Leucadia Investment in Trouble?

The financial partner in The Market Common project in Myrtle Beach has defaulted on its loan agreements with a national bank and might consider filing for bankruptcy protection, according to a notice issued Tuesday.

Leucadia National Corp., a financing partner with developer McCaffery Interests Inc., is contesting the defaults but said it is "exploring all options and remedies available to it including, but not limited to, a bankruptcy filing."

Thus begins an article on the Market Common fiasco--which you can read in full at Myrtle Beach Online. The trouble, however, doesn't stop there.

...[M]ore than one-third of The Market Common's tenants have asked the project's developers to lower their monthly rent payments, according to Tuesday's notice.

Jewelry store Carlyle & Co. plans to close in August and at least two other stores - Victoria's Secret and Bath and Body Works - have said they may close.

The stakes are actually pretty big on this one--i.e., foreclosure on the property by the bank is a possibility, however slim:

The financial default involves $7.6 million worth of payments Leucadia owes as part of an interest rate swap agreement tied to a construction loan.

Failure to pay that amount triggers another default on the primary $92.7 million construction loan and would let JP Morgan Chase foreclose on the property.

Leucadia, in the notice, said it has not paid the $7.6 million "and has no intention of paying such amount to Chase."

In addition to a possible bankruptcy filing, Leucadia said it is trying to negotiate new loan terms with the bank.

As the primary construction loan to Leucadia is scheduled to mature on October 10th, there's an end date to this financial posturing by both sides. But the problems at The Market Common seem likely to continue for a good while after.

Marty Whitman on the Balanced Approach

Munger likes Wisdom

Another title which pretty much states the obvious for us long-time fans.

This post will simply point to an article about the Oracle of Pasadena, Warren Buffett's right-hand man, Charlie Munger. The article talks about the Wesco meeting, and the man that many of the "cultists" go to hear speak.

A lifetime of practicing what he preaches has made Munger a billionaire: Good businesses are ethical businesses, he tells us. A business model that relies on trickery is doomed to fail.

Munger starts the session with "Socratic solitaire," in which he asks himself a series of questions.

"How serious is the present economic mess?" Munger asks. "Deadly serious. The worst mess since the Great Depression. You can't tell what happens when people get discouraged enough."

...

Today he's negative about the economy, but positive about stocks — a bullish sign. In the late 1990s, Munger complained that he didn't see much to buy. The market quickly proved him right. But, at current market prices, Munger sees many long-term investment opportunities.

"I am willing to buy common stocks with long-term money at these prices," Munger said. "Is Coca-Cola worth what it's selling for? Yes. Is Wells Fargo? Yes." He owns both.

"If you wait until the economy is working properly to buy stocks, it's almost certainly too late," he said. "I have no feeling that just because there's more agony ahead for the economy you should wait to invest."

Smart words from a very smart man. After reading the article, if you're wanting more Munger, get the book Damn Right! or Poor Charlie's Almanac.

Whitman Likes HK Real Estate

Marty Whitman likes Hong Kong real estate? That's probably not a secret to those of us who have been following him a long time.

But in Third Avenue's latest letter, Whitman presents some up-to-date information showing in numbers why he likes the great Hong Kong companies.

For example, the adjusted NAV for Cheung Kong Holdings is 100.38; for Henderson Land Development Company, it is 59.21; for Wheelock, it is 32.72.

Updating Whitman's data for the recent rise in share prices, but keeping the same adjusted NAV numbers, Cheung Kong is selling at a 15% discount, Henderson Land is 31% off, and Wheelock is still very cheap at a 41% discount.

"Most importantly," says Whitman, "all of the companies continue to have extremely strong financial positions and are very well poised to take advantage of opportunities presented by the current global recession and credit crunch."

This, he backs up by showing that the net debt to capital at Cheung Kong is 13.2%; at Henderson Land Development Company, 14.1%; and at Wheelock, a very low 1% (as it excludes debt at a major subsidiary which is non-recourse to the parent).

