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March 11, 2009

Forest City in the News: Financial Straits Edition

It looks like Atlantic Yards developer Forest City Enterprises might be in deeper doo-doo than they have been letting on.

Yahoo Finance, The Coming Value Party
By Tim Melvin, RealMoney.com Contributor

Third Avenue, the largest institutional holder of Forest City Enterprises stock (FCE-A), is also buying senior debt.

Because he has a fantastic track record in distressed bonds, I was very interested to see that both Third Avenue Value and the Third Avenue Small Cap Value run by Curtis Jensen were buying distressed credits in companies he believes are 70% to 80% likely to remain performing credits. In addition to buying more shares in long-term holding Forest City Enterprises, the fund purchased the bonds of the company at levels that provided yields to maturity of better than 30%. Forest City has exchange-traded bonds as well that trade under the symbol FCY on the NYSE. These are senior unsecured notes that trade at less than 25% of par, with yields of better than 30%. Whitman has done very well with this type of investment over the years, and if Forest City can survive the recession, these notes are a home run. In a bankruptcy, a quick glance tells me that these may work out to at least the purchase price as well.

To figure out what the heck this means, we contacted blogger Gari N. Corp who explained Third Avenue's hedge (emphasis added):

They're a big holder of FCE stock, but if FCE goes bankrupt then there's a good chance that stockholders get nothing, or almost nothing. That's because in bankruptcy the holders of debt are repaid first. Now, there are different types of debt - the best stuff is the secured debt, say debt that is secured on a piece of real estate (better hope, though, that its value has held up). At the bottom there's convertible or subordinated debt, as well as those bonds you brought to my attention that were "equity-linked".

But senior unsecured bonds give you a pretty good right to be repaid first, so in the event of a bankruptcy you'll get a fair amount of your money back. Well, if the bonds are trading at 25c on the dollar, the market is suggesting that you won't get a huge amount back, but if you're third ave and you bought the bonds at 25c on the dollar and you get back 30c on the dollar in bankruptcy then you've made a 20% profit.

The fact that Third Ave is now buying bonds as well as stock suggests that it has a very real concern that the stock would be wiped out in bankruptcy.

The Cleveland Plain Dealer, Forest City trying to sell stake in 15 properties, newsletter says
By Michelle Jarboe

Could Forest City be so strapped for cash that it is selling the good stuff?

Industry newsletter Real Estate Alert is reporting that Forest City Enterprises Inc. is looking for buyers for 15 properties.

Forest City, based in Cleveland, has been trying to sell properties outright or into joint-venture deals to raise money. The company largely has put new development on hold and is focusing on managing its existing properties and building up some cash. According to the Real Estate Alert report, Forest City is seeking buyers for full or partial stakes in 10 apartment properties, four shopping centers and the office portion of University Park at MIT, a mixed-use development at the Massachusetts Institute of Technology in Cambridge, Mass.

Forest City spokesman Jeff Linton would not comment on the Real Estate Alert article or discuss any specific properties that might or might not be for sale. He said any deals in the works would involve confidentiality agreements, which Forest City will not break.

Real Estate Alert's article did not cite a source.

NoLandGrab: We love how Forest City will not break "confidentiality agreements" concerning their efforts to dump hard assests to raise cash. That's like saying that the company won't break its own gag order signed with property owners who sold under threat of eminent domain.

Yahoo Finance, FCE-A
Forest City closed down for the day at 4.25.

Posted by lumi at March 11, 2009 6:52 PM