Hi Demetre, Michael
What do you mean by "NRV"? The NRV for the funeral homes will be higher than for cemeteries.
Where do you get the information that The assets that were sold are among the weaker properties that the company owned. I'm not at all saying that you're wrong, I'm just trying to get a handle on this and I'd love to be able to confirm this. They got just under 40 cents on the dollar for those assets, it would be nice if they could get a better price on other assets they have. Heck, help convince me of this and I'll cover my short and go long if things look bright enough!
The margins for the funeral homes are higher than the cemeteries.
True, but how would this affect the amount of the loss they realize on selling funeral homes vs. cemeteries? Presumably they knew this when they were buying funeral homes and cemeteries, and therefore paid proportionately more for funeral homes than cemeteries (per unit of sales, earnings, EBITDA, however they chose to measure their acquisitions). I can't see why they would have overpaid proportionately more on one or the other asset class.
I agree that it is good news for everyone all around that they reached an agreement with their bankers. Obviously Loewen management was able to convince them that it was right and proper to hold off just a little longer, and that doing so would not hurt the creditors' interests. It looks like they will not file for bankruptcy before September. Depending on how well they do at making interest payments in the interim and raising $300M to make their September repayment (by asset sales and/or earnings from operations and/or new debt), they might be able to avoid bankruptcy then too.
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Michael, you wrote
The red will really start to flow now that the company has disposed of some of its assets
Yes, but don't pay too much heed to the non-cash losses they realize. That's just recognizing today the mistakes of the past. Do pay attention though to the relative amounts they realize on asset sales (are their recoveries improving? 40, 45, 50 cents on the dollar?), as well as to their operating results (are they running the businesses they keep in a better or worse manner than they were being run recently).
*Is their any way to find out or estimate what percentage of revenue the sold assets represented?
I don't know this yet. One way would be to simply assume that the assets sold are representative of the assets they kept (i.e., neither prime nor sub-prime revenue producers) and simply pro-rate it as a fraction of the total. You can obviously see the holes in this method, but until I know more I don't know a better way. Doing this would give a result of $495M (my estimate of the purchase price they paid = price they received plus loss they realized) divided by $4157M (my estimate of the balance sheet value of their acquisitions), which is roughly 12%. You can calculate 12% of their revenue if you want.
*I read that Loewen dumped approximately 25% of her assets (124 cemetaries ) that generated 10% of her revenue for a 5% debt reduction (100 mill).
On my worksheet I have that they owned 1101 funeral homes and 510 cemeteries as of Mar/98. So that's about 25% of her cemeteries, but less than that w.r.t. her total assets. See above where I estimate 12% of revenues in the most simplistic manner - 10% of revenue is certainly well within the error bounds of my calculation.
I think you might be looking at it a bit too harsh, they paid down $100M of debt but they did realize nearly $200M in proceeds. They and their creditors decided that it would be appropriate for $100M to go to debt retirement and the rest kept as working capital - I'm not about to second guess that.
If we extrapolate that they sold 12% of their assets or revenue stream in return for 193/2113 = 9% of their debt, we come up with a figure that their entire assets or revenue stream would fetch about 75% of their debt. This (linear, simplistic and almost certainly wrong!) calculation would indicate that the bondholders could get 75 cents on the dollar.
If one assumes that they they sold their poorest properties under the most difficult of circumstances, and that they might realize better than 38 cents on the dollar on subsequent asset sales, then perhaps the bondholders might get more than 75 cents on the dollar. Perhaps they might even get 100 cents. Perhaps there might even be some value left over for the preferred equity holders.
This is why I am anxious to learn more about the details. It will help me better understand the safety or risk of my short stock position, and my potential long bond position.
What particularly appeals to me is the apparent safety of the bonds, with a pretty spectacular upside (30% annual, 90% total). In order to lose from buying bonds at 58 cents, they would have to sell off the rest of their assets at less than 32 cents on the dollar. It looks like (almost!) a one-way bet to me.
Let's say that I estimate that the bonds, bought at 58 cents, will not lose more than 1/3 of their value even under the worst case (this would equate to them liquidating the company, and realizing about $820M for the sole benefit of the bondholders. Is this a reasonable worst-case scenario? I more or less pulled it out of the air). Compare this to the common stock, which everyone agrees (I think?) has a potential for a 100% loss.
If we match downside risks by leveraging the bond position by 3X (i.e., the downside of buying $1000 of stock is $1000, the downside of buying $3000 of bonds is $1000), then the maximum upside "potential return" for this bond position (pay $3000 for bonds, estimating that you have $1000 at risk) is 90% per annum or 270% total by the time the bonds mature in Sept. 2002.
In order for a stock position bought today at $2.70C ($US1-13/16) to outperform the 270% maximum upside that the bonds offer, the stock price would have to exceed $9.99C (=3.7X $2.70C) before Sept-2002. (About $US6.50)
In other words, if the stock price (in $C) goes into double digits, it will have generated a superior return to a correspondingly risky (downside risk) bond position.
- Daniel |
