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  • peristentone peristentone May 9, 2012 7:08 PM Flag

    Will They Bribe Equity?

    I am going to have to post this in parts because Yahoo censorship software is blocking one large post. I hate Yahoo!

    Just for the heck of it, let's try to understand how does equity get paid in the case where they want give the company to the bondholders, but also want to avoid the expense and humiliation of a formal CCAA. My working assumption was that they might try to bribe equity with 1% of equity in the newly formed company in order to secure votes to satisfy the bondholders? As a bondholder, wouldn't you prefer to give a token amount of your equity away to avoid the possibility that a judge might do the math differently than you? If this goes to trial, the judge could give equity $0, but the judge might also give equity 5% of the new company. My guess is both Yellow management and the bondholders have an interest in giving *something* to equity. So, how much, and how does that get distributed?

    However, in doing the math, I think there could well be more than 1% available to offer equity, even with very pessimistic assumptions about 2013 EBITDA.

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    • I apologize for that broken post. I literally had to post some sections one sentence at a time - continually altering the text until the Yahoo censorship software allowed it to post.

      If there are seven levels to Hell, Yahoo deserves to have an eighth level created for the sadistic monsters who created this forum software.

    • How do others see a workout to equity here? Management might choose to force this through CCAA, in which case equity is in the hands of the judge. Personally I think that route might give a better outcome for equity, but it is also a long, difficult, and likely unfair process.

      Trying to provoke useful valuation discussions here, not exercise any opinion.

    • There might be significant upside in these numbers once those new shares start to trade.

    • Again, these numbers use a proposed valuation in a newly formed entity that would have no debt.

    • With about 500M common that works out to about 20 cents per common share.

      • 1 Reply to peristentone
      • Peristent, a restructuring makes sense, and the restructuring might leave equity with 1% (common practice). However, there are a few problems with the math:
        1) Markets are valuing the whole enterprise value of YPG at around $800-$900 million (roughly 50% of par on $1.8b in debt). That is significantly less than the $2b valuation you suggest.
        2) The 5x EBITDA multiple you assigned is too (see point 1), because EBITDA is falling fast. 5x EBITDA is appropriate for stable or growing companies, not one with the threat of obsolescence in the next two years.
        3) Different classes have different priority - pref comes first, but can be forced to convert. Prefs now appear to have cumulative market value of around $15-20m.

        If restructured EV is consistent with current markets of $900m, then the equity allocation of 1% would be worth only $9m. Adjusted for the forced conversion of prefs and convertible debt, you end up with 800m shares. That means that with an equity kicker of 1%, each common share would be worth only 1 cent.

    • So figure maybe $3 per preferred share.

    • Preferred shares have about $750M at par value.

    • Third question: how do others see that $200M (or whatever) stub of value getting divided among the different equity classes? I am guessing one half to preferred and one half to common?

    • First, what do others think the bondholders valuation will be? Please try to assume the other sides perspective. I am asking everyone what will be the valuation done by BONDHOLDERS.

      Second, how much of that valuation is left over for equity? Again, go on theory that bondholders and management want to avoid the CCAA proceeding and its uncertainty. Therefore they need to make enough of an offer to equity to bribe them into acceptance.

    • If you are a bondholder, you want to distort the financials and make the company look as sick as possible, in order to increase your take. Let's say that bondholders make an argument that the company is impaired and declining fast, and that the 2013 EBITDA is $400M. I am not asking anyone to agree with that number. Let's simply observe the bondholders' perspective. Apply a 5x multiple to that EBITDA and the company valuation is $2B. There appears to be enough to pay back debt - including debentures - in full - paid out as shares in the newly formed entity. There is a residual of maybe $200M to spread among equity: common shares, and four Preferred share series. This assumes they don't even bother to convert Preferred A and B to equity because the management basically gave up and is deciding to just treat all Preferred classes the same.