By Parke Shall
About a week ago, we wrote an article about why Concordia (NASDAQ:CXRX) could be headed for real trouble. We postulated that bankruptcy scenarios were on the table and made a plea for equity holders to be cautious.
In today's article, we wanted to make a couple of comments as to why the company's silence from this point forward is not golden and why the more Concordia communicates with the market, the better. We are not encouraged by the company's lack of transparency here at such a crucial stage for it and we think it could just be yet another ominous sign for Concordia going forward. It's reminding us of another bankruptcy scenario we saw play out just months ago and in this article, we want to draw some parallels.
When the company saw its CEO resign and when it withdrew its guidance, information became at a premium all of a sudden. Not only were shareholders now holding equity in the company that is worth 90% less than it was worth a year or two ago, but now you have a company that just simply doesn't want to communicate with the market.
Suspension of guidance without any further commentary tells us everything that we need to know. Management simply does not seem to have any visibility on the business going forward at all or it is already in the midst of discussing restructuring scenarios.
Whether this is because of the executive change, because of the new healthcare regulations in the United Kingdom, or because the company is working on a restructuring deal, we don't know. But we do know is that the company has likely decided to internally to head down a certain path and take a certain course of action, but as long as shareholders are not informed of what this is, silence is simply nothing more than an ominous sign for the company.
We want to make a small note about bankruptcy scenarios. While we are not claiming that it is definite that Concordia will file for bankruptcy, it is becoming more and more of a reasonable option and foregone conclusion as the company pushes forward into December without any details on what its strategic plan is going forward. We're fairly certain that the company wasn't able to sell itself, otherwise, it would've done that already, even for a fire sale price. The company's debt load is overwhelming when compared to its EBITDA.
The sad reality is that sometimes bankruptcies take a while to get set up before being announced. The whole situation feels very similar to when SunEdison (OTCPK:SUNEQ) filed for bankruptcy. The equity dropped to about 2 dollars per share, there were lots of speculators and day traders for a couple of months as the equity bounced back-and-forth, the company literally said nothing for almost two straight months. We remember having discussions internally about how insane it was that the company hadn't communicated with shareholders. Even if the company was pursuing a restructuring, we had felt in SunEdison's case that, it should've just said something before simply filing the bankruptcy announcement.
This situation feels really similar.
We legitimately feel like we could be in the 60 or 90 days prior to a bankruptcy. The fact that the company has brought on a new CEO, which has been argued by bulls as a reason to go long the equity now, is meaningless. This CEO, if he has his priorities straight, will want to re-capitalize the business completely in order to have his best shot at success and eventually earn whatever stock options or grants he would be entitled to under a new capital structure. It isn't absurd to think that the company could be in the midst of a "hard reset" in that the new management may not only be leading a new strategy for the company but ultimately in terms of capital structure, a new company altogether.
As part of our article that we wrote about a week ago, we pointed out the fact that the company's Junior unsecured bondholders were getting a bit ornery and that these bonds were trading at distressed levels, similar to the equity. Unsecured debt is the closest thing to equity in a situation like this, as it would likely both have trouble getting any restitution in a restructuring or bankruptcy scenario.
The longer the silence carries on in this case, the more likely we think it is that we will get an announcement of a bankruptcy scenario from the company. If the company had an active strategy to manage the business as it is, it would be making those announcements to shareholders and letting people know the way that it sees a road forward. Take, for instance, Valeant (NYSE:VRX). Many people thought Valeant was going to go bankrupt, and many people still do. However, months ago, the company came out and did a full-court press in a presentation to investors talking about exactly how it wants to restructure and reform the business without altering its capital structure. Concordia needs to do something similar if that is its plan. The more time that goes by, the more inclined we are to think that this isn't the plan.
Like an option that is eventually set to expire, we don't think Concordia can go much longer without addressing the scenario. Bondholders are starting to get angry, stockholders have already been angry, the company's cash flow stream is in jeopardy, and all the while everybody is being left in the dark. We would not take the silence as a good sign if it continues from here.
Disclosure: I am/we are short CXRX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.