💥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 ⬇️.

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

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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…

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…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.

🇺🇸Forever 21: Living the (American) Dream🇺🇸

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Back in June we kicked off coverage of Forever 21 Inc. with “💥Nothing in Retail is "Forever💥".

We then issued quick follow-ups in “💥Fast Forward: Forever21 is a Hot Mess💥” and “🍩Forever21 is Forever F*cking Up.🍩”

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Forgive us, then, for feeling like the company’s inevitable bankruptcy filing — which happened earlier this week — was a wee bit anticlimactic. After all, we all knew it was coming. As such, we felt the need to crank up some Kanye West to help get us through this additional coverage…

What you doing in the club on a Thursday?
She say she only here for her girl birthday
They ordered champagne but still look thirsty
Rock Forever 21 but just turned thirty — Kanye West in “Bound 2”

Just kidding, y’all. Kanye is garbage. We don’t listen to Kanye.*

Anyway, we’ve talked time and time again about how the papers that accompany a company’s chapter 11 bankruptcy petition are a perfect opportunity for a company to frame the narrative for the judge, parties in interest, the media and more. A company’s First Day Declaration, in particular, is the bankruptcy equivalent of home field advantage. Coupled with the first day hearing — usually held within a day or two of the bankruptcy filing — a debtor can leverage the First Day Declaration and the opportunity to present first to a courtroom to gain some sympathy from the judge for their current predicament and plant the seeds in the judge’s ears as to the direction of the case.

Except, over time, the judges must begin to get bored. After all, repetitive themes begin to emerge when you track bankruptcy cases. Themes like “the retail apocalypse.” Blah blah blah. The “Amazon Effect.” Oh, f*ck off. Disruption overcame the business! Zzzzzzz. Private equity is evil because they dividended themselves all of the company’s value! Yawn. There’s too much debt on the balance sheet! Typical. The lenders won’t play ball! Mmmm hmmm. The prior management was corrupt AF. Yup, it happens. Weather this year was uncharacteristically bad. Riiiight…that’s retail excuse-making 101.

And, so, it was with great excitement that we read that the Forever 21 bankruptcy stemmed from…wait for it…the American Dream. That’s right, the American Dream.

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In other words, this is a story about unbridled ambition and optimism.

*****

Here’s the short version: two immigrants came to this country in the early 80s from South Korea. They had nothing; they worked hard; they sought out opportunity:

During his time as a gas station attendant, Mr. Chang took notice of the customers that drove the most luxurious cars—the customers working in the garment industry. This realization piqued Mr. Chang’s interest. He recognized that together with his wife, they were perfectly suited to enter the fashion industry. This would enable the couple to capitalize on Mr. Chang’s relationship-building prowess and Mrs. Chang’s keen sense of fashion.

Putting aside how shady the notion of your gas station attendant creeping on you is, this is pretty amazing sh*t.

Mrs. Chang, and her nearly-clairvoyant ability to predict trends, were part of the catalyst that boosted Forever 21’s upswing.

Take note, people: this is the kind of pandering you should get when you pay $1,600/hour.

Anyway, over the years, the Changs built a business that employed tens of thousands of people and generated billions in sales. The Changs put their two daughters through ivy league schools and they subsequently joined the family business. This is a beautiful story, folks. Especially so in today’s fraught political environment where immigration remains a hot button issue. Together, as a family, the Changs grew this company to be a behemoth:

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And therein lies the rub. The company went from 7 international stores in 2005 to 251 by 2015.

Unfortunately, this rapid international expansion challenged Forever 21’s single supply chain and the styles failed to resonate over time across other continents despite its initial success.

It appears that the same entrepreneurial spirit that allowed the Changs to conquer the US led them astray internationally. Indeed, those European and Asian adventures — and the Chang daughters’ vanity project, Riley Rose — proved to be too costly. As you can see, while the domestic business has been in decline,** it still shows some promise. The international business, on the other hand, has really sucked the air out of the business⬇️.

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Sure, aside from the international issue, some of the usual excuses exist. Mall traffic is down. Not enough attention to e-commerce. Product assortment could have been better. The company had borrowing base issues under its asset-backed loan. Yada yada yada. But this doesn’t appear to be the absolute train wreck that other recent retailers have been. At least not yet.

So what now?

At the first day hearing, company counsel spared us any in-court singing,*** but did rely on some not-particularly-complex imagery. He said the company’s predicament is like a puzzle and that, to paraphrase, you sometimes just need to get all of the pieces to fit.

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Those pieces are:

The Footprint. Right-sizing the business by shuttering underperforming locations, domestically and internationally. The company currently spends $450mm in annual rent, spread across 12.2mm total square feet. The company will close 178 stores in the US and 350 in total. In other words, the company is mostly erasing its overzealous expansion; it will focus on selling cheaply made crap to Americans and our southern friends down in Latin America rather than poisoning the clothes racks in Canada, Europe and Asia. The new footprint will be around 600 stores. Or, at least, that’s the plan for now. Let’s pour one out for the landlords. Here is CNBC mapping out where all of the closures are and which landlords are hit the most. Also per CNBC:

At one point, two of Forever 21′s largest landlords, Simon Property Group and Brookfield Property Partners, were trying to come up with a restructuring deal where they would take a stake in the company to keep it afloat. It would’ve been similar to when Simon and GGP, which is now owned by Brookfield, bought teen apparel retailer Aeropostale out of bankruptcy back in 2016. But talks between Forever 21 and its landlords fell through, according to a person familiar with the talks. Simon and Brookfield are listed in court papers as two of Forever 21′s biggest unsecured creditors. Simon is owed $8.1 million, while Brookfield is owed $5.3 million, and Macerich $2.7 million.

Only one of the locations marked for closure, however, belongs to Simon Property Group ($SPG).

The company notes:

To assist with the initial component of the strategy, Forever 21’s management team and its advisors worked with its largest landlords to right size its geographic footprint. Four landlords hold almost 50 percent of its lease portfolio. To date, Forever 21 and its landlords have engaged in productive negotiations but have not yet reached a resolution. The parties have exchanged proposals and diligence is ongoing. Forever 21 looks forward to continuing to work with its landlords to reach a mutually agreeable resolution and proceeding through these chapter 11 cases with the landlords’ support.

In tandem with these negotiations, Forever 21 and its advisors met with nearly all of its individual landlords to discuss potential postpetition rent concessions and other relief on a landlord-by-landlord basis. Many of these smaller, individual negotiations proved more fruitful than negotiations with the larger landlords. Although Forever 21 has not finalized the terms of a holistic landlord deal as of the Petition Date, Forever 21 anticipates that good-faith negotiations with its landlord constituency will continue postpetition, and that all parties will work together to reach a consensual, value-maximizing transaction.

Company counsel asserts that, for landlords, Forever 21 is “too big to fail.” This kinda feels like this:

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But don’t worry: the A Malls are totally fine. 

And don’t worry about the loans (CMBX) at all. Noooooo.

Merchandising. Getting “Back-to-Basics” on the merchandising front and focus on the company’s “core customer base.” Here is Bloomberg’s Jordyn Holman casting some shade on this plan. And here is Bloomberg’s Sarah Halzack. While the bankruptcy papers certainly don’t highlight the competition, bankruptcy counsel made a point of highlighting H&MZara and Fashion NovaRetail Dive writes:

They did not grow with their target customer and the Millennials have graduated to Zara & H&M,’ Shawn Grain Carter, professor of fashion business management at the Fashion Institute of Technology, told Retail Dive in an email. ‘Gen. Z is more interested in rental fashion and vintage hand-me-downs because they are more environmentally conscious.’

Interestingly, Stitch Fix Inc. ($SFIX) was up 5% on Monday while the RealReal Inc. ($REAL) was up 15%. (PETITION Note: both got clobbered on Tuesday, but so did everything else).

The Washington Post piles on:

“Slimming down the operation and reducing costs is only one part of the battle,” Neil Saunders, managing director of GlobalData Retail, said in a note to clients. “The long-term survival of Forever 21 relies on the chain creating a sustainable and differentiated brand. This is something that will be very difficult to accomplish in a crowded and competitive sector.

Indeed, we’ve been writing for some time now that fast fashion seems out of sorts. Going “back to basics” may not actually be the right move in the end.

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🤔

Vendor Management. A quick digression: back in May, we wrote about Modell’s Sporting Goods avoidance of bankruptcy. Mr. Modell himself worked the phones and reassured most of his vendors, prompting them to continue doing business with the shrinking sporting goods retailer. This is a feature that you don’t get in PE-backed retail bankruptcies where you have hired guns on management. There, Mr. Modell’s legacy was at stake. He hustled. Likewise, here, the Changs personal business is threatened. Accordingly, the company met with 100 vendors representing 80+% of the vendor base and got them comfortable with continued business; they secured 130 vendor support agreements for equal or better terms. Everyone is invested in making a viable go of the ‘19 holiday season. Sometimes it pays to have someone who is truly invested be all over the supply chain.

Financing. The company’s capital structure is rather simple:

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The ABL is with JPMorgan Chase Bank NA as agent. The term loans were provided by the family. One from Do Won Chang for $10mm and the second from the Linda Inhee Chang 2012 Trust. Because nothing says “American Dream” like raiding your kid’s trust fund.

In conjunction with the bankruptcy, the company proposed a DIP credit facility in the form of (a) a $275 million senior secured super-priority ABL revolving credit facility, which includes a $75 million sub-limit for letters of credit and a “creeping roll up” of the pre-petition ABL Facility, and (b) a $75 million senior secured super-priority term loan credit facility, reflecting $75 million of new money financing. The company sought access to $60mm of the term loan at the hearing, indicating that with $40mm due in rent and $18mm in payroll, it would run out of cash without it. The judge approved this request.

And so here we are. The company intends to march forward with negotiations with its landlords, close tons of locations, sure up the vendor base, locate exit financing, and get this sucker out of bankruptcy in Q1 next year.

Ending up in bankruptcy certainly isn’t part of the American Dream. But living long enough to fight another day might just be.

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*H/t to @JordynJournals, retail reporter for Bloomberg News on this.

**The company notes that domestic sales have increased over the last 4 quarters.

***For those new to PETITION, the same lawyer from Kirkland & Ellis LLP that represents Forever 21 represented Toys R Us. In the now-infamous “first day” hearing in Toys, the attorney sang the Toys R Us jingle — “I don’t want to grow up…” — in the courtroom. Suffice it to say considering the outcome of that case, that tactic didn’t particularly age well. Indeed, this will age better, we reckon (won’t play in email, only in browser):

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📚Resources📚

We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥. We recently added “Super Pumped: The Battle for Uber” by Mike Isaac, which we blew through rather quickly. Next up on our list: “What it Takes: Lessons in the Pursuit of Excellence” by Stephen A. Schwarzman, “The Ride of a Lifetime: Lessons Learned from 15 Years as CEO of the Walt Disney Company” by Bob Iger, and “That Will Never Work: The Birth of Netflix and the Amazing Life of an Idea,” by Netflix co-founder Marc Randolph.


💰New Opportunities💰

PETITION LLC lands in the inbox of thousands of bankers, advisors, lawyers, investors and others every week. Our website(s) are visited by thousands more. Are you looking for quality people. Posting your job opportunities with PETITION is a great way for your listing to stand out from the LKDN muck.

Email us at petition@petition11.com and write “Opportunities” in the subject line if you’re interested in information about posting your opportunities with us.


Nothing in this email is intended to serve as financial or legal advice. Do your own research, you lazy rascals.


