Nebraska Book operates about 290 college bookstores. In 2004, Weston Presidio acquired Nebraska Book in a highly leveraged private equity deal. The company has experienced declining revenues and cash flow over the past few years, and is in bankruptcy. Having worked in both commercial lending and private equity for a significant portion of my 30 working years, I've had a good bit of experience with companies who are facing financial distress. It's painful, and I admire people like new Nebraska Book CFO Alexi Wellman, who jump into the fray when others turn and run.
The company has adjusted EBITDA of about $60MM (before professional fees and including improvements from recent leased-store closures) on about $600MM in revenues for FYE 3/31/2012. The trailing twelve month professional fees from the bankruptcy are about $30MM -- 50% of EBITDA (ouch! I'm in the wrong business). The company has been unable to refinance its $200MM senior secured notes that matured 12/2011 (CUSIP 639579AJ0), and its $175MM subordinated notes that matured March 2012 (CUSIP 639579AF8). Not a surprise since total funded debt/EBITDA is about 9x.
Nebraska Book has amended the restructuring plan multiple times over the past year in an attempt to exit bankruptcy. The latest plan (kccllc.net/nbc) calls for a new $80MM First Lien-Term Loan and cash on the balance sheet to take out the existing $125MM First Lien DIP Term Facility; and the issue of new equity and debt in consideration for the existing debt. I WILL BE VOTING AGAINST THE PLAN BECAUSE I BELIEVE THE COMPANY CAN DO BETTER FOR ITS CREDITORS. I WILL ALSO OBJECT TO THE PLAN BECAUSE IT DOES NOT PROVIDE SUFFICIENT CONSIDERATION FOR CLASS 1 AND CLASS 4, AND THE PROPOSED $80MM NEW MONEY TREATS NON-ACCREDITED INVESTORS UNFAIRLY BY PROHIBITING THEIR PARTICIPATION. I plan to attend the bankruptcy court hearing in Wilmington, DE on May 30.
A valuation by Rothschild shows the company has a great deal more value as a going concern than in liquidation. Under the revised plan, the holders of the senior secured would receive 90% of the equity of the company (other 10% of the equity goes to a management incentive program), and $100MM of Second-Lien Term debt in consideration for their existing $200MM Senior Secured. The consideration is valued at 81% ($162MM) according to the filing, presumably $100MM of that is the new second-lien term, and $62MM is the value of the 90% equity stake. The holders of the $179MM Subordinated ($175MM face value + $4MM accrued interest?) and $79MM in junior AcqCo notes would receive only warrants in the deal. This consideration is valued at about $5MM for the Subordinated and $0 for the junior AcqCo.
There's a much simpler solution I would propose, that is eminently more fair to all creditors. JUST KEEP ALL EXISTING FACILITIES IN PLACE, AND PAY THEM DOWN AS CASH FLOW PERMITS. Keep the $125MM First-Lien Term Loan and $75MM ($26.3MM outstanding at 3/31/12) ABL Facility in place. It is fully secured even in the most pessimistic liquidation scenario, and provides the working capital the company needs to operate.
The company has $104MM in cash on the balance sheet. The company generates about $60MM in EBITDA. Terming out the $125MM First Lien Term over 5 years would take $25MM of that $60MM each year, leaving $35MM for interest expense, maintenance cap ex, and additional principal paydowns. Cap Ex is $5MM, and cash interest on my new plan is about $18MM, leaving $12MM a year for principal paydowns. Here's the rest of the plan:
For Class 1, the $200MM Senior Secured: Tender at 75 for up to $100MM of the $200MM senior secured at a cost of $75MM, using cash on the balance sheet. The most recent $1MM+ marketplace sale for the Senior Secured was at a price of 69.75 on 4/30/12, so 75 would be a premium over market. This gives an opportunity for those who want to jump ship to do so, and eliminates the uncertainty of holding new take-back notes and equity. It will reduce interest expense by $10MM per year. Continue to pay the 10% annual coupon on a monthly basis for the outstanding Senior Secured. Each year, take 100% of cash flow and call that amount of senior secured at par (nice carrot for those who stay in the capital structure). The senior secured should be completely paid off in year 7.
For Class 2, Other Secured Claims, pay in full using cash on the balance sheet, cost $800M
For Class 3, Other Priority Claims, pay in full using cash on the balance sheet, cost $900M
For Class 4, the $179MM Subordinated Notes: the anticipated recovery according to the filing is 3% of the $179MM (about $5MM), but in the form of new warrants, the value of which is highly uncertain. Pay the coupon that was due 9/15/11 at a cost of about $7.5MM, from cash on the balance sheet. Continue to accrue interest at the 8.625% annual rate including the payment that was due 3/15/12, with no payment until the Class 1 senior secured has been paid off. After Class 1 has been paid, use the same 100% of cash flow to pay Class 4. The Subordinated should be completely paid off in year 10.
For Class 5, General Unsecured Claims: Option of 4% payment as proposed in the current plan, or continue as general unsecured with hope of greater recovery down the road.
For Class 6, the $77M in AcqCo Notes: Continue to accrue interest, with no payment until the Class 4 subordinated notes have been paid off. Finally, in lieu of the proposed management incentive program, create a bonus pool of 10% of EBITDA above $55MM. After Class 4has been paid, use the same 100% of cash flow to pay Class 6.
I'd be happy to hear your thoughts about the plan I've put forth, and the revised plan.
Disclosure: Long both 639579AJ0 AND 639579AF8.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.