Alternative Investments Distressed Debt Mini Case Homework Homemax Restructuring Answer question 1 in the spreadsheet. Answer questions 2-6 in this document (although you will likely need to use the spreadsheet or a calculation to solve these problems). Hand in both the spreadsheet and this document on the due date. The spreadsheet entitled homemax for case.xlsx is posted in Canvas. The spreadsheet contains several exhibits from the case study based on the article "A primer on distressed investing: Buying companies by acquiring their debt." by Moyer, Martin, and Martin, published in the Journal of Applied Corporate Finance in the Fall of 2012. The slides relating to this case are entitled homemax presentation.pptx and may be found in Canvas. For this homework, you are going to create a new Exhibit 7: Restructuring Analysis based on a different workout plan than is presented in the case. The spreadsheet contains the original Exhibit 7 (restructuring analysis) Note that there are no formulas in this Exhibit. This is by design! When you build your new restructuring analysis, you will need to build in formulas so that you can easily alter the spreadsheet by altering some assumptions. Assume that everything besides the workout plan is consistent with the case study and the spreadsheet Exhibits. TO DO: Assume that instead of the restructuring plan detailed in the case in Exhibit 7, the following restructuring plan is proposed: Assume EV of $560 million, as in initial case. Assume that Homemax will: a) Enter into a new $280 million 1st lien term loan and use $250,000,000 of the proceeds to pay off the existing 1L loan b) Issue 7,900,000 new shares of common stock. c) The existing 2L loan investors will receive the rest of the cash from the $280,000,000 loan as well as 22 shares of stock per bond. As in the case, please apply the 22 shares per bond for the 2L investors to the gross balance of their loan. \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|c|} \hline Exhibit7: NEW RESTRUCTURING & Stock price & & & & & & & & & \\ \hline \multirow[t]{2}{*}{ Class } & Original debt & New debt & Original Shares Stock & NewSharesStock & Total Shares & \% New Shares & \% Total Shares & Shares per Note & Recovery\$ & Total Recovery \\ \hline & & & & & & & & & (pernotefordebt,aggforsh) & \\ \hline \multirow{2}{*}{\multicolumn{11}{|c|}{New1LLoanNewHomeMaxStock}} \\ \hline & & & & & & & & & & \\ \hline Original 1L & $250,000,000 & COMPLETE IF ANY & 0 & NA & & & & & & \\ \hline Original 2L & $150,000,000 & COMPLETE IF ANY & & & & & & & & \\ \hline Senior Notes & $225,000,000 & COMPLETE IF ANY & & & & & & & & \\ \hline Equity & & & 100,000 & & & & & NA & & \\ \hline Management & & & & & & & & NA & & \\ \hline \end{tabular} d) The existing senior noteholders will receive 47% of the new stock e) Train will receive 3.00% of the newly issued shares f) Management will be granted the remaining newly issued shares TO DO: 1) Compete the worksheet, given the above assumptions. Specifically, every cell highlighted in green should be completed. 