Bankruptcy Investing: MMPIQ

June 30, 2010 | Comments (12)

This is a guest post by Andrei from AQ Value. Andrei and I have invested in many of the same companies but he has had far more success with bankrupt investments. I turn it over to Andrei for his latest distressed investment idea – MMPIQ. Let’s get the discussion under way.

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I have had Meruelo Maddux Properties on my radar since the end of 2009 (when it was a mere .05/share) and this past week I finally took the plunge and bought a sizeable position in the bankrupt Los Angeles Landlord. I have developed a bit of an affinity for bankruptcy situations as they have been some of my most profitable investments over the last 1 1/2 years.

To review MMPIQ’s situation, I think it is important to discuss some of the things that attracted me to make this investment and then talk about the negotiations that will undoubtedly take place with regard to the POR.

Why do I believe there will be a substantial return for holders of the equity of MMPIQ? Just some positives in no particular order:

  • Insider Ownership:
  • NOL Carryforwards
  • Successful Investor Stephen Taylor owning a large stake going into bankruptcy and adding more while the process runs its course
  • Real Estate Assets far exceeding Liabilities (Liquidation value looks to be upwards of $1/share).
  • Equity Committee in the process of being formed

Earlier this week MMPIQ filed a 2nd amended POR which was received extremely well by shareholders and with good reason. The initial POR mentioned a $10M cash infusion to the company by way of a rights offering only available to “accredited investors” owning more than $50,000 worth of the stock. Something about that just didn’t sound right to me. That would ultimately line the pockets of a few shareholders (including company executives Meruelo and Maddux) at the expense of other shareholders.  At the time it was filed I determined that it made an MMPIQ investment too risky. If approved, a POR like that could result in a permanent loss of capital which I aim to avoid. That being said, the process should always be closely monitored for progress as POR’s are presented or amended. We got one such amendment earlier this week.

The new POR has now included 2 options for investors.

Option 1“: On the Effective Date, or as soon as practicable thereafter, such Holder shall receive on account of and in exchange for its Interests cash in the amount of $.08 for each share of MMPI Existing Common Stock held by the Holder.

Option 2“: On the Effective Date, or as soon as practicable thereafter, such Holder, in exchange for the Holder’s Interests and after payment by the Holder of $.07 for each share of New
Existing Common Shares that the Holder held as of the Record Date.

So option 1 isn’t that interesting from a return standpoint: They are simply offering to buy shares for .08 each. This does however limit downside exposure. The risk of permanent loss of the entire investment would be off the table. Option 2 on the other hand is the rights offering that I mentioned before. For an additional payment of .07/share, you will receive one of the newly issued shares of Meruelo Maddux. That now gives us participation in the upside of MMPIQ’s new equity.

Disclosure: The author of the article owns shares in MMPIQ at the time of this writing.

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  • http://www.selectedfinancials.com Ankit Gupta

    Read some good stuff talking about Seth Klarman’s margin of safety and wanted to share it:

    “When properly implemented, troubled-company investing may entail less
    risk than traditional investing, yet offer significantly higher returns. When
    badly done, the results of investing can be disastrous…” He emphasizes that
    the market is illiquid and traders take advantage of unsophisticated investors.
    “Caution is the order of the day for the ordinary investor.”
    Klarman mentions to use the same investment valuation techniques you
    would use for a solvent company. He suggests that the analyst look to see if
    the companies are intentionally “uglifying” their financial statements. He
    cites the example of expensing rather than capitalizing certain expenses.
    The analyst needs to look at off-balance sheet arrangements. He cites
    examples as real estate and over-funded pension plans.

    Overall: Approach bankruptcies with caution, but if you study it, the potential rewards do exist.

  • http://aqvalue.wordpress.com Andrei

    Thanks Ankit for the very relevant Klarman wisdom. Really look forward to seeing what others think of this particular opportunity.

  • http://www.selectedfinancials.com Ankit Gupta

    Andrei – how should I be valuing the real estate that they have? They went into bankruptcy because the property wasn’t generating enough economic return. Remaining equity value will rest on the properties being worth more than the liabilities alone, right?

  • http://aqvalue.wordpress.com Andrei

    Exactly. Also keep in mind that the rights offering will provide MMPIQ with a cash infusion which will certainly help.
    .-= Andrei´s last blog ..New Holding- MMPIQ =-.

  • http://aqvalue.wordpress.com Andrei

    Yes remaining equity will depend on property value – liabilities – legal fees. Also keep in mind that proposed rights offering would serve as an infusion of cash to get house back in order. Once OEC is formed, I would expect a counter to current POR. Will have to watch closely for new developments. What do you think thus far?
    .-= Andrei´s last blog ..New Holding- MMPIQ =-.

  • http://www.selectedfinancials.com Ankit Gupta

    I think it’s interesting to see these different people involved, the insider buys, etc., but I’m still left a little confused. Why do you think there’s value for equity holders?

    I understand that many people are involved, a POR reduced the downside risk, etc., but how did they decide there’s value?

    Also, are you following this through PACER? Doesn’t seem to be on kccllc.net

  • http://www.selectedfinancials.com Ankit Gupta

    Also, aren’t the real estate assets hard to value? They aren’t producing the cash flows needed, which is why they’re in bankruptcy, and real estate has significantly changed since a few years ago. Do you know when they acquired the properties on their books?

  • http://aqvalue.wordpress.com Andrei

    In valuing the real estate assets I would stay away from analyzing cash flows because as you mentioned many of the properties don’t have cash flows at all. I would look at the properties one by one (I am actually going to be consolidating individual property info into one PDF to make this a bit easier to do and will post to my blog over the holiday weekend). For each property, I would look to value them based on sales comparisons for like-kind properties. Also keep in mind that they often add-value to their properties by redeveloping them. This could also be an important thing to look at.

    As for acquisition dates on each property, I don’t have that information available however, I will see what I can find out and try to compile something.

  • http://aqvalue.wordpress.com Andrei

    As I mentioned in my previous comment, I would be getting a PDF file together with more information about each of the properties owned by Meruelo Maddux. I have posted the file on my blog at:

    http://aqvalue.wordpress.com/2010/07/05/properties-owned-by-mmpiq/

  • http://aqvalue.wordpress.com/ Andrei

    MMPIQ sure has come a long way since this article was written.

  • http://www.oldschoolvalue.com Jae Jun

    It sure has. Thanks to you and Planmaestro for putting it out there and I’m benefiting as well.

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