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given2invest

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    Unlevered Rate of Return VS Levered Rate of Return

    in General Discussion

    Posted

    Ya I tend to look at EV vs CF or EBITDA.

     

    I dont mind levered companies, but feel they should trade at a discount. An undercapitalized capital structure allows one to sleep quite peacefully.

     

    With that said most of my companies are highly levered. The market gives these things away in times of stress. If you can take it then its a not a bad deal. With dealing with leverage I find its best to focus on the business model, and also the debt schedule. I prefer debt that is 5 years out, and a pretty safe business model.

     

    A levered company should only trade at a discount when comparing cash flow to market cap.  It should actually trade at an EV/EBITDA premium to an unlevered company due to it's lower cost of blended capital.

     

    Depends on the industry. If it's a cyclical industry then the risk to a highly levered company overrides in my opinion, and it should trade at a discount. As always it depends on the type of debt, the covenants, the assets, so forth. I'd rather own a small bank levered 15 to 1 and currently earning less than a bank levered 8 to 1 and earning more, if the latter's loan book is 30% construction and land development loans and most of the deposits are brokered, for one example.

     

    Financials are a whole different beast.  Also, it goes without saying a levered cyclical is extremely dangerous and probably not prudent.  ;)

    Unlevered Rate of Return VS Levered Rate of Return

    in General Discussion

    Posted

    After about 5 years, an unlevered company with a higher ROE will trump a levered company with a lower ROE, by a reasonable margin. A company with high ROE and some leverage will trump both. After 20 years, the difference between a 20% ROE and a 30% ROE is 3x as much money and even 30% debt won't come close to bridge the gap. You would need multiples of debt to equity and even then it's a close battle.

     

    That is all intuitive.  It's mostly because of the compounding, obviously. 

    Unlevered Rate of Return VS Levered Rate of Return

    in General Discussion

    Posted

    Ya I tend to look at EV vs CF or EBITDA.

     

    I dont mind levered companies, but feel they should trade at a discount. An undercapitalized capital structure allows one to sleep quite peacefully.

     

    With that said most of my companies are highly levered. The market gives these things away in times of stress. If you can take it then its a not a bad deal. With dealing with leverage I find its best to focus on the business model, and also the debt schedule. I prefer debt that is 5 years out, and a pretty safe business model.

     

    A levered company should only trade at a discount when comparing cash flow to market cap.  It should actually trade at an EV/EBITDA premium to an unlevered company due to it's lower cost of blended capital. 

    Unlevered Rate of Return VS Levered Rate of Return

    in General Discussion

    Posted

    I think companies that deploy a more efficient capital structure should trade at a premium to an unlevered/overcapitalized company. 

     

    EDIT:  From a market cap valuation perspective, not from an EV perspective obviously.  Also, in todays very low interest rate environment you can create your own capital structure using margin at very low rates which might even be superior to the company taking out debt.

     

     

     

    What is the Big-Big Picture?

    in General Discussion

    Posted

    Given, be careful what you're saying, because you'll be working for Harry one day.  ;D  Cheers!

     

    Hey, if he pays well and promises to teach me all of life's secrets I'd be pretty interested in that!    :D  Especially after the beating I've taken the last month... ;)

    What is the Big-Big Picture?

    in General Discussion

    Posted

    Harry,

     

    I hope nobody from this board followed you into MNTG.

    You LOVE mentioning your winners.

    You are a smart guy. How about starting a thread about your losers. It would probably be more instructive.

    Also, out of curiousity, if your computer "systems" are that effective, what do you actually bring to the table as someone running a portfolio?

     

    shh, don't mention MNTG!  he deleted that thread!  also, i'm sure any day now management is going to increase their hold and the millions if not billions will pour in! 

    What a Lovely Frickin' Day!

    in General Discussion

    Posted

    Welcome back Mungerville, 

     

    Mungerville is one of our early and better posters.

     

    Sswan11,

     

    Reread Tom Brown's posts leading up to the original credit crisis.  He is generally a little overly optimistic to say the least.  I stopped reading his blog shortly after the credit crisis started.  That being said they are right on BAC.

