How/Why would this company go BK? They have annual POSITIVE cash flow of over $1 billion. They have an almost $3 billion asset based lending LOC in place and only $1 billion in debt coming due by 2014. The ABL line is in place for 5-7 years... The company has a MINIMUM of 2 years to turn the company around before even thinking about BK...
I agree. If the company was heading to bankruptcy, why would someone try reducing the voting quorum from 75% to 50% and when this failed - to 66 2/3%?
I know from my work experience that such attempts are clear sign of a capital buyout plan.
Just imagine a situation where you are a co-owner of some property with bunch of other people and you want to cash out. What would you do? First, you try to get the right to sell. Then, you'll keep buying out as many co-owners as possible, to multiply your profit.
If the property goes in BK, you will stand LAST in line, after the lenders, bondholders, etc.
I am not sure who the "you" in SVU is but I believe we are going to find out soon.
The issue is not whether they go BK. The issue is whether is committed to improving the business under the current capital structure. Right now, it appears they have no desire to preserve current stockholders' investment. The market is predicting they will try to convert bonds to equity, and current equity will be worth no more than what it is trading at when the conversion is effective. You have no upside here because management is concerned more about employees and bondholders than stockholders at this point. Didn't you hear the references to "stakeholders" in the conference call. Be careful here. As a current stockholder, you are not adequately represented and there is a big capital restructing coming. It won't be a BK, but it will likely involve massive shareholder dilution.
They simply cannot convert the company to a viable low-cost platform without a significant infusion of capital.
The benefit of a BK goes beyond a capital restructuring. It allows SVU to dump a lot of liabilities with relative ease. If it was just about the leverage, SVU would do bond repurchases at below par and slowly de-lever. You don't need to hire bankers to accomplish that, no matter how incompetent your CFO is. What's the benefit of not doing a bk here?
"You have no upside here because management is concerned more about employees and bondholders than stockholders at this point."
Yes, that is the case. The shareholders will end up with little to show for their stock.
Wrong. The primary responsibility of the CEO is to increase shareholder value, not to bankrupt them. Management has no reason or benefit to put bondholders ahead of shareholders.
If you study the financials, bankrupting a subsidiary would add very little value if any at all. That's why the CEO ruled out bankruptcy during the conference call.
But your fear, though irrational, appears to be widely held and that's why the stock is at $2 instead of $5.
From the conference call, nothing is gauranteed except the revolver. Their guidance is to pay down debt at 500M per year for next 2 years, and then 400M per year after that. They are committed to operational CF of 1B. That's massive, and also attainable.
As a finance guy, that is music to my ears. As they pay down the debt, the value of equity will increase.
When the new financing is in place one should read the agreements and make sure that SVU management is transparent regarding what other assets remain to be used for other debt instruments.
Would also be nice for them to clarify whether or not any of the other debt instruments have any sort of commitments/guarantees and start publishing separate company financial statements as bankruptcy of individual subsidiaries might be a possible strategy as part of the workout. I can understand not publishing financials for the subsidiaries as they can't very well say ACME is losing or making tons of money but crap, we should know whether the other debt have commitments or are totally unsecured. Yet another example of poor transparency.
Yeah I totally agree, but I am sure they will get the financing and I dont think there is much question about that.
The creditors will loan them all they want as long as they have the hard assets to back it -- which they clearly do. They hired Goldman as insurance, which is probably the smartest decision they have made in a long time.
Goldman has a lot of good talent, if you are betting against SVU, you are basically betting against Goldman Sachs. Anyone with any sense knows that's not a good idea. Goldman's prop desk can buy this entire float in an hour and squeeze this stock all the way to 20 in less than a week.
I have to hand it to the short sellers, they played it well so far. But with Goldman Sachs now running the show, I would be very, very nervous.
I agree with Goldman Sachs price target of 4 or 5. That would be the minimum valuation based on current circumstances and that is if there is no change in strategy, and they just merely manage revs and costs.
Once the new credit line is secured next month, I think you will see a big pop.
If the current strategy works it will be 8 to 10 instantly, and could rise in several years to 25+. But that might be a bit optimistic considering the history.
I think they will be in violations of those debt covenants if they continue to perform as they did in the latest quarter. Unfortunately, SVU is not transparent so we don't know how the covenant calculations are made and can't say how close they are. Having said that, I'm pretty darn sure they are using past four quarters data to calculate coverage ratios so the latest quarter didn't kill them. This lack of transparency is very worrisome and reflects very poorly on SVU management.
Maybe they can adjust operations and get things back into a range where they comply but I don't think they think it is possible or they probably wouldn't have ran around like chickens with their heads cut off trying to negotiate deals two days before announcing results!
Bankruptcy is possible until they get the new agreements in place. Once they are in place they have at least a couple of years, probably more. Rite Aid does not have the debt covenants that SVU has. Very unfortunate that SVU waited until the situation became so dire before negotiating new debt agreements. Folks on this board, including myself, have talked about the need for doing this for at least the last six months. If we on the outside recognized the need, SVU denied the need and then did exactly what we said needed to be done exactly what does that say about the quality of management and the BOD? I think it is the recognition of their own competency problems that has led them to the decision to sell if at all possible.
Entirely possible that they cannot negotiate a deal for the sale of Albertson's that leaves them solvent in which case they wind up another Rite-Aid. Plodding along for years hoping for something to come along. In essence, unsecured bondholders put up the capital and shareholders get an option on improvements in prospects. Lots of scenarios but that is the one I think has the highest probability of coming into fruition.