Things That Caught Our Attention in the Waning Weeks of '16

It's easy for small matters to get lost in translation over the holidays and so we wanted to highlight a few developments that may have flown under the radar. 

American Apparel

The company is looking to hire FTI Consulting to provide supplementary services to its current financial advisor, Berkeley Research Group. FTI will be paid $100k to prepare the Schedules and Statement of Financial Affairs and $300k for "other services" given institutional knowledge gained from the original Chapter 11 filing (note: this is a Chapter 22). Sadly, FTI had to waive its $2mm+ claim stemming from the original filing to secure this minor mandate. Ouch. 

Choxi.com

The company and the official committee of unsecured creditors have submitted an application for CBIZ to serve as financial advisor to both concurrently. We've been around the business for a while but cannot think of any prior instances when the same financial advisor sat on both sides of the table. What are other instances of this, if any?

The Choxi.com negotiating table just got a lot more interesting.

France

Just when the unintentional comedy that is France couldn't get any funnier, the country instituted a law codifying a right to disconnect, applicable to all companies with 50 or more employees. That's right: 35 hour work weeks, 14 months a year of vacation, and now the right not to be bothered by a partner at 7 pm with a request for a memo due by 9 am even though he won't look at it until 12 pm...9 days later. The Paris office of a lot of law firms just got much more interesting.

'16 Q4 in Review

'16 Q4 in Review

Hopefully the industry can coast through the end of 2016 sans any emergency bankruptcy filings that destroy people's holidays. Last year, Swift Energy set the tone for 2016 with a New Year's Eve filing: we're sure the good folks at Jones Day LLP enjoyed the heck out of that. 

This past quarter saw a significant amount of activity among the usual sectors:

• Consumer Products/Retail (Gracious Home, Roust Corporation, American Apparel, Jo-Jo Holdings Inc., Nasty Gal, Garden Fresh, Cosi)
• Exploration & Production/Oil Field Services (Stone Energy, Northstar Energy, Erickson Inc., Shoreline Energy, Enquest, Basic Energy, American Gilsonite, Key Energy, Tervita, Connect Transport)
• Metals & Mining (Optima Steel, Emeco, Rubicon)
• Power (Illinois Power, La Paloma)
• Telecom/Media/Technology (Violin Memory, Scout Media, Choxi.com, Limitless Mobile, DirectBuy Holdings, Implant Sciences, Filip Technologies)

We spent much of the quarter focused on the food and retail space, whether it was addressing the implications of Amazon Go, the increasingly crowded and commoditized grocer space, noting the disaster that is the Chapter 22 filing of American Apparel, or querying (pre-election) whether progressive policies were destroying restaurants. We also discussed, in the wake of the Paragon Offshore decision, whether the industry has a feasibility problem and got some community feedback as to what the election of Donald Trump means for the industry. In other words, we've been busy.

Most professionals seem to think that many of the aforementioned industries will see continued distress in 2017 - with a number of previously-deemed potential 2017 hot spots having recovered nicely from the Trump bump, i.e., for-profit education, for-profit prisons, biotech/pharma, defense...to name a few. And many expect most of the same questions and themes we've covered to continue to be relevant. Time will tell. 

The following firms killed it in the fourth quarter and hereby win PETITION's first ever quarterly kudos:

• Legal (tied):
  • Latham & Watkins LLP (Optima Steel, Stone Energy, Illinois Power, Key Energy, Tervita)
  • Weil (Violin Memory, DirectBuy, Performance Sports Group, Basic Energy, American Gilsonite). Weil was the subject of a feature piece a few weeks back.
• Financial Advisor/Investment Banker:
  • Houlihan Lokey (Violin Memory, Roust Corporation, American Apparel, Erickston Inc., Catalyst Paper, Emeco, American Gilsonite, Key Energy, Tervita Corporation, Connect Transport)
• Claims Agent:
  • Prime Clerk (Northstar Offshore Group, Violin Memory Inc., Gracious Home LLC, DirectBuy Holdings Inc., Shoreline Energy LLC, American Apparel LLC, Transtar Holdings Company, Channel Technologies Group LLC, Performance Sports Group)

We'll be sure to watch closely for what 2017 has in store for us. We suspect more pain in the oil field services space, a post-holiday crush of (brick-and-mortar) retail spirits, and more advanced technological disruption of incumbent companies (and failure of "tech" companies). The same firms are likely to be just as busy in 2017 as they were in 2016. The only real mystery is who will be on the receiving end of Judge Jones' next big dress down...? 

As we (hopefully) jump from the beta test phase of our weekly curated newsletter (and corresponding website, where stories post on delay to the newsletter) to a more robust product and community, we ask for your assistance: please encourage your colleagues, peers and friends to subscribe HERE. The more people that are part of the community the more we'll collectively get out of it. 

Most importantly, PETITION wishes you a happy, healthy and safe new year. PETITION is out until 2017. Peace. 

Amazon Go and the Future of Quick Service Restaurants

This week Amazon announced the Seattle-based beta launch of its (a) cashier-free (b) line-free (c) self-checkout-free (d) sensor-based food shopping experience. The typical convenience or grocery store UX includes: put items in cart; wait in line for an absurd amount of time; take items out of cart and place them on a conveyor belt; watch person in front of you attempt to pay by check; wait more; watch items scanned and pay for items; watch items get bagged or bag them yourself; and, maybe, put items back in cart for external transport. Amazon Go would eliminate all of that. 

Instead, the entire user experience would be managed by way of sensors on the food items, sensors at the doors, and an app that catalogues the items once you place them in your bag and walk past the scanners on your way out. The transaction is paid for using your Amazon-linked credit card. For the technophiles among you, here is a summary - based on the filed patent(s) - of how this would work.

Now, initially, the Wall Street Journal and Business Insider reported that Amazon may roll this out to 2000 physical locations - which, if true, would put Amazon at a brick-and-mortar grocery scale of the likes of Kroger and Tesco. On Wednesday, Amazon denied that number.

What does this have to do with the restructuring community? On Tuesday, we discussed these developments with an Amazon employee and what follows is the (slightly-edited for length) narrative:

Amazon Employee: Curious to hear your questions and what your different angle is.

PETITION: Well [we're] in the restructuring space and so [we're] looking at it from the angle of "who gets f*cked?" if this concept takes off and scales to the Kroger/Tesco like level of 2000 stores. Wondering your thoughts there...? [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.

Amazon Employee: I've noticed that because not many people have seen it in person they tend to over-index on the idea that this affects grocery stores the most. But really, when you go inside, you realize that this is for quick shopping. A family of 4 or 5 cannot go in and by a week's worth of groceries. Really this is going to impact the quick service restaurants and the real growing category is in-grocery-sit down eating. So this is really for 20-30s who live in a dense urban environment and want a quick breakfast/lunch/dinner that is healthy/fresh/organic.

PETITION. So, this would affect the Pret A' Manger types more? And how does this reconcile with the reports that this technology is meant to be deployed in 2000 stores: you're saying the 2000 number applies to the fast-healthy-casual concept? And a lot of what [we] said would seem to still apply, no?

Amazon Employee: There are a lot of rumors out there about 2000 stores etc., but those people have zero idea what that really means. Amazon is probably testing more than one concept so there's no way to know if Go is the only concept and how widely it will be deployed. But a lot of your losers - belts, candy, impulse buys - will definitely still be at traditional supermarkets. So the Go concept seems to map more closely to QSR and in-market-dining. So those seem to be the big losers here. Pret A Manger is a good example. 

For now, then, it seems that this is more of a supply chain exercise than anything else though we'd be remiss if we didn't highlight that nothing was said about potential job loss (statistics on cashiers here and a counterpoint to the common counter-argument about the ATMs/bank-teller dynamic here). That said, if this technology takes hold, there is no reason to believe that this wouldn't eventually affect incumbent grocers as well. And as we all know - and we here at PETITION have well covered - the grocery and restaurant space could do without additional headwinds. Here is the list of the top 50 QSRs in the United States for good measure. 

Mmmmm...Food

The media is feeding us a confusing narrative.  

On one hand, restaurants should be benefiting from recent low gas prices and food deflation - with meat, chicken, and egg prices, in particular, depressed.  

Depressed food prices are not inuring to the benefit of restaurants...or grocers.

One the other hand, we've seen that restaurant chains are suffering from increased rent, healthcare and employment costs and, thus, more than a dozen restaurants have filed for Chapter 11 or 7 this year alone. While there are some outliers, e.g., Olive Garden, traffic at restaurants has fallen in 10 of the last 11 months (this includes the once-hyped fast casual segment, which is experiencing a customer count decline so far in 2016). And a U.S. Labor Department regulation increasing overtime pay for managers may still take effect and potentially make matters worse - despite a recent 11th hour injunction issued by a Texas District Court judge halting, at least temporarily, the December 1 effective date. 

