Goodness, Brew, it's not remotely that simple. LinnCo owns a bit more than a third of Linn's outstanding units, if memory serves. That'd cost more money than Linn could afford if you add in the legal costs, if it's even legal to begin with. Then there are the taxes on the deferred income upon the sale of units. That could be even more than the actual taxes I alluded to. Finally, I don't know if the taxes my post referred to are actually an issue. That's why I raised the questions. If Linn pays LinnCo's taxes, that resolves the matter. But, so far, I haven't read anything that raises the curtain.
I've never before seen LNCO sell at a price that's 15% below Linn's PPS. LinnCo being a holding company C-Corp. with nothing but Linn Energy units in its coffers makes for a problematic situation. Are there contractual covenants between the companies that militate against LinnCo? Will Linn have to pay taxes due on Linnco's share of the bond buy-in's invisible "profits"? Is LinnCo permitted to sell shares of LINE to pay off the IRS? (And sales would trigger yet more taxes that were deferred on distributions from Linn.) Finally, (and I grant that this is a stretch) would LinnCo need Chapter 11 to permit it to pay its taxes via unit sales of Linn? I wouldn't be surprised if the unknowns are causing selling pressure. The Linn/LinnCo arrangement is unusual to begin with and could become odder yet I suspect.
Unfortunately the UBIT gains per unit of Linn far exceed the carryforward losses that LinnCo has accumulated from Linn. Still, they'll be of some help. The question in my mind is if LinnCo can sell units of Linn to defray taxes or whether LNCO holders will be holding the bag.
You do realize, I hope, that the good hedges are rapidly rolling off and that this time next year (unless WTI magically soars) you may not be thanking anyone, let alone God, who's surely investing in something other than Linn Energy. It's probably the omniscience thing.
RMC, according to an IRS K-1 specialist I spoke to a couple of years back, you can carry forward UBIT losses, but I don't see how capital losses on unit sales have anything to do with UBIT. They don't even use the same tax schedules.
Yes, Tcar! Many us on this board know to the exact minute. It's simple if you cultivate psychic powers. But we're keeping mum to take advantage.
In regard to the bond accounting profits, those are UBTI and can't be used against a general category of "passive losses." Only UBTI losses can be carried forward to be applied against a UBTI gain. To do so with an MLP/LLC held in an IRA an annual Form 990T must be filed to maintain any UBTI loss. I don't know if that's also the case with non-IRA unit holdings. The good news is that the chances of being audited for this are pretty low as the IRS has much bigger UBTI fish to fry (universities, charities, churches, umpteen other non-profits) than MLP/LLCs.
I agree with your suspicion, Susan. UBTI gains (and they could be huge for 2015 and smartly more than the unit price) on the K-1 are an entirely different tax category from capital gains or losses.
Relief from the govt., TRG? Bankruptcy is the capitalistic relief valve. Then larger, more well-run companies buy up the assets or the smaller, well-run bankrupt companies have a chance for a fresh start. We had govt. bailouts (which turned out to be profitable) of some mega-sized financial concerns in 2008 because of their interconnectedness with so much of the rest of the economy. That doesn't obtain with relatively small energy companies.
RMC, but you pretty much defined what UBTI is: unrelated business taxable income, which would be the gain on debt extinguishment. As I see it anyway.
The following is from yesterday's Moody's announcement:
"The downgrade of LINE's ratings reflect elevated distressed exchange risk going forward at the company. While LINE's second lien financing helps to improve the company's leverage metrics, further debt reduction is necessary in order to improve asset coverage of debt as the company's hedge book continues to roll off into materially lower commodity prices," commented Gretchen French, Moody's Vice President. "In addition, the additional secured debt further subordinates LINE's unsecured debt."
Moody's also has a metric for the likelihood of generally accepted default, and the new rating for that is just about scraping bottom.
The latest trades for Linn's 8.625% notes maturing in April of 2020 are now around 22. Given a few months I'd expect that number to drop to the higher teens.
There's going to be a pretty large accounting profit on the bonds that were sold at an approximately 50% discount to par, something like a billion dollars it seems. My guess is that it all goes to Line 20v of the K-1, which taxes the holder for all UBTI over $1,000, each individual unit holder having a different sum based on his number of units, length of time held during the year, average purchase price, and who knows what else. The tax is based on the scale for trusts (if memory serves) and differs markedly from one's regular income tax percentage. . . and not in a good way. Does anyone know how close to the mark this guess is?
And what about LNCO holders? In the case of a C-corp. I'd guess that LinnCo itself would be on the hook and would have to sell LINE units to pay taxes due. It doesn't make sense to me that shareholders would have to come up with anything. It's not like they're responsible for any Linn UBTI.
Nschwartz, there's absolutely nothing illegal about making such a private deal. It's been done in the U.S. since the inception of bonds. (And it's an excellent deal for Linn and its balance sheet.)
There's still a $500K left to, in effect, exchange one billion dollars of the outstanding unsecured notes for a half billion dollars of the junior liens at 12%. That'd improve the balance sheet even more and save about another $8 million in annual interest. The current deal cut the amount of the 2019 notes by a bit more than half, so Linn will probably cut that down even more. It's not like they're out of the woods, but Linn is certainly much better off with such debt exchanges. Moreover, it's clear that the large institutional holders of Linn's debt don't find a potential BK very appealing.
". . . would it be better to buy back small amounts of debt?" Absolutely not. The open market lacks the liquidity for billions of dollars worth of trading and the institutional holders would never approve of it. Linn's doing it the only way possible, and I view it as rare good news for holders of LINE & LNCO.
Many posts seem to imply that Saudi Arabia produces so much of the world's oil that they're the virtual puppet masters of the world's oil production and prices of crude. Of course SA has influence, but it's certainly been in decline over the last decade just as OPEC has ceased being the monolithic "organization" that it actually never really was, as cheating has always been the norm .Anyway, let's look at 2014 oil production in barrels per day according to U.S. EIA data. Total daily oil production: 93 million plus barrels per day. SA's production: 11.5 million daily barrels. Were SA to cut production by 10%, it'd have an effect, but surely not one that would make oil prices rocket by 50%.
Moreover, it's not so easy, I believe, for SA to call the shots when countries are desperate for income even as supply exceeds demand and gives every indication of continuing to do so.
Why will the U.S. suffer if oil prices decline? I should think that the broad economy will benefit from lower industrial fuel and gasoline costs. The smaller oil and NG producers will simply be taken over at fire-sale prices by the oil giants, who may earn less for a while but still ultimately thrive. (It's not as if we're an energy-exporting nation.)
I remember when oil went down to as low as 10 bucks a barrel, which, with inflation adjustment, would be somewhere around 15 to 25 dollars today I'd guess. We managed. The U.S. is a highly resilient country.
Finally, who's doing the chattering? People who have inside info from the Saudi oil ministry? I doubt it.
I'm afraid you're right, Goskling. Absent a longshot, jaw-dropping surge of oil prices, Linn is headed for the boneyard. Even at today's prices I don't view LINE/LNCO as speculative material. And I remember when virtually every analyst, blogger, and poster was a wild bull about the company and I was actually ahead over $200K on Linn. The few savvy posters like Lisa Huang were regularly vilified when they pointed out Linn's weaknesses. Oddly, I supported her posts and stupidly held on the company until the 23s. Yikes!