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.
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!
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.
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⚡️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.
…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 $60mm of secured debt on top of them. The debtors’ prepetition secured lenders consent to the use of cash collateral to fund the cases but make no mistake about this: the debtors aren’t in good shape. They checked administrative insolvency on their filing petitions. So, yeah, there’s that: the value of this company likely doesn’t clear the debt.
So, what’s the bankruptcy going to achieve? Note:
Over the past several months, the Debtors have actively sought financing to support their working capital and cash demands, including seeking additional financing from their senior lender, equipment finance companies, accounts receivable factoring lenders, and other potential asset-based and cashflow lenders, but none of those lenders were able to underwrite or approve a loan due to the Debtors’ current financial condition and the industry outlook. The Debtors also recently explored potential business combination opportunities that might result in a stronger combined balance sheet. These discussions did not present a path forward and one of the potential partners actually ceased its own operations after suffering the same challenges. (emphasis added)
Again, dominos. Savage. The most obvious answer — which the debtors acknowledge — is that the debtors needed the “breathing spell” provided by the automatic stay. They’ll use the bankruptcy process to “liquidate certain inventory, raw materials, and equipment at their Pennsylvania location.” Otherwise, they’ll attempt to “right-size and streamline their businesses with the goal of emerging as a profitable enterprise.” They don’t give any indication of how they’ll do it. No doubt, though, both the debtors’ lenders and their unsecured creditors will take it on the chin.
Anything that even touches retail these days is a hot mess…
💥B. Riley Financial Reports Earnings, Crushes It💥
…unless, that is, you have a liquidator business among your portfolio of revenue generating business lines.
B. Riley Financial ($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.
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.
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 coats” for $271mm. Once again, you can do the math. These guys are savage.
*If you’re thinking RealReal Inc. ($REAL) might be a viable alternative to a measly 5% off Barney’s liquidation sale, you might want to check this out.
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.
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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.