11.22.2009

Distressed Debt Example - Accuride

The applications for the Distressed Debt Investors Club continue to roll in. As noted in previous posts, I am trying to stagger the number of people I admit so people that are just learning about the club get a fair chance to apply through the end of the year and into early 2010. That being said, if you have not heard from me one way or the other regarding your membership status, please give me a few more weeks to wade through all the applications.


Currently 40 members have been admitted from a wide range of hedge funds and buy and sell side shops. You would know most of these funds. The strength of the site is the community that is developing - that and the amount and quality of ideas presented to members. I have already learned of three or four situations that I had never even heard of that look to be quite lucrative.

Here is an example of an idea from one of the members of the site:

Accuride

Synopsis:

Accuride filed for a pre-negotiated bankruptcy on October 8, 2009. The proposed plan gives 95% of the re-org equity to the Sub Note holders. The company's operating assets are conservatively worth $715 mln ($130 mln EBITDA x 5.5x EV multiple). As planned by the POR, a $715 mln EV implies an equity value of ~$537 mln. As such, 95% of the new equity would be worth approximately ~$510 mln, providing a 42% return (on all capital invested). The investment's IRR would be materially higher than 42% as the rights offering purchase of the convertible notes would take place at emergence

Investment Thesis:

COMPANY DESCRIPTION:

Accuride is a North American manufacturer and supplier of commercial vehicle components. The company’s products include commercial vehicle wheels, wheel-end components and assemblies, truck body and chassis parts, seating assemblies and other commercial vehicle components. Accuride management believes the company has #1 or #2 market shares in nearly all of its major product lines. The company’s primary customers are commercial vehicle OEMs, namely Daimler Truck, PACCAR, International Truck and Volvo/Mack. Accuride operates 19 facilities in the U.S., Canada and Mexico and employs nearly 3,000 people. (Source: 2008 10k)

PATH TO BANKRUPTCY:

The commercial vehicle industry, already well-known as a “deep cyclical”, is suffering from its lowest demand levels in recent history. Class 8 truck production is expected to be ~116k vehicles in 2009, down nearly 50% from the past two years. As a commercial vehicle parts supplier, Accuride’s top line has suffered accordingly. For example, the company’s second quarter sales were down 45% y/y. As a result, the company was in violation of its financial covenants under its credit agreement at the end of the second quarter. On July 8, Accuride entered into the first of what would later become five temporary waivers with its credit facility lenders. Additionally, Accuride missed the August 3 coupon payment to its subordinated note holders. On August 31 the company entered into the first of a series of forbearance agreements with its bondholders. Accuride filed for bankruptcy (Delaware) on October 8. The pre-negotiated filing includes a support agreement with 57% (principal amt) of the credit agreement lenders and 70% (principal amt) of the noteholders.

PRE-NEGOTIATED PLAN:

The proposed plan has six key components:

a) $50 mln of a two-tranche new money DIP

b) The pre-petition credit agreement loans will be amended and re-instated

c) The pre-petition notes will be cancelled in exchange for 98% of post re-org equity (subj. to dilution)

d) A $140 mln rights offering of new senior unsecured notes convertible into 60% of the post re-org equity. The rights offering is available to the Sub Note holders and backstopped by the plan supporters

e) The proceeds from the rights offering will be used, in part, to repay the $70 mln “Last-out Loans” made by Sun Capital

f) The pre-petition equity holders will receive 2% of the new equity warrants for up to 15% of the company, subject to further dilution

VALUATION:

Accuride’s enterprise value is conservatively worth $715 mln based on a $130 mln (mid-cycle) EBITDA and a 5.5x enterprise value multiple. I estimate that the new company will have $110 mln of cash at emergence, reducing net debt and increasing equity value.

Mid-cycle EBITDA estimate = $130 mln

- During Accuride’s last trough-to-peak cycle (2002-2006) the company’s EBITDA averaged nearly $120 mln (source: company financials)

- Based on management projections the 2009-2013 trough-to-peak cycle will see average EBITDA of $139 mln (source: 8k filed 10/15/2009)

- Also note that free cash flow should be stronger than in the past as management projects lower than historical capital expenditures (obviously cash interest will be much lower given the new capital structure)

Enterprise value multiple = 5.5x

- Accuride only has a handful of semi-relevant peers. In descending order of relevance I believe the best comps are ArvinMeritor (5.6x 2011E), Allison Transmission (> 6.5x), and Navistar (6.0x). Purchasing AURD 8.5s at $80 “creates the company” at just over 4.0x my mid-cycle EBITDA estimate. Also note that the exit multiple of 5.5x is below that of each peer. Further, I believe new Accuride should trade at a premium to a company such as ArvinMeritor.

RISKS:

- I think there is very limited “plan risk” in this situation, however, if the pre-negotiated plan were to fall apart significant delays could occur, which would negatively affect the estate as a prolonged bankruptcy could cause the OEMs to seek out replacement suppliers.

- Valuation risk should be limited given the conservatism built into my valuation. That said, a lack of confidence in the prospects for the commercial vehicle industry could reduce multiples for Accuride and its peers.

RECOMMENDATION:

Buy Accuride Subs and participate fully in the rights offering. Accuride is a textbook example of a good business with a bad balance sheet. The company has leading market shares in its core products and has delivered low-single-digit operating margins over the past ten years. The model below shows my recovery estimates more explicitly. Note that I am assuming the New Converts are indeed converted on issuance, as is allowed according to the term sheet.

13 comments:

persistentone 11/23/2009  

You may want to add the terms of the $140M convertible (coupon and conversion terms)into your article.

persistentone 11/23/2009  
This comment has been removed by the author.
persistentone 11/23/2009  
This comment has been removed by the author.
Randeg 11/23/2009  

I am glad to have come across this example of a distressed debt as I see more clearly now how they go about facing the financial problem. It is not a surprise that Accuride ran into trouble because I think that all those that have something to do with the auto industry will experience the same. It is just too bad because I think it is a good company.

Evelyn Guzman
http://www.debtchallenges.com (If you want to visit, just click but if it doesn’t work, copy and paste it onto your browser.)

persistentone 11/23/2009  

Well, this is a nice write up, unfortunately it does not look like it is actionable information. The day that Accuride announced it had submitted the reorganization plan all trades in their bonds stopped.

Had this write up appeared sometime between October 8, 2009 when the new plan was announced and November 18, 2009 when it was submitted to court for approval, readers might have been able to buy.

Even then, the bond traded sporadically and only in huge lots, which I guess is consistent with its originally being a reg 144 offering (i.e., mostly institutional sellers).

Hunter 11/23/2009  

persistentone - would you please email me ... thx - Hunter

hfguy 11/23/2009  

what about the equity committee? why is 5.5x the right valuation - it seems high for a Tier I

Ninja,  11/23/2009  

hfguy: I included some comps in the write up. It's important to note that this is a Tier I commercial vehicle supplier and not a Tier I auto supplier. There are big differences in the two businesses w/ the commercial being more favorable (to suplliers).

I'll update on the equity committe, I originally submitted the idea before they were appointed last wk.

Ninja,  11/23/2009  

Persistentone:
I was shown some of these bonds today in a $75-ish context (5 pts below my purchase price in the write-up) so this is actionable. Yes, the trading is choppy...welcome to distressed.

If it makes you feel better I bought some this summer below $25 as well.

persistentone 11/23/2009  

Ninja, if you are author could you send me email at persistentone AT spamarrest.com and I wanted to ask about some of the math in your spreadsheet.

$75 was a great offer to get given lack of trading. I finally got offered at $82 and $85. If you don't want any more, maybe you could throw me a favor and let me know who has them at $75. :)

And congratulations on your buy at $25. You caught the exact bottom (or close enough).

P 1 12/29/2009  

Does anyone know of any groups online that are actively discussing the Accuride bankruptcy with any intelligence (that excludes Yahoo by definition )?

The third amendment to the reorg plan for Accuride pays Blackstone nearly 20% of the newly organized entity for "backstopping" the rights offering.

That looks outrageous to me. Is that level of dilution considered
ordinary or reasonable for such cases?

P 1 12/30/2009  

Sorry, it is Blackrock Financial not Blackstone. Players names change, but issue at hand is the same. They are being paid richly to participate in an offering that was already financially engineered to make the participants money.

p2,  2/05/2010  

Just to follow up in case in anyone is still watching - I have the same question in light of the objection to the plan filed by the equity committee. Seems like they make a pretty good case that the current plan is a giveaway to the ad hoc noteholders group, who at this point have already sold most of their notes and are just there for the backstop investment, especially given the possibility of alternative financing.
Obviously the equity committee's valuation is probably aggressive, but it has to be more realistic than the one in the current plan. Any thoughts on whether they might be able to up the distribution to the old equity? They say 26.5%, which is probably high, but is 10-15% out of the realm of possibility?
The judge's ruling requiring 2019 disclosure seems to indicate some sympathy to the equity committee, so feels like there might be a chance of postponing the confirmation at the hearing on Feb 8, or rejecting the plan if they hold the hearing on Feb 10. Thoughts?

Email

hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.