New Chapter 11 Filing - Sizmek Inc.

Sizmek Inc.

March 29, 2019

New York-based Sizmek Inc., an online advertising campaign management and distribution platform for advertisers, media agencies, and publishers, filed for bankruptcy in the Southern District of New York. The company indicates that it lost access to capital when Cerberus Business Finance LLC…took control of the Company's bank accounts and sought to divert customer receivables…” and filed, in large part, to have access to its lenders’ cash collateral. Major creditors include players in the ad world, including Google Inc. ($GOOGL), Facebook Inc. ($FB) and AOL ($VZ)(yes, AOL is still, technically, a “player” in something).

The company is a portfolio company of private equity firm, Vector Capital, which took the company private — merely two years after its IPO — via a 2016 all-cash tender offer for the outstanding shares of common stock for $3.90/share, a 65% premium over the then-30-day weighted average trading price. Kirkland & Ellis LLP represented Vector in the transaction.* In 2017, the company made a $145mm acquisition of Rocket Fuel, another struggling adtech company. And then shortly thereafter, AdExchanger reported merely two years later that Vector was looking to divest the company.

We’ll have more on this once the docket is updated.

*Interestingly, after filing, Katten Muchin Rosenman LLP replaced Kirkland & Ellis LLP as debtors’ counsel in these cases.

  • Jurisdiction: S.D. of New York (Judge )

  • Capital Structure: $172mm funded debt

  • Professionals:

    • Legal: Kirkland & Ellis LLP (James Sprayragen, Stephen Hessler, Marc Kieselstein, Justin Bernbrock)

    • Replacement Legal: Katten Muchin Rosenman LLP (Steven Reisman, Cindi Giglio, Jerry Hall, Peter Siddiqui)

    • Board of Directors: Eugene Davis, Mark Grether, Tom Smith, Marc Heimowitz

    • Financial Advisor: FTI Consulting Inc.

    • Claims Agent: Stretto (*click on the link above for free docket access)

  • Other Parties in Interest:

    • Prepetition Secured Agent: Cerberus Business Finance LLC

      • Legal: Klee Tuchin Bogdanoff & Stern LLP (David Fidler, Whitman Holt, Michael Tuchin, Thomas Patterson)

Updated 4/1/19 6:08 CT (#10)

New Chapter 11 Bankruptcy Filing - Z Gallerie LLC

Z Gallerie LLC

March 10, 2019

In January's "What to Make of the Credit Cycle. Part 25. (Long Warning Signs)," we discussed the leveraged loan market and, among many other things, highlighted the then-recent reports that KKR was planning to cut its leveraged loan exposure.

It seems pretty safe to say that this decision was partially informed by KKR's recent experience managing the $2b ex-Blackstone loan fund, Franklin Square Investment Corp. According to reporting by The Financial Times back in December, the Franklin Square fund (now FS-KKR Capital Corp) wrote down five loans between April and December last year. That must be lovely news for investors in the publicly-traded business development corporation ($FSK). Per the FT:

"Executives at Blackstone’s GSO credit arm approved the original loans. But KKR is now responsible for collecting the cash and assessing the loans’ value, and has taken a much gloomier view of their prospects. It has placed 28 percent of the portfolio on a list of deals that require close monitoring or are at risk of losing money, according to securities filings.  

'KKR is a formidable group, but they probably weren’t anticipating the losses that came forth in the GSO book,' said Finian O’Shea, an analyst who covers private credit funds for Wells Fargo."

Strangely, this is obviously good news for professionals with restructuring experience:

"KKR’s credit division has been hiring restructuring specialists to beef up a dedicated team charged with salvaging value from troubled investments — a move that executives there say was planned when the FS-KKR portfolio began to deteriorate. KKR declined to comment, as did the fund’s co-manager, Franklin Square Investments."

Those specialists might get increasingly busy. FSK owned, as of December 31, 2018, first lien loans in Acosta Inc. (written down by the BDC's board to "fair value" from $19.2mm to $11.8mm), Charlotte Russe (yikes), CTI Foods (which was written down by $900k), and Z Gallerie (which had been written down from $31.9mm to $11.3mm). It also owns second lien paper in Belk Inc. (written down from $119.1mm to $94.7mm), CTI Foods, and Spencer Gifts LLC (written down from $30mm to $25.6mm). And subordinated debt in Sungard (written down by 80%). The BDC's equity holdings in Charlotte Russe and Nine West are now obviously worthless. 

