RXO's Quiet Foreclosure
We believe lenders forced RXO to replace the unsecured credit with secured because the company is failing. We consider it a de facto asset foreclosure that leaves equity holders out in the cold.
The DISCLAIMER at the end of this post is required reading.
The big news in the quarter was not the massive EBITDA miss, but action surrounding debt. As we predicted, solvency has become an issue. Management announced a $450M ABL that “replaces” the $600M revolver. This is no voluntary replacement, in our view, rather a forced transaction signaling distress. The action constitutes a quiet foreclosure on RXO’s assets, in our opinion.
CEO Drew Wilkerson said ABL “is rightsized for our needs”, which we believe is factually incorrect. Financial statements indicate RXO requires ~$500-600M of credit to fund operations on an intra-quarter basis, indicating $450M is not enough. Further, a rational financial actor would not voluntarily swap out a $600M unsecured credit line for a $450M secured credit line with a lock-box provision. The ABL replacement is neither good for the company nor a choice, in our view.
We consider the transition from unsecured to secured credit a clear sign of financial distress; and reduction of the credit line below company needs a clear message from the lenders that the company needs to raise equity.
Evidence suggests RXO was likely forced by the lenders to transition to the ABL to avoid a public default. The lender group lowered its risk by reducing RXO’s credit line and placing itself at the top of the capital stack by claiming the only assets of value – accounts receivable.
The lenders did not fully abandon RXO, they threw the company a temporary solvency lifeline, but at a cost. When things go awry, the lenders will take full control over company cash inflows from quality accounts.
In our opinion, RXO has two choices. Management can tacitly admit defeat by raising equity capital openly; or they can continue the extend and pretend game by raising more capital than needed while overpaying for an acquisition target.
Despite the CEO’s statement that RXO is back “in growth mode”, we expect financial performance to continue to erode. Turning over control of cash flow to the lenders in times of stress puts equity holders in a deeply subordinated position, in our view. We believe there must be a reckoning with the stock.
DISCLAIMER
This report represents the opinions of Keith Dalrymple and Dalrymple Finance on RXO, Inc. It is an opinion piece, reflects our biases and should not be taken as investment advice of any kind. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction.
According to Yahoo Finance 17 sell-side analysts cover RXO. Sell-side analysts are licensed professionals. They likely have significantly more resources than Dalrymple Finances. They also likely have access to management. We strongly encourage those seeking investment advice to consult one or more of the sell-side research professionals covering the stock.
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RCF is undrawn pretty much though. Yes, over time it would prime the unsecured but they just assured assess to full amount plus accordion and a rate that isn’t distressed (not SOFR +400 or something). But I agree they likely set this up because they knew they were going to draw on the revolver and were concerned about access with stressed EBITDA. Tight leash and cash dominion can bleed the business and enable a winddown / slower crash landing. Once you’re one the A/R receivable train it’s hard to get off. Will this be off balance sheet?