😬Is Art Van Furniture the Next Bankrupt Retailer?😬

Back in November 24th’s Members’-only briefing, we highlighted how publicly-traded BDC, FS KKR Capital Corp. ($FSK), was having a wee bit of trouble with a small portion of its portfolio. It had designated several of its loans as “non-accrual.” At the time, the subject of our affection was the in-and-out-of-bankruptcy Acosta Inc. but we also highlighted the now-seemingly-soon-to-be-in-bankruptcy Art Van Furniture Inc. You can check the piece out here.

This weekend news surfaced that, indeed, Michigan-based and private equity-owned (Thomas H. Lee Partners) Art Van may be headed to the bankruptcy bin. If so, it would mark (only) the third retailer to end up in bankruptcy in 2020 (SFP Franchise Corp., a/k/a Papyrus, and Pier 1 Imports Inc. ($PIR)). Per the Detroit Free Press:

Private equity firm Thomas H. Lee Partners LP is in the process of working with advisers and creditors to find a possible buyer for the company and potentially filing for Chapter 11 bankruptcy, according to a report from Crain's Detroit Business. 

The leak got the communications machine working over time:

Art Van Vice President of Communications Diane Charles confirmed the company is in negotiations. 

“We are actively exploring a variety of options with our creditors, investors and landlords to ensure Art Van can continue serving our guests and our communities," Charles said in a statement to the Free Press. "It is premature at this time to comment further as no final decisions have been made. In the meantime, our stores are open, and it is business as usual.” 

“No final decisions have been made” is code for “no board resolution has yet been adopted that authorizes a chapter 11 filing at this time.” But, rest assured: one is coming.

💥Stage Stores Inc: Bankruptcy Soon? (Short Department Stores)💥

In August 2019’s “💥Tariffs Tear into Tech+💥,” we wrote:

We’ve previous noted the gradual unwind of Stage Stores Inc. ($SSI) in November 2018’s “💰Will Crypto Mine Some Bankruptcy Work?💰” “…noting that (a) its off-price business experienced a 9.9% comparable sales increase, alleviating negative 5.5% department store comps somewhat, equating to 2.8% total comp sales declines …,” in January 2019’s “💥A Retail Bloodbath💥,” (“…closing more stores and pivoting more into the discount space, replacing shuttered Goody’s stores with Gordmans locations.”), and in March 2019’s “Thanos Snaps, Retail Disappears👿” (“…closing between 40-60 department stores.”). On March 20, the stock was just barely hovering above penny-status, trading at $1.04/share. After the Trump-tweet/tariff-induced bloodbath on Friday, the stock now sits at $0.78/share.

Thursday was a big day for the company. One one hand, some big mouths leaked to The Wall Street Journal that the company retained Berkeley Research Group to advise on department store operations. That’s certainly not a great sign though it may be a positive that the company is seeking assistance sooner rather than later. On the other hand, the company reported Q2 ‘19 results that were, to some degree, somewhat surprising to the upside. Net sales declined merely $1mm YOY and comp sales were 1.8%, a rare increase that stems the barrage of consecutive quarters of negative turns. Off-price conversions powered 1.5% of the increase. The company reported positive trends in comps, transaction count, average transaction value, private label credit card growth, and SG&A. On the flip side, COGs increased meaningfully, adjusted EBITDA declined $2.1mm YOY and interest expense is on the rise. The company has $324mm of debt. Cash stands at $25mm with $66mm in ABL availability. The company’s net loss was $24mm compared to $17mm last year.

Some of the reported loss is attributable to offensive moves. The company’s inventory increased 5% as the company seeks to avoid peak shipping expense and get out ahead of tariff risk (PETITION Note: see a theme emerging here, folks?). There are also costs associated with location closures: the company will shed 46 more stores.

What’s next? Well, the company raised EBITDA guidance for fiscal ‘19: management is clearly confident that the off-price conversion will continue to drive improvements. No analysts were on the earnings call to challenge the company. Restructuring advisors will surely want to pay attention to see whether management’s optimism is well-placed.

Subsequently, the company issued a January 13 press release that spooked the markets. Interestingly, it reported positive comp sales (+1.4%) for the nine-week period ended 1/4/20. In retail-land these days, a positive comp sales figure is the equivalent of killing it. More compelling, for the 48-week year to date period, comp sales were up 4.2%. The problem? These figures didn’t live up to expectations.

The guidance didn’t help matters either. The company announced:

“In response to the holiday sales performance, we implemented incremental promotional efforts in the fourth quarter to ensure appropriate inventory levels as we enter fiscal 2020. As a result, we now expect full year 2019 earnings to be approximately $25 million to $30 million below the low end of the previously announced guidance range.”

Indeed, it appeared that management’s optimism was, in fact, misplaced.

Which gets us to yesterday’s The Wall Street Journal’s piece, entitled, “Discount Retailer Stage Stores Preps for Possible Bankruptcy.”

The Journal reported:

Stage Stores Inc. is preparing for a financial restructuring that could include a bankruptcy filing as the discount retailer contends with persistent losses at its department store outlets, according to people familiar with the matter.

The publicly listed, Houston-based company has recently been late in paying its vendors amid a liquidity squeeze, the people said.

The company is likely to file for chapter 11, although the situation remains fluid and Stage Stores could complete an out-of-court debt restructuring process, according to the people. (emphasis added)

The highlighted part above is the key, we think. It’s not that the company is stretching vendors per se … that much is fairly typical for companies with liquidity constraints. The question is why? Or more appropriately, who has risk?

Wells Fargo Bank NA ($WFC) is the company’s administrative agent and primary lender under the company’s asset-based credit facility. Prior to Destination Maternity’s ($DEST) chapter 11 filing, Wells Fargo tightened the screws, instituting reserves against credit availability to de-risk its position. It stands to reason that it is doing the same thing here given the company’s sub-optimal performance and failure to meet projections. Said another way, WFC has had it with retail. Unlike oil and gas lending, there are no pressures here to play ball in the name of “relationship banking” when, at the end of the day, so many of these “relationships” are getting wiped from the earth.

💰How Are the Investment Banks Doing? (Long Liability Management)💰

Generally speaking, quite well, actually.

Last week was earnings week for investment banks with restructuring groups. Let’s dive in.

1. Evercore Inc. ($EVR) reported its second best year in history, generating over $2.03b in revenue, an eye-popping number. Still, this represented a 2% decline from 2018 — thanks mostly to lower global M&A volumes and transaction count. While, generally speaking, this was a strong quarter, the firm dropped this doozy:

In response to these financial results, we have undertaken an initiative to ensure that our resources are focused on our greatest growth opportunities and that our entire team is performing at the high standards that we and our clients expect. We began this initiative at the end of 2019 by identifying markets, sectors and people that exhibited at productivity below our expectations. We are reducing our commitment to those areas, redeploying personnel where feasible and realigning certain operations to better position the firm for future growth.

In other words, the second best year in history didn’t stop the bank from sh*tcanning a meaningful portion (6%) of its workforce. 😬 The equity market — never one to infuse empathy into its behavior — rewarded the bank with an 11% pop on the news.

What of restructuring?

Demand for restructuring and more broadly debt advisory advice remained elevated as accommodative credit markets are driving higher levels of financial leverage.

Reminder: we are deeeeeeeep into a bull market, folks. To satisfy this demand, EVR appears to be expanding its platform to offer “increasingly more creditor advisory services that can serve our clients both in-court and more frequently out of court.” Ladies and gentlemen, the demarcation between debtor-side shops and creditor-side shops gets blurrier and blurrier. Can’t win a debtor mandate? Just slide on down that beautiful cap stack y’all. Revenue is revenue.

Interestingly, for the second quarter in a row, management suggested that deals are taking longer to complete — and therefore attribute to revenue — due to regulatory reasons, erratic stock markets, and choppy capital markets.

Unfortunately, despite prodding from analysts, management refused to parse out how different segments are faring so we cannot say how EVR’s restructuring group compared to other public competitor firms. Management claims that different teams cross-pollinate deals and so it’s hard to attribute revenue to different advisory segments. Which is an annoying AF explanation but we suppose there’s some logic to it (PETITION Note: we suppose this is the benefit of lawyers having to bill time: they can quantitatively attribute departmental productivity). Still, management declared:

…even though it's a very low default environment there clearly are sectors that have experienced consistent distress, energy, shipping, retail and certainly our backlogs would suggest that there is not going to be a diminution of that in 2020.

Any one betting big on recoveries in the energy and retail sectors ought to heed their friendly banker friends.

*****

2. The problem with EVR’s management’s stance that transactions are hard to separate between various groups is that they can’t then go out to the market and thump their chests like PJT Partners Inc’s ($PJT) Paul Taubman, touting the singular performance of the restructuring team:

Our world-class restructuring franchise maintained its leadership position, ranking No. 1 globally in dollar value of announced and completed restructurings. The business meaningfully exceeded our initial revenue expectations for 2019, powered by substantial growth in U.S. restructuring revenues.

Or...maybe they can? And should? After all, that rah rah rah doesn’t mean much when it isn’t backed up by concrete numbers. In fact, PJT, like EVR, doesn’t delineate restructuring-specific numbers either. 🤔🤔

PJT, as a firm, is a fraction of the size of EVR. Revenues were $718mm for the fiscal year, up 24% versus 2018. These numbers reflect “a meaningfully higher level of activity than...forecast” for restructuring in 2019. And backlog is even higher going into 2020 than it was going into 2019!!

So, to summarize, numbers were good. Thanks to good backlog carrying into ‘19 from ‘18. Go-forward backlog carrying into ‘20 is even stronger than ‘19. Reminder #2: we are deeeeeeeep into a bull market, folks.

