🙈New Chapter 11 Bankruptcy - Fred's Inc.🙈

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Fred’s Inc.

September 9, 2019

Dallas-based Fred’s Inc. and seven affiliated debtors have filed a long-awaited bankruptcy in the District of Delaware with the intent to unwind the business. The debtors are — or, we should say, were — discount retailers with full service pharmacies, focusing on fixed income families in small and medium-sized towns.

The bankruptcy papers — from a law firm largely known for litigation (a curious fact here until you consider that Alden Global Capital LLC is a large shareholder) — are remarkably sparse. No lengthy back story about the company and how “iconic” it is. Just, “it was founded in 1947, sold a lot of sh*t to people who have no other alternative and now we’re kaput.” No discussion of the interim, say, 70+ years. Not a mention in the First Day Declaration of the failed Walgreens/Rite-Aid transaction that would have given Fred’s a larger pharmacy footprint. Nothing about Alden’s stewardship. Nada. Not a word, outside of the motion to assume the liquidation consultant agreement, about the state of retail (and in that motion, only: “The Debtors faced significant headwinds given the continued decline of the brick-and-mortar retail industry.”). Given the case trajectory — an orderly liquidation — we suppose there’s really no need to spruce things up. There’s nothing really left to sell here.* All in, it’s, dare we say, actually kind of refreshing: finally we have a debtor dispensing with the hyperbole.

The debtors started 2018 with 557 locations. After four rounds of robust closures — 263 between April and June and another 178 between July and August — the debtors have approximately 125 locations remaining. Considering that those stores are now closing too and given that the average square footage per store was 14,684, the end result will be ~8mm of square footage unleashed on the commercial real estate market. We suspect that these small and medium-sized towns will have some empty storefronts for quite some time.

The debtors have a commitment from their pre-petition lenders for a $35mm DIP credit facility (which includes a rollup of pre-petition debt).

*The Debtors previously sold 179 of their pharmacy stores to a Walgreens Boots Alliance Inc. ($WBA) subsidiary for $177 million in fiscal Q4 ‘18 and 38 more to a CVS Health Corp. ($CVS) subsidiary for ~$15 million in August.

  • Jurisdiction: D. of Delaware (Judge Sontchi)

  • Capital Structure: $15.1mm RCF (+ $8.8mm LOCs), $20.9mm (Cardinal Health Inc., secured by pharmacy assets), $1.4mm in other secured debt.

  • Professionals:

    • Legal: Kasowitz Benson Torres LLP (Adam Shiff, Robert Novick, Matthew Stein, Shai Schmidt) & Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Andrew Remming, Matthew Harvey, Joseph Barsalona)

    • Board of Directors: Heath B. Freeman, Timothy A. Barton, Dana Goldsmith Needleman, Steven B. Rossi, and Thomas E. Zacharias

    • Special Legal: Akin Gump Strauss Hauer & Feld LLP

    • Financial Advisor: Berkeley Research Group LLC (Mark Renzi)

    • Investment Banker: PJ Solomon

    • Liquidator: SB360 Capital Partners LLC

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

  • Other Parties in Interest:

    • DIP Lender ($35mm): Regions Bank

      • Legal: Parker Hudson Rainer & Dobbs LLP (Eric Anderson, Bryan Bates) & Richards Layton & Finger PA (John Knight)

    • DIP Lender: Bank of America

      • Legal: Choate Hall & Stewart (John Ventola)

    • Large Shareholder: Alden Global Capital LLC

Update: 9/9/19 #19

🔫New Chapter 11 Filing - Sportco Holdings Inc. (United Sporting Companies Inc.)🔫

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SportCo Holdings Inc. (United Sporting Companies Inc.)

June 10, 2019

Callback to four previous PETITION pieces:

The first one — which was a tongue-in-cheek mock First Day Declaration we wrote in advance of Remington Outdoor Company’s chapter 11 bankruptcy — is, if we do say so ourselves, AN ABSOLUTE MUST READ. The same basic narrative could apply to the recent chapter 11 bankruptcy filing of Sportco Holdings Inc., a marketer and distributor of products and accessories for hunting, which filed for bankruptcy on Monday, June 10, 2019. Sportco’s customer base consists of 20k independent retailers covering all 50 states. But back to the “MUST READ.” There are some choice bits there:

Murica!! F*#& Yeah!! 

