I am currently reviewing a distressed opportunity and I wanted to know if anyone has any experience in this field that may be able to help.
So the distressed opp is a travel business that has been significantly affected by Covid, but the majority of their revenue is tied to leisure travel which is forecasted to rebound a lot quicker than corporate travel. I have modeled a liquidation value, but the value I arrive at indicates there are sufficient assets to pay down in full the RCF, senior and sub debt. Given full debt recovery, would it be reasonable to rather buy the equity if there is material upside?
My first thought would be to recheck your math because liquidation covering down to sub debt doesn’t sound right
I thought so too, but I've double-checked the math and used both aggressive and conservative discounts for the book value of assets on the B/S. In both cases I still arrive at a liquidation value above the total debt (ex lease liabilities).
Ok, for the sake of argument we'll say you're right and the equity is in the money or on the cusp. In these situations it can sometimes be more asymmetric to own the equity if you think there is a compelling catalyst to alleviate concerns of a credit event the market may anticipate. I.e., if you have a $1bn EV and $50m equity sliver, a +5% change in the EV creates an additional $50m equity value, and the same in the other direction is a zero. EV + / - 10% is still a 0 to equity on the downside but 3x on the upside, etc. However, on a probability weighted basis the risk / reward is generally not that great if there is a 75% chance or greater of a 0, which is probably correct if the market is pricing that way.
There's either little debt or you're overvaluing some assets I imagine. You also can't ignore leases in a liquidation..
My guess is you're talking about Carnival or one of the others at which point what you're saying could make sense
I'm looking at TUI Group
Makes sense now. Keep in mind that a large % of their asset base is comprised of cruise ships which have very low liquidation value because metal content for cruise ships is lower vs. cargo or other types of ships. You'd need to contract the ship to be taken to Aliaga if you are lucky enough to get in, or worst case to a scrap yard in India, Bangladesh, or Pakistan. Where specific ships are flagged has impact on where they can be scrapped and you need to pay for this in addition to transportation. Scrap value is ultimately determined by, effectively, a price x ton formula and the price is market dependent and can go up and down, you can't hedge it. Finally, this whole process will take a long time so you need to PV whatever the final scrap value is by an appropriate discount rate. Whatever cost was take a fraction of that and you'll have something close to scrap value. Not sure if this was the scenario you had in mind when saying liquidation, but there isn't really any other concept of liquidation for ships...you are either sailing and earning RevPAR or getting scrapped, and the market is over supplied with underutilized cruise ships at the moment.
Edit: Just adding that I realize this company has other assets across airlines, hotels, etc., but my point is that across all of these assets "liquidation" value is really, really low and secured debt would start sweating thinking about it.
Ah. Their debt isn't distressed at all.
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