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

[Liberty]

Liberty ... welcome back.

 

Thanks. To be clear, I'm not back in the stock, but I do keep an eye on the thread. :)

[lessthaniv]

Fortress Paper does not say why share is up

 

2015-05-12 13:46 ET - News Release

 

 

Mr. Chadwick Wasilenkoff reports

 

FORTRESS RESPONDS TO RECENT MARKET ACTIVITY

 

Fortress Paper Ltd., at the request of the Investment Industry Regulatory Organization of Canada, on behalf of the Toronto Stock Exchange, wishes to confirm that it is unaware of any reason for the increase in market activity in the company's stock today. On May 7, 2015, Fortress Paper released its financial results for the fiscal quarter ended March 31, 2015, which are available on SEDAR.

 

 

[jose]

Fortress Paper does not say why share is up

 

that should take the edge off of whatever's going on.

[sculpin]

Share price is reacting to the fact that fundamentals are slowly improving. Market cap is around $50MM on a business that could be generating $300 to $400 million in revenue with EBITDA of about that $50MM at some point in the intermediate future.

 

As well, there are always those "liquidity event" potential transactions which Chad states continue to keep the Company and insiders blacked out.

[lessthaniv]

Anyone else notice that Goldman has been sitting on the bid for days now? Wondering what their accumulation has been since the quarterly.

[sculpin]

Greece must stop hoping for a miracle - it needs to leave the euro

 

The best way for Greece to relearn the importance of economic orthodoxy is for it to test to destruction its own monetary policy, its own tax system and its own-self imposed rules.

 

http://www.telegraph.co.uk/finance/economics/11644762/Greece-must-stop-hoping-for-a-miracle-it-needs-to-leave-the-euro.html

 

Grexit and the mysterious case of the near doubling of Fortress Paper shares

 

TIM SHUFELT - INVESTMENT REPORTER

The Globe and Mail

Published Friday, May. 15 2015, 6:22 PM EDT

Last updated Tuesday, May. 19 2015, 6:30 AM EDT

 

http://www.theglobeandmail.com/globe-investor/investment-ideas/spike-in-fortress-paper-stocks-may-be-built-on-shaky-foundation/article24463037/

 

A mysterious spike in the shares of a small Canadian pulp and paper stock is rumoured to foretell an exit of Greece from the euro zone.

 

Fortress Paper’s stock has taken off in recent days despite the lack of any material catalyst, aside from speculation the company is positioned for a deal to print new Greek banknotes.

 

Greece would only require such a service, of course, were it to withdraw or be expelled from the European Economic and Monetary Union, a fate the country may yet avoid.

 

Linking the stock’s near-doubling to the potential return of the drachma is pure conjecture, but it’s gotten some attention in the absence of any major improvement in Fortress’s operations, its financials or the market it serves.

 

“There isn’t any reason to get super-encouraged,” said Mark Kennedy, an analyst at CIBC World Markets who covers the stock.

 

A portion of the surge in share price may be explained by modest improvements in the woeful global market for dissolving pulp, Fortress’s core line of business.

 

But this is not the first time a spike in Fortress’s trading activity coincided with an escalation of the Greek debt crisis.

 

Now, as then, the country’s financial outlook is bleak.

 

The Greek government was recently rebuffed in both its requests for loan forgiveness on its €330-billion ($450-billion) debt load, and for the postponement of recent debt repayments.

 

This week, Greece resorted to emptying an emergency International Monetary Fund reserve account to make a €750-million loan repayment to the IMF itself.

 

Some economists have called for Greece to introduce a parallel currency or return to the drachma should it default on its debt and/or leave the currency union. Its tenuous financial position doesn’t preclude either outcome.

 

Which is where Fortress Paper could, conceivably, come in.

 

The company’s Swiss subsidiary Landqart AG makes the security paper on which the Swiss franc is printed and it has produced the euro for 10 different countries. “The product they make is phenomenal,” said Daryl Swetlishoff, an analyst at Raymond James. “It’s the best on the market.”

 

In June, 2012, Fortress’s stock jumped by 42 per cent over two trading days after it announced it “had a material banknote order reinstated.” At the time, the sovereign debt crisis was roiling and the term “Grexit” had just entered the global financial lexicon.

 

Fast forward almost three years: Greece is again nearly out of cash, and Fortress’s share price makes another big move. The website Zero Hedge noted the coincidence, leading to speculation that the Greek drama is fuelling a speculative rally in the stock.

 

At the request of the Investment Industry Regulatory Organization of Canada, Fortress issued a statement on Tuesday indicating it is “unaware of any reason” to substantiate a 92-per-cent increase in share price over the previous five trading days, its stock breaking through the $4-mark for the first time in more than a year.

 

Days earlier, Fortress had reported its first-quarter earnings, but there was little in there to ignite the passions of investors.

 

Fortress reported a net loss per share from continuing operations of $1.61, reflecting the perpetual disappointment that is the company’s dissolving pulp mill in Thurso, Que.

 

A repurposing of the Thurso mill a few years ago was supposed to vault the company to a position of global leadership in the production of dissolving wood pulp, the main ingredient in rayon.

 

Rayon can be used as a substitute for cotton, the price of which soared past previous record highs in 2011 after a series of global supply shocks. The clothing industry was eager for a lower-cost fibre to help meet new demand for textiles emerging from China.

 

Dissolving pulp prices rose to $2,500 (U.S.) per tonne, making Thurso a potentially lucrative undertaking once a $240-million retrofit was completed. It was a compelling story and investors pumped the company’s stock to a high of $62 in early 2011.

 

Then everything went wrong for Fortress. The mill conversion was a train wreck. New producers of dissolving pulp popped up, flooding the market with supply. China imposed duties on dissolving pulp out of Canada, the United States and Brazil of between 13 per cent and 24 per cent. Cotton fell back to its historical price range, and dissolving pulp prices plunged to the $800-per-pound mark.

 

All of which combined to crush Fortress’s stock, which lost 98 per cent of its value over the four years or so after peaking.

 

It’s a stretch to say things are looking up. Fortress is forecasting lower production costs, but the Thurso mill is still losing money. The economics of dissolving pulp may be improving slightly, but prices remain near trough levels.

 

So, could it be Grexit speculation lifting Fortress shares? “I don’t know if I can make that leap,” Mr. Swetlishoff said. Alternatively, since the company has “massive leverage” to the dissolving pulp market, even slight upticks in the commodity price can have disproportionate effects on share price, he suggested.

 

Ultimately, it’s impossible to rule out Greece as a catalyst for a stock move that seems to defy a dissolving pulp market in an indefinite slump.

 

“It’s more of a hope trade than anything else, I would say,” Mr. Kennedy said.

[lessthaniv]

http://www.supplymanagement.com/news/2015/rayon-producer-commits-to-forest-protection-policy

 

This may help Fortress in the long run by placing a premium price on dissolving pulp sourced from non endangered forests. Hopefully other producers follow suit. 30% is a significant portion of the market currently sourcing from endangered forests.

[Keemochi]

$300m for Thurso sounds a little high to me ... they've sunk about $320m of capex into Thurso since 2010, and this industry doesn't earn its cost of capital over time so I'd want a discount to invested capital

 

That said ... it really hinges on your outlook for dissolving pulp prices.  industries like this tend to overshoot in either direction, and when prices spike those animal spirits really kick-in in the executive suites (of potential acquirers)

 

around 2010/2011 there was a huge spike in DP prices.  this led to a huge supply increase which has been hitting the market for the past several years.  2015 will likely be the first year in a while that demand growth will outpace supply growth.  2016 will be a similar story, given the lead-time required to bring on new capacity and a limited number of projects in the pipeline.

 

Looking further out to 2017+ , the cost per tonne to add new capacity may go up significantly since there are only so many old pulp mills that are suitable for conversion to DP and this recent wave of supply used up most of those suitable mills (or so I've read).  it's a lot more expensive to build from scratch.

 

The ~4-10x upside on the equity is probably sufficient compensation for the risk... but I like lay-ups, thus my only exposure at this point is the 2016 debentures.

 

Hi mr. Krusty,

 

Thanks for your suggestion on the 2016 debentures, I agree with your view that the 16 debs offer a more attractive risk reward profile vs the common equity in an interesting deep value play. However there is just one thing in the offering prospectus that's preventing me from reaching a high conviction on this idea and go in with a big position. 

 

Under Payment upon redemption/maturity, it states that

"The Company may, at its option, on not more than 60 and not less than 40 days prior notice and subject to

applicable regulatory approval, elect to satisfy its obligation to pay the principal amount of the Debentures which are

to be redeemed or the principal amount of the Debentures which are due on the Maturity Date, as the case may be, in

whole or in part, by issuing freely tradeable Common Shares to the holders of the Debentures."

