Everyone knows I am bearish on Molycorp Inc (NYSE:MCP) due to the fact that it has to find a solution to its cash burn rate. In yesterday's article, Molycorp: Is Apollo Providing Mullet Money?, I questioned [i] whether Apollo was being properly rewarded for its investment in the company's $230 million convertible debt, and [ii] if a restructuring of Molycorp's debt would be a long-term solution to its cash burn:
The company experienced cash out flows of about $78 million for Q1 2014.Based upon high level cash burn projections, the company's cash on hand could fall below $100 million by the end of the year. Molycorp may need to seek additional capital before cash falls to those levels. A rollover of debt with a lower coupon or different equity conversion rate may not be a long-term solution to the company's cash burn issues.
Standard & Poor's Downgrade
Today Standard & Poor's also looked askance on Molycorp's debt level, lowering Molycorp's corporate credit rating to "CCC" from "CCC+" with a negative outlook. Here are the details:
- S&P lowered the company's secured debt to "CCC" from "CCC+".
- S&P Lowered the company's unsecured debt from "CCC" to "CCC-".
Unsustainable Capital Structure
S&P cited that in their view, "the company's capital structure is unsustainable." The following chart outlines the company long-term debt of $1.5 billion; in Q1 2014, Molycorp paid interest of approximately $35 million on that long-term debt:
S&P cited that Molycorp's sources of liquidity may not be enough to cover operational and working capital needs, interest and capital expenditures next year. After cash out flows of $78 million in Q1 2014, the company's cash level was $236 million.
Distressed Debt Exchange
S&P believes that if the company's liquidity becomes strained to the point where it cannot cover its operational and working capital, interest and capital expenditures, Molycorp may seek a capital restructuring that could involve some form of distressed debt exchange. It may downgrade the company's debt further if it believes a capital restructuring or distressed debt exchange will occur with six months.
The Standard & Poor's downgrade comes after Moody's downgraded Molycorp to Caa2 a few weeks ago. The difference is that [i] Moody's cited that the company's capital structure "may be unsustainable" where S&P said it "was unsustainable" and [ii] Moody's only downgraded the subordinated debt, while S&P downgraded the subordinated debt and secured debt.
Pursuant to my $1.60 per share valuation of the company, I projected that Molycorp needed to raise about $260 million by the end of Q3 2014.
The S&P downgrade puts more pressure on Molycorp to find a long-term solution to its cash burn, which may involve a dilutive event. I rate the company a sell.
Disclosure: The author is short MCP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.