disclaimer: The discussed investment is very risky and not recommended for any investor. There are strong hints of insider trading and permanent loss of capital and permanent loss of principal is quite likely. The author owns the investment and is clearly biased towards a positive outcome
Thanks to a reader, I received some “research” about IVG directly out of London, HF and “predator” capital (highlights are mine):
IVG – Further Thoughts
I had the opportunity to talk to the company late on Friday. I remain public on the name and have not received private information…
As one would expect, the company would not give any details of proposals being discussed with stakeholders; however, the company admitted that it had considered a number of options for repaying the convertible and deleveraging the company (which became necessary when the synloan holders indicated they wouldn’t be able to refi in September 2014)… including a rights issue which wouldn’t work due to the size required and the status of the hybrid and a quickie disposal of the SQUAIRE which would have seen a very significant discount to book.
A couple of things became clear:
· The company views the equitisation of the convertible and the hybrid as being the necessary first step in a restructuring process
· The haircut may also have to apply to the syndicated loans – especially SynLoan 1 which is under-collateralised
· The company’s fervent hope is to avoid any type of insolvency through a consensual agreement. Any type of restructuring under insolvency is currently considered a distant ‘Plan B’
· The company believes that significant value could be generated for equity investors through the continued management of the SQUAIRE and in the unencumbered caverns currently due to be delivered to Cavern Fund II in c. four years
· The company’s major shareholders are supporting the restructuring proposals – at least from their position on the Supervisory Board; that doesn’t mean that they will vote for restructuring at the AGM…
· Any new capital would require 75% approval at the new AGM
· The convertible bonds will require 100% vote of those attending a general meeting (quorum 50%); but that could be lowered to 75% under a new German Scheme
· It looks like Plan B may well be the more realistic proposition…
The German market is relatively short of ‘prime’ office space… prime would mean significant property located in the centre of major cities like Berlin, Frankfurt, Hamburg and Munich. IVG categorises most of its property as located in these cities. However, more properly it should be described as near one of these cities and very little of the investment portfolio could be described as prime… Prime properties still command premium rentals, non-prime properties face significant competition and rents are likely to fall on the renewal of tenancy agreements. The company states that €2.25bn is core/core+, €690mn is value add (needs work or on short tenancy) and €250mn is workout… in an insolvency the core/core+ valuations would come under pressure; the latter two categories may well be reflective of a going concern but I believe could well be significantly haircut in an insolvency… Furthermore I place little value in the €264mn ‘future caverns’ given the lack of interest from utilities; the fund valuations could come under pressure if EuroSelect 14 does indeed default; and tax assets are hard to transfer.
The company confirmed that:
· The debt on the SQUAIRE represent c. 60% LTV; the rental currently covers interest and the cover will improve. The company expects this debt to roll when it falls due at the end of the year
· The company also has a Core Financing: currently €570mn vs. assets valued at €800mn
· The Pegasus loan is currently €140mn and is secured on a variety of properties situated all over Germany and valued at €300mn
· SynLoan 1 is under-collateralised; I got the impression that less than 75% of the loan had collateral
· SynLoan 2 is over-collateralised but I have the impression that not by much… c. 90% LTV; obviously it benefits from the caverns disposals which should generate €300mn by the end of 2014
It would seem that it would be in the best interests of all of the stakeholders to keep the company a going concern, otherwise one can make a case that even the collateralised parts of the syndicated loans could be haircut.
Andrew Carrie ** 22nd April 2013 ** firstname.lastname@example.org ** +44 20 7997 2066
In my opinion only 2 parts of that “research” is interesting:
The company views the equitisation of the convertible and the hybrid as being the necessary first step in a restructuring process
This is the same kind of b…s… I have heard in the first few Praktiker calls. The answer is simple: Nope. The first step is that equity gets wiped out, then Hybrid then senior. However it clearly shows that will go down the same path as Praktiker tried and ask the bondholders for deferral.
