Author Topic: FELP - Foresight Energy  (Read 289375 times)

Picasso

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Re: FELP - Foresight Energy
« Reply #10 on: March 21, 2016, 10:42:55 AM »
Nothing has changed from last week aside from not making the interest payment.  The funny thing is, SXC/SXCP should be getting hammered based on this FELP price action if the company is heading into bankruptcy.

I've bought more but there's a fairly big seller hitting all the bids and there's just no buyers (except me and a couple other clowns).  There's not a lot of investors in this company outside of Cline and Murray (maybe three) so someone wants out.  I'd be curious to find out if Fidelity has restrictions on owning stocks this deep into default but it feels like forced selling. 

The risk now is where Cline dilutes and by how much.  He can't dilute too much or he'll kill off the sponsor (Murray) but he needs to give the banks some assurance.  I don't think the various parties want to take this into bankruptcy but I can see how the defaults are nerve wracking for investors not looking at the incentives for Cline.  Cline can make a killing in various ways without overly diluting the unit holders.  I'm going to be really surprised if they file but hey anything can happen.


awindenberger

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Re: FELP - Foresight Energy
« Reply #11 on: March 22, 2016, 05:06:34 AM »
I agree, it doesn't make sense to bring this to BK. The question really is how much dilution will occur. Will the stock jump up when the deal is announced, or drop due to too much dilution.

bigbadwolf

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Re: FELP - Foresight Energy
« Reply #12 on: March 22, 2016, 11:08:11 AM »
Looking at the volumes it certainly feels like forced selling.  It will be interesting to see how this plays out.

Patmo

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Re: FELP - Foresight Energy
« Reply #13 on: March 23, 2016, 04:46:59 AM »
You bring some tasty ass trades to the board Picasso. I'll be following this company for a while, can't really bring anything to the discussion though

roark33

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Re: FELP - Foresight Energy
« Reply #14 on: March 23, 2016, 10:08:18 AM »
https://www.sec.gov/Archives/edgar/data/1540729/000156459016015070/felp-8k_20160316.htm

Another week long extension.  I think this is the third since I have been following it.  Usually means they don't file for bankruptcy, but the question is still how much the common is diluted. 

Picasso

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Re: FELP - Foresight Energy
« Reply #15 on: March 23, 2016, 10:44:17 AM »
I don't think there needs to be massive dilution at current prices.  Cline already owns 20 million units.  Let's say he comes in with $600 million of new cash in the form of 8% second lien debt.  Shares could easily be back at $5-6 which is worth around $100-120 million (to Cline) plus all the distributions at $13 million per year. 

He would have $48 million coming in each year from the new bonds.  Another $13 million from the FELP distributions.  And now have FELP stock worth at least $100 million.  If things get hairy with the business in the future, he will be in a position to be the fulcrum holder without throwing good money after bad.  He also owns 4.8 million unvested units of SXCP which can easily double when this is resolved.  Those are probably worth around $80 million plus another $100 million of seller financing to SXCP plus another $11 million of distributions per year.

So in that situation he gets to put in $600 million and get back $72 million each year just in distributions from FELP, FELP debt, and SXCP.  He would still have $880 million in mark to market FELP debt, FELP equity, SXCP equity, and SXCP seller financing.

Over ten years he'll earn over $700 million just from interest and distributions without taking on a ton of risk.  He'll still own 31% of FELP and have a free call option on the cycle turn (if it ever comes, but they're still very profitable at current levels).  He can plow most or all of it into new equity but I think that's a pretty nasty scorched earth policy.  Murray can sell him some assets in the future and he won't be in a position to pick up Murray assets in bankruptcy if he throws FELP into bankruptcy as well.  The logic of letting everybody burn over a technicality so you can come back in and pick up the pieces doesn't make sense to me.

That said I think you can dilute a fair amount and still get a price above $3 or $4.  I don't think dilution will get you down to $1 of fair value.

The problem is the debt holders know this and they are probably demanding par plus.  And honestly, they're right to ask for it.  I bet it gets settled really close to par...

PullTheTrigger

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Re: FELP - Foresight Energy
« Reply #16 on: March 24, 2016, 01:15:10 PM »
I'm asking for some education here more than anything because I'm not sure I understand the bankruptcy process and big picture here.

Are there any benefits for Cline or Murray if FELP is forced into bankruptcy? It would appear not, but I don't know the entire ownership structure of all the bonds. Murray just owns units, correct? So wouldn't he be at risk of total loss?

What is the upside for the bondholders forcing this into bankruptcy versus negotiating a settlement? What benefit would they get from taking control of the company? Would they gain control of the company at extremely low valuations with the intent to exit later with a recovery in coal prices?

Sorry if these are basic questions. Just trying to look at this from different angles.


Picasso

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Re: FELP - Foresight Energy
« Reply #17 on: March 24, 2016, 02:44:48 PM »
Murray and Cline own 80% of the units, no debt.  Murray would lose their entire $1.4 billion investment and Cline would lose his remaining 30% stake.  There were also cost savings of combining Murray with Foresight, so destroying Murray by bankrupting Foresight will also destroy a lot of the savings from having them work together.  Even if Cline thought he could pick up pieces of Foresight in bankruptcy, recreating the Foresight advantage is really hard.  He'd be starting all over again and it's unclear how much he could pick up in that kind of situation.  There's $300 million of senior bank debt in front of everyone so the recovery value for the note holders at $600 million might be tight during a fire sale.  One of the mines just caught fire for a second time, do they really want to be in this business long term without a solid management team running Foresight?  Will Murray or Cline be involved in a new Foresight if the bondholders wipe them out?  Will the market give new Foresight equity that has been swapped for notes a value well in excess of par?  I don't think the bondholders take a big win from bankruptcy unless they really, really want to be in the coal business long term and take a ton of new equity. 

If they negotiate a settlement, bondholders will make 40% or so.  If they don't, maybe some assets get sold to pay down bank debt (they can't sell Deer Run, it's on fire and they only own four key mines) and let's say this is worth half of what Murray paid back in 2015 minus some asset sales (the distribution was cut in half after all).  They might be lucky to make a similar 40%.  That's a lot of headache and work and there's obviously extra risks there.

So we have something that looks like this:

Door #1:  Cline can just come in and settle, make himself several hundreds of millions, the bond holders make their 30-40%, Murray lives to fight another day, and FELP shareholders get to see a 5 bagger from current levels.  It's not a $20 stock anymore but $5 is a lot better than $0.

Door #2:  Cline decides to take up sky diving this weekend and the parachute doesn't open on his first dive.  Bob Murray walks down into the various mines and lights them on fire.  The bond holders and banks get thrown into a nasty fight over what can be sold and what will be left and there will be no one to run Foresight during one of the most difficult environments for any coal business.

Door #3:  Nobody wants to give in and it gets thrown into bankruptcy anyway.  Cline doesn't want to make another billion dollars and thinks the billion he has is good enough.  Murray takes the last of his net worth and hires a hit man to take out Cline for being such a dick.

A lot can happen here, but door #1 seems most likely to me.

PullTheTrigger

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Re: FELP - Foresight Energy
« Reply #18 on: March 24, 2016, 02:51:27 PM »
Thanks Picasso!

BG2008

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Re: FELP - Foresight Energy
« Reply #19 on: March 24, 2016, 04:11:16 PM »
Fascinating idea - probably worth a 20-100bps flyer allocation.  I've been peripherally tracking the coal mining space.  Something about a leveraged equity in a distressed/flaming bag of poo type of industry attracts me.  But I think this is interesting in that there are imminent catalyst here.  I look at quite a bit of distress/bankruptcy situations.  Frankly, I think reading first day pleadings of bankrupted companies is great way to learn how companies get into trouble and help you to side step investment pitfalls, i.e. Pinnacle airline, Dolan Companies etc.   

There is a theory in these types of situations that having assets is worth than having no asset.  What do I mean by this is that if FELP was some sort of a services company, i.e. law firm, I Bank, Brokerage platform etc where the value is in the people and not the physical assets, I would be more certain that debt holder will want to settle.  This is counter intuitive, but it also makes sense as possessing a bunch of phones and customer list for an asset light business leads to less recovery than taking possession of a coal business that churns out cashflow.   

Given that FELP owns the coal mines, a competitor like Alliance Resource can come in and buy up assets during a BK process.  It also makes a ton of sense as FELP is actually in a lower cost position.  But it does have a flaming coal issue that Alliance doesn't.  In terms of game theory, I can see a situation where the debt holders say "okay, let's go into BK, we'll become the fulcrum security."  This is why it's important to check who currently own the debt.  If Wilbur Ross or Baupost own the debt that just defaulted, I would be very concerned as these guys are "loan to own" guys.  If it's still the original debt holder, then I think Picasso's arguments that these guys don't want to own a coal mine makes a ton of sense.  Sub $3 natural gas prices makes coal a hard sell to power plants and makes the conversion from coal to gas go much faster.  Coal in essence is a rapidly melting ice cube.  None of this is new information.  The market knows this and it's baked into the price.

I think there' s a price where just buy some and wait to see if it files or a deal gets done.