2023-08-04 10:15:37 ET
Summary
- IEP reported a weak Q2 2023 with a $417 million loss and a decrease in indicative net asset value.
- The company's generous distribution policy is unsustainable, and a distribution elimination is likely in the near future.
- Bond holders are selling off due to the insufficient distribution cut and the drop in NAV, posing refinancing problems in the future.
Fun isn’t something one considers when balancing your portfolio, but this, does put a smile on my face.
Source: Thanos
When we last covered Icahn Enterprises L.P. ( IEP ), we threw down the gauntlet to the yield chasers and told them the cut was on the way (emphasis in original):
The above prices also show that if the distribution is maintained, regardless what happens to the stock price, covered calls will vastly outperform cash secured puts. We think Mr. Icahn will ultimately defend the bonds by making the distribution more sustainable. We are betting on a sub 50 cent distribution for either the November 2023 or the March 2024 payment.
Source : "2 More Rate Hikes Could Seal The Deal On The Distribution"
IEP reported Q2 2023 results this morning and decided that it wanted to get onboard with the only course of action it had left.
We do not intend to let a misleading Hindenburg report interfere with this practice. This quarter, IEP is declaring a $1.00 per depositary unit distribution, which represents a 12% annualized yield based on yesterday's closing price and unitholders will continue to have the right to elect whether to receive cash or additional depositary units.
Source: Seeking Alpha-IEP Press Release (emphasis added).
Ok, so the cut comes earlier than expected, but it is a bit less than what we thought. How do we read the tea leaves?
Q2 2023
IEP reported yet another weak quarter, with a massive $417 million loss.
Over the last 6 months, indicative net asset value or NAV as calculated by IEP decreased $621 million. All of this happened as the indices were soaring. Value continues to underperform, and this is hurting the books. As bad as this drop is, it is far worse when you incorporate what is happening to the unit count. As we have discussed in the past, IEP's generous distribution policy has been enabled with the large unitholder, Carl Icahn, reinvesting all proceeds via units. So the unit count has been exploding up and this has become worse with a falling price. If you look at the income statement , though, the impact appears less than what it actually is.
That is because you are looking at the weighted average unit count . The actual unit count on June 30, 2023, was far higher.
Depositary units: 393,458,414 units issued and outstanding at June 30, 2023 and 353,572,182 units issued and outstanding at December 31, 2022
Source: IEP Q2-2023 8-K .
With 400 million units outstanding, IEP would be doling out an effective $3.2 billion in distributions, if it continued with $2.00 per unit, per quarter. IEP's own NAV calculation is $5.0 billion. Read that again, in case you missed it. What the yield chasers were expecting is that the company can easily pay at a 60% annualized rate on NAV while making losses. There is improbable, there is impossible, and then there is this situation, which left impossible far behind.
Outlook
With a $1.00 per quarter distribution, IEP will be paying out $1.6 billion equivalent annually. Yes, yes, we know. Carl Icahn will be reinvesting, so actual cash outflow will be far less. Of course, as the unit/share price reflects, reinvesting will happen at a far lower price, ballooning the amount of units issued.
IEP's current NAV per unit, calculated by the company (not by a third party shorting the stock), is about $12.50. Assuming the total NAV stays flat for the next year and all of Carl Icahn's distributions are reinvested, total unit count will go sailing past 500 million units and NAV per unit will be under $10.00. So you have an endless treadmill here that is going to get steeper and steeper.
The math is still not in your favor. The option pricing now suggests a distribution elimination by March 2024, so we will double down on our prior verdict. You will see a sub 50 cents distribution soon and an elimination or a virtual elimination (say 10 cents a quarter), is the most likely outcome.
How To Play
In our comment section of our last article, we had suggested that the GAP fill near $34.00 would be the point to aim for a short.
We did get that GAP filled on the "good news" that Carl Icahn restructured his personal loans and those would not be attached to the unit price.
So those that took on the stock at that point, you did well.
What is most interesting this morning, though, is the fact that the bonds are selling off.
We think this is coming from two areas. First, the distribution cut is not enough. Probably the bondholders expected an elimination as even the cash outflow to secondary unitholders is too much of a drain.
The second area is the drop in NAV, which reinforces the problem that refinancing will pose in the next 12-24 months. At present, the nearest maturity bonds are possibly the only long play in town. The September 2024 maturities have a double digit yield to maturity and if we had to play anything with IEP from the long side, that would be it. Everything else after that is too risky.
The Icahn Enterprises L.P. common units are likely to see single digits as the distribution gets eliminated in the next year. At a minimum, we expect them to trade at NAV, which is still far lower than the pre-market price. The most important play here is the lesson. That lesson is that math does not lie.
Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
For further details see:
Icahn Enterprises: Distribution Cut, Don't Get Too Comfortable With The 18% Yield