NOT AN ANALYST

Terms of the MSG Spinoff Cablevision (CVC) announced on July 30^th that its board of directors approved the spinoff of the Madison Square Garden (MSG) business to CVC shareholders. The transaction is expected to be finalized in the 1Q of 2010. MSG will assume 375 mm senior Revolving Credit Facility for 5 years to fund working capital needs, capital expenditures related to the renovation of the Madison Square Garden Arena and general corporate purposes. An important note is that MSG is expecting 190 mm from Rainbow Media Holdings, another subsidiary of CVC, as a repayment of demand loan (non-interest bearing). CVC announced that once MSG is spun off, the loan will be repaid.  The new MSG’s assets will include:

• Media Properties, including MSG, MSG Plus, and Fuse Network
• Sport Teams like New York Knicks of the NBA, New York Rangers of the NHL
• A live entertainment portfolio, including proprietary radio as well as concerts, shows and events.
• Leading venues, highlighted by the Madison Square Garden and Radio Music City Hall.

Valuation Its unsure how much cash MSG will have once it will operate as a standalone entity, but after reading the last three10K and the latest 8K reports of CVC, we can get an interpretation of how much MSG could be valued. Let’s start with the assumptions.

• MSG will have 290 mm in cash on hand as a standalone company, comprised of 190 mm from the repayment of the inter-company loan and 100 mm on hand.
• Capital expenditures for renovating the Madison Square Garden Arena will be 800 mm over three years with 60 mm accounted before the end of 2009 as pre construction expenditure. After 2012, once the renovation is expected to be completed, capital expenditures will be reduced to the historical levels of 55 mm per year.
• The Revolving Credit Facility will be fully drawn in 2011 and will be refinanced with a 700 mm new Term Loan in 2014. Each Loan will bear 600 bps interest rate
• EBITDA will drop 5% each year from the previous year in 2010 and 2011, as renovation will prevent full access to the Madison Square Garden Arena. Upon completion of the renovations, EBITDA will grow at 25% rate y o y under the conservative scenario and at a 50% rate y o y under the aggressive scenario.  

Post MSG spin off analysis The valuation is the same under both scenarios up to 2012, which is when the renovations are expected to be terminated. Beyond that point, if you believe a 50% growth in EBITDA, you will end up in 2014 with 33 mm in cash and 76 mm in FCFE and. If you believe in a 25% growth in EBITDA, then you will end up with no cash and 11 mm in FCFE. In both cases, leverage doesn’t seem to be an issue, but it looks like the Company is using a lot of borrowed capital to improve assets without generating enough return. This seems to be the problem that MSG always had, the Company has valuable assets but the margins are thin and have been shrinking as higher expenses and competition eroded returns over time. Also, my valuation is fairly generous; as it assumed a small amount in working capital needs and conservative capital expenditures. The Company estimated that renovation costs can total 850 mm. In addition, it will be important to know the covenants of the Revolving Credit Facility, especially minimum EBITDA and liquidity levels for the next 5 years.

Conclusion The MSG spin off will benefit Cablevision more that MSG itself, as the transaction will remove potential negative cash flows and high capital expenditures from the parent. I am not confident about the earning potential of MSG, as the media industry doesn’t seem to be recovering from the economic downturn. The Company has planned to make a lot of capital expenditures, but will EBITDA growth be enough in the years to come to justify them? I highly doubt that. Remember that the Entertainment and Sport segment of MSG use the Garden Arena to conduct their business, which amounts to 65% of the total revenue based on 2008 numbers. We will continue coverage once the spinoff is concluded.

Idearc, one of the largest publishers of yellow pages directories in the United States and leading online search providers, is expecting to emerge from bankruptcy by the end of the year. The Company filed for bankruptcy protection under Chapter 11 on March 31^st, blaming the downturn in the economy, a shift in advertising demand from print to online, and a high debt levels as result of the spin off from Verizon Communication in 2006. The Court approved the amended Plan of Reorganization on December 22, 2009.

Creation of Idearc The Company was formed in 2006 as a spin-off from Verizon Communications.  The terms of the spin-off were the following: Idearc issued shares of the Company to Verizon shareholders; it issued Senior Unsecured Notes of 2,850 mm and transferred to Verizon 2,500 mm in cash generated from the proceeds of the creations of the Tranche A and B Term Loan.

Capital Structure Most of the debt was incurred as part of the spin off and it is comprised of a Credit Agreement of 6,400 mm (Tranche A Term Loan 1,515 mm, Tranche B Term Loan 4,665 mm and Revolver 250 mm), Senior Unsecured Note of 2,850 mm, SWAP with fair value of 498 mm another SWAP with fair value of 1.9

Plan of Reorganization Owners of the 6,400 Credit Agreement will receive the pro-rated amount of a new Term Loan of 2,750 mm with a 6 years term @ LIBOR + 800 bps  95% of the post re-org new equity. Unsecured Debt holders will receive 10% of the reorganized company. Upon emergence, the Company will have 150 mm in cash and a cash Sweep will be established, with 67.5% of excess cash used to repay debt each year starting in 2010. Certain reorganization events happened in 2009 and are worth noting: the Company used 600 mm in cash available to run operations post petition and therefore no DIP financing was needed. The two swap agreements were settled for 424 mm. In April, a 250 mm payment to Secured Debt holders (188mm of principal and 62 mm in accrued interest) for adequate protection was made.  

Advertising Industry and Company’s outlook Idearc is another media Company that has been hit severely by the weakening demand in the advertising market. Among others, you can find Citadel Broadcasting, Heartland Publications, and RH Donnelly etc. Recent improvement in technologies and powerful internet search engines are replacing printed and radio advertising. On September 15, the Management forecasted the sales growth rates for the Company and for the advertising industry for the next 4 years. The outlook is grim. The demand for printed advertising, which accounts for about 85% of Idearc’s total revenue, is expected to drop double digits in the next 2 years and then stabilize at negative a 7% growth rate. However, revenue from Superpages.com, which accounts for 15% of Idearc’s total revenue, is expected to improve in the coming years with double digit growth after 2010.

Valuation The spreadsheet contains EBITDA forecasts based on the 8K filing released on September 15. Capital expenditures will be around 42 mm for 2009 and they will increase 5% each of the following year. I will assume no change in working capital for simplicity. The “Now-IRR” indicates recovery rates from the prospective of the bank lenders; therefore it indicates recovery from par. The post re-org equity assigned to the bank lenders amounts to 685 mm, and it will decrease through time as EBITDA will deteriorate. In the end of 2013, the lenders will be able to recover 84% of their principal, which is poor. But if you had bought all the bank debt in April when it was trading at 45 cents a share, then you would realize a nice 38% IRR at the end of 2010, comprised of a new 2,750 mm Term Loan, 250 mm in cash, 685 mm in equity and 303 mm in interest. Unsecured Debt holders are left with nothing basically.

Conclusion The Idearc’s new common stock that will be issued in 2010 doesn’t seem to have much appreciation potential given the current business model. If the Company can modify its operations and focus more on search engines and online advertising revenue, then EBITDA forecasts can be revised higher and maybe see more equity value in the coming years.

After days of valuation chaos, William Ackman, the founder of Pershing Square Capital Management, released a detailed report on General Growth Properties, highlighting the upside potential of the REIT and responding with vigor to the misleading valuation from Hovde Capital Advisors.  What’s genius about it is the timing. Few days ago, the Court approved a dividend the payment of 0.19 dollars a share for holders of record December 28, in order for the REIT to maintain its tax status. Today was the last day to buy the stock and still get the dividend in January 28 2010, as it will trades ex-dividend tomorrow. Realizing this, the shorts had to cover and longs had to buy, which magnified the effect of the report. It was just genius. I hope you can appreciate this reading as much as I did.

Citadel Broadcasting filed a voluntarily petition under Chapter 11 on December 20 2009 with a pre packaged restructuring plan supported by more than 60% of it secured lenders. The Company listed 2,464 mm in liabilities and 1,400 mm in assets. The First Day Motions were granted today and the Company will use 36 mm of cash on hand plus cash generated from operation to conduct business during the bankruptcy proceeding. No DIP financing will be needed.

Business Overview The Company is a major player in the radio broadcasting industry and it operates through two segments: Citadel Radio, which owns and operates radio stations across the country and accounts for two thirds of the revenue, and Citadel Media, which produces news and talk programming.

