Sunday, November 28, 2010

Comments about American Reprographics Debt Offering - ratings explained

In the previous post, I mentioned that American Reprographics (ARC) is in the process of selling notes; this, to raise funds that will be used to retire its line of credit. The existing line of credit has all sorts of covenants and restrictions. In addition, the existing line of credit requires substantial "pay-downs" of principal each quarter. It appears as though American Reprographics decided that it no longer wanted to deal with those covenants and restrictions. And, since the "new" debt will not (evidently) require quarterly or annual pay-down of principal, ARC will be able to horde cash and use it as it deems essential to its business, without having to worry about asking for permission from the financing entities that gave ARC the line of credit it is now replacing. Based on what I read about the "new" debt, ARC is supposed to receive the proceeds on or about December 1, 2010.

About the "new" debt. This new debt is "unsecured" debt. Meaning that, if there is a default on the debt, security holders (i.e., holders of the "new" debt) don't have (are not holding) "collateral", hence the term "unsecured."

Standard & Poors gave the new debt a BB- rating.
Moody's gave the new debt a B1 rating.

I was kind of surprised at the high interest rate ARC will be paying on the new debt. Nowadays, you can't earn much interest on savings accounts and CD's (today, 10 year treasury notes are yielding less than 3.0%. Want to earn substantially more than that? Well, how about ARC's new debt at a yield of around 11%. Maybe not as safe as a bank CD or a treasury note, but as to ARC's new "high-yielding" debt, ARC apparently hasn't had any difficulty paying down debt the past several years, in spite of difficult economic conditions.

I saw the credit ratings Standard & Poors and Moody's assigned to ARC's new debt. Apparently, ARC's new debt was rated "junk bond" status. That really surprised me. Anyway, who in this "new world" believes any of the ratings that S&P and Moody's come up with. Were they not the same rating agencies who gave AAA ratings to the CDO's that contained all of those exotic (or, I should say, toxic) mortgages?

Here's some information about ratings:

This first part comes from Wikipedia………..
Non-Investment Grade (also known as junk bonds)

▪ BB: more prone to changes in the economy
▪ B: financial situation varies noticeably
▪ CCC: currently vulnerable and dependent on favorable economic conditions to meet its commitments
▪ CC: highly vulnerable, very speculative bonds
▪ C: highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
▪ CI: past due on interest
▪ R: under regulatory supervision due to its financial situation
▪ SD: has selectively defaulted on some obligations
▪ D: has defaulted on obligations and S&P believes that it will generally default on most or all obligations
NR: not rated

This next part comes from Standard & Poors Credit Ratings………..
What do the letter ratings mean?

The general meaning of our credit rating opinions is summarized below. 

‘AAA’—Extremely strong capacity to meet financial commitments. Highest Rating.

‘AA’—Very strong capacity to meet financial commitments.

‘A’—Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.

‘BBB’—Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.

‘BBB-‘—Considered lowest investment grade by market participants.

‘BB+’—Considered highest speculative grade by market participants.

‘BB’—Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions. 

‘B’—More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments. 

‘CCC’—Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.

‘CC’—Currently highly vulnerable.

‘C’—Currently highly vulnerable obligations and other defined circumstances.

‘D’—Payment default on financial commitments.
Note: Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.

Thursday, November 25, 2010

American Reprographics in process of raising money through an offering of notes

BofA, JPMorgan, Wells Fargo handle American Reprographics debt sale
(This short news article was found on, Posted on: Wed, 24 Nov 2010 10:27:10 EST)

24 November 2010 - Bank of America Merrill Lynch, JPMorgan (NYSE: JPM) and Wells Fargo (NYSE: WFC) acted as book-runners for American Reprographics Company's (NYSE: ARP) private placement of $200,000,000 senior notes, Reuters reported.

The transaction, which was carried out on Tuesday, was downsized from the initially planned $220,000,000, Reuters added.

The notes were set a 10.5% coupon and were priced at 97.824% to yield 11%. The coupon is payable on a semi-annual basis from 15 June 2011 until the maturity on 15 December 2016.

The deal is scheduled to settle on 1 December 2010. Standard and Poor's and Moody's assigned the issue BB- and B1 ratings, respectively.

Tuesday, November 23, 2010

Service Point Announces Q3 2010 Results

Service Point SolutionsQ3 2010 Results
(, (per report found on SP’s web-site, dated November 15, 2010.)

I was unable to find an English version of SP’s report, so I used Google translate to translate the report from Spanish to English. While Google translate is pretty good, it is not perfect!

Through the first 9 months of 2010, SP’s sales, at 154 million Euro, appear to be approximately 5% off sales reported for the first 9 months of 2009.

Compared to sales in 2009, Service Point said that sales declined less in Q3 2010 (vs. Q3 2009) than was the case in the first half of 2010 (vs. the first half of 2009.)

