Lots of Noise About Cov Lite Loans

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Lots of recent clamoring on this topic as the cov-lite trend is dominating the US and now infecting Europe. Choice quote, "This year, 70% of the region’s new leveraged loans are known as covenant-lite, according to LCD, more than triple the number four years ago." Sounds like there is a lot of money chasing very few deals. Covenants are falling and pricing is increasing (yield baby!), with recent PE leverage ratios exceeding loan underwriting guidelines. Deutsche Bank warns, "We're overdue a correction." Interestingly, we noticed a strange parallel this week in the venture capital space where, suddenly, after a long lapse in talk about "bubbles," notable investors like Fred Wilson and Brad Feld wrote about dealing with a crash/collapse. You'll recall that Howard Marks wrote about cov-lite a few weeks ago in the midst of expressing caution. Perhaps we'd better launch our ICO soon before the window closes.

Grocery (What is Dead May Never Die)

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This space is getting uglier and uglier by the week. Info dump here: Jet.com (aka Walmart's ($WMT) e-commerce division) is launching its own grocery line to compete with Amazon. Walmart is also getting into the "meal kit" space. And The Fresh Market continues its descent into distressed territory with its secured notes down 15 points and Cerberus Capital Management - already big in the space - purportedly buying in.

Bank Regulation (Too Big to Short)

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Aka, self-regulation. Hahahahaha. We're old enough to remember the concept of "living wills". And how it took years and millions in professional fees for banks to comply. AND, fyi, those wills just got kicked down the road. Self-regulation, that's a good one. As it turns out, a new report concludes that "indicators of bank soundness have not recovered to pre-crisis levels." Still laughing. "In the United States, where the crisis originated, a new wave of deregulation appears to be underway: the government is considering reducing provisions of the Dodd-Frank Act and reviewing rules on financial advisers’ conflicts of interest. This may lead to the re-emergence of fragilities that post-crisis regulation aimed to tackle." Ugh. Laughter replaced with the pounding of beers and tears. 

Distressed Boutique Investment Banks (We Hope You Already Shorted This One)

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So, you don't see this everyday: Greenhill & Co., a boutique investment bank that dabbles in restructuring advisory work, announced a "self-help" transaction - powered by a new $300mm Goldman Sachs credit facility and $10mm from each of Chairman Bob Greenhill and CEO Scott Bok. The (quasi go-private?) transaction will include paying off debt, a tender for shares, and a substantial reduction-cum-elimination of the firm's elevated dividend. Our first question is whether shareholders get to waterboard Mr. Bok as part of the deal? Now that the company is levered, by some measures, to the tune of approx 9x, what kind of fee do we think its restructuring team will get for the (inevitable) restructuring of the new debt? 

Chart of the Week I: The Rise of Corporate Cash

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Corporate cash load - now a record $2.26t - is showing solid growth (Apple is literally 10% of that). And people wonder why the private markets are the new public markets. With that much cash on balance sheet, is it any wonder that Bonobos, Plated, Jet.com, and others are getting scooped up by corporates prior to ever hitting the public market (and having to show the grotesque nature of their revenue models)? P.S. This doesn't count the $1.53 trillion of private equity "dry powder" that's just laying in wait. 

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Bloomberg Finds Chapter 22s "Enticing"

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Ah, Poor Headlines...

Bloomberg is getting a little lax here with this headline, "Filing 'Chapter 22' Becomes Enticing Option for Ailing Retailers." We get what they're TRYING to say here which is that restructuring retail right now is really tough. And that a number of retailers, e.g., Wet Seal, American Apparel, General Wireless & Eastern Outfitters, have filed for bankruptcy twice in a short time span. Get it? Chapter 11 + Chapter 11 = Chapter 22. So creative these restructuring folk. Anyway, we've highlighted this issue too (see "Rewind II" here). But to suggest that filing a 22 is "enticing" is a bit of a stretch, yeah? All four of those businesses are effectively gone now and a lot of investor money was lost along the way: not much "enticing" about any of that. But they make tons of money and we do a free newsletter so what the hell do we know? P.S. the article short-changed the industry-agnostic, cough, appeal, of a chapter 22: it neglected to mention Venoco LLC and the possibility of a few solid oil and gas 22s to come. 

Long Influencer Marketing (Despite Ourselves)

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All Hail Gwyneth Paltrow and Kim Kardashian

So, we're not all too impressed with Gwyneth Paltrow or Kanye West: the whole idea that those two vapid degenerates are influencing anything gives us concern for the future of this great nation. And we thought that the utter dumpster fire known as the Fyre Festival would at least temporarily stick a fork into the whole concept of influencer marketing. Alas, we were wrong. Turns out that Adidas' rise and Under Armour ($UA) and Nike's ($NKE) fall is somewhat attributable to this phenomenon. "Experiential" retail is all the rage right now and not a day goes by where we don't hear some tunnel-visioned advisor mention the concept - always in the abstract we might add - as the panacea for ailing retail (see Toys "R" Us). But, maybe part of the issue was Toys' marketing strategy. Maybe, just maybe, Geoffrey the Giraffe isn't influencing much of anything. Beyonce and Serena have babies now: maybe Toys ought to take that $3 billion of new liquidity and hire one or both of them as a spokeswoman. It has worked for Weight Watchers ($WTW); it has an insane 1-year performance. This may buy some time for Toys' execs as they try and figure out what the hell "experiential retail" ACTUALLY means. 

