In this article I will review the capital structure of Cincinnati Bell (CBB), including the Preferred B shares (CBB.PRB) and the company's debt. It is my belief that the preferred shares appear attractive based on the following:
- Planned deleveraging from the sale of the company's interest in CONE.
- The company's planned reduction in CapEx from $367MM to $180 - $190MM.
- The preferred shares' current discount to the liquidation preference.
- The preferred shares' current yield of ~7.44%.
- Current pricing on the subordinated debt due (at or near par at the time of this article).
- Insider buying of the common equity by the CEO and CFO on March 15th and 14th, respectively.
Current Capital Structure
The company has a capital structure that consists of various debt instruments, preferred stock and common equity as detailed in the two tables below.
First, I want to focus specifically on the preferred shares, which have the following characteristics:
- Liquidation preference of $50 per share (in the ADR form)
- Coupon of 6.75%
- Conversion price of $28.84
- Quarterly pay
At the current market price of $45.36, the preferred shares are trading at a discount of 9.28% to the liquidation preference and are currently yielding 7.44%.
The Case for the Preferred Shares
The current cash flow and debt levels for the company do not paint a pretty picture, but in this section I will make the argument that there are a number of near-term factors that should benefit the preferred shares.
First, the ugly reality of the current situation. The Altman Z-score is a predictor of bankruptcy and financial distress. A score below 1.81 is highly predictive of bankruptcy in the next twelve months. With a Z-score of .5, one would expect to see the bonds, particularly the subordinated debt, to be trading below par. However, the sub debt is currently trading at or near par which is what has piqued my interest.
(click to enlarge)
It is my belief that there are number of factors contributing to the current price of the sub debt. They are:
The company has the equivalent economic interest of ~69% of the common equity of CONE which based on the March 28, 2013 closing price is valued at ~$345MM. The company has stated in its recent 10-K that it intends to systematically wind down its interest in CONE and use the proceeds to retire debt, repurchase shares or invest in otherwise attractive opportunities.
Planned CapEx reduction
Management has also indicated that they intend to reduce the 2012 level of CapEx of $367MM to between $180-$190MM which should yield between $177MM and $187MM in additional EBITDA.
Lastly, the CEO and CFO have both recently purchased shares of common equity as detailed in the table below.
With the sub debt trading at or near par, the senior debt trading above par, the recent purchase of common shares by the CEO and CFO and the preferred shares trading at a discount to the liquidation price, I believe the preferred shares of CBB offer and attractive risk-adjusted investment.