🔥F.E.A.R. Part Two.🔥

⚡️What. The. Hell. Part. Two.⚡️

Pardon us: it’s a little hard to write with a neck brace on. This week’s whiplash has us all sorts of flummoxed.

On Monday, the stock market surged 1000 points because … well … who the hell knows? Was President Trump correct last week when he suggested that some of last week’s negative market price action had to deal with the rise of Bernie Sanders? Maybe. On Monday, while the mainstream media simultaneously reported on the consolidation of the moderate democrat lane and new coronavirus-related deaths, the stock market somewhat-inexplicably rocketed higher. Apparently the thought of 2% of the US population succumbing to a painful pneumonia-like death was no longer so frightening now that “the establishment” was rallying against good ol’ Bernie. We know, we know, you’re wondering: is this really the reason? The answer: we have no f*cking idea. But whatevs 🤷‍♀️. The market was green!

Enter the FED. The market was looking mighty volatile again yesterday when the FED came out of nowhere and lowered its benchmark FED Funds rate by 50 bps — acting between meetings for the first time since 2008. We all know what happened that year. Why couldn’t the FED wait two weeks? Chairman Powell said:

“The committee judged that the risks to the U.S. outlook have changed materially. In response, we have eased the stance of monetary policy to provide some more support to the economy.”

In other words, the FED must be seeing some disturbing-AF data that we aren’t privy to yet. Less likely though equally plausible: Jerome Powell continues to be Reek to President Trump’s Ramsey Bolton.

The result? Well, the market rallied for about 1.2 hot seconds and then puked all over itself. It subsequently tumbled 2.8%. The energy sector is now down 23% YTD. The Ten-year treasury yield dipped below 1% for the first time in history.

FOR THE FIRST TIME IN HISTORY. Yes, folks, sh*t is getting real. We’d opine as to “how real” but, again, this is THE FIRST TIME IN HISTORY that this has happened. So, literally nobody knows.

To the extent this extraordinary measure was meant to calm markets, well…

``It’s doubtful that when JP left home this morning he thought ‘50 bp will really crush the stock market.’ So it goes.'' #coronaclientnotes pic.twitter.com/ZuptQoK5Bu

— Eliza Ronalds-Hannon (@ElizaHannon) March 3, 2020

A generation of investors believes that Central Banks are omnipotent and that pre-emptive strikes on financial stress are the solution to every crisis.

Today, that world view is being tested. It could represent a profound shift in the collective consciousness and a new regime.

— Christopher Cole (@vol_christopher) March 3, 2020

Time to extract that gold tooth: it’s going up in value.

You know what else is going up in value? Food. As coronavirus reports spread to multiple cases in NYC, North Carolina and other places, people are stocking up like crazy with an eye towards a potential quarantine situation. Lots of marriage about to get tested, y’all. Netflix and…KILL?!? 😬 Long divorce lawyers.

*****

What does all of this coronavirus disruption mean for restructuring professionals? It’s still far too early to tell. But this doesn’t bode well:

This shows that supplier delivery times are slowing due to China-related issues.

This doesn’t help either:

Ooof. No bueno. Like 2009-level no bueno. Stating the obvious, JPMorgan noted that “…demand, international trade and supply chains were severely disrupted by the COVID-19 outbreak.”

Bottom line: it’s hard to generate revenue (and service debt or comply with covenants) when you don’t have product.

🔥F.E.A.R.🔥

⚡️What. The. Hell.⚡️

This week was a complete and utter sh*tshow. There’s no sugar-coating it. As fears about coronavirus rose, the stock market got absolutely annihilated — the S&P dipped over 11% for the week (one of the most severe declines in history) and the Dow dropped approximately 4000 points — precipitating a rabid shift to safety in the markets: the 10-year treasury hit a record low, dipping below 1.2%. Leveraged loans, meanwhile, got napalmed.

About a month ago 60% of the $1.2T in outstanding US #leveragedloan debt was priced at 100 or better. A week ago it was 38%. After today just 10% of that debt is priced at par #COVID19US #economy pic.twitter.com/1PcVaWjzbU

— Leveraged Loans (@lcdnews) February 27, 2020

Majors like Apple Inc. ($AAPL), Mastercard Inc. ($MA) and Microsoft Inc. ($MSFT) lowered guidance and Goldman Sachs Inc. ($GS) issued a report indicating lowered growth expectations for the year — to zero. Yep, zero. The VIX “fear index” jumped into the 40s after being virtually catatonic for years. Now there’s widespread speculation that the FED will lower rates to stimulate the market — a controversial strategy given (a) the sheer volume of money already flushing through the system and (b) the fear that the FED will be ill-equipped to then address any subsequent recession.

There are a lot of restructuring implications — on both sides of the fence. On one hand, lower interest rates ought to help a number of companies with floating-rate loans. It’s clear that the rising interest rate catalyst that many expected — and the FED quickly shot down last year — is nowhere near becoming reality. Secondly, oil and gas prices are getting smoked and given that those commodities constitute huge input costs, companies will see some savings there. Theoretically, lower oil and gas prices should also help stimulate the consumer which, we all know, had been carrying both the economy and stock prices to recent (clearly inflated) highs.

That is, unless they stay home and do nothing other than watch Netflix ($NFLX) and Disney+ ($DIS) and order bottled water and canned goods from Amazon ($AMZN) and Walmart ($WMT) — assuming, of course, that third-party fulfillment isn’t affected by supply chain disruption. Interestingly, both the consumer staples and discretionary spending ETFs are down over 10%. And the former more than the latter, which, when there’s a flight to safety pushing treasury rates down, doesn’t make much sense. So 🤷‍♀️. Corporations are, one by one, curtailing business travel, cancelling conferences, and encouraging stay-home work as advisories abound about congregating in mass group settings. This is impacting the airlines and movie theaters, naturally. The MTA ought to see a decline in ridership which ought to dig a bigger budget deficit hole (PETITION Note: Is NYC f*cked?).

Transports are getting smoked too. SupplyChainDive writes:

The COVID-19 outbreak and resulting quarantines have led to a record number of blank sailings, according to the latest figures from Alphaliner. Inactive fleet size has swelled to 2.04 million TEUs or 8.8% of global capacity. The decline is greater than the 1.52 million TEUs of canceled capacity during the 2009 financial crisis, the previous record, 11.7% of the total fleet at the time.

The Ports of Los Angeles and Long Beach are facing 56 canceled sailings over the first three months of the year, the ports told Supply Chain Dive.

Note that we had previously asked “Short the Ports?” in “🚛Dump Trucks🚛” here.

Here is The Washington Post highlighting a world of hurt at the ports:

…shipping container traffic both coming and going from the ports of Los Angeles and Long Beach has been sliding at an average rate of 5.7 percent a month since the beginning of last year….

Port of Los Angeles is projecting a 25% drop in container volumes this month, as the economic impact of the coronavirus spreads across shipping operations and foreign supply chain. Imagine if 1 in 4 goods imported from Asia suddenly stopped coming. Impact just starting.

— Eric Lipton (@EricLiptonNYT) March 1, 2020

Pour one out for the shippers.

Of course, none of this is positive for sectors that are already massively struggling, i.e., restaurants. Nor retail. Per CNBC:

If the coronavirus spreads in the U.S., that could mean really bad news for U.S. mall owners, according to a survey taken this week.

The survey by Coresight Research found that 58% of people say they are likely to avoid public areas such as shopping centers and entertainment venues if the virus’ outbreak worsens in the United States. The group surveyed 1,934 U.S. consumers 18 and older.

The survey was taken Tuesday and Wednesday — before California said it was monitoring 8,400 people for COVID-19.

Back to energy. Energy bonds are getting smoked as massive outflows flee the sector.

