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

[jeffmori7]

Great post OptsyEagle! I must admit I feel pretty much the same about this investment...

 

One thing for sure is that it is not because assets were acquired at really cheap price that their cost is low...Total cost plus capex on Thurso will be high in the end. I understand that no one wated to buy those assets in part becvause the risk involved was great (not easy to transform a plant into a DP plant it now seems), but also because the plant at Thurso was really not up to date I think. In retrospect, I assume we would have been better to have LSQ first, a more modern plant where the ramp up would probably have been easier, burning less cash.

[prunes]

Hear hear Optsy, at least we can't go below zero! :)

[OptsyEagle]

Hear hear Optsy, at least we can't go below zero! :)

 

and that is why I never shorted it ... and never would. 

 

The funny thing about this investment is because most shorts would almost surely have a stop buy in place for protection, and I doubt it would be much higher then 10% to 15%, it is very likely that most short sellers lost money on this investment as well.  Of course there will be exceptions, as there were for a few nimble long investors, but the way this stock would shoot up on varying news and even re-iteration of old news (what was that 10% jump on the finalization of the Dresden sale.  Were those investors living in the dark), it is most likely that both long and short sellers lost money with Fortress Paper.

 

Weird eh?  I find it so interesting how the gods of investing, seem to deliver their will to investors.  Never ceases to amaze me.

[prunes]

Are the mills capitalizing their negative earnings as startup costs?

 

Share price aside it is interesting to look at the growth in book value over the past 5 years. Although I guess I'm just looking for a silver lining.

[lessthaniv]

  If you take the $20 million dollar loss from Q1 and you ramp it down, in each quarter, at any logical rate, for that amount of time, and then add up those losses, you will find that the $159 million Fortress received from Dresden, gets depleted quite significantly by then.

 

Optsy, you're a very smart guy/gal. Take a deep breathe and revisit this statement at some point. How are you ramping it down?

[OptsyEagle]

  If you take the $20 million dollar loss from Q1 and you ramp it down, in each quarter, at any logical rate, for that amount of time, and then add up those losses, you will find that the $159 million Fortress received from Dresden, gets depleted quite significantly by then.

 

Optsy, you're a very smart guy/gal. Take a deep breathe and revisit this statement at some point. How are you ramping it down?

 

That is for each investor to do on their own.  Ramp it down anyway you want.  It might even go up.  I expect it will be higher in Q2 or at least the same.  DP prices are still falling and they did shut down for 10 days in April.  My guess is some money was spent on something during that shutdown.  Are the problems over.  Who knows.  There is a reason why management wants to conserve money instead of plowing it into LSQ.  They certainly have enough to get the mill going, if they felt confident in going it alone.

 

This is just how I see things, but vision is always cloudy.  Even if they don't spend a dime of the Dresden cash, at best it supports the stock price where it is now.

[OptsyEagle]

Are the mills capitalizing their negative earnings as startup costs?

 

Share price aside it is interesting to look at the growth in book value over the past 5 years. Although I guess I'm just looking for a silver lining.

 

The losses at Thurso should be getting written off directly against revenues and the losses at LSQ are most likely being capitalized.

[OptsyEagle]

What do you guys think about the convertible debentures?  Almost 20% yield to maturity on this one today.

 

http://web.tmxmoney.com/quote.php?qm_symbol=FTP.DB

 

I know bond buyers are conservative but WOW, ... 20% !

[gokou3]

What do you guys think about the convertible debentures?  Almost 20% yield to maturity on this one today.

 

http://web.tmxmoney.com/quote.php?qm_symbol=FTP.DB

 

I know bond buyers are conservative but WOW, ... 20% !

 

I notice too.  What are the chances of not being made whole on this by 2016?  If one division (say Thurso) goes bankrupt, is the note affected?

 

I see in the debenture prospectus that the loan can be paid back in FTP shares, based on some VWAP formula when the debenture approach maturity. Is there any risk there of getting shares valued less than par?

[finetrader]

I see in the debenture prospectus that the loan can be paid back in FTP shares, based on some VWAP formula when the debenture approach maturity. Is there any risk there of getting shares valued less than par?

 

I am not an expert, but in the case of Yellow Media's restructuring, where the convertible debenture had the same kimd of clause concerning the loan paid back in shares, the debenture holders received about 5 cents on the dollar, while the senior received about 85 cents on the dollar.

