Please read my prior article, Pinetree Capital: Possibly the worst closed end fund ever, for a good backgrounder on what I am writing about here.
How would you like it if you bought an equity interest in 70 cents per share for the market price of 20 cents?
Normally most people would snap up on the opportunity. Every dollar you invested is backed by over 3 dollars of real net financial assets! What could be the catch?
The catch, of course, is that the assets you are purchasing are illiquid, of dubious value beyond a thin market quotation, and is managed by somebody that has an impressive track record of losing money.
Otherwise the market would not be giving such a steep discount to the whole consolidated operation.
What is interesting is that the capital fund continues to be hampered by debentures that have a 33% ceiling on the debt-to-asset ratio. Last year the fund breached this and had to pay handsomely for the privilege of obtaining more time.
Management has a huge incentive to not let the debtholders take over – surely the big players in the debenture space would liquidate the fund piece by piece and would not be hamstrung by pesky management or their insanely huge salaries.
The debentures, by virtue of the debt-to-asset covenant, are functionally secured, first-in-line debt, next in line to the margin loans the fund has been taking to fund its incredibly speculative investment portfolio.
They also mature in 1 year and 7 months time.
Now that the whole world stock market has tanked over the past month, speculative issues get hammered the most. Pinetree has been suffering, and its equity has thus gone down to the huge discount over stated asset value that you see today.
There is probably some value in the equity, but it will take time to realize the value due to liquidity issues.
However, the real value is in the debentures mainly because they have the noose over management at the moment, who have shown every indication they will dilute and use every trick in the book to maintain control of their lucrative salaries.
Who wants to invest in this train wreck? I don’t know, but if you have a very thick stomach wall for scraping the bottom of the investment barrel, consider purchasing some Pinetree Capital Debentures (TSX: PNP.DB) if you feel brave. There is a reasonable chance that you will be made whole.
Disclosure: I own the debentures.
I just quickly perused the Convertible Debenture Indenture dated 17th May, 2011.
If I understand correctly, the concern that I would have is that at maturity PNP can redeem the debs for common shares. Obviously, if this is true, then you could get a lot of paper for your debs. The market price of the common will implode even lower, if that happens.
True, management loses control of the gravy train if that happens, but it does get messy.
That’s correct, they have the right to pay the debentures in common shares, at a 5% discount from the market price (as determined over the average trading price over a certain number of days before the actual redemption).
I am guessing that management does not want to lose control of the gravy train.
Also I would guess if management did resign today that it would result in a not-so-trivial increase in the common share price. So if management were to be extracted out of the company, I would guess almost anybody else (we’ll nominate you, for example) would do a better job and the market price would reflect this.
They can keep the gravy train going indefinitely by simply issuing more debt (although at the rates the market are giving them this isn’t entirely possible at present unless if they utilize brokerage margin debt) and paying off the debentureholders and getting rid of that pesky 33% debt-to-asset covenant.
“So if management were to be extracted out of the company, I would guess almost anybody else (we’ll nominate you, for example) would do a better job and the market price would reflect this.”
I would nominate blind monkeys that could throw darts, as a more worthy management team. The shareholders would only have to pay for bananas. Performance couldn’t be worse, based on the value destruction that I see that has transpired.
Have they ever picked a winner?
“They can keep the gravy train going indefinitely by simply issuing more debt …”
I hate to underestimate the greed/skill of underwriters, but this won’t be an easy sell, even to retail chickens (err… clients).
“Have they ever picked a winner?”
If you go all the way back to 2005-2006 during the Uranium mania, you’ll discover they were absolutely fantastic.
All due to management’s genius, of course!
Actually there is one thing they’ve been amazingly successful with – creating a net capital loss tax shield for some other hedge fund to re-capitalize them with and start actually offsetting them with some gains once they’ve replaced management. There is legitimate value there.
Hi Sacha. Interesting day today for the folks at PNP. They seem to really love their KEEK investment, investing another 3MM in the form of 12% notes. Mind you, it looks a testicle, spectacle wallet and watch deal for KEK as PNP will have first claim to all “present and future assets and intangibles”. Looks like 4th down and 10 to me for KEEK. The posted NAV is now $0.63 cents, an all time low, and I would think we are headed for another covenant breach? Last time that cost them an additional 2% on the deb but they were able to stretch the debt to asset ratio to 50% for 9 months. Yet, they continue to invest: Manitex and Enerdynamic just in the last 6 weeks, and KEEK today. And to be fair, Management has more skin in the game than just their salaries as they took up 17% of the shares offered last May (at 45 cents!). My question: are we headed for a covenant breach and what real options do they have to deal with it? I too own this deb so I’m curious to know your thoughts.
Second and off topic to this post, do you still own the engineering company debentures you posted about some time ago? High management ownership seems to have saved the day on that one. Creative solution to offer a demand note in return for an extension. They continue to make progress with their balance sheet, work in progress and accounts receivable and the share price is slowly climbing out of the depths of despair. The next deb to mature is the A series I believe. Possibly another opportunity coming there as well. Again, curious to know your thoughts if you still own this.
