AMERICAN AXLE & MFG HOLDINGS AXL S
August 18, 2009 - 2:52pm EST by
mrsox977
2009 2010
Price: 5.16 EPS (3.75) (1.8)
Shares Out. (in M): 55 P/E nil nil
Market Cap (in M): 284 P/FCF nil nil
Net Debt (in M): 1,200 EBIT 0 0
TEV: 1,483 TEV/EBIT 170.0x 20.0x
Borrow Cost: NA

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Description

Warning:   This is a short idea in a stock that has been extremely volatile.  I believe that it offers outstanding risk/reward potential, however you will need a strong stomach.

For those of you new to the game, American Axle is the leading producer of driveline products in North America. The company is highly levered to GM, which is by far its largest customer.  AXL has historically operated under s long-term contracts with GM and it's management, technology and products are considered to be very respectable in the industry.

AXL's financial results have been severely depressed by the cyclical decline in domestic light vehicle demand as well as the secular decline in light truck demand. The Company's earnings power and enterprise value are highly uncertain.  Even though AXL has made progress along the lines of significant structural cost savings as well as much lower levels of capital expenditures than the Company has historically required, the Company is currently unprofitable and cash flwo negative given the well documented events surrounding GM, the car market, the overall recession, and the lack of consumer financing for auto purchases.  Cash Flow from Operations less Cap Ex has been negative for all but 2 of the last 6 years and the Company hasn't had a positive Return on Equity greater than 6% in the last 5 years.

AXL has 55m shares out at $5.16 after the HUGE move today (more on that later).  Net debt stands at around $1.2b.  Less than 2 weeks ago, their bank debt traded for 68c and their Senior notes traded for around 30c.  The equity was 26c in March and was $2.62 yesterday.  At the current $5.16 price, the Enterprise Value is $1.483b

AXL has been currently operating under a Waiver Agreement with its lenders which every few weeks seems to get extended for another few weeks.  The stock goes nuts when this happens as the market is clearly viewing AXL as either a survivor or a victim of bankruptcy.  This morning's extension has sent the shares soaring due to the fact that GM has reared its head and has entered the scene with a couple of promises and a list of demands for AXL.  Here is the 8-K verbatim:

START OF FILING

On August 17, 2009, American Axle & Manufacturing Holdings, Inc. ("Holdings") and American Axle & Manufacturing, Inc. ("AAM") entered into a second extension of the Waiver and Amendment, dated as of June 29, 2009, as amended and extended as of July 29, 2009 (the "Waiver and Amendment") to the Credit Agreement dated as of January 9, 2004, as amended and restated as of November 7, 2008 among Holdings, AAM, JPMorgan Chase Bank, N.A., as Administrative Agent (the "Administrative Agent") for the lenders party thereto (the "Lenders"), and J.P. Morgan Securities Inc. and Banc of America Securities LLC, as Joint Lead Arrangers and Joint Bookrunners (as amended and restated, the "Credit Agreement" and the facility thereunder the "Revolving Credit Facility"), with the Administrative Agent and the Lenders party thereto (the "Second Waiver Extension"). The Second Waiver Extension, among other things, extends the Waiver Extension termination date of August 20, 2009 to August 31, 2009. The Second Waiver Extension requires AAM to maintain a daily minimum liquidity of $75 million and can be terminated under certain circumstances, including AAM's inability to meet the minimum liquidity test for four consecutive business days. Except for the foregoing, the Waiver and Amendment remains in full force and effect.


Overview
    American Axle & Manufacturing Holdings, Inc. ("AAM") and General Motors Company ("GM") reached an agreement in principle, subject to negotiation and execution of definitive agreements, whereby GM will provide certain financial accommodations to AAM. Prior to entering into any definitive agreement with GM however, AAM will need an amendment with respect to certain provisions of its Revolving Credit Facility and Term Loan.
  Summary of Material Terms
    On the effective date of the definitive agreements with GM, AAM will receive a $110 million payment from GM on account of:
    Cure costs associated with contracts assumed and/or terminated by Motors Liquidation Company in its chapter 11 bankruptcy cases;
 
    Resolution of outstanding commercial obligations between AAM and GM (including, but not limited to, AAM retaining all programs sourced to AAM as of the effective date of the definitive agreements, subject to AAM amending its standard terms and conditions to be more consistent with GM's standard terms and conditions with other Tier 1 suppliers, GM's right to resource one previously awarded program (that has


      been excluded from AAM's new business backlog) and GM's acceptance of its obligation to AAM under the postretirement cost sharing agreement);
 
    Adjustment of installed capacity levels reserved for existing and awarded programs to reflect new estimates of market demand as agreed between the parties.
    AAM will have the right to elect to receive payment terms of "net 10 days" through December 31, 2013 in exchange for a 1.0% early payment discount to GM.
 
    GM will make available to AAM a second lien term loan facility of up to $100 million.
    Subject to a customary inter-creditor agreement with the holders of the Revolver Debt and Term Debt or holders of debt in a permitted refinancing.
 
    AAM will have the right to request multiple draws under this commitment (each in a principal amount of not less than $25 million) through September 30, 2013.
 
    The loan is repayable at par at any time prior to maturity on December 31, 2013.
 
    Interest is payable quarterly and is based on LIBOR (with a 2% floor), plus an applicable margin.
 
    GM will subordinate in favor of the existing senior secured credit agreements (Revolving Credit Facility and Term Loan) only its right of setoff for any amounts owing under the second lien term loan.
    AAM agrees to issue five year warrants to GM at the time the parties enter into definitive agreements to purchase up to 7.4% of the outstanding common stock of AAM. AAM will issue to GM additional five year warrants to purchase a pro rata portion of up to an additional 12.5% of AAM's outstanding common stock based upon the amount of the second lien term loan drawn.
 
    AAM will agree to a customary access and security agreement for so long as AAM receives expedited payment terms or the second lien term loan commitment remains outstanding and for 90 days thereafter. AAM will also be subject to certain limitations on executive compensation and "golden parachute" agreements for the same time period noted above as for the access and security agreement.

AAM's Outlook

  AAM expects sales to double from a range of $1.4 - $1.5 billion in 2009 to approximately $3 billion by 2013. This sales projection is based on the anticipated launch schedule for AAM's $1.1 billion new and incremental business backlog and the assumption that the U.S. SAAR increases from a range of 9.5 million - 10 million vehicle units in 2009 and 2010 to a range of 13 million - 14 million vehicle units in 2013.
 
  AAM expects to generate EBITDA as a percentage of sales in the range of 12% - 15% for the years 2010 - 2013.

 

END OF FILING

What is the market missing ?

I believe that even though today's filing is in general, a positive for AXL in terms of avoiding Bankruptcy, the key item in the 8-K that nobody seems to be looking at is the nebulous 5-yr warrant package granted to GM.  If GM is getting 20% of the AXL equity for essentially providing JUNIOR capital to the Company, how much flesh will SENIOR ($700) and BOND DEBT ($550) demand ?    Forgetting the fact that:

- AXL has hardly been a Free Cash Flow Machine, EVER

- Savings from AXL's new labor deal could be severely offset by rationalization in GM production (60% of revenue was one GM line in 2007)

- This is a low return on capital business

- They are STILL burning cash

... I will still award AXL a 5x EBITDA multiple on a generous 300m EBITDA number.  This gets me to $1.5b in EV.  Should the $1.2b in debt decide that this Company is better off leveraged at only 3x EBITDA this would equate to total debt of $900m, meaning $300m in debt would have to be replaced by equity.   At a $1.5b EV and $900m of debt there is $600m of equity to play with.  If debtholders are made whole in a mix of debt and equity, they would get 50% of this equity in order to capture the $300m in value.  GM we know now has 20% of this equity, leaving 30% for today's common Joe shareholder.  30% of $600m is $180m, divided by the current 55m shares out = $3.27 per share.  This $3.27 per share, in my opinion represents the absolute highest value for AXL is everything were to work out perfectly, and it is clearly substantially below the $5.16 price we have today.  Should the lenders push this into bankruptcy (a very real possibility), the equity will likely be zero.  The market is clearly overreacting and short covering AXL like crazy today and it will only be a matter of time before reality sets in.

