Do you have any estimate of recovery rates upon default? There is a large market for these infrastructure assets. If their book isn’t overstated this seems like a killer opportunity
The average LGD (loss given default) for all HY bonds is 75%, which means a recovery rate of 25%. However, this figure applies to all HY issues regardless of their credit rating, type of debt, or industry.
So, for infrastructure plays, we have to dig deeper. A recent article from Macquarie (link below) states that for infrastructure debt, the recovery reaches 70.0%.
The 2026 bonds are Senior Secure, while the 2029 bonds are one step below in the capital structure but still Secured. Given the company’s troubles in adverse scenarios, the recovery rate will probably be below 70%. It really depends on the reason for debt restructuring: a technical default, a debt service default, or bankruptcy.
That said, considering risk-reward and probabilities, the NFE debt is a lucrative opportunity. Of course, this is distressed debt play. Treat it as such.
It is a positive indicator; all FEMA-related good news increases the likelihood of a successful 2026 issue redemption, hence reducing the downside risk.
Whats your thought on buying the stock at these levels? I would have to think if you deem the 2026 bonds as medium to low risk the equity should have more upside if that becomes clearer to the market?
Frankly, I am not a huge fan of NFE equity. Given the alternatives, in that case, NFE distressed debt, NFE shares offer questionable payoffs and massive downside risk. I am happy with NFE bonds; they provide predefined payoffs, and default probabilities are knowable (to some degree).
An exception would be a tactical equity trade to bet on a short-lived "dead cat bounce". For truly speculative players, NFE call options are quite interesting. They offer path dependency immunity (prematurely hit stop loss due to whipsaw) plus explicit asymmetry.
CEO owns 53,000,000 shares and insiders 40% of the common equity. I would like to think that given the CEOs experience navigating debt and capital markets. He can right side the picture for the equity holders. The equity currently trading at $2.78 and has already taken a major hit from high $6 low $7. Most of us cannot buy the bonds so equity could be interesting but not without risks. I.e. a total wipeout in a restructuring. The thing that really is concerning is the fact that the company has missed filing a timely 10 Q.. which clearly is a violation of debt covenant and SEC rules. Deadline was May 20, 2025. Any thoughts with respect to this? Thank you very much for your input on this well written analysis.
As you pointed out, the 10Q delay is a covenant violation. My guess is that NFE will struggle in the coming months because this would not be the last violation. We are still in the fog of war, as they say. Good for us, bottom-fishing fans.
Wes' stake in the game hints that his interest is presumptively aligned with shareholders’. This means a share dilution is less likely, yet not impossible. Let’s see how the FEMA claim and Brazil auction are going.
If they play out well, NFE may rise again. If not, contractual default will come true, followed by debt restructuring and, in that case, probably share dilution.
Lack of access to NFE bonds truly sucks. Equity cannot provide the same payoffs/odds profile of the bet.
Nevertheless, options are a curious way to bet on NFE recovery. I like NFE calls with January 2027 expiration. Considering IV, they are overvalued. However, this is NFE equity, and wild swings (+ 200%) in a matter of weeks are the norm.
I wager that NFE may reach $12-15/share by January 2027. Of course, the odds are, at least to say, questionable. That said, ITM probability is good enough for me to take the plunge with a tiny bit of my book.
The NFE bonds have been struggling recently. Nevertheless, I still hold my thesis (and my NFE bonds). Extreme volatility is a feature, not a bug, when discussing distressed debt, as seen in the NFE case. Of course, the risk from total loss is always on the table, but it is way lower compared to equity.
The 2026 bonds remain de jure and de facto secured, but their creditor protections have been weakened.
The 2026 issue has been moved one step down on the capital structure below new credit facilities (Series I/II). After November 2026, some protective covenants were relaxed, including restrictions on additional debt, asset sales, and key financial ratio requirements (consolidated first lien debt ratio).
On May 12, 2025, an amendment was introduced to introduce a temporary suspension (covenant holiday) for financial ratios, compliance in Q2 2025, including the fixed charge coverage ratio.
In summary, the 2026 bonds are still Senior Secured as initially issued, but with a reduced level of safety.
Do you have any estimate of recovery rates upon default? There is a large market for these infrastructure assets. If their book isn’t overstated this seems like a killer opportunity
The average LGD (loss given default) for all HY bonds is 75%, which means a recovery rate of 25%. However, this figure applies to all HY issues regardless of their credit rating, type of debt, or industry.
So, for infrastructure plays, we have to dig deeper. A recent article from Macquarie (link below) states that for infrastructure debt, the recovery reaches 70.0%.
The 2026 bonds are Senior Secure, while the 2029 bonds are one step below in the capital structure but still Secured. Given the company’s troubles in adverse scenarios, the recovery rate will probably be below 70%. It really depends on the reason for debt restructuring: a technical default, a debt service default, or bankruptcy.
That said, considering risk-reward and probabilities, the NFE debt is a lucrative opportunity. Of course, this is distressed debt play. Treat it as such.
Link:
https://www.macquarie.com/kr/en/about/company/macquarie-asset-management/institutional-investor/insights/unpacking-the-credit-mechanics-of-infrastructure-debt.html
are any of the bonds registered or are they all 144a/regs QIB only ??
At least for EU investors, both issues are available for retail investors. I have both in my IBKR retail account.
Here are the ISIN codes:
September 2026 6.5%; ISIN USU6422PAC24
March 2029 8.75%; ISIN USU6422PAD07
ah yes. these bonds are only available to offshore investors that can buy REG-S. In the USA, only QIBs can purchase the 144a
How does this news fit into your thinking?
https://x.com/tradernorway/status/1924162338372174191?s=46&t=modj6GemmO829Bz9jFfjWQ
It is a positive indicator; all FEMA-related good news increases the likelihood of a successful 2026 issue redemption, hence reducing the downside risk.
Whats your thought on buying the stock at these levels? I would have to think if you deem the 2026 bonds as medium to low risk the equity should have more upside if that becomes clearer to the market?
Frankly, I am not a huge fan of NFE equity. Given the alternatives, in that case, NFE distressed debt, NFE shares offer questionable payoffs and massive downside risk. I am happy with NFE bonds; they provide predefined payoffs, and default probabilities are knowable (to some degree).
An exception would be a tactical equity trade to bet on a short-lived "dead cat bounce". For truly speculative players, NFE call options are quite interesting. They offer path dependency immunity (prematurely hit stop loss due to whipsaw) plus explicit asymmetry.
CEO owns 53,000,000 shares and insiders 40% of the common equity. I would like to think that given the CEOs experience navigating debt and capital markets. He can right side the picture for the equity holders. The equity currently trading at $2.78 and has already taken a major hit from high $6 low $7. Most of us cannot buy the bonds so equity could be interesting but not without risks. I.e. a total wipeout in a restructuring. The thing that really is concerning is the fact that the company has missed filing a timely 10 Q.. which clearly is a violation of debt covenant and SEC rules. Deadline was May 20, 2025. Any thoughts with respect to this? Thank you very much for your input on this well written analysis.
As you pointed out, the 10Q delay is a covenant violation. My guess is that NFE will struggle in the coming months because this would not be the last violation. We are still in the fog of war, as they say. Good for us, bottom-fishing fans.
Wes' stake in the game hints that his interest is presumptively aligned with shareholders’. This means a share dilution is less likely, yet not impossible. Let’s see how the FEMA claim and Brazil auction are going.
If they play out well, NFE may rise again. If not, contractual default will come true, followed by debt restructuring and, in that case, probably share dilution.
Lack of access to NFE bonds truly sucks. Equity cannot provide the same payoffs/odds profile of the bet.
Nevertheless, options are a curious way to bet on NFE recovery. I like NFE calls with January 2027 expiration. Considering IV, they are overvalued. However, this is NFE equity, and wild swings (+ 200%) in a matter of weeks are the norm.
I wager that NFE may reach $12-15/share by January 2027. Of course, the odds are, at least to say, questionable. That said, ITM probability is good enough for me to take the plunge with a tiny bit of my book.
Thank you for your response Mihail, have a great weekend!
Thank you for your response Mihail, have a great weekend!
Thank you for your response Mihail, have a great weekend!
These bonds have fallen nearly 40% since your write up and are now bid at 35 cents on the dollar. Is your thesis still in tact?
The NFE bonds have been struggling recently. Nevertheless, I still hold my thesis (and my NFE bonds). Extreme volatility is a feature, not a bug, when discussing distressed debt, as seen in the NFE case. Of course, the risk from total loss is always on the table, but it is way lower compared to equity.
Were protective covenants not stripped out of the 2026 bonds? Making them effectively unsecured?
The 2026 bonds remain de jure and de facto secured, but their creditor protections have been weakened.
The 2026 issue has been moved one step down on the capital structure below new credit facilities (Series I/II). After November 2026, some protective covenants were relaxed, including restrictions on additional debt, asset sales, and key financial ratio requirements (consolidated first lien debt ratio).
On May 12, 2025, an amendment was introduced to introduce a temporary suspension (covenant holiday) for financial ratios, compliance in Q2 2025, including the fixed charge coverage ratio.
In summary, the 2026 bonds are still Senior Secured as initially issued, but with a reduced level of safety.