'Interviews' with Valueground

BAC

Scott Murray                      scott.murray1@gmail.com             May 3 (6 days ago)
Just so I understand it clearly, did you shed all of your equity positions including RIMM over the last few days? Seems like you guys have really been active traders this year.... 

Value Ground                         May 5 (3 days ago)
Hi Scott,

Ya, as much as we would hate to admit, yes, we have been active traders this year. 

Nope, we have shed all of our equity postions including RIMM last month, and bought AIG and BAC warrants as featured in Valueground site. We would be sticking to these two positions for the coming few years; we are extremely comfortable in doing so as explained in our past articles.

What are your views on AIG and BAC?

Scott Murray                 scott.murray1@gmail.com               May 6 (3 days ago)
I just left the Berkshire meeting, a lot of quality laughs. Munger is insanely funny.

Look, I love AIG and BAC. They are bashed by the "pundits" on TV, sell for a fraction of tangible book, generate strong cash flows, are much safer than before, have good leadership. So, if you:
A. understand the business-check (I do, I don't know why it's so opaque to CNBC, it's called loans and insurance, medival businesses, and at generational low leverages)
B. like management-check (Benmosche is particularly likable for his intelligence IMO)
C. they have a competitive advantage-check (AIG has a very strong global insurance business,  BAC touches a large fraction of U.S. households)
D. ARE AVAILABLE AT THE RIGHT PRICE- check

So there you have it. Munger's 4 rules of investing. I wouldn't buy BAC warrants when the stock is at $7, why not just own the shares? Then you can sell calls/puts against them constantly.

Value Ground                    4:23 PM (15 minutes ago)
we are certainly jealous of you being able to attend the berkshire meeting, how we wish we are there!

Yes, you are absolutely right on AIG, such a great franchise trading below book value, we certainly cant imagine that going to be the case in the future when they start to ramp up business again. And, have you kept up to the latest news, government stake is reduced to 61% now from the offering on Monday and AIG intends to buy back $2Bn of it after doing so just a while back! Thats going to further increase their book value and Robert Benmosche says they are going to generate another $30bn from asset sales in the further!
(www.bloomberg.com/news/2012-05-07/u-s-treasury-sells-5-billion-of-aig-stock.html)

For Bac, you can certainly sell puts to lower down your cost of purchase in owning the common stocks. Refer to our article on why invest in bac warrants instead, http://valueground.blogspot.com/2012/03/why-invest-in-bank-of-america-common.html. We believe they are rare in nature, as they are long dated with clause on them to provide additional upside. Compared to common stocks, we believe this holding is going to generate much greater upside for us than the common stocks. 
 
Portfolio 

Ron Taylor                       Apr 15, 2012 08:16 PM
Nice work guys you put your money where your research and experience told you to . Look at the gains on AIG which is still in recovery mode.
Bac isn't too shabby either.

Getting in early certainly helps and still many investors do not know about these long term warrants. (2021 AIG)
AIG warrants are still cheap when you think they were introduced at $22.
Huge buyback will take place this year and an IPO. Cheers


Value Ground                    Apr 16, 2012 12:24 AM


We would expect a reappraisal of the market value of AIG once the U.S. Treasury exit their stake.
Hopefully, like what the rumours say, Buffet is shopping around again with his elephant gun!
And this time around, we decided to get in early and swing big, partly from the lesson we learn earlier;


Confessions: Even though we got into BAC stake before Buffet, we did not buy aggressively enough. We ended up "dollar costing" up instead!

AIG

Subject: How convicted is Valueground in the investment of AIG Warrants?

Dated 5 Apr 2012, 
Venue: Reader's comment in 'Why invest in AIG common stock when you can invest in AIG Warrants?' article

Contrarian by CynicismApr 5, 2012 10:37 AM
What is AIG's exposure to Japan's economy and currency?

Same question for the Euro?

Within 10 years one of the two will face a major crisis (my money's on Japan). Being an underwriter of risk, and with questionable results deriving from large tail risk events, how comfortable are you that their exposure is minimal and would not impact your thesis?

Similar question regarding US Muni bond insurance and other Government debts?

Value GroundApr 7, 2012 02:40 AM
While we do not have the figures with us, AIG derives about 50% of their revenues internationally.

Relating to your question on Japan and Europe and muni bond insurance exposure, AIG's property and casualty (P&C) insurance business is probably the best in the industry. Excluding reinsurers, AIG has the widest geographic exposure of all the insurance companies. This implies that (1)returns are derived from undertaking the least risk when compared with their peers, and (2) volatility of the returns is also minimal; AIG P&C business is an economic franchise.

Just take 2011 for example, we have earthquakes in Japan and New Zealand, floods in Thailand and Australia, and tornadoes and hurricanes in United States. But AIG managed to break-even (paid $25bn in claims). In contrast, Thai Re which has consistently earned ROE of 20% would have went bankrupt last year because of the Thailand floods if Prem Watsa of Fairfax Financial did not recapitalize the company.

And we all know that it is extremely difficult to build a 'direct' insurer with that kind of geographic exposure that AIG possess. Therefore, we still view AIG as being the elite of the P&C insurance industry both now and in 10 years time.

Second, we are extremely impressed with how AIG managed to pay off the government debt of more than $100bn. Of course, this would not be possible without government assistance. But $100bn is a huge, huge sum and we think AIG deserves applause and recognition for it. It also gives us the comfort when we invest in AIG because if the future remains bleak for P&C insurance industry, AIG will be able to overcome any obstacle better than all of their peers.

With regards to their investments (on other Government debts), they are pretty diversified with investments skewed towards corporate debt. In addition, within each category of investments including government debts, they are also pretty diversified.

Of course, the insurance business is a leveraged business, so the figures for each category of investments are still in the tens of billions of dollars (while their equity is about $100bn). If anything is to blow up in there, AIG will suffer a fair share of losses. But what keeps us very excited and confident about AIG is their economic franchise in P&C insurance which we believe will provide annual recurring income (before tax) of $14bn. You may decide for yourself whether (1) our estimate of $14bn is reasonable and (2) if our estimate is correct, whether the $14bn will be able to cushion the investment losses relating to other goverment debts or even on U.S municipal debt.
On top of that $14bn estimate, AIG common stock is selling at P/B of 0.6x, which implies the investor of AIG is expecting further losses. Therefore, you may also want to estimate with that kind of valuation, how much further losses can AIG business incur before an investor really 'lose money on AIG investment'. While we did not do the calculations, we figure out that AIG has to lose 'alot' of money before we start losing money on an AIG investment in common stock, which also explained why we invest in the warrants instead of the common stock.


Contrarian by Cynicism
       Apr 9, 2012 10:55 AM

12 guys in a room in London cost the company $100B. Yes, their earnings power is strong and they should be applauded for repaying their debt, but black swans are a common occurrence. Irrespective of their ability to generate cash, it must considerably trump risk. Between the Middle East, EU, Japan, and China, I cannot wrap my head around their exposures to have the same level of confidence as you. I wish you both the best of luck.

Value Ground                Apr 11, 2012 02:29 AM
We totally understand your concerns. Before we initiate a position in AIG, our discussions have always revolved around whether AIG would fail again.

While many claimed the 2008 AIG meltdown saga as a black-swan event, the kind of businesses - credit default swaps and the insurance on mortgage-backed securities - that were being exposed in 2008 are just plain bad insurance businesses.

Any student who takes Insurance 101 would understand that insurance businesses who undertake risk of widespread failure are bound to fail. The risk associated with 'failure-upon-an-occurance-of-financial-crisis' underlying the credit default swap business and the inadequate-pricing of the insurance on mortgage backed securities due to the undertaking of excessive risk associated with the real quality of the mortgage-backed securities as a result of 100% securitization of the mortgage-backed securities by the banks would guarantee these businesses to be unsustainable. But the magnitude of the devastating effects is unimaginable until the 2008 crisis.

So we analyze the various insurance businesses that AIG has that fall under the category of 'risk of widespread failure'. And we are particularly concerned with the municipal bond insurance business. In fact, AIG has double exposure to municipal bonds, accompanied by their investments in these bonds. We believe this is the biggest risk that we are undertaking when we invest in AIG.

However, the kind of confidence that we have over an investment in AIG is threefold. We believe it is worth taking the risk (1) associated with municipal bond insurance business and investments, (2) especially after what happened in the aftermath of 2008 crisis and (3) the price that we paid to undertake the risk.

On (1): There is a fundamental difference between municipal bond insurance and insurance on mortgage backed securities: The originations of mortgage-backed securities are by the 'finance guys' who are profit-driven , while municipal bonds are issued by the governments.

On (2): The 2008 meltdown saga would have result in tight supervisions imposed on AIG and regulatory measures undertaken and to-be-undertaken by AIG to prevent the failure of AIG again. To put it this way, if the 2008 meltdown saga did not happen, we would not have invested in AIG (and BofA) even if we believe both securities are priced attractively. These financial institutions are just way too complicated. Unlike many commentaries regarding criticism on the various regulatory guidelines imposed on these financial institutions, we believe the government is doing a wonderful job to 'stifle risk' (instead of 'stifile profitability' according to many commentaries) in these financial institutions. We believe these financial institutions will be earning an optimal return relative to risk for many years to come. (While capitalism has its benefits, the combination of capitalism and proper regulation and supervision in place would result in a more balanced approach in our view.)

