Cigarbutt

The healthy pushback is appreciated. I've learned to respect your judgement but would still push for an appeal in this specific case. :) As far as WIN and Unity, there is now a cloud of uncertainty that is not going away anytime soon. There's a relevant example that may be instructive in relation to this specific case. Norske Skog was a Norwegian paper company that got into trouble after heavy acquisition financing. Perhaps, because of operational and financial bad decisions, they deserved to file for bankruptcy in late 2017 but AFAIK did not use the same strategies as Windstream when facing liquidity issues. During out-of-court restructurings, involvement of "active" debt investors can be beneficial because claims tend to consolidate and valuation ranges narrow down for various classes even if conflicts are expected because of different interpretations and valuation appraisals of various outcomes. For Norske Skog, in late 2015 and early 2016, there was an attempt (IMO that possibly could have prevented the eventual bankruptcy) for a bond exchange offer but, there were three large groups that manifested counterintuitive behavior (similar to what has happened to WIN) and the attempt failed. It doesn't help when some players benefit even if the total value is reduced. The issue is how to deal with informational asymmetries.

A striking feature in this case is that a majority of bond investors followed through with Windstream. Majority votes and related "strategies" are not ideal but may be the best of bad options to align incentives, on a net basis, for all participants. I think its relevant (and so did the judge, who mentioned it) that of the original owners of the bonds in question, less than a majority voted to waive the default. Windstream got a large majority of the bonds that the exchanged into that indenture, but without that (pretty dodgy, imo) exchange, they wouldn't have had the majority and wouldn't have a waiver of the default. The transaction being a sale-leaseback seems pretty straightforward to me, so I doubt that's very likely to change on appeal. Maybe they can get the waiver of the default to stand somehow, that seemed less obvious to me. These are valid points of view. Windstream, it seems, instead of facing head-on the delayed notification of default with litigation decided to try to circumvent Aurelius with an add-on of notes maneuver that would have created (from the indenture) a new "single class for all purposes" including voting and that makes sense from a restructuring point of view but that, in substance, is a 'dodgy' way to deal with the situation, a conclusion reached in the last decision. But. Windstream completed the sale-leaseback transaction in 2015 and, effectively, because there were no (AFAIK) official adverse reactions, was acknowledged with 100% consent from the bond owners of all classes. More than two years after, when Windstream went ahead with more restructuring action (noise at that point that a fixed income activist is involved), a notice of default is sent by Aurelius (relevant questions: when was the bond stake built? and what was their net position on all Windstream-related securities?). I understand that Aurelius held part of only one of the series of bonds and Windstream carry the typical cross-default and cross-acceleration provisions. Think intent and economic reality here. Let's say you held Windstream notes in 2015 after the sale-leaseback transaction do you notify a default or decide to follow the situation? Why? Let's say you held Windstream notes in 2017 after the notification of default. Do you side with Windstream or Aurelius? Why? I would say that the individual intent has to do with maximization of individual outcome and the rules of the games should optimize the net maximization of value for all while maintaining a fair playing field to determine how this maximized outcome is shared. I have followed the CDS market for a while and feel that the regulatory/legal structure has difficulty catching up. More work needs to be done on empty creditors. https://corpgov.law.harvard.edu/2018/08/07/the-rise-of-the-net-short-debt-activist/

I would like to challenge you on that. :) I work under the assumptions that 1-debt over GDP should stop growing at some point (and maybe that point has been reached?), 2-payroll taxes account for only about a third of revenues and 3-aging demographic pattern will cause a disproportionate increase in Medicare and other mandatory spending AND conclude that the fiscal gap has been and, absent major changes, will continue to grow larger and larger. Where am I wrong? This "unfunded" question is interesting. I've been looking into GE (I assume you are also) and have spent some time on their unfunded (assets-liabilities=a negative number) pension situation. Last time I looked, there was a 29B gap and some suggest that the gap is only theoretical and one should not worry if GE continues as a going concern and, in a way, that's fair. But why let such a gap build up? What if interest rates go down instead of up? What if markets fall (for real)? I would say GE will be interesting to follow and boring, it probably won't be, cashflow wise. Isn't it easier to deal with a growing gap early on?

