don't know the exchange rate in the future, you use currency hedges to achieve this. But you only need to convert one - either revenues or debt payments to end up with the same currency for both. Since debt payments are more definite and known, it is easier to hedge debt payments than revenue (notional amount of the contract). Why do you think hedging the OCF is difficult? This is a very stable business. Right now they have hedges to sell the USD.CLP pair that covers their debt service. They can simply increase it by 400M USD size to also cover the OCF. It won't cover 100% of their OCF but a majority of it. Swapping OCF into USD increases financial risks to the firm (it's not hedging, it's speculation). What if CLP climbs 50% on the USD? You've just locked yourself into USD OCF but are now paying CapEx in 50% appreciated CLP, potentially putting you at solvency risk. These are just the 1st level effects of such a move; complex systems are harder to predict. You are effectively suggesting the creation of a currency mismatch. You are free to do this against your security if you want to speculate on currencies, but it makes little sense to do it from management's standpoint IMO. I don't think JM would say this is where his skillset lies anyway. Hedging the debt into CLP lowers risk by matching the currency of the assets to the currency of the liability. I certainly may be misconstruing something, but this is how I see it. Link to comment Share on other sites More sharing options...
ni-co Posted August 20, 2015 Share Posted August 20, 2015 I would have assumed that spinoff dynamics (e.g. blind selling of the smaller company) wouldn't apply to a malone entity but perhaps I was wrong. However, at the same time I wonder if it wasn't just priced too high. I think the recent sell-off has nothing to do with LILA. LILA is down with EEM 1:1. This is an EM sell-off and that's also why I expect it to continue. Link to comment Share on other sites More sharing options...
BraveChieftain Posted August 20, 2015 Share Posted August 20, 2015 Probably some incremental selling based on macro risk in Chile given what's going on with China/commodities. On another note, does anyone have a view on whether they'll be able to eventually bring their cost of financing lower? I think on a swapped basis, the VTR notes are at ~7% and LBTY has a weighted average ~5% cost of debt in Europe. Lilac definitely looks attractive on an EV/EBITDA basis, but if they have structurally higher financing costs, maybe this is deserved. Link to comment Share on other sites More sharing options...
jay21 Posted August 20, 2015 Share Posted August 20, 2015 Probably some incremental selling based on macro risk in Chile given what's going on with China/commodities. On another note, does anyone have a view on whether they'll be able to eventually bring their cost of financing lower? I think on a swapped basis, the VTR notes are at ~7% and LBTY has a weighted average ~5% cost of debt in Europe. Lilac definitely looks attractive on an EV/EBITDA basis, but if they have structurally higher financing costs, maybe this is deserved. At a 40% tax rate you are talking 4.2% vs 3% or 120bps difference in after tax cost of debt. Assuming 50/50 mix debt and equity it's a 60 bp difference in total WACC. Concerning? Not for me. FCF is just gravy if you really believe they can grow EBITDA and acquire cable systems because of the increase in net debt driving FCFE. Link to comment Share on other sites More sharing options...
ni-co Posted August 20, 2015 Share Posted August 20, 2015 LILA (bars) vs. EEM from 2nd July (first day of trading) until today. Link to comment Share on other sites More sharing options...
BraveChieftain Posted August 20, 2015 Share Posted August 20, 2015 Mix of debt/equity is higher and ability to borrow at cheap rates has a big impact as they are going to look to do a lot of deals. Link to comment Share on other sites More sharing options...
fa21212 Posted August 20, 2015 Share Posted August 20, 2015 VTR's cost of debt is 11% on a swapped basis. Link to comment Share on other sites More sharing options...
BraveChieftain Posted August 20, 2015 Share Posted August 20, 2015 Right sorry, was meant to say ~7% non-swapped. Either way, I think it's a pretty meaningful thing to consider when valuing the equity. Link to comment Share on other sites More sharing options...
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