Picasso Posted March 15, 2016 Share Posted March 15, 2016 Not much time to get this trade on, but I'm betting they don't take this into bankruptcy. I'm long. Even with 50% dilution (all going to Chris Cline) it's cheap and there isn't much float for the shorts to cover. Probably around $100 million of FCF with a pre-diluted market cap of $220 million. Who's with me? Link to comment Share on other sites More sharing options...
indirect Posted March 15, 2016 Share Posted March 15, 2016 Short trade seems too crowded and i don't think that debtors want to run the Co..... dont have balls to go long. Link to comment Share on other sites More sharing options...
awindenberger Posted March 15, 2016 Share Posted March 15, 2016 Not much time to get this trade on, but I'm betting they don't take this into bankruptcy. I'm long. Even with 50% dilution (all going to Chris Cline) it's cheap and there isn't much float for the shorts to cover. Probably around $100 million of FCF with a pre-diluted market cap of $220 million. Who's with me? I've got some shares already from a summer purchase at $8/share, not willing to buy more until I get confirmation they've settled with the bondholders. If they do settle, the stock is going to be worth at least $4 given the subordination agreement in place. Link to comment Share on other sites More sharing options...
Picasso Posted March 17, 2016 Author Share Posted March 17, 2016 Not much time to get this trade on, but I'm betting they don't take this into bankruptcy. I'm long. Even with 50% dilution (all going to Chris Cline) it's cheap and there isn't much float for the shorts to cover. Probably around $100 million of FCF with a pre-diluted market cap of $220 million. Who's with me? I've got some shares already from a summer purchase at $8/share, not willing to buy more until I get confirmation they've settled with the bondholders. If they do settle, the stock is going to be worth at least $4 given the subordination agreement in place. Why not buy more at $1.60? I spoke with the company today and feel like there's an extremely small chance the bondholders aren't settled out of court. The term loan is trading in the mid $80's and the unsecured notes in the mid $70's. Why accelerate and force a bankruptcy, what's the upside/downside on that scenario with that kind of bond/term pricing? This is a company that is still turning plenty of free cash flow with 80% of the shares in the hands of a couple die hard grinders. The going concern issue is from the non-existent liquidity if the bondholders accelerate, not because they aren't profitable or well positioned. There's too much mutually assured destruction that goes on in that kind of scenario. Chris Cline owns a bunch of unvested SXCP units plus seller financing that is at risk if he doesn't step in to resolve the issue. Even their contracts with the Convent terminal appear to be under market at around half the pricing of the revised Cloud Peak take or pays. They're essentially breakeven on exports so there's free optionality there as well. Why throw in the towel now? Market cap went from $3 billion to $200 million in a bit over a year, I don't think the intrinsic value of the business dropped *that* much. If Cline comes in and dilutes at say 50%, the stock is still really cheap here. At this point it's in everyone's interest to settle. The issue (for me) is the Russian roulette. If Cline dies in a freak accident before it's resolved, this is a $0. Link to comment Share on other sites More sharing options...
awindenberger Posted March 17, 2016 Share Posted March 17, 2016 Picasso, I've been debating adding more, as I agree with all of your points. However, my money was being allocated to augmenting my Terraform Global (GLBL) position instead. I did just receive some dividends from it that I'm considering using to buy some more FELP. My question is, why haven't they managed to come to an agreement with the bondholders yet? Also, if Cline were to come in with new equity cash and dilute existing holders by 50%, I wonder how the dividend agreements would work. Right now common shares have arrearages of $.51/share already built up. If Cline comes in buying new shares, would they be new common shares? Or perhaps he would buy some preferred shares, giving him lower dividend payments, but before anything on the common. The other concerning issue is the multiple fires they've been dealing with in their mines. I don't understand enough about coal mining, but it really seems odd to me that it would be so difficult to manage a fire in a mine. After hundreds of years of mining, how have they not developed techniques for this yet? Link to comment Share on other sites More sharing options...
Picasso Posted March 17, 2016 Author Share Posted March 17, 2016 The longer it drags on for, the more Cline will be able to dictate his terms. Based on the last report from Bloomberg it appears that Bob Murray is okay with a wide variety of situations to resolve this. The bondholders don't want to own a coal company and that mine fire is a great example of this. Maybe the guy from Blue Mountain wants to put on some overalls and a hardhat and go put out the Deer Run fire. If it gets resolved over the next month (which it probably will) it's better than going through bankruptcy, period. Bondholders will make their 50-60% return which is better than can be said for other coal bondholders. Throw this into bankruptcy with another leg down in coal prices or whatever potential risk seems silly. Honestly, I feel like Bob Murray would go down the various coal mines and light them all on fire if they were forced in bankruptcy. As far as the dividend agreements, I think you'll just see increased units to dilute the existing unit holders. Probably not a ton because Cline needs Murray to survive a bit longer to drop down some other assets. It's in Cline's interest to see Murray survive as well, but he's not a big Murray fan and it doesn't surprise me to see him pull out a bit of blood. As far as the mine fires, that's just what happens. A fire is carbon + oxygen so you have to starve out the oxygen and let it die out. Sometimes it doesn't die out. There's that risk but I don't think that's a game killer. It's just another reason why it doesn't make sense for this to be a loan-to-own. Link to comment Share on other sites More sharing options...
