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Debt as a Net net


rukawa
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I was think about this in the context of RELY. My net-nets are running out so I'm looking further afield. And one thought that came to me was that a company that is getting close to bankruptcy like RELY could become a debt-based net net. In other words if the equity goes to zero and the debt is going to in some sense take over the equity then you can perform a calc similar to net net.

 

In net nets:

 

2/3*(Current Asset - Total Liabilities) > market cap

 

In debt based nets nets since the Long term debt turns to equity:

 

2/3*(Current Assets - Remaining Current Debt) > market value of senior debt.

 

Does this make sense?

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Yes, although with the note that the debt must be trading at a significant discount to par to behave equity like. Otherwise you don't have the equity like upside. And if the assets are so much more valuable than the market value of the senior debt, it would probably not trade at this level. As far as I know RELY doesn't have traded debt, so I'm wondering if you would be able to provide a single example of a debt based net net at 33% discount. I would be surprised if they exist.

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Yes, although with the note that the debt must be trading at a significant discount to par to behave equity like. Otherwise you don't have the equity like upside. And if the assets are so much more valuable than the market value of the senior debt, it would probably not trade at this level. As far as I know RELY doesn't have traded debt, so I'm wondering if you would be able to provide a single example of a debt based net net at 33% discount. I would be surprised if they exist.

 

I can't. I think its a theoretical possibility but happens rarely in practice. But even if it did, I'm not sure how to screen for debt. Does anyone know how to do screens for debt? Can I just use EQS?

 

The problem with the whole idea is that its very strongly premised on the idea of the debt becoming the equity because otherwise the debt has no "ownership" over the company and so its really nonsense unless this is the case.

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Yes, although with the note that the debt must be trading at a significant discount to par to behave equity like. Otherwise you don't have the equity like upside. And if the assets are so much more valuable than the market value of the senior debt, it would probably not trade at this level. As far as I know RELY doesn't have traded debt, so I'm wondering if you would be able to provide a single example of a debt based net net at 33% discount. I would be surprised if they exist.

 

I can't. I think its a theoretical possibility but happens rarely in practice. But even if it did, I'm not sure how to screen for debt. Does anyone know how to do screens for debt? Can I just use EQS?

 

The problem with the whole idea is that its very strongly premised on the idea of the debt becoming the equity because otherwise the debt has no "ownership" over the company and so its really nonsense unless this is the case.

 

How much money are you looking to deploy here?  I ask because this would quickly become a very active involvement.  To make sure the debt has standing you're going to need to hire lawyers, stand up the debt committee (to make sure you get what you want) and then fight it through. 

 

I think an easier route to go is to find a company like this that has a bank line, then call the bank and try to buy it off of them.  The bank likely knows there's trouble, and will want to dump it and would take a discount to par.  So say you can buy it at 90% of par then force the company into receivership you have your equity upside as you can rebuild things and get it on track.

 

Not bad in theory.  I'd try to test it on a small situation before a big one.  Network and build connections at a bank and see what they'll sell.

 

Here's how you do that.  Approach a bank and say "I'm looking to buy some loans from your very best customers."  They'll package up anything they want to unload and you're off to the races.

 

Sounds like a cool approach.

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