🙈Eddie Lampert Makes His Move🙈

Sanchez Energy, Skilled Nursing & OPEC's🖕

Disruption from the Vantage Point of the Disrupted
12/9/18 Read Time = 13.4 a$$-kicking minutes
Twitter: @petition
Website: petition.substack.com

⚡️Some FYIs⚡️

Hey PETITIONERS -

Just some housekeeping here before we say “so long” to 2018. First, we want to thank you all again for your support of PETITION over the year. We are overwhelmed by the acceptance of PETITION by the restructuring/distressed community and look forward to bigger and badder things in 2019. Thank you for your subscription! 👊👍

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A heads up: next week’s 12/16/18 edition will be the last Members’-only Sunday edition of 2018. It’s the holidays and many of you will be traveling that we don’t want to write and distribute masterpieces only for them to go unseen, lost in the ether. We will post/send Members’-only content if/when necessary, depending on what happens out there. 🎄🕎

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🗞News of the Week (6 Reads)🗞

1. New Chapter 11 Filing - Senior Care Centers LLC (Long SNF Distress).

Ok, we take it back. We’ve been saying how healthcare distress was overhyped in the beginning of the year and now a mini-wave of healthcare-related bankruptcy filings has hit dockets across the country. It’s cool: we don’t take it personally.

Here, Senior Care Centers LLC and its bazillion affiliated debtors, filed for bankruptcy in the Northern District of Texas. The debtors are one of the largest skilling nursing services providers in the US, providing care for approximately 9k patients in Texas and Louisiana. They operate 97 skilled nursing facilities, 9 assisted living facilities and 6 hospice facilities. The company notes:

Like much of the healthcare sector, the operators of skilled nursing facilities (“SNFs”) are and have been experiencing significant challenges and financial distress in recent years. The challenges faced by the Debtors are similar to those experienced by other SNF operators and widespread within the skilled nursing industry. The Debtors faced increasing financial pressure in 2017 and 2018 cause by, among other things, declining reimbursement rates, difficulties in collecting accounts receivable, declining census, and occupancy rates, increasing lease obligations, tightening terms with various trade creditors, and a significantly reduced working capital loan facility. All of these factors have combined to negatively impact the Debtors’ operations.

Getting more specific, the company adds:

Since 2017, the Company experienced significant liquidity constraints caused by, among other things: (a) increasing rent and “above-market” leases with various Landlords; (b) declining performance within the current portfolio for a variety of industry-wide developments; (c) tightening terms with various trade creditors; and (d) declining census. The Company has struggled to respond to liquidity issues for several months. In July of 2018, Administrative Agent began establishing Borrowing Base reserves, resulting in reduced availability under the Credit Facility.

The immediate cause for the filing of these Chapter 11 Cases was due to liquidity issues resulting from reduced Borrowing Base availability. This problem was compounded when certain of the Debtors’ landlords issued termination and/or default notices (the “Landlord Notices”).

Certain vendors demanded modification to payment terms, which restricted or eliminated the Company’s trade credit. Moreover, relationships with current and prospective Employees and Patients have been affected by the uncertainty. For example, several recent candidates have rescinded their offers to join the Company and expressed concern regarding the Company’s financial stability.

That story should sound wildly familiar by now.

Of significance, however, is the company’s relationship with Sabra Health Care REIT Inc. ($SBRA), which is one of the major landlords who issued termination/default notices (over which there is some dispute as to whether they were subsequently withdrawn). Sabra owns CCP which is the debtors’ second lien lender. More importantly, Sabra is the landlord on approximately 40 of the debtors’ facilities. The debtors owe Sabra $31.78mm in unpaid rent, common area maintenance charges and taxes. Sabra ain’t happy about all of this.

Interestingly, Sabra’s own commentary about the debtors’ situation probably didn’t help matters much. On its Q3 earnings call on November 6, Sabra said a number of things about the debtors’ inability to pay rent, its marketing process, its efforts to obtain financing, and management’s skittishness about any go-forward transaction that would endanger their jobs. On that last point, Sabra indicated that it was discussing go-forward options directly with the debtors’ board as a result. The debtors’ various constituents could obvious see/hear these comments and react accordingly. And if “react accordingly” sounds ominous, well…it is. See “tightening terms with various trade creditors” above.

But the Sabra commentary also demonstrates how difficult the current environment is for SNFs right now. Some big takeaways from their earnings call:

  • It is reducing its exposure to Texas, its largest state, “which also happen to be the one state where there is an oversupply of skilled nursing beds in a number of markets due to new product. And Texas also has one of the weakest Medicaid systems in the country.” (PETITION Note: scour the Googles for other SNFs highly indexed to Texas for future distressed/bankruptcy candidates).

  • Skilled operators (read: private equity) are in acquisition mode and, therefore, pricing is high even for product that isn’t of the highest quality. (PETITION Note: “too much money chasing too few deals.” This should, theoretically, bode well for the debtors’ proposed sale, if so). Sabra’s CEO Rick Matros said, “we're not seeing much good skill product and I really believe that that's a function of the skilled operators are buying everything all of us are selling, but they're not putting reasonable assets on the market because everybody sees the light at the end of the tunnel both in terms of the demographic in terms of decreasing supply and in terms of the positive benefits of PDPM reimbursements system that’s going go into effect next October.” 🤔

  • Smaller SNFs will succumb to bankruptcy. Matros added, “My guess is over the course of the next year particularly with the mom-and-pops, we'll probably see more products come to market as a number of the smaller providers determine that they don't have the wherewithal or the desire to go through the transition that is going to be required to go through to be successful post-PDPM.

In other words, there should be a healthy amount of M&A and distressed activity in the near future in the SNF space.

Anyway, back to the debtors: they hope to use the automatic stay provided by the filing to (a) transition underperforming facilities to new operators in coordination with its landlords and (b) sell their profitable facilities. They will use cash collateral to fund the cases.

Let’s hope this case doesn’t become as messy as some other recent REIT-backed healthcare service provider bankruptcy cases.


2. Oil & Gas Roller Coaster (Long OPEC, Short #MAGA!!)

It was a wild week in oil country.

Saudi Arabia, Russian and the OPEC coalition decided, after two days of raucous meetings, to cut 1.2mm barrels a day from the oil market in Q1 ‘19. OPEC countries will curb 800k bpd while non-OPEC allies will shed 400k bpd. In total, this equates to 1% of global production. By limiting supply, prices should — much to President Trump’s chagrin — rise. Indeed, WTI crude rallied to $54.22, before shedding some of its gain and closing at $52.59 — up 3.7% on the week. Brent crude rose as high as $63.73 before retracing back to $61.70 — up 2.9% on the day and 5.4% for the week. Said another way, OPEC flipped this on over stateside: 🖕.

Per Reuters:

“Without cuts there would have been extreme downward pressure on the market,” said John Paisie, executive vice president at Stratas Advisors, a consultancy. “I think the Saudis tried to walk a tightrope: they want to make sure they maintain their relationship with the U.S., but they also need to make some cuts because they need a higher oil price to balance their budget.”

Per Bloomberg:

"This will be strongly felt in the spot oil market,” said SEB AB’s chief commodities analyst, Bjarne Schieldrop. "We are going up to $70.”

Despite talking heads saying mere months ago that oil was headed to $100, the commodity has been under significant pressure for months. Why?

Output from the world’s biggest producers - OPEC, Russia and the United States - has increased by 3.3 million bpd since the end of 2017 to 56.38 million bpd, meeting almost 60 percent of global consumption.

The surge is mainly due to soaring U.S. oil production, which has jumped by 2.5 million bpd since early 2016 to a record 11.7 million bpd, making the United States the world’s biggest producer.

U.S. drillers this week cut oil rigs by the most in over two years, after adding rigs in recent weeks. Energy companies cut 10 oil rigs in the week to Dec. 7, the biggest weekly decline since May 2016, bringing the total count down to 877, General Electric Co’s Baker Hughes energy services firm said in its closely followed report on Friday. Rig count is an indicator of future production. Still, the number of rigs remains up from a year ago.

Given supply due to come online, some analysts and market participants said the cut may not be sufficient to end oil’s rout.

“Relative to how big this looming supply tsunami is, it is not nearly enough to prevent big inventory builds next year,” said Robert McNally, president of Rapidan Energy Group in Washington. “President Trump and President Putin prevented OPEC+ from cutting by more, which was certainly needed to put a sturdy floor under prices. They are putting a fuzzy floor under prices.”

Related to the US’s rise in production is the fact that, this week, the US became a net oil exporter for the first time in 75 yearsa real boon to US ports in places like Louisiana.

The deal exempts Venezuela, Libya and Iran from production cuts. The latter is subject to exemption that allows China and other importers to transact with Iran, despite crippling U.S. sanctions. The next OPEC meeting is scheduled earlier than usual — in April ‘19 — to account for the fact that tighter sanctions from the U.S. on Iran will go into effect and the aforementioned waivers could expire. That will be a key date to watch if your an E&P business.

*****

Speaking of oil and gas…

Publicly-traded oil and gas company, Bakken Resources Inc. ($BKKN), filed for bankruptcy on Friday in the District of Nevada. The company focuses its activities in the Williston Basin in western North Dakota with a focus on acquiring mineral leases and non-operating oil mineral interests and then leasing their acreage to ten oil drilling operators.

Without getting into the weeds here, it seems pretty clear from the bankruptcy papers that the company required a little more focus on its royalty income payments: it suffers from all kinds of reconciliation issues with its partner operators as well as its “overriding royalty” holder, Holms Energy. It’s also getting sued up the wazoo. So, that’s a bit of a drain. As well as a hindrance to the company in terms of raising capital — $8-10mm of which is desperately needed to acquire new producing mineral rights. The company has no secured debt and less than a million of unsecured debt which begs a super serious question: how the hell did it hire Lowenstein Sandler LLP and AlixPartners LLP? Where’s THAT money coming from?

The company notes:

The commencement of this Chapter 11 Case is the product of a confluence of factors that continue to erode the Company’s liquidity and substantially impede the Company’s ability to raise necessary capital. The Company’s cash position deteriorated significantly in 2018 due to a precipitous drop in oil prices and continued litigation expenses. Since October 2018, oil prices have fallen by 28% which has drastically impacted the Company’s net royalty revenues, as has a decline in production from the Company’s current wells. The Company’s monthly net royalty revenues are projected to decline from $ 142,000 in April 2018 to approximately $ 70,000 in April 2019. This decline combined with legal expenses of approximately $ 2,300,000 to date in 2018 has forced the Company to consume more than $ 2 million in cash this year. The Company projects that it will exhaust an additional $ 1.3 million through June 2019 absent a bankruptcy filing.

Remember: the President of the United States WANTS low oil prices. But we digress.

AlixPartners is charged with selling the company as a going concern, raising capital, or selling discrete assets or operations. Which, we’d be remiss not to note, isn’t Alix’s typical kind of retention. We just hope they disclose any and all potential conflicts.

*****

Speaking of exemptions, production cuts alone may not save certain distressed (and over-levered) E&P companies. Like Sanchez Energy Corp. ($SN), for instance. The company announced this week that it had retailed Moelis & Co. ($MO) to explore strategic alternatives. The Houston-based company operates primarily in the Eagle Ford Shale basin. Its capital structure is as follows:

With that much debt, interest expense in Q3 alone was $44.1mm — which represented a meaningful YOY increase. Though revenues were up, operating costs and expenses were also up, leading to a marked decrease in YOY net income for Q3. Eugene Davis — a man who makes the rounds on boards of companies in distress — is present here too. Any time a Mom and Pop shareholder sees that name pop up on a board, they should cut their losses and run for the hills. We will continue to monitor this situation.

*****

Finally, Servicios de Petroleo Constellation SA, a Brazilian oil and gas driller, filed for bankruptcy in Brazil with a corresponding Chapter 15 in New York; its debt is governed by New York law and the Chapter 15 will initiate an automatic stay that would prevent US-based creditors from acting in ways that thwart the intent of the Brazilian proceeding. Per The Wall Street Journal:

In court papers, Andrew Childe, Constellation’s legal representative in the U.S., said the business’ troubles stem largely from the global decline in the oil-and-gas sector as well as a recession in Brazil. Long-term charters and service contracts for seven of its eight offshore drillships have either expired or are set to expire soon, he said.

That’s what happens when oil and gas prices get too low: bankruptcies abound. And they’re geographically agnostic.


3. Retail Roundup (Long Store Closures).

There was, like, maybe a week there when some major retailers reported earnings and all of the sudden things seemed rosy; there were scantily glad beautiful people dancing around a dreamy campfire, arms-interlocked singing kumbaya with actual unicorns galloping off into the countryside. Then reality struck. And now we’re back into apocalypse mode. All is right in the world again.

Consider some of the news emanating out of the retail world the last week:

  • Advanced Sports Enterprises Inc., the parent to Performance Bicycle, filed for bankruptcy on November 16th. On Friday, it announced that it is closing all 102 Performance Bicycle stores.

  • Christopher & Banks Corporation ($CBK) announced, amidst a 7.3% net sales decrease, that it is closing several dozen stores over the next two years. The company has liquidity and a recently-amended $50mm (plus $5mm FILO) Wells Fargo-agented cov-lite credit facility due 2023. The stock, however, has been trading under $1/share for about half a year and, come Q2 ‘19, will risk a delisting.

  • Crabtree and Evelyn filed for bankruptcy in Quebec and will be closing its 19 stores which just goes to show that the US doesn’t have a monopoly on retail pain.

  • FULLBEAUTY. Will it or won’t it…file for bankruptcy? We’re guessing the former.

  • Gymboree Group Inc. announced that it will be closing its Crazy 8 store locations and “significantly reduced the number of Gymboree store locations in 2019.” Cue the Scarlet 22. This is one of those instances that reflects how valuable it is to become counsel to the portion of the capital structure that is the fulcrum security: here, the term lenders swapped debt for equity as part of Gymboree’s bankruptcy and now Milbank Tweed Hadley & McCloy LLP — which represented said term lenders — gets the company mandate as a result. Looks like GGP Limited Partnership ($GGP) and Simon Property Group ($SPG) can just dust off their prior notebooks and just take their regular seat at the Gymboree Creditors’ Committee table.

  • Payless ShoeSource — rumored as another potential Chapter 22 candidate — was dogged this week by continued reports of store closures. Like the one here in Swansea Massachusettts. Here in Waterville Maine. Here in Fort Dodge Iowa. Here in Destin Florida. Here in Clinton Iowa. And here in Greenfield Indiana (on Xmas Eve, no less).

  • Shopko announced that it is closing 39 and, generally speaking, will, no doubt, find itself in bankruptcy shortly. This is another Sun Capital dumpster fire.

  • The Gap reported on November 20 that it intended to close hundreds of stores “with urgency.” The closures have started.

Mind you: we’re in the holiday quiet period. We suspect that there will be a number of retailers — on and off the run — that will file for bankruptcy after the New Year.


4. Sears. (Long 🙈.)

Sears Holding Corporation ($SHLD) continues to be a sh*tshow with Eddie Lampert’s hedge fund, ESL Investments, offering $4.6b (inclusive of new debt, a $1.8b credit bid, and $1.1b of assumed liabilities — including for you Toys R Us admirers out there, severance, it seems) to buy 500 Sears locations and operate them as a going concern. The bid also includes Diehard, real estate, the home improvement business (for which a separate auction is planned for 12/13) and the Kenmore brand. Naturally and at-least-somewhat-ironically, the Official Committee of Unsecured Creditors filed retention papers for its advisors, FTI Consulting Inc. ($FTI) and Houlihan Lokey Capital Inc. ($HL), on the same day that Mr. Lampert publicized his intended bid. (“Are you ready to ruuuuuuuumble!?). Finally, Omega Advisors Inc. is challenging the sale of medium-term notes issued by Sears Roebuck Acceptance Corp. to Cyrus Capital Partners LP, alleging that Sears ran a faulty insider-y process.

Now, many people have been wondering how Eddie Lampert has fared over this decade-plus long saga of Sears ownership and at least one brave journalism wizard, Michele Celarier of Institutional Investor, has ventured a conclusion. She writes:

Today Lampert’s reputation as the hedge fund world’s golden boy has lost its sheen. ESL Investments, the hedge fund that is now largely Lampert’s own money and invests mostly in Sears stock and debt and its spin-off companies, had regulatory assets under management of $1.3 billion at the end of last year, according to a filing with the Securities and Exchange Commission — down from a peak of more than $16 billion.

Yet below these depressing figures lies a shocking truth.

Although current Sears shareholders have lost almost their entire investment, tens of thousands of employees have lost their jobs, and creditors — including the U.S. government — and others are owed $11 billion, Lampert has still made nearly $1.4 billion to date from his Sears investment, a number that has never been calculated before. It’s also a sum that could change radically — up or down — depending on the outcome of what is likely to be a contentious bankruptcy process, which is now unfolding.

She goes on to carefully break down the component parts. And a major part derives from the beauty of the hedge fund structure:

At its peak in early 2007, Sears had a market capitalization of nearly $30 billion — almost twice that of Amazon at the time. The stock now trades at 33 cents per share, but financial engineering — dividends, interest payments, and asset spin-offs deployed to keep the company out of bankruptcy — looks to have narrowed Lampert’s losses on an approximate $1.5 billion equity investment to close to $624 million. 

Those losses, however, pale in comparison to the profits Lampert made, thanks to the compensation structure of his hedge fund, which he launched in 1988 at the age of 25. At Sears’ peak, the fund owned about half of the retailer. Performance fees that ESL’s investors paid Lampert on his Sears and Kmart investments as those shares took off, amounting to almost $11 billion at the end of 2006, come to an estimated $2 billion. That figure doesn’t include the fund’s management fee, estimated to be between 1 and 2 percent of assets, or investor payments for professional services — including legal, accounting, auditing, and brokerage commissions and fees.   

It doesn’t end there. The wild card in valuing Lampert’s Sears wealth is the $2.6 billion in the retailer’s debt, including some $1.5 billion secured by Sears’ real estate and other assets, owned by ESL and other Lampert entities. In any typical bankruptcy, the secured debt would be considered safe. Add that to the $1.4 billion, and Lampert’s Sears investment could be worth almost $3 billion. And if Lampert succeeds in his latest gambit — which is to swap that debt for hundreds of profitable Sears stores — he could wring even more money from Sears before it’s all over.   

Yet, while she covers a number of transactions including Sears Canada, the Land’s End spinoff, and the creation of the Seritage REIT, Ms. Celarier misses out on a few (insider-y) transactions that may, also, affect the calculus. For instance, going back to 2012:

  • ESL, after exercising its pro rata share of subscription rights, became the majority shareholder (approximately 63%) of Sears Hometown and Outlet Stores Inc. ($SHOS) and its ugly AF five-year stock chart (Significantly, on Friday, SHOS reported that it intends to close at least 80 more locations out of its total 761 stores across 49 states, Puerto Rico and Bermuda and announced “substantial doubt” about its ability to continue as a going concern.);

  • ESL provided the financing behind a ‘14 $400mm secured short-term loan that was paid off in June 2015, earning approximately $21mm in interest payments along the way; and

  • ESL issued various tranches of debt — FILO, secured term loans, L/Cs, IP loans, mezz debt — from 2016 through 2018, presumably collecting fees all along the way.

The bottom line is that — given the lookback limitations of the bankruptcy code or otherwise — we may never know for certain whether Mr. Lampert came out on top with his investment in Sears. What we do know is that the Creditors’ Committee intends to examine every transaction it can within the legal lookback periods and ensure that to the extent he has done well, he no longer does so to the detriment of those who’ve been burned along the way: employees, suppliers, vendors, pensioners, et al.

Things have been relatively calm of late as the company secured new financing and sold the MTNs. But make no mistake: a war is coming. And any and all Lampert transactions that were made will be under attack.

*****

Weil Gotshal & Manges LLP, meanwhile, is really perfecting the late Friday night filing dump. At 7:49 p.m. ET on Friday, the large law firm filed its first monthly fee statement for the period from October 15th through October 31. The damage? 1,632 partner billable hours, 3,400 associate billable hours, and 603 paralegal billable hours for a total of approximately $5mm.

NOT BAD FOR TWO WEEKS OF WORK (Thanks Eddie).


5. New Chapter 11 Filing - USA Gymnastics (Long Litigation-Induced BK).

Man this year has been filled with sleaze-based bankruptcy filings: we’re old enough to remember when The Weinstein Company may have taken the prize for filth. Now, this.

Earlier this week, on December 5th, USA Gymnastics (“USAG”) filed for bankruptcy in the Southern District of Indiana. The bankruptcy filing reminds us that in a coverage universe of companies that file for bankruptcy because of (i) various operational reasons (e.g., declining revenues due to supply chain interruptions, poor inventory management, sky high SG&A, etc.) and (ii) balance sheet reasons (e.g., too much debt, interest expense, and covenant compliance obligations), there are good ol’ fashion litigation-induced bankruptcy filings.

USAG is a 501(c)(3) Indianapolis-based not-for-profit with a focus on six athletic disciplines: women’s gymnastis, men’s gymnastics, trampoline and tumbling, rhythmic gymnastics, acrobatic gymnastics, and group gymnastics. Think of it like a platform (no pun intended): the USAG brings coaches, judges and competitors together for education and competitions throughout the United States. Indeed, the USAG sanctions approximately 4k competitions and has more than 200k members.

