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Francis Chou Comments on Resolute Forest Products

March 11, 2014 | About:

The common stock of Resolute Forest Products (NYSE:RFP) contributed significantly to the returns of the Fund. We do not normally buy common stock for the Fund but every now and then, due to restructuring, we receive shares for a debt security we hold. Such was the case with RFP. We received shares of RFP for our holdings in McMinn County, Tennessee revenue bonds. To cut a long story short, we purchased 15.48 million bonds for a total consideration of $155,800. We paid roughly one cent on a dollar for each bond, preparing to hold them for several years. We knew McMinn’s obligor was AbitibiBowater and we have been following AbitibiBowater story for a while (AbitibiBowater changed its name to Resolute Forest Products in 2011). McMinn bonds belong to a class of creditors that were in dispute with AbitibiBowater 7.95% class bonds, a dispute many thought would not likely be settled for several years. We figured that even if McMinn lost the lawsuit, and 100% of the disputed claim was awarded to the 7.95% class, we would not lose money on the McMinn bonds considering the price we paid. Lo and behold, a few months later, the lawsuit was settled and we received 52,564 common shares of RFP for our holdings of McMinn bonds. At the year-end price of $16.02, these shares of RFP were worth approximately $842,075.

Such a windfall comes maybe once every 20 years and we would not recommend this case as a regular way to invest in bonds. You needed a seller who was desperate to sell his holdings within a short time frame but could not find a buyer. And in a fortuitous way, we had invested in RFP for several years and were well acquainted with the story and the lawsuit. Further, the outcome was also dependent on a quick favorable legal judgment. The lawsuit could have dragged on for years which would have diminished the annualized returns by a considerable margin.

From Franis Chou's 2013 letter to shareholders.

Rating: 5.0/5 (3 votes)



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