🎢Weeeeeeeeeeeeeee🎢

⚡️Update: WeWork⚡️

This was us covering the hourly news diarrhea that came out about WeWork in the last 48 hours alone:

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Which, we suppose, is better than how the company’s equity and existing noteholders must be managing:

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Or the fine bankers over at JPMorgan Chase ($JPM) who are tasked with finding capital markets suckers…uh…investors…who’d be so kind as extend this steaming pile a lifeline:

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So, sifting through the constant headlines, where are we at?

Okay, right. The hot mess of a liquidity profile and limited amount of debt capacity to get a deal done.  Nothing to see here. All good.

Reminder: it is widely believed that WeWork will run out of cash by the end of the year without a new deal in place. Axios reports:

The company reported $2.4 billion of cash at the end of June, with a first-half net loss of $904 million. At that pace, it should have been able to survive at least through the middle of 2020. But I'm told that it significantly increased spend in Q3, partially due to the lumpy nature of real estate cap-ex, believing it would be absorbed by $9 billion in proceeds from the IPO and concurrent debt deal. One source says that there's probably enough money to get through Thanksgiving, but not to Christmas.

Riiiiiight. So here are the options:

  • Softbank Group new equity and debt bailout pursuant to which they get control of WeWork and napalm Masa’s former boy, Adam Neumann, in the process. This would reportedly be an aggregate $3b package “to get through the next year” — repeat, TO GET THROUGH THE NEXT YEAR — with the equity component coming significantly cheaper than the previous self-imposed $47b valuation (at a $10b valuation); or

  • JPM arranges some hodge-podge debt package and tests the market’s never-ceasing thirst for yield, baby, yield. The early reports were that the financing package would be $3b, comprised of $1 billion of 9-11% secured debt, $2b of unsecured PIK notes yielding 15% (1/3 cash pay, 2/3 PIK), and letter of credit availability. Wait, 15%?! How does a company with no liquidity even pay that? That’s why the PIK component is so critical: it would simply add 2/3 of the interest due to the principal of the debt. Said another way, the debt would compound annually and creep past $2.5b in two years. Per Bloomberg, “The $2 billion of proposed unsecured debt may carry an additional sweetener for investors: equity warrants designed so that investors could boost their return to around 30% if the company gets to a $20 billion valuation, according to the person who described the structure.” Because debt won’t dilute equity like Softbank’s equity-heavy proposal would, WeWork insiders (read: Neumann) apparently prefer the JPM approach. Regardless of what insiders prefer, however, is whether the market will be receptive to what one investor dubbed, per Bloomberg, “substantial career risk.

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We’re old enough to remember when WeWork’s notes rebounded a mere five days ago for reasons that were wildly inexplicable to us then and even more so now.

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So, to summarize, who are the big winners? IWG/Regus ($IWGFF)(long?). We’re pretty sure they’re loving what’s happening here; we have to imagine that the inbound calls have to be on the upswing. Also, the restructuring professionals. Whether you’re Weil Gotshal & Manges LLP (Softbank), Houlihan Lokey ($HLI)(Softbank), or Perella Weinberg Partners (WeWork’s Board of Directors), you’re incurring more billables/fees than you expected to mere days weeks ago. Somehow, some way, the restructuring pros always seem to come out ahead. And, finally, Goldman Sachs ($GS). Because there’s nothing more Goldman-y than them selling their prop stock right out from under a proposed IPO.

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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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The Latest and Greatest on Guitar Center

Long Capital Structure Rehabilitation 2.0

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Before we dive into the current status of Guitar Center Inc., let’s first establish that there is almost zero chance ⬆️ this kid ⬆️ ends up playing guitar when he’s older given today’s music trends. Just saying.

As everyone knows, the instrument retailer recently popped up on a variety of retail doom and gloom lists due to its over-levered capital structure and (relatively) near-term maturities. A quick flashback: the company was the target of a $2.1 billion 2007 leveraged buyout by Bain Capital. In a 2014 out-of-court restructuring, Ares Capital Management swapped its debt for equity in the company, effectively eliminating Bain from the equation and removing $500 million of debt and nearly $70 million in annual interest expense. The transaction was accompanied by a refinancing and maturity extension of other parts of the capital structure.

As a consequence of that transaction, the current capital structure stands as follows:

  • $375 million asset-backed revolving credit facility due April 2019 (“ABL”);
  • $615 million senior secured notes at 6.5% and due April 2019; and
  • $325 million senior unsecured notes at 9.625% due April 2020.

Yes, that’s a total of $1.2 billion of debt. Despite an uptick in pre-holiday sales, the dominant narrative remains that nobody plays guitar anymore. Consequently, there hasn’t been enough revenue coming into the coffers to service this debt. You can blame Yeezy and The Chainsmokers for that. We’ve harped on about the state of music here and, in a separate guest post about Gibson Brands’ struggles, Ted Gavin of Gavin/Solmonese added some additional perspective. Longer-term trends notwithstanding, Guitar Center seeks to live another day on the back of the short-term uptick. To do so, however, it must address that debt.

On Monday, Guitar Center — with the help of bankers UBS and Houlihan Lokey and the consent of Ares — launched an exchange offer and consent solicitation related to its unsecured notes. The offer is to swap the existing $325 million 9.625% notes for $325 million of 5% cash/8% PIK notes due 2022 (along with with some warrants). Per the company’s press release, $299 million worth of holders have already agreed (92% of the issuance). This swap would save the company $13,812,500 a year in interest expense AND have the effect of pushing out the maturity for three years. Gotta love the capital markets these days.

In tandem, the company is proposing to offer $635 million of new 9.5% senior secured notes due 2021. The use of proceeds of these new notes would be to redeem the $615 million 6.5% senior secured notes due 2019. With this piece of the transaction, the company will be taking on an additional $20.35 million of annual interest expense.

Finally, the company will also refinance the $375 million ABL, extending the maturity out by 5 years.

So, if you made it this far, here’s the upshot: if these transactions are successful, the company will have availed itself of a few years to turn itself around by pushing out its debt maturities. But, it will have eliminated ZERO INTEREST EXPENSE in the aggregate. Said another way: this is a band-aid, not a solution.

All of which means that the company needs to hope and pray some rock God hits the scene and reinvigorates the market for guitars in the next two years. We’ll take the under.

Busted Tech

Speaking of tech, Quixey, a "pioneer" of deep mobile search, announced in an epically hubristic blog post that it is shutting down and exploring strategic options (read: IP sale in bankruptcy, most likely). It has $31mm of venture debt and $134mm of venture capital from the likes of Alibaba and Softbank scattered on the cap table. On the topic of venture debt, choice quote from Fred Wilson taken from here: "I have lived [the venture debt] story several times in my career and we are seeing this play out again in the market." Sure sounds like it. We've surveyed a number of restructuring professionals and there seems to be very little attention given to busted tech. Well, maybe other than from us. Why? No debt, we're told. Really? No debt? See, e.g., Violin Memory, Answers.com, Aspect Software. And, now also, some Soundcloud news - a company we have previously identified as a potential bankruptcy candidate. The company appears to have secured an additional $70mm of venture debt (additive to the $30mm previously raised from Tennenbaum Capital Partners) from the likes of Ares Capital, among others. Something tells us that Houlihan Lokey isn't in the business of making nonsensical and useless acquisitions. Interested in this subject? Email us.