That's a good question. Accounting rules for stock options measure and reporting is a form of compromise. The convention now requires to bring no adjustments to the allocated expenses after the grant date but the principle of incentive alignment between you, the shareholder, and the manager is maintained. Remember that when the stock is down, the same logic works in reverse unless the Board grants large numbers of options at low prices to "compensate" for the expiring stock options previously granted. Stock options are truly an expense and the "true" expense (in the form of foregone opportunity to issue shares at market price), even if unrecognized, will be larger if the company does well. That seems fair. Another mitigating aspect is that the relevant accounts (compensation expense and paid-in capital) will gradually incorporate the new market information over time. BTW, nice avatar.

Thanks bizaro. I saw that but maintain that the issue is not so clear-cut. Out-of-court workouts are tough but, in some cases, sufficient and much less costly than BK restructurings. In this specific case, there is a toxic mix of creditor opportunism who wants to fabricate (or at least time) a default and debtor coercion who wants to fabricate a consent. During this workout, distorted negotiations were expected but my point is that the holdout problem that arises from a specific participant may be related to a private agenda possibly tainted by a conflict of interest. Pure application of contract law may not work so well here. A striking feature in this case is that a majority of bond investors followed through with Windstream. Majority votes and related "strategies" are not ideal but may be the best of bad options to align incentives, on a net basis, for all participants. In terms of where the money is in this scenario, the outcome has a binary nature with retro-active implications that will get more and more potentially adverse over time, and the outcome may have something to do with who is sitting on the bench, which is hard to discount. Also, uncertainty (increased now) will persist and will put pressure on the cost of capital (both Uniti and Windstream) in industries where the cost to access to market often makes the difference.

These depictions are interesting but like the mandated publicity on cigarette packs (black lungs, photos of people on chemo etc), the sensational aspect wears off quite rapidly, especially if you're addicted to nicotine. This is truly a bipartisan problem/issue and here's a graphic link with relevant info also about military spending. It seems to me that a combination of expense reduction and revenue increase is doable. https://www.debtconsolidation.com/us-debt-presidents/ With all the talk about decline (Mr. Munger etc), it's noteworthy to remember that it's not the persistently high military expenditures that broke Pax Romana, it's when the Romans' intrinsic capacity to generate revenue declined and when they had to outsource protection at the borders of the Empire where the Barbarians were waiting at the door.

This is indeed a very interesting situation. After some thought, I wonder if Windstream has a decent shot at a successful appeal. The decision's foundation rests on the literal definition of the sale-leaseback transaction, listed as a negative covenant and the logical outcome of default, with retro-active effect. The result of this judgement, if it stands, will result in a (undefined) benefit to Aurelius and a potentially negative outcome for others. The outcome may be the result of emphasis of form over substance. A conceptual way to evaluate what Winstream did is to see it through the lens of a succession of out-of-court restructuring attempts to get through a temporary period of distress. The economic reality of the 2015 transaction quite clearly corresponds to a sale-leaseback transaction but the delay before any debt holder officially notified the issuer suggests that there was an implicit consent and the second phase of the restructuring (the 2017 bond exchange transaction) was also met by consent from most bondholders. The intent of Aurelius, when they sent their notice of default in September 2017 and invoking a chicken or egg question, linking the 2017 and the 2015 transactions, could be interpreted as a way to cause a default in order to benefit. By waiting before reacting to the 2015 transaction, my take is that Aurelius provided a tacit consent to the ongoing restructuring efforts and forcing a default by referring to a previous event effectively prevents Windstream from completing out-of-court restructuring steps that could have maximized the outcome for all participants (equity holders, debtholders, partners, workers, community etc). Also interesting to see that Aurelius was sitting face to face to Elliott Management, in this specific case. Just my 2 cents.

^It seems that they have reached some kind of transition for their investment stance and IMO it is still unclear what the outcome will be. The underwriting results continue to be strong although Brit's results need to be followed. In the industry, periods of reserve releases are typically followed by periods of negative development and the last period has been particularly significant for releases. For Fairfax, the releases correspond more to a strong underwriting culture than following industry trends but, looking forward, it is reasonable to expect lower releases. In 2018, FFH released the equivalent of about 14.6 CR points in Q4 and the equivalent of about 6.8 CR points for the year. If anything at Fairfax, the trend for releases has been going up which is at least partly a sign of conservatism and may be mitigated by growth in premiums in the future when the trend goes down, but is still something to consider when evaluating future underwriting results. Business at run-off includes a lot of old lines but results there show how long it may take to see the full realization of reserve development.

This case is another example where the credit default swap instrument can give rise to an unusual set of incentives. https://www.ft.com/content/98fd33c8-b93d-11e8-94b2-17176fbf93f5 Who said that reading a bond indenture was boring?

Humble take. It is the story of an activist-type hedge fund that gets involved in distressed scenarios and who is ready to use variable strategies in order to realize large gains. The case seems to revolve around the definition of a sale-leaseback transaction done by a sub of a holding company that had issued bonds with indentures that could be interpreted in many ways. The judge had to decide if the issuing firm unfairly avoided default or if the active player in the restructuring is trying to fabricate a default. The latter won the last battle but I would say that the jury is still out.

Fair enough. However, the house (building, not the land) is both a consumer durable (shelter service) and a depreciating asset. We have lived in a house for 22 years in an area where the housing values have + or - followed income increases. The amount of money we "invested" over time to "maintain" it corresponds to the difference between today's value and the house value that would have been obtained from inflation alone. I remember reading Jim Grants' work (around 2005-6) on the decoupling that was happening between housing values and GDP (an equivalent measure of income) and then, he looked unattuned, as he often does.

^the above takes for granted that house values will keep increasing faster than inflation. A long term retrospective look indicates that this is not guaranteed. https://www.livabl.com/2017/03/canadian-house-prices-since-1921.html If interested, the full study referenced in the article is long but fascinating and includes a horrible chart, made in Japan.

There are various rent vs buy calculators available but one has to plug in the inputs. The biggest assumptions concern the after-tax return expected on investments (capital not used for a down payment and differential saved per month after) if you rent vs the expected home price appreciation over time if you buy. In Toronto, there are probably pockets of relative undervaluation for either rents or home purchases but it seems that both markets are overall expensive. An interesting feature is that homeownership rates have increased (in Toronto and Canada) but it seems that a peak has been reached. Also, millenials tend to stay home longer. https://www150.statcan.gc.ca/n1/en/daily-quotidien/171025/dq171025c-eng.pdf?st=P8xOuLu9

Some works have convincingly shown that buying the Nifty-Fifty stocks at the top would have resulted in an overall good result on a relative basis if held over the long term (assuming the investor had the mental and financial fortitude to get through some difficult years). So, the long term argument makes sense and one (or a household) has to live somewhere. If I would consider moving to Toronto today, the real estate factor (does seem crazy or is crazy) would play a significant and negative role. This is not about timing but about pricing. Taking the numbers and assumptions listed above and noting that the principles are similar to what the Bank of Canada is trying to do with their new stress tests, it seems that only 10 to 20% of households in the Toronto area would qualify for the typical average transaction. Who is buying? There has been a lot of talk about the "marginal" price-insensitive buyers who tend to push prices up but it seems that this "marginal" population would be responsible for, at the most, one month's worth of transactions. The above could be mitigated by the fact that the homeownership rate is about 2/3 (so one has to adjust the 10 to 20% up) but the above assumes that the typical home buyer carries a low level of non-housing-related credit which is probably too conservative. All that means is that the typical buyer is probably not following the "prudent" rules mentioned above and are stretching their budgets, an assessment that is confirmed by different surveys and perhaps an explanation for the negative pricing trends in 2018. So, where is the margin of safety when a small and unexpected bill could put sand in the gear?

