Author Topic: FELP - Foresight Energy  (Read 264177 times)

JRH

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Re: FELP - Foresight Energy
« Reply #1030 on: April 17, 2019, 05:52:01 AM »
The date on their report says 2018 even though the link says 2019.

Definitely isn't March 2019 - look at total assets listed at the bottom of the report vs. prior months.
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morob

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Re: FELP - Foresight Energy
« Reply #1031 on: April 17, 2019, 05:58:39 AM »
The date on their report says 2018 even though the link says 2019.

Definitely isn't March 2019 - look at total assets listed at the bottom of the report vs. prior months.

I already sent them a note to update the link.

PullTheTrigger

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Re: FELP - Foresight Energy
« Reply #1032 on: April 17, 2019, 06:43:06 AM »
The selling has to be more than just DDJ given roughly 4 million shares traded since late Feb. Maybe Accipiter. We'll find out about Accipiter in May.

Regardless, Picasso has an interesting point about the possibility of a buyout. It would seem to make financial sense from Murray's position if he could secure funding. What is Cline's perspective? Why would he sell now?


patience_and_focus

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Re: FELP - Foresight Energy
« Reply #1033 on: April 17, 2019, 06:52:21 AM »
The selling has to be more than just DDJ given roughly 4 million shares traded since late Feb. Maybe Accipiter. We'll find out about Accipiter in May.

Regardless, Picasso has an interesting point about the possibility of a buyout. It would seem to make financial sense from Murray's position if he could secure funding. What is Cline's perspective? Why would he sell now?

This may be a very naive question, but is it not possible that Cline group is also interested in purchasing shares in the open market (assuming that all the shares were traded in open market)? They must surely know that the equity price is undervaluing FELP and also must have considered the possibility of Murray trying to take over.

heth247

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Re: FELP - Foresight Energy
« Reply #1034 on: April 17, 2019, 10:29:06 AM »
Hi Guys, how do you get comfortable with the fact that FELP's 2L bond is going down to 78 now? What do those bond investors see that we don't see? They are not stupid.

Picasso

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Re: FELP - Foresight Energy
« Reply #1035 on: April 17, 2019, 11:25:55 AM »
Hi Guys, how do you get comfortable with the fact that FELP's 2L bond is going down to 78 now? What do those bond investors see that we don't see? They are not stupid.

The 2Lís have always been stranded in the capital structure since the 2017 refi. The company has taken cash to address the 1L repayments via sweep with the rest towards repaying equipment leases (the last of which run off this year aside from anything new they add for Deer Run in future years) and equity distributions. They should be buying that debt but they have this MQD problem and have maxed out allowable distributions to solve it. And not to mention any increase in leverage to take out minority holders will likely be senior to the 2Lís and further subordinate them.

In fact adding more leverage senior to the 2Lís would probably work nicely because it would free them up to acquire the 2Lís in the open market with excess cash instead of worrying about the MQDís. They could acquire each $100 million of liability between now and 2023 for less than $50 million between interest and principal reduction. And as they approach maturity with far less outstanding and the make whole provision getting back to par they could handle that refinance. If anything adding more senior leverage will help them pull in more value to their equity if theyíre able to reduce leverage by making open market purchases which they canít do right now without blowing up their MQD situation further.

Picasso

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Re: FELP - Foresight Energy
« Reply #1036 on: April 17, 2019, 03:18:18 PM »
Here's the math (cc: /r/theydidthemath)

My assumptions here are that EBITDA can be anywhere between 300-400 million by 2022. If you add $350 million of debt to take it up to $1.75 billion you are 5.8x levered on 2018/2019 numbers.

Get the 1L's to agree to a 75% cash flow sweep and the other 25% goes towards 2L repayment which can be done in the open market. Maybe have to bump up the rate 100 bps. No equity dividends unless they're levered under 4x or whatever.

From now until 2022 (the 2L's come due in 2023) they pay $75 million of 1L's and buy 2L's in the open market with what's left of their excess cash flow. Excess cash will probably ramp up a bit with Deer Run online but if it averages $100 million/year then leverage falls back to $1.35 billion and interest expense is back to where it is today. There have to be some other cost savings in there from removing some of the overhead and management contracts between the two co's.

If EBITDA is anywhere between $300-400 million in 2022 and you give it a 5-6x multiple then their equity stake will be worth anywhere between $150 million to $1 billion with 3.4-4.5x leverage.

If they don't do this and just keep up with the status quo then by 2022 the arrearages go up to $9/unit. That's an additional $720 million sitting in front of the subordinated equity stake minus whatever they are able to pay in distributions between now and then. And you have more debt to refinance because you had to worry about making those dividend payments instead of buying the 2L's. That subordinated stake is worthless unless EBITDA is somehow $500 million or something along those lines.

Not to mention the idea of being a public coal yieldco is crazy at this point (look at the cost of capital across the entire space). And it's even harder to deal with debt paydown when you're a partnership structure. There is absolutely no reason for this to be a public company at this point. They tried paying a dividend but the market doesn't care. So the best way to deal with that is take it private and when market conditions are better take it public again if need be. Not to mention having a public yield co with no float is another terrible idea. You need a vehicle like this to have way more liquidity to be put in passive index funds or get any analyst coverage. They can't fix that unless they take care of the MQD's because you can't issue shares down here.

