Notice of Appearance: Joshua Sussberg, Partner at Kirkland & Ellis LLP

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This week PETITION welcomes a notice of appearance by Joshua Sussberg, Partner in the New York office of Kirkland & Ellis LLP.

PETITION: What is the best piece of advice that you’ve been given in your career?

“Always be the most prepared. Period. Whether it is a call, meeting or court appearance, be the most prepared person there. This piece of advice is something I do not forget and pass on.”

PETITION: What is the best book you’ve read that’s helped guide you in your career?

“A Civil Action. It was a requirement to read heading into law school and I went back and read it again years later. It teaches that one lawyer can ultimately make a difference. It also speaks to, and without question demonstrates, the high stakes and personal commitment the profession requires and demands. A must read.”

PETITION: What is the one product that helps make you a more efficient or relaxed pro?

“Wireless headphones. Airpods. But it really can be any wireless headphones at all.…”

PETITION: Cool. Anything interesting you’re listening to at the moment?

"Top hits on Spotify!”

PETITION Note: You’re one in (70) million, Josh!

PETITION: What is one notable trend you expect to see in ’18 that not enough people are talking about?

“Restructuring professionals spend lots of time these days talking about the retail, oil & gas and the healthcare sectors, with much less attention being paid to real estate (both commercial and multi family). While there is still a lot of capital in the market place, rising rates and lower rents may pressure this and cause dislocation later in the year.”

PETITION Note: We agree, Josh. We’ve been writing since our inception that the cavalier attitude that many players in the space have taken vis-a-vis the real estate sector is mistaken. If anything, the recent low price offered by Brookfield Capital Partners for General Growth Properties may be the canary in the coal mine for commercial real estate. Note also, this, relating to the liquidation of The Bon-Ton Stores:

More in REIT-Ville $SRC $NNN $GGP

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Spirit Realty Capital Inc. ($SRC) reported numbers and promptly traded down 23% after experiencing an "abnormally high credit loss." The REIT's largest tenant is Shopko, a non-bigbox bigbox with 363 stores in the Central, Western and Pacific Northwest regions, some of which just happen to be shuttering. Shockingly, this uncoming dumpster fire isn't a Sun Capital Partners portfolio company...oh wait, yes...yes, it is. Elsewhere in REITs, National Retail Properties Inc. ($NNN) traded down 5% despite an abnormally high occupancy rate (99%). NNN is home to many stores of bankrupt Gander Mountain, the effect of which management declined to fully articulate - though they did seem to go out of their way to complement Camping World in a desperate attempt to not look so desperate. General Growth Properties also reported this past week and the stock quickly shot down.

Interesting Restructuring News

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  • Busted Tech. This is becoming a regular topic. After LivingSocial (remember LivingSocial?) and its $6b valuation sold for bupkis, serious doubts now surround its acquirer, the publicly-traded Groupon. 
  • Lit. Google released the results of a survey showing what is currently considered "lit" (read: "cool") among the teen and millennial demographics. A few observations: 1) Ivanka Trump's brand was conspicuously missing and so clearly there is a high probability of this being "fake news" (yes, we're joking); 2) Netflix and YouTube are the two highest rated brands in both demographics which certainly raises questions about conventional media companies; 3) Tesla is considered the coolest auto company despite not necessarily having the highest brand awareness (nevertheless a positive leading indicator for electric vehicles assuming a) these idiots will drive, b) they'll have money to buy a Tesla, and c) Tesla can manufacture enough cars to meet the supposed demand); 4) Still, car brands across the board are cooler to millennials than teens which raises questions - in the face of autonomous cars - about what car ownership may look like in the next decade; and 5) there is little to no consumer products representation in the "cool" zone outside of footwear and electronics (gaming, Apple, GoPro) which speaks volumes about why we're seeing as much pain in the retail space as we have been. Notably, Uniqlo, Zara and H&M - favorite excuses for why conventional retail is, gulp, out of fashion, are all middling in the 6.5 area. Footnote: Quicksilver looks to have subpar awareness and "lit" ratings which begs the question: how long before Oaktree Capital Management flips it...?
  • Post-Reorg Equity. Apparently filing for bankruptcy hasn't turned out too badly for certain oil and gas executives who find that they're realizing a lot of upside value through the reorganized equity of their companies (WSJ firewall). Elsewhere, upon release back into the market, Peabody Energy's equity initially traded up 3.5% only to flip-flop and go negative by over 12% by market close on Tuesday. #MAGA baby! Coal is, uh...back??
  • Professional Fees. The American Lawyer seems to have it out for bankruptcy professionals these days as it seems freakishly obsessed with professional fees: in this instance, Weil's fees representing Westinghouse. 
  • Restaurants. "There's been an oversupply for 10 years in our industry," says the Darden Restaurants CEO Gene Lene upon announcing the acquisition of Cheddar's Scratch Kitchen. Still, the fast casual space is showing signs of strength: most notably, Panera Bread's stock popped upon acquisition news earlier this week.
  • Retail. We really tried to stay away from retail this week because, like you, we're just tired of the story. But, here (video), Jason Mudrick of Mudrick Capital Management provides some interesting thoughts on how to trade the space. This isn't new ground, necessarily, but for the less-initiated, his comments on the difficulty of shorting retail debt may be educational. Note, however, that his views are disputed by analysts at Citi who claim the CMBX trade is over-crowded and that CDS is, in fact, the way to go. Either way, his overall thesis seems a bit inconsistent to us. On one hand, he indicates that the "Amazon effect" (lazy) is leading to a secular decline in retail, generally, but on the other hand he leaves us with the impression that only the lower tier malls will be affected. If the "Amazon effect" is what it is and our parents will die and our kids only shop online (paraphrasing here), why isn't he mentioning the A tier malls as well? This seems to be a blind spot within the restructuring space generally. As we've noted, General Growth Properties and Simon Properties are appearing in the vast majority of these retail cases - even the little ones that nobody appears to have heard of prior to the last few months. Now, granted, there's something to be said for the "replacement value" argument: but are these mall operators really filling vacancies fast enough to maintain revenue and, if so, who is filling the void? Warby Parker currently has 47 "retail locations" (a term we use loosely because this includes small kiosks like the one in the Los Angeles Standard Hotel - basically a cart). Bonobos has 31 locations. Cuyana has three locations (one a pop-up). Birchbox has one location. And most of these are in major cities so not even necessarily in malls. And, directing you back to "Lit" above: we don't see much mall-based retail on that survey - "A" mall-based retail included. So then what? Chiropractors, dentists and clinics? Seems thin. All of this said, the WSJ reported that "the national retail-property market is holding steady," using flat vacancy rates as its measure across shopping centers, regional malls and neighborhood and open-air shopping centers. And mall operators, naturally, are talking a big game. Curious. (*Note: if anyone is interested, we do have a 50+ page hedge fund presentation outlining the CMBX thesis. Let us know).
  • Retail II. DAMN IT, retail, we just can't quit you. More from this past week: 1) Citi cut both L Brands and Urban Outfitters from buy to neutral, 2) Ralph Lauren announced the closure of its Fifth Avenue flagship store (with additional closures to come), 3) Bebe Stores announced the closure of its 34th Street store (great quotes within) and 4) the discount space saw some consolidation as Dollar General scooped up Charlotte-based Dollar Express, a Sycamore Partners company. We can therefore add this to our #MAGA! sub-category given the 2700 jobs slated to be cut. SO. MANY. JOBS. LIKE. REMARKABLE.
  • Second Order Effects....of advancing car tech. We previously covered Benedict Evans' presentation on the rise of mobile and made some abstract statements relating to second order effects of mobile phones and electric/autonomous cars then. Here, Evans goes a bit further in what makes for a long but interesting read about industries that ought to brace for change (thanks to our friends at Hilco for forwarding to us). TL;DR: car suppliers, machine tooling, car repair, gas stations, convenience store retailers (and, by extension, snack & tobacco providers), building power generation providers, safety equipment manufacturers (i.e., airbags - this is thin, we think, and airbags will probably still be in cars for the foreseeable future), parking operators, truck stops, etc. Of course, this all presumes mass adoption in the time frame the herd generally suggests: 5-10 years. There are notable naysayers.
  • Sungevity, a Piece of the Solar Story & Real World Ramifications. Yikes. This is a STINGING synopsis of the downfall of Sungevity, a solar company that recently filed for bankruptcy (our summary and case roster is here). To be fair, the writer seems to have some sort of ax to grind with the company but the comments taken from Glassdoor are, in many respects, heart-breaking and serve as a real-world reminder that while they may line your pockets and juice your bonuses, these cases hurt people. Remember that. 
  • Venezuela. With a state oil company debt payment of $2b looming on the horizon, investors are speculating about the likelihood of default.
  • Fast Forward: Someone just please put Seadrill Ltd. out of its misery. Per Bloomberg, rue21 is due any day now. Sequa Corp....finally. And metals/mining looks like its back on the map with the announcement thatA&M Castle & Co. will be filing a prepackaged bankruptcy shortly.
  • Rewind I: We've been spending a good amount of time highlighting busted tech lately and so we'll add another (per Fortune): Yik Yak. For the uninitiated, Yik Yak was a high-flying anonymous social media app that garnered $73.5mm of VC from Sequoia Capital at a valuation over $400mm. Now it is effectively selling for parts (to Square?) in a manner that likely won't even cover the VC. Ouch. I suppose we can call this the "Snapchat Effect."
  • Rewind II: Ashley Stewart, a plus-size retailer that was in bankruptcy in 2014 opened its first new store last weekend, a counter-narrative to the doom-and-gloom otherwise hanging over retail.
  • Rewind III: We've covered Spotify at length and this week's news of a potential direct listing rather than an IPO is interesting. And goes to show what we've been saying: that convertible venture debt it took on is getting expensive.

News for the Week of 01/22/17

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  • Distressed Investing. A short discussion of opportunities in post-reorg equities.
  • Fraud. With lofty valuations and lofty P/E ratios come lofty expectations. And fraud. Here's hoping this is confined only to tech. 
  • Hospitals. They're going away.
  • Malls. Simon Properties and General Growth Properties take a hit from The Limited Brands bankruptcy, which is only valuable on an IP basis. But don't worry: pop-up stores and pickup centers will ease the pain. Wait, what?
  • Mexico. Pemex is selling a baseball field to sure up liquidity. Yes, you read that right.
  • Retail & Retail Analytics. Some analytics around retail. Meanwhile, in the face of talk about renewed IPO activity in '17, Claire's Stores unsurprisingly abandoned its IPO, further calling into question Apollo's $3b take-private transaction. And then there's BCBG trainwreck. But hope is not lost for physical retail: a number of e-commerce retailers are increasing their physical presence, including Bonobos, Rent the Runway and others.
  • Rewind I: More on the Dallas pension fiasco.
  • Rewind II: New developments with Takata pummel the stock.
  • Chart of the Week: