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GBI bankers extend deadline again to July 31, we believe transaction imminent: GBI has once again received an extension with its bank lenders requiring the Company to proceed with the sale of one or more of its subsidiaries effectively within 30 days. The term portion of its credit facility (we estimate about $16.6 million outstanding) must be paid by July 31, 2010 and the operating facility will be reduced to $5 million by that date. This deadline has been extended more than once with an original deadline of January 31, 2010. We believe GBI is in negotiation with potential buyers for segments, or all, of the company, and the likely scenario will be a sale transaction (of all or part of the company) within 30 days, although theoretically the deadline could be re-negotiated again, subject to additional bank fees.
While GBI is technically in default on its banking agreements (on a 12-month trailing basis) based on a 3.5x debt/EBITDA ratio (as the bank defines EBITDA), we believe that the banks are not terribly concerned, based on the fact that principal repayments are now being made and losses at the Montreal-based CADRI subsidiary have been stemmed, with good results reported in Q1 (FD EPS of $0.01, EBITDA of $1.27 million and operating cash flow per share of $0.22 per share). We expect EBITDA to be stronger in Q2, usually the strongest quarter in the rail industry, although operating cash flow may be impacted by the need to pay taxes.
Status of Banking arrangement: We note that GBI made a $770,000 principal payment on its debt on April 1, 2010 which will reduce its long-term debt from $17.4 million at the end of Q1 to $16.6 million. Two prior missed principal payments totalling $1.54 million will be made in 2012. A second principal payment should reduce long-term debt to $15.84 million by the end of 2010.
However, based on our conservative estimate of $4.6 million in 2010 EBITDA, we believe GBI will be close to being “onside” on its banking agreements by the end of 2010 if the company continues in its present form. Any sale of part of the company could also be used to reduce debt. Our one-year target of $1.60 and Buy recommendation is based on a valuation of the “sum-of-the-parts” which attributes no value to CADRI (see our Note of May 19, 2010).
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