Distressed Digest
July 26th 2020
Currently tracking 241 credits from 150 companies.
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Leaders for the Week
Laggards for the Week
Highlights
- WeWork (WEWORK 7.875 25) traded higher once again this week, ending up 4.5pts to 63.25 yielding 20.2%.
- Mallinckrodt Intl (MNK 5.75 ’22) bonds were extremely active this week. It was reported a large owner of $550M+ notes sold their entire position around the 10-11 context. The bonds ended the week down 12pts to around the 12.
- Cooper-Standard (CPS 5.625 ’26) traded down 5pts to 55 yielding 17.8%, closing at a new all-time low.
- Washington Prime Group (WPG 6.45 ’24) continues to struggle and traded lower by another 6pts to 39.
- Revlon Consumer Products ended the week weaker. REV 6.25 ’24 traded down 6pts to 16.00 while the REV 5.75 ’21 traded down 11pts to 44.00.
- Bombardier capital structure moved higher for the week. BOMBF 5.75 ’22 traded up 5.5pts to 90.00 yielding 12.9%.
- Hovnanian K Enterprises (HOV 10 ’22) traded up 10pts to 73.00 yielding 29.3% as the housing market remains strong.
Cooper-Standard continues to underperform
Nearly two years ago, Cooper-Standard (CPS) traded at an all-time high of $144.83 with a market capitalization of $2.58B. Since then, the stock has been in a steady decline since. As of this past Friday (July 24 2020), the CPS stock’s price closed at $11.94 with a market cap of only $201.6M. The company began to grab my attention over the past two weeks as the 5.625% senior unsecured notes due 2026 continue to fall.
Senior Notes — Searching for a floor
While many high yield credits fell significantly during the March selloff, the majority of them have bounced off their year lows. However, Cooper-Standard’s 5.625% senior unsecured notes of 2026 have experienced a steady decline.
With bonds now trading at 55, could it be an opportunistic time to look at this company?
Quick Company Overview
https://www.koyfin.com/snapshot/s/CPS
The company through it subsidiary Cooper-Standard Automotive (CPS) designs, manufactures, and sells sealing, fuel & brake delivery, and fluid transfer systems worldwide. All of CPS’s three major product lines are ranked within the top 3 of global market share within the respective category.
- Ranked 1st in Sealing Systems (18% global share)
- Ranked 2nd in Fuel & Brake Delivery (16% global share)
- Ranked 3rd Fluid Transfer (11% global share)
While the company provides these product lines to a number of automobile manufactures worldwide, 55% of prior year’s (2019) revenue came from Ford, General Motors, and Fiat Chrysler. Their products are considered essential to all types of cars and trucks.
Financials
https://www.koyfin.com/fa/fa.fh/CPS
Revenues have fallen by 21% since 2018.
EBITDA has dropped significantly as well.
Thus increasing Total Debt / EBITDA to highest level over the past decade. With the company raising an additional $250M in new secured financing this past May, Total Debt / EBITDA is only expected to rise even higher.
After issuing the new $250M 13.00% secured bonds, the company’s debt load will return to it’s highest levels set back over a decade ago. The new secured bond (currently at 105.50) has traded well since its has been issued. The combination of a double digit coupon along with being pari passu with the company’s term loan are the primary reasons. The current yield of the 13% secured notes are approximately 200bps higher than the lower ranking 5.625% notes.
Competitors
Some of Cooper-Standard’s competitors are privately owned subsidiaries of larger companies. Yet, there are a few publicly traded comps globally.
Capital Structure
With the new $250M 13% senior secured notes, CPS capital structure looks like this:
Conclusion
As the company restarts its global manufacturing operations, it is expected that Cooper-Standard will burn an additional $150M over the next year. The impact of the pandemic is expected to carry the automotive industry weakness over into 2021. Few analysts are currently covering this name but I believe a good starting point for EBITDA estimates to be around $125-$175M. Historically, the business has traded around 4.0-5.0x EV/EBITDA which makes the 5.625% senior debt somewhat close to that level.
It is refreshing to see a potential distressed opportunity that is not within the Energy or Retail sector. As a leader within its product lines, if Cooper-Standard is able regain somewhat close to its prior profitability levels, this capital structure is surely one to continue to watch.
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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.
Thanks for posting Rich. What are your thoughts on the undrawn ABL? ABL effectively has borrowing base of $145.6 million that’d prime the unsecured notes. Last recession the Company filed for bankruptcy back in August of 2009.
Link to the plan: https://www.sec.gov/Archives/edgar/data/1320461/000119312510127289/d8k.htm
Seems like a lot of new money had to be put into the plan on top of the bonds.
The outlook continues to be bleak and I expect that available borrowing base to be lowered. I have not look at the covenants but I expect the company wants to make sure they have enough room to operate without tripping them. I imagine that is why the issued the 13% secured bond as they were able to get a bit more concessions. You make a great point with the new money that came last time. It is the main risk for owning these unsecured notes and if the company heads into restructuring again, I would not expect much, if any, recovery.