Tag: TK

Dividend suspensions – Aimia, and soon-to-be Teekay Offshore

Aimia (TSX: AIM) suspended their common and preferred share dividends today. While this decision could have been entirely anticipated, the market still took the shares down another 20-25%. If you read between the lines from my previous post on them, this should not have been surprising. Nimble traders that were awake around 9:40am Eastern Time could have capitalized on an intraday bounce, but the current state of the union is likely to be short-lived since the company still has to figure out how to work its way out of a negative $3 billion tangible equity situation and pay the deluge of rewards liabilities. This will probably not end up well.

And in a “tomorrow’s news today” feature, it is more probable than not you will see Teekay management finally tuck in their tails and suspend dividends entirely on Teekay (NYSE: TK) and distributions from common and preferred units of Teekay Offshore (NYSE: TOO). When the announcement will be made is entirely up to management but it will likely be before the end of the month. What is funny is that I called it a couple weeks in advance (post is here), while it took a Morgan Stanley analyst a few days ago to actually cause a significant market reaction in the share price while everybody rushes for the exit. Teekay Offshore unsecured debt is now trading at 17% and with their preferred units still at 12%, it doesn’t take a rocket scientist to figure out what’s going to happen next – they desperately need a few hundred million in an equity infusion and they will be paying for it dearly.

As a bondholder in Teekay’s unsecured debt, I’m curious to see how management will bail themselves out this time. Since I do not believe they are interested in losing control, I still believe the parent company’s unsecured debt looks fairly good since there isn’t much ahead of it on the pecking order in the event of an unlikely liquidation event.

Thoughts on Teekay Offshore have not changed

Teekay Offshore (NYSE: TOO) reported their Q1-2017 results last night and they were lacklustre. In particular, the introduction of a litigation dispute with their largest customer, Petrobras, in respect of the operation of an offshore rig is not helping matters for them.

Last quarter I wrote about how Teekay Offshore units are “not going anywhere“, and that was an understatement considering this stock graph in the interm:

The next pillar to fall is their common unit dividend. Teekay traditionally declares dividends at the beginning of the calendar quarter and pays them out mid-quarter. I would expect there would be a 50/50 chance that they will suspend common dividends at the end of June or early July, and this would probably have a negative impact on their unit price. There is also an outside chance that they would decide to suspend their preferred unit dividends at the same time until they have shored up their financial resources.

The reason for this would be that they have not stabilized their financial position. With approximately 149.7 million units outstanding, the cash outflow of $16.5 million/quarter is something they really need to be putting into their outstanding debt. Preferred units receive around $11 million/quarter in cash in distributions and in a couple years, another series of preferred shares will switch from payment-in-units to payment-in-cash distributions (another $10.5 million/year).

Saving $27 million a quarter in distributions has to be attractive for a management that needs to repay $589 million in 2017 (this information is from their 20-F filing for their 2016 annual report). Cash flows through vessel operations will bridge some of this, but they are still missing some capital to make it through. They are also uncomfortably close to a debt covenant that they maintain total liquidity of at least 5% of their total debt (which is about $150 million in liquidity).

If you remember this chart from an earlier presentation when they got investors to chip in another $200 million in equity (April 2016):

CFVO (Cash flows through vessel operations) in Q1-2017 was $141.3 million, while net debt is ($3.12 billion gross minus $0.29 billion cash = $2.83 billion) – doing the math, we have ($2,830 / 4*$141.3) = 5.00 Net Debt/CFVO ratio!

This is way off the original 4.5x target as projected by management and this is getting into very dangerous territory where management has to take other measures to get the balance sheet back into a reasonable condition.

The only silver lining I can think of is that net debt has dropped $13 million for the quarter, but this is such a minor fraction of the overall net debt that it is relatively inconsequential.

Thus, I will predict that short of another form of recapitalization (or extremely dilutive equity offering), management will likely cut distributions from Teekay Offshore.

On a side note, I have gotten used to the “personality” of their quarterly reports and presentations as they release them and they are quite skillful at illuminating the information that they want you to be seeing and not paying any attention to the worms and termites that are crawling under the rocks. These nuggets of information are usually buried in the subsequent (weeks later) 6-K filings they report to the SEC. Also they are quite good at not reconciling their current situation with past expectations as you can see in the above post of their CFVO/Debt chart.

Teekay Offshore’s common units are not going anywhere

Reviewing Teekay Offshore’s financial results (NYSE: TOO), it strikes me as rather obvious that they have missed their initial early 2016 targets when they proposed a partial equitization (issuing common units, preferred units, and some refinancing) of their debt problems. They also borrowed $200 million from the Teekay parent entity (NYSE: TK).

In Q1-2016, they delivered a presentation with this chart:

In subsequent quarters, the company has generally not referred to progressing tracking to this projection, mainly because their debt to cash flow through vessel operations ratio has not met these targets. While the underlying entity is still making money, revenues are eroding through the expiration and renegotiation of various contracts, couple with some operational hiccups (Brazil) that is not helping matters any.

Putting a lot of the analysis away from this article, while in 2017 the future capital expenditure profile is going to be reduced (which would greatly assist with the distributable cash flows), the company doesn’t have a lot of leftover room for matters such as debt repayment and working on improving their leverage ratios in relation to cash generation ability. This leaves them with the option of continuing to dilute or depend on the parent entity for bridge financing. Indeed, one reason why I believe management thinks the company is still open for dilution is due to them employing a continuous equity offering program – they sold nearly 1.9 million units in the quarter at an average of US$5.17/unit. If they don’t think the company is worth US$5.17/unit, why should one pay more than that?

I don’t believe that they are a CCAA-equivalent risk in the current credit market (this is a key condition: “current” credit market), and I also believe that their preferred units will continue to pay distributions for the indefinite future, I don’t believe their common units will be outperforming absent a significant and sustained run-up in the oil commodity price. Note that there is a US$275 million issue of unsecured debt outstanding, maturing on July 30, 2019, which will present an interesting refinancing challenge. Right now those bonds are trading at around a 10% yield to maturity.

I have no positions in TOO (equity or debt), but do hold a position in the Teekay Parent’s debt (thesis here).

Re-examining Teekay Corp

Back in April 2016 I stated I invested in the unsecured corporate debt (January 2020) of Teekay Corp (NYSE: TK). Yields have compressed considerably since then:

tk-bonds

Part of this is due to a $100 million equity offering that was purchased by certain insiders, including the 37.7% holder Resolute Investments, Ltd. They paid US$8.32 for their shares which are trading at a market value of about $7.15 as I write this.

Teekay also significantly rectified a capital funding gap in their Teekay Offshore (NYSE: TOO) daughter entity with the issuance of preferred shares, conversion of preferred shares to common units, and other generally dilutive measures to their common unitholders. This will also involve TK with a higher ownership of TOO and the solving of TOO’s liquidity issue will serve to be positive to the payment of TK debt.

The last few trades of TK debt going on today (volume of roughly $400k par value) has been around 90 cents on the dollar, corresponding to a yield to maturity of about 12%.

What I expect to happen is the market will continue to normalize and ideally then we will see yields compress to result in above-par prices. In the meantime I get paid interest income. This is a reasonably heavy portfolio weighting.