We noted here, here and here that the investment banks have generally been reporting solid earnings of late. Restructuring advisory revenues, as far as we can tell from those that line-item the service, have been solid for the first three quarters of '17. Given the relative dearth of deal flow, however, the juicy debtor mandates are few and far between and seem to be increasingly allocated to the small subset of investment banking firms we noted in the links above. Considering this, it's interesting that a boutique investment bank with smaller market share like Millstein & Co. might look to diversify its business. This week, we noted an SEC filing for Mill Point Capital, a debut private equity fund headed up by Millstein & Co. Founder and CEO, Jim Millstein. The new fund will seek to raise $375mm to invest in control and turnaround deals in North American business services and industrial companies.
Well, trying to avoid it at least. Synchronoss Technologies Inc. ($SNCR) this week offloaded Intralinks, a ubiquitous provider of data rooms to the industry's bankers, for approximately $1b to private equity firm, Siris Capital Group LLC, billed as specializing in, among other things, turnaround, special situations and distress. We hope those individual data rooms have some serious privacy safeguards built-in to them. Otherwise, you're about to see Siris Capital's sourcing apparatus on steroids. Yes, we're being cynically flip.
Think Outside the Box, We Say
We can't seem to get over our own obsession with private equity/biglaw/bank recruiting; we've written about it here, here and here. Why? Mostly because its stupid-absurd which, in turn, makes it funny. But after reading about the rise of corporate pop-ups here, we came up with what we think is a genius way to jumpstart business development and recruiting efforts in one fell swoop: a biglaw pop-up store. Stick with us here: picture a mall with next-wave bankruptcy candidates like Charming Charlie, Nine West, Bon-Ton Stores ($BONT), Sears Corporation ($SHLD), Destination XL ($DXLG), Destination Maternity ($DEST), etc. (collectively, the "Effed Retailers"). Picture, also, within close proximity, a corporate pop-up for, say, Law Firm AB&C LLP featuring all kinds of fancy screens rolling clips of how bada$$ and extreme its attorneys are while arguing (or singing) in court on behalf of retail clients. Imagine the product placement opportunities for the likes of Payless Shoesource, rue21 Inc., Gymboree, and True Religion (the "Successfully Reorganized Retailers"). "Stop by the AB&C LLP popup for awesome limited edition kicks and 'lit' specialty women's apparel," they'll say. In the opposite corner there can be a skull-and-crossbones banner hovering over an ominous display of retail carnage, e.g., hhgregg, Gander Mountain, etc. - all of which were, conveniently, of course, represented by other firms. Like, literally, a pair of running kicks should be on fire and death metal ought to be playing on the loud speaker. Of course, the managers of the Effed Retailers will see this and, in a panicked frenzy, start dialing corporate HQ asking, "Who is our Restructuring counsel?" Oh, really? Fire them. We need to hire AB&C LLP stat!" Meanwhile the Successfully Reorganized Retailers will generate some revenue from the product placement which, of course, they'll want to pay back when they inevitably are no longer "successful" and need to file for Chapter 22. Cha Ching! Another retention. Don't forget the REITs: Simon Property Group ($SPG) can continue to boast about 97% occupancy rates thanks to AB&C LLP filing space. And, finally, think of the branding potential. Law students and future law students will walk by and say "Holy crap. I want to go work at THAT law firm, AB&C LLP." Massive cross-benefit for recruiting. Whichever of your firms deploys this strategy first can send royalties via Paypal to firstname.lastname@example.org.
New Startups Target Millennials
We previously snarked about the ridiculousness of private equity recruiting. Rather than just make fun of the problem, we figured we'd offer some constructive suggestions. First, we note that Bravely, a New York-based startup recently raised $1.5mm in seed funding; it provides a platform that connects employees with expert communication and conflict coaches for off-the-record b*tch-sessions. Some VP busting your chops about a misplaced comma in the latest-and-greatest all-nighter-induced pitchbook? See Bravely. Some Partner just throw you under the bus while on a call with the client? See Bravely. If this is anything less than the equivalent of the shrink in Billions telling young professionals how "alpha" they are and how much value they provide to their respective firms, then fire up the "Busted Tech" column: it'll be there soon. And if that doesn't entice you to join the PE/investment-bank/biglaw ranks, maybe this will. After all, who WOULDN'T want to sleep where they work? Basically everyone other than millennials, it seems. We guess this explains WeLive.