 

And additionally under Risks Related to the Offering - Repayment of the Debentures:

"The Company may, at its option, on not more than 60 days' and not less than 40 days' prior notice and subject to any required regulatory approvals, unless an Event of Default has occurred and is continuing, elect to satisfy its obligation to repay, in whole

or in part, the principal amount of the Debentures which are to be redeemed or which have matured by issuing and

delivering Common Shares to the holders of the Debentures. There is no guarantee that the Company will be able to

repay the outstanding principal amount in cash upon maturity of the Debentures."

 

Given that the current mkt cap of FTP is only approx. $60mm, it would obviously be very disastrous to receive payments in the form of shares. Additionally, it does not indicate anywhere under Events of Default that doing so would trigger a defaulting event either (assuming obligations for other securities are satisfied), so it wouldn't even be possible for holders of this security to attempt to force a cash payout in bankruptcy courts.

 

Now I know CEO Chad has a very large personal stake in the common equity and obviously would not want to see his stake diluted by more than 50 pct, and as you and others on this board have reiterated, significant debt obligations notwithstanding, the company appears to have sufficient liquidity to last past 2016. But there is still the possibility of a cash crunch and I think he would much rather choose share issuance over bankruptcy courts.

 

Maybe there is a simple answer to why such a scenario is highly unlikely (or impossible  :D) to materialize, so I apologize if this is a noob question - I am quite new to this  :) 

 

Would love to hear your thoughts on this and thanks again for the idea,

-K

 

[OptsyEagle]

Just so you know, those terms you quoted are on about every convertible debenture offering in the market place.  It is quite common to allow a company to pay the maturity value of the convertible bonds with shares instead of cash.

 

That is the main issue facing this company if the amount of money they get for their dissolving pulp does not increase and they run out of cash.  As we get closer to the maturity dates on those CVs, the stock market will start to price in the risk of the dilution caused by the maturity of the CVs Fortress possesses.  The share price will then start to decline on this uncertainty.  Since the price the CV holders will get is an average of some price that the stock is trading at, in and around the days before maturity, not only will common shareholders get diluted into the stone age from this conversion but since the share price will trade very, very low due to this uncertainty, you will find that pretty much the entire company will be given over to the CV holders via dilution and the common shareholders will be pretty much wiped out.

 

This happens time and again.  When FTP was issuing those debentures and everyone was cheering that they raised the needed capital without having to issue stock at what was believed to be a low stock price at the time, I was advising caution.  I mentioned in a post a few years ago that convertible debentures are a two edge sword.  If everything works out, they are a much better way to finance operations, then issuing straight equity.  However, if things go wrong they are the death knell to a company.  You get a better deal by issuing them but along with it can come great risk.  I suspect my point will be observed in December of next year...unless things get better darn quick.

 

Now back to your question.  The good news to the CV holder is that they get shares equal to the maturity value of their bonds, no matter what price they trade, at the time.  So if you have $10,000 of bonds and the stock is at a $1 you will get 10,000 shares.  If it trades at $0.50, you will get 20,000 shares.  This all sounds fine and safe, especially if you are buying the bonds at $0.50 to the $1.00.  The problem is the CV holders are not overly interested in the stock.  So if the stock trades at $0.50 and you get 20,000 shares for your $10,000 worth of bonds that you only paid $5,000 for, you might say, hey I will just sell my shares and bank my profit, plus all the interest payments I get.  That would be a very good plan if you were the only one coming up with it.  The problem is just about everyone that holds the CVs will be implementing that very same plan as well, at the very same time.  So when they announce that you will get 20,000 shares priced at $0.50, you will see the stock start to drop to $0.40, then $0.30, then $0.20, etc. as the CV holders short the stock before they get their hands on the converted shares and the others sell them as soon as they do.  All of a sudden the CV holders are losing money along with the common shareholders, except for a few that might work for Goldman Sachs who might be able to short shares they don't have in extremely large quantities without the concern for margin on such a volatile and low priced stock.  You will not have that advantage.

 

All that being said, the CVs are a little safer then the common shares but it is my opinion that if dissolving pulp prices do not rise, everyone is taking a bath, common shareholders and convertible bond holders as well.

[OptsyEagle]

This mechanism is only used when the share price is very low (or better put, the share price is low because this mechanism is about to be used).  If the stock was at $100 the CV holders would convert it themselves.  Actually FTP would have forced the conversion much earlier to save the interest payments.

 

No, this mechanism is ONLY used when the company has almost no other options and everyone loses money.  Common shareholders lose almost everything and CV holders usually lose considerably less...but still lose money.

[SharperDingaan]

We hold some of these debs, & bought them at close to the bottom, for exactly this reason. You need to think of them as structured options where every 6 months you will receive a large payment - if you are successful.

 

The firm, and its existing shareholders, are strongly incentivised to see to it that you get paid in cash - and not stock. Worst happens, your $50 investment get matured out at $100, and you collect the 13% cash yield every month.

 

As deb holder, you may well actually prefer default; as following dilution you will now own the firm; and it may now be profitable without the interest charge. You  enjoy the positive cash flow and use the opportunity to liquidate the assets & pay yourself a tax-free return of capital dividend.

 

The reality though is that while the uncertainty exists the price of both the stock and the deb tank, in the manner already pointed out. The common interim solution is a haggle for additional goodies in return for an extension.

 

Lots of ways it could go, but you need to have the patience to let the mechanics work themselves out.

 

Good luck to all.

 

SD

 

 

[OptsyEagle]

Worst happens, your $50 investment get matured out at $100, and you collect the 13% cash yield

 

Are you kidding.  That is actually the best case scenario and certainly very far from the worst.  The worst is that they declare bankruptcy before the next interest payment.  In that scenario the CV holders would lose just about everything.  With the cash they have in the bank, that scenario will not happen but the one I described above should be a real concern.

 

 

[alertmeipp]

 

 

U have to remember lsq loan are on Thurso.

Worst case is cv holders will get landquart

 

Dp price seems firming up,  btw. 

 

[jose]

Dp price seems firming up,  btw.

 

What's the price at nowadays?

[misterkrusty]

Keemochi- 

 

Thanks for your question and thanks everyone for the insightful replies.  first off, I believe this provision was inserted because the company was hoping to take advantage of a high share price ... remember that the equity was trading in the $30s when the 2016s were issued.  I don't think it was intended to serve as a kind of emergency parachute should Fortress not have sufficient cash at 12/31/16.  It's certainly possible they could be used as such, but as someone else pointed out, Fortress would probably only equitize the debentures as a last resort since it would effectively wipe out the current shareholders and the CEO owns ~17% of the shares.

 

All that said, I'm not overly concerned about this possibility.  As someone else pointed out, the # of shares that would be created will increase to offset whatever drop occurs to the share price.  I've gone through the mechanics of such an event and assuming a constant EV with $40.25m less debt at the holdco and came to the same conclusion as Alertmeipp - the 2016 holders basically wind up owning Landqart (plus whatever cash and securities are left at the holdco ... presumably less than $40.25m in this scenario ... offset by the 2017 and 2019 converts which total $94m)

 

By the way, the price is currently 71.49  http://web.tmxmoney.com/quote.php?qm_symbol=FTP.DB&locale=EN

[SharperDingaan]

Keep in mind that all the debs are unsecured, there are no floating claims on the assets, and that the later issues of debs are effectively subordinated debt. Should the first round of deb holders end up with control via a forced debt to equity swap, there is nothing to prevent them from buying in the later deb issues at well below 100, swapping for additional equity, and liquidating. The liquidating entity will not be paying back 94M of converts.

 

SD

 

[sculpin]

It’s more likely that investors think Fortress will benefit if, as the firm has suggested, it sells and leases back its seven-hectare Swiss site, which could raise between $100 million and $130 million, Kennedy said.

June 15, 2015

 

Fortress Paper stock bounce caused by more than turmoil in Greece, analyst says

 

By Peter Kuitenbrouwer

 

Even as Greece teeters on the brink of leaving the euro after 16 years, one analyst suggested that renewed interest in Fortress shares has nothing to...

 

Shares in Fortress Paper Ltd., the Vancouver-based company, have bounced more than 50 per cent in the last three months amid speculation that, should Greece leave the eurozone, Fortress's mill in Landquart, Switzerland is well-placed to win the contract to supply paper for a new version of Greece's historic currency, the drachma.

 

The Landquart mill, in eastern Switzerland near the Austrian border, produces security paper for the Swiss franc; ten governments in the eurozone use Fortress's paper to print the euro.

 

"There is speculation in the marketplace," agrees Irwin Michael, a Toronto-based investor whose ABC Dirt Cheap Stock Fund held a position in Forest Paper until recently. IA Michael Investments Counsel still owns Fortress Paper bonds.

 

Chad Wasilenkoff, the chief executive of Fortress Paper, said from London, England on Monday that his company has no deal to supply bank note paper to Greece.

 

"In the event that Greece were to pull out of the euro, the Greeks would require their own currency, and we as a supplier would be interested in tendering on that," he said. "But it would be up to Greece to put out a tender."

 

Even as Greece teeters on the brink of leaving the euro after 16 years, one analyst suggested that renewed interest in Fortress shares has nothing to do with the Greek situation.

