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Heartland Partners, LP (HTL) Message Board

  • Debaser8 Debaser8 Aug 10, 2002 3:09 PM Flag

    Been looking at this

    I looked at HTL when it was at 15 and luckily decided not to buy. Have looked at it again recently. I'm not to familiar with HTL's properties or real estate valuations, but based on previous selling prices for Kinzee I its Chicago lots seem to be its most valuable assets and conservatively worth 15 million.

    HTL has 7 million in debt. The loan to HTI of 8million should probably be written off. (Am I missing something? The press release/10-k says the B partnership interests are collateral for the loan but they are only entitled to between .5% and 1.5% of HTLs income and therefore not worth much over 150K at current market values, plus they are subject of another claim by Old Co (sp?)).

    The main question seems to be how much is the rest of HTLs property worth? Based on the following quote.

    "We must, however, pay down our revolving loan and some other debts before paying a distribution. Closing the Fife sale will allow us to accomplish this. Some combination of sales at Kinzie Station and the Menomonee Valley would probably get us there as well, but at this time only the Kinzie Station supermarket site is under contract."

    Management believes the Fife site is worth at least 7 million. The Milwaukee site is probably not worth less then 3 million (though I know next to nothing about it so this might be a gross miscalculation). This brings my property rough sketch to 25 million. Subtract the 7 million in debt you get 18million or a 3m million premium (20%) to the current market cap of 15 million.

    Most of these property valuation estimates are not meant to be very accurate at all. Instead they are supposed to encourage discussion. I am definitely considering buying HTL especially if it falls a litte more.

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    • I think PGO will make demands to settle. One of the unstated uses of being worthlessly secured is that it increases your "nuisance value". Under my "hypothetical scenario" I assumed that PGO was competently represented by counsel and they had adopted a long-term strategy to optimize their position.

      Don't just think of monetary demands. It is a mistake made by most laymen. Tactical advantage
      creates profit, either by accelerating income or decelerating outflow and/or eliminating potential liability. If I were PGO's counsel, I would always have in the back of my mind the potential liability PGO might have for failing to disclose a material fact or violation of a post-closing covenent. Trial lawyers have a field day with that kind of ammunition.

    • Generally, the insolvency of a general partner,especially as evinced by an act of bankruptcy, bars the GP from continuing to serve as such. The management fee could remain as an ongoing liability and the Class B interest could be a minor ongoing irritant. I would assume that HTL has not "rocked the boat" until HTL determines whether or not a "universal settlement" can be reached with HTI.

    • may be easier said then done.

      The creditors, which by the way includes Jacobson ,big chip is the general partnership of HTL.

      We will see how this all turns out ,but may cost some money

    • Al,

      Once again thanks.

      Your discussion of the course of PGO's involvement seems plausible. However, back to my question: "Do you think HTL will get "stuck" paying off all or a portion of HTI's $2.2M loan from PGO?...(in order to eliminate the possibility of PGO owning some of the Class B shs.)


      Galena,
      From the July 24th PR...If LA has his way there won't be any role for HTI in mgmt or the GP...

      "We have also been working on the issues arising from Heartland Partners' relationship with Heartland Technology, which is insolvent. As part of the workout and dissolution of Heartland Technology, we are proposing to end any management or general partner role of Heartland Technology. While I am CEO of
      Heartland Technology as well as CEO of CMC Heartland Partners, and on the boards of both, Ezra K.Zilkha, John R. Torell, III, and Robert S. Davis have resigned from the Heartland Technology board and now serve only on the Heartland Partners board. Heartland Technology has economic interests in Heartland Partners from the General Partner Interest, the Class B Interest and the fee paid under a
      Management Agreement. It also owes Heartland Partners about $8.5 Million it does not have the where-with-all to pay. Our goal is to achieve a resolution that is fair to Heartland Partners and allows it to function free of the problems of Heartland Technology."

      Andy

    • after HTI is desolved or goes bk,who owns the GP ?? The creditors of HTI ??

    • Andy-

      I would like to say that I completely understood the PG Oldco transactions, but I will confess I definitely do not.

      That said, here is what I can parse out of the filings and "a few years" in the commerxcial arena.

      PG Oldco acquired their obligation from HTI by selling a technology company of similar name to HTI. The obligation was either unsecured or secured by the stock of PG. It is clear to me that the sellers knew what the buyers did not and was fatal to the buyers,namely, that the business sold, being a technology business, was on the cutting edge of obsolescence. It seems that HTI made a habit of buying such operations and the tech downturn destroyed the value of those operations if they had any significant value at all.

      There was a cash portion (this is from memory,not research) to the transaction and my assumption is that the cash portion of the transaction was equal to or in excess of
      the true value of the operations.The note was gravy.

      In this scenario, the not, whatever it's characterization, was unsecured and as HTI lurched towards its date with the bankruptcy court it became increasingly apparent that the note would become worthless or close there to.

      Enter HTL. They wanted security and probably the holders of the PG Oldco note were required to give their consent (this total conjecture).
      HTI had nothing of value to give PG and HTL certainly would not allow any of their loan proceeds to be diverted. The way out was to grant a subordinate lien on the Class B asset held by HTI.

      You note that this secondary lien has little or no value. I agree. However, a SECURED worthless note is better than an UNSECURED
      worthless note and there was no downside for PG Oldco presumably gave up nothing to become secured.

      I know it seems odd and it is just my theory, but it is the best I can do on short notice.

    • Al,

      Thanks for your input: welcome, as usual.

      It doesn't settle all of my concerns.

