Some new events have occurred at a company that I wrote about several months ago, which prompted a sell-off of the stock. As a result, I think it’s worth another look.

Back in March, I wrote a thesis for the preferred equity of Maguire Properties, Inc. (MPG), and left some open questions on the value of its common equity. A sharp price recovery discontinued that series; I do not write much about stocks that I have sold.

Some recent events, specifically the resignation of the CEO Nelson Rising, prompted a sell-off of the stock.  I think it’s about time to pick up where we left off and answer those open questions.

• *Not much in recourse obligations left, the Orange County (OC) strategy should restart cash flow generation. There is cash, unencumbered land, a 20% participation in a profitable JV, and large net operating losses (NOLs) to carry them through the turnaround. The preferreds must be an easy kill. Is there more value left for the common?
• *Do we think that the common is not only undervalued, but has more upside than the opportunity cost: the potential 3x of the preferreds and its higher preference in the capital structure?

As we discussed, MPG is a highly indebted REIT that’s barely cash flow breakeven. Since that write-up, the preferreds have appreciated substantially. Meanwhile, the company has practically eliminated all recourse debt and corporate guarantees, so MPG may loose some valuable properties in the process. But each mortgage is independent, so a cash flow positive core will always survive.

Debt restructuring is not the only recent change. The company also has a new name — MPG Office Trust — the consequence of the firing and disentanglement of most business relations with Mr. Maguire. It also has a new CEO, David Weinstein, the consequence of the divergent views on the capital structure of Mr. Rising and the board.

Over the last year my main worry with MPG was a potential dilutive capital injection. I wasn’t opposed to it at a property level, with an asset sell or two included if necessary.  I do oppose to one at the corporate level, though, because at this stock price, it defeats the purpose of the well-conceived debt structure. This worry has been mitigated with the leaks following the CEO resignation. I think it’s pretty clear that the board defended shareholders’ equity with its recent actions.

Some of you will challenge this view that the market may be missing something. After all, MPG is not your usual small cap. It is widely known in the competitive REIT sector, so it should not lack suitors if it had substantial value left. The thing is, there’s a long line of suitors. For a start:

• * Winthrop Realty Trust (FUR) was a large holder of preferreds, and showed interest on a more active role before selling.
• * Brookfield Properties (BPO) has been mentioned as interested in several articles, including the Wall Street Journal article on the resignation of the CEO. One of their analysts has been a staple in recent MPG conference calls.
• * Appaloosa has a very large position — close to 10% — in the common, and most probably in the preferreds, as well.
• * Third Point had a large 10% position that was sold. Dan Loeb, in one of his tirades, complained about the company rejection of a $20 buyout offer in June 2008.
• * Balyasny Asset Management, besides being implicated in the recent insider trading scandal, bought a 5% position between Q4 2009 and Q1 2010
• * Robert Maguire, founder and former CEO, increased his position to close to 10% — prices between $1.4 and $2.5 — while firing a 13D between February and March this year.

This is quite substantial blue blood interest, especially for a company valued at only $100 million. The question is — what do they like about MPG? If you go the traditional way of valuing a REIT by using a multiple of net operating income (NOI), you would be disappointed. There is not much NOI.

At the same time, that method misses the fact that MPG was known for their subpar NOI generation versus its  net asset value (NAV). Its downtown leases are not paying sufficiently for the replacement cost and, for this reason, there is no new supply expected for years to come. In the meantime, the office vacancy is below 20%, and it will be absorbed rapidly after the downturn ends. No new supply, continuing downtown growth — I wonder what will happen next.

Past history is the way I have seen people arguing on behalf of MPG. They extrapolate its share price before the OC acquisition, and conclude that it’s worth more than $40 per share. But that’s not right either: the OC debacle cost MPG significantly, since they had to refinance and extract equity from the core Los Angeles CBD  to buy those properties … properties that are being handed over.

I think there is value — substantial value — but it’s going to take a long analysis. Please bear with me, and let’s hope that this time, the price doesn’t jump before we finish the series.

As I mentioned last month, I’m sharing some interesting possibilities in the financial sector. Next up is Newbridge Bancorp. (NBBC). Here are some quotations from the latest earnings report.

• –Local Market Share: With approximately $2.0 billion of total assets, NewBridge Bank is one of the largest community banks in North Carolina. Based on deposit market share, it’s the largest community bank in the Piedmont Triad Region of North Carolina, the Wilmington, NC area and Harrisonburg, VA, with 33 offices.