2) Calculate the cash on cash return at the end of 2012 for the senior debtholders assuming they initially bought the debt for $550/ bond at the end of 2011 and the workout too place on the last day of 2012. Assume that EBIDTA at the end of 2012 is $100 million, the EBIDTA multiple is 7, and assume that they received 15% interest on the face value of the debt during the year. You should do this per bond. 3) Calculate the IRR at the end of 2012 for the senior debtholders assuming they initially bought the debt for \$550/bond at the end of 2011. Assume that EBIDTA at the end of 2012 is $100 million, and assume that they received 15% interest on the face value of the debt during the year. (use Excel's IRR function as described in the slides, and per bond. 4) Using the same approach as in slide 27 from the Homemax presentation r2.pptx slides, and assuming bankruptcy costs of \$25 million, what would the Enterprise Value have to be in order for Train to feel sorry that they did the workout instead of a bankruptcy? Note: you should consider management's equity as well as the PE firm's. \begin{tabular}{|c|c|c|c|c|c|c|} \hline Exhibit 4: Balance sheet and capital st & & & & & & \\ \hline Panel A: Balance Sheets & & & & & & \\ \hline Balance Sheet Data (\$MM); Year & 2007 & 2008 & 2009 & 2010 & 2011 & \\ \hline Cash & $23.30 & $19.30 & $23.50 & $17.20 & $28.60 & \\ \hline Accounts Receivable & $76.20 & $61.00 & $35.30 & $38.10 & $36.40 & \\ \hline Inventory & $173.30 & $235.70 & $153.20 & $119.00 & $109.20 & \\ \hline Property, Plant, and Equipment & $257.20 & $251.50 & $246.36 & $241.70 & $239.50 & \\ \hline Goodwill & $728.30 & $728.30 & $728.30 & $728.25 & $728.30 & \\ \hline Total Assets & $1,258.30 & $1,295.80 & $1,186.66 & $1,144.25 & & \\ \hline Accounts Payable & $231.00 & $269.80 & $174.56 & $145.45 & $137.40 & \\ \hline Total Debt & $625.00 & $625.00 & $625.00 & $625.00 & $625.00 & \\ \hline Total Liabilities & $856.00 & $894.80 & $799.56 & $770.45 & $762.40 & \\ \hline Equity & $402.30 & $401.00 & $387.10 & $373.80 & $379.60 & \\ \hline Liabilities and Equity & $1,258.30 & $1,295.80 & $1,186.66 & $1,144.25 & & \\ \hline Panel B: Capital Structure & Amount & & Leverage/EBITDA(book) & Marketvalue & MarketPrice & Leverage/EBITDA(market) \\ \hline First Lien Bank Debt due 12/31/12 & $250.00 & lev/ebitda & & 100% & $250.00 & \\ \hline Second Lien Bank Debt due 12/31/12 & $150.00 & & & 92% & $138.00 & \\ \hline Total bank liens & $400.00 & allbank/ebitda & 5.0 & & & 4.9 \\ \hline Senior Notes due 6/30/2014 & $100.00 & & & 56% & $56.00 & \\ \hline Senior Notes due 9/30/15 & $125.00 & & & 56% & $70.00 & \\ \hline Total Debt & $1,025.00 & alldebt/ebitda & 12.9 & & $514.00 & 6.4 \\ \hline Estimated Market value at 7x EBITIDA & $558.25 & & & & & \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|c|c|c|} \hline \multicolumn{2}{|c|}{ Exhibit 1: Summary Data for Acquisition of HomeMax } & & & & & & \\ \hline \multirow[b]{2}{*}{2003 Operating Performance } & \multirow[b]{2}{*}{ (\$MM) } & & \multicolumn{3}{|c|}{ Sources and Uses of Cash (acquisition) } & \multirow[b]{2}{*}{ Uses (Post Acquisition) } & \\ \hline & & & Sources & & & & \\ \hline Revenue & 500 & & Secured Bank Debt & 200 & & Cash & 10 \\ \hline COGS & 350 & & Senior Notes & 100 & & Accounts Receivable & 20.55 \\ \hline Operating Income & 150 & & Assumed Liabilities & 74.72 & & Inventory & 61.64 \\ \hline Sell, Gen, and Admin Expenses & 75 & & Equity Contributio & 187.78 & & Goodwill & 370.31 \\ \hline EBITDA & 75 & & & & & Prop, Plant, and Equip & 100 \\ \hline Depr and Amort Expense & 10 & & & & & & \\ \hline EBIT & 65 & & Total & 562.5 & & Total & 562.5 \\ \hline Interest Expense & 20 & & & & & & \\ \hline Earnings before Tax & 45 & & Valuation & & & & \\ \hline Tax & 14.4 & & EBITDA & 75 & & & \\ \hline \multirow[t]{2}{*}{ Net Income } & 30.6 & & Valuation multiple & 7.5 & & & \\ \hline & & & Acquisition Price & 562.5 & & & \\ \hline & & & & & & & \\ \hline \multicolumn{8}{|l|}{ Exhibit 3: Operating performance } \\ \hline Onerating Performance (SMM). Year & 2007 & 2008 & 2009 & 2010 & 2011 & & \\ \hline Revenue & $1,264.90 & $1,011.90 & $860.10 & $868.70 & $886.10 & & \\ \hline Operating Income & $354.20 & $253.00 & $215.00 & $217.20 & $239.25 & & \\ \hline EBITDA & $139.10 & $70.80 & $51.60 & $52.10 & $79.75 & & \\ \hline Interest Expense & $47.00 & $47.00 & $47.00 & $47.00 & $47.00 & & \\ \hline Capital Expenditures & $65.00 & $20.00 & $20.00 & $20.00 & $22.00 & & \\ \hline Free Cash Flows (EBITDA - Int Exp - Cap Ex) & $27.10 & $3.80 & $15.40 & $14.90 & $10.75 & & \\ \hline% change in revenue & & 20% & 15% & 1% & 2% & & \\ \hline Operating Margin (Op inc/revenue) & 28% & 25% & 25% & 25% & 27% & & \\ \hline EBITDA/Revenue & 11% & 7% & 6% & 6% & 9% & & \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|c|} \hline \multicolumn{11}{|l|}{ Exhibit 5: Projected Recovery Values of Debt Tranches } \\ \hline$MM, Year & 2011 & & & & & & & & & \\ \hline EBITDA & $79.75 & & & & & & & & & \\ \hline Valution multiple & & & & & & & & & & \\ \hline Enterprise value (\$MM) (EBITDA x valuation multipl & $558.25 & & & & & & & & & \\ \hline First Lien Loan Amount & $250.00 & & & & & & & & & \\ \hline Value for Junior Creditors before second lien & $308.25 & & & & & & & & & \\ \hline Second Lien Loan Amount & $150.00 & & & & & & & & & \\ \hline Estimated recovery for second lien ( j/ /second) & 100% & & & & & & & & & \\ \hline Value for Junior Creditors after second lien & $158.25 & & & & & & & & & \\ \hline Senior Note Amount & $225.00 & & & & & & & & & \\ \hline Estimated Recovery for senior noteholders (jr/sr) & 70% & & & & & & & & & \\ \hline Exhibit 7: Restructuring Analysis (Potential) & Stock price & 28.50 & & & & & & & & \\ \hline Class & Original Debt & New Debt (MM) & Original Shares Stock & NewSharesStock & Total Shares & \% New Shares & \% Total Shares & Shares per Note & Recovery \$ & Total Recovery \\ \hline & & & & & & & & & (pernotefordebt,aggforsh) & \\ \hline New 1L Loan & & $275,000,000 & & & & & & & & \\ \hline New HomeMax Stock & & & & 9,900,000 & 10,000,000 & & & & & \\ \hline Original 1L & $250,000,000 & $250,000,000 & & & & & & & 1000.00 & $250,000,000.0 \\ \hline Original 2L & $150,000,000 & $25,000,000 & & 4,405,500 & 4,405,500 & 44.500% & 44.0550% & 29.3688 & 1003.7117 & $150,556,750.00 \\ \hline Senior Notes & $225,000,000 & & & 5,098,500 & 5,098,500 & 51.50% & 50.99% & 22.6600 & 645.81 & $145,307,250.000 \\ \hline Equity (TRAIN) & & & 100,000 & 198,000 & 298,000 & 2.00% & 2.98% & & $8,493,000 & $8,493,000.000 \\ \hline Management & & & & 198,000 & 198,000 & 2.00% & 1.98% & & $5,643,000 & $5,643,000.000 \\ \hline Total & Total & & & 9,900,000 & 10,000,000 & 100.00% & 100.00% & & & \begin{tabular}{|l|} $560,000,000 \\ \end{tabular} \\ \hline \end{tabular} Alternative