Disruption from the Vantage Point of the Disrupted
Freemium Briefing - 11/7/18
Read Time = 5.3 a$$-kicking minutes
On Sunday in our a$$-kicking Members’-only edition entitled “🐔A Conflicts Turducken?🐔,” we wrote, among many other things, about the ongoing drama that is Sears Holding Corp’s bankruptcy filing, its Inception-like conflict within a conflict within a conflict status, and its stunning similarity to season 2 of Game of Thrones. That’s right, Game of Thrones. One reader wrote us to call us “brilliant.” Another wrote us to say that we sound “disgruntled”. Another wrote, “Your commentary on the frenzied hiring was also intriguing. The dystopian future of genetic uber coupling for long term finance nerd offspring isn't that crazy.” Another wrote, “PETITION, I would pay you $1mm/year to get content twice as long every Sunday.” Okay, maybe one of those isn’t exactly true but the fact is that we’re getting people talking/thinking.
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🗞News of the Week (6 Reads)🗞
What the hell just happened? November is off to a frolicking start for restructuring professionals. This week — and, yes, it is only Wednesday — there has been a wave of notable filings that monopolized our production schedule. Is this a harbinger of things to come or just a blip on the radar screen? 🤔
Petroquest Energy Inc. ($PQUE), an independent energy company engaged in the exploration, development, acquisition and production of oil and gas reserves in Texas and Louisiana, managed to stave off bankruptcy back during the oil and gas downturn. How? Well, this is how:
Bankruptcy, however, caught up to it anyway.
Late last night while everyone was watching a wave…um…maybe?…the company filed for bankruptcy in the Southern District of Texas with a restructuring support agreement. The terms of the RSA reportedly reflect that (i) the prepetition term lenders will be paid in full with an exit facility, (ii) the holders of second lien notes will have an option to participate in the exit facility (which will be fully backstopped by certain consenting creditors), and (iii) the prepetition second lien noteholders will receive (a) 100% equity in the reorganized PetroQuest, (b) a backstop fee in connection with provision of the exit facility, and (c) $80mm of new second lien PIK notes. All of which is to say that the company will meaningfully de-lever its balance sheet. Meanwhile, general unsecured creditors will get $400k and all equityholders will, shockingly, get wiped.
Unfortunately, at the time of this writing, the RSA was not yet on file. If there is anything more of note to add, we’ll do so on Sunday.
Damn you Chipotle Mexican Grill Inc. ($CMG).
It’s been a rough several months for Mexican restaurants. Over the summer, Tennenbaum Capital and Z Capital-owned RM Holdco LLC (Real Mex) filed for bankruptcy in the District of Delaware and pursued a sale of its business. Now, Texas-based, TPG-owned Taco Bueno Restaurants, Inc., a Tex-Mex quick service restaurant (“QSR”) with 140 owned and 29 franchised locations, has filed a prepackaged bankruptcy that will convey ownership to Taco Supremo LLC, an affiliate of Sun Holdings Inc., which bought-out the debtors’ initial lenders in October. Taco Supremo subsequently signed a restructuring support agreement memorializing its intent to effectuate a debt-for-equity swap and provide the debtors with a DIP credit facility.
So, why is all of this necessary? The company noted:
…while Taco Bueno possesses a traditional brand with a loyal customer base and the potential for future growth under the leadership of its new management team, Taco Bueno’s existing capital structure is unsustainable and its financial performance fell significantly due to, among other things, historical mismatches between price and product value, a lack of product innovation, and deferred maintenance capital investment. In addition, competition in the Mexican food industry – including the rise in popularity of tacos at both QSRs and other types of restaurants – increased substantially in recent years, causing certain Taco Bueno stores to experience stagnant or reduced customer traffic and sales. Moreover, while Taco Bueno recently launched a process to close underperforming stores to better focus on core markets and high-value stores, Taco Bueno continues to suffer from a number of underperforming restaurants. Accordingly, Taco Bueno needs to continue to restructure its lease footprint and renegotiate existing leases to optimize profitability.
