Bluestar Group (BLU020)

[Enumerate]

Latest announcements offer complete transparency on the state of the banking covenants.

Any interest in a further discussion?

[Alan3285]

What are the latest announcements?

Do you have a link to the specific thing(s) you want to discuss?

Thanks,

Alan.

[Enumerate]

What are the latest announcements?

Analyst presentation:

http://www.nzx.com/markets/NZDX/BLU0...t-Presentation

Halfyear result:

http://www.nzx.com/markets/NZDX/BLU0...t-Presentation

The material details the nature of the senior loan covenants and reiterates the covenants in the BLU020 trust deed.

It is clear that they need to pay down more senior debt and improve revenue before the BLU020's will resume interest payments.

However, they are generating cash from the business, even in these dark times. My view is that the deep discount to face, offered in market, has more to do with the lack of liquidity than a reasonable estimate of counterparty risk.

[Alan3285]

Hi Enumerate,

Analyst presentation:

http://www.nzx.com/markets/NZDX/BLU0...t-Presentation

Halfyear result:

http://www.nzx.com/markets/NZDX/BLU0...t-Presentation

The material details the nature of the senior loan covenants and reiterates the covenants in the BLU020 trust deed.

It is clear that they need to pay down more senior debt and improve revenue before the BLU020's will resume interest payments.

However, they are generating cash from the business, even in these dark times. My view is that the deep discount to face, offered in market, has more to do with the lack of liquidity than a reasonable estimate of counterparty risk.

I had a look through the analyst's presentation.

I assume the interest on the bonds, which is not being paid, is not accumulating either?

Alan.

[Enumerate]

I assume the interest on the bonds, which is not being paid, is not accumulating either?

Not only is the interest accumulating ... it is compounding!

[GTM 3442]

Yowzah ! ! !

"Blue Star also confirms that when interest payments resume, interest will be
paid to the persons who are registered holders of the capital bonds on the
record date for the relevant interest payment date, being the Friday
proceeding the tenth business day prior to that interest payment date,
regardless of who might have been the holder of the bonds during any of the
interest suspension period prior to that record date. "

So not only are they cheap, but they've got backdated interest ?

Or am I missing something obvious ?

[Alan3285]

Hi GTM,

Yowzah ! ! !

"Blue Star also confirms that when interest payments resume, interest will be
paid to the persons who are registered holders of the capital bonds on the
record date for the relevant interest payment date, being the Friday
proceeding the tenth business day prior to that interest payment date,
regardless of who might have been the holder of the bonds during any of the
interest suspension period prior to that record date. "

So not only are they cheap, but they've got backdated interest ?

Or am I missing something obvious ?

That's what I was wondering - it seems 'too good to be true', although of course the real risk is that the issuer either goes belly up, or the date when interest payments resume is so far in the future that you have a cash flow 'negative' investment for a long time.

However, I am now quite interested.....

Alan.

[Enumerate]

Yes, the interest is accruing and compounding.

They halted payments due in Sept 2009, I believe. At this point, November onwards, the payments accrue at the higher interest rate of 13.1% (from memory).

[Enumerate]

BLU020 are being priced, by the market, as if they had already failed and the likely recovery rate is at the lower quartile of expected recovery for this type of business.

This, in my view, is clearly wrong.

The business is cash flow positive and while they will declare a modest loss in NPAT, this is not unreasonable performance during a recession.

Like most hedge fund mediated management buyouts - the capital structure is fairly thin. For example, the shareholders funds are about equal to the "goodwill" assets on the books. As the BLU020 are subordinated to the senior debt - there is a degree of discomfort in this position. Hence, the "counterparty risk", in terms of getting the capital back, is not zero. However, in my view, this risk is less than market pricing would imply.

Clearly, the risk of not receiving interest payments has come to pass. This is driven by both senior debtor covenants and by the BLU020 trust covenants - all free cash has been diverted to paying down senior debt. There is compensation for this, in terms of the increase in yield.

Investing in BLU020 is indicated if you believe that economic activity will slowly recover over the next few years. Based on this the company guidance of resuming interest payments in early 2011 would be a reasonable assumption.

Unlike finance companies, the downside protection is the value of seemingly viable industrial business units. It would appear unlikely that the hedge fund investors in Bluestar Group would allow their equity to be wiped out and control transferred to senior and subordinated investors.

My personal view is that 75cents per $1 face would be a reasonable discount, given the risk. The units trade at half these levels - which begs the question ... why?

Always grateful for any new perspective or information on this ...

[Enumerate]

Reasonable volumes of BLU020 traded today at about 60%

Well done guys!