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"The market can remain irrational longer than you can remain solvent" - John Maynard Keynes
Saturday, August 23, 2008
Allco Securities (AFG AFGHA AHUG RJT)
Allco AFG - The Parent Company
Allco's (AFG) stock price has fallen from a 52 week high of 11.45 to 44c as of the close yesterday. Allco had senior debt coming due and market capitalization covenants were triggered, this lead to doubts that they were going to be able to refinance. On 15 July they announced an agreement with their banks to roll over the debt until September 2009 and that the market capitalization covenants had been removed. As a result they are paying a little more interest on their borrowings.
As the major risk has been removed I had a look over some of the securities inside the rather complex web of Allco. In summary, based on the liquidation value I think that the AFG equity is probably worthless (except as a call option).
Allco Subordinated Notes AFGHA
AFGHA, the Allco subordinated notes are probably worth about what they're trading for based on assets - around 20c on the dollar (while paying 50% interest). A Yield to maturity of 57% if you wait until redemption in 2017 or 84% if you can redeem on reset in 2012. This is based on valuing their various business as follows (this is equity so debt has been subtracted from assets, in the case of debt exceeding assets the equity has been marked at zero if the debt was recourse):
Aviation - $723M (equity value on their balance sheet less intangibles)
Rail - $42M (equity value on their balance sheet less intangibles)
Shipping - $134M (equity value on their balance sheet less intangibles)
Infrastructure - $154M (equity value on their balance sheet less 20% discount on equity holdings less intangibles)
Property & Financial Services - $0 (negative equity, non-recourse debt)
Funds Management - $40M (equity value on their balance sheet less 60% discount on equity holdings less intangibles)
Group Investments - $160M (20% discount on assets used to calculate equity value on their balance sheet less 80% discount on equity holdings less intangibles)
Total assets of $1,255M versus corporate debt of $1,539M. This clearly leaves no residual for equity. There are $341M of notes outstanding which are impaired by $283M, leaving a face value of 17c on the dollar. Right now these subordinated notes are effectively the non-voting equity of Allco. They're trading at 20c. It seems very likely that Allco will continue as a going concern so the notes will pay out a 50% yield each year with little risk of capital loss because liquidation value is around the current price (except to the extent that I've overvalued any parts of their business). I've reduced their equity by 2.7Bn. The company has indicated that it is going to write down closer to 1.5Bn so my assumption is that reality is much larger. There is little margin of safety in a liquidation but as a going concern you get 50% interest per year which is a reasonable margin of safety.
Alleasing Debentures AHUG
AHUG the Alleasing debentures are probably worth 50-60c on the dollar (without the Allco parent guarantee), they're currently trading around 20c with a 50% yield and they are due to be redeemed on 17th August 2009 at par (105c on the dollar in this case). That is a yield to maturity of over 400% if they are in fact paid out at par. There is a reasonable case that they will be paid out at par because Allco has given the trust a letter of support to:
"provide sufficient financial assistance to Alleasing Trust and its controlled entities (...) to enable them to continue their operations and fulfill all their financial obligations until at least September 2009." Allco financial report 31 December 2007.
I expect that Allco is going to arrange a sale and as part of that sale they will ask the debenture holders to take a haircut, maybe more like 60c on the dollar leaving a 200% yield to maturity.
This Brisbane Times article (http://business.brisbanetimes.com.au/business/shareholders-cop-risks-of-deals-with-allco-bosses-20080309-1y8k.html) discusses the letter of support and the likely strength of such a letter. It says they are usually binding and would usually have been approved by the board. The article also says that Allco’s problems are due in no small part to all the self dealing between the company and it’s executives.
This Sydney Morning Herald article (http://business.smh.com.au/business/allco-mulls-alleasing-sale-20080408-24kz.html) indicates that there has been some interest from buyers in the Alleasing trust. They were interested in paying in excess of debt, though in this case it’s not clear if they mean the mezzanine debt or the debentures.
On liquidation based on the balance sheet AHUG doesn't have any value and the mezzanine finance provided by Allco would take a haircut based on the balance sheet as I’ve adjusted assets as follows:
Initial total assets: 850M
Deferred Tax: -21M
Revised total assets: 706M
However, the residual values of leases are under reported by accounting convention. Once this is adjusted for, along with additional earnings losses, then the debentures have value of around 50 to 60c:
Revised total assets: 706M
Additional Residual value: 175M
New Assets: 881M
Revised Liabilities 954M
Again assuming that Allco does not honor the letter of support. The debentures worth 50 - 60c obviously wipes out the equity.
Rubicon Japanese Trust RJT
Since I wrote about this RJT has revalued their assets. See my comments in brackets
Finally RJT is the Rubicon Japanese Trust. This is a managed investment scheme invested in Japanese property. They are managed by Allco (Allco is the Responsible Entity). RJT had a similar problem to Allco in that senior debt was coming due and the trust was concerned that they may not be able to roll it over. In addition they were getting increasingly large margin calls on their foreign exchange hedges. On 1st May 2008 they announced that they had reached an agreement with their banks until 31st March 2009. Under this agreement they need to reduce their debt and unwind their forex hedges. They confirmed their earnings expectations for the year in the same announcement.
RJTs balance sheet's assets seem real and the property valuations are quite recent. It is possible that some property values will have moved to the upside since the property valuations. Therefore in an orderly liquidation you'd need to know the discount from book that the properties would go for. I have no idea but the market is estimating a 25% discount to book. Given that property prices in Japan have held up I don't expect it's more than 10% which leads to a NAV of 53c ( The revaluation was 14% in JPY and 18% in AUD. This is much higher than I expected ), a 500% increase from the last trade at 8.8 cents. ( now their NAV is 30c and the shares trade at 6c which is a 500% upside). Part of the trust's strategy is to sell some assets to reduce short term debt and to buy back some securities. They were originally envisioning using 50M to buy back units. At today's price you could buy back the whole trust and still have $10M left! ( They are unlikely in a position to use cash to repurchase units when they are so close to exceeding debt covenants ) A catalyst will occur once a few sales happen at close to book value, debt is retired and the buy back begins. The trust is not going to pay distributions for a year or so. This has contributed to the price decline but is a positive for the NAV of the trust because it increases their viability.
Once the debt issue was resolved (or postponed for a year) there was still the problem that the Responsible Entity, Allco, might become insolvent. If this occurred then it would likely affect RJT in multiple negative ways. As Allco has just announced a resolution (or at least a temporary one) to their debt problems, RJT appears to have at least a year to get back on track by reducing gearing and working to reduce the gap between NAV and market price.
A couple of investors have taken a 5% or larger position in RJT, after Allco's position was liquidated on a margin call. They include Babcock and Brown, Yu Man Ying Lulu (the daughter of the chairman of Hong Kong Construction- a major Chinese property developer) and Ingot Capital Management (the managers of a UK based investment fund). The selling pressure has likely been exasperated by selling as a result of margin calls and broker failures such as Opes prime. ( the problem with RJT now is that they are very close to exceeding gearing covenants. They have warned that exceeding such a covenant due to a further reduction in asset values could trigger a number of loans to become due immediately. On this basis this does not seem like a reasonable risk. NAV after the revaluation stands at about 30c per share )
In order of return we have RJT 500%, AHUG 400%-200%, AFGHA 57% and finally AFG 0%. ( since RJT is so close to exceeding their debt covenants AHUG seems like the best choice followed by AFGHA and finally RJT seems worth a small punt)
Disclaimer and Disclosure
Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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