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How To Value New USEC Inc. Stock After Its Chap 11 Announcement?

|Includes: Centrus Energy Corp. (LEU)

USU has just announced Chap 11 filing and bond exchange offer.

1) $530 Million old bond to get $200 Million new USU bond

2) Old bond holders get 79% of new USU stock.

3) Old USU stockholders get 5% new USU stock.

4) Other strategic investors get 16% new USU stock.

USU stock is currently at about $3.50 with market cap of $17 million. Bond price went up after this announcement from about 20% face value to about 35% face value.

How to value new USU stock based on current old USU stock price and bond price?

The deal USU present to its bond holder is that it owes bond holders $530 million in principal amount. After deduct $200 million new bond, $330 million is exchanged for 79% new USU stock. If USU bond is valued at 100% face value, that would give USU market cap of $417 million. 5% of that is $21 million and translate to about $4.30 old USU stock price vs. $3.50 market price on Dec. 16, 2013.

Of course, USU bond does not worth 100% face value or it would not be force to file Chap. 11. That implies that USU stock is too high or bond price too low at current level.

My view is USU bond probably worth about 50% face value, namely $265 million. If we give new USU bond a 20% discount, then 79% of new USU stock cap is about $265-$160=$105 million.

Then, old USU stock is worth about $1.37 based on its 5% stake in new USU.

USU bond is a better buy that USU stock at this point.

Disclosure: I am long USU.

Additional disclosure: I am long USU bond. I have no USU stock. I will own new USU stock via its announced exchange offer of bond.