Tom Konrad CFA
Thursday Afternoon Panic
On Thursday, April 4th, battery manufacturer and recycler Exide Technologies’ (NASD:XIDE) stock plunged, starting around 2pm. There was no press release or SEC filing from the company, or stories on the public newswires. Likely short sellers were stoking rumors on the chat boards that the company had filed for bankruptcy, and that the story was on Reuters.
Electric Storage Battery Company advertisement for Exide batteries in the journal Horseless Age, January 15, 1918
Intraday, panicked shareholders dumped their shares for as little as $1.16, down 56% from the previous day’s close. Nasdaq circuit breakers stopped the plunge at 2:17. I spotted the decline when I checked the market at 2:45, and began hunting for its cause. The company’s IR contact line was busy, and I found nothing credible in the public newswires or chat boards. I knew the bankruptcy rumors were exaggerated in the absence of an SEC filing, and the fact that Exide has plenty of cash and capacity in its line of credit to meet its short term needs.
There was also an April 3rd story in the Los Angeles Times about LA council members irate about arsenic emissions from one of Exide’s lead recycling facilities in nearby Vernon, but the timing of this article did not correspond to the sudden stock drop at 2pm the next day. Further, Exide seemed to be making best efforts to locate and prevent the emissions at the source, and to keep the public informed. While possibly exposing as “many as 110,000″ people to unsafe levels of arsenic is clearly bad, it did not seem proportional to the $100 million plus decline in Exide’s valuation.
I bought two blocks of the stock at $1.40 and $1.42 in my managed account with most aggressive mandate, planning to sell into the relief rally I expected Friday morning.
The News Comes Out
As the market closed, Exide confirmed that Debtwire had reported on the company hiring Lazard to explore debt restructuring. With this additional confirmation that a bankruptcy was not immanent, I purchased additional shares at $1.40 in aftermarket trading in a number of managed accounts for sale in the expected Friday morning rally.
Short Lived Rally
Friday morning, the expected rally emerged with the stock opening at $1.77. Although I expected the relief rally to continue into the low $2 range as the day progressed, short term market dynamics become harder to judge the more time traders have to process the news. I took my 25-30% overnight profits from the short term trades in the first few minutes of trading, retaining my long term holdings.
The rally quickly began to fade, with the stock closing up only modestly at $1.57 on Friday. Over the weekend and Monday I began a more in-depth investigation to re-assess my first impression that the bankruptcy fears were overdone, and to decide what to do with my long term holdings. I contacted Debtwire to obtain a copy of their story, re-read Exide’s most recent earnings call transcript from February, and read the allegations of the class action lawsuits and news stories which are now coming out in relation to the stock decline.
By my count, there have now been four class action suits filed in relation to Exide’s stock decline. While the law firms plan “to investigate securities claims” against Exide regarding the failure to disclose the arsenic emissions and restructuring, it is unlikely they have any information unavailable to investors. Most of these law firms seem to be focusing on lack of disclosure around the arsenic emissions at the Vernon plant, but the Rosen Law Firm also plans to investigate allegations that “that it had concealed information relating to its impending bankruptcy.” [Italics mine.]
Given the inaccessibility of the Debtwire story to non-subscribers, I suspect that some shareholders read Rosen’s statements as confirmation that bankruptcy is actually impending for Exide, and this fueled the panic around the stock.
Chances of Bankruptcy
Exide’s debt consists of a $200 million revolving facility, a $675 million 8.625% bond due in 2018, and a $55.7 million floating rate convertible note due in September. Concerns about bankruptcy center around Exide’s ability to repay the September convertible note. A hedge fund analyst anonymously quoted in the Debtwire story was quoted as saying that EBITDA for 2014 is expected to be $130 million, $96 million short of the $80 million of expected capital expenditures, $70 million of interest, $30 million of cash taxes and pension costs, and the $55.7 million maturity.
However, the analyst’s calculations do not include $80 million in cash on hand and $82 million of available credit which Exide had in their revolving in the most recent quarter, ended December 2012. Furthermore, due to restructuring, Exide ended the quarter with cyclically high levels of inventory, which management intends to draw draw down over the coming quarters. Total inventory stood at $548 million on December 31st. With the shut down to two battery recycling operations, they should be able to reduce inventory below the $516 million seen at the end of 2011, freeing up an additional $32 to $50 million. The approximately $200 million in liquidity from these three sources should be more than sufficient to cover the $96 million cash shortfall identified by the hedge fund analyst in the the Debtwire story.
The above calculations also fit with management’s stated intention of repaying the convertible note from available cash. It seems unlikely that the September convertible maturity would send Exide into bankruptcy, even if Lazard is unsuccessful in restructuring the company’s heavy debt burden. The current panic is also reducing the price of Exide’s debt in the open market, and may even be strengthening Exide’s position if it allows the company to purchase some convertible notes at a discount on the open market.
It’s worth noting that Exide’s earnings are currently under pressure from both high input prices for lead, and economic weakness in Europe. Debt holders are unlikely to want to force Exide into bankruptcy now, before recent restructuring efforts and declining lead prices have a chance to improve the company’s cash flow and improve Exide’s ability to repay its debts.
Class Action Emanations
In terms of the other apparent investor concern regarding the arsenic emissions from the Vernon facility, these seem to have been primarily the result of the class action law
suits. Yet these lawsuits would not have been filed without the Thursday stock decline, triggered in turn by the Debtwire story. Between the time the Los Angeles Times story was published the morning of April 3rd, and the Debtwire publication at 2 pm April 4th, XIDE declined only 8 cents or 3%. The magnitude of the emissions has not yet been determined, but it would be extremely premature to take the alarm of local lawmakers an indicitave of the severity of the problem. Their alarm is much more indicative of their need to be seen to be doing something than of the health risks, or any risks to Exide’s finances.
Nor did the news break on April 3rd. Local papers carried stories about the emissions on March 25th and 28th. The company’s obligation under existing environmental laws seem to be to reduce the emissions as quickly as possible, and to communicate with local communities about the risks and the steps taken to mitigate them.
The oft-repeated press report that 110,000 people may have been exposed also seems to overstate the real risk. The local Air Quality Management Board identified the problem when a group of workers who work near the Exide facility showed increased cancer risk of 156 in 1 million, mainly due to the increased levels of arsenic emissions. Since these workers were near the Exide facility, it seems very unlikely that the entire area of 110 thousand people were exposed to anything like the same level of emissions. If even ten thousand people had a similar level of increased risk, we would expect only one or two extra cancer cases to result from the arsenic emissions.
In short, while any harmful emissions are a concern, the cost of complying with environmental standards and potential compensation which Exide might be liable for seem tiny relative to the enormous fall in the company’s market value.
Exide Technologies’ stock decline from $2.61 on April third to $1.44 where it is currently trading seems completely out of proportion to the real chance of bankruptcy and the likely costs posed by arsenic emissions at the Vernon facility.
Reporters and analysts are right to be focusing on the bankruptcy risk as the primary cause of the stock’s recent decline, even if class action law firms and some investors are transfixed by the arsenic emissions. Yet the fact that Exide has retained Lazard (the solid piece of information revealed in the Debtwire story) does not necessarily mean that bankruptcy risk has increased in any way. If Lazard is successful, bankruptcy risk will be reduced.
Near-term bankruptcy worries seem overblown. As Wedbush analyst Craig Irwin put it to StreetInsider, “the statements [suggesting Exide had failed to refinance its convertible notes] were aggressive, premature, and inconsistent with company communications.”
In the course of writing this story, I added to my positions in Exide.
Disclosure: Long XIDE.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.