     

    Tom Brown is a moron who basically got wiped out in 08.  Nothing he says should be taken seriously. 

    Any value in Sino-Forest Bonds?

    in General Discussion

    Posted

    I'm going to go ahead and say that we've reached a consensus. (lol.)

     

    How would you compare Sino-Forest Bonds with Worldcom, Tyco, Satyam or Global Crossing bonds at the point of deepest pessimism in those companies?

     

    In other words, what is the best way to determine cigarette butt value in bonds of fraudulent companies?

     

    The primary difference, at least with respect to Worldcom, Tyco and Global Crossing, is that those were US companies where US laws applied.  Their primary assets were also in the US and there was (presumably) a valid and perfected security interest in certain assets.  So one could simply count up the liabilities, value the assets and voila.  In the Sino case, you aren't sure what rights you have at all as it related to a security interest and you aren't sure exactly what the assets are even if you did know what your rights were.  Completely different animals.

     

    That's the only difference?  Shit.  I should take a look at these!

    TRE - Sino-forest put.

    in General Discussion

    Posted

    that's a heck of a mea culpa  :-\

     

    what about the fact that tons of "major investors" blew out like paulson?  someone was on the other side of the trade when those "major investors" bought in. 

     

    "major investors" owned worldcom, enron, etc.

     

    anyway, didn't want to see you lose money.  but you had a dozen people telling you to be careful.

     

     

    Buffett Puts $5B Into Bank of America!

    in General Discussion

    Posted

    It's my understanding that cumulative trust preferred stock (TRUPS) will not count toward Tier I capital after January 1, 2013.

     

    A traditional preferred (not a TRUPS) would continue to count as Tier 1 Capital before and after January 1, 2013.

     

    I'm not sure. It depends on the specific provisions of Berkshire's preferreds. Cumulative preferreds can't be used as Tier 1 capital, now, unless they meet certain standards, like the ability to defer payments for some period. But Basel III phases in some new test to determine how preferreds are counted as capital. It also takes away some of the seniority benefits.

     

    I'd be everything I own that BRK's preferreds are as senior/secure as TruPS and don't count towards Tier 1 after 1/1/13.  This transaction did not add any capital.  Why would warren buy a non-cumulative preferred?  Those are sucker investments.

     

    Well, they might be sucker investment for most investors, but he got some good poison pill. If you haven't read the details of the transaction. If BAC can’t pay its 6% annual dividends to BRK, they will accrue at a rate of 8%, and BAC will be barred from share buybacks or dividends to other shareholders. Essentially, no other shareholders will receive dividends if BAC doesn’t pay Buffett his $300 million a year. Isn't that an incentive for him to hold the preferreds.

     

    (On a footnote: He had agreed not to increase his BAC common holding above the 14.9% mark, if he would ever want to purchase more common stock.)

     

    Um, I never called him a sucker.  Man you guys can't read.  I said he would never invest in a preferred w/o a cumulative feature.  And sure enough, not only did he get a cumulative feature, but he got a higher interest rate if they defer!  In short, his preferred won't count toward Tier 1 capital on 1/1/13 so this can't be looked at as a capital raising event - just a dilutive one that hopefully will keep a run from happening on the bank. 

    Buffett Puts $5B Into Bank of America!

    in General Discussion

    Posted

    It's my understanding that cumulative trust preferred stock (TRUPS) will not count toward Tier I capital after January 1, 2013.

     

    A traditional preferred (not a TRUPS) would continue to count as Tier 1 Capital before and after January 1, 2013.

     

    I'm not sure. It depends on the specific provisions of Berkshire's preferreds. Cumulative preferreds can't be used as Tier 1 capital, now, unless they meet certain standards, like the ability to defer payments for some period. But Basel III phases in some new test to determine how preferreds are counted as capital. It also takes away some of the seniority benefits.

     

    I'd be everything I own that BRK's preferreds are as senior/secure as TruPS and don't count towards Tier 1 after 1/1/13.  This transaction did not add any capital.  Why would warren buy a non-cumulative preferred?  Those are sucker investments.

     

     

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