Some argue that grocers are benefitting from the restaurants' pain. Are they? The numbers reflect that grocers' margins and stock prices are also taking a hit from this wave of food deflation. A number of publicly-traded grocers like Sprouts Farmers Market, Smart & Final Stores Inc., and Kroger Co. have lowered full-year '16 guidance. WholeFoods reported its first annual comparable sales decline since 2009. Randalls, Jewel-Osco, H-E-B, Albertsons and even WholeFoods are slashing prices like crazy in a race to the bottom. And others have fallen victim to bankruptcy - A&P (the second time), Fresh & Easy (the second time), Haggen, Fairway, Garden of Eden - or been bailed out.

Much of this is just natural competition. Discounters like Family Dollar and big box stores like Target and Walmart are sacrificing margin in exchange for foot traffic. Indeed, Dollar General reported lower comp-store sales this week and a 10% decrease in its bottom line (and initiated a wholesale marketing process of various rental properties). WholeFoods and KMart are aiming to offer food to lower scale markets. Amazon Fresh, Munchery, Maple, Blue Apron, Zakara Life, Caviar (owned by Square and on the market), Hello Fresh, UberEats, and a seemingly endless array of other app-based food distribution and/or delivery services are also complicating matters. With free introductory experiences, consumers can have at least a week's worth of food subsidized by Silicon Valley: this isn't helping grocers in major markets.

What does this all mean in the end? For starters, we are likely to see continued stress and distress in both the restaurant and grocery space. As we get there, there will likely be job losses  - at the highest levels of management and beyond - and additional technological advancement.  Touchscreens are likely to proliferate and, where possible, broader-based automation deployed. To point, McDonalds this week announced the launch of its touchscreen self-service ordering kiosks in its 14,000 locations. While MCD's CEO Steve Easterbrook indicated that this would not reduce costs/jobs - merely alter them - do we really believe that? So he proposes to pay workers more to effectively do less? Not with Eatsas of the world expanding - now at 5 locations. 

The space has come a long way and there are more drastic changes in store.

We Have a Feasibility Problem

We're thankful this week for Judge Sonchi's decision last week in the Paragon Offshore bankruptcy cases. The decision was more than just a victory for the company's term loan lenders: it was a much-needed warning signal to the restructuring industry. 

First, a quick synopsis of the opinion. In short, Judge Sonchi sustained most, but not all, of the term lenders objections on the basis that the Debtors' (i) deployed unrealistic rig utilization and day rate assumptions and (ii) failed to take into consideration macro considerations that would affect the Debtors' eventual ability to refinance debt upon maturity in 2021 (if they didn't run out of cash before then). 

With respect to the former, the opinion underscores some dire trends (particularly provided correlations: rig supply up + price of oil down = dayrates down). Some highlights:

• "E&P companies are currently seeking to drive excessive costs out of the supply chain and are working to sustain this reduced cost environment to avoid over-inflation and 'boom and bust principle' that has been seen in recent years and in the current cycle." (emphasis added)
• "This 'vast oversupply' of rigs is creating a 'challenging commodity price environment' that is expected to last at least an additional 3.2 years...." (emphasis added)
• "The oversupply of rigs is 'historical' even excluding newbuild rigs; and the only prior comparable downturn occurred in 1986, which had less of an overhang and did not have the additional newbuild overhang." (emphasis added)

Clearly, this is no bueno for revenue/EBITDA go-forward. Accordingly, an investment banker performing an analysis maybe ought to consider all publicly available resources to configure proper assumptions. Clearly, that didn't happen here and Judge Sonchi made it known. The term lenders' expert testified that, with respect to ongoing projected flat day rates, there wasn't "a single analyst that took a contrary view." But the Managing Director for the Debtors did. Curious.

Regarding the latter refinancing point, the Judge highlighted that "$110 billion of debt associated with severely strained oilfield services and drilling (OFS) companies will mature or expire over the next five years" - hitting RIGHT at the time Paragon would need to tap the capital markets. $110 BILLION. The Debtors' banker explained this massive number away by indicating that there is a $1 trillion E&P market and financing, therefore, would be available. The Judge demurred - calling the analysis "superficial" - and agreed with the term lenders' expert that (a) the market for "asset-based" lending for drilling companies generally is smaller and more specialized and (b) the historical capital used to support the market is no longer as prevalent as it was in previous cycles. Indeed, as this Bloomberg piece notes, fears about refinancing are starting to gain traction in the market.

Putting aside the specifics of this case, the decision is important for another reason: it highlights the importance of feasibility. Now, granted, the term lenders had to object for Sonchi to arrive at his conclusion in Paragon but there is an increasing likelihood of Judges scrutinizing feasibility. This Fox Business piece notes, "Some critics say bankruptcy judges too often focus on hammering out an agreement without paying enough attention to companies' chances of long-term survival." Will this continue?

Maybe we need Judges to be activists and save us from ourselves. Deals are being cut, sure, but are they for the right reasons? Are they cut to ensure the viability of the companies underneath capital structures or to uphold "castles in the air" theory and line the pockets of distressed investors? Hard to say: seemingly, these deals aren't doing them any favors either. Without greater transparency to the markets, it's hard to know.

Here's what we do know. In the last several years, there have been a number of repeat restructurings: American Apparel LLC. Global Geophysical Services LLC. Hercules Offshore Inc. Essar Steel Algoma Inc. Fresh and Easy. A&P. Sbarro LLC. Revel Casino. Catalyst Paper. Perhaps we all -- judges included -- ought to ask ourselves why that might be.

American Apparel is the Latest Retail Trainwreck

So Many Caught With Their Pants Down

Add a prestigious lineup of distressed investors and professionals to the roster of folks pantsed by American Apparel.  

In October 2015, American Apparel filed for bankruptcy. It converted $200mm of secured debt into (a) equity and (b) a $120mm post-bankruptcy exit Term Loan (subsuming $30mm of new money). The Company was supposed to benefit from $10mm of new equity and a new $40mm asset-backed lending facility. But sometimes things don't go according to plan: on November 14 2016, the Company again filed for chapter 11. Now it wears the "Chapter 22" label (see what we did there?).  

The company's bankruptcy filings are riddled with incriminating statements about misguided management expectations and professional performance. The company suffered from "unfavorable market conditions" that were "more persistent and widespread than the Debtors anticipated" and "particularly detrimental to retailers." This is called tunnel vision. 

Post-bankruptcy, the Company suffered from 32.7% YOY sales decline and $40mm EBITDA decline. It could never nail down the $40mm of asset-backed lending that its business plan depended upon. The Company blames this, in part, on the CFO leaving the business. Maybe they should blame it on the reasons why the CFO left the business, i.e., the business sucked. Apropos, the Company notes that it failed in myriad ways: (i) it could not optimize its product and merchandizing, (ii) it suffered from chronic quality problems and defects (ah, American production!), (iii) it had no unified and consistent marketing plan (give founder Dov Charney this: there used to be one!), and (iv) it failed to improve its e-commerce platform. Wait what? FAILED TO IMPROVE E-COMMERCE?! Indeed. Its sales declined post-bankruptcy and amounted to only 10% of sales - 10% LOWER than the industry average. 

And so the plan is to sell the Company for parts. Gilden Activewear SRL, a Canadian company, is spending $66mm mostly for, among some other things, the company's intellectual property. The company's previously secured lenders - Monarch Alternative Capital LP, Coliseum Capital Management LLC, Goldman Sachs Asset Management LP, Pentwater Capital Management LP, and Standard General - "will likely recover only a fraction of the funds that they have advanced." (emphasis added). Somewhere Charney is smoking a cigar, sipping bourbon and laughing his a$$ off. 

Restructuring professionals are also getting burned here. Among the company's largest unsecured creditors this go-around are prestigious firms like FTI Consulting and Moelis & Co., owed $2.03mm and $645k, respectively. 

We are ripping on this a bit but, jokes and jabs aside, there is a sad social commentary here. First, the restructuring process clearly failed this Company. We could spend time digging into the millions that were surely paid out in fees but why bother? It's safe to assume it was a lot. Second, clearly the Judge got duped into thinking the company's plan of reorganization was feasible. Expect more scrutiny from judges on this point go-forward - and not just in the oil and gas space. Third, this is yet another example of US manufacturing being uncompetitive in the world market. Notably, Gilden is buying the intellectual property only. This is why Shark Tank's Kevin O'Leary is constantly telling entrepreneurs to ship their manufacturing to China: Los Angeles simply doesn't make sense - regardless of who is President. Finally, popularity doesn't last forever - particularly, in the retail space. Undoubtedly retail is suffering lately - a point exemplified by the onslaught of recent retail filings, e.g., Golfsmith, Nasty Gal, etc., - but failures there will only be amplified when quality slips, e-commerce is ignored, and execution is poor.

