Pensions & the PBGC

Long Financial Shenanigans

It's hard to categorize anything relating to pensions as "interesting stuff" but we like to go out on a limb. The Pension Benefit Guaranty Corporation - an independent agency of the US government created to safeguard defined benefit pension plans - issued its annual report this week and it contained some astounding numbers. Before we get there, for the uninitiated, the PBGC runs a federally-supported insurance program for those workers across the US who have deferred wages in favor of potentially lucrative retirement benefits. You see this a lot in manufacturing and energy companies and pensions can become a particularly hot topic for bankrupt companies who can, subject to various statutory requirements, use the tools of the bankruptcy code to shed pension obligations. Indeed, the PBGC is/was an active participant in the bankruptcies of Peabody Energy ($BTU) and, more recently,Appvion Inc., among several others. The numbers: the PBGC reported (i) an increased deficit in its insurance program for multi-employer plans ($65.1mm up from $58.8mm) and (ii) a decreased deficit in its single-employer insurance program (falling to $10.9mm from $20.6mm). What does this mean? For one, that the PBGC, itself, is basically insolvent. After providing $141mm in assistance to 72 insolvent multi-employer plans in fiscal '17 (up from $113mm to 65 plans), the PBGC notes that demand for its assistance is only set to increase. With $67.3b in liabilities and $2.2b of assets...well...you do the math. They say they'll run out of money by 2025. How they will make it that long is beyond us. But, wait: we said there was improvement in the (entirely separate) single-employer program, didn't we? Yes, we did. Choice quote, "The PBGC said the drivers of its continued improvement include premium and investment income, as well as increases in the interest factors used to measure the value of future liabilities." We're not pension experts by any stretch but we take that to mean that the PBGC generously toggled the interest factor used in its projections to pretty-up its numbers. And because those deficit numbers are also predicated upon increased investment income in a time of high-flying markets, there is cause for concern for that "improvement" once/if the markets turn (depending on the investment mix). Last point here: if anyone here thinks - as boring as talk of pensions may be - that any of this pension stuff DOESN'T impact local, state and federal elections, well, you may want to wake up.

A Rare Post-Reorg Equity Star: Peabody Energy Inc.

The Restructured Coal Company Gets Good News

BOOM! Having court decisionscome down in your favor can be accretive.

Contura Energy = Latest Post-Reorg Equity

Contura Energy, f/k/a Alpha Natural Resources, filed its S-1 Registration Statement today looking to price an IPO of 6mm shares at somewhere between $23-27. We've noted the recent post-reorg equity bloodbath that has transpired in the energy space of late. Perhaps Contura can buck the trend. Unrelated, Peabody Energy ($BTU) traded up 2+% today. 

Post-Reorg Equities, Oncor, & Elliott Management

Paul Singer is Keeping Busy

We've previously discussed post-reorg equities here, noting the mild rollercoaster that Peabody Energy ($BTU) equity has been on post-emergence. This week Elliott International Inc. filed a 13-D highlighting increased ownership in the stock. Speaking of Elliott, the firm received additional time to further consider its bid for the Oncor assets it is purportedly competing withBerkshire Hathaway for. Here (video), Elliott's Paul Singer clowns on the value of Trump bonds. Elsewhere, a lot of bonuses just got flushed down the toilet as Basic Energy Services ($BAS) reported earnings and the stock promptly traded down nearly 20%. Management resorted to boring tropes about the weather and holidays affecting revenue.

Notable (Dodd-Frank, 3D-Printing, Post-Reorg Equity, etc.)

3D Printing. Increasing evidence of its rise from the CEO of Jabil Circuit Inc. ($JBL) - and not just for prototyping. If this continues to grow, it will have wind-ranging implications for manufacturing.

Alitalia. Apparently it's getting a lot of interest.

Credit Cards. Chargeoffs are on the rise. This helps explain, to some degree, why consumer spending is coming in below expectations.

Dodd-Frank. Peace out. We would love some investigative reporter to do a story on the hundreds of millions of dollars that were proffered to big law firms to draft "living wills" that nobody...like not one person...ever thought were based in reality to begin with. That said, not to get political but haven't we seen this deregulation movie before? 

Post-Reorg equity. Brookfield Asset Management has a hedge fund ($300mm seeded, unclear of size now) that is chomping at the bit for post-reorg equity. We're curious to know which ones they think are attractive as several have flat-lined without having a large institutional sponsor underlying the stock. Peabody Energy($BTU), Midstates Petroleum ($MPO), Basic Energy ($BAS), Goodrich Petroleum Corporation ($GDP) and Sandridge Energy Inc ($SD) come to mind.

Radio Shack. Interested in some esoteric home furnishings? Well, interestingly, the carcass of Radio Shack remains up for auction and you can get a piece of it for your crib.

Simon Property Group ($SPG). We've beat these guys up ad nauseum because we don't buy the BS they're feeding us about how healthy they are - despite the noted new "click-to-brick" folks above and the opportunity that may present. This is a reason why. And we expect to see more of this.

Private Equity Dogs = No Fortune 500 $KKR $BTU

The Fortune 500 list came out and one of the companies that fell off of the list is KKR ($KKR), with causation linked to the firm's horrendous Samson Resources investment. Ouch. Peabody Energy ($BTU) was another notable fallen star. Elsewhere in private equity, Paul Singer of Elliott Management Corp. gives zero f*cks about what we all think. And, interestingly, Avenue Capital Group israising a second distressed energy fund (of $1b AUM). There is a boatload of dedicated money to distressed energy still waiting on the sidelines and so we find it interesting not that Avenue believes it can raise money in this space but that it can deploy it - at this juncture and in this competitive landscape - on opportunities that will provide a good rate of return. That's obviously not a bullish sign for the space. If they're right. Finally, stay tuned for a new report on the net job effect of PE from HBS researchers. In brief, the previously study - which subsumed data through 2005 - showed only a "modest net impact on employment." PE firms loved that sh*t because it made them look not-so-evil. What's happened a lot since 2005? A lot of PE. And a lot of dividend recaps. Popping popcorn and waiting for the new findings....
 

Interesting Restructuring News

• 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 2/12/17

• Coal. Prices have risen and Trump is promising assistance. Is this enough to offset sagging demand? China's new measures aren't helping. But the capital markets are, as Peabody Energy, Arch Coal, and Contura Energy are all taking advantage of cheap financing/refinancing options. Peabody shopped an upsized term loan (by $450mm) with revised company-favorable pricing; it also issued new notes and bonds. Amazing how quickly things changed with coal.
• Chicago. S&P is making threats. 
• Electric Vehicles. Something tells us that oil and gas management teams and their wildly astute restructuring bankers and advisors neglected to bake this element into their business plans. 
• European Debt. Increasing concerns about Italy and Greece. Meanwhile, in France, CVC Capital Partners' owned vehicle leasing firm Fraikin has hired Rothschild to restructure its 1.4 billion Euro debt. Lazard will represent the mezz debt.
• Moelis & Co. & Aramco. "Ken of Arabia"? C'mon, that's just dumb.
• Power. California has more power plants than it needs. After a slate of power-related bankruptcies, it looks like there is more hurt to come in this space. And big developments on the storage side probably won't help. And this new cooling tech won't help either - if it's legit.
• Retail. And people wonder why private equity is vilified...case and point: Rackspace. Speaking of private equity, Canada Goose's proposed IPO reeks of a dump-and-run on greater fools. Millennials don't spend money, but Bain Capital will have us believe that $900 fur-lined jackets are the exception to the rule. Riiiight. 
• Retail Part II. Organized Retail Crime = massive problem. 
• Retail Part III. Gander Mountain = toast.
• Retail Part IV. Amazon announced that the number of third-party sellers on its B2B site has reached 45k, up about 50% from the approx 30k sellers it had at the end of Q2...IN JUNE.
• Return of the Maturity Wall. Nothing gets restructuring professionals' juices flowing like sexy maturity stats. So, here it is: $2 trillion of corporate debt comes due in five years. And this is, in part, because the capital markets are definitely wide open right now in the face of soon-to-be rising interest rates. Take THAT wall, President Trump! 
• Sears. Everyone is looking at this oncoming trainwreck and wondering "when?", not "if." Nice recent CDS movements on it but then the company unearthed a remarkable $1b in cost savings. Like, out of nowhere. And, naturally, the stock soared 25+%.
• Spotify. Typically there are tremors before the earthquake. Perhaps Filip Technologies, Violin Memory, and Nasty Gal are the tremors foreshadowing a venture debt-backed reckoning on the horizon. It's unclear. But, in Spotify's case, the interest ratchets attached to $1b of debt get more and more expensive with each consecutive quarter sans IPO. A big "unicorn" is going to fail and fail big. Spotify may not be the one, but it ain't looking great. But that one IS coming (Zenefits anyone?). Along these lines, how the eff is Theranos not bankrupt yet? 
• Takata. Inching towards bankruptcy.
• Fast Forward: Most retail-focused restructuring pros emphasize "omni-channel," the latest retail buzzword that, practically speaking, means basically nothing in today's climate. Case and point: Neiman Marcus, which was downgraded this week with projected 10x leverage on $4.77b of debt. Most of the cap stack traded at new lows this week. Omni-channel ain't a panacea, it appears.
• Rewind I: This result for Relativity Media sure sounds positive.
• Rewind II: The grocery space is getting hammered so badly that now even Whole Foods is retrenching, shutting more stores than it's opening go-forward.
• Chart of the Week: