💥A Haircut Coming?💥
Regis Corporation ($RGS) still looks challenged, Enviva Action + Canoo Cannot.
⚡️Update + One to Watch: Regis Corporation ($RGS)⚡️
We’ve previously discussed Regis Corporation ($RGS) here:
Where does the company stand now, nearly two full years later? Let’s start with a brief reminder of what the company is and does: MN-based Regis Corporation ($RGS) franchises, owns, and operates hair salons across the US; its brands include Supercuts, SmartStyle, Cost Cutters, First Choice Haircutters, and Roosters. Over the past year, the stock has dropped close to 74%, as shown below.
The company completed a 1-for-20 reverse split in Nov ‘23 to comply with NYSE listing standards, though it didn’t quite accomplish that, as the company quickly fell under the $50mm market cap threshold. The company was thus forced to transfer its stock from the NYSE to the Nasdaq in Jan ‘24.
In our prior coverage, we highlighted that the company had only turned a profit in two years from ‘12 to ‘22 due to a large number of unprofitable salons. In response, management determined that switching to a full franchisee model was the best move forward, where most revenues are from royalty fees and franchise rental income. So, how has the company fared with two more years under its belt using the nearly full franchisee model?
While the company has begun to see increases in its operating profits, free cash flow hasn’t followed, which we reckon has some people focused on outstanding debt obligations. Previously the company retained Jefferies Financial Group ($JEF) to address the maturity of its Mar’ 23 maturing Revolving Credit Facility.
In Aug ‘22, the company announced a successful renegotiation of the Mar ‘23 Revolving Credit Facility. The amendment extended the maturity to Aug. ‘25 and converted the $291.27mm outstanding under the old revolver to a new facility consisting of a $180mm term loan and a $55mm revolving credit facility. The minimum liquidity covenant was also decreased to $10mm from $75mm. Interest on the new facility is set to increase to S+725 (425 bps paid in cash and 300 bps PIK).
As of the most recent filing, the company has $38mm in liquidity and $181mm outstanding on the facility ($164mm net on the term loan, $14mm on the revolver, $3mm PIK). Since this is due Aug ‘25, Jefferies might be due for some more work soon if it isn’t already.
Relating to liquidity, there was an interesting quote from the company’s last earnings call that may raise some red flags in regard to the operating lease liabilities:
"As a reminder, due to accounting standards, our balance sheet shows approximately $334 million of operating lease liabilities related to liabilities associated with sub-leasing salons to our franchisees over the entire life of their respective leases. These liabilities are serviced by our franchisees and should not be factored into Regis' debt position so long as the franchisees continue to pay their obligations as they have been. These liabilities have decreased $229 million over the last three years due to the reduction in salon count and also due to Regis moving off of franchise leases. Having our franchisees sign the leases accounted for approximately $85 million of the reduction."
Seems like a noteworthy “so long as.” 🤔
🪵Update: Enviva Inc. ($EVA)🪵
Back on March 12, 2024, MD-based Enviva Inc. ($EVA) and 20 affiliates (collectively, the “debtors”) filed chapter 11 bankruptcy cases in the Eastern District of Virginia (Judge Kenney). Wait, what? Virginia is back? Did these guys not have time to set up a sham LLC in New Jersey in the lead-up to filing? We mean … we discussed EVA back in mid-November in:
And, yes, that title did, in fact, refer to EVA. Surely four months is plenty of time to manufacture venue, guys, right?
Anyway, the debtors’ business is fairly straightforward. EVA procures wood fiber from mainly the southeastern United States and funnels these fibers through a process that mills, dries, and molds them into wood pellets. Most of these pellets are then sold to biomass powerplant customers located in the UK, the EU, and Japan through long-term, take-or-pay offtake contracts. The debtors accomplish all of this through 10 owned and operated pellet production plants and 6 owned or leased deep-water marine terminals. As of December 31, 2023, the total weighted-average remaining term of the debtors’ offtake contracts was ~13.7 years.
In many jurisdictions, wood pellets are considered a “green” alternative to coal for power generation. This can be controversial when the process involves the felling of trees … you can read more about this in our previous coverage. But, regardless, demand for wood pellet is strong: it’s easy to convert coal-fired plants to biomass-fired. And regulation on the emissions of greenhouse gases (eg. EU’s Emissions Trading System) have pushed the need for wood pellet.
Demand was so strong that the debtors historically bit off more than they could chew in their long-term take-or-pay contracts and consistently failed in providing the required amount of wood pellets. The solution? Shore up the balance from the spot market! This works when the wood pellet spot market is lower than the purchase price in the off-take contracts, but falls apart spectacularly when the spot market is higher. Basically, the debtors had an artificial short position on wood pellet prices.
Unfortunately, wood pellet prices reached an all-time high in ‘22. The debtors could no longer comfortably/affordably fill their short positions through the spot market and, freaking out, decided to enter into a series of transactions (the “Q4 2022 Transactions”) with long time customer and counterparty, RWE Supply & Trading GmbH (“RWEST”), to secure a large amount of wood pellets to cover future shortages through a long-term fixed-price contract. The debtors ended up negotiating a price higher than historical average prices due to the elevated prices at the time and even higher than sales prices under pre-existing sales contracts, but management was not worried. After all, there was no way prices would drop.
Spoiler alert. They dropped, less than a year after in ‘23.
To think the debtors could’ve avoided all this with some hedging.
Add on increasing inflation and we’re sure the debtors wish they could forget the entire year of ‘23.
If you were a non-controlling shareholder, you’re probably pretty irate at the Q4 2022 Transactions, and rightfully so! Thus, the board of directors initiated an independent investigation into the issue in early November 2023. Baker Botts LLP is currently continuing the investigation. Major shareholders here include Riverstone Holdings LLC (“Riverstone”):
As these issues accumulated, the debtors started to look for ways to bolster their liquidity including a $105mm term loan in January ‘23 from existing lenders, a $250mm PIPE with their two largest shareholders in March ‘23, and cost-cutting measures through ‘23.
By June ‘23, the debtors enlisted the help of Alvarez & Marsal LLC as financial advisor. Vinson & Elkins LLP became the company’s restructuring counsel in August ‘23 and Lazard Frères & Co. ($LAZ) joined the fun in October ‘23.
By fall of ‘23, the company entered negotiations with RWEST, resulting in a series of standstill agreements. However, RWEST issued a termination notice on January 16, 2024, meaning that $348.7mm in early termination payments became due. After a brief extension, the payment became due again on February 15, 2024. The debtors did not pay and on February 16, 2024, RWEST issued a letter demanding the overdue amounts.
During the same time period, the debtors also began negotiations regarding existing long-term contracts with the goal of raising the purchase price on certain of these contracts and, otherwise, walking away from out-of-the-money contracts without additional costs.
Outside of the RWEST contracts, see below for the cap structure of the debtors’ $1.8b of total funded debt. EVA clocks in as the fourth largest case to file in ‘24 so far (behind Gol, Audacy, and ConvergeOne):
In November ‘23, an Ad Hoc Group formed with Davis Polk & Wardwell LLP and Evercore Group LLC ($EVR) as advisors. Initially, the Ad Hoc Group consisted of holders of primarily the ‘26 Notes but by the petition date, the group included ~95% of the outstanding principal amount of the 2026 Notes, ~72% of the debtors’ outstanding debt under the senior secured credit facility, ~78% of the aggregate outstanding principal amount of the Epes Green Bonds, and ~45% of the aggregate outstanding principal amount of the Bond Green Bonds.
On January 15, 2024, the debtors skipped semi-annual interest payments under the ‘26 Notes. During the 30-day grace period, the debtors received an in-court transaction proposal from the Ad Hoc Group. The Ad Hoc Group proposal included a $500mm DIP facility split into two $250mm tranches, administered in up to five draws, and of which $100mm can be syndicated by the company (backstopped by the Ad Hoc Group).* The DIP is secured by first liens on unencumbered assets and a second-priority junior lien on the senior secured credit facility collateral package; it carries a SOFR+8% interest rate, a 3% backstop fee, a 4% OID upfront fee, and a 3% exit fee.
Two months later, on March 12th, the debtors entered into a restructuring support agreement (“RSA”) with the Ad Hoc Group, which finally brings us to the petition date.
The plan under the RSA contemplates a $750mm 1L exit facility which will serve to pay the senior credit facility (revolver+TL), unless holders of the revolver/TL decide to exercise their rights to participate in the exit facility and roll over their existing debt.
Tranche A of the DIP has the option to be equitized into reorganized Enviva while tranche B will be repaid in cash from a $250mm equity rights offering (“ERO”).
Holders of the ‘26 Notes, the Epes Green Bonds, the Bond Green Bonds, and GUCs will receive their pro rata share in reorganized Enviva equity. This is subject to dilution from the Tranche A equitization and the ERO. However, these parties (excluding holdco GUCs) also have the option to participate in the ERO.
Existing equity holders will receive 5% of reorganized Enviva equity and warrants with a 5 year term for 5% of reorganized Enviva equity.
On March 25, 2024, the US Trustee appointed an official committee of unsecured creditors (the “UCC”) that included RWEST, Drax Power Limited, and Ryder Integrated Logistics. Proposed counsel to the UCC is Akin Gump Strauss Hauer & Feld LLP. The ‘26 Notes trustee, Wilmington Savings Fund Society FSB, was up in arms for the apparent lack of inclusion and expressed its discontent through a motion to reconstitute the UCC. Wilmington Savings Fund is joined in support by the debtors (mostly due to concerns about the appointment of competitors RWEST and Drax) and the Epes green bonds’ trustee, Wilmington Trust NA.
Wilmington be like “wtf? we represent the majority of the unsecured debt.”
The US Trustee is probably like “but you’ve participated in the RSA.”
And Wilmington in response be like “Noooo. Technically the noteholders signed the RSA, we’re just the trustee. And what about the 5% that didn’t sign the RSA? We speak for all 2026 noteholders.”
A hearing for the reconstitution motion is set for May 9, 2024.
And that’s not the only issue up for the May 9th hearing. Recall that Riverstone is a major equity holder in Enviva and that Vinson & Elkins is the debtors’ proposed counsel. Well, it turns out V&E also represented Riverstone previously and several current/former directors. Of course, the UST is screaming conflict of interest and filed an objection to V&E’s retention application. UST on debtors’ counsel violence!**
There’s no plan on the docket yet and the debtors have 120 days after the petition date to draft one up along with a disclosure statement. The confirmation deadline is set for 185 days after the petition date, meaning this is going to be a rather long process. The debtors have got a looooooooot of contracts to renegotiate.
The debtors are represented by Vinson & Elkins LLP (David Meyer, Jessica Peet, Matthew Pyeatt, Trevor Spears) and Kutak Rock LLP (Michael Condoyles, Peter Barrett, Jeremy Williams) as legal counsel, Alvarez & Marsal LLC (Mark Rajcevich) as financial advisor, and Lazard Fréres & Co (George Bilicic) as investment banker. The Ad Hoc Group is represented by Davis Polk & Wardwell LLP (Damian Schaible, David Schiff, Hailey Klabo) and McGuire Woods LLP (Dione Hayes, Elizabeth Sieg, Connor Symons) as legal counsel, and Evercore Group LLC as financial advisor.
*The $100mm syndicated portion of the DIP completed on April 8, 2024.
**Unrelated but thematically on point, the UST in NJ has filed an objection to the retention of Kirkland & Ellis LLP — as sort of a piggyback to White & Case LLP’s flamethrower of an objection — in the Invitae Corporation matter on the basis of conflicts.
⚡️Update: Canoo Inc ($GOEV)⚡️
Canoo Inc’s ($GOEV) 4Q’23 call that happened April 1, 2024 felt like a full on preacher’s sermon.
In the minds of management, Canoo is following in the great messiahs of auto manufacturing, Henry Ford and… Elon Musk:
“[W]hether it be in Henry’s time, Elon’s time, these people are inspirations to us, and we studied what they did.”
“We have — we developed a hybrid process just like Henry and Elon did. I mean, we’re following the great ones.”
“The great ones,” we don’t know whether to laugh or puke.
Basically, Canoo doesn’t intend to bite off more than it can chew:
Like Ford and Musk, the company will slowly step up production and not waste money on a large new facility that never gets used — something Canoo thinks happens way too often in the EV world:
Apparently the groundbreaking conclusion you can get from studying “the great ones” is “don’t overspend.” Bravo.
Management then harps on the importance of capital efficiency and the “dangers” of having too much capital.
“Even those with endless amounts of capital, like, Boeing have learned the hard way and it has impacted tens of billions of shareholder value.”
“There have been many mistakes made in our industry, but one of them is also raising too much capital. You can only effectively deploy so much capital at one time.”
“But most of all, in young companies, the more capital you have, likely the more you waste. The bigger the facility you build and if you don’t figure out how to align CapEx to growth, you will burn your shareholders’ money.”
Okay, there’s a lot to unpack there.
Management thinks capital is a dirty seductress that tempts you into making bad choices. But, the problem is Canoo is running on fumes and as much as management preaches about how capital can be a poisoned chalice, the company desperately needs some. As of December 31, 2023, the company has $6.4mm in cash and ~$100mm remaining on its pre-paid advance agreement with Yorkville Advisors.
But maybe this is exactly where Canoo wants to be. You can’t waste capital if you have none of it to begin with!
Wait, maybe you can?
It’s hilarious when, amidst these headlines, CEO, Tony Aquila, says this on the earnings call:
“If you think about it, a lot of people punished us because we didn’t put a lot of cash on the balance sheet. We’re good stewards of people’s money.” [emphasis added]
Especially considering Mr. Aquila personally owns the private jet that the company is paying for. The company shelled out $1.7mm and $1.3mm for FY’23 and FY’22, respectively, in aircraft reimbursement fees.
The company is looking to bring in $50mm-$100mm in revenue for FY’24 but also expects to burn through $45mm-$75mm in cash PER QUARTER.*
The stock is down 24% since the call. 🤮
*We’ll update you all about how much of that ends up going towards Mr. Aquila’s travel, lol.
📚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 added, “The Credit Investor's Handbook: Leveraged Loans, High Yield Bonds, and Distressed Debt,” by Michael Gatto and have high hopes for its arrival.
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