If for some reason, they would succeed, this would in my opinion kill the complete (high yield) corporate bond market. If it is suddenly possible to change the sequence in teh capital structure, why should then be corporate spreads where they are at the moment ?
This is the really interesting part:
SynLoan 1 is under-collateralised; I got the impression that less than 75% of the loan had collateral
In some boards people were arguing: If a collateralized loan is sold at 85%, this is the proof that the senior is worthless, as even the collateral for the first priority loans is not sufficient. To be honest, I was struggling with that one most.
Well, this argument now doesn’t hold anymore. If in reality, the Synloan is only collaterallized at 75%, then a price of ~85% is in line with the current pricing of the convertible.
The uncollateralized part of the Synloan is “pari passu” with the convertible. So in case of the bankruptcy, synloan holders would get full repayment on the collateralized part (75%) plus pro rata repayment with the convertible which trades around 55%. The “fair value” of such a Synloan would therefore be 75% + (25%*0.55)= 87.5% and therefore absolutely consistent with current convertible prices.
If we assume that the buyers have quite high return requirements, then I think the fear of a zero recovery for the convertible gets even more unrealistic.
If only for this one piece of information, the “research” as superficial as it is has greatly increased my confidence in the IVG convertible, because suddenly the prices paid for the more senior but partly uncolateralised loans makes sense.
One should still expect a very bumpy ride with “Praktiker style” attempts to bail in the convertible holders before anyone else, but at current prices, the risk/return relationship looks very good to me.
Again a disclaimer: “Don’t do this at home” and I might be subject to confirmation bias.
Must read: Jim Chanos interview on fraud
The Brooklyn Investor on Loew’s corporation
A fund managament company which I discovered by chance which has an interesting “off the beaten path” portfolio: Evermore Capital
Highly recommended: “A good day to live” blog. Mainly about downshifting but with occassional great comments about investing, how to take crisis more easily etc.
Alternative Assets are overhyped says Abnormal returns. I like especially this quote which sums up alternative assets nicely:
Think of it like this, he [Bernstein] says: “The first person to the buffet table gets the lobster. The people who come a little later get the hamburger. And the ones who come at the end get whatever happens to be stuck to the tablecloth.”
A few days ago, I mentioned UK based Severfield Rowen as a potential interesting “deeply discounted rights issue” special situation.
Problem is that I don’t know much about the company. So the problem is always: How do you start looking at a new company ?
That’s when I remembered a very good post of Geoff Gannnon a few days ago:
I recently mentioned something in an email that I’m not sure I’ve said before on this blog. I always read the newest and oldest 10-K for a company when I start analyzing it. Reading the oldest 10-K gives you perspective.
I have to confess that normally I would start with the latest report and then work my way back, but the approach of Geoff really makes a lot of intuitive sense to me. So why not try with Severfield-Rowen ?.
So let’s compare some key figures from 2000 against 2011:
The difference couldn’t be bigger. In 1999/2000 we have a completely unlevered company with OK margins but very nice ROE/ROCE because of a quite efficient capital/sales ratio.
The 2011 company however looks very different. Sales have doubled, but lower margins, significant goodwill and debt including a growing pension liability reduce ROE/ROCE into low single digits.
So what happened in between ? Well of course, acquisitions:
2005: Acquisition of Atlas Ward, however this looked like rather a small fish at a bargain price
But then the big bummer:
2007: Acquisition of Fisher Engineering for a whopping 90 mn GBP
Fisher Engineering seemed to have been a Northern Ireland based company at least, the seemed to have paid partly in new shares according to this article:
Severfield-Rowen has agreed to buy AML for a total consideration of approximately £90m, of which £36.6m will be satisfied by the issue of 1,750,000 new shares at approximately 2,089 pence each with the balance in cash.
The rational given now f course sounds like a big joke, but at that time Ireland was still “hot” (for another 6 months or so:
The Fisher acquisition will extend Severfield-Rowen’s leading market position in the UK and give Severfield-Rowen a stronger presence in the growing Irish steel fabrication market.
In 2010 finally, they started a JV in India, but more on that later.
SO let’s look at 2006 vs. 2007 :
We can see in 2006 a very very healthy company with lots of net cash on the balance sheet, no goodwill nothing. In 2007, profits still went up but didn’t really compensate for the increased invested capital.
Interestingly, 2008 and 2009 were quire ok, however in 2010 S-R was hit by the “Wile E. Coyote” moment:
I spare myself the details, but i think this table is quite telling:
|Republic of Ireland and mainland Europe||8.9||79.5||23.2||3.6|
The access to the “Fast growing Irish market” for which they paid 90 mn GBP in 2007 had completely “vaporized” in 2010. I have to confess that this seems to be one of the worst timed acquisitions I have seen in my life.
interestingly enough, the still carry proudly the whole acquisition goodwill on their balance sheet. I wonder how the auditors sign this on a subsidiary without sales ?
The rights issue
Propectuses for rights issues are a very good ssource of information, the one from S-r is no exception.
Especially the following paragraph makes clear, how severe the problems are:
Severfield-Rowen will be in breach of one or more covenants under the Existing Facilities on 18 March 2013, being the date of the General Meeting. A breach of any one of such covenants would be an event of default under the Existing Facilities entitling the Group’s lenders to demand immediate repayment of all outstanding amounts and cancel the facilities. As at 14 February 2013 the Group had net financial indebtedness of £44.0 million. In the event that Shareholders’ do not vote in favour of the Resolution and the Group’s lenders demanded repayment of all outstanding amounts and cancelled the Existing Facilities on 18 March 2013, the Group would have insufficient funds to repay the amounts outstanding. The Group would then immediately need to find alternative sources of funds to replace the funds that would have been made available pursuant to the Rights Issue and the Revised Facilities. The actions that the Group would then seek to take to make up the shortfall in its funding requirements (which the Directors believe would need to be pursued simultaneously and immediately), include seeking to negotiate a new facility agreement with its lenders; seeking to obtain a sufficient amount of alternative funding from other sources; seeking to dispose of some or all of its assets or businesses; and/or seeking to find a purchaser of the entire Group. The Directors are not confident that any of the above actions will be achievable. In the event that the alternative courses of action set out above fail, the Group
ultimately may have to cease trading at that time. As a result, Shareholders could lose their investment in the Company.
So it is pretty clear: A failure to get the rights issue approved will lead to a direct insolvency of the company.
Quick valuation exercise
We have seen that the business of S-R is clearly very cyclical. At the moment, the UK and S-R are clearly at a low part of the cycle. Also, years like 2006 and 2007 will not be repeated any time soon.
Over the full 1999-2012 cycle, S-R has an average net margin of 3.7%. The exactly same average is the result of the “Normal” years, taking out 2007-2009 and 2012.
So if S-R gets back to ~300 mn GBP sales, that could result in 11.1 mn GBP normalized earnings. After the capital increase,S-R will have 290 mn shares outstanding. This results ~ 3.7 cents normalized earnings per share or a “fair value per share” after the capital increase of around 37 pence.
In order to make this interesting, the price should be definitely cheaper than that, so I would only buy below 25 pence or so.
The rights have been split of on Tue, March 19th. The stocks are trading now around 0,37 GBP
Looking at Severfiled-Rowen in 1999 and 2011 is like looking at two different companies. Especially the misguided acquisition in 2007 lead the company in deep trouble. However, despite the very significant decrease in the share price, S-R is still not a real bargain due to the massive dilution of the rights issue.
Only if one believes in a short term recovery of the UK economy, S-R would be a “buy” right now. So for the time being “no action”.
The weekend is always a good time to step away from the “micro level” i.e. single stocks to more general considerations.
More recently, if find myself more and more analysing French stockss, as they seem to be technically still quite cheap. In my portfolio, the weight of my French stocks Bouygues, Tonnelerie, Installux, April, Poujoulat is around 15% and growing.
