How to hedge gas prices
The hedge fund that bet Connacher Oil & Gas would crash now wants to own it
Ari Altstedter, Bloomberg News
Friday, Apr. 10, 2015
Connacher Oil & Gas Ltd.’s bid to restructure out of court in Canada was rejected as it struggles to cope with falling energy prices. File Photo
For Barry Kupferberg, a wager that Connacher Oil & Gas Ltd. would struggle to stay solvent was the perfect way to profit from crude’s collapse. Now, he’s looking to take over the firm and profit on the way back up.
Trilogy Capital Management, the US$200 million credit hedge fund where Kupferberg is director of research, bet against Connacher’s bonds in 2014 as crude collapsed, while also buying its more senior loans. Those loans now give Trilogy and fellow lenders an opening to take over the company after a missed interest payment put it in default and an Alberta court rejected a rival takeover plan by bondholders, Kupferberg said.
“Who wouldn’t like to control an asset that was worth $1 billion for about $35 million?” he said in a telephone interview. “We didn’t forecast being able to own the company through the first lien when we bought it. We dreamed of that possibility.”
Kupferberg is fighting other creditors for Connacher — including Avenue Capital Group, the largest bondholder — as the company seeks to rid itself of $1 billion in debt and raise the cash it says it needs to make it through the slump.
He’s just one of the latest to salivate over the opportunities in the beaten-down assets of energy companies after oil slumped more than 50 per cent since June. Blackstone Group LP’s GSO Capital Partners credit unit has been raising money to buy energy-company debt, and Royal Dutch Shell Plc this week announced a US$70 billion deal for BG Group Plc — the oil industry’s biggest acquisition in a decade.
Connacher chief executive Chris Bloomer didn’t return phone messages requesting comment.
The saga of Connacher and Greenwich, Connecticut-based Trilogy — founded by former Bear Stearns distressed debt investor Jonathan Rosenstein — escalated in the middle of last year, amid signs that China’s economy was slowing. Trilogy — then a Connacher bondholder — sought oil companies that needed high prices to stay viable, and thought of the Calgary-based oil sands producer.
When Connacher was looking to take out a US$128 million loan last May that would supersede the bonds in its capital structure, Trilogy sold its bonds and bought a portion of that. A month later, global crude prices began to slide.
Who wouldn’t like to control an asset that was worth $1 billion for about $35 million?
By late summer, Kupferberg says,
Trilogy was shorting Connacher’s U.S. dollar bonds outright, borrowing the securities with a view to buying them back cheaper and profiting from the difference.
That paid off as the bonds tumbled to 4 cents in March from about 80 cents on the dollar in August, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Trilogy also increased its stake in the loan to what Kupferberg says is now about 10 per cent.
The short-selling of Connacher bonds, and other moves like it, helped Trilogy post 9 per cent returns last year, according to Kupferberg. The average among hedge funds was about 1.6 per cent, according to data compiled by Bloomberg.
The trade pitted Trilogy against other funds including New York-based Avenue Capital, which bought up the discounted bonds.
Under a debt-for-equity swap proposed by Connacher in January, Avenue would have received a 42 per cent stake in the company, while Trilogy and the other senior lenders would get their loans — but no equity, according to regulatory filings.
For Connacher, swapping $1 billion of bonds for equity would have saved them interest payments, and the plan also called for raising $35 million through the sale of convertible notes to get them through the oil slump.
An Alberta court rejected the plan last week, after the loan holders objected. They said Connacher was in default after missing a coupon payment on its bonds, and they were now free to exercise their higher claim on its assets.
The ruling is not yet available in court records, and the company didn’t release the judge’s reasons.
Now Kupferberg says they can come up with the $35 million in capital the company needs and then take the firm through the Companies’ Creditors Arrangement Act, or creditor protection. That would nullify bondholders’ claims and allow Trilogy and other senior lenders to take ownership themselves, Kupferberg said.
Todd Fogarty, a spokesman for Avenue with Kekst & Co. declined to comment.
“We’re exploring some ways with the company that we can offer a similar amount of capital, and put them in a position where they can execute their business plan,” Kupferberg said. “Now we’re at a situation where we may be able to own that company.”
The alternative, Kupferberg said, would be for the bondholders to pay off the senior lenders, and then continue with their original plan. He stressed nothing has been decided yet.
Underlying the strategy is the belief that oil prices, eventually, will be “substantially higher,” he said. And Connacher, which he views as a “40-year asset” will be profitable again, Kupferberg said.
“We think this asset has significant value,” he said.Source: www.financialpost.com