💩Coal Country is Busy. Noooo…not Mining. Filing. For Bankruptcy (Short #MAGA!)💩

Pour one out for the fine folks of eastern Kentucky and western Virginia. They can’t seem to catch a break.

Earlier this week, Cambrian Holding Company Inc. (and its affiliate debtors) joined a long line of coal producers/processors (e.g., Cloud Peak EnergyWestmoreland CoalMission Coal) who have recently filed for bankruptcy. The company employees approximately 660 people, none of whom are members of a labor union (in contrast to bigger, more controversial, coal filings, i.e., Westmoreland) and most of whom must be fretting over their futures. They must really be getting tired of all of the post-election “winning” that’s going on in coal country.

The company’s problems appear to start in 2015, at the time the company acquired TECO Coal LLC and assumed $40mm of workers’ compensation and black lung liabilities that TECO had previously self-insured. The company sought to leverage its broader scale to increase production but it failed to raise the working capital it needed to live up to its obligations and sustain production at levels necessary to service the company’s balance sheet. Post-acquisition, the company doubled revenues, but it couldn’t sustain that progress and nevertheless recorded net losses from 2015 through 2018. In turn, the company triggered financial covenant and other defaults under its ABL Revolver and Term Loan.

In other words, the company has been in a state of emergency ever since the acquisition. Almost immediately, the company “undertook various efforts to return to a positive cashflow,” which, as you might expect, meant idling or closing certain mining operations, stretching the usable life of equipment, and laying off employees.* Its efforts proved fruitless. Per the company:

Notwithstanding these efforts, the Debtors have been unable to overcome the pressures placed on their profit margins from steadily declining coal prices (along with burdensome regulations and the accompanying decline in demand for coal), all of which have contributed to the Debtors’ substantial negative cashflow and inability to consummate a value-enhancing transaction.

So, what now? The company, with assistance from Jefferies LLC, will attempt to find a buyer willing to catch a falling knife: the plan is to “commence an expeditious sale and marketing process” of the company’s assets (call us crazy, but shouldn’t it be the other way around?). To fund this process, the company has a DIP commitment from affiliates of pre-petition lenders for $15mm.**

*Interestingly, it was in March 2016 when Hilary Clinton infamously stated, “Because we're going to put a lot of coal miners and coal companies out of business.” At the time, Cambrian was already struggling, laying off people in an attempt to generate positive cashflow. That message really must’ve struck a chord down in coal country. WHOOPS.

**The Term Lenders swiftly objected to the terms of the DIP and the use of cash collateral.

Is Spotify Ultimately the Death of Music?

Spotify Made Liam Gallagher Make His Own Coffee. That's Bad. 

Source: Pexels.com

Source: Pexels.com

It’s 2018 and that means that, unless side-tracked by $1.6b litigationSpotify’s “direct listing” is imminent, marking the company’s latest foray screwing over (read: disrupting) professionals who endeavor to make money. No, we don’t have much sympathy for the bankers who will lose out on rich underwriting fees. If anything, the blown IPOs for Snapchat ($SNAP) and Blue Apron ($APRN) kinda made the direct listing alternative a fait accompli. Now the market will be watching with great interest to see how the stock does without the various IPO-related safeguards in place. 

The real professionals on the short end of Spotify's stick, however, aren’t the bankers but may just be the artists themselves. Recall this video from Liam Gallagher. Recall this chart highlighting the juxtaposition between digital and physical sales. But that's not all, there's this piece: it stands for the proposition that Spotify really ought to go f*ck itself. Indeed, "To understand the danger Spotify poses to the music industry—and to music itself—you first have to dig beneath the “user experience” and examine its algorithmic schemes. Spotify’s front page “Browse” screen presents a classic illusion of choice, a stream of genre and mood playlists, charts, new releases, and now podcasts and video. It all appears limitless, a function of the platform’s infinite supply, but in reality it is tightly controlled by Spotify’s staff and dictated by the interests of major labels, brands, and other cash-rich businesses who have gamed the system." To point, Spotify has perfected "the automation of selling out. Only it subtracts the part where artists get paid." There is so much to this piece. 

And then there is this piece - from a musician - which really puts things in perspective, as far as second order effects go. One choice quote (among many in this must read piece), â€śAs a dad seeing my kids fall for an indistinguishable blob of well-coiffed brandoid bands and Disney graduates, I’m not at all shocked that amid their many fast-germinating aesthetic and creative ambitions, my own offspring have never seriously taken it into their heads to pick up an instrument or start a band. The craft of music has entirely succumbed to its marketed spectacle.” 

Against this backdrop, the distressed state of Gibson Brands Inc. and Guitar Center Inc.makes more sense. Here is Gibson Brands:

Given these disturbing downward trends, it's no wonder that Jefferies is working with the company to address the company's balance sheet and that Alvarez & Marsal LLC is helping streamline costs on the operational side. Indeed, last quarter the company negotiated some amendments (EBITDA, for one) with its lender, GSO, and even more recently negotiated, per reports, an extension of time to report financials to GSO. We can't wait to get our hands on those.

Guitar Center Inc., meanwhile, reported pre-holiday YOY increases in top and bottom line numbers, including a 1.3% increase in same store sales. Which surprised basically everyone. They have yet to release holiday numbers. They did, however, get a nice downgrade leading into Christmas. And there are debt exchanges to come in '18 for the company to manage an over-levered balance sheet unsustained by recent revenues.

Remember, Spotify did all of this with the help of $1b in venture debt (and NYC taxpayer subsidies, but we digress). Which, unless something has changed, is a ticking timebomb getting more expensive with each quarter the company fails to go public. 

Lest anyone fail to appreciate the growth trajectory of Spotify, there's the chart below to put it in perspective. 

One last note here. A few weeks ago Josh Brown wrote a piece entitled, "Just own the damn robots." If you haven't read it, we recommend that you do. The upshot of it is that the massive stock moves of the FANG stocks and other tech stocks are rooted in people's fear of being automated out of relevance. 

In that vein, maybe Spotify's imminent listing is the BEST thing that could possibly happen to creatives. Get a significant part of the company out of Daniel Ek's hands, out of the hands of the venture debt holders (assuming they have an equity kicker), and the venture capitalists. Get it in the hands of the artists themselves. Perhaps that way they can have SOME manner of control over their own commoditization. 

The Curious Case of Jefferies LLC v. Banro Corp.

In many respects the restructuring industry benefits from an information dislocation. Management teams thrust into stressed or distressed territory are dealing with different subgroups of investment banks and law firms than they're accustomed to. The professionals are different, the terminology is different, and the terms of engagement are different. On the flip side, sometimes the terms SHOULD be different, but aren't.

A fee tail is a great example of that. We've seen a variety of investment banker engagement letters that include a one year tail. Boiled down to its simplest form, this generally means that an investment banker is entitled to its fee (or a pre-negotiated portion thereof) if the company consummates a "transaction," as defined, within 12-months of the bankers engagement - regardless of whether THAT banker got the transaction to the finish line.

In the compressed timeline of a distressed issuer, a year is like a decade. Given that, we would argue, as a general matter, that a 12-month tail is absurd in the restructuring context. There are so many externalities that could come into play during that time that might require a change of strategy. A 6-month tail strikes us as far more reasonable. After all, we've heard of instances where a company considered filing for bankruptcy merely to be in position to reject a retention agreement and avoid the potential duplicative and monstrous fee. That's ridiculous. 

Now you're probably expecting us to shred some banker for a specific (ridiculous) provision. We hate to disappoint. Notwithstanding the above, we're actually of the view that tails serve a critical function. Why should an investment banker roll up sleeves and go to bat for a client if the client can cut ties at any moment and transfer all of that work over to an execution banker for a fraction of the cost? 

Jefferies LLC is asking precisely that question. In Jefferies LLC vBanro Corp. (1:17-cv-05490), Jefferies is asking the New York Southern District Court to enforce the terms of its engagement letter with the once-bankrupt gold-miner, Banro Corp.(and, in turn, Banro is attempting to transfer the litigation to federal court.). Jefferies alleges that it is contractually owed approximately $3.7mm in fees and expenses on account of a $175mm note exchange that is, according to Jefferies, expressly contemplated in its retention. The company purportedly terminated its relationship with Jefferies mere days before announcing that very transaction. Call us crazy but a tail of a few days strikes us as eminently reasonable. Professionals across the board ought to watch this case with great interest.