Cooper-Standard investors map out recovery valuations as liquidity concerns grow

A slew of disappointing earnings reports from Cooper-Standard, coupled with the lower guidance for full-year 2021 has incited investor concerns regarding the auto supplier’s thinning liquidity profile, according to three sources familiar with the situation. The grim financial reports along with the continued semiconductor shortage has put the spotlight on the issuer’s recovery estimates, the sources added.

And as investors look to conduct due diligence on Cooper-Standard’s true earnings potential and with maturities closing in, their conclusions could set the stage for a potential valuation fight down the road, they noted.

Even though some investors are projecting a turnaround for Cooper-Standard as the chip shortage is expected to abate, the company will likely need a capital injection by the second half of next year, given its ongoing cash burn. The term loan will also go current around the same time in 4Q22.

For 2022, one source predicted adjusted EBITDA of USD 125m and USD 250m for 2023, with double-digit revenue growth expected for both fiscal years.

On an LTM basis, the company generated USD 2.42bn of revenue, compared to USD 3.1bn in 2019, according to SEC documents.

Investor valuations vary drastically due to the company’s heavily adjusted EBITDA numbers. On an LTM basis through 3Q21, the issuer recorded adjusted EBITDA of USD 47m.

For recovery valuations, sources use USD 150m of adjusted EBITDA on normalized basis by heavily discounting the adjusted EBITDA average for 2017 (USD 452m), 2018 (USD 373m) and 2019 (USD 202m).

Another source used the 2019 adjusted EBITDA number of USD 202m.

Sources estimated a multiple of 4x to 5x compared to auto suppliers DanaLear and American Axle due to Cooper-Standard’s weaker performance and higher leverage.

Investors place Cooper-Standard at a deep discount to Dana, where the current EV multiple stands at roughly 7.4x. The comp’s equity traded today at USD 23.49 per share with a market cap of USD 3.39bn.

Two other sources pegged Lear’s EV multiple at roughly 8.3x, again factoring a steep discount for Cooper-Standard given the latter’s elevated leverage and operational struggles. Lear’s equity traded today at USD 180.91 per share with a market cap of USD 10.785bn.

The sources place American Axle’s EV multiple at 4.45x, falling in between Cooper’s EBITDA multiple expectations. American Axle’s equity traded today at USD 9.61 per share with a market cap of USD 1.096bn.

Handicapping the multiple is challenging, given the end of the chip crisis is a moving target. Some investors are using a 4x multiple, given that the uncertainty from the semiconductor shortage weighs more heavily on Cooper-Standard — thanks to higher leverage and weaker performance. Meanwhile, two sources argued that Cooper’s valuation should be more in line with the higher end, due to its historical ability to generate more EBITDA and hinging on the expectation that the shortage will resolve sooner rather than later.

With a multiple of 4x to 5x, Cooper-Standard’s valuation shakes out to USD 600m to USD 1.01bn. This argument for a higher multiple would mean that Cooper-Standard’s USD 400m 5.625% noteholders stand impaired and emerge as the fulcrum security, whereas at the lower multiple, the holders of the senior secured notes could be impaired.

Cooper’s leverage stands at 22x through USD 1.036bn of total debt and USD 47m of LTM adjusted EBITDA. Meanwhile, Lear’s leverage stands at 1.4x and Dana’s stands at 2.9x. American Axle is 3x levered.

As of 30 September, the company’s capital structure contains USD 636m of secured debt and USD 400m of unsecured debt.

Another pressure point is tied to its underfunded pension plan. In the event of a restructuring, the company may need to contend with a high-end estimate of USD 145m of pension obligations, totaling a recovery valuation of USD 605m, said two of the sources.

Factoring in the upper end of pension funding, Cooper-Standard’s USD 250m 13% senior secured notes due 2024 would be impaired. The company warned when it placed the deal in 2016 that the pensions are underfunded, and the company may have to make cash payments, according to the company’s OM.

Cooper-Standard’s equity, meanwhile, traded today at USD 23.95 per share and a USD 406.94m market cap.

The USD 400m 5.625% senior unsecured notes due 2026 last traded at 82.5 to yield 10.222% on 2 December, compared to trades at 76.75 to yield 11.911% in early November, according to MarketAxess.

The borrower’s USD 323m Libor+ 200bps term loan due 2023 is quoted today in the 93.071/94.339 context, compared to 90.5/92.5 context in early November, added a trader.

During its 3Q21 earnings, Cooper-Standard starkly lowered its outlook for 2021 EBITDA to negative USD 10m–negative USD 25m from previous expectations of positive USD 75m–USD 105m. Revenue is now expected to come in at USD 2.3bn–USD 2.34bn for the year, from previous estimates of USD 2.45bn–USD 2.6bn.

For the quarter ended 30 September, revenue totaled USD 526.7m, compared to USD 683.2m for the same period last year. Adjusted EBITDA shook out to negative USD 33.9m, down from positive USD 64.1m in 3Q20.

Cooper-Standard’s earnings fumbled due in part to the chip shortage and other factors such as supply chain constraints, higher commodity costs, rising wages, general inflation and labor availability.

Based on the company’s new estimates, Cooper-Standard could burn USD 280m–USD 300m of cash in 2021, taking the negative EBITDA estimates, less USD 100m of capex, USD 40m–USD 45m of cash restructuring costs, USD 70m of interest expense, USD 50m of working capital charges and USD 10m of cash taxes.

Even resolving to USD 150m of normalized go-forward adjusted EBITDA, Cooper-Standard could burn USD 120m to USD 125m of cash including USD 100m of capex, USD 40m-45m of cash restructuring costs, USD 70m of interest expense, USD 50m of working capital and USD 10m of cash taxes.

Based on previous expectations, Cooper-Standard was projected to have a cash outflow of USD 170m–USD 220m this year, as reported.

As of 30 September, liquidity totaled USD 380.2m through USD 253.3m of cash and USD 126.9m of revolver availability.

Messages left with the company were not returned.

2021 Debtwire

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