Is Fairway Group Holdings Corp. Headed for Chapter 22?

We were tempted to just leave it alone at “yes,” but we’ll at least add what Moody’s had to say:

"Despite the lower debt burden following the company's emergence from bankruptcy in 2016, we believe Fairway's capital structure is unsustainable given weaker than anticipated operating performance and upcoming debt maturities," stated Moody's Vice President and lead analyst for the company, Mickey Chadha. "Fairway is facing an extremely promotional business environment, and with competitive openings in its markets expected to continue, the ability to improve profitability at a level sufficient to support the current capital structure looks highly suspect, rendering a further debt restructuring highly likely in our estimation over the next 12-18 months," added Chadha.

Furthermore:

The ratings reflect elevated risk of another requisite debt restructuring or distressed exchange given Fairway's deemed untenable capital structure, evidenced in part by very weak credit metrics, weak and eroding liquidity, and upcoming debt maturities including a $25 million LC facility that matures October 2018 and more than $100 million (including PIK interest) of senior secured term loans that mature in January 2020. Moody's estimates lease adjusted debt-to-EBITDA in excess of 10 times, and EBIT-to-interest of less than 1.0 time over the next twelve months.

Remember: this company already shed $140mm of secured debt and $8mm in annual interest expense in the last bankruptcy a mere two years ago. In the company’s Disclosure Statement, company counsel Weil Gotshal & Manges LLP wrote:

Upon emergence from bankruptcy, all borrowings under the DIP Term Loan will be converted into an exit facility on a first out basis leaving an estimated $42 million of cash and cash equivalents on Fairway’s balance sheet that will allow it to maintain its operations and satisfy its obligations in the ordinary course of business and position Fairway for long term success.

Not to get ahead of ourselves here as Moody’s can surely be wrong. But, are we crazy or has the definition of “long term success” dramatically changed?

Which begs an interesting series of questions. First, at what point do professionals who have multiple chapter 22s attached to their names start to feel the affect of that in the marketplace? At what point do they get credibility checked on plan feasibility by judges at the confirmation hearing? “Mr. Lawyer ABC and Mr. Restructuring Advisor XYZ. Could you please explain why I should believe a thing you say about feasibility given that your last [insert applicable number here] grocery restructurings have all ended up back in bankruptcy court within short order? Have you properly guided your client to a truly ‘feasible long term success’ trajectory? Or are you really just succumbing to the wishes of stakeholders at the other side of the table (cough, GSO) whose business you hope to obtain in the future?

To be fair, we suppose if you service a monopoly of cases is a given sector and that sector is going to hell in a hand basket the way the grocery space is the likelihood of repeat bankruptcies goes up. Still, you’d think management teams (and/or the sponsors) would start to question the value of “quals” when those quals all ultimately result in an expensive round-trip ticket back to bankruptcy court.

GNC Holdings Inc. Kicks the Can

The Rise of DTC Supplements Constitutes a Threat to GNC

via GIPHY

Speaking of a concessions business, GNC Holdings Inc. ($GNC) is a big proponent (have you been to Rite-Aid lately?) and look how well…oh, wait…nevermind.

When we last wrote about GNC back in February, the company had reported surprising earnings, margins and free cash flow; it also paid down its revolving credit facility and seemed on the verge of amending and extending its term loan. It had also just received a cash infusion commitment from a Chinese investment fund in exchange for 40% of the company. Subsequently, the company was able to amend and extend the term loan to 2021. Concurrently, the company entered into a new $100 million asset-backed loan due August 2022 and engaged in certain other capital structure machinations to obtain $275 million of asset-backed “first in, last out” term loans due December 2022. Textbook. Kicking. The. Can. Which, of course, helped the company avoid Vitamin World’s bankrupt fate. 👊 Goldman Sachs!

Meanwhile, this is what the stock looks like:

Pretty ugly. And it may get worse when you factor in what’s going on in the world of supplements, generally. What’s going on, you ask? A sh*t ton of venture capital investment, corporate cash infusion and growth.

Earlier in March, a company called Ancient Nutrition, producer of bone broth protein and collagen supplement, raised $103 million of funding from VMG Partners, Hillhouse Capital and ICONIQ Capital. Notably, the product is available throughout Chicago — just not at GNC. Rather, it is available at Whole Foods, Fresh Thyme Farmers Market and Heinan’s. Similarly, in New York City, it is predominantly found at Whole Foods, Fairway and Natural Green Market, among other places.

Supplements are going gangbusters elsewhere too. Earlier this month, Hims, an erectile dysfunction and hair loss company aimed at millennials and dubbed “Viagra, but for hipsters” (yup, you read that right), raised $40 million of funding at a $200 million valuation (kudos to GQ for creative photography). It’s distribution channel? Direct-to-consumer. Sorry GNC. Same goes for Roman and Keeps, two Hims-like competitors.

Meanwhile, The Clorox Company got into the game last week with an $700 million acquisition (3.5x sales) of Nutranext, a Florida-based wellness company that makes supplements and has a strong direct-to-consumer business. You know where you can’t get Nutranext…?

That’s right: GNC.

Perhaps those restructuring professionals disappointed by Goldman Sachs’ success in securing the refinancing should just put that GNC file in a box labeled “2021.”

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.

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.