Thursday, June 5, 2008 3 comments ++[ CLICK TO COMMENT ]++

BCE Defers Dividend; AbitibiBowater Says The Future is Better

BCE Defers Dividend Decision

Fairly minor but BCE choosing to defer the dividend decision implies that the company is still trying to close the deal if the court rules in its favour. BCE will save about C$294 million and even though that's quite small for such a big deal, anything available to placate the banks (financiers) is well worth it.

AbitibiBowater Says the Future Is Better

AbitibiBowater, North America's largest paper producer, thinks it has turned the corner and the future is brighter. I suppose the future is indeed bright if you are recovering from the verge of bankruptcy. Even a flickering candle in a cavern looks bright. It looks like the CEO is quickly retiring after the huge compensation package from the merger between Abitibi and Bowater.

I used to follow AbitibiBowater more closely about an year ago. It is an extreme contrarian play (think deep "value" with super-high risk--higher than Ambac even!). It is in one of the worst industries in North America right now (just think about declining newsprint usage). It has high cost operations in Canada that were getting more expensive by the minute as the Canadian dollar rose (although the Bowater merger diversifed into the declining US$ market). It has strong labour unions unwilling to be flexible (think GM). And to top it off, it has massive debt that leaves it close to bankruptcy given its lack of profits for a long period of time. Oh, if I'm not mistaken, Abitibi (before the merger with Bowater) was the worst performer on the TSX in the last 15 years (or something like that). The stock price chart would have made waterfalls jealous. (as an aside there are other companies that were far worse but they generally get de-listed and fall to the TSX Venture, whereas Abitibi was a paper giant that simply kept sliding while meeting listing requirements.)

All those problems I mentioned is what kind of attracted to me. The large leverage, although potentially lethal, can result in massive profits. I don't remember the exact numbers but if the Canadian dollar declined something like 15%, Abitibi would have posted several hundread million in profit. It could easily make almost one third to half its market cap in one year if a few things turned in its favour.

I sort of stopped following it when, after being influenced by some superinvestors such as Walter Schloss and Warren Buffett, I started disliking companies with debt. The leveraged debt play just isn't for me. I also came to the opinion that it is better to consider newspaper companies than the forestry companies. Both the newspapers and the newsprint producers are suffering but the newspapers seem to have the potential to develop very large moats on the internet. The downside for newspapers is that they often have dual-class share structures (both in Canada and USA) with founders owning most of the voting rights without majority economic interest. There is lots of room for conflict of interest in such cases.

Bizarre Day

Today was a bizarre day--even if you weren't a monoline shareholder. There was a huge rally on seemingly weak news. We also had oil move up significantly, which seemed weird. In fact, almost everything went up except gold (I'm exaggerating here). We even had Ambac and MBIA move up today with massive volume. It wouldn't surprise me if everything goes down tomorrow.

When Moody's and S&P downgrade Ambac and MBIA, it will likely be the largest bond downgrades the world has seen. There may be up to $1 trillion worth of bond downgrades (more likely closer to $300 billion to $750 billion depending on the underlying rating of muni bonds). This is just a wild guess but I suspect there would be relatively minor (probably around $10 billion) of write-downs at banks and other institutions (single institution with the biggest exposure seems to be Morgan Stanley but this isn't reliable given that we don't know who still has exposure). Note that the cut is simply from AAA to AA, and many investment banks have likely hedged them to some degree. The ones that will probably suffer the most are those that can't hold anything lower than AAA-rated bonds or can't hedge (eg. pension funds, select mutual funds, etc). There was a lot of re-wrapping going on in the last 6 months (if I'm not mistaken a big chunk of Berkshire Assurance's and Assured Guaranty's new business were from wrapping existing insurance) so the big pension funds/insurance funds/etc would have purchased credit enhancement already. From what I understand, most of the bonds are trading as if they weren't credit enhanced so the price impact on the bonds is likely to be low (except from forced selling).

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3 Response to BCE Defers Dividend; AbitibiBowater Says The Future is Better

John
June 6, 2008 at 3:54 PM

Well, there goes my idea of BCE being a "pseudo cash" position ;-)

June 6, 2008 at 4:56 PM

Anything with the word pseudo is kind of scary... pseudo-religion... pseudo-science... well, add pseudo-cash to that ;)

BTW, did you ever invest in any of the distressed financials back in the early 90's?

June 6, 2008 at 9:16 PM

No, I didn't -- and the S&Ls were definitely a case of investors throwing out the baby with the bathwater. So I missed out.

But (and my memory is failing me here) it may have been a case where to play that game you needed to spread your bets over many positions. And in those days, I didn't have the $$$ to buy a bunch of different S&Ls.

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