In 1988, the USAG formed a separate (non-debtor) entity, The National Gymnastics Foundation, to further the Olympic sport of gymnastics. Thereafter, the United States Olympic Committee (“USOC”) and the Fédération Internationale de Gymnastique designated the USAG as the “national governing body for the sport of gymnastics in the United States.” That designation is now at risk. Why? Enter sleaze here…

Per the Company:

As a result of the misconduct of Larry Nassar, a former volunteer physician to USAG, USAG has been named as a defendant in approximately 100 lawsuits brought by survivors of Nassar’s abuse. USAG’s first priority is to ensure that these survivors are treated fairly and respectfully. The survivors’ claims, in the aggregate, may exceed the available resources of USAG. USAG submits that this Court is the best forum in which to implement appropriate procedures to equitably determine the rights to and allocate recoveries to survivors who have asserted claims against USAG. USAG remains committed to its mission of supporting athletes, and will continue to take specific and concrete steps to promote athlete safety and prevent future abuse.

Nassar was a volunteer medical provider who later faced accusations of sexual misconduct; Nassar ultimately pled guilty to sexual assault and other crimes and will spend his life in prison.

USAG has no secured debt and virtually no unsecured debt — other than the contingent liabilities arising out of the aforementioned lawsuits/claims. Hundreds of individuals have asserted claims in various states against USAG. USAG estimates the potential impact of these suits to be between $75-$150mm. On the asset side of the balance sheet, the company has an operating lease, $6.5mm of cash/equivalents/investments and its insurance policies. And that last piece is where the rubber meets the road. Per the Company:

USAG has insurance coverage encompassing numerous policies covering approximately 30 years, which I expect will provide substantial coverage for the amounts asserted in the various lawsuits and claims. Nevertheless, I understand that the applicable insurance proceeds may be insufficient to cover allowed claims of survivors against USAG. For this reason, USAG filed this chapter 11 case to establish an orderly procedure for the allocation of its insurance proceeds.

The company intends to use the “breathing spell” afforded by Bankruptcy Code section 362’s “automatic stay” (read: an injunction, basically) to (i) establish a process by which insurance proceeds may be doled out to claimants and (ii) assure the USOC and athletes that the USAG is positioned to be the national governing body for gymnastics going forward.

Our two cents? They should definitely consider a rebranding exercise.


6. Previously on PETITION

In “💰Will Crypto Mine Some Bankruptcy Work?💰,” we asked whether the collapse in the price of Bitcoin, new SEC enforcement, and other factors might contribute to a cryptocurrency-related bloodbath. The answer, it seems, is yes.

In “🚲Well-Funded Machines Terrorize Sidewalks 🚲,” we first wrote about the rise of e-scooters. So much has changed since then. Per The Financial Times:

In less than a year, millions of people have taken tens of millions of rides on Bird and Lime, the two California-based start-ups that pioneered scooter sharing and now operate in more than 100 cities worldwide.

In “Long ‘Peloton and Chill’?” and then again in “🚴 Peloton = Gympocalypse?🚴,” we noted the rise of Peloton and the disruptive effect of that rise on incumbent fitness providers. Earlier this week Recode reported that Peloton had 4% more US customers than SoulCycle last quarter, “more than doubling its subscriber base over the last year….” Analyzing credit card purchases, SoulCycle purchases declined nearly 10% YOY. Ruh roh.

In “What to Make of the Credit Cycle. Part 20. (Long VC Innovation),” we noted that General Catalyst, a well-known venture capital firm with investments in the likes of Airbnb Inc., Outdoor Voices, Warby Parker, Classpass, Stripe Inc. (which is what we use to process your subscription payments) and Josh Kushner’s Oscar Health Insurance Corp., was looking into getting into direct lending. Therein we wrote:

What message should we be walking away with when a VC fund seriously strategizes about embedding itself higher up in a company’s capital structure? Is this a bearish sign? Are they thinking about the end of the bull cycle and potential loan-to-own (intellectual property, etc.) as an alternative to full wipeout? Taking it a step further, might they then be able to subsequently roll-up the intellectual property of certain vertically-similar investments and, given a stellar network of engineers and operators, make lemonade?

We don’t have any of these answers. General Catalyst may not either. But when players who conventionally play in equity start thinking about debt, that piques our interest. It’s a hedge. And it’s a sign that times are changing.

