💄Revlon: Lipstick on a Pig? Part XIII. (The Trial.).💄
Honestly, we should probably just stop here:
In this Bloomberg Opinion piece from last week, Noah Feldman does a good job of outlining the competing legal standards at play in the Revlon/Citi/Hedgefunders debacle. Forgive us for skipping over it on Sunday when otherwise lambasting the bullsh*t spewing out of the hedge funders’ mouths. Describing the “discharge for value” rule (which, based on precedent, may work in favor of the hedge funders), Feldman writes:
This rule says that when a creditor gets a payment from a third party (like Citi) “in discharge” of any debt, the creditor doesn’t have to pay it back even if “the discharge was given by mistake,” so long as the creditor “did not have notice of the transferor’s mistake.” The idea here is, roughly, that if someone owes you money and it gets paid back, you should be able to assume that the payment belongs to you, even if it came to you at an unexpected time. After all, in some sense, it’s your money, since it was owed to you. (emphasis added)
That sounds good for Revlon’s creditors; but not so fast. The creditors will only get to keep the money under the … precedent if they had “no knowledge” that the money was transferred to them by mistake. That leaves the question of whether sophisticated financial actors like the creditors knew the money they were getting was received in error.
Technically, that’s a question of fact: Did the creditors know this was a blunder? The reality is that they must have known it almost instantaneously. No creditor expects to get the full principal from a sophisticated borrower when only interest is owed. The creditors were already angry at Revlon for allegedly eroding the value of their collateral. It seems almost unimaginable that they thought Revlon was somehow making their dreams come true. (emphasis added)
Not that this stopped them from arguing they had no clue. Even though … uh … there is … uh … apparently an electronic trail to the contrary. Per Bloomberg:
“I feel really bad for the person that fat-fingered a $900 million payment,” a vice president at HPS Investment Partners told another executive the day after the Aug. 11 transfers, according to an excerpt highlighted in court. “Not a great career move.”
“How was work today, honey?” the vice president said a little later, imagining both sides of the dinner table conversation that night at home. “It was OK, except I accidentally sent $900 million out to people who weren’t supposed to have it.”
Kinda hard to argue that you didn’t know it was a blunder when you use words like “fat fingered” and “accidentally” and “weren’t supposed to have it.” Just sayin’.
At a minimum, HPS looks like it’s dead in the water.
💥Issuers/Sponsors Continue Wave of Recent Aggression (Long Future Creditor-on-Creditor Violence)💥
Not to belabor recurring themes but … well … let’s be honest: there ain’t a whole lot happening out there in the distressed market. The evergreen “yield baby yield” theme continues to rule the day and market participants are taking advantage. This is clear in the equity markets — how many opportunistic equity issuances have Tesla Inc. ($TSLA) and the airlines engaged in already? And it is certainly clear in debt markets.
Take, for instance, the recent Ancestry.com deal. Back in August, Blackstone Group Inc. ($BX) announced that it agreed to acquire genealogy company, Ancestry.com, from private equity firms Silver Lake Capital, Spectrum Equity and Permira for $4.7b.* As attractive as it might be for a massive private equity firm to own sensitive genetic data of 3mm customers across 30 countries, Blackstone surely isn’t writing a $4.7b equity check to acquire the business. That’s where the financing comes in. And this financing had hair on it.
On November 23, the company announced its new high yield bond offering and last week the proposed $1.2b financing made headlines thanks to a provision in the issuance that capped investor voting rights to 20%, upending the heretofore market standard of “one bond, one vote.” Analysts were in uproar.
In response, the European Leveraged Finance Association — clearly fearful that US-based investor lust would traverse the Atlantic and infect European issuers/investors — issued a pointed statement in opposition to the deal terms. They wrote:
“The provisions in question create a ‘Voting Cap’ such that any investor’s voting power is limited to a maximum of 20% of the outstanding Notes, regardless of that investor’s actual holding size. There are numerous instances in which this partial disenfranchisement of investors could be harmful. Consider, for example, ‘Event of Default’ triggers which typically require at least 30% of Notes to be voted in order to instruct the trustees to take prescribed action. While groups of investors may theoretically act together to meet the threshold, no single investor would be able to enforce contractual protections, even in the event of a default. Capped voting power thus creates an unwelcome hurdle for creditors seeking to exercise and enforce their basic rights as creditors.”
But that’s not all:
“In addition to the above Voting Cap, which itself erodes investor protections, the provisions go on to allow the issuer (Ancestry.com) to ‘cherry-pick’ the votes it wants to count in instances where this arbitrary “Voting Cap” has been exceeded. This gives the private equity sponsor full discretion to choose which single investor may exceed this cap when it suits them. This inequality is then compounded by the inclusion of Net Short Lender provisions.”
Get ready for a whole lot of whinging a few years out when, ultimately, some large holder conspires with the issuer to jam non-participating holders. The writing is CLEARLY on the wall for some future creditor-on-creditor violence.
On that last point about “Net Short Lender” provisions, the The Financial Times writes:
The bond documents also include provisions that require an investor to disclose whether it is net short the company — meaning its bets on the company’s condition deteriorating outweigh bets that its value will increase — before it is granted any voting power at all. This is to discourage investors buying the company’s bonds as part of a larger strategy to tip it into default and profit off trades that pay out when it does.
It’s clear that sponsors, issuers and their lawyers are more than comfortable pushing the envelope these days. Back in October, Blackstone attempted to jam a similar provision into a debt issuance backing Precision Medicine Group but ultimately backed down after market backlash. But, if at once you don’t succeed, try, try again! Clearly Blackstone is of the view that with enough persistence, it can ultimately bend the market to its will and make it its b*tch. The worst part: it isn’t wrong. Investors reportedly over-subscribed the Ancestry.com issuance by a multiple. The company upsized the deal. All together now: YIELD, BABY, YIELD!
Kinda. The $700mm first lien senior piece due June 2028 offers 4.25% interest while the $500mm senior unsecured offering due December 2028 is at 6.125%.** The ratings agencies slapped Caa1 and CCC+ ratings on the latter.
In response, ELFA’s Executive Advisor Sabrina Fox told PETITION, “Continued support from central banks driving down yields combined with a continued hunt for same has created a dysfunctional competitive dynamic between debt investors and companies and their owners. Law firms will always push innovation in covenant provisions to benefit their clients, and this is just the latest example.”
The latest but undoubtedly not the last.
*Per the OM, the acquisition purchase price is $2.814b plus the assumption of $1.814b of debt.
**Per the OM, the company initially went to market contemplating $450mm of senior first lien notes and $550mm of senior notes.
💥SPAC-Lash: Mudrick's Proposed Second Vehicle Faced Minor Market Pushback💥
It’s raining SPACs…
…which means it’s raining specialized SPACs … which means it’s raining SPACs with a “distressed” bent because, like, pandemic-based opportunism?? 🤷♀️
This month alone, two such SPACs hit the market. First, Seaport Global Acquisition Corp. (the comically tickered, $SGAM), raised $125mm via IPO on December 1, 2020. Formed by Seaport Global Asset Management and comprised of a team of professionals from Seaport Global, Whippoorwill Associates Inc., Värde Partners Inc., and Houlihan Lokey Inc. ($HLI), the vehicle will hunt for distressed businesses with an enterprise value between approximately $400mm and $1b. Typical of SPACs, each unit had an offering price of $10 and consists of one share of common stock and one-half of one redeemable warrant with a strike price of $11.50/share. As of market close on December 15, the stock is trading a hair below the IPO price at $9.98/share.