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💊Pushed Pills Pressure Purdue Pharma💊

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Long time PETITION readers should be, if they’re paying attention, identifying recurring themes confronting the various sectors of distress we cover. In retail bankruptcy, for instance, the stories generally contain the same elements: some combination of too much leverage (especially if PE-backed), too large an uneconomical brick-and-mortar footprint, slow adoption of e-commerce, poor supply chain management, awful off-trend product assortment, and disruptors (i.e., Amazon Inc., resale, DTC, etc.). In oil and gas, too much leverage backing capital intensive exploration and production initiatives, an unfavorable commodity environment, bloated SG&A, and too much money chasing outsized returns. In biopharma, new drugs are expensive and time-intensive to produce and often, despite potentially valuable IP and viable use cases, companies run out of money (and/or bust convertible debt) and are unable to continue paying to push their products through the regulatory framework absent a chapter 11. In healthcare, rollups of behavioral health, CCRC, rehab centers, etc., layer on too much debt on top of questionable business models in the face of an uncertain regulatory atmosphere.

And then there is another category: companies with little to no funded debt, minimal trade debt, an ability to fend off competition, and a viable product. What’s their problem? As we’ve seen in recent cases, i.e., Takata CorporationImerys Talc America Inc. (also discussed here), Insys Therapeutics Inc.The Diocese of Rochesterthose companies tend to get sued into oblivion on the basis of shady-as-sh*t business practices or other general degenerative scumbaggery.

And so it should come as absolutely no surprise to anyone* that Oxycontin manufacturer, Purdue Pharma, has joined the fray, filing for bankruptcy this past week in the Southern District of New York (before the same judge administering the Sears sh*t show). Hold on to your butts people, this one ought to be interesting.

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Unless you’re a total ignoramus, you know by now that the country has been ravaged by an opioid epidemic. Here is 60 Minutes doing a deep dive into the issue. Here is the White House talking about “[e]nding America’s Opioid Crisis.” And here is John Oliver doing the John Oliver thing while talking about opioids.

We mean, you have to be willfully unaware or just plain stupid if you don’t know that this is a big problem. While numerous companies are implicated in this ever-visible scandal, Purdue Pharma is the biggest fish to fall to date (query how long that lasts). But, as noted above, Purdue Pharma generates a ton of money, has no funded debt, etc. So what it needs — and what it gets from a chapter 11 bankruptcy filing — is a break from the deluge of lawsuits against it. All 2,625 of them.

For the uninitiated, a bankruptcy filing triggers an automatic stay pursuant to section 362 of the bankruptcy code. This is an injunction, of sorts, that draws a line in the sand and prevents creditors from rushing to enforce their claims against a debtor. The idea is that by halting this rush and providing the debtor a “breathing spell,” the debtor will have a better opportunity to configure a go-forward strategy that is not only to its benefit, but also treats similarly situated claimants fairly. As you might imagine in a litigation scenario where there are literally thousands of potential judgement creditors scattered across various state and federal courts across the country, this is a powerful tool. It prevents Mia Wallace, plaintiff #1, from winning a huge judgement and collecting against that judgement to the point of siphoning away all of the debtors’ asset value before Vincent Vega, plaintiff #2, has had his day in court.** It also helps the debtors triage the outrageous expense involved with defending heaps of lawsuits all across the country; indeed, the Purdue Pharma debtors note that they spend $5mm/week — A WEEK! — defending themselves against litigation. They project to spend approximately $263mm on legal and related professional costs in 2019. That’s no typo, folks. Biglaw lawyers charge mint.

Here’s the thing about that “automatic stay” thing, though: there are exceptions to it — including, most relevant here, one that’s commonly referred to as the “police and regulatory power exception” (section 362(b)(4)). To preempt the applicability of this section, the debtors have already filed a “preliminary injunction motion,” seeking to enjoin continued prosecution of active governmental litigation against them (and a long slate of related parties, i.e., the entire Sackler family tree).***


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PG&E Picks Up the Pace (Long Seth Klarman)

 
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Well, that sure didn’t last long. In “Is it a Plan or a Placeholder?,” we discussed the recently proposed plan of reorganization filed by PG&E Corporation and Pacific Gas and Electric Company ($PCG). We wrote:

Moreover, the plan also depends on the “Subrogation Wildfire Claims” — claims “held by insurers or similar entities in connection with payments made to others on account of damages or losses arising from such wildfires” — coming in at a max $8.5b.[] Will these numbers hold? We suspect the answer is an emphatic ‘no.’

As much as we like being right, we certainly weren’t expecting it to happen so soon.

A mere few days after filing its plan of reorganization, PG&E announced an $11b settlement with parties representing 85% of the Subrogation Wildfire Claims. This settlement, still subject to the approval of the Bankruptcy Court, would satisfy and discharge all insurance subrogation claims against the Debtors arising from the 2017 Northern California wildfires and the 2018 Camp fire.” Per Reuters:

The company also amended its equity financing commitment agreements to accommodate the claims, and reaffirmed its $14 billion equity financing commitment target for its reorganization plan.

One amendment was an increase in the “Wildfire Claims Cap” to $18.9b from $17.9b. The debtors understand the signaling here: with the subrogation claimants almost immediately getting $2.5b more than what was in the plan, they prudently indexed higher to account for wildfire claimant expectations.

Despite the assumption of $3.5b more in liabilities (exclusive of earlier settlements), this is a net positive for PG&E. They removed one constituency from the board (assuming they don’t trade out of their claims and blow up the settlement), got a legitimate impaired accepting class to help usher the plan through, and moved themselves closer to a global settlement.

Anyway, the stock — somewhat mysteriously considering the marked INCREASE in liabilities — reacted favorably to the news, up over 11% on the week and erasing Monday’s post-plan blistering:

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🗞The NYT, New Media Models & Snowflake Subscribers🗞

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Take a look at these revenue numbers:

This, ladies and gentlemen, represents the most recently reported revenue from New York Times Co. ($NYT). It’s also evolution, illustrated.

We all know the story: in an age of heaps of free media and secular decline of print, media companies are (a) in the midst of a great pivot away from the ad-based business model and (b) as part of a hybrid model, leaning more heavily upon recurring-revenue-producing subscription (and other) products.

This pivot — and the reason for it — couldn’t be clearer from the reported Q2 ‘19 earnings. As you can see above, advertising revenue is flat, while subscription and “other” revenue is growing.

Generally speaking, the report was sound. The company added 131k net subscriptions; it also separately grew its separate subscription channels for “Cooking” and “Crossword,”* and launched a news series, “The Weekly,” on FX and Hulu (PETITION Note: we can’t help but question the long-term success of this series: who really wants to go to Hulu to watch a NYT news series? In the end, that didn’t work for Vice News on HBO. That said, this series apparently contributed to a 30% increase in “other” revenue in the quarter, so, who knows? Maybe we’re dead wrong). In total, subscriptions were up by 197k and the company now reports 3.8mm digital-only subscribers.

On the negative side, the company’s operating costs are increasing and, in turn, its operating profit is decreasing (down $4mm YOY) as it looks to grow its digital channels, properly analyze and manage its sales funnel, acquire additional journalist talent, etc. Some choice bits relating to subscriptions from the earnings call:

Total subscription revenues increased 4% in the quarter with digital-only subscription revenue growing 14% to $113 million. On the print subscription side, revenues were down 2.5% due to declines in the number of home delivery subscriptions and continued shift of subscribers moving to less frequent and therefore less expensive delivery packages as well as a decline in single copy sales. This decrease in print subscription revenues was partially offset by a home delivery price increase that was implemented early in the year.

Total daily circulation declined 8.5% in the quarter compared with prior year, while Sunday circulation declined 7.1%.

No surprises here. Digital is ⬆️, print is ⬇️, and even where there is print, the average revenue per user is shifting down in large part due to subscribers opting for ⬇️ delivery frequency. Interestingly, people are also buying fewer newspapers on the fly (“single copy sales”).

On the advertising side:

Total advertising revenue grew 1.3% compared with the prior year with digital advertising growing 14% and print declining by 8%. The increase in digital advertising revenue was largely driven by growth in direct sold advertising on our digital platforms, including advertising sold in our podcast and our creative services business. The print advertising result was mainly due to declines in the financial services, retail and media categories, partially offset by growth in technology.

The stock market did not act favorably — note the demarcation below:

Indeed, as of the time of this writing, the share price is down 20% from where it was on the date of the release.

There are some interesting takeaways here. First, podcasts continue to be a source of growth for many a media company — despite the lack of viable analytics across the podcasting space. Second, the second order effects of the decline in retail and media are notable. Third, the company’s purchase of Wirecutter is feeding its “other” revenue which implies — though it is not line-itemed — that affiliate-related revenue is a growing part of the business (long Amazon!).**

As for guidance, the company forecasted continued YOY subscription growth in the low-to-mid single digits, a decrease in ad revenue, and an increase in “other” revenue. Notably, “other” revenue also includes income from subletting office space, commercial printing, and licensing deals (i.e., when the NYT is referenced in a movie, etc.).

It will be interesting to see whether the NYT can continue to demonstrate subscriber growth in the midst of a hyper-polarized political environment. To point, a shift to subscribers is not without its dangers. Recently the NYT came under pressure both for (i) its 1619 Project about slavery and (ii) a headline describing President Trump’s reaction to the El Paso and Dayton shootings. Per The Wrap:

The New York Times saw an increase in subscription cancellations after a reader backlash over its lead headline on a story about a Donald Trump speech on Monday, a Times spokesperson told TheWrap.

The paper has “seen a higher volume of cancellations today than is typical,” the spokesperson said on Tuesday.

In an age of hyper-competition for the marginal dollar, this is a big problem. In a story about the dismal performance of the Los Angeles Times’ digital initiatives (net 13k subscriptions in the first six months of ‘19), Joshua Benton writes for Neiman Lab:

But once you get all those subscribers signed up, you’ve got to prove yourself worthy of their money, over and over again. Churn has always been an issue for newspapers, but it’s even more of one in a world of constant competition for subscription dollars. (“Hmm, Netflix raised their price — do I really use that L.A. Times subscription?”) Retention is critical to making reader revenue the bedrock of the new business model….

That’s what happens when you switch to a subscriber model. Investors care less about ad revenue and more about subscriber growth. Each individual subscriber matters. And retention really matters.

*****

But retention cannot come at a cost. A publication must establish values and live up to them. Take, for instance, this note we received from a reader recently:

“Your writings are done well, interesting, and humorous. However, take it from me and many of my colleagues, your anti-Trump insults are aggravating and misguided.  Some of us are considering unsubscribing because of it.”

He is referring to this piece, “Tariffs Tear into Tech+,” wherein we wrote about the recent escalation in trade hostility as follows:

We’re frankly not sure why this is controversial. All we did was insinuate that the man is intemperate (is that really even debatable?) and describe him in his own words.

President Trump’s policies — for better or for worse — have an impact on the economy. The delivery of those policies infuses volatility into the markets. It affects whether a company will commit to investing millions in coming months; it affects sales; it affects consumer spending which, in case you didn’t notice, is, for now, the only thing keeping GDP afloat. We’re going to write about that. And we’re going to do so in our usual voice. Just like we would if a democrat were in office: we’re equal opportunity snark.***

So, sure, Mr. Orange County, feel free to cancel your Membership if you think we’re misguided. That’s just what we all need: another highly educated person running for the hills because a few words didn’t comport with his sensibilities. Thanks for summing up this country’s current plight of discourse/discord in three sentences.

In conclusion, we won’t be bullied, subscription be damned.

*Impressively, the Cooking product has 250k subscribers and the Crosswords product has 500k subscribers.

**For those who don’t know, an affiliate fee is essentially a referral fee for sending traffic over to an affiliate partner that ultimately results in a transaction. So, for instance, if you go to Wirecutter.com to look up best back-to-school backpack and click on their #1 choice, a L.L. Bean ‘Quad Pack,’ and buy one, Wirecutter earns approximately 4% on that purchase.

***Case and point: we’ve previously asked, “Are Progressives Bankrupting Restaurants?

☎️Who Knew? People Don’t Use Landlines Anymore? (Short the Peso, Short US-denominated EM Debt).☎️

We’re all for a reprieve from retail and energy distress. Hallelujah.

