Commentary

In the closing days of 2010, The New York Times' Dealbook published an excellent piece documenting how Abercrombie & Fitch Co. (NYSE:ANF) is quietly seeking shareholder approval to reincorporate the company in the state of Ohio. This is an exceedingly rare move, as ANF is currently incorporated in the state of Delaware, a state that is home to 63% of the Fortune 500, 73% of all new U.S. IPOs and more than 879,000 other business entities. American states engage in a form of horizontal regulatory competition, the result of a conflict of laws principle that allows companies to choose their place of incorporation separately from their place of operations. Over the last century, Delaware has emerged victorious as the leader in new business entity formation, as well as attracting existing entities which initially incorporated in other states…

We previously profiled the public debate between Bill Ackman's Pershing Square Capital and Eric Hovde's Hovde Capital over General Growth Properties (NYSE: GGP). Another interesting debate is unfolding over The St. Joe Company (NYSE: JOE), between David Einhorn's Greenlight Capital and Bruce Berkowitz's Fairholme Funds. The St. Joe Company operates resorts and timberland, but its primary asset consists of approximately 577,000 acres of land in the Florida panhandle, 70% of which is within 15 miles of the beach.

The debate over JOE has been ongoing since at least May 23, 2007, when Einhorn used The Ira Sohn Investment Research Conference (an annual forum where select hedge fund managers present their investment ideas to raise money for charity) as a platform to present his short thesis. At the time, JOE was trading at $55 and Einhorn valued it at $15. JOE dropped 10% after Einhorn's presentation and nearly 50% in the subsequent six months (of course, this was during the general market meltdown in the second half of 2007). Notes from the presentation were passed around at the time and we have shown below in full certain notes compiled by BTIG and re-printed on ZeroHedge…

Last month, Blackstone (BX) announced an acquisition bid for Dynegy (DYN), an electric utility company that’s been struggling against weak demand.  The deal is unique because there are no change-of-control provisions on the unsecured debt, so BX can just buy the equity and not have to deal with much refinancing.  After buying out shareholders at $542mm, BX plans to sell assets worth $1.363 billion to NRG.  If BX could then dividend those proceeds to itself, DYN would effectively have required an upfront investment of only $97mm. Fears that this strategy would leave unsecured bond holders even less secured have driven bond prices down 10 points.  We can see in the chart below that the share price went up but the longest duration bonds took a hit when the buyout offer was made on August 13th…

Over the past few weeks, we’ve profiled two of the case studies that we’ll be presenting for our upcoming speech on “Distressed Debt Activism In The Age Of Electronic Media” at the 6th Global Forum on Investing in Distressed Debt. In our first profile, we chronicled the public debate on General Growth Partners (GGP) between the long camp, consisting of Bill Ackman’s Pershing Square Capital and Whitney Tilson’s T2 Partners, and the short camp, consisting of Eric Hovde’s Hovde Capital. In our second profile, we documented Birch Run Capital’s activism on behalf of equity holders in the Chapter 11 bankruptcy case of Energy Partners Limited (EPL).

In our third and final case study, we’ll discuss our own work on Eagle Rock Energy Partners LP (EROC), a distressed master limited partnership that underwent a financial restructuring earlier this year to lighten its debt load and…

Below is the second part in our series on “Distressed Debt Activism In The Age Of Electronic Media”. We will be presenting on this topic at the 6th Global Forum on Investing in Distressed Debt, and thought it fitting to discuss on our blog some of the case studies which we’ll be profiling. Last week, we examined the very public Pershing-Tilson-Hovde debate over General Growth Properties, and next week, we’ll cover our own work on Eagle Rock Energy. This week, we’ll profile the activism of Birch Run Capital in the bankruptcy of Energy Partners Ltd. (EPL), an oil & gas operator that filed for bankruptcy in May 2009…

In September, we will be giving a presentation at the 6th Global Forum on Investing in Distressed Debt on the topic of “Distressed Debt Activism In The Age Of Electronic Media”. We’ll focus on how activist investors in distressed situations are increasingly using internet communication to achieve faster and more meaningful impacts on their targets.

Given that we publish an active blog, we’ll also write posts on the case studies that we’ll be profiling at the conference. We will discuss three examples where the internet has allowed distressed activists to share their analyses with a broader audience, recruit new investors and ultimately increase pressure on their intended targets. Our first case study, which we will profile in this post, is the battle between Pershing Square, T2 Partners and Hovde Capital over…

Last week we commented on a WSJ article implicating ETFs as the cause for increased correlation between individual securities in the S&P.  Inspired by that article, we decided to do a little more research on the ETF market.  Relative to mutual funds, ETFs still make up a small piece of the market.  This Bloomberg chart shows what types of managed funds investors are using and what the 5-year return has been…

An article was published in the WSJ yesterday titled “The Herd Instinct Takes Over”, with interesting implications. The article was based off a chart published by Birinyi Associates showing the increased correlation between individual components of the S&P 500, and the author hypothesized that one potential reason for this is the increased use of ETFs…

Unemployment is on everyone’s mind these days, but because the labor force excludes discouraged job seekers, the actual unemployment rate isn’t the most informative metric to look at.  For some reason, analysts don’t seem to pay much attention to the employment-population ratio, which compares the number of people who are employed to the total non-institutionalized population over the age of 16.  Unless people are so discouraged that they’re committing crimes to get into jail, or the government is so desperate to produce good numbers that it’s sending more people to jail, the employment-to-population numbers will be difficult to manipulate.  Data stretching back to 1970 can be found below…

Bloomberg recently reported on the increased correlation between the CRY commodity index and the S&P, claiming that increased correlation decreases the incentive for investors to be in commodities and that continued high correlation will lead to outflows from commodity funds.  But one thing we noticed is that the charts look completely different depending on how far apart the data points are spaced.  Below we provide charts with data points taken monthly, quarterly, and annually…

SNL Financial recently reported “91 Institutions Defer May’s TARP Dividend”. The implication is that banks can’t make TARP payments, but this doesn’t seem to be the case for every bank on the list. Some banks aren’t being allowed to pay dividends by regulators even though it’s not likely to put the banks in jeopardy. For some banks, not paying dividends might make sense, especially if the preferreds are non-cumulative or if they’ve borrowed money (or have other preferred shares) yielding more than 5%…

The typical bank model revolves around the concept of borrowing money from one party at a low rate, and then lending to another party at a slightly higher rate.  The old-fashioned savings and loan institutions would take deposits from customers, represented on the balance sheet as liabilities.  The money you deposit at the bank is an asset for you and a liability to your bank because your bank has to return it to you.  After they take your money, they lend it out, frequently to homeowners in the form of a mortgage.  These loans are represented on the balance sheet as an asset because someone owes the bank money (or in the default scenario, a house).  Alongside the deposits, the bank must also have some of its own money invested.  This money represents the shareholders equity, money that either came directly from investors or that has been reinvested from historic profits.  Banks are required to maintain certain equity levels to protect lenders (depositors) from a loss if assets end up being worth less than the bank thought.  The model looks like this…