I have done pretty well in distressed debt investing, usually buying bonds in Chapter 11 and seeing my return after the company goes public again. I have seen at least 20 situations similar to what is happening at JOEZ, and the pattern is very familiar to me. I think the messages I am reading here completely miss the underlying dynamic.
This is pure *speculation* as I have no inside knowledge. But the events of the last week suggest to me that JOEZ had reason to believe that they had some agreement with the bank, and based on that announced a conference call date. The contract was not signed, and on the way to the closing the bank raised new conditions. JOEZ cancelled the call, and the comments that they are consulting an outside group about their options is a clear flag to me that if the company cannot reach agreement with the bank they will either: a) declare chapter 11; or b) pursue a private equity deal that buys the debt and equity avoiding a formal chapter 11 (i.e., an out of court reorganization).
Either a) or b) will effectively wipe out shareholders. This company has no tangible equity on their balance sheet. We can argue about whether the intangible assets have value, but the point people need to understand is that in a crisis like this, the private equity firms will give very little value to the intangible assets.
What you have today with JOEZ is a binary situation. Either:
1) The company will do a) or b) above, in which case shareholders are wiped out. OR:
2) The bank will blink at the last moment, realizing that they don't want to own the assets in bankruptcy, and they will refinance. If 2) takes place, JOEZ stock will revalue to 70 cents to $1.10 quickly.
To my eye, this would be a foolish investment at today's price. It's 35 cents up or 35 cents down, and you cannot game that outcome without inside knowledge. Talking about "hidden value" in a liquidity crisis is absolute nonsense. It's the #1 mistake I see in a crisis.
When are they due to list on NASDAQ?
What was the point of a reverse 10-to-1 split that still keeps their price under $5? They are going to be under limits set for many funds that might consider this.
You are living in the past, and you appear to be unable to accept change. The company may have been a sleazy call center, but it has been working to make itself something less sleazy. Rather than really analyzing that transformation, you just sling mud by trying to show events in the far past that don't accurately reflect the current entity.
I think the thing to watch is the NASDAQ offering. If most of that offering is a secondary with insiders bailing out, that would be a very bad sign.
Here is a devil's advocate argument, and I would appreciate your countering it.
As part of the uplift to NASDAQ, NHLD had to give up its most profitable alternative product business. Dec 2014 quarter reflects this with very low 0.5M earnings. If that trend continues, they earn only 2M per year, which on a forward basis puts them at a PE of 20 against the current share price.
They are already trading below book, but you could imagine the market only giving them tangible asset value and maybe writing off the goodwill, so unlikely book value is a protection when the earnings are in doubt.
bigbear I think you have it reversed. Tanker stocks went up because oil went down. Tanker stocks are under pressure now because oil is beginning to move back up.
Low oil prices meant more contracts for using tankers for offshore storage facilities. Oil at low prices increases volume demand, hence increases tanker rates.
On options, I couldn't disagree with you more. High premium indicates that the volatility is already in the option price, and the time decay eats everyone who is not a PhD in mathematics alive. High premium option bets are for suckers.
DDD has had a 25% borrow for the last few months yet someone holding it short in that timeframe did not make a profit, as the borrow cost offset the decline in value. That high borrow cost means you need to hold for a short time period and time the short absolutely perfectly.
I think you would be better off in DDD buying a put that is well into the money. The premium in this case would be less than the borrow cost shorting outright.
I'm still following JOEZ. I am interested in the news release that the CEO of Hudson is quitting the board and looking at his strategic alternatives. Apparently as part of the Hudson transaction, he took back about $23M of convertible bonds from JOEZ. Can someone explain to me what was the total compensation received by Hudson shareholders? How much of that was cash on closing of the sale, and how much of that was either equity or convertible bonds?
And now the million dollar question: where do those convertible bonds sit on the hierarchy of debt? I assume they will NOT have seniority to bank loans? So if JOEZ does do a Chapter 11 those convertible bonds might be worthless? Has someone done the math? Given a large negative tangible equity, it's hard to imagine that even the bank debt would see a complete recovery? Is the convertible bond to Hudson part of the short term or long term debt on the balance sheet?
What I am trying to figure out from all of this is what is the Hudson's CEOs incentive regarding a Chapter 11. My guess would be that he tries to do an out of court leveraged buyout that gives the banks most of the equity, preserves a more management amount of bank debt on the balance sheet, and gives him some equity in exchange for his convertible bonds and his agreement to manage the reorganized entity as the new CEO. I think shareholders will get effectively zero (less than 5%) of the reorganized entity.
BUT, after terms or reorganization are made public and all sides sign off on it, it might be interesting to see if the new CEO could launch a turnaround. I'm not sure you need to get in early to see the benefit of that, but it would be a stock to watch.
I am with kkranker on this. Don't you think the smart money said this a year ago and that is a primary reason for the stock being down this far?
I would remind people that the same thing happened in Australia a few years ago, with the new law threatening to put payday lending out of business. After six months of lobbying by industry, the rules were eased and that payday business was allowed to continue.
I think you buy this panic.
Are there any startup biochem companies that are public and are pursuing as their main product approach oncolytic immunotherapy? Are any of these using a viral approach similar to what Duke has done with modified polio virus?
That looks like totally wrong analysis. The cash flow statement and balance sheet tell you much more. The operating cash flow for year 2014 is -$10.3M and the other investment cash flows give them negative free cash flow around -$11.5M.
There is no cash on the balance sheet. So how did they finance that cash drain? Look at the net borrowings on the cash flow, and they borrowed an additional $12.3M. The company is in a liquidity crisis. That's why they are 20 cents even though fundamentally they are worth 80 cents to $1.20 easily. When you are in a liquidity crisis like this, the finance guys close your lines of credit and become vultures who make a grab for your assets.
You are making the mistake that all fundamental value investors make in liquidity crisis: you are confusing *fair* value with what a vulture pays for assets. In every situation like this I have seen where a bankruptcy is avoided, there is a last minute "financing" that effective dilutes the existing shareholders to zero. That happens simply because the company loses all of its financial flexibility and ability to negotiate fair terms on any deal. They end up taking what is offered because there is no better choice. Management does better than okay many times because they negotiated new incentive agreements with the new owners. Shareholders get nothing.
Yes, JOEZ is worth 80 cents plus, for sure. And that will all be for the benefit of the new owners, not common shareholders.
Does DHT have any public debt, either bonds or preferreds?
I'm trying to find a crude oil tanker company with recently priced convertible bonds or convertible preferreds. It doesn't have to be a US based company and the debt can be in a foreign market.
Do you know of any recently-issued convertible preferreds or convertible bonds for crude tanker companies that are public? I'm trying to realize a strike for the convertible that lets us expose to upside if crude tanker rates continue to improve, and to get paid something while waiting....
I'm looking for a new convertible. I'm not discussing the convertible that matures in April.
I think that just side steps my questions. I understand small brokers sell for a premium because this is a buy out environment. The issue is that NHLD is having to completely modify its earnings profile and no one understands (yet) what their revised earnings will be. That creates doubt about valuation even if you understand what the metric should be.