Distressed Debt 2011 Heats Up: BordersGroup and Ahern

Two quite significant events happened today in the distressed debt world: One widely expected and the other less so. First, as widely expected, Borders Group filed for bankruptcy. The only tradeable security (I've never seen the Term Loan trade) that I can see in the structure as of now is the revolver which is pegged at 96-97. I believe it at least RARELY trades and was quoted in the low 90s in the beginning of January. With that said, given the lumpiness of trade creditors here, I have to think a fairly active trade claims market will develop.

For those interested, you can find the docket here:

http://www.bordersreorganization.com/maincase.php

And the first day affidavit here:

BGP Filing

The real winners here look like Tennenbaum Capital, Stone Tower, and GB Merchant Power -they are providing a $55M senior secured super seniority term loan to Borders at L + 1250 with a 1% floor.

The second big piece of news NOT expected today was Ahern choosing to delay the interest payment on its second lien notes. This one was LESS expected:

Bonds went out at the end of the day 38-42 (flat).

In my opinion, this is one to keep your eyes on. Obviously its unfair to use LTM numbers to value this business. I have to think EBITDA improves here as the general economy / CRE market gets better. In addition, we have a very recent case (Neff, docket here: http://www.kccllc.net/neff) to look at and readily tradeable public comps (RRR, URI, etc). And in my opinion, the most important piece: Don Ahern, CEO controlling 97% company -he obviously does not want to turn over the keys. Why? Well - His father started the company in 1953, Don Ahern's son (Evan) is also an executive of the company and will seemingly take over, Don makes a million dollars a year as the CEO, and the kicker: The related parties transaction page in the 10K is 2 pages long - go for yourself and read them. Incredible stuff.

With that said, does Don Ahern pull a Jerry Moyes and use outside capital to buy up notes at a discount to try to stay involved? He seemingly has a good relationships with his banks - does he ask for more money to formulate a sort of debt for debt swap pushing out maturities and into a PIK structure? It's hard for me to wrap my arms around him just giving it all up. Maybe he runs it into the ground but that's unlikely given the cyclical tailwinds he's probably riding. Using a 7x multiple of $80M of EBITDA less ~$400M of senior debt gets me to a recovery approaching 70 cents on the dollar. I do think there could be downside here, especially if the Term Loan lenders argue that the discount to original equipment cost should be 50 cents on the dollar which with ~$800M of original cost implied $400M of value, essentially wiping out the bonds and creating the company at a multiple of 5x (i.e. massive upside). Valuation fight if it files? Definitely (if I use 6x above, the valuation drops to 35 cents on the dollar...).

This week has been quite active on the distressed front: Seahawk Drilling files to sell its assets to HERO, Tronox, Orleans Homebuilder and Oriental trading exit Chapter 11, Capmarket settlement - despite the primary credit markets being insane, still a lot to keep us busy on the desk.