*****

3. And then there is Moelis & Company ($MC) and its unbalanced year. The firm reported $224mm in Q4 (down 6% YOY) amidst the strongest second half in firm history. Its first half, however, dragged down full year performance which came in at $747mm, down 17% versus 2018 and just slightly more than PJT. These results stemmed from fewer completed transactions, partially offset by … wait for it … higher average fees on completed transactions (across M&A and restructuring). Here comes some first-class touting:

Our restructuring franchise achieved record revenues for the full year, surpassing last year's peak level of activity. This was the fourth consecutive year of growth reflecting our continued market share gains in the strength of the team. We ended the year as the number one advisor globally and in the US were completed transaction volumes according to Refinitiv and advised on six of the year's top 10 completed restructuring deals globally.

Query given overall performance whether comp reflected these stellar results or whether the failure of the enterprise to grow dragged restructuring folks down? 🤔 

Management was a bit unclear on the point. When challenged on a $40mm uptick in comp — an analyst basically asking whether Moelis bankers will win when they win and win when they lose ... to the detriment of shareholders — Mr Moelis responded by saying that the second half was robust and that the market is robust, justifying comp levels (PETITION NOTE: presumably he means both deal-wise and recruitment-wise, necessitating taking care of his people). But he also said the average MD “was down pretty significantly” and that he “did not boost pay.” But he also suggests that franchises that did well in H2 got paid. Was that restructuring? It’s unclear. What is clear is that analysts were flummoxed by this simple fact: revenues ⬇️, banker comp ⬆️. When asked to prognosticate restructuring activity for 2020, here’s what Mr. Moelis offered:

So, I expect our restructuring group to continue to gain market share. It was number one ranked this year. They did a spectacular job. It doesn't feel like the economy is going to give us a spike up there may be small amounts of growth, but we're talking about natural growth of the market just because the size of the market gets bigger, there's so much out there I don't sense a GDP problem that would cause us to have a leapfrog right now, but I expect we'll continue to gain market share.

He continued:

…all I know is sooner or later, the cycle does have a bit of an issue. And there's a lot of paper out there. I think we're in a 1% to 2% default market. We've been that way for five years now. Going back in time, we've always gotten the 3%, 4%. In the 2007, '08 cycle we got into the high-single digits in the fall. So, I know that's going to happen someday, not high, but I think we'll get into mid-single digits in a downturn and it will become a tremendous it will do a tremendous jump. That's a long way of saying, I don't expect anything spectacular out of them this year. Barring an event that I have not foreseen. I think it will just be steady improvement in our market share.

In agreement with EVR, Mr. Moelis also sees continued energy pain in ‘20:

Our last year was a big, big I mean especially oilfield services and I think if oil stays down here around $50, you're going to see a continued March of companies in that sector.

Thus far, 2020 has been chock full of restaurant and grocery bankruptcies. Count on energy stacking up some numbers soon.

*****

4. We’ve noticed that Greenhill & Co. Inc. ($GHL) appears to be upping its game. It had a creditor-side mandate in Clover Technologies Group LLC (prepack filed in Q4 ‘19), and debtor-side mandates in American Commercial Lines Inc. (prepack filed last week) and NPC International Inc., which is likely coming soon to a bankruptcy court near you. It also reported earnings last week and they were mixed: annual revenues of $301mm were down 14% YOY (blamed on industry-wide M&A decline and a softer year in Europe) but its Q4 ‘19 revenue of $106.7mm represented a 20% YOY increase. Is the bank turning around? Its bankers hope so: it sounds like comp may have been a bit disappointing this year.

Restructuring may be playing a part in the performance uptick. CEO Scott Bok noted:

By type of advice, we benefited from significant improvement in restructuring advisory revenue relative to recent years as our recently enlarged team gained increasing traction throughout the year.

And:

In restructuring advisory, we ended 2019 with a much-improved level of monthly retainer fees and a much larger backlog of assignments that should get to completion during 2020. Recent tightening of credit availability and increasing cost for borrowers with weaker credit rating should also be a positive factor for this business.

Backlog, backlog, backlog. It sure seems like every firm is saying the same thing: deal volume is up heading into 2020. Reminder #3: we are deeeeeeeep into a bull market, folks.

*****

5. And, finally, there’s Houlihan Lokey Inc. ($HLI). The firm reported its fiscal Q3 ended 12/31/19, highlighted by a 11.9% revenue increase amounting to a record $334mm, the first time quarterly revenues surpassed $300mm. Year-to-date revenues are $857mm, an 8% increase YOY. Not one to be left out, CEO Scott Beiser also engaged in some chest-pounding, asserting that Houlihan is #1 at…well…basically everything. Which, of course, doesn’t jive with PJT’s report but whatevs. This may just be cherry-picking. Or spin. Or “who the f*ck will actually verify.” Or “if we don’t parse out revenue by segments, how will anyone actually know?” Could be a number of these.

Relating to restructuring, Mr. Beiser said:

Our Financial Restructuring business continues to perform well, despite the current low default environment in the credit markets. Ongoing technology disruptors, changes in consumer buying habits, company mismanagement and over leverage have all contributed to current growth in our Restructuring business without the typical characteristics of a business downturn or higher interest rates.

Did we hear someone say disruption?? Music to our ears.👂👂👂

This bit was interesting as it validates our point earlier about restructuring firms no longer being beholden to traditional roles:

In Financial Restructuring, we continue to experience balance in our business between debtor and creditor work. And, in fact, in fiscal 2019 and fiscal 2020 year-to-date, our debtor revenues and our creditor revenues were pretty evenly split.

And yet most people still think of Houlihan as a creditor-side advisory firm. Just goes to show that there remains an information dislocation out in the marketplace.

We finished here with Houlihan because it is the one firm that actually has no problem delineating its restructuring revenue. All of the other firms duck and dive when asked for specifics, saying that it’s impossible to separate out work flows. Not Houlihan:

Financial Restructuring revenues were very strong this quarter at $93 million, a 24% increase from the same quarter last year, driven by higher transaction volume. We closed 28 transactions in the quarter, compared to 21 transactions in the same period last year. Average transaction fee on closed deals was relatively flat when compared to the same quarter last year.

In other words, Houlihan’s restructuring group did about as much revenue as all of Greenhill.

Again, energy was quite in focus as a huge potential revenue area in 2020. Here’s what Mr. Beiser had to say about that:

…we do see a little bit of a second pickup wave here in the oil and gas arena from a restructuring standpoint. It doesn’t feel like it’s going to necessarily be as big or as lengthy as what we saw before.

But as we’ve always looked at, it’s a combination of what kind of business plans people put together, what kind of financing package they have and what was the duration of that financing package and ultimately, where oil prices are. And all of those are causing some round of some additional conversations and mandates in restructuring. But at this juncture, don’t necessarily think it’s going to be the same size we saw a couple of years ago.

Interestingly benign assessment of what could end up being another bloodbath in energy this year. We think he’s understating the case. Just wait for it: there are a number of companies that either already went into BK back in the 14-17 time frame that are likely to fall back in (or do something out of court, i.e., Key Energy) and/or there are companies that avoided BK via an up-tier exchange of some other sleight-of-hand who can no longer fend off the inevitable — particularly with oil at $50/barrel.

💥Forever 81. Million.💥

Forever 21 Gets a Landlord Bailout

The bid deadline in the Forever 21 Inc. bankruptcy cases has come and gone and, well, the stalking horse bidders — a consortium between Simon Property Group Inc. ($SPG), Brookfield Property Partners LP and Authentic Brands Group LLC — won the day. The debtors filed a “notice of suspended auction” on Sunday that says it all:

The headline purchase price figure therefore remains $81mm for the distressed retailer (though, counting liabilities like costs to cure defaults, etc., the bankers assert the total deal is worth approximately $290mm). As indicated in the image above, the hearing to approve the sale is set for Tuesday, February 11 at 9am in the Delaware bankruptcy court.

This is not a good result for suppliers who claim they’re owed approximately $347mm, many of whom objected to the bid procedures and proposed sale. While they ultimately wrestled a small concession from the debtors/purchasers on the proposed break-up fee, they were otherwise shut out. Now, even that concession is worthless.

These vendors need to realize: virtually all of these retailers who file for bankruptcy are administratively insolvent on day 1. Forever 21 was supposed to be different. It wasn’t.

Indeed, in December, Bloomberg reported that the debtors were underperforming heading into the holiday season; that exit financing avenues were foreclosing; and that all hopes of a reorganization via its filed plan were going out the window. Indeed, we later learned that the debtors were in default under their DIP credit facility (heads up, academics). All of this precipitated the pivot to a quick sale.

Take a look at the debtors’ operating performance and it’s easier to understand the lender skittishness and strategic pivot. On October 15, 2019, the debtors filed their 13-week DIP budget wherein they projected $722.3mm in total receipts from the petition date through December 21, 2019. Actual receipts, however, totaled only $705.3mm through January 4, 2020. For the math challenged, that’s a $17mm underperformance against budget — EVEN WITH THE BENEFIT OF AN ADDITIONAL TWO WEEKS THAT SUBSUMED THE CRITICAL HOLIDAY SHOPPING PERIOD. This is yet another case where projections didn’t comport with reality: while the projections showed steadily increasing weekly receipts throughout the holiday period, the reality is that people simply didn’t shop at Forever 21 as much as anticipated. Despite millions upon millions of professional fees, this is still a business very much in need of an actual “turnaround” to survive (PETITION Note: the fees reflected below, for the most part, only cover the cases through the end of October).* The high fees further necessitated a quick sale.

