I mentioned the Metaldyne Chapter 11 filing earlier on and was just doing some more research on the bankruptcy proceedings. Apparently, the company issued a press announcement that included the following line:
“We are also pleased Metaldyne is moving through the bankruptcy process swiftly and
on plan. The highly competitive sale process in this challenging market is a testament to the
strength of our businesses, technology and the commitment of our employees.”
Yes, they were so strong and so committed that they had to file for bankruptcy.
Now that's south of ridiculous (original phrase coined by Lawrence G. McDonald).
On a more somber note, if Carlyle Group is involved, I fear that Metaldyne bondholders may have to be very cautious. It could be a double-edged sword.
For anyone else wanting to follow the Metaldyne bankruptcy, visit http://www.metaldynerestructuring.com/.
Showing posts with label Metaldyne. Show all posts
Showing posts with label Metaldyne. Show all posts
Wednesday, August 19, 2009
Sunday, November 23, 2008
Bondholders Unite: Trust Indenture Act of 1939
Through my recent experiences with junk bond trading, I've started to realise there can be a whole lot of fine print associated with bonds. It is definitely becoming more complex than I'd intended. My broker does not offer a very advanced bond trading platform, so I've had to scour the Internet for whatever's publicly available on bond issues I might be interested in.
I sometimes find this information on the SEC Web site, but more often than not, a search on the specific CUSIP of the particular issue will show you which hedge funds or mutual funds are bondholders.
I urge anyone who is interested in junk bond trading to do further research to find out what are the terms and conditions associated with the indenture. Probably the best way to do this is to contact the bond issuer and request a copy of all the indenture terms as well as find out who the Indenture Trustee is.
Many of this fine print will preclude certain aspects of the Trust Indenture Act of 1939. I do believe that all this fine print is a bit like a back door exit, which then enables the bond issuer to take at times unfair and coercive action against minority bondholders in debt restructuring initiatives that do not take into consideration the best interests of all bondholders.
I have noticed that with certain debt restructuring initiatives, such as the Metaldyne bond tender offer, a certain percentage of bondholders is required to agree to the bond tender offer terms in order for it to go through. Technically a bondholder is a creditor to the bond issuer. What right does one bondholder have to vote on the rights of another bondholder? What right does one bondholder have to effectively say to another bondholder: Well I lent this company $1000, but I'm willing to accept $270.018 to cash out these bonds and so should you!'? But this is exactly what is happening with these bond tender offers. These bond issuers are setting us up to accept less than what we are owed.
Suppose we are both bondholders of Metaldyne. If I agree to Metaldyne's bond tender offer and vote accordingly, my vote actually indirectly affects the terms of the bonds that you hold if you do not agree with the bond tender offer. Now is this fair? Bondholders are not shareholders. We are simply separate creditors to the same company. We have no further relationship. It should remain like that. This means if I would like to do something as stupid as cashing out my bonds at 72.982% below par, I should be the only one to live with such a mistake.
My goal with this post is to get minority bondholders to unite and become self-activists - which means basically to look after your own best interests when purchasing a bond. Under the current economic conditions, it is my philosophy to treat even all investment grade bonds as junk bonds regardless of their ratings - especially since we have imperfect information transparency here.
For anyone wishing to do more about reforming regulation related to debt restructuring initiatives, please post a comment to get in touch.
Mind you, there's still time to refuse the Metaldyne bond tender offer at this time. If you are one of the few bondholders bold enough to do this, please feel free to post a comment to get in touch.
I sometimes find this information on the SEC Web site, but more often than not, a search on the specific CUSIP of the particular issue will show you which hedge funds or mutual funds are bondholders.
I urge anyone who is interested in junk bond trading to do further research to find out what are the terms and conditions associated with the indenture. Probably the best way to do this is to contact the bond issuer and request a copy of all the indenture terms as well as find out who the Indenture Trustee is.
Many of this fine print will preclude certain aspects of the Trust Indenture Act of 1939. I do believe that all this fine print is a bit like a back door exit, which then enables the bond issuer to take at times unfair and coercive action against minority bondholders in debt restructuring initiatives that do not take into consideration the best interests of all bondholders.
I have noticed that with certain debt restructuring initiatives, such as the Metaldyne bond tender offer, a certain percentage of bondholders is required to agree to the bond tender offer terms in order for it to go through. Technically a bondholder is a creditor to the bond issuer. What right does one bondholder have to vote on the rights of another bondholder? What right does one bondholder have to effectively say to another bondholder: Well I lent this company $1000, but I'm willing to accept $270.018 to cash out these bonds and so should you!'? But this is exactly what is happening with these bond tender offers. These bond issuers are setting us up to accept less than what we are owed.
