The story as I understand it;
- Cobank only takes the senior part of credit facilities to which it is a co-lender.
- Three years ago Cobank would lend to some borrowers with senior leverage ratios up to 3.5 (roughly borrowers rated B and above, below B is junk) as long as their portfolio average met a specified target (somewhere below ?2.5?)
- Times have changed. As lenders have seen the leverage ratios of their borrowers associated with energy rise, or as those loans default, their portfolio average leverage ratio also goes up, so now they will only lend to borrowers that can satisfy a senior leverage ratio of 2.5 or below (that is the initial covenant that Cobank put on ALSK), because they need to lower the leverage ratio of their portfolio.
- Cobank may have been willing to lend OTEL ~$65M as a senior lender, but the additional $40M from an alternative lender would probably have had a higher rate than the 14% OTEL is now paying on their $15M second.
- So, OTEL went to alternative lenders for both their first and second liens, because the average rate was lower, also OTEL's covenants are a lot looser than ALSK's.
- Average inflation over the next 30 years is expected to average about 2.65% (how about that!), which implies that the spreads currently offered to the single B borrowers are likely to fall after the energy bust finishes playing out.
- I believe OTEL will be able to refinance this CF when the single B spreads fall. They won't need to sell the company at a bargain price, or sell convertibles. Keep an eye on BAMLH0A2HYBEY at the St.Louis Fed.
- I also believe the Class B shares will be converted and disposed of in the near future, when that happens I am looking to increase my exposure (currently at 2%).
And ... about that weather ...
Temperatures are 27% warmer than last year, my estimate was based on 20%.
Excluding the hedge Ebitda would have been 23.5M, compared to 45.2M last year.
Since it isn't getting any colder, I expect a similar drop in Q2 to 66.3M.
For Q3&Q4, I'm still looking at (34M), add the 12.5M hedge yields ebitda of 68.2M for the year.
With capex of 9.2M, interest expense of 8.0M, and taxes now of 12.7M, leaves CF of 38.3M.
I guess I need to wait till next winter to retire.
A few items;
- the heavy selling is most certainly due to disappointment with the new CF
- the 10% drop in the S&P since 1/1 hasn't helped
- the prior lenders will convert and dump their class B stock
Looking ahead; two high yield fund managers (Oaktree, Blackstone) have stated that this is the best time to buy high yield debt since 2011 (when everyone thought the Euro-zone would disintegrate) . Their reasoning is that the root cause is energy, which represents ~10% of HY debt. Companies like Otelco, that have CF's expiring now, just have unfortunate timing.
So ... go to the St. Louise Fed, look at the chart for the effective yield for B rated debt, BAMLH0A2HYBEY, and imagine what that may look like one or two years from now. Piper will charge another $2M to refinance the CF, and there is a small prepayment penalty on the subordinated debt, but it will be worth it.
She also recommended Navigator in April, November, and December. Although Eagle Capital reported owning 0 shares at 9/15.
Also noted, Black and Gabelli also own NVGS. As of 9/15 Black (Apollo) owned 0 shares and Gabelli owned 100,000 shares. It will be interesting to see what they held at the end of December.
Over the four quarters Q313-Q214 the company paid 8.2M of interest.
"IF" Ebitda stays flat with the twelve months ending Q315, the company will be able to pay down ~8M of debt in FY16, and will be looking at ~9.3M in interest FY16.
The company's challenge is to maintain/grow ebitda. They need to get their leverage ratio below 2.5 if they want to refinance at reasonable rates. Excluding non-recurring income/charges their leverage ratio was about 3.5 at 9/15.
With respect to the lenders allowing serial amendments; the only assumption that holds water is that the lenders believe they will get "their money" back.
IUB, thank you. That fills in some of the blanks into how the balance sheet got out of whack in 2004.
It got straightened out between 9/05 and 12/06 (it took 5 quarters to figure out how to correct the problem) by writing off $50M of CEEEB (basically, they would not get paid for work in process that they planned on getting paid for).
However, what is missing is the role that Deltak/China played. The first PR mentioned a $7M problem with a "previously completed" project at DC, the next mentioned a slightly larger problem with the Shanghai trading group. By the time it was over the 500,000 sf DC manufacturing facility was gone, along with $133M of retained earnings.
Between September and now the spread has increased by about 2.5% for B debt.
However ALSK also has; tighter covenants than OTEL - their leverage ratio starts lower and ratchets down each year, their CF obligations are lower, ebitda is higher, they need to purchase an interest rate swap, and they need to refinance their existing parent notes.
We talked about why this might happen back in December. The warning came when ALSK got their new CF.
What happened was that the melt down in the energy sector has increased spreads for everyone that is not AAA rated. Three years ago a company rated BB/BBB with a leverage ratio of 3.5 was looking at a spread of 3 points over libor. Now, similar companies need leverage ratios below 2.5 to qualify for a senior lien CF. OTEL is fortunate they got their term sheet two months ago, spreads have increased another 2-3 points since then (see BAMLH0A2HYB at the St Louis Fed).
"On January 21, 2016, the Audit Committee, in consultation with its outside advisors and management, concluded that the financial statements for the annual period ended December 31, 2012 and for all quarterly periods contained therein should not be relied upon"
"The Company has not yet determined the revisions to be made to the unaudited financial data for 2011 and 2010"
I say ... wait for the 10-K!
True, thank you I missed that.
They will still be under 2.5x though and should be able to refinance both loans in four years !IF! ...
... the big challenge is ebitda, if it has bottomed, or grows, the company will do well.
Just one more point to make. If the company can keep their Ebitda where it is, or grow it, four years from now they will have a leverage ratio under 2.5x and they will be able to refinance at a better rate then. In the mean time that17.4M of CFO before interest should attract some interest from potential acquirers, especially ones with tax loss carry forwards to use up.
Youv'e heard what they say about history rhyming ...
Then, and now, CEO is replaced, managers take early retirement, CFO is replaced .. twice back then.
I think the company learned form the previous instance, that is why I believe one or more of the acquisitions is the cause of the trouble.