SPG and ABG clearly think they are best positioned to ride out an option here. The purchase price is cheap, and there are other benefits that only, as landlord, SPG can derive (i.e., continued rent, full boxes, less in-line tenant risk, etc.). We’ve seen this movie before and it was called Aeropostale.

Here’s what SPG CEO David Simon had to say last week about Aeropostale:

…our cash investment in Aero OpCo was approximately $25 million. We have already received $13 million of distributions, so I have $12 million of cash invested in Aero OpCo. At the time we bought it, it was producing a negative EBITDA of $100 million and had over 500 stores. Today, today, we expect Aero OpCo to produce EBITDA pre-royalty from 575 stores of approximately $80 million of EBITDA.

We believe Aero is approximately, if you put a market multiple on it $350 million today and our ownership is 50%. 12 to three -- to 50% of $350 million. That's the math.

This was a private equity deal, complete with dividends. Only, unlike private equity firms, SPG has a residual interest in maintaining the AERO enterprise as its success directly contributes to the success of its other tenants. This is PE+.

Of course, SPG also has an investment in ABG. Here’s what Simon said about that:

Now with respect to ABG we invested -- we made a recent investment in it. So we have a total of 600 -- or sorry $67 million in ABG, Authentic Brands Group. At the time of our original investment, which was roughly $33 million, ABG produced EBITDA of approximately $150 million. Today our value is worth $190 million of our $67 million and ABG is expected to produce EBITDA well north of $350 million and the value is growing every day.

This means that, indirectly, SPG also owns Barney’s New York and Nine West, among other brands that have wound their way into bankruptcy courts near you.

With respect to Forever 21, he added:

…we have recently participated with Brookfield and Authentic Brands Group on behalf of the NewCo, SPAR Group, F21, LLC in a stocking horse bid for certain assets and liabilities in a going concern transaction under Section 363 of the Bankruptcy Code. Our Group's successful turnaround of Aero after climbing out of bankruptcy in 2016 gives us confidence with our ability to do the same with Forever 21.

Forever 21 is a storied and well -- widely recognized brand with over $2 billion in global sales. We believe F21 similar to Aero presents a very interesting repositioning opportunity. If the transaction is consummated the newco contemplates the continued operations of many of Forever 21 stores and e-commerce business and maintaining many jobs.

Our interest in the new venture will be approximately 50%. The aggregate purchase price -- acquisition price is approximately $81 million, plus the assumption of certain ongoing operating liabilities.

Again, this is a private equity deal. He continued:

We would not have done Aero and we're -- and we would not be attempting to do Forever 21 for the sole purpose of maintaining our rent. And that's the biggest misnomer out there when I read various publications and analyst notes and media notes. We do it -- we make these investments for the sole purpose of we think there's a return on investment.

Now the fact of the matter is we did all this that Aero and the reality is they kept paying us rent. So that's like -- that's obviously beneficial and I don't want to understate that but that's not why we do it. At the same time with F21, we do think there is a business there, but it's got to be turned around. And I'm not going to project today to you what those numbers are, but we've got our work ahead of us.

But if we are successful in turning around, we will make money at F21 and we'll get paid our rent.

It’s interesting. SPG is beta-testing, in real time, becoming a retail-focused venture and private equity firm. If retail continues to get decimated, we’ll see the extent of their ability to scoop up brands/businesses on the cheap. It seems safe to presume that its portfolio will be larger in a few years than it is now.

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*Which is not to say that good work hasn’t been done. As we noted on Twitter here, the debtors, with the help of their advisors, closed 102 stores (creating $91mm of rent relief), reduced operational costs of $100mm, and sold two warehouses for $37mm (the proceeds of which were used to pay down a portion of the DIP credit facility).

Still — and we write this knowing we harp on professional fees a lot — the DIP budget line-itemed $25.1mm for professional fees in the first 13 weeks of the case. According to the most recent operating report, the debtors are already at $11.97mm and that’s really only accounting for the end of October. Query whether 7+ weeks of work topped the budgeted delta of $13.13mm? 🤔

🙏A Lannister Always Pays His Debts. The Same Can’t Be Said of the Catholic Church (Long Cardinal Shady)🙏

Here is a Bloomberg Businessweek article about the Catholic Church weaponizing the bankruptcy code to manage sexual abuse cases that have been lobbed against it over the years. It’s brutal. Here’s the deal:

More dioceses are filing for bankruptcy now that rules are changing about how much time a victim has to sue over abuse. Seven states and the District of Columbia passed laws in 2019 that suspend the statute of limitations on civil sex abuse suits, and at least three other states are considering them. Known as “window statutes,” they’ve become popular in the wake of the #MeToo movement and public outcry over abuse by men in power. Until recently, only a half-dozen states had them. Window statutes caused churches to declare bankruptcy in San Diego, Wilmington, Del., and cities throughout Minnesota.

After New York state’s law went into effect in August, almost 430 sex abuse victims immediately filed lawsuits, most of them against dioceses. The diocese of Rochester declared bankruptcy in September; bishops in Brooklyn and Buffalo announced that theirs may soon follow.

Indeed, there are eight dioceses in New York and they all may be in trouble. Just a few days ago, the Bishop of the Buffalo Diocese indicated that a bankruptcy is probable, noting, per The Buffalo News, that “‘it won’t be long’ before a decision is made on whether to file.” This comes after the Diocese of Rochester already filed for bankruptcy back in September. In “⛪️Another Catholic Diocese Goes Bankrupt (Short Trusted Institutions)⛪️,” we noted the following with respect to Rochester:

Earlier this year, the New York State Legislature passed the Child Victims Act (“CVA”) and Governor Cuomo signed the legislation into law in February. The CVA (i) opened a one-year “window” through which time-barred child sex abuse claimants could lodge claims and (ii) extended “the statute of limitations for claims that were not time-barred on its date of passage, permitting such child victims to commence timely civil actions until they reach 55 years of age.” The result? 46 lawsuits involving 61 plaintiffs (plus another 12 demand letters indicating future suits). Chilling numbers.

Here’s another chilling number: “[s]ince the mid-1980’s, the Diocese has settled 44 claims related to child sexual abuse.” No wonder people today have lost faith in our institutions.

Now multiply that across numerous other dioceses across the US. Brutal.

Those of you who’ve been reading PETITION know by now that bankruptcy channeling injunctions can be a highly effective way for companies to deal with an onslaught of legal claims. We’ve seen these in mass tort cases (i.e., Takata, soon in PG&E), and asbestos cases. Indeed, two manufacturers filed for bankruptcy recently to take advantage of this. This allows a debtor to put a certain amount of money in a litigation trust and all claims are channeled towards that trust for recoveries. The question is the funding of said trusts. And, according to Bloomberg, it is here that the Church is acting inimical to religious values.

In many cases, churches precede bankruptcy by transferring and reclassifying assets. The effect is to shrink the pot of money available to clergy abuse victims. That and Chapter 11’s universal settle­ments and protections from further claims have been an effective one-two punch for limiting payouts. A Bloomberg Businessweek review of court filings by lawyers for churches and victims in the past 15 years shows that the U.S. Catholic Church has shielded more than $2 billion in assets from abuse victims in bankruptcies using these methods. “The survivors should have gotten that money, and they didn’t,” says Terry McKiernan, president of BishopAccountability.org. “The Catholic Church has behaved like a business. It hasn’t behaved like a religion that lives by the rules it espouses.”

And people wonder why this country is becoming increasingly secular.

🎅A Wave of Filings Crash the Holidays🎅

🤖Are There More #BustedTech Bankruptcies Coming?🤖

The recent bankruptcies of Fusion Connect (which just confirmed a plan swapping ~$270mm of debt for equity), Clover Technologies, uBiome (which just sold for a small fraction of its valuation), Loot Crate Inc., Juno Inc., Munchery, and Vector Launch Inc. — combined with the recent negative news surrounding WeWork (of course), Faraday Future (founder already in BK), Proteus Digital Health and Wag — signal that restructuring professionals shouldn’t sleep on “tech.” The sector has been surprisingly active in 2019 and there’s likely more to come in 2020 (e.g., RentPath?).

In the wake of the WeWork debacle, there has been a lot of talk about the end of “growth at all costs” thinking and a newfound emphasis on business fundamentals, i.e., unit economics. Indeed, post-WeWork, funding in startups immediately slowed down … for like a second … and people took measure; likewise, in the public markets, many recently IPO’d companies with questionable fundamentals have performed poorly. Time will tell, then, whether WeWork was just a blip on the radar screen or the canary in the coal mine. There are more signs of the former — this week it seems like 8,292,029 companies announced new raises — but might Vector Launch be validation of the latter? Who knows.

As we’ve argued in the past — obviously VERY prematurely — tech “startups” are more mature at earlier stages now than they used to be which very well may require them to sidestep the assignment for the benefit of creditors and launch headfirst into a bankruptcy court — if and when folks again get scared. With the private markets having become the new public markets over the last decade, there are a ton of private tech companies that are well-developed (read: “unicorns”); that have intellectual property (e.g., actual patents as well as brands); that have valuable contracts/leases; that have investors that seek releases. What they don’t appear to have are viable business models. When the tide goes out (read: the money scares), we’ll see who is wearing clothes.

The question is: what would be the catalyst? With interest rates steady or declining, there’s no reason to suspect the end is near for “yield baby yield” psychology and, therefore, the deployment of endless quantities of capital in alternative asset classes. That should bode well for tech.

And, yet, people are fearful. First Round Capital recently released its “State of Startups 2019” and if some of the fears come true, indeed, there will be more action as noted above:

Founders fear the bubble — concerns are at a 4-year high.

