FELP - Foresight Energy

[hswoon]

Iirc senior debt holders had 95% approval so probably not

[Picasso]

hwsoon is right, it was 95 or 97% senior lender approval.  I forget the number. 

 

For example, I had some friends buy a million of the notes and we emailed IR to consent to the senior lender deal.  They didn't let us agree to anything because they already had a group negotiating that exchange offer.  It really doesn't matter what some small percentage wants because they only needed 67% from the note holders.  The senior lenders were a different story but that was done first. 

 

So because all this sums up to 600 million does that mean there are no holdouts at the 2021 unsecured level?

 

There's probably some note holders that wanted more, but it's getting swapped at these terms anyway.  They don't have to tender for the cash consideration if they don't feel like it.  But I'm sure they will...

 

Also, would debt holders higher up the capital structure have any motives to sideline this deal?

 

We wouldn't have the senior lender support agreement if that were the case.

[heth247]

I thought the market would be pushing up a lot more.

 

Since Trump is here to save coal, maybe I'll buy more. Perhaps Trump could tap Murray to head the EPA.

 

I think since the minimum quarterly cash distribution is gone due to the restructure, the stock price will be depressed for a while.

[sampr01]

Hi Picasso,

 

Do you have an updated share valuation based on  75% of dilution from convertible notes. I remember, you mentioned about $4-5 even with 100% dilution. Thanks

[Picasso]

Sure, some back of the envelope here.

 

19.5 million tons @ $13 margins = $253 million of 2016 EBITDA.  There's $70 million of senior lender interest expense and $30 million of interest expense from the remaining $300 million notes.  Minus $70 million of capex leaves $83 million of DCF.

 

If they don't redeem the PIK's, you'll have about 400 million common units + 65 million subordinated.  So that's like 0.20 of DCF per common share which means it's trading for 8.5x that super crappy outcome.

 

What's much more likely is that they do a rights offering with Murray sometime over the next year.  The lower the price of the rights offering, the more Murray is screwed because he has all these subordinated units.  When they do that rights offering, you'll have 65 million subordinated + 75 million common (including the new warrants on redemption of the PIK's).  If they don't bother using their 2016/2017 cash flow to pay down the PIK's ahead of time, or sell any assets, the $300 million or so of the rights offering will be split between new subordinated shares and common.  Let's say it's done at $2.  That would add 150 million units; creating about 140 million subordinated and 150 million common. 

 

If we take the $83 million of DCF on the new 150 million common units, that's still a very high DCF of $0.55/common unit.  And that's with super nasty dilution from a rights offering at $2.

 

What's more likely is that they use cash flow from the next year to repurchase PIK's, Hillsboro gets fixed up, legal costs go away, and they don't need to issue $300 million of new equity.  If they only need to issue $150 million of equity @ $2 (this is reflexive, so it's probably trading for more than $2 if they don't need to issue as much) then common units go to about 110 million and that's 0.75 of DCF per common unit.

 

And more than anything, I don't think $83 million of DCF is normal earnings power here.  It's got some decent chance that it's a lot more than that.  But in terms of figuring out the margin of safety I think you should try and look at the possibility of $2 dilution on whatever amount and get comfortable with the share price. 

 

The market might be thinking they can't redeem the notes in a year and there's going to be massive dilution.  If that were they case, they wouldn't have structured the deal this way.  That feature is a way for the debt holders to get comfortable with a one-year payback without being pushed into bankruptcy in 2017 during a weak coal environment.  But it doesn't speak to the intentions of Murray/Cline as to why that feature exists.

[heth247]

Picasso,

 

My understanding is that the big 75% dilution comes form the $112~$120MM convert PIK notes. That should be not too hard to pay down with cash flow + small right offering.

 

The $294~300MM new notes has a 9% interest for the first two years. It does not make much sense to pay them off in a year by new equity at low prices, right?

 

Thanks

[Picasso]

There's $300 million of PIK notes but Cline will own about $180 million and the rest will be allocated to other note holders. The 75% dilution is a potential full conversion into just common units.  It's 75% dilution to the entire equity capital structure including the subordinated units.

[heth247]

There's $300 million of PIK notes but Cline will own about $180 million and the rest will be allocated to other note holders. The 75% dilution is a potential full conversion into just common units.  It's 75% dilution to the entire equity capital structure including the subordinated units.

 

Maybe I am confused. In below is from the 8-K.  Which one of the three were you referring to as the "$300mm of PIK notes"? I thought only the (i) $114-$120MM is the PIK convert notes that can dilute 75%. The (ii) $294-$300mm new second lien notes with 9% coupon does not convert (at least for the first two years). Am I wrong?

 

Holders of the Notes who are not affiliates of the Partnership, Reserves (as defined below) or Reserves Investor Group (as defined below) will exchange their Notes, through an exchange offer by the Partnership (the “Exchange Offer”), for:

 

 

 

(i)    between $114 and $120 million aggregate principal amount of second-lien senior convertible PIK notes (the “New Convertible PIK Notes”) (with a maturity date of April 7, 2017 and a 15.0% per annum PIK coupon), which may be redeemed or purchased: (a) at the Partnership’s option by or on behalf of the Partnership; (b) at the option of Murray Energy Corporation (“Murray”), by or on behalf of Murray; or © some combination of the purchase/redemption options described in clauses (a) and (b) that results in the entire purchase or redemption of the New Convertible PIK Notes (clauses (a), (b) and © being referred to as the “Note Redemption”). The New Convertible PIK Notes, if not redeemed or purchased under a Note Redemption, will convert into common units of FELP (the “Common Units”) representing 75% of the total outstanding units of FELP (including Common Units and subordinated units) on April 7, 2017;

 

(ii)  between $294 million and $300 million aggregate principal amount of second-lien senior secured notes due August 2021 (the “New Second Lien Notes”) (with a 9.0% per annum cash coupon for the first two years, a 10.0% per annum cash coupon thereafter plus, in each case,  an additional 1.0% per annum PIK coupon), plus an additional principal amount resulting from the capitalization of accrued and unpaid interest on the Notes held by such holders; and

 

(iii) warrants (the “Warrants”), to be issued on the date the Exchange Offer is consummated (the “Effective Date”), to acquire an amount of newly issued Common Units equal to 7.5% of the total outstanding units of FELP (including Common Units and subordinated units) outstanding on the date of a Note Redemption (after giving effect to the full exercise of the warrants and with certain other anti-dilution protections), exercisable only upon and after a Note Redemption until the tenth anniversary of the Note Redemption.

 

 

 

[Picasso]

Investors in Foresight Reserves LP (“Reserves” and such investors, the “Reserves Investor Group”) will purchase, through a tender

offer (the “Tender Offer”) (conditioned upon the contemporaneous consummation of the Exchange Offer described above), up to

$106 million principal amount of the Notes held by holders that are not Reserves, the Reserves Investor Group or their affiliates,

which shall settle contemporaneously with the settlement of the Exchange Offer (such purchased notes, the “New Affiliate Notes”).

Reserves Investor Group will then exchange the New Affiliate Notes, together with $80 million principal amount of Notes currently

held by them, for: (a) up to $180 million principal amount of New Convertible PIK Notes and (b) up to $6 million principal amount of

New Second Lien Notes. An additional principal amount of Second Lien Notes equal to the accrued and unpaid interest on the New

Affiliate Notes as of the Effective Date will be issued to the holders tendering in the Tender Offer. An additional principal amount of

Second Lien Notes equal to the accrued and unpaid interest on the Notes held by Reserves Investor Group as of the Effective Date

will be issued to Reserves Investor Group;

 

Then there's another $120 million of PIK notes that are going to the other "non-affiliate" note holders that you mentioned for a total of $300 million.  Plus another $300 million of the 2021 2nd liens.

[heth247]

Then there's another $120 million of PIK notes that are going to the other "non-affiliate" note holders that you mentioned for a total of $300 million.  Plus another $300 million of the 2021 2nd liens.

 

Ah, I missed that part. Thanks for the clarification.

[Guest roark33]

Just to point out some views from the peanut gallery....

 

They are planning to do 19.5m in volume this year, with around $13 margins. 

 

If you consider that a run rate or trough, I think there could be some upside.  But....

 

If FELP only does 17.5m in 2017 at $11.5 margins (roughly 200m ebitda), with around 80m of capex and a run rate of 130m in interest cost (this is 2016 run rate interest, but considering the equity dilution will come at an unknown and most likely "higher" cost), that gets you into the negative territory. 

 

My point being that even if you are the low cost producer, with declining volumes and pressured pricing, and a capital structure that carriers a significant amount of debt, you can very quickly turn negative. 

 

The idea that Cline/Murray were not going to let this go bankrupt this year was spot on.  I am just not sure what value there is going forward....for the equity holders. 

 

 

[Picasso]

Sorry it shouldn't be up by $5/ton.  I went back through the last time they had a fire at Deer Run and even though it was only a month of downtime versus several months so far, it didn't have a material impact on the costs per ton.  They already booked about 20 million tons for 2016.  Part of the reason costs were so high in 4Q was that production was down big from the Deer Run fire, but it's getting replaced by another mine so we should see that shift by the time they announce earnings; if they make it to next earnings.  If this Deer Run things never gets fixed then I think you're looking at closer to $23-25.  Maybe $10 EBITDA margins per ton in that environment?  $200 million EBITDA minus $75 million for capex leaves $125 million for the interest payments and equity holders.  Not a ton of wiggle room but this is the point where there is a lot of operating and financial leverage.  Costs are about as high as you'll ever get, ILB coal pricing is at or below average production costs (based on what I see from numbers disclosed from other ILB producers), and the interest payments are eating up most of the free cash. 

 

Whereas in the bearish scenario above you're looking at only $8 million of DCF, if they can get 25 million tons out @ $15 margins, you suddenly have $183 million of DCF again.  I really don't think 25 million tons at $15 margins is that crazy of an assumption for these guys. 

 

If there was no change of control default nonsense going on and I looked at the units @ $1 and tried to gauge the probable future earnings potential, it looks massive.  Several multiples of the current market cap.  So these trough conditions suck, especially because of the debt expense, but the equity is insanely geared to any positive turn and that's usually when you buy these stocks.  It's generally a terrible idea to buy any commodity producer when they're earning super high returns.  It might not mean this will turn out to be a good idea but more often than not this situation works well over time.  It helps that you have a bunch of stakeholders who either need this to work out or have substantial financial incentives to make it work.

 

I referenced that before.  Someone tell me if I'm wrong on this, but here's my logic.

 

1) Cline/Murray have already gone through great lengths to save this asset.  They've also done it in a way which preserves their upside optionality.  That would imply they see value in a big positive turn, not diluting the crap out of the units at $1 and taking their ball home.

 

2) You're at the low point where operating and financial leverage are the highest they're going to be.  If energy prices stay here, everyone but a very, very small number of producers are out of business.  Including the nat gas space.  Again that's when you buy these commodity plays, not when they trade for a low multiple on peak earnings.

 

3) You are in a growing coal basin.

 

4) You only have to wait until sometime in 2017/2018 to get normal conditions again.

 

5) Costs are up because their best mine has been nonoperational for a year.  I'd like to think that changes soon.  Even if it doesn't, we're looking at higher costs without it in any low teens margin forecast.  So you're not paying for the mine coming back or being sold. 

 

6) It's trading for less than the distributions necessary for Murray to convert his shares.

 

If you throw a super bearish outcome, you might be down to no DCF.  But that's simply not sustainable and I'm not sure you should value a stock on that part of the cycle.  I think XOM trades for 30x earnings or something, no one is going to price that asset at 7x bottom of the market conditions.  That would be silly.

 

And if Murray/Cline are not heavily diluting at these prices to resolve the CoC, logically they would only dilute lower if they had absolutely no other options.

[alpha asset strategies]

Hello-

 

I'm relatively new around here, but I love the great discussions and investment ideas / debates.

 

I'm still trying to get up to speed and wrap my head around this interesting opportunity.  The one major question I have is:  With the most recent 8-K filing (May 23), does that imply that the possibility of a Chap. 11 filing is pretty much off the table - or at least greatly diminished?  My hunch is that the answer to my question is "yes"........but I figured I'd check with the experts.

 

Forgive me if this question is quite elementary.  Over the past year, I have made some very good returns by shorting several coal companies into BK - most of those investments pretty much seemed like "no-brainers" - but FELP does seem like a decent opportunity to possibly make some money on the long side.  It certainly seems as if we're getting down to "survival of the fittest" in the coal sector.

 

Thanks!

[Picasso]

My view is that filing is enough to say bankruptcy isn't going to happen anytime soon. But there's a tiny chance it can fall apart. Maybe Cline gets hit by a car before he tenders for the notes and we get the swap.  Technically we aren't completely out of the woods yet.

[heth247]

 

I referenced that before.  Someone tell me if I'm wrong on this, but here's my logic.

 

1) Cline/Murray have already gone through great lengths to save this asset.  They've also done it in a way which preserves their upside optionality.  That would imply they see value in a big positive turn, not diluting the crap out of the units at $1 and taking their ball home.

 

2) You're at the low point where operating and financial leverage are the highest they're going to be.  If energy prices stay here, everyone but a very, very small number of producers are out of business.  Including the nat gas space.  Again that's when you buy these commodity plays, not when they trade for a low multiple on peak earnings.

 

3) You are in a growing coal basin.

 

4) You only have to wait until sometime in 2017/2018 to get normal conditions again.

 

5) Costs are up because their best mine has been nonoperational for a year.  I'd like to think that changes soon.  Even if it doesn't, we're looking at higher costs without it in any low teens margin forecast.  So you're not paying for the mine coming back or being sold. 

 

6) It's trading for less than the distributions necessary for Murray to convert his shares.

 

If you throw a super bearish outcome, you might be down to no DCF.  But that's simply not sustainable and I'm not sure you should value a stock on that part of the cycle.  I think XOM trades for 30x earnings or something, no one is going to price that asset at 7x bottom of the market conditions.  That would be silly.

 

And if Murray/Cline are not heavily diluting at these prices to resolve the CoC, logically they would only dilute lower if they had absolutely no other options.

 

Picasso, I think these are all valid points. One thing I did not understand is why they structure the deal such that Cline can exchange his $180mm second-lien notes for new convertible PIK notes. Otherwise, if all they need to deal with in a year is only the $120MM convertible PIK notes from the non-affiliated group, then I guess the stock price would have responded much better. 

 

If Cline can be the majority owner of both the equity and the second-lien notes, that would have made it easier for the company to survive down in the road. But why did he not choose to do so? Or, is it not by his choice?

 

[Picasso]

I don't think Murray wants Cline sitting fulcrum on 2nd lien notes past 2017. The PIK's will be redeemed and Cline gets to slightly increase his stake in FELP through the 7.5% warrant kicker while delevering the business. 

 

We still might see Cline invest directly into Murray which means he may own even more FELP through a potential Murray ownership.

[heth247]

I don't think Murray wants Cline sitting fulcrum on 2nd lien notes past 2017. The PIK's will be redeemed and Cline gets to slightly increase his stake in FELP through the 7.5% warrant kicker while delevering the business. 

 

We still might see Cline invest directly into Murray which means he may own even more FELP through a potential Murray ownership.

 

Hopefully you are right. Btw, how did the Murray's bond trade today?

[Picasso]

No change in either FELP or Murray bonds even though both traded. You can still buy FELP notes around $71.

[Picasso]

Interesting comments by Murray

 

http://bit.ly/1XQE492

[heth247]

Interesting comments by Murray

 

http://bit.ly/1XQE492

 

So Murray is looking to capture about 90MM tons of US coal production in the future. How much of that will come from FELP?  ;)

[Picasso]

Their intention was to eventually run it all through FELP.  But I don't think they can do it with a lot of leverage so they'll need a much stronger LP currency.  Which explains the way they've structured this deal. Murray and Cline probably see the value in the IDR's. They're really in it for the long haul.

[Picasso]

I just noticed something I missed the first read through.  heth, you're on to something here.  It looks like Cline is getting some flexibility on the PIK's.

 

FELP shall cause notice of any Partnership Redemption to be given to Reserves no less than 15 business days prior to the consummation of such Partnership Redemption stating its proposed terms. Within 10 business days of receipt, Reserves shall notify FELP that it intends to (i) continue to hold all of the Convertible PIK Notes held by Reserves and receive payment upon redemption in connection with such Partnership Redemption, (ii) exchange its pro rata share of the Convertible PIK Notes (not to exceed $180 million (plus accrued and unpaid interest)) for an equal aggregate principal amount of the debt or having a value (based on the economic terms of the Murray Investment), in the case of other securities, on the same terms being issued or borrowed in connection with such Partnership Redemption or (iii) any combination of (i) and (ii) above. If after exchange, Reserves would not be the holder of at least 60% of the total amount of any such new debt or other securities it shall have the option to provide cash that would result in Reserves holding up to 60% of an aggregate principal amount of such new debt or other securities. 

 

If Murray or FELP directly purchases or redeems, as the case may be, all of the Convertible PIK Notes directly from the holders thereof, Reserves may elect not to have the Convertible PIK Notes it then holds (in an aggregate principal amount not to exceed $180 million plus PIK interest), purchased or redeemed, as the case may be, and, if Murray or FELP does not purchase or redeem such Convertible PIK Notes from Reserves in connection with the purchase or redemption of Convertible PIK Notes from the other holders, then the Convertible PIK Notes held by Reserves shall automatically convert into Common Units in accordance with the terms of the Convertible PIK Notes Indenture (at a conversion price equal to the higher of (x) $0.8483 per unit (calculated assuming the Effective Date of July 15, 2016) and (y) the VWAP Price).  If Reserves’ Convertible PIK Notes convert as described in this paragraph, for all purposes hereunder, the Note Redemption shall nevertheless be deemed to have occurred so long as all of the other Convertible PIK Notes are purchased or redeemed in full as provided herein.

 

Reserves = Cline.  Basically Cline can swap into new debt that the 2nd lien holders allow, or he can let it get swapped into new units at the higher of VWAP or 0.85.

 

Also this:

 

Subject to approval by the Synergy and Conflicts Committee, Murray shall be entitled to make an investment in FELP (any such investment, the “Murray Investment”) at any time prior to April 7, 2017.  To the extent the Murray Investment is in the form of debt or preferred equity, it must: (a) be unsecured or secured on a junior lien basis to the Second Lien Notes pursuant to an intercreditor agreement that is reasonably acceptable to Murray, FELP and the holders of a majority in principal amount of the Second Lien Notes, (b) have a maturity date at least 91 days later than the earlier of (i) the maturity date of the Second Lien Notes and (ii) the date on which the Second Lien Notes have been paid in full in cash and are no longer outstanding; © have no obligor thereto other than the Issuers and the Guarantors, (d) not include cash payments while the Second Lien Notes are outstanding, and (e) other restrictions set forth in the Description of Notes (defined below).

 

I'll need to think about what options Murray would have to do a debt/preferred issuance instead of equity.  A lot of that will probably depend on where FELP is trading before the redemption is announced and what's going on at Murray itself and whether Cline steps into that picture.

[Picasso]

Okay sorry for the spam here...

 

It would appear that Cline owning $180 million of the PIK's would simply say "no thanks to the redemption, I'll take the VWAP in stock."

 

Which means FELP only needs to come up with another $120 million plus accrued interest to redeem the rest.  Cline has essentially already injected his capital with whatever price FELP happens to be by April 2017.  Worst case dilution happens at $0.85.

 

Now we're back into incentives again.  Murray is going to want to have Cline's PIK's convert at the highest price possible.  Then we get a Murray + a rights offering for the remaining $120 million + accrued.  An easier pill to swallow than Murray and the other shareholders coming up $300+ million of capital by April.  But this is super reflexive, they need to get the stock price up.  I'm sure they could repurchase a fair amount of PIK's in the open market as well.

[heth247]

Okay sorry for the spam here...

 

It would appear that Cline owning $180 million of the PIK's would simply say "no thanks to the redemption, I'll take the VWAP in stock."

 

Which means FELP only needs to come up with another $120 million plus accrued interest to redeem the rest.  Cline has essentially already injected his capital with whatever price FELP happens to be by April 2017.  Worst case dilution happens at $0.85.

 

Now we're back into incentives again.  Murray is going to want to have Cline's PIK's convert at the highest price possible.  Then we get a Murray + a rights offering for the remaining $120 million + accrued.  An easier pill to swallow than Murray and the other shareholders coming up $300+ million of capital by April.  But this is super reflexive, they need to get the stock price up.  I'm sure they could repurchase a fair amount of PIK's in the open market as well.

 

Thanks for digging that out, Picasso. This sounds much better to me. :)  Now, the question is, what can they do from now on to get the stock price up before April 2017?  What catalyst do you see can help the stock price up, since their DCF will be limited for now, and the big picture for coal probably would not turn around in the short term.  Maybe we really should start to hope for a Trump win of the election.  ;D

[Picasso]

A completed tender and swap will be helpful.  Having their notes no longer trading flat and defaulted. Earnings improvement in the back part of the year as they deliver deferred shipments. Utilities feeling okay with contracting 2017 volume now that bankruptcy isn't at play.  A super cold winter. Trump winning might get the market back into coal stocks. Deer Run fire getting extinguished. Maybe selling an asset.

 

There was basically no press on the 8K from yesterday. Nothing on Seeking Alpha, etc. Maybe we need a good earnings call and some positive PR to get people hyped up again. Right now IR won't even call back investors.  The company has their investors completely in the dark so it's still an uncomfortable situation. Oh god I sound like Bill Ackman.