Monday, February 22, 2010

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.

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