This year, over two-thirds of founders who ventured a guess think we are in a bubble for technology companies. It’s the highest number we’ve seen since 2015 — up 12% from 2018 and 25% from 2017.

Spoiler alert:

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💰Retail Roundup (Short Mall Traffic; Long Discounting)💰

Ah, the fourth quarter. The fourth quarter is critical for retailers as they play out the “holidays” option and hope to stave off bankruptcy. How’s that working out for them?

Per CNBC:

U.S. retail sales increased less than expected in November as Americans cut back on discretionary spending, which could see economists dialing back economic growth forecasts for the fourth quarter.

The Commerce Department said on Friday retail sales rose 0.2% last month.

Surveys had predicted a 0.5% retail sales acceleration.

Excluding automobiles, gasoline, building materials and food services, retail sales edged up 0.1% last month after rising by an unrevised 0.3% in October.

The so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 2.9% annualized rate in the third quarter.

The breakdown is as follows:

• Auto sales ⬆️ 0.5%;

• Gasoline ⬆️ 0.7%;

• Online/Mail-Order Retail ⬆️ 0.8%;

• Electronics/Appliances ⬆️ 0.7%; and

• Furniture ⬆️ 0.1%.

On the negative side, however:

• Apparel ⬇️ 0.6%;

• Restaurants/Bars ⬇️ 0.3%; and

• Hobby/Music/Book Stores ⬇️ 0.5%.

It gets worse for apparel. The Bureau of Labor Statistics’ latest CPI report revealed weakness for November — which, significantly, includes Black Friday and Cyber Monday. 😬

Men’s and women’s apparel decreased by 0.9% and 3.6% YOY, respectively, while boys’ and girls’ apparel decreased 3.9% and 2.2%. Said another way, there’s an epidemic of markdowns/discounts. That can’t bode well for retail’s bottom line.

Indeed, several retailers acknowledged that markdowns are a significant issue. American Eagle Outfitters Inc. ($AEO) CEO Jay Schottenstein* noted “the challenging environment promotional activity increased relative to our expectations,” a theme that was reiterated by management teams at Urban Outfitters ($URBN), Francesca’s ($FRAN), Children’s Place ($PLCE) and Designer Brands ($DBI). Gamestop Corp’s ($GME) CEO George Sherman — while reporting dogsh*t numbers — noted:

“At this stage, we've entered the commoditization phase of the console cycle, where promotional pricing is driving sales. And if you're out shopping or doing store checks over Black Friday or Cyber Monday you likely saw a clear example of [those] discount stands.”

The problem is that retailers need to draw foot traffic and when your retail experience is commoditized and your product sucks sh*t, how do you do that?

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🚛Dump Trucks🚛

Manufacturing, Trucking & the Ports

We’re old enough to remember a narrative that went something like this:

• Amazon Inc. ($AMZN) is dominating retail with 2-day (now 1-day) shipping +

• Traditional brick-and-mortar retailers are converting to e-commerce +

• Digitally-native-vertical-brands are cutting out brick-and-mortar and going direct-to-consumer =

• Increased need for logistics and shipping capabilities.

Because of these developments, among others, this country — it was said — was suffering from a trucking shortage relative to the demand and so wages rose rapidly and seemingly every retailer reported that rising shipping expenses were harming the bottom line. Given this, you’d think truckers would be crushing it.

Maybe…not? At least anymore.

In August we noted the following:

ACT research reflects two straight quarters of negative sector growth and DAT reported a 50% decline in spot market loads, with no category immune to the declining trend. Van load-to-truck is down 50%, flatbed load down 74.5% and reefer load down 55.5%. Some fear this may be a leading indicator of recession. Alternatively, it may just be the short-term effects of tariffs and the acceleration of orders into earlier months to avoid them. 

Still, the trucking industry is worried. 

Van spot rates were down 18.5%, flatbed spot rates down 18.4%% and reefer spot rates down 16.8%. The word “bloodbath” is now being bandied about. Per Business Insider:

“There has been a spate of trucking companies declaring bankruptcy this year, too. The largest was New England Motor Freight, which was No. 19 in its trucking segment. Falcon Transport also shut down this year, abruptly laying off some 550 employees in April.

"We have become increasingly convinced that freight is likely to remain weak through 2019 followed by falling truckload and intermodal contract rates in 2020," the UBS analyst Thomas Wadewitz wrote to investors in a June 18 note.

Trucking's biggest companies have been slashing their outlooks. Knight-Swift and Schneider both cut their annual outlooks earlier this year.”

Will this trend continue as manufacturing numbers continue to slip?

That was a good question. And, indeed, manufacturing does continue to slip — at least according to the ISM Manufacturing PMI report:

With the foregoing context, take some more recent news:

1. Hendrickson Truck Lines Co.

The family-owned trucking company recently filed for bankruptcy in the Eastern District of California (a chapter 22, actually). The company is on the smaller side: liabilities between $10-50mm; roughly 90 trucks and 100 drivers; operations in 10 states. Per FreightWaves:

“The company said its financial problems started in January with a sharp decline in overall freight tonnage. This, combined with excess truck capacity, resulted in a 21% rate drop compared with 2018, resulting in a $400,000 per month revenue drop, according to its petition.  

Two of the carrier’s top customers, which accounted for nearly 50% of its business, switched to lower-cost providers, the company said.” (emphasis added)

The company also blamed a poor truck leasing deal for its filing.

2. Truck Orders Are Down

The Wall Street Journal recently reported:

Order books for heavy-duty truck manufacturers are thinning out as a weaker U.S. industrial economy pushes fleet operators to put the brakes on plans to expand freight-carrying capacity.

Trucking companies in November ordered 17,300 Class 8 trucks, the big rigs used in highway transport, according to a preliminary estimate from industry data provider FTR. That was down 39% from November 2018 and a 21% decrease from October, providing a weak start for what is typically the busiest season for new-equipment orders.

The orders last month were the lowest for a November in four years, and analysts said they expect a backlog at factory production lines that has been dwindling this year to pull back even more.

It continued:

Truck-equipment makers have started scaling back production and laying off workers this year as demand for new trucks has weakened.

Daimler Trucks North America LLC said in October it planned to lay off about 900 workers at two North Carolina Freightliner plants as “the market is now clearly returning to normal market levels.”

Engine-maker Cummins Inc. cut its annual revenue forecast in October and the company last month said it plans to lay off about 2,000 workers early next year. “Demand has deteriorated even faster than expected, and we need to adjust to reduce costs,” the Columbus, Ind.-based manufacturer said in a statement.

What’s going on here? Well, yes, manufacturing is down. But “global trade tensions are weighing on transportation demand.” More from the WSJ:

U.S. factory activity contracted in November for the fourth straight month, according to the Institute for Supply Management.

Freight volumes and trucking prices have been on the decline. U.S. domestic freight shipments fell 5.9% in October compared with the same month last year, while truckload linehaul rates were down 2.5% year-over-year, according to Cass Information Systems Inc., which handles freight payments for companies.

🤔

3. Trade, Declining Truck Orders, and Imports (Short the Ports?)

We’re curious: if tariffs and trade wars are trickling down to trucking, what must this mean for ports in this country? Per Transport Topics:

Three West Coast ports saw significant drop-offs in cargo volume last month, the latest indication that the United States’ long-simmering trade dispute with China is impacting operations at the nation’s ports.

The Port of Los Angeles, the nation’s busiest facility, saw a 19.1% decline in 20-foot-equivalent units (TEUs) container volume, moving 770,188 compared with 952,553 in the same period a year ago. Imports and exports were both down 19%. The drop-off also means the Los Angeles port is 90,697 TEUs behind last year’s record pace, having processed 7,861,964 TEUs through the first 10 months, compared with 7,723,159 at this point last year.

Port Executive Director Gene Seroka and other officials were in Washington on Nov. 12, and he is sounding the alarm over the damage being done to the economy because of the ongoing trade battle and the resulting tariffs on hundreds of billions of dollars worth of products.

And this, apparently, isn’t isolated to the West Coast:

Rough October at Port of NY&NJ as loaded container imports fell slightly and loaded exports dropped 2.7%. The fall's East Coast shipping surge didn't get that far.

— Paul Page (@PaulPage) December 3, 2019

Will we start seeing some port distress in the near future? Fewer trucks and fewer trains mean lower revenue. 🤔

4. Celadon Group Files for Bankruptcy

Indianapolis-based Celadon Group Inc. ($CGIPQ) is a truckload freight services provider with a global footprint. Founded in 1985, the company professes to have pioneered the commerce trail between the United States and Mexico. Thereafter, it IPO’d and used the proceeds for growth capital, expanding its freight-forwarding business with the acquisition a UK-based company and another 36 companies thereafter. Not only did these acquisitions expand its geographic footprint, but they also expanded the company’s freight capabilities, opening up revenue possibilities attached to refrigerated and flatbed transportation. In all, today the company operates a fleet of 3300 tractors and 10000 trailers with 3800 employees. Its primary focus continues to be NAFTA countries; its customers include the likes of Lowes Companies Inc. ($LOW), Philip Morris International Inc. ($PM), Walmart Inc. ($WMT), Fiat Chrysler Automobiles NV ($FCAU), Procter & Gamble Inc. (($PG) and Honda Motor Co Ltd. ($HMC).  

All of the above notwithstanding, it is now a chapter 11 debtor. Worse yet, it will, in short order, wind down and no longer be in existence. In an instant, the aforementioned 3800 employees’ livelihoods have been thrown into disarray.

Not that the signals weren’t there. The company has been in trouble for some time now. In addition to macro woes, it has a large number of self-inflicted wounds. 

Back in July, the company teetered on the brink of bankruptcy but it bought itself a short leash. On July 31, 2019, the company refinanced its term loans held by Bank of America NA ($BAC), Wells Fargo Bank NA ($WFC) and Citizens Bank NA ($CFG) with a new facility agented by Blue Torch Finance LLC* that counted Blue Torch and Luminus Partners Master Fund as lenders.** The new lenders provided $27.9mm of new term loans and, in exchange, received $8mm in original issue discount and fees. The banks, it appears, got out just in the knick of time. Indeed, the company and its lenders have been engaged in an endless stream of negotiations, concessions and waivers ever since: the credit docs have been amended ad nauseam ever since the initial transaction because the company was in constant danger of breaching its covenants.

Why so much drama? Per the company:

“The need to file these chapter 11 cases was a result of a confluence of factors including industry-wide headwinds, former management bad acts, an unsustainable degree of balance sheet leverage and an inability to address significant liquidity constraints through asset sales and other restructuring strategies. In mid-2019, the trucking freight market began to soften. The combination of a decline in overall freight tonnage and excessive truck capacity in the market led to a significant decline in freight rates, and customers began to take bids at lower freight rates. Compared to the year immediately prior, 2019 showed a steady decline in freight rates, including spot freight rates and contractual rates. In addition to declining freight rates, volumes of loads in freight have experienced decreasing numbers for a significant portion of 2019.”

Sound familiar? Well, these issues alone should have been enough to present problems but they were accentuated by the fact that the company’s prior senior management allegedly engaged in some shady a$$ sh*t. That shady a$$ sh*t ultimately led to a Deferred Prosecution Agreement and a $42.2mm fine. While only $5mm has been paid to date, that $37mm overhang is substantial.

With all of these issues piling up, the company ultimately defaulted on its revolver. Consequently, MidCap Financial Trust, the company’s revolver lender, froze lending and the company’s already-growing liquidity problem became a wee bit more problematic. With barely enough money to fund payroll and payroll taxes, the company had no choice but to file for chapter 11. To put an exclamation point on this, the company had merely $400k of cash on hand when it pulled the trigger on bankruptcy. 

So what now? The company ceased operations and will commence an orderly wind down of its businesses, preserving only Taylor Express Inc. as a going concern. Taylor Express is a NC-corporation that the company acquired in 2015; it is a dry van and dry bulk for-hire services provider, operating principally for the tire and retail industries and primarily in the South and Southeast regions of the US. To fund the cases, the debtors secured a commitment from Blue Torch for $8.25mm in DIP financing. The DIP mandates that any sale order relating to the liquidating business be entered by January 22. 

As for the employees? Well: 

Yeah, they’re understandably pissed. For starters, they were laid off en masse with no notice. One employee, on behalf of all employees, filed an Adversary Complaint alleging a violation of the WARN Act, which requires 60 days’ advance written notice of a mass layoff and/or plant closing. In response, the truckers have formed a “Celadon Closure Assistance and Jobs” group on Facebook. It has 1300 members. Per Fast Company, 

“Truckers in [a] Facebook group are posting about having 20 minutes to clear out their trucks and go. CBS also reported that some drivers “were stranded when their company gas cards were canceled.”

YIKES. All told, this is a hot mess. Per SupplyChainDive:

“’This is noteworthy because of the size of the fleet,’ Donald Broughton, the principal and managing partner at Broughton Capital, told Supply Chain Dive in an interview.  ‘It’s noteworthy because less than 10 years ago Celadon was known as one of the most active, prolific and successful at salvaging small fleets that were struggling and in trouble.’

The failure of Celadon represents the largest trucking failure this year and ‘certainly one of the largest in history,’ Broughton said.”  

“Largest [insert industry here] failure” is not an honor that anyone wants.

*Blue Torch Finance LLC was also active in another DLA Piper LLP bankruptcy, PHI Inc., as DIP lender. 

**Blue Torch hold a priority right of payment on the term loan collateral with Luminus second and revolver lender, MidCap Financial Trust, third. 

⚡️Update: PG&E Corporation ($PCG)⚡️

Per The Wall Street Journal:

PG&E Corp. has reached a settlement with victims of the wildfires that pushed California’s largest utility into bankruptcy, agreeing to pay them $13.5 billion in damages.

The pact removes a significant obstacle to PG&E’s emergence from chapter 11 protection and includes reforms meant to address criticism that the company enriched shareholders while leaving customers exposed to danger from aged, unsafe equipment.

PG&E bowed to demands for more money for fire victims and gave in to pressure from California Gov. Gavin Newsom to improve its corporate governance and implement stricter safety protocols.

The best part: the settlement is payable half in cash and half in stock. All we have to say is:

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⛽️2019 Can’t End Fast Enough for Oil & Gas (Long Pain in TX)⛽️

Some numbers: the US now produces 13mm barrels per day and exports 3mm bpd. Per Reuters:

But the outlook for 2020 comes with growing skepticism from those inside the industry - and should growth fall short, it could shift the balance of power in world supply back to the Organization of the Petroleum Exporting Countries.

An increase in U.S. crude output by 1 million bpd would satisfy nearly all of the 1.2 million bpd increase in world demand next year, the International Energy Agency expects. [IEA/M]

That would keep a lid on prices, pressure OPEC to extend production cuts and leave shale producers still trying to achieve elusive profits. As a result, most industry executives and consultants said they expect slower U.S. shale growth.

Apropos, layoffs are starting to mount in the Permian. Austerity measures are now taking hold in the Eagle Ford. Per Bloomberg:

In the wake of the oil price crash that began in 2014, new drilling in the Eagle Ford dwindled as management teams cut budgets, and output in the region is now down about 20% from pre-crash levels.

That austerity finally began to pay off this year as the Eagle Ford as a whole generated free cash flow for the first time, according to IHS Markit.

And things may only get worse.* The state of Texas is expected to double its solar electricity output next year and again the following year. This would obviously have a negative impact on natural gas demand and prices.

Nevertheless, the Trump administration intends to bring MORE drilling online! Per The Houston Chronicle, the administration…

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⚡️Update: Destination Maternity Inc. ($DEST)⚡️

Speaking of ugly…

In the aforementioned October CBL update, we wrote:

The last thing CBL needed — on the heals of the downgrade — was near-instantaneous bad news. It got it this week.

Yesterday, the bankruptcy court granted interim approval authorizing Destination Maternity Corporation ($DEST) to assume a consulting agreement with Gordon Brothers Retail Partners LLC. Gordon Brothers will be tasked with multiple phases of store closures. Among those implicated? CBL, of course:

CBL is landlord to DEST on 16 properties that are slated for rejection. Considering that DEST cops to being party to above-market leases, this ought to result in a real economic hit to CBL as (a) it will lose a high-paying tenant, (b) it will take time to replace those boxes, and (c) it is highly unlikely to obtain tenants at as favorable rents.

Let’s pour one out for CBL, folks. The hits just keep on coming.

On Friday, Destination Maternity filed a motion seeking approval of a stalking horse bidder for its assets. In September’s “🤔Is it a "Destination" if Nobody Goes?🤔,” we concluded:

And so we’ll have to wait and see whether Greenhill can pull a rabbit out of their hats. Unfortunately, this is looking like another dour retail story. This looks like a liquidating ABL if we’ve ever seen one.

According to the motion, Greenhill dug deep. They reached out to over 180 potential buyers, executed 50 CAs, and granted due diligence access to nearly two dozen parties.* They also conducted 8 management presentations with potential bidders. If you’ve ever wondered why investment bankers make what they make, this ought to illustrate why: it can be a lot of work trying to garner interest and herd cats. Then again, they did accept a mandate where there was a questionable likelihood that the asset value would clear the debt. 🤔

Unfortunately, the result is not — as predicted — particularly stellar. To be clear, this isn’t a reflection upon Greenhill. This was a difficult assignment in a challenging retail environment: it’s a reflection of that.

And so Marquee Brands LLC** and a contractual joint venture between Hilco Merchant Resources LLC and Gordon Brothers Retail Partners LLC (together, the “Agent”) entered into an asset purchase agreement (APA) with the debtors pursuant to which they will purchase “the Debtors’ e-commerce business, intellectual property, store-in-store operations, and the right to designate the sale of certain inventory and related assets” for an estimated $50mm (subject to adjustments). Repeat: an estimated $50mm. The Agent will liquidate the company’s inventory, fixtures and equipment and conduct store closing sales at the 235 stores where closing sales are not already in process. Said another way: the company’s retail footprint is going the way of the dodo. Clearly this isn’t credit positive for CBL and other landlords.

To refresh everyone’s recollection, here is what the company’s capital structure looked like at the time of its bankruptcy filing:

We previously noted when highlighting the aggressive milestones baked into Wells Fargo Bank’s consent to use its cash collateral:

Wells clearly wants this sucker off its books in 2019.

Rightfully so. The $50mm purchase price is subject to a $4mm holdback. In other words, the actual value transfer may be approximately $46mm. That puts the purchase price at riiiiiiiiiiiiight around Wells Fargo’s exposure. Its aggressive handling of the case appears to be warranted: this thing looks a hair away from administrative insolvency.

Apropos, the official committee for unsecured creditors — in a grasp for some sort of relevance here — filed a limited objection to the motion. The committee argued that the break-up fee (3.5%) and expense reimbursement (up to $750k) were unwarranted given the size of the bid and the lack of a going concern offer.

They were shot down. They did, however, wrestle some concessions. They apparently got the purchase price increased by $225k (in exchange for avoidance actions) and an additional $225k to be paid to 503(b)(9) admin claimants prior to Wells getting its money. A small victory but something for some creditors here.

And that ladies and gentlemen is what bankruptcy boils down to. Is there value? And if so, who gets it? Here, it’s hard to see any real winners. Not the company. Not Wells. Not CBL and the company’s other landlords. Not vendors. Or suppliers. Or employees. Or, really, even the professionals (for once). Time will tell whether Marquee can do something with this brand that makes it one of the rare winners. It’s not clear from the papers how much of the $50mm is attributable to them and, therefore, how much they’re putting at risk. Clearly nobody else was comfortable with the risk here. However you quantify it.

*At the time of filing, the numbers were 170 parties contacted and 34 executed CAs. So, there wasn’t much additional interest in the assets post-filing.

**Marquee Brands also owns BCBG which, itself, traversed the bankruptcy process not long ago.

🛏KKR Tips Hand re Art Van Furniture (Short Midwest Mattresses)🛏

n “💩Acosta = Not a Good Look, Carlyle💩,” we noted how FS KKR Capital Corp ($FSK), a publicly-traded business development corporation placed its Acosta Inc. loan “on nonaccrual” because it was, well, clearly sh*tting the bed. Ultimately, after riding the mark down to the basement, FSK offloaded the position. It wasn’t the only stain in its portfolio. In fact, as of the end of the third quarter, approximately 1.7% of the portfolio was on nonaccrual, up from 1.2% at the end of Q2. While this, in and of itself is hardly alarming, it does mean that there are other potential restructurings sitting on FSK’s books. Indeed, one loan contributing to this uptick was to a company called Art Van Furniture.

Founded in 1958, Michigan-headquartered Art Van Furniture is a furniture retail store chain with approximately 190 company-owned stores in nine states operating, thanks to various tack-on acquisitions, under various brands: Art Van Furniture, Art Van PureSleep, Scott Shuptrine Interiors, Levin Furniture, Levin Mattress and Wolf Furniture. The tack-on acquisitions were, presumably, part of the company’s growth strategy after being acquired by private equity overlords Thomas H. Lee Partners.

The Columbus Dispatch recently reported on Art Van’s strategy annnnnnnd it’s definitely a bit counter-intuitive:

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💥Is Wyoming F*cked? (Short Chesapeake Energy Corp.)💥

Governor Mark Gordon released his Wyoming State Budget for 2021-2022 earlier this week and — whoa boy — he cuts right to the chase:

It is a budget intended to prepare our state to meet the coming storm head-on.

For most of the last century, Wyoming’s abundant coal, natural gas, oil, and other minerals have been the drivers of our economy; employing thousands; funding schools and government services; and stabilizing our state’s communities. Energy development, minerals, and the sovereign wealth they have bequeathed to our children have kept taxes low for citizens. But times are changing. Over the past few years we have witnessed an upheaval in the way energy is being generated, used, and developed. These changes seem to be accelerating and are not generally favorable to some of our most cherished industries. (emphasis added)

He then goes on to highlight some pretty hefty headwinds (pun intended) — things that should be no surprise to a restructuring community that has watched coal company after another file for chapter 11 bankruptcy:

• Coal production in Wyoming has declined by 35%.

• Natural gas companies are halting drilling there.

• 38 states have established renewable and carbon-free standards which hurts demand.

• Wyoming has an oil and gas energy but low oil prices will offset whatever hedge this provides against declining coal.

"Even if we get out of this current downturn with oil bailing us out, the economy becomes more and more dependent on oil, which is the most volatile of all of the commodities and the one that we are least confident with forecasting into the future," said Robert Godby, director of the University of Wyoming Center for Energy Economics and Public Policy.

To point, Chesapeake Energy Corp. ($CHK), a large presence in Wyoming, issued a going concern warning earlier this month:

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💩Acosta = Not a Good Look, Carlyle💩

Disruption Flummoxes Carlyle. Destroys Billions of Value.

Back in September 2018’s “Trickle-Down Disruption from Retail Malaise (Short Coupons),” we noted a troubled trio of “sales and marketing agencies.” We wrote:

With the “perfect storm” … of (i) food delivery, (ii) the rise of direct-to-consumer CPG brands, (iii) increased competition from private-brand focused German infiltrators Aldi and Lidl, and (iv) the increasingly app-powered WholeFoods, there are a breed of companies that are feeling the aftershocks. Known as “sales and marketing agencies” (“SMAs”), you’d generally have zero clue about them but for the fact that you probably know someone who is addicted to coupon clipping. Or you’re addicted to coupon clipping. No shame in that, broheim. Anyway, that’s what they’re known for: coupons (we’re over-simplifying: they each perform other marketing, retailing, and data-oriented services too). The only other way you’d be familiar is if you have a private equity buddy who is sweating buckets right now, having underwritten an investment in one of three companies that are currently in distress. Enter Crossmark Holdings Inc., Acosta Inc., and Catalina Marketing (a unit of Checkout Holding Corp.). All three are in trouble.

What’s happened since?

• Catalina Marketing filed for chapter 11 bankruptcy. ✅

• Crossmark Holdings Inc. effectuated an out-of-court exchange transaction, narrowing averting a chapter 11 bankruptcy filing. ✅

• And, as of last week, Acosta Inc. launched solicitation of a prepackaged chapter 11 bankruptcy filing. It will be in bankruptcy in the District of Delaware very very soon. We’ve basically got ourselves an SMA hat-trick. ✅💥

Before we dive into what the bloody hell happened here — and it ain’t pretty — let’s first put some more meat on those SMA bones. In doing so, mea culpa: we WAY over-simplified what Acosta Inc. does in that prior piece. So, what do they do?

Acosta has two main business lines: “Sales Services” and “Marketing Services.” In the former, “Acosta assists CPG companies in selling new and existing products to retailers, providing business insights, securing optimal shelf placement, executing promotion programs, and managing back-office order-to-cash and claims deduction management solutions. Acosta also works with clients in negotiations with retailers and managing promotional events.” They also provide store-level merchandising services to make sure sh*t is properly placed on shelves, stocks are right, displays executed, etc. The is segment creates 80% of Acosta’s revenue.

The other 20% comes from the Marketing Services segment. In this segment, “Acosta provides four primary Marketing Services offerings: (i) experiential marketing; (ii) assisted selling and training; (iii) content marketing; and (iv) shopper marketing. Acosta offers clients event-based marketing services such as brand launch events, pop-up retail experiences, mobile tours, large events, and trial/demo campaigns. Acosta also provides Marketing Services such as assisted selling, staffing, associate training, in-store demonstrations, and more. Under its shopping marketing business, Acosta advises clients on consumer promotions, package designs, digital shopping, and other shopper marketing channels.”

In the past, the company made money through commission-based contracts; they are now shifting “towards higher margin revenue generation models that allow the Company to focus on aligning cost-to-serve with revenue generation to better serve clients and maximize growth.” Whatever the f*ck that means.

We’re being flip because, well, let’s face it: this company hasn’t exactly gotten much right over the last four years so we ought to be forgiven for expressing a glint of skepticism that they’ve now suddenly got it all figured out. Indeed, The Carlyle Group LP acquired the company in 2014 for a staggering $4.75b — a transaction that “ranked … among the largest private-equity purchases of that year.” Score for Thomas H. Lee Partners LP(which acquired the company in 2011 from AEA Investors LP for $2b)!! This was after the Washington DC-based private equity firm reportedly lost out on its bid to acquire Advantage Sales & Marketing, a competitor which just goes to show the fervor with which Carlyle pursued entry into this business. Now they must surely regret it. Likewise, the company: nearly all of the company’s $3b of debt stems from that transaction. The company’s bankruptcy papers make no reference to management fees paid or dividends extracted so it’s difficult to tell whether Carlyle got any bang whatsoever for their equity buck.*

Suffice it to say, this isn’t exactly a raging success story for private equity (calling Elizabeth Warren!). Indeed, since 2015 — almost immediately after the acquisition — the company has lost $631mm of revenue and $193mm of EBITDA. It gets worse. Per the company:

“Revenue contributions from the top twenty-five clients in 2015 have declined at approximately 14.6 percent per year since fiscal year 2015. Furthermore, adjusted EBITDA margins have decreased year-over-year since fiscal year 2015 from over 19 percent to approximately 16 percent as of the end of fiscal year 2018.”

When you’re losing this money, it’s awfully hard to service $3b of debt. Not to state the obvious. But why did the company’s business deteriorate so quickly? Disruption, baby. Disruption. Per the company:

Acosta’s performance was disrupted by changes in consumer behavior and other macroeconomic trends in the retail and CPG industries that had a significant impact on the Company’s ability to generate revenue. Specifically, consumers have shifted away from traditional grocery retailers where Acosta has had a leadership position to discounters, convenience stores, online channels, and organic-focused grocers, where Acosta has not historically focused.

Just like we said a year ago. Let’s call this “The Aldi/Lidl/Amazon/Dollar Tree Effect.” Other trends have also taken hold: (a) people are eating healthier, shying away from center-store (where all the Campbell’s, Kellogg’s, KraftHeinz and Nestle stuff is — by the way, those are, or in the case of KraftHeinz, were, all major clients!); and (b) the rise of private label.

Moreover, according to Acosta, consumer purchasing has declined overall due to the increased cost of food (huh? uh, sure okay). The company adds:

These consumer trends have exposed CPG manufacturers to significant margin pressure, resulting in a reduction in outsourced sales and marketing spend. In the years and months leading to the Petition Date, several of Acosta’s major clients consolidated, downsized, or otherwise reduced their marketing budgets.

By way of example, here is Kraft Heinz’ marketing spend over the last several years:

Compounding matters, competition in the space is apparently rather savage:

“Acosta also faced significant pressure as a result of the Company’s heavy debt load. Clients have sought to diversify their SMA providers to decrease perceived risk of Acosta vulnerability. In fact, certain of Acosta’s competitors have pointed to the Company’s significant indebtedness, contrasting their own de-levered balance sheets, to entice clients away from Acosta. Over time, these factors have tightened the Company’s liquidity position and constrained the Company from making necessary operational and capital expenditures, further impacting revenue.”

So, obviously, Acosta needed to do something about that mountain of debt. And do something it did: it’s piling it up like The Joker, pouring kerosene on it, and lighting that sh*t on fire. The company will wipe out the first lien credit facility AND the unsecured notes — nearly $2.8b of debt POOF! GONE! What an epic example of disruption and value destruction!

So now what? Well, the debtors clearly cannot reverse the trends confronting CPG companies and, by extension, their business. But they can sure as hell napalm their balance sheet! The plan would provide for the following:

• Provide $150mm new money DIP provided by Elliott, DK, Oaktree and Nexus to satisfy the A/R facility, fund the cases, and presumably roll into an exit facility;

• First lien lenders will get 85% of the new common stock (subject to dilution from employee incentive plan, the equity rights offering, the direct investment preferred equity raise, etc.) + first lien subscription rights OR cash subject to a cap.

• Senior Notes will get 15% of new common stock + senior notes subscription rights OR cash subject to a cap.

• They’ll be $250mm in new equity infusions.

So, in total, over $2b — TWO BILLION — of debt will be eliminated and swapped for equity in the reorganized company. The listed recoveries (which, we must point out, are based on projections of enterprise value) are 22-24% for the holders of first lien paper and 10-11% for the holders of senior notes.

We previously wrote about how direct lenders — FS KKR Capital Corp. ($FSK), for instance — are all up in Acosta’s loans. Here’s what KKR had to say about their piece of the first lien loan:

We placed Acosta on nonaccrual due to ongoing restructuring negotiations during the quarter and chose to exit this position after the quarter end at a gain to our third quarter mark.

This was the mark back in December 2018 = $2.4mm fair value:

And this is the mark as of Q3 close, September 2019 = $1.3mm fair value:

Soooooo….HAHAHAHA. Now THAT is some top-notch spin! Even if they did mark to a gain versus the Q3 mark, they undoubtedly lost money on this position: the mark was cut in half in less than a year.

You have to take the benefits of quarterly reporting where you can, we suppose. 😬😜

*There have been two independent directors appointed to the board; they have their own counsel; and they’re performing an investigation into whether “any matter arising in or related to a restructuring transaction constituted a conflict matter.” There is no implication, however, that this investigation has anything to do with potential fraudulent conveyance claims. Not everything is Payless, people.

💰One’s Pain is Another’s Gain (Long Real Estate Consultants)💰

Yeah but someone is making money from all of this doom and gloom, right? You bet your a$$. The real estate consultants/advisors!! Using Houlihan’s for illustration purposes, let’s dive into what these guys do. 

Before we do, let’s establish some ground rules: we’re going to MASSIVELY over-simplify how this works just to extract some number out of the abstract figures and give folks some semblance of an idea of how this works. So, please spare us the righteous indignation about incomplete calculations, okay?  

In the Houlihan’s bankruptcy case, the debtors seek to engage Hilco Real Estate LLC as its real estate consultant and advisor. For the uninitiated, Hilco Real Estate counts countless bankrupted companies as clients, e.g., A&P, Fred’s, Gander Mountain, Furniture Brands, Garden Fresh Restaurant Corp., hhgregg, Hostess Brands, Ignite Restaurant Group, Logan’s Roadhouse, Payless Shoesource. You get the idea. Perversely, these guys kill it when you don’t (spare us the spin, y’all).

According to the agreement between Houlihan’s and Hilco, Hilco will, among other things, (a) meet with Houlihan’s to ascertain its goals, objectives and financial parameters (read: wherewithal); (b) mutually agree with Houlihan’s on a strategic plan for restructuring, assigning or terminating leases; (c) negotiate with third parties landlords in furtherance of the agreed-upon strategy; (d) provide updates on progress; and (e) assist Houlihan’s in closing the relevant lease restructuring, assignment, and termination agreements. The contract is exclusive. Said another way, Houlihan’s has agreed to convey over to Hilco all responsibility for negotiating with landlords for purposes of extracting concessions. 

Of course, Hilco doesn’t do this sh*t for free. They have a variety of ways to make money. 

First, it’s important to note that the Bankruptcy Code requires that debtors decide what to do with non-residential real property leases within 120 days from any filing. Consequently, many distressed companies engage real estate consultants long in advance of bankruptcy to get a handle on the real estate portfolio, help devise a strategy, and kickoff negotiations with landlords. Accordingly, any assigned or terminated lease pre-petition is eligible for 6% of Lease Savings (back to this in a minute). If a lease is modified rather than terminated, Hilco gets a flat fee of $1,500 + 5.25% of the savings. Post-petition, Hilco gets 6% for assignments/terminations/sales of leases — if there are any at that point that return cash value. 

Houlihan’s is a sale case so what happens if the leases are assumed and assigned pursuant to a sale of all or substantially all of the assets? Per the Agreement, 

“…any Lease that is assigned or sold to a purchaser of all or substantially all of the Company's or a division of the Company's assets shall not, in and of itself, be considered an Assigned/Sold Lease (but may still be a Restructured Lease).” 

Wait, what? The agreement doesn’t even define what an “Assigned/Sold Lease” is? But, it appears the intent of this language is to carve out leases that simply transfer to a buyer. No fee for Hilco there — that is, unless there is an agreed modification to the lease prior to assumption and assignment. (Note to Hilco: tighten up your sh*t). This makes sense. 

Of course, all of this might as well be written in Dothraki: 

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🔥David's Bridal = Chapter 11.5🔥

One year, three different capital structures and two restructurings — one in-court and one out-of-court. This has been a hell of a twelve-month stretch for David’s Bridal Inc. Clearly performance continues to sh*t the bed.

A year ago at this time the company was pre-bankruptcy. It had 311 stores, 9,260 employees and a $775mm capital structure split among (i) approximately $25.7 million in drawn commitments under its Prepetition ABL Agreement; (ii) an estimated $481.2 million in outstanding principal obligations under its Prepetition Term Loan Agreement; and (iii) an estimated $270.0 million in outstanding principal obligations under its unsecured notes. It filed a prepackaged bankruptcy on November 19, 2018. It confirmed its plan of reorganization in early January and the plan went effective almost 60 days after the filing.*

Under the plan of reorganization, the company shed hundreds of millions of debt, wiping out its private equity overlord, Clayton, Dubilier & Rice, LLC (except to the extent they owned unsecured notes). The company emerged from bankruptcy with (i) a $125mm asset-backed loan from Bank of America NA (the “ABL”), (ii) a $60mm “Priority” term loan agented by Cantor Fitzgerald and (iii) $240mm L+800bps “Takeback” term loan paper (also Cantor Fitzgerald). The term lenders — including, Oaktree CLO Ltd., a collateralized loan obligation structure managed by Oaktree Capital Group** — walked away as owners with, among other things, the takeback paper and the common stock in the reorganized entity. The unsecured noteholders received a pinch of common equity and warrants. The initial post-reorg board was reconstituted to include a representative from Oaktree, a former executive from Ralph Lauren, a former banker, a senior partner from Boston Consulting Group, and a venture capitalist with experience in the early stage consumer products space.

It didn’t take long for cracks to form. In May, S&P Global Ratings downgraded David’s Bridal’s credit rating into junk territory; it noted that the company’s performance "remained significantly weaker than anticipated after emergence from bankruptcy" and it “expect[s] poor customer traffic will pressure operating performance and lead to added volatility.” The ratings agency gave both term loans the “Scarlet D” for downgrade, noting that the capital structure was “potentially unsustainable based on its rapidly weakening operating performance, which makes it vulnerable to unfavorable business and financial conditions to meet its commitments in the long term.” The term loan quoted downward. The rating proved to be prescient.

Six months later and eleven months post-confirmation, it is clear that the balance sheet was NOT right-sized to the performance of the business. On Monday, the company announced that it obtained a new $55mm equity infusion from its existing lenders. Lenders unanimously exchanged “$276mm of its existing term loans into new preferred and common equity securities” leaving the company with $75mm of funded debt exclusive of the untapped $125mm ABL. The equity that CD&R and the other unsecured noteholders received are clearly worth bupkis today. Those warrants? HAHAHA. Wildly out-of-the-money. Peace out CD&R!

The question is why did this situation flame out so quickly? On a macro level, there are secular changes taking precedence in the marriage space: things just aren’t as formal as they used to be. On a micro level, clearly the company continues to suffer from operational challenges that were not addressed during the filing. Nor post-emergence. Per Bloomberg:

David’s lost its way with customers under prior management, Marcum said in the interview. When the company launched its online marketplace, it was a separate e-commerce profit that had different pricing and marketing promotions than the stores. “Consumers today are very smart and they see that,” [CEO James] Marcum said. “It caused a lot of friction” and an “extremely poor experience” for customers.

Ummm, okay, but wasn’t that supposed to have been fixed by now??

The company underestimated the negative impact that Chapter 11 would have going into its strongest selling period, and the competition “took advantage of it,” Marcum said.

Clearly the lenders underestimated the impact, too. How else do you explain the thinking around 10+% paper?

Given that the paper steadily quoted down for months leading up to this transaction, it’s obvious that (i) brides-to-be were steering clear from David’s Bridal after seeing media clips about other brides getting burned by bankrupted dress sellers, (ii) consequently, the lenders saw a constant stream of declining numbers, and (iii) as they learned more about the state of the business, lenders scrambled to try and dump this turd before a wipeout transpired. Spoiler alert: it has transpired.

