GREAT post from Yahoo:
From Bopfan--
"Despite the fact that everyone knows that there are at least $12 billion+ to satisfy debt and preferreds, the market has continued to undervalue these securities. In a liquidation the debt would receive 100%, so why is it trading around $.60?
Because the market over discounts when a company is in Chapter 11. (As a former bankruptcy lawyer I can tell you that even the most sophisticated business people -- holding fully SECURED claims -- become terrified when company with which they do business files bankruptcy.) For sophisticated distressed investors, this works very nicely because a $.60 purchase that he knows will pay 100% represents a 67% gain. This is one way people make money in distressed (strategy) investing. (Another way is by buying and trading credit default swaps.)
You buy at at discount (tactic) to increase your profit margin. You KNOW the debt would be paid in full, but by bidding well below 100% you tell your seller you're doing him a favor by relieving him of this paper. Of course, your nervous seller wants (or needs )to dispose of the risk created by the bankruptcy and sells it to you at a discount. You smile to yourself because seeing the NOL, $4.4 billion, and other assets you know WMI has enough to pay its $8 billion debt in full, and if you want to invest in the preferreds, you know the $12 billion in assets covers them too, so they are worth purchasing.
Has it occurred to people that WAMPQ is selling at 5.5% of liquidation value? If the liquidation value is paid that is a 18,182% (a spectacular) return?!
Frankly, I've invested for my own account so my interest is personal and sincere. Though I'm looking out for myself, I don't like the idea that people who can benefit from a good opportunity being dissuaded from doing so by people who post negative information about WMI securities. Yes, WMI is in Chapter 11, but as someone who has worked as a bankruptcy lawyer I've wagered my own funds because of my confidence in my judgment. Always do your own due diligence."
AI
