Libbey Glass Inc.

June 1, 2020

We first wrote about Libbey Glass Inc. ($LBY) back in a November 2019 Members’-only briefing. Given that (a) the company is a manufacturer and distributor of glass tableware and ceramic dinnerware and (b) many of the company’s end user channels were in distress themselves (e.g., foodservice and retail), we noted (i) that performance was declining, (ii) the companies leverage ratio was increasing, and (iii) the company just generally looked pretty darn f*cked. This week the Ohio-based company and 11 affiliates (the “debtors”) filed for chapter 11 bankruptcy in the District of Delaware.

In November we wrote:

There are a number of trends that are taking hold currently that may be disruptive to a company that manufactures and distributes glass tableware (i.e., shot glasses, tumblers, stemware, mugs, bowls, etc.) and ceramic dinnerware products (i.e., servicing utensils and trays) to food service distributors, mass merchants, department stores, retail distributors, houseware stores, breweries and other end users of glass container products. First, people don’t go to department stores or houseware stores anymore (in case you hadn’t heard, check out the stock performance of every department store in the US and, for good measure, Bed Bath & Beyond ($BBBY)). Second, millennials aren’t drinking as much as Generation Z did. Third, people are ordering food more frequently and cooking and hosting dinner parties far less often than they did prior to VC-subsidized companies like UberEats ($UBER), Postmates and Caviar coming along. Indeed, per the company’s most recent report:

In U.S. foodservice, restaurant traffic for Q3 as reported by Black Box was down 3.6% compared to down 1.3% in Q3 of 2018.

All of these things are headwinds to a company like Libbey Glass ($LBY), an Ohio-based company founded in 1888. The longevity of the business is uber-impressive, but the year is currently 2019, and sh*t is unforgiving out there: Libbey is starting to look a bit troubled.

We continued:

The company reported Q3 net sales of $192.4mm, a decline from Q2 but a YOY increase of 0.9%. It continued to have a net loss on declining gross profit and margin. Adjusted EBITDA and net cash both improved. The company is currently in the midst of an operational restructuring pursuant to which it reduced SG&A by $2.4mm. While the US and Canada are, despite the aforementioned trends, proving resilient, the company continues to struggle in Latin America and EMEA. The company issued weaker go-forward guidance.

This declining performance is becoming problematic considering the company’s capital structure:

- $100mm ‘22 ABL ($47.7mm outstanding as of Q2, a substantial increase over Q1, and $49.4mm outstanding as of Q3); and

- $378mm ‘21 Term Loan B.

At the time of this writing, the TLB was quoted in the high 70s, certainly distressed territory. To make things a bit more interesting, the ABL has a springing maturity to 1/21 if the term loan is not refinanced by then. With adjusted EBITDA at $67.3mm as of Q2, the company was 5.8x levered. Q3 performance had a slight positive impact there. Still, things generally are going in the wrong direction.

Nailed it. The company notes:

Throughout 2019 and the start of 2020, the Debtors’ business was impacted by global competition in all of the Debtors’ distribution channels, fluctuating business and consumer confidence in the United States and Europe as a result of increased economic and political uncertainty from various factors including ongoing trade tensions between the United States and China and the potential for a Brexit no-deal in Europe, as well as slowing economies in Europe, China and parts of Latin America. Other factors impacting the Debtors’ business during 2019 and the start of 2020 were continued declines in United States and Canada foodservice traffic with take-out and delivery increasing in popularity relative to in-restaurant dining; continued migration of consumer purchasing from brick-and-mortar stores to online commerce, particularly in the United States, Canada and Europe; shifting consumer preferences in Europe from mid-tier retailers (where sales of the Company’s Royal Leerdam® products have been concentrated) to discounters; and increased competitive pressures in Latin America, as Chinese manufacturers divert sales of their products from the U.S. market to Latin America in order to avoid the increased tariffs imposed by the United States on Chinese imports. (emphasis added)

Consequently, total revenues were down $16mm in fiscal ‘19. Due to non-cash impairment charges, the company incurred a net loss of $69mm, up from $8mm in ‘18.

This declining performance is problematic considering the company’s capital structure and the debtors’ inability to proactively address its debt despite attempts to refinance the term loan:

• $100mm ‘22 ABL ($47.7mm outstanding as of end of Q2, $49.4mm outstanding as of end of Q3, and now $66.9mm outstanding plus letters of credit and other reserves leaving a smidgeon of liquidity); and

• $378mm ‘21 Term Loan B.

To make matters worse, the ABL has a spring maturity: this means that if the term loan isn’t refinanced by January 2021, the ABL, which otherwise does’t mature until 2022, springs forward and becomes due and outstanding.

That was BEFORE the coronavirus did this to sale:

If refinancing was challenging before well…yeah, good luck with that. Per the company:

The Company engaged in discussions with the Lender Group around an amend-and-extend transaction. However, the Lender Group’s concern over the impact COVID-19 would have on the Company’s business ultimately prevented those discussions from resulting in a transaction. The Company also informed the Lender Group of certain inbound merger and acquisition proposals from strategic buyers. These proposals were not pursued because, among other reasons, they were insufficient to pay the Company’s Prepetition Term Loans in full, thus requiring lender consent, and the Lender Group did not believe it was in the Company’s best interest to pursue such a transaction.

So here we are. The debtors are in bankruptcy. And this addresses one issue: through a $100mm DIP ABL (rollup) and a $60mm new money DIP Term Loan, the debtors have shored up liquidity. The DIP has aggressive milestones baked in including confirmation of a plan of reorganization no later than 100 days after the petition date. Next, the debtors may use the weapons provided pursuant to the Bankruptcy Code to address their collective bargaining agreements and other retiree programs ($48mm unfunded liability). Moreover, they have potentially valuable excess interest expense, net operating losses and other tax attributes to protect.

• Jurisdiction: D. of Delaware (Judge Silverstein)

• Capital Structure: see above.

• Professionals:

  • Legal: Latham & Watkins LLP (George Davis, Keith Simon, David Hammerman, Anupama Yerramali, Madeleine Parish, Blake Denton, ) & Richards Layton & Finger PA (John Knight, Russell Silberglied, Paul Heath)

  • Independent Directors: Timothy Pohl, Patrick Bartels Jr.

  • Financial Advisor: Alvarez & Marsal LLC (Brian Whittman)

  • Investment Banker: Lazard (Jason Cohen)

  • Claims Agent: Prime Clerk LLC (*click on the link above for free docket access)

• Other Parties in Interest:

  • DIP ABL and Prepetition ABL Agent ($100mm): JPMorgan Chase Bank NA

    • Legal: Goldberg Kohn Ltd. (Dimitri Karcazes, Prisca Kim, Joseph Zizzo) & Womble Bond Dickinson US LLP (Matthew Ward)

  • DIP Term and Prepetition Term Agent ($60mm): Cortland Capital Market Services LLC

    • Legal: Arnold & Porter Kaye Scholer LLP (Michael Messersmith, Seth Kleinman, Sarah Gryll, Lucas Barrett) & Young Conaway Stargatt & Taylor LLP (Blake Cleary, Kenneth Enos)

  • Counsel to the Lender Group

    • Legal: Arnold & Porter Kaye Scholer LLP (Michael Messersmith, Seth Kleinman, Sarah Gryll) & Young Conaway Stargatt & Taylor LLP (Blake Cleary, Kenneth Enos)