Sonic Races to Avoid BankruptcySonic Races to Avoid Bankruptcy

The clock is ticking for the Sonic Automotive Group which has till May 7 to either come up with the cash to pay $105.3 million in debt or renegotiate with bondholders to restructure the debt.

Otherwise, the public dealer group will be in violation of three loan covenants and may be forced to file for bankruptcy. At the moment, Sonic does not have the cash to pay it, and is restricted from using an existing revolving credit facility to pay down the debt. Additionally, credit markets remain frozen which has hurt Sonic's ability to raise cash.

But the situation might not be as dire as it appears. Sources outside of Sonic who are close to the situation tell me they believe it is likely the company's bondholders will play ball and not let the group go into bankruptcy. In other words, a restructuring of the debt is probable. (But don't base your investment decisions on that information.)

The stock price was as low as $1.70 on Monday but closed at $2.21, which might indicate some shareholder confidence in the group. Sonic does have a great mix of brands and if it weren't for the credit crisis, it would be in okay shape.

Sonic may have a few cards to play yet such as selling off some stores. It is planning to sell as many as 35 dealerships this year -- that's approximately 20% of its portfolio. But those deals will take time to close, especially in today's environment.

However, Sonic is closing this week both the acquisition and sale of Beck Imports, a Mercedes dealership in Charlotte NC. And that should provide it with anywhere from $20 million to $30 million it can use to pay down the debt.

Sonic tried to acquire the luxury dealership in Feb. 2008 from current owner Skip Beck, but Mercedes refused to approve the deal citing problems with three Sonic-owned dealerships in California. Mercedes lifted the restriction in February once Hendrick Automotive Group decided to bid on the store. So Sonic is acquiring Beck and then immediately selling it to Hendrick. (Incidently, the deal gives Hendrick almost total control of the luxury market in Charlotte.)

During a recent conference call with analysts to release 2008 earnings, company executives did not answer questions about the impending debt and instead directed people to the 10K filing with the SEC.

Sonic says its operations were profitable in 2008, discounting the $658 million write-down of value of many of its stores, which really is a reflection of the ongoing credit crisis and not the strength of its stores.

Even if Sonic is able to renegotiate its debt by May 4, it still has a lot of work to do. Including the $105 million, Sonic has $1.5 billion to pay off in the next 18 months and another $400 million after that.