On the other hand if you read especially “Anglo Saxon” media, it seems to be clear that France is in deep trouble.
Perma Bear Mish for instance a month ago saw problems everywhere and as always a quite immediate chance of collapse.
Before that, the (UK based) Economist titled France as the “time-bomb” of Europe with a quite funny cover in on of its November issues:
Germany, in contrast, is considered to be the growth engine of Europe despite a recent slow down.
Let’t go back a couple of years:
The economist article greatly summarizes the overall view on the German economy of that time:
But it is now coming under pressure as never before. As economic growth stalls yet again, the country is being branded the sick man (or even the Japan) of Europe.
The reason was clear: A socialist Government and suspicious company bosses:
The red-green coalition government led by Gerhard Schröder since last October has “encouraged the suspicions of a corporate sector predisposed to fear the worst,” says Alison Cottrell, chief international economist at PaineWebber in London. The dark picture painted by Hans Eichel, Mr Lafontaine’s replacement, to justify fiscal belt-tightening has further unsettled industrial bosses. And a lack of corporate confidence has been one of the main factors that has kept unemployment so high.
The 1999 article mentions all the “standard” prerequisites for a better future like lowering corporate taxes, increasing flexibility but finishes with a quite bleak outlook:
It is, perhaps, not surprising that market-friendly politicians, including one or two in the government, now complain of Germany being a blockierte Gesellschaft (blocked society). Unblocking it will take determination. Without that, Germany is unlikely soon to shed its title as the sick man of Europe.
So what happened in between, how did the sick man of Europe become the (temporary) growth engine ?
Let’s look at Corporate taxes for instance:
It is interesting to see that the biggest drop in corporate tax rates actually happened in the 1998-2005 period where Gerhard Schroeder led a Social Democratic/Green government.
In my personal opinion, a combination of several factors has at least contributed to the change in fortune of Germany at least so far:
- lower tax rates on corporation which stimulated investment in Germany
- Hartz IV which “motivated” people to go back to work quicker when they lost a job
- increased labour flexibility (“Kurzarbeit”, etc.
- a generally cooperative climate between trade unions and employers with modest salary increases and more one time awards
- privatisation of major Government companies such as Deutsche Post, Deutsche Telekom etc.
A second set of developments which in my opinion is not so prominent but were nevertheless equally important:
The end of the “Deutschland AG” which was the description for the fact that almost all German companies were owned locally and/or by each other. Management of German companies did not have a lot of pressure because each manager sat on the board of several other companies. In the center of The Deutschland AG were the big financial institutions such as Deutsch Bank, Muenchener Rück, Commerzbank and Allianz.
The end of the “Deutschland AG” was driven in my opinion by 3 major developments:
- the removal of taxes on investment gains for corporations in 2002
- the problems of the large German financial institutions after the 2002/2003 crash which forced them to sell their shareholdings
- finally the Euro. Before the Euro, German Insurers for instance had to invest 95% of their investments in Deutschmark. So basically if they had to invest in German shares because there was no alternative. After that, the 5% restriction changed to “non Euro”, so suddenly german insurers could diversify their portfolios into the Eurozone.
Although there will always be a special relationship between companies in one country, one can say that the old “Deutschland AG” does not exist any more. One of the big examples for instance was the take over of Hochtief, the German construction company by ACS from Spain. 15 years ago, something like this would never had happened. Deutsch Bank or someone else would have organized a defense.
In my opinion, the end of the Deutschland AG contributed a lot to the positive developement of big German companies like BASF etc. because it put a lot more pressure on management. Ironically as a result, many of the benefits of the German renaissance went to foreign shareholders.
Back to France:
From the German example we know now that a title story in the economist might not be the best indicator for the future of a country. In the cae of France is see a few similarities to Germany in the end of the 90ties:
- everyone is complaining about the socialist president
- the press is full about the “millionaire tax” and guys like Gerard Depardieu and Aranult leaving the country
Without being an expert in French politics, however from my outside view this looks like a brilliant political move from Hollande. He gives his leftwing voters something directly and spectacular to calm them down. I would assume that a guy like Bernard arnault is not paying that much taxes in France anyway, so it doesn’t really hurt seeing him leaving.