There's $150 million to $1 billion or more of capital sitting there waiting for the sponsor to have a shot at. What better time than when some bondholders decide to pressure the stock back to prices that make a deal manageable and there's some uncertainty around their business.
« Last Edit: April 17, 2019, 03:25:38 PM by Picasso »

gadfly

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Re: FELP - Foresight Energy
« Reply #1037 on: April 17, 2019, 06:56:45 PM »
Here's the math (cc: /r/theydidthemath)

My assumptions here are that EBITDA can be anywhere between 300-400 million by 2022. If you add $350 million of debt to take it up to $1.75 billion you are 5.8x levered on 2018/2019 numbers.

Get the 1L's to agree to a 75% cash flow sweep and the other 25% goes towards 2L repayment which can be done in the open market. Maybe have to bump up the rate 100 bps. No equity dividends unless they're levered under 4x or whatever.

From now until 2022 (the 2L's come due in 2023) they pay $75 million of 1L's and buy 2L's in the open market with what's left of their excess cash flow. Excess cash will probably ramp up a bit with Deer Run online but if it averages $100 million/year then leverage falls back to $1.35 billion and interest expense is back to where it is today. There have to be some other cost savings in there from removing some of the overhead and management contracts between the two co's.

If EBITDA is anywhere between $300-400 million in 2022 and you give it a 5-6x multiple then their equity stake will be worth anywhere between $150 million to $1 billion with 3.4-4.5x leverage.

If they don't do this and just keep up with the status quo then by 2022 the arrearages go up to $9/unit. That's an additional $720 million sitting in front of the subordinated equity stake minus whatever they are able to pay in distributions between now and then. And you have more debt to refinance because you had to worry about making those dividend payments instead of buying the 2L's. That subordinated stake is worthless unless EBITDA is somehow $500 million or something along those lines.

Not to mention the idea of being a public coal yieldco is crazy at this point (look at the cost of capital across the entire space). And it's even harder to deal with debt paydown when you're a partnership structure. There is absolutely no reason for this to be a public company at this point. They tried paying a dividend but the market doesn't care. So the best way to deal with that is take it private and when market conditions are better take it public again if need be. Not to mention having a public yield co with no float is another terrible idea. You need a vehicle like this to have way more liquidity to be put in passive index funds or get any analyst coverage. They can't fix that unless they take care of the MQD's because you can't issue shares down here.

There's $150 million to $1 billion or more of capital sitting there waiting for the sponsor to have a shot at. What better time than when some bondholders decide to pressure the stock back to prices that make a deal manageable and there's some uncertainty around their business.

I don't see how there is any appetite for a deal like this. You're asking term loan guys to take high yield/equity risk and the forcing 2L guys to take straight up equity risk -- if volumes out of Hillsboro aren't placed at decent margins, or there is an operational hiccup, excess cash flow could certainly disappear.  Something like this does make sense for Murray, but I just don't see how it flies at a DoubleLine IC meeting. 

I guess you can say FELP is on the lowest part of the cost curve and ILB has a more favorable outlook than other basins so the market should allow more leverage, but this is coal mining after all and 5.8x seems excessive.  Look at Arch and ARLP -- Arch has negative net debt and is on track buy back 40% of its stock by the end of the year; Joe Craft from ARLP mentioned that he views low debt as a strategic advantage and doesn't plan to increase leverage anytime soon. I guess Murray is a leverage/banking fee junkie, but part of me thinks he may have mentally written his FELP sub units to zero and just wants to bide time collecting his MSA and hope for a bullish market to make a move. 

Murray and FELP are great operators and have survived high leverage because of their performance and asset quality, but I think we're at a point now where you can't assume their will be reasonable refi options for highly levered thermal players.


Picasso

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Re: FELP - Foresight Energy
« Reply #1038 on: April 17, 2019, 11:59:49 PM »
Sure but keep in mind the 2017 refinance had a lot of unrestrictive aspects to it to give them flexibility to make dividend payments and access a $170 million revolver. If Murray has written his sub units down to zero then why bother making any of the $35 million of dividend payments they've made since 2017. They could have just paid down debt and let all the equity holders suffer together while waiting on better days. Or they could have let someone else put in the $60 million of cash to take on the common units during the 2017 refi knowing they had little path to take care of the MQD's. And they could have let the PIK note redeem for equity instead of refi that out.

If they wait for better days to make a move then there would be no reason for the minority holders to sell because the market wouldn't have the units trading for $1.60.

I've seen a number of issuers where they are perennially levered 5-6x but they keep throwing out bones to the creditors to handle a refinance because it's too messy to actually restructure or sell the thing in court if they have a habit of continuing to pay. That's why I say they could change the cash flow sweep to 100% and bump the rate to get the deal done.

The 2L's are more like unsecured bonds if things get bad. They say they're 2L but there's nothing under them. With $800 million of 1L debt in front of it and if EBITDA takes the kind of hit one would be worried about they're not in a great position with comps like Alliance trading in the 4x EBITDA range. The second they were issued they were essentially the equity and cross your fingers tranche if things went bad. I've always liked the 2L's because I didn't think the bad outcome was anything more than low probability but getting primed was always the risk with owning them.

Overall I think my point is that the company has a solid case to go to creditors and say they can better handle their creditworthiness by taking out the current equity structure and focusing solely on debt paydown instead of doing what they're doing now. It's not so much that this company should or shouldn't be public, it's that the equity structure makes no sense given the situation.

PullTheTrigger

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Re: FELP - Foresight Energy
« Reply #1039 on: April 18, 2019, 04:08:39 AM »
DDJ still had 646k shares in March. Perhaps theyíve accelerated selling since.