Insider ownership is around 50% at each of the companies--a fact with both postive and negative implications.

Michael Lewis Likes Snowball. I Don't.

The title says it all: the author of Liar's Poker and a long, critical article about Warren Buffett, likes The Snowball. And he wrote a lot about why for The New Republic. The article ends with a look back at his critical piece, along with the main reason that Lewis enjoyed the book:

Even then I thought that his virtues far outweighed his vices, and felt a bit like the guy who, having grown weary of hearing others drone on about the physical perfection of some supermodel, went to the beach with a camera and snapped a photo of her cellulite.

Now Schroeder's brave book offers a close-up of the same cellulite, but more fairly, in the context of a genuinely delightful character.

Buffett might not like it, but this book has done him a very Buffett-like service. Twenty years from now, when the financial markets have forgotten our current trauma, and finance is once again fashionable, some young person will pick it up and discover that history's most legendary investor was not a cartoon but a real live human being. And still, somehow, deeply admirable.

Despite being a fan of some of the books Lewis has written, I'm glad his review ended when it did. Because I am no fan of The Snowball and was more than a bit eager for a rambling Lewis to get to the point as to why he was.

(As an aside, my view on the book is not that it is without merit. In fact, I transcribed some long excerpts that I think are particularly valuable in two of my favorite posts Buffett: The Sleuth Investor and Buffett Author Explains Derivatives.)

My main criticism of the book was stated previously like this: "Buffett achieved success because he was focused and frugal; this biography fails because it is unfocused and verbose." That was true, and still is, but I was being too nice.

This positive (and philosophically-revealing) review has actually motivated me to write more on why I don't like The Snowball. And why other books are better for the person who would like to learn how he accumulated a portfolio of wonderful businesses and friends. To be posted soon...

Greenlight's Q1 2009 Letter

Greenlight's 2009 Q1 Letter detailed his holdings of Ford debt, as well as the common stock of Pfizer, Harman, and EMC. For example, Einhorn explains why Greenlight invested in Ford debt:

Ford is the third largest auto manufacturer in the world. We bought a large amount of secured bank debt (term loan and revolver), of which there is $14.7 billion outstanding, at an average price of 37% of par, starting in the fourth quarter of 2008.

The bank debt is secured by almost all of Ford’s assets including most of Ford’s manufacturing plants, inventory and accounts receivable, working capital, its investment in Ford Credit, most of Ford’s foreign subsidiaries including intercompany debt to Volvo, 66% to 100% of the stock of all major first tier foreign subsidiaries (including Volvo and Grupo Ford S. de R.L. de C.V., a Mexican subsidiary), and certain domestic intellectual property, including trademarks (i.e. the famous blue logo). In addition, Ford has over $20 billion of cash, which it had been burning at a good clip (we expect cash burn to fall). Even so, the collateral pool is worth many times the implied $5 billion valuation of the secured debt.

We observed that when the U.S. Government invested in General Motors, it put its money in junior to the secured bank debt. Even so, it does not appear that Ford will need a government loan any time soon, if ever.

Ford had the foresight to borrow money when the debt markets were accommodating. Ford reacted faster than its competitors to the slowdown by cutting production and other costs, improving manufacturing efficiency and vehicle quality. If auto sales stabilize at these low levels, Ford should reach cash flow breakeven in 2010 and generate $4 to $5 billion of automotive operating income in the next mid-cycle of automobile sales.

We also bought a smaller amount of various bond issues at Ford’s credit subsidiary at very large annualized yields to near-term maturities. The secured bank debt ended the quarter at 45% of par.

The letter, which ends with a quote by JFK--saying that "a nation that is afraid to let its people judge the truth or falsehood in an open market is a nation that is afraid of its people"--can be read in its entirety at Todd Sullivan's Value Plays.

Notes on the Notes from the Leucadia Meeting

For those who haven't read the complete notes from Leucadia's shareholder meeting, Inoculated Investor has posted seven pages worth. Here are my quick notes on the notes:

*The succession plan is basically to focus more on buying great (read: durable) companies, to develop capable managers, and to not die.

*Jeffries shouldn't compensate young know-nothings so highly--and if they use stock as compensation they should buy some back too (in order to cut down on diluting present shareholders).

*Americredit was bought too soon and is heading into a tough time as business shrinks, but it is a viable business, will survive, and at some point will prosper.

*Their top investments, including Fortescue, should outperform as the markets come back.

*Cresud has a great set of assets but the fundamentals in Argentina now are terrible and they're not optimistic.

*Commercial real estate? No thanks, say Steinberg and Cummins. And don't ask again, until they are full of durable companies.

*The company is positioned for inflation as they have borrowed in dollars and invested in hard assets.

*Sangart's Hemospan seems to be working fine but more tests are needed. Nobody has died yet, so that's cool. If it works, it will be a lot cooler.

*Third money managers? Never again, say both collectively. It was a huge mistake--especially the Pershing investment where they lost pretty much everything.

*The two couldn't care less about Moody's rating--and don't think you should either. (Hard to argue on this point.) "They have missed almost everything and been late at each turn."

*They don't have a crystal ball and don't know how long the downturn will last.

*Jeffries (JEF) is in retrospect even a better deal now than what they thought when they first made the deal. The deal was done with LUK stock--when it was trading around $54. (There's a message in that for all the JEF-deal-haters.)

*They buy when something is on sale and start to think about selling when the discount disappears.

*Long-term view on natual gas prices is six to seven dollars per Mcf.

*LUK has cash. Is looking to invest. Have been buying back their debt in the meantime.

Einhorn on the Economy

David Einhorn's comments on the market,from the GLRE conference call, are excerpted below:

...In the first quarter Greenlight Re’s investment portfolio had a better result than it did in the prior two quarters.

There are several factors that contributed to this. First, we enter 2009 with a very conservative posture, about 80% long and 40% short or about 40% net long. Although we are holding a good amount of cash, we became more concerned about the market as it sold off in January and became even more defensively positioned ending January at just 29% net long.

As things continue to dislocate through February, we used this as an opportunity to cover a number of short positions and entered the March slightly more a net long. We also added to our debt portfolio particularly in Ford Motor secured bank debt. At the beginning of the year our debt portfolio was about 12% of capital. We ended the quarter was about a 17% weighting in debt instruments.

Greenlight as always invested in debt instruments with that part of the corporate capital structures offered compelling unlevered returns. We started accumulating our debt portfolio in October of last year and have built our allocation in a patient fashion as markets begin further dislocated.

...

Our current debt portfolio is invested in US companies and we have been mindful of the liquidity in each of the issues of which we are invested.

In addition to moving up the corporate capital structure, we have also constructed a less concentrated portfolio and we have to start it. Although we have found many compelling investments that appear to be at bargain prices, this is temporary by the worst economy most of us have seen. It is very difficult to develop a high degree of confidence in corporate revenues in earnings even in well established profitable companies with conservative balance sheets.

So we have offset some of this idiosyncratic risk by holding a more diversified portfolio.

...

We continue to be cautious about the environment, especially in light of the market latest rally, and aren’t as convinces as some others to the government response to the prices to date will actually fix the problems in the economy. We think this take some time to play out as the normal forces of supply and demand exert themselves. We continue to be worried about monitory actions and the fiscal situation and continue holding some of our cash involved for the time being.

It's important to remember that Einhorn is speaking for GLRE and not for Greenlight Capital. (Though his thoughts in many cases will be the same, the nature of both investment vehicles can be expected at times to lead to different strategies.)

For the rest of the transcript, which Seeking Alpha provides free of charge, click here.