 

"That's more of a red herring than anything else," said Mark Kennedy, a CIBC forest products analyst based in Calgary. "Ten companies in Europe produce bank notes. There is no guarantee that Fortress would get the business. And the security paper mill in Landquart is sold out for the next couple of years."

 

It's more likely that investors think Fortress will benefit if, as the firm has suggested, it sells and leases back its seven-hectare Swiss site, which could raise between $100 million and $130 million, Kennedy said.

 

"This would give them capital to repay debentures when they mature," Kennedy said.

 

Wasilenkoff said, "We have not talked to any buyers, but it would be a very attractive opportunity."

 

Fortress shares peaked above $60 on the TSX in 2011 during a wild ride for the price of dissolving pulp, a wood-based fibre used to produce rayon, which Fortress makes at its mill in Thurso, Qc.

 

Then the price of dissolving pulp crashed, and the government of China slapped a 13 per cent duty on imports from the Thurso mill. Plus Fortress mismanaged the conversion of the Thurso mill to dissolving pulp, with cost overruns of $100 million. The Quebec government recently extended the term on its $102-million loan to Fortress. The company must now repay the money by 2026.

Fortress shares languished, but have risen in the past month, cresting last week at $4.65.

[jose]

It’s more likely that investors think Fortress will benefit if, as the firm has suggested, it sells and leases back its seven-hectare Swiss site, which could raise between $100 million and $130 million, Kennedy said.

 

Seems like a much better explanation for the bump, even if just speculative at this point. Not that Mr. Market always has an explanation.

[misterkrusty]

Has anyone else not yet received their interest payment from the 2016s?  I do realize this (July 1) is Canada Day and the banks are closed, but I thought this was supposed to go out on june 30th ... right? 

[lessthaniv]

misterkrusty

 

My 2016 interest payments have been received and were processed on the Jun 30th.

[misterkrusty]

who is your broker?  mine is Schwab and I'm in the US, so maybe it's held up at the DTC or whatever.

[lessthaniv]

I'm Canadian and use Credential Direct

[obtuse_investor]

Shareholder vote results have been posted... resolutions #3 and #4 were defeated by a thin margin.

 

See attachment.

document.pdf

[sculpin]

Raymond James

 

 FTP.DB (6.5% ’16, X=$37.50, Size $40mm, YTM 30%) and FTP.DB.A (7% ’19, X=$31, Size $69mm, YTM 30%): I haven’t said this in some time but I would own these here. Both are trading on a similar YTM of about 30% but I would lean toward the ‘19 cvts as they are trading 20 points lower and as the balance sheet strengthens they should be the greater short term beneficiary of a tightening of the credit. Also, if the ‘16 cvts are restructured or refinanced in any form the ‘19 cvts will benefit as well. One of the reasons for the ‘16’s trading tighter is a view that in a bankruptcy process they will receive a greater recovery value. I’ve made a few inquiries and this does not appear to be certain. However, a case can be made for either, obviously the ‘16’s are where the companies attentions will be focused over the next 18 months. Some  other key points on why to own either of these cvts here:

 

o Landqart (Security paper business) has been progressing over the last couple years with waste rates coming down and its now having record months with a 2 year backlog currently in place

 In the process of trying to improve the company’s liquidity position they were at one time looking at an inventory backed facility with a European bank which might have raised $10-20mm but they wanted land security as well so FTP had the land appraised. Now it appears there is the potential for a $100-130mm sale leaseback agreement based on the value of the land.

 A sale leaseback agreement would see FTP pay 4-5mm Swiss Francs per year in rent in exchange for the upfront payment

 This would certainly be a great way to surface value and reduce debt particularly given no one has ever given them this much credit for these assets

 Ultimately FTP could sell the business separately if it chose to once the sale leaseback was completed

 However, its not likely we’ll see anything materialize in the short term (i.e. next month) as structuring the deal will take time so something closer to the end of the year might be achievable

 

o Thurso (Disolving pulp business) appears to be operating more consistently with longer runs between stoppages and fewer and smaller hiccups when they do occur, that being said, they’re probably due for one shortly

 pricing has also been better lately and costs are coming down so overall a net positive; however,

 If the Europeans start to see duties imposed on their product then pricing could get more interesting

 

FTP shares have been running as well recently having double over the last 2 months – a healthier equity is obviously healthy for the cvts and leaves the company with more optionality. Again, this company is quietly turning the corner . . . 

 

[sculpin]

Cdn $ sitting around the $1.30 level. Should help much with the margins on the dissolved pulp. Expect Q2 early August. Other catalysts....