🌵Don't Mess with Texas🌵

A Slate of Bankruptcy Filings Hit the Lone Star State

⚡️Announcement⚡️

If you’re wondering why we published our Members’-only newsletter on Saturday rather than Sunday the answer is this: we fat-fingered “send” by accident…pre-edit. Awesome. 😬


🥛Disruption, Illustrated: New Chapter 11 BK Filing - Southern Foods Group LLC (d/b/a Dean Foods Company)🥛

💥PETITION💥@petition
In one corner: innovation. In the other corner: disruption. Dean Foods Co. $DF, the largest US supplier of milk, is struggling as a result. From back in March:
petition.substack.com/p/private-equi… (paywall)

Micah Rosenbloom@micahjay1

No category has seen more innovation in the last 5 years than non dairy milks. Oat, Almond, Soy, Coconut. What’s next?

We’ve published these charts before here but they’re worth revisiting:

Since we’re all about the charts right now, here’s another one — perhaps the ugliest of them all:

Yup, Southern Foods Group LLC (d/b/a Dean Foods Company) has been a slow-moving train wreck for some time now. In fact, we wrote about the disruption it confronts back in March. It’s worth revisiting (we removed the paywall).

Image result for that stinks gif

Alas, the company and a long list of subsidiaries finally filed for bankruptcy yesterday in the Texas (where things seem to be getting VERRRRRY VERRRRRY busy these days; see below ⬇️).

Once upon a time everyone had milk. Serena and Venus Williams. Dwight Howard. Mark McGuire. Tyra Banks. The Olsen twins. David Beckham. Giselle. The “Got Milk? campaign was pervasive, featuring A-listers encouraging folks to drink milk for strong bones. Things have certainly changed.

Dean Foods’ long history begins in 1925; it manufactures, markets and distributes branded and private label dairy products including milks, ice cream, creamers, etc. It distributes product to schools, QSRs like McDonald’s Inc. ($MCD), small format retailers (i.e., dollar stores and pharmacies), big box retailers like Walmart Inc. ($WMT)(which accounted for 15.3% of net sales in ‘18), and the government. Its products include, among many others, Friendly’s, Land O Lakes and Organic Valley. This company is a monster: it has 58 manufacturing facilities in 29 states, 5000 refrigerated trucks and 15,000 employees (40% of whom are covered by collective bargaining agreements). Milk, while on the decline, remains big business.

How big? Per the company:

In 2018, Dean Foods’ reported consolidated net sales of $7.755 billion, gross profit of $1.655 billion, and operating income of $(315.2) million. Through the first 6 months of 2019, Dean Foods’ reported consolidated net sales of $3.931 billion, gross profit of $753.2 million, and operating income of $(96.2) million.

Those are some serious sales. And losses. And the company also has a serious capital structure:

Milk production is a capital intensive business requiring a variety of inputs: raw milk, resin to make plastic bottles (which likely infuse all of us with dangerous chemicals, but whatevs), diesel fuel, and juice concentrates and sweeteners. Hence, high debt. So, to summarize: high costs, low(er) demand, lots of debt? No wonder this thing is in trouble.

What are the stated reasons for the company’s chapter 11 filing?

  • Milk Consumption Declines. “For the past 10 years, demand has fallen approximately 2% year-over-year in North America.” This is consistent with the chart above.

  • Loss of Pricing Power. Because volumes declined, economies of scale also decreased. “Delivered cost per gallon rose approximately 20.7% between 2018 and 2013 as a result of volume deleverage.” That’s vicious. Talk about a mean spiral: as volumes went down, the company couldn’t support the input volumes it had previously and therefore lost pricing power. “Dean Foods suffered a full year 2018 year-over-year decline in fluid milk volume of 5.8% following a 2017 year-over-year decline of 4.2%. Moreover, Dean Foods’ volume declines continue to outpace the overall category; while category volumes declined by approximately 4%8 year-over-year through the end of September, 2019, Dean Foods experience declines of over 11.4%.” Apparently, this impacted Dean Foods disproportionately. Any buyer looking at this has to wonder how these issues can be remedied.

  • Market Share Disruption. New forms of “milk” have taken market share. “Sales of nut and plant beverages grew by 9% in 2018 and had sales of $1.6 billion, according to the Plant Based Foods Association.

  • Retail Consolidation. It doesn’t help when, say, Dollar General merges with Family Dollar. That gives the dollar stores increased leverage on price. And that’s just one example.

  • “The BigBox Effect.” The biggest retailers have become increasingly private label focused and, in turn, vertically integrated. Take Walmart, for example. In 2018, the retailer opened its first U.S. food production facility in Indiana. Want to guess what kind of food? Why would we be mentioning it? This new facility amounted to a 100mm gallon loss of volume to Dean Foods.

  • “The Loss Leader Effect.” We often talk about the venture-backed subsidization of commonplace lifestyle items, e.g., Uber Inc. ($UBER). Retailers have, in recent years, aggressively priced private label milk to drive foot traffic. “As retailers continue to invest in private-label milk to drive foot traffic, private label margin over milk contracted to a historic low of $1.26 in June, before falling even further to $1.24 in September.

  • Freight Costs. They’ve been up over the last few years. This is a different version of
    ”The Amazon Effect” ($AMZN).

All of these are secular issues that a balance sheet solution won’t remedy. Buyer beware. 😬🤔

So, what CAN the bankruptcy achieve? Yes, the obvious: the balance sheet. Also, there is a contingent liability of over $722.4mm that results from the company’s participation in an underfunded multi-employer pension plan. And liquidity: the bankruptcy will avail the company of a $850mm DIP credit facility. It may also allow the company to pursue a sale transaction to its long-time commercial partner and largest single raw milk vendor, Dairy Farmers of America (which is wed $172.9mm). Surely they must be aware of the secular trends and will price any offer accordingly, right? RIGHT? Either way, those ‘23 notes look like they might be about to take a bath.*

*Likewise certain trade creditors. The debtors state that that they have $555.7mm of total outstanding accounts payable and claim $257mm needs to go to critical vendors and another $189.2mm to 503(b)(9) admin claimants. That leaves a small subset of creditors due a bit more than $100mm holding the bag. This also explains the sizable DIP.
Meanwhile, one of the largest unsecured creditors is Acosta Inc., with a contingent, disputed and unliquidated claim arising out of litigation. Acosta is unlikely to recover much on this claim which is a bit ironic considering that an Acosta bankruptcy filing is imminent. Womp womp.

😷New Chapter 11 BK Filing - Nuvectra Corporation $NVTR😷

Texas-based medical device company, Nuvectra Corp. ($NVTR), filed for bankruptcy in the Southern District of Texas yesterday. It seeks to use chapter 11to continue its review of a range of options to maximize value and address its financial obligations.” Read: pursue a sale.

Nuvecta’s “Algovita Spinal cord Stimulation System” is FDA-approved for the treatment of chronic pain of the trunk and/or limbs; it also has capabilities under development to support other neurological indications such as sacral neuromodulation (“SNM”) for the treatment of overactive bladder and deep brain stimulation (“DBS”) for the treatment of Parkinson’s disease.

Back in July it noted the following in its 10-Q filed with the SEC:

We have incurred significant net losses and negative cash flows from operations since our inception and we expect to continue to incur additional net losses for the foreseeable future. Immediately prior to the completion of the spin-off, Integer made a cash capital contribution of $75.0 million to us, which we have used for the continued development and commercialization of Algovita, development of Virtis, and general corporate purposes. Based on our current plans and expectations, we estimate that our cash on hand, which includes proceeds from our follow-on common stock offerings completed in February 2018 and September 2018, Credit Facility draw-downs, proceeds from the divestiture of NeuroNexus, and cash generated from sales, should meet our cash needs for at least the next twelve months.

Those 12 months appear to have arrived awfully quickly: November - July = 4 months. But who’s counting?

For some mind-blowing reason the stock was up 5.7% during regular market hours today which means somebody made A FRIKKEN HORRIFIC TRADE. The stock has course corrected — as you might expect given the filing — after market, down 76%. 😬

At the time of this writing the filing was incomplete: we’ll update things once we see how the company is framing their strategy.


😷New Chapter 11 BK Filing - Walker County Hospital Corporation (d/b/a Huntsville Memorial Hospital)😷

Walker County Hospital Corporation (“WCHC,” d/b/a Huntsville Memorial Hospital) is the latest in a recent string of healthcare bankruptcies. It filed earlier this week in the Southern District of Texas. Why?

Per the debtor:

“While the Hospital has outpaced market trends in the region for admissions and revenue, and has little outstanding long-term debt, as a standalone hospital operator, the Debtor faces significant challenges in acquiring competitive pricing for necessary goods and services and favorable managed care contracts as compared to multi-hospital systems.”

If you’re wondering about why private equity firms are rolling-up hospital systems, this ⬆️ ought to give you some perspective.

“As a result, the Hospital has significantly above average operating costs that exceed its revenue generation.”

That, ladies and gentlemen, is what you call a lack of economies of scale.

“In addition, the Debtor’s over-extension into rural healthcare clinics and a failed lab venture and ambulatory surgery center, among other issues, have resulted in an unsustainable balance sheet and liquidity.”

So, uh, that all sucks.

Interestingly, the State of Texas helped bury the debtor:

In 2018, the State of Texas shifted its health insurance coverage for state employees from United Healthcare to Blue Cross Blue Shield. This shift materially impacted the Debtor’s revenue, as the Debtor’s contract with Blue Cross Blue Shield has less favorable reimbursement rates and a large portion of the Hospital’s patient population is employed by the State. The Debtor has been in negotiations with Blue Cross Blue Shield since 2016, in an attempt to obtain a managed care contract with the insurer at a fair market rate, but efforts thus far have remained unsuccessful.

Because of this and other issues, the debtor’s revenue dipped and it tripped covenants in its pre-petition credit facility AND defaulted under its operating agreements with the Walker County Hospital District. The debtor has been operating under forbearance agreements with both for some time now while it sought to find a buyer. It failed. This bankruptcy is intended to provide one final chance for such a sale: the debtor already has a sale process motion on the docket. It does not have a stalking horse purchaser, it does have some hope that the District will be a participant in an auction. To allow that process to play out, the debtor obtained a $5mm DIP credit facility commitment from its pre-petition (direct) lender, MidCap Financial Trust.


📚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💥. Lately we’ve been all about audiobooks: you can try Audible here. And you can listen to those books with these dope new noise-cancelling AirPods (at 6% off through Amazon)Here’s one review.


💰New Opportunities💰

MorrisAnderson, a leading middle market debtor-focused financial and operational advisory firm, is seeking associate director applicants in Chicago. Candidates should have two to five years of experience, an operational mindset, and a desire to learn and grow.  To apply, please visit here.

*****

Looking for quality people? PETITION lands in the inbox of 1000s of bankers, advisors, lawyers, investors and others every week. Email us at petition@petition11.com to learn about posting your opportunities with us.


Nothing in this email is intended to serve as financial or legal advice. Do your own research, you lazy rascals.

🔥David's Bridal = Chapter 11.5🔥

Fleetwood, B. Riley, David's Bridal & Jobs Jobs Jobs

One year, three different capital structures and two restructurings — one in-court and one out-of-court. This has been a hell of a twelve-month stretch for David’s Bridal Inc. Clearly performance continues to sh*t the bed.

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A year ago at this time the company was pre-bankruptcy. It had 311 stores, 9,260 employees and a $775mm capital structure split among (i) approximately $25.7 million in drawn commitments under its Prepetition ABL Agreement; (ii) an estimated $481.2 million in outstanding principal obligations under its Prepetition Term Loan Agreement; and (iii) an estimated $270.0 million in outstanding principal obligations under its unsecured notes. It filed a prepackaged bankruptcy on November 19, 2018. It confirmed its plan of reorganization in early January and the plan went effective almost 60 days after the filing.*

Under the plan of reorganization, the company shed hundreds of millions of debt, wiping out its private equity overlord, Clayton, Dubilier & Rice, LLC (except to the extent they owned unsecured notes). The company emerged from bankruptcy with (i) a $125mm asset-backed loan from Bank of America NA (the “ABL”), (ii) a $60mm “Priority” term loan agented by Cantor Fitzgerald and (iii) $240mm L+800bps “Takeback” term loan paper (also Cantor Fitzgerald). The term lenders — including, Oaktree CLO Ltd., a collateralized loan obligation structure managed by Oaktree Capital Group** — walked away as owners with, among other things, the takeback paper and the common stock in the reorganized entity. The unsecured noteholders received a pinch of common equity and warrants. The initial post-reorg board was reconstituted to include a representative from Oaktree, a former executive from Ralph Lauren, a former banker, a senior partner from Boston Consulting Group, and a venture capitalist with experience in the early stage consumer products space.

It didn’t take long for cracks to form. In May, S&P Global Ratings downgraded David’s Bridal’s credit rating into junk territory; it noted that the company’s performance "remained significantly weaker than anticipated after emergence from bankruptcy" and it “expect[s] poor customer traffic will pressure operating performance and lead to added volatility.” The ratings agency gave both term loans the “Scarlet D” for downgrade, noting that the capital structure was “potentially unsustainable based on its rapidly weakening operating performance, which makes it vulnerable to unfavorable business and financial conditions to meet its commitments in the long term.” The term loan quoted downward. The rating proved to be prescient.

Six months later and eleven months post-confirmation, it is clear that the balance sheet was NOT right-sized to the performance of the business. On Monday, the company announced that it obtained a new $55mm equity infusion from its existing lenders. Lenders unanimously exchanged “$276mm of its existing term loans into new preferred and common equity securities” leaving the company with $75mm of funded debt exclusive of the untapped $125mm ABL. The equity that CD&R and the other unsecured noteholders received are clearly worth bupkis today. Those warrants? HAHAHA. Wildly out-of-the-money. Peace out CD&R!

Image result for wedding gif

The question is why did this situation flame out so quickly? On a macro level, there are secular changes taking precedence in the marriage space: things just aren’t as formal as they used to be. On a micro level, clearly the company continues to suffer from operational challenges that were not addressed during the filing. Nor post-emergence. Per Bloomberg:

David’s lost its way with customers under prior management, Marcum said in the interview. When the company launched its online marketplace, it was a separate e-commerce profit that had different pricing and marketing promotions than the stores. “Consumers today are very smart and they see that,” [CEO James] Marcum said. “It caused a lot of friction” and an “extremely poor experience” for customers.

Ummm, okay, but wasn’t that supposed to have been fixed by now??

The company underestimated the negative impact that Chapter 11 would have going into its strongest selling period, and the competition “took advantage of it,” Marcum said.

Clearly the lenders underestimated the impact, too. How else do you explain the thinking around 10+% paper?

Given that the paper steadily quoted down for months leading up to this transaction, it’s obvious that (i) brides-to-be were steering clear from David’s Bridal after seeing media clips about other brides getting burned by bankrupted dress sellers, (ii) consequently, the lenders saw a constant stream of declining numbers, and (iii) as they learned more about the state of the business, lenders scrambled to try and dump this turd before a wipeout transpired. Spoiler alert: it has transpired.

As for the capital structure, clearly this thing came out of bankruptcy over-levered: it looks like the take-back paper was driven, in part, by CLOs in the capital structure. Callback to just a few weeks ago when, in “💥CLO NO!?!?💥,” we wrote (paywall):

…most CLO fund documents also don’t permit CLOs to take on new equity in restructurings. This limitation, by default, pushes CLOs towards “take-back paper” (read: new debt) in lieu of equity. If you’re a regular-way lender on an ad hoc group full of CLOs, then, this makes for an interesting dynamic: you may prefer — and have the latitude — to (i) swap debt for equity, thereby taking turns of leverage off to right-size the reorganized debtor’s balance sheet and (ii) give the reorganized entity a fighting chance to survive and drive equity returns. Your CLO counterparts, however, have different motives: they’ll push for more leverage. This misaligned incentive can sometimes get so bad that ad hoc groups will have to negotiate amongst themselves the go-forward capital structure without even getting management input. In this scenario, management projections are besides the point. If you’re looking for some explanation as to why there appears to be a rise in Chapter 22 filings, well, this might be one.

Not everything will have to file for bankruptcy a second time. But, as a practical matter, the result is the same here in terms of a capital structure refresh. Call this a Chapter 11.5.***

*Shockingly, the company didn’t boast of a “successful restructuring” like every other retailer-destined-for-a-chapter-22 tends to do. Perhaps retailers are now taking PETITION’s “Two-Year Rule” into account? 🤔😜
**The term lenders that made up the Ad Hoc Term Lender Group included a hodgepodge of private equity funds, hedge funds and CLOs.
***We really struggled with a witty thing to label a fact pattern where, within a year of bankruptcy, a company has to do a an out-of-court balance sheet refresh without going into a formal Chapter 22. Any ideas? Email us.

⚡️Announcement⚡️

Ok people. Enough free-riding. If you’ve been reading us for some time and haven’t yet become a Member, we ask that you please throw your support behind us and join our Member community ⬇️.

We process group Memberships for firms of 10+ people. Interested? Email us: petition@petition11.com.

Are you a student? We have special “edu” rates for the budget-conscious. Email us.


⚡️Tariffs Take a Victim (Long #MAGA!)⚡️

This was easy to see from a mile away.

Pennsylvania-based Fleetwood Acquisition Corp. and two affiliated debtors, Fleetwood Industries Inc. and High Country Millwork Inc., filed for bankruptcy in the District of Delaware on Monday. The filing constitutes a “second order effect” bankruptcy in that, according to the debtors, it results primarily from two dominant macroeconomic trends entirely outside of their own control: (i) the #retailapocalypse; and (ii) President Trump’s trade war with China. As we’ll discuss below, the filing will have uniquely American ramifications — at least for a participant in retail business.

Fleetwood Industries and High Country Millwork Inc. are “providers of customized fixtures and displays” primarily servicing the retail and hospitality industries; they are “full service fixturing companies beginning with creative and collaborative design services and continuing through the manufacturing and installation processes.” Said another way, they design, build, install and service display shelving, casing and checkout infrastructure that you look at and use whenever you go shopping. You probably never even think about who makes that stuff and how lucrative it might be: interestingly, in 2018, the business had $70mm in sales. The debtors list scores of retailers as clients including, ominously, Destination Maternity, Gymboree, JC Penney, Quiksilver, and True Religion, among many others (including, to be fair, relatively “healthy” retailers…to the extent those exist).

And that’s where the rubber meets the road. It’s hard for companies servicing retailers to generate growth when…well…not to state the obvious…retail is CLEARLY not in growth mode.

Tariffs didn’t help. Per the debtors:

…in 2019 as a result of the certain tariffs instituted against China and other headwinds in the retail industry, certain of the Debtors’ customers began delaying orders, significantly extending project timelines, and slow paying certain receivables. At the same time, the Debtors’ overhead expenses increased due to the Fleetwood expansion and certain of the materials utilized by the Debtors became more expensive due to the tariffs.

They continue:

…some of the Debtors’ customers unexpectedly began delaying orders and pushing out project timelines. Many of those customers are retailers who reported that the newly instituted China tariffs were negatively impacting their sales and profit margin projections. This, in turn, led such customers to slow their store expansion and refurbishment plans, defer new projects indefinitely, and reduce the scope of existing projects. This caused a significant decline in the Debtors’ revenue. Indeed, the Debtors project a combined decline of approximately 50% in revenues from 2018 to 2019.

We’re not math experts but if revenue was $70mm in 2018, we’re talking a $35mm nut in 2019. 😬

Customers also began to delay payment or to challenge invoices in unusual ways, presumably to address their own cash flow issues. At the same time, the Debtors’ liabilities to suppliers and internal overhead ballooned as the Debtors continued to work to fulfill customer orders for which payment was now being delayed or withheld.

This is called death dominos, ladies and gentlemen. Retailers are stretching payables and that’s stressing players further down the chain. Consequently, these guys sh*tcanned 63 employees across the enterprise, delayed capex, and starting negotiating revised credit terms and extended payment plans with their suppliers. And this is where the “uniquely American ramifications” come in. This isn’t Payless Shoesource where virtually all of the companies biggest creditors were in China; rather, the debtors’ top 30 list of general unsecured creditors is replete with good ol’ USA-based businesses (PA, CA, NY, OR, etc.). With cash projected to hover between $1.3mm and $2.2mm over the next 13 weeks, things aren’t looking so great for those folks (absent inclusion among the critical vendors line-itemed for $320k/week through the end of November). There’s $60mm of secured debt on top of them. The debtors’ prepetition secured lenders consent to the use of cash collateral to fund the cases but make no mistake about this: the debtors aren’t in good shape. They checked administrative insolvency on their filing petitions. So, yeah, there’s that: the value of this company likely doesn’t clear the debt.

So, what’s the bankruptcy going to achieve? Note:

Over the past several months, the Debtors have actively sought financing to support their working capital and cash demands, including seeking additional financing from their senior lender, equipment finance companies, accounts receivable factoring lenders, and other potential asset-based and cashflow lenders, but none of those lenders were able to underwrite or approve a loan due to the Debtors’ current financial condition and the industry outlook. The Debtors also recently explored potential business combination opportunities that might result in a stronger combined balance sheet. These discussions did not present a path forward and one of the potential partners actually ceased its own operations after suffering the same challenges. (emphasis added)

Again, dominos. Savage. The most obvious answer — which the debtors acknowledge — is that the debtors needed the “breathing spell” provided by the automatic stay. They’ll use the bankruptcy process to “liquidate certain inventory, raw materials, and equipment at their Pennsylvania location.” Otherwise, they’ll attempt to “right-size and streamline their businesses with the goal of emerging as a profitable enterprise.” They don’t give any indication of how they’ll do it. No doubt, though, both the debtors’ lenders and their unsecured creditors will take it on the chin.

Anything that even touches retail these days is a hot mess…


💥B. Riley Financial Reports Earnings, Crushes It💥

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…unless, that is, you have a liquidator business among your portfolio of revenue generating business lines.

B. Riley Financial ($RILY) reported earnings last week and the business of liquidating effed retailers continues to be highly lucrative. The firm’s “Auction and Liquidation” segment earned $11.3mm up from $2.5mm on a YOY basis. The margins continue to be very real and very spectacular.

Image result for real and spectacular gif

We’re talking $6mm of net income on that $11.3mm revenue. You can do the math there.

Overall the firm reported $180mm of revenue, up from $99.7mm YOY and $164.7mm in Q2.

Naturally, any proceeds from the firm’s involvement in Barney’s liquidation won’t factor through until Q4 and Q1 ‘20. And, boy, will there be proceeds.

As always, there’ll be lots of flashy signs to draw foot traffic. But buyer beware, the liquidation sale ain’t much of a sale.* Per the New York Times:

But a warning before you run out the door: It’s a very Barneys kind of sale.

You’ll find a Chloé bag for $1,690, or $85 off the pre-sale price. You could grab an Altuzarra sweater for $625.50, marked down from $695. Or you can wait and play chicken — the luxury retail version — with the liquidation specialists running the sales.

The minor discounts are attributable to the fact that Barney’s inventory is high-end merchandise.

“They’re very high-end, very exclusive designers,” [B. Riley’s] Mr. Carpenter said. The retail value of all of Barney’s merchandise right now is about $500 million, he said. (emphasis added)

Reminder: Barney’s sold its IP and its assets, “including reams of designer shoes, tuxedos and coatsfor $271mm. Once again, you can do the math. These guys are savage.

*If you’re thinking RealReal Inc. ($REAL) might be a viable alternative to a measly 5% off Barney’s liquidation sale, you might want to check this out.

💰New Opportunities💰

Force Ten Partners, an advisory firm specializing in corporate restructuring, challenged businesses, litigation, and other special situations, is growing. They seek Associates and Directors with 5-10 years of bankruptcy and restructuring experience. If you are interested, please visit here.

MorrisAnderson, a leading middle market debtor-focused financial and operational advisory firm, is seeking associate director applicants in Chicago. Candidates should have two to five years of experience, an operational mindset, and a desire to learn and grow.  To apply, please visit here.

*****

Looking for quality people? PETITION lands in the inbox of 1000s of bankers, advisors, lawyers, investors and others every week. Email us at petition@petition11.com to learn about posting your opportunities with us.


📚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💥. Lately we’ve been all about audiobooks: you can try Audible here. And you can listen to those books with these dope new noise-cancelling AirPods (at 6% off through Amazon)Here’s one review.

We previously indicated excitement for Stephen A. Schwarzman’s “What it Takes: Lessons in the Pursuit of Excellence,” thinking that there’d be gems about historic deals, pearls for aspiring private equity investors, etc. We’re about 2/3 through the book and we have to say: it’s garbage. Save your money: we honestly haven’t learned a thing.

On the flip side, Ronan Farrow’s “Catch and Kill” is a sprawling story about cover-up, complicity and corruption. PETITION is about disruption and this book has the potential to disrupt the media industry (as if it needs help). How? It discusses the morally and ethically bankrupt means that NBC brass, certain lawyers (Lisa Bloom), and Harvey Weinstein deployed to keep a critical story in the shadows. It’s an important book at an important time. And it reads like a spy thriller. We highly recommend it.👍


Nothing in this email is intended to serve as financial or legal advice. Do your own research, you lazy rascals.

🔥PG&E, Murray Energy & PJT🔥

⚡️Newsflash: PG&E Corporation⚡️

You got cute. You invested in the equity. Now you may be up sh*t’s creek.

With each passing day and each damaged structure, a growing administrative expense claim is squeezing any hope of equity value and potentially threatening the backstop commitments received back in…wait…carry the one…FRIKKEN SEPTEMBER. We’re old enough to remember reading this somewhere:

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. 🤔

Oh right. That was us: we wrote that. We really wish that hadn’t aged so well.


🌑New Chapter 11 Bankruptcy Filing - Murray Energy Holdings Co. (Short #MAGA)🌑

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Ohio-based Murray Energy Holdings Co. and its 90+ affiliated debtors are now part of a not-so-exclusive club: the Bankrupted Coal Company Club (the “BCCC”)! Unlike some more recent small(er) coal bankruptcy filings, this one is a behemoth: the debtors own and operate 13 active mines in Ohio, West Virginia, eastern and western Kentucky, Alabama, Illinois, and Utah*; their primary product is thermal coal used for electricity (though, with recent acquisitions, the debtors are also now in the steel-making business). To give you a sense of the magnitude of this company, here are some key figures:

  • Produced 53mm tons of bituminous coal in 2018;

  • Employs 5,500 people, including 2,400 active union members EXCLUSIVE of folks employed through the debtors’ partnership with soon-to-be-BCCC-member Foresight Energy LP ($FELP);

  • Generated $2.5b in coal sales and $542.3mm of EBITDA in 2018; and

  • Carries $2.7b of funded debt on balance sheet, $298mm of annual interest and amort expenses, AND $8b+ in actual or potential liability obligations under various pension and benefit plans. In 2018, the debtors’ statutory or CBA-related employee and retiree obligations totaled approximately $160mm. These are key factors that explain why, ultimately, despite every effort to hold out, this company capitulated into bankruptcy.

This is a story of unfettered expansion and spending, hubris, misplaced trust in new Washington on the part of Robert Murray, and utterly savage disruption.

The disruption side of the equation is compelling. Per the company:

“The thermal coal markets that Murray traditionally serves have been meaningfully challenged over the past three to four years, and deteriorated significantly in the last several months. This sector-wide decline has been driven largely by (a) the closure of approximately 93,000 megawatts of coal-fired electric generating capacity in the United States, (b) a record production of inexpensive natural gas, and (c) the growth of wind and solar energy, with gas and renewables, displacing coal used by U.S. power plants.”

Interestingly, this one statement ties together so much of what we’ve all been seeing in the restructuring space. Over the last several years, there have been a number of power company bankruptcies and through bankruptcy or otherwise, capacity has been cut considerably (indeed, FirstEnergy is a recipient of Murray Energy coal and undoubtedly took measures to cut back on coal supply). Fracking across the US has led to a deluge of natural gas — so much so that producers are flaring excess natural gas due to a lack of pipe infrastructure with which to transport it. Despite structural challenges, natural gas exports are on the rise. From the U.S. Energy Information Administration just yesterday:

“From January through June of 2019, U.S. net natural gas exports averaged 4.1 billion cubic feet per day (Bcf/d), more than double the average net exports in 2018 (2.0 Bcf/d), according to data in the U.S. Energy Information Administration’s (EIA) Natural Gas Monthly. The United States became a net natural gas exporter (exported more than it imported) on an annual basis in 2017 for the first time in almost 60 years.”

And as this odd illustration shows, the US is becoming increasingly dependent — in large part due to federal and state emissions standards — upon solar and wind for its electricity needs. The debtors highlight:

“…coal-fired installed capacity as a percentage of total installed capacity has fallen from 26 percent in 2013 to 20 percent in 2019, with coal-fired generation as a percentage of total generation falling from 35 percent in 2013 to 27 percent in early 2019. Natural gas and renewables installed electricity generation capacity in the United States as a percentage of total installed capacity has increased from 59 percent in 2013 to 67 percent in 2019, and natural gas and renewables generation as a percentage of total generation increased from 42 percent in 2013 to 48 percent in early 2019.”

YIKES. That is a DRAMATIC change. They continue:

“During its peak in 2007, coal was the power source for half of electricity generation in the United States and by early 2019, coal-fired electricity generation fell to approximately 27 percent. These challenges have intensified recently as (i) certain electric utility companies have filed for bankruptcy protection and others have sought, and received, subsidies for their nuclear generation capacity to avoid bankruptcy, at the expense of coal-fired facilities, (ii) domestic natural gas prices hit 20-year lows this past summer, and (iii) overall demand for electricity in the United States has declined two percent in 2019, further depleting demand for coal at domestic utilities.”

MAGA!!

The international story, though, ain’t much better, with the company noting a “perfect storm of negative forces” that includes:

“…low liquefied natural gas prices; a recent trade war driving Russia to increase exports; mild weather across the Northern Hemisphere led to a reduction in demand for heating in both Europe and Asia; higher freight costs; and a prolonged monsoon season in India which kept demand depressed while conditions cleared for a record eight months.”

As if all of that isn’t bad enough, the competitive landscape has been horrific and while we suppose its admirable to try and holdout to avoid the embarrassment and stigma of bankruptcy, that strategy clearly becomes untenable when literally every other competitor in the US has already joined the BCCC and stripped themselves of burdensome debt and pension obligations. The company acknowledges as much:

“…while Murray has historically been able to navigate the challenges of the coal marketplace, these rapidly deteriorating industry conditions have caused more than 40 coal companies to file for bankruptcy since 2008, with more than half a dozen major operators filing in the last year alone. These bankruptcies have affected thousands of workers across the United States, and they have left their mark on Murray. Competitors have used bankruptcy to reduce debt and lower their cost structures by eliminating cash interest obligations and pension and benefit obligations, leaving them better positioned to compete for volume and pricing in the current market, while Murray continued to satisfy its significant financial obligations required by the weight of its own capital structure and legacy liability expenses. As a result, Murray generated little cash after satisfying debt service obligations, paying employee health and pension benefits, and maintaining operations.”

That’s a quaint narrative but it’s also a bit misleading.

While every other company was falling apart, Mr. Murray went on a shopping spree, snapping up Consolidation Coal Company, Foresight Energy LP (coming soon to a bankruptcy court near you), Mission Coal Company LLC, Armstrong Energy Inc., and certain Colombian assets. This undoubtedly led to increased integration costs and debt. During that time, the debtors deployed every capital structure trick in the book to extend maturities and kick the can down the road. That road has come to an end at the bankruptcy court doors.

Here is that sweet clean capital structure:

Man, that’s a beaut.

Rounding out the company’s extensive liabilities are the obligations to employees under CBAs and pension and benefit plans.

Pursuant to these CBAs, Murray contributes to three multi-employer retirement plans. If you want a sense of how employer-employee relations have changed since the 1970s, look no farther than the debtors’ obligations under what they’ve dubbed the “1974 Pension Plan.” Per the debtors:

“Following the large wave of chapter 11 filings in 2015 and 2016, more than half a dozen large U.S. coal companies collapsed into bankruptcy over the last several years and withdrew from the 1974 Pension Plan. When an employer withdraws, its vested beneficiaries remain in the 1974 Pension Plan and are referred to as “orphan” beneficiaries. The remaining contributing employers become responsible for the benefits of these orphaned participants who were never their employees. As a result, approximately 95 percent of beneficiaries who currently receive benefits from the 1974 Pension Plan last worked for employers that no longer contribute to the Plan. As of January 2019, 11 employers contribute to the 1974 Pension Plan, compared to over 2,800 in 1984. This has placed significant stress on the 1974 Pension Plan and the small number of contributing employers—Murray most of all. If Murray withdraws from the 1974 Pension Plan, the withdrawal liability could be $6.4 billion or more, with annual estimated payments of approximately $32 to $35 million in perpetuity.”

Whoa. And that’s just one plan: the company is also on the hook for others, not to mention $1.9b in other federally-mandated post-employment benefits, asset retirement obligations and environmental obligations.

“Likely”?!?

The company has a restructuring support agreement with 60% of its “consenting superpriority lenders” and “consenting equityholders” (read: Robert Murray) that outlines the general terms of a path forward: a sale with the superpriority lenders as stalking horse bidder, DIP lender, and funder of administrative expenses. Those lenders committed to provide a $350mm DIP commitment. From here, the clock is ticking.

Image result for watchmen tick tock tick tock gif

The debtors hope to have an auction within 135 days and plan confirmation within 195 days. And within 106 days the debtors want to have a solution their CBA/retiree problem or file a motion seeking to reject those agreements and modify those benefits.

There is, as with most cases, a “cooler talk” aspect to this filing: there’s the Kirkland-is-dominating-with-yet-another-coal-bankruptcy-representation-post-westmoreland-and-mission-coal-and-armstrong-energy-which-means-that-A&M-is-dominating-which-means-that-Prime-Clerk-is-dominating-and-what-the-f*ck-happened-to-Jones-Day-which-used-to-crush-coal-filings-with-Peabody-and-Alpha-Natural-but-now-seems-to-be-unraveling-narrative, but putting aside that inside baseball crap and how much frikken cash this case is going to print for all of the above, it’s the miners themselves — those guys who were in the depths of the earth (as distinct from the white-collar professionals who always talk about “the trenches” and “hard fought” negotiations) — who are very likely to get completely and utterly shafted here. As if getting misled or lied to by Mr. Murray — however good his intentions may have been — and Mr. Trump wasn’t enough, they’re now facing the very real possibility of losing the benefits that they worked especially hard to get. All while the professionals are billing $1650/hour. Bankruptcy is vicious.

To point here is the UMWA’s statement about the bankruptcy:

“Today’s filing by Murray Energy for Chapter 11 bankruptcy reorganization comes as no surprise. This day has been coming for some time.

Coal production in this country continues to decline, due to the glut of natural gas on the market and continued government preference for gas and renewable energy to replace coal-fired power generation. Combined with a recent severe reduction in coal exports, these factors delivered a one-two punch that an over-extended Murray Energy could not withstand.

Now comes the part where workers and their families pay the price for corporate decision-making and governmental actions. Murray will file a motion in bankruptcy court to throw out its collective bargaining agreement with the union. It will seek to be relieved of its obligations to retirees, their dependents and widows. We have seen this sad act too many times before.”

Let’s pour one out for the little guys.

*This number is contradicted in the bankruptcy papers. In one instance, the company’s new CEO indicates that there are 13 owned and operated mines; in another he says 18. Whatevs. What are 5 mines in the scheme of things (we’re kidding…WTF, y’all?). The company also owns and operates a mine in Colombia, South America.

How Are the Investment Bankers Doing?

PJT Partners Inc. ($PJT) reported fiscal Q3 numbers yesterday and total revenue hit $174.2mm (up 24% YOY) — no thanks to the restructuring group. Per Mr. Paul Taubman, compared to last year, restructuring:

…revenues decreased meaningfully in the third quarter, but held almost even for the nine month period. Given the increase in distress within certain industries, such as energy, media, telecommunications, pharma, consumer retail, our outlook for the full-year has become a bit more positive and we now expect full-year restructuring revenues to be up slightly year-over-year. This activity level combined with restructurings increasing ability to leverage the expertise and connectivity of our Strategic Advisory bankers should result in a stronger backlog heading into 2020 versus a year ago. (emphasis added)

Wait. There’s distress in energy and consumer retail? Who knew. Anyway, this isn’t fake news but it isn’t really big news either: banker assignments close choppy which makes quarterly reporting for restructuring a tough game. Still, if you’re counting on a sizable year-end bonus, you probably don’t want the company CEO singling you out for being a drag on numbers — encouraging guidance notwithstanding.


💰New Opportunities💰

Force Ten Partners, an advisory firm specializing in corporate restructuring, challenged businesses, litigation, and other special situations, is growing. They seek Associates and Directors with 5-10 years of bankruptcy and restructuring experience. If you are interested, please visit here.

*****

Looking for quality people? PETITION lands in the inbox of 1000s of bankers, advisors, lawyers, investors and others every week. Email us at petition@petition11.com to learn about posting your opportunities with us.


📚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 previously indicated excitement for Stephen A. Schwarzman’s “What it Takes: Lessons in the Pursuit of Excellence,” thinking that there’d be gems about historic deals, pearls for aspiring private equity investors, etc. We’re about 2/3 through the book and we have to say: it’s garbage. Save your money: we honestly haven’t learned a thing.

On the flip side, Ronan Farrow’s “Catch and Kill” is a sprawling story about cover-up, complicity and corruption. PETITION is about disruption and this book has the potential to disrupt the media industry (as if it needs help). How? It discusses the morally and ethically bankrupt means that NBC brass, certain lawyers (Lisa Bloom), and Harvey Weinstein deployed to keep a critical story in the shadows. It’s an important book at an important time. And it reads like a spy thriller. We highly recommend it.👍


Nothing in this email is intended to serve as financial or legal advice. Do your own research, you lazy rascals.

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