(OSH) Some good questions EKS -- here were my notes:
1. Owned Property = OSH still has 7 stores remaining under which they own the RE & buildings. Historically they've been able to sell them to REITs & other property owners at an ~8% cap rate and ~$4m per store/lot. That's nice because it yields $28m of cash proceeds, but some of it will need to go back into tenancy improvements for the new store formats plus they'll start having to pay ~8% rates on the leases now that they didn't have to before. Since they're only paying ~5% rates on the non-Extended TL that comes due in Dec-2013 [which has to be paid off first per the latest creditor negotiations], these sale-leasebacks have not been particularly value-accretive despite the improved optics of the lower nominal debt levels.
2. Lampert = both Lampert and Bruce Berkowitz (Fairholme) will have major says in any capital structure decisions. They own 40.4% and 12.5%, respectively. The decision of whether the Company restructures or conducts a rights offering will be determined (largely) by these two, and, honestly, I don't know which way they're leaning.
Negative view: They both over-subscribed to the Sears Hometown & Outlets (SHOS) rights offering [which also has hardware/gardening retail stores], so they've "placed their bets," so to speak, on another horse.
Positive view: The press will have a field day if this goes BK (I can see the headlines now: "Recent spin-off from Sears declares bankruptcy -- is Sears next?" That'll really be bad for the payment terms Sears will get with trade partners), so Lampert may pour more $$$ into OSH.
Side note -- if you think there will be a rights offering, I highly recommend you buy the Preferred shares ("OSHSP") instead of the common ("OSH"). ESL & Fairholme both have the same ownership in that security while Ares does not (they own ~20% of the common) and it appears Ares has had an adversarial relationship with SHLD/ESL, so I'd expect ESL/Fairholme won't hesitate to prime them.
3. Buy the Term Loan = I thought about this idea as well. Three quick observations:
(a) Even at 67 cents, I'd be worried about Ares pushing for a 363 Sale rather than a restructuring. By the time you throw in a DIP + Administrative expense + further ABL draws, I'm not sure you'd be very well covered 67 cents, $30m of Current EBITDA, and <4-5x EBITDA multiples. I DEFINITELY think the company is worth more than $200m in 2-3 years as the Cali / Oregon housing markets rebound, but Ares / others may steal it via Bankruptcy before you get a chance to realize the value recover.
(b) I went through the Credit Agreement and I believe that there are "Consent Rights" on the loans (i.e. OSH Management / BoD gets to approve whether an investor is able to purchase the term loan or not). Since they're deep in negotiations on an amend+extend or restructuring, they're unlikely to allow new parties to enter the scene and so it's doubtful they'd approve your purchase. The make-up of the Lender consortium (heavy with CLOs) makes me think ESL has been very cautious about allowing activist credit investors into the TL [not that you'd be an activist, but Eddie can't be too careful :)]
(c) I realized that I am unable to buy loans via my broker, so even if (a) and (b) weren't true, I unfortunately could not execute a trade anyways
Again, these are all hypotheticals, but those are my thoughts.
- AFed |