The other two California investor-owned utilities are getting agitated and (one) raising the specter of bankruptcy, under the watch of rating agencies. So, potential pressure for some action that may mitigate the big risks. The inverse condemnation doctrine is enschrined in the Constitution and the present climate (political and popular) makes it unlikely that an amendment is ratified. However, the application of strict liability may be potentially modified using a more flexible definition to pass on the cost to ratepayers. There seems to be a potential relevant precedent (a 1997 state Supreme Court ruling that used this standard in a water-district case) and, for the 2017 fires, there seemed to be enough political will to get this through in a more sustainable way. Also, the idea of a California Wildfire Catastrophe Fund has been floated and could take the form of a partially funded pre-disaster program that could be modified according to the evolving wildfire experience. If the State starts to discuss splitting the company, PG&E may come up with a different type of split and it may get interesting. Following the playbook, the company also announced a Board restructuring, to add "a fresh perspective".

The traditional model of the regulated return on investment for electric utilities is transforming because 1-electric demand has basically flat-lined and decoupled from GDP growth for the last 20 years and 2-the role of the grid is being redefined. To grow in the context of a stable electricity demand, investor-owned utilities have differed in their strategies but have tended to expand their customer base, to widen their product portfolio and to develop a services component, which means that CFO is typically not enough to fund the dividend and the new ways to grow. I agree with JRM that PEs are high but that's mainly due to persistently low interest rates. Low rates have caused to increase leverage, to increase the ROE and to drive the valuations up because of the yield-chasing behavior so that there may be more cyclicality in future. Duke has a relatively higher yield and seems to be perceived as a more stable and slow growing utility (it has invested mostly in grid upgrades and NG infrastructure) but has performed relatively poorly, especially in the last few years. NextEra is more of a market darling with a lower yield but expected higher growth due to significant investments in renewable energy. So, some potential headwinds and execution risks and each utility has an increasingly different playbook. A potential advantage to look for in the future may be to have a lower cost of capital and to be able to elaborate and apply an efficient cost cutting program that does not affect reliability, customer satisfaction and safety.

Not sure which region you are in, but this is hard to believe considering that the housing investment would have been most likely leveraged...plus the tax exemption you'd get for the principal residence. I'm near Ottawa. We'd have paid for most of the house with cash, so not much leverage involved. I think the topic raises an interesting question. Leaving aside the intangible value that a "home" can have, choosing which opportunity to invest in and the leverage aspect can be handled as a two-level decision but taking the two decisions together, one could argue that it was (in 2010-2) relatively easy and cheap (leverage aspect) to buy a house using a significant amount of leverage (ie 3:1 or 4:1 debt to equity). Looking back (to the 2010-2 period) and, assuming one would sell today in Toronto, the return on the equity of the purchased home would have been quite rewarding, even taking into account the recent price decline and the return would have been tax-free assuming the principal residence exemption. CAGR of avg MLS transaction price=7-8% The interesting question is what would one do today in Toronto with a sum of money to "invest".

Interesting developments in Australia. It seems like the authorities want to look under the hood of financial institutions and monetary authorities are espousing an easing mood. Cyclical, secular or else? All real estate cycles have their own stories and are not always globally correlated. Who knows what will happen but a common theme has been that busts tend to be correlated to booms (in intensity and duration). https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12162132 What may be a fascinating aspect is the Sweden curve that seems to be unremarkable and whose section in the 1990-period does not stand out, although the house price to disposable income did increase by about 30% then with some uncomfortable consequences. http://archive.riksbank.se/Documents/Avdelningar/AFS/2015/Session%201%20-%20Englund.pdf Conclusion: History does not repeat itself and nobody knows the future but crises don’t arise out of thin air.

In his memo. Mr. Marks lists the reasons behind a country's preeminence in the world (page 9). I think he could have included institutional governance. https://www.transparency.org/cpi2018

Good discussion indeed. It seems that there are two sources of stress: intrinsic and extrinsic. Interesting to note that, during an era of improved standards and enlightenment (Mr. Pinker’s line of thinking), self-reported levels of stress have been growing and are reaching record levels. It may have something to do with the growing self-reported levels of anxiety and isolation at a time when we have never been more “connected” (“friends” on social media etc). The internal stress is defined mostly by your core beliefs and I guess what Ms. McGonigal describes is a method to alter those core beliefs. I would say outside input may be helpful but most of the work has to be internalized and, in my humble experience, I’ve rarely seen people change significantly after reaching adulthood (and even before), in terms of the ability to deal with stress. DooDiligence, your post reminded me of a quote (Mark Twain, The Adventures of Tom Sawyer): “Tom said to himself that it was not such a hollow world, after all. He had discovered a great law of human action, without knowing it—namely, that in order to make a man or a boy covet a thing, it is only necessary to make the thing difficult to attain. If he had been a great and wise philosopher, like the writer of this book, he would now have comprehended that Work consists of whatever a body is obliged to do, and that Play consists of whatever a body is not obliged to do.” I guess it boils down to doing the right things for the right reasons, and attitude.