As for Carney? His new startup venture is featured on Gimlet Media's newest "Startup" podcast...

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President-Elect Trump

We admit it. We got caught off-guard by the results. We had a nice feature piece ready about food, deflationary pressures, and the manner in which tech is affecting restaurants and grocers. Business as usual with President-Elect Clinton. But then Tuesday happened. 

So, instead we reached out to a small subset of the PETITION community for their take on what the election may mean for 2017. Here's what they had to say:

"Trump trade policies centered around taxing imports to protect American manufacturing will decimate consumer spending and accelerate the already rapid decline of brick and mortar retail...should be good for restructuring, right up until he gets goaded into World War III by some sort of 8th grade insult." - Restructuring Advisor, TX

"Despite an equity market rally following Trump's victory on Tuesday, plenty of signs point to an increase in restructuring activity on the horizon. First, there will be winners from deregulation, potential protectionism and lower taxes but there will be plenty of losers as well. Second, add higher interest rates and a steepening yield curve to the market's recent addiction to floating rate debt and levered borrowers are going to have a dramatically higher and in many cases unsustainable interest burden. Higher rates will also pull capital away from investor appetite to refinance the riskiest credits. Third, Trump thinks bankruptcy is a great tool -- don't expect him to go easy on a struggling sector; he may point debtors to the tools available under the Code as a smart solution. And finally, these drivers of increased activity all assume the best version of Trump shows up - any destabilization from Trump volatility in policy or leadership will likely spook capital markets and create far greater restructuring needs." - Investment Banker, NY

"I don’t have any special insight into Trump. The probability of Trump winning was so low that very few people involved in the markets went beyond focusing on his rhetoric to understanding what he would mean for the country economically. That was clearly a mistake. If Hillary would have been the predictable president with flat to moderate growth, Trump seems to be the high growth president with high tail risk. Trump, filtered through the Paul Ryan orthodoxy, with a Republican Senate and a Republican House, has a possibility of being highly productive and the market seems to be willing to believe that until proven otherwise. In particular, the market is and will continue to be focused on the unwinding of certain themes that have constrained growth during the Obama administration. Chief among these issues were increased regulation in certain sectors such as banking under Dodd Frank and the CFPB, the sweeping changes as a result of Obamacare, and a lack of progress on legislative initiatives such as increased infrastructure spending due to gridlock in Washington. While not entirely Obama’s fault, ultimately, the degree of change combined with legislative gridlock led to massive uncertainty that constrained capacity expansion and new construction, traditionally a large driver of growth in the economy. 
 
The view is now that the path is clear. With both the executive and legislative branches controlled by the Republicans and Trump’s agenda on some of these key issues relatively clear, the uncertainty has been eliminated, resulting in higher asset values and, in all likelihood, increased capital spending. The virtuous circle will then commence as higher asset values, begets more spending, begets higher asset values and so on. In particular, the long duration of lackluster business expenditure combined with a need for significant infrastructure spending has led to massive pent up demand and could further lead, ultimately, to a super cycle in corporate expenditure – a prospect that has excited distressed debt and equity investors in US markets. 
 
However, caution is warranted. It’s not all roses. Some sectors such as steel/iron ore may benefit from higher tariffs on Chinese imports of steel and increased infrastructure spending but automotive growth may be tempered by changes in free trade agreements as costs rise and foreign markets close. Community banks will do better as Dodd Frank is re-worked but large banks may continue to face harsh scrutiny as too big to fail. Healthcare’s picture will remain muddled for some time. For now, this will be viewed as a rising tide lifts all boats but I don’t believe that such a view is entirely accurate. I would steer towards the clear winners. 
 
My advice: in order to make money in this market, ignore Trump’s antics and focus on the policy he’s likely to achieve. Clear themes will emerge."  - Investor, NY

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The immediate effect of the election is clear: recent restructuring hotspots such as oil and gas, mining, and commodities saw bumps this week while others like healthcare and renewables got beat up badly. The recent focus on regulation of biotech/pharma will likely dim. So, too, for for-profit education and private prisons. Tech - notably the "FANG" stocks - got hit hard. Query whether this will help accelerate what many view as the inevitable popping of the tech bubble.

Speaking of tech, there is an active petition on Change.org to get Donald Trump to sit with Elon Musk to discuss, among other things, climate change. Notably, Musk has been silent since the election; aside from one EPA-related retweet, his twitter feed has nothing but an oddly and somewhat ironically timed announcement about Tesla's new German production facility. Musk is likely in wait-and-see mode: after all, it's no secret that both Tesla and SolarCity have benefited significantly from government subsidy over the course of the Obama administration and Trump was quick to highlight the Solyndra failure in the debates. The imminent showdown between Trump and the inspiration for Iron Man should be interesting: solar has taken a beating this past year with SunEdison and Verengo filing for bankruptcy and Yeloha shutting down shop. There isn't a lot of room for error in the space...

Comeback Kids

Everyone loves a comeback. And Weil is most definitely back.

Post-Lehman and GM, Weil settled into a notable rut as Kirkland & Ellis and others stole market share and preeminence in the restructuring world. Though Kirkland & Ellis arguably remains the dominant player in the industry, Weil is swiftly climbing back up the ranks. How have they done it?

We're going to stay away from crediting any specific individuals here because it is difficult to say what is outside deal flow origination and what is platform-based. 

But one thing is clear: Weil has diversified its practice. Sure, debtor work - across an array of industries - remains its bread and butter and debtor work abounds: Golfsmith, Aeropostale Inc., Breitburn Energy Partners, Fairway, Halcon Resources, Basic Energy, American Gilsonite, Paragon Offshore, CHC Group, A&P, Vantage Drilling Company, and Chassix Holdings Inc. But now Weil is also doing lender, bondholder, and equityholder work as in Seventy-Seven Energy, Things Remembered, Aspect Software, Performance Sports Group and DirectBuy Holdings. And unsecured creditor committee work, e.g., SunEdison and Ultra Petroleum. Wait, what? Weil does UCC work now? 

It's not all sunshine, though. Last week, Weil's attempted confirmation of Paragon Offshore's plan of reorganization over the objection of crammed-up term lenders failed in a rare judicial recognition of the feasibility standard. Now exclusivity may be in danger. In Breitburn Energy Partners, equity holders (represented by Weil alumni) successfully argued for an equity committee over vehement Weil objection (in contrast, this week Kirkland & Ellis successfully defeated an equity holder attempt to form an official equity committee in C&J Resources). In Aeropostale, the Southern District of New York judge handily denied Weil's attempts to recharacterize and equitably subordinate Sycamore Partners' claims.  

As we near the end of 2016, PETITION offers a hearty congratulations to Weil: it's been a great year. 2017 appears promising too.  

What About the Children?

This was a big (bankruptcy) week for oil field servicers. 

After months of upstream idling and cost cutting, expert predictions of a cascade through the midstream space finally came true with a trio of prepackaged bankruptcy cases: Key Energy Services Inc., Basic Energy Services and American Gilsonite. With oil mired in the $50/barrel range, upstream producers cut capex, competitive servicers cut pricing, and suddenly - in the example of Key Energy - $1b in funded debt became entirely unsustainable. Shocker.   

And yet Key's bankruptcy papers paint a picture of...success?!? Sure, we'll give some credit: a consensual prepackaged case with a two-month timeline is a shining star in an industry rife with supposed prearranged deals that descend quicker into chaos than Donald Trump at a presidential debate (we're looking at you Samson Resources, Sabine, and Midstates Petroleum). But let's not lose perspective here... 

Platinum Equity will come out as the largest equity holder. Various creditors will swap their debt for equity. Chevron will continue to receive services. Shareholders? C'mon. Key was a publicly-traded company. No one cares. 

J. Marshall Dodsen, CFO of Key, noted that Key undertook dramatic measures to stave off bankruptcy including shutting down business lines, selling assets, and riffing employees like nobody's business. He laid off 55% of the workforce. Some quick math here: 2900 employees remain...55% gone...carry the one...yup, 1600 employees axed. What a hero. 

Notably, Basic Energy's papers highlight a 30% headcount reduction as compared to 2014 (read: before oil cratered). While American Gilsonite noted that firings were part of its pre-filing cost-cutting strategy, it spared us from the exactitude. Outside of the bankruptcy court, we learned this week - in the context of reporting a $429mm net loss - that Baker Hughes has eliminated nearly 25,000 jobs during this commodity-price downturn. 

Sadly, nobody is earnestly talking about the real world implications of this debt-laden SG&A-ridden cowboy culture collapsing before our very eyes. But they should be. Because clearly people are losing jobs. Lots of people. 

It doesn't stop there. We singled out Samson and Midstates for a reason. And that's because Oklahoma is a complete and utter hot mess right now. Aside from lining biglaw and advisory pockets, these cases (and, of course, the oil price decline generally) have had other very real consequences. We recommend that you watch the 10/21/16 episode of Vice News on HBO for more detail but, suffice it to say, the oil bust is hitting the children. Lost oil revenue has destroyed school budgets and this means fewer school days for Oklahoma kids. To make up for this, the state is proposing a sales tax increase that would propel Oklahoma to the top of the combined state/local tax rates. If there is no other explanation for this crazy election season, there is this: people do desperate things when children are involved.

The restructuring industry is abuzz about this week's uptick in filings after a relatively slow Q3. But there are bigger forces at play here. Let's hope those Oklahoma children are safe when the next big force of an earthquake strikes.  

It's All About Yield

Yield. The driver of markets today is yield. We were reminded of that in three different but interesting ways in the past week...  

Nick Bilton ran a piece in Vanity Fair's The Hive this week in which he discussed - as we did last week - the failure and disappearance of a slew of tech/startup companies and noted, gulp, that the tech bubble may burst in March or April of next year. There's been a noted belt tightening in recent months after a surge of cash - in part from investors looking for yield from alternative asset classes - flooded the venture capital scene and hiked up valuations. This is why you maybe heard about Fidelity and other conventional asset managers drinking Blue Bottle Coffee while managing HR with Zenefits. A reckoning is coming to Silicon Valley.

We also saw this week the historic debt issuance by Saudi Arabia. Budget challenges stemming from depressed oil prices, high government salaries and free healthcare have sparked the need to diversify the economy and, to fund this initiative, SA marketed a $17.5 billion issuance at 100-200 bps yield above US treasuries. In light of that extra juice, the issuance was 4x over-subscribed. Here is a snapshot of Saudi's budget surplus/deficit: 

And, finally, Platinum Partners Value Arbitrage Fund. Wow. Nothing exemplifies the over-exuberant grasp for yield like a fallen $1b+ AUM fund...

On 10/21/15, Bloomberg News ran a piece exposing this shady trainwreck of an operation. We're talking about rabbis scamming terminally-ill patients for life insurance proceeds. You really should watch the video in the link. It's amazing. A large holder almost immediately issued a redemption request which, naturally, the fund did not honor. The holder, therefore, filed a petition seeking liquidation of the fund. Unsurprisingly, the fund couldn't honor the request because its portfolio is comprised of a "large concentration of illiquid private equity style investments" including winner positions in recently bankrupted IMX Acquisition Corp. (Implant Sciences) and Black Elk Energy. Now, a year later, the fund is winding down in the Cayman Islands and filed a Chapter 15 to aid the process. If anyone thinks this is the last episode of fraudulent activity to come out of this historic market run-up, we have a bridge to sell you...

Will the VC & PE-backed Tech World Converge with the Restructuring World?

At some point, the tech bubble will burst.  When it does, there'll be a fast and furious convergence between the worlds of (venture capital and private equity backed) tech and corporate restructuring. Expedited 363 sales of intellectual property are coming.

Why highlight this now? First, a recent Bed Bath & Beyond (*click for ticker) public filing highlights that the brick-and-mortar retailer purchased once-popular e-commerce retailer One Kings Lane for a mere $11.78mm. This easily makes OKL one of the largest VC-backed failures EVER. Approximately $200mm had been invested in it at a presumed valuation of nearly a billion dollars. Certainly NOT a successful exit for a near-unicorn. 

And second, Jason Goldberg re-emerged on a new Bloomberg podcast discussing the epic failure of his unicorn startup Fab.com. 

Now, to be fair, neither of these e-commerce platforms ended up filing for bankruptcy. But that is only because they effectively sold for parts before having to. 

Other tech companies, however, haven't been so lucky. There is a growing roster that have filed for bankruptcy lately:

1. NJOY - $145mm raised mostly from PE (incl. Morgan Stanley, Sean Parker)
2. Quirky - $176mm raised mostly from VC (incl. A16Z, Kleiner Perkins, Lowercase Capital)
3. Karmaloop - $19mm raised mostly from PE (Comvest Group).
4. Jumio - $50.3mm raised mostly from VC (incl. A16Z, Eduardo Saverin)
5. Fuhu - $49.7mm 
6. Filip Technologies - $8mm 
7. Homejoy - $39.7mm raised mostly from VC (Google Ventures, First Round Capital, A16Z)(note: also a unicorn and Y-Combinator darling)

Next up: Jawbone. Unlike most tech/startup companies, Jawbone actually has debt on it (via Blackrock and Kuwait Investment Authority) on top of VC (incl. A16Z, Kleiner Perkins, Khosla Ventures, Sequoia Capital).

Note, also, that Air Fast Tickets is another recent bankruptcy filing; it sought an asset sale under the fog of fraud. This brings to mind Theranos & Hampton Creek, two other high-flying startups currently plagued with fraud-related scandal. 

We'll spend more time on these topics in the future but, for now, any restructuring professional who thinks there's no business emanating out of the Silicon Valley frenzy ought to think again...

Are Progressives Bankrupting Restaurants?

According to the CEO of Garden Fresh Restaurant Intermediate Holdings (GFRIH), they are.  

This past week, John Morberg filed an affidavit in support of the chapter 11 bankruptcy filing of GFRIH, the holding company to restaurant brands Souplantation and Fresh Tomatoes. This family of restaurants includes 123 locations, 17 central kitchens and 2 distribution centers. All in, the company has 5500 employees, the majority of which work in the restaurants located in California, Texas and Florida.  

In addition to having approximately $135mm of funded debt, the company experienced increasing cash flow pressure which, according to Morberg, triggered the bankruptcy. Chief among the causes for this pressure was "declining sales consistent with the declines experienced in the entire restaurant industry." Morberg, here, is clearly referencing a string of recent restaurant bankruptcies including Cosi, Fox & Hound, Logan's Roadhouse, Don Pablo's, Zio Restaurants, Buffetts, and Champps. Cheap gasoline was supposed to translate into bigger consumer spending. Not so for these restaurants, apparently. 

Still, Morberg's explanation for the bankruptcy went a step farther. He noted that cash flow pressures also came from increased workers' compensation costs, annual rent increases, minimum wage increases in the markets they serve, and higher health benefit costs -- a damning assessment of popular progressive initiatives making the rounds this campaign season. And certainly not a minor statement to make in a sworn declaration.  

It's unlikely that this is the last restaurant bankruptcy in the near term. Will the next one also delineate progressive policies as a root cause? It seems likely.

Discounted Crackly-Crust Flatbread...

"All Sorrows Are Less With Bread" - Miguel de Cervantes Saavedra

If crackly-crust flatbread and Squagels (yes, this exists...and it is what it sounds like) are on your Christmas wish-list this year, you may be in luck: the once high-flying Cosi Inc. could be yours via bankruptcy sale.

For those familiar with Cosi In NYC, the downfall of the fast casual chain is particularly surprising. Once upon a time, blockbusting lunch lines for Cosi were a regular occurrence. As they waited, people jostled for access to the excess baked crackly-crust bread the bakers regularly dispensed. In certain locations, the competition for the excess was so fierce that the bakers resorted to placing the pieces in a small metal bowl on the counter - the fast casual equivalent of a home owner lazily putting a basket of Halloween candy on the doorstep for trick-or-treaters. Never mind hygiene: 126,292 other people put their hands into that bowl between the hours of 12 and 2. Yech.  

Here are the stats:

• 107 stores in 3 countries (but most in the US).
• 1555 employees (many of whom will now be losing their jobs)
• $7.5mm of (gulp, maybe) secured debt (which will position the lenders to own the business)
• $3mm in net losses in Q2 '16 (hence why we're talking about bankruptcy in the first place).

The court filings contain a choice quote: "The deteriorating sales are at least partially due to macro-economic issues as the restaurant industry as a whole and the fast casual sector in particular are experiencing decreasing sales trends." So much to unpack here. First, what happened to the notion that the "gasoline windfall" would lead to greater consumer spending? Second, aren't millennials spending more on food and experiences than on physical goods? Third, how does this purported trend affect the likes of Panera Bread, Chipotle, and a whole host of other fast casual upstarts? Sadly, the filings don't substantiate this statement. Curious.  

Winners:

• the original founders who blew out after the I.P.O. (yes, this thing is publicly-traded).

Losers:

• the senior secured lenders - they'll either get pennies on the dollar or 78 rubber-chicken-serving fast casual locations facing (unsubstantiated) headwinds; and
• the former CEO - the (public) filings go out of their way to note that he failed miserably to acknowledge the decline in the business and effectively turn it around (ouch). 
• employees - many are losing there jobs with little to no advanced notice.  
• shareholders - unlikely to see any recovery for their position.  

Thoughts, comments or questions? Note the comment section below.