VISTEON CORP VSTNQ
April 25, 2010 - 11:59pm EST by
Shoe
2010 2011
Price: 1.35 EPS $0.00 na
Shares Out. (in M): 130 P/E 0.0x 0.0x
Market Cap (in $M): 176 P/FCF 0.0x 0.0x
Net Debt (in $M): 3,140 EBIT 0 197
TEV ($): 3,316 TEV/EBIT 0.0x 0.0x

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Description

 

1  Idea / Trade Summary

2  Business / Background

3 Financials

4 Valuation

5 Upside / Downside

6 Bankruptcy Process

7 Trading / Sell side

8 Risks

9 Catalysts

10  Other similar plays

 

1

Idea / Trade Summary

Go long VSTNQ stock (and/or the bonds).  Preferably the stock with the bonds.  Stock currently trading at $1.35 or about $175mm of market cap as of 4/22

To simplify the analysis, assuming everything above the stock is reinstated, the stock could be worth $5-12 a share.  Around $8 at the midpoint.  However, having everything above the stock refinanced / reinstated is rather unlikely but still a possibility.  It’s more likely that the stock will get some share in the resulting equity or nuisance value.  But the valuation argument for the equity and bonds is pretty compelling.

The bonds could be worth 121-150 if they get to do their rights offering (not taking into account differences between the guarantees on the 12.25% vs. the plain 8.25% & 7% bonds).  They are currently around 102 & 110.    My target is 130 factoring the likely rights offering. 

But if the stock wins (i.e. gets all the post reorganized equity), you’ll get par + accrued on the bonds (by definition) and the stock goes up a lot.  If the stock loses, then the bonds get all the value.

It’s not much of an exaggeration to say that the entire US auto industry has restructured itself, cut costs, cut capacity, and strengthened its collective balance sheet, all at the same time.  Many auto companies are now operating with net cash.  As a tailwind, global SAAR is bouncing back.  Visteon it’s most tied to Ford and Asia, which are both doing rather well.  Visteon’s recent numbers were also very impressive and game changing.

As a “hedge”, you should buy Visteon bonds as well.  If the existing equity doesn’t get much new equity, it’s almost certain the bonds will.   I’d make the stock a small position.  My suggestion is, for every dollar of stock you buy,  I’d buy 4-5 dollars of bonds.  Be ready to stomach the volatility on the stock as well.

 

2

Business / Background

Visteon is a tier 1 auto supplier that was spun off from Ford in 2000.  They have 3 core product groups

-        climate group

-        electronics group (includes lighting)

-        interiors products group

 

Customer Concentration (sales)

Ford 28%   (being tied to Ford is a positive these days)

Hyundai/Kia 27%

Nissan/Renault 9%

PSA Peugeot Citroën 7%

Chrysler 3%

General Motors 3%

Volkswagen 2%

Mazda 2%

< span>BMW 1%

Fiat 1%

Honda 1%

Jaguar/Land Rover 1%

Toyota 1%

 

History

Visteon fell into the trouble that many other auto companies and suppliers fell into during the recent downtown.  Visteon was the result of a bad spinoff from Ford in 2000.  Then, as many of you know, the OEMs squeezed their suppliers for a while. 

 

3

Financials

The company’s 2011 plan projection is $538mm in EBITDA (versus the market view of $600mm+).  Mgmt could be sandbagging as they have been throughout the whole bankruptcy process.   LTM, they’re already at $6.68bn in sales,  if they can grow sales by 5% and get an 8.5% EBITDA margin, that puts them at $600mm in EBITDA overall already.   

However, Visteon has never consistently had an EBITDA margin higher than 7% since 1999 (EBITDA margin has been below 4% since 2003,  but that was when the OEMs were squeezing their suppliers).  VSTN did achieve EBITDA margins of 8-9% between 1997-1999 and put up very impressive numbers.  However, their numbers before 2000 were before the spinoff from Ford so it’s not the most direct comparison.   But, they already posted Q4 09 EBITDA margins of 8.9% (on the conservative side).  So, $600mm seems rather achievable. Pensions / OPEB are also going to be cut dramatically.

Looked at it another way, the headline 2009 EBITDA was $454mm.  However, some of that was one time in nature and bears argue that more of that needs to be backed out.   So, let’s say EBITDA was $400-425mm in 2009.    In any case, if “clean” Q4 EBITDA was $175mm (vs the $230mm headline number), on a run rate basis you’re already above $600mm of EBITDA.  And Q4 is usually a seasonally weaker quarter for VSTN. 

Of that $400-$425mm of EBITDA, about $125mm of that was from Halla.   So $275-$300mm of that EBITDA was from Visteon. 

Capex is projected to be around $175mm annually going forward.  So clearly easily covered.

Capital Structure – in bankruptcy ($mm)

                                     Low            High

Admin claims                   105            105

DIP facility                        75            75

Priority tax                        5.3            5.3

 

ABL Claims                        127.15    127.15

Secured tax claims            2.5            2.5

Other secured claims            2.85            2.85

Other priority claims            0.01            0.01

TL facility claims            1629            1629

 

Senior claims                        1946.8            1946.8

 

12.25% senior note            216.65            216.65

General unsecured            750.82            928.32

Trade claims                        47.71            47.71

 

Total Claims                        2961.9             3139.4

 

Stock Market Cap                 175            175

Total                                    3136.9            3314.4

 

Past Quarters

The last 2 quarters were good (like most other auto companies),  but Q4 was a exceptional

Q4 09

This was the blow out quarter that changed how everyone was looking at the company (and made people realize how much mgmt was sandbagging).   A Dec 17th projection showed FY 09 EBITDA of $302mm vs the $454mm that they actually posted.   People were using a $525mm 2011 EBITDA number before the Q4 numbers  and then started using a $600mm+ EBITDA number for 2011.   

Revenues +27% YoY

Gross margins +1100 basis points YoY. Large amount of costs were taken out in addition to some improved vehicle production levels.  EBITDA margins were at 8.9%

Headline Q4 09 EBITDA was $227mm vs -$11mm a year ago and FCF was solid at $163mm vs. -$75mm in Q4 08.    Ended the year with over $1.1bn in cash vs $600mm at the beginning of the year. 

Q3 09

Sales up 13% sequentially, but down 17% YoY

Gross profit of $116mm (up 170% YoY) on solid cost cutting.  It was the 3rd quarter of improved sales and improved margins

Operating cash flow of $84mm was solid

 

Halla/Yanfeng

VSTN has a 70% stake in Halla Climate Control Corp (auto air control equipment), which is a Korean/Asian auto supplier that has some very nice financials.  Its major customers are Hyundai and Kia.  Halla has a 1585bn KRW market cap (or $1.43bn) at the moment.  So VSTN’s 70% stake is worth ~$975mm.

Halla’s results are consolidated in VSTN’s results.  Halla trades at a ~9.75x EV/ 2011 EBITDA multiple (on $144mm in EBITDA).   Halla has almost no debt.

VSTN also has a 50% stake in Yanfeng, a Chinese auto supplier that produces interior, instrument panels, seating, safety, etc.   This makes up the bulk of the non-consolidated affiliates.

 

4

VSTN Valuation

 

Cash

Cash of $962mm and $133mm of restricted cash at 12/31/2009.  I’ll give them zero benefit for the cash here (which is probably more on the conservative side) as I assume that they’ll need a large chunk of it for OPEB and more restructuring payments.  VSTN is projecting another $172mm in reorg and restructuring fees.  And, like most other auto suppliers, they’ll want to keep a lot of the cash through the restructuring.   Also, a lot of bears argue that you shouldn’t give them credit for all of it because it’s in other domiciles anyway, etc.

They need around $500-$600mm to run the business (which is the range that the company is projecting and most analysts are using).  Through the whole downturn, they’ve been generating a lot of cash, so I’m not worried about their cash position and expect it to rise.

NOLs

And there is $700mm in NOL value (that’s extra gravy, as long as no shareholder trips the IRS tax rules that would put the NOLs at risk).  I would assume that no equity holder would do something that silly.  

Just to be conservative, let’s say that all the future growth in earnings is from Halla and EBITDA at Visteon (ex Halla) stays at $300mm for 2010 and 2011.  With the bounce back in the US and global auto markets, I think that’s an extremely conservative assumption.  I assume the rest of the growth in EBITDA to get to the $525mm or $600mm total EBITDA (whichever number you want to use) by 2011 comes from Halla.  From conservations and looking at Halla performance, it looks as if Halla will likely be the main driver anyway. 

In general, the majority of the value comes from Halla and the JVs. 

 

a) Conservative Upside Case

Visteon ex Halla = $300mm EBITDA x 5.5 EV/EBITDA = $1,650mm

Halla  (70% of mkt cap) = $975mm  < Halla shares are probably trading a bit cheap due to Visteon’s current woes and perceived selling pressure from VSTN

Non consolidated JVs (e.g. mostly Yanfeng) = $80mm in LTM net income  x 15 P/E = $1.2bn  <  Perhaps I’m being conservative on Visteon and bullish on Yanfeng.  But Yanfeng is tied to China

Total = $3,825mm EV

Debt claims total = $3,140mm

Excess value for equity = $686mm

Price per share = $5.26 (130.2mm shares of common).   Of course you only get that value assuming everything above you is reinstated or refinanced (a more simplified analysis). 

 

Assuming the equity gets nothing, and the bonds end up owning the entire post reorganized equity (with a rights offering taking out everything ahead of them to be conservative), the bonds are worth 121 cents on the dollar as a whole (i.e. disregarding the inevitable valuation fight between the 12.25% and the other unsecured bonds).  To mitigate that, just buy a strip of each bond (12.25%, 7% and 8.25%)

Assuming they can issue a new $1bn term loan to refi part of the existing term loan, the bonds are worth about 132. 

If group of equity holders does a massive rights offering and takes out everything, there’s still a 15% cash on cash return if they believe in the upside case here.  Not that great, but that’s assuming they just essentially buy the whole company with cash.  Clearly, the equity can reduce their cost basis and juice their returns by issuing some debt, using cash on the balance sheet, selling the JVs, etc.  As described below, it’s all up to their ability to set a reasonable plan forward. 

 

b) Bullish Upside Case

The market is already using a $600mm+ EBITDA for 2011 on Visteon as a whole. As I’ve argued above, $600mm already seems quite doable

Visteon as a whole = $600mm x 5.5x = $3,300mm in EV 

Non consolidated JVs = $96mm 2010 net income (a 20% increase) x 15 P/E = $1.44bn

Total = $4.7bn in EV

Debt claims total = $3,140mm

Excess value for equity = $1,600mm

Price per share = $12.3 (130.2mm shares of stock).   Of course you get that value assuming everything above you is reinstated or refinanced

 

Assuming the equity gets nothing, and the bonds end up owning the entire company (with a rights offering taking out everything ahead of them to be conservative), the bonds are worth 150 cents on the dollar as a whole (again disregarding the inevitable valuation fight between the 12.25% and the other bonds).  With $1bn term loan issuance to help reduce the cash outlay in a rights offering, the bonds are worth 174.

Even here, if group of equity holders (with a private equity backstop or something) does a massive rights offering and takes out everything above them, there’s still a 43% cash on cash return if they believe in the upside case here. 

 

c) Downside Cases

0 of course if it the stock gets nothing in bankruptcy. 

I think there’s a reasonable chance that the stock gets some nuisance value,  i.e. perhaps some warrants or a small amount of shares to just go away.  Maybe participation in the bondholder’s rights offering. 

So perhaps they get $100mm in reorganized value, in an estate that’s worth $3.1bn at the moment through the bonds (at par), $100mm is ~3% of $3.1bn.   So not totally unreasonable.    Currently the stock is at $1.35, or $175mm of market cap.   So you’re left with some recovery in the stock (60 cents ish). 

Maybe the equity gets 5% of a $4bn EV; that’s $1.54 per share of value.  

Again, from the above I’m not factoring in value from the NOLs or the cash horde. 

 

5

Upside / Downside 

Stock

Conservative case =  100% down,  290% up.  About 3 to 1

Bullish case = 60% down, 790% up.   Getting about 14 to 1

So a mid case around 8 to 1

 

Is this the next GGP?  Unlikely.  GGP was able to reinstate their debt and leave the company rather levered (because they had no other choice since the CMBS debt had no flexibility and were just termed out).  And, as of yet, there are no strategic bidders and there likely won’t be. But that’s a potential positive catalyst as well

 

Bonds

Downside is par + accrued interest.   Upside is 121 to 150.

Bond accrued interest

 

Bond            Par + Accrued

12.25%            116.0               (trading at 112)

7.00%            107.8               (trading at 102)

8.25%            110.1               (trading at 102)

 

6

Bankruptcy Process

Here’s the real question, what’s the probability that the equity gets something?  I’m going to guess better than 15%, (in which case you’re getting decent pot odds).  Thus far, VSTN/mgmt has only issued very low ball valuations and super conservative projections that try to strip value from the bondholders and stock.  They currently value the company at $2bn to $2.47bn (up from $1.5bn to $2.4bn in the initial plan).  If their Halla stake trades at $1bn, and their other JVs are worth perhaps another $1bn, they’re basically giving no value to Visteon core operations.  Maybe that’s the right thing to do if VSTN is a money losing business, but I find that hard to believe with the last few quarters they’ve put up and where the industry is going.  Management also wants de minims amounts of debt on the resulting company.

Clearly the stock has a lot of big name funds in there doing some heavy lifting with sizeable stakes in it (Davidson Kempner, Plainfield, Aurelius, Brigade, etc.)

The next mini catalyst would be the equity committee getting an examiner or official committee (April 30th).

It’s both good (and perhaps bad), that this bankruptcy could drag on for quite sometime.  Dragging out helps keep options open for the bonds and stock.  As time goes on and things get better, financials, financing and valuations should only improve (given the current economic, automotive, and credit environment).


Current Plan (From the company) – gives 85% equity to the term loan, ~6.2% to the 12.25%, ~8.8%, ~10% to management.    Management has been sandbagging and low-balling quite a lot.  They’ve been rather recalcitrant.  This plan is patently unfair with the valuation of $2-2.5bn.

 

Bondholder Plan - Sounds like they have all the money they need for a rights offering already ($1.4bn+).  Take out the senior debt and then just take the equity.  Maybe add some senior debt after that.  Bonds are an easy bet here.

 

Equity Plan – still seems like a long shot, but doable

I don’t think the Davidson Kempner plan will work – outlined in this 13D letter to Visteon mgmt (http://www.sec.gov/Archives/edgar/data/928549/000095012310028311/k48960aexv99w4.htm ) they’re going to need to come up with the cash and perhaps some refinancing.

 

More straightforward plan

- Raise some new debt.  Perhaps $1-1.2bn of new term loan (HY new issue and secondary markets are on fire).  That’s about 2x leverage on a more normal EBITDA.   Would still have a large net cash position.   Give the new term loan 100% 1st lien on Halla or something like that, although I don’t think they need to.   Though the company is ardently against more debt,  I don’t see why VSTN shouldn’t support at least some debt here.   It just makes corporate finance sense.

- Use cash on balance to help take out some debt as well.  VSTN will likely will generate some more cash through the restructuring, maybe you take out some of the bonds and other claims.

- Then a large rights offering

 

Maybe PE comes in as well?  There’s certainly a lot of financial engineering that could go on here with all the cash and assets that they could sell. For example, a PE firm can re-lever this up with a new $1.2bn term loan despite mgmt’s insistence on no post-reorg debt (basically 2x leverage on a normalized EBITDA), then perhaps sell one of the JVs for $800mm, and maybe use some $200mm of the excess cash on the balance sheet.   In total, that’s $2.2bn of cash proceeds, so the equity holders “only” have to pony up another $900mm.  With the current EV through the stock at $3.3bn, equityholders are paying about $1.075bn to make another ~$900mm (if you think total EV is ~$4.2bn) or an 83% absolute return in about 1 year.  

There’s a lot of cross ownership in the bonds and equity, perhaps there’s decent money in the equity as well.

 

Market technical tea leaves

Bonds trading above par, but below par + accrued interest.  So they’re either expecting to get just par +accrued interest or a lot of equity.   The 12.25% have some guarantees at some more profitable subsidiaries and intellectual property.  So there will likely be some negotiation and the 12.25% be given a larger piece of the pie.  

Term loan trading near par + accrued (which is around 109-110).  So they don’t expect to get more than their claim.

Equity trading at a decent market cap ($150mm+), so they’re expecting something here.  Or maybe it’s here because people are just buying the bonds with an equity kicker to hedge themselves.  But it seems to be that there are a lot of equity pure play guys in this.

 

7

Trading

The stock is obviously extremely volatile but found a recent trading floor around $1.00 (all else equal).   I don’t see this going above $2 unless there’s some more news around the equityholder’s ability to get the post-reorg equity.

The bonds have been well bid are currently still very well bid, though no one is reaching much to buy them higher.  I expect them to inch up slowly but stay a few points below par + accrued interest (i.e. not much higher than where they are now) until there’s more certainty as to how much of the equity they’ll get, if any. 

Sell Side

Sell side has been pretty reluctant on the name for some reason.  Maybe it’s because they all missed it (like a lot of people on the buyside).

All the major brokers trade it and cover it

 

8

Risks

- Bankruptcy uncertainty and risks  - This is clearly what is providing you with this opportunity – however, there are many ways that this can play out positively for both the bonds and the equity. And the equity has quite a good argument that they are in the money and that mgmt has been sandbagging too much.   I think it’s more likely that they get at least something (e.g. value equivalent to a few % of the EV) rather than a 0.   Also, bankruptcy is always a good cleansing process. 

- Autos turn south in general – hard to see that happening as the whole industry has become profitable at very low SAAR

- Visteon’s numbers are worse than expectations (probably reports numbers next around 5/11)  - hard to see that happening as the auto industry fundamentals still remain strong and bouncing back at high double digit rates. 

- A lot of debt above the equity to get through – that is true,  but as we’ve seen in recent situations, the fulcrum security continues to move lower because of valuations increasing, capital markets opening, and money rushing in.  The longer the process drags on, the more time for value to move lower.

 

9

Catalysts

- April 30th – here’s when we should find out if the stockholders gets their own official committee and/or an examiner.  Getting 1 would be nice.  Getting both would be great.  Getting neither would send the stock down.  My guess is the equityholders at least get an examiner to help mediate the situation

- Sell side analysts get more positive on it – many are still way behind and bearish on the name partly because “they just missed it and don’t want to chase”

- Replace management?   They’ve been quite recalcitrant through this bankruptcy process.  Would probably be a positive if they got replaced by a more cooperative management team

- The post reorganized equity will surely be on fire (similar to Lear, CIT, PPC, and many others), whenever it does come out.  People are going long reorg equities as an asset class.

- There are still a number of auto bears out there saying that Visteon has never been able to make money.  Arguably, Visteon has shown that they can now.   People who have passed on the capital structure before (when the bonds were in the 40s) are still loathe to take a look because they’ve “missed it”.   I think that will change slowly and more people will take another look

- Strong auto earnings in general (especially from Ford and others tied to Ford).  Strong auto results from Asia will also help since much of VSTN’s valuation is derived from Asia

- Clarity around VSTN’s reorganization and what VSTN will do with Halla shares & cash will help Halla shares rally as the large overhang will be removed. That in turn will help VSTN’s stock/bonds rally as well. It’s a nice virtuous circle. 

 

10

Other similar plays

Chapter 11 equity recovery situations

Chemtura (some bonds at 115, stock at 1.57)

Smurfit SSCC – probably no chance if I had to guess (bonds at 93, stock at 0.25)

Catalyst

- April 30th – here’s when we should find out if the stockholders gets their own official committee and/or an examiner.  Getting 1 would be nice.  Getting both would be great.  Getting neither would send the stock down.  My guess is the equityholders at least get an examiner to help mediate the situation

- Sell side analysts get more positive on it – many are still way behind and bearish on the name partly because “they just missed it and don’t want to chase”

- Replace management?   They’ve been quite recalcitrant through this bankruptcy process.  Would probably be a positive if they got replaced by a more cooperative management team

- The post reorganized equity will surely be on fire (similar to Lear, CIT, PPC, and many others), whenever it does come out.  People are going long reorg equities as an asset class.

- There are still a number of auto bears out there saying that Visteon has never been able to make money.  Arguably, Visteon has shown that they can now.   People who have passed on the capital structure before (when the bonds were in the 40s) are still loathe to take a look because they’ve “missed it”.   I think that will change slowly and more people will take another look

- Strong auto earnings in general (especially from Ford and others tied to Ford).  Strong auto results from Asia will also help since much of VSTN’s valuation is derived from Asia

- Clarity around VSTN’s reorganization and what VSTN will do with Halla shares & cash will help Halla shares rally as the large overhang will be removed. That in turn will help VSTN’s stock/bonds rally as well. It’s a nice virtuous circle. 

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