Cheers! Neil Jobin
Neil, which engineering company is that? IBI Group?
That’s correct. Apologies to Sacha, as I don’t think he ever did name the company, but the information posted by both he and I made it easy to know that it was IBI.
@Neil J: Yup, IBI. I was not subtle with my description and anybody astute (such as yourself) could easily pick it up. Their low valuations stuck out like a sore thumb on the debenture rankings. The only other one that was remotely close was Armtec and suffice to say, Brookfield is now virtually owner of that one.
Just FYI, I do not own any IBI anymore. Made a few bucks. They did an extraordinary job buying themselves some time, but the fact remains that their business needs to become more profitable than it has been in the past, and their financial leverage is far, far too high at present. A high risk, high reward type situation.
As for Keek and Pinetree, if Pinetree blows the covenant again, I think it will be another pound of flesh in a one-time cash payment, coupled with likely some sort of requirement that X% of sales proceeds go toward the repurchase of debentures and/or some sort of amortization schedule for the remaining debentures. Think about what happened to Yellow Media for a good example. I still do not know what happened about the $20 million debenture repurchase using “best efforts” when clearly only about $5 million were repurchased.
If they actually did repurchase $20 million at the time of the covenant breach, they’d be down to about $41 million outstanding.
Oh as for Keek, I think 4th down, and 30 yards to go is a more appropriate analogy, plus there is 3 seconds on the clock and even if they get a touchdown, they require a 2-point convert to just tie the game.
Thanks for the reply. I really enjoy and look forward to your posts and musings: intelligent, well written pieces with a healthy dose of humour. Your original post on PNP is still a favorite. I also appreciate your candour with the self inflicted wounds as you call them.
Like you, I backed the truck up (as it were) and purchased highly distressed debentures for 30 to 50 cents on the dollar late in December 2008. Interestingly that’s how I became aware of you but it was well after the fact. Since then I spend some time running my index finger down the debenture list stopping at any that are deeply discounted for a much harder look. Sometimes it works, sometimes is does not (yes, Yellow Media). And, I also have self inflicted wounds. In my case trying to hit the long ball on junior oil and gas with money I am prepared to lose, and often do.
I continue to take small bites of IBG.A. Second quarter reporting was generally good, with improvements in revenue that put them more in line with their peers. And lately some divestitures, plus material steps at cleaning up their credit facility and balance sheet. Looking much better. Still, I agree that their financial leverage is out to lunch and will be an on going albatross. The drums will start beating on the the “next up” piece of debt in early 2017. It’ll be interesting to see where they are at that point. High percentage management ownership is a powerful motivator and as you say, never underestimate the value of a gravy train.
Thanks again, Neil Jobin
I shorted this puppy when it traded at roughly 3.5 times book value. It took awhile to come down but it finally did. I have owned the debentures for awhile and got into the commons when I figured it couldn’t get any worse. It did. I think a takever would give value to the tax losses but this is always difficult to do as the aquire company must be in a similar business. Management is obviously incompetent. My God just put money in profitable companies.
Another covenant breach from Sheldon and company, incurring additional debt while the debt to asset ratio exceeds 33%. They must have forgotten that part of the indenture, or ignored it, or simply don’t care. This latest breach should be easily fixed as presumably they can simply sell some assets to generate 3.3 MM to cover the no-no debt. However, I expect the debt to asset breach will only worsen when they release their latest NAV within the week, given the lower loose “valuation” of their base metal and oil and gas names. A bit of a spiral. Yet, the debentures hang in there. It will be very interesting to see what they propose to have the deb holders waive the default. Increase to 11 or 12 % for the remainder of the term plus a raise in the d/a ratio to 50%? I would not be surprised if they asked for the d/a ratio to be increased until expiry of the debs so they don’t have to deal with it again.
November 30 NAV is 46 cents a share, so barring some miracle in December that would cause a valuation jump during the January 15th reporting date, it looks like management is going to have to cut a deal to avoid default.
46 cents is about $93 million in the black minus debt, so even when assuming a severe liquidity cost, the debenture holders are holding the power in this negotiation and will extract the appropriate amount of juice out of this rock – there is likely enough assets in Pinetree as a whole to pay off the $55 million outstanding.
It would be wise for institutions to include a mandatory buyback scheme where Pinetree would be obligated to repurchase a certain amount of debentures on the open market per month providing they are trading less than par value. The idea here is that it would generally be adverse to debenture holders if there was an equity conversion at maturity.
The meeting is scheduled for January 22 for debenture holders of record on December 18, so whoever owns the debt today will be deciding whether they want to approve whatever terms are offered.
In the 2013 default, the record date was August 13th and the proposed terms were offered on August 19th, so we will likely hear by month’s end what is proposed to debtholders to not put the company in default. They still have to print out the management information circulars and get consent from debtenture holders so the company can avoid default.