Di_vur, Perspicuator, Mung, I'd appreciate help with this. I keep wondering how the heck KK made its covenants for the 3rd quarter and how it will make them going forward. This is a challenge, as you know, since CEBITDA is only distantly related to KK's EBITDA - with consolidated JV's and restructuring and other costs removed. I think I may have a handle on it but would like your review and suggestions.
Starting off, I think the debt/CEBITDA covenant was the tougher one for the 3rd quarter and KK needed about $41M of rolling CEBITDA to be within covenant. 4.5 times $41M equals about the $185M of Consolidated Total Debt (as I read it) reported at 10/30/05.
We know that CEBITDA was deemed to be no more than $6.8M for the 3rd quarter and it seems reasonable to believe CEBITDA has been declining along with total and per store sales. So, maybe CEBITDA over the last 4 quarters has looked something like this: $13M, $12M, $9M, $7M. Incidentally, $41M of rolling CEBITDA would comfortably meet the 3.15x interest coverage test if rolling net interest expense was $9-10M.
If this is right, CEBITDA for the last 3 quarters would be $28M. I'm estimating net interest expense of $11-12M for the rolling 4 quarters through January so the 4th quarter wouldn't have to show much CEBITDA to meet the 2.5x coverage test.
On the other hand, if Consol. Total Debt is still $185M, rolling CEBITDA would still have to be at least $41M at the end of January and the 4th quarter would have to show $13M. That's quite a stretch from $7M in the 3rd quarter. I continue to wonder why the lenders lowered the interest coverage ratio for the 4th quarter but didn't increase the debt ratio until the 1st quarter of fiscal 2007. Could it have been a mistake?
In the 1st quarter of fiscal 2007, the new ratios suggest to me that rolling CEBITDA needs to be at least $30-33M. A series such as this would achieve that: $9M, $7M, $10M, $7M. Relative to the targets, this generally makes sense, except for what appears to be an expected blip in the 4th quarter. I suggested before that perhaps the lenders are keeping KK on a tight leash for the 4th quarter, but it's also very probable that I'm missing some important facts.
Have I bored you yet? I know this is very speculative and there isn't much anyone can or should do with this, but I think it's useful to try to anticipate developments. Also, if reality has any similarity to what I'm describing here, it would fit well with what we're seeing in terms of KK closing stores to eliminate negative EBITDA/CEBITDA and selling assets to reduce debt. If, in fact, the tighter of the two covenants is the debt ratio, then debt reduction would logically be a high priority.
i) ok, i was just trying to understand the language. They clearly had a lien on the JV equity stakes but I was trying to determine if they had create liens on JV properties.
ii) i understood exctly what you are saying, bu and this why i've got back into the documents. Let's say the Lenders expected x amount of recovery and they didn't get x, they'd clearly get dissapointed. But for this to factor into the calculations we'd need to see something like "total asset value". So far i only see the "Covered Property Value"
I'm trying to determine the relatinsip between the Commitments and the valueof underlying assets.
SECTION 2.01. The Commitments. Subject to the terms and conditions set
forth herein, each Lender agrees to make Syndicated Loans to the Borrower from
time to time during the Availability Period in an aggregate principal amount
that will not result in (a) such Lender's Revolving Credit Exposure exceeding
such Lender's Commitment or (b) the total Revolving Credit Exposures exceeding
the lesser of the total Commitments and the Borrowing Base then in effect.
Within the foregoing limits and subject to the terms and conditions set forth
herein, the Borrower may borrow, prepay and reborrow Syndicated Loans.
okso we know what the borrowing base is but we don't know how to define the commitments. I'm affraid the answer is in:
SCHEDULE I - Commitments
SCHEDULE II - Material Agreements and Liens
SCHEDULE VI - Subsidiaries and Investments
SCHEDULE VII - Real Property
Laura wil;not answer questions about stuff that's hidden in "schedules"
i) a lien on the equity is different than a lien on the assets of the equity interest.
ii) the first lien supposedly had $75 million in collateral. If part of that collateral was the $22.5 million FR loan (presumably at a discount to face value, but who knows), then the diminishment of the collateral would presumably diminish the available credit. Also, we don't know exactly how fast kkd is disposing of assets. Everytime they sell something which was collateral for the first lien, it should diminish credit availability, right?
I'm not referring to any particular clause, just trying to figure out why credit availability has decreased.
Did you ever talk to Laura?
I don't know.
We're only talking about roughly 1% of the unsecured claims that csfb/sp/???? would effectively not claim ($250,000 non-kkd obligations vs. over $24 million in kkd obligations).
So, if the court hadn't granted what the lenders were looking for, then a liquidation resulting in $3 million would have only cost them $30,000 (the share that would go to the non-kkd lenders). They get that much in legal bills every week.
1) i thought that it was already specified in the original agreements that the Lenders would create a lien on any unencumbered CJV assets...?
2) I still don't understand how this would influence liquidity. The 2nd lien holders gave KKD a bunch of money to be burned in a certain way. They knew that any cash lost to FR, or receivables created w.r.t. FR (which eventually amounted to $24mm) would be a drain of cash.
And even if a lien is denied to the Lenders,.. you said a lien was denied to the 2nd lien lenders, how would that influence the 1st lien facility? and just because the unsecured debt was $24mm, it doesn't mean the "lost asset value" is the same. and besides, even if $24mm is missing, 18mm+24mm=42mm, which implies a CEBITDA of $28mm - still too low.
