Hi EKS,
I've spent a lot of time on this one, and I was attracted to it as a Long investment for the same reasons as you (beaten up, overlevered small-cap spin-off that's likely to get some nice tailwinds as Cali/West Coast residential construction / fix-ups recover).
Here's the state of play with respect to their debt:
Currently they've busted the financial ratio covenants on their secured term loan (due Dec-2013) and are negotiating with lenders right now. Per an 8-k filed in December, if they don't refinance by January 31, 2013, they pay an extra 50bps on the debt.
The Secured TL is currently trading for ~67 cents on the dollar, implying a 15% cash-on-cash yield for the Extended Term Loan due Dec-2015.
Since they haven't filed an 8-k yet updating investors on the lender negotiations, I'm assuming it hasn't gone well.
Here's the current financial performance:
Current EBITDA = $30m
Current CapEx = $(20)m
Current Interest Expense = $(15)m
Current FCF = $(5)m [ignoring WC outflows as the ABL will fund that for inventories, etc.]
I am a believer that OSH's neighborhood-format stores has a place between Ace / True Value & Home Depot / Lowes, plus I think EBITDA can get north of $50m as the new store formats continue to be rolled out & the residential housing industry improves, but I think the leverage will lead the Company into a pre-packaged bankruptcy or Chapter 11 first.
Why am I not shorting it?
2 reasons:
1) The Secured TL holders are mostly CLO = for a variety of reasons which I can go into if you'd like, they tend not to want a restructuring. In other words, there's a small chance that the Company announces another amendment and they push the maturity dates out further. This will give the Company more breathing room and the stock will almost certainly pop.
2) There's a chance OSH pushes for a rights offering to de-lever, with ESL providing a back-stop. Normally this would cause the stock price to fall, but I've seen enough situations where investor euphoria takes over and the stock rips upwards on lower BK risk.
Happy to provide any other thoughts if you're interested.
- Afed
P.S. There's some very interesting gamesmanship going on between ESL and Ares (ranging from the Preferred Stock to the ownership limitations in the Credit Agreements). It'll be interesting to see how this dynamic plays out. |