Remington (f/k/a Freedom Group) is "Freedom Built, American Made." Because nothing says freedom like blowing sh*t up. Cue Lynyrd Skynyrd's "Free Bird." Hell, we may even sing it in court now that Toys R Ushas made that a thing. 

Our company traces its current travails to 2007 when Cerberus Capital Management LP bought Remington for $370mm (cash + assumption of debt) and immediately "loaded" the North Carolina-based company with even more debt. As of today, the company has $950mm of said debt on its balance sheet, including a $150mm asset-backed loan due June '19, a $550mm term loan B due April '19, and 7.875% $250mm 3rd lien notes due '20. Suffice it to say, the capital structure is pretty "jammed." Nothing says America like guns...and leverage. 

Indeed, this is true of Sportco too. Sportco “sports” $23mm in prepetition ABL obligations and $249.8mm in the form of a term loan. Not too shabby on the debt side, you gun nuts!

More from our mock-up on Remington:

Shortly after Cerberus purchased the company, Barack Obama became president - a fact, on its own, that many perceived as a real "blowback" to gun ownership. Little did they know. But, then, compounding matters, the Sandy Hook incident occurred and it featured Remington's Bushmaster AR-15-style rifle. Subsequently, speeches were made. Tears were shed. Big pension fund investors like CSTRS got skittish AF. And Cerberus pseudo-committed to selling the company. Many thought that this situation was going to spark "change [you] can believe in," lead to more regulation, and curtail gun sales/ownership. But everyone thought wrong. Tears are no match for lobby dollars. Suckers. 

Instead, firearm background checks have risen for at least a decade - a bullish indication for gun sales. In a sick twist of only-in-America fate, Obama's caustic tone towards gunmakers actually helped sell guns. And that is precisely what Remington needed in order to justify its burdensome capital structure and corresponding interest expense. With Hillary Clinton set to win the the election in 2016, Cerberus' convenient inability to sell was set to pay off. 

But then that "dum dum" "ramrod" Donald Trump was elected and he enthusiastically and publicly declared that he would "never, ever infringe on the right of the people to keep and bear arms."  While that's a great policy as far as we, here, at Remington are concerned, we'd rather him say that to us in private and declare in public that he's going to go door-to-door to confiscate your guns. Boom! Sales through the roof! And money money money money for the PE overlords! Who cares if you can't go see a concert in Las Vegas without fearing for your lives. Yield baby. Daddy needs a new house in Emerald Isle. 

Wait? "How would President Trump say he's going to confiscate guns and nevertheless maintain his base?" you ask. Given that he can basically say ANYTHING and maintain his base, we're not too worried about it. #MAGA!! Plus, wink wink nod nod, North Carolina. We'd all have a "barrel" of laughs over that.  

So now what? Well, "shoot." We could "burst mode" this thing, and liquidate it but what's the fun in that. After all, we still made net revenue of $603.4mm and have gross profit margins of 20.9%. Yeah, sure, those numbers are both down from $865.1mm and 27.4%, respectively, but, heck, all it'll take is a midterm election to reverse those trends baby. 

That was a pretty stellar $260mm revenue decline for Remington. Thanks Trump!! So, how did Sportco fare?

Trump seems to be failing to make America great again for those who sell guns.

But don’t take our word for it. Per Sportco:

In the lead up to the 2016 presidential election, the Debtors anticipated an uptick in firearms sales historically attributable to the election of a Democratic presidential nominee. The Debtors increased their inventory to account for anticipated sales increases. In the aftermath of the unexpected Republican victory, the Debtors realized lower than expected sales figures for the 2017 and 2018 fiscal years, with higher than expected carrying costs due to the Debtors’ increased inventory. These factors contributed to the Debtors tightening liquidity and an industry-wide glut of inventory.

Whoops. Shows them for betting against the stable genius. What are these carrying costs they refer to? No gun sales = too much inventory = storage. Long warehousemen.

Compounding matters, the company’s excess inventory butted with industry-wide excess inventory sparked by “the financial distress of certain market participants.” This pressured margins further as Sportco had to discount product to push sales. This “further eroded…slim margins and contributed to…tightening liquidity.” Per the company:

Many of the Debtors’ vendors and manufacturers suffered heavy losses as a result of the Cabela’s-Bass Pro Shop merger, Dick’s Sporting Good’s pull back from the market, and the recent Gander Mountain and AcuSport bankruptcies. Those losses adversely impacted the terms and conditions on which such vendors and manufacturers were willing to extend credit to the Debtors. With respect to the Gander Mountain and AcuSport bankruptcies, the dumping of excess product into the marketplace pushed prices—and margins— even lower. The resulting tightening of credit terms eroded the Debtors’ sales and further contributed to the Debtors’ tightening liquidity.

The company also blames some usual suspects for its chapter 11 filing. First, weather. Weather ALWAYS gets a bad rap. And, of course, the debt.

Riiiiiight. About that debt. When we previously asked “Who is Financing Guns?,” the answer, in the case of Remington, was Bank of America Inc. ($BAC), Wells Fargo Inc. ($WFC) and Regions Bank Inc. ($RF). Likewise here. Those same three institutions make up the company’s ABL lender roster. We’re old enough to remember when banks paid lip service to wanting to do something about guns.

One other issue was the company’s inability to…wait for it…REALIZE CERTAIN SUPPLY CHAIN SYNERGIES after acquiring certain assets from once-bankrupt competitor AcuSport Corporation. Per the company:

The lower than anticipated increase in customer base following the AcuSport Transaction magnified the adverse effects of the market factors discussed above and resulted in a faster than expected tightening of the Debtors’ liquidity and overall deterioration of the Debtors’ financial condition.

The company then ran into issues with its pre-petition lenders and its vendors and the squeeze was on. Recognizing that time was wearing thin, the company hired Houlihan Lokey Inc. ($HLI) to market the assets. No compelling offers came, however, and the company determined that a chapter 11 filing “to pursue an orderly liquidation…was in the best interest of all stakeholders.”

R.I.P. Sportco.

*****

But not before you get in one last fight.

The glorious thing about first day papers is that they provide debtors with the opportunity to set the tone in the case. The First Day Declaration, in particular, is a narrative. A narrative told to the judge and other parties-in-interest about what was, what is, and what may be. That narrative often explains why certain other requests for relief are necessary: that is, that without them, there will be immediate and irreparable harm to the estate. The biggest one of these is typically a request for authority to tap a committed DIP credit facility and/or cash collateral to fund operations. On the flip side of that request, however, are the company’s lenders. And they often have something to say about that — objections over, say, the use of cash collateral are common.

But you don’t often see an objector re-write the entire frikken narrative and file it prior to the first hearing in the case.

Shortly after the bankruptcy filing, Prospect Capital Corporation (“PCC”), as the second lien term loan agent, unleashed an objection all over the debtors. Per PCC:

Just a few years ago, the Debtors were the largest distributor of firearms in the United States, with reported annual revenue of in excess of $770 million. Contrary to the First Day Declaration filed in these cases, the Debtors’ demise was not due to outside forces such as the “2016 presidential election,” “disruptions in the industry” and “natural disasters. Rather, as a result of dividend recapitalization transactions in 2012 and 2013, the Debtors’ equity owner, Wellspring Capital, “cashed out” in excess of $183 million. After lining their pockets with over $183 million, fiduciaries appointed by Wellspring Capital to be directors and officers of the Debtors grossly mismanaged the business and depleted all reserves necessary to weather the storms and the headwinds the business would face. In a short time, the business went from being the largest firearms distributor in the United States to being liquidated. As a result of years of mismanagement and the failure of the estates’ fiduciaries to preserve value, the Second Lien Lenders will, in all likelihood, recover only a small fraction of their $249.7 million secured loan claim. Years of mismanagement ultimately placed the Debtors in the position where they are in now….

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This sh*t just got much more interesting: y’all know we love dividend recapitalizations. Anyway, PCC went on to object to the fact that this is an in-court liquidation when an out-of-court process would be, in their view, cheaper and just as effective; they also object to the debtors’ proposed budget and use of cash collateral. The upshot is that they see very little chance of recovery of their second lien loan and want to maximize value.

Of course, the debtors be like:

scoreboard.jpeg

The numbers speak for themselves, they replied. They were $X of revenue between 2012 and 2016 and then, after Trump was elected, they’ve been $X-Y%. Plain and simple.

So where does this leave us? After some concessions from the DIP lenders and the debtors, the court approved the debtors requested DIP credit facility on an interim basis. The order preserves PCC’s rights to come back to the court with an argument related to cash collateral after the first lien lenders (read: the banks) are paid off in full (and any intercreditor agreement-imposed limitations on PCC’s ability to fight fall away).

Ultimately, THIS may sum up this situation best:

It’s genuinely difficult to pick the most villainous company in this story. Is it the company selling guns who made a big bet on people’s deepest fears and insecurities and then shit the bed? The private equity company bleeding the gun distributor dry and then running it straight into the ground? Or the other private equity company that is now mad it likely won’t get anything near what it paid out in the original loan to the distributor? Folks...let them fight.

  • Jurisdiction: D. of Delaware (Judge Silverstein)

  • Capital Structure: $23.1mm ABL, $249mm term loan (Prospect Capital, Summit Partners)

  • Professionals:

    • Legal: McDermott Will & Emery LLP (Timothy Walsh, Darren Azman, Riley Orloff) & (local) Polsinelli PC (Christopher Ward, Brenna Dolphin, Lindsey Suprum)

    • Board of Directors: Bradley Johnson, Alexander Carles, Justin Vorwerk

    • Financial Advisor/CRO: Winter Harbor LLC (Dalton Edgecomb)

    • Investment Banker: Houlihan Lokey Inc.

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

  • Other Parties in Interest:

    • DIP Agent: Bank of America NA

      • Legal: Winston & Strawn LLP (Daniel McGuire, Gregory Gartland, Carrie Hardman) & (local) Richards Layton & Finger PA (John Knight, Amanda Steele)

    • Agent for Second Lien Lenders: Prospect Capital Corporation

      • Legal: Olshan Frome Wolosky LLP (Adam Friedman, Jonathan Koevary) & (local) Blank Rome LLP (Regina Stango Kelbon, Victoria Guilfoyle, John Lucian)

    • Prepetition ABL Lenders: Bank of America NA, Wells Fargo Bank NA, Regions Bank NA

    • Large equityholders: Wellspring Capital Partners, Summit Partners, Prospect Capital Corporation

    • Official Committee of Unsecured Creditors (Vista Outdoor Sales LLC, Magpul Industries Corporation, American Outdoor Brands Corporation, Garmin USA Inc., Fiocchi of America Inc., FN America LLC, Remington Arms Company LLC)

      • Legal: Lowenstein Sandler LLP (Jeffrey Cohen, Eric Chafetz, Gabriel Olivera) & (local) Morris James LLP (Eric Monzo)

      • Financial Advisor: Emerald Capital Advisors (John Madden)

Update 7/7/19 #115

New Chapter 11 - Remington Outdoor Company

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Remington Outdoor Company

3/25/18

Remington Outdoor Company, a gun manufacturer, has finally filed for bankruptcy - a day after Americans took to the streets to #MarchforourLives. Ah, bankruptcy irony. The company's operations are truly national in scope; it has manufacturing facilities in New York and Alabama and a primary ammunition plant in Arkansas. Its "principal customers are various mass market retail chains (e.g., Wal-Mart and Dick's Sporting Goods) and specialty retail stores (e.g., Bass Pro Shops and Cabela's) and wholesale distributors (e.g., Sports South)." Guns! #MAGA!!

Why did the company have to file for bankruptcy? We refer you to our mock "First Day Declaration" from February here. Much of it continues to apply. Indeed, our mockery of the change in tone from President Obama to President Trump was spot on: post Trump's election, the company's inventory supply far exceeded demand. The (fictional) threat of the government going house-to-house to collect guns is a major stimulant to demand, apparently. Here is the change in financial performance,

"At the conclusion of 2017, the Debtors had realized approximately $603.4 million in sales and an adjusted EBITDA of $33.6 million. In comparison, in 2015 and 2016, the Debtors had achieved approximately $808.9 million and $865.1 million in sales and $64 million and $119.8 million in adjusted EBITDA, respectively."

Thanks Trump. 

We'd be remiss, however, if we didn't also note that NOWHERE in the company's bankruptcy filings does it mention the backlash against guns or the company's involvement in shootings...namely, the one that occurred in Las Vegas. 

The company, therefore, negotiated with its various lenders and arrived at a restructuring support agreement. The agreement provides for debtor-in-possession credit ($193mm asset-backed DIP + $100mm term loan DIP + $45mm DIP, the latter of which is a roll-up of a bridge loan provided by lenders prior to the filing). Upon the effective date of a plan of reorganization, the third lien lenders and term lenders will own the reorganized company. 

  • Jurisdiction: D. of Delaware 
  • Capital Structure: $225mm ABL (Bank of America, $114.5mm funded), $550.5mm term loan (Ankura Trust Company LLC), $226mm 7.875% Senior Secured Notes due 2020 (Wilmington Trust NA), $12.5mm secured Huntsville Note     
  • Company Professionals:
    • Legal: Milbank Tweed Hadley & McCloy LLP (Gregory Bray, Tyson Lomazow, Thomas Kreller, Haig Maghakian) & (local) Pachulski Stang Ziehl & Jones LLP (Laura Davis Jones, Timothy Cairns, Joseph Mulvihill)
    • Financial Advisor: Alvarez & Marsal LLC (Joseph Sciametta)
    • Investment Banker: Lazard (Ari Lefkovits)
    • Claims Agent: Prime Clerk LLC (*click on company name above for free docket access)
  • Other Parties in Interest:
    • DIP ABL Agent ($193mm): Bank of America NA (DIP ABL Lenders: Bank of America NA, Wells Fargo Bank NA, Regions Bank, Branch Banking and Trust Company, Synovus Bank, Fifth Third Bank, Deutsche Bank AG New York Branch)
      • Legal: Skadden Arps Slate Meagher & Flom LLP (Paul Leake, Shana Elberg, Jason Liberi, Cameron Fee)
    • Admin Agent to the DIP TL: Ankura Trust Company LLC
      • Legal: Davis Polk & Wardwell LLP (Damian Schaible, Darren Klein, Michele McGreal, Dylan Consla) & (local) Richards Layton & Finger LLP (Mark Collins, Michael Merchant, Joseph Barsalona)
    • Ad Hoc Group of TL Lenders 
      • Legal: O'Melveny & Myers LLP (John Rapisardi, Andrew Parlen, Joseph Zujkowski, Amalia Sax-Bolder) & (local) Richards Layton & Finger LLP (Mark Collins, Michael Merchant, Joseph Barsalona)
    • Third Lien Noteholders
      • Legal: Willkie Farr & Gallagher LLP (Rachel Strickland, Joseph Minias, Debra McElligott) & (local) Young Conaway Stargatt & Taylor LLP (Edmon Morton, Allison Mielke)
    • Wells Fargo Bank NA
      • Legal: Otterbourg PC (Andrew Kramer)
    • Cerberus Operations and Advisory Company, LLC
      • Legal: Schulte Roth & Zabel LLP (David Hillman)
    • Reorganized Board of Directors (Anthony Acitelli, Chris Brady, George W. Wurtz III, G.M. McCarroll, Gene Davis, Ron Coburn, Ken D'Arcy)
  • Official Committee of Unsecured Creditors
    • Legal: Fox Rothschild LLP (Michael Menkowitz, Paul Labov, Jason Manfrey, Jesse Harris, Seth Niederman)

Updated: 4/27/18