⚡️Notice of Appearance⚡️ - Gregory Segall, Chairman and CEO of Versa Capital Management LLC

 
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This week we welcome a notice of appearance from Gregory Segall, the Chairman and CEO of Versa Capital Management LLC.

PETITION: Everyone is talking about "too much money chasing too few deals." Can you enlighten us a bit as to your experience looking to acquire or invest in middle to lower middle market companies (in or out of bankruptcy)?  

Can safely say the conventional ‘distress cycle’ has been hyper-extended by the combination of low interest rates, multiplying sources of non-bank lending sources and economic strength. We track the outcome of all deals we do not buy and our number one competitors at the moment are either “liquidated” (i.e., too sick to save) or “refinanced” (i.e., found someone who let them kick can down road...again). But at the end of the day, the cycle has been delayed, not denied, so our mantra remains “Distress 2020!” (unless it’s 2021...)

PETITION: Given how disruptive technology has become and how quickly "change" appears to be occurring, how do you evaluate management teams and scrutinize their projections today? Have you changed any methodologies from, say, 10 years ago?

I see two layers to the question, one being the effects on a business of technology and how that impacts projection reliability, and then management competency in making projections. On the former, most everyone’s crystal ball has been off both in identifying where technology may be applied to or disrupt a given business’s expectations. On the latter, the quality of management projections, whether 13 week cash flows or 5 year valuation models, is usually a function of how long a given companies business cycle is (ie fast food has pretty good short term insight but pretty foggy about 1 or 2 years out, vs. building locomotives usually cannot do much about short term but can have pretty good visibility over the medium-longer term given the procurement cycle). Sprinkle all this with the question of management’s competency and command of the business, both from the forest and the trees, and that will tell you something about projection reliability.

PETITION: Versa owns Avenue Stores since its 2012 bankruptcy. The company once had 500 stores and now, according to its website, it has 262. What lessons have you guys applied to that business and what continued evolution is in store? Where do you see retail in 5 years? 10 years?  

When we acquired Avenue its store base was immediately pared to about 300, and over the last few years the company has been letting leases roll off where stores are less productive; fortunately Avenue has always had a strong and sizable eComm/direct business (~33%) so the store roll off gets offset by ecomm growth, and going forward where possible a retailer like Avenue can operate in a much smaller footprint (ie 3,000 sqft instead of 5-6,000) and therefore more profitably so they are executing that shift wherever they can. Retail will continue to transition for years to come, and it is somewhat helpful that landlords are starting to become more realistic about the need to make accommodations or lose tenants.  “Retail” has always been a rough neighborhood; I expect it always will be whether 5 years or 10 years out, will just be a new set of challenges.

PETITION: The bankruptcy business has changed considerably in the years you've been in the space. What is the biggest issue you see today with the bankruptcy process and what's your remedy to solve it?  

Aside from the bankruptcy code looking like the tax code in terms of all the “special interests” getting their fingers in the pie going back to the BAPCPA amendments, there used to be a much greater emphasis on seeing debtors reorganize. I won’t be the first to observe that most mid-market debtors “can’t afford to go bankrupt” given the cost and other pressures including timing and all the parties who keep trying to elevate their priority resulting in rapid administrative insolvency. Since “high costs” are certainly a difficult issue but almost impractical to reduce to a fixable sound bite here, If I had to choose one or two remedies it would be getting rid of or extending the shortened deadlines for lease assumption or rejection, as well as reducing the number and kind of pre-petition creditors that can elevate their claim priority.

PETITION: In addition to a lot of accomplished, senior folks like yourself, we have a great number of junior professionals and students that read PETITION. What is your advice for them? What is the best book you've read that's helped guide your career?

When starting out early in your career, don’t every view any task as being beneath you - add value by being seen as a go-to resource, make yourself like fly paper and things will stick to you, increasing your role and experiences in your organization. As for a book (or four), gIven how often it is cited It seems almost passe to reference Sun Tzu, but it is a great book on strategy and tactics; also recommend “How to Win Friends and Influence People” by Dale Carnegie, another classic - success in this business, or really in any, is often all about working with people. Regardless of your politics, “Rumsfeld’s Rules” is also a terrific summary of common sense management techniques from a guy who has had enormous public and private sector experiences. And finally from the standpoint of bankruptcy, I highly recommend “Feast for Lawyers” by Sol Stein - if you can find it, a great if slightly dated primer on the reorganization process, and a great read - more like a novel though based on true stories.

PETITION: Thanks, Greg.

News for the Week of 2/26/17

  • Busted Startups. Here, Beepi. Despite $150mm of VC and a last raise at a $564 valuation, the used-car marketplace is selling for parts, with Sherwood Partners acting as assignee. With auto-lending for new cars at subprime levels, this capitulation isn't all-too surprising.
  • Busted Startups II. Some argue that part of the failing brick-and-mortar narrative relates to delivery services like Birchbox. Maybe not. Trunk Club sold to Nordstrom and has languished and now JackThreads looks like it's worth JackSh*t
  • Clean Energy. Challenges. But progress with storage.
  • Disruption. The fall of Blackberry.
  • Distressed Investing. In malls. These guys have cajones.
  • Greece. Remember the bailout controversies that sent the markets into a tizzy a few years back? Yeah, they're back. Europe looks staged for a lot of volatility in coming months with elections looming in France and Germany. This could create some real interesting investment opportunities. Of course, that's what people said of Brexit, too.
  • Power. Maybe. Maybe not. This week the denials poured down from Toshiba re: Westinghouse. Meanwhile, FirstEnergy drops some bombs in its investor presentation.
  • Restaurants. Five chains that look like dogsh*t in 2017.
  • Retail. Apparently President Trump's promises to make America great again did not take into account all of the vitriol that would be unleashed towards his brands and resulting domino effect: case and point, Perfumania, which was teetering BEFORE folks wanted to wash themselves of the Trump stank. Speaking of mall-based stench, L Brands' Victoria's Secret ain't looking so hot these days as forward guidance looked bleak. And Amazon announced the release of its discount bras. Cue Jaws theme song.
  • Retail II. People have been talking about Toys R' Us for years and in '16 they took steps to deal with the over-levered balance sheet. The company continues to cut costs on the ops side too. Meanwhile, other companies like J.Crew are engaging in Intellectual Property machinations to stave off the inevitable and raise financing - the legality of which remains an open question.
  • Retail III - Department Stores. AlixPartners makes a cameo appearance in this interesting summary of the state of department stores. Choice stat: "As recently as 1999, department stores had total sales of $230 billion. Last year they came in at $155.5 billion, according to Census data." Accordingly, JC Penney is closing 140 stores (and probably still has 300 too many) and Sears is continuing to cut costs with 130 HQ firings. On point, Macy's reported numbers this past week. And so did Walmart - and the market initially responded in a way that is a smack to Warren Buffett (see last week's newsletter). Meanwhile TJX Cos. (TJ Maxx, Home Goods, Marshalls) showed that brick-and-mortar still has some legs (as did Nordstrom).

  • Fast Forward: Ocean Rig acknowledged that it's effed and the stock took a dive: a possible bankruptcy is on the horizon. And Cumulus Media had a setback in its efforts to restructure.
  • Rewind I: Sporting goods - analysts are starting to notice the massive bloodbath and, accordingly, downgraded Dick's Sporting Goods.
  • Rewind II: Let's hope that Sycamore Partners' purchase of The Limited fares better than Versa Capital Management's investment in Eastern Outfitters. $26.8mm price tag. Meanwhile, Wet Seal is available.
  • Chart of the Week
  • Tweet of the Week:

News for the Week of 2/5/17

  • Athleisure. Start the funeral dirge. Under Armour reported dreadful numbers and guided poorly, citing the Sports Authority bankruptcy as a reason for decreased exposure to product. Then S&P kicked UA while it was down, downgrading its corporate credit rating from investment grade to high yield. It's not a restructuring candidate with double-digit growth but its results don't bode well for retailers, generally. Good thing J.Crew is NOW starting to focus on athleisure.
  • Avaya. Doing a little damage control.
  • Cumulus MediaWhat the public is learning.
  • Europe. Some expect a bigger year for restructuring in 2017.
  • Private Equity. Some doubts about portfolio quality.
  • Solar. The technology continues to take hold and grab share but there'll be a lot of carnage along the way. Meanwhile, Exxon got pummeled, noting over $2b in writedowns.
  • Retail. As distressed investors and bankruptcy professionals lick their chops over the possibilities with rue21True ReligionClaire's StoresJ.Crew and others, "fast fashion" gets a second look as a culprit in the demise of retail (adding to the typical Amazon narrative). Still, even H&M and Uniqlo have announced intentions to scale back growth plans and/or close stores in the US.
  • More RetailThe Finish Line Inc. announced its sale of Jack Rabbit Sports this week (66 locations) for undisclosed terms. "Undisclosed terms" = GU gels and a jock-strap. Peter J. Soloman served as financial advisor. The quote, "The acquisition eases fears that the chain would face liquidation with no strategic buyers for the business"...basically sums up specialty retail. Reasons for the company's struggles are particular to specialty running stores, including, notably a marked decline in marathon participation. It's just not that easy to take a selfie while running 26.2.
  • Morer Retail - Canada. Once high-flying e-commerce startup Shoes.comcapitulates under the weight of multiple lawsuits, thwarting an IPO. In addition to shutting down the e-comm channels, the Vancouver-based company will shut down two brick-and-mortar locations - effectively flushing $45mm of PE down the toilet. Still, that URL seems like it would fetch some value...
  • Fast ForwardWalmart is looking to disrupt Amazon while Amazon is looking to disrupt Alphabet and FacebookAnd UPS. In other words, Amazon is after EVERYONE.
  • Rewind I: Usually we reserve "rewind" for topics we've discussed in previous weeks but we're making an exception here: apparently HMV still exists in Canada. Or did. What a major blast to the past. What were they selling, exactly, 8-tracks?
  • Rewind IIPayless Shoes4400 stores? Wow.  Apropos, retail now the sector with the most distressed debt. In other retail news worth a rewind, Sports Direct is reportedly in talks to acquire Eastern Outfitters, the parent company of Bob's Stores and Eastern Mountain Sports from Versa Capital Management out of bankruptcy. If those names sound familiar, it's because Versa literally just bought them in bankruptcy last year in the Vestis Group case. So, add this to the growing list of Chapter 22 cases. 
  • Rewind III: Given our revelation last week of the connection between Puerto Rico-Dentons-New Gingrich, its intriguing that Greenberg Traurig is distancing itself from another Trump supporter.
  • Chart of the Week: Sometimes to disrupt the incumbents, you have to bleed cash like nobody's business...

News for the Week of 01/15/17

  • Canada. Predicting lots of doom and gloom.
  • CovenantsSome developments in the capital markets thanks to recent activity with makewhole provisions - including "the end of covenants?". 
  • Fees. It was only a matter of time before there was a new chapter in the always inevitable vilification of restructuring professionals due to fees. Instead of a front page story about Lehman or TXU in the WSJ, here the Houston Chronicle highlights oil and gas cases.
  • Fund Performance. Bloomberg does IR work for Brigade Capital Management, highlighting the asset management company's purported big '16. And for Mudrick Capitalnoting the fund's turnaround after a period of high profile poor performance.
  • Let's Get Technical. For you geeks who love worrying about CDS, high yield bonds and liquidity, this report is for you.
  • Municipal Trouble: we've talked about Dallas in the past and now Providenceis in the crosshairs.
  • North Dakota: In a shocking development, the state's forecasts did not account for the upheaval in the energy space: just a mere billion short.
  • Radio. Pros focused on radio-based media situations ought to take note of what is happening in Norway, which is now the first country to completely switch off its FM radio network and convert entirely to digital. Meanwhile, in the streaming music space, Soundcloud bankruptcy rumors continue to increase (we called it).
  • Sears. We're tempted to run a pool to gauge when this sucker FINALLY files for bankruptcy but like the villain in Die Hard, Lampert will probably find a way to keep the thing coming back.
  • Rewind IGarden Fresh Restaurant has sold to Cerberus Capital Management in bankruptcy. Sun Capital's pain is Cerberus' gain. Speaking of Sun Capital, it seems they made out okay with their Limited investment thanks to distributions and dividends. To summarize, they made 1.8x their initial $50mm investment. And 4000 people are losing jobs.
  • Rewind IIGilden Activewear Inc. will acquire American Apparel for $88mm, a premium to the original stalking horse bid. Meanwhile, Nasty Gal received approval to sell its brand and customer information for $20mm. Wet Seal, meanwhile, looks headed towards a Chapter 22 at best and a liquidation at worst - not long after Versa Capital bought it out of bankruptcy for $7.5mm.
  • Rewind IIIJawbone continues to struggle as the wearables space continues to consolidate.
  • Chart of the Week
  • Tweet of the Week