Tuesday, March 31, 2009

Idearc And Crusader File For Bankruptcy

Two companies threw in the towel today. The first one is provider of directory services Idearc, which as recently as a year ago was claiming it is in phenomenal health. Curiously, Idearc notes that "it does not need nor intend to obtain debtor-in-possession (DIP) financing during the reorganization, as the Company maintains substantial cash balances and continues to generate positive cash flow, and has reached an agreement on use of cash collateral." Not even bankruptcy can subdue Idearc's optimism - the company will be surprised just how quickly its cash balance will disappear once all those legal bills start flowing in. Some more optimism:

“Today we take an important step forward as we continue to transform Idearc. Essentially we have a company with good potential being held back by a terminally ill balance sheet,” said Scott W. Klein, chief executive officer of Idearc Inc. “We are not only open for business and serving our clients as usual, we are also continuing our focus on transforming Idearc for the future based on a bold strategy, including all of the new programs launched earlier this month.
Um... they make yellow pages for god's sake. Has anyone told Mr. Klein about this recent invention known as Google? And as the restructuring will be handled by the strong yet gentle hands of Bill Derrough of Moelis & Co., ZH is certain a successful turnaround is just around the corner. The proposed recapitalization that Derrough et al will attempt to implement is along these lines:
Under the agreement in principle with the agent bank and steering committee, the Company's total debt will be reduced from approximately $9 billion today to a pro forma level of $3 billion of secured bank debt, with a 12 percent interest rate and a six-year term. Mandatory amortization will be $60 million for each of the first two years following confirmation and $40 million per year thereafter. The Company will retain 32.5 percent of surplus cash flow, with the balance to be paid as additional amortization on the bank debt. At emergence from Chapter 11, the Company will have a cash balance of $150 million. Other terms of the plan are still to be negotiated, and it is anticipated that the remainder of the Company’s bank debt and bonds will be converted to equity.

Nothing like being held hostage by your bank, which collects more than half the cash flow your business generates (if any). Either way, Zero Hedge wishes them well.

Amusingly, the (ex) Jefferies connection shows up in the second bankruptcy as well, this time of smallish E&P company Crusader Energy. Jefferies will continue serving as the company's financial advisor through its bankruptcy, which will seek to reorganize $326 million in debt, consisting of $30 million in first lien debt, $249 million in second lien, and $49 million in unsecured trade debt. According to David Norman, CEO, "It's unfortunate that a series of unrelated events resulted in the Company seeking protection under the United States Bankruptcy Code. The Company will continue to operate and to explore strategic alternatives with the assistance of Jefferies & Company, Inc., its financial advisors. The Company's management and Board of Directors believe that the Chapter 11 proceedings will allow the Company to conduct a process that will facilitate the Company's efforts to maximize value for all its stakeholders."

Crusader is likely not the last small E&P to seek chapter 11 protection. As I wrote previously, the liquidity crunch is gradually catching up with all E&Ps, which are getting impacted by declining commodity prices, the result being banks slashing borrowing bases as the value of securing collateral plummets. Sphere: Related Content
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Anonymous said...

Tyler, you love the Idearc bankruptcy as it sits in the middle of two of your favorite topics: CDS settlement auctions and bonds/CDS basis packages.

There are a huge number of Idearc bonds currently held in basis packages, all of which should be put into the auction. This dynamic should really make the auction one to watch.

ty webb said...

I can't say I agree with your analysis on this one, Tyler. Idearc is a healthy business underneath the debt - Yellow Pages is still a very profitable business, heavily used in many communities, particularly by people older than 40, albeit a declining business(not unlike the traditional landline business of Verizon, which begat Idearc several years ago).

Their problem was that when Verizon spun them out to raise cash for the FIOS build out, they saddled Idearc with all the debt it could possibly bear, and clearly more, in order to strengthen Verizon's balance sheet and maximize the cash extraction. They didn't care about the future viability of Idearc, just about getting money in the door.

That's probably why this will be an easy bankruptcy - wipe out the debtholders and get back to business.

Amit Chokshi said...

Idearc and other directory businesses worldwide were gobbled up by LBO firms circa 2002-2003. Those guys did a great job of bilking the moron bankers through constant dividend recaps and then IPO'd out at healthy valuations. Too bad they took those proceeds and invested in crap like Freescale, etc.

Anonymous said...

"Um... they make yellow pages for god's sake. Has anyone told Mr. Klein about this recent invention known as Google?"

I hear you ZH. They really should have moved this company into the back room to collect dust with the buggy whip company.

Maybe, just maybe the depression will leave us without power and as such no Internet. Then this jewel will rise from the ashes and dominate!