I'm all confused about what you're trying to say...
are you referring to any particular clause in the original agreemnts?
How are you arriving at the $185 million?
If you are adding in $23 million for cjv's the definition of Financial Test Group explicitly excludes that:
"Consolidated Total Debt" means at any date the aggregate principal amount
of all Indebtedness of the Financial Test Group (excluding obligations of the
Financial Test Group with respect to Hedging Agreements), determined on a
consolidated basis in accordance with GAAP as of such date.
"Financial Test Group" means the Parent Guarantor and the Consolidated
Subsidiaries, but excluding the Consolidated Joint Ventures. In determining the
Financial Test Group for any date or period of time, only entities that are
members of the Financial Test Group as of such date or during such period of
time, as the case may be, shall be included.
That would make Consolidated Total Debt = $162.
162 / 4.5 = 36
My guess is that the table contains a typo, i.e. q4 should be 5.4 not 4.5.
If that's the case,
162 / 5.4 = 30
My guess on interest expense is about $10 thru end of q3 rising to $13 or so at the end of q4.
2.5 * 13 = 31.5
So, these guesses would be somewhat consistent.
It might be worth an email to i/r to find out if the (a) table is accurate.
Your numbers seem logical, but no, I didn't add the CJV debt. The $185M is made up of: $120M company debt, $23M letters of credit, and $42M of guarantees. I think all of these are included in the definition of Indebtedness and you don't deduct cash, so far as I know.
FWIW Meme, I estimate that franchise revenue declined from $6.2M in the October 2004 quarter to $5.0M in the October 2005 quarter. Operating income was reported at $4.4M a year ago and could be around $3.4M currently. On one hand, it's possible KK isn't spending much on franchise support so the profit and cash flow margins could be higher. On the other, we don't know what accounts KK isn't able to collect and what deals they might have cut that would pull these figures down. My estimates are based on the declines in store counts and average store sales.
you're not boring us. We all see the same numbers but it's hard to tell. The ratio puzzle me as well.
I'm not so convinced CEBITDA has been declining all that much because:
- franchisee sales result in a royaltee. i.e. for every 1% of sales going down, the amount of royaltees goes down 1% as well.
- CJV's were not included
- potential round-trips being set up by KKD (financing a franchisee so they can buy more)
- potential price hikes, remember the blogger said he has no clue what's going on. What if Cooper goes to one of his franchisee buddies like Spoor and asks him to do a favor, buy mix at higher cost, and build up a payable from KKD to Spoor, or easier: a receivable from spoor to KKD. We just don't know anything about the accounting treatment.
frankly, di_vur's model based on the $66mm was good because it gave us an idea of what was [supposedly] going on. Right now I think we have no info at all.
The 6.8mm I still don't get.
So I think your decline assumptions are too agressive. Whatif we take quarterly CEBITDA at $13mm $12mm $11mm $10mm ending Oct30?
That would give you a total of $46mm, that's $207mm of debt permitted, interest of $14.6mm.
I'm more concerned about cash flow. I've raised those issues before but no one has taken them up yet. Knowing the Aussie transaction occured during Q4, KKD burned only $14mm in cash from Jun26-Oct30. That's less than $4mm per quarter, and this includes supposedly a medium-high (say $4mm-$9mm) payment to BNS, interest of around $1mm per month, and Kroll fees of around $800k per month. It seems that KKD is no longer burning cash. Why not? Are they forcing some franchisees to pay? I have no clue... we need ideas for this. cashburn is kiiind of the most important thing that any secured creditor would be looking at right now. Remeber, KKD's cash is also a collateral.
anyway that's myrant about cash flow, but let's continue with CEBITDA and attack that next.
Meme, thanks very much for the comments and I'm sorry I neglected to include you in the group of people I listed.
I tend to agree that the operating cash burn isn't disastrous. Possibly more like water torture. As I've posted before, if CEBITDA in the 3rd quarter was something like $7M, Kroll and other restructuring costs around $4M, and consolidated JV losses $2M, then "true" EBITDA might have been around $1M. These are extremely rough figures of course. I suspect the true picture is somewhat worse, but evidence is hard to come by.
Interest expense may be approaching $4M per quarter and there must be some maintenance cap ex. $1M per quarter? These two figures would take the quarterly cash burn to $4M. Weak, but not disastrous in the short term. A concern for the lenders has to be not the current cash flow, but the trend. When and where will a turnaround occur?
I disagree with your view that cash flow has declined fairly slowly. I believe the evidence shows that, historically, KK's company store results declined about 60 cents for each $1 of decline in average weekly sales. With AWS down to around $47,000 from the $58,000 reported for October 2004, this should be putting a big hurt on cash flow contribution from company stores. In fact, I think store operating income is probably negative, down from a positive $9.6M reported for October 2004. KZC is undoubtedly working to minimize the impact of the decline in AWS, but there's only so much they can do.
Define liquidity as Cash + Available Credit.
June 30 Liquidity = 42 + 79 = 121
Oct 31 Liquidity = 25 + 34 = 59
In other words, Liquidity DROPPED BY $62 million during the 4 month period.
At that pace, kkd would be out of Liquidity by the end of February.
imo, this number is more important than cash burn alone which can be a little erratic due to capex, stretching payables, etc...