Ah, the facts are the best antiseptic. Snarfy posted that the bonds were trading at a discount, hence the smarties (like him??) did not view Cheniere's balance sheet favorably. Well look at the performance of those bonds since the initial announcements in late September
A bit of a different story than our dear friend Snarfy has led us to believe.. Probably still a good buy. Now look at their higher coupon bonds.
What!!! They are trading at a PREMIUM to par.
Snarfy, you are an amateur. Prepare to get your butt handed to you.
Does my bearish interpretation of the converts' risk premium reconcile with what Cheniere's financial statements tell us? Yes, the company has $90 million cash in the bank and it's burning $45-55 million per year, and it's about to sell its one real source of cash flow, the CQP common units, to pay off Blackstone so the cash burn will worsen. Relief in the form of improved cash flow will come if and when the CQP subordinated units start paying distributions, but that won't happen until 2015 at the earliest when the export facility comes online.
But what about the fact that the price has been risen substantially since last fall? Somebody sees an increased possibility that the company will actually be able to pay off the convertible bonds. Why is that possibility increasing? What can the company do to pay off that debt? The CQP common units will get sold to pay off one lender. There goes their main source of cash flow. So what trick does the company have up its sleeve? What can they possibly do? Answer: promote the export story to drive up the share price of LNG's common shares and then do a secondary offering.
The bulls should start making hors d'oeuvres and getting ready for a housewarming party to welcome a new group of shareholders into their lives. The pie is about to get cut into much smaller pieces.
Snarfy, I think what you are missing is the fact that a very large percentage of people that buy stocks (including those that consider themselves knowledgeable about the markets) have very low intellect. They see it going up and buy, they see it going down and sell. You can try to figure out what is right all day long, but if you are out of step with the market participants, it is meaningless.
Snarf, your analysis is limited to looking in the rear view mirror. So far it has been completely wrong. Markets are forward looking, but you apparently haven't figured that out yet.
Best of luck pal, your education is going to be expensive
The second bond you refer to is the liability of a completely separate legal entity from Cheniere Energy, Inc. They are the senior secured bonds of Sabine Pass LNG, L.P. I have no quarrel with them trading at par. S&P has said they would be investment grade rated rather than junk but for the fact that Sabine Pass is tangled up with Cheniere. It makes sense give they have first claim on the cash flows Chevron and Total are contractually obligated to make. That the senior secured bonds of Sabine Pass are trading at par says nothing about my short thesis on LNG common stock. In fact, I bought some of the senior secured bonds. In effect I was getting paid 8% to indirectly own Chevron bonds when actual Chevron bonds were yielding substantially less.
Those bonds sit at the very top of the food chain of CQP. After them comes the common units of CQP and then subordinated common units of CQP. LNG is an entirely different entity. LNG owns some of the common units of CQP. Those are used to secure the loan from Blackstone and have been registered so they can be sold to pay off the loan. LNG also owns some of the subordinated common units and 100% of the general partnership units. The subordinated units aren't generating any cash flow and won't do so unless the export facility gets built or unless U.S. gas differentials vs. the rest of the world get reversed and stay reversed. Only then will they have value. However, the export facility won't go into service until 2015 at the earliest, and in the mean time they have been used to secure the $300 million loan due May 31, 2012.
The first bond you refer to is within the sphere of my bearish argument. It is a senior unsecured obligation of Cheniere. It sits behind the $300 million loan and the $250 million Blackstone loan. You point to the rising bond price as a bullish signal - one that contradicts my bearish argument. Aha! I've been misleading you!
Or have I? Let's think about what it means that LNG's convertible bonds have been rising in price. First, junk bonds across the board have been rallying. It would be one thing if LNG's converts were rallying while junk bonds in general were falling. That would be a very company-specific signal, but that's not the case.
Second, what does the actual yield to maturity of 17% on the current price tell us? 2 year Treasuries are yielding 0.83%. The duration isn't an exact match but it's not a difference maker. So the spread is roughly 1,600 points. Let me repeat that. The risk premium is around 1,600 basis points. That is an unambiguous company-specific signal that this company is experiencing severe financial distress. Junk bonds in general are currently offering risk premiums of just 600 or 700 basis points.