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SFK trading down to 33 cents due to ABH contract cancellation.

 

the SFK convertible bond are trading at 47 cents on a dollar - providing close to 15% yield...and higher yield if you hold it thru maturity.

 

I bought some bond at 40's...

 

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  • 3 weeks later...
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The debs are trading @ 33 cents looks like another disaster to me. Abitibi ,Brick, Sfk, CGS thats 4 zeros I know the game is not over as Prem is likely to end up with controlling positions in all of these but hopefully there are some lessons to be learned here

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http://nbbusinessjournal.canadaeast.com/journal/article/676338

 

"Justice Daniele Mayrand said that while the termination of the contract may force negotiations, there is nothing illegal in such an effort.

 

"SFK's situation isn't gleaming, but it is more robust than Abitibi's," she wrote in her ruling, noting that SFK has twice suspended its St-Felicien operations since December.

 

But she disagreed with SFK's assertion that Abitibi's $12.2-million annual loss from the contract represented "a drop in the bucket" for the large company."

 

??? ??? ???  Is breaking a contract is not illegal in Canada? or is it somehow contingent on whether you keep your mills open when your order book is completely out of wack?  Its hidden somewhere in the MD&A but they now have over 120 million dollars worth of unsold inventory sitting around...my guess is that they're down to something like 10 million in cash and they've already borrowed 20 million dollars so far this year from their credit lines just to keep operations going. 

 

 

That 12.2 million dollar loss is obviously a gain for SFK, can someone please explain to me why the financial condition of either company has anything to do with contract law? 

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When ABH went into CCRA, SFKs remaining contracted $20/ton discount became an unsecured liability. SFK essentially lines up with every other ABH creditor, in the hope of geting an eventual payout of cents on the dollar. ABH is one of the 'special' Quebecois coys, has a damaged reputation & is trying to offer a huge volume at spot, in a down market. A deal will get down, but expect it to be somewhat controversial - & convoluted.

 

The deb pricing essentially assumes the wipe-out of all existing equity & the liquidition of all 3 plants for scrap, net of costs. Most would think that a more realistic outcome, would be PIK interest payments and some kind of negotiated debt to debt & equity conversion.

 

Re disclosure. We hold long positions in both the deb & the common

 

SD

 

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With the currency weakening the numbers are probably about to get decidedly ugly. A refinancing at least is required if the reductions in the senior credit  are more than 20 million then equity does not exist so a pik payment is like getting an interest payment in GM shares if you are a GM creditor. GM old shares have pretty much zero value new shares will likely have substantial value. It really is up to Prem and the banks how this deal is sorted out he pretty much has all the cards as he is driving the Abitibi deal and soon will be driving the SFK deal. With FFH trading at a discount to bv the low hanging fruit is just buy FFH and let Prem and the mkt sort out the SFK restrucuring.  I have not seen Prem buying any more SFK nor have I seen any insiders rushing out to buy any paper . In the pulp and paper business it seems that tissue and cardboard are about the only spaces that really have any legs long term the parts of the industry that are selling into anything that has to do with print are facing the same bleak long term prospects there are cyclical issues overlaying secular issues and they are both awfull for a lot of players. You are right dingaan the debs are trading for probably liquidation values but are not many pulp and paper properties in fact going to be sold for scrap because that is the only thing that will bring the market back into supply demand balance.

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With the 'black tar' subsidy that US pulp producers are currently getting and the CAN$ close to $0.90US the Canadian pulp producers have to be a little shell shocked.

 

SFK is a great company (as is Canfor Pulp). Goes to show that just because you have a strong business model/good management and are well run that you can't get gorged by a partner or global events... I will be sitting this one out, but believe pulp will be a solid investment at some point in the next 12 to 24 months.

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In recognition to some of the other boardmembers following this security,

you might want to consider hedging some common against the debs.

 

We know that SFK's CF is getting stressed, the debs are deep underwater, the conversion price is far out of the money, & the chip agreement is triping indenture covenants. There are various possibilities, but perhaps some of the more prominent might be;

 

1) The debs extend the maturity & accept PIK interest (in deb) at the same rate for a period of 'X' years, in return for a re-priced conversion at around $1.00 (2-3x current market). Certainty returns, CF significantly benefits, the deb price rises, but there's a material deferred dilution.

 

2)The debs & accumulated interest exchange into new longer term debs at a higher rate - and common. Retiring the old debs produces a material gain, & a portion of that gain becomes attributable to the newly issued common. Certainty returns, CF benefits less signifantly, BS strengthens, the new debs value at about the MV of the old debs, & there's material & immediate dilution. There may also be a share consolidation.

 

3) The debs & accumulated interest exchange into new common, and shares are consolidated on a 2or3:1 basis. Retiring the old debs produces a material gain, wholly attributed to the newly issued common. Certainty returns, CF significantly benefits, BS materially strengthens, but there is massive dilution. Deb holders essentially own the company. There may also be a chips related acquisition.

 

In all cases we get a much stronger company - but it gets progressively harder on the existing shareholder. Something to consider.

 

This is not intended as a solicitation.

 

SD

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I am not sure what you mean by hedging SD. Buying the convertible debentures and shorting the common at $0.27? Shares are simply not available to short.

 

Now regarding the convertible debentures, I am not sure that the financial engineering that you proposed will do much for SFK. This company is showing annualized negative cash flow of around $17 million. Even if the convertible debentures were not requiring any interest payment, this would only save $3.6 million a year. I understand that there was a massive amount of downtime taken in the first quarter to align their production with demand, but remember that cash flow removes depreciation which is a very large component of fixed charges.

 

The ones who will be calling the shots here are the owner of the credit facilities if interest or principal are not paid per schedule. They are the ones who will be telling the jokers at SFK how they will be getting paid back.

 

To avoid this fate, they need to find a way to slash costs on a grand scale. And even if the company is financially restructured with the common losing everything and the convertible owners retaining something, they are likely to lose it all down the road unless the root cause or costs is fixed. Tembec is a great case.

 

Disclosure: I own a small position in SFK.UN and debating if I should simply sit and gamble with it or take whatever is left to invest in more promising ideas.

 

Cardboard

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I think the convert will have some value in case of bankruptcy which isn't impossible.

 

Commodities and loonies are both rising; if the demand for pulp doesn't pick up, it will be ugly.

 

Replacement value trap. I have some common and convert and are thinking about whether I should sell the common.

 

Again, if pulp market comes back, common will have huge upside from here.

 

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Sell existing common, go long a few debs, & make a guess as to how much existing common those debs might convert into. If the debs do convert - you're synthethic short will be covered by the conversion. Your common position will be protected against a further fall/dilution & a potential consolidation, & while the changes are going on you're in a stronger financial position.

 

The debs are cheap, partly because of the dire CF projection .... but keep in mind that the projection will only occurr if the coy does nothing. The reality is that SFK will react to stem the outflow, & business conditions will improve (albeit very slowly). If St Feliceon were mothballed for a year, it could look very different.

 

There is still an investment risk, but there are ways of mitigating it. If the debs pan out 4-5 yrs hence, they will be 4+ baggers, & at least you know the company.

 

Not for everyone, but if you wish to hold - at least consider hedging.

 

Best of luck to us all.

 

SD

 

 

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The cashflow is horrible because they haven't been able to clear their inventory, based on the disclosure I don't see any other covenant other than maintaining 10 million dollars in cash in case they want to pay dividends.  If they could sell just 40% of their inventory, they'd get roughly 45-50 million in cash.  I wish I never got involved in this one but I can't get myself to unload the common at these prices.

 

Looks like someone sold over 2 million units at 25 cents on friday, also means someone bought 500k worth of the stock.  

 

 

http://wood.lesprom.com/news/38712/

 

some good news, pulp inventories world wide are actually balanced...maybe we'll be pleasantly surprised after q2! 

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Keep in mind that the inventory figure includes wastepaper, parts for machinery and others. It is not all saleable pulp. From the annual report, around 50% is pulp or $55 million out of $109.

 

If we apply the same ratio to the March 31 figure we get $62 million in pulp. Although, I agree with you. It seems like a low hanging fruit that they should go after agressively.

 

I am not planning to buy more at this time. I think that I will wait to see what gets done. I would also be very hesitant to buy the convertibles when you can go out and buy CFX.UN. It came back down recently because Dundee Securities downgraded it to a sell because the stock was ahead of itself. This one is a double from here and I would not be surprised to see it go back to $10 if pulp goes back to $900. Definitely a low cost producer, low risk and very nice upside from here.

 

Cardboard

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Alert. Though we hedged at a much higher price, we hold our residual position in the common for much the same reason. It will not take much for the price to double, & both the deb & the common would benefit from it.

 

Cardboard. Agreed that if this were new $ we'd probably stay in cash untill we saw some early sign of a sectoral improvement, then decide between the two. As we know the coy, & its old $, we're really just repositioning at little cost. Were this a coy we didn't know, we would be out.

 

Oldeye. Consider it tuition. If you bought at $1, & sold at $.25, you'd need to earn 400% on your $.25 just to break even .... but if by wise investment you managed to get $.50 - your task would be much easier, & you'd effectively have earnt 200% on your $.25 investment. Valuable experience.

 

SD   

 

 

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Seems that just about everything that could go wrong has gone wrong.  Not sure if the Canadian mill makes black liquor, the recycled mills have been crushed by the subsidies.  It might be common practice, but the Abitibi ruling left a foul taste in my mouth, it must be weird for FFH to be on both sides of the lawsuit.  Anyway to find out who, if anyone owns SFK credit default swaps? 

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Speculation, but over the near term we'd expect 2 main effects.

 

Heavy polluters that would otherwise have shut their doors will stay in business. Pulp prices drift lower as capacity comes out slower than overall demand falls.

 

More sovereigns react with matching subs of their own. The good news is something from Quebec, the bad news is additional capital requirement that will drive down the industy's allready poor ROI

 

SD

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It was not clear why they suspended the AGM to June 29th but I'm guessing it was due to uncertainty (at that time) of possible PQ financial support and/or the status of an appeal of the ABW court ruling. They have clearly stated that they will breach their interest ration covenants and perhaps don't have a clear position from the prime creditor. The next quarterly interest payment is due the following day (June 30th). I am wondering if they will attempt to pay in units instead of cash as they have a right to do.  If there is a good chance of this, I'm wondering if it makes sense to short an equal amount of the common to the convertible, anticipating a mass dilution.

 

Wilscott

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Woodstove: The indenture permits payment of interest and principal in units, priced at 95% of the units average close price over the previous 20 odd trading days. To modify the terms of the debenture requires a 2/3 vote.

 

Wilscott: The date is significant because this is the debs ex-date for the June-30 interest payment; ie. the debs 'book of record' closes at end of trading on June-26. Given the significance, it would seem likely that debenture holders may see some kind of proposal in the near future.

 

As most folk expect that Q2 results will be brutal, most would expect the June-30 interest payment to be in units. Most managements would want to tell their shareholders directly, before it happened.

 

Shite happens, but we have a capable management doing a solid job in what are truly extremely tough conditions. Let them do what we've hired them to do.

 

SD

 

   

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Oldye/Wilscott:

 

 

I asked mgmt via email, and received feedback that the proposed Canadian government programme could benefit SFK Pulp since the St-Félicien mill produces black liquor.

 

Thanks for the confirm, it looks like chemical pulp plants like the Saint-Felicien produce black liquor and is one of the 28 mills that qualify.  I think that we'll know the true character of management 2-3 years in the future when looking back.  If they're capable of stewarding the company through this time without permanently impairing the value of the units.  Lots of times companies that recover from near catastrophe end up selling themselves before shareholders get to reap the full benefits from the risks they assumed. 

 

One take away I have is that investing in commodity companies should only be done when prices are well below the industries marginal cost of production.  Natural gas below 4$ is a good starting point!

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