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X - US Steel Corp


valuedontlie
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Looking at 6.05% 6/1/2017 bonds trading around 75 or >27% YTM (just over 18 months away). I have no opinion on steel prices, no interest in the equity or anything longer dated than the 2017 maturity. X is an integrated steel producer of flat-rolled and tubular products. Volume and pricing in decline and a good amount of energy exposure.

 

The company has about $1.2bn in cash and $3.5bn in debt on the balance sheet. Fundamentals are in decline. The company expects to do $225m in FY15 EBITDA (vs. $842m trailing EBITDA).

 

It is highly probable the company will begin to burn cash in the near future; however, management is extremely focused on cash management/preservation. They have been slashing costs and draining WC to keep operating cash flow positive. It is expected that Q4 op. cash flow will be greater than capex. YTD CFO is $308m vs. $407m in capex.

 

Looking to get thoughts on the business in the context of the above-mentioned security. I see this sort of yield on commodity businesses in much worse shape.

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The trade case on imports didn't get quite the results the market anticipated.  Yields on these bonds were less than 10% a few weeks ago which is kind of nuts.

 

I've been buying SXC since they have take-or-pay contracts with MT, X, and AKS.  It's like a diversified basket of steel credits and SXC has no parent level debt.  Anyway that's been my play here but I am starting to really like the prices on these X notes.  AKS will likely not get to the finish line, but MT and X should have the ability to stave off bankruptcy for a while. 

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Yields on these bonds were less than 10% a few weeks ago which is kind of nuts.

 

This struck me as interesting as well. Hard to tell if a high-yield ETF or mutual fund simply puked this security. Given the short duration of the note, the yield is obscene. Almost indicative of a company on the verge of bankruptcy.

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The yield curve on X is inverted so yeah it's indicative of a deeply distressed company likely to head into bankruptcy.  There's no good answer for the flood of uneconomical China imports but that balances against a relatively small amount of debt at X.  You would think X had $5+ billion of outstanding debt or something.

 

I'm also curious what's been causing this decline; the selling pressure picked up on the 17th so I've been trying to find some ETF or fund that might have been hit with redemptions.  There isn't that much liquidity in these junk bonds to swallow up that kind of volume. 

 

Can't mention an inverted yield curve without an obligatory Top Gun reference: 

 

 

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I have been purchasing the 2017s recently. I could absolutely be underestimating the future cash burn of this company but given the recent sell-off these bonds look like a good deal.

 

Seeing how long companies like BTU, ACI, and AKS have survived, I'd be surprised to see X file in the next 18-24 months.

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I've been buying the 2017's as well, but I generally dislike buying on the short end of a distressed situation.  You get the timing wrong and all maturities get hit with similar haircuts and then you get swapped with extended maturities.  If you buy at $40 and get back $6 for a year and you have a $34 basis on that long-term bond which is a better margin of safety.  The $75 bond you collected say $6 on is now at a $69 basis compared to the guy who's long at $34. 

 

I think X has enough liquidity to get through 2019 at a minimum but just something to consider.

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Anyone worried about following.

 

On November 20, 2015, United States Steel Corporation (the "Corporation") received notice of acceleration from persons purporting to be beneficial owners of at least 25% of the outstanding principal amount of the Corporation's 2.75% Senior Convertible Notes Due 2019 (the "2.75% Notes"), issued under the Seventh Supplemental Indenture, dated as of March 26, 2013, between the Corporation and The Bank of New York Mellon, as trustee (the "Indenture"), declaring the principal amount of, and interest on, all the 2.75% Notes due and payable. Upon receipt of proper documentation confirming ownership of the beneficial owners, in accordance with the terms of the Indenture, the Corporation will pay promptly in full the aggregate outstanding principal amount of the 2.75% Notes together with accrued and unpaid interest to the date of payment. As of the date of this Current Report on Form 8-K, the aggregate outstanding principal amount of the 2.75% Notes was $118,595,000.

>:(

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Anyone worried about following.

 

On November 20, 2015, United States Steel Corporation (the "Corporation") received notice of acceleration from persons purporting to be beneficial owners of at least 25% of the outstanding principal amount of the Corporation's 2.75% Senior Convertible Notes Due 2019 (the "2.75% Notes"), issued under the Seventh Supplemental Indenture, dated as of March 26, 2013, between the Corporation and The Bank of New York Mellon, as trustee (the "Indenture"), declaring the principal amount of, and interest on, all the 2.75% Notes due and payable. Upon receipt of proper documentation confirming ownership of the beneficial owners, in accordance with the terms of the Indenture, the Corporation will pay promptly in full the aggregate outstanding principal amount of the 2.75% Notes together with accrued and unpaid interest to the date of payment. As of the date of this Current Report on Form 8-K, the aggregate outstanding principal amount of the 2.75% Notes was $118,595,000.

>:(

 

Not a positive, but does not seem very bad.

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Anyone worried about following.

 

On November 20, 2015, United States Steel Corporation (the "Corporation") received notice of acceleration from persons purporting to be beneficial owners of at least 25% of the outstanding principal amount of the Corporation's 2.75% Senior Convertible Notes Due 2019 (the "2.75% Notes"), issued under the Seventh Supplemental Indenture, dated as of March 26, 2013, between the Corporation and The Bank of New York Mellon, as trustee (the "Indenture"), declaring the principal amount of, and interest on, all the 2.75% Notes due and payable. Upon receipt of proper documentation confirming ownership of the beneficial owners, in accordance with the terms of the Indenture, the Corporation will pay promptly in full the aggregate outstanding principal amount of the 2.75% Notes together with accrued and unpaid interest to the date of payment. As of the date of this Current Report on Form 8-K, the aggregate outstanding principal amount of the 2.75% Notes was $118,595,000.

>:(

 

Not a positive, but does not seem very bad.

 

It looks like its not a surprise according to last conference call.

 

GS Anlyst question:

Okay. And then, just a question again on some balance sheet items. So, I know that the convertible bonds are puttable to the company, and I know you guys have said that you would pay them in cash. Have you been approached by convert holders to refinance them? Has anyone put them to you? I mean, are there discussions going on at all, or is everyone just sitting in their corners and kind of waiting – you wait till you hear from them and they maybe wait until there's some more equity upside there on the converts?

 

Dan Lesnak - General Manager-Investor Relations

We'll have to hear from them. It's in their hands.

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  • 3 months later...

It certainly helps with discussion on import tariffs floating around!

 

I have noticed a sharp uptick in most of the distressed credit I own.

 

There is still some good value out there...

 

One issue I own is XCO 9/15/2018s trading around 12c right now. Quite a bit more dodgy than the X bonds but insiders + Fairfax have been buying the equity and now own 51% of shares. Company has been buying back 2018 and 2022 issues on open market. I anticipate they will continue to do so and eventually make an exchange offer or tender for remaining outstanding. At market prices the outstanding amount is less than $20m relative to $33m in cash on hand.

 

Q4 press release: http://ir.excoresources.com/press-release/exco-resources-inc-reports-fourth-quarter-and-full-year-2015-results

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OT:

 

Yeah, the crap oil debt has rallied a lot in last couple days too. I still hold some CHK 2020 and DNR 2021s - both could go BK though, so not suggesting to buy either.

 

XCO - I thought XCO will be gonner by now too. I don't think FFH is great investor in this area, they have lost a lot of money on energy cos. But yeah, I've seen XCO bonds suggested before. I will look at them again.

 

I also hold some SFY 2017s that are in BK now and trading at .03, so... I'm not an expert. :)

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XCO is a POS and I do not put faith in Fairfax's investment here... that said, this is a very peculiar situation...

 

Here is a link to involvement of new Chairman and CEO:

 

http://www.excoresources.com/exco-resources-enters-into-a-services-and-investment-agreement-with-a-subsidiary-of-bluescape-resources-company-llc-to-drive-performance-improvements-and-names-c-john-wilder-as-executive-chairman-and/

 

Chairman John Wilder required to purchase stock on open market amounting to $10m... Given extremely valuable warrants exercisable in 2019 (incentive for company to survive)...

 

Here are recent insider purchases from Chairman on open market: http://openinsider.com/insider/Wilder-John-C-Jr/1629304

 

I realize this is fairly qualitative analysis... Fundamentals at XCO are horrendous... It is a speculative bet...

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Thanks Value for the Idea, :)

 

Hi Jurgis

 

Is there any chance of recovery for SFY 2017s bonds?. :)

 

OT:

 

Yeah, the crap oil debt has rallied a lot in last couple days too. I still hold some CHK 2020 and DNR 2021s - both could go BK though, so not suggesting to buy either.

 

XCO - I thought XCO will be gonner by now too. I don't think FFH is great investor in this area, they have lost a lot of money on energy cos. But yeah, I've seen XCO bonds suggested before. I will look at them again.

 

I also hold some SFY 2017s that are in BK now and trading at .03, so... I'm not an expert. :)

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Is there any chance of recovery for SFY 2017s bonds?. :)

 

OT: SFY 2017s are being converted to equity in Chapter 11. Here is what I wrote when Chapter 11 plan was announced:

http://www.siliconinvestor.com/readmsg.aspx?msgid=30388531

You can click on the message numbers that I replied to, to get the rest of the thread.

The newest restructuring plan is at http://www.kccllc.net/swiftenergy/document/1512670160205000000000007 and seems to say that noteholders + rejection claims (not clear how big slice that is) get 88.5% of new Swift Equity. I still think that it won't trade at more than $200M, which would be around $.20 on note.

I don't think my thoughts have changed much since I wrote the SI message. Honestly though, I'm no expert in valuing the new SFY. If you evaluate it and think it will be worth more than $200M, then notes or shares might still be attractive - if you can purchase them.

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Sold X 2018s, still have some X 2020s quoted above .70 now.

 

Fido sucks - no inventory on practically anything I look at: X, XCO, SFY, CHK, DNR, etc. (But I won't switch to IB, gonna continue suffering with Fido :) ). BTW, not saying any of these are buys, I just don't want to spend lots of time researching if I can't buy anyway.

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