🧦Renfro Corporation. Short Rancid Socks.🧦

Kelso & Company-owned Renfro Corporation Struggles

The pandemic has been tough on all of us but one benefit is that we no longer have to see short-pants-wearing hedge fund and investment banker DBs strut through midtown Manhattan showing off their stupid frikken “sock game.” “Oooh, I love your socks, want to party?” said no person anywhere ever. So, small victories.

Speaking of losers, North Carolina-based Renfro Corporation is a Kelso & Company-backed* manufacturer of socks and the cotton behind partner brands like Fruit of the Loom, New Balance, Dr. Scholl’s, Carhartt, and Sperry as well as its own brands KBell, Hot Sox and Copper Sole. They produce exciting threads like these:

And when they really want to get cray cray, they spice things up with … well … whatever the hell this is supposed to be:

For the record, these socks — which, we think, show fruit(?) (see what they did there?) — have zero reviews. We reckon that’s because there isn’t a human being on earth who actually bought them, let alone reviewed them. Seriously, who green lit these things? Whomever it was has, at best, zero design sensibility and, at worst, psychopathy. Just sayin'.

The company’s capital structure is looking a bit deranged too — enough so that Moody’s slapped a fierce downgrade on the company (Caa3) back in late August. The cap stack consists of:

• an $87.4mm asset-backed revolving credit facility due February ‘21;

• a $20mm senior secured priming term loan due February ‘21 (Caa1); and

• a $132mm secured first lien term loan (Caa3) due March ‘21 that bids in the low 30s.

In connection with securing the priming term loan, the company obtained an extension of a limited waiver related to going concern language in its most recently audited financial statements to October 31, 2020. So, there’s a potential catalyst on the horizon. Shortly thereafter, there are the maturities. February and March are right around the corner. 😬

Per Moody’s:

Renfro's Caa3 CFR reflects the company's weak liquidity and risks regarding the company's ability to refinance its upcoming debt maturities given recent performance challenges and high financial leverage.

As of April 2020, lease adjusted debt/EBITDAR stood at around 6.4 times, and funded debt to credit agreement EBITDA was around 5.9 times. Recent unprecedented disruptions caused by the global coronavirus pandemic will likely challenge the company's ability to significantly reduce leverage over the very near term when it needs to refinance maturing debt. The rating also incorporates the company's modest revenue scale relative to the global apparel industry, significant customer concentration, and narrow product focus. With regard to financial strategy, in Moody's view, given a low equity valuation, private equity sponsor Kelso & Company, L.P. is unlikely to provide any sponsor equity support . Supporting the rating are Renfro's well-recognized licensed brands, long-term customer relationships and the relatively stable nature of the socks business. (emphasis added)

Moody’s appears a bit forgiving here. This company had plenty of challenges to deal with before COVID heightened things. First, while the company does boast of some US-based manufacturing, a significant amount of its supply chain is dependent upon Asia which, thanks to trade conflict with China, was likely already under strain. Second, a significant amount of its business is done through Walmart Inc. ($WMT). While on one hand this is a positive given Walmart’s recent performance, y’all know how we feel about too much customer concentration. Third, there’s this from Renfro’s website:

The company’s respected name, integrity, and innovation have fostered solid, trusted relationships with the world’s biggest retailers, including Wal-Mart, Kmart, Macy’s, Costco, J.C. Penney, Sears, and Target, to name a few. It is considered the category captain by several retailers.

Call us “deranged” but now doesn’t seem to be a great time to over-index to Kmart, Macy’s Inc. ($M), J.C. Penney or Sears. The decline of the department store is obviously trouble for a lot of different “mall-adjacent” products but especially so for products that Renfro CEO Stan Jewell himself described as an "afterthought." Less foot traffic equals fewer impulse purchases of socks (that just happen to be conveniently located near cash registers). Any product that benefits from being an add-on as part of a larger shopping trip will feel the #retailapocalypse especially hard.

This is where the company’s “narrow product focus” bites. The company only makes socks and not much more. Attempts to generate revenue elsewhere didn’t go all-too-well: back in May, for instance, the state of Tennessee paid the company $8.2 million to deliver cloth masks. Renfro stepped up producing millions of made-in-America cloth masks on short notice. The reception was … a bit … cold:

It also doesn’t help that the company has upstart sock competitors nipping at its feet. Renfro is a ~$500 million player in a market orders of magnitude larger than that. Though socks on the whole are far from a growth category there is a strong shift in mix towards fashion-oriented socks. As Mr. Jewell has pointed out, maybe you "…like pizza and beer so I’m going to have pizza and beer on my socks [and] like Picasso, so I’m going to have Picasso on my socks." Or maybe you get a pair or socks with a massive middle finger on it. Does Renfro sell those? 🤔

Renfro has tried to capture some of this category. But they were a little late to the party. Companies like Stance and Bombas didn’t exist a decade ago and are now each reportedly doing hundreds of millions in revenue and, in the case of Stance, partnering with the likes of Billie Eilish and the MLB. Their growth comes at the expense of slower moving, less well funded players like Renfro. And there is also a horde of other brands (e.g., Allbirds) and generic D2C “blands” with missions to "change the rules on how socks work” funded by growth-at-all-cost venture investors focused on customer acquisition everywhere but the mall. A strong relationship with J. C. Penney won't do much to combat these headwinds. 

Renfro has a tough few months ahead of it. The work-from-home trend won’t help matters either. But, perhaps Moody’s underestimates Kelso and they’ll write another check. Crazier things have happened. But Renfro will likely have to show that they have a strategy to combat the perfect storm swirling around it.

---

*Kelso acquired the company in 2006 — an oddly hot year for the sock industry. That same year Blackstone took Gold Toe private and scooped up rival Moretz. Blackstone exited the investment in 2011 with a $350mm sale to Gildan Activewear Inc. ($GIL) in 2011.

The company is also 25% owned by Japanese conglomerate Itochu Corp. ($ITOCY), one of five companies recently invested in by Warren Buffett. Looks like Berkshire Hathaway ($BRK.A) just can’t stay away from its textile roots. 

🎆Lehman = Anniversary Fever🎆

Initiate the Deluge of Lehman Retrospectives (Short History)

The onslaught of “10 years ago” retrospectives about the collapse of Lehman Brothers, the “Great Recession,” and lessons learned (and not learned, as the case may be), has officially begun. Brace yourselves.

Bloomberg’s Matt Levine writes:

Next weekend marks 10 years since the day that Lehman Brothers Inc. filed for bankruptcy. I suppose you could argue for other dates being the pivotal moment of the global financial crisis, but I think most people sensibly take Lehman Day as the anniversary of the crisis. Certainly I have a vivid memory of where I was on Sept. 15, 2008 (on vacation, in Napa, very confused about why no one around me was freaking out), which is not true of, say, Bear Stearns Hedge Funds Day. So expect a lot of crisis commemoration in the next week or two.

Fair point about Bear Stearns. As we’ll note in a moment, that isn’t the only pivotal moment that is getting lost in the Lehman Brothers focus.

Anyway, Levine pokes fun at a Wall Street Journal piece entitled, “Lehman’s Last Hires Look Back.” It is worth a read if you haven’t already. The upshot: all four of the folks who started at Lehman on or around the day it went bankrupt ended up landing on their feet. In fact, it doesn’t sound like any of them really suffered much of a gap of employment, if any at all.

Levine continues:

I mean he stayed there for two and a half years and left, not because he was working for a bank that had imploded and couldn’t pay him anymore, but because he got “super jaded.” Another one “was fortunate that my position was maintained at Neuberger Berman [an investment-management firm then owned by Lehman], and I spent eight years there” — and now works for Dick Fuld at his new firm. It is all a bit eerie to read. Of course Lehman’s bankruptcy led, fairly rapidly, to many job losses in the financial industry, and particularly — of course — at Lehman.  But there is a lot of populist anger to the effect that investment bankers brought down the global economy and escaped relatively unscathed, and that anger will not be much assuaged by learning that these young bankers — who, to be fair, had nothing to do with bringing down the economy! — kept their jobs for years after Lehman’s bankruptcy and left only when they felt super jaded.

He’s got a point.

It’s not as if this is a happy anniversary and so there are a number of folks who are doubling-down on the doom and gloom. McKinsey, for instance, notes that global debt continues to grow and households have reduced debt but are still over-levered. They also note, as we’ve written previously, that (i) corporate debt serves as a large overhang (e.g., developing country debt denominated in foreign currencies, growth in junk bonds, the rise in “investment grade” BBB bonds, the resurgence of CLOs), (ii) real-estate prices are out of control and creating housing shortages, (iii) China’s growth trajectory is becoming murkier in the face of significant debt, and (iv) nobody fully knows the extent to which high-frequency trading can affect markets in a panic. They don’t even mention the possible effects of Central Banks’ tightening and unwinding QE (Jamie Dimon must be shaking his head somewhere). Nevertheless, they conclude:

The good news is that most of the world’s pockets of debt are unlikely to pose systemic risk. If any one of these potential bubbles burst, it would cause pain for a set of investors and lenders, but none seems poised to produce a 2008-style meltdown. The likelihood of contagion has been greatly reduced by the fact that the market for complex securitizations, credit-default swaps, and the like has largely evaporated (although the growth of the collateralized-loan-obligation market is an exception to this trend).

But one thing we know from history is that the next crisis will not look like the last one. If 2008 taught us anything, it’s the importance of being vigilant when times are still good.

Arturo Cifuentes writes in The Financial Times that, unfortunately, ratings agencies, insurance companies and investment executives got off relatively unscathed (in the case of the former, some fines notwithstanding). The Economist notes that housing issues, offshore dollar finance, and the post-Great Recession rise in populism (which prevents a solution to the euro’s structural problems) continue to linger. Ben Bernanke, Timothy Geithner and Henry Paulson Jr. worry that Congress has de-regulated too much too soon.

Others argue that the crisis made us too afraid of risk, at least initially — particularly at the individual level. And that this is why the recovery has been so slow and, in turn, populism has been on the rise. Indeed, some note that the response to the crisis is why “the system is breaking now.” And still others highlight how the return of covenant-lite is Exhibit A to the argument that memories are short and any lessons went flying right out the window. Castles in the air theory reigns supreme.

Anyway, The Wall Street Journal has a full section devoted to “The Financial Crisis: 10 Years Later” so you can drown yourself in history all you want. This Financial Times pieceresonated with us: we remember embarking on the same prophylactic personal financial protections at the time. And how eerie it was.

But what haven’t we seen much of? We would love to see “A Man in the High Castle”-like coverage of what would have happened had AIG not been bailed out and been allowed to fail. The bailout of AIG has largely been relegated to a footnote in the history of the financial crisis — much like, as Levine implied, the failure of Bear Stearns. Make no mistake, it’s undoubtedly better off that way. But remember: the AIG bailout occurred one day afterLehman Brothers bankruptcy filing. It, therefore, didn’t take long for the FED to conclude amidst the carnage of Lehman’s failure that an AIG failure would do ever-more unthinkable Purge-like damage to the international financial system. In fact, many believed at the time that, through its relationships with all of the big banks and the extensive exposure it had to credit default swaps, that AIG was more strongly correlated to the international system (and hence more dangerous) than even Lehman.

After seeing what was happening once Lehman went bankrupt, this was simply a risk that the FED wasn’t willing to take. What if they were willing? Where would the world economy look like now? It’s interesting to think about.

One last note on AIG: Lehman had 25,000 employees. AIG is currently twice that. Even from the perspective of headcount, it was literally too big to fail.

Asset Values Soar: Human Asset Values. (Long Inflation)

Asset values have been soaring off into the stratosphere to the point that even Warren Buffett is complaining about a dearth of reasonably-priced opportunities (hence his short dalliance with Uber?). The FED, meanwhile, is keeping tabs on inflation; perhaps the Fed ought to look no farther than the legal world. It is experiencing two forms of inflation this week.

First, Milbank Tweed Hadley & McCloy announced that it was raising first year associate salaries to $190k and generally all associate salaries between $10k-15k. Choice bit from The American Lawyer:

“Two years have now gone by, and there is cost-of-living increases and inflation,” Edelman said. “We want to signal to the market that we do want the best, and we’re willing to pay for the best, and we think after two years, an additional increase is appropriate.”

Inflation indeed. As one biglaw partner told us a year ago, a clear cut sign of a market top is when biglaw firms raise first year associate salaries. Well, then…let the recession commence!

Indeed, nothing says "good timing" (or income inequality) like a pay raise to know-nothing lawyers at a time when Toys R Us’ fees are front page news and mad-as-hell employees are picketing KKR's offices. Sometimes biglaw can be its own worst enemy. More:

Edelman said the change would not have “a material effect on firm finances,” adding that he didn’t expect partner capital contributions to change.

Right. Because with 500 associates, the extra $5 million in expense will surely be passed on to the clients. Get ready for a fee increase folks. That’s something worth singing about in court even.

Anyway, we’re not hating. After all, Milbank needs to incentivize people to go to law school AND choose them over several other biglaw firms. Why would anyone do that if they can make $40k/month as a social media influencer? Why would anyone do that if they can be “Running a $500,000 Retail Empire by iPhone?” Good and serious question. That is the competition these days.

*****

Second, Weil Gotshal & Manges LLP announced that, in an effort to incentivize lawyers to stay, partnership (and, for some, counsel position) will now be offered to lawyers that have been with the firm for a mere 7.5 years. Per the ABA Journal,

Weil, Gotshal & Manges hopes to improve associate retention by cutting the wait for partnership by two years. 

Except, those "partners" will be non-share partners making “fixed income” rather than receiving partner distributions. And, except, further,

Lawyers in the niche counsel category for specialty practices can remain there as long as they stay at the firm. Lawyers in the other category get, at most, three years in the position. During that time, they may be promoted to partner. Those who don’t make it will be transitioned out of the firm.

Hahaha. C’mon. So you’ll basically have 10.5 years to prove that you merit equity partner before they unceremoniously toss you out into the wilderness…uh, sorry…”transitioned.” You know, rather than 9.5 years. But that new title though!! Title inflation!!

Query: where did Weil get that idea from? (Cough, Kirkland & Ellis). What's that saying: imitation is the sincerest form of flattery? We guess they’re waiting 7.5 years before labeling someone a “partner” rather than 6 years so, uh, there’s that. Just what biglaw needs: more lawyers running around with an inflated sense of self.

On point.