To me the biggest question with OXF is if the distribution will be cut, which resets the conversion timeframe for the subordinate equity holders. If this happens it will be very beneficial for OXF shareholders as it significantly delays conversion of about 50% of the outstanding shares.
The recent changes in credit terms were purly so management could continue to pay the distribution.
Does anyone have any ideas on how far OXF can go before they are forced to cut the distribution on regular shares? Can they keep increasing credit terms and pay the distribution out of credit, or was this a one time action?
The sub shareholders are highly motivated to prevent this, so I think they'd have to essentially be forced into it given cash flow realities.
I think you have it wrong...see the text below. The subordination period is reset if distributions are cut to either the common or the subordinate units. And since they already cut the distribution to the subordinate units, the clock already reset.
"The subordination period will end on the first business day after we have earned and paid from operating surplus generated in the applicable period at least (i) $1.75 (the minimum quarterly distribution on an annualized basis) on each outstanding common unit and subordinated unit and the corresponding distribution on our general partner units for each of three consecutive, non-overlapping four quarter periods ending on or after..."
Liz, you said it much more clearly than I did. I went the long way around; it depends on reading the right page from the offering circular. But however you get there, I believe the subordination period has been extended to 2015 at the least.
I don't own OXF so I'm not sure of the impact of this. My feeling is that since the subordinated unit holders are already delayed in converting their units into common units, there is no real downside to cutting/suspending the common unit distribution if it were to become necessary for the survival of the business. OXF would have to make up any arrearages that would arise from this, but at least the arrearages don't carry an interest charge, so they might, if things got bad enough.
On the other hand, I think we're getting close to a bottom in coal, and things should get better from here. Since OXF has said they have the financing to continue the distribution, I doubt people will see any cut. I think the next 2 events for coal are the election and how warm or cold the winter is. But for the next 2 Qs, I think the distribution is pretty safe.
The cash flow from this year's and next years contracts fully covers debt servicing and the full common distribution.
The subordinated distribution was cut last quarter to help make the adjustments for the cancelled contract, and there is now a question about when the full subordinated distribution will be resumed. The debt convenent agreement recently made makes it easier to meet coverage requirements while restoring the subordinated, but we do not know how much will be paid to the subordinated units.
As you point out, its to the advantage of the common for the subordinated to be paid less then their ful, because it postpones their conversionb and also provideds more of a cash cushion for operations.