So what are the levers?
1. Buy bonds at a discount – We’ve written on this extensively so all I will say is that BYD has bonds trading in the 60s so they can de-lever by about 20 cents (after tax) for every dollar they borrow from the credit facility to buy back bonds. If Senator Ensign delivers there will be not tax.
2. Cut costs – I think BYD has been very aggressive in this area and we should see it show up in their Q4 margins. Revenues are challenged but again that is the consensus view.
3. Cut Capex – Slots can wait. So can growth capex.
Management seems remarkably complacent about the covenant situation which leads me to believe that: a) recent results are better than expected, b) cost cutting is ahead of plan, c) capex is lower than projected, d) enough discounted bonds were bought back earlier in Q4 to appropriately de-lever. On a very positive note, an equity raise is not under consideration.
In the meantime, BYD will generate $175 million in net free cash flow over the next 12 months (after Q1). That is cash after all capex; growth and maintenance. The free cash flow yield on the stock is an astonishing 40%. Sometimes you just gotta say what the ….