Investments Distressed Debt Mini Case Homework Homemax Restructuring Answer question 1 in the spreadsheet. Answer questions 2-6 in this document (although you will likely need to use the spreadsheet or a calculation to solve these problems). Hand in both the spreadsheet and this document on the due date. The spreadsheet entitled homemax for case.xlsx is posted in Canvas. The spreadsheet contains several exhibits from the case study based on the article "A primer on distressed investing: Buying companies by acquiring their debt." by Moyer, Martin, and Martin, published in the Journal of Applied Corporate Finance in the Fall of 2012. The slides relating to this case are entitled homemax presentation.pptx and may be found in Canvas. For this homework, you are going to create a new Exhibit 7: Restructuring Analysis based on a different workout plan than is presented in the case. The spreadsheet contains the original Exhibit 7 (restructuring analysis) Note that there are no formulas in this Exhibit. This is by design! When you build your new restructuring analysis, you will need to build in formulas so that you can easily alter the spreadsheet by altering some assumptions. Assume that everything besides the workout plan is consistent with the case study and the spreadsheet Exhibits. TO DO: Assume that instead of the restructuring plan detailed in the case in Exhibit 7, the following restructuring plan is proposed: Assume EV of $560 million, as in initial case. Assume that Homemax will: a) Enter into a new $280 million 1st lien term loan and use $250,000,000 of the proceeds to pay off the existing 1L loan b) Issue 7,900,000 new shares of common stock. c) The existing 2L loan investors will receive the rest of the cash from the $280,000,000 loan as well as 22 shares of stock per bond. As in the case, please apply the 22 shares per bond for the 2L investors to the gross balance of their loan. \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|c|} \hline Exhibit7: NEW RESTRUCTURING & Stock price & & & & & & & & & \\ \hline \multirow[t]{2}{*}{ Class } & Original debt & New debt & Original Shares Stock & NewSharesStock & Total Shares & \% New Shares & \% Total Shares & Shares per Note & Recovery\$ & Total Recovery \\ \hline & & & & & & & & & (pernotefordebt,aggforsh) & \\ \hline \multirow{2}{*}{\multicolumn{11}{|c|}{New1LLoanNewHomeMaxStock}} \\ \hline & & & & & & & & & & \\ \hline Original 1L & $250,000,000 & COMPLETE IF ANY & 0 & NA & & & & & & \\ \hline Original 2L & $150,000,000 & COMPLETE IF ANY & & & & & & & & \\ \hline Senior Notes & $225,000,000 & COMPLETE IF ANY & & & & & & & & \\ \hline Equity & & & 100,000 & & & & & NA & & \\ \hline Management & & & & & & & & NA & & \\ \hline \end{tabular} d) The existing senior noteholders will receive 47% of the new stock e) Train will receive 3.00% of the newly issued shares f) Management will be granted the remaining newly issued shares TO DO: 1) Compete the worksheet, given the above assumptions. Specifically, every cell highlighted in green should be completed. 