A bank loan would fetch a higher rate, I agree.
As for corporate bonds, I've read that low-grade
bonds (aka junk) are issued to more risky
(small,tech,etc) ventures. BLDG, w the acq, moves up to something
like $800M in sales, which I guess is at the top of
the smallcap/bottom of the midcap range. I don't
personally know what "size" a company has to be to issue
low-grade bonds, but Barron's has indicated that there is
much corporate paper being issued w todays more
favorable (for the borrower) interest rate environment. The
low-grade bonds usually have higher rates associated with
them though. Rerunning the calc w 8% produces 1st year
interest of $43.8M and $4.6M in prn reduction. Rerunning w
10% gets us to $54.9M in interest, and $3.1M in prn
reduction. This (10%) seems the upper end of the comfort
zone (especially if $66M is a reasonable estimate of
EBIT). I read, in one of BLDG's releases, that they're
comfortable w $5.00/share in 1999. How they'll pull that off,
in the face of these pmts, is beyond me. Thanks for
your post; I'm still trying to get the "parameters of
this space" down..
I thought the release said that they borrowed the
money from the bank? I don't think that gets 6.5%
interest. Is it normal for companies of this size to issue
corporate bonds? I thought that was for larger size
companies? I would think that even with corporate bonds,
because of the size of the company and the leverage the
market would demand a higher rate that 6.5%. It is a
good company, but it still doesn't have the
wherewithal to demand such low interest, IMO.
I suspect the debt will be financed w corporate
bonds, where corp bonds might fetch 6.5% (a bit above
treasuries).. anyway, assume a 30 year note, w 6.5% interest,
principal of $550M.
PV = -$550,000,000
FV = $0.00
N = 12*30
PMT = $3.476M/mo or
In the 1st yr that works out to $35.57M in interest,
<- (BLDG+Q3&Q4 w MBCI.)
Exp________0.163M________35.57M <- 1st years interest
Saving the best for last, the debt is reduced to
$543.853M. If they throw in a few prepayments now and then
it will vanish in a jiffy #%^)
Well, I hope you get an answer to your letter
before I have to sell the stock. This is actually the
first stock I ever bought, and I bought it back in
March, so boy I'm a genius :-) Anyway
If the stock
goes too much in either direction I'm thinking of
I would like to preserve my 55%+
profit, and also the US economy, and the fundamentals of
the stock worry me. Here's hoping.
I would worry also if the p/e expanded to 20. If
you use 1999's EPS of (approx.) $5.00 times an p/e of
15, you get $75, which is close to $80.
worry about how in the world NCI plans to pay off the
debt. I agree that there has to be some significant
cost-cutting to pay off the debt.
Out of my concerns
regarding the debt, I've written a letter to Johnie Shulte
asking for an explanation as to how he will pay it off.
I'll let everyone know what he has to say.
I would be scared if the PE expanded to 20, that
is quite a bit of expansion. I don't think I would
hold on to the stock then.
"assuming a 6.5%
I think that is a pretty low
assumption. That is 2 points below prime and I don't know of
any company that gets that. I would think it would be
in the 8.5% to 9.5% range. That extra couple of
percent adds a few million to expenses, so they better be
able to get some cost cutting out of it.
... if they can handle the debt. I was doing some
quick and dirty calculations last night. I think there
is an outside chance that BLDG can handle the debt
created from their recent acquisition.
if. $550 million borrowed, assuming a 6.5% interest
rate = approx. $36 million per year in interest
payments, which is pretty close to what NCI will earn this
year. I don't know the financials of MBCI but their
sales last year were about the same as NCI, so I'm
guessing MBCI will barely generate enough $ to allow NCI
to pay for it. Still, if sales continue to increase,
and if ther is some room for cost-cutting to reduce
overhead, then I think NCI may be able to handle the
I sure hope Shulte doesn't go out and buy anything
else for a few years!
They've already announced a stock split for
sometime in July. However, some are of the opinion this is
just a prelude to capitalizing their debt and diluting
shareholder equity. So things are changing, so you better
keep a close eye on this one now.