ESSX - Essex Rental Corp

[SnarkyPuppy]

I’ll post a quick and dirty summary and then we can dive into specific areas where warranted.  I suggest reading the report on VIC for detailed background – there are also a few decent write-ups on SA that will bring you up to speed on recent events.  In short, the net assets are worth significantly more than the current market price but there are few risks/uncertainties that I am still trying to get comfortable with.  Hoping to facilitate some discussion on this thread. 

 

Elevator Pitch

Essex Rental Corp is a relatively illiquid 7mm market cap (.28 cents per share) holding company.  The Essex Rental Corp Holding Company (“HoldCo”) has two operating subsidiaries – Essex Crane (“EC”) and Coast Crane (“CC”).  Both subsidiaries own different types of construction cranes/towers and make money primarily by renting assets for use in construction/infrastructure projects (they also have some revenue from transportation to renters, retail sales, and repair/maintenance).  The EC sub triggered a default (covenant breach) on its Revolving Credit Facility in June 2015 and the company has subsequently entered recurring forbearance agreements (currently under Forbearance Agreement #5 as of 3/2016) while working with the creditors on resolution.  The company delisted from NASDAQ in early Q12016 due to stock price/cost savings and currently has an avg daily trading volume of 35k.  Nobody wants to own this thing.  The company has explicitly stated both formal SEC filings and management conference calls that the two subsidiaries are NOT cross-collateralized.  It seems as though the market is not giving full credit for the fact that CC is shielded from the debts of EC.  Assuming EC is a $0, CC’s assets in liquidation net of all non-EC debt is worth 2-3x the current market price of .28 cents.     

 

Key Items

EC owns Traditional and Hydraulic lattice-boom crawler cranes – at a high level the Traditional Cranes are relatively outdated/oversupplied given current industry demand whereas the Hydraulic Cranes are newer models/more valuable in a sale.  CC owns Rough Terrain Cranes, Boom Trucks, and Tower Cranes and provides service primarily in the Western US territory. 

 

Due to the nature of the debt contracts, the company has historically been subject to independent third-party appraisals of Orderly Liquidation Value (“OLV”) and Net OLV (“NOLV”) every 6 months on the equipment assets of EC and CC.  OLV is publically disclosed and assumes a “slow” liquidation over 9 months – NOLV is not disclosed publically, but leveraging the VIC reports DD, haircuts to arrive at NOLV are consistently between 8-12% (this seems to be reasonable with the exception of the outdated/oversupplied traditional cranes within EC). 

Resulting from the EC technical default in June 2015, the debtors hired a new 3rd party appraiser which resulted in the value of EC’s rental fleet being reduced by $64mm (CC assets were interestingly valued upwards by the new appraiser) – there is some small comfort in the fact that the new appraisers were likely more stringent given the circumstances of the default.  The latest OLV ascribes a value of $164mm to EC assets, $101mm to CC assets, and $2mm to the HoldCo.  The company breaks out debt related to the various entities in the Q3 10Q (9/30/15 – latest filing before delisting).  EC has $150.3mm of debt, EC has $59.04mm of debt, and there is $10.53mm debt which isn’t explicitly assigned to any legal entity so I’ve assumed this would be a reduction to CC’s value. 

 

EC Valuation:  EC is worth < $0 if the haircut on OLV is any amount greater than 8%.  This seems likely so I’m ascribing $0 value to it (more on why it’s floored at $0 later) and this can be seen as a sort of “free option” in a turnaround. 

 

CC Valuation:  CC is shielded from EC’s debt.  From the 9/30/15 10Q:

“Although the Company has determined that there is substantial doubt about Essex Crane's ability to continue as a going concern, the Company does not anticipate that these circumstances will impact Coast Crane's ability to continue as a going concern. Coast Crane and Essex Crane are separate legal entities with separate revolving credit facilities and other debt obligations. The companies do not cross-collateralize their debt agreements and the events of default at Essex Crane should have no impact on Coast Crane's current debt obligations or its ability to obtain additional sources of capital in the future. Coast Crane is well established as one of the largest rental equipment providers of boom trucks, rough terrain cranes and tower cranes in the western U.S. and the Company does not anticipate that the current situation at Essex Crane will significantly affect our customer's, or the market's, perception of the Company or its rental offerings. Furthermore, Coast Crane derives a significant portion of its revenues through retail equipment sales, retail parts sales and repair and maintenance services on third-party equipment, all of which are independent of Essex Crane and unique to Coast Crane. Although Coast Crane and Essex Crane share certain customers, sales force and certain accounting and management functions to a limited extent, Coast Crane is structured in such a manner that it can continue normal business operations even in the event that Essex Crane ceases operations.” 

 

Management has made similar explicit statements in conference calls (even has gone as far to explicitly say that the value of CC is completely independent of EC and the stock is mispriced – but I wouldn’t give any credence to this in and of itself).  I’ve also looked at the forbearance agreements and there’s no indication that this structure has changed (The HoldCo and CC are both absent from any of the forbearance agreements).   

