CNGO 9 ½ 06/15/24

Publicly traded companies mentioned herein: Cengage Learning Holdings II, Inc (CNGO), Chegg Inc (CHGG), KKR & Co (KKR), 

Highlights

***On the morning of 10/27/2020 McGraw-Hill reported earnings. McGraw’s higher education business experienced revenue growth and mid-single digit enrollment declines vs. expectations of declines in the mid-20s%. The presenter believes this is evidence of McGraw’s digital transformation fully inflecting. 

The presenter is long Cengage Learning Holdings II, Inc’s CNGO 9 ½ 06/15/24 bonds. Cengage (CNGO) and McGraw-Hill have historically both been textbook publishers. In May, courts rejected a potential merger between CNGO and McGraw over textbook monopoly concerns from student advocate groups. This merger, which was supposed to be accretive, was overruled and in addition the pandemic has kept college students at home. CNGO’s capital structure is relatively straightforward with $1.6B of loans, $600MM in the 9 ½ notes, and $50MM in ABLs. The loan trades in the mid-80s, yields 11% and matures in June 2023. The 9 ½’s trade around 70, yield about 1000 bps wide of the loan, which is historically unheard of, and mature in June 2024. The bonds are interesting here because the potential merger caused McGraw to change their fiscal year to March and both companies now have March fiscals. The McGraw loan matures in May 2022 and depending on the timing of their 10-K, it's likely that McGraw’s auditors will make the company discuss some sort of the solution for the loan. CNGO’s loan matures a year and a month after that. He doesn’t believe CNGO has the same constraint on their loan, but believes both companies have a number of assets they can monetize, both have pivoted to digital offerings, and there are no sacred cows at either company. Given that McGraw’s loan matures a year ahead of CNGO, he believes they’ll lay out a clear path on how to think through the capital structure for CNGO. Subsequently, this will cause the 1000 bps spread between the bonds and loans to tighten, especially given that over the last six months the rejection of the merger and the pandemic has repriced the whole debt stack.