$250m (+37.5m) sen unsec cb coming tonight from BARC/CITI. Terms: 6.5 yrs, 1.625%-2.125% up 30-35%, pctns. UOP = gcp/cap ex/potential 3% buy back. Existing 3% trades rich 2 model due to outright ownership. -2.8% up 32% @116 vs cls = L+165 (30%), theo=110.65. Small but solid B credit w/good liquidity. Aerospace = 55% of rev w/exp growth this yr (demand for fuel efficient aircraft), defense= 20% rev which has some political risk.
PF Cash = 340m
Debt = 483m
LTM EBITDA = 97m
FCF -54m
Lev = 5x
Mkt cap = 909m
3yr $150m undrawn sec/rev = L+200, we’d use L+400 for 6.5 yr. ADV = 315k so hard to realize vol, no leaps, brw a ? on way down, we’ll cap vol at 30. Theo = 104.3. History does repeat itself in our market so look at 3%. Clear l/only demand, stk -5%. This is a STEEL.
Producer of titanium mill products, fabricated titanium and specialty metal components. RTI is a small titanium producer w/customers in aerospace, defense, energy, & medical device markets. Acq Rennele 2/12 for $183m cash, provider of eng service to same sectors, will provide some diversification. Aerospace 55% of rev, expect growth 2013 driven by demand for fuel-efficient aircraft. Defense about 20% revenues, some risk of cuts via sequestration. Liquidity good w/$150m secured rev undrawn (L+200, matures 2/17)
Our assigned spread L+400
At the mids, L+600, 35v, 50bps borrow, new issue models 1.5-2pts cheap.
RTI primarily a metals processor, so we compared it to KALU, X, DCO (specialty aerospace materials), ATI, and AA. Both X and AA are vertically integrated in steel and aluminum, so companies reflect commensurately higher leverage and earnings volatility. Meanwhile, pro forma leverage looks to be 33% of total cap, 1x LTM EBITDA, assuming no immediate buyback of 2015 converts. For comparison, other materials processors (KALU, ATI, DCO) average 39% debt/debt+mkt cap, 3x LTM EBITDA. Business profile should position company well for growth as overall industrial economy improves. Our only complaint is that company not a great cash generator and apparently has no cost pass-through on its long-term supply contracts, which could result in periodic risk to operating margin. Over time, we’d like to see co. look to build some add’l cash balances to hedge this risk. However, in the meantime, our credit estimate builds in some compensation for this potential volatility.
Financial Comps
1yr Sales 1yr EBITDA YTD Stock 1yr Fwd 1yr Fwd LTM
Mkt Cap Leverage Groeth Margin Return EV/Sales EV/EBITDA FCF
DCO 222 62.3% 1.5% 11.7% 29.2% 0.7x 6.1x 32
KALU 1,214 23.9% 6.3% 13.6% 2.4% 0.9x 6.3x 108
AA 8,887 50.1% 0.9% 11.6% -3.9% 0.8x 7.1x 236
X 2,578 60.5% -2.7% 5.9% -24.8% 0.3x 5.4x 412
ATI 3,338 30.7% 2.6% 11.3% 2.9% 0.9x 7.9x 68
Average 45.5% 1.7% 10.8% 1.1% 0.7x 6.6x
RTI 910 19.4% 6.7% 14.2% 8.5% 1.3x 9.0x (53)
Trading Comps
Issuer Mkt Cap Leverage Ref Security Prem/Z-spd
Ducommun 222 62.3% 9 3/4 ’18 (’17c) 640
Kaiser Aluminum 1,214 23.9% 8 1/4 ’20 (’18c) 462
Alcoa 8,887 50.1% 7yr sr CDS 370
US Steel 2,578 60.5% 7yr sr CDS 790
Allegheny Tech 3,338 30.7% 5.95 ’21 (’20c) 270
RTI 910 19.4% 550