Anonymous Billionaire - is he trading Brazil stocks or call options?

Stymie said:
Today there is a good example of an oil company coming out of chapter 11 bankruptcy. The symbol is $BAS. The news says that existing common stock holders received both new stock and warrants. Here again, people before the opening were confused that this was the old shares. They paid over $110 instead of $35. The NASDAQ has announced that they reviewed the trades and they will stand as executed. If you had the new shares, you could have sold them before the opening to these other confused people. It's crazy that NASDAQ approves of this but live by caveat emptor. In all likelihood, Goldman Sachs sold the shares and told NASDAQ not to unwind the trades. Didn't have any of this one. Damn!

The plan equitized over $800 million of unsecured debt, eliminated over $60 million in annual cash interest, and raised $125 million of new capital, the company said. Existing shareholders will receive new common stock and warrants in the reorganized company.
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So technically they got equity but the shareholders went from owning 100% of the company to owning .5% (.26% after a mandatory convertible note conversion), so it was really a token amount of equity. They lost 99.74% of their ownership of the company in the bankruptcy. These kind of token gestures to shareholders aren't uncommon, but effectively meaningless.

From the company's restructuring page (http://basicenergyservices.com/about-us/restructuring.html)
"Provide the Company's existing shareholders with a recovery in the form of 0.5% of reorganized Basic's equity on the Effective Date (which will be 0.26% of the total outstanding equity in reorganized Basic upon conversion of the new mandatorily convertible notes assuming such conversion occurs 36 months after the Effective Date) and 7-year warrants to acquire an additional 6% of total outstanding equity in reorganized Basic (after giving effect to the conversion of the new mandatorily convertible notes)"
 
The part of these reorgs which is more common than people think is the amount that management get as part of the restructuring. They typically are given stock options equivalent to all the common shareholders combined. In this case, they also get .5% of the new equity.
The real value of those shares depends on what is left after wiping out all the debt and cash provided due to all the actions taken. The numbers are not big for those who bought stock on the last day of trading and the management tend to be the big winners out of all of this. I don't know how common it is for the management to get paid big bonuses for sticking around after they bankrupt their own company? Why judges approve these management comp schemes is like giving a drivers license to the guy who caused a head on collision cause no one else wants to get behind the wheel of his wrecked truck??
 
dealmaker said:
In 1939 Sir John Templeton bought 104 stocks that were trading on NYSE under a $1, 37 of which were in bankruptcy. 5 years later when he liquidated his position 100 out of 104 were profitable bets...This was in the book "The Lessons of Great Minds of Investing". Buying "when there is blood on the streets" is a tried and true strategy.
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Do you have a link to this book on amazon?
 
I would imagine that statistically most penny stocks have to be overpriced (just like most options are). Makes you wonder what information advantage one has to have to achieve a high success rate in this strategy
 
I think it is Great Minds of Investing by William Green. No kindle version, expensive, and does not get good reviews. Talk is interesting on youtube
 
sle said:
I would imagine that statistically most penny stocks have to be overpriced (just like most options are). Makes you wonder what information advantage one has to have to achieve a high success rate in this strategy
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I would think there is a congruence of forces which change the risk profile for these type of trades.
A summary would be:
1. The asset management community liquidating a stock below $5.
2. The exchange threatening removal when trading below $1 for six months.
3. The analysts and auditors refusing to vouch for viability of business causing sell recommendations.
4. The board talking down the stock so they can get more stock options when they come out of a restructuring.
5. The risk profile of the company changing such that there is a wholesale liquidation of current shareholders to a new liquidity provider profile looking at whole business.
6. The inherent value of having a stock market listing for asset injections minus liabilities.

But having said that, like options, most will be worth less than zero so there is the question of picking the right stock at the right time when most are short but now want to be long.
There must be a liquidity event (New shareholder) or takeover to get a listing status for other unrelated assets.

So, if John Templeton were to announce that he was buying a penny stock and provide the much needed capital to survive, how would the stock do anything but go up? If like Buffett, he would get actively involved and put them on notice to perform or get sacked.

This is what these hedge fund managers do over breakfast and lunch meetings today. They all agree to buy one company and the stock can only go up as long as they are providing liquidity. Look at the quarterly declarations and you'll notice the friendly guys are buying the same stocks...Then like Ackman with Valeant, they end up on the board when stock not performing and trying to find new ways to get their money back. It clearly doesn't always work out for them....Can't con a conman or can you?
 
Stymie said:
The part of these reorgs which is more common than people think is the amount that management get as part of the restructuring. They typically are given stock options equivalent to all the common shareholders combined. In this case, they also get .5% of the new equity.
The real value of those shares depends on what is left after wiping out all the debt and cash provided due to all the actions taken. The numbers are not big for those who bought stock on the last day of trading and the management tend to be the big winners out of all of this. I don't know how common it is for the management to get paid big bonuses for sticking around after they bankrupt their own company? Why judges approve these management comp schemes is like giving a drivers license to the guy who caused a head on collision cause no one else wants to get behind the wheel of his wrecked truck??
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That's a tough one. On the one hand I tend to share your feelings. On the other hand, it looks like this was a private equity deal, where the model is to buy a company with established cash flows and lever it up as much as the lending market will bear to extract value from it through financial engineering. If those steady cash flows falter, everyone knows it's going to have to go chapter 11 but they've probably already extracted more than their initial purchase price by then so they don't care. In this case it could well not be the management's fault at all, the unexpected low price of oil just meant they couldn't meet the debt service that their private equity owners saddled them with and no matter who you put in that situation you would have had the same result. Fundamental attribution error if you're into that kind of thing.
In that case you as the debt holder, who are now the company owner, would not want to risk putting a whole new management team in who doesn't know the company when the team you have operates the company just fine absent the debt. And it's well established that management who share in the success of the company are far more successful than those who don't have a stake in it. In the startup world most investors won't even invest unless the management team has a significant equity stake after the investment, and we're talking double digit ownership not .5%!
 
Stymie said:
If you look at shipping stocks in the US, they have been using bankruptcy for the last decade or more to restructure the business to raise capital while keeping the existing shareholders. They use it to convert all their debtholders to equity investors and stockholders take a haircut. So it is possible at a time of extreme stress that entire industries are operating under bankruptcy protection while restructuring their balance sheet. But like buying real estate at the bottom, your whole portfolio is underwater so where do you get the cash to buy these bankrupt companies? You can bet the broker and banks wont offer margin facilities so you have to be a cash investor.

Cash investors don't use leverage. They only outperform when markets crash and cash is king. The rest of the time they're on holiday.
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You know my heart:)
 
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