by the company at today's Lehman Bros. hi yield bond conf. You can view the slides at:
Pay particular attention to the last couple of slides, I think they are 31-33. Among other things, they show where the Co's. available beds are, who they expect to use the beds, and where near term growth is going to come from.
I would think their purpose in presenting this information, and where it is presented, is in preparation for eliminating the preferred issues and perhaps refinancing their current debt. This would be an additional source of substantial near term (one year) financial opportunity.
Interesting discussion on the Pref's. If the A is called it will be replaced by debt not another preferred issue. Although CXW will not pay taxes for a few years, once they see the light at the end of the tunnel they will reverse their valuation allowance and start booking a GAAP tax provision. Changing the capital structure will reduce the impact of the Preferreds on the GAAP eps which is usually attractive to management and when they start paying tax in 2005 it will be better from an economic sense too. I think they will call the A within 2 years or so and the yield to that call is approximately equal to the yield on the B's if called in a year but the A's have a better tax profile since $2 of the yield will come as a long term capital gain.
"I guess the only way the A would be better is if it got redeemed. "
Gabelli Convertible fund (GCV) just issued a new AAA preferred and the yield was 6%. I think with the cost of issuance it's doubtful CXW could do better with a new preferred. Also they have a large tax loss carry forward which keeps taxes down. The only possibilty would be to issue a bond instead which changes their capital structure. So I'm not sure but I would think doubtful of a pref A call from my view point. It would be interesting to find out where the 9.875% bond they have is trading but I have yet to find a market.
My thought is go with the "sure" bet on the pref B call. You get 2% extra and cash dividends in Sept. Next spring after a hopeful (or not actually) call then review the situation.
This is actually a strategy I use a lot to buy yield paper. Buy high potenial call paper. You get great yield and high quality. i.e. Last year I bought GGT pref 8% AAA at $25.25. They had issued a partial call on it so it was cheap. The dividend was $2 or $.50/quarter. That means it accrued $.1666/month. If you buy it at $25.25 2 months after the last ex-dividend you would actual get $25.33 (roughly)because they pay the accrued dividend to that point if called. So I really got higher then a 8% for it. They finally called the rest recently but I did get close 7-8 months at 8%annual rate, AAA. The other beauty of premium paper like this is it has better protection if rates climb because their coupons are so high due to high possible call. Most are thin markets so they require patience and I adjust my price relative to the last ex-diviend date...if you like to fish then you'll like this method...Shhh.....keep this to yourself..;-)
"The current yield on the A is 8.77% ($2/$22.80) the yield to call on the B is 10.89% if purchased at $24.70 a $.24 premium(call is $24.46...$2.93-$24.70-$24.46=$2.69/$24.70=10.89%)"
I guess the only way the A would be better is if it got redeemed. If it were redeemed 4/1/2005 you would get 25.00+4.50-22.80 I assume it would still be a full $.50 for the 1st qtr of 2005 , but I am not sure of it + it is not yet x-div for the for the first qtr of this year. If it costs $22.80 that would be a return of about 14% per year (6.70/22.80). Of course it were redeemed earlier the yield would be higher and the reverse if it were redeemed later.
Back in message 20179 you mentioned their real costs at 10% due to taxes. That would assume a 20% tax rate. If you assume a 25% rate it would be 10.67%, a 35% rate would be 12.3% A while back I think MK explained to me that they had an average tax rate of 25%. I wish I could remember the reason. If the marginal rate were 35%, then I think this might be the most appropriate way to figure.
If you don't think it will be redeemed, I have to agree the B's are probably better.
Certainly the company is limited in the amount of growth it can obtain, it seems slow growth at this time, but steady. But looking at the last 2 quarters shows the great progress in their capital structure is making the difference. Interest expense in the 4th(2002) and 1st(2003) quarter ran at over $28mm. The 2nd quarter ran at $22m and now the 3rd and 4th quarters are coming in at $18mm. A $10mm/Q. savings from the beginning of the year. It's roughly a $1.50/shr. savings in interest costs alone. A refi. of the pref B and possibily the 9.875% note could save them another $10m a year in interest costs. This equals a total of $2/shr. in savings. I find that dramatic.
Total debt to tangible equity has improved in just one year from 1.78 to 1.30. And my favorite, adjusted free cash flow remains a solid $85mm/year or $2.68/shr and $23mm or
remarkable $.72/shr in the the 4th quarter.
I bought even more CXW pref B ex-dividend date at $24.50, a 12% yield. I have gathered a huge amount of this stuff in the last 3 years and not sold one share!!....keep up the great work CXW!!!
Flipper, the General is of the opinion that you should repost a corrected version of your message #20189 after proof-reading it.
Pay particular attention to your parenthecated "years." The General believes you meant a year less than you've shown (from your subsequent use of the past tense). Also, pay attention to your "m"s. Is "m" thousands and "mm" millions, or "m" millions and "mm" bilions? I think that it's apparent to anyone familiar with CXW's numbers, what you intended to say, it's just that your typing fingers haven't exactly executed your mind's thoughts.
Example: << . . . and 1st (2003) quarter ran at over $28mm. The 2nd quarter ran at $22m and now the 3rd and 4th quarters are coming in at $18 mm. >>
That's one helluva crystal ball you've got there. Either that, or you must be in some sort of a time warp. Maybe you could beam us all up?
<< A #10mm/Q savings from the beginning of the year. It's roughly a $1.50/shr. savings in interest cost alone. A refi. of the preferred B and possibily the 9.875% note could save them another $10m a year in interest costs. This equals a total of $2/shr. in savings. >>
Something about the magnitude of your reduced interest cost and its translation into savings in $/shr doesn't jibe based in what you've written.
There are three reasons that the General can come up with to explain what you've done and why the General has a problem understanding it. They are:
1. It is "new" math.
2. The General is dense.
3. You hope to be named Greenspan's successor.