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Otelco, Inc. Message Board

  • captainodestin captainodestin Feb 2, 2013 12:51 PM Flag

    Something of an unusual filing

    After reading the awfully long 8k you see both the purpose and reason for the BK filing.

    The purpose is to extend the due date of the $162 million of the companys senior debt from Oct of this year to sometime in 2016 (can't remember the exact month in 2016) in exchange (A) for the company paying off a minimum of $20 million of the debt on completion (?) of the Bankruptcy; and (B) giving the senior debt holders a 7.5 percent share interest in the company post bankruptcy in the form of a new class B common stock to be issued; and (C) somewhat debasing the current shareholders (who are actually both shareholders and indirectly subordinate debt holders) into pure shareholders with no debt interest in the company; and lastly (D) converting the so called "bachelor" subordinate notes into class A common stock of the company.

    The reason for going the BK route -as opposed to restructuring outside of BK- is the companys statement that it be believes that it might not get the required level of consent from all debtholders to do it outside of the BK process.

    In respect of C and D of the purpose of filling BK, the company has in the past issued $108 million face of subordinate notes. Some $99 million of the notes are currently secured as $7.50 income deposit securities (IDS) with each share of the companys current common stock representing ownership of one IDS. Thus the current shareholders are also in effect indirect holders of $99 million of the companys subordinate debt. The remaing $9 million of the subordinate debt is not structured in this way and is refered to as the "bachelor notes" (i. e. they are not "married" to shares of stock) and simply exist as oustanding subordinate notes. Obviously the senior debt holders want the $108 million converted into new ordinary common stock because it then leaves them as the companys only debt holders. This matters to the senior holders BECAUSE given the companys tangable assets its failry clear that shareholders would be entitled to nothing should the company fail at some point in the next few years after the current restructuring. With the subordinate debt wiped out the senior holders then would be able to just take the company entirely for themselves if the company starts to fail at some point after the restructuring is completed. Thus C and D effectively give the company to the senior holders if something goes wrong after the current restructuring. Its their protection in case the restructing just doesn't t work out.

    So the restructuring debases the current shareholders somewhat. They get demoted from being shareholders and debt holders into just being plain shareholders. On the other hand the company gets the due date on its senior debt extended into 2016 which gives the company time to see if it can improve things. I would say its a fair trade off.

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    • As I say I see the proposed deal as a fair tradeoff to the current shareholders.

      However I do not want to minimize the risk in the stock by this remark. After the restructuring the stock will remain the same high risk lottery tickett that it is now.

      This is because the restructuring contains terms that EXPLICITLY hand the company over to the senior debt holders if the company does not meet stringent leverage targets after the restructuring is completed.

      The first thing is that the proposed restructuring allows the senior debt holders to select 3 members for the OTT board of directors. These are reffered to as "special directors" in the agreement because in the case of a "triggering" event each of these directors is given 2 votes for a total of 6 votes out of 10 on the OTT board. A triggering event then gives the senior debt holders control of the company through the 6 out of 10 votes they will control on the board.

      The restructuring agreement explicitly defines 2 triggering events the first is a breach of an EBITDA leverage to senior debt ratio of 4.25 to 1 as measured at the end of each quarter following the completion of the restructuring. The other is a failure to make quarterly payments on the senior debt. (amortization @ 1.25 percent of principal per quarter)

      If any such triggering event occurs the the special directors get 2 votes each and the debholders seize outright control of OTT.

      Furthermore, the occurence of either one of these qualifyinf events also triggers a sale covenant in the restructing agreement. This is covenant is exactly what it sounds like it is. I quote directly from the 8k of the other day:

      "The sale covenant shall require the Borrower to sell all of the equity interests or all or substantially all of the assets of the Credit Parties (the “ Sale Covenant ”) within one hundred eighty days after the occurrence of a Trigger Event "

      The companys EBITDA is therefore critical going forward. They project $32.5 million for 2013, which gives them an EBITDA leverage ratio of 4.15 to 1 on the $135 million senior debt that will be outstanding when the restructuring completes. (i. e. $135 million divided by $32.5 million is 4.15)
      Notice that this is just above the triggering event ratio of 4.25 by a very small amount. My trusty calculator tells me that a 2013 EBITDA of $31.76 million will give a leverage ratio of 4.25 and thus will be a triggering event as defined in the restructuring agreement. That is only a shortfall of $0.74 million below the company current 2013 EBITDA projection.

      Thus there is no margin for error going forward. The slightest shortfall going forward will breach the EBTIDA leverage ratio and give the 3 special directors selected by the senior debt holders voting control of the company and at the same time the sale covenant will come into effect requiring the sale of the company within 180 days. The senior debt holders will then control the OTT board of directors and then sell the company in accordance with the sale covenant.

      Given that the companys tangable assets are well below the $135 million in senior debt that will remain post restructuring, such a sale of the company would result in nothing going to the companys shareholders. So the stock is a lottery ticket today, same as it was before the restructuring proposal.
      if the company can meet or exceed its projections then shareholders can come out ok in time, but if not then shareholders are simply going to be wiped out here (and probably wiped out before the end of 2013 because there is virtually no downside cushion on the leverage ratio). Lottery ticket.

      • 3 Replies to captainodestin
      • Captainodestiny,
        While I would also prefer more breathing room before a "Trigger Event," I don't believe the situation is as dire as you've indicated. While the "Special Directors" must be acceptable to the senior lenders (Class B shareholders), this acceptance must be based only on five specified criteria: "experience, qualifications, disinterestedness, independence and integrity." The disinterestedness and independence requirements are further defined to mean that the special directors cannot be biased in favor of the lenders or have had any history of business or personal relationships with the lenders. Also, the special directors will still be elected by the Class A shareholders, the same as the other directors, except the CEO. So, the special directors won't be in the pocket of the special lenders and won't necessarily do what they want in case of a trigger event.

        While I agree the leverage ratio of 4.25:1 doesn't leave much margin for error, the 8-K states that the lenders may waive the Sale Covenant if the ratio is breached. If the breach is not large, it would be in the interests of the lenders to waive the Sale Covenant because they would receive more through continued operations of the company than a liquidation. The 8-K estimates that net proceeds from a hypothetical liquidation would be between $103 & $112 million, which is less than the restructured debt of $135 million plus 7.5% equity. Plus, the lenders would forego the enviable interest rate of 6.5% to 7.5% going forward. I have scene this scenario play out with other companies, such as ocean drybulk shippers, where lenders renegotiate their agreements because they have more to gain if the company survives. I believe liquidation is a last resort to be used only if it is clear the company is not viable going forward. If the lenders did not believe Otelco was viable, they would have pushed for liquidation now.

        I agree there is still risk in Otelco, but much less than before this reorganization was announced, and much less than the current price would indicate.

      • You are correct if you take OTT's 2013 EBITDA estimate at face value. I don#$%$ low-ball IMO.

        OTT is saying in the presentation that a $16M decrease in revenue from 2012 to 2013 (because of TW & new government price rules) equates to an approximate decrease of $13M in EBITDA? I find that very hard to believe. On 8/7/12 OTT issued a FY '13 EBITDA estimate of of $34-$35M. Now the FY '13 estimate is $32.5M? The effect of both TW & government pricing rules were known in August when OTT made that estimate.

        I encourage anyone who believes this new $32.5M 2013 EBITDA estimate to sell their IDS units tomorrow.

      • I understood most of that from my reading, but could never have connected all the dots and stated it as flatly as you did. U get my nomination for Message Board participant of the year!! AND I move that nominations be closed.

    • Don't forget-we will get further dilution as the "management incentive plan" gets developed. The banks are running this show. We have nothing to say until they are paid down. 75% of free cash flow goes to the bank quarterly. 4.2x EBITDA is a bit more difficult that they let on. We are all going for a ride into the unknown.
      It could work but I would feel much safer if there were a new CEO and CFO.

    • Thanks for your post.

      The one thing that bothers me the most is the massive Goodwill writedowns they took a few qtr's ago in paving the way for this. They took goodwill down from188M to 44mm and another 12M in Intangible writedowns. In 2003 they had over 100M in Goodwill and it grew each and every year. So they effectively cleaned house on the balance sheet decimating the stock making the sub debt wipeout much easier. Management is 100% responsible for this. I have to question why they are going to continue to be in charge.

      • 1 Reply to hdecker88
      • As an OTT unitholder for just two months, I'll go to bat for management. I think managements actions I've read about in the past year have been extraordinary in the face of a hellish year that saw its number one revenue source do a surprise attack and not renew, while the goverment inflicted further punshiment with its new pricing rules. The goodwill is a direct result of these events. And I can think of a few companies I own that have taken large non-cash goodwill charges in the past year that have appreciated alot since then.

        Rarely do you find management & Boards take salary cuts at companies even when things aren't going so good. Management was quick to repond to the TW news by immediately terminating the dividend & deferring the interest on the sub notes. By taking swift action, OTT today was in a much better position to deal with the banks as evidenced by its $20M payment to them to get the wheels in motion to delevrage its balance sheet. There was $32M on OTT's balance sheet at the end of 2012. They had about $11M at the end of 2011. They acted swiftly & decisively to deal with the approaching storm. Had they not responded as they did, the IDS units would be worth alot less than they are now.

 

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