Description

Investment Thesis

Accuride is a North American supplier of commericial vehicle components (primarily wheels) to heavy and medium duty truck and commercial trailer OEMs. This is a recommendation to purchase the 8.5% senior subordinated bonds, which will convert to equity upon the company's expected late 1Q / early 2Q 2010 emergence from bankruptcy. At a price of 91, a buyer is creating the enterprise (pre NOLs) for 4.9x / 7.2x / 9.1x mid-cycle ('05-'09) EBITDA / unlevered FCF / levered FCF. Applying 2011 plan projections, these ratios are 4.0x, 5.5x and 6.4x. At a valuation of 5.5x (8x unlevered FCF) my estimated 2011 EBITDA, I believe the equity (and converts) will appreciate >20% upon emergence. At 6.0x EBITDA, the potential appreciation is >35%.

Accuride is a deep cyclical operating in the trough part of the cycle. Starting in late 2007, trucking companies began delaying purchases due to a weak freight environment. This continued through 2008 and 2009 with North American Class 8 truck production falling an additional 43% in 2009. Compared to the 2006 peak, production is off 69%.

This weakness coupled with high debt levels from the KKR LBO and TTI acquisition led to Accuride's bankruptcy (Delaware/09-13449) on October 8, 2009. In a prearranged agreement with bondholders and senior lenders (i.e. "pre-pack"), holders of the 8.5% senior subordinated notes will receive 98% of the equity and an option to participate in a rights offering. Note - holders should participate in the rights offering.

Company Overview

Accuride is a North American manufacturer of commercial vehicle components via 19 facilities in the US, Mexico and Canada. The company's products include wheels (41% of sales), wheel-end components and assembles (27%), truck body and chassis parts (13%), seating assembles (4%) and other commercial vehicle components (15%). Known mainly for wheels, Accuride offers the broadest product line in the North American heavy and medium duty wheel industry, and is the only manufacturer of both steel and forged aluminum heavy and medium duty wheels. 

The majority of sales are to heavy and medium duty truck and commercial trailer OEMs. Other customers include manufacturers of buses, commercial light trucks and military vehicles. Major customers include Daimler Truck North America (Freightliner, Western Star and Thomas Built), PACCAR (Peterbilt and Kenworth), Navistar and Volvo Truck (Volvo and Mack), which account for 55% of sales. Other customers large include Great Dane and Wabash National on the commercial trailer side and GM for light trucks. The company is a standard supplier of many components, which leads to recurring revenue as these components are installed on most trucks ordered from that platform, unless the end user specifically requests a different product, generally at an additional charge.

Production tends to be lower volume (limits foreign competition) and more customized in the truck industry. This is a key difference between Accuride and automotive suppliers. The relationship between suppliers and truck manufacturers is closer as truck OEMs place a premium on dependable component suppliers, flexibility and "just-in-time" inventory management. Accuride is able to provide a one-stop shopping solution for many types of mission critical components. 

Competitors in wheels include Alcoa, ArvinMeritor and Hayes Lemmerz. In the other markets, ArvinMeritor, Consolidated Metco, Web Wheel Products, National Seating and several smaller private companies compete with the company. In terms of market share, Accuride holds #1 or #2 positions in all of its markets. 

Raw materials consist of steel and steel scrap, pig iron and aluminum. Other raw materials include silicon sand, binders, sand additives and coasted sand. Natural gas and coke are the primary energy sources for the company's melting operations. On the labor front, approximately 49% of employees are unionized. 

Bankruptcy Process

As mentioned above, Accuride filed for bankruptcy in October. The company announced that it had agreed to a restructuring with a majority of the ad hoc committee of holders of its 8.5% senior subordinated notes and the steering committee of lenders under its credit facility. The terms of this arrangement are listed below:

1. An extension of the credit agreement maturity to 6/30/13 and modification of financial covenants.
2. The 8.5% senior subordinated will be cancelled and noteholders will receive 98% of new common stock.
3. A $140 MM rights offering of new senior unsecured converts will be offered to existing 8.5% noteholders and backstopped by certain investors. The new notes will be convertible into 60% of the new common at the option of the holder. The converts will repay the "last-out" term loan and add to liquidity.
4. Trade creditors will be paid in full.
5. Existing shareholders will receive 2% of the new common stock and two-year warrants exercisable for 15% of the new common stock.

A plan confirmation hearing is scheduled for February 10, 2010. Pursuant to a Key Employee Incentive Plan (KEIP), management will get a $4.41 MM bonus if Accuride emerges before March 1st. This potential bonus declines each month. Emergence after May 31, 2010 results in no bonus.  

Pre-Petition Capital Structure (9/30/09)

US & CAD Revolver                                           $56 MM

Term Loan B                                                    $225       

Last-Out Term Loan*                                        $77

Industrial Revenue Bond                                   $3

8.5% Senior Subordinated Notes*                      $275

Total Debt**                                                   $635 MM

Cash                                                              $25

Net Debt                                                         $610 MM

*Held by Sun Capital Partners.

**The latest monthly (October) I could find shows total debt of $658 MM and cash of $53 MM. 

Estimated Post-Petition Capital Structure

Restructured Credit Facility*                             $281 MM

Industrial Revenue Bond                                 $3

7.5% Senior Convertible Notes**                     $140

Total Debt***                                               $424 MM

Cash                                                            $95

Net Debt                                                       $329 MM

*LIBOR +6.75% (with a LIBOR floor of 3%).

**Terms: PIK for first 3 years, 2020 maturity, convertible (187.5 MM shares) @ any time by holder, call protection, upstream guarantees.

***Does not include OPEB and pension liabilities of $81 MM as of 12/31/08.

The $140 MM rights offering of converts is coercive and should trade well above par, so I expect most subordinated holders to participate. The offering is backstopped (for a king's ransom) by Blackrock, Brigade, Sankaty and Tinicum. Assuming conversion of the new converts, subordinated holders will receive a 91.4% stake, equity holders 0.6% and the backstop providers receive an incremental 8%. If the warrants* are exercised, the interests shift to 26.7% (bonds), 6.5% (equity), 6.8% (backstop) and 60% (convert), respectively.

*Warrants (15% of company) to be exercisable at a "strike price that is 110% of a par recovery" on the subordinated notes on the effective date.

Financials                                              2005                        2006                        2007                        2008                        2009E

Revenue                                               $1,229 MM               $1,408                      $1,014                     $931                        $575

EBITDA                                                 $198                        $216                        $106                        $67                          $22

Capital Expenditures                              $48                          $42                          $36                          $30                          $23

North American Class 5-7*                      253                          275                          205                          158                          94

North American Class 8*                         336                          376                          212                          205                          116

Trailers*                                               256                          277                          214                          142                          76

Plan Projections                                   2010E                      2011E                      2012E                      2013E                     

Revenue                                            $769 MM                  $1,023                     $1,247                     $1,456                    

EBITDA                                              $80                          $152                        $201                        $240                                       

North American Class 5-7*                    123                          157                          180                          195                         

North American Class 8*                       142                          253                          298                          309                         

Trailers*                                             102                          180                          237                          263                         

 *ACT Research. An estimated 20% and 35% of sales is from Class 5-7 and Class 8 trucks.

As you can see from the historical performance, this business is very cyclical. Pre-recession, the sector grew with GDP. Management's 2011E numbers appear aggressive, although the announced $70 MM cost cuts* from the "strategic restructuring" should provide a tailwind. On the last conference call (2Q09) management claimed the company gained market share (without using price) including winning its first aluminum wheel sales contract in Europe (Utility Trailer) and additional military business. Typically, incremental product sales result in contribution margins in the 20%-30% range, which should provide some expense leveraging when sales rebound.

*Headcount reductions of 31%, consolidated facilities (aluminum plants/warehouses) and reduced sq. footage by 20% without reducing capacity.

In any event, there should be sustained growth off of the lows seen in 2008 and 2009. The average age of Class 8 North American trucks in 2010 will approximate 6.6 years, the highest level ever (at least going back 20 years). Historically, fleet ages averaged 5.8 years. Between the cost cuts, recent contract wins and volume increases, I expect 2011 to at least hit the mid-cycle average of $125-130 MM.

Valuation

At current prices, I calculate you are creating Accuride for 4.0x, 5.5x and 6.4x EBITDA, unlevered FCF and FCF using management's 2011 estimates. On a mid-cycle basis, which I believe is most appropriate, these ratios are 4.9x, 7.2x and 9.1x. The comparable set in the POR is Commercial Vehicle Group, Cummins, Navistar, PACCAR, Superior Industries, Titan International, Wabash National and WABCO. I also included ArvinMeritor. The average multiple for these businesses is 6.6x 2011 EBITDA, or 5.8x if I remove the highest and the lowest multiples.

Conclusion

On a standalone basis and compared to peers, Accuride looks cheap to me. I believe there is >20-35% potential appreciation (before considering the value of NOLs). Supplying commercial wheels to large truck OEMs is not a great business, but it is more specialized than the automotive business and less capital intensive. In the end you're buying the market dominant player at a production trough (1^st time since 1982 production declined three years in a row) with bankruptcy dynamics on your side.

Risks

1. Cyclical business - depends on the overall strength of the demand for heavy and medium-duty trucks
2. Illiquidity. These converts will likely be put away, or trade sparingly
3. Overseas competition. The relatively small market (compared to passenger cars) and just-in-time nature of production limits overseas competition
4. Customer concentration
5. Higher raw material and escalating fuel costs
6. Union contracts (49% of employees)
7. Robust plan projections may not be achievable
8. Equity objects to plan of reorganization and wins larger share of restructured entity. This is a high-class problem since it would imply that the bonds are covered and should receive value equity to par plus pre-and post-petition interest (106-107).

Catalyst

Emergence from bankruptcy

Evidence of increasing Class 5-8 truck production