indirect Posted March 18, 2016 Share Posted March 18, 2016 what do guys make of filing by felp? risk of common dilution gets less? no response from Mr. Market Link to comment Share on other sites More sharing options...
Picasso Posted March 18, 2016 Author Share Posted March 18, 2016 They need to resolve all the default issues before they can issue debt and units under the old shelf filing. You can still get diluted but it'll be part of the settlement with bondholders. Link to comment Share on other sites More sharing options...
awindenberger Posted March 18, 2016 Share Posted March 18, 2016 Well, FELP has officially defaulted on the Bond payment. Curious to see what happens now. Link to comment Share on other sites More sharing options...
bigbadwolf Posted March 21, 2016 Share Posted March 21, 2016 Mr. Market not responding kindly to 8-K from Friday. Stock down almost 12% today. Forbearance agreement lasts until tomorrow. Any thoughts? Link to comment Share on other sites More sharing options...
Picasso Posted March 21, 2016 Author Share Posted March 21, 2016 Nothing has changed from last week aside from not making the interest payment. The funny thing is, SXC/SXCP should be getting hammered based on this FELP price action if the company is heading into bankruptcy. I've bought more but there's a fairly big seller hitting all the bids and there's just no buyers (except me and a couple other clowns). There's not a lot of investors in this company outside of Cline and Murray (maybe three) so someone wants out. I'd be curious to find out if Fidelity has restrictions on owning stocks this deep into default but it feels like forced selling. The risk now is where Cline dilutes and by how much. He can't dilute too much or he'll kill off the sponsor (Murray) but he needs to give the banks some assurance. I don't think the various parties want to take this into bankruptcy but I can see how the defaults are nerve wracking for investors not looking at the incentives for Cline. Cline can make a killing in various ways without overly diluting the unit holders. I'm going to be really surprised if they file but hey anything can happen. Link to comment Share on other sites More sharing options...
awindenberger Posted March 22, 2016 Share Posted March 22, 2016 I agree, it doesn't make sense to bring this to BK. The question really is how much dilution will occur. Will the stock jump up when the deal is announced, or drop due to too much dilution. Link to comment Share on other sites More sharing options...
bigbadwolf Posted March 22, 2016 Share Posted March 22, 2016 Looking at the volumes it certainly feels like forced selling. It will be interesting to see how this plays out. Link to comment Share on other sites More sharing options...
Patmo Posted March 23, 2016 Share Posted March 23, 2016 You bring some tasty ass trades to the board Picasso. I'll be following this company for a while, can't really bring anything to the discussion though Link to comment Share on other sites More sharing options...
Guest roark33 Posted March 23, 2016 Share Posted March 23, 2016 https://www.sec.gov/Archives/edgar/data/1540729/000156459016015070/felp-8k_20160316.htm Another week long extension. I think this is the third since I have been following it. Usually means they don't file for bankruptcy, but the question is still how much the common is diluted. Link to comment Share on other sites More sharing options...
Picasso Posted March 23, 2016 Author Share Posted March 23, 2016 I don't think there needs to be massive dilution at current prices. Cline already owns 20 million units. Let's say he comes in with $600 million of new cash in the form of 8% second lien debt. Shares could easily be back at $5-6 which is worth around $100-120 million (to Cline) plus all the distributions at $13 million per year. He would have $48 million coming in each year from the new bonds. Another $13 million from the FELP distributions. And now have FELP stock worth at least $100 million. If things get hairy with the business in the future, he will be in a position to be the fulcrum holder without throwing good money after bad. He also owns 4.8 million unvested units of SXCP which can easily double when this is resolved. Those are probably worth around $80 million plus another $100 million of seller financing to SXCP plus another $11 million of distributions per year. So in that situation he gets to put in $600 million and get back $72 million each year just in distributions from FELP, FELP debt, and SXCP. He would still have $880 million in mark to market FELP debt, FELP equity, SXCP equity, and SXCP seller financing. Over ten years he'll earn over $700 million just from interest and distributions without taking on a ton of risk. He'll still own 31% of FELP and have a free call option on the cycle turn (if it ever comes, but they're still very profitable at current levels). He can plow most or all of it into new equity but I think that's a pretty nasty scorched earth policy. Murray can sell him some assets in the future and he won't be in a position to pick up Murray assets in bankruptcy if he throws FELP into bankruptcy as well. The logic of letting everybody burn over a technicality so you can come back in and pick up the pieces doesn't make sense to me. That said I think you can dilute a fair amount and still get a price above $3 or $4. I don't think dilution will get you down to $1 of fair value. The problem is the debt holders know this and they are probably demanding par plus. And honestly, they're right to ask for it. I bet it gets settled really close to par... Link to comment Share on other sites More sharing options...
PullTheTrigger Posted March 24, 2016 Share Posted March 24, 2016 I'm asking for some education here more than anything because I'm not sure I understand the bankruptcy process and big picture here. Are there any benefits for Cline or Murray if FELP is forced into bankruptcy? It would appear not, but I don't know the entire ownership structure of all the bonds. Murray just owns units, correct? So wouldn't he be at risk of total loss? What is the upside for the bondholders forcing this into bankruptcy versus negotiating a settlement? What benefit would they get from taking control of the company? Would they gain control of the company at extremely low valuations with the intent to exit later with a recovery in coal prices? Sorry if these are basic questions. Just trying to look at this from different angles. Link to comment Share on other sites More sharing options...
Picasso Posted March 24, 2016 Author Share Posted March 24, 2016 Murray and Cline own 80% of the units, no debt. Murray would lose their entire $1.4 billion investment and Cline would lose his remaining 30% stake. There were also cost savings of combining Murray with Foresight, so destroying Murray by bankrupting Foresight will also destroy a lot of the savings from having them work together. Even if Cline thought he could pick up pieces of Foresight in bankruptcy, recreating the Foresight advantage is really hard. He'd be starting all over again and it's unclear how much he could pick up in that kind of situation. There's $300 million of senior bank debt in front of everyone so the recovery value for the note holders at $600 million might be tight during a fire sale. One of the mines just caught fire for a second time, do they really want to be in this business long term without a solid management team running Foresight? Will Murray or Cline be involved in a new Foresight if the bondholders wipe them out? Will the market give new Foresight equity that has been swapped for notes a value well in excess of par? I don't think the bondholders take a big win from bankruptcy unless they really, really want to be in the coal business long term and take a ton of new equity. If they negotiate a settlement, bondholders will make 40% or so. If they don't, maybe some assets get sold to pay down bank debt (they can't sell Deer Run, it's on fire and they only own four key mines) and let's say this is worth half of what Murray paid back in 2015 minus some asset sales (the distribution was cut in half after all). They might be lucky to make a similar 40%. That's a lot of headache and work and there's obviously extra risks there. So we have something that looks like this: Door #1: Cline can just come in and settle, make himself several hundreds of millions, the bond holders make their 30-40%, Murray lives to fight another day, and FELP shareholders get to see a 5 bagger from current levels. It's not a $20 stock anymore but $5 is a lot better than $0. Door #2: Cline decides to take up sky diving this weekend and the parachute doesn't open on his first dive. Bob Murray walks down into the various mines and lights them on fire. The bond holders and banks get thrown into a nasty fight over what can be sold and what will be left and there will be no one to run Foresight during one of the most difficult environments for any coal business. Door #3: Nobody wants to give in and it gets thrown into bankruptcy anyway. Cline doesn't want to make another billion dollars and thinks the billion he has is good enough. Murray takes the last of his net worth and hires a hit man to take out Cline for being such a dick. A lot can happen here, but door #1 seems most likely to me. Link to comment Share on other sites More sharing options...
PullTheTrigger Posted March 24, 2016 Share Posted March 24, 2016 Thanks Picasso! Link to comment Share on other sites More sharing options...
BG2008 Posted March 24, 2016 Share Posted March 24, 2016 Fascinating idea - probably worth a 20-100bps flyer allocation. I've been peripherally tracking the coal mining space. Something about a leveraged equity in a distressed/flaming bag of poo type of industry attracts me. But I think this is interesting in that there are imminent catalyst here. I look at quite a bit of distress/bankruptcy situations. Frankly, I think reading first day pleadings of bankrupted companies is great way to learn how companies get into trouble and help you to side step investment pitfalls, i.e. Pinnacle airline, Dolan Companies etc. There is a theory in these types of situations that having assets is worth than having no asset. What do I mean by this is that if FELP was some sort of a services company, i.e. law firm, I Bank, Brokerage platform etc where the value is in the people and not the physical assets, I would be more certain that debt holder will want to settle. This is counter intuitive, but it also makes sense as possessing a bunch of phones and customer list for an asset light business leads to less recovery than taking possession of a coal business that churns out cashflow. Given that FELP owns the coal mines, a competitor like Alliance Resource can come in and buy up assets during a BK process. It also makes a ton of sense as FELP is actually in a lower cost position. But it does have a flaming coal issue that Alliance doesn't. In terms of game theory, I can see a situation where the debt holders say "okay, let's go into BK, we'll become the fulcrum security." This is why it's important to check who currently own the debt. If Wilbur Ross or Baupost own the debt that just defaulted, I would be very concerned as these guys are "loan to own" guys. If it's still the original debt holder, then I think Picasso's arguments that these guys don't want to own a coal mine makes a ton of sense. Sub $3 natural gas prices makes coal a hard sell to power plants and makes the conversion from coal to gas go much faster. Coal in essence is a rapidly melting ice cube. None of this is new information. The market knows this and it's baked into the price. I think there' s a price where just buy some and wait to see if it files or a deal gets done. Link to comment Share on other sites More sharing options...
