July 26th 2020
Currently tracking 241 credits from 150 companies.
If you wish to view the Distressed Watchlist within Google Sheets, please request access to it and I will shortly grant you access to it.
Leaders for the Week
Leaders for the Week
WeWork (WEWORK 7.875 25) traded higher once again this week, ending up 4.5pts to 63.25 yielding 20.2%.
Mallinckrodt Intl (MNK 5.75 ’22) bonds were extremely active this week. It was reported a large owner of $550M+ notes sold their entire position around the 10-11 context. The bonds ended the week down 12pts to around the 12.
Cooper-Standard (CPS 5.625 ’26) traded down 5pts to 55 yielding 17.8%, closing at a new all-time low.
Washington Prime Group (WPG 6.45 ’24) continues to struggle and traded lower by another 6pts to 39.
Revlon Consumer Products ended the week weaker. REV 6.25 ’24 traded down 6pts to 16.00 while the REV 5.75 ’21 traded down 11pts to 44.00.
Bombardier capital structure moved higher for the week. BOMBF 5.75 ’22 traded up 5.5pts to 90.00 yielding 12.9%.
Hovnanian K Enterprises (HOV 10 ’22) traded up 10pts to 73.00 yielding 29.3% as the housing market remains strong.
Cooper-Standard continues to underperform
Nearly two years ago, Cooper-Standard (CPS) traded at an all-time high of $144.83 with a market capitalization of $2.58B. Since then, the stock has been in a steady decline since. As of this past Friday (July 24 2020), the CPS stock’s price closed at $11.94 with a market cap of only $201.6M. The company began to grab my attention over the past two weeks as the 5.625% senior unsecured notes due 2026 continue to fall.
Senior Notes — Searching for a floor
While many high yield credits fell significantly during the March selloff, the majority of them have bounced off their year lows. However, Cooper-Standard’s 5.625% senior unsecured notes of 2026 have experienced a steady decline.
With bonds now trading at 55, could it be an opportunistic time to look at this company?
Quick Company Overview
The company through it subsidiary Cooper-Standard Automotive (CPS) designs, manufactures, and sells sealing, fuel & brake delivery, and fluid transfer systems worldwide. All of CPS’s three major product lines are ranked within the top 3 of global market share within the respective category.
- Ranked 1st in Sealing Systems (18% global share)
- Ranked 2nd in Fuel & Brake Delivery (16% global share)
- Ranked 3rd Fluid Transfer (11% global share)
While the company provides these product lines to a number of automobile manufactures worldwide, 55% of prior year’s (2019) revenue came from Ford, General Motors, and Fiat Chrysler. Their products are considered essential to all types of cars and trucks.
Revenues have fallen by 21% since 2018.
EBITDA has dropped significantly as well.
Thus increasing Total Debt / EBITDA to highest level over the past decade. With the company raising an additional $250M in new secured financing this past May, Total Debt / EBITDA is only expected to rise even higher.
After issuing the new $250M 13.00% secured bonds, the company’s debt load will return to it’s highest levels set back over a decade ago. The new secured bond (currently at 105.50) has traded well since its has been issued. The combination of a double digit coupon along with being pari passu with the company’s term loan are the primary reasons. The current yield of the 13% secured notes are approximately 200bps higher than the lower ranking 5.625% notes.
Some of Cooper-Standard’s competitors are privately owned subsidiaries of larger companies. Yet, there are a few publicly traded comps globally.
With the new $250M 13% senior secured notes, CPS capital structure looks like this:
As the company restarts its global manufacturing operations, it is expected that Cooper-Standard will burn an additional $150M over the next year. The impact of the pandemic is expected to carry the automotive industry weakness over into 2021. Few analysts are currently covering this name but I believe a good starting point for EBITDA estimates to be around $125-$175M. Historically, the business has traded around 4.0-5.0x EV/EBITDA which makes the 5.625% senior debt somewhat close to that level.
It is refreshing to see a potential distressed opportunity that is not within the Energy or Retail sector. As a leader within its product lines, if Cooper-Standard is able regain somewhat close to its prior profitability levels, this capital structure is surely one to continue to watch.