CENVEO INC CVO
March 06, 2012 - 9:09am EST by
cameron57
2012 2013
Price: 101.00 EPS $0.00 $0.00
Shares Out. (in M): 63 P/E 0.0x 0.0x
Market Cap (in $M): 293 P/FCF 0.0x 0.0x
Net Debt (in $M): 1,270 EBIT 132 144
TEV ($): 1,563 TEV/EBIT 11.8x 10.9x

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  • Self-tender
  • Highly Leveraged
  • Capital Structure Arbitrage
 

Description

 

Cenveo (NYSE:CVO) is one of the US’ largest commercial printers, with annual revenues of ~$1.9bn.  The Stamford-based Company, a product of many acquisitions (e.g. roll-up), is run by Rob Burton Sr, a former commercial printing executive who took control of CVO in 2005 via proxy fight.  While I have relatively strong views on (i) the quality of CVO’s operations relative to other commercial printers (they are better, but not ‘that much’ better), (ii) the longer-term trends in every one of CVO’s business lines (they are not great, despite management’s assertions and claims of ‘organic growth’) and (iii) the Company’s equity value (how is this business worth >6.5x again?), this write-up focuses entirely on the capital structure. 

Specifically, Cenveo’s recently announced tender offer presents asymmetric capital structure arbitrage opportunities.  See below for the Company’s current capital structure (everything, outside of the bank debt, has traded up 15 points over the last few months). 

 $mm  12/31/11A Net Leverage Int Rate Maturity Rating Price Simple YTM Market Value Mkt / LTM EBITDA
 Revolver                      -   6.25% Dec-14           100.0 6.2%                  -  
 Term Loan B                  353   6.25% Dec-16 BB- / NA         100.0 6.2%              353  
 Second Lien Notes                  400   8.88% Feb-18 B3 / B-           98.0 9.3%              392  
 Total Secured Debt                  753 3.3x                        745 3.3x
 Senior Notes                  170   10.50% Aug-16 Caa1 / CCC+         101.0 10.2%              170  
 Senior Sub Notes                  285   7.88% Dec-13 Caa1 / CCC+           98.0 9.1%              279  
 Senior Sub Notes                    25   8.38% Jun-14 Caa1 / CCC+           98.0 9.3%                25  
 Cap Leases & Eqp Loans                    13   5.00% NM Caa1 / CCC+         100.0 NM                13  
 Total Debt               1,246 5.4x                     1,232 5.3x
 Plus Pension & OPEB                    82                
 Less Cash                   (58)                
 Less Investments                      -                
 Market Cap                  293                
 Enterprise Value               1,563 6.7x              
                   
 2011A PF EBITDA                  235                 

As you can see, Cenveo is certainly levered, but unlike peers RR Donnelly (NYSE:RRD) and Quad Graphics (NYSE:QUAD), Cenveo’s capital structure is quite complex.  More specifically, I offer brief descriptions of each tranche of debt below. 

  • $503mm first lien credit facility, comprised of (i) $150mm (undrawn) revolver, (ii) $353mm term loan B.  This syndicated loan is led by BofA, and with 6.25% pricing (LIBOR floor of 1.50% plus 475bps spread) trades at par.  The first lien credit facility has mandatory amortization requirements and maintenance covenants (senior leverage, total leverage, fixed charge coverage).
  • $400mm second lien notes.  These were issued in early 2010, as a means to delever the first lien credit facility.  These notes have a 3.75x permitted liens basket.
  • $170mm senior notes.  These were issued in June of 2008, as financing for one of CVO’s larger acquisitions (consummated right before the economy fell apart).  These notes limit CVO’s ability to refinance subordinated debt (in place at the time of the offering) with pari passu debt (more on that later).
  • $310mm senior subordinated notes, comprised of two individual notes (due in December 2013 and June 2014).  Obviously the inside maturity, these notes are driving the Company’s proposed tender offer.  

Cenveo’s proposed tender offer looks to refinance all of the Company’s senior ($170mm) and subordinated ($310mm) notes.  This is a necessary step, given the looming 2013 maturity, and, in my view, questionable earnings growth prospects (or at the very least, limited capital structure flexibility).  Incremental secured debt (recall they took down bank exposure meaningfully in 2010, they have 3.75x permitted liens covenant on seconds) capacity is minimal.  The Company must find a way to refinance the subordinated notes, however, investors are unlikely to buy a subordinated financing so long as the senior notes remain outstanding.  Importantly, so long as the senior notes remain outstanding, the Company must finance subordinated debt with ‘like-for-like’ (e.g. additional sub debt) securities.  If you have the 10.5% indenture, the relevant section I’m referencing is Permitted Refinancing Indebtedness (iii). 

The Company’s capital structure would be much improved via a refinancing of the senior (2016) and sub (2013 & 2014) notes.  I believe a deal can and will get done here, but that the proposed financing makes little sense.  The senior notes, which are call-protected through August of 2012 @ 105.25 (equivalent call price of 110), have meaningful blocking value here.

Put another way, holders of the senior notes are getting hosed in the proposed tender.  I believe the Company decided (or received advice) to throw out a low-ball offer (10 points below the call price) just to see if it worked.  They need 50.1% of holders ($85.2mm) in order to strip the senior notes’ restrictive language.  While I have no great color as to how the tender is going (just announced last Wednesday – Fidelity is a major player, with 23% of senior notes and 13% of the 2013 sub notes), I believe the proposed trade offers true asymmetric returns.  Consider the following set-up at 1.00x ratio:

 Trade   Entry Price   Ratio   Net Capital             
 Long Seniors               101.0 1.00x         101.0            
 Short Subs                 98.0 -1.00x          (98.0)            
    NET             3.0            
                   
 Scen One - Amend Tender   Price   Ratio   Net Capital   G / (L)   commentary         
 Long Seniors               110.0 1.00x         110.0             9.0  seniors are non-call through August 2012 (@ 105.25)   
 Short Subs               100.3 -1.00x        (100.3)            (2.3)  seniors contain governor on CVO's ability to refinance sub debt 'like for like' 
    NET             9.8             6.8          
                   
 Scen Two - As Proposed   Price   Ratio   Net Capital   G / (L)           
 Long Seniors               101.0 1.00x         101.0               -   CVO can strip covenants with majority (50.1%) of holders   
 Short Subs               100.3 -1.00x        (100.3)            (2.3)  cross-holdings may drive consent / tender actions   
    NET             0.8            (2.3)          
                   
 Scen Three - Deal Falls Apart   Price   Ratio   Net Capital   G / (L)           
 Long Seniors                 95.0 1.00x           95.0            (6.0)  will trade at meaningful premiums (need to address sub deb maturities very soon) 
 Short Subs                 85.0 -1.00x          (85.0)           13.0  `         
    NET           10.0             7.0           

This is not the sexiest idea in the world but, but I see little to no downside here, and very high returns on net capital in a short period of time (they are extremely focused on getting a deal done this spring, after they waited way too long last year (and markets fell apart)).  Probability weightings, of course, are subjective – but I think the Company is very likely to revise the tender offer.  A sub-for-sub deal is likely to come at a 300-350bps premium (relative to an all senior deal), meaning the Company’s payback period (on the 10 points of call premium) is less than two years.  More importantly, an all senior deal would greatly simplify the capital structure and maturity cadence. 

Any and all pushback is encouraged.  Happy, of course to delve into details as to the Company’s history, pro forma business mix or the management team, but for the purposes of this write-up I’ve focused purely on the capital structure.  I’ve given direct feedback to the management team and BofA (dealer manager), and would encourage other like-minded holders to do so (if you agree). 

Risks 

  • The primary risk here (depending on how you put this on) is that holders of the 10.5s take an un-economic deal in order to protect their interests in the subordinated notes.  I do not know how to handicap this risk but am working to (i) get more color and (ii) make sure that this thesis gets ‘out there’.
  • Theoretically, you will lose money if the deal falls apart, however, if you hedge this on a 1.00x ratio you will do very well.  It has become (much more) apparent that the Company is intent on a refinancing in the very near-term, and the Company must address the 10.5s in order to refinance the subordinated notes.
  • Liquidity is a risk, only in terms of this being a relatively small capital structure.  We’ve been able to put this on over the past few days and most distressed desks trade this fairly regularly.


Catalyst

Company amends the proposed tender offer
Deal falls apart (seniors will trade at meaningful premiums due to (i) contractual seniority and (ii) increasing focus on blocking value)
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    Description

     

    Cenveo (NYSE:CVO) is one of the US’ largest commercial printers, with annual revenues of ~$1.9bn.  The Stamford-based Company, a product of many acquisitions (e.g. roll-up), is run by Rob Burton Sr, a former commercial printing executive who took control of CVO in 2005 via proxy fight.  While I have relatively strong views on (i) the quality of CVO’s operations relative to other commercial printers (they are better, but not ‘that much’ better), (ii) the longer-term trends in every one of CVO’s business lines (they are not great, despite management’s assertions and claims of ‘organic growth’) and (iii) the Company’s equity value (how is this business worth >6.5x again?), this write-up focuses entirely on the capital structure. 

    Specifically, Cenveo’s recently announced tender offer presents asymmetric capital structure arbitrage opportunities.  See below for the Company’s current capital structure (everything, outside of the bank debt, has traded up 15 points over the last few months). 

     $mm  12/31/11A Net Leverage Int Rate Maturity Rating Price Simple YTM Market Value Mkt / LTM EBITDA
     Revolver                      -   6.25% Dec-14           100.0 6.2%                  -  
     Term Loan B                  353   6.25% Dec-16 BB- / NA         100.0 6.2%              353  
     Second Lien Notes                  400   8.88% Feb-18 B3 / B-           98.0 9.3%              392  
     Total Secured Debt                  753 3.3x                        745 3.3x
     Senior Notes                  170   10.50% Aug-16 Caa1 / CCC+         101.0 10.2%              170  
     Senior Sub Notes                  285   7.88% Dec-13 Caa1 / CCC+           98.0 9.1%              279  
     Senior Sub Notes                    25   8.38% Jun-14 Caa1 / CCC+           98.0 9.3%                25  
     Cap Leases & Eqp Loans                    13   5.00% NM Caa1 / CCC+         100.0 NM                13  
     Total Debt               1,246 5.4x                     1,232 5.3x
     Plus Pension & OPEB                    82                
     Less Cash                   (58)                
     Less Investments                      -                
     Market Cap                  293                
     Enterprise Value               1,563 6.7x              
                       
     2011A PF EBITDA                  235                 

    As you can see, Cenveo is certainly levered, but unlike peers RR Donnelly (NYSE:RRD) and Quad Graphics (NYSE:QUAD), Cenveo’s capital structure is quite complex.  More specifically, I offer brief descriptions of each tranche of debt below. 

    Cenveo’s proposed tender offer looks to refinance all of the Company’s senior ($170mm) and subordinated ($310mm) notes.  This is a necessary step, given the looming 2013 maturity, and, in my view, questionable earnings growth prospects (or at the very least, limited capital structure flexibility).  Incremental secured debt (recall they took down bank exposure meaningfully in 2010, they have 3.75x permitted liens covenant on seconds) capacity is minimal.  The Company must find a way to refinance the subordinated notes, however, investors are unlikely to buy a subordinated financing so long as the senior notes remain outstanding.  Importantly, so long as the senior notes remain outstanding, the Company must finance subordinated debt with ‘like-for-like’ (e.g. additional sub debt) securities.  If you have the 10.5% indenture, the relevant section I’m referencing is Permitted Refinancing Indebtedness (iii). 

    The Company’s capital structure would be much improved via a refinancing of the senior (2016) and sub (2013 & 2014) notes.  I believe a deal can and will get done here, but that the proposed financing makes little sense.  The senior notes, which are call-protected through August of 2012 @ 105.25 (equivalent call price of 110), have meaningful blocking value here.

    Put another way, holders of the senior notes are getting hosed in the proposed tender.  I believe the Company decided (or received advice) to throw out a low-ball offer (10 points below the call price) just to see if it worked.  They need 50.1% of holders ($85.2mm) in order to strip the senior notes’ restrictive language.  While I have no great color as to how the tender is going (just announced last Wednesday – Fidelity is a major player, with 23% of senior notes and 13% of the 2013 sub notes), I believe the proposed trade offers true asymmetric returns.  Consider the following set-up at 1.00x ratio:

     Trade   Entry Price   Ratio   Net Capital             
     Long Seniors               101.0 1.00x         101.0            
     Short Subs                 98.0 -1.00x          (98.0)            
        NET             3.0            
                       
     Scen One - Amend Tender   Price   Ratio   Net Capital   G / (L)   commentary         
     Long Seniors               110.0 1.00x         110.0             9.0  seniors are non-call through August 2012 (@ 105.25)   
     Short Subs               100.3 -1.00x        (100.3)            (2.3)  seniors contain governor on CVO's ability to refinance sub debt 'like for like' 
        NET             9.8             6.8          
                       
     Scen Two - As Proposed   Price   Ratio   Net Capital   G / (L)           
     Long Seniors               101.0 1.00x         101.0               -   CVO can strip covenants with majority (50.1%) of holders   
     Short Subs               100.3 -1.00x        (100.3)            (2.3)  cross-holdings may drive consent / tender actions   
        NET             0.8            (2.3)          
                       
     Scen Three - Deal Falls Apart   Price   Ratio   Net Capital   G / (L)           
     Long Seniors                 95.0 1.00x           95.0            (6.0)  will trade at meaningful premiums (need to address sub deb maturities very soon) 
     Short Subs                 85.0 -1.00x          (85.0)           13.0  `         
        NET           10.0             7.0           

    This is not the sexiest idea in the world but, but I see little to no downside here, and very high returns on net capital in a short period of time (they are extremely focused on getting a deal done this spring, after they waited way too long last year (and markets fell apart)).  Probability weightings, of course, are subjective – but I think the Company is very likely to revise the tender offer.  A sub-for-sub deal is likely to come at a 300-350bps premium (relative to an all senior deal), meaning the Company’s payback period (on the 10 points of call premium) is less than two years.  More importantly, an all senior deal would greatly simplify the capital structure and maturity cadence. 

    Any and all pushback is encouraged.  Happy, of course to delve into details as to the Company’s history, pro forma business mix or the management team, but for the purposes of this write-up I’ve focused purely on the capital structure.  I’ve given direct feedback to the management team and BofA (dealer manager), and would encourage other like-minded holders to do so (if you agree). 

    Risks 


    Catalyst

    Company amends the proposed tender offer
    Deal falls apart (seniors will trade at meaningful premiums due to (i) contractual seniority and (ii) increasing focus on blocking value)

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