Taiga Building Products notes

I was doing some research on Taiga Building Products subordinated notes (TBL.NT, coupon 14%, due September 2020). The amount outstanding is $129 million face value. They are trading around 49 cents on the dollar so this is obviously in the distressed debt category – the yield to maturity calculation is an irrelevant figure (32%). The debt traded as low as 17 cents (if it did so today, the yield to maturity would be 103%). Yield to maturity is a misleading figure because it assumes coupons can be reinvested at a rate that is at the YTM. This will obviously not be the case.

In early 2008 the notes were trading very close to par value. Around October 2008 they went below 90 cents and never came back.

The first thing that struck out at me is that any company willing to shell out debt at 14% is a high credit risk. They issued the notes in September 2005.

The equity is around 41 cents, at 32.4 million shares outstanding this is a market capitalization of $13.3 million. This would rule out any debt-for-equity swaps, at least outside the context of bankruptcy proceedings.

The other salient detail is that they deferred interest payments up until September 1, 2010. This is also conveniently the date where their revolving credit facility ($53 million) becomes due. This essentially means that the credit facility gets paid off first (as it is secured by various assets of the company) and then the noteholders will get the second stab at the company.

Looking at their financials, Taiga is a profitable company, but they are not generating net income nearly as quickly as they need to in order to pay off the debt by September 2010. They generated about $11 million in free cash flow for the first 6 months of their fiscal year, but this will likely moderate for the rest of the fiscal year. Their balance sheet is in rough shape, with equity at negative 82 million and a significant chunk of debt due in less than a year. If I was a creditor to Taiga I would be somewhat concerned as the September 2010 debt payment date comes closer.

The value of the notes strongly depends on whether they can refinance their credit facility. Presumably the company would be in better financial shape if they paid off their 14% notes and refinanced the amount for a lower rate of interest.

That said, the market right now is not going to let the company do that.

It is essentially a gamble to decide whether Taiga will be able to refinance. My bet is that they will not be able to without giving some sort of concession on the interest rate, plus an equity stake in the company. It will be very expensive for shareholders and the company in general. It is clear that Taiga can be a sustainably profitable company, but it has simply taken on too much debt – my unprofessional estimation would be that it needs to go down to about half of existing levels.

As such, I wouldn’t touch the notes at current values.

12 thoughts on “Taiga Building Products notes”

  1. You point the revolving credit becomes due in 2010 but what’s to say it just won’t be continued with updated rates? I’m sure Taiga has an idea what’s happening with this already.

    According to Google Finance Taiga opened a new distribution center in December 2009 (the second in California).

    You are talking about who gets first and second stab at the company. Based on the fact that they are expanding I can`t see why.

    Grant.

  2. Grant; if the credit facility is renewed, the company still has to deal with the principal payments on the notes. They clearly don’t have enough money to do that, and if you were the provider of money on their credit facility, do you want to fork over another $129M? I wouldn’t.

  3. The principal payments on the notes are due Sept. 2020, not 2010. That’s over a full decade away.

    Grant.

  4. Sorry Grant, you are correct, I was confused with reading my own notes and shouldn’t write comments while distracted.

    Anyhow, replace “prinicpal payments” of my previous comment with “$27M of accrued interest payments due on the notes on September 1, 2010”.

    Although this isn’t $129M, if you were giving the credit facility to the company, I don’t think you’d be comfortable giving that much cash to the second-in-line creditors.

  5. Let’s put it this way: if you anticipate that they’ll get paid off whole, they’re a screaming buy. I don’t see it happening that way.

  6. If you really look into the situation, you will find that the majority shareholder is the Chairman. You will also see that the notes were issued just subsequent to said person becoming a significant shareholder. Guess who is making money here?

  7. I just checked this company again.

    The chairman owns about 19% of the company and there is another significant shareholder and director owns 39%, both of them from Malaysia, so that is effective joint control of the company.

    I don’t know who owns the notes, but you can infer from the annual financials that 53% of these notes are held by this same group of people, so yes, it probably was a monetary extraction.

    In their recent quarter, they declared a 9 cent dividend (based on 25% of their last year’s earnings) and given their debt levels of some $231 million, this is financially insane.

    They do have a $102 million line of credit at the end of March 2010 outstanding, which expires in September 1. Presumably anybody with any financial sense at all would be charging a high rate, since this company has “insolvency” written all over it. I’m amazed the equity is even trading over a dollar.

  8. Screaming buy,,,,,,
    I have been watching this for a while, they just got refinanced. I will be buying at 97 this week.

    Wish I wasn’t such a weiner and bought at 47 ish.

    It’s interesting looking at these comments after a year has passed.

  9. Well, all I can say is that the market obviously disagreed with my take on the situation, but as Warren Buffet said, “there are no called strikes in Finance”.

    But the people that picked up the notes for cheap (especially below 50!) must be laughing now since they are sitting on pieces of paper that are giving off incredible yield.

    That said, the company is still over-leveraged and my capital will not be going anywhere near it, especially at current price levels.

  10. anyone have any more info on this company? Are the notes worth getting? Do you get paid $11.6667 for every note? Or would you need essentially 10 notes to make the $1000 principle and therefore you would get paid $11.6667 for every 10 notes?

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