The day I read "To those dedicated customers of Spirit, this one's for you" is the day I swore off participating in legal special sits
But tactically I think if one is early enough to an asymmetric special sit and can take out most or all of the cost basis along the way, then playing the situation's outcome with a "free roll" can make sense
You mentioned doing fewer of these special situations. What sort of things have worked well for you over the past few years? Ultimately, the big challenge is that there isn't a fixed distribution for these sorts of returns. Even if you think you had an advantage in some sort of distressed or special situation in the past, that doesn't mean that you'll have an advantage going forward. "What the wise man does in the beginning, the fool does in the end" still holds true.
I think the big advantage of these special situations is that they're much less correlated and have defined outcomes. Depending on your time frame, that can be very helpful. If you're playing for the option value, I think you could reasonably buy it at $1 and sell it at $5. However, if you're buying because you believe in the ultimate outcome and you're trying to have an edge on the results then I think you need to look at how good your predictions are versus the actual outcome. You can use tools like the area under the curve, etc. Obviously, with a small sample size, it can be hard to know entirely.
The downside of special situations is the potential for getting zeroed. It can take a lot of effort/brain damage and opportunity cost to understand the special situations while you have to use a small amount of capital because of the risk of a wipeout.
Personally, I haven't had a ton of success with these special situations, and so I try to avoid them unless I think there's a strong behavioral edge or the case is really clear from a kind of common sense and who cares sort of outcome, like the Musk-Twitter agreement or the MSFT - ATVI acquisition. I also try to think through a lens of do most people care about this (e.g. Paramount and Warner Brother’s people care about less content / prices being jacked up, and same with Spirit so I avoid those. I was burned on the TPR-CPRI acquisition and am even more cautious about these situations now.
There may be two different kinds of edge getting mixed together here.
One is having superior insight into the final legal outcome. The other is recognizing that the market has priced the range of possible outcomes incorrectly.
You can have the second without having the first.
The problem is that those require very different disciplines. If your thesis is that the optionality is mispriced, then the investment case may disappear once the market reprices that optionality — long before the court ever decides who was right.
That makes the exit part of the edge.
Otherwise a correctly identified mispricing can quietly turn into a bet on an outcome you never had any special ability to predict.
Malone's friends (management, "disinterested directors") got 10% of the reorganized company + Releases. A win for them of course! Classic Cable Cowboy style corporate governance!
Wow. I had not known of this situation, but seems very unfair to the prfs. Reminds me of a series of Texas bank holding companies filing bankruptcy in the late 80s - assets got trapped at the holding company, Feds demanding they be downstreamed to the operating banks. Feds lost, bonds went from the teens to full recoveries.
Management argues (67% of Pref holders agreed) that wiping the pref was necessary to avoid litigation to recoup dividends (ie. that legacy Pref holders had effectively raided the debtor OpCos causing the insolvency)
Management got 10% MIP + Releases. Why would they fight for equity holders? Their own stock/pref stake worth close to nothing at this point, even if prefs got 20c on the dollar, the 10% MIP is worth far more. This is what you get for being a minority shareholder in a co run by Malone's friends.
I also expected the P shares to have some recovery. This case underscores that a management team will always have some lever to wipe Old Equity in a bankruptcy.
I don’t think a lawyer has any specific advantage in this scenario. Even a bankruptcy lawyer. There was way too much complexity in the structure, the intercompany debt was opaque, and the tax analysis was very complicated. The main good advice from a lawyer with workout experience would be: “avoid.”
That complexity is a John Malone special. His managers can use it to their advantage. Here: getting 10% MIP for themselves while letting all other equity holders bite the dust.
People who invest in Malone entities assume that management is aligned with their interests with large personal ownership. The 10% MIP should serve as a warning to people who think these guys are on their side.
bankruptcies will be used to raid parent company assets from now on...awesome
The day I read "To those dedicated customers of Spirit, this one's for you" is the day I swore off participating in legal special sits
But tactically I think if one is early enough to an asymmetric special sit and can take out most or all of the cost basis along the way, then playing the situation's outcome with a "free roll" can make sense
I very much had that one in mind
You mentioned doing fewer of these special situations. What sort of things have worked well for you over the past few years? Ultimately, the big challenge is that there isn't a fixed distribution for these sorts of returns. Even if you think you had an advantage in some sort of distressed or special situation in the past, that doesn't mean that you'll have an advantage going forward. "What the wise man does in the beginning, the fool does in the end" still holds true.
I think the big advantage of these special situations is that they're much less correlated and have defined outcomes. Depending on your time frame, that can be very helpful. If you're playing for the option value, I think you could reasonably buy it at $1 and sell it at $5. However, if you're buying because you believe in the ultimate outcome and you're trying to have an edge on the results then I think you need to look at how good your predictions are versus the actual outcome. You can use tools like the area under the curve, etc. Obviously, with a small sample size, it can be hard to know entirely.
The downside of special situations is the potential for getting zeroed. It can take a lot of effort/brain damage and opportunity cost to understand the special situations while you have to use a small amount of capital because of the risk of a wipeout.
Personally, I haven't had a ton of success with these special situations, and so I try to avoid them unless I think there's a strong behavioral edge or the case is really clear from a kind of common sense and who cares sort of outcome, like the Musk-Twitter agreement or the MSFT - ATVI acquisition. I also try to think through a lens of do most people care about this (e.g. Paramount and Warner Brother’s people care about less content / prices being jacked up, and same with Spirit so I avoid those. I was burned on the TPR-CPRI acquisition and am even more cautious about these situations now.
There may be two different kinds of edge getting mixed together here.
One is having superior insight into the final legal outcome. The other is recognizing that the market has priced the range of possible outcomes incorrectly.
You can have the second without having the first.
The problem is that those require very different disciplines. If your thesis is that the optionality is mispriced, then the investment case may disappear once the market reprices that optionality — long before the court ever decides who was right.
That makes the exit part of the edge.
Otherwise a correctly identified mispricing can quietly turn into a bet on an outcome you never had any special ability to predict.
Malone's friends (management, "disinterested directors") got 10% of the reorganized company + Releases. A win for them of course! Classic Cable Cowboy style corporate governance!
Wow. I had not known of this situation, but seems very unfair to the prfs. Reminds me of a series of Texas bank holding companies filing bankruptcy in the late 80s - assets got trapped at the holding company, Feds demanding they be downstreamed to the operating banks. Feds lost, bonds went from the teens to full recoveries.
Interesting post-mortem...it's worth reviewing the bankruptcy presentations https://restructuring.ra.kroll.com/QVC/
Management argues (67% of Pref holders agreed) that wiping the pref was necessary to avoid litigation to recoup dividends (ie. that legacy Pref holders had effectively raided the debtor OpCos causing the insolvency)
Management got 10% MIP + Releases. Why would they fight for equity holders? Their own stock/pref stake worth close to nothing at this point, even if prefs got 20c on the dollar, the 10% MIP is worth far more. This is what you get for being a minority shareholder in a co run by Malone's friends.
I also expected the P shares to have some recovery. This case underscores that a management team will always have some lever to wipe Old Equity in a bankruptcy.
I don’t think a lawyer has any specific advantage in this scenario. Even a bankruptcy lawyer. There was way too much complexity in the structure, the intercompany debt was opaque, and the tax analysis was very complicated. The main good advice from a lawyer with workout experience would be: “avoid.”
That complexity is a John Malone special. His managers can use it to their advantage. Here: getting 10% MIP for themselves while letting all other equity holders bite the dust.
In bankruptcy, management teams always spike the proverbial football on shareholders. John Malone joint or not.
People who invest in Malone entities assume that management is aligned with their interests with large personal ownership. The 10% MIP should serve as a warning to people who think these guys are on their side.