We wrote yesterday about some technical considerations which resulted in the 25% drop in Aleris' DIP trading price in the secondary market post break. Debtwire picks up the theme today, and discloses some other pretty ghastly information that was previously not widely known. Turns out the company provided projections to lenders which disclosed that company EBITDA in 2009 would be a meager $100 million, significantly below the $300 million LTM number through Q3 2008. And, according to analysts, even the $100 million number may be a stretch. As the DIP itself will consume $190 million in interest expense and $75 million will be spent on capital expenditures, the $100 million in EBITDA would result in a cash burn of at least $165 million. Additionally, the credit metrics for the DIP are ugliness personified, at 10.75x thru the ABL DIP ($1,075 million of new DIP) and 15.75x thru the pre-petition roll up portion of the DIP (total DIP size is $1.575 billion as we reported previously).
A lender who is punching himself in the face now for throwing more money down the garbage chute said "There is a general view the DIP was put together very hastily, before people had a chance to sit down and dig into the numbers, do sensitivity analysis. They hit a critical wall and all people were worried about was putting together some liquidity... once people had time to digest the size of the dip, they are looking at the leverage and what they're going to do for EBITDA."
If one applies a current prevailing industry multiple of 5x to the $100 million EBITDA number, the implied Aleris enterprise value is no more than $500 million, implying the DIP lenders will likely soon be equitized at a loss yet again (comparable Kaiser Aluminum is currently trading at about 5x forward EBITDA). It also means a fair trading price for the Aleris DIP should be no more than 50 cents on the dollar for the ABL portion.
Seeing how Oak Tree and Apollo backstopped the new money DIP term loan, it is not surprising why there was a rush to get the deal done with little to no disclosure. We hope Apollo managed to offload its portion quickly as all they need now is more bad investments, especially secured debt losses in someone else's private equity deal gone wrong... they have enough of their own.
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