Upload
others
View
1
Download
1
Embed Size (px)
Citation preview
Introduction to Distressed Investing
Shelly Lombard
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
1
Introduction to Distressed Investing
Shelly Lombard is a consultant with 30 years of experience analyzing and investing in high yield and distressed debt and special situation equities.
After earning her MBA in Finance from Columbia University, she joined the leveraged finance group at Citibank. Shelly was the first analyst selected to work on the RJR Nabisco management buyout, which at that time was the largest LBO in history. Later, she joined the high yield group at Drexel Burnham Lambert, the firm that essentially created the new issue market for junk bonds, in particular the use of junk bonds to finance LBO and hostile take overs.
Shelly spent the next 25 years working on both the buy side and the sell side. She helped start the bank debt trading desk at Chase and ran a prop trading desk at Barclays Capital. She was involved in many high profile bankruptcies, including Tyco, Adelphia, and Charter Communications and has served on several creditors committees. From 2003 to 2010, she worked as a high yield analyst, covering the automotive industry. During the 2007-2009 downturn and the General Motors bankruptcy, Shelly was one of the most quoted analysts on Wall Street and often appeared in the New York Times, Wall Street Journal, and on CNBC.
Shelly is currently an independent consultant who does financial and credit analysis for individual clients as well as financial training. She has taught financial modeling, valuation, credit analysis, and capital markets theory to analysts at top investment banks and hedge funds. She is a lecturer in the graduate business executive education programs at the University of North Carolina-Chapel Hill, Columbia
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 2
Introduction to Distressed Investing
What went wrong? Can it be fixed?
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 3
Does management have enough time to fix it?
What are the company’s bonds & equity worth?
What price should I pay for the stock or bonds?
Developing an
InvestmentThesis
Introduction to Distressed Investing
Read 10K & 10Q: business description, MD&A
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 4
Listen to earnings calls.
Analysts’ reports e.g. Seeking Alpha
Review financial statements.
Developing an
InvestmentThesis
Introduction to Distressed Investing
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 5
Revenue
Industry wide?
Companyspecific?
Costs
Industry wide?
Company specific?
Cyclical Secular
Operating
Cyclical
Operating
Secular
Introduction to Distressed Investing
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
6
• High oil & gas prices driving synthetic rubber prices higher & miles driven lower.Goodyear
• Problems scaling up to build more carsTesla
• 2nd largest radio station operator in US• Advertisers now have many more optionsCumulus
Introduction to Distressed Investing
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 7
Costs
Industry wide?
Cyclical
Rubber prices up but able pass on price increases because:
• Industry-wide• Inelastic demand• No substitution risk from
outside of industry
Introduction to Distressed Investing
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 8
Revenue
Industry wide?
Cyclical
Miles driven down so slower replacement.
Offset lower volume by getting customers to pay higher price for new products that are safer.
Introduction to Distressed Investing
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 9
What Went Wrong? Can It Be Fixed?
Cyclical Management will usually acknowledge When will it end?
And can they offset the impact of lower revenue or higher costs until cycle turns?
Operating Not always obvious. Management may not acknowledge.
Can THIS management team fix the problem?
Secular Not always obvious. Management often in denial.
Will it end?
May not be “fixable”. If there has been a change in customer preferences or ability to substitute, company may not longer have a reason to exist.
Introduction to Distressed Investing
Two Keys to “Can it be fixed?”
•Management execution•Reason to exist
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
10
Introduction to Distressed Investing
What went wrong? Can it be fixed?
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 11
Does management have enough time to fix it?
What are the company’s bonds & equity worth?
What price should I pay for the stock or bonds?
Developing an
InvestmentThesis
Introduction to Distressed Investing
Run out of cash
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 12
Can’t refinance an upcoming maturity
Nervous trade creditors require COD.
Banks will not waive covenant violations.
Why Companies
GoBankrupt
Introduction to Distressed Investing
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
13
Teslain 000’s
Fiscal Year Ended
12/31/2017
Fiscal Year Ended
12/31/2016
Fiscal Year Ended
12/31/2015
Revenue $11,578.751 $7,000,132 $4,046,025
Cost of Revenue 9,536,264 5,400,875 3,122,522
Gross Margin 2,222,487 1,599,257 923,503
Selling, General & Admin 1,378,073 834,408 717,900
Research & Development 2,476,500 1,432,189 922,232
Loss from Operations or EBIT (1,632,086) (667,340) (716,629)
Introduction to Distressed Investing
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/14
Teslain 000’s
Fiscal Year Ended
12/31/2017
Fiscal Year Ended
12/31/2016
Fiscal Year Ended
12/31/2015
Loss from Operations or EBIT (1,632,086) (667,340) (716,629)
Depreciation & Amort 1,636,003 947,099 422,590
Stock Compensation 466,760 334,225 197,999
Nonrecurring ChargesNon-Cash Charges 131,665 65,520 44,940
Cash Charges
Adjusted EBITDA $602,342 $679,504 ($51,100)
Introduction to Distressed Investing
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 15
EBITDA orAdjusted EBITDA
Useful for valuation
NOT a proxy for cash flow NOT sufficient
for financial analysis
Introduction to Distressed Investing
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 16
EBITDA & ratios that use EBITDA do not capture:
Cash Taxes
Working Capital
Capital Spending
Non Recurring Cash Expenses
Pension Contributions
Introduction to Distressed Investing
Shelly Lombard copyright 2018 https://www.linkedin.com/in/shellylombard/
17
EBITDA
Cash from Operations
Free Cash Flow
Introduction to Distressed Investing
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
18
Teslain 000’s
FY Ended 12/31/2017
FY Ended 12/31/2016
FY Ended 12/31/2015
Net Loss ($2,240,578) ($773,046) ($888,663)
Depreciation & Amortization & Stock Comp
2,102,763 1,281,324 620,589
Non-Cash Interest Expense 226,274 79,511 98,436
Non Recurring Non Cash Charges 347,490 (17,757) 138,428
Change in Working Capital (496,603) (693,861) (493,289(
Cash from Operations (60,654) (123,829) (524,499)
Introduction to Distressed Investing
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
19
Teslain 000’s
FY Ended 12/31/2017
FY Ended 12/31/2016
FY Ended 12/31/2015
Cash from Operations (60,654) (123,829) (524,499)
Capital Expenditures (4,081,354) (1,440,471) (1,634,850)
Free Cash Flow ($4,142,008) ($1,564,300) ($2,159,349)
Introduction to Distressed Investing
≥
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
20
PROJECTEDEBITDA
Interest ExpenseCapital Spending
Cash RestructuringWorking Capital
Cash TaxesPension Contributions
Introduction to Distressed Investing
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
21
Tesla Liquidity @ Year End 12/31/2017
Cash $3,367,914
Unused Revolver Availability 729,929
Non-Recourse Revolver Availability 864,393
$4,964,253
Introduction to Distressed Investing
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 22
Tesla in 000’s 2018 2019
Cash & Revolver Availability at Start of Period $4,964,253 $789,600
Projected EBITDA 1,375,000 3,465,000
Cash Interest Expense (225,000) (225,000)
Cash Taxes (50,000) (100,000)
Change in Working Capital (844,653) (840,000)
Capital Expenditures (4,100,000) (3,300,000)
Minor Debt Maturities (330,000) 0
Cash (Used)/Provided during the Period ($4,174,653) ($1,000,000)
Cash & Revolver Availability at End of Period $4,964,253 $789,600 ($210,400)
Introduction to Distressed Investing
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/23
Tesla Debt
Total Debt $10,167,380
Debt due in 2018
2.75% Convertible Notes ($560.64 per share) $230,000
Related Party Promissory Notes due February 2018 100,000
Non-recourse Debt 157,095
Debt due in 2019
0.25% Convertible Notes ($359.87 per share) $920,000
1.625% Convertible Notes ($759.36 per share) 566,000
Non-recourse Debt 835,607
Introduction to Distressed Investing
What went wrong? Can it be fixed?
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 24
Does management have enough time to fix it?
What are the company’s bonds & equity worth?
What price should I pay for the stock or bonds?
Developing an
InvestmentThesis
Introduction to Distressed Investing
EBITDA Valuation
25
“Normal” EBITDA Range
Enterprise Value
Multiple
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
Introduction to Distressed InvestingComps Company A Company B Company C
Stock Price $xx.xx $xx.xx $xx.xx
x Diluted Shares Outstanding xxx,xxx xxx,xxx xxx,xxx
Market Value of Equity $xxx,xxx $xxx,xxx $xxx,xxx
Total Debt $xxx,xxx $xxx,xxx $xxx,xxx
Less Cash x,xxx x,xxx x,xxx
+ Net Debt $xxx,xxx $xxx,xxx $xxx,xxx
+ Preferred Stock $x,xxx $x,xxx $x,xxx
+ NonControlling Interest $x,xxx $x,xxx $x,xxx
= ENTERPRISE VALUE $xxx,xxx $xxx,xxx $xxx,xxxShelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 26
Introduction to Distressed Investing
Comps Company A Company B Company C
ENTERPRISE VALUE $xxx,xxx $xxx,xxx $xxx,xxx
Enterprise Value/LTM Sales .xx .xx .xx
Enterprise Value/LTM EBIT X.xx X.xx X.xx
Enterprise/LTM EBITDA X.xx X.xx X.xx
copyright 2018 Shelly Lombard https://www.linkedin.com/in/shellylombard/
27
Introduction to Distressed Investing
Radio Operator Comps Salem Emmis CBS Entercom
Market Value of Equity $63 $32 $8,377 $183
Net Debt 322 348 6,987 805
Enterprise Value 385 380 15,363 988
LTM EBITDA $51 $45 $1,740 $112
EV/LTM EBITDA 7.5x 8.4x 8.8x 8.8xSept 2009. From company 10Qs & 10Ks
Shelly Lombard copyright 2018 28
Introduction to Distressed Investing
Comps Company A Company B Company C
ENTERPRISE VALUE $xxx,xxx $xxx,xxx $xxx,xxx
EV/Projected Sales .xx .xx .xx
EV/Projected EBIT X.xx X.xx X.xx
EV/Projected EBITDA X.xx X.xx X.xx
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
29
Introduction to Distressed Investing
Cumulus 2016 2015 2014 2013
Revenue $1,141,400 $1,168,679 $1,263,423 $1,245,715
Adjusted EBITDA
205,867 259,145 329,526 363,357
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
30
Introduction to Distressed Investing
CompanyDownside
CaseBaseCase
UpsideCase
Projected Normalized EBITDA
$200,000 $250,000 $290,000
Multiple 8.25 8.50 8.75
Enterprise Value $1,650,000 $2,125,000 $2,537,500
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/31
Introduction to Distressed Investing
Bankruptcy Waterfall
Debtor-in-Possession Loan (DIP)
Admin and Priority Claims
Pre-Bankruptcy Secured Debt
Unsecured Senior Bonds
Unsecured Subordinated Bonds
Equity
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 32
Introduction to Distressed Investing
Downside Case
Base Case
UpsideCase
Enterprise Value $1,650,000 $2,125,000 $2,537,500
Existing Bank Revolver/DIP (500,000) (500,000) (500,000)
Bank Term Loan (1,280,400) (1,280,400) (1,280,400)
Value to All Unsecured Creditors
(130,400) 344,600 757,100
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
33
Introduction to Distressed Investing
Downside Case
Base Case
UpsideCase
Value left for Senior Unsecured Bonds (130,400) 344,600 757,100
7.75% Senior Bonds due 2023 $275,000
What are Senior Bonds Worth? 0% 100% 100%
Value left for Subordinated Bonds 0 69,600 482,100
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 34
Introduction to Distressed InvestingDownside
CaseBase Case
UpsideCase
Value left for Subordinated Bonds 0 69,600 482,100
11.5% Bonds due 2025 $335,000
What are Subordinated Bonds Worth? 0% 21% 100%
Value Remaining for Equity 0 0 147,100
# of Shares Outstanding 29.3mn
What is Stock Worth (per share)? $5.00
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 35
Introduction to Distressed Investing
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
36
Home Worth $500,000
____________
Mortgage Debt: $400,000
Equity worth:$100,000
Value Drops to $350,000
___________
Mortgage holder entitled to: $350,000
Equity worth: $0
New Owner Finances
$350,000 with___________
New Mortgage:$300,000
New Equity:$50,000
Introduction to Distressed Investing
What went wrong? Can it be fixed?
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 37
Does management have enough time to fix it?
What are the company’s bonds & equity worth?
What price should I pay for the stock or bonds?
Developing an
InvestmentThesis
Introduction to Distressed Investing
A company’s distressed bonds are offered at 75.
•The bonds pay a 8% coupon and mature in 4 years. •Your liquidity analysis indicates that the company may run out of
cash in a year, leading to a restructuring. •Your valuation analysis indicates that the bonds could recover 91
cents to par after two years in bankruptcy. •What should you pay for the bonds?
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
38
Introduction to Distressed Investing
Calculating a bond’s yield to maturity on Excel
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
39
Introduction to Distressed Investing
Modify cash flows to incorporate the most likely scenarios.Use Excel to determine what return you will earn
if you buy bonds at 75.
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
Worst Case ScenarioCash flows are -75, 8, 0, 91
=IRR(cashflows)IRR = 10.3%
Best Case ScenarioCash flows are -75, 8, 0, 100
=IRR(cashflows)IRR = 13.7%
40
Introduction to Distressed Investing
Use Excel to determine what you should pay for the bonds
if you want a 20% return.
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/
41
Base Case ScenarioCash flows are 8, 0, 100
=NPV(desired return, cash flows)= NPV(.20,8,0,91)
NPV = 59.3
Upside ScenarioCash flows are 8, 0, 100
=NPV(desired return, cash flows)= NPV(.20,8,0,100)
NPV = 64.5
Introduction to Distressed Investing
The company’s stock is trading at $2.00.
• If the company restructures, the stock will be worthless.•But if in two years, the company manages to increase EBITDA to
the level in your Upside Case and avoid bankruptcy, the stock could be worth $7.35
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/42
Best Case Scenario=IRR(cashflows)=IRR(-2,0,7.35)
IRR = 92%
Introduction to Distressed Investing
What went wrong? Can it be fixed?
Shelly Lombard Copyright 2018 www.linkedin.com/in/shellylombard/ 43
Does management have enough time to fix it?
What are the company’s bonds & equity worth?
What price should I pay for the stock or bonds?
Developing an
InvestmentThesis