I think Reddy Ice is an interesting long idea longer-term.
That said, Reddy Ice's refinancing is very expensive and a find the timing questionable. They said that they did it to address debt maturities, remove certain covenants in their credit facility, to raise cash to make accretive acquistions etc. etc. That may be the right long-term strategy . . .
That said, pro forma for their announced refinancing their cash interest will increase $35 mm per year from ~$15 mm to about ~$50 mm.
I think the stock has considerable downside risk in the short to medium term as folks begin to pro forma future earnings for the increased interest costs.
I think most of the positive news is priced into the stock re the likely settlement with the government and the increased interest expenses have not been factored in by most investors.
I DO NOT expect to see a settlement with the government imminently -- if it was coming in the near-term surely Reddy Ice would have waited to do their HY deal.
Ok, the debt is going from 10.5% to 13.25% or at least $270 million of the debt will reprice. They paid $26.69 million in interest in 2009 and they will pay $35 million in interest this year.
S&P put them on negative credit watch with a B rating. The3 statement they made was that this represented a rating 5 levels below investment grade. They DID NOT say that they were lowering them 5 more notches. They stated that they had concerns that the level of debt would restrict their liquidity. This refinance directly addresses that issue and chances are that this message had been communicated to the board previously by S&P which is why they did the financing at this time anyway.
My guess, having not reviewed the debt covenants of the previous agreement,is that they were restricted from using cash to make acquisitions. Most likely they restructured the debt to allow them sufficient liquidity to acquire some of the smaller ice companies who may be struggling at this time.
S&P cuts Reddy Ice Holdings Inc ratings3:41PM ET on Wednesday Feb 24, 2010 via Thomson Reuters
(The following statement was released by the rating agency)
-- Reddy Ice <FRZ.N> announced an offer to exchange its senior unsecured notes for new senior secured operating company notes. We view this exchange offer as distressed.
-- We are lowering our long-term corporate credit rating on Reddy Ice to 'CC' from 'B' and removing the rating from CreditWatch with negative implications.
-- We are lowering our issue-level rating on the company's senior unsecured debt to 'C' from 'CCC+' and removing this rating from CreditWatch with negative implications. The recovery rating remains '6'.
-- The negative outlook reflects the fact that we would lower our ratings on the existing Holdings debt that participates in the exchange or tender to 'D' and the corporate credit rating to 'SD' at the completion of the exchange transaction.
also, i should clarify my other post. i agree with much on the other poster's thoughts with the exception that i don't have a view on the short term price action. it's very hard to predict, in my opinion.
where do you get 50mm of interest payments from? can you break that down?
i agree with you about the most of the rest of your post. the debt refi was a good deal because they were close to breaking some covenants. it's better safe than sorry and they will now have the chance to go out and make acquisitions while the antitrust issue stays in the background.