Even the “Buenoheads” — yes, that’s actually a thing, apparently — couldn’t save this thing from bankruptcy. The debtors’ EBITDA fell to approximately $17.2 million in 2017 with a projected EBITDA of approximately $5.9 million for 2018, compared to approximately $33 million in 2016 EBITDA and approximately $31 million in 2015 EBITDA. Of course, the $130mm of debt doesn’t help either.
Consequently, to salvage liquidity and allow its bankers to conduct a process, the debtors closed 20 locations in the last year (and are in the midst of negotiations with Spirit Realty Capital Inc. ($SRC), U.S Realty Capital, and Kamin Realty Co., the landlords of over 50% of the debtors’ leases). The management team has turned over and the company attempted a pre-petition sale process. That process culminated in the above-noted RSA-based transaction that will attempt to flush the company in and out of bankruptcy court by the middle of December.
On Sunday, November 4, 2018, we wrote the following in our “Fast Forward” segment:
Aegean Marine Petroleum Network Inc. ($ANW) is now subject to a fraud probe by international auditors. This thing will be in a bankruptcy court near you before too long.
We didn’t expect that prediction to come to fruition so quickly!
Admittedly, Aegean, one of the world’s largest independent marine fuel logistics companies with 57 owned and chartered vessels, has been a slow moving train towards bankruptcy for some time. The recent revelation of fraud — yes, fraud — is just the cherry on top. (PETITION Note: in frothy times come desperate shenanigans. This won’t be the last bankruptcy filed in the near-term that, in part, will have an element of fraud in the story.) And, alas, earlier, Aegean Marine Petroleum Network Inc. and 74 affiliated debtors filed for bankruptcy in the Southern District of New York. The more immediate trigger? The maturity of its 4% convertible unsecured notes.
Aegean blames an over-saturated market, limitations imposed by its lenders under the credit facilities, and…wait for it…the fraud…as reasons for its bankruptcy filing. Wait. Why are we describing the debtors’ ails in words when they’ve provided us with some crafty graphics to illustrate, in part, the “perfect storm of circumstances” that have plagued them:
Aegean intends to use the bankruptcy process to address its capital structure (namely the maturity), stabilize operations and sell to Mercuria Energy Group Limited, a private company that, back in August, became the sole lender under both the debtors’ US and Global credit facilities. Mercuria also provided a DIP proposal that consists of a $160mm US credit facility, a $300mm global credit facility, and a $72mm term loan that the debtors deemed better than a proposed facility from an ad hoc group of unsecured convertible noteholders. The question will be to what degree a more robust and competitive sale process emerges now that this thing is finally in bankruptcy court.
Most professionals predicted at the start of 2018 that healthcare would be an active industry for restructuring activity. Instead, there’s only been a few cases here and there — nothing to really stand out from the crowd in terms of volume. And, so just when we’re on the verge of declaring that prediction utterly and emphatically wrong, here is Promise Healthcare Group LLC and its affiliated debtors — another short-term and long-term acute care and nursing facility operator in bankruptcy court (with DLA Piper and FTI Consulting in tow, a seemingly regular occurrence these days in sizable healthcare matters).
Why is another large acute care operator in bankruptcy? The debtors blame the usual deplorables, i.e., reimbursement rate declines, capital-intensive and ultimately-abandoned new business projects, underperforming facilities, and an “unsustainable balance sheet.” Consequently, it undertook performance improvement measures, including the closure of two facilities and the sh*tcanning of 147 full-time equivalent employees. This, collectively, freed up a total of $13.5mm but vendors had begun squeezing the company in such a way that this amount, alone, wasn’t enough to cash flow to sustain the debtors.
The debtors intend to (i) sell non-core assets and real estate to payoff certain secured creditors (including one in Silver Lake, Los Angeles, to the L.A. Downtown Medical Center for $84.15mm) and (ii) otherwise market and sell substantially all of the rest of their assets or, if an equity sponsor emerges, restructure. They intend to do this within six months (anyone want to take the under?). The company has a $85mm DIP commitment ($20mm new money) to fund the process.
On Sunday night, the New England Patriots took down the Green Bay Packers but the official pizza of the team took an “L.” Indeed, New England local news reported that dozens of area Papa Gino’s locations had abruptly shut down. Now we know why. And, it turns out, the dozens were really 95 stores all in. Which, we’d be remiss not to note, affects 1,100 employees who are now out of jobs.
On Monday morning, PGHC Holdings Inc., the parent company of 141 company-owned and 37 franchisee-and-licensee-owned New England restaurant chains Papa Gino’s Pizzeria and D’Angelo Grilled Sandwiches, filed for bankruptcy to effectuate a sale to WC Purchaser LLC, an affiliate of Wynnchurch Capital. Wynnchurch will provide a DIP credit facility to fund the case.
We, here, at PETITION have highlighted disruption in the casual dining space ad nauseum. The debtors, in their filings, confirmed a lot of what we’ve been saying. They noted:
Consumer preferences have shifted from in-restaurant dining to delivery and carryout ordering, which require fewer overall restaurants and smaller restaurant size to service the same geographic area. As a result of these shifting consumer preferences, the Debtors’ existing footprint is too large — in terms of both number and size of restaurants. In addition, minimum wage increases across many of the Debtors’ markets combined with higher employee benefit costs associated with health plans have also pressured the Debtors’ cash flows. The Debtors also have faced increased competition and associated price pressure from national chains that have increased their footprint in the Debtors’ core New England markets. In addition to these and other operational factors, the Debtors have a substantial debt load that, as noted above, they have been unable to service and are in default under.
Consequently, the debtors have let leases expire, engaged in (mostly unsuccessful) negotiations with landlords on lease forgiveness, changed internal IT systems, emphasized digital media marketing and formulated a smaller more efficient restaurant concept. Nevertheless, these efforts didn’t generate enough revenue and profitability to enable the debtors to handle their debt burden.
Wynnchurch will provide the company with a $13.8mm DIP facility, permit the use of cash collateral, and credit bid the debt it took over to the tune of $20mm. In other words, this is effectively a “loan-to-own” play. Bravo!
Republic Metals Refining Corporation (and affiliates), a Miami-based family-owned refiner of gold and silver, filed for bankruptcy to run an orderly sale process of their assets and operations. Last spring, the debtors discovered “a significant discrepancy” in their inventory accounting that, ultimately, led to summer-time default notices from their various senior lenders. The lenders, however, were mostly kept at bay until the filing because the debtors appeared, on multiple occasions, to be close to a going concern sale.
Close. But no cigar.
In the absence of a pre-petition buyer and/or stalking horse bidder, the debtors will now continue their potential sale process or, alternatively, engage in a process to liquidate. The debtors have an agreement with their senior lenders for the consensual use of cash collateral for a short period to attempt a sale, liquidate, and implement a plan for the wind down of the debtors’ estates.
We have compiled a list of a$$-kicking resources on the topics of restructuring, tech, finance, investing, and disruption. 💥You can find it here💥.
Meanwhile, Guggenheim Securities’ Jim Millstein recently spoke with Barry Ritholtzof Ritholtz Asset Management (audio) about the financial crisis, a coming wave of bankruptcies on the horizon, sovereign and municipal debt (where he says there’ll be a reckoning thanks in large part to pensions…right, pensions) and more. Therein, he recommended several books: “Can Capitalism Survive?,” “Crashed: How a Decade of Financial Crises Changed the World,” “Capitalizing on Crisis: The Political Origins of the Rise of Finance,” and “Sapiens: A Brief History of Humankind” (which really appears to be one of the ‘it’ books of the moment). With the holidays coming up, all of the resources included on our list would make a great gift for the finance/law geek close to you.
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Nothing in this email is intended to serve as financial or legal advice. Do your own research, you lazy rascals.