Telex to Restructure Debt
By Chris Doering
Marketing Partner, Dynamic Market Systems

It took more time than Telex and GSC Partners were expecting, but it appears that roughly $225 million of Telex’ $400 million total debt is about to vanish and magically re-appear as $56,250,000 in new debt (at a higher rate and shorter maturity) and equity.

For almost three weeks, Telex’ plan to convert most of its long term debt into equity seemed to be on shaky ground. Three successive press releases extended the offer deadline without reporting any additional tenders beyond those received by the original deadline of October 12th, for $27.5 million of its 10.5% Senior Subordinated Notes and $18.5 million of the 11% Senior Subordinated Notes. But on November 7th Telex was able announce that it had received “tenders of approximately $124,500,000 principal amount (or 99.6%) of the 10-1/2% Senior Subordinated Notes, and tenders of approximately $99,950,000 principal amount (or 99.95%) of the 11% Senior Subordinated Notes.”

Apparently this deal was well worth the wait. The original announcement was made on Sept 14th and set to expire on October 12th. That offer was extended to October 19th, then to the 26th, apparently so that some important deal revisions could be finalized. The Amended and Supplemented Consent Solicitation Statement and Exchange Offering Memorandum gives Telex the option to decide whether or not to transfer its assets and liabilities to a new operating company. It also eliminates some of the covenants associated with the existing Senior Subordinated Notes, waives defaults of those covenants (presumably including the September 17 and November1 interest payments that Telex missed). And oh by the way, it lowers the price of the deal substantially.

The original offer was to swap 10 1/2% and 11% bonds due in 2007 for “$127 million of cash, Senior Subordinated Notes and Preferred Stock, and all of the Common Stock of the new operating company and Warrants to purchase up to 30% of the Common Stock of the new operating company.” On October 24th the $225 million in Senior Subordinated Notes became worth $56.25 million in 13% notes due 2006, plus warrants to purchase 25% of Telex or its successor “subject to the satisfaction of specified EBITDA requirements” (translation: “if the new company makes enough of a profit”). According to the Industry Biz spreadsheet, the offer, which almost of the bond holders have accepted, values Telex at about $675 million: not bad for a company that has lost $32,722,000 so far this year, and which will still have over $200 million in liabilities on its balance sheet after this deal is done.

But that loss is just for tax purposes, right? For those evaluating the risks of exchanging notes (which have a specified rate of return and date of maturity) for equity (which has neither), Telex states an “Adjusted Operating EBITDA” (Earnings Before Interest, Taxes, Depreciation and Amortization) of $ 33,095,000 for the first three quarters of 2001. The legal disclaimer on EBITDA says that “EBITDA is not a measure of performance under generally accepted accounting principles ("GAAP") and it should not be considered in isolation or as a substitute for net income, cash flows from operating activities, or other income and cash flow statement data prepared in accordance with GAAP, or as a measure of profitability or liquidity. Moreover, EBITDA is not a standardized measure and may be calculated in a number of ways.” But plenty of bankers use it to evaluate deals, because it represents “free cash flow” from which “net present value” or “internal rate of return” can be calculated. Problem is, the adjustments allow lots of leeway, as turnaround specialist Angus Littlejohn recently pointed out in the Financial Times. “…adjusted for what?” Littlejohn asked. “You’d find anything that was bad had been classified as a one time event. So you were pricing off a multiple of the good stuff. It was crazy.” Crazy like a fox, if you’re a management team trying to keep your multi-brand international manufacturing company out of Chapter 11. Telex has done nothing unethical or contrary to normal business practice in stating its Adjusted Operating EBITDA. But the future (which is what all those financial spreadsheets and formulas attempt to predict) often falls below one’s best hopes, and reserves the option to get worse than one’s worst fears.

One thing seems certain at this point: the people in Burnsville, MN and many of Telex’s other locations around the world can keep coming to work. Not so in Buchanan, MI, where what used to be the center of EV engineering and manufacturing will be shut down early next year, resulting in the loss of about 150 manufacturing jobs. One other big question: will those employees be part of Telex or a new corporation? We may find that out on November 20th, unless the first day of the rest of Telex’s life gets pushed farther into the future.