• –Growing Core Deposits: Increased 7% in the quarter to $886 million.

• –Well Capitalized: Tier one capital as a percentage of average assets was 9.02%, and total capital as a percentage of total risk weighted assets was 12.44%, well above the levels required to meet the “well capitalized” standards of 5% and 10%, respectively.

• –Well Reserved: Allowance for credit losses was $35.5 million, 2.48% of total loans, or 63% of nonperforming loans. Excluding loans for which the full anticipated loss has been charged off, the allowance for credit losses totaled 108% of nonperforming loans, compared to 105% at December 31, 2009.

• –Nonperforming Assets Stabilizing: Increased $462,000 to $86.0 million, or 4.40% of total assets, at March 31, 2010, from $85.6 million, or 4.40% of total assets, at December 31, 2009.

• –Nonperforming Loans Declining: Declined 11% from June 2009 peak to $56.7 million or 2.90% of total assets.

• –Profitable: We achieved a first quarter improvement in pre-tax income of $7.0 million from the quarter ended March 31, 2009, to $476,000 from a loss of $6.5 million.

• –High Net Interest Margin: Increased 98 bps over prior year’s first quarter, 34 bps over fourth quarter 2009, to 3.97%.
• –Net Interest Income Increasing: 23% over prior year’s first quarter.

• –Provision Expense Declining: 56% from prior year’s first quarter.

• –Efficiency Improving: Excluding $1.7 million expense/loss related to Other Real Estate Owned, efficiency improved to 70% in the quarter comparing favorably to 84% for the three months ended March 31, 2009.

• –Bolt-on acquisitions: We are actively exploring opportunities to grow non-interest income through acquisitions such as Bradford Mortgage, although organic recruitment of talent is likely to remain our best opportunity for growth in the near future.

• –Low Interest Rate Risk: NewBridge Bank maintains a largely neutral interest rate risk position and would generally be unaffected by most rising interest rate scenarios.

They seem to show a well-capitalized bank that, once again, is profitable. Where loan problems peaked almost a year ago, provisions and non-performing loans seem to have stabilized and started to decline. It’s almost impossible to believe that this bank is priced at 0.35x tangible equity (TE) and 0.5x tangible common equity (TCE).

Too good to be true?

It seems too good to be true, so I tried a more stringent capital ratio: tangible common equity over tangible assets (TCE/TA) to avoid including the preferred equity and intangibles. And it is a healthy 5.5%, better than several national banks.

Next, having seen how some banks hide problems with non-performing assets (NPAs) by fast and furiously selling their other real estate owned (OREO) and taking big equity hits, I checked the common equity trend. It has stabilized, even though the expected loss for a significant part of their non-performing loans has been charged off.

TCE/share

Q1 2010            6.85
Q4 2009            6.83
Q3 2009            6.94
Q2 2009            6.98
Q1 2009            7.38

What about the future? The review of a bank portfolio risk profile is unavoidable in these times. And a 12.1% of the portfolio in construction and development loans (C&D) seems okay in my book.

The only reason I could find for this bank deep discount, besides the new regulation uncertainty, is the 29.7% in commercial real estate loans, but this does not include the risky CRE construction and development loans that are included in C&D. As we have discussed, the risk profile of these loans is much safer than C&D, and bad underwriting should be transparent by now; but it’s simply not there in the numbers.

Did I mention the insider buying? This is another small bank where the CFO has been buying: 40,000 shares over the last year, the last few in May.

Consider the optimistic outlook after several quarters of conservative guidance:

“Through the first three months of this year our financial results have closely tracked our 2010 profit plan. We are optimistic we will have a profitable year that will reward our shareholders. Tough actions we took early in this credit cycle are resulting in improvements thus far this year. We made realistic mark-to-market adjustments on our problem assets and established strategies to reduce expenses and improve our operating margins. These factors should benefit us for the rest of the year. While our net interest margin has steadily grown over the last four quarters, the benefits of lowering deposit costs has largely been realized; therefore, we anticipate a flattening but stable net interest margin in the range of 4%. NewBridge Bank maintains a largely neutral interest rate risk position and would generally be unaffected by most rising interest rate scenarios. The strong expense controls demonstrated throughout 2009 are continuing in 2010 as we maintain our disciplined cost management culture. We are actively exploring opportunities to grow noninterest income through acquisitions such as Bradford Mortgage, although organic recruitment of talent is likely to remain our best opportunity for growth in the near future.” – NewBridge Bancorp CEO (emphasis added)

Disclosure: Long NBBC

As a consequence of analyzing the prospects of the financial sector, I have come across some potentially interesting investments. I’ll mention some of them but, given that banks are complex to analyze, I’ll emphasize breadth over depth. If they capture your interest, we can go into more detail in a future post. I would appreciate readers’ comments, because local knowledge can be critical when investing in banks.

LNBB is a small bank from Lorain, Ohio with a strong local presence:

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LORAIN NATIONAL BANK
MORGAN BANK

Deposit Market Share
(2009)

Lorain County             #1 with 23.6% share
City of Lorain              #1 with 41.8% share
Amherst                       #1 with 29.4% share
Oberlin                         #1 with 52.3% share
Vermillion                    #2 with 29.4% share

Hudson                          #1 with 22.1% share

*************************************************

It appears that its credit indicators are stabilizing at a very manageable 3.8% non-performing assets to total assets (NPAs), despite high levels of unemployment (above 10%). Even more important:

Total 30- to 90-day delinquency decreased from 1.34% of total loans at December 31, 2008 to 0.75% of total loans at December 31, 2009. 30- to 90-day delinquency as a percent of loan type is under 1% for all loan types.

The 30- to 90-day delinquency is the most-followed indicator of potential future problem loans, and the low levels across all loan types piques an investor’s interest. The bank’s loan portfolio has a low 7.8% of risky construction and development loans (C&D), while the main market concern is probably the 35.6% in commercial real estate (CRE) loans, where the performance is good and improving. It’s worth remembering that CRE loans do not include CRE developments that are considered part of C&D.

Deposits have grown during the last two years from $867M to $981M, and LNBB has been building substantial liquidity, with a very low 82.7% loans over deposits.  The bank is ready to spring into loan generation as soon as the economy allows.

All capital ratios are well above what the FDIC considers well capitalized. But when it comes to banks, I’m very old school, and the bank’s 5% tangible common equity (TCE) over tangible assets (TA) looks a little thin. They have no private preferred listed on their balance sheet, and $25M in TARP, which seems about normal for a bank this size. That means that at some point, they might have the option of issuing privately held preferreds. Considering that they’re profitable ($0.14 per share in Q1 2010), well reserved, and all the credit indicators are improving, I’ll forgive the TCE issue. The probability of a large dilutive capital injection seems low.

It looks like a safe bank, but how cheap is it? Considering that its TCE is $56M, pre-tax, pre-provision earnings in 2009 was a growing $14M. Net interest margin is a very nice 3.7%, and the bank has a commanding market share in its region.  Therefore, $37M of market cap looks very cheap indeed.

Did I mention the insider buying? CEO, CFO, HR included?

For further investigation, the bank just filed their shareholders meeting presentation

http://xml.10kwizard.com/filing_raw.php?repo=tenk&ipage=6909843

Disclosure:  Long LNBB

“Good liabilities are an asset” – Bill Ackman

The thesis has three parts. First, to prove that Maguire Properties, Inc. (MPG) has a margin of safety and its liability structure will protect it from Chapter 11. If that is true, it will become perfectly clear that the unencumbered and non-recourse properties should provide plenty of assets and cash flow to pay the cumulative preferreds in a year or two.

The preferreds have already accumulated $1.9 per share and will keep accumulating $1.9 per year. And there are only 10 million preferred shares with a $25 liquidation preference trading at $9 per share. I think it is safe to say we are looking to a potential 3x in two years with a clear catalyst (dividend reestablishment) and downside protection (properties with non-recourse mortgages and unencumbered assets). And every quarter we wait, at least we are accruing more dividends.

The second part is trickier because it is not only about showing that the common is undervalued, but more importantly, that it has more upside than our opportunity cost: the potential 3x of the preferreds and its higher preference in the capital structure. And there is a real possibility that I may fail to convince you given that an important part of the value in the equity is intangible optionality.