Some violent moves in energy junk bonds. One example: Whiting Petroleum bonds have lost almost half their value in a month, losing 12.5 cents on the dollar today alone. pic.twitter.com/8Neb8ltmz0

— Lisa Abramowicz (@lisaabramowicz1) February 27, 2020

Today it's like the Sorcerer's Apprentice here, with alerts flooding in every few minutes on outsized drops and new record lows for #distresseddebt bonds. The drought for the #restructuring and #bankruptcy advisers may be over.

— Rick Green (@RickGreenNYBiz) February 28, 2020

OPEC meets next week to discuss a massive production cut. From a restructuring perspective, it’s likely irrelevant at this point.

We’re heading into redetermination season for oil and gas explorers and producers and, given the rapid decline in oil and gas prices, banks are likely to take a stern stance vis-a-vis borrowing base levels. That ought to help usher in another wave of oil and gas restructuring.

Hold on to your hats, folks.

💥Stage Stores Inc: Bankruptcy Soon? (Short Department Stores)💥

In August 2019’s “💥Tariffs Tear into Tech+💥,” we wrote:

We’ve previous noted the gradual unwind of Stage Stores Inc. ($SSI) in November 2018’s “💰Will Crypto Mine Some Bankruptcy Work?💰” “…noting that (a) its off-price business experienced a 9.9% comparable sales increase, alleviating negative 5.5% department store comps somewhat, equating to 2.8% total comp sales declines …,” in January 2019’s “💥A Retail Bloodbath💥,” (“…closing more stores and pivoting more into the discount space, replacing shuttered Goody’s stores with Gordmans locations.”), and in March 2019’s “Thanos Snaps, Retail Disappears👿” (“…closing between 40-60 department stores.”). On March 20, the stock was just barely hovering above penny-status, trading at $1.04/share. After the Trump-tweet/tariff-induced bloodbath on Friday, the stock now sits at $0.78/share.

Thursday was a big day for the company. One one hand, some big mouths leaked to The Wall Street Journal that the company retained Berkeley Research Group to advise on department store operations. That’s certainly not a great sign though it may be a positive that the company is seeking assistance sooner rather than later. On the other hand, the company reported Q2 ‘19 results that were, to some degree, somewhat surprising to the upside. Net sales declined merely $1mm YOY and comp sales were 1.8%, a rare increase that stems the barrage of consecutive quarters of negative turns. Off-price conversions powered 1.5% of the increase. The company reported positive trends in comps, transaction count, average transaction value, private label credit card growth, and SG&A. On the flip side, COGs increased meaningfully, adjusted EBITDA declined $2.1mm YOY and interest expense is on the rise. The company has $324mm of debt. Cash stands at $25mm with $66mm in ABL availability. The company’s net loss was $24mm compared to $17mm last year.

Some of the reported loss is attributable to offensive moves. The company’s inventory increased 5% as the company seeks to avoid peak shipping expense and get out ahead of tariff risk (PETITION Note: see a theme emerging here, folks?). There are also costs associated with location closures: the company will shed 46 more stores.

What’s next? Well, the company raised EBITDA guidance for fiscal ‘19: management is clearly confident that the off-price conversion will continue to drive improvements. No analysts were on the earnings call to challenge the company. Restructuring advisors will surely want to pay attention to see whether management’s optimism is well-placed.

Subsequently, the company issued a January 13 press release that spooked the markets. Interestingly, it reported positive comp sales (+1.4%) for the nine-week period ended 1/4/20. In retail-land these days, a positive comp sales figure is the equivalent of killing it. More compelling, for the 48-week year to date period, comp sales were up 4.2%. The problem? These figures didn’t live up to expectations.

The guidance didn’t help matters either. The company announced:

“In response to the holiday sales performance, we implemented incremental promotional efforts in the fourth quarter to ensure appropriate inventory levels as we enter fiscal 2020. As a result, we now expect full year 2019 earnings to be approximately $25 million to $30 million below the low end of the previously announced guidance range.”

Indeed, it appeared that management’s optimism was, in fact, misplaced.

Which gets us to yesterday’s The Wall Street Journal’s piece, entitled, “Discount Retailer Stage Stores Preps for Possible Bankruptcy.”

The Journal reported:

Stage Stores Inc. is preparing for a financial restructuring that could include a bankruptcy filing as the discount retailer contends with persistent losses at its department store outlets, according to people familiar with the matter.

The publicly listed, Houston-based company has recently been late in paying its vendors amid a liquidity squeeze, the people said.

The company is likely to file for chapter 11, although the situation remains fluid and Stage Stores could complete an out-of-court debt restructuring process, according to the people. (emphasis added)

The highlighted part above is the key, we think. It’s not that the company is stretching vendors per se … that much is fairly typical for companies with liquidity constraints. The question is why? Or more appropriately, who has risk?

Wells Fargo Bank NA ($WFC) is the company’s administrative agent and primary lender under the company’s asset-based credit facility. Prior to Destination Maternity’s ($DEST) chapter 11 filing, Wells Fargo tightened the screws, instituting reserves against credit availability to de-risk its position. It stands to reason that it is doing the same thing here given the company’s sub-optimal performance and failure to meet projections. Said another way, WFC has had it with retail. Unlike oil and gas lending, there are no pressures here to play ball in the name of “relationship banking” when, at the end of the day, so many of these “relationships” are getting wiped from the earth.

💰How Are the Investment Banks Doing? (Long Liability Management)💰

Generally speaking, quite well, actually.

Last week was earnings week for investment banks with restructuring groups. Let’s dive in.

1. Evercore Inc. ($EVR) reported its second best year in history, generating over $2.03b in revenue, an eye-popping number. Still, this represented a 2% decline from 2018 — thanks mostly to lower global M&A volumes and transaction count. While, generally speaking, this was a strong quarter, the firm dropped this doozy:

In response to these financial results, we have undertaken an initiative to ensure that our resources are focused on our greatest growth opportunities and that our entire team is performing at the high standards that we and our clients expect. We began this initiative at the end of 2019 by identifying markets, sectors and people that exhibited at productivity below our expectations. We are reducing our commitment to those areas, redeploying personnel where feasible and realigning certain operations to better position the firm for future growth.

In other words, the second best year in history didn’t stop the bank from sh*tcanning a meaningful portion (6%) of its workforce. 😬 The equity market — never one to infuse empathy into its behavior — rewarded the bank with an 11% pop on the news.

What of restructuring?

Demand for restructuring and more broadly debt advisory advice remained elevated as accommodative credit markets are driving higher levels of financial leverage.

Reminder: we are deeeeeeeep into a bull market, folks. To satisfy this demand, EVR appears to be expanding its platform to offer “increasingly more creditor advisory services that can serve our clients both in-court and more frequently out of court.” Ladies and gentlemen, the demarcation between debtor-side shops and creditor-side shops gets blurrier and blurrier. Can’t win a debtor mandate? Just slide on down that beautiful cap stack y’all. Revenue is revenue.

Interestingly, for the second quarter in a row, management suggested that deals are taking longer to complete — and therefore attribute to revenue — due to regulatory reasons, erratic stock markets, and choppy capital markets.

Unfortunately, despite prodding from analysts, management refused to parse out how different segments are faring so we cannot say how EVR’s restructuring group compared to other public competitor firms. Management claims that different teams cross-pollinate deals and so it’s hard to attribute revenue to different advisory segments. Which is an annoying AF explanation but we suppose there’s some logic to it (PETITION Note: we suppose this is the benefit of lawyers having to bill time: they can quantitatively attribute departmental productivity). Still, management declared:

…even though it's a very low default environment there clearly are sectors that have experienced consistent distress, energy, shipping, retail and certainly our backlogs would suggest that there is not going to be a diminution of that in 2020.

Any one betting big on recoveries in the energy and retail sectors ought to heed their friendly banker friends.

*****

2. The problem with EVR’s management’s stance that transactions are hard to separate between various groups is that they can’t then go out to the market and thump their chests like PJT Partners Inc’s ($PJT) Paul Taubman, touting the singular performance of the restructuring team:

Our world-class restructuring franchise maintained its leadership position, ranking No. 1 globally in dollar value of announced and completed restructurings. The business meaningfully exceeded our initial revenue expectations for 2019, powered by substantial growth in U.S. restructuring revenues.

Or...maybe they can? And should? After all, that rah rah rah doesn’t mean much when it isn’t backed up by concrete numbers. In fact, PJT, like EVR, doesn’t delineate restructuring-specific numbers either. 🤔🤔

PJT, as a firm, is a fraction of the size of EVR. Revenues were $718mm for the fiscal year, up 24% versus 2018. These numbers reflect “a meaningfully higher level of activity than...forecast” for restructuring in 2019. And backlog is even higher going into 2020 than it was going into 2019!!

So, to summarize, numbers were good. Thanks to good backlog carrying into ‘19 from ‘18. Go-forward backlog carrying into ‘20 is even stronger than ‘19. Reminder #2: we are deeeeeeeep into a bull market, folks.

*****

3. And then there is Moelis & Company ($MC) and its unbalanced year. The firm reported $224mm in Q4 (down 6% YOY) amidst the strongest second half in firm history. Its first half, however, dragged down full year performance which came in at $747mm, down 17% versus 2018 and just slightly more than PJT. These results stemmed from fewer completed transactions, partially offset by … wait for it … higher average fees on completed transactions (across M&A and restructuring). Here comes some first-class touting:

Our restructuring franchise achieved record revenues for the full year, surpassing last year's peak level of activity. This was the fourth consecutive year of growth reflecting our continued market share gains in the strength of the team. We ended the year as the number one advisor globally and in the US were completed transaction volumes according to Refinitiv and advised on six of the year's top 10 completed restructuring deals globally.

Query given overall performance whether comp reflected these stellar results or whether the failure of the enterprise to grow dragged restructuring folks down? 🤔 

Management was a bit unclear on the point. When challenged on a $40mm uptick in comp — an analyst basically asking whether Moelis bankers will win when they win and win when they lose ... to the detriment of shareholders — Mr Moelis responded by saying that the second half was robust and that the market is robust, justifying comp levels (PETITION NOTE: presumably he means both deal-wise and recruitment-wise, necessitating taking care of his people). But he also said the average MD “was down pretty significantly” and that he “did not boost pay.” But he also suggests that franchises that did well in H2 got paid. Was that restructuring? It’s unclear. What is clear is that analysts were flummoxed by this simple fact: revenues ⬇️, banker comp ⬆️. When asked to prognosticate restructuring activity for 2020, here’s what Mr. Moelis offered:

So, I expect our restructuring group to continue to gain market share. It was number one ranked this year. They did a spectacular job. It doesn't feel like the economy is going to give us a spike up there may be small amounts of growth, but we're talking about natural growth of the market just because the size of the market gets bigger, there's so much out there I don't sense a GDP problem that would cause us to have a leapfrog right now, but I expect we'll continue to gain market share.

He continued:

…all I know is sooner or later, the cycle does have a bit of an issue. And there's a lot of paper out there. I think we're in a 1% to 2% default market. We've been that way for five years now. Going back in time, we've always gotten the 3%, 4%. In the 2007, '08 cycle we got into the high-single digits in the fall. So, I know that's going to happen someday, not high, but I think we'll get into mid-single digits in a downturn and it will become a tremendous it will do a tremendous jump. That's a long way of saying, I don't expect anything spectacular out of them this year. Barring an event that I have not foreseen. I think it will just be steady improvement in our market share.

In agreement with EVR, Mr. Moelis also sees continued energy pain in ‘20:

Our last year was a big, big I mean especially oilfield services and I think if oil stays down here around $50, you're going to see a continued March of companies in that sector.

Thus far, 2020 has been chock full of restaurant and grocery bankruptcies. Count on energy stacking up some numbers soon.

*****

4. We’ve noticed that Greenhill & Co. Inc. ($GHL) appears to be upping its game. It had a creditor-side mandate in Clover Technologies Group LLC (prepack filed in Q4 ‘19), and debtor-side mandates in American Commercial Lines Inc. (prepack filed last week) and NPC International Inc., which is likely coming soon to a bankruptcy court near you. It also reported earnings last week and they were mixed: annual revenues of $301mm were down 14% YOY (blamed on industry-wide M&A decline and a softer year in Europe) but its Q4 ‘19 revenue of $106.7mm represented a 20% YOY increase. Is the bank turning around? Its bankers hope so: it sounds like comp may have been a bit disappointing this year.

Restructuring may be playing a part in the performance uptick. CEO Scott Bok noted:

By type of advice, we benefited from significant improvement in restructuring advisory revenue relative to recent years as our recently enlarged team gained increasing traction throughout the year.

And:

In restructuring advisory, we ended 2019 with a much-improved level of monthly retainer fees and a much larger backlog of assignments that should get to completion during 2020. Recent tightening of credit availability and increasing cost for borrowers with weaker credit rating should also be a positive factor for this business.

Backlog, backlog, backlog. It sure seems like every firm is saying the same thing: deal volume is up heading into 2020. Reminder #3: we are deeeeeeeep into a bull market, folks.

*****

5. And, finally, there’s Houlihan Lokey Inc. ($HLI). The firm reported its fiscal Q3 ended 12/31/19, highlighted by a 11.9% revenue increase amounting to a record $334mm, the first time quarterly revenues surpassed $300mm. Year-to-date revenues are $857mm, an 8% increase YOY. Not one to be left out, CEO Scott Beiser also engaged in some chest-pounding, asserting that Houlihan is #1 at…well…basically everything. Which, of course, doesn’t jive with PJT’s report but whatevs. This may just be cherry-picking. Or spin. Or “who the f*ck will actually verify.” Or “if we don’t parse out revenue by segments, how will anyone actually know?” Could be a number of these.

Relating to restructuring, Mr. Beiser said:

Our Financial Restructuring business continues to perform well, despite the current low default environment in the credit markets. Ongoing technology disruptors, changes in consumer buying habits, company mismanagement and over leverage have all contributed to current growth in our Restructuring business without the typical characteristics of a business downturn or higher interest rates.

Did we hear someone say disruption?? Music to our ears.👂👂👂

This bit was interesting as it validates our point earlier about restructuring firms no longer being beholden to traditional roles:

In Financial Restructuring, we continue to experience balance in our business between debtor and creditor work. And, in fact, in fiscal 2019 and fiscal 2020 year-to-date, our debtor revenues and our creditor revenues were pretty evenly split.

And yet most people still think of Houlihan as a creditor-side advisory firm. Just goes to show that there remains an information dislocation out in the marketplace.

We finished here with Houlihan because it is the one firm that actually has no problem delineating its restructuring revenue. All of the other firms duck and dive when asked for specifics, saying that it’s impossible to separate out work flows. Not Houlihan:

Financial Restructuring revenues were very strong this quarter at $93 million, a 24% increase from the same quarter last year, driven by higher transaction volume. We closed 28 transactions in the quarter, compared to 21 transactions in the same period last year. Average transaction fee on closed deals was relatively flat when compared to the same quarter last year.

In other words, Houlihan’s restructuring group did about as much revenue as all of Greenhill.

Again, energy was quite in focus as a huge potential revenue area in 2020. Here’s what Mr. Beiser had to say about that:

…we do see a little bit of a second pickup wave here in the oil and gas arena from a restructuring standpoint. It doesn’t feel like it’s going to necessarily be as big or as lengthy as what we saw before.

But as we’ve always looked at, it’s a combination of what kind of business plans people put together, what kind of financing package they have and what was the duration of that financing package and ultimately, where oil prices are. And all of those are causing some round of some additional conversations and mandates in restructuring. But at this juncture, don’t necessarily think it’s going to be the same size we saw a couple of years ago.

Interestingly benign assessment of what could end up being another bloodbath in energy this year. We think he’s understating the case. Just wait for it: there are a number of companies that either already went into BK back in the 14-17 time frame that are likely to fall back in (or do something out of court, i.e., Key Energy) and/or there are companies that avoided BK via an up-tier exchange of some other sleight-of-hand who can no longer fend off the inevitable — particularly with oil at $50/barrel.

🎅A Wave of Filings Crash the Holidays🎅

🤖Are There More #BustedTech Bankruptcies Coming?🤖

The recent bankruptcies of Fusion Connect (which just confirmed a plan swapping ~$270mm of debt for equity), Clover Technologies, uBiome (which just sold for a small fraction of its valuation), Loot Crate Inc., Juno Inc., Munchery, and Vector Launch Inc. — combined with the recent negative news surrounding WeWork (of course), Faraday Future (founder already in BK), Proteus Digital Health and Wag — signal that restructuring professionals shouldn’t sleep on “tech.” The sector has been surprisingly active in 2019 and there’s likely more to come in 2020 (e.g., RentPath?).

In the wake of the WeWork debacle, there has been a lot of talk about the end of “growth at all costs” thinking and a newfound emphasis on business fundamentals, i.e., unit economics. Indeed, post-WeWork, funding in startups immediately slowed down … for like a second … and people took measure; likewise, in the public markets, many recently IPO’d companies with questionable fundamentals have performed poorly. Time will tell, then, whether WeWork was just a blip on the radar screen or the canary in the coal mine. There are more signs of the former — this week it seems like 8,292,029 companies announced new raises — but might Vector Launch be validation of the latter? Who knows.

As we’ve argued in the past — obviously VERY prematurely — tech “startups” are more mature at earlier stages now than they used to be which very well may require them to sidestep the assignment for the benefit of creditors and launch headfirst into a bankruptcy court — if and when folks again get scared. With the private markets having become the new public markets over the last decade, there are a ton of private tech companies that are well-developed (read: “unicorns”); that have intellectual property (e.g., actual patents as well as brands); that have valuable contracts/leases; that have investors that seek releases. What they don’t appear to have are viable business models. When the tide goes out (read: the money scares), we’ll see who is wearing clothes.

The question is: what would be the catalyst? With interest rates steady or declining, there’s no reason to suspect the end is near for “yield baby yield” psychology and, therefore, the deployment of endless quantities of capital in alternative asset classes. That should bode well for tech.

And, yet, people are fearful. First Round Capital recently released its “State of Startups 2019” and if some of the fears come true, indeed, there will be more action as noted above:

Founders fear the bubble — concerns are at a 4-year high.

This year, over two-thirds of founders who ventured a guess think we are in a bubble for technology companies. It’s the highest number we’ve seen since 2015 — up 12% from 2018 and 25% from 2017.

Spoiler alert:

---

THIS IS A SUBSCRIBING MEMBER’S POST. TO READ THE REST OF THIS ARTICLE (AND MORE OF OUR KICK@$$ CONTENT) CLICK HERE.

💥Distressed Debt Investors Need a Reset: 2020 Can’t Come Fast Enough💥

As hedge funds continue to get decimated and investor money shifts rapidly to private equity and private credit, the negative news for distressed investors is piling on heading into the new year.

Here is an excellent Financial Times piece about GSO, the massive $142b fund manager that is in the midst of significant senior management transition. Among many interesting tidbits, the article cites the problems that GSO is having trying to keep committed capital as “key man” managers depart and performance suffers:

Blackstone set about trying to persuade investors to keep faith with its $7bn distressed debt fund, but matters were complicated by heavy losses on distressed debt investments linked to GSO’s energy franchise, which Mr Scott used to run. One of the troubled energy companies, Oklahoma-based Tapstone Energy, whose board Mr Scott previously sat on, this month missed an interest payment on its debt.

The setbacks wiped out most of the gains made by investors in Capital Solutions II, a previous fund that investors viewed as similar.

PETITION Note: it probably won’t help matters when Tapstone Energy definitively files for bankruptcy. Tick tock, tick tock…it should be any day now.

What the piece illustrates is that, for many funds, energy-related performance in the middle of the decade has since taken a dramatic turn for the worse — wiping out gains that, at one time, helped (a) make various investors much richer via bonuses and (b) follow-up funds raise cash.

Between June 2013 and the end of 2017, the predecessor fund had notched up annual gains of 14 per cent, securities filings show. By the end of September 2019, however, Blackstone’s portfolio valuation indicated that those profits had all but disappeared, leaving investors with net internal rate of return of just 1 per cent.

The ramifications of this extend beyond having to discount fees in order to maintain funds. Perception risk — elevated by an extraordinary amount of coverage in the mainstream and other media outlets about “manufactured defaults” — is now apparently front-of-mind for GSO.

---

THIS IS A SUBSCRIBER’S POST, TO READ THE REST OF THIS ARTICLE, SUBSCRIBE TO OUR KICK@$$ BI-WEEKLY NEWSLETTER HERE.

🇨🇦Oh Canada (Short Mary Wanna)🇨🇦

If we were to be accused — and we haven’t really — of being too US-centric we would be…well…GUILTY AF. We admit it: we act like snobby Americans — like the rest of the world doesn’t really exist. Shockingly, though, it does. Who knew?😜

One thing that caught our eye recently is the apparent proliferation of cannabis-related distress in Canada — something that, due to federal law limitations, you couldn’t see…at least in court…in the United States.

On December 2nd, an Ontario-based company called AgMedica Bioscience Inc. filed a CCAA proceeding to give itself some breathing room and access much needed DIP capital. The company obtained a $7.5mm DIP credit facility from a Canadian lender, Hillmount Capital Inc., and seeks to use the bankruptcy to restructure several tranches of secured and unsecured debt.

What’s interesting is the timeline. In late 2018, everyone thought cannabis was going to be a 21st century gold rush. Canopy Growth Corporation ($CGC) was reportedly the first federally regulated and licensed cannabis producer to trade on a public exchange in Canada (artfully under the ticker “WEED”) and then went public in the United States in May 2018. The stock opened around $26/share and then rocket-shipped to as high as $52.74. It has since come WAY BACK DOWN TO EARTH and trades here:

Similarly, Tilray Corporation ($TLRY) went public in June 2018, debuting on Nasdaq at $17/share. Here is the chart since then:

---

TIRED OF SEEING THIS PAYWALL? US TOO, SO CLICK HERE AND GIVE YOURSELF SOME RELIEF (AS WELL AS SOME KICK@$$ INSIGHTS ON EVERYTHING DISRUPTION, DISTRESSED DEBT, AND BANKRUPTCY) BY SUBSCRIBING TO OUR BI-WEEKLY PREMIUM MEMBER’S NEWSLETTER.

DISRUPT YOUR COMPETITION, WITH #PETITION!

🚂Manufacturing (Short the Railroads?)🚂

We were surprised to hear certain Representatives boast about US manufacturing growth during the impeachment hearings. We stopped in our tracks: “wait, what?” As we noted on Wednesday, the ISM Manufacturing numbers tell a different story — a contraction story.

But, to be fair, there are other surveys. The recent IHS Markit index painted a different picture. This Axios piece discusses the difference between the two surveys and is worth a quick read. The ISM survey includes fewer participants and “…uses five components, each weighted evenly at 20% — new orders, production, employment, supplier deliveries and inventories.” The IHS survey “…uses a weighted average that gives greater importance to new orders (30%), output (25%) and employment (20%), and lower weighting to suppliers’ delivery times (15%) and stocks of purchases (10%).” The bottom line is that if the former is correct, the US economy may be f*cked; if the latter is more accurate, the economy is expanding.

Now, granted its a small data set but the current trucking situation (see Wednesday’s “🚛Dump Trucks🚛“) seems to reflect, at least in part, a slowdown in manufacturing (among other things, including the effect of tariffs and shipping). But what about the railroads?

In November, rail carloads declined 7.5% YOY, led primarily by coal (⬇️ 14.5%) and primary metal products (⬇️ 15.1%). Per Logistics Management:

---

TO READ THE REST OF OUR PREMIUM INSIGHTS (AND TO GET THAT EXTRA EDGE) CLICK HERE AND SUBSCRIBE TO OUR PREMIUM NEWSLETTER. YOU (AND YOUR BOSS) WON’T REGRET IT.

⚡️Update: Forever21 Inc.⚡️

Forever21 Inc. is forever filing motions to reject sh*t. On Friday, the company followed up its Store Closing Motion (which, itself, had two supplements) with its fourth rejection motion of non-residential real property leases. By our count, somewhere between 100-150 different lease (or sublease, as the case may be…looking at you Belk Inc.) counterparties have been affected now by the bankruptcy. That’s a lot of landlords and lessors looking for tenants and subtenants, respectively.

Who is bearing the brunt of this? By our count (in approximate numbers):

---

TO SEE OUR PREMIUM INSIGHTS ON WHICH MALL REITS ARE GETTING SH*T ON BY FOREVER21 & MORE, CLICK HERE TO SUBSCRIBE (ISN’T TIME YOU GOT AHEAD? DISRUPT YOUR COMPETITION WITH PETITION!)

💰Retail Roundup (Short Mall Traffic; Long Discounting)💰

Ah, the fourth quarter. The fourth quarter is critical for retailers as they play out the “holidays” option and hope to stave off bankruptcy. How’s that working out for them?

Per CNBC:

U.S. retail sales increased less than expected in November as Americans cut back on discretionary spending, which could see economists dialing back economic growth forecasts for the fourth quarter.

The Commerce Department said on Friday retail sales rose 0.2% last month.

Surveys had predicted a 0.5% retail sales acceleration.

Excluding automobiles, gasoline, building materials and food services, retail sales edged up 0.1% last month after rising by an unrevised 0.3% in October.

The so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, grew at a 2.9% annualized rate in the third quarter.

The breakdown is as follows:

• Auto sales ⬆️ 0.5%;

• Gasoline ⬆️ 0.7%;

• Online/Mail-Order Retail ⬆️ 0.8%;

• Electronics/Appliances ⬆️ 0.7%; and

• Furniture ⬆️ 0.1%.

On the negative side, however:

• Apparel ⬇️ 0.6%;

• Restaurants/Bars ⬇️ 0.3%; and

• Hobby/Music/Book Stores ⬇️ 0.5%.

It gets worse for apparel. The Bureau of Labor Statistics’ latest CPI report revealed weakness for November — which, significantly, includes Black Friday and Cyber Monday. 😬

Men’s and women’s apparel decreased by 0.9% and 3.6% YOY, respectively, while boys’ and girls’ apparel decreased 3.9% and 2.2%. Said another way, there’s an epidemic of markdowns/discounts. That can’t bode well for retail’s bottom line.

Indeed, several retailers acknowledged that markdowns are a significant issue. American Eagle Outfitters Inc. ($AEO) CEO Jay Schottenstein* noted “the challenging environment promotional activity increased relative to our expectations,” a theme that was reiterated by management teams at Urban Outfitters ($URBN), Francesca’s ($FRAN), Children’s Place ($PLCE) and Designer Brands ($DBI). Gamestop Corp’s ($GME) CEO George Sherman — while reporting dogsh*t numbers — noted:

“At this stage, we've entered the commoditization phase of the console cycle, where promotional pricing is driving sales. And if you're out shopping or doing store checks over Black Friday or Cyber Monday you likely saw a clear example of [those] discount stands.”

The problem is that retailers need to draw foot traffic and when your retail experience is commoditized and your product sucks sh*t, how do you do that?

---

TO READ THE REST OF THIS KICK@$$ ARTICLE, CLICK HERE AND SUBSCRIBE (AND GET SO MUCH MORE, DISRUPT THE COMPETITION, WITH PETITION)

🚛Dump Trucks🚛

Manufacturing, Trucking & the Ports

We’re old enough to remember a narrative that went something like this:

• Amazon Inc. ($AMZN) is dominating retail with 2-day (now 1-day) shipping +

• Traditional brick-and-mortar retailers are converting to e-commerce +

• Digitally-native-vertical-brands are cutting out brick-and-mortar and going direct-to-consumer =

• Increased need for logistics and shipping capabilities.

Because of these developments, among others, this country — it was said — was suffering from a trucking shortage relative to the demand and so wages rose rapidly and seemingly every retailer reported that rising shipping expenses were harming the bottom line. Given this, you’d think truckers would be crushing it.

Maybe…not? At least anymore.

In August we noted the following:

ACT research reflects two straight quarters of negative sector growth and DAT reported a 50% decline in spot market loads, with no category immune to the declining trend. Van load-to-truck is down 50%, flatbed load down 74.5% and reefer load down 55.5%. Some fear this may be a leading indicator of recession. Alternatively, it may just be the short-term effects of tariffs and the acceleration of orders into earlier months to avoid them. 

Still, the trucking industry is worried. 

Van spot rates were down 18.5%, flatbed spot rates down 18.4%% and reefer spot rates down 16.8%. The word “bloodbath” is now being bandied about. Per Business Insider:

“There has been a spate of trucking companies declaring bankruptcy this year, too. The largest was New England Motor Freight, which was No. 19 in its trucking segment. Falcon Transport also shut down this year, abruptly laying off some 550 employees in April.

"We have become increasingly convinced that freight is likely to remain weak through 2019 followed by falling truckload and intermodal contract rates in 2020," the UBS analyst Thomas Wadewitz wrote to investors in a June 18 note.

Trucking's biggest companies have been slashing their outlooks. Knight-Swift and Schneider both cut their annual outlooks earlier this year.”

Will this trend continue as manufacturing numbers continue to slip?

That was a good question. And, indeed, manufacturing does continue to slip — at least according to the ISM Manufacturing PMI report:

With the foregoing context, take some more recent news:

1. Hendrickson Truck Lines Co.

The family-owned trucking company recently filed for bankruptcy in the Eastern District of California (a chapter 22, actually). The company is on the smaller side: liabilities between $10-50mm; roughly 90 trucks and 100 drivers; operations in 10 states. Per FreightWaves:

“The company said its financial problems started in January with a sharp decline in overall freight tonnage. This, combined with excess truck capacity, resulted in a 21% rate drop compared with 2018, resulting in a $400,000 per month revenue drop, according to its petition.  

Two of the carrier’s top customers, which accounted for nearly 50% of its business, switched to lower-cost providers, the company said.” (emphasis added)

The company also blamed a poor truck leasing deal for its filing.

2. Truck Orders Are Down

The Wall Street Journal recently reported:

Order books for heavy-duty truck manufacturers are thinning out as a weaker U.S. industrial economy pushes fleet operators to put the brakes on plans to expand freight-carrying capacity.

Trucking companies in November ordered 17,300 Class 8 trucks, the big rigs used in highway transport, according to a preliminary estimate from industry data provider FTR. That was down 39% from November 2018 and a 21% decrease from October, providing a weak start for what is typically the busiest season for new-equipment orders.

The orders last month were the lowest for a November in four years, and analysts said they expect a backlog at factory production lines that has been dwindling this year to pull back even more.

It continued:

Truck-equipment makers have started scaling back production and laying off workers this year as demand for new trucks has weakened.

Daimler Trucks North America LLC said in October it planned to lay off about 900 workers at two North Carolina Freightliner plants as “the market is now clearly returning to normal market levels.”

Engine-maker Cummins Inc. cut its annual revenue forecast in October and the company last month said it plans to lay off about 2,000 workers early next year. “Demand has deteriorated even faster than expected, and we need to adjust to reduce costs,” the Columbus, Ind.-based manufacturer said in a statement.

What’s going on here? Well, yes, manufacturing is down. But “global trade tensions are weighing on transportation demand.” More from the WSJ:

U.S. factory activity contracted in November for the fourth straight month, according to the Institute for Supply Management.

Freight volumes and trucking prices have been on the decline. U.S. domestic freight shipments fell 5.9% in October compared with the same month last year, while truckload linehaul rates were down 2.5% year-over-year, according to Cass Information Systems Inc., which handles freight payments for companies.

🤔

3. Trade, Declining Truck Orders, and Imports (Short the Ports?)

We’re curious: if tariffs and trade wars are trickling down to trucking, what must this mean for ports in this country? Per Transport Topics:

Three West Coast ports saw significant drop-offs in cargo volume last month, the latest indication that the United States’ long-simmering trade dispute with China is impacting operations at the nation’s ports.

The Port of Los Angeles, the nation’s busiest facility, saw a 19.1% decline in 20-foot-equivalent units (TEUs) container volume, moving 770,188 compared with 952,553 in the same period a year ago. Imports and exports were both down 19%. The drop-off also means the Los Angeles port is 90,697 TEUs behind last year’s record pace, having processed 7,861,964 TEUs through the first 10 months, compared with 7,723,159 at this point last year.

Port Executive Director Gene Seroka and other officials were in Washington on Nov. 12, and he is sounding the alarm over the damage being done to the economy because of the ongoing trade battle and the resulting tariffs on hundreds of billions of dollars worth of products.

And this, apparently, isn’t isolated to the West Coast:

Rough October at Port of NY&NJ as loaded container imports fell slightly and loaded exports dropped 2.7%. The fall's East Coast shipping surge didn't get that far.

— Paul Page (@PaulPage) December 3, 2019

Will we start seeing some port distress in the near future? Fewer trucks and fewer trains mean lower revenue. 🤔

4. Celadon Group Files for Bankruptcy

Indianapolis-based Celadon Group Inc. ($CGIPQ) is a truckload freight services provider with a global footprint. Founded in 1985, the company professes to have pioneered the commerce trail between the United States and Mexico. Thereafter, it IPO’d and used the proceeds for growth capital, expanding its freight-forwarding business with the acquisition a UK-based company and another 36 companies thereafter. Not only did these acquisitions expand its geographic footprint, but they also expanded the company’s freight capabilities, opening up revenue possibilities attached to refrigerated and flatbed transportation. In all, today the company operates a fleet of 3300 tractors and 10000 trailers with 3800 employees. Its primary focus continues to be NAFTA countries; its customers include the likes of Lowes Companies Inc. ($LOW), Philip Morris International Inc. ($PM), Walmart Inc. ($WMT), Fiat Chrysler Automobiles NV ($FCAU), Procter & Gamble Inc. (($PG) and Honda Motor Co Ltd. ($HMC).  

All of the above notwithstanding, it is now a chapter 11 debtor. Worse yet, it will, in short order, wind down and no longer be in existence. In an instant, the aforementioned 3800 employees’ livelihoods have been thrown into disarray.

Not that the signals weren’t there. The company has been in trouble for some time now. In addition to macro woes, it has a large number of self-inflicted wounds. 

Back in July, the company teetered on the brink of bankruptcy but it bought itself a short leash. On July 31, 2019, the company refinanced its term loans held by Bank of America NA ($BAC), Wells Fargo Bank NA ($WFC) and Citizens Bank NA ($CFG) with a new facility agented by Blue Torch Finance LLC* that counted Blue Torch and Luminus Partners Master Fund as lenders.** The new lenders provided $27.9mm of new term loans and, in exchange, received $8mm in original issue discount and fees. The banks, it appears, got out just in the knick of time. Indeed, the company and its lenders have been engaged in an endless stream of negotiations, concessions and waivers ever since: the credit docs have been amended ad nauseam ever since the initial transaction because the company was in constant danger of breaching its covenants.

Why so much drama? Per the company:

“The need to file these chapter 11 cases was a result of a confluence of factors including industry-wide headwinds, former management bad acts, an unsustainable degree of balance sheet leverage and an inability to address significant liquidity constraints through asset sales and other restructuring strategies. In mid-2019, the trucking freight market began to soften. The combination of a decline in overall freight tonnage and excessive truck capacity in the market led to a significant decline in freight rates, and customers began to take bids at lower freight rates. Compared to the year immediately prior, 2019 showed a steady decline in freight rates, including spot freight rates and contractual rates. In addition to declining freight rates, volumes of loads in freight have experienced decreasing numbers for a significant portion of 2019.”

Sound familiar? Well, these issues alone should have been enough to present problems but they were accentuated by the fact that the company’s prior senior management allegedly engaged in some shady a$$ sh*t. That shady a$$ sh*t ultimately led to a Deferred Prosecution Agreement and a $42.2mm fine. While only $5mm has been paid to date, that $37mm overhang is substantial.

With all of these issues piling up, the company ultimately defaulted on its revolver. Consequently, MidCap Financial Trust, the company’s revolver lender, froze lending and the company’s already-growing liquidity problem became a wee bit more problematic. With barely enough money to fund payroll and payroll taxes, the company had no choice but to file for chapter 11. To put an exclamation point on this, the company had merely $400k of cash on hand when it pulled the trigger on bankruptcy. 

So what now? The company ceased operations and will commence an orderly wind down of its businesses, preserving only Taylor Express Inc. as a going concern. Taylor Express is a NC-corporation that the company acquired in 2015; it is a dry van and dry bulk for-hire services provider, operating principally for the tire and retail industries and primarily in the South and Southeast regions of the US. To fund the cases, the debtors secured a commitment from Blue Torch for $8.25mm in DIP financing. The DIP mandates that any sale order relating to the liquidating business be entered by January 22. 

As for the employees? Well: 

Yeah, they’re understandably pissed. For starters, they were laid off en masse with no notice. One employee, on behalf of all employees, filed an Adversary Complaint alleging a violation of the WARN Act, which requires 60 days’ advance written notice of a mass layoff and/or plant closing. In response, the truckers have formed a “Celadon Closure Assistance and Jobs” group on Facebook. It has 1300 members. Per Fast Company, 

“Truckers in [a] Facebook group are posting about having 20 minutes to clear out their trucks and go. CBS also reported that some drivers “were stranded when their company gas cards were canceled.”

YIKES. All told, this is a hot mess. Per SupplyChainDive:

“’This is noteworthy because of the size of the fleet,’ Donald Broughton, the principal and managing partner at Broughton Capital, told Supply Chain Dive in an interview.  ‘It’s noteworthy because less than 10 years ago Celadon was known as one of the most active, prolific and successful at salvaging small fleets that were struggling and in trouble.’

The failure of Celadon represents the largest trucking failure this year and ‘certainly one of the largest in history,’ Broughton said.”  

“Largest [insert industry here] failure” is not an honor that anyone wants.

*Blue Torch Finance LLC was also active in another DLA Piper LLP bankruptcy, PHI Inc., as DIP lender. 

**Blue Torch hold a priority right of payment on the term loan collateral with Luminus second and revolver lender, MidCap Financial Trust, third. 

💥Shade of the Week— “We Believe Real Models Will Become Wildly Popular in the Post WeWork Era”💥

Restoration Hardware Inc. ($RH) reported earnings this week and blew it out of the water in every possible way. Not all retail is a hot mess, apparently. When you crush it like they did — 6+% revenue increase and doubled profits — we suppose that gives you some license to sh*t on LITERALLY EVERYONE UNDER THE SUN. This is savage:

DAAAAAAAAAMMMMN. DTC DNVBS and standard brick-and-mortar retailers just got run over by the Restoration Hardware bus. And rightfully so:

---

LIKE WHAT WE HAVE TO SAY SO FAR AND WANT TO READ THE REST? YOU CAN, BY SUBSCRIBING TO OUR PREMIUM BI-WEEKLY KICK@$$ NEWSLETTER, HERE.

⚡️Update: PG&E Corporation ($PCG)⚡️

Per The Wall Street Journal:

PG&E Corp. has reached a settlement with victims of the wildfires that pushed California’s largest utility into bankruptcy, agreeing to pay them $13.5 billion in damages.

The pact removes a significant obstacle to PG&E’s emergence from chapter 11 protection and includes reforms meant to address criticism that the company enriched shareholders while leaving customers exposed to danger from aged, unsafe equipment.

PG&E bowed to demands for more money for fire victims and gave in to pressure from California Gov. Gavin Newsom to improve its corporate governance and implement stricter safety protocols.

The best part: the settlement is payable half in cash and half in stock. All we have to say is:

---

LIKED OUR ARTICLE SO FAR? CLICK HERE AND SUBSCRIBE TO OUR PREMIUM @$$KICKING BI-WEEKLY NEWSLETTER ON DISRUPTION FROM THE VANTAGE POINT FROM THE DISRUPTED. YOU (AND YOUR BOSS) WON’T REGRET IT.

⛽️2019 Can’t End Fast Enough for Oil & Gas (Long Pain in TX)⛽️

Some numbers: the US now produces 13mm barrels per day and exports 3mm bpd. Per Reuters:

But the outlook for 2020 comes with growing skepticism from those inside the industry - and should growth fall short, it could shift the balance of power in world supply back to the Organization of the Petroleum Exporting Countries.

An increase in U.S. crude output by 1 million bpd would satisfy nearly all of the 1.2 million bpd increase in world demand next year, the International Energy Agency expects. [IEA/M]

That would keep a lid on prices, pressure OPEC to extend production cuts and leave shale producers still trying to achieve elusive profits. As a result, most industry executives and consultants said they expect slower U.S. shale growth.

Apropos, layoffs are starting to mount in the Permian. Austerity measures are now taking hold in the Eagle Ford. Per Bloomberg:

In the wake of the oil price crash that began in 2014, new drilling in the Eagle Ford dwindled as management teams cut budgets, and output in the region is now down about 20% from pre-crash levels.

That austerity finally began to pay off this year as the Eagle Ford as a whole generated free cash flow for the first time, according to IHS Markit.

And things may only get worse.* The state of Texas is expected to double its solar electricity output next year and again the following year. This would obviously have a negative impact on natural gas demand and prices.

Nevertheless, the Trump administration intends to bring MORE drilling online! Per The Houston Chronicle, the administration…

---

THIS IS A SUBSCRIBER’S POST. CLICK HERE, TO SUBSCRIBE AND READ THE REST OF THIS ARTICLE. DISRUPT THE COMPETITION WITH PETITION.

🥈Second Order Effects Are Real (Long #retailapocalypse Victims)🥈

We’ve spent a considerable amount of time discussing the possible and/or actual second order effects of disruption. For instance, waaaaaaay back in December 2016, we queried to what degree the scanless technology that Amazon Inc. ($AMZN) had then launched in its AmazonGo concept might affect grocers and quick service restaurants. We noted the following possibilities:

[Our] list of losers: manufacturers of conventional scanners...plastic separator bricks...cash registers...conveyer belts; landlords (maybe? - less square footage required without the cashier and self-checkout stations); print media/candy manufacturers/gift cards - all things that benefit from lines and impulse buys at checkout; human capital; people on the wrong end of income inequality.

Three years later, you don’t hear much about AmazonGo. Sure, it’s grown: there are now reportedly 20 locations with more on the way, but it hasn’t exactly taken the world by storm and caused mass disruption to either grocers or QSRs. It’s still worth watching though: the possible second order effects are countless.

An example of actual second order effects is Cenveo Inc., which filed for bankruptcy in February 2018. At the time we wrote:

…it's textbook disruption. Per the company, 

"In addition to Cenveo’s leverage issues, macroeconomic factors, including the introduction of new e-commerce, digital substitution for products, and other technologies, are transforming the industry. Consumers increasingly use the internet and other electronic media to purchase goods and services, pay bills, and obtain electronic versions of printed materials. Moreover, advertisers increasingly use the internet and other electronic media for targeted campaigns directed at specific consumer segments rather than mail campaigns." 

Ouch. To put it simply, every single time you opt-in for an electronic bank statement or purchase a comic book on your Kindle rather than from the local bookstore (if you even have a local bookstore), you're effing Cenveo.

To close the trifecta, we’ll again highlight the recent pain in the SMA space. Catalina Marketing and Acosta Inc. both became chapter 11 filers while Crossmark Holdings Inc. narrowly avoided it. Why? Because CPG companies are taking it on the chin from new and exciting direct-to-consumer e-commerce brands, among other things, and have therefore shifted marketing strategies.

So, on the topic of second order effects, imagine being in the C-suite of a company that, among other things:

• Prints signage, displays, shelf marketing and other promotional-print-material for brick-and-mortar retailers including the likes of, among others, struggling GNC Inc. ($GNC), Gap Inc. ($GPS), and GameStop Inc. (GME), all of which are shrinking their brick-and-mortar footprint;

• Creates menu boards, register toppers, ceiling danglers and more for QSRs and fast casual restaurants who are competing with food delivery services more and more every day; and

• Services consumer packaged goods companies by creating end cap promotions, shelf marketing, floor graphics and more.

Uh….YEAAAAAAAAAH. Some high risk exposure areas right there, folks.😬 And, so you’ve got to imagine that revenues of this “hypothetical” C-suiter’s company are declining, right? Particularly given that print is a highly competitive price-compressed industry?

Luckily, you don’t have to stretch the imagination too far.

---

LIKE THIS SO FAR AND WANT TO READ THE REST? YOU CAN, BY SUBSCRIBING TO OUR PREMIUM BI-WEEKLY KICK@$$ NEWSLETTER, HERE.

💥Good Retail Numbers. Bad Malls.💥

⚡️Update: CBL & Associates Properties ($CBL)⚡️

We did a deep dive into Tennessee-based CBL & Associates Properties ($CBL) back in March’s “Thanos Snaps, Retail Disappears👿” and, in the context of Destination Maternity’s bankruptcy filing, followed-up in an October update. To refresh your recollection, CBL is a real estate investment trust (REIT) that invests primarily in malls based in the southeastern and midwestern US. At the time of the aforementioned “Thanos” piece, the REIT’s stock was trading at $1.90/share; its ‘23 unsecured notes were priced around $80 and its ‘24 unsecured notes around $76. In case you haven’t noticed — all Black Friday ($7.4b in online sales, $2.9b via mobile ordering) and Cyber Monday (a record $9.2b) talk about gangbusters retail sales notwithstanding — the malls haven’t particularly fared much better since Q1. To put an exclamation point on this, early reports are that brick-and-mortar stores saw an overall 6% decline in sales over Black Friday.

When it reported Q3 earnings at the end of October, CBL’s numbers weren’t pretty. Revenue fell approximately $20mm YOY, net operating income declined 5.9% YOY, and same-center mall occupancy, while up on a quarter-by-quarter basis, was down 200 basis points YOY.

On Monday, the company announced that “it is suspending all future dividends on its common stock, 7.375% Series D Cumulative Redeemable Preferred Stock and 6.625% Series E Cumulative Redeemable Preferred Stock.” The company’s CEO, Stephen Lebovitz said:

“We anticipate a decline in net operating income in 2020 as a result of heightened retailer bankruptcies, restructurings and store closings in 2019. Offsetting these declines by retaining available cash is necessary to maintain the market dominant position of our properties and to reduce debt. CBL has also made significant efforts over the past 18 months to reduce operating costs, including executive compensation and overall corporate G&A expense, as well as execution of a strategy to utilize joint venture and other structures to reduce capital expenditures. Ultimately, we believe these actions will allow the Company to return greater value to its shareholders.”

Given the above, it’s worth revisiting the alleged benefit of REITs to investors. Among them are that:

• post 1960, REITs provided small investors with an opportunity to benefit from commercial property rental streams; and

• they are, typically, high dividend payers — considering that by law, they must distribute at least 90% of their taxable income to shareholders as dividends.