Notable (Cov Lite Loans, Delaware Bankruptcy Filings & More)

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More = Busted Tech, Investment Banks & REITS

Biglaw. Summer Associate satisfaction surveys (firewall). In case anyone actually gives a sh*t.

Busted Tech. A view that recent IPOs will never make money. Meanwhile, Toys R Us is a harbinger of, you guessed it, BUSTED TECH. 

Canadian Retail. Also looking increasingly ugly.

Cov Lite. We're old enough to remember when people said it was dead and would never come back. Memories are short AF. 

Delaware. This article about retail bankruptcy cases avoiding filing in Delaware misses the mark widely. Like, way outside. Any DE practitioners want to opine - without attribution - on this?? Email us here.

Investment Banking. Jefferies can't trade for sh*t but advisory fees baby. Given these advisory fees, it looks like UBS wants to get back into the restructuring advisory game. Again. For, like, the 283th time. 

J.Crew. Investors are pissed.

New York. Is it in danger of becoming Detroit?

Puerto Rico. The hits just keep on coming. Sad, really.

REIT Investments. This is an interesting piece about alternative investments by REITS. Simon Property Group ($SPG) looks particularly active.

Retail (Taxes). When you're industry is in secular decline, fight for scraps. Here, tax changes.

Music Disruption (Short the Rock Star)

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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?
 

Employment (Short Payroll Processors & Payday Lenders)

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Andreessen Horowitz is Going After Payday Lending

Employment (Short Payroll Processors & Payday Lenders). We've been fortunate enough to never have to really think about the (arbitrariness of the) payroll schedule. To live paycheck to paycheck. To succumb to usurious payday lenders in a fit of liquidity need. As we read this, it certainly sounds like a process/industry in need of disintermediation. 

Fallout from Toys R US & More Distressed Retail

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Blah, Blah, Private Equity = Death to Retail?

Courtesy of the New Yorker, some more Toys "R" Us history here. Mattel ($MAT) had to amend its credit agreement, reflecting significant leverage ratio uncertainty after the Toys "R" Us bankruptcy filing. Jakks Pacific Inc. ($JAKK) reported that it now expects a net loss in '17 and then, as if to pour salt on the wound, the ratings agencies unleashed a downgrade. Folks are getting increasingly nervous about the retail fallout amidst conflicting reports about store closures/openings. PETITION NOTE: lost in all the noise around Toys is that their new business plan calls for increased employee wages - implying a belief that Walmart's ($WMT) wage increases have helped Walmart provide a better "experience."  PETITION NOTE II: It appears that the lenders firmly believe that comparisons between Toys "R" Us and (liquidated) Circuit City are misplaced. Toys is THE LAST LARGE free-standing toy seller. Circuit City was generally expendable given that, at the time, the space was considered saturated and uber-competitive. Now, Best Buy ($BBY - up ~26% YTD, which is down after cratering the other day) fills that void. Just like Barnes & Noble ($BKS - down ~37% YTD) fills the (physical) book void (well, at least until Amazon book stores sprout in force - already it's popping up in New York and LA). And Dick's Sporting Goods ($DKS - down ~50% YTD) now has significant sporting goods market share. We're not saying WE would invest on this "LAST" basis because we wouldn't be caught dead with DKS, BKS or BBY in the PETITION 401(K); but, we are saying that the lenders appear to be lending, at least in part, on that basis. And word is that the DIP is over-subscribed (and Reorg Researchcaptures how lenders are clamoring for inclusion). Meanwhile, the list of distressed retailers seems to grow by the day: note: Belk Inc., Fresh Market, Bi-Lo, 99 Cents Only Stores and more (blah blah, private equity). But, to put an exclamation point on this, see, "Private equity drove Toys "R" Us into bankruptcy, sure, but that isn't quite the same thing as destroying it."

The List of Bloodied Retailers is Longer Than Our J$&%$#!

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Retail (Get New Sheets, Bed Bath & Beyond Sh*t the Bed)

We have a rock-solid "because of Hurricane Irma" excuse in the books, ladies and gentlemen. Bed Bath & Beyond ($BBBY) reported numbers on Tuesday and the market promptly pushed down the stock double-digit percent. Naturally the chorus of "#retailapocalypse"started dropping left and right (blah, blah Amazon). Revenue missed by $70mm and growth projections were ratcheted down.