Enterprise Value and Debt question
Hi All,
Not sure if this is right forum for this. I am looking at a company where EBITDA has halved (-50%) due to COVID-19, therefore enterprise value has reduced as well. If the potential debt you are looking to invest is no longer covered by enterprise value (due to the decline in EV) would you still invest in the notes or not?.
I expect that the company will recover back to almost pre-covid levels at which point my debt would be covered. Furthermore, the debt is trading below par therefore it would be a good opportunity to invest in my view.
Can anyone let me know if this is the right way to think about it?
Thanks in advance
On the job so apologies if worded a little lengthy.
You got 2 questions wrapped into 1. The first one is how to think about EV when EBITDA dips. Generally it makes little sense to analyze EV and by connection EBITDA on an isolated, 1 year basis, but more in a dynamic context (as you allude to already). In other words, look into next year's EBITDA and see how much visibility you have towards actually achieving pre-COVID levels and from that try to understand what the new normalized EBITDA looks like. That's your basis for your EV calculation.
On your second question, which is whether you should invest in the notes, the debate is much more nuanced since it involves an analysis of the liquidity of the company, FCF generation, covenants, price (trading below par doesn't mean much - how much below par and how do returns look like when you account for the risks embedded in that EBITDA?). But just from a credit support perspective (which is an oversimplification, can't disclaim that enough), stress test your next-year EBITDA and your normalized levels, run a recovery analysis on those scenarios and see where you land. If relative to the price you get an asymmetric enough risk-return distribution, then the notes could make sense as an investment.
thanks! SB'ed
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