Enterprise value in distress
Im having trouble working my way through assessing the enterprise value in the situation I describe below, and I was hoping for some advice:
A business operates in 4 different countries, with an operating subsidiary in each country while a holding company owns 100% of the equity of each. Each subsidiary has about the same tangible asset value and puts out about the same EBITDA, and the growth and risk prospects in each country are about the same - stable market, positive outlook. That holding company issued bonds and common equity when times were good. Those Sr Secured bonds, not due til 2020, are guaranteed by 2 of the subsidiaries, and the other 2 subs are non-restricted, non-guarantors. After a rough few years, with liquidity very low but otherwise stabilizing, the $100mm face of secured bonds trade at a deep discount at about a 25% yield after flirting with missing a coupon payment twice this past year, and they've hovered around that yield for 5 months now. There is no other debt, and the common stock trades at some penny price on option value alone. Finally, the business sold a 25% equity stake in both of its non-restricted, non-guarantor subs.
How do I think about constructing the enterprise value of this entire business? Is a simple multiple on consolidated EBITDA accurate? I'm mostly confused by the split of the guarantors and the non-controlling interest stake in the other subs. What roughly do the bonds have a claim on in terms of that enterprise value if this company were to make an distressed exchange offer or file?
EV= market value of all securities (The hold Co benefits from all of the value except the 25% stakes that were sold)
Sorry for the poo, fat figure on phone situation.
To elaborate, you have to see how the value can flow up the holdco. How can the company sell assets without the bond holders having a say, and the rights of the holdco to these assets. You would have to assess the debt at the Opco level too (it’s unlikely that it’ll have no debt at this level, particularly if the company is stressed). Unless you’re in France there should be upstream guarantees by any company that has benefitted from the borrowings. To get more granular, you can look at the intercompany loans and guarantees.
Ultimately, it’s important to assess who would control any restructuring of the company and the negative effects that the RXing would have. Look at Codere for an example of how bad it can get (Argentina looking to withdraw licenses on bankruptcy etc.). Are the bondholders in the driving seat, is the company family owned (usually means they’ll hate converting debt to equity), what other debt is there, is this cyclical or structural……? An insolvency in Spain will take a considerable amount of value out of the company, in the UK, not so much, in the US, just fees. There is a myriad of issues you have to consider before you start to look at the financials.
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