I bailed at $1 a month or so ago and almost got out at $1.40 but got too cute trying to hold out for a little more. I rolled the remnants into RRC and just cashed out a 45% gain the other day. I still need a multi bagger just to break even though. Not that I bet it all on UPL.
They aren't remotely close to fixing debt covenants and it's too late anyway, they already filed chapter 11. The current asset values are based on $2.00 gas. There's an argument this is too low but they're orders of magnitude away from the value of the assets offsetting the debt. Debt holders get paid before shareholders.
I may play a dead cat bounce trade but there's little chance current shareholders are left with anything when the restructuring is done and I won't be holding for the outcome. Current debt holders will own at least most of the company, most likely all of it and will probably do very well once the nat gas industry rationalizes. IMO that's why they were so eager to pull the plug. It's Watford's fault for over leveraging and not acting to delever soon enough and my fault I lost most of this investment for not understanding this one well enough.
I took out a small stake in UPL a few years ago and increased it as UPL plummeted over the last year. Selling natural gas is a real business a good producer should be able to make money over the long run and according to conservative sources like Mornigstar this was supposed to be a good low cost producer. Of course M*'s fair value has gone from $40's to $1 last check, they probably drop coverage soon if they didn't already. Here are the warning signs "I" missed.
1. I saw the huge debt and huge debt with no cash and thought it was a worry but M* and some other reputable fairly conservative analyst thought it was manageable so I told myself it was O.K. "I" was wrong.
2. Less than a year ago an analyst brought up the debt covenants on a cc and Watford emphatically stated they could handle the issue by simply moving debt from the operating company to the parent company. Watford belittled the analyst for asking the question and I cheered Watford on assuming he must know what he's talking about to be so confident he has the issue under control. "I" was wrong to discount the analyst and believe Watford.
3. This fall Watford claimed there was an asset sale in the works that would solve their covenant problems and implied it was all but done. I loaded up at the time thinking Watford had the covenant problem resolved. "I" was wrong.
4. There were plenty of warnings that El Nino would result in a warm winter and drive gas prices sub $2. I figured low rig counts would drive production down to offset warm weather if they were right. "I" was wrong.
5. I've seen lots of other companies get into debt covenant problems work something out to modify the covenants and assumed UPL could do the same. "I" was wrong.
6. I knew UPL has to asses the value of their assets each year and the value would take a big hit after gas prices plummeted in 2015 and chose to believe they could handle this. I was wrong.
The same warnings were there for all investors.
Given I have no skin in the game and the low value of the NOL's to the debt ensures debt holders aren't going give up half the company to preserve the NOL's even if you are right, I'm not going to waste time following every referenced section in the code you referenced to try to thoroughly understand how NOL's can be transferred.
That said I've seen this issue come up with other companies who's shareholders thought they were going to reap a windfall from all of the losses their worthless company generated over the years. My understanding is that regulation limits the NOL carryover based on proportion of the acquired assets to the new company not on who owns stock in the new company.
I don't think UPL is worthless in fact it's value is probably why debt holders are so quick to pull the plug. I didn't mean to suggest UPL is worthless in the paragraph above however IMO anyone holding right now is making a mistake if they think the NOL's are going to save them. As did the investors in the worthless companies thinking the NOL's had value to them.
Getting a judge or debt holders in a settlement to agree to an asset value orders of magnitude higher than the current value is the only thing that's going to leave current shareholders with anything in the restructuring.
I've skimmed links to the code you referenced and don't have time to read thoroughly however they refer to acquisitions as expected have special rules for reorganizations and I've seen this issue come up in the past and have a clue about what the intent is.
The intent is not to have the IRS subvert the legal hierarchy of claim on assets and put shareholders in front of debt holders it's to ensure a company does not acquire another company solely for it's NOL's. Add to this:
"The total U.S. federal tax net operating loss of $913.4 million will be carried forward to offset taxable income generated in future years, and if unutilized, will expire between 2033 and 2035."
This offsets taxes if/when UPL is ever profitable again and can use the offsets. That's about $300M/ tax savings over multiple years vs. $3.9M debt. Even if the IRS was giving shareholders leverage over debt holders (which they're not) by holding the NOL's hostage to a min. 50% existing shareholder stake, what are the chances debt holders decide half the company is worth less than $300M over multiple years if/ when UPL is profitable again?
I believe this only pertains to a possible merger of UPL's assets with another company. To protect the tax benefit from the net operating losses UPL's assets probably have to be at least 50% of the merged company assets. The IRS doesn't care about who currently owns or may own shares in UPL in the future. They do have an interest in making sure regulations like NOL carry forwards are not abused. IE making sure a business isn't bought solely for it's NOL tax benefits.
I'm have no expertize in BK litigation however the assets and liability numbers being bantied about right now are based on the value of the assets at trough gas strip prices. IE: the value of the assets at trough gas prices is about half of the debt which suggests debt holders will own everything in the restructuring. Obviously the assets were valued higher than the debt when the assets were purchased (not too long ago from what I remember). The one hope I see for current shareholders is they can argue current gas prices are abnormal and asset values too low and for a valuation higher than the debt. I no longer have skin in the UPL game and would not bet on it, but that's the one hope left for anyone determined to ride this to the end.
From today's 10Q:
In addition, we have substantial unpaid principal maturities and interest payments that are past due, and we have substantial additional principal maturities and interest payments coming due in the near future. We do not have sufficient liquidity to pay our unpaid and near-term principal maturities and interest payments without raising additional capital. We do not have sufficient liquidity to pay our indebtedness if it is accelerated and becomes immediately due and payable without raising additional capital...
