BWNB - Babcock & Wilcox: 17% Yielding Preferreds Are A Journey Into Chaos

2023-12-10 21:28:12 ET

Summary

• Babcock & Wilcox preferreds are trading for 45 cents on the dollar and offer a 17% yield on cost as the market prices in deteriorating credit risk.
• The company's net losses ramped up during the third quarter due to the discontinuation of its solar unit.
• An eventual sale of the unit is unlikely to be material to free cash burn that has materially reduced the cash runway of the business.

Babcock & Wilcox ( BW ) is at the intersection of the decarbonization shift. The company provides steam boilers for thermal power plants including coal-fired facilities but also has a growing business providing boilers to more environmentally sustainable industries including waste-to-energy and biomass facilities. BW also has a partnership with Eos Energy ( EOSE ) to provide short and long-duration energy storage systems to utility-scale solar and wind energy projects. BW is built around three business segments, all with a sole focus on the creation of energy. This is a business integral to global energy production, founded in 1867 and spurned off in 2015 from BWX Technologies ( BWXT ) , its boilers provide more than 300 GW of generating capacity in roughly 60 countries.

BW has had a dire year, the commons are down 70% and are currently just 68 cents above the $1 minimum required to remain compliant with NYSE listing rules. The market cap at $146 million is set against long-term debt of $372 million at the end of its fiscal 2023 third quarter. This collapse comes on the back of a 1-for-10 reverse stock split in 2019 amidst a global shift towards renewable energy. This is a price action that infers a near-term bankruptcy filing. BW has three outstanding securities; 7.75% Series A Cumulative Preferred Stock ( BW.PR.A ), 6.50% Senior Notes Due 12/31/2026 (BWNB), and 8.125% Senior Notes Due 2/28/2026 (BWSN).

Series A Preferreds And Balance Sheet Health

The preferreds are currently swapping hands for $11.38 per share and offer a fixed $1.9375 annual coupon for what's currently a 17% yield on cost. These started trading in May 2021 when BW sold 4 million preferred shares. The potential reward of these is huge to reflect the deteriorating credit risk profile of BW. To be clear, the preferreds are trading at a roughly 55% discount to their $25 par value, or for 45 cents on the dollar to reflect bearish sentiment increasingly built around expectations that BW will be unable to meet the currently $2.5 million per quarter total coupon obligation to preferred shareholders. With the redemption date 2.4 years from now on 7 May 2026, the preferreds offer a potential yield to redemption of roughly 47%. However, these are perpetual preferreds and there is no obligation on BW to redeem these when their redemption dates come up.

MW's balance sheet is heavier on liabilities with negative stockholders' equity, rising accumulated deficit, and falling cash and equivalents all working to place the preferreds solely in the realm of speculation. Firstly, MW's cash position, including current restricted cash, stood at $54.87 million at the end of the third quarter. This was down $18.43 million sequentially and from $91.57 million at the end of 2022. The future trajectory of cash looks negative against free cash burn that could come in at $45 million to $75 million over the next four quarters, around $15 million per quarter at the midpoint of this range.

Follow The Losses, Free Cash Burn, And Divestitures

BW recorded third-quarter revenue of $239.4 million , up 13.1% over its year-ago comp but a miss by roughly $50 million on consensus estimates. This was against a backlog set to be in the range of $550 million to $650 million by the end of 2023. Free cash burn for the third quarter came in at $33.17 million, maintaining a deterioration set in place since the start of 2023. This came on the back of a third-quarter net loss of $120.6 million, around $1.35 per share, a marked increase from a net loss of $21.5 million, $0.24 per share, in the year-ago comp. BW's big salvo in the third quarter came from its announcement that it would be realigning its business to focus on its higher-margin aftermarket services business.

BW Moves To Divest Solar

BW provided $30 million as a ballpark figure of annualized cost savings that it expects to realize from a reduction of the high overhead from seeking multiple new-build projects. The net loss for the third quarter was outsized due to the company moving to reclassify its solar business out of continuing operations. This came with a $56.6 million impairment charge and roughly $48 million in contract losses. However, underlying operations even without the solar business were still not ideal. Net loss per share from continuing operations at $0.18 per share was up 3 cents from the year-ago period with interest expense of $13.4 million, up 21% from its year-ago comp, far in excess of operating income of $5.54 million.

Further, whilst it makes sense to divest solar as the unit is making losses I don't see the unit being able to fetch a high price from a sale with the US solar industry amidst disruption from higher interest rates. The solar unit offers engineering, procurement, and construction services for solar community, industrial, and utility-scale solar projects. Management was upbeat during the third-quarter earnings call about the prospects of the sale to pave the way for improved performance in 2024. It's also important to note that the company has been bankrupt before. The predecessor before the 2015 spinoff filed for bankruptcy in 2000 due to asbestos claims and took 6 years to emerge from the Chapter 11 filing. BW and its securities are a sell as the divestment of the solar business will not fix the continued cash burn and the dwindling cash balance.

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