Think Print is Dead? Try These Debt Plays

Chasing what everyone else likes is a recipe for underperformance

We’ve all heard the news: Print is dead.

That widely shared sentiment has had a dramatic impact on investors—few private equity funds are willing to even consider investments in companies considered “old media,” or in, say, a commercial printer. Yet a few sophisticated investors are betting that profitability decline does not necessarily mean lack of cash flow, and that there’s money to be made on the way down.

“Most investors tend to undervalue declining businesses, and they don’t want any securities of the companies that are in secular decline,” says Vladimir Jelisavcic, CIO and senior portfolio manager at Bowery Investment Management, LLC. Bowery is an SEC-registered investment advisor that focuses on niche distressed investments in middle- market energy and old media, among other industries.

“We recognize that these companies are in secular decline, but search for such businesses that have significant free cash flow that can be used to pay down debt or make accretive acquisitions.”

Jelisavcic has been focused on print for close to 10 years, including his time as a co-portfolio manager at Longacre Fund Management, a hedge fund that closed in 2011.

A commercial printer gets restructured

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One example of Bowery’s strategy is Cenveo, a commercial printing and envelope company that recently underwent a distressed exchange to address its 2017 maturities.

The company had an unusual capital structure—junior bonds matured before the more senior securities. With more than seven turns of leverage and senior bonds trading at a discount, a refinancing would have been difficult to pull off. So the company introduced an exchange of the junior-most 11.5 percent securities into a longer-dated bond with a lower coupon and warrants for common stock, and repurchased some of the 7 percent unsecured notes at 60 cents on the dollar.

Allianz Global Investors, an investment management arm of Germany’s Allianz SE—which played a key role in the exchange as a junior bondholder—did not return requests for comment.

Bowery, which owns a significant portion of $540M 6 percent first-lien notes due in 2019, saw its bonds trade up as the overhang of a near-term reorganization was removed. The bigger benefit, however, came from Bowery’s investment in the 11.5 percent notes, which traded up by almost 35 basis points in the week after the exchange was announced, according to TRACE. The increase came on the back of the expectation that the notes that were not part of the exchange could be taken at par at maturity in May 2017. However, according to a report from Moody’s that came out in May, that “near-term refinancing risk…[remains].”

Looking forward, the company is set to save $20M of annual interest expense, while its EBITDA is set to come in at $155M in FY16, roughly equal to the last year, according to the consensus estimates.

“Sometimes in a distressed exchange, the best place is in the holdout bonds or the senior part of the capital structure,” says Jelisavcic.

Given a projected EBITDA increase and lower interest expenditures, it’s possible that that the company will grow into its new capital structure and organically refinance or even sell itself around the time the maturities come around, he explains.

Phonebook directory success

 Another example of Bowery’s strategy is evident in phonebook business Dex Media.

Dex sells phonebook directories and also has a smaller, lower-margin digital business that consists mostly of website and social media development for small businesses.

“It is very obvious that print will eventually go to zero, but it will take longer than people think,” says Jelisavcic. “The company is trading at 1.25x LTM EBITDA so you are buying a runoff business very cheap and getting the digital business for free.”

The company recently filed for a pre-packaged Chapter 11 reorganization, in which 96 percent of the lenders have agreed to exchange their $2.12B of claims into a new $600M loan and 100 percent of the reorganized company equity and a cash distribution upon emergence, according to the company’s press release. Bowery is a longtime lender to Dex and is part of the agreement.

Even though the company has failed to grow its digital business as projected, and the print business is declining, it is forecast to throw off enough cash flow to pay down roughly 50 percent of the new loan by the end of 2017, according to the debtor’s projections presented in one of the key bankruptcy documents, the disclosure statement.

Also, given the simpler capital structure, the new debt is expected to trade up after the bankruptcy process is completed. The implied price of the new loan is 95 cents on the dollar, according to Bowery’s estimates, as compared with roughly 40 for the old loans.

“To be a successful investor you need to be somewhere where other people are not,” concludes Jelisavcic. “Chasing what everyone else likes is a recipe for underperformance.”