In February, we wrote a mock "First Day Bankruptcy Declaration" for Remington Outdoor Company. We wrote:
Murica!! F*#& Yeah!!
Remington (f/k/a Freedom Group) is "Freedom Built, American Made." Because nothing says freedom like blowing sh*t up. Cue Lynyrd Skynyrd's "Free Bird." Hell, we may even sing it in court now that Toys R Us has made that a thing.
Our company traces its current travails to 2007 when Cerberus Capital Management LP bought Remington for $370mm (cash + assumption of debt) and immediately "loaded" the North Carolina-based company with even more debt. As of today, the company has $950mm of said debt on its balance sheet, including a $150mm asset-backed loan due June '19, a $550mm term loan B due April '19, and 7.875% $250mm 3rd lien notes due '20. Suffice it to say, the capital structure is pretty "jammed." Nothing says America like guns...and leverage.
Shortly after Cerberus purchased the company, Barack Obama became president - a fact, on its own, that many perceived as a real "blowback" to gun ownership. Little did they know. But, then, compounding matters, the Sandy Hook incident occurred and it featured Remington's Bushmaster AR-15-style rifle. Subsequently, speeches were made. Tears were shed. Big pension fund investors like CSTRS got skittish AF. And Cerberus pseudo-committed to selling the company. Many thought that this situation was going to spark "change [you] can believe in," lead to more regulation, and curtail gun sales/ownership. But everyone thought wrong. Tears are no match for lobby dollars. Suckers.
Instead, firearm background checks have risen for at least a decade - a bullish indication for gun sales. In a sick twist of only-in-America fate, Obama's caustic tone towards gunmakers actually helped sell guns. And that is precisely what Remington needed in order to justify its burdensome capital structure and corresponding interest expense. With Hillary Clinton set to win the the election in 2016, Cerberus' convenient inability to sell was set to pay off.
But then that "dum dum" "ramrod" Donald Trump was elected and he enthusiastically and publicly declared that he would "never, ever infringe on the right of the people to keep and bear arms." While that's a great policy as far as we, here, at Remington are concerned, we'd rather him say that to us in private and declare in public that he's going to go door-to-door to confiscate your guns. Boom! Sales through the roof! And money money money money for the PE overlords! Who cares if you can't go see a concert in Las Vegas without fearing for your lives. Yield baby. Daddy needs a new house in Emerald Isle.
Wait? "How would President Trump say he's going to confiscate guns and nevertheless maintain his base?" you ask. Given that he can basically say ANYTHING and maintain his base, we're not too worried about it. #MAGA!! Plus, wink wink nod nod, North Carolina. We'd all have a "barrel" of laughs over that.
So now what? Well, "shoot." We could "burst mode" this thing, and liquidate it but what's the fun in that. After all, we still made net revenue of $603.4mm and have gross profit margins of 20.9%. Yeah, sure, those numbers are both down from $865.1mm and 27.4%, respectively, but, heck, all it'll take is a midterm election to reverse those trends baby.
So, we'd rather "blow up" the capital structure, eliminate $700mm in debt, and start fresh. So, that's what we're going to do. And if you have a problem with it, allow us to remind you that we are armed to the hilt. We've got the lenders putting $145mm of fresh capital into this thing. The ABL lenders will be refinanced-out and the term lenders will get 82.5% of the company and some cash. The third lien noteholders will get the remaining 17.5% of equity, a "brass"-full of cash and some 4-year warrants to capture some upside. You know, in case Trump doesn't win re-election in 2020. Gotta preserve that upside potential. And if anyone DOES have a problem with it...well...let me assure you (looking down at pocket): we're NOT happy to see you.
As it turns out, our (tongue-in-cheek) assessment of the situation wasn't far off. Indeed, increased inventory levels and decreased sales created significant issues for the company's over-levered balance sheet. Earlier this week, we added the following in our synopsis of the company’s bankruptcy filing:
Indeed, our mockery of the change in tone from President Obama to President Trump was spot on: post Trump's election, the company's inventory supply far exceeded demand. The (fictional) threat of the government going house-to-house to collect guns is a major stimulant to demand, apparently. Here is the change in financial performance,
"At the conclusion of 2017, the Debtors had realized approximately $603.4 million in sales and an adjusted EBITDA of $33.6 million. In comparison, in 2015 and 2016, the Debtors had achieved approximately $808.9 million and $865.1 million in sales and $64 million and $119.8 million in adjusted EBITDA, respectively."
We'd be remiss, however, if we didn't also note that NOWHERE in the company's bankruptcy filings does it mention the backlash against guns or the company's involvement in shootings...namely, the one that occurred in Las Vegas.
It’s true. Not a mention. Which is even more amazing when you consider that the bankruptcy filing was made on Sunday, March 25, 2018 — the day after the #MarchforourLives. The company blames the bankruptcy almost entirely on the balance sheet. There is a lot of debt:
$225mm ABL (Bank of America, $114.5mm funded),
$550.5mm term loan (Ankura Trust Company LLC),
$226mm 7.875% Senior Secured Notes due 2020 (Wilmington Trust NA),
$12.5mm secured Huntsville Note
Significantly, the bankruptcy is supposed to dress the situation. Nowhere it the company’s papers did it suggest any non-debt headwinds — like, for instance, regulation. Indeed, the company doesn't seem to expect any regulatory backlash. This is what the company projects in sales for the coming years: