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.

U.S. Concrete (RMIX) Files Prepackaged Bankruptcy

Earlier this year, Credit Bubble Stocks did a successful capital structure arbitrage involving U.S. Concrete (RMIX) notes and equity. We then sold the notes, although kept the short open because the equity looked like a zero.

After a sharp, inexplicable rally in the equity during the first few weeks of April (which didn't scare us), the equity fell 75% today on the news that the company filed for bankruptcy protection.

It appears to be a "prepackaged" plan (i.e. has the support of the impaired classes and should be processed quickly) with the following terms:

• The 8.325 percent senior subordinated Notes due in 2014 will own all of the equity in the reorganized company.
• Existing shareholders will get warrants to buy 15 percent of the reorganized company's stock.

What the current equity (owned by existing shareholders) is worth depends on what the warrants they will get will be worth, which depends on what the terms of the warrants will be.

But in order to get the holders of the Notes to agree to this, the plan can't offer much value to existing shareholders. So I am still bearish on the stock.

Collateral

Giving Myself a High Five for Selling the U.S. Concrete (RMIX) Notes This Morning

The U.S. Concrete (RMIX) Notes have traded lower, from 56/59 this morning, to 51/56.625 now!

Looks like about a quarter of the outstanding shares are going to turn over today!

Thoughts on U.S. Concrete (RMIX) Conference Call

U.S. Concrete's (RMIX) 2009 adjusted EBITDA was $25.3 million in 2009 compared to $40.5 million in 2008. Note that even this sadly diminished figure benefited from gains on the repurchase of a portion of their senior subordinated Notes earlier in 2009, and from cost cutting.

Unfortunately, neither of those benefits to EBITDA are sustainable, as the company no longer has the cash to buy back Notes at a discount, and as management pointed out on the conference call this morning,

you should note that several of the recent cost reduction initiatives are more temporary in nature, as we do fully expect to reinstate normal salary adjustments and incentive compensation as well as 401(k) matching contribution when economic conditions return and improve to more normalized levels.

Until construction starts booming again (could be years), RMIX might continue to have these dismal EBITDA and even worse cash flow numbers (thanks to cap ex requirements). Meanwhile, the annual interest payment on the Notes is something like $23 million - hence the need for a balance sheet restructuring.

Reading the Indenture Agreement for the U.S. Concrete (RMIX) 8.375% Notes

Last night I was reading the Indenture Agreement for the U.S. Concrete (RMIX) 8.375% Notes. Even though I have sold out of the Notes this morning, I am paying attention to the situation as I may want to buy the Notes back at lower levels.

First, the company has signaled, and it is likely, that the senior lenders will "block" the interest payments on the Notes. The Notes are now trading "flat" (without accrued interest being paid by buyers to sellers) because of this expectation.

(The company has a 30 day grace period with respect to making payments on the Notes, anyway. See Section 6.01(a) Events of Default.)

The provision of the indenture that allows the blocking is Section 12.03. Default on Senior Debt

During the continuance of any default (other than a default described in clause (a) or (b) of the preceding sentence) with respect to any Designated Senior Debt pursuant to which the maturity thereof may be accelerated immediately without further notice (except any notice required to effect the acceleration) or the expiration of any applicable grace period, the Company may not pay the Notes for a period (a “Payment Blockage Period”) commencing upon the receipt by the Company and the Trustee of written notice of such default from the Representative of the holders of such Designated Senior Debt or, if there is no Representative, from the holders of such Designated Senior Debt, specifying an election to effect a Payment Blockage Period (a “Payment Blockage Notice”) and ending 179 days thereafter (unless such Payment Blockage Period is earlier terminated by written notice to the Trustee and the Company from the Representative of the holders of such Designated Senior Debt or, if there is no Representative, from the holders of such Designated Senior Debt that gave such Payment Blockage Notice (a) because such default is no longer continuing or (b) because such Designated Senior Debt has been repaid in full in cash). Not more than one Payment Blockage Notice with respect to all issues of Designated Senior Debt may be given in any consecutive 360-day period, irrespective of the number of defaults with respect to one or more issues of Designated Senior Debt during such period. No non-payment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be the basis for a subsequent Payment Blockage Notice. Following the expiration of any Payment Blockage Period, the Company shall (unless otherwise prohibited as described in the first sentence of this paragraph) resume making any and all required payments in respect of the Notes, including, without limitation, any missed payments, unless the maturity of any Designated Senior Debt has been accelerated, and such acceleration has not been rescinded.

The senior credit facility has a variety of financial covenants that would constitute a default if violated. That is one way the blocking provision could come into play.

If the interest payments are delayed, interest will accrue (compound) on them, thanks to Section 4.01 of the indenture

The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal and premium, if any, from time to time on demand at a rate that is 1% per annum in excess of the rate then in effect; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest (without regard to any applicable grace periods), from time to time on demand at the same rate to the extent lawful.

The indenture contains other interesting provisions that could come into play someday (since the Notes don't mature until 2014). There is a rather lengthy Section 4.09 regarding (and restricting) the Incurrence of Additional Debt. 

Also, Section 4.18 provides for Repurchase at the Option of Holders Upon a Change of Control

(a) Upon the occurrence of a Change of Control, the Company shall, within 30 days of a Change of Control, make an offer (the “Change of Control Offer”) pursuant to the procedures set forth in Section 3.09. Each Holder shall have the right to accept such offer and require the Company to repurchase all or any portion (equal to $1,000 or an integral multiple of $1,000) of such Holder’s Notes pursuant to the Change of Control Offer at a purchase price, in cash (the “Change of Control Amount”), equal to 101% of the aggregate principal amount of Notes repurchased, plus accrued and unpaid interest on the Notes repurchased, to the Purchase Date.

Unwinding the Successful U.S. Concrete (RMIX) Trade

This morning U.S. Concrete (RMIX) reported its awful 2009 results, complete with a going concern warning.

The stock is down 25 percent on the day, to 40 cents, and the bonds are down slightly, at 56 bid 59 ask. Some big blocks of bonds have traded at the 58 level.

If you recall from my posts about the RMIX capital structure arbitrage trade, I bought the notes at an average price of 58.5. I was able to get out of them today for ~56, a loss of about 4 points (7%) counting the loss of accrued interest since the notes are now trading flat.

However, I hedged the notes by selling stock at $1, which has fallen 60%. And I sold more stock on the way down, including on Monday when RMIX inexplicably rallied as part of the market wide short squeeze.

Adjusted EBITDA was only $25 million in 2009! So the current enterprise value of $308 million is 12x last year's EBITDA - expensive!

I have not covered the short yet, since I think the stock is worth zero, but I will start to cover as it goes lower. I mainly wanted to get out of the bonds today because they are under-reacting to the financial distress.

U.S. Concrete (RMIX) and Grubb & Ellis (GBE) Giving Up Yesterday's Gains

U.S. Concrete (RMIX) down 15% (ten cents) today, giving back its irrational rally gains from yesterday. 

NASDAQ has sent them a Deficiency Notice regarding their penny stock status, although this is a non-issue that can be easily resolved using a reverse split. 

Still seeing tons of "RMIX bankruptcy" searches coming here. Tomorrow is the big day when they will announce earnings and probably a restructuring plan. 

Maybe they will file BK! Who knows? That's why I'm short tons of the common.

***

Grubb & Ellis (GBE) is only down slightly today but importantly it has lost its rally momentum. Here's a good comment from Seeking Alpha on my critique of human services companies

You are exactly right. Just like investment banks that went public, the partners of these formerly private firms realized they could have their cake and eat it too - i.e. cash out their equity value in a public offering and then keep the majority of the profits going forward through lucrative compensation packages. From a human capital position, GBE is in a worse capital position than JLL and CBRE, who have huge investment management portfolios that they can leverage to keep their brokers captive. GBE can only attract productive brokers by competing on splits - some of their top brokers can make 75%+ of their gross commissions, leaving a few pennies for the owners after overhead. In the best of times, they might generate an EBITDA margin in the mid-teens, but in bad times, they always lose money - it is an ugly business model.

Yes! 

U.S. Concrete (RMIX) Excitement

Lots of visitors today searching for "RMIX bankruptcy" and coming from the Google Finance page for U.S. Concrete. I guess there is a fair amount of interest in the situation.

All I can say is... buy the bonds, not the stock! For the stock to be worth anything, the company basically cannot fail to pay principal and interest on the bonds, which is a 25% yield at current bond prices!

U.S. Concrete (RMIX) Now Up 17% For the Day

Pretty strange that we are seeing this explosion in the stock and yet only one small bond trade today.

I think that if this surge reflected new information we'd be seeing higher prices or at least higher activity in the bonds.

Now, if the rally was totally meaningless, you would expect it to happen in the context of a day when every heavily shorted junk stock was screaming higher..

U.S. Concrete (RMIX) Notes Now Trading Flat; Stock Rallying Anyway

U.S. Concrete (RMIX) stock is up 9% (5 cents) today.

Meanwhile, the notes that I own as part of the RMIX capital structure trade aren't really trading today but they are about 60 bid, although that bid is flat, meaning without accrued interest.

The next coupon payment is supposed to be April 1, although it is pretty clear from the company's press releases that the bank lenders are going to "block" that payment. So, most bidders are essentially treating the ~4 cents of currently accrued interest as a lost cause.

How any of this is bullish for the equity is a mystery to me. I am looking at adding to my RMIX short today.

Gimme Credit?

Is there anyone with access to Gimme Credit who can get me a copy of their new report on U.S. Concrete (RMIX) - Between a Rock and a Hard Place by Vicki Bryan?

I assume she agrees with me but I would like to see.

"RMIX Bankruptcy"

Noticing a lot of Google searches coming here for "RMIX bankruptcy."

As I explained in my post yesterday, I think U.S. Concrete (RMIX) will be able to use a voluntary distressed debt exchange to resolve its financial situation.

However, I think it will be highly dilutive for the current equity, which is starting to catch on (down 8% today).

U.S. Concrete (RMIX) Engages Restructuring Advisor and Will "Explore Alternatives"

In my December 2009 post about the U.S. Concrete (RMIX) capital structure arbitrage trade, I wrote that,

"RMIX is over-leveraged. If the bonds were due sooner, it would be a bankruptcy candidate. They are a great candidate for a note exchange."

And I said that I was buying the Notes (the 8 3/8% senior subordinated Notes due April 1, 2014, at an average price of 58.5) and shorting the stock. As the RMIX situation has deteriorated, the Notes price and stock price have fallen and I have added to both the Notes position and the short position.

Last Friday's press release announced that RMIX has hired Lazard Freres and AlixPartners as its financial advisors, and Kirkland & Ellis as its legal advisor, "to assist the Company in assessing potential alternatives to strengthen its balance sheet." RMIX also received a "waiver through April 30, 2010 regarding a default for any non-payment of the interest payment on the senior subordinated Notes".

Today's 8-K filing indicated that the banks also waived any RMIX default regarding "delivery of its 2009 fiscal year financials with a 'going concern' opinion or similar qualification." The company will also be permitted to "prepay or redeem the Notes with the proceeds of permitted subordinated debt and/or an equity issuance, but not cash."

According to Yahoo! Finance, RMIX will report 4th quarter 2009 earnings on March 1, 2010.

I suspect that RMIX will report a rather poor quarter and that they will try to use the 30 day grace period for the interest payment on the 2014 Notes, while announcing some sort of distressed debt exchange offer. They will probably offer noteholders the chance to receive stock, or stock plus a bond with later maturity than 2014, in exchange for their Notes. (Just like what we saw last year with Georgia Gulf and Callon Petroleum and Yellow Roadways.)

I think the current value of RMIX as a firm is less than the face amount of the debt. Competitor Monarch Cement trades at an enterprise value of 5.5x EBITDA. Cemex trades at ~8x. For RMIX's current common stock to be worth anything, the firm would have to be worth close to 10x my guesstimate of $30 million for 2009 EBITDA. That seems unlikely.

Therefore, I believe that to be accepted by the noteholders, any restructuring offer would need be highly dilutive. Perhaps the current equity would be allowed to retain 5% of the reorganized equity assuming that all noteholders tendered their shares.

If the company is having difficulty making the April 1 interest payment, then the current shareholders' negotiating position is poor. Management will want to save their jobs and will probably do whatever it takes to get the noteholders to agree to exchange their notes.

Thus, I think the long-notes and short-equity trade is still a winner. I am surprised the equity has held up as well as it has. I think buying a note at 50 ($500) and selling maybe 425 shares of stock ($300), for a net debit of $200, would be the right ratio. That means that in an apocalypse liquidation scenario, you would only need the bonds to recover 20 cents to break even.

Tuesday

Sold more US Concrete (RMIX) today at around $0.90.

The Callon Petroleum (CPE) trade has been outstanding. Small quantities of the notes have traded as high as 95 this week!

I've gotten interested in the natural gas ETF (UNG) as a short.

US Concrete Inc. (RMIX)

US Concrete Inc. (RMIX) has been on my radar of distressed situations for a while. Someone recently mentioned to me that he was interested in buying the equity, which prompted me to take another look.

RMIX has two segments producing different concrete products: ready-mixed and precast. Of course, the concrete business depends on construction and has suffered from the credit bubble collapse. Charts of residential and commercial construction spending give a sense of how unusually high construction spending was during the years that RMIX experienced peak revenue and profitability.

RMIX operates principally in Texas, California, New Jersey/New York and Michigan. Ready-mixed concrete must be placed within hours of mixing, which limits the market for a permanently installed ready-mixed concrete plant to a 25-mile radius of its location.

Their “liquidity outlook for 2010 continues to weaken, primarily as a result of continued softness in residential construction, further softening of demand in the commercial sector and delays in public works projects in many of our markets.”

Capital Structure
Enterprise value is ~$320 million. At $1, the market cap is only $36 million. The bonds (8.375% due Apr 2014) trade at 55 to yield 26%. The bonds have rallied from 30 in March, despite the absence of much improvement in the company's financials. However, over the past month the bonds and stock have begun to slump substantially.



One good thing about the notes - there is not much debt senior to them. Just $16 million drawn on a senior secured facility that has $71.6 million of remaining capacity. There are $271.7 worth of notes outstanding (the company has bought some back).

Looking at RMIX I am debating whether the notes are a good deal at 55, and whether the stock should still be shorted at this valuation. The market value of the notes plus senior debt is $163 million.

The notes are guaranteed by all subsidiaries, excluding Superior and minor subsidiaries. The notes restrict the company's ability to incur additional debt [limited to the greater of (1) borrowings available under the Credit Agreement, plus the greater of $15 million or 7.5% of our tangible assets, or (2) additional debt if, after giving effect to the incurrence of such additional debt, our earnings before interest, taxes, depreciation, amortization and certain noncash items equal or exceed two times our total interest expense.]

The company has $46 million in net working capital, mostly tied up in receivables and inventory. That is 11 cents on the dollar to the bonds after paying off senior debt.

Earnings
The company has been suffering huge losses, though mostly consisting of non-cash impairment charges. Adjusted earnings before interest, income taxes, depreciation and amortization (EBITDA) was $12.5 million in the Q3 2009, compared to $17.6 million in Q3 2008. Year to date EBITDA has been $26.2 million versus $42.0 million for the first nine months of 2008.

A simple annualization of YTD EBITDA gives $35 million, so the market enterprise value through the bonds is 4.7x EBITDA. Annualizing is a stretch because 4th quarter is a slow quarter, but the multiple for the year is going to come in the mid 5s I suspect. That is bullish for the notes – competitor Monarch Cement trades at 5.6x TTM EBITDA. Larger and more diversified concrete companies trade at even higher EV/EBITDA multiples.

EBITDA peaked in 2005 at $50 million. However, they have been divesting assets and probably no longer have the capacity they did during the bubble.

Looking at the equity: The interest payment on the notes alone is almost $23 million annually. That eats up almost all of the EBITDA.

Capital expenditures have been averaging close to $30 million annually. Their guidance for Q4 2009 is that capital expenditures will be in the range of $2.0 million to $3.0 million.

Conclusion
RMIX is over-leveraged. If the bonds were due sooner, it would be a bankruptcy candidate. They are a great candidate for a note exchange. Since they aren't in a rush - the notes don't mature until 2014 - they are in a decent negotiating position. It will only get worse unless their profitability improves.

If they were to offer say 1000 shares of stock per bond, or maybe a note due in 2019 at a lower rate but convertible at $2 or $3, they would probably get great participation from the type of people that participate in exchange offers.

This would allow management to focus on buying plants cheaply rather than selling them.

I am buying the notes and shorting the stock.

Thoughts on REG and RMIX

Investors' exuberance for Regency Centers (REG) on Friday was not rewarded today - gave it all back.

I have been looking at U.S. Concrete (RMIX) as a possible short for about a month now. Today it rallied 25% on nothing more than O'bama's vague suggestions that we should spend the TARP money on make-work road projects.

RMIX bonds - with hardly any debt senior to them - trade at a 25% yield.