⚡️Earnings Season Ushers in More Bad News for Retail⚡️

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In “Thanos Snaps, Retail Disappears👿,“ “Even Captain America Can’t Bring Back This Much Retail (Long Continued Closures)“ and “💸The #Retailapocalypse is a Boon for...💸,” we’ve chronicled the seemingly endless volume of retail store closures that continue to persist in the first half of 2019. As we’ve said time and time again, there are no signs of this trend disappearing. In fact, it continues to get worse.

Last week brought us a deluge of retail news and earnings. And, indeed, along with earnings came more store closure announcements and more indications of who are the “haves”* and the “have nots.”

Let’s start with department stores where there’s a lot of pain to go around in “have not”-ville.

Macy’s ($M) kicked things off with a surprise increase in same-store sales and so it was ONLY down approximately 0.9% on the week. In contrast, Kohl’s ($KSS), Dillard’s ($DDS), J.C. Penney ($JCP) and Nordstrom ($NWN) all got hammered — each down more than 7% — after across-the-board dismal earnings. Kohl’s performance was particularly interesting given its acclaimed experimentation, including partnerships with Amazon ($AMZN) and, coming soon, Fanatics. The company reported a 2.9% revenue decline and a same-store comp decline of 3.4%. Adding fuel to the fire: the company cut its full-year earnings guidance, citing…wait for it…tariffs(!) as a massive headwind.

Kohl’s wasn’t alone there. Home Depot ($HD) also indicated that new tariffs on China might cost it $1b in revenue — on top of the $1b it already anticipated from the prior round of tariffs. 😬

Other have nots in retail? Party City ($PRTY) is closing 45 stores. Tuesday Morning Corp. ($TUES) is closing a net 12 stores. Fred’s ($FRED) announced 104 more closures in addition to the 159 previously announced closures. Burberry Group Plc ($BURBY) is closing 38 stores. Topshop is now bankrupt and will close 11 stores in the US (and more abroad). Hibbett Sports ($HIBB) is adding 95 store closures to the pile (despite otherwise nice results). Of course, we’d be remiss if we didn’t mention the dumpster fire that is Dressbarn:

Finally, all of the pain in retail already has at least one ratings agency questioning whether David’s Bridal is out of the woods post-bankruptcy. We can’t wait to add that one to our “Do We have a Feasibility Problem?” series.

All of this has people scattered wondering what’s the next shoe to drop (more tariffs!) and, in turn, what can possibly stop the bleeding? Here is a piece discussing how private brands are on fire.

Here is to hoping that Generation Z saves malls. What draws them to malls? Good food. Malls with great food options apparently experience more sales. Now Neiman Marcus and H&M are going the resale route. Urban Outfitters ($URBN) is experimenting with a monthly rental service. Startups like Joymode look to benefit from the alleged shift from ownership to “access.”

As for continued bleeding, here is yet another sign that things may continue to worsen for retail:

Notably, production of containerboard — a type of paperboard specially manufactured for the production of corrugated board (or cardboard) — is suffering a YOY production decline. Is that indicative of a dip in e-commerce sales to boot? 😬

*On the flip side, there have been some clear winning “haves.” Take, TJX Companies Inc. ($TJX), for instance. The owner of T.J. Maxx reported a 5% increase in same store sales. Target Inc. ($TGT) and Walmart Inc. ($WMT) also appear to be holding their own. The former’s stock had a meaningful pop this week on solid earnings.

Cracks in Malls Grow Deeper (Long Thanos, Short CMBS)

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Retail Carnage Continues Unabated (R.I.P. Payless, Gymboree, Charlotte Russe & Shopko)

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Talk of retail’s demise is so pervasive that the casual consumer may be immune to it at this point. Yeah, yeah, stores are closing and e-commerce is taking a greater share of the retail pie but what of it?

Well, it just keeps getting worse.

Consider 2019 alone. The Payless ShoeSource, Gymboree, Charlotte Russe, Shopko, and Samuels Jewelers* liquidations constitute thousands of stores evaporated from existence. It’s like Thanos came to Earth and snapped his fingers and — POOF! — a good portion of America’s sh*tty unnecessary retail dissipated into dust. Tack on bankruptcy-related closures for Things Remembered, Beauty Brands and Diesel Brands USA Inc. and you’re up to over 4,300 stores that have peaced out.

That, suffice it to say, would be horrific enough on its own. But “healthy” (read: non-bankrupt) retailers have only added to the #retailapocalypse. Newell Brands Inc. ($NWL)is closing 100 of its Yankee Candle locations to focus on “more profitable” distribution channels. Gap Inc. ($GPS) announced it is closing 230 of its more unprofitable locations and spinning Old Navy out into its own separate company — the good ol’ “good retail, bad retail” spinoff. Chico’s FAS Inc. ($CHS) is closing 250 stores. Stage Stores Inc. ($SSI) — which purchased once-bankruptcy Gordmans — is closing between 40-60 department stores. Kitchen Collection ($HBB) is closing 25-30 stores. E.L.F. Beauty ($ELF) is closing all 22 of its locations. Abercrombie & Fitch Co. ($ANF)? Yup, closing stores. Up to 40 of them. GNC Inc. ($GNC) intends to close hundreds more stores over the next three years. Foot Locker Inc. ($FL)? Despite a strong earnings report, it is closing a net 85 stores. J.C. Penney Inc. ($JCP)…well…it didn’t report strong earnings and, not-so-shockingly, it, too, is closing approximately 27 stores this year. Victoria’s Secret ($LB)? 53 stores. Signet Jewelers Ltd. ($SIG)? Mmmm hmmm…it’s been closing its Zales and Kay Jewelers stores for years and will continue to do so. As we noted on Sunday, The Children’s Place Inc. ($PLCE) also intends to close 40-45 stores this year. Build-A-Bear Workshop Inc. ($BBW) will close 30 stores over the next two years. Ascena Retail Group Inc. ($ASNA) recently reported and disclosed that it had closed 110 stores (2% of its MASSIVE footprint) in the last quarter. Even the creepy-a$$ dolls at American Girl aren’t moving off the shelves fast enough: Mattel Inc. ($MAT) indicated that it needs to rationalize its retail footprint. There’s nothing Wonder Woman — or even a nightmare-inducing American Girl version of Wonder Woman — can do to prevent all of this carnage.

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As a cherry on top, EVEN FRIKKEN AMAZON INC. ($AMZN) IS CLOSING ALL 87 OF ITS POP-UP SHOPS! Alas, The Financial Times pinned the total store closure number for 2019 alone at 4,800 stores (and just wait until Pier 1 hits). Attached to that, of course, is job loss at a pretty solid clip:

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All of this begs the question: if there are so many store closures, are the landlords feeling it?

