⚡️A Quick Update⚡️: The Bon-Ton Stores

On Monday, The Bon-Ton Stores filed a motion seeking permission to pay a $500k diligence fee to a combination of DW Partners, Namdar Realty Group, Washington Prime Group Inc. ($WPG) and AM Retail Group Inc. in connection with a signed letter of intent to purchase the company’s assets. The former three firms would seek to own all of Bon-Ton’s assets other than a distribution center, which would go to AM Retail. The company also postponed its sale auction to April 16. The purchase price is:

“…no less than (i) an aggregate purchase consideration sufficient to have a minimum excess availability of 22.5% at closing; and (ii) a minimum aggregate cash payment of no less than $128,000,000.00 (the “Baseline Bid”), a sufficient portion of which shall be funded into an escrow account to pay fees and expenses (including professional fees) associated with the wind-down of the Debtors’ estates after the Closing.”

In filing the motion, the Debtors champion that this bid is the only bid it received by its bid deadline that would allow for the Debtors to continue to operate as a going concern rather than liquidate; it is the only bid that would have the effect of:

“saving over 20,000 jobs and preserving a 120-year-old business that is a significant customer for its vendors, an anchor tenant for many of its landlords, and the leading hometown department store for millions of consumers in local communities throughout twenty-three (23) states.”

This will, no doubt, be a controversial course of action as certain creditors have been pursuing liquidation since the petition date.

Four things of note:

1. The minimum cash consideration offered — the $128mm — is INCLUSIVE of professional fees to fund the wind-down of the case. With only one Operating Report on file with no professional fees paid to date, it’s unclear how much of that consideration will actually inure to the benefit of the estate.

2. The offer is contingent upon a “[d]emonstrable commitment…by a substantial number of the Debtors’ existing landlords and trade vendors…to support the Company’s liquidity needs at close and through a period of no less than one year from the closing date….” In other words, this is very much pay-to-play: if landlords and vendors want to benefit from Bon-Ton remaining a going concern, they have to agree, upfront and for one year, to engage in rent and receivables forgiveness. What do they do? This is the quintessential “cutting off the nose to spite the face” dilemma.

3. The Official Committee of Unsecured Creditors filed a “Statement” last night supporting the proposed diligence fee; it analogizes this case to Aeropostale and notes how the work fee there helped encourage a going concern transaction. It said the diligence fee and a going concern offer “…is the last and only hope to save Bon-Ton from the fate of so many retailers that have filed for bankruptcy during this ‘retail apocalypse.’” Dark and stormy. We dig it.

4. Morgan Stanley Research analysts are bullish on the transaction for the mall operators. Per CoStar,

“If they were to lose Bon-Ton as a tenant, cap rates for their malls would likely widen if given the risk of co-tenancy and capex requirements to redevelop. 

But it could also be somewhat of an offensive move. It's possible that the landlords could place Bon-Ton stores in malls where they have a big box vacancy. 

’We can't help but think this would be a competitive advantage for these two mall landlords relative to their peers,’ the two analysts said. ‘First, they could choose to keep open stores at their properties while closing others at competing locations. Second, it could provide them an opportunity to buy malls from their competitors at more attractive valuations if there is a risk of losing a major tenant.’”

This is retail today, ladies and gentlemen.

Oil Field Services (Not Out of the Woods)

It has been a bloodbath for the midstream segment of the oil and gas industry the past two years. With oil mired in the mid-40s and talk of peak supply, "It is now consensus that global oil markets will swing into surplus in 2018 and the burden of proof that this will not happen lies with the bulls," said Morgan Stanley analyst Ole Slorer. Others are calling oil to $30. Ruh roh.

Notable (Goldman Sachs, Puerto Rico, Lazy Media & More)

  • Gibson Dunn & Crutcher LLP. Better late than never, we guess. The firm has announced the acquisition/growth of its oil and gas team down in Houston. 
  • Goldman Sachs. Somehow its poor quarterly performance - largely due to poor distressed desk trades - is Morgan Stanley's fault. 
  • Lazy Media. Perhaps the folks at Fortune should call us because their research skills are soft. The other day Fortune reported on Quantum Partners' purchase of Violin Memory out of bankruptcy. Of note, QP is a fund tied to billionaire George Soros. The article - not particularly informative in any way whatsoever - doubled-down on its uselessness by noting that "terms of the deal were not disclosed," which, for those of us who know better, reeks of journalistic laziness. Why? Well, of course the terms needed approval by the bankruptcy court and so they were 100% publicly available. $25.6mm (including the DIP/exit facility rollup). Just saying.
  • Puerto Rico. Apparently it has been a distressed investing quagmire
  • Owl Creek Asset Management is shutting down its Asia fund, voluntarily (cough cough) chopping 10% of AUM off. An interesting move considering a general view that there'll be a lot of opportunity there...
  • Varde Partners, a $12b US-based buyout and distressed investing firm, is turning its attention to Asia.