Then on December 8, 2020, Jason Mudrick launched his second SPAC IPO, Mudrick Capital Acquisition II ($MUDSU) — a vehicle focused on acquiring a post-bankruptcy business. Jason Mudrick has become something of a household name in distressed, founding Mudrick Capital in 2009 after an 8-year career at Contrarian Capital Management. Household name notwithstanding, Mr. Mudrick’s MUDSU received a lukewarm reception from the market, forcing Mr. Mudrick to downsize from his original go-to-market target of $300mm as far down as $250mm before market froth kicked in and boosted the offering a bit. Ultimately, Mr. Mudrick raised $275mm (offering 27.5mm units at $10/each and one-half of a warrant, exercisable at $11.50). Note the timeline per Renaissance Capital:
Query whether the chilly-market-reception-amidst-an-otherwise-salivating-market-over-all-things-SPAC had something to do with the -30% performance of Mr. Mudrick’s first SPAC acquisition: Hycroft Mining Corporation ($HYMC). 🤔
What is Hycroft? It is a gold and silver producer with operations in Northern Nevada; it was, up until a few years ago, part of Allied Nevada Gold Corp., a company that filed for chapter 11 bankruptcy back in March 2015. Mudrick had fun playing within various parts of the capital structure in that case. Indeed, per court filings, Mr. Mudrick (a) owned a considerable amount of 8.75% senior unsecured notes — notes that ultimately exchanged for 100% equity (subject to dilution) in connection with the company’s plan of reorganization — and (b) lent into the DIP and exit facilities.
Upon emergence several months post-filing, Mudrick Managing Director and Senior Analyst David Kirsch became the Chair of Hycroft’s Board of Directors.
Fast forward a couple of years and Mr. Mudrick successfully IPO’d his first SPAC, Mudrick Capital Acquisition Corporation ($MUDS), on February 7, 2018, offering 20mm units at $10/unit. Each unit consisted of one share of the Company's Class A common stock and one warrant enabling the holder to purchase one share of the Class A common stock at a price of $11.50 per share. The SPAC contained a common provision which required a consummated transaction within 24 months lest the entity liquidate and return invested capital to investors. MUDS and Hycroft (conveniently?) announced their merger in a January 13, 2020 8-K, juuuuuuuuuust slipping in before the deadline.
In July, Jason Mudrick and David Kirsch spoke with CommonStockWarrants.com about SPAC opportunities generally and Hycroft specifically.* We love the production value here:
Per the interview:
“We did sponsor a special purpose acquisition company, called…MUDS. It has since been ‘de-SPAC’d’ because we’ve merged with Hycroft Mining. And we … IPO’d our SPAC a couple of years ago…and the thinking at the time…it was a very different from the world we live in today…[but] nobody had raised a SPAC that we had known about with a very specific mandate of merging into a post-bankruptcy company…A lot of SPACs had been raised by industry veterans to go after certain industry verticals … so you would have a management team focused on Paper & Packaging and they would look for a paper and packaging asset that they could take public through merging with their blank check company … but nobody had looked at the problem that we were seeing in post-bankruptcy equities and that problem was that many of them were very illiquid.” (Emphasis added).
Points for originality (we think). Query whether, at the time the SPAC launched, the market and/or Mudrick knew that he’d ultimately use the vehicle to engineer a path forward for one of his long-held illiquid holdings as opposed to another business with a good management team, a significantly de-levered balance sheet and a “good business.” The timing seems to suggest not (PETITION Note: admittedly, we’re speculating a bit here but Mr. Mudrick acknowledges that a SPAC deal can be put together in 90 or so days so why wait until the 23rd month unless you were unable to source some other target on viable terms?).
A saving grace? Mudrick highlights how his fund is “all-in” on the name — a key point that might satiate any concern that MUDS was just a way to dump an illiquid portfolio holding onto the markets to cash out. Per the interview:
“…We are very involved still in Hycroft Mining…so whereas a lot of SPACs merge and the original sponsors are sort of gone, we put new money into Hycroft, we were a $25mm check into the deal, in addition to our existing ownership that was created through the SPAC and through our prior ownership in Hycroft, we are very much ‘all-in’ in the success of Hycroft Mining...”(emphasis added).
“All in” apparently means around 40% ownership. So far not so good.