In part, surprisingly, the number appears to be ‘no.’ Per the FT:

“Investors in mall debt have also shown little sign of worry. The so-called CMBX 6 index — which tracks the performance of securitised commercial property loans with a concentration in retail — is up 4.4 per cent for 2019.”

Yet, in pockets, the answer also appears to be increasingly ‘maybe?’

For example, take a look at CBL & Associates Properties Inc. ($CBL) — a REIT that has exposure to a number of the names delineated above.

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On its February 8th earnings call, the company stated:

“We are pleased to deliver results in line with expectations set forth at the beginning of the year notwithstanding the challenges that materialized.”

Translation: “we are pleased to merely fall in line with rock bottom expectations given all of the challenges that materialized and could have made sh*t FAR FAR WORSE.”

The company reported a 4.4% net operating income decline for the quarter and a 6% same-center net operating income decline for the year. The company is performing triage and eliminating short-term pressure: it secured a new $1.185b ‘23 secured revolver and term loan with 16 banks as part of the syndicate (nothing like spreading the risk) to refinance out unsecured debt (encumbering the majority of its ‘A Mall’ properties and priming the rest of its capital structure in the process); it completed $100mm of gross dispositions plus another $160mm in “sales” of its Cary Towne Center and Acadiana Mall; it reduced its dividend (which, for investors in REITs, is a huge slap in the face); and it also engaged in “effective management of expenses” which means that they’re taking costs out of the business to make the bottom line look prettier.

Given the current state of affairs, triage should continue to remain a focus:

“Between the bankruptcy filings of Bon-Ton and Sears, we have more than 40 anchor closures.”

“…rent loss from anchor closures as well as rent reductions and store closures related to bankrupt or struggling shop tenants is having a significant near-term impact to our income stream.”

They went on further to say:

“Bankruptcy-related store closures impacted fourth quarter mall occupancy by approximately 70 basis points or 128,000 square feet. Occupancy for the first quarter will be impacted by a few recent bankruptcy filings. Gymboree announced liquidation of their namesake brand and Crazy 8 stores. We have approximately 45 locations with 106,000 square feet closing.”

Wait. It keeps going:

“We also have 13 Charlotte Russe stores that will close as part of their filing earlier this month, representing 82,000 square feet.”

Earlier this week, Things Remembered filed. We anticipate closing most of their 32 locations in our portfolio comprising approximately 39,000 square feet.”

And yet occupancy is rising. The quality of the occupancy, however — on an average rental basis — is on the decline. The company indicated that new and renewal leases averaged a rent decline of 9.1%. With respect to this, the company states:

As we've seen throughout the years, certain retailers with persistent sales declines have pressured renewal spreads. We had 17 Ascena deals and 2 deals with Express this quarter that contributed 550 basis points to the overall decline on renewal leases. We anticipate negative spreads in the near term but are optimistic that the positive sales trends in 2018 will lead to improved lease negotiations with this year.

Ahhhhh…more misplaced optimism in retail (callback to this bit about Leslie Wexner). As a counter-balance, however, there is some level of realism at play here: the company reserved $15mm for losses due to store closures and co-tenancy effects on company NOI. In the meantime, it is filling in empty space with amusement attractions (e.g., Dave & Buster’s Entertainment Inc. ($PLAY), movie theaters, Dick’s Sporting Goods Inc ($DKS) locations, restaurants, office space and hotels. Sh*t…given the amount of specialty movie theaters allegedly going into all of these emptying malls, America is going to need all of those additional gyms to work off that popcorn (and diabetes). Get ready for those future First Day Declarations that delineate that, per capita, America is over-gym’d and over-theatered. It’s coming: it stretches credulity that the solution to every emptying mall is Equinox and AMC Entertainment Holdings Inc. ($AMC). But we digress.

All of these factors — the average rent decline, the empty square footage, etc. — are especially relevant considering the company’s capital structure and could, ultimately, challenge compliance with debt covenants. Net debt-to-EBITDA was 7.3x compared with 6.7x at year-end 2017. Here is the capital structure and the respective market prices (as of March 19):

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The new Senior secured term loan due ‘23:

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The Senior unsecured notes due ‘23:

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The notes due ‘24:

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The notes due ‘26:

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Additionally, the company is trying to promote how flexible it is with its ability to pay down debt and invest in redevelopment properties. Here is a snippet of the company presentation that displays the debt covenants on its revolver, term loan and other unsecured recourse debt:

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What is the real value of the mall assets that are left unencumbered? Recently, the Company has been slowly impairing a number of its assets and many of the Company’s tier 2 and 3 malls have yet to be revalued. If appraisers lower the value of these assets that are really supposed to be supporting the debt, what then?

And that doesn’t even take into consideration the co-tenancy clauses. As anchor tenants fall like flies, you’ll potentially see a rush to the exits as retailers with four-wall sales that don’t justify rents (and rising wages) exercise their rights.

So, given all of above, does the market share management’s (misplaced) optimism?

J.P. Morgan’s Michael W. Mueller wrote in a February 7, 2019 equity research report:

"While commentary in the earnings release noted some sequential improvement in 4Q results, we still see it being a grind for the company over the near to intermediate term."

BTIG’s James Sullivan added on February 20, 2019:

"We see no near-term solution for the owners of more marginal “B” assets like CBL & Associates. Sales productivity for such portfolios has shown little growth over the last eight quarters in contrast to the better-positioned “A” portfolios."

"The recent re-financing provides CBL with some near-term liquidity but limits future access to the mortgage market as only a small number of readily “bankable” assets remain unencumbered."

“We expect the challenging conditions in the industry to continue to create pressure on the operating metrics of mall portfolios with average sales productivity of less than $400/foot. More anchor closures are likely and in-line tenants are also likely to manage their brick-and-mortar exposure aggressively and close marginal locations. We reiterate our Sell rating and $2 price target.”

“With overall flat sales productivity in the portfolio, there is limited evidence that a turnaround in performance is likely in the next 24 months. Instead, we expect continued declines in SSNOI with negative leasing spreads and lower operating cost recovery rates.”

“CBL’s new facility which totals $1.185B is secured and replaces a series of unsecured term loans and a line of credit. Collateral includes 20 assets, of which three are Tier 1 Malls, 14 are Tier 2 Malls, and three are Associated Centers. As a result, CBL now has a much smaller number of unencumbered malls.”

“There are no unencumbered Tier 1 Malls (Sales exceeding $375/foot). There are nine unencumbered Tier 2 Malls (sales $300 -$375/foot) and those malls averaged $337/foot in 2017. The 2018 data is not available yet, but sales/foot for Tier 2 assets in 2018 declined by an average $5/foot. So assuming the law of averages applies, the average productivity of the unencumbered Tier 2 assets is $332/foot. Malls with that level of productivity cannot be financed in the CMBS market per CBL management.”

“With limited access to financing using their unencumbered malls, CBL has to look to its available capacity on its new line of credit, $265m, and projected free cash flow after paying its dividends, we estimate, of $155m in 2019 and $135m in 2020. CBL is currently estimating an annual capital requirement of $75m - $125m to redevelop closed anchor boxes. The per box range is $7m - $10m which we believe is low compared to peers whose cost per unit is closer to $17m. So CBL faces dwindling capital sources at the same time that its portfolio is suffering significant quarterly drops in SSNOI.”

Apropos, the shorts are getting aggressive on the name:

The historical stock chart is ugly AF:

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Which brings us to commercial mortgage-backed securities (CMBS) — derivative instruments comprised of loans on commercial properties. Canyon Partners’ Co-Chairman and co-CEO Joshua Friedman is shorting the sh*t out of mall-focused CMBS (containing among many other things, CBL properties) via a well known CDS index: the Markit CMBX.BBB- (and lower Indices) — to the tune of approximately $1b (out of $25b AUM). This is the mall-equivalent of the big short, except for commercial real estate. 🤔🤔

Here is a CMBX primer for anyone who wants to nerd out to the extreme. Choice bit:

CMBX allows investors to short CMBS credit risk across a wide array of vintages and credit ratings. Shorting individual cash bonds is difficult and rarely done, with the exception of a few very liquid names. The market for cusip level CMBS CDS used to exist, but the liquidity proved very poor and it was quickly replaced by trading of the synthetic indices.

And here is some color on what Mr. Friedman said regarding his trade:

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Wowzers. Just imagine what happens to retail — including the malls — when the noise gets even louder.

*Samuels Jewelers filed chapter 11 last year but announced liquidation this year after failing to secure a buyer for its assets.

We (STILL) Have a Feasibility Problem (Long the “Two-Year Rule”)

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Payless ShoeSource Files for Chapter 11. Again.

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Man. That aged poorly AF.

That’s one + two + three…yup, three total “success” claims and that’s just the heading, subheading and intro paragraph. EEESH. This has turned into the bankruptcy equivalent of Oberyn Martell taking a victory lap in the fighting pits of King’s Landing.

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And, sadly, it almost gets as cringeworthy:

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Of course, we obviously know now that the Payless story is about as ugly as Oberyn’s fate.

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Payless is back in bankruptcy court — a mere 18 months after its initial filing — adorning the dreaded Scarlet 22. It will liquidate its North American operations, shutter over 2000 stores, and terminate nearly 20k employees. All that will remain will be its joint venture interests in Latin America and its franchise business — a telltale sign that (a) the brick-and-mortar operation is an utter sh*tshow and (b) the only hope remaining is clipping royalty and franchise fee coupons on the back of the company’s supposed “brand.” And so we come back to this:

That’s right. We have ourselves another TWO YEAR RULE VIOLATION!!

Okay. We admit it. This is all a little unfair. We definitely wrote last week’s piece entitled, “💥We (Still) Have a Feasibility Problem💥,” knowing full-well — thanks to the dogged reporting of Reuters and other outlets — that a Payless Holdings LLC chapter 22 loomed around the corner to drive home our point. Much like Gymboree and DiTech before it, this chapter 22 is the culmination of an abject failure of epic proportions: indeed, nearly everything Mr. Jones stated in the press release reflected above proved to be 100% wrong.

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Let’s start, given a dearth of new financial information, with the most obvious factor here as to why this company has round-tripped into bankruptcy — destroying tons of value and irreversibly hurting retail suppliers en masse along the way. In the company’s financial projections attached to its 2017 disclosure statement, the company projected fiscal year 2018 EBITDA of $119.1mm (PETITION NOTE: we’d be remiss if we didn’t highlight the enduring optimism of debtor management teams who consistently offer up, and get highly-paid investment bankers to go along with, ridiculous projections that ALWAYS hockey stick up-and-to-the-right. Frankly, you could strip out the names and, in a compare and contrast exercise, see virtually no directional difference between the projected revenues of Payless and the actual revenues of Lyft. Seriously. It’s like management teams think that they’re at the helm of a high growth startup rather than a dying legacy brick-and-mortar retailer with sh*tty shoes at not-even-discounted-for-sh*ttiness prices.

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On what realistic basis on this earth did they think that suddenly — POOF! — same store sales would be nearly 10%.

Seriously. Give us whatever they’re smoking out in Topeka Kansas: sh*t must be lit. Literally.

So what did EBITDA actually come in at? Depending on which paragraph you read in the company’s First Day Declaration filed in support of the chapter 22 petition: negative $63mm or negative $66mm (it differs on different pages). For the mathematically challenged, that’s an ~$182mm delta. 🙈💩 “Outstanding leadership team,” huh? The numbers sure beg to differ.

This miss is SO large that it really begs the question: what the bloody hell transpired here? What is this dire performance attributable to? In its 2017 filing the company noted the following as major factors leading to its bankruptcy:

Since early 2015, the Debtors have experienced a top-line sales decline driven primarily by (a) a set of significant and detrimental non-recurring events, (b) foreign exchange rate volatility, and (c) challenging retail market conditions. These pressures led to the Debtors’ inability to both service their prepetition secured indebtedness and remain current with their trade obligations.

The company continued:

Specifically, a confluence of events in 2015 lowered Payless’ EBITDA by 34 percent—a level from which it has not fully recovered. In early 2015, the Debtors meaningfully over purchased inventory due to antiquated systems and processes (that have since undergone significant enhancement). Then, in February 2015, West Coast port strikes delayed the arrival of the Debtors’ products by several months, causing a major inventory flow disruption just before the important Easter selling period, leading to diminished sales. When delayed inventory arrived after that important selling period, the Debtors were saddled with a significant oversupply of spring seasonal inventory after the relevant seasonal peak, and were forced to sell merchandise at steep markdowns, which depressed margins and drained liquidity. Customers filled their closets with these deeply discounted products, which served to reduce demand; the reset of customer price expectations away from unsustainably high markdowns further depressed traffic in late 2015 and 2016. In total, millions of pairs of shoes were sold below cost in order to realign inventory and product mix. (emphasis added)

You’d think that, given these events, supply chain management would be at the top of the reorganized company’s list of things to fix. Curiously, in its latest First Day Declaration, the company says this about why it’s back in BK:

Upon emergence from the Prior Cases, the Debtors sought to capitalize on the deleveraging of their balance sheet with additional cost-reduction measures, including reviewing marketing expenses, downsizing their corporate office, reevaluating the budget for every department, and reducing their capital expenditures plan. Notwithstanding these measures, the Debtors have continued to experience a top-line sales decline driven primarily by inventory flow disruption during the 2017 holiday season, same store sales declines resulting in excess inventory, and challenging retail market conditions. (emphasis added).

Like, seriously? WTF. And it actually gets more ludicrous. In fact, the inventory story barely changed at all: the company might as well have cut and pasted from the Payless1 disclosure statement:

The Debtors also faced an oversupply of inventory in the fall of 2018 leading into the winter of 2019. As a result, the Debtors were forced to sell merchandise at steep markdowns, which depressed margins and drained liquidity. Customers filled their closets with these deeply discounted products, which served to reduce customer demand for new product. In total, millions of pairs of shoes were sold at below market prices in order to realign inventory and product mix. (emphasis added)

As if that wasn’t enough, the company also noted:

The delayed production caused a major inventory flow disruption during the 2017 Holiday season and a computer systems breakdown in the summer of 2018 significantly affected the back to school season, leading to diminished sales and same store sales declines.

Sheesh. Did the dog also eat the real strategy? Bloomberg writes:

The repeat bankruptcies are a sign the original restructuring may have been rushed through too quickly or didn’t do enough to solve the retailers’ industry-wide and company-specific problems.

And this quote, clearly, is dead on:

“One of the easiest ways to waste time and money in Chapter 11 is to use the process only to effect a change in ownership but not to take the time and protections afforded by the bankruptcy process to fix underlying operations,” Ted Gavin, a turnaround consultant and the president of the American Bankruptcy Institute, told Bloomberg Law. 

This begs the question: what did the original bankruptcy ACTUALLY accomplish? Apparently, it accomplished this pretty looking chart:

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And not a whole lot more.*

The company also failed to achieve another key strategic initiative upon which its post-bankruptcy business plan was based: investment in its stores and the deployment of omni-channel capabilities that, ironically, would make the company less dependent upon its massive brick-and-mortar footprint. Per the company:

…the Debtors’ liquidity constraints prevented the Debtors from investing in their store portfolio to open, relocate, or remodel targeted stores to keep up with competitors.

And:

Moreover, Payless was unable to fulfill its plan for omni-channel development and implementation, i.e., the integration of physical store presence with online digital presence to create a seamless, fully integrated shopping experience for customers. As of the Petition Date, the completion of this unified customer experience has been limited to approximately two hundred stores. Without a robust omni-channel offering, Payless has been unable to keep up with the shift in customer demand and preference for online shopping versus the traditional brick-and-mortar environment.

In other words “success” really means “still too much effing debt.” This would almost be funny if it didn’t tragically end with the termination of thousands of jobs of people who, clearly, mistakenly put their faith in a management team so entirely in over their heads. Literally nothing was executed according to plan. Nothing.

Seven months after emerging from bankruptcy the company was already in front of its lenders with its hand out seeking more liquidity. Which…it got. In March 2018, the company secured an additional $25mm commitment under the first-in-last-out portion of its asset-backed credit facility. What’s crazy about this is that, never mind the employees, the supplier community got totally duped again here. In the first case, the debtors extended their suppliers by ONE HUNDRED DAYS only for them, absent critical vendor status, to get nearly bupkis** as general unsecured claimants. Here, the debtors again extended their suppliers by as much as 80 days: the top list of creditors is littered with manufacturers based in Hong Kong and mainland China. Who needs Donald Trump when we have Payless declaring a trade war on China twice-over? (PETITION NOTE: we know this is easier said than done, but if you’re a supplier to a retailer in today’s retail environment, you need to get your sh*t together! Pick up a newspaper for goodness sake: how is it that the entire distressed community knows that a 22 is coming and yet you’re extending credit for 80-100 days? It’s honestly mind-boggling. The company cites over 50k total creditors (inclusive of employees) and $225mm of unsecured debt. That’s a lot of folks getting torched.)

Some other notes about this case:

Liquidators. Much like with Things Remembered and Charlotte Russe, they mysteriously have bandwidth again such that they no longer need to JV up as a foursome as they did in Gymboree. Instead, we’re back to the slightly-less-anti-competitive twosome of Great American Group LLC ($RILY) and Tiger Capital Group.

Kirkland & Ellis. There’s something strangely ironic here about the fact that the firm went from representing the company in the chapter 11 to representing its liquidators in the 22. Seriously. You can’t make this sh*t up.

Independent Directors. Here we go again. Remember: the Payless 11 led us to Nine West Holdings which led us to Sears Holding Corp. ($SHLD). We have documented that whole string of disasters here. In the first case, Golden Gate Capital and Blum Capital got away with two separate dividend recaps totaling millions of dollars in exchange for a piddling $20mm settlement. Moreover, to incrementally increase the pot for general unsecured creditors, senior lenders had to waive their deficiency claims that would have otherwise diluted the unsecured pool and made recoveries even more insubstantial. So, here we are again. Two new independent directors have been appointed to the board and they will investigate whether controlling shareholder Alden Capital Management pillaged this company in a similar way that it has reportedly and allegedly pillaged newspapers across the country.***

Fees. If you want to quantify the magnitude of this travesty, note that the first Payless chapter 11 earned the following professionals the following approximate amounts:

  • Kirkland & Ellis LLP = $4.995mm

  • Armstrong Teasdale LLP = $495k

  • Guggenheim Securities LLC = $6.825mm

  • Alvarez & Marsal = $1.9mm

  • Munger Tolles = $898k

  • Pachulski Stang Ziehl & Jones LLP (as lead counsel to the UCC) = $2.5mm

  • Province Inc. = $2.6mm

  • Michel-Shaked Group = $560mm

Now THAT was money well spent.****

*Via three separate store closing motions, the company shuttered 686 stores. The second store closing motion proposed 408 store closures but was later revised downward to only 216.

**Unsecured creditors received their pro rata share of two recovery pools in the aggregate amount of $32.3mm, $20mm of which came from the company’s private equity sponsors as settlement of claims stemming from two pre-petition dividend recapitalization transactions. In exchange, the private equity firms received releases from potential liability (without having to admit any wrongdoing).

***Alden Global Capital is no stranger to controversy over its media holdings. In the same week it finds itself in bankruptcy court for Payless, Alden found itself in the news for its reported desire to buy Gannett. This has drawn the attention of New York Senator Chuck Schumer who expressed concerns over Alden’s “strategy of acquiring newspapers, cutting staff, and then selling off the real estate assets of newsrooms and printing presses at a profit.” 

***This is but a snapshot. There were several other professionals in the mix including, significantly, the real estate advisors who also made millions of dollars.

👜Retail May Get Marie Kondo'd👜

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👠Marie Kondo is Coming to a First Day Declaration Near You (Long Thrift Shopping)👠

2019 has already been a rough year for retail. Beauty Brands LLC, a Kansas City-based brick-and-mortar retailer with 58 stores in 12 states filed for chapter 11 bankruptcy in the first week of January. Then, last week, both Shopko (367 stores) and Gymboree (~900 stores) filed for chapter 11 bankruptcy — the former hoping to avoid a full liquidation and the latter giving up hope and heading straight into liquidation (it blew its first chance in bankruptcy). And, of course, there’s still Charlotte Russe, Things Remembered, Payless and others to keep an eye on.

All of this has everyone on high alert. Take this piece from The Wall Street Journal. Pertaining to J.C. Penney ($JCP) and Sears Holding Corporation ($SHLDQ), the WSJ notes:

J.C. Penney Co.’s sales are falling, its stores are stuck in malls and the turnaround strategy keeps changing. Now, three months after the embattled retailer hired a new chief executive, a handful of senior positions remain vacant.

The series of events is prompting analysts and other industry experts to question whether Penney can avoid the fate of fellow department-store operator Sears Holdings Corp., which filed for bankruptcy and barely staved off liquidation.

The Plano, Texas-based chain was once the go-to apparel retailer for middle-class families. It and Sears had once dominated American retailing but lost their customers, first to discounters like Walmart , then to fast-fashion retailers and off-price chains like T.J. Maxx. The shift to online shopping hastened their decline.

First, the Sears Holding Corporation ($SHLDQ) drama continues as the company heads towards a contested sale hearing in the beginning of February. To say that it “staved off liquidation” is, at this juncture, factually incorrect. While the company’s prospects have improved along with Mr. Lampert’s purchase offer, it is not a certainty that the company will be able to avoid liquidation. At least not until the Official Committee of Unsecured Creditors’ objection is overruled and the bankruptcy court judge blesses the Lampert deal. The sale hearing is slated for February 4.

Second, we were relieved to FINALLY see an article about retail that didn’t pin the blame solely at the feet of Amazon Inc. ($AMZN). As we’ve been arguing since our inception, the narrative is far more nuanced than just the “Amazon Effect.” To point, Vitaliy Katsenelson recently wrote in Barron’s:

Retail stocks have been annihilated recently, even though retail sales finished 2018 strong. The fundamentals of the retail business look horrible: Sales are stagnating, and profitability is getting worse with every passing quarter.

Jeff Bezos and Amazon.com get most of the blame, but this is only part of the story. Today, online sales represent only 8.5% of total retail sales. Amazon, at about $100 billion in sales, accounts only for 1.6% of total U.S. retail sales, which at the end of 2018 were around $6 trillion. In truth, the confluence of a half-dozen unrelated developments is responsible for weak retail sales.

He goes on to cite a shift in consumer spending to more expensive phones, more expensive phone bills, more expensive student loan bills and more expensive health care costs as contributors to retail’s general malaise (PETITION Note: yes, it appears that lots of things are getting more expensive. Don’t tell the FED.). More money spent there means less discretionary income for the likes of J.C. Penney. Likewise, he highlights the change in consumer habits. He writes:

We may not care about clothes as much as we may have 10 or 20 years ago. After all, our high-tech billionaires wear hoodies and flip-flops to work. Lack of fashion sense did not hinder their success, so why should the rest of us care about the dress code?

And:

Consumer habits have slowly changed, including the advent of rental clothes from companies like Rent the Runway and LeTote.

We’ve previously written extensively about the rental and resale wave. We wrote:

Indeed, per ThredUp, a second-hand apparel website, the resale market is on pace to reach $41 billion by 2022 and 49% of that is in apparel. Moreover, resale is growing 24x more than overall apparel retail. “[O]ne in three women shopped secondhand last year.” 40% of 18-24 year olds shopped retail in 2017. Those stats are bananas. This comment is illustrative of the transformation taking hold today,

“The modern consumer now has a choice between shopping traditional retail or trying new, innovative business models. New apparel experiences and brands are emerging at record rates to replace old ones. Rental, subscription, resale, direct-to-consumer, and more. The closet of the future is going to look very different from the closet of today. When you get that perfectly curated assortment from Stitch Fix, or subscribe to Rent the Runway’s everyday service, or find that killer handbag on thredUP you never could have afforded new, you start realizing how much your preferences and behavior is changing.”

Lots of good charts here to bolster the point.

That wave just got a significant shot of steroids.

Earlier this month Netflix Inc. ($NFLX) debuted “Tidying Up with Marie Kondo,” a show that springs off of Ms. Kondo’s hit 2014 book, “The Life-Changing Magic of Tidying Up: The Japanese Art of Decluttering and Organizing.” The news since is not too encouraging for retailers.

Per NPR, “Thrift Stores Say They’re Swamped With Donations After ‘Tidying Up with Marie Kondo’” (audio and audio transcript). Indeed, thrift stores like Goodwill are seeing an uptick in donations across the country (and Canada). The Wall Street Journal published a full feature predicated upon “throw a lot of sh*t out.”

Of course, all of this decluttering is an opportunity. Anna Silman writes in The Cut:

Well, congrats to all the people who have committed to the KonMari life and ridded themselves of the burden of their unwanted possessions, and who now have to waste 15 minutes a day folding their underwear into tiny rectangles. But also, good for us! Imagine how many bad choices people are liable to make in a feverish post New Year’s Kondo-inspired purge? Mistakes will be made. Purgers are going to see that lavish fur cape they never wore and deem it impractical; come Game of Thrones finale cosplay time, they’re going to rue their hastiness. Conscientious closet cleaners will dispose of the low-rise jeans they haven’t worn since the mid-aughts, but the joke’s on them, because low-rise jeans are coming back, bitches!

So, my fellow anti-Kondoers, if you’re in a post-holiday shopping mood, get thee to thy nearest second-hand clothing store Beacon’s (or Goodwill, or Buffalo Exchange, or Crossroads, or the internet) and get started on building your 2019 wardrobe. And if you arrive at your nearest resale outlet and see a long line, don’t worry: Those people are there to sell. Those aren’t your people. Forget them. Focus on the racks — those sweet, newly stocked, overflowing racks, where so much joy awaits.

It’s just like the old adage: One woman’s trash is another woman’s treasure, especially because most of it was never trash to begin with.

Likewise, Lia Beck writes in Bustle, “…get out there and find some things that spark joy for you.”

And reseller The RealReal is signaling that resale is so big that it’s ready to IPO. Talk about opportunistic. No better time to do this than during Kondo-mania. The company has raised $115mm in venture capital from Perella Weinberg Partners, Sandbridge Capital and Great Hill Partners, most recently at a $745mm valuation.

None of this is a positive for the likes of J.C. Penney. They need consumers to consume and clutter. Not declutter. Not go resale shopping. We can’t wait to see who is first to mention Marie Kondo as a headwind in a quarterly earnings report. Similarly, we wonder how long until we see a Marie Kondo mention in a chapter 11 “First Day Declaration.” 🤔

Nine West & the Brand-Based DTC Megatrend

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Digitally-Native Vertical Brands Strike Again

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The Walking Company. Payless Shoesource. Aerosoles. The bankruptcy court dockets have been replete with third-party sellers of footwear with bursting brick-and-mortar footprints, high leverage, scant consumer data, old stodgy reputations and, realistically speaking, limited brand value. Mere days away from a Nine West bankruptcy filing, we can’t help but to think about how quickly the retail landscape is changing and the impact of brands. Why? Presumably, Nine West will file, close the majority of - if not all of - its brick-and-mortar stores and transfer its brand IP to its creditors (or a new buyer). For whatever its brand is worth. We suppose the company’s lenders - likely to receive the company’s IP in a debt-for-equity swap, will soon find out. We suspect “not a hell of a whole lot”.

Back in December, we snarked about Proctor & Gamble’s efforts to innovate around cheaper razors in the face of competition from digitally-native vertical brands like (now Unilever-owned) Dollar Shave Club and Harry’s. The struggle is real. Per the Financial Times,

In 2016, revenues of the large consumer good companies — from beer to soft drinks, food and household products — grew at their slowest rate since 2009, when the recession took hold. The 207 results for many of those companies that have reported remain weak.

A few weeks ago the Interactive Advertising Bureau released a new study entitled, “The Rise of the 21st Century Brand Economy.” It is well-worth perusing. In fact, we’re a bit late to the game here because we wanted to give it an earnest review. The upshot? Consumption habits are rapidly shifting away from third-party wholesalers like Nine West towards direct-to-consumer relationships. With nimble, oft-outsourced supply chains, DTC e-comm brands are stealing market share from consumer products manufacturers and distributors. In the aggregate, it’s creating real shocks. Some significant themes:

Economic benefits are accruing to firms that create value by tapping into low-barrier-to-entry, capital-flexible, leased or rented supply chains. These include thousands of small firms in all major consumer-facing categories that sell their own branded goods entirely or primarily through their owned-and-operated digital channels.

First-party data relationships are important not for their marketing value independent of other functions, but because they fuel all significant functions of the enterprise, including product development, customer value analysis, and pricing.

An arms race for first-party data is influencing strategy, investment, and marketing strategies among major incumbent brands across all categories.

The significance of these themes cannot be overstated. Putting some numbers around them:

In the razor category, Gillette’s share of the U.S. men's-razors business fell to 54% in 2016, from 70% in 2010. Almost all of that share has shifted to Dollar Shave Club, Harry’s, and several other digital primary sellers.

In pet food, subscription service The Farmers Dog is averaging 40-50% revenue growth monthly, in a U.S. pet food market projected up 4.4% in 2018.

Grocery store revenue growth is projected to be about 1 percent annually through 2022. Over that same period, the market for Meal Kits is expected to grow by a factor of 10x.

Amazon ($AMZN) has meal kits. Walmart ($WMT) just launched meal kits. Albertsons purchased Plated. Meanwhile, the bankruptcy courts have a laundry list of grocers on their dockets.

Saving the most relevant to Nine West for last,

Sales at U.S. shoe stores in February 2017 fell 5.2%, the biggest year-over-year tumble since 2009. Online-only players like Allbirds, Jack Erwin, and M.Gemi have gained nearly 15 percentage points of share over five years.

Yes, the very same Allbirds that is so popular that it is apparently creating wool shortages. Query whether this factor will be featured in Nine West’s First Day Declaration with such specificity. Likely not.

Elizabeth Warren vs. the Bankruptcy Bar

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A Reminder That Disruption Takes on Many Forms

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PETITION is, broadly speaking, a newsletter about disruption. As loyal readers have surely noticed, the predominant emphasis, to date, has been tech-based disruption. But, spoiler alert, there are other forms. Earlier this week, Senators Elizabeth Warren and John Cornyn proposed a bill that swiftly reminded a cohort of (mostly Delaware) legal professionals that legislation, if passed, can be an even more immediate, powerful and jarring form of disruption.

Let’s take a step back. Shortly before Christmas, the Commercial Law League of America (CLLA) indicated that the U.S. Senate should consider a new bankruptcy venue reform bill. The gist of the proposal is that a debtor should have to file for bankruptcy in its principal place of business (or where their principal executive offices reside) - as opposed to, as things currently stand, its state of incorporation (the "Inc Rule"), where an affiliate is located (the "Affiliate Rule"), or where a significant asset is located (the "Abracadabra Rule"). Notably, a large percentage of companies are incorporated in Delaware, a state with well-established and well-developed corporate laws and legal precedent. Consequently, thanks to the "Inc Rule," Delaware is typically the most sought after venue by debtors, perennially topping annual lists with the most bankruptcy filings. In other words, the state of Delaware is the biggest beneficiary of the status quo. 

Putting aside the Inc Rule for a moment, the “Affiliate Rule” and “Abracadabra Rule,” respectively, have provided debtor companies with wide and crafty latitude to file in jurisdictions other than that of their principal place of business. Again, typically Delaware (and then, to a lesser extent, New York). Have a non-operating subsidiary formed in Delaware? Venue, check on the "Affiliate Rule." Got a random (unoccupied) office you set up last week in a WeWork in Manhattan? POOF, venue! Check on the "Abracadabra Rule." Got a bank account set up (a week ago) with JPMorgan Chase Bank in New York? Venue, again check on the "Abracadabra Rule". It is, seemingly, THAT optional. All of this is like saying that despite the entire automobile industry being manufactured, headquartered and principally-based in Detroit, General Motors ($GM) should file for bankruptcy in New York rather than Michigan. Oh, wait. That actually happened. Take two: that’s like saying that despite the entire automobile industry being manufactured, headquartered and principally-based in Detroit, Chrysler should file for bankruptcy in New York rather than Michigan. Damn. That also happened. Ok, here’s a good one: that’d be like saying it’s okay for the Los Angeles Dodgers to file for bankruptcy in Delaware rather than California. Wait, SERIOUSLY!?!? WTF. Who is to blame for this outrage? 

We'll keep this simple, lest this become a treatise absolutely nobody will want to read: federalism. Bankruptcy law is federal but every state has their own courts, circuit courts, and legal precedent. Some states have bankruptcy courts that are historically more favorable to debtors (cough, Delaware...need that incorporation business) - which, speaking commercially and realistically - are de facto clients of the state. Currently, debtors typically choose the venue so if you want to drive debtors to your courthouse steps, favorable corporate and debtor-favorable bankruptcy case precedent goes a long way towards filling court calendars. Not to mention hotels. In this regard, the bankruptcy court isn't all too dissimilar from a large tech company. Go fast and furious to market, aggregate a ton of users (here: debtors), acquire talent (read: judges), and build a database full of information (read: precedent) to then use against everyone else who tries to compete with you. That aggregation is the moat, the competitive advantage. Say, "we're the most sophisticated due to our talent, data, and predictability" and win. Boom. Dial up the Hotel Du Pont please!  

As a consequence of federalism, one jurisdiction's "makewhole provision" enriching bondholders is another jurisdiction's "no recovery for you" enraging bondholders. One jurisdiction's "restructuring support agreement" is another jurisdiction's "meaningless bound-to-be-blownup-worthless-piece-of-paper." That's the beauty of venue selection, currently. The system allows debtors to choose based on that precedent. Ask any of your biglaw buddies about "venue analysis" and watch their eyes roll into the back of their heads. That is, if you're even still reading this. They've all had to do it. It's a big part of the filing calculus. And everyone knows it. 

Enter Senators Warren and Cornyn. They're saying, "No way, Jose. This sh*t needs to stop." Okay, they didn't say that, exactly, but Senator Warren did say this, "Workers, creditors, and consumers lose when corporations manipulate the system to file for bankruptcy wherever they please. I’m glad to work with Senator Cornyn to prevent big companies from cherry-picking courts that they think will rule in their favor and to crack down on this corporate abuse of our nation’s bankruptcy laws.” The argument goes that the bill “'will strengthen the integrity of the bankruptcy system and build public confidence' by availing companies, small businesses, retirees, creditors and consumers of their home court." Ruh roh. 

A few years ago, a heavy hitter lineup of restructuring professionals were asked by The Wall Street Journal what they thought about this venue debate. The general upshot was "nothing to see here." With apologies for the paywall attached to the following links, you'll get the general idea. See, e.g., "the myth of forum shopping." See, also, "venue reform is a solution in search of a problem."; 
“allowing fiduciaries to exercise their business judgment about what filing location might maximize enterprise value or reduce execution risk or both.”; “If it ain’t broke, don’t fix it.”; "the current status quo of wide venue choice – should win out.”; “It’s not clear that these rules are problematic, so don’t apply a fix with its own set of unintended consequences.”; “The truth is that venue provisions are very appropriate and do not need to be adjusted”; "Letting debtors choose as they can now is 'good business sense.'"; and "current venue requirements 'strike a fair balance.'” In summary, you've got Senators Warren and Cornyn up against a LARGE subset of the bankruptcy bar. And those aren't all Delaware practitioners. That's a cross-section of the entire bar - with some financial advisors and investment bankers thrown in for good measure. Pop us some popcorn.

Now, we've been highlighting venue shenanigans since our inception. Not because it's wrong to leverage a favorable venue with uber-favorable precedent if you have that option; rather, because it has gotten so FRIKKEN OBVIOUS. Clearly an industry with $1750/hour billing rates isn't known for its subtlety. Want a third-party release to shield the private equity bros? St. Louis here we come! Have the opportunity to take advantage of a "rocket docket" and get those billable rates rubber stamped? Godspeed. Want to issue a "Standing Order" to divert bankruptcy traffic (back) into your court? May the Force be with you. 

That last bit is particularly notable. Venue gaming got so blatant that even the courts got in to the game. That "Standing Order" is as patent an acknowledgement of venue manipulation as anything we've seen of late. Why did this happen? Take a look at the case trends. After a few early (small) oil and gas exploration and production companies (E&P) filed in Texas and things, uh, didn't go particularly well for professionals, a deluge of E&P debtors mysteriously started popping up in Delaware. That's basic cause and effect. The subsequent cascading secondary effect was the "Standing Order" which, in response, guaranteed professionals that they'd get one of two judges and that, effectively, the Texas courts were open for business. Once that Order came out, debtor traffic curiously reverted back to Texas. E&P management teams and creditors could be heard in their home jurisdiction. Local firms could become "local counsel." Delaware counsel's loss was Texas counsels' gain. (If only the same could be said for lead counsel). Naturally, then, both the Texas Bankruptcy Bar Association and Texas Hotel & Lodging Association back the proposed bill: it basically fortifies the Standing Order. Also, guess where Senator Cornyn is from? Alexa, please cancel that Hotel Dupont reservation. 

We're not taking a position in this debate. We have no skin in that game. But we can't help but to chuckle at the timing. Ironically, it seems that more and more debtors are filing near their principal place of business rather than Delaware anyway (cough, third party releases!). See, e.g., Toys R Us, rue21, Payless Shoesource. And so this has the potential to reinforce a recent trend and compound the issues that have already surfaced for Delaware professionals. 

This is nerdy sh*t. But it’s still big deal disruption. Just disproportionately for the Delaware bar and the city of Wilmington. It’s so big that even iHeartRadio released a podcast discussing it. Without irony. Dramatic disruption AND comedy. 

Who knew bankruptcy could be so entertaining?

Will TOM SHOES Be Another Victim of Private Equity?

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Is Blake Mycoskie's Company in Distress?

NPR’s “How I Built This” podcast featuring TOMS Shoes founder Blake Mycoskie is great. But it footnotes a big piece of the TOMS story and neglects another entirely: that Mycoskie sold 50% of the company to private equity firm, Bain Capital. And that the company has debt currently trading at distressed levels and faces a potential liquidity crisis.

Let’s take a step back. TOMS Shoes Inc. is an unequivocal success story and Blake Mycoskie is deserving of praise. He took an idea that was originally meant to be purely charitable and created a company that scaled from $300k of revenue in year one to $450mm in revenue in year seven. His "buy-one-give-one" model has resulted in millions without shoes now having shoes. And the model itself has been copied by Warby Parker, Bombas, and others, across various businesses. 

That said, for us, this tweet sparked a renewed interest in the company. Many have speculated for years that the TOMS story isn’t all rainbows and unicorns and that there are unintended consequences that emanate out of the one-for-one model. The report referenced in the tweet drives this point home. 

Why is this important now? Because the charity narrative is critical to TOMS. The company cannot afford for the public to sour on the message. Particularly since the company hasn’t been doing so hot lately. Revenue fell nearly 24% YOY in Q2 and EBITDA fell 72% YOY to $5mm. Cash is thinning and the leverage ratio is fattening. S&P downgraded the company back in August. The company's $306.5mm senior secured Term Loan is trading at distressed levels down in the mid 40s, a marked decline from the mid 70s in the beginning of ’17. And that is up from a week or so ago, when it was in the low 40s: this partnership with Apple ($AAPL) and Target ($TGT) helped pump the quote. For those who don't deal in the world of restructuring or distressed investing, a plunge of loan value by nearly 100% is, well, quite obviously a terrible sign. This means, plainly, that the market is pricing in the very real possibility that TOMS will default (and won't be able to pay back its loan in full). 

A positive? There are no near term maturities: the $80mm revolver is due in 2019 and the term loan is due in October 2020. Still, at Libor+550bps, the interest rate on the term loan is a minimum of 6.5% which is a cool $21mm in annual interest expense. And that’s before interest rates rise. The company looks like it will have trouble sustaining its capital structure and there’s no indication that the addition of new SKUs will help the company grow into it. With that interest expense, liquidity is going to get tighter. Those of you paying attention have heard this leveraged-buyout-gone-awry-lots-of-interest-expense story before: it’s the same one as Toys “R” Us, rue21, Payless Shoesource, & Gymboree. 

According to S&P, the wholesale business is feeling the trickle down effect of pervasively battered retail with inventory orders on the decline. In a thus far successful effort to maintain margin, TOMS is focusing on operational streamlining. We are guessing that some kind of financial advisor is in there (anyone know?). At a certain point, there are only so many costs you can take out of a business. Does anyone think the wholesale business is set to reverse course anytime soon given the state of retail? We don't. 

Which brings us back to NPR’s podcast. Celebrating how something is built is great and, again, we are big fans. The series has featured a variety of awesome episodes (email us for recs). But it bothered us that we weren't given the whole story. It's not sexy, we get that, but the company's debt load, interest expense, and private equity history should have been the last chapter. What comes next is to be determined. 

Questioning Venue

For those of you who aren’t interested in restructuring/legal inside baseball, feel free to just scroll down to the News section below. Why? Well, we about to get legal up in this m*ther$%&$*, that's why. 

Thanks to that pesky little thing called federalism, every state has their own court system. This makes "venue" a big deal in bankruptcy cases as companies on the verge of a bankruptcy filing generally have several venue options based on various factors (i.e., principal place of business, location of an affiliate, etc.). Historically, Delaware has been an obvious choice of venue because most companies are incorporated there. It also helps that the jurisdiction's law is debtor-friendly and the judges are viewed as smart, sophisticated, and fit to handle the most complex and commercial of issues. 

Right now, though, there are a number of Delaware practitioners wondering what's behind a recent shift of significant bankruptcy filings to other venues. There are a number of theories swirling around. 

  1. Jurisdictional Competition. One theory is that that other jurisdictions, i.e., Texas and Missouri, want in on the recent surge of restructuring action. And to get in, they’re intentionally exhibiting a greater willingness to work with Yankee professionals and ensure a smooth case. Otherwise known as "playing ball." This is why some believe Payless Shoesource landed in the lap of a Missouri judge (note: curiously, the judge, by certain accounts, has virtually no track record to speak of - yes, there are plenty of folks who monitor judicial leanings). It stands to reason, then, that a $100mm+ critical vendor ask would slide by without as much as a batted eye by the judge (note: even the company must have anticipated some controversy here; it filed a declaration in support of the relief - not something typically deserving of a separate evidenciary filing). Query this: if many of these vendors were already stretched to 100-day terms - per the company's own declaration - what real difference would another 10-20 days make so that a creditors' committee could form to evaluate the request? Hmmm.
  2. Releases. Play ball with what, exactly? This may be the bigger question. We’re not going to opine on the current state of the law vis-a-vis third-party releases but, suffice it to say our favorite topic of late - dividend recaps - seems in play here too. After all, Payless is another private equity backed retailer and, by all accounts, there were dividends to speak of within the relevant lookback period. Why WOULD those guys want to take the likelier risk that releases would be in question in Delaware? Well, they wouldn’t. And so the question is: will they be in question in Missouri? The fact is that, more and more, these cases are driven by the interests of those other than the debtor.  Delaware is often looked upon as a solid choice of venue because of the vast and relatively predictable case law. If you're funding and/or driving a case, that may be part of the problem. Sometimes it may just be worth rolling the dice (Caesars notwithstanding).
  3. Too sophisticated? The third theory relates to whether the Delaware judges are TOO sophisticated. Apparently practitioners scare easily. When the Texas bench filleted investment bankers early on in the oil and gas wave (see BPZ Resources Inc.), bankers on subsequent deals purportedly grew increasingly skittish about United flights and advocated for Delaware filings instead. But this was short-lived. Once the Delaware bench dropped Paragon Offshore’s plan confirmation attempt faster than Pepsi drops distasteful ads and demonstrated that we have a feasibility problem, that mood quickly shifted. Fickle bunch. Clearly nobody wants to be on the wrong side of a bad feasibility opinion. After all, why risk losing the chance to refile the case in approximately 12 months and collect on a second round of fees, right? See, e.g., American Apparel, Radio Shack/General Wireless, Global Geophysical Services. Had the Delaware judge turned a blind eye to day rates, utilization and refinancing ability - sophisticated inputs that factor into valuation and feasibility - maybe there’d be discounted shoes lining up outside the Delaware courthouse steps. Then again, maybe not...releases!

It’ll be interesting to see where the next set of cases file... 

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