Bankruptcy Investing: MMPIQ


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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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