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

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:

Music Disruption (Short the Rock Star)

What do Paul McCartney, U2, the Rolling Stones and Eric Clapton Have in Common?

Music Disruption (Short the Rock Star). Many of you probably went to see Paul McCartney this week (jealous). The guy is 8394 years old and still touring. Why? Probably because there's no money in the music business other than touring. That might also explain why U2 - a classic Hall of Fame band that literally has to GIVE its album away - keeps touring (and ANOTHER tour is on the horizon). Rolling Stones? Check. Eric Clapton? Check. Meanwhile, Spotify is looking to circumvent an IPO, Tidal is looking for a buyer (while Kanye and Jay-Z sue each other), and Soundcloud needed a bailout. All of which is to say that Liam Gallagher is 100% right here - except the streamers are also making "nish" (amusing video). Which begs the question: is anyone winning in music today? Taylor Swift?
 

Notable (Abercrombie, Halcon, Sears Canada & More)

Abercrombie & Fitch ($ANF) see-sawed its own stock after proclaiming that it would seek a buyer (stock went up) but then, a mere few weeks later, indicating that it had terminated the sell-side process. The shares plummeted 21%.

Halcon Resources Corp ($HK) plans, per Reuters, to sell its North Dakota operations for $1.4b in cash as part of a broader (and smart) plan to shift its focus to the lower cost-basis Texas' Permian Basin. The stock popped on the news. The piece makes it sound like this is the CEO's grand vision - as if he's not getting a tremendous amount of pressure from his new(ish) credit-oriented short-term-oriented overlords. 

Hedge Funds. Apparently the business isn't as bad as previously thought. That is, unless these investments in Puerto Rico bonds crater.

India (Geographical arbitrage). Hey you. Yeah, you, Associate sitting in New York with a 15 year path to partnership. You may want to consider moving to India and becoming an expert in the new Insolvency and Bankruptcy Code there. Apparently nobody there has a clue what the hell is going on. You may be able to fast-track your career. We want credit if you pull the trigger.

Professional Athletes (Short Personal Finance Wherewithal). Livan Hernandez, who made $53mm over the course of his baseball career, has filed for bankruptcy. Seriously, what the hell is wrong with these guys? 

Sears Canada. C'mon. Eddie Lampert, the King of Bad-Money-After-Good (aka all things Sears ($SHLD)), is reportedly considering a deal for Sears Canada. Officially, the company has hired a joint venture between Gordon Brothers Canada ULC and Merchant Retail Solutions ULC for the liquidation of inventory/FF&E of 45 locations and is actively pursuing a transaction: over 20 parties have signed NDAs.

Tea (Short Retailing it). Small potatoes relative to the universe we typically cover but given that Capital Teas Inc. was once a 22-store retailer of, well, tea, and is now bankrupt, we figured we'd note it. We particularly love how the company didn't even bother to update its "bio," of sorts, noting that it was honored as a member of The Inc. 5000, "the nation's fastest growing private companies." Well, not anymore, obvi. The company plans to shutter 10 locations as part of the bankruptcy. If that is considered "fastest growing," the US is even more effed than we thought.

True Value. This is not a distressed candidate - not with $1.51b of revenue in '16 - but the fact that the private company is reportedly looking to market itself is telling in this age of Amazon. The home improvement space is largely thought to be impervious to the "Amazon Effect." At least, that is the narrative behind investing inHome Depot ($HD) and Lowe's Companies Inc. ($LOW). Perhaps people are worried about the narrative? Perhaps they're just looking to take advantage of a potential strategic acquirer tapping capital markets? Interesting.

WeWork. We admit: we're obsessed with this company. On the heals of closing its $760mm Series G round valuing the company at $20b, this startup now officially has a larger valuation than publicly-traded office REITS like Vornado Realty (which we covered here) and Boston Properties. Makes. Total. Sense. Jokes aside, it has inserted itself as a platform for companies like GM, IBM, Spotify and Salesforce, effectively being the office manager of choice. Interesting model. Can't imagine this remaining in a downturn when companies need to look for ways to cut costs. 

Chart of the Week I (Digital Music)

This is technological disruption illustrated. The demonstrable change in recorded digital music revenue generation...even as Spotify continues to bleed cash as users "lov[e] it to death"...

The Apple Effect - $P, $AAPL, $FOSL

As the markets wait to see what happens with Spotify, Pandora ($P) is now looking to explore strategic alternatives (and we're listening to"This House is on Fire" by AC/DC as we listen to this). Is this also Amazon Effect? The Apple Effect? After Rdio filed for bankruptcy not long ago and Soundcloud has taken on more debt, it's clear that the music space is still in flux with the big players crowding out the smaller guys. PS. Since we're so sick of hearing about the "Amazon Effect," we'll double down on the "Apple Effect": Fossil ($FOSL) watches appear to be feeling it.

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.

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• 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: