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Bankruptcy or Restructuring...it's just gambling...

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April 05, 2014 – Comments (2) | RELATED TICKERS: PPC , YRCW , LDKSY

 Actually, it's worse than gambling.  I keep a small trading account where I do some very Foolish things from time to time. I find the bigger the profit I have in the account currently AND/OR when I'm cash heavy, that I really try to find something to trade and at times, it turns into a gamble or worse....

I find that if I've been profitable that I have to take some of the money out of the account and get it out of site of my rogue fingers.

Overall, trading small sums can be interesting, and more like a hobby, or casino, keeping me in the game and forcing me to learn....but I like to have some odds on my side of some sort.  Else you are just giving your money away. 

Companies going into and out of or through bankruptcy fascinate me for some reason.  I did poorly predicting who would go bankrupt in 2008-2009 and how companies that went into it would/if come out. 

Still the volatility is "fun" to "watch", if it’s not your money frozen by trading halts. 

LDK Solar Co  (LDKSY) went into BK protection in the Caymans in Mid-February at $1.01 per share and sat frozen for six weeks.  Holders of the equity clearly were banking on new financing which seems to give short term jolts and "new hope" for the equity, but all it usually does is lock whatever value is left as the primary lien for the last note holder.  

 Some companies do get concessions on debt and come back out of bankruptcy with some value left for shareholders. YRC Worldwide (YRCW) is one that continues to surprise me. Their debt load and union contracts seemed insurmountable, but one thing I learned during the 2008-2009 crash is that creditors don't want to shut you down for pennies on the dollar if there is any hope you can recover.  Apparently their creditors don't want to drive trucks and their workers were concerned enough for their jobs to work out an agreement, although they still seem to me to be very excessively valued.

  Some companies come out for a short term and then back in again.  Others that have come out with nice gains for the believers is Pilgrim’s Pride (PPC) which went from $40 per share to $0.25 (a mere quarter) per share in late 2008 and is now a healthy $20.00 per share and climbing.   

  The key is how much is restructuring an option, do you have enough potential that your creditors would rather give you a chance?   Do you have assets that can cover your liabilities?  Is it a onetime issue that got you against the ropes?  American Airlines is an example of a company that had sufficient assets to negotiate out. 

  LDK Solar came out of the filing dropping from $1.01 to $0.10 as those who had been stuck unloaded. The listing was taken of the NYSE and moved to the OTC board.   Shorts came in, speculators, and now we have a four day rally up to $0.80.   What is LDK Solar really worth?  According to their books, they are at least $1B underwater if every dollar of book value were credited to their property plant and equipment.  Considering the technology changes and how fast solar companies need to retool to stay profitable and with the best producing cells, that's clearly not possible. 

A Reuters report indicates that they didn't file for bankruptcy protection...but filed for "provisional liquidation". 

  On the trading on the OTC boards, however, LDK Solar announced that they have NOT given up on restructuring.  They still want to go Chapter 15, similar to their peer Suntech.

The only variable I see left is how LDK Solar Co, LTD, incorporated in the Caymans, is tied to LDK Solar in China.  The article indicates that LDK Solar in China will NOT seek any further "debt restructuring".  It doesn’t appear to me that they are maintaining any financial relationship. 

I can't see how the liquidation process will morph into money for shareholders.  Unlike Pilgrim's Pride and American Airlines, it looks like liquidation means sorting out which of the creditors gets what percent of the money, but if they can restructure and remain in operation, its possible shareholders might get a few pennies.  Restructuring usually requires the majority of investors to agree, and the heavier the debt, the less likelihood of restructuring being successful, the less some investorss want to continue gambling, even if it means leaving with pennies on the dollar.

LDK Solar is a reminder that not all companies in a sector are equal, especially in a sector that needs to be nimble to be cost effective and hold a meaningful piece of the limited market.  Solar, similar to other industries got well ahead of itself during "its boom".   It appears that the more nimble companies are coming out of the 2012 "solar crash". Without subsidies, however, and a thinning of the competition, they still have a long way to go. Those heavily debt laden, who possibly grew too fast such as LDK and Suntech, however show how not all companies are created equal in a sector.

Technology in 1999-2000,. Internet, possibly Biopharms and Social Media today....rapidly rising sectors can pull up the chaff and the good can fall with the bad.  Finding the right companies to be loyal to can be difficult.   

Playing the bankruptcy bounce, however, can be even more Foolish. 

I think LDK Solar could spike to $1.20-$1.50 in the short run...some people will trade it, some will speculate on it.  Just remember that for every dollar won, someone lost that dollar.  If you like adrenaline and high risk, you might play into it, just do so with the trading funds with your eyes open and your risk/reward measured with trigger points.

I do crazy things in my trading account sometimes, but there are odds and there is just flushing the money.

LDK Solar is a reminder to seek out quality, be wary of sectors rising rapidly,  give up when you're wrong, manage risk,  and while some days a quarter may be worth $20, most days it can be worth nothing.....and you can't start over or try again with nothing....sometimes it just pays to be chicken.....

TSIF,

The sky is not falling today...but some bubbles are leaking some air, and some bubbles really do burst..... 

2 Comments – Post Your Own

#1) On April 07, 2014 at 4:17 PM, Mega (99.96) wrote:

What is it about STP and LDK that make people not believe that they're going to $0? Plenty of Chinese companies have gone to $0 without even bothering to file bankruptcy. In contrast the bankruptcy process makes it clearer that STP and LDK are worthless.

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#2) On April 07, 2014 at 6:50 PM, TSIF (99.96) wrote:

Wishful thinking....a few companies escape bk, and speculators indiscriminately latch onto all of them...the fact they are China companies should give them second doubts.  I'm aware of some companies that shut down during "golden week" and padlocked the door before the workers came back...no preannounce to anyone, suppliers, customers or workers.  China subsidized some industries for years....maybe speculators think they are too big to fail......

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