Newcor Hits a Pothole

While Newcor Inc.'s bonds seem to have settled firmly into distressed territory, sources last week said they expect the company to pull through.

Newcor's $125 million of 9.875% senior subordinated noted have dropped to 55 in the last few weeks, down from 88 on Sept. 27. On Sept. 28 the company announced its second quarter earnings were going to be lower than expected, which sent the bonds down to 72. Since then they have been steadily nose-diving.

For the third quarter, Bloomfield Hills, Mich.-based Newcor lost $3.1 million on revenue of $61.2 million. Last year for the same time period, it posted a loss of $134,000 on revenue of $56.5 million.

Newcor manufactures molded rubber and plastics products for the medium- and heavy-duty truck industry.

Banc One Capital Markets fixed income analyst Eric Mollman said the whole auto sector has been suffering since late May. "There's been a lot of supply of new issue paper and some companies haven't performed particularly well," he said.

Mollman added that, while on the surface it appeared there was some value, he wasn't sure anyone would want to be the first to "dip their toes in the water." He had an "avoid" recommendation on the debt when it was at 72.

"My point is that disappointing performance will continue more likely than improve," he said, "and it would make sense to wait before considering buying."

He has not reviewed the bond since then, but said that avoiding it is probably the best recommendation until there is some indication of operational improvement.

Since enterprise values as a multiple of EBITDA in the auto supply sector are very low now, Mollman said it's probably in management's best interest to continue working to improve things rather than to think about selling it.

Newcor chief financial officer James Connor agreed that the company needed to resolve operational problems at two locations, but expected a turnaround. "By the middle of 2000 we should be back on track," he said. The company has recently renegotiated its revolver, he added.

Mollman said there was no imminent crisis. "It's just that performance is weak and people prefer to wait until things get better," he said, adding that the company had no need to restructure its debt. "They have plenty of liquidity - about $4.5 million in cash and $26 million in a revolving credit facility."

Standard & Poor's lowered Newcor's senior subordinated notes to CCC+ recently. Connor said based on where the bonds were trading, the recent downgrade had not impacted the company terribly.

"Bid was 50 and ask was 55," he said, adding that there were no significant transactions to note. "Because of the low volume in trade, it seems that our bondholders agree with us in our plans for the long-term."

Mollman said he didn't think the Standard & Poor's news should be any surprise to anyone. "The statistics are more reflective of a company that should have a CCC+ rather than a B- rating," he said. The market tends to move around more quickly reflecting financial performance, certainly faster than the rating agencies, he said.