What the market sees is declining rig dayrates combined with declining utilization. All the drillers are getting hit by this "double whammy", but PGN is getting hit harder, because it has mostly old, standard spec jackup rigs that are employed on shorter contracts. I think PGN can continue to produce strong free cash flow as long as it can keep its floaters contracted. If Petrobras were to terminate those contracts, then PGN's situation would be dire, but so far that hasn't happened.
Through all of 2015, standard jackup dayrates have been declining and rig utilization has been falling, and that is likely to continue through the end of 2016. After that the outlook is cloudy at best. It's difficult to see a catalyst to turn the market around. As Paragon works down its backlog, it isn't able to sign enough new contracts and extensions to keep its backlog from shrinking. That means revenue, earnings, and free cash flow will continue declining at least through 2016. Again, it's hard to see when or if a turnaround will begin.
I expect Paragon to kick off $150 million of free cash flow in 2Q, and at least $100 million each quarter for 3Q and 4Q of 2015. That will go a long way toward reducing Paragon's bond debt, since they can purchase it for less than half of face value. I can't see any other use for the cash as compelling as buying back senior bond debt.
goskiing, we'll soon know if management has stepped up senior bond purchases. I expect PGN to report free cash flow (before capital investment) in 2Q of at least $150 million. It will be interesting to see how they spent that money. If they didn't buy back senior bonds trading at less than half of face value, they are brain-dead.
newpikachu, I do intend to drop IR a line to recommend Paragon buy back discounted bonds using its free cash flow. Although, I'm 95% sure management is one, two or three steps ahead of me. Paragon management isn't as clueless as some on this board would have us believe. And, I'm convinced management is highly motivated to keep the company solvent, and to navigate the "rough waters" ahead. Paragon has a good chance to survive current weak industry conditions as long as its floaters stay contracted for the next few years. Key to financial sustainability will be Paragon's ability to retire a large chunk of its senior bond debt during the next two years. If Stilley's strategy is to buy back bonds at a discount, then the worst thing he could do would be to announce he intends to buy back bonds at a discount. If bondholders think Paragon in the market to buy back its bonds in a big way, then the bond price goes up. Stilley shouldn't trumpet his interest in buying back bonds, as that would be self-defeating. Rather, he should feign indifference. Stilley has long experience in negotiating deals, and I'm pretty sure he knows "who's on first". He may be better off waiting until individual bondholders approach Paragon about buying back their bonds.
goskiing99, I sympathize with your anxiety, as the stock price has cratered, and that doesn't inspire confidence in Paragon or its management. But, I'm not sure the management actions you propose are truly in the interest of stockholders. The way out of Paragon's existential dilemma is to buy back its senior bonds at a steep discount using its huge free cash flow. In order for that strategy to succeed, the bonds need to continue trading at half of face value or less. So, ironically, it would be counterproductive for management to do anything to reassure bondholders that Paragon will pull through. In other words, it's in shareholders' interest for management to appear to be feckless, so that the senior bonds continue to trade at a steep discount. That will allow management to continue to buy back the bonds for half or less of face value. If management were to buy PGN stock in the open market as a demonstration of their confidence in Paragon's prospects, although it would likely boost shareholder morale, it would also boost bondholder morale, and would likely boost the value of the bonds Paragon needs to buy back. That's why stock purchases by Paragon management are self-defeating. In terms of Paragon's sustainability, it would be more effective if Paragon insiders sell PGN stock, which would serve to fan the flames of investor panic, likely causing both the stock and bonds to trade lower.
Management was busy closing the Prospector acquisition. During the last six months it has become clear to management that reducing debt is a top priority. I expect management to ramp up purchases of senior debt at half or less of face value. The free cash flow is available for Paragon to pare its debt, and buying back debt at 43% of face yields a roughly 16% cash-on-cash return on investment. There isn't any other investment that produces a higher ROI. With the paucity of tenders for new contracts, Paragon won't buy rigs on spec.
I've seen similar situations where the bondholders panic and a company is able to buy back its debt at half of face value, eventually retiring a huge chunk of their debt. This is doable!
Again, Paragon isn't even close to being insolvent. Paragon produced $210 million in free cash flow last quarter. I anticipate Paragon will produce at least $150 million in free cash flow in the current quarter, and at least $100 million of quarterly free cash flow for the remaining two quarters in 2015. (The foregoing assumes Paragon doesn't sign a single new contract or extension.)
Paragon senior debt is selling at 43 cents on the dollar. If Paragon devotes its copious free cash flow to buying back senior debt at half of face value, then it should be able to pay off half of its balance sheet debt by 2021 when it needs to refinance the term loan. This is doable!
After the Prospector financing closes in 3Q, Paragon will have roughly $1.7 billion of balance sheet debt. If Paragon applies $200 million of free cash flow to buy senior bonds, it should reduce debt to $1.3 billion by the end of this year. I'm guessing that Paragon can reduce the debt balance to $700 million by the end of 2016. Backlog stood at $1.7 billion at the end of April 2015 after reflecting the Pemex contract cancellations. Paragon doesn't actually have to sign new business to pare its debt because the debt is trading at 43% of face value. I've seen other companies do this.
Errata: I stated in a previous post that the term loan is due in 2019. That's wrong--it's due in 2021. Basically, Paragon has six (6) years to clean up its balance sheet by buying back senior debt before it has to refinance the term loan.
