🤔Is it a Plan or a Placeholder?🤔

PG&E, Fred's Liquidates & Reader Feedback!

⚡️Update: PG&E Files its Plan (Long Future Amended & Restated Plans)⚡️

The PG&E Corporation and Pacific Gas and Electric Company ($PCG) debtors released the framework of their plan of reorganization this week and while it’s certainly a step in the right direction towards complying with the California Assembly’s imposed June 30, 2020 timeline for confirmation, man oh man is there still a lot of work to be done. In a nutshell, the plan impairs all wildfire claimants and common interest holders and rides everyone else through.*

The question is: how will those who don’t ride through fare?

For starters, the debtors are upfront about the fact that the plan is predicated upon a Court-imposed estimation of “Wildfire Claims” (i.e., Butte Fire (2015), the North Bay Wildfires (2017), and the Camp Fire (2018)) not exceeding $8.4b. Moreover, the plan also depends on the “Subrogation Wildfire Claims” — claims “held by insurers or similar entities in connection with payments made to others on account of damages or losses arising from such wildfires” — coming in at a max $8.5b.** Will these numbers hold? We suspect the answer is an emphatic ‘no.’ The company itself has seesawed between liability figures and tort claimants certainly will insist on the liability figure being on the higher end of the range. Moreover, something tells us the BK judge won’t take kindly to, in effect, being told what the answer is on liability before having a chance to weigh the evidence; likewise, the subrogation claims holders. In any event, these figures are affirmatively stated limitations/conditions of the plan going effective. Interestingly, despite the doomsday news reports last week, the availability of “wildfire recovery or similar bonds” is not a condition precedent to the plan. Take that legislators! As usual, you’re useless. 😜

What about common interest holders? They’ll get to retain their interests but run the risk of being significantly diluted from any common stock issued under the plan. And, make no mistake about it, an underwritten common stock rights offering is a big component of plan funding. How big? $14b big. The company already has backstop commitment letters from the likes of Abrams Capital Partners LP/Riva Capital Partners/Whitecrest Partners (all controlled by Abrams) and Knighthead Capital Management. If we were nerdy enough to evaluate the crazy-a$$ formulas baked into the commitment, we’re sure we’d uncover all kinds of super-favorable discounted terms for the backstop counterparties. As for other interest holders, sure, sure, they’ll have an opportunity to participate in the rights offering (a not-so-common equity rights offering, go bankruptcy!) but it’s more likely that the big institutions will eat this up. At least the rights are distributable. The stock did not act favorably to the news:

Interestingly, Abrams & Knighthead have conditioned their support on, among other things, two key components: (1) a “wildfire claims cap” of $17.9mm and (2) no “occurrence of one or more wildfires in the Debtors’ service territory after the Petition Date and prior to January 1, 2020 that is asserted by any person to arise out of the Debtors’ activities and that destroys or damages more than 500 Structures.” Will global warming blow up this deal? Note: the Thomas Fire ripped through Ventura and Santa Barbara counties in December 2017, wrecking 281k acres, 1063 structures, and killing 23 people. 🤔

To fund the plan, the debtors will also need to tap the capital markets. Luckily, the capital markets are all-too-accommodating these days (yield, baby yield!) and so several interested banks have indicated — via “highly confident” letters — that they’re interested in arranging the debt financing and placing any equity financing. This includes Barclays Capital Inc., Citigroup Global Markets Inc. ($C), Goldman Sachs & Co. LLC ($GS), J.P Morgan Securities LLC ($JPM), and Morgan Stanley & Co. LLC ($MS). Each acknowledges that approximately $35-40b of capital is required under the proposed plan.

Suffice it to say, this filing made a lot of people unhappy.

Per Cal Matters:

“What they’re proposing is just a fraction of what’s needed to rebuild wildfire victims’ lives. They’re not serious about making victims whole,” said Patrick McCallum with the wildfire victims group Up From The Ashes and a victim himself. “I think the next step is to see whether the bondholders are able to put together something that makes victims whole and the company healthy.”

Per Bloomberg:

Mike Danko, a lawyer representing wildfire victims, called the plan “dead on arrival.”

This one is well-stated and painful to read:

Get ready for a deluge of objections — from bondholders who’d previously submitted a plan*** and claimants — to roll in. Remember that paralegal with the 431 billable hours in Sears? Take the “over” for the PG&E paralegal. 😜🤦🏽‍♀️

*All power purchase agreements and community choice aggregation servicing agreements will be assumed as will CBAs, pensions and workers’ comp claims.
**Local governments that have already settled with the debtors will receive $1b. The state also intends to put into a place a go-forward wildfire fund under California Assembly Bill 1054. This is a prophylactic fund to address any and all future wild fires and the debtors will fund a $4.8b initial contribution and then approximately $193mm in annual contributions. This fund will also be funded by other investor-owned utilities.
***This new plan explicitly denies any make-whole premiums.

🏢Another Retailer Bites the Dust (Short Small & Medium Town Commercial Real Estate)🏢

Dallas-based Fred’s Inc. and seven affiliated debtors have filed a long-awaited bankruptcy in the District of Delaware with the intent to unwind the business. The debtors are — or, we should say, were — discount retailers with full service pharmacies, focusing on fixed income families in small and medium-sized towns.

The bankruptcy papers — from a law firm largely known for litigation (a curious fact here until you consider that Alden Global Capital LLC is a large shareholder) — are remarkably sparse. No lengthy back story about the company and how “iconic” it is. Just, “it was founded in 1947, sold a lot of sh*t to people who have no other alternative and now we’re kaput.” No discussion of the interim, say, 70+ years. Not a mention in the First Day Declaration of the failed Walgreens/Rite-Aid transaction that would have given Fred’s a larger pharmacy footprint. Nothing about Alden’s stewardship. Nada. Not a word, outside of the motion to assume the liquidation consultant agreement, about the state of retail (and in that motion, only: “The Debtors faced significant headwinds given the continued decline of the brick-and-mortar retail industry.”). Given the case trajectory — an orderly liquidation — we suppose there’s really no need to spruce things up. There’s nothing really left to sell here.* All in, it’s, dare we say, actually kind of refreshing: finally we have a debtor dispensing with the hyperbole.

The debtors started 2018 with 557 locations. After four rounds of robust closures — 263 between April and June and another 178 between July and August — the debtors have approximately 125 locations remaining. Considering that those stores are now closing too and given that the average square footage per store was 14,684, the end result will be ~8mm of square footage unleashed on the commercial real estate market.

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We suspect that these small and medium-sized towns will have some empty storefronts for quite some time.

The debtors have a commitment from their pre-petition lenders for a $35mm DIP credit facility (which includes a rollup of pre-petition debt). It will be used to wind-down the business.

Word on the street is that as recently as a week ago, the company appeared close to a going concern restructuring centered around approximately 100 stores. Alas, that was not meant to be.

Another one bites the dust.

*The Debtors previously sold 179 of their pharmacy stores to a Walgreens Boots Alliance Inc. ($WBA) subsidiary for $177 million in fiscal Q4 ‘18 and 38 more to a CVS Health Corp. ($CVS) subsidiary for ~$15 million in August.

💥Feedback: Junior Associates Take Note that We Make Mistakes💥

With regard to last Wednesday’s “🔥Newspapers. Newspapers. Newspapers.🔥,” one reader wrote:

Nice update.  I would note that it’s “case in point” not “case and point”, lest impressionable law firm associates reading this start to let “case and point” creep into their drafts.

[Insert snarky comment about how firms bill for things like correcting “case and point” to “case in point.”]

PETITION response: It’s a good catch so we’ll sweep the snark aside. Thanks for the correction (we’ve made the change on our website). Mark down a 0.1 for yourself.

On the substance of that briefing, another reader up in Canada wrote:

Good piece on newspapers. Here in Canada, we just had a big newspaper chain file for creditor protection, and its [sic] causing a big uproar in Quebec - the government has responded by launching a legislative committee to figure out how to save/protect the French-speaking news industry.

Trustee's first report is here, if you're interested (it's in French but can be translated).

PETITION Note: Not by us, but interesting nonetheless.

And then others wrote to support this statement that we made here:

But retention cannot come at a cost. A publication must establish values and live up to them. Take, for instance, this note we received from a reader recently:

“Your writings are done well, interesting, and humorous. However, take it from me and many of my colleagues, your anti-Trump insults are aggravating and misguided.  Some of us are considering unsubscribing because of it.”

President Trump’s policies — for better or for worse — have an impact on the economy. The delivery of those policies infuses volatility into the markets. It affects whether a company will commit to investing millions in coming months; it affects sales; it affects consumer spending which, in case you didn’t notice, is, for now, the only thing keeping GDP afloat. We’re going to write about that. And we’re going to do so in our usual voice. Just like we would if a democrat were in office: we’re equal opportunity snark.

So, sure, Mr. Orange County, feel free to cancel your Membership if you think we’re misguided. That’s just what we all need: another highly educated person running for the hills because a few words didn’t comport with his sensibilities. Thanks for summing up this country’s current plight of discourse/discord in three sentences.

In conclusion, we won’t be bullied, subscription be damned.

They wrote:

Ofc it had to be orange county 😂

And:

Bravo to you Petition……for having the gumption to stand up to Mr. Orange County and his highly delicate sensibilities. Hard to believe that merely regurgitating the incoherent gunk that this president spews out daily is taken to be “anti-Trump insults” by Mr. OC and most other media bashers. For every one of those guys you lose, there are ten of us that respect your journalistic backbone and recognize that, if nothing else, you get your shots in all-around.

Image result for indeed omar gif

As we said, “we’re equal opportunity snark.

Annnd:

NEVER STOP BEING YOU. FUCK THIS DUDE - I’ll subscribe twice. 



“Your writings are done well” is writing not done well. It made me cringe. 

Your writings are neither misguided nor aggravating. 

And, with very few exceptions who can literally go jump off a cliff, the vast majority of our community is not on the trump train. 

So again, please for the love of all things holy, keep doing you because it is the best thing to ever happen to our industry. 

PETITION Note: we just call it like we see it, again, without prejudice. Thanks for the feedback. We especially appreciate the last sentence!

And, finally, this was our favorite one:

I just wanted to write to commend you for your excellent newsletter. I found you through a link on Judd Legum's incredible Popular Information newsletter and decided to give you a try.

The funny part, though, is that I am not a lawyer. I am not involved in the bankruptcy business whatsoever. I hope to never become involved in bankruptcy as I'm a small (VERY small) owner of a powder coating business. I find your insights into the foibles of the various business sectors that are experiencing "disruption" invaluable, however, in making sure that I don't make similar mistakes in my own small biz world. 

Thus, although I cannot afford a paying subscription, I wanted you to know how much I value the insights that you drop for us poor folk and how much I enjoy the occasional snark. Congratulations on a product well-rendered and long may you continue to provide such valuable information to those who are truly in need of it!

Thank you!

PETITION Note: we couldn’t have asked for a better note. One thing we wanted to do with this little company of ours was to democratize information. It looks like we’re on our way. Cheers!


📕Resources📕

We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥. We’ve recently added “Super Pumped: The Battle for Uber” by Mike Isaac, which came out earlier this week. One thing we learned from it is that Google got the idea of the dual-class stock structure from, of all people, Warren Buffett. That structure was subsequently deployed by Uber, Slack, Snapchat and others. This subject has garnered much more attention of late thanks to the shenanigans of none other than Adam Neumann. His super-voting arrangement is one reason among many that the WeWork IPO is looking increasingly shaky.


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