Lots of people are focused on BDCs given lending standards during this long bull run. If that portfolio is any indication, they should be. 

*****

Speaking of Z Gallerie, it filed for bankruptcy last weekend in the District of Delaware. It is a specialty-niche furniture retailer that has 76 stores across select states in the US. And this is its second trip into bankruptcy in 10 years. While we think that's too large a spread to really be a "chapter 22," its an ignominious feat nonetheless. 

So another retailer in bankruptcy. We're all getting bored of this. And we're also getting bored of private equity firms helping drive companies into the ground. In this instance, Brentwood Associates, a $2.4b Los Angeles-based private equity purchased a 70% stake in the company in 2014 (and took two seats on the company's board of directors). At the time, Brentwood had this to say about the transaction:*

"Z Gallerie is a differentiated retailer in the home furnishings market with a very unique merchandise assortment. We see a significant opportunity to accelerate growth of the current retail store base."

But…well...not so much. This statement by the company's CRO is a pretty damning assessment of Brentwood's claim that they "build[] category-defining businesss through sustained, accelerated growth”:

"Following a transaction in 2014 in which the Zeidens sold majority control of Z Gallerie to Brentwood Associates (“Brentwood”), Z Gallerie’s overall performance has declined significantly. The reasons for these declines are mostly self-imposed: (i) a store footprint expansion did not meet performance targets, (ii) the addition of the Atlanta distribution center disrupted operations and increased costs, and (iii) the failure to timely invest enough capital in their e-commerce platform limited its growth. These missteps were exacerbated by macroeconomic trends in the brick and mortar retail industry and lower housing starts. As a result, net revenue and EBITDA declined during fiscal year 2018. With Z Gallerie’s current cash balances of less than $2 million, and no availability under its secured credit facilities, the commencement of these chapter 11 cases became necessary to ensure access to capital going forward."

 That's brutal. Something tells us that Z Gallerie is going to make a swift disappearance from Brentwood's website.

Anyway, the company includes all kinds of optimistic language in its bankruptcy filing papers about how, after it closes 17 stores and executes on its business plan, it will be poised for success. It intends to enhance its e-commerce (currently 20% of sales), revamp its Atlanta distribution center, launch social media campaigns (long Facebook), and better train its employees (long Toys R Us PTSD). The company claims numbers have already been on the upswing since the holidays, including February same-store sales up 5% YOY. 

Current optimism notwithstanding, make no mistake: this is yet another instance of value destruction. This is the company's balance sheet (at least some of which dates back to 2014 and is related to Brentwood's purchase):

Screen Shot 2019-03-13 at 9.15.20 AM.png

That $91mm senior secured term loan? Yeah, that's where KKR sits. 

The company has a commitment for a $28mm DIP credit facility from KeyBank which will effectively rollup the senior secured revolving loans and provide $8mm in new money. 

The company has already filed a "hot potato" plan of reorganization — in other words, the lenders will take the company if they have to, but they don't really want to, and so they're happy to pass it on — and have a banker actively trying to pass it on (Lazard Middle Market) — to some other schmuck who thinks they can give it a go. In other words, similar to the plan proposed earlier this year in the Shopko case, this plan provides for the equitization of the allowed secured revolver and term loan claims IF the company is otherwise unable to find a buyer to take it off their hands and pay down some of their loans with cash. The company filed bid procedures along with the plan; it does not have a stalking horse bidder lined up. The company estimates a 4 month timeline to complete its bankruptcy.

We can't imagine that KKR is stoked to own this company going forward. And we can only imagine what kind of projections the company will put forth to convince the court that this thing is actually feasible: the plan has a blank space for the exit facility so that exit structure is also apparently a work in progress.

In any event, given recent loan underwriting standards, KKR, and other BDCs, might want to get used to owning credits they never expected to. 

*Brentwood was represented in the transaction by Kirkland & Ellis LLP, now counsel to the company. The company drops in a footnote that any potential claims against Brentwood and its two directors will be conducted by Klehr Harrison Harvey Branzburg LLP, a firm we’re sure was hired with absolutely zero input by Kirkland and/or the two Brentwood directors. Two independent directors are currently sitting on the board.

  • Jurisdiction: District of Delaware (Judge: Laurie S. Silverstein)

  • Capital Structure: see above

  • Professionals:

    • Legal: Kirkland & Ellis LLP (Joshua Sussberg, Justin Bernbrock, Joshua Altman, Emily Kehoe) & (local) Klehr Harrison Harvey Branzburg LLP (Dominic Pacetti, Michael Yurkewicz)

    • Financial Advisor: Berkeley Research Group LLC (Mark Weinsten)

    • Investment Banker: Lazard Middle Market LLC (Jason Cohen)

    • Claims Agent: Bankruptcy Management Solutions, Inc. d/b/a/ Stretto (*click on the link above for free docket access)

  • Other Parties in Interest:

    • DIP Agent: Keybank NA

      • Legal: Buchanan Ingersoll & Rooney PC (Mary Caloway, Mark Pfeiffer)

    • KKR Credit Advisors US LLC

      • Legal: Proskauer Rose LLP (Vincent Indelicato, Christ Theodoridis) & (local) Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Matthew Talmo)

New Chapter 11 Bankruptcy Filing - DIESEL USA, Inc.

DIESEL USA, Inc.

March 5, 2019

Three things immediately occurred to us when we saw the news that Diesel USA Inc. filed for bankruptcy in the District of Delaware:

  1. That makes perfect sense — Jersey Shore went off the air a long time ago;

  2. This is “The Mattress Firm Effect” in action — a retailer using a quick trip in bankruptcy to, on an expedited basis, flush out some burdensome leases and otherwise leave parties in interest unimpaired; and

  3. More surprising than the company filing for bankruptcy is the law firm filing it for bankruptcy. Arent Fox LLP, while a fine firm for sure, isn’t exactly known for its debtor-side chops. Just saying.

The numbers around this one are…well…interesting. The company’s brick-and-mortar retail operations consist of 28 retail store locations in 11 states, comprised of 17 full-price retail stores and 11 factory outlet stores. Net sales were:

  • In 2014: $83mm for full-price retail and $42mm for outlet (Total: $125mm); and

  • In 2018: $38mm for full-price retail and $34.5mm for outlet (Total: $72.5mm).

In terms of percentages:

  • In 2014: brick and mortar represented 64% of net sales; and

  • In 2018: brick and mortar represented 70% of net sales.

We see a couple of significant problems here.

Despite the superlatives that the company’s CRO generously uses to describe the company, i.e., “cutting-edge,” and “cultural icon,” the numbers reflect a BRAND — let alone the business — in significant trouble. Sure, net sales are down generally, but the distribution has gotten wildly askew. The numbers reflect a bare reality: Diesel simply isn't a brand people will pay full price for anymore. This couldn’t be more stark. And that’s a big problem when the company is (or was) party to expensive height-of-the-real-estate-market leases in prime locations like Manhattan’s Fifth Avenue. Diesel, quite simply, isn’t “Fifth Avenue,” let alone “Madison Avenue.”* We’re not convinced the company is being realistic when it says that it has “retained a loyal customer base.” The numbers plainly say otherwise. Moreover, in an age where digital sales are increasingly more important, the business has become MORE dependent on brick-and-mortar as opposed to its wholesale and e-commerce channels.**

But don’t take our word for it. Here’s the company’s CRO:

…in 2015 prior management implemented a strategic initiative that was focused on repositioning Diesel stores and products in premium locations and with premium customers so as to place them side-by-side with other premium fashion brands across the retail, online, and wholesale platforms. Unfortunately, since its implementation, the Debtor’s net sales have significantly decreased while its losses have significantly increased.

The market has spoken: Diesel is, according to the market, simply not “premium.”

And by “market” we also mean wholesalers. The company opted to stop distributing its products to wholesale partners “that were deemed not to fit the premium image.” Now, we can only imagine that included discount retailers. Basically, SOME OF THE RETAILERS WHO HAVE PERFORMED THE BEST OVER THE LAST SEVERAL YEARS. But wait: it gets even worse: the wholesale customers the company DID retain pursued voluminous “chargebacks.” Per the company:

As is common in the retail industry, the Debtor provides certain customers with allowances for markdowns, returns, damages, discounts, and cooperative marketing programs (collectively, the “Chargebacks”). If the Debtor’s customers fail to sell the Debtor’s products, they generally have the right to return the goods at cost or issue Chargebacks, which are netted against the Debtor’s accounts receivable. Due to mounting Chargebacks from wholesale customers, the Debtor was forced to significantly reduce its wholesale activities in recent years.

Basically, nobody is buying this sh*t. Not in stores. Not in wholesale.

