The Confusing case of the Overseas Shipholding $OSGIQ bankruptcy

I follow LongShortGreek on Twitter and have found his information and thoughts about bankrupt stocks to be good and actionable. When he tweeted that the bankruptcy plan would give current OSGIQ shareholders $2/share worth of new equity I was intrigued by the seemingly obvious short.

See the most recent OSGIQ 10-K for the total share count:

As of March 3, 2014, 30,677,595 shares of Common Stock were outstanding.

See the most recent bankruptcy plan (dated March 7th, 2014).

From page 27 in the bankruptcy plan (emphasis mine):

(k) Class E1: Subordinated Claims and Old Equity Interests in OSG.
(i) Classification. Class E1 consists of all Subordinated Claims and
Old Equity Interests in OSG.
(ii) Treatment. Effective as of the Effective Date, on, or as soon as
reasonably practicable after the Initial Distribution Date, each Holder of an Allowed Class E1
Claim or Allowed Class E1 Old Equity Interest shall receive, in full satisfaction, settlement,
discharge and release of, its Allowed Class E1 Claim or Allowed Class E1 Old Equity Interest,
as the case may be, a pro rata share of Reorganized OSG Equity equal to $61.4 million, subject
to dilution on account of the Management and Director Incentive Program, the Rights Offering,
and the Commitment Premium Shares and Warrants. The Reorganized OSG Equity to be
distributed to each (x) Domestic Holder of an Allowed Class E1 Claim or Allowed Class E1 Old
Equity Interest shall be in the form of Reorganized OSG Stock, and (y) Foreign Holder of an
Allowed Class E1 Claim or Allowed Class E1 Old Equity Interest shall be in the form of a
combination of Reorganized OSG Stock and Reorganized OSG Jones Act Warrants, as necessary
for Reorganized OSG to comply with the Jones Act.
(iii) Voting. Class E1 Claims are Impaired and the Holders of Allowed
Class E1 Claims and Allowed Class E1 Old Equity Interest as of the Voting Record Date are
entitled to vote to Accept or reject the Plan.

So the shareholders of OSGIQ will receive shares in the new company equal to $61.4 million. Divide that by the number of shares and you get a value of $2.001 per share of OSGIQ.

For a contrary viewpoint see the shareholders’s response to the plan on February 26th (PDF).

Here are a couple recent filings by the debt & equity committee that bode well for the plan being approved:

So what is the catch? There are currently 170,000 shares of OSGIQ available to short at Interactive Brokers (FTP link to full short list) and the borrow rate is only 3.45% APR. That would indicate that there is something I am missing otherwise the borrow rate would be higher. For past obvious bankruptcy shorts like EKDKQ (Kodak) or EXMCQ (Excel Maritime) the borrow rates were way over 20% APR (closer to 60% if I recall correctly, and the effective borrow rate on each was well over 100% due to their low share price).

OSGIQ|USD|Overseas Shipholding Group Inc|10859|XXXXXXX81053|-3.37|3.45|1700000|

Equity holders have until April 4th to review and file objections to the plan. On that day the judge will review it (as I publish this I think that date has been delayed two weeks).

See this page for updates from the bankruptcy court.

For a contrary view of OSGIQ take a look at this random person’s tweets. I am thoroughly confused right now so I closed for a loss my original short position that I took two days ago.


Disclaimer: I have no position in OSGIQ and I may short or buy at any time. I have no relationship with any parties mentioned above. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

Are VIX Futures ETPs Effective Hedges? No.

This purpose of this post is not to bash certain supposed trading gurus who were so incredibly stupid as to lose money owning TVIX when it was trading at a nearly 100% premium to its NAV (for the pedants, yes I know that ETNs don’t technically have NAVs — they have indicative values, but those function the same way as NAV — it is the value of the underlying asset or derivative contract). Learn more about TVIX at the VelocityShares website. (Speaking of TVIX, I would be chary of buying any product that has scores of references in its prospectus to when (not if) its value reaches $0.)

No, this post is just to let people know that using VIX futures and ETNs based on it for hedging a long stock portfolio is not the best idea. From a paper just posted to SSRN a few days ago (emphasis mine):

Exchange-traded products (ETPs) linked to futures contracts on the CBOE S&P 500 Volatility Index (VIX) have grown in volume and assets under management in recent years, in part because of their perceived potential to hedge against stock market losses.

In this paper we study whether VIX-related ETPs can effectively hedge a portfolio of stocks. We find that while the VIX increases when large stock market losses occur, ETPs which track short term VIX futures indices are not effective hedges for stock portfolios because of the negative roll yield accumulated by such futures-based ETPs. ETPs which track medium term VIX futures indices suffer less from negative roll yield and thus appear somewhat better hedges for stock portfolios. Our findings cast doubt on the potential diversification benefit from holding ETPs linked to VIX futures contracts.

The paper is Are VIX Futures ETPs Effective Hedges? by Deng, McCann, and Wang. See the full abstract and download the paper at SSRN.

Disclaimer: No relationship with any parties named above and no positions in any stocks or funds mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well..

Is the Firsthand Technology Value Fund (SVVC) Undervalued? No.

I just read in the WSJ about the plunge in value of a couple business development companies (BDCs) following the IPO disaster that is Facebook (FB). BDCs are interesting creatures — essentially, they are publicly-traded private-equity funds that typically invest in small to medium-sized companies’ debt and equity. Two BDCs were discussed, SVVC and GSVC. The more interesting company was SVVC (Firsthand Technology Value Fund, Inc). The article indicated it was trading at a discount to its cash value. I have in the past made investments / longer-term trades based on special situations and valuation so I decided to exercise my value-investing skills and take a look.

The first thing to do when investigating something like this is to calculate its pro-forma numbers. BDCs have a net asset value (NAV) that is updated quarterly. Because of its large share issuance in April and its large holdings of FB, I had to adjust all the numbers from its most recent quarterly report. Take a look at the Google Doc with my numbers. I came up with net cash value per share of $20.39 and an adjusted book value per share (accounting for the decrease in value of publicly traded stock in Facebook and Intevac since the end of the first quarter) of $24.10. With a closing price yesterday of $18.24, SVVC would seem to be a screaming buy, because it is trading at a 10.5% discount to its cash alone (ignoring the value of its investments).

The problem with looking at the valuation that way is that BDCs exist to invest, and depending on the market’s mood, BDCs can trade at a premium or a substantial discount to their NAV. In fact, it is much more common for them to trade at a subtantial discount to their NAV. One BDC I am quite familiar with, having previously invested in it and analyzed it in detail a few years ago, even talking to their CFO, is MVC Capital (I am no longer invested in it). Of the BDCs that existed a few years ago, MVC Capital was my favorite. As of the market close yesterday ($12.48) and using the NAV from the end of April (the most recent NAV given by the company), the stock is trading at a 27% discount to NAV.

SVVC will not liquidate and give cash back to shareholders. The cash it has will be invested and as a result it should trade in line with other BDCs, at a discount to the total value of its assets. It is currently trading at a 24% discount to its NAV (adjusting for the decrease in value of publicly traded stock since its last NAV report at the end of March, but not accounting for the likely decrease in the value of its private equity investments). This discount is similar to the discount of MVC Capital (which invests in significant debt as well as equity, meaning it has less market / business risk), meaning that SVVC is fairly valued, despite trading at a discount to net cash (liquidation) value.

Disclaimer: I have no positions in any stocks mentioned and no relationship with any people mentioned. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well.

The Default investment

This post was originally published on my blog on 7/27/2007. Due to blog moves it was not correctly moved to this blog so I have reposted it. 

In what should you invest if you know nothing about investing? While there are plenty of people (most readers of my blog) who enjoys spending time seeking out new and attractive investments, there are plenty of people who do not enjoy that, do not have the time, or do not have the knowledge or the desire to gain the knowledge necessary to invest well. Luckily, there are some good solutions for such “defensive investors”. The standard advice for defense of investors has been to invest in index funds. This is a great idea.

Unfortunately, there are now hundreds of different index funds in many different asset classes. So even choosing in which index funds to invest is now a complicated decision. Luckily, there are now many target date funds. These are funds that are set up for investors who wish to withdraw their money gradually starting on a certain date, usually because of retirement but for other reasons such as paying for college for children as well. So let’s say that you are investing for retirement starting approximately 2040 and paying for your children’s college education starting in 2025. You estimate that it will cost $200,000 for each of your two children and that you will need at least $2 million at the start of retirement. You can plug these numbers in any of various online retirement or savings calculators to calculate how much you will need to save. Then, you invest in two different target date index funds through Vanguard: a 2025 target date fund and the 2040 target date fund.

You use those handy online calculators again to determine how much you’ll need to put into each fund to reach your goals. All that is left for you to do is to faithfully put away money into each of those funds every month like clockwork. You will never have to think about your investments again, except for occasionally checking to make sure that you are progressing well towards your goals. Those target date funds will do all the work for you, investing mostly in stocks at first and gradually sticking more money into bonds as your target date approaches. And the only target date funds you should consider are Vanguard’s funds, because they have the lowest fees around, about 0.21% per year. I think the above plan is the easiest and most generally appropriate plan for the majority of individual investors. However, your investment needs may differ, in which case you may wish to seek out a certified financial planner (CFP) who is compensated on an hourly basis to offer you unbiased and personalized investment advice.

Disclosure: Disclaimer: I own some Vanguard index funds in an IRA and my wife owns a Vanguard ETF in an IRA. We have no target-date funds–all our investments in retirement accounts are in cash or stocks. This blog has a terms of use that is incorporated by reference into this post; you can find all my disclaimers and disclosures there as well..

Are your deposits insured? How to avoid losing money in the coming bank Armageddon

I am not one to use the term Armageddon lightly. But when major banks like National City (NCC) and Washington Mutual (WM) are trading under 30% of book and Wachovia (WB) is trading at under 50% of book value, what othe term is appropriate? The market is pricing in a fair probability of a number of very large banks being bought out at firesale prices (like just happened to PFB) or being taken over by the FDIC and then being dismantled.

That being said, while the coming two years will be a very bad time to own bank stocks or bonds or to have uninsured deposits at banks (over the $100,000 FDIC limit), the economy will not completely collapse (though we should have a decent recession) and the world will move on.

The main thing to do is make sure that you and any friends and relatives never have more than $100,000 at any bank. If you wish to keep more, you may want to visit the FDIC website to see if your type of account is protected for more money (some are). You can search for your bank here and find out if it is insured by the FDIC and you can view financial information on your bank, even if it is private. For example, try searcing for “Home State Bank NA” in zip code 60014* (see random note at bottom of post). Then click on “Last Financial Information”, and on the next page click on “generate report”. This brings you to the bank’s balance sheet. If you click on the link towards the bottom for “past due and nonaccrual assets”, you will be taken to the good stuff. You can see that past-due loans have more than doubled over the last year. Unsurprisingly, much of the increase ($2.5m) was from “construction and land development loans”. It also pays to note that this big increase in past-due loans was solely in the 30 to 89 days late category. A more agressive bank might still be accruing interest on those loans. However, this is a conservative community bank and as you can see towards the bottom of the page, all loans that are more than 30 days late are non-accrual. (An interesting discussion of regulatory vs. tax requirements for deciding which loans are non-accruing can be found here.)

If you go back to the main balance sheet page and click on “net loans and leases” you can find the breakdown of loans. This is a good place to find out how risky your bank’s loan portfolio is. Unfortunately for Home State Bank, 20% of their loans are construction and land development loans. This bank is based in the far northwest exurbs of Chicago, so I think it likely that the bank will take a huge hit here. If you click on “1-4 family residential” you can see the breakdown of these loans. Luckily, most of these are first mortgages. Overall, Home State Bank looks okay. What about your bank?

If you have accounts as a credit union, visit NCUA to see details on insurance of your deposits. You can find your credit union and then request that a financial report be emailed to you. As an example I uploaded the report on my credit union. You can download the Excel Spreadsheet here. When analyzing credit unions, be aware that they will generally have more real estate exposure than similar commercial banks. Important things to examine are delinquent loans as a percent of assets (sheet 2, line 21 in the spreadsheet), asset mix including the amount of REO (sheet 4). If you are afraid of a bank run sparked by articles similar to this, take a look at the amount of uninsured deposits (sheet 5, lines 46-50). Delinquent loan info is always interesting (sheet7). For most of the data in the spreadsheet, an average of peer group credit unions is provided as well, making comparison easy. Overall, I think West Community looks quite safe.

What should you do if your bank doesn’t look safe (such as National City, where I have multiple accounts)? First thing that you should do is make sure your deposits are insured. Then make sure that you have enough cash in safer banks so that you can last awhile if you temporarily lose access to your money. Up until now the FDIC has been very good at getting depositors quick access to their insured deposits at a failed bank, but if things get really bad and big banks go down the FDIC could become backed up and take weeks or months to grant depositors access to their money. It pays to be prepared for such a scenario, even if it is unlikely.

*This bank, by the way, provided me with my first mortgage. Easiest mortgage I ever got — my father and I ran into Steve Slack, the bank president, while dining at the local country club, and I mentioned that I was buying a house in St. Louie. Slack gave me his card and told me to give him a call when I get close to finding a house. There are benefits to relationship banking–my extended family has banked there for three generations and uses the bank for a family company.

Disclosure: I am short several regional and local banks. 

SEC Ensures that Penny Stock Market Manipulation Remains Profitable

An SEC enforcement division press release today shows why penny stock manipulation remains popular and why I hate the SEC. According to the SEC:

“The Commission’s complaint alleged that, in August and September 2002, Hayden, Marc Duchesne, and others carried out a scheme to manipulate the price of Nationwide’s stock. The scheme was orchestrated by Duchesne, and began with a matched trade between Duchesne and Hayden that artificially inflated Nationwide’s stock price from pennies to $9.35 per share. The Complaint further alleged that, thereafter, Duchesne, Hayden, and others bought or sold Nationwide shares at inflated prices to increase the price of Nationwide stock, to generate volume, and to stimulate market demand for the manipulated shares. The scheme collapsed on October 1, 2002, when the Commission suspended trading in Nationwide securities. “

The judge “entered a Final Judgment of permanent injunction and other relief, including a bar against participating in offerings of penny stocks, against Jeffrey A. Hayden on May 7, 2008.” Hayden agreed to the judgment “without admitting or denying the Commission’s allegations.”

Midway through reading the press release I thought to myself, “Hey, maybe the SEC finally is starting to care about penny stock manipulation!” The description of the financial penalty imposed upon Hayden destroyed any last shreds of hope I might have had that the SEC cares about doing its job (emphasis mine):

“Hayden was liable for disgorgement of $290,798, together with prejudgment interest of $116,330, but payment of these amounts was waived based upon Hayden’s sworn Statement of Financial Condition. A civil penalty was not imposed for the same reason.”

There you have it! The only penalty to Hayden was a promise not to manipulate penny stocks. He did not have to pay one penny. That is less than a slap on the wrist. This is yet another reason why I believe that we should abolish the SEC and most stock regulations and instead pursue stock market fraud under the common law definition of fraud. Penalties would be far harsher and might actually scare people away from penny stock manipulation.

(Note–I am not a lawyer; if you are one and I am spouting nonsense, please let me know!)

The dumb way to steal from your investors

If a manager who runs a $30 million hedge fund decides to embezzle money, it usually makes sense to actually embezzle it and then run away, rather than just transferring it to a shell-company brokerage account and then losing half of it selling short Treasuries. Evidently someone forgot to give that sage advice to Matthew La Madrid and his hedge fund management company Plus Money. According to a recent SEC complaint:

The complaint further alleges that, unbeknownst to investors, in the fall 2007 Plus Money and La Madrid abandoned the covered call trading strategy, emptied out the monies in the Premium Return Funds’ brokerage accounts, and dissipated the money through a series of illicit transfers.

The SEC’s complaint alleges that investors were not told that in the fall 2007, La Madrid and Plus Money transferred nearly all monies from the Premium Return Funds’ brokerage accounts to Vision Quest Investments, a La Madrid dba, which in turn transferred $10 million to relief defendant Palladium Holding Company. The complaint further alleges that Palladium:

* Transferred $5 million to its own brokerage account and used the funds to trade in numerous short-sell transactions involving Treasury bonds; as of April 25, this activity had depleted more than half of the account’s value
* Wired $500,000 back to La Madrid
* Transferred $1.8 million to several real estate title companies
* Used $95,000 towards the purchase of two automobiles
* Transferred another $90,000 to a Denver-based car dealership

What I do not understand is why La Madrid did not simply make the losing bets in the hedge fund. If he had lost the money in the fund then he would have been guilty of little more than misleading his investors about his investment strategy (the fund was supposed to invest in covered calls).