On (3): Finally, while we may find the business economics of AIG to be attractive, we take a gigantic position in AIG mainly because of the price that we paid as compared to the price others are willing to pay during 2000-2007. In our view, buying at the current price is equivalent to between 1/3 to 1/7 of what investors are willing to pay for the 'same thing' during 2000-2007 as the business fundamentals remain intact, and 1/2 of what investors currently are willing to pay for the other similar insurance companies. (We are led to believe that investors are still haunted by what happened in 2008 or investors are just not buying because government is holding a gigantic stake in AIG)

While we don't hope to convince you or anyone with regards to an AIG investment, we feel obliged to reply as you have pointed out major concerns regarding an investment in AIG. We ought to thank you for the brilliant comments you have made in Valueground. We hope you will continue to 'patronize' Valueground and leave more comments in the future.

Ron Taylor                  Apr 12, 2012 05:20 PM
Today CNBC announced Warren Buffet might be interested in buying AIG treasuries. This is only a RUMOUR
at this time but it wouldn't surprise me in the least.

AIG (NYSE: AIG) is ripping higher Thursday on rumors that none other than the Oracle of Omaha, Warren Buffett, could buy a large chunk of the government's remaining stake in the company.

The U.S. Treasury still holds 1.248 billion shares of AIG common stock, or 70 percent of outstanding common stock. This is in addition to FRBNY's $9 billion loan to Maiden Lane III, which is preparing to get bids.

Buffett, as you may know, is no stranger to the insurance business. His Berkshire Hathaway (NYSE: BRK-a) is huge in the space.

Still the rumors are just that - rumors - and many of these have no merit.

Street Insider

Value Ground                          Apr 14, 2012 04:16 AM
Seems like his 'trigger finger' for the elephant gun is itchy again.

Radioshack
Subject: Radioshack - The next Circuit Cities/Kmart?
Dated 5 Apr 2012, Venue: 'Portfolio' Page

value_investorApr 5, 2012 01:31 PM
What is your thesis on Radioshack when Retail is such a tough industry.

Value GroundApr 6, 2012 02:07 AM
While we have sold out on this position, we continue to like Radioshack for it being very resilient and adaptive, selling at a share price which is extraordinarily cheap. We believe it has no chance of being bankrupt and results will recover when the retail cycle turns for the better. As such, buying Radioshack at below book value has minimal risk of permanent capital loss.

If you break down their revenue segments and looked at the progress on their mobility segment, you will realize that 4Q11 mobility revenues have grown by 15% y-o-y. The management has been changing its focus from consumer electronics to mobility since 2008, and they are spot-on on the changing consumer trends (Best Buy has suffered as a result). To our understanding, this doesn't look like a company that is going to be associated with 'the likes of Kmart and Circuit City Stores'.

However, the major concern by institutional investors is margins in the mobility segment are not as attractive as that of consumer electronics, as shown in their recent financial results. We agree. But their recent results are negatively skewed by 2 factors: (1) their mobility segment is underutilized; as sales continue to increase in this segment, greater economies of scale will be achieved and margins will continue to improve in the future. (2) 4Q11 Consumer electronics revenues declined by 33% y-o-y, resulting in a dramatic shift in sales mix skewed towards the mobility segment.

In addition, Radioshack operates in many locations with a smaller store-format, which makes it easier to manage costs. The recent Best Buy announcement that they are going to close 50 big stores and open 100 small stores may have validated my statement.

We hope our brief comment on Radioshack helps.


Exco Resources
Subject: Our Investment in Exco Resources
Dated 4 Apr 2012, Venue: valueground@gmail.com

Paras Dagli parasd@gmail.com


to me
Hi,

I recently stumbled upon your blog. It was the BAC warrants that got
me interested. I was buying in late 2011. I saw your post and it is
good to see people finally making some of the features of the warrants
publicly known.

What is it that you see in EXCO? I have been looking at it due to
Wilbur Ross' position. It seems like they are likely one of the
winners from this low natgas prices. Already talking about acquiring
assets and they still have production that is profitable at $3 natgas
prices. Would you mind sharing any of your thoughts on EXCO?

Thanks,
Para

Value Ground



to Paras
Hi,

Great to hear that. U are already earning lots of money on these warrants!

For our Exco investment (which we have already sold out and instead allocate our capital to AIG warrants), we like Wilbur Ross more than the company, Exco. As you would have known, Wilbur Ross is the kind of investor that buys 25 cents on the dollar, and we believe Exco is trading at about 25 cents on the dollar. We are impressed with Exco for a few reasons: 

(1) We believe their break-even natural gas price is about $3.85 at current production quantities, while many small-to-mid-caps have break-even of at least $4.
(2) And because Exco is one of the lowest cost producer, their operating cash flow position is superior! In 2011, Exco has operating cash flow of $400mn. 2012 operating cash flow, however, will be materially reduced.