Maxcom USA Telecom Inc. is a telecommunications provider deploying “smart-build” approaches to “last mile” connectivity (read: modems, handsets and set-up boxes) for enterprises, residential customers and governmental entities in Mexico — which is really just a fancy way of saying that it provides local and long-distance voice, data, high speed, dedicated internet access and VoIP tech, among other things, to customers.* It purports to be cutting edge and entrepreneurial, claiming “a history of being the first providers in Mexico to introduce new services,” including (a) the first broadband in 2005, (b) the first “triple-play” (cable, voice and broadband) in 2005, and (c) the first paid tv services over copper network using IP…in 2007. That’s where the “history” stops, however, which likely goes a long way — reminder, it’s currently the year 2019 — towards explaining why this f*cker couldn’t generate enough revenue to service its ~$103.4mm in debt.** Innovators!!

And speaking of that debt, it’s primarily the $103.4mm in “Old Notes” due in 2020 that precipitated this prepackaged bankruptcy filing (in the Southern District of New York).***

The Old Notes derive from a prior prepackaged bankruptcy — in 2013 (PETITION Note: not a “Two-Year Rule” violation) — and were exchanged for what were then outstanding 11% senior notes due in 2014. These Old Notes have a “step-up interest rate,” which means that, over time, the interest rate…uh…steps up…as in, increases upward/up-like. The rate currently stands at 8%. Unfortunately, the company doesn’t have revenue step-ups/upwardness/upseedayzee to offset the interest expense increase; rather, the company “…incurred losses of $4.9 million for the three months ended June 30, 2019, as compared to losses of $2.9 million for the three months ended June 30, 2018, and losses of $16 million for the year ended December 31, 2018, compared to losses of $.8 million for the year ended December 31, 2017….” Compounding matters are, among other things, the negative effects of decreased interest income and foreign currency exchange rates (the dollar is too damn strong!).**** The closure of the residential segment also, naturally, affected net revenue.


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💩There’s No End in Sight for Retail Pain (Long the “Playbook”)💩

Retail, retail, retail.

Brutal. Absolutely B.R.U.T.A.L.

Avenue Stores LLC, a speciality women’s plus-size retailer with approximately 2,000 employees across its NJ-based HQ* and 255 leased stores,** is the latest retailer to find its way into bankruptcy court. On Friday, August 16, Avenue Stores LLC filed for chapter 11 bankruptcy in the District of Delaware. Like Dressbarn, another plus-size apparel retailer that’s in the midst of going the way of the dodo, any future iteration of the Avenue “brand” will likely exist only on the interwebs: the company intends to shutter its brick-and-mortar footprint.

What is Avenue? In addition to a select assortment of national brands, Avenue is a seller of (i) mostly “Avenue” private label apparel, (ii) intimates/swimwear and other wares under the “Loralette” brand and (iii) wide-width shoes under the “Cloudwalkers” brand. The company conducts e-commerce via “Avenue.com” and “Loralette.com.” All of this “IP” is the crux of the bankruptcy. More on this below. 

But, first, a digression: when we featured Versa Capital Management LP’s Gregory Segall in a Notice of Appearance segment back in April, we paid short shrift to the challenges of retail. We hadn’t had an investor make an NOA before and so we focused more broadly on the middle market and investing rather than Versa’s foray into retail and its ownership of Avenue Stores LLC. Nevertheless, with the benefit of 20/20 hindsight, we can now see some foreshadowing baked into Mr. Siegel’s answers — in particular, his focus on Avenue’s e-commerce business and the strategic downsizing of the brick-and-mortar footprint. Like many failed retail enterprises before it, the future — both near and long-term — of Avenue Stores is marked by these categorical distinctions. Store sales are approximately 64% of sales with e-commerce at approximately 36% (notably, he cited 33% at the time of the NOA). 

A brand founded in 1987, Avenue has had an up-and-down history. It was spun off out of Limited Brands Inc. and renamed in 1989; it IPO’d in 1992; it was then taken private in 2007. Shortly thereafter, it struggled and filed for bankruptcy in early 2012 and sold as a going-concern to an acquisition entity, Avenue Stores LLC (under a prior name), for “about $32 million.” The sale closed after all of two months in bankruptcy. The holding company that owns 100% of the membership interests in Avenue Stores LLC, the operating company, is 99%-owned by Versa Capital Management. 

Performance for the business has been bad, though the net loss isn’t off the charts like we’ve seen with other recent debtors in chapter 11 cases (or IPO candidates filing S-1s, for that matter). Indeed, the company had negative EBITDA of $886k for the first five months of 2019 on $75.3mm in sales. Nevertheless, the loss was enough for purposes of the debtors’ capital structure. The debtors are party to an asset-backed loan (“ABL”) memorialized by a credit agreement with PNC Bank NA, a lender that, lately, hasn’t been known for suffering fools. The loan is for $45mm with a $6mm first-in-last-out tranche and has a first lien on most of the debtors’ collateral. 

The thing about ABLs is that availability thereunder is subject to what’s called a “borrowing base.” A borrowing base determines how much availability there is out of the overall credit facility. Said another way, the debtors may not always have access to the full facility and therefore can’t just borrow $45mm willy-nilly; they have to comply with certain periodic tests. For instance, the value of the debtors’ inventory and receivables, among other things, must be at a certain level for availability to remain. If the value doesn’t hold up, the banks can close the spigot. If you’re a business with poor sales, slim margins, diminishing asset quality (i.e., apparel inventory), and high cash burn, you’re generally not in very good shape when it comes to these tests. With specs like those, your liquidity is probably already tight. A tightened borrowing base will merely exacerbate the problem.


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⛽️Oil & Gas Continues to Be a Free-for-All (Long Houston’s Restaurant Scene)⛽️

Speaking of borrowing bases and being f*cked, there’s also Alta Mesa Holdings LP(“AMH”), a Houston-based E&P company focused on the Anadarko stack. See, the funny thing about asset-backed loans is that when the asset quality deteriorates, a bank, to no one’s surprise, wants to reduce its credit exposure and borrower risk. This is why lenders bake in “redetermination rights” into their credit documents; they want the flexibility to ratchet down their commitment to a borrower should the borrower, say, sh*t the bed in a big big way. 

In case you haven’t been paying attention, oil and gas, as an industry, has been sh*tting the bed in a big BIG way. 

Hence, Alta Mesa’s SEC filing earlier this week that it received notice pursuant to its credit agreement, that the borrowing base has been reduced from $370mm to $200mm. YIKES. 

Let’s, for sh*ts and giggles, parse out the filing, shall we? 

“AMH’s combined borrowings and letters of credit outstanding exceed the new borrowing base by $162.4 million.” 

PETITION Note: Ruh roh. Just like that, the lenders have put the squeeze on AMH. AMH meet world of hurt. World of hurt, meet AMH.


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❓How’s Oil and Gas Doing. (Spoiler Alert: Not Well)❓

Callback to May 12’s “Fast Forward - Oil & Gas is SO 2019.” We wrote:

In March’s “Oil and Gas Continues to Crack (Long Houston-Based Hotels),” we wrote:

The bankruptcy waiting room is becoming standing room only for oil and gas companies despite oil resting near 2019 highs (even after a rough 2% decline on Friday). We’ve previously mentioned Jones Energy ($JONE)Sanchez Energy Corporation ($SN)Southcross Energy Partners LP ($SXEE)Vanguard Natural Resources, Alta Mesa Holdings LP ($AMR) and Chaparral Energy Inc. ($CHAP) in “⛽️Is Oil & Gas Distress Back?⛽️.” Based on earnings reports or other SEC filings this week, add Emerge Energy Services LP ($EMES), EP Energy Corporation ($EPE) and Approach Resources Inc. ($AREX) to the list.

And:

Here’s the bottom line: both amend-and-extended and formally restructured oil and gas companies were an option on oil prices. That option is out of the money for a number of these companies. The end result will be an uptick in Texas’ hotel reservations and bankruptcy fees. And soon.

We also wrote:

Legacy Reserves Inc. ($LGCY) is yet another E&P company that looks like it may be destined for the bankruptcy bin. The company announced this week that it is evaluating strategic alternatives. It subsequently filed its 10-K which included going concern language and, significantly, confirmation that the company’s lenders had agreed to extend the company’s maturity under its credit agreement from April 1 to May 31, 2019. This is like a good movie needing a bit more production time prior to theatric release: usually, the movie ultimately it gets released. Likewise, this will ultimately end up in bankruptcy court.

Let’s take stock of the bankruptcy bodybag count since then:

  • Jones Energy ✅;

  • Southcross Energy Partners LP ✅;

  • Vanguard Natural Resources ✅;

  • Sanchez Energy Corporation ✅;

  • Emerge Energy Services LP ✅;

  • Legacy Reserves ✅.

Meanwhile, EP Energy Corporation ($EPEG) reportedly just missed its $40mm interest payment due under the indenture governing its 8.000% 1.5 Lien Notes due 2025 (due on August 15, 2019). Of course, there’s also been a number of private oil-and-gas companies 


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⚡️Update: Interlogic Outsourcing Inc.⚡️

We wrote about this bankruptcy filing on August 11. We noted the highly competitive landscape confronting outsourced payroll, benefits and human resources services companies. Because the bankruptcy filing wasn’t complete at the time of publication, however, we didn’t have the opportunity to add that the company descended into bankruptcy primarily because its sole owner (fraudulently?) mismanaged the company and misappropriated approximately $90mm. Uh oh.

The result? A free fall into bankruptcy one month after an independent director took over management of the business, a CRO came on board (Huron) and an expedited sale process commenced. This world being the savage world it is, competitors started picking off company clients and so the value of this company appears to be dissipating before our eyes with each passing day. The company has a $7.8mm DIP commitment in place from pre-petition lender, KeyBank NA.


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💩Yes, Let’s Get Right to It: Retail Blows. The End.💩

 

You have to respect the brevity deployed by Lolli and Pops Inc., the sweets retailer that filed for bankruptcy in the District of Delaware on Monday. In a shockingly-yet-refreshingly terse 8-page first day declaration, the company and its affiliated debtors’ CRO justified the bankruptcy filing by saying, in effect, the following: retail blows. The funny thing is that the document could have been even shorter. We’ll give it a shot:


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📦Nerds Lament: Subscription Box Company Goes BK📦

We’re old enough to remember when subscription boxes were all the rage. The e-commerce trend became so explosive that the Washington Post estimated in 2014 that there were anywhere between 400 and 600 different subscription box services out there. We reckon that — given the the arguably-successful-because-it-got-to-an-IPO-but-then-atrocious-public-foray by Blue Apron Inc. ($APRN) — the number today is on the lower end of the range (if not even lower) as many businesses failed to prove out the business model and manage shipping expense.

And so it was only a matter of time before one of them declared bankruptcy.

Earlier this morning, Loot Crate Inc., a Los Angeles-based subscription service which provides monthly boxes of geek- and gaming-related merchandise (“Comic-con in a box,” including toys, clothing, books and comics tied to big pop culture and geek franchises) filed for bankruptcy in the District of Delaware.* According to a press release, the company intends to use the chapter 11 process to effectuate a 363 sale of substantially all of its assets to a newly-formed buyer, Loot Crate Acquisition LLC. The company secured a $10mm DIP credit facility to fund the cases from Money Chest LLC, an investor in the business. The company started in 2012.

Speaking of investors in the business, this one got a $18.5mm round of venture financingfrom the likes of Upfront VenturesSterling.VC (the venture arm of Sterling Equities, the owner of the New York Mets), and Downey Ventures, the venture arm of none other than Iron Man himself, Robert Downey Jr. At one point, this investment appeared to be a smashing success: the company reportedly had over 600k subscribers and more than $100mm in annualized revenue. It delivered to 35 countries. Inc Magazine ranked it #1 on its “Fastest Growing Private Companies” listDeloitte had it listed first in its 2016 Technology Fast 500 Winners list. Loot Crate must have had one kicka$$ PR person!

But life comes at you fast.

By 2018, the wheels were already coming off. Mark Suster, a well-known and prolific VC from Upfront Ventures, stepped off the board along with two other directors. The company hired Dendera Advisory LLC, a boutique merchant bank, for a capital raise.** As we pointed out in early ‘18, apparently nobody was willing to put a new equity check into this thing, despite all of the accolades. Of course, allegations of sexual harassment don’t exactly help. Ultimately, the company had no choice but to go the debt route: in August 2018, it secured $23mm in new financing from Atalaya Capital Management LP. Per the company announcement:

This financing, led by Atalaya Capital Management LP ("Atalaya") and supported by several new investors (including longstanding commercial partners, NECA and Bioworld Merchandising), will enable Loot Crate to bolster its existing subscription lines and improve the overall customer experience, while also enabling new product launches, growth in new product lines and the establishment of new distribution channels.

Shortly thereafter, it began selling its boxes on Amazon Inc. ($AMZN). When a DTC e-commerce business suddenly starts relying on Amazon for distribution and relinquishes control of the customer relationship, one has to start to wonder. 🤔

And, so, now it is basically being sold for parts. Per the company announcement:

"During the sale process we will have the financial resources to purchase the goods and services necessary to fulfill our Looters' needs and continue the high-quality service and support they have come to expect from the Loot Crate team," Mr. Davis said.

That’s a pretty curious statement considering the Better Business Bureau opened an investigation into the company back in late 2018. Per the BBB website:

According to BBB files, consumers allege not receiving the purchases they paid for. Furthermore consumers allege not being able to get a response with the details of their orders or refunds. On September 4, 2018 the BBB contacted the company in regards to our concerns about the amount and pattern of complaints we have received. On October 30, 2018 the company responded stating "Loot Crate implemented a Shipping Status page to resolve any issues with delays here: http://loot.cr/shippingstatus[.]

In fact, go on Twitter and you’ll see a lot of recent complaints:

High quality service, huh? Riiiiiiight. These angry customers are likely to learn the definition of “unsecured creditor.”

Good luck getting those refunds, folks. The purchase price obviously won’t clear the $23mm in debt which means that general unsecured creditors (i.e., customers, among other groups) and equity investors will be wiped out.***

Sadly, this is another tale about a once-high-flying startup that apparently got too close to the sun. And, unfortunately, a number of people will lose their jobs as a result.

Market froth has helped a number of these companies survive. When things do eventually turn, we will, unfortunately, see a lot more companies that once featured prominently in rankings and magazine covers fall by the wayside.

*We previously wrote about Loot Crate here, back in February 2018.

**Dendera, while not a well-known firm in restructuring circles, has been making its presence known in recent chapter 11 filings; it apparently had a role in Eastern Mountain Sports and Energy XXI.

***The full details of the bankruptcy filing aren’t out yet but this seems like a pretty obvious result.

⚡️Here a Sale. There a Sale. Everywhere a Sale Sale! (Long Bankruptcy Code Section 363)⚡️

In a nutshell, bankruptcy code section 363 allows a debtor to sell assets free and clear of liens and encumbrances.

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In other words, a company can sell itself and the buyer can leave a bunch of bad sh*t behind. It’s a powerful tool and helps the buyer avoid any sort of “fraudulent conveyance” liability down the road. We’re seeing a proliferation of 363-based bankruptcy cases. In the last week, for instance, Barneys New York Inc., iPic-Gold Class Entertainment LLC, and Perkins & Marie Callender’s LLC all filed with the intent of pursuing sales (PETITION Note: see, also, Jack Cooper Ventures Inc. below).


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⛽️Halcon Resources Poised to be the Next Oil & Gas Chapter 22 (Long Kerosene)⛽️

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Nearly three years after its last prepackaged plan of reorganization wiped $1.8 billion of debt off of the company’s balance sheet, onshore E&P company, Halcon Resources Corporation ($HKRS), is once again on the bankruptcy courthouse steps with another prepackaged bankruptcy. This company is burning debt like a baaaaaaaaaaaawse.

In the prior bankruptcy, the company eliminated $1b of 13% ‘22 senior secured third lien notes, $316mm of 9.75% ‘20 senior notes, $297mm of 8.875% ‘21 senior notes, $37mm of 9.25% ‘22 senior notes, and $290mm of 8% ‘20 senior convertible notes. The majority of the equity in the reorganized entity went to the third lien noteholders, with other equity going to unsecured holders (15.5%), convertible noteholders (4%) and common stockholders (4%). That equity holds very little value today. The stock traded publicly up until July 23, 2019, when the Nasdaq delisted the company’s shares ($HR) and the stock began trading on OTC pink sheets under the $HKRS symbol.

Meanwhile, here’s what the company’s current debt sitch looked like this as of the most recent 10-Q:


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📽A $5.7mm “Human Error” (Short Bankruptcy Projections)📽

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Never try to cover sh*t up in corporate America. That is f*ck up #1 and a sure-fire way to get yourself pink-slipped. When you screw up in corporate America — and you WILL screw up in corporate America — the right approach is to squelch the temptation to sweep that f*ckup under the rug and, instead, fess up to the mistake with a solution in hand. That last part is key: accepting responsibility isn’t enough. “Responsibility” in corporate America includes having a fix for the issue.

A bit over a week ago, in the Z Gallerie LLC bankruptcy matter, the professionals kinda sorta followed this protocol.

In a statement filed with the bankruptcy court (Docket 464), the company described how it achieved the Herculean feat of selling Z Gallerie’s abysmal business (for ~$20mm) and confirming a plan of confirmation three-months-to-the-day from the petition date.* The company emphasized that it was incentivized to move the cases rapidly to (a) avoid a liquidation trigger under its DIP credit facility, (b) preserve value for the company’s prospective buyer by avoiding a long, drawn-out in-court proceeding that would surely have the effect of leaking value in today’s complex dog-eat-dog retail environment, and (c) “ensure[] that those who provide actual, necessary benefits to the company during its distress are paid in full.” To do this, however, the company had to do a wee bit of forecasting; it had to estimate its administrative claims to ensure that the company would have enough cash at sale closing to satisfy those claims.

The company performed this analysis and, ultimately, the company’s interim CEO declared to the bankruptcy court that, indeed, it, would have enough cash to satisfy priority and administrative claims under the plan (including DIP claims, professional fee claims, and other administrative and priority claims). But, as it turns out — and as PETITION readers know ALL TO WELL from our ongoing review of feasibility projections — forecasts are subject to, from time to time, “significant errors and omissions.” Or, put another way, “human error.” Or put another way, these mathematicians missed their numbers by $5.7mm. Or put ANOTHER way, this case puts the PETITION “Two-Year Rule” in an entirely new light. It’s one thing to realize that your projections are off within two years; it’s an entirely different story to realize you’re off within two months! 😬

So, what happened?

Up until roughly a week ago, the estate had been administered by a “Wind-Down Trust” that had been spearheaded by the company’s CFO. That CFO, however, was apparently too busy auditioning for a new job — uh, serving as DirectBuy’s main “transition” point of contact — to properly administer the trust. In a statement (Docket 465) in which the interim CEO acknowledged that he’s “ultimately responsible” for the estate, he simultaneously goes to great lengths to establish a record of ineptitude on the part of the company’s CFO. He failed to reconcile accounts, he failed to accurately predict invoices from the company’s delivery companies, etc. etc.** This is what the delta looks like:

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💰How are the Investment Banks Doing?(Long Increasing Fees?)💰

Evercore Inc. ($EVR) reported earnings this week and, well, inflation exists somewhere. The company increased adjusted revenue by 18% YOY to $535.8mm. Net income increased by nearly $18mm. The bank reported a decline in the number and dollar volume of its deals but…BUT…numbers nevertheless improved thanks to a strong move in investment banking advisory fees (up 22% YOY). With 81 earned fees of $1mm or more compared to 85 last year, the company appears to be adding clients and raising fees. Because the bank doesn’t delineate restructuring revenues separate and apart from other advisory services, it’s unclear to what degree restructuring is adding or detracting from performance — from either a deal volume or fee perspective. 

Houlihan Lokey ($HLI) also reported earnings; it notched a 14% revenue increase YOY ($250mm) and a 44% net income increase. Financial restructuring revenues increased 57%! Surprisingly, however, the bank noted that “[r]evenue increased primarily as a result of an increase in the number of closed transactions, partially offset by a reduction in the average transaction fee.” Curious. 


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💥Higher Interest Rates Eff Mortgage Originator (Long FED Fear of POTUS). New Chapter 11 Filing - Stearns Holdings LLC💥

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Hallelujah! Something is going on out in the world aside from the #retailapocalypse and distressed oil and gas. Here, Blackstone Capital Partners-owned Stearns Holdings LLCand six affiliated debtors (the “debtors”) have filed for bankruptcy in the Southern District of New York because of…drumroll please…rising interest rates. That’s right: the FED has claimed a victim. Stephen Moore and Judy Shelton must be smirking their faces off.

The debtors are a private mortgage company in the business of originating residential mortgages; it is the 20th largest mortgage lender in the US, operating in 50 states. The debtors generate revenue by producing mortgages and then selling them to government-sponsored enterprises such as Ginnie MaeFannie Mae and Freddie Mac. To originate loans, the debtors require a lot of debt; they also require favorable interest rates. Favorable interest rates = lower cost of residential home purchases = increased market demand and sales activity for homes = higher rate or origination.

Except, there’s been an itsy bitsy teeny weeny problem. Interest rates have been going up. Per the debtors:

The mortgage origination business is significantly impacted by interest rate trends. In mid-2016, the 10-year Treasury was 1.60%. Following the U.S. presidential election, it rose to a range of 2.30% to 2.45% and maintained that range throughout 2017. The 10-year Treasury rate increased to over 3.0% for most of 2018. The rise in rates during this time period reduced the overall size of the mortgage market, increasing competition and significantly reducing market revenues.

Said another way: mortgage rates are pegged off the 10-year treasury rate and rising rates chilled the housing market. With buyers running for the hills, originators can’t pump supply. Hence, diminished revenues. And diminished revenues are particularly problematic when you have high-interest debt with an impending maturity.

This is where the business model really comes into play. Here’s a diagram illustrating how this all works:


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⚡️Update: Trickle-Down Healthcare Distress (Long Electronic Beds, Short Nana). Part I.⚡️

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We scoured far and wide to see whether there might be some businesses that would get hammered by the uptick in healthcare distress we’ve all witnessed of late. In early June, we took a bit of a stab in the dark (Members’-only access):

There has been notable bankruptcy activity in the healthcare industry this year — from continuing care retirement communities to the acute care space. When end users capitulate and need to streamline operations and cut costs, who gets harmed farther down the chain? It’s a good question: after all, there’s always some trickle down effect.

Our internal search for answers to this question recently brought us to Charlotte-based Joerns Healthcare, a “premier supplier and service provider in post-acute care.” The company sells supportive care beds, transport systems, respiratory care solutions and more.

Among other things, we noted how the Joerns’ term loan maturing May 2020 “was among one of the worst performing loans in the month of May — quoted in the low 70s, down approximately 15% since April.” We insinuated that a bankruptcy filing may not be too far away.

We didn’t expect it to be in court a mere six weeks later.

On Monday, Joerns WoundCo Holdings Inc. and 13 affiliated entities filed a prepackaged bankruptcy in the District of Delaware. Among other reasons provided to explain its capitulation into bankruptcy court is “post acute sector disruption.” Now that’s music to our ears.

⚡️Update: FuelCell Energy Inc.⚡️

In May’s “🌋FuelCell Sucks Wind (Long Distressed Power)🌋,” we closed by saying:

“…we suspect we’ll be seeing this thing in Delaware sometime soon.”

The day of reckoning appears to have been stalled a bit.

FuelCell Energy Inc. ($FCEL) recently filed its Form 10-Q with the SEC. Across the board, the numbers were dogsh*t. This company is pretty darn good at losing money, apparently. Year-over-year revenues are WAY down and operating losses are mounting. The company retained Huron Consulting Group as CRO, paying them upwards of $1025/hour and an (elective) success fee:


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