Suppose we are both bondholders of Metaldyne. If I agree to Metaldyne's bond tender offer and vote accordingly, my vote actually indirectly affects the terms of the bonds that you hold if you do not agree with the bond tender offer. Now is this fair? Bondholders are not shareholders. We are simply separate creditors to the same company. We have no further relationship. It should remain like that. This means if I would like to do something as stupid as cashing out my bonds at 72.982% below par, I should be the only one to live with such a mistake.
My goal with this post is to get minority bondholders to unite and become self-activists - which means basically to look after your own best interests when purchasing a bond. Under the current economic conditions, it is my philosophy to treat even all investment grade bonds as junk bonds regardless of their ratings - especially since we have imperfect information transparency here.
For anyone wishing to do more about reforming regulation related to debt restructuring initiatives, please post a comment to get in touch.
Mind you, there's still time to refuse the Metaldyne bond tender offer at this time. If you are one of the few bondholders bold enough to do this, please feel free to post a comment to get in touch.
Thursday, November 13, 2008
Are Bond Issuers Taking Investors for A Ride?
A number of companies have clearly been taking advantage of the current liquidity crisis. But are they going so far as to be considered taking their investors for a ride?
These are mainly the companies that made extremely good use of the previous economic boom by issuing junk bonds like crazy.
If my theory is correct, these same companies are now using the global financial crisis as an excuse to push their own corporate bond prices even lower so that they can repurchase the bonds from jittery investors at below par value.
What do they have to gain? Junk bonds typically have very high interest rates. Plus, the issue price is sometimes below face value, which makes the yield on these bonds even more attractive to investors. However, for the company issuing the bonds, they could turn out to be a very expensive mistake.
With the economic downturn, assets are being broadly deleveraged, driving prices down quickly and drastically. Junk bonds are no exception. If the issuer can repurchase these junk bonds on the secondary market at a fraction of their original cost, then this translates to substantial cost savings in interest payments. Moreover, they have the option to then sell these bonds out onto the market once the economy recovers.
Amongst the guilty companies:
1. Metaldyne, which launched a bond tender attempting to buy out senior bondholders at $0.27018 on the dollar
2. E*Trade, which is issuing 25 million shares of common stock in an effort to retire $450 million worth of subordinated notes
3. ION Media Networks, which has been deferring the interest payments on their 2013 senior subordinated series A notes (CUSIP 46205AAB9) for about a century. This bond issue actually dropped down to $0.06 on the dollar recently.
If only the bond market had a Carl Icahn…
These are mainly the companies that made extremely good use of the previous economic boom by issuing junk bonds like crazy.
If my theory is correct, these same companies are now using the global financial crisis as an excuse to push their own corporate bond prices even lower so that they can repurchase the bonds from jittery investors at below par value.
What do they have to gain? Junk bonds typically have very high interest rates. Plus, the issue price is sometimes below face value, which makes the yield on these bonds even more attractive to investors. However, for the company issuing the bonds, they could turn out to be a very expensive mistake.
With the economic downturn, assets are being broadly deleveraged, driving prices down quickly and drastically. Junk bonds are no exception. If the issuer can repurchase these junk bonds on the secondary market at a fraction of their original cost, then this translates to substantial cost savings in interest payments. Moreover, they have the option to then sell these bonds out onto the market once the economy recovers.
Amongst the guilty companies:
1. Metaldyne, which launched a bond tender attempting to buy out senior bondholders at $0.27018 on the dollar
2. E*Trade, which is issuing 25 million shares of common stock in an effort to retire $450 million worth of subordinated notes
3. ION Media Networks, which has been deferring the interest payments on their 2013 senior subordinated series A notes (CUSIP 46205AAB9) for about a century. This bond issue actually dropped down to $0.06 on the dollar recently.
If only the bond market had a Carl Icahn…
Sunday, November 9, 2008
Metaldyne's Ultimatum to Bondholders: Accept $0.27018 On the Dollar or Reorganization On Our Terms
After a very expensive 2007, during which I saw the value of my entire stock portfolio decline by over 30% and my forex account basically self destruct, I decided to get into bonds at the start of 2008. Bonds seem easy enough to trade and corporate bond yields have been temptingly competitive with equities. They seemed like such a good buy and every forex diva likes a good bargain.
So in late August 2008, I purchased Metaldyne’s senior bonds (CUSIP 591160AD8) at a major discount. If this position worked out, I would gain over 79% annually because the bonds were trading at such a huge discount. Plus, there would be a constant stream of interest income that I would be able to go on minor shopping sprees with.
I was so proud of myself really and occasionally giving myself a pat on the back just thinking about this deal.
However, when Metaldyne recently issued an ultimatum that basically told their senior bondholders to either accept $0.27018 on the dollar or a prepackaged reorganization, I finally understood why junk bonds are called junk bonds. To add insult to injury, they even cancelled their latest interest payment.
To accept or not accept this ridiculous tender offer? That is the question.
Well, one could actually play this announcement a few ways.
Option 1: Purchase Metaldyne Senior Bonds On the Secondary Market If the Price is Below What Is Being Offered by Metaldyne
One would then gain the price differential when the Metaldyne tender offer goes through. While this may seem like a good play, the risk is that not every bondholder will accept the tender offer (95% of each bondholder group – both senior and subordinated – would be required for the tender offer to go through).
Moreover, I should think that Metaldyne would be looking to buy out any remaining bonds on the secondary market if they could purchase the bonds for less than the $0.27018 on offer.
Option 2: Sell Your Bonds on the Secondary Market
Remember one needs to pay a $30 processing fee to accept the tender, so if you bought your bonds at a good price and the commission on your bond trade is less than $30, it may be a good idea for you to sell on the secondary market. However, will you find any buyers?
Option 3: Refuse the Offer
If I were to accept the offer, I would be losing about 12% on the deal, including transaction fees. This isn’t too bad.
However, the idea of Metaldyne giving bondholders an ultimatum has me very suspicious indeed. Do not march in here and give bondholders an ultimatum for failing to properly manage your business. If you’re going to give an ultimatum, make it a fair one.
While every bankruptcy is different, $0.27018 is below the norm expected of bondholder recoveries in bankruptcy filings. Remember that WorldCom and Enron bondholders were able to recover above what is being offered by Metaldyne. And Metaldyne has quite an asset base.
Based on a conservative estimate of Metaldyne’s most recently published balance sheet, it is my opinion that senior bondholders should expect no less than $0.66 on the dollar based on Metaldyne’s recent balance sheet. Senior bondholders should be taking a more aggressive stance and protecting their own interests in this tender offer.
Disclaimer: Do your own homework. Do not in any way take this to be investment advice. You are responsible for your own portfolio.
So in late August 2008, I purchased Metaldyne’s senior bonds (CUSIP 591160AD8) at a major discount. If this position worked out, I would gain over 79% annually because the bonds were trading at such a huge discount. Plus, there would be a constant stream of interest income that I would be able to go on minor shopping sprees with.
I was so proud of myself really and occasionally giving myself a pat on the back just thinking about this deal.
However, when Metaldyne recently issued an ultimatum that basically told their senior bondholders to either accept $0.27018 on the dollar or a prepackaged reorganization, I finally understood why junk bonds are called junk bonds. To add insult to injury, they even cancelled their latest interest payment.
To accept or not accept this ridiculous tender offer? That is the question.
Well, one could actually play this announcement a few ways.
Option 1: Purchase Metaldyne Senior Bonds On the Secondary Market If the Price is Below What Is Being Offered by Metaldyne
One would then gain the price differential when the Metaldyne tender offer goes through. While this may seem like a good play, the risk is that not every bondholder will accept the tender offer (95% of each bondholder group – both senior and subordinated – would be required for the tender offer to go through).
Moreover, I should think that Metaldyne would be looking to buy out any remaining bonds on the secondary market if they could purchase the bonds for less than the $0.27018 on offer.
Option 2: Sell Your Bonds on the Secondary Market
Remember one needs to pay a $30 processing fee to accept the tender, so if you bought your bonds at a good price and the commission on your bond trade is less than $30, it may be a good idea for you to sell on the secondary market. However, will you find any buyers?
Option 3: Refuse the Offer
If I were to accept the offer, I would be losing about 12% on the deal, including transaction fees. This isn’t too bad.
However, the idea of Metaldyne giving bondholders an ultimatum has me very suspicious indeed. Do not march in here and give bondholders an ultimatum for failing to properly manage your business. If you’re going to give an ultimatum, make it a fair one.
While every bankruptcy is different, $0.27018 is below the norm expected of bondholder recoveries in bankruptcy filings. Remember that WorldCom and Enron bondholders were able to recover above what is being offered by Metaldyne. And Metaldyne has quite an asset base.
Based on a conservative estimate of Metaldyne’s most recently published balance sheet, it is my opinion that senior bondholders should expect no less than $0.66 on the dollar based on Metaldyne’s recent balance sheet. Senior bondholders should be taking a more aggressive stance and protecting their own interests in this tender offer.
Disclaimer: Do your own homework. Do not in any way take this to be investment advice. You are responsible for your own portfolio.
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