You are incorrect. The bonds are not collateralized by the properties. They are unsecured. The bank debt has a first lien on the properties. They get made whole first (which should be no problem). THEN (ignoring second lien debt, complicated JV structures, etc.) the unsecured bonds try and achieve full recovery from what's left. They are unsecured. No collateral.
I agree with your perspective on the bond market in general. And if I were the bond market, I would not be worried about LINE either. That's because LINE could cut the distribution to $0 and have plenty of equity value to survive or get sold - no haircut to debt. However, that would obviously impact an equity security a great deal. So I would not extrapolate risk from the bond perspective to risk from the equity perspective.
You can list all the c-corps in the market, but that doesn't make LINE more valuable. LINE/LNCO has to issue more units to acquire those c-corps, and what we're trying to discuss here is how LINE might increase PER UNIT VALUE (not size). All you are talking about is buying stuff to get bigger, not more valuable. Juts buying c-corps does not increase LINE's price per unit. If you have a case for how LINE can acquire WLL or any other c-corp and increase the value of the company on a per-unit basis, please share.
I'm very long LINE and will hang around for a while after getting in during the July fireworks, but I can't make sense of the expectations of high thirties and $40/unit. Today the distribution is $2.90, and we're around a 10% yield. Not at all unusual for an E&P MLP. LINE has certainly traded at lower yields, but that was back when they could do no wrong and had years of smooth sailing behind them. After a year like 2013, I would expect them to trade at a higher yield, at least for a while. Even if they bump up the distribution to $3.08 as was once discussed, a 10% yield still has us in the $30s. Over time I believe LINE can earn back trust and get a lower yield from the market, but I think it will be months if not years. I feel like it's too simplistic to say it's the same LINE as before but with Permian and Berry so the price should be higher than it was before. That ignores any assets that did not meet expectations and any assets that were unable to replace reserves via drilling (because every well's volumes decrease every year). Remember that because of LINE's size they either NEED outstanding drilling results to remain in the same place OR really big acquisitions just to remain in the same place. Would love to be shown what I'm missing, but that's how I read the tea leaves.
what do you mean by "all available shares are shorted"? Certainly there is no limit on the number of shares that can be shorted, so I must be missing something.
Very reasonable assumptions, and I would not be surprised. If they keep the distribution around the $2.90 to $3.08 range, a 10% yield is not crazy at all, and that has them around the levels you are describing.
I bet you a dollar that Linn announces an agreement with Denbury during 2014. Denbury recently studied converting to or spinning off an MLP, but they decided to stay put. Great asset for MLP. Secondary recovery of oil in old field via CO2 injection. Low decline, stable, lots of reserves in the ground, factory-like, no exploration. I imagine Linn is hoping Denbury can wait just a little longer.
What do you see the distribution doing during this 12-month period that you are describing? To me all valuation for this breed of company starts there.
I prefer to only get long after a real beat down, as NRP had after Obama was re-elected and LINE had after the SEC decided to help Hedgeye. When I exit LINE, I don't anticipate getting into any E&P MLPs as the only ones under pressure leave me without conviction of a recovery (LRE, QRE). NRP passes many of your tests long-term, but coal is still under pressure, and their coverage has been steadily falling (to now near 1.0x). Natural gas will get to $5 one day, which will help coal, but I think that is still years away. CVRR and UAN have come under great pressure lately, for good reasons, but I believe they are variable distribution MLPs, which makes valuation trickier, and I don't have a feel for management on either. I also try to repeat the same process with BDCs which I think have a more sustainable model than commodity MLPs (e.g. MCC), but their market will be tough for a long time with these Fed games being played.
This may be built into the KBW modeling, but one big reason I buy into the attractiveness of BDC (and even MLP) debt is that if things get really bad, BDC/MLP can reduce or turn off the dividend/distribution for a while, and when you are not sending the bulk of your cash flow out the door, it's amazing how quickly you can shore things up. Of course the equity securities would rightfully take a beating, and the debt might swoon upon the news, but the debt should have plenty of asset value coverage to avoid haircuts.
I have not been listening to CCs or reading reports, so bear with me if these are obvious answers.
1) Has there ever been any talk of SLRC going to monthly dividends like SUNS?
2) Has SLRC stated any triggers to increase the dividend or simply return to the $0.60 quarterly dividend level?
3) Is it correct to say that more of SUNS's positions are higher in the capital structure than SLRC's?
4) Does SUNS have a higher percentage of floating rate debt than SLRC?
Thanks for input.
Can you share the list of 8 that fell into such category? I've been looking to do that for some time, and your info would be a huge benefit.
I'm very long LINE, but with a current annual distribution of $2.90 and PRIOR guidance of $3.08 with the Berry assets, I am not expecting to see $35 for the next year. I assume we trade no better than a 10% yield while at $2.90 which gives me a $29 price, and if we get a bump to $3.08 the market might squeeze down to 9% yield for a reward, which gives me a $34.22. How do you get to anything higher? I would be delighted to be missing something.
Karen, I've had success with NRP and LINE and was formulating a theory basically along the lines of your Perfect Storm. But you are ahead of me. Do you have any tools you use that alert you to securities that are down X% in the last Y days, etc., etc.?