As for the capital structure, clearly this thing came out of bankruptcy over-levered: it looks like the take-back paper was driven, in part, by CLOs in the capital structure. Callback to just a few weeks ago when, in “💥CLO NO!?!?💥,” we wrote (paywall):

…most CLO fund documents also don’t permit CLOs to take on new equity in restructurings. This limitation, by default, pushes CLOs towards “take-back paper” (read: new debt) in lieu of equity. If you’re a regular-way lender on an ad hoc group full of CLOs, then, this makes for an interesting dynamic: you may prefer — and have the latitude — to (i) swap debt for equity, thereby taking turns of leverage off to right-size the reorganized debtor’s balance sheet and (ii) give the reorganized entity a fighting chance to survive and drive equity returns. Your CLO counterparts, however, have different motives: they’ll push for more leverage. This misaligned incentive can sometimes get so bad that ad hoc groups will have to negotiate amongst themselves the go-forward capital structure without even getting management input. In this scenario, management projections are besides the point. If you’re looking for some explanation as to why there appears to be a rise in Chapter 22 filings, well, this might be one.

Not everything will have to file for bankruptcy a second time. But, as a practical matter, the result is the same here in terms of a capital structure refresh. Call this a Chapter 11.5.***

*Shockingly, the company didn’t boast of a “successful restructuring” like every other retailer-destined-for-a-chapter-22 tends to do. Perhaps retailers are now taking PETITION’s “Two-Year Rule” into account? 🤔😜

**The term lenders that made up the Ad Hoc Term Lender Group included a hodgepodge of private equity funds, hedge funds and CLOs.

***We really struggled with a witty thing to label a fact pattern where, within a year of bankruptcy, a company has to do a an out-of-court balance sheet refresh without going into a formal Chapter 22. Any ideas? Email us.

How Are the Investment Bankers Doing?

PJT Partners Inc. ($PJT) reported fiscal Q3 numbers yesterday and total revenue hit $174.2mm (up 24% YOY) — no thanks to the restructuring group. Per Mr. Paul Taubman, compared to last year, restructuring:

…revenues decreased meaningfully in the third quarter, but held almost even for the nine month period. Given the increase in distress within certain industries, such as energy, media, telecommunications, pharma, consumer retail, our outlook for the full-year has become a bit more positive and we now expect full-year restructuring revenues to be up slightly year-over-year. This activity level combined with restructurings increasing ability to leverage the expertise and connectivity of our Strategic Advisory bankers should result in a stronger backlog heading into 2020 versus a year ago. (emphasis added)

Wait. There’s distress in energy and consumer retail? Who knew. Anyway, this isn’t fake news but it isn’t really big news either: banker assignments close choppy which makes quarterly reporting for restructuring a tough game. Still, if you’re counting on a sizable year-end bonus, you probably don’t want the company CEO singling you out for being a drag on numbers — encouraging guidance notwithstanding.

⚡️Newsflash: PG&E Corporation⚡️

You got cute. You invested in the equity. Now you may be up sh*t’s creek.

The #KincadeFire is now the biggest California wildfire of 2019 ⬇️

- More than 100,000 residents remain under mandatory evacuation orders
- 75,415 acres burned
- 15% contained
- 124 structures destroyed & 90,000 more (including 80,000 homes) threatenedhttps://t.co/Gp26JZCSaN

— The Sacramento Bee (@sacbee_news) October 29, 2019

With each passing day and each damaged structure, a growing administrative expense claim is squeezing any hope of equity value and potentially threatening the backstop commitments received back in…wait…carry the one…FRIKKEN SEPTEMBER. We’re old enough to remember reading this somewhere:

Interestingly, Abrams & Knighthead have conditioned their support on, among other things, two key components: (1) a “wildfire claims cap” of $17.9mm and (2) no “occurrence of one or more wildfires in the Debtors’ service territory after the Petition Date and prior to January 1, 2020 that is asserted by any person to arise out of the Debtors’ activities and that destroys or damages more than 500 Structures.” Will global warming blow up this deal? Note: the Thomas Fire ripped through Ventura and Santa Barbara counties in December 2017, wrecking 281k acres, 1063 structures, and killing 23 people. 

Oh right. That was us: we wrote that. We really wish that hadn’t aged so well.

A quarter trillion dollars is ... only 8 wildfire seasons of damages ... ??? https://t.co/SluN9h2m3B

— Kim-Mai Cutler (@kimmaicutler) October 28, 2019

💥CLO NO!?!?💥

On October 3rd, Deluxe Entertainment Services Group Inc., a content creation-to-distribution video services company (whatever the hell that means), filed a prepackaged bankruptcy case in the Southern District of New York. The purpose? To address the company’s over-levered capital structure ⬇️.

That’s right, even “content creation-to-distribution video services” companies have no trouble loading up over $1b of debt.

Gotta love these markets. Anyway, it’s not the capital structure itself that’s interesting here. Rather, it’s the parties playing in that capital structure.

In its bankruptcy papers, the company took pains to note that it thought it would get an out-of-court deal done. In July, it secured a loan — the $73mm “Priming Term Loan” above — to enhance liquidity and bridge the company to a transaction that would substantially reduce its debt obligations by equitizing the “Existing Term Loans.” Shortly thereafter, as all parties were working towards consummating the transaction, it became apparent to all that the company would need $25mm in incremental liquidity. While this is curious from a 13-week cash flow management perspective (), this shouldn’t have been a show stopper.

But then the ratings agencies had to go and screw everything up.

On August 5th, S&P Global Ratings downgraded the company’s debt three notches into junk territory to CCC- from B-. Per the Wall Street Journal:

S&P primary credit analyst Dylan Singh said the ratings were lowered because Deluxe has faced challenges in refinancing its debt structure, a problem that could increase the likelihood of a default.

Although the new $73 million loan will give additional liquidity to Deluxe, Mr. Singh said he doesn’t expect the company to be able to repay its ABL facility when it comes due in November and believes the business will try to extend the maturity before then. The current capital structure is unsustainable, he said.

Crossing over to the CCC threshold is a big problem for a lot of lenders — specifically, CLOs. For the uninitiated, here is a decent CLO primer about what CLOs are and how they work. For purposes of this briefing, it’s important to note that most CLOs are forbidden by their foundational fund docs from holding an allocation of more than 7.5% of their portfolio in CCC-or-lower-rated debt. This effectively handcuffed most of the CLOs in Deluxe’s capital structure from providing the necessary new money.

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💩Workers’ Compensation, Powered by Private Equity💩

One Call Corporation is a Florida-based private equity-owned (Apax Partners) provider of “cost containment services to the workers’ compensation industry.” It’s a B2B service in that its clients are payors, i.e., insurers. The company formed in 2013 after Apax Partners acquired One Call Care Management, the predecessor entity, from private equity firm Odyssey Investment Partners (terms undisclosed) and contemporaneously acquired Align Networks from growth equity firm General Atlantic and The Riverside Company and merged the two together to form Once Call Corporation.

We bet you’re wondering: how complex can a workers’ comp solutions provider really be? We mean…this has to be the least sexy business ever. That said, we’re glad you asked. This company has a stupefying amount of debt on its balance sheet! $2b, in fact. You really have to love private equity.

You also have to really love poop-frosted layer cake capital structures:

• $56.6mm ‘22 revolver;

• $842.6mm ‘22 L+5.25% Term Loan B;

• $37.9mm ‘20 L+4% Term Loan B

• $343mm ‘24 7.5%/11% PIK new first lien toggle notes;

• $349mm ‘20 L+3.75%/6% PIK 1.5 first lien term loan (KKR, GSO Capital Markets);

• $94.7mm ‘24 7.5% first lien notes;* and

• $291mm ‘24 10% second lien notes.*

You get all of that? This may be the first time a capital structure for a company single-handedly put us across our newsletter length limitations. Sheesh that’s a lot of debt. And this is after an exchange transaction earlier this year in which the two tranches above with asterisks were (clearly not wholly) exchanged for the $343mm PIK toggle notes. That transaction — and, no doubt, all the fees that came with it — bought the company…

…a rather insignificant amount of time, it seems. The company’s performance apparently cannot sustain that much debt. Per Bloomberg:

Cash has been running short at One Call, which recently drew $50 million from its $56.6 million revolver…. Leverage was around 6.95 times earnings at mid-year, bumping up against the 7-times limit in its lender agreement….

So, the company has covenant issues and a lack of liquidity. It therefore failed to make an interest payment on the $291mm second lien notes on October 1 and it’s now operating amidst a customary 30-day grace period. No cash and little covenant room = no bueno. But, you know what it does have? A blog. That’s right, a blog. And the company is a prolific poster:

For the past couple of weeks, we have been engaging with our lenders on a comprehensive solution that will ensure One Call has an appropriate capital structure to support our long-term business objectives. As these constructive discussions continue, we decided to take advantage of an available grace period for making an interest payment due October 1 under the terms of one of our debt agreements. This grace period, which is fairly standard, allows us to defer this payment for 30 days – without constituting an event of default – while we work together on a solution.

S&P promptly downgraded the company to CC from CCC and put it on CreditWatch.

Per Bloomberg, negotiations are ongoing as to how the capital structure will be dealt with. Suffice it to say, this sucker will file for bankruptcy. And they’ll likely try and make quick work of it. We can’t wait to see how the company manufactures venue in White Plains given that its legal and restructuring advisory professionals are the same dynamic duo from FullBeauty, Sungard and Deluxe Entertainment. Lately, with these characters, “quick work of it” is a matter of relative degree.