Distressed Credit Digest
June 21, 2020
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Distressed/High Yield Watchlist
Tracking 238 credits from 145 companies
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No new companies
Removed (2 companies)
Redwood Trust (RWT)
Joseph T Ryseron (RYI)
Top Movers for the Week
Bottom Movers for the Week
‣ Chesapeake Energy (CHK) skipped coupon payments on some of its unsecured notes. It will use the grace period to continue to work with its lenders on a bankruptcy plan. The second liens were higher among the top movers this week, trading higher by 10pts as they began to trade flat.
‣ Hertz (HTZ) bonds dropped this week after the company announced the cancellation of its stock sale. The attempt to issue new shares while still in bankruptcy caught the scrutiny of the SEC. Hertz unsecured notes traded down 16.50pts to 32.00 while the 2nd priority notes held up a bit better, trading down 8pts to 73.00.
‣ As bankruptcy looms for Men’s Warehouse (TLRD) the TLRD 7.00 ’22 traded down by 6-7pts to 15.00.
‣ Rayonier AM Products (RYAM) moved higher by nearly 10pts to 60.50 yielding 20.6%. The stock was up 17% on Friday after it was upgraded at BofA off its recent credit amendment.
‣ Revlon Consumer Products (REV) continued to move higher. REV 5.75 ’21 traded higher by 12pts to 78.00 and the REV 6.25 ’24 higher by 7pts to 24.50.
‣ Extraction Oil & Gas (XOG) headed into bankruptcy with a restructuring support agreement (RSA). The bonds ended the week higher in the lows 20s.
Profit Engine Stalls at Briggs & Stratton
On Monday June 15, Briggs & Stratton decided not to make a $6.7M interest payment on it 6.875% Senior Notes due 2020. The company with a long history of manufacturing small gasoline engines now has entered a 30-day grace period to start negotiating with its debt holders on a possible bankruptcy filing.
Briggs & Stratton Corporation designs, manufactures, markets, sells, and services gasoline engines for outdoor power equipment to the original equipment manufacturers in the United States. It operates in two segments, Engines and Products.
The Engines segment offers four-cycle aluminum alloy gasoline engines that are used primarily by the lawn and garden equipment industry. This segment’s products are used in various lawn and garden equipment applications, including walk-behind lawn mowers, riding lawn mowers, garden tillers, and snow throwers, as well as products for industrial, construction, agricultural, and other consumer applications, such as portable and standby generators, pumps, and pressure washers. It also manufactures and sells replacement engines and service parts to sales and service distributors. This segment primarily sells commercial engines under the Vanguard name.
The Products segment primarily provides a line of lawn and garden power equipment, turf care products, portable and standby generators, pressure washers, snow throwers, and job site products. This segment sells its products through various channels of retail distribution comprising consumer home centers, warehouse clubs, mass merchants, independent dealers and distributors, and online merchants under its own brands that include the Briggs & Stratton, Simplicity, Snapper, Snapper Pro, Ferris, Allmand, Billy Goat, Hurricane, Murray, Branco, and Victa, as well as other brands, which comprise Craftsman and Troy-Bilt.
The company also exports its products principally to customers in Europe, Asia, Australia, and Canada. Briggs & Stratton Corporation was founded in 1908 and is headquartered in Wauwatosa, Wisconsin.
Annual Financial Highlights
Business stalls out
From 2014 to 2020, the company experienced no revenue growth. Their primary business which focused on small engines used within residential markets was in a slow decline. The only bright spot was the company’s commercial products which have been growing a healthy 10-15% a year to make up the difference. Unfortunately, commercial sales only made up 30% of the company’s total revenue in 2018.
Since 2018, Briggs & Stratton has missed nearly every quarterly earnings estimates. Unfavorable weather, the Sears bankruptcy and operating inefficiencies were all to blame for the company’s eroding margins.
LTM Revenues + EBITDA — 10 Years
Optimization + Repositioning = More Debt
In 2018 the company seemingly recognized the potential of the commercial business as well as the need to become more efficient. Management began its “Business Optimization” program with some simple goals at heart.
‣ Expand and consolidate production capacity
‣ Increase efficiencies to achieve $30-35M in annual cost savings
After the announcement of the optimization program, capital expenditures doubled over the next two years in order to fund the program. Yet, these investments came at an inopportune time as the company’s cash flow from operations dropped significantly from $100mm in 2018 to negative -$100mm in 2020 (shown on the graph below).
Cash Flow from Operations (Rolling LTM basis)
In addition to a lack of operating cash flow, the company continued to repurchase stock and pay a dividend during this period. As a result, the company’s total debt obligations soared to a new high of $723M.
Total Debt vs EBITDA/Debt
At the start of this year, the company announced a “Business Repositioning” plan which set to:
‣ Continue improvement of its cost structure and restore margins
‣ Reduce required capital expenditures
‣ Focus on commercial Vanguard engines and batteries for growth
‣ Divest the turf business and use the proceeds to pay down debt in an effort to reduce leverage and interest expense
While this plan may help restore the company to profitability, investors have yet to see any benefits from the prior optimization program announced in 2018.
Dealing with the 2020 maturity
J.P. Morgan was retained to advise Briggs and Stratton on a possible divestiture of its turf businesses as well as debt refinancing. Management expected a possible divestiture to generate enough proceeds to pay off the $195M Senior Notes along with some of its ABL facility.
With no announcement of possible suitors or new capital, the senior notes traded down to around 30% of face value. When its June 15th payment to bondholders came due, the company elected to use the 30-day grace period to discuss its options with lenders.
BGG 6.875% due 12/2020 Senior Notes
The same day as the skipped payment, the company entered into an amended credit agreement with its secured lenders. By allowing secured lenders to increase the cost of borrowing, the company received some additional flexibility in raising junior debt or completing a sale-leaseback. However, many investors and analysts believe that this won’t be enough to avoid bankruptcy.
It was also disclosed, the company had $61.9M available on their ABL facility under the new credit agreement, as of June 12.
Capital Structure as of Today
If the company was to file bankruptcy. The expected amount of DIP financing needed would be approximately $50M – $150M, depending on its seasonable cash needs.
Lets assume a simple restructuring to analyze the possible value of the company:
‣ $80M DIP converted into secured debt upon emergence from bankruptcy
‣ New ABL Facility capacity of $400M with ~$100M undrawn
‣ Senior notes fully converted into new 95% equity with management owning 5%
‣ Old equity will be eliminated or wiped out.
‣ Company does not even up divesting the turf business
If the company’s optimization and repositioning initiatives pay off, analysts believe EBITDA can recover to the $65-$100M range in the next 2 years.
Based on historical EV/EBITDA multiples of 6.0x – 8.0x, a reorganized company could be valued anywhere between $390M and $800M. Under this scenario, the senior notes would be fully recovered just under $600M valuation (enterprise value).
EBITDA LTM vs Estimates
EV/EBITDA Multiple before 2018-2020 Problems
Using the mentioned assumptions above alongside the valuation range. The table below shows the recovery value in bond points for the Senior Notes. The recovery comes from the $195M Senior Notes converting into approximately 95% of the total shares outstanding.
Post Reorg Valuation for BGG 6.875% Holders
When analyzing any potential distressed reorganized situation, many things need to be taken into consideration and assumptions need to be made. Assuming things go well, it seems that owning the senior notes provides investors with numerous outs or ways of realizing upside value. However, investors need to take into consideration the fact that management hasn’t been able to execute on its turnaround plans over the past two years. It will be interesting to see if and how they can keep this 112 year old business running or if the engine will eventually burn out.
I am Rich, the co-founder of Koyfin. As a former distressed high-yield trader now designer/developer, I wanted to share some thoughts and observations I see in the distressed high-yield corporate bond market. During my trading days, I shared a daily distressed digest with clients containing trading color and news. Now, I hope to share them with you. Feel free to follow me on Twitter @koyfinTrader as well as share any feedback. My DMs are always open.