Sex may sell, but it sure ain’t profitable

The old adage that sex sells may be true, but if an investor wanted to invest in publicly traded peddlers of sex (in all its legal incarnations), that investor would have only a few poor choices. While those choices may soon expand (when Penthouse goes public, as it is expected to do soon), the anti-prude investor should steer clear of this field.

The largest publicly-traded sex-related company, Playboy [[pla]], is the quintessential poor investment. Over the last two decades Playboy stock is up 42%, while the Dow Jones Industrial Average is up 520%. Even as Hugh Heffner continues to cavort with silicone-enhanced playmates one-third his age, the company’s centerpiece magazine continues to lose subscribers.

The story is much the same at cable-smut purveyor New Frontier Media [[noof]], where the stock has appreciated 2% over the last decade. The DJIA is up 64% over the same time period. The problem with cable porn is that it will suffer the same fate as newspapers: it is going to be crushed by internet competition. So despite a cheap P/E of 15, New Frontier will likely be a poor investment.

Rick’s Cabaret International [[rick]], a chain of strip clubs (see a commercial for it here), has been kinder to its investors than the above companies. Over the last decade it has outperformed the DJIA, 270% to 64%. But Rick’s is trading now at a stratospheric P/E of 34, which is out of line with companies most comparable to it: staffing companies such as Administaff [[asf]] and Manpower [[man]], both of which trade at P/E ratios under 15. While Rick’s provides stripping services in branded locations, it is not really that different from staffing firms that provide administrative and other services to companies. It relies upon its ability to recruit skilled workers, and its brand is far less important than the actual capabilities of its workers. Also like the staffing firms, it is vulnerable to a recession.

The last public sex company of which I am aware is the worst, yet it comes with the most wholesome reputation. This company is Berman Center Inc. (Pink Sheets: BRMC). This is a sex therapy center and website that caters to couples looking to improve their sex lives. Its eponymous founder, Dr. Laura Berman, is not only knowledgeable but also good at getting press. She has appeared on Oprah Winfrey’s show and she is a columnist for the Chicago Sun-Times. Despite the advantages the company has, its financials are a mess. The company, with a market capitalization of $12.5 million, has a book value of negative $1.3 million (see the most recent 10Q for details). The company lost $1.3 million over the first nine months of 2007 and lost $1.2 million over the first nine months of 2006. The company is also delinquent in filing its 2007 annual report.

Overall, sex makes for a poor investment, at least in terms of public companies.

Disclosure: I have no position in any stock mentioned. My disclosure policy is considered obscene in Utah, because it is transparent and it prohibits stock fraud, front-running, pump-and-dump scams, and MLM schemes.

Interim Performance Review

Your humble blogger is not averse to eating crow. So it is time to admit that I have been wrong so far about Frederick’s of Hollywood [[foh]] (Movie Star Inc prior to a recent reverse merger). It is difficult to invest without knowing all the information, and I appear to have been over-optimistic about the growth of the company. Especially with competitors like Limited Brands [[ltd]] (owner of Victoria’s Secret) selling quite cheaply, Frederick’s does not look like a worthwhile stock to buy. Frederick’s stock has recently fallen from $3.60 to $2.80 (its 52-week low after adjusting for a recent 2-for-1 reverse split).

On the other hand, my bearish advice continues to be very good: since scolding Patrick Byrne and [[ostk]] in a Dueling Fools article (for The Motley Fool), the stock has declined from $15.76 to $8.90.

In other news, despite Exmocare (OTC BB: EXMA, formerly 1-900 JACKPOT) being a horridly overvalued useless piece of trash with no sales and no significant book value and no chance of ever being worth one-tenth of its market cap, its stock has gone up since I pledged the profits from my short position in the stock to charity. The 1st Annual Short-a-Thon was a failure and raised $0 for charity.

Disclosure: I have no position in any stock mentioned. I trained in the dark arts of Jedi under the Sith Lord himself. My disclosure policy wants you to read it.