Securities Analyses that I Found Interesting in December 2024

Date 12-18-24

DHCNL : Investing in distressed debt in a turnaround REIT 

https://valueinvestorsclub.com/idea/DIVERSIFIED_HCR_6.25_SR_2046/5127682322

I have been interested in distressed debt situations and this one was an interesting case study. The author looked at the 6.25% Baby Bonds due 2/1/46 for the Diversified Health Trust REIT. These are senior unsecured bonds. All bonds are bound by a Debt Service Coverage Ratio (DSCR) covenant (set at 1.5x) which they are in violation of as it was at 1.08x in Q3 of 2023.

The author saw some opportunity for that covenant within 2 years to be met and those bonds to be paid closer to face value.
Keep an eye on:

• A strong possibility of regaining covenant compliance
• High likelihood of net operating income (NOI) improving closer to previous levels for its major senior living operations.  (Continued operating improvement at SHOP segment
• Targeted asset sales
• Preferred equity issuance to reduce interest rate expense
• Paydown or refinancing of near term debt maturities
• Sale of the company

In addition insiders were aligned with high incentive and had high ownership, suggesting that one or more of these scenarios would materialize. 

Over one year later, after some asset sales DSCR sits at 1.17x. This appears to have been driven by a slower recovery of SHOP NOI. Management blames, lower occupancy growth. and increased expenses for utilities and wages. 

While they have taken steps to dispose properties, and are in the works to dispose around $350M more in the future, the NOI headwinds may be too much.

They have also built up new agency debt, on similar terms to previous debt at an interest rate of 6%. 

Confidence: 6/10

Too much trust in a cyclical turnaround for me.

Was selling at: 13.25

Now selling at 16.20

O-I Glass Inc. : A Potential Turnaround

https://valueinvestorsclub.com/idea/O-I_GLASS_INC/3235249573

O-I glass was interesting as well. Its a simple story. It centers around a recent change in management that promises to improve the business by lowering working capital requirements, and increasing EBITDA. They plan to do this with lower inventory levels and by closing excess capacity. They are also coming out of asbestos and pension liabilities and a cyclical downturn. There is also opportunity for multiple expansion that would bring it in line with its peers. Much more upside than downside. 

“This gets us to a target of $1,594 million in 2027 EBITDA without the benefit of volume.  At OI’s current multiple and discounted back to the present, this should result in a share price of $24.04 or 96% above current levels and at peer multiples a target price would be $40.25 per share or 228% above current levels.”

Confidence: 4/10

I haven’t had much luck in turnarounds, and this one seems to be in a very tough industry where the business model may beat management.

Was trading at 12.72

Now trading at 10.38

HEPS: A merger arbitrage special situation in a Turkish company.

https://valueinvestorsclub.com/idea/Hepsiburada/9863035934

Merger Opportunity:

• Hepsiburada (HEPS), a Turkish e-commerce company, is being acquired by Kaspi (KSPI), a Kazakh “super app,” for $5.36/share overall, including $4.75/share for Class B shares currently trading at $3.35.
• The market misunderstands Turkish capital market rules, which likely Legal Framework:
• Turkish Capital Markets Board (CMB) rules mandate a takeover offer for minority shareholders when control changes (defined as acquiring >50% voting rights). KSPI will own 65% post-transaction, triggering this requirement. Exemptions do not apply in this case, as the takeover results in a clear control change. These rules would require KSPI to make a mandatory takeover bid for minority Class B shares at no less than $4.75/share. Upon transaction closure (expected 1Q’25), KSPI must announce a plan to acquire minority shares under mandatory takeover provisions.

Mis-Valuation

• There is a spread between the current price ($3.35) and the expected mandatory bid price ($4.75), offering potential upside.

Significant Risk

However, the obligation to initiate an MTO applies specifically to publicly held companies as defined by Turkish Capital Markets Law. A company is considered publicly held if its shares are publicly traded or if it has a certain number of shareholders, generally exceeding 500.

Hepsiburada (HEPS), asserts that it does not meet the criteria of a publicly held company under Turkish law because: (1) HEPS is not listed on any Turkish stock exchange. (2) Shareholder Count: HEPS has fewer than 500 shareholders.

If this scenario is true (which I believe) at least 500 people would have to buy ADRs in HEPS, crack them into local securities before the control change, and litigate to enforce their rights under Turkish law. Cracking the ADRs incurs certain costs, which would require a high position size to overcome. I’m not confident enough to take that position. Plus it would be a lot of work. 

Other Considerations:

• Uncertainty about KSPI’s actions regarding minority buyout.
• EM jurisdiction risks, including Turkey’s hyperinflation and regulatory environment.
• Legacy shareholders’ profit-taking after the deal announcement may keep prices suppressed temporarily.

Argument against:

However, the obligation to initiate an MTO applies specifically to publicly held companies as defined by Turkish Capital Markets Law. A company is considered publicly held if its shares are publicly traded or if it has a certain number of shareholders, generally exceeding 500.

In the case of Hepsiburada (HEPS), the company asserts that it does not meet the criteria of a publicly held company under Turkish law because:

• Listing Status: HEPS is not listed on any Turkish stock exchange.
• Shareholder Count: HEPS has fewer than 500 shareholders.

This position is detailed in their 20-F filing, pages 161-162.

Confidence: 4/10

I like the logic, but am uncertain that shareholders could mount and win a legal battle here.

Aker Carbon Capture – Merger Arbitrage

https://valueinvestorsclub.com/idea/aker_carbon_capture/7238562602#description

Aker Carbon Capture agreed to sell 80% of their business to SLB for 4.5Bn NOK in cash plus an additional 1.4Bn NOK in potential performance based consideration. The current market cap is 3.7Bn NOK, so it is selling at 62% of NAV.

The biggest risk here is that the company sold their position to SLB in June 2024. 6 months later we have not received a plan for what they will do with their cash. 

They recently updated article 15 of the articles of association: The company’s purpose is to, by itself or together with other parties, invest in, develop, and divest from businesses that operate within energy, climate and environmental solutions, associated technology and infrastructure, related goods and services, and capital management.”

Which suggests that they will most likely pursue acquisitions rather than return cash to shareholders. We have no idea what those will be, so there is a lot of unknown here. 

Confidence: 2/10

Thames Water Utilities LTD. : A distressed debt situation

https://valueinvestorsclub.com/idea/Thames_Water_Utilities_Ltd/7915004964

Thames Water is a distressed debt opportunity. The author suggests that the likely outcome is a restructuring or sale at a valuation that avoids severe losses for senior creditors (Class A bonds). As a regulated utility, the government and regulator are incentivized to preserve the credibility of the RAB framework and secure future investment in the UK’s infrastructure.

Thames Water (THAMES) is the UK’s largest water and wastewater utility but is financially distressed due to:

• High debt and complex financial structure.
• Strained relationship with the regulator (Ofwat), which penalizes inefficiency and caps investment allowances.
• Shareholders abandoning further equity injections.
• A downgrade to junk credit status, which limits access to debt markets.
• Liquidity running out by December 2024.

Class A bonds are selling at an unusually low valuation. 

The market prices Class A bonds assuming a potential default or restructuring, implying a significant discount (42-46%) to the Regulated Asset Base (RAB), which is historically unprecedented for UK utility assets.

The regulator’s targets and RAB valuation are critical because RAB is the foundation for long-term investor returns in regaulated utilities. And so the UK government is unlikely to let this happen given its broader agenda to encourage private sector investment.

The author suggest sthat the government and Ofwat are expected to engineer a sale at a moderate discount to RAB (~25%) to protect bondholders while eliminating shareholders and junior creditors.

This implies Class A creditors will not take haircuts and bond spreads will retrace to investment-grade levels.

In order for this thesis to playout the following must be true:

1.  the government must intervene to grant regulatory concessions. 

2. new investors must value the company at less of a discount, specifically in their equity valuation. 

3. creditors, equity investors and class a bondholders must align. Notably Class A bondholders must retain their seniority in the capital structure with minimal or no haircuts.

4. The company must not run out off liquidity before the restructuring. 

5. The company must avoid nationalization (the favored solution)

Confidence: 1/10

This has too many conditionals where I have to predict the actions of many parties. I am totally new to the space, so I didn’t invest, but found the situation interesting.

What ended up happening is that Thames Water issued higher interest super-senior debt to the class a bondholders, increasing risk. It also pushed out time to a more permanent resolution further. With the company seemingly preferring  short-term liquidity over long-term debt restructuring.

Washington Prime Group INC: Distressed Equity

https://valueinvestorsclub.com/idea/WASHINGTON_PRIME_GROUP_INC/1974610553

Washington Prime Group (WPG), a bankrupt Class B mall REIT, has proposed a Plan of Reorganization (POR) where preferred shareholders (WPG.PH) are entitled to recover $20 million (~$2.50 per share) under the current terms.

However the market underestimates the potential for a higher recovery due to recent developments.

Development 1:

Judge Marvin Isgur expressed reservations about the “coercive” voting structure of the POR, which could violate the Bankruptcy Code by prioritizing common shareholders over preferreds. He hinted that preferred shareholders might be entitled to 100% of equity recovery.

Development 2:

Official Equity Committee (OEC): On July 15, an OEC was appointed to represent equity holders (both preferred and common). 

Development 3:

Ad Hoc Committee’s Negotiation Success: An earlier committee of preferred shareholders successfully negotiated for additional value, demonstrating that preferred holders can extract further concessions.

Valuation:

The base POR gives preferreds $2.50/share. If the preferreds vote in favor of the Plan and common shareholders vote against, preferreds may receive $40 million (~$5/share).

1. 5% probability of recovering $0 due to Plan falling apart
2. 25% probability of recovering $2.50 due to failure of official equity committee to generate additional value
3. 25% probability of recovering $3.75 halfway between existing Plan and my most likely scenario
4. 30% probability of recovering $5.00 – my most likely scenario outlined above
5. 10% probability of recovering $7.50 due to preferreds taking all cash and additional value generated by official equity committee (e.g. warrants, rights offering participation, additional cash, etc.)
6. 5% probability of recovering $10 due to successful auction

The stock was trading at $3.25/share while the author attributes an expected value of $4.30/share based on those probabilities. 

Confidence: 8/10

The logic makes sense and I probably would have taken the shot. I think I estimate lower probabilities on the extremes and maybe a higher probability of the 25-50% of upside being higher.

It is now trading at 4.64

Pactiv Evergreen INC: Turnaround

https://valueinvestorsclub.com/idea/PACTIV_EVERGREEN_INC/3559646906

Long-term compounder with undervaluation driven by asset transformation and near-term headwinds.

PTVE is a long-term compounder opportunity with significant near-term upside as it transitions to a lean, capital-light plastic packaging leader. The company’s undervaluation (6.8x 2025 EBITDA vs. 8.6x peers) reflects temporary headwinds tied to its legacy SBS assets, which are being addressed through divestitures. If management delivers on its plan, PTVE’s increased cash flow generation, deleveraging, margin expansion and multiple expansion could drive its share price to $24/share within 12 months.

PTVE shares have 100%+ upside potential to $24/share within 12 months, as the company transforms into a capital-light, sustainable plastic packaging leader after divesting its capital-intensive paper mill assets.

Management is implementing a clear plan for margin expansion, EBITDA growth, and aggressive deleveraging, creating significant free cash flow (FCF) and valuation re-rating potential.

Over the past 18 months, PTVE has divested or closed its high-capital-intensity paperboard (SBS) assets, including. These moves reduce distraction, enable focus on core businesses, and create opportunities for margin expansion.

Proceeds from the Pine Bluff sale ($110M) and FCF (~$95M in 2H 2024) support rapid deleveraging, bringing net debt down to $3.3B by year-end 2024 and $2.6B by 2026.

Lower capex (post-SBS divestitures) and declining interest expenses create additional FCF tailwinds.

The Pactiv Evergreen Production System (PEPS) initiative, focused on productivity and waste reduction, along with footprint optimization and modest volume growth, could drive margins to 18%+ by 2027/28, delivering $1B+ in EBITDA.

Current Valuation is Attractive:

Valuation metrics: PTVE trades at just 6.8x 2025 EBITDA vs. peers at 8.6x, and offers 14%-18% FCF yields (2025-26 estimates). 

Deleveraging trajectory (Net Debt/EBITDA from 4.5x in 2024 to 3.0x by 2026) makes this valuation discount unsustainable.

Current EBITDA is $785 million

Owner Alignment

Billionaire Graeme Hart owns 77% of shares, is focused on long-term value creation, and may privatize the company if undervaluation persists.

Keep an eye on: 

• Asset rationalization: Closing of Pine Bluff sale and ongoing footprint optimization.
• Cyclical volume recovery and secular shift away from plastic foam to more sustainable plastic packaging.
• Cash flow growth from lower capex, declining interest costs, and margin expansion.
• Debt reduction, leading to improved investor confidence and valuation multiple re-rating.

Key Risks:

• Execution risk in margin improvement and deleveraging.
• Slower-than-expected cyclical recovery in foodservice or food packaging volumes.
• Ongoing stock volatility due to limited free float (22%).

Price and Date

• Current Price: ~$12/share (as of mid-2024).
• Valuation Multiple: Target valuation at 8x 2026 EBITDA of $875M similar to peers. 
• Target Price: $24/share in 12 months (~100% upside).

Confidence: 6/10

PTVE is now subject to a merger offer of $18.00 per share

And now selling at: $17.23