Two Catalysts for Another Sharp Drop in Georgia Gulf

After the big selloff on Friday when the registration statement for 30 million new Georgia Gulf (GGC) shares was approved, trading has slowed down, and the stock is hovering around 15.

It seems like some of the bond funds haven't decided to sell their new shares yet. But I see two catalysts for another sharp move lower in the stock.

First, GGC will be releasing third quarter earnings Wednesday at 5:00 PM ET. Competitors PPG and Olin (OLN) both announced disappointing chlor-alkali results. I don't see how GGC could have done better. I do not expect GGC to meet management's 2009 EBITDA target, which would make it a stretch for GGC equity to be worth anything.

Second, I wouldn't be surprised if GGC attempts to issue stock. Raising equity at these prices and de-leveraging the company would make great financial sense. There are about $40 million of the subordinated notes outstanding which they could buy at 15-20% yields.

Author's Disclosure: I am short GGC and long GGC debt and long OLN.

Comments

[Art Bitrage:]

That is absolutely silly- they just exchanged most of the bonds for 93% of the pro-forma stock- the $63mm left outstanding is but a pittance compared to the $700mm+ they retired. The bonds TRADE at 15% yields but their annual interest costs on whats left is only $7mm - the weighted cost of capital to them is about 9.98%, not 15%. GGC should trade at a premium to OLN and at $15 it would imply a discount based on published 2010 EBITDA estimates- time to unwind your trade.

Nov 05 12:04 PM

[mikhailb:]

Art, according to today's earnings transcript, the QUARTERLY interest burden is going to be 18M plus another 4M for the next 2-3 years, for a total of 22M per quarter. That's a lot more than 7M annual.

Am I missing something?

Here's the relevant quote:
----------------------...
Frank Mitsch - BB&T Capital Markets

Looking forward to steady share counts, et cetera, into the future, I think you indicated that your cash interest expense is $18 million for the third quarter. Is that a reasonable level for the fourth quarter and beyond?

Greg Thompson

Yeah, I think so. I guess, to the extent we pay more debt down or borrow more based upon the seasonality of the business, it could fluctuate a bit. I think that's a pretty reasonable kind of midrange that we would expect going forward.


On Nov 05 12:04 PM Art Bitrage wrote:

> That is absolutely silly- they just exchanged most of the bonds
> for 93% of the pro-forma stock- the $63mm left outstanding is but
> a pittance compared to the $700mm+ they retired. The bonds TRADE
> at 15% yields but their annual interest costs on whats left is only
> $7mm - the weighted cost of capital to them is about 9.98%, not 15%.
> GGC should trade at a premium to OLN and at $15 it would imply a
> discount based on published 2010 EBITDA estimates- time to unwind
> your trade.

Nov 05 11:19 PM