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.