What we didn’t note about Recode’s reporting is that in the piece we based our writing off of, Recode speculated that the exploration of a direct lending business might be an initiative taken to sate the interest of a potential strategic investor: Goldman Sachs. ($GS). Well, this week, The Wall Street Journal reported that Goldman is, in fact, purchasing a $200mm minority equity stake in General Catalyst — a move that occurs often in private equity but not so much in venture capital.

So, what do we make of this? For one, this means that the direct lending notion may not, in fact, be happening. Time will tell. Yet, we still think this is a bearish sign. Consider that while Airbnb may finally IPO in 2019, General Catalyst is a VC firm with mostly illiquid assets with super high valuations. If the IPO window closes and its largest investments cannot exit, many book gains the company has may fly out the door. Taking some money off the table now by selling a stake to Goldman Sachs at a valuation predicated derivatively upon the underlying portfolio at today’s valuations is a solid hedge by GC’s large equity holders. And a sign that some of the most astute early stage investors out there are taking precautions to minimize their downside.


Want to tell us we're morons? Or praise us? Cool, either way: email us at petition@petition11.com


📉Charts of the Week📈


💼Pros Say💼

Corporate Governance. Here, Weil Gotshal & Manges LLP’s Ryan Preston Dahl writes about the governance factors that made Claire’s Stores’ 7-month bankruptcy case work.


🗓Events🗓

Foley & Lardner Holiday Party, 12/10, NY


⛓Notable: What We're Reading (5 Reads)⛓

1. Asset Stripping (Long Angry Investors). Marble Ridge Capital is agitating about The Neiman Marcus Group’s move back in September to insulate MyTheresa from creditors.

2. Bird and the Rise of “Business in a Box.” Is this the next evolution of the franchise model? And what might it mean for the future of business?

3. The Rise of Direct-to-Consumer Cookware (Long Instagrammable Dinner Parties). Who gets upended by this trend?

4. Hedge Funds (Long Gregg Opelka). The highest item on the list of any investment professional should be to make sure that you don’t f*ck up so royally that Gregg Opelka writes about you. This is SAVAGE. Speaking of hedge funds, any senior(ish) folks considering a hedge fund job as a viable alternative to lawyering or banking ought to read this.

5. Faraday Future (Short EVs). We’ve written about this trash heap extensively. It just needs to die already.


🙌Congratulations to:🙌

Christopher Boies of King & Spalding LLP on his promotion to Partner.

Dominic Pacitti of Klehr Harrison Harvey Branzburg on his ascension to Head of Bankruptcy and Corporate Restructuring.

Gianfranco Finizio of Kilpatrick Townsend on his promotion to Partner.

Jonathan Jordan of King & Spalding LLP on his promotion to Counsel.

The lawyers at Kirkland & Ellis LLP for winningBest Law Firm of the Year” by The American Lawyer at the first American Lawyer Industry Awards. A 19% leap in revenue in 2017 and 126k hours of pro bono work helped seal the deal.


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📚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💥. It has been updated to include the Financial Times’ “Best books of 2018: Economics.”

Also, we’d be remiss not to note that Hamish McKenzie, one of the co-founders of Substack, the newsletter-enabling tech company we use here at PETITION, released his book “Insane Mode: How Elon Musk’s Tesla Sparked an Electric Revolution to End the Age of Oil” this week. We got to read a preview copy and found the chapter about Chinese innovation in the EV space especially interesting. And if you haven’t read the Ashley Vance book about Elon Musk yet, this book will give also you the highlights about Tesla without bogging you down in all the technical aspects of SpaceX. Check it out.


💰New Opportunities💰

Jefferies’ Restructuring & Recapitalization Group is actively looking for experienced Associates and Vice Presidents for our New York office.

The Group provides a full array of advisory and financing solutions to increase financial flexibility for corporate and investor clients. Services include debtor and creditor advisory, liability management / debt exchanges, private capital raising (“rescue”, DIP, exit, and other bespoke financings), and special situations M&A (stressed/distressed, 363 sales, post-reorg), both in bankruptcy and on an out-of-court basis.

Applicants MUST have 2-10+ years of restructuring experience at another investment bank, law firm, consultancy / FA, or as a distressed investor.

If you meet this requirement, please submit your resume to: jmeltz@jefferies.com.

If your firm has job opportunities, please email us at petition@petition11.com.


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