BG2008 Posted March 24, 2016 Share Posted March 24, 2016 Just to make this thread more entertaining, Chris Cline was dating Tiger Wood's ex wife. We can all learn something from "Maximizing value" and "top ticking" from Elin Nordegren. She walked away from Tiger with $100mm and she parted way with Chris Cline just as the coal market started to tank. Smart gal! http://pagesix.com/2013/03/12/exclusive-tigers-ex-elin-nordegren-dating-billionaire-coal-magnate/ Link to comment Share on other sites More sharing options...
Picasso Posted March 24, 2016 Author Share Posted March 24, 2016 Yep, I thought about the Oaktree's of the world being in the debt as an issue. I didn't see anything there that worried me, Blue Mountain is maybe the worst of the bunch but not aggressive loan to own guys. DDJ clearly isn't. About 34% of the debt is held by pension plans or vanilla funds. See attached. Link to comment Share on other sites More sharing options...
Guest roark33 Posted March 25, 2016 Share Posted March 25, 2016 Door #3: Nobody wants to give in and it gets thrown into bankruptcy anyway. Cline doesn't want to make another billion dollars and thinks the billion he has is good enough. Murray takes the last of his net worth and hires a hit man to take out Cline for being such a dick. A lot can happen here, but door #1 seems most likely to me. Picasso--if this files and the equity gets wiped out, I just want to let you know that you don't have to make it back the way you lost it, in other words, don't take the call from Murray for the Door #3 option... Link to comment Share on other sites More sharing options...
Picasso Posted March 25, 2016 Author Share Posted March 25, 2016 Door #3: Nobody wants to give in and it gets thrown into bankruptcy anyway. Cline doesn't want to make another billion dollars and thinks the billion he has is good enough. Murray takes the last of his net worth and hires a hit man to take out Cline for being such a dick. A lot can happen here, but door #1 seems most likely to me. Picasso--if this files and the equity gets wiped out, I just want to let you know that you don't have to make it back the way you lost it, in other words, don't take the call from Murray for the Door #3 option... I imagine if this files the negotiations turned out a bit like this: Link to comment Share on other sites More sharing options...
PullTheTrigger Posted March 25, 2016 Share Posted March 25, 2016 Door #1: Cline can just come in and settle, make himself several hundreds of millions, the bond holders make their 30-40%, Murray lives to fight another day, and FELP shareholders get to see a 5 bagger from current levels. It's not a $20 stock anymore but $5 is a lot better than $0. Door #2: Cline decides to take up sky diving this weekend and the parachute doesn't open on his first dive. Bob Murray walks down into the various mines and lights them on fire. The bond holders and banks get thrown into a nasty fight over what can be sold and what will be left and there will be no one to run Foresight during one of the most difficult environments for any coal business. Door #3: Nobody wants to give in and it gets thrown into bankruptcy anyway. Cline doesn't want to make another billion dollars and thinks the billion he has is good enough. Murray takes the last of his net worth and hires a hit man to take out Cline for being such a dick. Let me ask a couple more questions. 1. Cline has the cash to come in and settle, but is Murray in any type of similar situation? Could he come in with some type of settlement himself or is too late to raise that amount of cash? I'm not sure about his company and ability to raise cash. 2. I understand you're reasoning on the upside for Cline to settle, but what is the downside? I mean he could presumably just walk and lose his 30%, which is peanuts compared to the cash Murray just paid him. Is it worth the headache to settle? Is there a chance of losing more money if he settles? There is a lot of cash flow here, so the downside seems limited. I look at the industry and regulations and like BG2008 says, it's a slowly melting ice cube and it would seem FELP is in a good position given it's low cost coal, but are there some political risks here as well? If a Democrat wins the White House, the EPA regulations will likely be continued or accelerated. If it's a Republican, will they try to roll back some of the coal regulations? I realize this is coin toss, but it does seem like the coin is slightly weighted to settle. Thanks for the interesting thread! I've learned a ton. Link to comment Share on other sites More sharing options...
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