MIT released a study that indicated that private equity and venture capital marks tend to increase as the public equity market increases. Shockingly, the marks don't decrease, correspondingly, when the equity market decreases. Choice quote, "'We make no claim that this behavior is intentional...[i]t is quite plausible that private equity managers subconsciously produce positively biased valuations merely because they are optimistic.'" Riiiiight. Color us cynical, but we think it's pretty hard to justify that 2-and-20 when an ETF is up 18% and your risk-adjusted return is -3.3%. But optimism. Sure.
Corporate cash load - now a record $2.26t - is showing solid growth (Apple is literally 10% of that). And people wonder why the private markets are the new public markets. With that much cash on balance sheet, is it any wonder that Bonobos, Plated, Jet.com, and others are getting scooped up by corporates prior to ever hitting the public market (and having to show the grotesque nature of their revenue models)? P.S. This doesn't count the $1.53 trillion of private equity "dry powder" that's just laying in wait.
Blah, Blah, Private Equity = Death to Retail?
Courtesy of the New Yorker, some more Toys "R" Us history here. Mattel ($MAT) had to amend its credit agreement, reflecting significant leverage ratio uncertainty after the Toys "R" Us bankruptcy filing. Jakks Pacific Inc. ($JAKK) reported that it now expects a net loss in '17 and then, as if to pour salt on the wound, the ratings agencies unleashed a downgrade. Folks are getting increasingly nervous about the retail fallout amidst conflicting reports about store closures/openings. PETITION NOTE: lost in all the noise around Toys is that their new business plan calls for increased employee wages - implying a belief that Walmart's ($WMT) wage increases have helped Walmart provide a better "experience." PETITION NOTE II: It appears that the lenders firmly believe that comparisons between Toys "R" Us and (liquidated) Circuit City are misplaced. Toys is THE LAST LARGE free-standing toy seller. Circuit City was generally expendable given that, at the time, the space was considered saturated and uber-competitive. Now, Best Buy ($BBY - up ~26% YTD, which is down after cratering the other day) fills that void. Just like Barnes & Noble ($BKS - down ~37% YTD) fills the (physical) book void (well, at least until Amazon book stores sprout in force - already it's popping up in New York and LA). And Dick's Sporting Goods ($DKS - down ~50% YTD) now has significant sporting goods market share. We're not saying WE would invest on this "LAST" basis because we wouldn't be caught dead with DKS, BKS or BBY in the PETITION 401(K); but, we are saying that the lenders appear to be lending, at least in part, on that basis. And word is that the DIP is over-subscribed (and Reorg Researchcaptures how lenders are clamoring for inclusion). Meanwhile, the list of distressed retailers seems to grow by the day: note: Belk Inc., Fresh Market, Bi-Lo, 99 Cents Only Stores and more (blah blah, private equity). But, to put an exclamation point on this, see, "Private equity drove Toys "R" Us into bankruptcy, sure, but that isn't quite the same thing as destroying it."
M*therf*ckers Have Lost Their G*d-damned Minds
There is so much to unpack in this stupid piece about the annual private equity recruiting frenzy. First, let's stop calling kids who are weeks out of college "talent" merely because they got a job in an investment bank trainee program. They haven't proven that they're talented at anything just yet. Going to an ivy league school, having a trust fund and being a douche isn't dispositive of anything. So, everyone chime the f*ck down please. Second, these folks get paid $200k? And people say there's no wage inflation? Third, the idea that an ibanker trainee is going to be appreciative for the two years of training a bank has given them and, in turn, give later private equity business to said bank is ludicrous. As a practical matter, his/her connection to that bank lasts a mere few weeks prior to them securing the next bigger, better and more Tinderable gig with which they prefer to identify. This seems like an outdated model with bad assumptions baked into it. The only sure thing seems to be that no matter which one of the PE firms these trainees land at, they'll be hiring Kirkland & Ellis LLP as bankruptcy counsel for one of their busted portfolio companies. Fourth, we love this bit about recruiting being earlier than ever "after an agreement to hold back fell apart." Hahahaha. So, private equity firms - KNOWN FOR DEAL-MAKING - couldn't even come to a deal amongst themselves?? This is like mutually assured destruction among KKR, Warburg Pincus, Carlyle Group LP, Apollo Global Management LLC, Bain Capital, Blackstone Group LP, TPG and Golden Gate Capital. Here's a great idea: lets trip over ourselves - and each other - to hire people with literally "no work experience." Those interviews must be PAINFUL AF. And, oh, hey you Managing Director. We love that you're "often forced to cancel business meetings last-minute to interview candidates." We're sure a multi-billion dollar transaction can wait for some piss-ant Harvard bro who inexplicably and unnecessarily writes equations on glass to regale everyone with his rad math skills. So lit. On what basis are these kids REALLY getting hired then? We think its probably pretty obvious. And its questionable how this BS still flies. What does any of this have to do with disruption? Well, when you're competing with venture capital and tech to acquire "talent," desperate times seemingly call for desperate measures. Logic has been disrupted. And it's absurd.
Amazon. Patent activity tipped off designs on fulfillment and logistics aspirations now closer to reality with the Whole Foods transaction. Elsewhere in Amazon land, the company is becoming a massive lender and most people are walking around with Amazon plastic in their pockets too.
Australian Distress. Anchorage Capital Group is sniffing around Ten Network Holdings.
Energy XXI Gulf Coast Inc. ($EXXI). Fired a bunch of people.
Key Energy Services ($KEG) sold frac stack and well testing assets for $23.7mm.
Penn Virginia Corp ($PVAC) has hired Jefferies to explore a potential sale one year after emerging from bankruptcy. The current owners (here, Strategic Value Partners LLC, Anchorage Capital Group LLC and Contrarian Capital Management LLC) of all of these restructuring oil and gas players are, seemingly, running for the hills creating a glut of sell-side engagements for bankers.
Private Equity. The House of Representatives just passed legislation that would loosen regulations on the private equity industry - including the need to register with the SEC. Suffice it to say, many large institutional PE investors like CalSTRS expressed opposition to the new legislation.
THL Credit ($TCRD) has closed its third direct lending vehicle with $511mm of AUM.
Apparently they've finally gotten the memo on retail (although, as we have well covered, the PE shops seem to be doing okay even while driving their portfolio companies into bankruptcy...but we digress): investments in retail companies are down markedly to 86 globally in 2017 as compared to 300 in each of '15 and '16. Speaking of private equity and retail, gotta love the timing behind the departure of TPG Capital's sole female partner given David Bonderman's ill-timed and inappropriate comments in the Uber boardroom. Notably, one noted potential cause for the separation is that heads needed to roll for the terrible J.Crew investment.
The Fortune 500 list came out and one of the companies that fell off of the list is KKR ($KKR), with causation linked to the firm's horrendous Samson Resources investment. Ouch. Peabody Energy ($BTU) was another notable fallen star. Elsewhere in private equity, Paul Singer of Elliott Management Corp. gives zero f*cks about what we all think. And, interestingly, Avenue Capital Group israising a second distressed energy fund (of $1b AUM). There is a boatload of dedicated money to distressed energy still waiting on the sidelines and so we find it interesting not that Avenue believes it can raise money in this space but that it can deploy it - at this juncture and in this competitive landscape - on opportunities that will provide a good rate of return. That's obviously not a bullish sign for the space. If they're right. Finally, stay tuned for a new report on the net job effect of PE from HBS researchers. In brief, the previously study - which subsumed data through 2005 - showed only a "modest net impact on employment." PE firms loved that sh*t because it made them look not-so-evil. What's happened a lot since 2005? A lot of PE. And a lot of dividend recaps. Popping popcorn and waiting for the new findings....
- Financial Services. Ocwen Financial Corp. got pummeled this week with fresh allegations.
- Healthcare. Suddenly the space is looking increasingly distressed - and this doesn't even take into account Adeptus Health Inc. or Halt Medical Inc. (see case summaries in "Cases").
- Investing. Looks like Intelsat jacked up distressed debt returns. Too bad, for some, that EFH jerked em' right back down.
- Manufacturing/3D-Printing. Holy sh*t. Is there anything Amazon doesn't touch?