 

 

 

 

Catalyst

The Second Waiver Extension extends the Waiver Extension termination date of August 20, 2009 to August 31, 2009....perhaps we will know by then what the new equity will look like.  Either that, or reality will set in.  B of A already put out a note with a $1.00 target on AXL this afternoon.

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    Description

    Warning:   This is a short idea in a stock that has been extremely volatile.  I believe that it offers outstanding risk/reward potential, however you will need a strong stomach.

    For those of you new to the game, American Axle is the leading producer of driveline products in North America. The company is highly levered to GM, which is by far its largest customer.  AXL has historically operated under s long-term contracts with GM and it's management, technology and products are considered to be very respectable in the industry.

    AXL's financial results have been severely depressed by the cyclical decline in domestic light vehicle demand as well as the secular decline in light truck demand. The Company's earnings power and enterprise value are highly uncertain.  Even though AXL has made progress along the lines of significant structural cost savings as well as much lower levels of capital expenditures than the Company has historically required, the Company is currently unprofitable and cash flwo negative given the well documented events surrounding GM, the car market, the overall recession, and the lack of consumer financing for auto purchases.  Cash Flow from Operations less Cap Ex has been negative for all but 2 of the last 6 years and the Company hasn't had a positive Return on Equity greater than 6% in the last 5 years.

    AXL has 55m shares out at $5.16 after the HUGE move today (more on that later).  Net debt stands at around $1.2b.  Less than 2 weeks ago, their bank debt traded for 68c and their Senior notes traded for around 30c.  The equity was 26c in March and was $2.62 yesterday.  At the current $5.16 price, the Enterprise Value is $1.483b

    AXL has been currently operating under a Waiver Agreement with its lenders which every few weeks seems to get extended for another few weeks.  The stock goes nuts when this happens as the market is clearly viewing AXL as either a survivor or a victim of bankruptcy.  This morning's extension has sent the shares soaring due to the fact that GM has reared its head and has entered the scene with a couple of promises and a list of demands for AXL.  Here is the 8-K verbatim:

    START OF FILING

    On August 17, 2009, American Axle & Manufacturing Holdings, Inc. ("Holdings") and American Axle & Manufacturing, Inc. ("AAM") entered into a second extension of the Waiver and Amendment, dated as of June 29, 2009, as amended and extended as of July 29, 2009 (the "Waiver and Amendment") to the Credit Agreement dated as of January 9, 2004, as amended and restated as of November 7, 2008 among Holdings, AAM, JPMorgan Chase Bank, N.A., as Administrative Agent (the "Administrative Agent") for the lenders party thereto (the "Lenders"), and J.P. Morgan Securities Inc. and Banc of America Securities LLC, as Joint Lead Arrangers and Joint Bookrunners (as amended and restated, the "Credit Agreement" and the facility thereunder the "Revolving Credit Facility"), with the Administrative Agent and the Lenders party thereto (the "Second Waiver Extension"). The Second Waiver Extension, among other things, extends the Waiver Extension termination date of August 20, 2009 to August 31, 2009. The Second Waiver Extension requires AAM to maintain a daily minimum liquidity of $75 million and can be terminated under certain circumstances, including AAM's inability to meet the minimum liquidity test for four consecutive business days. Except for the foregoing, the Waiver and Amendment remains in full force and effect.


    Overview
        American Axle & Manufacturing Holdings, Inc. ("AAM") and General Motors Company ("GM") reached an agreement in principle, subject to negotiation and execution of definitive agreements, whereby GM will provide certain financial accommodations to AAM. Prior to entering into any definitive agreement with GM however, AAM will need an amendment with respect to certain provisions of its Revolving Credit Facility and Term Loan.
      Summary of Material Terms
        On the effective date of the definitive agreements with GM, AAM will receive a $110 million payment from GM on account of:
        Cure costs associated with contracts assumed and/or terminated by Motors Liquidation Company in its chapter 11 bankruptcy cases;
     
        Resolution of outstanding commercial obligations between AAM and GM (including, but not limited to, AAM retaining all programs sourced to AAM as of the effective date of the definitive agreements, subject to AAM amending its standard terms and conditions to be more consistent with GM's standard terms and conditions with other Tier 1 suppliers, GM's right to resource one previously awarded program (that has


          been excluded from AAM's new business backlog) and GM's acceptance of its obligation to AAM under the postretirement cost sharing agreement);
     
        Adjustment of installed capacity levels reserved for existing and awarded programs to reflect new estimates of market demand as agreed between the parties.
        AAM will have the right to elect to receive payment terms of "net 10 days" through December 31, 2013 in exchange for a 1.0% early payment discount to GM.
     