(3) They have revolving credit facility of $1.2bn of which $431mn is unused. They estimate their 2012 CAPEX will be $470mn.

(4) We like the management as they are very focused in being the lowest cost producer and we admire their courage and conviction of developing the natural gas assets when many other producers have decided to switch to liquids play. Exco can play the 'all-in-on-natural-gas'  game because they are one of the lowest cost producer.

Additional comments that you may find useful: We would prefer Chesapeake and Quicksilver Resources if Wilbur Ross hasn't invested in Exco. 

We believe Quicksilver is more undervalued than Exco because it has more than twice the (1) proved reserves and (2)land acreage than Exco's but has a market capitalization of $900mn vs. Exco's $1300mn. Furthermore, Quicksilver has $800mn unused credit facility under their disposal for future CAPEX. Quicksilver, to our understanding, has slightly higher break-even cost than Exco. We also like the management (Darden Family). U can read about them in the shareholders letters. 

Chesapeake has all along been our favourite; It reminds us of how T Boone Pickens and other 'oilmen' have become mega-rich. We shall not speak about them in here as there are so many brilliant articles out there. We agree with all of Aubrey McClendon (Chesapeake's CEO) capital allocation decisions despite he has received lots of criticism. The leverage that Chesapeake will have with the possession of massive land acreage in both liquids and gas plays is the dream of every investor! Think of Eddie Lampert and Sears Holdings. 

<And Chesapeake is selling at about 1 times of book value, with the book value being negatively impacted again and again by impairments (which means that buying chesapeake today is equivalent to buying the oil and gas properties for less than the price Aubrey bought in). Unbelievable! >


Post Holdings

Subject: More on Post Holdings 

Dated 21 Feb 2012, Venue: Valueground@gmail.com
e t noidonotgofish@gmail.com



to me
You really do. I suspect i will have to do some deeper digging on this situation into the night tonight. Shoot me a line if you happen to be burning the late night oil so that we might be able to do some tire kicking. From what i am finding right now, although only still looking on the surface, there are some loose ends that need to be accounted for. For example, they are already coming on the market with 716m in debt and they just issued another 775m, with the proceeds to go to Ralcorp. Am i reading this correctly that this means 716m old debt + 775m new debt =1.5billion in total debt?? With no cash?? This kind of debt dwarfs the 100+m free cash they are generating as it will take them more than a decade to pay off their debt and its not like they are a high-growth company.
Although the cash flows look ok, their revenues are decreasing from 2009, 2010 and 2011. As much as i love their cereals, something else is catching peoples breakfast attention. Is it the generics? Breakfast cereals on the shelves are pretty darn unjustifiably expensive for regular everyday consumption these days, especially with so many other options available.
On a positive note i couldnt help but to notice that mr director william danforth bought 125k shares at the $26 per share price.
Again, if you happen to be up shoot me a line. Im going to see how up to date i can get on them and maybe see if i can get their cfo robert vitale on the horn in the morning. However, if it turns out that their debt situation is as bad as it seems to me that it might be, i may have to pass on this situation

Value Ground



to e
Hi E.t.,

Thanks for your comment.

To address your questions, firstly, this is a spin-off whereby Post will effectively issue new debt to retire that held under the parent Ralcorp. They cannot possibly split the debt as everything is held under Ralcorp, hence, new debt has to be issued.

I have attached Post fillings prior to the spin-off. It contains all the information you needed.
In case you dont have the time to look through, below is an extract where they mentioned about the debt issuance:

"As part of the separation, we expect to incur approximately $950 million of new indebtedness, which we expect to consist of $175 million aggregate principal amount of borrowings under a senior secured term loan facility and $775 million in aggregate principal amount of senior notes. We will not receive any proceeds from the senior notes, which we expect to initially issue to Ralcorp in connection with the separation. We expect that approximately $125 million of the proceeds from the term loan facilities will be transferred to Ralcorp in connection with the separation and to directly or indirectly acquire the assets of the Canadian operations of the Post cereals business. Of the remaining $50 million in proceeds, we expect to retain approximately $25 million after payment of fees and expenses relating to the financing transactions."

In summary, the total debt they will incur is as follow:

Debt
        Interest exp                               
Senior Notes7757.38%57.16
Term loan1758%14



71.16





Hence, not a problem at all, using the above calculation, their yearly interest expense would only be about $71M.

For your concern on their decreasing revenue, bear in mind that all other cereal makers are also affected due to the weak economy. Furthermore, we believe it is over exaggerated as their market share only drops from 12% to 11% from 2009 to 2011 and this is due to their decreased spending in marketing and higher pricing of their cereals.

Hope this finds you well.

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