Distressed Debt Analysis - Visteon (VSTNQ)
A few months ago we looked at the distressed debt of Visteon, given the enormous run-up in prices of the underlying securities. Since that post, and as expected, junior securities (equity and bonds) have rallied substantially as Visteon continues to put up strong numbers. In addition, there has been a number of negotiations behind the scene to get a better deal done. Let's take a stab and see if we can see what this thing is worth.
For reference: Here is Visteon's Bankruptcy Docket
Last week, Visteon ("the company") filed a new plan of reorganization with the bankruptcy court (Docket #3011). On the same day, the company filed a motion authorizing the debtors to enter into a plan support agreement, an equity commitment agreement, and a backstop agreement. In this document, the company gives us a little background of what has been going on in the case:
From the outset of these cases, Visteon has made clear that an expeditious exit from bankruptcy with a deleveraged capital structure supported by its OEM customers was its primary goal. To the end, Visteon has worked determinedly with its creditor constituents to develop a consensual plan of reorganization with all voting classes that would address its reorganization goals for the last several months. As a result of these efforts, Visteon has reached a milestone in putting forth a “toggle” plan of reorganization, filed contemporaneously with this Motion, that Visteon believes represents the best path toward a successful conclusion of these cases.The Plan is comprised of two mutually exclusive sub plans—a rights offering plan (the “Rights Offering Sub Plan”), pursuant to which the holders of Visteon’s prepetition unsecured notes who are eligible to participate in the rights offering would have the opportunity to purchase 95% of the equity in reorganized Visteon in exchange for $1.25 billion in cash raised through a fully backstopped rights offering; and a claims conversion plan (the “Claims Conversion Sub Plan”), which is similar to the plan filed on March 15, 2010 in that the holders of Visteon’s term loan debt would receive approximately 85% of the equity in reorganized Visteon and unsecured note holders would receive approximately 15% of the equity in reorganized Visteon, while other general unsecured creditors would receive a cash payout. The fundamental tenet of the Plan is that if the note holders deliver $1.25 billion in cash plus an exit financing facility to pay the term lenders in full, the Debtors will move forward with the Rights Offering Sub Plan; while if the note holders do not deliver the capital, they will be required to support a “toggle” to the Claims Conversion Sub Plan pursuant to the terms of the Plan Support Agreement and Equity Commitment Agreement, except under very narrow circumstances that the Debtors largely control. In the Debtors’ view, the toggle plan offers the cleanest path to confirmation that would avoid a costly four-sided cram down fight and would localize and simplify a valuation fight to one between old equity, on the one hand, and everyone else, on the other. The “toggle” plan construct allows note holders to truly put their money where their mouth is, while minimizing the Debtors’ risk of being left at the confirmation altar without a confirmable plan if the note holders do not live up to their promise to deliver capital. The Plan also avoids what would be costly and protracted cram down litigation with the Debtors’ note holders and resolves disputes over valuation among all parties other than “out of the money” equity holders who will dispute any valuation that does not provide them with a recovery.The Plan is fully supported by note holders holding more than two-thirds in amount of Visteon’s prepetition unsecured notes and the Debtors continue to work towards obtaining the support of the official committee of unsecured creditors, a proxy for the general unsecured creditor class. While the term lenders have not yet indicated a willingness to support the Plan, Visteon notes that the term lenders would receive the same, or an equivalent recovery, to which they would have recovered under the March 15, 2010 plan. Specifically, the term lenders would be paid in full, in cash, including accrued prepetition and postpetition interest, and therefore would be unimpaired, and without voting rights, under the Rights Offering Sub Plan and would receive virtually the same treatment under the Claims Conversion Sub Plan as was contemplated by the Debtors’ March 15, 2010 plan, for which they previously provided their support. Thus, the Debtors believe that the term lenders ultimately will support the Plan. Lastly, while the Debtors expect equity holders to oppose the Plan, such holders are deemed to reject the Plan and will not be entitled to vote—making their support irrelevant to Plan confirmation.
Now that is a mouthful I know. Let's break it down:
- 2 possible paths: 1) Rights offering funded by bondholders after which they will get 95% of the equity and will pay down the term loan from the funds raised 2) If rights offering fails, old plan is the go where term lenders own the vast majority of the company 3) Equity gets nothing
What I found most interesting about this plan was point #3 above. Earlier in the month, the U.S. Trustee recommended the appointment of an examiner after the ad hoc equity committee requested one. From a recent court filing:
On February 26, 2010, the Debtors released 2009 year-end financial results that dramatically changed the course of these cases. The Debtors’ enormously improved financial performance, as well as the market’s reflection of the bright prospects for the automotive sector and the economy as a whole, have rendered the Debtors’ intended path for these cases illegal and improvident. Indeed, prior to the release of the 2009 financial results, the Debtors filed a plan that provided no recovery for unsecured debt, much less equity. Now, that same unsecured debt is trading above par plus accrued interest. To pretend that this is a typical case where the Debtor has worked over the course of a year towards an inevitable plan that extinguishes equity is disingenuous. Yet, despite these different circumstances, the Debtors remain on approximately the same path as before and continue to stand behind a plan that rests on erroneous valuations and projections simply unsupported and refuted by the currently improving financial landscape.
In addition, equity holders have filed a motion to terminate the debtor's exclusivity and to solicit votes their their own Chapter 11 plan. What is equity arguing specifically? Undervaluation. As a reference, most equity committee's argue for undervaluation, but in Visteon's case, the argument is fairly compelling: Why? Visteon has a massive amount of value in its JV and cash on its balance sheet which current plans are undervaluing (2.5x net income? HA).
The equity committee is proposing a new plan where the term loan lenders would be partially reinstated (paid down with an equity rights offering), bond holders would receive a new security, and equity would be reinstated. The downside of this plan: The company would be emerging with a significant amount of debt which in a judge's eyes would make it less favorable to a competing plan.
For reference, Visteon's EBITDA was $161M in 1Q 2010 vs $22M in 1Q 2009. Strong. Cash at year end is approximately $1 billion dollars. The trading level of securities:
- Term Loan: 106-108
- Visteon 8.25% of 2010: 111/112
- Visteon 7% of 2014: 112/113
- Visteon 12.25% of 106: 115/117
- Equity: $1.70 resulting in a market cap of $221M.
Let's figure out how much this puppy is worth:
- Halla: Visteon has a 70% position of a Korean auto supplier. The company today has a $1.4B USD market cap...$980M of value.
- Other non consolidated JVs: Mostly Yanfeng: "The major products are automotive interior and exterior trim products. such as seat assembly. instrument panel assembly,door trim panel assembly, steering wheel assembly, sun visor assembly, color bumper, B pillar and C D pillar etc. " Visteon owns 50%. Assume $80M of attributable net income (meaning the 50% that the company gets) at a 10x multiple...$800M
- Cash - $964M ... Assume 50% is retained...Approximately $500M of value
So before even looking at Visteon's underlying operations we have approximately $2.3B of value.
Because Halla is consolidated in Visteon's results, we need to back out their cash flow and then apply a multiple to stand-alone Visteon's EBITDA. Halla is doing right under $140M of EBITDA, so run-rate stand-alone Visteon is probably close to $300M on a VERY conservative case. At a 5x multiple, we get another $1.5B of value. Net, net...Total value is $3.8B.
For debt claims, I am using $3.2B. Therefore the excess value to equity is $600M against 130M shares outstanding leads to a share price between $4 and $5. This valuation also does not give them any credit for NOLs. But we like to be conservative here at Distressed Debt Investing.
So we think equity has value here - the question is...will they get any of it? It really depends on how the judge plays his hand. And I will save portfolio positioning for the next post. We will discuss the implications of the varying guarantees of the bonds (the 12.25% have certain guarantees that other notes do not have), the possibility of equity get a nuisance value claim and how that affects portfolio positioning. Finally, we will talk about par + accrued and possibly make-wholes to determine our downside on the bonds.
