Description

Rayonier Advanced Materials (RYAM) 5.5% note due June 2024 is an attractive risk/reward that has multiple catalysts over the next 12 months providing a path to par. At ~68, the downside is well protected (~$815MM creation versus an enterprise that’s likely worth in excess of $1.8Bln implying ~3.3x EBITDA create based on “normalized” ~$250MM EBITDA) and the upside provides an equity-like return of ~50% on a 1-year to event basis.

RYAM is currently benefiting from its lumber segment (yet the credit market largely ignoring) and this is turn is providing the biz with additional FCF (likely ~$30MM generation in 2H), additional liquidity (closer to $225MM by YE inclusive of the $31MM tax credit) and most importantly runway to grow into the capital structure (covenant cushion is improving and should not be an issue for the next 18-months and improved visibility post COVID is improving the odds of a non-core asset sale and / or convert issuance that the market is largely ignoring as well). Notably, Street expectation is for ~$60MM in 2H EBITDA (this management team has mostly surprised to the downside in the past, so I generally think the market is bracing for $50MM given how bad this management team is) versus my expectation for $90 - $100MM  = variance largely driven by lumber (even this team can’t screw it up?). While the lumber earnings puff is transitory (just of matter of when it reverts back to some “new normal”), the Northstar on RYAM is that the “core biz” (specialty and commodity pulp) will normalize off of cyclical low levels. Currently, the commodity pulp portion of the biz is cash break-even (~$100MM of upside assuming 5-year historical average pricing) and specialty pulp is at the tail-end of a 7-year imbalanced S/D environment (TBD on when if this reverts to more normalized economics, but RYAM and other strategics in the space triangulate $50 - $100MM of earnings power upside based on more normalized ROIC assumptions). Overall, I estimate 2020E EBITDA of ~$150MM and see a path to $200 - $300MM under more normalized pulp conditions (i.e. “core biz” provides a path $150 - $200MM improvement and lumber likely falls off by $25 - $50MM). Based on $250MM, the notes create RYAM at 1.9x – 3.3x (market) and ~1.9x – 3.9x (face)

Simplifying the biz down, RYAM has a 1) “core biz” which is very attractive and coveted and 2) 3 “non-core biz” (2 of which are likely separable and might be sold over the next 12-months):

1)      Core biz is comprised of 1MM tons of specialty / commodity pulp, historically specialty has transacted at >$2k / ton and commodity at closer to $1k/ton. Using a punitive assumption of $1k - $1.5k / ton (I think there would be many bidders if the assets ever were fire-sold under these conditions), equates to $1 - $1.5Bln from the “core biz”

2)      3 “non-core” biz include lumber, paperboard and newsprint. Lumber is likely worth in excess of $150 - $200MM (inclusive of the tariff payments – notably this portion of the biz is benefiting from the ridiculous and temporary run-up in lumber prices as noted above), paperboard is a very attractive asset and likely worth >$400MM (historically generates >$75MM inclusive of the integrated pulp and multiple bidders would be interested in this asset), and newsprint is likely a liability (TBD on how much, but let’s assume $0 – to negative $50MM of value). Overall, I peg “non-core” biz units at $500 - $600MM+

In total, core and non-core have $1.6 - $2.1Bln of value. Through the 5.5% note due June 24, the create is ~$815MM (at 68 market price) and closer to $975MM (face net of cash inclusive of $31MM tax refund and some incremental cash flow in 2H). Based on my 20E estimate of $150MM, leverage is 3.2 – 5.4x through the note (market) and 3.2 – 6.5x (face). Based on my normalized EBITDA of $250MM, leverage is 1.9x – 3.3x (market) and 1.9x – 3.9x (face)

Regarding catalysts, RYAM has a $133MM of TLA that matures in November 2022 that needs to be addressed. I peg YE liquidity at little north of $225MM. I believe there are 3 options on the table. 1) RYAM is contemplating selling lumber (possibility of $150-$200MM) and paperboard (possibility of >$400MM). 2) As an alternative, the market cap is ~$300MM currently and I believe the management time might contemplate a convert issuance ($100MM size would likely provide more than adequate runway). 3) Lastly, my sense is that management is more confident in growing into the capital structure (i.e. $90-$100MM of EBITDA in 2H would be a positive surprise versus expectation of ~$60MM and attaining $150MM in 20E and path to $200MM in 21E.

Catalyst

$133MM of TLA that matures in November 2022 that needs to be addressed. YE liquidity at little north of $225MM. 3 options on the table. 1) RYAM is contemplating selling lumber (possibility of $150-$200MM) and paperboard (possibility of >$400MM). 2) As an alternative, the market cap is ~$300MM currently and I believe the management time might contemplate a convert issuance ($100MM size would likely provide more than adequate runway). 3) Lastly, my sense is that management is more confident in growing into the capital structure (i.e. $90-$100MM of EBITDA in 2H would be a positive surprise versus expectation of ~$60MM and attaining $150MM in 20E and path to $200MM in 21E.