Description

Reorg beer money trade, it is kind of thin, but patient accumulation is possible.  Due to the size/liquidity its more for PAs and smaller funds.  

Pennsylvania REIT is going through its second chapter 11 in the past 3 years.  Interest rates and debt load drove the company to reorg again.  Last go around the prefs and equity were left intact, this go around they're getting $10m to be split 70% to the prefs and 30% to the common, subject to some adjustments should the debtor spend money fighting against the formation of an equity committee.  In the declarations, the $10m has been characterized as a "gift" to equity holders.  In my view, it probably is.  The adjustments exclude deminimus legal expenses of responding to letters from upset shareholders.  I don't think there's a credible case for an EC here, as the 2nd lien holders are converting to equity and there's some new money coming in.  I listened to the first day hearing to see if any of the usual suspects that would wrangle for an EC would show up and make some noise.  In October, one of those lawyers sent a letter to the board on behalf of some pref holders but did not show up at the hearing.  I suppose it is possible he still does, but getting an EC here is a very long shot and the juice probably isn't worth the squeeze.  Absent a pref holder from South Africa claiming to own 10k shares, no one appeared to make the case for equity or an EC.  The judge let the man be heard and then just moved on with the other 1st day issues.  So, I don't think someone real is going to take up the cause.  From the rest of the hearing, it appears very little is in dispute other than some minor procedural things.  

There are 3 classes of prefs and the equity.  Workout values for the common appear to be in the 55c range ($3m on 5.3m shares out) vs a current quote of 45c or so.  The prefs look to be trading about 40c vs workout value of about 45c ($7m/15m+ prefs of varying classes), so they bit richer relative to the common for a class that should be treated pari in the reorg, so the common appears to be a better value, in my view.  The reorg appears to be on a fast track towards confirmation sometime in the first quarter.  Under the RSA, the plan must be confirmed by 1/31 and effective by 2/15, so a pretty tight timeline but one the judge seemed supportive of.  There's risk it gets pushed back, but based on how this is being handled and the speed at which they want to move, I'd anticipate its still a good IRR.  I'd anticipate the $10m "gift" is actually paid shortly thereafter to re-emerge.  

Risks:

Someone shows up wrangling for an EC and the debtor has to spend money that eats into the workout value

Dates get pushed out, reducing IRR and potentially having the RSA recut in a way that reduces or eliminates the "gift"

Pref holders may try to argue they should get the whole $10m

Catalyst

moving through the b/k process