As noted by many people in the comments today the preferred shares of Compass Diversified (CODI) are down dramatically this morning.
Last night I posted in ‘headlines‘ a press release from CODI which was for investors to not rely on recent financials. The article is here.
Almost without exception these types of things always send shares lower—most of the time they recover–but maybe they do and maybe they don’t–as always uncertainty kills.
The CODI preferreds can be seen here–all are off $6-7/share this morning.
Maybe these are a bargain? I personally never buy into these situations–but that is just me–maybe others can pick up shares cheap.
I wonder if “irregularities” concerning “inventory” and “financing arrangements” could be code for “we’ve been buying illegal conflict diamonds.” Any chance?
There’s a nice little war going on in the Congo still….
I think it’s going to be much worse than that, at least from a shareholder perspective. Like “we financed inventory that doesn’t exist” or something.
Well, their jewelry is hideously ugly, to the point of being creepy. It’s like what would happen if Vladimir Harkonnen became a jewelry designer….
Derek –
As to your comment:
“Well, their jewelry is hideously ugly, to the point of being creepy. It’s like what would happen if Vladimir Harkonnen became a jewelry designer….”
The average sale at Lugano is $450,000 – so it seems that many ultra-wealthy folks would disagree with you. Of course, many of them probably have too much money to spend. Opinions vary, but implying that a stunning 33-carat diamond ring is creepy seems like a stretch.
Here is a recent YouTube video from Forbes of the Lugano CEO (that was just fired) and the customer experience at the stores:
https://www.youtube.com/watch?v=MmcStXdKDdY
OC –
Regarding your post:
“I think it’s going to be much worse than that, at least from a shareholder perspective. Like “we financed inventory that doesn’t exist” or something.”
Would have to disagree with your statement (of course nobody knows for sure until the lawyers and forensic accounting team are finished). From CODI’s 5/7/25 press release disclosing the situation:
“At Lugano, Josh Gaynor, who joined the company in 2024 as President, has been appointed interim CEO. He and Lugano CFO Christoph Pachler, who also joined Lugano in 2024, will step in to handle all of Mr. Ferder’s former responsibilities.”
There is no way CODI would have kept the President and especially the CFO of Lugano on board if the accounting irregularities were systemic and wide spread across all management levels. You don’t put the foxes in charge of fixing the hen house. It sounds like one rogue employee – who unfortunately happened to be the CEO. My guess is the Lugano CFO was the whistle blower who informed CODI senior management of the problem.
It also seems like a mild positive that any restatement will only be for 2024, and not prior years (CODI acquired Lugano in 2021). So that tells me the problem is fairly recent.
We should have a resolution soon. I’m still trying to pick up CODI preferred shares below $16.
I don’t see any mention of the percentage of revenue or profit for this portfolio company. Both are reported significant percentages. Not for me. GLTA
Reposting my comment from Reader Alerts a bit ago….. Lugano was over 50% of CODI’s EBITDA in Q4, and is also the about only business (of the 9) that is growing. Lugano was about 40% of full-year 2024 EBITDA. Lugano is the key engine at CODI. If there is big fraud there, its a problem. Also note that even though CODI has a private-equity like strategy, these businesses DO NOT get there own financing (like PE funded firms), CODI finances them all directly, and as a result, in addition to its $260 million equity investment in Lugano, CODI has a $600 mm+ intercompany loan to Lugano (financing inventory, working capital). I would recommend looking at their last presentation on the CODI website which shows trends for each business, etc. It might all work out, who knows….all depends on what is actually going on with Lugano.
Also, its pretty easy to look at the EBITDA from each of the 9 businesses, and apply your own valuation to each and figure out what you think each business is worth, and then compare the totals to the debt plus preferred. Also have to adjust for the percent of each business that CODI actually owns (example they own 60% of Lugano). CODI paid high prices for most of these businesses (like 12-17x EBITDA) that were supposed to be growth platforms, but most of them are not growing, so they are probably not worth what they paid. Will be interesting to watch this and see how it shakes out.
This is correct and why the market is so concerned. The debt is not contained in individual companies or assets at CODI (such as the way all the Brookfield entities do, where Brookfield has very little recourse debt to the parent companies… so subsidiaries can fail and that debt doesn’t have to be paid by parentco, although they lose the asset in the subsidiary). At CODI, all debt is at parent company so effectively all of its assets are cross collateralized. So, if Lugano is really bad (which I have no idea how bad) and is by far the biggest asset at CODI and its EBITDA is way off then they will need waivers and will bust their debt covenants which is 5x gross debt to EBITDA.
If it’s just a minor restatement this is a golden opportunity, but if real bad well it could be real bad for all layers of capital structure.
As for me, I owned these prefs and sold premarket yesterday as their were bids >$20 for the size I had. Might buy back as smoke clears, if they stay depressed… but when you have bad internal controls over your biggest and most important investment, that you have been dumping capital into and promoting as the star of the show, it scares me.