2) Calculate the cash on cash return at the end of 2012 for the senior debtholders assuming they initially bought the debt for $550/ bond at the end of 2011 and the workout too place on the last day of 2012. Assume that EBIDTA at the end of 2012 is $100 million, the EBIDTA multiple is 7, and assume that they received 15% interest on the face value of the debt during the year. You should do this per bond. 3) Calculate the IRR at the end of 2012 for the senior debtholders assuming they initially bought the debt for \$550/bond at the end of 2011. Assume that EBIDTA at the end of 2012 is $100 million, and assume that they received 15% interest on the face value of the debt during the year. (use Excel's IRR function as described in the slides, and per bond. 4) Using the same approach as in slide 27 from the Homemax presentation r2.pptx slides, and assuming bankruptcy costs of \$25 million, what would the Enterprise Value have to be in order for Train to feel sorry that they did the workout instead of a bankruptcy? Note: you should consider management's equity as well as the PE firm's. \begin{tabular}{|c|c|c|c|c|c|c|} \hline Exhibit 4: Balance sheet and capital st & & & & & & \\ \hline Panel A: Balance Sheets & & & & & & \\ \hline Balance Sheet Data (\$MM); Year & 2007 & 2008 & 2009 & 2010 & 2011 & \\ \hline Cash & $23.30 & $19.30 & $23.50 & $17.20 & $28.60 & \\ \hline Accounts Receivable & $76.20 & $61.00 & $35.30 & $38.10 & $36.40 & \\ \hline Inventory & $173.30 & $235.70 & $153.20 & $119.00 & $109.20 & \\ \hline Property, Plant, and Equipment & $257.20 & $251.50 & $246.36 & $241.70 & $239.50 & \\ \hline Goodwill & $728.30 & $728.30 & $728.30 & $728.25 & $728.30 & \\ \hline Total Assets & $1,258.30 & $1,295.80 & $1,186.66 & $1,144.25 & & \\ \hline Accounts Payable & $231.00 & $269.80 & $174.56 & $145.45 & $137.40 & \\ \hline Total Debt & $625.00 & $625.00 & $625.00 & $625.00 & $625.00 & \\ \hline Total Liabilities & $856.00 & $894.80 & $799.56 & $770.45 & $762.40 & \\ \hline Equity & $402.30 & $401.00 & $387.10 & $373.80 & $379.60 & \\ \hline Liabilities and Equity & $1,258.30 & $1,295.80 & $1,186.66 & $1,144.25 & & \\ \hline Panel B: Capital Structure & Amount & & Leverage/EBITDA(book) & Marketvalue & MarketPrice & Leverage/EBITDA(market) \\ \hline First Lien Bank Debt due 12/31/12 & $250.00 & lev/ebitda & & 100% & $250.00 & \\ \hline Second Lien Bank Debt due 12/31/12 & $150.00 & & & 92% & $138.00 & \\ \hline Total bank liens & $400.00 & allbank/ebitda & 5.0 & & & 4.9 \\ \hline Senior Notes due 6/30/2014 & $100.00 & & & 56% & $56.00 & \\ \hline Senior Notes due 9/30/15 & $125.00 & & & 56% & $70.00 & \\ \hline Total Debt & $1,025.00 & alldebt/ebitda & 12.9 & & $514.00 & 6.4 \\ \hline Estimated Market value at 7x EBITIDA & $558.25 & & & & & \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|c|c|c|} \hline \multicolumn{2}{|c|}{ Exhibit 1: Summary Data for Acquisition of HomeMax } & & & & & & \\ \hline \multirow[b]{2}{*}{2003 Operating Performance } & \multirow[b]{2}{*}{ (\$MM) } & & \multicolumn{3}{|c|}{ Sources and Uses of Cash (acquisition) } & \multirow[b]{2}{*}{ Uses (Post Acquisition) } & \\ \hline & & & Sources & & & & \\ \hline Revenue & 500 & & Secured Bank Debt & 200 & & Cash & 10 \\ \hline COGS & 350 & & Senior Notes & 100 & & Accounts Receivable & 20.55 \\ \hline Operating Income & 150 & & Assumed Liabilities & 74.72 & & Inventory & 61.64 \\ \hline Sell, Gen, and Admin Expenses & 75 & & Equity Contributio & 187.78 & & Goodwill & 370.31 \\ \hline EBITDA & 75 & & & & & Prop, Plant, and