U.S. Concrete (RMIX) Disclosure Statement Indicates Minimal Recovery For Equity

I'm going through the bankruptcy court docket for U.S. Concrete (RMIX) to get a better sense of what is going to happen to the existing equity. Their fate is revealed (sealed) in the Chapter 11 Plan of Reorganization that was filed today.

We knew that the Plan would involve extinguishing existing U.S. Concrete equity and issuing them warrants, but the precise terms were unclear from the press releases. Now, in the definitions section of the Plan, it says that,

New Warrants means, subject in all respects to the New Warrant Agreement, two tranches of warrants, each with a 7 year term issued by New U.S. Concrete Holdings to acquire New Equity (both subject to dilution by the Management Equity Incentive Plan): (i) warrants to acquire 7.5% of the New Equity on a fully diluted basis exercisable at a New Equity value that is equal to a Par Plus Accrued Interest Recovery to holders of Note Claims; and (ii) warrants to acquire an additional 7.5% of the New Equity on a fully diluted basis exercisable at a New Equity value that is equal to a Par Plus Accrued Interest Recovery plus $50 milion to holders of Note Claims.

What they are trying to do is give the existing equity a stake if and only if the Notes are made whole and then some. This is done by setting the strike price equal to (or greater than, for the second tranche of warrants) the "Par Plus Accrued Interest Recovery." The plan calculates that this would imply a total valuation of the New Equity equal to $285.009 million.

Also, when they say "subject to dilution," they are referring to the big equity stake that management is getting:

On the Effective Date, 9.5% of the New Equity, on a fully-diluted basis, shall be reserved for issuance as grants of stock, restrcted stock, options, or stock appreciation rights or similar equity awards to management and employees in connection with the Management Equity Incentive Plan, and 0.5% of the New Equity, on a fully diluted basis shall be reserved for Director Equity.

I have no idea why creditors agree to giving management such a big piece, but they do.

So, the current equity will have the chance to buy into the new equity at a valuation of $285 million. That's a long term, waayyy out of the money option. But the important question is how far out of the money is the option? The Disclosure Statement can help answer this, and my conclusion is "very far."

Based on the Financial Projections and solely for purposes of the Plan, Lazard estimates that the Total Enterprise Value of the Reorganized Debtors falls within a range from approximately $180 million to $208 million, with a mid-point estimate of $194 million. For purposes of this valuation, Lazard assumes that no material changes that would affect value occur between the date of this Disclosure Statement and the Assumed Effective Date. Based on an estimated net debt balance of approximately $51 million projected as of the Assumed Effective Date, Lazard's mid-point estimate of Total Enterprise Value implies a value for the New Equity (the "Equity Value") of approximately $143 million.

Lazard's valuation of the New Equity is $143 million, but the warrants are struck at $285 million plus.

All the same, I have covered the RMIX short because the margin requirement ($2.50/share) was too onerous and I have better places to deploy capital.

The other, more important, important question is what are the implications for the value of the notes? Based on Lazard's valuation of the New Equity, I am coming up with about 45 cents. But the notes ended up at 60 today, so some people are obviously more optimistic than Lazard.