- Oil & Gas. Sort of telling when Saudi Arabia is making a $50b push towards renewables. And also telling that new owners are already looking to shop assets post-BK (Stone Energy). At least some are already worried about another wave of distressed E&P based on revolver drawdowns. But US-based shale-focused private equity doesn't appear to have gotten the memo.
- Pharma/Hedge Fund Hotels. We enjoyed this summary of Bill Ackman's involvement in Valeant. And this piece discussing Marc Cohodes' short-strategy vis-a-vis Concordia International.
- Private Equity. These guys are making bigger and bolder moves into tech - though there is a "mixed record" there (citing Avaya, for instance)(firewall).
- Fast Forward. With Agent Provocateur (amusing write-up below, if we do say so ourselves) going bankrupt and L Brands (Victoria's Secret) reporting dogsh*t numbers last quarter, we figured we'd look at the lingerie space for a hot second and we found a lot of action. And it ain't good for the incumbents. It'll be interesting to see if Aerie's omnichannel strategy pays off - bold move to double down on physical stores these days - when Amazon looms right around the corner.
- Rewind I: Groupon. As we foreshadowed might happen, Groupon dropped this bomb on Good Friday while markets were closed - a banal and cynical PR trick to try and avoid a bad news cycle.
- Rewind II: Sun Capital Partners. We have been beating up on Sun Capital Partners as its retail portfolio just gets uglier and uglier (see now Marsh Supermarkets, which has apparently hired Hilco to explore strategic options, and Vince, which got itself a recent downgrade). Perhaps CVC Capital Partners and Leonard Green & Partners have gotten the memo; the two PE firms appear to be exploring a sale of BJ's Wholesale Club which, in turn, probably means that any plans of an IPO are on hold.
- Commercial Real Estate Backed Loans. Looks like J.C. Penney store closures could impair $30b of loans.
- European Elections & CDS. Investors perceive greater redenomination risk in France and Germany.
- European Retail. It seems the bloody retail phenomenon isn't exclusive to US retailers. Jack Wolfskin, a German producer of outdoor wear and equipment, is in the midst of a restructuring of its $365mm of debt. The Blackstone Group is the company's sponsor and PJT Partners is shopping the company. Meanwhile, Jaeger, a UK-based clothier is also on the block, with an administration within the bounds of possibility. AlixPartners is advising the company.
- High Yield. Valeant Pharmaceuticals, Foresight Energy and Community Health Systems all issued new high yield debt this past week and what screams of a massive yield grab. No, we're not joking: this actually happened. And demand was so strong that upsizing took place. We repeat: "demand was so strong that upsizing took place."
- Oil & Gas Fallout. Like we said last week, we're crushing Ramen so it's hard to feel sorry for a man pulling in $2mm and a $50k/month consulting fee, but its interesting to see some of the effects of the energy downturn - here, relating to Energy XXI's former CEO.
- Power. The Westinghouse saga got juicier with Weil and the Japanese Prime Minister basically saying put up or shut up. Meanwhile, FirstEnergy is involved in shenanigans and Exelon is now getting active.
- Private Equity History Lesson. A review of J.Crew's take-private transaction and private equity's affinity for dividends, long-term viability be-damned.
- Puerto Rico. Sh*t is getting real and people are starting to clamor for bankruptcy.
- Television. Netflix is going after unscripted reality TV. Choice quote: "The competition should be scared out of their minds. These guys are monsters — they're coming in to play and play hard."
- Uber. Expansion in India seems to be predicated upon a mountain of driver debt.
- Rewind I: Five weeks ago we reported the following: "The Finish Line Inc. announced its sale of Jack Rabbit Sports this week (66 locations) for undisclosed terms. "Undisclosed terms" = GU gels and a jock-strap." Apparently, we were too generous with our characterization of the financial consideration. Something tells us this won't stop Peter J. Soloman from dutifully and opportunistically noting the tombstone on its pitch materials for the next big retail mandate. See, also, this.
- Rewind II: Looks like Avaya Inc. has a potential buyer in publicly-traded Extreme Networks Inc. for its networking business (for $100mm).
- Rewind III: Store closures. Add Staples to the list (70 locations) and Signet Jewelers (165 stores). And here is one report on the failure of BCBG.
