đŸ’„PETITION's Hot Take And Potentially Regrettable Statement on Hertz' ShenanigansđŸ’„

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On May 26, 2020, Hertz Global Holdings Inc. ($HTZ) and a number of affiliates filed massive chapter 11 bankruptcy cases. The company’s publicly-traded stock dropped to $0.56/share. Thereafter, the stock inexplicably started to rise. On Thursday June 4, HTZ stock experienced a sudden and mysterious surge that had everyone who knows anything about chapter 11, the absolute priority rule, and the typical bankruptcy treatment of equity (read: it typically gets wiped out) a bit befuddled. The surge continued through the beginning of this week — reaching as high as $5.53/share on Monday, June 8th. The Twitterverse, in particular, went apesh*t as Dave Portnoy and other gamblers 
 uh, investors 
 took aim at HTZ and several other cheap stocks on the (un)sound (un)fundamental basis of their 
 well, cheapness.

Most folks could predict that it wouldn’t end well. After all, HTZ is, to state the obvious, BANKRUPT!, its debt trades like dogsh*t and its equity is currently the subject of a delisting notice. Still, folks like Jim Cramer and Josh Brown all but encouraged the behavior, back-handedly claiming that it’s a good “learning opportunity” for these (predominantly new) market participants. As of market close on June 11, the stock has fallen back down to earth, trading at $2.06/share leaving many a now-learned investor in its wake.

Still, one’s foolishness is another’s opportunity.

In a motion filed June 11 (along with a complementary motion seeking shortened notice and an emergency hearing), the HTZ debtors seek authority to enter into a sale agreement with Jefferies LLC to issue up to and including 246,775,008 shares of common stock through at-the-market transactions under HTZ’s existing shelf-registration — a move designed “to capture the potential value of unissued Hertz shares for the benefit of the Debtors’ estates.” The debtors opportunistically note:

The recent market prices of and the trading volumes in Hertz’s common stock potentially present a unique opportunity for the Debtors to raise capital on terms that are far superior to any debtor-in-possession financing. If successful, Hertz could potentially offer up to and including an aggregate of $1.0 billion of common stock, the net proceeds of which would be available for general working capital purposes. Unlike typical debtor-in-possession financing, the common stock issuance would not impose restrictive covenants on the Debtors and would not impair any of the creditors of the Debtors. Moreover, the stock issuance would carry no repayment obligations, and the Debtors would not pay any interest or fees to those who provide the funding by buying shares at the market. Hertz would include disclosure in any prospectus used to offer common stock highlighting that an investment in Hertz’s common stock entails significant risks, including the risk that the common stock could ultimately be worthless. (emphasis added).

Congratulations people. The very folks that Cramer and Brown talked about have been marked as fools. And people erupted:

Our inbox immediately flooded with messages reflecting incredulousness and lost faith in humanity. We get it. This is next level sh*t right here. Dumb motherf*ckers are about to get taken advantage of.*

But you know what? Maybe we just want to be contrarian, but we are impressed with this move.** Look, for the last week the market has been awash with commentary about how nothing makes sense anymore and how “the Fed put” has introduced all kinds of bubble-like behavior. Idiots off of Robinhood have been (maybe) getting rich off of $HTZ stock and $CHK stock and $WLL stock while legends like Ray Dalio, Stanley Druckenmiller and Warren Buffett are eating sh*t. Like
this actually happened:

Proponents of efficient markets have been apoplectic. None of this makes any sense to them. For good reason.

But you know what does make sense? Basic supply and demand. And if there is enough demand for something as asinine as acquiring a portfolio of HTZ stock and HTZ alone can quench that demand, why wouldn’t and shouldn’t it issue those shares? Isn’t that efficient markets playing out in their harshest and most savage form? Isn’t it more efficient for the debtors to issue more stock than pay some usurious coupon on a DIP credit facility? Why get ripped off by lenders when you can rip off aspirational equityholders?

The HTZ debtors have a duty to maximize the value of their estates.*** To use or sell property of the estate, the debtors merely need to show that the use/sale is an exercise of sound business judgment. They write:

Here, the decision to enter into the Sale Agreement and to sell unissued shares of Hertz’s common stock is an exercise of the Debtors’ sound business judgment. The rise in the trading price of Hertz’s shares indicates that the market believes that the shares have significant value. The proposed sale of Hertz’s unissued shares would allow the Company to raise up to and including $1.0 billion in gross proceeds, the net proceeds of which the Debtors could use general working capital purposes. The sale would also allow the Debtors to raise capital on terms superior to any debtor-in-possession financing. The stock issuance would not impose restrictive covenants on the Debtors and would be junior to claims of the Debtors’ creditors. Moreover, other than the 3.0% fee that would be owed to Jefferies and related transactional costs, the issuance of the shares would impose no payment or repayment obligations on the Debtors. (emphasis added).

Do the debtors have some sort of duty to those prospective shareholders that are about to get dragged over the tracks? Do the debtors need to be concerned about the business judgment of the morons on the other side of the transaction?**** Does a prospectus describing the dangers eliminate any and all responsibility here? The debtors are clearly of the view that the answers are ‘no’ and ‘yes,’ respectively.

Notably, Jefferies ain’t no fool. In addition to getting 3% of the gross proceeds of any shares that are sold through the proposed ATM program, they’ll get a crucial indemnity from HTZ “
based upon or otherwise related to or arising out of or in connection with Jefferies’ participation, services or performance under the Sale Agreement or the sale of shares or the offering contemplated hereby, provided that the Company shall not be liable to the extent a court determines a claim resulted directly from Jefferies’ gross negligence or willful misconduct.” Moreover:

The Company will also agree to reimburse Jefferies for any and all expenses reasonably incurred by Jefferies in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action.

Jefferies saw the equity price action this week and be like


Michael Jordan GIF.gif


and immediately dusted off that same ATM pitch they’ve used in plenty of other situations. In the process, they make no mistake about it: they know they’re about to get dragged in some mud.

And so where does this leave us? It’s not a bankruptcy court’s jurisdiction to protect the Robinhood bros. They’re not parties in interest in the cases. The debtors will likely get authority pursuant to their motion and Jefferies will try and push shares into the market and, in turn, the market will prove whether there’s continued demand. If there’s more demand, the debtors will then have an option to sell more shares on the basis of that demand.*****

As to whether there is some mysterious way that the equity ultimately has value in the future? Not to cop out on the question but we simply don’t have enough information to opine on that. Likely, neither do the debtors. Nor the Robinhood traders. Will travel recover? Will the used car market sh*t the bed? In a pandemic, anything goes. And that’s the point of the debtors’ motion and precisely why, all the furor notwithstanding, it actually makes sound business sense for them to move forward with it.

A hearing on the motion is scheduled for tomorrow, June 12th, at 3pm ET. Pop your popcorn.

*Meanwhile, some HTZ directors are laughing their asses off after hitting the top right on the head:

**We fully acknowledge that we may regret this hot take at a later time.

***The debtors actually argue that, pursuant to certain case law, unissued shares may note even constitute property of the estate. They seek approval pursuant to this motion “out of an abundance of caution.”

****This assumes the debtors are actually insolvent. Remember: this case basically came out of nowhere thanks to COVID and what, in form, was a margin call.

*****The process leaves a lot of latitude:

From time to time, the Company may submit orders to Jefferies relating to the shares of common stock to be sold through Jefferies, which orders may specify any price, time or size limitations relating to any particular sale. The Company may instruct Jefferies not to sell shares of common stock if the sales cannot be effected at or above a price designated by the Company in any such instruction. The Company or Jefferies may suspend the offering of shares of common stock by notifying the other party.

đŸ’©Coal Country is Busy. Noooo
not Mining. Filing. For Bankruptcy (Short #MAGA!)đŸ’©

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Pour one out for the fine folks of eastern Kentucky and western Virginia. They can’t seem to catch a break.

Earlier this week, Cambrian Holding Company Inc. (and its affiliate debtors) joined a long line of coal producers/processors (e.g., Cloud Peak Energy, Westmoreland Coal, Mission Coal) who have recently filed for bankruptcy. The company employees approximately 660 people, none of whom are members of a labor union (in contrast to bigger, more controversial, coal filings, i.e., Westmoreland) and most of whom must be fretting over their futures. They must really be getting tired of all of the post-election “winning” that’s going on in coal country.

The company’s problems appear to start in 2015, at the time the company acquired TECO Coal LLC and assumed $40mm of workers’ compensation and black lung liabilities that TECO had previously self-insured. The company sought to leverage its broader scale to increase production but it failed to raise the working capital it needed to live up to its obligations and sustain production at levels necessary to service the company’s balance sheet. Post-acquisition, the company doubled revenues, but it couldn’t sustain that progress and nevertheless recorded net losses from 2015 through 2018. In turn, the company triggered financial covenant and other defaults under its ABL Revolver and Term Loan.

In other words, the company has been in a state of emergency ever since the acquisition. Almost immediately, the company “undertook various efforts to return to a positive cashflow,” which, as you might expect, meant idling or closing certain mining operations, stretching the usable life of equipment, and laying off employees.* Its efforts proved fruitless. Per the company:

Notwithstanding these efforts, the Debtors have been unable to overcome the pressures placed on their profit margins from steadily declining coal prices (along with burdensome regulations and the accompanying decline in demand for coal), all of which have contributed to the Debtors’ substantial negative cashflow and inability to consummate a value-enhancing transaction.

So, what now? The company, with assistance from Jefferies LLC, will attempt to find a buyer willing to catch a falling knife: the plan is to “commence an expeditious sale and marketing process” of the company’s assets (call us crazy, but shouldn’t it be the other way around?). To fund this process, the company has a DIP commitment from affiliates of pre-petition lenders for $15mm.**

*Interestingly, it was in March 2016 when Hilary Clinton infamously stated, “Because we're going to put a lot of coal miners and coal companies out of business.” At the time, Cambrian was already struggling, laying off people in an attempt to generate positive cashflow. That message really must’ve struck a chord down in coal country. WHOOPS.

**The Term Lenders swiftly objected to the terms of the DIP and the use of cash collateral.

Is Spotify Ultimately the Death of Music?

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Spotify Made Liam Gallagher Make His Own Coffee. That's Bad. 

Source: Pexels.com

Source: Pexels.com

It’s 2018 and that means that, unless side-tracked by $1.6b litigation, Spotify’s “direct listing” is imminent, marking the company’s latest foray screwing over (read: disrupting) professionals who endeavor to make money. No, we don’t have much sympathy for the bankers who will lose out on rich underwriting fees. If anything, the blown IPOs for Snapchat ($SNAP) and Blue Apron ($APRN) kinda made the direct listing alternative a fait accompli. Now the market will be watching with great interest to see how the stock does without the various IPO-related safeguards in place. 

The real professionals on the short end of Spotify's stick, however, aren’t the bankers but may just be the artists themselves. Recall this video from Liam Gallagher. Recall this chart highlighting the juxtaposition between digital and physical sales. But that's not all, there's this piece: it stands for the proposition that Spotify really ought to go f*ck itself. Indeed, "To understand the danger Spotify poses to the music industry—and to music itself—you first have to dig beneath the “user experience” and examine its algorithmic schemes. Spotify’s front page “Browse” screen presents a classic illusion of choice, a stream of genre and mood playlists, charts, new releases, and now podcasts and video. It all appears limitless, a function of the platform’s infinite supply, but in reality it is tightly controlled by Spotify’s staff and dictated by the interests of major labels, brands, and other cash-rich businesses who have gamed the system." To point, Spotify has perfected "the automation of selling out. Only it subtracts the part where artists get paid." There is so much to this piece. 

And then there is this piece - from a musician - which really puts things in perspective, as far as second order effects go. One choice quote (among many in this must read piece), â€œAs a dad seeing my kids fall for an indistinguishable blob of well-coiffed brandoid bands and Disney graduates, I’m not at all shocked that amid their many fast-germinating aesthetic and creative ambitions, my own offspring have never seriously taken it into their heads to pick up an instrument or start a band. The craft of music has entirely succumbed to its marketed spectacle.” 

Against this backdrop, the distressed state of Gibson Brands Inc. and Guitar Center Inc.makes more sense. Here is Gibson Brands:

Given these disturbing downward trends, it's no wonder that Jefferies is working with the company to address the company's balance sheet and that Alvarez & Marsal LLC is helping streamline costs on the operational side. Indeed, last quarter the company negotiated some amendments (EBITDA, for one) with its lender, GSO, and even more recently negotiated, per reports, an extension of time to report financials to GSO. We can't wait to get our hands on those.

Guitar Center Inc., meanwhile, reported pre-holiday YOY increases in top and bottom line numbers, including a 1.3% increase in same store sales. Which surprised basically everyone. They have yet to release holiday numbers. They did, however, get a nice downgrade leading into Christmas. And there are debt exchanges to come in '18 for the company to manage an over-levered balance sheet unsustained by recent revenues.

Remember, Spotify did all of this with the help of $1b in venture debt (and NYC taxpayer subsidies, but we digress). Which, unless something has changed, is a ticking timebomb getting more expensive with each quarter the company fails to go public. 

Lest anyone fail to appreciate the growth trajectory of Spotify, there's the chart below to put it in perspective. 

One last note here. A few weeks ago Josh Brown wrote a piece entitled, "Just own the damn robots." If you haven't read it, we recommend that you do. The upshot of it is that the massive stock moves of the FANG stocks and other tech stocks are rooted in people's fear of being automated out of relevance. 

In that vein, maybe Spotify's imminent listing is the BEST thing that could possibly happen to creatives. Get a significant part of the company out of Daniel Ek's hands, out of the hands of the venture debt holders (assuming they have an equity kicker), and the venture capitalists. Get it in the hands of the artists themselves. Perhaps that way they can have SOME manner of control over their own commoditization. 

The Curious Case of Jefferies LLC v. Banro Corp.

In many respects the restructuring industry benefits from an information dislocation. Management teams thrust into stressed or distressed territory are dealing with different subgroups of investment banks and law firms than they're accustomed to. The professionals are different, the terminology is different, and the terms of engagement are different. On the flip side, sometimes the terms SHOULD be different, but aren't.

A fee tail is a great example of that. We've seen a variety of investment banker engagement letters that include a one year tail. Boiled down to its simplest form, this generally means that an investment banker is entitled to its fee (or a pre-negotiated portion thereof) if the company consummates a "transaction," as defined, within 12-months of the bankers engagement - regardless of whether THAT banker got the transaction to the finish line.

In the compressed timeline of a distressed issuer, a year is like a decade. Given that, we would argue, as a general matter, that a 12-month tail is absurd in the restructuring context. There are so many externalities that could come into play during that time that might require a change of strategy. A 6-month tail strikes us as far more reasonable. After all, we've heard of instances where a company considered filing for bankruptcy merely to be in position to reject a retention agreement and avoid the potential duplicative and monstrous fee. That's ridiculous. 

Now you're probably expecting us to shred some banker for a specific (ridiculous) provision. We hate to disappoint. Notwithstanding the above, we're actually of the view that tails serve a critical function. Why should an investment banker roll up sleeves and go to bat for a client if the client can cut ties at any moment and transfer all of that work over to an execution banker for a fraction of the cost? 

Jefferies LLC is asking precisely that question. In Jefferies LLC v. Banro Corp. (1:17-cv-05490), Jefferies is asking the New York Southern District Court to enforce the terms of its engagement letter with the once-bankrupt gold-miner, Banro Corp.(and, in turn, Banro is attempting to transfer the litigation to federal court.). Jefferies alleges that it is contractually owed approximately $3.7mm in fees and expenses on account of a $175mm note exchange that is, according to Jefferies, expressly contemplated in its retention. The company purportedly terminated its relationship with Jefferies mere days before announcing that very transaction. Call us crazy but a tail of a few days strikes us as eminently reasonable. Professionals across the board ought to watch this case with great interest.