NOT AN ANALYST

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.

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.