I like the CETV 3.5% converts due 3/15/13 trading at about 89 for a 9% yield to maturity. There is s a good chance that the company will try to pre-fund the maturity of this convert so the overhang on the stock is lifted.

I spoke to Romana Wyllie, VP corp communications, about the company. They are looking to refinance the convert issue due 3/15/2013 prior to maturity and possibly in the next few months. The converts are the first maturity but current cash is not enough to take out the issue so CETV would have to raise new money. The company expected to be FCF break-even in 2011.

CETV Analysis

Cash = $302m

Subsidiary Debt

CZK 300m facility = $16.6m available; 0 drawn

CZK 1.5B 5.25% credit facility ($85.4m) = undrawn, available with another $54m unsecured bond repurchase

CET 21 €170m 9% senior secured = $237m

Holdco debt (all pari passu)

$475m 3.5% converts 3/15/13= $440m

€207m floaters 5/15/14 = $207m

€440m 11.625% 9/15/16 = $607m

Total debt = $1.49B

Market cap = $1.5B

Net leverage = 11x (estimated 5.3x by end 2011)

CETV operates “free to air” TV broadcast stations and owns content in central and eastern Europe including Czech Republic, Romania, Slovak Republic, Slovenia, Croatia, and Bulgaria. In January 2010, CETV sold its Ukraine operations for $400m. In April 2010, CETV bought a Bulgarian channel from News Corp for $400m. CETV owns the leading TV station in all of its markets except Croatia where it is number 2.

The company’s revenues and EBITDA is cyclical due to its reliance on advertising. Quarterly LTM EBITDA peaked at $349m in 2Q 2008 and troughed at $61m in 1Q 2010. As of 3Q 2010, it was $88m. 2010 was a tough year for the company due to negative GDP growth in half of its markets (Romania, Croatia and Bulgaria), however, all of its markets are expected to grow in 2011 at an average of about 2.5%.

Bank of America forecasts EBITDA to be $202m in 2011 and FCF to be $28m.

CETV has two share classes: 56.9m Class A (one vote per share) and 7.5m Class B (10 votes per share). Time Warner is the largest shareholder with a 30% stake. Ronald Lauder owns a 5% stake; 68% of voting stake.

The TV stations have asset value. The Ukrainian unit was sold for over $300m in early 2010 despite having negative EBITDA.

In October 2010, CETV sold €170m 9% secured notes due 11/1/17. Proceeds were used to repay $160m credit line and repurchase 34.8m converts at 88.25 and €2m floaters at 81.75, €6m of the 11.625 at 102.5. CETV also entered into a new CZK1.5B ($85.4m) credit facility that requires the company to repurchase an aggregate of $100m unsecured bonds.

CETV depends on selling advertising on its channels with about 70% sold forward 1 year. Currently, Czech Republic and Slovenia are seeing positive trends while Romania and Bulgaria are struggling. Bulgaria was -$44.8m ebitda in 2009 but should be positive in Q4 2010, helped by the acquisition.

CETV is expected to generate about $185m EBITDA in 2011. Cap ex should be about $50m. The company’s costs are local content which are more variable and acquired studio content under 2-3 year contracts that are not as variable.

Covenants

The convertible bonds do not have the major financial covenants contained in the non-convertible bonds. However, the convert indenture has a restriction on liens. The non-converts have incurrence covenants but not maintenance covenants. Incurrence covenants prevent a company from taking any action but do not require a company to maintain some minimum ratio to avoid default.

Feb 22, 2001

CETV has completed the privately negotiated exchange of a $206,252,000 aggregate principal amount of its 3.50% senior convertible notes due 2013 for a $ 206,252,000 aggregate principal amount of 5.0% senior convertible notes due 2015 and cash consideration as well as accrued interest on the 2013 notes of approximately $ 30.2M.
• New notes will bear interest at 5.0% per annum and will mature on 15-Nov, 2015
• New notes will be convertible into shares of Class A common stock upon the occurrence of certain specified events based on an initial conversion rate of 20 shares of CME’s Class A common stock per $1,000 principal amount of notes (which is equivalent to an initial conversion price of $50 per share of CME’s Class A common stock)
• New notes will be jointly and severally guaranteed on a senior basis by two of CME’s wholly-owned subsidiaries
• New notes will be secured by a security interest in shares of these two subsidiary guarantors

June 24, 2011

Central European Media Enterprises announces exchange of senior convertible notes due 2013 for senior convertible notes due 2015 ($19.76)
• Compnay announces an agreement to repurchase, in privately negotiated transactions, $52.3M aggregate principal amount of its 3.50% senior convertible notes due 2013 (the “2013 notes”). In exchange for their 2013 notes, holders will receive $52.3M aggregate principal amount of 5.0% senior convertible notes due 2015 (the “2015 notes”) and $4.6M in cash, including a net interest payment in respect of accrued interest on the 2013 notes and the 2015 notes.
• Company initially issued $206.3 million aggregate principal amount of 2015 notes 18-Feb. The 2015 notes pay interest semi-annually at 5.0% per annum, mature 15-Nov-2015, and have an initial conversion price of $50/share.

Conclusion

This trade performed well, as CETV pushed out $260m of the 3.5% converts to 2015. There are now only $130m of the converts remaining which is very manageable for the company. The 3.5% converts traded up to 96 after the announcement of the first exchange for a three month return of about 9%.

Near term catalyst

On 3/19/10, GY amended their credit agreement to allow the company to refinance their outstanding unsecured bonds. The agreement allows GY to issue up to $438m in debt but the company has to use the proceeds to retire either the term loan or the unsecured bonds. In exchange, GY will pay L+325, 100 bps higher than the old rate for the term loan. We bought some 2.25% bonds at 92.75 (7% yield to put 11/20/11). We feel that the company is likely to take action to refinance either the 2.25% converts or the 9.5% straights, which could lead to a tender offer for the 2.25%.

I feel very comfortable about GY credit. The company is a defense contractor with long product cycle including a funded backlog that covers 1 years worth of sales. The company is free cash flow positive, fresh off a Moody’s review for upgrade and a credit agreement amendment

GY Analysis

Cash = $158m

Term loan due 2013 = $51.5m drawn ($75 capacity)

Revolver = $65m undrawn

Letter of credit = $85m drawn ($125m capacity)

2.25% sub convert due 11/20/11 = $132m

9.5% sub straights due 8/15/13 = $75m

4.0625% sub convert due 12/31/14 = $200m

Total debt = $477m

Environmental remediation and postretirement liabilities = $520m

GY should generate about $140m EBITDA in 2010 for a leverage of 3.4x.

EBITDA/Interest expense is 5.3x. These metrics are consistent with a BB rating. Moodys currently rates it B3, on review for an upgrade.

Business

GY is a manufacturer of aerospace and defense systems with a real estate segment. Aerospace  includes Aerojet-General, which makes propulsion systems (mostly for missiles) for defense and space applications. GY is one of the largest providers of such propulsion systems in the US. Customers include the major prime contractors (LMT, RTN, BA) to the US government, the department of defense, and NASA. GY also owns about 12,200 acres of land adjacent to US Highway 50 east of Sacramento. GY is seeking to change zoning rules to optimize its value. The land is estimated to be $200m at the low end.

Aerojet has been an industry leader in propulsion systems for 60 years. It is the only domestic supplier of all four propulsion types – solid, liquid, air-breathing, and electric. Competitors include Alliant Techsystems (solid, air), American Pacific (liquid, electric), Astrium (solid, liquid), Northrup (liquid), Pratt & Whitney (liquid, air, electric) and SpaceX (liquid). Aerojet is number 2 in solids behind ATK and liquids behind Pratt.

Prime contractors Raytheon and Lockheed Martin account for 31% and 26% of 2009 sales, respectively. About 51% of sales were fixed price contracts, 37% from cost reimbursable contracts, and 12% from other sales. Many products have life cycles of over 10 years. These contracts are initially small during the development phases that can last two to five years, followed by low-rate and then full rate production.

GY’s funded backlog is $811m and unfunded backlog is $379m. Funded backlog is the amount of money that has been directly appropriated by the US congress and unfunded backlog is the amount for which funding has not been appropriated.  GY’s annual sales are $800m, so funded backlog covers 1 year of sales. Most of GY’s R&D are funded by customers so the company does not have much R&D expense.

Steel Partners owns about 7% of the company and in the past have pressured the company to make strategic changes. On January 6, 2010, the company appointed a new president and CEO Scott Seymour from Northrop Grumman. In December 2009, Moody’s placed GY on review for upgrade from its current B3 rating.

March 26. 2010

Met with GY management today.

The company has $230m in cash (there is $30m restricted that has to be used to buy back debt). The 2.25% converts are the next maturity $132m. The company just amended their credit facility so that any new proceeds from a debt issue have to go directly to repaying debt. The company says they are looking hard at all options and reducing debt remains their top priority. GY hired a new CEO about 6 months ago and I believe he would like to right size the capital structure as soon as possible. This includes terming out maturities to give the company a more stable debt structure.

Prior to the credit agreement, the company could only issue a bond that had lower coupon than the debt that they were retiring. This restriction is now gone. Also in the prior agreement, GY was only able to buy back $10m of bonds. Now they can buy use any cash to buy back bonds as long as their net debt leverage ratio is below 3.0x. It is currently below that.

GY has a backlog that covers 1 years of revenues and about $20m FCF per quarter. GY is a defense company that makes missiles for government programs. They have long product cycles and 1 year visibility into their order book.

Conclusion

GY never did tender for the 2.25% converts or do a large buy back. Instead, they will wait until maturity. However, the trade still worked as the bonds traded up to 98 from 92 in just a few short months.

NPF 0.75% converts due 2/1/12 are trading at 88, which presents a great opportunity for capital appreciation because I believe that management wants to refinance the convertible soon. I spoke  with management and they expressed interest in issuing either a high yield bond or a new convert so that they can clear out near term maturities. Also, NFP has a credit facility due 8/22/11 and I believe that the company may be in negotiations to extend the credit facility maturity, which may require it to refinance the converts to a longer maturity date than the new credit facility.

Business Description

National Financial Partners is a insurance broker that sells to high net worth individuals on a commission basis. NFP has a network of brokers that sell insurance products for a wide range of insurance firms including Lincoln financial, Hartford and others. NFP collects a commission fee for each product sold.

NFP itself is not an insurance company so it does not have a portfolio of assets and has no credit risk. It only takes a fee for each transaction.

Capital Structure

Cash = $56m

Credit Facility = $40m ($160m undrawn) –matures 8/22/11; debt /EBITDA has to be less than 2.5x

0.75% converts due 2/1/12 = $230m 

 The company generated $116m FCF in 2009 ($123m of CFFO and only $7m Capex). The company has been FCF positive every year for the last 10 years. Traditionally, the company has use the FCF to make acquisitions. It is likely that NFP would have to extend its credit facility and refinance the convert in order to give it the most flexibility for future acquisitions.

June 9, 2010

NFP announces plans to issue $125m of new convertible bonds. The company will tender for the old 0.75% converts for 95.5 for a quick 7.5 gain in just a few months.

There are opportunities in busted converts that mature in 2011 that trade in the mid 90s. Many companies, particularly high yield companies, have been calling or tendering for their debt that is coming due within 2 years. Companies have been especially active retiring debt before they have to be classified as short term maturities on the balance sheet. So as of today, that means any debt due or put in the 1H of 2011 will be prime targets.

The two that I like most are the UAUA and BZH converts because they have a significant cash cushion and are strong enough companies to carry out a refinancing right now.

United Airlines (UAUA)

4.5% subordinated converts 95.0625 ask $726M put at par 6/30/2011

5% senior converts 96.625 ask $150M put at par 2/1/2011

UAUA will end 1Q10 with $3.2B in unrestricted cash. Furthermore, the company will likely end 2Q with $4.4B in cash because they will settle a $700M debt offering secured by its Japanese routes. UAUA generated $443m of free cash flow in 2009 and is expected to generate $700m of free cash flow in 2010.

UAUA has $545M in amortizing capital leases due in 2010. These converts are the next debt maturities for the company after that. Both the 4.5% and 5% converts can be repaid using cash or common stock at the company’s option.

Equity analysts think UAUA will potentially take out both convertible issues because they are an overhang for the equity.

There is a good chance that UAUA will tender for both convert issues in March 2010 because 1) the bond market is wide open 2) the stock is at new 52 week highs.

March is also a window of opportunity because the company will report in April. UAUA is scheduled to speak at the JPM transport conference on March 9, which could be a good time for them to tender for the bonds.

I think there is a good opportunity to make a quick 3-5 points. I would think the company would take care of both convertibles at the same time due to the close proximity of their put dates.

Beazer Homes (BZH)

4.625% converts 95.75 ask $145m put 6/15/2011

On January 11, 2010, BZH called the $127m 8.625% straight bonds due 5/15/2011 with proceeds from a $50m mandatory and $90m equity issue. The company will also get a $101m tax refund in 1Q. Management has made it clear that their number one priority is to deleverage.

At the end of 1Q, BZH will have about $560m in cash. The next debt maturity is the $145m converts with a put at par on 6/15/2011.

BZH generated $61m FCF in FY 2009 (Sep) and is expected to generate $113m FCF in FY 2010. The FCF by quarter is very seasonal with the most recent Dec Q -65m FCF, March Q expected +69 FCF, June Q -30m, and Dec Q +$140m.