FELP - Foresight Energy

[Patmo]

 

I'm in agreement with you guys that there shouldn't be a lot of downside here.  I haven't sold anything and it makes up at least 95% of my net worth.

 

Gnarly. I think you do OPM as well, right? Is it all in one pot or did you go a different route with their $? How have they reacted throughout?

[Patmo]

 

Good bit on the MQD, totally flew over my head. These shares do need to be accounted for at some point since they do end up grabbing some of the profits. But put a 10% yield on the distribution and it stays irrelevant until the 20's, and that's without accounting for arrears... Although it looks like the MQD is 1.35 annually and the $2 mark is a threshold to allow the subs to be converted to common? I'm not clear on this, the writings are confusing.

 

Question: The terms for the credit facilities don't allow any "restricted payments including discretionary dividends" until the later of June 2018 or some other crap, after which they can pay up to 25mil. Do the MQD's get lumped into "discretionary dividends" or is the company in the clear for those distributions? I figure some common holders with a lot of clout in the company might want to drive share price up before that happens. You're not the only person who is evil that way !

 

Here is from their 10K

 

"All subordinated units are currently held by Murray Energy. The principal difference between our common units and subordinated units is that subordinated unitholders are not entitled to receive a distribution from operating surplus until the holders of common units have received the minimum quarterly distribution (“MQD”) from operating surplus. The MQD is $0.3375 per unit for such quarter plus any cumulative arrearages of previously unpaid MQDs from previous quarters. Subordinated unitholders are not entitled to receive arrearages. The subordination period will end, and the subordinated units will convert to common units, on a one-for-one basis, on the first business day after the Partnership has paid the MQD for each of three consecutive, non-overlapping four-quarter periods ending on or after March 31, 2017 and there are no outstanding arrearages on the common units. Notwithstanding the foregoing, the subordination period will end on the first business day after the Partnership has paid an aggregate amount of at least $2.025 per unit (150.0% of the MQD on an annualized basis) on the outstanding common and subordinated units and the Partnership has paid the related distribution on the incentive distribution rights, for any four-quarter period and there are no outstanding arrearages on the common units."

 

I take that to mean they can make a lump sum payment of $2 + outstanding arrearages($1.32/year) and convert the subs.

 

As for the MQD part question. Since these are normal distribution,they should be restricted by the notes's covenants.

 

I see, then would it be fair to account for the sub units fully, but also reduce EV by the $3.32*# units? Fair middle ground valuation imo

 

That's not what I hoped on MQD, but that's what I thought...

[Picasso]

Well I think I mentioned this before but I got lucky in terms of timing.  I was up a fair amount going into the summer from other holdings but FELP hadn't moved very much yet (remember all the extension/tender angst?) even when the risk/reward changed a lot.  I was able to plow more and more into it when the downside became negligible and worst case maybe I'd end the year flat.  And it was still under $4 when the tender was done.  That didn't make much sense, especially with API 2 ripping.

 

It's different doing that with OPM.  Some investors would pop blood vessels or keep a lawyer on standby.  But if you've done well for them for a while and they've been down this road before it's easier to take those positions.  i.e., say you turned $20 million into $60 million over several years and then take a $10 million bet on FELP at $2 for maybe $30-40 million of upside.  If it goes tits up, you still have $50 million and hopefully you don't lose your head and turn into a crappy investor trying to make back that $10 million.  The key is sticking with your process if it's a good process.  But if someone just hands you $60 million, do you want to plow $10 million into FELP?  Man you better be right because fresh capital isn't going to be too happy about a mistake even if the odds were well in your favor (say Cline got hit by a bus).  I think it's bad business to just put "new" OPM into "risky" bets.  You have to grind it out for a while and show your process and give them a cushion.  But I'm also lucky in that I have pretty good clients.  I can't concentrate the same way for OPM as my PA but it's still pretty concentrated.  It does seem like they've had some fun tracking the whole FELP saga (Bob Murray is hilarious).  A lot of funny moments... But it's not over yet, we'll see how this refinance plays out. 

[awindenberger]

 

I'm in agreement with you guys that there shouldn't be a lot of downside here.  I haven't sold anything and it makes up at least 95% of my net worth.

 

Gnarly. I think you do OPM as well, right? Is it all in one pot or did you go a different route with their $? How have they reacted throughout?

 

I thought I was half nuts putting 60% of my PA into GLBL when it was a $3.00. Really hoping that FELP remains in this trading range through April so I can roll some of my GLBL position in it once I hit 1-yr mark, but have a feeling Q4 results will make that harder.

 

Picasso you haven't kept us updated with Bob Murray's recent excitement, if any.

[Patmo]

Well I think I mentioned this before but I got lucky in terms of timing.  I was up a fair amount going into the summer from other holdings but FELP hadn't moved very much yet (remember all the extension/tender angst?) even when the risk/reward changed a lot.  I was able to plow more and more into it when the downside became negligible and worst case maybe I'd end the year flat.  And it was still under $4 when the tender was done.  That didn't make much sense, especially with API 2 ripping.

 

It's different doing that with OPM.  Some investors would pop blood vessels or keep a lawyer on standby.  But if you've done well for them for a while and they've been down this road before it's easier to take those positions.  i.e., say you turned $20 million into $60 million over several years and then take a $10 million bet on FELP at $2 for maybe $30-40 million of upside.  If it goes tits up, you still have $50 million and hopefully you don't lose your head and turn into a crappy investor trying to make back that $10 million.  The key is sticking with your process if it's a good process.  But if someone just hands you $60 million, do you want to plow $10 million into FELP?  Man you better be right because fresh capital isn't going to be too happy about a mistake even if the odds were well in your favor (say Cline got hit by a bus).  I think it's bad business to just put "new" OPM into "risky" bets.  You have to grind it out for a while and show your process and give them a cushion.  But I'm also lucky in that I have pretty good clients.  I can't concentrate the same way for OPM as my PA but it's still pretty concentrated.  It does seem like they've had some fun tracking the whole FELP saga (Bob Murray is hilarious).  A lot of funny moments... But it's not over yet, we'll see how this refinance plays out.

 

Haha yeah he's been a riot, not sure he's being a great ambassador for coal though. At least not in the public eye, but I guess he'll jive well with the next presidency

[heth247]

Hi, Guys, I have a question regarding the new shares that will be issued to redeem the $350M PIK. Would they be considered as sub units?  Otherwise, wouldn't the MQD apply to them as well and further delay Murray's pay day? Thanks.

[awindenberger]

Hi, Guys, I have a question regarding the new shares that will be issued to redeem the $350M PIK. Would they be considered as sub units?  Otherwise, wouldn't the MQD apply to them as well and further delay Murray's pay day? Thanks.

 

I imagine they would be considered common units, which is a reason why Murray will probably try to take company private ASAP.

[Patmo]

Hi, Guys, I have a question regarding the new shares that will be issued to redeem the $350M PIK. Would they be considered as sub units?  Otherwise, wouldn't the MQD apply to them as well and further delay Murray's pay day? Thanks.

 

I imagine they would be considered common units, which is a reason why Murray will probably try to take company private ASAP.

 

Has anybody talked to someone affiliated with Murray about this or are we inferring based on the incentives perceived?

[awindenberger]

Hi, Guys, I have a question regarding the new shares that will be issued to redeem the $350M PIK. Would they be considered as sub units?  Otherwise, wouldn't the MQD apply to them as well and further delay Murray's pay day? Thanks.

 

I imagine they would be considered common units, which is a reason why Murray will probably try to take company private ASAP.

 

Has anybody talked to someone affiliated with Murray about this or are we inferring based on the incentives perceived?

 

I imagine Picasso could comment on this.

[Picasso]

Murray said it in an interview, but I think it could be interpreted different ways such as owning most of the GP.  I don't know where the link to the interview is, but it was sometime in September or August.

 

Murray says now Foresight's debt is shored up and Murray Energy is operating the mines and marketing the coal. Murray said he hopes in coming months his company "will have a path to control Foresight Energy and bring it under Murray Energy, a private corporation."

[Guest roark33]

Umm, probably the only way picasso gets out of his position given the volume.... ;)

[PullTheTrigger]

http://www.snl.com/web/client?auth=inherit#news/article?id=37836430&cdid=A-37836430-11058

 

Interview with Murray back in Sept

 

 

[Patmo]

http://www.snl.com/web/client?auth=inherit#news/article?id=37836430&cdid=A-37836430-11058

 

Interview with Murray back in Sept

 

Thanks PTT

[heth247]

Preliminary data: Coal surge in Q3'16 slowed down in Q4'16

 

http://www.snl.com/web/client?auth=inherit#news/article?id=39137358&cdid=A-39137358-12073

 

In the third figure shown in the above article, it shows that MC NO.1 mine of Foresight increased the production from 2.86M tons in Q3'16 to 2.91M tons in Q4'16 (not sure why the table shows a -1.6%). When compared to Q4'15 (2.25M tons), that is a 29% increase!

 

 

 

[Patmo]

Preliminary data: Coal surge in Q3'16 slowed down in Q4'16

 

http://www.snl.com/web/client?auth=inherit#news/article?id=39137358&cdid=A-39137358-12073

 

In the third figure shown in the above article, it shows that MC NO.1 mine of Foresight increased the production from 2.86M tons in Q3'16 to 2.91M tons in Q4'16 (not sure why the table shows a -1.6%). When compared to Q4'15 (2.25M tons), that is a 29% increase!

 

The calculations for the 2016 QoQ chg, they all have the wrong operator in front but otherwise the calculation is correct. So -1.6 is really 1.6 and 8.9 is really -8.9. Weird mistake...

[PullTheTrigger]

Accipiter sold about 14,000 shares.

[valcont]

Just thinking about the possible scenarios to tackle the PIK debt. My understanding is that there are three ways to deal with them when they come due:

 

1. No payment in which case the note holders gets 75% of the common + subs. Everyone is screwed in that case.

 

2. Payment via equity offering Or Murray buys the debt: In this case, the Reserves(i.e. Cline group) would have an option to convert their $180m into commons vs $120m for remaining PIKs, not a great option for Murray if the price is lower.

 

3. Refinance the debt :Refinance the debt on better terms considering FELP's improved situation.

 

I am not clear on what will happen in scenario 3. Since there is no equity conversion , wouldn't reserves lose their option to convert? If that is the case, then shouldn't Murray opt for 3? No dilution of equity so the MQD will be lower to activate the subs and Cline's stake gets taken out. The only downside for him in this scenario is that the market will price the equity higher since the dilution risk is gone. So it'll be harder for Murray to buyout the whole enterprise.But it will be an attractive asset for the drop ins. Any thoughts?

[heth247]

Just thinking about the possible scenarios to tackle the PIK debt. My understanding is that there are three ways to deal with them when they come due:

 

1. No payment in which case the note holders gets 75% of the common + subs. Everyone is screwed in that case.

 

2. Payment via equity offering Or Murray buys the debt: In this case, the Reserves(i.e. Cline group) would have an option to convert their $180m into commons vs $120m for remaining PIKs, not a great option for Murray if the price is lower.

 

3. Refinance the debt :Refinance the debt on better terms considering FELP's improved situation.

 

I am not clear on what will happen in scenario 3. Since there is no equity conversion , wouldn't reserves lose their option to convert? If that is the case, then shouldn't Murray opt for 3? No dilution of equity so the MQD will be lower to activate the subs and Cline's stake gets taken out. The only downside for him in this scenario is that the market will price the equity higher since the dilution risk is gone. So it'll be harder for Murray to buyout the whole enterprise.But it will be an attractive asset for the drop ins. Any thoughts?

 

Regarding scenario 3, previous discussion on this thread seems to indicate that they cannot simply refi the $350MM PIK debt part for better terms. They will need to refi the 2021 notes as well. Picasso had his lawyer friend once looked into the credit agreement, not sure what was the conclusion....

[Picasso]

They can refinance the PIK note with debt but it will involve refinancing out the 2021 debt as well.  Which they probably should given the 10% cost on that debt is probably well above market.  Those notes are trading over par so it's entirely possible.  That said the make whole on the 2021 debt is expensive at 105.50.  $19 million to retire it early plus whatever other refinance expenses.  Could they issue $600 million at 8% and get the cost back in savings? Seems like it but Murray and Cline will do just as well by taking more common units.

 

But I sort of like that they're being forced to develer.  It's not the end of the world if they issue some stock to pay down the PIK notes, they also have a decent amount of cash on the balance sheet + cash coming in before the refinance is due.

[valcont]

Just thinking about the possible scenarios to tackle the PIK debt. My understanding is that there are three ways to deal with them when they come due:

 

1. No payment in which case the note holders gets 75% of the common + subs. Everyone is screwed in that case.

 

2. Payment via equity offering Or Murray buys the debt: In this case, the Reserves(i.e. Cline group) would have an option to convert their $180m into commons vs $120m for remaining PIKs, not a great option for Murray if the price is lower.

 

3. Refinance the debt :Refinance the debt on better terms considering FELP's improved situation.

 

I am not clear on what will happen in scenario 3. Since there is no equity conversion , wouldn't reserves lose their option to convert? If that is the case, then shouldn't Murray opt for 3? No dilution of equity so the MQD will be lower to activate the subs and Cline's stake gets taken out. The only downside for him in this scenario is that the market will price the equity higher since the dilution risk is gone. So it'll be harder for Murray to buyout the whole enterprise.But it will be an attractive asset for the drop ins. Any thoughts?

 

Regarding scenario 3, previous discussion on this thread seems to indicate that they cannot simply refi the $350MM PIK debt part for better terms. They will need to refi the 2021 notes as well. Picasso had his lawyer friend once looked into the credit agreement, not sure what was the conclusion....

 

Well that would be a weird clause. As long as the debt is PIK and junior to the 2021, I don't think 2021 noteholders should object. Do you know where that clause is where they HAVE to refinance the 2021 if they refinance the PIKs? The only one I could find says that the refinanced debt should mature later than 91 days of 2021 maturity.

 

Anyways my question was assuming Murray can refinance the debt as PIKs payable later than 91 days from 2021, he can get rid of this dilutive covenants and let the price rise. Now he has a better access to capital markets and opportunity to pay those PIKs at his choosing. Why wouldn't he want to do that? I just don't see any clause that prevents him from handling these PIKs in  two steps. These notes are already trading on the par so its not like he is creating uncertainty to get better terms.

 

 

[Picasso]

I imagine there isn't much appetite for debt that would fit the 2021 debt restrictions.  The cost would be so high that you might as well refinance out everything or pay with stock.

[valcont]

I imagine there isn't much appetite for debt that would fit the 2021 debt restrictions.  The cost would be so high that you might as well refinance out everything or pay with stock.

 

Not disagreeing with that but it seems like the equity issuance is so much more favorable to Cline that Murray would rather buy out the whole enterprise or refinance. Atleast the buyout would not trigger the change of control like the last time. I would prefer the dilution and using FELP as a vehicle for drop ins.

[jrallen81]

What are people's opinions about how it plays out for passive holders -- other than debt maturity dates are there any calendar event catalysts?

[heth247]

valcont, here is waht Aqul posted back in Nov 2016:

 

Is there any chance of a re-fi for the Exchangeable PIK? The new 2021 notes don't allow the refinancing debt to pay cash, or have more favorable maturity terms (see below), so it's going to be difficult to re-fi, to say the least. Are you all assuming full dilution for the PIK in your valuations?

 

From the Indenture (Exhibit 4.1 from the 9-6-16 8-K):

With respect to (i) any Debt Incurred pursuant to this Section 4.06 to refinance the Exchangeable PIK Notes and all subsequent refinancings thereof (collectively, the “Exchangeable PIK Notes Refinancing Debt”) and (ii) any Debt Incurred pursuant to this Section 4.06 after the Issue Date more than a majority of which is loaned or otherwise provided by an Affiliate (other than the Issuers and any Restricted Subsidiary) (which, for the avoidance of doubt, does not apply to any Debt outstanding on the Issue Date, including the Exchangeable PIK Notes, or any Debt outstanding (whether Incurred before, on or after the Issue Date) that is acquired by an Affiliate after the initial Incurrence thereof), in each case of clauses (i) and (ii) other than Excluded Debt, such Debt must: (a) be unsecured or constitute Junior Lien Obligations, (b) have a maturity date no earlier than 91 days later than the earlier of (i) the Notes Maturity Date and (ii) the date on which the Notes are no longer outstanding, © have no issuer, obligor or guarantor thereof other than the Issuers and the Guarantors, (d) not provide for any cash payments while the Notes are outstanding and (e) not contain any negative covenants or events of default that are more restrictive than the negative covenants and Events of Default (as applicable) in this Indenture unless this Indenture is amended to contain such more restrictive negative covenants or events of default (as applicable).

[valcont]

valcont, here is waht Aqul posted back in Nov 2016:

 

Is there any chance of a re-fi for the Exchangeable PIK? The new 2021 notes don't allow the refinancing debt to pay cash, or have more favorable maturity terms (see below), so it's going to be difficult to re-fi, to say the least. Are you all assuming full dilution for the PIK in your valuations?

 

From the Indenture (Exhibit 4.1 from the 9-6-16 8-K):

With respect to (i) any Debt Incurred pursuant to this Section 4.06 to refinance the Exchangeable PIK Notes and all subsequent refinancings thereof (collectively, the “Exchangeable PIK Notes Refinancing Debt”) and (ii) any Debt Incurred pursuant to this Section 4.06 after the Issue Date more than a majority of which is loaned or otherwise provided by an Affiliate (other than the Issuers and any Restricted Subsidiary) (which, for the avoidance of doubt, does not apply to any Debt outstanding on the Issue Date, including the Exchangeable PIK Notes, or any Debt outstanding (whether Incurred before, on or after the Issue Date) that is acquired by an Affiliate after the initial Incurrence thereof), in each case of clauses (i) and (ii) other than Excluded Debt, such Debt must: (a) be unsecured or constitute Junior Lien Obligations, (b) have a maturity date no earlier than 91 days later than the earlier of (i) the Notes Maturity Date and (ii) the date on which the Notes are no longer outstanding, © have no issuer, obligor or guarantor thereof other than the Issuers and the Guarantors, (d) not provide for any cash payments while the Notes are outstanding and (e) not contain any negative covenants or events of default that are more restrictive than the negative covenants and Events of Default (as applicable) in this Indenture unless this Indenture is amended to contain such more restrictive negative covenants or events of default (as applicable).

 

I see. All this means is that they can't make interest payments in cash i.e. the debt has to be PIK if they refinance the debt. Murray has lots of levers to play with today compared to last year this time. He may refinance all the debt in one big swoop or just take it private.