Republished from ThumbTackInvestor with permission

I have built a small position in Falcon Energy, betting that they’d manage to restructure their debt successfully.

Stock price 

3.9 c

52-week range

2  - 10 c

PE (ttm)

--

Market cap

S$34 m

NAV

18.4 c

Dividend 
yield
(ttm)

--

1-yr return

-33%

Source: Bloomberg, Company

They’re still not out of the woods yet, but at least they managed to increase their liquidity with a $23mil injection from the partial sale of CH Offshore.

Anyway, I’d just cut and paste my response to someone who asked me for my thoughts on Falcon Energy:

No plans to do a write up on FE cos it’s a small position and I’m gg on holiday next month… 

Maybe let me just share here briefly then: 

As of mrq, FE had current debts payable of $132mil (all figures are rough and taken off the back of my head, so may be slightly inaccurate. Typing on mobile here) 

and cash on hand of something like $12mil I think. Even their total current assets is something like just under $120mil. 

In other words, they are pretty much insolvent, and can only remain viable under 2 scenarios: 

1) Lenders restructure debt, either by taking a haircut or by dragging out payment period 

2) They get a white knight's capital infusion 

Failing which, the only other alternative is BK. 

So the scenario is binary in nature: Either insolvent and BK or survive in 1 form or other. 

And we know that the lenders are not going to sit ard and do nothing, so there’s pressure for something to materialize. We just don’t know if it’s going to be BK or survival. 

The key, though, is that at that point, when the share price was under $0.03, the markets were pricing in near-certain bankruptcy. Their NTA was ard 13 US cents, and the markets were assigning a value of 3 SG cents to them. 

My entry price is an average of $0.033 simply cos I made a stupid mistake when keying in my orders and ended up selling instead of buying, and had to buy back and incur more costs, including a penalty fee for buying in.

So that jacked up my average price substantially. Otherwise, it’d would have been below 0.03 (https://www.investingnote.com/posts/893150)


Since the outcome is binary, how’d I end up on the side of them surviving? 

1) Oil prices were recovering. I’m not saying this helps from a fundamental aspect. That is, I don’t think the oil price recovery = more revenue for FE = able to survive. 

Nope. Not at all. These things take time to filter down. And to begin with, many of their contracts would’ve locked in the prices. So saying oil price going up = they will do well is too broad and useless. BUT when the basic industry’s commodity is improving, the 3 banks and lenders are likely to be more willing to restructure.

In my experience, banks are unlikely to force a BK cos it's a messy process, and even if their debt is secured, after taking into account the legal processes and such, they’d either still get a haircut and likely see their monies after a prolonged duration. They will likely restructure a dragged out repayment process instead. The only reason to NOT do this is if the borrower is very unlikely to be able to pay up even X months or years down the road, and/or requires more capital infusion. It is for this reason, that the optics of an improving industry is very important for getting some leeway from the lenders. 

2) If we zoom into the BS of the company, they are facing insolvency now because of the large debt due currently. 

Yet the non-current liabilities are quite manageable, aka there is little long-term debt. This suggests that if the lenders are able to drag out the payment periods, the company’s current debt profile will immediately improve. If I can see that, the parties involved can too. Forcing FE to pay up right now and risk forcing them to go into BK, versus dragging out payment periods or delaying collection WITHOUT any further capital infusion, and eventually being able to collect in full without any haircut….

which would you do if you were the lender? 

3) The wide gap between NAV and the price! Even in the event of liquidation… 3 SG cents vs 13 US cents? 

Even if we write off 50% of the asset values carried in the books… there’s still a wide MOS there 

4) Whilst the company keeps reporting losses……. the key number that the lenders will zoom into is the CFO. And cashflows from operations is positive in the mrq (Can’t rem exactly how much) 

wongfongfuiFF Wong, Chairman and CEO of Boustead Singapore
5) FF Wong made a personal investment of $2mil. From my previous experience with Boustead, I know how this guy invests. He’s extremely conservative, and if he’s putting money in, it’s cos the situation is derisked. For god’s sake, this guy gave up 3 opportunities to deploy Boustead’s cash when they were in advanced negotiations, each time because he identified some risk. He’s very careful with money.

6) Despite all these points, my position size in this is very small. Just 200,000. I won’t lose sleep regardless of how the situation pans out, yet % returns wise, it’s pretty attractive as I get a what… 40%? ROI within a month or so. (based on current figures at least)

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