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Non-Tech : Loewen Group -- Ignore unavailable to you. Want to Upgrade?

To: Michael Bidder who wrote (162)	5/19/1999 8:22:00 AM
From: Daniel Chisholm	Read Replies (4) \| Respond to of 277

Michael, Good thoughts on balance sheet leverage. You are correct that selling off assets at a discount to book value does result in the balance sheet becoming more leveraged. However, I think that everybody acknowledges that at this point the balance sheet filed with the SEC does not properly represent the true state of affairs. There is a great deal of confusion of course, as to what exactly the true state of affairs is. This will slowly become apparent as management reorganizes (asset sales, etc), perhaps the debt is restructured, etc. If we were to try to adjust the balance sheet today to reflect what you and I might guess to be the most realistic situation, then the asset sales you mention (at a substantial discount to their acquisition price) may not necessarily be at a discount to the book value they would have on the balance sheet that you and I construct. Obviously, if we were running the company, we would only want to sell assets if it reduced the leverage of this "true" balance sheet. It may even be the case that our "true" balance sheet (possibly even management's) would have negative shareholders equity. Even so, the above would hold. The grim picture you paint, Furthermore they will lose the revenue of those assets. In effect the sale of assets leaves them in a worse state than before the sale. may very well be true w.r.t. the value available for common shareholders. In my opinion and analysis, this is the case (this is why I am short Loewen common). However w.r.t. the bondholders, you might consider this to be a "stealth" or partial liquidation, done by the company (admittedly with the creditors' gun to the company's head) outside of bankruptcy court. Think of the actions they are taking now as somewhere along the continuum between a healthy debt-free company and a bankrupt one in receivership. In a sense management may be thinking of the creditors as their future equity holders, and managing the company's state of affairs for the benefit benefit of the future shareholders. If today's common equity is worthless and unredeemable no matter what course of action management might take, they might as well focus on pleasing their future owners (the creditors). FWIW, I (finally!) ended up buying some Loewen bonds. I paid 50.50 (neat number, eh?) for the 6.10% '02 (Canadian dollar tranche). The price of their bonds has been sliding ever since I first became interested in buying their bonds (they were 58 then). Most of the other debt is of similar maturity and sells for much the same price. In your previous post you wrote 1) Are the PATS bondholders? The answer to this is essentially yes. They rank on an equal basis with the bondholders. The PATS securities are puttable (by the PATS holders) to the company in September or so, this is why they form the core of the crisis that the company faces. Because of their earlier maturity, they are trading at a slightly higher price than the 3 year or so bonds. The PATS were trading at 57 or 58 when I got a price of 50 or so for the bonds. 2) If the PATS refuse to refinance what are their chances for 100 cents on the dollar. I would say similar to the chances of the bondholders, perhaps a bit better. I don't think it's a matter of the PATS refusal to refinance, the creditors group has insisted that "satisfactory refinancing" of the PATS be accomplished in order for the to not declare a default. 3) Is the ROE for the PATS such that they would want LWN to continue or is the risk to them such that they want to recover now rather than let the company bleed away the equity? What's the ROE for a bondholder? ;-) IMHO, the company does have real assets of real value, whether they are kept and operated or sold off. Mistakes were made in the past, losses (whether marked to market or not) have been incurred, the correct question is where does everybody go from here? I don't think that the companies assets are wasting, nor are most of the business segments cash drains (though the cemetery finance segment does drain cash -- it would need a strong cash generator to complement it). The $64,000 question is of course how the bondholders ought to protect the (remaining) value of their investment. In reading their filings and news releases, I certainly get the sense that the creditors are very upset with the company, and are worried about the security of their investment ;-). Appropriate enough response, though one might question their intelligence in loaning the money in the first place. However in my opinion I don't see things getting worse for the creditors from here (here being a market value for the debt of about 50 cents on the dollar). Whether the PATS get refinanced and the company more or less continues on with operations or if a refinancing is unsuccessful and the company is liquidated beginning in September, I don't see much downside from here (for the creditors, valuing their holdings at the current market rate of 50). - Daniel