Description
This idea was inspired by the ENLC common write-up published on April 20, 2020 so please read that in conjunction with this write-up. I agree that a strongly incentivized large private equity sponsor, debt trading at a discount and no debt maturities until 2024 create interesting value creation opportunities in the junior portions of this capital structure. While the common share price has doubled since the April write-up, the 6% Series C prefs have not rallied so are worth a close look. Note that on YTD basis common stock and Series C prefs are both down ~61% YTD.
The 6% Series C prefs are perpetual, senior to common equity and junior to the Series B preferred (owned by TPG and GS). The Series C prefs are a $400m issue and are currently trading at 28c of par, putting the current yield at ~21%. Note that coupon resets to L+411bps in Dec 2022 at which point the current yield will be ~15% (assuming Libor is at 0%). This compares to yield on common stock of 15%.
On their Q1 20 conference call, ELNC guided to FY 2020 EBITDA of $950-1,025m and FCF of $260-280m (after the common dividend is paid). I think EBITDA could step down to ~$900m in 2021 but FCF should be ~$250m as capex will also step down and interest expense will be a little lower.
Based on $900m of EBITDA, the Series C prefs at par “create” the company at 7.0x EBITDA. However, over the next 4 years there will be a cumulative ~$1bn of FCF to pay down debt which will result in $1.0-1.3bn of debt paydown (depending on how much debt they can retire at a discount). Thus, looking out 4 years, the face value of the Series C preferreds will be at 5.6-5.9x EBITDA. Using current price of 28c of par, the Series C prefs create the company at 6.7x EBITDA today and 5.3-5.6x EBITDA in 4 years.
If you take $250m in FCF and add-back $185m common dividend and $24m Series C pref dividend, the company is generating $460m of FCF before the Series C Pref. Thus, the coverage ratio on the Series C pref dividend is ~19x.
The Series C prefs were trading at 70c of par pre-Covid (8.5% current yield at the time). Assuming the Series C prefs can return to trading at 8.5% yield on 4.11% coupon implies $48 target price. Including the coupons, this is a ~31% IRR over 4 years.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Deleveraging (hopefuly at a discount to par)