New Chapter 11 Filing - Brookstone Holdings Corp.

Wellness, Entertainment & Travel Retailer Now Bankrupt

Brookstone Holdings Corp.

8/2/16

Source: Brookstone.com

Source: Brookstone.com

Almost exactly a month ago we asked “Is Brookstone Headed for Chapter 22? and wrote the following:

Go to Brookstone’s website for “Gift Ideas” and “Cool Gadgets” and then tell us you have any doubt. We especially liked the pop-up asking us to sign up for promotional materials one second after landing; we didn’t even get a chance to see what the company sells before it was selling us on a flooded email inbox. Someone please hire them a designer.

On Friday, Reuters reported that the company has hired Gibson Dunn & Crutcher LLP(remember them?) to explore its restructuring options. What’s the issue? Well, retail. Need there be any further explanation?

The company has roughly 120 stores (20 are in airports), approximately $45mm of debt and a Chinese sponsor in Sanpower Group Co Ltd.

This is a big change from when it first filed for bankruptcy in April 2014. At the time of that filing, the company had 242 stores and approximately $240mm in debt. The company blamed its over-levered capital structure for its inability to address its post-recession challenges. It doesn’t appear to have the same excuse now.

Upon emergence, it reportedly still had 240 stores. Clearly the company ought to have used the initial bankruptcy for more of an operational fix in addition to its balance sheet restructuring. While this could be a costly mistake, the company’s sponsor is a bit of a wild card here: Chinese sponsors tend to be more disinclined to chapter 11 proceedings than American counterparts. Will they write an equity check then?

Well, we now have our definitive answers. Yes. The company filed for bankruptcy earlier today. And whether Sanpower was disinclined to file or not, well…it’s in bankruptcy. And, it will not, at least not as of now, be writing an equity check.

The New Hampshire-based company describes itself as “a product development company and multichannel retailer that offer a number of highly distinctive and uniquely designed products. The Brookstone brand is strongly associated with cutting-edge innovation, superior quality, and sleek and elegant design.” Which is precisely why we plastered a “videocassette” emoji in our title. Because that description comports 100% with the way we view the brand. But we digress.

The company has clearly engaged in some downsizing since emerging from bankruptcy a few years ago; it notes that it currently operates 137 retail stores across 40 states with 102 of those stores located in malls and 35 in airports; it also carries 700 SKUs, the majority of which fall in one of three product categories (wellness, entertainment and travel). It sells across four product channels: mall retail, airport retail, e-commerce (brookstone.com and Amazon.com), and wholesale (including TV shopping which, we believe, means home shopping network sort of stuff). For fiscal year 2017, the company had net sales of $264mm and negative EBITDA was $60mm. For the first half of 2018, net sales were $74mm and negative EBITDA was $29mm. Annualize that first number and you’re looking at a pretty precipitous drop in revenue!

The company highlights the juxtaposition between its mall and retail sales channels. Whereas the former generated ‘17 net sales of $137.9mm and negative EBITDA of $30mm, the latter generated net sales of $37.7mm and “adjusted” EBITDA of $1.4mm. We haven’t seen the numbers but we’re guessing the adjustment takes this statement into account:

Moreover, the net sales and adjusted EBITDA figures do not tell the whole story with respect to the productivity of the Airport retail outlets. As described further below, supply chain issues have limited the sales potential that would otherwise be captured with a healthy network of suppliers. The Debtors believe that through the bankruptcy they can correct the supply chain issues and allow the airport stores to greatly increase their profitability.

🤔🤔 Seeing a lot of adjustments on the basis of “belief” these days.

Likewise, the company claims that aberrational externalities affected its e-commerce operations as well. There, the company claims $55.2mm in net sales and negative adjusted EBITDA of $1mm. The company believes that the discontinuation of its catalog mailings had a detrimental impact on its e-commerce (and store retail) numbers. It notes:

As with the airport retail segment, the net sales and adjusted EBITDA associated with the Debtors’ ecommerce segment is not reflective of its true potential due to supply chain difficulties. In addition, and as described further below, technology issues and a turnover of senior level management at the e-commerce segment led to underperformance at a segment that should be performing at a significantly higher level. The Debtors believe that the bankruptcy filing will afford the Debtors the opportunity to right the operational defects that have artificially stymied the overall profitability that should be incumbent to the Debtors’ online presence.

Finally, the company claims its wholesale business has a lot of demand and has been under-utilized due to the same supply chain issues affecting its other channels.

In other words, when we said earlier that “[c]learly the company ought to have used the initial bankruptcy for more of an operational fix,” we hit the nail on the head. The company notes:

Following the 2014 Bankruptcy, sales continued to lag almost immediately. For the years ended 2014 and 2015, net sales were pegged at approximately $420 million and $389 million respectively, while adjusted EBITDA was booked at negative $38 million and negative $24 million respectively. While a number of factors contributed to the underperformance, sourcing of products and supply chain difficulties were the major drivers.

But of course there’s an overall macro overlay here too:

The drop in net sales in 2016 and 2017 was further exacerbated by the decline in the mall model as a means for consumers to buy products of the type sold by Brookstone. During this time, foot traffic at mall locations decreased drastically, as consumers continued to seek out products online as a replacement for traditional brick and mortar shopping.

The company’s e-commerce efforts could not pick up the slack. It blames leadership changes, a new platform (and a loss of data and indexing that resulted), and the discontinuation of the hard copy catalog for this. The company notes:

Because the catalogs were directly responsible for a significant portion of the web traffic on the Debtors’ e-commerce site, the negative impact on the Debtors’ online sales was dramatic.

Anyone who thinks that e-commerce can survive independent of paper mailings ought to re-read that sentence. It also explains the fifteen Bonobos catalogs we get every week and the 829-pound Restoration Hardware calalog we receive every quarter. Remember the buzzword of the year: “multi-channel.” Case and point.

To make this already (too) long story short, Sanpower kept sinking money into this sinking ship until it finally decided that it was just throwing good money after bad. Callback to July when we said they’re disinclined to chapter 11…well, lighting millions of dollars on fire will make you a little more inclined. 💥💥

Powered by a $30mm DIP credit facility (not all new money: some will be used to refi out the ABL) from its prepetition (read: pre-bankruptcy) lenders, the company intends to use the bankruptcy filing to execute an orderly store closing process and market and sell the business. This is clearly why it went to great lengths to pretty up its e-commerce, mall and wholesale businesses in its narrative. Still, the company has been marketing the business for a month and, thus far, there are no biters. Per the agreement with its DIP lenders, the company has until September 2018 to effectuate its sale process. You read that right: a company that bled out over a period of years has two months on life support.

Major creditors include Chinese manufacturers and, as you might expect, the usual array of landlords, General Growth Properties ($GGP)Simon Property Group Inc. ($SPG), and Macerich Co. ($MAC). Given the positioning of the respective businesses, we wouldn’t expect much of a mall business to survive here regardless of whether a buyer emerges.

  • Jurisdiction: D. of Delaware (Judge Shannon)

  • Capital Structure: $70mm ABL Revolver (Wells Fargo NA) & $15mm Term Loan (Gordon Brothers Finance Company), $10mm second lien notes (Wilmington Trust), $39.4mm Sanpower Secured Notes, $46.6mm Sanpower Unsecured Notes

  • Company Professionals:

    • Legal: Gibson Dunn & Crutcher LLP (David Feldman, Matthew Kelsey, Matthew Williams, Keith Martorana, Jason Zachary Goldstein) & (local) Young Conaway Stargatt & Taylor LLP (Michael Nestor, Sean Beach, Andrew Magaziner)

    • Financial Advisor: Berkeley Research Group LLC

    • Investment Banker: GLC Advisors & Co. (Soren Reynertson)

    • Liquidator Consultants: Gordon Brothers Retail Partners LLC & Hilco Merchant Resources LLC

    • Claims Agent: Omni Management Group (*click on company name above for free docket access)

  • Other Parties in Interest:

    • DIP Agent: Wells Fargo NA (Morgan Lewis & Bockius LLP, Glenn Siegel, Christopher Carter & Burr & Forman LLP, J. Cory Falgowski)

    • DIP Term Agent: Gordon Brothers Finance Company (Choate Hall & Stewart, Kevin Simard, Jonathan Marshall & Richards Layton & Finger PA, John Knight)

    • Indenture Trustee: Wilmington Trust NA

New Chapter 11 Filing - FirstEnergy Solutions Corp.

FirstEnergy Solutions Corp. 

March 31, 2018

#MAGA!!

FirstEnergy Solutions Corp. ("FES"), the wholly-owned subsidiary of publicly-traded (non-debtor) FirstEnergy Corp. has filed a "freefall" bankruptcy in the Northern District of Ohio. FES is a provider of "unregulated"-yet-regulated energy-related products and services to retail and wholesale customers primarily in Illinois, Maryland, Michigan, New Jersey, Ohio and Pennsylvania. It owns and operates (a) fossil generating facilities (read: coal) in Ohio (three) and Philadelphia (one) through its FirstEnergy Generation subsidiary ("FG") and, (b) 3 nuclear generating facilities (two in Ohio and one in Philadelphia)through its FirstEnergy Nuclear Generation LLC ("NG") subsidiary. 

For those of you who aren't power geeks - and we confess that we are not - this filing gives a pretty solid primer on how United States' power production and distribution works. Or doesn't work - depending on your point of view, we suppose. We summarize some high points here but if you're especially nerdy and want to understand the power industry better, read docket number 55. You can find it via the case name link above. 

A big piece of this bankruptcy filing is the debtors' retail electricity business. Retail sellers of electricity are subject to state-applied "Renewable Portfolio Standards" ("RPS") that requires sellers to obtain a certain percentage or amount of its power supply from renewable energy sources. One way to comply is through the purchase of renewable energy credits ("RECs"). Historically, FES has obtained RECs to comply with the RPS via eight power purchase agreements entered into between 2003-2011 with various wind and solar power producers. But apparently things have changed considerably since then. And FES no longer wants the RECs. 

What's changed? Now FES's actual and projected sales are much lower. Per the company in more detail: 

"The main drivers to the collapse in prices include:
• Lower natural gas prices due to continued improvements in natural gas fracking;
• Excess generating capacity due in part to lower than expected load growth;
• Lower cost of construction for renewable technologies, and/or improved performance (e.g., higher capacity factors); and
• Surplus of RECs."

Also, future market prices and outlook for power and RECs are projected materially lower. RPS mandates are less demanding (#MAGA!!). And the supply of RECs is significantly greater. Said another way: energy disruption. From frackers pushing a rapid expansion in nat gas supplies which, in turn, caused plummeting electricity prices and reduced profits. From regulation and the rise of renewables. From energy efficient electronics. 

Per the company, "While the PPAs made sense to FES at the time they were entered into, a dramatic downturn in the energy market and prices of RECs now renders these contracts extremely burdensome and uneconomic to FES." They're also, according to the debtor, unnecessary: FES is phasing out its retail business and, today, expects to sell less than half of the amount of power this year that it sold in 2013. Consequently, FES seeks to reject those PPAs in bankruptcy.

Which is not the only PPA it seeks to reject. The debtor also seeks to shed its multi-party intercompany PPA pursuant to which it and several other power companies purchase power generated via fossil fuel from the Ohio Valley Electric Corporation ("OVEC"). The debtor alleges that this obligation is priced at above-market rates. And because FES sells very little wholesale power emanating out of the OVEC PPA, it stands to lose approximately $268 million from the deal. Yikes. 

The issue, though, is whether the rejection of the nine PPAs will cause disruption to the continued supply of wholesale electricity or impact the reliability of the transmission grid in the regional transmission organization that governs FES and FG. That generally means YOUR electricity - if you live in the Northeast. Naturally, the debtor argues it won't. The federal government may think otherwise. And this is precisely why the company filed an action seeking a declaratory judgment and injunction against the Federal Energy Regulatory Commission ("FERC") to prevent the feds from hindering -- on the basis of the Federal Power Act -- the company's attempts to reject the PPAs under the federal bankruptcy code. FERC regulates the wholesale power market. It is also why the company has filed a request for assistance from Rick Perry, President Trump's Energy Secretary. This is some real dramatic sh*t folks: a conflict between federal statutes with efforts for executive branch intervention. Someone dial up Daniel Day-Lewis and bring him out of retirement: this could be the next "Lincoln." 

So, in a nutshell: the company filed for bankruptcy because it needs to leverage the bankruptcy code's debtor-friendly provisions to shed some burdensome contracts - including the PPAs. It also needs to address its cost structure, its over-levered balance sheet (in terms of interest payments and near-term maturities), and lease payments under certain sale-leaseback arrangements related to one of its power facilities. Said another way, this is a full-stop restructuring: both operational and financial in nature. There is a "Process Support Agreement" with various parties in interest which reflects a good faith commitment to cooperate on first day motions, implementation of employee retention and severance programs, and establishing a protocol for the disposition of company assets. Sounds great but it doesn't really promise any certainty given the various claims and regulatory issues. Buckle your seat belts. 

Some additional things of note:

  • "Just when I thought I was out, they pull me back in!" (Long Don Corleone). Ironically in the week that Westinghouse Electric Corp. emerged out of its own bankruptcy proceeding, it may now find itself back in bankruptcy court for purposes of adjudicating its $2.36 million trade claim.
  • Coal (#MAGA!!). A first order of business is the debtor is seeking to reject its coal transportation agreements with BNSF Railway Company ((owned by Berkshire Hathaway ($BRK.A)) and Norfolk Southern Railway Company ($NSC). Why? It expects to order 200,000 tons of coal less than the 2.5 million tons of coal minimum requirement delineated in the contract. The debtor claims that rejection of the contract will save it $105.6 million over the next 12 months as it replaces rail with barge transportation. 
  • Commodities. The company also seeks to reject certain uranium supply contracts because (i) it already has enough uranium inventory for the rest of 2018 and 2019, (ii) the spot price for uranium has dropped precipitously since entering into the agreements (from $36 and $48 per pound, respectively, to $22 per pound), and (iii) there is "ample supply of uranium available in the market." 
  • Professional Retentions: Two law firms represent the Ad Hoc Group of Holders of the 6.85% Pass Through Certificates due 2034 because George Davis departed O'Melveny & Myers LLP for Latham & Watkins LLP. 
 
  • Jurisdiction: N.D. of Ohio (Judge Koschik)
  • Capital Structure: $3.8 billion funded debt     
    • FES

      • $700 million secured revolving credit facility, ~$332 million of '21 6.05% unsecured notes; (c) ~$363 million of '39 6.80% unsecured notes; and (d) $150 million revolving credit note with Allegheny Energy Supply Company, LLC under which $102 million is currently outstanding and is due on April 2, 2018. 

    • FG

      • ~$328 million of secured fixed-rate pollution control revenue notes ("PCNs"); ~$677 million of unsecured fixed-rate PCNs

    • NG

      • ~$285 million of secured PCNs; ~$842 million of unsecured PCNs

  • Company Professionals:
    • Legal: Akin Gump Strauss Hauer & Feld LLP (Ira Dizengoff, Lisa Beckerman, Brad Kahn, Scott Alberino, Kate Doorley, David Applebaum, Todd Brecher, Sean O'Donnell, Rachel Presa, Brian Carney, Abid Qureshi, Joseph Sorkin, David Zensky) & (local) Brouse McDowell LPA (Marc Merklin, Kate Bradley, Bridget Franklin) & (conflicts) Willkie Farr & Gallagher LLP
    • Financial Advisor/CRO: Alvarez & Marsal North America LLC (Charles Moore)
    • Investment Banker: Lazard Ltd. 
    • Claims Agent: Prime Clerk LLC (*click on company name for docket)
    • Special Nuclear Regulatory Counsel: Hogan Lovells US LLP
    • Industry Consultants: ICF International Inc.
    • Special Litigation Counsel: Quinn Emanuel Urquhart & Sullivan LLP
    • Tax Consultant: KPMG US LLP
    • Communications Consultant: Sitrick and Company
  • Other Parties in Interest:
    • Board of Directors of FirstEnergy Corp. 
      • Legal: Squire Patton Boggs (US) LLP (Stephen Lerner, Peter Morrison, Julia Furlong)
    • Wilmington Savings Fund Society FSB
      • Legal: KIlpatrick Townsend & Stockton LLP (Todd Meyers, Michael Langford) & (local) McDonald Hopkins LLC (Michael Kaczka, Scott Opincar, Maria Carr)
    • Indenture Trustee: Bank of New York Mellon Trust Company, N.A.
    • Indenture Trustee to PCNs: UMB Bank, National Association
    • Ad Hoc Group of Holders of the 6.85% Pass Through Certificates due 2034
      • Legal: O'Melveny & Myers LLP & Latham & Watkins LLP
      • Financial Advisor: Guggenheim Partners LLC
    • Ad Hoc Group of Holders of PCNs issued by FG and NG
      • Legal: Kramer Levin Naftalis & Frankel LLP 
      • Financial Advisor: GLC Advisors & Co.
    • Contract Counterparty: BNSF Railway Company
      • Legal: Whitmer & Eherman LLC (Mary Whitmer, James Ehrman, Robert Stefancin)
    • Non-debtor Parent: FirstEnergy Corp.
      • Legal: Jones Day (Heather Lennox, Thomas Wilson)

New Chapter 11 Filing - TerraVia Holdings Inc.

TerraVia Holdings Inc.

  • 8/1/17 Recap: TerraVia, a publicly-traded (Nasdaq: $TVIA) "next-generation" algae-based food company based out of San Francisco filed for bankruptcy. The company has a stalking horse bidder lined up to buy it for $20mm plus certain assumed liabilities and seeks to jam this case through bankruptcy in about 6 weeks lest it run out liquidity in the process (even with a proposed $10mm DIP); it claims that more time is unnecessary given that it ran a robust marketing process pre-filing that included outreach to over 100 parties. We'll let the company economics do the rest of the talking (see below).
  • Jurisdiction: (Judge Sontchi)
  • Capital Structure: $144.2mm 5% '19 convertible senior subordinated notes (GLAS Trust Company LLC) & $33.475mm 6% '18 convertible senior subordinated notes (Wilmington Trust)   
  • Company Professionals:
    • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Steven Szanzer, Adam Shpeen, Benjamin Kaminetzky) & (local) Richards Layton & Finger P.A. (Mark Collins, Amanda Steele)
    • Financial Advisor: 
    • Investment Banker: Rothschild & Co. (Tero Janne)
    • Claims Agent: KCC (*click on company name above for free docket access)
  • Other Parties in Interest:
    • DIP Agent: Wilmington Savings Fund Society FSB & Ad Hoc Consortium of Holders of Convertible Senior Subordinated Debt (Gilead Capital LP, Higher Ground SICAV PLC Core Wealth Fund, Lazard Asset Management LLC, Passport Capital LLC, Wolverine Asset Management LLC, Zazove Associates LLC)
      • Legal: Brown Rudnick LLP (Robert Stark, Steven Levine, Brian Rice, Kellie Fisher) & (local) Ashby & Geddes P.A. (William Bowden, Gregory Taylor, Katharina Earle)
      • Financial Advisor: GLC Advisors & Co. LLC
    • Passport Capital
      • Legal: Shearman & Sterling LLP (Joel Moss) & (local) Drinker Biddle & Reath LLP (Patrick Jackson)
    • 6% Notes Successor Trustee: Wilmington Trust NA
      • Legal: Katten Muchin Rosenman LLP (Craig Barbarosh, Karen Dine, Jerry Hall) & (local) Morris James LLP (Eric Monzo)
    • JV Partner: Bunge Global Innovation LLC
      • Legal: Jones Day (Joshua Morse)
    • Silicon Valley Bank
      • Legal: Troutman Sanders LLP (Harris Winsberg, Stephen Roach) & (local) Chipman Brown Cicero & Cole LLP (William Chipman Jr., Mark Olivere)
    • Corbion NV
      • Legal: Baker & McKenzie LLP (Debra Dandeneau, Frank Grese) & (local) Whiteford Taylor & Preston LLC (L. Katherine Good, Aaron Stulman)

Updated 8/26/17

First Day Declaration.

First Day Declaration.

New Filing - Basic Energy Services Inc.

Basic Energy Services Inc.

  • 10/24/16 Recap: Publicly-traded E&P servicer files prepackaged chapter 11 cases to equitize $824.6mm of unsecured debt and bolster liquidity via $125mm rights offering.  
  • Jurisdiction: D. of Delaware
  • Capital Structure: $100mm '19 ABL, $165mm '21 13.5% TL, $475mm '19 7.75% senior notes, $300m '22 7.75% senior notes. 
  • Company Professionals:
    • Legal: Weil (Ray Schrock, Ronit Berkovich, Jessica Liou, Arkady Goldinstein, David Zubkis, Elizabeth Kagedan, Alexander Welch) & (local) Richards Layton (Daniel DeFranceschi, Michael Merchant, Brendan Schlauch, David Queroli, Zachary Shapiro)
    • Financial Advisor: AlixPartners (David Johnston, Charles Braley, Brian Huffman)
    • Investment Banker: Moelis & Co. (Adam Keil)
    • Claims Agent: Epiq Bankruptcy Solutions LLC (*click on company name for docket)
  • Other Parties in Interest:
    • ABL Admin Agent: Bank of America
      • Legal: Vinson & Elkins (Paul E. Heath) & (local) Morris Nichols (Robert Dehney, Eric Schwartz, Marcy McLaughlin)
    • Term & DIP Lenders (Goldman Sachs Merchant Banking, Riverstone Holdings LLC)
      • Legal: Davis Polk (Marshall Heubner, Darren Klein, Adam Shpeen) & (local) Potter Anderson LLP (Jeremy Ryan, R. Stephen McNeill)
      • Investment Banker: PJT Partners Inc.
    • Unsecured Bondholders:
      • Legal: Fried Frank (Brad Scheler, Peter Siroka, Carl Stapen) & (local) Blank Rome LLP (Michael DeBaecke)
      • Investment Banker: GLC Advisors
    • Agent to Postpetition Lenders: US Bank
      • Legal: Lowenstein Sandler LLP (Jeffrey Prol, Nicholas Vislocky, Theodore Sica)
    • Bank of America Leasing & Capital LLC
      • Legal: Norton Rose & Fulbright (Kristian Gluck, Greg Wilkes) & (local) Womble Carlyle (Kevin Mangan)
    • Creditors (Ascribe Capital, Atlas Enhanced Master Fund, Broad Street Energy Advisors, Blackgold Capital Management, Brigade Capital Management, Covalent Partners, Susquehanna Advisors Group Inc., Phoenix Investment Advisor LLC, Silver Point Capital LP, Whitebox Advisors LLC)

Updated 12/30/16