        GM will make available to AAM a second lien term loan facility of up to $100 million.
        Subject to a customary inter-creditor agreement with the holders of the Revolver Debt and Term Debt or holders of debt in a permitted refinancing.
     
        AAM will have the right to request multiple draws under this commitment (each in a principal amount of not less than $25 million) through September 30, 2013.
     
        The loan is repayable at par at any time prior to maturity on December 31, 2013.
     
        Interest is payable quarterly and is based on LIBOR (with a 2% floor), plus an applicable margin.
     
        GM will subordinate in favor of the existing senior secured credit agreements (Revolving Credit Facility and Term Loan) only its right of setoff for any amounts owing under the second lien term loan.
        AAM agrees to issue five year warrants to GM at the time the parties enter into definitive agreements to purchase up to 7.4% of the outstanding common stock of AAM. AAM will issue to GM additional five year warrants to purchase a pro rata portion of up to an additional 12.5% of AAM's outstanding common stock based upon the amount of the second lien term loan drawn.
     
        AAM will agree to a customary access and security agreement for so long as AAM receives expedited payment terms or the second lien term loan commitment remains outstanding and for 90 days thereafter. AAM will also be subject to certain limitations on executive compensation and "golden parachute" agreements for the same time period noted above as for the access and security agreement.

    AAM's Outlook

      AAM expects sales to double from a range of $1.4 - $1.5 billion in 2009 to approximately $3 billion by 2013. This sales projection is based on the anticipated launch schedule for AAM's $1.1 billion new and incremental business backlog and the assumption that the U.S. SAAR increases from a range of 9.5 million - 10 million vehicle units in 2009 and 2010 to a range of 13 million - 14 million vehicle units in 2013.
     
      AAM expects to generate EBITDA as a percentage of sales in the range of 12% - 15% for the years 2010 - 2013.

     

    END OF FILING

    What is the market missing ?

    I believe that even though today's filing is in general, a positive for AXL in terms of avoiding Bankruptcy, the key item in the 8-K that nobody seems to be looking at is the nebulous 5-yr warrant package granted to GM.  If GM is getting 20% of the AXL equity for essentially providing JUNIOR capital to the Company, how much flesh will SENIOR ($700) and BOND DEBT ($550) demand ?    Forgetting the fact that:

    - AXL has hardly been a Free Cash Flow Machine, EVER

    - Savings from AXL's new labor deal could be severely offset by rationalization in GM production (60% of revenue was one GM line in 2007)

    - This is a low return on capital business

    - They are STILL burning cash

    ... I will still award AXL a 5x EBITDA multiple on a generous 300m EBITDA number.  This gets me to $1.5b in EV.  Should the $1.2b in debt decide that this Company is better off leveraged at only 3x EBITDA this would equate to total debt of $900m, meaning $300m in debt would have to be replaced by equity.   At a $1.5b EV and $900m of debt there is $600m of equity to play with.  If debtholders are made whole in a mix of debt and equity, they would get 50% of this equity in order to capture the $300m in value.  GM we know now has 20% of this equity, leaving 30% for today's common Joe shareholder.  30% of $600m is $180m, divided by the current 55m shares out = $3.27 per share.  This $3.27 per share, in my opinion represents the absolute highest value for AXL is everything were to work out perfectly, and it is clearly substantially below the $5.16 price we have today.  Should the lenders push this into bankruptcy (a very real possibility), the equity will likely be zero.  The market is clearly overreacting and short covering AXL like crazy today and it will only be a matter of time before reality sets in.

     

     

     

     

    Catalyst

    The Second Waiver Extension extends the Waiver Extension termination date of August 20, 2009 to August 31, 2009....perhaps we will know by then what the new equity will look like.  Either that, or reality will set in.  B of A already put out a note with a $1.00 target on AXL this afternoon.

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