 

The key variable here is the net liquidation value haircut.  12% seems to be the high end of industry norm and it is worth noting that the company has sold 100 rental fleet assets at approximately 104% of OLV since 2014.  I’ve included a few scenarios at 8% (bull), 12% (base) and 20% (very conservative).  VIC commenter who has been doing DD is using 6%. 

 

$101mm OLV

$59.04 CC assigned debt

$10.53 holdco debt assigned to CC

NOLV (8% haircut to OLV):  $95mm nolv - $70mm debt = $25mm liquidation value = 1.00 per share (234% premium to price)

NOLV (12% haircut to OLV):  $89mm nolv - $70mm debt = $19mm liquidation value = .84 per share (180% premium to price)

NOLV (20% haircut to OLV):  $81mm nolv - $70mm debt = $11mm liquidation value = .52 per share (73% premium to price)

 

Obviously the NOLV haircut is critical here and I’m still trying to find more info – but this seems reasonable based on everything I have come across to date. 

 

I’ve looked at the residual balance sheet after OLV-linked assets and debt.  Applying some reasonable haircuts (100% cash, 75% AR, 50% Other Receivables, 25% PPE, 0% to remainder).  The ‘liquidated’ balance sheet essentially nets out to $0 after these considerations (~$40,000 to be specific); but this assumes that the $28mm Deferred Tax Liability is not a real cost in liquidation.  When I think DTL, I think of temporary differences between GAAP books and Tax Books; a prime example being accelerated depreciation deduction used in Tax Book that will eventually be reversed as GAAP depreciation exceeds Tax Depreciation over time.  At least in this example, I don’t see why the DTL would have any economic cost in liquidation – but open to criticism here and this is a critical component of the thesis.   

 

Risks/Uncertainties

-NOLV Haircuts to CC assets (see above)

-DTL cost in liquidation (see above)

-CC has $59mm maturing in March 2017.  I haven’t seen any discussion of this in the various reports I’ve read, but CC only does about ~$10mm in EBITDA and I don’t see how they will repay this on time unless they are allowed to completely refinance.  Borrowing capacity at CC is a measly $1.6mm as of 9/30/15.  This is a further reason for valuing on liquidation. 

-Non-liquidation events.  The thesis is obviously based on a liquidation of the assets and it’s difficult to determine how the company looks going forward in any restructuring (dilution to creditors and future cash burn).  This is a cyclical industry which has undoubtedly been in the trough of a downcycle.  The company did $70M EBITDA in 2008 (47mm EC and 23mm CC) as its margins benefit from some operational leverage during peaks.  It is possible that the lenders are looking at the potential for a recovery and will drag this out - but hard to know.  My inclination is economic capex can be minimized in the short term to pay off debt if need be (most of these assets have long useful lives) so EBITDA is probably an OK proxy.    The consolidated company had EBITDA of $15mm, $16mm, and $15mm respectively in FY12, FY13, and FY14.

Other Random notes:

-Over the course of the 2015, two activist appointed directors have joined the board.   

-Board comp changed from 100% cash to 50% stock (options and RSUs to be exercised seems immaterial to the thesis) 

 

Still working through on some of the risks/uncertainties but felt this was enough for a post.   

 

[SnarkyPuppy]

Spread is pretty wide today - might be able to snag < .28 at some point

[SnarkyPuppy]

Press release issued today:

http://investor.essexrental.com/releasedetail.cfm?ReleaseID=979002

 

Seems to be overall good news.

 

Essex Crane Subsidiary

It looks like the bank is taking the Essex Crane Subsidiary assets (collateral on the debt) and selling in a public auction.  My guess is this sub is worth $0 as stated above.  Also as I've described above, this subsidiary is seemingly not cross-collateralized with the remaining business (Coast Crane subsidiary).

 

Coast Crane Subsidiary

Some overall good news here.  It seems that the company received a sales bid at a value greater than the current market cap, net of debt, but the Board of Directors thought it was too low.

 

The Company has been working with Stifel, Nicolaus & Company, Incorporated ("Stifel") over the past several months in an effort to evaluate strategic alternatives, specifically related to the sale or refinancing of Coast Crane. The results of the sale process were encouraging and indicated value, net of debt, in excess of the current market capitalization, however, values were not at a level that garnered support of the Board of Directors of the Company.

 

Looks like they're focused on refinancing the debt on the Coast Crane subsidiary and waiting for better bids/letting the business results do the talking. 

 

While Essex Crane's results of operations have been significantly negatively impacted by the ongoing forbearance issues, Coast Crane continues to generate significant free cash flow and we are excited about expanding these assets within our portfolio, continuing to pay down debt and creating value for our shareholders.

 

They'll begin reporting regularly starting with 2016Q2 results in August. 

 

Looks like there's likely some value here but hard to predict exactly how this will play out until Q2 results are provided.