Actually if its a minor restatement the equity might be the better play if gambling on a good outcome as I imagine 50%+ upside there whereas I’d bet prefs only get back to low 20’s, and even then they have an atm open on prefs so who knows if they abuse that here or not?
My 2c
I was unfortunately already holding CODI-B prior to the big drop, but I decided to double down this morning at 15.72. I don’t know what the full details of the investigation are, but my simple theory is that knowing what I currently know right now, CODI-B seems underpriced relative to A and C.
Right now, I’m showing CODI-A at a current yield of 11.57% (7.25% coupon), CODI-B at 12.41% (7.875% coupon), and CODI-C at 12.12% (7.875% coupon). A and C are fixed, while B floats at TSFR3M+4.985%+0.26% in 2028. Since I’m not expecting sub 2% interest rates, all else equal this makes me think B is the bargain of the bunch.
But that logic only makes it a bargain relative to its brethren. I’d certainly be interested to hear reasons why they are all going to default. Unless the Lugano problems are indicative of the rest of their holdings, I don’t think it’s an existential risk for them.
aren’t B and C cumulative, but A isn’t?
I see the debt due in 2029 and 2032 offered in the low 9’s.
Yes, my understanding is that A is non-cumulative, but B and C are cumulative. Until now I had been trusting QuantumOnline for this (https://www.quantumonline.com/ParentCoSearch.cfm?tickersymbol=CODI), but I did just click through and check that each prospectus matches this claim.
Glad I got out of this one a while back! That said, this is definitely tradeable here now.
For me, tradable would mean I can short it for a reasonable fee as well as get long.
The fees on IB to short these are prohibitive.
I’ve noticed Fidelity typically has much better, or no, fees to short many stocks.
On CODI, I just don’t want to do the work to figure out if this is worth trading.
I was lucky enough to survive Franchise Group’s preferred unscathed and I am not sure I want to go through that again. I was thinking of dumpster diving and decided against it. It just seems like both the common and preferred were punished beyond what they should have been. Below 16 for the higher yielding preferred does not seem like a horrible purchase if one can swing it. I just was not brave enough and did not pay enough attention to this company to have the moxie to do it.
“The Board and senior leadership team at CODI are committed to seeing the investigation through and are actively evaluating all available options to preserve value and protect all layers of CODI’s capital structure, including common shareholders”
Why was this statement necessary?
Dan,
This is just management trying to calm shareholders to stop the panic selling.
It doesn’t mean much of anything (practically) other than “the Board and Senior” leadership team:
1. are saying they weren’t the bad actors (whatever is going on), and
2. are trying to create an “us v them” mindset with the Board/mgmt on the side of the investors, who together will be trying to figure out who the bad guys are and what they did.
Corporate crisis management 101.
The common is down much more: 60%, 17 to 7.
Lugano is a jewelry retailer located in Newport Beach, CA that CODI paid $256M for back in 2021. Shouldn’t be too complicated of a business. Sounds like the Lugano CEO was playing games with inventory/cost accounting. Immediately fired.
https://luganodiamonds.com/
CODI owns 9 companies – the market is treating this like all 9 are now toxic. I have been buying the CODI preferreds on the smash lower. Hoping they will eventually be home runs. But these selloffs usually take a few trading days to play out. DYODD.
Doc my reading told me they have been using the preferred C as an ATM and issuing more shares.
Charles –
“my reading told me they have been using the preferred C as an ATM and issuing more shares.”
That is correct. There were 4.6M shares of CODI-C outstanding as of 12/30/23 (same as when preferreds were issued in 2019), and 6.754M as of 12/31/24. Same deal with the Series B, as they added 2.2M shares in the last year. Also added 551K shares of Series A.
But one could argue they were fortunate to issue nearly 5M more shares before they collapsed 30%. CODI raised $115M in proceeds from issuing 4.897M in preferreds in 2024 at an average cost of about $23.50/share.
But they won’t be able to issue any more common or preferred until the company regains the confidence of investors and gets past this Lugano crisis. I’m betting they will.
How are the other 8 being managed is the question? Lots of garbage in the PE space right now resulting from the easy money years and a scramble among firms to do deals. I bet the whole space blows up, with bank loans, BDC’s and CLO’s following suit.
just because a bunch of junk goes no-bid doesn’t mean that it’s worthless. if you’re levered, fine, take the call…but the whole 1tn muni market is no bid and it functions fine as collateral…the cash either flows or it doesn’t. Even treasuries like to go no-bid every once in a while, as a treat. It creates moral hazard because people know that the Fed will inject liquidity, so people are leveraged up too much, but that’s their problem, not mine.
I don’t think PE bits and pieces are gonna go to zero, I just think they can no longer outperform. No more ‘senior’ and ‘mezzanine’ loans from crap companies that can barely borrow money for me.
that said, I’d rather have the bb bit of a big bank like statestreet than a bunch of loans from tiny companies all bundled together.
they own sterno..interesting…and some old names. I bought 50 of the preferred for a laugh.