 

So those convertible debentures have to be considered closer to equity than debt.

[OptsyEagle]

What do you guys think about the convertible debentures?  Almost 20% yield to maturity on this one today.

 

http://web.tmxmoney.com/quote.php?qm_symbol=FTP.DB

 

I know bond buyers are conservative but WOW, ... 20% !

 

I notice too.  What are the chances of not being made whole on this by 2016?  If one division (say Thurso) goes bankrupt, is the note affected?

 

I see in the debenture prospectus that the loan can be paid back in FTP shares, based on some VWAP formula when the debenture approach maturity. Is there any risk there of getting shares valued less than par?

 

The CV's I linked to mature on December 31, 2016.  Sure things could be pretty ugly by then if we don't get some upward movement in DP prices.  However,  I doubt they will be bankrupt by then, since they do have a lot of money from Dresden and are not planning on plowing it all into LSQ anymore.  Worst case scenario is that they have spent all the Dresden money by Dec.2016 and are still losing money operationally.  In that scenario I would imagine they would have a hard time refinancing the debentures so they would issue shares at maturity.  Yes, the shares would be tanking in this scenario as well, so for the common shareholders, it would be bye-bye from dilution, where the debenture holders would probably assume 99% of the equity of the company or something like that.  So the question is, would the assets of the company be worth enough to give you 68 cents on a dollar of debenture.  In the mean time you are getting almost 10% current yield.

 

Remember, that was the downside.  The upside is that everything works out to plan, Fortress starts making a crap load of money, at anytime within the next 3 years and you get about a 20% return on your money, 10% of it while you wait.  Maybe even a higher return if you can sell them around par or anything higher, before maturity.

[OptsyEagle]

I see in the debenture prospectus that the loan can be paid back in FTP shares, based on some VWAP formula when the debenture approach maturity. Is there any risk there of getting shares valued less than par?

 

I am not an expert, but in the case of Yellow Media's restructuring, where the convertible debenture had the same kimd of clause concerning the loan paid back in shares, the debenture holders received about 5 cents on the dollar, while the senior received about 85 cents on the dollar.

 

So those convertible debentures have to be considered closer to equity than debt.

 

You have a point here.  The IQ loans from the Quebec government would definitely have a senior call on the Thurso assets before the convertible debenture holders and right now, they are the only assets that have much value.

 

Maybe 20% YTM is the right price. Who knows.  I've never owned a bond so I suppose this may not be the one to start with.

[triedtestedand]

Current $105M IQ loan is at the Specialty Cellulose (i.e. Thurso) subsidiary level, tied against those assets, and is non-recourse to the parent.  If everything blows up, IQ would have first dibs on Thurso assets, but not parent co assets (including current cash and Landqart assets).

 

~$160M net proceeds from Dresden (cash sitting in an account in Switzerland) is at the parent co level ... i.e. IQ doesn't have dibs on that.  All of the debentures (~$134M worth - $40.5M public due 2016; $25M private due 2017; $69M due 2019) are at parent co level.

 

~$30M cash on balance sheet at end of Q1 ... not sure where it resides ... presumably a mix of parent co and subsidiary levels.

 

 

[SharperDingaan]

The debs are wholly unsecured, & subordinate to all other debt & trade payable. Interest is payable in stock at the company discretion, & deb holders agree to convert at $31.00/share. It has lost 31% of its value in the 1 year since they were issued, & the only reason the deb isn't lower is because it matures in 6.5 yrs.

 

If you dumped the deb at today's $68.51, & bought in the equivalent shares at today's $6.68, you could extract $47.00 per $100 of deb, less commission. If you simply reinvested the $47.00 in a 'real' bond with a 1.5% YTM, you could gain an roughly extra 71 bp for minimal risk.

 

FTP is capitalizing start-up costs, & burning a lot of cash. It is also highly likely that the asset sale was not voluntary, & that there will be a mystery disposition loss in Q2. A BV loss that may well  put these debs further behind, & trigger a downgrade.

 

Most would think they still have quite a way to drop yet  ;)

 

 

 

 

 

[OptsyEagle]

The debs are wholly unsecured, & subordinate to all other debt & trade payable. Interest is payable in stock at the company discretion, & deb holders agree to convert at $31.00/share. It has lost 31% of its value in the 1 year since they were issued, & the only reason the deb isn't lower is because it matures in 6.5 yrs.

 

If you dumped the deb at today's $68.51, & bought in the equivalent shares at today's $6.68, you could extract $47.00 per $100 of deb, less commission. If you simply reinvested the $47.00 in a 'real' bond with a 1.5% YTM, you could gain an roughly extra 71 bp for minimal risk.

 

FTP is capitalizing start-up costs, & burning a lot of cash. It is also highly likely that the asset sale was not voluntary, & that there will be a mystery disposition loss in Q2. A BV loss that may well  put these debs further behind, & trigger a downgrade.

 

Most would think they still have quite a way to drop yet  ;)

 

The CV's are subordinate but not to all debt.  They would be equal to unsecured trade debts, accounts payable, and most employee obligations.  In any event, they would be subordinate to the IQ loans with respect to the Thurso assets.

 

Also, I am pretty sure you are not going to see a mystery disposition loss in Q2.  They made a huge profit on Dresden, so you are going to see gain.  It will be understood as an extraordinary gain, but a gain all the same.

 

As for the voluntary issue.  FTP needed money.  With 20% rates on bond financing and even higher costs on equity, I will agree they had very little choice but to sell Dresden and they were very lucky to find the buyer they did.  That being said, I doubt there were forced in any other way.

 

They would be capitalizing all their expenses at LSQ, but all the other expenses, except capital improvements, at Thurso and Landqart would be expensed in each quarter.

[SharperDingaan]

The voluntary issue was strictly in respect to their business plan. While they did very well in the capital raise, & assuming the Dresden sale results in a big gain, they couldn't do the expansion unless they actually sold the Dresden asset. They needed the cash from sale to reduce  their borrow, & the gain on sale to raise equity to the point where they can carry the D/E ratio. Hence ... it was forced.

 

Smart move, but the Dresden gain had better be stellar to offset the operating losses & the usual misc. write-offs that are commonplace when an asset is sold. Most folks are not going to look at the nature of the debs; the focus will be on the size of the D/E ratio & their rate of cash burn.

 

[gokou3]

The debs are wholly unsecured, & subordinate to all other debt & trade payable. Interest is payable in stock at the company discretion, & deb holders agree to convert at $31.00/share. It has lost 31% of its value in the 1 year since they were issued, & the only reason the deb isn't lower is because it matures in 6.5 yrs.

 

I believe the conversion is at the option of the deb holders, not a mandatory conversion (in which case the deb should trade at much lower prices!).  Can someone else confirm?

 

Not quite sure about the situation with Yellow, but if the FTP deb is to be repaid in shares at maturity, the "conversion" price in such scenario should be much closer to the then market price then to $31.

[SharperDingaan]

Prospectus: 7.0% Convertible Unsecured Subordinated Debentures .....

 

Each Debenture will be convertible into Class A voting common shares of Fortress (the "Common Shares") at the option of the holder at a conversion price of $31.00 per Common Share (the "Conversion Price"), subject to adjustment in certain events

 

The payment of the principal and premium, if any, of, and interest on, the Debentures will be subordinated in right of payment, as set forth in the Indenture, to the prior payment in full of all Senior Indebtedness (as defined herein) of the Company and indebtedness to trade creditors and will rank pari passu with all other unsecured subordinated indebtedness.

 

The Indenture will not limit the ability of the Company to incur additional indebtedness, including indebtedness for borrowed money or from mortgaging, pledging or charging its properties to secure any indebtedness.

 

The Company may elect, from time to time, to satisfy its obligation to pay interest on the Debentures (the "Interest Obligation"), on an Interest Payment Date, by delivering sufficient Common Shares to the Debenture Trustee to satisfy the Interest Obligation in accordance with the Indenture (the "Common Share Interest Payment Election")

 

Not quite what they may seem to be ....

SD

[OptsyEagle]

The conversion is at the option of the debenture holder.  On the date of maturity, Fortress would have the option to issue shares instead of cash, to redeem the notes.  The number of shares issued would be based on the current trading price of the shares (not the $31).  If this happens, the common shareholders will be diluted into the stone age.  That is mainly because the market sees this in advance and the share price always tanks, many months before the maturity dates, based on this upcoming dilution.

 

I have seen this before, many times.  That is why I am not a big fan of CV financing.  At the time it always seems great.  Instead of issuing equity at the current price, they issue these at a conversion price 30% to 50% higher.  As long as the stock goes up, it all works out wonderful for the current shareholders.  Since shareholders always assume the stock will go up, they always applaud this type of financing.  I do not.  Convertible bonds are NOT equity.  If the stock goes down, they can become the biggest risk a company can face, so I don't mind them in small quantities, but many times companies become too dependant on them and they eventually become their demise. 

 

The last round of CV financing, should have been straight equity, even though the share price was considered very low at the time.  But, that is done.  At least Chad figured it out and stop issuing them.

[OptsyEagle]

Fortress issued a new updated presentation.

 

http://www.fortresspaper.com/images/pdfs/investor_relations/Fortress%20Powerpoint%20May%2027%202013.pdf

 

Anyone understand the graph on page 9.  Not sure I understand the difference between the constant price and the nominal price, in this graph.

[SharperDingaan]

Supposedly, real forecast demand (after US devaluation) is flat through 2016, then rises steeply for 3 yrs to 2019. Most would assume the price rise to be so uncertain, that it is unreasonable.

 

They are also expecting moderate & growing inflation through 2016, & aggressive inflation from 2016 through 2019. Conveniently, just about the time the debs mature.

 

We wish them well, but it looks like this thing is going to give them a nightmare.

 

 

 

[lessthaniv]

Company has cash for a tender offer, or perhaps open market stock purchases to be held in treasury to offset dilution. Cash has given them flexibility as long as the co-gen gets up and running and the DP line stabilizes.

[triedtestedand]

A contingency world view ... presuming DP price stays low ad infinitum and/or Chinese shut out one or multiple of US/Canada/Brazilian DP makers.

 

In 2010/2011, when Thurso was getting de-mothballed and producing NBHK, they had several quarters where they were producing ~60K tonnes/quarter.

 

At the time NBHK list prices were around $820/tonne, and in those quarters Thurso made $5M/qrtr EBITDA (~4M operating profit, where am presuming ~$1M/qrtr in amortization, and where it looks like Thurso was getting much less than list prices, on spot market probably).

 

NBHK list prices are now back around $860/tonne, with production in N. America somewhat tight(ironically, Sappi just converted a big NBHK mill in Cloquet MN to DP production ... spending similar amount as FTP).

 

Also, Chad's May 27th presentation indicates that co-gen will begin producing in Q2. So with only 32 days left, even in my cynical state, I'd hazard to guess it's pretty close, which then translates into ~$5M/qrtr itself.

 

Worst comes to worst ... convert back to producing NBHK, and you've got potential for $10M+/qrtr in EBITDA as an NBHK producer (where downside then turns to relating to NBHK market dynamics) ... in which case you have plenty to pay down IQ loan, and dividend some up to the parent annually.

 

Just a thought ...

[lessthaniv]

http://canadianinsider.com/node/7?menu_tickersearch=FTP+%7C+Fortress+Paper

 

 

[OptsyEagle]

http://canadianinsider.com/node/7?menu_tickersearch=FTP+%7C+Fortress+Paper

 

Director - Fortress Paper

 

Mr. Anil Wirasekara has been an Executive Vice President and Chief Financial Officer of Macdonald Dettwiler & Associates Ltd. since 1996. Mr. Wirasekara has over 25 years of financial management experience in the manufacturing, defence, aerospace and information technology industries. Mr. Wirasekara joined NetNation in 1992 as a Manager of Operations Accounting and Information. From 1988 to 1991, Mr. Wirasekara was Controller and Secretary of Rainex Limited, a Vancouver, British Columbia company involved in project development, technology transfers and international trade. He has served as a Director of Day4 Energy Inc. since December 6, 2007. He served as a Director of NetNation Communications Inc. since October 1999. Mr. Wirasekara holds the designations of a Chartered Accountant and Certified Management Accountant. He is also a member of the Chartered Institute of Management Accountants of the United Kingdom, the Chartered Institute of Marketing and Management of the United Kingdom in 1985, and the Institute of Chartered Accountants of Sri Lanka. He became a Chartered Accountant in 1983