- Chart of the Week:
- Chart of the Week II:
- Athleisure. Start the funeral dirge. Under Armour reported dreadful numbers and guided poorly, citing the Sports Authority bankruptcy as a reason for decreased exposure to product. Then S&P kicked UA while it was down, downgrading its corporate credit rating from investment grade to high yield. It's not a restructuring candidate with double-digit growth but its results don't bode well for retailers, generally. Good thing J.Crew is NOW starting to focus on athleisure.
- Avaya. Doing a little damage control.
- Cumulus Media. What the public is learning.
- Europe. Some expect a bigger year for restructuring in 2017.
- Private Equity. Some doubts about portfolio quality.
- Solar. The technology continues to take hold and grab share but there'll be a lot of carnage along the way. Meanwhile, Exxon got pummeled, noting over $2b in writedowns.
- Retail. As distressed investors and bankruptcy professionals lick their chops over the possibilities with rue21, True Religion, Claire's Stores, J.Crew and others, "fast fashion" gets a second look as a culprit in the demise of retail (adding to the typical Amazon narrative). Still, even H&M and Uniqlo have announced intentions to scale back growth plans and/or close stores in the US.
- More Retail. The Finish Line Inc. announced its sale of Jack Rabbit Sports this week (66 locations) for undisclosed terms. "Undisclosed terms" = GU gels and a jock-strap. Peter J. Soloman served as financial advisor. The quote, "The acquisition eases fears that the chain would face liquidation with no strategic buyers for the business"...basically sums up specialty retail. Reasons for the company's struggles are particular to specialty running stores, including, notably a marked decline in marathon participation. It's just not that easy to take a selfie while running 26.2.
- Morer Retail - Canada. Once high-flying e-commerce startup Shoes.comcapitulates under the weight of multiple lawsuits, thwarting an IPO. In addition to shutting down the e-comm channels, the Vancouver-based company will shut down two brick-and-mortar locations - effectively flushing $45mm of PE down the toilet. Still, that URL seems like it would fetch some value...
- Fast Forward: Walmart is looking to disrupt Amazon while Amazon is looking to disrupt Alphabet and Facebook. And UPS. In other words, Amazon is after EVERYONE.
- Rewind I: Usually we reserve "rewind" for topics we've discussed in previous weeks but we're making an exception here: apparently HMV still exists in Canada. Or did. What a major blast to the past. What were they selling, exactly, 8-tracks?
- Rewind II: Payless Shoes. 4400 stores? Wow. Apropos, retail now the sector with the most distressed debt. In other retail news worth a rewind, Sports Direct is reportedly in talks to acquire Eastern Outfitters, the parent company of Bob's Stores and Eastern Mountain Sports from Versa Capital Management out of bankruptcy. If those names sound familiar, it's because Versa literally just bought them in bankruptcy last year in the Vestis Group case. So, add this to the growing list of Chapter 22 cases.
- Rewind III: Given our revelation last week of the connection between Puerto Rico-Dentons-New Gingrich, its intriguing that Greenberg Traurig is distancing itself from another Trump supporter.
- Chart of the Week: Sometimes to disrupt the incumbents, you have to bleed cash like nobody's business...
- For-Profit Education - Despite a recent settlement with the government, for-profit educator DeVry University faces new headwinds. Also, another college closure.
- Fossil joins the ranks of retailers who will soon be taking restructuring charges and closing stores.
- Healthcare/Pharma - many distressed investors and professionals are turning their attention away from E&P, OFS and retail are turning their attention here given the possibility that increased regulatory pressure may create more stress.
- Lumber Liquidators continues to face legal scrutiny: is it a near-term bankruptcy candidate?
- Municipal bankruptcy - Populism converges on Scranton as a $500mm+ debt load triggers voter movement to put bankruptcy to vote.
- Payday Lenders are under siege.
- Private Equity - an assessment of its influence and future.
- Last Week: We noted the large AUM raises by Oakhill and Carlyle for deployment into the distressed market. In contrast, Fortress Investment Group underscores that prices are too rich and yields too low, and so they're prepared to return investor funds.
- Last Week II: As "Dead Malls" continue to garner attention, a major mall owner talks up its own book and projects a major Aeropostale turnaround.
- Last Week III: In the wake of increased seismic activity, Oklahoma and federal regulators order the closure of injection wells in Oklahoma. We noted this issue in last week's feature.
- Chart of the Week: