FGE.to - Fortress Paper (formerly FTP.to)

[sculpin]

New Presentation....

 

https://www.fortressge.com/wp-content/uploads/2018/06/Investor-Presentation-June-15-2018.pdf

 

 

[bizaro86]

Thanks for the presentation link. One thing that sticks out to me is that the cogen has been consistently operating at less than 80% of capacity, which is quite low for a power plant.

[Cardboard]

Was it any of you who dumped 20,000 shares at market on a hot summer day via Merrill Lynch?

 

Dumb or something? Depressive? Margin call? Don't like money?

 

Just tell me next time and I will give you a few more dimes per share on the trade which will provide you with a nice steak dinner...

 

Cardboard

[doc75]

Was it any of you who dumped 20,000 shares at market on a hot summer day via Merrill Lynch?

 

Dumb or something? Depressive? Margin call? Don't like money?

 

Just tell me next time and I will give you a few more dimes per share on the trade which will provide you with a nice steak dinner...

 

Cardboard

 

I saw that.  At first I was thrilled because I had a stink bid in and thought I got filled.  But then I checked and my bid had actually expired at end of June.

 

 

[Cardboard]

Not as good as I would have hoped due to a few hiccups and this delay in getting regulatory approval for the 5th digester but, certainly a much better quarter with volume and EBITDA.

 

Pricing also getting better in USD and with the $CAD being weak that is another plus on pricing. If this continues, it will pay big dividends in Q4 to reduce the duration by 50% of the annual shutdown by having used these unplanned stops to implement remedies.

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aFGE-2642822&symbol=FGE&region=C

 

Global oil price, cotton, pulp, all support a higher DP price. We shall see but, the odds of a major turnaround for this company remain strong.

 

Cardboard

[FFHWatcher]

August 2011 post by another Fortress shareholder....

 

IMHO, a 370m market cap seems crazy for all the assets that they have and all the juicy catalysts on the horizon (even without any acquisitions..).

 

Jump ahead 7 years and it is a $45M company.

A couple thousand bucks of this stock trades per day.  7 years ago, Chad's $13M bonus compensation was being discussed, he was a genius, etc. Everyone was impressed because he was issuing stock at $50, buying it back at $30... and now it is $3. 

 

In 2011 Apple was something like $35 and Microsoft was $20.

 

Why do we all, including me, waste so much time on crap businesses in crap sectors? 

[doc75]

 

In 2011 Apple was something like $35 and Microsoft was $20.

 

Why do we all, including me, waste so much time on crap businesses in crap sectors?

 

I've been asking myself that question a lot this year.

[Cardboard]

Timing and price on cyclical is very very important.

 

Regarding Microsoft, I held it for a while in the $20's and sold it in the $30's. Back then you could see no exciting growth ahead. None. It was seen as a profitable company, paying a sweet dividend with utility like growth ahead.

 

Apple had large growth but, it had rallied enormously following the Ipod and Iphone introduction. Would it continue? What next? Pricing was higher than competitors, etc. If you had told someone about a $1 trillion valuation they would have looked at you like you were out of your mind.

 

Of course, investing into profitable/stable enterprises will vastly reduce the odds of a calamity of investing into a Fortress when things were great for them. However, I don't think there is a one-fits-all. Each case has to be studied individually and you always have to look forward and not in the rear view mirror.

 

Not easy to predict the future but, getting back to Fortress, I have yet to see a commodity that did not rebound strongly following under-investment, no interest in it for a while (years) and continued growth in demand.

 

Cardboard

 

 

[petec]

Why do we all, including me, waste so much time on crap businesses in crap sectors?

 

Because it's not that easy to pick which companies will be great in the future! I've owned MSFT since it was at $25 because 7x EV/FCF struck me as insanely cheap for one of the world's great businesses. So chalk up one success. But I couldn't (and still can't) see the value in Apple. So I'm 1-1 on that front. The whole "buy great businesses" theme is very sensible (and to an extent I implement it, so this isn't a hater post) but suffers a lot of hindsight bias. Many formerly great businesses have gone nowhere from a certain point. I'm not sure it's a better method than deep value, overall.

[Cardboard]

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aFGE-2652162&symbol=FGE&region=C

 

Very positive IMO. I assume that they have held talks with large holders and already got their approval.

 

This should remove significant uncertainty. With more reliability, increased production capacity and a slowly climbing commodity with good fundamentals, EBITDA should improve quite a bit over coming quarters.

 

Cardboard

[bizaro86]

I always think early consent fees (and any other coercive offers) are slimy. I will probably consent (or sell prior) but that definitely doesn't leave a good taste in my mouth.

 

As a debenture holder, I would have rather seen an improved conversion option than a coercive consent fee.

[Cardboard]

Bad taste in your mouth?

 

2% bonus to accept a better interest rate?

 

Even Fairfax offered more than principal in the past to get bond holders to accept and I never heard of this being coercion or leaving bad taste in their mouth...

 

Cardboard

[triedtestedand]

I can definitely see (some) grumbling from deb holders in terms of legacy conversion price being maintained, and maybe some consideration could have been included as a sweetener ... but counterpoint to that from a common shareholder standpoint is that deb holders have been getting cash at 7% the whole time, along with obvious preference over common shareholders by virtue of being such deb holders. 

 

Further, if shares are what was truly desired by deb holders, one strategy for deb holders would be / have been to re-invest  interest payments to buy common shares on the open market. 

 

I look at the stock chart for the past 5 years, and can eyeball a $4/avg per share over that time (varying from <$2/share to over $8/share), or a roughly avg $60M valuation (assuming 15M shares outstanding).

 

Take 7% per year of the $62M that is net outstanding of the 2019 debs (after FGE bought back ~10% of the debs a few years ago),  multiply by five over 5 years, and you have 35% of the $62M, or ~$22M paid out in interest in aggregate... so assuming debs bought in at $4/share without moving the share price (which trades <10K shares per day ... i.e. effectively illiquid), then debs could be holding 1/3 of the company by now, while still maintaining their deb holdings and priority status.

 

I know this is theoretical ...

 

Thinking about this a bit further ... looking forward, a key from downside perspective in accepting/rejecting the amendment is likely whether debs think they will be able to get paid at end of 2022.  I guess if they feel there is risk there then they can sell on open market (in which case any buyers would get the 8% until 2022, along with any premium as a discount to par if existing deb holders choose to sell at less than par) ... so the demographics of the deb holder may change with this amendment offer to those with greater risk appetite.

 

All said and done, there's some tension from both sides here, which makes it feel like a fair deal.

 

And Cardboard ... good reminder r.e. FFH offering a sweetener in the past to bond holders.

[bizaro86]

It's not coercive to offer a bonus, it's coercive because they are only offering the bonus to people who tender early.

 

So it becomes a game theory thing. I would rather have my money back than this new offer, and they can afford to pay.

 

However, I think it's likely that the offer will pass, so I'll vote in favor early as otherwise I don't get the 2%. They are also paying brokers to gather votes for them, which I also think is distasteful.

 

If the deal was that everyone who owns the debs got the 2% bonus for the extension, I'd have no objection to it whatsoever. I do think that it wouldn't pass without that factor though...

 

 

[bizaro86]

The debs have been getting cash because they are the senior security. The company could have issued equity when they did the debs, but they didn't want the dilution.

 

One way to check whether the market thinks this is a good deal for the debs is to see how they trade in the next couple of days. My prediction is down.

 

If 7-8% from these guys was such a fantastic deal, this would have been trading at par already.

[triedtestedand]

Good points bizaro86. 

 

Agree that there's some game theory/incentivization aspects going on here, and yes, it will definitely be interesting to see where the debs trade the next couple of days. 

 

The debs have been trading at 90 cents on the dollar +/- for approaching 2 years now (i.e. 8% yield + 10% premium at maturity), so will be interested to see where this goes.

 

[bizaro86]

That's true, but 2.5 years ago they were trading under $60. I paid in the $40s for mine, and I'm not that interested in earning a high single digits return going forward.

 

I probably should have sold when it was $96 or so, but at a recent $90 this had a yield to maturity in the mid teens, which is reasonable for their risk profile, imo.

 

After this deal I'm effectively getting a much lower yield to maturity on a longer security, so I'm not happy.

 

I do think this is probably a positive for the common, as that takes refi/dilution risk off the table for a few more years.

[triedtestedand]

bizaro86 ... got it ... now I see your perspective ...  you're one of those who have been smart and made out well buying it distressed, but extending the term without payout will lower your own average yield to maturity, despite the increased interest and the sweetener. 

 

I guess for you then it becomes what to do ... accept the lower yield to maturity or sell (now or sometime after the amendment) and find something else that is more attractive for your investment risk level.

 

For us sufferers with the commons, I would like to have your unhappiness to deal with  ;-)

[Cigarbutt]

Disclosure: have followed this company for a long time with higher levels of interest in 2009-11 when I held common shares and more recently for the debentures which I simply watched.

 

Position: bizaro86, I understand your discomfort because I find the deal feels "slimy" but these guys (like they should) have always put common shareholders first and this is the case again.

 

In 2008, got interested in this company for the usual value reasons but, in a relevant way, in part because I had concluded that they had managed the conversion of their convertible debentures in a very satisfactory manner for the common shareholders.

https://fortresspaper.com/wp-content/uploads/2018/03/FORTRESS-PAPER-REDEEMS-7500000-CONVERTIBLE-NOTE-May-22-2008.pdf

 

Interestingly in 2008, Fairfax also had a convertible debt issue due that resulted in dilution which was compensated by an unusually large share repurchase. FTP then negotiated (with "amendments") to allow for an early redemption with Mercer (related to the IPO) which, combined with a targeted share repurchase resulted essentially in minimal dilution. That was a time of significant free cash flows and dilution was the main concern, not the need to issue shares to pay for notes coming to maturity.

 

So, as a holder of the 2019 debentures, I would say that you had to be aware of contractual clauses and potential "amendments" possibilities.

 

However, I would agree that the way they plan to proceed is questionable (fairness point of view for the debenture holder). My understanding is that, once amendments are accepted by 2/3 of votes, all debentures change their risk/return profile whether you vote for or against. In the case of Fairfax, they have occasionally completed early redemption of notes as part of included contractual clauses and have done recurrent tender offers (exchange or for cash, even by way of a modified Dutch Auction on one occasion) allowing holders to keep the "old notes" if they wished to refuse the premium and bonus option.

 

In the case of FGE, they are effectively forcing you to participate in a beauty contest like Keynes described where you have to guess where the debentures will trade after the amendments. I agree that they probably went for an "institutional" feel and it just goes to show how the reaching for yield mentality is alive (I find the terms not generous). Then, it may be reasonable to expect that the debentures will not trade very far from now but, from an individual investor perspective, I find that the maturity extension (even if good for the shareholders) significantly changes the risk profile and I would certainly value the debenture much less than it is trading at now.

 

Like a triedandstand describes, there will be a "demographic" change of debenture ownership and it is a quite interesting that this change is +/- imposed by the firm and not a choice for the individual investor.

 

[sculpin]

That's true, but 2.5 years ago they were trading under $60. I paid in the $40s for mine, and I'm not that interested in earning a high single digits return going forward.

 

I probably should have sold when it was $96 or so, but at a recent $90 this had a yield to maturity in the mid teens, which is reasonable for their risk profile, imo.

 

After this deal I'm effectively getting a much lower yield to maturity on a longer security, so I'm not happy.

 

I do think this is probably a positive for the common, as that takes refi/dilution risk off the table for a few more years.

 

One good thing about the extension for someone like you that paid in the $40's for your debentures is that you get to delay the realization of the capital gain on the debentures for another 3 years if it is held in a taxable account.

 

And maybe DP prices will go $1000+, cost realizations will finally come to fruition & the new pulp sugar will be a success. In this case you could realize far greater than $100 on your debentures --- because they paid you an additional 2% plus another 8% over each those 3 years to be patient...

 

 

[bizaro86]

Letting taxes make investment decisions is probably why I didn't sell at $96, which I'll file in the mistakes file. The debs are taking a lower ytm for a longer maturity even with the 2%. The press release talks about 7% vs 8%, but the ytm on the debs was mid teens before, and now it's low double digits, even assuming you consent early.