There, everything you ever wanted to know about well classification. :) https://www.canadasnaturalgas.ca/en/environmental-action/land/liability https://www.aer.ca/regulating-development/project-closure/suspension-and-abandonment/how-are-wells-abandoned Interesting to remember that the remediation problem would disappear from the radar if oil prices would go up. IMO, the regulators wanted to help but are now behind the ball. You've probably heard of the path to insolvency, gradually then suddenly. The problem with bizaro's comment to require firms to maintain a LMR ratio above 2 is that, at this point, requiring weak firms to provide regulatory capital may push some into insolvency, further compounding the problem. It seems to be easier to avoid a mess than to disentangle from one.

The number of orphaned wells has gone up tremendously in the last 5 years and there are reasons for this rise (mostly smaller and weaker players) but there was already an underlying industry-wide upward trend for "inactive" wells before 2015, most of which had very little chance of going back into production, even with very optimistic "projections". There is a lot of talk about shared benefits which should be proportional to potentially shared liabilities. At a time when the industry needs to improve the public perception and at a time where pipelines going through someone else's lands are necessary to get its extracted product to the end consumer, I think that oil and gas market participants should not simply bet on a rebound but should take a pro-active stance with elected officials and regulators in order to show a balanced concern for the environmental liabilities. The environmental liabilities could be backed by partial bonding and, to avoid having a specific timeline on the growing number of "inactive" wells, should push for a mandated insurance program to be used in the interim. I'd say this would be a +NPV project when all costs and benefits are considered.

shalab, since you seem to have developed a fascination about the relative status of both countries, here's some info that you may find useful. From a per capita and PPP perspective, the US has been and continues to be wealthier, by a wide margin. The median numbers simply reflect a lower (and growing slower) level of inequality. International comparisons are often apples to oranges but the following (ends in 2012, but trends haven't really changed since then) publication uses three approaches that basically say the same thing. https://www150.statcan.gc.ca/n1/pub/11f0027m/11f0027m2014094-eng.htm The net worth value trends for the US and Canada have decoupled since the the recognition of the US housing bubble. One way to interpret this is that the US is one step ahead towards reconciliation with fundamentals. Disclosure: 75% of my net worth is in USD. Another aspect to consider is that net worth for all age groups in Canada has continued to rise significantly (mostly because of housing), even during the 2008-9 episode, which has not been the case for all age groups 64 and under on your side of the border. https://macromon.wordpress.com/2019/02/03/the-clash-of-generations-fed-china-and-the-sp500/

Thanks for the wise words. Interesting because the analogy was also nicely used by a journalist/columnist (Liam Denning, January 7th, 2019) who summarized the issue quite well: "The Gordian knot here is that the cost of the wildfires, the risk of future wildfires (which is rising) and the expense of hardening the Californian grid against that risk must ultimately be met by ratepayers. Finding the most cost-effective way to do this over the long term must be balanced against ensuring PG&E (and its shareholders) pay a price for any of the company’s shortcomings." In the 90's some commentators suggested that deregulation of the California electricity market was akin to cutting the Gordian knot, only to find out that the knot had to be reweaved after some turmoil. At the very least, this will be interesting to watch and a potential outcome is that the knot remains intact.

Hi muscleman, The surprise may be related to the two-level discussion that your thread initiated: 1-the notion of feeling good about a "method" 2-the method being technical vs value (whatever that means) FWIW, your thread triggered me to go back to The Intelligent Investor (presently re-reading the revised edition by Jason Zweig). I guess it's like when people marry a second time with the same person, to make sure they are still on the same page.