On April 1, 2016, we elected to defer making an interest payment of approximately $26.0 million due April 1, 2016 with respect to our 6.125% Senior Notes due 2024 (the "2024 Notes"). The indenture governing the 2024 Notes provides a 30-day grace period for us to make this interest payment. We do not expect to make this interest payment before the end of the grace period under the indenture governing the 2024 Notes. If we do not make this interest payment before the end of the grace period, this will become an event of default under the indenture governing the 2024 Notes and may result in the acceleration of all of our indebtedness, including the 2024 Notes. Due to our current financial constraints, including the likelihood of the occurrence of events of default under our debt agreements, there is a substantial risk that it may be necessary for us to seek protection from our creditors under Chapter 11 or the Canadian Bankruptcy and Insolvency Act, or an involuntary petition for bankruptcy may be filed against us in the U.S. or in Canada.
The current management team would be more than happy to keep running the company for the new owners if the new owners want to keep them on. The debt holders are going to trade in for equity it's only a matter of whether they get the whole company or just about the whole company. IE: shareholders will either be completely wiped out or just about completely wiped out when the debt gets restructured.
I finally bailed at ~$1/ share licked my wounds and moved on. Early on I was betting creditors didn't want to own the company and would re-work the covenants. Prices have been too low for too long leaving UPL too far out of compliance for a little help. I agree that valuing their assets on trough gas pricing seems unfair but it's reality. I'd make the case all parties should look at normalized prices but the smartest guys I read don't seem to know exactly what that is.
In regard to the debate about whether investors get zero or a slap on the wrist it's clear the debt holders are going to own most if not all of this company. I see one hope for shareholders in that there are two classes of debt holders, one at the parent company and one at the operating company. Operating company debt holders are senior. I'm not an expert on analyzing debt but right now debt exceeds the trough value of the assets. So it would seem Op Co debt holders will get all or near all in BK and parent company debt holders will be holding the bag. It thought for a while that if the parent company debt holders traded in their 1.3B in debt for say 70% equity (maybe an institutional shareholders takes a big stake in equity as well) they could get their debt down enough to get past this crisis and existing shareholders aren't completely wiped out. The way this is dragging out it doesn't look good and I finally just threw in the towel.
Another thought, they have some institutional shareholders that stand to lose all. They might be able to convince someone to salvage their current stake by upping the ante into a large chunk of the company to get it past this current crisis. It's not like they sell buggy whips, you should be able to make money selling natural gas.
Not a expert on debt but they made it clear just having some debt holders trade up in line isn't going to be enough. The solution will be trading debt for equity. The question is will debt holders et 100% or will current shareholders be left with anything? Debt holders certainly ain't gonna leave anything to shareholders out of the goodness of their hearts and the market is certainly betting shareholders are going to wind up with nothing.
That said I see one possibility shareholders don't lose all. There are two classes of debt holders, one at the operating company level an one at the holding company level. Apparently the operating company level debt holders will get the business in a restructuring and the holding company level debt holders will get nothing. Debt at the holding company level is $1.3B or 35% of total debt. If eliminating this debt would solve the covenant issues at the operating company level then Watford may be able to convince the holding company debt holders to trade in their debt for say 50% of equity leaving current equity holders with a lot less of the company but at least something.
Again, I ain't a debt expert and I could be missing something, but I've seen a few intelligent sources point out that the holding company debt holders will get screwed in a restructuring. If so Watford may actually have a lever to pull.
Cash flows were based on substantial hedging. They are un-hedged going forward. They're also on the verge of tripping debt covenants. They need help and it's going to come down to whether their creditors want to help them get past a disasterous warm winter or own the company.
Creditors usually just want to get paid back and are not keen on forcing BK but it's anything but a certainty they'll get help. On the last cc Watford spoke about an impending asset sale like it was all but done. I didn't see any mention of status of a potential asset sale in the press release. The press release wasn't much help, lets hope the cc is more helpful.
Animals; Sheep if I remember right. Pigs, 3 Different Kinds was a personal favorite. Will we be laughing or crying tomorrow?
They're just listing the total market for each "potential" treatment. At least under the old regime they narrowed the list down to treatments where the prognosis under traditional treatment is near certain death in months making their treatment (if it worked as promoted) the only viable option.
They also discussed specific reimbursement per treatment and had supposedly vetted this reimbursement with insurance companies. Since it was cheaper than traditional treatment it they supposedly received favorable responses from the insurance companies. Notice all of this is gone from the current investor presentation. There's a reason why they discuss vague generalities in regard to the economics of their products these days.
You also forgot to mention the biggest intentional mistake in the current presentation. The proof of concept milestone is based on a product they already walked away from. The trachea isn't even their primary target for clinical trials even though they claim to have human proof of concept for it.
Just dumped over 75% of their stake. They are a biotech focused fund with a strong track record that took part in the secondary late 2014 when HART was supposed to be in a large animal study as prerequisite to getting their trachea product into clinical trials. 6 months later when the large animal trial was supposed to be ending they pulled the rug out from under investors announcing they were starting over with a new product. Another 6 months and Prosight is bailing.
Not that I don't blame former CEO David Green for not vetting Dr. M's work before creating a company around it but at least he has a scientific background and ran a legit public company before moving down to HART. Now you have a guy who has to read from cue cards when he discusses what his company does. Add to that you went from Prosight, a NJ Pension Fund and some other legit institutional investor doing a legit secondary in 2014 to Aspire doing death spiral financing a year later.
The writing is on the wall.