CCMO 2012/13 "Legacy" Bonds CCMO
October 05, 2011 - 2:15pm EST by
rickey824
2011 2012
Price: 85.75 EPS $0.00 $0.00
Shares Out. (in M): 1 P/E 0.0x 0.0x
Market Cap (in M): 512 P/FCF 0.0x 0.0x
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT 0.0x 0.0x

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Description

I'll keep it brief as this is a pretty straightforward idea.  High yield bonds in the US are getting slammed.  This is especially true for high beta names like CCMO.  I won't go into any detail on the business here as I don't have any unique insight and this name is extremely well covered by research desks and large credit funds.  However, due to the market selloff and the "beta" preventing MtM-sensitive investors from diving in, I think this is one to be "greedy" on.

I recommend two small "legacy" issues in particular as they are both "prefunded" with cash on hand.  CCMO's 5% bonds, which mature in January 2012 and yield ~10% for three months of risk, are a good place to keep cash while you wait for more lucrative opportunities.  More interesting to me are the 5.75% bonds, which mature in January 2013 and yield ~18% for fifteen months of risk.

These bonds are the next two maturities in CCMO's massive $21 billion debt structure.  They are relatively tiny at $512 million outstanding in aggregate.  To meet these maturities, CCMO has $1.2 billion of cash on its balance sheet.  In addition, they have $580 million available on a cashflow revolver and another $625 million asset-based facility with nothing drawn (they don't disclose borrowing base so I'm not sure how much exactly is available currently on the ABL).  The Company is currently FCF positive, trending well, and expected to be so for foreseeable future - double dip aside.  Needless to say, $1.8+ billion of liquidity more than covers $512 million of debt even a very extreme downside scenario.  Case and point, the Company burned less than $200 million of cash in 2009 - its trough year - when EBITDA was $1.3 billion vs. $1.8 billion LTM.  With an election year helping ad spending in 2012, it is really hard to imagine things getting that bad next year.

It is also worth highlighting that when the Company talks about liquidity, they don't even really address the 2012/3 maturities as they don't think they are worth talking about.  From the Q2 earnings call: "My comments about 2014 is that really is the next significant maturity profile that we need to address.  The maturities that we have between now and 2014 are either having pre-funded already or fully managed with our cash balances."  Furthermore, the recent $750mm add-on bond deal they did just a few months ago listed the 2012 notes as a "Use of Proceeds" in the prospectus.

Anyways, the risk here is that these bonds have no guarantees and are, thus, subordinate to a pretty hefty cap structure of a very cyclical business.  If for some reason CCMO went into free-fall way worse than 2008/9 and had to restructure, the legacy bonds would almost certainly be wiped out as well as the $500 million (based on trading price of small public float) or so of equity value below them - TH Lee and Bain invested $2.2 billion to own their 72% stake in 2008.  A default is really difficult to imagine in the next fifteen months given CCMO's liquidity profile, cashflow generation and the fact that CCMO is comfortably in compliance with the only maintenance covenant in its credit agreement.  An 18% return seems to more than compensate you for this risk.

Catalyst

Bonds will be retired at maturity in 2012/13.
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    Description

    I'll keep it brief as this is a pretty straightforward idea.  High yield bonds in the US are getting slammed.  This is especially true for high beta names like CCMO.  I won't go into any detail on the business here as I don't have any unique insight and this name is extremely well covered by research desks and large credit funds.  However, due to the market selloff and the "beta" preventing MtM-sensitive investors from diving in, I think this is one to be "greedy" on.

    I recommend two small "legacy" issues in particular as they are both "prefunded" with cash on hand.  CCMO's 5% bonds, which mature in January 2012 and yield ~10% for three months of risk, are a good place to keep cash while you wait for more lucrative opportunities.  More interesting to me are the 5.75% bonds, which mature in January 2013 and yield ~18% for fifteen months of risk.

    These bonds are the next two maturities in CCMO's massive $21 billion debt structure.  They are relatively tiny at $512 million outstanding in aggregate.  To meet these maturities, CCMO has $1.2 billion of cash on its balance sheet.  In addition, they have $580 million available on a cashflow revolver and another $625 million asset-based facility with nothing drawn (they don't disclose borrowing base so I'm not sure how much exactly is available currently on the ABL).  The Company is currently FCF positive, trending well, and expected to be so for foreseeable future - double dip aside.  Needless to say, $1.8+ billion of liquidity more than covers $512 million of debt even a very extreme downside scenario.  Case and point, the Company burned less than $200 million of cash in 2009 - its trough year - when EBITDA was $1.3 billion vs. $1.8 billion LTM.  With an election year helping ad spending in 2012, it is really hard to imagine things getting that bad next year.

    It is also worth highlighting that when the Company talks about liquidity, they don't even really address the 2012/3 maturities as they don't think they are worth talking about.  From the Q2 earnings call: "My comments about 2014 is that really is the next significant maturity profile that we need to address.  The maturities that we have between now and 2014 are either having pre-funded already or fully managed with our cash balances."  Furthermore, the recent $750mm add-on bond deal they did just a few months ago listed the 2012 notes as a "Use of Proceeds" in the prospectus.

    Anyways, the risk here is that these bonds have no guarantees and are, thus, subordinate to a pretty hefty cap structure of a very cyclical business.  If for some reason CCMO went into free-fall way worse than 2008/9 and had to restructure, the legacy bonds would almost certainly be wiped out as well as the $500 million (based on trading price of small public float) or so of equity value below them - TH Lee and Bain invested $2.2 billion to own their 72% stake in 2008.  A default is really difficult to imagine in the next fifteen months given CCMO's liquidity profile, cashflow generation and the fact that CCMO is comfortably in compliance with the only maintenance covenant in its credit agreement.  An 18% return seems to more than compensate you for this risk.

    Catalyst

    Bonds will be retired at maturity in 2012/13.

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