Comparing SP’s Q3 2010 vs. Q3 2009:

Sales, Q3 2010 – 48.3 million Euro
Sales, Q3 2009 – 49.3 million Euro

EBITDA, Q3 2010 – (.3) million Euro (loss)
EBITDA, Q3 2009 – 1.4 million Euro

Net Income, Q3 2010 – (4.7) million Euro (loss)
Net Income, Q3 2009 – (2.8) million Euro (loss)

Blog author's comment: Q3 2010 was not a pretty picture. Not only a loss on the Net Income line, but an EBITDA loss as well.

My comments about what Service Point said about “sector” performance:

Per what Service Point said in the report, “In terms of sectors, financial and educational business continues its strong performance and continues to show strength in all branches of the group.”

Translating these statements from Spanish to English were not easy; it “sounds like” this were the points that SP was attempting to explain about its performance in the AEC sector: In regard to the AEC (engineering, construction, architecture), which accounts for approximately one third of sales, the decline of sales in the AEC sector is slowing, compared to the decline over previous quarters but still has setbacks. This sector is one that is weighing on growth. Group net sales for all sectors, except for this sector, have increased

And, Service Point talked about these initiatives:

SPS has strengthened the team's American branch with the addition of a new head person, who was previously head of, and responsible for, the management of the financial sector (of SP’s business) in the UK (the latter, experiencing double-digit growth). His short-term priority will be to develop business in the U.S. operations in education and financial sectors, sectors that are growing faster in the group and have shown anti-cyclical.

In previous reports and announcements, SP talked about acquisitions it was currently targeting and/or negotiating. In the Nov 15th, 2010 report, here’s something about that, translated by Google from Spanish to English:
“As announced by the company in General Meeting and notes of previous results, the company negotiates selectively in two key areas identified for development of the group, Germany, Scandinavia and growth phase. These operations are in final stage, estimating to announce the first acquisition in the first quarter of 2011.”

So, it “sounds like” SP will be announcing an acquisition sometime during Q1 2011. Question: Will the acquisition be in Germany, Denmark, Iceland (highly doubtful), Norway, Sweden or Finland? (I think I know, but I’m not saying.)

SP’s French company, Reprotechnique, remains a drag on SP’s performance. SP’s Nov 15 report said this (Google translation from Spanish to English):

“On August 3 Reprotechnique shareholders (Service Point 51%) called the situation "redressement Judiciaire" in order to undertake a thorough operational and financial review being carried out successfully in the face to be viable as soon as possible to this venture.”

Well, after I saw the term, “redressement Judiciaire”, I had to look that up to see what it meant in English.

Redressement judiciaire = Receivership
Receivership is a measure ordered by the court of commerce when a company is insolvent.
An insolvency procedure is initiated when the company is unable to cope with current liabilities with its available assets is to say she met financial difficulties. Legally, it is said that the company is in a state of insolvency. The purpose of this procedure is to allow the continued operation of the business, maintaining employment and settle its debts. 

At the trial opening, the court will appoint: 

- A bankruptcy judge: it is responsible to ensure expeditious conduct of proceedings and protection of interests. 

- An administrator: his appointment by the court is compulsory until the company reaches certain threshold (3 million euros in sales and at least 20 employees). The administrator may have either a monitoring mission of the debtor (the company executives retain their full power) is an assistance mission (there is a joint management between the leaders and the administrator) or a representative mission (the director becomes the legal representative of the company). 

- An agent or legal representative of creditors who will act on behalf and in the collective interest of creditors and whose mission includes establishing the list of creditors. It's his hands that creditors of the company must submit a claim.

Now that you’ve read about what a “redressement Judiciaire” means, take that into consideration when you read the Google translated (Spanish to) English version of the comments Service Point made in the Nov 15th report:

Restructuring plan of the investee Reprotechnique in France (Service Point 51%);
As announced in the previous note of results of the company, the shareholders of Reprotechnique, a French company in which Service Point has a 51% and acquired in June 2008, have proceeded to the official statement of the situation "redressement Judiciaire "in order to harness its economic record and undertake a plan to make viable the subsidiary, while not involving an additional financial burden on the resources of the shareholders.

By the situation of "redressement Judiciaire" The aim is to undertake a thorough operational and financial restructuring to keep only the production facilities that provide benefits, restructuring or closing which are not. This process allows the game to freeze the company's creditors and can negotiate in a timely manner to manage a company financially viable. Under this circumstance, the French market continues to be of interest to Service Point.

A dated August 3, the Commercial Court of Créteil approved the status of "Redressenment Judiciare (bankruptcy) of Reprotechnique, having been renewed on October 15 the proceedings, setting a review date next February 2011. This has opened an observation period, in which there is continuity of the business of the company, with a freeze on the old debt, and with contributions from the Employment Tribunal in the process of saving jobs (EREs) that are executed in the coming months.

It is proceeding with the Labour Court plan below (ERE) that affects workers of the company, of which a portion will be dispensed in November, and another in February. The negotiations with works councils, social and trade unions tried already in final stage and is expected to complete the first phase in early November.

Additionally, using the judiciare redressement process has proceeded to consolidate production facilities and sale of nonstrategic assets. The sale process has been done through an "electronic tender", supervised by the commercial court, and is scheduled for November as the date of execution and acceptance of final bids.

A consultant has been selected by SPS prestige and the commercial court as the auditor of the financial model of reorganization. According to the model of this consultant covering the period 2010-2020, the company can support the restructuring plan and overcome the observation period and debt repayments. According to the model will be positive cash flow from early 2011

Is estimated to be in a position Reprotechnique "redressement Judiciaire" during a period of one year in which the company will continue operating and serving customers as before.

This decision is made to shield the shareholders and not to harm the group's cash like the results. Through this restructuring, the subsidiary of a 51% Service

Service Point can emerge stronger French business. The cash flow supports the assessment of the value of RT in the consolidated balance sheet of the group

Wednesday, November 17, 2010

AIA ABI Index for October 2010

It looks like it's going to be "flip-flop-flip-flop" for a few more months.

Architecture Billings Index Reverts Back into Negative Territory
Inquiries for new projects remain extremely high

Contact: Scott Frank

For immediate release:
Washington, D.C. – November 17, 2010 – Following the first positive reading since January 2008 (which happened last month, September), the Architecture Billings Index (ABI) dropped nearly two points in October. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the October ABI score was 48.7, down from a reading of 50.4 the previous month. This score reflects a decrease in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 61.7, down slightly from a nearly three-year high mark of 62.3 in September.

“This is disappointing news, but not altogether that surprising,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “We were anticipating a slow recovery period and it is likely that there will be some fits and starts before conditions show consistent improvement. Right now, reluctance from lending institutions to provide credit for construction projects and a sluggish economy are the main impediments to a revival of the design and construction industry.”

Key October ABI highlights:

Regional averages: Northeast (54.5), Midwest (51.8), South (48.6), West (44.3)
Sector index breakdown: commercial / industrial (54.5), institutional (50.8), multi-family residential (49.1), mixed practice (43.2)
Project inquiries index: 61.7

Tuesday, November 2, 2010

ARC (NYSE: ARP) Q3 2010 Results

(This post was originally written the day ARC announced its Q2 2010 results, but I forgot to activate the post.)

After the market closed today, ARC reported its Q3 2010 results

Considering the fact that ARC released the bad news (the downward EPS and cash-flow revisions ARC previously announced) on October 11th, there were no surprises, whatsoever, in today’s Q3 2010 results press release.

Sales for Q3 2010 - $109.4 million
Sales for Q3 2009 - $119.4 million

Earnings for Q3 2010 - $300,000 (prox) (excluding the Goodwill impairment charge)
Earnings for Q3 2009 - $2.9 million (excluding Goodwill and intangible asset impairment charges and excluding a charges related to ARC’s credit agreements)

EPS for Q3 2010 - $.01 per share (excluding the Goodwill impairment charge)
EPS for Q3 2009 - $.06 per share (excluding Goodwill and intangible asset impairment charges and excluding a charges related to ARC’s credit agreements)

ARC’s Sales, for the first 9 months of 2010, came in at $336.7 million
ARC’s Sales, for the first 9 months of 2009, came in at $389.9 million

ARC’s Sales, for Q4 2009, came in at $111.7 million
ARC’s Sales for the full year 2009, came in at $501.6 million

In a post I did on this blog on August 4th, 2010, I “guessed” that ARC’s full-year 2010 Sales would come in between $447.0 - $452.0 million.

Based on ARC’s Q3 2010 results, I’m now revising that guess to somewhere between $441.0 and $446.0 million.

Earlier this year, AEC industry analysts – and some financial analysts – were projecting that the construction industry would be off another 10% in 2010 vs. 2009. ARC’s 2010 Sales results appear to be tracking that decline pretty closely.

ARC’s Q3 2010 press release said this, “Management noted that the Company acquired six new Global Services accounts since June, which are projected to generate more than $9 million in sales for 2011. The accounts were won primarily on the strength of ARC's managed print services offering.”

Questions about the above statement:

a) Regarding the six “new” Global Services Accounts, were these accounts completely “new” to ARC? Or, were one or more of these accounts formerly “regular” (non-Global-Serivces) accounts at ARC? In other words, is the $9 million “all new” business to ARC?

b) who are these six new “Global services” accounts? And, which reprographers lost these accounts?

Despite the very deep recession the AEC industry experienced (and, for the most part, continues to experience), ARC continues to impress with positive earnings from operations.