Thursday, December 10, 2009

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.

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.

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.


Anonymous said...

The bigger issue regarding timing is the bank covenant, which is triggered when liquidity drops below $25 million, not the 2014 maturities. The stock and bonds dropped following the 3Q09 call when the CFO stated that the margin is going to be "razor thin" on that covenant and that is given management's projection of volumes down in the low single digit area in 2010. If volumes are off >10%, the banks will have the ability to cut off their liquidity and force either a bankruptcy or a distressed debt exchange. The bonds are a better value at $55 given my potential recovery analysis (the stock being worthless of course), so I agree with your trade, but I also worry that recovery could be lower. I especially like EBITDA calculations that have recently included gains on bond repurchases, but that's another story. What I like most about RMIX is that they have liquidity triggers from some "non-core" assets and potentially core if liquidity becomes more dire, which is also bad for the equity. Good luck and go Stimulus!

Alan said...

A newbie question. How does one go about investing in debt? I don't think any of the online brokerages provide this functionality. Thanks for any advice.

CP said...

It's not something you can do "online." But you can call in and they should be able to buy bonds for you.