What about the longs? Let the equity die and new equity given to the lenders in return for elimination of the debt. This would keep MCP going.
Many Americans purchased houses in the last boom. When the boom went bust in 2008, they were stuck with property not worth the mortgage. Many houses were abandoned and the bank short sold it and took a loss on the mortgage. The previous owners lost all their equity. Short selling was practiced widespread in the last 5 years.
The same phenomenon is happening to MCP. It overpaid for Neo and Project Phoenix. MCP is not worth the current debt of $1.7 bln. The upcoming restructuring is a type of "short sale" where the property is sold at market value to the current bondholders. They will recover some of the $1.7 bln. The existing longs are like the homeowner who lost all his equity.
Longs anticipate REE prices to rise dramatically. They hope that tonight's 60 Minutes piece will release a nationalistic drive to save MCP. Both of these events are highly unlikely. But if they do happen, the money will all go to the bondholders who are severely underwater.
Cb, you have limited financial skills. Where do you think the $200 mln will come from to convert the debt to equity? Poof, all the equity is gone!
Also, you have poor trading skills. My short will mature in May when my holding period reaches 1 year. If I needed to synthetically close it now, what is to prevent me from selling long dated puts?
I am a short and am not campaigning for any more damage to MCP stock. It is a mortally wounded animal that will die all by itself. Those silly posts you read are from children or similar types that like to see longs writhe in pain. The fact that you react to them is a tell on your mental state. It is no fun to see a lot of money lost. Learn from this and be on the winning side next time.
Oh my! Back in the day, Enron's stock dropped due to accounting fraud. Ken Lay and Skilling were led out in a perp walk. Would you go out and buy Enron stock given these circumstances?
WAMU shareholders got nothing. In a similar government bail-out, GM shareholders got nothing. I expect the same results here if the government steps in. Longs fail to appreciate that there is 1.7 bln debt on the books. These owners are in front of the line.
I would have thought an investor as smart as you are would know about stock trading in BK. Shorts have nothing to worry about. One day the stock will be cancelled and new stock issued to the bond holders. If a short really wanted to buy stock to close, he could do it at any time and well after the BK is done. Example: About 5 years ago Blockbuster went BK and the stock got cancelled. But the stock still trades! Look up BLIAK, the old Blockbuster stock. There is a YMB; it looks like a regular stock but it isn't.
I'm sure if I look around I can find the cancelled GM stock board.
Shorts, this stock is going to zero. Your only choice you need to make is when to take the gain.
Josey, it is remarkable that MCP shyt the bed on Monday and by Friday you already have a court action. I think you wanted to dump your wife anyway and MCP is just an excuse.
I opened up my MCP short last May and have no intentions to cover. One may not be able to sell short once it goes onto the pink sheets but all previous shorts stay intact. Delisting is a minor problem at MCP. They have an existential crisis.
To my fellow shorts: You don't need to cover. But if you do, make sure your holding period is over one year so you get long term capital gains treatment on the juicy gains. You don't have to cover in 2015. Next year is OK if you wish to push the gain a different year. Even after BK and the stock is declared dead, it will trade and you can cover.
The end game is upon us.
Why it's Miss Ann T. Lope grazing in the grass on a serene African savanna day. But wait, I hear approaching hyenas whining and yelping in a cacophonous din. They circle poor Miss Ann T. Lope and prepare for the kill. An alert lioness sees those pesky hyenas and lets out a roar. Within minutes, the male lions of the pride arrive on the scene and take care of business. Most hyenas scatter but some are caught by the males and killed just to show who's boss. Miss Ann T. Lope is moving slowly for a stage right exit. But she is not so lucky. She is pounced upon by several lioness. They start to feed even though she is still alive. Then with a mighty roar and much violence, the male lions jump in pushing aside the females and chomp, chomp, chomp, finish off Miss. Ann T. Lope.
Moral of this story: It sucks to be a MCP long. It also sucks to be a jr. debt holder.
Any dealings between the hyena and antelope will be sniffed out by the lion. He will jump in and exert his dominance. Why do you think the seniors trade higher than the juniors? The seniors will chomp, chomp, chomp on the poor antelope before the hyena. Yes we hear about hyena Apollo. But when the lion comes on the scene and roars, Apollo will back down.
Hawkins is a lion since he owns senior debt. Apollo owns the '16 convertibles and is a hyena that wants to eat the antelope (equity) to stay alive. But the lion is king and will chomp on the antelope first. Until the lion is satiated, all the hyenas can do is look on and whine and look like hungry savannah animals.
Is there enough antelope meat to go around? Senior debt is selling for 45%; juniors are 16%. Do the math and it seems that only the lion will have a meal. And even so, the lion will still be hungry. The poor hyenas will try to grab a bite, but the lion is too strong. Lions will kill those who try to poach food.
What about the poor antelope? Chomp, chomp, chomp! Nothing left!
Two months ago, MCP engaged Jones Day to restructure the debt. Apparently they failed and now MCP has Miller Buckfire to negotiate the deal. Although the near dated convertibles pose the most urgent refinance problem, the senior debt having the highest coupon rate also must be included in the discussions. MCP must reduce interest payments for it to have a chance for profitability.
The animal kingdom offers a wonderful analogy on the relationship between the components of MCP’s capital structure.
The lion: (Senior debt) Top of the food chain and must kill to eat.
The hyena: (Convertible debt) A scavenger nemesis to the lion. Will kill small game.
The antelope: (Equity) A frequent nosh for the lion and hyena
In the ongoing negotiations, the lion controls everything. They communicate with their mouths: Chomp, Chomp, Chomp! The only “food” available to eat is an antelope. So long as a lion is around, the hyena can just whine and wait for the big cat to chomp, chomp, chomp on the antelope. Maybe the hyena will get a bite of the leftovers. How much leverage does the antelope have with the lion? Can it survive? Will there be any equity left? In other words, can an antelope tell the lion to take a bite or two and then let it go? No! Chomp, chomp, chomp!
And this is what will happen to MCP’s stock. When Miller Buckfire is done, the equity will go to the lion. If the lion is full, the remainder goes to the hyena. If the antelope is lucky, the lion will kill it before being devoured. If unlucky, the lion will eat the antelope alive.
Chomp, Chomp, Chomp!
It is rare to find a young lion with patience and even with the ability to order wine. You must be a hit with the lioness.
Ah, I see you have been brainwashed by Mark Smith! Years ago he said the new Mt. Pass could get cost down to $7 per kg. There are several faults with this belief. It depended on all being right with the plant. We know now that this is not true. The water balance is constantly off and may never be right. Chlor Alkali is also a problem. But the killer is that half of the plant's production, Cerium sells for $3.50 per kg. Even if the goal of $7.00 per kg is reached, the plant is still a loser. You may ask how does China make money at $3.50 per kg. They can because the REE is co-produced with iron. The fact is that Mt. Pass was never to be the low cost producer. Even with export tariffs, China can sell lower than MCP.
I have no doubt that Mt. Pass can now or one day be operated at 20,000 tonnes per year. The critical question is can they sell at this rate. It is stupid to operate a plant at design rates just to show you can do it. And in the meantime, the inventory goes through the roof. And locked in this inventory is the cash used to produced the unwanted inventory.
My assumptions are based on the very bad stock price. It should raise your eyebrows also. I don't know exactly what is going on behind closed doors. But I do know that seniors have all the trump cards and equity longs are on the bargaining block.
All debt instruments are festooned with legal clauses that protect the lender. Other than collecting the interest, the only other event of interest is repayment of principal. If the debt holder gets wind that their loan may not be repaid, they will jump in and protect their rights.
The debt restructuring underway now at MCP is not a bankruptcy proceeding. Nor has MCP filed for bankruptcy protection. It’s a business-like negotiation wherein MCP seeks to reduce its interest cost. I say it’s an impairment event because if the negotiations stall, the seniors will file to recover their principal. Debt holders will be asked to take a haircut in principal or interest. The only bargaining chip that is of value is the equity. So you can pencil in a wipe out of existing equity for reissue as new equity to be distributed to the debt holders. I use the lion analogy to underscore the power longs have in losing their shares: none. They are the unfortunate Miss Ann T. Lope in this storyline. No matter how compassionate or morally right it is for the longs to survive, all they will hear is chomp, chomp, chomp.
As MCP is now configured, it will fail. It is an LREE company selling into a saturated market. They need to quadruple Mt. Pass production to achieve the Oaktree operating goals. You tell me how this is possible.
One for all and all for one! This applies to the debt situation. If one series is in trouble all are in trouble. And once there is trouble, an impairment event, the debt holders can demand repayment. If you held debt and MCP came to you and said your debt was at risk what would you do? Try and recover as much as possible. And that is where the lion analogy comes into play. The senior debt holders are akin to lions as they can chomp on all they want until they are satiated, (100% return of principal).
In the alternative, would they try to work out a deal so that stockholders get something, convertibles get something, and the seniors get something but less than they could? NFW! They are lions and can chomp on all that is in sight. Does a lion cares that a gazelle wants to live rather than to be eaten. No! Chomp, chomp, chomp.
I laugh every time I hear about the Oaktree $150 mln add-on financing. MCP has to ramp up to a high level to achieve the goals needed to enable the add-on. NFW! MCP would burn through more than $150 mln in trying to ramp up. The REE market will not absorb all that they produce. MCP knows this. This is part of the reason why they are renegotiating the debt.
Yes, your definition of restructuring is right.
But I like my lion analogy better to describe the negotiations underway right now.
The senior debt holders hold $637 mln debt. Seniors are like hungry lions, they want to eat and have the resources to eat what they want. Until they are satiated ($637 mln), they will continue ravage the savannah and eat. Their reputation is poor; many a wildebeest claim lions do not know the right wine to drink with their food. Their food preparation skills are also poor. Most lions eat their food adhuc vivens (latin for “still alive”) despite protestations from the unfortunate prey.
In the case of MCP, there are not enough assets to pay off the seniors. Left to their own devices, the seniors can shut down the company and sell everything off to achieve their goal of 100% recovery. Chomp, chomp, chomp.
Wait, let’s be civilized; let’s wipe out the equity and issue new stock to the seniors. Chomp, chomp, chomp.
What about the convertibles? If the seniors are satiated by only a portion of the new equity, the rest goes to the convertibles.
This is the process underway now. This is how MCP remains intact and does not become an adhuc vivens meal for the seniors.
If you’re a long go in peace. Don’t be like Miss Ann T. Lope who said while she was in the jaws of a very hungry lion: “You don’t have to eat all of me. Just take a bite or two and let me go.” The hungry lion responded: Chomp, chomp, chomp!
I think institutions have not fully bailed out yet. Some are hedged by short positions so they cannot lose everything. The common shareholders will lose evereything despite the continual trading in the stock. At some time in the near future, MCP will issue a warning to shareholders saying the common is most likely worthless.