To be clear, this isn’t meant to be a commentary about Mr. Mudrick. We wish him and his investors well. But this is instructive: when asked in the same interview about whether there’ll be a second SPAC offering or MUDS was a “one shot deal,” Mr. Mudrick answered:
“…we have not started working on a Mudrick Capital Acquisition II … we’re very much focused on making Mudrick Capital Acquisition I a success … and … we’re very involved still in Hycroft Mining … I do think that it’s a good time to have a SPAC in our arsenal so I think we will do a second SPAC but it’s certainly a lot easier to do it when you can point to the prior one and say ‘Look how successful SPAC 1 was … people will throw money at you to do SPAC 2 if you had success with SPAC 1 so, yes, is the answer, but not just yet.” (emphasis added)
Soooooooo…like, 🤷♀️. There goes that. That was literally three months before going balls to the wall with the SPAC 2 launch — despite Hycroft’s clear continued underperformance.** SPACs are all about the sponsor, they say. Well, Mudrick must really be waving some performance statistics relevant to his other vehicles (PETITION Note: by all accounts, he’s done quite well) because that prior SPAC performance doesn’t give him much to point to and say “look how successful SPAC 1 was….”
We can’t decide whether this is just another example of some cynical-a$$ opportunism or a pragmatic move by Mr. Mudrick to just play within the rules of the game. Maybe it’s both. What we do know is that this level of market latitude is what happens when everyone chases:
We feel obliged to highlight that this isn’t the first time we’ve highlighted a certain degree of SPAC opportunism. We’ve previously wrote about Tilman Fertitta’s SPAC, Landcadia Holdings II ($LCA). We covered how Fertitta took a $300mm loan to help his entertainment empire during the Covid-19 crisis, which was partially paid down with cash from the SPAC trust, while the remainder was assumed by the merged LCA and Golden Nugget Online Gaming corporate entity.*** It’s a shady-cum-gangster move and, to his credit, it’s paid off for investors (to date):
We’ll see if investors in Mudrick SPAC 2 are so lucky. Will this be the vehicle to take once-bankrupt e-cigarette brand, NJoy, public? Potential bread crumbs here:
*At the time of the interview, the share price was $12.86/share. Gold was at 1957 and silver was at 23.46. At the time of this writing, gold is at 1856 and silver is 24.62.
**Mr. Mudrick says that this investment isn’t “rocket science”: it comes down to capital and execution and the SPAC provided the necessary capital. Sooooo, sounds like execution hasn’t lived up to expectations given the current pricing.
***While Tillman Fertitta’s $LCA has been performing well, we still think some of the moves he has made have been questionable at best. Per Bloomberg:
“Texas billionaire Tilman Fertitta is weighing taking a substantial part of his casino and restaurant empire public, according to people with knowledge of the matter…An initial public offering could include a substantial number of the casinos and restaurants that are under the Golden Nugget and Landry’s umbrellas, giving the company a valuation of several billion dollars, one of the people said. Fertitta would retain control through a stake of well over 50%, the same person said…”
But is Fertitta really ‘bout that shareholder value creation life? We think not. Bloomberg continues:
“Fertitta has relied on debt to fuel the growth of his companies, which include Golden Nugget casinos and restaurant chains such as Bubba Gump Shrimp and Del Frisco’s. The billionaire found himself struggling to keep his empire afloat this year amid the onset of the pandemic and a plunge in oil prices.
He furloughed tens of thousands of employees to reduce costs and borrowed hundreds of millions of dollars at double-digit rates to navigate the pandemic. The massive cuts allowed his casinos and restaurants to absorb the impact of the pandemic better than expected, according to people with knowledge of the businesses’ performance through Sept. 30, who asked not to be identified because the results are private. Listing a stake in the business could allow the billionaire to take advantage of strong investor appetite for new equity offerings to pay down debt.”
Shouldn’t shareholders be standing up against moves like this? As long as the music plays, everyone keeps dancing. The question is what happens when the music stops and shareholder value plummets? Do retail investors truly understand the risks they are taking with these investments or are they simply becoming enamored by “household name” sponsors and dreams of “yield, baby, yield.”?
