pxupa very attractive, page-25

Nothing to fear but fear itself?

My problem is probably a lack of fear. Not that I don't sht myself seeing my finances stripped away on a dialy basis or feel sick at the prospect of serious money dissappearing into an insolvency money pit. In fact my keyboard has a moulded plastic cover to stop vomit lodging under the keys. I have the unfortunate disposition of clynical analytical descisioning combined with a gamblers optomism and preparedness to play the odds.

Patience and fear are probably the best attributes to survive in this market...... unfortunately not me. I'm a sucker for a bargain and like a fish with ADHD if you wave it infront of my nose I will take it hook and all. The one obvious downfall to long-term value investing in this bear market is that it WILL get cheaper the next day. Long-term value is of little consolation when you see your stock drop 25% the next week. So probably nothing is worth buying now because it will all get cheaper..... until it doesn't! At some point in the future good money will be made by those that buy big near the bottom.

The above is conventional wisdom with which to temper my view on PXUPA amongst other hybrids. I had a chat with one of the executive team at PPX and I am comfortable buying at these prices other than the obvious risk that it could always become cheaper. sgoni is definitely switched on and has been right on many financial stocks so I wouldn't wager against his call of sub $20. I think it definitely worthwhile to buy some now however just in case the world doesn't end for PPX tomorrow. A summary of my chat with management and my thoughts.

The interest debt covenent will be breached if sales are not completed by Dec 2008. The banks are well aware of the situation with PPX and although it was put in as a protective measure if required but is not a show stopper. There is not a hard and fast outcome of events if the banks choose to chase an "accelerated repayment" agenda, it triggers a negotiation period about what measures should be taken.

The obvious measures the banks can take to accelerate repayment are 1) asset sales or 2) restrict dividends and re-direct free cash flow to repayments. Asset sales are underway and if they drag on there is really not much point in the banks jumping up and down as the outcome is the same. Suspending the dividends is a possibility that while not greatly accelerate debt repayment certainly helps a little bit and sends a message to management to hurry up an accept an offer.

Most importantly to PXUPA, the view conveyed to me was that interest payments to PXUPA are unlikely to be suspended even if dividends were suspended. Although on the equity side of the balance sheet, PXUPA was clearly issued as a debt instrument without any equity upside exposure and will be treated as debt to be serviced. I suspect the banks will also agree that the PXUPA's are a debt not voluntary equity dividend distribution and will agree to leave them be even during an accelerated debt repayment agreement.

From my limited research I believe that Allco and other suspect companies continued to pay interest on their hybrid debt securities right up to administration / receivership despite having dividends suspended long ago. This is reasonable precidence that hybrids will be treated as subordinated debt right up to the end (hoping that never happens of course).

In terms of liquidity, management mentioned it could enter the market and buy back it's own PXUPA, as soon as sales go through and excess funds are generated, as the most profitable capital management tool available. Say bidding at $50 and thus removing $2 of debt for $1 purchased while also saving circa 15% in annual interest costs. Of course predicated on successful sales and truning the business around but a credible and compelling action.

Risk abounds for sure and sellers have turned a crashing hybrid market, based on collapsing RBA cash rates with comensurate falling yields, into a rout for fear of solvency risk associated with PPX. For existing holders now well underwater it probably makes sense to take some money off the table at $30 in case things get worse while keeping a proportion if things get better. Stop losses and risk minimisation as such. New buyers have no such legacy issues and should be grinning like a horse eating thistles.

I have taken a reasonable position and kinda hope they get cheaper but then if they do my fear factor may over-come by better judgement and stop me buying the rest. With $5.25 interest payment going ex in under 1 month they look cheap but yeah...... they will probably get cheaper.

I take no responsibilty for the veracity of my comments or interpretation of management's comments.

goodluck