đ„What the Bloody Hell is Happening with Evergrande?đ„
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đ A Wave of Filings Crash the Holidaysđ
đ€Are There More #BustedTech Bankruptcies Coming?đ€
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. â combined with the recent negative news surrounding WeWork (of course), Faraday Future (founder already in BK), Proteus Digital Health and Wag â signal that restructuring professionals shouldnât sleep on âtech.â The sector has been surprisingly active in 2019 and thereâs 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 âgrowth at all costsâ 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 IPOâd 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 â this week it seems like 8,292,029 companies announced new raises â but might Vector Launch be validation of the latter? Who knows.
As weâve argued in the past â obviously VERY prematurely â tech âstartupsâ 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 â 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: âunicornsâ); 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 donât appear to have are viable business models. When the tide goes out (read: the money scares), weâll see who is wearing clothes.
The question is: what would be the catalyst? With interest rates steady or declining, thereâs no reason to suspect the end is near for âyield baby yieldâ 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 âState of Startups 2019â and if some of the fears come true, indeed, there will be more action as noted above:
Founders fear the bubble â 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. Itâs the highest number weâve seen since 2015 â up 12% from 2018 and 25% from 2017.
Spoiler alert:
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đ„Distressed Debt Investors Need a Reset: 2020 Canât Come Fast Enoughđ„
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 âkey manâ 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 GSOâs 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 wonât help matters when Tapstone Energy definitively files for bankruptcy. Tick tock, tick tockâŠit 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 â 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, Blackstoneâs 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 â elevated by an extraordinary amount of coverage in the mainstream and other media outlets about âmanufactured defaultsâ â is now apparently front-of-mind for GSO.
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đšđŠOh Canada (Short Mary Wanna)đšđŠ
If we were to be accused â and we havenât really â of being too US-centric we would beâŠwellâŠGUILTY AF. We admit it: we act like snobby Americans â like the rest of the world doesnât really exist. Shockingly, though, it does. Who knew?đ
One thing that caught our eye recently is the apparent proliferation of cannabis-related distress in Canada â something that, due to federal law limitations, you couldnât seeâŠat least in courtâŠin 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 $7.5mm DIP credit facility from a Canadian lender, Hillmount Capital Inc., and seeks to use the bankruptcy to restructure several tranches of secured and unsecured debt.
Whatâs interesting is the timeline. In late 2018, everyone thought cannabis was going to be a 21st century gold rush. Canopy Growth Corporation ($CGC) was reportedly the first federally regulated and licensed cannabis producer to trade on a public exchange in Canada (artfully under the ticker âWEEDâ) 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:
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đManufacturing (Short the Railroads?)đ
We were surprised to hear certain Representatives boast about US manufacturing growth during the impeachment hearings. We stopped in our tracks: âwait, what?â As we noted on Wednesday, the ISM Manufacturing numbers tell a different story â 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 ââŠuses five components, each weighted evenly at 20% â new orders, production, employment, supplier deliveries and inventories.â The IHS survey ââŠuses a weighted average that gives greater importance to new orders (30%), output (25%) and employment (20%), and lower weighting to suppliersâ delivery times (15%) and stocks of purchases (10%).â 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 Wednesdayâs âđDump Trucksđâ) 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 (âŹïž 14.5%) and primary metal products (âŹïž 15.1%). Per Logistics Management:
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âĄïžUpdate: Forever21 Inc.âĄïž
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 beâŠlooking at you Belk Inc.) counterparties have been affected now by the bankruptcy. Thatâs 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):
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đ°Retail Roundup (Short Mall Traffic; Long Discounting)đ°
Ah, the fourth quarter. The fourth quarter is critical for retailers as they play out the âholidaysâ option and hope to stave off bankruptcy. Howâs that working out for them?
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 âŹïž 0.5%;
Gasoline âŹïž 0.7%;
Online/Mail-Order Retail âŹïž 0.8%;
Electronics/Appliances âŹïž 0.7%; and
Furniture âŹïž 0.1%.
On the negative side, however:
Apparel âŹïž 0.6%;
Restaurants/Bars âŹïž 0.3%; and
Hobby/Music/Book Stores âŹïž 0.5%.
It gets worse for apparel. The Bureau of Labor Statisticsâ latest CPI report revealed weakness for November â which, significantly, includes Black Friday and Cyber Monday. đŹ
Menâs and womenâs apparel decreased by 0.9% and 3.6% YOY, respectively, while boysâ and girlsâ apparel decreased 3.9% and 2.2%. Said another way, thereâs an epidemic of markdowns/discounts. That canât bode well for retailâs bottom line.
Indeed, several retailers acknowledged that markdowns are a significant issue. American Eagle Outfitters Inc. ($AEO) CEO Jay Schottenstein* noted âthe challenging environment promotional activity increased relative to our expectations,â a theme that was reiterated by management teams at Urban Outfitters ($URBN), Francescaâs ($FRAN), Childrenâs Place ($PLCE) and Designer Brands ($DBI). Gamestop Corpâs ($GME) CEO George Sherman â while reporting dogsh*t numbers â noted:
âAt this stage, we've entered the commoditization phase of the console cycle, where promotional pricing is driving sales. And if you're out shopping or doing store checks over Black Friday or Cyber Monday you likely saw a clear example of [those] discount stands.â
The problem is that retailers need to draw foot traffic and when your retail experience is commoditized and your product sucks sh*t, how do you do that?
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đ©Retail, the Internet, China & Counterfeiting (Long Unscrupulousness).đ©
This is a story about Sâwell. It illustrates just how vicious competition is today. And made even more vicious by (i) âsignalingâ and ease of discovery (lots of likes on Instagram), (ii) shady-AF Chinese manufacturers (producing legit product by day, extra off-the-truck product by night), and (iii) Amazon Inc.âs ($AMZN) failure to police third-party sellers. Choice bit:
Counterfeiting is an old game: In ancient Rome, counterfeiters knocked off authentic Roman coins. In recent decades, counterfeits of luxury products like handbags, watches, and sneakers have become commonplace. Now, though, online marketplaces like Amazon and social-media sites like Facebook and Instagram are enabling a new copycat ecosystem thatâs become a hall of mirrors for both brands and shoppers. Itâs never been easier for makers of knockoffs to reach consumers, project authenticity, and make money â and itâs never been harder for the real companies to regain control.
This is crazy:
âŠless than a year into starting the business, Kauss realized she had a big problem. Kauss and her then-boyfriend Jeff Peck (now her husband and the companyâs president) were heading to Sâwellâs factory in China when they stopped for a couple daysâ vacation in Hong Kong. Kauss saw there was a trade show and insisted on stopping by. When she arrived, it appeared that Sâwell had a significant presence at the show, with bottles displayed in a case and a ribbon flaunting an award it had apparently won. âA man came over to me and gave me his business card, very properly, and said he was from Sâwell,â she says. His card had Sâwellâs logo on it, with the little TM for âtrademark.â
The problem: Kauss at that point was running Sâwell from her apartment. It had no presence in Asia. Nor did it have a sales rep there. And it had no employees besides Kauss. She had barely gotten the company off the ground, and her bottles were being knocked off.
What. The. Hell. Read the piece. Itâs long. And nuts.
But thatâs not all. This is a horribly pervasive problem:
Last year, when the Government Accountability Office bought 47 consumer products like cosmetics and travel mugs online from third-party sellers on sites including Amazon.com and Walmart.com, it determined that 20 of them were fakes.
Hereâs the problem from another vantage point (also very much worth reading):
I've been talking to a friend who's a cofounder at a womenswear ecommerce startup about their content strategy. I searched around to see what kind of stuff is out there about them (press mentions, reviews, etc.), and stumbled upon something odd. On a Bustle.com top ten sex toys list, it had listed a product from their brand. They do not sell sex toys. I clicked through, and it led to an Amazon site with their companyâs branding. They do not sell on Amazon.
It turned out a China-based seller had âhijackedâ their brand. This is apparently a regular thing.
A few days later, when visiting my friend's office, I found out that they had one staff member dedicated to monitoring Amazon for exactly these situations. There was a big spreadsheet where they tracked various culprits. There was a specific contact at Amazon they would call when they found shady stuff like this. They had a lawyer they billed, and a process in place to deal with this. It cost time and money and it was a never-ending game of whack-a-mole. It had become such an increasingly frequent problem over the past few years, yet they seemed fairly blasé about it. It was just business as usual.
I understand counterfeiting has always been a problem in retail, but this felt different. Amazon was their competitor. It had launched a private label brand that directly competed, undercutting them on price and shipping speed. Yet, Amazon also sold counterfeit items of theirs (well, Amazon âfacilitatedâ it) and the startup bore the cost of cleaning up the trillion dollar companyâs platform. I guess this was how ecommerce worked in 2019.
The article goes on to explain that this is the natural side effect of Amazonâs concerted efforts to court Chinese sellers to its platform. It explains the lack of quality control andâŠ..
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đ„Shade of the Weekâ âWe Believe Real Models Will Become Wildly Popular in the Post WeWork Eraâđ„
Restoration Hardware Inc. ($RH) reported earnings this week and blew it out of the water in every possible way. Not all retail is a hot mess, apparently. When you crush it like they did â 6+% revenue increase and doubled profits â we suppose that gives you some license to sh*t on LITERALLY EVERYONE UNDER THE SUN. This is savage:
DAAAAAAAAAMMMMN. DTC DNVBS and standard brick-and-mortar retailers just got run over by the Restoration Hardware bus. And rightfully so:
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âĄïžUpdate: PG&E Corporation ($PCG)âĄïž
PG&E Corp. has reached a settlement with victims of the wildfires that pushed Californiaâs largest utility into bankruptcy, agreeing to pay them $13.5 billion in damages.
The pact removes a significant obstacle to PG&Eâs 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:
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âœïž2019 Canât End Fast Enough for Oil & Gas (Long Pain in TX)âœïž
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 administrationâŠ
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đ„Second Order Effects Are Real (Long #retailapocalypse Victims)đ„
Weâve 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 donât hear much about AmazonGo. Sure, itâs grown: there are now reportedly 20 locations with more on the way, but it hasnât exactly taken the world by storm and caused mass disruption to either grocers or QSRs. Itâs 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:
âŠit's textbook disruption. Per the company,
"In addition to Cenveoâs 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, weâll 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.
UhâŠ.YEAAAAAAAAAH. Some high risk exposure areas right there, folks.đŹ And, so youâve got to imagine that revenues of this âhypotheticalâ C-suiterâs company are declining, right? Particularly given that print is a highly competitive price-compressed industry?
Luckily, you donât have to stretch the imagination too far.
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đKKR Tips Hand re Art Van Furniture (Short Midwest Mattresses)đ
n âđ©Acosta = Not a Good Look, Carlyleđ©,â we noted how FS KKR Capital Corp ($FSK), a publicly-traded business development corporation placed its Acosta Inc. loan âon nonaccrualâ because it was, well, clearly sh*tting the bed. Ultimately, after riding the mark down to the basement, FSK offloaded the position. It wasnât the only stain in its portfolio. In fact, as of the end of the third quarter, approximately 1.7% of the portfolio was on nonaccrual, up from 1.2% at the end of Q2. While this, in and of itself is hardly alarming, it does mean that there are other potential restructurings sitting on FSKâs books. Indeed, one loan contributing to this uptick was to a company called Art Van Furniture.
Founded in 1958, Michigan-headquartered Art Van Furniture is a furniture retail store chain with approximately 190 company-owned stores in nine states operating, thanks to various tack-on acquisitions, under various brands: Art Van Furniture, Art Van PureSleep, Scott Shuptrine Interiors, Levin Furniture, Levin Mattress and Wolf Furniture. The tack-on acquisitions were, presumably, part of the companyâs growth strategy after being acquired by private equity overlords Thomas H. Lee Partners.
The Columbus Dispatch recently reported on Art Vanâs strategy annnnnnnd itâs definitely a bit counter-intuitive:
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đReality Check: Honeyđ
Paypal Inc. ($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 sooooooâŠa lot of people just made one crazy return on investment.
Speaking of crazy, the company reportedly made âmore than $100 million in revenue last year and it was profitable on a net income basis in 2018.â Profitably for a startup these days is crazy enough, we suppose, but THAT MULTIPLE. Holy
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âĄïžRide-Sharing is Vicious (Long Matchsticks)âĄïž
Starting in 2016, Juno USA LP, a NY-centric ride-hailing company was able, in just 3.5 years, to become the third largest ride-hailing business in New York, counting 50k contracted drivers and 50k rides per day as key business drivers (pun intended). Now it is kaput. The company filed for bankruptcy earlier this week.
At its inception, the company differentiated itself by offering drivers restricted stock units (âRSUsâ) âwith the expectation that such an approach would result in an overall enhanced driving experience for drivers and, in turn, riders.â This is interesting because, obviously, it incentivizes drivers to be more attentive to Juno rides than Lyft and/or Uber but it obviously doesnât address the demand side of the marketplace function. 50k rides per day sounds like a lot. Yet, it pales in comparison to its competition: according to the Taxi and Limousine Commission, in 2018, Uber Inc. ($UBER) tallied 400k trips per day in NYC and Lyft Inc. ($LYFT) collected 112k trips per day. Moreover, NYC taxis typically make about 300k trips per day. In total these are staggering numbers â even more so when you consider that taxis are going bankrupt in record-breaking numbers and Uber and Lyft are losing money like crazy (Uberâs loss, ex-stock-based compensation, was $800mm last quarter!). Ultimately, that differential compelled a merger of rivals: Israel-based GT Forge, d/b/a Gett, acquired Juno in Q2 â17 and transferred its riders to Juno. At the same time, Juno cashed out the driver RSUs, using other incentives (read: higher commissions of 10%) to maintain its supply-side.
As we all now know from the WeWork debacle, financial metrics for high growth startups are different than what restructuring professionals are used to. EBITDA is a foreign concept here: âsuccessâ is measured by revenue growth. Hereâs Junoâs revenue trend:
$218mm in 2017;
$269mm in 2018 (23% growth) đ; and
$133mm in 2019. đŹ
Juno does not, however, indicate what its operating costs and expenses were; it merely serves up excuses about early stage capital requirements and the need for monthly cash infusions from Gett. Over time, however, the operating expense burden coupled with âburdensome local regulations and escalating litigation defense costsâ led to a 2019 YOY revenue decline of 34%. What the net loss was, however, is left unsaid in the companyâs bankruptcy papers.
The litigation runs the gamut. The company has been sued by (a) former drivers for the termination of the RSU program (read: securities fraud); (b) riders for personal injuries allegedly caused in accidents during active Juno rides; (c) competitors for patent infringement; and (d) drivers, alleging that they are employees rather than independent contractors. Itâs pretty hard to grow a business when youâre getting sued into oblivion and have poor business fundamentals. đ
The City of New York really didnât help those fundamentals. The companyâs bankruptcy papers elucidate ride-hailing economics after NYC imposed mandatory minimums of $17.22/hour regardless of the number of rides undertaken during that time (something that Uber and Lyft continue to combat, including by freezing drivers out of the apps during low-demand times, something that irks the hell out of Bill De Blasio, apparently). Hereâs how it works:
Drivers are entitled to a minimum of $0.58/mile + $0.27 per minute. âEach of these figures is separately divided by a so-called âutilization rate,â which is calculated based on the frequency that a TNC sends trips to drivers while they are available for work. The current industrywide average utilization is 58%.â (Petition Note: this also means that 42% of the time, drivers are just moving around clogging up NYC streets).
So, for a 10-mile trip that takes 30 minutes, you end up with:
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đ„Is Wyoming F*cked? (Short Chesapeake Energy Corp.)đ„
Governor Mark Gordon released his Wyoming State Budget for 2021-2022 earlier this week and â whoa boy â 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, Wyomingâs 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 stateâs 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) â 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:
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đ°Oneâs Pain is Anotherâs Gain (Long Real Estate Consultants)đ°
Yeah but someone is making money from all of this doom and gloom, right? You bet your a$$. The real estate consultants/advisors!! Using Houlihanâs for illustration purposes, letâs dive into what these guys do.
Before we do, letâs establish some ground rules: weâre 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 Houlihanâs 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, Fredâs, Gander Mountain, Furniture Brands, Garden Fresh Restaurant Corp., hhgregg, Hostess Brands, Ignite Restaurant Group, Loganâs Roadhouse, Payless Shoesource. You get the idea. Perversely, these guys kill it when you donât (spare us the spin, yâall).
According to the agreement between Houlihanâs and Hilco, Hilco will, among other things, (a) meet with Houlihanâs to ascertain its goals, objectives and financial parameters (read: wherewithal); (b) mutually agree with Houlihanâs 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 Houlihanâs in closing the relevant lease restructuring, assignment, and termination agreements. The contract is exclusive. Said another way, Houlihanâs has agreed to convey over to Hilco all responsibility for negotiating with landlords for purposes of extracting concessions.
Of course, Hilco doesnât do this sh*t for free. They have a variety of ways to make money.
First, itâs 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 â if there are any at that point that return cash value.
Houlihanâs 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,
ââŠany 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).â
Wait, what? The agreement doesnât even define what an âAssigned/Sold Leaseâ 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 â 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:
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đThe Latest in Fitness Trends (Long Innovation)đ
There are a lot of venture investors operating under the hypothesis that audio is the next frontier in wearables and that the Apple AirPods were just the opening salvo. Amazon Inc. ($AMZN) is apparently working on pods that double-up as fitness trackers. This is a space worth watching.
Elsewhere in fitness, weâre writing this particular section midweek and yet we literally just walked by someone rocking his NYC Marathon medal. Seems a bit aggressive to still be wearing that thing 72 hours post-race but, whatevs. To each his own.
Hereâs a piece from Reess Kennedy about fitness and marketing, discussing the rise of the Nike Vaporfly 4%, a running shoe that Nike Inc. ($NKE) alleges will enhance performance byâŠwait for itâŠ4%. Regarding the NYC marathon, he writes, âIâd safely wager that 70% of the men and women running under 3:10 were wearing it.â He adds:
ââŠSunday all I was thinking was, âWhy and how did Nike win so hard here?! Theyâve gobbled up significant market share and achieved one of the most successful product adoption feats in the history of footwearâpossibly in the history of product adoption!âand, at $250, theyâve also set a new off-the-chart, âluxuryâ price point for racing shoes in the process!ââ
He concludes that much of the adoption is attributable to FOMO: if your competitors are juicing with the Vaporfly, you should be juicing too. He writes:
âI think the far more powerful demand ignitor was actually the brazen insertion of a precise performance gain right into the name of the actual product: The Vaporfly 4%.â
âFor the first time in history, a shoe company is making a clear ROI claim to buyers. This is the real reason theyâve sold so many.â
âMany runners really struggle over many marathon attempts to break three hoursâoften, tragically, missing it by only a few minutes on each attempt. A 4% improvement for these folks hovering around three hours would mean about a seven-minute gain! If youâre on the edge of a lifetime goal is it worth it to pay $250 to achieve it? Yeah, probably. â
This begs the obvious question: how long until the release of the âBrooks Boss 6%,â the âAdidas A$$-kicker 7%â or the âSaucony Supersonic 9%â? Will we start seeing distressed players engage in marketing schemes like this to drive traffic? Should we?*
Why arenât restructuring firms using this tactic?
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đ°How Are the Investment Banks Doing?đ°
Greenhill & Co. Inc. ($GHL) reported Q3 earnings earlier his week and, well, they werenât great. The company had $87mm of revenue for the quarter (flat YOY) and $194.3mm in revenue year-to-date. The latter is down 26% on the back of a poor first half.
Why the poor performance? The company largely blamed âa very low level of activity in European M&A.â It then asked the analyst community to deploy some Pym Particles and take a time travel trip back to rosier times: 2016-2018. The companyâs earnings presentation listed (a) fee paying clients and (b) $1mm+ clients for each of those years but, curiously, did not disclose those numbers for 2019.
Despite the lack of transparency, the firm is nevertheless â[s]till expecting solid full year revenue performance,â particularly with its capital advisory business. Curious how that works. đ€
As for restructuring, the firm touted its expanded team and notedâŠ.
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đ°Whatâs New in Marketing Trends (Long Facebook Inc. ($FB))đ°
Weâve often highlighted how distressed retailers may be in for a rude awakening if they think deploying influencer-based social marketing on platforms like Facebook Inc. ($FB) and others will be the cure-all to their woes. And be easy. It wonât be and itâs not. The campaigns require significant expertise to execute and the cost of such campaigns has been on the rise. Until recently, it seems. In Facebookâs recent earnings call, CFO Dave Wehner said:
âIn Q3, the number of ad impressions served across our services increased 37% and the average price per ad decreased 6%. Impression growth was primarily driven by ads on Facebook News Feed, Instagram Stories and Instagram feed.â
Surprisingly, Facebook appears to be driving a large part of that impressions growth rather than Instagram Stories and the Instagram Feed. This means ads are reaching more people on the platform and, yet, the average price of ads decreased. While itâs not clear from the companyâs SEC filings nor its earnings call why this is the case, this is a potential positive for retailers looking to deploy social ads.
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