WOMP. WOMP. Not so much these days, it seems. But, we bet you’re asking: how can it terminate its dividend while maintaining its REIT status? From the company:

“The Company made this determination following a review of current taxable income projections for 2019 and 2020. The Company will review taxable income on a regular basis and take measures, if necessary, to ensure that it meets the minimum distribution requirements to maintain its status as a Real Estate Investment Trust (REIT).”

Umm, that doesn’t portend well. The answer is: it may not have “taxable income.” B.R.U.T.A.L.

How did the market react?

The stock market puked on the news. The stock was down 6% with a general market drawdown, but after-hours, upon the announcement, the stock gave up an additional ~30% on Monday and closed at $1.02/share on Tuesday:

Meanwhile, the preferred stock also obviously traded down (lots of Moms and Pops chasing yield, baby yield, getting burned here), and the ‘23 unsecured notes and the ‘24 unsecured notes, at the time of this writing, last sold at $72.75 and $64.1, respectively.

The GIF above says it all about this story. And, worse yet: it may get uglier.

🛏KKR Tips Hand re Art Van Furniture (Short Midwest Mattresses)🛏

n “💩Acosta = Not a Good Look, Carlyle💩,” we noted how FS KKR Capital Corp ($FSK), a publicly-traded business development corporation placed its Acosta Inc. loan “on nonaccrual” because it was, well, clearly sh*tting the bed. Ultimately, after riding the mark down to the basement, FSK offloaded the position. It wasn’t the only stain in its portfolio. In fact, as of the end of the third quarter, approximately 1.7% of the portfolio was on nonaccrual, up from 1.2% at the end of Q2. While this, in and of itself is hardly alarming, it does mean that there are other potential restructurings sitting on FSK’s books. Indeed, one loan contributing to this uptick was to a company called Art Van Furniture.

Founded in 1958, Michigan-headquartered Art Van Furniture is a furniture retail store chain with approximately 190 company-owned stores in nine states operating, thanks to various tack-on acquisitions, under various brands: Art Van Furniture, Art Van PureSleep, Scott Shuptrine Interiors, Levin Furniture, Levin Mattress and Wolf Furniture. The tack-on acquisitions were, presumably, part of the company’s growth strategy after being acquired by private equity overlords Thomas H. Lee Partners.

The Columbus Dispatch recently reported on Art Van’s strategy annnnnnnd it’s definitely a bit counter-intuitive:

---

THIS IS A SUBSCRIBING MEMBER’S ARTICLE, TO READ THE REST, CLICK HERE.

🐝Reality Check: Honey🐝

Paypal Inc. ($PYPL) made a big splash this week when it agreed to a $4b cash and stock acquisition of Honey, an LA-based deal-finding browser extension and mobile app. Yes, $4 BILLION. The company had only raised $49mm in funding soooooo…a lot of people just made one crazy return on investment.

Speaking of crazy, the company reportedly made “more than $100 million in revenue last year and it was profitable on a net income basis in 2018.” Profitably for a startup these days is crazy enough, we suppose, but THAT MULTIPLE. Holy

---

TO READ THE REST OF WHAT WE HAD TO SAY ABOUT HONEY, JUST CLICK HERE AND SUBSCRIBE.

💥Is Wyoming F*cked? (Short Chesapeake Energy Corp.)💥

Governor Mark Gordon released his Wyoming State Budget for 2021-2022 earlier this week and — whoa boy — he cuts right to the chase:

It is a budget intended to prepare our state to meet the coming storm head-on.

For most of the last century, Wyoming’s abundant coal, natural gas, oil, and other minerals have been the drivers of our economy; employing thousands; funding schools and government services; and stabilizing our state’s communities. Energy development, minerals, and the sovereign wealth they have bequeathed to our children have kept taxes low for citizens. But times are changing. Over the past few years we have witnessed an upheaval in the way energy is being generated, used, and developed. These changes seem to be accelerating and are not generally favorable to some of our most cherished industries. (emphasis added)

He then goes on to highlight some pretty hefty headwinds (pun intended) — things that should be no surprise to a restructuring community that has watched coal company after another file for chapter 11 bankruptcy:

• Coal production in Wyoming has declined by 35%.

• Natural gas companies are halting drilling there.

• 38 states have established renewable and carbon-free standards which hurts demand.

• Wyoming has an oil and gas energy but low oil prices will offset whatever hedge this provides against declining coal.

"Even if we get out of this current downturn with oil bailing us out, the economy becomes more and more dependent on oil, which is the most volatile of all of the commodities and the one that we are least confident with forecasting into the future," said Robert Godby, director of the University of Wyoming Center for Energy Economics and Public Policy.

To point, Chesapeake Energy Corp. ($CHK), a large presence in Wyoming, issued a going concern warning earlier this month:

---

TO READ THE REST OF THIS ARTICLE, CLICK HERE AND SUBSCRIBE TO OUR BI-WEEKLY KICK@$$ NEWSLETTER.

💰One’s Pain is Another’s Gain (Long Real Estate Consultants)💰

Yeah but someone is making money from all of this doom and gloom, right? You bet your a$$. The real estate consultants/advisors!! Using Houlihan’s for illustration purposes, let’s dive into what these guys do. 

Before we do, let’s establish some ground rules: we’re going to MASSIVELY over-simplify how this works just to extract some number out of the abstract figures and give folks some semblance of an idea of how this works. So, please spare us the righteous indignation about incomplete calculations, okay?  

In the Houlihan’s bankruptcy case, the debtors seek to engage Hilco Real Estate LLC as its real estate consultant and advisor. For the uninitiated, Hilco Real Estate counts countless bankrupted companies as clients, e.g., A&P, Fred’s, Gander Mountain, Furniture Brands, Garden Fresh Restaurant Corp., hhgregg, Hostess Brands, Ignite Restaurant Group, Logan’s Roadhouse, Payless Shoesource. You get the idea. Perversely, these guys kill it when you don’t (spare us the spin, y’all).

According to the agreement between Houlihan’s and Hilco, Hilco will, among other things, (a) meet with Houlihan’s to ascertain its goals, objectives and financial parameters (read: wherewithal); (b) mutually agree with Houlihan’s on a strategic plan for restructuring, assigning or terminating leases; (c) negotiate with third parties landlords in furtherance of the agreed-upon strategy; (d) provide updates on progress; and (e) assist Houlihan’s in closing the relevant lease restructuring, assignment, and termination agreements. The contract is exclusive. Said another way, Houlihan’s has agreed to convey over to Hilco all responsibility for negotiating with landlords for purposes of extracting concessions. 

Of course, Hilco doesn’t do this sh*t for free. They have a variety of ways to make money. 

First, it’s important to note that the Bankruptcy Code requires that debtors decide what to do with non-residential real property leases within 120 days from any filing. Consequently, many distressed companies engage real estate consultants long in advance of bankruptcy to get a handle on the real estate portfolio, help devise a strategy, and kickoff negotiations with landlords. Accordingly, any assigned or terminated lease pre-petition is eligible for 6% of Lease Savings (back to this in a minute). If a lease is modified rather than terminated, Hilco gets a flat fee of $1,500 + 5.25% of the savings. Post-petition, Hilco gets 6% for assignments/terminations/sales of leases — if there are any at that point that return cash value. 

Houlihan’s is a sale case so what happens if the leases are assumed and assigned pursuant to a sale of all or substantially all of the assets? Per the Agreement, 

“…any Lease that is assigned or sold to a purchaser of all or substantially all of the Company's or a division of the Company's assets shall not, in and of itself, be considered an Assigned/Sold Lease (but may still be a Restructured Lease).” 

Wait, what? The agreement doesn’t even define what an “Assigned/Sold Lease” is? But, it appears the intent of this language is to carve out leases that simply transfer to a buyer. No fee for Hilco there — that is, unless there is an agreed modification to the lease prior to assumption and assignment. (Note to Hilco: tighten up your sh*t). This makes sense. 

Of course, all of this might as well be written in Dothraki: 

---

THIS IS A SUBSCRIBING MEMBERS POST, TO VIEW THE REST OF THIS ARTICLE, CLICK HERE.