Thursday, April 30, 2009

FCY: Forest City Senior Bond & Discussion of Process Use to Make a Purchase Decision/

******************************************Original Post:

Some observers have noted that LB is cautious and LB is always looking for the bogeyman around the corner.  All LB can do in its defense is to explain its reasons for calling the caution police.

Sometimes the caution arises, at least in part, from having inadequate information on some critical factor.  I know that I do not know something that I need to know in order to make an intelligent decision.   An example of that quandary came from a purchase in the 4th quarter of 2008 of just $500 of a a senior bond issued by Forest City Enterprises (common: FCE-E), a non-REIT real estate company.  The symbol is FCY for the exchange traded bond. One benefit of buying an exchange traded bond is that I have no problem buying just a small amount when my discomfort level is high but I do not want to completely ignore it either. When looking at a bond purchase, I always want to know as much as I can about the debt more senior to the instrument that I may buy.  The junior debt holders would be more of nuisance.  For a senior bond, secured debt is more senior and has priority in the event of a bankruptcy.  While some real estate companies have small amounts of secured debt compared to senior debt, others have far more secured debt. Forest City has a ton of secured debt.  FORM 10-K What I am trying to determine is how much of a claim does my security have on the property after the secured debt receives its just due.  To make that determination, I want to first know whether the secured debt is recourse or non-recourse to the corporation.  That is, if the creditor seizes the property, and the value has sunk below the current mortgage balance, can the creditor secured a deficiency judgment against the company?  I would hope the answer to that question is no when buying a senior debt security.  This became an issue recently for  a North Carolina mall owned by Glimcher Realty, which I discussed in posts last year.  For a senior debt holder, the best case is that the secured debt is non-recourse.  The next step is to try and determine how many properties have no secured debt attached to them, and how much are those properties worth compared to the outstanding balance of the senior debt.  This is where my analysis of FCY broke down, since I could not arrive at a firm judgment based on the information available to me.  I had some level of comfort just buying the senior note at a huge discount to its $25 par value.  I may have been aware then that Marty Whitman was taking a position in FCY, or other senior Forest debt, but he does not share his information about property values with me.  So, along with many negative factors, some of which are discussed in the earlier blog, I bought only 50 shares of this exchange traded bond at slightly less than $10.   FCY: Odd lot limit order filledRB was given 3 votes on that decision, as to the number of shares to buy, but lost the vote count 4 to 3. FCY: Forest City Enterprises Senior Bond (FCY)/FCZ
RB wanted to buy 100 which was down from the usual 1000 share order advocated by it.
Many of these problems are just some of the negative factors inherent in being a lone individual investor trying to find his own way, without a bevy of research analysts, MIT pets, and access to a boatload of expensive boutique research.   

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