Capital Structure The Senior Revolving and Term Facility were amended for the fourth time on March 26 2009 to include a monthly EBITDA test and monthly liquidity test. The Company anticipated that it will be in compliance with its covenants through the end of 2009 (150 mm EBITDA and 25 mm in cash) but it didn’t expect to meet the financial covenants requirements on January 15 2010 (150 mm of cash on hand, 30 mm in cash anytime, postpone maturity date of convertible to on or after 2014 and Senior Secured Debt leverage of 6.75x by December 2010).

 One of the main balance sheet issues for Citadel Broadcasting is over leverage. The Company was able to do get away with high debt levels in 2007 and prior years due to lax financial covenants and lack of impairment tests of goodwill and intangibles. The Plan of Reorganization will cut 1,400 mm in debt and will address the over leverage issue, but I am not sure how happy Secured Debt holders will be. I have not worked the numbers yet, but it might take few years for them to recover their principal amount in terms of equity appreciation. I will work out a model in the coming weeks.

Plan of Reorganization  The pre petition Secured Creditors will receive a pro rata share of a new Term Loan in the principal amount of 762.5 mm with a 5 year term @ LIBOR + 800 bps and 90% of the new common stock. The Convertible Note holders will have the option to receive a pro rata share of 10% of the new common stock or cash equal to 5% of unsecured claims (capped at 2%). Common stock, preferred, options, warrants will be cancelled.

EBITDA Forecast The Company is going to end up with 180 mm in EBITDA in 2009, a 28% drop from the previous year. In the next 3 to 4 years, I expect EBITDA to grow in at 2%-3% rate each year, far away from the 11%-12% growth rate experienced in 2006-2007, after the ABC Radio merger in February 2006. Besides the economic downturn, that is still keeping advertising expenses low, the demand for advertising is shifting from radio to online technologies like Google. People surf the web more than they listen to the radio, so why should you advertise your product on the radio? On top of that, the Company recognizes six industries that generate most of revenue: automotive, retails, medical, financial, entertainment and food stores. Three out of the six are still experiencing cost cutting and low top line growth, so it’s tough to project double digits EBITDA growth levels for the coming years. Stick around for more forecasting and valuation analysis in the next few weeks.

Accuride Business Overview Accuride is a manufacturer and supplier of commercial vehicle components in North America. The products include wheels, truck body parts, seating assembly and other vehicle parts. The Company operates in a highly competitive and cyclical market as it’s largely dependent on the overall strength of the demand for heavy and medium-duty trucks.

Path to Bankruptcy The automotive industry was severely affected by the economic downturn and the prolonged lack of demand for commercial vehicle significantly affected the Company’s operations. In the 2Q of 2009, a series of temporary waivers with respect to the Credit Facility were implemented, as the Company determined that it would likely be in violation of certain financial covenants. The Company also entered in series of forbearance agreements with the Senior Subordinated holders as the interest payment due August 3^rd wasn’t honored.

Restructuring Plan After a series of negotiations, the Company reached an agreement with its creditors for a pre-packaged restructuring plan. At emergence, the Company anticipates 290.1 mm in secured debt and 435.5 mm in consolidated debt. The Plan was announced on October 8 and the terms are

• The Credit Agreement, which is the Term Facility 56.07 mm and the Revolving Credit Facility 224.6 mm, will be amended with interest of LIBOR + 675 bps maturing on June 30 2013 and an annual cash flow sweep of 75% with first sweep date on 1Q 2012 (after meeting a minimum liquidity of 25 mm a month).
• 275 mm Senior Sub 8.50% due 2015 will be cancelled and note holders will receive 98% of the common stock of the reorganized Company and 140 mm of a new Senior Convertible note.
• The new Senior Convertible note will mature in 10 years with the first six payment made PIK and the remaining payable in cash at 7.50%. Part of the proceeds from the issuance will be used to repay 70 mm of the “Last-Out” Sun Capital Loan, which is a loan outstanding under the Credit Agreement
• Equity holders will receive 2% of the new common stock and warrants to purchase up to 15% of the reorganized Company, exercisable in 2 years and only at a strike price that is 110% of par recovery on the Senior Sub notes from the day of restructuring.
• The Company secured a DIP loan consisting of 25 mm @ LIBOR + 6.750% plus another 25 mm @ LIBOR plus 7.750%, both maturing in 9 months.

Capital Structure The Company has 275 mm of Senior Sub notes due 2015, a Revenue Bond for 3 mm, a Revolving Credit for 56.07 mm and a Term Facility for 294.6 mm.  Senior Sub CUSIP 004398AE30R0 or ARUC.GD @ 8.50% due 2015

Valuation The model is basically an LBO, there is a cash flow sweep used to pay down debt and the equity value is calculated from the EV. On an 8K filed on 10/15, the Company provided very useful information about future operating earnings, and I used projected EBITDA to estimate how much FCF will be generated in the next four years. I expect working capital needs to increase up to 108 mm in 2011, and then be stable afterwards; capital expenditures will be 25 mm in 2010 and the go down to 20 mm until 2013. The Company is expecting demand to pick up significantly in the coming years, especially in 2010 and 2011, and it will need to buy inventory and sell items on credit. During peak cycle in 2005-2006, working capital was between 101 mm and 106 mm with EBITDA between 196 mm to 211 mm and capital expenditures ranging between 40.7 mm to 47.6 mm respectively. Cash at filing was 12 mm per the Affidavit from the CFO.

The Equity Value If you would be buying all the Sub notes, how much would you get in return? 98% of post re-org equity seems a lot, but it will be diluted to 50% after 4 years, assuming half of the convertible note or 70 mm will be converted upon issuance, and rest by 2012 (see the Convertible note schedule under “Assumptions” on the spreadsheet). Further dilution comes from the warrants which will be eligible to be converted into 15% of post re-org equity in 2012. Senior Sub holders will be able to recover around 50% of the principalpar value of their bonds in 2010. That doesn’t seem much but the appreciation potentialis great. In 2011, the equity will be valued at 314 mm, an annualized IRR of 23%, which includes dilution from the conversion of the Convertible note and warrants. In the years to follow, the equity grows but dilution decreases your return potential significantly. In 2013, the Company will generate almost 1,200 mm in equity but you will own only 700 mm. You could sell your investment for a 32% IRR, excluding the interest accrued on the Convertible note. Its a little light considering al the risks involved in the transaction. 

Conclusion Probably the best year to sell your investment would be 2012, as one more year will not give you much more return. You can buy the Senior Sub @ 85 cents on the dollar and 2 years after emergence you will get a 31% IRR annualized on your equity value, which includes the conversion of 100 mm of the Convertible note, but excludes interest on the convertible note. It’s a good plan of reorganization for the Company as leverage decreases and equity increases significantly over the years but dilution creates a drag on investors’ returns.

The attachment below explains the reasons why Pershing Square is shorting Realty Income Corp. I don’t really agree that, with a 7.50% drop in NOI and a Cap Rate of 9.50%, the price should be 14 dollar per share. The company is currently valued with a very conservative Cap Rate, around 11%, which accounts for all the risks and unknowns. In my previous post, I wrote that 26 dollar per share is a fair price for the Company at this moment. I don’t see 40% premium to NAV as Pershing Square indicates. It’s also interesting how, during the Q1 and Q2 earnings call Q&A, the Company Representative wouldn’t even talk about the name of the tenants. I agree with the fact that the SEC may require to disclose the name of the lessees, which is another catalyst for a large drop in value. Well, enjoy the reading.

The Catalyst About a month ago we talked about Realty Income Corp as a good candidate for a short play, but since then the stock hasn’t really move in any direction. Let’s take a closer look at what can be the catalyst for a significant drop in value. The latest 10K reports that there are no maturities due until March 2013; therefore the company doesn’t need to refinance its debt anytime soon. But if the company wants to sustain or raise the common dividend, it would need to issue equity or new notes as the cash on hands and the operating income generated is not sufficient. I seriously doubt the company could raise funds early next year, so the only option would be to cut the dividend dramatically, which would cause a significant drop in price.

Tough Short It’s inevitable that the company will cut the common dividend, the problem is when. Keeping a short position open on Reality Income Corp it’s very expensive. You have to pay the big dividend to the long and it is an expensive stock to borrow because the amount of shares short as a percentage of the float is pretty high, around 22%.

NOI and Price There is no misprice at the moment between the intrinsic value and the market value. If NOI for next year is projected to drop 20%-25% from 2009 levels, the company should be valued around 19 dollars per share, but accounting for 303 mm in NOI for 2009, which seems accurate based on the latest 10Q, the company it’s correctly priced at 26 dollars per share. We calculate the Market Value as NOI/Cap Rate and the share price as the MV/shares outstanding. The cap rate is r (required rate of return) – g (growth rate). The required rate of return is simply the WACC = wd*D (1-T) + we*E. The capital structure consists of 47% debt and 53% equity. The yield on the latest bond issued, which is the 6.75% note issued on September 2007, is 6.50%. The tax rate is minimal as REITs are exempt from federal income tax, so I am going to ignore it. The yield on the common shares is now 6.54%. This gives us a WACC of 6.52%. The growth rate is calculated as the retention rate (b)*ROE. Net Income available to common shareholders for 2009 will be around 105 mm with cash dividends for the year amounting to 178 mm, which give us a retention rate (b) of -69%. ROE for 2009 is going to be around 6.7% and we arrive at a negative growth rate of 4.6%. Therefore the cap rate, calculated as r-g, it is 11.12%. Now we have all the data, with 104 mm shares outstanding and assuming NOI for 2009 remains at 303 mm, the Company is valued at 2,725 mm and the price per share is 26.2, which is around what it’s currently trading. However, if NOI drops 20% or 25%, which is a possible scenario accounting for the poor quality of lessees and their questionable capacity to pay, then the share price should be at least 6-7 dollars lower.

Emergence from Bankruptcy The US Bankruptcy Court has approved today, December 8^th, the plan of reorganization that CIT Group proposed to its creditors. The Company is now expected to emerge from bankruptcy by mid-December. This is an overview on the plan of reorganization that CIT Group offered to different bond classes:

Series A and B Notes The company will issue two new notes in exchange for the old notes:

Characteristics: Series A note 7% coupon with maturities ranging from 2013 to 2017

Series B note 9% coupon with maturities ranging from 2013 to 2017.

Collateral: Series A and B are guaranteed by a lien on all CIT Group personal properties excluding interest in CIT Bank, certain equity interests in foreign subsidiaries (it’s unspecified which one) and other regulated subsidiaries.

Ranking: the collateral securing Series A and B notes is the same as the collateral securing the Senior Credit Facility but the lien of Series A and B collateral is subordinated to the lien of the Senior Credit Facility collateral.

Redemption: Each note will be callable @ 103.5 on Jan 1 2011 and @ 102 on Jan 2012 at the option of the issuer.

Covenants: The indenture of the new notes contain certain covenants that limit the Company’s ability to incur additional debt, pay dividends or repurchase debt or equity, merge with other companies, engage in transaction with affiliates.

Bond Classes Assuming holders of each bond class accept the plan, they will receive respectively:

Class 6 Letter of Credit – a payment of 103 cents on the dollar

Class 7 Canadian Senior Unsecured – 100% of series B note

Class 8 Long dated Senior Unsecured – 70 cents on the dollar of Series A note and 3.6% of new common interest

Class 9 Senior Unsecured – 70 cents of Series A note and 77.7% of new common interest

Class 10 Senior Unsecured Term – 70 cents of Series A note 1% of new equity common interest

Class 11 Senior Unsecured Credit Agreement – 70 cents of Series A note and 9.4% of new common interest

Class 12 Senior Sub – 7.5% of new common interest 

Class 13 Junior Sub- 0.8% of new common interest

Common interest will be cancelled and bondholders will own 100% of the post re-org company.

Post Re-org Price Class 9 holders are the largest creditors with 25,504 mm of principal outstanding and will own 77.7% of the post re-org Company. But how much is that percentage in share amount? The offering memorandum informs me that the estimated recovery on the note 94.4%, so if I am getting 70 cents on the dollar of the new note, there are still 24.4 cents that I am missing to arrive at the 94.4% recovery rate. The post- re-org equity will fill that gap. Assuming all bond classes accept the plan, the reorganized company will have 8,000 mm in equity, which is disclosed in the company memorandum, and will issue 200 mm in new shares to replace the current 400 mm shares outstanding per today’s press release. This will gives me a price of 40 per share. Is that reasonable? It is. If I am a buyer of all Class 9 debt, then I will get 155.4 mm shares of the new company (77.7% of 200 mm) and each Class 9 bondholder will get 6.09 shares which equals $240 (6 shares + cash). The math turns out perfectly, $700 of the new bond + $240 of new equity = $940 which is close to the recovery rate of 94.4% provided on the offering memorandum.

Series B notes There is a good chance that the Series B will go to par upon emergence. If you bought a Class 9 note in November at 70 cents on the dollar and you choose to participate in the plan of reorganization, you are definitely getting a great deal.

After 6 month of trading, your note can easily be trading par and the new equity at 50 per share, which gives you an annualized IRR of 17.5% without accounting for interest payments.

GGWPQ Distressed Investment Just a few weeks ago I introduced General Growth Properties as a great opportunity to capitalize on distressed investing. The following analysis will unlock the equity value hidden behind the mall giant currently operating under the guidelines of Chapter 11.

Debtors vs. non-debtors General Growth Properties has been releasing a monthly operating report; an 8K filing required by US Bankruptcy Laws, indicating the debtors’ operating performance, working capital and assets/liabilities levels. It’s a very useful report and it shows how much profit the Company has generated post-petition. The report excludes operating performance, assets and liabilities of non-debtors; as such entities are operating outside of the provision of Chapter 11. However, the debtors’ ownership in such entities is disclosed and it’s reported as “investment in controlled non-debtors” on the balance sheet and earnings/losses from such entities are reported under “income/loss of unconsolidated real estate affiliates” on the income statement.

Valuation With the information provided on the post-petition monthly operating report along with the cash flow forecast released on May 22, I was able to come up with a model that estimates General Growth Properties’ price upon emergence in June 2010. From the filing date up to October 31^st, the debtors generated 960 mm in NOI, which is calculated as total revenue minus real estate taxes minus repairs and maintenance minus property operating costs. At emergence, the Company will have produced 1,700 mm in NOI in the worst case scenario and 2,040 mm or 20% more, in the best case scenario. I used a 10% capitalization rate to arrive at the EV, which is conservative considering that Simon Property Group (SPG) is currently trading with a 9.00% cap rate and that’s expected to drop to 8.50% in 2010 and 8.00% in 2011 based on projected NOI and EV. Remember that just a couple of years ago, REITs used to be valued with a 7.50%-8.00% cap rate. The total EV, including non-debtors, will be 17,900 mm in the worst case scenario and 21,480 mm on the best case scenario. I estimated that non-debtors will contribute from 90 mm to108 mm in NOI.

Post-petition cash flow The 8K released on May 22, 2009 provides a nice cash flow forecast on a consolidated basis, which includes debtors and non-debtors. The Company will generate 2,172 mm in cash from operations which includes revenue from mall/offices, Master Planned Communities and property management fees. Financing related expenses will amount to 1,097 mm, which include a cash inflow from the DIP loan of 400 mm and DIP related expenses like a commitment fee of 15 mm, a 3.00% exit fee and interest charges. Inclusive is a charge of 213 mm related to the repayment of the Goldman Loan and various interest charges and principal amortizations. Other expenses are working capital and restructuring fees that will amount to 661 mm and 156 mm. The net cash flow balance from petition date up to emergence on June 2010 will be 426 mm.

Equity Value The total EV available to secured creditors is the sum of the debtors’ residual value and investments in non-debtors, which are assets that operate outside of the provision of Chapter 11. Secured creditors are mortgages secured by properties and unsecured creditors represent outstanding notes like the 2,245 mm of Rouse Bonds, 1,550 mm of GGP LP Notes, 206 mm TRUPS and 2,577.5 mm in revolver and term loan. The Junior Sub notes were repurchased with the proceeds from the sale of TRUPS. The residual equity value ranges from 9,040 mm to 12,620 mm, which is enormous given the fact that the Company is in financial distress. But this is a unique case of bankruptcy, where non-debtors’ assets account for a large part of the company, which is why the equity is trading at almost 10 dollars a share. But I believe there is more upside from the current level, and in the worst case scenario, the Company will be trading at 29 dollars per share, an annualized IRR of 43% from today’s closing price of 9.50 dollars a share.

Related Posts on this Blog:

Undervalued equity: General Growth Properties (GGWPQ)

Chemtura Corp Chapter 11 recovery analysis

CIT Group Bankruptcy and CIT-PZ