Equip & 100 \\ \hline Depr and Amort Expense & 10 & & & & & & \\ \hline EBIT & 65 & & Total & 562.5 & & Total & 562.5 \\ \hline Interest Expense & 20 & & & & & & \\ \hline Earnings before Tax & 45 & & Valuation & & & & \\ \hline Tax & 14.4 & & EBITDA & 75 & & & \\ \hline \multirow[t]{2}{*}{ Net Income } & 30.6 & & Valuation multiple & 7.5 & & & \\ \hline & & & Acquisition Price & 562.5 & & & \\ \hline & & & & & & & \\ \hline \multicolumn{8}{|l|}{ Exhibit 3: Operating performance } \\ \hline Onerating Performance (SMM). Year & 2007 & 2008 & 2009 & 2010 & 2011 & & \\ \hline Revenue & $1,264.90 & $1,011.90 & $860.10 & $868.70 & $886.10 & & \\ \hline Operating Income & $354.20 & $253.00 & $215.00 & $217.20 & $239.25 & & \\ \hline EBITDA & $139.10 & $70.80 & $51.60 & $52.10 & $79.75 & & \\ \hline Interest Expense & $47.00 & $47.00 & $47.00 & $47.00 & $47.00 & & \\ \hline Capital Expenditures & $65.00 & $20.00 & $20.00 & $20.00 & $22.00 & & \\ \hline Free Cash Flows (EBITDA - Int Exp - Cap Ex) & $27.10 & $3.80 & $15.40 & $14.90 & $10.75 & & \\ \hline% change in revenue & & 20% & 15% & 1% & 2% & & \\ \hline Operating Margin (Op inc/revenue) & 28% & 25% & 25% & 25% & 27% & & \\ \hline EBITDA/Revenue & 11% & 7% & 6% & 6% & 9% & & \\ \hline \end{tabular} \begin{tabular}{|c|c|c|c|c|c|c|c|c|c|c|} \hline \multicolumn{11}{|l|}{ Exhibit 5: Projected Recovery Values of Debt Tranches } \\ \hline$MM, Year & 2011 & & & & & & & & & \\ \hline EBITDA & $79.75 & & & & & & & & & \\ \hline Valution multiple & & & & & & & & & & \\ \hline Enterprise value (\$MM) (EBITDA x valuation multipl & $558.25 & & & & & & & & & \\ \hline First Lien Loan Amount & $250.00 & & & & & & & & & \\ \hline Value for Junior Creditors before second lien & $308.25 & & & & & & & & & \\ \hline Second Lien Loan Amount & $150.00 & & & & & & & & & \\ \hline Estimated recovery for second lien ( j/ /second) & 100% & & & & & & & & & \\ \hline Value for Junior Creditors after second lien & $158.25 & & & & & & & & & \\ \hline Senior Note Amount & $225.00 & & & & & & & & & \\ \hline Estimated Recovery for senior noteholders (jr/sr) & 70% & & & & & & & & & \\ \hline Exhibit 7: Restructuring Analysis (Potential) & Stock price & 28.50 & & & & & & & & \\ \hline Class & Original Debt & New Debt (MM) & Original Shares Stock & NewSharesStock & Total Shares & \% New Shares & \% Total Shares & Shares per Note & Recovery \$ & Total Recovery \\ \hline & & & & & & & & & (pernotefordebt,aggforsh) & \\ \hline New 1L Loan & & $275,000,000 & & & & & & & & \\ \hline New HomeMax Stock & & & & 9,900,000 & 10,000,000 & & & & & \\ \hline Original 1L & $250,000,000 & $250,000,000 & & & & & & & 1000.00 & $250,000,000.0 \\ \hline Original 2L & $150,000,000 & $25,000,000 & & 4,405,500 & 4,405,500 & 44.500% & 44.0550% & 29.3688 & 1003.7117 & $150,556,750.00 \\ \hline Senior Notes & $225,000,000 & & & 5,098,500 & 5,098,500 & 51.50% & 50.99% & 22.6600 & 645.81 & $145,307,250.000 \\ \hline Equity (TRAIN) & & & 100,000 & 198,000 & 298,000 & 2.00% & 2.98% & & $8,493,000 & $8,493,000.000 \\ \hline Management & & & & 198,000 & 198,000 & 2.00% & 1.98% & & $5,643,000 & $5,643,000.000 \\ \hline Total & Total & & & 9,900,000 & 10,000,000 & 100.00% & 100.00% & & & \begin{tabular}{|l|} $560,000,000 \\ \end{tabular} \\ \hline \end{tabular}