Monday, March 2, 2009

Louisiana Pacific CDS Poised To Explode

The troubled company, after posting ghastly numbers on Friday, just announced it is commencing a $350 million debt offering, which will be "issued at a discount to the face amount." The maker of Oriented Strand Board, or the 99 cent store plywood equivalent, is burning cash at an accelerating rate and with new housing starts at record lows, needs to replenish its dwindling cash reserves or become the latest addition to our Death Watch list. One of the main reasons why LPX CDS has traded as tight as it has (14/15 pts upfront) given its gloomy prospects is that there has been only $200 million in deliverable notes in its capital structure (coupled with the misjudged expectation that in a bankruptcy recoveries would be high from asset sales as someone will pay good money for its timber mills). If this bond offering is successful, and that is a big IF, the deliverable against its CDS will more than double to $550 million in total notional debt, which should be sufficient reason for the CDS to skyrocket past historic high levels of 20 some point upfront.

Concurrently with the bond offering, LPX announced it is launching an exchange offer of its existing 200 million of 8.875% "secured" notes, which, if successful, would strip the bonds of virtually all covenants:
The proposed amendments would delete certain restrictive covenants from the indenture governing the Notes that presently restrict the ability of (i) the Company to incur liens and security interests on its properties and assets and to enter into sale and lease-back transactions; (ii) the Company’s unrestricted subsidiaries to become restricted subsidiaries; and (iii) the Company to merge or consolidate with or into any other person or transfer all or substantially all of its assets to any other person unless certain conditions are satisfied.
Seems like things at the Nashville company are getting worse by the day.


Joke of the day: S&P rates LPX's new $350 notes BBB-. If that isn't borderline insulting negligence nothing is. Sphere: Related Content
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