⚡️New Chapter 11 Bankruptcy Filing - Griddy Energy LLC⚡️

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Griddy Energy LLC

Sooooooo this one was predictable. The writing was on the wall a few weeks ago and we noted in “💥Is Texas F*cked?💥,” that Griddy Energy LLC was a likely bankruptcy candidate.* On Sunday, we noted how recent PUCT/ERCOT decisions to extend the deadline “…for electric retailers to dispute the ridonkulous liabilities imposed upon them after the now-infamous Texan storm” — liabilities that already claimed Just Energy Group Inc.($JE) and Brazos Electric Power Cooperative Inc. as victims — might buy time for certain other players in the stack to figure out their futures. By then, however, it was already too late for Griddy. On February 26, 2021, ERCOT forced the mass transition of Giddy’s customers to other electricity providers.

Griddy’s whole business model was passing through wholesale pricing sans mark-up to 29,000 retail end customers in exchange for a monthly fixed fee of $9.99. Through this model, Griddy claims to have saved its customers more than $17mm since 2017. Griddy argues that at no point since its inception was its model targeted as problematic by the PUCT. PUCT, after all, granted Griddy’s license.

That all obviously changed with February’s big storm. Per the debtor:

During the winter storm in Texas in February 2021, Griddy and its customers suffered as a result of (a) inaccurate information from ERCOT about the preparedness of the electricity grid for the 2020-2021 winter season, (b) the decision by the PUCT to order electricity prices be set to $9,000 per megawatt hour (“MWh”), and (c) ERCOT’s decision to hold electricity prices at $9,000 per MWh for 32 hours after firm load shed had stopped. Prior to the PUCT order, the real-time electricity price had reached $9,000 per MWh for a total of only 3 hours since 2015. In contrast, after the PUCT order, the electricity price was set to $9,000 per MWh for 87.5 hours between February 15, 2021 and February 19, 2021.

This obviously creates a whole host of issues when, in turn, you’re only getting $9.99 per customer per month (plus other passthrough expenses) for a total of $289.7k in revenue a month. Prior to the storm, Griddy was solvent. As of the petition date, it has only $1.448mm of pre-petition debt outstanding (due to Macquarie Investments US Inc.). Griddy obviously blames the reversal of that fortune on ERCOT’s missteps and poor planning. Per the debtor:

Prior to the mid-February winter storm event, Griddy was solvent. As discussed above, the failures of ERCOT and resulting actions taken by the PUCT during the winter storm event resulted in Griddy’s loss of all of its customers and forced Griddy to file this case. The winter storm event also left Griddy in an untenable position – engage in aggressive collection actions against customers for exceedingly high prices for wholesale electricity and ancillary services (which is not its preference) and fight baseless lawsuits – or file for bankruptcy and distribute its remaining cash in an orderly manner.

Be that as it may, Griddy now owes a contingent and disputed $29mm nut to ERCOT — its largest general unsecured creditor. Its customers — who generally tend to be on the lower end of the socioeconomic spectrum — have bills far in excess of historical norm and expectation. So now what?

Griddy is basically flicking the bird to ERCOT (🖕):

In the weeks since the winter storm event, Griddy has created a chapter 11 plan whereby (i) Macquarie would compromise a portion of the remaining amount of money owed to it by Griddy for the benefit of Griddy’s other creditors, (ii) Griddy would give former customers with unpaid bills releases in exchange for such customers’ releases of Griddy and certain other parties, (iii) other general unsecured creditors would share pro rata in remaining available cash, and (iv) upon emergence, a plan administrator would take over ownership of Griddy and, in his or her discretion, pursue causes of action, whether against ERCOT for potential preference claims, fraudulent transfers or other claims related to the winter storm event, or otherwise. Griddy has filed its proposed chapter 11 plan, disclosure statement and related motions concurrently herewith. Griddy intends to seek confirmation of its proposed chapter 11 plan on as expedited basis as possible.

“Certain other parties” no doubt includes Macquarie.

All of this seems so strangely … American. Thousands of innocent people sign up for a product that they don’t fully understand most likely thinking that there are systems in place to protect them. Turns out the systems are broken: thousands of innocent people lose electricity for days and ultimately get billed up the wazoo and, naturally, nobody wants to take any responsibility for that. Lawsuits commence. Bankruptcies ripple through the area.** Meanwhile, the lenders do everything in their power to shed any and all liability risk. God bless America.

*We said we “smell a chapter 7 filing” which, it turns out, was perhaps a bit to flippant. While the spirit of the comment is correct in that there is no future for the company as a going concern, we neglected to consider some of the benefits of a chapter 11 filing including, among other things, the sought-after releases.

**One interesting side note — given that this is a uniquely Texan fact pattern — is that it took this catastrophe to finally hour-up some Texas-based lawyers rather than enrich some Chicago or New York attorneys. Putting aside Just Energy Group Inc. (represented by Kirkland & Ellis LLP), Brazos Electric Power Cooperative Inc. is represented by Norton Rose Fulbright and Griddy is represented by Baker Botts LLP. The lender, Macquarie, is counseled by Haynes and Boone LLP and ERCOT is represented by Munsch Hardt Kopf & Harr P.C. The local folks must seriously be thinking “it’s about time.”

Date: March 15, 2021

Jurisdiction: S.D. of Texas (Judge Isgur)

Capital Structure: $15mm Borrowing Base Facility ($1.448m outstanding)

Company Professionals:

  • Legal: Baker Botts LLP (Robin Spigel, David Eastlake, Chris Newcomb, Jacob Herz)

  • Claims Agent: Stretto (Click here for free docket access)

Other Parties in Interest:

  • Pre-petition Lender: Macquarie Investments US Inc.

    • Legal: Haynes and Boone LLP (Kelli Norfleet, Arsalan Muhammad)

  • ERCOT

    • Legal: Munsch Hardt Kopf & Harr P.C. (Kevin Lippman)

New Chapter 11 Bankruptcy Filing - Tuesday Morning Corporation ($TUES)

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Tuesday Morning Corporation

May 27, 2020

Dallas-based Tuesday Morning Corporation ($TUES) is 80% open now — just in time to start closing 230 of its brick-and-mortar locations (132 in a first phase and 100 more in a follow-up phase) and commence liquidations sales while in bankruptcy. This, in a nutshell, ladies and gentlemen, sums up the plight of retail today.

If you tune in to CNBC or Bloomberg, one could be forgiven for thinking that a retailer like TUES might actually do relatively well during shelter-in times. It specializes in upscale home furnishings, textiles and housewares for crying out loud. According to the talking heads, everyone is spending time at home judging the inadequacy of their living accommodations — a process that ought to serve as a real boost to home furnishing specialists ((e.g., Restoration Hardware Inc. ($RH)) and home improvement companies ((e.g., Home Depot Inc. ($HD) and Lowe’s Companies Inc. ($LOW)). Not so much for TUES, apparently: the total lack of online presence and the company’s 100% reliance on in-store sales certainly didn’t help matters. The pandemic and related fallout “…resulted in a near-total cessation of new revenue beginning in March 2020.” Repeat: Near. Total. Cessation. Yikes.

Indeed, the debtors’ website serves a very limited purpose: it has a store locator. One literally cannot transact on the site. That said, there does appear to be pent up demand: the company reports that since re-opening its stores on April 24, comp store sales for the reopened stores have been approximately 10% higher than the same period in fiscal ‘19. Perhaps people DID, in fact, identify a lot of things they wanted to remedy at home! And they’re clamoring for that “treasure hunt” experience, y’all!!

What’s somewhat sad about that is, looking at the debtors’ list of top 40 unsecured trade creditors, nearly every vendor they do business with is US-based. In fact, the debtors source 80% of their inventory from US vendors. These store closures and the attendant loss of volume will cascade through the economy. Sigh.

Anyway, we previously wrote about the company in February upon the company’s Q2 ‘20 earnings report. We noted:

Quick coverage of this Dallas-based off-price retailer because, well, it’s performing like dogsh*t. The company reported Q2 ‘20 numbers last week. They. Were. Not. Good.

Nope. Like, not at all. Here are some highlights:

- A 4.1% decrease in net sales YOY driven primarily by a 3% decrease in comp store sales;

- A 3.7% decrease in the size of the average ticket, offset only somewhat by a 0.7% increase in customer transactions (read: more people buying less stuff — not exactly a testament to inventory quality);

- Declining gross margin (down 1.9%);

- Operating income down $5.2mm for the Q and $6.3mm for the 1H of fiscal ‘20;

- Cash is burning, down $6.5mm from June 2019.

The company blamed this piss poor performance on the shortened holiday calendar (how predictable) and uber-competition within that period that resulted in heavy promotions.

We further noted that the company had 175 leases rolling off in the next 12 months and, therefore, “…this is more a lease story than a bankruptcy story.” Whoops. Our crystal ball didn’t pick up on COVID-19. We further noted:

The company has no maturities prior to 2024 and has significant room under its $180mm revolving credit facility ($91.4mm of availability). Still, this thing needs its performance to turn around or it will be dancing with several other distressed retailers soon enough.

“Soon enough” came quicker than we anticipated.

The problem is that not only did the shut-down completely shut the revenue spigot, it also led the debtors to default, as of March 2020, under their revolving credit facility (“RCF”). The RCF Credit Agreement had a provision prohibiting the debtors from “suspend[ing] the operation of its business in the ordinary course of business.” Ever since, they have been in a state of continued negotiation and forbearance with their RCF enders, JPMorgan Chase Bank NA ($JPM), Wells Fargo Bank NA ($WFC), and Bank of America NA ($BAC).

That negotiation has borne fruit. The debtors obtained a DIP financing commitment of $100mm which will consist of some new money as well as a “gradual” roll-up of pre-petition funded debt ($47.9mm + $8.8mm LOCs). The debtors will pay a 2% upfront fee, a 0.5% unused commitment fee and customary letter of credit fees. “The interest rate under the DIP Documents is, either (at the Debtors’ option), (a) a 3 month LIBO Rate (2.0% floor) + 3.00% per annum or (b) CBFR (2.0% floor) + 2.0% per annum, payable on each applicable Interest Payment Date, in cash, provided that no Interest Period may extend beyond the Maturity Date.”

So what now? The debtors main assets are their inventory, a Dallas distribution center and corporate office, and equipment; they also have upwards of $100mm in net operating losses. There isn’t a lot of debt on balance sheet: this is not an example of a private equity firm coming in and dividending all of the value out of the enterprise. Rather, the crux of this case in the near-term will be, as we noted back in February, about the rejection of hundreds of leases and the stream-lining of the debtors’ footprint to a leaner operation. The crux longer-term, however, will be whether there’s any reason for this business to exist. Will the lenders enter into an exit facility? Will there be a plan of reorganization that will allow the debtors to emerge as reorganized debtors? Will there be a sale of substantially all of the assets? The chapter 11 bankruptcy process will be used to hopefully find answers to these questions.

  • Jurisdiction: N.D. of TX (Judge Hale)

  • Capital Structure: $47.9mm funded RCF + $8.8mm LOCs

  • Professionals:

    • Legal: Haynes and Boone LLP (Ian Peck, Stephen Pezanosky, Jarom Yates)

    • Financial Advisor: AlixPartners LLP (Barry Folse, Ray Adams, Wilmer Cerda, JR Bryant)

    • Investment Banker: Stifel Nicolaus & Co. Inc. & Stifel Nicolaus-Miller Buckfire & Co. LLC (James Doak)

    • Real Estate Advisor: A&G Realty Partners LLC

    • Liquidation Consultant: Great American Group LLC

    • Claims Agent: Epiq Corporate Restructuring LLC (*click on the link above for free docket access)

  • Other Parties in Interest:

    • DIP Agent: JPMorgan Chase Bank NA

      • Legal: Vinson & Elkins LLP (William Wallander, Bradley Foxman)

    • Official Committee of Unsecured Creditors

      • Legal: Montgomery McCracken Walker & Rhoads LLP (Edward Schnitzer, Gilbert Saydah Jr., David Banker) & Munsch Hardt Kopf & Harr PC (Kevin Lippman, Deborah Parry)

⛽️New Chapter 11 Bankruptcy Filing - Diamondback Industries Inc.⛽️

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Diamondback Industries Inc.

April 21, 2020

Texas-based Diamondback Industries Inc. and two affiliates (the “debtors”) filed for bankruptcy in the Northern District of Texas; they are manufacturers and sellers of disposable setting tools, power charges, and igniters used in the completion of oil and gas wells. Their wares are patent and trademark protected and appear to enjoy use by oil and gas companies engaged in drilling and well services. The debtors have managed to weather the oil and gas downturn over the last several years but the recent perfect storm brought on by the calamitous drop in oil prices + COVID-19 was too much to bear. These factors alone would have been troubling but the debtors also ran into some crippling legal troubles.

On April 3, 2020, the District Court for the Western District of Texas entered a patent judgment against the debtors that instantly dumped a $39.9mm obligation on the debtors in favor of Repeat Precision LLC. Originally, Repeat Precision LLC was the defendant in a patent license agreement dispute pursuant to which the debtors claimed breach of contract, misappropriation of trade secrets and fraudulent inducement. Repeat Precision filed counterclaims for patent infringement and tortious interference. It appears the debtors weren’t prepared for the counter-punches. The judgment was the knockout punch.

And that punch created a domino effect. The judgment triggered an event of default under the debtors’ prepetition credit agreement. This was a double-whammy: just two days before, the debtors failed to make a principal payment and breached various financial covenants under the agreement. The debtors’ lender, UMB Bank NA, did enter into a forbearance agreement with the debtors but the debtors nevertheless determined that chapter 11 cases may afford them a “breathing spell” to get their business together (and perhaps pursue a sale process). The debtors secured a $5mm DIP commitment to fund their cases.

  • Jurisdiction: N.D. of Texas (Judge Morris)

  • Capital Structure: $20mm funded RCF (UMB Bank NA)

  • Professionals:

    • Legal: Haynes and Boone LLP (Ian Peck, David Staab, Matthew Ferris)

    • Financial Advisor/CRO: CR3 Partners LLC (Greg Baracato, Cade Kennedy)

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

  • Other Parties in Interest:

    • US Bank NA

      • Legal: Bryan Cave Leighton Paisner LLP (Kyle Hirsch, Tricia Macaluso)

    • Unsecured Creditor: Repeat Precision LLC

      • Legal: Munsch Hardt Kopf & Harr PC (Davor Rukavina, Thomas Berghman)