NOT AN ANALYST

Investment Thesis BGP carries an intrinsic value of $6.5 based on the relative valuation of comparable multiples. The stock is expected to reach its fair value by the end of 2010, giving an annualized IRR of 77% from current levels. BGP represents a value opportunity in a mature industry. The Company’s shares have been pushed lower over the last year due to significant price competition among book retailers and unfunded bankruptcy rumors. Now the scenario has shifted; the implementation of a new business strategy and the commitment of fresh capital from a group of lenders, are clear signs that BGP can effectively manage through its troubles and focus on regaining market share.

General BGP is an operator of book, music, movie superstores and mall-based bookstores. The business is organized three main segments: Borders Superstores, which includes Borders.com launched in May 2008, Waldenbooks Specialty Retail Stores, which operates small boutiques located in malls, airports and outlet malls, and International Stores.

Restructuring Efforts In the last three years, BGP has suffered a significant price competition from online book retailers such as AMZN, which has squeezed Borders’s margins and profitability. However, due to a conservative capital structure, consistently positive FCFF and cost cutting initiatives, the Company was able to survive. In the beginning 2008, Borders launched a turnaround effort designed to return to profitability. These efforts included store closings, staff reductions, advertising cuts and reduction in inventory for stagnant segments like music and movies. The efforts are ongoing and are expected to continue through 2010. BGP is also planning to gradually exit the Waldenbooks Specialty Retail Stores segment because it has not delivered the amount of growth expected, given the capital invested. The international Stores segment accounts only for a very small fraction of the overall revenue.

New Business Strategy The U.S. book retailing industry is a mature industry, which experienced little or no growth in recent years. In the beginning of 2010, Borders have developed a new strategy designed to grow certain segments, increase revenue in the long-run and drive traffic into stores. There are three main points of the new strategy:

1-Leverage Boarders.com and the power of social media –Grow the online sales business on Borders.com and introduce new technologies. A new shop zone will be introduced called “Area-e”, where multiple e-Readers will be available for sale.

2-Become a community gathering place –Host customer events including author and celebrity signings, local events, educator appreciation weekends, which are expected to drive traffic into stores and sales.

2-Improve in-store experience – Retain customers through reward and coupon programs.

Availability of Capital The ability to refinance its debt and to obtain credit are key ingredients for the Company’s recovery.  On March 31, 2010, the Company entered into a Third Amended and Restated Revolving Credit Agreement, which replaces the prior Senior Revolving Credit Agreement. The commitments are divided into a $270.5 mm existing tranche maturing in 2011 and a $700 mm extended tranche maturing in 2014. Also, on March 31, 2010 BGP entered into a Term Loan Agreement under which the lenders committed to provide $80 mm in capital maturing in 2014. The commitments by the lenders are subject to which include borrowing base and availability restrictions, which are pretty “lax” and should not trigger a credit event in any circumstance.

Unfunded Bankruptcy rumors In late 2009, rumors that the Company was close to file for Bankruptcy skunked the shares below $1. However, when we look at the historical current ratio and various capitalization rations, we can clearly see that liquidity and solvency have never been an issue for BGP. The capital structure has always been conservative and compliance with financial covenants was always maintained. The new financing received on March 31^st, which provides capital for the next four years, confirms that investors are confident about Border’s ability to repay its obligations over time and the risk of bankruptcy is now remote.  However, the share price still doesn’t reflect that.

Valuation BGP trades at multiples that are significantly lower than its direct competitors. Comparison with the book retail industry is not meaningful, because multiples of the industries include online retailers such as AMZN, which have a much higher growth rate than BGP. Applying these multiples to BGP would overstate its value. The most meaningful comparison can be made with Barnes and Noble (BKS) because it has a very similar business model, it operates in the same geographical areas and it has similar fundamental characteristics. However, a relative comparison based on multiples of EPS, EBITDA and FCFF is not meaningful.  BGP is experiencing negative earnings and BKS had high capital expenditures in the last twelve months, generating a negative FCFF. A valuation based on Adjusted CFO, which is CFO plus after-tax interest, Total Revenue and Book Value seems more accurate. When we apply multiples to BGP fundamental, we find an average price of $6.50, which equates to an IRR of 133% over 8 months or represents an annualized IRR of 77%.

Potential Dilution Resulting from Equity Offering In connection with the term loan made by Pershing Square, which was repaid in the 1^st Quarter of 2010, BGP issued warrants to Pershing Square to acquire 14.7 million shares of our common stock, which currently represent approximately 19.7% of the outstanding shares.

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.

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.

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.