🥑New Chapter 11 Bankruptcy Filing - BC Hospitality Group Inc. (a/k/a by CHLOE)🥑
BC Hospitality Group Inc. — best known as by Chloe, a small fast casual restaurant chain known to vegans in big cities like New York, Boston, Los Angeles and … uh …. Providence — and 19 affiliates (the “debtors”) filed for bankruptcy in the District of Delaware earlier this week using Subchapter V of chapter 11.* The debtors have 14 restaurants and … well ... need we say more? New York City closed indoor dining again on the petition date (and Mayor De Blasio indicated a citywide shut down may be coming) and Los Angeles is in the midst of a shutdown of its own. It’s brutal out there for restaurants these days. This one happens to be owned by (i) Bain Capital Double Impact Fund LP (“Bain Capital”); (ii) BCIP Double Impact Associates L.P.; (iii) Kitchen Fund LP (“Kitchen Fund”); (iv) KF-Chloe LLC; (v) Qoot International UK Limited; (vi) Lion/BC LLC; (vii) Collab+Consumer I L.P.; (viii) Samantha Wasser; and (ix) ESquared Hospitality LLC (“ESquared”).** But this isn’t a private-equity-loaded-the-thing-up-with-too-much-debt-to-expand-like-crazy story. It only has $24k of secured debt (secured by a vehicle lease). The rest is trade and other unsecured debt and, as you might surmise from the Subchapter V filing, even that ain’t a whole lot (it’s approximately $2.75mm).***
To the extent there’ll be drama here, it is likely to come from Chloe herself. Chef Chloe got booted out of the company in 2017 and she and the debtors have been embroiled in litigation basically ever since. Chef Chloe has been fighting for her equity back and, after years of proceedings, appeared to get a real victory in September. That victory sparked settlement negotiations that proved unfruitful. The parties pivoted to mediation but ultimately came away without an agreement.
Now the company is in bankruptcy — a devastating result for everyone. COVID-19 decimated the business, leading to a 67% revenue decline since February 2020. Liquidity became a serious issue. The debtors will use the bankruptcy process to obtain $3.25mm of L+4% DIP financing from their pre-existing owners (sans Ms. Wasser and her father’s company, ESquared) to fund a sale process.
As for Chloe? Nothing like getting a victory only to have a bankruptcy slam on top of you. Query whether, after years of fighting, there’ll be anything left for her to walk away with.
*We provided some detail about what makes Subchapter V special in connection with the bankruptcy of NTS W. USA Corp. d/b/a Desigual here. Furla (U.S.A.) Inc. is another recent retail case to leverage the new provisions under Subchapter V.
**Bain Capital and Kitchen Fund led investments in the debtors in ‘18 and ‘19, investing $31mm.
***The debtors didn’t count the $2.673mm PPP loan it obtained, used, and applied for forgiveness from.
Brent Worthy (Managing Director) joined BDO USA from Deloitte Consulting.
Jeremy Matican (Managing Director) joined Jefferies from Evercore.
Val Shapiro (Senior Managing Director) joined Ankura Consulting from Goldman Sachs Asset Management.
Alice Byowitz of Kramer Levin on her promotion to Partner.
Jessica Peet of Vinson & Elkins on her promotion to Partner.
The team at TRS Advisors LLC on their acquisition by Piper Sandler Companies ($PIPR).
The following Alvarez & Marsal LLC employees who were recently promoted to Director: Chase Brantley, Andrew Ciriello, Glenn Gilmour, John Jansen, Stuart Loop, Austin Prentice, Ethan Sooy, and William Walker.
The following Alvarez & Marsal LLC employees who were recently promoted to Senior Director: Richard Behrens, Steven Coverick, Thomas Downey, Robert Esposito, Sean Farrell, David Hales, Nicholas Haughey, Dwight Hingtgen, Landon Kenworthy, Paul Kinealy, Donald Koetting, Allen Mahr, Mauricio Rivera and Seth Waschitz.
Speaking of female restructuring professionals, the new members of The International Women's Insolvency and Restructuring Confederation’s Board of Directors: Leyza Blanco, Jennifer Kimble, Marjorie Kaufman, Karen Fellowes and Evelyn Meltzer.
Monarch Alternative Capital for raising $3b for a new fund.
Nothing in this email is intended to serve as financial or legal advice. Do your own research, you lazy rascals.