      Especially perplexing is this in your reply..."The reason that HTL lent the money to HTI on the collateral of the Class B is equally simple-HTL is the only party to whom the class B interest has much value at all."

      It is reasonable that HTL would accept HTI's Class B shs as collateral for a multimillion $ loan...but what was PG Olco's motivation to lend money on the Class B shs?

      A while back I wrote this...

      "HTI Class B,LLC - a wholly owned sub of HTI owns all of the Class B shs of HTL. These shs are valued at about $9.5 million on HTL's Balance sht at the end of Q1."

      "HTI owes us $8.5M and PG Oldco $2.2M, and has pledged their Class B shs as collateral for both loans. HTL has the "senior debt", so we(HTL) get paid first. PG Oldco gets $2.2M from whatever is left over after we get ours."

      "Is the Balance Sheet Valuation of the Class B shs reasonable? Probably not. The value of the assets is understated. (Assets are valued at their cost plus improvement costs if significant - not at market value)"

      "It appears that PG Oldco will wind up with some of the Class B shs. Who can they sell those to? ... Based on the paltry amount of income allotted to the Class B shs, it seems unlikely that many people are interested ..."

      "If PG Oldco is faced with owership in assets it doesn't get any income from and can't sell, won't they try to force a liquidation of the underlying assets of HTL? I would."

      "My guess is that the management of HTL isn't interested in having an unrelated party, (PG Oldco) as owners of a portion of the Class B shares. I think we'll buy them from PG Oldco, and maybe retire the Class B shares entirely."

      I see HTL getting "stuck" for HTI's loans. Do you disagree? If so, why?

      Also...

      If Class B holders, (ie HTI), benefit from the rise in the inherent value of the properties, I can begin to understand why the former management kept plowing money back into new assets or improvement on old properties. To my unsophisticated and naive mind, it makes evident the reason why they weren't anxious to pay off the loan which restricted cash distributions...

      Assuming that EJ et al had a substantial interest in seeing HTI prosper, there was little reason to pay out cash... Ergo...If cash is distributed HTI gets 1/2%...If the cash is retained and invested, the HTI "account" gets credited with approximately 50% of those funds, a hundredfold increase above the 1/2%. And, when the game is perpetuated, 50% of the subsequent increase in asset value.

      If you're an employee of both firms and also an owner, you've got reason enough to perpetuate the business, and hold tightly unto any "cash"/profit.

      Of course, I could have this wrong also.

      Comments?

      Andy

    • Page 3, Item 1: States General Partner HAS DISCRETION to make distributions out of available cash (in the the prescribed percentages). Means he doesn't have to distribute anything even if HTL has the funds...but if he does distribute, it must be in the prescribed percentages.

      Page 3, Item 2: Upon dissolution of the partnership(i.e the final wind-up of business affairs) the distributions are to be made pro rata according to the positive balances in the respective capital accounts. Thus, final distributions to wind up the capital accounts will be made based on the relative portion of capital held by your class relative to total capital.

      Let's not make this too hard. If Class A has a capital account balance of $5 million,Class B has $4 million and the general partner has $1 million, each dollar distributed at wind up would be divied up 50 cents to class A,40 cents to class B and 10 cents to the GP.Perfectly simple and fair.

      The reason that HTL lent the money to HTI on the collateral of the Class B is equally simple-HTL is the only party to whom the class B interest has much value at all.

      The Class B interest is effectively $9 million
      payable at HTL's discretion (essentially at dissolution). Even if HTL lands generated a $100 million profit, the increase in value of the Class B interest would be $500,000. And windup could be some time after 2050. Who would get into a mousetrap like that! Anyone care to PV $9 million payable at zero interest in say 50 or 60 years. Uggh!

      Reminds me of a bankrupt compay some years back that had 9% coupon bonds due in 1999. During the pendency of the case, we began to refer to the bonds as the Nones of Never.

      Out of this came the bankruptcy bar's contribution to financial engineering-the zero coupon perpetual bond. There always has to be a topper however. One of my colleagues recently came up with the Swiss franc denominated zero coupon perpetual bond. It pays negative zero per cent interest.

    • Al is better equiped to answer your question.

      however,I do not believe class B capital will not vary much as it is only affected by .5% of profit or loss.

      As to what caused Market Decline,We have speculated on that before,distressed seller was my guess.

    • Galena,

      You are correct...in both instances. Available cash is distributed exactly as you state, and liquidating distributions are different...all as per third para on page 3 in the last 10K.

      My confusion, probably not articulated well, has to do with the value of the Class B shs...
      If they are entitled to "fair value" of the assets only under the condition of liquidation of the partnership why would HTL accept the shs as collateral for the $8.5M in loans? And why would PG Oldco feel the same way and accept the Class B shs for the $2.2M they loaned HTI?

      If liqidation of the partnership is a remote possibility, of what value are the Class B shs? If they have value equal to or greater than the $10.7M, the total of the monies owed by HTI to HTL and PGO, how does that impact the value of the Class A shs? The $30M or so net assets have to be divided between the partners.
      If that division is according to the distribution of available cash there is no way the Class B shs could be worth anything like that $10M. Yet why would two parties, theoretically operating independently of HTI accept the Class B shs as collateral? What am I missing?

      Also, is there a connection between the roughly 50% decrease in market value of the Class A shs since January, and the HTI predicament?

      Despite this from the July 24th news release..."As always, if you have any further questions or concerns, feel free to contact us." I tried to get an appreciation of the matter from officials at HTL only to be told they were constrained from "opining" on the situation by SEC regulations. My posts are a reflection of my frustration.

      Sure wish Al was around....

      Andy

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