Equity ideas
Astec (ASTE) puts DEC 07, 45 strike at 1.55, 40 strike at 75
CAT puts puts Jan 08, 60 1.23
Oshkosh (OSK) Jan 08 50, 2.50
Hmm, what would I rather own? Neff rental that trades at 65 cents on the dollar at 5 times EBITDA, or the companies that sell to NEFF (and now are competing to sell with Neff as Neff unloads equipment) for 12 times in the equity piece. Easy trade. Bonds please.
CAT puts puts Jan 08, 60 1.23
Oshkosh (OSK) Jan 08 50, 2.50
Hmm, what would I rather own? Neff rental that trades at 65 cents on the dollar at 5 times EBITDA, or the companies that sell to NEFF (and now are competing to sell with Neff as Neff unloads equipment) for 12 times in the equity piece. Easy trade. Bonds please.
posted by MattKelly54 at
12:25 PM
7 Comments:
on a previous discussion from Red Herring:
In the past, distressed mortgage borrowers would have slashed their spending to raise cash to keep mortgages intact, but now many appear willing to throw in the towel early on their loans, Ratcliff noted.
Their mortgage may have become so large that sacrificing spending makes little difference or there may be a lack of refinancing opportunities or large fees when refinancing is available. As a result, foreclosure is the "least terrible of a set of terrible choices," Mr. Ratcliff wrote.
- my conclusion- let them default.
mattkelly54, regarding your comment on CFC deriving more fees when the loans go into default, does this mean anything on a cash basis? Why would the defaulted loanholders pay the higher CFC fees but not make their mortgagement payments? They have made the decision to throw in the keys and stop paying across the board.
The seemingly "smart" contract hedge is therefore ineffective when correlation goes to 1 - the defaulted loanholder stops paying everyone.
I looked at a company called MR Default. They earn their money by processing claims in bankruptcy in default. They basucally are awarded this money straight from the court.
The more I look at the Neff/CAT trade, the more I like it... though it could get awfully ugly going through BK if we get there. One concern that I have is I think that CAT, OSK, and some of these other manufacturers of construction equipment are selling to customers other than rentals. Not sure how it impacts their business if a Neff or a URI or an RSC goes away.
That said, you buy Neff at half the EV of its suppliers with an equitized bond yield built in... 17% if I am remembering correctly. The company can't even screw this up for you because almost any cash flow they'll generate is going to service debt.
I almost feel bad for whomever bought these bonds at par 6 weeks ago. Almost.
You are right. Neff bonds could be zeros where it is highly unlikely that OSK equity will hit zero. I need to rethink this. By any measure the NEFF bonds are not covered. But it is stupid because I would short the equity of CAT and OSK at 12x but I would never short the bonds of NEFF even though I think they are most likely zeros.
I think their is zero reward for going long CAT at 12 times the peak. Yet I think there is big rewards for going long NEFF if it eeks it out. My favorite Redleafism is eeking it out.
I need to rethink this. Bottom line I am short CAT and OSK. Not sure about NEFF. Wouldn't long it though.
NEFF is a scary short for a whole other reason as well. There's no credit derivatives market, which means you are going short in cash pay. A 15.5% cost of carry + thin liquidity makes that a non-starter for me.
Not sure about all that. For CDS you need a counterparty. For cost of carry you should subtract out the yield of your portfolio of risky assets.
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