 

If they didn't make the offer coercive, they'd have had to offer a better conversion price to get that done, which would have offset some of that ytm loss.

 

I get this is good for the common, but I have to say I'm not sure if it says much about the ethics of the people running the place. While this is a legal thing for them to do, it doesn't seem like a character trait I'd look for in someone taking care of my money, since maybe I'm the next one to get profit maximized by Chad and Co.

 

[Cardboard]

I rarely disagree with you Bizaro86 but, on this one I do.

 

YTM on this one at current time is not real as they have no cash/financing to redeem at par. Other than extending/amending, the other options were to:

 

1- Find a different lender. Probably next to impossible with all other debts already in place: these guys also want their money back eventually and are senior to debs.

2- Redeem a portion of debs combined with extend/amend. Would have hurt cash position and weakened outlook on company's ability to eventually redeem the majority of debs or worst.

3- Convert into shares at market next year. Creates such dilution for common and a rush for the exits by debs holders who want nothing to do with common that you would have seen a 30-50% haircut from here.

 

So IMO, this was baked into current price of around $90 for the debs: get an effective 7.8% cash yield and pray for no forced conversion next year. Looking at other debs where current financials are really tight and where maturity is a few years out or was pushed out, I believe that you will not see much change in trading price.

 

Regarding terms, many holders will really like this 2% cash bonus, 1% additional interest and reduced uncertainty for 3 years or the income folks. I see additional demand come in. While a more achievable conversion price would have suited you better since you are comfortable with holding equity. So maybe some exit here. At $96 you were really pushing the envelope but, if you sell at $90 or a bit above that, it is about as good as it gets with these type of situations IMO.

 

Cardboard

[Cigarbutt]

I would say that limited options with maturity nearing meant that FGE needs to pay more in order to obtain the amend and extend refinancing option.

 

IMO the leading man has been unusually good at extracting value with financing options over time and the dynamics here are:

-the business itself which has had its share of distress with a potentially brighter future

-the mood of the financing market which I find quite complacent

and

-*the investor holder base, which I think has a retail profile

 

I agree that your voting decision has a lot to do with the confort level you have with the equity.

 

If I would hold debs now, since I could never reach an approriate level of confort with equity when the firm switched to dissolving pulp, I would vote no and hope for better terms (early consent fee and higher interest rate going forward) as I feel that the firm has room to maneuver in the event of unexpected resistance. I just don't think that it would be reasonable to expect better conditions for the conversion price.

 

Who I am to say but I would suggest to try to put away the emotions and to see this event as a firm trying to obtain the best financing deal under the circumstances. Distressed debt investing does not mean you need to become distressed. :)

[bizaro86]

I completely agree that amend and extend is the right move here, I just think they would have had to offer better terms if it wasn't coercive. I would have liked a better conversion price, and would have voted no to a non-coercive offer on the current terms, which I would have expected to fail.

 

I could be wrong, and the price action today doesn't support my position that it's an unfavorable exchange, as its only down a bit. I still think that's true, so I sold today at $88.

 

The common might still make sense, I'm not sure. I see the common mainly as an option on dissolving pulp prices, and with this exchange that option just got some extra time value.

 

[MrB]

Bondholders Announce Intention to Vote AGAINST Amendments to Debentures Issued by Fortress Global Enterprises Inc.

 

TORONTO, Sept. 21, 2018 /CNW/ - On September 21, 2018, Polar Asset Management Partners Inc., Chou Associates Management Inc., Concise Capital Management, LP and Fulcra Asset Management Inc., who in aggregate hold, or exercise control and direction over, more than 31% of the issued and outstanding 7.0% convertible unsecured subordinated debentures due December 31, 2019 (the "Debentures") (TSX: FGE.DB.A) of Fortress Global Enterprises Inc. (the "Company") (TSX: FGE) (OTCQX: FTPLF), announced their intention to vote against the Company's proposed amendments to the terms of the Debentures. The proposed amendments were announced on August 28, 2018 and a meeting at which holders of the Debentures are to vote on the amendments is scheduled for October 1, 2018

 

https://www.newswire.ca/news-releases/bondholders-announce-intention-to-vote-against-amendments-to-debentures-issued-by-fortress-global-enterprises-inc-693942711.html