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.

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.