By my reckoning, even if Paragon doesn't sign a single new contract or extension, it will still be kicking off $100 million of free cash flow by 2015 4Q. So, if I were Stilley, my strategy would be to use all of that free cash flow to buy back Paragon's bonds at half of face value or less. The bonds are trading at 43 cents on the dollar or so. If Stilley devotes all of Paragon's free cash flow through the end of 2016 to buying back bonds, he should be able to retire at least $800 million face value of bonds. Look--this is absolutely doable! He needs to ignore the term loan due in 2019, and just put every cent of free cash flow into buying bonds at a steep discount. If he does that, then he'll be able to refinance the term loan when it comes due in 2019, because half of Paragon's current debt will be paid off by then. The balance sheet will be sustainable, and Paragon will be creditworthy enough in 2019 to be able to refinance the term loan.
It is noted that in 2015 1Q, Paragon generated $210 million of cash from operations, and spent roughly $51 million on capital investments. In other words, after Paragon spent $51 million on capital investments, the cash left over from the first quarter cash from operations was enough to pay its debt service for the next 3 quarters. I expect Paragon to generate nearly as much cash from operations in 2015 2Q as it generated in 1Q.
For the record, Stilley bought a pile of PGN shares last December. It might be worth remembering that Stilley's financial well-being is totally dependent on Paragon. Any financial advisor worth his salt would advise Stilley to diversify his investment portfolio, and not to load up on shares of Paragon, because 100% of Stilley's income from employment is derived from Paragon. That is the conventional financial advice that financial advisors give executives like Stilley.
I believe Stilley is diligently pursuing new business, and is making every effort to secure contract extensions. But, the total number of rigs in service is falling across the industry. Stilley can't win new contracts unless there are tenders. I'm confident that Paragon's standard rigs are competitive for many applications, especially for workovers and development work. The stock price has been crushed and suggests possible bankruptcy. Paragon's existing backlog seems to indicate that bankruptcy isn't in the cards, at least through 2016.
It stands to reason that spinoffs of the CLO, online lending and real estate businesses will trade at higher multiples than PSEC does currently. Eliasek stated during the web seminar a week ago that PSEC will look to reinvest the cash it gets from the spinoffs at similar or higher yields than those the spun off businesses were generating, so PSEC's dividend shouldn't be much affected post-spinoffs. The spinoffs all have higher internal ROIC than PSEC does, so should trade at higher multiples than PSEC. Industry comps support this assumption. Investors have a right to be skeptical or even cynical after the dividend cut last December, and considering the fact that the rapid growth in PSEC's assets over the last few years haven't benefited shareholders. But, I still think the planned spinoffs will create shareholder value at the end of the day. And, although many shareholders have questioned management's motives, it can't be denied they have been making large PSEC share purchases recently. So, now John Barry owns over 5.3 million shares after recent purchases. Based on the current PSEC share price, his timing doesn't appear to be prescient. Still, it is noted that he recently bought PSEC shares at their largest discount to book value since the financial crisis, and the spinoffs could be the near-term catalyst for shareholder value creation. It doesn't appear that the market is ascribing any value to the spinoff plan, so it would surprise me if John Barry's PSEC share purchase of last week is in the red a year from now.
truthbetoldkids, I think there is a basic misconception at work here. The judge is only supposed to decide matters of law, ie what the patents at issue mean. The judge isn't supposed to determine matters of fact, ie "who did what/when". So, the judge just sets up the case parameters by interpreting the applicable law, and what the patents at issue mean. But, only the jury can decide if somebody really infringed those patents. The plaintiff (Finjan) still has to prove that Blue Coat's products were sold in commercial quantities in the market at a time when Finjan's patents were valid. There are timing issues and other considerations. Finjan needs to introduce all sorts of historical evidence dating from the time of the alleged infringement to prove that Blue Coat infringed, and that the infringement involved a material amount of revenue and wasn't trivial.
I'm guessing the trial will take 6 months to a year. Look how long the last Symantec trial took. Both sides have to recruit their expert witnesses, and coach them, and prepare graphics to present during the trial, etc.
Who says BlueCoat is amenable to a settlement? Finjan has been offering to settle from Day One, but BlueCoat says "Not interested". Anyway, I don't believe your characterization that "the judge said pretty much Finjan you win, but not on everything" is correct. The judge has interpreted what Finjan's asserted claims mean as matters of law. Now it is up to a jury to determine matters of fact--ie, did or did BlueCoat not infringe the asserted patents with its products.
Agreed. I think the real sticking point is that reducing AUM will reduce management fees in direct proportion (to the reduction in AUM). Another possible sticking point is that PSEC's assets are illiquid. PSEC mostly owns loans made to middle market companies, and each loan is different. IOW, those loans aren't like government bonds that trade in an active market. The only way PSEC can raise cash for its assets is to find a buyer--probably another BDC--that wants to buy them. So, when they say their "mark-to-market" value of the loan portfolio is the current fair market value of the loan portfolio, it's with a wink and a nod. In reality, there isn't an actively traded market for middle market loans. Those are Level 3 assets that are hard to value.
Here is my response to Mr. Cimini in PSEC IR:
Dear Mr. Cimini,
Thank you for your response to my share buyback proposal. Please note that I'm proposing that Prospect Capital execute a share buyback in conjunction with a concurrent asset liquidation in equal dollar-for-dollar amounts. In other words, I'm proposing that for every dollar of PSEC share purchases, a dollar of PSEC assets will be sold, so the net result will be leverage neutral. As proposed, the buyback will not adversely affect leverage ratios, and will not impact S&P's assigned debt rating.
This share buyback proposal is clearly in the interest of shareholders who have endured a 30% share price plunge since last Fall. I wish to point out that there is a perception in the investor community that PSEC management appears to put the interests of the management company ahead of shareholder interests. Executing a share buyback will be a strong demonstration that management puts the interests of shareholders first.