And, yet, the company holds premium leases:

The primary means of implementing the 2015 strategy was to reposition the Debtor’s full-price retail and outlet stores to “premium”, high-profile, and high-visibility locations, which was executed by opening certain new stores and relocating others to “premium” locations while closing others deemed not to fit the new strategic positioning model. The result was, despite the losses suffered in connection with the Fifth Avenue store, management’s negotiation and entry into several expensive, long-term leases for certain of the Debtor’s retail locations, such as the Debtor’s “Flagship” store on Madison Avenue, which do not expire by their terms until 2024-2026. Of course, it was then (and remains today) an inopportune time to make long-term commitments to costly retail leases and the significantly increased lease expenses have not been offset by increased sales, which, in fact, have dropped precipitously.

…numerous of the Debtor’s stores are producing heavy losses. The Debtor’s unprofitable stores combined to produce negative EBITDA of approximately $10.7 million in 2018, nearly all of which flowed from full-price retail stores. The Debtor’s profitable stores are not enough to off-set the losses, as the 17 fullprice stores combined to produce negative EBITDA of approximately $8.7 million in 2018.

Now, the company does indicate that certain (seemingly outlet) stores remain profitable, as do the wholesale and e-commerce operations.*** So, there’s that. New management is in place and their plan includes (a) using the BK to negotiate with landlords, shutter some locations, shutter and relocate others, opening new smaller stores and refit existing locations; (b) deploying influencer marketing generally and aiming more efforts towards females (and hoping and praying that athleisure — a term we didn’t see ONCE in the entire first day declaration — doesn’t continue to hold sway and steer people away from jeans, generally);**** (c) growing e-commerce; and (d) revitalizing the wholesale business with key selective wholesale partners. This plan is meant to take hold in the next three years and “will require significant capital investments.” (PETITION Note: cue the chapter 22 preparation). The company intends to effectuate its new business plan via a plan of reorganization pursuant to which it will reject certain executory contracts. All in, the company hopes to be confirmed in roughly 5 weeks. Aggressive! But, like Mattress Firm, trade creditors are “current” and there’s no debt otherwise, so the schedule isn’t entirely out of the realm of possibility.

But this is the part that REALLY gets us. If you’ve been reading PETITION long enough — particularly our “We Have a Feasibility Problem” series — you know by now that you ought to be AWFULLY SKEPTICAL of management team’s rosy projections. Per the company:

The Debtor’s projections indicate that the Reorganization Business Plan will return the Debtor to stand-alone profitability by 2021 assuming successful store closures through this Chapter 11 Case, thereby ensuring its ability to continue operating as a going-concern, saving over 300 jobs, and creating new ones through the new store openings.

Generally, we’ll take the under. Though, we have to say: at least they’re not audaciously projecting a miraculous profit in 2019.

How will they achieve all of these lofty goals? The company’s foreign parent will invest $36mm over the three-year period of the business plan because…well…why the hell not? Everyone loves a Hail Mary.


*The company suffered from an ill-advised and poorly-timed real estate spending spree. Between 2008 and 2015, right as brick-and-mortar really started to decline and e-commerce expand, the company expended $90mm on leases. As for Fifth Avenue, per the company, “the Debtor’s store on Fifth Avenue in Manhattan, which opened in 2008 and closed in 2014, by itself received approximately $18 million in capital expenditures during its tenure while generating substantial losses.

**The company doesn’t appear to have put much into its e-commerce growth. While e-commerce now represents 12% of net sales, sales are only incrementally higher in absolute numbers (from $8mm in 2014 to $12mm in 2018). The wholesale channel, on the other hand, has gone in the opposite direction. Net sales went from $61mm (2014) to $19mm (2018) and now represent only 19% of net sales (down from 32%).

***It seems, though, that outlet stores, wholesale and e-commerce resulted in negative $2mm EBITDA if the math from the above quote is correct. Curious.

****Score for Facebook Inc. ($FB)!


  • Jurisdiction: D. of Delaware (Judge Walrath)

  • Professionals:

    • Legal: Arent Fox LLP (George Angelich, David Mayo, Phillip Khezri) & (local) Young Conaway Stargatt & Taylor LLP (Pauline Morgan, Kenneth Enos, Travis Buchanan)

    • Claims Agent: Bankruptcy Management Solutions d/b/a Stretto (*click on the link above for free docket access)

  • Other Parties in Interest: