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The Implications Of Linn Energy's Share Exchange

Summary

News broke regarding Linn Energy and LinnCo, whereby the latter has extended, once again, its share exchange program for Linn Energy's units.

The move in question is geared toward protecting investors from restructuring efforts, but many investors aren't biting.

The fine details of the situation seem to indicate a decent amount about the risks of the business moving forward, and how investors can use those to their advantage.

In the past, I've written articles about Linn Energy (NASDAQ:LINE) and LinnCo (NASDAQ:LNCO), such as the one here. For the most part, my work on the topic has covered the company's probability of survival but lately I've been placing some emphasis into the current situation, whereby the entity does risk going bankrupt or otherwise harming shareholders through an alternative restructuring plan. Now, however, something interesting has popped up that I believe investors should be made well aware of, which is the emphasis of this piece.

Linn's share tendering has been extended but changed

On two separate occasions, LinnCo has announced a share exchange program where investors in Linn can turn in one share of their stock and get one share of LinnCo instead. While the two entities are more or less the same, the benefit of exchanging Linn shares for LinnCo shares is that the latter will protect investors from CODI (cancellation of debt income) in the event that debt is restructured through bankruptcy proceedings or some other event.

As an example, let's say that Linn were to restructure its debt such that $1 per share's worth will be forgiven. For tax purposes, Linn would need to count this as income but, since the company is an MLP (Master Limited Partnership), it must pass through those earnings to its investors even if no actual cash will be distributed to them. This means that, although you may be paying $0.37 per share, you would have to claim $1 per share on your tax returns next year for the debt restructuring, keeping all else the same. Unless the company's share price rebounds...


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