NOT AN ANALYST

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.

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.

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.

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Undervalued equity: General Growth Properties (GGWPQ)

Chemtura Corp Chapter 11 recovery analysis

CIT Group Bankruptcy and CIT-PZ

Company Overview Chemtura Corp is a manufacturer and marketer of specialty chemical products, most of which sold to industrial manufacturing customers for use as additives, ingredients or intermediates that add value to their end products. The Company operates on a global scale with 52% of last year sales coming from outside the United States.

Path to Bankruptcy In the 4Q of 2008, Chemtura experienced an unprecedented reduction in orders as the global recession deepened. Liquidity also deteriorated as the availability of financing under the European Receivable Facility decreased significantly due to the Company’s weak financial performance and it was eventually terminated in the 2Q of 2009. On January 2009, the US Facility was formed for the purpose of selling receivables and restoring most of the liquidity that was available in the previous quarter. However, sales and the overall financial performance deteriorated further in the first part of 2009, resulting in the company’s inability to be in compliance with two maintenance covenants under its Amended and Restated 2007 Credit Facility. On December 2008, the Company obtained a 90-day waiver of compliance with the covenants from the lenders under the 2007 Credit Facility. When Chemtura realized that it wasn’t able to refinance its 370 mm notes due in July 15, it filed for bankruptcy on March 18 2009. Foreign subsidiaries and certain US subsidiaries were not included in the filings. The Company is expected to file a plan of reorganization by February 15 2010, after the court already granted two extensions.

Capital Structure As of petition date, there are 1,020 mm of unsecured debt and 199 mm of secured debt, for a total of 1,229 mm.

Advances under the 2007 Credit Facility were originally set to 300 mm, but after it was amended on December 30 2008, the maximum allowed was reduced to 190 mm. The 2009 Notes (GLK.GA) are obligations of Great Lakes Chemical Corp, a wholly owned subsidiary of Chemtura Corp. The 2016 Notes (HTRA.GA) are obligations of certain domestic subsidiaries of Chemtura Corp, but may be released from their subsidiary guarantees under certain circumstances (exhibit 10.1 10Q filing on May 10 2006). The 2026 Debentures (CK.GE) are obligations of Chemtura Corp, the parent company, and therefore junior compared to the other notes.  The 2009 US Facility was terminated on March 23 as a condition of the debtor entering into 400 mm DIP Lending Agreement.  All receivables were sold back to the Company by purchasers for the amount of 117 mm. The CFO for 2009 already contains that charge.

Valuation For the nine months ending in September 30, the Company accumulated 169 mm in EBITDA and it will earn approximately 210 mm for the entire year. During Chemtura’s peak cycle 2005-2007, EBITDA ranged from 350 mm to 400 mm, which is not possible in this environment as demand remains weak, therefore I expect EBITDA for 2010 to be 210 mm on the conservative side, and 20% higher to 250 mm on the aggressive side. EV is calculated with a 4.5 multiple, which is conservative considering that the company never traded around these levels, but rivals like DOW and DD, traded around 5.2 and 6.2 during their peak cycles in 2005-2007. For the nine months ending in September 2009, CFO was 26 mm and it will be approximately 50 mm for the year with 60 mm in capex. For 2010, I expect the company to generate 60 mm in CFO with 90 mm in capex. Historically, capex has been around 110 mm a year with a CFO of 150 mm in 2007 and 250 mm in 2006. Keep in mind that results before 2005 are not directly comparable to more recent results due to the inclusion of operating results of Great Lakes, subsequent to the merger on July 2005.

Recovery Analysis Unsecured debt holders, excluding the 2026 Debentures, are getting 100 cents on the dollar if EV is higher then 1,035 mm in 2010. In fact, the 2009 and 2016 Notes are now trading around 107 cents on the dollar and 2026 Debentures are trading around 78 cents on the dollar, which implies that investors are expecting an EV on the high end of my valuation, around 245-250 mm. There seems to be no equity value left after restructuring at this moment, but if the company earns more then 210 mm in EBITDA for 2009 and expects to earn mote then 270 mm in EBITDA for 2010, I would be a buyer of the 2026 Debentures and the equity as well, which is now trading at 70 cents under CEMJQ.

General Growth Properties Overview General Growth Property’s primary business is the ownership and management of over 200 malls and shopping centers. Operations are divided in two segments: retail, the primary source of income, which includes management of shopping centers, and Master Planned Communication, which includes the development and sale of land.

GGP Structure GGP Group is organized as a REIT and is the general partner of GGP Limited Partnership (GGP LP) which is the entity through which operations are conducted. In turn, GGP LP owns and control GGP LP LLC, The Rouse Company LP and General Growth Management Inc (GGMI) which is excluded from the filing.

GGP Bankruptcy  The Company wasn’t able to refinance its mortgage debt in the second half of 2008 because credit markets were locked and sought protection under Chapter 11 on April 2009 to restructure its debt. Pershing Square provided 375 mm DIP financing at LIBOR + 12% for 18 months from filing date. GGP has until April 2010 to submit a reorganization plan but it has an extension until October 2010. What’s very interesting about GGP is that the NOI has been rising over time, which means that malls and shopping centers are generating significant profits despite challenges in the CRE market and Bankruptcy. I am under the impression that GGP still has a lot of value and if the Company can defer maturities and reduce its debt levels, it’s going to be in good shape again as operating performance has been strong. As of December 31 2008, there are 24,850 mm of consolidated par debt outstanding, which includes 18,270 mm of secured debt and 6,580 mm of unsecured debt. Total liabilities account to 27,300 mm and total assets are 29,600 mm. Net Operating performance (NOI) for 2008 was reported at 2,590mm a 4.5% increase from the previous year. In the next few weeks I am going to post a more detailed analysis on the bankruptcy and I will try to unlock the Company’s equity value, which I think it’s substantial.

Recent News There has been a couple of significant articles lately and the stock started to soar. The Company announced on November 19 that it reached an agreement with lenders to postpone loan maturities  and it expects to emerge from bankruptcy by the end of the calendar year. Also there are rumors that Simon Properties Group might put some capital into the company.

CIT Group Bankruptcy Overview On Nov 02, CIT Group and CIT Group Funding Company of Delaware LLC filed for chapter 11 Bankruptcy protection under the pre-packaged plan of reorganization. The conditions for the debt exchange offer were not met. CIT Bank was not part of the filing and will continue to operate regularly. Court proceedings should not take long and CIT Group is expected to emerge from bankruptcy by the end of the year or early next year. The firm is now trading under CITGQ.PK. I am skeptical about CIT Group’s ability to return to profitability even if the company is reducing its debt level and postponing maturities, since leverage remains elevated. In 2006, the company’s leverage was 12x operating earnings (EBITDA), in 2007 and 2008 it was 15x. Assuming operating earnings remain constant post re-org in 2010 at 4,260 mm; the company will be leveraged 9x, which it is still a high number.  The credit rating that will be assigned after the company emerges from bankruptcy and the evolving of ongoing regulatory issues, the “cease and desist order” imposed by FDIC on CIT Bank, will be a key factor for the firm’s capacity to raise short term funds.

CIT Preferred Class Z While I was looking up and down the capital structure, I found out that a mandatory convertible preferred stock, CITEQ which was formally CIT-PZ, trades around $16, surprising for a preferred stock. The interesting part is that the security is actually benefiting from bankruptcy filing. Let’s take a closer look at it.

Corporate Units On October 17 2007, CIT Group issued 24,000 m of mandatory convertible preferred shares called “Corporate Units”. Each unit represents a 1/40 or 2.5% ownership interest in $1,000 principal amount senior note maturing on November 15, 2015 issued by CIT Group and is composed of a purchase contract which obligates the holder to purchase, no later than November 17, 2010, for a price of $25 in cash, a certain number of common shares.

Treasury Units Holders of a Corporate Units have the right to substitute, anytime before November 1^st 2010 in integral multiples of 40, for Treasury Units which consist of an ownership interest in a $1,000 principal zero-coupon U.S. Treasury security (CUSIP No. 912820MJ3) maturing November 15, 2010. Each Treasury Unit is composed of a purchase contract which obligates you to purchase common shares under the same terms of a Corporate Unit Holder. More specifically, when the treasury security matures on Nov 15 2010, the proceeds are used to purchase common shares on Nov 17 2010.  

Bankruptcy Clause The offering states that in the event of Bankruptcy, the obligation under the purchase agreement is terminated. You are no longer obligated to purchase common shares on Nov 17 2010, which could cause a huge loss at the current price, and can no longer create Treasury Units from Corporate Units either, because that was contingent to satisfying your obligation under the purchase contract.

Conclusion CIT-PZ is trading at $16, slightly below what holders are expected to receive from Bankruptcy, which is 70 cents on the dollar plus some unspecified equity interest like. If you are looking to buy senior unsecured bonds and participate in the restructuring, you should buy CIT-PZ because it has the same recovery rate as a Class 9 Senior Unsecured bond but it offers higher liquidity and better price.

Related posts on this Blog:

CIT Debt Exchange Set to Fail

Introduction CIT Group and CIT Group Funding Company of Delaware launched a Restructuring Plan on October 1^st to enhance the capital levels of the firm. We will first look at the capital structure and then at the terms of the Plan. 

Capital Structure CIT Group has all the characteristics of a High Yield Issuer. The Company is structured as a holding company, it relies heavily on short-term bank debt (JPM Letter of Credit, most of Senior Unsecured Notes, Senior Unsecured Term Loan and Credit Agreement are bank debt) and debt is borrowed at the parent level (the senior unsecured notes are issued by CIT Group which is the parent) but funds to pay the obligations are generated from operating subsidiaries.  The offering memorandum provides very useful insights however it’s 250 pages!

Only the face amount for holders entitled to vote in the offering are displayed

Restructuring Plan The Company’s principal objectives under the Restructuring Plan are to reduce leverage, return to investment grade rating, transfer business platforms to CIT Bank and recapitalization. Bondholders can elect to participate in the Restructuring Plan through consummation of the Offer or the Plan of reorganization. The Offering is conditioned upon achieving acceptable liquidity and leverage targets and the Plan of Reorganization is accepted if it reaches a certain approval percentage. The Company will file for bankruptcy protection without a prepackaged restructuring plan if the offer is not consummated or the plan of reorganization is not accepted.

Terrible deal Investors holding the Canadian Senior Unsecured Note or Structurally Senior Unsecured debt in the table above (for amount of $2,188 mm) are pushing for greater consideration from the Offering Plan as they are entitled to recover close to 100 cents on the dollar from the pre-packed Plan of Reorganization. Also Subordinated Bondholders (amount to $1,979 mm) are only offered Preferred Stock and are asking for more equity or extra money if the company will perform well. It’s important to note that the “New Preferred Stock” offered is not a preferred stock per se but it’s basically an equity stake in the company. The “New Preferred Stock” will have no stated dividend, no intention to pay a dividend, no maturity, it will not be listed on any exchange, it will not be subject to any sinking fund provision and only redeemable at the Company discretion. Should I go on? This Preferred Stock may very well be worthless if the company seeks Chapter 11 protection a few months after the offering.

Amendments and more On October 19, Carl Ichan offered to underwrite a $6,000 mm loan to rescue the lender after the offering was amended on October 16 to include some minor changes that are “sweetening” the offer. However, the company has major liquidity and operating issues and these actions are just postponing the problem. For the months ending on December 31 2009, there is $1,600 mm in notes maturing, including $800 mm due in the first week of November and for the months ending in August 31 2010, there is $7,600 mm of debt funds needed.

Little Hope Bankruptcy seems inevitable for CIT Group even if an out of court reorganization is implemented. The company’s ability to raise funds is impaired under two fronts: capital markets because the company has credit rating below investment grade and cannot issue short term debt like commercial paper (or it might be able to at high rates) to fund its lending business and bank deposits because the FDIC imposed a restriction called Cease and Desist Order on the CIT Bank ability to grow deposits as the regulator is concerned about the firm’s financial well being.

Covenants Restrictions The new notes are going to be subject to certain covenants that protect bondholders but will impair the ability of the Company to generate income.

• Restriction on the parent and its subsidiaries from incurring additional debt. This is obvious but there should be some tests implemented every quarter to check if capital levels are adequate (maintenance or debt incurrence test).
• Pay dividend. The Company has to retain income, if any.
• Make investments .This is my point, how is the company going to grow?
• Create liens or use assets to secure other transactions. A principal element of he Restructuring Plan is to “negotiate new or amend secured credit facility to provide additional liquidity” but this is not possible under the new notes covenants.
• Sell certain assets or merge. If the company ends up in trouble again, which I deem very possible, the only solution will be Chapter 11
• Transaction with affiliates. Part of the business Post-Restructuring Plan indicates that the “most likely scenario” is to transfer all “bank-like” operations (that takes place in other subsidiaries) to CIT Bank, but this is not possible under the new notes covenants and until the FDIC lift the restriction discussed above.

A breach of any of these covenants could result in a default under the New Notes Indenture.

Conclusion The Restructuring Plan doesn’t seem well drafted as some of the core objectives cannot be implemented due to the restrictive bond covenants of the new notes. The company may end up in court for bankruptcy under Chapter 11 as the Offering doesn’t look appealing to bondholders.