Finally, I think it is important to discuss tactical issues like

• potential for dilutive capital injection (aka OCNF)
• possibility of a tender for the preferreds below liquidation preference (aka NCT)
• catalysts like a potential acquisition or reestablishment of dividends
• protection against a potential crash (preferreds were punished in March 2009)
• use of covered calls and naked puts given the high volatility of the common
• management incentives

So let’s start. “Good liabilities are an asset” is counterintuitive. However, when credit is limited, long-term maturities and non-recourse give management options in negotiations with lenders:

The post is dry, so I hope this chart will make things easier. The top right quadrant (Type 1) is the driver’s seat. But if you have to refinance an unprofitable mortgage, it will be in your own terms because you have time (LT maturities) and you carry a stick (non-recourse). It is much more difficult if you are in the bottom left corner (Type 4). The obligatory maturity payment gives the lender the upper hand. Even a profitable property like Lantana could be a liability.

For the most part, MPG has good liabilities (Type 1 in green). However, even some of these good mortgages, the ones highlighted in red, have some recourse obligations. One is Lantana that was sold in November last year, so problem solved, and another is Griffin Towers recently mentioned in a WSJ article, with a $23 million recourse repo facility.

Also from the good mortgages (type 1) you have probably noticed that several are in default. Those are the ones jingled mailed (OC strategy) that I mentioned in Part 1 of the series:

I’d like to begin my comments this morning with a brief background on the assets involved in our plan announced today. All seven of these assets were acquired by the company after the initial public offering of Maguire in June 2003.Four were part of the acquisition of 24 EOP/Blackstone assets in April 2007. One was part of the acquisition of the common wealth portfolio in March of 2005 and Park Place I and Park Place II were acquired in 2004. The borrower for each of these loans secured by these assets is a special purpose entity formed for the purpose of owning and operating and individual property. Prior short falls in monthly debt service and leasing costs have been mostly satisfied through property level reserves. These reserves were funded at acquisitions with mortgage proceeds. As these reserves are exhausted, capital of contributions to these special purpose entities will be required.

Six of these assets included in the plan are encumbered by CMBS mortgage loans. The master servicers of the mortgage loans in cumber in these properties have been advised that the future operating and debt service requirements for the property will rely only on property generated revenues and as a result, the borrower expects an imminent default under the loan. (CC Q3 2009)

And what is the beauty of this? Well, all these properties have a combination of large vacancies, high interest rates, or both. In other words, they were burning needed cash.

Projected cash flow savings for the next 18 months from the disposition of these seven assets are anticipated to be approximately $30 million. Then in addition for this group of asset, the cash burn associated with this group of assets during the quarter was approximately $6 million so as you can see one these assets are dispose we’re still slightly negative primarily due to capital expenditure but again we are still utilizing restricted cash on our balance to fund the majority of our leasing cost, those are funds that will be defeated overtime and need to replace but from a near term liquidity perspective , that’s a major source of cash that we have to lease of our portfolio. (CC Q3 2009)

Cash Flow Savings = $30 million / 18 * 12 = $20 million per year

Reduced Cash Burn = $6 million * 4 = $24 million per year

Increased Cash Flow = $44 million per year

For MPG, which has only recently achieved cash flow breakeven, this is nothing to sneeze at and should help the company navigate the recourse debt left. Also, it could easily sustain the dividends for the preferreds if the core Los Angeles CBD properties do not deteriorate.

But that is not the end of the story, since MPG is carrying a big stick and there is no incentive for the lenders to foreclose. I do not want to push this point too far given that to renegotiate commercial mortgage-backed securities (CMBS) is difficult given the fragmented nature of its ownership (ie: Stuveysant). But, if MPG, who does this for a living, is not able to lease these properties up to profitable levels, who else will?

Regarding the recourse short maturity portfolio (type 4), most of it is related to constructions loans.

Each of our construction loans is subject to a partial or total guarantee by our Operating Partnership. The amounts guaranteed at any point in time are based on the stage of the development cycle that the project is in and are subject to reduction if and when certain financial ratios have been met. These repayment guarantees expire if and when the underlying loans have been fully repaid.

The terms of our Lantana Media Campus construction loan and Plaza Las Fuentes mortgage require our Operating Partnership to comply with financial ratios relating to minimum amounts of tangible net worth, interest coverage, fixed charge coverage and liquidity. Certain of our other construction loans require our Operating Partnership to comply with minimum amounts of tangible net worth and liquidity. We were in compliance with such covenants as of September 30, 2009.

So selling Lantana, which was a $176 million combined debt, solved a large part of the remaining recourse issues. The rest are substantially smaller and the way they are dealing with it is through a lease up strategy to eliminate some of the recourse obligations:
If you were to look at the portfolio, basically in Orange Country, probably an asset that has got the largest cash burn would be an asset called Griffin towers. It also has associated with it a repurchase facility that is recourse to the company. So there’s a $23.2 million, I believe recourse facility. Though upon Karman Campus, which is 151,000 square foot building in Irvine, it’s a building that we constructed that’s currently empty, that’s obviously has cash burn from interest expense. Again it has a recourse obligation associated with it approximately $7 million.

Then in Central Orange, we also having that, it’s called 3800 Chapman. It’s about 63% vacant, so it is not covering debt service. However, it has a debt service guarantee until maturity for 100% of the debt service. So, our focus there is to lease-up that asset if we can achieve a one-one debt service coverage ratio for two consecutive quarters we can eliminate the recourse and that has been our strategy for that assets.

Then in San Diego, we have an asset called 2385 Northside, which was a construction asset, was 52% leased. That tenant will start paying rent later on in the year. So, it’ll make a debt into the short fall. Currently, we have no rent coming in and we are very close to signing another lease that will take that asset to 72% occupied. Our strategy there has been to focus on leasing because again, that asset has a repayment guarantee that can be eliminated, as you achieve certain debt service coverage ratio. (CC Q3 2009)

If the lease up does not work, Plan B is to sell the property and pay the difference, a strategy similar to the sale of 3161 Michelson in the second quarter of 2009.
Gordon Watson – Ore Hill Partners On the construction loans you’re selling, are you anticipating at this time making any payments from unrestricted cash to get rid of those construction loans?

Nelson Rising It’s conceivable there will be some, but it’s our hope that it will be minimal. The Northside property is on the market. It’s 75% leased. It’s a good property that’s part of a four-building complex, and we are marketing all four buildings and just the newly constructed building separately if someone wants that.

And so I think that will be successful in not having any payment. The offer that we have in bottom of that for in common stock will require some payment to bring that loan to the balance. The purchase price is being offered to us under a letter of intent, not a binding agreement yet, on the 207 Goode would be the loan balance number. These are all transactions in the works. Nothing is closed, and I just don’t have an answer as to the amount that we would be forced to pay. Those loans do have guarantees.

In the case of the Glendale property we have just received a Certificate of Occupancy and as is the case of most construction loans, until you have Certificate of Occupancy 100% of the loan is guaranteed. Once the lender approves the Certificate of Occupancy, the Glendale number will be $9 million. Von Karman is about $7 million, and Northside is about $4 million. But it’s our hope that our sales prices will come close to giving us break even on this.(CC Q3 2009)

So $20 million from the construction projects plus $23 million for Griffin Towers in recourse obligations should not be the end of the world. And there are no really big short-term non-recourse issues (Type 3). KPMG Tower comes due only in 2012 and it is 93% leased so it should not have a problem to renegotiate or sell. The only other issue could be Brea Corporate Place, which is only 56.3% leased.

So let’s consider some assets besides the profitable LA CBD core: cash, unencumbered land, a 20% participation in a profitable JV, and a net operating loss carry forward. First cash:

A total of $62 million in unrestricted cash and it seems that items 2, 3, and 4 are just conservative accounting. And when properties are sold, some of these reserves will be released.

Regarding land, I went through the 10K (Note 22), and $151.6 million in the books is unencumbered (Note 4 in the 10Q).

We also own undeveloped land that we believe can support up to approximately 4 million square feet of office and mixed-use development and approximately 5 million square feet of structured parking, excluding development sites that are encumbered by the mortgage loans on our Stadium Towers Plaza, 2600 Michelson and Pacific Arts Plaza properties, which are in default.

Land held for development and construction in progress includes the following (in thousands):

MPG also owns a 20% interest and is responsible for day-to-day operations of the properties of a joint venture with Macquarie Office Trust. Given that they use the equity method, the cash flow statement only records distributions undervaluing the earnings power of the JV. It also receives fees for asset management, property management, leasing, construction management, acquisitions, dispositions, and financing.

Quintana defaulted, but all the other properties are very profitable. One California Plaza is in a bind given its short-term maturity. But its equity is substantial and it generates cash flow, so it is in a good position for a sell.

With respect to One Cal Plaza, that’s a process that is being basically driven by Macquire. There has been a significant interest in the asset. Again, it’s under contract, and the person who has it under contract with the entity is in the process of raising, trying to put together a final financing on that property. (CC Q3 2009)

And finally, As of December 31, 2008, MPG had a net operating loss carry forward of approximately $270 million that should shield the profits when the recovery comes.

So the equation is easy: not much in recourse obligations left, the OC strategy should restart cash flow generation, and there is cash, unencumbered land, a 20% participation in a profitable JV and large NOL carry forward to carry them through the turnaround. The preferreds must be an easy kill; is there more value left for the common? Stay tuned…

Even during TCI’s most heavily leveraged days, Malone was always careful to use as much non-recourse debt as possible, so if water flooded one “compartment” (i.e. an individual cable system could not service its debt) it would not threaten the entire ship (TCI and its shareholders as a whole) – Investor’s Consigliere Blog

 At MidAmerican, we have substantial debt, but it is that company’s obligation only. Though it will appear on our consolidated balance sheet, Berkshire does not guarantee it. Even so, this debt is unquestionably secure because it is serviced by MidAmerican’s diversified stream of highly-stable utility earning – Warren Buffett

“In my 40 years in real estate, I’ve found there is only one metric that matters — replacement cost” – Sam Zell

***

If you want to invest in hard assets (real estate, utilities, gas pipelines, oil fields, shipping, etc), you need to know how to analyze debt quality. I am not fan of debt, but most of the companies in this arena use easy credit in boom times taking advantage of their tangible and tradable assets, or collateral as bankers call it. Collateral makes it so much easy. So if you want to profit from busts in these cyclical industries it is important to separate those that were prepared for the bust from those that were just trading stinky sardines.

To make things as easy and illustrative as possible, I am going to use as an example Maguire Properties (MPG). What I like about this example is that it is a pure equity REIT buying and developing properties with bank debt. No CDOs, no CMBSs, no RMBSs like a mortgage or hybrid REIT. In summary, no weird instruments that could obscure the lessons of non-recourse debt, stable earnings and buying below replacement costs.

So we are clear, I own MPG stock but it is a small position. There are still some necessary steps in the turnaround and it is just beginning to solve its issues. MPG is unusual both because of the quality of its assets and scale of its debt. The company has assets of $4.2 billion and liabilities of $4.7 billion. So $500 million of negative equity? Yes, but please bear with me.

Robert Maguire is the 74 years old founder and former CEO fitting so well the part of gutsy developer that it is almost tragic. He built several of the most prominent skyscrapers in downtown Los Angeles. The Downtown skyline is dominated by Maguire properties: Gas Company Tower, One California Plaza, US Bank Tower, Two California Plaza, and the Wells Fargo Tower.

 MPG problems can be traced back to the $3 billion purchase in 2007 of a section of Equity Office Properties from Blackstone Group that they had just recently bought from Sam Zell in a legendary deal. These deals were made at the market’s top and included office buildings leased to brokers and financial institutions in Orange County that were at the epicenter of the mortgage bust (i.e. New Century).

Facing a stock price tailspin and concerns about MPG’s financial strength Robert Maguire tried to raise money to take it private. Having failed, he stepped down as chief executive in May 2008.  Those of you that have followed my PRXI posts know how I consider waiting for the change of management a critical first step before investing in a potential turnaround. And that is even truer when the CEO is a brilliant, gutsy and stubborn founder.

Well, it is more of a year since Robert Maguire’s departure and only recently good news are starting to surface.

1. MPG announced on August that it was handing over the keys to seven of its office buildings in Orange County and Los Angeles to lenders because it could no longer afford to carry them. Some of you would be surprised that I consider this good news, but to understand that let me summarize the thesis.
2. On December, MPG announced they sold one of its prized properties: the Lantana Media Entertainment Campus, home to several entertainment firms (i.e.: Larry David Productions of Seinfeld and Curb your Enthusiasm fame). The deal was valued at more than $200 million. Minus $175 million of debt it should report a profit

How is it that abdicating properties or selling prized ones for a small profit improves the prospects of a company? That is the power of non recourse debt. But to understand what is going on, it is important to lay down the investment thesis that is the subject of part 2.