Category: Equity

How will OPTI restructure?

OPTI Canada (TSX: OPC) is an oil sands producer that is facing insolvency. They have $2.6 billion in debt and they have failed to make an interest payment on their secured notes.

Suffice to say, the equity is trading in anticipation of it becoming worthless (presently 10 cents per share, which is about 9.99 cents over-valued at present).

The company has first-lien notes which as the name suggests, is a first claim on the assets of the company. Those bonds (US$825M face value outstanding) are trading at nearly par. The senior secured notes ($1.75B outstanding) are second in line and are trading at 40 cents on the dollar. Senior to all of this is a $165M line of credit.

OPTI obviously has leveraged themselves too deeply and their shareholders will be taking a large bath on their investments. The question is how the company is going to get carved up, with the first lien debtholders having the trump card – they will negotiate the senior secured noteholders a deal to salvage some value for them to expedite the uncertainty caused by creditor protection.

For retail shareholders, probably the best thing for them to do is to sell their shares, take a capital loss, and get on with life. If the company formally declares bankruptcy, the shares will be halted on the TSX and it will become much more difficult to dispose of the security and take the loss.

Armtec Infrastructure

You would think the way that Armtec Infrastructure (TSX: ARF) has been trading over the past week that it was a Chinese company that was embroiled in a huge fraud allegation, but alas, the story is much more simple: bad business performance. The company’s Q1 report also came with an announcement they were cutting their dividend to zero.

The company has two main divisions, one dealing with products and one dealing with the services that sell the products. The products and services are for the construction and maintenance of various infrastructure-related projects in the public and private sector. The company’s revenues are broadly based across Canada.

Financially, Armtec formerly traded as an income trust and converted to a corporation. Its capitalization was primarily funded with debt (once you subtract intangible and goodwill from equity). The company has had a very rough 2010 and 2011 to date.

Probably the best recent decision management made was when they did a bought deal financing (of equity), selling about 3.6 million shares for $16.20 a piece on April 13, 2011 – which you can now buy for 75% less! This raised about $50 million in net proceeds for the company, which they used to pay down their line of credit – their debt at the end of March 2011 was $290 million, and this will be about $50 million less. You also wonder how much due diligence those investors that paid $16.20 a pop did on the company – it has been a continual slide downhill leading up to last week’s catastrophic result.

I am not going to comment too much on valuation since my investigation is still ongoing, but there could be value in the company – either the equity or convertible debentures. You would have to determine whether the company can get back to the profitability it had back in 2008-2009 (where they were delivering considerable operating income) or whether the current state is more likely. For example – how much was this company aided by the stimulus package by government?

This is also a small lesson for people investing in companies that are heavily leveraged and mainly give out cash – any hiccup in the operation and the financial state of the company becomes a much more dominant concern than the operational performance. Armtec is facing loan covenant violations which it will have to renegotiate, likely to the detriment of shareholders.

Holloway Lodging gets a stealth takeover

It appears that Holloway REIT (TSX: HLR-UN.TO) had its prior trustees, including the CEO W. Glenn Squires, were kicked out by George Armoyan’s group of people by a margin of 85% to 15%, according to SEDAR filings.

Now that Armoyan has full control over the company (and indeed, roughly a 20% equity stake by virtue of his ownership in Royal Host REIT (TSX: RYL.TO), it remains to be seen what his plans for the two companies are. There are logical synergies between both companies, but both companies face huge balance sheet issues – mainly that the cash that the properties are generating is not proportionate to the cost of capital required to finance such properties.

Looking at the last quarterly report for Holloway, their balance sheet has stacked up a significant amount of current debt maturities, including a $3.6M line of credit, $42.1M of mortgages requiring refinancing, and perhaps more urgently, $20.2M of convertible debentures that are maturing on July 31, 2011, just under two months away! The company has $300,000 in cash on the balance sheet and the line of credit is good for $5 million.

It should be noted on their MD&A that the company states that:

The REIT has a signed term sheet to finance the repayment of the debentures. The Board and management continue to explore other alternatives to raise funds to repay the debenture holders which may include other debt financing, the sale of certain properties, or some combination thereof.

One wonders what the terms on this term sheet is and who the heck would be willing to lend this company money on an unsecured basis.

The market capitalization for the firm at their existing price of 34 cents is about $13M, which means that if the company wished to pay off the debenture using equity (which I am not sure is legal without shareholder approval) then that would represent a significant dilution.

Interestingly enough, these debentures are trading at par.

Also, I have no position in any of these securities.

Suspicious when insurance companies raise capital

I always get suspicious when insurance (and to a lesser degree, financial) companies raise capital through preferred share offerings unless if such offerings are associated with some form of refinancing.

An example would be the latest preferred share offering from PartnerRE (NYSE: PRE) which is a Bermuda-based reinsurance firm. They managed to get “whacked” by the Japanese earthquake and as a result, will be taking a net loss for the year.

Normally, well-capitalized insurance firms set money aside for rainy day years, such as when earthquakes, hurricanes and other sorts of disasters strike all at once. When such disasters hit all at once, they can dip into the cash buffers and pay off the claims. So why raise relatively expensive money? Is their balance sheet that leveraged that they feel uncomfortable just paying off the claims?

All insurance firms are very research-intensive. It is impossible to properly value these companies by just reading the financial summary – otherwise they all look like spectacular purchases.

Rangebound markets

I am not a large believer in technical analysis providing predictive value, but the pattern-seeking eye sees the following trend in the S&P 500 over the past 6 weeks:

We see a downtrend channel. Is this part of a trading range?

Volatility only saw a very brief spike up in March, primarily due to the Japanese earthquake:

We add these two together and see a marketplace betting on a trading range. The swing traders at this point are likely the ones to end up making the money, rather than the trend followers. Not a good time to be taking risk.

What was the big winner in 2011? Oddly enough, nothing more than the 30-year US treasury bond: