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- entertainment group will generate profit but remain a poor investment return after COVID
- wireless losing share on 5G to TMobile so long-term cash flows expected to decline continuously
- Other areas may have growth but not enough to offset cash flow generation declines in 2 main businesses: security, business networking services, FirstNet
- dividend growth may remain relatively flat. IF cash flows fail greatly, expect future cut down the road if buybacks don't solve problem
- significant risk for PE compression to levels similar to Verizon leading to greater capital losses
Why might private companies choose a SPAC over an IPO?
https://www.fidelity.com/learning-center/trading-investing/SPACs?ccsource=email_weekly_AT
Due in part to the SPAC voting rule change, and other market forces, SPACs have become an increasingly popular alternative to IPOs. According to a recent Investor Bulletin from the SEC on SPACs, "Certain market participants believe that, through a SPAC transaction, a private company can become a publicly traded company with more certainty as to pricing and control over deal terms as compared to traditional IPOs."
More specifically, some of the reasons a private company might choose to go public via a SPAC versus an IPO include:
- Circumventing the IPO process. An IPO can be time intensive and carry significant costs. A SPAC is already public and, consequently, it can allow a company to quickly access public markets.
- Flexibility of SPACs. Instead of raising funds through an IPO as a private company, a SPAC can be an alternative for those companies that are highly leveraged (i.e., the company has a relatively significant amount of debt as a percentage of its total financing). A highly leveraged company may have difficulty raising funds in an IPO.
- Private company shareholder benefits. Founders and other major shareholders who want to sell some of their ownership position upon going public can sell a higher percentage in a reverse merger than they might be able to with an initial public offering. Also, these founders and shareholders can avoid lock-up periods (a predetermined amount of time that a shareholder cannot sell their shares) that can be associated with an IPO.
An important distinction to note here is the different valuation approaches with SPACs and IPOs. According to the SEC, "Unlike the traditional IPO process, where a private operating company sells its securities in a manner in which the company and its offered securities are valued through market-based price discovery, [SPAC managers] are solely responsible for deciding how to value the private operating company and how much the SPAC will pay for it."
Potential Value Opportunities
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There are superior alternatives to T and CFG, including TU, WFC, BNS, TD, and CFR. This means I would personally only recommend buying ADM, ABBV, ETN, and SPG today.
ET - Energy Transfer
Energy Transfer LP provides energy-related services. The company owns and operates natural gas transportation pipeline, and natural gas storage facilities in Texas and Oklahoma; and approximately 20,090 miles of interstate natural gas pipeline. It also sells natural gas to electric utilities, independent power plants, local distribution and other marketing companies, and industrial end-users. In addition, the company owns and operates natural gas gathering pipelines, processing plant, and treating and conditioning facilitie
ET-24Q1-Energy Transfer Reports Strong First Quarter 2024 Results.pdf. link
2024 Q1 results
- $.32 per share for 2024 Q1
- operating volumes increased > 11% yoy
- increasing NG pipeline capacity
- expect yoy EBITDA up 3%
- new debt issues rated BBB
- debt ratio stable at 62%
- dividend very safe now
- current dividend rate 8.25%
ARCC - Ares Captial Corp
ARCC is a BDC specializing in acquisition, recapitalization, mezzanine debt, restructurings, rescue financing, and leveraged buyout transactions of middle market companies. It also makes growth capital and general refinancing.
- ARCC is the market leading BDC lender
- flexible asset strategy should continue to adapt well to changing market conditions
- eps continues to grow
- common dividend coverage is a goal
- common dividend increases only when core earnings increase
- dividend coverage averages 125%, rate about 8.2%, dividend growth averages 4% with low dividend risk
- AUM - Credit loans are 65% of assets, equity types most of the rest
OBDC - Blue Owl Development Corp
OBDC is a BDC that specializes in direct and fund of fund investments. The fund makes investments in senior secured, direct lending or unsecured loans, subordinated loans or mezzanine loans and also considers equity-related securities including warrants and preferred stocks also pursues preferred equity investments, first lien, unitranche, and second lien term loans and common equity investments. Within private equity, it seeks to invest in growth
- lender with 81% senior secured, 73% first lien investments, 97% floating rate debt investments
- 12% ROE rate given leverage
- risk is floating rate will impact future earnings as rates drop
- dividend is 10.3% but coverage is only 105% so the dividend is only moderately safe
- loans are 60%, equity investments are 40%
- avoids cyclical industries
RITM - Rithm
RITM is an asset manager focused on real estate, credit, and financial services. It operates through Origination and Servicing, Investment Portfolio, Mortgage Loans Receivable, and Asset Management segments. Its investment portfolio primarily comprises of mortgage servicing rights (MSR), and MSR financing receivables, title, appraisal and property preservation, excess MSRs, and services advance investments; real estate securities, call rights, SFR properties, and residential mortgage loans; consumer and business purpose loans; and asset management related investments.
- Q1 eps = $.54 up from a loss in 2023
- dividend is 8.2% ( $1.00 dps ) with coverage now at 175% and dividend risk is moderate
- earnings vary highly with interest rates
- some mortgage loans and MBS with risk
NLY - Annaly Capital REIT
Annaly Capital Management, Inc., a diversified capital manager, engages in mortgage finance. The company invests in agency mortgage-backed securities collateralized by residential mortgages; non-agency residential whole loans and securitized products within the residential and commercial markets; mortgage servicing rights; agency commercial mortgage-backed securities; to-be-announced forward contracts; residential mortgage loans; and agency or private label credit risk transfer securities. It has elected to be taxed as a real estate investment trust (REIT). As a REIT, it is not subject to federal income tax to the extent that it distributes its taxable income to its shareholders.
- dividend > 13% typically BUT stock price declines historically as income drops, stock issued to cover
- payout ratio ( now 100% ) was often too high in the past leading to stock issues that cut eps, dropped stock price
- bulk of assets in MBS ( 85% ) with high variable default risk in commercial markets, many residential loans are agency backed
- hi debt leverage - Economic leverage* of 5.6x, down from 5.7x in the fourth quarter
- rate risk when financing long-term loans with short-term debt ( bad in rising rate environment )
- Financing costs increased modestly with average GAAP cost of interest-bearing liabilities of 5.40%, up 3 basis points quarter-over-quarter, and average economic cost of interest-bearing liabilities* of 3.78%, up 36 basis points quarter-over-quarter
- buys hedges on rate risk
- debt leverage used to pay for the hedges
- Hedge ratio decreased from 106% to 97% given maturity of short-term swaps; new hedges were placed further out the yield curve
- eps driven by volumes, shares outstanding, income from net interest margin ( earned vs paid ) and leverage
- NLY Strategic model
- Annaly’s Agency portfolio is made up of high quality and liquid securities, predominantly specified pools, TBAs and derivatives
- Portfolio benefits from in-house proprietary analytics that identify emerging prepayment trends and a focus on durable cash flows
- Diverse set of investment options within the Agency market, including Agency CMBS, provides complementary duration and return profiles to Agency MBS
- Access to deep and varied financing sources, including traditional bilateral repo and proprietary broker-dealer repo
Potential Challenges
Candidate Solutions
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