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alstry (< 20)

FloridaBuilder's Financial Lesson



May 21, 2008 – Comments (6)

Let's get a few points out of the way.  First, there is no one more important to the CAPs blogs than FloridaBuilder.  Second, the reason I put his name in the title is I get AT LEAST twice as many hits and a few more recommendations.  Third, my posts are not primarily for popularity but  to simply make people think and not to necessarily agree with my position as socratic debate tends to lead to reasoned  results.  Finally, FloridaBuilder and I are conducting a friendly competition, so my pimping posts are intended to be no different than if we were playing poker and I was trying to throw him off his game or bluffing my brilliant hand. 

Now with the above out of the way, back to the competition.  FloridaBuilder has made some whacked out comments lately that simply can't go unanswered.  For example, he has repeatedly tried to compare the MTH and HOV recent debt and equity offerings to his belief that SPF will somehow raise equity.  The problem is seemingly FB is recovering from too much libation on vacation and too little concentration on the equation.

To keep it simple, let's just focus on HOV.  Yes it raised equity, but only $150 million.  When a company has lots of debt and poor revenue coverage, equity is that last place investors want to be because in a BK you are the last to get paid off.  For HOV, the equity gamblers were only willing cough up $150 million(in MTH's case, it was only $100 million), and that was a company  with B ratings on the lowest  tranche  of debt.  If the debt is rated B, the equity is probably rated B- or CCC from a safety standpoint.  (By the way CCC means that you are pretty much dead, but the doctor hasn't told you yet).  You think if HOV could have raised more than a $150 million, Ara wouldn't have  jumped at the chance as opposed to paying 11 1/2% on $600 million.  Of course he would have and he and daddy Kevork would have made big donation as they flew on the company's private jet to a private charity function, but $150 million worth of bagholders was all Wall Street could scrap up.

This brings us back to SPF, in the last few days, SPF has received two CCC ratings on its lowest tranche of debt from two different ratings agencies.  I can't belive the ratings agencies were so generous based  on my review of  the financials.  However, if SPF's debt is now rated CCC, that means the equity is figuring out whether it wants to be buried or cremated since the doctor  just took it off life support and the EKG is no longer beeping.

And FB is fantasizing that SPF is going to raise equity with two CCC debt ratings???????  And he compares SPF to much stronger HOV and MTH?  That is like Ralph Nader still fantasizing he will be the next President of the United States.  I have little doubt about the fantasy, the reality is simply a different  matter.

Now it is possible that SPF might issue a convertible.  But with a CCC rating, it will have to be an instrument that the lenders can hedge their losses fully.  Last Fall SPF was able to scrape up $100 million with a very shareholder unfriendly convertible where SPF actually issued new shares to let the institutional  lenders short.  Now if that wasn't a situation where management intentionally hosed shareholders for their own benefit I don't know what is.....SPF raised only $100 million which facilitated executive bonuses a few months later but destroyed over $300 million of shareholder value within a few weeks of announcing the offering.....and we all knew it was coming since the current CEO with prestegious degrees and lots of investment experience and no homebuilding experience bought a few shares on the open market to help create the illusion that insiders were buying.  What a con job that turned out to be just a few weeks later.

Today,  the situation is much worse than it was in the Fall.  SPF financial condition has deteriorated.  The value of its assets have contracted and its revenues are evaporating.  At this point, no self respecting "I am going to hose you" hedge fund manager would accept anything less than a true honest to goodness death sprial convertible(if you don't know what one is you can read about it on wikipedia).  If SPF goes that route, it is pretty much the end for current stockholders because the holders of the convertible can basically convert it into an unlimited amount of shares wiping out any practical value for existing holders.

All of the above said, it is still a coin toss  whether  SPF or WCI goes BK first.  From my perspective, if I am even close it is a victory because no one on the  Street sees it coming(which is a whole seperate issue) and FB has it green thumbed.  I  really have no chance now!!!!!

Whether I win or lose, I am humbled  to have a shot at the title against FB.  He has given me a lot of insight on the BS of Wall Street and its "analysts."  This will definitely have to become a much more important  factor going forward....and I am indebted to FB for his assistance.  That said, I still hope I can kick the backside out of him in this competition.  Can you imagine, Costco boy beating  Ferregamo Man-I see the headlines now.  But just like Mr. Nader, I can fantasize too.

6 Comments – Post Your Own

#1) On May 21, 2008 at 1:18 AM, Evlampius (< 20) wrote:

lol! yup i'm short SPF as well.


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#2) On May 21, 2008 at 2:57 AM, DemonDoug (30.98) wrote:

btw, for all of those who are wondering, the death spiral "convertible" is technically called a "convertible bond."  And yes these things are really death spiral instruments.  I'm wondering whether they'll be able to even get a convertible bond offering.

As far as BK, I see it as a tight race but SPF will win.  Why?  Because companies hang on and prop up the stock price for as long as possible, and then they drop precipitously, and BK's happen very fast.  They happen when banks stop giving you extensions, and then they sue for money, and then, blam, chapter 11.  WCI seems to have gotten the knack for holding on and is coming in for a soft chapter 11; i'm willing to bet SPF will get totally crushed like NEW did and will end up in chapter 7.  These precipitous falls happen seriously quickly, NEW, AHM, BSC, Enron, etc.

Good luck man I'm waiting to see who finally wins this thing. 

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#3) On May 21, 2008 at 7:51 AM, klemenv (97.36) wrote:

I have been employed by good standing growing company that have received death spiral "convertible" investment while not understanding the concept of it.

Vulture investors got through cavenants power to block management, prevent any turnover. As consequence, price of stock thumbeled, and they were given majority of the company. Afterwards, they implement better management measures and sold out company.

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#4) On May 21, 2008 at 10:00 AM, alstry (< 20) wrote:

The real question now is should SPF's management and the board be criminally prosecuted for faking out our buddy FloridaBuilder.  Nobody messes with Altstry's buddies......and these guys have really screwed with FloridaBuilder.

When someone as smart as FB gets fooled, the Fools need to speak up.  We are the Foolians!!!

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#5) On May 21, 2008 at 10:07 AM, EnigmaDude (56.72) wrote:

great post! very entertaining and educational.

But you did not mention the news about the Landsource notice of default in LA, or its impact on Lennar (or is this old news now?) and its ripple effect on other SoCal homebuilders.

From AP news story on May 20:

The default notice came at the end of a several-months-long forbearance period that LandSource had negotiated with the lenders, she said.
CalPERS, with $254.8 billion in assets, is involved through its participation in MW Housing Partners, an investment fund managed by MacFarlane Partners LLC.
MW Housing Partners acquired 68% of the property, once owned by Newhall Land and Farming Co., from home builder Lennar Corp. (LEN) and LNR Property Corp., a unit of Cerberus Capital Management LP.

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#6) On May 21, 2008 at 8:23 PM, thisthatother47 (63.37) wrote:

Well written, a definite Alstry classic!

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