NOT AN ANALYST

Synopsis Chemtura Corp is among the largest publicly traded chemical Companies in the United States, dedicated to the manufacturing and marketing of specialty chemical products. The Company filed for bankruptcy protection on March 18, 2009, as a result of a sharp decline in demand for its products and restricted access to credit. The Debtor has until June 2010 to file a plan of reorganization and it estimates to emerge from bankruptcy by the 3^rd Q of 2010.

Investment Thesis Buy the 7% 2009 notes as they provide an attractive risk/reward ratio compared to other debt in the capital structure. The notes trade around 107 cents on the dollar and have virtually no downside and have significant upside potential if converted into equity.

Valuation The Company is worth around $2,000 mm, which should cover all the unsecured debt and existing liabilities, including a large diacetyl claim. The valuation is based on 2009 EBITDA growth of 10% to 18% and a multiple of 7.72 derived from comparable Companies.

EBITDA In 2010, EBITDA will range between $285 and $300 mm, which represents a growth of 10% to 18% from 2009 levels. The growth is justified by a stronger demand for the Company’s products and emergence from bankruptcy. Peak cycle EBITDA was recorded around $400-450 mm during 2005-2007, but these level will be probably be attainable after 2015.

Multiple The 6.78 multiple represents an average of the EV/2010E EBITDA multiple extracted from Companies in the industry with similar fundamentals like market capitalization and debt (Albermale-ALB, Ashland-ASH and Lubrizol-LZ). I applied a 10% growth rate to the 2009 EBITDA level of the Companies analyzed. For reference, Chemtura’s market capitalization in 2007 was $1,050 and total debt to capital was 38.2%.

Capital Structure The DIP loan was refinanced at a lower rate on February 12 and increased by $50 mm to $450 mm to fund bankruptcy charges and ongoing capital requirements. The Term Loan, which constitutes part of DIP financing, has been fully drawn as of February 12. Borrowing under the 2007 Credit Facility were $154 mm as of January 31^st 2010, however this amount can increase following the drawing of certain letters of credit issued under the Facility. The 2009 notes and the 2016 notes are senior unsecured and guaranteed by certain subsidiaries. The 2026 notes senior unsecured parent Company notes and are not guaranteed by any subsidiary.  

2009 Notes Senior unsecured and guaranteed by Great Lakes Chemical, a subsidiary of the Debtor, which merged with Crompton Corp. to form Chemtura Corp. in 2005. In virtue of their maturity, the notes cannot be reinstated. In the worst case scenario, they’ll be repaid out at par plus post-petition interest. In the best case scenario, they’ll be converted to equity and participate in an upside potential materially above par.  

Other Liabilities The Debtor is subject to various other legacy liabilities, including environmental liabilities, estimated to be around $146 mm over 10 years, pension and OPEB (other-post-retirement-obligations) of about $172 mm. The Company, primarily through its non-Debtor subsidiary, Chemtura Canada, is also exposed to diacetyl litigation, estimated around $300 mm. Claims have been filed arguing that exposure to diacetyl, a chemical used to enhance and mimic food flavorings, caused workers to develop a disease that affected their lungs.

Risks The 2009 notes have virtually no downside risk. However, the risk of reinstatement for the 2016 and 2026 notes, will force repayment for the 2009 notes. The negative pledge clause in the notes would be triggered, so the notes would need to be reinstated as secured debt. In case of a debt to equity conversion, the creditors will have a lower claim on the Company’s assets if the Equity Committee will push for a high valuation above $2,500 mm.

In recent months, several high –profile bankruptcy cases saw a high involvement from shareholders represented by a formal Equity Committee. The formation of an ad hoc committee representing the owners of the Company appears to have recently taken the US bankruptcy world by storm and will likely impact how future restructurings are handled. If bankruptcy is a tool that creditors use to protect their interest, should shareholders have similar rights in these proceedings?

Rational for an Equity Committee

According to the absolute priority rule in the Bankruptcy Code, shareholders are forced to the bottom of the capital structure. However, if the Debtor still maintains a viable business, all stakeholders want to obtain some value from the reorganized entity. Equity participants believe that their interest are not adequately protected in bankruptcy and therefore feel it necessary to appoint a formal Committee. The US Bankruptcy Code doesn’t provide any assurance of “adequate protection” and the degree of protection for shareholders is determined on a case by case basis. Usually solvency is the “make-or-break” feature regarding the appointment of an Equity Committee.

The concept of solvency

The Board of Directors of a Corporation has a fiduciary duty to its shareholders. However, when a Company becomes insolvent, the fiduciary duty now extends to its creditors. Solvency is the most used applicable legal standard when deciding whether or not to appoint an Equity Committee. If the Debtor is hopeless insolvent, justification can be made that there is no need for shareholder representation, as the cost required and charged to the bankrupt estate for professional representation of the shareholders outweighs the adequate representation interest of the shareholders and it would be burdensome to the bankrupt estate. Usually an Equity Committee  can only exercise a meaningful weight on the restructuring process when bankruptcy is not the result of insolvency.

Role of the Equity Committee

Similarly to the Creditors Committee, the Equity Committee participates in the restructuring process and communicates with the Debtor, Advisors and other stakeholders, negotiate specific terms and conditions relating to the Debtor’s Plan of Reorganization (POR) and participate in the confirmation of the POR. The goal of the Equity Committee, along with the Creditors Committee, is to maximize value and to divide that value in order to satisfy all stakeholders. To accomplish their goal, Equity Committees typically try to:

ü  Be involved as early as possible in the case in order to have more negotiation power

ü  Ensure an open communication with all stakeholders, specially the Debtor and its Advisors in order to limit litigation costs

ü  Ensure the debtor is awarded the maximum value of the enterprise

Recent cases

The Equity Committee has the potential to promote conflicts regarding the valuation of the enterprise, assigning a higher valuation to the estate and therefore diluting the value to creditors. It can be argued that the increasing involvement of Equity Committees in the restructuring process has been a liability for Creditors. Let’s look at General Growth Property’s case for example; here the Equity Committee probably has more weight on the restructuring process than the Creditors, even if they are forced to the bottom of the capital structure.  Another meaningful example is Accuride Carp case. On February 9, shareholders won a delay of the company’s reorganization schedule to develop an alternative plan that includes new $400 million exit loan. One major point of the dispute was valuation. The shareholders claimed the Company is worth about 823 mm, or 260 mm more than what was estimated by the Creditors.  Shareholders would receive 26.5% of the new equity, instead of 2% under the original plan. The battle is still ongoing in court.

Based on the 4Q earnings released few days ago,  we have the following updated information:

2009 full year NOI = 2,417 mm
Total debt = 27,815 mm

Given its current stock price of 13.50, and using FY 2009 NOI, GGP trades at an implied cap rate of 7.50%:

NOI = 2,417 mm
Debt = 27,815 mm
Equity value = 13.50 x 314 mm shares = 4,239 mm
Enterprise value = debt + equity = 27,815 mm + 4,239 mm = 32,054 mm
Implied cap rate = 2,417 mm/ 32,04o mm = 7.54%

SPG, on the other hand, trades at an implied cap rate of 6.75%.

The quality difference between SPG and GGP’s portfolio’s is marginal. SPG’s overall quality is slightly higher but GGP owns higher quality assets. If SPG wants to purchase GGP, then it must bid to an implied cap rate that better reflects the value of an A quality portfolio. Realistically, a 7.00% implied cap rate is a fair value for GGP. Arguably, if you want to purchase it, you must bid a premium; therefore a 6.75% implied cap rate should be warranted.

At a 7.00% implied cap rate:

Enterprise value = NOI / implied cap rate = 2,417 mm / 7.00% = 34,528 mm
Equity Value = Enterprise value – total debt = 34,528 mm – 27,815 mm= 6,713 mm
Stock price = Equity value / total shares = 6,713 mm / 314 mm shares = 21.38

A 10 bps reduction in cap rate, it implies a stock price of 22.97, which means that a 10 bps adjustment in cap rate affects the stock price by 1.60. That’s significant.

The management of the Debtor cannot allow SPG to steal the Company at their initial bid of $9 which corresponds to an implied cap rate of 8.00%. This will be a catastrophe not only for GGP shareholders but for the CRE market as well. It would mean that cap rates based on recent deals have increased, therefore decreasing the value of the stocks in the REIT industry.

20-25 dollars per share is a more plausible bid for GGP’s assets.

SPG offered $6 per share in cash to GGWPQ shareholders and par plus accrued interest to all unsecured note holders for a total offer of $10,000 m. This implies a 9% cap rate to value the entity, assuming NOI around 2,400 m and without accounting for the Master Planned Community Business. Every 10 bps change in cap rate (or 9.8 bps to be more accurate) equates to a $1 per share increase/decrease to GGP shareholders.

NOI=2,400

Total Secured Debt=18,000

Bank Debt=3,000

Bonds=4,000

Total Unsecured=7,000

Total Debt=25,000

Equity @ $6/share=1,885

EV=26,885

Implied cap rate=8.92%

Assuming a price of $3 per share to the Master Planned Community Business, the implied cap rate is reduced by 30 bps only. The deal failed to materialize.

Based on the press releases, GGP is pursuing a dual track process: soliciting offers for the whole company and attempting to emerge from bankruptcy as a standalone company through a large capital raise to de-lever and have the capital to payback the unsecured creditors. This may cause large dilution to shareholders, but it’s a less likely process, as the Company will look for potential bidders first. The sales process is expected to get underway in early March. The press release also indicated that they held discussion with “other interested parties” in coming to the conclusion to not preempt a full process with multiple bidders. Brookfield Asset Management (BAM) is likely Simon’s biggest competitor in a bid, though Simon still has the upper hand given their ability to drive greater synergies. Other interested parties are Westfield and Vornado.

Here is Simon’s offer made on Feb 16:

Dear Glenn and Adam:

We are prepared to acquire General Growth Properties, Inc. (“GGP”) in an all-cash transaction which will result in a favorable outcome for all of GGP’s creditors and shareholders, and a prompt conclusion to GGP’s reorganization proceedings. This letter is intended to provide you with the specifics of our proposal which are outlined below.

Consideration. Simon Property Group, L.P. (“Simon”) would provide a full cash recovery (par plus accrued interest and dividends) to GGP’s unsecured creditors, the holders of its trust preferred securities, the lenders under the GGP credit facility, and the holders of Exchangeable Senior Notes. Simon would also pay the holders of GGP common stock $6.00 per share in cash, and distribute to them all of GGP’s ownership interests in the MPC assets. We are willing to discuss consideration consisting (in whole or in part) of Simon common equity in lieu of the cash portion of the consideration to GGP’s stockholders, and perhaps certain of its unsecured creditors, for those who would prefer to participate in the upside associated with owning Simon stock.

We believe the current trading value of GGP’s common already includes a takeover premium, and given its high percentage of insider ownership and the fact that the stock trades in an over-the-counter securities market, reflects a price that cannot be realized in a stand alone reorganization. Any reorganization has a highly uncertain outcome which can be achieved only after an extended period of time, while incurring considerable additional expense, and may result in significant dilution of the current equity holders to the extent creditor claims are satisfied through the issuance of additional equity and/or GGP is recapitalized with proceeds from the issuance of new equity.

No Financing Contingency. We have, or have access to, all of the financial resources required to consummate this transaction, and the transaction would not be subject to any financing contingency or condition.

Due Diligence. The terms described above are based on publicly available information and subject to confirmatory due diligence. We and our team of advisors have thoroughly analyzed GGP, its assets and the ongoing bankruptcy proceedings, based upon publicly available information, and we are prepared to proceed immediately to undertake and complete confirmatory due diligence and to enter into and consummate this transaction as promptly as possible. Simon has an unmatched track record of completing large and successful acquisitions, and we are prepared to commit the resources necessary to address all issues and finalize a mutually beneficial transaction between our two companies.

We are convinced that a transaction with Simon is superior to any proposal you may be contemplating. We trust that when considering our proposal, you will take into account the many benefits of having GGP’s equity holders receive full and fair compensation for their interest versus the uncertain value in any other scenario. The fact that the proposal is all cash and pays unsecured creditors in full will bring certainty to the reorganization process and accelerate its completion which will have the added benefit of eliminating GGP’s significant bankruptcy related expenses.

Our proposal is not open-ended, particularly given the uncertain economic environment that exists today. We look forward to hearing from you soon and working together to consummate a transaction.

Very truly yours,

David Simon

And here is the response from GGP management:

Dear David:

 
Thank you for your letters dated February 8 and 16, 2010 in which you indicated Simon’s interest in acquiring General Growth Properties, Inc. (the “Company”). We appreciate that you took the time to meet in person with management, UBS and Miller Buckfire to explain your indication of interest, as well as provide your view on the timing and diligence process you require in order to convert your indication of interest into a fully documented definitive proposal. We have been discussing your letter with your financial advisors during this past week. Our advisors have also discussed our position with you as recently as yesterday. We and our board of directors have given considerable thought to your indication of interest and have concluded based on discussions with other interested parties that it is not sufficient to preempt the process we are undertaking to explore all avenues to emerge from Chapter 11 and maximize value for all the Company’s stakeholders.

As we indicated during our meeting, we are about to commence a process to explore several potential options for the Company’s emergence from Chapter 11, including a sale of the entire Company as you have proposed as well as a capital raise. The Company and its advisors have been working over the past several months to prepare the Company to launch this process. We will be providing detailed information on the Company, including a confidential information memorandum, financial projections, and asset level information to participants. We will also provide access to an electronic data room. As we are committed to fully exploring all potential options available to the Company, we would like to include Simon as part of this process. We believe the information we would provide to you as part of this process will enable you to better understand the Company, get to a higher valuation, and provide a fully documented offer.

We understand from our meeting with you and the press release you issued this morning that time is of the essence. We feel the same, and intend to run our process in an efficient and expeditious manner. We are currently finalizing the information memorandum and plan to send materials to participants in the process by the beginning of March. We would expect to receive indications of interest within 4 weeks of the launch of the process. In order to expedite your participation and evaluation of due diligence information, we will be sending to you shortly a markup of the NDA you provided to us during our meeting in Chicago.

Again, we appreciate your interest and we recognize the potential value that Simon could bring as an option for the Company to emerge from Chapter 11. The Company intends to pursue the process described above and we look forward to your participation. However, we reserve the right to pursue any proposals that we receive prior to or after formally launching the process so that we can maximize value for all stakeholders of the Company, and we reserve the right to change the process at any time we determine appropriate and without notice.

We would be happy to discuss this response further. To that end, you should feel free to contact either UBS or Miller Buckfire.

Sincerely,
Adam Metz

Recent turmoil In the past few weeks, there have been a number of reports from different individuals trying to value GGP and unfold how much equity will be created through reorganization. There are a lot of uncertainties over how much GGP is worth and we might see a valuation battle between the creditors and the owners. It’s clear that the Committees representing each side have different views: the Unsecured Creditors will want a lower valuation so they can have a higher equity stake and the shareholders will want a higher valuation so they can retain a higher residual stake.

For those who have not been following the GGP bankruptcy story, I will offer a brief synopsis:

• As of January 25, the restructuring of 74 secured mortgage loans aggregating approximately 9.4 billion has been completed. As a result, 180 GGP subsidiary debtors owning 96 properties are no longer in bankruptcy.
• The restructuring of the remaining 16 loans aggregating approximately 2.1 billion was approved by the Bankruptcy Court in December 2009 and January 2010 and is expected to be completed in the next few weeks.
• GGP has recently engaged UBS Investment Bank to assist the Company with exit strategies and Miller Buckfire & Co., LLC as a financial advisor and investment banker.

Now it all boils down to a restructuring plan for the remaining 2,590 mm in Bank Debt and 4,000 mm in Unsecured Debt. Valuation is rarely litigated in court; usually the Creditors and Equity Committee will submit a plan of reorganization which implies a valuation of the Debtor they both agreed upon. But in the case of GGP, there might be large discrepancies between Creditors and Owner, and we might see a valuation battle between the two. The Company is contractually obligated to de-lever its balance sheet based on the loan extension agreements with the Secured Mortgage Loans. Also, the fact that all the 6,590 mm remaining liabilities could be potentially reinstated at par and still have substantial equity left, it doesn’t mean that the Bankruptcy Court will allow it, as the Judge has to make sure that the Debtor will be able to survive as a going concern through another financial downturn.

Key ingredients Let’s look at some key elements that will play a pivotal role in the valuation process:

Ownership: There is a strong bias towards generating a high equity value. The Company is held by insiders, the Bucksbaum family has a 25% ownership and William Ackman, which is Director and a member of the Board, has a 20% ownership.

Equity Committee: An honorable member is Luis A. Bucksbaum, ex-CEO of the Company, which will push for a high valuation, given the large equity interest by his family.

UBS compensation: The Investment Bank charges several fees, but the discretionary fee that caught my attention. There is a completion fee comprised of the greater of 17,500 mm and 0.33% on any amount by which the equity recovery exceeds 1,000 mm. UBS will be indifferent between the two if the residual equity is 5,300 mm or 16.6 dollars a share. This is an incentive for UBS to maximize shareholders’ value.

A Valuation Expert: If the creditors and owner cannot agree on a valuation, the Court will consider the opinion of a third party independent and credible expert. This could be good news for GGP as the positive report from William Ackman, which value the Debtor between 42 and 24 dollars a share, is highly valued and recognized by other institutions and Hedge Funds.

Hovde Capital: The Hedge Fund that highly criticized Pershing Square Capital valuation and rates the Company at 5 dollars a share will have no weight in Court. The Hedge Fund is not a member of any committee, doesn’t own any equity or debt and it’s not a valuation expert.

De-leveraging How will de-leveraging be achieved? Two of the Rouse Bonds were due in 2009, and the Company will probably repay them at par plus post petition accrued interest. The 1,990 mm Term Loan under the 2006 Credit Facility will be refinanced with an Exit Facility and the 590 mm Revolver will be repaid in full. Eurohypo AG is the only creditor under the 2006 Facility and it’s a member of the Creditor Committee. How will the Debtor come up with the cash to pay off the bonds and Revolver ? With proceeds from equity issuance. If the three remaining Rouse bonds and the GGP LP notes, amounting to 1,650 mm and 1,550 mm respectively, are converted into new common, leverage will significantly decrease and equity will increase by 3,200 mm. That would mean that shareholders will face substantial dilution, probably around 40%. Let’s assume that the residual equity is valued at 5,000 mm, an addition 3,200 mm in equity will mean a 39% dilution for shareholders.

This is an overview of the restructuring businesses discussed on the Blog, to update investors on recent developments. I would be glad to give my feedback, or receive yours, on the on any bankruptcy proceedings discussed here.

CIT Group – It emerged from Bankruptcy on December 10 and it’s now trading under “CIT” on the NYSE. As you remember, the Company cancelled the old equity and issued 200 mm of new common shares. The implementation of the Company’s strategy unfolds around CIT Banks; the subsidiary will be the focal point for the origination of middle market loans, bank deposits and other businesses like Vendor Finance (which provides leasing solutions) and Trade Finance (factoring and ABS). That is currently on hold; waiting regulatory approval from the FDIC. On July 2009, the FDIC imposed a “Cease and Desist Order” on CIT Bank, which prevents the subsidiary to grow deposits given the weakness of the institution at the time.

CIT_New_Business_Model

General Growth Properties – The Debtor is expecting to emerge from bankruptcy by the end of June 2010. There are still 3,000 mm in Secured Mortgage debt that need to be reorganized before a plan of reorganization for the Unsecured (Rouse Bonds, GGP LP Notes and TRUPS) and Secured Notes (2008 Credit Facility, 2006 Term Loan and Revolving Credit Facility) is implemented. Most likely maturities for the remaining Mortgage Debt will be postpones at higher rates and a debt-to-equity conversion will be implemented for all or part of the Unsecured Notes. Worth noting is the dividend of 0.19 dollars a share that the Bankruptcy Court authorized the Debtor to pay to common shareholders in order to maintain the REIT tax status and avoid tax penalties.

Chemtura Corp – The December MOR (Monthly Operating Report) reported EBITDA of 54 mm, which brings the 2009 EBITDA to 251 mm, well above my expectations of 220 mm. We might be able to see some equity value up to 2 dollars a share even before a POR is unfolded. The Equity Committee was appointed on December 29 and I am under the impression that the current shares will continue to trade post bankruptcy and reinstated on the NYSE, but shareholders will experience dilution (probably around 50%) due to debt-to-equity conversion and/or new offering. Read my last post on Chemtura Corp for more details on that.

Idearc Corp – The Restructuring process was completed on January 4 and the business emerged under the name of Supermedia Inc which symbolizes a new line of business that the Company launched.  The pre-emergence common stock of Idearc Inc. (which has traded under the symbol “IDARQ.PK “) was cancelled effective December 31, 2009 and the Company now trades on the NASDAQ under “SPMD”. The new name symbolizes the continuity of the old business and the implementation of new products. More details on the different business segments are highlighted in the presentation attached.

SuperMedia_New_Business_Model

Accuride Corp – A third amendment to the Plan of Reorganization was filed with the Bankruptcy Court on December 21. The last date to vote on the Plan is January 29 and the confirmation hearing is scheduled for February 10 2010. The Equity Committee has urged shareholders to strongly reject the plan, arguing that a 2% share of the reorganized Company (which will become 0.6% after dilution) is far too little. The Committee plans to object the Plan at the Confirmation Hearing, and might be able to get away with more, maybe 5% of the reorganized equity. The Committee is not wrong, given the fact that creditors are expected to get no more that 100% recovery plus accrued interest through bankruptcy, but because the proposed Plan offers a significant equity interest to creditors, the upside will be more that 100%. Look at my previous post on Accuride Corp on December 9 for more details about the POR and dilution.

Chemtura Corp is expected to come up with a plan of reorganization in the next three months and emerge from bankruptcy by the middle of 2010. I am proposing a potential plan of reorganization that sees part of the Unsecured Notes reinstated and a 550 mm Exit Facility. In my previous post, I highlighted how the Company needed to generate 2010 EBITDA>270 mm to have equity value. Now, I recognize that the 4.5x multiple used was probably too conservative, therefore with a multiple of 6.00x and with a lower 2010 EBITDA forecast, there can be some equity value.

2009 Developments

Term of the DIP Loan – 250 mm Term Loan, 64 mm Revolving Credit and 86 mm Revolver that will be converted in a Term Loan once the Company exits bankruptcy

DIP Fees – Around 10.5% for the 250 mm Term Loan and 64 mm Revolver; around 6.5% for the 86 mm Revolver. There is a 1.5% unused fee for the unused portion of the Revolving Credit average balance, a 2% exit fee on the 86 mm payable to the lenders and 3% exit fee on all other commitments. The DIP Loan matures in March 18 2010

DIP Term Balance – 165 mm of the Term Loan was used in March to fully terminate the US Receivable Facility and to fund working capital. The remaining 85 mm of the Term Loan was used in April to fund certain outstanding amounts owed to Secured Creditors under the amended 2007 Credit Facility.

Assumptions

Emergence from BK – Before the end of 2010, probably around the 3Q of 2010

PVC additive business – The transaction will generate 45 mm in cash, capital expenditures will be reduced by 18% or 13 mm, which is the percentage of PVC sales to the total segment sales, and EBITDA will be reduced by 10% or 21 mm, which is a percentage of the PVC sales to total sales.

Capital expenditures – The Debtor will incur 45 mm in capital expenditures in 2009 and 2010, which includes a reduction due to the PVC additive business sale. The 8K on February 29 indicated that the company wanted to keep cap ex below 60 mm for 2009.

Working Capital – The Debtor will generate 20 mm in cash from reduction of working capital in 2009 and 30 mm in 2010 due to continuing effort to reduce inventories and account receivables. In 2011 and 2012 working capital requirement will be 20 mm and 40 mm

Potential Plan of Reorganization

Exit Facility – A 550 mm Term Loan with 50 mm amortization schedule each year. The loan will be fully amortized in 11 years.

DIP Loan –The 250 mm Term Loan will be repaid with proceeds from the Exit Facility, cash on hands and cash generated from operations. The 86 mm Revolver will become available as a new line of credit

Credit Facility – The 151 mm balance of the 2007 Credit Facility will be repaid in full using proceeds from the Exit Facility, cash on hands and cash generated from operations.

370 mm Senior Unsecured due 2009 – The Debtor will repurchase them at par plus accrued interest using proceeds from the Exit Facility, cash on hands and cash generated from operations.

500 mm Senior Unsecured due 2016 – The Notes will be reinstated and accrued interest will be paid.

150 mm Debentures due 2026 – The Notes will be converted into a 1.50% coupon mandatory Convertible Note. I assume that 80 mm will be converted in 2011 and the remaining 70 mm in 2012

Capitalization Upon emergence, the Debtor will have a 1,200 mm in debt comprised of a 550 mm Exit Term Loan Facility with an amortization schedule, an 85 mm unused Revolver balance, 500 mm in Unsecured Debt and 150 mm Convertible Note. The latter will be converted into equity by the end of 2012, bringing the debt level down to 950 mm. The end cash level in 2010 will be 116 mm; debt/EBITDA will be 5.4 and 3.2 in 2010 and 2012 respectively. Financial covenants under the Exit Facility should contain a minimum EBITDA of 190 mm per year and a minimum cash balance of 80 mm each month. Now, I am under the impression that the 2016 and 2026 Notes can be reinstated, given the fact that default on these notes was triggered only by cross-default provision included in the indenture governing them, and not by breach of their financial covenants. In order words, the default on the 2016 and 2026 Notes was the result of non-compliance with the covenants under more Senior debt, the Amended Credit Facility. It was likely that the Company couldn’t repay or refinance the 370 mm 2009 Notes due in July; therefore I anticipate that they will be repurchased at par plus accrued interest. Under this scenario I see little equity value in 2010, but can potentially appreciate to 4 dollars a share within one or two years after emergence. I am also attaching a link to an interesting article that I found on another Blog regarding reinstating the Chemtura’s Unsecured debt. Enjoy and I would greatly appreciate your feedback.

http://chemturaresearch.blogspot.com/2010/01/could-chemtura-reinstate-certain-debt.html

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.