On the other hand, Hollande seems to now the German play book quite well and is on the way trying to improve labour flexibility in France. Interestingly, Sarkozy made a similar last minute attempt almost exactly a year ago.
But as history shows, at least in continental Europe, real labour reforms are mostly implemented by Socialist Governments, liberal or conservative ones. As always, the comment says that this is not enough:
Still, this is no Reagan (or even Schröder) Revolution. The unions will preserve counterproductive worker protections and welfare guarantees. The deal includes expanded privileges for union reps within companies and more reserved seats on company boards.
However, you have to start somewhere and together with his “U turn” in corporate taxation, this is a significant green shoot in my humble opinion.
Last but not least I see two other interesting factors at work which might point to a better future for France:
France’s demographic development is much much better than Germany’s as one can read for instance here.
From a demographic standpoint, France and Germany are thus in radically different situations. While France has maintained a satisfactory fertility rate, almost sufficient to ensure the long-term stability of the population, Germany’s low birth rate will lead to a substantial and rapid decline in the total population and to much more pronounced ageing than in France (Figures 3 and 4).
At some not so very distant point in the future, there will be more Frenchies than Germans:
So yes, France has definitely a problem with youth unemployment, but part of the problem is that they actually do have a lot of young people which Germany does not have any more.
I am not able to comment on Mali or any other political issue here. But if at some point in time Africa will catch up with the rest of the world, French companies will benefit most due to their historical relationship etc.
It is clear that France at the moment does not look like the future growth machine of Europe but neither was germany end of the 90ties. However I see a good chance that France finally gets it act together and implements the required reforms. If that happens, France could experience a somehow similar trajectory like germany over the last 10-15 years.
From an investment point of view, this might be one of the most interesting “secular” opportunities going forward despite (or because of) the very negative headline news. From a micro level, I find a lot more well managed, unlevered companies in France than in all the PIIGS countires combined.
From a portfolio point of view, I will accept a quite significant weighting of French stocks if I find additional interesting french companies. I could imagine having up to 30-50% of french stocks in my portfolio going forward.
But make no mistake, this will be a long journey and superior investment returns on French stocks might require more then 1 or 2 years to materialise.
And finally to make this a little bit funnier, the Monty Python take on the epic battle between the English and the French:
Interesting paper on the merits of low volatility stocks
Greenbackd on Benjamin Graham – Skill or luck ?
MUST READ: Howard Marks Q4 memo. Time to be cautious, at least for bonds.
Bruce Greenwald on Apple and Amazon
Cable TV seems to have one more life
Felix Salmon on stock picking as an upper class men’s hobby
Some very good “common sense” investment advice from the Aleph Blog
Great and detailed analysis of a Bulgarian REIT
Fascinating story about human crowd management from The New Yorker. Maybe there is a lesson for stock market bubbles ?
David Einhorn Q3 Investor letter
Must Read: The family of Chinese Premier Jinbao has squirreled away 2.7 bn USD
Damodara about sunk costs and “portfolio maintenance”.
The Sloan Ratio, a good way to track accruals in balance sheets
East Coast Investment Management investor letter on investment process
Charlie Munger transcript from 2010
Great final post from Wexboy about investment catalysts with “case studies”
Great documentary (German) about the end of one of the shittiest German banks ever, WestLB.
Very interesting Asset Allocation blog called GestaltU. Among others they recommend cash in order to protect against inflation…..
ExpectingValue, a great UK blog has reviewed his Portfolio. Good place to start if one is interested in UK small caps.
MUST READ: Graham and Doddsville fall edition (Greenblatt, Royce, Tisch)
Steve Romick plays the “Renault stub” game among others.
Long read from Micheal Pettis about how to be a China Bull
16 timeless lessons about investing from Walter Schloss
16 timeless lessons on investing from Sir John Templeton